VRT, Inc. v. Dutton-Lainson

Brief Fact Summary. One party contracted to buy all rights to another party's product.  The selling party was to begin the process of obtaining a patent on the product, and transfer that application to the buyer.  The selling party's attorney never filed the requisite paperwork to begin the process of obtaining a patent.

Synopsis of Rule of Law. If a party does not substantially perform their obligations under a contract, they do not have a right to bring an action pursuant to the contract.

Facts. The Plaintiff-Appellee seller, VRT,Inc. (previously known as Sanitas, Inc.) (the "Plaintiff"), filed suit to obtain "its right to past and future royalties" pursuant to a purchase and sales contract.  The product involved was a type of "patient care equipment".  The Plaintiff alleges that the Defendant-Appellant, Dutton-Lainson (the "Defendant") failed to pay it royalties under a purchase and sales contract, and consequently breached that contract.  The court concluded the Plaintiff did everything in its power to patent their "patient care equipment."  After their attorney told them they were going to inevitably obtain a patent, the Plaintiff and the Defendant entered into an agreement whereby by the Plaintiff sold and the Defendant bought those assets relating to the "patient care equipment."  At the closing, the Plaintiff delivered the Defendant a document entitled "BILL OF SALE AND ASSIGNMENT" purporting to assign the Defendant various rights relating to the "patient care equipment."  Additionally, the Plaintiff delivered the Defendant documents that purported to assign the Defendant the patent application and the Plaintiff's interest in the invention referred to in the application.  Although the Plaintiff thought their attorney procured a patent, in fact he did not do so until after the parties executed their contract.  As a result, the Plaintiff filed suit against their attorney alleging that his negligence forced them to file this current lawsuit.  That lawsuit was settled.  The district court found the Defendant liable for past and future royalties.

Issue. Is there a valid contract under which the Defendant is liable for past and present royalties?

Held. No.  The court first observed that as a prerequisite to bringing a breach of contract action, it is necessary for a plaintiff to demonstrate they substantially performed their obligations under the contract.  A contract will be deemed substantially performed only if the deviations are "relatively minor and unimportant."  Even if there is substantial performance, it must be shown that the defendant was not prejudiced.  As to the attorney client relationship, the court observed "omissions and commissions of an attorney are to be regarded as the acts of the client whom the attorney represents, and the attorney's neglect is equivalent to the neglect of the client." Further, the court observed about the transaction here "that the very essence of the transaction was to enable Dutton-Lainson to manufacture, market, and distribute the improvements which were the subject of the patent application. While Dutton-Lainson took the risk that, for reasons beyond the control of the parties, a patent might not issue, Dutton-Lainson did not bargain for the certainty that a patent would not issue because, contrary to the representation made to it, no application had been filed."  As such, the court concluded that the Plaintiff's failure to undertake the process to obtain a patent was a substantial divergence from their responsibilities.  The court then equated the Plaintiff's lack of good faith with a failure to substantially perform their obligation and disallowed their action for royalties.

Discussion. There was a condition in the parties' contract requiring the Plaintiff to file the patent application prior to when the contract was signed.  The Plaintiff did not satisfy this condition.