Opinion ID: 1463107
Heading Depth: 2
Heading Rank: 1

Heading: Exclusive License Agreement

Text: We begin by addressing Xenon's contention that it did not violate the terms of the Exclusive License Agreement when it licensed its interest in the joint patent application to Novartis without paying the Foundation its share of the licensing fee. As a threshold matter, Xenon argues that this dispute is resolved by federal patent law, not by contract law. The district court did not address the question whether Xenon retained a federal statutory right to freely license its interest without regard to the Foundation's contract rights. The court resolved the parties' disputes based solely on the terms of their various contracts, holding that Xenon effectively executed a sublicense with Novartis and that this transaction fell within the provision of the Exclusive License Agreement governing sublicenses. Xenon contends that federal law  specifically, 35 U.S.C. § 262  gives it the right to freely license its undivided one-half interest in the joint patent application without accounting to the Foundation under the terms of the Exclusive License Agreement. We disagree. Federal law provides that joint patent owners, like the Foundation and Xenon, have control over the entire property, and each co-owner may freely use the patented technology without regard to the other. See 35 U.S.C. § 262. We have previously observed that under this principle of patent law, each co-owner is `at the mercy' of the other in that the right of each to license independently `may, for all practical purposes, destroy the monopoly and so amount to an appropriation of the whole value of the patent.' Rail-Trailer Co. v. ACF Indus., Inc., 358 F.2d 15, 17 (7th Cir.1966) (quoting Talbot v. Quaker-State Oil Ref. Co., 104 F.2d 967, 968 (3d Cir.1939)). This statutory rule is subject to an important exception, however: Joint patent owners may vary their rights by contract. The statute provides that  [i]n the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention ... without the consent of and without accounting to the other owners. 35 U.S.C. § 262 (emphasis added). The statutory default rule therefore controls unless there is an agreement to the contrary. Here, the Foundation and Xenon modified the statutory default rule by contract; the Exclusive License Agreement plainly qualifies as an agreement to the contrary for purposes of § 262. That agreement provides: [The Foundation] hereby grants to Xenon an exclusive license, limited to the [field of human healthcare,] ... under the Licensed Patents to make, use and sell Products. In exchange Xenon agreed to pay the Foundation a percentage of any payments, royalties, or sublicense fees it received by commercializing the technology itself or sublicensing the technology to a third party to commercialize. Under the terms of the agreement, sublicenses are expressly permitted  provided Xenon pays the Foundation the specified percentage of any royalties or sublicense fees  but assignments are prohibited without the Foundation's prior written consent. [3] Xenon argues that nothing in the Exclusive License Agreement explicitly revokes its statutory right to license its interest freely. True, but the agreement's provision requiring that Xenon pay the Foundation a share of the fees derived from any sublicense plainly undermines Xenon's claim that it retained an unfettered right under § 262 to transfer its interest in the technology to third parties. So does the agreement's provision prohibiting assignment of the license without the Foundation's consent. The bargained-for exchange between the parties provided that the Foundation would forego its right to separately license the patent in exchange for receiving a share of the profits from Xenon's commercialization of the technology  either directly or via a sublicense to a third party. Xenon received a significant benefit from the agreement  the exclusive right to exploit the technology protected by the joint patent application. Xenon cannot avoid paying royalties or sublicense fees to the Foundation simply by labeling the Novartis transaction a license rather than a sublicense. Accordingly, the terms of the Exclusive Licensing Agreement, not 35 U.S.C. § 262, govern the parties' rights and responsibilities here. Under that agreement Xenon held an exclusive license to develop the SCD discovery for commercial purposes and a corresponding obligation to share proceeds with the Foundation. The agreement gives Xenon three options: (1) commercialize the technology directly and pay royalties to the Foundation; (2) sublicense the technology to a third party and pay a percentage of the sublicense fees to the Foundation; or (3) assign its exclusive licensing rights to a third party with the prior consent of the Foundation. Xenon suggests in the alternative that it never actually gave Novartis a license to the Foundation's interest in the jointly patented technology. The district court properly rejected this argument. The Xenon-Novartis agreement provides that Xenon grants to Novartis an exclusive license to all Xenon technology in the field of human and animal healthcare. Xenon technology includes Xenon's interest in all Patent Rights in the Field, as specifically described in Schedule B, and Schedule B prominently lists the joint patent application owned by Xenon and the Foundation  first out of four listed patents. Xenon argues unpersuasively that the phrase patent rights does not include rights it obtained through the Exclusive License Agreement. In the warranty clause of the Xenon-Novartis agreement, Xenon represents that it is the owner or licensee of all rights, title and interest in and to the Xenon Patent Rights. (Emphasis added.) Accordingly, Xenon granted Novartis any interest it held in the joint patent application by specifically including it in Schedule B. Put another way, Xenon effectively sublicensed its exclusive license rights in the jointly patented technology. The district court correctly concluded that the Xenon-Novartis agreement is subject to the terms of the Exclusive License Agreement governing sublicenses.
After concluding that Xenon granted Novartis a sublicense in the jointly patented technology, the district court held that Xenon violated the terms of the Exclusive License Agreement by failing to pay the Foundation a share of the sublicense fees. Xenon argues that it is not obligated to make payments to the Foundation until products are actually brought to market and sold as a result of the sublicense. Because no products have yet been sold, Xenon claims it does not owe the Foundation anything. Again, we disagree. The Exclusive License Agreement requires Xenon to pay the Foundation license fees, milestones, and royalty payments as soon as they are received. [4] Section 4 of the Exclusive License Agreement, titled Consideration, lays out the payment details and schedule. Subsection (B)(i) of that section states: For all Products sold directly by Xenon, Xenon shall pay to [the Foundation] ... a royalty calculated as a percentage of the Selling Price of Products.... (Emphasis added.) It goes on to specify that royalties are earned on either the date the product is actually sold, the date an invoice is sent, or the date the product is transferred to a third party for promotional reasons  whichever comes first. The next subsection  the provision most relevant to this dispute  states: For all Products sold by Xenon sublicensees, Xenon shall pay to [the Foundation] a percentage of any license fees, milestones, and royalty payments received by Xenon as consideration for the sublicense granted to such sublicensees under Section 2B. The percentage shall remain fixed at a rate of ten percent (10%) for years one (1) and two (2) of this Agreement and seven and one-half percent (7.5%) thereafter until this Agreement is terminated. Because both subsections begin with the phrase [f]or all Products sold  (emphasis added), Xenon argues that it does not owe the Foundation any payments for the Novartis sublicense until products are actually brought to market and sold. We agree with the district court that Section 4, read as a whole, requires payment of the Foundation's share of the sublicense fee independent of any actual sales of products. The apparent point of the prefatory phrase [f]or all Products sold in each of the two subsections governing payment is to distinguish between payments required when Xenon commercialized the technology itself and payments required when Xenon issued a sublicense to a third party to do so. In the former circumstance, the payment due the Foundation is a royalty based on products sold; in the latter circumstance, the payment due the Foundation is a specified percentage of the sublicense fee Xenon receives, plus milestones and royalties. Because the Novartis transaction falls under the second subsection, payment is due on receipt of a sublicense fee, not on the occurrence of product sales. This reading of the payment provision is the most plausible for several reasons. Although both subsections use the same introductory phrase, the first subsection also says that payment is due upon actual product sale while the second subsection  governing sublicenses  does not include similar language. Instead, the second subsection states that Xenon owes the Foundation a percentage of any license fees and milestones, in addition to royalty payments, stemming from any sublicense. As the district court noted, sublicense fees and milestone payments are not contingent upon a sale; they are paid immediately or on an ongoing basis by a licensee or sublicensee in exchange for the right to make sales of products developed in the future. Finally, the parties agree that it generally takes about 15 years to bring a drug product to market. Yet the Exclusive License Agreement specifies that Xenon must pay the Foundation 10% of any license fees, milestones, and royalty payments received during the first two years of the agreement and 7.5% thereafter. This provision would make little sense if no payment was required on a sublicense until a product was brought to market. Accordingly, the district court properly concluded that Xenon breached the Exclusive Licensing Agreement by failing to pay the Foundation its share of the fee from the Novartis transaction. [5]
The district court entered summary judgment on liability; damages were tried to a jury. Xenon's agreement with Novartis purported to grant a license to: (1) the joint patent agreement; (2) the PPA compounds; (3) several other patent applications; and (4) Xenon's know-how. Novartis paid Xenon $4 million in cash and another $11 million in stock as part of a separate Stock Purchase Agreement signed the same day. The question for the jury was how much of this fee was payment for the joint-patent-agreement sublicense and the PPA compounds as opposed to the other pieces of the package. [6] As we have noted, the Exclusive License Agreement stipulated that the Foundation should receive 7.5% of any license fees, milestones, and royalty payments received by Xenon as consideration for the sublicense.  (Emphasis added.) In a special verdict, the jury awarded nothing for the sale of the PPA compounds and $1 million for the sublicense  just under 7.5% of the $15 million in cash and equity Xenon received from Novartis. Xenon moved posttrial for remittitur, which the district court granted. The judge held that the jury had sufficient evidence to award plaintiff 7.5% of the full $4,000,000 that Novartis paid in cash for defendant's intellectual property. But the judge concluded there was insufficient evidence to support inclusion of a percentage of the $11 million in stock, which the evidence suggested was part of a separately negotiated agreement. The district court offered the Foundation a remittitur of $300,000  7.5% of the $4 million cash fee  which the Foundation accepted. On appeal Xenon argues that the Foundation did not provide sufficient evidence of damages to justify even a $300,000 damages award. We review sufficiency-of-the-evidence challenges de novo, viewing the evidence in the light most favorable to the prevailing party and drawing all inferences in its favor. Lopez v. City of Chicago, 464 F.3d 711, 718 (7th Cir.2006). Under Wisconsin law a plaintiff must present enough evidence to provide a reasonable basis for calculating damages; the evidence will be sufficient if it enables the jury to make a fair and reasonable approximation of damages. See Olympia Hotels Corp. v. Johnson Wax Dev. Corp., 908 F.2d 1363, 1372 (7th Cir.1990); Brogan v. Indus. Cas. Ins. Co., 132 Wis.2d 229, 392 N.W.2d 439, 444 (1986). Under this lenient standard, the evidence is easily sufficient to sustain the damages award. The Foundation argued to the jury that the joint patent application was the only item in the Xenon-Novartis package with any real value, and thus the price Novartis paid reflected its fair market value. The Foundation relied on a sales-pitch letter Xenon sent to Novartis offering to sell the technology covered by the joint patent application; the letter made no mention of the PPA compounds or any other patented technology. The Foundation also noted that the joint patent application is listed first in the Novartis agreement, arguably demonstrating priority over the other listed patent applications. Moreover, the Foundation noted that Xenon transferred only about 100 grams of the PPA compounds to Novartis  left over material that was so insignificant that Xenon did not price it or invoice it. Finally, the Foundation suggested that Xenon's know-how was valueless because the phrase was defined in such a way as to include nothing beyond what was already covered under Xenon Patent Rights. Viewed in the light most favorable to the Foundation, this evidence was sufficient to sustain the damages award. Xenon complains that the Foundation did not adequately establish the precise market value of the sublicense for the joint patent application as compared to the other parts of the package. But Wisconsin law provides that a contracting party that causes an uncertainty of proof cannot demand a more precise measure of damages. See Novo Indus. Corp. v. Nissen, 30 Wis.2d 123, 140 N.W.2d 280, 285 (1966). Xenon had a duty under the Exclusive Licensing Agreement to make an accounting to the Foundation on a quarterly basis, to disclose any payments received, and to explain how any amounts owed to the Foundation had been calculated. It did not do so. Under these circumstances the Foundation was not required to establish a more specific measure of damages. Xenon also argues that proving damages in this case required the use of expert testimony, citing a number of Wisconsin cases holding that expert testimony is required in complex or technical cases where the issue is outside the common knowledge of a jury. See, e.g., Weiss v. United Fire & Cas. Co., 197 Wis.2d 365, 541 N.W.2d 753, 757 (1995) (The court has long recognized that certain kinds of evidence are difficult for jurors to evaluate without the benefit of expert testimony.). Here, although the interlocking contracts were obviously technical and complex, the issue of damages was not beyond a lay juror's understanding. The Foundation was entitled to prove the value of the sublicense essentially by a process of elimination  by showing that the other items in the Xenon-Novartis transaction had little or no value. This method of proving damages dispensed with any need for expert testimony regarding the market value of the joint patent application.
In addition to damages, the Foundation also asked for a declaration that it had a right to terminate the Exclusive License Agreement based on Xenon's breach. The district court granted summary judgment for the Foundation on this claim, and on May 17, 2006, the Foundation sent Xenon a letter terminating the Exclusive License Agreement. Xenon responded with two motions, one for reconsideration of the district court's decision and the other for a stay of execution of the judgment pending disposition of Xenon's motion for reconsideration. The district court granted Xenon's motion to stay enforcement of the judgment, holding that the Foundation's purported termination of the Exclusive License Agreement was void because the Foundation had not given Xenon notice and 90 days to cure its breach, as the agreement required. The court further held that once the Foundation filed this lawsuit, its right to terminate the license agreement depended on a finding of breach by the court. The judge concluded as follows: [A]ny attempted termination of the agreement that has already occurred is suspended until the court has ruled on the post-trial motions and plaintiff may not take renewed action to terminate the agreement until that time. A month later, the district court granted Xenon's motion for reconsideration, agreeing that the Foundation had not properly moved for summary judgment on this claim. However, the judge also said that if the Foundation wanted to terminate the Exclusive License Agreement, it could now do so  because Xenon had been found in breach  but that the Foundation was first required under the terms of the agreement to give Xenon notice and 90 days to cure. On appeal the Foundation challenges the district court's conclusion that its right to terminate the agreement did not arise until the court found Xenon in breach of the agreement. The Foundation maintains that its right to terminate was triggered by Xenon's breach and was not contingent upon the court's finding of breach. The Foundation also argues that it properly terminated the agreement. We agree on both counts. Section 7 of the Exclusive License Agreement governs the Foundation's right to terminate: If Xenon at any time defaults in the timely payment of any monies due ... or commits any breach of any other covenant herein contained, and Xenon fails to remedy any such breach or default within ninety (90) days after written notice thereof by [the Foundation,]... [the Foundation] may, at its option, terminate this Agreement by giving notice of termination to Xenon. In March 2005 the Foundation sent Xenon written notice that it considered the Xenon-Novartis transaction to be a sublicense of the joint patent application and that Xenon owed the Foundation sublicense fees. The relevant portion of the letter states: Our analysis has led us to conclude that the Novartis agreement is, in fact, a sublicense of rights granted by [the Foundation] to Xenon and we also require that Xenon remit ... payment of any amounts owed to [the Foundation] under the Agreement. In the event that Xenon contends that no amounts are owed to [the Foundation] or that the Novartis agreement is not a sublicense as contemplated by the Agreement, Xenon must immediately provide ... a detailed written explanation as to why such amounts are not owed or why the Novartis agreement is not a sublicense.... This letter plainly gave Xenon notice that the Foundation considered it to be in breach of its payment obligations under the Exclusive License Agreement. Notably, Xenon does not disagree. Instead, Xenon argues that the Foundation did not provide 90 days to cure the breach because the Foundation filed suit a month after sending Xenon this letter. The March 2005 notice, Xenon says, was therefore ineffective under the termination provision of the Exclusive License Agreement. We disagree. A contractual obligation to provide notice and an opportunity to cure a default prior to terminating a contract does not necessarily affect the aggrieved party's right to sue for breach. See Ameritech Info. Sys., Inc. v. Bar Code Res., Inc., 331 F.3d 571, 573-74 (7th Cir.2003). Here, nothing in the Exclusive License Agreement prevented the Foundation from suing for breach within the 90-day cure period, id. at 574, nor was the Foundation's right to terminate somehow suspended by the filing of this lawsuit. Having filed the suit, the Foundation's right to terminate did not become contingent upon the court finding Xenon in breach. A contracting party's right to terminate arises under the terms of the contract and need not await a formal declaration of the contracting parties' rights. Here, the district court issued a stay of the execution of its summary-judgment ruling pending disposition of Xenon's posttrial motions. A stay, unlike an injunction, operates only on the judicial proceeding itself and does not otherwise prohibit the parties from acting. See Nken v. Holder, ___ U.S. ___, ___, 129 S.Ct. 1749, 1757-58, 173 L.Ed.2d 550 (2009) (An injunction and a stay have typically been understood to serve different purposes. The former is a means by which a court tells someone what to do or what not to do.... By contrast, instead of directing the conduct of a particular actor, a stay operates upon the judicial proceeding itself.). Some of the court's language in the stay order is suggestive of an injunction: [A]ny attempted termination of the agreement that has already occurred is suspended until the court has ruled on the post-trial motions and plaintiff may not take renewed action to terminate the agreement until that time. But if this was meant to be an injunction, it was an improper one. As a procedural matter, injunctions must comply with the requirements of Rule 65(d) of the Federal Rules of Civil Procedure; a court issuing an injunction must, among other things, give advance notice to the adverse party, hold a hearing on the matter, explain why the injury that would occur without the injunction is irreparable, and specify the scope of the injunction in reasonable detail. The district court's stay order did not comply with these requirements. Accordingly, the district court erroneously concluded that the Foundation's right to terminate the agreement was contingent upon the court's finding that Xenon had breached the Exclusive License Agreement. The Foundation was entitled to terminate the agreement based on Xenon's breach, and it properly did so under the agreement's termination provision. The Foundation's March 2005 letter was sufficient to give notice to Xenon that the Foundation considered it in breach. More than 90 days elapsed between the time of this notice and the Foundation's letter  on May 17, 2006  terminating the license agreement. Nothing more was required.