Federal Circuit Enforces Fee-Shifting Provision in Settlement-and-License Agreement

Authored by D. Brian Kacedon, John C. Paul, and Andrew E. Renison

Due to the constantly changing nature of the corporate environment, individuals with full knowledge of agreements entered into by a corporation often do not remain with the corporation throughout the life of every agreement they negotiate. Thus, it is not uncommon that a corporate licensing executive may not have complete knowledge of every agreement entered into by the corporation or their impact on the company. In Buckhorn Inc. v. Orbis Corp.,¹ the plaintiff brought suit for infringement of a patent apparently unaware that the defendant had a license to that patent under an agreement entered into by predecessor corporations. Despite this lack of knowledge, the Federal Circuit, in an unpublished opinion, enforced a fee-shifting provision in that agreement, awarding attorney fees to the defendant who was the prevailing party, and held that such enforcement was not unconscionable.

Background

In 1990, Schoeller's predecessors-in-interest, collectively Xytec, brought a patent-infringement action against Orbis's predecessor-in-interest, Ropak, over certain bulk containers used in the materials-handling business. A 1992 settlement-and-license agreement resolved the litigation and provided Ropak with a license to four patents and any corresponding child patents, which included the '927 patent and its child, the '592 patent.

The 1992 agreement contained several key provisions. A fee-shifting provision provided that, "[i]n any litigation based on a controversy or dispute arising out of or in connection with this Agreement or its interpretation, the prevailing party shall be entitled to recover all fees, costs, reasonable attorney's fees, and other expenses attributable to the litigation." Another provision required Xytec's express written consent before Ropak could transfer the licensed rights to a competitor, "except in connection with the sale or merger of substantially all of Ropak with another such entity."

Ropak's corporate structure changed over the years. In 2000, Ropak transferred its materials-handling business, including its rights under the 1992 agreement, to LMH. In 2006, Orbis acquired LMH and changed its name to OMH. Also, in 2007, Schoeller licensed the '592 patent to Myers. That license allowed Myers to assert infringement of the '592 patent and to transfer its rights and obligations under the agreement to a subsidiary without notifying Schoeller. After Myers' wholly owned subsidiary, Buckhorn, brought the present action against Orbis and OMH in 2008, OMH merged into Orbis in 2009, thereby purporting to transfer all of OMH's assets to Orbis—including its rights under the 1992 agreement. In 2010, the '592 patent expired.

Then, almost two years after OMH merged into Orbis, the district court granted summary judgment on Orbis's affirmative-license defense, finding that it was licensed as the successor-in-interest to the rights under the 1992 agreement for the '592 patent and that the transfer of those rights to Orbis was consistent with the 1992 agreement. Those findings resolved most of the suit in Orbis's favor. But the district court denied Orbis's subsequent motion for fees and costs from Schoeller, which Orbis sought under the fee-shifting provision of the 1992 agreement. The district court found that the fee-shifting provision did not apply because the plaintiffs had no knowledge of the license at the time of suit and further because enforcing the provision would be unconscionable.

The Buckhorn Decision

The Federal Circuit, applying state contract law, found that the "clear and explicit" fee provision language did not require knowledge of either the 1992 agreement or the scope of the rights thereunder at the time of filing. Further, the court deemed the fee provision not unconscionable, as the 1992 agreement was fair when entered into and the fee provision did not produce an overly harsh result.

The court first examined the alleged knowledge requirement to enforce the fee provision. Initially, the Federal Circuit clarified that, although the trial court stated that the plaintiffs lacked knowledge of the 1992 agreement, Schoeller in fact produced the 1992 agreement in discovery; rather, Schoeller only denied being aware that the 1992 agreement covered the '592 patent. Regardless, the court explained, the parties to that agreement intended to resolve future disputes over the '927 patent and its progeny, namely, the '592 patent, with a broadly worded fee provision. In the Federal Circuit's view, the trial court did not give proper effect to the "in connection with" language in the fee provision. Specifically, this litigation related to the rights under the Agreement, and the "clear and explicit" fee provision language did not require any knowledge of the Agreement or those rights at the time of filing.

Next, the court examined whether enforcement of the fee provision was unconscionable. Applying state contract law, the Federal Circuit looked at both procedural and substantive unconscionability. The court reiterated that unconscionability must be determined at the time of contracting; the district court erred by looking at events after the 1992 agreement, rather than at the time Ropak and Xytec entered into that agreement. According to the Federal Circuit, Ropak and Xytec were sophisticated business parties that thoughtfully worked out a settlement to resolve both the on-going litigation and future disputes. Further, the fee provision was not overly-harsh because it was reciprocal, as it would inure to the benefit of either prevailing party.

Finally, the Federal Circuit distinguished the provision's alleged unconscionability from the reasonableness of the fee award to Orbis. Schoeller argued in support of the trial court's unconscionability finding that Orbis and OMH were in a better position to assess the validity of the transfer of rights under the 1992 agreement and that Orbis and OMH delayed producing evidence about the changes in the corporate structure of their predecessors-in-interest. Specifically, Schoeller argued that it did not know whether the exception in the provision governing the transfer of the rights granted applied—Ropak  needed Xytec's express consent to transfer the license except when "in connection with the sale or merger of substantially all of Ropak with another such entity"—because of the delayed production of evidence. The Federal Circuit clarified that the delay might impact the reasonableness of the fee award on remand, but that it would not affect Orbis's lawfully received rights under the 1992 agreement.

Strategy and Conclusion

This case highlights some of the challenges faced by licensing executives in the corporate environment who, due to frequency of corporate restructuring, may be unaware of the existence, scope, or impact of license agreements that affect the corporation. This case also highlights the possible implications of agreeing to fee-shifting provisions in license agreements.

Endnotes

¹ The Buckhorn opinion can be found at http://www.finnegan.com/files/Publication/c037630d-09cb-4954-be54-b6858ea1e809/Presentation/PublicationAttachment/479a9a6e-2a8d-4280-a22f-bbcbf37d1fab/12-1643%209-19-13.pdf.

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