## Facts

- Weyerhaeuser Company manufactured and sold private-label disposable diapers in a market where competitors and patent owners asserted patent rights covering leak-prevention features and related diaper technology.
- Weyerhaeuser did not own several patents implicated by its diaper designs and, over time, was sued or threatened with suit by multiple patent holders for infringement.
- Seeking to exit the diaper business, Weyerhaeuser attempted to sell the business but was unable to find a buyer through a conventional sale process.
- Weyerhaeuser instead created a new subsidiary, Paragon Trade Brands, Inc. (Paragon), transferred the diaper business to Paragon, and disposed of the business through an IPO of Paragon’s stock.
- In connection with the IPO and the subsequent asset-transfer documentation, Weyerhaeuser disclosed some pending patent disputes but did not disclose key details about royalty demands and the business impact if those royalties had to be paid.
- Weyerhaeuser also failed to disclose that it lacked licenses to use certain patent technologies that were needed to continue manufacturing diapers as the business had been operated.
- After the IPO closed, Weyerhaeuser and Paragon executed an asset-transfer agreement that included express warranties, including a warranty that the intellectual property transferred to Paragon was adequate and sufficient to continue the diaper business as then conducted.
- Following the transfer, Paragon faced patent-infringement claims and licensing pressure, including disputes involving major industry patent holders, and Paragon incurred costs to address infringement exposure and maintain production.
- Paragon ultimately filed for Chapter 11 bankruptcy protection.
- Acting through the bankruptcy estate’s litigation representative, Paragon brought an adversary proceeding against Weyerhaeuser for breach of the asset-transfer warranties, seeking damages tied to infringement exposure, redesign efforts, and costs associated with the bankruptcy case.

## Issues

1. Whether Weyerhaeuser breached express warranties in the asset-transfer agreement by transferring intellectual property that was not “adequate and sufficient” to allow Paragon to continue operating the diaper business as it had been conducted.
2. Whether Paragon proved that the warranty breaches proximately caused the damages it sought, including liabilities or payments associated with patent disputes, product redesign costs, and bankruptcy-related costs.
3. What categories of contract damages were recoverable under the governing contract-damages rules, including limits based on foreseeability, certainty of proof, and remoteness.
4. Whether Paragon’s post-transfer business choices and litigation or settlement decisions reduced or barred recovery based on mitigation or intervening-cause arguments.

## Decision

- The bankruptcy court concluded that Weyerhaeuser breached the asset-transfer agreement’s warranties concerning the adequacy and sufficiency of the intellectual property transferred for continuation of the diaper business.
- The court found that the lack of necessary patent licenses and the scale of infringement exposure were not consistent with the “adequate and sufficient” warranty and that these deficiencies contributed substantially to Paragon’s financial harm.
- On causation and damages, the court allowed recovery for categories of losses it found were directly tied to the IP shortfall and reasonably contemplated in a transaction involving a patent-sensitive manufacturing business, including costs incurred to respond to infringement exposure and to modify products to continue operating.
- The court applied traditional contract-damages limits and reduced or rejected claimed items that were not proven with adequate certainty or were too remote from the warranty breaches, including categories where the evidence did not reliably connect the claimed amount to the breach.
- The court addressed bankruptcy-related costs with the same causation and foreseeability framework, permitting recovery only to the extent the estate showed those costs flowed from the IP deficiencies rather than from independent business factors.

## Legal Principles

- An express warranty in an asset-transfer agreement is a contractual promise; if the warranted condition is untrue at closing, the warrantor is liable for breach even if third-party claims later reveal the shortfall.
- A warranty that transferred intellectual property is “adequate and sufficient” to continue operating the business as then conducted is violated when the transferee lacks needed rights or licenses to manufacture and sell the products without substantial infringement exposure.
- Contract damages aim to place the injured party in the position it would have occupied had the warranties been true; this may include consequential damages when they are proximately caused by the breach and reasonably foreseeable at the time of contracting.
- The claimant must prove damages with reasonable certainty; courts will not award amounts resting on speculation or on an attenuated causal chain.
- Even when a breach is shown, recovery may be limited where the claimant fails to show that particular costs were reasonable, were caused by the breach, or could not have been avoided through reasonable mitigation.

## Conclusion

In Paragon Trade Brands, Inc. v. Weyerhaeuser Company, the bankruptcy court held that Weyerhaeuser’s transfer of a diaper business breached express warranties that the intellectual property package was adequate and sufficient to continue operations, where Paragon lacked needed patent rights and faced major infringement exposure; applying ordinary contract rules on proximate cause, foreseeability, and certainty, the court awarded damages for proven infringement-related and redesign costs while limiting or denying items not adequately tied to the warranty breaches or not proven with reliable evidence.


Paragon Trade Brands, Inc. v. Weyerhaeuser Company, 324 B.R. 829 (2005)