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Parties’ Agreement Under Rule 68 Did Not Require Payment of a Litigation Royalty

April 21, 2006

Decision icon Decision

Last Month at the Federal Circuit - May 2006

Judges: Rader, Clevenger (author), Dyk

In Parental Guide of Texas, Inc. v. Thomson, Inc., No. 05-1493 (Fed. Cir. Apr. 21, 2006), the Federal Circuit affirmed the district court’s ruling that Thomson, Inc. (“Thomson”) did not owe Parental Guide of Texas, Inc. (“Parental Guide”) a contingent payment under an agreement that settled a previous patent infringement suit between the parties.

Parental Guide previously sued Thomson and several other parties for infringement of U.S. Patent No. 4,605,964 (“the ’964 patent”). Parental Guide and Thomson eventually entered into a settlement agreement (“the Agreement”) under which Thomson made a $4 million payment. The Agreement also provided that if Parental Guide obtained a “Favorable Termination” of the suit, Thomson would make an additional contingent payment based on a “Litigation Royalty.” However, if all defendants in the lawsuit were to settle with Parental Guide before any Favorable Termination of the lawsuit, Thomson would pay no further royalty.

Afterwards, Mitsubishi Digital Electronics America, Inc. (“Mitsubishi”), the sole remaining defendant in the lawsuit, filed an offer of judgment under Fed. R. Civ. P. 68 (“the Rule 68 offer”), which Parental Guide accepted. The district court then entered Final Judgment, assessing damages of $1,098,250, based on a royalty rate of $1.15 per unit.

Parental Guide then made a demand on Thomson for a contingent payment. Parental Guide argued that it had obtained a “Favorable Termination” of the lawsuit via the Final Judgment with Mitsubishi, thereby obligating Thomson to pay royalties to Parental Guide. After Thomson refused to pay, Parental Guide filed an action for breach of contract and the district court granted SJ in favor of Thomson, concluding that Thomson did not owe any contingent payment under the Agreement.

The Federal Circuit affirmed, noting that the parties in drafting the agreement used terms of art from patent law. In particular, the Court found that, by defining “Litigation Royalty” as “the lowest per unit reasonable royalty, if any, as expressly determined in the [l]awsuit in accordance with the law applicable to 35 U.S.C. § 284,” the Agreement unambiguously contemplated that the “Litigation Royalty” would be a reasonable royalty determined by a judge or a jury after application of the Georgia-Pacific factors.

Because the terms of a judgment under Rule 68 are agreed upon by the parties, neither a jury nor the court expressly determined a reasonable royalty applying the Georgia- Pacific factors. Because there was no reasonable royalty determined in accord “with the law applicable to 35 U.S.C. § 284,” there was no “Litigation Royalty.” And without a “Litigation Royalty,” there could be no contingent payment. Thus, the Federal Circuit concluded that the district court correctly interpreted the Agreement and affirmed its grant of SJ.