Opinion ID: 416558
Heading Depth: 1
Heading Rank: 3

Heading: The 1970 Diamond Provision for Accrual of Royalties

Text: 22 The 1970 licensing agreement between Ziegler and Diamond contained a paragraph entitled Accrual of Royalties, which provided as follows: 23 Licensee may hold and accrue royalties without forwarding the same to Ziegler during any period during which Ziegler is engaged in a suit for patent infringement involving the process utilized by Licensee and being defended by a party under a contractual obligation to hold Licensee harmless. Licensee, however, shall continue to account to Ziegler during such period of accrual and promptly upon termination of such suit shall pay accrued royalties to Ziegler, after deduction of any applicable credits, if, as a result of such suit, it is adjudged that Licensee's process infringes any valid claim of a patent owned by Ziegler and litigated in said suit, or if Licensee does not cancel this License as provided hereinafter. If, as a result of such suit, it is not adjudged that Licensee's process infringes any valid claim of a patent owned by Ziegler and litigated in said suit, Licensee, may by written notice, advise Ziegler of cancellation of this License. Upon such cancellation, Licensee shall be subject to any action in law or equity which would have been or is available to Ziegler in absence of this License, including action for past infringement during the period that royalties were not paid. Licensee will have the benefits of any settlement reached by and between Ziegler and any third party contractually obligated to hold Licensee harmless. 24 The first sentence causes the Accrual of Royalties provision to apply to Diamond during the pendency of the Phillips litigation because Phillips had agreed to hold Diamond harmless. If the identical provision were included in a Novamont license, it would not apply to and benefit Novamont. Hence SGK claims that the Accrual of Royalties provision is irrelevant to the operation of Novamont's MFL Clause. 25 The district court reasoned, however, that giving literal effect to the tailoring in this fashion of a beneficial royalty provision so that it would not benefit a licensee who is entitled to the protection of an MFL clause would be an evasion of the intention of the parties to the clause. 518 F.Supp. at 571. We agree. 26 We note SGK's argument that Diamond had little incentive to take a license so long as it enjoyed the protection of the Phillips hold-harmless agreement. SGK may well have been correct that the Accrual of Royalties provision was necessary in order to obtain Diamond's agreement. That proposition, however, is beside the point in determining the proper impact of the MFL clause. It is likely to be generally true that a licensor's grant of more favorable terms is supported by a sound business reason, but the benefit of more favorable terms is exactly what the person whose license includes an MFL clause has bargained for and to which he is entitled. 27 The purpose of the MFL clause was to protect Novamont from a competitive disadvantage resulting from more favorable terms granted to another licensee. Prestole Corporation v. Tinnerman Products, Inc., 271 F.2d 146, 152 (6th Cir.1959). Limitation to Diamond of the right to accrue and delay payment of royalties during the infringement litigation would give Diamond a competitive advantage over Novamont. The fact that Diamond would have been held harmless if it continued to infringe rather than take a license is not germane to any purpose of the MFL clause. In a sense the limiting language helps identify the Phillips litigation as the suit the parties had in mind, but for any other purpose the MFL clause requires the limiting language to be disregarded. We think Novamont's MFL clause entitled it to substitute the entire Diamond license agreement, including a right to accrue royalties under the provision, as long as the Phillips litigation continued. 28 We are more troubled, however, by Novamont's failure to make a written request for substitution of all the provisions of the Diamond license within ninety days after being supplied with its provisions on October 30, 1970. 29 Novamont made no such written request until August 26, 1977, shortly before SGK brought this action for unpaid royalties under the 1974 agreement. Novamont had then learned of the undisclosed agreements and its counsel wrote SGK's counsel adopting the provisions of the Diamond license, including the undisclosed agreements. Even in that letter there was no specific reference to a claim that Novamont was entitled to enjoy the benefit of the Accrual of Royalties provision. 30 The district court, however, found that at a meeting on November 6, 1970, Ziegler's representatives refused to grant Novamont the right to accrue, rather than pay, the royalties due during the period of the Phillips litigation. 518 F.Supp. at 566. Addressing the point in an unpublished opinion on post-trial motions, the court said, in part, Novamont did attempt to secure the right to accrue during its negotiations with Ziegler. Based on the response it received during those negotiations, Novamont could reasonably have concluded that the submission of a formal written request would have been an exercise in futility. 31 For evidence on the point, the parties have cited two memoranda from the Novamont side. 32 One refers to the November 6 conference. It lists provisions of the Diamond agreement, some less favorable than Novamont's existing license, and some more favorable, including the right not to pay during the infringement litigation. The Novamont position is stated: Novamont wants a new agreement assuring it some benefits comparable to those given by the new Ziegler/Diamond Agreement. The Ziegler position is stated: Prof. Ziegler's representatives contested such a right of Novamont. They were willing to allow Novamont to get the lower rates existing in the Diamond Agreement, but with the obligation to continue royalty payments. 33 The second memorandum is dated November 13, 1970 and appears to be a report on a recent conference. It contains a reference to the provision for accrual: The present contract offered to Diamond is tailored to Diamond, since it provides that there will be no payments as long as there is another company, holding the licensee harmless. The attitude of the Germans seemed inflexible. 34 The proof is less than clear that Novamont offered to take all the other provisions of the Diamond agreement, favorable and unfavorable, if it could have the accrual right. Nevertheless, we might well consider the district court finding not clearly erroneous if the matter stopped there. 35 There is, however, a further question, whether Novamont's claim to be entitled to the Diamond license provisions, including accrual, survived the July 1, 1974 agreement between Novamont and SGK. We conclude that it did not. 6 36 SGK claimed that the July 1, 1974 agreement constituted an accord and satisfaction. In the unpublished opinion on post-trial motions, the district court stated that SGK had not carried its burden. There is no evidence in the record of any express statement by either of the parties, either during the negotiations leading up to the 1974 agreement, at the time it was entered into, or in the agreement itself, that the agreement was intended to constitute an accord and satisfaction. 37 The agreement, 518 F.Supp. at 568, did provide that it was made in order to settle the differences between the parties. It is true that in its recitation of disagreements there was no mention of dispute over Novamont's right to substitute the provisions of the 1970 Diamond license. It did provide that the 1967 Novamont Agreement remains in full force and effect and that Novamont shall immediately account for and pay, with 10% interest, all past due royalties under the 1967 agreement. These agreements are flatly inconsistent with any claim that Novamont's royalty obligations were governed by the Diamond Agreement. The agreement to pay interest was completely at war with any application to Novamont of the accrual provisions. In our view the parties' intent to merge those claims in the settlement was so clear that some express reservation of them would have been necessary to avoid that result. 38 The district court erred in awarding an offset to Novamont based on the accrual provisions.