18 May 2009

US Appeals Court Rules an Irrevocable License Cannot Be Terminated Even in the Case of Material Breach

In 1998, Nano-Proprietary Inc. granted Canon Inc. an "irrevocable" and "perpetual" license under Nano-Proprietary's field emission display patents, useful in field of flat panel televisions. The license expressly prohibited sublicenses. A mere six months later, Canon entered into a joint development venture with Toshiba to develop technology utilizing Nano's patents. After Nano brought suit, the lower court in the case ruled that the joint venture constituted an impermissible sublicense and therefore a material breach of the agreement. Consequently, the lower court, notwithstanding the irrevocability language, ruled that this breach permitted Nano to terminate the license.

The appeals court (Fifth Circuit Court of Appeals) reversed, holding that under ordinary rules of contract interpretation, a perpetual and irrevocable license is exactly that. Nano would be entitled to pursue breach of contract remedies, but termination was not available per the terms of the parties' bargain. Adding insult to injury, the appellate court held that Nano's damages claims were disallowed as speculative, given the undeveloped and incipient nature of the market in which the patents applied.