Fraud Negates License
November 19, 2001
Last Month at the Federal Circuit - December 2001
Judges: Clevenger (author), Dyk, and Schall
In Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., No. 00-1218 (Fed. Cir. Nov. 19, 2001), the Federal Circuit affirmed a district court’s judgment against DeKalb Genetics Corporation (“DeKalb”) for fraudulent inducement concerning a license with Rhone-Poulenc Agro, S.A. (“RPA”), trade-secret misappropriation, and patent infringement.
The litigation arose from disputes about several different technology transfers and licenses between RPA and DeKalb relating to herbicide-resistant corn. In 1985, DeKalb and nonparty Calgene, Inc. (“Calgene”) entered into an agreement (“the 1985 Agreement”) for the joint development of crops containing genetic material patented by Calgene. The 1985 Agreement gave DeKalb an exclusive license to the Calgene patents in the field of use of corn and provided for various royalty payments to be made by DeKalb to Calgene for products developed under the 1985 Agreement. In 1991, RPA, DeKalb, and Calgene entered into an assignment and assumption agreement (“the 1991 Agreement”) in which RPA assumed Calgene’s rights and obligations under the 1985 Agreement.
Beyond these agreements, DeKalb and RPA were involved in a broader collaboration to produce herbicide- resistant corn in which RPA would create various genetic constructs and DeKalb would transform corn cells by placing these constructs into the cells. In 1992, RPA provided one such construct, consisting of an optimized transit peptide and a mutated gene (“the RD-125 construct”), to DeKalb for the transformation process. In exchange for the RD-125 construct, DeKalb, through Dr. Mackey, promised to provide RPA with the results of a testing program on corn containing RD-125. DeKalb failed to inform RPA of a highly successful field test of the RD-125 corn conducted in 1994. Instead, DeKalb immediately began backcrossing the successful corn plants with commercial varieties of corn to obtain a marketable product. Also in 1994, in settlement of a lawsuit by RPA against Monsanto, RPA and DeKalb entered into a new agreement (“the 1994 Agreement”) that dissolved the 1985 and 1991 Agreements. RPA granted DeKalb a license to use various technologies, including the RD-125 technology, covered by the Calgene patents and RPA’s own patents.
RPA sued DeKalb, claiming that by not providing the results of the 1994 field test, DeKalb fraudulently induced RPA to enter into the 1994 Agreement. RPA asserted a claim for misappropriation of trade secrets, alleging that the RD-125 technology constituted an RPA trade secret. Further, RPA asserted a patent infringement claim based on another patent.
The district court had bifurcated the case into two different jury trials. In the first trial, which covered the fraud and licensing issues, the jury had found that DeKalb, by not disclosing the results of the 1994 field tests, had fraudulently induced RPA into entering into the 1994 Agreement. The jury had awarded RPA $1 in nominal damages, $15 million for unjust enrichment, and $50 million in punitive damages. In the second jury trial, which involved the infringement and misappropriation issues, the jury had found DeKalb liable for both patent infringement and trade-secret misappropriation. RPA entered into a stipulated agreement regarding damages for those claims.
Applying North Carolina law, the Federal Circuit affirmed the jury’s finding of fraudulent inducement. In North Carolina, for the remedy of rescission, the familiar elements of fraud need only be proven by a preponderance of the evidence. DeKalb argued that RPA had failed to demonstrate that DeKalb had made a representation with knowledge of its falsity, that RPA had failed to demonstrate that DeKalb had intended to deceive RPA, and that RPA had failed to demonstrate that RPA had reasonably relied on DeKalb’s allegedly misleading statements. Taking these first two arguments collectively, as permitted by North Carolina law, the Federal Circuit found a legally sufficient evidentiary basis for the jury’s verdict. In so holding, the Federal Circuit relied on the failure of DeKalb to disclose the favorable field tests conducted in 1994, correspondence from DeKalb to RPA that conspicuously lacked any mention of the field tests, the fact that a DeKalb employee and a DeKalb lawyer who participated in the 1994 license negotiations knew of the field tests, and the deceptive appearance of DeKalb witnesses at trial.
RPA’s reliance on DeKalb’s failure to disclose was reasonable, according to the Federal Circuit, because RPA and DeKalb scientists had a history of a close working relationship. Against the backdrop of this working relationship, DeKalb’s failure to disclose the successful field tests proved deceptive enough so that RPA’s reliance on DeKalb’s conduct was reasonable. Since the 1994 field tests produced important and unexpected results, and since those results were never disclosed, DeKalb gained an unfair advantage in the 1994 licensing negotiations. This unfair advantage, procured through failure to disclose important information, amounted to fraud.
In addition to affirming the punitive-damages award, the Federal Circuit affirmed the district court’s decision to rescind the 1994 Agreement and return the parties to the terms of the 1985 and 1991 Agreements. As a result, DeKalb retained no rights to the RD-125 technology because the 1985 and 1991 Agreements did not cover this technology. DeKalb argued that a modification of the 1985 and 1991 Agreements provided it with a licensing defense. In the first trial, the jury had found that an agreement was formed through the conduct of the parties in 1992. At this time, RPA provided the RD-125 construct to DeKalb, and DeKalb promised to provide test results to RPA. According to the jury, it is this Agreement that was breached and later formed the basis for a finding of fraudulent inducement. DeKalb argued that the 1992 modification provided it with a license to the RD-125 technology. The Federal Circuit held that the modification did not amount to a license for the RD-125 technology but was merely an agreement to provide RD-125 to DeKalb in exchange for test results. Even if the 1992 modification provided DeKalb with a license to the RD-125 technology, the Federal Circuit held that DeKalb’s material breach of that modification precluded DeKalb from enforcing it.
With the 1994 Agreement rescinded, DeKalb essentially had no defense to the patent infringement and trade-secret misappropriation claims. Applying North Carolina law, the Federal Circuit upheld the district court’s conclusion that DeKalb misappropriated RPA’s trade secret in RD-125. DeKalb asserted that publication of its own PCT application in 1995 constituted a disclosure of the RD-125 trade secret. The jury had found that the RD-125 technology ceased to be a trade secret upon the publication of RPA’s PCT application on RD-125 in 1997 and not upon publication of DeKalb’s PCT application on RD-125 in 1995. The jury had concluded that DeKalb did not have RPA’s permission to include RD-125 in its 1995 PCT application. The Federal Circuit observed that courts have carved out an exception to the general rule that publication of a patent application terminates all trade-secret rights in cases where the wrongdoer has published the trade secret. In this case, DeKalb could not use its own wrongful disclosure of RPA’s trade secret, the 1995 PCT publication of RD-125, in order to overcome a claim of trade-secret misappropriation.