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The Mayo Foundation granted a license to a startup company under a patent application that Mayo had filed for certain nano tech­nol­o­gy. See OmegaGenesis Corp. v. Mayo Foundation for Medical Edu­ca­tion and Research, No. 15-3346 (8th Cir. Mar. 20, 2017) (affirming dismissal on the pleadings for failure to state a claim upon which relief can be granted).

In the license agreement, the startup company “warranted that it had ‘in­de­pen­dently evaluated the Patent Rights, Know-How, and Con­fi­den­tial Information . . . [and] is entering into this Agreement on the basis of its own evaluation and not in reliance o[n] any rep­re­sen­ta­tion by Mayo . . . .'”  (Emphasis ad­ded.) The license agree­ment also dis­claimed any im­plied war­ranties by Mayo about the pat­ent­a­bil­i­ty of the tech­nol­o­gy, among other things; the agreement stated that the licensed subject matter was being provided “as is,” “with all faults,” and “with all defects.” Id., slip op. at 9.

Things apparently didn’t go well for the startup company:  The patent ap­pli­c­a­tion died when (i) the patent examiner issued a non-final re­jec­tion of the pend­ing claims in the patent application, citing prior art, and (ii) the startup com­pa­ny (which was to take over prosecution of the patent application) failed to re­spond to the rejection within the six-month period prescribed by the patent statute.

The startup company then sued Mayo, alleging among other things that Mayo had engaged in fraud and misrepresentation. (The startup company had raised $500,000 in funding from investors; conceivably the lawsuit might have rep­re­sent­ed an attempt by the startup company to divert investor anger away from management and toward Mayo.)

The district court held, and the Eighth Circuit affirmed, that the start­up com­pa­ny’s fraud- and negligent-misrepresentation claims against Mayo were barred by the reliance disclaimer in the license agree­ment. This was because, under Minnesota law, act­ual and reasonable reliance on the alleged mis­re­pre­sen­ta­tions was both (i) a required element of both claims, and (ii) negated by the re­li­ance disclaimer quoted above.

Drafting lesson: This is yet another example of the successful use of reliance dis­claimers to immunize a contracting party from fraud claims.

(A reliance disclaimer will not always work, though; see the annotations to the Common Draft reliance disclaimer.)

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In a patent license agreement, a key contract term was drafted in the form of a multi-part sentence — and, perhaps as a result, the term crucially misstated a key aspect of what a court later found to have been the parties’ intended business deal. This eventually led to:

  • the wasting, by two global corporate empires, of millions of dollars and several years in pat­ent in­fringe­ment litigation that evidently should never have been brought in the first place; and
  • an award, against the plaintiff, of some $5.9 million of the de­fen­dant’s at­tor­ney fees.

See Bayer CropScience AG v. Dow AgroSciences LLC , No. 2015-185 (Fed. Cir. Mar. 17, 2017), affirming Civ. 12-256 (D. Del. Mar. 13, 2015) (Bumb, J.), adopting magistrate judge’s report (D. Del. Dec. 22, 2014) (Schneider, M.J.); see also summary judgment in favor of Dow on sublicensing issue (D. Del. Oct. 7, 2013) (Bumb, J.).

Background

The contract was an exclusive patent license agree­ment between Bayer CropScience, as licensor, and a company called MS Tech. The license agreement expressly gave MS Tech a right to grant sub­li­cen­ses; MS Tech later granted a sub­license to Dow Agro­Sciences.

But was MS Tech’s sublicensing right sufficient to shield Dow from Bayer’s patent rights?  Bayer’s answer was “no”; it took the position that the license agreement did not license MS Tech for com­mer­cial use of the patented tech­nol­ogy, because the license agreement’s exclusivity language made an exception for the commercial-use rights that had been granted to another company, Strine.

Bayer sued Dow for patent infringement, but in a summary-judgment proceeding, the district court concluded — largely from the testimony of Bayer’s own witnesses and the company’s doc­u­ments — that Bayer had indisputably intended for MS Tech indeed to have com­mer­cial-use rights. The district court spanked Bayer for persisting in its new no-commercial-use position; according to the court, even basic pre-suit due diligence, let alone discovery, should have re­vealed to Bayer that it had no case under the governing English law. The district court held that the case involved “extraordinary cir­cum­stan­ces” and, as authorized by the U.S. patent statute, awarded Dow some $5.9 million in attorney fees.   The Federal Circuit affirmed.

The contract-drafting error

Let’s look at what might have led Bayer’s counsel, in the lawsuit, to assert that the license agreement did not license MS Tech for commercial use of the pat­ent­ed technology (even though Bayer’s witnesses and documents said otherwise).  The Federal Circuit quoted the crucial contract language:

The SELLER [Bayer] hereby grants to the PURCHASER [MS Tech] . . . a worldwide, fully paid-up, exclusive license – {note the dash} with the right to grant sublicenses solely as set out in Article 3.1.3 and with the ex­cep­tion of the rights to in­crease, market, distribute for sale, sell and offer for sale, {note the comma} granted to STINE by separate agreement . . . .

Federal Circuit slip op. at 4 (boldfaced emphasis and italicized curly-bracketed text added, square-bracketed text by the court).

Taken in isolation, this license-granting language certainly seems to support, at a minimum, the position that MS Tech’s rights did not extend to sublicensing commercial use of the patented technology, the right to which had been been granted to Stine in a separate agreement. That would have resulted in Dow’s sublicense being invalid.

But:

As the district court explained, the parties agreed that English law governed the Bayer–MS Tech contract. The parties further agreed that under English law, the background facts and cir­cum­stan­ces surrounding the agreement—known in English law as the “factual matrix”—must be considered in construing the con­tract’s terms.

Id., slip op. at 10 (emphasis added).  After considering the back­ground facts and cir­cum­stan­ces — perhaps most notably including the testimony of Bayer’s own witnesses — the district court con­clu­ded that, when negotiating the license agreement, the parties had intended something completely opposite to the position that Bayer was taking in the litigation, namely that MS Tech was indeed to be grant­ed com­mer­ci­al­i­za­tion rights.  As a result, concluded the district court, Dow wasn’t a patent infringer, it was a sublicensee of MS Tech and thus an authorized user of the patented technology.

The district court concluded that Bayer did not adequately investigate the facts before filing its patent-infringement suit against Dow; ac­cord­ing to the court, Bayer’s own witnesses and documents would have revealed to Bayer that the license-agreement language did not accurately reflect the parties’ intent. The district court also found, in effect, that Bayer should have abandoned its infringement claim once discovery revealed the flaw in Bayer’s contract interpretation.  The court therefore awarded attorney fees to Dow; the Federal Circuit affirmed, holding that:

… [T]he district court permissibly relied on the testimony of Bayer’s witnesses to discredit Bayer’s interpretation.

The district court likewise did not abuse its discretion in concluding that Bayer failed to perform a diligent presuit investigation of its claims against Dow. Bayer’s own witnesses testified against its contract interpretation.

Id. 

Lesson:  How could this have been avoided?

We mustn’t reflexively blame the contract drafters for this train wreck. We have no idea what instructions the drafters received from their clients; it’s certainly not unheard-of for business people to be imprecise and even inaccurate in conveying their wishes.  As a result, what follows is necessarily Monday-morning quarterbacking.

To support (what became) Dow’s position, the drafters could have rephrased the crucial language by breaking it up into shorter sent­en­ces with more single-subject paragraphs, possibly along the following lines:

The SELLER [Bayer] hereby grants to the PURCHASER [MS Tech] … a worldwide, fully paid-up license to in­crease, market, dis­trib­ute for sale, sell and offer for sale, [the licensed subject matter].

The license includes, without limitation, the right to grant sub­li­censes, but only as set out in Article 3.1.3.

The license is exclusive except for the rights, granted to STINE by separate agreement, to in­crease, market, distribute for sale, sell and offer for sale, [the licensed subject matter]  . . . .

Or, to support what became Bayer’s position:

The SELLER [Bayer] hereby grants to the PURCHASER [MS Tech] … a worldwide, fully paid-up license to practice [the licensed sub­ject matter], for noncommercial purposes only. [The term “non­com­mer­cial purposes” should probably be defined.]

The license includes, without limitation, the right to grant sub­li­censes, but only as set out in Article 3.1.3.

The parties note that, by separate agreement, STINE has been granted certain rights to in­crease, market, distribute for sale, sell and offer for sale, [the patented subject matter]  . . . .

With these shorter, stand-alone para­graphs, the business people might have had a better shot at spotting any discrepancy between the drafters’ contract language and their own intentions for the deal.

See also:

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Contract drafters and reviewers sometimes get confused about what constitutes “consequential damages” excluded by a limitation of liability. A federal district court recently proposed this recap, with extensive citations:

Defendant’s brief frequently discusses foreseeability, and it is true in some sense that predictability is relevant to determining whe­ther damages naturally flow from a breach and are considered direct or indirectly result and are considered consequential.

But that definition has never been very instructive for analyzing particular damages, and foreseeability is the limit of all contract damages, not the distinction between direct and consequential damages.

Rather than turning on foreseeability, the difference between direct and consequential damages depends on whether the damages represent (1) a loss in value of the other party’s per­form­­ance, in which case the damages are direct, or (2) collateral losses following the breach, in which case the damages are consequential.

Direct damages refer to those which the party lost from the contract itself—in other words, the benefit of the bargain—while consequential damages refer to economic harm beyond the immediate scope of the contract.

So direct damages are the costs of a plaintiff getting what the defendant was supposed to give—the costs of replacing the defendant’s performance.

Other costs that the plaintiff may not have incurred if the defendant had not breached, but that are not part of what the plaintiff was supposed to get from the defendant, are consequential.

Even this more developed definition is not precise, so it is im­port­ant to remember that the goal of contract interpretation is to give effect to the parties’ intent and that the primary guide to determining their intent is the actual language of the agreement.

Jay Jala, LLC v. DDG Construction, Inc., No. 15-3948, slip op. at 3-5 (E.D. Pa. Nov. 1, 2016) (partially granting defendant’s motion for summary judgment on damages) (emphasis and extra paragraphing added, internal quotation marks and extensive citations omitted).

The Jay Jala court’s formulation has some appeal; I’m mulling over how it might relate to a different test articulated by the Texas supreme court in a number of cases, such as one from 2012:

Direct damages are the necessary and usual result of the defendant’s wrongful act; they flow naturally and necessarily from the wrong…. Consequential damages, on the other hand, result naturally, but not necessarily.

Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex. 1997), quoted in El Paso Marketing, L.P. v. Wolf Hollow I, L.P., 383 S.W.3d 138, 144 (Tex. 2012) (internal quotation marks and footnote omitted, alterations by the El Paso Marketing court, emphasis added).

Hmm … if I had to litigate a consequential-damages case, and I had to choose between the Jay Jala court’s recap and the Texas supreme court’s Arthur Andersen test, I suspect that the Texas defini­tion might provide a brighter line, one that could well be easier for the jury to use in deciding the case.

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A Fifth Circuit opinion, issued yesterday, reminds contract drafters that if a forum-selection clause specifies the courts of a state or county as the exclusive forum, that might well preclude removal to federal court.  See Grand View PV Solar Two, LLC v. Helix Electric, Inc., No. 16-20384 (5th Cir. Feb. 1, 2017) (affirming remand to state court because forum-selection provision had granted “sole and exclusive” jurisdiction to state courts). The forum-selection clause read as follows:

The Parties hereto hereby irrevocably and unconditionally consent to the sole and exclusive jurisdiction of the courts of Harris County in the State of Texas for any action, suit or proceeding arising out of or relating to this Agreement or the Proposed Transaction, and agree not to commence any action, suit or proceeding related thereto except in such courts.

The Parties hereto further hereby irrevocably and unconditionally waive any objection to the laying of venue of any action, suit or proceeding arising out of or relating to this Agreement in the courts of Harris County in the State of Texas, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.

Id., slip op. at 2-3 (emphasis and extra paragraphing added). The court held:

Plaintiffs correctly allege that Helix Electric waived its removal rights by agreeing in the [Agreement] to “the sole and exclusive jurisdiction of the courts of Harris County in the State of Texas for any action, suit or proceeding arising out of or relating to this Agreement or the Proposed Transaction.”

The [forum-selection clause] is “clear and unequivocal”: It gives Harris County state courts exclusive jurisdiction over disputes such as the one plaintiffs brought in that county. Because Helix Electric, L.L.C., agreed to the [Agreement]’s terms, it cannot remove, and neither can its co-defendants.

Id., slip op. at 4 (footnote omitted, extra paragraphing added).

This wasn’t an unusual result; see, e.g., Doe 1 v. AOL, LLC, 552 F.3d 1077, 1081-82 (9th Cir. 2009) (per curiam) (also holding that forum-selection provision was unenforceable for unrelated reasons).

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Baseball-style dispute resolution is underutilized as a tool to motivate contracting parties to be reasonable in their settlement proposals.  (In that process, each party proposes one or two possible res­ol­u­tions and the judge or arbitrator decides which of the proposals is closest to the “correct” one.)  The process can work nicely:  Last week, my hometown Houston Astros and one of their starting pitchers were about to go to arbitration of the pitcher’s salary. The team proposed $3 million, the pitcher proposed $3.9 million, and the arbitral tribunal would have to pick one of the two proposals. The parties elected not to go forward with the arbitration; instead, they agreed to split the difference at a salary of $3.45 million.   See Jake Kaplan, Astros avoid arbitration with starting pitcher Mike Fiers, Houston Chronicle, Jan. 19, 2017.  “The Astros have still yet to reach settlements with starting pitcher Collin McHugh, super utility man Marwin Gonzalez and relief pitcher Will Harris. If the sides are unable to find common ground, an arbiter will decide between the salary figures proposed last week.” Id.

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