In answering patent infringement complaints, defendants often do their best to throw in any potentially supportable equitable estoppel / implied license defense they can think of. But in patent actions, these defenses can be hard to prove and are rarely successful. They typically drop off at some point later in the case.
This week we got a great example of what a successful equitable estoppel defense looks like, in an opinion from Judge Bataillon granting summary judgment on that basis.
Basically, it involved lots of incredibly strong facts.
The defendant is Sirius XM Radio (SXM). According to the opinion, back in 1998, plaintiff Fraunhofer granted an "irrevocable" license to a third party named WorldSpace. Worldspace then granted an "irrevocable" sublicense to defendant SXM's predecessor, and the parties (apparently plaintiff, SXM, and Worldspace) started jointly developing the technology.
Later, in 2008, Worldspace went bankrupt, and the defendant SXM paid nearly $300k to "maintain" its irrevocable sublicense.
Just after that, things get interesting. Plaintiff and Worldspace "rejected" the master license agreement to Worldspace, which plaintiff argues also invalidated the defendant's sublicense. But the plaintiff kept working with SXM and didn't tell SXM that plaintiff thought they were infringers:
WorldSpace and Fraunhofer rejected . . . the master license agreement . . . . But if [plaintiff] Fraunhofer believed the [defendant's] sublicense also terminated, it kept that to itself for more than five years and, in the meantime, continued consulting with [defendant] SXM as usual. Not until October 2015 did Fraunhofer notify SXM of its alleged infringement.
Fraunhofer-Gesellschaft Zur Forderung der Angewandten Forschung E.V. v. Sirius XM Radio Inc., C.A. No. 17-184, at 2 (D. Del. July 10, 2023).
The Court had previously found that the SXM was licensed under the sublicense, but the Federal Circuit reversed, "questioning whether the master license had been terminated" and if so whether the sublicense survived.
This time, the Court held that even assuming the license terminated, equitable estoppel prevents the plaintiff from terminating the license in secret, working with the defendant for five years to develop the technology, and then asserting infringement:
Why the wait? If, as Fraunhofer so forcefully argues, the master license conclusively terminated in June 2010, then its undisputed more than five-year delay in asserting, let alone mentioning, its patent rights against a known former sublicensee and now-alleged infringer—who, for that matter, had consulted with Fraunhofer in further developing that patented technology and had paid nearly $300,000 the year before to maintain the sublicense—amounts to a bait and switch. This equity estops.
. . .
At bottom, if Fraunhofer believed that its 2010 rejection of the master license extinguished the sublicense that SXM had just fully paid and could point to Bankruptcy Court order approving, had consulted with Fraunhofer for years under, and would continue to consult in at least limited capacity for several more years, the record confirms that Fraunhofer never said so until five-plus years later. That undisputed and misleading silence-plus-more very reasonably implied approval of SXM’s now-allegedly infringing activity.
Id. at 3.
The Court also found detrimental reliance by the SXM when it built out a satellite radio network using plaintiff's technology, given it had at least one other non-infringing option that it could have used instead.
Prejudice, undisputed, requires little inquiry. Besides the Deutsche Marks lost to history and the remaining hundreds of thousands of Euros paid to develop the high-band system before and after the supposed master-license termination, work it now apparently can’t use without Fraunhofer’s permission, . . . SXM irretrievably installed hundreds of millions of dollars of equipment into peoples’ cars during the ten years it took to shift car manufacturers over to the new system—or launched it into space . . . .
The Court also noted that terrestrial radio is now eating satellite radio's lunch:
And it’s worth highlighting (judicial notice permitting), now that high-speed cellular data permits music and podcast streaming to iPhones in cars across the nation, it’s not just that SXM can’t get its time back—from present vantage, that five-year period of Fraunhofer’s silence may have been SXM’s golden years.
Id. at 8. The Court summed it up nicely at the end:
To conclude, an undisputed record establishes a more than five-year period during which Fraunhofer’s silence and course of conduct (intentional or not) misled SXM into reasonably believing it still had a valid and Bankruptcy Court approved sublicense to the asserted patents, during which SXM substantially developed its business in reliance, in an expenditure of time, product development, manufacturing shifts, and installations that (aside from the money) SXM could not get back were this stale claim permitted.
THEREFORE, IT IS ORDERED THAT SXM’s motion for summary judgment, D.I. 638, is granted [as to this issue].
Id. at 8.
So, next time you are staring at a draft answer, racking your brain for what equitable estoppel might look like in a patent context, think back to this case and ask yourself: "Did plaintiff secretly cancel my client's license and then spend five years helping it develop a global satellite network, only to turn around and claim infringement by the very same network it helped develop?"
If you have something like that, you might just have an equitable estoppel defense.
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