Failure to Disclose Prior License

by Dennis Crouch

Hollister Inc. v. Zassi Holdings, Inc., 2018 U.S. App. LEXIS 30085 (11th Circuit 2018) [Hollister Inc. v. Zassi Holdings_ Inc._ 2018 U.S. App][Hollister Inc. v. Zassi Holdings_ Inc._ 2016 U.S. Dist]

This case before the 11th Circuit involves a patent sale with a hidden prior license.  Hollister bought two pending patent applications from Zassi.  As part of the transaction, Zassi and its founder (Peter von Dyck) represented that the rights were “free and clear of any licenses.”

Later, when Hollister sued two competitors, Bard and ConvaTek, for infringement it learned that Zassi had already licensed the technology to ConvaTek.  Thus, while Bard paid $6 million for a license, the case against ConvaTek was dismissed.   Hollister Inc. v. ConvaTec Inc., 2011 U.S. Dist. LEXIS 66638 (N.D. Ill. June 21, 2011), aff’d without opinion, Hollister Inc. v. ConvaTec Inc., 470 F. App’x 904 (Fed. Cir. 2012).

Hollister then turned back to Zassi and von Dyck and sued for damages associated with the undisclosed license to ConvaTek.  The jury sided against Zassi and von Dyk for breach of warranty of title and fraud.  As a twist, however, the court awarded no damages.  Using a case-within-a-case analysis, the district court found that ConvaTek’s actions were infringing, but-for the prior license.  Hollister relied upon its license to Bard as a mechanism to calculate a reasonable royalty damage amount for ConvaTek as the “best, most comparable, most reliable evidence.”  However, the district rejected the argument — finding that the settlement with Bard had now foundational basis other than being the amount the parties agreed upon.  In other words, Hollister provided no objective economic approach showing the $6 million settlement was a reasonable royalty.

Hollister’s failure to explain how the parties calculated the lump-sum in the Bard agreement or to prove that the $6.65 million amount represented a reasonable royalty, upon which its damages theory in this case depends, is a failure of proof.

The district court similarly refused to give credence to the $5.9 million that ConvaTek paid to Zassi for the prior license.  The problem was that these settlements didn’t have an associated economic story. Without an objective economic story, the district court suggested it was left in the wind without any grounding for assigning a royalty amount.

Given no other tools to arrive at a reasonable royalty, the Court cannot invent one out of thin air, particularly given that the Federal Circuit requires sound economic proof of the nature of the market and likely outcomes in order to prevent the hypothetical from lapsing into pure speculation. (quoting Riles v. Shell Exploration & Prod. Co., 298 F.3d 1302 (Fed. Cir. 2002)).

As a result of the lack of proof, the district court awarded ZERO dollars in damages.

On appeal, the Eleventh Circuit has reversed — finding the whole approach here suspect.  The problem is that the damages for fraud should be calculated as of the bargain back in 2006 — here though the district court looked at damages as of the 2010 lawsuit against ConvaTek.

This was error; it is too speculative to treat the amount that ConvaTec would have paid as a royalty for a license in 2010 as establishing the value of a license four years earlier. This is particularly true because in 2006 a license would have been less valuable due to the fact that no patent had yet been granted for the technology.

Then going on to the proof of damages, the appellate panel found that the evidence Hollister presented was enough to allow to recover at least “some damages in the hypothetical infringement action.”

Even when the patentee’s proof of damages is extremely weak, the proper course is for the court to award nominal damages, not zero damages. . . . Hollister introduced proof that the license ConvaTec negotiated in 2010 had value. . . . Even if Hollister’s proof of a reasonable royalty wasn’t very exact or there were ways that the proof could be challenged, it seems to us that Hollister was still entitled to something more than a royalty of zero.

On remand, the lower court will hold a new trial on damages — focusing on the question of what is the damages for the fraud associated with selling the applications without providing notice that the applications had already been licensed.

= = = =

You could conceive of a system where a prior patent license is not good against a subsequent good faith purchaser for value. In fact, the patent law provides a statute on point, but is limited to assignments:

An interest that constitutes an assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.

35 U.S.C. 261.  The USPTO will record license agreements. MPEP 301-302. But, there is no general negative consequence that flows from failure to record. (Certain gov’t licenses must be recorded).

12 thoughts on “Failure to Disclose Prior License

  1. 6

    I just finished a book on common law remedies and the parties erred. They treated it like a legal malpractice case. Why was it preserved error?

  2. 5

    former Univ. of Missouri School of Law Professor – Josh Hawley (whose spouse is a current Univ. of Missouri School of Law Professor [is the (R) candidate for governor of Missouri]

    Hilarious. And then there’s this:

    Colleges and universities should be responsible for repaying student loans of anyone who can’t find work in their field, Hawley said. “Our universities have taken billions of dollars in tax subsidies, your money, and they’ve taken billions more in middle class debt, your money, and they’re increasingly doing what?” Hawley said. “Giving students worthless degrees and indoctrinating them in far-left thinking. It’s time to put a stop to that.”

    How awesome it must be to have this hypocritical t 00 l’s wife as your co-worker! It must make the job of handing out worthless far-left degrees so much more satisfying. When is the U of Missouri law school going to start paying back its unemployed graduates? Or perhaps the plan is to get them working for minimum wage doing cite checking for the Federalist Society.

    LOL

  3. 4

    So legal damages for a State COA for fraud is not a jury issue in a Federal Court sitting in diversity? or did the Judge JNOV the jury determination?

    Also this sounds like a classic LES created confusion as to the ‘hypothetical license’ for ‘valuation’ swallowing up the actual legal issue as to what theory a jury can hear to determine damages.

    1. 4.1

      A jury found that there was a fraud., and the parties waived their right to a jury trial on damages.

  4. 3

    Yup, the Eleventh Circuit got it right. As I was reading about halfway through, I was thinking “this is a fraud case about the sale price fo the patent. The measure of damages is the difference in price that would have been agreed had the license been disclosed, not the damages later. For infringement, a reasonable royalty calculation assumes that the patent is valid and infringed. But for contract, the damages are calculated based on the facts as they stood and as they were known to the parties at the time.”

    And sure enough, that’s where the Eleventh Circuit ended up. The district court’s reasoning is bizarrre, though perhaps understandable if the only damages theory put forward by the parties was the bogus one based on after-the-fact information.

    1. 3.1

      Nice analysis Dave.

    2. 3.2

      Fraud is right.

    3. 3.3

      But if there is fraud, why are there not also consequential damages? For example, it occurred to me that Hollister should be entitled to collect its fees for suing Convatec, which then had to be aborted because of the license. (Maybe the fees were not so large as to matter.)

      As for the lost royalties, that depends on whether the state allows only out-of-pocket damages for fraud, or also allows benefit of the bargain damages. (NY, where I practice, allows only the former. But my impression is that some states allow the latter.)

  5. 2

    How much did ConvaTec pay Zassi for the license in the first place?

    1. 2.1

      5.9 million — but it was more than just for the patent license.

      1. 2.1.1

        It would be interesting to see what else that 5.9 M went for (and how much that other stuff may be deemed dependent on exclusivity for its value).

  6. 1

    The jury sided with Zassi and von Dyk for breach of warranty of title and fraud.

    Do you mean “against Zassi and von Dyk”? (I may just be reading badly this afternoon)

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