Opinion ID: 403697
Heading Depth: 1
Heading Rank: 3

Heading: Hybrid Royalty.

Text: 49 Span-Deck disputes the applicability of Lear in this case because the franchise contract is not a naked patent license; the consideration for the royalties was found to be not only patent rights, but also nonpatent consideration such as trade secrets. Because of the hybrid nature of the royalty, Span-Deck asserts that the Lear doctrine of patent law overriding the law of contracts is inapplicable and that Aronson v. Quick Point Pencil Co., 440 U.S. 257, 99 S.Ct. 1096, 59 L.Ed.2d 296 (1979), is more closely analogous. 50 In Aronson, the licensee agreed to pay a royalty of five per cent of the selling price of a product manufactured according to a specific design. The agreement provided that if a patent on the design was not allowed within five years, the royalty would be reduced to two and one-half per cent. The patent was not allowed within five years and was ultimately rejected. The licensee subsequently sought a declaratory judgment that the royalty agreement was unenforceable on the grounds that federal patent law pre-empted state contract law. The Supreme Court held that federal patent law did not pre-empt state contract law so as to preclude enforcement of the contract because nothing in the state contract law stood as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress in federal patent law. 440 U.S. at 262, 99 S.Ct. at 1099. The Court found that the patent monopoly rights were not used as leverage to negotiate the reduced royalty since the reduced royalty rested on the contingency that no patent would issue within five years. 440 U.S. at 264-65, 99 S.Ct. at 1100-01. See Brulotte v. Thys Co., 379 U.S. 29, 33, 85 S.Ct. 176, 179, 13 L.Ed.2d 99 (1964) (monopoly granted under a patent cannot lawfully be used to negotiate nonpatent royalties with the leverage of that monopoly). The Court also found that the agreement did not fall within the Lear rationale of encouraging the early adjudication of patent validity to further the strong federal policy of insuring that only inventions which meet the rigorous requirements of patentability are withdrawn from the public domain because, in Aronson, no patent ever issued and no ideas were withdrawn from public use. 440 U.S. at 264, 99 S.Ct. at 1100. 51 Lear appears to be more closely applicable to this case than Aronson. First, patents were issued in this case, thereby removing certain ideas from the public domain. Second, the patents necessarily were used as leverage to negotiate the hybrid royalty in this case, unlike the reduced royalty in Aronson. Finally, the terms of the contract itself make the Lear rationale more applicable. Paragraph 4.1 provides: 52 In the franchise area, LICENSEE will cooperate with LICENSOR at the sole cost and expense of LICENSOR in taking such legal action as might be reasonably necessary to protect said trademarks, LICENSOR'S processes, and the patents thereon. In the event a final judgment should be entered in a Court of competent jurisdiction determining (a) That the right to the use of the name SPAN-DECK is not exclusively vested in LICENSOR and its LICENSEE, for the manufacture of such product in the territory covered by this agreement, or (b) That LICENSOR'S machine and/or processes are not protected by LICENSOR'S patents, with the effect that persons not licensed by LICENSOR may utilize same without liability for infringement, or with the effect that use of same is deemed an infringement of patents owned by persons other than LICENSOR, then LICENSEE may, at its option, terminate this license agreement by giving 60 days notice by registered mail, whereupon both parties will be released from all obligations under this agreement except that LICENSEE shall not be released from its Agreement to pay royalties already due or any other accrued obligation, nor from any other agreement herein contained which is stated to be binding subsequent to termination of this contract. 53 Thus, the entire royalty is avoidable under the contract in the event that the patents are invalid; no allocation of the percentage of royalties attributable to trade secrets and know-how is provided. The contract language indicates the primary importance of the patent rights in determining consideration. 54 The Ninth Circuit encountered a similar situation in St. Regis Paper Co. v. Royal Industries, 552 F.2d 309 (9th Cir.), cert. denied, 434 U.S. 996, 98 S.Ct. 633, 54 L.Ed.2d 490 (1977). In that case, the court found the underlying patent invalid and held unenforceable a royalty agreement which failed to distinguish between patent rights and know-how rights. The court stated: 55 When, as here, the patent rights and the know-how are so intimately intertwined, we believe that the same rule which makes royalties for patent rights uncollectible if the patent is invalid should apply with equal force to know-how. This does not mean Royal will be deprived of compensation for know-how; it merely means Royal is not entitled to royalties under the license agreement, which did not distinguish between royalties for patent rights and royalties for know-how. 56 .... 57 We hold that section 12(b)(1) is unenforceable for both the patent rights and the know-how. Nevertheless, we believe that Royal is entitled to compensation for its know-how. 552 F.2d at 315. 12 58 The court continued with a discussion of damages and the reasonable value of the know-how, premised ostensibly on grounds of unjust enrichment. See Dusenka v. Dusenka, 221 Minn. 234, 21 N.W.2d 528, 530-31 (1946).IV. Letter of Termination. 59 Paragraph 4.3 of the franchise/license contract entered into on October 7, 1970, contains the following provision: 60 This Agreement may be renewed at the option of the LICENSEE for an additional period of five (5) years, and thereafter for additional periods of five (5) years, provided that LICENSEE shall not be in default under any provisions of this Agreement. Renewal shall be automatically effected unless LICENSEE gives written notice of its intention not to renew to LICENSOR, at least six (6) months prior to the expiration of the original term of this Agreement or any renewal term. 61 Defendants alleged at trial that on April 2, 1975, Fabcon gave an unambiguous written notice of nonrenewal by way of letter to Span-Deck, thus terminating the agreement as of October 6, 1975. 13 They argued, therefore, that if they are liable for compensatory damages, such damages should be limited to those incurred from the time of the alleged breach until the contract's alleged termination in October 1975. 62 The district court submitted the issue to the jury and the jury found that renewal occurred as of October 1975 in accordance with the franchise contract's terms, assessing compensatory damages of $1,500,000. The district court justified submission of the issue to the jury on the grounds that the question involved resolution of certain factual issues upon which the evidence was in dispute including whether Fabcon's notice of nonrenewal was unambiguous. 63 Fabcon contends that the nonrenewal notification letter is unambiguous on its face and that the district court improperly found that Fabcon's subsequent actions created ambiguity. Because Fabcon ceased making royalty payments and ultimately terminated the contract based on its assertions of patent invalidity, Fabcon argues that its continued production was not inconsistent with the post-termination requirements of paragraph 4.4, but, in fact, was consistent with its notice of nonrenewal. Thus damages should have been cut off as of October 6, 1975. 64 Span-Deck urges that Fabcon's failure to comply with paragraph 4.4 is evidence of its intent to renew the agreement, creating an ambiguity, and thereby justifying submission of the issue to the jury. Span-Deck further contends that Fabcon's default precluded its exercise of the right of nonrenewal. Finally Span-Deck contends that, even if Fabcon effectuated a timely notice of nonrenewal, the jury's damages should be allowed to stand as damages for Fabcon's illegal use of trade secrets and for patent infringement occurring after the October 1975 termination date. 65 We find the notice of nonrenewal clear and unambiguous. Span-Deck's admission of the October 1975 termination is further evidence of the parties' understanding regarding renewal of the agreement. In light of this and Fabcon's reasons for ceasing payment of royalties and not renewing the franchise agreement, the continued use of patented processes does not appear to be inconsistent conduct creating an ambiguity. The district court's determination of whether an ambiguity exists in a written document is a question of law, see Republic National Life Insurance Co. v. Lorraine Realty Corp., 279 N.W.2d 349, 354 (Minn.1979), and is thus subject to review by this court. The intent of the parties may be gained entirely from the writings in this case; therefore, the construction and effect of the written contract and notice letter were questions of law to be resolved by the court, not by the jury. See Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 66 (Minn.1979); Leslie v. Minneapolis Teachers Retirement Fund Ass'n, 218 Minn. 369, 16 N.W.2d 313, 315 (1944). 66 As to Span-Deck's contention regarding the effect of default on Fabcon's right to exercise the nonrenewal option, it appears that the district court properly concluded under paragraph 4.3 of the agreement that Fabcon's right to renew was contingent on absence of default, but the right of nonrenewal was not so qualified. The alleged breach had no effect on Fabcon's timely notification of intent to nonrenew. 67 Conclusion. 68 In light of our finding regarding the invalidity of the Mitchell patent and the date of termination of the contract, it is apparent that the trial court erred in allowing the jury to assess compensatory damages based on unpaid royalties for the period after October 7, 1975. Span-Deck's contention that the damages included for that time period should be allowed to stand because such a computation is a fair method of computing damages for unauthorized use of trade secrets is not convincing. Although the jury found that Fabcon continued to use Span-Deck's trade secrets acquired as a result of a confidential relationship with Span-Deck, and although a reasonable royalty is one fair method of computing damages in such a case, cf. University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 539-40 (5th Cir. 1974) (reasonable royalty standard one measure of damages for misappropriation of trade secrets), it does not follow that the jury would have necessarily computed the same damages had it treated the contract as terminated as of October 1975. In sum, a remand for determination of compensatory damages based on the value of nonpatent consideration received by Fabcon during the period from cessation of royalties until the October 1975 contract termination and damages for the misappropriation of trade secrets after contract termination is in order. 69 Because the withholding of royalties when challenging patent validity is authorized under Lear, thereby justifying any encouragement by a parent corporation to a wholly-owned subsidiary to so act, the judgment against Rauenhorst is reversed. Because the jury found the Kinnard patent uninfringed, and because the Mitchell patent is invalid due to obviousness, the judgment against Fabcon for breach of contract is reversed; however, because the jury found that Fabcon received nonpatent consideration, the cause is remanded for a determination of the value of nonpatent rights received by Fabcon from the time Fabcon ceased payment of royalties until termination of the contract on October 6, 1975. In addition, a determination of damages for misappropriation of trade secrets after the contract termination is ordered. 70 The judgment is vacated and the cause is reversed and remanded for further proceedings in accord with this opinion. 71