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Patent Infringement Claim Barred Under Covenant Not to Sue as Rights Under Settlement Did Not Transfer with Business Assets

May 16, 2007
Burgy, Adriana L.

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Last Month at the Federal Circuit - June 2007

Judges: Bryson, Clevenger, Linn (author)

[Appealed from: D. Minn., Judge Ericksen]

In General Mills, Inc. v. Kraft Foods Global, Inc., Nos. 06-1569, -1606 (Fed. Cir. May 16, 2007), the Federal Circuit affirmed the district court’s dismissal of General Mills, Inc.’s (“General Mills”) claim for patent infringement against Kraft Foods Global, Inc. (“Kraft”) and affirmed the district court’s finding that Kraft abandoned its counterclaim alleging that General Mills breached a settlement agreement.

General Mills sued the Farley Candy Company (“Farley”) for patent infringement of two patents directed to rolled food items. General Mills and Farley resolved that dispute through a settlement agreement. As part of the settlement agreement, General Mills released its patent claims and provided for a covenant not to sue Farley for past, current, or future infringement in exchange for a lump sum. The settlement agreement defined Farley as encompassing “Farley Candy Company and its Affiliates, including, without limitation, all parent corporations, subsidiaries, heirs, executors, administrators, and corporate predecessors and successors.” Slip op. at 2 (emphasis in original). Likewise, the covenant not to sue contained language that released Farley and its “successors.”

The settlement agreement also contained two provisions that limited the conditions to the assignment or transfer of rights under the agreement to another party by Farley. The first provision required that the party assigning or transferring their rights provide written notice to the other party. The second provision required that, inter alia, Farley may assign its rights and obligations under the settlement agreement provided that “Farley must transfer its entire rolled food product business, including without limitation all assets, good will, and trademarks to the party to whom the rights and obligations are being assigned; . . . .” Id. at 3.

Based on a series of transactions, Kraft succeeded Farley and complied with the requirements of the settlement agreement, as General Mills conceded. Subsequently, Kraft sold and transferred Farley’s assets, which included Farley’s trademark and good will, to Catterton Partners (“Catterton”), but Kraft retained at least some portion of Farley’s original assets as well as Farley’s rolled food business. Following the sale to Catterton, Kraft sold the remaining portion of Farley’s assets to Kellogg Company (“Kellogg”).

For the time period between the Catterton and Kellogg transactions, General Mills filed suit against Kraft, alleging infringement of the two patents directed to rolled food items that were originally asserted against Farley. Kraft answered and counterclaimed, alleging that General Mills breached the settlement agreement. General Mills replied to Kraft’s counterclaim, and Kraft moved for SJ. General Mills later filed an amended complaint reasserting the patent infringement claim and added a new breach of contract claim, which included a copy of the settlement agreement. Kraft moved to dismiss both counts of the amended complaint and never answered the amended complaint or reasserted its counterclaim.

The district court granted Kraft’s motion to dismiss and thereby dismissed General Mills’s patent infringement claim. The district court then declined to exercise jurisdiction over the remaining state law contract claim and, thus, entered judgment in favor of Kraft. As for Kraft’s counterclaim, the district court stated that “Kraft did not reassert its counterclaim in response to the amended complaint, no counterclaim was pending when the district court entered judgment and . . . the judgment was therefore final and complete.” Id. at 5. General Mills appealed and Kraft cross-appealed.

On appeal, General Mills argued that the Catterton transaction divested Kraft of any rights under the settlement agreement, as Farley’s assets were sold and Kraft cannot be in the shoes of Farley. The Federal Circuit explained that General Mills’s argument stems from the provision in which Farley “‘must transfer its entire rolled food business’ if it wishes to assign its rights under the Settlement Agreement without General Mills’ consent.” Id. at 7. The Court noted that the district court correctly recognized that the settlement agreement focused on the assignment of rights and Kraft did not assign its rights under the settlement agreement.

Moreover, the Court highlighted that the settlement agreement does not “bar Farley from retaining its rights under the agreement when it transfers parts of its rolled food business.” Id. As a result, the Court concluded that “[t]here is simply nothing in the contract that requires Kraft to retain all or any particular assets of the Farley business to preserve Kraft’s status as successor.” Id. at 8.

The Court further indicated that the only way General Mills could prevail was if “Kraft’s rights under the agreement must have either (1) terminated by operation of law at the time of the Catterton transaction, or (2) been transferred from Kraft to Catterton by operation of law or by the terms of the Catterton transaction.” Id. As for the first circumstance, courts avoid construing contracts to forfeit a party’s rights, unless there is clear intent in the contract to do so, and this holds true for patent rights.

Likewise, unless the transaction is a consolidation or merger, transfers of property in corporate law do not include all the powers or immunities of the selling corporation. Admittedly, Catterton did not acquire all of Farley and was not a merger or consolidation. Thus, the Federal Circuit held that the district court properly dismissed General Mills’s patent infringement claim against Kraft.

Regarding Kraft’s counterclaim, the Federal Circuit found that “a motion to dismiss does not extend the time for filing an answer to an amended complaint, . . . where the time for responding to the original complaint has already run.” Id. at 12. Specifically, the Court explained that under Fed. R. Civ. P. 15, Kraft had only ten days after service of General Mills’s amended complaint to file an answer and counterclaim because the response for the original pleading had lapsed. Although Fed. R. Civ. P. 12(a)(4) may extend periods of time, the time for answering an amended complaint is set by Rule 15. Accordingly, the Federal Circuit held that the district court did not abuse its discretion in finding that Kraft abandoned its counterclaim.