First published in LES Insights
While settlement agreements are often intended to fully and finally resolve disputes between the parties, a failure to comply with the terms of a settlement can result in renewal of those disputes. For example, Ryan Data Exchange, Ltd. d/b/a Rydex v. Graco, Inc.1 involved breach of contract and patent infringement claims between two parties who had previously settled a similar dispute through a license agreement. But when Graco stopped making royalty payments based on a belief that Rydex failed to fulfill its obligations under the agreement, Rydex sued Graco again. Graco argued that the license agreement should control the dispute, even if Graco breached the agreement, and that the agreement barred all future patent infringement claims by Rydex against Graco. The court disagreed, finding that Graco's arguments contradicted the express language of the agreement.
Patent licensing agreements are one means of settling patent-infringement disputes. Often, such an agreement may express an intention to govern all further infringement disputes between the parties. Despite such provisions, if the licensee breaches the agreement in a manner that results in termination of the license, the licensor may then have the ability to pursue a patent-infringement claim against the licensee. Recently, in Ryan Data Exchange, Ltd. d/b/a Rydex v. Graco, Inc., the U.S. District Court for the Southern District of Iowa rejected a licensee's argument that the licensor's infringement claim should be dismissed because it was governed by the parties' licensing agreement.
In January 2005, Rydex Ltd. and Michael C. Ryan (collectively, "Rydex") sued a competitor, Graco Inc., for allegedly infringing Ryan's patent related to nozzles for controlling fluid delivery. The parties settled the litigation and entered into a license agreement, wherein, among other provisions, the agreement provided that "Licensors and Licensee acknowledge that this Agreement is also a settlement of the Litigation and that when the Litigation is dismissed, the sole and exclusive further remedy between Licensors and Licensee shall be a remedy for breach of this License Agreement." The agreement also provided that the "Licensors shall have the initial choice and obligation to prosecute infringement," and that, unless terminated, the agreement would last for the life of the patent. The Licensors, however, could terminate the agreement if the Licensees default on the royalty payments and the default remains unremedied after 30 days written notice.
Six years later, in August 2011, Rydex and Graco agreed that third parties were infringing the patent. Rydex filed suit against the third parties, but Graco accused Rydex of allowing the third parties to continue to make, use, offer to sell, and/or sell the allegedly infringing products, in violation of the agreement. Graco sent a letter to Rydex, alleging that Rydex failed to honor the agreement and that Rydex's breach relieved Graco from making further royalty payments. After receiving Graco's letter, Rydex filed suit against Graco for breach of contract and patent infringement. Graco moved for summary judgment requesting that the court dismiss Rydex's infringement claim, arguing that, under the agreement, Rydex's only remedy was for breach of contract.
The Rydex Decision
Graco made three arguments in support of its summary judgment motion. First, Graco argued that suit for breach of the agreement is the "sole and exclusive" remedy for disagreements between the parties, pursuit to the agreement. Second, Graco argued that the agreement released it from any future infringement claims by Rydex. Finally, Graco argued that the Rydex's infringement claim was barred by res judicata, a doctrine that prohibits re-litigation of an issue that was or could have been litigated in a prior law suit, after the prior suit reaches a final judgment.
In response, Rydex argued that Graco breached the agreement through its letter and subsequent failure to pay royalties. Second, Rydex argued that the language in the agreement did not bar future infringement actions, only actions that could have been brought prior to the agreement.
Addressing Graco's second argument first, the court found that the agreement, which resolved claims between the parties "up to and including the effective date of this agreement," did not bar Rydex's present claim for infringement, which arose after the date of the agreement. Turning to Graco's first argument, the court concluded that "it would be an unreasonable interpretation that Plaintiffs would agree to limit their ability to sue Graco for patent infringement if, as they allege, Graco terminated the agreement." In other words, the court found untenable Graco's argument that the agreement should govern all disputes between the parties, even if Graco breached the agreement. Finally, the court rejected Graco's res judicata argument, explaining that Rydex's current infringement suit targeted conduct that occurred after the first suit, meaning the two lawsuits are not the same. Accordingly, the court denied Graco's motion for summary judgment, allowing Rydex's infringement claims to proceed.
Strategy and Conclusion
The Rydex decision serves to remind licensees and licensors of the paramount importance that should be placed on the express language of a license agreement between the parties and the consequences of breaching an agreement. In the Rydex case, Graco argued that a license agreement resolving claims for past infringement barred any and all claims for future infringement, protecting Graco from future lawsuits other than those for breach of the agreement itself. But the court found otherwise, concluding that an agreement to resolve past claims was limited to exactly that—past claims—and that a party should not be bound to an exclusive remedy under the terms of an agreement if the adverse party breaches the agreement first.