Paragon Trade Brands, Inc. v. Weyerhaeuser Company

324 B.R. 829 (2005)

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Paragon Trade Brands, Inc. v. Weyerhaeuser Company

United States Bankruptcy Court for the Northern District of Georgia
324 B.R. 829 (2005)

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Facts

Weyerhaeuser Company (defendant) made and sold diapers under a private label, meaning it sold them to companies to resell under their own brand names. Weyerhaeuser’s diapers utilized several patents aimed at preventing leakage. Weyerhaeuser did not own these patents and, over time, was sued or faced threat of suit for patent infringement by a number of patent holders. While those disputes were ongoing, Weyerhaeuser decided to divest itself of its diaper business and began looking for a buyer. Weyerhaeuser was unable to find a buyer through traditional means, so its CEO decided to dispose of the diaper business through an initial public offering (IPO) of 100 percent of the stock of a newly formed subsidiary to which Weyerhaeuser would transfer its entire diaper business. Weyerhaeuser named its new subsidiary Paragon Trade Brands, Inc. (Paragon) (plaintiff). During the IPO process, Weyerhaeuser disclosed to Paragon some of the patent actions pending against it but not all relevant details, including the level of royalties demanded by the alleged patent owners or the significant impact those payments would have on the success of Weyerhaeuser’s diaper business if it had to pay them. Weyerhaeuser also did not disclose that it did not have a license to use certain patent technologies that were necessary for the ongoing manufacture of its diapers. Weyerhaeuser and Paragon executed an asset-transfer agreement after the IPO closed. The agreement included several warranties by Weyerhaeuser, including that the intellectual property it transferred to Paragon was adequate and sufficient to continue the diaper business as it was currently conducted. After the asset transfer, Paragon faced additional patent-infringement suits relating to the diapers it bought from Weyerhaeuser and eventually filed for bankruptcy. Paragon sued Weyerhaeuser for breach of warranty, arguing that the intellectual property it bought from Weyerhaeuser was not adequate or sufficient at the time of the IPO closing because Paragon did not have the licenses necessary to make its diapers without threat of patent infringement. The parties went to trial.

Rule of Law

Issue

Holding and Reasoning (Murphy, J.)

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