Studiengesellschaft Kohle mbH v. Novamont Corp., 77 Civ. 4722 (RWS).

• Decision Date: 26 February 1980
• Docket Number: No. 77 Civ. 4722 (RWS).,77 Civ. 4722 (RWS).
• Citation: 485 F. Supp. 471
• Parties: STUDIENGESELLSCHAFT KOHLE mbH, Plaintiff, v. NOVAMONT CORPORATION, Defendant, v. MAX-PLANCK-INSTITUT FUR KOHLENFORSCHUNG and Maria Ziegler, Additional Defendants on Counterclaim.
• Court: U.S. District Court — Southern District of New York

485 F. Supp. 471

STUDIENGESELLSCHAFT KOHLE mbH, Plaintiff, v. NOVAMONT CORPORATION, Defendant, v. MAX-PLANCK-INSTITUT FUR KOHLENFORSCHUNG and Maria Ziegler, Additional Defendants on Counterclaim.

No. 77 Civ. 4722 (RWS).

United States District Court, S. D. New York.

February 26, 1980.

Sprung, Felfe, Horn, Lynch & Kramer, New York City, for plaintiff and counterclaim defendants; Arnold Sprung, Nathaniel D. Kramer, New York City, of counsel.

Morgan, Finnegan, Pine, Foley & Lee, New York City, for defendant; Harry C. Marcus, New York City, of counsel.

OPINION

SWEET, District Judge.

This is an action by Studiengesellschaft Kohle mbH ("SGK") against Novamont Corporation ("Novamont") to recover royalties under a patent license agreement. Novamont has counterclaimed, alleging that SGK fraudulently failed to comply with the most favored licensee clause in its license agreement.¹ Novamont now moves to amend its counterclaim to allege an additional fraud which prevented Novamont from gaining full advantage from its most favored licensee clause. The motion is granted.

The background of this action is set forth in an opinion of this court dated October 19, 1978. SGK is the owner of a patent for production of polypropylene, which it obtained from Professor Karl Ziegler ("Ziegler"). Novamont entered into a patent license agreement with Ziegler in 1967 containing a "most favored nation" clause,² which entitled Novamont to substitute for its agreement the terms of any license granted by Ziegler to an American company during the life of the agreement which, "considered in their entirety," were more favorable than those accorded to Novamont.

In 1971, the District Court for the Northern District of Texas issued a decision limiting the applicability of Ziegler's patent. Novamont discontinued payments to Ziegler, whereupon Ziegler on March 24, 1977, terminated the 1967 agreement.

Following reversal of the lower court's opinion, Ziegler v. Phillips Petroleum Co., 483 F.2d 858 (5th Cir.), cert. denied, 414 U.S. 1079, 94 S.Ct. 597, 38 L.Ed.2d 485 (1973), SGK and Novamont agreed that the prior notice of termination would be deemed ineffective. They entered into a contract providing for Novamont to pay past royalties due under the 1967 agreement, plus 10 percent, and specifying that in the future Novamont would enjoy the license terms granted to Diamond Shamrock Corporation ("Diamond"), the successor to Phillips.

Novamont's original counterclaim alleged that SGK had breached the most favored licensee clause in Novamont's license by fraudulently concealing certain secret terms of its 1974 agreement with Diamond which were more favorable than those given to Novamont.

Novamont now claims that it has discovered new evidence which indicates that SGK fraudulently failed to disclose the terms of a paid-up license contract negotiated between Ziegler and Hercules Incorporated ("Hercules") in 1972. This non-disclosure allegedly prevented Novamont from learning first, that the terms of the Hercules contract were even more advantageous than those contained in the secret Diamond contract, and second, that Novamont was entitled under its most favored licensee clause to a paid-up license calculated on the same basis as Hercules' agreement. Novamont seeks to amend its counterclaim to include the allegations concerning Hercules.

Hercules and Ziegler first entered into a license agreement on September 24, 1954. This original agreement was modified by a supplemental agreement executed on May 25, 1964. Following a dispute, Hercules discontinued payment of royalties for the manufacture of polypropylene on March 31, 1970. On April 26, 1972, Hercules and Ziegler entered into a letter agreement to settle their disputes under which Hercules contracted to pay Ziegler a total of $1,600,000 covering both its past production of polypropylene from April 1, 1970 to December 31, 1972 and a fully paid-up license to produce up to 600 million pounds of polypropylene annually through December 3, 1980, the date of expiration of Ziegler's patent.

On May 11, 1972, Novamont wrote to Ziegler, requesting disclosure of the terms of Hercules' agreement. An exchange of correspondence ensued, during which Ziegler first declined to state the terms of Hercules' agreement, then revealed the general terms of the agreement. When Novamont demanded further details, Ziegler wrote to Novamont on August 28, 1972, explaining that the value of Hercules' paid-up license had been calculated by projecting the present value of Hercules' estimated royalty payments over the life of the patent, that is through 1980. Ziegler stated that the royalty rate used to make this calculation was that "which Hercules had to pay under their older license" and

was substantially less than that provided for in the previous agreement between Novamont and Ziegler. The Hercules agreement was negotiated before Professor Ziegler's patents issued and provided for royalty payments during this period prior to patent issue. As the Hercules royalty rates would not concern a paid-up license offered to Novamont, I see little purpose in providing Novamont with a copy of the Hercules agreement.

In short, Ziegler took the position that since the 1954 Hercules agreement, as amended, preceded the 1967 Novamont agreement, Novamont had no right to the favorable rates contained in that agreement which had been used to calculate the amount of Hercules' paid-up license.

During later negotiations, SGK adopted a similar stance. In a letter dated January 30, 1974, Novamont stated,

We see no basis for any meaningful negotiations premised on the Hercules license agreement .... The Hercules figures are concerned with the basic 1954 agreement and the 1964 amendment, both being earlier than any contract we had with Novamont.

As stated above, on July 1, 1974, Novamont and SGK finally reached agreement on a new license which provided for payment of royalties on a running percentage basis, rather than a paid-up basis, and incorporated many of the terms of the Diamond-SGK agreement.

Novamont claims that although SGK represented that the Hercules paid-up license involved only a projection of Hercules' future production at advantageous rates stemming from the 1954 agreement as amended in 1964, in fact Hercules obtained new concessions in 1972. In particular, Novamont has discovered evidence which it claims indicates that the lump sum paid by Hercules was not derived from a computer projection over the life of the patent, but rather excluded the last three years of its life so that, in effect, Hercules paid no royalties for use of the patent from 1978 through 1980. Further, the lump sum for use of the patent from 1970, the date of Hercules' royalty suspension, through 1977 is said to reflect an additional discount of 25 percent on projected royalty payments beyond the present value discount. If these new discounts had been known, Novamont contends, it would have had a right under its most favored licensee clause to a paid-up license calculated at the same rates as those accorded to Hercules.

SGK asserts that amendment of the counterclaim should not be permitted since the alleged fraud fails to state a claim. SGK claims first, that Novamont was never entitled to the terms granted to Hercules; second, that the agreement entered into by Novamont in July, 1974 was an accord and satisfaction of its disputes with Ziegler and SGK and precludes further relief at this point; and third, that Hercules' lump-sum agreement and Novamont's running payment license contract are so different in nature that comparison of the terms of these agreements is impossible.

In ruling upon a motion to amend under Rule 15(a), Fed.R.Civ.P., it would be improper for this court to determine the merits of Novamont's claim. On the other hand, it would be a futile gesture to grant leave to amend, if the new claim asserted by Novamont could be defeated by a motion to dismiss. DeLoach v. Woodley, 405 F.2d 496 (5th Cir. 1968); Grogg v. General Motors Corp., 72 F.R.D. 523, 527 (S.D.N.Y. 1976). Yet, as the Supreme Court stated in Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962),

If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave to amend should, as the rules require, be "freely given."

See also Holt v. Katy Industries, Inc., 71 F.R.D. 424, 426-27 (S.D.N.Y.1976).

The first ground of opposition to the amendment is that Novamont's most favored licensee clause did not entitle it to the favorable terms granted to Hercules. In support of this contention, SGK points out that Hercules entered into its lump sum agreement in 1972, following the district court's ruling in Ziegler v. Phillips, and before the reversal of that ruling. The agreement provided that Hercules would remain bound whether or not the Court of Appeals for the Fifth Circuit affirmed that ruling, so long as the validity of Ziegler's patent was upheld. SGK argues that these circumstances demonstrate that Hercules in effect decided to purchase an insurance policy in 1972 against the possibility that the Court of Appeals would reverse the district court. By contrast, according to SGK, Novamont elected to gamble that the Phillips decision would be affirmed and in fact waited until July, 1974, over a year after the Fifth Circuit issued its opinion, to reach an accord with SGK. Therefore, it would be inequitable to allow Novamont, a gambler, to gain rights enjoyed by Hercules, a risk-averter, under guise of its most favored licensee clause.

However,...