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Preliminary injunction

ting it to withhold payments of royalties under the license during the pendency of the action while restraining Cordis from terminating the license in the event the patent is found to be valid. The motion will be denied.

Facts

On June 1, 1979, Cordis and TPL executed a license agreement. At that time, TPL was unable to afford the expense of challengRoyalty provisions ing the patent owned, by Cordis. It knew, however, that another company, Cardiac Pacemakers, Inc., was challenging the validity of the patent. Article VII(B) of the license agreement provides:

In general (§66.4231)

Licensor has right to terminate license if licensee breaches agreement by failure to pay royalties, even though patent was held invalid in action between licensor and different party, and licensee is not entitled to preliminary injunction permitting it to withhold royalty payments under license during pendency of its suit for declaration of patent invalidity, while restraining licensor from terminating license if patent is found valid.

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Cordis is now involved in litigation with Cardiac Pacemakers Inc. of Minnesota, over the patent rights herein licensed. Royally obligation hereunder shall terminate immediately as to any patent rights found invalid in any final unappealable judicial decision including that litigation. Furthermore, until that litigation is concluded, the TPL royalty obligation as to U.S. Patent Rights shall not exceed four hundred thousand ($400,000.00) if TPL is in operation in Group I or Group II and $500,000.00 if in Group III.

(Emphasis added). On August 31, 1981, the trial court in the referenced litigation ruled that the Cordis patent is invalid. Cardiac Pacemakers, Inc. v. Cordis Corp., CIVIL 477-427, 215 USPQ 604 (D. Minn. Aug. 31, 1981), appealed docketed, No. 81-2048, 216 USPQ 288 (1981). As of the date of this Memorandum and Order, the briefs for the appeal have been filed, but it has not yet been set on the calendar for argument.

The license agreement also contains other terms regarding termination of the license. Article VII(A) grants Cordis an option to terminate the agreement if TPL defaults on its obligations. Article VII(A) provides:

If TPL fails to make any statement or report required herein, fails to make any payment of royalties as herein provided for, or fails to perform any other obligation herein provided for, Cordis may notify TPL in writing of its intention to cancel this Agreement specifying the default complained of, and this Agreement shall then terminate sixty (60) days after such notice unless TPL makes good and cures the default complained of before the end of said sixty (60) days.

Article VII(D) grants TPL an option to terminate without any cause. It provides:

At any time, TPL may, at its option, terminate the license herein granted, upon sixty (60) days written notice to Cordis to that effect.

Several months prior to the decision by the trial court in Cardiac Pacemakers, Inc. v. Cordis Corp., TPL started withholding the royalty payments due under the agreement. Cordis has demanded payment and has given the notice required by Article VII(A). In this lawsuit, TPL now challenges the validity of the Cordis patent, relying on the trial court adjudication of invalidity in Cardiac Pacemakers, Inc. v. Cordis Corp. TPL seeks to restrain Cordis from exercising its option to terminate pursuant to Article VII(A) of the license agreement, while being relieved of its obligations to pay royalties pending the appeal in Cardiac Pacemakers, Inc. v. Cordis Corp.

Discussion

On a motion for a preliminary injunction, the Court must consider the following factors: [W]hether a preliminary injunction should issue involves consideration of (1) the threat of irreparable harm to the movant; (2) the state of balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest.

Dataphase Systems, Inc. v. C L Systems, Inc., 640 F.2d 109, 114 (8th Cir. 1981). The movant's likelihood of success on the merits and the threat of irreparable harm are the primary factors.

The plaintiff contends that it has established a strong likelihood of success on the merits by citing Cardiac Pacemakers, Inc. v. Cordis Corp. and arguing that if the decision is upheld on appeal, then Cordis will be collaterally estopped from contesting the merits of the challenge to the validity of the patent in this action. See Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 169 USPQ 513 (1970). The plaintiff contends that it will suffer irreparable harm if it must continue making royalty payments in order to preserve its rights under the licensing agreement. The plantiff contends that it is unclear how much, if any, of the royalty payments it may be able to recover if the patent is found invalid by the Eighth Circuit.

The motion before the Court involves an issue left open by the United States Supreme Court in Lear, Inc. v. Adkins, 395 U.S. 653,

162 USPQ 1 (1969) in which the Supreme Court overturned the doctrine of licensee estoppel which theretofore had prohibited a licensee from contesting the validity of the patent. In Lear, the Supreme Court enunciated the public policy of fostering "full and free competition in the use of ideas which are in reality a part of the public domain." 395 U.S. at 670, 162 USPQ at 8. To foster this policy, the Supreme Court determined that licensees must be permitted to challenge the validity of patents, and must be given an economic incentive to test the validity at the earliest opportunity. Therefore the Lear Court held that a licensee cannot be compelled to continue paying royalties due under a license agreement during the pendency of a lawsuit challenging the validity of a patent. 395 U.S. at 673, 162 USPQ at 8-9. The Supreme Court did not address the issue of whether the licensor could terminate the license agreement for nonpayment of royalties rather than compelling payment of the royalties.

It appears from the language of the license agreement that the parties had in mind the possibility that this issue would arise. The license agreement expressly provides that Cordis may terminate the agreement if TPL fails to make payments of royalties. It also expressly provides, "Royalty obligation hereunder shall terminate immediately as to any patent rights found invalid in any final unappealable judicial decision, including (the Cardiac Pacemakers, Inc. v. Cordis Corp.] litigation." TPL has given no reason why the trial court's ruling in the Cardiac Pacemakers, Inc. v. Cordis Corp. litigation should permit it to rewrite this contract by eliminating Cordis' option to terminate for nonpayment of royalties. TPL certainly contemplated the possibility that the trial court in that litigation would hold the patent to be invalid, yet Article VII(B) only applies to a "final unappealable" decision. Because the matter is currently on appeal, Article VII(B) has no application to this case.

Moreover, the Eighth Circuit Court of Appeals has held that Lear does not prevent a licensor from exercising a clause permitting termination of a license for nonpayment of royalties. In Nebraska Engineering Corp. v. Shivvers, 557 F.2d 1257, 195 USPQ 227 (8th Cir. 1977), a licensee filed an action challenging the underlying patent, and simultaneously filed a motion to enjoin the licensor from terminating the license agreement. The district court ordered that the royalty payments be deposited with an escrow agent pending the decision on the merits of the challenge to the patent's validity. The court of appeals

reversed, holding that the licensor had the right to terminate the license agreement if the licensee breached its obligation to pay the royalties. The court declined to rule on the issue of whether the licensee would be entitled to recover the royalties if it succeeded in having the patent declared invalid.

[1] The Shivvers holding directly controls this motion. The fact that the underlying patent was held invalid in a different lawsuit does not distinguish the facts of this action from Shivvers. The adjudication of invalidity of the patent is currently on appeal, and the Court will not speculate as to the outcome of the appeal.

As in Shivvers, this Court need not rule at this time on how much, if any, of the royalty payments made by TPL to Cordis may be recoverable should the patent ultimately be invalidated. It is sufficient to note that while the Eighth Circuit has not yet addressed this issue, a number of other circuits have. See,

e.g., Precision Shooting Equipment Co. v. Allen, 646 F.2d 313, 210 USPQ 184 (7th Cir. 1981); Warner-Jenkinson Co. v. Allied Chemical Corp., 567 F.2d 184, 193 USPQ 753 (2d Cir. 1977); St. Regis Paper Co. v. Royal Industries, 552 F.2d 309, 194 USPQ 52 (9th Cir.), cert. denied, 434 U.S. 996 (1977); Atlas Chemical Industries, Inc. v. Moraine Products, 509 F.2d 1, 184 USPQ 281 (6th Cir. 1974).

[2] Finally, the Court finds that there is no evidence before it that Cordis would be unable to repay the royalties in the event that it was ordered to do so. Therefore, the option of requiring royalty payments to be paid into an escrow account is inappropriate in this action. Shivvers, 557 F.2d at 1260; see Precision Shooting Equipment, 646 F.2d at 321.

Accordingly, It Is Hereby Ordered that the plaintiff's motion for a preliminary injunction is denied.

Entry of this Order is hereby stayed for ten days.

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Danville, Ill., Huebner & Worrel, Los
Angeles, Cal., and D.A.N. Chase, Kansas
City, Mo., for defendants,

Morgan, District Judge.

This'cause coming on to be heard on the motion of plaintiffs for a preliminary injunction against defendants, and due notice having been given to the defendants, and plaintiffs being represented in open court by their attorney, Thomas E. Harrington of Busch, Harrington & Porter; and defendants being represented in open court by their attorney, D.A.N. Chase of Kansas City, Missouri, and their local counsel, F. Daniel Welsch and William A. Young of Young, Welsch, Young and Hall; and the court having considered the Complaint, the Amended Complaint, the affidavits submitted in support of Plaintiffs' Motion for Temporary Restraining Order, the testimony of Douglas Allen, President of defendant Állen Archery, Inc., and the exhibits submitted to the court during the hearing in open court and in camera on the motion, and having heard the arguments of counsel, makes the following findings of fact and conclusions of law:

Findings of Fact

1. The Letters Patent in question were granted to defendant Holless W. Allen in 1969, who sold his interest therein to defendant Allen Archery, Inc., a corporation, by written assignment recorded in the U.S. Patent Office on June 18, 1974.

2. Said corporation is wholly owned by defendant Holless W. Allen and members of his family. Certain other matters pertaining to Holless W. Allen, Allen Archery, Inc., said assignment and said patent, including financial statements, were the subject of in camera proceedings and at defendants' request are the subject of a separate protective order entered herein. Said matters, including testimony and exhibits (to be kept under seal and to be opened only on order of court), are a part of the record of these proceedings and were considered by this court in arriving at the decision herein expressed.

3. Plaintiffs, pursuant to license agree ment (Exhibit A attached to the Complaint herein), have paid approximately $285,000 in royalties prior to August 10, 1977, to defendants (or either of them) pertinent to the patent in question, and it appears reasonably likely that plaintiffs will, within the next two years, become obligated under said license agreement for further royalties

to defendants in an amount approximating $500,000.

4. At the time of filing the Complaint, plaintiffs paid into this court the sum of $47,901.39, being the amount of the royalty payment admitted to be due under the agreement attached to the Complaint, and an additional $6,000 as bond pursuant to this court's Temporary Restraining Order, dated August 16, 1977.

5. Defendants' said patent has been, is, and it appears reasonably likely that it will in the future be the subject of other litigation.

6. Defendants, or one of them, being the patent owners, have disclaimed claims 1, 2 and 11 of the subject patent.

7. It is reasonably likely that the plaintiffs may prevail in this declaratory judgment action, and in that event it is reasonably likely that the defendant corporation would be unable to repay the substantial royalties paid by plaintiffs under said License Agreement.

8. Plaintiffs have reasonable fear that they would be irreparably damaged if required to pay royalties directly to defendants, or either of them, during the pendency of this lawsuit, because of potential inability to repay.

9. Where any finding of fact, in whole or in part, may be construed as a conclusion of law, it should be so construed.

Conclusions of Law

[1] 1. A licensee may contest the validity of a licensed patent, may challenge whether certain products fall within a license agreement, and may challenge whether he is entitled to more favorable terms which may have been given to other licensees. Lear v. Adkins, 395 U.S. 653, 162 USPQ 1 (1969).

[2] 2. A patent licensee who wishes to continue using a patent cannot withhold royalty payments without risking a patent infringement suit and an injunction against all future use of the patent.

[3] 3. Where there is strong indication that the patent owner might not be financially able to repay royalties at the end of the litigation, it should be deprived of its right to receive royalties in the interim, so long as they are safely paid into escrow as here required.

[4] 4. It is clear under the "BlonderTongue" doctrine [Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 169 USPQ 513 (1971)] that once a patent is declared invalid

in any district, that judgment automatically applies to any other district.

5. The issue of escrowing royalty payments where the defendant's financial ability to repay has been challenged appears to be a question of first impression within the Seventh Circuit.

6. No damage has been caused to defendants as a result of the temporary restraining order granted heretofore; defendants had intended to raise the subject matter of this complaint in this district; and there is a reasonable likelihood of success by plaintiffs in their declaratory judgment action and thus a reasonable likelihood of irreparable damage to plaintiffs if they were required to continue to pay royalties to defendants, or either of them, during the period required for such litigation.

7. Wherever any conclusion of law, in whole or in part, constitutes a finding of fact, it shall be so construed.

It is therefore ordered that the defendants Holless W. Allen and Allen Archery, Inc., a corporation, and their officers, attorneys, servants, agents, associates, members, employees, and all persons acting in conjunction with the defendants or at their direction be, and they are hereby, until further order of this court, restrained and enjoined from bringing any other action in any other court, whether state or federal, against the plaintiffs or their assigns with regard to any subject matter which has been, reasonably could be, or will be pleaded to or counter-claimed in this action, until the subject matter raised by the Complaint herein has been disposed of by a final court order, or otherwise by agreement of the parties approved by this court.

It is further ordered that the plaintiffs, Precision Shooting Equipment Co. and Paul E. Shepley, Jr., or their assigns, shall continue to pay into this court all amounts of royalties which shall accrue under the License Agreement attached to the Complaint, pending the final disposition of this matter by court order, or otherwise by agreement of the parties approved by this court; and it is further ordered that all royalties paid in to court by plaintiffs shall be deposited by the clerk of this court in an interest bearing account or invested in interest bearing securities of the United States of America until further order of the court.

It is further ordered that the bond on said temporary restraining order is hereby dis

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