Tekelec, Incorporated v. Verint Systems, Incorporated

Filing

REVISED PUBLISHED OPINION FILED. [7292511-2] [11-41408]

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IN THE UNITED STATES COURT OF APPEALS
United States Court of Appeals
FOR THE FIFTH CIRCUIT
Fifth Circuit

FILED
February 13, 2013

No. 11-41408

Lyle W. Cayce
Clerk

TEKELEC, INC.,
Plaintiff - Appellee
v.
VERINT SYSTEMS, INC.,
Defendant - Appellant

Appeal from the United States District Court
for the Eastern District of Texas

Before HIGGINBOTHAM, ELROD, and HAYNES,* Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This appeal arises out of a contract dispute between Verint Systems, Inc.
(“Verint”) and Tekelec, Inc. (“Tekelec”). The district court awarded summary
judgment to Tekelec and denied Verint’s cross-motion for summary judgment.
We affirm.

*

Concurring in the judgment only.

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I.
The facts of this case begin with a patent dispute between two corporate
entities not directly involved in this appeal, Blue Pumpkin Software, L.L.C.
(“Blue Pumpkin”), and IEX Corporation (“IEX”). In 2001, IEX—which was, at
the time, a wholly owned subsidiary of Tekelec—filed suit against Blue Pumpkin
for allegedly infringing U.S. Patent No. 6,044,355 (the “‘355 Patent”). In 2005,
Blue Pumpkin commenced its own infringement action against IEX. In April
2006, Blue Pumpkin and IEX executed the Blue Pumpkin/IEX Settlement &
Cross-License Agreement (“Blue Pumpkin/IEX Agreement”) to resolve their
ongoing patent dispute.1 Under Section 2 of the Agreement, entitled “Settlement
and Dismissal of Litigations,” Blue Pumpkin and IEX agreed to settle the two
pending infringement actions between them. The only condition to settlement
was Blue Pumpkin’s payment of an $8,250,000 lump sum fee, on or before April
7, 2006.
Under Section 6.1.2, which creates the right to payment that Tekelec seeks
to enforce in this appeal, Blue Pumpkin agreed that beginning on April 1, 2007,
it would make six annual payments of $500,000 to IEX (the “Section 6.1.2
Payments”). The Payments are listed under the heading “License Fee/Balancing
Payment.”

No provision of the Blue Pumpkin/IEX Agreement makes the

settlement set forth in Section 2 contingent on Blue Pumpkin’s timely tender of
the Section 6.1.2 Payments.
Finally, under Section 4.3, IEX granted Blue Pumpkin an “irrevocable,
perpetual” license in its ‘355 Patent. However, under Section 4.3.5, IEX reserved
the right to terminate the license “upon Blue Pumpkin’s failure to make any of
the payments set forth in Section 5.1.2" (the “Termination Provision”). As there
is no Section 5.1.2 in the Agreement, and as Section 5 contains no reference to

1

See Appendix, No. 1.

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payments, the parties presumably intended the Termination Provision to refer
to the aforementioned Section 6.1.2 Payments.
In accordance with the terms of the Blue Pumpkin/IEX Agreement, Blue
Pumpkin timely paid IEX the initial settlement fee of $8,250,000, and pursuant
to Section 2 of the Agreement, the parties dismissed their infringement actions
with prejudice. Shortly after Blue Pumpkin and IEX executed the Agreement,
Tekelec sold IEX to NICE Systems, Inc. (“NICE”)—an entity not party to this
appeal—in a stock purchase agreement.

However, under the separate

Assignment of Royalty Rights Agreement (“Royalty Assignment Agreement”),
executed at the same time NICE finalized its acquisition of IEX, IEX assigned
its right to the six Section 6.1.2 Payments to Tekelec.2 In the instrument of
assignment, IEX also promised that it “would not terminate the [Blue
Pumpkin/IEX Agreement] without [Tekelec’s] written permission,” and that it
would “provide reasonable assistance to [Tekelec] to facilitate the resolution of
any failure of Blue Pumpkin” to timely make any of the six Section 6.1.2
Payments due under the Blue Pumpkin/IEX Agreement.
At some point after IEX assigned its right to the Section 6.1.2 Payments
to Tekelec but before the first payment came due, Witness Systems, Inc.—also
not a party to this appeal—assumed all of Blue Pumpkin’s rights and obligations
under the Blue Pumpkin/IEX Agreement, including the license in IEX’s ‘355
Patent as well as the obligation to make the six Section 6.1.2 Payments to
Tekelec. In accordance with its obligations, Witness timely made the first
$500,000 payment to Tekelec on April 1, 2007. In May 2007, Verint, the
appellant in this case, acquired Witness, assuming all of its rights and

2

See Appendix, No. 2.

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obligations under the Blue Pumpkin/IEX Agreement.3 On April 1, 2008, Verint
timely made the second $500,000 payment to Tekelec.
At this time, Verint was embroiled in its own patent dispute with NICE,
involving five separate infringement actions and dozens of patents. In August
2008, Verint and NICE entered into the Verint/NICE Settlement Agreement and
Covenant Not to Sue (“Verint/NICE Settlement”) to resolve their ongoing patent
disputes on a global, portfolio-wide basis.4 Both parties recited that they were
entering into the Settlement to “compromise, settle, discharge, and resolve, fully
and finally,” all claims for patent infringement then pending or assertable
between them.
In furtherance of this objective, NICE agreed, both on behalf of itself and
its subsidiaries, not to initiate or prosecute any infringement actions against
Verint on any and all patents then held by NICE or its subsidiaries (the
“Covenant Not to Sue”). The Covenant Not to Sue would begin on August 1,
2008 and terminate on a patent-specific basis, as set forth in the Settlement.
Moreover, NICE agreed, both on behalf of itself and its subsidiaries, that “any
royalties or other patent damages that may have otherwise accrued” against
Verint during the pendency of the Covenant Not to Sue on any and all patents
held by NICE or its subsidiaries “shall not accrue as to [Verint]” (the “NonAccrual Clause”). Verint made mirror-image promises to NICE.
On April 1, 2009—eight months after the effective date of the Verint/NICE
Settlement—Verint timely made the third $500,000 Section 6.1.2 payment to
Tekelec. However, after that date, Verint made no further payments, claiming
that the Non-Accrual Clause in the Verint/NICE Settlement extinguished its
obligations to Tekelec. Tekelec sued Verint for breach in the Eastern District of

3

See Appendix, No. 3.

4

See Appendix, No. 4.

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Texas. In its answer, Verint counterclaimed to recover the April 1, 2009
payment, which it alleged it had made in error. The district court awarded
summary judgment to Tekelec, denied Verint’s cross-motion for summary
judgment, and ordered Verint to pay up. Verint appeals.

II.
Verint claims that Tekelec lacks constitutional standing to enforce its right
to the remaining three Section 6.1.2 Payments, offering three related theories
as to why it is not party to an enforceable agreement with Tekelec. Though
couched in terms of Article III, Verint’s theories of non-liability really go to the
merits of whether an enforceable agreement exists, and we address them as
such. Because this case is before us on the parties’ cross motions for summary
judgment, we review de novo, asking whether the evidence leaves no genuine
issue as to any material fact and shows that Tekelec is entitled to judgment as
a matter of law.5 The enforceability of a contract is a legal question that is
proper subject matter for summary judgment.6
Verint first argues that IEX assigned to Tekelec only the “limited and
discrete right to receive” the Section 6.1.2 Payments, not the power to enforce the
Payments as against Blue Pumpkin or its assigns. But under Texas law, a
promise to pay becomes binding if it meets certain formation requirements

5

Jenkins v. Cleco Power, LLC, 487 F.3d 309, 313 (5th Cir. 2007).

6

See Westlake Petrochems., L.L.C. v. United Polychem, Inc., 688 F.3d 232, 238–39 (5th
Cir. 2012) (citing Martin v. Martin, 326 S.W.3d 741, 747 (Tex. App. 2010)). Texas law governs
the enforceability and interpretation of the Blue Pumpkin/IEX Agreement, for two
independently sufficient reasons. First, “[w]e apply Texas law to the enforcement of
settlement agreements in Texas diversity cases.” See Cavallini v. State Farm Mut. Auto Ins.
Co., 44 F.3d 256, 266 (5th Cir. 2005). Second, the Agreement designates Texas law as
controlling. We give effect to such a choice-of-law provision unless a party can show that it is
“unreasonable under the circumstances.” Ginter ex. rel. Ballard v. Bletcher, Prendergast &
Laporte, 536 F.3d 439, 449 (5th Cir. 2008).

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Verint does not challenge here; there is no additional requirement that the
promise be accompanied by an express grant of enforcement authority, either
when first made to the promisee,7 or when assigned by the promisee to a third
party.8 As IEX validly assigned its right to the Section 6.1.2 Payments to
Tekelec, and as Tekelec thereby “stepp[ed] into [IEX’s] shoes” with respect to
Blue Pumpkin’s promise to make the Payments,9 Tekelec has the right to enforce
the Payments against Blue Pumpkin’s successor Verint.
Verint next suggests that IEX itself did not have the right to enforce the
Section 6.1.2 Payments, and that Tekelec, as assignee, can have no greater
rights than IEX. Verint apparently reasons that because the Termination
Provision in the Blue Pumpkin/IEX Agreement gave IEX the right to terminate
Verint’s license in the ‘355 Patent if Blue Pumpkin or its assigns failed to timely
tender the Section 6.1.2 Payments, the Termination Provision was necessarily
IEX’s exclusive remedy for nonpayment. But as Tekelec points out in its brief,
this argument “misses the obvious additional enforcement right inherent with
any contract: the right to sue for breach.” Under Texas contract law, “[a]
construction which renders [a] specified remedy exclusive should not be made
unless the intent of the parties that it be exclusive is clearly indicated or
declared.”10

In this case, there is no language in the Blue Pumpkin/IEX

7

See generally 49 DAVID R. DOW & CRAIG SMYSER, TEXAS PRACTICE SERIES: CONTRACT
LAW § 1 (West 2012) (surveying the requirements for contract formation).
8

See, e.g., Thweatt v. Jackson, 838 S.W.2d 725, 728 (Tex. App. 1992) (“[I]t is axiomatic
that an assignee . . . stands in the shoes of the assignor and obtains the rights, title, and
interest that the assignor had at the time of the assignment. Moreover, the assignee of a debt
ordinarily obtains all remedies which were available to the assignor against the debtor for the
enforcement of the obligation.”).
9

Thweatt, 838 S.W.2d at 728.

10

Bifano v. Young, 665 S.W.2d 536, 539 (Tex. App. 1984) (emphasis in original)
(citations omitted); see also McCarty v. Montgomery, 290 S.W.3d 525, 534 (Tex. App. 2009)
(holding that in order for a termination provision to be construed as the exclusive remedy, it

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Agreement that suggests—let alone “clearly indicate[s]” —that the Termination
Provision was to serve as IEX’s exclusive remedy for nonpayment. IEX retained
the right to sue for nonpayment, and Tekelec succeeded to that right by virtue
of the assignment.
Finally, Verint claims that “IEX retained the right to terminate the [Blue
Pumpkin/IEX Agreement],” and that “it would be entirely inconsistent to allow
Tekelec to sue for the non-payment of royalties that IEX was entitled to
extinguish.” Verint points to no specific provision in the Blue Pumpkin/IEX
Agreement that gives IEX the unilateral right to terminate the Agreement;
rather, it argues that under the separate Royalty Assignment Agreement
between IEX and Tekelec, IEX promised that it would not terminate the Blue
Pumpkin/IEX Agreement. Verint reasons that unless IEX had a unilateral
termination right, “there would have been no reason for Tekelec and IEX to
include the non-termination covenant in the Royalty Assignment Agreement.”
Verint’s argument is flawed, for three reasons.

First, the Royalty

Assignment Agreement is extrinsic evidence that cannot be used to prove that
IEX has a unilateral termination right never mentioned in the Blue
Pumpkin/IEX Agreement.11

Second, the non-termination provision in the

Royalty Assignment Agreement is not rendered superfluous if IEX lacks an
affirmative termination right, as the provision still protects Tekelec from the
risk that IEX could terminate the Agreement without an affirmative right to do
so (which might excuse Blue Pumpkin or its assigns from making the Section

must contain either language making termination the “sole” or “exclusive” remedy, or
language expressly limiting remedies to a discrete number of choices).
11

See, e.g., Nat’l Union Fire Ins. Co. v. Crocker, 246 S.W.3d 603, 606 (Tex. 2008) (“[W]e
must give [a contract’s] words their plain meaning, without inserting additional provisions into
the contract.”). Though the Agreement does give IEX the right to terminate the license in the
‘355 Patent if Blue Pumpkin or its assigns fail to timely make the Section 6.1.2 Payments,
nothing in the Agreement gives IEX a unilateral right to terminate.

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6.1.2 Payments to Tekelec). Third, even assuming that IEX does have the
unilateral right to extinguish the Section 6.1.2 Payments, that right is not
“inconsistent” with Tekelec’s right to enforce the Payments against Verint unless
IEX actually extinguished the Payments—the central issue disputed in this
case. So long as IEX has not extinguished the Payments, Verint’s obligation to
make the Payments remains, as does Tekelec’s right to sue for nonpayment.

III.
Having determined that Tekelec has the power to enforce the Blue
Pumpkin/IEX Agreement against Verint, we turn to Verint’s claim that the
subsequent Verint/NICE Settlement extinguished its obligation to make the
disputed Section 6.1.2 Payments. We again apply the same summary judgment
standard as the district court. The interpretation of an unambiguous contract is
a legal question that can be properly decided on summary judgment.12 However,
if a contract’s terms are ambiguous, summary judgment is generally
inappropriate.13
Verint’s argument is relatively simple: Under the Non-Accrual Clause of
the Verint/NICE Settlement, NICE agreed, on behalf of IEX, to extinguish all
“royalties or other patent damages that may have otherwise accrued” against
Verint on IEX’s ‘355 Patent at any point after August 1, 2008 and throughout
the pendency of the Covenant Not to Sue.14 According to Verint, the parties to
12

Boudreaux v. Unionmutual Stock Life Ins. Co. of Am., 835 F.2d 121, 123 (5th Cir.

13

Transource Int’l, Inc. v. Trinity Indus., Inc., 725 F.2d 274, 289 (5th Cir. 1984).

1988).

14

Verint’s construction of the Settlement on this point is correct, but requires a close
reading of the contract. The Non-Accrual Clause extinguishes all “royalties or patent
damages” that “would have otherwise accrued against Verint [during the term of the Covenant
Not to Sue] with respect to the NICE Patents [and] the Non-Asserted Nice Patents.” Section
3.4 defines “Non-Asserted NICE Patents” to include “any patent . . . owned or controlled by
VERINT or a Subsidiary,” and Section 5.1 specifies that the Covenant Not to Sue commences

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the Blue Pumpkin/IEX Agreement intended the Section 6.1.2 Payments to serve
as “royalties” for Blue Pumpkin’s (and eventually Verint’s) license in IEX’s ‘355
Patent. Consequently, Verint reasons, because the last four Section 6.1.2
payments “accrued” after August 1, 2008, NICE has, on behalf of IEX,
extinguished Verint’s obligation to make those payments.
Tekelec disagrees, urging that the parties to the Blue Pumpkin/IEX
Agreement did not intend the Section 6.1.2 Payments to serve as “royalties” for
the ‘355 Patent, but merely as a deferred component of the price Blue Pumpkin
paid to settle IEX’s claims for past infringement. According to Tekelec, “Verint’s
argument that the up-front $8.25 million constituted the consideration for the
settlement and release, and that the [Section 6.1.2 Payments] were tied only to
the continuing license to the [‘355 Patent], has no basis or support from the plain
language of the [A]greement.”
Perhaps Verint is correct that the parties to the Blue Pumpkin/IEX
Agreement intended the Section 6.1.2. Payments to serve as fees for the license
in IEX’s ‘355 Patent,15 but this argument misses the point. The principal
question presented by this appeal is not whether the Payments serve as
“royalties” in some abstract, economic sense, but whether they fall within the
scope of the “royalties or other patent damages” extinguished by the Non-Accrual
Clause in the subsequent Verint/NICE Settlement. We think they do not.

on August 1, 2008. Section 3.1 defines the term “Subsidiary” in a manner that includes IEX,
a wholly-owned subsidiary of NICE. IEX owns the ‘355 Patent.
15

As Verint observes, the Agreement provides that the only condition to the settlement
of past claims is Blue Pumpkin’s timely payment of the initial $8,250,000 lump sum; nothing
in the Agreement makes the settlement contingent on Blue Pumpkin’s tender of the Section
6.1.2 Payments. Moreover the Agreement ties the Section 6.1.2 Payments to Blue Pumpkin’s
(now Verint’s) license in IEX’s ‘355 Patent by giving IEX the right to terminate the license if
Blue Pumpkin (now Verint) fails to timely make any of the Section 6.1.2 Payments. Finally,
the Agreement sets forth the Payments under the heading “License Fee/Balancing Payment.”

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Under Texas law, the words of a contract must be read in context,16 and
technical or legal terms of art must be given their technical or legal meaning.17
Here, the Non-Accrual Clause extinguishes “royalties or other patent damages
that may have otherwise accrued” against Verint on all patents held by NICE
and its subsidiaries during the pendency of the Covenant Not to Sue. We read
the qualifying phrase “or other patent damages” to indicate that the term
“royalties” refers not to Verint’s contractually bargained-for payment obligations
under Section 6.1.2 of the Blue Pumpkin/IEX Agreement, but to the courtordered “reasonable royalties” that serve as the generally accepted measure of
patent damages under 35 U.S.C. § 284.18 Our reading is bolstered by the
immediately succeeding phrase “that may have otherwise accrued,” which

16

See, e.g., United States Fid. and Guar. Co. v. Goudeau, 272 S.W.3d 603, 606 (Tex.
2008) (“Under the traditional canon of construction noscitur a sociis (‘a word is known by the
company it keeps’), each of the words used [in the insurance contract at issue] here must be
construed in context.”); see also 11 RICHARD A. LORD, WILLISTON ON CONTRACTS § 32:6 (4th ed.
1999 & Supp. 2009) (“The context and subject matter of a contract may indicate that an
ordinary word or phrase has an unusual meaning in a given sentence. . . . The ancient maxim
noscitur a sociis summarizes the rule of both language and law that the meanings of particular
words may be indicated or controlled by associated words.”).
17

E.g., Cherokee Water Co. v. Freeman, 33 S.W.3d 349, 355 (Tex. App. 2000) (“Where
the words used have a technical or legal meaning and there is nothing in the deed, when
construed as a whole, to show that any other meaning was intended, they will be given their
legal meaning.”); see also LORD, supra note 16, at § 32:4 (“Technical terms or words of art will
be given their technical meaning [unless] the circumstances or context show that the parties
intended a [different] meaning.”).
18

Under § 284, courts are empowered to award a patent holder “damages adequate to
compensate for [an] infringement, but in no event less than a reasonable royalty for the use
made of the invention by the infringer, together with interests and costs as fixed by the court.”
See 35 U.S.C. § 284. “Reasonable royalty” awards under § 284 are distinguishable from
contractual royalty arrangements, both practically and conceptually. As a practical matter,
§ 284 awards are court-mandated, not bargained for. As a conceptual matter, courts have
acknowledged that “[t]he setting of a reasonable royalty after infringement cannot be treated
. . . as the equivalent of ordinary royalty negotiations among truly ‘willing’ patent owners and
licensees,” as “[t]hat view would . . . make an election to infringe a handy means for
competitors to impose a ‘compulsory license’ policy upon every patent owner.” See Panduit
Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1158 (6th Cir. 1978).

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reinforces the conclusion that the phrase “royalties or other patent damages”
refers not to the fixed Section 6.1.2 Payments, but to the potential patent
damages a court might find accrued against Verint on patents held by NICE or
its subsidiaries during the pendency of the Covenant Not to Sue.19 In the
absence of the Non-Accrual Clause, NICE could conceivably recover such accrued
damages by breaching the Covenant or suing after the Covenant expired.20
Even if we were presented with the question of how to characterize the
Section 6.1.2 Payments in the abstract, the Payments do not present in the most
common form of “royalty.” We can assume without deciding that the parties to
the Blue Pumpkin/IEX Agreement intended the Payments to serve as fees for
the license in IEX’s ‘355 Patent. But a “royalty” is generally defined as a
payment that fluctuates with the licensee’s actual usage of the licensor’s
intellectual property, such as a payment based on the number of patented

19

See College Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 148 F.3d
1343, 1354 (Fed. Cir. 1998) (“[U]nder the federal patent law, damages begin to accrue at the
time that the alleged infringer receives notice of infringement, either through a marked
product or directly from the patentee.”).
20

See 12 RICHARD A. LORD, WILLISTON ON CONTRACTS § 36:16 (4th ed. 1999 & Supp.
2009) (“A covenant not to sue for a limited time does not suspend or affect in any other way
the covenantor’s right to sue, [and] the covenantee’s only remedy is by an action for damages
for breach of the covenant.”); Core Labs., Inc. v. Hayward-Wolff Research Corp., 136 A.2d 553,
571 (Del. 1958) (holding that the effect of a covenant not to sue for a limited period of time was
merely “to postpone [the patent holder’s] claim against [the defendant] for infringement” until
the covenant expired); see also Samsung Elecs. Co., Ltd. v. Rambus, Inc., 440 F. Supp. 2d 495,
504 (E.D. Va. 2006) (“If [the patent-holder] breached the covenant not to sue by asserting an
infringement claim . . . , its suit would not fail for lack of jurisdiction. Whether the covenant
not to sue could be pleaded as an affirmative defense, in addition to forming the basis for a
breach of contract action, would have to be litigated.”); cf. Robert H. Mnookin et al., “HardBargaining” and “Over-Lawyering”: Common Pitfalls in Constructing a Deal, 18 ALTERNATIVES
TO HIGH COST LITIG. 171 (2000) (observing that transactional attorneys often “waste the
client’s time and money by focusing on small or unlikely risks that do not justify contractual
planning.”).

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articles sold.21 A fixed-fee licensing arrangement such as the one at issue here
is conceptually distinct from a royalty.22
Because we conclude that Verint’s fixed, contractual payment obligations
under the Blue Pumpkin/IEX Agreement unambiguously fall outside of the scope
of the subsequent Verint/NICE Settlement’s boilerplate Non-Accrual Clause, we
need not consider Tekelec’s alternative argument that the disputed payments
“accrued” prior to the August 1, 2008 effective date of the Verint/NICE
Settlement.

IV.
We AFFIRM the district court’s grant of summary judgment to Tekelec
and denial of Verint’s cross-motion for summary judgment.

21

See, e.g., BLACK’S LAW DICTIONARY 1356 (8th ed. 2004) (defining “royalty” as “a
payment made to an . . . inventor for each copy of a work or article sold under a . . . patent.”);
MERRIAM WEBSTER’S COLLEGIATE DICTIONARY 1021 (10th ed. 1996) (defining “royalty” as “a
payment made to an author or composer for each copy of a work sold or to an inventor for each
article sold under a patent.”); AMERICAN HERITAGE COLLEGE DICTIONARY 1190 (3d ed. 1993)
(defining “royalty” as (i) “a share of the profit paid to a writer or composer out of the proceeds
resulting from the sale or performance of his or her work” or (ii) “a share in the proceeds paid
to an inventor or a proprietor for the right to use his or her invention or services.”).
22

See generally Morton I. Kamien & Yair Tauman, Fees Versus Royalties and the
Private Value of a Patent, 101 Q. J. ECON. 471 (1986).

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Appendix — Chart of Relevant Parties and Agreements
NICE and Verint reach global settlement of
their patent disputes and NICE agrees to
Non-Accrual Clause

4
Verint
(Appellant)

3

V/N
Settlement
(8/1/08)

Tekelec
(Appellee)

NICE

IEX assigns its right to the six
Section 6.1.2 Payments to
Tekelec (7/6/06)

Verint assumes Blue Pumpkin’s
rights and obligations under
BP/IEX Agreement, incl. license
in ‘355 Patent and obligation to
make the five remaining Section
6.1.2 Payments (~5/07)

2

BP/IEX
Agreement
(4/6/06)

Blue Pumpkin

IEX

1
IEX grants Blue Pumpkin a license in
‘355 Patent and Blue Pumpkin agrees to
make the six Section 6.1.2 Payments

‘355 Patent