Virginia Polytechnic Institute v. IRS, Record No. 030965.

• Decision Date: 23 April 2004
• Docket Number: Record No. 030965.
• Parties: VIRGINIA POLYTECHNIC INSTITUTE AND STATE UNIVERSITY, et al. v. INTERACTIVE RETURN SERVICE, INC.
• Court: Virginia Supreme Court

595 S.E.2d 1

267 Va. 642

VIRGINIA POLYTECHNIC INSTITUTE AND STATE UNIVERSITY, et al. v. INTERACTIVE RETURN SERVICE, INC.

Record No. 030965.

Supreme Court of Virginia.

April 23, 2004.

Charles K. Sayfarth (Christopher C. Spencer; Jerry D. Cain, Gen. Counsel and Special Asst. Atty. Gen.; Kay Heidbreder, Associate Gen. Counsel and Special Asst. Atty. Gen.; Brian C. Riopelle; Robert M. Tyler; Bowman and Brooke; McGuire Woods, on briefs), Richmond, for appellants.

David A. Kikel, Washington, DC (James S. Rinse; Hogan and Hartson, McLean, on brief), for appellee.

Present: All the Justices.

CYNTHIA D. KINSER, Justice.

The primary question in this appeal is whether a reasonably prudent person in the position of the contracting parties would have considered the type of damages claimed in this case to be the natural consequence of a breach of certain agreements dealing with the assignment of intellectual property rights. Answering that question affirmatively, we conclude that the circuit court did not err by admitting evidence of consequential damages. We also conclude that the circuit court did not err in instructing the jury on the issue of waiver.

PRIOR PROCEEDINGS

Interactive Return Service, Inc. ("IRS"), filed a breach of contract action against Virginia Polytechnic Institute and State University ("Virginia Tech"), Virginia Tech Intellectual Properties, Inc. ("VTIP"), and William Landsidle, Comptroller.¹ IRS sought damages against Virginia Tech for its alleged breach of a sponsored "Research Agreement" ("SRA") entered into between IRS and Virginia Tech, and damages against both Virginia Tech and VTIP for their alleged breach of an "Industry Project Agreement" ("IPA") entered into between IRS, Virginia Tech, VTIP and the Center for Innovative Technology ("CIT"). A jury returned a verdict in favor of IRS against both Virginia Tech and VTIP and fixed damages in the amount of $110,000. The circuit court entered judgment against Virginia Tech and VTIP, jointly and severally, in that amount. Virginia Tech and VTIP (sometimes referred to as "the defendants") along with Landsidle appeal from that judgment²

RELEVANT FACTS

The terms of the SRA entered into between Virginia Tech and IRS in January 1995 provided that IRS would sponsor research at Virginia Tech to develop "an Interactive Response Unit for use with IRS' patent pending [for an] [I]nteractive and [V]ideo [D]ata [S]ervice [S]ystem." According, to the SRA, "[t]he Interactive Response Unit . . . is a device that interprets a television transmitted audio signal and analyzes coordinates of a position on the television screen directed by a laser beam and transmits a signal to-a local repeater station using IVDS (Interactive and Video Data Service)." The Interactive Response Unit supposedly allows a television viewer to interact with the television by purchasing an advertised product, responding to a polling question presented during a news program, or connecting to the "Internet."

Under the terms of the SRA, Virginia Tech was required to "make every effort[ ] to develop mass production engineering prototypes of the system . . . in compliance with the Federal Communications Commission['s]... rules for IVDS that will allow manufacturers to produce reliable products that are affordable to the general public and reliable products for the IVDS network providers." IRS agreed to reimburse Virginia Tech, on a monthly basis, for a portion of the costs of the research and development of the prototype. Virginia Tech was to submit monthly billings to IRS for the costs that had been incurred in the performance of the SRA, and IRS was obligated to pay promptly 80 percent of the billings, with the remaining 20 percent to be paid after Virginia Tech delivered the prototype. Finally, Virginia Tech had "the right to cease to perform any additional effort upon written notice to IRS to that effect, only after a material breach of this agreement [had] occurred." In that event, Virginia Tech was required to produce "a final report describing the effort at such time as the effort ceased."

The SRA also addressed the ownership of inventions resulting from the research. The title and ownership of inventions resulting from research conceived solely by researchers at Virginia Tech would be assigned to CIT.³ For inventions resulting from research conceived jointly by Virginia Tech researchers and IRS, title and ownership would reside jointly with IRS and CIT. Finally, inventions resulting from research conceived solely by IRS would be owned by IRS.

Virginia Tech began the research in 1995. The research was supposed to be completed in nine months at a cost of $201,505, but Virginia Tech requested several work extensions and additional research costs. Although IRS agreed to these extensions and increased costs, IRS repeatedly advised Virginia Tech that it had no revenues and that its only source of cash was to sell "equity participation (IRS[ Shares) or by selling technology rights." According to IRS, its major assets were its proprietary technology and the relationship with Virginia Tech and CIT.

IRS paid Virginia Tech slightly more than $103,000. However, after December 1995, IRS did not make any further payments on the research costs owed to Virginia Tech under the SRA.⁴ Virginia Tech sent several letters to IRS demanding payment of the unpaid costs. IRS never denied the indebtedness but responded by offering to work out a payment schedule that delayed payment of the past due amount until the research produced a working prototype. IRS also offered to pay interest on the unpaid balance. In approximately June 1996, IRS informed Virginia Tech that it could not make any further payments until it received the finished product. Nonetheless, IRS admitted at trial that it owed Virginia Tech approximately $750,000.⁵

During the same period of time, June 1996, IRS, Virginia Tech, VTIP, and CIT, entered into the IPA. In that agreement, the parties acknowledged their desire that the technology related to the Interactive Video and Data Service System "be used in the public interest and be available to the public quickly and efficiently." CIT agreed to "cost-share" the research project by providing $73,500 to Virginia Tech. In return for CIT's funding, IRS agreed to repay CIT the amount of $147,000, double CIT's investment, out of "net revenues arising from the selling, leasing, licensing, sublicensing, or in any other manner generating revenue from the transfer or use of any products and/or services using" the technology related to the Interactive Video and Data Service System. IRS also agreed to sponsor the research project at Virginia Tech by providing $416,131 to Virginia Tech. Pursuant to the terms of the IPA, Virginia Tech was obligated to assign any "Discoveries... conceived, developed, or reduced to practice during the Term of the Research Program" to VTIP, which would in turn "assign to CIT all intellectual property rights related to the Discover[ies]."⁶

After execution of the IPA, Virginia Tech requested additional extensions and cost increases for the research project, but IRS still did not make any payments to Virginia Tech. In a "Call/Visit Documentation" dated July 10, 1996, a contracts and grants administrator for the Virginia Tech Office of Sponsored Programs noted "as of" June 26, 1996 that "[s]ponsor [IRS] will not have money until he receives finished product ,and can sell it. He will pay us then. We are to keep invoicing him." According to IRS, Virginia Tech agreed in the fall of 1996 to continue the research project until a working prototype was developed and to give IRS 90 days thereafter to pay its indebtedness to Virginia Tech. In December 1996, Virginia Tech requested a "no-cost extension" of the research project to June 30, 1997.

However, soon after December 1996, Virginia Tech stopped working on the project. It did not deliver a final report to IRS as required by the SRA. In a July 1997 letter, Virginia Tech advised IRS that, in light of the fact that the research results and intellectual property derived from the project remained with Virginia Tech, it would assign these rights to VTIP unless IRS's obligation was paid in full within 45 days. Virginia Tech further advised IRS that VTIP, upon receiving the assignment, intended to execute a license with Proceso Interactivo S.A. de C.V. ("PISA") and that the terms of that license would include an obligation by PISA to repay to Virginia Tech the outstanding indebtedness of IRS.⁷

IRS did not pay as requested. Consequently, in an August 1997 document titled "Virginia Tech Intellectual Property Disclosure," Virginia Tech captured the results of the research so that it could be licensed to PISA.⁸ The type of work listed in the disclosure was "Interactive Video Data Service (IVDS) System," and the disclosure stated that "the rights to use this technology will be assigned to PISA." Virginia Tech assigned the intellectual property and research results to VTIP, and one day later, VTIP licensed those rights to PISA. The intellectual property rights related to the research project were never assigned to CIT as required by the terms of both the SRA and the IPA.

In October 1997, IRS entered into an agreement with The HAGO Company, Inc. ("HAGO") for the sale and exclusive use of certain intellectual property rights in the United States of America. In the agreement, IRS stipulated that it had a research and development contract with Virginia Tech and that the ownership of the software and other results of that research were in dispute. Accordingly, HAGO agreed to pay IRS "a monthly payment equal to the greater amount between fifty U.S. cents per each Audio-Link in operation and the minimum monthly amount" of $10,000. HAGO agreed to increase the minimum monthly amount to $60,000 "thirty days after [Virginia Tech] delivered] the software and results of the research and development project and "a letter of no action against" IRS...