IP Law Daily Award of no damages resulting from acquisition of company that failed to disclose patent license was error
Friday, October 26, 2018

Award of no damages resulting from acquisition of company that failed to disclose patent license was error

By Nicholas Kaster, J.D.

In an action for breach of contract and fraud for failing to disclose a patent license agreement related to its purchase of a bowel management product, a federal district court erred in concluding that the plaintiff, Hollister, Inc., was entitled to no damages, according to the U.S. Court of Appeals for the Eleventh Circuit. The lower court erred when it measured damages from the time the infringement action was brought, rather than from the date of the breach, as required by Florida law. It committed a second, separate error, when it concluded that Hollister failed to prove the value of a reasonable royalty and thus awarded it no damages (Hollister Inc. v. Zassi Holdings, Inc., October 25, 2018, per curiam.).

In 2006, Hollister, Inc. purchased assets from defendant Zassi Holdings, LLC related to Zassi’s bowel management system product, including its interests in two pending patent applications. In the transaction, Zassi and its founder represented to Hollister that it was transferring the rights to the intellectual property free and clear of any licenses. Several years later, after the patents issued, Hollister brought an infringement action against a competitor. The suit failed because Zassi had given the competitor a license to use the intellectual property. It was only at that point that Hollister learned of this licensing agreement.

After losing that litigation, Hollister then sued Zassi and its founder for fraud and breach of contract based on their failure to disclose the license. In a bifurcated proceeding, a jury found the defendants liable for fraud and breach of contract. At the bench trial to determine Hollister’s damages, the district court calculated the damages as of the date when Hollister learned of the fraud. But Florida law required that the damages be calculated as of the date of the breach, meaning the damages should have been calculated as of a date four years earlier, when the asset purchase transaction closed. The district court made an additional error when, in calculating damages as of the later date, the court erroneously concluded that Hollister had failed to prove any damages and awarded it nothing. Given these two layers of error, the Eleventh Circuit reversed and remanded the case for a new trial.

In the first point, the appellate court held that the district erred as a matter of law in measuring Hollister’s damages for the fraud claim as of 2010 when Hollister brought its unsuccessful infringement action against the competitor, rather than as of 2006 when the defendants committed the fraud and breached the contract.

At trial, Hollister relied on a benefit of the bargain theory to prove its damages. Hollister asserted that if the facts as represented by the defendants about the non-existence of a license agreement had been true, it would have had the right to enforce the patent in an infringement action. However, the appellate court noted that, under Florida law, Hollister was required to prove its damages as of the time of the fraud—that is, in 2006 when the Zassi asset purchase closed. Yet the district court, in effect, calculated Hollister’s damages as of 2010—after the patents had issued and Hollister sued the competitor. This was error, said the court. It was too speculative to treat the amount that a competitor would have paid as a royalty for a license in 2010 as establishing the value of a license four years earlier. This is particularly true because in 2006 a license would have been less valuable due to the fact that no patent had yet been granted for the technology, the court noted.

Second, the appellate court held that the lower court erred in concluding that Hollister failed to prove it was entitled to any damages. Even assuming that it was correct for the district court to use a damages model that looked to the amount that Hollister would have recovered in the hypothetical infringement action in 2010 to calculate its benefit of the bargain damages for the fraud that occurred in 2006, the district court erred in concluding that Hollister failed to prove it would have recovered any damages in the hypothetical infringement action.

The appellate court disagreed with the district court because Hollister’s evidence—although imperfect—established that a reasonable royalty in 2010 had value and thus Hollister would have recovered some damages in the hypothetical infringement action.

The appeals court acknowledged that on appeal Hollister has challenged only the district court’s conclusion that Hollister failed to offer any evidence of the value of a reasonable royalty in the hypothetical infringement action; it did not argue that the district court erred in measuring its damages for fraud that occurred in 2006 by looking to the damages that Hollister would have recovered in a hypothetical infringement action brought in 2010. But, the Eleventh Circuit held that it was appropriate to address both of these errors so that the district court, upon remand, can award damages using a model that—consistently with Florida law—calculates Hollister’s damages as of the time when the fraud occurred.

Accordingly, the Eleventh Circuit reversed the district court’s judgment awarding no damages to Hollister. The case was remanded for a new trial on damages.

This case is No. 16-17734.

Attorneys: James D. Adducci (Adducci, Dorf, Lehner, Mitchell & Blankenship, PC) for Hollister Inc. Taylor Wayne Casey (The Casey Firm, PLLC) for Zassi Holdings, Inc.

Companies: Hollister Inc.; Zassi Holdings, Inc. a/k/a Zassi Medical Evolutions, Inc.

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