Wednesday, November 21, 2012

Apple-HTC license agreement would terminate automatically after change of control

I have found, in a place where few people look for this kind of information, a heavily-redacted (more than 90% of the content is blacked out) public version of the Apple-HTC license agreement that was signed and announced on Sunday, November 11, 2012 by Taiwan as well as European time (it was still Saturday, November 10, by U.S. time). Here's the header (click on the image to enlarge):

Samsung's lawyers are fighting for a completely unredacted copy. Apple and HTC are willing to let them see the whole thing except the part on license fees (33 words would be redacted).

It's hard to glean much information from the public version I've obtained, but let me share a few observations:

  1. The agreement is governed by U.S. and particularly California law. There is no arbitration clause, at least not in the publicy-accessible parts of the document.

  2. The HTC parties include various HTC entities as well as S3 Graphics, a company that HTC had acquired particularly in hopes of buying itself some leverage for a settlement with Apple. VIA Technologies, a chip maker that was also suing Apple, has entered into a separate but simultaneous settlement agreement with Apple. Here's the header of the VIA-Apple contract (click on the image to enlarge):

    Many observers always viewed VIA's patent assertions against Apple as part of HTC's countersuing activity, given an important overlap at the company owner level.

  3. A potential like Samsung could not solve its own IP issues with Apple through such a deal. The Apple-HTC agreement says the following:

    In the event of a Change of Control of a party, this Agreement shall automatically terminate unless otherwise agreed in writing by the Parties, effective immediately prior to such Change of Control.

    "Change of Control" is defined as follows:

    "Change of Control" of a Person means any of the following occurring after the Effective Date in which the beneficial owners of securities representing the right to exercise voting power with respect to the election of directors or similar managing authority of such Person immediately prior to the respective transaction or series of related transactions do not, immediately after the consummation of the respective transaction of series of related transactions, beneficially own more than fify percent (50%) of the voting power of the surviving or reslting entitiy (or direct or indirect parent of the surving or resulting entity) with respect to the election of directors or similar managing authority: (a) any Third Party or group (within the meaning of Sections 13(d)(3) or 14(d) (2) of the Securities Exchange Act of 1934) of Third Parties (other than such Person, any trustee or other fiduciary holding securities under any employee benefit plan of such Person, or any company owned, directly or indirectly, by the stockholders of such Person in substantially the same proportions as their ownership of the common stock of such Person) becomes the beneficial owner, directly or indirectly, of securities of such Person representing more than fifty percent (50%) of the voting power of such Person's then outstanding securiteis entitled to vote generally in the election of directors; or (b) the consummation by such Person of a merger or consolidation with any other Third Party or gorup of Third Parties. As used in this Agreement, a "Change of Control of a Party" means a Change of Control of HTC CORPORATION or APPLE INC. (or any Parent Holding Company under Section 9.6).

    While a change-of-control clause is normal in such situations, it's not always automatic. An alternative structure would allow the other party to terminate, and could make such termination subject to reasonable discretion or more specific criteria.

  4. Unsurprisingly, the agreement protects both parties in the event any of the Covered Patents are assigned or licensed exclusivly o a third party. In that case, the patents must remain encumbered.

  5. What's clearly unusual is that the dismissals of the parties' various U.S. actions will be dismissals without prejudice, theoretically keeping the door open to future reassertions. This is presumably part of the protection that Apple wanted against a change of control. The change-of-control rules and the kind of dismissal applies to both parties, but realistically, Apple is not going to be acquired during the ten-year term, while HTC is small enough that many other industry players could afford a deal. If anyone wants to buy HTC now, it's still possible, but the Apple agreement won't benefit the new owner (unless the new owner previously secures Apple's consent).

    The dismissals of the parties' numerous German actions are also without prejudice, but that's what a Klager├╝cknahme (withdrawal of a complaint) always is. At some stage of the proceedings (after oral argument) it requires the consent of the other party, and Apple and HTC have agreed to consent to it in each of their German actions.

  6. The non-redacted passages of the version of the agreement that I have access to don't provide a clear indication as to whether or not Apple has reserved certain patents exclusively. The public parts of the document don't state that all of the parties' current and future patents are included. Only "certain" patents are "Covered Patents". But tha could still mean all patents in practical terms. There's a clause entitled "Reservation of Rights" and, more importantly, a whole section (section 5) entitled "EXCLUSIONS TO GRANT OF RIGHTS". The redacted part of that section is not long enough to impose specific restrictions, but the 30-page agreement comes with seven exhibits and there could be an exhibit that specifies certain carve-outs.

  7. The agreement relates to certain "Covered Products" only. The definition of "Covered Products" is redacted and presumably (but not necessarily) very inclusive.

  8. No one will be allowed to claim, based on the agreement, to be a third-party beneficiary. But patent exhaustion (which is not mentioned explicitly, at least not in the publicly-accessible parts of the document) would benefit both parties' downstream customers.

These are just a few pieces of the puzzle. Some more information may come to light at or even before the December 6 Apple v. Samsung injunction hearing.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Share with other professionals via LinkedIn: