Gjerlov v. Schuyler Laboratories, Inc.

• Decision Date: 01 December 1997
• Docket Number: No. 97-1089,97-1089
• Parties: Mogens GJERLOV and Jacob Verschoor, Plaintiffs-Appellees, v. SCHUYLER LABORATORIES, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1016

131 F.3d 1016

44 U.S.P.Q.2d 1881

Mogens GJERLOV and Jacob Verschoor, Plaintiffs-Appellees, v. SCHUYLER LABORATORIES, INC., Defendant-Appellant.

No. 97-1089.

United States Court of Appeals Federal Circuit.

Dec. 1, 1997.

Rehearing Denied Dec. 29, 1997.

Edmund J. Sease, Zarley, McKee, Thomte, Voorhees & Sease, P.L.C., Des Moines, IA, argued for plaintiffs-appellees.

Steven Paul DeVolder, Lewis, Webster, Johnson, Van Winkle & DeVolder, Des Moines, IA, argued for defendant-appellant.

Before ARCHER, Chief Judge, MICHEL, and RADER, Circuit Judges.

MICHEL, Circuit Judge.

This case concerns choice of law between federal patent law and state contract law regarding the measure of damages for breach of a settlement agreement and related attorney fees and costs. We hold that while patent law provides the basis for federal jurisdiction, here state contract law provides the grounds for decision.

In this appeal, Schuyler Laboratories, Inc. ("Schuyler") challenges orders of the United States District Court for the Southern District of Iowa: (1) holding Schuyler had breached its Settlement Agreement and Release (the "Agreement") with Mogens Gjerlov and Jacob Verschoor ("Patentees"), Gjerlov v. Schuyler Laboratories, Inc., No. 4-93-70312 (July 25, 1995) (order granting motion to enforce settlement agreement); and (2) awarding Patentees Patent Act damages, attorney fees and costs upon the finding of breach but not infringement, id. (Sept. 30, 1996) (order accepting the magistrate judge's report and recommendation on damages). Applying the Patent Act, the district court awarded $343,200.00 as a reasonable royalty, and $14,065.00 as reasonable attorney fees and $20,877.80 for costs for an "exceptional" case based on willful acts.

This appeal was submitted for our decision following oral argument on October 8, 1997. Because the district court's interpretation of the Agreement was correct, and its finding that the Agreement was breached was not clearly erroneous, we affirm as to liability for breach. The district court's award of damages, however, was improperly premised on 35 U.S.C. § 284, and its award of attorney fees and costs on 35 U.S.C. § 285. We, therefore, vacate and remand as to damages, fees and costs.

BACKGROUND

Patentees sued Schuyler in the early 1990s for infringement of U.S. Patent No. 5,038,396 ("the '396 patent"). The '396 patent covers a psyllium-based calf oral rehydrant. The product made in accordance with the patent is used to treat calves that become dehydrated. Its significant percentage of psyllium represented an improvement over the prior art because psyllium contains polysaccharides that aid in the absorption of the electrolytes, glucose, and fluids necessary for rehydration. Psyllium also slows absorption of the rehydrant by the animal so that fewer doses are needed. The patent lists Mogens Gjerlov as its sole inventor and is owned jointly by Patentees. Patentees are principals in Pharmalett International B.V., a European manufacturer of the patented calf In October 1993, the lawsuit was settled by the Agreement, and subsequently the district court entered a consent decree, injunction and order disposing of the case (the "consent decree"). The consent decree established that Patentees are the legal owners of the '396 patent and that Schuyler had infringed it. The consent decree also prohibited Schuyler from continuing to infringe, but it did not prohibit Schuyler from manufacturing or selling a new product reformulated in accordance with the specific terms of the Agreement. The consent decree further provided that the district court's jurisdiction based on the complaint of patent infringement continued in order to enforce the terms of the Agreement and the consent decree.

oral rehydrant product. In the United States, the patented product is exclusively marketed with Patentees' permission under the name DELIVER TM by Bayer Corp. ("Bayer").

The Agreement provides, inter alia, at paragraph 6 that:

Nothing hereunder shall prohibit Schuyler from manufacturing and selling a product containing electrolytes, glucose and psyllium so long as the amount of electrolytes and glucose on the one hand remains greater than or equal to 69.5% by weight and the amount of psyllium (calculated as 100% pure psyllium husk) on the other hand is equal to or less than 28.5% by weight. The parties agree that for purposes of compliance with this paragraph, product analysis may be made at Iowa State University Testing Laboratories as an independent laboratory and that the results shall be respected by the parties. Schuyler agrees to promptly inform plaintiffs of the first lot number of the new HIGH ENERGY product sold under the terms of this Agreement.

(emphasis added). In this manner, Patentees allowed Schuyler to re-enter the market but with a less efficient and non-infringing product.

After execution of the Agreement, Schuyler reformulated its product and tested it at the Woodson-Tenent Laboratories, Inc. ("Woodson-Tenent"), a private laboratory, before marketing it. The Woodson-Tenent test results, according to Schuyler, showed that the reformulated product met the requirements of the Agreement. Schuyler forwarded the test results and a sample of the new product to Patentees in December 1993. Patentees, however, did not respond to Schuyler because they were waiting to test the final formulation as marketed. Shortly thereafter, Schuyler began selling its reformulated product under the name SKY-HIGH ENERGY.

Gjerlov later purchased samples of Schuyler's reformulated product as marketed and commissioned Dr. Stahr, an analytical chemist heading the Chemistry Laboratory of the Veterinary Diagnostic Laboratory at Iowa State University, to test the samples. Dr. Stahr's test reports showed that the reformulated product contained an insufficient percentage of electrolytes and glucose in breach of the Agreement. The results of two samples tested showed that Schuyler's SKY-HIGH ENERGY contained 57.99% or 59.22% by weight electrolytes and glucose; both percentages were below the 69.5% minimum amount stipulated in the Agreement.

In October 1994, Patentees notified Schuyler that Schuyler was in violation of the Agreement. Schuyler, however, disagreed with Patentees' interpretation of the Agreement and hence Patentees' interpretation of the test results. Therefore, Schuyler did not cease selling its reformulated product. Patentees' test measured the percentage of electrolytes and glucose by interpreting the term "glucose" to mean C sub6 H sub12 O sub6 (glucose anhydrous) whereas Schuyler's test measured the percentage of electrolytes and glucose by interpreting the term "glucose" to mean C sub6 H sub12 O sub6 H sub2 O (glucose monohydrate). The attached water molecule causes glucose monohydrate to weigh about 10% more than glucose in its anhydrous form; therefore, measuring for glucose monohydrate causes the resulting percentage of electrolytes and glucose to be correspondingly higher as compared to the total weight of the product.

Patentees filed a motion to enforce the Agreement, and the district court conducted an evidentiary hearing to determine whether the term "glucose" as used in paragraph 6 of The issue of damages was tried subsequently to a magistrate judge. Schuyler presented evidence that it had sold 151,000 pounds (68,640 kgs) of product that failed to meet the minimum requirements stipulated in the Agreement as interpreted by the court. Dr. Verschoor testified for Patentees that Pharmalett would not license their formulation for less than the profit of $6.50 per kilogram it made from sales to its exclusive U.S. licensee, Bayer. After considering other relevant market and production factors, the magistrate judge found $5.00 per kilogram to be a reasonable royalty, totaling $343,200.00 for the product Schuyler admitted selling. The patent statute requires that infringement damages not be less than a reasonable royalty. See 35 U.S.C. § 284 (1984). The magistrate judge found, therefore, that because the lost profits proved by Patentees were less than the $343,200.00 total of the reasonable royalty proven, under 35 U.S.C. § 284 Patentees were entitled to recover the $343,200.00 in damages.

the Agreement was ambiguous and what the word "glucose" meant. The district court commenced its analysis by noting that "[g]lucose is a chemical compound symbolized by the empirical formula C sub6 H sub12 O sub6 . Glucose in its hydrous form is called glucose monohydrate and is symbolized by the empirical formula C sub6 H sub12 O sub6 H sub2 O." Gjerlov, slip op. at 2 (July 25, 1995). Hence, because "glucose" and "glucose monohydrate" are two different compounds, each represented by a different empirical formula, the district court held they cannot be considered the same or interchangeable. The district court also focused on the fact that Schuyler's batch records for both the unreformulated product and SKY-HIGH ENERGY specifically identified the glucose source used as glucose monohydrate. The district court determined that, because Schuyler's own batch records expressly referred to glucose in its monohydrate form, Schuyler knew how to distinguish between glucose and glucose monohydrate. The district court found that the term "glucose" in the Agreement unambiguously referred to glucose in its anhydrous form, C sub6 H sub12 O sub6 , and not glucose monohydrate, C sub6 H sub12 O sub6 H sub2 O. The district court further found that even assuming the term "glucose" in the Agreement was ambiguous, the parties intended the term to mean the compound identified as C sub6 H sub12 O sub6 , and not glucose monohydrate, C sub6 H sub12 O sub6 H sub2 O. The district court, therefore, granted Patentees' motion to enforce the Agreement and ordered Schuyler to discontinue production and sales of its SKY-HIGH ENERGY product.

The magistrate judge also found that Schuyler's violation of the Agreement was willful, making the case "excep...