Paramount Technical Products, Inc., a South Dakota Corporation v. Gse Lining Technology, Inc., a Delaware Corporation, Formerly Known as Gundle Ventures, Inc. Gundle/slt Environmental, Inc., a Delaware Corporation, Formerly Known as Gundle Environmental Systems, Inc. Pg Technology Co., a South Dakota General Partnership
Docket: 96-3334
Court: Court of Appeals for the Eighth Circuit; April 29, 1997; Federal Appellate Court
Paramount Technical Products, Inc. sought a declaratory judgment in the Eighth Circuit to determine if a proposed transaction would activate an automatic termination clause in a licensing agreement. Paramount, which holds patents for moisture barrier technology, aimed to prevent GSE Lining Technology, Inc., Gundle/SLT Environmental, Inc., and PG Technology Co. from transferring partnership interests and corporate stock to an outside entity not involved in the original licensing agreements from 1989. The defendants counterclaimed, arguing that the licenses would not terminate since the agreements should be interpreted together. The district court granted summary judgment in favor of Paramount, which was affirmed on appeal.
The original patent owners, Bryan and Patrick McGroarty, along with their companies, Paramount and Paratech, entered into agreements with Gundle/SLT Environmental and its subsidiary, GSE Lining, to establish a partnership, PG Technology Co., for manufacturing moisture barriers. A Joint Licensing and Development Agreement (JLDA) was also signed, granting licenses to PG Technology and stipulating that ownership of the partnership was shared with Paramount and Gundle entities. Importantly, the JLDA included a clause stating that licenses would automatically terminate if they came under the control of outside parties without Paramount's consent. PG Technology utilized these patents exclusively to produce and market Gundseal, which it sold only to GSE Lining and Paramount.
Changes in the legal structures of various entities and complex transactions led to significant developments affecting patent rights and ownership. Approximately one year following the execution of original agreements, the McGroartys sold all of Paramount's stock to RPM, Inc. and assigned their patents to Paramount via a Technology and Patent Rights Assignment Agreement. Consequently, only Paramount, Gundle Environmental, and PG Technology remained involved in the licensing agreement, with Paramount becoming the holder of all relevant patents. The structure of PG Technology was unaffected by this assignment, and the McGroartys retained ownership of Paratech, a partner in PG Technology.
In December 1994, a new partner was introduced to PG Technology when Paratech sold 99.999% of its 50% partnership interest to GSE International, a subsidiary of Gundle Environmental. The partnership agreement was amended to include GSE International and stipulated that management would be conducted by representatives of the majority shareholders. As a result, PG Technology's new partnership structure comprised Paratech (0.0005% interest), GSE Lining (50% interest), and GSE International (49.9995% interest). Despite this sale, the McGroartys continued to own Paratech, which granted Gundle Environmental an option to purchase all outstanding shares of Paratech stock, leaving unaffected the licensing agreement involving PG Technology and its partners.
The lawsuit was triggered in January 1996 when Paramount discovered a proposed sale of PG Technology to CETCO, a competitor. Gundle Environmental and PG Technology had signed a letter of intent to sell their 99.9995% general partnership interest to CETCO, which would also seek to acquire Paratech's 0.0005% interest and secure the liner patent license agreements through the transaction. Paramount was requested to affirm that this transaction would not impact PG Technology's licensing rights; however, it refused, citing potential violations of the licensing agreement that could lead to automatic termination of the licenses.
Paramount initiated a lawsuit seeking a declaration that licenses would automatically terminate if a proposed transaction occurred, arguing that CETCO, not being a party to the licensing agreement, would gain "control or use" of the patents, triggering an automatic termination clause in section 2.03. Gundle Environmental, GSE Lining, and PG Technology counterclaimed, asserting the transaction would not lead to termination and outlined a new structure involving the transfer of partnership interests from Gundle Environmental subsidiaries to Paratech, followed by the sale of Paratech stock to CETCO. Initially, they described the transaction as a complete stock sale of Paratech, later refining it to indicate a majority interest transfer to Paratech, making it a wholly-owned CETCO subsidiary.
The district court ruled in favor of Paramount, stating the automatic termination clause would be activated by the transaction. The defendants appealed, claiming the court erred by not interpreting the licensing and partnership agreements in conjunction and incorrectly determining that the transaction would assign licenses to CETCO. They argued that the partnership agreement allows new partners without terminating the licenses, emphasizing that only ownership of Paratech would change, while PG Technology's control remains intact.
Section 2.03 of the licensing agreement stipulates that licenses terminate automatically if control or use falls to anyone other than the parties without Paramount's consent. This section's broad language indicates a clear intent to protect Paramount's patents, reinforcing that any shift in control or use of the licenses outside the agreement parties triggers termination, despite the partnership agreement allowing for changes in partnership structure.
The appellants contend that the partnership agreement allows for the addition of new partners, which should not terminate the existing licenses tied to the licensing agreement. However, neither agreement states that new partners automatically become parties to the licensing agreement. The original licensing agreement explicitly identifies the partnership entities—Paratech and GSE Lining—as parties, implying that new partners do not gain licensing rights. If control of the partnership were to shift to an entity not part of the licensing agreement, such as CETCO, Paramount's consent would be required to prevent automatic termination of the licenses, which was not granted.
The appellants propose that only stock ownership of Paratech would change, asserting that since control would remain with the partnership, termination provisions would not apply. However, this transaction was not initially presented to the district court and likely would still result in license termination. The licensing agreement stipulates that any transfer of control or use to a party outside the agreement leads to termination, regardless of the original parties' technical ownership of the licenses. Paramount's consent is critical for any changes to control or use of the patents, as it signed on behalf of PG Technology.
Should Paratech become a wholly-owned subsidiary of CETCO, control over the partnership and its licenses would effectively transfer to CETCO, resulting in automatic license termination under the agreement's terms. The licensing agreement's broad language regarding termination reinforces that any change in control or use to a non-party triggers termination. Consequently, the district court's judgment is affirmed, confirming that the proposed transactions would violate the licensing agreement.
