Novametrix Medical Systems, Inc. v. BOC Group, Inc., 14467

• Decision Date: 22 December 1992
• Docket Number: No. 14467,14467
• Citation: 224 Conn. 210,618 A.2d 25
• Court: Connecticut Supreme Court
• Parties: NOVAMETRIX MEDICAL SYSTEMS, INC. v. The BOC GROUP, INC.

Page 25

618 A.2d 25

224 Conn. 210

NOVAMETRIX MEDICAL SYSTEMS, INC. v. The BOC GROUP, INC.

No. 14467.

Supreme Court of Connecticut.

Argued Sept. 24, 1992.

Decided Dec. 22, 1992.

John M. Calimafde, New York City, pro hac vice, with whom were William H. Narwold, Hartford, and, on the brief, Lee A. Goldberg, New York City, pro hac vice, and Maurice K. Segall, Stamford, for appellant (plaintiff).

Keith V. Rockey, Chicago, IL, pro hac vice, with whom were Alison L. Bonds, New Haven, and, on the brief, Thomas C. Elliott, Jr., Chicago, IL, pro hac vice, for appellee (defendant).

Before PETERS, C.J., and CALLAHAN, BORDEN, NORCOTT and FRANCIS X. HENNESSY, JJ.

NORCOTT, Associate Justice.

The sole issue in this appeal is whether the return of a nonrefundable payment made under a licensing agreement negotiated after a finding of patent infringement is required if the finding of infringement is later reversed, thereby obviating the need for the licensing agreement. The plaintiff, Novametrix Medical Systems, Inc., brought suit against the defendant, The BOC Group, Inc., to recover a $400,000 payment made to the defendant under a licensing agreement between the parties. The trial court granted the defendant's motion to strike the complaint on the ground that the complaint failed to allege a cause of action for breach of contract to justify return of the payment. ¹ The plaintiff appealed from the judgment of the trial court to the Appellate Court, and we transferred the appeal to this court pursuant to Practice Book § 4023 and General Statutes § 51-199(c). We affirm the judgment of the trial court.

The relevant facts are as follows. The plaintiff is in the business of manufacturing and selling medical monitoring equipment. Its principal product is the oximeter, which detects and measures the oxygen content in blood. The defendant, through one of its divisions, manufactures and sells life support and critical care equipment, including a line of oximeters that is in competition with those sold by the plaintiff. The oximeter manufactured by the defendant has been protected under United States Patent No. 4,407,290 since October, 1983. ²

In June, 1986, the defendant filed a patent infringement action against the plaintiff in federal court seeking to prevent the plaintiff from manufacturing and selling oximeters that came within the scope of the defendant's patent. In April, 1989, the federal District Court issued a memorandum of decision finding the defendant's patent valid, enforceable and infringed by the manufacture and sale of the plaintiff's oximeter. BOC Group, Inc. v. Novametrix Medical Systems, Inc., 11 U.S.P.Q.2d 1853, 1859-60, 1989 WL 124062 (D.Conn.1989). By virtue of the District Court's decision, the defendant obtained a legal right to have the court issue a permanent injunction against the plaintiff to prevent the plaintiff from continuing to manufacture and sell the oximeter. In the decision, the District Court directed the parties to "file an agreed form of judgment consistent with [its] ruling within thirty days." Id., 1860.

The demise of the plaintiff company would have been certain had an injunction issued prohibiting the production of its principal product. To assure its survival pending an appeal from the district court's finding of patent infringement, the plaintiff negotiated an agreement with the defendant whereby the plaintiff would agree to a form of judgment that included the injunction and the defendant would agree to grant the plaintiff a license to enable it to stay in business. The licensing agreement provided that the plaintiff would pay the defendant a nonrefundable sum of $400,000 which would constitute a credit against future royalties owed or which could be applied as a credit against an award of damages for past infringement. ³ The parties specified that the obligation to pay this sum would survive the termination of the licensing agreement. ⁴

The plaintiff appealed only the issue of infringement to the federal Circuit Court of Appeals. ⁵ The Circuit Court reversed the District Court's finding of infringement, holding that the plaintiff's technology was not covered by the scope of the defendant's patent. BOC Group, Inc. v. Novametrix Medical Systems, Inc., 15 U.S.P.Q.2d 1475 895 F.2d 1422 (Fed.Cir.1990). ⁶

Following the decision of the Circuit Court, the plaintiff filed the present state court action for the return of the $400,000 nonrefundable payment. The plaintiff alleged, alternatively, that: (1) established law dictated that royalties paid by a licensee after a challenge is made to a patent are recoverable if the patent is later found to be unenforceable (the "challenge rule"); and (2) the licensing agreement should be rescinded because the parties entered into it under a mutual mistake. ⁷

The defendant moved to strike the complaint for failure to state a cause of action. The trial court granted the motion to strike, concluding that the plaintiff had not alleged a breach of contract to justify return of the $400,000 payment or any legal basis for rescission of the licensing agreement. On appeal, the plaintiff claims that, because the trial court incorrectly treated the first count of the complaint as one alleging breach of contract rather than one alleging grounds for applying the challenge rule, the trial court improperly granted the motion to strike. ⁸ We conclude that, under either analysis, the trial court properly granted the motion to strike.

"The purpose of a motion to strike is to 'contest ... the legal sufficiency of the allegations of any complaint ... to state a claim upon which relief can be granted.' In ruling on a motion to strike, the court is limited to the facts alleged in the complaint. The court must construe the facts in the complaint most favorably to the plaintiff." (Citations omitted.) Gordon v. Bridgeport Housing Authority, 208 Conn. 161, 170, 544 A.2d 1185 (1988). A motion to strike is properly granted if the complaint alleges mere conclusions of law that are unsupported by the facts alleged. Cavallo v. Derby Savings Bank, 188 Conn. 281, 285, 449 A.2d 986 (1982); Mora v. Aetna Life & Casualty Ins. Co., 13 Conn.App. 208, 211, 535 A.2d 390 (1988). The first count of the plaintiff's complaint demanded return of the $400,000 payment on the ground that "royalties paid after challenge to a patent are recoverable if the patent is later found to be unenforceable. The BOC patent was found to be unenforceable against Novametrix." The plaintiff argues that this allegation, which the plaintiff claims accurately states the "challenge rule," provides the legal basis for its suit against the defendant, and that, therefore, the claim should have survived a motion to strike. Whether the policy embodied by the challenge rule warrants overriding the clear language of the licensing agreement to permit refund of a royalty payment if a claim of patent infringement is successfully challenged is an issue of first impression for this court. Our review of this doctrine and the policy underlying it leaves us unpersuaded that the plaintiff is entitled to any relief. ⁹

The challenge rule originated with Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), in which the United States Supreme Court departed from prior law to hold that a patent licensee was no longer estopped from challenging the validity of the patent underlying the license agreement. ¹⁰ The Lear court considered "the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain," and that "[l]icensees may often be the only individuals with enough economic incentive to challenge the patent-ability of an inventor's discovery." Id., 670, 89 S.Ct. at 1911. The court thus held that this important public policy overrides the technical requirements of contract doctrine so as to relieve a licensee from the liability for paying royalties once the licensee successfully challenges the validity of the licensor's patent. Id., 674, 89 S.Ct. at 1913; Ransburg Electro-Coating Corporation v. Spiller & Spiller, Inc., 489 F.2d 974, 977 (7th Cir.1973).

Subsequent cases have consistently upheld the right of a patent licensee to recover royalties paid after a successful legal challenge is made to the patent's validity. See Bristol Locknut Co. v. SPS Technologies, Inc., 677 F.2d 1277, 1283 (9th Cir.1982); Transitron Electronic Corporation v. Hughes Aircraft Co., 649 F.2d 871, 874 (1st Cir.1981); St. Regis Paper Co. v. Royal Industries, 552 F.2d 309, 313-14 (9th Cir.), cert. denied, 434 U.S. 996, 98 S.Ct. 633, 54 L.Ed.2d 490 (1977); Troxel Mfg. Co. v. Schwinn Bicycle Co., 465 F.2d 1253, 1260 (6th Cir.1972), cert. denied, 416 U.S. 939, 94 S.Ct. 1942, 40 L.Ed.2d 290 (1974). The challenge rule has maintained a relatively narrow existence, however, and courts have been reluctant to extend its ambit beyond that originally conceived by the court in Lear. See, e.g., Foster v. Hallco Mfg. Co., 947 F.2d 469, 475 (Fed.Cir.1991) (Lear policy does not override policy of preserving the finality of judgments); Hemstreet v. Spiegel, Inc., 851 F.2d 348, 350 (Fed.Cir.1988) (federal patent policy enunciated in Lear does not also override policy in favor of settlement of disputes); Troxel Mfg. Co. v. Schwinn Bicycle Co., supra, 465 F.2d at 1257 (court declines to interpret Lear to permit recovery of royalties paid before challenge is made to validity of patent).

The plaintiff asks this court to extend the challenge rule to require refund of the $400,000 payment if a successful challenge was made to a finding of patent infringement rather than to a finding of patent validity. This doctrine apparently has never been applied if a challenge was made to patent infringement alone and we decline to do so now. The plaintiff entered into the licensing agreement with the defendant after the district court found the defendant's patent to be valid,...