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American Cyanamid Co. v. Fermenta Animal Health Co.

submitted pursuant to LAR 34.1(a) on panel rehearing: March 28, 1995.


On Appeal From the United States District Court For the District of New Jersey. (D.C. Civil Action No. 93-cv-04936). This Opinion Substituted by The Court for Vacated Opinion of March 14,.

Before: Stapleton, Hutchinson and Rosenn, Circuit Judges.

Author: Stapleton


STAPLETON, Circuit Judge:

The issue in this case is whether a 1980 contract between the parties and a 1983 amendment thereto conveyed to American Cyanamid Company ("Cyanamid") perpetual rights to use the federal regulatory authority of Fermenta Animal Health Company ("Fermenta") to market an animal feed supplement. Cyanamid marketed the drug under the trademark Aureozol. Before the district court, both sides maintained that these documents are unambiguous, although each side differed on what was unambiguously stated therein. The district court held that "the plain language of the 1980 agreement and the 1983 amendment," when read against the background of the parties' pre-contract negotiations and post-contract conduct, did not convey that right. We will affirm.


This dispute arises from a contract that was signed between Cyanamid, a chemical and pharmaceutical conglomerate, and Diamond Shamrock Corporation ("Diamond Shamrock") in 1980. Fermenta, the defendant in this case, became the successor in interest to Diamond Shamrock through an acquisition in 1985. The purpose of the contract was to enable Cyanamid to produce and sell an animal feed drug that Diamond Shamrock had developed and was marketing. The drug was an antibiotic animal feed supplement consisting of chlortetracycline, sulfathiazole and penicillin, known as CSP 250. As consideration, Diamond Shamrock would receive an advance royalty and future royalties from Cyanamid's sales.

In order for Cyanamid to manufacture and sell Diamond Shamrock's product, the contract granted it two distinct rights. First, Cyanamid was given access to Diamond Shamrock's proprietary information about its animal feed drug for the purpose of manufacturing and selling it. Equally important, the agreement obligated Diamond Shamrock to seek federal regulatory authority to enable Cyanamid to sell the drug by applying for a "supplemental NADA" designating Cyanamid as a distributor of the drug.

The FDA licenses the sale in interstate commerce of animal drugs by approving a manufacturer's New Animal Drug Application (NADA), which remains on file with the FDA. Through the NADA, the FDA approves both the properties of the drug and its place and method of manufacture. See 21 U.S.C. § 360b(a). In 1971, Diamond Shamrock had obtained FDA approval of a NADA for its animal feed drug.*fn1

Obtaining a NADA can be an expensive and lengthy process because of the amount of resources that must be expended on researching and demonstrating the safety and efficacy of the proposed animal drug. However, a company may be able to avoid the costs associated with obtaining its own NADA if it wishes to market a drug identical to that already marketed by another company which has obtained federal regulatory approval for the sale of the drug. The company seeking to enter the market may request the current NADA holder to apply to the FDA for a "supplemental NADA" which designates the new market entrant as a distributor of the product. See 21 C.F.R. § 514.8(a)(4)(v).*fn2

Cyanamid entered into this contract with Diamond Shamrock because its own animal drug, which competed in the market with Diamond Shamrock's CSP 250, was under scrutiny by the FDA for the possible carcinogenic effects of one of its components, sulfamethazine. Cyanamid sought to "insure" itself in the event the FDA took adverse action against its existing animal product by expanding its own product line to include Diamond Shamrock's animal feed supplement. Thus, in 1979, it entered negotiations with Diamond Shamrock, hoping to obtain the right to develop and sell Diamond Shamrock's product. Since Cyanamid could not sell Diamond Shamrock's drug without federal regulatory authority, the agreement required Diamond Shamrock to prepare and file a supplemental NADA establishing Cyanamid's facility as an alternate manufacturing site and designating Cyanamid as a distributor of the drug. In addition to pursuing an agreement with Diamond Shamrock, Cyanamid was formulating plans to obtain its own NADA for an animal product consisting of aureomycin, sulfathiazole and penicillin, a combination similar to CSP 250. This was reflected in a letter sent from Cyanamid to Diamond Shamrock during the course of negotiations in December of 1979.

Cyanamid and Diamond Shamrock executed their contract on July 23, 1980. Diamond Shamrock obtained the supplemental NADA in June of 1982 and the original five year contract period commenced on that date. Cyanamid thus enjoyed both commercial and regulatory rights to manufacture and sell the animal feed drug through June of 1987.

The contract also gave Cyanamid an option at the expiration of the agreement to purchase a perpetual license from Diamond Shamrock. Article 9.2 provides in part:

Upon expiration of the full term of this Agreement . . . CYANAMID shall have the right to obtain a perpetual, paid-up, non-exclusive license, without right to sublicense, under TECHNICAL INFORMATION as shall have been licensed hereunder to CYANAMID upon the payment of twenty-five thousand ($25,000) dollars to DIAMOND SHAMROCK for such perpetual rights.

App. 158.

The option described in Article 9.2 was exercised prematurely by the parties in 1983 in the form of an amendment to the agreement. The amendment provides in part:

You will grant to us [Cyanamid] a perpetual paid-up nonexclusive license without right to sub-license under TECHNICAL INFORMATION as shall have been licensed under the Agreement upon our payment to you of $87,500 for such perpetual rights. . . .

All other terms and conditions of the Agreement will remain in effect.

App. 165.

The dispute before the district court turned on whether this 1983 amendment, when read together with the original contract, gives Cyanamid a perpetual right to use the supplemental NADA to sell CSP 250. Cyanamid argued that the 1983 amendment gave it such a right, but Fermenta insisted that such a right ceased in 1987 with the expiration of the original contract.

Fermenta acquired Diamond Shamrock's interest in the contract in October of 1985, and from then through 1993, Fermenta monitored Cyanamid's regulatory compliance with the NADA. Prior to 1993, Fermenta never informed Cyanamid that its right to reference its NADA had expired with the termination of the original contract in 1987. Fermenta claims not to have realized that the contract expired in June of 1987 until 1993, when Fermenta more closely examined the entire contract because of Cyanamid's alleged regulatory breaches associated with the supplemental NADA. Fermenta thereupon demanded that Cyanamid pay it $500,000, agree to pay a 10 percent royalty on all sales, and grant it a paid-up, royalty-free license under any patent or NADA which Cyanamid may have obtained on ...

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