WILLIAM S. DUFFEY, Jr., District Judge.
This matter is before the Court on Defendants XRT, Inc. ("XRT") and David Eugene Silverglate's (together, "Defendants") Motion for Partial Summary Judgment [47] and Plaintiffs GOT I, LLC ("GOT I") and Kids II, Inc.'s ("Kids II") (together, "Plaintiffs") Cross-Motion for Partial Summary Judgment [60].
This is a contract dispute regarding the royalties due under a Royalty Agreement [1.3] entered into by Plaintiffs and Defendants. GOT I, XRT (formerly known as Rhino Toys), and David Silverglate entered into an Asset Purchase Agreement [1.2] ("APA") and the Royalty Agreement on December 30, 2010. By them, GOT I purchased from XRT all of the "Acquired Assets," as that term is defined in Section 1.1 of the APA.
The Royalty Agreement provides for royalties to be paid by GOT I to XRT on three separate categories of products sold by Kids II: (i) "Existing Product Lines"; (ii) "Newly Developed Product Lines"; and (iii) "Combined Products." The Royalty Agreement defines Existing Product Line(s) as: "(i) the current product lines of [Rhino Toys] which were actually sold in the marketplace as of the Closing Date; (ii) former product lines of [Rhino Toys] which were previously sold in the marketplace prior to the Closing Date; and (iii) product lines currently under development by [Rhino Toys] but not yet sold in the marketplace as of the Closing Date. Products in these Existing Product Lines are referred to herein as `Existing Products.'" ([1.3] at 3).
Newly Developed Product Line(s) are defined, in part, as: "[A]ny products developed by Kids II after the Closing Date, December 30, 2010, that do not fall within the Existing Product Lines, and which are (1) based on or derived from the Existing Products or any intellectual property or proprietary technology embodied therein . . . . Products in the Newly Developed Product Lines are referred to herein as `Newly Developed Products.'" (
The Royalty Agreement provides that Delaware law governs the interpretation and construction of the Royalty Agreement.
The parties disagree on the interpretation of the definition of "Newly Developed Product Lines." Defendants contend that "intellectual property" embodied in the Existing Products Lines includes "trademarks." They claim that a product that contains or attaches an embedded OBALL trademark, or other trademark used with an Existing Product, is a "Newly Developed Product Line." Plaintiffs' position is that a product cannot be classified as a "Newly Developed Product Line" just because it contains or has attached the OBALL trademark or other trademark.
Summary judgment is appropriate where the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.
"At the summary judgment stage, facts must be viewed in the light most favorable to the nonmoving party only if there is a `genuine' dispute as to those facts."
The parties agreed that the Royalty Agreement is governed by Delaware law.
Extrinsic evidence may only be introduced if an ambiguity exists in the language of the contract. A contract provision is not ambiguous simply because the parties disagree on its meaning.
The dispute here is whether a product that uses a trademark from an Existing Product is a "Newly Developed Product Line" under the Royalty Agreement. Newly Developed Product Line(s) are defined, in part, as: "[A]ny products developed by Kids II after the Closing Date, December 30, 2010, that do not fall within the Existing Product Lines, and which are (1) based on or derived from the Existing Products or any intellectual property or proprietary technology embodied therein." Defendants contend that the plain meaning of "intellectual property" includes trademarks, and thus a Newly Developed Product necessarily includes trademarks embodied in or associated with an Existing Product. Plaintiffs argue that the plain language precludes classifying a product as a Newly Developed Product based solely on the use of a trademark because (i) a Newly Developed Product cannot be "based on or derived from" a trademark; (ii) a trademark is not intellectual property or proprietary technology "embodied" in an Existing Product; and (iii) Defendants' interpretation is not commercially reasonable and renders other language in the Royalty Agreement superfluous and meaningless.
The Court begins its analysis with the plain and ordinary meaning of the contract language. "Intellectual property" is defined as:
The plain and ordinary meaning of "intellectual property" inarguably encompasses trademarks, which Plaintiffs concede. Plaintiffs argue, however, that, when read in the context of the Royalty Agreement, the term intellectual property does not include trademarks. Plaintiffs first note that Black's Law Dictionary defines "embodiment" as "the tangible manifestation of an invention," and they argue that, because a trademark is merely a mark used in association with goods or services— and not a tangible manifestation of an invention—"intellectual property" must not include trademarks. Plaintiffs' argument is misleading, because Plaintiffs rely on the legal definition of the term "embodiment," which applies only to patents, rather than the plain and ordinary meaning of "embodied." To "embody" means:
Thus, contrary to Plaintiffs' restrictive, patent-specific definition, to "embody" means merely to "incorporate" or "include." Based on this definition, a product that is based on or derived from trademarks incorporated or included in an Existing Product theoretically is a "Newly Developed Product."
The question remains whether based on other Royalty Agreement terms this theoretical definition is reasonable. The Royalty Agreement requires that the product be "based on or derived from" the intellectual property. Plaintiffs argue that a product cannot be "based on or derived from" a trademark. They argue that, because a trademark is a word, phrase, or graphic design used to indicate the origin or ownership of a good, a "product" cannot be "based on or derived from" a trademark. The Court agrees. A "product" is "[a]n article or substance that is manufactured or refined for sale[.]"
Based on these definitions, the Court finds that it would stretch the imagination and the plain and ordinary meaning of the Royalty Agreement language to find that a product could arise or originate from a mark denoting another product. Under such an interpretation, a Newly Developed Product could encompass any product merely by the act of placing on it the "OBALL" trademark or another mark denoting the Existing Products. Plumbing equipment, under Defendants' interpretation, would be "derived from" a trademark of an Existing Product merely by virtue of the trademark being affixed to the equipment. Defendants fail to offer any persuasive explanation how a product could derive from a trademark.
The more reasonable, and natural, interpretation, is that a Newly Developed Product is a product that is based on or originates from the Existing Products or a patent or other proprietary technology embodied by the Existing Products. The Court's conclusion is supported by the observation that, in the context of the APA and the Royalty Agreement, the products at issue are physical toys. It is difficult to see how a toy could be "based on or derived from" the trademark "OBALL," or any other mark. Further, had the parties intended Defendants' interpretation, they would have used trademark-specific language to define Newly Developed Product Line(s). For instance, the parties could have defined Newly Developed Product Line(s) to include any product "marketed and sold under a trademark used in connection with any Existing Product." Indeed, in Section 1(n) of the Royalty Agreement—one page after the definition of Newly Developed Product Line(s)— the parties defined "Bendy Ball Product" to mean "the product marketed and sold . . . under the product name BABY EINSTEIN
The Court finds that a product cannot be classified as a Newly Developed Product under the Royalty Agreement based solely on the use of a trademark. Accordingly, Defendants' Motion for Partial Summary Judgment is denied, and Plaintiffs' Cross-Motion for Partial Summary Judgment is granted.
For the foregoing reasons,