Opinion ID: 664760
Heading Depth: 3
Heading Rank: 2

Heading: Royalty Calculations

Text: 16 Figgie argues that the district court erred in interpreting the provisions of the settlement agreement governing the calculation of royalties on regulators sold by SSA, Figgie's affiliated distributor, to unaffiliated customers. Under this sales arrangement, two separate sales occur, the first from Figgie to SSA and the second from SSA to the unaffiliated customer. The parties do not dispute that pursuant to the agreement, the amount of the royalty is calculated as a percentage of a sales price. However, the price for regulators that Figgie charged SSA was twenty-five percent less than the price that SSA charged to unaffiliated customers, although Figgie's price to SSA was the same as that which Figgie charged independent distributors. Therefore, the dispute centers on which sales price is used to calculate royalties. Figgie contends that the agreement requires that royalties be based on the sales price that Figgie charges SSA, rather than the sales price SSA charges unaffiliated customers, as held by the district court. 17 Interpretation of an agreement presents a question of law, governed by state contract law. See S & T Mfg. Co. v. Hillsborough County, Fla., 815 F.2d 676, 678, 2 USPQ2d 1280, 1281 (Fed.Cir.1987) (Questions regarding settlements are governed by state law applicable to contracts in general.). Here the law of New York controls. In resolving this issue, we must give effect to the intent of the parties as memorialized by the terms of the agreement. See Laba v. Carey, 29 N.Y.2d 302, 308, 327 N.Y.S.2d 613, 618, 277 N.E.2d 641, 644 (1971). 18 Under paragraph 3(b) of the agreement, Figgie is obligated to pay royalties on all regulators covered by the '145 patent that are invoiced by Figgie. The agreement further provides that such royalties are to be calculated based on sales made by Figgie to unaffiliated customers. Settlement Agreement at pp 3(b), 1(f). The agreement defines an unaffiliated customer as any Customer in which [Figgie] holds an equity interest of less than 35% of such Customer's total equity and which is not controlled by or under common control with [Figgie]. Id. at p 1(e). In addition, the parties expressly stipulated that the terms of the agreement would apply to Figgie as a corporate family, i.e., itself, its parent, its divisions, its wholly or partly owned subsidiaries, and its wholly or partly owned affiliates. 19 Where the intention of the parties is clearly and unambiguously set forth, effect must be given to [that] intent as indicated by the language used. Slatt v. Slatt, 64 N.Y.2d 966, 967, 488 N.Y.S.2d 645, 646, 477 N.E.2d 1099, 1100 (1985). By defining royalty-bearing sales as those made by the Figgie corporate family to unaffiliated customers, the parties clearly intended that sales between members of the Figgie family would not invoke royalty liability under the agreement. The parties do not dispute that SSA, a wholly or partly owned subsidiary of Figgie, does not fall within the definition of an unaffiliated customer. Hence, where sales of regulators are made by Figgie through SSA, the only sale from the Figgie family to an unaffiliated customer is the one made by SSA. A royalty is therefore properly based on that sale. 20 We do not agree, as the district court conceded, that this interpretation leads to an awkward scenario in which a royalty would technically attach before it could be calculated. 815 F.Supp. at 1516, 27 USPQ2d at 1339. A royalty attaches once the sale to the unaffiliated customer is invoiced by SSA, and the amount of the royalty is calculated on that sale. This interpretation gives reasonable meaning to all the parts of the agreement and avoids irreconcilable conflict or surplusage of its provisions. See Laba, 29 N.Y.2d at 309, 327 N.Y.S.2d at 619, 277 N.E.2d at 645. 21 Figgie next argues that sales made by SSA may not be included in calculating royalties because the agreement's royalty provisions only apply to sales made by Scott Aviation, another subsidiary of Figgie. The district court found that the agreement was ambiguous on this issue and thus relied on extrinsic evidence in determining that the royalty provisions were not limited to sales by Scott Aviation. Although we reach the same conclusion, we do so because we conclude that the agreement unambiguously dictates that result. Where, as here, the parties' intent is clear, resort to extrinsic evidence is not necessary. See Slatt, 64 N.Y.2d at 967, 488 N.Y.S.2d at 646, 477 N.E.2d at 1100. 22 As discussed above, the terms of the agreement expressly apply to all members of the Figgie corporate family, including SSA, not exclusively to Scott Aviation. Moreover, as the district court recognized, nowhere in the settlement agreement is the term Scott Aviation used.... It would have been a simple matter to substitute the words, 'Scott Aviation' at appropriate points. 815 F.Supp. at 1516, 27 USPQ2d at 1339. We agree with the district court that sales made by SSA to unaffiliated customers were properly subject to the agreement's royalty payment provisions. 23 We therefore affirm the district court's interpretation and hold that Figgie improperly calculated royalties due on sales made by Figgie through SSA by basing them on sales from Figgie to SSA rather than on those from SSA to unaffiliated customers.