Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-02469/USCOURTS-cand-4_06-cv-02469-17/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

APPLIED ELASTOMERICS, INCORPORATED, a

California corporation,

Plaintiff,

v.

Z-MAN FISHING PRODUCTS, INCORPORATED,

a South Carolina corporation,

Defendant.

 /

AND RELATED COUNTERCLAIMS.

 /

No. C 06-2469 CW

ORDER DENYING

DEFENDANT'S

MOTION FOR

PARTIAL JUDGMENT

ON THE PLEADINGS

AND GRANTING IN

PART PLAINTIFF'S

MOTION TO DISMISS

COUNTERCLAIMS

Defendant Z-Man Fishing Products, Inc. moves for partial

judgment on the pleadings in its favor with respect to Plaintiff

Applied Elastomerics, Inc.'s claim for a contractual trebling

penalty. Plaintiff opposes the motion and, in a separate motion,

moves to dismiss the second, third, fourth, fifth, sixth and

seventh causes of action in Defendant's third amended countercomplaint. Although Defendant opposes that motion, it agrees to

the dismissal of its second, third, fifth, sixth and part of its

Case 4:06-cv-02469-CW Document 130 Filed 06/01/07 Page 1 of 11
United States District Court

For the Northern District of California

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1

The factual background of this case is described in the

Court's August 10, 2006 and November 8, 2006 orders. 

2

seventh counterclaims. The matter was decided on the papers. 

Having considered all of the papers filed by the parties, the Court

denies Defendant's motion and grants Plaintiff's motion in part and

denies it in part.

BACKGROUND

As explained in the Court's prior orders, Plaintiff invents

and patents certain chemical compositions, composites and articles

made from these compositions and composites. Plaintiff

commercializes its technology by licensing its patents, proprietary

technology and know-how to third parties. Plaintiff's president,

John Chen, handles all of the business aspects of commercializing

the technology he invents and develops. Defendant develops and

manufactures fishing lure components and fishing lures for major

lure manufacturers. In 2001, Mike Shelton, Defendant's Vice

President of Marketing and Sales and Director of Technology,

contacted Mr. Chen concerning a fishing lure product that he was

trying to develop, the "superworm."1

According to Plaintiff's complaint, the parties entered into a

license agreement in July, 2001. The agreement is governed by

California law. Under the agreement, Defendant must make one of

two types of royalty payments on a quarterly basis: either a

"running royalty," which is calculated as a percentage of

Defendant's net revenues from sales of products using Plaintiff's

technology or patents, or a "minimum royalty." Section 5.7 of the

agreement further provides:

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For the Northern District of California

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In addition to the interest provision of this Section as to

late royalty payments, the following shall be the penalty due

to fraud or false statements in connection with any unpaid

royalties for which AEI has provided Company with notification

and which remain uncorrected or unpaid (with interest) under

this Section for more than thirty (30) days from the date of

such notification: A penalty of three (3) times the amount of

royalty underpayment due to fraud or false statements which are

unreported and unpaid falling within the term of this Agreement

which penalty shall be considered as the sole compensation and

damages for the unreported infringing sales and such sales

shall be treated as infringing sales in accordance with 35

U.S.C. § 284.

In June, 2004, Defendant wrote to Plaintiff stating that it

did not intend to pay any more royalties. According to Defendant,

it did not owe any royalties under the agreement because it was not

manufacturing and selling products that infringed the patent rights

or used Plaintiff's technology. Plaintiff disagreed and sent

Defendant numerous letters seeking to collect the minimum royalties

it believed it was owed. Defendant refused to pay, again claiming

that it did not owe Plaintiff any minimum royalties. 

On April 7, 2006, Plaintiff brought this suit for breach of

contract and breach of the covenant of good faith and fair dealing. 

Plaintiff seeks to recover the minimum royalties it alleges it is

owed under the agreement; it does not seek to recover any running

royalties. In addition, it alleges that, pursuant to section 5.7

of the agreement, the amount it is owed is subject to trebling

because Defendant's failure to pay the minimum royalties was based

on its false statements that it did not owe the minimum royalties.

Defendant filed a motion to dismiss for lack of personal

jurisdiction, which the Court denied. On July 13, 2006, Defendant

filed a complaint against Plaintiff in the District of South

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2

The Court related and consolidated the transferred case to

this case. 

4

Carolina; that case has been transferred to this district.2

Defendant filed its answer and twelve counterclaims, nine of

which the Court dismissed with leave to amend. Defendant then

filed its first amended counter-complaint, which contained five

causes of action: (1) fraud; (2) negligent misrepresentation;

(3) restitution; (4) breach of the covenant of good faith and fair

dealing and (5) declaratory relief. With Plaintiff's stipulation,

Defendant filed a second amended counter-complaint on January 3,

2007. The second amended counter-complaint contained only two

claims for relief: breach of the covenant of good faith and fair

dealing and declaratory judgment of no breach of contract for

failure to pay royalties because of non-infringement. 

Plaintiff moved to dismiss Defendant's second amended countercomplaint. The Court granted Plaintiff's motion, dismissing the

breach of covenant cause of action with leave to amend and

dismissing the breach of declaratory judgment cause of action

without leave to amend. The Court instructed Defendant to include

in its third amended counter-complaint any viable claims it wished

to pursue from the transferred South Carolina action. 

On March 15, 2007, Defendant filed its third amended countercomplaint, which contained seven causes of actions: (1) breach of

the covenant of good faith and fair dealing; (2) declaratory

judgment -- non-infringement; (3) declaratory judgment --

invalidity; (4) declaratory judgment -- co-inventorship;

(5) constructive trust; (6) conversion; and (7) restitution --

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unjust enrichment. Shortly thereafter, Plaintiff covenanted not to

sue Defendant on the challenged patents. 

LEGAL STANDARD

I. Judgment on the Pleadings

Federal Rule of Civil Procedure 12(c) provides, "After the

pleadings are closed but within such time as not to delay the

trial, any party may move for judgment on the pleadings." Judgment

on the pleadings is proper when the moving party clearly

establishes on the face of the pleadings that no material issue of

fact remains to be resolved and that it is entitled to judgment as

a matter of law. Hal Roach Studios, Inc. v. Richard Feiner & Co.,

Inc., 896 F.2d 1542, 1550 (9th Cir. 1990). In considering a motion

for judgment on the pleadings, the Court must accept the

allegations of the non-moving party as true; the allegations of the

moving party which have been denied are assumed to be false. Id.

The Court, however, may consider facts that “are contained in

materials of which the court may take judicial notice.” See

Heliotrope General, Inc. v. Ford Motor Co., 189 F.3d 971, 981 n.18

(9th Cir. 1999) (quoting Barron v. Reich, 13 F.3d 1370, 1377 (9th

Cir. 1994)).

II. Motion to Dismiss

A motion to dismiss for failure to state a claim will be

denied unless it is “clear that no relief could be granted under

any set of facts that could be proved consistent with the

allegations.” Falkowski v. Imation Corp., 309 F.3d 1123, 1132 (9th

Cir. 2002) (citing Swierkiewicz v. Sorema N.A., 534 U.S. 506

(2002)). Dismissal of a complaint can be based on either the lack

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of a cognizable legal theory or the lack of sufficient facts

alleged under a cognizable legal theory. Balistreri v. Pacifica

Police Dept., 901 F.2d 696, 699 (9th Cir. 1990).

All material allegations in the complaint will be taken as

true and construed in the light most favorable to the plaintiff. 

NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).

A complaint must contain a “short and plain statement of the

claim showing that the pleader is entitled to relief.” Fed. R.

Civ. P. 8(a). “Each averment of a pleading shall be simple,

concise, and direct. No technical forms of pleading or motions are

required.” Fed. R. Civ. P. 8(e). 

DISCUSSION

I. Defendant's Motion for Partial Judgment on the Pleadings

Defendant seeks judgment on the pleadings that Plaintiff

cannot recover on its claim for a trebling penalty under the

agreement. It argues that the "fraud or false statements" trigger

for the trebling provision applies only to fraud or false

statements by the licensee regarding "running," or sales-based,

royalties, not minimum royalties. Emphasizing one portion of

section 5.7, Defendant contends that this is the only possible

interpretation of the clause because sales, whether infringing or

not, are not relevant to the calculation of minimum royalties: "A

penalty of three (3) times the amount of royalty underpayment due

to fraud or false statements which are unreported and unpaid

falling within the term of this Agreement which penalty shall be

considered as the sole compensation and damages for the unreported

infringing sales."

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3Nor will the Court address Defendant's suggestion that the

trial date and other dates be delayed. If Defendant desires to

change the trial date and other dates in case management schedule,

it must file a motion to do so.

7

Plaintiff, however, emphasizes a different portion of section

5.7:

In addition to the interest provision of this Section as to

late royalty payments, the following shall be the penalty due

to fraud or false statements in connection with any unpaid

royalties for which AEI has provided [Z-Man] with written

notification and which remain uncorrected or unpaid (with

interest) under this Section for more than thirty (30) days

from the date of such notification. . . .

In particular it emphasizes "with any unpaid royalties." Plaintiff

argues that the only way to interpret this section is to find that

the trebling provision applies to any unpaid royalties, which

includes both minimum and running royalties.

The Court need not at this time determine which party's

interpretation is correct.3 Even if Defendant is correct that the

language of the contract supports its interpretation, not

Plaintiff's, the Ninth Circuit requires that the Court give

Plaintiff "an opportunity to present extrinsic evidence as to the

intention of the parties in drafting the contract." Trident Center

v. Connecticut General Life Ins. Co., 847 F.2d 564, 570 (9th Cir.

1988). As explained in A. Kemp Fisheries, Inc. v. Castle & Cooke,

Inc., Bumble Bee Seafoods Div., 852 F.2d 493, 497 n.2 (9th Cir.

1988), under Trident, "courts may not dismiss on the pleadings when

one party claims that extrinsic evidence renders the contract

ambiguous." Rather, the case must proceed beyond the pleadings so

that the court may consider the evidence and if, "after considering

the evidence, the court determines that the contract is not

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reasonably susceptible to the interpretation advanced, the parol

evidence rule operates to exclude the evidence." Id.

Because extrinsic evidence cannot be considered on a motion

for judgment on the pleadings, Defendant's motion cannot be

granted. Defendant fails to establish clearly on the face of the

pleadings that no material issue of fact remains to be resolved

concerning the trebling penalty and that it is entitled to judgment

as a matter of law.

II. Plaintiff's Motion

As noted above, Plaintiff moves to dismiss the second, third,

fourth, fifth, sixth and seventh causes of action in Defendant's

third amended counter-complaint. Defendant agrees to dismiss its

second, third, fifth and sixth counterclaims. Although Defendant

states in the introduction of its opposition that it agrees to

dismissal without prejudice of its second and third counterclaims

and dismissal with prejudice of its fifth and sixth claims, in its

conclusion it states that it agrees to dismissal without prejudice. 

The Court dismisses the second and third without prejudice;

the fifth and sixth counterclaims are dismissed with prejudice. As

Plaintiff notes, under California law, Defendant's fifth

counterclaim for constructive trust is a remedy, not an independent

cause of action, mandating dismissal with prejudice. See

Stansfield v. Starkey, 220 Cal. App. 3d 59, 76 (1990). And

Defendant seemingly concedes that the statute of limitation ran on

its conversion claim before it first asserted that claim in the

South Carolina action.

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A. Fourth Counterclaim

In its opposition, Defendant clarifies that its fourth

counterclaim seeks to correct inventorship under 35 U.S.C. § 256

and nothing more. In response, Plaintiff withdraws its motion to

dismiss the claim to the extent it relates to the three issued

patents. It persists in its motion to dismiss the fourth

counterclaim to the extent it relates to the pending patent that,

according to Defendant's counterclaim, the Patent and Trademark

Office is about to issue.

Section 256 authorizes judicial resolution of co-inventorship

contests over issued patents, not over patents that have not yet

issued at the time the complaint is filed. Eli Lilly and Co. v.

Aradigm Corp., 376 F.3d 1352, 1357 n.2 (Fed. Cir. 2004). The

Federal Circuit has explained that the subsequent issuance of a

patent after the complaint was filed cannot cure the jurisdictional

defect. GAF Building Materials Corp. v. Elk Corp. of Dallas, 90

F.3d 479, 483 (Fed. Cir. 1996). Because the Court has no

jurisdiction over the disputed inventorship of a pending patent

application, even if that application then issues as a patent after

the complaint was filed, the Court dismisses Defendant's claim

concerning Patent Application No. 10/199,362. Defendant may seek

to amend its complaint if a patent has issued based on that

application.

B. Seventh Counterclaim

Also in its opposition, Defendant explains that its seventh

counterclaim for unjust enrichment is based on two theories:

(1) restitution for Plaintiff's conversion of Defendant's

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4

Defendant's motion for judicial notice (Docket No. 111) is

GRANTED. Defendant's motion to file a sur-reply (Docket No. 122)

is DENIED. As Plaintiff notes in its opposition, the proposed 

sur-reply addresses issues that Defendant should have, and could

have, addressed in its opposition.

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proprietary information and (2) restitution of money paid by

Defendant to Plaintiff to the extent that a contract is not found

to have existed between the parties. Defendant states that,

because it agrees to dismiss its conversion claim, it also agrees

to dismiss its restitution claim based on that theory. With regard

to its second theory, however, Defendant argues that it has stated

a valid counterclaim that should not be dismissed. It

acknowledges, however, that it has not previously plead this theory

in this action or in the transferred South Caroline action.

As Plaintiff points out, Defendant did not have the Court's

permission to amend its counter-complaint to include a claim that

was never before raised. Nonetheless, although the Court dismisses

Defendant's claim for unjust enrichment based on its first theory,

it will not dismiss Defendant's unjust enrichment claim based on

its second theory. Defendant has asserted throughout this

litigation its theory that a contract did not exist between the

parties. Plaintiff will not be prejudiced by allowing Defendant to

plead an unjust enrichment claim based on its theory of restitution

of money paid by Defendant to Plaintiff to the extent that a

contract is not found to have existed between the parties. 

CONCLUSION

For the foregoing reasons, the Court DENIES Defendant's Motion

for Partial Judgment on the Pleadings (Docket No. 110).4

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Plaintiff's Motion to Dismiss (Docket No. 102) is GRANTED IN PART

AND DENIED IN PART. Defendant's second and third claims are

dismissed without prejudice; the fifth and sixth claims are

dismissed with prejudice. The portion of Defendant's fourth claim

to correct inventorship with respect to Patent Application

No. 10/199,362 is dismissed without prejudice. Defendant's seventh

claim for unjust enrichment based on its conversion claim is

dismissed with prejudice. Defendant's seventh claim for unjust

enrichment based on Defendant's theory that the parties never

formed a contract, however, is not dismissed; Defendant can go

forward with that counterclaim. 

Currently, the dispositive motion cut-off date is set for

Friday, August 31, 2007 at 10:00 a.m.; that date is continued to

Thursday, September 6, 2007 at 2:00 p.m. The pretrial conference,

currently scheduled for Friday, November 2, 2007, is continued to

Tuesday, November 6, 2007 at 2:00 p.m.

IT IS SO ORDERED.

Dated: 6/1/07 

CLAUDIA WILKEN

United States District Judge

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