Jang v. Boston Scientific (Third Circuit 2013)
Dr. Jang is an inventor on BSC's stent patent no. 5,922,021. Jang's contract requires BSC share 10% of royalty revenue with Jang, including "any recovery of damages" from infringers with a $60 million cap. The question in this case was whether a prior settlement with Cordis involved such a recover of damages.
In that prior 2003 case, Cordis and BSC countersued one another. A jury found that Cordis infringed the Jang patent and that BSC infringed Cordis patents. However, the parties settled before the court calculated or awarded damages. The settlement involved a payment of $1.725 billion from BSC to Cordis. BSC admitted that the settlement agreement represented the net difference between its expected damages and those it owed Cordis. In essence, the fact that Cordis infringed the BSC/Jang patent reduced the amount that BSC owed to Cordis. However, BSC argued that it did not owe Jang anything because BSC did not receive any damages or revenues in the deal. The district court sided with BSC on the pleadings on appeal, however, the Third Circuit reversed – finding that Jang's case should move forward. In particular, the appellate panel held that (1) the cash-offset qualifies as a "recovery of damages" and (2) that "BSC violated the implied covenant of good faith and fair dealing by structuring a settlement to thwart the agreed purpose of [the contract provision]."
A cash offset is the functional equivalent of a cash payment. . . . Courts have long recognized the equivalence of a debt offset and a cash payment through the common-law "right of setoff." . . . In this case, BSC made money on the Jang patent. It lost money on Cordis' separate claim. That its gain and loss were consolidated to produce one net payment does not change the fact that the Jang patent produced a monetary gain for BSC.
The real question is whether that gain qualifies as a "recovery." We see no reason why it should not; it makes no difference to BSC's bottom line whether it receives a check for the Jang infringement claim or reduces its debt by the same amount.
Writing in dissent, Judge Barry argued that the language of the contract was clear and contemplated damage recovery, not offsetting claims.
Although the case involves patent law it is at heart a contract dispute. Thus, the appeal was heard by the regional circuit court rather than the Federal Circuit. In a prior dispute over the same contract, the Federal Circuit claimed appellate jurisdiction apparently based upon the fact that a quasi-infringement analysis was required to settle the dispute. Under Gunn v. Minton, that case (if heard today) would not likely be heard by the Federal Circuit.
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A large number of patent assignment deals similarly involve substantial “upside.” If one of the parties to the deal is a litigation expert then the the other party may well assume that full enforcement of the deal will also require litigation.