Opinion ID: 403701
Heading Depth: 3
Heading Rank: 4

Heading: payment of the underreported royalties

Text: 31 Before it ceased paying royalties because of doubts about the patents' validity, Bristol Locknut engaged in a deliberate and systematic underreporting of sales, thereby reducing the royalties paid to SPS. Bristol Locknut contends it has no obligation to pay royalties on the underreported sales that would otherwise be due if the patents were valid and not infringed. We reject the argument. To permit Bristol Locknut to retain the royalties it owed SPS would be inequitable and would undermine federal patent law policy. Bristol Locknut's contractual obligation to pay royalties terminated only after it ceased paying royalties and clearly notified SPS it was contesting the patents' validity. Just as the subsequent determination of the patents' invalidity did not affect Bristol Locknut's duty to pay royalties before it challenged the patents' validity, it does not affect the duty to pay the full amount of royalties owed under the contract. Cf. Ransburg Electro-Coating Corp. v. Spiller & Spiller, Inc., 489 F.2d 974, 978 (7th Cir. 1973) (an infringement settlement agreement was enforced even though the patent was later declared not infringed, since a contrary result would be inconsistent with the Lear policy favoring early challenges to patent validity). 32 A contrary result would also be inequitable. Here, Bristol Locknut received the full benefit of the licensing agreement despite the later adjudication of the patents' invalidity. Bristol Locknut was licensed to sell the locknuts without being sued by SPS for infringement. For six years Bristol Locknut enjoyed the benefits of the patent and developed a substantial business, economies of scale, and customer goodwill. It cannot avoid its contractual obligation by deliberately underreporting its sales. See Kraly v. National Distillers & Chemical Corp., 502 F.2d 1366, 1372 (7th Cir. 1974).