Summary
stating that courts should encourage settlement agreements and respect that expectation of finality
Summary of this case from Town of Cheswold v. Cent. Del. Bus. ParkOpinion
C.A. No. 15617
Submitted: June 25, 1999
Decided: September 23, 1999
George H. Seitz, III and Patricia P. McGonigle of Seitz, Van Ogtrop Green, Wilmington, Delaware. OF COUNSEL: Anthony S. Volpe and John J. O'Malley of Volpe Koenig, Philadelphia, Pennsylvania. Attorneys for Plaintiff.
Allen M. Terrell, Jr. and Jeffrey L. Moyer of Richards, Layton Finger, Wilmington, Delaware. OF COUNSEL: William M. Grant, Jr. and Michael S. Pitts of Grant Leatherwood, Greenville, South Carolina. Attorneys for Defendant.
MEMORANDUM OPINION
I. Issues Presented
At issue is whether a settlement agreement resulting from voluntary mediation ("the Agreement") should be set aside or whether it should be specifically enforced. Plaintiff Asten, Inc. ("Asten"), argues that the Agreement, if it is to be considered a contract, is unenforceable because both parties were mistaken about the "material fact" that an unofficial document from the Patent and Trademark Office ("PTO') would, in the ordinary course, soon become official. It is clear, however, that both parties voluntarily entered into the Agreement fully realizing that the document in question was unofficial and that there was a chance, albeit a remote chance, that this document would never be entered into the PTO official record. Alternatively, Asten argues that the Agreement lacks material terms essential to the formation of a contract. I find, however, that the Agreement contains all necessary material terms. Perhaps some logistical issues were not addressed in detail during the hurried consummation of the Agreement, but those minor omissions are not fatal to contract formation and require only administrative resolution.
Courts generally encourage alternative methods of dispute resolution, and settlement agreements which result should be entered into with the expectation of finality; not with the belief that if the future does not unfold as expected the settlement agreement can be set aside. Accordingly, for reasons discussed more fully below, defendant, Wangner Systems Corporation ("Wangner"), is entitled to specific enforcement of the settlement agreement as negotiated and signed by representatives of the two parties.
II. Background
A. The Parties and Their Patent Disputes
Asten and Wangner, both Delaware corporations with their principal place of business in South Carolina, are competitors in the business of producing fabrics used in the paper making industry. During the early 1980s, Asten and Wangner began battling over various patent rights. The dispute escalated into PTO called patent reexaminations, which involve a challenge to the validity of a patent's claims; and into patent interference proceedings, which resolve disputes over the right to be considered the first inventor. In 1995, Wangner sued Asten in the United States District Court for the District of South Carolina alleging that Asten was infringing on several Wangner patents. At about the same time, Asten began attacking several of Wangner's patents by filing additional applications for reexamination with the PTO. Understandably, both sides grew weary of the costly disputes and, in 1996, agreed to non-binding mediation.
B. The Mediation and the Settlement Agreement
From January 14-17, 1997, representatives from both Delaware corporations, principally operating in South Carolina, engaged in mediation in Florida. Late in the day on January 16, Wangner's attorney drafted a document to reflect the agreement the parties reached earlier that day. The parties agreed to cross-license and that Asten would pay Wangner a designated monetary amount plus royalties capped at an agreed upon figure. The draft agreement was distributed to all parties on January 17, the final day allotted for mediation, and negotiations continued throughout that day. Late in the afternoon, Asten's attorney raised the issue of third party licenses. Hurriedly, the parties reached an agreement on the issue and the mediator added a handwritten paragraph ("paragraph 6") reflecting this resolution. Representatives from both parties signed the Agreement before they left Florida, and each participant in the mediation believed the parties had formed a binding contract.
I assume Florida in January provided an environment intended to warm relations between the parties.
III. The Parties Contentions
Asten asks me to declare the Agreement void because the parties failed to include all material terms relating to third party licensing; there was no mutual assent to form a contract; or that the Agreement was the product of fraud. Alternatively, Asten argues that if the Court concludes that a contract was formed, the Court should rescind it either because there was a failure of consideration or because there was a mutual mistake of fact. Wangner asks that the terms of the Agreement be specifically enforced. Wangner also seeks attorneys' fees and treble damages as provided for by the South Carolina Unfair Trade Practices Act.
IV. Analysis
A. Does South Carolina or Delaware Law Apply?
Where a contract does not contain a choice of law provision, Delaware courts apply Restatement (Second) Conflict of Laws to determine which state law applies. The law of the jurisdiction having the most significant relationship to the transaction and to the parties will govern. In determining which jurisdiction has the most significant relationship, one should look to (1) where the contract was negotiated; (2) where it is to be performed; (3) the location of the subject matter of the contract; and (4) the places of incorporation and business of the contracting parties.
See Harbour Ins. Co. v. Newmont Min. Co., Del Super., 564 A.2d 352, 356 (1989).
RESTATEMENT (SECOND) CONFLICT OF LAWS, § 188.
Id.
Although both corporations chose Delaware as their place of incorporation and Florida for its conducive climate for negotiation, South Carolina has the most significant relationship to the transaction as South Carolina is both the principle place of business of both parties and where the Agreement will be performed. Therefore, South Carolina law, where it speaks to a particular issue in this action, is controlling.
B. Were Material Terms Omitted that were Essential to the Formation of a Contract?
Asten argues that the Agreement omits material terms relating to Asten's likely conveyance of the patent rights to third parties in exchange for payments in-kind. Paragraph 6 of the Agreement provides "that the patent rights will be jointly licensed to third parties with the proceeds thereof generally divided 80% to Asten and 20% to Wangner." While the Agreement does not expressly mention payments in-kind, it does state that the parties agree "to work out a more detailed plan for implementing such arrangement during the next two weeks." Paragraph 6 was a handwritten eleventh hour addition to the Agreement, added while several participants were scrambling to catch flights and to check out of the hotel. Nonetheless, representatives from both parties believed upon signing that they had reached a final, binding agreement.
Jo mt Trial Ex. 17.
Id.
Tr. 121-22, 254, 297, 350.
"The enforceability as a contract of an agreement which leaves a matter for future negotiation depends on the relative importance and severability of the matter left to the future." "It is a question of degree to be determined by whether the matter left open is so essential to the bargain that to enforce that promise would render enforcement of the rest of the agreement unfair."
17 C.J.S. Contracts § 49 (1980), quoted in Jaffe v. Gibbons, S.C. Ct. App., 351 S.E.2d 343, 347 n. 1.
17 C.J.S. Contracts § 49 (1980), quoted in Jaffe v. Gibbons, S.C. Ct. App., 351 S.E.2d 343, 347 n. 1.
Paragraph 6 is clear evidence of the parties' intent — 80% of the proceeds of third party licensing are to go to Asten, and 20% are to go to Wangner. If a third party licensee pays in cash there would be no difficulty in making the designated allocation. Minor difficulty arises, however, if a third party licensee swaps intellectual property and/or equipment in exchange for the license. Presumably, this is the scenario for which the parties intended "to work out a more detailed plan." Despite the parties having not yet done so, this open matter is not so essential to the bargain that enforcement of the Agreement would be unfair. The intent of the parties to split the proceeds "generally" 80/20 is clear; an unresolved administrative issue as to how to effect that split does not constitute the omission of a material term.
See Channel Home Ctrs. v. Grossman, 795 F.2d 291, 299 (3d Cir. 1986) (stating "the jurisdictions that have considered the issue have held that [an agreement to negotiate in good faith] if otherwise meeting the requisites of a contract, is an enforceable contract").
C. Do the Terms of the Agreement Conflict to the extent there could be No Meeting of the Minds?
Asten claims there is a "substantial conflict" between paragraph I and paragraph 3 of the Agreement. Asten contends that Paragraph I states that Asten is to pay $1.875 million for cross-licensing rights while paragraph 3 provides that cross-licensing rights transferred under the Agreement are fully paid upon execution of the Agreement. Citing this alleged inconsistency, Asten argues the Agreement must lack mutual assent because its terms are irreconcilably contradictory. Asten further claims Wangner's representative stated in deposition that the Agreement as written was correct and reflected his intent. After rereading that deposition, I believe Asten mischaracterizes his testimony. The gist of the Wangner representative's testimony was that he believes the Agreement has to be read as a whole, it can not be dissected and examined piecemeal; and if read as a whole, the Agreement reflected his intent.
Paragraph 1 of the Agreement clearly provides for payment by Asten of an initial sum plus a continuing royalty capped at a designated amount. Paragraph 3 guarantees the cross-licenses between the parties could be utilized immediately by stating that the cross-licenses "are fully paid by the parties upon execution." Despite Asten's present attempt to use this alleged conflict as a means to escape the Agreement. I am convinced that there was never any real misunderstanding on either side as to the meaning of these paragraphs.
See Tr. 121.
Asten also claims conflicting interpretation of language in the Agreement regarding dismissal of pending proceedings demonstrates there was no mutual meeting of the minds. Specifically, Asten alleges that Wangner's filing of interference applications after the signing of the Agreement impacted patent rights covered by the Agreement. This filing, argues Asten, evidences different interpretations of what the Agreement covered as Asten contends the Agreement bars such a filing. However, Wangner does not interpret the language of the Agreement any differently than Asten. Wangner agrees with Asten that the Agreement bars interference applications and other litigation impacting patent rights covered by the Agreement. I have no reason to believe the parties ever intrinsically believed any differently. As for its recent interference filings, Wangner simply denies the filings impact rights included in the Agreement.
The evidence is clear that neither Asten nor Wangner contemplated that the Agreement would include, resolve or affect claims or proceedings other than those expressly listed in the Agreement. Both parties also realized, and should still realize, that the filing of actions prohibited by the Agreement would constitute breach of contract. Accordingly, I do not find that the parties failed to reach a meeting of the minds on any material issue. As consideration existed on both sides, I also find that the Agreement, when signed by authorized representatives of each party, formed an enforceable contract.
D. Was there a Mutual Mistake of Fact or Fraud in the inducement justifying Rescission of the Contract?
Well-established South Carolina law states that a court can only rescind or reform a contract under the following circumstances:
(1) where the mistake is mutual and is in reference to the facts, or supposed facts, upon which the contract is based; (2) where the mistake is mutual and consists in the omission or insertion of some material element affecting the subject-matter or the terms and stipulations of the contract, inconsistent with those of the parol agreement which necessarily preceded it; (3) where the mistake is not mutual, but unilateral, and has been induced by the fraud, deceit, misrepresentation, concealment, or imposition in any form of the party opposed in interest to the reformation or rescission, without negligence on the part of the party claiming the right; (4) where the mistake is not mutual, but unilateral, and is accompanied by very strong and extraordinary circumstances, showing imbecility or something which would make it a great wrong to enforce the agreement, sustained by competent testimony of the clearest kind.
Jumper v. Queen Mab Lumber Co., S.C. Supr., 106 S.E. 473, 475 (1921).
Only clear and convincing evidence is sufficient to set aside a contract on the grounds of mutual mistake.
Blanton v. Blanton, S.C. Ct. App., 325 S.E.2d 340 (1985).
On January 7, 1997, one week before the mediation began, an examiner from the PTO ("the Examiner") signed and faxed a one-page document to the office of Wangner's counsel ("the January 7th fax"). The January 7th fax contained language confirming Wangner had the rights to several of the patent claims disputed by Asten. Clearly, this document, at the very least, boded positively for Wangner. The confirmation described in the January 7th fax, however, was unofficial. The Examiner stated in deposition that the fax was only intended to be an indication of where he was leaning on the matter, and in fact, it was not the normal course of business for the PTO to send unofficial faxes to patent holders.
Nonetheless, Wangner gleefully shared the January 7th fax with Asten right before the start of the mediation. Although Wangner later attempted to discount the significance of the January 7th fax, I am quite certain Wangner believed that the appearance of the January 7th fax greatly enhanced its position right at the most opportune moment. Before it received the January 7th fax, Wangner had made repeated inquiries with the PTO about the subject of the January 7th fax, and it seems that the Examiner departed from the normal PTO procedures in sending this fax as a direct result of Wangner's anxiety.
For its part, Asten claims it drastically altered its mediation strategy when it learned of the January 7th fax. Asten also claims it did not learn until after the mediation was complete and the Agreement signed that the document was unofficial and would not necessarily be placed into the official PTO file. Asten even goes as far as to assert that Wangner fraudulently portrayed the January 7th fax as an official document with the intent for Asten to rely on that representation.
From the evidence before me, including the credibility of witnesses who testified on the issue I find no fraud and, I am convinced Asten's representatives knew, before the Agreement was signed, that the document was unofficial and there was a chance, albeit a slight one, the contents of the January 7th fax would never make it into the official PTO record.
In any event, "[w}here there is no confidential or fiduciary relationship, and an ann's length transaction between mature, educated people is involved there is no right to rely." Poco-Grande Investments v. C S Family Credit, S.C. Ct. App., 391 S.E.2d 735, 735 (1990) (quoting Florentine Corp., Inc. v. PEDA I, Inc., S.C. Supr., 339 S.E.2d 112, 114 (1985).
In effect, Asten assumed the risk that the contents of the January 7th document would never become official. As in any business judgment, Asten weighed the risks of action against the benefits of action. Obviously, Asten decided it was a wise business decision to go through with the voluntary mediation as scheduled and to reach a binding agreement, instead of deciding to wait to see what developed officially regarding the contents of the January 7th fax. Admittedly, in the collective experience of all of the patent professionals involved in this case, a quite experienced group, no one had ever seen an examiner-signed document sent to the patent owner, but not made part of the PTO official file. Nonetheless, Asten knew the January 7th fax was unofficial, and that its transmission to Wangner was outside of the normal practice of the PTO. Perhaps, Asten afforded those facts little significance; that decision was Asten's to make. Asten, however, cannot now undo an agreement it entered into knowingly and voluntarily.
A party must avail himself of the knowledge or means of knowledge open to him. The court will not protect the person who, with full opportunity to do so, will not protect himself." Poco-Grande Investments, 391 S.E.2d at 736 (quoting King v. Oxford, S.C. Ct. App., 318 S.E.2d 125, 128 (1984)).
"A party's prediction or judgment as to events to occur in the future, even if erroneous, is not a mistake" warranting the rescission of a contract. As neither Asten nor Wangner were mistaken as to any existing or past material fact, I find no basis to rescind the contract.
RESTATEMENT (SECOND) OF CONTRACTS § 151 cmt. (1981) (also stating that "the erroneous belief must relate to the facts as they exist at the time of the making of the contract"). South Carolina law likewise requires that the mistake be based upon a finding of unknown facts that were in existence and were not in contemplation of the parties when the settlement was consummated. See Smothers v. United States Fidelity Guar. Co., S.C. Ct. App., 470 S.E.2d 858, 860 (1996).
The verbatim contents of the January 7th fax were never entered into the PTO official record. After about six months of wrangling and the issuance of two additional PTO documents, Wangner claims to now have all the rights indicated in the January 7th fax. Asten debates Wangner's interpretation, and argues that Wangner now has only one third of the rights indicated by the January 7th fax. 1, however, need not resolve this debate to decide this case.
E. Should the Agreement, now that I have decided it is a Binding Contract, be Specifically Enforced?
To be entitled to specific performance, a plaintiff must demonstrate more than the mere existence of a valid contract. I should grant specific performance only if there is no adequate remedy at law and specific enforcement of the contract is equitable. In order to be eligible for specific performance a contract also must not be infected by fraud, accident or mistake. Under South Carolina law, a flaw in the bargaining process, not grievous enough to warrant rescission of a contract, still may "taint the contract sufficiently to justify refusal of specific performance. In such an event, equity may refer the aggrieved party to a remedy at law. In an action for specific performance, the burden of proof is upon the plaintiff to establish the contract "by competent and satisfactory proof, such as is clear, definite, and certain . . . [T]he degree of certainty required is reasonable certainty having regard to the subject-matter of the contract."
King v. Oxford, S.C. Ct. App., 318 S.E.2d 125, 129 (1984).
Id .
Id .
Id., citing Masonic Temple v. Ebert, S.C., 18 S.E.2d 584 (1942).
King , 318 S.E.2d at 129.
Cash v. Maddox, S.C. Supr., 220 S.E.2d 121, 122 (1975) (quoting Aust v. Beard, S.C. Supr., 96 S.E.2d 558, 561 (1957)). The decision of whether or not to award specific performance is arguably a procedural matter. Nonetheless, even if Delaware law is applied, my decision would not differ as the Delaware and South Carolina standards are quite similar. See Hazen v. Miller, Del. Ch. , C.A. No. 1292; slip op. at 3, Jacobs, V.C. (Nov. 18, 1991) (stating that requesting party must demonstrate by clear and convincing evidence that specific performance is justified); Cheese Shop Int'l, Inc. v. Steele, Del. Supr., 311 A.2d 870, 871 (1973) (implying that specific performance is only appropriate when there is no adequate remedy at law).
Wangner argues that specific performance is equitable and appropriate because there is no adequate remedy at law and because Wangner has already performed in accordance with Agreement and will continue to do so. I agree with Wangner that it would be extremely difficult, if not impossible, to calculate reliably the value of the cross license, especially since over two years have passed since the Agreement was signed. There is no factual basis to conclude that Wangner defrauded Asten and I recognize that Wangner has thus far performed in accordance with the Agreement.
Equity respects the freedom to contract, and dictates that both Wangner and Asten should receive the benefit of their bargain through specific performance. Accordingly, I find that Wangner is entitled to have the Agreement as written specifically enforced.
F. Is this Court the correct forum to determine whether or not Asten violated South Carolina's Unfair Trade and Practices Act?
Wangner asks me to find that Asten violated South Carolina's Unfair Trade and Practices Act ("UTPA"), and to order treble damages and attorneys fees because of this violation. Alternatively, Wangner asks me to stay the UTPA claims pending resolution of these claims in a South Carolina suit. The South Carolina suit to which Wangner refers has been stayed awaiting resolution of the matters before this Court. Wangner filed the South Carolina action before Asten filed the present action before this Court. Although Wangner included its UTPA claims as counterclaims in the present action, it has clearly indicated its willingness, more probably its preference, to have the UTPA claims resolved in South Carolina courts.
In its own pleadings, Wangner states that "Wangner, with due deference to this Court, would be content for this Court to stay Wangner's [UTPA claims] pending resolution of those issues in the South Carolina suit." Def's Post-Trial Br. at 49, n. 38.
While I recognize, only too well, that "[t]he application of foreign law is not sufficient reason to warrant dismissal under the doctrine of forum non conveniens," under the doctrine of comity Delaware courts may dismiss an action when there is a prior filed action pending in a court of another state involving the same parties and claims, particularly where the same party asserts the same claims in both actions and asserted them first in the foreign jurisdiction and asserts them here only as a counterclaim. This is the case here as Wangner first filed an action in South Carolina involving the same parties and the same UTPA claims. Accordingly, I decline to stay but instead dismiss without prejudice Counts V and VI of Wangner's Counterclaim (pertaining to the UTPA claims) in order to allow Wangner to pursue those claims in the South Carolina court.
Taylor v. LSI Logic Corp., Del. Supr., 689 A.2d 1196, 1200 (1997).
Taylor v. LSI Logic Corp., Del. Supr., 715 A.2d 837, 842 (1998).
V. Conclusion
Asten has failed to demonstrate any defect in formation that would prevent the Agreement from being considered an enforceable contract, or the existence of mutual mistake regarding a material term that would justify rescission. As there is no adequate remedy at law, I order the Agreement specifically enforced as written. Applying the doctrine of comity, I dismiss Wangner's UTPA counterclaim here so that the previously stayed claims in South Carolina may proceed. Wangner will submit an order consistent with this Opinion.
_________________________ Vice Chancellor