Motion to Enforce Settlement Agreement Denied Where Agreement Was Reached as to the Amount of the Settlement But Party Struck Through Two Other Material Terms

June 17, 2013

Graco Childrens Products Inc. ("Graco") filed a patent infringement action against Kids II, Inc. ("Kids II"). During discovery, Graco and Kids II agreed to discuss terms to settle the dispute. As part of that process, Graco's in-house counsel sent an email to Kids II's in-house counsel, with a settlement proposal calling for a two-year mutual non-solicitation provision and a purchase by Kids II of the family of patents-in-suit with a non-exclusive license back to Graco for $1,150,000 or, in place of an outright purchase of the patents, a full settlement of the pending claims for $750,000. The offer was contingent on the execution of a mutually agreeable settlement agreement and was to expire on March 15, 2013.

On March, 19, 2013, Kids II's in house counsel set forth a counterproposal, offering $750,000 for, among other things, the purchase of the patents previously identified by Graco and a mutual two-year moratorium on employee solicitation. Graco responded by seeking clarification on whether Graco would be granted a right to practice the patents and the parties then attempted to reach an agreement on the amount for the settlement.

Graco countered with $815,000 and would "call it a deal" and explained it would be willing to stay all discovery pending the executive of the final settlement agreement. The negotiations continued with Kids II agreeing to pay the requested sum and reiterated its original seven terms as forming the substance of the agreement. The next day, Graco supplied a draft settlement agreement. Kids II edited the draft settlement agreement and forwarded it for Graco's review. Graco made additional changes in response.
Kids II disagreed with two of the edits, which resulted in inclusion of the following terms: (1) a six-month moratorium on the hiring of a non-clerical employee of the other party even where the employee/applicant was not solicited by the party; and (2) a representation by Kids II that it will not license, assign, or otherwise transfer any of the identified patents. Kids II struck the two objected to terms from the draft settlement agreement, made other 'minor changes," and provided to Graco what it believed to be a settlement agreement because it had agreed to pay the requested amount.
After Graco asserted there was no settlement agreement based on the striking of the two provisions, Kids II then moved to enforce the settlement agreement. The district court framed the issue as follows: "Here, the Court must determine whether Mr. Beckstrom's invitation to "call it a deal" resulted in a binding settlement agreement between the parties."

The district court acknowledged that Kids II's position had some superficial appeal: "The contention that the parties did form a binding contract once Kids II agreed to pay the settlement amount Graco was asking for does have superficial appeal. After all, the parties reached an agreement on the settlement amount [Doc. No. 37-1-71] and Mr. Beckstrom himself had previously asserted that he had "no issues on the remaining points" [doc. 37-1, 48] that were put forward by Kids II. Nevertheless, a review of the settlement agreement drafts exchanged by the parties makes apparent that there was no meeting of the minds on two of the terms material to the parties' agreement."
The district court explained that "[i]n view of Kids II's intention to practice the patents, any license granted to Graco would have had to be a non-exclusive one. See Manual for Patent Examining Procedure ยง 301 (8th ed. Rev. 9, Aug. 2012) ('The exclusive license prevents the patent owner (or any other party to whom the patent owner might wish to sell a license) from competing with the exclusive licensee...'). Thus, a non-exclusive license could reasonably encompass the scope put forward by Graco. However, prior to the circulation of the draft settlement agreement, neither party had attempted to confer with the other over the metes and bounds of the license to Graco. There is no evidence that either party was aware that the other's understanding of the scope of the license was any different from its own until the time the draft of the settlement agreement materialized.

The district court also found that the alteration of the non-solicitation clause was significant as well: " Second, with regard to the non-solicitation provision, Kids II proposed that each party agree to a two-year moratorium on soliciting the other's non-clerical employees. . . . By doing so, Kids II altered the offer that was before it, putting forward, in essence, a counter proposal, which Graco was free to accept or reject. Rather than accepting the counterproposal, Graco sought to add an additional restriction, limiting the hiring of an employee who had responded to a job posting to those employees who had not worked for the other party for at least5 six months prior to the hiring [Doc. No. 37-1, 142]. Kids II rejected the restriction and Graco declined to negotiate further. Thus, no agreement was reached on a material aspect of the non-solicitation provision"

Accordingly, the district court determined that there was no meeting of the minds on a material aspect of the settlement agreement and denied the motion to enforce.

Graco Children's Products Inc. v. Kids II, Inc., Case No. 1:12-cv-3246-SCJ (N.D. Ga. June 3, 2013)

The authors of www.PatentLawyerBlog.com are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. We represent inventors, patent owners and technology companies in patent licensing and litigation. Whether pursuing patent violations or defending infringement claims, we are aggressive and effective advocates for our clients. For more information contact Stan Gibson at 310.201.3548 or SGibson@jmbm.com.