A $51 million final judgment awarding the University of Texas System Board of Regents royalties wrongly withheld by a veterinary diagnostic testing company is based on the plain reading of an unambiguous contract and must be reinstated, counsel for the board told the Texas Supreme Court during oral arguments Wednesday.
The state’s high court in September agreed to wade into the contract interpretation dispute that pits UT against IDEXX Laboratories, a company that makes and sells diagnostic tests used by veterinarians to detect heartworms. UT and IDEXX inked a three-tier royalty deal under which the lab, seeking to expand its product line, licensed UT’s technology relating to the detection of Lyme disease.
According to the contract, the first tier required IDEXX pay UT a royalty of 4 percent on products sold testing only for Lyme disease. The second tier required IDEXX pay UT a royalty of .5 to 1 percent for products that were sold to detect Lyme disease “in combination with one other veterinary diagnostic test or service.” The third tier required IDEXX pay UT a 2.5 percent royalty on products sold to detect Lyme disease “in combination with one or more veterinary diagnostic products or services to detect tick-borne disease(s).”
A trial court sided with UT, agreeing IDEXX had for years underpaid, handing over a .5 percent royalty on the products when, under the tiered system, it actually owed a 2.5 percent royalty. But the Fourteenth Court of Appeals reversed, finding the ambiguities in the contract doomed the final judgment in UT’s favor.
Justice Jimmy Blacklock asked Warren Harris of Bracewell, who represents UT, what the royalty would be, under the contract, on a product that tests for Lyme disease and two other diseases that aren’t tick-borne.
“That is a nonexistent product,” Harris said. “There’s no evidence anyone … discussed or proposed any such product. The product was heard about for the first time after this lawsuit was filed.”
Justice Blacklock followed up.
“There seems to be a hole in your interpretation,” he said.
“The first time a product like that was ever raised was after this lawsuit was filed,” Harris said. “It was never contemplated by the parties.”
Justice Jane Bland asked Harris why the court couldn’t consider the nonexistent product when making its determination on ambiguity.
“Why wouldn’t we just look at the language itself and say ‘There’s a gap here. That gap creates an ambiguity regardless of whether the facts fit within the gap?’” she asked.
Harris said it’s “perfectly reasonable” for parties drafting a contract to settle on language that doesn’t cover “everything that could ever be done.”
“Otherwise, a party is going to have to gameplay every possible scenario,” he said. “Or someone is otherwise going to come in and invent something for litigation — find some gap that the parties didn’t discuss, didn’t need — and use that to argue that the contract’s ambiguous. Which is what has happened here.”
Lisa Bowlin Hobbs of Kuhn Hobbs, who represents IDEXX, began her arguments by telling the justices that if there were no third tier in the royalty structure, “no one would dispute” that the products could fall into the second tier.
“At the same time, if there were no two and we just had three, no one would dispute these … products detect Lyme disease in combination with one or more veterinarian diagnostic programs or services to detect tick-borne disease,” she said. “These are combination tests. They could fall in either bucket two or bucket three, and that’s precisely why [the contract] is ambiguous.”
Justice Jeff Boyd told Hobbs under her interpretation of the contract, tier three would be rendered superfluous.
“If we read two the way you want it, to create an ambiguity, then doesn’t three become completely superfluous?” he asked.
“I believe that I don’t have a perfect argument, nor does the other side have a perfect argument,” Hobbs said. “That is why this is ambiguous.”
UT filed its petition for review with the Texas Supreme Court in September 2022, challenging the ruling issued a month earlier by the Fourteenth Court of Appeals in Houston that found the contract was ambiguous and “susceptible to more than one reasonable interpretation” on the issue of the royalty rate that applies to the products.
Harris County District Judge Scot Dollinger had determined the agreement unambiguously entitled UT to a 2.5 percent royalty on the products and that IDEXX had been paying a .5 percent royalty on the products instead. Judge Dollinger signed an order in October 2020 awarding the board $19.6 million in underpaid royalties, $30 million in accrued interest, $1.4 million in attorney fees and post-judgment interest.
IDEXX is also represented by 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 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.