The Federal Circuit Holds that an “Agreement to Agree” to License Does Not Establish an Enforceable License Right
| October 26, 2020
Phytelligence v. Washington State University
August 27, 2020
PROST, REYNA, and STOLL, Precedential opinion by Reyna
Summary
Appellant, Phytelligence, Inc. (Phytelligence) is an agricultural biotechnology company that uses tissue culture to grow trees for sale to nurseries and growers. Phytelligence entered into a Propagation Agreement with Washington State University (WSU) regarding growing of “W38” apple trees developed and patented by WSU. The Propagation Agreement was focused on research and development, but included a clause indicating that Phytelligence is “granted an option to participate” as a seller in the future upon signing “a separate contract.” Phytelligence did not execute a later contract with WSU, but later brought a legal action against WSU asserting that the Propagation Agreement granted Phytelligence a right to license. The district court affirmed WSU’s motion for summary judgment dismissing Phytelligence’s claim on the basis that the contract was an unenforceable “agreement to agree.” On appeal, the Federal Circuit affirmed the district court’s decision.
Background
Appellant, Phytelligence, Inc. (Phytelligence) is an agricultural biotechnology company that uses tissue culture to grow trees for sale to nurseries and growers.
Phytelligence engaged in discussions with Washington State University (WSU) regarding growing of “W38” apple trees developed and patented by WSU.
The parties entered into a Propagation Agreement under which Phytelligence could propagate the W38 apple trees and experiment with propagation techniques for research and development purposes. However, the agreement did not provide a right for Phytelligence to sell the W38 trees. Under the agreement, Section 4 included the following clause:
If [Phytelligence] is an authorized provider in good standing . . . by signing this Agreement, [Phytelligence] is hereby granted an option to participate as a provider and/or seller of Plant Materials listed in Exhibit A, if the Cultivar is officially released by WSU and becomes available for licensing by [WSU] . . . . [Phytelligence] will need to sign a separate contract with [WSU], or an agent of [WSU], to exercise this option.
Phytelligence emailed WSU “to clarify” that to exercise its option under Section 4, WSU would need to “grant it a separate license for the purpose of selling,” and WSU emailed “yes” in reply. Phytelligence emailed again indicating that the agreement had a “wispy forward commitment,” but then emailed stating “since this agreement is a precursor to any other, we suppose there’s no harm in going ahead and executing it. Then at least we will have the pieces in place when we are all ready to go beyond R&D mode. With that context, the agreement is fine as it is.”
In March 2013, WSU issued request for proposals seeking an exclusive licensee to manage the commercialization of WA38 and awarded an exclusive license to Proprietary Variety Management (PVM). PVM provided nonexclusive sublicenses to companies provided that such companies become Northwest Nursery Improvement Institute (NNII) member nurseries.
On May 18, 2017, Phytelligence informed WSU that it desired to proceed under Section 4 of the agreement. WSU indicated that the Propagation Agreement required a separate contract with PVM. Phytelligence approached PVM, but refused to become such a member nursery, and rejected that requirement and did not enter an agreement with PVM.
On September 15, 2017, WSU presented Phytelligence with three other options for propagating and selling WA 38, including two options that did not require NNII membership. Phytelligence rejected the three options.
On January 16, 2018, WSU terminated the Propagation Agreement with Phytelligence on the basis that Phytelligence had sold and delivered WA 38 without a license.
On February 26, 2018, Phytelligence sued WSU in state court for breach of the Propagation Agreement. WSU then asserted patent and trademark infringement counterclaims and removed the case to federal district court. WSU moved for summary judgment, arguing that Section 4 was an unenforceable “agreement to agree” under Washington state law.
The district court granted the motion for summary judgment. And, Phytelligence appealed.
The Federal Circuit’s Decision
Legal Issue
The question on appeal is whether Section 4 of the Propagation Agreement granted Phytelligence a license right as being an enforceable agreement with open terms rather than an unenforceable “agreement to agree.”
Standard of Review
The Federal Circuit reviews a grant of summary judgment under the law of the regional circuit, and, thus, de novo in this case.
Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
Discussion
The Federal Circuit explained that this legal issue is a matter of contract interpretation, which is determined under state law. Under Washington state law, an “objective manifestation” standard is employed, wherein a court looks to the reasonable meaning of the contract language to determine the parties’ intent.
Agreement to Agree vs. Agreement with Open Terms
The Federal Circuit noted that an “agreement to agree” is unenforceable, explaining that “[a]n agreement to agree is an agreement to do something which requires a further meeting of the minds of the parties and without which it would not be complete.” The court explained that an “agreement with open terms” differs in that “the parties intend to be bound by … key points agreed upon with the remaining terms supplied by a court or another authoritative source, such as the Uniform Commercial Code” such that “[a]ny missing or open terms can therefore be ‘easily’ discerned by a court.” The court also explained that open terms can also be appropriate when they are based on an objective formula or method contained within the contract itself.
However, the Federal Circuit noted that Section 4 of the Propagation Agreement “provides the court with no objective method for determining the terms of the separate contract” between WSU or (or its agent).” Thus, the Federal Circuit affirmed that the Section 4 of the Propagation Agreement is merely an unenforceable agreement to agree.
Extrinsic Evidence
Phytelligence argued that the extrinsic evidence established that Section 4 was an enforceable contract with open terms. The Federal Circuit explained that under Washington law, to assist in determining the meaning of contract language, a “context rule” is also applied that includes “examination of the context surrounding a contract’s execution, including the consideration of extrinsic evidence.” However, the court explained that extrinsic evidence is to only be used “to determine the meaning of specific words and terms used and not to show an intention independent of the instrument …”
Moreover, the Federal Circuit explained that extrinsic evidence revealed that no agreement was reached and pointed out that in emails to WSU, Phytelligence actually acknowledged that Section 4 contained a “wispy forward commitment” and that there was “no harm” to sign the agreement because the agreement “is a precursor to any other.” The Federal Circuit noted that “[o]n these undisputed material facts, no reasonable fact finder could conclude that at the time of execution, Phytelligence and WSU agreed” that Section 4 would contain the terms of the later PVM form license, but rather that WSU did not commit to any definite terms of a future license.
Phytelligence also argued that a declaration of the CEO of Phytelligence supported that there was a material dispute because the CEO had declared “My understanding … was that … Phytelligence would have the option to acquire a license on the standard terms.” However, the court expressed that “mere allegation and speculation do not create a factual dispute for purposes of summary judgment.”
Phytelligence also argued that the parties’ conduct after the execution of the Propagation Agreement also created a factual dispute. However, the court rejected that argument and noted that WSU had offered Phytelligence three different licensing options, including two that didn’t require joining of NNII, which were all rejected by Phytelligence. The court explained that “[b]ased on this evidence, no reasonable fact finder could conclude that, at the time of execution, the parties understood that there was nothing left for future negotiation regarding the terms of Phytelligence’s separate contact under Section 4.”
Accordingly, the Federal Circuit affirmed the district court’s decision.
Takeaways
- In drafting agreements, it is important to keep in mind that an “agreement to agree” at some later date regarding any terms of the agreement is not enforceable. Accordingly, one should exercise care to avoid development of contract terms of this nature.
- In drafting agreements, it is also important to appreciate that some contract terms can be drafted as “open terms” that may still be enforceable, but that for such “open terms” to be enforceable, such “open terms” must be defined in the contract in a manner to be supplied by a court or another authoritative source or based on some objective formula or method set forth in the contract itself.
- In collaborative relationships, it is also important to carefully plan for future circumstances. In this case, Phytelligence’s emails prior to signing of the Propagation Agreement reflected a concern that there was no agreement for future sale of the product. However, rather than effectively addressing the issue at that time, Phytelligence moved forward with the relationship regarding research and development without sufficiently securing its future ability to engage in sale of the product.
Tags: Agreement to Agreement > contract > Intent of Parties > interpretation > license
Burden of persuasion in the post-MedImmune world
| September 27, 2012
Medtronic v. Boston Scientific Corporation, Guidant Corporation and Mirowski Family Ventures
September 18, 2012
Panel: Lourie, Linn, Prost. Opinion by Linn.
Summary
This decision discusses who carries the burden of persuasion in the post-MedImmune world. This question arises as a consequence of the Supreme Court’s decision in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007). In MedImmune, the Supreme Court found declaratory judgment jurisdiction even though the declaratory judgment plaintiff-licensee continued to make royalty payments pursuant to a license. The Court reasoned that a licensee should not be forced to cease royalty payments and risk infringement liability before the licensee can challenge the extent of coverage of the license.
The district court entered judgment of non-infringement in favor of Medtronic and judgment of validity and enforceability in favor of Mirowski Family Ventures (MFV). MFV appeals the judgment of non-infringement and Medtronic cross appeals the district court’s claim construction. The CAFC vacates the district court ruling and remands.
Tags: burden of persuasion > claim construction > Declaratory judgment > license
Damage calculations based on entire market value rule is improper absent evidence that patented feature drives demand for entire multi-component product
| September 19, 2012
LaserDynamics, Inc., v. Quanta Computer, Inc.,
August 30, 2012
Panel: Dyk, Clevenger and Reyna. Opinion by Reyna.
Summary
LaserDynamics, owner of a patent regarding optical disc drives, sued Quanta Computer Inc. and Quanta Storage Inc., etc. for patent infringement. In calculating damages, the entire market value rule is a narrow exception to the general rule under 35 U.S.C. § 284 adequate to compensate for the infringement. Only if showing that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits of the entire product. The date of the hypothetical negotiation for the purpose of determining the reasonable royalty is the date that the infringement began, which is sometimes or often earlier than the date of the first notice of the infringer’s infringement. To prove or tend to prove a reasonable royalty, the evidence of the granted licenses and the royalties received by the patentee for the patent in suit are probative.
原告は光ディスクドライブに関する特許の所有者であり、光ディスクドライブメーカーと、そのドライブを組み込んだラップトップPC組立メーカーとを特許侵害で訴えた。争点の一つは、損害賠償の計算方法であるが、特許技術の部品を含む完成品の市場価格に基づく計算方法（entire market value rule）は、合理的なロイヤルティ（reasonable royalty）について定めた特許法284条の例外であるため、特許の特徴が複数部品からなる完成品全体に対する需要を引き起こしたということを証明しなければ、そのような計算方法を使用することはできない。換言すると、そのような立証ができた場合にのみ、特許権者はその完成品の売上もしくは利益に乗じた損害賠償を受けることができる。また、合理的なロイヤリティを決定するための判断基準となる日は、いわゆる仮想的交渉日(hypothetical negotiation date)に基づいて判断されるのであるが、それは、被告による侵害開始の日であって、被告が侵害を最初に知った日（たとえば警告日や訴状提出日）ではない。さらに、合理的なロイヤルティを証明するためには、問題特許に関して、特許権者が受け取ったロイヤルティなどが、証拠の一つとなる。
Tags: damages > entire market value > entire market value rule > license > licensee > reasonable royalty > royalty
