Each contractual negotiation your company enters into carries with it a common subset of goals. The end result of negotiations should be a contract that both advances your company’s interests and protects its rights. The agreement should also clearly and unambiguously define the rights and obligations of each party during the agreement’s term. In other words, you will want to have a very clear understanding of the precise terms and conditions to which are you agreeing.
While it may seem obvious, a recent case decided by the U.S. Court of Appeals for the Federal Circuit again illustrates that if you intend a specific outcome to occur upon the happening of certain events, you and/or your company’s attorneys should take the time and care to negotiate and draft specific language that will achieve that outcome. Simply including language in an agreement that refers to a seemingly applicable statutory provision, rather than spelling out in detail your desired result, could detrimentally limit the reach of your agreement.
The Facts
In Parental Guide of Texas, Inc. v. Thomson, Inc., No. 05-1493, (Fed. Cir., April 21, 2006), the U.S. Court of Appeals for the Federal Circuit had to determine the effect of referencing a specific statutory provision in a written agreement.
In a previous lawsuit, Parental Guide had sued Thomson and several other parties for patent infringement. Parental Guide and Thomson reached a settlement in that lawsuit and entered into a release and license agreement pursuant to which Thomson made an initial damages payment and was required to make a contingent payment based upon a "litigation royalty" if Parental Guide obtained a favorable termination of the lawsuit against the other defendants. The release and license agreement defined "litigation royalty" as "the lowest per unit reasonable royalty, if any, as expressly determined in the Lawsuit in accordance with the law applicable to 35 U.S.C. § 284, by the final, irrevocable, and nonappealable order in the Lawsuit."
Before trial, Mitsubishi, the final remaining defendant in that lawsuit, filed an offer of judgment pursuant to Federal Rule of Civil Procedure 68, which is a provision that allows a defendant in federal court to offer, at any time more than 10 days before the trial begins, to allow judgment to be taken against it for a specified sum. If within 10 days after the service of the offer the offeree serves written notice that the offer is accepted, and the offer and acceptance are filed with the court, the clerk must enter judgment. If, however, the offer is not accepted, and the judgment finally obtained by the offeree is not more favorable than the offer, the offeree must pay the costs incurred after the making of the offer. In this case, Parental Guide accepted Mitsubishi’s offer and the court entered final judgment in Parental Guide’s favor.
Parental Guide then made a demand on Thomson for a contingent payment based upon the royalty rate contained in the Rule 68 offer and incorporated into the court’s final judgment. Thomson argued that no contingent payment was owed under the release and license agreement and refused to make such a payment, which resulted in the present Parental Guide of Texas, Inc. v. Thomson, Inc. case.
The Result and the Court’s Reasoning
The Court of Appeals for the Federal Circuit affirmed the district court’s ruling that no litigation royalty had been "expressly determined . . . in accordance with the law applicable to 35 U.S.C. § 284" in the patent infringement lawsuit, and that Thomson did not, therefore, owe Parental Guide a contingent payment under the release and license agreement.
In reaching its decision, the Court of Appeals noted that the specific statutory provision referenced by the parties in their definition of litigation royalty – 35 U.S.C. § 284 – requires that "[u]pon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement," that "[w]hen the damages are not found by a jury, the court shall assess them," and that "[t]he court may receive expert testimony as an aid to the determination of damages or what royalty would be reasonable under the circumstances." The court therefore reasoned that by specifically referencing 35 U.S.C. § 284 in the definition of litigation royalty, the release and license agreement unambiguously contemplated that a litigation royalty would be a reasonable royalty that was determined by a judge or a jury through the express application, by the judge or the jury, of a list of factors long since established in the case law (i.e., the Georgia-Pacific factors). However, under Rule 68 of the Federal Rules of Civil Procedure, the terms of the judgment were agreed upon by Mitsubishi and Parental Guide; the court had no input into any of the terms, nor any discretion to alter or modify the terms. More specifically, neither the judge nor jury made an express determination of a reasonable royalty, nor did the judge or jury undertake an evaluation of the Georgia-Pacific factors. By merely entering the Rule 68 judgment, the court had simply entered a judgment in which Mitsubishi and Parental Guide had already agreed to certain damages. Thus, Thomson did not owe Parental Guide any contingent payment under the release and license agreement.
Lessons Learned
There is a fairly good chance that Parental Guide, in negotiating and drafting the release and license agreement with Thomson, did not envision or intend for the outcome reached by the court. However, if Parental Guide had desired coverage broader than what could be reasonably inferred from a reference to Section 284 of the Patent Statute, it could have and should have taken the time and care to negotiate and draft specific language that would have achieved its desired outcome, rather than simply relying upon language that referred to a seemingly applicable statutory provision. As noted by the court Parental Guide:
Accordingly, when you and/or your attorneys are negotiating and drafting an agreement, you should try to avoid relying upon a specific statutory provision to govern an outcome where it is not necessary to do so, and where it is just as easy, although perhaps a little bit more time consuming, to set forth in detail exactly what you wish the outcome to be. Moreover, when someone involved in the negotiation initially insists upon referring to a specific statutory provision to govern an outcome, insist on sitting down with him or her to play out what that outcome may actually be. If it is not what you intend, if it is not clear, or if more than one outcome – one or more of which may be less desirable than the others – could result, take the time and care to set forth in detail in the agreement exactly what you wish the outcome to be.
It is during the negotiation and drafting of an agreement that you have the best control over what the outcome of the agreement will be. Once an agreement is executed and a dispute that cannot be resolved by the parties arises, it is no longer you, but a judge or jury, that will dictate the outcome. As the Parental Guide case illustrates, a reference in your agreement to a specific statutory provision could be interpreted more narrowly than you originally envisioned, and could lead to an unintended and undesirable outcome.
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