Opinion
Case No. 98-75206
August 2, 2000
OPINION AND ORDER DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT
I. Facts
Plaintiff, Cadillac Products Inc., brought this action against TriEnda for breach of contract, alleging that TriEnda granted Shuert/Oakland, Inc. a royalty-free license and that under the most-favored licensee provision of Cadillac's license of the same patent from TriEnda, Cadillac also was entitled to a royalty-free license. Cadillac is a licensee under a nonexclusive license agreement with TriEnda, whereby Cadillac pays a royalty of approximately $1.00 per unit to TriEnda for certain plastic pallets covered by a patent owned by TriEnda, U.S. Patent No. 4, 428, 306 (the "306 patent"). The license agreement contains what is known as a "most favored licensee" clause, which provides:
Subsequently TriEnda transferred its rights to the "306 patent to TriEnda Newco, Inc. TriEnda Newco has been joined as a party defendant. TriEnda and TriEnda Newco are jointly referred to herein as TriEnda.
[i]n the event Licensor grants a license to a third party which has a more favorable royalty rate than that charged herein, Licensor will give to Licensee the benefit of such more favorable rate from and after the date it is established, but only if Licensee accepts any less favorable conditions in said third-party license.
In 1995, TriEnda brought suit against Shuert claiming violation of its "306 patent. The parties settled pursuant to an agreement dated June 7, 1996. Under the settlement agreement, TriEnda granted to Shuert a royalty free license to use patent "306 until the patent expires on October 8, 2001. In return, Shuert granted TriEnda a royalty free license to use seven different patents owned by Shuert. Cadillac contends that under the most favored licensee clause of its license with TriEnda, it is entitled to a royalty free license retroactive to the date of TriEnda's settlement agreement with Shuert, June 7, 1996.
Cadillac previously claimed that Shuert received a "royalty-free" license from TriEnda. While TriEnda did not receive a cash royalty, Shuert did give TriEnda a license to use seven of Shuert's patents in exchange for Shuert's license of the "306 patent. This Court previously held that the value of the Shuert patents and thus, whether Shuert received a more favorable rate, was a fact question which could not be determined on summary judgment. Opinion and Order Denying TriEnda's Motion for Summary Judgment, filed December 22, 1999. The Court explained:
The parties dispute whether Shuert was granted a more favorable rate than Cadillac. TriEnda alleges that from June of 1996 until April of 1999, its total sales of products covered by the Shuert patents and/or manufactured by methods covered by Shuert patents were $41,602,904. Cadillac contends that the Shuert patents were worth nothing to TriEnda. Cadillac claims that the value of the license to use the patents is the gross sales or units multiplied by a royalty of $0, in sum the value TriEnda received from Shuert is zero. TriEnda counters that the value of a license is the use that a Darty can make of it, which may exceed the royalty rate. The value of the Shuert Datents is an issue of fact which cannot be determined on summary judgment.Id. at 7. The Court also held that TriEnda "has the burden of proving that it has not given a more favorable rate to a third party because the facts relating to the consideration under the license are within the peculiar knowledge of the licensor," Id. at 6 (citingShatterproof Glass Corn. v. Libbey-Ownes-Ford Co., 482 F.2d 317, 324 (6th Cir. 1973)).
This Court has also previously ruled on Cadillac's motion requesting that the Court interpret Claim No. 1 of one of the seven Shuert patents. Cadillac argued that it was necessary to interpret the Claim in order to determine the value of the patent. The Court disagreed, finding that it was not necessary to interpret the Claim to determine the value of the Shuert patent, and that an interpretation of the Claim was not relevant in this case. Order Denying Plaintiffs Objections to Magistrate Judge's May 25, 2000 Order and Affirming Order, filed June 27, 2000. The Court explained that value is dependent upon the use of TriEnda's process permitted by the license. "The issue is whether the patent had real value to TriEnda, that is whether a person of ordinary skill in the art would have had a reasonable basis to conclude that TriEnd a's process was covered by the patent and the value to TriEnda of avoiding the risk of infringement." Id. at 3.
The parties have now filed cross motions for summary judgment.
II. Standard for Summary Judgment
Summary judgment is appropriate only when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The central inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). After adequate time for discovery and upon motion, Rule 56(c) mandates summary judgment against a party who fails to establish the existence of an element essential to that party's case and on which that party bears the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
III. Analysis
A. Cadillac's Motion for Summary Judgment
Cadillac moved for summary judgment, claiming that TriEnda's proposed proofs do not contain evidence sufficient as a matter of law to carry TriEnda's burden of proving that it has not given a more favorable rate to a third party. Shatterproof Glass Corp. v. Libbey Owens-Ford Co., 482 F.2d 317, 324 (6th Cir. 1973)). Cadillac complains that TriEnda has attempted to value the Shuert patents by focusing on its sales of products covered by Shuert patents from 1996 to date. This valuation method, Cadillac charges, fails to value the Shuert patents based on what TriEnda would have known in 1996.
Cadillac's motion for summary judgment must be denied. TriEnda may present evidence of sales from 1996 forward as evidence of the value of the Shuert patents. Although this is not a patent infringement case, the rules that apply in infringement actions apply here by analogy. In a patent infringement case, the patentee is entitled to damages "adequate to compensate for the infringement, but in no event less than a reasonable royalty." 35 U.S.C. § 282. Thus, courts determine the actual lost profits or a reasonable royalty. Trell v. Marlee Electronics Corp., 912 F.2d 1443, 1445 (Fed. Cir. 1990). A reasonable royalty is based on an established royalty, or if there is no established royalty, is based on "a hypothetical royalty resulting from arms' length negotiations between a willing licensor and a willing licensee." Id. In determining a royalty reasonable under the circumstances, courts may consider the infringer's anticipated profits, as evidenced by the infringer's actual profits. Id.
The methodology [for determining a hypothetical royalty] encompasses fantasy and flexibility; fantasy because it requires a court to imagine what warring parties would have agreed to as willing negotiators; flexibility because it speaks of negotiations as of the time infringement began, yet permits and often requires a court to look to events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators.Fromson v. Western Litho Plate and Supply Co., 853 F.2d 1568, 1575 (Fed. Cir. 1988) (emphasis added). See also Georgia Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970) (one of fifteen evidentiary facts relevant to determining a reasonably royalty is the established profitability of the product made under the patent, its commercial success, and its current popularity);Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1158 (6th Cir. 1978) (licensee profit is but one of the measures applicable to determine hypothetical reasonable royalty). While evidence of actual profits may be used to show a reasonable royalty, a court must focus on what a hypothetical royalty would have been at the time. Hanson v. Alpine Valley Ski Area. Inc., 718 F.2d 1075, 1081 (Fed. Cir. 1983). Thus, TriEnda has submitted some evidence of value of the Shuert patents, and there are genuine issues of material fact concerning the value of the Shuert patents that cannot be determined on summary judgment.
Note that settlement induced royalty agreements are also influenced by the risk and expense of litigating a patent suit.Rite-Hite Corp. v. Kelley Co., Inc., 774 F. Supp. 1514, 1534 (ED. Wis. 1991), vacated in part on other grounds, 56 F.3d 1538 (Fed. Cir. 1995).
B. TriEnda's Motion for Summary Judgment
1. Argument that Cadillac's Failure to Make or Offer a Lump Sum Payment Bars its Cause of Action
The Shuert licenses that TriEnda received in 1996 in exchange for granting a license to Shuert were the equivalent of a "lump sum royalty" because Shuert received a paid up license to use TriEnda's "306 patent. Shuert's potential use of the patent was limitless, its future use was unknown, and its cost was not affected by the use it made of the patent. In order for Cadillac to receive the benefit of the most favored licensee clause, it was required to make a lump sum payment to TriEnda of equal value to the value given to TriEnda by Shuert; Cadillac was not entitled to credit on a paid up license based on royalties it already paid. This much is supported by case law. See Harley C. Loney Co. v. Mills, 205 F.2d 219 (7th Cir. 1953), discussed below. TriEnda goes on to argue that because Cadillac failed to make or offer a lump sum payment in 1996, its claim for breach of contract is barred. There is no law supporting this proposition.
Harley C. Loney Co. v. Mills, 205 F.2d 219 (7th Cir. 1953), is closely analogous to this case. The patent owner Loney gave a license to Mills. Mills agreed to pay a royalty on each licensed wheel balancing weight that it sold. The license agreement also contained a most favored licensee clause, which provided that "In the event Loney shall hereafter grant a license under the patent aforesaid at a royalty rate or rates lower than [the rate provided here], Mills shall be entitled to the benefit of such lower royalty rate . . . Thereafter, Loney gave a paid up license to Perfect Equipment Company for the lump sum of $13,500. Loney offered a paid up license to Mills for the same amount. Mills responded one year later, stating that it wanted to accept a paid up license and requesting credit in the amount of over $10,000 that it had paid in royalties during the past year. Loney refused, and a lawsuit ensued.
The Seventh Circuit affirmed the district court's finding that the most favored licensee clause was self executing and thus that Mills was entitled to a paid up license at any time. However, the court also found that Mills was not entitled to a credit in the amount of royalties already paid.
Whether the lump sum payment by Perfect for a paid-up license was "more favorable terms' than the royalty payments then being made by defendant was uncertain; it was an open question.... It can hardly be doubted that an amount paid in a lump sum, as was done by Perfect, was more costly to the payor than a similar amount paid over a course of time on an installment basis (without interest), or conversely, that the lump sum payment was worth more to the payee. More than that, Perfect, in paying a lump sum for a paid-up license, took the risk that such payment would cost it more in the long run than royalty payments. Defendant [Mills] was unwilling to take such risk but elected to wait until it could determine the course which would be more advantageous.Id. at 221. Thus, the court concluded, Mills was not entitled to wait and see whether a lump sum or running royalties was the better deal. The purpose of the most favored licensee clause is to ensure that the licensee is treated equally as other licensees; it's purpose is not to ensure preferential treatment. Id. Far from finding that Mills was barred from claiming entitlement to a paid up license, the court found that Mills was entitled to a paid up license for the sum of $13,500; "it is so entitled today, nothing more and nothing less."
TriEnda also relies on Studienqesellschaft Kohle m.b.H. v. Novamont Corp., 704 F.2d 48 (2d Cir. 1983). However, that case is distinguishable because there the most favored licensee clause required the licensee to exercise its option to obtain a prepaid license within ninety days. Because the licensee did not exercise its option within ninety days, it was not entitled to a pre-paid license for the same sum paid by another licensee. Id. at 56.
Like Mills, the licensee in Loney, Cadillac has a claim that it is entitled to a paid up license for an amount equal to the value Shuert gave to TriEnda, the value of the seven Shuert patents. Thus, Cadillac's claim for breach of contract is not barred. However, underLoney, Cadillac's claim that it is entitled to a credit for royalties paid is barred. TriEnda's motion for summary judgment is DENIED.
2. Argument that Cadillac's Claim for Lost Profits Must be Dismissed Due to Impermissible Speculation or Failure to Mitigate
Count II of Cadillac's Second Amended Complaint alleges that TriEnda is liable for Cadillac's lost profits due to its failure to obtain a 1999 contract for pallets from the Post Office, alleging that "but for TriEnda's breach immediately prior to the parties' submission of bids for the November, 1999 U.S. Post Office contract, by failing to offer Cadillac Products a license under the "306 patent at the same rate given to Shuert, the U.S. Post Office would have awarded the postal pallet contract to Cadillac Products." Second Amended Complaint ¶ 20. Cadillac alleges that if it did not have to pay the $1.00 royalty to TriEnda, its bid would have been lower and it would have obtained the Post Office contract.
TriEnda argues that Cadillac's claim for lost profits should be dismissed because Cadillac's claim is based on impermissible speculation. In making its argument, TriEnda also engages in speculation. Among other things, TriEnda claims that if it had not been receiving the $1.00 royalty, its bid on the Post Office contract might have been different and it might still have won the 1999 Post Office contract.
While lost profits cannot be based solely on conjecture, they must be shown with a reasonable degree of certainty. "Even where lost profits are difficult to calculate, and are speculative to some degree, they are still allowed as a loss item." Lorenz Supply Co. v. American Standard, Inc., 300 N.W.2d 335, 340 (Mich.App. 1980). It is uncertainty as to the fact of damage that is fatal to a claim, not uncertainty as to the amount. Id. (citing Wolverine Upholstery Co. v. Ammerman, 135 N.W.2d 572 (Mich.App. 1965).
This Court cannot determine on summary judgment whether Cadillac's lost profits claim is wholly speculative; the determination can only be made after an offer of proof at trial. Cadillac is entitled to put in its proofs on this claim, and TriEnda is entitled to move for directed verdict on the issue of speculation.
TriEnda also argues that Cadillac's claim for lost profits must be dismissed based on Cadillac's alleged failure to mitigate. TriEnda claims that Cadillac should have mitigated by lowering its bid for the 1999 Post Office contract. While Michigan law requires parties to make every reasonable effort to mitigate their damages, Wells v. 10-X Mfg. Co., 607 F.2d 248, 256 (6th Cir. 1979), it is a fact question whether Cadillac's bidding strategy constituted an unreasonable failure to mitigate. TriEnda points out that Cadillac's President, Robert Williams, admits that in hindsight, in light of Cadillac's costs and capacity, it might have been better off had it gotten the Post Office contract with a lower profit margin than to have lost the bid as it did. Even so, this does not constitute dispositive evidence that Cadillac failed to make a reasonable effort to mitigate its damages. Similarly, TriEnda claims that Cadillac should have presumed that it would win this lawsuit, that it would recoup the $1.00 per pallet royalty that it had to pay TriEnda, and thus Cadillac should have bid $1.00 per pallet less than it did on the Post Office contract. The requirement that a party take reasonable efforts to mitigate did not necessarily require Cadillac to use this bidding strategy. The parties have simply presented a fact question regarding whether Cadillac's bidding strategy constituted an unreasonable failure to mitigate its damages.
IV. Conclusion
Being fully advised in the premises, having read the pleadings, and for the reasons stated above, the Court hereby orders as follows:
Plaintiffs Motion for Summary Judgment is DENIED.
Defendants' Motion for Summary Judgment is DENIED.
SO ORDERED.