Gemini Technologies, Incorporated v. Smith & Wesson, Corp. et al
Filing
86
MEMORANDUM DECISION AND ORDER - Plaintiffs and Counterdefendants Motion for Partial Summary Judgment (Dkt. 63 ) is DENIED. Plaintiffs and counterdefendants Motion to Strike (Dkt. 77 ) is DENIED as MOOT. The Court will conduct a telephonic status conference with the parties for the purpose of discussing scheduling deadlines. A separate notice of hearing is forthcoming. Signed by Judge Candy W Dale. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (jd)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
GEMINI TECHNOLOGIES,
INCORPORATED, an Idaho
corporation,
Plaintiff,
v.
SMITH & WESSON CORP., a
Delaware corporation, and AMERICAN
OUTDOOR BRANDS
CORPORATION, a Nevada corporation,
Defendants.
SMITH & WESSON CORP., a
Delaware corporation,
Counterclaimant,
v.
GEMINI TECHNOLOGIES,
INCORPORATED, an Idaho
Corporation; RONALD J. MARTINEZ,
an individual; and PHILIP H. DATER,
an individual,
Counterdefendants.
MEMORANDUM DECISION AND ORDER - 1
Case No. 1:18-cv-00035-CWD
MEMORANDUM DECISION AND
ORDER
INTRODUCTION
This case involves a dispute regarding the rights, obligations, and liabilities of the
parties arising out of the purchase by Defendants Smith & Wesson Corp. and American
Outdoor Brands Corp. (collectively, “Smith & Wesson”) of Plaintiff Gemini
Technologies, Inc.’s (“Gemtech”) assets. The parties entered into an Asset Purchase
Agreement (“APA”) on June 29, 2017. The Gemtech sale closed on August 7, 2017.
Gemtech initiated this action against Smith & Wesson, raising multiple contract claims.
Smith & Wesson denies those claims and filed a counterclaim for indemnification against
Gemtech and its former principles, Ronald Martinez and Philip Dater.
Before the Court is Gemtech’s motion for partial summary judgment (Dkt. 63) on
its claim for breach of the parties’ escrow agreement, as well as on each of Smith &
Wesson’s indemnity claims. (Dkt. 63.) Gemtech contends that Smith & Wesson does not
have a valid basis in fact or law to contest Gemtech’s claim for breach of the escrow
agreement, because Gemtech’s counterclaims were either resolved in arbitration or there
are no facts to substantiate them. Accordingly, Gemtech seeks distribution of the 1.5
million dollars still held in escrow, with accrued statutory interest from January 2, 2018,
to the present. Gemtech also filed a motion to strike, (Dkt. 77), objecting to statements
MEMORANDUM DECISION AND ORDER - 2
contained in the declarations of Christopher Scott and Deana McPherson filed by Smith
& Wesson in opposition to the motion for partial summary judgment. 1
After careful consideration of the record, the parties’ briefing and supporting
materials, and oral argument on the motions, the Court will deny Gemtech’s motion for
partial summary judgment and deny its motion to strike as moot. The Court finds that
Gemtech failed to carry its burden regarding Smith & Wesson’s counterclaims, which in
turn precludes entry of judgment as a matter of law on Gemtech’s claim for breach of the
escrow agreement. The Court did not rely upon the statements in the declarations to
which Gemtech objected. The reasons for the Court’s decision are explained below.
FACTS
Ronald Martinez and Philip Dater are the former principles of Gemtech, which
designs and manufactures gun silencers. In early 2017, Smith & Wesson approached
Martinez about purchasing Gemtech. The parties’ negotiations culminated in the
execution of an Asset Purchase Agreement on June 29, 2017. (Dkt. 63-6 at 8.) On the
closing date of August 7, 2017, the parties executed an Escrow Agreement, a Trademark
Assignment, and an Estimated Purchase Price Acknowledgment. The purchase price for
Gemtech also moved to strike certain statements and characterizations made by Smith & Wesson in its
statement of facts as speculative or giving rise to a false inference. Pl. Mem. at 2 – 6. (Dkt. 77-1.) In this
regard, the motion is not well taken. A party may object to material cited to support or dispute a fact that
cannot be presented in a form that would be admissible in evidence. Fed. R. Civ. P. 56(c)(2). The
arguments presented in Gemtech’s brief do not comply with Rule 56, as all of the objections could be
overcome at trial, present additional argument, and essentially go to the weight of the evidence.
Moreover, the Court relied upon the timeline of events as evidenced by the parties’ correspondence, the
language of the agreements signed by the parties, and the documents submitted in support of and in
opposition to the motion for partial summary judgment.
1
MEMORANDUM DECISION AND ORDER - 3
acquiring Gemtech’s assets as set forth in the Estimated Purchase Price Acknowledgment
was $11,395,284.25.
1. The APA 2
Under the terms of the APA, at the Closing, Gemtech agreed to “sell, convey,
assign, transfer, and deliver” to Smith & Wesson, and Smith & Wesson in turn agreed to
“purchase, acquire, and accept delivery of, all assets and properties owned or Used by the
Company,” unless such assets were otherwise excluded. The assets sold included all
accounts receivable, all accounts payable, inventories, supplies, proprietary knowledge,
and all rights of the Company in and to all trademarks “Used in the Business….” APA §
1.1(a). In turn, Smith & Wesson “shall assume…all trade accounts payable…the
Company’s liabilities and other obligations arising subsequent to the Closing….” APA
§1.1(c).
The APA contained a formula for arriving at the purchase price for Gemtech’s
assets, which included a “Working Capital” adjustment. APA § 1.2, Payment for Assets.
The Working Capital adjustment provision provides:
As consideration for the Assets being acquired by Buyer
hereunder, Buyer shall pay to the Company, in the manner set
forth in this Section 1.2, the sum of (i) Ten Million One
Hundred Sixty Thousand Dollars ($10,160,000), plus (ii) the
excess, if any, of the Company’s Working Capital as of the
Closing Date over $1,689,000, minus (iii) the excess, if any,
of $1,689,000 over the Company’s Working Capital as of the
Closing, subject to further adjustment as provided in Section
1.6, Section 7.3, and Section 8.4 hereof (such sum, as so
adjusted from time to time, is herein referred to as the
“Purchase Price”).
2
The APA is in the record as Exhibit 1 to the Declaration of Ronald Martinez, at Docket 63-6.
MEMORANDUM DECISION AND ORDER - 4
APA § 1.2, Payment for Assets.
Because the Purchase Price involved a calculation of Working Capital, the APA
included a formula for estimating the purchase price on the Closing date. Sections 1.3 and
1.4 of the APA contain the parties’ agreement concerning the exchange of the Estimated
Purchase Price, and Section 1.5 set forth the dispute resolution process related to the
Estimated Purchase Price.
The first step in calculating the Estimated Purchase Price required the parties to
“execute and deliver an estimated purchase price acknowledgement, in a form reasonably
acceptable to Buyer and the Company, that sets forth a calculation of estimated Working
Capital and, on the basis of the foregoing, a calculation of the estimated Purchase Price
(the “Estimated Purchase Price”).” APA § 1.3(a). Smith & Wesson then had sixty days
from the Closing Date to prepare and deliver “(i) a balance sheet for the Business and
Assets acquired hereunder dated as of the Closing Date (the “Closing Date Balance
Sheet”), and (ii) a written report (the “Buyer’s Report”) that includes a calculation of the
actual Working Capital and, on the basis of the foregoing, the Purchase Price….” APA §
1.4, Closing Date Balance Sheet and Buyer’s Report.
Gemtech had thirty days to respond to the Buyer’s Report, and could either
“advise Buyer…that the Company’s Accountants (i) agree with Buyer’s calculations in
the Buyer’s Report, or (ii) deem that one or more adjustments are required….” APA §
1.5(a), Disputes.
MEMORANDUM DECISION AND ORDER - 5
If the parties could not resolve their disagreements within 30 days after the date of
the Company’s report, the parties were required to refer the matter to an independent
certified public accountant selected by mutual agreement, and the APA provided that “the
determination of the Settlement Accountants shall be final and shall not be subject to
further review, challenge, or adjustment absent fraud.” Id.
Article III of the APA contained Gemtech’s warranties and representations.
Pursuant to APA § 3.8, Gemtech represented it “has delivered to Buyer true and complete
copies of unaudited Financial Statements” for calendar years ending in 2016, 2015, and
2014, as well as certain “unaudited Financial Statements” for the five months up through
May 31, 2017. APA § 3.8(a). Gemtech further represented that: “All of such Company
Financial Statements present fairly the financial condition and results of operations of the
Company for the dates or periods indicated thereon.” Id. The APA includes also
provisions related to Gemtech’s accounts receivable and inventory. APA Schedule 3.8(c);
APA § 3.8(d).
The APA contemplated that the sale included Gemtech’s intangible rights,
including all trade names, trademarks, or service marks “owned, Used, licensed, or
controlled by the Company and all goodwill associated therewith.” APA § 3.15,
Intangible Rights.
To effectuate the provisions of the APA, Smith & Wesson was granted access to
information and properties from the date of the Agreement through the Closing, which
access included access to all files, records, data, and information “for the purpose of
conducting an investigation of the Company’s financial condition, corporate status,
MEMORANDUM DECISION AND ORDER - 6
operations, prospects, business, and Properties.” APA § 5.1, Buyer’s Access to
Information and Properties.
Article VII set forth certain Post-Closing obligations, including a Post-Closing
Indemnity provision. APA § 7.3(a). According to the Indemnity provision, Gemtech
agreed to “indemnify and hold harmless Buyer” from any and all “Damages arising out
of, resulting from, or in any way related to” a breach of or inaccuracies in any
representations made by Gemtech. APA § 7.3(a), Post-Closing Indemnity
Section 9.1(d) set forth the procedure for making an indemnity claim. The
procedure required the party seeking indemnification to “notify in writing the
Indemnifying Party of such claim or demand stating with reasonable specificity the
circumstances of the Indemnified Party’s claim for indemnification.” APA § 9.1(d).
The Escrow Agreement required Smith & Wesson to deposit funds held in a
segregated escrow account “to be held by Escrow Agent for the purpose of
indemnifications that may become due to Buyer” pursuant to the APA. Escrow
Agreement, Background, Section A. (Dkt. 63-8 at 2.) Washington Trust Bank served as
the escrow agent for the deposit and disbursement of funds pursuant to the terms of the
APA and the Escrow Agreement.
The Escrow Period continued up through August 7, 2019, unless earlier terminated
pursuant to the Escrow Agreement. Escrow Agreement § 1. Definitions. The Escrow
Agreement included a procedure for making a claim for indemnity. Section 6 of the
Escrow Agreement allowed for Smith & Wesson to make a written demand during the
escrow period with a reasonably detailed description of the claim and the basis therefore,
MEMORANDUM DECISION AND ORDER - 7
as well as the amount, if known, asserted by Smith & Wesson for the claim. Escrow
Agreement § 6(a). Gemtech next had 10 calendar days to respond.
If Gemtech objected to the Claim Notice within 10 calendar days, and delivered a
written “Claim Response,” the Escrow Agent could release to Smith & Wesson all
amounts except for the amounts contested. Escrow Agreement § 6(c).
2. The Parties’ Dispute
Smith & Wesson submitted its “Buyer’s Report” to Gemtech on October 20, 2017,
pursuant to APA § 1.5(a). Martinez Decl., Ex. 8 (Dkt. 63-13.) The Buyer’s Report
demanded a purchase price adjustment in Smith & Wesson’s favor in the amount of
$358,821.58, based upon adjustments to accounts receivables, bad debts, inventory, and
accounts payable. (Dkt. 63-13 at 2.) Gemtech disputed the calculation of “Working
Capital” in the Buyer’s Report, and submitted its Seller’s Report on December 4, 2017.
Martinez Decl., Ex. 9. (Dkt. 63-14.) Gemtech demanded a purchase price adjustment in
its favor in the amount of $82,839.61, and detailed its own accounting of adjustments to
inventory, accounts receivables, bad debts, and accounts payable. On January 2, 2018,
Smith & Wesson sent its response to Gemtech’s Working Capital notice and objections.
Martinez Decl., Ex. 5. Smith & Wesson’s letter simply stated it objected to Gemtech’s
calculations, but did not provide further exp0lanation or analysis.
On January 18, 2018, Smith & Wesson submitted a supplemental Buyer’s Report,
demanding a revised purchase adjustment in its favor in the amount of $505,547.56.
Martinez Decl. Ex. 10. The letter outlines the valuation of certain ammunition in
MEMORANDUM DECISION AND ORDER - 8
inventory; physical inventory counts; R&D valuations; and other adjustments to accounts
receivables and inventory.
On August 14, 2018, the Working Capital dispute was submitted to Grant
Thornton, a certified public accounting firm, for arbitration. Martinez Decl. Ex. 11. On
February 4, 2019, Grant Thornton issued a written determination settling the parties’
dispute regarding the Working Capital calculation, and reduced the total Purchase Price
by $138,299.25 in Smith & Wesson’s favor. Martinez Decl. Ex. 11. Further, Grant
Thornton’s determination expressly excluded consideration of Smith & Wesson’s claims
and calculations included in the January 18, 2018 supplemental Buyer’s Report, on the
grounds that the APA did not allow for untimely submitted claims as part of the Working
Capital dispute resolution process. Neither party sought review of the Grant Thornton
determination.
Meanwhile, Smith & Wesson had submitted claim notices to Washington Trust
Bank, the escrow holder, which were copied to Gemtech. The first claim notice was dated
December 22, 2017, referencing APA § 7.3(a)(i) and (ii), claiming $150,000 in invalid
accounts receivables; misappropriated cash in excess of $40,000, and in a second amount
to be determined; unknown amounts representing duplicate shipments overstating
Gemtech sales, profitability, and accounts receivables; unknown amounts regarding other
irregular transactions; a claim that Gemtech misrepresented the status of a trademark it
allegedly used for doing business in the EU (the EU Mark); and demanding a Working
Capital adjustment of $358,821 to the extent the “underlying transactions constitute
MEMORANDUM DECISION AND ORDER - 9
breaches of or inaccuracies in various representations and warranties.” Martinez Decl.
Ex. 4.
Gemtech responded to the December 22, 2017 claim notice the same day,
objecting to Smith & Wesson’s instructions to Washington Trust Bank that it withhold
the remaining $1,500,000.00 held in trust. Gemtech contended in its response letter that
Smith & Wesson: failed to provide a reasonably detailed description of certain claims;
should have discovered these issues earlier; and that the claim for Working Capital
adjustment is duplicative of the issue submitted to the arbitrator. Gemtech further
asserted the claims were not yet ripe. Martinez Decl. Ex. 6, 7.
Additional claim notices from Smith & Wesson ensued on February 27, 2018;
October 16, 2018; February 11, 2019; March 12, 2019; and August 6, 2019. McPherson
Decl., Exs. 3, 4, 5, 6, and 7. (Dkt. 71-2.)
Smith & Wesson also pursued international patent litigation related to the EU
Mark in the spring of 2019. Smith & Wesson claimed it learned in January of 2019 that
Law Enforcement International (LEI) had registered the EU Mark and was using it
internationally to market Gemtech products. On March 8, 2019, Smith & Wesson
submitted an application to the EUIPO to cancel the EU Mark owned by LEI. Felton
Decl. ¶ 7. (Dkt. 63-3.) Smith & Wesson prevailed in the international patent litigation,
and the EUIPO revoked the Gemtech mark owned by LEI. Felton Decl., Ex. 1.
In the claim letters and in its counterclaim in this lawsuit, Smith & Wesson asserts
it is entitled to indemnification pursuant to the APA for: (1) unpaid taxes, fees, and
penalties owed to the state of Oregon; (2) uncollectible accounts receivables; (3)
MEMORANDUM DECISION AND ORDER - 10
inaccurate inventory valuations; (4) pre-acquisition liabilities and obligations; and (5)
inaccurate representations and warranties regarding intellectual property rights related to
the GEMTECH trademark. Smith & Wesson claims in excess of $2,250,000.00 in
damages, and has instructed the escrow holder not to release the 1.5 million dollars
remaining in escrow.
The following table summarizes Smith & Wesson’s counterclaims for
indemnification, and Gemtech’s asserted defenses:
Claim
Unpaid pre-APA tax liabilities
Accounts Receivable
Inventory
Preacquisition liabilities/obligations
Trademark
Total
Source
Oregon
General A/R
Arsenal A/R
Overvalued inventory
Withheld Cash
Defective products
Defective Suppressor
EU Mark
Amount
$607.11
$237,759.15
$219,700.00
$174,535.22
$84,179.51
$36,695.86
$1,725.00
$1,500,000.00
$2,255,201.85
GemTech Defense
denies owed
Collateral estoppel
Collateral estoppel
collateral estoppel
denies owed
denies owed
denies owed
duty to mitigate
Gemtech denies it owed any pre-APA tax liabilities to the state of Oregon or that it
owed Smith & Wesson for any pre-acquisition liabilities. Regarding Smith & Wesson’s
claims for indemnification for uncollectible accounts receivables and alleged inaccurate
inventory, Gemtech asserts that the arbitration proceedings before Grant Thornton
collaterally estop Smith & Wesson’s claims. Last, concerning the trademark claim,
Gemtech contends Smith & Wesson had a duty to mitigate its damages, and denies that it
misrepresented ownership of the EU Mark.
MEMORANDUM DECISION AND ORDER - 11
STANDARDS OF LAW
1.
Summary Judgment
Summary judgment is proper where “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). The moving party has the burden of demonstrating the absence of a
genuine issue of fact for trial. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256
(1986). Once the moving party meets its burden, a party opposing a properly made and
supported motion for summary judgment may not rest upon mere denials but must set out
specific facts showing a genuine issue for trial. Id. at 250; Fed. R. Civ. P. 56(c), (e). In
particular, when the non-moving party bears the burden of proving an element essential
to its case, that party must make a showing sufficient to establish a genuine issue of
material fact with respect to the existence of that element or be subject to summary
judgment. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
An issue is genuine if evidence is produced that would allow a rational trier of fact
to reach a verdict in favor of the non-moving party. Anderson, 477 U.S. at 248. The Court
must assume the truth of direct evidence set forth by the opposing party. See Hanon v.
Dataproducts Corp. 976 F.2d 497, 507 (9th Cir. 1992). However, where circumstantial
evidence is presented, the Court may consider the plausibility and reasonableness of
inferences arising therefrom. See Anderson, 477 U.S. at 249-50; TW Elec. Serv., Inc. v.
Pacific Elec. Contractors Ass’n, 809 F.2d 626, 631-32 (9th Cir. 1987). In that regard, “a
mere ‘scintilla’ of evidence will not be sufficient to defeat a properly supported motion
for summary judgment; rather, the nonmoving party must introduce some ‘significant
MEMORANDUM DECISION AND ORDER - 12
probative evidence tending to support the complaint.’” Summers v. Teichert & Son, Inc.,
127 F.3d 1150, 1152 (9th Cir. 1997).
In ruling on a summary judgment motion, “the judge’s function is not…to weigh
the evidence and determine the truth of the matter but to determine whether there is a
genuine issue for trial.” Anderson, 477 U.S. at 249. “Credibility determinations, the
weighing of the evidence, and the drawing of legitimate inferences from the facts are jury
functions….” Id. at 255.
2.
Applicable Law
Section 9.5 of the APA provides that Delaware law governs disputes concerning
interpretation of the APA. At the hearing, the parties agreed that Delaware law applies to
the contract disputes. 3
Delaware follows the objective theory of contract. See Haft v. Haft, 671 A.2d 413,
417 (Del. Ch.1995); Progressive Int'l Corp. v. E.I. Du Pont de Nemours & Co., No. C.A.
19209, 2002 WL 1558382, at *7 (Del.Ch.2002) (unpublished opinion). Although the law
of contract generally strives to enforce agreements in accord with their makers' intent, the
objective theory considers “objective acts (words, acts and context)” the best evidence of
that intent. Haft, 671 A.2d at 417. Unambiguous written agreements should be enforced
according to their terms, without using extrinsic evidence “to interpret the intent of the
parties, to vary the terms of the contract or to create an ambiguity.” Eagle Indus., Inc. v.
However, both parties contend Idaho law regarding collateral estoppel would apply to other aspects of
the dispute. This issue is not squarely before the Court at this time.
3
MEMORANDUM DECISION AND ORDER - 13
DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997); see also City Investing
Co. Liquidating Trust v. Cont'l Cas. Co., 624 A.2d 1191, 1198 (Del.1993).
Under Delaware law, a contract is not ambiguous merely because the parties
disagree about its interpretation. Whether a contract is ambiguous is determined
according to an objective, reasonable-person standard and is a question of law. See Eagle
Indus., 702 A.2d at 1233 n. 8 (“The true test is what a reasonable person in the position of
the parties would have thought it meant,” not what the parties to the contract intended it
to mean). Words are to be given their ordinary meaning and should not be “torture[d]” to
impart ambiguity where none exists. Rhone–Poulenc Basic Chems. Co. v. Am. Motorists
Ins. Co., 616 A.2d 1192, 1196 (Del. 1992). When the provisions in controversy are
reasonably or fairly susceptible of different interpretations or may have two or more
different meanings, there is ambiguity. In that event, the interpreting court must look
beyond the language of the contract to ascertain the parties' intentions. Eagle Indus., Inc.
v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997).
DISCUSSION
1.
Unpaid Tax Claim
APA § 8.1 states that the Company [Gemtech] and the Stockholders represent and
warrant that “[a]ll taxes owed by the Company…have been paid,” and that “the Company
has withheld and timely paid over all Taxes required to be withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, or third party.” APA § 8.1(a), (b). (Dkt. 63-6 at 40.)
MEMORANDUM DECISION AND ORDER - 14
APA § 8.4 Indemnification for Taxes reads that the Company and the
Stockholders “agree to indemnify, jointly and severally, Buyer…against…any and all
claims…resulting from: A claim by any taxing authority for [] any Taxes of the Business
or related to the Assets allocable to any taxable period ending on or prior to the Closing
Date….” APA §8.4(a)(i). (Dkt. 63-6 at 41.) Gemtech does not dispute the applicability of
APA §§ 8.1 and 8.4.
Smith & Wesson notified Martinez on October 16, 2018, that it received a
statement of account from the Oregon employment tax authority that indicated an amount
of $607.11 was owed. This amount allegedly represented taxes, interest, and penalties
assessed on unpaid tax liabilities for taxes incurred by Gemtech prior to June 29, 2017,
the effective date of the APA. McPherson Decl. Ex. 4. (Dkt. 71-2 at 24-26.)
Gemtech claims it had no prior knowledge of any unpaid tax liabilities in
connection with the APA. In the Declaration of Martinez, he states he reached out to the
State of Oregon tax authorities 4 and “verified that there are no outstanding claims,
including any claims from the Oregon taxing authority relating to Gemtech.” Martinez
Decl. ¶ 22. (Dkt. 63-5.) Martinez does not include reference to any document received
from the Oregon tax authority. Nonetheless, Gemtech argues the damages claimed by
Smith & Wesson are remote, speculative, and uncertain, and therefore not recoverable.
The facts are disputed. On the one hand, the Court has a statement of account
dated October 1, 2018, purporting to be an invoice from the State of Oregon reflecting
4
It is unclear from the record when Martinez made this inquiry.
MEMORANDUM DECISION AND ORDER - 15
tax liabilities incurred by Gemtech prior to June 29, 2017, the effective date of the APA.
On the other, the Court has Martinez’s statement that he verified there were no
outstanding claims from the Oregon taxing authority. Gemtech does not dispute the
meaning of APA § 8.4, or otherwise appear to contest Smith & Wesson’s assertion that
Gemtech must indemnify Smith & Wesson for pre-closing tax liabilities. Rather,
Gemtech relies solely upon Martinez’s testimony that no pre-closing taxes were owed.
The Court cannot decide the factual dispute regarding this claim on summary
judgment, and finds Gemtech has failed to carry its burden on its motion.
2.
Accounts Receivable and Inventory Claims
Gemtech argues Smith & Wesson’s claims for accounts receivables and inventory
are duplicative of the claims submitted during the Working Capital dispute and were
subject to, and resolved by, the Grant Thornton arbitration determination or otherwise
were waived because Smith & Wesson failed to discover these issues during the 60-day
Buyer’s Report period. In response, Smith & Wesson denies that the claims are
duplicative, and contends it was unable to discover the misrepresentations related to
Gemtech’s accounts receivables and inventory during the Buyer’s Report period. Smith
& Wesson asserts that several customers refused to pay their outstanding accounts for
various reasons when Smith & Wesson attempted to collect amounts owed. Smith &
Wesson contends it gave notice of the accounts receivable claims to Gemtech on January
18, 2018, but that Gemtech objected to the inclusion of these claims in the arbitration
proceedings. The inventory claim is premised upon Smith & Wesson’s assertion that it
MEMORANDUM DECISION AND ORDER - 16
made additional inventory adjustments beyond those made by Grant Thornton “due to the
decrease in value of the inventory” that Smith & Wesson had purchased.
First, the Court does not interpret the APA as precluding the submission of postclosing indemnity claims by Smith & Wesson to Gemtech related to inventory and
accounts receivable. Acceptance of Gemtech’s argument that all claims relating to
inaccurate or unsaleable inventory and uncollectible accounts receivable must have been
raised during the binding arbitration process, and within the 60-day Buyer’s Report
period, would render the entirety of Sections 7.3 and 9.1 of the APA, and the Escrow
Agreement, a virtual nullity. Further, the dispute resolution provision related to the
Working Capital adjustment contains no qualifying language encompassing “all known
and unknown” adjustments to Working Capital. And, the unambiguous language of the
Limitation on Liability section provides for a two-year indemnity period. APA § 9.1.
According to Section 7.3, the Post-Closing Indemnity clause, all of the representations set
forth in Sections 3.8 through Section 3.27 “survive the Closing,” and any “breach of, or
inaccuracy in, any of the representations made by” Gemtech constitutes “a breach or
default in performance….”
In contrast, the provisions in the APA relating to the calculation of Working
Capital and the settlement of the Purchase Price, reflect different considerations. Grant
Thornton deemed the provisions of Sections 1.4 and 1.5 of the APA unambiguous, and
limited its review of the Working Capital dispute to only those items set forth in the
written submissions allowed during the Buyer’s Report period and Company Response
MEMORANDUM DECISION AND ORDER - 17
period following the Closing Date. The Working Capital dispute resolution procedures
were expressly limited to arriving at a final adjusted Purchase Price.
Nonetheless, the Court cannot resolve the parties’ dispute on summary judgment.
It is unclear from the record whether the indemnity claims raised by Smith & Wesson are
duplicative of the Working Capital adjustment made by Grant Thornton when it valued
accounts receivables and inventory as part of the Working Capital calculation. The Court
is ill-equipped to parse through, line by line, the accounting records reviewed by Grant
Thornton, compare them to the records comprising Smith & Wesson’s disputed accounts
receivable and inventory claims, and reconcile the two. Further, the parties dispute what
could or should have been included in the Working Capital dispute resolution process. On
the one hand, Smith & Wesson claims it could not have discovered the alleged
inaccuracies in the Gemtech accounts receivables and inventory during the limited 60day Buyer’s Report period. Yet, Gemtech argues Smith & Wesson had access to
Gemtech’s books and records, and had sufficient resources to conduct a thorough review.
The Court cannot resolve this dispute on summary judgment.
Thus, while some of the accounts receivable and inventory claims by Smith &
Wesson may be precluded because they could have or should have been raised before the
arbitrator, the Court cannot make such a determination on the record before it. The Court
therefore finds Gemtech has not carried its burden on summary judgment related to Smith
& Wesson’s accounts receivable and inventory claims.
MEMORANDUM DECISION AND ORDER - 18
3.
Preacquisition Liabilities and Obligations– Withheld Cash, Defective
Products, and Suppressor Claim
Smith & Wesson demanded indemnification for several preacquisition liabilities
and obligations it claims Gemtech failed to disclose in its records. First, Smith & Wesson
demanded reimbursement of $84,179.51 in cash “misappropriated by Mr. Ron Martinez.”
McPherson Decl., Ex. 5. According to one of the attachments to the February 11, 2019
demand letter, after Smith & Wesson acquired Gemtech, “the former controller continued
to collect A/R cash receipts and web sale credit card charges” into a bank account not
owned by Smith & Wesson. McPherson Decl., Ex. 5. Second, Smith & Wesson
demanded reimbursement for alleged defective products in the amount of $36,695.86, for
products sold by Gemtech prior to Closing that Smith & Wesson replaced. McPherson
Decl., Ex. 6. And third, in a letter dated February 27, 2018, Smith & Wesson requested
indemnification for $1,725.00 for a defective and discontinued suppressor manufactured
and sold prior to closing, for which a Gemtech customer demanded a refund. McPherson
Decl., Ex. 3. (Dkt. 71-2 at 22.)
Gemtech argues Smith & Wesson does not have a factual basis for these claims,
because Smith & Wesson has not provided proof of actual damages and is therefore not
entitled to recover for them. However, in its reply, Gemtech does not dispute the
evidence presented by Smith & Wesson to support these indemnity claims. Rather,
Gemtech reiterated its argument that these claims related to the purchase of assets under
the APA were capable of discovery during the Buyer’s Report period, and were not the
product of fraud or misrepresentation. Accordingly, Gemtech contends these claims are
MEMORANDUM DECISION AND ORDER - 19
also barred by res judicata, because they should have been raised instead during the
arbitration proceedings.
The Court cannot resolve the disputes related to these claims for the same reasons
discussed above regarding Smith & Wesson’s claims for indemnification related to
accounts receivable and inventory. The record is unclear whether these claims bear any
relationship to the Working Capital calculation, and whether Smith & Wesson could or
should have discovered them during the Buyer’s Report period.
4.
EU Mark
Smith & Wesson contends that, because LEI owned and registered the trademark
GEMTECH in the EU in 2005, Gemtech’s representations in Section 3.15 of the APA
constitute a breach of the parties’ agreement. McPherson Decl., Ex. 5. On August 6,
2019, Smith & Wesson demanded $1,500,000 in damages for Gemtech’s
misrepresentation that it owned the EU Mark when the mark was registered to LEI in the
EU. McPherson Decl., Ex. 7.
Gemtech argues Smith & Wesson does not have a valid trademark indemnification
claim, because: Smith & Wesson suffered no damages; Smith & Wesson failed to
mitigate any damages, as it could have purchased the mark from LEI for $100,000.00, or
accepted a free license from LEI; Smith & Wesson obtained a revocation of the EU
trademark; and Gemtech is not responsible for damages because Gemtech did not own
the EU Mark and never represented that it did.
According to the plain language of APA § 3.15, the list and description in
Schedule 3.15 of Gemtech’s marks constituted a list of “all” trademarks of any type
MEMORANDUM DECISION AND ORDER - 20
“owned, Used, licensed, or controlled by the Company,” and that the Company “owns or
has the right to use and shall as of the Closing Date own or have the right to use
any…Trademark Rights…that are necessary or customarily Used by the Company for the
ownership, management or operation of its Properties…including, but not limited to, the
Intangible Rights listed on Schedule 3.15.”
APA § 3.25 states that Gemtech “owns, leases, or has the legal right to use all the
Assets, and Buyer will be vested with good, valid, marketable, and undivided title to the
Assets….The Assets constitute all of the assets necessary to conduct the Business as
currently being conducted, and no Person other than the Company owns any assets used
in the Business.”
When capitalized, “Used” has a specific definition. It is defined as property
“owned, leased, licensed, or otherwise held by the Company which were acquired for use
or held for use by the Company in connection with the Company’s business….” APA §
10.26.
Gemtech represented in the APA that the list of marks on Schedule 3.15
comprised only those owned, “Used,” licensed or controlled by Gemtech. Prior to the
Closing Date, Martinez responded to an inquiry concerning Gemtech’s trademarks that
Gemtech transferred “only domestic” marks for Gemtech, “no foreign.” Martinez Decl.,
Ex. 13. Schedule 3.15 does not include reference to the Gemtech mark owned by LEI.
According to Felton’s declaration, LEI owned the EU Gemtech mark, and it was
registered and used by LEI, not Gemtech. Further, the complaint does not specifically
MEMORANDUM DECISION AND ORDER - 21
mention sales in the EU, instead referring generally to “international sales.” First Am.
Compl. at 7 – 8. (Dkt. 54.)
However, Smith & Wesson provided documents in support of its opposition to the
motion that purportedly demonstrate Gemtech used the mark in the EU. Decl. of Squires,
Exs. 2 and 3. (Dkt. 71-3.) These documents reflect that Gemtech’s Director of Global
Sales, who was located in Meridian, Idaho, was discussing potential sales of Gemtech
products with customers in Denmark and Belgium in March and May of 2017. The sales
representative’s email signature included Gemtech’s mark.
On the record before it, the facts are disputed concerning Gemtech’s use of the EU
Mark. The Court has evidence (albeit limited) before it in the form of correspondence
between a representative of Gemtech in Idaho and customers in Denmark and Belgium
sufficient to create a disputed issue of fact as to Gemtech’s use of the mark to market its
products in the EU. Otherwise, the Court has no evidence concerning how Gemtech may
have been using the EU Mark to generally market its products in the EU. And, although
Gemtech’s representations to Smith & Wesson never claimed ownership of any foreign
marks, the APA arguably encompasses disclosure of any marks “Used” by Gemtech in
connection with its business. The Court cannot resolve this factual dispute as a matter of
law in Gemtech’s favor under the facts presently before the Court, and therefore finds
that Gemtech did not carry its burden on its motion for summary judgment.
MEMORANDUM DECISION AND ORDER - 22
CONCLUSION
The Court finds that Gemtech, in seeking to invalidate every one of Smith &
Wesson’s indemnity claims to prevail on its counterclaim, did not carry its burden on its
motion for summary judgment. As discussed above, there are genuine disputes as to the
material facts, and the record before the Court does not clearly establish that Gemtech is
entitled to judgment as a matter of law.
ORDER
NOW THEREFORE IT IS HEREBY ORDERED:
1)
Plaintiff’s and Counterdefendants’ Motion for Partial Summary Judgment
(Dkt. 63) is DENIED.
2)
Plaintiff’s and Counterdefendants’ Motion to Strike (Dkt. 77) is DENIED
as MOOT.
3)
The Court will conduct a telephonic status conference with the parties for
the purpose of discussing scheduling deadlines. A separate notice of
hearing is forthcoming.
DATED: June 27, 2022
_________________________
Honorable Candy W. Dale
United States Magistrate Judge
MEMORANDUM DECISION AND ORDER - 23
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