The Software IP Report

Pleading Implied License as an Affirmative Defense to Patent Infringement

An implied license is an affirmative defense to patent infringement. Because the defense is, by definition, highly fact-specific, it is not always clear what allegations are required to adequately plead the implied license defense. However, requirements for pleading the defense, e.g., under an estoppel theory, are not unduly onerous.  The court’s denial of a motion to dismiss the defense in Integrated Global Concepts, Inc. v. J2 Global, Inc., No. C-12-03434-RMW (N.D. Cal. June 28, 2013), is illustrative.

A complicated procedural history, including other litigation, underlies this declaratory judgment action. For present purposes, the essentials of the pleadings are that J2 brought counterclaims seeking a declaratory judgment of infringement of four patents in response to IGC’s declaratory judgment action, and IGC in turn responded to J2’s counterclaims with its own counterclaim for a declaratory judgment of implied license, among other things.

The facts underlying these pleadings are also a little complicated, but necessary for understanding the basis of the implied license defense raised by IGC. The facts (which you can skim and skip below to the gist of the court’s analysis) as pled by IGC were that:

  • In 1997 and 1998, J2 filed patent applications that subsequently issued as U.S. Patent Nos. 6,208,638 and 6,597,688.
  • In 1999, IGC “entered into an exclusive agreement with a company named eFax which called for IGC to operate eFax’s fax-to-email service using IGC’s “own systems, source code and intellectual property.”
  • J2 began negotiating a merger agreement with eFax around September 1998. When J2 became aware of eFax’s dispute with IGC concerning eFax’s payment obligations for certain IGC services, “IGC, and eFax entered into an agreement whereby eFax and j2 acquired from IGC a non-exclusive software license and other services to implement the transfer of the eFax customer base from IGC’s systems to j2’s.”
  • A June, 2000, agreement between J2, IGC, and eFax released IGC from claims arising from past services that IGC provided to eFax or J2.
  • “In early 2005, j2 acquired control of U.S. Patent Nos. 4,994,926; 5,291,302; 5,459,584; 6,643,034; and 6,785,021 (the ‘Catch Curve patents’).” J2’s subsidiary Catch Curve sued IGC in 2006 in Georgia District Court, alleging infringement of the Catch Curve patents. IGC brought a breach of contract counterclaimed, dismissed by the Georgia court for failure to state a claim.
  • In April, 2012, J2 sued IGC in the Central District of California, “asserting infringement of the ‘638, ‘688, and ‘132 patents.” That case was stayed, “pending resolution of IGC’s contract claims” in the instant case.

The court began its analysis by noting the pleading standards established by Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), allow a claim to survive a Rule 12(b)(6) motion to dismiss when it has “facial plausibility.” Further, a declaratory judgment action may be brought where there is a “substantial controversy.”

In this case, “IGC’s claim for declaratory relief of an implied license is an actual, non-abstract controversy, which the court may hear.” An implied license requires no formal grant, but “can arise in a variety of ways including through acquiescence, conduct, equitable estoppel and legal estoppel.” When an implied license arises, it “signifies a ‘patentee’s waiver of the statutory right to exclude others from making, using or selling the patented invention.'” (Citing Wang Labs. v. Mitsubishi Elecs. Am., 103 F.3d 1571, 1580 (Fed. Cir. 1997)). IGC here “argue[d] it has an implied license under the theories of legal estoppel, equitable estoppel, and acquiescence.”

The court first dismissed J2’s argument that, because IGC had pled only an estoppel theory, it could not raise other theories in its briefing. Legal theories are merely labels, and IGC could freely argue that it had pled adequate facts to support its implied license counterclaim. However, as it turned out, the court decided in IGC’s favor on its equitable estoppel theory, and did not turn to its other theories. The court explained that:

An implied license by equitable estoppel requires that: “(1) the patentee, through statements or conduct, gave an affirmative grant of consent or permission to make, use, or sell to the alleged infringer; (2) the alleged infringer relied on that statement or conduct; and (3) the alleged infringer would, therefore, be materially prejudiced if the patentee is allowed to proceed with its claim.” Winbond Electronics Corp. v. Int’l Trade Comm’n, 262 F.3d 1363, 1374 opinion corrected, 275 F.3d 1344 (Fed. Cir. 2001).

The court found that IGC pled a plausible claim of implied license by equitable estoppel by alleging “that the Agreement of Understanding was an affirmative grant, that it relied on the Understanding in continuing to operate its product, and thus, that it would be prejudiced if j2 proceeded with its claims.” J2’s argument that its delay in bringing suit was due to its discretion, and its desire to wait for a patent re-examination to be completed, and that therefore it never acquiesced, was unavailing. The court explained that “IGC has adequately alleged a communication that could form the basis for an implied license and j2’s alleged behavior around the time of that communication could be interpreted as acquiescing to the license.”

The court also dismissed IGC’s claims for patent exhaustion (because there was no allegation of a sale), and for punitive damages (because IGC had cited no authority for punitive damages beyond the award for an “exceptional case” provided in 35 U.S.C. §§ 284-85).