Zoetis, Inc. v. Boehringer Ingelheim Vetmedica, GmbH

Background

Zoetis, Inc. sued Boehringer Ingelheim Vetmedica, GmbH (BIV) for breach of contract and sought a declaration concerning deductions BIV made from royalty payments owed under a patent license agreement. The parties’ January 1, 2010 License Agreement concerned cross-licensed patents related to animal vaccines and required BIV to pay royalties to Zoetis for vaccines BIV sold.

Section 4.4 allowed BIV to deduct an amount equal to royalties BIV paid under a separate Merial-BI License Agreement, subject to a limit that the credit could not reduce the amount owed to Zoetis below 60 percent of the required royalty. The agreement defined that term by referring to specified agreements signed by Merial and BIV.

BIV acquired Merial in 2017. In late 2016, Zoetis and BIV amended their agreement. The First Amendment added that no credit could be applied for royalties paid to an affiliate of BIV. The agreement defined an affiliate as an entity directly or indirectly controlling, controlled by, or under common control with a party. The amendment was intended to prevent BIV, after acquiring Merial, from paying royalties to Merial and deducting those payments from royalties owed to Zoetis.

BIV continued taking deductions. It later acknowledged that deductions from the second quarter of 2018 through the fourth quarter of 2019 were inadvertent. During discovery, BIV produced amended reports concerning the first quarter of 2017 through the first quarter of 2018. Those reports treated payments to certain universities as eligible for credits. BIV explained that Merial had obtained licenses from the universities and that Merial passed royalties received from BIV to them. BIV also produced a Second Amendment to the First Restated Sublicense Agreement, made retroactive to March 31, 2017, under which BIV adopted Merial’s payment obligations to the universities and paid the universities directly.

Issue and analysis

The motion sought summary judgment, which is a decision without a trial when there is no genuine dispute about a material fact and the moving party is entitled to judgment under the law. The parties agreed that the central issue was the interpretation of Section 4.4. The court applied New York law because the License Agreement contained a New York choice-of-law provision and the parties’ briefing assumed that New York law governed.

The court held that the agreement’s language was clear and unambiguous. Section 4.4 permitted deductions only for payments made under the Merial-BI License Agreement and prohibited credits for royalties paid to an affiliate of BIV.

If the university payments were made through Merial, they could not be deducted because Merial was BIV’s affiliate. If BIV made the payments directly, they could not be deducted because the defined Merial-BI License Agreement contemplated payments from BIV to Merial, not direct payments from BIV to the universities.

The court rejected BIV’s argument that this interpretation made Section 4.4 meaningless. The provision could still apply to payments BIV made to Merial before acquiring Merial, and it could apply again if Merial and its patents were later separated from BIV.

The court also rejected BIV’s argument that the Second Amendment made the university payments payments under the Merial-BI License Agreement. The License Agreement’s definition referred only to the earlier agreements and did not include the Second Amendment. Although parties may generally agree to alter their own obligations retroactively, the court stated that they could not retroactively recharacterize past payments to the detriment of Zoetis, a third party whose royalty rights were affected.

Finally, the court rejected BIV’s argument that denying the deductions was commercially unreasonable because BIV would have to pay both the universities and Zoetis. The court explained that Section 4.4 protected against double payments only concerning obligations to Merial and Zoetis, not payments to every other party. The court also found the result commercially reasonable in light of the parties’ arrangements after BIV acquired Merial.

Ruling

Judge Denise Cote granted Zoetis’s motion for summary judgment on whether BIV was permitted to deduct the university payments from royalties owed to Zoetis. The opinion stated that the motion did not include a determination of the amount of damages.