Beraha v. Baxter Health Care Corp.

• Decision Date: 28 April 1992
• Docket Number: No. 90-3789,90-3789
• Citation: 956 F.2d 1436
• Parties: Dan BERAHA, M.D., Plaintiff-Appellant, v. BAXTER HEALTH CARE CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1436

956 F.2d 1436

22 U.S.P.Q.2d 1100

Dan BERAHA, M.D., Plaintiff-Appellant, v. BAXTER HEALTH CARE CORPORATION, Defendant-Appellee.

No. 90-3789.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 27, 1991.

Decided March 17, 1992.

Rehearing and Rehearing En Banc Denied

April 28, 1992.

Keith V. Rockey, (argued), Timothy J. Haller, Kathleen A. Lyons, Rockey & Rifkin, Joseph N. Hosteny, Niro, Scavone, Haller & Niro, Chicago, Ill., for plaintiff-appellant.

Granger Cook, Jr., (argued), Gary W. McFarron, Cook, Egan, McFarron & Manzo, Chicago, Ill., for defendant-appellee.

Before WOOD, Jr., RIPPLE and MANION, Circuit Judges.

MANION, Circuit Judge.

Invoking the diversity jurisdiction of the federal court, Dan Beraha, M.D., filed suit against Baxter Health Care Corporation ("Baxter") based on an exclusive patent license agreement ("license agreement") between Beraha and Omnis Surgical, Inc. ("Omnis"), a Baxter affiliate that was later merged into Baxter. ¹ Count I of the Complaint claimed that Baxter violated express and implied obligations of good faith and fair dealing in the license agreement; Count II claimed that Baxter breached a fiduciary obligation under the license agreement; and Count III alleged that Baxter made false representations to Beraha at the time of the license agreement. The district court issued summary judgment in favor of Baxter on all three counts. Beraha appeals, however, only from the district court's summary judgment on Counts I and III. We affirm in part, vacate in part and remand the case to the district court for further proceedings.

I. Background

A license agreement for the development of a biopsy needle lies at the center of this controversy. Baxter makes and sells a variety of medical products, including a needle for performing prostate biopsies known as the Tru-Cut needle. In 1983, Beraha, a physician specializing in urology, designed a biopsy needle that he believed was an improvement over the Tru-Cut biopsy needle. In February 1984, Beraha filed an application to patent his improvement. ² In April and May of 1984, Beraha negotiated with Baxter for the grant of a license under the patent application and any resulting patent. At the time of these negotiations, Beraha had not made or tested the biopsy needle claimed in his patent application.

During initial negotiations with Baxter, Beraha sought the advice of his patent attorney, Macdonald Wiggins. In a letter to Michael Cannizzaro, Vice President for Sales & Marketing at Omnis, dated April 20, 1984, Wiggins stated that he had reviewed the terms Baxter had proposed to Beraha for rights to Beraha's invention. Wiggins then listed for Cannizzaro the recommendations that he made to Beraha. Under those recommendations, Baxter would receive an exclusive license to manufacture and sell Beraha's invention worldwide. Baxter would pay Beraha a royalty of $1.00 on each unit sold during the pendency of the application and for the term of any patent that eventually issued from the application. If the application for the patent were rejected, the royalty would be reduced to 50 cents on each unit for a period of ten years, and Baxter would have a royalty-free license thereafter. Baxter would pay Beraha an advance royalty of $50,000 when the license agreement was executed. After the first anniversary of the license agreement, Baxter would guarantee Beraha a minimum annual royalty of $50,000. As an alternative to a license agreement, Wiggins suggested an agreement in which Beraha would assign all rights in the invention and any patent issuing on the invention. Under the assignment agreement, Beraha would receive a downpayment of $100,000, annual payments of $50,000 for ten years, and royalties of 25 cents per unit sold for the life of the patent or 12.5 cents per unit sold for ten years after a final rejection of the patent.

On May 1, 1984, Paul Flattery, Associate General Counsel for Baxter, sent Beraha a patent license agreement counter-proposal that Cannizzaro wanted to discuss with Beraha at a meeting in New Orleans. The letter accompanying the counter-proposal stated that Cannizzaro wanted to deal directly with Beraha regarding the financial terms of the license agreement but that if Beraha had any other questions regarding the license agreement, Flattery would work with Beraha's attorney to resolve them prior to the meeting. Under the counter-proposal, Baxter would acquire an exclusive license. Beraha would receive an advance royalty payment of $20,000, an earned royalty of three percent of net sales and a guaranteed minimum annual royalty of $10,000 after the first anniversary of the license agreement. If no patent issued before the third anniversary of the license agreement, no further earned royalties would be due. The counter-proposal limited the total royalties over the life of the license agreement to $500,000. It further provided that Baxter could convert the license to a nonexclusive license by written notice to Beraha at any time after the third anniversary of the license agreement and cease minimum annual royalty obligations. If Beraha subsequently granted a license under the licensed patent at a royalty rate less than that paid by Baxter, then Baxter would be entitled to reduce its royalty to the rate charged to the other licensee. Baxter could terminate the license at any time upon ninety days written notice to Beraha.

On May 8, 1984, at Cannizzaro's request, Beraha met with Victor Chaltiel, president of Omnis, and Cannizzaro in New Orleans to negotiate the terms of the license agreement. No attorneys were present at the meeting. The discussions focused on the Baxter counter-proposal. Chaltiel and Beraha went through the counter-proposal paragraph by paragraph, making changes and initialling them.

At the end of the meeting, the parties had a marked-up copy of the counter-proposal that increased the advance royalty from $20,000 to $50,000, deleted the provision for minimum annual royalties, and deleted the cap on total royalties that would be paid to Beraha. The royalty rate was increased from three percent to three and one-half percent, and the time period during which royalties would be paid even if no patent issued was extended from three to four years. The agreement deleted Baxter's option to convert the license to a non-exclusive license and terminate the license upon written notice. The increase in the advance royalty from $20,000 to $50,000 served as a trade-off against minimum annual royalties. While Chaltiel gave some oral assurance to Beraha at some point in their negotiations that Baxter would go forward with the Beraha needle, ³ no best efforts provision was written onto the marked-up counter-proposal during the May 8 meeting. Furthermore, the parties left intact a merger clause stating that the agreement constituted the entire understanding between the parties. Beraha and Chaltiel, on behalf of Baxter, then signed the marked-up counter-proposal.

On May 24, 1984, Paul Flattery sent a letter to Beraha with an attached license agreement. The license agreement incorporated all the handwritten changes that Beraha and Chaltiel had made and initialled on the Baxter counter-proposal at the New Orleans meeting on May 8, 1984. At first Beraha refused to sign the re-typed version of the agreement because it contained no best efforts provision. He telephoned his contacts at Baxter ⁴ and requested some assurance from Chaltiel concerning the level of effort that Baxter would exert to develop the Beraha needle. During the telephone conversation, Beraha received no representation concerning the specific level of effort that would be made. Nevertheless, reassured by the promise that Chaltiel would send him a letter, on May 29, 1984, Beraha signed the re-typed version of the agreement which did not contain a best efforts clause. Flattery suggested language to Chaltiel to be used in a letter to Beraha.

In June 1984, Beraha visited Baxter's research facilities in connection with the development of Beraha's needle. Chaltiel was not present during Beraha's visit but had a letter dated June 20, 1984 ("Chaltiel letter") hand-delivered to Beraha which read as follows:

Welcome to Chicago! I want to simply [sic] thank you very much for both the license agreement we recently worked out together when Mike and I visited you in New Orleans, and for your visit today in our Research & Development center to pursue together our new biopsy needle project.

Although we work in an environment that is always subject to changing conditions, you can be assured that our present intent is to do our very best to make this project a success, not only for obvious business reasons but also because such a new product could be a step forward in prostate biopsies.

Again, Dr. Beraha, thank you and welcome here.

/s/

Attch: $50,000.00 advanced royalty check as per our Agreement.

Beraha agrees that the letter reflected what Beraha thought was the intent of the parties insofar as it assured Beraha that Baxter would use its best efforts to make the project a success.

Years passed, yet Baxter still had not fully developed and marketed the Beraha needle. Beraha became dissatisfied with Baxter's inaction. On November 22, 1988, Beraha brought a three-count Complaint against Baxter. Count I alleged that Baxter violated express and implied obligations of good faith and fair dealing in the license agreement, Count II alleged Baxter violated fiduciary obligations to Beraha, and Count III alleged that Baxter fraudulently misrepresented to Beraha that it would aggressively and effectively market the Beraha needle. After Baxter moved for summary judgment, Beraha successfully moved for leave to file an Amended Complaint setting forth additional allegations in Count III. Baxter filed a revised motion for summary judgment on all counts in the Amended Complaint. The district court initially granted summary judgment as to all three counts but later...