Digimarc Corporation v. Verance Corporation

Filing 139

ORDER: The Court ADOPTS Magistrate Judge Jelderks's Findings and Recommendation and DENIES Defendant Verance's Motion 13 to Dismiss or Stay this Action and to Compel Arbitration, DENIES Defendant Verance's Motion 69 for Partial Summary Judgment, and GRANTS in part and DENIES in part Plaintiff Digimarc's Motion 55 for Partial Summary Judgment. Signed on 01/20/2012 by Judge Anna J. Brown. See attached 10 page Order for full text. (bb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
PORTLAND DIVISION

DIGIMARC CORPORATION,
an Oregon corporation,

10-CV-1489-BR
ORDER

Plaintiff,
v.
VERANCE CORPORATION,
Defendant.
BROWN, Judge.
On September 19, 2011, Magistrate Judge John Jelderks
issued Findings and Recommendation (#106)1 in which he
recommended this Court DENY Defendant Verance Corporation’s
Motion (#13) to Dismiss or Stay this Action and to Compel
Arbitration, DENY Verance’s Motion (#69) for Partial Summary
Judgment, and GRANT in part and DENY in part Plaintiff Digimarc

1

After issuance of the Magistrate Judge’s Findings and
Recommendation, this case was reassigned to this Court.
Nevertheless, the Court will review the Findings and
Recommendation in accordance with the applicable standards.
1 - ORDER

Corporation’s Motion (#55) for Partial Summary Judgment.2

This

matter is now before the Court under 28 U.S.C. § 636(b)(1) and
Federal Rule of Civil Procedure 72(b).
When any party objects to any portion of the magistrate
judge's findings and recommendation, the district court must make
a de novo determination of that portion of the magistrate judge's
report.

28 U.S.C. § 636(b)(1).

See also United States v. Reyna-

Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003)(en banc); United
States v. Bernhardt, 840 F.2d 1441, 1444 (9th Cir. 1988).

For

any portion of the findings and recommendation to which the
parties do not object, the court is relieved of its obligation to
review the factual record de novo, Reyna-Tapia, 328 F.3d at 1121,
and reviews de novo only the magistrate judge’s conclusions of
Barilla v. Ervin, 886 F.2d 1514, 1518 (9th Cir. 1989),

law.

overruled on other grounds by Simpson v. Lear Astronics Corp.,
77 F.3d 1170, 1174 (9th Cir. 1996).
Neither Verance nor Digimarc objected to the Magistrate
Judge’s Findings and Recommendation as to Verance’s Motion (#69)
for Partial Summary Judgment or as to Digimarc’s Motion (#55) for
Partial Summary Judgment to the extent that the Magistrate Judge
found genuine disputes of material facts exist as to the amount
of damages incurred by Digimarc arising from Verance’s breach of
2

The Magistrate Judge denied Verance’s Motions (#40) to
Strike or in the Alternative to Stay Defendant’s Motion to
Dismiss Pending Discovery and (#80) to Stay Discovery.
2 - ORDER

contract.

Having reviewed the legal principles de novo as to

those portions of the Findings and Recommendation to which the
parties do not object, the Court does not find any error.
Verance filed timely Objections to the Magistrate Judge’s
Findings and Recommendation as to its Motion (#13) to Dismiss or
Stay this Action and to Compel Arbitration and to Digimarc’s
Motion (#55) to the extent that the Magistrate Judge found
Verance liable for breach a licensing agreement between the
parties.
The Court, therefore, reviews de novo those portions of the
Magistrate Judge’s Findings and Recommendation.

BACKGROUND
Digimarc alleges Verance breached a licensing agreement by
which Verance agreed to pay royalties and fees to Digimarc for
the right to use Digimarc’s patents relating to “Audio Copy
Protection” and “Audiovisual Copy Protection”; i.e., “Fields of
Use” in Verance’s products.

Under the agreement, Verance was

required to submit quarterly reports to Digimarc accounting for
net revenues that Verance received from the sale of any of its
products that were subject to the licensing agreement.

Verance

agreed to pay certain percentages of those revenues to Digimarc
as “contingent licensing fees.”

Under the agreement, disputes

were to be resolved in state or federal courts in Oregon.
3 - ORDER

Digimarc alleges Verance breached the licensing agreement by
(1) not making payments under the agreement, (2) granting
itself a credit of payments previously made under the agreement,
and (3) filing an action in Delaware seeking a declaration that
the licensing agreement is void.

Digimarc seeks damages, an

order requiring Verance to perform its obligations under the
agreement, a constructive trust for assets and funds that Verance
realized, and an injunction halting the Delaware patent
litigation.

VERANCE’S MOTION TO DISMISS OR STAY
AND TO COMPEL ARBITRATION
In September 2010 Verance submitted a quarterly report to
Digimarc reflecting its net revenues from the sale of its
licensed products and took a “credit” in the amount $1,851,100
after reallocating net revenues from 2003 forward that were
generated from products it sold that were otherwise subject to
the licensing agreement between the parties.

Digimarc contends

Verance was not entitled to such a credit.
Verance contends the parties’ dispute in any event should be
arbitrated in accordance with the terms of the licensing
agreement between the parties subject to the provisions of the
Federal Arbitration Act (FAA), 9 U.S.C. §§ 2 and 3.

Accordingly,

Verance asserts this case should be dismissed or stayed pending

4 - ORDER

such arbitration.
The Magistrate Judge recommends this Court deny Verance’s
Motion (#13) because “[n]one of the specific, narrow, arbitration
provisions in the Agreement apply to the circumstances giving
rise to Digimarc’s breach of contract claim.”
Verance objects to the Magistrate Judge’s recommendation on
the ground that specific provisions in the licensing agreement
require the parties’ dispute to be arbitrated.

Accordingly,

Verance urges this Court to reject the Magistrate Judge’s
recommendation and to dismiss this case or to stay it pending the
outcome of such arbitration.
Digimarc, in turn, contends the licensing agreement does not
provide for arbitration of the specific disputes between the
parties in this case.
Standards
Under the Federal Arbitration Act (FAA), agreements to
resolve disputes in “a transaction involving commerce” by
arbitration are generally “valid, irrevocable, and enforceable.”
9 U.S.C. § 2.

In an action otherwise subject to arbitration,

the court “shall on application of one of the parties stay the
trial of the action until such arbitration has been had.”
9 U.S.C. § 3.

“The FAA thereby places arbitration agreements on

an equal footing with other contracts, and requires courts to
enforce them according to their terms.”

5 - ORDER

Rent-A-Car, West, Inc.

v. Jackson, 130 S. Ct. 2772, 2778 (2010)(internal citation
omitted).
The FAA “manifest[s] a ‘liberal federal policy favoring
arbitration agreements.’”

Davis v. O’Melveny & Myers, 485 F.3d

1066, 1072 (9th Cir. 2007)(internal citation omitted).
Analysis
There are three separate arbitration provisions in the
parties’ licensing agreement.

The arbitration provision at issue

is set forth in “Amendment Number One to the Original DigimarcVerance Agreement.”
Section 7 of the Amendment addresses “Contingent License
Fees [to be paid] to Digimarc” under the licensing agreement.
Section 7.1.3.2 provides:

“If market conditions change, and

[Verance] sell[s] Licensed Products that fall within [specified]
Fields of Use,” the contingent license fees payable to Digimarc”
will be applied in a particular manner.

Emphasis added.

Section 7.1.3.3 requires the parties “[w]ith respect to
Section 7.1.3.2” to “negotiate in good faith to determine the
Portion of Verance Net Revenues allocable to [Digimarc’s]
Licensed Products and Services within the Fields of Use [i.e.,
Verance’s “Audio Copy Protection” and “Audiovisual Copy
Protection” products] for a period not to exceed thirty days
after the date Digimarc has received written notice from Verance
that such an allocation is required.”
6 - ORDER

Emphasis added.

If

negotiations fail, the dispute “will be settled by arbitration”
in accordance with Section 6.4 of the original agreement, which
describes the procedure to be followed when invoking and
conducting “expedited” arbitrations.
The alleged arbitrable issue pertains to a $1.866 million
“credit” that Verance applied against its outstanding obligations
to Digimarc in September 2010.

Verance’s entitlement to such a

credit allegedly arises as a result of Verance’s “misallocation
of revenue” in 2003 relating to certain of its products that at
the time were purportedly within the field of use as described in
the agreement between the parties.

Verance contends none of the

above contractual provisions foreclose its right to arbitrate
whether Verance is entitled to a credit from Digimarc flowing
from the reallocation of such past revenue.

To support its

position that it is entitled to such a credit, Verance relies on
Section 9.5 of the original agreement between the parties (also
incorporated in Amendment Number One) that provides in relevant
part:
If Verance has to reverse previously
recognized Verance Net Revenue reported under
a previous Quarterly License Reporting
Statement, Verance could claim a credit on a
subsequent Quarterly License Reporting
Statement for the same quarter it reversed
the previously recognized Verance Net Revenue
in Verance’s income statement.
Def. Mem., Ex. 1 (emphasis added).

7 - ORDER

According to Verance, its

“reversal” of approximately $1.866 million of previously reported
revenue from seven years earlier is a type of “credit” referred
to and falling within the meaning of Section 9.5.
As noted, the Magistrate Judge rejected Verance’s position
and found the “if market conditions change” language in Section
7.1.3.2 is “clearly a forward-looking provision” that conditions
Verance’s right to seek a reversal of previously-recognized
revenue.

In Verance’s case, the reallocation was clearly not

connected to a change in market conditions but was based on a
purported “misallocation of revenue” years earlier.
After reviewing de novo the Magistrate Judge’s Findings and
Recommendation as to Verance’s Motion (#13), the Court concurs in
the Magistrate Judge’s conclusion that “none of the specific,
narrow arbitration provisions in the Agreement apply to . . .
Digimarc’s breach of contract claim.”
Accordingly, the Court ADOPTS the Magistrate Judge’s
Findings and Recommendation as to this Motion and DENIES
Defendant Verance’s Motion (#13) to Dismiss or Stay this Action
and to Compel Arbitration.

8 - ORDER

DIGIMARC’S MOTION FOR PARTIAL SUMMARY JUDGMENT
Digimarc seeks summary judgment that Verance breached the
licensing agreement with Digimarc by taking a credit of
$1,851,100 otherwise owed to Digimarc by improperly reallocating
its net revenues.
In his Findings and Recommendation, the Magistrate Judge
concluded the agreement did not give Verance the right to
reallocate revenue by taking that credit.

Verance objects

to this portion of the Magistrate Judge’s Findings and
Recommendation.
After de novo review of the record, the Court concurs with
the Magistrate Judge’s conclusions for the reasons set out in the
Findings and Recommendation.
Accordingly, the Court ADOPTS the Magistrate Judge’s
Findings and Recommendation and GRANTS Plaintiff Digimarc’s
Motion (#55) for Partial Summary Judgment to the extent that
Verance is liable to Digimarc for breach of the licensing
agreement.

CONCLUSION
The Court ADOPTS Magistrate Judge Jelderks’s Findings and
Recommendation and DENIES Defendant Verance’s Motion (#13) to
Dismiss or Stay this Action and to Compel Arbitration, DENIES
Defendant Verance’s Motion (#69) for Partial Summary Judgment,
9 - ORDER

and GRANTS in part and DENIES in part Plaintiff Digimarc’s Motion
(#55) for Partial Summary Judgment.
IT IS SO ORDERED.
DATED this 20th day of January, 2012.

/s/ Anna J. Brown
ANNA J. BROWN
United States District Judge

10- ORDER