In this contract, shorter sentences and paragraphs might have prevented a $5.9 million attorney-fee award

by Dell C. "D. C." Toedt III on 2017-03-27

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.).

Table of Contents

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.