Opinion
Civil No. 02-4786 (JRT/FLN)
February 20, 2003
Stanley N. Zahorsky, Zahorsky Law Firm, Edina, MN, for plaintiffs.
Cynthia Jokela Moyer and Emily Duke, Fredrikson Byron, P.A., Minneapolis, MN, for defendants.
MEMORANDUM OPINION AND ORDER
Defendants SignCad Systems, Inc., Lynn Berg, Judd Roby, and Strategic Technologies, Inc., (collectively, defendants or "SSI") request a preliminary injunction in this trademark infringement and breach of contract case to prevent plaintiffs SignCad Technology Corporation and Paul C. Effrem (collectively, plaintiffs or "STC") from reproducing or distributing various software programs and user manuals, and to prevent plaintiffs from using several marks (including SignCAM and SignCAD). For the reasons discussed below, the Court grants in part defendants' motion for a preliminary injunction.
BACKGROUND
Plaintiff Paul Effrem and defendant Lynn Berg worked together to create software and user manuals for the traffic sign industry. They worked together for about two years before incorporating into Berg and Effrem, Inc.; they eventually changed the company name to SignCad Systems, Inc. As part of the incorporation, Effrem and Berg assigned their individual copyrights and trademarks to the new company. SignCad Systems, Inc. continued to develop and market the SignCAD products (used to design traffic signs), and also developed SignCAM (used to manufacture traffic signs), and registered several marks related to that software.
Effrem and Berg decided they no longer wished to work together, and in March of 2001, Effrem was terminated as CEO of SignCad Systems, Inc., and Berg became CEO. Effrem stayed on as an employee for a short time while the parties negotiated a separation agreement.
I. The Separation Agreement
The parties signed an agreement titled "Separation Agreement" ("October 11 Agreement" or "Agreement") on October 11, 2001. Defendants claim that this agreement was a proposed separation agreement and would not take effect unless and until the parties signed a buy-sell agreement. Plaintiffs argue that the October 11 Agreement was final, and was not subject to any condition precedent.
Berg, CEO of SignCad Systems, Inc., signed the agreement on October 15, 2001.
The October 11 Agreement anticipates that Effrem would start his own company that would maintain and update the software code for SignCAD and SignCAM. The agreement states that "SSI and STC shall have equal rights to the Sign Library and SignCAD and SignCAM trademarks." October 11 Agreement at 2. STC was entitled to all rights to the Source Code, and was also granted a license to use, modify and distribute the Dataware. In addition, Effrem was to receive a royalty for each SignCAD and SignCAM license sold, and loans Effrem had made to SSI were to be repaid according to an attached schedule.
The Source Code is defined as "the development version of SignCAD and SignCAM, including program source code, data files."
The October 11 Agreement contains an exclusivity clause, which reads "SSI will be granted the exclusive right to market worldwide all transportation related software produced by STC for a minimum of three years." Id. This exclusivity is subject to SSI meeting minimum annual sales and payments schedules, and could be lost by failure of SSI to pay STC royalties in a timely fashion.
Under "General Provisions" is the following clause: "This agreement is contingent upon both parties agreeing to a buy-sell agreement, to be attached as Schedule D attached [sic] and made part of this Agreement." Id. at 6. Attached to the October 11 Agreement is a document headed "Schedule D," which appears to be an unsigned letter of intent to sell, from Effrem to SSI. Schedule D is one of five attachments to the October 11 Agreement, and it differs from the others in that it is the only attachment that is referred to in the future tense in the body of the October 11 Agreement.
In contrast, Schedule A is described as follows: "Exclusivity is subject to SSI meeting minimum annual sales goals and payment schedules as set forth in the marketing forecast, Schedule A, which is attached and made part of this agreement." Id. at 4 (emphasis added).
II. The Parties Actions Following the October 11 Agreement
Following October 11, the parties appeared to perform in accordance with the terms of the October 11 Agreement. For example, Effrem incorporated his new company, STC; defendants paid plaintiffs royalties and goodwill payments and stopped paying Effrem a salary; and the parties divided SSI's assets according to a schedule that was attached to the October 11 Agreement. Notably, the parties exchanged drafts of proposed buy-sell agreements, but apparently were not able to agree on a final version although Effrem claims he has offered to sign the latest version.In March of 2002, defendants stopped paying the scheduled royalties to plaintiffs. Defendants claim they stopped making payments because the buy-sell agreement had not been implemented and it became apparent that it never would be implemented.
Defendants claim that they had been making the royalty payments not because the October 11 Agreement was in effect, but in the good faith belief that the parties eventually would reach an agreement on the buy-sell issue. Plaintiffs counter that defendants simply did not have the money to pay the royalties according to schedule. Plaintiffs claim that although the October 11 Agreement was effective, defendants lost their right to exclusivity when they stopped making the royalty payments. Therefore, plaintiffs argue, they are no longer bound by the exclusivity provision in the October 11 Agreement, and are entitled to market the disputed software.
ANALYSIS I. Preliminary Injunction Standard
A preliminary injunction may be granted only if the moving party can demonstrate: (1) that there is a likelihood of success on the merits; (2) that the movant will suffer irreparable harm absent the restraining order; (3) that the balance of harms favors the movant; and (4) that the public interest favors the movant. Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981) (hereinafter "Dataphase factors"). The moving party bears the burden on all four factors. Gelco Corp. v. Coniston Partners, 811 F.2d 414, 418 (8th Cir. 1987). "None of these factors by itself is determinative; rather, in each case the four factors must be balanced to determine whether they tilt toward or away from granting a preliminary injunction." West Pub. Co. v. Mead Data Cent., Inc., 799 F.2d 1219, 1222 (8th Cir. 1986). Though no single factor is determinative, the likelihood of success on the merits predominates in both copyright and trademark cases, and where the movant establishes that likelihood, irreparable harm is presumed. Taylor Corp. v. Four Seasons Greetings LLC, 171 F. Supp.2d 970, 972 (D. Minn. 2001) (citing West Pub. Co., 799 F.2d at 1222); Calvin Klein Cosmetics Corp. v. Lenox Labs, Inc., 815 F.2d 500, 505 (8th Cir. 1987) (citing Black Hills Jewelry Mfg. Co. v. Gold Rush, Inc., 633 F.2d 746, 753 (8th Cir. 1980)).
A. Likelihood of success on the merits
To demonstrate a likelihood of success on the merits, defendants must show that plaintiffs are not entitled to market the disputed software and/or use the disputed marks. Defendants argue that the October 11 Agreement never took effect due to the failure of a condition precedent, therefore, defendants argue, plaintiffs have no right to use the software or marks. Plaintiffs dispute the existence of a condition precedent, and alternately argue that even if the buy-sell clause amounts to a condition precedent, the condition precedent has been waived. Finally, plaintiffs argue that promissory estoppel should bind defendants to the October 11 Agreement. The Court examines these arguments in turn in order to determine defendants' likelihood of success on the merits.
1. Condition precedent
A condition precedent refers to "any fact or event, subsequent to the making of a contract, which must exist or occur before a duty of immediate performance arises under the contract." Nat'l City Bank of Minneapolis v. St. Paul Fire Marine Ins. Co., 447 N.W.2d 171, 176 (Minn. 1989) (citations omitted).
The plain language of the October 11 Agreement suggests that the Agreement was in fact contingent on a buy-sell agreement, which the parties agree has not been executed. However, the attachment labeled "Schedule D," the unsigned memorandum, raises sufficient ambiguity for the Court to look to the parties' actions to determine whether the attachment satisfied the condition precedent, and whether therefore the October 11 Agreement was effective. When construing an ambiguity in a contract, the court has a duty to give effect to the intent of the parties. Ecolab, Inc. v. Gartland, 537 N.W.2d 291 (Minn.Ct.App. 1995) (citing Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 66 (Minn. 1979)); see also Resolution Trust Corp. v. Kahn, 501 N.W.2d 703, 705 (Minn.Ct.App. 1993); Fredrich v. Indep. School Dist. No. 720, 465 N.W.2d 692, 696 (Minn.Ct.App. 1991) (holding that the interpretation the parties give the contract is entitled to great weight and looking to post-contract conduct to determine parties' interpretation).
"This agreement is contingent upon both parties agreeing to a buy-sell agreement, to be attached as Schedule D attached [sic] and made part of this Agreement."
Following October 11, the parties continued to negotiate a buy-sell agreement, and referred to the documents they drafted as the "buy-sell" agreement and often titled drafts "Exhibit D." It is clear from these actions that neither party expected that the buy-sell agreement was in its final form.
Plaintiffs nonetheless argue that, on the whole, the parties' post-October 11 actions demonstrate that the Agreement was intended to be binding. Plaintiffs point to a letter from defendant Berg to Effrem, dated April 1, 2002, which references the "signed final Separation Agreement." This letter also indicates that the parties agreed to some sort of buy-sell agreement on October 11 — "The signed Separation Agreement, which includes the Buy/Sell Agreement that you verbally agreed to sign, is a binding legal agreement." The parties also divided property according to a schedule attached to the October 11 Agreement and defendant Berg delivered a letter to SSI's banker indicating that Effrem had resigned in accordance with the terms of the October 11 Agreement.
Notably, defendants accepted the benefit of an updated version of the SignCAD product (version 4.7), which defendants continue to sell. Finally, defendants accepted a beta version of the next level (5.0) of the SignCAD product.
The Court finds that despite numerous examples of conduct in conformity with the October 11 Agreement, the continued negotiation of the buy-sell agreement undermines the notion that the parties believed they had a complete and final agreement. The Court finds defendants' reading of the October 11 Agreement and the buy-sell clause is more persuasive. Despite the presence of some significant factual issues, the Court determines that defendants have shown some likelihood of success on the contractual interpretation issue.
2. Waiver
Plaintiffs argue that even if the buy-sell agreement was a condition precedent, defendants waived that condition by acting in conformance with the October 11 Agreement before a buy-sell agreement was signed. Minnesota law provides that a party to a contract may waive a condition precedent which exists for that party's own benefit. Taylor Investment Corp. v. Weil, 169 F. Supp.2d 1046, 1056 (D.Minn. 2001) (citing Steinhilber v. Prairie Pine Mut. Ins. Co., 533 N.W.2d 92, 93 (Minn.Ct.App. 1995) (describing the rule as "well-settled")). The Steinhilber court noted that "[i]gnoring a provision in a contract will constitute waiver, . . . and waiver may be found where a party continues to exercise rights under a contract even though [that party] knows a condition has not occurred or cannot be performed." Steinhilber, 533 N.W.2d at 93 (quoting Appollo v. Reynolds, 364 N.W.2d 422, 424 (Minn.Ct.App. 1985)). Waiver is found where the benefited party voluntarily and intentionally relinquishes a known right, and courts may infer waiver by conduct. Montgomery Ward Co. v. County of Hennepin, 450 N.W.2d 299, 304 (Minn. 1990); Carpenter v. Vreeman, 409 N.W.2d 258, 262 (Minn.Ct.App. 1987); Blankholm v. Fearing, 22 N.W.2d 853, 856 (Minn. 1946). Nonetheless, waiver must be manifested in some unequivocal manner. Ohio Confection Co. v. Eimon Mercantile Co., 191 N.W. 910, 911 (1923).
Where a condition precedent is for the benefit of both parties, both parties must waive that condition before a valid contract comes into existence. Hanson v. Moeller, 376 N.W.2d 220, 225 (Minn.Ct.App. 1985).
In this case, it simply cannot be said that defendants ignored the condition. Indeed, both parties actively pursued a buy-sell agreement for several months. Defendants' pursuit of an agreement precludes any finding that defendants intended to relinquish those rights. However, plaintiffs could prevail on the waiver argument if plaintiffs can show that Effrem was in fact willing to sign a reasonable buy-sell agreement and that defendants frustrated that willingness. Minnesota law provides that a party that frustrates satisfaction of a condition precedent cannot take advantage of that failure. In re Hennepin County 1986 Recycling Bond Litig., 540 N.W.2d 494, 502 (Minn. 1995). Currently there is insufficient evidence in the record to determine whether plaintiff's waiver claim affects the Court's determination of defendants' likelihood of success on the merits.
3. Promissory estoppel
Plaintiffs finally argue that if the October 11 Agreement is not a binding contract, promissory estoppel should apply because the defendants' promises enumerated in that Agreement constitute promises that legally bind the parties. Promissory estoppel is an equitable doctrine that implies a contract in law where none exists in fact. Rudd v. Great Plains Supply, Inc., 526 N.W.2d 369 (Minn. 1995); Grouse v. Group Health Plan, Inc., 306 N.W.2d 114, 116 (Minn. 1981). It requires proof that (1) a clear and definite promise was made, (2) the promisor intended to induce reliance and the promisee in fact relied to his or her detriment, and (3) the promise must be enforced to prevent injustice. See Cohen v. Cowles Media Co., 479 N.W.2d 387, 391 (Minn. 1992).
The Court questions the application of the doctrine of promissory estoppel in this situation. Promissory estoppel is more typically applied when an oral promise induces reliance. See generally, Olson v. Synergistic Technologies Bus. Sys., Inc., 628 N.W.2d 142 (Minn. 2001) (discussing the history of promissory estoppel and its applications in Minnesota Courts); Schumacher v. Schumacher, 627 N.W.2d 725, 728 (Minn.Ct.App. 2001). In this case, however, the parties bargained for a written contract that contained a condition precedent. Minnesota case law is not clear that promissory estoppel applies where there is an actual agreement, but that agreement is unenforceable due to failure of a condition precedent. An analogous, but inconsistent, line of cases discusses whether promissory estoppel can apply where there is an actual agreement, albeit an unenforceable one by reason of the statute of frauds. Schumacher, 627 N.W.2d at 728-29 (recognizing inconsistency) (citing Del Hayes Sons, Inc. v. Mitchell, 230 N.W.2d 588, 594 (Minn. 1975); Norwest Bank v. Midwestern Mach. Co., 481 N.W.2d 875, 880 (Minn.Ct.App. 1992)). The Court in Del Hayes Sons, Inc., held that promissory estoppel was not available where an actual contract was shown, but that contract was unenforceable under the statute of frauds. 230 N.W.2d at 594. Conversely, the Court in Norwest Bank v. Midwestern Mach. Co. held that "[a]n agreement may be taken outside the statute of frauds by equitable or promissory estoppel." 481 N.W.2d at 880 (citing Berg v. Carlstrom, 347 N.W.2d 809, 812 (Minn. 1984)). Given this apparent inconsistency, and the written agreement contingent on the condition precedent, the Court finds it unlikely that plaintiffs can prevail under a promissory estoppel theory. The Court therefore finds that defendants have demonstrated a likelihood of success on the merits, and turns to the remaining Dataphase factors.
B. Irreparable harm
Irreparable harm is usually presumed when a movant shows likelihood of success on a copyright claim. Taylor Corp. v. Four Seasons Greetings LLC, 171 F. Supp.2d 970, 972 (D.Minn. 2001). That presumption is less persuasive in this case because the parties contemplated joint use of at least some of the marks. The contemplated joint use undermines defendants' argument that money damages will not suffice to make defendants whole should they prevail on the contract issue. In addition, the Court notes that defendants seek sweeping injunctive relief. It is necessary to group defendants' requests to determine which if any of the alleged infringements give rise to a persuasive claim of irreparable harm.
1. Materials within the October 11 Agreement
The October 11 Agreement provided that the parties would have equal rights to the use of the marks SignCAD, SignCAM, and Sign Library. Defendants were to have rights to the mark Dataware, but plaintiffs were to have access to it and development use of it, and plaintiffs were to retain rights to the Source Code. Although the agreement provided that STC was not to market any of the products, it also provided that any sales by STC "are subject to distributor payments to SSI in the same percentage as if SSI were selling the product directly." October 11 Agreement at 5. The parties contemplated joint use of the marks, and even planned the remedy if STC overstepped its contractual rights. The Court finds that money damages will be adequate to compensate defendants for any infringement of the materials inside the October 11 agreement.
2. Materials outside the October 11 Agreement
The Agreement does not address use of the following marks: SignCAD No Speed Limits, SignTRACK, SignNEST. Plaintiffs do not have a strong argument for their continued use of these marks. Even if the Court finds that the October 11 Agreement was valid, and that defendants failure to pay royalties forfeited their exclusivity, it is not clear that plaintiffs then should have the use of these specific marks. In addition, plaintiffs' use of these marks leads to unnecessary consumer confusion. The Court finds that defendants' argument for irreparable harm is stronger on these materials.
3. Statements to consumers
Finally, defendants complain that plaintiffs have made misleading statements to consumers regarding the software, ownership of it, and the status of SSI as a company. Defendants have pointed to evidence of consumer confusion, and have demonstrated that consumers are unwilling to do business with SSI while the ownership of the software is in dispute. Defendants have shown irreparable harm in the form of damage to their reputation, which probably cannot be compensated by money damages. At the same time, however, plaintiffs complain that defendants have made equally damaging and disparaging remarks concerning STC's products and status. The Court therefore finds that injunctive relief is appropriate as to both parties on this issue.
C. Balance of harm
The balance of harms is usually "regarded as insignificant in a copyright infringement action." Taylor Corp., 171 F. Supp.2d at 977 (citing E.F. Johnson Co. v. Uniden Corp. of Am., 623 F. Supp. 1485, 1491 (D.Minn. 1985)). Though the potential for harm is roughly equal here — both parties are small companies, attempting to stay in business — the Court finds that this factor tilts slightly in favor of defendants.
D. Public interest
"[T]he public interest is always served by upholding copyrights, and thereby encouraging individual effort and creativity." Janel Russell Designs, Inc. v. Mendelson Associates, Inc., 114 F. Supp.2d 856, 861 (D.Minn. 2000). The public interest is also served by enforcement of valid contractual agreements. The Court finds that this factor also favors defendants.
II. Conclusion
The Court finds that defendants have shown some likelihood of success on the merits on the contract interpretation issues, despite the ambiguities in the October 11 Agreement, and the numerous other fact issues, including the parties' post-October 11 conduct, which the Court has identified. However, the contract contains a condition precedent, and despite extensive negotiations, the condition has not been satisfied. The Court will grant preliminary injunctive relief, but only as to marks and materials outside the October 11 Agreement. Irreparable harm has not been demonstrated as to the materials referenced in the Agreement.
ORDER
Based upon the foregoing, the submissions of the parties, the arguments of counsel and the entire file and proceedings herein, IT IS HEREBY ORDERED that:
1. The Order dated December 24, 2002 [Docket No. 9] is DISSOLVED;
2. Defendant's motion for a preliminary injunction [Docket No. 4] is
GRANTED as follows:
a. Until further order of this Court, absent explicit written permission from defendants, plaintiffs are hereby restrained and enjoined from use of the following marks: SignCAD No Speed Limits, SignTRACK, and SignNEST;
b. Until further order of this Court, absent explicit written permission from defendants, plaintiffs are hereby restrained and enjoined from selling products containing the marks SignCAD No Speed Limits, SignTRACK, and SignNEST;
c. In accordance with Fed.R.Civ.P. 65(c), the preliminary injunction shall become effective upon defendants posting a bond with the Clerk in the amount of ten thousand dollars ($10,000) for the payment of such costs and damages as may be incurred or suffered by plaintiffs in the event plaintiffs are found to have been wrongfully enjoined.
IT IS FURTHER ORDERED that both parties are RESTRAINED AND ENJOINED from disparaging the other party's company and/or products. The parties may answer questions about the pending litigation, but any response must be neutral and must not make statements regarding the other party's status as a viable business. If the parties require additional clarification, the Court suggests that the parties jointly submit language for the Court's approval which can be used to describe the dispute between the parties.