[00:00:32] Speaker 02:
Next case is Diamond Coating Technologies versus Hyundai Motor America.

[00:00:42] Speaker 02:
Council, prepared to go forward?

[00:00:44] Speaker 02:
Yes, Your Honor.

[00:00:45] Speaker 02:
Mr. Grinstein?

[00:00:47] Speaker 02:
Yes, Your Honor.

[00:00:47] Speaker 02:
Mr. Grinstein, there's very little in the brace that isn't highlighted as yellow.

[00:00:58] Speaker 02:
Does all of this have to be confidential?

[00:01:00] Speaker 02:
Because if it is,

[00:01:01] Speaker 02:
I have a couple questions.

[00:01:03] Speaker 01:
Well, yes, Your Honor.

[00:01:05] Speaker 01:
We are in the business of licensing.

[00:01:06] Speaker 01:
The confidential material that's been designated as confidential all relates to the license agreement or the assignment agreement between DCT and Sanyo, which was marked confidential.

[00:01:18] Speaker 01:
And so we're not in the complete authority.

[00:01:21] Speaker 02:
It was marked confidential?

[00:01:23] Speaker 01:
In the course of the agreement.

[00:01:25] Speaker 01:
The agreement expressly states that the agreement is confidential.

[00:01:30] Speaker 01:
We don't have the power to wave that unilaterally, Your Honor.

[00:01:33] Speaker 02:
OK, so let me ask a couple of questions.

[00:01:35] Speaker 02:
One, what's the impact of a published opinion which reveals the relevant sections of that agreement?

[00:01:44] Speaker 01:
Your Honor, I wouldn't suggest that Your Honors should publish an opinion that holds back anything whatsoever.

[00:01:49] Speaker 02:
The court below published an opinion, counsel.

[00:01:51] Speaker 02:
Excuse me?

[00:01:52] Speaker 02:
The court below published an opinion?

[00:01:54] Speaker 01:
That's right, Your Honor.

[00:01:55] Speaker 02:
The clock's not on.

[00:01:56] Speaker 02:
It should be.

[00:01:59] Speaker 01:
The court below did publish an opinion, Your Honor.

[00:02:02] Speaker 01:
I don't believe that the court's opinion below went extensively into it.

[00:02:06] Speaker 02:
Well, no.

[00:02:06] Speaker 02:
I take that back.

[00:02:06] Speaker 02:
It shouldn't be.

[00:02:07] Speaker 02:
Go ahead.

[00:02:08] Speaker 02:
Resend it.

[00:02:09] Speaker 01:
Go ahead.

[00:02:10] Speaker 01:
The court below did publish an opinion.

[00:02:12] Speaker 01:
I don't think it got extensively into the exact contractual terms that we're discussing.

[00:02:17] Speaker 02:
So it quoted them directly and by number.

[00:02:22] Speaker 02:
OK.

[00:02:24] Speaker 02:
So number two, you're bound by that agreement with Sanyo.

[00:02:28] Speaker 01:
That's correct, Your Honor.

[00:02:30] Speaker 02:
So they control that?

[00:02:32] Speaker 01:
We don't have the unilateral right to waive the confidentiality provision.

[00:02:35] Speaker 01:
That's certainly true, Your Honor.

[00:02:36] Speaker 04:
Do you think that that might suggest that Sanyo has control over some substantial control over your ability to stand here and answer important questions whose answers are necessary to establish your right to sue, and maybe that's a substantial right?

[00:02:53] Speaker 01:
This court has never held that the right to control the confidentiality of an agreement is a substantial right.

[00:02:58] Speaker 04:
that speaks to issues like- You have to establish, particularly as an appellant, that you have a right to sue.

[00:03:05] Speaker 04:
Correct.

[00:03:06] Speaker 04:
We have kind of a hard time, and this completely turns on the details of this agreement, and we can't talk about them.

[00:03:13] Speaker 04:
And Sanyo has the ability to stop you from talking about it.

[00:03:19] Speaker 01:
How does that not- My understanding, Your Honor, is that given the context of the court proceeding that we're in right now,

[00:03:26] Speaker 01:
Uh, we are freely able to talk about the provisions of the contract because it's necessary.

[00:03:31] Speaker 02:
Run that clock.

[00:03:36] Speaker 03:
Are we free to?

[00:03:37] Speaker 03:
Yeah.

[00:03:38] Speaker 03:
All right.

[00:03:39] Speaker 03:
So just to be sure, I don't want to step on any toxic.

[00:03:43] Speaker 03:
Your understanding is that we are free to discuss everything in the briefs that it's marked as confidential.

[00:03:50] Speaker 01:
That's my understanding of how the switch rules work, your honor.

[00:03:53] Speaker 01:
I don't believe I can stop the court from asking me questions about

[00:03:56] Speaker 01:
the specific provisions and I'm here ready, willing and able to discuss the specific provisions of the contract.

[00:04:01] Speaker 01:
I believe that's necessary in this court's opinion.

[00:04:04] Speaker 03:
This is a recorded oral argument.

[00:04:06] Speaker 03:
Yes, Your Honor.

[00:04:07] Speaker 01:
I understand that.

[00:04:08] Speaker 03:
And there will be possibly a published opinion.

[00:04:11] Speaker 03:
Correct, Your Honor.

[00:04:12] Speaker 02:
And you haven't asked for the courtroom to be cleared.

[00:04:14] Speaker 03:
I have not, Your Honor.

[00:04:19] Speaker 02:
So we can take it you waived the confidentiality.

[00:04:22] Speaker 01:
Your Honor, I think we've done what we need to do to protect the confidentiality as with respect to our contractual partner, Sanyo.

[00:04:31] Speaker 01:
And I believe at this point, Sanyo couldn't complain about the steps we've taken to protect the confidentiality.

[00:04:36] Speaker 01:
But Your Honors need to be able to ask me questions about these provisions in the agreement.

[00:04:40] Speaker 01:
And so at this point, per court order, per the court's rulings and necessities, we've got to discuss these issues.

[00:04:50] Speaker 01:
But as it relates to this contract, I think an important initial matter we should consider, Your Honors, is how this case differs from the vast majority of this Court's previous standing cases.

[00:05:03] Speaker 01:
In the vast majority of this Court's previous standing cases, we have a situation in which a holder of title of the patents exclusively licenses some set of rights to a licensee.

[00:05:16] Speaker 01:
And then this court is faced with a question from a prudential standing standpoint of whether or not the licensee... Let me ask you a clean-up question for me.

[00:05:25] Speaker 02:
Yes, Your Honor.

[00:05:26] Speaker 02:
In your blue brief on 34 and 37, you say various provisions were all simply intended to ensure, and then again on 37, simply intended to protect.

[00:05:41] Speaker 02:
But you don't have any evidence to support that intent.

[00:05:44] Speaker 02:
That's correct.

[00:05:44] Speaker 02:
What's the evidence in the record that shows that?

[00:05:46] Speaker 01:
There is no evidence with respect to intent in the record.

[00:05:48] Speaker 01:
This was not a parole evidence type case.

[00:05:51] Speaker 01:
I'm getting that intent, and we're getting that intent from the generalized structure of the agreement.

[00:05:55] Speaker 01:
The purpose of those provisions are provisions.

[00:05:57] Speaker 02:
So that's simply argument, and it doesn't have any support?

[00:06:00] Speaker 01:
I believe it's supported by the structure of the agreement, Your Honor.

[00:06:04] Speaker 01:
But no, we're not relying upon this person or that person's affidavit or

[00:06:09] Speaker 01:
declaration that says this agreement was intended to be X, Y, or Z. To the contrary, under New York law, you don't look to parole evidence in order to discern the purpose of an agreement or anything like that unless there's alleged to be an ambiguity.

[00:06:22] Speaker 01:
There's no such allegation right here.

[00:06:24] Speaker 04:
Can I ask about one of the several provisions that I have been focusing on?

[00:06:30] Speaker 01:
Yes, sure.

[00:06:30] Speaker 04:
And that's, I think it's 6.1.

[00:06:33] Speaker 04:
The first sentence says something about

[00:06:39] Speaker 04:
a right to practice that SADYO is given, right?

[00:06:43] Speaker 01:
It's 5.1.1, I believe you're on.

[00:06:45] Speaker 04:
No, I think the 6.1 is... I'm sorry, you're right.

[00:06:49] Speaker 04:
5.1.4 is it, I think?

[00:06:52] Speaker 01:
5.1.1 is the DCT activities clause.

[00:06:57] Speaker 01:
5.4 is a clause dealing with certain conflicts of interest.

[00:07:01] Speaker 04:
I'm sorry.

[00:07:02] Speaker 04:
I'm terribly sorry about the numbers.

[00:07:03] Speaker 04:
2.4A.

[00:07:04] Speaker 04:
2.4A.

[00:07:05] Speaker 04:
Sorry, it's not even in the 5-6 range.

[00:07:07] Speaker 04:
We'll probably get to 6.1 and 5.148.

[00:07:12] Speaker 04:
So 2.4A has two sentences, and the first says, Sanyo can make stuff and sell it, can also lease it.

[00:07:20] Speaker 04:
Can also lease it.

[00:07:22] Speaker 04:
So I'm going to ask you a question about what a lessee's protection, if any, against infringement is if it buys something, if it leases something from Sanyo.

[00:07:35] Speaker 04:
And then I'm interested as well in the second sentence that discusses foundry rights, where I assume that that adds something to what the first sentence says that doesn't invoke exhaustion, which is only based on a sale and therefore wouldn't cover the lease situation anyway.

[00:07:54] Speaker 04:
And Sanyo can provide manufacturing services and then give the

[00:08:03] Speaker 04:
manufactured item to somebody else, is the somebody else, the foundry service customer protected against infringement?

[00:08:12] Speaker 01:
To answer the first issue first as to lessees, I assume a lessee would be protected per the terms of this, per patent exhaustion principles.

[00:08:21] Speaker 01:
But of course, we're talking about that lessee has to be obtaining a Sanyo produced product.

[00:08:27] Speaker 01:
So it's really not any different than selling a Sanyo produced product to that person.

[00:08:32] Speaker 01:
leasing it or selling it, they're still going to acquire some certain rights pursuant to the doctrine of patent exhaustion.

[00:08:38] Speaker 04:
As to the issue of foundry rights... So you think that Sanyo, by virtue of this agreement, can choose to effectively license its foundry customers and its lessees to engage in otherwise infringing activity?

[00:08:59] Speaker 04:
a form of licensing.

[00:09:00] Speaker 04:
Why is that not substantial?

[00:09:02] Speaker 01:
Let me separate out those two.

[00:09:04] Speaker 01:
As far as the lessee rights, that's really no different than what a non-exclusive licensee normally gets the right to do.

[00:09:11] Speaker 01:
So under that theory, every non-exclusive licensee who has the right to make a user sell a product gets a right in some sense to sub-license to its customers by handing them the product that they are licensed to make.

[00:09:22] Speaker 04:
So I don't think that's substantial.

[00:09:23] Speaker 04:
But that's why I did focus on the word lease as opposed to

[00:09:27] Speaker 04:
So exhaustion would give a, um, a practitioners, uh, sale customers, it's purchasers that write, but this gives Sanyo the right to allow me if it leases me something or if it makes something for me that, that the, um, background law, including the law of exhaustion does not give.

[00:09:55] Speaker 04:
And so Sanyo has the ability to say,

[00:09:57] Speaker 04:
diamond coating, you don't get to control whether I can use and then sell this product.

[00:10:08] Speaker 04:
It can make it for me.

[00:10:09] Speaker 01:
Again, let me distinguish between the lessee rights and the foundry rights.

[00:10:12] Speaker 01:
As far as the lessee rights are concerned, it still has to be a Sanyo product.

[00:10:16] Speaker 01:
I mean, Hyundai and Kia couldn't come to Sanyo and say, please lease us our own auto parts.

[00:10:21] Speaker 01:
It's got to be a Sanyo product.

[00:10:22] Speaker 01:
And so I don't really see it as expanding much beyond

[00:10:25] Speaker 01:
the non-exclusive license grant.

[00:10:26] Speaker 04:
But Sanyo can effectively license me not to make, but to use and sell.

[00:10:33] Speaker 04:
Isn't that a significant licensing right?

[00:10:36] Speaker 04:
As their lessee, or as their foundry customer.

[00:10:42] Speaker 01:
Well, the foundry rights, let's talk about the foundry rights, because the foundry rights are completely different.

[00:10:46] Speaker 01:
The foundry rights in section 2.4 make it very clear that, for example, Hyundai and Kia could not go to Sanyo and say,

[00:10:55] Speaker 01:
We've been sued, let's start buying product from you, Sanyo, because that way we can get foundry rights and be exempt from suit.

[00:11:02] Speaker 01:
Because section 2.4 states that Sanyo may not provide those foundry rights to anyone who's under notice of infringement.

[00:11:09] Speaker 04:
So this court frequently... But that takes care of some group, the ones who have had notice.

[00:11:17] Speaker 04:
But as to others, Sanyo can license them to use and sell.

[00:11:24] Speaker 01:
I would submit, Your Honor, that's not a substantial right, because in that situation, Sanyo can only provide those rights to its customers who are normal customers, which is not any different than a non-exclusive right.

[00:11:36] Speaker 01:
I mean, it's not like Sanyo can go out there and freely start sub-licensing these patents, especially considering the fact that 2.4a expressly excludes sub-licensing from Sanyo's rights.

[00:11:48] Speaker 04:
I'm sorry, where's the business about normal customers?

[00:11:51] Speaker 01:
Well, it doesn't use the phraseology normal customers, but it talks about covered products, which are covered Sanyo products.

[00:11:59] Speaker 01:
So Sanyo can't go out there and start.

[00:12:04] Speaker 01:
My point being, Your Honor, that in order for someone to enjoy the 2.4A license rights that are provided here to Sanyo, they've got to be a customer of Sanyo.

[00:12:13] Speaker 01:
It's got to be a Sanyo product, which is not any different, Your Honor, than any other non-exclusive licensee who also

[00:12:21] Speaker 01:
gets the right to make, use, and sell products, and thereby exempt its customers from infringement suits.

[00:12:28] Speaker 01:
Go ahead.

[00:12:29] Speaker 01:
No, you're hurting me.

[00:12:30] Speaker 03:
What is your understanding of the full scope of the concept of the Foundry rights?

[00:12:36] Speaker 01:
My understanding of the concept of Foundry rights is like contract manufacturing.

[00:12:40] Speaker 01:
So someone comes to you and says, I would like you to make this product for me.

[00:12:45] Speaker 01:
The Foundry performs and creates the product for that person.

[00:12:49] Speaker 01:
And in that sense, the product is then exempt from an infringement suit to the extent that the foundry has exclusive or not exclusive.

[00:12:56] Speaker 03:
But these would be products that are made by Sanyo, not products that Sanyo contracts for someone else to make for Sanyo.

[00:13:03] Speaker 01:
That's correct.

[00:13:04] Speaker 01:
Sanyo is acting as the foundry.

[00:13:07] Speaker 01:
So if anyone wants to take advantage of these rights, they have to go and start using Sanyo as a foundry, which, by the way, I would note that there's no record evidence whatsoever that Sanyo actually has been acting as a foundry for anyone.

[00:13:19] Speaker 01:
So putting that aside, the license grant and the rights that are granted in 2.4a are very limited and don't give Sanyo any right to indulge infringement.

[00:13:29] Speaker 01:
Because once infringement comes up, once it's identified that there is an infringer, Sanyo can't provide those foundry rights.

[00:13:36] Speaker 01:
And I see that my time has expired here.

[00:13:39] Speaker 02:
Any other questions?

[00:13:43] Speaker 02:
OK, Council.

[00:13:49] Speaker 02:
Mr. Hill.

[00:13:51] Speaker 00:
Yes.

[00:13:51] Speaker 00:
Good morning, your honor.

[00:13:52] Speaker 00:
I'm Reggie Hill with Jenner and Block here on behalf of Nissan.

[00:13:54] Speaker 00:
I'm going to argue for defend the police.

[00:13:57] Speaker 00:
My colleague, Chad Ray, is here.

[00:13:58] Speaker 00:
Also, I want to introduce counsel for Hyundai Kia entities, James Pack and Dan Talish.

[00:14:05] Speaker 00:
May it please the court.

[00:14:07] Speaker 00:
Your honor, under this court's standing precedent and consistent with the policy behind the potential standing doctrine, Diamond Coding Technologies, DCT, lacks all substantial rights

[00:14:19] Speaker 00:
And Sanyo should have been joined in order for there to be prudential standing.

[00:14:24] Speaker 00:
Without Sanyo, this case was properly dismissed by the district court.

[00:14:29] Speaker 00:
The situation we have here, Your Honor, is that DCT is a mere agent of Sanyo to enforce the patents and shield Sanyo from the obligations and burdens of U.S.

[00:14:40] Speaker 00:
patent litigation while providing all the benefits, including Sanyo maintaining substantial financial and ownership interests in the patents.

[00:14:50] Speaker 00:
As a practical matter, this arrangement thwarted the defendants and appellees in this case from getting routine and important discovery.

[00:15:00] Speaker 00:
For example, the defendants were not able to get conception and reduction to practice documents or testimony for the inventors, even though that had been promised.

[00:15:09] Speaker 03:
Let me ask you this.

[00:15:10] Speaker 03:
Suppose that this was a much less complicated agreement and it only had one principal provision, which, well, let's say two provisions.

[00:15:19] Speaker 03:
One is,

[00:15:19] Speaker 03:
that there's a transfer of title to the patent to DCT.

[00:15:24] Speaker 03:
And two is that half of any proceeds from either the sale or the exploitation via licensing or infringement action from the patent would be split 50-50 between Sanyo and DCT.

[00:15:42] Speaker 03:
Would you say under those circumstances that there was a substantial right that

[00:15:48] Speaker 03:
No, not all substantial rights had been conveyed to DC2.

[00:15:54] Speaker 00:
I don't think that I would say that in that particular case as you laid it out, your honor.

[00:15:58] Speaker 03:
In other words, the fact that the payments for the transfer of title are in the form and effect of a share of the proceeds is not enough to defeat the transfer of substantial rights.

[00:16:12] Speaker 00:
I believe that's consistent with this court's precedent that that in itself alone would not be enough.

[00:16:18] Speaker 03:
Okay.

[00:16:19] Speaker 03:
And what do you think, setting aside the sharing of proceeds, what do you think it is that in your view, principally, most importantly, trips the wire for kicking this over into a non-substantial rights transfer?

[00:16:34] Speaker 04:
Right.

[00:16:35] Speaker 00:
So I would leave it, sum it down to a couple of things, your honor.

[00:16:39] Speaker 00:
I mean, first off, and the court has looked at this, for example, in the Propat case.

[00:16:44] Speaker 00:
the inability to be able to assign its rights under the agreement and the patents themselves.

[00:16:51] Speaker 00:
In other words, to the extent DCT has something, they have something that they can't sell or transfer to someone else without Sanyo giving its consent, which is unfettered.

[00:17:02] Speaker 03:
Well, we know they can't transfer the agreement, but why can't they transfer the assets?

[00:17:08] Speaker 00:
I think in this particular case, your honor, whatever was given over to Sanyo, if you look at the grant clause, was given subject to the agreement.

[00:17:17] Speaker 00:
I believe, and I'm not quoting it, but it... That's true.

[00:17:20] Speaker 03:
But I mean, why does the agreement prohibit DCT from selling the assets?

[00:17:26] Speaker 00:
I believe the entire arrangement prohibits them from selling the agreements, both by the limitations on what DCT's business is.

[00:17:34] Speaker 00:
DCT's business is in fact limited.

[00:17:36] Speaker 00:
If you look at the agreement to licensing,

[00:17:39] Speaker 00:
enforcing practice.

[00:17:40] Speaker 00:
They can't practice it and the invention and they can license and litigate.

[00:17:45] Speaker 00:
And then there's a clause that says you can't do anything else.

[00:17:47] Speaker 00:
So this is an ongoing operation that can do what it wants to do.

[00:17:51] Speaker 00:
It's limited in what it can do.

[00:17:53] Speaker 00:
And then I believe that the security interests that were recorded against the patent, and there's no clear way to erase the security interests, anyone taking the patents.

[00:18:02] Speaker 00:
So theoretically, if they were to make an assignment without Sanyo's consent, any consent

[00:18:07] Speaker 00:
anyone taking the patents would certainly be taking them subject to whatever right Sanyo has and whatever the agreements has.

[00:18:14] Speaker 00:
And they would have the security interests that would prevent sort of further transferring the agreements or at least encumbering the agreements in that matter.

[00:18:22] Speaker 00:
And so as I see it as a practical matter, the only way they could actually transfer the patent assets themselves is if Sanyo consents.

[00:18:30] Speaker 00:
That's certainly the only way I would advise any client of mine to purchase these particular assets.

[00:18:35] Speaker 00:
So I believe that's one issue.

[00:18:37] Speaker 00:
I also believe that the questions that your honors touched upon in terms of the ability of Sanyo to actually give some licenses is also important.

[00:18:45] Speaker 00:
It's a very substantial right.

[00:18:47] Speaker 00:
And I view the foundry rights in addition to the have made rights that Sanyo has under the license gives Sanyo, except for the narrow exception pointing out where there's been notice of infringement, that Sanyo can both make products for somebody else so they could make products

[00:19:03] Speaker 00:
for Nissan and Hyundai if they had not been sued on notice of infringement, or they could in fact have their suppliers make products for Sanyo that Sanyo could then sell as Sanyo products.

[00:19:14] Speaker 00:
So I do believe this is different than the other cases in the court's precedent where there have not been substantial rights in the sense that there are substantial rights for licensing here.

[00:19:23] Speaker 02:
Are the foundry rights limited solely to Sanyo making the materials?

[00:19:29] Speaker 00:
Well, I believe that the foundry rights are limited to Sanyo making.

[00:19:34] Speaker 00:
But in fact, they have have-made rights as well.

[00:19:37] Speaker 00:
So Sanyo can have other products under the patents made for them.

[00:19:41] Speaker 02:
Your opposing counsel said there was no evidence that Sanyo actually had, I think he said that Sanyo had foundry capability.

[00:19:48] Speaker 02:
Is that true?

[00:19:50] Speaker 00:
Your Honor, we've had no access to Sanyo and what their ability is.

[00:19:53] Speaker 00:
That's part of the problem with this lawsuit.

[00:19:55] Speaker 00:
So I don't have any idea what Sanyo, in fact, is able to do.

[00:20:00] Speaker 00:
Fair enough.

[00:20:03] Speaker 03:
Now, with respect to the rights that Sanyo has retained vis-a-vis any licensing, how would Sanyo's position, let's set Foundry rights aside for a moment.

[00:20:17] Speaker 03:
How is Sanyo's position any different from that of any non-exclusive licensee?

[00:20:25] Speaker 00:
It's a good question, Your Honor.

[00:20:27] Speaker 00:
I believe that

[00:20:28] Speaker 00:
If you set aside the foundry rights, I mean, and the have-made rights I think are important too, there certainly have been other cases in this court where that type of ability to sub-license, I think, for example, the Luminarra case that the court recently had before it, there was some ability for Disney in that case to do some licensing to affiliates and to other people that were associated it, and that sounds

[00:20:57] Speaker 00:
a bit more similar to that circumstance than the circumstance we have in this case on that particular issue?

[00:21:04] Speaker 03:
Well, if, for example, I'm the transferor of the title to the patent, but I retain a non-exclusive license, that itself wouldn't be a substantial right retained.

[00:21:21] Speaker 03:
It's sufficient to defeat the transfer of title, I gather, and the standing would not be a problem for the

[00:21:27] Speaker 03:
transferee, correct?

[00:21:29] Speaker 03:
I believe that's consistent.

[00:21:31] Speaker 03:
So, and I make products, I sell them to people under my non-exclusive license.

[00:21:37] Speaker 03:
They clearly can use the products without a fear of infringement suits, right?

[00:21:44] Speaker 00:
Absolutely.

[00:21:45] Speaker 03:
Okay.

[00:21:45] Speaker 03:
And I'm just wondering what it is in your view that puts Sanyo in a different position from someone in my position.

[00:21:53] Speaker 00:
I believe what's different is the foundry rights, quite frankly, Your Honor.

[00:21:58] Speaker 00:
because although those would be products that were made by Sanyo and then sold to downstream customers.

[00:22:04] Speaker 00:
But we have the opportunity for Sanyo to make a product, let's say we're in the automotive industry, for General Motors that could then be sold.

[00:22:13] Speaker 00:
And so they have an additional right to provide others, not just their own customers, but they could make products for others.

[00:22:20] Speaker 03:
So for example, let me give you a big- Don't those people become their customers?

[00:22:26] Speaker 03:
I mean, if they're making the products

[00:22:28] Speaker 03:
Yes, it's true that they are contracting with someone to provide them with the, in some form, the products, but that their own selection of folks to whom to sell is all covered by the license, right?

[00:22:46] Speaker 03:
A non-exclusive license.

[00:22:47] Speaker 00:
I believe that's right.

[00:22:47] Speaker 00:
I want to step back though and say, what if it were, if it were our supplier, Schaeffler.

[00:22:52] Speaker 00:
So say for example, somebody supplies pistons to the automotive industry.

[00:22:57] Speaker 00:
Sanyo is not in that business of supplying those to the automotive industry.

[00:23:00] Speaker 00:
I don't know if they are or not, it's a hypothetical, but because of the patents and the rights that they have in terms of the license, including the rights to do foundry,

[00:23:11] Speaker 00:
then Sanyo could make that product for the supplier, Schaeffler, and Schaeffler could sell that to the entire automotive industry.

[00:23:19] Speaker 00:
So therefore, they have some ability to indulge infringements, if you will, that DCT does not.

[00:23:25] Speaker 02:
Is it the norm in retaining a non-exclusive license that the transferee doesn't have a right to practice the patent in suit?

[00:23:35] Speaker 00:
I think it is somewhat, it is abnormal for the transferee, Your Honor, not to be able to practice the patent and suit.

[00:23:42] Speaker 02:
And we have this actually... To me, that distinguishes it as well.

[00:23:45] Speaker 00:
Right.

[00:23:45] Speaker 00:
I've never finished my list of distinguishing, but in fact, not being able to have the right to practice the invention, there's also some level of control that is being maintained by Sanyo with regard to who gets sued and who doesn't get sued.

[00:24:00] Speaker 02:
Well, it seemed you were relying solely on foundry rights.

[00:24:03] Speaker 02:
I thought there was more.

[00:24:05] Speaker 00:
I apologize.

[00:24:05] Speaker 00:
I know we're relying on all the rights set forth in our brief, both individually and cumulatively with respect to this particular situation, because that's what the court's precedent has looked at.

[00:24:16] Speaker 00:
And so I started out with that, but certainly the right to practice or the inability of DCT to actually practice the invention is very important.

[00:24:25] Speaker 00:
Also, I think what's very important in this particular case are the broad reversionary rights that there are in the actual assets themselves.

[00:24:33] Speaker 00:
so that it seems no matter what happens, these assets end up back with Sanyo.

[00:24:38] Speaker 00:
So for example, if they fail to maintain the patents and prosecute the patents, there are provisions that allow Sanyo to either step in and do the prosecution through them, or it requires them to give the patents back to DCT.

[00:24:54] Speaker 00:
If DCT decides it doesn't want to exploit the patents and

[00:24:57] Speaker 00:
And I know you've read the briefs, but they need to exploit these patents sort of in the best interest of Sanyo and DCT.

[00:25:03] Speaker 00:
And that's a different circumstance than what's in the court's precedent as well.

[00:25:07] Speaker 00:
Who determines the best interest?

[00:25:09] Speaker 00:
That's a very good question, your honor.

[00:25:11] Speaker 00:
I think if Sanyo writes them a letter and says it's in our best interest that you do X, Y, and Z, I believe they are required to give that some consideration or those words don't have meaning in the agreement.

[00:25:21] Speaker 00:
And those words are important, I think, into the agreement.

[00:25:24] Speaker 00:
So what is in the interest of Sanyo?

[00:25:26] Speaker 00:
We know that they identified some particular targets at some point, and we know that they also allowed DCT to exclude certain people from being sued.

[00:25:37] Speaker 00:
And so all of those things which relate to who gets sued under these patents are being collectively controlled by Sanyo and DCT on some level.

[00:25:48] Speaker 03:
If Sanyo had sold the patents outright to DCT in exchange for

[00:25:53] Speaker 03:
a large chunk of DCT stock, then I suppose DCT would be obliged by principles of corporate governance to act in the interest of the shareholders, and that would mean that they would not be able to do things that were adverse to the interest of this large shareholder that has just transferred the patent, right?

[00:26:14] Speaker 03:
I mean, I'm wondering whether the act in the interest of Sanyo really goes any farther than a different kind of arrangement would go

[00:26:23] Speaker 03:
which would clearly not be a retention of an interest.

[00:26:28] Speaker 00:
I believe it goes very far.

[00:26:29] Speaker 00:
I mean, obviously corporate officers have some fiduciary obligations.

[00:26:34] Speaker 00:
I think those are different.

[00:26:35] Speaker 00:
They relate to sort of the corporation itself.

[00:26:38] Speaker 00:
Here we have the shareholders themselves.

[00:26:42] Speaker 00:
Absolutely.

[00:26:43] Speaker 00:
Here we have a situation where DCT sort of has color of title.

[00:26:51] Speaker 00:
and is a separate operation.

[00:26:53] Speaker 00:
And we both have Sanyo limiting their corporate operation at the same time.

[00:26:58] Speaker 00:
They have to act in the best interests of Sanyo and DCT, whatever that is, with relation to commercializing these particular inventions, which really means licensing and litigating these particular patents.

[00:27:13] Speaker 03:
What is it about the term exploiting?

[00:27:17] Speaker 03:
I think it's exploitation or exploiting the patents

[00:27:21] Speaker 03:
that leads you to believe that that does not include the possibility of transferring the patents for, if that turns out to have been the wisest commercial course for DCT.

[00:27:35] Speaker 00:
Right.

[00:27:35] Speaker 00:
So if you turn in the agreement, at least we've made several arguments, Your Honor, on this particular issue.

[00:27:41] Speaker 00:
And the first one is the whole character of the agreement, if you read it, is about licensing and litigating.

[00:27:46] Speaker 00:
I understand.

[00:27:47] Speaker 00:
I understand.

[00:27:47] Speaker 03:
But if push came to shove and they just decided

[00:27:50] Speaker 03:
This licensing business is not doing well, but we have somebody that's willing to pay what we regard as a vastly overmarket value for these patents.

[00:28:02] Speaker 03:
What is it that tells you in the agreement that DCT couldn't do that, even though they would conclude that that was very much in their interest and that of Sanyo?

[00:28:11] Speaker 03:
Because they would transfer half of that very large proceeds to Sanyo.

[00:28:20] Speaker 00:
Right, Your Honor.

[00:28:21] Speaker 00:
You know, as you ask the question, my answer would deal in practicalities, quite frankly.

[00:28:28] Speaker 00:
And I believe that there's language about exploit that we've raised in our brief.

[00:28:32] Speaker 00:
But sure, if someone showed up with a ton of cash, which is actually what these parties set out to do in the very beginning before they got to this arrangement to sell those patents, I believe that there might be an arrangement that could be struck.

[00:28:45] Speaker 00:
But there's nothing in this agreement that

[00:28:48] Speaker 00:
determines what those arrangements would be.

[00:28:50] Speaker 00:
And in fact, Sanyo would have to give its consent to that arrangement at that time.

[00:28:55] Speaker 00:
And I believe that the parties would work it out at that time.

[00:28:58] Speaker 03:
But if DCT came in and said, we're exploiting the patent, what better form of exploitation than to get more than you could possibly get by licensing?

[00:29:06] Speaker 03:
Would there be an answer in the four corners of the agreement to where you would conclude they could not do that, no matter how advantageous a commercial transaction might be thought to be?

[00:29:18] Speaker 00:
I believe there is evidence that that would be argued that they could not do that based upon the agreement.

[00:29:23] Speaker 00:
And that would be, I'm sorry, Your Honor, that would basically be in 5.1, there are certain activities for DCT that are limited.

[00:29:33] Speaker 00:
So DCT's business shall consist of the prosecution, maintenance, licensing, litigation, enforcement, and exploitation of the assets.

[00:29:41] Speaker 03:
Well, the exploitation, of course, is the key word there.

[00:29:44] Speaker 00:
And exploitation, if you look in 5.1.4, at least Your Honor,

[00:29:48] Speaker 00:
There's one statement there that says in the middle of 5.14, in the event DCT determines it will no longer exploit a family of patents within the assets, DCT shall notify Sanyo and give Sanyo a 90-day option to acquire DCT's rights to the family for the consideration of only $10.

[00:30:10] Speaker 00:
It goes on.

[00:30:11] Speaker 00:
My point being that exploit as used in that particular part of the paragraph could not mean selling the assets because if they stopped exploiting them, if they exploited meaning selling them, then they wouldn't have anything to return back to Sanyo as contemplated in this paragraph.

[00:30:28] Speaker 00:
So we don't believe if you read this entire agreement that you come away with the idea that there was some ability to sell the patents.

[00:30:35] Speaker 00:
And if you compare it with the other agreement,

[00:30:38] Speaker 00:
In fact, the other agreement was very explicit about selling the patents.

[00:30:42] Speaker 00:
Time's up.

[00:30:43] Speaker 00:
Thank you, your honor.

[00:30:44] Speaker 00:
Thank you, counsel.

[00:30:50] Speaker 01:
Your honor, I'd like to just hit a couple of the substantial rights that my colleague mentioned.

[00:30:55] Speaker 01:
The first thing I mentioned my colleague mentioned was that Sanyo controls the ability to assign and that DCT has no ability to assign and Sanyo's consent rights are unfettered.

[00:31:07] Speaker 01:
My colleague unfortunately, I'm afraid, is mistaken.

[00:31:10] Speaker 01:
Section 9.12 of the agreement states expressly that any time a consent is required in the agreement, that consent cannot be unreasonably withheld.

[00:31:20] Speaker 01:
And Judge Bryson, you held in the speed play case that assignment clauses that are conditioned upon the reasonable withholding of consent do not give rise to a substantial right.

[00:31:32] Speaker 01:
So even if we want to interpret section 9.6 as limiting the ability of

[00:31:37] Speaker 01:
DCT to assign the patents without the consent of Sanyo, per speed play, that's not a substantial right because Sanyo has to give, cannot unreasonably withhold its consent.

[00:31:49] Speaker 02:
You misspoke yourself, counsel.

[00:31:51] Speaker 01:
I'm sorry.

[00:31:51] Speaker 02:
The court held.

[00:31:52] Speaker 01:
The court held.

[00:31:53] Speaker 01:
Yes, your honor.

[00:31:56] Speaker 01:
The second right that my colleague referenced was the right, the alleged absence of any right within

[00:32:05] Speaker 01:
DCT to practice the patents.

[00:32:08] Speaker 01:
The license doesn't or the assignment agreement doesn't say that DCT is not allowed to practice the patents.

[00:32:15] Speaker 01:
And, in fact, that entire proposition is entirely inconsistent with Section 2.4.

[00:32:21] Speaker 01:
In Section 2.4, DCT grants to Sanyo a non-exclusive right to practice the patent.

[00:32:29] Speaker 01:
Well, if DCT didn't have a right to practice the patent,

[00:32:33] Speaker 01:
How could DCT have granted a license to Sanyo to practice the patent?

[00:32:39] Speaker 01:
On top of all of that, I would direct Your Honor's attention to Article 1, the definition of gross proceeds.

[00:32:45] Speaker 01:
The definition of gross proceeds within Article 1 says that DCT has got to pay all of these monies over to Sanyo, including any cash it receives from the, quote, use of the patents, close quote, and use is distinguished from litigation, licensing, all those other things.

[00:33:02] Speaker 01:
There is no express prohibition against DCT practicing.

[00:33:06] Speaker 01:
DCT has to pay 50% of all of its revenues from the use of the patents.

[00:33:11] Speaker 01:
And there is no possible way that DCT could grant a license to practice to Sanyo unless DCT had the right to practice.

[00:33:21] Speaker 01:
So in our opinion, there is no right of practice that resides within DCT.

[00:33:28] Speaker 01:
On the issue of exploit.

[00:33:30] Speaker 01:
The question was raised as to whether or not the exploitation rights that DCT enjoys include the right to sell the patents.

[00:33:39] Speaker 01:
And Sanyo itself has argued, what does exploit mean?

[00:33:43] Speaker 01:
Exploit means make productive use of.

[00:33:46] Speaker 01:
A definition I'm willing to embrace.

[00:33:49] Speaker 01:
If you look at Schedule B to the patents, Schedule B is the compensation arrangement under this agreement.

[00:33:56] Speaker 01:
Schedule B says Sanyo shall be paid

[00:33:59] Speaker 01:
for the, quote, productive use, close quote, of the patents based upon 50% of the gross proceeds.

[00:34:07] Speaker 01:
And how is gross proceeds defined?

[00:34:10] Speaker 01:
It includes cash that is made via the purchase of the patents.

[00:34:15] Speaker 01:
Someone else purchasing the patents, paying DCT money.

[00:34:19] Speaker 01:
In that case, Sanyo gets 50% of those gross proceeds.

[00:34:23] Speaker 01:
So schedule B makes it clear that exploit

[00:34:27] Speaker 01:
is associated with the concept of selling the patents based upon Sanyo's own definition of exploit, which is to make the productive use of.

[00:34:35] Speaker 01:
Per Schedule B, making productive use of something includes selling it.

[00:34:41] Speaker 01:
Lastly, with respect to the issue of acting in the best interest of Sanyo, again, I would emphasize... Is there a difference between selling and practicing?

[00:34:52] Speaker 01:
Selling the patents would be to offload the asset.

[00:34:54] Speaker 01:
Practicing the patents would be to

[00:34:55] Speaker 01:
use the patents and create some sort of a product with them.

[00:35:01] Speaker 02:
The agreement specifically provides DCT shall engage in no business or activity other than the business.

[00:35:10] Speaker 02:
And the business is prosecution, maintenance, licensing, litigation, enforcement, and exploitation, but not actually practicing.

[00:35:21] Speaker 01:
Well, Your Honor, by the definition that Sanyo even uses of exploitation,

[00:35:24] Speaker 01:
Exploitation means to make productive use of something.

[00:35:28] Speaker 01:
I would submit that practicing a patent is plainly making the productive use of something.

[00:35:32] Speaker 01:
You are using the patent to make a product.

[00:35:35] Speaker 01:
I mean, exploit has got to mean something, Your Honor, beyond litigation and licensing, because litigation and licensing are separately identified in section 5.1.1.

[00:35:44] Speaker 01:
So we have to struggle with what exploit means.

[00:35:47] Speaker 01:
And it logically means both using the patent to practice something and selling it per the other terms of the agreement.

[00:35:54] Speaker 02:
I'll let you wrap up.

[00:35:56] Speaker 03:
Actually, could I ask quickly just a question?

[00:35:59] Speaker 03:
I did not have the page before me when you were talking about Schedule B financial terms.

[00:36:07] Speaker 03:
And I thought you had said that there was a reference to purchasing of patents in Schedule B. Yes, Your Honor.

[00:36:11] Speaker 01:
It's a two-step point.

[00:36:14] Speaker 01:
Sanyo should be paid based on the productive use of the patents.

[00:36:17] Speaker 01:
And Sanyo is defined productive use to mean exploit.

[00:36:20] Speaker 01:
Then it says 50% of adjusted gross proceeds

[00:36:23] Speaker 01:
Gross proceeds is a defined term.

[00:36:26] Speaker 01:
So if you flip back to Article 1, Gross Proceeds, on record page A0201, gross proceeds is defined, and there's quite a bit of language.

[00:36:38] Speaker 01:
But if you get down to paragraph B, or subsection B, shall include any cash, blah, blah, blah, blah, blah, including relating to the purchase of the assets.

[00:36:50] Speaker 01:
So schedule B refers to gross proceeds.

[00:36:53] Speaker 01:
proceeds is money from the purchase of assets.

[00:36:56] Speaker 01:
Thank you.