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Fraunhofer-Gesellschaft Zur Forderung Der Angewandten Forschung E. V. v. Sirius XM Radio Inc.

United States Court of Appeals, Federal Circuit

October 17, 2019

FRAUNHOFER-GESELLSCHAFT ZUR FÖRDERUNG DER ANGEWANDTEN FORSCHUNG E. V., Plaintiff-Appellant
v.
SIRIUS XM RADIO INC., Defendant-Appellee

          Appeal from the United States District Court for the District of Delaware in No. 1:17-cv-00184-JFB-SRF, Senior Judge Joseph F. Bataillon.

          David C. McPhie, Irell & Manella LLP, Newport Beach, CA, argued for plaintiff-appellant. Also represented by Ben J. Yorks, Alexis Paschedag Federico, Kamran Vakili; Alan J. Friedman, Shulman Hodges & Bastian LLP, Irvine, CA.

          Mark Baghdassarian, Kramer Levin Naftalis & Frankel LLP, New York, NY, argued for defendant- appellee. Also represented by Jonathan Caplan, Shannon H. Hedvat; Paul J. Andre, Menlo Park, CA.

          Before Dyk, Linn, and Taranto, Circuit Judges.

          DYK, CIRCUIT JUDGE

         Fraunhofer-Gesellschaft zur Förderung der an-gewandten Forschung E.V. ("Fraunhofer") sued Sirius XM Radio Inc. ("SXM") alleging infringement of claims of four of Fraunhofer's patents. The district court granted SXM's motion to dismiss for failure to state a claim on the ground that it had a valid license to the patents-in-suit. We conclude that this license defense cannot be resolved on a motion to dismiss. We vacate the judgment, and remand to the district court for further proceedings. We also reverse the district court's denial of Fraunhofer's motion for leave to amend.

         Background

         Fraunhofer is a partially state-funded non-profit research organization headquartered in Munich, Germany. Over the past three decades, Fraunhofer has developed and patented several inventions related to multicarrier modulation. Multicarrier modulation is a method for transmitting a main data stream over multiple carrier data streams. The utilization of multiple carrier data streams is useful in satellite-based communication networks, where the signal quality for an individual data stream can vary depending on the line of sight between the satellite and the receiver.

         On March 4, 1998, Fraunhofer and a third party, WorldSpace International Network Inc. ("WorldSpace"), entered into an exclusive license agreement ("the Master Agreement") related to Fraunhofer's multicarrier modulation technology ("the MCM Intellectual Property Rights"). The Master Agreement gave WorldSpace a "worldwide, exclusive, irrevocable license, with the right to sublicense, under the MCM Intellectual Property Rights to make, have made, use, have used, sell or have sold MCM Technology (and products and services incorporating or utilizing the MCM Technology) in connection with WorldSpace Business." J.A. 483. The Master Agreement required WorldSpace to pay a $1 million license fee, payable in installments, to Fraunhofer (which was fully paid by December 31, 2000) and to make other payments relating to future patent prosecution. Section 9.5 of the Master Agreement states that "[t]his Agreement shall be subject to, governed by, and construed in accordance with" German law. J.A. 488.

         In the late 1990s, SXM began developing its Digital Audio Radio Services ("DARS") System.[1] SXM sought to use Fraunhofer's MCM Technology in the DARS system. Because Fraunhofer had already granted an exclusive license to WorldSpace, on July 24, 1998, SXM entered into a Sub-license Agreement with WorldSpace. The Sublicense Agreement granted SXM a license "to use the WorldSpace Licensed Technology [including the MCM Intellectual Property Rights] for the development, implementation and commercialization of the [SXM DARS] System for transmission in and over the geographic area of the United States and its territories," J.A. 187. On June 7, 1999, the Sublicense Agreement was amended to make the license "irrevocable." J.A. 203.

         Thereafter, Fraunhofer assisted SXM in developing a satellite communication system utilizing Fraunhofer's technology. On July 16, 1999, SXM and Fraunhofer entered into a Technical Consulting Contract for "Fraunhofer [to] contribute to the development of the [SXM] DARS system in the following areas: System Engineering; Receiver development; Test equipment development and production; [and] multimedia adapter." J.A. 847. The Technical Consulting Contract also confirmed that Fraunhofer and SXM understood that the "patents related to MCM technology are exclusively licensed to WorldSpace," and that SXM had agreed to obtain a license from WorldSpace. J.A. 881. Pursuant to the Technical Consulting Contract, Fraunhofer allegedly constructed for SXM "the [SXM] DARS System . . . using the technologies [allegedly] covered by the [patents that SXM is now accused of infringing]." J.A. 1409.

         WorldSpace thereafter ran into financial difficulties. On October 17, 2008, WorldSpace filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On June 12, 2012, WorldSpace's bankruptcy case was converted to Chapter 7. At the bankruptcy court, WorldSpace rejected the Master Agreement pursuant to section 365(d)(1) of the Bankruptcy Code.[2]

         Under the Supreme Court's recent ruling in Mission Products, WorldSpace's rejection was equivalent to a breach occurring "immediately before the date of the filing of the [bankruptcy] petition." Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S.Ct. 1652, 1658 (2019) (alterations in original) (quoting 11 U.S.C. § 365(g)(1)). This breach gave Fraunhofer the right to terminate the Master Agreement. Fraunhofer did not at the time terminate the agreement but did file an administrative claim for amounts unpaid under the Master Agreement. Nor did WorldSpace terminate the Sublicense Agreement. On July 13, 2009, the bankruptcy court approved a Settlement Agreement between WorldSpace and SXM that "provided that SXM would pay WorldSpace $298, 517 in satisfaction of all of its obligations under the sublicense, and emphasized that the sublicense would remain in effect." J.A. 16 (citing J.A. 219, §§ 1, 3). As a result of the Settlement Agreement no further payments were due from SXM to WorldSpace under the Sublicense Agreement, and there is no indication that SXM was otherwise in breach of the Sublicense Agreement. SXM continued to utilize the MCM technology.

         In October 2015, many years later, Fraunhofer sent a letter to SXM alleging that SXM was infringing four of its patents: U.S. Patent Nos. 6, 314, 289 ("the '289 patent"), 6, 931, 084 ("the '1084 patent"), 6, 993, 084 ("the '3084 patent"), and 7, 061, 997 ("the '997 patent") (collectively, "the patents-in-suit"). The '289 patent describes a multi-antenna system used to transmit and receive multicarrier modulation signals. The '1084 patent describes a method used to correct phase shifts that are introduced by echoes that occur during multi-carrier transmission. The '3084 patent describes a method for inserting reference symbols into each carrier data stream which are then used for coarse synchronization of carrier signals. The '997 patent describes a method and apparatus for fine frequency synchronization using phase shift keying. These four patents were covered in the Master Agreement and Sublicense Agreement.

         On November 13, 2015, Fraunhofer sent a letter to WorldSpace ("Termination Letter") claiming that the Master Agreement "was terminated in the context of the rejection [in bankruptcy]," and "declar[ing] (in the alternative and as a precautionary measure in case the [Master Agreement] has remained yet unterminated) the [Master Agreement] terminated for cause (auβerordentliche Kündigung) under German law [and] . . . on the basis of the provisions in Section 7.2 and 7.3 of the [Master Agreement]." J.A. 251.

         On February 22, 2017, Fraunhofer sued SXM for infringement the '289 patent, '1084 patent, '3084 patent, and '997 patent in the United States District Court of Delaware. SXM moved to dismiss the complaint. Fraunhofer later sought to amend its complaint. The district court, applying United States law, dismissed Fraunhofer's complaint on the ground that Fraunhofer's sublicense under the Sublicense Agreement was a complete defense to infringement and denied Fraunhofer's motion to amend the complaint on ground of futility.

         We have jurisdiction over this appeal pursuant to 28 U.S.C. § 1295(a)(1). Before oral argument, we issued an order advising that parties be prepared to address:

1. Whether the choice of law provision in Section 9.5 of the Master License Agreement requires this court to interpret the Master License Agreement according to German law, and to determine the rights of SXM according to German law.
2. Whether the application of German law would result in SXM's sublicense rights surviving contract termination of the Master License
Agreement. See, e.g., M2Trade, Bundesgerichtshof [BGH] [Federal Court of Justice] July 19, 2012, Entscheidungen des Bundesgerichtshofes in Zivilsachen [BGHZ] 194, 136 (Ger.); Take Five, BGH July 19, 2012, Neue Juristische Wochenschrift Rechtsprechungs-Report Zivilrecht [N]W-RR] 2012, 1127 (Ger.).
3. Whether this case should be remanded to the District Court for further proceedings to address the impact of German law ...

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