Exhibit 10.2
SETTLEMENT AGREEMENT AND RELEASE
OF CLAIMS
This Settlement Agreement and
Release of Claims (the “Agreement”) is made and entered
into this 17th day of January, 2006, between Masimo Corporation and
Masimo Laboratories, Inc. (hereinafter “Masimo”), and
Nellcor Puritan Bennett, Inc., Mallinckrodt, Inc, Tyco Healthcare
Group LP, Tyco International Ltd, and Tyco International (US)
Inc. (collectively “Nellcor”) (each individually
as a “Party” or collectively the
“Parties”).
RECITALS
A.
Whereas the Parties are involved in
litigation in the United States District Court for the Central
District of California, Civil Action Nos. CV 00-6506 MRP (AJWx) and
CV 03-0603 MRP (AJWx) alleging claims under federal patent laws
(the “Patent Litigation”);
B.
Whereas the Parties are involved in litigation in the United States
District Court for the Central District of California, Civil Action
No. CV 02-4770 MRP (AJWx) alleging claims under federal antitrust
laws (the “Antitrust Litigation”); and
C.
Whereas Masimo and Nellcor desire to
settle fully and finally all claims and disputes between the
parties other than the Antitrust Litigation.
AGREEMENT
Now, therefore, in consideration of
the mutual covenants and promises herein contained and other good
and valuable consideration, receipt and sufficiency of which are
hereby acknowledged, and to avoid the expense of further
litigation, the Parties covenant and agree as follows:
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Definitions
:
1.1
“Affiliate” means, with respect to each Party, any legal
entity that is, directly or indirectly, controlling, controlled by
or under common control with the Party. For purposes of this
definition, an entity shall be deemed to control another entity if
it owns or controls, directly or indirectly, more than fifty
percent (50%) of the voting equity of the other entity (or other
comparable ownership interest for an entity other than a
corporation).
1.2
“ Essentially Unchanged
” means no changes other than (i) immaterial changes to the
software for the correction of bugs or implementation of a
software translation (e.g., a recompile due to processor change),
and /or (ii) hardware changes that are not covered by any of the
other Party’s patents not proven invalid or unenforceable by
a court of competent jurisdiction, and/or (iii) software changes
for size or power utilization, industrial design, user interface
and connectivity that are not covered by any of the other
Party’s patents not proven invalid or unenforceable by a
court of competent jurisdiction, and/or (iv) changes consisting of
the addition of the parameters of
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blood pressure, respiration rate,
temperature, ECG, and CO2 that are not, alone or in combination
with other new features, functions or parameters, covered by any of
the other Party’s patents not found invalid or unenforceable
by a court of competent jurisdiction and/or (v) changes consisting
of the addition of new feature(s), function(s) or parameter(s) that
are generated from pulse rate and/or Oxygen Saturation calculations
and that are not, alone or in combination with other new features
or functions or parameters, covered by any of the other
Party’s patents not found invalid or unenforceable by a court
of competent jurisdiction. For purposes of this Section 1.2,
“other Party’s patents” includes (a) patents that
are exclusively licensed to such Party and (b) with respect to a
specified field of use, patents that are exclusively licensed to
such party for such field of use.
1.3
“ Pulse Oximetry
Revenue” means Nellcor’s and its Affiliates’
net pulse oximetry revenue for products shipped, service and
licenses to purchasers in the United States. Net Pulse
Oximetry Revenue is calculated in accordance with GAAP, consistent
with how such calculations were made in the past by Nellcor, as
provided to Masimo in accordance with Section 3.1. Nellcor
has not and will not direct revenue away from the United States and
to international markets in order to avoid or reduce paying
royalties under this Agreement. For multiparameter devices
(i.e., devices including parameters or therapeutic functions other
than pulse rate and Oxygen Saturation), the per unit portion of the
net revenue attributable to pulse oximetry revenue will be set at
100% of the then current year average net sales price of
Nellcor’s stand alone pulse oximetry monitors, but not less
than $1500.
1.4
“Masimo
Patents” means U.S.
Patent Nos. 6,263,222, 6,157,850, and 5,769,785.
1.5
“06 Pulse Oximetry
Products” means
Nellcor’s pulse oximetry products (including oximetry
software licensed to OEMs) that use the 06 algorithm as shown to
Masimo during November 2005 in the due diligence process of the
Memorandum of Understanding dated October 20, 2005. A list of
the 06 Pulse Oximetry Products is set forth in Exhibit
C.
1.6
“Oxygen
Saturation” is as
defined in ISO 9919:2005 section 3.25 (definition of SpO2, which is
an estimate of SaO2 or the true functional saturation).
1.7
“Fractional
Saturation” is as
defined in ISO 9919:2005 section 3.8 (definition of fractional
oxyhaemoglobin FO2Hb), or HbO2/(Hb + HbO2 + HbCO + HbMet), or SpO2
— (SpCO and/or SpMet), (including using the ratio of ratios
for each of the hemoglobins and then converting to fractional
saturation), and any approximations thereof.
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2
Settlement
Payment:
2.1
By January 19, 2006, Nellcor shall
deliver a non-refundable payment by wire transfer to Masimo Corp.
in the amount of Three-Hundred Thirty Million Four-Hundred-Eighty
Thousand Dollars ($330,480,000). This amount is comprised of
Two-Hundred-Fifty-Eight Million ($258,000,000) for infringements by
04, 05 and 05ci sales through December 31, 2005; Six Million Two
Hundred Fifty Thousand ($6,250,000) for pulse oximetery sales from
January 1, 2006 through January 31, 2006; and Sixty-Six Million
Two-Hundred- Thirty Thousand ($66,230,000) as an advance royalty
payment for the period from February 1, 2006 through December 31,
2006. Late payments shall accrue interest at 10% per
annum.
2.2
The Settlement Payment in Section
2.1 is based upon unit shipments of Nellcor 04, 05, 05ci and 06
pulse oximeters and pulse oximeter boards for January 2006 of 9,000
units. No later than April 1, 2006, Nellcor will provide
actual unit volumes for sales of such pulse oximeters and pulse
oximeter boards for January 2006 for the same geographic scope
presented at the trial. If Nellcor shipped more than 9,000
units during that period, it shall pay to Masimo an additional
amount as follows: the number of such units over 9,000 shall be
calculated (“Overage Units”) and, for each 06 unit
shipped, up to the number of Overage Units, Nellcor will pay 20% of
the Pulse Oximetry Revenue for such units, and if there are any
Overage Units in excess of the number of 06 units shipped, Nellcor
will pay $580 per unit for each such unit. If Nellcor shipped
less than 9,000 units Masimo will credit Nellcor $580 per unit for
each unit under 9,000 toward future royalties due. The number
of units shipped for January 2006 provided by Nellcor will be
subject to the audit provisions of Section 6 below.
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Representations and
Warranties :
3.1
In advance of execution of this
Agreement, Nellcor has provided to Masimo’s counsel (under
attorney-eyes only confidentiality and to Masimo’s CEO and
CFO) documents sufficient to show: (i) unit shipments of 04, 05,
and 05ci pulse oximeter products between June 2004 through October
2005 consistent with the damages calculation during the Patent
Litigation; and (ii) Pulse Oximetry Revenue for the consecutive
calendar quarters ending December 31, 2001 through December 31,
2005. Nellcor states that its good faith estimate for its
Pulse Oximetry Revenue in 2006 is approximately $350 million.
Nellcor represents and warrants that the information provided under
this Section 3.1 is materially accurate and complete based upon the
information in the books and records of Nellcor.
3.2
Nellcor represents and warrants that
the 06 Pulse Oximetry Products commercially released will be the
same as the product reviewed by Knobbe, Martens, Olson & Bear
in November 2005 and will use the same
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specification, circuit diagrams and
source code provided under section 4.2. Further, Nellcor
represents and warrants that the 06 Pulse Oximetry Products do not
(i) contain closed loop adaptive filters, (ii) calculate Oxygen
Saturation based on two or more alternative calculations of Oxygen
Saturation, ratio of ratios or a representative indication or value
for Oxygen Saturation from the same signal, (iii) calculate pulse
rate based on three or more alternative calculations of pulse rate
from the same signal, or (iv) measure physiological parameters
other than pulse rate, Oxygen Saturation, plethysmographic
waveforms, ECG, pulse amplitude (not displayed as a number or in
real time on a scale with a number), blood pressure, respiration
rate, temperature, ECG and CO2. Masimo acknowledges for
purposes of this Section 3.2 that an ECG signal and an optical
signal are not the same signal. Nellcor acknowledges that for
the purposes of this Section 3.2, an optical signal is considered
the same signal regardless of the number of wavelengths
detected.
3.3
Nellcor represents that none of its
current sensors, cables which connect the sensor to the pulse
oximeters (including OEM boards), or O6 Pulse Oximetry Products are
configured to be compatible with any current Masimo pulse oximeters
(including OEM boards) or sensors.
3.4
Masimo represents that none of its
current sensors, cables which connect the sensor to the pulse
oximeter (including OEM boards), or products listed in exhibit D
are configured to be compatible with any current Nellcor OxiMax
pulse oximeter (including OEM boards) or Oximax Sensors, except
with respect to the RCAL compatibility (including in OxiMax
sensors). Masimo further represents (i) that Masimo’s
currently commercially available oximeters do not store the
physiological patient data collected during monitoring in a memory
on the sensor, and (ii) that Masimo’s currently commercially
available oximeters do not store in a memory on the sensor,
sensor-specific user troubleshooting messages for optimal sensor
placement. For purposes of clarity, storing the sensor type
or ID and displaying the sensor type when the sensor is connected
to the oximeter is not storing a sensor-specific user
troubleshooting message.
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Covenants Not to
Sue
4.1
Masimo and it Affiliates covenant
not to sue Nellcor and/or its Affiliates for infringement by
Nellcor’s 06 Pulse Oximetry Products, and new products
Essentially Unchanged therefrom. This covenant also extends
to the potential change referenced in Section 5.1. For as
long as the running royalties are being paid, Masimo and its
Affiliates further covenant not to sue Nellcor and/or its
Affiliates for the Nellcor pulse oximetry portion of future Nellcor
products, including oximetry software licensed to OEMs,
(“Next Generation Pulse Oximeters”) under Claims 17 or
18 of U.S. Patent Number 6,263,222, and continuations and
continuations-in-part, either with claims directed to or
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covering the same subject
matter. For as long as the running royalties are being paid,
Masimo and its Affiliates further covenant not to sue Nellcor
and/or its Affiliates for the Next Generation Pulse Oximeters under
Claims 1, 10, 11, 22, 23 and 24 of U.S. Patent Number 6,157,850,
and continuations and continuations-in-part, either with claims
directed to or covering the same subject matter, provided that such
Next Generation Pulse Oximeters (i) do not calculate any
physiological parameter other than pulse rate based on two or more
alternative calculations of that physiological parameter from the
same signal and (ii) do not calculate pulse rate based on three or
more alternative calculations of pulse from the same signal, and
(iii) do not include parameters other than Oxygen Saturation, pulse
rate, plethysmographic waveforms, pulse amplitude (not displayed as
a number or in real time on a scale with a number), blood pressure,
respiration rate, temperature, ECG and CO2 and feature(s),
function(s) or parameter(s) that are generated from pulse rate
and/or Oxygen Saturation calculations. If Nellcor succeeds in
reducing royalties under Section 5.1, the same condition to reduce
the royalty applies to Next Generation Pulse Oximeters in order for
the royalty reduction to apply. Masimo also covenants not to
sue for infringement any customer, distributor, OEM, licensee,
supplier or purchasing organization with respect to the purchase,
distribution, manufacturing (excluding sensors and accessories not
manufactured for Nellcor), marketing or use of the covenanted
products or Nellcor and/or its Affiliates products Essentially
Unchanged therefrom as described in this Section 4.1. The
covenants of this Section 4.1 do not extend to any products that
are permitted or intended for use, with any sensors (including
non-Nellcor sensors manufactured by Nellcor for another company)
other than Nellcor sensors.
4.2
Nellcor shall deliver one Nellcor
pulse oximeter containing 06 technology to Masimo’s lawyers,
and represents that this has the same technology and performance as
that disclosed to Masimo’s lawyers and tested during November
2005. Nellcor also shall place in an independent, third party
escrow on mutually agreeable terms the corresponding
specifications, circuit diagrams and source code for such pulse
oximeter, as evidence of the 06 technology disclosed to Masimo,
which Nellcor represents and warrants will be the same as that
disclosed to Masimo’s lawyers and tested during November
2005. Masimo’s lawyers may provide the pulse oximeter
to Masimo on or after January 10, 2006.
4.3
Nellcor and its Affiliates covenant
not to sue Masimo and/or its Affiliates for infringement by
Masimo’s pulse oximetry and Rainbow SET products commercially
available as of January 17, 2006 and new products Essentially
Unchanged therefrom. Nellcor and its Affiliates further
covenant not to sue Masimo and/or its Affiliates for infringement
of any new disposable and multisite versions of the currently
commercially available reusable Rainbow sensors and associated
cables, and new products Essentially Unchanged therefrom, provided
that such sensors are not configured to be compatible
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with Nellcor’s pulse
oximeters, where the compatibility between pulse oximeter and the
sensor (i.e, lock and key) is covered by a Nellcor patent not
proven invalid or unenforceable by a court of competent
jurisdiction. Nellcor and its Affiliates further covenant not
to sue Masimo and/or its Affiliates for infringement due to any
changes to such products above to enable such products to include
the parameters of Fractional Saturation, carboxyhemoglobin,
methemoglobin, total hemoglobin, hematocrit, bilirubin and/or
glucose.. Nellcor’s and its Affiliates covenants
include a covenant not to sue Masimo and/or its Affiliates for
infringement for (i) improvements (except improvements to sensors)
to precision and accuracy of any parameter in such products
available as of January 17, 2006, and Fractional Saturation, total
hemoglobin, hematocrit, bilirubin and/or glucose, except to the
extent such improvement is covered by any Nellcor patent (or patent
exclusively licensed to Nellcor or exclusively licensed to Nellcor
for the relevant field of use) not found to be invalid or
unenforceable by a court of competent jurisdiction, the substance
of which is filed for the first time after the January 17, 2006 and
not having a priority claim to a date or entitled to priority from
a date before such date and (ii) any other improvement to the
covenanted products, except to the extent such other improvement is
covered by any Nellcor patent (or patent exclusively licensed to
Nellcor or exclusively licensed to Nellcor for the relevant field
of use) not found to be invalid or unenforceable by a court of
competent jurisdiction. Nellcor and its Affiliates also
covenant not to sue for infringement any customer, distributor,
OEM, licensee, supplier or purchasing organization with respect to
the purchase, distribution, manufacturing (excluding sensors and
accessories not manufactured for Masimo), marketing or use of the
covenanted products or Masimo and/or its Affiliates products
Essentially Unchanged therefrom as described in this Section
4.3. Masimo will use good faith efforts to compile a list of
pulse oximetry and Rainbow SET products commercially available as
of January 17, 2006 and provide such list to Nellcor’s
lawyers (under attorney-eyes only confidentiality and to David
Sell, Brian Earp, and Paul Mannheimer), and attached hereto as
Exhibit D.
4.4
The covenants of Sections 4.1 and
4.3 extend to proprietary rights that are exclusively licensed to
the covenanting party, or, with respect to a specified field of
use, patents that are exclusively licensed to the covenanting party
for such field of use, including any right to control the
institution or maintenance of litigation. Nellcor and Masimo
will not assist any of its licensors in enforcing proprietary
rights against the other party, except to the extent required by
law.
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Ongoing Royalties
.
5.1
Nellcor agrees to pay Masimo Corp. a
13% running royalty based on its and its Affiliates Pulse Oximetry
Revenue occurring on or after February 1, 2006. Nellcor will
pay an additional 7% running royalty on its and its
Affiliates
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Pulse Oximetry Revenue for calendar
year 2006. Nellcor will pay an additional 2% running royalty
on its and its Affiliates Pulse Oximetry Revenue for calendar year
2007. Nellcor will pay an advance royalty of $66,230,000 on
or before January 19, 2006 (the “Payment Date”) for the
2006 royalty as provided in Section 2. On or after January 1,
2007, the 13% royalty will be reduced to 10%, plus the additional
2% for 2007, in the event that Nellcor establishes that a proposed
change to the 06 Pulse Oximetry Products and new products
Essentially Unchanged therefrom (and the Next Generation Pulse
Oximeters) would result in not calculating any physiological
parameter based on two or more alternative calculations for that
parameter, or a representative indication or value for that
parameter, from the same signal, and that proposed change is then
implemented in such products (and the prior products are no longer
being made or sold). In the event of a dispute involving
whether a proposed change would acc
