Gen. Hosp. Corp. v. Esoterix Genetic Labs., LLC

16 F.4th 304

The GENERAL HOSPITAL CORPORATION ; Dana-Farber Cancer Institute, Inc., Plaintiffs, Appellees/Cross-Appellants,

v.ESOTERIX GENETIC LABORATORIES, LLC, Defendant, Appellant/Cross-Appellee,Laboratory Corporation of America Holdings, a/k/a Laboratory Corporation of America, Defendant, Cross-Appellee.

Nos. 20-2126

20-2149

United States Court of Appeals, First Circuit.

October 7, 2021

Christopher R. Howe, with whom Campbell Conroy & O'Neil, P.C., Robert I. Steiner, Jaclyn M. Metzinger, and Kelley Drye & Warren LLP were on brief, for defendants.

Douglas J. Nash, with whom Carolyn M. Crowley and Barclay Damon LLP were on brief, for plaintiffs.

Before Lynch, Selya, and Barron, Circuit Judges.

SELYA, Circuit Judge.

Although these appeals arise out of a dispute between sophisticated entities concerning intellectual-property rights, they turn on abecedarian principles of contract law. Those principles, though familiar, are often difficult to apply. Because the court below erred in applying the pertinent principles to the documents at hand, we vacate its million-dollar-plus damages award and certain of its other rulings, and we remand for further proceedings consistent with this opinion.

I. BACKGROUND

We start by rehearsing the relevant facts and travel of the case. The plaintiffs, The General Hospital Corporation and Dana-Farber Cancer Institute, Inc. (collectively, the Hospitals), own patents related to the detection of the epidermal growth factor receptor (EGFR) mutation that, when present, suggests that certain cancer treatments are likely to be effective. In 2005, the Hospitals licensed the patents to a company that was in the genetic-testing business. Under the master license agreement (the License), the licensee is permitted to use and sell certain products and processes covered by the EGFR-detection patents, as well as to sublicense those same rights to third parties. In exchange, the licensee is required to pay stipulated amounts, including an annual license fee, royalties on its use and sales of the processes and products, and a portion of the fees and other income received from sublicensees (including their royalty payments).

Approximately five years later, the prior licensee's rights were passed on to one of the defendants, Laboratory Corporation of America Holdings (LabCorp), when LabCorp purchased most of the seller's genetic-testing business. The rights later passed to defendant Esoterix Genetic Laboratories, LLC (Esoterix) — an entity created by LabCorp to manage the assets.

According to the License, royalties and sublicensing fees and income are to be paid twice a year following six-month reporting periods ending on June 30 and December 31. The License delineates how these payments are to be computed. Royalties owed on sales of processes, for example, are calculated by multiplying a "royalty rate" by the "CONTRACT NET SALES," as defined, of processes sold during a reporting period. Though simple on its face, this calculation requires further computation to determine the inputs. Payments owed for sublicensing arrangements are calculated more straightforwardly: Esoterix owes the Hospitals a fixed percentage of certain fees or income collected from sublicensees.

In 2014, Esoterix sued QIAGEN Manchester, Ltd. and other related entities (collectively, QIAGEN), for, inter alia, breach of a sublicense anent the EGFR-detection patents. QIAGEN filed counterclaims challenging the patents’ validity. Esoterix and LabCorp eventually settled all claims with QIAGEN. They also agreed to pay the Hospitals a portion of the settlement amount paid by QIAGEN. The parties entered into a settlement agreement to this effect on June 27, 2017.¹ Section 3.1 of the settlement agreement comprised a broad release, which was effective as of the date of execution of the agreement. In it, the Hospitals released Esoterix and LabCorp:

of, from, and with respect to, any and all liabilities, losses, damages, charges, complaints, claims, counterclaims, obligations, promises, agreements, controversies, actions, causes of action, suits, rights, demands, costs, debts and expenses (including attorneys’ fees and court costs) of any nature whatsoever, known or unknown, suspected or unsuspected that may have arisen before the Effective Date, which [the Hospitals] may have, own or hold, or claim to have, own or hold against [Esoterix and LabCorp], relating to or arising from (i) the acts or omissions that were stated in, arose out of, or which may have arisen out of, the [prior litigation], (ii) the Patent Rights; (iii) the [License], including but not limited to the provision of any notice(s) required under the [License] or the payment of any past royalties or other fees pursuant to the [License] ....

Under the terms of the License, a reporting period closed on June 30, 2017 (a few days after the effective date of the release). Esoterix's royalties and sublicensing payments, along with a semi-annual royalty report, were due within forty-five days thereafter. Esoterix took the position that the release operated to discharge the payment obligations for all uses and sales that occurred before June 27. Accordingly, its report for that reporting period supplied revenue and royalty information only for the period between June 28 and June 30.² The payments owed for those few days were defrayed by application of Esoterix's annual license fee, an offset that was permissible under the License.

Unwilling to turn the other cheek, the Hospitals brought suit in a Massachusetts state court. Noting the existence of diversity jurisdiction, the defendants removed the action to the United States District Court for the District of Massachusetts. See 28 U.S.C. §§ 1332(a), 1441. The Hospitals alleged, among other things, that Esoterix and LabCorp violated the terms of the License by failing to pay amounts owed for the entire reporting period ending June 30, 2017. Soon after removal, the defendants moved to dismiss. See Fed. R. Civ. P. 12(b)(6). The Hospitals opposed that motion and went on the offensive, filing a motion for partial summary judgment on their breach of contract claim.

The district court consolidated these motions for hearing. Thereafter, the court granted the Hospitals’ partial summary judgment motion, concluding that Esoterix had not been released from its obligation to pay royalties and sublicensing fees for uses and sales occurring before June 27.³ See Gen. Hosp. Corp. v. Esoterix Genetic Lab'ys, LLC, No. 18-11360, 2019 WL 4218706, at *1, *4 (D. Mass. Sept. 4, 2019). Esoterix's motion to dismiss was denied, save for the count of the complaint that sought reformation of the settlement agreement (count five). See id. at *5-6. That count was dismissed as moot (due to the court's disposition of the breach of contract claim). See id. Following the parties’ stipulation to dismiss without prejudice the remaining claims — including those pending against LabCorp — the court entered judgment for the Hospitals on the breach of contract claim in an agreed-upon sum of $1,291,427.13 plus interest. The judgment also granted the Hospitals’ prayer for an audit and accounting. These timely appeals ensued.

II. ANALYSIS

These appeals rise or fall on the Hospitals’ claim that Esoterix breached the License by failing to pay certain royalties and sublicensing fees. Our analysis of that claim begins — and ends — with Esoterix's flagship contention: that the terms of the release wiped out Esoterix's obligations to pay the unpaid royalties and sublicensing fees for uses and sales that occurred before the effective date of the release (June 27). Contrary to the district court's determination, the terms of the release and the License do not indicate that Esoterix's obligations arose after the release's effective date (when they became due and payable).

We subdivide our analysis into three segments. First, we review the text of the relevant release provision. Next, we assess the district court's interpretation of that provision. Finally, we address the effect of the release and explain how it operates in this case.

For the most part, the applicable legal standards are familiar. We review the district court's entry of summary judgment de novo. See Mason v. Telefunken Semiconductors Am., LLC, 797 F.3d 33, 37 (1st Cir. 2015). In the course of that review, we take the facts in the light most hospitable to the nonmovant (here, Esoterix) and draw all reasonable inferences therefrom to that party's behoof. See id.

This case, removed from a state court, is brought in diversity jurisdiction. See 28 U.S.C. § 1332. Thus, although we look to federal law for the summary judgment framework, we look to state law for the substantive rules of decision. See Mason, 797 F.3d at 38 (citing Hanna v. Plumer, 380 U.S. 460, 473, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965) ). The parties agree — and the choice-of-law provisions in the settlement and license agreements reflect — that Massachusetts is the wellspring of the relevant state law.

A. The Settlement Agreement and Release.

In matters of contract, words are the signposts that the contracting parties use to demarcate the boundaries of their agreement. Consequently, we begin with the text of the release provision contained within the settlement agreement.

Under Massachusetts law, the interpretation of a contractual provision is a question of law for the court. See NTV Mgmt., Inc. v. Lightship Glob. Ventures, LLC, 484 Mass. 235, 140 N.E.3d 436, 443 (2020) ; see also Bank v. Thermo Elemental Inc., 451 Mass. 638, 888 N.E.2d 897, 907 (2008). "Contract language is ambiguous where the phraseology can support a reasonable difference of opinion as to the meaning of the words employed and the obligations undertaken." Bank, 888 N.E.2d at 907 (quotations omitted). "[T]he parties’ intent must be gathered from a fair construction of the contract as a whole and not by special emphasis upon any one part." Bukuras v. Mueller Grp., LLC, 592 F.3d 255, 262 (1st Cir. 2010) (...