Addressing whether a cash offset to a settlement payment was the equivalent of a monetary gain for purposes of profit sharing under a patent assignment, the U.S. Court of Appeals for the Third Circuit reversed the district court’s dismissal of the case and allowed it to proceed to discovery, finding that a cash offset was in fact a monetary gain.  G. David Jang, M.D. v. Boston Scientific Scimed, Inc., et al., Case Nos. 12-3434 (3rd Cir., Sept. 5, 2013) (Sloviter,  J.).

Dr. Jang received a patent for a coronary stent invention.  He then assigned the patent to Boston Scientific in an agreement that required it to share profits with Jang, including any damages recovered from third party infringers.  In 2010 Boston Scientific settled a claim against Cordis Corporation for infringement of the patent in combination with a claim Cordis had against Boston Scientific.  The settlement resulted in Boston Scientific paying Cordis and the parties exchanging several patent licenses.  Importantly for this case, Boston Scientific received a multibillion dollar offset of the amount it paid Cordis based on Dr. Jang’s patent.  Jang claims that the offset, as well as the valuable patent licenses Boston Scientific received, qualify as damages under the assignment agreement and must be shared with him.  When Boston Scientific refused payment, Jang filed his complaint alleging breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty and a demand for the enforcement of an equitable lien on Boston Scientific’s right to recover from Cordis.  The state law claims are governed by Massachusetts law.  The district court granted Boston Scientific’s motion to dismiss the complaint, finding that the value Boston Scientific obtained in the Cordis settlement did not constitute a recovery of damages under the agreement.  The district court denied Jang’s post-judgment motion for leave to amend his complaint to add a claim for violation of the agreement’s anti-assignment provision.  Jang appealed. 

The 3rd Circuit concluded that the agreement unambiguously defined damages as “cash received or monetary profits.”  Accordingly it turned its analysis to Jang’s argument that the offset Boston Scientific received for its payment to Cordis should be considered a monetary gain for Boston Scientific.  The Court agreed with Jang that the cash offset was the functional equivalent of a cash payment.  It found that courts have “long recognized the equivalence of a debt offset and a cash payment through the common-law right of setoff.”  The Court reversed the dismissal and returned the case to the district court for discovery and further proceedings.

Similarly, the Court reversed the dismissal of Jang’s breach of the covenant of good faith and fair dealing claim, finding the allegations “minimally sufficient” under Massachusetts law.  Jang argued that Boston Scientific circumvented the agreement’s intentions that Jang share in any kind of infringement recovery by structuring the Cordis settlement as a cash offset and license.

Practice Note:  When structuring assignment agreements, the parties should take care to detail whether non-cash recoveries from enforcing the patent are included in payments to be shared with the assignor.