Institut Pasteur v. Cambridge Biotech ( 1997 )

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 96-2028
INSTITUT PASTEUR AND PASTEUR SANOFI DIAGNOSTICS,
Appellants,
v.
CAMBRIDGE BIOTECH CORPORATION,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Cyr, Boudin and Lynch,
Circuit Judges.
Jeffrey D. Sternklar, with whom Michael Gottfried and Burns &
Levinson LLP were on brief for appellants.
Joseph F. Ryan, with whom Jeffrey L. Jonas, Anthony L. Gray,
Andrew P. Strehle and Brown, Rudnick, Freed & Gesmer, P.C. were on
brief for appellee.
January 17, 1997
CYR, Circuit Judge. Unsuccessful in their intermedi-
CYR, Circuit Judge.
ate appeal to the district court, Institut Pasteur and Pasteur
Sanofi Diagnostics [collectively: "Pasteur"] again appeal from
the bankruptcy court order which confirmed the chapter 11 reorga-
nization plan ("Plan") proposed by debtor-in-possession Cambridge
Biotech Corporation ("CBC"), the holder of two licenses to
utilize Pasteur patents. The Plan provision central to the
present dispute calls for the sale of all CBC stock to a subsid-
iary of bioMerieux Vitek, Inc. ("bioMerieux"), a major competitor
of appellant Pasteur. Finding no error, we affirm.
I
I
BACKGROUND
BACKGROUND
CBC manufactures and sells retroviral diagnostic tests
for detecting the human immunodeficiency virus (HIV) associated
with AIDS. Its HIV diagnostics division annually generates
approximately $14 million in revenues. Institut Pasteur, a
nonprofit French foundation engaged in AIDS-related research and
development, owns various patented procedures for diagnosing HIV
Virus Type 2 ("HIV2 procedures"). Pasteur Sanofi Diagnostics
holds the exclusive right to use and sublicense Institut
Pasteur's patents.
In October 1989, CBC and Pasteur entered into mutual
cross-license agreements, whereby each acquired a nonexclusive
perpetual license to use some of the technology patented or
licensed by the other. Specifically, CBC acquired the right to
incorporate Pasteur's HIV2 procedures into any diagnostic kits
2
sold by CBC in the United States, Canada, Mexico, Australia, New
Zealand and elsewhere.1
Each cross-license broadly prohibits the licensee from
assigning or sublicensing to others. See Royalty-Free Cross-
License, at 7.1; Royalty-Bearing Cross-License, at 8.1 ("[N]o
other person shall acquire or have any right under or by virtue
of this Agreement."). Nevertheless, either Pasteur or CBC was
authorized to "extend to its Affiliated Companies the benefits of
this Agreement so that such party shall remain responsible with
regard [to] all [license] obligations." Id. 1.4. "Affiliated
Company" is defined as "an organization which controls or is
controlled by a party or an organization which is under common
control with a party." Id.
CBC filed its chapter 11 petition on July 7, 1994, and
thereafter continued to operate its retroviral diagnostic testing
business as debtor-in-possession. Its reorganization plan
proposed that CBC assume both cross-licenses, see 11 U.S.C. 365
(executory contracts),2 continue to operate its retroviral
diagnostics division utilizing Pasteur's patented HIV2 proce-
dures, and sell all CBC stock to a subsidiary of bioMerieux, a
giant French biotechnology corporation and Pasteur's direct
1These cross-licenses expressly provide that Massachusetts
law governs their interpretation. See Royalty-Free Cross-Li-
cense, at 9; Royalty-Bearing Cross-License, at 10.
2The parties agree that the cross-licenses are "executory
contracts," since substantial performance remains due by both
parties. See Summit Inv. & Dev. Corp. v. Leroux (In re Leroux),
69 F.3d 608, 610 n.3 (1st Cir. 1995).
3
competitor in international biotechnology sales. Pasteur previ-
ously had licensed bioMerieux to use its HIV2 procedures, but the
earlier license related to a single product manufactured by
bioMerieux (i.e., bioMerieux's VIDAS automated immunoassay test
system), and applied only to VIDAS sales in markets other than
the United States, Canada, Mexico, Australia, and New Zealand,
markets expressly encompassed within the CBC cross-licenses.
Not surprisingly, in due course Pasteur objected to the
Plan. Citing Bankruptcy Code 365(c), 11 U.S.C. 365(c), it
contended that the proposed sale of CBC's stock to bioMerieux
amounted to CBC's assumption of the patent cross-licenses and
their de facto "assignment" to a third party in contravention of
the presumption of nonassignability ordained by the federal
common law of patents, as well as the explicit nonassignability
provision contained in the cross-licenses. Isabelle Bressac,
Pasteur's licensing director, attested that Pasteur would not
have granted its competitor, bioMerieux, or a subsidiary, a
patent license under the terms allowed CBC.
The bankruptcy court authorized CBC to assume the
cross-licenses over Pasteur's objection. It ruled that the
proposed sale of CBC stock to bioMerieux did not constitute a de
facto "assignment" of the cross-licenses to bioMerieux, but
merely an assumption of the cross-licenses by the reorganized
debtor under new ownership, and that Bankruptcy Code 365(c)
enabled CBC to assume the cross-licenses as debtor-in-possession
because the prepetition licensing relationship between Pasteur
4
and CBC was neither "unique" nor "something in the category of a
personal services contract." In re Cambridge Biotech Corp., No.
94-43054, slip op. at 17-18, 24 (Bankr. D. Mass. Sept. 18, 1996);
Tr. 176-77.3 The district court upheld the bankruptcy court
ruling on intermediate appeal.
II
II
DISCUSSION
DISCUSSION
A. Appellate Jurisdiction
A. Appellate Jurisdiction
Citing our decision in Rochman v. Northeast Utils.
Serv. Group (In re Public Serv. Co. of N.H.), 963 F.2d 469 (1st
Cir.) ("Public Service"), cert. denied, 506 U.S. 908 (1992), CBC
now moves to dismiss the appeal for lack of appellate jurisdic-
tion. It contends that Pasteur failed to pursue all available
remedies for preserving a temporary stay of the confirmation
order pending appeal after this court lifted the temporary stay
on October 9, 1996.4 See Trone v. Roberts Farms, Inc. (In re
Roberts Farms, Inc.), 652 F.2d 793, 798 (9th Cir. 1981) (noting
that appellant should file motion to stay judgment with Circuit
3The bankruptcy court further found that the Plan had been
proposed in good faith, see 11 U.S.C. 1129(a)(3), and that the
stock sale to bioMerieux had been negotiated in good faith and at
arm's length. In re Cambridge Biotech Corp., No. 94-43054, slip
op. at 7, 12.
4A series of stays had prevented CBC from consummating the
Plan by August 2, 1996, as scheduled, and a final consummation
date was set for October 31, 1996. In early October, CBC asked
this court to vacate the pending stay, claiming that further
delay threatened irreparable injury. It represented that almost
half its employees had quit during the preceding year, jittery
clients had begun to cancel contracts, and that its revenues had
declined by 10%.
5
Justice if necessary). Since CBC substantially consummated its
Plan on October 21, 1996, it argues that Pasteur can no longer be
afforded complete relief because neither this court nor the
bankruptcy court has jurisdiction over the many third parties
affected by, and much of the res distributed pursuant to, the
consummated Plan. Finally, CBC argues, no court can now provide
Pasteur with meaningful partial relief, such as selective rescis-
sion of the stock sale or the cross-license assumption/assignment
provisions, because retention of these cross-licenses by CBC is
indispensable to any successful reorganization of its retroviral
diagnostics business, and, from bioMerieux's standpoint, is a
"deal-busting" component of the Plan. See Plan IX.B.2.a
("[P]rovisions of the Confirmation Order are nonseverable and
mutually dependent."). We disagree.
Contrary to CBC's suggestion, our Public Service
decision does not reduce to the simplistic theme that appellate
courts invariably are deprived of jurisdiction by the lack (or
premature dissolution) of a stay which results in substantial
plan consummation prior to final disposition of the appeal.
Rather, we rested our decision in Public Service primarily on two
circumstantial considerations. See In re Andreuccetti, 975 F.2d
413, 418 (7th Cir. 1992) (noting that Public Service contem-
plates that "'[t]he court should reach a determination upon close
consideration of the relief sought in light of the facts of the
particular case'") (citation omitted).
First, the equities weighed heavily against the appel-
6
lants in Public Service, who repeatedly and inexplicably failed
to avail themselves of interlocutory appeals from earlier denials
of their requests for stay by the courts below. As a consequence
of their notable lack of diligence, a full sixteen months had
elapsed from the date of confirmation, during which "implementa-
tion of the confirmed plan proceeded apace." In re Public Serv.,
963 F.2d at 472. In contrast, Pasteur assiduously preserved its
stay throughout the three-month period which elapsed following
confirmation, and, on the day this court dissolved the temporary
stay, we expedited the Pasteur appeal.
Second, Public Service involved extraordinarily intri-
cate Plan provisions, as well as a multi-billion dollar enter-
prise, with the result that any attempted Plan dismantling
following the substantial and unexcused lapses by appellants
would have produced "'a nightmarish situation for the bankruptcy
court on remand.'" Id. at 474 (citation omitted); see, e.g.,
Baker & Drake, Inc. v. Public Serv. Comm'n of Nev., 35 F.3d 1348,
1351-52 (9th Cir. 1994) (finding appellate jurisdiction, and
noting that reorganization plan at issue was "not a complex,
billion-dollar affair" like the plans in Trone and Public Ser-
vice). Although the CBC Plan is not without its own complexi-
ties, CBC is a much less complex enterprise than Public Service,
and its Plan was substantially consummated much more recently in
relation to the date of appeal.5
5The equitable and pragmatic tests employed in Public
Service are symbiotic. See In re UNR Indus., 20 F.3d 766, 769
(7th Cir.), cert. denied, 115 S. Ct. 509 (1994) ("There is a big
7
We need not resolve the jurisdictional challenge urged
upon us by CBC, however, since the merits of Pasteur's contention
that CBC's assumption of the cross-licenses and its sale of
stock to the bioMerieux subsidiary contravene Bankruptcy Code
365(c) are readily dispatched. See Casco N. Bank. N.A. v. DN
Assocs. (In re DN Assocs.), 3 F.3d 512, 515 (1st Cir. 1993)
(noting that appellate court may bypass jurisdictional questions
where appeal would falter on merits even assuming jurisdiction)
(citing Norton v. Mathews, 427 U.S. 524, 532 (1976)).
B. The Merits6
B. The Merits
Pasteur argues that the CBC Plan effects a de facto
assignment of its two cross-licenses to bioMerieux, contrary to
Bankruptcy Code 365(c)(1) which provides as follows:
The trustee [viz., CBC]7 may not assume or
assign any executory contract . . . , whether
or not such contract . . . prohibits or re-
stricts assignment of rights or delegation of
duties, if
(1)(A) applicable law excuses a party[]
other than the debtor[] [viz., Pasteur]
to such contract . . . from accepting
difference between inability to alter the outcome (real mootness)
and unwillingness to alter the outcome ('equitable mootness'),"
and "[u]sing one word for two different concepts breeds confu-
sion"; instead, appellate courts ultimately must ask "whether it
is prudent to upset the plan of reorganization at this late
date.") (citations omitted).
6We review the district court's conclusions of law de novo
and the bankruptcy court's findings of fact for clear error only.
See Petit v. Fessenden, 80 F.3d 29, 32 (1st Cir. 1996).
7As debtor-in-possession, CBC has substantially the same
rights and powers as a chapter 11 trustee, including the power to
assume executory contracts under Bankruptcy Code 365. See 11
U.S.C. 1107.
8
performance from or rendering perfor-
mance to an entity other than the debtor
or the debtor in possession, whether or
not such contract . . . prohibits or re-
stricts assumption or assignment; and
(B) such party [viz., Pasteur] does not
consent to such assumption or assignment
. . . .
11 U.S.C. 365(c)(1).
Pasteur argues that in order to encourage optimum
product innovation the federal common law of patents presumes
that patent licensees, such as CBC, may not sublicense to third
parties absent the patent holder's consent. See, e.g., Commis-
sioner v. Sunnen, 333 U.S. 591, 609 (1948). This federal common
law rule of presumptive nonassignability thus qualifies as an
"applicable law," within the meaning of Bankruptcy Code
365(c)(1)(A), which precludes Pasteur from being compelled to
accept performance from any entity other than CBC e.g.,
bioMerieux's subsidiary and therefore prevents CBC from either
assuming or assigning these cross-licenses. See Everex Sys.,
Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 679-80
(9th Cir. 1996) (federal patent law of nonassignability preempts
state law relating to patent license assignability). Further,
says Pasteur, even assuming that section 365(c) might allow a
debtor simply to assume the cross-licenses without a subsequent
assignment to a third party, CBC formally structured this Plan
transaction as an assumption by the debtor-in-possession, whereas
in substance it was an assignment of the cross-licenses to
bioMerieux, a complete stranger to the original cross-licensing
9
agreements.
These contentions are foreclosed by our decision in
Summit Inv. & Dev. Corp. v. Leroux (In re Leroux), 69 F.3d 608(1st Cir. 1995),8 which analyzed and interpreted companion
Bankruptcy Code subsections 365(c) and (e) and their relevant
legislative history.9 As in the present case, in Leroux we were
urged to interpret subsections 365(c) and (e) as mandating a
"hypothetical test." Under such an approach, the chapter 11
debtor would lose its option to assume the contract, even though
it never intended to assign the contract to another entity, if
either the particular executory contract or the applicable
nonbankruptcy law purported to terminate the contract automati-
cally upon the filing of the chapter 11 petition or to preclude
its assignment to an entity not a party to the contract. Id. at
612.
We rejected the proposed hypothetical test in Leroux,
holding instead that subsections 365(c) and (e) contemplate a
case-by-case inquiry into whether the nondebtor party (viz.,
8See Williams v. Ashland Eng'g Co., 45 F.3d 588, 592 (1st
Cir.) ("In a multi-panel circuit, newly constituted panels are,
for the most part, bound by prior panel decisions closely on
point."), cert. denied, 116 S. Ct. 51 (1995).
9Bankruptcy Code 365(e)(2)(A) provides that a statutory or
contractual termination provision, which is contingent upon the
filing of a bankruptcy petition, may be enforceable in bankruptcy
if the "applicable law excuses a party, other than the debtor, to
such contract or lease from accepting performance from or render-
ing performance to the trustee or to an assignee of such contract
or lease, whether or not such contract or lease prohibits or
restricts assignment of rights or delegation of duties; and (ii)
such party does not consent to such assumption or assignment . .
. ." 11 U.S.C. 365(e)(2)(A) (emphasis added).
10
Pasteur) actually was being "forced to accept performance under
its executory contract from someone other than the debtor party
with whom it originally contracted." Id. Where the particular
transaction envisions that the debtor-in-possession would assume
and continue to perform under an executory contract, the bank-
ruptcy court cannot simply presume as a matter of law that the
debtor-in-possession is a legal entity materially distinct from
the prepetition debtor with whom the nondebtor party (viz.,
Pasteur) contracted. Id. at 613-14 (citing H.R. Rep. No. 1195,
96th Cong., 2d Sess. 27(b) (1980); NLRB v. Bildisco &
Bildisco, 465 U.S. 513, 528 (1984)). Rather, "sensitive to the
rights of the nondebtor party (viz., Pasteur)," the bankruptcy
court must focus on the performance actually to be rendered by
the debtor-in-possession with a view to ensuring that the
nondebtor party (viz., Pasteur) will receive "the full benefit of
[its] bargain." Id. at 612-13 (citing S. Rep. No. 989, 95th
Cong., 2d Sess. 59 (1978), reprinted in 1980 U.S.C.C.A.N. 5787,
5845).
Given the pragmatic "actual performance" test adopted
in Leroux, the ultimate findings of fact and conclusions of law
made by the bankruptcy court10 below did not constitute error.
CBC simply does not occupy the same position as the debtor in
CFLC, Inc., 89 F.3d 673 (9th Cir. 1996), upon which Pasteur
10We are not persuaded by Pasteur's contention that the
failure to cite Leroux in the confirmation order indicates that
the bankruptcy court failed to follow it. Pasteur itself cited
Leroux at the July 1996 confirmation hearing, and the bankruptcy
court's ultimate findings faithfully track its model.
11
relies most heavily. The Plan in CFLC, Inc. unmistakably provid-
ed for an outright assignment of the debtor's patent license to
an entirely different corporation with which the patent holder
Cadtrak Corporation had never contracted. Id. at 679-80. By
contrast, CBC all along has conducted, and proposes to continue,
its retroviral diagnostic enterprise as the same corporate entity
which functioned prepetition, while utilizing Pasteur's HIV2
procedures in that same prepetition endeavor.
Pasteur nonetheless insists that the reorganized CBC is
different than the prepetition entity, not due merely to its
chapter 11 filing but because it is now owned by a different
legal entity than before namely, bioMerieux's subsidiary qua
CBC shareholder. Pasteur's contention finds no support, however,
either in Massachusetts law, see supra note 1, or in the cross-
license provisions it negotiated.
Stock sales are not mergers whereby outright title and
ownership of the licensee-corporation's assets (including its
patent licenses) pass to the acquiring corporation. Rather, as a
corporation, CBC "is a legal entity distinct from its sharehold-
ers." Seagram Distillers Co. v. Alcoholic Beverages Control
Comm'n, 519 N.E.2d 276, 281 (Mass. 1988) (citing 6 William M.
Fletcher, Cyclopedia of Corporations 2456 (1979 & Supp. 1986)).
Absent compelling grounds for disregarding its corporate form,
therefore, CBC's separate legal identity, and its ownership of
the patent cross-licenses, survive without interruption notwith-
standing repeated and even drastic changes in its ownership. See
12
id. (holding that corporation's sale of all its capital stock
does not alter its identity, nor effect a transfer of the
corporation's executory contracts or licenses); see also PPG
Indus. v. Guardian Indus. Corp., 597 F.2d 1090, 1096 (6th Cir.),
cert. denied, 444 U.S. 930 (1979) (same; distinguishing mere sale
of stock from a transfer of patent license as part of corporate
merger wherein merging licensee ends its corporate existence).
Pasteur cites no apposite authority to the contrary.
Furthermore, Pasteur's position finds no support in the
negotiated terms of its cross-licenses. As the patent holder
and given CBC's corporate form and the governing Massachusetts
law, supra Pasteur was free to negotiate restrictions on CBC's
continuing rights under the cross-licenses based on changes in
its stock ownership or corporate control. See id. at 1095
(parties may override law of merger by negotiating express patent
license provision); see also Seagram, 519 N.E.2d at 280-81.11
Nevertheless, these cross-licenses contain no provision either
limiting or terminating CBC's rights in the event its stock
ownership were to change hands. The generic nonassignability
provisions found in these cross-licenses, see, e.g., Royalty-Free
Cross-License, at 7.1 ("This Agreement . . . has been made
solely for the benefit of the parties hereto" and "no other
person shall acquire or have any right under or by virtue of this
11Notwithstanding Pasteur's reliance on the important policy
goals animating the federal common law of patents, the product-
innovation theme promoted under patent law may well be accommo-
dated by allowing patent holders to control sublicensing through
negotiated contract restrictions.
13
Agreement."), plainly do not address the circumstance presented
here. Rather, these nonassignability provisions simply beg the
essential question, which is whether bioMerieux's subsidiary, by
virtue of its acquisition of CBC stock, terminated CBC's rights
under the cross-licenses. Interpreted as Pasteur proposes, CBC's
own rights under the cross-licenses would terminate with any
change in the identity of any CBC stockholder.
Other cross-license provisions directly undercut
Pasteur's interpretation as well. See Willitts v. Roman Catholic
Archbishop of Boston, 581 N.E.2d 475, 478 (Mass. 1991) (noting
that a contract must be interpreted as a whole). These cross-
licenses explicitly authorize CBC to share its license rights
with any "affiliated company," which on its face presumably
encompasses a parent corporation such as bioMerieux's subsidiary.
Cross-Licenses, at 1.4 (defining "Affiliated Company" as "an
organization which controls . . . a party or an organization
which is under common control with a party"); see supra Section
I. Yet more importantly, CBC insisted upon a provision which
would afford it the unilateral right to terminate any sublicense
Pasteur might extend to a company called Genetic Systems "if
control of Genetic Systems shall . . . be acquired, directly or
indirectly, by any person or group of connected persons or
company not having such control at the date hereof, by recon-
struction, amalgamation, acquisition of shares or assets or
otherwise." Royalty-Free Cross-license, at 2.3 (emphasis
added); see PPG Indus., 597 F.2d at 1096 (noting that patent
14
holder's express reservation of change-of-stock-ownership condi-
tion in two patent licenses suggested its intention not to
reserve condition in nine other patent licenses); see also
Plumbers & Steamfitters Local 150 v. Vertex Constr. Co., 932 F.2d
1443, 1449 (11th Cir. 1991) ("[T]he doctrine of expressio unius
est exclusio alterius instructs that when certain matters are
mentioned in a contract, other similar matters not mentioned were
intended to be excluded."). Taken together, these provisions
persuade us that Pasteur foresaw, or reasonably should have
foreseen, that CBC might undergo changes of stock ownership which
would not alter its corporate legal identity, but nonetheless
chose not to condition the continued viability of its cross-
licenses accordingly.12
12Lastly, Pasteur misplaces reliance upon In re Alltech
Plastics, Inc., 5 U.S.P.Q.2d 1806 (Bankr. W.D. Tenn. 1987), where
it was held that section 365(c) precluded an entity, which had
acquired the corporate debtor's stock pursuant to a chapter 11
reorganization plan, from exercising the debtor's rights under a
prepetition patent license. Following the conversion of its
original chapter 11 reorganization case to a chapter 7 liquida-
tion, Alltech discontinued all operations and discharged its
employees. Before the debtor once again converted to chapter 11,
its trustee liquidated virtually all its assets, except for its
patent license. Noting that plan confirmation is a fact-inten-
sive, equity-based inquiry, id. at 1813, the bankruptcy court
characterized the sale of Alltech's stock to Fluoropak Container
Corporation as a de facto assignment of the patent license to a
noncontracting party. It so held because unlike CBC, Alltech had
ceased to exist except as a "shell." Id. at 1807 & 1810 (noting
that "shell" emerging after Alltech's chapter 7 conversion "is in
reality a different entity than the prepetition Debtor"). The
bankruptcy court specifically observed that the "attempted
innovative rebirth of a corporate shell is not analogous to a
sale of stock by an active corporation," id. at 1810-11, and that
"the present case is distinguished from one where the reorganiz-
ing debtor, operating continuously and in good standing with its
licensor, seeks to approve the sale of its stock [to a third
party]," id. at 1812. The bankruptcy court further noted that
15
III
III
CONCLUSION
CONCLUSION
As CBC remains in all material respects the legal
entity with which Pasteur freely contracted, Pasteur has not made
the required individualized showing that it is or will be de-
prived of "the full benefit of [its] bargain," Leroux, 69 F.3d at
612-13, under the ruling challenged on appeal. Accordingly, the
district court judgment is affirmed and costs are awarded to
appellee.
So ordered.
So ordered.
the lack of demonstrated expertise on the part of Fluoropak, in
utilizing the patented process to manufacture toxic-material
containers, likewise posed a serious public safety risk. Id.These distinguishing circumstances make Alltech inapposite.
16