United States District Court, W.D. Texas, San Antonio Division
Nautilus, Inc. Plaintiff,
Icon Health & Fitness, Inc. Defendant.
MEMORANDUM OPINION: GRANTING THE PLAINTIFFS MOTION
FOR SUMMARY JUDGMENT DENYING THE DEFENDANT'S MOTION FOR
SUMMARY JUDGMENT DENYING AS MOOT ALL OTHER MOTIONS
LAMBERTH UNITED STATES DISTRICT JUDGE
Court has before it the parties' cross-motions for
plaintiff-Nautilus, Inc.-and the defendant-ICON Health &
Fitness, Inc.-are parties to a patent licensing agreement
(the "contract"). Pursuant to the contract,
Nautilus gave to ICON a license to incorporate Nautilus's
patented technology into ICON'S ellipticals. In return,
ICON agreed to pay to Nautilus a royalty on the sales of
ellipticals covered by any of Nautilus's patents. By
January 25, 2015, all of Nautilus's patents had expired
except for its Chinese patent.
the plain terms of the contract, ICON need only pay royalties
on the sale of "Products" (with a capital
"p"). The definition of "Products" in the
contract unambiguously incorporates and is limited by the
scope of "the intangible legal rights and interests that
exist" in Nautilus's patents. Because these legal
rights can only be determined with reference to the
underlying substantive patent law that creates those rights,
determining what is and is not a "Product" on which
ICON must pay royalties requires reference to that underlying
patent law. Here, Nautilus contends that the products in
question are covered by Nautilus's Chinese patent, which
was issued under and is governed by Chinese law, so the Court
must apply Chinese law to determine whether ICON'S
products infringe on the Chinese patent. Doing so, the Court
concludes that ICON'S products-elliptical component parts
and assembly instructions that are fabricated and packaged,
but not finally assembled, in China-infringe on the Chinese
patent. Therefore, ICON'S products are
"Products" on the sales of which ICON must pay
royalties to Nautilus.
these reasons, the Court will grant Nautilus's motion for
summary judgment, deny ICON'S motion for summary
judgment, and deny all other pending motions in the case as
plaintiff, Nautilus, Inc. ("Nautilus"), is an
exercise-equipment company that owns a series of now-expired
patents relating to the design and manufacture of
ellipticals. The defendant, ICON Health & Fitness, Inc.
("ICON"), develops and manufactures exercise
equipment-including ellipticals-for sale around the world.
2004, Nautilus's and ICON'S predecessors-in-interest
entered into a patent licensing agreement (the
"contract"). Nautilus and ICON are the current parties
to the contract. Under the contract, ICON received a
non-exclusive license to certain Nautilus patents in exchange
for its agreement to pay to Nautilus a five percent royalty
on the gross sales of all "Products" (as defined by
the contract) manufactured and sold by ICON that practiced
the licensed patents. The licensed patents concerned the
parts for and the manner of constructing
"front-end" ellipticals. Some of the patents were
U.S. patents while others were foreign patents. On January
25, 2015, all of the patents licensed under the PL A had
expired except for one-Nautilus's Chinese patent.
the expiration of the U.S. patents, ICON continued
manufacturing ellipticals in China. Some of these ellipticals
were shipped-unassembled, but with instructions to complete
assembly-to purchasers in the United States. ICON initially
paid royalties on a portion of these sales. But in December
2015 ICON took the position that these
manufactured-but-unassembled ellipticals sold to United
States consumers did not qualify as "Products"
under the PLA and stopped making royalty payments. Nautilus
disagreed and demanded royalty payments. ICON ultimately
refused to make the payments. The parties have now sued each
other, with Nautilus seeking payment of the royalties it
believes it deserves and ICON seeking a refund of the royalty
payments it believes it made in error.
Cross-Motions for Summary Judgment
parties agree as to the material facts of the case. Between
January 25, 2015 (when the U.S. patents expired), and January
25, 2016 (when the Chinese patent expired), ICON manufactured
the component parts of its ellipticals and packaged those
parts, together with assembly instructions, in China. Some of
these unassembled ellipticals were sold to consumers in the
United States and other countries in which Nautilus held no
valid patents. These consumers would complete assembly of the
ellipticals themselves in the United States.
the parties agree on these facts, the parties disagree as to
the application of the contract as it relates to the sale of
the unassembled ellipticals. Nautilus asserts that the
unassembled ellipticals sold in the United States are
"Products" under the plain terms of the contract.
ICON disagrees, arguing that the PLA's definition of
"Products" incorporates the doctrine of patent
infringement and that the unassembled ellipticals do not
infringe the Chinese patent.
Court must determine whether defining the term
"Products" under the contracts requires reference
to Chinese patent law. And if it does, the Court must
determine whether the unassembled ellipticals and their
assembly instructions, sold in the United States, infringe
the Chinese patent. But if it does not, the Court will still
need to decide whether the ICON products in question fall
within the contract's definition of "Products"
on which royalties must be paid.
I. The Court Must Conduct an Infringement Analysis
Under Chinese Patent Law to Determine Whether the ICON Must
Pay Royalties on the Products at Issue.
ICON Need Not Pay Royalties to Nautilus for Everything It
Sells-Just for "Products" as Defined by the
starting point for the Court's analysis is Section 3.1 of
the contract, which is the royalties clause. The royalties
clause reads, in relevant part, as follows:
During the Term of this Agreement, in consideration of the
Patent Rights licensed to Licensee under this Agreement ...
for all Products that are either made, have made, used, sold,
offered for sale, or imported in the Field of Use in the
Territory, Licensee shall pay Licensor a royalty of five
percent (5%) of the gross sales of such Products by Licensee
(ECF #39-2 at 30). This clause contains many
specially-defined terms, the majority of which (Licensee,
Licensor, Field of Use, Territory, Term, Agreement) are not
in dispute and do not figure in any important way in the
dispute between the parties. What is in dispute, however, is
the term "Products." As the royalties clause makes
plain, ICON does not owe royalties to Nautilus for everything
that ICON sells in the Field of Use in the Territory. Rather,
ICON only owes royalties to Nautilus on the gross sales of
"Products" as defined by the contract. That is the
heart of the current dispute. Nautilus contends that the ICON
products in question- unassembled component parts and
assembly instructions packaged in and shipped from China, but
sold to U.S. customers- are "Products" as defined
by the contract and ICON contends that they are not.
The Contract's Definition of "Products"
Requires an Infringement Analysis Under Chinese Patent
contract defines "Products, " in part, as "any
apparatus, system or products covered by at least one Claim
of any of Licensor's Patent Rights." (Section 1.5).
The word "Claim" in that definition "means...
the issued claims of the Patent Rights." (Section 1.8).
The term "Patents Rights" in both of those
definitions means the "intangible legal rights or
interests that exist" in any of Nautilus's patents.
(Section 1.1). And the "Licensor" is Nautilus.
Replacing the statutory terms with their definitions, then,
gives us the following definition of "Products":
any apparatus, system or products covered by at least one
issued claim of any of the intangible legal rights or
interests that exist in any of Nautilus's patents.
Court finds that the phrase "covered by" in the
definition of "Products" plainly means
"infringing." Nautilus argues that this is not so
because ICON'S ellipticals can, somehow, be
"covered" by Nautilus's patents without also
infringing on the patents. This cannot be. If Nautilus was
right, the definition of "Products" would not be
limited by the legal rights and interests existing in the
patents. But as demonstrated above, the definition of
"Products" in the contract is explicitly tied to
the "legal rights or interests existing in" the
patents. This clearly shows that those rights and interests
are intended to limit what counts as a "Product."
The legal right existing in a patent is the right to a legal
monopoly-the exclusive right to manufacture, use, or profit
from the subject of the patent. Any violation of that legal
monopoly without the patentee's authorization is an
infringement, nothing more and nothing less. Patent rights,
then, "cover" no more than that which infringes the
patent because the patent creates only a legal right against
infringement. Any interpretation of the phrase "covered
by" that goes beyond the scope of the patent rights that
may be infringed, then, renders unintelligible the
definition's incorporation of the patent rights.
understanding aligns perfectly with the purpose of a
licensing agreement. The patentee holds a patent, which gives
the patentee a legal monopoly in the utilization of the
patented technology. Because of that legal monopoly, the
patentee may assert a cause of action for infringement
against any party that utilizes the technology without the
patentee's assent. The licensee, meanwhile, desires to
infringe upon (utilize) the patented technology. To do this,
the licensee pays money to the patentee in exchange for the
patentee's permission to infringe on the patent. The
licensee is not paying to do that which does not infringe on
the patent because the patentee has no right to prevent the
licensee from doing that which does not infringe on the
patent. Therefore, absent clear and unambiguous language to
the contrary, it makes no sense to say that a licensing
agreement covers anything except that which would infringe on
the patent being licensed. Merely using the phrase
"covered by" instead of "infringing" is
not clear and unambiguous language to the contrary.
these reasons, the incorporation of "Patent Rights"
into the definition of "Products" only makes sense
if the phrase "covered by" means
"infringing." And as "covered by" means
"infringing, " determining whether the little-p
products at issue here-component parts and assembly
instructions for ellipticals that are packaged, but not
assembled, in China and then sold to countries in which
Nautilus has no valid patents-are capital-p
"Products" on which ICON must pay royalties
requires an infringement analysis under the relevant
country's patent law-China's.
Nautilus's Argument that ICON Admitted that Its Products
Are Covered by the Chinese Patent Are Unavailing.
addition to its argument, disposed of above, that
"covered by" means something other than
"infringing, " Nautilus asserts that ICON admitted
that the disputed products are covered by the Chinese patent.
Nautilus argues that ICON admitted to this in two ways: (1)
ICON "contractually admitted" that these products
are covered by the Chinese patent, and (2) ICON admitted the
products are covered by the Chinese patent in its responses
to depositions and interrogatories. For the following
reasons, the Court disagrees that ICON made any such
ICON Did Not "Contractually Admit" that the
Products in Question Are Covered by the Chinese Patent or
Otherwise Subject to Royalty Payments.
points to numerous contractual provisions beyond the clause
defining "Products" on which royalties must be paid
to support its contention that ICON agreed to pay royalties
on the disputed products. As the Court will explain, none of
these provisions actually support that contention.
Nautilus points to the "Agreed Background Facts"
section of the contract, which reflects "the fundamental
understanding and intent of the parties in entering the"
contract. (ECF #42-3 ¶18(a), (b)). That is all well and
good, but it does not support Nautilus's position. The
"Agreed Background Facts" section establishes the
following: (1) Nautilus owns the patents relevant to this
dispute, (2) ICON sells fitness products (ellipticals), and
(3) Nautilus intended to give to ICON a non-exclusive license
to the patents in return for royalties "-pursuant to
the terms and conditions of this Agreement." (ECF
#39-2 at 4 (emphasis added)). This section makes clear that
Nautilus was to receive royalties subject to the terms of the
contract, which, as the Court has explained, requires royalty
payments only for the sale of "Products" as those
are defined within the contract. Nothing in these background
facts supports the argument that ICON agreed that any
particular product was subject to the royalty payments.
citing Sections 1.1, 1.5, 2.1, 3.1, 3.3, and 5.2 of the
contract, Nautilus makes the bold assertion that the
"parties agreed that ICON'S ellipticals were covered
by each of the patents subject to the PLA." (ECF #42-3
¶18(c)). But Nautilus is wrong. Sections 1.1 and 1.5
define "Patent Rights" and "Products"
respectively, and the Court parsed their language earlier in
this opinion. Section 2.1 is the grant of the license.
Section 3.1 is the royalties clause, which the Court has
already made clear requires royalty payments only on the
sales of "Products" as defined in Section 1.5.
Section 3.3 states that the royalty is to be a flat-rate
royalty; it says nothing about what actually counts as a
"Product" on which that flat-rate royalty must be
paid. And Section 5.2 states only that ICON
agrees that Nautilus's patents are valid and enforceable.
But ICON is not attacking the validity of the Chinese patent,
only its scope. In short, none of the contractual provisions
cited by Nautilus actually support its contention that ICON
agreed that its ellipticals were covered by the patents. The
provisions only establish that ICON agreed to pay royalties
on ellipticals that actually were covered by the patents.
Nautilus argues that ICON contractually agreed that all of
its ellipticals are "Products" because the
definition of "Products" expressly incorporates
Schedule C of the contract, (ECF #39-2 at 5, ¶1.5), and
"Schedule C identifies the types of ICON products
covered by the [contract], which are ellipticals containing
the patented features depicted therein." (ECF #42-3
¶18(d), (e)). The Court disagrees with this
interpretation of Schedule C. Looking at Schedule C, all the
Court sees is a picture of an elliptical. (ECF #39-2 at
19-20). Nautilus's interpretation of this is basically
that all elliptical-looking things count as
"Products". But this is an impermissibly broad
interpretation of a picture. It would render completely
superfluous the rest of the definition of
"Products." There would be no need to incorporate
Nautilus's patent rights into the definition if all
things resembling a picture of an elliptical counted as
the meaning of this mysterious picture of an elliptical is
best understood from the label given to it and the context in
which the contract was first made. The picture is labeled
"FreeMotion Institutional Elliptical, " which seems
to be the name of a certain elliptical model that the
original licensee was producing and selling at the time the
contract was first negotiated and solemnized. (ECF #39-2 at
18). In addition, not all of the relevant patents were
finalized at the time of the contract's formation-the
original licensor still had several patents that were merely
in the application stage (including the Chinese patent
involved in the present dispute), which were identified in
Schedule B of the contract. (ECF #39-2 at 17). As such, the
Court thinks it best to interpret Schedule C and its
incorporation into the contract's definition of
"Products" as a stopgap measure. It ensured that
the licensor would receive royalties on the sale of the
FreeMotion Institutional Elliptical throughout the entire
scope of the Territory even though all of the necessary
patents were not yet in place. Once the patent applications
specified in Schedule B were approved, the single elliptical
model identified in Schedule C would ostensibly be covered by
those patents, as would future models and products on which
royalties would be owed. This reading of Schedule C
successfully gives a meaning and function to Schedule C (as a
stop-gap measure until the Schedule B patents applications
could be approved) without making fully redundant the
contract's incorporation of Nautilus's patent rights
into the definition of "Products." For these
reasons, then, the Court does not agree that Schedule C
identifies "the types of ICON products covered by
the" contract. Rather, it identifies a single product
(or model thereof), the FreeMotion Institutional Elliptical,
that is not the subject of any of the contested royalties.
But at the very least, Schedule C cannot be interpreted so
broadly as to incorporate all things resembling ellipticals
(or containing elliptical features that Nautilus claims are
patented technology) into the definition of
"Products" in a way that would render superfluous
the need for patent rights.
nowhere in the contract does ICON admit that its contested
products are "covered by" the Chinese patent or
that they are "Products" as contemplated by the
ICON Did Not Admit that Its Products Are Covered by the
argues that "ICON admits that the ICON Products are
covered by the Chinese patent subject to the" contract.
(ECF #42-3 ¶20). Nautilus then refers to numerous
portions of ICON'S responses to interrogatories and
depositions in which Nautilus claims these admissions
happened. The Court will not copy all of the
disputed statements in this opinion or address them
one-by-one. The essence of the statements is that ICON does
concede that its ellipticals, when purchased and fully
assembled in China, are covered by the Chinese patent.
But through all of its statements, ICON consistently
maintains that the products disputed in this litigation-
unassembled component parts and their assembly instructions
that are purchased by U.S. customers and assembled in the
U.S.-are not covered by the Chinese patent because that
arrangement does not constitute infringement under Chinese
patent law. ICON'S statements about Chinese patent law
may or may not be right (ultimately, they are wrong), but for
now it is enough to say that they do not constitute an
admission that the products are covered by the Chinese