Court Opinion

ID: 3002132
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:25:16.081041+00
Date Added: 2024-06-11T18:02:01.571199
License: Public Domain

In the

United States Court of Appeals
              For the Seventh Circuit
                        ____________

Nos. 07-1726, 07-1727

E RAG EN B IOSCIENCES, INC.,

                            Plaintiff-Appellee, Cross-Appellant,

                                v.

N UCLEIC A CIDS L ICENSING LLC,

                         Defendant-Appellant, Cross-Appellee,

and

S TEVEN A. B ENNER,
                                 Defendant, Cross-Appellee.
                        ____________

           Appeals from the United States District Court
               for the Western District of Wisconsin.
          No. 06-C-305-C—Barbara B. Crabb, Chief Judge.
                        ____________

      A RGUED JUNE 2, 2008—D ECIDED S EPTEMBER 2, 2008
                        ____________

 Before E ASTERBROOK, Chief Judge, and R OVNER and
W OOD , Circuit Judges.
  W OOD , Circuit Judge. Litigation can sometimes take on
a life of its own, propelling the parties into maneuvers
2                                     Nos. 07-1726, 07-1727

and rhetorical flourishes that might not have been under-
taken in more placid times. This case seems to be a caution-
ary tale for how the pressures of litigation can overtake
parties like Hokusai’s wave swamping the boats (“The
Great Wave Off Kanagawa,” ca. 1831, Katsushika Hokusai
(1760-1849)).
   Dr. Steven Benner invented and patented some useful
techniques for using DNA in laboratory environments. He
formed Sulfonics, Inc., which in 1999 was merged into
EraGen. As part of this acquisition, EraGen signed several
licensing agreements with Benner allowing it to use his
patents. For a time Benner sat on EraGen’s board of
directors. Things were not as good as they seemed, how-
ever. From the beginning, EraGen and Benner did not
trust each other, and they had constant disputes over
matters including the timeliness of royalty payments,
sublicensing agreements EraGen had made with Bayer,
whether EraGen’s management should be replaced, and
whether Benner had succeeded in his effort to terminate
the agreements in 2004. The parties concluded new agree-
ments on April 27, 2005, in an attempt to set aside their
earlier problems. Of the several agreements, the most
important for this litigation is the Artificially Enhanced
Genetic Information System (AEGIS) Agreement (“the
Agreement”). The Agreement provided for a semiannual
payment of royalties on March 1 (covering July to Decem-
ber of the previous calendar year) and September 1 (cover-
ing January through June of that calendar year).
  The wheels fell off the wagon with the very first royalty
payment under the new Agreement on September 1, 2005:
Nos. 07-1726, 07-1727                                       3

Benner thought that he was underpaid, but EraGen
thought that it had overpaid him. Benner then tried to
exercise his right to terminate, but EraGen disputed
(again) whether that termination was effective. To compli-
cate matters, Benner had assigned all of his rights under
the Agreement to Nucleic Acids Licensing (“NAL”), as of
August 11, but he did not inform EraGen that he had done
so until October 21. (From this point onward, unless the
context requires otherwise, we refer to Benner and NAL
interchangeably.) To make matters even more confused,
there appears to have been a Bayer sublicense for cystic
fibrosis research that may or may not have been concealed
from NAL because it may or may not have been related
to the AEGIS patents—but which the district court did
not examine in any case. (In order to distinguish it from
an existing Bayer sublicense, we refer to the “missing”
license as the “cystic fibrosis sublicense” throughout this
opinion.) Letters, then threats, then summonses were
exchanged, and the case ended up in federal court.
  On cross-motions for summary judgment, the district
court split the difference. It found that EraGen did breach
the Agreement by underpaying Benner, but it also found
that Benner had waived the breach through his conduct
in the months that followed. Both parties asserted
claims for money had and received (unjust enrichment),
but the district court granted summary judgment against
both on that issue. The district court likewise granted
summary judgment against both parties on claims of a
breach of good faith and fair dealing. No one has ap-
pealed from the latter ruling. The rest is left for us to sort
out on de novo review. See Harrell v. United States Postal
4                                     Nos. 07-1726, 07-1727

Service, 445 F.3d 913, 918 (7th Cir. 2006). We do so under
the substantive law of Florida, which (all agree) is the
jurisdiction to which Wisconsin’s choice-of-law
principles direct us.

                             I
   Before reaching the central question—was the Agreement
properly terminated—we must decide whether this is
still a live issue. In other words, even if Benner took the
right steps to terminate the Agreement, did he then waive
the benefits of that termination and allow the Agreement
to continue uninterrupted? This, roughly, is how the
district court interpreted the sequence of events. It con-
cluded that NAL and Benner had (after several detours)
terminated the Agreement effective November 2, 2005,
but that they reopened the discussions about royalties
in February 2006 and continued them through May with-
out reasserting that the Agreement had been terminated.
Even more persuasive to the district court was the fact
that NAL accepted and deposited the March 1, 2006,
royalty payment without challenge, even though the
Agreement had long since, by NAL’s lights, supposedly
been terminated. NAL also sent a letter in March in-
dicating that “this matter can be resolved,” which seemed
to the district court inconsistent with termination. For
these reasons, the district court found that NAL con-
tinued to act as if the Agreement were still in force after
declaring it terminated, and thereby somehow nullified the
termination and forgave the breach. See Acosta v. Dist. Bd.
of Trustees of Miami-Dade Community College, 905 So. 2d 226,
229 (Fla. Dist. Ct. App. 2003).
Nos. 07-1726, 07-1727                                        5

   There is another way to look at NAL’s actions, however:
after declaring that the Agreement had been breached and
exercising its right to terminate, NAL could simply have
been mitigating its damages. The Agreement specifically
provided that all rights under the licenses would revert to
Benner (or NAL, after assignment) upon termination.
Agreement §§ 2.3, 4.2. Upon proper termination of the
Agreement, EraGen would have no right to retain the
royalties, because it no longer held the licenses or benefit-
ted from the sublicenses. Thus, NAL’s acceptance of
royalty payments from EraGen would merely mitigate
the damages arising from the breach precipitating the
termination: that money would arguably belong to NAL if
it sued for unjust enrichment on a properly terminated
contract. Florida applies the ordinary principles of mitiga-
tion of damages to contract law, Young v. Cobbs, 110 So. 2d
651, 653 (Fla. 1959), and so shall we: if a party is mitigating
damages, it is not, in so doing, waiving the breach that
caused the damages.
  The facts offer more support for the mitigation hypothe-
sis than they do the waiver interpretation. In its letter of
March 4, 2006, acknowledging receipt of the checks, NAL
expressly reiterated its position that the AEGIS Agreement
had been terminated in November. The Agreement itself
says that termination “shall not release either party from
any obligation heretofore accrued.” Agreement § 4.4. The
March 2006 payment was for royalties accrued from July
through December of 2005, most of which predated the
November 2005 termination. Given the wording of this
letter and the accrued obligation, acceptance of the pay-
ment is better seen as mitigation of damages rather
than waiver of any claim.
6                                     Nos. 07-1726, 07-1727

   Another reason to reject the waiver interpretation is that
it creates a logical problem: if a contract has been termi-
nated, rightly or wrongly, is it possible any more to
“waive” anything about it? While one can waive a breach
and proceed as if the contract were still in force, termina-
tion is a different story: “When a contract is terminated,
even wrongfully, there is no longer a contract.” Horwitz-
Matthews, Inc. v. Chicago, 78 F.3d 1248, 1251 (7th Cir. 1996)
(Illinois law); see also Indian River Colony Club, Inc. v.
Schopke Constr. & Eng’g, Inc., 592 So. 2d 1185 (Fla. Dist. Ct.
App. 1992). If the contract was properly terminated, there
is nothing left to waive (other than, perhaps, continued
benefits under the contract, although one could also
mitigate damages by accepting such benefits). If the
contract was wrongfully terminated, it is still at an end;
the wrongful termination, however, gives rise to a claim
on behalf of the aggrieved party.
  The importance of this distinction is confirmed when we
consult the Agreement before us. Termination can
take place upon the occurrence of any one of a list of
events. See Agreement § 4.2. While other occurrences
might give rise to a lawsuit and damages, only certain
enumerated breaches of contract are regarded as serious
enough to justify termination. NAL and Benner might
have waived their rights under the Agreement by re-
fraining from exercising the right to terminate under § 4.2,
but they did not: by claiming termination, they demon-
strated that they were not willing to overlook EraGen’s
failure to perform.
  This district court appeared to conflate breach and
termination in analyzing the waiver issue. Although that
Nos. 07-1726, 07-1727                                         7

is understandable given how closely related they are in
this contract, it is still error. We find that NAL did not
waive its right to terminate the Agreement, and thus that
there is a live question before us whether the steps that
it took were effective to bring about termination.

                               II
   So far we have assumed that the Agreement was prop-
erly terminated; we now turn to examining that assump-
tion to see if it is correct. At this point, the wording of the
Agreement becomes important. We proceed in two steps:
first, were there proper grounds for termination, and
second, if so, did NAL properly communicate the fact that
it was exercising its right to terminate? “In contract
interpretation cases, we review a district court’s inter-
pretation of an unambiguous contract de novo. . . . If the
contract is ambiguous, a more deferential standard of
review is applied to the interpretation of the terms and
factual findings.” Platinum Tech., Inc. v. Federal Ins. Co., 282
F.3d 927, 931 (7th Cir. 2002) (citation omitted).
 The provision governing termination is § 4.2 of the
Agreement:
    Benner may terminate this Agreement upon written
    notice to EraGen upon:
        A. non-payment of the payments due Benner
           under Sections 3.1, 3.2, 3.3 and 3.4, and 5.3,
           provided that EraGen or its designee shall have
           the right to cure such breach within sixty (60)
           days of EraGen receiving written notice from
           Benner;
8                                      Nos. 07-1726, 07-1727

    ....
    Upon termination of this Agreement pursuant to
    Section 4.2, all of the rights in the Licensed Patents and
    Know How will revert to Benner, subject only to
    Benner’s obligations to sublicensees [enumerated
    elsewhere].
An underpayment of royalties would constitute a breach,
giving EraGen a period during which it had a right to
cure after it was notified. Here, Benner promptly
notified EraGen on the day after he received the check,
September 2, 2005, of his conclusion that there had been
an underpayment, triggering a cure period ending Novem-
ber 2, 2005: on that date the contract would automatically
terminate.
  We must refer to the words of the contract to see whether
this sequence of events supported termination. Benner
believed that he had been underpaid, and thus that he
was permitted to declare EraGen in breach and to invoke
§ 4.2; EraGen was convinced that there was no breach, and
that it had actually overpaid Benner. It has always
asserted that no proper ground for termination existed,
and so, it concludes, Benner was not entitled to terminate
the contract.
   The primary reason for the frustrating lack of clarity
about this situation is that EraGen failed to furnish the
royalty report required by the licensing agreement with
its September 1, 2005, royalty payment. When he saw the
amount tendered, Benner computed the amount that he
(and NAL, given that the rights had been assigned by this
point) thought were owed based on several publicly
Nos. 07-1726, 07-1727                                       9

available sources. Benner came up with a number ap-
proximately $3,416 greater than the amount of the check;
most of the difference was attributable to royalties from
the AEGIS licenses. Meanwhile, on September 7, 2005,
EraGen sent a letter to Benner asserting that it had under-
paid on several sublicenses but overpaid on an existing
Bayer sublicense, for a net overpayment of approximately
$40,000 (later amended to $50,000 after an analysis by a
certified public accountant; we are also still setting aside
the “missing” cystic fibrosis sublicense).
  The greatest part of the discrepancy between the com-
peting totals comes from the parties’ difference of opinion
about the proper interpretation of the term “accruing” in
§ 3.7 of the Agreement. Section 3.7 is a timing clause,
designed to specify when a higher royalty rate would come
into effect. It said that a higher royalty rate would be paid
on “all revenues accruing from Net Sales or sublicensing . . .
on or after February 15, 2005.” Agreement § 3.7 (emphasis
added). The money from the Bayer sublicense in question
was booked before February 15, but actually reached
EraGen’s accounts after February 15. EraGen asserts that
§ 3.7 was using the term “accruing” in the accountant’s
sense, under which the royalties would be paid on the
lower pre-February 15 rate for all transactions booked
before that date. Benner asserts that the “plain meaning” of
the term implies cash-in-hand. Revenues, he thinks, did not
accrue from sales until the sale was complete and payment
made. The district court accepted Benner’s position, but we
think that this puts too much of a strain on the language
the parties chose for their contract.
10                                     Nos. 07-1726, 07-1727

  First, we note that the distinction between accrual and
cash basis transactions is a common one in the business
world: some people keep track of transactions as they are
booked (accrual businesses), and others keep track of them
as money is spent or collected (cash businesses). Without
evidence to the contrary, we see no reason to assume that
the parties to the AEGIS Agreement chose to use the
word “accrual” idiosyncratically to mean “cash basis.”
Second, neither party disputes that EraGen uses the accrual
method of accounting and that Benner knew this. Benner
sat on EraGen’s board of directors long enough both to see
that this was the case and to understand what it meant.
The Florida Supreme Court has also expressed no doubt
that the term “accrued,” especially when used against a
background of accounting, means “an item . . . definitely
ascertained as to its amount, and acknowledged to be due,”
Orlando Orange Groves Co. v. Hale, 119 Fla. 159 (1935). In the
AEGIS Agreement, the term “received” (rather than
accrued or accruing) is used elsewhere in the document,
see, e.g., Agreement §§ 3.4, 3.10, raising a strong inference
that the use of “accruing” in § 3.7 was for a specific reason.
The parties here are sophisticated enough to make us
reluctant to assume that they meant nothing by their
choice of words in a fully-dickered document. The descrip-
tion of the royalty payments in § 3.9 confirms that the
royalties are paid for periods “in which such amounts were
earned,” not when they were actually received. There is
sufficient information within the Agreement to raise a
strong inference that the term is not even ambiguous.
  Even if we were to assume, generously, that the term
“accrued” is ambiguous and thus that we should resort to
Nos. 07-1726, 07-1727                                     11

parol evidence to prove its meaning, the balance tilts
strongly in favor of an interpretation following the ac-
counting convention. This was not the parties’ first shot at
a contract. They had concluded a previous agreement that
had failed because EraGen did not pay its royalties on
time. The issue of timely payment was on the table and
both Benner and NAL had every incentive to be crystal
clear on the timing issue. Indeed, Benner seemed to
interpret the clause in the accounting sense. In a
letter written October 24, 2005, concerning the timing of
royalties, Benner even asked whether the Bayer royalty
money “was on EraGen’s books as accrued income before
February 15” because this would “determine[ ] the royalty
rate.” Moreover, it was NAL’s own lawyers who inserted
the phrase “revenues accruing from Net Sales” in place of
the single word “transactions.” Because this is a patent
license agreement, the relevant transactions are the sales of
products using the licensed technologies to third parties.
Such a transaction takes place at the moment the product
is sold, which is also when EraGen realizes its revenue.
This matches with the normal business definition of
“accruing,” but not with a reading that takes “accruing” to
mean actual receipt of funds.
  With all of this parol evidence in hand, the weight of the
arguments favoring the “accounting” meaning overpowers
the countervailing notion that the district court drew from
the fact that the Agreement did not specifically state
that it was using “accruing” in a technical sense. The
district court found both readings of the term plausible,
but it favored the plain meaning offered by Benner and
NAL. We find both possible, but only one plausible. In the
12                                   Nos. 07-1726, 07-1727

context of a clause dealing with the financial details of a
carefully negotiated contract between parties that had
been doing business together for years, a shift in wording
between “accruing” and “received” cannot be disregarded.
The term is unambiguous, and thus the district court
erred when it found that the term “accruing” referred to
actual revenues received, rather than revenues booked.
   This conclusion has several consequences. Benner based
his termination of the Agreement on a mistake, putting to
one side for the moment the cystic fibrosis sublicense (to
which we return below). He thought that EraGen
had underpaid royalties, but when one draws the line
between the old royalty rate and the new one using
accrued transactions, it appears that EraGen indeed
overpaid by approximately $50,000. This does not mean
that Benner’s notice of termination was ineffective, but
it does mean that Benner may have ended the Agreement
wrongfully.

                            III
  Benner and NAL offer a second ground that, in their
view, demonstrates that the termination was justified. They
assert that EraGen failed to abide by the section of the
Agreement requiring it to maintain the proper filings with
the Patent and Trademark Office (“PTO”). Section 5.3 of
the Agreement provides that EraGen must pay the mainte-
nance fees for the patents and, if necessary, take care of
changing the status of the holding organization from
that of a “small” entity to a “large” entity. (Certain fees
are higher when patent licenses are held or practiced
Nos. 07-1726, 07-1727                                      13

by large entities rather than small ones. See 37 C.F.R.
§ 1.20(e)-(h). When the patents and licenses were prac-
ticed only by EraGen or Sulfonics, they were held by a
small entity. Bayer, however, is indisputably a large entity,
and so once it had rights to the patents, the filings had to
be corrected to reflect its role.) One of the grounds for
terminating the Agreement is the failure to maintain the
proper filings, including information about entity status,
with the PTO. See Agreement § 4.2.A. Importantly, this
is a section that requires written notice of the breach and
gives a right to cure within 60 days of receipt of the notice.
   NAL wrote one letter to EraGen on October 24, in
which it asserted that “EraGen has not made payments
due under Sections 3.1, 3.2, 3.3 and 3.4, and 5.3. Under
Article 4.2 of the Agreement, failure to make these pay-
ments is sufficient grounds for termination. Therefore, the
notice of Termination, dated September 2, 2005, stands.”
Later, it complained more specifically to EraGen in a
letter of November 27, 2005, that EraGen had failed to
comply with its obligations under Article 5.3. EraGen
followed up with some emails seeking Benner’s coopera-
tion in correcting the PTO problems, and by March 4, 2006,
it had completed corrective action. The PTO accepted the
payments and corrected the patents with no prejudice to
the holders and no net penalties.
  NAL maintains that the fees should have been paid in
March 2005, but it is unclear where in the contract it found
that deadline. The only clause mentioning a time for
payment says that the maintenance fees must be paid
within two months of becoming payable. Agreement § 5.3.
14                                     Nos. 07-1726, 07-1727

Neither party addresses the date to which this might
refer. Moreover, the Agreement imposes no deadline for
changing the status of the entities holding the patents.
   More significantly, we agree with the district court that
NAL and Benner provided no notice whatsoever to EraGen
that it might have breached this part of the contract, and so
it never had the chance to cure its failure to perform and
avoid termination. NAL contends the October 24 letter
sufficed to give EraGen written notice, because it men-
tioned § 5.3 at the end of the laundry list of provisions
under which EraGen had supposedly failed to pay. (Actu-
ally, the list more or less quotes § 4.2 of the Agreement.) It
is asking far too much of EraGen (or any other party) to
read into that fleeting reference a claim that an obliga-
tion—never before mentioned and even then not dis-
cussed at all—was being used as grounds for termination.
Such a reading would render meaningless EraGen’s right
to cure violations of § 5.3. The correspondence that had
gone before, as well as that which succeeded the October
24 letter, mentioned only the royalty underpayment as a
ground for termination. We conclude that the breach now
alleged of § 5.3 did not support termination, because
NAL’s notice to EraGen was insufficient.

                             IV
  At this point, we must confront the cystic fibrosis
sublicense. What was it? Was it covered by the AEGIS
agreement? What happened to the royalties that were
collected from Bayer? The question pervades both parties’
briefs because this large chunk of money ($525,000) has the
Nos. 07-1726, 07-1727                                    15

potential to make all the difference to the outcome of this
litigation. If, as EraGen contends, the cystic fibrosis
sublicense was outside the scope of the AEGIS Agreement,
then NAL and Benner wrongfully terminated the Agree-
ment and the district court’s judgment in favor of NAL on
this point was wrong: NAL would owe approximately
$49,383 to EraGen. If, on the other hand, as Benner con-
tends, EraGen wrongfully concealed from Benner and NAL
the existence of the cystic fibrosis sublicense and that
sublicense was indeed covered by the AEGIS Agreement,
then Benner’s conclusion that EraGen underpaid the
royalties due is probably correct, even if not for the
reasons he originally gave. The problem we face is that
the district court did not address this sublicense or the
money attributable to it.
   According to documents in the district court record, on
March 24, 2005, EraGen and Bayer concluded a sublicense
that pertained specifically to cystic fibrosis research. On
April 27, 2005, the new Agreement between EraGen and
Benner was signed. That Agreement included a warranty
that EraGen would enumerate all of the sublicensees it
held for the AEGIS patents. When EraGen compiled the
list, however, it did not include the Bayer cystic fibrosis
sublicense. It now explains the omission with an assertion
that the Bayer license did not cover the AEGIS technology.
NAL later found some evidence to the contrary, in the
form of a “press release indicating that the cystic fibrosis
sublicense uses AEGIS technology.” Our attempts to
locate this press release in the record on appeal were
unavailing, but we did find another piece of potentially
relevant evidence: NAL pointed out that Irene Hrusovsky,
16                                    Nos. 07-1726, 07-1727

EraGen’s CEO, stated that 95% of EraGen’s revenue came
from sublicenses using the AEGIS technology. NAL
reasons that this percentage is mathematically possible
only if the $525,000 from the cystic fibrosis sublicense
is included among the AEGIS sublicenses, even though
Hrusovsky elsewhere denied that connection. This is
intriguing evidence, but it is not enough to allow us to
determine definitively whether EraGen was correctly
keeping the cystic fibrosis sublicense out of the AEGIS
royalty pool or was duplicitously attempting to hide
the revenue from NAL and Benner.
  EraGen argues that we should read the district court’s
silence as a sub silentio rejection of NAL’s claim that this
money is rightly due. This strikes us as entirely out of the
question. This issue arose late in the litigation because
EraGen was taking the position that the sublicense did
not use the AEGIS technology and that it was somehow
entitled to keep all information pertaining to the cystic
fibrosis sublicense away from its adversary and the
district court. When facts about the sublicense began to
emerge, it became clear that the question whether it rested
in part on the AEGIS technology was a serious one. Comb-
ing through the district court record, we have satisfied
ourselves that the issue was presented to the district court,
but for reasons that do not appear on the record, it received
no resolution. Because a decision one way or the other on
this sublicense will effectively decide the case, we cannot
leave it up in the air.
Nos. 07-1726, 07-1727                                   17

                            V
  We therefore V ACATE the judgment of the district
court and R EMAND this case for further proceedings
consistent with this opinion. We have established the fact
that Benner and NAL did terminate the AEGIS Agreement,
but the question whether that termination was wrongful
depends on the proper characterization of the cystic
fibrosis sublicense. That issue will also determine whether
Benner owes money to EraGen, or if EraGen underpaid
royalties to Benner and NAL. Each party is to bear its
own costs on appeal.

                           9-2-08