Anderson v. TOL, Inc.
Filing
44
MEMORANDUM OF THE COURT. Signed by District Judge Aleta A. Trauger on 2/28/13. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(afs)
UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
LLOYD RANDALL ANDERSON,
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Plaintiff,
v.
TOL, Inc.,
Defendant.
Case No. 3:12-cv-01312
Judge Aleta A. Trauger
MEMORANDUM
Plaintiff Lloyd Randall Anderson has filed a Motion for Temporary Restraining Order
and Preliminary Injunctive Relief (“Motion for Preliminary Injunction”), to which the defendant,
TOL, Inc. (“TOL”), filed a Response in opposition (Docket No. 23), and Anderson filed a Reply
(Docket No. 34). TOL has filed a Motion to Dismiss or Transfer (Docket No. 16), to which
Anderson filed a Response in opposition (Docket No. 26), and TOL filed a Reply (Docket No.
40). Anderson has also filed a Motion for Leave to File Motion for Partial Summary Judgment
(Docket No. 33), to which TOL has filed a Response in opposition (Docket No. 41).
On February 7, 2013, the court held a preliminary injunction hearing (“PI Hearing”). At
the conclusion of that hearing, the court ruled from the bench and issued a preliminary injunction
against TOL and Overbreak, LLC. This Memorandum further explains the court’s reasoning for
that decision. Furthermore, for the reasons explained herein, the Motion to Dismiss or Transfer
and the Motion for Leave to File a Motion for Partial Summary Judgment will both be denied
without prejudice.
1
BACKGROUND
I.
Factual Background1
This case involves claims by an inventor, Lloyd Randall Anderson, who claims that TOL
is liable to him for patent infringement, breach of contract, and fraud. Anderson was the inventor
of patented technology for rigid helium balloons that Overbreak, LLC (“Overbreak”) utilized to
create a popular children’s toy called the “HoverDisc.”
On February 25, 2002 – before Anderson had applied for any patents concerning the rigid
helium balloons – Anderson filed a voluntary petition for Chapter 13 Bankruptcy. See In Re
Anderson, No. 3:02-bk-02305 (Bankr. M.D. Tenn. Feb. 25, 2002) (“Bankruptcy Case”).2
On February 5, 2003, Anderson filed Articles of Organization for “PhoenixArts, LLC”
(“PhoenixArts”), a Tennessee limited liability company for which Anderson served as the
President and sole owner. (See O’Brien Decl. II, at Ex. 1 (pp. 10-11); Anderson Decl. ¶ 4;
Verified Compl. ¶ 14). On February 14, 2003, Anderson filed a patent application with the
United States Patent and Trademark Office (“USPTO”) in his own name, seeking a patent for his
1
The parties presented witnesses and introduced documents into evidence at the PI
Hearing. (See Docket Nos. 37 (list of witnesses and exhibits) and 39 (PI Hearing transcript)).
The parties have also introduced various other sworn materials, including: (1) Anderson’s
Verified Complaint (Docket No. 1) (with associated attachments); (2) a declaration from Dayne
Sieling in support of TOL’s Motion to Dismiss or Transfer (Docket No. 18, Attachment 1)
(“Sieling Decl. I”); (3) a declaration from Anderson in support of his request for a preliminary
injunction (Docket No. 19) (“Anderson Decl.”); (4) declarations from Sieling and Sean D.
O’Brien in support of TOL’s Response in opposition to Anderson’s request for preliminary
injunctive relief (Docket No 23, Exs. 1 (“Sieling Decl. II”) and 2 (“O’Brien Decl. I”)); and (5) a
declaration from O’Brien in support of TOL’s Reply concerning the Motion to Dismiss or
Transfer (Docket No. 40) (“O’Brien Decl. II”). Unless otherwise noted, this background section
is based on the sworn materials and testimony presented to the court.
2
TOL filed a copy of the bankruptcy court docket and certain entries contained therein as
an exhibit to the Second O’Brien Declaration. (See O’Brien Decl. II, Ex. 2.) The court takes
judicial notice of these materials.
2
rigid helium balloon invention (hereinafter, “838 Patent Application”). (See Verified Compl.,
Ex. B, at p. 1.) On February 22, 2003, PhoenixArts entered into a License Agreement with
Overbreak, in which PhoenixArts purported to license the 838 Patent Application and all related
applications and patents to Overbreak, in return for Overbreak’s promise to pay PhoenixArts
royalties based on its “Net Sales” of the HoverDisc. (Docket No. 5 (filed under seal) (“License
Agreement”).) The USPTO ultimately issued the 838 Patent in Anderson’s name on December
9, 2003 (“838 Patent”). (Verified Compl., Ex. B, at p. 1.)
On August 19, 2003, Anderson filed a follow-on patent application (“151 Patent
Application”), which the USPTO granted and issued on May 29, 2007 (“151 Patent”). (Id., Ex.
B, at p. 12.) On November 12, 2003, Anderson applied for a patent related to the 838 Patent
(hereinafter, “487 Patent Application”), which the USPTO granted and issued on February 6,
2007 (“487 Patent Application”). (Id.)
Anderson has claimed that he orally conveyed to PhoenixArts the right to sub-license the
Patents – including, apparently, the right to sub-license Anderson’s interest in the Patent
Applications while they were pending. (See Docket No. 19, Anderson Decl. ¶¶ 4-5; PI Hearing
Transcript at 35:16-25; 98:24-99:5; Verified Compl. ¶¶ 14-16.) Anderson has not stated when he
entered into this alleged oral licensing agreement with PhoenixArts. Anderson did not disclose
the Patent Applications or the Patents at any time during the five-year duration of his Chapter 13
bankruptcy plan.
At any rate, pursuant to the License Agreement, Overbreak began manufacturing and
selling HoverDiscs, which became a popular children’s toy. (Sieling Decl. I ¶ 4; Sieling Decl. II
¶ 4.) Overbreak remitted approximately $1.5 million in royalties to Anderson through 2007.
3
(Id.)3 However, between 2005 and 2007, Anderson complained to Overbreak that it was failing
to pay him sufficient royalties by improperly deducting non-allowable expenses from the
quarterly payments, in violation of the License Agreement. (Sieling Decl. I ¶ 4; Verified Compl.
¶¶ 23-32 (with associated exhibits); PI Hearing Exs. 2-7; PI Hearing Transcript 47:5-48:10,
49:16-56:9.) It does not appear that Overbreak seriously disputes that, under the letter of the
License Agreement, the expenses were not allowable. (See, e.g., PI Hearing, Ex. 5 (2/21/07
Letter from Elizabeth Risha to Paige Mills); PI Hearing Transcript 156:9-14; 157:2-5.) Although
Overbreak never paid the disputed amounts, Anderson did not pursue the dispute any further, at
least at the time. The parties vigorously dispute whether a March 1, 2007 demand letter sent by
Anderson’s counsel on his behalf terminated the License Agreement. (See PI Hearing Ex. 7.)
In the interim, several relevant events occurred. First, beginning in 2004, Overbreak
procured foreign patents in Anderson’s name in at least four foreign jurisdictions (collectively,
“Foreign Patents”) . (PI Hearing Ex. 1; PI Hearing Transcript 44:9-46:19.) However, without
notice to PhoenixArts as required by the License Agreement, Overbreak permitted the Foreign
Patents to expire, with no prospect of re-filing. (Id.) It appears that Anderson did not disclose
the Foreign Patents in the Bankruptcy Case. Second, PhoenixArts was administratively dissolved
under Tennessee law on September 17, 2004, was reinstated on October 27, 2004, and was again
administratively dissolved (for the second and last time) on August 19, 2005. (O’Brien Decl. II,
Ex. 1 (p. 9).)
3
The Sieling Declarations do not specify the time period in which Anderson received
these royalty payments, but, for purposes of this Memorandum, the court will assume that
Sieling is referring to the time period from the date of the License Agreement through the last
royalty payment that Overbreak made to Anderson in 2006.
4
On June 15, 2007, Overbreak entered into an “Assignment of Rights” with TOL, a
company consisting of the same shareholders, officers, assets, and operations as Overbreak.
(Sieling Decl. II ¶ 5; Docket No. 28, Ex. A.) That assignment conveyed only Overbreak’s rights
– not Overbreak’s liabilities – and did not reference the License Agreement, let alone purport to
comply with certain specific conditions of assignment set forth therein.4 Overbreak did not
obtain Anderson’s approval for this purported assignment. (PI Hearing Transcript 60:19-61:3.)
Unbeknownst to Anderson, Overbreak (and later TOL) continued to manufacture and sell
HoverDiscs after March 2007, albeit in limited quantities. (Sieling Decl. I ¶ 6; PI Hearing
Transcript 143:12-22.)
Anderson received his bankruptcy discharge on April 10, 2007, having completed the
payments under his Chapter 13 Plan, and, on August 7, 2007, the bankruptcy court closed the
Bankruptcy Case. (O’Brien Decl. II, Ex. 2.) Under the Plan, Anderson had paid to the Trustee,
for the benefit of his creditors, $27,705. (Id.)
In approximately June 2012, Anderson, believing that he possessed unfettered ownership
of the Patents, approached TOL (among other toy manufacturers) to explore the possibility of relaunching the HoverDisc. (PI Hearing Transcript at 64:25-67:5.) Anderson claims that, during
these negotiations, TOL essentially acknowledged that it did not have any rights under the
4
TOL now contends that, under a so-styled “Nunc Pro Tunc Agreement of Succession,”
executed after this lawsuit was filed, it actually succeeded to all of the rights and liabilities of
Overbreak on June 15, 2007, expressly including all of Overbreak’s rights and obligations under
the License Agreement. (Sieling Decl. II, Ex. 2 (1/29/13 Nunc Pro Tunc Agreement); PI
Hearing Transcript 23:23-24:11.) As explained herein, TOL has not established that this
document has any retroactive legal effect for purposes of this lawsuit, and it does not comply
with the License Agreement assignment provisions, in any case. (See also Docket No. 26,
Anderson’s Response in opposition to TOL’s Motion to Dismiss or Transfer, at p. 6 n.6.)
5
License Agreement and required a license from Anderson before proceeding with a new product
launch in early 2013. (Id. at 69:10-70:1.) However, TOL asserts that it was simply seeking to
revise and update the existing License Agreement during its negotiations with Anderson. (See,
e.g., id. at 148:19-21; 175:22-177:13.)
In any event, after the parties had agreed on potential terms for a new license agreement,
Anderson backed out of the prospective deal. (See PI Hearing Exs. 9 (draft Letter of Intent) and
12 (10/16/12 email from Anderson to Sieling); PI Hearing Transcript 70:2-3 and 74:8-21.)
However, upon receiving Anderson’s communication of withdrawal from the new licensing
agreement, TOL responded by claiming that it had rights in the Patents all along and would
proceed with its plans to re-launch the HoverDisc in early 2013. (PI Hearing Ex. 13; PI Hearing
Transcript 75:3-15.)
On December 20, 2012, Anderson filed this lawsuit, claiming that TOL was liable for
breach of contract, fraud, and patent infringement, for which Anderson sought immediate
injunctive relief in the form of a temporary restraining order (“TRO”) and/or a preliminary
injunction.5 On December 20, 2012, the court held a hearing (“TRO Hearing”) and denied the
request for a TRO. On February 7, 2013, the court conducted the PI Hearing, at the conclusion
of which the court enjoined TOL and/or Overbreak from continuing to manufacture, market, and
sell the HoverDisc.6
ANALYSIS
The parties vigorously dispute various basic facts of this case, including whether
5
Anderson also asserts a separate count for a declaratory judgment.
6
The injunction was conditioned on the posting of a bond by Anderson, which Anderson
accordingly posted on February 14, 2013. (Docket No. 38.)
6
Anderson and/or TOL are parties to the License Agreement, whether Anderson owns the Patents,
and whether and when the License Agreement terminated. The court’s consideration of some of
these disputes impacts both the jurisdictional analysis (with respect to TOL’s Motion to Dismiss
or Transfer) and the merits of the underlying claims (with respect to Anderson’s request for a
preliminary injunction).
I.
Parties to the License Agreement and Ownership of the Patents
The original License Agreement was made between PhoenixArts as “Licensor” and
Overbreak as “Licensee.”
The License Agreement permitted Overbreak to assign the agreement to a third party
under either of two circumstances: (1) with the explicit consent of PhoenixArts (License
Agreement ¶ 29), or (2) without PhoenixArts’ consent, provided that the unilateral assignment
from Overbreak include, inter alia, a 1% increase in royalties and an assignment of all rights and
“obligations and limitations” under the License Agreement (id., ¶ 2(g)).
Overbreak did not satisfy either of these conditions in its “assignment” to TOL in June of
2007. First, Overbreak did not seek consent from PhoenixArts or Anderson for the assignment.
Second, Overbreak’s unilateral “Assignment of Rights” did not comply with ¶ 2(g) in two
respects: (1) it failed to assign its obligations (as well as its rights) under the License Agreement;
and (2) it failed to include a provision for a 1% increase in royalties.7 Thus, TOL is not a party to
7
TOL urges the court to find that the Nunc Pro Tunc Agreement – purportedly signed by
Overbreak and TOL on January 29, 2013 – cures any potential deficiencies in this regard
retroactive to June 25, 2007. TOL does not cite to any legal authority for its position that the
Nunc Pro Tunc Agreement, which does not recite any consideration and purports to reflect a
present agreement by a company (Overbreak) that was dissolved several years ago, should
retroactively confer TOL rights under the License Agreement. Given that TOL has the same
shareholders and officers as Overbreak did, the court is highly skeptical that this purported
7
the License Agreement and cannot assert any rights thereunder.8
With respect to PhoenixArts, the parties vigorously dispute (a) what rights, if any,
Anderson originally conveyed to PhoenixArts before it entered into the License Agreement with
Overbreak; and (b) to the extent that Anderson conveyed any rights to PhoenixArts, whether
those rights reverted to Anderson when PhoenixArts was administratively dissolved.9 Anderson
has averred that, at an unspecified time, he orally granted an exclusive license to PhoenixArts to
sub-license his Patents. He also argues (and avers), without citation to any legal authority, that
the license he conveyed to PhoenixArts automatically“reverted” to him upon the dissolution of
PhoenixArts. (See, e.g., Verified Compl. ¶ 14 (“Upon the dissolution of PhoenixArts, all right,
agreement reflects an arms length transaction, rather than simply a post hoc attempt by Mr.
Sieling (and the other common owners/officers of TOL and Overbreak) to justify their infringing
activity retroactively. At any rate, even if the Nunc Pro Tunc Agreement had retroactive legal
effect, it fails to include the required 1% royalty increase and, therefore, does not constitute a
valid unilateral assignment under ¶ 2(g).
8
Whether TOL could be liable for the debts of Overbreak – if any claims against
Overbreak by Anderson remain actionable – under an alter ego or successor liability theory may
present a distinct legal question, with respect to which the court expresses no opinion.
On a separate note, ¶ 5 of the License Agreement provided that it would not renew if,
upon a renewal date, the Licensee was in material breach of the agreement. As of the second
renewal date, Overbreak (and/or TOL) had let the Foreign Patents expire without notice to
Anderson, in plain violation of ¶ 11(c), and had failed to cure the royalty payment deficiencies
identified by Anderson, which may have constituted a violation of ¶ 6. Also, Overbreak and
TOL had not furnished royalties or provided royalty statements to Anderson from Q4 2006
forward, in violation of ¶ 2(c). If ¶ 5 was self-executing and one or more of these breaches
constituted a material breach – which appears to be the case – the agreement would have expired
by its own terms on December 31, 2009, even if it had otherwise remained effective after June
2007.
9
Until TOL filed its Reply, the court was not aware of the corporate history of
PhoenixArts, including that it was administratively dissolved in September 2004, reinstated in
October 2004, and administratively dissolved a second and final time in August 2005. The
courts also notes that the parties have not drawn any distinction between the legal effect of the
first dissolution and the legal effect of the second dissolution.
8
title, interest in and to the Anderson Patents reverted to Mr. Anderson.”); Anderson Decl. ¶ 4; PI
Hearing 35:19-22.) In response, TOL points out that PhoenixArts represented that it was the sole
owner of the Patents in the License Agreement, which, it argues, creates a material issue of fact
as to whether Anderson owns the Patents. (See, e.g., License Agreement ¶¶ 1(h), 1(a), 2(c).)
TOL also argues that, if Anderson did orally convey ownership of the Patents to PhoenixArts,
then those rights never “reverted” to Anderson because PhoenixArts failed to comply with
necessary asset liquidation procedures upon its dissolution. TOL contends that, taken together,
these disputed facts preclude a finding that Anderson is likely to prevail on the merits of his
patent infringement claims.
As an initial matter, under 35 U.S.C. § 261, assignments of a patent or patent application
must be in writing to be effective. See Waymark Corp. v. Porta Sys. Corp., 334 F.3d 1358 (Fed.
Cir. 2003); Enzo APA & Son, Inc. v. Geapag A.G., 134 F.3d 1090, 1093 (Fed. Cir. 1998).
Therefore, Anderson could not have validly assigned title to the Patents and Patent Applications
to PhoenixArts orally. Thus, regardless of the language of the License Agreement, it appears that
PhoenixArts could have not have been the sole owner of the referenced Patents and Patent
Applications pursuant to an oral assignment from Anderson. At most, PhoenixArts may orally
have received a license to the Patents and Patent Applications, see Waymark, 334 F.3d at 1364
(stating that, under appropriate circumstances, “[l]icenses may be oral”), while ownership
remained in Anderson’s name. Indeed, all three Patent Applications were filed in Anderson’s
name, and all three associated Patents were issued in Anderson’s name. Moreover, two of the
Patent Applications were filed after PhoenixArts and Overbreak entered into the License
Agreement, the USPTO issued all of the Patents in Anderson’s name, and two of these Patents
9
(the 151 Patent, dated February 6, 2007, and the 487 Patent, dated May 29, 2007), were not
issued until after PhoenixArts had been administratively dissolved on August 19, 2005.
Having reviewed the License Agreement closely, it is not clear to the court whether the
parties to that agreement engaged in sloppy drafting, whether PhoenixArts made an affirmative
misrepresentation, or whether the agreement simply incorporates some form of mutual mistake.
For example, the “Background” section on the first page of the agreement defines PhoenixArts as
the “Licensor” and states that “Licensor filed on February 14, 2003 for a United States utility
patent, attached hereto as Schedule A, with respect to Rigid Helium Balloons.” However ,the
attached “Schedule A” is a copy of the 838 Patent Application filed by Anderson in his own
name. Accordingly, unless the court construes “Anderson” and “Licensor” synonymously in this
particular context, it is difficult to understand how the language of the License Agreement can be
reconciled with the 838 Patent Application attached as Schedule A, which on its face was not
filed by PhoenixArts. At any rate, however the parties intended the License Agreement to be
construed, its language would not have overridden the requirements of federal statutory law,
which does not appear to recognize oral assignments of patent ownership.
Therefore, based on the existing record, the court is satisfied that Anderson currently
owns the Patents, regardless of the language in the License Agreement.10 The issues of whether
Anderson conveyed an oral license to PhoenixArts and, if so, the current status of that license are
disputed issues that the court need not resolve at this early stage, particularly on an undeveloped
record.
10
To the extent TOL’s argument concerning the effect of the Bankruptcy Case on
Anderson’s rights can be construed as a challenge to his ownership of the Patents, the court
addresses that issue in a later section.
10
II.
Venue
TOL argues that, under the forum selection clause in the License Agreement, Anderson
was required to file this lawsuit in California. Anderson argues that he was not bound by the
forum selection clause because (1) he did not agree to the venue provisions (PhoenixArts did), (2)
his lawsuit falls within ¶ 19 of the License Agreement, which permits a lawsuit to be filed “in any
court” of law for violations of the agreement’s confidentiality provisions, and/or (3) the License
Agreement terminated before he sued TOL.11 As set forth in the previous section, the court has
found that TOL was a not a party to the License Agreement and never received a valid
assignment from Overbreak. Thus, TOL cannot enforce the forum selection clause provision in
the License Agreement in the first place and, therefore, the court will not dismiss or transfer the
case on that basis.12
Finally, TOL has not established that, absent consideration of the forum selection clause,
the traditional venue factors otherwise favor transferring the case to a different venue under 28
U.S.C. § 1404(a). In considering a § 1404(a) motion, “a district court should consider the private
interests of the parties, including their convenience and the convenience of potential witnesses, as
well as other public-interest concerns, such as systemic integrity and fairness, which come under
the rubric of ‘interests of justice.’” Moore v. Rohm & Haas Co., 446 F.3d 643, 647 n.1 (6th Cir.
11
Here, Anderson seems to be attempting to “have his cake and eat it too”: he seeks to
enforce certain provisions of the License Agreement against TOL, yet argues that the venue
provision – if otherwise enforceable by TOL – should not bind him.
12
Federal courts have expressed some uncertainty as to whether Rule 12(b)(1), Rule
12(b)(3), Rule 12(b)(6), or § 1406 provides the appropriate vehicle for considering whether to
enforce a forum selection clause. In an abundance of precaution, TOL has moved under each of
these provisions. Because the court finds that TOL has no right to assert the forum selection
clause in the License Agreement in the first place, the court need not address which rule(s) or
statute would provide an appropriate means for its enforcement.
11
2002) (quoting Moses v. Bus. Card Express, Inc., 929 F.2d 1131, 1137 (6th Cir. 1991)); Kerobo
v. Sw. Clean Fuels, Corp., 285 F.3d 531 537 (6th Cir. 2002). The Sixth Circuit has suggested
that relevant factors to consider include: (1) the convenience of the parties and witnesses; (2) the
accessibility of evidence; (3) the availability of process to make reluctant witnesses testify; (4)
the costs of obtaining willing witnesses; (5) the practical problems of trying the case most
expeditiously and inexpensively; and (6) the interests of justice. Reese v. CNH Am. LLC, 574
F.3d 315, 320 (6th Cir. 2009). The burden is on the defendant to establish that a transfer is
warranted. Blane v. Am. Inventors Corp., 934 F. Supp. 903, 907 (M.D. Tenn. 1996) (citing
Factors, Etc. v. Pro Arts, Inc., 579 F.2d 215 (2d Cir. 1978)); Smith, 578 F. Supp. 2d at 958
(citing Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508, 67 S. Ct. 839, 91 L. Ed. 1055 (1947)). Thus,
unless the balance of these factors weighs strongly in favor the defendant seeking transfer, “the
plaintiff’s choice of forum should rarely be disturbed.” Id.; see also Smith v. Kyphon, 578 F.
Supp. 2d 954, 958 (M.D. Tenn. 2008).
Here, Anderson is a resident of Hendersonville, Tennessee, a city within this judicial
district. TOL has not established that the burden on TOL of litigating in Tennessee would
outweigh the burden on Anderson of litigating in California. Also, TOL has not established that
the convenience of non-party witnesses, as opposed to employee witnesses, would be adversely
affected by litigating the case in this court. TOL has identified only one potential material
witness who is not currently employed by TOL. See Smith, 578 F. Supp. 2d at 963 (a party’s
employees’ “convenience is of lesser relevance,” because they “can be compelled to testify on
behalf of their employer”). Moreover, that witness, Elizabeth Risha, testified at the PI Hearing in
this case, demonstrating that she is capable and willing to testify voluntarily on TOL’s behalf. To
12
the extent that TOL possesses business records that may be relevant to the litigation, it has not
demonstrated that litigating in this forum would, in light of modern electronic discovery
techniques, impose more than the ordinary costs of discovery. TOL also appears to concede that
this court and a California district court are both similarly positioned with respect to issues
relating to conflicts of laws and the capacity to conduct a fair trial.
Based on these considerations, the court finds that TOL has not met its burden to justify
transfer of the case under § 1404(a).
III.
Standing
TOL argues that Anderson lacks standing to assert his state law claims and his federal
patent infringement claims. As an initial matter, based on the existing record, the court has
already found that Anderson did not convey ownership of the Patents to PhoenixArts. To the
extent that TOL’s arguments are premised on the assumption that PhoenixArts – not Anderson –
presently owns the Patents, the court rejects those arguments at this stage.
Under the Chapter 13 rules in effect when Anderson filed his petition, Anderson was
required to file a schedule containing all of this assets and liabilities, including all of his legal or
equitable interests in property (including intellectual property) at the commencement of the case.
See 11 U.S.C. § 521(a)(1).13 While his Chapter 13 Plan was being administered, Anderson was
also statutorily required to declare all property acquired after the commencement of the case. See
id. § 1306(a)(1); In re Seafort, 669 F.3d 662, 667 (6th Cir. 2012). The Patent Applications,
Patents, and Foreign Patents at issue here each were filed and/or issued in Anderson’s name
13
In April 2005, Congress amended § 521 to add certain provisions, see PL 109-8, 2005 §
256 (2005), but those amendments did not obviate Anderson’s general obligation to disclose
property that constituted “property of the estate.”
13
during the five-year pendency of his Chapter 13 Plan, yet Anderson never declared them as assets
or revealed them to the Chapter 13 Trustee. It appears that they should have been, particularly
where Anderson takes the position here that he always owned those assets and had merely
licensed them to PhoenixArts until its dissolution.14
Here, TOL has a strong case that the right to recover unpaid royalties from Overbreak –
i.e., Anderson’s right to profit from exploitation of the Patents, Patent Applications, and Foreign
Patents during the time frame of the Bankruptcy Case – belonged to the bankruptcy estate. Had
Anderson disclosed these assets, his plan would have been modified, and his creditors would
have received more money through his Chapter 13 Plan. Indeed, by failing to disclose the royalty
stream, Anderson may have defrauded his creditors.15 As a consequence, he may lack standing to
pursue those claims here.16
14
Under Chapter 13, a debtor remains in possession of all property of the bankruptcy
estate and can exercise the rights and powers of the trustee under certain circumstances. Id. §
1306(b) and § 1303. Here, the parties have not addressed whether the purported license to
PhoenixArts was enforceable in the absence of notice to the Chapter 13 Trustee.
15
On February 5, 2003 – one year after filing for Chapter 13 bankruptcy – Anderson filed
the Articles of Organization for PhoenixArts with the Tennessee Secretary of State. On
February 14, 2003, Anderson filed the first Patent Application in his own name, after which
PhoenixArts claimed sole ownership of the Patents and associated Applications in the License
Agreement on February 22, 2003. Anderson then collected over a million dollars in royalties
from Overbreak based on exploitation of the Patents, Patent Applications, and/or Foreign Patents
in his name, but he does not appear to have disclosed that income in the Bankruptcy Case.
Furthermore, even after the alleged license to PhoenixArts purportedly “reverted” to Anderson
when PhoenixArts was administratively dissolved, Anderson did not disclose the Patents,
pending Patent Applications, Foreign Patents, and/or the associated royalty income stream in the
Bankruptcy Case. Anderson now claims that he always owned these assets. Given this chain of
events, if there is a reasonable explanation for Anderson’s failure to disclose these assets at any
point before the close of the Bankruptcy Case, it is not self-evident to this court.
16
Even if Anderson has standing to assert claims for unpaid royalties by Overbreak, this
case could present circumstances justifying an exercise of judicial estoppel to bar the contract
claims. For example, courts have often found that, where a debtor unreasonably fails to declare a
14
However, the right to profit from exploitation of the Patents and Patent Applications
during the pendency of the Bankruptcy Case is distinct from the ultimate legal ownership of
those Patents. As discussed above, the existing record contains Patent Applications filed by
Anderson and associated Patents issued to Anderson. There is no bankruptcy trustee at the
moment and TOL has not established that PhoenixArts has a present claim of exclusive
ownership over the Patents. Therefore, the court is not persuaded by TOL’s argument that
Anderson lacks standing to enforce the Patents at this point. Thus, at least at this stage, the court
is satisfied that Anderson owns the Patents and can sue to protect against their infringement.17
IV.
Motion for Preliminary Injunction
A.
Standard of Review
Under Fed. R. Civ. P. 65, a plaintiff seeking a preliminary injunction must establish that
he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of
preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the
public interest. Winter v. Nat’l Resources Def. Council, Inc., 555 U.S. 7, 20, 129 S. Ct. 365, 172
L. Ed. 2d 249 (2008). Because substantive matters of patent infringement are unique to patent
law, the estimated likelihood of success in establishing infringement is governed by Federal
Circuit law. Revision Military ,Inc. v. Balboa Mfg. Co., 700 F.3d 524, 526 (Fed. Cir. 2012).
viable cause of action as a contingent asset in Chapter 13 proceedings, that debtor may be
judicially estopped from asserting that cause of action following the close of a bankruptcy case.
See, e.g., Richardson v. United Parcel Service, 195 B.R. 737, 738-39 (E.D. Mo. 1996).
17
It may be that, if the bankruptcy court were to reopen the Bankruptcy Case, Anderson’s
interests in the Patents could be subject to those proceedings and the bankruptcy trustee could
seek to intervene in this case as the real party in interest. Nevertheless, the Bankruptcy Case was
closed several years ago, and the record here contains three patents applied for and issued in
Anderson’s name.
15
Under that standard, a movant seeking a preliminary injunction can establish a sufficient
likelihood of success on the merits by showing that success is more likely than not. Id. “[T]he
weight of the likelihood may be considered as an equitable factor, along with issues of the
position of the parties with respect to the status quo, in the ultimate balance of equities.” Id.
B.
Application
1.
Likelihood of Success on the Merits
Under 35 U.S.C. § 271, anyone who, “without authority makes, uses, offers to sell, or
sells any patented invention, within the United States or imports into the United States any
patented invention during the term of the patent therefor, infringes the patent.” In its briefing,
TOL argues that there are questions of fact as to whether Anderson owns the Patents, whether the
Patents are valid, and whether the HoverDiscs in question constitute infringing devices. Under
35 U.S.C. § 282, an issued patent comes with a statutory presumption of validity at every stage in
litigation. Tech. Licensing Corp. v. Videotek, Inc., 545 F.3d 1316, 1319-27 (Fed. Cir. 2008).
Only if an alleged infringer raises a substantial question concerning the validity of the patent as
an affirmative defense must the party seeking injunctive relief establish that the invalidity defense
lacks merit. Id. at 1327-28. If an infringer is unable to “identify any persuasive evidence of
invalidity, the very existence of the patent satisfies the patentee’s burden on the validity issue.”
Canon Computer Sys., Inc. v. Nu-Kote Int’l, Inc., 134 F.3d 1085, 1088 (Fed. Cir. 1998). To
overcome the presumption of validity, defendants must show invalidity “by clear and convincing
evidence.” H.H. Robertson Co. v. United Steel Deck, Inc., 820 F.2d 384, 387 (Fed. Cir. 1987).
As set forth above, the court has found that Anderson currently owns the Patents and can
sue to protect against their infringement. Furthermore, based on the existing record, TOL has not
16
presented a viable argument that the Patents are invalid. Also, TOL’s argument that manufacture
and sale of HoverDiscs would not infringe the Patents strikes the court as disingenuous, given
that TOL’s position is that it had a valid and exclusive license to exploit the Patents under the
License Agreement in the first place. Instead, the existing record establishes that TOL does not,
and did not, have a right to exploit the Patents, yet it utilized the Patents in the manufacture and
sale of the HoverDisc toy from June 2007 forward, including current marketing efforts and a
projected “re-launch” of the product in 2013. Thus, Anderson has demonstrated that he is
reasonably likely to succeed on the merits of his claim that TOL was infringing the Patents.18
2.
Irreparable Harm
“[T]he irreparable harm inquiry seeks to measure harms that no damages payment,
however great, could address.” Celsis In Vitro, Inc. v. CellzDirect, Inc., 664 F.3d 922, 930 (Fed.
Cir. 2012). “Price erosion, loss of goodwill, damage to reputation, and loss of business
opportunities are all valid grounds for finding irreparable harm.” Id. (citing Abbott Labs v.
Sandoz, Inc., 544 F.3d 1341, 1362 (Fed. Cir. 2008)); Polymer Technologies, Inc. v. Bridwell, 103
F.3d 970, 974 (Fed. Cir. 1996).19
18
The preliminary injunction is premised on TOL’s infringing activity only. Therefore,
for purposes of Rule 65, the court does not address the likelihood that Anderson will succeed on
the merits of his claims other than the patent infringement claims.
19
In Reebok Int’l, Ltd. v. J. Baker, Inc., 32 F.3d 1552 (Fed. Cir. 1994), the Federal Circuit
stated that a strong showing of a reasonable likelihood of success entitles the patentee to a
presumption of irreparable harm. However, following the Supreme Court decision in eBay Inc.
v. MercExchange, L.L.C., 547 U.S. 388, 126 S. Ct. 1837, 164 L. Ed. 2d 641 (2006), some federal
districts courts have found that the Reebok presumption no longer applies and that the burden
remains on the patentee to present sufficient evidence of irreparable harm, see Voile Mfg. Corp.
v. Dandurand, 551 F. Supp. 2d 1301, 1306-1307 (D. Utah. 2008) (collecting cases), while other
district courts have continued to apply the presumption. See, e.g., Domino’s Pizza Franchising,
LLC v. Yeager, No. 09-14704, 2010 WL 374116, at *4 (E.D. Mich. Jan. 25, 2010). Here,
Anderson did not argue that a presumption applies, the parties did not brief the issue, and
17
At the evidentiary hearing, Anderson offered persuasive testimony on all of these points.
Anderson testified that he has been seeking to utilize his Patents for a re-launch of the HoverDisc
or a similar toy with other toy manufacturers, but the inability to demonstrate that he can offer an
exclusive license for the Patents is preventing him from entering into any deals. Anderson also
testified that TOL recently has been producing HoverDiscs of poor quality, thereby diminishing
the potential value of Anderson’s Patents. He also testified that TOL has been marketing the
HoverDiscs at a lower effective retail price than Overbreak did previously, which reduces the
profit margin on each sale and thereby makes the Patents less valuable to other companies.
Anderson testified that Overbreak’s continuing use of his Patents threatened to degrade the value
of those Patents to such a degree that other companies might not do business with him at all.20 In
light of this testimony, the court finds that Anderson has established that he will suffer multiple
forms of irreparable harm if TOL does not cease its infringing activity.
3.
The Balance of Hardships
With respect to the balance of hardships, a district court “must balance the harm that will
occur to the moving party from the denial of the preliminary injunction with the harm that the
non-moving party will incur if the injunction is granted.” Hybritech Inc. v. Abbott Labs., 849
F.2d 1446, 1457 (Fed. Cir. 1988). Where the harm to an alleged infringer from a preliminary
Anderson demonstrated with affirmative evidence that he is likely to suffer irreparable harm in
the absence of an injunction for the reasons set forth herein. Therefore, application of the
Reebok presumption would make no difference here, and the court need not consider its
continuing validity post-eBay.
20
In oral argument, TOL characterized Anderson’s claims of irreparable harm as
“laughable” and emphasized that Anderson stood to earn a lot of money if TOL proceeded with
its early 2013 re-launch of the HoverDisc. (See, e.g., PI Hearing Transcript at 29:8-9 and 131:21132:15.) However, even if Anderson could profit from doing business with TOL, that fact would
not obviate the irreparable harm caused by infringement of his Patent rights.
18
injunction is self-inflicted, courts typically find that such harm is a natural consequence of
infringing activity that does not weigh against issuance of an injunction. See, e.g., Smith Int’l,
Inc. v. Hughes Tool Co., 718 F.2d 1573, 1581 (Fed. Cir. 1983) (injunction warranted, where
infringing party took a “calculated risk” that it might infringe patents at issue); i4i Ltd. P’ship, v.
Microsoft Corp., 598 F.3d 831, 863 (Fed. Cir. 2010) (“[N]either commercial success, nor sunk
development costs, shield an infringer from injunctive relief . . . . [The infringer] is not entitled to
continue infringing simply because it successfully exploited its infringement.”); Acumed LLC v.
Stryker Corp., 551 F.3d 1323, 1330 (Fed. Cir. 2008) (district court did not abuse discretion in
refusing to consider infringer’s expenses for designing and marketing the infringing product);
Windsurfing Int’l, Inc. v. AMF, Inc., 782 F.2d 995, 1003 n. 12 (Fed. Cir. 1986) (“One who elects
to build a business on a product found to infringe cannot be heard to complain if an injunction
against continuing infringement destroys the business so elected.”); Smith & Nephew, Inc. v.
Synthes (U.S.A.), 466 F. Supp. 2d 978, 984-85 (W.D. Tenn. 2006) (finding that impact of ceasing
operations related to infringing product did not weigh in favor of infringer, where such hardship
“is the consequence of a patent infringement”); Zen Design Grp. Ltd. v. Clint, No. 08-cv-14309,
2009 WL 4050247, at *6 (E.D. Mich. Nov. 23, 2009) (“The hardship to [the infringer] in
enjoining him from selling the infringing product is of his own creation and should be not be
considered in the analysis.”).
Here, the balance of hardships favors Anderson. To the extent TOL incurs damages from
ceasing its manufacturing and marketing efforts for the HoverDisc, that harm is self-inflicted and
is the natural consequence of its infringing activity. TOL acted without a valid license to exploit
the Patents and continued to press forward with its projected 2013 re-launch of the HoverDisc,
19
even after Anderson appropriately challenged TOL’s right to exploit the Patents.21
By contrast, as explained in the previous section, the hardships to Anderson from TOL’s
infringing activity were substantial, threatening to cause irreparable harm to Anderson if TOL
continued to market and sell the HoverDisc as planned. Accordingly, the balance of hardships
weighs strongly in favor of Anderson.
4.
Public Interest
The patent statute, 35 U.S.C. § 261, which exercised power granted to Congress by the
United States Constitution, Art. I § 8, cl. 8, reflects a strong public policy interest in “promot[ing]
the progress of the useful arts.” Smith, 718 F.2d at 1557; see also PPG Indus., Inc. v. Guardian
Indus. Corp., 75 F.3d 1558, 1567 (Fed. Cir. 1996) (noting “the strong public policy favoring the
enforcement of patent rights”). This factor favors enforcement of the Patents against infringing
activity by TOL.
5.
Conclusion
Anderson has justified the issuance of a preliminary injunction against TOL to restrain it
from infringing his Patents.
V.
Motion for Leave to File Motion for Partial Summary Judgment
Anderson seeks leave to file a motion for partial summary judgment on the following
21
Indeed, based on the existing record, it appears that TOL initially recognized that it did
not have a valid license to the Patents. Only after Anderson backed out of the proposed
licensing deal did TOL claim to have possessed a license all along. At any rate, even if TOL
ultimately proves to be correct that Anderson lacks standing to sue for patent infringement or is
otherwise barred from asserting the infringement claims – a position that the court finds
unpersuasive at this stage – it appears that TOL does not and never had a valid right to utilize the
Patents in the first place. Thus, regardless of which entity or entities ultimately prove to be the
appropriate parties in interest, TOL’s utilization of the Patents was likely unlawful, and the
damage it will have incurred from ceasing that activity will have been self-inflicted.
20
three issues: (1) the License Agreement was terminated; (2) TOL has no rights under the License
Agreement; and (3) TOL infringed the Patents. In response, TOL argues that the motion is
premature, because there are substantial disputes concerning these and other material facts that
will require discovery. TOL argues, inter alia, that the facts will show that Anderson lacks
standing to bring some or all of his claims, that Anderson will not be able to demonstrate that
TOL actually infringed the Patents, and that the Patents may be invalid in light of KSR Int’l Co.
v. Teleflex Inc., 550 U.S. 398, 127 S. Ct. 1727, 167 L. Ed. 2d 705 (2007).
As an initial matter, the court’s findings herein have been made under the Rule 65
standard, which does not preclude the parties from addressing those issues at a later stage in the
case upon a complete evidentiary record. Furthermore, this case presents a myriad of factual and
legal issues that require discovery and/or further consideration by the parties.22 Thus, even to the
extent that Anderson seems likely to prevail on certain facts – such as the lack of a valid
assignment to TOL – the court perceives minimal benefit from considering a partial summary
judgment motion at this early stage. Accordingly, the court will deny the motion without
prejudice.
CONCLUSION
For the reasons stated herein, Anderson’s Motion for Preliminary Injunction was granted,
TOL’s Motion to Dismiss or Transfer will be denied without prejudice, and Anderson’s Motion
for Leave to File a Motion for Partial Summary Judgment will be denied without prejudice.
22
For instance, both parties appear to have played fast and loose with the rights and
obligations of their previous related companies – PhoenixArts vis-a-vis Anderson and Overbreak
vis-a-vis TOL – leading to disputes about the legal effect of certain past acts and omissions.
21
An appropriate order will enter.
_____________________________
ALETA A. TRAUGER
United States District Judge
22
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