No. 77 B 4082
December 15, 1978
Bankrupts — Provable Debts — Patent Infringement
Bankrupt's failure to pay royalties to the holder of an exclusive license of a U.S. patent for sales of the patented product constituted unjust enrichment and breach of an implied contract and therefore the royalties owed created a provable debt under Section 63a(4) and were dischargeable under Section 17a of the Bankruptcy Act.
Creditor was the exclusive licensor of a U.S. patent and had offered bankrupt a non-exclusive license to use the patent for a royalty of 4 1/2% of the net selling price of products covered by the patent. Bankrupt refused the license but manufactured and sold the patented products. The creditor was not scheduled in the Chapter XI proceeding and did not receive official notice of the proceeding prior to confirmation. Subsequent to the order of confirmation which enjoined all creditors whose debts were discharged from instituting any actions, creditor filed a complaint alleging that bankrupt had infringed its patent. In response to the court's order to show cause why creditor should not be held in contempt for disobeying the order of confirmation, creditor claimed that because its debt was not provable under Section 63a(4) it had not been discharged under Section 17a.
The court first noted that where the licensor of a non-exclusive license is suing an alleged infringer where the infringer has benefitted from the use by sale of the licensed patent products, the damage to the licensor is only the loss of royalties with interest. If the creditor had filed a claim for unpaid royalties the court stated "the cases are clear that the claim would have been provable." This is due to the application of the legal fiction of an implied contract to pay the equivalent of the ill-gotten gains. The contract need not be implied in fact as generally the wrongdoer did not intend to pay for the goods. Rather it is provable if payment can be implied in law. Under Section 63a(4), implied contracts create provable debts. The fact that the creditor elected a tort remedy does not preclude the provability of a claim based upon an alternative remedy in a subsequent bankruptcy proceeding. Thus, the court held held the debt to be provable under Section 63a(4) and discharged under Section 17a. See Sec. 63a(4) at ¶ 2615 and Sec. 17a [§ 523] at ¶ 9226.