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Acknowledging a factual assertion in a contract might preclude you from challenging it later

CellPortSystemsLogo Cellport Systems, Inc., of Colorado, and Peiker, a German company, entered into a patent-license agreement. The agreement required Peiker to pay royalties on certain products, and stated that “the Parties acknowledge [that the specified products] utilize technology, designs or architectures covered by one or more of the claims included in the Licensed Patents.Cellport Sys., Inc. v. Peiker Acustic GmbH & Co., KG, No. 13-1029, slip op. at 3 (10th Cir. Aug. 5, 2014) (reversing and remanding trial-court judgment in part; emphasis added).

In the trial court, Peiker argued successfully that — notwithstanding the license agreement’s “acknowledge” language — certain of Peiker’s products did not come within the scope of the Cellport patent claims, and therefore Peiker did not owe Cellport royalties for sales of those products. The trial court concluded that the “acknowledge” language established only a rebuttable presumption about the products in question, and that Peiker had successfully overcome that presumption. See id. at 6.

The appeals court disagreed: Citing a 1937 Colorado supreme court case, the Tenth Circuit ruled that the acknowledgement was binding on Peiker:

… we do not see anything in the License Agreement that can transform Peiker’s acknowledgments to rebuttable presumptions. See I Oxford English Dictionary 108 (2d ed. 1989) (defining “acknowledge” as “to recognize or admit as true”).

Id. at 10. Consequently, said the Tenth Circuit, it (the appeals court) did not need to determine whether Peiker’s products in question infringed Cellport’s patent claims; this meant that the court did have jurisdiction to hear the appeal and did not need to transfer the appeal to the U.S. Court of Appeals for the Federal Circuit. See id. at 11.

In addition, said the court, the acknowledgement in the contract was dispositive of the question whether Peiker owed royalties for the products in question:

… section 1.17(i) of the License Agreement creates a category of products on which royalties are due regardless of whether any of Cellport’s patents are infringed. Thus Peiker owes Cellport royalties on those products because both products fall within the meaning of subsection 1.17(i). Any evidence that Peiker presented to the district court that the products did not infringe Cellport’s patents is irrelevant.

Id.

Footnote for patent lawyers: On the payment of royalties for products not coming within the scope of the patent claims, the Tenth Circuit cited the Supreme Court’s decision in Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 138 (1969). In that case, the Court stated that “[i]f convenience of the parties rather than patent power dictates the total-sales royalty provision, there are no misuse of the patents and no forbidden conditions attached to the license.” See Cellport, slip op. at 10 (citing Zenith). The Tenth Circuit didn’t, however, cite to any evidence in the record indicating that such a royalty obligation for Peiker’s products in question was in fact for the convenience of the parties and therefore not a misuse of the patents. (It could be that Peiker’s counsel didn’t raise the misuse issue.)

Lessons:

  • A contract reviewer should be extremely careful about statements in a draft agreement in which the parties purport to “acknowledge” something or another, because the acknowledgement might preclude the reviewer’s client from later contending otherwise.
  • A contract drafter, on the other hand, should give some thought to judiciously including one or more such acknowledgements in a draft, because doing so could help make it easier for the client’s future trial counsel to do their jobs. (Don’t be a jerk about it, though; nobody likes a drafter who asks the other side to “acknowledge” something that is or would be in dispute.)

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