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Nautilus, Inc. v. Icon Health & Fitness, Inc.

United States District Court, W.D. Texas, San Antonio Division

January 19, 2018

Nautilus, Inc. Plaintiff,
v.
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

          ROYCE LAMBERTH UNITED STATES DISTRICT JUDGE

         Summary

          The Court has before it the parties' cross-motions for summary judgment.

         The 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.

         Under 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.

         For 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 moot.

         Background

         The 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.

         In 2004, Nautilus's and ICON'S predecessors-in-interest entered into a patent licensing agreement (the "contract").[1] 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.

         After 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.

         The Cross-Motions for Summary Judgment

         The 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.

         While 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.

         So the 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.

         Analysis

          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.

         A. ICON Need Not Pay Royalties to Nautilus for Everything It Sells-Just for "Products" as Defined by the Contract.

         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 (the "Royalty").

(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.

         B. The Contract's Definition of "Products" Requires an Infringement Analysis Under Chinese Patent Law.

         The 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.

         The 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.

         This 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.

         For 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.

         C. Nautilus's Argument that ICON Admitted that Its Products Are Covered by the Chinese Patent Are Unavailing.

         In 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 admission.

         1. ICON Did Not "Contractually Admit" that the Products in Question Are Covered by the Chinese Patent or Otherwise Subject to Royalty Payments.

         Nautilus 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.

         First, 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.

         Second, 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.[2] 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.

         Third, 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 "Products."

         Instead, 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.

         Therefore, 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 contract.

         2. ICON Did Not Admit that Its Products Are Covered by the Chinese Patent.

         Nautilus 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.[3] 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 patent.

         P. ...


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