There was apparently no public record of the seller’s license with its competitor.
M&A Stories
February 12, 2022
Introduction:
In a significant legal case, a buyer was awarded $9.2 million after discovering that the seller of a medical device had granted a patent license to a competitor, without disclosing this crucial information.
The Deal:
Back in 2006, a medical device manufacturer acquired the technology and patented intellectual property rights for a bowel management system designed for bedridden medical patients.
The Lawsuit:
However, what the buyer didn’t know was that the seller had previously made an agreement with a competitor, encumbering the same intellectual property. In a patent infringement dispute settled in 2005, the seller agreed to release the competitor from any future claims of infringement related to the technology in exchange for a payment of $5.9 million. This release was not a transfer of patent rights but a simple agreement allowing the competitor to continue using the technology without fear of legal consequences from the seller.
The Problem Arises:
In 2010, the buyer noticed that the competitor was apparently infringing on the same intellectual property it had purchased from the seller. Unaware of the release agreement, the buyer filed a lawsuit against the competitor, alleging infringement. The competitor responded by presenting the settlement agreement and release, leading to the buyer’s defeat on a summary judgment motion. Subsequently, the buyer filed a lawsuit against the seller in a Florida federal district court to recover damages.
The Court’s Decision:
After a legal battle, the court ultimately ruled in favor of the buyer and awarded them $9.2 million in damages.
This case is referred to as Hollister Incorporated v. Zassi Holdings, Inc., No. 20-10636, United States Court of Appeals, Eleventh Circuit, (December 16, 2021)
Conclusion:
This case highlights the importance of full disclosure in business deals. In this instance, due diligence would not have helped the buyer, as the seller’s agreement with the competitor was not public knowledge. It serves as a cautionary tale for buyers to thoroughly investigate any potential encumbrances on intellectual property before making important acquisitions.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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