Diomed, Inc.

1Prior to the hearing, Endolaser filed a Response to the Objection [docket #384]
followed by a Supplemental Response [docket #400] filed after the hearing. The
Debtors and Creditors’ Committee then submitted a Post-Hearing Memorandum and
Response to Endolaser’s Supplemental Response [docket # 410].
UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
In re 	: 	Chapter 11
DIOMED INC. et al. 	: 	CASE NO. 08-40749-JBR
DEBTORS 	:
MEMORANDUM OF DECISION ON APPLICATION OF ENDOLASER ASSOCIATES,
L.L.C. FOR ALLOWANCE AND PAYMENT OF ADMINISTRATIVE EXPENSE CLAIM
PURSUANT TO 11 U.S.C. §§ 503(a), 503(b) AND 507(a)(2)
This matter came before the Court for hearing on the Application of Endolaser
Associates, L.L.C. for Allowance of Administrative Expense Claim pursuant to 11 U.S.C.
§§ 503(a), 503(b) and 507(a)(2) [docket # 328] and the objections of the Debtors
[docket # 356] and Creditors’ Committee [docket # 357]. Endolaser asserts an
administrative claim of approximately $2.33 million while the Debtors and Creditors’
Committee disagree as to the amount, and with respect to most of the claim, the
classification of the claim as administrative. Upon consideration of the arguments
raised by the parties at the hearing and in their pleadings1 and for the reasons set forth
herein, the Application is allowed in part and denied in part. A portion of the claim,
namely that arising from rejection of the License Agreement, may be allowed as a
general unsecured claim if Endolaser is able to establish that such claim is part of the
rejection damages. The amount of the claim, both the administrative expense and the
unsecured portions, will be determined at a later evidentiary hearing if the parties are
unable to resolve that dispute.
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2The inventors named in the 777 Patent included Doctors Luis Navarro, Lester
Navarro, Carlos Bone Salat, Joaquina Fructuoso Gomez, and Robert J. Min. Endolaser
obtained its undivided interest by acquiring the interests of all of the inventors except Dr.
Min.
3During the June 2, 2008 hearing, Diomed’s attorneys referred to the fact that
Diomed purchased the Min interest in the 777 Patent before it entered into the License
Agreement with Endolaser. See Transcript of June 2, 2008 hearing (docket # 322)
(hereinafter cited as “Tr.”) at page 14, lines 13-18, and page 24, line 24 through page
25, line 1. As Endolaser acknowledges in its Application and as the documents
indicate, the Min interest was obtained by a purchase agreement dated July 23, 2003
while the License Agreement is dated July 11, 2003. This troubling discrepancy is not
relevant to the Court’s decision.
2
FACTS
The facts are not in dispute but, as far as the Court can determine, present a
scenario caused by the intersection of bankruptcy and patent law not addressed in any
published decision. In July 2003 the Debtor, Diomed, Inc., entered into a license
agreement with Endolaser whereby Diomed received an exclusive license, including the
sole right to issue sublicenses, of Endolaser’s undivided interest in U.S. Patent No.
6,398,777 (the “777 Patent”), 2 which is used in the manufacturing of products for
endovenous laser treatment of varicose veins, in exchange for a lump sum payment
and the obligation to make periodic royalty payments. See License Agreement at ¶ 5.
Diomed was to use “commercially reasonable efforts to actively market and sell
Licensed Products....” See License Agreement at ¶ 3.1. The License Agreement also
conferred on Diomed the sole right to enforce the 777 Patent, including discretion
whether to bring infringement actions and the right to settle such actions. See License
Agreement at ¶ 4.6. 	Diomed subsequently purchased the remaining undivided interest
in the 777 Patent from its holder, Dr. Robert Min.3 In 2004 Diomed sued
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3
AngioDynamics, Inc. (“Angio”) and Vascular Solutions, Inc. (“VSI”) for infringement of
the 777 Patent in the United States District Court for the District of Massachusetts and
obtained jury verdicts of $9.71 million and $4.975 against Angio and VSI respectively.
Angio and VSI were also permanently enjoined from infringing on the 777 Patent. Angio
and VSI both appealed. On March 14, 2008 (the “Petition Date”), approximately one
month before oral arguments were to be heard in the appeal, Diomed and Diomed
Holdings, Inc. (the “Debtors”) filed voluntary petitions for reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code.
Shortly after the Petition Date Diomed filed a Motion to Approve Compromise
with Angio (docket # 67), which was approved, without objection, on April 2, 2008.
Under the compromise the judgment against Angio was reduced to $7 million and Angio
dismissed its appeal. On April 8, 2008 Diomed filed a Motion to Approve Compromise
with VSI (docket # 137), which was approved, without objection, on April 16, 2008.
Pursuant to the VSI compromise the judgment against VSI was reduced to $3,586,478
and the remainder of the appeal was dismissed. The permanent injunction prohibiting
Angio and VSI from infringing on the 777 Patent remained in effect after the
compromises, however.
The License Agreement provides that Endolaser shall share in the settlement
proceeds. Specifically the License Agreement calls for Endolaser to receive 25% of the
settlement proceeds minus all Patent Litigation Costs and applicable Interest Factors,
both as defined in the License Agreement. See License Agreement at ¶ 5. Diomed has
not tendered and Endolaser has not received any portion of the settlement proceeds.
On April 9, 2008 the Debtors filed a Motion to Sell (docket # 149), which
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4Although the cost of curing the defaults under the License Agreement was not
quantified, the parties appear to agree that the cost would be “significant.” See
Emergency Motion to Reject License Agreement at ¶ 13.
4
proposed to sell substantially all of the Debtors’ assets to Angio. Among the items that
Angio was to receive was
[a]n agreement executed by Sellers in form and substance
reasonably satisfactory to the parties: (i) granting Buyer the
right of first refusal with respect to the sale of the 777 Patent
and the exclusive license with respect thereto; (ii) a release
and agreement not to sue or otherwise file legal actions
against Buyer for infringement of the 777 Patent, which shall
be binding upon the Sellers’ successors and assigns; and
(iii) releasing the injunction imposed against Buyer in the
District Court of Massachusetts relating to litigation between
Buyers and Sellers over the 777 Patent....
Asset Purchase Agreement, dated April 9, 2008 (the “APA”) at Section 3.2(k).
Endolaser objected (docket # 269 and # 288) on the grounds that the APA, especially
Section 3.2(k) was a thinly disguised attempt to transfer ownership and control of the
exclusive license of the 777 Patent to Angio without assuming and assigning the
License Agreement. 4 At the first hearing on the Motion to Sell, held on May 28, 2008,
the Court agreed and advised the parties it would not approve the sale as contemplated
but urged the parties to resolve the dispute. When the parties were unable to reach a
resolution, the Debtors and Angio filed an amendment to Section 3.2(k) of the Asset
Purchase Agreement (docket # 292) whereby the sale was restructured to provide
Angio with “a non-exclusive, worldwide, perpetual, fully paid-up, royalty free license
under Diomed’s undivided ownership interest in the 777 Patent and all foreign
counterparts....” Amended Section 3.2(k) also required the Debtors to cooperate with
Angio “in all actions deemed reasonably necessary” by Angio to vacate the permanent
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5Other than this simple statement, the motion does not address the timing of the
two events in relation to each other.
6Clean and blacklined copies of the orders approving the sale and rejection of the
License Agreement appear on the docket at # 298 and # 299 (the sale order) and # 300
and #301 (the rejection order).
7See Tr. at page 35, line 25 through page 36, line 3 and page 42, lines 12-17.
5
injunction. At the same time the Debtors filed an emergency motion to reject the
License Agreement (docket #290) “in conjunction with the sale” of their assets.5 Both
motions were allowed on June 2, 2008 with some modifications, including the deletion of
the word “worldwide” from amended Section 3.2(k). 6 At the express request of
Endolaser, 7 to which the Debtors and Angio acquiesced, the Motion to Reject License
Agreement was allowed and became effective before the sale was consummated.
Endolaser also agreed not to oppose the dissolution of the permanent injunction as to
Angio and expressly reserved its rights to assert its monetary claims under the License
Agreement before this Court.
ENDOLASER’S ADMINISTRATIVE CLAIM
Endolaser now seeks allowance and payment of an administrative claim, which
consists of four separate components. First, Endolaser seeks an administrative claim
for royalties for the use of the 777 Patent in products that were sold postpetition but
prior to the rejection of the License Agreement (the “Prerejection Royalty Claim”).
Second, Endolaser alleges an administrative claim for royalties for the bulk sale of
products using the 777 Patent, which were sold to Angio as part of the sale of
substantially all of the Debtors’ assets (the “Bulk Inventory Royalty Claim”). Third,
Endolaser seeks administrative treatment for its claim to a portion of the net settlement
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8Section 503(a) addresses when a request for administrative payment may be
made: either “timely” or “tardily... if permitted by the court for cause.” An administrative
bar date has not been set and thus the request is timely.
9Section 507(a)(2) grants a second priority, behind domestic support orders, to
administrative expenses allowed under section 503(b).
6
proceeds derived from the Angio and VSI settlements (the “Settlement Proceeds
Claim”). Finally, Endolaser alleges an administrative claim for damages it avers
resulted from Diomed’s agreement to cooperate with Angio in having the permanent
injunction released (the “Permanent Injunction Release Claim”).
DISCUSSION
Endolaser asserts a claim pursuant to 11 U.S.C. §§ 503(a),8 503(b)(1)(A), and
507(a)(2). 9 It is the application of § 503(b) that determines whether Endolaser has an
administrative claim. That section provides in pertinent part:
After notice and a hearing, there shall be allowed
administrative expenses, other than claims allowed under
section 502(f) of this title, including--
(1)(A) the actual, necessary costs and expenses of preserving the
estate....
As the party asserting the administrative claim, Endolaser bears the burden of
satisfying each element of § 503(a)(2)(B) by a preponderance of the evidence. Woburn
Assoc. v. Kahn (In re Hemingway Transport, Inc.), 954 F.2d 1, 5 (1st Cir. 1992). Citing
to the pre-Bankruptcy Code case of Cramer v. Mammoth Mart, Inc. (In re Mammoth
Mart, Inc.), 536 F.2d 950 (1st Cir. 1976), the Hemingway court instructed that generally
a request for priority payment of an administrative expense
pursuant to Bankruptcy Code § 503(a) may qualify if (1) the
right to payment arose from a postpetition transaction with
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10Based on the Supreme Court decision of Reading Co. v. Brown, 391 U.S. 471,
88 S.Ct. 1759 (1968), the First Circuit has also recognized a “special category” of
administrative expense claim based on principles of fundamental fairness. Hemingway,
954 F.2d at 5; Mammorth Mart, 536 F.2d at 954. Traditionally, such administrative
expense claims, however, have been applied to torts and speak only to the second
prong of the what the PYXSYS court referred to as the Mammoth Mart/Hemingway
analysis as the special category arises only when the claimants are “injured by the
debtor-in-possession’s operation of the business even though their claims did not arise
from transactions that were necessary to preserve or rehabilitate the estate.”
Hemingway, 954 F.2d at 5(quoting Mammorth Mart, 536 F.2d at 954). See also Spunt
v.Charlesbank Laundry, Inc. (In re Charlesbank Laundry, Inc.), 755 F.2d 200 (1st Cir.
1985)(granting administrative status to award of damages for postpetition breach of
injunction aimed at preventing a nuisance); Carter-Wallace, Inc. v. Davis-Edwards
Pharmacal Corp., 443 F.2d 867, 874 (2d Cir.1971)(terminating a temporary injunction
against debtor’s use of patent and noting patentee would have administrative claim if
debtor’s postpetition use subsequently determined to be an infringement). Endolaser
has not alleged it is seeking administrative status under the “special
circumstances”standard. Nevertheless, as dealt with herein, it advocates that fairness
mandates allowance of its claim as administrative.
7
the debtor estate, rather than from a prepetition transaction
with the debtor, and (2) the consideration supporting the
right to payment was beneficial to the estate of the debtor.
Hemingway, 954 F.2d at 5. See also In re PYXSYS, 288 B.R. 309 (Bankr. D. Mass.
2003). 10 “The traditional presumption favoring ratable distribution among all holders of
unsecured claims counsels strict construction of the Bankruptcy Code provisions
governing requests for priority payment of administrative expenses.” Hemingway, 954
F.2d at 4-5. Nevertheless, as one of the primary purposes of § 503(b)(1)(A) is to
encourage parties to do business with a debtor in possession or trustee, the “actual,
necessary costs and expenses of preserving the estate” include “the actual and
necessary expenditures of the trustee in operating the business of the estate.” 4 L.
KING, COLLIER ON BANKRUPTCY ¶ 503.06, at 503-24.2 15 th Ed. Rev. 1995).
Before turning to Endolaser’s claims, the Court notes that some fundamental
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8
tenets of patent law are central to its analysis of whether each of the four components of
Endolaser’s claim satisfies § 503(b)(1)(A). When multiple inventors are named as the
inventors of a patent, each co-owner presumptively owns a pro rata undivided interest in
the entire patent, no matter how great or small his individual contribution to the
invention. Israel Bio-Engineering Project v. Amgen, Inc., 475 F.3d 1256, 1263 (Fed. Cir.
2007). With co-ownership comes the power to use the patent in its entirety, even if the
circumstances suggest that the use results in the abuse of the rights of the remaining
co-owners.
The rights of co-owners of a patent stem from 35 U.S.C.A. § 262, which provides:
In the absence of any agreement to the contrary, each of the
joint owners of a patent may make, use, offer to sell, or sell
the patented invention within the United States, or import the
patented invention into the United States, without the
consent of and without accounting to the other owners.
(Emphasis added).
See also Massachusetts Eye and Ear Infirmary v. QLT Phototherapeutics, Inc., 412
F.3d 215, 236 (1st Cir. 2005), cert. denied 547 U.S. 1147, 126 S.Ct. 2296 (2006)
quoting CORPUS J URIS 2D PATENTS § 315 (“[I]n the absence of any agreement to the
contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the
patented invention ... unless such profits accrue after a joint owner has procured an
assignment of his coowner's interest to himself by fraud.”); Gibbs v. Emerson Elec. Mfg.
Co., 29 F. Supp. 810, 811 -12 (D.C.MO. 1939) quoting 48 CORPUS JURIS § 365 (“The
use of a patent right is different from the use of any other property, and in determining
the rights, powers, and liabilities of coowners of patents it is not safe to follow the rules
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11At oral argument the Debtor stated that administrative treatment for this portion
of the claim may not be appropriate under Mammoth Mart. The Court disagrees and
concludes this portion of the claim is what can be described as a “classic” administrative
claim. See In re Beverage Canners Int’l Corp., 255 B.R. 89 (Bankr. S.D.Fla. 2000)
(granting administrative status to a trademark licensor whose mark was used
postpetition despite the fact that the licence agreement was prepetition).
9
adopted in regard to coowners of ordinary chattels. The nature of a patent is such that
joint owners in it are at the mercy of each other. In the absence of a special agreement,
each co-owner may manufacture, use, and sell the patented invention with or without
the consent of his coowner, no matter how small his interest may be, without liability to
account for his individual use of the invention, and without being liable to account for
profits, unless such profits accrue after a joint owner has procured an assignment of his
coowner's interest to himself by fraud.”). When there is no agreement to the contrary,
each co-owner “may use the whole of the invention as he wishes, or he may grant a
non-exclusive license to outsiders to use it, and may then retain the proceeds and
profits thereof.” Milgram v. Jiffy Equipment Co., 362 Mo. 1194, 1200, 247 S.W.2d 668,
673 (1952).
With these principles as the framework for its analysis, the Court must examine
each of the four components of Endolaser’s claim.
1. The Prerejection Royalty Claim
The parties agree that this component of the claim is entitled to administrative
treatment. 11 The only dispute is the amount of the royalty payments outstanding. The
Court has ordered the parties to file a written status report regarding their efforts to
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12Diomed has not presented any evidence that the measure of the value received
by its postpetition, prerejection use of the license was anything other than the value
ascribed to the license in the License Agreement, namely the royalty payments.
“Presumptively, the value of consideration received under an executory contract is the
amount set forth in such contract. ...The basis for such a presumption is that the parties
are in the best position to negotiate the terms and value of the consideration. It logically
follows that if a debtor makes full use of the services provided under a contract, the
benefit to the debtor is the entire bargained for value pursuant to such agreement.”
Beverage Canners, 255 B.R. at 93 (internal citations omitted).
10
resolve what appears to be little more than an arithmetic calculation.12 In the event that
the parties are unable to reach a resolution, the Court will schedule a further hearing.
2. The Bulk Inventory Royalty Claim
The parties disagree whether the sale of inventory as part of the sale of
substantially all of the Debtors’ assets triggers a royalty claim that should be afforded
administrative treatment. Quite simply Endolaser alleges that it is entitled to an
administrative claim because the sale of this inventory occurred postpetition and
generated approximately $1.5 million of the purchase price for the estates. This
position assumes that the bulk sale necessarily occurred pursuant to the License
Agreement, a scenario that is factually inaccurate. Moreover, Endolaser’s Response
proclaims “it is beyond good faith debate that the only reason why the License
Agreement was rejected immediately prior to the sale, [sic] was to prevent Diomed from
selling exclusive rights in the ‘777 Patent without compensating Endolaser as required
by the Bankruptcy Code.” Of course this statement ignores that it was Endolaser who
insisted on the timing of the rejection. Nor can Endolaser’s argument that it is unfair for
the Debtors to have used its license to negotiate the sale carry the day. The special
circumstances exception to the general rule regarding administrative claims does not
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11
actually create the claim.
If there is such a thing as a fundamental fairness doctrine in
bankruptcy, it is pertinent to the determination of the request
that a claim be afforded administrative priority; it has nothing
to do with the validity of the claim itself. The estate's liability
cannot be based on any such doctrine, but only on some
violation of a legal duty imposed by the bankruptcy code or
non-bankruptcy law....
In re Sheridan, 174 B.R. 763, 767 (Bankr. N.D.Ill.1994), aff’d 187 B.R. 611 (N.D.Ill.
1995).
The Debtors argue that, at best, the claim is unsecured as the sale occurred after
the License Agreement was rejected but they assert that the correct treatment for the
Bulk Inventory Claim is to deny it in its entirety as sale of the 777 Patent inventory was
permissible under Diomed’s ownership of its undivided interest in the 777 Patent.
Because co-owners of patents may license the patent without accounting to the other
co-owners for the profits, they argue Endolaser is not entitled to any claim, much less
an administrative one.
Prior to rejection of the License Agreement, Diomed and Endolaser had modified
their rights under 35 U.S.C.A. § 262; they agreed that only Diomed would use, market,
and sublicense the 777 Patent and in exchange, Diomed agreed to make royalty
payments based on products sold. That landscape changed and changed dramatically
when the License Agreement was rejected, even if said rejection only took place
immediately before the sale.
Rejection of an executory contract is “[o]ne of the most powerful tools in the
chapter 11 debtor-in-possession’s bankruptcy tool kit.” In re Dehon, 352 B.R. 546, 558
(Bankr. D. Mass. 2006). “Rejection does not constitute a termination of the contract....
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13N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 104 S.Ct. 1188 (1984).
14Lubrizol’s holding was superceded by the enactment of 11 U.S.C. § 365(n),
which gives special protection to licensees of intellectual property rights when the
debtor is the licensor. The enactment of § 365(n) does not detract from the Lubrizol
court’s analysis.
12
It does not cause a contract to magically vanish. Rather, the Debtor's rejection of the
lease of the Property constitutes a breach of the lease as of the petition date.” In re The
Ground Round, Inc., 335 B.R. 253, 261 (1st Cir. B.A.P. 2005), aff’d 482 F.3d 15 (1st Cir.
2007). See 11 U.S.C. § 502(g). Once rejection occurred, however, Diomed’s right to
the continued use of the exclusive license ended. Ground Round, Inc., 482 F.3d at 18.
Upon rejection, Diomed could no longer sell inventory using Endolaser’s license but,
because of the machinations of patent law, it did not need Endolaser’s license. Its co-
ownership was enough.
That the results of rejecting an executory contract can be onerous does not
permit this Court to ignore § 365.
Congress has plainly provided for the rejection of executory
contracts, notwithstanding the obvious adverse
consequences for contracting parties thereby made
inevitable. Awareness by Congress of those consequences
is indeed specifically reflected in the special treatment
accorded to union members under collective bargaining
contracts, see Bildisco, 465 U.S. at ----, 104 S.Ct. at 1193-
96, [13] and to lessees of real property, see 11 U.S.C. §
365(h). But no comparable special treatment is provided for
technology licensees such as Lubrizol. They share the
general hazards created by § 365 for all business entities
dealing with potential bankrupts in the respects at issue here.
Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1048 (4th
Cir. 1985), cert. denied 475 U.S. 1057, 106 S.Ct. 1285, 89 L.Ed2d 592 (1986). 14 Free
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15License Agreement at ¶ 5.3; 5.4; 5.5; and 5.6.
16Similarly the Court is not ruling whether any unsecured claim asserted by
Endolaser would be timely.
13
from its obligations under the contract, Diomed could use, market, and/or sublicense,
albeit on a non-exclusive basis, the technology without accounting for, or remitting to
Endolaser, any profits. Although the bulk sale of inventory occurred post-petition and
indeed the inventory itself was manufactured while the License Agreement was still in
effect, the triggering event for the payment of royalties, namely the actual sale of the
inventory, 15 occurred after the agreement was rejected. It occurred pursuant to
Diomed’s co-ownership rights as set forth in 35 U.S.C.A. § 262; Diomed did not need
nor did it use any portion of the License Agreement or Endolaser’s rights to accomplish
the bulk sale. Therefore Endolaser’s Bulk Inventory Royalty Claim must be denied
administrative status. Endolaser, however, may assert the royalties as part of its
unsecured claim for damages arising from the rejection of the License Agreement.
Whether the royalties can be allowed as part of Endolaser’s rejection claim is left for
another day. 16
3. The Settlement Proceeds Claim
Endolaser seeks administrative treatment for its claim to 25% of the net
settlement proceeds on the ground that the claim to the proceeds arose postpetition,
namely when the Court approved the compromises with Angio and VSI. It argues that
prior to that point, the judgment could have been reversed on appeal. The Debtors
disagree; they assert that Endolaser’s argument that the judgment could have been
reversed is simply a way of saying the judgment was contingent claim. According to the
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14
Debtors and the Committee, because this claim arose, at the very latest, when
judgment entered, the Settlement Proceeds Claim cannot satisfy the Mammoth
Mart/Hemingway standard; it is a prepetition general unsecured claim. As support the
Debtors rely on the Bankruptcy Code’s definition of “claim.”
If the Debtors are correct, then a contingent claim does not metamorphose into
an administrative claim simply because it becomes fixed postpetition. But before
concluding whether or not the Settlement Proceeds Claim is a garden variety prepetition
contingent claim, the Court must examine both the Bankruptcy Code’s definition of
“claim” and the unique considerations of patent law.
The term “claim” includes a “right to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured....” 11 U.S.C.A. §
101(5)(A). If the Court’s inquiry began and ended with the definitional section, then the
Debtors would be correct in their characterization of the Settlement Proceeds Claim.
But another basic principle of patent law creates a wrinkle.
“It is well settled that, in the absence of an agreement to the contrary, one co-
owner of a patent cannot sue a third party for infringement unless all other co-owners of
the patent voluntarily join the suit.” Ethicon, Inc. v. U.S. Surgical Corp., 954 F. Supp.
51, 53 (D. Conn. 1997), aff’d 135 F.3d 1456 (Fed. Cir. 1998), cert. denied 525 U.S. 923,
119 S.Ct 278, 142 L.Ed.2d 229 (1998). See Waterman v. Mackenzie, 138 U.S. 252,
255, 11 S.Ct. 334, 335, 34 L.Ed. 923 (1891). Chisum, Patents, § 21.03[3], 21-295
(2008). This is frequently expressed by noting that one co-owner, acting alone, lacks
standing to bring an infringement action. "The doctrine of standing limits federal judicial
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15
power and has both constitutional and prudential components." Media Techs. Licensing,
LLC v. Upper Deck Co., 334 F.3d 1366, 1369 (Fed. Cir. 2003).
[T]he irreducible constitutional minimum of standing contains
three elements. First, the plaintiff must have suffered an
“injury in fact”-an invasion of a legally protected interest
which is (a) concrete and particularized,... and (b) actual or
imminent, not conjectural or hypothetical, .... Second, there
must be a causal connection between the injury and the
conduct complained of-the injury has to be fairly ...
trace[able] to the challenged action of the defendant, and not
... th[e] result [of] the independent action of some third party
not before the court.... Third, it must be “likely,” as opposed
to merely “speculative,” that the injury will be “redressed by a
favorable decision.” Id., at 38, 43, 96 S.Ct., at 1924, 1926.
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-561, 112 S.Ct. 2130, 2136
(1992)(internal citations and quotation marks omitted). Clearly Diomed had
constitutional standing at every stage without regard to whether or not Endolaser joined
in the litigation. But the prudential consideration for standing requires further investigation.
Waterman v. Mackenzie, 138 U.S. 252, 255 (1891), is frequently cited as the origin for
the prudential doctrine of standing in patent infringement cases. In Waterman, the
Court stated, among other things, that all patent owners have standing to sue for patent
infringement. Subsequently, in Independent Wireless Telegraph Co. v. Radio
Corporation of America, 269 U.S. 459, 468, 46 S.Ct. 166, 169 (U.S. 1926), the Court
explained why both the owner and the exclusive licensee of a patent were necessary
parties to infringement suits.
The presence of the owner of the patent as a party is
indispensable, not only to give jurisdiction under the patent
laws, but also in most cases to enable the alleged infringer
to respond in one action to all claims of infringement for his
act, and thus either to defeat all claims in the one action, or
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16
by satisfying one adverse decree to bar all subsequent actions.
The same rationale holds true when there are multiple owners of a patent. “Since all
co-owners have standing to sue for infringement, if all the co-owners are not joined in
an infringement suit, there may be a risk that the defendant will be subject to multiple
suits.” Vaupel Textilmaschinen KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 875
(Fed.Cir.1991) (policy underlying requirement of joining owners is to prevent possibility
of two suits against a single infringer.) Therefore it is necessary to protect a defendant
from multiple litigations, each commenced by a different co-owner. When one co-owner
sues for patent infringement, the court will find the non-joined co-owner indispensable to
protect a defendant from the “justifiable fear that should [it] prevail and the court
determine that the patent in suit is either invalid or not infringed, the remaining joint
owners might still relitigate these issues at a later date in another costly and vexatious
proceeding.” Willingham v. Star Cutter Co., 555 F.2d 1340, 1345 (6th Cir. 1977).
Although the Court has not found any cases involving the intersection of the
Bankruptcy Code’s broad definition of claim and the prudential considerations of
standing in patent infringement cases in a scenario comparable to the instant one, the
facts, as played out, in the instant case, provide the roadmap for analyzing the priority to
be afforded to the Settlement Proceeds Claim. When the infringement judgments
entered against Angio and VSI, the infringement defendants filed a timely appeal. The
judgments, therefore were contingent and would remain so until a final order entered
either from a court of last resort or by agreement of the parties. The parties, that is
Diomed and Angio, then Diomed and VSI, stipulated to final resolutions of the monetary
judgments. But Endolaser’s ability to enter into a binding stipulation was only possible
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because of the License Agreement, which expressly provided that Diomed had the sole
right to settle litigation and bind Endolaser to the settlement. That is precisely what
happened in this case. Diomed used the License Agreement to reach final settlements,
thereby avoiding the possibility that the judgments would be overturned on appeal, and
saving the estate the expense and delay of prosecuting the appeal. These facts fall
squarely within the Mammoth Mart/Hemingway analysis.
Diomed, however, cites Schwarz Pharma, Inc. v. Paddock Laboratories, Inc.,
504 F.3d 1371 (Fed. Cir. 2007), for support that it had standing to maintain the appeal
without Endolaser. Schwarz Pharma is inapposite to the facts at bar. In Schwarz
Pharma Schwartz Pharma, the exclusive licensee of a patent owned by Warner-
Lambert, sued Paddock Laboratories for infringement. Paddock Laboratories joined
Warner-Lambert as a party in the district court litigation. When the district court entered
a judgment of non-infringement, only Schwartz Pharma appealed. Paddock
Laboratories moved to dismiss the appeal on the grounds that Schwartz Pharma lacked
standing to prosecute the appeal. The appellate court disagreed and stated that “when
a patentee joins an exclusive licensee in bringing a patent infringement suit in a district
court, the licensee does not lose standing to appeal even though the patentee does not
join in the appeal.” If read in a vacuum, as Diomed would have the Court do, the
holding indeed seems to support Diomed’s position that it could continue the appeal
without Endolaser. The facts in Schwartz Pharma distinguish this case. First, the
Schwarz Pharma court recognized that the prudential doctrine of standing in patent
cases has its underpinnings in the potential threat that an alleged infringer could be
subject to multiple litigations for infringement. As the district court found there was no
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infringement and Warner-Lambert failed to appeal, there was no danger that Paddock
Laboratories would be subjected to a later suit for infringement by Warner-Lambert.
Second, Schwartz Pharma had standing as an exclusive licensee; the exclusive license
agreement gave Schwartz Pharma its standing. To the extent that Diomed had
standing to maintain an appeal as an exclusive licensee without joining Endolaser, it is
only because of the License Agreement. Diomed needed to use and did use the
License Agreement postpetition to derive a benefit to the estate and thus the Settlement
Proceeds Claim is entitled to administrative status.
Similarly Roche Products, Inc. V. Bolar Pharmaceautical Co., 733 F.2d 858 (Fed.
Cir.), cert. denied 469 U.S. 856, 105 S.Ct. 183 (1984), which the Debtors cited at the
hearing as support for its position, is readily distinguishable. After its patent had
expired, Roche sued a competitor, who had begun experimental testing of a generic
drug before the patent had expired, for infringement. Therefore the issue before the
court was the narrow one of whether such competitor’s testing in preparation for the
expiration of the patent, was actionable. Roche was the assignee of the patent rights.
Patent rights are freely assignable. 35 U.S.C. § 261 (“patents shall have the attributes
of personal property. Applications for patents, patents, or any interest therein, shall be
assignable in law ....”). With Roche, as assignee, holding the full bundle of rights under
the patent, there was no other party to be joined as a plaintiff.
4. The Permanent Injunction Release Claim
11 U.S.C. § 502 (g)(1) provides:
A claim arising from the rejection, under section 365 of this
title or under a plan under chapter 9, 11, 12, or 13 of this
title, of an executory contract or unexpired lease of the
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debtor that has not been assumed shall be determined, and
shall be allowed under subsection (a), (b), or (c) of this
section or disallowed under subsection (d) or (e) of this
section, the same as if such claim had arisen before the date
of the filing of the petition.
Despite the clear language of the statute, Endolaser argues that it is entitled to over $1
million for damages resulting from Diomed’s agreement to assist Angio in obtaining the
release of the permanent injunction entered against Angio and VSI in the district court
litigation. As a basis for elevating the rejection claim to administrative status, Endolaser
asserts that Diomed owed it a fiduciary duty under New York law arising from the
covenant of good faith and fair dealing implied in every contract governed by New York
law. Again the Debtors disagree, arguing they do not owe Endolaser a fiduciary duty
and asserting that Angio had the right to use the technology once it received a non-
exclusive license as part of the sale of the Debtors’ assets. The release of the
permanent injunction was superfluous.
The License Agreement is governed by New York law, which imposes a
covenant of good faith and fair dealing on all of contracts. That covenant, however,
does not create a fiduciary duty or give rise to a separate cause of action. Silvester v.
Time Warner, Inc., 1 Misc.3d 250, 258 (Sup.Ct.2003), aff'd on other grounds , 14 AD3d
430 (1st Dept.2005). Banco Espanol de Credito v. Security Pacific Nat. Bank, 763
F.Supp. 36, 44 (S.D.N.Y.,1991), aff’d 973 F.2d 51 (2rd Cir. 1992), cert. denied 509 U.S.
903, 113 S.Ct. 2992, 125 L.Ed.2d 687 (1993). Moreover, a fiduciary relationship does
not exist absent a “specific relationship of confidence” even if the contract uses the
words “agent” and “principal” as the License Agreement does in one paragraph.
Wilhelmina Artist Management, LLC v. Knowles ,2005 WL 1617178, 9 (N.Y.Sup.)
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(N.Y.Sup.2005).
A fiduciary duty arises in situations where one party puts its
trust and confidence in another because of the other’s
superior knowledge or expertise. The essential feature of a
fiduciary relationship is reliance by one party on the integrity
or discretion of another.... A commercial relationship may
give rise to a fiduciary duty, ... but a fiduciary duty generally
does not arise out of a contractual relationship between
parties with comparable bargaining power where the duties
of the parties are dictated by the terms of the contract.
Mia Shoes, Inc. v. Republic Factors Corp., 1997 WL 525401, *2
(S.D.N.Y.,1997)(internal citations omitted). There is no suggestion that the parties were
in unequal positions or that the parties intended or anticipated that the License
Agreement would give rise to a fiduciary relationship. The relationship between Diomed
and Endolaser was simply as arm’s length parties to a licensing agreement that
contemplated they would be left to the morals of the marketplace, not a fiduciary
relationship. “If the parties find themselves or place themselves in the milieu of the
“workaday” mundane marketplace, and if they do not create their own relationship of
higher trust, courts should not ordinarily transport them to the higher realm of
relationship and fashion the stricter duty for them.” Northeast General Corp. v.
Wellington Advertising, Inc., 82 N.Y.2d 158, 162, 624 N.E.2d 129, 131, 604 N.Y.S.2d 1,
3 (N.Y.1993).
Similarly Endolaser’s claim that “Diomed had an obligation to act in the best
interests of all patent interests, and not solely for the benefit of the interest it owned
outright” and thus had an ongoing responsibility to protect Endolaser’s interest by
maintaining the permanent injunction is more verbiage expressing the same thought.
Endolaser suggests that once the injunction was obtained, Diomed was forever bound
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to vigilantly preserve it. Such an argument ignores the fact that, once the License
Agreement was rejected, as was Diomed’s right, Diomed was free to grant Angio a
license to the 777 Patent. That license, without more, is sufficient to permit Angio to
use the technology without fear of future restriction. See InternetAd Systems, LLC v.
Opodo Ltd.. 481 F. Supp.2d 596, 607 (N.D.Tex. 2007)(non-exclusive license is a
promise from the licensor not to sue for infringement).
Endolaser’s claim that Diomed monopolized the 777 Patent throughout the
bankruptcy until it negotiated a deal with Angio and then rejected the agreement raises
a bad faith argument. While bad faith can be the basis for a court refusing to permit
rejection of an executory contract, In re Logical Software, Inc., 66 B.R. 683, 686 (Bankr.
D. Mass.1986), the time to have pressed such an objection has passed. It was at
Endolaser’s behest that the License Agreement was rejected prior to the sale. The
Court has only found one reported case in which bad faith formed the basis for rejection
damages. In In re Besade, 76 B.R. 845, 848 (Bankr. M.D.Fla. 1987), the court
acknowledged that bad faith could form the basis for rejection damages under Florida
law.
The bad faith standard under Florida law for damages based
on breach of contract is far different from the bad faith
standard under bankruptcy law for determining whether a
case should be dismissed or a motion to reject an executory
contract denied. See, e.g., In re Albany Partners, Ltd., 749
F.2d 670 (11th Cir.1984); In re Waldron, 785 F.2d 936 (11th
Cir.1986). Just because debtor did not act in bad faith when
seeking court authorization under 11 U.S.C. § 365 to reject
an executory contract does not mean that debtor did not act
in bad faith under state law for the purposes of determining
damages for breach of contract.
In Florida, a bad faith breach is found to exist where the seller has
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title and refuses to convey, or disables himself from doing so by
conveyance to another person. Wolofsky, supra, at 615, quoting
Key v. Alexander, 91 Fla. 975, 108 So. 883 (1926).
Id. Whether Endolaser can establish a claim for bad faith damages under New York law
as part of its rejection claim remains to be determined.
Finally, according to Endolaser, if it had been released from the License
Agreement, it would have provided a second source of that technology and having two
sources, instead of one, would have caused Angio to pay a lesser price for its non-
exclusive license. Leaving aside that there is no evidentiary support for Endolaser’s
argument, Endolaser could have sought to compel rejection of the License Agreement
at any point during the case. It did not. Furthermore, to the extent there could be a
sustainable claim arising from Diomed’s use and then rejection of the License
Agreement, the claim is nothing more than a rejection claim deemed to be the
equivalent of a prepetition breach. There is nothing to suggest that the claim is entitled
to anything more than unsecured status.
CONCLUSION
For the reasons set forth herein, the Motion will be ALLOWED as to the
Prerejection Royalty Claim and the Settlement Proceeds Claim as to administrative
status only; and DENIED as to the Bulk Inventory Royalty Claim and Injunctive Release
Claim.
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A separate order will issue.
Dated: September 15, 2008 	__________________________
Joel B. Rosenthal
United States Bankruptcy Judge
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