Sublicense May Survive Termination of a Main License

FRAUNHOFER-GESELLSCHAFT v. SIRIUS XM RADIO INC.

Before Dyk, Linn, and Taranto.  Appeal from the District of Delaware.

Summary:  Contract interpretation must be applied in determining whether a sublicense survives termination of the main license. 

Fraunhofer-Gesellschaft (“Fraunhofer”) granted WorldSpace a worldwide, exclusive, irrevocable license to several patents (“Main License”), with the right to sublicense the patents.  WorldSpace sublicensed the patents to Sirius XM Radio Inc. (“SXM”) under an irrevocable sublicense (“Sublicense”).  WorldSpace subsequently entered bankruptcy and rejected the Main License with Fraunhofer, which constituted a breach and gave Fraunhofer the right to terminate the License.  Fraunhofer did not terminate the Main License or Sublicense at that time.  The bankruptcy court approved a settlement between Fraunhofer and SXM that emphasized that SXM satisfied its obligations under the Sublicense and that the Sublicense remained in place.

Six years later, Fraunhofer sent a cease and desist letter to SXM alleging infringement of its patents which were covered in the License.  One month after that, Fraunhofer sent a letter to WorldSpace alleging that the Main License was terminated during the bankruptcy proceedings.  Fraunhofer then brought suit against SXM for infringement of its patents.  SXM moved to dismiss the complaint, asserting the Sublicense as a complete defense.  The district court granted SXM’s motion to dismiss, and Fraunhofer appealed to the Federal Circuit.

The Federal Circuit vacated the dismissal.  First, the Federal Circuit stated that the district court must determine whether the Main License was properly terminated, which the district court had not decided.  Second, the Federal Circuit stated that, if the Main License was properly terminated, the district court must determine whether the Sublicense nonetheless survived the termination of the Main License.  The Federal Circuit stated that there is no default rule regarding whether a sublicense survives termination of a license.  Rather, contract interpretation must be applied.  If the contract language is ambiguous, the finder of fact must consider extrinsic evidence to determine the intent of the parties.  Here, the terms of the Main License were ambiguous as to whether a sublicense would survive termination of the Main License.  Thus, extrinsic evidence needed to be considered.  Consideration of such evidence cannot be resolved on a motion to dismiss.  Therefore, the Federal Circuit vacated the district court’s grant of SXM’s motion to dismiss and remanded for further proceedings.

Editor: Paul Stewart

Written by: Brian Reece & Christie Matthaei