Wang Laboratories v. Oki Electric Industry Co., CIV.A. 93-11882-RCL.

• Citation: 15 F.Supp.2d 166
• Decision Date: 31 July 1998
• Docket Number: No. CIV.A. 93-11882-RCL.,CIV.A. 93-11882-RCL.
• Parties: WANG LABORATORIES, INC., Plaintiff, v. OKI ELECTRIC INDUSTRY CO., LTD., Defendant.
• Court: United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts

15 F.Supp.2d 166

WANG LABORATORIES, INC., Plaintiff, v. OKI ELECTRIC INDUSTRY CO., LTD., Defendant.

No. CIV.A. 93-11882-RCL.

United States District Court, D. Massachusetts.

July 31, 1998.

COPYRIGHT MATERIAL OMITTED

Paul F. Ware, Goodwin, Procter & Hoar, Boston, MA, Robert F. Ruyak, Kenneth M. Reiss, Jonathan G. Graves, Howrey & Simon, Washington, DC, Florinda J. Iascone, Wang Laboratories, Inc., Billerica, Scott L. Robertson, Thomas J. Scott, Thomas J. Scott, Jr., Hunton & Williams, Washington, DC, for Plaintiff.

Gary D. Wilson, Wilmer, Cutler & Pickering, Suzanne G. Ramos, Wilmer, Cutler & Pickering, Washington, DC, Dennis J. Kelly, Burns & Levinson, Boston, MA, for Defendant.

MEMORANDUM AND ORDER ON PARTIES' OBJECTIONS TO THE REPORT OF THE SPECIAL MASTER

LINDSAY, District Judge.

The plaintiff, Wang Laboratories ("Wang"), seeks summary judgment on its claim of entitlement to royalties from the defendant, Oki Electric Industry Company ("Oki"), pursuant to a licensing agreement granting Oki permission to use two Wang patents for computer memory modules. Oki contends that it does not owe royalties to Wang because: (1) Wang's patents are invalid and (2) Wang's patents do not cover Oki's modules. Oki also seeks partial summary judgment in its favor on grounds that the licensing agreement between Wang and Oki is unenforceable due to a breach of the agreement by Wang. On November 16, 1995, the court bifurcated Oki's claims, holding in abeyance Oki's claim that the patents are invalid pending a determination of whether Oki's modules are covered by the Wang patents. By separate order dated September 6, 1996, the court referred the case to a special master, Alan Kirkpatrick. The special master conducted a non-jury evidentiary proceeding on December 10-12, 1996, and issued a report on May 14, 1997.

The special master carefully analyzed the issues the parties raised in the motions referred to him. The court agrees with a number of the special master's findings, but reaches different conclusions with respect to others. The areas of agreement and disagreement are set forth below, in response to the parties' objections to the special master's report.

Facts

On April 7, 1987, Wang (through James Clayton, a Wang employee) obtained United States patent # 4,656,605 (the "'605 patent") for a "single in-line memory module" or "SIMM." On February 23, 1988, Wang obtained Patent # 4,727,513 (the "'513 patent") on a continuation of the '605 application.¹

In its first application for what ultimately was issued as the '605 patent, Wang described a module to hold computer memory chips. Wang initially sought to cover several types of memory module with its patent application, but the patent and trademark examiner rejected Wang's first effort as overbroad. A second version met the same fate. On its third and successful attempt, Wang restricted its application to cover just memory modules holding chips in a single row (i.e., the "Leaded Classic" and, arguably, a version without leads called the "Leadless Classic"). As so written, the patent and its continuation excluded two other types of modules, the "3-Pack" and the "Lateral." Each of the excluded types houses more than a single row of chips.

Having foregone its claims to multiple-row module coverage, Wang could not later assert that the '605 and '513 patents covered this type of module. That is because the doctrine of "prosecution history estoppel" precludes a patentee from regaining, through litigation, coverage of subject matter relinquished during prosecution of the patent application. See Zenith Labs., Inc. v. Bristol-Myers Squibb Co., 19 F.3d 1418, 1424 (Fed. Cir.1994); citing Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 870 (Fed.Cir.1985).

Nevertheless, Wang brought suit in the United States District Court for the Eastern District of Virginia against Toshiba Corporation, alleging infringement of the '605 and '513 patents by both single and multiple-row module types. Wang also initiated an infringement action against Oki and others with the International Trade Commission ("ITC"), based on sales of single row, 3-Pack, and Lateral modules. Oki and Wang settled the ITC dispute by agreeing to a non-exclusive licensing agreement on March 25, 1992. The instant action arises from that licensing agreement.

The terms of the licensing agreement included the following: in addition to a single $850,000 payment to Wang, Oki covenanted to pay running royalties (i.e., royalties triggered by actual sales as they occurred) to Wang on sales of any modules subject to "one or more valid and unexpired claims" of the '605 and '513 patents. Even though Oki had raised a prosecution history estoppel defense in the ITC action as to multiple-row modules, Oki nevertheless consented in the licensing agreement to pay royalties on sales of both single and multiple-row modules occurring after January 1, 1992.

On May 10, 1993, on appeal from a ruling of the district court in the litigation between Toshiba and Wang, the Court of Appeals for the Federal Circuit held that Wang had relinquished coverage of multiple-row module types, including the 3-Pack and Lateral, during the prosecution of the '605 and '513 patents. See Wang Labs., Inc. v. Toshiba Corp. et al., 993 F.2d 858, 868 (Fed.Cir.1993), reversing in part Wang Labs, Inc. v. Toshiba Corp., CIV. 90 — 1477-A, 1991 WL 333696 (E.D.Va. Aug.23, 1991). Realizing that the Federal Circuit's Toshiba decision was likely to bind Wang in its dealings with Oki, Wang informed Oki that it no longer owed royalties on sales of 3-Pack and Lateral modules after the date of the Federal Circuit decision.

Oki continued to pay royalties on both single row modules with leads ("Leaded" modules) and on single row modules without leads ("Leadless modules") marketed up to September 30, 1992. However, Oki announced in a letter to Wang dated May 27, 1993, that it would no longer pay royalties on Leadless modules marketed on or after October 1, 1992. Oki stated that it had "reconsidered" the scope of the Wang patents and believed that the Oki Leadless modules were not covered under its licensing agreement with Wang.

Standard of Review

By consent of the parties, the order appointing the special master in this case established the standards by which the special master's findings would be reviewed. See Stauble v. Warrob, Inc., 977 F.2d 690, 694 (1st Cir.1992) (noting that parties may consent to have master perform judicial functions). As set forth in that order, the special master's findings on the issues of infringement and patent construction are reviewed herein to determine whether they are clearly erroneous or contrary to governing law. With regard to the vitality of the contract between Wang and Oki, however, the order appointing the special master required the special master to issue a report and recommendation, in the manner prescribed for magistrate judges in 28 U.S.C. § 636(b)(1)(B) (authorizing magistrate judges to conduct hearings and issue proposed recommendations and findings of fact). The court thus reviews the contract issue de novo in the discussion below.

"Most Favored Licensee" Claim

In addition to the primary issue of patent coverage, Oki raises a threshold challenge to its contract with Wang. Oki claims that Wang violated a "most favored licensee" ("MFL") provision in the Wang-Oki licensing agreement pursuant to which Oki agreed to pay royalties based on its use of the '605 and '513 patents. The "most favored licensee" provision required Wang to notify and to grant equally beneficial terms to Oki should Wang provide another licensee with more favorable running royalty rates or a more favorable running royalty base (i.e., one calculated on the basis of fewer patents).

In support of its claim Oki asserts that, on June 21, 1993, Wang entered into a more favorable license agreement with Hyundai involving the '605 and '513 patents (the "June 21 agreement"). Pursuant to that agreement, Hyundai's royalties were based on sales of single-row modules only, with Wang reserving the right to collect royalties on multiple-row modules should the Toshiba decision be reversed. The June 21 agreement therefore provided Hyundai with a more favorable royalty base than the one to which Oki originally had agreed.

Wang contends that the June 21 agreement did not disadvantage Oki, because Wang had relieved Oki of the obligation to pay royalties on 3-Pack and Lateral modules as of May 10, 1993. The June 21 agreement, however, contained language to the effect that it ran retroactively from January 1, 1993 forward to December 31, 1994.² Due to this allegedly retroactive time frame, Wang's agreements with Hyundai and Oki overlapped (on paper, if not in fact) for slightly over five months before their royalty bases were made equal.

The June 21 agreement required Hyundai to make a lump sum payment of $750,000 to Wang, which payment the parties termed a "pre-paid running royalty" — that is, an arrangement in which money is paid up front and then drawn against as royalties accrue (as opposed to a periodic accounting and payment). Despite this contract terminology, common sense dictates that this sum could only have been "pre-paid" for events after June 21, 1993. Prepayments could not be made for uses of the patents before the June 21 agreement was concluded. Therefore, some portion of the lump sum was intended to compensate Wang for past uses of its patent.

The MFL dispute turns on how one characterizes that portion of the lump sum intended to cover past events. The special master viewed the June 21 agreement as retroactively affording Hyundai royalty terms more favorable than those Oki enjoyed. Consequently, the special master deemed Wang's claims against Oki unenforceable due to Wang's breach of the MFL clause. Upon de novo consideration, however, the court determines that the relevant precedents and the language of the contract give rise to the conclusion that the portion of...