Third Circuit Holds that Contract Providing for Sharing of Recovery from Infringement Suits May Possibly Include Sharing of Recovery from Offsets Paid in Settlements for Cross-Licenses

Authored by D. Brian Kacedon, John C. Paul, and Daniel F. Roland

When an inventor or other patent owner agrees to have another party enforce its rights, it may be difficult to anticipate all forms of compensation that may result from such enforcement and draft language that specifically addresses in all instances how compensation should be shared. Absent specific language in the agreement that addresses a particular arrangement, however, determining how to share such recovery can be complicated. For example, how does one share recovery in the form of a cross-license or other non-monetary compensation?

A recent case in the Third Circuit¹ illustrates this challenge and its possible consequences. In that case, the court found that the provision on sharing compensation could be read in different ways and the interpretation of the provision could not be resolved on summary judgment. Rather, a full trial on the merits was required. The court found that one possible interpretation of the provision that the inventor share in "any recovery of damages" was that the inventor might be entitled to recover a share of offsets that occurred in a cross-settlement agreement, even when the assignee did not actually receive any monetary payment as part of the cross-settlement. The court also found it possible that the assignee breached the implied covenant of good faith and fair dealing by structuring its settlement deal in a way that circumvented the inventor's reasonable expectation to share in the value of the settlement.

Background

Inventor G. David Jang was awarded the '021 patent, which relates to a coronary stent. In 2002, he entered into an assignment agreement with Boston Scientific Corporation ("BSC") in which he assigned to BSC the '021 patent along with other stent patents. The agreement granted BSC the exclusive rights to develop and sell stents using Jang's patents and to bring patent-infringement suits against third parties. BSC paid Jang approximately $50 million up front and agreed to pay him ten percent of future profits from his patents—or ten percent of "Net Sales" of "Contingent Payment Products" in the agreement's terminology—with the payments capped at $60 million. BSC further agreed to pay Jang an additional $50 million if its future profits from the patents reached $2.5 billion within five years. The agreement defined "Net Sales" to include any damages obtained from third-party infringers. Section 7.3(c)—the key provision in the case—directed that "any recovery of damages" from an infringement "suit or settlement" should first be used to pay BSC's legal expenses, with "the balance" being deemed part of BSC's Net Sales.

In 2003, Cordis sued BSC for infringement of two Cordis-owned patents and BSC filed a counterclaim against Cordis for infringement of Jang's patent. Separate juries found that Cordis infringed Jang's patent and that BSC infringed the Cordis patents. According to Jang's complaint, each company owed the other several billion dollars, and on the eve of the damages trial, BSC and Cordis settled. The settlement provided for only one cash payment: approximately $1.725 billion from BSC to Cordis, which is alleged to represent the net difference—or the cash offset—between the companies' claims. The settlement also entailed an exchange of licenses between BSC and Cordis, including a license for the '021 patent.

Following the settlement, BSC denied that it had recovered any damages under the agreement. If BSC had, it would have been obligated to share with Jang. Jang then filed suit and alleged, among other things, that BSC breached the agreement by refusing to pay Jang his share of the infringement recovery; that BSC breached the agreement by refusing to pay Jang his share of the value from licensing his patents; and that BSC breached the implied covenant of good faith and fair dealing. Each party moved for judgment on the pleadings, the district court granting judgment for BSC and finding that the value BSC obtained in the Cordis settlement did not constitute a "recovery of damages" under section 7.3(c) of the agreement and that there could be no breach of the implied covenant of good faith and fair dealing without a breach of the contract's express terms. Jang appealed.

The Jang Decision

On appeal, the Third Circuit would only affirm the district court's decision if, when viewing all the facts in the light most favorable to Jang, no material issue of fact remained. The court began its analysis by considering whether section 7.3(c) was an ambiguous provision. Although Jang argued for a broader reading of the term "damages," the Third Circuit agreed with the district court that the ordinary meaning of "damages" is a sum of money.

The Third Circuit next addressed whether the cash offset was a monetary gain for BSC, and thus a "recovery of damages." The court deemed that an offset was the functional equivalent of a cash payment because it simply combined two transactions into one; thus, the court found that the settlement produced a monetary gain for BSC. The Third Circuit held, however, that it was arguably ambiguous whether section 7.3(c) applied only to a net recovery as a whole, or instead applied to any recovery on the Jang patents, even if the suit/settlement as a whole produced a loss. Reasoning that the term "any recovery of damages" in section 7.3(c) could be read to include the cash offset, the Third Circuit held that the district court erred in dismissing Jang's breach of contract claim as a matter of law.

Jang also contended that he was entitled to share in the value of the licenses that BSC received in the Cordis settlement. According to Jang, because the parties did not contemplate the possibility of a nonmonetary settlement, section 7.3(c) is ambiguous with regard to the licenses. The court reasoned that, notwithstanding the possibility that Jang and BSC failed to consider a settlement-in-kind when negotiating the agreement, contract terms must still be interpreted according to their plain meaning. In the eyes of the court, section 7.3(c) plainly applied to monetary recoveries only. Holding that the contract did not require BSC to share the proceeds of a settlement-in-kind, the Third Circuit agreed with the district court that BSC did not breach the agreement's express terms by refusing to share the value of the Cordis licenses.

Jang further contended that BSC breached the implied covenant of good faith and fair dealing by structuring its settlement deal in a way that circumvented its obligation to share any recovery with Jang. The Third Circuit stated that, contrary to the district court's opinion, breach of contract is not a predicate for a breach of the covenant of good faith and fair dealing. To survive dismissal of his claim on the pleadings, Jang needed to allege only a plausible claim that BSC intentionally thwarted Jang's reasonable expectation to share in the value of the settlement. Even though BSC may ultimately convince a fact-finder that Jang's expectation was not justified, the Third Circuit found nothing in the agreement flatly contradicting that expectation. The Third Circuit, therefore, held that the district court should not have dismissed the claim because disputed material facts remained about the purpose of section 7.3(c) and the reasonableness of Jang's expectation.

One judge dissented from the holding, viewing section 7.3(c) as unambiguously limiting Jang to receive a share of a net recovery by BSC. Regarding the claim for violating the implied covenant of good faith and fair dealing, the dissenting judge viewed another provision in the contract, section 7.3(b), as giving BSC unqualified discretion to control and resolve legal proceedings, which would necessarily preclude Jang's claim that BSC was obligated to structure a settlement to provide him with monetary recovery.

Strategy and Conclusion

This case demonstrates the value of explicitly defining terms to avoid unintentional ambiguities that might lead to later disputes, and it illustrates the challenges of anticipating and drafting specific provisions to address a variety of possible litigation outcomes such as cross-licenses and non-monetary compensation.

Endnotes
¹The Jang decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2013/Jang_v_BSC.pdf.

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