MEADOW RIVER LUMBER v. Univ. of Ga. Research

• Decision Date: 30 June 1998
• Docket Number: No. A98A0295.,A98A0295.
• Citation: 503 S.E.2d 655,233 Ga. App. 169
• Parties: MEADOW RIVER LUMBER COMPANY et al. v. UNIVERSITY OF GEORGIA RESEARCH FOUNDATION, INC.
• Court: Georgia Court of Appeals

503 S.E.2d 655

233 Ga. App. 169

MEADOW RIVER LUMBER COMPANY et al. v. UNIVERSITY OF GEORGIA RESEARCH FOUNDATION, INC.

No. A98A0295.

Court of Appeals of Georgia.

June 30, 1998.

Certiorari Denied November 20, 1998.

Cook & Connelly, Bobby Lee Cook, Summerville, James E. Spence, Jr., for appellants

Chilivis, Cochran, Larkins & Bever, Nickolas P. Chilivis, Anthony L. Cochran, John K. Larkins, Jr., Atlanta, for appellee. BEASLEY, Judge.

Meadow River Lumber Company and Curlpak, Inc. (appellants) are licensee and sub-licensee respectively to certain exclusive rights to two patents owned by University of Georgia Research Foundation related to an apparatus and method for making curled wood flakes which are used in the potpourri industry. After learning of alleged use of the device more than one year prior to the Foundation's application for the patents, appellants brought suit alleging the Foundation breached the patent licensing agreement, committed fraud in the inducement, and is liable to indemnify appellants against claims of other sub-licensees who relied on the validity of the patent. The Foundation filed a motion to dismiss under OCGA § 9-11-12(b)(6) which was converted into a motion for summary judgment under OCGA § 9-11-56 and granted on all counts.

A party is entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."¹ The evidence is construed most strongly against the movant.²

In appellants' favor is evidence that on May 26, 1992, the Foundation licensed to Meadow River the exclusive right to make, use, and sell "wood curls" produced on the patented machine in the United States. An amendment gave Meadow River a worldwide exclusive license to make, have made, use and lease the patented equipment.³ As authorized by the agreement, Meadow River sub-licensed the rights to Curlpak and two others. Curlpak further sub-licensed its rights.

On March 21, 1995, Meadow River became aware of facts upon which it bases a claim that the patents were never valid in that allegedly they had been exploited commercially more than one year in advance of the patent application. Since that time, Meadow River has demanded that the Foundation take steps to stop any infringing use of the patents. On August 8, 1996, Meadow River and Curlpak filed this suit. Meadow River has not made any royalty payments since February 1994, and the Foundation counterclaimed alleging breach of contract for this and other reasons.

Certain background matters set this case in context.

(a) State court jurisdiction involving patents.

Federal district courts have original jurisdiction of "any civil action arising under any Act of Congress relating to patents,"⁴ but that jurisdiction is narrowly defined to include only "those cases in which a well-pleaded complaint establishes either that federal patent law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of the well-pleaded claims."⁵ The test requires that patent law be essential to each of several alternative theories of recovery under at least one claim for federal jurisdiction to exist.⁶ Where no federal jurisdiction exists, state courts may address questions of patent validity.⁷

The United States District Court for the Middle District of Georgia already determined that it did not have jurisdiction over Meadow River's claims. It held that though the claims "may relate to patents," they are state law claims and belong in state court. Meadow River did not appeal this decision.

(b) Application of Georgia law.

Patents are based exclusively on federal law, and state courts are advised to look to the decisions of the Circuit Court for the Federal Circuit for guidance on questions involving patent law.⁸ But patent licenses are not governed by the patent act.⁹ Accordingly, the construction of patent license agreements is solely a matter of state law.¹⁰

Under Georgia law, two actions are available to one who was fraudulently induced by misrepresentations into entering a contract: affirm the contract and sue for breach or seek to rescind and sue in tort for fraud and deceit.¹¹ Appellants assert both claims. Although appellants' brief is written as if Meadow River and Curlpak stood on equal footing, Meadow River is the only party in a direct contractual relationship with the Foundation. Curlpak, a sub-licensee of Meadow River, has no standing to bring any of these claims.

1. In Count 1 of its complaint, Meadow River alleges the Foundation breached the licensing agreement by failure of consideration because "the patents that are the subject matter of the ... agreement and the sole consideration provided by the Foundation were improperly issued, and are unenforceable and of no value whatsoever." This contention is based on the contention that the product was in public use or on sale more than one year prior to the date of the application for the patents, which, if it had been disclosed to the Patent Office, would have been fatal to a patent application under federal law,¹² and that therefore the patents are invalid. For the purpose of this appeal we accept as true that the evidence presents a question of fact as to whether prior use or sale of the device should have prevented acceptance of the patent application by the Patent Office under 35 USC § 102(b) or otherwise rendered the patent invalid.

But Meadow River did not bargain for a warranty of patent validity. "A mere license is not deemed to constitute any interest in the patent. A license is but a promise by one having an interest in a patent to forbear from suing one who would commit what would be, but for the license, an infringement of that interest."¹³ As stated by the Supreme Court, "a manufacturer gains only two benefits if he chooses to enter a licensing agreement.... First, ... the licensee may have avoided the necessity of defending an expensive infringement action during the period when he may be least able to afford one. Second, the existence of an unchallenged patent may deter others from attempting to compete with the licensee."¹⁴

In accord with the definition of a patent license, Meadow River's license agreement makes no representations about the validity of the patents. On appeal, appellants now admit that they "did not bargain for patents warranted to be valid, instead, they bargained for patents that were not known by [the Foundation] to be invalid." Because validity of the patent is not part of the consideration, there is no claim for failure of consideration as a matter of law.

Further, any claim of breach of warranty regarding the validity of the patent or the nature of the rights obtained is precluded by the terms of the license agreement. As noted by the trial court, the license expressly disclaims any representations or warranties associated with the patents. The license states "[THE FOUNDATION] MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO THE LICENSED PATENTS OR LICENSED TECHNOLOGY AND EXPRESSLY DISCLAIMS ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND ANY OTHER IMPLIED WARRANTIES WITH RESPECT TO THE CAPABILITIES, SAFETY, UTILITY, OR COMMERCIAL APPLICATION OF LICENSED PATENTS OR LICENSED TECHNOLOGY." The license agreement also contains a clause which states that the agreement "constitutes the entire agreement between [the Foundation] and LICENSEE with respect to the subject matter hereof and shall not be modified, amended or terminated except as herein provided or except by another agreement in writing executed by the parties hereto."

Meadow River urges that the second clause is not a "merger clause." A merger clause typically includes a provision which merges into the agreement any prior representations between the parties.¹⁵ But Meadow River does not complain about alleged prior representations or understandings. The provisions quoted above bar all aspects of Meadow River's breach of contract claim. Where "the allegedly defrauded party elected to affirm the contract, that party is bound by the contract's terms and is subject to any defenses which may be based on the contract."¹⁶

Meadow River argues its claim survives application of the disclaimer and entire agreement clause. It quotes SCM Corp. v. Thermo Structural Products:¹⁷ "Even though a party electing to affirm a contract is ordinarily bound by a merger clause contained therein [cits.], a merger clause is without application where the fraud allegedly perpetrated concerned intrinsic defects in the article forming the subject matter of the contract and was such as to prevent the defrauded party from exercising its own judgment. [Cits.]"

As stated in the quotation, this rule applies only where there is an intrinsic defect and the seller has prevented the purchaser from exercising his own judgment.¹⁸ That has not happened here. There is no intrinsic defect in what Meadow River received. The nature of a patent and a patent license simply does not include a warranty of validity of the patent.

Meadow River argues in support of its breach of contract claim that although the Foundation did not make any warranty of validity, it licensed patents which it knew to be invalid.

This theory addresses the concept of passive concealment similar to that used in connection with the purchase and sale of real estate. In real estate transactions, there is an exception to the general rule of caveat emptor which "places upon the seller a duty to disclose in situations where he or she has special knowledge not apparent to the buyer and is aware that the buyer is acting under a misapprehension as to facts which would be important to the...