Re: IBM's interpretation of the GNU GPL contract

[Alexander Terekhov]

IBM even managed to cite Dow Chemical (on repudation and termination)...

Here's more:

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III. The License

The Court of Federal Claims held on motion for summary judgment that
"the 1972 license must be considered effectively terminated ab initio."
Dow II, 32 Fed. Cl. at 16. We review the court’s grant of summary
judgment de novo. See Conroy v. Reebok Int’l, Ltd., 14 F.3d 1570, 1575,
29 USPQ2d 1373, 1377 (Fed. Cir. 1994). Summary judgment is appropriate
when there is no genuine issue as to any material fact and the moving
party is entitled to judgment as a matter of law. See U.S. Ct. Fed. Cl.
R. 56(c); Fed. R. Civ. P. 56(c).

The government argues that the Court of Federal Claims improperly
treated the license as void ab initio. The government contends that it
did not repudiate the license because its refusal to pay royalties was
based on the belief that it had not practiced the invention. The
government continues to view the license as being "in full force and
effect," and argues that Dow’s notice of termination dated January 10,
1985, was ineffective.

Dow contends that the government’s failure to pay royalties constitutes
a material breach by repudiation which permitted Dow to rescind the
license. Dow argues that the Court of Federal Claims correctly held that
the license is void ab initio because it was repudiated by the
government.

We consider first whether the government repudiated the license.
"Repudiation is a statement by the obligor to the obligee indicating
that the obligor will commit a breach that would itself give the obligee
a claim for damages for total breach." Mobil Oil Exploration & Producing
Southeast, Inc. v. United States, ___U.S. ___, ___, 120 S. Ct. 2423,
2429 (2000) (citing Restatement (Second) of Contracts § 250 (1979))
(internal quotations omitted). Repudiation occurs when one party refuses
to perform and communicates that refusal distinctly and unqualifiedly to
the other party. See DeKonty v. United States, 922 F.2d 826, 827-828
(Fed. Cir. 1991) (citing Dingley v. Oler, 117 U.S. 490, 499-500 (1886)).
The injured party can choose between terminating the contract or
continuing it. See St. Paul Plow-Works v. Starling, 140 U.S. 184 (1891);
McDonnell Douglas Corp. v. United States, 182 F.3d 1319, 1327 (Fed. Cir.
1999); Cities Serv. Helex, Inc. v. United States, 543 F.2d 1306, 1313
(Ct. Cl. 1976).

On July 9, 1975, Dow requested from the government an accounting and
payment of royalties provided for in the license. The government
responded on December 28, 1976, that it did not consider any royalties
due on the basis that it was not practicing the invention of the ‘039
patent. Over the next two years the government and Dow continued to
discuss the government’s position, as well as reasonable royalty rates,
through correspondence and meetings.

On November 2, 1978, the government informed Dow that "new information
has been developed which raise[s] seriously litigable issues" as to
validity and infringement and the "viability and life of any license
issued" and that if the ‘039 patent is valid "it has not been infringed
by [government] activities which follow the prior art." The government
stated in the November 1978 letter that it was the [government’s] final
decision that there has been no substantial, if any, practice of the
claimed process which would give rise to a valid claim for payment for
royalties under the alleged license or a claim for compensation based on
infringement of the patent.

Furthermore, the letter said that "[n]o action will be taken on any
further requests for reconsideration of this matter."

On January 10, 1985, approximately six years after the November 1978
letter and two years after this proceeding was commenced, Dow sent the
government a letter terminating the license due to the government’s
material breach by failing to pay royalties, effective "either as of the
date of the breach or the date of this Notice, whichever is legally
earlier."

The Court of Federal Claims determined that because the government never
paid any royalties, did not intend to pay any royalties, and contested
the validity of the patent as well as the viability of the license, the
government's conduct "constituted a classic breach of contract by
repudiation." Dow II, 32 Fed. Cl. at 18. The court then found that Dow
had lawfully terminated its contract with the government, and held that
because Dow’s termination abrogated the license to the extent it
remained unperformed, and because the government had never performed
under the license, Dow’s termination had ab initio effect, rendering the
license void from its inception. Id.

The government’s November 2, 1978 letter, "clearly and unequivocally
expressed its intention to never pay royalties," id., and furthermore
showed an intention to challenge not only the validity of the patent,
but also the viability and life of the license itself. These actions of
the government constitute a distinct and unequivocal refusal to perform
under the license, thus causing a material breach, or repudiation, of
the contract. Accordingly, there are legally sufficient grounds for
upholding the determination of the Court of Federal Claims that the
government materially breached and repudiated the license."

...

A material breach, or repudiation, gives rise to a right to exercise a
termination provision in a contract. See, e.g., McDonnell Douglas, 182
F.3d at 1327; Cities Serv., 543 F.2d at 1313. Moreover, under the
circumstances of this case, the absence of an express termination clause
would not ordinarily prevent a party from ending the contract. See,
e.g., Ross-Simons of Warwick, Inc. v. Baccarat, Inc., 217 F.3d 8, 10
(1st Cir. 2000) ("Every contract involves a bargained-for exchange of
obligations, the material breach of which by one party gives the other
party a right to terminate."); Apex Pool Equip. Corp. v. Lee, 419 F.2d
556, 562 (2d Cir. 1969) (stating that a right to terminate upon material
breach is implied in many contracts); see also Restatement (Second) of
Contracts § 237 (1981).

As to the government’s waiver argument, we are not persuaded. This court
stated in McDonnell Douglas, 182 F.3d at 1327, that "[a] party that
chooses to proceed with the contract – even if it is the government . .
. – does not thereby waive its right to terminate for default." Although
one of our predecessor courts stated that a failure "to take action to
end the agreement within a reasonable time after becoming aware of the
facts" may result in a waiver, it also noted that the strict application
of the election [waiver] doctrine, i.e., the doctrine that a
non-defaulting party has an election either to end the contract or to
continue performance, has sometimes been modified. Cities Serv., 543
F.2d at 1313 (citing Northern Helex Co. v. United States, 455 F.2d 546,
553 (Ct. Cl. 1972)). In Cities Service, the court also noted that:

[s]ome courts have shared Professor Corbin’s view that an election
[waiver] should not be conclusive unless facts giving rise to an
estoppel exist; either the breaching party must have changed his
position in reliance on the injured party’s failure to cancel or the
injured party’s conduct must be such that it would be unjust to allow
him to change his position.

543 F.2d at 1314 (citing 5A A. Corbin, Contracts § 1220 (1964)).

Applying these principles, we conclude that the government’s material
breach and repudiation of the license gave Dow the right to either
terminate the license or continue to treat it as outstanding. The
government’s challenge to the validity of the patent and the viability
of the license, together with the refusal to pay any royalties, made the
absence of a termination clause in the license immaterial. Under these
circumstances, a termination right is properly implied. See Ross-Simons,
217 F.3d at 10; Apex Pool, 419 F.2d at 562. During the ensuing period
from 1978 until suit was filed and the license was formally terminated
in January 1985, there is no evidence that the government was prejudiced
by Dow’s delay in terminating the license. Further, the government has
not argued that Dow was estopped from terminating the license for
reasons similar to those suggested by Professor Corbin. See Cities
Serv., 543 F.2d at 1314.

We conclude that the government repudiated the license, and that Dow had
a right to terminate the license that was not waived. Consequently,
Dow’s letter of January 10, 1985 effected a termination of the license
on the date it was received by the government, viz., January 18, 1985."

So when did IBM send a letter to SCO about alleged
repudation/breaches/etc. and effecting the GPL termination? Hmmm...

regards,
alexander.