Novamedix, LTD. v. NDM Acquisitions Corporation

United States Court of Appeals for the Federal Circuit (Fed. Cir). January 28, 1999

BACKGROUND
After obtaining a patent, you identify an infringer of your patent and negotiate a settlement agreement where the infringer admits infringement of your patents and agrees to provide you its inventory of infringing goods. You receive the infringing goods and find out that they are not fit for sale because they do not conform to regulatory requirements. Your counsel notes that under your state's laws, sales of goods are subject to certain implied warrantees, such as warrantees merchantability and fitness. Your counsel concludes that the settlement agreement was a contract for the sale of goods and wants to receive monetary compensation instead of the infringing goods from the infringer. What happens?

EXECUTIVE SUMMARY
In this case relating to a consent judgment for a settlement agreement for a patent infringement suit for medical foot pumps for the bedridden, the District Court and the Fed. Cir. were faced with deciding whether a consent judgment was a contract for the sale of goods under the appropriate state's version of the Uniform Commercial Code (UCC). The District Court and the Fed. Cir. looked to the appropriate state (New York) and federal law to determine that consent judgments should be interpreted narrowly in light of the predominant purpose of the parties. In the present case, the District Court and Fed. Cir. noted that under the appropriate law the predominant purpose of the parties was to settle a lawsuit and not to create a contract for the sale of goods under the UCC and that the implied warrantees of fitness and merchantability did not attach. The Practice Pointer to be gained from this case is that settlement agreements are not necessarily a sale of goods and that drafters of settlement agreements should consider expressly including warrantees for fitness and merchantability.

THE LAW
Consent judgments are contracts to settle patent infringement suits and can include the transfer of title for goods. The United States Supreme Court has cautioned against construing a consent judgment beyond its press terms and to look towards the predominant purpose of the parties to the contract. United States v. Armour & Co., 402 U.S. 673 (1971). The appropriate state contract law should be consulted to determine if the predominant purpose of the parties to the contract was to create a contract for the sale of goods. Generally, if the predominant purpose of the contract was the sale of goods, then the implied warrantees of fitness and merchantability attach to the transferred goods.

IMPORTANCE OF THE CASE
This case highlights the importance of carefully considering the implications of the transfer of title for goods under a settlement agreement. If appropriate, the parties should consider expressly setting forth certain implied warrantees in settlement agreements including the transfer of title for goods.