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Medinol Ltd. v. Guidant Corp.

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK


August 7, 2007

MEDINOL LTD., PLAINTIFF,
v.
GUIDANT CORP. AND ADVANCED CARDIOVASCULAR SYSTEMS, INC., DEFENDANTS.

The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.

OPINION AND ORDER

I. INTRODUCTION

Medinol sued Guidant alleging patent infringement. During the course of a jury trial, the parties resolved the dispute when Medinol granted Guidant a license to use certain Medinol patents. The parties notified the Court that they had settled the action. Calling this a "delightful piece of news" the Court directed the parties to state the terms of their settlement on the record.*fn1 An attorney for each side then outlined the settlement on the record and all parties agreed that the attorneys' statements accurately expressed the terms of their agreement. Medinol's lawyer summarized the settlement in the following words: "Guidant will pay $[sealed] for a paid up license with respect to the '381 patent and its family, and there will be a covenant not to sue with respect to actions in the United States, and we will dismiss this action."*fn2 In the colloquy that followed, Abbott's attorney, Medinol's representative, and Medinol's counsel specified the subject matter and geographic scope of the license, the breadth of the covenant not to sue, and the nature of the dismissal.*fn3 With these clarifications, Abbott's counsel affirmed that the statements on the record appropriately summarized the terms of the settlement.*fn4 Representatives of both Medinol and Abbott*fn5 confirmed that they accepted the terms of the settlement as stated on the record.*fn6 Though both sides still agree that the "settlement agreement stated on the record is valid and enforceable",*fn7 there is no doubt that the parties intended to prepare a written settlement agreement, setting forth the terms of their settlement in legal language and in complete detail.

Unfortunately, as the parties circulated draft settlement agreements, they found that they disagreed with respect to one essential term of the settlement: whether the license Medinol granted to Abbott was restricted with respect to Abbott's use of the patented technology. Both sides agreed -- and continue to agree -- that the case was indeed settled, but each side argued that its interpretation of that one essential term was the correct interpretation. Because the parties could not agree on this term, each side moved to enforce the settlement that it believed had been reached. This Court referred those motions to the Magistrate Judge to prepare a report and recommendation to the Court.*fn8 After receiving written submissions and holding an evidentiary hearing, the Magistrate Judge issued a sealed Report and Recommendation ("R&R") on February 14, 2007. Abbott filed timely objections to the R&R.

II. THE AGREEMENT

When asked to place the settlement on the record, the parties made the following statements:

Medinol Counsel: Guidant will pay $[sealed] for a paid up license with respect to the '381 patent and its family, and there will be a covenant not to sue with respect to actions in the United States, and we will dismiss this action.

Abbott Counsel: If I could add at least one thing, and that would be a clarification on what [Medinol counsel] said about the '381 patent family. That's all related patents. It includes continuations, reexamination, anything that is related.

The Court: [Abbott counsel] stated it included patents, related patents, continuations and reexaminations. Is that acceptable, Dr. Richter [Medinol representative]?

Dr. Richter: That's acceptable. This is what we meant by the family.

The Court: It's best to be clear. [Abbott counsel], is there anything else?

Abbott Counsel: I am not sure that [Medinol counsel] said there would be a dismissal with prejudice.

The Court: There will be a dismissal with prejudice; is that correct, [Medinol Counsel]?

Medinol Counsel: Absolutely.

The Court: Anything else?

Abbott Counsel: Just to clarify, there is a covenant not to sue, paid up on all of these patents?

Medinol Counsel: Yes.

The Court: He actually said in the U.S.

Medinol Counsel: This relates to the U.S. patents, your Honor.

[Record indicates that Dr. Richter conferred with his wife, Dr. Judith Richter.]

Dr. Richter: To clarify, I think we are saying exactly the same thing. What we are talking about is all of the Israel patent family, its existing patents, continuation, reexamination of the Israel patent family. Yes?

Abbott Counsel: Yes

Dr. Richter: OK.

The Court: You keep saying all related to that. That's a point that I am not quite getting agreement on. You keep saying all related to that. What do you mean by that, [Abbott counsel]?

Abbott Counsel: This case has been about the '381 patent, but there are other patents in the family.

The Court: Try to explain what you mean by that. You may be OK with each other, but you used all related. That may be the problem. Family means what to you, Israel patents?

Abbott Counsel: Yes.

The Court: And anything else?

Abbott Counsel: No, Israel family.

The Court: OK

Dr. Richter: Israel family, continuation and reexamination. We are talking about the same thing.*fn9 After this colloquy, the court asked each party representative to confirm on the record that the terms of the settlement, as stated, were acceptable. Dr. Richter verified, on behalf of Medinol, "that the terms of the settlement stated on the record" were accepted "in full satisfaction of your claims in this action."*fn10

Dr. Schneiderman, on behalf of Abbott also confirmed that the settlement was acceptable.*fn11 The parties then agreed that Abbott would make payment on the fully paid up license within forty-five days.*fn12

III. THE DISPUTE

The disputed settlement term involves the scope of the license granted by Medinol -- namely whether it is a restricted or unrestricted license. Medinol claims that Abbott's license to use the '381 patent family is restricted in that the license allows Abbott to use those patents only in the Vision and Xience stents originally developed by Guidant (the "V/X" stents), and improvements*fn13 to those stents.*fn14 In response, Abbott accuses Medinol of trying to add a term to the settlement that was never stated on the record, nor agreed to by the parties, to wit, the V/X field-of-use restriction. Abbott argues that the parties agreed to an unrestricted license, and that it may therefore use the '381 family of patents in any of its present or future stent products.

Though the parties stated several license restrictions on the record on the evening on which this action settled,*fn15 it is undisputed that no field-of-use restriction was stated on the record. Thus, it appears that Medinol is asking the Court to "clarify" the agreement by finding that the parties had agreed to a license that was restricted to only two products (and improvements thereto). In its motion to enforce the settlement, Medinol argued that while no restriction on the license was placed on the record, this oversight was due to the court's request that the parties "place a minimum statement [of the settlement] on the record" and "generally state the terms of the settlement."*fn16 Medinol also argues that the settlement was made between Medinol and Guidant, not Medinol and Abbott, which means that the license was necessarily restricted to Guidant products.

Because the Magistrate Judge found that the terms of the settlement stated on the record were ambiguous, she held that she had the authority to clarify the terms of the settlement. In order to do this, she held an evidentiary hearing in an effort to determine the true intent of the parties at the time of the settlement. Based on the testimony adduced at the hearing, including her findings as to the credibility of the various witnesses, she concluded that the parties intended to agree on a license restricted to only two products.

IV. THE REPORT AND RECOMMENDATION

A. Standard of Review

In the context of a Report and Recommendation, this Court must "make a de novo determination . . . of any portion of the magistrate judge's disposition to which specific written objection has been made."*fn17 In this case, I need only review findings of fact if I agree that the Magistrate Judge correctly concluded that the terms of the settlement were ambiguous and that it was appropriate to hold an evidentiary hearing to determine the intent of the parties.

B. The Legal and Factual Bases for the Evidentiary Hearing

The Magistrate Judge began her report by noting that "[a] stipulation of settlement made in open court is binding and enforceable" and that the district court has the power to enforce a settlement agreement.*fn18 However, she also noted that after the terms of a settlement are placed on the record, a court "'retain[s] authority to clarify subsequently the settlement and to impose clarifying terms.'"*fn19

Finally, she pointed out that "[a]lthough a court may only 'implement[] but not expand[] upon the parties' settlement agreement,' a court has 'ample authority to clarify ambiguities in the description of the settlement reached on [the record] by crafting the terms at issue."*fn20

Based on these uncontested principles of law, the Magistrate Judge concluded that because the "lack of detail in the[] stated agreement creates uncertainty as to its meaning, the Court plays a proper role in undertaking to craft terms that resolve that uncertainty."*fn21 The Magistrate Judge held that the court would apply ordinary principles of contract law to determine the intent of the parties.*fn22 If the agreement was "complete, clear and unambiguous on its face [it] must be enforced according to the plain meaning of its terms."*fn23 If, on the other hand, a contract is incomplete, or its language ambiguous, "a court may consider extrinsic evidence to determine what the parties intended."*fn24

The Magistrate Judge then found that the parties' statements on the record were silent as to the scope of the license. While noting that "the general rule is that silence does not create an ambiguity," she nonetheless found that when the parties' written or oral statement "is not a fully integrated and complete statement of the parties' agreement, 'parol evidence may be admitted 'not to contradict or vary, but to complete the entire agreement.""*fn25

The Magistrate Judge noted that the parol evidence rule generally forbids reference to oral agreements or other external evidence, but the rule does not apply where the agreement was not intended to embody the entire agreement between the parties.*fn26 The Judge rejected Abbott's argument that "the parties' statement on the record is regarding the promised license reflects the entirety of the parties' agreement and is unambiguous[.]"*fn27 She noted that in Core-Vent v. Implant Innovations, Inc., the Federal Circuit approved a district court's interpretation that a license included a field-of-use restriction "despite the absence of any restrictive language in the parties' on-the-record description of the agreed license[.]"*fn28 Because the Magistrate Judge concluded that this agreement was plainly "incomplete" in that it was silent as to the scope of use permitted by the license, she decided that it was appropriate to consider parol evidence to determine the intent of the parties.*fn29 In order to obtain that evidence, the Magistrate Judge held an evidentiary hearing. After hearing from various witnesses and considering all of the evidence at the hearing, the Judge concluded that the parties had intended to grant and purchase a restricted license, i.e., one that limits Abbott's use of the licensed patents to the V/X stents (and improvements thereon).

V. ABBOTT'S OBJECTIONS

Abbott begins with the simple proposition that a restriction on a license is a highly material term and that Medinol's failure to mention any such term when it stated the terms of the settlement on the record, while represented by very experienced counsel, should end the dispute. Abbott further notes that to add such a term is not a mere "clarification," but is an impermissible "expansion" or "variance" of the parties' settlement agreement.*fn30 Abbott also argues that even though most, if not all, settlements reached in open court are necessarily less detailed than carefully-drafted settlement agreements, courts typically will not look behind a settlement stated on the record because it will inevitably lead to a renegotiation of its terms, particularly by a party having second thoughts. The fact that a settlement has not yet been reduced to a writing that includes every detail of the agreement should not be a "green light" to permit a party to "inject new, deal-altering restrictions" which were not "disclosed to the Court."*fn31

Abbott next argues that "in exchange for a license under [a] patent . . . the licensee's acquired rights are coextensive with the full reach of the patents involved."*fn32 Moreover, Abbott argues, "the customary import of a 'paid-up' license for patented technology is that the licensee has fully paid at the commencement of the license . . . to use whatever invention the patent in question purports to cover."*fn33 Abbott goes on to make the policy argument that by agreeing to a fully paid-up license, Abbott bore the entire risk of loss if any "future iterations or innovations failed to gain FDA approval, or otherwise proved unsuccessful."*fn34 If the R&R is affirmed, Abbott argues, Medinol will be able to challenge any of Abbott's future stent designs by "simply reasserting the same patents Abbott has already paid to use. In essence, the Recommendation will propel the parties down a short path toward future litigation . . . ."*fn35

Finally, Abbott distinguishes the cases relied upon by the Magistrate Judge in support of her decision to hold an evidentiary hearing that ultimately resulted in the addition of a settlement term that was not found in the record. Abbott noted that the Magistrate Judge placed heavy reliance on two cases -- Core-Vent and Manning v. New York University -- in reaching her conclusion that in the event of an ambiguity (or an incomplete statement) of a settlement, a court has the power to examine the intent of the parties and "clarify" the terms of the settlement.

Abbott points out that in Core-Vent, the Federal Circuit affirmed the district court's decision not to hold an evidentiary hearing. The Federal Circuit found that because the settlement on the record named the infringing products and tied the license royalties to those same infringing products, and because the parties affirmatively assented to the settlement as stated on the record, the district court acted properly when it denied the defendant's request for an evidentiary hearing and found that the settlement license was restricted to the products for which royalties were to be paid.*fn36 Here, according to Abbott, the situation is the mirror image. The present settlement license contained no product restriction -- yet Medinol now seeks to impose such a restriction. Abbott also notes that in Manning, the Second Circuit rejected a pro se plaintiff's attempt to obtain an evidentiary hearing as to the intent of the parties in reaching a settlement, finding that the final written settlement agreement (which included clarifications by the court) did not modify the settlement terms placed on the record.

VI. MEDINOL'S RESPONSE

Medinol responds to Abbott's objections with two principal and related arguments. Acknowledging that the settlement stated on the record is valid and enforceable, Medinol first argues that the settlement contained "a limitation of the scope of the license: the reference to 'Guidant'".*fn37 As a corollary, Medinol argues that the parties were only litigating the products that had been sold by Guidant -- namely the Vision and Xience stents. Medinol's second argument, flowing inexorably from its first, is that it is Abbott, not Medinol, that is seeking to add a term to the settlement -- the term that the license is unrestricted -- when no such term was stated on the record.*fn38

In sum, the parties agree that the words that appear on the record embody a valid and enforceable settlement agreement. Abbott argues that the agreement does not contain a field-of-use restriction, and that Medinol is attempting to add one after the fact. Medinol argues that the parties' use of the term "Guidant" is a field-of-use restriction, and that Abbott is attempting to add licenses for products other than the V/X stents.

VII. DISCUSSION AND CONCLUSION

I begin by confirming the important point with which the Magistrate Judge began her Report and Recommendation. A settlement stated on the record is "one of the strongest and most binding agreements in the field of the law" and is thus entitled to substantial deference.*fn39 A court should be extremely hesitant to pry into the thoughts and motives of the parties after the fact in an attempt to discern their intent in settling a case. There are many reasons to settle a matter and a court is not in a particularly good position to understand those reasons. It almost goes without saying that an oral statement of a settlement is not fully integrated and complete. It is, by definition, an outline of terms that the parties later intend to flesh out and reduce to writing. "A trial court['s] inherent power to enforce summarily a settlement agreement where the terms of the agreement are 'clear and unambiguous' . . . is especially clear where the settlement is reported to the court during the course of a trial or other significant courtroom proceedings.'"*fn40 A settling party -- no matter how acute its buyer's remorse -- may not assert ambiguity to undo the settlement when the record contains an agreement that is clear on its face. The mere fact that a settlement is stated orally and in outline form should not be a license for courts to circumvent the parol evidence rule with evidentiary hearings. Such circumvention transforms final, unambiguous in-court settlements into litigation ploys.

I conclude that the terms of the settlement were clear and unambiguous. As a result, there was no need to hold an evidentiary hearing. When the terms of a contract are clear, it is error to cite extrinsic evidence in order to interpret that contract.*fn41 "Importantly, the determination of whether contract language is unambiguous 'is made by the court with reference to the contract alone.'"*fn42 "In the circumstances of this case, there were no[] disputed issues of material fact that required a hearing. Here, the parties stated on the record both the terms of the settlement and their unqualified agreement to it. '[N]o hearing is necessary where there is no dispute as to the existence of a settlement.'"*fn43

The long and short of it is that the settlement placed on the record by the parties on the evening of the settlement contained no field-of-use restriction. The license Medinol gave Abbott to use the '381 patent family included a geographic limitation and was specified to include "related patents, continuations and reexaminations," but was unrestricted as to its use.*fn44 "This case demonstrates the validity of an old legal truism: God may know but the record must show."*fn45

To reach this result, I need only address Medinol's argument that a field-of-use restriction was indeed stated on the record by way of the parties' consistent reference to the settlement between Medinol and Guidant and to the license Medinol granted to Guidant. Medinol's reliance on this argument will not carry the day.

It is uncontested that "Guidant sold its entire vascular intervention business -- including its stent business -- to Abbott."*fn46 On April 21, 2006, after this sale, Boston Scientific Corporation acquired the remainder of Guidant.*fn47 Thus, by July 12, 2006, the date of the settlement, Guidant was no longer in the stent business and had no use for this license. This chronology shows beyond a doubt that both parties knew that Abbott was the intended licensee, not Guidant. In addition, even under the Magistrate Judge's interpretation, the license covered "generational improvements" on Guidant's existing stents. It is obvious that Guidant would make no "improvements" as it was out of the stent business. This, too, reveals that Medinol negotiated a fully paid-up license with Abbott, not Guidant. Finally, the settlement stated on the record indicates that "Guidant will pay $[sealed] for a paid up license."*fn48 Obviously, this payment would be made by Abbott, not Guidant.

Medinol's argument -- that the use of the term "Guidant" was the equivalent of stating a product restriction on the license -- is a leaking sieve. In a declaration filed in support of the motion to enforce the settlement, Medinol's head and founder, Dr. Jacob Richter, stated that the intended license had evolved to include "colorable variations" of the V/X stents.*fn49 Clearly, Guidant was incapable of making any variations -- only Abbott was in the business of manufacturing stents. Thus, Medinol's interpretation of a field-of-use restriction to those products manufactured by Guidant -- the V/X stents -- makes no sense because it is Abbott that will continue to develop and market stents, including variations on the V/X stents. Medinol's interpretation also supports Abbott's argument that in agreeing to the product restriction now urged by Medinol, Abbott would be buying a future litigation. There can be no doubt that it is Abbott that will manufacture and sell the Xience stent (which was never sold by Guidant) and that will create "improvements" to the V/X stents.*fn50 If Abbott had agreed to the product restriction that Medinol now argues is found in the plain language of the settlement stated on the record, Abbott would face a new patent infringement suit every time it developed a new generation of the V/X stents. This result defies the record, logic, and common sense.

Moreover, to enforce a restriction such as the one now urged by Medinol would be bad policy. For an on-the-record settlement agreement to be enforceable, each party must have an opportunity to be heard as to the settlement terms, including an opportunity to clarify, correct, or object to the other party's statements or omissions regarding the settlement agreement. Medinol had the opportunity to state the terms of the settlement (which it did), including field-ofuse restrictions (which it did not), and to voice any objections to Abbott's statements or omissions. Abbott had the same opportunity, which it used to add or clarify several terms, including the patents licensed and the geographic restriction. For a court to impose a field-of-use restriction at this stage would deny Abbott the opportunity to object to such a restriction.

In all, the missing term is clearly material and very important. If Medinol had meant to restrict its license to two products it had only to say so on the record.*fn51 If this term, which it now deems critical, had defeated the settlement, then so be it. It is unfair at this stage -- to both Abbott and the Court -- to ask the Court to read language into the agreement that was not stated on the record. I reach this conclusion even while mindful of the fact that the parties' negotiating history supports the Magistrate Judge's conclusion that up until the evening of the settlement, the parties had negotiated both a restricted and an unrestricted license to Medinol's '381 patent and the family of related patents, and that in their most recent discussions they had focused on a license limited to the V/X stents. Nonetheless, when the parties reached a settlement and placed it on the record, they stated no such restriction. I decline to add a material term to an agreement that was never expressed on the record.

For these reasons, Abbott's motion to enforce the settlement is GRANTED and Medinol's motion is DENIED. The parties are directed to prepare a judgment in accordance with this Opinion and the Clerk of the Court is directed to close this case upon entry of the judgment.

SO ORDERED

Shira A Scheindlin, U.S.D.J.


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