Opinion
No. 02-0123-AS
November 19, 2002
OPINION and ORDER
Defendants adidas America, Inc.; adidas-Salomon North America, Inc.; adidas-Salomon U.S.A., Inc.; adidas Sales, Inc.; and adidas Promotional Retail Operations, Inc. (collectively "Defendants"), move to dismiss the Third and Fourth Claims for Relief asserted against them by plaintiffs Anatomic Research, Inc. ("Anatomic"), and Frampton E. Ellis, III ("Ellis"), (collectively "Plaintiffs") in their First Amended Complaint filed August 16, 2002 (the "Complaint"). Defendants contend that Plaintiffs have failed to adequately allege the "special relationship" required to support their claims for tortious breach of the duty of good faith and fair dealing and fraud based on omissions. Defendants also argue that Plaintiffs waived their rights to pursue these claims when they signed a release in December 1997.
Preliminary Procedural Matter
When considering a motion to dismiss under Rule 12(b)(6), the court limits its review to the complaint, and all allegations of material fact are taken as true and viewed in the light most favorable to the non-moving party. Cassettari v. County of Nevada, 824 F.2d 735, 737 (9th Cir. 1987). Here, Plaintiffs have submitted lengthy materials in support of their complaint which are not properly before the court. Defendants limited their materials and arguments to the allegations of the complaint and the agreements referred to in the complaint. Accordingly, the court will limit its review to those materials offered by Defendants and will not, at this time, consider the additional materials produced by Plaintiffs. In the event Defendants find it necessary to file a motion for summary judgment on these claims, Plaintiffs may present the same materials for consideration at that time and in that context.
Background
Ellis is the inventor of a number of patents protecting his unique improvements to shoe sole structures that he sold or assigned to his company, Anatomic. In November 1994, Plaintiffs and Defendants executed an Exclusive Patent License Agreement (the "Agreement"). The Agreement granted Defendants an exclusive license to a number of Plaintiffs' footwear patents, both existing and yet to be issued. In return, Defendants agreed to pay Plaintiffs certain royalties for footwear products sold before January 1, 2001, with additional royalties on licensed shoes sold thereafter. Defendants were required to provide Plaintiffs with notice in the event they discontinued the sales or manufacture of the licensed shoes without the intent to resume or for a specified period of time.
In May 1996, the parties executed a "Memorandum of Understanding" which "interpreted" and "modified" the Agreement primarily with regard to Defendants' ability to participate in the patenting process (the "Memorandum"). Specifically, the Memorandum required Defendants to pay royalties on products incorporating a patent for which a license application was pending but not issued only if Defendants were participating in the prosecution of the patent. The Memorandum authorized Defendants to participate in all patent applications which allowed a "substantial opportunity for substantive prosecution." "Substantial opportunity for substantive prosecution" was defined as:
any licensed patent application that, for example, new and amended claims may still be entered, continuation, continuation in part and divisional applications may still be pursued, no issue fees have been paid, nor has there been irrevocable abandonment.
The Memorandum also provided that Defendants could withdraw from participation in a patent application only if Plaintiffs did not incorporate Defendants' prosecution recommendations into that particular application. "Prosecution Recommendations" included "new claims, amendments, inclusion or deletion of argument and remarks from draft responses, and filing of continuations, continuation in part, divisional, or reissue applications." Defendants were responsible for paying any additional patent office fees generated by their prosecution recommendations. Plaintiffs were required to execute a Power of Inspection allowing Defendants full access to Plaintiffs' patent portfolio. The Memorandum specifically required both parties to "use good faith efforts to obtain maximum patent protection allowed by law."
In December 1997, the parties further modified the terms of the Agreement through an Amendment to the License Agreement (the "Amendment"). The Amendment, in part, terminated the Memorandum and purported to "settle all claims related thereto." The Amendment specifically provided that:
Licensors and adidas hereby agree that with effect from the date of this Amendment the Memorandum shall be terminated and shall be of no effect, and any liabilities of Licensors to adidas and of adidas to Licensors arising under the Memorandum are hereby settled and discharged. Accordingly, adidas shall have no right from the date of this Amendment to participate in the prosecution of any of the Licensed Patents that are pending applications.
Licensors agree to take advice on the prosecution of the Licensed Patents that are pending applications from a partner in a firm of patent attorneys with experience in similar matters.
The Amendment continued the obligation of Plaintiffs to execute a Power of Inspection authorizing Defendants to have full access to Plaintiffs' license application files, to identify all existing patents and patent applications and to advise Defendants of any new patent applications within a specified time.
Plaintiffs allege that, during the term of the Agreement, they cooperated with Defendants and Defendants' attorneys by incorporating Defendants' recommendations regarding claim terms, elements and language into their patent applications. Specifically, Plaintiffs allege that:
In reliance on Adidas America, Inc.'s anticipated good faith and fair dealing in the performance of the License Agreement, and in order to maximize Adidas America, Inc.'s benefits under the License Agreement and as an exclusive licensee, including obtaining the maximum patent protection for shoes sold by the Adidas entities and maximizing their commercial values and benefits to defendants and other Adidas entities, and in reliance on the special trust, and fiduciary relationship that existed between them and Adidas America, Anatomic and Mr. Ellis adopted and incorporated into their patent applications and correspondence with the patent agencies the patent claims, claim terms/elements and comments drafted by Adidas America, Inc.'s attorneys.
Plaintiffs additionally allege that in December 2000, Defendants' attorneys mentioned to Plaintiffs that Defendants were considering refusing to pay any royalties for shoes sold by Defendants after December 31, 2000, based on their opinion that all of the claims of the patents, including those incorporating or embodying the claims, claim terms/elements and other comments drafted by Defendants' counsel were invalid or not infringed by Defendants' products.
Plaintiffs assert that Defendants had a special trust and fiduciary relationship based on their involvement in the prosecution of Plaintiffs' patent applications and that Plaintiffs relied upon Defendants and their attorney in adopting and incorporating Defendants' recommendations into the patent applications. Plaintiffs allege that, as a result of that fiduciary relationship, Defendants had a duty of good faith and fair dealing with regard to the patent applications. Defendants allegedly breached that duty by inducing Plaintiffs to adopt its recommendations and then subsequently contend that the patents adopting the recommendations were invalid or not infringed by Defendants' products.
Plaintiffs also allege that, based on the special or fiduciary relationship between Plaintiffs and Defendants, Defendants had an obligation to inform Plaintiffs that they discontinued manufacturing licensed shoes and that they intended to use their right to participate in the patent application process to diminish the value of Plaintiffs' patent rights and free Defendants from their obligation to pay royalties under the Agreement. Plaintiffs allege that, not only did Defendants not inform them of their intent, they misrepresented their intent by encouraging Plaintiffs to submit specific patent claims, claim terms/elements and comments drafted by Defendants' counsel, to various patent agencies as a part of the patent application process and by inducing Plaintiffs to spend substantial sums of money on patents that they would later claim were invalid or not infringed. Defendants also allegedly misrepresented their position to Plaintiffs thereby preventing Plaintiffs from terminating the Agreement and offering the patents to Defendants' competitors.
Legal Standard
Defendants' motion to dismiss for failure to state a claim challenges the legal sufficiency of the complaint. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). Because the court rules before it receives any evidence, such motions are disfavored. C. Wright A. Miller, Federal Practice and Procedure § 1357 (1984). In considering a motion to dismiss, the factual allegations in the complaint are presumed to be true and are viewed in the light most favorable to the non-moving party. Cassettari v. County of Nevada, 824 F.2d 735, 737 (9th Cir 1987). A motion to dismiss under Rule 12(b)(6) will be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Gibson v. United States, 781 F.2d 1334, 1337 (9th Cir 1986), cert den, 479 U.S. 1054 (1987). The question is not whether the plaintiff ultimately will prevail, but whether he cannot possibly prevail even if the allegations in the complaint are assumed to be true. The court may not dismiss a claim merely because the pleadings indicate that the likelihood of prevailing is remote. See Scheuer, 416 US at 236. Nor, at this stage of the proceedings, does the court consider whether there is any evidence to support the allegations that have been made in the complaint.
Discussion
Third Claim for Relief-Tortious Breach of the Duty of Good Faith and Fair Dealing Defendants seeks dismissal of Plaintiffs' tortious bad faith claim on the grounds that Plaintiffs failed to allege "facts to support a finding that a 'special relationship' existed between adidas and Anatomic" required for such a claim. Additionally, Defendants contend that the Agreement, the Memorandum and the Amendment preclude the existence of such a relationship. Finally, Defendants contend that the parties released each other for any liability with regard to the prosecution of Plaintiffs' patent application in the Amendment.
The implied, contractual duty of good faith and fair dealing is a well-recognized part of Oregon common law. Best v. United States Nat'l Bank of Or., 303 Or. 557, 561 (1987). This duty requires that the parties will not act in a way that destroys or injures the other, Perkins v. Standard Oil Co. of Ca., 235 Or. 7, 16 (1963), or that frustrates or defeats the object of the contract. Warnock v. Bonneville General Agency. Inc., 271 Or. 634 (1975). The contractual good faith doctrine is designed to "effectuate the reasonable contractual expectations of the parties." Best, 303 Or. at 561. In contrast, the tort of bad faith only applies to contracting parties where the offending party "is subject to a standard of care independent of the terms of the contract." Georgetown Realty v. The Home Ins. Co., 313 Or. 97, 105-106 (1992).
This contract/tort distinction was recently addressed by the Oregon Supreme Court in Uptown Heights Assoc. v. Seafirst Corp., 320 Or. 638 (1995). There, plaintiff alleged that a bank violated implied good faith contractual duties and committed the tort of bad faith when it foreclosed on construction loans for an apartment complex. Although Uptown pled the existence of a "special relationship" based upon a past "course of dealing," the trial court granted the bank's O.R.C.P. 21 A(8) motion to dismiss on the basis that Uptown had failed to state sufficient facts to sustain the contract or tort claim. The Supreme Court affirmed, finding nothing in the alleged course of conduct to suggest that the parties' relationship was anything but that of an ordinary debtor-creditor. Oregon courts, unlike federal courts, require "ultimate fact" pleading. Compare O.R.C.P. 18A; Conley v. Gibson, 355 U.S. 41, 47 (1957) (plaintiff need make only a "short and plain" statement of claim that will give defendant fair notice), citing Fed.R.Civ.P. 8. Here, Plaintiffs allege:
A special trust and fiduciary relationship existed between (a) Adidas America, Inc., and (b) Anatomic and Mr. Ellis in connection with their participation in the prosecution of patent applications of Anatomic and Mr. Ellis.
Defendants participation in the patent process was specifically addressed in the Memorandum, which was effective from May 1996 through December 1997. Otherwise, the Agreement did not control Defendants' involvement in the patent process. Accordingly, for the majority of time, Defendants did not have a contractual right to participate in the patent process and any duties owed to Plaintiffs as a result of Defendants' suggestions or recommendations during this period would be independent of the Agreement.
The release language in the Amendment provides that any liabilities of the parties "arising under the Memorandum" are hereby settled and discharged. To the extent Defendants participated in the patent process prior to May 1996 and after December 1997, the release would clearly not apply. Additionally, to the extent Defendants exceeded their authority under the Memorandum, the release language would arguably not apply.
The court finds that under the liberal federal pleading rules, Plaintiffs have adequately alleged a "special relationship" to support their claim for breach of the duty of good faith and fair dealing at this stage. This is not to say, however, that the evidence supporting Plaintiffs' allegations would survive a motion for summary judgment. The court also finds that the language of the release found in the Amendment does not preclude this claim.
Fourth Claim for Relief — Fraud
Defendant argues that Plaintiffs' claim for fraud fails because of the lack of a special relationship to establish Defendants' duty to avoid omissions and the existence of the release language in the Amendment. The court has addressed these issues in its discussion above and found Defendants' arguments lacking at this juncture.
Conclusion
Defendants' motion (74) to dismiss Plaintiffs' Third and Fourth Claims for Relief is DENIED with leave to Plaintiffs to amend their complaint to add more detail and to Defendants to move for summary judgment against the claims, if the parties feel either action is appropriate.