CAFC Upholds Sanctions Against DuPont, in Favor of Monsanto

On Friday, May 9, 2014, the United States Court of Appeals upheld sanctions leveled against E.I. Du Pont de Nemours and Company and its subsidiary Pioneer Hi-Bred International, Inc. (collectively “DuPont”) by the United States District Court for the Eastern District of Missouri. See Monsanto Co. v. E.I. Du Pont De Nemours and Co.

DuPont had appealed from orders of the district court, which had imposed sanctions on DuPont by striking DuPont’s contract reformation defense and counterclaims and awarding Monsanto Company and Monsanto Technology, LLC (collectively “Monsanto”) attorney fees. Finding that the district court did not abuse its discretion the Federal Circuited affirmed the sanctions.

Monsanto developed a genetic modification in soybean seeds, marketed under the Roundup Ready® (“RR”) brand name and known as the 40-3-2 event (the “RR trait”), which enables soybean plants to tolerate the application of glyphosate herbicide that kills weeds. Monsanto obtained U.S. Patent RE 39,247E (the “’247 Patent”), which covers the RR trait, and granted Pioneer Hi-Bred International, Inc. (“Pioneer”) a nonexclusive license to produce and sell soybean seeds containing Monsanto’s glyphosate-tolerant traits. After Pioneer became a subsidiary of DuPont, Monsanto and Pioneer entered into an Amended and Restated Roundup Ready® Soybean License Agreement on April 1, 2002 (the “License”), which superseded the 1992 license.

In 2006, DuPont announced that it had developed its own glyphosate-tolerant trait, Optimum GAT® (“OGAT”), which was expected to confer tolerance to both glyphosate and acetolactate synthase inhibitor herbicide. J.A. 33991. DuPont intended to commercialize the OGAT trait, but subsequent testing indicated that OGAT alone did not provide sufficient glyphosate-tolerance for commercial use. J.A. 34004. DuPont therefore stacked, or combined, its OGAT trait with Monsanto’s RR trait and discovered that the OGAT/RR stack provided increased yields in field trials.

In May 2009, Monsanto sued DuPont for breach of the License and infringement of the ’247 Patent. Monsanto maintained that the License did not allow DuPont to stack the RR trait with another glyphosate-tolerant trait, such as OGAT, or to commercialize the stacked product. Monsanto, ECF No. 124, slip op. at 2. DuPont answered and counterclaimed that the License permitted it to stack OGAT with RR and that if the License were interpreted to restrict or preclude the OGAT/RR stack, then the License should be reformed.

The district court granted partial judgment on the pleadings to Monsanto in January 2010, holding that the License was “unambiguous and [did] not grant [DuPont] the right to stack non-RR glyphosate-tolerant trait tech- nologies with the licensed” trait. On January 29, 2010, DuPont moved for reconsideration and sought to restore its counterclaim to reform the License. DuPont also moved for leave to file a second amended answer and counterclaims (“SAAC”) to add three contract reformation counterclaims. The district court declined to reconsider its ruling that the License did not grant DuPont “a right to create OGAT/RR stacked seed products.” The court did, however, grant DuPont leave to file the second amended answers and counterclaims to assert reformation counterclaims and defenses.

During discovery, Monsanto moved to compel production of documents relating to DuPont’s understanding of stacking restrictions under the License, which the district court ruled relevant given DuPont’s assertion of reformation claims based on mutual mistake and unilateral mistake. By claiming mutual and unilateral mistake, DuPont had placed the truthfulness of its subjective belief concerning its stacking rights at issue. As a result, the district court gave DuPont the option to “either voluntarily dismiss these reformation claims or produce to Monsanto all documents bearing on the issued, which had previously been withheld. DuPont chose to continue litigating its reformation counterclaims and produced previously withheld internal e-mails of its in-house attorneys and high-level executives who were directly involved in negotiating the License.

The problem for DuPont was that the internal e-mails showed that in-house attorneys advised DuPont executives that the company did not have the right to commercialize the stacked product “[b]ecause of the field of use limitation” contained within the Licensing agreement. Upon learning that DuPont had been advised that they had no right to stack, Monsanto moved for sanctions, asking the district court to rule that DuPont had misrepresented its subjective belief concerning stacking rights and had perpetrated a fraud on the court.

After a hearing, the district court granted the motion and imposed sanctions. The court noted that, since the beginning of the litigation, DuPont had taken the position that “they contracted for, and have always believed that the [Li- cense] provided them with, the right to stack and commercialize” the RR trait with the OGAT trait in soybeans, which provided the basis for DuPont’s reformation claims. The court found, however, that DuPont’s position was not “rooted in fact” and that DuPont had made misrepresentations, which called into question its candor to the court.

Although this was a patent case, the Federal Circuit applies procedural law of the Circuit from which the case comes, which in this case was the Eighth Circuit. In the Eighth Circuit, the standard used to review a district court’s imposition of sanctions under its inherent powers is an abuse of discretion standard. Although not cited in this case because the case did not deal with attorneys fees under 35 U.S.C. 285, the abuse of discretion standard would be in keeping with the Supreme Court’s recent pronouncement on attorneys fees, where the Supreme Court granted district courts wide latitude to award attorneys fees in exceptional cases under Section 285, also saying that in that scenario the proper standard of review is an abuse of discretion standard. See Easing the Standard for Recovering Attorneys Fees.

The Federal Circuit easily sided with Monsanto, but the decision did not leave any stone unturned. The Federal Circuit pointed out that the License was governed by Delaware law, and under Delaware law there are only three grounds for reformation: (1) mutual mistake; (2) unilateral mistake coupled with silence; and (3) fraud. By arguing reformation under all three possible ground, the Federal Circuit concluded that DuPont’s subjective belief concerning the terms of the License was indeed a material factual issue.