challenged the scope of Willemijn's patent under their license agreement. Having bargained for and received a most-favored-licensee clause, SMC was entitled to no less than a royalty-free license once Proteon was released from the obligation to pay royalties. To conclude otherwise would place SMC at a severe competitive disadvantage with respect to Proteon.
Two of the three arbitrators here, however, reached the conclusion that SMC was not entitled to the benefit of its bargain. Since the arbitrators have given no explanation for their decision, as is their right, United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 598, 4 L. Ed. 2d 1424, 80 S. Ct. 1358 (1960), I must confirm the award "if a ground for [their] decision can be inferred from the facts of the case." Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1216 (2d Cir. 1972).
Willemijn offers two possible explanations for the arbitrators' decision. First, that the 1994 Willemijn-Proteon agreement did not trigger SMC's most-favored-licensee clause. Willemijn concedes that its agreement with Proteon constitutes a license. Indeed, it is well established that a patent holder grants a license by agreeing "not to seek an injunction against infringement and not to sue for damages therefore." Shatterproof Glass Corp. v. Libbey-Owens-Ford Co., 482 F.2d 317, 320 (6th Cir. 1973); see General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, 181, 82 L. Ed. 1273, 58 S. Ct. 849 (1938) (acknowledging that the grant of a non-exclusive license amounts "to no more than a mere waiver of the right to sue" (internal quotation marks omitted)).
Willemijn nevertheless asserts that the 1994 Willemijn-Proteon agreement did not trigger SMC's most-favored-licensee clause because it did not contain any provisions "requiring" the "payment" of "royalties." Willemijn's expert testified before the panel that SMC's most-favored-licensee clause was "very narrow" and evinced the parties' intent that only a subsequent license which "required payment" at a lower "rate of royalty" would entitle SMC to seek substitution of its royalty provisions. Because the 1994 agreement only granted Proteon immunity from suit, it did not in any way reduce or alter Proteon's obligation to pay royalties, which remained operative (if unenforceable). In other words, if the 1994 agreement provided that Proteon was "required" to "pay" a "rate of royalty" of 0.0001% (or even a "rate" of zero percent, for that matter), SMC would be entitled to a substitution of terms; however, because the agreement merely waived Willemijn's right to demand payment of any royalties due, SMC is not entitled to substitution.
This argument is meritless. A licensor's grant of immunity from suit in settlement of a dispute under a prior license agreement is "the equivalent of a license" and may trigger another licensee's most-favored-licensee clause. See Novamont, 704 F.2d at 55. By relinquishing the right to sue for royalties, Willemijn has granted Proteon a royalty-free license. Cf. Cold Metal Process Co. v. McLouth Steel Corp., 170 F.2d 369, 377 (6th Cir. 1948). To conclude otherwise would allow Willemijn to eviscerate the effect of SMC's most-favored-licensee clause by, for example, "requiring" a subsequent licensee to pay a higher royalty rate and then waiving the right to sue for all or part of that rate. The arbitrators could not have seriously considered Willemijn's argument that the parties intended this construction and the untenable outcomes it could generate. I note that Willemijn's expert offered no explanation why anyone would make such a distinction, let alone consent to it. See John T. Brady & Co. v. Form-Eze Sys. Inc., 623 F.2d 261, 264 (2d Cir.) (binding courts to uphold an arbitrator's interpretation of a contract "so long as it is barely colorable"), cert. denied, 449 U.S. 1062, 66 L. Ed. 2d 605, 101 S. Ct. 786 (1980).
Second, Willemijn argues that SMC is not entitled to a substitution of royalty provisions because it cannot accept all the terms and conditions of the 1994 Willemijn-Proteon agreement as required by the most-favored-licensee clause. In exchange for immunity from suit, Proteon agreed to dismiss its petition to confirm an arbitration award releasing it from the obligation to pay further royalties to Willemijn under the '852 patent. SMC does not possess a similar arbitration award ripe for confirmation. Willemijn therefore presumes that SMC is unable to "agree to accept" this additional term.
Under Willemijn's proposed interpretation of the license agreement, it may freely evade its duty to offer comparable terms to SMC simply by making any more favorable arrangement extended to another licensee contingent upon a condition which is inapplicable to SMC. The Second Circuit rejected precisely this argument in Novamont. 704 F.2d at 53-54. There the licensor had granted a subsequent licensee a more beneficial royalty provision containing a condition inapplicable to a prior most-favored licensee.
The court rejected the condition precedent and extended the more beneficial provision to the most-favored licensee, noting that "giving literal effect" to the condition "would be an evasion of the intention of the parties to the clause." Id. at 53.
It is also irrelevant that the 1994 Willemijn-Proteon agreement merely implemented an arbitration award that already released Proteon from an obligation to make royalty payments. SMC bargained for the right not to be placed at a competitive disadvantage by Willemijn. The question whether Proteon could have continued manufacturing products without obtaining a license from Willemijn "is not germane to any purpose of the MFL clause." Id. As the Second Circuit noted in Novamont,
it is likely to be generally true that a licensor's grant of more favorable terms is supported by a sound business reason, but the benefit of more favorable terms is exactly what the person whose license includes an MFL clause has bargained for and to which he is entitled.
Id. at 53. SMC has agreed not to pursue any further claims, either before a panel of arbitrators or in court, regarding the validity of the '852 patent. It was therefore unquestionably entitled to enjoy the same royalty-free license extended to Proteon.
Since Willemijn's arguments before the panel fail and since I can conceive of no other basis for the arbitrators' decision, I conclude that the two arbitrators in the majority manifestly disregarded and failed to honor the "well-defined, explicit, and clearly applicable" terms of the parties' agreement, Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir. 1986), and that they disregarded as well the law that a party is entitled to the benefit of terms clearly stated and intended in such a contract. Were it not for what happened here, this fundamental principle of contract law would hardly need iteration. See, e.g., Broadway Nat'l Bank v. Progressive Cas. Ins. Co., 775 F. Supp. 123 (S.D.N.Y. 1991), aff'd, 963 F.2d 1522 (2d Cir. 1992). There the District Court stated:
Where the terms of [a contract] are unambiguous, they must be given their plain and ordinary meaning, and a court must refrain from rewriting the agreement. Under such circumstances, the question is one of law, and summary judgment is proper. In the words of Judge Weinfeld: