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Surmodics, Inc. v. Southern Research Inst.

United States District Court, D. Minnesota

April 17, 2013

SURMODICS, INC., Plaintiff,
v.
SOUTHERN RESEARCH INSTITUTE, Defendant

Jana M. Gaffaney, Deborah A. Ellingboe, and John B. Holland, FAEGRE BAKER DANIELS LLP, for plaintiff.

Thomas W. Thagard III and James E. McDaniel, MAYNARD, COOPER & GALE P.C.; Mark G. Schroeder and Michael H. Streater, BRIGGS & MORGAN, P.A., for defendant.

OPINION

Patrick J. Schiltz, United States District Judge.

Page 939

ORDER

This matter is before the Court on the cross-motions for summary judgment of plaintiff SurModics, Inc. (" SurModics" ) and defendant Southern Research Institute (" SRI" ). Both SurModics and SRI seek a declaration of their rights under a contract governing SRI's sale of a third company -- Brookwood Pharmaceuticals, Inc. (" Brookwood" ) -- to SurModics. The parties' summary-judgment motions are each granted in part and denied in part, for the reasons described below.

I. FACTS

A. Background

SRI is an Alabama non-profit corporation that conducts pharmaceutical research.

Page 940

SRI has long compensated its employees pursuant to what are known as the " Awards Policies." Under the Awards Policies, current and former employees of SRI are paid royalties on income derived from intellectual property that those employees helped to develop. Compl. ¶ 13 [ECF No. 1].

In 2005, SRI spun off its drug-delivery group into Brookwood, which became a wholly-owned for-profit subsidiary of SRI. Compl. ¶ 11. SRI transferred some of its intellectual property to Brookwood, including United States Patent Number 5,407,609 (" the '609 Patent" ). Compl. ¶ 14. Brookwood, in turn, assumed SRI's duty to pay royalties owed under the Awards Policies with respect to the '609 Patent and the other intellectual property that had been transferred to Brookwood.

In July 2007, SRI sold Brookwood to SurModics for approximately $40 million, plus additional amounts contingent on Brookwood meeting certain revenue thresholds. Compl. ¶ 12; Pl. Mem. in Supp. at 2 [ECF No. 33]. After it purchased Brookwood and its intellectual property, SurModics licensed the '609 Patent to two companies: Genentech, Inc. (" Genentech" ) and Edge Therapeutics, Inc. (" Edge" ). Both deals required certain upfront payments to SurModics, followed by future payments that were contingent on various revenue thresholds. See Counterclaim ¶ ¶ 2-3 [ECF No. 7 at 13]; Def. Mem. in Supp at 7-8 [ECF No. 27].

In April 2009, two former employees of SRI -- Richard M. Gilley (an inventor or coinventor of the '609 Patent) and Herbert M. Blatter (a contributor to the '609 Patent) -- sued SRI in Alabama state court. Compl. ¶ ¶ 23-24. In their original complaint, Gilley and Blatter alleged that SRI owed them a portion of the Brookwood sale price pursuant to the Awards Policies. See Def. Ex. B ¶ ¶ 18, 22 [ECF No. 8-2]. The Court will refer to this as the " purchase-price" claim. Gilley and Blatter later amended their complaint, adding SurModics and Brookwood [1] as defendants and seeking recovery of royalty payments allegedly owed to them on account of the Genentech and Edge contracts. See Def. Exs. C-D [ECF Nos. 8-3 & 8-4]. The Court will refer to this as the " royalties" claim. The Alabama litigation is ongoing.

This lawsuit involves the question of who bears responsibility for the financial losses that SRI and SurModics have experienced -- and may in the future experience -- as a result of the Alabama litigation. That question turns on the terms of the Stock Purchase Agreement (the " Agreement" ) that governed SRI's sale of Brookwood to SurModics. Pl. Ex. 1 [ECF No. 35-1 at 1-59] (" Agreement" ). The Court now turns to that Agreement.

B. The Stock Purchase Agreement

Under the Agreement, SRI and SurModics have a number of ongoing obligations to each other and to the employees of Brookwood and SRI, including obligations related to the Awards Policies. Under the Awards Policies, current and former employees of Brookwood and SRI remain entitled to royalties when Brookwood earns income on intellectual property that those employees helped to develop. Section 7.13 of the Agreement divides responsibility for paying those royalties between SRI and SurModics. Pursuant to the Agreement, liability for royalty payments to Brookwood and SRI employees is separated into three " buckets" :

Bucket 1 consists of programs identified in Schedule 7.13(b) of the Agreement. SRI assumed all liability for the payment

Page 941

of royalties owed pursuant to those programs. See Agreement § 7.13(b).
Bucket 2 consists of programs identified in Schedule 4.14(j) of the Agreement. SRI and SurModics share the liability for the payment of royalties owed pursuant to those programs. See Agreement § 7.13(c).
Bucket 3 consists of royalties owed " in connection with any future programs not identified on Schedule 4.14(j) or Schedule 7.13(b)." Agreement § 7.13(d)(i). SurModics assumed all liability for the payment of royalties owed pursuant to those programs insofar as any such royalties " do not exceed 20% of the revenues to which they relate." Agreement § 7.13(d)(i)(2).

The parties agree that, if Gilley and Blatter are awarded damages on their purchase-price claim, SRI will bear sole responsibility for paying those damages. The parties further agree that, if Gilley and Blatter are awarded damages on their royalties claim, SurModics will bear sole responsibility for paying those damages. (The parties disagree about the source of that obligation, but they nevertheless agree that SurModics is solely responsible for paying any damages that are awarded on the royalties claim.) Thus, the dispute between SRI and SurModics is not about who bears responsibility for any damages awarded in the Alabama litigation, but who bears responsibility for the attorney's fees that SRI and SurModics each incur in defending the Alabama litigation.

Indeed, the dispute is even narrower than that. The parties agree that SRI must bear its own attorney's fees for defending the purchase-price claim. The parties also agree that, insofar as SurModics incurs attorney's fees in connection with the purchase-price claim, SRI must indemnify SurModics for that expense. What the parties dispute, though, is who bears responsibility for the attorney's fees incurred by SRI and SurModics in defending the royalties claim. The parties agree that their dispute is governed by § § 8.1 and 8.2 of the Agreement, but they disagree about what § § 8.1 and 8.2 require.

Section 8.1 imposes obligations on SRI to indemnify SurModics for " Loss" -- including " reasonable attorneys' fees or expenses" [2] -- under certain circumstances. Section 8.2 imposes obligations on SurModics to indemnify SRI for " Loss" (again, including reasonable attorney's fees and expenses) under other circumstances. Obviously, the two indemnification provisions differ, in that § 8.1 imposes obligations on SRI to indemnify SurModics, while § 8.2 imposes obligations on SurModics to indemnify SRI. But the two indemnification provisions differ in other respects as well. Notably for purposes of this case, § 8.1(e) of the Agreement requires SRI to " indemnify, defend, and hold harmless SurModics from and against any and all Loss incurred . . . by SurModics . . . related to or arising out of any . . . claims by any current and former employees of SRI or Brookwood for royalties or other payments pursuant to the Awards Policies . . . .," whereas § 8.2(b) of the Agreement requires SurModics to " indemnify, defend, and hold harmless ...


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