Redf-Organic Recovery, LLC v. Kafin et al

Filing 27

OPINION & ORDER: Plaintiff's application for a preliminary injunction is denied, Defendant's motion to dismiss is denied, and the action is stayed pending arbitration. (Signed by Judge John F. Keenan on 11/19/2012) (ft)

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: Nov. 19, 2012

UNITED STATES DISTRICT COURT
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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SOUTHERN DISTRICT OF NEW YORK
REDF ORGANIC RECOVERY, LLC,
-----------------------------------------------------------x :
In re FANNIE MAE 2008 SECURITIES
::
08 Civ. 7831 (PAC)
Plaintiff,
OPINION &
LITIGATION
::
09 MD 2013 (PAC)
:
ORDER
:
-against::
OPINION & ORDER
:
12 Civ. 7973 (JFK)
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STEVE KAFIN and ORGANIC DYNAMICS, LLC
:
:
Defendants.
:
----------------------------------------XDistrict Judge:
HONORABLE PAUL A. CROTTY, United States
JOHN F. KEENAN, United States District Judge:
Before the Court is Plaintiff REDF Organic Recovery, LLC’s
BACKGROUND1

(“REDF” or “Plaintiff”) this decade saw a boom a home financing which was fueled, among
The early years of application for in preliminary injunction
requiring Defendant Steve rates and lax credit conditions. New lending instruments, such as
other things, by low interest Kafin (“Kafin” or “Defendant”) to give
power of attorney to (high credit risk loans) and Alt-A pursue a patent
subprime mortgages REDF so that REDF can mortgages (low-documentation loans)
application currently Borrowers played a role too; they took on unmanageable risks on the
kept the boom going. pending before the U.S. Patent and
Trademark Office (“PTO”) would set to to rise and that refinancing options would always be
assumption that the market but continue be deemed “abandoned” on
November 23, in the future. Lending discipline Order to in the system. Mortgage originators did
available 2012. Pursuant to an was lacking Show Cause entered
on October 26, 2012, Plaintiffs were also directed torisk on their books, the
not hold these high-risk mortgage loans. Rather than carry the rising show cause
why the matter should not be referred to arbitration. The
originators sold their loans into the secondary mortgage market, often as securitized packages
matter was heard on November 15, 2012. For the reasons that
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
follow, the preliminary injunction is denied and the action is
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
stayed pending arbitration.
and home prices began to fall. In light of the changing housing market, banks modified their
I. Background
lending practices and became unwilling to refinance home mortgages without refinancing.
REDF is a Delaware company with its principal place of
business in otherwise indicated, all references cited as “(¶ _)”(Compl. ¶ 2.)are to the Amended Complaint,
Defendant
1
Unless Bernardsville, New Jersey. or to the “Complaint”
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.

Kafin is Managing Member of co-defendant Organic Dynamics.

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Kafin is a resident of Miami Beach, Florida, and Organic
Dynamics is a Florida company with a principal place of business
in Miami Beach, Florida. (Compl. ¶¶ 3-4.)

Plaintiff proffers

that venue in this Court is proper pursuant to a forum selection
clause in a license agreement entered into by the parties (the
“License Agreement”). (Compl. ¶ 6.)
The License Agreement between Organic Recovery and REDF
provided REDF with a license for certain fertilizer technology
owned by Organic Recovery.

Specifically, REDF acquired

exclusive rights in New York and non-exclusive rights in the
rest of the United States to technology and intellectual
property used to convert food and other organic waste into
liquid organic fertilizer.

REDF facilitates the purchase of the

liquid organic fertilizer by commercial and organic farmers, as
well as home gardeners. (Compl. ¶¶ 8-9.)

Under the License

Agreement, Organic Recovery was required to pursue a patent for
this technology.

Organic Recovery filed the patent application,

and was awaiting response from the PTO as of March 29, 2009,
when it filed for Chapter 7 bankruptcy in the Southern District
of Florida.
As part of the bankruptcy proceeding, Kafin purchased
Organic Recovery’s assets, which included the technology that is
the subject of the License Agreement.

Upon purchasing the

technology, Kafin asserted that he was not bound by the License
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Agreement with REDF, and the issue was litigated before the
Florida bankruptcy court.

In December 2011, the Florida

bankruptcy court found that the License Agreement is binding
upon Kafin. (Compl. ¶¶ 9-10.)

Plaintiff contends that since

Kafin is bound by the License Agreement, he must continue to
pursue the patent application, and keep REDF apprised of his
progress. (Compl. ¶¶ 12-15.)
In May, the PTO issued a “non-final” rejection of certain
aspects of the patent application, and asked Kafin to respond
within three months with more comprehensive information about
the technology.

Because the PTO also gave a three-month grace

period, the deadline for Kafin to respond is November 23, 2012.
If he does not submit a reply by the deadline, the patent
application will be deemed “abandoned.” (Compl. ¶¶ 20-23.)
Kafin informed REDF that he probably will not pursue the patent
application, based upon advice from his patent attorney that the
technology is likely not patentable. (Compl. ¶¶ 22-25.)
REDF contends that it has invested substantial amounts of
money and effort in commercializing the technology, expecting
that it would be patented.

REDF formed a “Joint Venture

Sublicensee” named California Safe Soil (“CSS”), constructed a
plant in West Sacramento, California, to test the technology,
and explored contracts with supermarkets to advance the
availability of this technology.

These steps were taken “as a
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first step before proceeding with the construction and operation
of larger, commercial-scale” facilities that use this
technology. (Compl. ¶¶ 15-17).

REDF represents that the patent

application is of critical importance to the future viability of
REDF and CSS.

REDF further states that it is working with a

patent attorney, who believes the technology is patentable, and
has prepared a response to the PTO with the additional
information it required.
II. Discussion
The Court will first address the application for a
preliminary injunction.

Next, the Court will consider

Defendant’s motion to dismiss, which he filed on November 15,
2012.

At oral argument that same day, Plaintiff stated that

response papers were unnecessary, citing the time-sensitive
nature of this dispute.

Finally, the Court will consider the

arbitrability of this dispute.
A.

Preliminary Injunction

Preliminary injunctive relief is “one of the most drastic
tools in the arsenal of judicial remedies.” Hanson Trust PLC v.
SCM Corp., 774 F.2d 47, 60 (2d Cir. 1985).

Because it is such

an extraordinary remedy, it should be granted only “when the
intervention of a court of equity is essential to protect a
party’s property rights against injuries that would otherwise be
irremediable.” Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 68
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(2d Cir. 1999).

Upon demonstration that legal remedies are

inadequate to make a party whole, a movant may obtain injunctive
relief upon the showing of:

“(1) irreparable harm or injury,

and (2) either (a) a likelihood of success on the merits or (b)
sufficiently serious questions going to the merits to make them
a fair ground for litigation and a balance of the hardships
tipping decidedly in favor of the movant.” Earthweb Inc. v.
Schlack, 71 F. Supp. 2d 299, 308 (S.D.N.Y. 1999).
Courts have long recognized that irreparable harm is the
sine qua non of a preliminary injunction.

Demonstrating the

mere possibility of harm is not sufficient to warrant the
drastic imposition of a preliminary injunction.

Rather, the

movant must present sufficient proof to provide a reasonable
basis for believing that the injury is real and imminent. See
Time Warner Cable, Inc. v. DirecTV, Inc., 497 F.3d 144, 153 (2d
Cir. 2007).
Plaintiff has failed to demonstrate irreparable harm
primarily because the “abandonment” of a patent application is
reversible, pursuant to federal regulation.

Under 37 C.F.R.

§ 1.137, which governs the PTO’s standard for reviving a patent
that has been deemed abandoned, “[r]evival of [an] abandoned
application” is permitted where the applicant can show that the
delay was either unavoidable or unintentional. See 37 C.F.R.
§ 1.137.

The application’s abandonment will be deemed
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unavoidable where the applicant can demonstrate that he
exercised the care and diligence “generally used and observed by
prudent and careful men in relation to their most important
business.” Kapusta v. Gale Corp., 457 F. Supp. 2d 1051, 1067
(E.D. Cal. 2006).
In the Court’s view, Kafin’s abandonment of this patent
would fall squarely within the definition of “unavoidable,” as
applied against REDF.

REDF has taken every step possible to

avoid abandonment of this application, yet has been unable to do
so.

Its diligence in trying to avoid the lapse of the PTO’s

deadline is evidenced by the litigation it has pursued in both
Florida and New York, and by the fact that it has employed a
patent lawyer and has a response already prepared for the PTO.
Should Plaintiff assume control of the patent application, the
Court is confident that the PTO will permit the application to
be revived.
In Futures Technology, Ltd. v. Quigg, 684 F. Supp. 430 (E.
D. Va. 1988), plaintiff entered into a contract with Enertronics
in 1982, which called for Enertronics to develop inventions and
file the corresponding patent applications.

According to the

contract, Enertronics was to hold any patents it obtained in a
fiduciary capacity for plaintiff, and plaintiff was to be the
equitable owner of the inventions and patent applications. Id.
at 430.

After a dispute between the parties regarding
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Enertronics’ dubious diligence in pursuing one of the patent
applications, plaintiff assumed control of that application,
which had already been deemed abandoned.

The court ruled that

plaintiff, as equitable owner, had a right to rely on
Enertronics’ performance under the contract and that plaintiff
had exercised diligence by inquiring about the status and was
given assurances by Enertronics that work was being done on the
application, when in fact, the work was not being done. Id. at
431.

The case at bar presents a similar situation.

If REDF is

permitted to assume control of the patent application, its
petition for revival would reflect that it (1) was diligent in
inquiring about the status of the application, (2) pursued every
avenue in an attempt to avoid lapse of the PTO’s deadline, and
(3) was denied the power to intervene when it appeared that
Kafin would not prosecute the patent.

This evidence should be

more than sufficient for the PTO to permit revival of the
application.
Plaintiff’s assertion of irreparable harm also fails
because it is speculative.

As discussed above, Plaintiff can

only speculate that the PTO will deny a request to revive the
patent.

Moreover, even if REDF were to assume the application,

the patent may nonetheless be denied. Therefore, Plaintiff has
not met the high burden of proving “actual” harm absent a
preliminary injunction. See Grand River Enter. Six Nations, Ltd.
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v. Pryor, 481 F.3d 60, 66 (2d Cir. 2007) (“To satisfy the
irreparable harm requirement, [p]laintiffs must demonstrate that
absent a preliminary injunction they will suffer an injury that
is neither remote nor speculative, but actual and imminent, and
one that cannot be remedied if a court waits until the end of
trial to resolve the harm.”).
B.

Motion to Dismiss

Defendant has also filed a motion to dismiss, for (1) lack
of personal jurisdiction, (2) forum non conveniens, and (3)
failure to state a cause of action.

This motion is dismissed

for the reasons stated below.
The first two bases for dismissal are meritless in light of
the forum selection clause in the License Agreement. (Goldstein
Letter, Exh. F at 29-30 (“Legal proceedings commenced by any
party arising hereunder shall be brought exclusively in the
courts sitting in New York.

Each Party irrevocably and

unconditionally submits to the jurisdiction of such courts.”).)
Where a contract contains a forum selection clause, a party to
that contract may not litigate forum or venue.

See D.H. Blair &

Co., Inc. v. Gottdiener, 462 F.3d 95, 103 (2d Cir. 2006)
(“Parties can consent to personal jurisdiction through forumselection clauses in contractual agreements.”), Nat’l Equip.
Rental, Ltd. v. Szukhent, 375 U.S. 311, 315-16 (1964) (“And it
is settled . . . that parties to a contract may agree in advance
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to submit to the jurisdiction of a given court.”); see also Med.
Devel. Mgmt., Inc. v. New You Publ., LLC, 11 Civ. 8438, 2012 WL
4459909 at *4 (S.D.N.Y. Sept. 25, 2012) (“It simply defies logic
that it would be inconvenient for the parties to adjudicate the
2010 Agreement claims in New York, when the parties, by virtue
of their own mandatory forum selection clause, must litigate the
Loan Agreement claims here.”).
Next, Defendant’s 12(b)(6) motion is meritless because
Plaintiff has adequately stated its claim for breach of contract
and breach of the covenant of good faith and fair dealing.
Plaintiff has alleged that (1) the License Agreement is binding
upon both parties, (2) Kafin has failed to provide the PTO with
the information it requested or keep Plaintiff apprised of the
status of the application, and (3) such action was required
under the License Agreement.

These allegations, taken as true,

would establish that Kafin breached the License Agreement.
C.

Arbitration

Plaintiff does not dispute that the License Agreement
contains a valid arbitration clause, but rather contends that
Defendant has waived his right to enforce the arbitration
provision by submitting to litigation in Florida two and a half
years ago.
The right to arbitrate is “an affirmative defense that is
waived where the party seeking to raise the defense engages in
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protracted litigation that results in prejudice to the opposing
party.” Brookridge Funding Corp. v. Nw. Human Res., Inc., 170 F.
App’x 170, 171 (2d Cir. 2006).

“Waiver of arbitration is not to

be lightly inferred.” La. Stadium & Exposition Dist. v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 626 F.3d 156, 161 (2d Cir.
2010) (quoting PPG Indus., Inc. v. Webster Auto Parts, Inc., 128
F.2d 103, 107 (2d Cir. 1997)).

In determining whether a party

has waived its right to arbitration by expressing its intent to
litigate the dispute in question, the Court considers three
factors:

“(1) the time elapsed from when litigation was

commenced until the request for arbitration; (2) the amount of
litigation to date, including motion practice and discovery; and
(3) proof of prejudice.” La. Stadium & Exposition Dist., 626
F.3d at 159.

“Prior litigation of the same legal and factual

issues as those the party now wants to arbitrate results in the
waiver of the right to arbitrate.” Doctors Assocs., Inc. v.
Distajo, 107 F.3d 126, 133 (2d Cir. 1997).

There is no “rigid

formula” or “bright-line rule” for identifying when a party has
waived its right to arbitration; rather, “the above factors must
be applied to the specific context of each particular case.” La.
Stadium & Exposition Dist., 626 F.3d at 159.
Plaintiff argues that Defendant took affirmative steps
against asserting the right to arbitrate through his
participation in the Florida litigation.
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According to

Plaintiff, over the last two and a half years, Defendant
participated in depositions, document productions, summary
judgment motions, and a trial related to Defendant’s substantive
claims as to the enforceability of the License Agreement.
As Judge McMahon noted, and this Court agrees, Defendant’s
participation in the Florida litigation does not amount to a
waiver of arbitration.

“The dispute here in issue is an alleged

breach of the License Agreement, while the prior litigation
between the parties involved whether the License Agreement was
valid and binding.

Those are two different disputes, and it

appears to this court that as soon as the breach of Agreement
was raised with a court, defendants asserted their right to
arbitration.” (Scheduling Order ¶ 2.)

Indeed, Defendant’s

invocation of the arbitration clause at this stage of the
proceeding is perfectly reasonable.

The issues before the

Florida court involved whether Defendant Kafin was subject to
the License Agreement.

It would have been nonsensical – and

detrimental to his position – for Kafin to invoke the
arbitration clause of an agreement to which he did not believe
he was a party.
Next, the Court will consider whether Plaintiff has been
prejudiced by the fact that Kafin did not assert his right to
arbitrate until now.

Prejudice “can be substantive, such as

when a party loses a motion on the merits and then attempts, in
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effect, to relitigate the issue by invoking arbitration, or it
can be found when a party too long postpones his invocation of
his contractual right to arbitration, and thereby causes his
adversary to incur unnecessary delay or expense.” Kramer v.
Hammond, 943 F.2d 176, 179 (2d Cir. 1991).

“Such prejudice has

been found where a party seeking to compel arbitration engages
in discovery procedures not available in arbitration, makes
motions going to the merits of an adversary’s claims, or delays
invoking arbitration rights while the adversary incurs
unnecessary delay or expense.” 170 F. App’x at 171.
As discussed above, Kafin invoked his right to arbitration
as soon as the Florida court determined that he was a party to
the License Agreement.

Therefore, Defendant cannot be accused

of causing Plaintiff to incur unnecessary delay.

In addition,

Plaintiff’s breach of contract claim against Defendant has not
yet been litigated.

As a result, Plaintiff cannot maintain that

Defendant is attempting to relitigate any issue through
arbitration.
Given the unambiguous arbitration clause contained in the
License Agreement, (Goldstein Letter, Exh. F at 29-30 (“The
Parties agree that . . . each of them shall make bona fide
efforts to resolve any dispute . . . in accordance with binding
arbitration.”)), the Court cannot contravene the parties’
contractual rights absent clear evidence that the right has been
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waived.

intiff has failed to demonstrate that Kafin was

unreasonable in waiting to assert his right to arbitration.
Additionally, Plaintiff has not shown that it would suffer any
prejudice if this dispute were sent to arbitration.

Therefore,

the agreed-upon arbitration clause must be upheld.
III. Conclusion

For the foregoing reasons, Plaintiff's application for a
preliminary injunction is denied, Defendant's motion to dismiss
is denied, and the action is stayed pending arbitration.

SO ORDERED.

Dated: New York, New York
November / / ' 2012

United States District Judge

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