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

Heading: The Undisclosed Agreement With Diamond Concerning Past Infringement

Text: 10 Ziegler did not initiate disclosure to Novamont of the 1970 agreement with Diamond. Only in part were the royalty provisions more favorable than Novamont's. The royalty rates in the Diamond agreement were lower than those in the 1967 Novamont agreement. On the other hand the Diamond agreement required a $200,000 down payment, did not permit the deduction of royalty payments to third parties, and granted no right to suspend royalty payments if infringers were not prosecuted. 4 In any event, Novamont learned about the Ziegler-Diamond agreement, demanded to be informed, and Ziegler, on October 30, 1970 supplied Novamont with the document which granted the license to Diamond. Novamont did not request substitution under paragraph A.2 of the MFL clause. Ziegler also disclosed a part of a separate letter, although it did not disclose the paragraph which agreed that in the event of recovery by Ziegler for Diamond's past infringement such recovery shall additively be credited to the down-payment made in accordance with Paragraph III of the license agreement in the same manner as if the same had initially constituted part of the down-payment actually made, and shall be credited against royalties as provided in the license. 518 F.Supp. at 566. Paragraph III(a) required Diamond to pay $100,000 within 30 days, $50,000 more within one year, and $50,000 more within two years. The entire $200,000 was non-returnable except that it could be credited against royalties up to 50% of the royalties in any one year. 11 Novamont contends that the undisclosed 1970 paragraph was a royalty provision because it should be viewed as providing for a reduction in royalty. In any event, says Novamont, the undisclosed paragraph must be deemed part of the licensing agreement, and since the royalty provisions as a whole were more favorable, the MFL clause entitled Novamont to an agreement which included the undisclosed paragraph. Obviously the undisclosed paragraph was not likely to be significant until the final outcome of the Phillips litigation over the '115 patent, but on May 6, 1974, after final decision in the Phillips case, SGK released Diamond from liability for infringement before July 1, 1970 in return for a payment of $750,000, credited as agreed. The terms of the 1974 settlement were not disclosed to Novamont. 12 It is clear that the terms of the undisclosed paragraph, taken literally, could not have benefited Novamont because Novamont had not then been an infringer. To be of benefit to Novamont the MFL clause would have to be so broadly construed as to call for modification in addition to substitution of the terms of the new agreement. Novamont evidently reasons that the MFL clause must be construed so as to entitle it to enjoy a credit against royalties equivalent in substance to the credit given Diamond for the sums paid for infringement. Novamont argues that the equivalent credit would be the amount paid by Diamond, $750,000, or at least the aggregate royalty Novamont had paid during the period Diamond had been infringing, some $465,000. 13 SGK contends that Ziegler agreement in 1970 to apply the amount recovered for infringement to royalties (as well as the acceptance of $750,000 in settlement for infringement) relates to past infringement, and is not a royalty provision of the new license agreement. SGK emphasizes that Ziegler did not wholly forgive the past infringement because the interest cost to Diamond of the $750,000 advance payment was substantial (allegedly about $354,000). But SGK contends that whatever discount Ziegler afforded Diamond in the settlement of claims for infringement was irrelevant to the MFL clause. 14 The district court decided this issue in favor of SGK, correctly, we think. 15 Other cases have involved a similar tension between treatment of an earlier licensee, who was entitled to the protection of an MFL clause, and a competitor who takes a license later, after a period of infringing activity. Arguably, parallel treatment would require not only that royalty terms be the same from the grant of the second license forward, but that the licensor must insist upon an exaction from the later licensee for past infringement which is equivalent to the royalty terms governing the earlier licensee during the same period, or must make a refund to the earlier licensee. 16 MFL clauses do not seem to have been drawn so as to compel that degree of equivalency and the courts which have dealt with the situation have declined to interpret the clauses with that breadth. Raytheon Mfg. Co. v. Radio Corporation of America, 286 Mass. 84, 190 N.E. 1, 5 (1934); Universal Oil Products Co. v. Vickers Petroleum Co., 41 Del. 238, 19 A.2d 727, 729 (1941); Rothstein v. Atlanta Paper Co., 321 F.2d 90, 96 (5th Cir.1963); Searle Analytic, Inc. v. Ohio-Nuclear, Inc., 398 F.Supp. 229 (N.D.Ill.1975). 5 17 The district court relied on these decisions, and we agree.