Novamedix, Ltd. v. NDM Acquisition Corp.

• Decision Date: 28 January 1999
• Docket Number: No. 97-1507,97-1507
• Citation: 166 F.3d 1177,49 USPQ2d 1613
• Parties: , 37 UCC Rep.Serv.2d 918 NOVAMEDIX, LIMITED, Plaintiff-Appellant, v. NDM ACQUISITION CORPORATION and Vesta Healthcare, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1177

166 F.3d 1177

49 U.S.P.Q.2d 1613, 37 UCC Rep.Serv.2d 918

NOVAMEDIX, LIMITED, Plaintiff-Appellant, v. NDM ACQUISITION CORPORATION and Vesta Healthcare, Inc.,

Defendants-Appellees.

No. 97-1507.

United States Court of Appeals, Federal Circuit.

Jan. 28, 1999.

Stephen J. Marzen, Sherman & Sterling, of Washington, DC, argued for plaintiff-appellant. With him on the brief was Reginald R. Goeke.

Shannon M. O'Toole, Oppenheimer Wolff & Donnelly, of Minneapolis, Minnesota, argued for defendants-appellees. With her on the brief was Anne F. Larson.

Before RICH, Circuit Judge, SMITH, Senior Circuit Judge and NEWMAN, Circuit Judge.

EDWARD S. SMITH, Senior Circuit Judge.

Novamedix Limited ("Novamedix") appeals the March 20, 1997 order of the District Court for the Southern District of Ohio, overruling a motion by Novamedix to enforce a consent judgment entered in a patent infringement suit brought by Novamedix against NDM. We hold that the settlement agreement incorporated into the consent decree is not a contract for the sale of goods and therefore the implied warranties of fitness and merchantability of UCC §§ 2-314 and 2-315 do not apply. Accordingly, we affirm the decision of the District Court.

Background

NDM Acquisition Corp. (predecessor by merger to New Dimensions in Medicine, Inc.; together, "NDM") and Novamedix are competitors in the market for medical footpumps. Footpumps improve the return of blood from the feet to the heart in bed-ridden patients by regularly inflating and deflating specially designed slippers on the patients' feet. The improvement in circulation reduces blood clots and swelling and aids in healing of ulcers in such patients. The footpumps and slippers are regulated as medical devices by the Food and Drug Administration (FDA).

Novamedix sued NDM and Vesta Healthcare ¹ in June of 1994, alleging infringement of Novamedix's four U.S. Patents. ² The parties agreed to settle the patent infringement suit on the terms of a settlement agreement, which they entered into on March 5, 1996. Under the settlement agreement, NDM agreed to: (1) admit that it infringed Novamedix's patents and admit the validity and enforceability of those patents; (2) cease infringing the patents; (3) deliver its inventory of footpumps and slippers, along with its customer list, to Novamedix; (4) grant Novamedix an exclusive license under NDM's own patents; and (5) pay Novamedix $47,500.

For its part, Novamedix agreed to release NDM from further liability on its patent infringement claim, and agreed not to depose certain NDM employees in connection with ongoing, unrelated patent litigation. In addition, Novamedix was required to send a notice to all of NDM's customers, informing them of the transfer of NDM's inventory and stating that "Novamedix or its designee would like to service the needs of Customers on mutually accepted terms." The settlement agreement also contained a New York choice-of-law provision.

The District Court for the Southern District of Ohio entered a consent judgment on March 11, 1996. In the consent judgment, NDM admitted the validity and enforceability of Novamedix's patents, and admitted infringing the patents. The consent judgment also enjoined NDM from further infringement and incorporated the settlement agreement, requiring both parties to "adhere to the terms of the Agreement between them dated March 5, 1996." The district court retained jurisdiction for enforcement of the decree.

NDM then delivered its inventory and customer list to Novamedix. The parties dispute whether they understood that Novamedix intended to sell NDM's inventory to NDM's former customers. Whatever the parties' understanding, the slippers in NDM's existing inventory, and delivered to Novamedix, proved to be unsaleable because they did not meet FDA requirements. ³ On May 13, 1996, Novamedix filed a Motion to Enforce Final Judgment on Consent, arguing that under New York law the settlement agreement was a contract for the sale of goods and therefore subject to the implied warranties of merchantability and fitness of New York's version of the Uniform Commercial Code (UCC) §§ 2-314 and 2-315.

On March 20, 1997, the district court overruled Novamedix's motion. The district court framed the issue posed by Novamedix's motion as whether the "Consent Judgment should be treated as a contract for the sale of goods for the purpose of implying the specified UCC warranties." The district court, relying on United States v. Armour, 402 U.S. 673, 91 S.Ct. 1752, 29 L.Ed.2d 256 (1971), held that it should not. The district court found the language of the settlement agreement to be unambiguous, barring the use of extrinsic evidence in its interpretation. The court concluded that it was bound to hold the settlement agreement to its express terms, because Armour prohibited construing a consent decree so as to further the subjective purposes of one of the parties to the agreement. Since no express warranties were given by NDM in regard to the quality of its inventory, the district court refused to imply warranties by construing the settlement agreement as a contract to sell goods.

We agree with the district court's framing of the issue and, although our reasoning differs somewhat, we agree with the court's ultimate conclusion. ⁴ We therefore affirm.

Jurisdiction and Standard of Review

The original claim for relief arose under the patent laws, 28 U.S.C. § 1338(a), and the consent judgment disposing of the case contained a provision retaining jurisdiction for purposes of enforcement. Thus, the orders appealed from arise under the patent laws and we have jurisdiction over the appeal. See Gjerlov v. Schuyler Labs., Inc., 131 F.3d 1016, 1019 (Fed.Cir.1997).

In this case, the consent decree under consideration incorporates the terms of the parties' settlement agreement, and it is the terms of the incorporated settlement agreement that are at the heart of the parties' disagreement. Generally, interpretation of a settlement agreement is not an issue unique to patent law, even if arising in the context of a patent infringement suit. See Gjerlov, 131 F.3d at 1020. See also Sun Studs, Inc. v. Applied Theory Assocs., Inc., 772 F.2d 1557, 1561 (Fed.Cir.1985). In issues that are not unique to patent law, we apply the law of the appropriate regional circuit. Accordingly, we apply the law of the Sixth Circuit in this case.

The Sixth Circuit has held that both consent decrees and settlement agreements are construed in the same manner as other contracts. See Brown v. Neeb, 644 F.2d 551, 557 (6th Cir.1981) (" '[S]ince consent decrees and orders have many of the attributes of ordinary contracts, they should be construed basically as contracts.' ") (quoting United States v. ITT Continental Baking Co., 420 U.S. 223, 236-237, 95 S.Ct. 926, 43 L.Ed.2d 148 (1975)); Bamerilease Capital Corp. v. Nearburg, 958 F.2d 150, 152 (6th Cir.1992) ("Settlement agreements are a type of contract and are therefore governed by contract law.... Wong v. Bailey, 752 F.2d 619, 621 (11th Cir.1985) ('The construction and enforcement of settlement agreements are governed by principles of the state's general contracts law.')").

Construction of a contract is a matter of law that is subject to plenary review on appeal. Federal Deposit Ins. Corp. v. Aetna Cas. & Sur. Co., 903 F.2d 1073, 1077 (6th Cir.1990) ("When the district court construes a contract, such interpretation is a question of law and reviewable de novo by the appellate court."). Here, the parties' settlement agreement specifies that any disputes arising out of the agreement would be governed by New York law. We therefore review independently and completely the settlement agreement, applying the laws of the state of New York.

Interpretation of the Settlement Agreement

As the district court observed, the Supreme Court has cautioned against construing a consent judgment beyond its express terms simply because the decree as written does not serve the asserted purpose of one of the parties to the settlement.

Consent decrees are entered into by parties to a case after careful negotiation has produced agreement on their precise terms. The parties waive their right to litigate the issues involved in the case and thus save themselves the time, expense, and inevitable risk of litigation. Naturally, the agreement reached normally embodies a compromise; in exchange for the saving of cost and elimination of risk, the parties each give up something they might have won had they proceeded with the litigation. Thus the decree itself cannot be said to have a purpose; rather the parties have purposes, generally opposed to each other, and the resultant decree embodies as much of those opposing purposes as the respective parties have the bargaining power and skill to achieve. For these reasons, the scope of a consent decree must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it.... [T]he instrument must be construed as it is written, and not as it might have been written had the plaintiff established his factual claims and legal theories in litigation.

United States v. Armour & Co., 402 U.S. 673, 681-682, 91 S.Ct. 1752, 29 L.Ed.2d 256 (1971) (footnote omitted).

The district court found itself bound by Armour not to construe the settlement agreement as a contract for the sale of goods. To do so, the court reasoned, would directly contravene Supreme Court precedent because it would amount to construing the agreement by reference to Novamedix's purpose in entering into it. We agree that the interpretation of the agreement must be based, not on the subjective intentions of the parties, but on the objective words of their agreement. The district court's reasoning however, short-circuits the necessary analysis. The wording of the district court's order suggests that it refused to construe the agreement as a contract for the sale of goods solely because to...