Amer Cyanmid v. Fermenta ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
5-8-1995
Amer Cyanmid v Fermenta
Precedential or Non-Precedential:
Docket 94-5413
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
N0. 94-5413
AMERICAN CYANAMID COMPANY,
Appellant
v.
FERMENTA ANIMAL HEALTH COMPANY,
a Delaware corporation
On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civil Action No. 93-cv-04936)
ARGUED OCTOBER 28, 1994
OPINION VACATED APRIL 26, 1995
SUBMITTED PURSUANT TO LAR 34.1(a)
ON PANEL REHEARING MARCH 28, 1995
BEFORE: STAPLETON, HUTCHINSON and ROSENN, Circuit Judges
(Opinion Filed May 8, 1995)
John Vanderstar (Argued)
Christopher N. Sipes
Covington & Burling
1201 Pennsylvania Ave., N.W.
P. O. Box 7566
Washington, D.C. 20044
and
Donald A. Robinson
Robinson, St. John & Wayne
Two Penn Plaza East
Newark, N.J. 07105-2249
Of Counsel:
Ronald J. Cracas
Jane Y.C. Mathews
American Cyanamid Company
One Cyanamid Plaza
Wayne, N.J. 07470-8426
Attorneys for Appellant
Clinton R. Batterton (Argued)
Edward John Allera
Naomi Joy Levan
Akin, Gump, Strauss, Hauer & Feld
1333 New Hampshire Ave., N.W.
Suite 400
Washington, D.C. 20036-1511
Of Counsel:
James B. Daniels
Friedman Siegelbaum
7 Becker Farm Road
Roseland, N.J. 07068
and
Lars H. Liebeler
The Robinson Law Firm
717 D Street, N.W., #400
Washington, D.C. 20004
Attorneys for Appellee
OPINION OF THE COURT
STAPLETON, Circuit Judge:
The issue in this case is whether a 1980 contract
between the parties and a 1983 amendment thereto conveyed to
American Cyanamid Company ("Cyanamid") perpetual rights to use
the federal regulatory authority of Fermenta Animal Health
Company ("Fermenta") to market an animal feed supplement.
Cyanamid marketed the drug under the trademark Aureozol. Before
the district court, both sides maintained that these documents
are unambiguous, although each side differed on what was
unambiguously stated therein. The district court held that "the
plain language of the 1980 agreement and the 1983 amendment,"
when read against the background of the parties' pre-contract
negotiations and post-contract conduct, did not convey that
right. We will affirm.
I.
This dispute arises from a contract that was signed
between Cyanamid, a chemical and pharmaceutical conglomerate, and
Diamond Shamrock Corporation ("Diamond Shamrock") in 1980.
Fermenta, the defendant in this case, became the successor in
interest to Diamond Shamrock through an acquisition in 1985. The
purpose of the contract was to enable Cyanamid to produce and
sell an animal feed drug that Diamond Shamrock had developed and
was marketing. The drug was an antibiotic animal feed supplement
consisting of chlortetracycline, sulfathiazole and penicillin,
known as CSP 250. As consideration, Diamond Shamrock would
receive an advance royalty and future royalties from Cyanamid's
sales.
In order for Cyanamid to manufacture and sell Diamond
Shamrock's product, the contract granted it two distinct rights.
First, Cyanamid was given access to Diamond Shamrock's
proprietary information about its animal feed drug for the
purpose of manufacturing and selling it. Equally important, the
agreement obligated Diamond Shamrock to seek federal regulatory
authority to enable Cyanamid to sell the drug by applying for a
"supplemental NADA" designating Cyanamid as a distributor of the
drug.
The FDA licenses the sale in interstate commerce of
animal drugs by approving a manufacturer's New Animal Drug
Application (NADA), which remains on file with the FDA. Through
the NADA, the FDA approves both the properties of the drug and
its place and method of manufacture. See 21 U.S.C. § 360b(a).
In 1971, Diamond Shamrock had obtained FDA approval of a NADA for
its animal feed drug.1
Obtaining a NADA can be an expensive and lengthy
process because of the amount of resources that must be expended
on researching and demonstrating the safety and efficacy of the
proposed animal drug. However, a company may be able to avoid
the costs associated with obtaining its own NADA if it wishes to
market a drug identical to that already marketed by another
company which has obtained federal regulatory approval for the
sale of the drug. The company seeking to enter the market may
request the current NADA holder to apply to the FDA for a
"supplemental NADA" which designates the new market entrant as a
distributor of the product. See 21 C.F.R. § 514.8(a)(4)(v).2
1
. When Fermenta became the successor in interest to Diamond
Shamrock's animal drug business, it acquired Diamond Shamrock's
NADA authority, as noted in 21 C.F.R. § 558.15(g)(1).
2
. 21 C.F.R. § 514.8(a)(4)(v) provides in part:
A communication proposing a change in a new
animal drug application should provide for
any one of the following kinds of changes:
. . . .
(v) Provision for outside firm to
participate in the preparation, distribution,
or packaging of a new animal drug (new
Cyanamid entered into this contract with Diamond
Shamrock because its own animal drug, which competed in the
market with Diamond Shamrock's CSP 250, was under scrutiny by the
FDA for the possible carcinogenic effects of one of its
components, sulfamethazine. Cyanamid sought to "insure" itself
in the event the FDA took adverse action against its existing
animal product by expanding its own product line to include
Diamond Shamrock's animal feed supplement. Thus, in 1979, it
entered negotiations with Diamond Shamrock, hoping to obtain the
right to develop and sell Diamond Shamrock's product. Since
Cyanamid could not sell Diamond Shamrock's drug without federal
regulatory authority, the agreement required Diamond Shamrock to
prepare and file a supplemental NADA establishing Cyanamid's
facility as an alternate manufacturing site and designating
Cyanamid as a distributor of the drug. In addition to pursuing
an agreement with Diamond Shamrock, Cyanamid was formulating
plans to obtain its own NADA for an animal product consisting of
aureomycin, sulfathiazole and penicillin, a combination similar
to CSP 250. This was reflected in a letter sent from Cyanamid to
Diamond Shamrock during the course of negotiations in December of
1979.
Cyanamid and Diamond Shamrock executed their contract
on July 23, 1980. Diamond Shamrock obtained the supplemental
NADA in June of 1982 and the original five year contract period
(..continued)
distributor, packer, supplier, manufacturer,
etc.).
commenced on that date. Cyanamid thus enjoyed both commercial
and regulatory rights to manufacture and sell the animal feed
drug through June of 1987.
The contract also gave Cyanamid an option at the
expiration of the agreement to purchase a perpetual license from
Diamond Shamrock. Article 9.2 provides in part:
Upon expiration of the full term of this
Agreement . . . CYANAMID shall have the right
to obtain a perpetual, paid-up, non-exclusive
license, without right to sublicense, under
TECHNICAL INFORMATION as shall have been
licensed hereunder to CYANAMID upon the
payment of twenty-five thousand ($25,000)
dollars to DIAMOND SHAMROCK for such
perpetual rights.
App. 158.
The option described in Article 9.2 was exercised
prematurely by the parties in 1983 in the form of an amendment to
the agreement. The amendment provides in part:
You will grant to us [Cyanamid] a
perpetual paid-up nonexclusive license
without right to sub-license under TECHNICAL
INFORMATION as shall have been licensed under
the Agreement upon our payment to you of
$87,500 for such perpetual rights. . . .
All other terms and conditions of the
Agreement will remain in effect.
App. 165.
The dispute before the district court turned on whether
this 1983 amendment, when read together with the original
contract, gives Cyanamid a perpetual right to use the
supplemental NADA to sell CSP 250. Cyanamid argued that the 1983
amendment gave it such a right, but Fermenta insisted that such a
right ceased in 1987 with the expiration of the original
contract.
Fermenta acquired Diamond Shamrock's interest in the
contract in October of 1985, and from then through 1993, Fermenta
monitored Cyanamid's regulatory compliance with the NADA. Prior
to 1993, Fermenta never informed Cyanamid that its right to
reference its NADA had expired with the termination of the
original contract in 1987. Fermenta claims not to have realized
that the contract expired in June of 1987 until 1993, when
Fermenta more closely examined the entire contract because of
Cyanamid's alleged regulatory breaches associated with the
supplemental NADA. Fermenta thereupon demanded that Cyanamid pay
it $500,000, agree to pay a 10 percent royalty on all sales, and
grant it a paid-up, royalty-free license under any patent or NADA
which Cyanamid may have obtained on any related product. When
Cyanamid refused to comply, Fermenta sent a letter to the FDA
informing it that Cyanamid was no longer authorized to use the
supplemental NADA that accessed Fermenta's NADA.
In response to Fermenta's action, Cyanamid filed a
complaint in the U.S. District Court for the District of New
Jersey seeking a preliminary injunction and a declaration that it
held a perpetual, royalty-free license to use the supplemental
NADA so that it could continue to sell the product. Fermenta
counterclaimed, seeking a declaration that Cyanamid's right to
use the supplemental NADA had expired in 1987. The jurisdiction
of the district court was based on diversity, 28 U.S.C. § 1332.
After a one day evidentiary hearing at which it
listened to extrinsic evidence of intent tendered by each side,
the district court entered a declaratory judgment that Cyanamid
"did not purchase a perpetual right to use the NADA or
supplemental NADA." Dist. Ct. Order, No. 93-4936 (D. N.J.,
entered June 22, 1994). In its opinion, the district court
analyzed the structure and text of the original agreement and the
amendment and concluded that they could not reasonably be read to
convey to Cyanamid a perpetual right to utilize Diamond
Shamrock's regulatory authority. The court also concluded that
the extrinsic evidence provided no basis for interpreting the
scope of the rights conveyed by the agreements more broadly than
the parameters of those rights as defined by its analysis of the
structure and text.
We have conducted a plenary review of the district
court's conclusions. Kroblin Refrigerated Xpress, Inc. v.
Pitterich, 805 F.2d 96, 101 (3d Cir. 1986) (plenary review
conducted of district court's conclusion that term of contract
read against the background of the relevant extrinsic evidence
was unambiguous). While our analysis of the structure and text
of the agreement differs in one respect from that of the district
court, that difference is not material for present purposes and
our conclusions are the same as those reached by the district
court.
II.
The district court exercised its diversity
jurisdiction. This means that the law to be applied is that of
the forum state -- New Jersey. While the state law to which we
look includes New Jersey's choice of law rules, Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941), neither party
suggests any reason why a New Jersey court would apply other than
its own law to this dispute and both, by the case law cited in
their briefs, implicitly recognize New Jersey as providing the
controlling law of contracts. The parties do not contend,
moreover, that New Jersey's contract law differs in any material
way from the generally accepted principles of contract law
reflected in the Restatement (Second) of Contracts or from the
"traditional rules of contract interpretation" that we described
in Teamsters Indus. Emp. Welfare Fund v. Rolls-Royce Motor Cars,
Inc., 989 F.2d 132, 135 (3d Cir. 1993). Cyanamid successfully
urged the district court to follow the principles which we
articulated in Rolls-Royce and Fermenta relies heavily on those
principles before us. We there observed in the context of a
collective bargaining agreement alleged to be ambiguous:
Although federal law governs the
construction of collective bargaining
agreements, traditional rules of contract
interpretation apply when not inconsistent
with federal law. To decide whether a
contract is ambiguous, we do not simply
determine whether, from our point of view,
the language is clear. Rather, we "hear the
proffer of the parties and determine if there
[are] objective indicia that, from the
linguistic reference point of the parties,
the terms of the contract are susceptible of
different meanings." Sheet Metal Workers,
949 F.2d at 1284 (brackets in original)
(quoting Mellon Bank, N.A. v. Aetna Business
Credit, Inc., 619 F.2d 1001, 1011 (3d Cir.
1980)). Before making a finding concerning
the existence or absence of ambiguity, we
consider the contract language, the meanings
suggested by counsel, and the extrinsic
evidence offered in support of each
interpretation. Id.; Mack Trucks, 917 F.2d
at 111; see also Restatement (Second) of
Contracts § 223 cmt. b (1981) ("There is no
requirement that an agreement be ambiguous
before evidence of a course of dealing can be
shown. . . ."). Extrinsic evidence may
include the structure of the contract, the
bargaining history, and the conduct of the
parties that reflects their understanding of
the contract's meaning.
Id. at 135 (citations omitted).
These teachings appear to us to be consistent with
those of New Jersey law. In Atlantic Northern Airlines, Inc. v.
Schwimmer, 96 A.2d 652 (N.J. 1953), the Supreme Court of New
Jersey summarized this area of the law in the following terms:
Evidence of the circumstances is always
admissible in aid of the interpretation of an
integrated agreement. This is so even when
the contract on its face is free from
ambiguity. The polestar of construction is
the intention of the parties to the contract
as revealed by the language used, taken as an
entirety; and, in the quest for the
intention, the situation of the parties, the
attendant circumstances, and the objects they
were thereby striving to attain are
necessarily to be regarded. The admission of
evidence of extrinsic facts is not for the
purpose of changing the writing, but to
secure light by which to measure its actual
significance. Such evidence is adducible
only for the purpose of interpreting the
writing--not for the purpose of modifying or
enlarging or curtailing its terms, but to aid
in determining the meaning of what has been
said. So far as the evidence tends to show,
not the meaning of the writing, but an
intention wholly unexpressed in the writing,
it is irrelevant. The judicial interpretive
function is to consider what was written in
the context of the circumstances under which
it was written, and accord to the language a
rational meaning in keeping with the
expressed general purpose. Casriel v. King,
2 N.J. 45, 65 A.2d 514 (1949).
Id. at 656.
It is important for present purposes to note that
extrinsic evidence of the negotiations, conduct and other
circumstances of the parties is important to a court's analysis
of whether an agreement is ambiguous only to the extent, if any,
that such evidence provides "objective indicia that, from the
linguistic reference point of the parties, the terms of the
contract are susceptible of different meanings." Mellon Bank,
N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1011 (3d Cir.
1980). That is, extrinsic evidence is permitted because the law
recognizes that the meaning of words can depend on context, and
what may seem unambiguous without context (or in the context that
the judge may hypothesize, based on his or her own experience)
may be ambiguous when understood from "the linguistic reference
point of the parties." Id. See 3 Arthur L. Corbin, Corbin on
Contracts § 542 (1960). Cf. 4 Samuel Williston & Walter H. E.
Jaeger, A Treatise on the Laws of Contracts § 601, at 310-11 (3d
ed. 1961). But the focus must remain on the language chosen by
the parties, and a text unambiguous when accorded the commonly
understood meaning of its words cannot be disregarded unless the
extrinsic evidence is such as might cause a reasonable fact
finder to understand the text differently. See Mellon Bank, 619
F.2d at 1011 & 1012 n.13.
The point is well illustrated by Mellon Bank, N.A. v.
Aetna Business Credit, Inc., a case to which we looked in Rolls-
Royce for the "traditional rules of contract interpretation."
Rolls-Royce, 989 F.2d at 135. There, Mellon Bank and Aetna
Business Credit were commercial lending institutions. In the
transaction giving rise to the dispute, Mellon was the
construction lender and Aetna was the permanent lender. Mellon
alleged that Aetna breached their contract by refusing to
purchase the construction loan held by Mellon. Under the
agreement, Aetna had "no obligation to acquire the construction
loan from the construction lender in the event of . . .
insolvency of the Borrower." Mellon Bank, 619 F.2d at 1006.
Mellon contended that the parties intended "insolvency"
to mean that the borrower's liabilities exceeded its assets
without reference to the liabilities or assets of the borrower
that accrued from the particular project being financed. The
district court heard extrinsic evidence and held, based on the
conduct of the parties during their negotiations, that Mellon's
reading was "required by the clear allocation of lending risks
between" the contracting parties. Id. at 1008. We described the
district court's reasoning and the issue before us in the
following terms:
The district court found that Aetna in
analyzing the security for its permanent loan
did not consider the borrowers' cash flow,
did not condition its obligation upon any
occupancy level, and therefore concluded
"Aetna recognized that the financial
transaction in question was not a basis for
finding insolvency." The district court
cited no basis in the contract document or
wording of the insolvency clause for its
conclusion. Our task is to decide if the
district court permissibly used extrinsic
evidence to interpret the contract and, if
so, whether it drew the proper legal
conclusions therefrom.
Id. at 1009.
We reversed, holding as follows:
Although extrinsic evidence may be considered
under proper circumstances, the parties
remain bound by the appropriate objective
definition of the words they use to express
their intent. . . .
We have concluded that the district
court here exceeded the permissible boundary
of interpretation. . . . When the district
judge received Mellon's evidence it should
have rejected it as insufficient to vary the
meaning of a commercial term as well
established as "insolvent." In this case the
district court added a term which made the
condition a nullity. It ruled that, although
the solvency of the borrowers was a condition
in the written contract, the fact that the
borrowers' solvency was not significantly
considered by Aetna in evaluating the take-
out loan minimized or nullified this clause
of the contract.
. . . The fact that the insolvency of the
borrowers was not significantly considered by
Aetna in evaluating the take-out loan is
immaterial given the expression of that
concern in the written words of the contract.
Id. at 1013-14.
Our approach in Mellon Bank is consistent with the law
of New Jersey. Although the New Jersey Supreme Court in Atlantic
Northern Airlines extolled the use of extrinsic evidence to aid
in ascertaining the intent of the parties, even when the terms of
the instrument are otherwise unambiguous, it cautioned that such
evidence may not be used "for the purpose of modifying or
enlarging or curtailing" the terms of the contract. With this
understanding of the controlling law, we turn to examine the
structure and text of the agreements and then to consider the
extrinsic evidence offered by the parties.
III.
The preamble of the 1980 agreement clearly and tersely
states Cyanamid's two objectives in entering the agreement --
access to Diamond Shamrock's proprietary information and the
right to sell the drug under a supplemental NADA:
DIAMOND SHAMROCK has developed or otherwise
acquired certain proprietary information
relating to the manufacture of an animal feed
supplement and is the owner of an approved
New Animal Drug Application (NADA) which
permits the sale of such animal feed
supplement; and
. . . CYANAMID desires to manufacture and
sell such animal feed supplement and would
like to obtain the right to utilize DIAMOND
SHAMROCK's proprietary information and have
DIAMOND SHAMROCK file supplemental NADA's to
establish CYANAMID as an alternate
manufacturing site and to designate CYANAMID
as a distributor pursuant to 21 CFR 514.8.
App. 151.
Two separate sections of the contract implement the
transfer to Cyanamid of the commercial and regulatory rights it
sought. The first is Article 2.1, which is the focal point of
this controversy.
Article 2.1 provides:
DIAMOND SHAMROCK grants to CYANAMID a
non-exclusive license to use TECHNICAL
INFORMATION to practice the LICENSED PROCESS
and to make, use and sell PRODUCT under its
own name and trademarks.
App. 153-54. The terms used in Article 2.1 are defined in
Article 1. "TECHNICAL INFORMATION" is defined as meaning "all
information licensable by DIAMOND SHAMROCK as of the effective
date of this Agreement and which relates to the practice of the
LICENSED PROCESS or to the production and use of PRODUCT."
"Licensed process" is defined as "DIAMOND SHAMROCK's process for
the manufacture of an animal feed supplement presently sold under
the trademark CSP 250 and comprising chlortetracycline,
sulfathiazole and penicillin." The term "product" refers to CSP
250. App. 152. Thus, Article 2.1 grants commercial authority to
Cyanamid to use Diamond Shamrock's proprietary information to
manufacture, distribute and sell CSP 250.
Article 11.1, on the other hand, commits Diamond
Shamrock to seek regulatory authority for Cyanamid to market CSP
250. That clause provides in part:
Promptly upon execution of this
Agreement, DIAMOND SHAMROCK shall prepare and
submit to the FDA supplemental new animal
drug applications to establish CYANAMID's
facility as an alternate manufacturing site
and to designate CYANAMID as a distributor of
PRODUCT under 21 CFR 514.8.
App. 160. This provision was, of course, a critical term of the
agreement. If Diamond Shamrock failed to obtain a supplemental
NADA by December 31, 1982, Article 11.2 entitled Cyanamid to
terminate the agreement.
The dichotomy between commercial and regulatory rights
reflected in the preamble and in Articles 2.1 and 11.1 is
important for present purposes because the scope of the perpetual
license Cyanamid claims to have received by virtue of the 1983
amendment is defined in that amendment and Article 9.2 of the
original agreement solely by reference to the rights conferred by
Article 2. As we have noted, Article 9.2 grants Cyanamid an
option to obtain upon the termination of the agreement a
perpetual "license . . . under TECHNICAL INFORMATION as shall
have been licensed hereunder to CYANAMID." It was this perpetual
license that Cyanamid acquired in 1983 when it was granted a
perpetual "license . . . under TECHNICAL INFORMATION as shall
have been licensed under the Agreement," i.e., a perpetual
license to use "all information licensable by Diamond Shamrock as
of [July 23, 1980] which relates to the practice of [its
manufacturing process for CSP 250] or to the production and use
of [CSP 250]."
The 1983 amendment provides that, save for the grant of
this perpetual license of Diamond Shamrock's proprietary
information, all other terms and conditions of the original
agreement were to remain unchanged. Since one such term and
condition was the five year limit on the rights originally
conveyed, this meant that only the perpetual license of
proprietary information was to survive beyond June of 1987. It
necessarily follows that any right Cyanamid had under the 1983
amendment after 1987 had to be a right conferred by Article 2.1.
Before the district court, Cyanamid insisted that, when
Diamond Shamrock conveyed in Article 2.1 a "license to use
TECHNICAL INFORMATION to practice the LICENSED PROCESS and to
make, use and sell PRODUCT under its own name and trademarks,"
Diamond Shamrock conveyed a right to use the supplemental NADA.3
We agree with the district court, however. If the quoted words
and those of the remainder of the agreement are given their
commonly understood meaning, Article 2.1 simply does not make
such a grant.
When the definitions of the defined terms are inserted
in the grant evidenced by Article 2.1, one has a straightforward
conveyance of a license to use Diamond Shamrock's proprietary
information to practice its process and make, use and sell its
product -- such proprietary information consisting of "all
information licensable by Diamond Shamrock as of [July 23, 1980]
which relates to the practice of [its manufacturing process for
CSP 250] or to the production and use of [CSP 250]." This
conveyance is consistent with the dichotomy we have previously
3
. As we discuss in part V, infra, Cyanamid now argues that
Article 2.1 conveys the commercial license to sell the product,
and that once this right was perpetually conveyed through the
1983 amendment, Cyanamid enjoyed clear commercial and regulatory
authority to sell the product, since only the FDA could terminate
its right to use the supplemental NADA. However, Cyanamid did
not argue before the district court that Fermenta could not
terminate its right to use the supplemental NADA. Indeed, it
proceeded on the contrary assumption.
identified in the preamble and between the grants made in
Articles 2.1 and 11.1. As the district court stressed, if
Article 2.1 gave Cyanamid not only a commercial license to make,
use and sell CSP 250 using Diamond Shamrock's proprietary
information, but also a right to use the supplemental NADA that
Diamond Shamrock hoped to obtain for Cyanamid, Article 11 would
serve no purpose. It is a well settled principle, however, that
a court should read a contract so as to give all its terms their
intended effect. J. L. Davis & Associates v. Heidler, 622 A.2d
923, 927 (N.J. Super. Ct. App. Div. 1993) (disapproving of a
"reading of [a] contract [which] would nullify its very terms and
render [a] provision useless"); Goldberg v. Commercial Union Ins.
Co. of New York, 188 A.2d 188, 191 (N.J. Super. Ct. App. Div.
1963) ("Effect, if possible, will be given to all parts of the
instrument . . . .); 3 Corbin, supra, § 549, at 183 (stating that
the "legal effects" of the terms of a contract are to be
"determined as a whole").
Moreover, as the district court also noted, an
understanding of Article 2.1 that includes a conveyance of
regulatory rights as well as a commercial license to use
proprietary information is inconsistent with its time focus.
Article 2.1 effects a conveyance of rights Diamond Shamrock
possessed as of July 23, 1980. As is recognized in Article 11,
Diamond Shamrock had no authority on that date to give Cyanamid
the right to legally sell CSP 250 in the United States. This
could be accomplished only by Diamond Shamrock's taking the steps
necessary to secure authority for Cyanamid from the FDA,
authority which, as the escape clause demonstrates, the parties
knew might be obtained, if at all, only after the passage of a
substantial period of time.
Cyanamid correctly points out that the reading of
Article 2.1 which Fermenta champions and we adopt is not entirely
consistent with the district court's reading of that provision.
The district court interpreted Article 2.1 to convey two rights,
a "license to use TECHNICAL INFORMATION to practice the LICENSED
PROCESS" and a license "to make, use and sell PRODUCT under its
own name and trademarks." As previously indicated, we, on the
other hand, read both the "to practice" clause and the "to make,
use and sell" clause as modifying "license to use TECHNICAL
INFORMATION." The latter reading seems to us the more natural
one since Cyanamid was going to use its own name and trademarks,
Diamond Shamrock had no patent on CSP 250, and the only non-
regulatory basis for excluding Cyanamid from competing in the CSP
250 market was the rights Diamond Shamrock possessed in its
proprietary information. We do not, however, regard our
difference with the district court as material in the present
context. Even if there be an ambiguity as to what the "make, use
and sell" clause modifies, that ambiguity does not render the
text of the agreement and the 1983 amendment ambiguous as to
whether Cyanamid possesses a perpetual right to use the
supplemental NADA. As the district court's opinion demonstrates,
this is so because the scope of the only perpetual license
acquired by Cyanamid is defined solely by reference to the
"TECHNICAL INFORMATION . . . licensed under the Agreement."
Thus, even if, like the district court, one breaks Article 2.1's
conveyance up into two segments, it is only the first, TECHNICAL
INFORMATION segment that is the subject of the perpetual license.
TECHNICAL INFORMATION is a defined term and, as we have
demonstrated, its meaning cannot be stretched to include a
commitment on Diamond Shamrock's part to seek FDA authority for
Cyanamid in the future.
IV.
The extrinsic evidence of intent heard by the district
court does not transform Article 2.1's straightforward grant of a
license to make, use and sell CSP 250 utilizing proprietary
information into something else. Indeed, that evidence tends to
support the reading of the agreements that accords the words
their ordinarily accepted meaning.
When one who is unfamiliar with the background reads
the agreement and the 1983 amendment, an important question
arises: Why would Cyanamid want to pay for a perpetual license to
use Diamond Shamrock's proprietary information concerning CSP 250
if it anticipated that its right to market CSP 250 under the
supplemental NADA would expire in mid-1987? The extrinsic
evidence supplies the answer. Cyanamid could apply for its own
NADA and sell a product that was similar to CSP 250, and it
intended to do so. Both the correspondence between the parties
during the negotiation of the agreement and the testimony of
Cyanamid's employees indicate that during the relevant period it
was pursuing its own plan to secure independent marketing
authority from the FDA for a product consisting of aureomycin,
sulfathiazole and penicillin. Thus, Cyanamid did not contemplate
having to use the supplemental NADA indefinitely. It was buying
time through these agreements insofar as regulatory authority was
concerned, but it wanted continuing commercial authority to use
the proprietary information regarding CSP 250 (which contained
sulfathiazole, a component of the drug that Cyanamid was
developing).4
The record also establishes that prosecution of an
application for a NADA is time consuming and costs well in excess
of $1,000,000. Against this background, the structure of the
consideration to be paid by Cyanamid provides further evidence
that the agreement was deliberately drafted to treat the
supplemental NADA as a right separate and apart from the
TECHNICAL INFORMATION. The single most important part of the
agreement was the commitment to seek regulatory authority,
without which Cyanamid could terminate the agreement. Under
Article 3 of the agreement, in addition to the $150,000 advance
royalty (which was creditable against 50 percent of earned
royalties), Cyanamid was committed to pay earned royalties out of
4
. Cyanamid's former manager of animal regulatory affairs
testified that prior to 1980, Cyanamid had been selling a product
containing chlortetracycline, penicillin and sulfamethazine, and
that Cyanamid had become interested in Diamond Shamrock's
product, which contained sulfathiazole instead of sulfamethazine,
because "[s]ulfamethazine was coming under a great deal of
scrutiny by FDA" and "sulfamethazine was retained in the tissues
longer than sulfathiazole." App. 16-17. Thus, even if Cyanamid
did not intend to market CSP 250 in the future, the information
about sulfathiazole could be relevant with respect to future
product development.
the proceeds of its sales. Diamond Shamrock was entitled to a
minimum earned royalty of $62,500, in addition to the full
advance royalty (for a total of a minimum of $212,500), within
three years of the approval of the supplemental NADA; if it did
not receive this sum, it could terminate the agreement under
Article 8. Of course, given the potential volume of Cyanamid's
sales, Diamond Shamrock could earn a much larger sum in
royalties. Under Article 9.2, however, the costs to Cyanamid for
a permanent license to use the TECHNICAL INFORMATION was only
$25,000.5 Based both on the parties' understanding of the time
and expense of prosecuting a NADA application and on the amount
of the royalties specified in the agreement for the rights
Cyanamid was to possess over the limited period of the agreement,
it seems highly unlikely that Diamond Shamrock would have been
willing to convey for $25,000 a perpetual license that would
include both the right to use its proprietary information and the
right to use the supplemental NADA. Stated conversely, the
5
. The $87,500 price paid by Cyanamid as consideration for the
Amendment consisted of two components: (1) the $25,000 provided
for by Article 9.2 of the Agreement in exchange for a perpetual
license to the TECHNICAL INFORMATION, and (2) $62,500 for the
royalties which Cyanamid would have owed under Article 8 of the
Agreement on its minimum sales obligation of $5 million. The
$62,500 was calculated as follows: Article 3 of the Agreement
provided that earned royalties were to be calculated at the rate
of 2.5 percent on the first $10,000,000 of net sales, and at the
rate of one percent thereafter. Therefore, on $5,000,000, the
royalty would be $125,000 ($5,000,000 x 2.5%). However, Article
3 also provided for an advance royalty of $150,000 creditable
against 50 percent of earned royalties. Accounting for that
credit, the royalty remaining to be paid on $5,000,000 minimum
sales would be $62,500.
economics of the matter at least suggest that the option to buy a
perpetual license to use TECHNICAL INFORMATION for $25,000 did
not include the use of the supplemental NADA in perpetuity.
In these respects, the extrinsic evidence confirms that
according the terms of the agreements their plain meaning makes
commercial sense.
The extrinsic evidence stressed most heavily by
Cyanamid as throwing light on the intention of the parties is the
conduct of Fermenta's employees in the period following July of
1987. Shortly after the execution of the 1983 amendment, SDS
Biotech acquired Diamond Shamrock's animal health business. SDS
Biotech, in turn, was acquired by Fermenta in October of 1985,
after the perpetual, paid-up license had been purchased with a
lump sum payment, but still during the five year term of the
original agreement. Thus, after Fermenta succeeded to Diamond
Shamrock's rights, it was never entitled to receive royalties
under the agreement and it received none. When June of 1987 came
and the original five year term of the agreement expired,
Cyanamid continued to sell CSP 250 under its own name and
trademark. Over the six years from June of 1987 to October of
1993, Fermenta did not protest Cyanamid's continuing sales. The
explanation for this failure to protest, which was uncontradicted
in the record and accepted by the district court, was given by
Fermenta's general counsel. He testified that over the years, he
and others were aware of the existence of the contract and of
Cyanamid's use of the supplemental NADA because of inquiries from
the FDA about that use. However, no one at Fermenta read the
contract and focused on its terms until a more serious regulatory
problem arose in the Fall of 1993, at which point Fermenta's
general counsel reviewed the contract in its entirety.
The significance of Fermenta's failure to protest is
diminished by the fact that Diamond Shamrock, rather than
Fermenta, negotiated the original agreement and the 1983
amendment and oversaw its execution during the period when
Cyanamid was paying royalties. Nevertheless, we acknowledge that
the evidence does not rule out the possibility that the failure
to protest may have been attributable in part to someone at
Fermenta having read the agreements at some point after June of
1987 and having concluded that they conveyed to Cyanamid the
right to continue to use the supplemental NADA. Even if this
occurred, however, we would not regard it as a justification for
us to read the agreements of the parties in a different way.
Like the parties in Mellon Bank, the parties here used words
quite common in agreements of this kind with generally accepted
meanings. Like Aetna's pre-contract conduct in Mellon Bank,
Fermenta's post-contract conduct does not suggest that the
parties had an unusual "linguistic reference." As a result, we
agree with the district court that a reasonable person reading
the agreements against the background of the extrinsic evidence
could not find them susceptible of a reading that would bestow
upon Cyanamid a perpetual right to use the supplemental NADA.
V.
On appeal, Cyanamid advances an additional argument
that it insists provides an "independent reason" for us to
reverse the declaratory judgment of the district court.
According to Cyanamid, although the holder of a NADA has the sole
right to apply for authority to permit others to manufacture its
product at "alternate manufacturing sites," the issuance of the
supplemental NADA, by operation of law, permanently deprives the
holder of control over the continued manufacture of its product
at those facilities. It is apparent from an examination of the
transcript of the proceedings before the district court and the
brief Cyanamid submitted to it that Cyanamid did not advance this
legal argument before the district court. "It is well
established that failure to raise an issue in the district court
constitutes a waiver of the argument." Brenner v. Local 514,
United Brotherhood of Carpenters and Joiners of America, 927 F.2d
1283, 1298 (3d Cir. 1991). We will not depart from this well
established principle of appellate review to consider the merits
of Cyanamid's regulatory argument, and we accordingly express no
view with respect to it.
VI.
For these reasons, the judgment of the district court
will be affirmed.