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Eragen Biosciences, Inc. v. Nucleic Acids Licensing LLC

September 2, 2008


Appeals from the United States District Court for the Western District of Wisconsin. No. 06-C-305-C-Barbara B. Crabb, Chief Judge.

The opinion of the court was delivered by: Wood, Circuit Judge.


Before EASTERBROOK, Chief Judge, and ROVNER and WOOD, Circuit Judges.

Litigation can sometimes take on a life of its own, propelling the parties into maneuvers and rhetorical flourishes that might not have been under-taken in more placid times. This case seems to be a caution-ary tale for how the pressures of litigation can overtake parties like Hokusai's wave swamping the boats ("The Great Wave Off Kanagawa," ca. 1831, Katsushika Hokusai (1760-1849)).

Dr. Steven Benner invented and patented some useful techniques for using DNA in laboratory environments. He formed Sulfonics, Inc., which in 1999 was merged into EraGen. As part of this acquisition, EraGen signed several licensing agreements with Benner allowing it to use his patents. For a time Benner sat on EraGen's board of directors. Things were not as good as they seemed, how-ever. From the beginning, EraGen and Benner did not trust each other, and they had constant disputes over matters including the timeliness of royalty payments, sublicensing agreements EraGen had made with Bayer, whether EraGen's management should be replaced, and whether Benner had succeeded in his effort to terminate the agreements in 2004. The parties concluded new agreements on April 27, 2005, in an attempt to set aside their earlier problems. Of the several agreements, the most important for this litigation is the Artificially Enhanced Genetic Information System (AEGIS) Agreement ("the Agreement"). The Agreement provided for a semiannual payment of royalties on March 1 (covering July to December of the previous calendar year) and September 1 (covering January through June of that calendar year).

The wheels fell off the wagon with the very first royalty payment under the new Agreement on September 1, 2005:

Benner thought that he was underpaid, but EraGen thought that it had overpaid him. Benner then tried to exercise his right to terminate, but EraGen disputed (again) whether that termination was effective. To complicate matters, Benner had assigned all of his rights under the Agreement to Nucleic Acids Licensing ("NAL"), as of August 11, but he did not inform EraGen that he had done so until October 21. (From this point onward, unless the context requires otherwise, we refer to Benner and NAL interchangeably.) To make matters even more confused, there appears to have been a Bayer sublicense for cystic fibrosis research that may or may not have been concealed from NAL because it may or may not have been related to the AEGIS patents-but which the district court did not examine in any case. (In order to distinguish it from an existing Bayer sublicense, we refer to the "missing" license as the "cystic fibrosis sublicense" throughout this opinion.) Letters, then threats, then summonses were exchanged, and the case ended up in federal court.

On cross-motions for summary judgment, the district court split the difference. It found that EraGen did breach the Agreement by underpaying Benner, but it also found that Benner had waived the breach through his conduct in the months that followed. Both parties asserted claims for money had and received (unjust enrichment), but the district court granted summary judgment against both on that issue. The district court likewise granted summary judgment against both parties on claims of a breach of good faith and fair dealing. No one has ap-pealed from the latter ruling. The rest is left for us to sort out on de novo review. See Harrell v. United States Postal Service, 445 F.3d 913, 918 (7th Cir. 2006). We do so under the substantive law of Florida, which (all agree) is the jurisdiction to which Wisconsin's choice-of-law principles direct us.


Before reaching the central question-was the Agreement properly terminated-we must decide whether this is still a live issue. In other words, even if Benner took the right steps to terminate the Agreement, did he then waive the benefits of that termination and allow the Agreement to continue uninterrupted? This, roughly, is how the district court interpreted the sequence of events. It concluded that NAL and Benner had (after several detours) terminated the Agreement effective November 2, 2005, but that they reopened the discussions about royalties in February 2006 and continued them through May without reasserting that the Agreement had been terminated. Even more persuasive to the district court was the fact that NAL accepted and deposited the March 1, 2006, royalty payment without challenge, even though the Agreement had long since, by NAL's lights, supposedly been terminated. NAL also sent a letter in March indicating that "this matter can be resolved," which seemed to the district court inconsistent with termination. For these reasons, the district court found that NAL continued to act as if the Agreement were still in force after declaring it terminated, and thereby somehow nullified the termination and forgave the breach. See Acosta v. Dist. Bd. of Trustees of Miami-Dade Community College, 905 So. 2d 226, 229 (Fla. Dist. Ct. App. 2003).

There is another way to look at NAL's actions, however: after declaring that the Agreement had been breached and exercising its right to terminate, NAL could simply have been mitigating its damages. The Agreement specifically provided that all rights under the licenses would revert to Benner (or NAL, after assignment) upon termination. Agreement §§ 2.3, 4.2. Upon proper termination of the Agreement, EraGen would have no right to retain the royalties, because it no longer held the licenses or benefitted from the sublicenses. Thus, NAL's acceptance of royalty payments from EraGen would merely mitigate the damages arising from the breach precipitating the termination: that money would arguably belong to NAL if it sued for unjust enrichment on a properly terminated contract. Florida applies the ordinary principles of mitigation of damages to contract law, Young v. Cobbs, 110 So. 2d 651, 653 (Fla. 1959), and so shall we: if a party is mitigating damages, it is not, in so doing, waiving the breach that caused the damages.

The facts offer more support for the mitigation hypothesis than they do the waiver interpretation. In its letter of March 4, 2006, acknowledging receipt of the checks, NAL expressly reiterated its position that the AEGIS Agreement had been terminated in November. The Agreement itself says that termination "shall not release either party from any obligation heretofore accrued." Agreement § 4.4. The March 2006 payment was for royalties accrued from July through December of 2005, most of which predated the November 2005 termination. Given the wording of this letter and the accrued obligation, acceptance of the payment is better seen as mitigation of damages rather than waiver of any claim.

Another reason to reject the waiver interpretation is that it creates a logical problem: if a contract has been terminated, rightly or wrongly, is it possible any more to "waive" anything about it? While one can waive a breach and proceed as if the contract were still in force, termination is a different story: "When a contract is terminated, even wrongfully, there is no longer a contract." HorwitzMatthews, Inc. v. Chicago, 78 F.3d 1248, 1251 (7th Cir. 1996) (Illinois law); see also Indian River Colony Club, Inc. v. Schopke Constr. & Eng'g, Inc., 592 So.2d 1185 (Fla. Dist. Ct. App. 1992). If the contract was properly terminated, there is nothing left to waive (other than, perhaps, continued benefits under the contract, although one could also mitigate damages by accepting such benefits). If the contract was wrongfully terminated, it is still at an end; the wrongful termination, however, gives rise to a claim on behalf of the aggrieved party.

The importance of this distinction is confirmed when we consult the Agreement before us. Termination can take place upon the occurrence of any one of a list of events. See Agreement § 4.2. While other occurrences might give rise to a lawsuit and damages, only certain enumerated breaches of contract are regarded as serious enough to justify termination. NAL and Benner might have waived their rights under the Agreement by refraining from exercising the right to terminate under § 4.2, ...

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