GREGORY H. WOODS, United States District Judge.
Plaintiff Automated Irrigation Controls ("AIC") sues for breach of contract, claiming that Defendant Watt Stopper, Inc. ("Watt Stopper") has failed to pay royalties to which Plaintiff contends it is contractually entitled. The governing contract, however, contains a self-executing clause that, absent waiver or other modification, terminated Watt Stopper's royalty obligations. The contractual language at issue is clear and unambiguous, and consistent with the law of New York, is to be enforced according to its terms. However, as material issues of fact persist as to whether the contractual framework was modified by waiver, the Court cannot conclude on the record before it that Watt Stopper's royalty obligations have terminated. As a result, for the reasons that follow, Watt Stopper's motion for summary judgment is GRANTED IN PART and DENIED IN PART and AIC's motion for summary judgment is DENIED.
Watt Stopper markets and sells lighting control products. AIC developed certain wireless outdoor lighting control products.
TLA § 2(D).
Because Watt Stopper "desire[d] to employ certain individuals previously employed by AIC," TLA, Recitals at 1, the TLA anticipated that certain persons who were employed by AIC at the time the TLA was executed would be offered employment at Watt Stopper. That Watt Stopper anticipated hiring those employees, and the implications of any violations of those employees' employment agreements with Watt Stopper, were embodied in the text of the TLA.
TLA at 3 (the "Conditions on Royalties Clause"); TLA § 3 ("In connection with [the TLA], Wattstopper shall extend offers of employment to current AIC employees Bryan Pike, Joe Dylinski, Zane Brown, and Nathan Wood.")
Joe Dylinski and Bryan Pike both executed employment agreements with Watt Stopper on November 12, 2013. Dylinski Agreement, Dkt. No. 95-8; Pike Agreement, Dkt. No. 95-7, (collectively, the "Employment Agreements"). Section 3.3 in both Employment Agreements are identical, and both state that:
Employment Agreements § 3.3 (the "Conflict of Interest Clauses").
Neither Pike nor Dylinski ever divested their interests in DCS; nor, consequentially, did they provide proof of such divestiture. Statement of Undisputed Facts ("56.1"), Dkt. No. 121 ¶¶ 17, 18 (neither man "divest[ed] his ownership interest in DCS because [they] could not."). Peter Horton was the primary representative of Watt Stopper in negotiating the TLA. 56.1 ¶ 2. On June 11, 2013, Pike wrote an email to Horton, copying Dylinski, in which he stated that: "Per the license agreement, AIC needed to show full divestiture of DCS by now. What do we need to do if anything to comply?" 56.1 ¶ 19. Horton subsequently forwarded the email to Jim Young, a Watt Stopper executive. Id. Young informed Horton that he "should ask Pike and Dylinski for an executed copy of the DCS sale agreement." Id. Horton "forwarded [that] email to Pike, advising him to `see below' for Young's request." Id. As described above, however, neither Dylinski nor Pike divested their DCS holdings, nor provided proof of divesture. 56.1 ¶¶ 17, 18.
The TLA is governed by the law of the State of New York, without regard to New York's conflict of laws principles. TLA § 15. The Agreement contains an anti-waiver provision which states that "[n]o waiver by either Party of any default shall be deemed as a waiver of prior or subsequent default of the same of [sic] other provisions of this Agreement." TLA § 19. The Agreement is fully integrated, and its terms prohibit modification or amendment of the TLA except in writing. The relevant provision states:
TLA § 23, (the "Written Modifications Only Clause") (emphasis added).
This case was filed on March 19, 2018. Dkt. No. 1. The Amended Complaint was served on May 31, 2018. Dkt. No. 39 ("AC"). In the Amended Complaint, Plaintiff pleaded three causes of action. Counts I and II alleged breaches of the TLA by Watt Stopper. In Count I, Plaintiff alleged that Watt Stopper "failed to use reasonable efforts to exploit [the exclusive] license" granted in the TLA. AC ¶¶ 47-52. In Count II, Plaintiff alleged that Watt Stopper failed to make royalty payments on "functionally equivalent successor products to the Royalty Bearing Products." AC ¶¶ 53-58. In Count III, Plaintiff alleged that Legrand tortiously interfered with the TLA "by taking action to prevent Watt Stopper from using its reasonable and best efforts to exploit the exclusive license." AC ¶¶ 59-65.
On June 28, 2018, Watt Stopper served a motion to dismiss Count I of the Amended Complaint. Dkt. No. 55. That same day,
Watt Stopper's Answer and Counterclaims were served on June 25, 2019. CCs, Dkt. No. 53. In Count I of the Counterclaims, Watt Stopper seeks, inter alia, declaratory judgment that as of the date of the breach of Pike's and Dylinski's Employment Agreements, all sales of Royalty Bearing Products were royalty-free and all licenses granted under the TLA were fully paid. Id. ¶¶ 28-39. Watt Stopper additionally seeks declaratory judgment that it is entitled to the return of all Watt Stopper's property in Pike's or AIC's possession, custody, or control. Id. ¶ 39. In Count II of the Counterclaims, Defendants allege that AIC tortiously interfered with Pike's and Dylinski's Employment Agreements—inducing both men to breach their Employment Agreements and damaging Watt Stopper. Id. ¶¶ 40-47.
Before the Court are cross-motions for summary judgment. Watt Stopper has moved for summary judgment on all counts in the Amended Complaint, and for partial summary judgment in its favor as to Count I of its Counterclaims.
Summary judgment is appropriate when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ("[S]ummary judgment is proper `if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" (quoting former Fed. R. Civ. P. 56(c))). A genuine dispute exists where "the evidence is such that a reasonable jury could return a verdict for the nonmoving party," while a fact is material if it "might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "Factual disputes that are irrelevant or unnecessary will not be counted." Id.
The movant bears the initial burden of demonstrating "the absence of a genuine issue of material fact," and, if satisfied, the burden then shifts to the non-movant to present "evidence sufficient to satisfy every element of the claim." Holcomb v. Iona Coll., 521 F.3d 130, 137 (2d Cir. 2008) (citing Celotex, 477 U.S. at 323, 106 S.Ct. 2548). To defeat a motion for summary
In determining whether there exists a genuine dispute as to a material fact, the Court is "required to resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought." Johnson v. Killian, 680 F.3d 234, 236 (2d Cir. 2012) (internal quotation marks and citation omitted). The Court's job is not to "weigh the evidence or resolve issues of fact." Lucente v. Int'l Bus. Machs. Corp., 310 F.3d 243, 254 (2d Cir. 2002) (citation omitted); see also Hayes v. N.Y.C. Dep't of Corr., 84 F.3d 614, 619 (2d Cir. 1996) ("In applying th[e] [summary judgment] standard, the court should not weigh evidence or assess the credibility of witnesses."). "Assessments of credibility and choices between conflicting versions of the events are matters for the jury, not for the court on summary judgment." Jeffreys v. City of New York, 426 F.3d 549, 553-54 (2d Cir. 2005) (citation omitted). However, if "no rational finder of fact `could find in favor of the nonmoving party because the evidence to support its case is so slight,' summary judgment must be granted." Brown v. Eli Lilly & Co., 654 F.3d 347, 358 (2d Cir. 2011) (quoting F.D.I.C. v. Great Am. Ins. Co., 607 F.3d 288, 292 (2d Cir. 2010)).
In resolving cross-motions for summary judgment, "each party's motion must be examined on its own merits, and in each case all reasonable inferences must be drawn against the party whose motion is under consideration." Morales v. Quintel Entm't, Inc., 249 F.3d 115, 121 (2d Cir. 2001) (citing Schwabenbauer v. Bd. of Educ., 667 F.2d 305, 314 (2d Cir. 1981)).
For the reasons that follow, the undisputed evidence comes to the precipice of establishing that no later than May 13, 2014, "sales by [Watt Stopper] of Royalty Bearing Products [were] royalty free and all licenses granted by AIC hereunder [were] fully paid." TLA at 4. Ultimately, however, questions of material fact remain as to whether Watt Stopper waived its right to benefit from the Conditions on Royalties Clause, and accordingly the Court cannot, on this record, conclude that Watt Stopper's royalty obligations terminated in May 2014.
Under New York law,
The Conditions on Royalties Clause contains clear and unambiguous language regarding the impact of a breach of the Conflict of Interest Clauses of the Employment Agreements on the TLA. In the case of such a breach, "then as of that date sales by [Watt Stopper] of Royalty Bearing Products will be royalty free and all licenses granted by AIC hereunder will be fully paid." TLA at 3 (emphasis added). A review of the Conditions on Royalties Clause's clear and unambiguous language reveals three features pertinent to this analysis. First, it is self-executing.
Pike and Mr. Dylinski executed their Employment Agreements on November 12, 2013. Pike Agreement at 2; Dylinski Agreement at 2. The Conflict of Interest Clauses of those agreements require, inter
AIC does not contend that Pike or Dylinski ever divested their DCS holdings or provided proof of their divestiture. Nor has AIC adduced evidence that it has suffered any damages if Watt Stopper's royalty obligations terminated on May 12, 2014. 56.1 ¶ 20. Rather, AIC contends that principles of waiver and estoppel counteract the contractual mechanisms described above.
For the reasons that follow, the Court cannot, on this record, determine that there is no question of material fact as to the issue of contractual modification by waiver, which precludes the Court from determining at this time whether Watt Stopper's royalty obligations terminated as of May 13, 2014.
"Under New York law, parties may modify a contract by another agreement, by course of performance, or by conduct amounting to a waiver or estoppel." Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 783 (2d Cir. 2003) (internal quotation marks and citation omitted). However, as discussed above, the TLA contains the Written Modifications Only Clause, which states, in pertinent part, that the TLA "cannot be modified or amended except in writing signed by both Parties and specifically referring to this Agreement." TLA § 23. This provision is enforceable under N.Y. Gen. Oblig. Law § 15-301(1) ("§ 15-301") which "places this type of clause on the same footing as any other term in a contract." Israel v. Chabra, 12 N.Y.3d 158, 167, 878 N.Y.S.2d 646, 906 N.E.2d 374 (2009); see HGT Capital LLC v. HDS Int'l Corp., 60 Misc.3d 1225(A), 1225(A), 2018 WL 4000483 (N.Y. Sup. Ct. 2018) ("The defense of waiver is also inapplicable, as the Note contains a no-oral-modification clause.").
"Despite § 15-301, New York recognizes oral modification or waiver of a contractual provision, but only under limited circumstances, specifically, (1) `when there has been partial performance of an agreement to modify, so long as the partial performance is unequivocally referable to the oral modification,' or (2) `when one party has induced the other party to rely on an oral modification' such that `the first party may be equitably estopped from invoking the requirement that any modification be in writing.'" DiStefano v. Maclay, 102 F. App'x 188, 189 (2d Cir. 2004) (summary order) (quoting Towers Charter & Marine Corp. v. Cadillac Ins. Co., 894 F.2d 516, 522 (2d Cir. 1990)).
For the reasons that follow, there is a question of material fact regarding the application of the waiver by partial performance exception to § 15-301. As a result, on this record, the Court cannot determine whether Watt Stopper's royalty obligations terminated on May 13, 2014.
It is undisputed that Watt Stopper continued to pay AIC royalty payments, despite Pike's and Dylinski's failure to divest their DCS holdings.
On this record, the Court cannot conclude that there is no question of material fact regarding whether Watt Stopper's continued payment of royalties is unequivocally referable to a modification of the TLA. Watt Stopper contends that because its obligation to pay royalties was imposed by the TLA, its continued payment of royalties cannot be unequivocally referable to a modification of the TLA. Watt Stopper's Reply, Dkt. No. 134 at 5 ("[T]he partial performance alleged by MTS was the payment of money, which it was already required to do under the original agreements." (alteration in original) (quoting Am. Int'l Tel., Inc. v. Mony Travel Servs., Inc., 99-cv-11581-CM-LMS, 2001 WL 209918, at *4 (S.D.N.Y. Feb. 23, 2001))). That argument is flawed, however, for the basic reason that, absent a modification of the contract, the TLA did not require Watt Stopper to make payments after May 12, 2014. Royalty payments after that date were not required under the original agreement—that is, unless it was modified. This is the only argument presented by Watt Stopper on this point—the only egg that it placed in this basket—and it is profoundly flawed because the continued stream of royalty payments was not required by the contract as written. Given that Watt Stopper has not presented alternative explanations of the continued payment stream, the Court cannot determine, on this record, that there is no question of material fact regarding whether the continued payment of royalties is unequivocally referable to a modification of the TLA.
Watt Stopper has not presented alternative explanations for the continued royalty payments in briefing this motion to dismiss. Despite that failure, however, the Court notes in dicta that other explanations for the continued payment of royalties may ultimately call into question whether those payments were unequivocally referable to a modification of the TLA.
For all these reasons, the Court concludes that there is a question of material facts as to whether the royalty payments made by Watt Stopper on or after May 13, 2014 are unequivocally referable to Watt Stopper's waiver of the Conditions on Royalties Clause. Accordingly, the Court cannot conclude that Watt Stopper's obligation to pay royalties terminated on May 12, 2014. Nor, however, can the Court conclude that Watt Stopper's Royalty obligation necessarily survived beyond that date. Consequentially, both pending motions for summary judgment are denied to the extent that those motions are premised on a determination of that issue.
The Court need not reach this issue, as it has already determined that a question of material fact exists as to whether Watt Stopper's royalty obligations persisted past May 13, 2014. However, in dicta, the Court notes that AIC's estoppel arguments appear to be flawed in that AIC has not presented any evidence of detrimental reliance on any act taken by Watt Stopper.
In order to benefit from the estoppel exception to § 15-301, a party must demonstrate, inter alia, "acts taken in detrimental reliance" on the conduct at issue, which in turn must be "unequivocally referable'" to the modification of the agreement. Richardson & Lucas, Inc. v. N.Y. Athletic Club of City of New York, 304 A.D.2d 462, 758 N.Y.S.2d 321, 322 (1st Dep't 2003) (quoting Rose, 42 N.Y.2d at 343, 397 N.Y.S.2d 922, 366 N.E.2d 1279). AIC, however has not adduced evidence of any specific acts it took in detrimental reliance on the receipt of payments which, had the TLA been strictly enforced according to its terms, it may not have been entitled to receive.
Despite lacking factual support in the record, AIC made the following arguments in support of its purported detrimental reliance. First, that "AIC relied on [Watt Stopper's] actions in continuing to sell the licensed products and pay AIC royalties
As for AIC's second argument, the Court notes that it appears to be in tension with AIC's admission that neither Pike nor Dylinski were capable of divesting their DCS holdings—which begs the question of how AIC could have cured Pike's and Dylinski's failure to timely divest.
The Court understands that AIC contends that the TLA, rather than the Employment Agreements themselves, was modified by the parties. That position seems sensible in light of the record evidence of the timing of the purported conversations between Dylinski and Horton.
The Employment Agreements, unlike the TLA, are governed by the law of Georgia. Employment Agreements § 5.7. Accordingly, any amendment of the Employment Agreements would be considered outside the ambit of § 15-301, which is a creature of New York law.
As dicta, the Court notes that, even construing the facts in the light most favorable to AIC, the record indicates that any amendment of the Employment Agreements would have occurred in "the last quarter of 2014." Dylinski Tr. at 77:9-11. As discussed above, Pike and Dylinski were obligated to divest their DCS holdings no later than May 12, 2014. Accordingly, on this record, the Court could not conclude that any amendment of the Employment Agreements based on purported conversations between Dylinski and Horton occurred prior to the self-execution of the Conditions on Royalties Clause. Therefore, it appears that any such amendment of the Employment Agreements would have occurred too late in time to prevent the Conditions on Royalties Clause from
AIC has moved for summary judgment on Watt Stopper's counterclaims, to the extent that those claims are premised on a purported breach of Pike's Employment Agreement in 2018.
Pike worked for Watt Stopper until his resignation, which was effective April 13, 2018. CC 56.1 ¶ 19. According to the terms of Pike's Employment Agreement, Pike became an at-will employee on January 1, 2017. Id. ¶¶ 19-20. At the time of his resignation, Pike returned a laptop to Watt Stopper. Id. ¶ 23. Before he did so, however, he copied certain files from that laptop onto a flash drive, which he subsequently provided to counsel for AIC for use in this litigation. Id. ¶¶ 24, 43 (the extent of the files copied is disputed). Pike additionally disclosed certain Watt Stopper files saved on digital Dropbox servers to counsel for AIC for use in this litigation. Id. ¶¶ 25-28, 42.
In his Employment Agreement, Pike agreed to "to deliver to [Watt Stopper] at the termination of his employment or at any other time the Company may request, all Company property, including, but not limited to, Confidential Information which he then may possess or have under his control." Pike Employment Agreement § 3.1. Pike further agreed that he would "not, at any time, whether during the Term of [the Employment Agreement] or otherwise ... reveal, divulge or make known to any person or entity (other than [Watt Stopper]) or use for his own account, any ... Confidential Information...." Id. The Watt Stopper files that Pike disclosed to counsel for AIC contained "Confidential Information" as that term is defined in Pike's Employment Agreement. CC 56.1 ¶ 42. By August 20, 2018 counsel for the parties had conferred regarding this issue, and all files which Watt Stopper considered to be confidential had been deleted or returned. 56.1 ¶¶ 33-34.
Watt Stopper asserts that these facts constitute another breach of Pike's Employment Agreement, which again triggered the Conditions on Royalties Clause, and therefore terminated Watt Stopper's royalty obligations, to the extent any remained, as of April 13, 2018. See TLA at 3.
In its motion for summary judgment, AIC contends that it cured any breach within the notice period provided by the TLA, preventing the application of the Conditions on Royalties Clause. AIC's Br., Dkt. No. 98 at 8-9. However, the TLA does not provide any such applicable notice period. Accordingly, for the reasons that follow, AIC's motion is denied in this respect.
AIC points to § 8(C) of the TLA which states: "Either Party may terminate this Agreement if the other Party materially breaches this Agreement, and fails to cure such material breach within sixty (60) days after receiving written notice thereof." On that basis AIC contends that the TLA provided them with 60 days to cure any breach of the TLA.
AIC's argument is premised on the incorrect assumption that triggering the Conditions on Royalties Clause terminates
Accordingly, as AIC's motion for summary judgment is premised on the existence of an applicable notice period for which the TLA does not provide, AIC's motion for summary judgment is denied in this respect.
In the Amended Complaint, AIC alleges that Watt Stopper owes it additional royalties because Watt Stopper did not use reasonable efforts to promote the Royalty Bearing Products, as defined in the TLA. Watt Stopper has moved for summary judgment on that issue, contending that the TLA does not contain an obligation to use reasonable efforts to promote the Royalty Bearing Products. For the reasons that follow, the Court cannot conclude that such an obligation is not implied within the TLA. Accordingly, to the extent Watt Stopper has moved for summary judgment on this basis, its motion is denied.
The TLA does not expressly require that Watt Stopper use reasonable efforts to market or otherwise promote the Royalty Bearing Products. Nonetheless, as first articulated in Justice Cardozo's famed opinion Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917), and confirmed by that case's progeny, New York law may imply into an agreement an obligation that a licensee must use reasonable efforts to exploit the licensed products, especially in circumstances in which the payment of royalties on the sale of licensed products is the only consideration given for an exclusive license. Id. at 91, 118 N.E. 214. Watt Stopper provides two arguments as to why such an implied covenant should not be read into the TLA: (1) the parties specifically contemplated including a reasonable efforts provision in the TLA and chose not to do so; and (2) AIC received consideration other than the payment of royalties, and thus the Lady Duff-Gordon rule does not apply. For the reasons that follow, the Court cannot conclude that either argument precludes the Court from implying a duty to use reasonable promotional efforts into the TLA, pursuant to Lady Duff-Gordon and its progeny.
During the negotiation of the TLA, AIC proposed the inclusion of the following clause:
56.1 ¶ 11 (emphasis added). It is undisputed that AIC proposed that language in an "attempt[] to protect itself against the possibility that Defendants would not use reasonable efforts to promote, develop, or market the Royalty Bearing Products and to address the circumstances of Watt Stopper not making sales equal to the amount that were projected." Id. (alteration in original) (internal quotation marks omitted) (emphasis added). Ultimately, the proposed term was not included in the TLA. The only term in the TLA which relates to the prospect of complete failure by Watt Stopper to promote the Royalty Bearing Products is § 8(E), which, as the quotation below indicates, only applies if Watt Stopper leaves the business entirely.
TLA § 8(E).
On that factual predicate, Watt Stopper invokes Reiss v. Fin. Performance Corp., 97 N.Y.2d 195, 738 N.Y.S.2d 658, 764 N.E.2d 958 (2001), for the proposition that New York law "will not imply a term [into a contract] where the circumstances surrounding the formation of the contract indicate that the parties, when the contract was made, must have foreseen the contingency at issue and the agreement can be enforced according to its terms." Id., 738 N.Y.S.2d 658, 764 N.E.2d at 961. According to Watt Stopper, Reiss precludes implying a duty to use reasonable promotional efforts into the TLA. However, for the reasons that follow, the Court cannot conclude that Reiss is applicable to the facts established here.
Even assuming arguendo that Reiss controls, the facts here do not support Watt Stopper's contention that Reiss precludes implying a duty to use reasonable promotional efforts into the TLA. The duty to reasonably promote sales of a licensed product, as implied into certain contracts by Lady Duff-Gordon and its progeny, is an implied contractual duty, not a remedy. The clause proposed by AIC during negotiations would not only have imposed a duty to "actively promote," but would also have created a specific remedy for failing to "actively promote"—reversion of the intellectual property at issue in the TLA to AIC. Accordingly, the Court has not been presented with undisputed evidence that the parties specifically rejected a contractual obligation to use reasonable promotional efforts. Rather, the parties rejected a clause which would have imposed an obligation to "actively"—as opposed to "reasonably"—promote the Royalty Bearing Products and that would have created a specific remedy as a result of any such breach. As a result, it is far from clear on this record why the parties rejected the proposed clause. For example, it may have been the case that Watt Stopper rejected the clause due to its imposition of an additional remedy, or because it imposed a duty to "actively" promote, which could be interpreted as going beyond the default Lady Duff-Gordon rule's implied obligation to use "reasonable" efforts. Accordingly, even if Reiss is presumed to control, there would be a question of material fact as to the precise rationale for the parties' rejection of the proposed clause.
Courts have been reluctant to imply a duty to use reasonable promotional efforts into contracts granting exclusive licenses when the agreement at issue provides for a substantial upfront payment or the payment of guaranteed royalties. See, e.g., Emerson Radio Corp. v. Orion Sales, Inc., 253 F.3d 159, 169 (3d Cir. 2001) (applying New York law) ("[W]e cannot hold that it is necessary to imply an obligation to use reasonable efforts" when the agreement at issue guaranteed "a substantial minimum royalty payment totaling $4 million per year for three years."). On the other hand, "courts have, on occasion, implied a covenant requiring a licensee to exploit a license even when the licensor has received a guaranteed minimum royalty or upfront fee." Palazzetti Import/Export, Inc. v. Morson, 98-cv-722-FM, 2001 WL 1568317, at *6-7 (S.D.N.Y. Dec. 6, 2001), aff'd, 54 F. App'x 698 (2d Cir. 2002) (collecting cases).
The evidence of additional consideration adduced by Watt Stopper falls well short of constituting, or being analogous to, a substantial guaranteed payment of royalties or an upfront payment sufficient to prevent an implied duty to use reasonable promotional efforts from arising. Watt Stopper claims that the TLA provides two additional categories of consideration to AIC beyond the payment of royalties: (1) the signing of a separate agreement (the "OEM Agreement") which required payments to AIC, and (2) the hiring of AIC employees by Watt Stopper. For the reasons articulated below, the Court cannot conclude as a matter of law that those categories of consideration preclude the implication of a duty to use reasonable promotional efforts into the TLA.
The TLA provides that Watt Stopper's "obligation to pay the Royalty hereunder shall be subject to AIC's contemporaneous execution of the OEM Agreement with Wattstopper...." TLA § 2. That language unambiguously establishes that Watt Stopper's royalty obligations are conditioned on AIC's execution of the OEM Agreement. It follows that the execution of the OEM Agreement is consideration provided, at least in part, for Watt Stopper's benefit. Furthermore, while the OEM Agreement requires Watt Stopper to pay AIC for ancillary services and rental space, the TLA only anticipates the execution of the OEM Agreement, it does not require that the OEM Agreement have any particular terms. See TLA at 3; OEM Agreement § 13, Ex. AA. On those facts, the Court cannot conclude as a matter of law that the execution of the OEM Agreement
And as for the hiring of AIC employees, the language of the Conditions on Royalties Clause unambiguously establishes: (1) that Watt Stopper anticipated hiring those employees in order to benefit from their "know-how" of the licensed technology, and (2) Watt Stopper's right to terminate royalty payments in the event the conduct of those employees breached their respective Employment Agreements such that Conditions on Royalties Clause was triggered.
TLA at 3. In that context, the hiring of those employees, which directly benefitted Watt Stopper and, at most, indirectly benefitted AIC, is not at all similar to a substantial upfront payment or guaranteed royalty. In sum, the evidence of consideration adduced by Watt Stopper does not establish as a matter of law that a minimum royalty was owed, or that AIC was otherwise provided with consideration otherwise sufficient to preclude the implication of a duty to use reasonable promotional efforts into the TLA.
For all these reasons, on this record the Court cannot conclude that the TLA does not contain an implied obligation that Watt Stopper use reasonable efforts to promote the Royalty Bearing Products—with the corollary that to the extent Watt Stopper's motion for summary judgment is premised on such a finding, that motion is denied.
At issue in this case is whether certain Watt Stopper products are "functionally equivalent successor products" as defined in the TLA. TLA at 4. Despite the technological complexity involved in comparing AIC's products with the purported "functionally equivalent successor products," AIC chose not to procure and notice any expert testimony to support its claims. Accordingly, for the reasons which follow, to the extent that AIC's claims are contingent on such comparisons, AIC is unable to bear its burden of persuasion.
The TLA defines "Royalty Bearing Products" as:
The wireless DLM products that AIC contends are functionally equivalent successor products are identified as follows: LMBR-600, LMBC-600, LMRC-611MCC, LMDL-600-LMDM-601; LMPC-600, LMPX-600, and LMSW-605. 56.1 ¶ 27. It is undisputed that the wireless DLM products at issue are not "products on Exhibit A that are re-named or re-branded without material change to their features of functionality." 56.1 ¶ 30. Accordingly, the wireless DLM products are only Royalty Bearing Products if they are "re-configurations of the same technology (same feature/functionality) as products on Exhibit A but [are not] battery operated single digital or analog input or `single point' products." TLA at 4.
AIC concedes that "LMDL-600, LMPC-600, and LMPX-600 are battery operated single digital or analog input products." 56.1 ¶ 32. Accordingly, the clear terms of the TLA indicate that those products are not Royalty Bearing Products and accordingly summary judgment must be granted to Watt Stopper with respect to those products.
As to the remaining products, at trial AIC would bear the burden of demonstrating that those products are "functionally equivalent successor products." However, they have failed to procure an expert who can opine on this topic. For the reasons that follow, that failure is fatal to their claim.
While "there is no categorical rule requiring expert testimony.... [g]enerally speaking, it is needed when the facts and concepts of a case are beyond a layperson's understanding." S.E.C. v. Ginder, 752 F.3d 569, 575 (2d Cir. 2014). The issues which would be presented to the jury, were this case to proceed to trial, would go well beyond a layperson's understanding. In order to determine if a wireless DLM product was a Royalty Bearing Product, the jury would need to resolve at least the following three categories of evidentiary issues: (1) the nature of the technology involved in the AIC products, including those products' features and functions; (2) the nature of the technology involved in allegedly royalty-bearing Watt Stopper products, including those products' features and functions; and (3) a comparison of the technology at issue to determine whether any Watt Stopper product qualifies as a "functionally equivalent successor product." TLA at 4. As the issues presented are technical in nature, and involve comparing various technological features and functionalities, the Court draws on patent jurisprudence to determine whether
"[N]o expert opinion [is] required... [when] the technology [is] `easily understandable.'" Wyers v. Master Lock Co., 616 F.3d 1231, 1240 (Fed. Cir. 2010) (quoting Centricut, LLC v. Esab Group, Inc., 390 F.3d 1361, 1369 (Fed. Cir. 2004)). "However, as [the Federal Circuit] noted in Centricut, `expert testimony regarding matters beyond the comprehension of laypersons is sometimes essential,' particularly in cases involving complex technology." Id. at 1240 n.5 (quoting Centricut, 390 F.3d at 1369-70 (requiring expert testimony to establish infringement)); see Asia Vital Components Co. v. Asetek Danmark A/S, 377 F.Supp.3d 990, 1011-12 (N.D. Cal. 2019) ("The Federal Circuit has explained that `cases involving complex technology' may require expert testimony `to establish ... the existence (or lack thereof) of a motivation to combine references.' But it has declined to adopt `a per se rule that expert testimony is required to prove infringement when the art is complex.'") (alteration in original) (quoting Wyers, 616 F.3d at 1240 n.5, and Centricut, 390 F.3d at 1370).
In the Asia Vital Components Co. case cited above, the Northern District of California, in determining that the technology at issue in that case was sufficiently complex that it necessitated expert testimony, compiled an illuminating survey of the Federal Circuit's treatment of this issue.
The wireless DLM products integrate multiple layers of technology in what can be described as "stacks." See 56.1 ¶ 29. Their features include "wirelessly control[ling] lighting loads," "sens[ing] light level[s]," communicating requested or sensed light levels "wirelessly to another device," and determining the "occupancy status of a room." AIC's Resp. to Am. Inter. 16, Dkt. No. 95-13 at 3-6. Applying the Asia Vital Components Co. framework described above, the Court observes that the technology at issue here is multifunctional, involves digital and programmable features, and is designed to wirelessly synergize and communicate with other products. Accordingly, the technology at issue is not analogous to products such as "screw anchors" or "retractable tarp[s]" where a lay juror could reasonably be expected to make the necessary determinations without the benefit of expert testimony. Asia Vital Components Co., 377 F. Supp. 3d at 1012. Rather, these products are more similar to a multi-functional medical device or a "system for cooling computer components," id., which are "beyond a layperson's understanding" without expert testimony. Ginder, 752 F.3d at 575. Comparing the technology at issue in such products is similarly beyond the ken of a lay juror.
Expert discovery closed on November 12, 2018, and despite an extension of the expert discovery period, AIC has not adduced any expert testimony regarding whether any of the wireless DLM products in question here is a "functionally equivalent successor product." TLA at 4. For the reasons articulated above, without the benefit of expert testimony AIC cannot bear its burden of persuasion as to the question of whether any product at issue is a "reconfigurations of the same technology (same feature/functionality) as products on Exhibit A" of the TLA. Id.
AIC's contention that it can bear its burden of persuasion through lay testimony is unavailing. According to AIC, the lay testimony of Zane Brown, the developer of the AIC products at issue, together with the lay testimony of Jonathan Cartrette, who oversaw the development of the Watt Stopper products at issue, would be, in combination, sufficient to bear its burden. However, for the reasons that follow, neither man's lay testimony could be admitted to the extent necessary to bear AIC's burden.
"Lay opinion under Rule 701 must be limited to opinions that `result[] from a process of reasoning familiar in everyday life.'" United States v. Cuti, 720 F.3d 453, 459 (2d Cir. 2013) (alteration in original) (quoting the Fed. R. Evid. 701 advisory committee's note to the 2000 amendment). Lay testimony is limited to testimony that is "not based on scientific, technical, or other specialized knowledge within the scope of Rule 702." Fed. R. Evid. 701(c). "[T]he purpose of Rule 701(c) is `to eliminate the risk that the reliability requirements set forth in Rule 702 will be evaded through the simple expedient of proffering an expert in lay witness clothing.'" Bank of China, N.Y. Branch v. NBM LLC, 359 F.3d 171, 181 (2d Cir. 2004) (quoting the Fed. R. Evid. 701 advisory committee's note to the 2000 amendment).
In order for Brown's and Cartrette's testimony to carry AIC's burden of persuasion, they would need to testify as to the nature of the technology at issue and the similarities and differences between the technology in the AIC and Watt Stopper products. That testimony would not "result[] from a process of reasoning familiar in everyday life," Cuti, 720 F.3d at
The cases AIC cites in support of its position are inapposite. AIC cites 523 IP LLC v. CureMD.Com, 48 F.Supp.3d 600, 635 (S.D.N.Y. 2014), for the proposition that "co-founders of a technology can, without being designated as an expert, testify as to the features and functionality of the software system they created based on their personnel knowledge." Pl.s' Opp. at 18. In order to bear its burden of persuasion, however, AIC must adduce evidence as to how the "technology" at issue was developed and operates in order to demonstrate that it was a "functionally equivalent successor product," TLA at 4, not merely as to the features and functionality of that technology. See supra n.16. Indeed, in allowing the lay testimony in question, the 523 IP LLC court observed that the testimony did not involve "any technical or other specialized knowledge, such as software coding or computer systems functionality." 523 IP LLC, 48 F. Supp. 3d at 635 (internal quotation marks omitted). Without that type of detailed technical testimony, however, AIC cannot bear its burden of persuasion—and accordingly 523 IP LLC does not support AIC's position.
For all these reasons, to the extent Watt Stopper seeks summary judgment on the basis of AIC's inability to prove at trial that any product is a "functionally equivalent successor product" due to lack of expert testimony, its motion is granted.
Watt Stopper also contends that it is entitled to summary judgment because AIC has failed to adduce expert testimony regarding the applicable standard for determining whether Watt Stopper's efforts to promote the Royalty Bearing Products were reasonable. For the reasons that follow, Watt Stopper's motion for summary judgment is denied in this respect.
"[T]he necessity of expert testimony depends on circumstances, and ... there is no categorical rule requiring expert testimony.... Generally speaking, it is needed when the facts and concepts of a case are beyond a layperson's understanding." Ginder, 752 F.3d at 575. "It is well settled that expert testimony is unnecessary in cases where jurors `are as capable of comprehending the primary facts and of drawing correct conclusions from them as are witnesses possessed of special or peculiar training.'" Wills v. Amerada Hess Corp., 379 F.3d 32, 46 (2d Cir. 2004) (quoting Salem v. U.S. Lines Co., 370 U.S. 31, 35, 82 S.Ct. 1119, 8 L.Ed.2d 313 (1962)).
Watt Stopper contends that what constitutes reasonable promotional efforts in the
As discussed in § II(D) above, the technology at issue in this case is sufficiently complex that expert guidance is required to assist the jury in determining if one product is a "functionally equivalent successor product" of another. That is because, inter alia, the products themselves involve complex technology, and comparison of the features, functionalities, components, and other aspects of those products at issue to determine if they were "functionally equivalent" is beyond the ken of a lay juror.
Plaintiff can prove its claim with evidence of an absence of any efforts to promote the products, which would not require expert testimony. At minimum, a duty to use reasonable efforts to promote "requires that the promising party undertake at least some activity." Holland Loader Company, LLC v. FLSmidth A/S, 313 F.Supp.3d 447, 473 (S.D.N.Y. 2018). The corollary of this basic principle is that if AIC adduces evidence at trial that Watt Stopper undertook no promotional efforts, a jury could reasonably find that Watt Stopper had failed to use reasonable efforts to promote the products at issue. Such evidence would not require the testimony of an expert. Because AIC might support its claim with evidence of a lack of any efforts by Watt Stopper, this element of Watt Stopper's motion must be denied.
Watt Stopper argues that because the products at issue are complex to install, may be custom built, and the sales force tasked with selling them received additional training on how to sell those products, that promotion of those products is an area "beyond a layperson's understanding." Ginder, 752 F.3d at 575. Notably, however, the cases cited in support of that proposition discuss industries in which a determination of whether promotional efforts were reasonable would be far more complex than in this case. E.g., Musket Corp. v. Suncor Energy (U.S.A.) Mktg., Inc., H-15-100, 2017 WL 896510, at *6 (S.D. Tex. Mar. 7, 2017) (applying New York law) (expanding a rail terminal sufficient to accept certain quantities of crude oil); Sekisui Am. Corp. v. Hart, 15 F.Supp.3d 359, 381 (S.D.N.Y. 2014) (bringing a breast cancer diagnostic assay to market in the FDA-regulatory context).
For all these reasons, the Court has not been presented with an adequate factual or legal basis to conclude that the question of whether Watt Stopper's promotional efforts were reasonable is "beyond a layperson's understanding." Ginder, 752 F.3d at 575. Accordingly, on this record, the Court cannot conclude that expert testimony is necessary for AIC to bear its burden of persuasion as to that issue. As such, to the extent Watt Stopper's motion for summary judgment is premised on the requirement that AIC must adduce expert testimony to demonstrate that Watt Stopper did not engage in reasonable promotional efforts, Watt Stopper's motion is denied.
Watt Stopper has argued that it is entitled to partial summary judgment under Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964), and its progeny due to the expiration of the last remaining patent licensed to Watt Stopper pursuant to the TLA on March 19, 2017. AIC reinstated that patent at or around January 17, 2019. As the lapse of that patent was a necessary factual predicate for Watt Stopper's Brulotte argument, the
In its Counterclaims, Watt Stopper seeks declaratory judgment that its royalty obligations terminated at the time of any breach of Pike's or Dylinski's respective Employment Agreements, that Watt Stopper is owed repayment of any royalties paid after the Conditions on Royalties Clause went into effect, that all sales of Royalty Bearing Products are royalty-free and all licenses granted to Watt Stopper by the TLA are fully paid, and that Watt Stopper is entitled to the return of all of its property in Pike's or AIC's possession, custody, or control. CC ¶¶ 35-39.
Watt Stopper has moved for partial summary judgment as to its declaratory judgment counterclaim, contending that the undisputed evidence establishes that the Conditions on Royalties Clause was triggered by Pike's and Dylinski's respective breaches of their Employment Agreements, terminating Watt Stopper's royalty obligation. AIC has also moved for summary judgment as to the declaratory judgment counterclaim, contending that Watt Stopper's royalty obligation never terminated. As the Court has concluded above, however, questions of material fact persist as to whether Watt Stopper's royalty obligation was terminated or survived. Accordingly, both motions for summary judgment are denied to the extent those motions are reliant on a dispositive determination of whether Watt Stopper's royalty obligation was terminated.
The Court understands, as discussed in § III(B) above, that Pike has returned or deleted all Watt Stopper property in his possession, custody, or control. Accordingly, the Court considers the request for declaratory judgment that Pike must return any such property to no longer be germane.
Watt Stopper's theory of its tortious interference claim is that AIC induced the breaches of the Employment Agreements, which triggered the Conditions on Royalties Clause, and which, in turn, caused Watt Stopper to overpay royalties to AIC, harming Watt Stopper. AIC has moved for summary judgment on this claim. However, AIC's argument is premised on its contention that Watt Stopper's royalty obligation never terminated. For the reasons stated above, however, there is a question of material fact whether Watt Stopper's royalty obligations terminated due to breaches of Pike's and Dylinski's Employment Agreements. As the Court cannot determine on this record whether Watt Stopper's royalty obligation survived or was terminated, there is necessarily a question of material fact as to whether Watt Stopper overpaid AIC. Accordingly, AIC's motion for summary judgment on the tortious interference counterclaim is denied.
While this issue is decided, and the Court need not, and does not, take any further position on it, in dicta, the Court notes certain concerns regarding Watt Stopper's tortious interference claim. First, the Court notes what appears to be a logical flaw in Watt Stopper's theory. In order to state a claim for tortious interference with contract under New York law,
Second, the Court notes that Watt Stopper's claim that it was harmed by its overpayment of royalties is in tension with its arguments that there was no waiver within the context if § 15-301. See § III(A) and n.10, above. The Court questions if Watt Stopper is attempting to have it both ways—if the payments were voluntary, it may be the case that they were not "unequivocally referable" to a modification of the TLA. On the other hand, if Watt Stopper continued to make the royalty payments specified in the TLA, knowing that its obligation to do so had terminated—those actions may be pertinent to a determination of whether those payments were unequivocally referable to a modification of the TLA.
For the reasons articulated above, Watt Stopper's motion for summary judgment as to the Complaint is GRANTED IN PART and DENIED IN PART, and AIC's motion for summary judgment as to the Counterclaims DENIED.
Watt Stopper is granted summary judgment as to AIC's claims to the extent those claims any are reliant on a determination that any given product is a "functionally equivalent successor product." Watt Stopper is also granted summary judgment as to AIC's claims to the extent those claims relate to products bearing the model numbers LMDL-600, LMPC-600, and LMPX-600. In all other respects, the parties' motions for summary judgment are denied.
The Court understands that Watt Stopper's counterclaim for declaratory judgment that Pike is obligated to return all Watt Stopper property in his possession, custody, or control is no longer germane.
The Clerk of Court is directed to terminate the motions pending at Dkt. Nos. 92 and 97.
SO ORDERED.
However, as the Court has determined that AIC cannot bear its burden of persuasion as to whether any term is a "functionally equivalent successor product" absent expert testimony, the Court need not, and does not, take any further position as to the impact of AIC's erroneous proposed construction of this term on their claims.
