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Leviton Manufacturing Co., Inc. v. Pass & Seymour, Inc.

United States District Court, E.D. New York

July 18, 2017

LEVITON MANUFACTURING CO., INC., Plaintiff,
v.
PASS & SEYMOUR, INC., Defendant.

          MEMORANDUM DECISION & ORDER

          COGAN, District Judge.

         Plaintiff Leviton Manufacturing Co., Inc. (“Leviton”) brings this action against defendant Pass & Seymour, Inc. (“P&S”), alleging that P&S has breached the parties' “Settlement and License Agreement.” The Settlement and License Agreement was executed in 2012 and resolved a lawsuit filed in this Court by Leviton against P&S for patent infringement (the “prior lawsuit”). The issue before me is whether P&S, by alleging patent invalidity in its counterclaims in this case, is subject to a clause in “Article III” of the Settlement and License Agreement that fixes damages in the event of an unsuccessful challenge to Leviton's patents, or whether that clause is void as a penalty.

         In its complaint, Leviton claims that P&S's new model of ground fault circuit interrupters (“GFCIs”) is covered by the license granted to it under the Settlement and License Agreement, but P&S has failed to pay royalties for sales of the new model. In defending these allegations, P&S has asserted that its new model is not covered by the license, and, in any event, Leviton's patents are invalid. P&S has also filed numerous counterclaims for declaratory judgment, including patent invalidity and non-infringement.

         Before me are the parties' cross-motions for judgment on the pleadings, requesting that the Court enter judgment in their favor on count seven of P&S's counterclaims - declaratory judgment of the unenforceability or inapplicability of Article III of the Settlement and License Agreement. For the following reasons, defendant's motion for judgment on the pleadings is granted and plaintiff's is denied.

         BACKGROUND

         Leviton and P&S are both producers and manufacturers of electrical and electronic wiring devices and are direct competitors in the market for GFCIs. A GFCI is a device that protects people from electric shock and is commonly found in households in the United States. Leviton has several patents for electrical wiring devices, but central to this lawsuit are its Patent Nos. 7, 463, 124 (the “‘124 patent'”) and 7, 737, 809 (the “‘809 patent”).

         In May 2012, Leviton filed the prior lawsuit against P&S alleging that P&S's 1596 model GFCI violated the ‘124 patent, ‘809 patent, and another Leviton patent not asserted in this suit. In December 2012, the prior lawsuit was dismissed when the parties entered into the Settlement and License Agreement in which the parties agreed that: (1) all claims and counterclaims asserted by Leviton and P&S against the other would be dismissed with prejudice; (2) the Court would retain jurisdiction over plaintiff and defendant to enforce the terms of the Settlement and License Agreement; and (3) P&S would be granted a non-exclusive license to specific claims of numerous of Leviton's patents.

         Specifically, P&S was granted a non-exclusive license to the “Leviton Licensed Patents Rights, ” which encompass claims within five of Leviton's patents, [1] including the ‘809 patent and the ‘124 patent, that “do not include any limitation regarding reset lockout.” The non-exclusive license granted to P&S permits it to “make, have made, use, offer for sale, sell, resell, import, or otherwise transfer” any product of P&S that “is currently existing or that will be developed at any time in the future, including . . . any GFCI receptacles that would infringe any of the Leviton Licensed Patent Rights in the absence of the license granted herein.” The agreement identifies these products as “Licensed Products.” In accordance with the Settlement and License Agreement, since 2012, P&S has paid and continues to pay royalties to Leviton for sales of its 1596 GFCIs.

         In 2015, P&S released the 1597 GFCI, a new redesigned model GFCI. P&S, however, has never paid royalties for sales of the 1597 GFCI. Leviton alleges that the 1597 GFCI is a Licensed Product because it would infringe the Leviton Licensed Patents Rights if not for the Settlement and License Agreement. It therefore brought this action seeking payment of royalties owed under the agreement.

         P&S denies Leviton's allegations. It alleges that the 1597 model is not covered under the Settlement and License Agreement because it would not infringe the Leviton Licensed Patent Rights, and, in fact, P&S specifically designed the 1597 model to fall outside the Leviton Licensed Patents Rights. In the alternative, P&S alleges that the ‘809 patent and ‘124 patent are invalid.

         Leviton claims that P&S's allegations of patent invalidity have triggered the application of Article III. Section 3.1 of the Settlement and License Agreement provides that:

Commencing on the last date of execution below until the termination or expiration of this Agreement, so long as Leviton does not initiate legal or administrative proceedings against P&S . . . for infringement of the Leviton Licensed Patent Rights, or otherwise violate any release or covenant not to sue hereunder, P&S . . . agree[s] not to challenge the validity and/or enforceability of any claim encompassed by the Leviton Licensed Patent Rights (each a “Patent Challenge”), or to participate in, fund, or otherwise actively support in any way (“Support”) any Patent Challenge.

         Section 3.1 also includes a caveat to the prohibition on P&S's ability to commence a Patent Challenge by providing that, “[n]othing in this Agreement shall prevent P&S . . . from . . . raising any and all affirmative defenses, claims and counterclaims if Leviton should bring any claim of infringement of one or more of the Leviton Licensed Patents against P&S . . . . ” Section 2.13, which is comprised of releases granted to Leviton by P&S, echoes Section 3.1 by similarly stating that “[n]othing in this Agreement shall preclude P&S from raising any defense against a claim of patent infringement brought by Leviton.” Section 3.2 grants Leviton the right to terminate the Settlement and License Agreement if P&S breaches Section 3.1 by commencing, participating, or supporting any Patent Challenge.

         Section 3.3 provides Leviton with an alternative method of proceeding if P&S breaches Section 3.1. It states that:

In any event and independent of Section 3.1 . . . and without limiting Leviton's rights and remedies with respect thereto, if P&S commences, participates in, or Supports any Patent Challenge, and Leviton does not elect to terminate [the Settlement and License Agreement], then:
(i) P&S agrees to pay all royalties accruing or due during the Patent Challenge;
(ii) during the pendency of that Patent Challenge (regardless of whether P&S withdraws from any patent Challenge if the Patent Challenge continues without P&S), the royalty rates in ...

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