A lower court’s ruling that wiped out a $51 million award for the University of Texas System Board of Regents was undone Friday by the Texas Supreme Court after it found UT’s contract with a laboratory that makes veterinary diagnostic tests was unambiguous.
But the unanimous ruling, authored by Chief Justice Nathan Hecht, did not hand the university regents an outright win in the dispute with IDEXX Laboratories. The board of regents had asked the court to reinstate a Harris County trial court’s ruling that it was entitled to $51 million in damages in the royalty dispute over patented technology that detects Lyme disease and is used in veterinary products.
“Labs argues that the University shouldn’t be allowed to accept royalties at the lower rate for more than 13 years, throughout the life of the licensing agreement, and then after the agreement ended complain for the first time that royalties were due at the higher rate,” Chief Justice Hecht wrote. “Labs reported to the University — in detail, every quarter, for each … product — the sales, royalty rates, and amounts paid. The University doesn’t claim to have misunderstood or been misled. It claims only that it was unaware of an issue that Labs purportedly recognized and didn’t raise. Labs has defenses to the University’s claim that the court of appeals must address on remand.”
UT and IDEXX, which made tests to detect heartworms, inked a three-tier royalty deal under which the lab, seeking to expand its product line, licensed UT’s technology related to the detection of Lyme disease.
Per the agreement, IDEXX was to pay UT under a three-tier royalty structure:
- 4 percent of net sales on products that tested only for Lyme disease.
- 0.5 percent to 1 percent of net sales on products that test for Lyme disease in addition to “one other” disease, such as heartworm.
- 2.5 percent of net sales on products that test for Lyme disease in addition to “one or more tick-borne diseases.”
UT filed suit in 2018, alleging it had been underpaid.
Harris County District Judge Scot Dollinger sided with UT, agreeing IDEXX had for years paid a .5 percent royalty on the products when, under the tiered system, it actually owed a 2.5 percent royalty.
Judge Dollinger entered final judgment for the UT board on Oct. 12, 2020, awarding $19.6 million in outstanding royalties, $30 million in prejudgment interest on the outstanding royalties, about $51,000 in costs and about $1.4 million in attorney fees.
But the Fourteenth Court of Appeals reversed in August 2022, finding the contract’s ambiguities doomed the final judgment in UT’s favor.
“Because the agreement is susceptible to more than one reasonable interpretation, it is ambiguous as to what royalty rate applies to the… products,” Justice Charles A. Spain wrote for the panel, explaining that some products could fall under two categories of royalty percentages. “Accordingly, the trial court reversibly erred by rendering partial summary judgment that the agreement unambiguously mandated a 2.5 percent royalty as to the… products.”
Chief Justice Hecht wrote that the Fourteenth Court of Appeals concluded that two royalty provisions could apply to the same product by considering them “separately and in the abstract.”
But when the royalty provisions are read “together, not separately” and are considered in the context of the parties’ agreement, they are not ambiguous.
“The context surrounding the parties’ agreement favors the University’s reading,” he wrote for the court.
The Texas Supreme Court heard oral arguments in the case in January.
Warren W. Harris of Bracewell, who delivered oral arguments on behalf of UT, told The Lawbook on Friday he and his client were “very pleased with the court’s ruling.”
Counsel for IDEXX did not respond to messages seeking comment Friday.
IDEXX is represented by Lisa Bowlin Hobbs of Kuhn Hobbs, Kent Rutter and Natasha Breaux of Haynes Boone and Murray Fogler and Michelle Gray of Fogler, Brar, O’Neil & Gray.
The UT Board of Regents is also represented by Stephani A. Michel of Bracewell, J. Hoke Peacock III, John P. Lahad and Shawn D. Blackburn of Susman Godfrey, solo practitioner Harriet O’Neill and Kyle D. Highful and Lanora C. Pettit of the attorney general’s office.
The case number is 22-0844.