A recent case highlights some of the difficulties that can arise when negotiating a patent license as part of a litigation settlement and how disputes can arise over whether there has been an actual meeting of the minds on the terms of such a license.
In Graco Children's Products Inc. v. Kids II, Inc.,1 the parties agreed to discuss settlement of their litigation. As a result, Graco's in-house counsel sent a settlement proposal to Kids II's in-house counsel calling for: (1) a two-year mutual nonsolicitation provision and (2) either a purchase by Kids II of the family of patents at issue with a nonexclusive license back to Graco for $1.15 million or a full settlement of the pending claims for $750,000. Graco's offer was contingent on the execution of a mutually agreeable settlement agreement and was set to expire on March 15. On the day the offer was set to expire, Kids II emailed Graco, stating its intention to submit a counteroffer. Following up on that email, Kids II then sent a seven-point counterproposal as a framework for a settlement agreement, offering $750,000 to purchase the patents previously identified by Graco and a mutual two-year moratorium on employee solicitation. Upon Graco's inquiry, Kids II replied that it would extend a nonexclusive license to Graco.
The parties then sought agreement on the monetary payment. Graco set forth the price it would agree to and indicated that it had "no issues on the remaining points." Kids II responded with a lesser amount and requested that the parties agree to temporarily stay discovery. Responding to the request to stay discovery, Graco stated that it could not agree to do so and proposed "that we agree to $815,000 and call it a deal." Kids II agreed to $815,000 and reiterated its original seven terms as forming the substance of the agreement.
Graco sent a draft settlement agreement, which Kids II edited. Graco then further edited the draft agreement to include (1) a six-month moratorium on the hiring of a nonclerical employee of the other party even where the employee/applicant was not solicited by the party but rather responded to an employment posting on employment websites or the party's own website, and (2) a representation by Kids II that it would not license, assign, or otherwise transfer any of the identified patents. Kids II struck these two new additions and provided what it believed to be a settlement agreement that reflected the terms the parties settled on by email. Graco responded that the two points were "crucial" and that Graco could not agree to a settlement without them.
Citing to the parties' correspondence, Kids II expressed the belief that the parties had reached an agreement on all the material terms when Kids II agreed to Graco's proposal for $815,000 and to "call it a deal." As the parties failed to execute a settlement agreement, Kids II filed a motion to enforce what they understood to be a settlement agreement.
The district court relied on Georgia law to resolve the dispute. Georgia law does not distinguish between settlement agreements and other contracts, so an agreement to settle a pending lawsuit must meet the same requisites of formation and enforceability as any other contract. Among other things, this requires that the parties agree on all material terms and that the acceptance mirror the offer. Thus, in this case, the question was whether the phrase "call it a deal" resulted in a binding settlement agreement between Graco and Kids II.
Kids II claimed that Graco's email proposing "that we agree to $815,000 and call it a deal" was an offer to settle the litigation on the terms extended by Kids II in its earlier seven-point counterproposal in exchange for $815,000. According to Kids II, with the exception of the settlement amount, the parties had agreed on all material terms, as shown by Graco's email that it "had no issues on the remaining points," with those "remaining points" being the terms Kids II had extended.
Graco, on the other hand, claimed that the language "agree to $815,000 and call it a deal" expressed only Graco's willingness to stay discovery upon the parties' agreement on the settlement amount. In support, Graco pointed out that its email was a response to Kids II's request to stay discovery and that Graco could not agree to a stay in discovery until the parties had an agreement on the dollar amount. Thus, the "deal" Graco was referring to was a deal to stay discovery so that the parties could negotiate the remaining material terms.
The district court, after reviewing the drafts of the settlement agreement that the parties exchanged, agreed with Graco. In particular, the district court found that the drafts of the settlement agreement made it clear that there was no meeting of the minds on two of the terms material to the parties' agreement.
First, the license to Graco: Kids II offered to extend a "nonexclusive, royalty free license" to Graco on the patents it would purchase from Graco, and Graco sought to acquire a nonexclusive license, as evidenced by Graco's incorporation of this provision in its draft settlement agreement. But, according to the court, it was clear that the parties had not reached an understanding on the scope of the license Graco would acquire. Kids II, on one hand, intended to retain the ability to license the patents to others. Graco, on the other hand, understood that Kids II would be the only other entity on the market with the right to practice the acquired patents. According to Kids II, Graco's restriction on Kids II's ability to license the patents to third parties would, in effect, give Graco an exclusive license. But according to Graco, the license to Graco would necessarily be nonexclusive because Kids II would retain the right to practice the patents. Further, Graco claimed to have come to the settlement table with the understanding that Kids II would be Graco's only competitor.
The district court found that, in view of Kids II's intention to practice the patents, the license granted would necessarily be a nonexclusive license. But, the court explained, neither party had attempted to confer with the other over the scope of the nonexclusive license and no evidence showed that either party knew that the other party viewed the scope of the license differently until the draft settlement agreement materialized. Graco added a provision to the draft agreement stating that Kids II "will not license, assign or otherwise transfer." Kids II struck that provision, Graco added it back, and Kids II struck it again. Thus, although the parties agreed that a nonexclusive license would be granted, they did not agree on the scope of that nonexclusive license. Therefore, there was never a meeting of the minds.
Second, the nonsolicitation provision: Kids II proposed that each party agree to a two-year moratorium on soliciting the other's nonclerical employees. Even if they had reached general agreement on a two-year moratorium on solicitation, the court found, it was clear that the parties had yet to define "solicitation." In the first written draft, Graco defined the term as encompassing both direct and indirect solicitation. Kids II did not alter that definition, but it did seek to include a disclaimer that the term should not be construed as restricting either party from posting any open employment positions or hiring an employee of the other party who responded to such a posting. The court viewed this as putting forward a counterproposal that Graco was free to either accept or reject. Graco, in turn, sought to add another restriction, limiting the hiring of an employee who had responded to a job posting to those employees who had not worked for the other party for at least six months before hiring. Kids II rejected this additional restriction, and Graco declined to negotiate further. Therefore, according to the court, the parties did not agree on a material aspect of the nonsolicitation provision.
In conclusion, the court found that Kids II had not met its burden of establishing that the parties reached an agreement on all material terms.
Strategy and Conclusion
Agreements based on an exchange of positions rather than an integrated document can be difficult to enforce. Parties attempting to settle a litigation should recognize that they may not have an enforceable settlement agreement until they reach a meeting of the minds that resolves all material aspects of their dispute. In the case at hand, reaching an agreement on the amount of compensation for patent rights did not result in an enforceable agreement because other material terms, such as the scope of the patent rights, remained in dispute.