One of the banes of any practicing patent attorney's professional existence is counseling clients on licensing agreements where the parties attempt to avoid setting forth definitive terms on contract provisions regarding circumstances expected to arise in future. This is an understandable inclination, because such terms are likely to depend on such future circumstances that neither party wishes to anticipate and thus later find that they are at a disadvantage as a consequence. But such an inclination neglects to consider other ways to structure a contract to avoid these risks, and also neglects to acknowledge the possible consequences of failing to address these issues during current contract negotiations. For such clients, the Federal Circuit's recent decision in Phytelligence, Inc. v. Washington State University provides a cautionary tale (as well as an example for the intrepid attorney to use for convincing such clients of the pitfalls that can arise and problems that can be created by fainthearted conduct during contract negotiations).
The predicate facts are these. WSU and Phytelligence negotiated a Propagation Agreement for propagating a new apple cultivar named WA38 and patented by WSU. The Propagation Agreement permitted Phytelligence to propagate the trees but not to sell them unless the company obtained permission under a separate license. The relevant provision of the Propagation Agreement provided that:
If [Phytelligence] is an authorized provider in good standing . . . by signing this Agreement, [Phytelligence] is hereby granted an option to participate as a provider and/or seller of Plant Materials listed in Exhibit A, if the Cultivar is officially released by WSU and becomes available for licensing by [WSU] . . . . [Phytelligence] will need to sign a separate contract with [WSU], or an agent of [WSU], to exercise this option.
Prior to executing the Propagation Agreement, Phytelligence requested clarification of this provision, with regard to whether WSU intended to require a separate license (to which WSU replied in the affirmative). But this clarification came with a caveat: WSU informed Phytelligence that "there exists the possibility that if we license WA 38 to an exclusive licensee, that company/ person/ group may want to do his/her own plant propagation without outside assistance or may want to do that under contract with its own contractors." And further:
We [WSU] have no idea how WA 38 will be licensed at this time. It would take any form: under an open release through a nursery group, for example, to an exclusive license with a company, group of individuals, coop., etc. That decision has not yet been made, so there can be no guarantees made to anyone at this point.
(Which turned out to be not much of a license or even an agreement to enter into a license.) Under these circumstances, Phytelligence considered its agreement to be a "strictly research undertaking" that would permit the company to "experiment with propagation techniques"; WSU did not disagree. Phytelligence proposed that it "might make more sense" to make a "fee-for-service" arrangement or experiment with propagation on its own; WSU responded that the "fact of the matter is that what happens from a commercialization/licensing point of view in regard to WA 38 and future apple releases is completely out of [our] hands at the moment." Phytelligence ultimately signed the Propagation Agreement, specifically stating that in view of the need to sign this agreement as a precursor to any future licensing activity or agreement, this agreement was "fine as it is" (emphasis in opinion).
As it turned out, that decision (or at least the basis for it) was a mistake. Less than six months thereafter, WSU announced a Request for Proposals to companies interested in commercializing WA38 apples. The proposal was for an exclusive license to manage commercialization of these apples, including contracting with nurseries to propagate the apples. Phytelligence did not submit a proposal.
In due course WSU executed an exclusive license with Proprietary Variety Management (PVM) to manage commercialization, and the right to subcontract for nursery services exclusively with Northwest Nursery Improvement Institute (NNII). Under these contracts and licenses, as the opinion sets forth, "no industry participant could obtain a license to sell WA 38 without becoming a member of NNII."
Three years later, Phytelligence notified WSU that it wanted to exercise its option under Section 4 of the Propagation Agreement. Pursuant to the option clause in Section 4, WSU notified Phytelligence that it needed to sign a separate contract with PVM as WSU's agent. In its turn PVM notified Phytelligence that it needed to join the NNMI, which the company refused to do and notified WSU that this requirement was not contained in Section 4 of the Propagation Agreement. WSU provided Phytelligence with three options, two of which did not require membership in NNMI. Phytelligence rejected these options and thereafter, WSU terminated the Propagation Agreement on the grounds that Phytelligence had materially breached the Propagation Agreement by selling and delivering WA38 to a third party without a license, and for patent and trademark (COSMIC CRISP) infringement.
Phytelligence brought suit in Washington State court against WSU for breach of the Propagation Agreement for granting an exclusive license with PVM; Phytelligence sought damages and specific performance, to wit, "issuing a license to Phytelligence to propagate and sell commercially WA38 apples." In counterclaims WSU alleged Phytelligence had infringed its patents and trademarks and removed the action to federal court. The District Court granted summary judgment in favor of WSU on the University's motion that Section 4 was an "unenforceable agreement to agree." The parties stipulated to an injunction to permit this appeal and WSU waived any money damages it had sought before the District Court.
The Federal Circuit affirmed, in an opinion by Judge Reyna joined by Chief Judge Prost and Judge Stoll. With regard to the patency of Section 4 as an enforceable term of the Propagation Agreement, the Court analyzed this provision under Washington State contract law. The law instructs the court to look at the "reasonable meaning of the contract language to determine the parties' intent," according to the opinion, citing Hearst Commc'ns, Inc. v. Seattle Times Co., 115 P.3d 262, 267 (Wash. 2005) (termed the "objective manifestation theory"). This analysis is based on the "ordinary, usual, and popular meaning" of contract terms absent the parties manifesting a different meaning when the court considers the entire agreement. Under Washington State law, an agreement to agree is unenforceable, because "[a]n agreement to agree is an agreement to do something which requires a further meeting of the minds of the parties and without which it would not be complete," quoting P.E. Sys., LLC v. CPI Corp., 289 P.3d 638, 644 (Wash. 2012). Citing this authority, the opinion contrasts an "agreement having open terms" as being one in which "the parties intend to be bound by the key points agreed upon with the remaining terms supplied by a court or another authoritative source, such as the Uniform Commercial Code." Under these principles and precedent, the Federal Circuit considered Section 4 to be an unenforceable agreement to agree because under the plain meaning of the words in the Propagation Agreement the exercise of the option required a separate contract between the parties wherein the terms of such contract were not set forth, even in principle, in Section 4. (Some of the Court's reasoning is practical: the opinion states "the Propagation Agreement provides the court with no objective method for determining the terms of the 'separate contract' between Phytelligence and WSU (or its agent).")
The Federal Circuit also rejected Phytelligence's attempt to introduce and rely on extrinsic evidence to support its appeal of the District Court's summary judgment decision. This extrinsic evidence included a form constituting "WSU-approved standard licensing terms" which negated any need for future negotiations on the terms of the sought-after license. To the extent Washington State law permits such extrinsic evidence (under what it terms "the context rule") it is limited "to determin[ing] the meaning of specific words and terms used and not to show an intention independent of the instrument or to vary, contradict or modify the written word" (emphasis in opinion). On the merits, Phytelligence's theory fails as being "self-contradictory" according to the Court; the opinion states:
According to Phytelligence, the parties agreed that Phytelligence would receive the terms contained in the Form License. . . . The Form License, however, requires the "Licensee" to "be a NNII member nursery in good standing" in order to license WA 38. . . . It is also undisputed that no propagator was offered a license to WA 38 unless it was a member of NNII. Membership in NNII is the very requirement that Phytelligence alleges was not required by Section 4 and triggered WSU's breach. Thus, Phytelligence's claim of breach of contract fails under either premise. On the one hand, if the parties agreed that the "separate contract" in Section 4 would contain the standard terms of the Form License, then WSU did not breach Section 4 by requiring Phytelligence to become a NNII member. On the other hand, if the parties did not agree to such standard terms, Section 4 is unenforceable as an agreement to agree [citations to the record omitted].
And the e-mail colloquy between the parties prior to executing the Propagation Agreement did not support Phytelligence's arguments regarding the form contract supplying the needed specificity on licensing terms. Considering this extrinsic evidence, the Federal Circuit held that "the email communications between the parties indisputably indicate that at the time the parties executed the Propagation Agreement, WSU did not commit to any definite terms of a future license with Phytelligence."
And none of the other extrinsic evidence proffered by Phytelligence was any more persuasive to the Federal Circuit. This evidence included a declaration from Phytelligence's CEO regarding his understanding of the agreement (which the Court held did not create a genuine material fact dispute) (indeed, the opinion notes that the CEO's deposition testimony supported the conclusion that there was no understanding between the parties at the time the Propagation Agreement was signed regarding the terms of a future commercialization license). And the Court similarly rejected Phytelligence's allegation that WSU had established a "customary practice" of licensing its apple cultivars by licensing other cultivars, because there was no evidence that the parties agreed that any such customary practices would be followed in these licenses. Finally, the Court rejected Phytelligence's argument that the parties' conduct created a genuine issue of material fact on this question, because the parties engaged in negotiations over the terms of a license and could not agree on such terms.
The opinion lacks any mention of the principle that a contract can be construed against the drafter or that WSU, having the cultivar, the patent, and the trademark was in a position to strategically leave certain terms vague and then be in the position to make the best bargain for itself in future when the circumstances were more certain. Perhaps such considerations would have been relevant if the case had gone to trial, but by being able to have the District Court grant summary judgment sufficiently supported by Washington State law WSU was able to avoid these issues, to Phytelligence's detriment.
Phytelligence, Inc. v. Washington State University (Fed. Cir. 2020)
Panel: Chief Judge Prost and Circuit Judges Reyna and Stoll
Opinion by Circuit Judge Reyna
[View source.]
