DC motion to dismiss remanded due to ambiguity regarding sublicense survival after bankruptcy

Fraunhofer-Gesellschaft v. Sirius XM Radio Inc.

Docket No. 2018-2400
October 17, 2019

Brief Summary: DC grant of motion to dismiss reversed and remanded for reconsideration of evidence relating to survival of a sublicense after bankruptcy.

Summary: Fraunhofer sued Sirius (SXM) for infringement of four of Fraunhofer’s patents and the DC dismissed the complaint after finding SXM had a valid license to those patents. That license came from an sublicensable exclusive license (“Master Agreement”) with WorldSpace International Network Inc. (“WorldSpace”) to Fraunhofer’s technology (“MCM IP rights”). WorldSpace sublicensed the MCM IP rights to SXM, and that license was amended to be “irrevocable” in 1999. WorldSpace filed for Chapter 11 bankruptcy in 2008, which was converted to Chapter 7 in 2012. “At the bankruptcy court, WorldSpace rejected the Master Agreement pursuant to section 365(d)(1) of the Bankruptcy Code”, but it was unclear from the DC’s decision whether it had also been rejected in an earlier agreement approved by the bankruptcy court (see FN2). The FC opinion explains that under Mission Products (US 2019), “WorldSpace’s rejection was equivalent to a breach occurring ‘immediately before the date of filing of the [bankruptcy] petition”, which “gave Fraunhofer the right to terminate the Master Agreement” which it did not do. The bankruptcy court approved a 2009 “Settlement Agreement” between WorldSpace and SXM under which SXM paid WorldSpace about $300,000 and “emphasized that the sublicense would remain in effect”, and “SXM continued to utilize the MCM technology.” In 2015, Fraunhofer accused SXM for infringement of the four patents which the FC opinion explains “were covered in the Master Agreement and Sublicense Agreement.” Also in 2015, Fraunhofer wrote WorldSpace a “Termination Letter” “claiming that the Master Agreement ‘was terminated in the context of the rejection [in bankruptcy],’” and “as a precautionary measure” terminating the Master Agreement for cause under the Master Agreement’s controlling German law. Fraunhofer then sued SXM in 2017, and the DC subsequently granted SXM’s motion to dismiss which is the subject of this appeal. The FC panel explained that the issues here “are whether the Master Agreement was terminated and, if so, whether that termination had the effect of terminating the sublicense” (see FN7 for a discussion of the effect of the conversion from Chapter 11 to Chapter 7 bankruptcy). The FC panel first found that US law applies, not German law, since neither party raised “the issue of whether foreign law may apply” to the DC (it was therefore was waived under Third Circuit law). The FC panel also explained that while Fraunhofer had “three plausible arguments” for terminating the Master Agreement, “it is unclear whether” it “properly” did so, and did not decide that issue (nor did the DC). Then, “[a]ssuming arguendo that” it was “terminated by the Termination Letter”, the FC panel decided the Master Agreement was “ambiguous” as to survival of the sublicense” and that the issue could not be properly decided on a motion to dismiss (also explaining that “our law does not provide for automatic survival of a sublicense” (Rhone-Poulenc, FC 2001; TransCore, FC 2009; Mitchell, US 1873)).

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