CONFIDENTIAL TREATMENT REQUESTED — ATTORNEY-CLIENT PRIVILEGED / WORK PRODUCT — DRAFT FOR DISCUSSION PURPOSES ONLY
CONFIDENTIAL DRAFT — FOR SETTLEMENT DISCUSSION PURPOSES ONLY
TERM SHEET
PROPOSED SETTLEMENT FRAMEWORK
Optiwave Semiconductor Corp. v. Lumicore Technologies, Inc. Case No. 2:24-cv-00319-JRG United States District Court for the Eastern District of Texas
Prepared by: Calderwood & Harkness LLP 350 South Grand Avenue, 48th Floor Los Angeles, CA 90071
Responsible Attorney: Alan Ngo, Partner (IP Litigation)
Draft Date: [Date TBD]
STATUS: CONTINGENCY DRAFT — Not authorized for transmission to opposing counsel. Subject to review and approval by client and Ridgeline Capital Partners, LP.
DISCLAIMER: This term sheet is a non-binding summary of proposed terms for settlement discussion purposes only. It does not constitute an offer, acceptance, or binding agreement. No binding obligation shall arise unless and until a definitive settlement agreement is executed by all parties. All terms are subject to final approval by the respective Boards of Directors of Optiwave Semiconductor Corp. and Lumicore Technologies, Inc. This document is protected by the attorney-client privilege, work-product doctrine, and Federal Rule of Evidence 408. Any disclosure of this document to any person not authorized to receive it is strictly prohibited.
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SECTION 1: PARTIES
1.1 Licensor / Plaintiff
Optiwave Semiconductor Corp. ("OWS" or "Optiwave"), a corporation duly organized and existing under the laws of the State of Delaware, with its principal place of business located at 4810 Bayside Technology Parkway, Suite 300, Santa Clara, California 95054.
OWS is a leading developer and manufacturer of silicon photonic integrated circuits, optical transceivers, and related semiconductor components for data-center interconnect and telecommunications applications. OWS's Chief Executive Officer is Dr. Priya Ramaswamy, and its General Counsel is Rebecca Tanaka.
OWS's majority equity holder is Ridgeline Capital Partners, LP ("Ridgeline"), a private equity fund headquartered at 200 Clarendon Street, 40th Floor, Boston, Massachusetts 02116. Ridgeline holds an approximately fifty-five percent (55%) equity stake in OWS, acquired in 2019 for approximately $780 million. Franklin Osei, Managing Partner of Ridgeline, serves as Chair of the OWS Board of Directors.
Internal Note: Pursuant to OWS Board Resolution No. 2024-07, the Board authorized litigation spend of up to $18.5 million in connection with the prosecution of the Litigation. Board Resolution No. 2024-07 does not authorize the settlement of the Litigation; separate Board approval is required for any settlement. Any proposed settlement must be presented to and approved by the full Board, including Mr. Osei in his capacity as Board Chair and Ridgeline designee, prior to execution of any binding agreement.
1.2 Licensee / Defendant
Lumicore Technologies, Inc. ("Lumicore" or "LTC"), a corporation duly organized and existing under the laws of the State of Delaware, with its principal place of business located at 9200 Spectrum Boulevard, Building C, Austin, Texas 78759.
Lumicore designs, manufactures, and sells high-speed optical transceiver modules and photonic integrated circuits for cloud computing, hyperscale data-center, and telecommunications infrastructure applications. Lumicore's Chief Executive Officer is Thomas "Tom" Kessler, and its General Counsel is Raymond Bautista.
Lumicore is a publicly traded company, with its common stock listed on the Nasdaq Global Select Market under the ticker symbol "LMCR." Lumicore completed its initial public offering in March 2022 at a price of $24.00 per share. As of the date of the filing of the complaint in the Litigation (April 22, 2024), Lumicore's common stock was trading at approximately $37.00 per share, with approximately 91.8 million shares outstanding, representing an approximate market capitalization of $3.4 billion.
Internal Note: As a publicly traded company, Lumicore's entry into any definitive settlement agreement of this magnitude will likely constitute a "material definitive agreement" requiring disclosure on a Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission ("SEC"). In addition, the financial terms of any settlement may need to be reflected in Lumicore's quarterly and annual financial statements (Forms 10-Q and 10-K). These disclosure obligations should be taken into account in structuring the confidentiality provisions of the Definitive Agreement. The settlement will also require approval by Lumicore's Board of Directors.
1.3 Counsel
Plaintiff's Counsel:
Calderwood & Harkness LLP 350 South Grand Avenue, 48th Floor Los Angeles, California 90071 Responsible Partner: Alan Ngo Telephone: (213) 555-8200
Email: a.ngo@calderwoodharkness.com
Local Counsel: Whitmore & Callahan LLP 110 North College Avenue, Suite 800 Tyler, Texas 75702 Lead Attorney: James "Jim" Callahan Telephone: (903) 555-1400
Email: jcallahan@whitmorecallahan.com
Defendant's Counsel:
Hawthorne Vega & Cruz LLP 600 Congress Avenue, Suite 2400 Austin, Texas 78701 Lead Partner: Catherine "Kate" Rourke Telephone: (512) 555-6300
Email: k.rourke@hvclegal.com
Local Counsel: Trask Eddington LLP 425 East Front Street, Suite 300 Tyler, Texas 75701 Lead Attorney: Maria Garza Telephone: (903) 555-7750
Email: m.garza@traskeddington.com
SECTION 2: RECITALS AND BACKGROUND
2.1 The Litigation
On April 22, 2024, OWS filed a Complaint for Patent Infringement against Lumicore in the United States District Court for the Eastern District of Texas, marshall Division, Case No. 2:24-cv-00319-JRG, before the Honorable James R. Gilstrap, United States District Judge (the "Litigation"). The Complaint was served upon Lumicore on or about May 1, 2024.
The Complaint asserts seven counts against Lumicore as follows:
Count I: Direct infringement of U.S. Patent No. 10,234,847 (the "'847 Patent") under 35 U.S.C. § 271(a);
Count II: Direct infringement of U.S. Patent No. 10,891,193 (the "'193 Patent") under 35 U.S.C. § 271(a);
Count III: Direct infringement of U.S. Patent No. 9,678,562 (the "'562 Patent") under 35 U.S.C. § 271(a);
Count IV: Direct infringement of U.S. Patent No. 11,402,015 (the "'015 Patent") under 35 U.S.C. § 271(a);
Count V: Induced infringement under 35 U.S.C. § 271(b);
Count VI: Contributory infringement under 35 U.S.C. § 271(c); and
Count VII: Willful infringement with request for enhanced damages under 35 U.S.C. § 284.
On June 17, 2024, Lumicore filed its Answer and Counterclaims, asserting defenses of non-infringement, invalidity under 35 U.S.C. §§ 102 and 103, unenforceability based on alleged inequitable conduct, and a counterclaim for declaratory judgment of non-infringement. Lumicore's Answer denies all material allegations and raises numerous affirmative defenses including prosecution history estoppel, patent exhaustion, laches, and equitable estoppel.
The Litigation is currently in the early stages of fact discovery. A Scheduling Order was entered on August 5, 2024, and a three-tier Confidentiality Order (covering Confidential, Highly Confidential — Attorneys' Eyes Only, and Highly Confidential — Source Code materials) was entered on September 9, 2024. OWS filed a Motion to Compel Production of Opinion-of-Counsel Letters (D.E. 38) on October 21, 2024, which remains pending as of the date of this term sheet.
2.2 The Asserted Patents
The Litigation involves four asserted United States patents (collectively, the "Asserted Patents"), each of which is described below:
(a) U.S. Patent No. 10,234,847 (the "'847 Patent") — Titled "Multi-Channel Silicon Photonic Waveguide Multiplexer with Low Insertion Loss." The '847 Patent was filed on September 14, 2016, and issued on March 19, 2019. The '847 Patent is assigned to OWS and covers innovations in silicon-photonic waveguide multiplexer architecture designed to achieve low insertion loss across multiple optical channels, enabling higher bandwidth and more efficient data transmission in data-center interconnect applications.
(b) U.S. Patent No. 10,891,193 (the "'193 Patent") — Titled "High-Bandwidth coherent Optical Transceiver Integrated on Silicon Substrate." The '193 Patent was filed on April 7, 2017, and issued on January 12, 2021. The '193 Patent is assigned to OWS and claims a coherent optical transceiver architecture integrated on a monolithic silicon substrate, providing significant improvements in bandwidth, power efficiency, and manufacturing scalability compared to prior-art discrete-component designs.
(c) U.S. Patent No. 9,678,562 (the "'562 Patent") — Titled "Method for Thermal Management of Photonic Integrated Circuits Using Embedded Micro-Channel Heat Sinks." The '562 Patent was filed on November 22, 2014, and issued on June 13, 2017. The '562 Patent was originally assigned to Solara Optics, Inc., a California corporation (now dissolved), and was acquired by OWS pursuant to an Asset Purchase Agreement dated June 15, 2018, for aggregate consideration of $34.5 million (covering a portfolio of twelve patents, including the '562 Patent). The '562 Patent covers a novel thermal management methodology for photonic integrated circuits employing embedded micro-channel heat sinks that enable sustained high-power operation without performance degradation.
(d) U.S. Patent No. 11,402,015 (the "'015 Patent") — Titled "Polarization-Diverse Grating Coupler for Silicon Photonic Transceivers." The '015 Patent was filed on August 30, 2019, and issued on August 2, 2022. The '015 Patent is assigned to OWS and discloses a polarization-diverse grating coupler design that addresses the polarization-dependent loss challenges inherent in silicon-photonic transceiver devices, improving coupling efficiency and overall transceiver performance.
Patent Family Relationships: The '562 Patent and the '847 Patent are in the same patent family and share a continuation relationship. The '193 Patent and the '015 Patent share a common Provisional Application, U.S. Provisional Application No. 62/499,117, filed April 7, 2017. These family relationships are relevant to the scope of the license grant contemplated in Section 4 below.
Maintenance Fee and IPR Status: All maintenance fees for each of the Asserted Patents are current and have been duly paid. As of the date of this term sheet, no inter partes review ("IPR") petitions have been filed against any of the Asserted Patents at the United States Patent and Trademark Office ("USPTO").
2.3 The Accused Products
The Complaint accuses three of Lumicore's optical transceiver product lines (collectively, the "Accused Products") of infringing one or more of the Asserted Patents:
(a) LumiLink 400G-ZR+. Lumicore's LumiLink 400G-ZR+ coherent optical transceiver module was launched in the third quarter of 2022. It is designed for data-center interconnect ("DCI") applications at 400 gigabits per second over distances of up to 120 kilometers using QSFP-DD form factor. OWS alleges that the LumiLink 400G-ZR+ infringes claims of the '847 Patent, the '193 Patent, and the '562 Patent. Lumicore's publicly reported fiscal year 2023 revenue attributable to the LumiLink 400G-ZR+ product line was approximately $94.8 million.
(b) LumiLink 800G-DR8. Lumicore's LumiLink 800G-DR8 optical transceiver module was launched in the first quarter of 2023. It employs an eight-lane direct-detection architecture for intra-data-center connectivity at 800 gigabits per second over distances up to 2 kilometers using the OSFP form factor. OWS alleges that the LumiLink 800G-DR8 infringes claims of the '847 Patent, the '193 Patent, the '562 Patent, and the '015 Patent. Lumicore's publicly reported fiscal year 2023 revenue attributable to the LumiLink 800G-DR8 product line was approximately $128.4 million.
(c) LumiEdge 1600G-LR. Lumicore's LumiEdge 1600G-LR optical transceiver module was launched in the fourth quarter of 2023. It employs advanced silicon-photonic integration to achieve 1.6 terabits per second of aggregate bandwidth for long-reach campus and metro-area network applications. OWS alleges that the LumiEdge 1600G-LR infringes claims of the '193 Patent and the '015 Patent. Lumicore's publicly reported fiscal year 2023 revenue attributable to the LumiEdge 1600G-LR product line was approximately $41.7 million.
Revenue Summary: Total fiscal year 2023 revenue attributable to the Accused Products was approximately $264.9 million. Based on the preliminary economic analysis prepared by Dr. Lawrence Keating of Meridian Economic Consulting Group, LLC (OWS's retained damages expert), total accused-product revenue from the initial product launch date (Q3 2022) through the projected trial date (Q4 2025) is estimated to be approximately $714.6 million.
2.4 Damages Context
OWS's aggregate damages demand, as articulated in the Complaint and further refined through preliminary expert analysis, is approximately $210 million. This aggregate figure comprises the following components:
(i) Lost Profits. Approximately $128.9 million in lost profits, based on a Panduit analysis demonstrating that OWS would have made additional sales of its competing products (OWS-400ZR, OWS-800XR, and OWS-1600DR) but for Lumicore's infringing sales of the Accused Products. OWS contends that it satisfies all four Panduit factors: (1) demand for the patented product; (2) absence of acceptable non-infringing substitutes; (3) OWS's manufacturing and marketing capability to exploit the demand; and (4) the amount of profit OWS would have made.
(ii) Reasonable Royalty. Approximately $37.5 million in reasonable royalty damages on non-lost-profit sales, based on a Georgia-Pacific analysis yielding an 8.5% royalty rate applied to Lumicore's net sales of the Accused Products that cannot be attributed to OWS lost profits.
(iii) Enhanced Damages. Approximately $43.6 million in enhanced damages under 35 U.S.C. § 284, based on OWS's contention that Lumicore's infringement was willful. OWS asserts that Lumicore had actual knowledge of the Asserted Patents prior to the filing of the Complaint, as evidenced by the pre-suit licensing correspondence and meeting described in Section 2.5 below, and that Lumicore proceeded to launch the LumiEdge 1600G-LR product after receiving notice of infringement without conducting a reasonable investigation or obtaining a credible opinion of counsel.
OWS asserts both literal infringement and infringement under the doctrine of equivalents with respect to certain claims, specifically Claims 3 and 7 of the '193 Patent and Claim 12 of the '015 Patent. OWS also seeks a permanent injunction against Lumicore's continued manufacture, use, sale, offer for sale, and importation of the Accused Products. Internal analysis by Lumicore (as disclosed in its Answer and preliminary discovery responses) estimates that a product redesign to design around the Asserted Patents would require approximately 18 to 24 months of engineering effort. OWS estimates that approximately 42% of Lumicore's total product revenue would be at risk during any injunction period.
2.5 Pre-Suit Licensing History
Prior to the commencement of the Litigation, OWS, through its licensing agent FairPoint Licensing Group, LLC (Managing Director: Angela Reeves), made two written licensing overtures to Lumicore:
(i) On January 15, 2023, FairPoint Licensing Group sent a detailed licensing inquiry letter to Lumicore's General Counsel, Raymond Bautista, identifying the '847, '193, and '562 Patents and inviting Lumicore to engage in licensing discussions regarding its LumiLink 400G-ZR+ product.
(ii) On May 15, 2023, FairPoint Licensing Group sent a follow-up letter to Lumicore, expanding the scope of the inquiry to include the '015 Patent (which had issued on August 2, 2022) and the LumiLink 800G-DR8 product (which had been launched in Q1 2023).
An in-person licensing meeting was held on April 20, 2023, in Austin, Texas, attended by representatives of FairPoint Licensing Group and Lumicore's in-house legal team. At the meeting, OWS's licensing representatives presented claim charts mapping the Asserted Patents to the Accused Products and proposed commercial licensing terms, including a proposed running royalty rate and a lump-sum past-damages payment.
On July 10, 2023, Lumicore formally declined to accept a license, referencing "competent legal opinions" obtained by Lumicore concluding that its products do not infringe the Asserted Patents. Lumicore did not provide copies of such opinions and has resisted production of opinion-of-counsel letters in the Litigation (see D.E. 38, Motion to Compel). Pre-suit negotiations were unsuccessful, and OWS subsequently authorized the filing of the Complaint.
2.6 Purpose of Term Sheet
This term sheet sets forth the principal terms upon which the parties would propose to resolve the Litigation, subject to the negotiation and execution of a definitive Settlement Agreement and Mutual Release (the "Definitive Agreement"). The purpose of this term sheet is to provide a framework for settlement discussions and to identify the key terms, conditions, and open issues that must be resolved before a binding settlement can be reached.
All terms set forth herein are non-binding and are intended solely for discussion purposes. No binding obligation shall arise from this term sheet. Binding obligations will arise only upon the execution of the Definitive Agreement by duly authorized representatives of both OWS and Lumicore, and only after all conditions precedent to effectiveness (as described in Section 17) have been satisfied.
SECTION 3: SETTLEMENT PAYMENT
3.1 Lump-Sum Payment
As partial consideration for the settlement of the Litigation, the mutual release, and the other covenants set forth herein, Lumicore shall pay to OWS a lump-sum cash settlement payment in the amount of $[___] million (the "Lump-Sum Payment").
Internal C&H Note — Negotiation Brackets:
Plaintiff's Opening Position: $[_] million
Defendant's Expected Counter: $[_] million
Target Range: $[_] million – $[_] million
The minimum acceptable Lump-Sum Payment, per the Settlement Authority Memorandum dated October 2024, is $125 million (in a scenario where a royalty-bearing license is also included) or $100 million (in a scenario involving a permanent injunction or product withdrawal by Lumicore in lieu of a prospective license). The expected value of the trial outcome, based on a comprehensive decision-tree analysis performed by Calderwood & Harkness, is approximately $138 million. This expected-value figure reflects a 75% probability of liability, an 85% probability of patent validity survival, and the full range of damages outcomes (including both lost profits and reasonable royalty components, with probability-weighted willful enhancement).
The Lump-Sum Payment shall be made by wire transfer of immediately available funds in United States dollars to a bank account designated by OWS, within [30/45/60] days of the date of execution of the Definitive Agreement (the "Payment Date"). Wire transfer instructions shall be provided to Lumicore by OWS separately and in advance of the Payment Date. OWS's primary banking relationship is with Weston Fidelity Bank, N.A., and OWS anticipates designating an account at that institution for receipt of the Lump-Sum Payment.
3.2 Payment Mechanics
(a) Preferred Payment Structure. OWS's preferred payment structure is a single lump-sum payment of the full amount on or before the Payment Date.
(b) Alternative Installment Structure. As an alternative to be considered during negotiations, the parties may agree on a two-installment payment structure, under which Lumicore would make two equal installments. The first installment would be due on the Payment Date, and the second installment would be due ninety (90) days after the first installment. If the parties agree on an installment structure, Lumicore shall secure the second installment by providing an irrevocable standby letter of credit, in a form reasonably acceptable to OWS, issued by a commercial bank with a long-term credit rating of at least [A-] from a nationally recognized statistical rating organization (e.g., Standard & Poor's, Moody's, or Fitch). The letter of credit shall be issued in favor of OWS in the amount of the second installment and shall remain in effect until the second installment is paid in full.
(c) Late Payment Interest. Any payment not received by OWS on or before the applicable due date shall bear interest from the date due until the date of actual receipt at a rate equal to the lesser of (i) one and one-half percent (1.5%) per month (18% per annum), compounded monthly, or (ii) the maximum rate permitted by applicable law.
(d) Withholding Taxes. Lumicore shall be responsible for any and all applicable withholding taxes, if any, imposed by any governmental authority in connection with the Lump-Sum Payment. If any withholding is required by applicable law, the Lump-Sum Payment shall be grossed up by Lumicore such that OWS receives the full amount of the Lump-Sum Payment after giving effect to any such withholding. Lumicore shall promptly provide OWS with evidence of any taxes withheld and remitted to the applicable governmental authority.
3.3 Treatment of Payment
For tax and accounting purposes, the Lump-Sum Payment shall be characterized as [damages / a settlement payment for past infringement of the Asserted Patents]. The specific characterization shall be agreed upon by the parties in the Definitive Agreement, in consultation with their respective tax advisors, to ensure consistency of treatment by both parties.
OWS and Lumicore shall cooperate in good faith with respect to any IRS Form 1099 reporting obligations arising from the Lump-Sum Payment. Each party shall be responsible for its own tax obligations arising from the Lump-Sum Payment and shall hold the other party harmless from any tax liability resulting from the Lump-Sum Payment, other than any tax liability arising from a mischaracterization of the payment attributable to the indemnifying party's action or omission.
The Lump-Sum Payment is independent of, and in addition to, the prospective royalty payments to be made by Lumicore under the royalty-bearing license described in Section 4 below. The Lump-Sum Payment is intended to compensate OWS for past infringement of the Asserted Patents by the Accused Products and is not intended as a prepayment or credit against future royalties.
3.4 Relationship to C&H Fee Arrangement
INTERNAL NOTE — NOT FOR INCLUSION IN TRANSMITTED TERM SHEET: The Calderwood & Harkness engagement letter dated March 18, 2024, includes a success fee provision entitling C&H to a success fee equal to five percent (5%) of net recovery in excess of $150 million. The Lump-Sum Payment will count toward the "net recovery" calculation under the engagement letter. Depending on the final settlement amount and the aggregate value of the prospective royalty stream, the success fee could range from $0 (if total net recovery is $150 million or less) to a significant amount. For example, if the Lump-Sum Payment is $125 million and the present value of the prospective royalty stream is estimated at $40 million, total net recovery would be approximately $165 million, triggering a success fee of approximately $750,000 (5% of $15 million excess above $150 million). This should be modeled for the client as part of the net-proceeds analysis.
C&H fees incurred to date through January 2025 are approximately $3.2 million in fees plus approximately $200,000 in costs, for cumulative billed amounts of approximately $3.4 million. The remaining approved litigation budget under Board Resolution No. 2024-07 is approximately $15.1 million.
SECTION 4: PROSPECTIVE ROYALTY-BEARING LICENSE
4.1 Licensed Patents
Subject to the terms and conditions of the Definitive Agreement, OWS shall grant to Lumicore a license under the following United States patents (collectively, and together with their related patents described below, the "Licensed Patents"):
(a) U.S. Patent No. 10,234,847 (the "'847 Patent");
(b) U.S. Patent No. 10,891,193 (the "'193 Patent");
(c) U.S. Patent No. 9,678,562 (the "'562 Patent"); and
(d) U.S. Patent No. 11,402,015 (the "'015 Patent").
The Licensed Patents shall include, in addition to the four patents listed above, all continuations, continuations-in-part, divisionals, reissues, reexaminations, and extensions of each of the foregoing patents, to the extent owned or controlled by OWS during the term of the license.
Scope Limitation: OWS holds a total portfolio of 142 issued United States patents and 58 pending United States patent applications. The license granted herein is limited to the Licensed Patents and does not extend to any other patent or patent application in OWS's broader portfolio, unless a specific additional patent or application is expressly enumerated in an exhibit to the Definitive Agreement. If Lumicore desires a broader license covering additional OWS patents, such a license must be negotiated separately and is outside the scope of this term sheet.
4.2 Licensed Products
The license granted under Section 4.1 shall apply to the following products (collectively, the "Licensed Products"):
(a) Current Accused Products. The LumiLink 400G-ZR+, LumiLink 800G-DR8, and LumiEdge 1600G-LR, including all existing versions, configurations, and variants thereof, as currently manufactured and sold by Lumicore as of the Effective Date of the Definitive Agreement.
(b) Next-Generation Successor Products. Any product that is designed to replace, upgrade, or succeed any of the Accused Products in Lumicore's product line and that practices one or more claims of any of the Licensed Patents. For the avoidance of doubt, a "next-generation successor product" means a product that (i) serves substantially the same function as, and is marketed as an upgrade or replacement for, one or more of the Accused Products in Lumicore's product catalog; and (ii) incorporates substantially similar patented technology as that employed in the corresponding Accused Product(s) with respect to the claims of the Licensed Patents.
Negotiation Note: The specific definition of "next-generation successor product" is subject to further negotiation. OWS will seek a definition that ensures the license covers genuine evolutionary improvements to the Accused Products without providing Lumicore with an overly broad license to develop entirely new product lines that happen to practice the Licensed Patents. Lumicore will likely seek the broadest possible definition to maximize the value of the license.
The license shall not extend to any Lumicore product that does not practice any claim of any of the Licensed Patents. In the event of a dispute as to whether a particular product constitutes a Licensed Product, the dispute resolution procedures set forth in Section 15 shall apply.
4.3 Scope of License
The license granted by OWS to Lumicore under this Section 4 shall be a non-exclusive, worldwide, royalty-bearing license under the Licensed Patents, granting Lumicore the right to make, have made, use, sell, offer for sale, and import Licensed Products in all countries and territories of the world.
(a) No Right to Sublicense. Lumicore shall have no right to sublicense any rights under the Licensed Patents without the prior written consent of OWS. OWS's consent shall not be unreasonably withheld, conditioned, or delayed with respect to sublicenses to Lumicore's contract manufacturers, foundry partners, and assembly and test subcontractors that are acting on Lumicore's behalf and under Lumicore's direction in the manufacture, assembly, or testing of Licensed Products. Any sublicense granted with OWS's consent shall be subject to the terms and conditions of the Definitive Agreement, and Lumicore shall remain fully responsible for the acts and omissions of any sublicensee.
(b) Personal License. The license is personal to Lumicore Technologies, Inc. and its wholly-owned subsidiaries as of the Effective Date. The license is not transferable or assignable except in connection with a Change of Control as defined in and subject to the provisions of Section 10 below.
(c) Non-Exclusive. The license is non-exclusive. OWS retains the unrestricted right to practice the Licensed Patents itself, to grant licenses to the Licensed Patents to any third party, and to enforce the Licensed Patents against any third party.
4.4 Royalty Rate
In consideration of the license granted under this Section 4, Lumicore shall pay to OWS a running royalty equal to [___] percent ([___]%) of Net Sales Revenue (as defined in Section 4.5) of Licensed Products sold by Lumicore and its sublicensees during each calendar quarter during the term of the license (the "Royalty Rate").
Negotiation Note — Royalty Rate Range:
OWS's proposed Royalty Rate, consistent with the Georgia-Pacific reasonable royalty analysis prepared by Dr. Lawrence Keating (Meridian Economic Consulting Group, LLC), is 8.5%. The range of royalty rates observed in comparable licenses in the silicon-photonics industry, based on Dr. Keating's benchmarking analysis, is 4.0% to 12.5%. The following comparable license data points are relevant to the negotiation:
• OWS-Terralink Semiconductor License (2020): 6.5% running royalty on approximately $45 million in licensed revenue.
• OWS-NovaWave Corp. License (2021): 9.0% running royalty on approximately $22 million in licensed revenue.
• OWS-Helix Integrated Photonics License (2022): 7.75% running royalty plus a $2.5 million upfront payment on approximately $68 million in licensed revenue.
• Stratos Photonics v. ArcLight Systems Settlement (2019): 8.0% royalty (public court filing).
• Coreline Technologies v. Prisma Semiconductor Cross-License (2021): 10.2% effective royalty rate (confidential; known through expert analysis).
The final Royalty Rate will be negotiated by the parties in the context of the overall settlement consideration, including the amount of the Lump-Sum Payment, the scope of the Licensed Products, and the duration of the license term. A higher Lump-Sum Payment may justify a lower Royalty Rate, and vice versa.
4.5 Definition of Net Sales Revenue
"Net Sales Revenue" means the gross revenue invoiced by Lumicore and its sublicensees from the sale of Licensed Products, less the following deductions to the extent actually incurred and separately identifiable in Lumicore's books and records:
(a) Trade discounts, volume rebates, and promotional credits actually granted to customers and taken, provided they are consistent with Lumicore's customary business practices;
(b) Credits and allowances for product returns, provided the corresponding revenue was previously included in Net Sales Revenue;
(c) Shipping, freight, handling, and insurance charges that are separately invoiced to and paid by the customer; and
(d) Customs duties, import/export taxes, sales taxes, use taxes, value-added taxes (VAT), and similar governmental charges that are borne by Lumicore and are separately stated on invoices to customers.
For the avoidance of doubt, no deduction shall be permitted for Lumicore's cost of goods sold, sales commissions, marketing expenses, internal cost allocations, general and administrative overhead, or any other expense not expressly enumerated above. In the event of any transfer-pricing arrangement between Lumicore and any affiliate or sublicensee, Net Sales Revenue shall be calculated based on the arm's-length fair-market-value price of the Licensed Products.
4.6 Royalty Term
The license granted under this Section 4 shall commence on the Effective Date of the Definitive Agreement and shall continue for a period of [___] years from the Effective Date, or until the expiration of the last-to-expire Licensed Patent, whichever is earlier (the "License Term").
Expiration Analysis: Based on the standard 20-year patent term measured from the earliest effective filing date, the estimated expiration dates of the Licensed Patents are as follows:
• '562 Patent (filed November 22, 2014): approximately November 2034
• '847 Patent (filed September 14, 2016): approximately September 2036
• '193 Patent (filed April 7, 2017): approximately April 2037
• '015 Patent (filed August 30, 2019): approximately August 2039
The latest expiration among the Licensed Patents is approximately August 2039 for the '015 Patent. The parties may negotiate a fixed license term (e.g., 5, 7, or 10 years) with automatic renewal provisions, or may tie the License Term to the remaining life of the Licensed Patents. A fixed term provides certainty to both parties, while a patent-life-based term ensures that OWS receives royalty compensation for the full enforceable period of its patents.
Upon expiration of the License Term (as opposed to early termination for breach), the license shall become irrevocable, fully paid-up, and perpetual with respect to the Licensed Patents.
4.7 Royalty Reporting and Audit Rights
(a) Quarterly Royalty Reports. Lumicore shall deliver to OWS a written royalty report within [30/45] days following the end of each calendar quarter during the License Term. Each royalty report shall set forth, for the applicable calendar quarter: (i) the unit sales of each Licensed Product, broken down by product line; (ii) the Net Sales Revenue attributable to each Licensed Product; (iii) the calculation of the royalty due for each Licensed Product; and (iv) the aggregate royalty payment due to OWS for the quarter. Each royalty report shall be accompanied by payment of all royalties due for the applicable quarter.
(b) Certification. Each quarterly royalty report shall be certified as accurate and complete by an authorized officer of Lumicore. The parties contemplate that the certifying officer shall be Lumicore's Chief Financial Officer, Janet Moreno, or her designee.
(c) Audit Rights. OWS shall have the right, no more than once per calendar year and upon at least thirty (30) days' prior written notice, to engage an independent certified public accounting firm, mutually agreed upon by the parties, to audit Lumicore's books and records as they relate to the manufacture and sale of Licensed Products and the calculation and payment of royalties due under the Definitive Agreement. The audit shall be conducted at Lumicore's principal place of business during normal business hours and shall be limited to the records necessary to verify the accuracy of Lumicore's royalty reports.
Auditor Exclusions: To avoid potential conflicts of interest, the parties agree that neither Gresham & Whitfield LLP (OWS's current auditing firm) nor Brennan Kellogg & Associates LLP (Lumicore's current auditing firm) shall serve as the independent auditor for purposes of the royalty audit.
(d) Underpayment. If any audit reveals that Lumicore has underpaid royalties for any audited period by more than [5] percent, then, in addition to paying the amount of the deficiency together with interest at the rate specified in Section 3.2(c) from the date such amounts were originally due, Lumicore shall bear all reasonable costs and expenses of the audit, including the fees and expenses of the independent auditing firm. If the audit reveals an underpayment of five percent (5%) or less, OWS shall bear the costs of the audit.
4.8 Minimum Royalty
[Optional — subject to negotiation]: In each calendar year during the License Term, Lumicore shall pay to OWS a minimum annual royalty of $[___] million (the "Minimum Royalty"). Earned royalties paid or payable during a given calendar year shall be credited against the Minimum Royalty for such year. If the earned royalties in any calendar year are less than the Minimum Royalty, Lumicore shall pay the difference (the "Shortfall Payment") to OWS within thirty (30) days following the end of such calendar year. The Minimum Royalty is non-refundable and shall not be credited against earned royalties in any subsequent year.
Negotiation Note: The inclusion and amount of the Minimum Royalty is subject to negotiation. A Minimum Royalty provides OWS with a guaranteed baseline revenue stream and protects against the risk that Lumicore may reduce sales of Licensed Products or shift revenue to unlicensed products to minimize royalty payments. Lumicore will likely resist a Minimum Royalty or seek a low floor.
SECTION 5: COVENANT NOT TO SUE
5.1 Scope of Covenant
In consideration of the Lump-Sum Payment, the royalty payments, and the other terms of the Definitive Agreement, OWS covenants and agrees that it shall not assert, or cause or authorize any third party to assert, against Lumicore, Lumicore's wholly-owned subsidiaries, or Lumicore's direct customers (solely with respect to their purchase, use, or resale of Licensed Products purchased from Lumicore in the ordinary course of business), any claim of patent infringement based on any of the Licensed Patents (as defined in Section 4.1, including all continuations, continuations-in-part, divisionals, reissues, reexaminations, and extensions thereof).
The covenant not to sue shall extend to any continuation patents that issue from patent applications filed during the term of the license, provided that such continuation patents are within the same patent families as the four Asserted Patents and are encompassed within the definition of Licensed Patents.
5.2 Limitations
The covenant not to sue set forth in Section 5.1 is subject to the following express limitations:
(a) The covenant does not extend to any OWS patents that are outside the Licensed Patent families (as defined by the family relationships described in Section 2.2), including any of OWS's 142 issued patents and 58 pending applications that are not Licensed Patents.
(b) The covenant does not extend to any Lumicore products that are not Licensed Products (as defined in Section 4.2). OWS retains the unrestricted right to assert any of its patents, including the Licensed Patents, against any Lumicore product that does not qualify as a Licensed Product.
(c) The covenant does not extend to any acquirer of Lumicore or its assets, except as expressly provided in Section 10 (Change of Control).
The covenant not to sue shall terminate automatically, without notice, upon a material breach of the Definitive Agreement by Lumicore, subject to the notice and cure provisions set forth in Section 11. Upon termination of the covenant, OWS shall have the unrestricted right to assert the Licensed Patents against Lumicore and its products as if the Definitive Agreement had never been executed, subject to OWS's obligation to retain all payments previously received.
5.3 Customer Protection
For the avoidance of doubt, the covenant not to sue shall extend to Lumicore's end-user customers, including but not limited to hyperscale data-center operators, cloud service providers, telecommunications carriers, and enterprise network operators, solely to the extent that such customers purchase Licensed Products from Lumicore (or from authorized distributors or resellers of Lumicore) and use such Licensed Products in the ordinary course of their business.
This customer-protection provision is intended to address concerns that have been raised by certain of Lumicore's customers in connection with the Litigation, including but not limited to Pinnacle Data Systems, LLC (Longview, Texas), Frontier Cloud Services, Inc. (Marshall, Texas), and CrossPoint Networking Corp. (Plano, Texas), each of which has expressed concern about potential patent-infringement liability arising from their purchase and use of the Accused Products. The customer-protection covenant is designed to provide these and similarly situated customers with assurance that they will not be targeted by OWS for their ordinary-course use of Licensed Products purchased from Lumicore.
SECTION 6: MUTUAL RELEASE
6.1 OWS Release of Lumicore
Effective as of the Effective Date, OWS, on behalf of itself and its predecessors, successors, assigns, affiliates, subsidiaries, parent companies, officers, directors, employees, agents, representatives, attorneys, and all persons and entities claiming by, through, or under OWS (including, without limitation, Ridgeline Capital Partners, LP), hereby fully, finally, and forever releases and discharges Lumicore Technologies, Inc., together with its predecessors, successors, assigns, affiliates, subsidiaries, officers, directors, employees, agents, representatives, attorneys, insurers, and all persons and entities claiming by, through, or under Lumicore, from any and all claims, demands, actions, causes of action, suits, debts, liens, obligations, liabilities, damages, losses, costs, and expenses (including, without limitation, attorneys' fees and costs of litigation) of every kind and nature, whether known or unknown, suspected or unsuspected, accrued or unaccrued, that arise out of, relate to, or are in any way connected with:
(a) The Litigation, including all claims asserted and that could have been asserted in Case No. 2:24-cv-00319-JRG;
(b) Any infringement of the Licensed Patents by the Accused Products or Licensed Products occurring at any time prior to the Effective Date of the Definitive Agreement; and
(c) The pre-suit licensing negotiations conducted by or on behalf of OWS, including all communications by and through FairPoint Licensing Group, LLC, including but not limited to the January 15, 2023 and May 15, 2023 licensing letters and the April 20, 2023 in-person licensing meeting.
6.2 Lumicore Release of OWS
Effective as of the Effective Date, Lumicore Technologies, Inc., on behalf of itself and its predecessors, successors, assigns, affiliates, subsidiaries, officers, directors, employees, agents, representatives, attorneys, and all persons and entities claiming by, through, or under Lumicore, hereby fully, finally, and forever releases and discharges OWS, together with its predecessors, successors, assigns, affiliates, subsidiaries, parent companies, officers, directors, employees, agents, representatives, attorneys, insurers, and all persons and entities claiming by, through, or under OWS (including, without limitation, Ridgeline Capital Partners, LP, Calderwood & Harkness LLP, Whitmore & Callahan LLP, and FairPoint Licensing Group, LLC), from any and all claims, demands, actions, causes of action, suits, debts, liens, obligations, liabilities, damages, losses, costs, and expenses (including, without limitation, attorneys' fees and costs of litigation) of every kind and nature, whether known or unknown, suspected or unsuspected, accrued or unaccrued, that arise out of, relate to, or are in any way connected with:
(a) The Litigation, including all claims and counterclaims asserted and that could have been asserted in Case No. 2:24-cv-00319-JRG;
(b) The Counterclaims asserted by Lumicore in the Litigation, including counterclaims for non-infringement, invalidity, unenforceability and inequitable conduct, and declaratory judgment of non-infringement;
(c) The pre-suit licensing negotiations, including all communications by and through FairPoint Licensing Group, LLC; and
(d) Any claims for antitrust violations, unfair competition, tortious interference with business relations or contractual relations, abuse of process, malicious prosecution, or any other tort or statutory claim related to the filing, prosecution, or maintenance of the Litigation or the assertion of the Asserted Patents.
6.3 Preservation of Future Claims
Notwithstanding the foregoing releases, the mutual release set forth in Sections 6.1 and 6.2 shall not extend to, and shall not be construed as a release or waiver of:
(a) Any claims arising after the Effective Date for breach of the Definitive Agreement or any ancillary agreement executed in connection therewith;
(b) Any claims for infringement of OWS patents that are not Licensed Patents (i.e., patents outside the Licensed Patent families); or
(c) Any rights or obligations arising under the prospective royalty-bearing license set forth in Section 4, including OWS's right to receive royalty payments and Lumicore's obligation to make such payments, report royalties, and comply with the other terms and conditions of the license.
SECTION 7: NO ADMISSION OF LIABILITY
7.1 No Admission by Lumicore
Nothing in this term sheet or the Definitive Agreement shall be construed as an admission by Lumicore of infringement (whether literal infringement or infringement under the doctrine of equivalents), validity, enforceability, or willful infringement of any of the Asserted Patents. Lumicore does not admit that any Accused Product infringes any claim of any Asserted Patent, and Lumicore does not admit the correctness of any claim construction or infringement theory advanced by OWS in the Litigation. Lumicore's agreement to enter into the settlement, to make the Lump-Sum Payment, and to accept a royalty-bearing license is made solely for the purpose of resolving a dispute and avoiding the cost, risk, and burden of continued litigation. Lumicore's entry into the Definitive Agreement shall not be deemed or construed as an admission for any purpose in any proceeding, whether judicial, administrative, or otherwise, except to the extent necessary to enforce the terms of the Definitive Agreement.
7.2 No Admission by OWS
Nothing in this term sheet or the Definitive Agreement shall be construed as an admission by OWS that any of the Asserted Patents is invalid, unenforceable, or procured through inequitable conduct, or that any Accused Product does not infringe any claim of any Asserted Patent. OWS does not concede any defense, affirmative defense, or counterclaim asserted by Lumicore in the Litigation. OWS's agreement to enter into the settlement, to grant a license, and to provide a covenant not to sue is made without any concession regarding the merits of OWS's claims or Lumicore's defenses.
7.3 Admissibility
The existence and terms of the settlement, including this term sheet, any drafts thereof, and the Definitive Agreement, together with all negotiations, communications, correspondence, and discussions leading to the settlement, shall not be admissible in any court, arbitral, administrative, or other proceeding for any purpose whatsoever, other than in a proceeding to enforce the terms of the Definitive Agreement, except as required by applicable law. The parties acknowledge that Lumicore, as a publicly traded company listed on the Nasdaq Global Select Market, may be required to disclose the existence and certain terms of the Definitive Agreement in SEC filings, including without limitation a Current Report on Form 8-K, quarterly reports on Form 10-Q, and annual reports on Form 10-K. Nothing in this Section 7.3 is intended to prohibit or restrict any disclosure required by applicable securities laws, rules, or regulations, or by the listing rules of the Nasdaq Stock Market.
The parties acknowledge that Federal Rule of Evidence 408 and corresponding state evidentiary rules protect settlement negotiations from admissibility. The Definitive Agreement shall include an express agreement that neither party will seek to introduce the terms of the settlement, or any communications related thereto, in any proceeding other than an action to enforce the Definitive Agreement.
SECTION 8: DISMISSAL OF LITIGATION
8.1 Joint Stipulation of Dismissal
Within [5/10] business days following the satisfaction of both (a) the execution of the Definitive Agreement by duly authorized representatives of both parties, and (b) the receipt by OWS of the Lump-Sum Payment in full (or the first installment, if the parties agree to an installment payment structure), the parties shall file a Joint Stipulation of Dismissal with Prejudice (the "Stipulation of Dismissal") in Case No. 2:24-cv-00319-JRG, dismissing all claims and counterclaims with prejudice, with each party bearing its own attorneys' fees and costs.
The Stipulation of Dismissal shall be filed pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii) and shall be in a form mutually agreed upon by the parties prior to filing. The Stipulation shall expressly state that the dismissal is with prejudice as to all claims and counterclaims and that each party shall bear its own costs, expenses, and attorneys' fees.
8.2 Retention of Jurisdiction
The Stipulation of Dismissal shall include a provision requesting that the United States District Court for the Eastern District of Texas retain jurisdiction over the parties solely for the purpose of enforcing the terms of the Definitive Agreement, in the event that enforcement becomes necessary. This retained-jurisdiction provision is intended to provide an efficient forum for resolution of any future disputes regarding the interpretation or enforcement of the Definitive Agreement, without requiring the initiation of a new action, and shall be without prejudice to the parties' rights under the dispute resolution provisions set forth in Section 15.
8.3 Withdrawal of Pending Motions
Upon the filing of the Stipulation of Dismissal, the parties shall jointly move to withdraw or terminate all pending motions in the Litigation, including without limitation:
(a) OWS's Motion to Compel Production of Opinion-of-Counsel Letters (D.E. 38, filed October 21, 2024); and
(b) Any other motions, applications, or requests that are pending before the Court as of the date of filing of the Stipulation.
All discovery obligations, including any outstanding document-production obligations, deposition scheduling, and interrogatory responses, shall terminate upon the filing of the Stipulation of Dismissal, except to the extent that the Confidentiality Order entered in the Litigation imposes surviving obligations with respect to the handling and disposition of confidential materials, as set forth in Section 9.3 below.