## Facts

- XCO owned U.S. and primarily European patents covering heat-sensitive cables.
- In 1991, XCO assigned the patents to Pacific Scientific (PacSci) in exchange for a payment package that included an initial payment and continuing annual payments tied to PacSci’s sales through the patents’ expiration.
- As part of the same transaction, PacSci licensed the patents back to XCO for XCO’s ongoing business, and XCO agreed to pay PacSci an annual amount plus royalties under the license.
- The agreement allocated patent-related costs to PacSci, stating PacSci would be responsible for all expenses relating to the patent rights, including European maintenance fees.
- Beginning in 1993, PacSci stopped paying maintenance fees for patents it did not wish to use; by 1998, multiple patents had lapsed.
- XCO treated the lapse of patents as a breach, declared the contract terminated in 1998, and sought recovery under a “Breach and Liquidated Damages” clause requiring payment of amounts owed plus $100,000 per year from termination through the last patent expiration year.
- XCO sought $600,000 under the clause (1998–2003) and did not attempt to prove actual damages.
- The district court found PacSci breached the maintenance-fee obligation but held the liquidated-damages provision unenforceable as a penalty; both sides appealed.

## Issues

1. Whether the contract obligated PacSci to pay maintenance fees for all assigned patents, including those PacSci did not exploit.
2. Whether the $100,000-per-year post-termination “liquidated damages” provision was enforceable under Illinois law or an unenforceable penalty.
3. Whether any claims warranted sanctions based on frivolous litigation positions.

## Decision

- The court affirmed that PacSci breached the agreement by failing to pay maintenance fees required by the contract.
- The court agreed that the liquidated-damages provision was unenforceable as a penalty because it lacked a reasonable relationship to anticipated or actual harm.
- Because XCO relied on the clause and did not prove actual damages, XCO obtained no recovery under the liquidated-damages theory.

## Legal Principles

- Under Illinois law, a liquidated-damages clause is enforceable only if actual damages were difficult to estimate at contracting and the stipulated amount is a reasonable forecast of probable loss; otherwise it is a penalty and unenforceable.
- A flat, time-based payment that applies regardless of the extent of harm and bears no rational relation to likely loss is treated as punitive rather than compensatory.
- Contract language making a party “responsible for all expenses” related to acquired patent rights, including maintenance fees, is construed broadly absent clear contractual limitations.

## Conclusion

The Seventh Circuit held that PacSci breached a broad contractual obligation to pay patent maintenance fees but refused to enforce a fixed $100,000-per-year “liquidated damages” clause as an Illinois-law penalty, leaving the plaintiff without that contractual recovery absent proof of actual damages.


XCO Int'l Inc. v. Pac. Sci. Co., 369 F.3d 998 (7th Cir. 2004)