IP Law Daily Flea-control patent owner not estopped from suing rival for contract breach
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Thursday, March 19, 2020

Flea-control patent owner not estopped from suing rival for contract breach

By Thomas Long, J.D.

A prior district court ruling unnecessarily addressed the rival’s liability for making a competing product that infringed a patent, in violation of an agreement.

The U.S. Court of Appeals in Cincinnati has determined that French animal health company Merial, Inc., was not collaterally estopped from pursuing a breach of contract agreement against competitor Sergeant’s Pet Care Products, Inc., regarding Sergeant’s marketing of a flea-and-tick control product that infringed a Merial patent, which Sergeant’s had agreed not to do. A prior ruling by a federal district court in Georgia—involving a related dispute over the same technology with Sergeant’s parent company—decided questions regarding Sergeant’s liability that were not necessary to the outcome of that proceeding and therefore lacked preclusive effect. Of particular note was the fact that Sergeant’s maintained a separate corporate identity from its parent, and the question of Sergeant’s liability, as opposed to the parent’s liability, was not at issue in the Georgia case. Accordingly, a Michigan district court’s decision to dismiss Merial’s lawsuit was reversed (Merial, Inc. v. Sergeant's Pet Care Products, Inc., March 18, 2020, Boggs, D.).

Merial made the popular flea control product Frontline Plus. It accused two competitors, Sergeant’s Pet Care Products, Inc., and Velcera, Inc., of infringing a patent that was commercially embodied in that patent. Although the parties came close to reaching a resolution of the dispute through negotiations and contractual agreements, the two competitors merged with or were bought by Perrigo Company plc. One of the settlement agreements provided a license to make a generic version of Frontline Plus, and the other prohibited doing so, causing problems between Merial and Perrigo that resulted in a lawsuit filed in the Northern District of Georgia. The district court ruled in favor of Perrigo, holding that it had a right to produce the generic version of Frontline Plus.

Merial then took legal action against Sergeant’s (now a subsidiary of Perrigo) in the Western District of Michigan. That court dismissed the new lawsuit on the ground of collateral estoppel, based on the Georgia court’s ruling. However, the Sixth Circuit said, it was "far from clear that the Georgia ruling should be preclusive." According to the appellate court, "Its language is tangled and (as to the question before us) contradictory. Moreover, Sergeant’s is a corporate entity distinct from Perrigo, and a ruling as to Sergeant’s liability does not appear to have been necessary to the Georgia decision." Although the appellate court considered it a close question, it decided to reverse the judgment of the Western District of Michigan.

Patent-in-suit; contract dispute. The patent-in-suit was U.S. Patent No. 6,096,329 ("the ’329 Patent"), which was granted in 2000 and expired in August 2016. It used a combination of the pesticides fipronil and methoprene. The Frontline Plus product embodying the patent’s invention was popular with consumers and was imitated by competitors. In 2010, Sergeant’s began marketing a product using the same pesticide combination ("combination product"). Sergeant’s also filed a request with the USPTO for reexamination of the ’329 patent. In April 2011, Sergeant’s and Merial entered into an agreement (the "Sergeant’s Agreement") under which Sergeant’s promised not to sell combination products during the life of the ’329 patent if the USPTO found in Merial’s favor (which it did). In 2012, Merial entered into another agreement with Velcera (the "Velcera Agreement"), which, unlike the Sergeant’s Agreement amounted to a license to sell a version of Frontline Plus after 2014 in exchange for royalty payments and certain protections. Merial agreed that it would not license the patent to anyone else.

However, the arrangement was disturbed when Perrigo acquired Sergeant’s through an asset purchase agreement in September 2012 and transferred Sergeant’s assets to a new subsidiary, Perrigo Animal Health. Then, in April 2013, Perrigo merged with Velcera and became the sole owner of the latter company’s assets, including its flea and tick products. The two agreements now were under one corporate roof. Disputes ensued. Perrigo took the position that, pursuant to the Velcera Agreement, it could produce and release infringing products through Sergeant’s. Perrigo also heard rumors that Merial had granted a license to another animal-products company, Ceva Animal Health, without notifying Perrigo. Merial denied this, but it was later confirmed to be true.

Georgia lawsuit. On December 12, 2014, Perrigo, Sergeant’s, Velcera, and FidoPharm (a subsidiary of Velcera) sued Merial in a Nebraska federal court, for breach of the Velcera Agreement. Two weeks later, Merial sued Perrigo and the other companies in the Northern District of Georgia, alleging breach of the Sergeant’s Agreement. The Nebraska court transferred that suit to Georgia, and the cases were consolidated. The Georgia district court granted a motion by Perrigo and its affiliated companies to dismiss the claims against them for lack of personal jurisdiction. This left Merial as the defendant in Perrigo’s suit for damages over the Velcera Agreement. With respect to Merial’s claims as a plaintiff (over the Sergeant’s Agreement), that court decided, although those claims no longer existed due to the dismissal on jurisdictional grounds, to rule on the merits of the contract claims over the Sergeant’s Agreement (purportedly because they undermined Merial’s position regarding the Velcera Agreement).

Issue on appeal. The question before the Sixth Circuit was to what extent the Northern District of Georgia’s decision was preclusive in the Sixth Circuit. According to the Sixth Circuit, it was difficult to discern what the Georgia court actually said, and how much of what it said was actually necessary to say. It was clear that the Georgia court treated the two agreements as creating simultaneous rights and obligations for Perrigo, which conflicted. The Georgia court reasoned that the contract-law rule of "last in time" should be applied, meaning that the Velcera Agreement controlled, to the extent that it conflicted with the Sergeant’s Agreement. However, on the question of preclusive effect, the Sixth Circuit said, "The opinion provides ample rhetorical ammunition to both sides of the dispute before us."

Collateral estoppel. The Michigan district court held that all four parts of the collateral-estoppel test were satisfied: that the identical issue was raised and actually litigated in the prior proceeding; that the determination of the issue was necessary to the outcome of the prior proceeding; that the prior proceeding resulted in a final judgment on the merits; and that the party against whom issue preclusion was sought had a full and fair opportunity to litigate the issue in the prior proceeding. The third and fourth elements of this test were not at issue on appeal. The first and second were.

Same question. The first part of the test asks whether the two suits involve the "same question" or "precise issue." Unfortunately, according to the Sixth Circuit, the Georgia district court provided evidence for both sides of the question. In favor of Merial’s position, the Georgia court had stated that the last-in-time rule applied when a company stepped into the shoes of different parties. However, said the Sixth Circuit, the "company" here could only be Perrigo; Sergeant’s did not step into Velcera’s shoes, only Perrigo did. Therefore, the last-in-time rule would apply to Perrigo, not Sergeant’s. Moreover, the Georgia court’s opinion spoke only of Perrigo, not Sergeant’s, and it was not tenable to read the opinion as treating every mention of Perrigo as also mentioning Sergeant’s by implication. Sergeant’s continued to have a separate corporate existence, the Sixth Circuit pointed out. In addition, the Georgia court referred to the companies separately at the end of its decision, meaning that, in the Sixth Circuit’s view, Sergeant’s could not "either logically or linguistically be assumed to be silently included every time Perrigo is mentioned in the opinion." The court also found various inconsistencies in the Georgia district court’s reference to Sergeant’s as an "affiliate" of Perrigo because the definition of "affiliate" used by the Georgia court included owners, but not subsidiaries or siblings. Further complicating matters was the fact that the Georgia court used a different definition of "affiliate" in other documents, in a way that would cover Sergeant’s. Although the question was a close call, the Sixth Circuit held that because the Georgia court mentioned explicitly at least once the right of Sergeant’s to produce infringing products, the Georgia court did speak to the precise issue now being litigated, meaning that Sergeant’s narrowly passed the first part of the test.

Necessity. However, Sergeant’s failed the second part—the necessity of determining the issue to the outcome of the prior proceeding. Noting that the standard for necessity was strict, the court applied a test analogous to but-for cause: but for the decision in question, could the previous ruling have been made? According to the Sixth Circuit, Merial had the stronger argument here. Because the Georgia court’s ruling concerned Merial’s liability to Perrigo (and Perrigo’s liability with respect to Merial’s counterclaims), a determination of Sergeant’s liability was not necessary. The Georgia decision referred to Perrigo as having not breached its obligations, while differentiating Sergeant’s as a separate entity. Even though Perrigo owned Sergeant’s, they were formally distinct, and Perrigo had elected to place Sergeant’s assets in a subsidiary corporation rather than to use them directly. These were not empty formalities, the Sixth Circuit said. The fact that Perrigo had inherited Sergeant’s and Velcera’s rights and obligations "flowing up" did not necessarily mean that Sergeant’s automatically inherited Perrigo’s and Velcero’s rights and obligations "flowing down." Adding that the lack of clarity of the Georgia district court’s decision as to what was precluded meant that it had to be construed narrowly, the Sixth Circuit concluded that collateral estoppel did not apply, and it reversed the Michigan district court’s decision to the contrary.

This case is No. 19-1133.

Attorneys: Gregory A. Castanias (Jones Day) for Merial, Inc. Paul W. Garrity (Sheppard, Mullin, Richter & Hampton LLP) for Sergeant's Pet Care Products, Inc.

Companies: Merial, Inc.; Sergeant's Pet Care Products, Inc.

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