Patents, Copyrights and Trademarks -- 2013



Jaffe v. Samsung Electronics Co.   (4th Circuit)

Effect of bankruptcy on patent cross-licensing agreements

This case involves a German company that manufactured semiconductor memory devices, but that filed for bankruptcy. Over the years, it has signed numerous cross-license agreements for thousands of patents relating to DRAM technology, flash memory and semiconductor process technology. The validity of those licenses, and the expectations of many high-tech companies that have relied on them, are in jeopardy in this litigation. The foreign representative of the company sought a court order allowing it to reject the licenses for its U.S. patents and compel its licensees to negotiate new licensing agreements at more favorable rates. The court rejected this request, but that issue was appealed to the U.S. Court of Appeals for the Fourth Circuit.

The NAM and other business groups filed an amicus brief on Nov. 20, 2012 urging the appeals court to affirm this decision. On Dec. 3, 2013, it did so. It ruled that the bankruptcy judge properly balanced the interests of all parties, and that U.S. bankruptcy law allows licensees the right to retain their rights under the licenses. Our brief argued that allowing the rejection of cross-license agreements in bankruptcy could have a devastating impact on the American semiconductor industry and the American economy as a whole. Companies depend on cross-licensing to protect their massive investments in research, development and manufacturing, and eliminating that certainty would constrain investment and innovation in the United States.

Allowing unilateral rejection of patent cross-licenses makes a licensee pay twice to use the same patent. After companies sink huge investments into product development, production, marketing and distribution, it would be much more difficult and expensive to switch to alternative designs and products, and they would be in a much weaker negotiating position. Patent owners in bankruptcy would be able to use the threat of an injunction to extract an extortionate royalty, rather than the actual market value of a patent when it was implemented by the licensee. This in turn would have a negative impact on consumers, research and development, innovation and exports. Moreover, U.S. producers would have an incentive to move their manufacturing operations to another country to avoid infringement liability under U.S. law. It would also provide perverse incentives for companies with patents to transfer them to entities with marginal financing, with the possibility that bankrupcty would allow them to recover far more than they originally negotiated for their licenses.

The outcome is a substantial relief to manufacturers and others who rely on patent licensing to stay in business.


Related Documents:
NAM brief  (November 20, 2012)