Opinion ID: 765605
Heading Depth: 2
Heading Rank: 6

Heading: The 1% Royalty Rate for Past Infringement and Future Practice of the

Text: 79 '861 Patent 80 Appellants advance several reasons why the bankruptcy court allegedly erred in setting a 1% royalty rate under the 1987 Agreement as damages for past infringement and compensation for future practice of the '861 patent. Appellants first argue that the bankruptcy court misinterpreted the 1987 Agreement in concluding that Cambridge is entitled to the same license terms as Genetic for Institut Pasteur's improvement technology. Appellants contend that the court's interpretation that 2 covers pre-settlement exclusive licenses to PSD and Genetic reads 4 out of the Agreement. Appellants next argue that even if Cambridge were entitled to the same license terms for the improvement technology as Genetic, the court erred in using 6% as the total consideration paid by Genetic for all of Institut Pasteur's technology; this miscalculation, appellants continue, resulted in an artificially low 1% rate for improvement technology when the court subtracted the 5% existing royalty rate (see 6) as directed by 3. Appellants contend that in addition to the 6% royalty, Genetic is paying and has paid a significant amount of other consideration. Appellants lastly argue that the bankruptcy court erred in not considering a hypothetical negotiation in 1993, when infringement began, and in not deciding that such a negotiation would have resulted in a license at 15% royalty, plus an up-front payment of $500,000. 81 Cambridge essentially responds that appellants should not be allowed to rewrite 2; since the 1987 Agreement is unambiguous, its plain language must be enforced under Maryland law. 12 Cambridge continues that based on a plain reading, the bankruptcy court's interpretation of 2 does not read 4 out of the agreement. As for the 1% rate, we understand Cambridge to argue that while Genetic provides and has provided consideration beyond the 6% royalty, the 1% royalty rate for the '861 patent alone is not artificially low because, unlike Cambridge, Genetic receives the benefit of all of Institut Pasteur's technology, in effect offsetting the additional consideration. Cambridge lastly asserts that the bankruptcy court properly disregarded the testimony of Genetic's President, Terrance Beiker, regarding a hypothetical negotiation. 82 A reasonable royalty 'may be based upon an established royalty, if there is one, or if not upon a hypothetical royalty resulting from arm's length negotiations between a willing licensor and a willing licensee.' See Trell v. Marlee Elecs. Corp., 912 F.2d 1443, 1445, 16 USPQ2d 1059, 1061 (Fed. Cir. 1990) (quoting Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078, 219 USPQ 679, 682 (Fed. Cir. 1983). When a 'reasonable royalty' is the measure, the amount may again be considered a factual inference from the evidence, yet there is room for exercise of a common-sense estimation of what the evidence shows would be a 'reasonable' award. Lindemann Maschinenfabrik, GmbH v. American Hoist & Derrick Co., Harris Press & Shear Div., 895 F.2d 1403, 1406, 13 USPQ2d 1871, 1874 (Fed. Cir. 1990). 83 It is well-established that Maryland follows the objective law of contracts. See Adloo v. H.T. Brown Real Estate, Inc., 686 A.2d 298, 304 (Md. 1996); General Motors Acceptance Corp. v. Daniels, 492 A.2d 1306, 1310 (Md. 1985). In General Motors, the Court of Appeals of Maryland explained how a court should interpret a contract: 84 A court construing an agreement under this test must first determine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated. In addition, when the language of the contract is plain and unambiguous there is no room for construction, and a court must presume that the parties meant what they expressed. . . . [T]he clear and unambiguous language of an agreement will not give away [sic, way] to what the parties thought that the agreement meant or intended it to mean. As a result, when the contractual language is clear and unambiguous, and in the absence of fraud, duress, or mistake, parol evidence is not admissible to show the intention of the parties or to vary, alter, or contradict the terms of that contract. 85 See General Motors, 492 A.2d 1306-10. 86 Based on the foregoing guidelines, we agree with Cambridge that the bankruptcy court did not abuse its discretion in using the 1987 Agreement as the basis for calculating a reasonable royalty, nor did the court clearly err in awarding appellants a 1% royalty. The parties do not dispute that Cambridge is entitled to a license under the 1987 Agreement, see Appellants' Br. at 38, so it is clear that the bankruptcy court did not abuse its discretion in looking to that agreement to calculate the proper damage award. Accordingly, we need not address appellants' arguments regarding alternate methods for computing damages, specifically hypothetical negotiation. We are left to consider appellants' arguments concerning the interpretation of the 1987 Agreement and the resulting calculation of a 1% royalty rate. 87 Appellants argue that the bankruptcy court misinterpreted 2 to include pre-settlement exclusive licenses to PSD and Genetic, thereby reading 4 out of the agreement, and that moreover, 2 only covers separate improvement technology licenses. We agree with Cambridge, however, that such pre-settlement licenses are not excluded. The language of 2 plainly states that: 88 Improvement Technology made available under subparagraph 2 by one Party to the licensees of the other party shall be made available by the licensor at a royalty rate and under conditions no less favorable than those offered to its own licensees. 89 Under Maryland law, we see no reason to interpret 2 other than by what it says, i.e., that Institut Pasteur must license its improvement technology, the '861 patent, to Cambridge at the same rate as to its sublicensee Genetic. Moreover, this interpretation does not read 4 out of the Agreement, because that paragraph applies when a party, in this case Institut Pasteur, has not licensed the improvement technology at issue to its own licensee. In this case, Institut Pasteur had already licensed the improvement technology to its own sublicensee, Genetic (via PSD), as of 1990. Thus, 4 simply does not apply, and our construction of 2 does not render 4 a nullity as appellants contend. 90 We are likewise unpersuaded by appellants' argument that the bankruptcy court clearly erred in arriving at a 1% royalty rate. As noted previously by the bankruptcy court, the parties did not expressly provide for the present contingency in the 1987 Agreement, so the bankruptcy court reasonably followed the procedure of 3 of the agreement, which provides for calculating the royalty rate for improvement technology in the similar situation in which a licensor licenses both existing and improvement technology to a licensee. While appellants correctly indicate that Genetic has paid and is paying significant consideration in addition to the 6%, Cambridge, unlike Genetic, is only receiving the benefit of a portion of the improvement technology in the form of the '861 patent. Indeed, the bankruptcy court indicated that an argument could be made that 1% is in fact too much. See Pasteur II, slip op. at 10. Acknowledging the fact that determination of a reasonable royalty involves some degree of common-sense estimation, see id., we conclude that the bankruptcy court did not clearly err in determining that appellants were entitled to a 1% royalty rate. 91 We have considered the parties' other arguments but conclude that they do not alter our decision. Inasmuch as appellants' appeal has not succeeded, Cambridge's cross-appeal is moot.