In the

United States Court of Appeals

For the Seventh Circuit

____________

Nos. 07-1726, 07-1727

ERAGEN BIOSCIENCES, INC.,

Plaintiff-Appellee, Cross-Appellant,

v.

NUCLEIC ACIDS LICENSING LLC,

Defendant-Appellant, Cross-Appellee,

and

STEVEN A. BENNER,

Defendant, Cross-Appellee.

____________

Appeals from the United States District Court 

for the Western District of Wisconsin.

No. 06-C-305-C—Barbara B. Crabb, Chief Judge.

____________

ARGUED JUNE 2, 2008—DECIDED SEPTEMBER 2, 2008

____________

Before EASTERBROOK, Chief Judge, and ROVNER and

WOOD, Circuit Judges.

WOOD, Circuit Judge. Litigation can sometimes take on

a life of its own, propelling the parties into maneuvers
2 Nos. 07-1726, 07-1727

and rhetorical flourishes that might not have been undertaken in more placid times. This case seems to be a cautionary tale for how the pressures of litigation can overtake

parties like Hokusai’s wave swamping the boats (“The

Great Wave Off Kanagawa,” ca. 1831, Katsushika Hokusai

(1760-1849)).

Dr. Steven Benner invented and patented some useful

techniques for using DNA in laboratory environments. He

formed Sulfonics, Inc., which in 1999 was merged into

EraGen. As part of this acquisition, EraGen signed several

licensing agreements with Benner allowing it to use his

patents. For a time Benner sat on EraGen’s board of

directors. Things were not as good as they seemed, however. From the beginning, EraGen and Benner did not

trust each other, and they had constant disputes over

matters including the timeliness of royalty payments,

sublicensing agreements EraGen had made with Bayer,

whether EraGen’s management should be replaced, and

whether Benner had succeeded in his effort to terminate

the agreements in 2004. The parties concluded new agreements on April 27, 2005, in an attempt to set aside their

earlier problems. Of the several agreements, the most

important for this litigation is the Artificially Enhanced

Genetic Information System (AEGIS) Agreement (“the

Agreement”). The Agreement provided for a semiannual

payment of royalties on March 1 (covering July to December of the previous calendar year) and September 1 (covering January through June of that calendar year).

The wheels fell off the wagon with the very first royalty

payment under the new Agreement on September 1, 2005:
Nos. 07-1726, 07-1727 3

Benner thought that he was underpaid, but EraGen

thought that it had overpaid him. Benner then tried to

exercise his right to terminate, but EraGen disputed

(again) whether that termination was effective. To complicate matters, Benner had assigned all of his rights under

the Agreement to Nucleic Acids Licensing (“NAL”), as of

August 11, but he did not inform EraGen that he had done

so until October 21. (From this point onward, unless the

context requires otherwise, we refer to Benner and NAL

interchangeably.) To make matters even more confused,

there appears to have been a Bayer sublicense for cystic

fibrosis research that may or may not have been concealed

from NAL because it may or may not have been related

to the AEGIS patents—but which the district court did

not examine in any case. (In order to distinguish it from

an existing Bayer sublicense, we refer to the “missing”

license as the “cystic fibrosis sublicense” throughout this

opinion.) Letters, then threats, then summonses were

exchanged, and the case ended up in federal court.

On cross-motions for summary judgment, the district

court split the difference. It found that EraGen did breach

the Agreement by underpaying Benner, but it also found

that Benner had waived the breach through his conduct

in the months that followed. Both parties asserted

claims for money had and received (unjust enrichment),

but the district court granted summary judgment against

both on that issue. The district court likewise granted

summary judgment against both parties on claims of a

breach of good faith and fair dealing. No one has appealed from the latter ruling. The rest is left for us to sort

out on de novo review. See Harrell v. United States Postal
4 Nos. 07-1726, 07-1727

Service, 445 F.3d 913, 918 (7th Cir. 2006). We do so under

the substantive law of Florida, which (all agree) is the

jurisdiction to which Wisconsin’s choice-of-law

principles direct us.

I

Before reaching the central question—was the Agreement

properly terminated—we must decide whether this is

still a live issue. In other words, even if Benner took the

right steps to terminate the Agreement, did he then waive

the benefits of that termination and allow the Agreement

to continue uninterrupted? This, roughly, is how the

district court interpreted the sequence of events. It concluded that NAL and Benner had (after several detours)

terminated the Agreement effective November 2, 2005,

but that they reopened the discussions about royalties

in February 2006 and continued them through May without reasserting that the Agreement had been terminated.

Even more persuasive to the district court was the fact

that NAL accepted and deposited the March 1, 2006,

royalty payment without challenge, even though the

Agreement had long since, by NAL’s lights, supposedly

been terminated. NAL also sent a letter in March indicating that “this matter can be resolved,” which seemed

to the district court inconsistent with termination. For

these reasons, the district court found that NAL continued to act as if the Agreement were still in force after

declaring it terminated, and thereby somehow nullified the

termination and forgave the breach. See Acosta v. Dist. Bd.

of Trustees of Miami-Dade Community College, 905 So. 2d 226,

229 (Fla. Dist. Ct. App. 2003).
Nos. 07-1726, 07-1727 5

There is another way to look at NAL’s actions, however:

after declaring that the Agreement had been breached and

exercising its right to terminate, NAL could simply have

been mitigating its damages. The Agreement specifically

provided that all rights under the licenses would revert to

Benner (or NAL, after assignment) upon termination.

Agreement §§ 2.3, 4.2. Upon proper termination of the

Agreement, EraGen would have no right to retain the

royalties, because it no longer held the licenses or benefitted from the sublicenses. Thus, NAL’s acceptance of

royalty payments from EraGen would merely mitigate

the damages arising from the breach precipitating the

termination: that money would arguably belong to NAL if

it sued for unjust enrichment on a properly terminated

contract. Florida applies the ordinary principles of mitigation of damages to contract law, Young v. Cobbs, 110 So. 2d

651, 653 (Fla. 1959), and so shall we: if a party is mitigating

damages, it is not, in so doing, waiving the breach that

caused the damages.

The facts offer more support for the mitigation hypothesis than they do the waiver interpretation. In its letter of

March 4, 2006, acknowledging receipt of the checks, NAL

expressly reiterated its position that the AEGIS Agreement

had been terminated in November. The Agreement itself

says that termination “shall not release either party from

any obligation heretofore accrued.” Agreement § 4.4. The

March 2006 payment was for royalties accrued from July

through December of 2005, most of which predated the

November 2005 termination. Given the wording of this

letter and the accrued obligation, acceptance of the payment is better seen as mitigation of damages rather

than waiver of any claim.
6 Nos. 07-1726, 07-1727

Another reason to reject the waiver interpretation is that

it creates a logical problem: if a contract has been terminated, rightly or wrongly, is it possible any more to

“waive” anything about it? While one can waive a breach

and proceed as if the contract were still in force, termination is a different story: “When a contract is terminated,

even wrongfully, there is no longer a contract.” HorwitzMatthews, Inc. v. Chicago, 78 F.3d 1248, 1251 (7th Cir. 1996)

(Illinois law); see also Indian River Colony Club, Inc. v.

Schopke Constr. & Eng’g, Inc., 592 So.2d 1185 (Fla. Dist. Ct.

App. 1992). If the contract was properly terminated, there

is nothing left to waive (other than, perhaps, continued

benefits under the contract, although one could also

mitigate damages by accepting such benefits). If the

contract was wrongfully terminated, it is still at an end;

the wrongful termination, however, gives rise to a claim

on behalf of the aggrieved party.

The importance of this distinction is confirmed when we

consult the Agreement before us. Termination can

take place upon the occurrence of any one of a list of

events. See Agreement § 4.2. While other occurrences

might give rise to a lawsuit and damages, only certain

enumerated breaches of contract are regarded as serious

enough to justify termination. NAL and Benner might

have waived their rights under the Agreement by refraining from exercising the right to terminate under § 4.2,

but they did not: by claiming termination, they demonstrated that they were not willing to overlook EraGen’s

failure to perform.

This district court appeared to conflate breach and

termination in analyzing the waiver issue. Although that
Nos. 07-1726, 07-1727 7

is understandable given how closely related they are in

this contract, it is still error. We find that NAL did not

waive its right to terminate the Agreement, and thus that

there is a live question before us whether the steps that

it took were effective to bring about termination.

II

So far we have assumed that the Agreement was properly terminated; we now turn to examining that assumption to see if it is correct. At this point, the wording of the

Agreement becomes important. We proceed in two steps:

first, were there proper grounds for termination, and

second, if so, did NAL properly communicate the fact that

it was exercising its right to terminate? “In contract

interpretation cases, we review a district court’s interpretation of an unambiguous contract de novo. . . . If the

contract is ambiguous, a more deferential standard of

review is applied to the interpretation of the terms and

factual findings.” Platinum Tech., Inc. v. Federal Ins. Co., 282

F.3d 927, 931 (7th Cir. 2002) (citation omitted).

The provision governing termination is § 4.2 of the

Agreement:

Benner may terminate this Agreement upon written

notice to EraGen upon:

A. non-payment of the payments due Benner

under Sections 3.1, 3.2, 3.3 and 3.4, and 5.3,

provided that EraGen or its designee shall have

the right to cure such breach within sixty (60)

days of EraGen receiving written notice from

Benner;
8 Nos. 07-1726, 07-1727

. . . .

Upon termination of this Agreement pursuant to

Section 4.2, all of the rights in the Licensed Patents and

Know How will revert to Benner, subject only to

Benner’s obligations to sublicensees [enumerated

elsewhere].

An underpayment of royalties would constitute a breach,

giving EraGen a period during which it had a right to

cure after it was notified. Here, Benner promptly

notified EraGen on the day after he received the check,

September 2, 2005, of his conclusion that there had been

an underpayment, triggering a cure period ending November 2, 2005: on that date the contract would automatically

terminate.

We must refer to the words of the contract to see whether

this sequence of events supported termination. Benner

believed that he had been underpaid, and thus that he

was permitted to declare EraGen in breach and to invoke

§ 4.2; EraGen was convinced that there was no breach, and

that it had actually overpaid Benner. It has always

asserted that no proper ground for termination existed,

and so, it concludes, Benner was not entitled to terminate

the contract.

The primary reason for the frustrating lack of clarity

about this situation is that EraGen failed to furnish the

royalty report required by the licensing agreement with

its September 1, 2005, royalty payment. When he saw the

amount tendered, Benner computed the amount that he

(and NAL, given that the rights had been assigned by this

point) thought were owed based on several publicly
Nos. 07-1726, 07-1727 9

available sources. Benner came up with a number approximately $3,416 greater than the amount of the check;

most of the difference was attributable to royalties from

the AEGIS licenses. Meanwhile, on September 7, 2005,

EraGen sent a letter to Benner asserting that it had underpaid on several sublicenses but overpaid on an existing

Bayer sublicense, for a net overpayment of approximately

$40,000 (later amended to $50,000 after an analysis by a

certified public accountant; we are also still setting aside

the “missing” cystic fibrosis sublicense).

The greatest part of the discrepancy between the competing totals comes from the parties’ difference of opinion

about the proper interpretation of the term “accruing” in

§ 3.7 of the Agreement. Section 3.7 is a timing clause,

designed to specify when a higher royalty rate would come

into effect. It said that a higher royalty rate would be paid

on “all revenues accruing from Net Sales or sublicensing . . .

on or after February 15, 2005.” Agreement § 3.7 (emphasis

added). The money from the Bayer sublicense in question

was booked before February 15, but actually reached

EraGen’s accounts after February 15. EraGen asserts that

§ 3.7 was using the term “accruing” in the accountant’s

sense, under which the royalties would be paid on the

lower pre-February 15 rate for all transactions booked

before that date. Benner asserts that the “plain meaning” of

the term implies cash-in-hand. Revenues, he thinks, did not

accrue from sales until the sale was complete and payment

made. The district court accepted Benner’s position, but we

think that this puts too much of a strain on the language

the parties chose for their contract.
10 Nos. 07-1726, 07-1727

First, we note that the distinction between accrual and

cash basis transactions is a common one in the business

world: some people keep track of transactions as they are

booked (accrual businesses), and others keep track of them

as money is spent or collected (cash businesses). Without

evidence to the contrary, we see no reason to assume that

the parties to the AEGIS Agreement chose to use the

word “accrual” idiosyncratically to mean “cash basis.”

Second, neither party disputes that EraGen uses the accrual

method of accounting and that Benner knew this. Benner

sat on EraGen’s board of directors long enough both to see

that this was the case and to understand what it meant.

The Florida Supreme Court has also expressed no doubt

that the term “accrued,” especially when used against a

background of accounting, means “an item . . . definitely

ascertained as to its amount, and acknowledged to be due,”

Orlando Orange Groves Co. v. Hale, 119 Fla. 159 (1935). In the

AEGIS Agreement, the term “received” (rather than

accrued or accruing) is used elsewhere in the document,

see, e.g., Agreement §§ 3.4, 3.10, raising a strong inference

that the use of “accruing” in § 3.7 was for a specific reason.

The parties here are sophisticated enough to make us

reluctant to assume that they meant nothing by their

choice of words in a fully-dickered document. The description of the royalty payments in § 3.9 confirms that the

royalties are paid for periods “in which such amounts were

earned,” not when they were actually received. There is

sufficient information within the Agreement to raise a

strong inference that the term is not even ambiguous.

Even if we were to assume, generously, that the term

“accrued” is ambiguous and thus that we should resort to
Nos. 07-1726, 07-1727 11

parol evidence to prove its meaning, the balance tilts

strongly in favor of an interpretation following the accounting convention. This was not the parties’ first shot at

a contract. They had concluded a previous agreement that

had failed because EraGen did not pay its royalties on

time. The issue of timely payment was on the table and

both Benner and NAL had every incentive to be crystal

clear on the timing issue. Indeed, Benner seemed to

interpret the clause in the accounting sense. In a

letter written October 24, 2005, concerning the timing of

royalties, Benner even asked whether the Bayer royalty

money “was on EraGen’s books as accrued income before

February 15” because this would “determine[ ] the royalty

rate.” Moreover, it was NAL’s own lawyers who inserted

the phrase “revenues accruing from Net Sales” in place of

the single word “transactions.” Because this is a patent

license agreement, the relevant transactions are the sales of

products using the licensed technologies to third parties.

Such a transaction takes place at the moment the product

is sold, which is also when EraGen realizes its revenue.

This matches with the normal business definition of

“accruing,” but not with a reading that takes “accruing” to

mean actual receipt of funds.

With all of this parol evidence in hand, the weight of the

arguments favoring the “accounting” meaning overpowers

the countervailing notion that the district court drew from

the fact that the Agreement did not specifically state

that it was using “accruing” in a technical sense. The

district court found both readings of the term plausible,

but it favored the plain meaning offered by Benner and

NAL. We find both possible, but only one plausible. In the
12 Nos. 07-1726, 07-1727

context of a clause dealing with the financial details of a

carefully negotiated contract between parties that had

been doing business together for years, a shift in wording

between “accruing” and “received” cannot be disregarded.

The term is unambiguous, and thus the district court

erred when it found that the term “accruing” referred to

actual revenues received, rather than revenues booked.

This conclusion has several consequences. Benner based

his termination of the Agreement on a mistake, putting to

one side for the moment the cystic fibrosis sublicense (to

which we return below). He thought that EraGen

had underpaid royalties, but when one draws the line

between the old royalty rate and the new one using

accrued transactions, it appears that EraGen indeed

overpaid by approximately $50,000. This does not mean

that Benner’s notice of termination was ineffective, but

it does mean that Benner may have ended the Agreement

wrongfully.

III

Benner and NAL offer a second ground that, in their

view, demonstrates that the termination was justified. They

assert that EraGen failed to abide by the section of the

Agreement requiring it to maintain the proper filings with

the Patent and Trademark Office (“PTO”). Section 5.3 of

the Agreement provides that EraGen must pay the maintenance fees for the patents and, if necessary, take care of

changing the status of the holding organization from

that of a “small” entity to a “large” entity. (Certain fees

are higher when patent licenses are held or practiced
Nos. 07-1726, 07-1727 13

by large entities rather than small ones. See 37 C.F.R.

§ 1.20(e)-(h). When the patents and licenses were practiced only by EraGen or Sulfonics, they were held by a

small entity. Bayer, however, is indisputably a large entity,

and so once it had rights to the patents, the filings had to

be corrected to reflect its role.) One of the grounds for

terminating the Agreement is the failure to maintain the

proper filings, including information about entity status,

with the PTO. See Agreement § 4.2.A. Importantly, this

is a section that requires written notice of the breach and

gives a right to cure within 60 days of receipt of the notice.

NAL wrote one letter to EraGen on October 24, in

which it asserted that “EraGen has not made payments

due under Sections 3.1, 3.2, 3.3 and 3.4, and 5.3. Under

Article 4.2 of the Agreement, failure to make these payments is sufficient grounds for termination. Therefore, the

notice of Termination, dated September 2, 2005, stands.”

Later, it complained more specifically to EraGen in a

letter of November 27, 2005, that EraGen had failed to

comply with its obligations under Article 5.3. EraGen

followed up with some emails seeking Benner’s cooperation in correcting the PTO problems, and by March 4, 2006,

it had completed corrective action. The PTO accepted the

payments and corrected the patents with no prejudice to

the holders and no net penalties.

NAL maintains that the fees should have been paid in

March 2005, but it is unclear where in the contract it found

that deadline. The only clause mentioning a time for

payment says that the maintenance fees must be paid

within two months of becoming payable. Agreement § 5.3.
14 Nos. 07-1726, 07-1727

Neither party addresses the date to which this might

refer. Moreover, the Agreement imposes no deadline for

changing the status of the entities holding the patents.

More significantly, we agree with the district court that

NAL and Benner provided no notice whatsoever to EraGen

that it might have breached this part of the contract, and so

it never had the chance to cure its failure to perform and

avoid termination. NAL contends the October 24 letter

sufficed to give EraGen written notice, because it mentioned § 5.3 at the end of the laundry list of provisions

under which EraGen had supposedly failed to pay. (Actually, the list more or less quotes § 4.2 of the Agreement.) It

is asking far too much of EraGen (or any other party) to

read into that fleeting reference a claim that an obligation—never before mentioned and even then not discussed at all—was being used as grounds for termination.

Such a reading would render meaningless EraGen’s right

to cure violations of § 5.3. The correspondence that had

gone before, as well as that which succeeded the October

24 letter, mentioned only the royalty underpayment as a

ground for termination. We conclude that the breach now

alleged of § 5.3 did not support termination, because

NAL’s notice to EraGen was insufficient.

IV

At this point, we must confront the cystic fibrosis

sublicense. What was it? Was it covered by the AEGIS

agreement? What happened to the royalties that were

collected from Bayer? The question pervades both parties’

briefs because this large chunk of money ($525,000) has the
Nos. 07-1726, 07-1727 15

potential to make all the difference to the outcome of this

litigation. If, as EraGen contends, the cystic fibrosis

sublicense was outside the scope of the AEGIS Agreement,

then NAL and Benner wrongfully terminated the Agreement and the district court’s judgment in favor of NAL on

this point was wrong: NAL would owe approximately

$49,383 to EraGen. If, on the other hand, as Benner contends, EraGen wrongfully concealed from Benner and NAL

the existence of the cystic fibrosis sublicense and that

sublicense was indeed covered by the AEGIS Agreement,

then Benner’s conclusion that EraGen underpaid the

royalties due is probably correct, even if not for the

reasons he originally gave. The problem we face is that

the district court did not address this sublicense or the

money attributable to it.

According to documents in the district court record, on

March 24, 2005, EraGen and Bayer concluded a sublicense

that pertained specifically to cystic fibrosis research. On

April 27, 2005, the new Agreement between EraGen and

Benner was signed. That Agreement included a warranty

that EraGen would enumerate all of the sublicensees it

held for the AEGIS patents. When EraGen compiled the

list, however, it did not include the Bayer cystic fibrosis

sublicense. It now explains the omission with an assertion

that the Bayer license did not cover the AEGIS technology.

NAL later found some evidence to the contrary, in the

form of a “press release indicating that the cystic fibrosis

sublicense uses AEGIS technology.” Our attempts to

locate this press release in the record on appeal were

unavailing, but we did find another piece of potentially

relevant evidence: NAL pointed out that Irene Hrusovsky,
16 Nos. 07-1726, 07-1727

EraGen’s CEO, stated that 95% of EraGen’s revenue came

from sublicenses using the AEGIS technology. NAL

reasons that this percentage is mathematically possible

only if the $525,000 from the cystic fibrosis sublicense

is included among the AEGIS sublicenses, even though

Hrusovsky elsewhere denied that connection. This is

intriguing evidence, but it is not enough to allow us to

determine definitively whether EraGen was correctly

keeping the cystic fibrosis sublicense out of the AEGIS

royalty pool or was duplicitously attempting to hide

the revenue from NAL and Benner.

EraGen argues that we should read the district court’s

silence as a sub silentio rejection of NAL’s claim that this

money is rightly due. This strikes us as entirely out of the

question. This issue arose late in the litigation because

EraGen was taking the position that the sublicense did

not use the AEGIS technology and that it was somehow

entitled to keep all information pertaining to the cystic

fibrosis sublicense away from its adversary and the

district court. When facts about the sublicense began to

emerge, it became clear that the question whether it rested

in part on the AEGIS technology was a serious one. Combing through the district court record, we have satisfied

ourselves that the issue was presented to the district court,

but for reasons that do not appear on the record, it received

no resolution. Because a decision one way or the other on

this sublicense will effectively decide the case, we cannot

leave it up in the air.
Nos. 07-1726, 07-1727 17

V

We therefore VACATE the judgment of the district

court and REMAND this case for further proceedings

consistent with this opinion. We have established the fact

that Benner and NAL did terminate the AEGIS Agreement,

but the question whether that termination was wrongful

depends on the proper characterization of the cystic

fibrosis sublicense. That issue will also determine whether

Benner owes money to EraGen, or if EraGen underpaid

royalties to Benner and NAL. Each party is to bear its

own costs on appeal.

9-2-08