Drafting tip: Putting an “interest on past due amounts” clause in an “audit rights” provision might backfire

Cellport Systems, Inc. won a lawsuit against Peiker, a German company, for unpaid patent royalties under a license agreement. The agreement included an audit provision that required Peiker to pay interest on past-due royalties at 1.5% per month.

The trial court, however, awarded Cellport interest at the (lower) statutory rate, on grounds that, in context, the contractual interest rates was intended to apply only to underpayments revealed in an audit. The Tenth Circuit agreed that the lower rate was proper:

According to Cellport, the License Agreement’s reference to the rate contains no limitations on its application.

As the district court explained, however, the sentence is in the middle of a paragraph devoted to Cellport’s right to verify the royalty payments it is owed through audits. And we must interpret this provision in its context.

We agree with the district court that the interest rate was contractually intended to apply only to accounting disputes. The application of the statutory rate was appropriate.

Cellport Sys., Inc. v. Peiker Acustic GmbH & Co., KG, No. 13-1029, slip op. at 21-22 (10th Cir. Aug. 5, 2014) (affirming trial-court judgment in part; emphasis and extra paragraphing added).

Lesson: As in the Common Draft contract terms, it’s a good idea to separate the interest clause from the audit clause.