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M.B.H. v. Novamont Corp.

March 28, 1983


Appeal from a judgment of the United States District Court for the Southern District of New York, Sweet, J., holding that plaintiff breached the most-favored licensee clause by allowing a certain licensee, but not defendant, to accrue royalties during pendency of infringement litigation and, thus, plaintiff was obligated to pay defendant the $94,651 in interest defendant was required to pay on royalties owed for period of litigation but withheld during that litigation. Affirmed in part, reversed in part.

Author: Fairchild


MESKILL, PIERCE, and FAIRCHILD,*fn* Circuit Judges.

FAIRCHILD, Circuit Judge

These appeals involve the interpretation and application of a "most favored licensee" (MFL) clause in a patent license agreement. Studiengesellschaft 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).*fn1

In the 1967 agreement, Ziegler, the original patentee, granted Novamont a non-exclusive license to produce certain polymers of propylene under United States Patent No. 2,113,115 (the '115 patent). Thereafter Ziegler brought action charging Phillips Petroleum Company with infringement. On June 23, 1971, the district court found no infringement.*fn2 Presumably because of the district court judgment, Novamont gave notice July 9, 1971 that it would discontinue payment of royalties. No 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, Novamont 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 all 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 period 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 entirely, 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 the aforesaid full text of such other license from Licensor, to substitute for the entirely of this Agreement all of the provisions of such other license."*fn3

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, undisclosed 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 provision 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 Power Company, amending previous license agreements 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 nondisclosure concerning these agreements with the other parties, amounting to fraud.

I.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 provisions more favorable than Novamont's. The royalty rates in the Diamond agreement were lower than those in the 1967 Novamont agreement. On the other hand the Diamond agreement 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.*fn4 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 substitution 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 provided 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 $50,000 more within two years. The entire $200,000 was non-returnable except that it could be credited against royalties up to 50% 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 reduction in royalty. In any event, says Novamont, the undisclosed paragraph must be deemed part of the licensing agreement, 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 undisclosed 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.

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 construed 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 Novamond 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 royalties (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 Diamond in the settlement of claims for infringement was irrelevant to the MFL clause.

The district court decided this issue in favor of SGK, correctly, 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. v. Vickers Petroleum Co., 41 Del. 238, 19 A.2d 727, 729 (1941); Rothstein v. Atlantic Paper Co., 321 F.2d 90, 96 (5th Cir. 1963); Searle Analytic, Inc. v. Ohio-Nuclear, Inc., 398 F. Supp. 229 (N.D. Ill. 1975).*fn5

The district court relied on these decisions, and we agree.

II. The Undisclosed Copolymer Option

Simultaneously with the 1970 license agreement and the undisclosed agreement concerning past infringement, Ziegler and Diamond made a separate Option Agreement. Diamond paid $20,000 on execution of the Option Agreement. The agreement 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 ...

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