Opinion ID: 416558
Heading Depth: 1
Heading Rank: 4

Heading: The 1972 Hercules Pre-Paid License

Text: 39 Ziegler had licensed Hercules in 1954, and their agreement had been amended in 1962 and 1964. 518 F.Supp. at 562. It provided for running royalties as did Novamont's, i.e., rates applied to amounts of sales. The Hercules rates were somewhat lower than Novamont's, but this was irrelevant with respect to Novamont's MFL clause because the Hercules license existed before the 1967 Novamont license, and the MFL clause applied only to licenses granted during the life of the agreement. 40 As already noted there came to be alleged infringement of the '115 patent by Phillips and others. On that account Hercules suspended royalty payments as of April 30, 1970. It claimed the right to do so under a provision of its license. 41 On April 26, 1972, Ziegler and Hercules reached a new agreement, 518 F.Supp. at 563. Paragraph 5 granted Hercules a fully paid-up immunity from suit until December 3, 1980. The immunity from suit has been treated as the equivalent of a license extending to the expiration of the '115 patent. The license was pre-paid for a quantity of 600 million pounds per year sales, and a 1% royalty was to be paid on any excess. Other provisions required Hercules to make immediate non-refundable payments totalling $800,000, and an additional payment of $800,000, with interest from May 1, 1972, contingent upon a favorable decision on the validity of the '115 patent in the Phillips litigation. 42 Literally Paragraph 1 called for immediate payment of $770,000 in settlement of unpaid royalties from April 1, 1970 through 1972. Paragraph 2 called for immediate payment of $30,000 plus the contingent $800,000 for immunity from suit after 1972. The district court found, however, that the division was artificial, made for the tax purposes of Hercules and did not represent the actual agreement. The actual agreement called for a full $1.6 million down-payment in the event that Ziegler was successful in the Phillips action, which down-payment was entirely directed toward future production, rather than partially directed toward past infringement. 518 F.Supp. at 572. 43 On appeal, Novamont contends that the $770,000 represented a total of Hercules' suspended royalties from April 1, 1970 to December 31, 1971, plus the then present value of Hercules' expected royalty for the year 1972, rounded off by a discount of .22%, and that the $830,000 represented the then present value of Hercules' expected royalty for the years from 1973 through 1980, but reduced by a very substantial discount of 55.71%. 44 Novamont argues that its MFL clause entitled it in 1972 to a pre-paid license covering its desired production of 160 million pounds per year. The lump sum pre-paying 1972 to 1980 would be computed by employing Novamont's (or as it says, Diamond's) royalty rates, sales of 160 million pounds each year, and the same discounts used in the Hercules computation. Unpaid royalties since 1971 would be treated in a similar manner to Hercules' suspended royalties. Presumably the total lump sum would have been divided into a required payment and a contingent payment, although by hindsight we know that the contingency was fulfilled. In other words, Novamont contends its MFL clause gave it the right to a customized pre-paid license, with a lump sum royalty equivalent to the Hercules lump sum royalty, except for the difference in production. It now claims to be entitled to an adjustment which would put it in the same position as if it had made an agreement on that basis in 1972. 45 SGK points out that Novamont pursued a different theory at trial, and did not urge the significance of the $770,000 figure in Paragraph 1 of the Hercules agreement. Indeed Novamont proposed a finding, similar to the district court's, that the $770,000 was, for tax purposes, attributed to payment of royalties from April 1, 1970 to December 31, 1972. In its amended complaint, Novamont had alleged that the Hercules agreement was a paid-up license for $1.6 million. Unlike the district court findings, and unlike its present theory, it proposed a finding that the $1.6 million lump sum represented 75% of Hercules' suspended royalties, plus approximately 75% of the projected royalties through 1977, according Hercules free royalty for the last three years of the life of the patent. 46 As we understand the SGK version, it was that Hercules prepared a projection of sales, based on plant expansion and increased production. Price trends were projected. There was a reduction of approximately 20% for contingencies in the course of planned plant expansion. If and when sales exceeded 600 million pounds in any year, royalty on the excess would be 1%. The $1.6 million represented the 1972 present value of royalties at the previous Hercules rate on the estimated future sales up to 600 million pounds per year. 47 The district court found that Novamont failed to establish that a three year forgiveness was embodied in the agreement or that a method was used to reach the Hercules agreement different from that used in an offer made to Novamont. 518 F.Supp. at 574. If essential for the purpose of this decision, we are unable to say that the finding is clearly erroneous. 48 We conclude, however, that Novamont's MFL clause did not entitle Novamont to this analysis. 49 If we assume Novamont was right in either the analysis on which it proceeded at trial, or the one which it argues here, Novamont's position would rest upon an untenably broad construction of its MFL clause, albeit a construction which the district court seemed willing to entertain. 518 F.Supp. at 573-74. 50 Moreover on the facts before us Novamont's success would require a retrospective hypothetical reconstruction which presents serious difficulties. At the time of the 1972 Hercules agreement, Hercules had not been paying royalties for two years, claiming a contractual right to suspend because of infringement by others. Hercules was willing to pay $800,000 down in order to secure a pre-paid license covering 600 million pounds annually, promising an additional $800,000 if the Phillips litigation turned out so as to sustain validity. Hercules did not know what that outcome might be, but its willingness to pay $800,000 down must have been affected by its judgment of the probabilities in the Phillips case. 51 Novamont had not paid royalties for most of one year. Ziegler had given notice of termination and viewed Novamont as an infringer. Novamont did not desire a license covering more than 120 to 160 million pounds per year. Its assessment of the Phillips probabilities would affect its willingness to accept particular terms. There is nothing to show what terms it would have agreed to, although we know it did not agree to a pre-paid license for $1.6 million, one-half down and one-half contingent on a favorable outcome in Phillips. 52 The unavoidable uncertainty as to Novamont's assessment in 1972 of the Phillips outcome may itself be a reason for concluding, contrary to the district court, that in 1974 when the parties used the language remains in full force and effect and is uncancelled they did not intend a reconstruction of their liabilities as if the MFL clause had been in force and availed of at the time of the 1972 Hercules agreement. 53 Assuming that they so intended, however, Paragraph 1 of the MFL clause requires that licensor shall furnish the full text of the royalty provisions of the second license. Under a natural reading of the term royalty provisions, Paragraph 1 was substantially fulfilled when Ziegler informed Novamont that the Hercules lump sum royalty for 600 million pounds a year was $1.6 million, one-half payable immediately, and one-half on a favorable Phillips decision on validity. 54 The natural reading of Paragraph 2 of the MFL Clause gave Novamont the right, upon written request within ninety days, to a pre-paid license for the same lump sum, and quantity similarly payable. Under that reading Novamont's failure to make a request ended the matter. Novamont would contend, however, for a construction permitting it to take a pre-paid license for the quantity of its choice based on such similar or comparable considerations, components, and methods of computation so that the royalty provisions could be deemed equally favorable. Presumably there would be some difficulty in achieving equality. For example, it appears that one of the considerations in computing the Hercules lump sum was an assessment of the probability that it would achieve the production it planned. Although the license authorized 600 million pounds annually the probability that Hercules would reach that level may well have been different from the probability that Novamont would reach the level it chose. 55 The district court suggested that the term all of the provisions of such other license can mean all of the provisions pertaining to the method by which the lump-sum payment ... was calculated. 518 F.Supp. 573. Really to complete the thought, it would be necessary to construe Paragraph 2 so as to entitle the Licensee to substitute for his license all of the provisions of such other license, including, where the other license is a license for a specified quantity, to be pre-paid by a lump sum, a provision for a pre-paid license for a quantity chosen by the Licensee in return for a lump sum calculated by the methods by which the lump sum was calculated for the quantity specified in the other license. 56 If all of the provisions in Paragraph 2 be so construed, it would seem to follow that royalty provisions in Paragraph 1 should be similarly construed, so that the licensor would have been obligated to supply all the information concerning the method of calculation. Method in each case would have to include the assumptions to which the mathematical computations were applied. 57 With all respect, these constructions seem overstrained. Because of imponderables which seem to have been involved in the Novamont-Ziegler-Hercules situation, and would frequently be involved in working out terms which would maintain competitive equality, these constructions would place the court in the position of an arbitrator. 58 We are unaware of any New York decision to give us guidance as to New York law on the point, and of a decision of any court which would support this extent of departure from ordinary meaning of the contract language. Moreover, the two decisions which deal with somewhat related problems counsel closer adherence to the ordinary meaning. 59 In Hazeltine Corporation v. Zenith Radio Corporation, 100 F.2d 10 (7th Cir.1938), cert. denied, 306 U.S. 656, 59 S.Ct. 646, 83 L.Ed. 1054 (1939), Zenith was found to be entitled to a standard license under which the royalty rate was 3% of selling price of some items and 1 1/2% of others. Alternatively each licensee could elect to pay $150,000 per year for an unlimited volume. Zenith also had the benefit of what amounted to an MFL agreement that the rate of royalty specified in [its] license shall be as low as the lowest rate of royalty specified in any other license. Id. at 12. Zenith contended that because a large producer electing the lump sum royalty per year could achieve a percentage rate per unit lower than the 3% or 1 1/2%, the MFL agreement entitled Zenith to the lowest percentage rate so achieved. 60 In deciding against Zenith on this claim, the court said: 61 In view of the vital and significant differences between a fixed sum per period rate of royalty and a percentage of selling price rate of royalty we are of the opinion that the two rates of royalty are substantially different types and that there is no basis in fact for the conversion of a lump sum rate of royalty into a rate of per cent of selling price royalty. The former is a true alternative to the latter and must be so treated in determining the rights of Hazeltine and Zenith in respect to royalty provisions under the option contract. 62 100 F.2d at 18. 63 The shoe was on the other foot in Cardinal of Adrian, Inc. v. Amerock Corp., 208 U.S.P.Q. 822 (E.D.Mich.1979), affirmed by unpublished order, 698 F.2d 1218 (6th Cir.1982). The licensor granted a new licensee (Weiser) a pre-paid license (with no limit on quantity) for $84,000. Amerock, an existing licensee, sought a pre-paid license for $84,000 under its MFL clause. The licensor argued that Amerock produced a much larger quantity and offered a license at Weiser's effective rate per unit. Then Chief District Judge Kennedy, now Circuit Judge, declined the construction Cardinal wanted, converting a pre-paid lump sum royalty into an equivalent per unit royalty, saying that Weiser had purchased the right to make as many units as it wanted, and Amerock was entitled to the same right for the same lump sum royalty. 64 It should be noted that the customizing contended for in those cases would have required only a simple mathematical computation, and not the assumptions and estimates required here. 65 We decline to construe the MFL clause as entitling an MFL licensee to the type of customizing of the royalty provisions of the second license sought by Novamont. 7