Opinion
2007/11921.
Decided December 11, 2009.
Defendants, Tarksol International, LLC, PMK International, LLC, Rexer, LLC, Emmet Cotter, William F. Rexer, Jr., and Amrex Chemical Company, Inc., move pursuant to CPLR 3212 for an order granting judgment dismissing plaintiffs' first, second, third, fourth, fifth, sixth, seventh, eight, ninth, tenth, eleventh, twelfth, thirteenth, fourteenth, fifteenth, sixteenth, seventeenth, nineteenth, twenty-first, twenty-second, and twenty-third causes of action. Plaintiffs, Ark Patent International, LLC, Stone Cliff Holdings, LLC, Tarksol, Inc., and A. Richard Koetzle, cross move for an order granting partial summary judgment declaring that ARK properly rescinded the License Agreement in September 2007, or in the alternative, an order rescinding the agreement as a matter of law in light of defendants' breaches and/or the fraudulent inducement of ARK to the License Agreement. Plaintiffs further seek an order restoring the respective patent rights to ARK and requiring defendants to have the patent rights fully restored and re-recorded in ARK's name with the USPTO.
Plaintiffs commenced this action in September 2007, shortly after they declared in a September 10th letter that the license agreement was rescinded/cancelled by defendants' non-performance. Since commencement, the complaint has been amended twice and now contains twenty-three causes of action. At issue in this litigation is a contract for patent rights between ARK and Tarksol International. Plaintiffs contend that the contract is a license, whereas defendants argue that the contract is an assignment of the patent rights.
A joint venture was entered into by A. Richard Koetzle, Emmet Cotter, and William F. Rexer, Jr., and the purpose of the venture was to pursue a patent application involving a method to increase flashpoints on flammable solvents. An application in that regard was filed on October 20, 2004, by Koetzle. In February 2005, in order to produce and market the products, Cotter introduced Koetzle to Rexer and discussions of a business relationship began. It is alleged that the purpose of the venture embarked upon by these gentlemen was to blend and distribute products, such as Tarksone and Tarkseal, which involved the method of the pending patent.
Defendants contend that Rexer hired Koetzle to work for Amrex in October 2005. It is further alleged that, in the winter of 2006, Koetzle, Cotter, and Rexer discussed creating a company or companies to further develop the commercial potential of the Tarksone and Tarkseal products. By February 2007, all three had formed Nevada limited liability companies: Rexer, LLC (sole member is Rexer), Stone Cliff Holdings, LLC (Koetzle was the sole member, but changed membership to include his children and a trust), PMK International, LLC (Cotter family members as sole members); and Tarksol International, LLC (Rexer, LLC, Stone Cliff Holdings, LLC, and PMK International, LLC members with equal interests). In February 2007, ARK was formed (Koetzle is the sole member) for the purpose of receiving and holding the pending patent from Koetzle individually. On February 27, 2007, Koetzle signed an "Assignment of Application" which transferred from Koetzle to ARK all of Koetzle's right, title, and interest in the method to increase flash points of flammable solvents.
On that same date, Koetzle also signed the contract which is at the heart of the dispute pending before the court: the "Exclusive License Agreement." On September 10, 2007, Tarksol International received a letter from ARK purporting to terminate the rights granted under the "Exclusive License Agreement." A Letter Patent was issued to Tarksol International, LLC on September 25, 2007, bearing U.S. Patent No. 7,273,839. Prior and subsequent to said issuance, ARK (by Koetzle) petitioned the USPTO, arguing that the agreement was not an assignment and that the patent should not have been issued to Tarksol International, LLC. The USPTO acknowledged it did not have authority to conclusively resolve the dispute, but issued an opinion concluding that the "Exclusive License Agreement" was in fact an assignment.
The parties previously came before the court on an order to show cause on October 2007. In that application, plaintiffs sought a permanent injunction directing specific performance of Sections 2.01, 2.02, and 2.03 of the Agreement. The application was denied and the court determined that plaintiffs, if successful, could be recompensed with a monetary award.
It is well settled that "the proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact." Alvarez v. Prospect Hosp., 68 NY2d 320, 324 (1986) (citations omitted). See also Potter v. Zimber, 309 AD2d 1276 (4th Dept. 2003) (citations omitted). "Once this showing has been made, the burden shifts to the nonmoving party to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact that require a trial for resolution." Giuffrida v. Citibank Corp., 100 NY2d 72, 81 (2003), citing Alvarez, 68 NY2d at 324. "Failure to make such showing requires denial of the motion, regardless of the sufficiency of the responsive papers." Wingrad v. New York Univ. Med. Ctr., 64 NY2d 851, 853 (1985) (citation omitted). See also Hull v. City of North Tonawanda , 6 AD3d 1142, 1142-43 (4th Dept. 2004). When deciding a summary judgment motion, the evidence must be viewed in the light most favorable to the nonmoving party. See Russo v. YMCA of Greater Buffalo , 12 AD3d 1089 (4th Dept. 2004). The court's duty is to determine whether an issue of fact exists, not to resolve it. See Barr v. County of Albany, 50 NY2d 247 (1980); Daliendo v Johnson, 147 AD2d 312, 317 (2nd Dept. 1989) (citations omitted).
Reargument
Defendants contend that plaintiffs seek to reargue the court's previous decision denying the request for a preliminary injunction. According to defendants, plaintiffs' cross motion seeks to reargue assertions for relief that were previously denied by the court. In particular, defendants take issue with plaintiffs' arguments asserted with respect to Koetzle's alleged failure to account, failure to report sales of Tarksol products, and failure to remit funds to Tarksol International.
In the preliminary injunction decision previously issued, the court stated that "[t]he parties' dispute in this regard hinges upon whether Koetzle and his entities were entitled to continue selling Tarksone and Tarkseal products after signing the Exclusive License." Decision and Order dated November 21, 2007, at 8. The court continued:
While that issue is not directly before the court at this juncture for determination, it does bear on the balance of the equities issue which attends consideration of whether an injunction directing specific performance should issue.
Id.
Despite defendants' contentions, there is no motion to reargue before the court, nor need such a motion be made. The court explicitly stated in the previous decision that the issue of Koetzle's sales was not before the court for immediate determination. The court considered the argument on the balancing of the equities issue but stated specifically that the issue "need not be decided" at that time. Id. at 9. Moreover, a decision on a motion for a preliminary injunction does not foreclose ultimate adjudication of the merits by trial or summary judgment, and "lacks preclusive effect." BFP 245 Park Co., LLC v. GMAC Commercial Mort. Corp. , 12 AD3d 330 , 332 (1st Dept. 2004). See Preston Corp. v. Fabrication Centers, Inc., 68 NY2d 397, 402 (1986)("granting or refusal of a temporary injunction does not constitute the law of the case or an adjudication on the merits, and the issues must be tried to the same extent as through no temporary injunction had been applied for").
Assignment or License
The parties vigorously dispute whether the "Exclusive License Agreement" granted a license or an assignment.
Plaintiffs' also contend that they are entitled to rescission, thus making the question of license or assignment academic. That contention is addressed below.
Section 5.08 of the "Exclusive License Agreement" states:
GOVERNING LAW . This License shall be governed by and construed in accordance with the laws of the State of New Nevada (sic).
Complaint, Exhibit C. Whereas federal law governs the issue of a patent's validity, see Loral Fairchild Corp. v. Matsushita Elec. Indus. Co., 840 F.Supp. 211, 217 (E.D.NY 1994), state contract law governs ownership of a patent. Id. 840 F.Supp. at 217 ("ownership of these patents will be settled by state contract law"). Akazawa v. Link New Technology Intern, Inc., 520 F.3d 1354, 1357 (Fed Cir. 2008)("case law is clear that state law, not federal law, typically governs patent ownership"); Jim Arnold Corp. v. Hydrotech Systems, Inc., 109 F.3d 1567, 1572 (Fed Cir. 1997)("the question of whether a patent is valid and infringed ordinarily is one for federal courts, while the question of who owns the patent rights and on what terms typically is a question exclusively for state courts"). On the other hand, because the provisions of Exclusive License Agreement "involve the granting of rights to various patents, [a state court] appropriately look[s] to federal case law on standing in patent infringement cases ( see e.g. Bottlers Seal Co. v. Rainey, 225 NY 369, 372, 122 N.E. 200, citing, inter alia, Waterman v. Mackenzie, 138 U.S. 252, 11 S.Ct. 334, 34 L.Ed. 923; see also Sybron Transition Corp. v. Nixon, Hargrave, Devans Doyle, 770 F.Supp. 803, 809 [W.D.NY 1991])." Biosynexus, Inc. v. Glaxo Group Ltd. , 40 AD3d 384 (1st Dept. 2007), affing in relevant part, 11 Misc 3d 1062 (A), 2006 WL 624896 (Sup. Ct., NY Co. March 13, 2006).
The Supreme Court of Nevada has defined an "assignment" as "A transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any estate or right therein.'" Gasser v. Jet Craft, 87 Nev. 376 (1971). An assignment requires the manifestation of "an intention to transfer the right to another person." Stuhmer v. Centaur Sculpture Galleries, 110 Nev. 270, 275 (1994). Plaintiffs contend that the Exclusive License Agreement" constitutes a license, not an assignment, because there was no intention to transfer the rights, and indeed, the agreement failed to fully transfer rights because plaintiffs retained certain rights with respect to the patent. For the reasons stated below, the contentions lack merit.
The "Exclusive License Agreement" states, in relevant part:
WHEREAS, A.R.K. has acquired the entire right, title, and interest in the application for the United States patent which was filed on October 20, 2004, Serial Number 968441, known as the Koetzle Patent . . .
WHEREAS, The full and exclusive right to said invention was acquired from A. Richard Koetzle . . . by A.R.K. A.R.K. now holds the entire right title and interest in and to any and all patent(s) which includes any application for a continuation-in-part on this or subsequent patent on this technology which may be granted therefor . . .
WHEREAS, This sale, assignment and transfer in full includes any subsequent new findings, inventions or additional patents or enhancements there of as a plastersizer . . .
WHEREAS, Tarksol desires an Exclusive License Agreement with A.R.K. for any and all current and future rights acquired from A.R.K. or A. Richard Koetzle in regards to any and all title and interests in any and all patents issued by any country on this or subsequent technology which may be granted therefor on the Koetzle Patent solvents as described above.
"Exclusive License Agreement," at 1. The Agreement continues, as is relevant herein:
1.01 GRANT OF LICENSE . A.R.K. with the consent of A. Richard Koetzle, inventor and managing member of A.R.K., International LLC, hereby grants transfers and assigns to Tarksol International LLC, an exclusive and irrevocable right with no restrictions or reservations in any field of use . . . There are no time limitations therefor, until all Patents run out in both U.S. and any foreign country or state; state or regional; current and future Improvement Patents . . .
3.03 IMPROVEMENTS MADE BY A.R.K . Subsequent improvements made by A.R.K. shall be deemed included within this License Agreement, and Tarksol shall be responsible for preparing, filing, and processing any such application for patent and shall pay the costs incidental to the preparation filing and processing of the patent application and for conveying to Tarksol all such improvements and discoveries . . .
4.01 TERMS OF LICENSE . The License granted is a perpetual license subject to no time or reason for termination . . .
5.01 ASSIGNMENT BY TARKSOL . A.R.K. must consent to any assignment of their License or any of its rights under this Agreement of the continuation of the license upon transfer or change of control of Tarksol and such consent will not be unreasonably withheld. Notwithstanding the forgoing Tarksol may enter into distributorship, marketing, manufacturing or other operational agreements, which may be structured as LLC joint ventures corporations.
Id.
In support of its contentions that the agreements created a license, not an assignment, plaintiffs point to Section 2.01, wherein ARK retained a right to receive perpetual royalties; Section 5.01, wherein ARK retained the right, upon transfer or change of control of Tarksol International, to determine whether to consent to any assignment to transferee, except that such consent could not be unreasonably withheld; Section 2.02, wherein ARK retained the right to bimonthly accountings; Section 2.03, wherein ARK retained the right to inspect Tarksol International's books and records to verify the money payable by Tarksol International to ARK each month; Section 3.05, wherein ARK retained the right to demand indemnification and defense of infringement claims; Section 3.06, wherein ARK retained the right to be notified of infringement suits; and Section 3.06, wherein ARK retained the right to share in the proceeds of settlements or judgment arising from an infringement suit. Plaintiffs, therefore (for the reasons stated in the margin) fail to establish prima facie entitlement to summary judgment establishing that Ark retained rights, interests, and control of the patent under the agreement such that a license was intended and not an assignment. Accordingly, insofar as plaintiff's motion seeks a declaration that the Exclusive License Agreement is a license, it is denied.
But see Watson v. United States, 222 F.2d 689, 691 (10th Cir. 1955) (royalty provisions did not reserve any control); Sybron Transition Corp., 770 F. Supp. at 809 (reservation of a royalty does not defeat assignment) (collecting cases).
But see Watson, 222 F.2d at 691("precautionary provision was intended to protect the rights of the parties under the contract, not to proscribe, limit, or nullify their intent and purpose to vest immediately in the transferee the right to manufacture, sell, and use the carts throughout the life of the patent"); Speedplay, Inc. v. Bebop, 211 F.3d 1243, 1252 (Fed. Cir. 2000)("the principle of Vaupel [cited in fn 8, below] compels a conclusion that the consent requirement does not significantly restrict the scope of Speedplay's rights in the '778 patent"). Compare Abbott Laboratories v. Diamedix Corp., 47 F.3d 1128, 1132 (Fed. Cir. 1995) (absolute right to veto contrasted).
But see Speedplay, Inc. v. Bebop, Inc., 211 F.3d at 1252 (limited accounting provision "constitutes a policing mechanism, not a substantial proprietary right"); Biosynexus, Inc., supra, 2006 WL 624896 (same), aff'd in relevant part, 40 AD3d 384.
But see authorities cited in immediately preceding footnote concerning similar limited policing mechanisms which do not retain for plaintiffs a substantial proprietary right.
But see Biosynexus, Inc., supra, 2006 WL 624896, at fn.19 (such provisions do not defeat characterization of the agreement as an assignment).
But see Vaupel v. Textilmaschinen KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 875 (Fed. Cir. 1991) (such a provision "merely a means of compensation . . . [,] not inconsistent with an assignment").
But see Vaupel, 944 F.2d at 875.
Defendants, on the other hand, prima facie establish in support of their motion that the agreement constituted an assignment to Tarksol International. Specifically, defendants highlight the WHEREAS portion of the agreement, in which the transfer is described as a "sale, assignment, and transfer in full . . . for any and all current and future rights acquired from A.R.K. or A. Richard Koetzle"; Section 1.02, wherein the agreement "grants transfers and assigns to Tarksol International, LLC, an exclusive and irrevocable right with no restrictions or reservations"; Section 3.03, wherein any improvements made by ARK are included in the agreement and gives Tarksol International responsibility for preparing and filing ensuing patent applications; Section 3.06, wherein Tarksol International is made solely responsible for patent enforcement; and Section 4.01, which grants the license "in perpetuity." Because "the agreement transfers all substantial rights' to a patent, then it qualifies as an assignment." Biosynexus, Inc., supra, 2006 W.L. 624896, aff'd in relevant part, 40 AD3d 384. See Vaupel, 944 F.2d at 875 (transferring "all substantial rights").
Defendants establish that those sections relied on by plaintiffs in reality only contain ARK policing mechanisms by which it can monitor the consideration ARK was to receive under the agreement.
Under Nevada law, courts "construe a contract that is clear on its face from the written language, and it should be enforced as written." State ex rel. Masto v. Second Jud. Dist. Court ex rel. County of Washoe, 125 Nev. 5, 199 P.3d 828, 832 (2009). "A contract is ambiguous only when it is subject to more than one reasonable interpretation." Id. "In interpreting a contract, the court shall effectuate the intent of the parties, which may be determined in light of the surrounding circumstances if not clear from the contract itself.'" Anvui, LLC v. G.L. Dragon, LLC, 123 Nev. 25, 163 P.3d 405, 407 (2007), quoting NGA # 2 Ltd. Liab. Co. v. Rains, 113 Nev. 1151, 1158 (2007). "Any ambiguity, moreover, should be construed against the drafter." Id.
The nomenclature used in an agreement has little impact or "significance in resolving the question whether the instrument amounted to an assignment or was a license." Watson, 222 F.2d at 691 ("The calling of the instrument a license agreement, and the demonstration of the parties thereto as licensor and licensee, respectively, did not fix, limit, or qualify the scope and effect of the grant. The legal question whether the instrument constituted an effective assignment or was a license must be determined by considering together the several provisions contained in the instrument, not its title or the manner in which reference was made to the parties"). See also, Judy v. Tri-State Motor Transit Co., 844 F.2d 1496 (11th Cir. 1988) ("Thus, the fact that a contractor may characterize a worker as an independent contractor rather than as an employee is not of controlling significance"); Schmitt v. C.I.R., 271 F.2d 301, 305 (9th Cir. 1959) ("the nomenclature used to describe the contract and the parties thereto, has little, if any, value or significance in resolving the question whether there was an assignment or a license"); Messner Vetere Berger McNamee Schmetterer Euro RSCG Inc. v. Aegis Grp., 93 NY2d 229, 237 (1999) ("the nomenclature of the parties is not what is significant"); Biosynexus, Inc., supra, WL 624896 ("makes no difference whether the parties call the agreement a license"), aff'd in relevant part, 40 AD3d 384. Plaintiffs do not raise an issue of fact to the contrary, especially by reference to parol evidence. Vintage, LLC v. Laws Constr. Corp., ___ NY3d ___ (November 23, 2009)("earlier correspondence . . . irrelevant to our analysis because the terms of the agreements govern, and they unambiguously demonstrate . . .").
The court has reviewed the "Exclusive License Agreement" and, based upon Nevada's rules of contract interpretation and the federal cases Biosynexus, Inc. allows consideration of, id., 40 AD3d 384, finds that the agreement granted an assignment to Tarksol International, not a license. Throughout the agreement, all substantial rights are assigned to Tarksol International without limitation as to time or otherwise. The assignment of all substantive rights with respect to the patent are granted in perpetuity to Tarksol International. See "Exclusive License Agreement" § 4.01. Moreover, the rights retained by ARK are minimal and have the combined effect of providing ARK with a mechanism whereby it can monitor and ensure that the amounts due to it are indeed being paid. Taking the factors of Waterman v. MacKenzie, 138 U.S. 252 (1891), see Biosynexus, Inc., supra, and in particular the unqualified transfer of the right to sue for infringement, Sybron Transition Corp., 770 F.Supp. at 808; Biosynexus, Inc., supra, defendants establish prima facie that the Exclusive License Agreement is fundamentally and without question an assignment rather than a license. See also, Crown Dye Tool Co. v. Nye Tool Machine Works, 261 U.S. 24, 43 (1923); Calgon Corp. v. Nalco Chem. Co., 726 F. Supp. 983, 986 (D. Del. 1989)("most importan[t]" right in the "all substantial rights" calculus is the "right to sue infringers").
Plaintiffs rely, inter alia, on Sicom Sys. Ltd v. Agilent Techs., 427 F.3d 971 (Fed. Cir. 2005); Abbott Laboratories v. Diamedix Corp., 47 F.3d 1128 (Fed. Cir. 1995); and Pfizer Inc. v. Elan Pharmaceutical Research Corp., 812 F.Supp. 1352, 27 USPQ2d 1161 (D. Del. 1993) in support of their position that a mere license here is involved. But these cases are distinguishable. In Abbott, the court distinguished Vaupel as follows:
In this case, Diamedix has retained a significantly greater interest in the patents than Marowsky retained in Vaupel. Unlike in Vaupel, Diamedix retained a limited right to make, use, and sell products embodying the patented inventions, a right to bring suit on the patents if Abbott declined to do so, and the right to prevent Abbott from assigning its rights under the license to any party other than a successor in business.
Those retained rights are the sort that are commonly held sufficient to make a patent owner who grants an exclusive license a necessary party to an infringement action brought by the licensee. See, e.g., Grantham v. McGraw-Edison Co., 444 F.2d 210, 213-16, 170 USPQ 69, 71-73 (7th Cir. 1971) (licensing owner retained right to sue infringers if the licensee refused to do so); Agrashell, Inc. v. Hammons Prods. Co., 352 F.2d 443, 446-47, 147 USPQ 347, 349 (8th Cir. 1965) (licensing owner retained right to make, use, and sell products described and claimed in the patent, and right to sue for infringement if the licensee declined to do so); Pfizer Inc. v. Elan Pharmaceutical Research Corp., 812 F.Supp. 1352, 27 USPQ2d 1161 (D. Del. 1993) (licensing owner retained, inter alia, right to market patented product); Raber v. Pittway Corp., 23 USPQ2d 1313, 1314-15, 1992 WL 219016 (N.D. Cal. 1992) (license subject to rights of prior licensees and limits imposed on licensee's power of assignment), aff'd mem., 996 F.2d 318 (Fed. Cir. 1993); Refac Int'l Ltd. v. Visa USA Inc., 16 USPQ2d 2024, 2028, 1990 WL 130032 (N.D. Cal. 1990) (limits imposed on licensee's power of assignment); Calgon Corp. v. Nalco Chem. Co., 726 F.Supp. 983, 13 USPQ2d 1529 (D. Del. 1989)(same); Erbamont, Inc. v. Cetus Corp., 720 F.Supp. 387, 392-96, 12 USPQ2d 1344, 1349-51 (D. Del. 1989) (licensing owner retained right to bring suit if licensee refused). We therefore conclude that Abbott does not have a sufficient interest in the '878 and '285 patents to sue, on its own, as the "patentee" entitled by 35 U.S.C. § 271 to judicial relief from infringement.
Abbott, 47 F.3d at 1132-33. A sensitive reading of Abbott and the cases cited in the excerpt above shows that plaintiffs here did not retain rights such as are commonly described in the cases to entitle them to be joined in any suit for infringement brought by Tarksol International pursuant to the Exclusive License Agreement. None of the retained rights described in the excerpt above were reserved to ARK in this agreement. In addition, the treatment of Sicom Sys. Ltd v. Agilent Techs., supra, in the helpful case of Internetad Sys., LLC v. Opodo Limited, 481 F.Supp.2d 596, 604-05, 608-09 (N.D. Tex. 2007) shows that this agreement conveys all substantial rights in the patent such that an assignment was clearly intended and effected by the agreement. The court made clear that, "in each case finding restrictions on the right to assign an indication that not all substantial rights have been transferred, the Licensor had an unfettered right to withhold its consent to an assignment." Id., 481 F.Supp.2d at 609 (emphasis supplied) (citing Propat Int'l Corp v Rpost, Inc., 473 F.3d 1187, 1191-92; Sicom Sys., 427 F.3d at 975, 979; Intellectual Prop. Dev. Inc. v. TCI Cablevision of Cal., Inc., 248 F.3d 1333, 1342 (Fed. Cir. 2001); and Abbott, 47 F.3d at 1132. By contrast, in Internetad Sys., LLC v. Opodo Limited, as in this case, "the Licensor cannot unreasonably withhold its consent" and therefore the court finds as in that case that "the Licensor's qualified right to approve assignments a reasonable condition in place to protect Licensor's financial interest under the contract, and not a retention of proprietary rights in the Patents." Id., 481 F.Supp.2d at 609.
The "Exclusive License Agreement," despite the nomenclature used in that agreement, assigned the patent to Tarksol International.
Shop Rights
In response to defendants' effort to show that plaintiffs made unauthorized sales of Tarksol products after execution of the agreement, plaintiff has asserted a shop right. Although the court ultimately agrees with plaintiff that the question of a shop right is a red herring, the court does not reach the question whether such shop right exists on these facts. A "shop right" arises where a "servant uses his master's time, facilities, and materials to attain a concrete result, the latter is in equity entitled to use that which embodies his own property and to duplicate it as often as he may find occasion to employ similar appliances in his business." U.S. v. Dubliner Condenser Corp., 289 U.S. 178, 188-89 (1933). Thus, if an employee conceives and perfects an invention for which he obtains a patent while working with his employer's materials, the employer enjoys exclusive rights to use the patent. If the invention is not conceived and perfected during working hours using the employer's tools and materials, then the employer does not have such an exclusive right. See, e.g., Cahill v. Regan, 5 NY2d 292, 298-99 (1959); McNamara v. Powell, 256 App. Div. 554 (4th Dept. 1939).
Here, plaintiffs contend that Tarksol, Inc. had a valid shop right in the ARK patents. Plaintiffs allege that Koetzle conceived of and developed the technology that is the subject of the patent while an employee of Tarksol, Inc. Plaintiff's argument in this regard is relevant because, if Tarksol, Inc. sold and distributed the patent after the Exclusive License Agreement was executed pursuant to a valid shop right, then those actions would not constitute a breach of the agreement. In other words, the relevance of the shop right pertains only to defendants' allegations (such as they are, see below) of Tarksol Inc.'s post agreement sales of Tarksol products.
In his interrogatory responses, Koetzle listed his employment dates with Tarksol, Inc. as "2007-current." Affidavit of R. Aswad, Exhibit D at 24. Defendants state that since there is no dispute that the patent was developed prior to 2007, Koetzle, by his own admission, was not an employee of Tarksol, Inc. at the necessary time. Moreover, in an unemployment questionnaire mailed by Koetzle on July 13, 2007, Koetzle stated that he had worked for Tarksol, Inc. in an advisory capacity only and that the duration of employment was two years. Affidavit of Rexer, Exhibit C. Likewise, the salary he derived from said employment was "0." Id. Defendants also contend that Koetzle was not solely responsible for developing the patent. Plaintiffs counter, that Koetzle alone developed the patent as an "agent of Tarksol, Inc." Reply Affirmation of T. Cronmiller, ¶ 30. The agency is otherwise not described.
For the reasons stated below, and primarily for the reason that no putative unauthorized sales by Tarksol, Inc. have been established on this record ( see below), the court declines to reach the shop right issue.
Rescission, etc.
Acting upon what it perceived as several material breaches of the Exclusive License Agreement, ARK unilaterally rescinded the agreement in a September 10, 2007, letter. That letter listed six distinct separate breaches. Both in the September 10th letter and on plaintiffs' motion for partial summary judgment, plaintiffs alleged that Tarksol International materially breached the license agreement by (1) failing to provide accountings; (2) failing to pay ARK royalties and fees in accordance with the Exclusive License Agreement; (3) failing to keep accurate books and records pertaining to its sale of Tarksol products in such manner as to contain the information necessary for ARK to make an exact determination of money payable by Tarksol International for each period; (4) transferring rights under the license agreement to Amrex without the consent of ARK; (5) failing to use its best efforts to promote the products; and (6) converting the ARK patent rights. Plaintiffs' motion, however, was predicated on their interpretation of the Exclusive License Agreement as conferring a license, not an assignment. On the other hand, as stressed in their reply papers, plaintiffs contend that, on either interpretation of the agreement, they had the right to cancel the contract on September 10 by reason of Tarksol International's failure to provide accountings, failing to pay royalties and fees, failing to keep accurate books and records, and failing to use its best efforts to promote the product. In effect, plaintiffs seek a declaration that ARK "appropriately rescinded the License Agreement on September 10, 2009." Notice of Cross-Motion, dated August 25, 2009. Alternatively, plaintiffs seek partial summary judgment ordering rescission of the license agreement by reason of what they contend was defendants' fraudulent inducement. In particular, plaintiffs contend that, in the event that the court finds that the Exclusive License Agreement is, in reality, an assignment, "then ARK was fraudulently induced into signing it because Defendants represented to ARK explicitly that the License Agreement was a license not an assignment." Affirmation of Thomas B. Cronmiller, Esq., dated August 25, 2009, at ¶ 10. The court addresses the alternative fraudulent inducement argument first.
Under New York law, an alleged misrepresentation at variance with the plain terms of a contract cannot support a claim of fraudulent inducement. Bango v. Nautin, 184 AD2d 961, 963 (3d Dept. 1992)("express provision in the written contract contradicts the claimed oral representations in a meaningful fashion"). See also, Urstadt Little Properties, Inc. v. Excelsior Realty Corp. , 65 AD3d 1135 , 1137 (2d Dept. 2009); Old Clinton Corp. v. 502 Old Country Road, LLC , 5 AD3d 363 , 365 (2d Dept. 2004)("since that alleged oral misrepresentation conflicts in a meaningful manner with a particular provision in a written agreement . . ., any claim of reasonable reliance is negated"). In this case, "although there is an issue of fact concerning whether plaintiff was assured that . . . [the agreement constituted a license], plaintiff cannot, in any event, avoid the consequences of his written . . . [agreement] . . . and, where the alleged misrepresentations conflict with the terms of a written agreement, there can be no reasonable reliance as a matter of law." Rafino v. Neiman, 17 AD3d 998, 1000 (4th Dept. 2005). This rule applies particularly in the case of sophisticated commercial transactions involving parties with access to legal representation. Orlando v. Kukielka , 40 AD3d 829 , 831-32 (2d Dept. 2007).
The same result obtains under Nevada law. "To establish fraud in the inducement, . . . [plaintiff] must prove by clear and convincing evidence each of the following elements: (1) a false representation made by . . . [defendant], (2) . . . [defendant]'s knowledge or belief that the representation was false (or knowledge that it had an insufficient basis for making the representation), (3) . . . [defendant]'s intention to therewith induce . . . [plaintiff] to consent to the contract's formation, (4) . . . [plaintiff]'s justifiable reliance upon the misrepresentation, and (5) damage to . . . [plaintiff] resulting from such reliance." J.A. Jones Construction Co. v. Lehrer McGovern Bovis, Inc., 120 Nev. 277, 290, 89 P.3d 1009, 1018 (2004). Although there is some reference in the Nevada cases to a rule relieving the plaintiff of the burden of showing reasonable reliance on the misrepresentation where a defendant made a false representation knowingly and with the intention that the other party be deceived, Pacific Maxim, Inc. v. Wilson, 96 Nev. 867, 870, 619 P.2d 816, 818 (1980) (misrepresenter "should not be allowed to profit from the credulity or negligence of a party upon whom it had its intended effect"), there is evidence (if not express precedent under Nevada's citation rules) that the Nevada Supreme Court only applies this rule when "the fact pattern involves misrepresentation or fraud by a party with an unequal knowledge or bargaining skills." Pepe v. The 8th Judicial District Court of the State of Nevada, unpublished disposition, 2008 WL 6058802, at fn. 8 (September 5, 2008)(citing, inter alia, Pacific Maxim, Inc. v. Wilson, supra). As shown above, the concept of "justifiable reliance upon the misrepresentation" was reaffirmed in J.A. Jones Construction Co., 120 Nev. at 290-91, 89 P.3d at 1018, and the elements of a fraudulent inducement claim articulated therein, which included justifiable reliance, was incorporated into the elements of a cause of action for rescission based on fraudulent inducement in Awada v. Shuffle Master, Inc., 123 Nev. 613, 173 P.3d 707, 713 n. 30 (2007). Even if justifiable reliance is not an element of a claim for rescission based upon fraudulent inducement, however, actual reliance remains an element of such a cause of action. Pacific Maxim, Inc. v. Wilson, 96 Nev. at 871, 619 P.2d at 818 ("intentional false representation which is relied upon in fact").
On the facts alleged by plaintiff, there can be no reliance "in fact" on a characterization of the agreement as a license given the very terms of the agreement itself, which unequivocally and unambiguously establish its character as an assignment (see above). "Parties to a written . . . agreement are bound by its conditions regardless of their subjective beliefs at the time the agreement was executed." Campenelli v. Conservas Altamara, 86 Nev. 838, 841, 477 P.2d 870, 872 (1970). As well explained:
Parol, or extrinsic, evidence "is not admissible to add to, subtract from, vary, or contradict . . . written instruments which . . . are contractual in nature and which are valid, complete, unambiguous, and unaffected by accident or mistake." Ringle v. Bruton, 120 Nev. 82, 86 P.3d 1032, 1037-38 (2004). This rule, known as the parol evidence rule, provides that prior negotiations and agreements merge in the written contract, and parol evidence is not admissible to vary or contradict the written agreement's terms. Tallman v. First Nat'l Bank of Nev., 66 Nev. 248, 208 P.2d 302, 306 (1949). The parol evidence rule is not just an evidentiary rule, but a substantive rule that applies in equity as well as at law. State ex rel. List v. Courtesy Motors, 95 Nev. 103, 590 P.2d 163, 165 (1979).
Although the rule prohibits admitting evidence that would change the terms of a clear, definite, and unambiguous written contract, "parol evidence is admissible to prove a separate oral agreement regarding any matter not included in the contract or to clarify ambiguous terms so long as the evidence does not contradict the terms of the written agreement." Ringle, 86 P.3d at 1037. For example, if a contract contained a blank space, parol evidence would be admissible to explain what information should have been entered therein, but would be inadmissible with respect to the remainder of the contract if the rest of the contract were unambiguous. Pentax Corp. v. Boyd, 111 Nev. 1296, 904 P.2d 1024, 1027 (1995). Additionally, where it "may be properly inferred that the parties did not intend the written paper to be a complete and final settlement of the whole transaction between them, parol evidence is admissible." Aladdin Hotel Corp. v. Gen. Drapery Servs., Inc., 96 Nev. 516, 611 P.2d 1084, 1086 (1980). A court must limit such evidence to matters on which the existing written agreement is silent, and the alleged oral agreement's terms must be consistent with the written agreement's terms. Golden Press, Inc. v. Pac. Freeport Warehouse Co., 97 Nev. 163, 625 P.2d 578, 579 (1981).
Additionally, parol evidence is admissible if the party attacking the instrument can establish fraud or mistake. Chiquita Mining Co. v. Fairbanks, Morse Co., 60 Nev. 142, 104 P.2d 191, 196 (1940). "[A] party relying upon fraud for this purpose must both plead and prove it." Tallman, 208 P.2d at 306-07. Nevada prohibits the introduction of parol evidence to contradict a writing on a simple allegation, without proof, of fraud or mistake. Id. at 307 ("It is only when independent facts constituting fraud are first proven that parol evidence is admissible."). Nevada requires proof of the fraud independent of the alleged oral agreement because:
It is reasoning in a circle, to argue that fraud is made out, when it is shown by oral testimony that the obligee contemporaneously with the execution of a bond promised not to enforce it. Such a principle would nullify the rule: for conceding that such an agreement is proved, or any other contradicting the written instrument, the party seeking to enforce the written agreement according to its terms, would always be guilty of fraud.
Id. (quoting Towner v. Lucas' Ex'r, 54 Va. (13 Grat.) 705, 716 (Va. 1857)). The alleged fraud must consist of fraud in procuring the instrument or a breach of confidence concerning its use, and not a promise contradicting the written instrument's terms. Id.
Crockett Myers, Ltd. v. Napier, Fitzgerald Kirby, LLP, 440 F.Supp.2d 1184, 1191-92 (D. Nev. 2006), aff'd in relevant part, 583 F.3d 1232 (9th Cir. 2009). In short, "fraud is not established by showing parol agreements at variance with a written instrument." Tallman, 66 Nev. at 259, 208 P.2d at 307. Just as it makes no difference what words the parties chose to characterize their agreement in writing, Watson, 222 F.2d at 691 ("The calling of the instrument a license agreement, and the demonstration of the parties thereto as licensor and licensee, respectively, did not fix, limit, or qualify the scope and effect of the grant. The legal question whether the instrument constituted an effective assignment or was a license must be determined by considering together the several provisions contained in the instrument, not its title or the manner in which reference was made to the parties"), their characterization of the agreement orally should not cause legal consequence because of its unambiguous terms. Accordingly, insofar as the complaint alleges a cause of action for rescission based upon defendants' parol representation of the agreement as a license, summary judgement dismissing such cause of action is granted, and plaintiffs' motion for summary judgment judicially declaring a rescission by reason thereof is denied.
In connection with plaintiffs' cross-motion for summary judgment, that leaves for consideration whether plaintiff is entitled to summary judgment declaring that the September 10, 2007, unilateral rescission-cancellation of the agreement was warranted. The Exclusive License Agreement contemplated a transfer of patent rights by ARK in consideration for fees as defined in § 2.01 of the agreement, together with bi-monthly accountings, including payments within 30 days from the close of each month (§ 2.02), and the maintenance by Tarksol International of sufficient books and records of its sales of Tarksol products "as to contain the information necessary for ARK Patent International to make an exact determination of money payable by Tarksol for each period." Exclusive License Agreement § 2.03. In addition, Tarksol International was required to use its best efforts to create a demand for the products produced pursuant to the patent. Finally, while the agreement contemplated that "Tarksol may enter into distributorship, marketing, manufacturing or other operational agreement[s], which may be structured as L.L.C. joint ventured or corporations[,]" Tarksol International could not "assig[n]" their acquired rights under the Exclusive License agreement without ARK's consent, except that such consent could not be unreasonably withheld by ARK.
Regardless of the mistaken interpretation of the Exclusive Licensing Agreement as a mere license identified above, plaintiffs have established prima facie by admissible evidence that Tarksol International breached the agreement in regard to the fee provisions (§ 2.01), the accounting and payment provisions (§ 2.02) (no attempt at an accounting was made until after the September 10th rescission letter), and the verification duties imposed by § 2.03 of the agreement. I do not find, however, that defendants established as a matter of law by admissible evidence that Tarksol International breached the agreement by transferring rights under the license agreement to Amrex without the consent of ARK, by failing to use best efforts to sell Tarksol products, and wrongfully converting the ARK patent rights to the USPTO. Concerning the arrangement with Amrex, there does not appear to be a written agreement between Tarksol International and Amrex containing such an assignment, and plaintiffs' motion papers do not establish prima facie that the arrangement is not a "distributorship, marketing, manufacturing, or other operational agreement" permitted by § 5.01. That defendants may have hopelessly commingled as between Tarksol International and Amrex does not alone establish prima facie a prohibited assignment without consent under the circumstances contemplated by that section. Nor for that matter do defendants establish prima facie as part of their motion that such an assignment did not occur.
Given what plaintiffs do establish, in response, defendants seek to raise issues of fact whether plaintiffs (1) substantially performed under the agreement; (2) are not entitled to equitable relief by reason of unclean hands in regard to, inter alia, their belated assertion of a shop right despite the unambiguous terms of the agreement; (3) themselves caused the claimed breaches in regard to an accounting and payments of royalties by plaintiffs' own conduct pursuant to the claimed shop right and allegedly in derogation of defendants' rights under § 5.01 of the agreement; (4) are responsible themselves for the claimed deficiencies in Tarksol International's best efforts to sell Tarksol products; (5) are incorrect in their claim that the transaction with Amrex was indeed an assignment subject to the consent provision or only one permitted by § 5.01 of the agreement; and (6) have established by clear and convincing evidence their fraudulent inducement claim, the representations concerning which in any event are fully denied by Rexer and Cotter. Defendants succeed in raising an issue of fact on items # 5 and # 6 enumerated above, but on the claimed breaches of sections 2.01, 2.02, and 2.03 of the agreement, defendants fail to raise an issue of fact. For the reasons stated in ¶¶ 3-20, 32-38, and 40 of the Cronmiller Reply Affirmation, dated Sept. 14, 2009, which treats in detail the Cotter, Rexer, and Evans affidavits, defendants do not establish an issue concerning whether their breaches of sections 2.01, 2.02, and 2.03 of the agreement were even in part caused by plaintiffs, or otherwise excused. In addition, defendants do not raise an issue of fact concerning whether their post Sept 10th accountings were not inaccurate as established in plaintiffs' cross-motion. Finally, the unclean hands argument made principally in a memorandum of law depends on only a speculative assertion that sales were made by Tarksol, Inc. post May 1, 2007, and on the assertion of a shop right. As well explained in the Cronmiller reply affirmation, the latter assertion post dated the Sept 10th rescission/cancellation letter, was made primarily in litigation, and would not have any significance unless defendants established post May 1 sales by plaintiffs. The assertion of unauthorized sales was not established by admissible evidence, and therefore cannot support an unclean hands defense to defendants' breaches of Article II of the agreement. Even if such sales had been established, the remedy is a patent infringement suit by Tarksol International, and not non-performance of the latter's duties under Article II of the agreement. Indeed, the question of a shop right would only be relevant if defendants bring an infringement suit.
There is reference in defendants' papers to a state of facts under which payments were not forthcoming because revenues did not exceed Amrex's expenses. But this contention is wholly unexplained and otherwise unsupported with admissible evidence of the same. In any event, the breaches of Article II are established without contradiction.
Given the established breaches of Article II of the agreement, the question remains whether plaintiffs were entitled to declare the contract rescinded on Sept. 10th by reason of non-performance alone. Plaintiffs do not rely on any statements from defendants or their representatives unequivocally repudiating the contract or any of defendants' obligations thereunder. The only statements Koetzle refers to in the May 1 to Sept 10 period is a sharply disputed conversation allegedly promising a parking lot assault on him if the subject of money is brought up again. Even if true, that conversation cannot be taken as a "definite unequivocal manifestation of intention on the part of the repudiator that he will not render the promised performance when the time fixed for it in the contract arrives." 10-54 Arthur L. Corbin, Corbin on Contracts § 973 (Rev. Ed.)
Under New York law: "To support the claim of anticipatory repudiation, there must be an unqualified and clear refusal to perform with respect to the entire contract'" ( O'Connor v. Sleasman , 37 AD3d 954 , 956, lv denied 9 NY3d 806, quoting DeLorenzo v. Bac Agency, 256 AD2d 906, 908), which may take the form of an unequivocal statement or act ( see Norcon Power Partners v. Niagara Mohawk Power Corp., 92 NY2d 458, 463." Highbridge Development BR, LLC v. Diamond Development, LLC, ___ AD3d ___, 2009 WL 3644669 (3d Dept. November 05, 2009). "However, it is clear that there must be a definite and final communication of the intention to forego performance before the anticipated breach may be the subject of legal action." Rachmani Corp. v. 9 East 96th Street Apartment Corp., 211 AD2d 262, 267 (1st Dept. 1995), citing McCloskey Co. v. Minweld Steel Co., 220 F.2d 101 (3d Cir. 1955); Ga Nun v. Palmer, 202 NY 483, 488 (1911). As well summarized:
While Supreme Court's first order properly found that there were triable issues of fact on the issue of anticipatory repudiation, it erred when it found upon reargument, that this issue was a question of law (see Norcon Power Partners v. Niagara Mohawk Power Corp., 92 NY2d 458, 463 [1998]; Inter-Power of NY v. Niagara Mohawk Power Corp., 259 AD2d 932, 933 [1999], lv. denied 93 NY2d 812 [1999]). If it is found that a "party repudiates contractual duties prior to the time designated for performance and before' all of the consideration has been fulfilled, the repudiation entitles the nonrepudiating party to claim damages for total breach'" ( Norcon Power Partners v. Niagara Mohawk Power Corp., supra at 462-463, quoting Long Is. R.R. Co. v. Northville Indus. Corp., 41 NY2d 455, 463 [1977]). Such a factual determination is heavily dependent upon a determination of whether "a breaching party's words or deeds are unequivocal" ( Norcon Power Partners v. Niagara Mohawk Power Corp., supra at 463).
O'Connor v. Sleasman , 14 AD3d 986 (3d Dept. 2005). Here, the parties evidently did not communicate regularly or otherwise concerning the monthly and bi-monthly breaches between May 1 and Sept. 10th, nor did plaintiffs demand any assurances of adequate performance as they might have had a right to do under New York law. Norcon Power Partners v. Niagara Mohawk Power Corp., supra (importing the UCC's demand for adequate assurances of performance formula, UCC § 2-609, into the common law of anticipatory repudiation in limited instances). One commentator has underscored that, even if the UCC formula is not incorporated into the common law for this purpose, the fact or not of a demand for adequate assurance is relevant to the common law inquiry:
Little is added to the legal analysis of potential material breach by simply describing these repeated performance breaches as repudiations. The definition of material breach in Restatement (Second) section 241 includes a series of breaches that threatens the aggrieved party with the prospect of being deprived of the benefit of the contract. A party who communicates candidly throughout should not be considered to have repudiated unless he unequivocally refuses to perform or to give assurances of future performance. The nature of communication between the parties should be a major factor in the court's evaluation of their claims for compensation. Failure of a party to seek cure or assurances gives rise to an inference that that party did not regard the disruption as a real threat to the contract relationship. In such a case, the series of breaches should not be treated as a contract-terminating event.
Arthur Roset, Partial, Qualified, and Equivocal Repudiation of Contract, 81 Colum. L. Rev. 93, 109 (1981). See also, A.L.I., Restatement (Second) of Contracts § 251 and comment a. Accordingly, assuming the doctrine of anticipatory breach applies at all in this context in which plaintiffs obligations under the agreement to convey/assign the patent rights virtually all occurred upon execution of the agreement, compare 10-54 Arthur L. Corbin, Corbin on Contracts, §§ 961-962 (Rev. ed.) (which treatise Nevada courts regularly cite in their decisions), with, Long Is. R.R. v. Northville Inds., 41 NY2d at 463; Acacia Nat. Life Ins. Co. v. Kay Jewelers, Inc., 203 AD2d 40, 43-44 (1st Dept. 1994), the question must be reserved to a trier of fact.
I do not perceive a difference between this analysis and that under Nevada law. See Covington Bros. v. Valley Plastering, Inc., 93 Nev. 355, 360, 566 P.2d 814. 817 (1977)("contractual anticipatory repudiation must be clear, positive, and unequivocal," the determination of which "must be decided in light of the total factual context of the individual case"); Kahle v. Kostiner. 85 Nev. 355, 358, 455 P.2d 42, 44 (1969). See also, Thornton v. Agassiz Const., Inc., 106 Nev. 676, 799 P.2d 1106 (1990("Materiality is generally a question of fact").
Accordingly, plaintiffs' motion for partial summary judgment declaring that their rescission/cancellation of the contract was justified by defendants' nonperformance between May 1 and Sept 10th is denied despite the established breaches of Article II of the agreement.
The Remainder of Defendants' Motion
Although the Exclusive License Agreement is in fact an assignment, I do not agree with defendants that the first three causes of action cannot stand as pled, and their motion for summary judgment dismissing them is denied without prejudice. Defendants' motion for summary judgment dismissing the fourth (unjust enrichment), fifth (GBL § 340), sixth (tortuous interference) and eighth (fraud) causes of action is denied without prejudice. I do not believe the fraud alleged in the eighth cause of action is the same fraud relied on by plaintiffs to support the fraudulent inducement claim, and in any event plaintiffs establish that five depositions were agreed upon and scheduled when defendants filed their motion for partial summary judgment. Defendants' motion for summary judgement dismissing the ninth, tenth, eleventh, twelfth, thirteenth, and fourteenth causes of action is denied without prejudice. Defendants' motion for summary judgment dismissing the sixteenth, nineteenth, twenty-first, and twenty-second causes of action also is denied without prejudice, although the court notes that defendants could not have misrepresented to the USPTO that Tarksol International was an assignee of patent rights if indeed the Exclusive License Agreement constituted an assignment, as found above. The motion for summary judgment dismissing the twenty-third cause of action is denied without prejudice. The motion for summary judgment dismissing the seventh and seventeenth causes of action is denied inasmuch as the right to the accounting according to the terms of the Exclusive License Agreement, as properly interpreted in this decision (and not as technically pled in said causes of action) is indisputably established by the agreement.
Civil Conspiracy Cause of Action
The motion for summary judgment dismissing the fifteenth cause of action alleging a civil conspiracy is granted. New York does not recognize such a separate and distinct cause of action and the choice of law provision relied on by plaintiffs does not govern this non-contractual cause of action. Fieldman v. Smart Choice Communications, LLC , 41 AD3d 343 (1st Dept. 2007); Keneierman v. Bache Halsey Stuart Shields, Inc., 74 AD2d 290 (1st Dept. 1980), overruled on other grounds, Rescildo v. R.H. Macy's, 187 AD2d 112, 117 (1st Dept. 1993). See generally, Lehman Bros. Special Fin., Inc., 414 F.3d 325, 334-335 (2d Cir. 2005).
SO ORDERED.