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Discovision Associates v. Toshiba Corp.

May 18, 2009


The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge


This contract dispute concerns a license agreement pursuant to which Plaintiff Discovision Associates ("DVA") granted to Defendant Toshiba Corporation ("Toshiba") and certain of its subsidiaries a non-exclusive license of patent rights related to digital recording and playback devices. The case turns on whether certain business entities in which Toshiba has an interest are subsidiaries covered by the license agreement and, if so, the amount of royalties those entities owe to DVA. By order dated January 15, 2009, Magistrate Judge Peck bifurcated this case into liability and damages phases. Before the Court are cross-motions for summary judgment on the liability phase. For the following reasons, Toshiba's motion for summary judgment is DENIED and DVA's motion for summary judgment is GRANTED.*fn1

I. Factual Background

A. DVA-Toshiba License Agreement

On March 31, 2003, DVA and Toshiba entered into a contract entitled Non-Exclusive Limited Worldwide Patent License Agreement for Playback and Recording Products (the "Toshiba-DVA License Agreement" or the "License Agreement"). (Decl. of Michael Traino, dated Mar. 2, 2009 ("Traino Decl.") at Ex. 1.) As set forth in the contract's first recital, the parties entered into the License Agreement "in order to avoid patent litigation" and the agreement represents a "settlement of all outstanding controversies between the parties" concerning the subject matter of the contract.

Pursuant to the License Agreement, DVA granted Toshiba a worldwide, non-exclusive, royalty-bearing license for certain patents owned by DVA (the "Licensed Patents") to, inter alia, make, have made, use, offer for sale, or sell digital recording and playback devices such as DVD players and DVD-R disc drives, defined collectively in the License Agreement as "Licensed Products." In exchange for the right to make and sell Licensed Products and DVA's release of Toshiba and certain of its subsidiaries from infringement claims related to the Licensed Patents, Toshiba agreed to pay royalties, both in lump sums due on dates certain and, under circumstances germane to this dispute, per-unit royalties for each Licensed Product sold in excess of a set numerical threshold in a given fiscal year.

Pursuant to the contractual provision at the heart of this dispute, Section 3.4, the license granted to Toshiba also includes a license to Toshiba's "Subsidiaries," defined in the agreement as any corporation or other business entity that Toshiba controls through beneficial ownership of more than fifty percent of the voting interests or rights to more than fifty percent of the entity's income. Specifically, Section 3.4 provides, in pertinent part, as follows:

[1] The license granted herein includes a license to [Toshiba's] Subsidiaries of the same scope as the one granted to [Toshiba] in Section 3.1 above. [2] [Toshiba] represents that its Subsidiaries include the Subsidiaries identified on Appendix A, which are involved in the manufacture of Licensed Products as of the Effective Date. [3] [Toshiba] shall pay and account to DVA for royalties hereunder with respect to the exercise by any Subsidiary of [Toshiba] of the license granted to it hereunder, and if [Toshiba] fails to make such payment or accounting, DVA reserves the right to seek directly from such Subsidiary any royalties due and owing to DVA. [4] Licenses will be granted to additional Subsidiaries of [Toshiba], which are not existing as of the Effective Date, during the term of this Agreement upon receipt by DVA of written notices from [Toshiba] setting forth the names and addresses of such additional subsidiaries to be covered by this Agreement.

Section 3.4 further provides that Licensed Products made or sold by a Subsidiary "added by [Toshiba] after the Effective Date" will be included in the group of Licensed Products covered by the lump-sum royalty payments, "so long as the consolidated total unit sales of [Toshiba] and its Subsidiaries existing as of the Effective Date (hereinafter referred to as "Pre-existing Subsidiary") and all of such added Subsidiaries does not exceed [a set number of] units for each fiscal year." Thus, Toshiba agreed that it would be liable for per-unit royalties for each Licensed Products sold by Subsidiaries formed after the effective date in excess of the annual numerical threshold. According to DVA, this dispute concerns just such a situation.

B. Toshiba-Samsung Business Integration Agreement

Wholly separate from its agreement with DVA, Toshiba entered into an agreement dated January 13, 2004 with Samsung Electronics Co., Ltd ("Samsung") pursuant to which Toshiba and Samsung agreed to integrate into a worldwide joint venture their respective businesses related to "development, manufacture and sales of optical disc drive[s] ("ODD")." (Decl. of Paul Stewart, dated March 4, 2009, ("Stewart Decl.") Ex. Q ("Toshiba-Samsung Agreement")). The Toshiba-Samsung agreement contemplated the formation of two entities-a parent Japanese corporation and a subsidiary Korean corporation (collectively "TSST") and thatToshiba would hold a fifty-one percent majority interest in the parent corporation. TSST would be in the business of, inter alia, design, development, manufacture, marketing and sales of finished and semi-finished ODD devices. Both TSST entities were formed on April 1, 2004-just over one year after the March 31, 2003 effective date of the Toshiba-DVA License Agreement-and Toshiba never gave written notice to DVA setting forth the name and address of either TSST entity as subsidiaries to be covered under the License Agreement. (Toshiba 56.1 Stmt. ¶¶4-5.) The principal issue here is whether the TSST entities are subsidiaries covered by the License Agreement. In the event of an affirmative answer, the amount of royalties owed by TSST will be determined by a subsequent damages phase.

C. DVA-Samsung License Agreement

The third contractual relationship of some relevance to this litigation is a patent license agreement entered into between DVA and Samsung in 2001 (the "DVA-Samsung Agreement"). The DVA-Samsung Agreement grants to Samsung an earlier non-exclusive license to use the same patents covered by the License Agreement between DVA and Toshiba. (Stewart Decl. Ex D.) Toshiba also seeks summary judgment that it is not liable for royalty payments for products manufactured by Samsung's manufacturing subsidiaries, sold to the Korean TSST entity ("TSST-K") and, subsequently sold back to Samsung subsidiaries. Toshiba contends that Licensed Products that "passed through" TSST-K were already licensed by DVA under the DVA-Samsung Agreement and DVA wrongfully seeks to collect two royalties for the same product. Toshiba further argues that under the doctrine of "patent exhaustion" DVA's patent rights were extinguished upon the first sale of the Licensed Products. DVA rejoins that Toshiba misreads the DVA-Samsung Agreement which differs from the Toshiba License Agreement in certain material respects. Consequently, the meaning and import of certain terms of the DVA-Samsung Agreement is also before me.

D. Procedural History

DVA filed this action in April 2008 to enforce its rights under Section 6.7 of the License Agreement to conduct an audit of Toshiba and its Subsidiaries to determine the amount of royalties due under the contract. On October 7, 2008 I denied DVA's motion for summary judgment on its right to an audit because I found a genuine issue of material fact to exist as to the permissible scope of the audit. After fruitless attempts at settlement, this action was bifurcated into liability and damages phases, and the issue of permissible scope of DVA's audit rights is now squarely before me. The instant motions require me to decide only two narrow issues: whether the TSST entities are "Subsidiaries" under the License Agreement and whether Toshiba owes royalty payments for Licensed Products manufactured by Samsung and which "passed ...

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