WILLIAM Q. HAYES, Judge.
The matter before the Court is the Motion for Preliminary Injunction filed by Defendant/Counter-Claimant Schawbel Technologies LLC. (ECF No. 14).
On August 21, 2018, this case was removed to this Court by Defendant/Counter-Claimant Schawbel Technologies, LLC (Schawbel). (ECF No. 1). Plaintiff/Counter-Defendant Heat Factory USA, Inc. (Heat Factory) filed a complaint against Schawbel alleging breach of contract, fraud, negligent misrepresentation, express indemnity, and intentional interference with prospective economic advantage. (Heat Factory Compl., ECF No. 1-2 at 3). Schawbel filed a counter-claim against Heat Factory alleging breach of contract and patent infringement. (Schawbel Counter-Claim, ECF No. 1-7 at 7).
On January 15, 2019, Schawbel filed a Motion for Preliminary Injunction. (ECF No. 14). On February 5, 2019, Heat Factory filed Opposition. (ECF No. 15). On February 12, 2019, Schawbel filed a Reply. (ECF No. 16). On March 29, 2019, the Court heard oral argument on the Motion. On April 2, 2019, Schawbel filed a Supplemental Declaration of William Schawbel. (ECF No. 19). On April 3, 2019, Heat Factory filed a Response to the Supplemental Declaration. (ECF No. 20). On April 4, 2019, the Court held an evidentiary hearing on Schawbel's claim of irreparable harm.
Schawbel owns fifty-four United States patents related to the design of heated insoles and related heating products.
Id.
On July 18, 2017, Schawbel and Heat Factory also executed the Exclusive Patent License Agreement (License Agreement). (License Agmt., ECF No. 1-7 at 64). The License Agreement granted Heat Factory an exclusive license for "certain patents, technological information, and general know-how from [Schawbel] in exchange for royalty payments . . . ." Id. Under the License Agreement, Heat Factory was authorized to manufacture and distribute products utilizing Schawbel's patented technology under Heat Factory's brand name. The License Agreement provided for a schedule of royalty payments based on net sales to be paid by Heat Factory to Schawbel, beginning on January 1, 2018. Id. at 70. In the event net sales did not generate more than $300,000 in royalties for Schawbel, the License Agreement guaranteed Schawbel a minimum $300,000 in royalty payments. Id. The License Agreement contained a schedule requiring that Heat Factory make minimum royalty payments as follows:
Id. at 71.
In the event that Heat Factory failed to make payments under either the License Agreement or the APA, Schawbel was entitled to terminate the License Agreement after a single overdue payment
Id. at 79.
In the event the License Agreement was terminated, Section 9.6 and 9.7 of the License Agreement provide:
Id. at 81.
Section 3.6 of the License Agreement contains an offset provision, which states:
Id. at 71-72.
In December 2017, Heat Factory made a payment of $352,477 of the $500,000 owed to Schawbel for inventory purchased under the APA. (Schawbel Decl., ECF No. 14-2 ¶ 21). On December 11, 2017, Schawbel sent a notice demanding the remaining $147,523. Id. On January 10, 2018, Heat Factory was required to make a $600,000 payment under the APA. Id. ¶ 22. Heat Factory did not make a January APA payment. On January 13, 2018, Schawbel sent a notice to Heat Factory demanding the January payment. Id. Heat Factory did not make any subsequent APA payments. The unpaid balance under the APA is $2,597,523. Id. ¶ 23.
On January 15, 2018, the first minimum royalty payment was due to Schawbel under the License Agreement. Heat Factory completed the first $50,000 minimum royalty payment. (Schawbel Decl., ECF No. 14-2 ¶ 8). On January 31, 2018, Schawbel sent notice to Heat Factory terminating the License Agreement pursuant to Section 9.4 based on Heat Factory's failure to make overdue December 2017 and January 2018 payments under the APA. Id. ¶ 24. On February 12, 2018, Heat Factory and Schawbel entered into a forbearance period during which Heat Factory was permitted to continue utilizing Schawbel's patents as "if the License Agreement were still in effect" while the parties negotiated a possible resolution. (Treptow Decl., Ex. A, ECF No. 15-1 at 13).
On February 15, 2018, Heat Factory's second minimum royalty payment of $50,000 was due under the License Agreement. (ECF No. 1-7 at 71). Heat Factory did not make a February minimum royalty payment. (Schawbel Decl., ECF No. 14-2 ¶ 30). On February 19, 2018, Schawbel gave written notice to Heat Factory that it had not made the February minimum royalty payment. (Schawbel Decl., Ex. 10, ECF No. 14-4 at 39). Heat Factory did not make any subsequent minimum royalty payments. Id. ¶ 30.
On July 10, 2018, Schawbel gave written notice to Heat Factory terminating the License Agreement, citing Section 9.4 of the License Agreement and Heat Factory's failure to make the February minimum royalty payment within the thirty-day notice period. (Schawbel Decl., Ex. 11, ECF No. 14-4 at 39).
On September 12, 2018, Schawbel terminated the forbearance period. (Schawbel Decl., Ex. 12, ECF No. 14-4 at 41).
Heat Factory is the only vendor currently utilizing Schawbel's patent. Id. ¶ 33. Schawbel has discussed its patented technology with at least four prospective business partners who "have expressed interest in buying the Patented Technology, licensing the Patented Technology, and/or entering into consulting contracts with Schawbel regarding the Patented Technology." Schawbel has not been able to find a buyer. (Suppl. Schawbel Decl., ECF No. 19 ¶ 3).
"A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20 (2008) (citations omitted). The standard is substantially the same in a patent case. See Abbott Labs. v. Andrx Pharm., Inc., 473 F.3d 1196, 1200-01 (Fed. Cir. 2007).
Schawbel contends that Schawbel validly terminated the License Agreement and that Heat Factory's continued manufacture and sale of products utilizing Schawbel's technology is infringing on its patent. (ECF No. 14-1). Schawbel asserts that Heat Factory failed to make certain payments under the APA and License Agreement, that Heat Factory was not entitled to withhold payment pursuant to the License Agreement's indemnity clause, Section 3.6, because Heat Factory had not obtained "a final, non-appealable court order," and that Schawbel validly terminated the License Agreement. (ECF No. 16 at 5). Specifically, Schawbel contends that Schawbel validly terminated the License Agreement by letter on January 31, 2018, pursuant to Section 9.4, based on Heat Factory's failure to complete the December 2017 and January 2018 APA payments, and again on July 10, 2018, pursuant to Section 9.4, based on Heat Factory's failure to make a February minimum royalty payment and failure to cure with interest within thirty days. (ECF No. 14-1 at 14-15). Schawbel contends that Heat Factory "is now actively infringing on Schawbel's patents by continuing to make and sell products covered by those patents." Id. at 19.
Heat Factory contends that Heat Factory was entitled to withhold payment to Schawbel because of certain alleged misrepresentations made by Schawbel during negotiations over the APA. Heat Factory contends that Heat Factory is entitled to offsets for indemnification under Section 3.6 of the License Agreement that are equal to or greater than the amount owed to Schawbel under the APA and the License Agreement. (ECF No. 15 at 6). Heat Factory asserts that there is sufficient evidence in the record to demonstrate that it will prevail in its claim for offsets under the APA and/or License Agreement. Id. At oral argument, Heat Factory asserted that it was entitled to withhold payment under Section 3.6 because it will obtain a court order if it prevails in this action.
To succeed on a patent infringement claim, the plaintiff must demonstrate that a valid patent exists and that infringement occurred. Markman v. Westview Instruments, Inc., 517 U.S. 370, 384 (1996). In this case, the record establishes that Schawbel owns the patents licensed to Heat Factory under the License Agreement and that, absent the License Agreement, manufacture or sale of products utilizing Schawbel's patented technology constitutes patent infringement.
The Court interprets the plain meaning of the License Agreement. See Balles v. Babcock Power Inc., 70 N.E.3d 905, 911 (Mass. 2017) ("When contract language is unambiguous, it must be construed according to its plain meaning.").
Section 3.6 of the License Agreement states that Heat Factory was entitled to withhold payment to Schawbel if the offset "1) has been agreed to by the Parties; 2) has been determined by a final, non-appealable court order; or 3) relates to any Bulk Sales Claims." Id. at 71. If none of those conditions was satisfied, Heat Factory was required under the License Agreement to continue paying Schawbel royalties until it obtained a court order or deposit the disputed payments into an escrow account if the disputed amount was more than $20,000. See License Agmt., ECF No. 1-7 at 72. The record reflects that Heat Factory failed to make complete payments to Schawbel in December 2017, January 2018, and February 2018. Heat Factory does not have a final, non-appealable court order stating that it is entitled to an offset. Heat Factory did not deposit the disputed amounts into an escrow account.
Schawbel contends that a preliminary injunction is necessary on the grounds that Heat Factory's ongoing use of Schawbel's patents "is depriving Schawbel of its ability to exercise its rights as the proper owner of the patents." (ECF No. 14-1 at 6-7). Schawbel asserts that Heat Factory's continued use of the patent is "preventing consummation of new revenue-producing transactions for Schawbel." Id. at 22.
Heat Factory contends that any harms Schawbel may suffer are monetary and not irreparable. Heat Factory asserts that "the appropriate mode of compensation, in the event that Schawbel does prevail to one extent or another is an award of damages under the contracts." (ECF No. 15 at 6). Heat Factory contends that Schawbel's delay in seeking a preliminary injunction and willingness to enter into a forbearance period weighs against a finding of irreparable harm. Id. at 7.
A patent holder is not precluded from establishing irreparable harm because it chooses to license a patent instead of commercially exploiting the patent itself. eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 393 (2006) ("[S]ome patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves. Such patent holders may be able to satisfy the traditional four-factor test, and we see no basis for categorically denying them the opportunity to do so."); see In re Berwyn E. Etter, 756 F.2d 852, 859 (Fed. Cir. 1985) ("The essence of all property is the right to exclude and the patent property right is certainly not inconsequential."); Robert Bosch LLC v. Pylon Mfg. Corp., 659 F.3d 1142, 1148 (Fed. Cir. 2011) (noting as basis for finding irreparable harm "the fundamental nature of patents as property rights granting the owner the right to exclude"); Port-a-Pour, Inc. v. Peak Innovations, Inc., 49 F.Supp.3d 841, 872 (D. Colo. 2014) ("The right to use one's property as one wishes—either to use the property to its own advantage, to exclude another from its use, or to sell, lease or transfer such property to another—is fundamental, and being excluded from the rights inherent in one's property constitutes irreparable injury."). A patent infringement plaintiff must provide specific facts demonstrating irreparable injury. Robert Bosch, 659 F.3d at 1149 (plaintiff can no longer rely on presumption of irreparable harm); see High Tech Med. Instrumentation, Inc., 49 F.3d at 1556 (failing to establish irreparable harm in part because plaintiff did not provide evidence that infringer's "activities have precluded it from licensing its patents or entering the market" or that plaintiff "needs an injunction to protect its right to refuse to exploit its invention commercially or to prevent others from doing so"); T.J. Smith & Nephew Ltd. v. Consol. Med. Equip. Corp., 821 F.2d 646, 648 (Fed. Cir. 1987) (finding that unexcused fifteen month delay rebutted finding of irreparable harm).
In this case, Schawbel has demonstrated that it is likely to prevail on the merits of its patent infringement claim because it is likely to prevail on its claim that the License Agreement was validly terminated both in January 2018 and July 2018. This Court held an evidentiary hearing on irreparable harm and permitted the parties to file additional briefing on the topic. (ECF Nos. 19, 20).
After Schawbel sent notice to Heat Factory in January 2018 that it was terminating the License Agreement, the parties entered into a forbearance period while the parties discussed a resolution, which continued until September 2018. On December 12, 2018, an early neutral evaluation conference was held in front of the Magistrate Judge. On January 15, 2019, Schawbel filed for a preliminary injunction in this Court. (ECF No. 14). While nearly a year passed between the time Schawbel first sent notice to Heat Factory that it was terminating the License Agreement and the filing of this Motion, the Court does not find that Schawbel's decision not to seek a preliminary injunction while the parties attempted a non-judicial resolution is the result of a lack of diligence by Schawbel or indicative of a lack of urgency. See High Tech. Med., 49 F.3d at 1557 (delay excusable if there exists a "good explanation"); see, e.g., Advanced Commc'n Design, Inc. v. Premiere Retail Networks, Inc., 46 Fed. App'x 964, 984 (Fed. Cir. 2002) (declining to hold eight months the parties spent in settlement negotiations against the party seeking an injunction).
The Court finds that absent injunctive relief, Schawbel will suffer irreparable harm because it will be inhibited from exercising its right as the patent holder to commercially exploit its patents.
Schawbel contends that the balance of equities tips in its favor because "Heat Factory has other unrelated products that it can continue to sell as it did before, but Schawbel's technology is completely tied up in this dispute." (ECF No. 14-1 at 24). Schawbel asserts "what remains of Schawbel's business will be threatened" if Heat Factory is not enjoined from continuing to use Schawbel's patent during the pendency of this litigation because of actions filed by Schawbel's creditors. Id.
Heat Factory contends that the balance of equities tips in its favor because Heat Factory will be unable to fill outstanding orders and will be forced to store remaining Schawbel products. (ECF No. 15 at 8-9). Heat Factory contends that an injunction should not issue because Schawbel will be made whole with monetary damages "plus the termination of the License Agreement and the freedom to market its intellectual property for sale or license to whomever it chooses" if Schawbel ultimately prevails. (ECF No. 15 at 8).
"A preliminary injunction is an extraordinary remedy never awarded as of right." Winter, 555 U.S. at 24. "In each case, courts `must balance the competing claims of injury and must consider the effect on each party of the granting or withholding of the requested relief.'" Id. (quoting Amoco Prod. Co. v. Gambell, 480 U.S. 531, 542 (1987)).
Absent an injunction, the Court will allow Heat Factory to continue to manufacture products utilizing Schawbel's patent for the pendency of this litigation without a valid license agreement and without paying Schawbel royalties for the use of its patent. There is evidence in the record that Schawbel will have difficulty finding a new licensee as long as Heat Factory continues to manufacture products utilizing its patents. Any harm Heat Factory might sustain as a result of an injunction could have been avoided had Heat Factory acted in compliance with the License Agreement. The Court finds that the balance of equities weighs in favor of a limited preliminary injunction. See, e.g., Port-a-Pour, 49 F. Supp. 3d at 873 ("Moreover, I can give no weight to harm [defendant] might sustain by an injunction against selling infringing products."); TM Comput. Consulting, Inc. v. Apothacare, LLC, 2008 WL 4238913, at *9-10 (D. Or. 2008) (finding balance of harms favored licensor because licensee continued to misuse licensor's rights after termination of license and "grant of a preliminary injunction only will prevent defendants from doing what they are not authorized to do").
Schawbel contends that the public interest is served by an injunction in this matter because it is in the public interest to ensure that parties are upholding their contractual obligations. (ECF No. 14-1 at 24). Schawbel also contends the public is confused about who is responsible for customer service and general maintenance of products utilizing Schawbel's intellectual property. (ECF No. 16 at 12).
Heat Factory contends that an injunction would not be in the public interest because "the public interest is served by preventing companies like Schawbel from profiting from overt misrepresentations, and by maintaining the status quo ante and allowing the continued sale of products to retailers and consumers, and the ordinary flow of business, unrestrained." (ECF No. 15 at 9).
The public interest is served by upholding contractual obligations and recognizing patent rights. Moreover, a limited injunction enjoining Heat Factory from manufacturing new products utilizing Schawbel's patents while allowing Heat Factory to fulfill existing orders with existing inventory significantly mitigates any harm the public may suffer as a result of this injunction. The Court finds that a limited injunction would not be contrary to the public interest.
Schawbel contends that the Court should issue a broad injunction "ordering that Heat Factory may not use the Patents nor use or sell any Products or Inventory covered by the Patents." (ECF No. 14-1 at 25). Heat Factory contends that any injunction should be narrow, and should not include the ThermaCELL products it purchased from Schawbel under the APA since Schawbel exhausted its patent rights when it sold the ThermaCELL products to Heat Factory. (ECF No. 20).
Schawbel established that it will suffer irreparable harm in the absence of an injunction because it will be inhibited from exercising its right as the patent holder to commercially exploit its patents during the pendency of this litigation. Evidence in the record demonstrates that prospective licensees are deterred by the prospect of a competitor manufacturing infringing products for an indefinite period—months to perhaps years— while this litigation reaches a final resolution. Enjoining Heat Factory from manufacturing products utilizing Schawbel's patents will assure prospective licensees that the universe of products entering the market utilizing Schawbel's patents is limited to the products in existence as of the date of this Order.
With regard to existing inventory, the record is insufficient to conclude that sale of Heat Factory's existing inventory would deter prospective licensees in light of assurances that no new products utilizing Schawbel's patents will be manufactured by Heat Factory. Consequently, the record does not support a finding at this time that enjoining Heat Factory from sale of existing inventory is necessary to prevent irreparable harm. The Court declines to enjoin Heat Factory from sale of existing inventory.
The Motion for Preliminary Injunction filed by Defendant/Counter-Claimant Schawbel Technologies LLC (ECF No. 14) is GRANTED IN PART and DENIED IN PART. Heat Factory is HEREBY ENJOINED from further manufacture of products utilizing the patents at issue in this action until the Court directs otherwise.
IT IS FURTHER ORDERED that within ten days of the entry of this Order, the parties shall submit briefing on what, if any, bond Schawbel shall be required to obtain in connection with this injunction. Additionally, within ten days of the entry of this Order, Schawbel shall submit a proposed order specifying the terms of the injunction to opposing counsel and the Court's efile box.
(License Agmt., ECF No. 1-7 at 71).
