Engineered Data Products v. Nova Office Furniture

Citation: Engineered Data Prods., Inc. v. Nova Office Furniture, Inc., 849 F. Supp. 1412 (D. Colo. 1994).

Factual Background
Licensor, Engineered Data Products (“EDP”), is in the business of manufacturing metal fabricated computer accessories and furniture. In 1987, Mr. Schairbaum, a patent owner, approached EDP with the purpose of licensing his patent to them for manufacturing purposes. The patent was for a piece of office furniture known as a "network desk." The network desk allowed for maximum work surface by utilizing a transparent portion on the desk surface where a monitor, which would be placed below the desk plane, could be viewed. EDP pursued the opportunity and licensed the patent. A licensing agreement was drafted between the parties. The License Agreement included an addendum that required that the patent owner's approval and input in certain sub-licensing situations. EDP began employing the "network desk" patent in its office furniture. Shortly thereafter, EDP found that the "network desk" was highly undesirable due to the untraditional materials used in its production. EDP began implementing new production techniques in order to improve the desirability of the "network desk," however, each new technique was met with similar results.

While at a trade show, EDP met a gentleman [Lechman] that had experience in building wood cabinetry. EDP began discussing the possibility of Lechman utilizing the patent in his cabinetry. Despite not having any form of license or written agreement, Lechman began using the patent on a limited basis. Notwithstanding Lechman’s willingness to sublicense the patent, EDP expressed concern over his lack of financial stability or experience in the office furniture market.

Shortly after EDP voiced its concern, Lechman secured the support of Nova Office Furniture. When EDP learned of Lechman’s newfound financial backing, they changed their position on sublicensing the patent. Subsequently, EDP entered into negotiations with Nova.

The negotiation process produced two contracts concerning the parties’ Marketing and Licensing agreements. The marketing and licensing agreements were later integrated to produce one contract to license technology for a product that would be manufactured and marketed by Nova.

The License Agreement granted numerous "non-exclusive" rights. In relevant part, the Agreement provided that EDP would have the right to practice the "network” desk" patent within the territory of the "stand-alone office market," while Nova was limited in its design to products primarily constructed of wood. Additionally, the agreement contained a “Binding Effect” clause which allowed for the sublicensing of "right and licenses granted herein…to third parties as to all or any of the proprietary rights represented. . . ." After the Agreement was signed, EDP continued to sell desks incorporating the "network" design. Additionally, the Licensor also manufactured and marketed retrofit kits. Although such kits were not in existence when the agreement was executed, the kits can be applied to covert metal desks with laminated wood tops into "network desks." EDP’s actions gave rise to a dispute between the parties regarding their rights, duties and obligations under the license agreement. As a result, EDP sought declaratory judgment.

Trial Court Proceedings
At trial, the district court clarified the rights and obligations of the party. In doing so they determined that 1) EDP was within its rights to manufacture office desks incorporating the patent; 2) EDP was within its rights to manufacture and market retrofit kits only with regard to metal based, stand-alone office products; and 3) the licensing agreement did not allow Nova to have unlimited rights to sublicense the patent.

In reaching this determination, the court found that EDP’s non-exclusive right to practice the "network desk" patent was limited only by territory. Conversely, the agreement limited Nova’s use of the patent in both the materials it could use to manufacture the desk and the territory it could market the desk to. Since these terms were unambiguous, the court was required to follow the intent of the parties at the time the agreement was made. Therefore, in accordance with the agreement, EDP was within its rights to manufacture "network desks" as well as retrofit kits to be used in metal-based products.

Further, in regards to Nova’s sublicensing rights, the court noted that Nova’s belief that it was entitled to unlimited licensing rights was “unreasonable”. The court concluded that to adopt Nova’s argument would be to accept the notion that the parties “drafted and constructed an agreement which began with a broad grant of exclusivity, then narrowed and defined the scope of that exclusivity, only to wipe out the direful limitation of scope by returning to an unlimited grant to sublicense the patent.” Since the parties bargained “long and hard” over the Agreement, accepting such an interpretation would produce “extreme and absurd result[s]”.

Additionally, the location of the sublicensing clause was situated as an administrative provision at the end of the Agreement. Since the entire License Agreement pertained to the "network desk' patent the court reasoned that it would be counterintuitive to interpret a clause labeled “Binding Effect” as granting unlimited sublicensing rights. For the aforementioned reasons, the court determined that Nova was allowed to grant sublicenses “as necessary to implement its own rights under the license agreement.”