Settlement Agreement Does Not Prevent Suit Against Microsoft Customers

There is a reason why parties negotiating settlement agreements in patent cases often devote considerable time and energy to negotiating language covering use of patented technology by the licensee's customers and downstream users.  Despite, or perhaps because of, this attention, disputes sometimes arise.  Illustratively, Microsoft was recently denied summary judgment on its claim that Eolas Technologies breached a settlement agreement (in the notorious case in which Eolas was awarded over $500 million in damages against Microsoft) by bringing a patent infringement suit against some of Microsoft's customers.  Microsoft Corp. v. Eolas Technologies, Inc. , No. 10 C 3820, 2012 U.S. Dist. LEXIS 75975 (N.D. Ill. June 1, 2012).

Microsoft had obtained a patent license from Eolas, along with a release and covenants that Microsoft believed provided broad protection for its customers.  Accordingly, after Eolas sued Microsoft customers in the Eastern District of Texas, Microsoft sued the Eolas in the Northern District of Illinois, which retained jurisdiction over the settlement agreement, seeking a declaratory judgment and an injunction against some of the claims Eolas had brought in Texas.  The court therefore had to consider whether Eolas had breached the agreement, and whether, if so, Microsoft had been harmed.

The license agreement between Microsoft and Eolas provided that Eolas would not

sue any of [Microsoft]'s or its Affiliates' customers, developers, manufacturers, distributors . . . or end-users . . . for their making, using, selling . . . or distributing Licensee Products or practicing any method in connection with their making, using, selling, offering for sale, licensing, leasing, importing or otherwise disposing or distributing Licensee Products.

Microsoft contended that Eolas' broad allegations about the scope of its patent claims made in the earlier litigation supported a broad reading of the license.  Eolas, in contrast, argued that it had expressly disclaimed any claims in the Texas lawsuit based on use of Microsoft products.

While expressing concern about Eolas' refusal to disavow claims that defendants in the Texas action induced infringement by users of Microsoft software, the court agreed that Microsoft had not shown a breach of the settlement agreement.  Illinois law permitted "the court to consider the objective circumstances out of which the settlement agreement arose."  However, Microsoft's arguments to the contrary notwithstanding, the court thought it more likely that Eolas had had the upper hand in settlement negotiations, "and that Microsoft was not in a position to negotiate the very broad contract interpretation for which it now argues."  In any case, Microsoft having "resisted discovery on this question," the court, in deciding the summary judgment motion, was compelled to "construe the record in the light most favorable to Eolas."  The court noted that "Eolas was free to sue Texas Defendants who distribute executable applications used on non-Microsoft operating systems, and to sue non-Microsoft website operators for visits by non-Microsoft browsers running on an operating system other than Windows."

Having found for Eolas on the breach of contract question, the court only briefly considered the question of harm.  The court stated that it would have expected Microsoft to have made some showing of harm, i.e., “some evidence of loss of good will, injury to customer relations, or loss of the enhanced value that its server software should enjoy as a result of the license."   However, Microsoft had made no such showing.

Despite agreement that the Texas defendants were third-party beneficiaries of the settlement agreement, the court found that there was no reason why Eolas could not sue them in Texas so long as it did not run afoul of the settlement agreement.  The court also took cognizance of a jury's recent invalidation of Eolas' patents in the Texas action.  "If it sticks," the court said, the defendants'

victory in the Texas lawsuit arguably puts them in a better position than they would have been in, had this court enjoined any portion of the lawsuit in Texas. Microsoft has standing to sue for harm to third-party beneficiaries, but it has no standing to seek a stay of litigation that frees its customers to do business with other software providers.

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