Epic Systems v. Allcare Health Management

Epic Systems Corporation (Epic) (plaintiff) entered into an agreement with Allcare Health Management System, Inc. (AHM) (defendant) for a nonexclusive, nontransferable license under one of AHM’s patents. The license agreement contained a most-favored-nation (MFN) provision that entitled Epic to substitute the “financial terms” of any license AHM granted to similarly situated third-party licensees if the other licensee’s financial terms were more favorable. The financial terms applicable to Epic were contained in several paragraphs and related to the calculation and payment of a running royalty. The MFN provision was intended to ensure that Epic would be able to obtain more favorable payment terms if AHM entered into additional licensing agreements. Thereafter, AHM sued numerous other similarly situated parties, including MedicaLogic, Inc., alleging patent infringement. In settlement of the suit, MedicaLogic paid AHM a lump sum of $350,000 for a nonexclusive license. Epic requested information from AHM regarding the settlement, but AHM refused to disclose or confirm the terms and maintained that the settlement terms were not relevant because they did not involve a running royalty. Other settling defendants also obtained lump-sum, paid-up licenses from AHM. Eventually, Epic formally exercised its right under the MFN provision and paid AHM the difference between $350,000 and the sums that Epic had paid to date, or about $146,000. AHM rejected the payment. Epic sued AHM alleging breach of contract and seeking a declaratory judgment that Epic had the right to substitute more favorable financial terms from the subsequent licenses even if the financial terms related to a lump-sum, paid-up royalty.