Waterloo Furniture Components, Ltd. v. Haworth, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-4744
WATERLOO FURNITURE COMPONENTS, LTD.,
Plaintiff-Appellee,
v.
HAWORTH, INC.,
Defendant-Appellant.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 0507—Elaine E. Bucklo, Judge.
____________
ARGUED SEPTEMBER 15, 2006—DECIDED OCTOBER 30, 2006
____________
Before FLAUM, Chief Judge, and KANNE and SYKES,
Circuit Judges.
FLAUM, Chief Judge. On October 29, 1992, Haworth, Inc.
(“Haworth”) entered into an agreement with Water-
loo Furniture Components, Ltd. (“Waterloo”), granting
Waterloo a license to Haworth’s Patent No. 4,616,798 (“the
‘798 patent”). The agreement included a “most favored
nations” provision that required Haworth to give Waterloo
the benefit of any more favorable royalty rates that
Haworth might grant to another licensee under the ‘798
patent. Haworth’s patent expired on October 14, 2003. On
March 24, 2004, Haworth executed a settlement agree-
ment with a third party, SoftView Computer Products
Corporation (“SoftView”), for past infringement of the ‘798
2 No. 05-4744
patent. Waterloo learned of the settlement agreement
and brought suit against Haworth alleging breach of
contract. The district court stayed discovery in the case and
granted Haworth’s motion for summary judgment holding
that Waterloo’s rights under the “most favored nations”
clause ended on the day the parties’ agreement expired,
October 14, 2003. For the following reasons, we affirm the
judgment of the district court.
I. BACKGROUND
Waterloo is a manufacturer of articulated keyboard
support devices with its principal place of business in
Ontario, Canada. Haworth is an office furniture systems
manufacturer with its principal place of business in Michi-
gan. Haworth owned the ‘798 patent, which was for an
adjustable support for a computer keyboard. The device
attaches to the underside of a desk, allowing a computer
keyboard to swing out from under the desk and be adjusted
to various heights and positions. The patent issued on
October 14, 1986 and expired on October 14, 2003.
In December 1992, Haworth granted a license to Waterloo
under the ‘798 patent (“the Haworth/Waterloo Agreement”)
to resolve an infringement claim that Haworth brought
against Waterloo. The parties chose Michigan law to govern
the contract. Under the “Grant and Term” section, the
contract provided, “This Agreement shall be effective only
when executed by both parties and shall continue for the
full term of said Licensed Patent, unless this Agreement is
earlier terminated pursuant to the provisions hereof.” The
Haworth/Waterloo Agreement also contained a “most
favored nations” clause that provided:
If, during the term of this Agreement, Haworth grants
a license to thereafter make, use or sell under the ‘798
patent to a direct competitor of Waterloo at a more
No. 05-4744 3
favorable royalty than that contained in Section IV-1
hereof . . . then such more favorable royalty will be
automatically offered to Waterloo . . . The intent of
Haworth and Waterloo is to provide that Waterloo is
treated no less favorably than direct competitors of
Waterloo in regard to licensing of the ‘798 patent . . . In
the event that Haworth enters into any license agree-
ment under the ‘798 patent with any direct competitor
of Waterloo, then Haworth shall provide written notice
of such agreement and the terms thereof to Waterloo
within thirty days following the execution thereof.
In 1997, a third party, SoftView, filed a declaratory
judgment action in New York federal court against
Haworth, arguing that SoftView was not infringing the ‘798
patent. In June 1998, Haworth asserted a counterclaim
against SoftView, alleging that SoftView had infringed the
‘798 patent. The case was litigated for over five and a half
years.
On December 9, 2003, Haworth and SoftView reached an
agreement in principle to settle the case. The parties
negotiated the terms of a formal settlement between
December 2003 and March 2004 and executed a final
agreement on March 24, 2004 (the “Haworth/SoftView
Agreement”). Waterloo learned about the agreement and
requested a copy from Haworth. Haworth responded that its
agreement with SoftView was confidential.
On March 15, 2005, Waterloo filed a first amended
complaint in this case alleging breach of contract. On
May 4, 2005, Haworth moved for summary judgment. On
May 9, Waterloo served discovery, including a request
that Haworth produce a copy of the Haworth/SoftView
Agreement. On May 23, the district court sua sponte stayed
all discovery pending its ruling on the summary judgment
motion. In support of its motion for summary judgment,
Haworth submitted the affidavit and reply affidavit of
4 No. 05-4744
James R. Wiersma. Wiersma was one of the Haworth
employees responsible for negotiating the
Haworth/SoftView Agreement. Waterloo filed three related
motions in conjunction with its response: 1) a motion to
strike Wiersma’s affidavit under the Best Evidence Rule; 2)
a motion to deem certain allegations admitted pursuant to
Federal Rule of Civil Procedure 8(d); and 3) a motion to
refuse application for judgment pursuant to Federal Rule of
Civil Procedure 56(f).
On December 6, 2005, the district court granted
Haworth’s motion for summary judgment. See Waterloo
Furniture Components, Ltd. v. Haworth, Inc., 402 F. Supp.
2d 950, 953 (N.D. Ill. 2005). The court found that the
Haworth/Waterloo Agreement terminated October 14, 2003,
the date the ‘798 patent expired. Because the
Haworth/Softview Agreement was not executed until after
the expiration of the ‘798 patent, the district court held that
Haworth’s obligations under the Haworth/Waterloo
Agreement had ended. The district court also held that “the
status of the Agreement as a license (or not) is irrelevant.”
Id. Finally, the district court denied Waterloo’s related
motions to strike, to refuse application for judgment, and to
deem allegations admitted.
II. DISCUSSION
On appeal, Waterloo argues that the district court erred
by interpreting the Haworth/Waterloo Agreement as
terminating on October 14, 2003, and further argues that
the Haworth/SoftView Agreement constituted a license
for past infringement violating the Haworth/Waterloo “most
favored nations” clause. Waterloo also argues that the
district court erred by denying discovery before granting
Haworth summary judgment, and by denying its Rule 56(f)
motion. Finally, Waterloo argues that Wiersma’s affidavit
No. 05-4744 5
violated the Best Evidence Rule. We will address each
argument in turn.
A.
Waterloo argues that the district court erred in ruling
that the Haworth/Waterloo Agreement terminated before
Haworth executed its agreement with SoftView. We review
a district court’s grant of summary judgment de novo. See,
e.g., Matuszak v. Torrington Co., 927 F.2d 320, 322 (7th Cir.
1991). Summary judgment is not warranted when there are
genuine issues of material fact with respect to the interpre-
tation of a contract. See Diehl v. Twin Disc, Inc., 102 F.3d
301, 305 (7th Cir. 1996). “[A] contract’s meaning is a matter
of law, and where there is no contractual ambiguity, there
is no resort to extrinsic evidence, hence no factual dispute
to preclude summary judgment.” Id. (citing GCIU Employer
Ret. Fund v. Chi. Tribune Co., 66 F.3d 862, 864 (7th Cir.
1995)).
The plain language of the Haworth/Waterloo Agreement
makes clear that it terminated on October 14, 2003, the
same day that the ‘798 patent expired. Under Michigan law,
which controls the contract, a court is required to interpret
an unambiguous contract as a matter of law. UAW-GM
Human Res. Ctr. v. KSL Rec. Corp., 579 N.W.2d 411, 414
(Mich. Ct. App. 1998). A contract is only ambiguous when
its words may reasonably be understood in different ways.
Raska v. Farm Bureau Mut. Ins. Co., 314 N.W.2d 440, 441
(Mich. 1982).
Section III-4 states that “this Agreement . . . shall
continue for the full term of said Licensed Patent, unless
this Agreement is earlier terminated pursuant to the
provisions hereof.” This provision is found under the
heading “Grant and Term” and clearly states the dura-
tion of the contract. Moreover, the contract provides no
6 No. 05-4744
other termination date. Section III-4 is not susceptible to
any other reasonable interpretation, and thus, its plain
language terminates the agreement upon expiration of
the ‘798 patent.
Waterloo advances five arguments as to why the above
interpretation of Section III-4 is incorrect. Each is with-
out merit. First, Waterloo claims that interpreting the
Haworth/Waterloo Agreement as terminating on Octo-
ber 14, 2003 conflicts with the intent of the parties as
described in Section VII-2 of the Agreement. Waterloo
argues that the district court’s interpretation of the contract
permits Haworth to license a competitor’s past sales at
more favorable terms, without notifying Waterloo. As we
discuss in Part B infra, however, it is not possible to license
a patent past its expiration. In addition, the parties’ intent
that “Waterloo is treated no less favorably than direct
competitors of Waterloo in regard to licensing of the ‘798
patent,” only provides insight into the parties obligations
during the term of the contract. It does not extend the
Agreement past its express termination date.
Second, Waterloo argues that even if the Haworth/
Waterloo Agreement terminated on October 14, 2003,
Haworth’s obligations under Section VII-2 continued
past that date. This argument fails because an expired
contract releases all its parties from their respective
contractual obligations. See Advanced Plastics Corp. v.
White Consol. Indus., Inc., 828 F. Supp. 484, 488 (E.D.
Mich. 1993) (granting summary judgment on plaintiff’s
breach of contract claim where the contractual obligations
of the parties simply expired prior to the alleged breach).
The first sentence of the most favored nations provision
states, “If, during the term of this Agreement, Haworth
grants a license . . . at a more favorable royalty . . . then
such more favorable royalty will be automatically offered to
Waterloo . . . .” Consequently, the section’s first sen-
No. 05-4744 7
tence specifically limits Haworth’s obligations under the
most favorable nations clause to the term of the Agreement.
As discussed above, the term of the Agreement ended on
October 14, 2003.
Third, Waterloo argues that the district court’s interpre-
tation of Section III-4 renders Section V-6 of the Agreement
superfluous. Section V-6 states, “In any case Waterloo’s
obligation to pay royalties shall cease as of the day the ‘798
patent expires.” Waterloo contends that if Section III-4 of
the Agreement terminated on October 14, 2003, there would
be no reason to reiterate the termination date. We reject
this argument because Section V-5, which precedes
Section V-6, details several scenarios in which Waterloo’s
obligation to pay royalties would end before that termina-
tion date. Consequently, Section V-6 simply clarifies the
expiration date.
Fourth, Waterloo claims that the contract’s definition of
the term “agreement year,” as “a twelve (12) month interval
extending from either the effective date hereof or the
annual anniversary of the effective date hereof . . .,”
operates to extend the contract. We reject this argument
as well. The term “agreement year” only appears in the
contract with reference to determining the royalty rates
in any given year. The contract required Waterloo to pay
one royalty rate for the first 100,000 units sold in any
agreement year, a slightly lower rate for the second 100,000
units sold in the agreement year, and yet a slightly lower
rate for any units sold above 200,000 units. Thus, the term
“agreement year” is defined for purposes of determining
royalty rates and has no relation to the contract’s duration.
The term “agreement year” is not found under the contract’s
“Grant and Term” section and cannot be construed to
contradict the plain language of Section III-4.
Finally, Waterloo argues that Haworth’s actions consti-
tute acquiescence that the most favored nations clause
8 No. 05-4744
extended beyond the term of the ‘798 patent. Waterloo
argues that in response to its requests to review a copy
of the Haworth/SoftView Agreement, Haworth only claimed
that the Agreement was confidential and did not assert to
Waterloo, at that time, its belief that the most favored
nations clause had expired. We reject this argument.
Because Section III-4 of the Agreement is clear and unam-
biguous, any of the parties’ subsequent actions are entirely
irrelevant. See, e.g., Prentis Family Found., Inc. v. Barbara
Ann Karmanos Cancer Inst., 698 N.W.2d 900, 914 (Mich. Ct.
App. 2005) (“When the contract is unambiguous, the
construction is gleaned from the actual language used.”); L.
& S. Bearing Co. v. Morton Bearing Co., 93 N.W.2d 899, 901
(Mich. 1959) (holding that “where a written contract is not
ambiguous . . . extraneous matter will not be considered”
and “subsequent acts of the parties” are irrelevant).
B.
The Haworth/Waterloo most favored nations clause is
limited to “licenses to . . . make, use or sell under the ‘798
patent . . . .” As a result, if the Haworth/Softview Agree-
ment is not a “license,” Waterloo’s claim that Haworth
breached the most favored nations clause must fail. As far
as we can tell, no court has determined whether a settle-
ment for past infringement entered into after the patent’s
expiration constitutes a license.1 We hold today that such
1
Courts are divided on the issue in cases where the settle-
ment agreement is entered into before the patent’s expiration.
On the one hand, this Court and the Second Circuit have each
held that payment designed to compensate solely for past in-
fringement is not a license and does not implicate a “most favored
nations” provision. See Studiengesellschaft Kohle v. Novamont
Corp., 704 F.2d 48, 52 (2d Cir. 1983); Ransburg Electro-Coating
(continued...)
No. 05-4744 9
a settlement agreement is not a license.
A “patent law license” is “a written authority granted by
the owner of a patent to another person empowering the
latter to make or use the patented article for a limited
period or in a limited territory.” Black’s Law Dictionary
1068 (4th ed. 1951). Courts have recognized the prospective
quality of a patent license, which allows another party to
use the patentee’s property in the future without fear
of suit. See Wang Labs., Inc. v. Oki Elec. Ind. Co., Ltd., 15
F. Supp. 2d 166, 172 (D. Mass. 1998) (“there is authority to
the effect that the concepts of both royalty and license are
necessarily prospective, rendering a ‘retroactive royalty
agreement’ a legal nullity”); Searle Analytic Inc. v. Ohio-
Nuclear, Inc., 398 F. Supp. 229, 231 (N.D. Ill. 1975) (“A
license . . . is prospective in operation”); Universal Oil
Prods. Co. v. Vickers Petroleum Co. of Del., 19 A.2d 727, 729
(Del. Super. 1941) (“It is somewhat difficult to understand
what is meant by a ‘retroactive implied license.’ A license in
its very nature is prospective in operation.”); Raytheon Mfg.
Co. v. Radio Corp. of Am., 190 N.E. 1, 5 (Mass. 1934) (“The
word ‘royalty’ commonly imports payment for permissive or
lawful use of a property right, and not damages for a
pirated or illegal appropriation of such right.”). However,
once a patent expires, the right to exclude others expires,
and the right to make, use or sell the patented invention
becomes “public property.” Nat’l Bus. Sys., Inc. v. AM
1
(...continued)
Corp. v. Spiller & Spiller, 489 F.2d 974, 977 (7th Cir. 1973). On
the other hand, the Sixth Circuit and the Federal Circuit have
held that a release compensating a party for past infringing use of
a patent can have the effect of and be construed as a license for
purposes of a “most favored nations” clause. See
Studiengesellschaft Kohle v. Hercules, Inc., 105 F.3d 629, 634
(Fed. Cir. 1997); Shatterproof Glass Corp. v. Libbey-Owens-Ford
Co., 482 F.2d 317, 318 (6th Cir. 1973).
10 No. 05-4744
Intern, Inc., 743 F.2d 1227, 1238 n.10 (7th Cir. 1985).
Therefore, after a patent’s expiration there is nothing left
for the patent holder to license.
In this case, the ‘798 patent expired on October 14, 2003.
After that date, Haworth no longer had anything left
to license. For this reason, the March 2004 Haworth/
SoftView Agreement was not a license.
C.
Waterloo argues that the district court erred by hold-
ing that no discovery was necessary before granting sum-
mary judgment in favor of Haworth. However, Rule 56 does
not require that discovery take place in all cases before
summary judgment can be granted. See Fed. R. Civ. P. 56.
In fact, this Court has noted that “the fact that discovery is
not complete—indeed has not begun—need not defeat [a
motion for summary judgment].” Am. Nurses Ass’n. v.
Illinois, 783 F.2d 716, 729 (7th Cir. 1986). Thus, the mere
fact that the district court granted Haworth’s summary
judgment motion prior to allowing any discovery is irrele-
vant.
Waterloo also asserts that the district court erred in
denying Waterloo’s 56(f) motion. We review a district court’s
denial of a Rule 56(f) motion for abuse of discretion. See
Kalis v. Colgate-Palmolive Co., 231 F.3d 1049, 1056 (7th
Cir. 2000). Rule 56(f) requires a party to state the reasons
why it cannot adequately respond to the summary judgment
motion without further discovery and must support those
reasons by affidavit. Chambers v. Am. Trans Air, Inc., 17
F.3d 998, 1002 (7th Cir. 1994).
In support of its Rule 56(f) motion, Waterloo submitted
attorney Rhett Dennerline’s affidavit, which speculated that
further discovery would demonstrate that the
Haworth/SoftView Agreement was a retroactive license. As
No. 05-4744 11
discussed above, however, a settlement for past infringe-
ment entered into after the patent’s expiration can never be
a license. See supra Part B. Additionally, Haworth’s obliga-
tions under the Haworth/Waterloo Agreement’s most
favored nations clause terminated when the ‘798 patent
expired. Because Dennerline’s affidavit did not assert that
further discovery would indicate that the Haworth/
Waterloo Agreement would terminate on a date later than
October 14, 2003, the district court did not abuse its
discretion in denying Waterloo’s 56(f) motion.
D.
Finally, Waterloo claims that the district court erred
in rejecting its best evidence argument. In support of its
summary judgment motion, Haworth submitted the
affidavit and reply affidavit of James R. Wiersma, who
testified that “Haworth has never licensed the ‘798 patent
to SoftView” and asserted that Haworth finalized its
agreement with SoftView in March 2004. Waterloo
argues that the district court abused its discretion by not
requiring that the summary judgment record contain the
original or a copy of the Haworth/SoftView Agreement as
the best evidence of Wiersma’s assertions. This Court’s
standard of review for determining whether the district
court erred by not excluding evidence is abuse of discretion.
Taylor v. Nat’l R.R. Passenger Corp., 920 F.2d 1372, 1375
(7th Cir. 1990).
The Best Evidence Rule provides that “the production of
the original document is required to prove the contents of a
writing.” Fed. R. Civ. P. 1002. If a witness’s testimony
is based on his first-hand knowledge of an event as opposed
to his knowledge of the document, however, then Rule 1002
does not apply. Simmons v. Allsteel, Inc., No. 95 C 3049,
1999 WL 1045214, *2 (N.D. Ill. Nov. 12, 1999). Wiersma’s
statements are based on his personal knowledge of the
negotiations between Haworth and SoftView, not on his
12 No. 05-4744
knowledge of the Haworth/SoftView Agreement.2 Moreover,
Wiersma’s statement that the Agreement was not a license
was based on his belief that a settlement agreement was
not a license. Because neither of the allegedly objectionable
statements relates to the contents of the Haworth/SoftView
Agreement, the Best Evidence Rule does not apply to
Wiersma’s testimony. For this reason, the district court did
not abuse its discretion in denying Waterloo’s motion to
strike the Wiersma affidavit.
III. Conclusion
For the reasons set forth in this opinion, the judgment of
the district court is AFFIRMED.
2
Wiersma testified that on December 9, 2003, he “participated in
an all-day negotiating session in Chicago, at which attorneys for
Haworth and SoftView, along with representatives of the
two companies, reached an agreement in principle to settle
the case.” Moreover, Wiersma stated that “between December 9,
2003 and March 2004, Haworth and SoftView negotiated the
terms of a formal Settlement Agreement, which was executed
by the parties on or about March 24, 2004.”
No. 05-4744 13
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-30-06