Witco Chemical Corp. v. Dow Chemical Co.
| Decision Date | 19 November 1985 |
| Docket Number | Civ. A. No. 84-514-JLL. |
| Parties | WITCO CHEMICAL CORPORATION, Plaintiff, v. The DOW CHEMICAL COMPANY, Defendant. |
| Court | U.S. District Court — District of Delaware |
Edmund N. Carpenter II, Robert H. Richards III and Robert W. Whetzel of Richards, Layton & Finger, Wilmington, Del. (Harold Haidt, G.T. Delahunty and C.G. Mueller of Brooks Haidt Haffner & Delahunty, and Alan M. Abrams and Morton Friedman, New York City, of counsel), for plaintiff.
Douglas E. Whitney and Mary B. Graham of Morris, Nichols, Arsht & Tunnell, Wilmington, Del. (Bernd W. Sandt and Michael S. Jenkins, Midland, Mich., of counsel), for defendant.
Witco Chemical Corporation ("Witco"), a Delaware corporation, brought this action for patent infringement,1 and unfair competition,2 against the Dow Chemical Company ("Dow"), also a Delaware corporation. Witco's predecessor corporation, Isocyanate Products, Inc. ("IPI"), had entered into a License Agreement ("Agreement") with Dow, dated June 1, 1967, under which Dow was licensed for certain hoped-for patent rights involving use of polyether polyols which were at the time the subject of IPI's pending patent applications. The dispute which led to this litigation began when Witco gave Dow notice on September 17, 1979, that it was terminating the Agreement pursuant to its provisions. Dow responded that no such termination had occurred and, after Witco continued to claim that the Agreement was terminated, Dow filed a notice of intention to proceed in the Chancery Court of Delaware to resolve this issue. Dow later filed a Chancery suit. Witco then filed the present action in this Court. After a conference with counsel for the parties, Dow agreed to dismiss its Chancery action and proceed in federal court on the issue of whether Witco had terminated the Agreement.3
On April 8, 1985, Dow moved for summary judgment in this Court on the ground that no termination of the Agreement had occurred. After considering the parties' submissions on this motion and oral argument, this Court has determined that the Agreement is still in full force and effect and will therefore grant defendant's motion for summary judgment.
The interpretation of contract provisions is crucial to the resolution of the issues raised by Dow's summary judgment motion. Therefore, primary attention will be devoted to a description of the Agreement between Dow and Witco and the correspondence between the parties, applying the facts that are undisputed to the provisions of the Agreement. Since this case at its present juncture does not directly involve patent infringement, the technology of polyurethane foam need be only briefly described.
Kenneth P. Satterly, an owner/employee of IPI, Witco's predecessor, invented a rigid, insulating polyurethane foam at reduced cost. The foam is prepared by reacting an arylene polyisocyanate and a polyether polyol, an additional product of an alkylene oxide having three or more carbon atoms, and a polyol having at least four hydroxy groups and a chlorofluoro alkane as the essential blowing agent. (D.I. 39, ¶ 4.) Satterly's polyurethane foam gains its excellent thermal insulation from the fluorocarbon blowing agent which is retained within the closed cells of the foam. Satterly's insulation is nearly twice as efficient as the next best kind of commercial insulation and is recognized as the most cost effective insulation available commercially. (Id. at ¶ 5.) The patent, No. 3,846,347 ('347 patent), was issued on this invention only on November 5, 1974. (Id. at ¶ 6.)
At the time that the Agreement was entered into with Dow, Witco's predecessor, IPI, a relatively small company, was being sued for patent infringement. This suit imposed significant burdens on IPI's finances. (D.I. 39, ¶ 7.) In order to finance its defense to this suit, IPI entered into separate license agreements with E.I. duPont de Nemours & Company, Mobay Chemical Corporation, Atlas Chemical Company, and Dow, four major suppliers to the polyurethane foam industry. (Id. at ¶ 8.) Under Witco's License Agreement with Dow, the need to report royalty payments on the use of polyols did not arise until a patent was actually issued. (Id. at ¶ 14.) On February 3, 1981, Witco was issued another patent, No. 4,248,975 ('975 patent), which covers rigid shrink stable thermal insulating polyurethane foams in language different from that of the '347 patent. (Id. at ¶ 28.)4
The genesis of this controversy occurred in 1967, when IPI entered into the Agreement with Dow, granting Dow a non-exclusive license to the rights of patents which had yet to be issued. (D.I. 1, ¶ 4.) The Agreement remains unchanged to the present, except for an amendment to the reporting terms by way of a letter agreement.5
The terms of the Agreement, as they pertain to the issues in this case, are as follows. The Agreement states Dow's desire for a license under the two patents with a right to sublicense this license to its subsidiaries. (D.I. 34A at A-1.) In Section 2(a), Dow and its subsidiaries have the right to grant immunity from suit to customers for infringement of the patent rights with respect to polyol sold by each of them. (Id. at A-2.) Pursuant to Section 3(a), Dow paid IPI $25,000 in part payment for the license and rights. Dow and IPI agreed that the "amount of polyol used or sold for use by Dow under Patent Rights is a convenient and adequate measure of royalties hereunder." (Id., Section 3(b).) Dow further agreed to pay running royalties to IPI "at the rate of no more than one-quarter cent ($0.0025) per pound of polyols used or sold for use" under the rights applicable only after Dow and its sublicensed subsidiaries used or sold for use forty million pounds of polyols. (Id.) Section 4, whose language is central to this case, reads in full:
4. DOW AND SUBLICENSED Subsidiaries shall keep records in sufficient detail to permit an accurate determination of royalties which accrue under this agreement and DOW shall report to IPI in writing within sixty (60) days after the end of each calendar half-year during the life of this agreement the number of pounds of polyols which DOW and said Subsidiaries used or sold for use under Patent Rights during said half-year and accompany the report with a payment of any accrued royalties thereon. If DOW and said Subsidiaries during said half-year have not used any polyols under Patent Rights nor sold any for such use the report shall so state. DOW agrees that its pertinent records may be examined at IPI's request during regular business hours by a certified public accountant, reasonably acceptable to DOW, for the purpose of determining royalties accrued hereunder, and such accountant shall report to IPI the amount of accrued royalties only.
(D.I. 34A at A-3.)
Section 7(a), the termination provision, also merits quotation in full:
(D.I. 34A at A-4-5.)
At the time IPI entered into this Agreement with Dow, there was very little demand for rigid polyurethane foam and, thus, for the polyol used to make the foam. Only much later did a significant market develop, with a corresponding increase in value of the right to the license.
Dow's reporting under this Agreement can be traced clearly from the correspondence between the two parties. In arguing that it properly terminated the Agreement, Witco disputes that Dow complied with the Agreement's provisions on reporting or at the very least, that such compliance raises factual issues. On its motion for summary judgment, Dow in turn attempts to rebut Witco's allegations with evidence from the correspondence, including explanatory letters as well as reports.
Dow claims to have filed all reports of its activities as required under the provisions of the Agreement. Dow began reporting under the Agreement on November 3, 1975, when it stated that there had been no activity for the period January 1, 1975 to June 30, 1975. (D.I. 34A at A-24.) On May 19, 1976, Dow reported no activity for the period January 1, 1976 to December 31, 1976.6 Subsequently, Dow duly reported no activity on February 28, 1977 for all of 1976 (id. at A-29) and on February 15, 1978 for all of 1977. (Id. at A-30.) Dow's first report of activity was on March 27, 1979, when it reported activity for the second half of 1978. (Id. at A-31.)7
By a letter of notice dated September 17, 1979, Witco stated that it was terminating the Agreement pursuant to Section 7(c).8 In this letter, Witco claimed that Dow was required to keep records "which permit an accurate determination of the royalties due and to make periodic reports each calendar half-year during the life of the Agreement." (D.I. 34A at A-32.) Witco stated that since it had not received any royalty reports, Dow was in default of the Agreement. Witco did state, however, that there would be no termination if the fault was remedied within the sixty day period stipulated in the Agreement. Dow replied to...
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