Legal Translation of Licensing Agreements
There is a burgeoning need for translating licensing agreements from English to Chinese. Licensing agreements are commonly entered into when one company desires to utilize products or technology protected by another company’s patent. In our increasingly globalized economy, license agreements may involve multiple patents, not all of which may be U.S. based.
Indeed, many companies choose to obtain several patents, including patents from other countries, in order to protect their products to the fullest. In the case discussed below, the court analyzed whether the defendant owed the plaintiff royalty fees when the plaintiff’s U.S. patent expired but the plaintiff’s Chinese patent remained in effect.
Plaintiff and Defendant Enter Into a Licensing Agreement.
In 2004, the plaintiff, a company that sells exercise equipment, entered into a patent licensing agreement with the defendant, a manufacturer of exercise equipment. Pursuant to their product and licensing agreement (“Agreement”), the defendant received a license to incorporate the plaintiff’s patented technology into the defendant’s elliptical machines. In return, the defendant agreed to pay the plaintiff a 5% royalty fee on the sales it received for the products that utilized the plaintiff’s patents. Some of the plaintiff’s patents were U.S.-based while others were foreign patents, including Chinese patents.
The Plaintiff’s U.S. Patent Expires.
In 2015, all of the relevant patents to the parties’ licensing agreement expired except for one Chinese patent. For almost a full year, the defendant continued paying plaintiff royalty fees on products it manufactured and sold to customers in the United States and other countries in which the plaintiff held no patents.
Thereafter, the defendant decided that it did not owe plaintiff any royalty fees due to the fact that the U.S. patents expired. Accordingly, the defendant stopped paying the plaintiff royalty fees for these products. The plaintiff then filed suit in federal court.
After filing suit, the parties filed cross-motions for summary judgment. The plaintiff argued that the unassembled elliptical machines the defendant sold in the United States were “Products” which, according to the Agreement, entitled plaintiff to royalty fees. The defendant contended, however, that the term “Products” in the Agreement related to patent infringement and that the unassembled elliptical machines did not violate the one remaining Chinese patent. The defendant also argued that it did not violate the plaintiff’s patent because it did not actually assemble any products in China. Rather, the defendant argued that it merely exported components to be assembled in other countries, which did not constitute a patent violation.
Court Reviews English Translations of Chinese Patent Law, Holds Defendant Violated Chinese Patent Law.
The court concluded it was necessary to conduct an infringement analysis under Chinese patent law in order to determine whether defendant owed any royalty fees under the licensing agreement. Each party provided the court with their own English translations of the applicable sections of Chinese patent law.
After reviewing the Chinese to English legal translations, which the court did not find to be substantially different, the court held that the defendant had violated the plaintiff’s Chinese patent and ruled that the defendant was required to pay the plaintiff royalty fees on the sale of goods which utilized the plaintiff’s patent.
The court reasoned that “the inclusion of final assembly instructions with all of the necessary component parts is equivalent to actual assembly for purposes of practicing the Chinese patent.” The court also held that the act of offering the products for sale constituted a violation of Chinese Patent Law, Article 11, and that the defendant infringed on the plaintiff’s Chinese patent within China because it was undisputed that the products were manufactured and packaged in China.
Court Held Patent-Misuse Doctrine Did Not Apply.
The court specifically rejected the defendant’s argument that paying royalty fees to plaintiff would violate the “patent-misuse doctrine.” As discussed by the United States Supreme Court in Brulotte v. Thys Co., 379 U.S. 29 (1964), this doctrine holds that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se,” and “[c]ontracts that call for a licensee to pay royalties on a product after the patent for that product has expired are unenforceable.”
However, the Brulotte court also held that when a license agreement covers multiple patents, “royalties may run until the latest-running patent covered in the parties’ agreement expires.” This exception to the “patent misuse doctrine” is otherwise known as “tying” or “bundling.” In determining that the patent misuse doctrine did not apply, the court held that the products in dispute were covered by the Chinese patent at the time the U.S. patent expired.
Court Explains Lawsuit Involves Breach of Contract, Not Patent Infringement.
In holding that the defendant owed the plaintiff royalty fees, the court explained that the case was not an action intended to “punish” the defendant for infringing on a Chinese patent under U.S. patent law, but, rather, an action to hold the defendant to its contractual obligations.
The court was careful to point out that this case was a breach of contract action, not a patent infringement action. The court further explained that “whether or not a U.S. court would uphold a patent infringement suit based on the sale of products in the U.S. covered by a Chinese patent, or whether a U.S. court would enforce a Chinese judgment of infringement in such a case is…another issue entirely.”
After establishing that the defendant violated the parties’ licensing agreement, the court entered judgment in favor of the plaintiff and against the defendant in the sum of $1,782.508. The court also held that the plaintiff was entitled to recoup its attorneys’ fees, expenses, and other costs.
In consideration of the above case, attorneys should carefully review the scope of clients’ license agreements, particularly when licensing agreements involve both U.S. and foreign patents and their foreign language translations. As demonstrated above, parties should be careful not to violate any existing licensing agreements. Failing to adhere to such contractual agreements can result in expensive and protracted litigation and can be financially disadvantageous to the losing party.
The case is Nautilus, Inc. v. Icon Health & Fitness, Inc., Court No. SA-16-CV-00080-RCL, decided on January 19, 2018 by the U.S. District Court for the Western District of Texas.
All Language Alliance, Inc. provides certified legal translation of license agreements, licensing contracts, royalty agreements, licensing agreements from English to Spanish, Simplified Chinese, Arabic, French, Traditional Chinese, German, and other foreign languages to English.
**This law translations blog article should not be construed as legal advice. You should always consult an attorney regarding your specific legal needs.