Kapsch TrafficCom IVHS, Inc. v. Florida Department of Transportation , 249 So. 3d 693 ( 2018 )

FIRST DISTRICT COURT OF APPEAL
STATE OF FLORIDA
_____________________________
No. 1D17-743
_____________________________
KAPSCH TRAFFICCOM IVHS,
INC.,
Appellant,
v.
FLORIDA DEPARTMENT OF
TRANSPORTATION, FLORIDA
TURNPIKE ENTERPRISE,
NEOLOGY, INC., and SMARTRAC,
N.V.,
Appellees.
_____________________________
On appeal from the Circuit Court for Leon County.
Terry P. Lewis, Judge.
June 4, 2018
PER CURIAM.
This case came before the trial court on the parties’ cross-
motions for summary judgment. The parties were then—and still
are—fully in agreement regarding the material facts. They
disagree, however, as to the legal conclusions to be drawn from the
undisputed facts. The matter, therefore, was appropriately
disposed of by summary judgment. On appeal, Kapsch TrafficCom
IVHS, Inc. (“Kapsch”) argues that the trial court erred in not
granting summary judgment in its favor. We disagree and affirm.
This case centers on a patent license agreement (“Agreement”)
entered into between the Florida Turnpike Enterprise acting on
behalf of the Florida Department of Transportation (collectively,
“FDOT”), and Neology, Inc. and its parent company, Smartrac,
N.V. (collectively, “Neology”). Under the terms of the Agreement,
FDOT paid $7 million to Neology for the nonexclusive right to use
technology owned by Neology, namely, Neology’s patented 6C
technology. The 6C technology would allow FDOT’s automated toll
collection “readers” to communicate not just with Florida’s Sun
Pass® system transponders, but with all transponders or “tags” on
passing vehicles from any state, in order to assess a toll. 1
Kapsch filed suit in the trial court claiming the license
agreement was illegal because FDOT failed to follow the
competitive bidding process dictated by section 287.057, Florida
Statutes. That section applies when a state agency seeks to
procure “commodities” or “contractual services” costing more than
$35,000. § 287.057(1), Fla. Stat. (referencing the “threshold
amount provided for CATEGORY TWO in s. 287.017”). The trial
court expressly noted that Kapsch did not contend that the
1 Prior to 2012, the automated tolling technologies utilized
throughout the United States employed readers to communicate
with vehicle transponders or “tags” to identify the vehicle’s tag
number through radio frequency identification protocols (“RFID”).
But the system lacked uniformity. Some of the more common
protocols are known in the industry by their acronyms TDN, SeGo,
and 6C. For example, Florida’s RFID protocol was SeGo. SeGo,
however, could not read a transponder in a vehicle from Georgia,
which was calibrated to be read by Georgia’s 6C RFID protocol. As
a consequence, Florida could not collect a toll from a Georgia
vehicle, and millions of dollars in revenue from Georgia drivers
were being lost each year.
In 2012, Congress addressed the disparity in state tolling
systems by enacting “MAP-21”—the acronym for “Moving Ahead in
the 21st Century.” See Pub. L. No. 112-141, § 1521 [23 USCA § 129
Note (b)]. This federal law required a national, interoperable toll
system by July 2016.
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Agreement is one for services, and it duly observed that nothing in
the agreement requires Neology to deliver a commodity.
Kapsch argued that a patent license is a “commodity” because
it is a type of intangible personal property, and “personal property”
is specifically listed in the definition of “commodity” in section
287.012(5), Florida Statutes. It also attempted to place the license
agreement within the purview of Article IX of the Uniform
Commercial Code (“UCC”), as codified in section 679.1021, Florida
Statutes, because, in a UCC comment, “general intangibles” are
defined as a residual category of personal property, including, for
example, a license for the use of intellectual property; hence, a
patent license. The trial court rejected both contentions. It
observed that “[t]he definitions and comments in Article IX of the
UCC [] serve a different purpose than those in section 287.057.” It
further explained that “[i]f such a broad, sweeping interpretation
were given to the term ‘personal property’ urged by [Kapsch], there
would be no reason to list the several examples in [section
287.012(5)]. The term ‘personal property’ would necessarily
include all others.”
Instead, the trial court was “more persuaded” by the cases
cited by FDOT and Neology describing “the nature of a non-
exclusive patent license as a covenant not to sue or a grant of
immunity from suit for patent infringement,” thereby giving the
licensee, FDOT, no property right in the patent itself. See Gen.
Talking Pictures Corp. v. W. Elec. Co., 304 U.S. 175, 181 (1938)
(citation omitted) (holding that a company was “a mere licensee
under a nonexclusive license, amounting to no more than ‘a mere
waiver of the right to sue’”); U.S. Philips Corp. v. Int’l Trade
Comm’n, 424 F.3d 1179, 1189 (Fed. Cir. 2005) (“A nonexclusive
patent license is simply a promise not to sue for infringement.”);
Pub. Varieties of Miss., Inc. v. Sun Valley Seed Co., 734 F. Supp.
250, 252 (N.D. Miss. 1990) (“A license merely grants a party
permission to do something which would otherwise be unlawful; it
grants immunity from suit rather than a proprietary interest in
the patent.”); see also TransCore, LP v. Elec. Transaction
Consultants Corp., 563 F.3d 1271, 1275 (Fed. Cir. 2009) (“[A]
patentee, by license or otherwise, cannot convey an affirmative
right to practice a patented invention by way of making, using,
selling, etc.; the patentee can only convey a freedom from suit.”);
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W. Elec. Co. v. Pacent Reproducer Corp., 42 F.2d 116, 117 (2d Cir.
1930) (citations omitted) (“In its simplest form, a license means
only leave to do a thing which the licensor would otherwise have a
right to prevent. Such a license grants to the licensee merely a
privilege that protects him from a claim of infringement by the
owner of the patent monopoly. . . . He has no property interest in
the monopoly of the patent, nor any contract with the patent owner
that others shall not practice the invention.”).
The trial court then turned to the actual wording of the
Agreement between Neology and FDOT. In Article 2.1, the
Agreement grants FDOT “a nonexclusive, perpetual,
nontransferable, license under [the] respective Patent Rights.”
Applying the logic of the foregoing federal decisions, the trial court
concluded “as a matter of law” that “the Agreement does not
constitute a purchase of personal property, tangible or intangible.
It merely gives FDOT permission to use the 6C technology
patented by Neology without risking liability to Neology for patent
infringement.” The trial court went on to explain that even were
the license to be considered a form of personal property, “its very
nature makes it impossible to be procured by competitive bid. The
right to use technology protected by a particular patent can only
be obtained from the patent owner. No amount of competitive
bidding can change that.” 2
Lastly, the trial court addressed Kapsch’s claim that
paragraph 2.8 of the Agreement, which gave FDOT a credit equal
to $7 million—the amount of the license fee—against future
purchases of products from Neology, brings the agreement within
the purview of section 287.057. However, as the trial court
2
The trial court declined Kapsch’s invitation to address the
issue of whether FDOT’s agreement with Neology was a “prudent
and wise expenditure of taxpayer’s money.” It correctly concluded
that it was not for the court to decide whether FDOT’s agreement
“was a good or bad deal.” Instead, it properly parsed the various
arguments and distilled the issues to the single, relevant legal
inquiry: Whether the license agreement “is one for commodities or
services as contemplated by section 287.057, [Florida Statutes].” It
concluded, “it is not,” and we agree.
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determined, that issue is moot due to the fact that FDOT and
Neology voluntarily amended the license agreement prior to the
instant suit being filed to remove paragraph 2.8 from the
Agreement. The Agreement contains a severability clause in
paragraph 7.8 that permitted the severance of the credit clause
without affecting the rest of the Agreement. This is so because, as
the trial court rightly decided, paragraph 2.8 “did not go to the
essence of the agreement.” See, e.g., Lamaritata v. Lucas, 823 So.
2d 316, 316 n.3 (Fla. 2d DCA 2002) (applying the severability
clause to sever the unenforceable portion of the contract, while the
remainder of the contractual provisions remained valid and in
force); Brevard Cty. Bd. of Cty. Comm’rs v. Williams, 715 So. 2d
1100, 1101-02 (Fla. 1st DCA 1998) (holding that the invalid
provision of a settlement agreement should have been severed
pursuant to the severability clause rather than declaring the
entire agreement unenforceable). New Prod. Corp. v. City of N.
Miami, 241 So. 2d 451 (Fla. 3d DCA 1970) (holding that “the
obligation to perform certain covenants in addition to conveyance
of the property (which are for the benefit of the purchaser) are
severable,” and, “even though the covenants may not be performed
or would be illegal they are not integral parts of the contract and
the purchaser may require specific performance of the remaining
valid portions of the agreement”).
Here, it bears repeating that no factual dispute exists
regarding FDOT’s prime motivation to enter into the Agreement.
It desired to obtain a patent license, not to purchase commodities
or services from Neology. Therefore, the credit provision was
properly severed from the Agreement.
Based upon the foregoing discussion and the trial court’s well-
reasoned analysis, we hold that summary final judgment was
properly entered in favor of FDOT and Neology. Accordingly, we
affirm.
AFFIRMED.
WETHERELL and JAY, JJ., concur; MAKAR, J., dissents with
opinion.
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_____________________________
Not final until disposition of any timely and
authorized motion under Fla. R. App. P. 9.330 or
9.331.
_____________________________
MAKAR, J., dissenting.
Government procurement codes are followed meticulously to
uphold principles of fair and open competition upon which they are
founded. When governmental agencies choose to contract directly
with one private vendor, thereby foregoing competitive public
bidding, their exercise of discretion must hew closely to lawful
parameters of an exception or risk invalidation See Accela, Inc. v.
Sarasota Cty., 993 So. 2d 1035, 1044 (Fla. 2d DCA 2008) (county
agreements that significantly expanded a piggy-back exception in
the procurement code held to be arbitrary and capricious such that
the agreements were “void and of no effect”).
The privately-negotiated contract in this case—which is “an
unusual agreement” and not a “routine transaction” for a Florida
governmental agency—is between the Florida Department of
Transportation (FDOT) and two vendors, Neology, Inc., and
Smartrac N.V., consisting of two related parts: (a) the grant to
FDOT of the use of certain intellectual property rights of the
vendors for $7 million, and (b) a credit in that same amount to
FDOT to be applied to the procurement of related commodities
offered by the vendors. The first part extends immunity or
indemnity from suit for potential violations of the intellectual
property rights of the vendors, for which a colorable claim exists
that no “commodity” has been procured and compliance with
section 287.057, Florida Statutes, was unnecessary.
But the second part of the agreement, which states as follows,
presents a problem:
2.8 In addition to the license of Patent Rights under
this Agreement, the [FDOT] shall have a credit equal to
the amount of the License Fee [$7 million] that may be
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applied dollar for dollar against any future purchases of
tags or readers or other products sold by or on behalf of
the [Neology and Smartrac]. The [FDOT]’s credit balance
may be used as full payment for [FDOT]’s purchases until
the complete credit balance has been exhausted. [Neology
or Smartrac] will provide [FDOT] with a written
acknowledgement of the remaining balance of the credit
after each purchase made by [FDOT].
No dispute exists that this paragraph provides a $7 million credit
for the purchase of commodities (“tags or readers or other
products”) from the vendors, who expressly wanted to establish a
customer relationship for these items with FDOT.
Once the agreement became public, it resulted in controversy
and, ultimately, litigation. Mr. Kapsch, the CEO of a competitor,
Kapsch Trafficom, who learned of the contract due to a press
release, traveled from Austria to meet with the FDOT official in
charge, expressing disappointment that his company did not get to
participate in the procurement process and claiming it could have
provided the technological licensing protocol for free; he also
pointed out that the $7 million credit put his company at a
competitive disadvantage as to procurement of the listed
commodities. Soon thereafter, the FDOT official instructed that
paragraph 2.8 be removed and a new agreement was signed, the
ostensible purpose being to “provide a confidence level” to vendors
by “eliminat[ing] the appearance of an unlevel playing field in a
future procurement.” The $7 million of bargained-for commodities
credit was thereby extinguished in the process.
All this was too little too late. An agreement that included the
procurement of $7 million of commodities had been effectuated
without compliance with state law; it was privately-negotiated and
subject to no public scrutiny before its finalization and release.
That it contained a potentially valid agreement for intellectual
property rights does not save its overall legitimacy; excising the
commodities clause (and foregoing a $7 million benefit to the State)
does not change the fact that the procurement process was violated
and the agreement overall was invalidly procured. The remedy for
non-compliance is to declare the agreement void. Wester v. Belote,
138 So. 721, 724 (Fla. 1931) (contract violating public competitive
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bid laws “is absolutely void, and that no rights can be acquired
thereunder by the contracting party, is beyond question in this
jurisdiction.”); Robert G. Lassiter & Co. v. Taylor, 128 So. 14, 17
(Fla. 1930) (failure to comply with provision as to contracting is a
violation that renders the agreement “illegal and void”). Severance
of the commodities clause might make sense if the clause were, as
the trial court determined, a non-essential one. But a $7 million
credit to State coffers—that would negate “dollar for dollar” the
FDOT’s entire $7 million upfront payment—can’t be other than a
material one; seven million dollars is not chump change.
And severance sends the wrong message: it normalizes an
improper procurement practice, forgiving the agency at great
expense to State coffers. It cuts against the grain of principles of
procurement laws that must be followed to “prevent favoritism”
and are of a “highly remedial character” whose “construction
always . . . will fully effectuate and advance their true intent and
purpose and which will avoid the likelihood of same being
circumvented, evaded, or defeated.” Wester, 138 So. at 724. And
dispensing with the commodities clause seems little different from
the types of “exceptions, releases, and modifications in the contract
after it is let” that “afford opportunities for favoritism, whether
any favoritism is actually practiced or not.” Id.
FDOT and the vendors counter that the $7 million credit
would have been exercised only if either Neology or Smartrac was
a successful bidder for these commodities in a future competitive
procurement process, but their agreement doesn’t say that. Even
if it were true, it doesn’t excuse the failure to comply with the
procurement code in the first instance. The reason is that the $7
million commodities credit is little different than the procurement
of gift cards, vouchers, or other similar means of purchasing “tags
or readers or other products sold by or on behalf of” the vendors.
Kapsch Trafficom and others who compete with the vendors have
a legal right to be participants in a competitive procurement of
these items, but were excluded. An agency can’t do indirectly what
it’s prohibited from doing directly. Lassiter & Co., 128 So. at 17
(“[C]ity could not circumvent the charter provision by first entering
into a legal contract for pavement ‘in accordance with plans and
specifications on file,’ and later, by agreement, change the contract
to a different type of pavement or make a new contract.”); see
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generally Evasion of law requiring contract for public work to be let
to lowest responsible bidder by subsequent changes in contract after
it has been awarded pursuant to that law, 69 A.L.R. 697 (1930 &
Supp. 2018) (overview of cases consistent with Lassiter & Co.).
Perhaps FDOT focused on the licensing portion of the agreement,
and was lulled into ceding to the commodities clause, which served
the vendors’ interests of getting a foothold for its commodities.
That may be the case, but unlike situations where an agency is
entitled to “regroup, reevaluate, redesign, or reject” a project, the
commodities clause was a means of avoiding competition that can
result in contractual invalidation. Dep’t of Transp. v. Groves-
Watkins Constructors, 530 So. 2d 912, 914 (Fla. 1988).
This case is unlike those where severance of an invalid
covenant, such as one requiring that property be rezoned by a city,
could be accomplished without prejudice to the parties or the
public. In New Products Corp. v. City of North Miami, 241 So. 2d
451, 452 (Fla. 3d DCA 1970), the city was sued to force specific
performance of a land sales contract in which it promised to the
buyer to that it would rezone the property to multi-family. The city
changed its mind, the buyer sued, and the trial court held that the
illegal covenant made the entire contract illegal. The appellate
court disagreed, ruling that the buyer’s offer to take the property
as currently zoned and waive the covenant was valid. The
difference is that a contract made in violation of a procurement
statute is void; it is irredeemable, not merely voidable at the behest
of the party for whom it would have benefitted. Wester, 138 So. at
724 (citing Lassiter & Co.); see Harris v. Sch. Bd. of Duval Cty., 921
So. 2d 725, 735 (Fla. 1st DCA 2006) (“A contract entered into in
violation of statutes and rules requiring competitive bids ‘is
absolutely void, and . . . no rights can be acquired thereunder by
the contracting party.’”) (footnote omitted) (quoting Wester, 138 So.
at 724).
All this said, the trial judge’s decision—upholding the split of
the contract into two severable slices—has a Solomonic quality at
first glance. But what gets lost is public faith in the procurement
process; and let’s not forget the $7 million. Wester, 138 So. at 724
(“[L]aws of this kind requiring contracts to be let to the lowest
bidder are based upon public economy, are of great importance to
the taxpayers, and ought not to be frittered away by exceptions.”).
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_____________________________
Philip J. Padovano of Brannock & Humphries, Tallahassee; Kelly
Overstreet Johnson and Russell B. Buchanan of Baker Donelson
Bearman Caldwell & Berkowitz, PC, Tallahassee, for Appellant.
Marc Peoples, Assistant General Counsel, Tallahassee, for
Appellees Florida Department of Transportation and Florida
Turnpike Enterprise; W. Douglas Hall and Peter D. Webster of
Carlton Fields, Tallahassee, for Appellees Neology, Inc., and
Smartrac, N.V.
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