The Federal Circuit Holds that an “Agreement to Agree” to License Does Not Establish an Enforceable License Right
| October 26, 2020
Phytelligence v. Washington State University
August 27, 2020
PROST, REYNA, and STOLL, Precedential opinion by Reyna
Summary
Appellant, Phytelligence, Inc. (Phytelligence) is an agricultural biotechnology company that uses tissue culture to grow trees for sale to nurseries and growers. Phytelligence entered into a Propagation Agreement with Washington State University (WSU) regarding growing of “W38” apple trees developed and patented by WSU. The Propagation Agreement was focused on research and development, but included a clause indicating that Phytelligence is “granted an option to participate” as a seller in the future upon signing “a separate contract.” Phytelligence did not execute a later contract with WSU, but later brought a legal action against WSU asserting that the Propagation Agreement granted Phytelligence a right to license. The district court affirmed WSU’s motion for summary judgment dismissing Phytelligence’s claim on the basis that the contract was an unenforceable “agreement to agree.” On appeal, the Federal Circuit affirmed the district court’s decision.
Background
Appellant, Phytelligence, Inc. (Phytelligence) is an agricultural biotechnology company that uses tissue culture to grow trees for sale to nurseries and growers.
Phytelligence engaged in discussions with Washington State University (WSU) regarding growing of “W38” apple trees developed and patented by WSU.
The parties entered into a Propagation Agreement under which Phytelligence could propagate the W38 apple trees and experiment with propagation techniques for research and development purposes. However, the agreement did not provide a right for Phytelligence to sell the W38 trees. Under the agreement, Section 4 included the following clause:
If [Phytelligence] is an authorized provider in good standing . . . by signing this Agreement, [Phytelligence] is hereby granted an option to participate as a provider and/or seller of Plant Materials listed in Exhibit A, if the Cultivar is officially released by WSU and becomes available for licensing by [WSU] . . . . [Phytelligence] will need to sign a separate contract with [WSU], or an agent of [WSU], to exercise this option.
Phytelligence emailed WSU “to clarify” that to exercise its option under Section 4, WSU would need to “grant it a separate license for the purpose of selling,” and WSU emailed “yes” in reply. Phytelligence emailed again indicating that the agreement had a “wispy forward commitment,” but then emailed stating “since this agreement is a precursor to any other, we suppose there’s no harm in going ahead and executing it. Then at least we will have the pieces in place when we are all ready to go beyond R&D mode. With that context, the agreement is fine as it is.”
In March 2013, WSU issued request for proposals seeking an exclusive licensee to manage the commercialization of WA38 and awarded an exclusive license to Proprietary Variety Management (PVM). PVM provided nonexclusive sublicenses to companies provided that such companies become Northwest Nursery Improvement Institute (NNII) member nurseries.
On May 18, 2017, Phytelligence informed WSU that it desired to proceed under Section 4 of the agreement. WSU indicated that the Propagation Agreement required a separate contract with PVM. Phytelligence approached PVM, but refused to become such a member nursery, and rejected that requirement and did not enter an agreement with PVM.
On September 15, 2017, WSU presented Phytelligence with three other options for propagating and selling WA 38, including two options that did not require NNII membership. Phytelligence rejected the three options.
On January 16, 2018, WSU terminated the Propagation Agreement with Phytelligence on the basis that Phytelligence had sold and delivered WA 38 without a license.
On February 26, 2018, Phytelligence sued WSU in state court for breach of the Propagation Agreement. WSU then asserted patent and trademark infringement counterclaims and removed the case to federal district court. WSU moved for summary judgment, arguing that Section 4 was an unenforceable “agreement to agree” under Washington state law.
The district court granted the motion for summary judgment. And, Phytelligence appealed.
The Federal Circuit’s Decision
Legal Issue
The question on appeal is whether Section 4 of the Propagation Agreement granted Phytelligence a license right as being an enforceable agreement with open terms rather than an unenforceable “agreement to agree.”
Standard of Review
The Federal Circuit reviews a grant of summary judgment under the law of the regional circuit, and, thus, de novo in this case.
Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
Discussion
The Federal Circuit explained that this legal issue is a matter of contract interpretation, which is determined under state law. Under Washington state law, an “objective manifestation” standard is employed, wherein a court looks to the reasonable meaning of the contract language to determine the parties’ intent.
Agreement to Agree vs. Agreement with Open Terms
The Federal Circuit noted that an “agreement to agree” is unenforceable, explaining that “[a]n agreement to agree is an agreement to do something which requires a further meeting of the minds of the parties and without which it would not be complete.” The court explained that an “agreement with open terms” differs in that “the parties intend to be bound by … key points agreed upon with the remaining terms supplied by a court or another authoritative source, such as the Uniform Commercial Code” such that “[a]ny missing or open terms can therefore be ‘easily’ discerned by a court.” The court also explained that open terms can also be appropriate when they are based on an objective formula or method contained within the contract itself.
However, the Federal Circuit noted that Section 4 of the Propagation Agreement “provides the court with no objective method for determining the terms of the separate contract” between WSU or (or its agent).” Thus, the Federal Circuit affirmed that the Section 4 of the Propagation Agreement is merely an unenforceable agreement to agree.
Extrinsic Evidence
Phytelligence argued that the extrinsic evidence established that Section 4 was an enforceable contract with open terms. The Federal Circuit explained that under Washington law, to assist in determining the meaning of contract language, a “context rule” is also applied that includes “examination of the context surrounding a contract’s execution, including the consideration of extrinsic evidence.” However, the court explained that extrinsic evidence is to only be used “to determine the meaning of specific words and terms used and not to show an intention independent of the instrument …”
Moreover, the Federal Circuit explained that extrinsic evidence revealed that no agreement was reached and pointed out that in emails to WSU, Phytelligence actually acknowledged that Section 4 contained a “wispy forward commitment” and that there was “no harm” to sign the agreement because the agreement “is a precursor to any other.” The Federal Circuit noted that “[o]n these undisputed material facts, no reasonable fact finder could conclude that at the time of execution, Phytelligence and WSU agreed” that Section 4 would contain the terms of the later PVM form license, but rather that WSU did not commit to any definite terms of a future license.
Phytelligence also argued that a declaration of the CEO of Phytelligence supported that there was a material dispute because the CEO had declared “My understanding … was that … Phytelligence would have the option to acquire a license on the standard terms.” However, the court expressed that “mere allegation and speculation do not create a factual dispute for purposes of summary judgment.”
Phytelligence also argued that the parties’ conduct after the execution of the Propagation Agreement also created a factual dispute. However, the court rejected that argument and noted that WSU had offered Phytelligence three different licensing options, including two that didn’t require joining of NNII, which were all rejected by Phytelligence. The court explained that “[b]ased on this evidence, no reasonable fact finder could conclude that, at the time of execution, the parties understood that there was nothing left for future negotiation regarding the terms of Phytelligence’s separate contact under Section 4.”
Accordingly, the Federal Circuit affirmed the district court’s decision.
Takeaways
- In drafting agreements, it is important to keep in mind that an “agreement to agree” at some later date regarding any terms of the agreement is not enforceable. Accordingly, one should exercise care to avoid development of contract terms of this nature.
- In drafting agreements, it is also important to appreciate that some contract terms can be drafted as “open terms” that may still be enforceable, but that for such “open terms” to be enforceable, such “open terms” must be defined in the contract in a manner to be supplied by a court or another authoritative source or based on some objective formula or method set forth in the contract itself.
- In collaborative relationships, it is also important to carefully plan for future circumstances. In this case, Phytelligence’s emails prior to signing of the Propagation Agreement reflected a concern that there was no agreement for future sale of the product. However, rather than effectively addressing the issue at that time, Phytelligence moved forward with the relationship regarding research and development without sufficiently securing its future ability to engage in sale of the product.
Tags: Agreement to Agreement > contract > Intent of Parties > interpretation > license
Same difference: A broad interpretation of “contrast” renders patented design obvious in view of prior art showing a similar “level of contrast”.
| October 19, 2020
Sealy Technology, LLC v. SSB Manufacturing Company (non-precedential)
August 26, 2020
Before Prost, Reyna, and Hughes (Opinion by Prost).
Summary
In nixing a design patent purporting to show “contrast” between design elements, the Federal Circuit broadly interprets “contrast” in the claimed design as not requiring a level of contrast that is different than what is available in the prior art.
Details
In their briefs to the Federal Circuit, Sealy Technology, LLC (“Sealy”) told the story about how, during a slump in sales around 2009, they re-designed their Stearns & Foster luxury-brand mattresses to visually distinguish their mattresses in a marketplace overrun with white or otherwise monochromatic mattress designs.
To be visually distinct, Sealy incorporated a “bold” combination of contrast edging running horizontally along the edges of the mattress and around the handles on the mattress.
Sealy claimed this design in their U.S. Design Patent No. 622,531 (“D531 patent”). The D531 patent claimed “[t]he ornamental design for a Euro-top mattress design, as shown and described”, with Figure 1 being representative:
The D531 patent did not contain any textual descriptions of the contrast edging in Sealy’s mattress design.
Sealy’s dispute with Simmons Bedding Company (“Simmons”) began shortly after the D531 patent issued, when in 2010, Sealy sued Simmons for infringing the D531 patent. The product at issue was Simmons’s Beautyrest-brand mattress:
in 2011, Simmons sought an inter partes reexamination of the D531 patent. During the first round of the reexamination, the Examiner interpreted the claimed design as including the following elements:
- The horizontal piping along the edges of the top and bottom of the mattress and along the top flat surface of the pillow top layer has a contrasting appearance.
- The [eight] flat vertical handles each have contrasting sides of edges running vertically with the length of the handles.
However, the Examiner declined to adopt any of Simmons’s requested anticipation and obviousness challenges. And when Simmons appealed the Examiner’s refusal to the Patent Trial and Appeal Board, Sealy vouched for the Examiner’s interpretation.
Unfortunately for Sealy, the Board on appeal entered new obviousness rejections. A second round of the reexamination followed. This time around, the Examiner adopted the Board’s rejections, which Sealy was unable to overcome even after a second appeal to the Board. Sealy then appealed the rejections to the Federal Circuit.
Sealy raised two main issues on appeal: first, whether the Board correctly construed the “contrast” in the claimed design; and second, whether the cited prior art was a proper primary reference.
On the question of claim construction, the Board had determined that “the only contrast necessary is one of differing appearance from the rest of the mattress”, whether by contrasting fabric, contrasting color, contrasting pattern, and contrasting texture.
Sealy argued that the Board’s construction was too broad. The proper construction, argued Sealy, should require a more specific level of contrast, that is, “a contrasting value and/or color” or “something that causes the edge to stand out or to be strikingly different and distinct from the rest of the design”.
Sealy relied on MPEP 1503.02(II), which provides that “contrast in materials may be shown by using line shading in one area and stippling in another”, that “the claim will broadly cover contrasting surfaces unlimited by color”, and that “the claim would not be limited to specific material”. Sealy also argued that a designer of ordinary skill in the art would have understood the D531 patent as requiring a more specific degree of contrast than the Board’s construction.
The Federal Circuit disagreed.
The Federal Circuit agreed with the Examiner and the Board’s findings that the patent contained no textual descriptions about contrast in the claimed design, that the drawings did not convey a different level of contrast than the prior art, and that Sealy’s argument regarding the understanding of a designer skilled in the art lacked evidentiary support..
On the question of obviousness, Sealy challenged the Board’s reliance on the Aireloom Heritage mattress shown below, arguing that the prior art mattress lacked the requisite contrast.
The weakness in Sealy’s argument was that its success depended entirely on the Federal Circuit adopting Sealy’s claim construction. And because the Federal Circuit did not find that the claimed design required a “strikingly different” contrast between the edging and the rest of the mattress, the Federal Circuit agreed with the Board’s determination that the prior art mattress had “at least some difference in appearance” between the edging and the rest of the mattress. This was sufficient to qualify the Aireloom Heritage mattress as a proper primary reference.
Takeaway
- Consider adding strategic textual descriptions in the specification to clarify the claimed design. For example, in Sealy’s case, since the contrast in the claimed design is provided in part by contrast in color, it may have been helpful to include such descriptions as “Figure 1 is a perspective view of a mattress showing a first embodiment f the Euro-top mattress design with portions shown in stippling to indicate color contrast”.
- If color contrast is important to the claimed design, consider adding solid black shading to the appropriate portions. 37 C.F.R. 1.152 (“Solid black surface shading is not permitted except when used to represent the color black as well as color contrast”).
- If the color scheme is important to the claimed design, consider filing a color drawing with the design application. One of Apple’s design patents on the iPhone graphical user interface includes a color drawing, which helped Apple’s infringement case against Samsung because similarities between the claimed design and the graphical user interface on Samsung’s Galaxy phones were immediately noticeable.
LICENSING AGREEMENTS AND TESTIMONIES COULD BE USED AS EVIDENCE OF SECONDARY CONSIDERATIONS TO OVERCOME OBVIOUSNESS ONLY WHEN THEY PROVIDE A “NEXUS” TO THE PATENTS
| October 10, 2020
Siemens Mobility, Inc. v. U.S. PTO
September 8, 2020
Lourie (author), Moore, and O’Malley
Summary:
The Federal Circuit affirmed the PTAB’s final decision that claims of Siemens’s patents are unpatentable as obvious. The Federal Circuit found that the PTAB’s findings in claim construction of “corresponding regulations,” and evaluation of Siemens’s evidence of secondary considerations are clearly supported by substantial evidence.
Details:
Siemens Mobility, Inc. (“Siemens”) appeals from two final decisions of the PTAB, where the PTAB held that claims 1-9 and 11-19 of U.S. Patent No. 6,609,049 (“the ‘049 patent) and claims 1-9 and 11-19 of U.S. Patent No. 6,824,110 (“the ‘110 patent) were unpatentable.
The ‘049 patent and ‘110 patent
Siemens’s ‘049 and ‘110 patents are directed to methods and systems for automatically activating a train warning device, including a horn, at various locations. The systems include a control unit, a GPS receiver, and database of locations of grade crossings, and a horn. Siemens’s two patent disclose that if that grade crossing is subject to state regulations, the horn is activated based on those state regulations. If that grade crossing is not subject to state regulations, Siemens’s system considers that crossing as subject to a Federal Railroad Administration regulation and sounds the horn when the train is 24 seconds or fewer away from the crossing.
Independent claim 1 of ‘110 patent:
1. A computerized method for activating a warning device on a train at a location comprising the steps of:
maintaining a database of locations at which the warning device must be activated
and corresponding regulations concerning activation of the warning device;
obtaining a position of the train from a positioning system;
selecting a next upcoming location from among the locations in the database based at least in part on the position;
determining a point at which to activate the warning device in compliance with a
regulation corresponding to the next upcoming location; and
activating the warning device at the point.
The claims of the ‘049 and ‘110 patents substantially similar.
PTAB
Westinghouse Air Brake Technologies Corporation (“Westinghouse”) petitioned for IPR, challenging claims of both ‘049 and ‘110 patents under §103.
The PTAB found that all challenged claims would have been obvious over two references (Byers and Michalek). In addition, the PTAB did not found Siemens’s evidence of secondary considerations to be persuasive. Finally, the PTAB found that a skilled artisan would have combined the teachings of both references.
Siemens appealed.
CAFC
Three aspects of the PTAB decisions at issue in the appeal:
- The board’s claim construction of “corresponding regulations”;
- The board’s evaluation of Siemens’s evidence of secondary considerations; and
- The board’s findings of a person of skill in the art would have combined both references.
As for the second issue, Siemens presented two license agreements to both patents. Also, Siemens provided evidence regarding Westinghouse’s request to license and testimony from Westinghouse employees regarding the strength of two patents.
Siemens argued that the PTAB improperly discounted this evidence for lack of nexus.
The CAFC did not find those license agreements to be persuasive.
The CAFC noted that the license agreement with Norfolk Southern was presented to the PTAB with royalty information redacted and that another license was provided only for a nominal fee. Also, the CAFC noted that a license request from Westinghouse was for avoiding the cost of a pending patent infringement suit.
Furthermore, the CAFC agreed with the PTAB’s position that testimony from Westinghouse “provided a scant basis for accessing the value of the ‘110 patent” because while the testimony referred to a “horn sequencing patent” or “automatic horn activation,” it did not provide any connection to the language of the claims.
Therefore, the CAFC held that the PTAB’s findings were clearly supported by substantial evidence.
Takeaway:
- In the obviousness analysis, a nexus is required between the merits of the claimed invention and the offered evidence.
- Licensing agreements and testimonies could be used as evidence of secondary considerations to overcome obviousness only when they provide a “nexus” to the patents at issue.
Tags: employee testimony > evidence of secondary considerations > licensing agreement > nexus > obviousness
