Opinion ID: 765605
Heading Depth: 2
Heading Rank: 4

Heading: The Bankruptcy Court and District Court Litigation

Text: 22 Appellants sued Cambridge for infringement of the '391, '496, and '861 patents in the United States Bankruptcy Court for the District of Massachusetts on March 8, 1995. 2 Appellants filed their complaint in the bankruptcy court rather than the district court based on 11 U.S.C. 362, the automatic stay provision of the Bankruptcy Code, and Local Rule 201 of the District Court of Massachusetts. 3 Appellants alleged that Cambridge infringed the '861 patent by making, using, and/or selling HIV diagnostic kits that contained at least one of the proteins claimed in the patent. See Compl. at 3. Appellants further alleged that Cambridge infringed the '391 and '496 patents by making, using, and/or selling diagnostic kits for detecting antibodies to HIV-2. See id. at 3-4. Based on these allegations, appellants sought damages and a permanent injunction. See id. at 4. Appellants further asserted that the proceeding was not a core proceeding as set forth in 28 U.S.C. 157(b)(2) and that they did not consent to the entry of any final order or judgment by the bankruptcy court. See Compl. at 1-2; see also 28 U.S.C. 157(b)(1), (c)(1)-(c)(2). 4 Lastly, appellants demanded a jury trial for all of the issues raised in their complaint. See Compl. at 5. 23 In its Answer and Counterclaim, Cambridge denied that the proceeding was a non-core proceeding as well as appellants' allegations of infringement. See Answer and Countercl. at 1-3. Cambridge raised several affirmative defenses, including, inter alia, 1) that it possessed a license to make, use, and sell the inventions claimed in the '391 and '496 patents, 2) that appellants were estopped from or had waived their right to assert infringement claims regarding these patents, and 3) that the '861 patent was invalid and not infringed. See id. at 3-4. In the Answer and Counterclaim, Cambridge sought a declaration that Institut Pasteur, by way of its subsidiaries and affiliates, had provided Cambridge with a valid license to the '391 and '496 patents under the 1989 Agreement between Cambridge and PSD. See id. at 7. Alternatively, Cambridge requested the bankruptcy court to find that Institut Pasteur had breached the best efforts provision of the 1989 Agreement by failing, through PSD, to acquire the rights to these patents from Genetic and therefore that appellants were estopped from asserting an infringement claim against Cambridge. See id. at 8-9. Cambridge also sought a declaration that, inter alia, the '861 patent is invalid and not infringed. See id. 24
25 Cambridge sought an order from the bankruptcy court declaring the adversary proceeding a core proceeding as defined by 28 U.S.C. 157(b)(2). At a May 26, 1995 hearing, the bankruptcy court, from the bench, granted Cambridge's motion, concluding that the proceeding qualified as a core proceeding under 157(b)(2)(B) or 157(b)(2)(O). 5 The court concluded that the proceeding fell within 157(b)(2)(B) because, in essence, appellants were prosecuting a claim in bankruptcy against Cambridge's estate when they filed their infringement complaint, which was in reality a proof of claim. See Findings and Rulings at 41-43, Pasteur I (No. 94-43054). Alternatively, the court ruled that the proceeding was core because the dispute went to a central aspect of the reorganization, and thus would fall within the catchall provision of 157(b)(2)(O). See id. at 43-44. Finally, the bankruptcy court denied appellants' request for a jury trial based on the core and equitable nature of the proceeding. See Findings and Rulings at 44, Pasteur I (No. 94-43054); Pasteur I, 186 B.R. at 12. 6
26 Under Rule 19 of the Federal Rules of Civil Procedure, 7 appellants moved to dismiss the portions of Cambridge's counterclaim in which it requested a declaratory judgment that it possessed a license to the '391 and '496 patents, or that alternatively, Institut Pasteur, via PSD, had breached its best efforts obligation to acquire the right to grant a license and that appellants were thus estopped from asserting infringement. Appellants argued that the bankruptcy court could not adjudicate these counts of the counterclaim because PSD, the other party to the 1989 Agreement, was a necessary and indispensable party to the adjudication. See Pasteur I, 186 B.R. at 17. The bankruptcy court disagreed and held that PSD was not a necessary party under Rule 19(a). See id. at 19. The bankruptcy court observed that by its ruling that Cambridge was licensed under the '391 and '496 patents, PSD's rights were not affected, as it did not possess rights to the patents before or after the ruling. See id. at 18. 27 Despite the bankruptcy court's conclusion that PSD was not a necessary party, the court proceeded to balance the equities under Rule 19(b) and concluded that PSD was also not an indispensable party. See id. at 19. The bankruptcy court observed that there would be no prejudice to PSD because, as noted before, none of its rights had been altered, as it did not then possess rights to the patents. As to the other factors under Rule 19(b), the bankruptcy court reasoned that: 1) due to the absence of prejudice, there would be no need to shape the judgment to reduce the prejudice to the parties, 2) a judgment declaring the rights owned by Cambridge would give Cambridge adequate relief, and 3) Cambridge would not have an adequate remedy if the portions of its Answer and Counterclaim at issue were dismissed, as it would have to sue in France (where it could not sue Genetic), thus greatly hindering an efficient reorganization. See id. The bankruptcy court also noted several other equitable considerations in favor of Cambridge, including that PSD could easily have become a party to the lawsuit, thus eliminating any argument regarding prejudice, that both Genetic and Institut Pasteur, as related companies, adequately represented PSD, and that appellants were responsible for the nonjoinder, not Cambridge. See id. 28 On appeal, the district court affirmed. As to the 19(a) issue, the district court disagreed with the bankruptcy court and held that since PSD was a signatory to the 1989 Agreement, it was a necessary party. See Pasteur III, 212 B.R. at 18. However, the district court agreed with the bankruptcy court that it was proper to have proceeded without PSD under Rule 19(b) based upon principles of 'equity and good conscience.' See id. (quoting Fed. R. Civ. P. 19(b)). 29
30 Cambridge moved for summary judgment of noninfringement as to both the '391 and '496 patents. In support of its argument that it was licensed to practice the '391 and '496 patents pursuant to its 1989 Agreement with PSD, Cambridge principally asserted that since PSD was the sole owner of SDP, and because SDP then acquired all of the stock of Genetic, this acquisition constituted a recovery by PSD of the '391 and '496 patent sublicensing rights from Genetic under the 1989 Agreement. See Pasteur I, 186 B.R. at 16. The Bankruptcy Court rejected this argument, reasoning that 1) possessing the right to grant sublicenses and owning a corporation whose wholly-owned subsidiary possesses that right are not the same and 2) the acquisition of Genetic was not contemplated by the parties when the 1989 Agreement was signed. See id. 31 Turning to Cambridge's best efforts argument, however, the bankruptcy court, acting in equity, applied the equitable maxim equity treats as done that which in good conscience should be done. See id. The court noted that although PSD had obligated itself to use best efforts to obtain the '391 and '496 patent rights, it had breached that obligation by failing to make any effort to recover the rights following the execution of the 1989 Agreement, despite wholly owning the company (SDP) that wholly owned Genetic. See id. The bankruptcy court essentially concluded that it would be inequitable for PSD not to be regarded as having recovered the rights. See id. The bankruptcy court thus declared the '391 and '496 patents Licensed Patents under the 1989 Agreement and dismissed appellants' infringement claims under these patents. See id. at 22. 32 Reviewing the bankruptcy court's grant of summary judgment of noninfringement de novo, the district court affirmed, concluding that there was no genuine issue of material fact. See Pasteur III, 212 B.R. at 17. The court observed that while there was a dispute as to the meaning and intent of the best efforts clause, it was clear that the clause required at least some effort, and it was undisputed that PSD made no effort to recover the sublicensing rights from Genetic. See id. Accordingly, since the clause was unambiguous to that extent, the district court concluded that by making no effort, PSD had in fact breached the 1989 Agreement. See id. The district court further concluded that the bankruptcy court's application of equitable principles in declaring that Cambridge was licensed to practice the '391 and '496 patents was appropriate under the circumstances. See id. 33
34 the '861 Patent 35 Both Cambridge and appellants moved for summary judgment on the issue of infringement of the '861 patent. The bankruptcy court held that claims 1-4 were not invalid and were infringed by sales of Cambridge's HIV-1 diagnostic kit. See Pasteur I, 186 B.R. 19-22. The bankruptcy court enjoined Cambridge from making, using, or selling its HIV-1 Western Blot kits for the remainder of the life of the patent, see Pasteur I, 186 B.R. at 22, although the bankruptcy court stayed the injunction pending its determination of Cambridge's rights under the 1987 Settlement Agreement, see Pasteur II, slip op. at 2. The bankruptcy court held a trial to determine the royalty rate which Cambridge was obligated to pay for future practice of the '861 patent under the 1987 Agreement, as well as the damages to which appellants were entitled for Cambridge's past infringement. Significantly, the parties did not dispute that Cambridge was entitled to a license of the '861 patent under the 1987 Agreement. See id. at 7. 36 The bankruptcy court first determined the appropriate royalty rate that Cambridge was obligated to pay Institut Pasteur for future practice of the '861 patent. The bankruptcy court noted that, contrary to Cambridge's assertion, 3 of 2 of the 1987 Agreement did not squarely apply to this case, because that provision covers a scenario in which a licensor decides to license improvement technology to an existing licensee, and as part of that license, the licensor reduces the royalty payments that the licensee already pays for existing technology. See id. at 8. In contrast, in this case, Genetic (the licensee) pays Institut Pasteur (the licensor), via PSD, one royalty rate (6%) for all of Institut Pasteur's technology, both existing and improvement. See id. at 8-9. The bankruptcy court further observed that the 1987 Agreement contains no provision expressly covering the facts of the present case. 37 The bankruptcy court nevertheless concluded that the best indication of how to determine the portion of the 6% attributable to improvement technology alone, such as the '861 patent, was to follow the procedure set forth in 3. The bankruptcy court therefore subtracted the existing royalty rate of 6 (5%), from the aggregate royalty percentage (6%) to arrive at a 1% royalty rate for the improvement technology. See id. at 9-10. The bankruptcy court noted that while one might argue that the '861 patent is only part of the improvement technology, and thus that the royalty rate should be less than 1%, no evidence suggested otherwise how to allocate the charges for the various improvement technologies. See id. at 10. Accordingly, the bankruptcy court concluded that Institut Pasteur charged Genetic a 1% royalty for the '861 patent, see id. at 10, and that Cambridge was entitled under the 1987 Agreement to pay the same amount. 38 The bankruptcy court then calculated the damages owed by Cambridge for its past infringement. The bankruptcy court concluded that since appellants had failed to establish lost profits, appellants should be entitled under 35 U.S.C. 284 to a reasonable royalty, which the bankruptcy court had previously calculated as 1% of net sales. See Pasteur II, slip op. at 15-16. Applying this 1% rate, the bankruptcy court awarded appellants $29,601.17. See Pasteur 2, slip op. at 16; see also Institut Pasteur v. Cambridge Biotech Corp. (In re Cambridge Biotech Corp.), No. 94-43054-JFQ, at 1 (Bankr. D. Mass. Jan. 5, 1996) (judgment). The bankruptcy court terminated the injunction and declared a nonexclusive license of the '861 patent (with a royalty rate of 1% of Cambridge's net sales of its Western Blot kits), to be in effect between Institut Pasteur and Cambridge commencing January 1, 1996. See Pasteur II, slip op. at 16, 18-19; see also Institut Pasteur v. Cambridge Biotech Corp. (In re Cambridge Biotech Corp.), No. 94-43054-JFQ, at 1-2 (Bankr. D. Mass. Jan. 5, 1996) (judgment); Institut Pasteur v. Cambridge Biotech Corp. (In re Cambridge Biotech Corp.), No. 94-43054-JFQ, at 1-2 (Bankr. D. Mass. Feb. 12, 1996) (amended judgment). 39 The district court affirmed the bankruptcy court's grant of summary judgment of infringement and validity of the '861 patent. See Pasteur III, 212 B.R. at 15. Reviewing the bankruptcy court's damages determination under the clearly erroneous standard, the district court affirmed, concluding that it had no compelling reason to interpret the agreement other than as did the Bankruptcy Court. See id. at 20. Likewise, the district court concluded that the bankruptcy court did not clearly err in its declaration of a license between Institut Pasteur and Cambridge. See id. at 21.