Lambert v. Weyerhaeuser Co. (In Re Paragon Trade Brands, Inc.)

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW

TABLE OF CONTENTS

Page

I. INTRODUCTION ..841

II. FINDINGS OF FACT.842

A. Background of the Private-Label Baby Diaper Business Weyerhaeuser Transferred to Paragon in the IPO .842

B. The IPO.850

C. Paragon After The IPO .852

D. Paragon Is Driven To Bankruptcy By Intellectual Property Inadequacies.854

E. Paragon’s Losses For Which Plaintiff Seeks Damages.855

1. Bankruptcy-Related Costs.855

2. Product Re-Design Costs.855

3. Lost Profits.855

4. Obligations Incurred To PG And KC .856

a. PG obligations.856

b. KC obligations.858

c. Wellspring’s purchase of Paragon.861

d. Cash payments to PG and KC and remaining liability to them.863

e. SAP compliance costs.863

5. Mabesa.863

F. Plan Confirmation and Proceedings in This Adversary Proceeding.864

III. CONCLUSIONS OF LAW. 00 <J5 05

A. Washington Law Governs. 00 05 05

B. Prejudgment Interest. 00 05 05

C. Contractual Indemnity Is Not The Exclusive Remedy 00 Ol

D. Contract Indemnification Remedy. 00 Gi

1.Actual Liability Defense. 00 05 «D

*840 2. Failure To Provide Notice Defense. t — i tí— 00

a. ATA notice provision. rH t-00

b. Paragon substantially complied with Section 11.03(a) rH C— 00

c. Weyerhaeuser did not suffer actual prejudice. CQ 00

3. Weyerhaeuser Defenses And Counterclaim. LQ !>■ 00

E. Common Law Measures Of Damages. 05 t— CO

F. Cost To Cure Measure Of Damages. Cm GO CO

1. PG-Related Losses Arising From Inadequate Intellectual Property To Utilize ILG Feature. 00 00 CO

a. Cost to cure damages attributable to the PG Royalty. 00 00 CO

(1) “Conversion period” royalties paid. 00 00 CO

(2) Other royalties paid. 00 00 00

(3) Loss attributable to post-Plan-confirmation royalty obligation . CO CO 00

(4) Should the PG royalty-related cost to cure damages be reduced for royalties attributable to products not utilizing the ILG feature on the IPO date?. CO 00 ^

(a) Economy diaper and training pant. 00 00 cn

(b) Supreme diaper. CO 00 05

(c) Canadian sales . 00 00 05

(5) Should the PG royalty-related cost to cure damages be reduced based on damages attributable to non-ILG patents?. 00 00

(6) Should the royalty-based damages be reduced to an after-tax measure?. 00 CO 05

b. Cost to cure damages attributable to PG’s agreed $158.5 million unsecured claim and $5 million administrative claim. t— 00 00

(1) Cash payment. t> 00 CO

(2) Promissory note obligations. C> CO 00

(3) Unpaid portion of PG’s unsecured claim. GO 00 CO

(4) Deductions to PG’s unsecured claim-related cost to cure damages because a portion of damages are attributable to Paragon’s non-Ultra diaper products?. 00 00 00

(5) Deductions to PG’s unsecured claim-related cost to cure damages because a portion of the damages are attributable to Paragon settling other disputes with PG? . CO 00 00

(a) Canadian sales . 00 00 <X>

(b) Pre-petition and Post-petition sales allegedly infringing PG’s Aziz, Buell, Robertson and Anderson patents 05 CO 00

(c) PG released its Motion for Contempt. 05 00 00

2. KC-Related Losses Arising From Inadequate Intellectual Property O 05 00

a. The Delaware Judgment was a proximate cause of Paragon incurring KC-related losses . 05 00

b. The Tyco decision does not limit Paragon’s KC-related losses ... 05 00

c. KC royalty-related cost to cure losses. 05 00

(1) Royalties paid. 05 00

(2) Loss attributable to KC royalty obligation. lO 05 00

(3) Should the KC royalty-related cost to cure damages be reduced for royalties attributable to products not utilizing the ILG feature on the IPO date?. 00 <£> C7T

d. Cost to cure damages attributable to KC’s $110 million unsecured claim and $5 million administrative claim .... LQ 05 00

(1) Cash payment. LO 05 00

(2) Promissory note obligations. LQ 05 00

(3) Unpaid portion of KC’s unsecured claim. CD 05 00

(4) Deductions to KC unsecured claim-related cost to cure damages attributable to non-Ultra diaper products.. CD 05 00

*841 e. Deductions to KC royalty-related and unsecured claim-related cost to cure damages attributable to settlement of KC’s SAP patent infringement claims?. 05 00

f. Deductions to KC royalty-related and unsecured claim-related cost to cure damages because the Enloe II and III patents issued post-IPO. 05 00

g. SAP compliance costs. 05 00

3. The Cost To Cure Damages Were Foreseeable 05 00

4. Total Cost To Cure Damages. 05 00

Difference In Value Measure. 05 00

Destruction of Business Loss Measure . O 05

Consequential Damages. O 05

1. Product re-design costs. O 05

2. Lost profits. O 05

3. Bankruptcy-related costs. t — ( 05

4. Prejudgment Interest. r-( 05

Mitigation.-. r — 1 05

Attorneys’ Fees. r — i 05

Posb-Judgment Interest. t-H 05

IV. CONCLUSION.917

I. INTRODUCTION

1. This adversary proceeding is a breach of contractual warranty case. Plaintiff, Randall Lambert, is the appointed litigation trustee for the bankruptcy estate (“Estate”) of Paragon Trade Brands, Inc. (“Paragon”). Plaintiff filed this action on behalf of Paragon’s Estate to recover damages for the alleged breach by Weyerhaeuser Company (“Weyerhaeuser”) of four warranties in two contracts: an Asset Transfer Agreement (“ATA”) and an Intellectual Property Agreement (“IPA”), by which Weyerhaeuser transferred- its private-label baby diaper business to its newly-created, wholly-owned subsidiary, Paragon. The transfer was part of Wey-erhaeuser’s concurrent sale of 100% of Paragon’s stock to the public in an initial public offering (“IPO”). The IPO closed February 2, 1993. After the IPO, Paragon was a company independent from Weyer-haeuser. Weyerhaeuser received $214.1 million net cash from the IPO.

2. On December 30, 1997, the United States District Court for the district of Delaware (“Delaware Court”) issued its judgment, entered January 6, 1998, against Paragon, 1 permanently enjoining it from selling its primary product, a private-label baby diaper, because it utilized a key “inner leg gather” (“ILG”) feature that the Delaware Court held infringed Procter & Gamble’s (“PG”) patents (the “Delaware Judgment”). The Delaware Judgment prompted Paragon to file a Chapter 11 proceeding January 6, 1998. To further its bankruptcy reorganization, in 1999, Paragon entered into settlement and license agreements with both PG and Kimberly-Clark Corporation (“KC”) to obtain licenses to utilize the ILG feature, which Weyerhaeuser had begun using in March 1991, and which Paragon continued to use after the IPO. This court approved those agreements August 6, 1999, after contested, intensive and lengthy hearings. Para *842 gon’s Chapter 11 plan was confirmed January 13, 2000 (the “Plan”) and implemented on the effective date of the Plan January 28, 2000. In accordance with the Plan, Plaintiff was appointed as litigation trustee to pursue certain claims of the Estate, including the claims that form the basis of this adversary proceeding.

3. After completing discovery in this adversary proceeding, Plaintiff and Weyer-haeuser submitted cross motions for summary judgment. Plaintiff sought partial summary judgment that Weyerhaeuser was liable for damages as a result of its breach of the warranties in the ATA and IPA. Weyerhaeuser sought complete summary judgment in its favor. On October 30, 2002, an order was entered granting Plaintiffs motion and denying Weyerhaeu-ser’s motion (“Summary Judgment Order” or “SJO”): Weyerhaeuser had breached the four warranties at issue, and Plaintiff was entitled to damages. Weyerhaeuser filed a motion for reconsideration, which was denied after briefing and oral argument by order entered June 24, 2003.

4. Trial was held on the remaining issue: the amount of damages Plaintiff is entitled to recover from Defendant. Additionally, during the trial, Weyerhaeuser presented testimony and argument in support of a counterclaim for indemnity it contends survived the SJO. The evidence presented at trial was considered and accorded its proper weight in accordance with the Federal Rules of Evidence.

II. FINDINGS OF FACT

A. Background of the Private-Label Baby Diaper Business Weyerhaeu-ser Transferred to Paragon in the IPO

5. Weyerhaeuser commenced a baby diaper business in 1972. This business consisted largely of selling a private-label diaper to large retail establishments that placed their store names on the package and sold the diaper on their shelves at lower prices than the branded diapers sold by PG, which sold the “Pampers” and “Luvs” brands, and KC, which sold the “Huggies” brand. The diaper was the primary product in Weyerhaeuser’s Personal Care Products (“PCP”) Division.

6. In the late 1980s, Weyerhaeuser embarked on a plan to refocus on its core businesses. Because the baby diaper business was not considered one of its core businesses, the diaper business was targeted for divestment. Weyerhaeuser informed the investment community about its refocusing and proceeded to move as quickly as possible to dispose of its baby diaper business (the “Business”).

7. The Business had performed well in the early 1980s, earning pre-tax profits for Weyerhaeuser in 1983 and 1984 of $31 to $39 million. A key to Weyerhaeuser’s success during these years was a “brand matching” practice, which included utilizing an elastic leg gather feature 2 patented under PG’s Buell ’003 patent. This strategy gave Weyerhaeuser’s private-label diaper an advantage over its competitors’ private-label diapers.

8. In 1981, PG sued Weyerhaeuser for infringing the Buell patent, seeking an injunction against use of the patented feature, damages for a reasonable royalty, and enhanced damages for willful infringement. Weyerhaeuser asserted various invalidity defenses to PG’s Buell patent, and elected to take the case to trial instead of removing the feature or re-designing its diaper to avoid the infringement claim. The jury found that Weyerhaeuser willful *843 ly infringed PG’s Buell patent, and that a reasonable royalty would have been 1% of sales. The trial court rejected Weyer-haeuser’s invalidity defenses. On July 2, 1985, the trial court entered judgment against Weyerhaeuser, permanently enjoining it from making its private-label diaper as it was then designed, and awarding PG reasonable royalty damages of $2.3 million, plus prejudgment interest and attorneys’ fees. 3

9. In the year after it was enjoined from selling its main product (1986), the Business’s sales volume decreased significantly from 12 million cases to approximately 8.4 million cases, causing it to lose substantial market share. Its profits fell from over $31 million in 1984 to $3 million in 1986. The Buell injunction was a significant factor in this downturn in the Business.

10. In 1987 and 1988, Weyerhaeuser was able to recapture some of its lost market share, but by 1989, Weyerhaeuser was again losing market share to its competitors, its market share going to 11% in 1987, 12% in 1988, then down to 11% in 1989. During 1987 and 1988, the Business either lost money or earned very low profits, recording a $2.2 million loss in 1987, a $9.4 million profit in 1988, and a $2.0 million profit in 1989.

11. As of mid-1990, the Business was expected to lose $5 to 7 million, its sales were declining, and the quality of Weyer-haeuser’s private-label diaper product lagged behind the brands’ and even private-label competitors’ products. In mid-1990, the Business had just abandoned “Project Epcot,” a three-year effort to develop a branded diaper, and Weyer-haeuser suffered a $100 million write-off on the project. At that point in 1990, the Business was considered a financially sick business and it was described as being in a “fight for survival.” Confronting the “sick” Business were: a macro United States market for baby diapers that was expected to be flat-to-declining in future years because of lower birth rates and an improved product yielding fewer daily diaper changes; new private-label competitors emerging to challenge Wey-erhaeuser for its private-label market share; serious excess diaper manufacturing capacity, which was leading to lower prices and, hence, lower revenues; and the brand manufacturers, PG and KC, engaging in what was described as “fierce battles” for market share, with tactics of (i) accelerating the pace of diaper innovations, (ii) lowering prices, and (iii) aggressively pursuing each other and private-label competitors on claims of infringing their patented innovations. In summary, the competitive environment facing the Business, which was already considered “sick,” was intense, and was expected to intensify. For the Business to survive in this intensely competitive market, Weyerhaeuser had to improve the quality of its private-label diaper product.

12.The primary means for improvement was the addition of a newer feature known as the inner leg gather, or “ILG.” An ILG, in layman’s terms, is a second elasticized inner barrier cuff in the diaper that contains or channels effluent, and thus reduces leakage. 4 Because leakage pre *844 vention is the primary purpose of a diaper, the ILG was the most important new feature for diapers ever incorporated in disposable diapers. Weyerhaeuser internally concluded that failure to add the ILG would negatively impact its sales volume by one million cases (1% of market share, or 1/12 its sales) in the first year and another 500,000 cases in the second through fourth years. Weyerhaeuser personnel believed that having the ILG on its Ultra diaper was essential for it to compete in the private-label diaper market. KC’s ILG was marketed nationally in early 1990, and PG was expected to do so in September, 1990.

13. In June 1990, Weyerhaeuser invested $7 million to install equipment to add the ILG feature to the Ultra diaper. In November 1990, at the annual Private Label Manufacturers’ Association meeting, the Business’s retail customers were demanding that Weyerhaeuser deliver them a diaper with the ILG as soon as possible. In March 1991, Weyerhaeuser launched its new Ultra private-label diaper with the ILG feature. This new diaper was a huge success for the Business. As anticipated, it reduced leakage in Weyerhaeuser’s private-label diaper by up to 40%. Weyer-haeuser’s net diaper sales increased strongly from $275 million in 1990 to approximately $396 million in 1991, and then to $484 million in 1992, while operating profits increased from $2 million in 1990 to $33.4 and $34.8 million in 1991 and 1992, respectively. The ILG, while not the sole contributor, was extremely important to the Business’s turnaround because it substantially improved leakage containment, the key quality feature of the diaper. The Business’s customers were very satisfied with the new ILG Ultra diaper.

14. PG and KC, however, each had patent claims encompassing the ILG feature, under PG’s “Lawson” patent and KC’s “Enloe” patent. PG’s Lawson patent described an ILG that was fluid impermeable or hydrophobic, and KC’s Enloe patent described an ILG that was fluid pervious. For each day after March 1991 that Wey-erhaeuser earned sales and profits using the ILG technology, its potential liability for patent infringement grew.

15. Weyerhaeuser’s increased sales after the ILG diaper launch were largely achieved by taking market share from PG’s “Luvs” brand. PG was known as a tenacious competitor that aggressively enforced its patents, as Weyerhaeuser well knew from its prior experience in the Buell lawsuit. Weyerhaeuser knew its ILG, made of a substantially hydrophobic, or impermeable material, fell within the claims made by PG’s Lawson ILG patent. Weyerhaeuser also knew its ILG Ultra diaper infringed PG’s Dragoo patent, which issued in 1991, after Weyerhaeuser launched its ILG diaper. Weyerhaeuser’s only defense to an action by PG for an injunction and damages for infringement was to argue that the Lawson and Dragoo patents were invalid, as it had argued unsuccessfully in the Buell lawsuit.

16. In pursuit of that invalidity defense, Weyerhaeuser obtained patent opinions from outside counsel that the Lawson, Dragoo and Enloe patents were invalid based on certain cited prior art. Weyer-haeuser had received a similar invalidity opinion regarding Buell that was proven wrong at trial. These opinions did not guarantee success in litigation, but would help protect Weyerhaeuser against a willful infringement finding, which carried the threat of enhanced or treble damages. Weyerhaeuser knew that issued patents, such as Lawson, Dragoo and Enloe, are presumed valid, and that a party attacking *845 validity has the burden of overcoming this presumption by clear and convincing evidence. The patent opinions Weyerhaeuser obtained did not assess the probability or likelihood that a court would find invalid the presumptively valid ILG patents of PG and KC, and Pat Coogan, Weyerhaeuser’s in-house patent counsel with oversight responsibilities for the PCP Division, testified he did not request such an assessment from outside counsel. In what appears to have been a lengthy meeting held September 5, 1991, Mr. Coogan advised Weyer-haeuser’s General Counsel, Bob Lane, that Weyerhaeuser’s chance to succeed on an invalidity defense to PG’s Lawson or KC’s Enloe patent infringement claims was no better than “50/50.”

17. In the year before launching its ILG diaper in March, 1991, Weyerhaeuser negotiated with PG to obtain a license to use its ILG feature, offering on many occasions to pay royalties or to trade licenses to various Weyerhaeuser patents for the right to use the ILG feature. These negotiations failed in May 1991 because PG demanded a 3% royalty to license the ILG feature, an amount Weyerhaeuser stated it could not afford to pay and remain competitive in the diaper market.

18. Also in 1991, PG and KC were litigating with each other in federal district court in Seattle, Washington (the “Seattle litigation” or “Seattle trial”) over whose ILG invention was reduced to practice first and which had priority of invention. As issued on September 22, 1987, PG’s Lawson patent made claims to both the generic ILG invention and ILGs made of impermeable materials. KC’s Enloe patent, issued November 3, 1987, made claims to ILGs made of “fluid pervious” materials (referred to later as “Enloe I”). KC sought to establish Enloe’s priority of invention to invalidate Lawson’s claims and to establish a right to have Lawson’s ILG claims transferred to an amended Enloe application filed with the Patent And Trademark Office (“PTO”).

19. Weyerhaeuser expected that the Seattle litigation was of sufficient scope for the winner between PG and KC to be found to have a “likelihood of success” in a later action to enjoin Weyerhaeuser from making and selling its private-label ILG Ultra diaper, and from using the ILG on any other product. In June 1991, trial of the Seattle litigation was conducted. Wey-erhaeuser’s in-house patent counsel Pat Coogan attended most of the trial.

20. In March 1991, a few months before the Seattle trial started, Weyerhaeu-ser’s Investment Evaluation Department (“IED”) commenced efforts to value the Business and determine how to sell it to obtain the best value. Weyerhaeuser also hired the investment banking firm of Morgan Stanley to advise on the Business’s likely market value and likely buyers. In a report issued August 28, 1991, Weyer-haeuser’s IED concluded that the Business’s value was $90 million. Morgan Stanley’s base case valuation of the Business was between $75 and $95 million. Neither the valuation of Morgan Stanley nor Weyerhaeuser’s IED, however, assumed any royalty payable to KC or PG for the ILG technology, or payment of damages for past infringement. Morgan Stanley also reported to Weyerhaeuser an “unusually limited universe of buyers” for the Business and a significant risk that no transaction would result from a sale process.

21. In its valuation study, the IED reported that (i) each percentage point change in the Business’s market share would change the Business’s value by *846 about $30 million; and (ii) a $1 change in the gross profit margin per standard case sold would change the Business value by $80 million. Assuming, however, a combined 5.5% royalty payable by the Business (which equaled PG’s and EC’s last demands before Weyerhaeuser closed the IPO, as discussed beginning at page 13, ¶ 29), Weyerhaeuser’s gross profit margin per case would drop by $1.49, from $5.62 to $4.13. According to Weyerhaeuser’s valuation analysis before the 1992-93 IPO, if paying these royalties, the Business would have zero or negative value. Notes prepared by a Weyerhaeuser IED officer of a meeting with Mr. Coogan, Mr. Robert Dowdy, 5 and others August 20, 1991, reflect discussions over possibly putting the diaper division in a separate subsidiary to protect Weyerhaeuser from what was then stated to be a substantial and growing infringement liability. In November 1991, Chemical Bank, a bank with whom Weyer-haeuser had a relationship through its investment banking arm, advised Weyer-haeuser that the Business might not be saleable at anything better than a “fire sale” price. In early 1992, Weyerhaeuser also investigated disposing of the Business through a leveraged management buyout.

22. On September 10, 1991, 6 while Weyerhaeuser was reviewing disposition of the Business, the decision in the Seattle litigation awarded priority of invention to EC’s Enloe patent. 7 As a result, Lawson’s claims to generic ILGs were held invalid as obvious or anticipated in light of Enloe. The district court, however, held that Lawson’s claims to impermeable, or hydrophobic, ILGs remained valid despite Enloe, given that Enloe’s “fluid pervious” ILG patent taught away from Lawson’s impermeable ILG design. The consequence of this decision was that Weyerhaeuser’s largely impermeable ILG diaper stood squarely within Lawson patent claims of PG that did survive the Seattle trial, and Weyerhaeuser knew it. Weyerhaeuser had no solid non-infringement position against the surviving Lawson impermeable ILG patent claims. Mr. Coogan also realized that the Seattle court’s decision meant Lawson’s generic claims to all ILGs (regardless of permeability) would, in due course, be transferred to Enloe and issue in an amended Enloe patent that would encompass all ILGs, including ILGs used on Weyerhaeuser’s Ultra diaper. Mr. Coogan reported this expectation to nine different Weyerhaeuser officers and lawyers, including its CFO and CEO, in his September 13, 1991 memorandum sent three days after the Seattle decision issued.

23. The Seattle trial result put Weyer-haeuser in the predicament of having to license the technology to make and sell its impermeable ILG diaper from not just one, but two competitors: PG, holding Lawson’s surviving impermeable ILG patent claims; and EC, which would be granted an amended Enloe patent 8 claiming all *847 ILGs, regardless of hydrophobicity. Wey-erhaeuser expected the prevailing party in the Seattle litigation, which was on appeal, would demand royalties from Weyerhaeu-ser for use of the ILG feature, and if a license and royalty agreement could not be resolved, that one or the other- — -PG or KC — would sue to enjoin Weyerhaeuser from using the ILG and for damages, including lost profits and/or reasonable royalties. Weyerhaeuser representatives were aware during this period that its potential liability for infringing PG’s ILG patents included damages for lost profits on sales Weyerhaeuser was taking from PG, and that such damages could be “enormous” because PG’s profit margin on the Weyerhaeuser ILG diaper sales approached 30%.

24. In December 1991, PG formally notified Weyerhaeuser that its Ultra diaper infringed PG’s Lawson and Dragoo patents. In a December 1991 meeting, Wey-erhaeuser’s General Counsel, Bob Lane advised Weyerhaeuser’s auditor, Arthur Andersen, that the damages arising from such a PG claim could be “enormous” for Weyerhaeuser. On February 10, 1992, Mr. Lane reported to Weyerhaeuser’s auditor, Arthur Andersen, that the PG claim could result in a 3% royalty payable and an injunction.

25. By early 1992, Weyerhaeuser had been unable to sell the Business through traditional means. In March 1992, Weyer-haeuser launched a plan to dispose of the Business through an initial public offering of 100% of stock of a newly-formed Weyer-haeuser subsidiary into which it would transfer the Business. Weyerhaeuser retained Merrill Lynch to be the lead underwriter for this offering. Merrill Lynch retained the.Skadden Arps law firm as its counsel. Weyerhaeuser retained the Paul Weiss law firm to be its counsel. The newly-formed company, which became Paragon, had no separate counsel. Wey-erhaeuser employees responsible for the Business were expected to become the managers of the newly-formed public company after the IPO. The Business had a successful year (on paper) in 1991, earning over $33 million in operating profit on net sales over $396 million. Its performance was up significantly from its $2 million operating profit in 1990 on net sales of about $286 million, and significantly better than the Business’s performance the prior four years, 1986-89. The Business’s successful results in 1991 and 1992 positioned Weyerhaeuser to pursue the IPO.

26. Weyerhaeuser incorporated Paragon Trade Brands, Inc. in June 1992 as its wholly-owned subsidiary, to own the business Weyerhaeuser planned to take public. Initially, the IPO was planned to close in late August or September 1992, but it was tabled in early September due to concerns over the effect a PG diaper price reduction would have on the Business’s narrow profit margin.

27. In August 1992, two separate events occurred that confirmed the problematic ILG patent predicament facing the Business. First, on August 14, 1992, the PTO decided in Enloe’s (KC’s) favor the *848 pending interference action fought between PG and KC over ILG patent priority. Weyerhaeuser’s in-house patent counsel, Mr. Coogan, knew that as a result, EC’s Enloe patent would be amended to include the generic ILG claims originally granted to Lawson. This new patent, which would not be limited to “impermeable” or “fluid pervious” iterations, would squarely encompass Weyerhaeuser’s Ultra ILG diaper.

28. The second event with impact on the ILG patent predicament facing Weyer-haeuser occurred August 26, 1992, when the Federal Circuit Court of Appeals affirmed the Seattle trial court’s decision as to priority of invention in the Seattle litigation, again leaving PG’s Lawson patent with valid claims to ILGs made of impermeable materials. 9 Based on this ruling, Weyerhaeuser’s ILG diaper remained squarely within the claims of what was now a litigation-tested Lawson patent of impermeable diaper ILGs. It was foreseeable by Weyerhaeuser and known within the patent law practice at the time of the IPO that a license can be required from two different parties in order to sell a particular product.

29. Weyerhaeuser expected that both PG and KC would seek royalties from Weyerhaeuser for use of the ILG or, failing an agreed payment, would sue for an injunction against use of the feature and damages. In fact, Weyerhaeuser conducted dual license negotiations with PG and KC in the months before closing the IPO transaction to obtain freedom to use the ILG feature. No license agreement with PG or KC was concluded before closing. PG’s last demand before the IPO closed was for a 3% royalty on net sales of all ILG products in return for a license under Lawson and the companion ILG patent, Dragoo. No evidence shows that PG offered, before the IPO closed, to forgive past infringement as part of a license agreement. EC’s last demand before the IPO closed was a 2.5% royalty on net sales of ILG products for seven and a half years in return for a license under Enloe I and the to-be-issued generic ILG patent (which later issued as Enloe III), which would be deemed fully paid after the 7.5 years. The proposed KC license did not contemplate a separate payment for past infringement. Both PG and KC rejected Weyerhaeuser’s various counteroffers, which consisted of cross-licenses of various Weyerhaeuser diaper patents, or a royalty as low as 0.2%.

30.Weyerhaeuser could not have proceeded with the IPO had the Business been paying royalties in the range demanded by PG and KC. In the IPO Prospectus, which Weyerhaeuser and its attorneys drafted, Weyerhaeuser disclosed the existence of PG’s and EC’s ILG patent claims, but Weyerhaeuser did not disclose the level of royalties demanded or the severe impact the royalties would have on the Business if forced to pay them. Wey-erhaeuser did not disclose that past attempts to license the feature from PG had failed; it downplayed the negotiations as “discussions”; and, the IPO Prospectus represented to the new public shareholders in at least three places that “the Company believes that any outcome with respect to these [ILG patent] matters will have no material adverse effect on its financial position or its results of opera *849 tions.” A 5.5% royalty (the aggregate amount PG and KC were demanding) would have eliminated virtually all of the Business’s 6% profit margin. A 4% royalty (approximately the amount the Business eventually agreed to pay in 1999 in the settlement agreements with PG and KC) would have eliminated approximately two-thirds of the Business’s profit margin.

31. Weyerhaeuser had withheld needed capital from the Business in the years before the IPO. The plan was for Paragon, after the IPO, to use its profits to finance its four-year capital improvement program, which was designed to (i) make its operations more cost-efficient so it could survive anticipated pricing actions of the brands and its private-label competitors, (ii) add and improve product features to keep pace with expected continuing diaper improvements in the industry, and (iii) expand production capacity. Being forced to pay royalties in the range of 5% would have severely undermined, if not destroyed, the Business’s ability to make the capital investments necessary to survive the pending and anticipated future diaper price wars. In fact, PG and KC did continue their price wars after the IPO, and diaper prices sharply declined by 15 to 22% within three years. Had the Business been forced to pay substantially all its profits to PG and KC in royalties to use the ILG feature, the Business would not have been a viable, on-going business after the IPO, and the IPO likely would not have occurred.

32. The evidence showed that the Business could not, and its managers did not expect it could, independently raise its diaper prices to recoup the extra costs of ILG royalties. As a private-label manufacturer, the Business was a known price follower of the branded manufacturers’ (PG and KC) prices. No evidence was presented to show that any of its managers expected they -could rely on PG and KC to raise their prices if the Business paid them royalties, thus allowing price increases to recoup the royalty costs. PG and KC, with aggregate market share of ±70%, had been chronically engaged in “fierce battles” inter se over market share, and were lowering prices. In addition to the pressures from PG and KC, Paragon faced, as Weyerhaeuser had, vigorous competition from its private-label competitors that further constrained its ability to raise prices.

33.At the time of the IPO, 10 the Business had no alternative, market-tested design that could be used to replace the ILG feature for the Ultra diaper. Dropping the ILG feature from the Ultra diaper would have been disastrous to the Business, returning it to the “sick” condition from which the ILG feature had rescued it. The Ultra diaper, which was the Business’s premium quality private-label diaper, represented approximately 84% of its net sales. The Business also produced and sold a line of economy diapers (the “Economy diaper”) that had fewer features than the Ultra diaper. The Economy diaper, which represented about 14% of net sales in 1993 (15% in 1992), did not utilize an ILG feature when the IPO closed. At the time of the IPO, the Business had just introduced a training pant, which is a form of diaper used by older toddlers. The training pant did not then utilize an ILG and represented about 1% of the net sales of the Business at that time. Accordingly, *850 as sold to the public through the IPO, the Business had essentially béen built as, and was, a company with a single product — the Ultra ILG diaper — but with good potential for growth and expansion.

34. The consequences of not having the right to use the key ILG feature had been discussed within Weyerhaeuser as similar to the consequences it suffered from the 1985 Buell injunction. These consequences included an injunction requiring the Business to pull the Ultra diaper from retailer shelves, costs to develop a new diaper design, lost sales and profits from being forced to sell an inferior, non-ILG product, payment of the' substantial royalties PG and KC were demanding for a license to continue using the ILG feature, and liability to PG and KC for their lost profits, which Weyerhaeuser knew could be substantial.

B. The IPO

35. Under these ominous circumstances, Weyerhaeuser closed the IPO February 2, 1993, selling 11.5 million shares 11 of Paragon common stock to public investors who paid $19.00 per share. Weyerhaeuser received $179,100,000 of the $218,500,000 IPO proceeds, 12 and $35,000,000 from Paragon, which Paragon had borrowed under its new revolving bank credit facility. In light of the previous estimations of the value of the Business, and in light of the patent infringement threats from PG and KC, the receipt of $214.1 million for selling its Business represented a successful transaction for Weyerhaeuser. By the end of the first trading day, Paragon’s stock traded up to close at $24.75 per share, giving Paragon a market value of $284,625,000 on February 2,1993.

36.At closing, Weyerhaeuser transferred the Business to Paragon by executing an Asset Transfer Agreement (ATA) and Intellectual Property Agreement (IPA) (together, the ATA and IPA are the “Transfer Agreements”). The ATA and IPA, as finally executed at the IPO closing, contained assumption of liabilities clauses, whereby Paragon assumed virtually all liabilities of Weyerhaeuser relating to operation of the Business, past and prospective (defined as the “Assumed Liabilities”), including patent liabilities. 13 The Transfer Agreements, at ATA Section 11.02(a) and IPA Section 4.01, also contained certain provisions providing that Paragon would *851 indemnify and defend Weyerhaeuser from the Assumed Liabilities, including any third party claims against Weyerhaeuser for patent infringement relating to operation of the Business. As discussed at length in the Summary Judgment Order entered October 30, 2002, assumption of liability and indemnity clauses existed in early drafts of these contracts, prepared months earlier than the February 2, 1993 actual closing. Later, however, numerous warranties were added to the contracts. Plaintiff sued on four of the warranties. Two are found in the ATA, and were made with no limitation as to Weyerhaeuser’s knowledge. In the final, signed ATA, these two warranties provide, in relevant part:

3.01(c): [Weyerhaeuser] has, and will transfer to [Paragon] at the Closing, good title to all of the other Assets [all assets other than Real Property] ... free and clear of any and all mortgages, security interests, liens, claims, charges, options and encumbrances of any nature whatsoever, except for minor defects and irregularities in title or encumbrances that do not materially impair the use of any such Assets for the purposes for which they are held.

3.01(d): The Transferred Assets and the services and materials to be provided pursuant to the Related Agreements are sufficient to conduct the Business 14 as now being conducted.

The other two warranties, in the IPA, provide that, “to the best of [Weyerhaeu-ser’s] knowledge”:

3.11(ii): “Schedules 3.01(a) and 3.01(b) are accurate and complete lists of all Patent Rights and Trademarks, as used in connection with the Business or the Products.”

3.11(vii): “[T]he Primary Intellectual Property 15 plus Trademarks and Secondary Intellectual Property 16 are adequate for the continuation of the Business as currently conducted.”

At closing of the IPO, Weyerhaeuser certified the warranties were true and correct. In Section 3.01(a) of the ATA, Weyerhaeu-ser represented and warranted to Paragon that the ATA warranties were enforceable on their terms. The IPA and ATA were each fully integrated contracts, which, pursuant to merger clauses in each, superced-ed all prior discussions between the parties over the subject matter of the agreements. The IPA and ATA were required to be, and were, filed with the SEC as “material contracts” and made a part of the Registration Statement for Paragon’s newly issued common stock. Weyerhaeuser, in Section 11.02(b) of the ATA, agreed to indemnify Paragon for all losses, costs, *852 expenses and damages arising from a breach of any of the four warranties at issue.

C. Paragon After The IPO

37. After the IPO, the Business now known as Paragon continued to make and sell the Ultra diaper with the same ILG feature Weyerhaeuser had used before the IPO. For infringement purposes, Paragon’s ILG feature did not change from the feature on which Weyerhaeuser had built the Business. Paragon also continued to sell the Economy diaper and training pant. After the IPO, in the mid to late 1990s, Paragon added the ILG feature to the Economy diaper and to the training pant. Also after the IPO, Paragon began to sell a “Supreme” diaper. No credible evidence was introduced to show that this product ever had an ILG.

38. After the IPO, Paragon continued to employ the same outside patent counsel that Weyerhaeuser had used on diaper patent issues before the IPO. 17 After the IPO and through at least 1996, Paragon’s attorneys continued to consult Weyerhaeu-ser’s in-house patent attorney, Pat Coogan, regarding the ILG patent matters. For the first two years after the IPO, PG and KC lowered their diaper prices by more than 20%, and Paragon was forced to respond by lowering its diaper prices accordingly.

39. After the IPO, the representations in the IPO Prospectus that “the Company believes any outcome of [the ILG patent] matters will have no material adverse effect” on the Business restrained Paragon from agreeing to licenses with PG and KC at royalty rates that would have so eroded Paragon’s profits as to be a material adverse effect on Paragon’s financial position. 18 On January 20, 1994, PG sued Paragon in federal district court in Delaware for infringing PG’s Lawson and Dragoo patents (the “Delaware Litigation”). In return for dismissal of the lawsuit, PG demanded that Paragon pay a 2.5% royalty. Paragon sought an alternative resolution by tendering several alternative diaper designs to PG, and asked PG to agree that the designs would not infringe its patents. On February 28, 1994, PG responded to Paragon’s request, agreeing that two of the samples would not infringe Lawson or Dragoo. PG asserted, however, that even if Paragon elected to switch to one of these designs. Paragon would still be required to pay a 2.5% royalty on all past infringement of Lawson and Dra-goo, back to 1991 (approximately $30 million), plus a 1% royalty on future net sales of the sample diaper for licenses under PG’s Aziz and Buell patents, because PG claimed the sample diaper infringed Aziz and Buell. 19

40.Paragon rejected PG’s offer. Paragon had not commercially tested the samples it had delivered to PG, and believed them to be inferior designs, which were not a commercially viable option. Paragon countered PG’s offer by offering to pay a 0.1% royalty for licenses of Lawson and Dragoo for three years, after which no *853 further royalties would be due. Paragon’s offer and position was consistent with the IPO Prospectus immateriality disclosure, and with the pre-IPO advice of Mr. Coo-gan as to what would be a “reasonable royalty” for PG’s ILG patents. PG rejected Paragon’s counteroffer, telling Paragon it believed the parties were at an impasse. Consequently, pretrial discovery proceeded.

41.During 1995, KC filed a lawsuit against Paragon in Dallas, Texas for infringing its Enloe and Enloe II ILG patents. By July 1996, after settlement discussions with PG had resumed, PG had lowered its royalty demand for Lawson and Dragoo licenses to 2%, but still demanded Paragon pay $30 million for past infringement back to 1991, when Weyer-haeuser had begun selling the ILG diaper. Even though this was PG’s lowest settlement offer, Paragon believed it could not afford to pay PG a 2% royalty, given its competitive situation and the likelihood that this rate would become precedent for a royalty payable to KC for licensing KC’s Enloe patents, which Paragon considered stronger, more defensible patents than Lawson. The pendency of the KC claims under Enloe, which would (soon) include a generic claim for all ILGs, materially limited Paragon’s options in reaching a settlement with PG. From the time of the IPO through the February 1997 PG trial in Delaware, Paragon continued to study alternative designs to avoid paying any royalty, but found no viable alternative to the ILG design on its diaper. Removing the ILG altogether was not a viable option for Paragon.

42. Before the trial in Delaware and thereafter, Stephen Judlowe, Paragon’s trial counsel who had originally been selected by Mr. Coogan, Weyerhaeuser’s in-house patent counsel, was advising Paragon that the likelihood of Paragon’s success at trial against PG’s claims was very high, and as high as 80%, and that even if Paragon lost on PG’s claims it would win on its counterclaim for PG’s alleged infringement of Paragon’s Pieniak patent and would, “at the end of the day walk away making money” on the litigation. Paragon relied on Mr. Judlowe’s advice and rejected PG’s settlement offer. PG and Paragon proceeded to trial.

43. A bench trial before Judge Joseph Longobardi commenced in Delaware February 3, 1997. The day after the PG trial started, the PTO issued to KC the Enloe III patent containing the generic ILG claims originally granted to Lawson in 1987. 20 After presentation of evidence had concluded, but before the Delaware court ruled, PG and Paragon conducted further settlement discussions. At an April 1997 meeting, PG representatives met and explained the implications of the Enloe III patent, and how Paragon had no way to avoid single or even double jeopardy for infringement except by retreating to what essentially was its pre-1991 diaper, which would have been “commercial suicide” for Paragon. In May 1997, after the trial had *854 been completed, PG renewed its pretrial offer of a 2% royalty, attributing 1.25% to Lawson and .75% to Dragoo, but increased its demand for past infringement damages to $40 million. Paragon calculated that accepting this offer would have cost it about $150 million. Paragon still believed it could not afford to accept PG’s demand, in part due to the overhanging claims of KC, which by then had filed a second lawsuit against Paragon in federal district court in Dallas, Texas, to include its enforcement of the Enloe III generic claims to all ILG diapers (the “Texas lawsuits”). Also, Paragon’s trial counsel continued to give bullish advice after the Delaware trial, advising that Paragon was a likely winner. For this and the reasons described earlier, Paragon rejected PG’s post-trial pre-ruling settlement offers. In turn, PG rejected Paragon’s counteroffer of a 0.2% royalty capped at $3 million. 21 The parties thus waited for Judge Longobardi’s decision.

44. When the patent infringement lawsuits were filed against Paragon, Paragon did not send Weyerhaeuser a formal written notice demanding that Weyerhaeuser defend it or indemnify it for liability. Weyerhaeuser had actual notice, however, that Paragon had been sued by PG for infringing Lawson and Dragoo: Mr. Coo-gan was consulted after the IPO by Paragon in-house counsel, and was deposed in the