Petition — U.S.S. Polypropylene Division v. Studiengesellschaft Kohle m.b.H.
Supreme Court brief1983
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Supreme Court of the United States
OCTOBER TERM 1983
U.S.S. POLYPROPYLENE Division, A DIVISION
OF UNITED STATES STEEL CORPORATION,
Petitioner,
v.
STUDIENGESELLSCHAFT KOHLE M.B.H..
Respondent.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
JaMES B. GAMBRELL
B. R. PRAVEL
PRAVEL, GAMBRELL, HEWITT,
KiRK & KIMBALL
1177 West Loop South
Suite 1010
Houston, Texas 77027
(713) 850-0909
Attorneys for Petitioner
Of Counsel:
Stuart C. GAUL
WILLIAM L. KRAYER
JOHN R. PEGAN
600 Grant Street
Pittsburgh, Pennsylvania 15230
September 1, 1983
QUESTIONS PRESENTED
1. In view of the paramount federal interest which requires
candor and honesty in the procurement, licensing and use of
patent rights, should the Second Circuit have condoned a patent
owner's concealment of more favorable license terms in a later
license in breach of its contractual obligation under a “most
favored licensee” clause, thus preventing the “most favored
licensee” holder from having the opportunity to accept the later
license terms?
2. Should this Court exercise its power of supervision where
the Court of Appeals departed from the usual course of judicial
proceedings by (a) refusing to hold as a matter of law that a
patent owner must disclose more favorable royalty provisions in
later licenses to give the first licensee the opportunity to make a
binding choice and thereby avoid any basis for litigation on that
point, and (b) having thus created the need for the court to
equalize the royalty provisions in the several licenses, refusing to
resolve that need by stating that such resolution “would place
the court in the position of an arbitrator.”
3. As between conflicting positions taken by the Second Cir-
cuit below and the Sixth Circuit in Shatterproof Glass Corp. v.
Libby-Owens-Ford Co., 482 F.2d 317 (6th Cir. 1973), cert.
denied, 415 U.S. 918 (1974), was the Second Circuit correct in:
(a) holding as a matter of law that a “most favored li-
censee” clause does not require consideration by the court
of arguably more favorable royalty provisions in a later
license which deducted payments for past infringement
from royalty payments due in the future?
(b) placing the burden of proof on Petitioner-Licensee to
show more favorable terms in later licenses even though the
Petitioner-Licensee had established a breach of contract by
the patent owner’s purposeful concealment of accurate and
complete information as to such later licenses?
As of January, 1982, Petitioner Novamont Corporation (Novamont)
was no longer a corporation; it became and is now USS.
Polypropylene Division, a Division of United States Steel Corpora-
tion, a Delaware corporation. The foregoing information is supplied
under Supreme Court Rule 28.1.
TABLE OF CONTENTS
PAGE
Questions Presented ..
ee
RI oss we ce eco c eee
Ey adie dee lave ocr o's Se ks
Constitutional and Statutory Provisions Involved
Statement of the Case ..............
NSN NYO N= — =:
Whether a Patent Owner Can Misuse Its
Patent Rights by Concealing From a Licensee
Unequal Provisions in Subsequent Licenses
Granted to Competitors of a Licensee Who Has
Bargained For “Most Favored Licensee”
ES a
A. The Importance of the Question
B. Although the Misuse of Patents Has Been
Consistently Condemned by This Court In
A Variety of Circumstances, the Misuse
Resulting From a Patent Owner's
Concealment of Information Between
Licensees Where Disclosure is Required by
a Most Favored Licensee Clause Has Not
Been Settled By This Court ............. §
C. The Obligation of Full Disclosure in
Dealing With Issued Patents is Analogous
To the Equitable Doctrine of Candor and
Honesty in Obtaining Patents from the
United States Patent and Trademark
SU Sue sc sls ve vcvaceces 10
ii
PAGE
2. The Court of Appeals Improperly Refused to
Resolve Disputed Royalty Provisions in the
Patent License Agreements Because “[T] hese
Constructions Would Place the Court in a
Position of an Arbitrator.” Since the
Fundamental Responsibility of a Court Is to
Resolve Disputes, in a Manner Akin to
Arbitration, the Refusal by the Court of
Appeals To Do So Requires this Court's Power
of Supervision to Avoid Such a Departure From
the Accepted and Usual Course of Judicial
Proceedings ; 11
3. The Court of Appeals’ Decision is in Conflict
With the Decision of the Sixth Circuit Court of
Appeals on the Question of Whether More
Favorable Royalty Terms Based on Payments
For Past Infringement Must be Considered in
Evaluating Equality of Patent License Terms 13
4. The Court of Appeals Compounded the Error
of Its Departure From the Accepted and Usual
Role of Judicial Responsibility in Not Only
Refusing to Resolve the Issue of Equal Royalty
Treatment, But Also by Placing the Burden of
Proof as to the More Favorable Terms on the
MFL Holder Instead of on the Patent Owner
Who Granted the Subsequent Licenses... ___. 16
eR Pune tart bee cit is yee ee 17
Appendix
Appendix A — Court of Appeals Opinion........ A-1
Appendix B — District Court’s Opinion ......... B-|
Appendix C — Order Denying Petition for
NS or ay oe, C-]
Appendix D — Order Extending Time to File
Petition for Writ of Certiorari .. D-1
Appendix E — US. Constitution, Article I, § 8,
Sl Sc eta as peer a vre tr eewee. E-|
iv
TABLE OF AUTHORITIES
Cases
PAGE
Arco Polymers, Inc. v. SGK, 555 F.Supp. $47 (E.D. Pa.
SD as actreiietand kee 8
Carbice Corp. of America v. American Patents
Development Corp., 283 U.S. 27, $1 S.Ct. 334, 75
iM EU CEMOAR wicca 0 an' &
Dairy Foods Inc. v. Dairy Maid Products Cooperative,
297 F.2d 805 (7th Cir. 1961) ..... 10
DeForest Radio Telephone & Telegraph Co. v. United
States, 273 U.S. 236, 47 S.Ct. 366, 71 L.Ed. 625
GIT las cieuNns Gey wot een kes 4, 14,15
RMU itn k a cece ncaa teeth es on 7
Erving Paper Mills v. Hudson Sharp Machine Co., 332
F.2d 674 (7th Cir. 1964), cert. denied, 379 U.S. 946
SUNN shatier Co ers ys ch abeecnedcealeie rasa bass neal
Cf. Gamewell Mfg., Inc., v. HVAC Supply, Inc., No.
82-1533, Slip Op. (4th Cir. Aug. 9, 1983) ........ 4
Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986 (9th Cir.
SUE aS evar ne rante tek ees cee utes asics me
Hazeltine Corp. v. Zenith Radio Corp., 100 F.2d 10
(7th Cir. 1938), cert. denied, 306 U.S. 656 (1939) ...12,13
Kahn v. Dynamics Corp. of America, 508 F.2d 939 (2d
Cir. 1974), cert. denied, 421 U.S. 930 (1975) ....... 10
Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th
Cir. 1952), cert. denied, 344 U.S. 837 (1952) . Pic, ae
Leitch Mfg. Co. v. Barber Co., 302 U.S. 458, 58 S.Ct.
PP ee Eee BE CUR Sa tn cond than cwce ce awcyes 9
Mercoid Corp. v. Mid-Continent Investment Co., 320
U.S. 661, 64 S.Ct. 268, 88 L.Ed. 376 (1944) ........ 9
Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 62
AA, ay OP Rede DUO CEMERD vc gc vehi ccewaelcwas ss 9
PAGE
Precision Instrument Mfg. Co. v. Automotive Co., 324
U.S. 806, 65 S.Ct. 993, 89 L.Ed. 1381 (1945) ....... 10
Raytheon Mfg. Co. v. Radio Corporation of America,
oe re i)
Searle Analytic, Inc. v. Ohio-Nuclear, Inc., 398 F.Supp.
a an GRO te on et eae 14
SGK v. Dart Industries, Inc., 549 F Supp. 716 (D. Del.
SO as aks airs a ok Waren Sols we as RON Dalen a ae eed 8
SGK v. Eastman Kodak, ©o., 450 F.Supp. 1211 (E.D.
Tex. 1977), aff'd in part, rev'd in part, 616 F.2d 1315
(Sth Cir. 1980), cert. denied, 449 U.S. 1014 (1980) .. 8
Shatterproof Glass Corp. v. Libby-Owens-Ford Co.,
482 F.2d 317 (6th Cir. 1973), cert. denied,
415 US. 918 (1974) .. 3,4, 5,6, 7, 11, 12, 13, 14, 15, 16, 17
Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173,
i im Bp og Oe ee) Py” + en 4
Unarco Indus. Inc. v. Kelley Co., 465 F.2d 1303 (7th
nk Re er erp eee eee <
United States v. Hayes, 369 F.2d 671 (9th Cir. 1966) .. 16
Lnited States v. Line Materia! Co., 333 U.S. 287, 68
a ee ee es Pe CUI 5. cw ov oe wen ae cpebees 4
Lnited States v. New York, New Haven & Hartford
R.R., 355 U.S. 253, 78 S.Ct. 212, 2 L.Ed.2d 247
SP a eS SS ree me Rides, SN, Seen eernne Ean 16
Universal Oi] Products Co. v. Vickers Petroleum Co., 41
es ae OP ae PAT AUUUOT «oc cv at vliodecdwachasks 14
USM Corp. v. SPS Technologies, Inc., 694 F.2d 505
I rd eg a a 4
Walker Process Equipment, Inc. v. Food Machinery and
Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15
UY MUIR Avs clan chase ahaddancauseweeces 9,10
vi
Constitutional and Statutory Provisions
United States Constitution, Art. I, § 8, Cl. 8
28 U.S.C.
§ 1254/1)
§ 1332(2) ..
35, U.S.C.
7
Treatises
Eckstrom, Licensing in Foreign and Domestic
Operations, Vol. 1, (1982)
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a
IN THE
Supreme Court of the United States
OCTOBER TERM 1983
NOVAMONT CORPORATION nna. U.S.S. NOVAMONT
INCORPORATED,
Petitioner,
Vv.
STUDIENGESELLSCHAFT KOHLE m.b.H.,
Respondent.
PETITION FOR WRIT OF CERTIORARI
Petitioner respectfully prays that a Writ of Certiorari issue to
review the judgment and opinion of the United States Court of
Appeals for the Second Circuit (Court of Appeals) entered in
the above entitled case on March 28, 1983.
Opinions Below
The Opinion of the Court of Appeals rendered March 28,
1983 is reported at 704 F.2d 48 (2d Cir. 1983) [Appendix A
hereto, (cited herein as “Pet. App. Al"’)]. The Opinion of the
United States District Court for the Southern District of New
York entered June 30, 1981 is reported at 518 F.Supp. 557
(S.D.N.Y. 1981) [Appendix B hereto (cited herein as “Pet. App.
Bi")}.
2
Jurisdiction
After the Judgment of the Court of Appeals was entered, a
petition for rehearing with a suggestion for rehearing en banc
was timely filed on April 11, 1983. The petition for rehearing
was denied by an Order dated May 12, 1983 [Appendix C
hereto (Pet. App. C1)]. An application for extension of time in
which to file this petition for writ of certiorari was filed within
ninety days thereafter on August 8, 1983, and an Order
Extending Time to File Petition for Writ of Certiorari to
September 1, 1983 was entered August 9, 1983 by Justice
Thurgood Marshall [Appendix D hereto (Pet. App. D1)]. The
jurisdiction of this Supreme Court is invoked pursuant to 28
U.S.C. § 1254(1).
Constitutional and Statutory Provisions Involved
This case involves Article I, § 8, Cl. 8 of the United States
Constitution, [Appendix E hereto (Pet. App. El)] and Title 35,
U.S.C. § 1, et. seq.
Statement of the Case
The federal jurisdiction of the United States District Court
was invoked by Respondent Studiengesellschaft Kohle m.b.H.
(SGK), a West German corporation against Petitioner
Novamont Corporation (Novamont), now a Division of United
States Steel Corporation (Novamont) under 28 U.S.C.
§ 1332(2). United States Patent No. 3,113,115 (“°115"), which
has been assigned to SGK, relates to a certain polymerization
catalyst used for making polymerized chemicals such as
polypropylene commonly called “plastics.” The ‘115 patent,
which expired in 1980, was licensed by a number of United
States companies. Petitioner was one of the licensees under that
patent. At the time Petitioner entered into the license, Dr. Karl
Ziegler of West Germany was the owner of the ‘115 patent
although at the time the litigation was instituted the title of the
‘115 patent had been assigned to Respondent SGK.
3
The patent license agreement entered into with respect to the
“115 patent was effective January 1, 1967 and it included as
Article IX a most favored licensee clause (“MFL”) which reads
as follows:
“A. 1) Should Licensor, during the life of this Agreement,
grant to any company producing Agreement Polymers in
the United States a license under United States patent
3,113,115 which license contains royalty provisions that,
when considered in their entirety, are more favorable than
those specified in Article III hereof, then avd in that event
Licensor shall promptly furnish Licensee with the full text
of the royalty provisions of such license.” (Emphasis
added.)
On July |, 1970, Ziegler entered into a license agreement with
Diamond Shamrock Corporation (Diamond) granting Diamond
terms which were more favorable than those granted to
Novamont. The District Court found that Ziegler “concealed
from Novamont the additive credit features of his 1970 contin-
gent agreement and final 1974 settlement agreement with
Diamond Shamrock”, 518 F.Supp. 570.* The concealed terms of
the Ziegler/Diamond agreement stated that Diamond was to
pay $750,000 to Ziegler for past infringement, but such amount
was to be credited towards royalty payments due under the
license for the future use of the patent. Both the District Court
and the Court of Appeals excused such concealment by Ziegler
as a matter of law because the payment was for past infringe-
ment in settlement of infringement claims — despite the fact
that future royalty rates were materially affected by the deduc-
tion. The District Court did not cite Shatterproof Glass Corp. v.
Libby-Owens-Ford Co., 482 F.2d 317 (6th Cir. 1973), cert.
denied, 415 U.S. 918 (1974). While the Court of Appeals cited
* Petitioner entered into a new agreement with SGK on July |,
1974 which reactivated the 1967 Agreement without knowledge of
the secret Ziegler/Diamond agreement to deduct the $750,000
(denominated as past infringement) from future royalties, and
with incomplete information as to the Ziegler/ Hercules license.
4
Shatterproof in Footnote $ (Pet. App. A-6), it refused to follow
the holding of the Sixth Circuit which required consideration of
all royalty provisions in a later license in evaluating whether
such provisions were more favorable than those granted the first
licensee.
Promptly upon learning of the concealed Ziegler / Diamond
agreement, Novamont gave written notice to substitute the
terms of the Diamond license on August 26, 1977.
This case does not involve an interpretation of provisions of
the patent license agreements since the Second Circuit found the
terms clear. As a matter of law, however, it refused to give them
effect in conformance with the Shatterproof holding. What this
case involves is the question of whether, as a matter of sound
public policy, a patent owner should be required to disclose al!
royalty provisions to a “most favored licensee” holder so that
such holder has an opportunity to accept such later licenses or
the patent owner should be held to have breached its duty of
candor and honesty relating to the use of patent rights. We are
here concerned with the specific policy of the patent law dealing
with federal patent rights and therefore, the legal relations
which they affect must be deemed governed by federal law hav-
ing its source in the patent statutes, 35 U.S. | et. seq., and the
US. Constitution. Unarco Indus. Inc. v. Kelley Co., 465 F.2d
1303, 1306 (7th Cir. 1972) following Sola Electric Co. v. Jeffer-
son Electric Co., 317 U.S. 173, 176, 63 S.Ct. 172, 87 L.Ed. 165
(1942). Cf. Gamewell Mfg. Inc. v. HVAC Supply, Inc., No. 82-
1533, Slip. op. (4th Cir.Aug. 9, 1983). This case also involves a
conflict between the law set fourth by the Court of Appeals below
and the law as set forth by the Sixth Circuit in the Shatterproof
Glass case, cited supra, and also in DeForest Radio Telephone
& Telegraph Co. v. United States, 273 US. 236, 47 S.Ct. 366,
71 L.Ed. 625 (1927), which was relied upon by the Shatterproof
court.*
* Although the new Court of Appeals for the Federal Circuit
(CAFC) has jurisdiction over patent infringement actions arising
"A
Under the letter agreement between Ziegler ani Diamond
found by the District Court to have been kept secret or con-
cealed (518 F.Supp 570), the $750,000 payment for “past
infringement” was treated as if it were a down payment on
future royalties due under ine license so that, in reality, the
$750,000 was a deduction from royalties Diamond had to pay
for the future operation under the license The refusal of the
Court of Appeals to consider the effect of such royalty deduction
as required by Shatterproof resulted in Petitioner having a less
favorable license in the amount of the $750,000. Moreover, the
Court of Appeals’ refusal and its condonement of Ziegler’s con-
cealment of facts encourages licensees to conceal more favorable
license terms from licensees in the enforcement of rights
governed by the Constitution and the federal patent statute, 35
U.S.C. 1, et. seq.
The Diamond concealment was not SGK’s only concealment.
A second license was entered into between Ziegler and Hercules
Corporation on April 26, 1972. As recognized by both the Dis-
trict Court (Pet. App. B-21), and the Court of Appeals (Pet.
App. A-15), although Ziegler’s attorney disclosed the total
royalty provided in the agreement, the “full text” of the
Ziegler/Hercules agreement was not furnished as required by
the Novamont MFL clause. Specifically concealed was a 20%
contingency discount (Pet. App. B-21) and a June 21 telex
which acknowledged a “further admitted discount to Hercules”.
When SGK’s attorney asked SGK if he should furnish
Novamont with a copy of the Hercules agreement, SGK bla-
tantly instructed him, “Do not forward Hercules agreement
because we do not want discount in a further paid-up license”.
in whole or in part under 28 U.S.C. §1338, as provided for in 28
U.S.C. $1295, the conflict between the circuits here presented will
not likely be presented to the CAFC because the rights involved
here do not come within that court's jurisdiction under the above
statutes, nor can it be demonimated a pendent claim of unfair
competition under §$1338(b). Therefore, if this Court does not
resolve the conflict between circuits, it will continue to foment
unnecessary litigation.
6
Thus, Ziegler again breached the MFL clause agreement with
Novamont by concealing the true picture of the royalty arrange-
ment between Ziegler and Hercules. Further, the Hercules
license was clearly more favorable than Petitioner's license
because Hercules was given the privilege of a paid-up license
based on its choice of plant capacity. Petitioner was not given an
Opportunity to accept such a privilege. Since Petitioner's plant
had a much lower capacity than Hercules, a lump sum royalty to
Petitioner calculated on the same basis as that of Hercules
would have been a great deal less.
Because the roy@lty in the Ziegler/Hercules 1972 agreement
was a-lump sum royalty rather than the running royalty of the
Ziegler /Novamont agreement, the Court of Appeals declined to
consider whether the different format of the royalties paid by
Hercules gave Hercules more favorable terms. The court was
obligated to make this judgment based on its judicial respon-
sibility and elemental rules of fairness. Moreover, its refusal to
do so was contrary to the holding in a like situation in Shatter-
proof Glass Corp. v. Libby-Owens-Ford Co., 482 F.2d 317, 324
(6th Cir. 1973), cert. denied, 415 U.S. 918 (1974).
Petitioner entered into its agreement with SGK on July 1.
1974 without knowledge of the secret Ziegler/Diamond agree-
ment to deduct the $750,000 from future royalties, and with
incomplete information as to the Ziegler/Hercules license.
Not only did the court below ignore the improper concealment
by Ziegler (SGK), but the Court of Appeals placed on Petitioner
the burden of proving that the terms of the Ziegler/Diamond
license and the Ziegler/Hercules license were more favorable
than the terms of the Ziegler/Novamont license, even though
Novamont had shown a breach of the contract by Ziegler’s pur-
poseful concealment of the full text and total royalty informa-
tion with respect to the two licenses and even though SGK was
in the better position to evaluate the comparability of the royalty
provisions. At the very least, the burden of proof should have
shifted to Ziegler upon the showing of the breach by Ziegler as
-
held in Shatterproof Glass Corp. v. Libby-Owens-Ford Co., 482
F.2d 317, 324 (6th Cir. 1973), cert. denied, 415 US. 918
(1974).
REASONS FOR GRANTING THE WRIT
1. This Court Has Not Settled the Question of Whether a
Patent Owner Can Misuse Its Patent Rights by Concealing
From a Licensee Unequal Provisions in Subsequent
Licenses Granted to Competitors of a Licensee Who Has
Bargained For “Most Favored Licensee” Treatment
A. The Importance of the Question
Virtually every patent license has a “most favored nations” or
“most favored licensee” clause. Such clauses are also common in
other contracts, including government consent decrees which
often include MFL provisions to restore competition. See, for
example, the facts in Shatterproof. The purpose of these clauses
is to provide equal royalty terms between licensees so that each
party who takes a license from a patent owner will be able to
compete in the marketplace with its competitors on an equal
basis insofar as the licensed cost for the patented product or
process is concerned.
Patent licensing is the backbone of the patent system as well
as a major contributor to international trade and the transfer of
technology by U.S. companies. Patents are most often used com-
mercially through the granting of exclusive and non-exclusive
licenses. This is particu.arly true with respect t. & patent such as
the one involved in this case, which involved a process for
polypropylene manufacture by a number of major companies in
the United States and other parts of the world.* So far as Peti-
tioner has been able to determine, no published official data is
* The litigation involving the Ziegler patent 3,113,115 has been
extensive; it includes the following cases: Eastman Kodak Co. v.
SGK, 392 F.Supp. 1152 (D. Del. 1975); SGK v. Eastman Kodak
Co., 450 F.Supp. 1211 (E.D. Tex. 1977), affd in part, rev'd in
part, 616 F.2d 1315 (Sth Cir. 1980), cert. denied, 449 U.S. 1014
(1980); SGK v. Dart Industries, Inc., 549 F.Supp. 716 (D. Del.
8
available on the number of patent licenses which are in effect
annually in the United States, or the total dollars involved in
such licenses, but based upon published information which has
become available to the Petitioner through the Licensing Execu-
tive Society (LES) and publications such as “Licensing in
Foreign and Domestic Operations” by Eckstrom, Vol. 1, pp.
163-165 (1982), it is estimated that royalties involved in domes-
tic and international business of United States parties on an
annual basis are in the neighborhood of several! billion dollars.
When patent licensees who have most favored licensee clauses
are deprived of the necessary information to evaluate whether
the terms in later licenses are more favorable, expensive con-
troversy and litigation results, causing a further increase in the
workload of the courts. Exercise of this Court's power of supervi-
sion to prevent concealment of such patent license information
would go far in reducing controversy and litigation and in
promoting fair dealing among patent owners and licensees. Fair
dealing requires full disclosure.
B. Although the Misuse of Patents Has Been Consistently
Condemned by This Court in a Variety of Circumstances,
the Misuse Resulting From a Patent Owner's Concealment
of Information Between Licensees Where Disclosure is
Required by a Most Favored Licensee Clause Has Not
Been Settled by This Court.
This Court has consistently condemned misuse of patents by
restrictive licensing practices and failures to disclose critical
information to the Patent and Tradmark Office. Carbice Corp.
of America v. American Patents Development Corp., 283 US.
27, 51 S.Ct. 334, 75 L.Ed. 819 (1931); Leitch Mfg. Co. v.
Barber Co., 302 U.S. 458, 58 S.Ct. 288, 82 L.Ed. 371 (1938);
Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 62 S.Ct.
402, 86 L.Ed. 363 (1942); Mercoid Corp. v. Mid-Continent
1982); Arco Polymers, Inc. v. SGK, $55 F.Supp. 547 (E.D. Pa.
1982).
9
Investment Co.. 320 US. 661, 64 S.Ct. 268, 88 L.Ed. 376
(1944): Walker Process Equipment, Inc. y. Food Machinery
and Chemical Corp., 382 US. 172, 86 S.Ct. 347. 15 L.Ed.2d
247 (1965). The Public policy behind the “misuse” doctrine is to
Prevent anticompetitive Practices by the patent owner's abuse of
the patent grant, USM Corp. y. SPS Technologies, Inc., 694
F.2d $05, $11 (7th Cir. 1982). This is such a case.
of the royalty terms in the Ziegler/Diamond license (518
F.Supp. 570), Although such concealment was not Characterized
by the parties or the courts below as a “misuse” of Patent rights
by the patent Owner, a concealment of information by a patent
nitely a detriment to the Petitioner in this case. Rather, the issue
is whether there js a patent misuse when a Patent Owner inten-
tionally fails in its duty of candor and honesty in dealing with
Patent rights and their licensing.
Patent rights are granted under the Constitution. As this
Court has stated in a number of prior decisions: “The patent is a
Privilege... . which is conditioned by a public Purpose.”’ Mer-
coid Corp. y. Mid-Continent Investment Co.. 320 U.S. 661, 64
10
action is contrary to the public interest and basic elements of fair
play.
C. The Obligation of Full Disclosure in Dealing With Issued
Patents is Analogous to the Equitable Doctrine of Candor
and Honesty in Obtaining Patents from the United States
Patent and Trademark Office.
This Court held in Precision Instrument Mfg. Co. v. Automo-
tive Co., 324 U.S. 806, 65 S.Ct. 993, 89 L.Ed. 1381 (1945), and
restated it in Walker Process Equipment, Inc. v. Food
Machinery and Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15
L.Ed.2d 247 (1965), that a patentee has an obligation of full
disclosure, candor and honesty in dealing with the United States
Patent and Trademark Office in initially obtaining patents.
“Those who have applications pending with the Patent
Office or who are parties to Patent Office proceedings have
an uncompromising duty to report to it all facts concerning
possible fraud or inequitableness underlying the applica-
tions in issue.”
By analogy, public policy and public interest require the same
type of candor and honesty by a patent owner in the use of the
patent rights. For example, where patent owners have sought to
enforce patents known to be invalid, the courts have condemned
it. See, Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th
Cir. 1952), cert. denied, 344 U.S. 837 (1952); Dairy Foods Inc.
v. Dairy Maid Products Cooperative, 297 F.2d 805 (7th Cir.
1961); Kahn v. Dynamics Corp. of America, 508 F.2d 939 (2d
Cir. 1974), cert. denied, 421 U.S. 930 (1975); Handgards, Inc.
v. Ethicon, Inc., 601 F.2d 986 (9th Cir. 1979). When the patent
owner knowingly conceals vital information from its licensee as
Ziegler and SGK did here, the patent owner fails in its obliga-
tion of candor and honesty in the use of the patent. In view of the
public interest in patents, and their proper use, should there be
any lesser standard of candor and honesty for a patent owner in
dealing with the patent rights after the patent has been granted
than this Court requires of the patent owner when obtaining the
patent? Certainly, the answer is NO, and most especially when
the duty of candor is a matter of public interest such as consider-
ation bargained for by the patent licensee and which provides
competitive cost equality among licensees.
2. The Court of Appeals Improperly Refused to Resolve Dis-
puted Royalty Provisions in the Patent License Agreements
Because “[T]hese Constructions Would Place the Court in a
Position of an Arbitrator.” Since the Fundamental Respon-
sibility of a Court Is to Resolve Disputes in a Manner Akin to
Arbitration, the Refusal by the Court of Appeals To Do So
Requires this Court’s Power of Supervision to Avoid Such a
Departure From the Accepted and Usual Course of Judicial
Proceedings.
When the Court of Appeals refused to resolve the
“Novamont-Ziegler-Hercules situation,” its astounding basis for
justifying such position was that working out the terms to
maintain competitive equality “would place the court in the posi-
tion of an arbitrator.” Since the usual and historical role of
courts is to resolve legal and factual disputes, the Court of
Appeals should have, at the very least, remanded the case to the
District Court for such a resolution — as the Sixth Circuit did in
Shatterproof. To do less is to leave the parties without an oppor-
tunity for judicial relief and to sterilize MFL provisions. Such
circumstances properly call into play this Court's power of
Supervision to prevent such a departure from the necessary and
usual role of judicial responsibility.
The Court of Appeals’ refusal is particularly egregious here
where the patent licensor intentionally concealed some of the
terms of later licenses from the MFL holder which created the
problem in the first instance. If the Court below had followed the
prophylactic rule that candor and good faith demanded that
SGK disclose all royalty related terms, then the judgment on
whether some terms in the later licenses were more favorable or
not would have rested with Petitioner and not the Court. Having
failed in its duty, SGK should not now be given the added help
of an injudicious determination by the Second Circuit that it will
12
not meet its responsibilities by deciding the disputed terms of the
various agreements or remanding the case for the District Court
to do so. Since this is what courts do everyday in determining the
respective rights of parties to a license where such licenses do not
cover every conceivable contingency, this restrictive view of a
court’s function leaves even the most prudent licensee at the
mercy of its non-disclosing licensor.
The refusal also is in conflict with the Sixth Circuit in Shar-
terproof. By the way of background, for example in the
Ziegler /Hercules agreement, lump sum payments were made to
Ziegler under that license by Hercules, the heaviest producer in
the industry. The total lump sum paid was $1,600,000 (Pet.
App. 88). Petitioner's license with Ziegler required a running
royalty payment on a percentage basis of the amount of
polypropylene sold by Petitioner. Because of such difference in
the type of royalty payments, the Court of Appeals below
declined to even consider what it derogated as “customizing.”
i.e. whether the lump sum to Hercules as the giant in the domes-
tic industry was more favorable than the running royalty of
Petitioner.
This is contrary to the 1974 Shatterproof opinion, although
supported to some extent by the older Seventh Circuit opinion in
Hazeltine Corp. v. Zenith Radio Corp., \00 F.2d 10 (7th Cir.
1938), cert. denied, 306 U.S. 656 (1939) which was relied upon
by the Court of Appeals below. Hazeltine held that:
“In view of the vital and significant differences between a
fixed sum per period rate of royalty and a percentage of
selling price rate of royalty we are of the opinion that the
two rates of royalty are substantially different types and
that there is no basis in fact for the conversion of a lump
sum rate of royalty into a rate of per cent of selling price
royalty. The former is a true alternative to the latter and
must be so treated in determining the rights of Hazeltine
and Zenith in respect to royalty provisions under the option
contract.” 100 F.2d at 18.
13
This holding — and its philosophy — is in direct conflict with
common sense and with the Shatterproof case. The latter
squarely held that even though the royalty arrangements are
different in the two license agreements the question to be
determined is whether one was more favorable than the other.
Shatterproof had this to say (p. 324):
“Thus, the consideration in each case was certainly differ-
ent. But the question tc be determined is whether one was
more favorable than the other. Only by a comparison of the
value of the consideration given in each instance can it be
determined whether Shatterproof is entitled to more
favorable rates.” (Emphasis added.)
It is clear that there is a conflict in the law applied by the
several Circuits that have considered this question. If the law set
forth in the Hazeltine case and by the Court of Appeals in this
case is followed, a patent owner can readily evade MFL clauses
merely by providing its licensees with different types of royalty
arrangements. Tolerating such a potential subterfuge by patent
owners is not good public policy. It should not be permitted by
this Court since it makes a travesty of an important type of
provision used to maintain competition in the marketplace.
3. The Court of Appeals’ Decision is in Conflict with the Deci-
sion Of the Sixth Circuit Court of Appeals on the Question of
Whether More Favorable Royalty Terms Based on Payments
for Past Infringement Must be Considered in Evaluating
Equality of Patent License Terms.
The District Court relied upon decisions in 9ne district court
case and in two state court cases in reaching its /egal conclusion
that MFL provisions do not apply to the settlement of infringe-
ment claims, 518 F.Supp. 570. The cases relied upon by the
District Court, Searle Analytic, Inc. v. Ohio-Nuclear, Inc., 398
F.Supp. 229 (N.D. Ill. 1975); Universal Oil Products Co. v.
Vickers Petroleum Co., 41 Del. 238, 19 A.2d 727 (1941):
Raytheon Mfg. Co. v. Radio Corporation of America, 286
Mass. 84, 190 N.E. 1 (1934) are weak support of an ill-con-
ceived position.
14
The District Court did not cite, and apparently did not con-
sider, the Sixth Circuit decision in Shatterproof Glass Corp. v.
Libby-Owens-Ford Co., 482 F.2d 317 (6th Cir. 1973), cert.
denied, 415 U.S. 918 (1974). The Court of Appeals considered
the Shatterproof case in a footnote (Pet. App. A-6) but rejected
the Sixth Circuit holding on the superficial basis of the “facts of
that case” without discussing any factual differences. Indeed, on
the threshold issue of a licensee's obligation, it cannot be distin-
guished. Moreover, if the Second Circuit's Position is allowed to
stand, it makes most favored nations clauses useless and makes a
mockery of the duty of fair and open dealing between licensors
and licensees — Particularly when a party bargained for such
treatment.
Although the facts in the Shatterproof case were not identical
to the facts in the present case, the facts are clearly comparable
on the issue of whether payments for past infringement should
be considered in evaluating the equality of terms with respect to
a most favored licensee clause. In the Shatterproof case, Ford
paid Libby-Owens-Ford (LOF) $400.000 for a release for
infringement prior to January 1, 1961 (482 F.2d 317. 319). The
Sixth Circuit, relying on the holding by this Court in DeForest
Radio Telephone & Telegraph Co. v. United States, 273 US.
236, 47 S.Ct. 366, 71 L.Ed. 625 (1927), concluded as a matter
of law that settlement by payment of just compensation for
previous use of the patent amounted to a license at more
favorable terms even though there was some difficulty in the
allocation of royalties among different patents. To hold
otherwise, in the court's judgment, would “make evasion of a
‘favored nations’ clause possible.” (p. 321). If the decision below
is also to stand, such evasion will not merely be possible, it will
be inevitable!
In the present case, contrary to the Court of Appeals’ attempt
to distinguish factually from Shatterproof, the facts here are
even more compelling in favor of Petitioner. As recognized by
the District Court, $18 F.Supp. 570, but ignored by the Court of
15
Appeals, the payment under the Ziegler/Diamond license for
past infringement was to be credited to the payment of royalties
due in the future. Thus, even any arguable distinctions between
royalties paid for past infringement or a future license do not
apply in this case. The Court of Appeals had no basis for failing
to carry out its judicial responsibility, which it did when it
refused to consider whether the payment of $750,000 by
Diamond to Ziegler should have been credited to Petitioner to
make the terms between the two licensees equal.
The DeForest case decided by this Court determined that pay-
ments for past infringement effectively constituted a license
under the patent. However, this Court has not settled the ques-
tion of important federal law which should be settled, namely,
whether all royalty payments including payments for past
infringement should, as a matter of law, be considered in evalu-
ating equality of royalty terms in different licenses. In view of
the conflict between the Court of Appeals for the Second Circuit
in this case and the Court of Appeals for the Sixth Circuit in the
Shatterproof case, that issue is in conflict. So long as that issue
remains unsettled, it will foster litigation among patent owners
and licensees and reduce the level of candor by parties on both
sides of the issue. Although the settlement of past infringement
is a desirable goal, the use of past infringement settlements by a
patent owner to evade a bargained-for commitment to equality
among licensees-competitors is bad public policy and should not
be the law of the land.
4. The Court of Appeals compounded the error of its departure
from the accepted and usual role of judicial responsibility in
not only refusing to resolve the issue of equal royalty treat-
ment, but also by placing the burden of proof as to the more
favorable terms on the MFL holder instead of on the patent
owner who granted the subsequent licenses.
As held by the Sixth Circuit in Shatterproof Glass Corp. v.
Libby-Owens-Ford Co., 482 F.2d 317, 324 (6th Cir. 1973), cert.
denied, 415 U.S. 918 (1974), the burden of proof is initially on
16
the licensee which has the most favored nations clause to show a
breach of the contract by the patent owner. Once that has been
shown, it would be an “unfair and unrealistic burden” to require
the licensee to prove that other licensees were given more
favorable royalty terms. As the Court there stated (p. 324):
“The ordinary rule, based on considerations of fairness,
does not place the burden upon a litigant of establishing
facts peculiarly within the knowledge of his adversary.”
United States v. New York, New Haven & Hartford R.R.,
355 U.S. 253, 256 n. §, 78 S.Ct. 212, 214, 2 L.Ed.2d 247
(1957); United States v. Hayes, 369 F.2d 671, 676 (9th Cir.
1966): Erving Paper Mills v. Hudson Sharp Machine Co.,
332 F.2d 674, 678 (7th Cir. 1964), cert. denied, 379 US.
946 (1964).
Under this rationale, after the licensee cart.ed its burden by
showing a breach, the Sixth Circuit placed the burden of proof
on the patent owner to show that the later licensee was not given
a license on more favorable terms than the first licensee.
In the present case, the Court of Appeals implicitly placed the
burden of proof on Petitioner to show that there was a breach
and that the later licenses were more favorable. Even with that
improperly placed burden, Petitioner satisfied the Court of
Appeals that the Ziegler/Diamond license was more favorable
than Petitioner's license, 704 F.2d 48, n.5, yet the court still
denied Novamont its requested relief. With respect to the
Ziegler / Hercules license, however, the District Court’s require-
ment that Petitioner Novamont had to show “by a preponder-
ance of the evidence” that the Hercules license had more
favorable terms, (Pet. App. B-38), was implicitly adopted by the
Court of Appeals when it held that such finding was not clearly
erroneous (Pet. App. A-19). Thus, the Court of Appeals for the
Second Circuit placed the burden of proof on Petitioner contrary
to the ordinary rule of fairness referred to and adopted by the
Sixth Circuit in its holding in the Shatterproof case in a similar
type of situation.
17
Conclusion
For each of the foregoing reasons, a Writ of Certiorari should
issue to review the judgment and opinion of the Second Circuit.
Respectfully submitted,
B. R. PRAVEL
PrRAVEL, GAMBRELL, HEWITT,
KirK & KIMBALL
1177 West Loop South
Suite 1010
Houston, Texas 77027
(713) 850-0909
Attorneys for Petitioner
Of Counsel:
Stuart C. GauL
WILLIAM L. KRAYER
JOHN R. PEGAN
600 Grant Street
Pittsburgh, Pennsylvania 15230
September 1, 1983
18
CERTIFICATE OF SERVICE
I hereby certify on this .... day of September, 1983, three
copies of this Petition for Writ of Certiorari were mailed, via
first class mail, postage prepaid, to Sprung, Horn, Kramer &
Woods, 600 Third Avenue, New York, New York 10016. |
further certify that all parties requiring to be served have been
served. This modified Petition has been submitted as a substitute
for the one filed with the Court on September 1, 1983.
James B. Gambrell
Attorney for Petitioner
APPENDIX A
STUDIENGESELLSCHAFT KOHLE m_.b.H..,
Plaintiff-A ppellee-Cross- Appellant,
V
NOVAMONT CORPORATION nna.,
U.S.S. Novamont Incorporated,
Defendant-Appellant-Cross- Appellee.
Nos. 397, 398, Dockets 82-7143, 82-7163.
United States Court of Appeals,
Second Circuit.
Argued Oct. 13, 1982.
Decided March 28, 1983.
Before MESKILL, PIERCE and FAIRCHILD®, Circuit
Judges.
FAIRCHILD, Circuit Judge.
These appeals involve the interpretation and application of a
“most favored licensee” (MFL) clause in a patent license agree-
ment. Studiengeselischaft Kohle m.b.H (SGK), the owner of the
patent, sued Novamont Corporation to recover royalties due
under a license agreement dated July 1, 1974. Novamont
counterclaimed, claiming breaches of the MFL clause in the
previous license agreement between the parties dated January 1,
1967, and fraud in the negotiation of the 1974 agreement. The
facts appear in detail in the opinion and findings of the district
court, Studiengesellschaft Kohle v. Novamont Corp., 518 F.
Supp. 557 (S.D.N.Y. 1981).
* Honorable Thomas E. Fairchild. United States Senior Circuit
Judge for the Seventh Circuit, sitting by designation.
‘Jurisdiction is founded on diversity. All parties appear to have
assumed that New York law controls substantive questions.
A-2
In the 1967 agreement, Ziegler, the origina! patentee. granted
Novamont a non-exclusive license to produce certain polymers
of propylene under United States Patent No. 3.113.115 (the
"115 patent). Thereafter Ziegler brought action charging Phil-
lips Petroleum Company with infringement. On June 23, 1971,
the district court found no infringement.* Presumably because of
the district court judgment, Novamont gave notice July 9. 1971
that it would discontinue payment of royalties. On March 24.
1972 Ziegler gave notice of cancellation of Novamont’s license.
On July 1. 1974, after decision on appeal reversing the district
court judgment, upholding the Validity of the patent, and finding
infringement, Novamtont and SGK, Ziegler’s successor, reached
agreement (see 518 F\Supp. at 568), creating the new license
agreement sued upon here by SGK and providing that the 1967
agreement would remain in full force and effect notwithstanding
notice of termination and that Novamont would pay al! past due
royalties under the 1967 agreement, with interest. See 518
F.Supp. at 568.
The district court concluded, 518 F.Supp. at 569, that the
1974 agreement restored the position of Novamont under the
1967 agreement and that it could enforce its MFL clause with
respect to events during its periods of alleged infringement. We
examine the interim events as consistently as possible with the
continued vitality of the 1967 agreement.
The 1967 MFL clause, Article IX, paragraph A.1, imposed a
duty upon Ziegler promptly to furnish Novamont with the full
text of the royalty provisions of any license granted by Ziegler
under the "115 patent if such royalty provisions, considered in
their entirety, are more favorable than those in the 1967
Novamont Agreement. Paragraph A.2 gave Novamont the right
“upon written request within ninety (90) days after receipt of
* Ziegler was successful on appeal in 1973. Ziegler v. Phillips
Petroleum Company, 483 F.2d 858 (Sth Cir.), cert. denied, 414
U.S. 1079, 94 S.Ct. $97, 38 L.Ed.2d 485 (1973).
A-3
the aforesaid full text of such other license from Licensor, to
substitute for the entirety of this Agreement all of the provisions
of such other license.”
On July 9, 1970 Ziegler granted a license to Diamond
Shamrock Chemical Company (Diamond). One of the principal
controversies upon appeal is whether a simultaneous, undis-
closed agreement between Ziegler and Diamond concerning past
infringement was required to be disclosed, and included in a
substitute agreement between Ziegler and Novamont if
Novamont so elected. A second, though minor, controversy is
whether another undisclosed agreement giving Diamond an
option to expand its license to include copolymers of propylene
was subject to similar requirements. A third controversy is
whether Novamont was and is entitled to the benefit of a provi-
sion for accrual of royalties similar to the accrual permitted to
Diamond in its 1970 agreement with Ziegler.
On April 26, 1972 Ziegler made a new agreement with
Hercules Powder Company, amending previous license agree-
ments and granting “a fully paid-up immunity from suit” until
the expiration of the ‘115 patent. A fourth controversy is
whether Novamont was entitled to a prepaid license computed
on a similar basis but tailored to a much smaller amount of
production.
Finally, Novamont asserts misrepresentation and nondis-
closure concerning these agreements with the other parties,
amounting to fraud.
|. The Undisclosed Agreement With Diamond Concerning
Past Infringement
Ziegler did not initiate disclosure to Novamont of the 1970
agreement with Diamond. Only in part were the royalty provi-
sions more favorable than Novamont's. The royalty rates in the
’ The full text of the MFL clause is set forth in 518 F.Supp. at 565.
A-4
Diamond agreement were lower than those in the 1967
Novamont agreement. On the other hand the Diamond agree-
ment required a $200,000 down payment. did not permit the
deduction of royalty payments to third parties, and granted no
right to suspend royalty payments if infringers were not
prosecuted.‘ In any event, Novamont learned about the Ziegler-
Diamond agreement, demanded to be informed, and Ziegler. on
October 30, 1970 supplied Novamont with the document which
granted the license to Diamond. Novamont did not request sub-
Stitution under paragraph 2 of the MFL clause. Ziegler also
disclosed a part of a separate letter, although it did not disclose
the paragraph which agreed that in the event of recovery by
Ziegler for Diamond's past infringement “such recovery shall
additively be credited to the down-payment made in accordance
with Paragraph III of the license agreement in the same manner
as if the same had initially constituted part of the down-payment
actually made, and shall be credited against royalties as pro-
vided in the license.” 518 F.Supp. at 566. Paragraph III(a)
required Diamond to pay $100,000 within 30 days, $50,000
more within one year, and $$0,000 more within two years. The
entire $200,000 was non-returnable except that it could be
credited against royalties up to $0% of the royalties in any one
year.
Novamont contends that the undisclosed 1970 paragraph was
a royalty provision because it should be viewed as providing for a
*‘ Because of our conclusion, consistent with that of the district court.
that Novamont was entitled by its MFL clause to the benefit of an
Accrual of Royalties provision similar to that contained in the 1970
Diamond licensing agreement, we conclude that the royalty provi-
sions of the Diamond agreement, considered in their entirety, are
more favorable than those in the 1967 Novamont agreement. It
follows that the MFL Clause required disclosure of the royalty
provisions even though some of the provisions were less favorable.
The same conclusion is implicit in the district court opinion previ-
ously cited, $18 F.Supp. at 571-572, and was made explicit in an
unpublished opinion denying SGK’s post-trial motions.
A-5
reduction in royalty. In any event, says Novamont, the undis-
closed paragraph must be deemed part of the licensing agree-
ment, and since the royalty provisions as a whole were more
favorable, the MFL clause entitled Novamont to an agreement
which included the undisclosed paragraph. Obviously the undis-
closed paragraph was not likely to be significant until the final
outcome of the Phillips litigation over the ‘115 patent, but on
May 6, 1974, after final decision in the Phillips case, Ziegler
released Diamond from liability for infringement before July 1,
1970 in return for a payment of $750,000, credited as agreed.
The terms of the 1974 settlement were not disclosed to
Novamont.
[1] It is clear that the terms of the undisclosed paragraph,
taken literally, could not have benefited Novamont because
Novamont had not then been an infringer. To be of benefit to
Novamont the MFL clause would have to be so broadly con-
strued as to call for modification in addition to substitution of
the terms of the new agreement. Novamont evidently reasons
that the MFL clause must be construed so as to entitle it to
enjoy a credit against royalties equivalent in substance to the
credit given Diamond for the sums paid for infringement.
Novamont argues that the equivalent credit would be the
amount paid by Diamond, $750,000, or at least the aggregate
royalty Novamont had paid during the period Diamond had
been infringing, some $465,000.
SGK contends that its agreement in 1970 to apply the amount
recovered for infringement to rovalties (as well as its acceptance
of $750,000 in settlement for infringement) relates to past
infringement, and is not a royalty provision of its new license
agreement. SGK emphasizes that it did not wholly forgive the
past infringement because the interest cost to Diamond of the
$750,000 advance payment was substantial (allegedly about
$354,000). But SGK contends that whatever discount it afforded
A-6
Diamond in the settlement of claims for infringement was irrele-
vant to the MFL clause.
The district court decided this issue in favor of SGK, cor-
rectly, we think.
Other cases have involved a similar tension between treatment
of an earlier licensee, who was entitled to the protection of an
MFL clause, and a competitor who takes a license later, after a
period of infringing activity. Arguably, parallel treatment would
require not only that royalty terms be the same from the grant of
the second license forward, but that the licensor must insist upon
an exaction from the later licensee for past infringement which
is equivalent to the royalty terms governing the earlier licensee
during the same period, or must make a refund to the earlier
licensee.
MFL clauses do not seem to have been drawn so as to compel
that degree of equivalency and the courts which have dealt with
the situation have declined to interpret the clauses with that
breadth. Raytheon Mfg. Co. v. Radio Corporation of America,
286 Mass. 84, 190 N.E. 1,5 (1934); Universal Oil Products Co.
vy. Vickers Petroleum Co., 41 Del. 238, 19 A.2d 727, 729 (1941)
Rothstein v. Atlanta Paper Co., 321 F.2d 90, 96 (Sth Cir.
1963); Searle Analytic, Inc. v. Ohio-Nuclear, Inc., 398 F.Supp.
229 (N.D.IIl. 1975).
The district court relied on these decisions, and we agree.
II. The Undisclosed Copolymer Option
[2] Simultaneously with the 1970 license agreement and the
undisclosed agreement concerning past infringement, Ziegler
*Novamont cites Shatterproof Glass Corp. v. Libbey-Owens-Ford
Co., 482 F.2d 317, 321 (6th Cir. 1973), cert. denied, 415 US. 918,
94 S.Ct. 1417, 39 L.Ed.2d 473 (1974). The court determined under
the particular facts of that case that the release from claims of past
infringement “was in effect a settlement by payment of just compen-
sation for previous use of the patent” and had the effect of a retroac-
tive license. We are not similarly persuaded here.
A-7
and Diamond made a separate Option Agreement. Diamond
paid $20,000 on execution of the Option Agreement. The agree-
ment gave Diamond the right upon payment of an additional
$30,000, to have the license amended to include manufacture,
use and sale of certain propylene copolymers, subject to the
same obligation to pay royalties. Both payments were non-
returnable except that they would be credited against royalties.
The Option Agreement was not disclosed to Novamont. The
option was never exercised by Diamond. Novamont already had
the right to produce the copolymers under its 1967 agreement.
Novamont devotes little of its appellate argument to its claim
that nondisclosure of the Option Agreement violated its MFL
clause. We think the district court correctly denied this claim.
518 F.Supp. at 569.
Ill. The 1970 Diamond Provision for Accrual of Royalties
The 1970 licensing agreement between Ziegler and Diamond
contained a paragraph entitled “Accrual of Royalties,” which
provides as follows:
Licensee may hold and accrue royalties without forward-
ing the same to Ziegler during any period during which
Ziegler is engaged in a suit for patent infringement involv-
ing the process utilized by Licensee and being defended by a
party under a contractual obligation to hold Licensee harm-
less. Licensee, however, shall continue to account to Ziegler
during such period of accrual and promptly upon termina-
tion of such suit shall pay accrued royalties to Ziegler, after
deduction of any applicable credits, if, as a result of such
suit, it is adjudged that Licensee's process infringes any
valid claim of a patent owned by Ziegler and litigated in
said suit, or if Licensee does not cancel this License as pro-
vided hereinafter. If, as a result of such suit, it is not
adjudged that Licensee's process infringes any valid claim
of a patent owned by Ziegler and litigated in said suit,
A-8
Licensee, may by written notice, advise Ziegler of cancella-
tion of this License. Upon such cancellation, Licensee shall
be subject to any action in law or for which would have
been or is available to Ziegler in absence of this License,
including action for past infringement during the period
that royalties were not paid. Licensee will have the benefits
of any settlement reached by and between Ziegler and any
third party contractually obligated to hold Licensee
harmless.
The first sentence causes the Accrual of Royalties provision to
apply to Diamond during the pendency of the Phillips litigation
because Phillips had agreed to hold Diamond harmless. If the
identical provision were included in a Novamont license, it
would not apply to and benefit Novamont. Hence SGK claims
that the Accrual of Royalties provision is irrelevant to the opera-
tion of Novamont’s MFL Clause.
[3] The district court reasoned, however, that giving literal
effect to the tailoring in this fashion of a beneficial royalty provi-
sion so that it would not benefit a licensee who is entitled to the
protection of an MFL clause would be an evasion of the inten-
tion of the parties to the clause. 518 F.Supp. at 571. We agree.
We note SGK’s argument that Diamond had little incentive to
take a license so long as it enjoyed the protection of the Phillips
hold-harmless agreement. SGK may well have been correct that
the Accrual of Royalties provision was necessary in order to
obtain Diamond’s agreement. That proposition, however, is
beside the point in determining the proper impact of the MFL
clause. It is likely to be generally true that a licensor’s grant of
more favorable terms is supported by a sound business reason,
but the benefit of more favorable terms is exactly what the per-
son whose license includes an MFL clause has bargained for and
to which he is entitled.
The purpose of the MFL clause was to protect Novamont
from a competitive disadvantage resulting from more favorable
A-9
terms granted to another licensee. Prestole Corporation Vv. Tin-
nerman Products, Inc., 27\ F.2d 146,152 (6th Cir. 1959). Lim-
itation to Diamond of the right to accrue and delay payment of
royalties during the infringement litigation would give Diamond
a competitive advantage over Novamont. The fact that Diamond
would have been held harmless if it continued to infringe rather
than take a license is not germane to any purpose of the MFL
clause. In a sense the limiting language helps identify the Philips
litigation as the suit the parties had in mind, but for any other
purpose the MFL clause requires the limiting language to be
disregarded. We think Novamont’s MFL clause entitled it to
substitute the entire Diamond license agreement, including a
right to accrue royalties under the provision, as long as the Phil-
lips litigation continued.
[4] We are more troubled, however, by Novamont's failure
to make a written request for substitution of all the provisions of
the Diamond license within ninety days after being supplied with
its provisions on October 30, 1970.
Novamont made no such written request until August 26,
1977, shortly before SGK brought this action for unpaid royal-
ties under the 1974 agreement. Novamont had then learned of
the undisclosed agreements and its counsel wrote SGK’s counsel
adopting the provisions of the Diamond license, including the
undisclosed agreements. Even in that letter there was no specific
reference to a claim that Novamont was entitled to enjoy the
benefit of the Accrual of Royalties provision.
The district court, however, found that at a meeting on
November 6, 1970, Ziegler’s representatives refused to grant
Novamont the right to accrue, rather than pay, the royalties due
during the period of the Phillips litigation. $18 F.Supp. at 566.
Addressing the point in an unpublished opinion on post-trial
motions, the court said, in part, “Novamont did attempt to
secure the right to accrue during its negotiations with Ziegler.
Based on the response it received during those negotiations,
A-10
Novamont could reasonably have concluded that the submission
of a formal written request would have been an exercise in
futility.”
For evidence on the point, the parties have cited two
memoranda from the Novamont side.
One refers to the November 6 conference. It lists provisions of
the Diamond agreement, some less favorable than Novamont's
existing license, and some more favorable, including “the right
not to pay” during the infringement litigation. The Novamont
position is stated: “*Novamont wants a new agreement assuring it
some benefits comparable to those given by the new
Ziegler/Diamond Agreement.” The Ziegler position is stated:
“Prof. Ziegler’s representatives contested such a right of
Novamont. They were willing to allow Novamont to get the
lower rates existing in the Diamond Agreement, but with the
obligation to continue royalty payments.”
The second memorandum is dated November 13, 1970 and
appears to be a report on a “recent conference.” It contains a
reference to the provision for accrual: “The present contract
offered to Diamond is tailored to Diamond, since it provides that
there will be no payments as long as there is another company,
holding the licensee harmless. The attitude of the Germans
seemed inflexible.”
The proof is less than clear that Novamont offered to take all
the other provisions of the Diamond agreement, favorable and
unfavorable, if it could have the accrual right. Nevertheless, we
might well consider the district court finding not clearly errone-
ous if the matter stopped there.
There is, however, a further question whether Novamont’'s
claim to be entitled to the Diamond license provisions, including
A-11
accrual, survived the July |, 1974 agreement between Novamont
and Ziegler. We conclude that it did not."
SGK claimed that the July 1, 1974 agreement constituted an
accord and satisfaction. In the unpublished opinion on post-trial
motions, the district court stated that SGK had not carried its
burden. “There is no evidence in the record of any express state-
ment by either of the parties, either during the negotiations lead-
ing up to the 1974 agreement, at the time it was entered into, or
in the agreement itself, that the agreement was intended to con-
stitute an accord and satisfaction.”
The agreement, 518 F.Supp. at 568, did provide that it was
made “in order to settle the differences between the parties.” It
ig true that in its recitation of disagreements there was no men-
tion of dispute over Novamont’s right to substitute the provisions
of the 1970 Diamond license. It did provide that the 1967
Novamont Agreement “remains in full force and effect’ and
that Novamont shall immediately account for and pay, with 10%
interest, all past due royalties under the 1967 agreement. These
agreements are flatly inconsistent with any claim that
Novamont’s royalty obligations were governed by the Diamond
Agreement. The agreement to pay interest was completely at
war with any application to Novamont of the accrual provisions.
In our view the parties’ intent to merge those claims in the settle-
ment was so clear that some express reservation of them would
have been necessary to avoid that result.
*SGK contends that because the counterclaim was filed October 24,
1977, the claim for the benefit of the Accrual provision was in any
event barred by the six year statute of limitations. Novamont asserts
that certain events tolled the running of the statute. The district
court was under the impression that although SGK had pleaded the
statute of limitations, SGK had abandoned that defense “in its pre-
trial order’ On appeal SGK cites language from the order which
appears to preserve all issues raised by the pleadings, and Novamont
has cited no provision indicating abandonment. In view of our dis-
position of this claim, we do not reach the limitations issue.
A-12
The district court erred in awarding an offset to Novamont
based on the accrual provisions.
IV. The 1972 Hercules Pre-Paid License
Ziegler had licensed Hercules in 1954, and their agreement
had been amended in 1962 and 1964. 518 F.Supp. at 562. It
provided for “running” royalties as did Novamont’s, i.e., rates
applied to amounts of sales. The Hercules rates were somewhat
lower than Novamont’'s, but this was irrelevant with respect to
Novamont’s MFL clause because the Hercules license existed
before the 1967 Novamont license, and the MFL clause applied
only to licenses granted during the life of the agreement.
As already noted there came to be alleged infringement of the
"11S patent by Phillips and others. On that account Hercules
suspended royalty payments as of April 30, 1970. It claimed the
right to do so under a provision of its license.
On April 26, 1972, Ziegler and Hercules reached a new agree-
ment, 518 F.Supp. at 563. Paragraph 5 granted Hercules a
“fully paid-up immunity from suit until December 3, 1980.” The
“immunity from suit” has been treated as the equivalent of a
license extending to the expiration of the ‘115 patent. The
license was pre-paid for a quantity of 600 million pounds per
year sales, and a 1% royalty was to be paid on any excess. Other
provisions required Hercules to make immediate non-refundable
payments totalling $800,000, and an additional payment of
$800,000, with interest from May 1, 1972, contingent upon a
favorable decision on the validity of the "115 patent in the Phil-
lips \itigation.
Literally Paragraph | called for immediate payment of
$770,000 in settlement of unpaid royalties from April 1, 1970
through 1972. Paragraph 2 called for immediate payment of
$30,000 plus the contingent $800,000 for immunity from suit
after 1972. The district court found, however, that the division
was artificial, made for the tax purposes of Hercules and did not
A-13
represent the actual agreement. “The actual agreement called
for a full $1.6 million down-payment in the event that Ziegler
was successful in the Phillips action, which dow n-payment was
entirely directed toward future production, rather than partially
directed toward past infringement.” 518 F.Supp. at 572.
On appeal, Novamont contends that the $770.000 represented
a total of Hercules’ suspended royalties from April 1, 1970 to
December 31, 1971, plus the then present value of Hercules’
expected royalty for the year 1972, rounded off by a discount of
.22%, and that the $830,000 represented the then present value
of Hercules’ expected royalty for the years 1973 through 1980,
but reduced by a very substantial discount of $5.71 %.
Novamont argues that its MFL clause entitled it in 1972 to a
prepaid license covering its desired production of 160 million
pounds per year. The lump sum pre-paying 1972 to 1980 would
be computed by employing Novamont'’s (or as it Says,
Diamond's) royalty rates, sales of 160 million pounds each year,
and the same discounts used in the Hercules computation.
Unpaid royalties since 1971 would be treated in a similar man-
ner to Hercules’ suspended royalties. Presumably the total lump
sum would have been divided into a required payment and a
contingent payment, although by hindsight we know that the
contingency was fulfilled. In other words, Novamont contends its
MFL clause gave it the right to a “customized” prepaid license,
with a lump sum royalty equivalent to the Hercules lump sum
royalty, except for the difference in production. It now claims to
be entitled to an adjustment which would put it in the same
position as if it had made an agreement on that basis in 1972.
Ziegler points out that Novamont pursued a different theory
at trial, and did not urge the significance of the $770,000 figure
in Paragraph | of the Hercules agreement. Indeed Novamont
Proposed a finding, similar to the district court's, that the
“$770,000 was, for tax purposes, attributed to payment of royal-
ties from April |, 1970 to December 31, 1972.” In its amended
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complaint, Novamont had alleged that the Hercules agreement
was a paid-up license for $1.6 million. Unlike the district court
findings, and unlike its present theory, it proposed a finding that
the $1.6 million lump-sum represented 78% of Hercules’ sus-
pended royalties, plus approximately 75% of the projected royal-
ties through 1977, according Hercules free royalty for the last
three years of the life of the patent.
As we understand the SGK version, it was that Hercules
prepared a projection of sales, based on plant expansion and
increased production. Price trends were projected. There was a
reduction of approximately 20% for contingencies in the course
of planned plant expansion. If and when sales exceeded 600 mil-
lion pounds in any year, royalty on the excess would be 1%. The
$1.6 million represented the 1972 present value of royalties at
the previous Hercules rate on the estimated future sales up to
600 million pounds per year.
[5] The district court found that Novamont failed to estab-
lish that a three year forgiveness was embodied in the agreement
or that a method was used to reach the Hercules agreement
different from that used in an offer made to Novamont. $18
F.Supp. at 574. If essential for the purpose of this decision, we
are unable to say that the finding is clearly erroneous.
We conclude, however, that Novamont’s MFL clause did not
entitle Novamont to this analysis.
If we assume Novamont was right in either the analysis on
which it proceeded at trial, or the one which it argues here,
Novamont’s position would rest upon an untenably broad con-
struction of its MFL clause, albeit a construction which the dis-
trict court seemed willing to entertain. $18 F.Supp. at 573-574.
Moreover on the facts before us Novamont’s success would
require a retrospective hypothetical reconstruction which
presents serious difficulties. At the time of the 1972 Hercules
agreement, Hercules had not been paying royalties for two
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years, claiming a contractual right to suspend because of
infringement by others. Hercules was willing to pay $800,000
down in order to secure a pre-paid license covering 600 million
pounds annually, promising an additional $800,000 if the Phil-
lips litigation turned out so as to sustain validity. Hercules did
not know what that outcome might be, but its willingness to pay
$800,000 down must have been affected by its judgment of the
probabilities in the Phillips case.
Novamont had not paid royalties for most of one year. Ziegler
had given notice of termination and viewed Novamont as an
infringer. Novamont did not desire a license covering more than
120 to 160 million pounds per year. Its assessment of the Phil-
lips probabilities would affect its willingness to accept particular
terms. There is nothing to show what terms it would have agreed
to, although we know it did not agree to a pre-paid license for
$1.6 million, one-half down and one-half contingent on a
favorable outcome in Phillips.
The unavoidable uncertainty as to Novamont’s assessment in
1972 of the Phillips outcome may itself be a reason for conclud-
ing, contrary to the district court, that in 1974 when the parties
used the language “remains in full force and effect and is
uncancelled™ they did not intend a reconstruction of their liabili-
ties as if the MFL clause had been in force and availed of at the
time of the 1972 Hercules agreement.
Assuming that they so intended, however, Paragraph | of the
MFL clause requires that licensor shall furnish the full text of
the royalty provisions of the second license. Under a natural
reading of the term “royalty provisions,” Paragraph | was sub-
stantially fulfilled when Ziegler informed Novamont that the
Hercules lump sum royalty for 600 million pounds a year was
$1.6 million, one-half payable immediately, and one-half on a
favorable Phillips decision on validity.
The natural reading of Paragraph 2 of the MFL Clause gave
Novamont the right, upon written request within ninety days, to
A-16
a pre-paid license for the same lump sum, and quantity similarly
payable. Under that reading Novamont’'s failure to make a
request ended the matter. Novamont would contend, however,
for a construction permitting it to take a pre-paid license for the
quantity of its choice based on such similar or comparable con-
siderations, components, and methods of computation so that the
royalty provisions could be deemed equally favorable. Presum-
ably there would be some difficulty in achieving equality. For
examply, it appears that one of the considerations in computing
the Hercules lump sum was an assessment of the probability that
it would achieve the production it planned. Although the license
authorized 600 million pounds annually the probability that
Hercules would reach that level may well have been different
from the probability that Novamont would reach the level it
chose.
The district court suggested that the term “all of the provi-
sions of such other license can mean “all of the provisions
pertaining to the method by which the lump-sum payment .. .
was calculated.” 518 F.Supp. 573. Really to complete the
thought, it would be necessary to construe Paragraph 2 so as to
entitle the Licensee to substitute for his license “all of the provi-
sions of such other license, including, where the other license is a
license for a specified quantity, to be prepaid by a lump sum, a
provision for a prepaid license for a quantity chosen by the
Licensee in return for a lump sum calculated by the methods by
which the lump sum was calculated for the quantity specified in
the other license.”
If “all of the provisions” in Paragraph 2 be so construed, it
would seem to follow that “royalty provisions” in Paragraph |
should be similarly construed, so that the licensor would have
been obligated to supply all the information concerning the
method of calculation. “Method” in each case would have to
include the assumptions to which the mathematical computa-
tions were applied.
A-17
With all respect, these construction seem overstrained.
Because of imponderables which seem to have been involved in
the Novamont-Ziegler-Hercules situation, and would frequently
be involved in working out terms which would maintain competi-
tive equality, these constructions would place the court in the
position of an arbitrator.
We are unaware of any New York decision to give us
guidance as to New York law on the point, and of a decision of
any court which would support this extent of departure from
ordinary meaning of the contract language. Moreover, the two
decisions which deal with somewhat related problems counsel
closer adherence to the ordinary meaning.
In Hazeltine Corporation v. Zenith Radio Corporation, 100
F.2d 10 (7th Cir. 1938), cert. denied, 306 U.S. 656, 59 S.Ct.
646, $3 L.Ed. 1054 (1939), Zenith was found to be entitled to a
standard license under which the royalty rate was 3% of selling
price of some items and |'2% of others. Alternatively each licen-
see could elect to pay $150,000 per year for an unlimited
volume. Zenith also had the benefit of what amounted to an
MFL agreement that “the rate of royalty specified in [its]
license shall be as low as the lowest rate of royalty specified in
any other license.” /d. at 12. Zenith contended that because a
large producer electing the lump sum royalty per year could
achieve a percentage rate per unit lower than the 3% or 1'2%,
the MFL agreement entitled Zenith to the lowest percentage
rate so achieved.
In deciding against Zenith on this claim, the court said:
In view of the vital and significant differences between a
fixed sum per period rate of royalty and a percentage of
selling price rate of royalty we are of the opinion that the
two rates of royalty are substantially different types and
that there is no basis in fact for the conversion of a lump
sum rate of royalty into a rate of per cent of selling price
royalty. The former is a true alternative to the latter and
A-18
must be so treated in determining the rights of Hazcltine
and Zenith in respect to royalty provisions under the option
contract.
100 F.2d at 18.
The shoe was on the other foot in Cardinal of Adrian, Inc. \
Amerock Corp., 208 U.S.P.Q. 822 (E.D.Mich.1979), atlirmed
by unpublished order, 698 F.2d 1218 (6th Cir. 1982). The licen-
sor granted a new licensee (Weiser) a pre-paid license (with no
limit on quantity) for $84,000. Amerock, an existing licensec.
sought a pre-paid license for $¥4.,000 under its MFL clause. The
licensor argued that Amerock produced a much larger quantity
and offered a license at Weiser’s effective rate per unit. Then
Chief District Judge Kennedy. now Circuit Judge. declined the
construction Cardinal wanted, converting. a pre-paid lump sum
royalty into an equivalent per unit royalty, saying that Weiser
had purchased the right to make as many units as it wanted, and
Amerock was entitled to the same right for the same lump sum
royalty.
It should be noted that the customizing contended for in those
cases would have required only a simple mathematical computa-
tion, and not the assumptions and estimates required here.
We decline to construe the MFL clause as entitling an MFL.
licensee to the type of customizing of the royalty provisions of
the second license sought by Novamont.”
"We are mindful of our holding that Novamont’s claim to substitu-
tion of Diamond's 1970 license provisions did not survive the 1974
Novamont/ Ziegler Agreement. Although the facts giving rise to
Novamont’s claim to provisions equivalent to the Hercules pre-paid
license also occurred before 1974, Novamont was allegedly unaware
in 1974 of some of the facts which were critical to its theory, and we
do not rest our decision with respect to the Hercules license on the
1974 Agreement.
V. Claims of Fraud
In part, Novamont bases its claim of fraud on Ziegler’s
nondisclosure of the paragraph of the 1970 letter to Diamond
promising that recovery for past infringement would be addi-
tively credited to the down payment under the 1970 Diamond
license: on nondisclosure of the 1970 copolymer option granted
to Diamond: and on several statements by Ziegler representa-
tives in 1971 which may have artfully led Novamont’s people to
believe that Ziegler would exact more substantial damages from
Diamond for past infringement than Ziegler truly did and that
there were no agreements with Diamond other than those dis-
closed to Novamont.
We have concluded, as did the district court, that Novamont’s
MFL clause did not entitle Novamont to information on these
subjects nor to the benefit of the undisclosed agreements. 518
F Supp. at $76-76. It follows that these nondisclosures and
allegedly misleading statements did not constitute fraud on
Novamont with respect to its enforcement of its MFL rights.
In further part, Novamont bases its claim of fraud on
Ziegler’s refusal to furnish the full text of the 1972 Hercules
agreement and on allegedly false representations on the dis-
counts allowed in arriving at the $1.6 million lump sum for the
Hercules pre-paid license. In particular the 20% so called contin-
gency discount was not disclosed. The district court found that
there was no misrepresentation in characterization of the lump
sum payment and that Novamont failed to establish knowing
misrepresentation of the manner of calculation of the lump sum.
518 F.Supp. at 575-76. We do not consider these findings clearly
erroneous.
In any event we have concluded that Novamont’s MFL clause
did not entitle Novamont to information as to the method of
calculation of the lump sum nor to the benefit of a customized
pre-paid license for a different quantity.
A-20
[6] Novamont appears to argue that, apart from any effect
on its MFL rights, the nondisclosures and alleged misrepresenta-
tions fraudulently induced Novamont to make the July 1, 1974
agreement with SGK on which this action was brought.
Novamont contends that the fraud provided a complete defense
and a basis for punitive damages.
The district court did not deal with this argument, either in its
published opinion after trial, $18 F.Supp. $57, nor in its unpub-
lished opinions on post-trial motions. In view of the care with
which the court dealt with the issues, this point may not have
been urged with much force.
Novamont and Ziegler carried on negotiations from time to
time from the fall of 1970 until July 1, 1974 after the appellate
decision in the Phillips case, when the existing agreement was
signed. Shortly before that, Novamont became aware of the full
text of the Hercules agreement, previously denied it.
We can understand that if Novamont had been aware of the
terms of the infringement settlement with Diamond, Novamont
would have included that treatment in its arguments during the
course of negotiations. In that general sense the information may
be considered materi-'.
Novamont has failed, however, to point out that the treatment
of Diamond or Hercules in these respects is material to any
provision of the 1974 agreement, or that Novamont relied to its
detriment on any misconception of these facts in making the
agreement.
Insofar as the judgment awarded Novamont damages on its
counterclaim and provided that each party shall bear its own
costs, it it reversed, and the cause remanded with directions to
restore the full award to plaintiff, without offset, and to recon-
sider the matter of costs in the light of the outcome of these
appeals. In all other respects, the judgment is affirmed. Plaintiff
shall recover its costs on appeal.
APPENDIX B
STLDIENGESELLSCHAFT KHOLE mbH.
Plaintiff,
\
NOV AMONT CORPORATION
Defendant,
V
MAX-PLANCK-INSTITUT FLR KOHLENFOR-
SCHUNG. Dr. Med. Marianne Witte and Dr. Erhart Ziegler,
heirs of Maria Ziegler, and Wilhelm Schmidtmann, Executor of
the Estate of Maria Ziegler, Additional Defendants on
Counterclaim.
No. 77 Civ. 4722 (RWS).
United States District Court.
S. D. New York.
June 30, 1981.
OPINION
SWEET, District Judge.
This is a diversity action brought by the plaintiff,
Studiengesellschaft Kohle m.b.H. (“SGK"), a West German
Corporation, against the defendant Novamont Corporation, a
Delaware Corporation, now known as U.S.S. Novamont, Inc.
(“Novamont”), for royalties allegedly due and unpaid since
March of 1977. These royalties are said to arise under a July |,
1974 agreement licensing certain propylene patent properties
owned by SGK, including U.S. Patent 3,113,115 (the “*‘115"
patent. Novamont counterclaimed for compensatory and puna-
tive damages arising out of the alleged breach by SGK of the
SGK in its complaint alleged violations of its ‘11$ patent without
identifying any particular plant where the violations were said to
occur. At the outset of the trial, the parties noted an additional
aspect to their dispute. SGK noted that all its discovery and pro-
= evidence related to the activities of Novamont at its Neal,
est Virginia, plant, and that certain information indicated the
B-2
most favored licensee clause (“the MFL clause”) of the
Novamont-SGK license agreements. A summary judgment
motion on behalf of SGK was denied, other pretrial proceedings
were had and the action was tried to the court on February |. 13,
17 and 20, 1981.’
Post trial briefs and proposed findings of fact and conclusions
of law were submitted on March 18, 1981, by skilled and learned
counsel for both parties who throughout these proceedings pro-
vided great assistance to the court in its exploration of the intri-
cacies of the licensing of a valuable and important patent. On
the basis of all these proceedings, as set forth below, | conclude
that SGK is entitled to judgment granting certain of the relief
which it seeks and dismissing all but one aspect of Novamont’s
counterclaims against the Max-Planck-Institute fur Kohlenfor-
schung (“MPI”) and Dr. Med. Marianne Witte and Dr. Erhart
Ziegler (“the heirs’) and Wilhelm Schmidtmann (“the
Executor’).
Findings of Fact
Background of the Patent, its Holders and its Licensing
Professor Karl Ziegler (“Ziegler”), who died in 1973, was an
organic chemist and served as the director of MPI in Mulheim,
Germany in the early 1950's. MPI is a world renown basic
possibility its patent might be infringed by the production of
Novamont's LaPort, Texas plant. The parties were unble to stipu-
late in advance as to the res judicata effect, or lack of it, of the
judgment to be entered on this opinion. No facts were adduced in
this action concerning the LaPort plant, the process used by
Novamont at that plant or the production figures resulting from that
process. This opinion therefore does not address such issues.
*An understanding concerning the admissibility of exhibits at the
time of trial dissolved in the period of post trial reflection.
ee $ motion to strike certain of SGK’s exhibits is resolved as
8:
SGK exhibits — 139, 188 — granted
SGK exhibits — 10, 61, 64, 66, 78, 80,81. 111. 117. 118, 121, 123,
131, 142, 144, 178, 186 and 188 — denied.
B-3
research and educational institute. At MPI, Ziegler, together
with Dr. Heinz Martin (“Dr. Martin”) and others, studied cut-
alytic reactions, several of which produced unexpected and
Meniticant results applicable to the production of Plustics and
synthetic rubbers. Ziegler patented certain of these Processes
Included among them was the process which received the 118
patent, which was held by Ziegler until his death in 1973. Mar-
tin, the present manager of SGK. who testified on its behalf
during the trial, also had an interest in the patents, including the
11S
SGK is the present licensor and titleholder of the 115 patent,
which it holds in trust for counterclaim defendant MPI SGK’s
Principal function is and has been to license patent properties
and collect royalties for MPI. SGK took title to the patent
Properties and all rights and obligations thereunder. including
those embodied in license agreements, by trust agreement dated
October 4, 1973, from the former counterclaim defendant,
Maria Ziegler, the wife of Professor Zicgler.
Maria Ziegler, as sole heir and executrix of Zicgler’s estate,
took title to the patent properties by inheritance upon her hus-
band’s death. Both Zicgler and his wife, who died during the
pendency of this action, were citizens and residents of West
Germany. By memo endorsement dated July 1S, 1980, the Court
substituted Dr. Med. Marianne Witte, Dr. Erhart Ziegler, and
Mr. Wilhelm Schmidtmann, all citizens and residents of West
Germany, as defendants on the counterclaim for Maria Ziegler.
Drs. Witte and Ziegler are the surviving children of the Zieglers,
and sole heirs under a contract of inheritance left by Mrs.
Ziegler. Mr. Schmidtmann is the duly appointed executor of
Mrs. Ziegler’s estate. None of the individual defendants
appeared.
Pursuant to a series of agreements between Zicgler and MPI
entered into December 22, 1985, Ziegler during his lifetime held
B-4
legal title to the licensed patent properties and license agree-
ments in trust for and on behalf of MPI, which held all rights
and obligations with respect thereto. Ziegler was required by
these agreements to follow MPI's instructions with respect to
licensing activities and to account and pass along in gross to
MPI all royalties collected under the licenses. SGK, pursuant to
agreement with MPI of December 22, 1955, was assigned the
trust administration of the patent rights arising from Ziegler
inventions, including the right to license the patent rights and to
compensate the inventors, all at MPI's expense. SGK was at all
times contractually required to follow MPI’s instructions.
The 115 process patent employs catalysts in the production of
propylene and co-polymers. The catalysts are “used to cause
small molecules of gases or liquids to react together to form solid
plastics and synthetic rubbers from which commercially used
articles and objects may be fabricated for use in everyday liv-
ing,” Ziegler v. Phillips Petroleum Company, 483 F.2d 858,
861 (Sth Cir.), cert. denied, 414 U.S. 1079, 94 S.Ct. $97, 38
L.Ed.2d 485 (1973). The "115 patent was issued on December 3,
1963 on an application filed on October 29, 1958 and expired on
December 3, 1980. Montecatini-Edison S.A. (“Montecatini”)
participated in the research leading up to the patent, and after
the patent was issued, Montecatini became Ziegler’s agent with
respect to licensing the patent in the United States. In the early
days after Ziegler’s discovery, many of those seeking to produce
plastics visited Muelheim to learn about the process. In 1954, a
license agreement was entered into between Ziegler and
Hercules Powder Company (“Hercules”) under which Hercules
commenced the production of propylene. That agreement was
amended in 1964. In 1967, a license agreement covering the use
of the ‘115 patent was entered into between Ziegler and
Novamont under which Novamont commenced production.
Other producers of propylene, however, refused to take
licenses from Ziegler and became infringers in his eyes and in
B-S
the view of his licensees. Included in this group were Dart Drug
Company, Eastman Kodak and Phillips Petroleum. Phillips
Petroleum, produced propylene at its Monument plant, which it
subsequently sold to Diamond Shamrock Chemical Company
(“Diamond Shamrock”) and, as part of the sale, undertook to
hold Diamond Shamrock harmless against any infringement
claims. By letter of May 23, 1969 Hercules formally notified
Ziegler of infringements of his patent in accordance with their
agreement.
Early in 1970 Ziegler’s counsel sent letters to Diamond
Shamrock, Phillips Petroleum, Eastman Kodak and Dart Drug
seeking to obtain those companies as licensees. By July 9, 1970
Ziegler had entered into a patent license agreement and certain
other agreements with Diamond Shamrock. These agreements
will be considered in greater detail below, since aspects of them
are claimed by Novamont to violate its preexisting MFL clause.
Notwithstanding, by letter of September 23, 1970, Hercules
gave notice to Ziegler of its suspension of royalty payments,
since the infringements of which it had complained had not
abated nor had the infringers been sued.
Ziegler thereafter commenced an infringement action against
Phillips, which included a challenge to Phillips’ unlicensed
production of propylene. On June 23, 1971 the Honorable Sarah
Hughes of the United States District Court for the Northern
District of Texas declared the patent valid but not infringed by
Phillips’ use of the catalyst. Ziegler appealed the decision.
Novamont, on July 9, 1971, notified Ziegler of its discon-
tinuance of the payment of royalties; Ziegler protested the
action. On March 24, 1972 he gave Novamont notice of
termination of the 1967 agreement between them.
In the meantime, Ziegler sought to resolve his differences with
Hercules, and negotiated with it to that end. These efforts. were
successful. On April 26, 1972, an agreement was entered into
between Hercules and Ziegler. The details of that agreement
B-6
will be considered below, since it and its implementation in 1974,
in addition to the Ziegler/ Diamond Shamrock agreement dis-
cussed above, are claimed by Novamont to violate Novamont’s
1967 MFL clause.
Despite correspondence and negotiation, further licensing
under the ‘11S patent remained in limbo awaiting the
determination by the Fifth Circuit of Ziegler’s appeal from
Judge Hughes’ decision. This was announced on April 13, 1973.
The Fifth Circuit restored Zigler’s patent position against Phil-
lips with respect to the use of the patent. Shortly thereafter, on
May 65, 1974, Diamond Shamrock and Ziegler reached an
agreement on the basis of their earlier 1970 understanding. Dur-
ing the same period, the discussions between Novamont and
Ziegler intensified and on July 1, 1974 the agreement was
entered into which is the basis of SGK’s claim for unpaid royal-
ties in this action.
Thereafter, Novamont obtained certain information concern-
ing the Diamond Shamrock agreement and in August, 1977,
announced its intention to adopt the provisions of the Diamond
Shamrock license and to discontinue the payment of royalties,
actions it claimed to be entitled to take by virtue of its MFL
clause. This action by SGK to recover royalties followed.
Novamont counterclaimed on the basis of its MFL clause. After
discovery in this action, Novamont successfully moved to amend
its counterclaim to include a claim arising out of the alleged
violation of its MFL clause by the Hercules agreement. 485
F.Supp. 471.
It is against this background that further consideration must
be given to the Ziegler/Diamond Shamrock Agreements, the
Ziegler/Hercules Agreement and the Ziegler/Novamont
Agreements.
B-7
The Ziegler) Diamond Shamrock Agreement
Diamond Shamrock had purchased the Monument Plant for
making propylene from Phillips before Novamont and Ziegler
entered into their 1967 agreement. Phillips operated the plant
for Diamond Shamrock’s benefit initially and also gave Diamond
Shamrock a commitment to hold Diamond Shamrock harmless
in the event of a determination at a later time that the process
employed at the plant violated any patent rights.
After Hercules, an early Ziegler licensee, as set forth above,
gave its notice of the infringement of other manufacturers in
May. 1969, Ziegler’s representatives, early in 1970, sought to
enter into a license agreement with Diamond Shamrock. It was,
of course, Ziegler’s position that Diamond Shamrock was
infringing his patent as was Phillips. Negotiations were held in
mid-April and continued until July 9, 1970 when Diamond
Shamrock and Ziegler reached an understanding which was set
forth in three agreements.
The first agreement was a patent license agreement which
granted Diamond Shamrock a non-exclusive license under
Ziegler’s ‘115 patent to make, use and sell propylene in the
United States. Diamond Shamrock agreed to make a down pay-
ment of $200,000 to be credited at a 50% rate against future
royalties. Royalty rates calculated on volume of sales were
agreed upon. It was also agreed that Diamond Shamrock could
accrue royalties and account to Ziegler for such accruals during
the pendency of any patent litigation involving an alleged
infringer bound to hold Diamond Shamrock harmless for
infringement, the Phillips’ action then being in progress. Dr.
Martin, SGK’s present Director, characterized this license
agreement as the agreement which thereafter became the
standard propylene agreement offered to licensees by Ziegler.
In addition, an option agreement was entered into permitting
Diamond Shamrock to obtain a license covering certain co-
polymers. Diamond Shamrock paid $20,000 for this option. It
B-8
was agreed that upon its exercise an additional $30,000 would be
paid, both sums to be credited against future royalties. This
option, though granted, was never exercised.
Finally, as an integral part of the agreement. Ziegler sent
Diamond Shamrock the following undated letter:
Law Department
Diamond Shamrock Chemical Company
300 Union Commerce Building
Cleveland, Ohio 44115
U.S.A.
Gentlemen:
We have entered into a license agreement concerning the
polypropylene field, effective July 1, 1970.
It is understood and agreed that this license agreement
does not cover any alleged infringements of my patent
rights by Diamond Shamrock prior to this July 1, 1970 date
and that my rights to sue or take any other action against
Diamond Shamrock or any other party in interest concern-
ing this alleged past infringement are preserved.
I furthermore agree that, should there be any recovery by
me, my successors, heirs or assigns for this past infringe-
ment by Diamond Shamrock as a result of suit, settlement,
or otherwise, such recovery shall additively be credited to
the down-payment made in accordance with Paragraph III
of the license agreement in the same manner as if the same
had initially constituted part of the down-payment actually
made, and shall be credited against royalties as provided in
the license.
Thereafter, Diamond Shamrock accounted and accrued royal-
ties. After the final resolution of the Fifth Circuit decision in
June of 1973 reversing the District Court and holding Phillips an
B-9
infringer of Ziegler’s patent, Arnold Sprung (“Sprung”), coun-
sel for Ziegler at the time and trial counsel for SGK in this
proceeding, opened negotiations with Diamond Shamrock, con-
cerning its accrued royalties and the pre July 1970
infringements.
March 27, 1974
Diamond Shamrock Chemical Company
Law Department
1100 Superior Avenue
Cleveland, Ohio 44114
Attention: John C. Tiernan, Esq.
Re: Ziegler Polypropylene License
Dear John:
This is to confirm our telephone conversation of today.
If Diamond Shamrock is agreeable to immediately render
an accounting and make payment, we would consider the
alleged breach of the Polypropylene License of July 1, 1970,
rectified.
I have telexed Studiengesellschaft Kohle mbH to forward
Diamond Shamrock the statement required by Article VI of
the agreement, and agree hereby to hold your royalty pay-
ment check in escrow, pending your receipt of the written
statement, as set forth in Article VI.
| also confirm that | am willing to enter into negotiations
concerning Diamond Shamrock’s polypropylene production
going back prior to July 1, 1970, and suggest that we get
together for this purpose, should you desire.
Best personal regards,
Very truly yours,
BURGESS, DINKLAGE & SPRUNG
B-10
By May 6, 1974, these negotiations were concluded by an agree-
ment between Ziegler and Diamond Shamrock which provided
that an additional $750,000 would be paid by Diamond
Shamrock and
“additively credited to the down-payment made in
accordance with Paragraph III of the license agreement of
July 1, 1970, in the same manner as if the same had initially
constituted part of the down-payment made, and shall be
credited against royalties as provided in the license, i.e., no
more than fifty percent (SO%) of any payment otherwise
due pursuant to Paragraph IV of the license for any one
year shall be credited against the total down-payment”
Diamond was released thereby from any liability for pre July |.
1970 infringement.
In terms of its continuing running royalty, aside from the
effect of the down payment, the Diamond Shamrock rates were
slightly more favorable than those held by Novamont in 1970,
although certain third party payments as offsets were not
included and other differences existed between the agreements.
For reasons not made clear on this record, when given terms of
the Ziegler/Diamond Shamrock agreement in the fall of 1970,
Novamont chose not to adopt its terms.
The Ziegler/Hercules Agreements
Hercules was one of the early participants in the work of Dr.
Ziegler and entered into a Polyolefin Contract with him on
September 24, 1954, which was amended in 1962 and supple-
mented in 1964 in ways not material to this dispute. By the late
60’s Eastman Kodak, Dart Drug and Phillips, who declined to
enter into license arrangements with Ziegler, were producing
polypropylene also. As noted above, in May, 1969, Hercules
gave notice of this infringement under its agreement with
Ziegler, and a period of negotiations ensued.
B-1 |
Hercules twice extended the period during which Ziegler
could abate the infringement or file suit against the infringer and
then, on September 23, 1970, gave notice that it would suspend
payment of royalties after April, 1970. Sprung believed this to
be a negotiating position looking toward a reduction of royalties.
To resolve the matter he proposed that the 115 patent be deemed
to expire 3 years before its actual termination date for purposes
of calculating Hercules’ royalty obligations, and that Hercules
agree that Ziegler need sue only one infringer at a time.
Hercules apparently kept this proposal in mind, but its interest
in an immediate resolution of this dispute over the terms of the
license agreement was undoubtedly affected by the lower court
decision in the Phillips action in mid-1971. The situation was
reported by Hercules to Ziegler on July 12, 1971 as being “far
more complicated than I [the Hercules Assistant General
Manager, Polymers Department] realized.” In an exercise of
personal diplomacy, Von Kriesler, one of Ziegler’s close
associates, wrote Brown, President of Hercules, calling upon per-
sonal and past business ties to bind up the dispute. In November,
1971, Brown responded, refusing to pay royalties but seeking to
keep the discussions alive.
Thereafter the negotiations moved forward in a deliberate and
calcualted fashion. Hercules estimated its exposure and Dr.
Martin and Sprung evaluated the Ziegler position, recognizing
that Ziegler’s leverage depended in large measure on the suc-
cessful resolution of the appeal in the Phillips action. On
February 1, 1972 Hercules proposed a $1,250,000 non-refund-
able down-payment, a fully paid-up license up to a capacity of
600 million pounds a year and a royalty of 1% of net sales in
excess of that quantity.
Sprung, having received this Hercules proposal, forwarded it
to Muelheim together with the computer run upon which the
$1,250,000 down payment was determined. This calculation
included a royalty rate of .73% of the projected capacity to
B-12
produce polypropylene and a projection of the future price of
polypropylene based on past price movements, a projection
which showed a decrease of the price over the next six years. The
royalty rate was the minimum rate agreed upon in the 1964
supplement to the original Ziegler/Hercules agreement. The
calculation implicitly accepted the earlier suggestion of Ziegler
with respect to a three year advance in the termination date, for
the calculation ran only through 1977. A present value of money
factor of 12% was applied. The cumulative present value of the
royalties came out to $1.656 million dollars, which Hercules
then reduced to $1.2 million as a settlement figure. Sprung pro-
posed to Ziegler a reply to Hercules to the effect that either a
25% settlement reduction from $1.6 million to $1.25 million or
the three year earlier termination would be satisfactory, but not
both. Sprung pressed for consideration of the proposal noting:
“This may be last opportunity to obtain substantial royalty pay-
ments prior to decision on appeal! in Phillips’ suit.”
On February 21, 1972 Dr. Martin, on Ziegler’s behalf, sent
Sprung a computer run including 1970 and 1971. The results of
the run varied from the Hercules price calculation as a result of
the period covered. Hercules had started its projection in 1968
and Ziegler noted that a 1967 starting date would produce a
significantly higher price and consequently an increased dollar
value for sales in the future projections. The effect of a constant
price calculation was considered, and Dr. Martin concluded that
under Ziegler’s calculations averaging its two methods of calcu-
lating price and continuing through 1980, a 75% settlement
would require a $1.7 million dollar down-payment.
On March 16, 1972 Sprung and Dr. Martin met with
Hercules, and an agreement was arrived at. This agreement was
formalized by letter from Hercules on April 26, 1972, and
accepted by Ziegler. It amended the prior 1954, 1962 and 1964
agreements and provided as follows:
B-}3
1. In settlement of any and all liabilities for royalties
accruing under the Polyolefin Contract for the period April
1, 1970 through December 31, 1972, Hercules will pay
Ziegler $770,000.00 promptly after your acceptance of this
letter.
2. As consideration for immunity from suit after
December 31, 1972, as granted in paragraph 5 hereof,
Hercules will pay Ziegler $30,000.00 promptly after your
acceptance of this letter. In addition, when and if Ziegler
receives a favorable decision on the validity of U.S. Patent
3,113,115 (without regard to the decision on infringement
of said patent) from the Court of Appeals in the pending
Ziegler v. Phillips Civil Action in Texas, Hercules will
promptly pay Ziegler $800,000.00 plus interest from May
1, 1972 at 6%.
3. All payments to Ziegler under paragraphs | and 2
shall be non-refundable to Hercules by Ziegler.
4. Inthe event U.S. Patent 3,113,115 is held invalid by
the Court of Appeals in the above-mentioned Civil Action,
Hercules will be excused from the $800,000.00 payment
referred to in paragraph 2 hereof but in such event the
immunity from suit granted in paragraph 5 hereof shall not
apply to any process patent that Ziegler may hereafter
obtain corresponding substantially in scope to U.S. Patent
3,113,115 unless Hercules shall within a reasonable time
after issuance of such patent make said $800,000.00
payment.
5. Ziegler hereby grants Hercules a fully paid-up
immunity from suit until December 3, 1980 under Professor
Ziegler’s U.S. Patent rights with respect to polypropylene
(including non-elastromeric copolymers with a minor
amount of ethylene) up to a limit of six hundred million
pounds (600,000,000) per year sales. On any sale quantity
of polypropylene over six hundred million pounds
B-14
(600,000,000) per year, Hercules will pay royalties of one
percent (1%) of Net Sales Price.
Dr. Martin testified that the schedule of payments was
determined by Hercules’ tax considerations and that he con-
sidered the settlement to constitute a payment of $1.6 million
dollars in settlement of all past infringement and in payment for
the “fair value” of the paid-up license.
Q What was your belief that the $1.6 million figure we
had negotiated represented?
A It was my true belief that this was the fair value of
the residual time up to ‘80 of the Hercules agreement.
QI notice in (the agreement] it does not simply say
they're going to make two payments of $800,000 each.
They have a sum in paragraph | of 770 and in 2 of 30,000
and so forth.
Q What was your understanding of those segregations
of those sums?
A The sum is right. It comes out to 1.6. Hercules had
some desire to divide up because of tax purposes the first
$00,000.
QQ For their own convenience?
A Yes.
A handwritten exhibit was introduced of notes which Dr.
Martin testified were made by Sprung during the meeting and
exchanged with him. These notes confirm the testimony of Dr.
Martin as to the Ziegler view of the agreement. The notes con-
tain figures which were said to represent the initial positions of
the parties and the rejection of those positions. Then there fol-
lows a calculation which Martin explains as follows:
B-15
CONTINLED DIRECT EXAMINATION BY MR.
SPRUNG:
Q When we adjourned you were discussing the
Hercules meeting.
| now hand you an exhibit which has been marked as
Plaintiffs’ Exhibit 104. I ask you if you can identify the
scribbling?
A Yes.
Q_ Tell us what that is?
A This was the written correspondence between us two
during the meeting with Hercules.
Q Could you explain what those various figures are and
what the significance of them are?
A I can try. In the first left, upper left corner, we
started with the figure Hercules had offered us and below
this figure the new figure we computerized. Then we crossed
this out.
Q_ Which figure is that?
A The 2.318.
Martin's testimony continues with the detailed description of the
calculations made. It indicates that however Hercules reached
its calculation of the $1.6 million down payment, Ziegler con-
sidered it on the basis of a royalty extending through the life of
the patent, using a projected price and consequent sales volume
established on a historical basis. According to Dr. Martin, this
amount was reduced by a present value calculation, and then
further reduced by an amount calculated to offset the increased
royalty rate contained in the agreement on the excess of the
paid-up production over 600 million pounds, in order to keep the
rates consistent with the previous Hercules rate. This amount
was then further reduced by an arbitrary 20%, urged upon
B-16
Ziegler by Hercules, which represented a reduction of the esti-
mated volume figures which had been the result of a computer
calculation of production capacity based on a time projection.
That reduction was said to be required by experience which
established that unforeseen delays as a consequence of construc-
tion lags, labor disputes and other factors could well cause devia-
tions from the computer projections.
There is substantial evidence, including the memorandum
submitted to Hercules’ executive committee on April 7, 1972
which sought approval of the agreement, that Hercules never
changed its method of calculating the $1.6 million figure, and
continued to view that figure as reflecting a forgiveness of royal-
ties for three years at the end of the patent period. Another
difference between the methods of calculation of Hercules and
Ziegler was the treatment of the royalties accrued during the
period of Hercules non-payment, the question being whether
they were forgiven, discounted or included in the total down
payment.
Regardless of the different calculations said to have been used
to reach the $1.6 million figure, there is no dispute as to that
figure and the terms of the license agreement. The letter agree-
ment spoke simply of the payment of $770,000 in settlement of
all past royalties due for the period of suspension, $30,000 in
consideration for entering into the relationship and $800,000 to
be paid upon a favorable decision in the Phillips action. For
these payments Hercules received a license over the life of the
patent and was required to pay royalties equivalent to 1% of all
net sales over 600 million pounds annually.
The Ziegler/Novamont Agreements
In 1964, a license agreement was entered into between Ziegler
and Novamont. On December 21, 1967 this agreement was
terminated and was superseded by an agreement entitled
“Propylene Ziegler Patent License Agreement.” Montecatini,
B-|7
the then parent of Novamont, signed the agreement on behalf of
Ziegler as his licensing agent.
The agreement licensing the use of the 115 patent by
Novamont contained 19 articles and consisted of 19 pages. For
the purpose of this action only Article IX need be set forth in its
entirety. It follows:
ARTICLE 1X — Most Favored Licensee Clause
A.
1) Should Licensor, during the life of this Agreement,
grant to any company producing Agreement Polymers in
the United States a license under United States patent
3,113,115 which license contains royalty provisions that,
when considered in their entirety, are more favorable
than those specified in Article III hereof, then and in that
event Licensor shall promptly furnish Licensee with a full
text of the royalty provisions of such license.
2) Licensee shall be entitled, upon written request
within ninety (90) days after receipt of the aforesaid full
text of such other license from Licensor, to substitute for
the entirety of this Agreement all of the provisions of
such other license.
3) The substituted license shall be effective and this
Agreement suspended as of the date of the request for
substitution of terms by the Licensee.
4) If the substituted license ceases to be in force during
the time period in which this Agreement would have been
effective but for such substitution, then and in that event
the suspension of this Agreement shall be terminated and
this Agreement shall again be binding upon the parties
for the balance of its term.
D. In no case shall any provision of this Article IX be
construed to impose any obligation on Licensor to repay
to Licensee any royalties previously paid pursuant to this
B-|8
Agreement or any antecedent license agreement under
United States patent 3,113,115.
Novamont paid royalties under this agreement during the
period from 1967 until mid-1971, although Novamont sought
unsuccessfully to modify the agreement in the light of the com-
petitive situation in the United States including the infringing
activities of others.’ It was also during this period that Hercules
gave its notice of infringement to Ziegler and that Diamond
Shamrock and Ziegler entered into their agreements of July 9,
1970 already discussed. Indeed the Diamond Shamrock agree-
ment was discussed by Ziegler and Novamont during this
period.*
From the documents submitted, the correspondence, and the
testimony of Dr. Martin, it appears that despite efforts at
secrecy, most information concerning license agreements soon
found itself shared in the industry. By letter of September 24,
1970 Novamont sought to enlist Montecatini’s help in obtaining
relief from royalties due Ziegler in view of the widespread
infringement. Within two weeks, Smareglia of Novamont sought
to obtain from Montecatini information about the Diamond
Shamrock agreement which had been reached on July 9, 1970.
On October 14, 1970, Manzillo, President of Novamont, con-
fronted the Ziegler representatives with the “rumors and
requested the Diamond Shamrock agreement under Novamont’s
MFL clause.
‘Both parties were ably represented, not only during the trial but
during these negotiations, which have been the subject of extensive
discovery in this action under the able direction of Magistrate
Leonard Bernikow, and in other litigation as well. For example, a
virtually verbatim 49 page record of the meeting between the parties
in Muelheim on March 2 and 3, 1971 is available for the court's
enlightenment.
‘It should be noted that the “divorce” between Novamont and
Montecatini had been achieved and Novamont no longer had any
relationship to Ziegler’s former licensing agent.
B-|9
By letter of October 30, 1970 Sprung forwarded the Diamond
Shamrock agreement along with a letter from Diamond
Shamrock of September 4, 1970 confirming that the agreement
did not cover past infringement. The Diamond Shamrock letter
duplicated the Ziegler undated letter relating to infringement,
quoted above, entered into at the time the agreement was signed.
However, the Diamond Shamrock letter omitted the third
paragraph of Ziegler’s letter which, as indicated above, stated as
follows:
| furthermore agree that, should there by any recovery by
me, my successors, heirs or assigns for this past infringe-
ment by Diamond Shamrock as a result of suit, settlement,
or otherwise, such recovery shall additively be credited to
the down-payment made in accordance with Paragraph III
of the license agreement in the same manner as if the same
had initially constituted part of the down-payment actually
made, and shall be credited against royalties as provided in
the license.
Neither this paragraph nor the option agreement relating to co-
polymers was every shown to Novamont. The terms of those
documents are claimed by Novamont to be more favorable to the
licensee than the terms of Novamont’s agreement were to
Novamont; their concealment is therefore claimed to violate its
MFL.
Ziegler’s representative did offer the revealed terms of the
Diamond Shamrock agreement to Novamont, without requiring
‘In this connection it is noted that the option was never exercised,
See pp. 560-561, supra. As to the third paragraph, as noted above,
after the Phillips action was decided in favor of Ziegler in 1973 and
all further appellate proceedings subdued, Diamond Shamrock and
Ziegler entered into the agreement of May 6, 1974 which provided
for an additional payment of $750,000 to be “additively credited” to
the down-payment already made and to constitute a credit against
$0% of future royalties annually until exhausted. This agreement
gave effect to the third paragraph of Ziegler’s July, 1970 letter and
is claimed by Novamont to complete the breach of its MFL clause.
B-20
a $200,000 down payment, but also without giving credit for
prior royalties paid. At a meeting on November 6, 1970,
Ziegler’s representatives refused to grant Novamont the right to
accrue, rather than pay, the royalties due during the period of
the Phillips litigation. Although Novamont was offered the
literal terms of the Diamond Shamrock provision pertaining to
accrual, those terms applied specifically to Diamond Shamrock
in its position as the beneficiary of the hold-harmless agreement
with Phillips, and would have bestowed no right to accrue during
the pendency of the Phillips’ suit on Novamont. The Diamond
Shamrock accrual! provision, in pertinent part. reads as follows:
“Licensee may hold and accrue royalties without forwarding the
same to Ziegler during any period during which Ziegler is
engaged in a suit for patent infringement involving the process
utilized by Licensee and being defended by a party under a con-
tractual obligation, to hold Licensee harmless.’ Novamont,
based on the information it had received, made no effort to
obtain the Diamond Shamrock terms.
Still seeking relief from its license agreement and the competi-
tive situation in the U.S. market, Novamont gave notice on July
9, 1971 of its discontinuance of royalty payments in the wake of
the Phillips lower court decision. Sprung turned his attention to
Hercules and concentrated his efforts on resolving the
Ziegler/Hercules dispute. As set forth above, by March 17,
1972 an agreement seemed close at hand, and was in fact
reached on April 26, 1972. In the meantime, on March 24, 1972
Sprung sent Novamont a notice of cancellation of its 1967
license arising out of its termination of royalties in July of the
prior year.
By May, 1972 Novamont had gotten wind of the Hercules
agreement and claimed a right to enforce its MFL clause. It
chose to disregard Ziegler’s claim that it was an infringer.
Sprung informed Novamont that Hercules had a paid up license
and by June 26, 1972 offered to calculate a paid up license on
B-2|
the same basis, namely, $1.6 million for a capacity of 600 mil-
lion pounds a year. By letter of July 19, 1972 Sprung stated:
The royalty rate on which the computer calculations were
made was the royalty rate in Hercules’ existing agreement
with Professor Ziegler of which | believe you are cognizant.
The prepaid discount was at 12%. Quite simply, Hercules
agreed to pay a royalty of $1,600,000, immediately paying
$800,000 and agreeing to pay a further $800,000, plus 67%
interest, upon the decision of the Sth Circuit Appeals Court
provided that they did not reverse the District Court and
hold the ‘115 patent invalid. There were no other contingen-
cies provided.
Pressed further by Novamont, Sprung wrote the following on
August 28, 1972:
Apparently, | have not been too clear in my proposals to
you. Hercules’ royalty rate has nothing to do with the
arrangement that Professor Ziegler is willing to offer to
Novamont in order to enable Novamont to obtain a paid-up
license. A paid-up license would only be made available by
taking Novamont’s present agreement and on the basis of a
computer run, taking into consideration a diminishing price
for polypropylene, to project the royalties which would be
due from Novamont over the life of the patent up to the
maximum plant capacity provided for, and to calculate on
this basis, taking into consideration a 12% discount, a paid-
up value.
Sprung thereby did not reveal the .73% royalty rate previously
obtained by Hercules on which the calculation was based, nor
did he reveal what Dr. Martin in a June 21, 1972 telex to Sprung
on the subject referred to as the “further admitted discount to
Hercules.” Although this discount could refer to the alleged
three-year fice ride, the preponderance of the evidence indicates
that it refers to the 20% contingency discount intended to
account for risks in achieving the anticipated increased capacity,
B-22
a discount not mentioned to Novamont in Sprung’s August 28,
1972 letter.
The evidence indicates three possible sources of this 20% dis-
count: the forgiveness of the accrued royalties for 1971 and
1972; the alleged three-year free ride from 1977-1980; and the
20% contingency to allow for construction delays and other
unexpected obstacles to the achievement of the projected,
unusual capacities. While, as indicated, the evidence preponder-
ates that the contingency factor was the element used in
Ziegler’s calculations, in any case, none of three possible sources
was described to Novamont in Sprung’s August 28, 1972 letter.
There the matter lay until the decision of the Sth Circuit in
April, 1973. One month after that decision, Manzillo filled in the
blanks, as had been suggested by Sprung in his offer of August
of 1972 and expressed interest in negotiating. Sprung replied,
offering to settle the infringement claim for $650,000 and offer-
ing a paid-up license for 120 million pounds of capacity for 1.2
million dollars. In authorizing this proposal, Dr. Martin used
nearly the same methodology as had been employed in the
Hercules computation. However, there were several significant
differences, two of them tied to conditions in the polypropylene
and money markets and one reflecting differences between the
underlying Hercules and Novamont license agreements. The
Hercules lump-sum had been calculated at a time when
polypropylene prices were decreasing, and the calculations had
taken that trend into account. However, Ziegler’s offer to
Novamont was based on a computed price calculation that was
flat throughout the seven year period. Although, according to
Ziegler, polypropylene projected prices then showed an increase
which would have resulted in increased royalties a constant price
was chosen for use in the Novamont calculations in an effort to
avoid discriminating against Novamont and in favor of Hercules
in view of the changing pattern of propylene pricing. Another
difference between the basis of the two lump-sum offers was that
B-23
the Novamont figure was arrived at through application of a
10% present value factor, rather than a 12% factor. That change
reflected changes in the price of money in the marketplace.
Finally, the royalty rate used was Novamont’s prior royalty rate,
approximately 1.5% as opposed to Hercules. 73%. In other
regards, leaving aside the issue of the suspended payments by
Hercules, the calculations followed the Ziegler view of the
Hercules formula, including a 20% discount for unexpected
production delays. Although not a precise duplication of the
Hercules calculation, it constituted a rough approximation.
Novamont was not informed of the three year grace period
proposal.
Despite meetings in November, 1973 and March, 1974, the
parties were unable to reach agreement. Finally, with the
Phillips action resolved and the Hercules down-payments in
hand, Ziegler rejected Novamont’s proposals. On July 1, 1974
Novamont and Ziegler reached an agreement on the terms
demanded by Ziegler.
The relevant terms were as follows:
WHEREAS, NOVAMONT and Professor Dr. Karl
Ziegler (hereinafter called “ZIEGLER”) had entered into
an agreement on December 21, 1967, entitled
“Polypropylene Ziegler Patent License Agreement’; and
WHEREAS, a disagreement had arisen concerning
NOVAMONT'S obligations under said agreement, and
ZIEGLER had forwarded a Notice cancelling the agree-
ment, which NOVAMONT had maintained was ineffec-
tive; and
WHEREAS, STUDIEN is the successor to the Patent
Rights of ZIEGLER and to the rights of ZIEGLER under
said agreement of December 21, 1967;
NOW, THEREFORE, in order to settle the differences
between the parties, the parties agree as follows:
B-24
1. The parties agree that the Notice of termination
of the agreement between NOVAMONT and
ZIEGLER, dated December 21, 1967. is ineffective and
the agreement dated December 21, 1967, remains in full
force and effect and is uncancelled.
2. NOVAMONT shall immediately render an up-
to-date accounting to STUDIEN for all royalties past
due under the agreement of December 21, 1967, includ-
ing an accounting for the period extending from the first
quarter of 1971 to date, and shall immediately make pay-
ment of said past due royalties to STUDIEN, plus inter-
est calculated at a rate of ten percent (10%) per annum.
3. As of the Date of this Agreement, the agree-
ment of December 21, 1967, shall be converted to, and
replaced by the License Agreement attached hereto as
Appendix A.
In effect, Novamont was required to pay past royalties and to
sign the so-called standard polypropylene license at its previ-
ously established rate.
The Issues
Under the facts as found above certain issues remain for
resolution.
1. Is Novamont entitled to MFL treatment with respect to
licenses entered into from July 1971 to July 1, 1974, its period
of infringement?
2. Does the Ziegler/Diamond Shamrock option agreement
violate the Novamont MFL clause?
3. Does the undisclosed Ziegler/Diamond Shamrock agree-
ment to treat any infringement payment as an additive down-
payment violate the Novamont MFL clause?
B-25
4. Is Novamont entitled to any benefits which might have
resulted from an accrual of royalties during the period of the
Phillips action?
5. Does the Ziegler/Hercules agreement violate the
Novamont MFL clause?
6. Was Novamont defrauded by SGK’s failure to disclose to
it the terms of the Ziegler/Hercules agreement?
7. Was Novamont defrauded by SGK’s representation that
the Hercules agreement contemplated the application of the
entire $1.6 million payment toward future royalties rather
than the application of nearly half of that sum toward past
due royalties that had been suspended?
The Conclusions
The Effect of the 1974 Ziegler/Novamont Agreement
[1] The Ziegler/Novamont agreement of July 1, 1974 was
entered into by powerful parties, ably represented. At issue is
whether the agreement means what it says and restores
Novamont to its 1967 position or whether Novamont is barred
as an infringer from enforcing its MFL clause with respect to
events occurring during the period of its infringement, which of
course is the very period during which the Diamond Shamrock
and Hercules agreements were entered into. | conclude the
agreement means what it says and that Novamont is entitled to
enforce its MFL clause with respect to events occurring during
its period of infringement.
The very issue between the parties was the infringing conduct
by Novamont, conduct that resulted from Novamont's own
determination to take a chance on the invalidity or inappli-
cability of the patent after the lower court decision in Phillips.
When the uncertainty created by that decision was removed by
the Sth Circuit decision in 1973, Novamont was in an exposed
position and ultimately paid up, dollar for dollar, the royalties
B-26
that were due during its infringing period. It bargained for, paid
for and got the restoration of its prior status.
Given the demonstrated skill of Novamont’s counsel, it may
well be that even at the time of the 1974 Ziegler/Novamont
agreement, suspicions may have been harbored that there was
more to the Diamond Shamrock and Hercules agreements than
met the eye — a suspicion which turned out to be true, whatever
the legal effect of that fact may be. Sprung. Ziegler’s United
States negotiator, certainly highly experienced and in command
of the facts, knew as a participant all the facts relevant to the
Diamond and Hercules agreements. Nonetheless, there is no
evidence in this carefully presented and well documented record
that the retroactivity provision of the Ziegler/ Novamont agree-
ment was intended to be anything other than what it purported
to be. The clear language controls and Novamont is entitled to
the benefits of its 1967 MFL clause, if any.
The Ziegler/Diamond Shamrock Option Agreement
[2] The Diamond Shamrock option agreement for co-
polymers was concealed from Novamont. That concealment,
however, did not violate Novamont’s MFL clause, which
required revelation only of actual license agreements containing
royalty provisions that, in their entirety, were more favorable
than those contained in the Novamont license agreement. The
Diamond Shamrock option agreement was not such a license
agreement. It was not a license agreement at all, but an option to
create a license agreement. See generally Plantation Key
Developers, Inc. v. Colonial Mortgage Co., $89 F.2d 164 (Sth
Cir. 1979) (proferred contract underlying option agreement not
binding contract until accepted); /020 Park Ave., Inc. v. Ray-
nor, 97 Misc.2d 288 411 N.¥.S.2d 172 (Civ.Ct.N.Y.Cnty.
1978) (exercise of option converts offer into binding contract).
As such, it did not fall within the purview of the MFL clause,
and its disclosure was not required by that clause. Furthermore,
because it was never exercised, it did not lead to the creation of a
B-27
license agreement the disclosure of which might have been
required.
Even if the option agreement is viewed not as a separate con-
tract but as one component of Diamond Shamrock’s license
agreement, the conclusion stands that its disclosure was not
mandated by the MFL clause. That is because the option agree-
ment was not a royalty provision, and only royalty provisions
were covered by the MFL clause. Therefore, even though the
option agreement may well have been beneficial to Diamond
Shamrock, it was not the type of provision which the MFL
clause required the licensor to disclose.
Finally, since under its 1967 agreement Novamont had the
right to produce co-polymers, the Diamond Shamrock option
agreement was not more favorable than the agreement
Novamont already had. For that reason, too, its concealment
was not violative of Novamont’s MFL clause.
The Ziegler/Diamond Shamrock Additive Down Payment
Agreement
[3] There is no doubt that Ziegler concealed from
Novamont the additive credit features of his 1970 contingent
agreement and final 1974 settlement agreement with Diamond
Shamrock. Those provisions were conveniently and deliberately
withheld from Novamont, a withholding which SGK claims was
justified by the line of cases holding that MFL provisions similar
to those in the instant case do not apply to the settlement of
infringement claims. See Searle Analytic, Inc. vy. Ohio-Nuclear,
Inc., 398 F.Supp. 229 (N.D.IIL. 1975); Universal Oil Products
Co. v. Vickers Petroleum Co., 41 Del. 238, 19 A.2d 727 (1941);
Raytheon Mfg. Co. v. Radio Corporation of America, 286
Mass. 84, 190 N.E. 1 (1934). The policy behind such holdings
appears to be to facilitate settlements by not compelling licen-
sors to choose between |) exacting from infringers royalty pay-
ments for the period of infringement equivalent to those paid
during the same period by those holding licenses containing
B-28
MFL clauses and 2) forfeiting the payments made during that
period by those licensees. The wisdom of that policy is amply
demonstrated by the facts here, which involve an important
patent, of long and hotly contested validity, and multiple parties
with competing interests, variously situated with respect to the
patent throughout the period of conflict. During the pendency of
the infringement action involving Phillips, Ziegler sought to
achieve settlements in order to shore up his patent position, to
minimize infringement, and to obtain down payments, presum-
ably to assist in the necessary litigation. In these circumstances,
it must be assumed that a commitment and cash on hand in
1970 and 1972 during the period of patent litigation were more
valuable to Ziegler than the same commitments and cash would
have been after the validation of his position by the Fifth Circuit
in 1973. At the same time, the competing manufacturers of
polypropylene were forced to make judgments with respect to
their positions vis-a-vis the patent and its holder: whether to
infringe or settle, whether to make or withhold royalty pay-
ments, and so on. In such circumstances, the policy that
withholds MFL treatment from arrangements regarding past
infringement serves the valuable purpose of resolving conflict
and encouraging settlement.
The difficult aspect of the 1974 Diamond Shamrock settle-
ment for past infringement is that the device used takes the form
of a conversion of liability for any past infringement into a
down-payment credited towards future royalties. In that sense,
the settlement not only looked to the past but also affected the
future, a confusion made evident by this court's earlier rulings
on the defendants’ motion for summary judgment. See
Studiengesellschaft Kohle mbH vy. Novamont Corporation, 77
Civ. 4722 (RWS) (S.D.N.Y. Oct. 19, 1978). However, that fact
alone does not suffice to trigger a departure from the rule estab-
lished by precedent for the treatment of past infringements.
Because the secret agreement between Diamond Shamrock and
B-29
Ziegler related to the method by which a past infringement was
to be resolved, and because the royalty terms themselves, as
opposed to the method of payment, were made available to
Novamont, the settlement agreement was not subject to nor vio-
lative of Novamont’s MFL clause.
The important point here is that insofar as the arrangement
looked to the past, it was not covered by the MFL clause, see
Universal Oil Products, supra; Raytheon Mfg. Co., supra, and
insofar as it pertained to the future in its provision for down-
payments on future royalties, Novamont was offered a similar
agreement, which it did not accept. Because the MFL clause was
prospective only, that offer satisfied the MFL clause obligations
of SGK. See Universal Oil, supra; Raytheon, supra.
In this regard, there would appear to be no reason to distin-
guish between the original down-payment agreement Ziegler
reached with Diamond Shamrock in 1970 and the subsequent
additive credit agreement which resolved the dispute about
Diamond Shamrock’s past infringement. Novamont was offered
an agreement with the same royalty terms utilized in both of
those Diamond Shamrock agreements, and it is equivalence of
royalty terms that the MFL clause provides for.’ The fact that
one portion of those royalty payments was paid as part of a
settlement of past infringement does not alter the essential fact:
the nature of the royalty terms themselves.
In addition, Diamond Shamrock’s application of payments
covering past infringement toward future royalties did not
entitle Novamont to receive credit toward future royalties for its
own payments made during the period of Diamond Shamrock’s
*The reference to “royalty terms” here means the rate at which
royalties were to be assessed for future manufacture under the
patent. In fact, the creditable down-payment made by Diamond
Shamrock in 1974 was twice as large as a payment calculated
through a maneneer of those royalty terms to the manufacture dur-
ing the infringement period would have been.
B-30
infringement. That conclusion follows from the rulings in Searle
Analytic, Inc., supra, and Universal Oil Products Co., supra. In
Searle Analytic, the licensee, “Ohio,” was protected by an MFL
clause in all reievant respects indistinguishable from that present
here. A subsequent agreement entered into between the licensor
and another party forgave that party's past infringement. Ohio
claimed that it was entitled to an abatement of the royalties it
paid during the period of the subsequent licensee's forgiven
infringement. The court ruled against Ohio, finding that the
licensor had not forfeited its right to Ohio's royalty payments
during the period of the third party's infringement by forgiving
that infringement. A similar conclusion was reached in Univer-
sal. See also, Rothstein v. Atlanta Paper Co., 32) F.2d 90 (Sth
Cir. 1963) (d.scussing “built-in-gap” between prior and subse-
quent licensees”); Raytheon Mfg. Co., supra. As these cases
indicate, Novamont was not cautled to a credit toward future
royalties for the payments it made during the period of Diamond
Shamrock’s infringement, just as Ohio was not entitled to an
abatement in Searle Analytic.
Finally, there is no evidence before me that a prepayment of
future running royalties was a benefit to the licensee; given the
cost of money during this period, a demonstration to that effect
would be extremely difficult, if not impossible, and none was
attempted here.
[4] Another feature of the Diamond Shamrock agreement is
claimed to violate Novamont’s MFL clause, namely, the right
granted Diamond Shamrock to accrue, rather than pay over,
royalties during the period of the Phillips litigation. I agree that
the failure to offer a comparable accrual right to Novamont
constituted a violation of its MFL clause. SGK argues that it
satisfied its MFL obligation by offering Novamont the literal
terms of the Diamond Shamrock accrual provision. However,
the proof at trial established that those terms were tailored to
Diamond Shamrock’s situation vis-a-vis Phillips and that they
B-3)
would not, if included in an SGK-Novamont agreement, have
allowed Novamont to accrue royalties during the Phillips litiga-
tion. To accept SGK’s argument that by offering these terms to
Novamont, to whom they were useless, SGK satislied its MFL
obligations would be to ratify a procedure with the potential of
vitiating MFL clauses altogether If a licensor were able to
evade bestowing more favorable royalty provisions contained in
subsequent license agreements on prior licensees protected by
MFL clauses through the simple expedient of designing royalty
provisions that benefit only the subsequent licensee, then the
licensor would possess the ability to sap MFL clauses of their
substance and utility. | do not accept SGK’'s argument because it
would lead to precisely that result. Novamont was entitled by
virtue of its MFL clause and SGK’'s agreement with Diamond
Shamrock to an agreement that allowed it to accrue royalties
during the pending of the Phillips litigation, just as Diamond
Shamrock was allowed to do. It was not offered such an agree-
ment. It is therefore entitled to succeed on the portion of its
counterclaim based on deprivation of the accrual right to the
extent that it was harmed thereby.
The appropriate measure of damages on Novamont's counter-
claim for this breach of the MFL clause is the $94,651 interest
Novamont was required to pay on the royalties owed for the
period of the Phillips litigation but withheld during that litiga-
tion. That is the measure because Diamond Shamrock was
charged no interest on the royalties it accrued during that
period.
The Ziegler Hercules Agreement
The Ziegler/Hercules agreement was reached in the spring of
1972, as described above. Although SGK has consistently
referred to the agreement as simply the conversion of existing
running royalty obligations into a down-payment of $1.6 million,
thereby seeking to invoke Hazeltine Corporation v. Zenith
Radio Corporation, 100 F.2d 10 (7th Cir. 1938), cert. denied,
B-32
306 U.S. 656, 59 S.Ct. 646, 83 L.Ed. 1054 (1939), the agree-
ment on its face does not so provide. As finally approved, the
agreement divided the amounts to be paid into 770,000 for past
infringement $30,000 for entering into the agreement, and
$800,000 as a down-payment in lieu of running royalties to be
paid during the life of the ‘115 patent for production of
polypropylene up to a capacity of 600 million pounds, with an
additional royalty of 1% to be paid on sales in excess of 600
million pounds. As set forth above, this division of the amounts
to be paid was arbitrary, made at Hercules’ request and solely
for its own tax purposes. I conclude that this division of the
down-payment was not only arbitrary but artificial and did not
represent the actual agreement of the parties. The actual agree-
ment called for a full $1.6 million down-payment in the event
that Ziegler was successful in the Phillips action, which down-
payment was entirely directed toward future production, rather
than partially directed toward past infringement. That finding
does not lay this issue to .est, however, for the effect of the
Novamont MFL clause in the light of the Hercules lump-sum
payment agreement remains to be determined.
SGK rests in large measure on Hazeltine, supra. in Hazeltine,
the Hazeltine Corporation (“Hazeltine’’) was the holder of
patents covering certain radio applications. It entered into
license agreements with various manufacturers of radios, includ-
ing Zenith. Zenith’s license agreement contained a “most
favored licensee” clause, providing that Zenith was entitled to a
royalty rate as low as that paid by any other licensee. The con-
tract provided that royalties would be calculated at a given
percentage of selling price. In lieu of paying such percentage
royalties, Hazeltine licensees, including Zenith, could elect, at
the beginning of any given year, to pay a lump sum of $150,000.
Zenith argued that if any other licensee elected to pay such a
lump sum in lieu of a percentage of sales, and at the end of the
year it appeared that the licensee’s royalty was lower than it
B-33
would have been had it been calculated according to the
percentage rate specified in Zenith’s own license contract, then
Zenith would be entitled to utilize the lower percentage rate
allegedly reflected in the other licensee's lump-sum payment.
The court rejected this argument, holding that Zenith had no
right under its contract to convert the rate actually achieved by a
licensee electing a lump-sum formula into a percentage rate
applicable to Zenith’s contract. The court found that a lump-
sum payment represented an altogether different method of
calculating royalties than that used in fixing a running royalty
schedule and that an MFL clause does not entitle its holder to
the security of the latter coupled with the potential benefits of
the former. Hence, the court refused to allow Zenith to avoid the
risks inherent in a lump-sum payment, yet enjoy its advantages
should it turn out that Zenith would have fared better by choos-
ing a lump-sum form of payment at the beginning of the year.
The court concluded that the MFL clause was satisfied so long
as the same lump-sum figure was offered to Zenith. That offer
had been made, and so the court concluded there was no MFL
violation.
The essence of Hazeltine is that an MFL clause does not
entitle its holder to a lump-sum down-payment option calculated
using the same royalty rates as those effectively reflected in a
lump sum accepted from a competitor. Applied to this case, its
teaching would be that SGK satisfied its MFL obligation by
disclosing the terms of the Hercules agreement, thereby allowing
Novamont to opt for a $1.6 million down-payment for 600 mil-
lion pounds of annual production. Under Hazeltine, SGK went
beyond the call of its MFL duty by offering Novamont a lump-
sum payment option calculated according to the method
employed by Ziegler in the Hercules negotiations, with royalty
rates derived from the Novamont agreement.
[5S] If Hazeltine were the law of this Circuit, it would dictate
victory for SGK on this portion of this lawsuit. However, the
B-34
vitality of Hazeltine is questionable, for, though cited in several
treatises, see, e.g., A. Deller, 4 Deller's Walker on Patents, 691
(2d ed. 1965), its holding has not been relied upon in this or any
other circuit. Furthermore, I question the wisdom of the Hazel-
tine holding. Hazeltine appears to permit a licensor to evade the
spirit of its MFL obligation whenever dealing with subsequent
licensees with relatively large projected capacities. The obvious
purpose of MFL treatment is to protect licensees shielded by
MFL clauses against the granting of competitive advantages to
subsequent licensees; the holding in Hazeltine appears to frus-
trate that purpose.” I therefore decline to rest on it alone. Rather
I find for SGK on the independent ground that Novamont’s
MFL clause did not entitle it to a lump-sum payment option
calculated using Hercules’ royalty rates. | reach that conclusion
on the basis of the terms of the MFL clause itself and the policy
behind MFL treatment.
To begin with, the terms of Novamont’s MFL clause, as
quoted supra, p. 565, provided that Novamont would be entitled
to substitute for its own agreement “all of the provisions” of any
subsequent license agreement containing “royalty provisions
that, when considered in their entirety, are more favorable than
those specified [in the Novamont agreement]."” There are two
ways in which to interpret this clause as applied to the Hercules
* A simple illustration demonstrates the problem. Under Hazeltine, if
a licensor granted a license containing an MFL clause to a producer
with a projected production capacity of 1,000 units using a royalty
rate of $10 per 100 units of production, it could afterwards grant a
license to another dgmee with a projected production capacity of
100,000 units for the lump sum of $1,000 without violating its MFL
obligation. the MFL clause holder, that is, the prior licensee, would
gain nothing by opting for the lump sum payment, for its projected
capacity is too small to gain any benefit from it. At the same time,
the subsequent licensee would have the benefit of an effective
royalty rate one tenth as large as that applied to the MFL holder,
despite the fact that the subsequent licensee is one of those who,
under the MFL clause, was not to be granted a competitive
advantage over the MFL holder.
B-35
agreement. One way, that suggested by Hazeltine, is to say that
“all of the provisions” refers to the precise terms of the Hercules
agreement, that is, a paid-up license for 600 million pounds
capacity for the price of $1.6 million. For the reasons set forth
above, I decline to rely upon that interpretation, Hazeltine
notwithstanding.
Alternatively, “all of the provisions” can mean all of the
provisions pertaining to the method by which the lump-sum pay-
ment provided for in the Hercules agreement was calculated.
This interpretation makes sense in light of the purpose of pro-
spective MFL treatment. That purpose, as noted above, is to
protect licensees shielded by MFL clauses against the granting
of competitive advantages to subsequent licensees. However, the
purpose is not to redress disadvantages vis-a-vis prior licensees;
the holder of a prospective MFL clause enters into the agree-
ment containing that clause with knowledge that it will not pro-
tect him from competitive advantages secured by prior licensees.
This method of calculation interpretation is consistent with
the purpose of an MFL clause. In instances in which an agree-
ment is entered into between the licensor and a new licensee,
after the granting of an MFL clause to a third party, the most
favored licensee would be entitled to a license agreement calcu-
lated utilizing all aspects of the method whereby the new license
agreement was calculated, including the method whereby the
royalty rate was chosen. In instances in which a prior licensee's
agreement is modified or a novation is executed, the most
favored licensee would similarly be entitled to opt for an agree-
ment calculated through reference to provisions in its prior con-
tract, including its own prior royalty rate, then the most favored
licensee would similarly be entitled to a contract calculated
through reference to the analogous provisions in its own prior
contract, including its own prior royalty rate. Thus, its-<competi-
tive position relative to prior licensees is preserved, and it bears
no risk of being subjected to new competitive disadvantages
B-36
from subsequent licensees. The purpose of the MFL clause is
thereby satisfied.
Application of this “method of calculation” interpretation is
complicated herein, however, because, as I have already found,
the written agreement does not accurately reflect the actual
agreement between the parties in this regard. It is to that
“actual” agreement, if indeed one exists, that it is necessary to
refer in order to ascertain the effect of the MFL clause.
As previously discussed, two competing explanations were
offered at trial with respect to the derivation of the Hercules
lump-sum amount. Novamont contends that that amount
reflects a forgiveness of royalties for the last three years of the
patent term. SGK maintains that no future royalties were
forgiven, but that the lump sum covered projected royalties to
the end of the patent's life, with appropriate discounts for con-
tingencies and present value.
As outlined above, there is evidence in support of both
explanations. Novamont relies on a documentary history of the
proposals and counter-proposals preceding the final negotiating
session. SGK relies on the trial testimony of Dr. Martin and one
page of handwritten notes said to be the record of Dr. Martin's
and Sprung’s calculations during the final negotiations. Unfor-
tunately, the final figure itself, $1.6 million, provides no insight,
for both methods of calculation yield that same result.
Dr. Martin’s testimony is somewhat troublesome, because,
though his trial testimony was firm and believable and indicated
a high degree of conviction regarding the manner in which SGK
calculated the $1.6 million figure, that testimony was weakened
by his earlier deposition in which he claimed a failure of recol-
lection on precisely that subject. He testified at trial that in the
time between deposition and trial, he had reviewed documents
and engaged in conversation with Sprung, and had thereby
refreshed his recollection on the manner of calculation. | found
Martin's testimony at trial credible, in that | found it to be an
B-37
honest statement of his present belief regarding the events of
nearly a decade ago. | cannot, however, make a determination
that his testimony reflected an agreement between the parties at
that time. The process of memory refreshment is a mystifying
one, and there can be no certainty here that Dr. Martin actually
recalled those long concluded calculations rather than merely
believing that he did, the wish, perhaps, having become father to
the recollection. In any case Martin's recollection simply con-
firms the use of what one of the Hercules participants termed the
“negotiating tools” without achieving the degree of formality
Necessary to constitute an agreement between Ziegler and
Hercules with respect to the calculation of the $1.6 million.
That uncertainty notwithstanding, | find SGK’s theory a
plausible one. On the other hand, Novamont’s extrapolation
from the documentary proof is also plausible, and its argument
that the parties were unlikely to have abandoned the basis of
their prior discussions in the final negotiating session has a
certain ring of truth. In the final analysis, however, | am unable
to say on this record that the final agreement reflected a three-
year forgiveness; indeed, | am unable to conclude that the par-
ties on either side of the negotiating table ever agreed with each
other on a method of calculation. It is entirely possible, and
consistent with the record of this case, that only the final figure,
and not the manner of reaching it, was the subject of a “meeting
of the minds” between the parties. In short, there are two pos-
sible methods by which the lump-sum payment provided for in
the Hercules agreement may have been calculated, and the
evidence does not preponderate that either was agreed upon.
In order to have prevailed on its counterclaim under my view
of the operation of the MFL clause, Hazeltine aside, Novamont
would have had to establish by a preponderance of the evidence
that a different method of calculation was used in calculating the
Hercules lump sum than that used in calculating the offer made
B-38
by Sprung to Novamont. In other words, had Novamont estab-
lished that the Hercules agreement in fact contemplated a three
year royalty-free ride, then it would be entitled to a determina-
tion that SGK’s failure to offer Novamont a comparable grace
period was a breach of its MFL clause. As indicated, however,
the evidence does not preponderate that such a three-year
forgiveness was embodied in the Hercules agreement or that a
royalty rate was used which differed from Hercules pre-
Novamont rate. Therefore, it cannot be said that SGK breached
its MFL obligation.
SGK contends that it offered Novamont a lump-sum payment
agreement with the lump-sum calculated according to the
method it says it used in arriving at the Hercules agreement,
that is, the method applied a royalty rate derived from
Novamont’s pre-existing agreement to Novamont’s projected
production, with appropriate discounts for the present value of
money and for contingencies. To establish its counter-claim, it
was up to Novamont to prove by a preponderance of the
evidence that a different method of calculation was used to reach
the Hercules agreement than that used to arrive at the
Novamont offer. Because it failed to carry that burden,
Novamont does not succeed on its counterclaim based on the
Hercules agreement.”
[6] Finally, Novamont claims to have been defrauded by
SGK in connection with the negotiations between it and SGK
revolving around the Hercules agreement in two respects. First,
Novamont contends that it was defrauded when SGK
represented the Hercules agreement as providing for a payment
of $1.6 million for a paid-up license when, in Novamont’s view,
“a large part of this sum went to pay past due royalties that had
*SGK contends that Novamont’s rejection of the lump-sum agree-
ment offered to it constituted a waiver of Novamont’s MFL rights
with respect to the Hercules agreement. Because of my conclusion
that Novamont failed to carry its burden of proof on this portion of
its counterclaim, I need not reach this issue.
B-39
been suspended.” Second, Novamont contends that it was
defrauded when SGK failed to disclose the manner in which the
Hercules agreement was calculated and failed to calculate the
Novamont offer according to the same method. Neither conten-
tion succeeds.
The first claim fails because the $1.6 million lump-sum pay-
ment, as | concluded supra pp. 572-573, was in fact a payment
for future use and not for past, suspended royalties. There was
therefore no misrepresentation in SGK’s characterization of it in
th. "espect.”
. ae second claim fails because Novamont has not shown that
SGK knowingly misrepresented the manner in which the
Hercules lump-sum payment was calculated. As indicated
above, the evidence does not preponderate that the Hercules
agreement embodied a three-year royalty free ride. Indeed, the
evidence does not preponderate that any one method of calcula-
tion was agreed upon in negotiating the Hercules lump-sum pay-
ment. SGK’s offer to Novamont was arrived at through a
method of calculation which SGK claims is the same as that
used in calculating the Hercules agreement, and because of the
uncertainty regarding the manner in which the Hercules agree-
ment was calculated, the record here does not support the con-
tention that that claim is or was knowingly false. Therefore,
Novamont does not succeed on its claim of fraud.
On the present record, it is not possible to fix damages because
Novamont has failed to account jor the period involved in this
action. There will therefore be a conference on July 15, 1981 at
4:00 p.m. to discuss the appropriate procedure for going forward
with proof of damages in accordance with this opinion prior to
the entry of judgment.
IT IS SO ORDERED.
* The forgiveness of past infri t implicit in this arrangement is
not violative of Novamont’s MFL clause rights for the reasons set
—_oo discussion of the Diamond Shamrock agreement, supra,
Pp. I.
APPENDIX C
UNITED STATES COLRT OF APPEALS
SECOND CIRCUIT
Ata stated term of the United States Court of Appeals, in and
for the Second Circuit, held at the United States Courthouse, in
the City of New York, on the twelfth day of May, one thousand
nine hundred and cighty-three.
xX
STUDIENGESELLSCHAFT
gtd agwEe 2 Pee OY United States Court
aintiff-Appellee-Cross Appellant, of Appeals
v. Filed May 12, 1983
A. Daniel Fusaro,
NOVAMONT CORPORATION nna.. Clerk, Second Circuit
USS. NOVAMONT Nos. 82-6143-7163
INCORPORATED,
Defendant-Appellant-Cross Appellee.
xX
A petition for rehearing containing a suggestion that the
action be reheard in banc having been filed herein by counsel for
the defendant-appellant-cross appellant, U.S.S. Novamont
Incorporated.
Upon consideration by the panel that heard the appeal, it is
Ordered that said petition for rehearing is DENIED.
C-2
It is further noted that the suggestion for rehearing in banc
has been transmitted to the judges of the court in regular active
service and to any other judge on the panel that heard the appeal
and that no such judge has requested that a vote be taken
thereon.
A. Daniel Fusaro, Clerk
by
/s/ Francis X. Gindhard
Francis X. Gindhart,
Chief Deputy Clerk
APPENDIX D
Supreme Court of the United States
No. A-96
NOVAMONT CORPORATION nna. U.'S.S. NOVAMONT
CORPORATION,
Petitioner
Vv.
STUDIENGESELLSCHAFT KOHLE m.b.H.
ORDER EXTENDING TIME TO FILE PETITION FOR
WRIT OF CERTIORARI
LPON CONSIDERATION of the application of counsel for
petitioner(s),
IT IS ORDERED that the time for filing a petition for writ of
certiorari in the above-entitled cause be, and the same is hereby
extended to and including September |, 1983.
/s/ Thurgood Marshall
Associate Justice of the Supreme
Court of the United States
Dated this 9th day of August, 1983
APPENDIX E
United States Constitution
Article I, Section 8, Clause 8
“Patents and copyrights
To promote the Progress of Science and useful Arts, by secur-
ing for limited Times to Authors and Inventors the exclusive
Right to their respective Writings and Discoveries;”
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