Corebrace LLC v. Star Seismic LLC

• Citation: 566 F.3d 1069
• Decision Date: 22 May 2009
• Docket Number: No. 2008-1502.,2008-1502.
• Parties: COREBRACE LLC, Plaintiff-Appellant, v. STAR SEISMIC LLC, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

566 F.3d 1069

COREBRACE LLC, Plaintiff-Appellant, v. STAR SEISMIC LLC, Defendant-Appellee.

No. 2008-1502.

United States Court of Appeals, Federal Circuit.

May 22, 2009.

Charles L. Roberts, Workman Nydegger, of Salt Lake City, UT, argued for plaintiff-appellant. With him on the brief were L. David Griffin, Matthew A. Barlow, and Chad E. Nydegger. Of counsel on the brief was Mark E. Wilkey, Core-Brace, LLC, of West Jordan, UT.

H. Dickson Burton, TraskBritt, PC, of Salt Lake City, UT, argued for defendant-appellee. With him on the brief were Brick G. Power, and Casey K. McGarvey.

Before LOURIE, FRIEDMAN, and PROST, Circuit Judges.

LOURIE, Circuit Judge.

CoreBrace LLC ("CoreBrace") appeals from the judgment of the United States District Court for the District of Utah dismissing its claims for breach of a patent license agreement and for patent infringement. See Corebrace LLC v. Star Seismic LLC, No. 2:08-cv-11, 2008 U.S. Dist. Lexis 55471 (D.Utah July 18, 2008). Because the court did not err in concluding that Star Seismic LLC's ("Star's") license to make, use, and sell the patented product carried with it an implied license to have the product made by a third party, we affirm.

BACKGROUND

CoreBrace owns U.S. Patent 7,188,452 ("the '452 patent"), which is directed to a brace for use in the fabrication of earthquake-resistant steel-framed buildings. On June 10, 2007, Star and the inventor of the '452 patent entered into a "Non-Exclusive License Agreement" ("License"), by which Star received a license under the '452 patent; the inventor later transferred his interest to CoreBrace. The License grants Star a nonexclusive right to "make, use, and sell" licensed products. It does not explicitly provide a right to have the licensed product made by a third party. The License does state that Star may not "assign, sublicense, or otherwise transfer" its rights to any party except an affiliated, parent, or subsidiary company. It also reserves to CoreBrace "all rights not expressly granted to [Star]." However, it provides that Star owns any technological improvements "by a third party whose services have been contracted by [Star]."

Star used third-party contractors to manufacture licensed products for its own use. CoreBrace contends that such use of third parties was a breach of the License because Star lacked the right to have a third party make products for Star. On January 4, 2008, CoreBrace sent a letter to Star stating that the License was terminated. The License provides that it can be terminated if it is breached, after written notice of the breach and after a thirty-day opportunity to cure. CoreBrace has not alleged that it provided notice of a breach or that it gave Star thirty days to cure such breach.

On January 4, 2008, the same day that it sent the termination letter, CoreBrace sued Star for breach of the License due to Star's use of third-party contractors and for patent infringement based on Star's use of patented products under a terminated License. Star moved to dismiss the complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim, and the district court granted Star's motion. The court held that Star did not breach the License by having third-party contractors make the licensed products. According to the court, under Carey v. United States, 164 Ct.Cl. 304, 326 F.2d 975 (1964), a patent licensee's right to "make" an article includes the right to engage others to do all of the work connected with its production. The court also relied on similar reasoning in Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362, 36 Cal.Rptr.2d 581, 885 P.2d 994 (1994). The court further reasoned that, even when a license prohibits sublicensing, as in this case, "have made" rights are granted unless they are expressly prohibited. The court distinguished Intel Corp. v. U.S. International Trade Commission, 946 F.2d 821 (Fed.Cir. 1991), as a case that was primarily about "foundry" rights, or a licensee's rights to make a product and sell it under a third party's name, and as having been based on the parol evidence of the parties' intent in that case not to grant such foundry rights. The court also examined the License and, based on its apparent acknowledgement of third-party manufacturers, concluded that nothing in the License precluded Star from having a third party manufacture the licensed product for Star. Thus, the court held that Star had the right to have a third party manufacture the licensed product for it.

The court then held that, even if Star had breached the License, CoreBrace did not properly terminate it because CoreBrace failed to follow the License's termination provisions. CoreBrace had conceded that it had not followed the termination provisions, but had argued that Star's breach of the License was incurable, so notice was not required prior to termination. According to the court, however, Star's alleged breach was not incurable, as CoreBrace could have notified Star that it should make the product itself, cease using a third party, or have the third party obtain a license. Such action, according to the court, would not have been impossible or futile. Furthermore, the court found that the alleged breach did not frustrate the purpose of the License, as the inventor collected a royalty from Star on each product, no matter who manufactured it. Thus, according to the court, CoreBrace should have followed the prescribed procedure for terminating the License, and the failure to properly terminate it meant that Star retained its rights under the License.

Finally, the court held that, because the License was neither breached nor terminated, Star could not have infringed the patent under which it was licensed. CoreBrace timely appealed the district court's dismissal. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(1).

DISCUSSION

CoreBrace argues that the district court erred in holding that the License was not breached. The License reserves to CoreBrace all rights not expressly granted, and, according to CoreBrace, the district court found that "have made" rights were not expressly granted. CoreBrace also asserts that "have made" rights are not inherent in the right to make, use, and sell, as a licensee can make the product itself rather than having it made by a third party. Thus, CoreBrace argues that Star did not have the right to have a third party make the products.

CoreBrace also argues that the court improperly distinguished Intel and relied on Advanced Micro and Carey to hold that a prohibition on "have made" rights must be explicit. According to CoreBrace, in Intel, this court held that "have made" rights were restricted by the reservation of rights clause in the license. CoreBrace asserts that Advanced Micro is inapposite because the ruling was on appeal from an arbitrator. CoreBrace also argues that Carey is inapposite because the exclusive license in that case granted the right to sublicense, which, according to CoreBrace, includes the right to "have made."

Finally, CoreBrace argues that, although certain provisions in the License mention "third parties," the License also mentions specific third parties, not including third-party manufacturers. Thus, according to CoreBrace, the License would have mentioned third-party manufacturers if the parties had intended for such manufacturers to be permitted. Although the License mentions third parties in general whose services have been contracted for by Star, CoreBrace argues that those third parties might be architects, contractors, or others with a connection to Star, rather than manufacturers.

Star responds that the grant of a right to "make, use, and sell" inherently includes the right to have others make the product, as the Court of Claims held in Carey. Star also asserts that the facts of Intel differ from this case, as the question in Intel was whether the licensee could operate as a foundry, i.e., make the product for a third party and sell it under the third party's name. Moreover, according to Star, the decision in Intel was based on strong parol evidence and applied the law of a different circuit. Furthermore, Star argues that the California Supreme Court later concluded in Advanced Micro that "have made" rights are included in a license to "make, use, and sell" unless they have been expressly excluded.

Star also argues that the License specifically provides that Star may contract with third parties to exercise its rights, which necessarily includes contracting with third-party manufacturers. Moreover, according to Star, the License requires Star to provide its supply and service contracts for inspection, implying that such supply and service contracts, including manufacturing contracts, are permissible.

We conclude that in granting the 12(b)(6) motion the district court correctly determined that Star was entitled to have contractors make the licensed product and did not breach the patent license in doing so. "The question ... whether a Rule 12(b)(6) motion was properly granted is a purely procedural question not pertaining to patent law, to which this court applies the rule of the regional [] circuit," in this case the Tenth Circuit. Gen. Mills, Inc. v. Kraft Foods Global, Inc., 487 F.3d 1368, 1373 (Fed.Cir.2007) (quotation marks omitted). "Because the sufficiency of a complaint is a question of law, [the Tenth Circuit] review[s] de novo the district court's grant of a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), applying the same standards as the district court." Sunrise Valley, LLC v. Kempthorne, 528 F.3d 1251, 1254 (10th Cir.2008) (quotation marks omitted). "A complaint is subject to dismissal for failure to state a claim if the allegations, taken as true, show the plaintiff is not entitled to relief." Jones v. Bock, 549 U.S. 199, 215, 127 S.Ct. 910, 166 L.Ed.2d 798 (2007). The appropriate law for construing the terms of a contract is the law of the jurisdiction identified in the...