Property, intangible

You’ve all seen this language before. This is from an agreement to transfer rights to a formula for nutritional products in exchange for royalties:

If you can’t read the image, it says

In consideration of the sum of $1.00 payable by Synergy to HealthBanc upon execution of this Agreement, HealthBanc hereby transfers and assigns to Synergy and its successors and assigns, HealthBanc’s entire rights, title, and interest in and to the Greens Formula, including, without limitation, all patent rights and other intellectual property rights of any kind.…

HealthBanc also gave this warranty:

HealthBanc hereby represents and warrants that it is the sole and exclusive owner of the entire rights, title and interest, including without limitation all patent, trademark, copyright and other intellectual property rights, in and to the Greens Formula .…

Synergy changed the formula several times; HealthBanc found out that Synergy wasn’t paying royalties on product sold in South Korea; Synergy claimed it didn’t have to; and a lawsuit ensued on variety of legal theories.

The first part of the opinion is on a breach of contract claim, primarily whether the changes in the formula and packaging avoided the royalty obligation. There was no summary judgment on that argument because the agreement was ambiguous.

But here’s the interesting part. Synergy counter-claimed for breach of contract on the basis that the two above paragraphs were breached, because it turned out that HealthBanc had no exclusive rights in the “intellectual property” (let’s collectively groan) of the formula. So surely one of the above two paragraphs must have been breached, right? Nope. According to the court,

The assignment of rights provision, for example, contains a main clause stating that HealthBanc transferred its “entire rights, title, and interest in and to the Greens Formula” to Synergy. This language is followed by a dependent clause clarifying the scope of the rights transferred: “including, without limitation, all patent rights and other intellectual property rights of any kind.” This dependent clause makes clear that this transfer of all of HealthBanc’s property rights to the Greens Formula includes all patent or intellectual property rights it held. In other words, HealthBanc did not represent that it owned intellectual property rights to the Greens Formula and that it was transferring those rights to Synergy. The plain language of this provision is merely an agreement to transfer all of HealthBanc’s rights, including any intellectual property rights, to Synergy.

The assignment of rights provision is similar to a quitclaim deed. The distinguishing characteristic of a quitclaim deed is that it is a conveyance of the interest or title of the grantor in and to the property described, rather than of the property itself. In other words, HealthBanc transferred all of the rights it held to the Greens Formula, including all intellectual property rights, to Synergy. Similar to a quitclaim deed, HealthBanc agreed to transfer all rights that it had; it did not contract to convey any specific intellectual property right to Synergy.

Synergy’s reading of the warranty provision suffers from a similar defect. The main clause of the warranty provision represents that HealthBanc was “the sole and exclusive owner of the entire rights, title and interest … in and to the Greens Formula.” Embedded in this main clause is a dependent clause that further defines the scope of HealthBanc’s exclusive ownership rights to the Greens Formula, which “includ[ed] without limitation all patent, trademark, copyright and other intellectual property rights.” Taken together, these two clauses represent that all property rights to the Greens Formula, including all intellectual property rights, were held by HealthBanc. This warranty clause does not guaranty that HealthBanc owned some unidentified property right to the Greens Formula. It states only that no other entity or person held any rights to the formula, including any intellectual property rights.

In short, it would have been simple for the parties to draft a clause that guaranteed HealthBanc held specific intellectual property rights to the Greens Formula. But, as noted above, the contract does not contain such a provision. Thus, Synergy’s breach of contract counterclaim, to the extent that it is based upon the existence of such a guaranty, fails as a matter of law.

I agree on the interpretation of the assignment provision but I find the interpretation of the warranty clause surprising. First, I don’t agree that the dependent clause “further defines the scope of HealthBanc’s exclusive ownership rights.” The clause says “including, without limitation” – I don’t know how much clearer you can be that it shouldn’t be construed as limiting. Nevertheless, I understand the court’s view to be that the clause doesn’t state that there are any exclusive rights, only that, to the extent there are any, that HealthBanc owns them. And there weren’t any, so the claim wasn’t false. The takeaway is the make sure your agreement states that the assignor/licensor actually owns something exclusive.

But it was a moot point; a representative for Synergy testified that he questioned whether there were any exclusive rights 2007 or 2008, so the claim was barred by the statute of limitations.

HealthBanc Int’l, LLC v. Synergy Worldwide, Inc., No. 2:16-cv-00135-JNP-PMW (D. Utah Aug. 1, 2019)

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