XCO International v. Pacific Scientific

XCO International (XCO) (plaintiff) and Pacific Scientific (PacSci) (defendant) were large commercial enterprises. In 1991, XCO assigned its patents relating to heat-sensitive cables to PacSci for (1) a $725,000 down payment, (2) the greater of $100,000 or 5 percent of PacSci’s annual sales from 1995 through 2000, and (3) 5 percent of PacSci’s annual sales from 2000 until 2003, when the patents expired. PacSci immediately licensed back the patents to XCO, for which XCO agreed to pay $100,000 plus royalties on sales of XCO’s cables. Under the parties’ licensing agreement, PacSci was responsible for paying all expenses to keep the patents active, including fees owed to the patent office. The agreement contained a liquidated-damages clause providing that a breach by PacSci would entitle XCO to receive all outstanding amounts owed by PacSci as well as $100,000 per year from the year of contract termination through 2003. In 1993, PacSci began failing to pay certain fees to the patent office, causing numerous patents to lapse. In 1998, XCO declared PacSci’s breach, terminated the contract, and sued PacSci to recover $600,000 in liquidated damages, or $100,000 per year for the years 1998 through 2003. XCO did not attempt to prove actual damages. The trial court determined that PacSci was in breach, but XCO received no relief because the court invalidated the liquidated-damages provision based on finding that it was an unenforceable penalty. XCO appealed.