Licensor's Non-Material Breach Doesn't Excuse Royalties Non-Payment
The US Court of Appeals for the Eighth Circuit affirmed denial of a licensee’s motion for a new trial, finding that there was no error in awarding damages to the plaintiff/licensor for the licensee’s failure to pay royalties under a patent license agreement, despite the district court’s finding that the licensor also breached the agreement. Ryan Data Exchange, Ltd. v. Graco, Inc., Case No. 17-1451 (8th Cir. Jan. 10, 2019) (Beam, J).
In 2005, Rydex sued Graco for patent infringement, and the parties settled. Rydex granted Graco an exclusive license to use the patent in return for royalties of 5 percent of the net selling price of the products using the patent. The agreement contained a provision under which Rydex would have the initial choice and obligation to prosecute any third-party infringers.
In 2011, Rydex sued three parties, Badger Meter, Balcrank Corp. and Lincoln Industrial Corp. (collectively, Badger), for patent infringement. In that case, the evidence revealed that Rydex and Graco knew that Badger was allegedly infringing the patent at the time they entered into the exclusive license agreement in 2005. Rydex and Badger settled in 2012.
In 2013, Graco stopped paying royalties and asserted that Rydex had breached the license agreement’s exclusivity provision by allowing Badger to continue its infringement and failing to prosecute the infringement claim. Rydex, in turn, sued Graco for breach of contract and patent infringement. Graco countersued, also alleging breach of contract, and sought declaratory judgments that the patent was invalid and that Rydex had lost its right to receive royalty payments.
At trial, the district court ruled as a matter of law, pursuant to Rule 50(a), that Rydex had breached its duty to prosecute infringements of the licensed patent and that Rydex was in breach of the exclusivity provision of the license agreement from the date of the dismissal of the Badger litigation in 2012. The district court noted that the record was clear that over a period of several years before the Badger litigation, both parties operated under the license agreement with the understanding that there was some threat to either the validity of the patent or the existence of potential infringing third parties.
The issues were presented to a jury, which found that Graco breached the license agreement by failing to pay royalties to Rydex from 2013 through the date the patent expired, and awarded Rydex $313,000 in damages. The jury awarded Graco $0 for Rydex’s breaches already determined by the court as a matter of law. Graco asked the district court to renew its judgment as a matter of law and rule that Rydex was not entitled to damages. The district court declined, however, noting that “although it had determined as a matter of law that Rydex breached the Agreement, it had notmade any determination as to materiality,” and the jury determined that Rydex had not materially breached the agreement. Both parties appealed.
The Eighth Circuit agreed with the district court that the record established that the parties operated under a license agreement with the knowledge and understanding that there was some threat to the validity of the patent and the existence of potential infringers for several years. However, under Iowa law, only a material breach could excuse Graco’s non-performance. The issues were presented to the jury, which determined that the breach was not material. Finding no error, the Eighth Circuit affirmed.