USM Corp. v. SPS Technologies, Inc.

USM (plaintiff) sued SPS (defendant), seeking to invalidate SPS’s patent and reclaim royalties USM had paid to SPS. In a previous suit, SPS had sued USM for infringement of its patent, and USM argued that it had a license through a “grant back clause” in an unrelated patent licensing agreement. After trial, the court held that USM did not in fact have a license, which spurred a settlement agreement. In the settlement, USM agreed to acknowledge the validity of the patent and pay royalties to SPS. Three years later, before the district court, USM alleged that the license that was a part of the earlier settlement agreement constituted patent misuse, and further argued that the patent was invalid. The license agreement included a varying royalty percentage USM owed to SPS, depending on the identity of USM’s sublicensee. Under that varying royalty rate, USM owed SPS a base of 25% royalties on sublicenses. However, if USM sublicensed to any of four prior SPS licensees, then USM owed a 75% royalty on the sublicense. The district court ruled that the patent was invalid, as of the date of the second lawsuit. The district court further held that USM was permitted to recoup royalties it had paid after the second suit was filed, but, because the license agreement did not constitute patent misuse, USM could not recoup royalties paid on that agreement prior to the second suit. Both parties appealed.