The intentions of contracting parties are meaningless unless the parties agree on material terms, as the plaintiff learned in Phytelligence, Inc. v. Washington State University. The plaintiff argued that the option to license intellectual property in a contract with the defendant was an enforceable “agreement with open terms” rather than an unenforceable “agreement to agree.” The court disagreed, explaining that “[c]ourts are not in the business of making contracts” because the option contemplated a separate licensing agreement. ABA Litigation Section leaders view this case as a reminder to include all material terms in option agreements if parties want to exercise them.
Phytelligence, Inc., was an agricultural biotechnology start-up, organized to commercialize an innovation developed by a Washington State University Department of Horticulture professor. In November 2012, the company started negotiating a propagation agreement with the university to grow trees using the university’s proprietary WA 38 apple cultivar. The agreement forbade the company from selling WA 38 trees but granted the company “an option to participate as a provider and/or seller of [WA 38 trees]” if the university decided to license the cultivar. To exercise the option, the company needed to “sign a separate contract” with the university.
The company sought clarification of the option to license, but the university explained that it had not yet decided whether it would attempt to commercialize WA 38 or how it would do so. Accordingly, the university could not write more definitive terms into the license option. The company acknowledged that the agreement was a “strictly research undertaking” that permitted it to experiment with propagation techniques. Although concerned about the “wispy forward commitment” contained in the option language, the company signed the propagation agreement. The company rationalized that “everyone thinks . . . [it] and others would have a shot at securing commercial licenses,” so “the agreement is fine as it is.”
Several years later, when the company sought to exercise its option, the university would not present the company with “a separate contract” to do so. Rather, the university directed the company to its exclusive licensee for the right to grow and sell WA 38 trees. The company did not like the terms on which the exclusive licensee sought to contract and declined to enter into an agreement with the licensee.
The company sued the university for breach of contract in state court. The university filed counterclaims for patent and trademark infringement and removed the case to federal court. The university moved for summary judgment, arguing the language was an unenforceable agreement to agree. The company argued that the option to license contained in the propagation agreement was not an “agreement to agree,” but an enforceable agreement with open terms. The U.S. District Court for the Western District of Washington granted the university’s motion, and the U.S. Court of Appeals for the Federal Circuit affirmed.
The court of appeals relied upon the parties’ correspondence before executing the propagation agreement. In response to the company’s request for clarification of the license option, the university stated that it had not yet decided the terms of the future license. The university specifically stated that it might grant an exclusive license and let the licensee decide whether to sublicense, which is the course of action the university ultimately chose.
The court of appeals rejected the company’s argument that the option was an agreement with open terms because the agreement provided no guidance as to how to fill those open terms. Although the company argued that the parties agreed to fill the open terms with the “‘standardized licensing terms’ [the university] planned to offer other industry participants,” the court of appeals was not persuaded, holding that the parties’ contemporaneous communications refuted the company’s argument.
“Parties tend to put the amount of effort into fleshing out contract terms that they think is due, based on the value of what they are getting,” explains Richard F. Kurz, New York, NY, cochair of the Litigation Section’s Intellectual Property Committee’s Patents subcommittee. “This case shows that the parties in this particular action did not put as much thought or effort into the contract as they should have.” Kurz notes that start-ups and invention owners tend to take shortcuts when they are not sure the invention will be commercialized.
Kurz expresses concern about whether justice was served. “The parties thought the university was granting something very specific. The agreement states, ‘Phytelligence is hereby granted an option to participate as a provider and/or seller’ of WA 38 plant materials,’” he observes. “The university was transferring some definitive right, presumably in exchange for consideration from Phytelligence,” Kurz continues.
“The decision makes sense,” asserts Chad S.C. Stover, Wilmington, DE, cochair of the Section’s Intellectual Property Committee. “Distinguishing between an ‘agreement to agree’ and an ‘agreement with open terms’ is often difficult. Here, however, the precontract communications make it clear the parties did not have a meeting of the minds on licensing terms.” To avoid this problem in the future, Stover advises parties to “include material terms of the future agreement in the original agreement, or at least specify how the material terms will be determined at the later date.”
