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In re Provider Meds, L.L.C.

United States Court of Appeals, Fifth Circuit

October 29, 2018

In the Matter of: PROVIDER MEDS, L.L.C., Debtor
TECH PHARMACY SERVICES, doing business as Advanced Pharmacy Services, Appellee RPD HOLDINGS, L.L.C., Appellant

          Appeal from the United States District Court for the Northern District of Texas

          Before HIGGINBOTHAM, SMITH, and GRAVES, Circuit Judges.


         RPD Holdings, L.L.C. claims that it purchased a patent license from multiple debtors in bankruptcy sales of their estates. Tech Pharmacy Services argues that RPD does not have rights under the license to Tech Pharm's patented invention. Concluding that the patent license was a rejected executory contract and could not have been transferred by the bankruptcy sales in question, we agree with Tech Pharm and affirm the decision of the district court.


         This appeal emerges from a series of bankruptcy cases involving "OnSite." The entities involved in operating OnSite, the "OnSite parties," placed dispensing machines with long-term care facilities, then used proprietary OnSite software to remotely dispense pharmaceuticals from the machines to nurses in the facilities. They had a joint corporate parent, OnSiteRx, but functioned as independent business entities[1]-and, when the time came to file for bankruptcy, filed separate bankruptcy cases.


         The story begins before the OnSite parties filed for bankruptcy. Tech Pharm holds a patent on a system, software, and related methods of remote pharmaceutical dispensing.[2] In 2010, it sued multiple defendants in the Eastern District of Texas-including several OnSite parties-for infringing this patent by using their own remote pharmaceutical dispensing machines.[3]The OnSite parties counterclaimed challenging Tech Pharm's patent. The parties agreed to settle the litigation, entering into a "Compromise, Settlement, Release, and License Agreement" (the "License Agreement"), granting a "non-exclusive perpetual license" to all but one of the OnSite parties for "so long as the Patent or Patents are valid and enforceable." The OnSite parties agreed to pay a one-time licensing fee of $4, 000 for each OnSite machine placed into operation after the execution of the agreement, and to provide quarterly reports reflecting all new machines placed in service. All parties also agreed to release any and all claims they "may have or claim to have . . . which relate to or could have been claimed in the Litigation, or that relate to the [Patents] or any alleged infringement [or invalidity] of same, except for the obligations specifically called for under this Agreement." Following the settlement agreement, the district judge in the Eastern District of Texas dismissed all claims with prejudice.


         Beginning in 2012 and continuing into 2013, the six OnSite parties relevant to this appeal filed separate Chapter 11 bankruptcy cases in the Northern District of Texas.[4] Each case was later converted to Chapter 7. Five of the six OnSite debtors were also parties to the Tech Pharm License Agreement. Despite the bankruptcy requirement that they schedule all assets and creditors, however, none of the debtors listed the License Agreement or Tech Pharm on their schedules.

         RPD had a security interest in the OnSite debtors' collateral. It agreed to purchase its collateral from three of the bankruptcy estates-ProvideRx of Grapevine, LLC ("Grapevine"), ProvideRx of Waco, LLC ("Waco"), and W. Pa. OnSiteRx, LLC ("Western Pennsylvania")-instead of litigating its liens. RPD and each estate laid out the terms of each sale in a separate asset purchase agreement, the APA, and each sale was approved by the bankruptcy court in a separate sale order. No APA explicitly referenced the License; instead, each APA covered certain categories of subject property. In turn, the sale orders approved the sale of the subject property in each APA-providing that to the extent that any of the subject property was an executory contract, it was "hereby ASSUMED by the Estate and immediately ASSIGNED to RPD under the applicable provisions of section 365 of the Bankruptcy Code." The parties have stipulated that RPD was not aware of the License until after all three sale motions and APAs were filed with the bankruptcy court, but that it became aware of the License before the bankruptcy court entered the last of the sale orders, the Waco sale order.

         Shortly after the bankruptcy court approved the last of these sales, the trustees from the other estates-Provider Meds, LP ("Provider Meds"), OnSiteRx, Inc. ("OnSite"), and ProvideRx of San Antonio, LLC ("San Antonio")-entered into a settlement agreement, the "global agreement," with RPD and CERx, a competing secured party. The global agreement provided for RPD and CERx to severally own the OnSite source code, and divided other assets between them. RPD avers that because it was aware of the License at this point, it believed that it had purchased the License under the terms of the Grapevine, Western Pennsylvania, and Waco APAs and sale orders. As a result, the global agreement provided that the Provider Meds and San Antonio trustees would transfer their Tech Pharm licenses to CERx, but that "RPD is entitled to all remaining available Tech Pharm licenses (such as those otherwise acquired from ProvideRx of Grapevine, LLC; W Pa OnsiteRx, LLC; and ProvideRx of Waco, LLC)."


         Almost a year after the bankruptcy court approved the global agreement, Tech Pharm filed a petition in Texas state court against several defendants, including the Waco and San Antonio debtors, alleging that the defendants had failed to comply with their obligations under the License Agreement to provide quarterly reports and pay licensing fees for new machines. RPD intervened and removed the proceeding to the bankruptcy court, arguing that one or more of the debtor estates had assigned or otherwise transferred the License to RPD.

         The bankruptcy court held that RPD did not have rights under the License Agreement for either of two reasons: RPD had not purchased the License under any of the OnSite sales and, regardless of the terms of the sales, the License Agreement was an executory contract that was rejected by operation of law prior to any alleged transfer.[5] It also determined that RPD had not gained rights under the License Agreement by purchasing OnSite machines from the debtors.[6] RPD appealed to the district court, which concluded that the License was a rejected executory contract and affirmed.[7]

         RPD now appeals the decision of the district court affirming the bankruptcy court. It claims that its rights under the License Agreement were established by final and non-appealed bankruptcy court orders, so any determination to the contrary would constitute an impermissible collateral attack. It also argues that the bankruptcy and district courts erred on the merits in determining RPD has no rights under the License Agreement.


         In reviewing a decision of the district court affirming the bankruptcy court, we apply "the same standard of review to the bankruptcy court that the district court applied," reviewing findings of law de novo and findings of fact for clear error.[8] We conclude that the License Agreement was an executory contract that was deemed rejected by operation of law prior to the bankruptcy sales where RPD allegedly purchased the License. Because the License was not part of the bankruptcy estates at the time of the relevant sales, the bankruptcy court's final orders did not effect a transfer of the License from the OnSite debtors to RPD.


         Section 365 of Title 11 of the United States Code addresses the ability of bankruptcy trustees to assume or reject executory contracts and unexpired leases. This provides a way for "a trustee to relieve the bankruptcy estate of burdensome agreements which have not been completely performed."[9] Once a trustee assumes an executory contract, a trustee may generally also assign the contract, even where legal or contractual provisions would otherwise prohibit assignment.[10] An executory contract must be assumed or rejected in its entirety, [11] and rejection may be treated as a breach of contract.[12]

         Under most bankruptcy chapters, the trustee may assume or reject an executory contract at any point before the plan is confirmed, [13] but the rule is different for Chapter 7 cases. Section 365(d)(1) provides that in Chapter 7 cases,

if the trustee does not assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.[14]

         Here, if the License Agreement was an executory contract, the sixty-day time period started when the cases were converted to Chapter 7 and would have expired before the first of the bankruptcy sales.[15] The trustees did not assume the License Agreement within the required period. RPD contends that the bankruptcy and district courts erred in concluding that the License Agreement was an executory contract. It further argues that even if the License Agreement is an executory contract, section 365(d)(1)'s time limit should not apply where the debtors failed to schedule the License and the trustees therefore were unaware of its existence. We disagree.


         Our first inquiry is whether the License Agreement was an executory contract. The Bankruptcy Code does not define the term "executory contract, "[16]but we have concluded that a contract is executory if "performance remains due to some extent on both sides" and if "at the time of the bankruptcy filing, the failure of either party to complete performance would constitute a material breach of the contract, thereby excusing the performance of the other party."[17]We must therefore determine whether both sides-Tech Pharm and each of the OnSite parties-owed additional performance under the License Agreement, and whether any party's failure to perform would constitute a material breach excusing the other side's performance.

         The bankruptcy court held, and the district court affirmed, that Tech Pharm had an ongoing obligation under the License Agreement to refrain from suing its counterparties for patent infringement for machines placed into service after execution of the Agreement.[18] It further concluded that the OnSite licensees had ongoing material obligations because they were required to provide quarterly reports as to new machines, pay a one-time licensing fee of $4, 000 to Tech Pharm for each new machine, and refrain from making public statements about the settled lawsuit.[19]


         RPD does not dispute that these reciprocal requirements would typically be enough to render the License Agreement executory, but argues instead that unique features of the License Agreement make it non-executory. RPD's principal contention is that because the License Agreement came hand in hand with a settlement agreement to dismiss Tech Pharm's patent infringement suit against the OnSite debtors with prejudice, Tech Pharm's sole executory obligation under the License Agreement-to refrain from suing the OnSite debtors for patent infringement involving future machines-was illusory.

         Claim preclusion "bars the litigation of claims that either have been litigated or should have been raised in an earlier suit."[20] Our analysis is most closely governed by principles of claim preclusion as they apply to patent infringement suits.[21] The Federal Circuit has held that claim preclusion does not bar patent infringement allegations "with respect to accused products that were not in existence at the time of the [previous actions, ] for the simple reason that [claim preclusion] requires that in order for a particular claim to be barred, it is necessary that the claim either was asserted, or could have been asserted, in the prior action."[22] As a result, claim preclusion solely encompasses "the particular infringing acts or products that are accused in the first action or could have been made subject to that action."[23] This is consistent with the Supreme Court's decision in Lawlor v. National Screen Service Corp., an antitrust case holding that even where two suits involved "essentially the same course of wrongful conduct," the later suit was not barred by claim preclusion because the prior judgment "[could] not be given the effect of extinguishing claims which did not even then exist and which could not possibly have been sued upon in the previous case."[24]

         RPD argues that these general principles apply differently to method patent claims than to other claims for patent infringement. It contends that under a method patent, the determinative question is whether a particular process infringed on the method[25]-so once a claim for method patent infringement is dismissed with prejudice, any future challenge to the use of the same process is barred by claim preclusion. Under RPD's view, once Tech Pharm dismissed with prejudice its claim that the OnSite parties' process infringed its method patent, it could never again sue the OnSite parties for using that same process, even if the OnSite parties used the process after the termination of the lawsuit to place new machines into operation.

         We disagree, finding recent Federal Circuit case law conclusive on this point. Mentor Graphics Corp. v. EVE-USA, Inc. is particularly instructive.[26] There, the relevant parties had previously litigated two method and logic system patents, [27] but-as in this case-the patentholder dismissed its infringement claims with prejudice and granted a license to the asserted patents.[28] When another company acquired the licensee, the license automatically terminated.[29] The acquiring company then sued the patentholder for a declaratory judgment of non-infringement, and the patentholder counterclaimed for infringement.[30] The Federal Circuit flatly held that because the infringement claims were based on acts that occurred after the initial lawsuit, they were not precluded by the initial suit's dismissal with prejudice.[31] Following Lawlor, it emphasized that where infringement allegations could not have previously been brought in an initial suit because the alleged infringing act had not yet occurred, claim preclusion would not apply even where the alleged infringement was "essentially the same" as that litigated in the prior action.[32] Especially relevant here, the court observed that if such claims were instead barred by claim preclusion, "any licensee holding a license obtained through litigation could breach that license, yet prevent the patentee from asserting infringement against new products not covered by the license."[33] By holding that future infringement claims were not barred by claim preclusion, the Mentor Graphics decision avoided that counterintuitive result.

         The Federal Circuit has reached similar results concerning other method patent claims. Mentor Graphics relied in part on the court's previous decision in Brain Life, LLC v. Elekta Inc., which straightforwardly held that claim preclusion would not bar claims for method patent infringement "relating to acts of infringement that postdate [the prior] judgment" because the patentee could not have asserted claims in the first lawsuit for acts of infringement that occurred after the judgment in that suit.[34] Similarly, in Asetek Danmark A/S v. CMI USA Inc., the Federal Circuit addressed an injunction predicated on a jury finding of liability for infringement of two system and method patents.[35]The patentholder dismissed with prejudice its claims against one of the defendants prior to trial, [36] but after the jury found liability, the district court enjoined both original defendants-including the dismissed party.[37] The court concluded that the injunction against the dismissed party addressing its future conduct was not barred by claim preclusion, because "[i]t is well established . . . that the difference in timing means that the two situations do not involve the same 'claim' for claim-preclusion purposes, even if all the conduct is alleged to be unlawful for the same reason."[38] Although the court ultimately remanded for a more thorough determination of whether the injunction was permissible against the dismissed party, [39] it made clear that principles of claim preclusion standing alone would not have barred the injunction-even though the system and method infringement claims had previously been dismissed with prejudice.[40]

         RPD's reliance on the Federal Circuit's earlier decision in Hallco Manufacturing Co. v. Foster is unpersuasive.[41] Hallco held that because a party had dismissed its patent invalidation claim with prejudice in earlier litigation, it was potentially barred from suing the patentholder to invalidate the same patent or from seeking a declaratory judgment that a redesigned device did not infringe the patent.[42] While Hallco's language may be read more broadly, we take the Federal Circuit to have since clarified that the case does not govern preclusion of infringement claims brought by the patentholder, which were not at issue in Hallco.[43] The other cases we have discussed are more representative of whether claim preclusion would prevent Tech Pharm from suing the OnSite debtors over new machines-and they indicate that it would not.

         In sum, but for the License Agreement, Tech Pharm would not be barred from suing the OnSite debtors for patent infringement stemming from their introduction of new OnSite machines-even if those machines used the same process at issue in the settled 2010 litigation. Tech Pharm had an ongoing material obligation under the License Agreement to refrain from suing the debtors.


         The OnSite debtors also had corresponding material obligations under the License Agreement. The License Agreement straightforwardly obligated the debtors to take certain ongoing actions, such as filing quarterly reports and not discussing the settled lawsuit.[44] RPD claims, however, that because the License Agreement granted a "perpetual" license for so long as the Tech Pharm patent was valid and enforceable, Tech Pharm would be prohibited from suing the debtors for patent infringement even if they breached their side of the agreement-and so any debtor obligations would not be material, as required by our definition of an executory contract.[45] It points to cases holding that where a license is both "irrevocable" and "perpetual," the licensor may not revoke the license even when the licensee breaches.[46]

         But the cases RPD cites do not stand for the proposition that a merely "perpetual" license is itself irrevocable in the face of material breach. Rather, they hold that when a license uses the terms "irrevocable" and "perpetual," "irrevocable" must mean something beyond "not revocable at will," since otherwise the use of both "irrevocable" and "perpetual" would be superfluous.[47]Both cases explain that the use of "perpetual" indicates that the license may not be revoked at will; the use of "irrevocable" goes one step further and indicates that the license may not be revoked for any reason, even a breach by the other side.

         RPD is arguably correct that because the License granted under the License Agreement was "perpetual," under Texas law, it was therefore not revocable at will.[48] This does not mean, though, that Tech Pharm would not be excused from its obligations if the OnSite debtors were to materially breach the License Agreement. RPD has offered no authority holding that a license that is only "perpetual," and not "perpetual and irrevocable," is ...

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