Friday, October 30, 2009

The Lazy Patent Licensee, Lady Duff and Tom Waits -- If You Take a License, You Need to Get Out There and Sell!

The First Circuit came down with an opinion yesterday [Sonoran v. PerkinElmer, if you're keep ing score], which should give pause to companies which may take a patent license with an ongoing royalty obligation.

The Sonoran case involved a sale of Sonoran's "computer to plate printing technology" business to PerkinElmer -- a deal which was made because Sonoran could not make a go of the business on its own. The deal was that PerkinElmer would pay $3.5 million for the company's assets (which was to go to pay off creditors), but would also give the company a cut of the sales of future units which used the technology. There was no "best efforts" clause in the contract and PerkinElmer had no specified duty to sell these units in the future.

As so often happens, PerkinElmer also failed at this venture and, as you might expect, was sued by Sonoran and its shareholders for not using its "best efforts" to promote the sales of machines which used Sonoran's technology. PerkinElmer objected, saying that under the contract, it had no such duty to Sonoran.

The First Circuit disagreed, holding that Massachusetts law (which applied here) applied the so-called "Lady Duff rule" (created by Justice Cardozo in 1917 in the Wood v. Lady Duff Gordon case), cited in the Sonoran case. The court held that, under the "implied covenant of good faith and fair dealing," which, in Massachusetts, is implied in every contract, PerkinElmer had a duty to promote the sale of machines which used Sonoran's technology, even though the written contract imposed no such duty. The First Circuit sent the case back down to the lower court to decide whether PerkinElmer had actually violated that duty.

Thus, it could very well be argued that, under the Lady Duff Rule, a licensee of a patent who had agreed to a running royalty might actually have an implied duty to actually practice that patent -- especially if that license was exclusive.

Does this rule also apply in California? Yes!

The California courts have recognized this same rule in the context of the long-standing California "implied covenant of good faith and fair dealing" rule.

This came up in a case involving the singer Tom Waits. [Third Story Music, Inc. v. Waits 41 Cal.App.4th 798, 48 Cal.Rptr.2d 747 (1995), if you're interested in the cite]. In that case, Waits had evidently sold the rights to some of his music to the plaintiff music company, which had licensed back the right to promote the music to Waits and Warner Bros. Third Story later claimed that Waits and Warner were not promoting the music Third Story owned, preferring to promote Waits' later music (for which Waits and Warner presumably made more money)

The court recognized the Lady Duff rule and held that there was an implied duty on the part of Waits and Warner to promote the music owned by Third Story, but held that that duty had been satisfied by a set royalty the parties had agreed to. The court noted that the royalty was pretty low -- especially for a major recording artist like Waits -- but noted that Third Story had agreed to it and that they really had nothing to complain about.

Presumably, this would also apply to patent licensing agreements , but would be subject to the same constraints as the Waits court imposed -- if you actually agree to accept a certain amount of money, you may not be in a position to complain if it gets paid.

So, lazy patent licensee who thinks that the language of the contract will protect him, remember the words of Tom Waits: "The large print giveth and the small print taketh away."

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