Opinion
CIVIL ACTION NUMBER 91-1720, (Ref: No. 04-1558), SECTION "L" (3).
March 30, 2005
ORDER REASONS
Pending before the Court is the Defendant Saucony's Second Motion for Summary Judgment Dismissing the Complaint. The matter came before the Court with oral argument on February 16, 2005. For the following reasons, the Motion for Summary Judgment is GRANTED in part and DENIED in part.
I. BACKGROUND
Plaintiff, Hockerson-Halberstadt, Inc. ("HHI") originally brought this action in May 1991 alleging patent infringement against Nike, Reebok, and various other footwear companies and distributors. Hyde Athletic Industries ("Hyde"), now known as Saucony, Inc., was named as a defendant in that suit. In December 1991, HHI and Hyde entered into a Patent License Agreement settling the patent infringement claims against Hyde and granting Hyde a license under United States Letters Patent Nos. 4,322,895 and 4,259,792. The license provided:
commencing with, but not before the date upon which a final judgment holding one or more claims of the HHI PATENTS valid, is entered from which no appeal has been taken in the CIVIL ACTIONS HYDE shall pay HHI, as a royalty, $0.25 (twenty five cents) for each pair of shoes that would otherwise infringe either or both of the HHI PATENTS.
Pursuant to the License Agreement, the Defendant paid $50,000 to HHI and the parties agreed that HHI would be entitled to a running royalty of twenty-five cents ($0.25) per pair of shoes sold after a date to be determined in the future. The License Agreement also contained a "most favored nation" clause which provided:
6.1 HHI shall, within 30 (thirty) days of licensing third parties, provide [THE DEFENDANT] with a copy of such license.
6.2 In the event that HHI grants a license to another party under one or both HHI PATENTS on terms deemed more favorable to the license than those terms herein granted to [THE DEFENDANT], [THE DEFENDANT] shall on written notice to HHI, have the option of selecting such more favored terms provided, however, any sums paid prior to the date of such election by [THE DEFENDANT], shall not be returnable to [THE DEFENDANT].
6.3 In the event that [THE DEFENDANT] elects more favorable terms, such terms shall become effective on [THE DEFENDANT'S] election.
Hyde admits that it has not paid any royalties to HHI since this License Agreement was instituted. On June 3, 2004, Plaintiff Hockerson-Halberstadt, Inc. ("HHI") brought this action against Defendant Saucony (referred to as "Hyde" in HHI's complaint) for declaratory relief, breach of contract, and patent infringement. This case was consolidated with lead case, #91-1720.
HHI's declaratory judgment action is based on a Consent Decree entered on January 30, 1992 ("1992 Consent Decree"), dismissing the patent infringement actions against HHI and Nike. HHI seeks a declaration that the 1992 Consent Decree is a final judgment that satisfies the suspensive condition set forth in the Patent License Agreement with Hyde. The breach of contract claim hinges on the outcome of the declaratory judgement action. If the suspensive condition in the license agreement was satisfied by the 1992 Consent Decree, then HHI claims that Hyde breached the Patent License Agreement by not paying royalties to HHI. Lastly, HHI argues in the alternative, that the Defendant is liable for patent infringement because the license agreement was forfeited by the Defendant's refusal to pay royalties. Saucony responded to HHI's complaint by filing a counterclaim asserting that HHI breached the Patent License Agreement by failing to provide Saucony with a copy of each license that HHI entered into with third parties.
The Defendant first moved for summary judgment on October 15, 2004. The Defendant argued that summary judgment should be granted in its favor because HHI's breach of contract claim had prescribed, HHI's patent infringement claim was barred by the License Agreement between the parties, and HHI's declaratory judgment action was therefore moot. Oral argument was heard on the motion on December 15, 2004, at which time the motion was taken under submission. The Court concluded that HHI's breach of contract claims was partially prescribed, but that summary judgment was not warranted for part of the breach of contract claim, the patent infringement claim, nor the declaratory judgment action. Therefore, the Defendant's first motion for summary judgment was granted in part and denied in part.
The Defendant again moved for summary judgment and the Court heard oral argument on the Defendant's second motion for summary judgment on January 5, 2005. In its motion, the Defendant argued that the "most favored nation" clause of the License Agreement between the Defendant and HHI permits the Defendant to elect more favorable terms from other license agreements entered into by HHI. HHI entered into a license agreement with Brooks Shoe, Inc. ("Brooks") in September 1995 (the "Brooks License") for the same patents at issue in the Defendant's License Agreement. Like the Defendant, Brooks paid $50,000 to HHI. However, the $50,000 was considered a payment in full, and Brooks was not required to pay a running royalty. Therefore, the Defendant argued that the Brooks License contained more favorable terms than the Defendant's License Agreement, which the Defendant would have elected had HHI provide a copy of the Brooks License within thirty (30) days as required by the Defendant's License Agreement. According to the Defendant, HHI's failure to provide a copy of the Brooks License until November 5, 2004 constituted a breach of contract that, pursuant to Louisiana Civil Code Article 1772, entitles the Defendant to select the more favorable terms of the Brooks License now with the same effect that such an election would have had in July 1995. The Defendant reasons that since the Defendant has already paid $50,000 for a license, selecting the terms of the Brooks License releases the Defendant from any obligation to pay a running royalty.
The date on the Brooks License is July 1995 and the Defendant refers to the July date at one point in its motion. However, at one point the Defendant states that the Brooks License was created in September 1995. HHI's response that it sent the Defendant a copy of the Brooks license in October 1995 suggests that the September 1995 date is the correct date. The Court may want to clarify this at oral argument. In any case, it is clear that 1995 is the year in which HHI entered into a license with Brooks, and that the Defendant is arguing that it did not receive a copy of that agreement until 2004.
Louisiana Civil Code Article 1772 provides that "[a] condition is regarded as fulfilled when it is not fulfilled because of the fault of a party with an interest contrary to the fulfillment."
At oral argument, HHI argued that the Defendant never provided formal, written notice that it wished to exercise its right to more favorable terms, as required by the License Agreement. The Court ruled that timely notice of the Brooks License was not given to the Defendant and that an election of the Brooks License terms has been made by the Defendant. The Court then took the Defendant's Second Motion for Summary Judgment under advisement and ordered the parties to file supplemental briefs addressing the effective date and significance of the Defendant's election of the more favorable terms.
II. DEFENDANT'S SECOND MOTION FOR SUMMARY JUDGMENT
Defendant Saucony again moves for summary judgment pursuant to Federal Rule of Civil Procedure 56. Now that the Court has ruled that the Defendant has elected the more favorable terms of the Brooks License, the only issue remaining is the effect, if any, of such election. HHI maintains that the Defendant's motion for summary judgment is premature because there are genuine issues of material fact regarding whether the Defendant can make an election now and the effective date of any such election. HHI argues that, even if election is possible, the Defendant's election of the Brooks License terms are not effective until the Defendant pays to HHI the $50,000 required as consideration under the Brooks License. Additionally, HHI claims that a valid election cannot release the Defendant from liability for royalties owed prior to the effective date of the election. Furthermore, HHI argues that there are genuine issues of material fact as to whether the Defendant would have elected the Brooks License in 1995, thus questioning the retroactive effect of the Defendant's election.
The Defendant replies that it has already paid the $50,000 required to release it from royalty payments under the terms of the Brooks License. According to the Defendant, HHI's argument that the Defendant's election cannot apply retroactively is erroneous according to applicable case law. Furthermore, the Defendant maintains that it owes no royalties for the period prior to the execution of the Brooks license. Finally, the Defendant requests that the court reconsider whether HHI's claim for patent infringement has prescribed.
III. LAW AND ANALYSIS
Summary judgment will be granted only if the pleadings, depositions, answers to interrogatories, and admissions, together with affidavits show that there is no genuine issue as to any material fact and that the defendant is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56. When considering a motion for summary judgment, the Court must "review the facts drawing all inferences most favorable to the party opposing the motion." General Universal Systems, Inc. v. Lee, 379 F,3d 131, 137 (5th Cir. 2004). If the party moving for summary judgment demonstrates the absence of a genuine issue of material fact "the nonmovant must go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial." Willis v. Roche Biomedical Laboratories, Inc., 61 F.3d 313, 315 (5th Cir. 1995).
In determining whether summary judgment is appropriate in the instant case, several questions concerning the effect of the Defendant's election of the more favorable Brooks License terms must be addressed: (1) whether the Defendant must pay $50,000 under the Brooks License; (2) whether the election is retroactive to the date of the Brooks License; and (3) whether the election releases the Defendant from liability for royalties owed but not paid prior to HHI's execution of the Brooks License. The Court will address these issues in turn.
A. Whether the Defendant must pay an additional $50,000
Several Circuits have held that "where a patent licensor has later granted a paid up license for a sum certain, a licensee who has a most favored nation clause is entitled to a paid-up license for the same sum." Cardinal of Adrian, Inc. v. Amerock Corp., 208 USPQ 822 (E.D. Mich, 1979) (emphasis added), affirmed by, 698 F2d 1218 (6th Cir. 1982), citing, Rothstein v. Atlantic Paper Cp., 321 F.2d 90, 138 (5th Cir. 1963). Under the 1995 Brooks License, $50,000 was paid to HHI for a fully paid, royalty free license. The Parties agree that, in 1991, the Defendant also paid HHI $50,000 for its License Agreement, which provided in pertinent part that:
Upon execution of this agreement by both parties, [THE DEFENDANT] shall pay HHI the sum of $50,000 (fifty thousand dollars) in full consideration of any and all manufacture, use of sale by . . . of products that are within the scope of the HHI PATENTS from fate of issuance through the date of receipt by [THE DEFENDANT] of notice that a final judgment has been entered in the CIVIL ACTION from which no appeal has or can be taken holding at least one claim valid.
Therefore, because it has already paid $50,000, the Defendant argues that it is entitled to the more favorable, fully paid license that Brooks enjoyed without paying another $50,000.
HHI argues that the $50,000 paid by the Defendant was for release from prior infringement and for a fully paid, royalty free license from the date of the License Agreement up to the date of entry of the final judgment referred to in the license. Thereafter, the Defendant was required to pay a running royalty of $0.25 per unit. While HHI agrees with the Defendant that the most favored nation clause permits the defendant to convert the per unit royalty license into a fully paid, royalty free license, HHI maintains that this can only be done after the Defendant has paid $50,000 in consideration for that conversion. In effect, HHI approaches its agreement with the Defendant as two licenses: (1) a release plus a fully paid license lasting only until entry of final judgment, for which the Defendant paid $50,000 consideration; and, thereafter (2) a license with a running royalty of $0.25 per unit, for which the Defendant paid no consideration. According to HHI's reasoning, it is the running royalty license that the Defendants wish to replace with the more favorable terms of the Brooks Agreement. Therefore, HHI believes that the Defendant's must pay $50,000 for those terms, as did Brooks.
Whether or not the January 30, 1992 Consent Decree is a final judgment that satisfies the suspensive condition set forth in the License Agreement is the basis of HHI's declaratory action against the Defendant.
The usual principles on contract law control the construction of a patent license. U.S. Industries, Inc. v. Camco, Inc., 277 F.2d 292, 294 (5th Cir. 1960). Under the usual rules of contract interpretation in Louisiana, "the Court is to determine the parties' common intent as reflected by the words of the contract." In re Cudd Pressure Control, Inc., 109 F.Supp.2d 486, 493 (E.D.La 2000); La.C.C. art. 2045. "When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent." La.C.C. art. 2046. Neither the words of the Defendant's License Agreement nor the Brooks License specifically allocated the $50,000 as either consideration for the release or consideration for the fully paid license. Furthermore, the Defendant's position that its license was one, single license wherein the requirement to pay royalties could be triggered by the fulfilment of a certain condition is more consistent with the clear language of the License Agreement than HHI's position that the Defendant had two separate licenses. As the Defendant states, the only difference between its License Agreement and the Brooks License is that the Defendant's License Agreement had a contingency (the entry of final judgment) that would shorten the length of the time that the license was considered a royalty free license. The Defendant's License Agreement required the Defendant to pay royalties only after "the date upon which a final judgment holding one or more claims of the HHI PATENTS valid, is entered from which no appeal has been taken." In short, both the Defendant and Brooks paid $50,000 for their licenses; however, the Brooks License remained a fully paid license for the length of the patents, without any contingency. The terms of the Brooks License are clearly more favorable and, pursuant to the most favored nations clause in the Defendant's License Agreement, the Defendant is entitled to the benefit of those more favorable terms for the same sum paid by Brooks. In this case, the Defendant has already paid $50,000, and need not pay that sum again.
B. Whether the Defendant's election is retroactive to the date of the Brooks License
At the January 5, 2005 oral argument, the Court found that HHI did not timely notify the Defendant of the Brooks License, as was required by the Defendant's License Agreement. Louisiana Civil Code Article 1772 provides that "[a] condition is regarded as fulfilled when it is not fulfilled because of the fault of a party with an interest contrary to the fulfillment." Therefore, once HHI failed to fulfill its duty of providing to the Defendant a copy of the Brooks License when that license was executed in 1995, the Defendant could regard that duty as having been timely fulfilled. In other words, it is as if HHI did notify the Defendant of the Brooks License in 1995, and the Defendant's election should relate back to that date.
HHI argues that there are genuine issues of material fact as to whether the Defendant would have actually elected the terms of the Brooks License in 1995 had the Plaintiff provided a copy of that license. HHI points out that David Wolf, the Defendant's counsel in 1995, admits in his declaration that he was aware of HHI's compromise with Brooks but assumed that any resulting license agreement did not contain more favorable terms since he was not forwarded a copy of any license with Brooks. (Wolf Decl. at ¶¶ 5, 7). HHI argues that, considering the Defendant's actual knowledge of the Brooks License, the Defendant should have contacted HHI for a copy. According to HHI, the Defendant's failure to do so should constitute a waiver of the Defendant's right to elect the terms of the Brooks License. Studiengesellschaft Kohle, M.B.H. v. Hercules, Inc., et al., 105 F.3d 629, 633 (Fed. Cir. 1997) speaks directly to this issue. In that case, a similar most favored nation clause was included in a license agreement. As in the instant case, the licensor in Studiengesellschaft Kohle did not notify the licensee of a license that contained more favorable terms than the licensee's license. However, because the licensee did not elect the more favorable terms until six (6) years after the more favorable license was executed, the licensor argued that such election should not be retroactive to the date of the more favorable license. In Studiengesellschaft Kohle, the Federal Circuit stated:
To be sure, we nor the parties can know with certainty whether [the licensee] would have exercised its right to a license on [the more favorable] terms [six years ago], had it received the required notice . . . But the uncertainty was caused by [the licensor's] breach, the consequences of which it must bear. 105 F.3d at 633.
The Federal Circuit concluded that the licensee was entitled to the terms of the more favorable license effective retroactively to the date when the more favorable license became effective. Id. The same is true for the Defendant in this case. While it is uncertain whether the Defendant would have elected the terms of the Brooks license in 1995, it is consistent with the law that the Defendant's election of the terms of the Brooks Agreement be retroactive to the date that the Brooks agreement was executed in 1995.
C. Whether the Defendant's owes royalties for the period prior to the Brooks License
Paragraph 6.3 of the most favored nation clause in the License Agreement between HHI and the Defendant provides that "[i]n the event that [THE DEFENDANT] elects more favorable terms, such terms shall become effective on [THE DEFENDANT'S] election." As discussed above, due to HHI's failure to provide a copy of the Brooks License, the effective date of the Defendant's election is in 1995 when the Brooks License was executed. Therefore, from that date forward, the Defendant's license became a royalty-free license. The Defendant argues that the language of its License Agreement supports the position that it should not owe any royalties prior to 1995. However, the Defendant does not provide the Court with sound reasoning to support this conclusion. The License Agreement does state that "any sums paid prior to the date of such election by [THE DEFENDANT], shall not be returnable to [THE DEFENDANT]." (Patent License Agreement ¶ 6.2). However, as HHI argues, it does not follow that the non-refundability of amounts already paid means that amounts not paid are not owed. Following oral argument on the Defendant's first motion for summary judgment on December 8, 2004, the Court granted summary judgment dismissing HHI's claim for royalties that were due on July 31, 1993 and up to June 2, 1994 and denied summary judgment dismissing HHI's claim for royalty payments that became due any time from June 3, 1994 to July 27, 1999. Therefore, because the Defendant's election is retroactive to 1995, HHI can only claim royalty payments for those allegedly due from June 3, 1994 to the effective date of election in 1995.
D. Whether HHI's claim for patent infringement has prescribed
The Defendant has requested that the Court reconsider the portion of its December 22, 2004 Order and Reasons in which the Court concluded that, though HHI ultimately may not be able to recover under both a patent infringement claim and a claim for breach of the License Agreement, HHI is not prohibited from pleading both claims in its complaint. In reaching said decision, the Court reasoned:
The Defendant argues that the Patent License Agreement bars HHI's patent infringement claim. However, in the Defendant's answer to HHI's complaint, the Defendant denies that HHI is entitled to a declaration that the suspensive condition triggering the Patent License Agreement has been satisfied. Therefore, whether the license was ever triggered is still at issue. If HHI were to fail on its declaratory judgment action because the suspensive condition was never satisfied, then HHI's only remedy is in its claim of patent infringement. In short, whether or not the license agreement ever went into effect is an issue of material fact that will determine whether HHI's patent infringement claim is barred. Consequently, the Defendant is not entitled to a judgment as a matter of law at this time. (December 22 Order and Reasons at 10-11.)
However, given the arguments presented by both HHI and the Defendant on the effect of the Defendant's election of more favorable terms, the Court's explanation may have been in error. It is now clear that the condition set forth in the License Agreement (namely, the entry of final judgement holding the HHI patents valid) does not affect "whether or nor the license agreement ever went into effect". Even HHI admits that, until a final judgment holding the HHI patents valid was entered, the Defendant had a fully paid, royalty free license. (Supp. Memo. in Opp. to Second Motion for Summary Judgment at 3). Instead, the condition set forth in the License Agreement affects whether or not the requirement to pay royalties of $0.25 per unit ever went into effect. The License Agreement was valid regardless of whether a final judgment on the patents' validity had been entered.
Despite the Court's misstatement, the fact remains that HHI is entitled to assert claims for both patent infringement and breach of license. If the 1992 Consent Decree was sufficient to trigger the contingency transforming the fully paid license into a running royalty license, then HHI may argue that it has a claim for patent breach of the license agreement due to the Defendant's failure to pay royalties. On the other hand, in that same situation, HHI could argue that the Defendant's failure to pay royalties was a breach that terminated the license pursuant to La.C.C. art 2013, enabling HHI to sue for patent infringement. Therefore, the initial existence of the licence does not necessarily bar HHI's claim of patent infringement.
La.C.C. art. 2013 provides that "[w]hen the obligor fails to preform, the obligee has a right to the judicial dissolution of the contract or, according to the circumstances, to regard the contract as dissolved. In either case, the obligee may recover damages."
The Defendant also raises the issue of the patent infringement claim being prescribed. In the Defendant's reply memo in support of it's second motion for summary judgment, the Defendant argues that HHI's claim that the License Agreement should be declared terminated had to be brought within ten (10) years of July, 31, 1993, when HHI first failed to pay royalties. (p. 6). Under Louisiana law, an action on contract is governed by a prescriptive period of ten (10) years. La.C.C. art. 3499. HHI did not file suit against the Defendant until June 3, 2004, more than ten (10) years after the Defendant's failure to pay royalties would have terminated the License Agreement. However, La.C.C. art. 2013 does not require an obligor to bring an action seeking judicial dissolution of a contract. Rather, La.C.C. art. 2013 allows the obligor "according to the circumstances, to regard the contract as dissolved" without seeking judicial dissolution. Therefore, on July 31, 1993, it may have been possible for HHI to regard the license as dissolved and to file suit against the Defendant for patent infringement. Accordingly, the prescriptive period at issue is not the period applicable to HHI's claim that the contract was terminated, but rather the prescriptive period applicable to a patent infringement claim.
35 U.S.C. § 286 provides that "[e]xcept as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint . . . for infringement in the action." Several Circuits have explained that the six-year statute of limitations "limits the period of recovery of damages to six years" but "does not expressly limit the patentee's right to maintain an action." Studiengesellschaft Kohle, M.B.H. v. Eastman Kodak Co., 616 F.2d 1315, 1325 (5th Cir. 1980), citing TWM. Manufacturing Co., Inc. v. Dura Corp., 592 F.2d 346, 348 (6th Cir. 1979); see also Naxon Telesign Corp. v. Bunker Ramo Corp., 686 F.2d 1258, 1262 (7th Cir. 1982). Since HHI's delay in bringing the patent infringement action has exceeded the six-year limitation, the delay is presumed unreasonable, injury to the Defendant is presumed, and HHI has the burden of justifying the delay. Studiengesellschaft Kohle, 616 F.2d at 1326. In response to the Defendant's prescription argument, HHI claims that the prescription issue is not properly before the Court and that the