Background
In 2008, Nartron Corporation (now Oldnar) and Sanyo North America entered a Development and Supply Agreement (DSA) to jointly build an in-car touchscreen system to pitch to General Motors. Under the agreement, Sanyo would pay Nartron a 10% royalty on sales of any product incorporating their jointly developed technology. But after winning the GM contract — worth hundreds of millions in revenue — Sanyo cut out Nartron and partnered with Atmel Corporation instead, using a different product for the final deliverable.
Nartron sued for breach of contract and unjust enrichment, alleging that Sanyo misused its proprietary intellectual property and know-how through the development process. The district court in the Western District of Michigan found that Sanyo did breach the DSA by misusing Nartron’s IP through November 2009, but awarded only $1 in nominal damages, finding Nartron’s sole damages methodology — a 10% contractual royalty applied to Sanyo’s GM sales — was not legally supportable.
The Court’s Holding
In a per curiam opinion by Chief Judge Sutton and Judge Moore, the Sixth Circuit affirmed. The majority agreed that Nartron’s sole damages theory — applying the DSA’s 10% royalty provision (Section 5.2) to all of Sanyo’s GM touchscreen revenue — was legally inapplicable for two reasons. First, the royalty clause required an executed license agreement that was never signed. Second, the 10% royalty applied to the “Parties System” — the jointly developed product — but the final product Sanyo sold to GM was a different system built with Atmel, not Nartron. Because Nartron offered no alternative damages methodology despite full discovery, the court held that any figure above $1 “would have been pulled from thin air.”
Judge Bush dissented sharply, identifying what he called circular reasoning at the heart of the majority’s approach. The absence of a signed licensing agreement was itself the breach — Sanyo refused to execute the required agreement. “The majority effectively says Nartron gets nothing precisely because Sanyo breached,” Bush wrote, calling this contrary to the fundamental purpose of contract damages. He further argued that the DSA’s “any variants made” language meant the 10% royalty applied even if Nartron’s IP didn’t go directly into the final product, as long as it was used in the development process — which all parties conceded it was. Bush estimated Sanyo potentially owed Nartron 10% of hundreds of millions in GM revenue, suggesting “$43 million might be a steal.”
Key Takeaways
- A sole damages theory is a high-stakes gamble. Nartron’s failure to present any alternative damages methodology — even a fallback — proved fatal. IP litigants should always prepare multiple damages theories.
- Contractual royalty clauses may not double as damages formulas. A royalty provision designed for a future licensing agreement doesn’t automatically become a damages measure when the counterparty breaches by refusing to sign.
- Joint development agreements need clear IP misuse remedies. The DSA’s failure to specify damages for IP misappropriation separate from the licensing royalty left Nartron without an effective remedy despite proven breach.
- The dissent’s reasoning may influence future cases. Judge Bush’s argument that a breaching party shouldn’t benefit from its own refusal to perform is a powerful principle that could be adopted in future IP licensing disputes.
Why It Matters
This case is a cautionary tale for companies entering joint development agreements. Even when a partner admits to misusing your proprietary know-how, proving damages requires more than pointing to a contractual royalty rate — you need evidence connecting your specific IP contributions to the revenue generated. The sharp 2-1 split signals unresolved tension in how courts measure damages for IP misuse in the contract setting, a question that affects technology partnerships across industries. For IP practitioners drafting joint development agreements, the case underscores the importance of building self-executing remedies for IP misappropriation, rather than relying on a future licensing agreement that may never materialize.