In an opinion issued December 4, 2023, the U.S. Court of Appeals for the Federal Circuit[1] reversed a lower court’s denial of Intel Corporation’s (“Intel’s”) motion for leave to amend its answer to assert a new license defense in a patent infringement suit brought by VLSI Technology LLC (“VLSI”).  The decision paves the way for Intel to make the case that it received a license to VLSI’s patents when a company that Intel had an existing license with became affiliated with VLSI due to its acquisition by an investment management firm.

VLSI sued Intel for infringement of two patents in April 2019.  Several months prior to trial, in September 2020, Intel filed a motion to stay the litigation due to a new license defense the company wished to assert.  Intel argued it had acquired a license to VLSI’s patents (including the two patents asserted in the litigation) due to a change of control of Finjan, Inc., a company with which Intel had a pre-existing license agreement.

Intel entered into a patent license agreement with Finjan, Inc. and Finjan Software, Inc. (collectively, “Finjan”) in November 2012.  Under the agreement, Intel received a perpetual and irrevocable license to “Finjan’s Patents,” which meant, “all Patent Rights that are owned or controlled at any time on or after November 6, 2012[,] by Finjan.”  Notably, the agreement defined “Finjan” as Finjan, Inc., Finjan Software, Inc., and their “Affiliates.”  “Affiliates” was defined as “any Person that, now or hereafter, directly or indirectly through one or more entities, controls or is controlled by, or is under common control with [Finjan].[2]” In July 2020, affiliates of investment management firm Fortress Investment Group LLC (“Fortress”) acquired Finjan, bringing Finjan under the control of Fortress.  Since VLSI is also managed by Fortress, Intel argued that VLSI and Finjan were under the common control of Fortress, making VLSI an “Affiliate” of Finjan under Intel’s 2012 patent license.

In November 2020, the district court had not yet ruled on Intel’s September 2020 motion to stay.  Seeking to preserve its license defense, Intel filed a subsequent motion to amend its answer to include the defense.  Intel also sought to sever the defense from the ongoing case and to stay its adjudication.  The case went to trial in late February 2021 without a ruling from the district court on the November 2020 motion. A jury found infringement of both asserted patents and awarded VLSI damages totaling over $2 billion dollars.  Only after trial did the district court finally rule on Intel’s motion to amend its answer to include the license defense, which it denied.

On appeal, the Federal Circuit reversed that denial, which had been granted by the district court due to untimeliness, prejudice, and “most significantly – unimportance because of futility of the defense.”  After dispensing with untimeliness and prejudice, the Federal Circuit focused on what it considered to be the “determinative” factor: “the soundness of the district court’s conclusion that the record developed makes the license defense so clearly meritless that allowing it even to be pleaded is a futile act.”  This conclusion, according to the Federal Circuit, was wrong as a matter of law.

The holding was not on the merits of the license defense itself, which will be the subject of further proceedings on remand.  Instead, the Federal Circuit held simply that the defense needed to be more fully developed either through “fuller analysis of the governing law…or more fact-based litigation.”  Following Delaware law, the district court denied the motion as futile because it determined VLSI could not be bound by a contract to which it is not a party.  However, the Federal Circuit noted that though this is the standard rule, there can be exceptions under certain circumstances.  Prior precedent from the Delaware Supreme Court indicated that there are some situations when contracts may bind affiliates.

Sidestepping any substantive determinations, the Federal Circuit hinted at potential issues for analysis on remand, including whether it matters that VLSI was not an affiliate of Finjan when the contract was entered into in 2012 and whether it matters that VLSI does not control and is not controlled by an original signatory.  The Federal Circuit also suggested that the district court could consider certifying a legal question to the Delaware Supreme Court.  Though the Federal Circuit kept its holding narrow, this dicta suggests the court recognizes the sweeping implications the license defense would have if it is ultimately successful.  

If Intel prevails, it would confirm that the “future affiliates” trap is a significant and practical risk in patent (and potentially other IP) license agreements.  That trap involves licenses granted on behalf of a licensor and its affiliates, where the term “affiliate” is not clearly defined to be limited to affiliates existing at the time of entering into the license agreement, such that a company (i.e., the future affiliate) may be bound by a license agreement it did not enter into, simply because it becomes the licensor’s “affiliate” later on (in this case, having come under common control with the licensor as a result of both companies being held by the same investment management firm).  This issue, as well as issues of foreseeability will undoubtedly be scrutinized closely on remand.

[1] VLSI Technology LLC v. Intel Corp., No. 22-1906 (Fed. Cir. Dec. 4. 2023).

[2] “Control” was defined as “the possession, direct or indirect, of the power to direct the management and policies of a Person, whether through the ownership of any percentage of voting interests of such Person, through contract or otherwise.”