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Fourth Circuit Rules on Breach of Intellectual Property License Agreement

Keystone Northeast, Inc. v. Keystone Retaining Wall Systems, LLC
No. 15-1457, (United States Court of Appeals for the Fourth Circuit, January 18, 2017)

by Caroline E. Willsey, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.ca4.uscourts.gov/Opinions/Unpublished/151457.U.pdf  

In Keystone Northeast, Inc. v. Keystone Retaining Wall Systems, LLC, No. 15-1457, the Fourth Circuit considered a challenge to the enforceability of an intellectual property licensing agreement.

Keystone Retaining Wall Systems, LLC (“Keystone Wall”), the designer of and holder of intellectual property related to a segmental retaining wall system, entered into a License Agreement with Keystone Northeast, Inc. (“Keystone Northeast”) to manufacture and sell the system in Maine, New Hampshire, and eastern Massachusetts. The License Agreement imposed a quota requirement on Keystone Northeast and allowed Keystone Wall to terminate the Agreement if Keystone Northwest failed to meet the quota. During the term of the License Agreement, Keystone Northeast’s relationships with several local manufacturers deteriorated. Subsequently, Keystone Northeast transferred a portion of the licensed territories back to Keystone Wall in exchange for reduced quotas under a series of transfer agreements.

The first transfer agreement (the “Gagne Transfer Agreement”) was between Keystone Northeast, Keystone Wall and Gagne & Son Concrete Blocks, Inc. (“Gagne”) (a local manufacturer). The Gagne Transfer Agreement (1) renewed the License Agreement through 2003, (2) increased sales quotas in 2003, (3) provided that Gagne’s sales in Maine would count toward Keystone Northeast’s sales quota, and (4) provided that Keystone Northeast had the right of first refusal to expand its licensed territory into western Massachusetts. Keystone Northeast and Keystone Wall subsequently entered into two (2) other similar transfer agreements that transferred back Keystone Northeast’s territory in areas serviced by the manufacturers HiWay Concrete Products, Co., Inc. (“HiWay”) and Adolf Jandris & Sons, Inc. (“Jandris”) in Massachusetts. These agreements (1) set out schedules for license-fee sharing between Keystone Northeast and Keystone Wall; (2) provided that Jandris’ and HiWay’s sales would count toward Keystone Northeat’s quota; (3) added western Massachusetts to Keystone Northeast’s licensed territory and (4) provided for the continuation of the License Agreement.

In March 2009, Keystone Wall notified Keystone Northeast that Keystone Northeast had failed to meet its quotas for 2008 and that Keystone Wall was terminating the License Agreement. Keystone Wall defended its position by arguing that Keystone Northeast’s sales quota had increased by virtue of western Massachusetts being added to its territory under the Jandris Transfer Agreement. By obtaining rights to production in western Massachusetts under the Jandris Agreement, Keystone Wall claimed that Keystone Northeast had exercised its right of first refusal under the Gagne Agreement.

Keystone Northeast filed a breach of contract action. After finding that Keystone Northeast had not exercised its right of first refusal, the district court granted Keystone Northeast’s motion for summary judgment for damages for the period from the end of 2008 to 2010 when the License Agreement expired. The court also awarded Keystone Northeast damages under the transfer agreements and ordered specific performance of the transfer agreements, requiring Keystone Wall to pay royalties in the future. Keystone Wall appealed.

First, Keystone Wall contended that Keystone Northeast had in fact exercised its right of first refusal to obtain the western Massachusetts territory and that therefore its quota under the License Agreement increased to a figure that Keystone Northeast did not meet in 2008. The Fourth Circuit concluded, as a matter of law, that Keystone Northeast did not exercise its right of first refusal. Under Minnesota law, which governed the contract, in order for a right of first refusal to ripen into an option, a third party would have to make a bona fide offer and that offer would have to be communicated to the party holding the right. There was no evidence that any third party made a bona fide offer to Keystone Wall. The mere fact that other parties were openly interested in the western Massachusetts territory, as Keystone Wall argued, was insufficient to constitute a bona fide offer. Accordingly, the Fourth Circuit held that Keystone Wall’s termination of the License Agreement constituted a breach of the agreement, for which Keystone Northeast was entitled to damages.

Second, Keystone Wall contended that the district court erred in ruling that the three (3) transfer agreements were separate and independent contracts under which Keystone Northeast was entitled to damages for royalties and specific performance. Instead, Keystone Wall argued that these transfer agreements were amendments to the License Agreement and that when the License Agreement ended, so too did the transfer agreements. In its analysis, the Fourth Circuit noted that the transfer agreements effected transfers of portions of territory licensed under the License Agreement, and they would therefore be meaningless without the License Agreement. The transfer agreements even contained language specifically stating, “The License Agreement, except to the extent amended by this [Transfer] Agreement, shall continue in full force and effect.” Additionally, language in the transfer agreements extending the underlying License Agreement was indicative of the parties’ original view that the transfer agreements were simply amendments to the License Agreement. For those reasons, the Fourth Circuit held that the district court erred in holding that the transfer agreements imposed independent and continuing obligations beyond the termination of the License Agreement and vacated the award of damages and specific performance on the transfer agreements.

The Fourth Circuit remanded the case to the district court for a recalculation of damages consistent with its ruling.


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