Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-02469/USCOURTS-cand-4_06-cv-02469-23/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 GRANTING IN

PART PLAINTIFF'S

MOTION FOR

SUMMARY JUDGMENT

AND GRANTING

DEFENDANT'S

CROSS-MOTION FOR

PARTIAL SUMMARY

JUDGMENT

Plaintiff Applied Elastomerics, Inc. moves for summary

judgment on several issues. Defendant Z-Man Fishing Products, Inc.

opposes Plaintiff's motion and cross-moves for partial summary

judgment. Plaintiff opposes Defendant's cross-motion. The matter

was heard on September 20, 2007. Having considered all of the

parties' papers and oral argument, the Court grants Plaintiff's

motion in part and grants Defendant's motion. 

BACKGROUND 

Plaintiff invents and patents certain chemical compositions,

composites and articles made from these compositions and

composites. In particular, it holds various patents covering the

formulation of thermoplastic elastomer (TPE) gels. Plaintiff

commercializes its technology by licensing its patents, proprietary

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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 April, 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." In July, 2001, Mr. Chen forwarded a copy of a

license agreement to Mr. Shelton. 

The license 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." In exchange for these royalties, Plaintiff agreed not to

license the patents listed on Schedule A to any third party for the

purpose of manufacturing a fishing lure. Defendant had the right

to terminate the exclusivity provision, and its obligation to pay

minimum royalties, at any time upon ninety days' written notice to

Plaintiff. 

The license agreement that Mr. Chen provided is fully

integrated. See Creason Dec., Ex. A, §10.12 ("this Agreement

constitutes the entire agreement between the parties with respect

to its subject matter and supersedes all prior agreements or

understandings between the parties relating to the subject

matter."). Section 5.7 of the agreement further provides:

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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. Company shall also pay any reasonable attorney

fees and expenses incurred by AEI as a result of such fraud or

false statements and misrepresentations.

Creason Dec., Ex. A. 

Also relevant to Plaintiff's motion is section 9.2(a), which

provides: "If the parties fail to resolve the dispute through

mediation, or if neither party elects to initiate mediation, each

party shall have the right to pursue any other remedies legally

available to resolve the dispute, provided, however, that the

parties expressly waive any right to a jury trial." Id.

On July 24, 2001, Mr. Shelton signed the agreement. In

addition, Myrna Wahoup, formerly Defendant's Vice President and

Secretary, signed the agreement. According to Mr. Shelton, either

the day he signed the agreement or the next day, he called Mr.

Chen. Mr. Shelton told Mr. Chen that he did not have a problem

signing the agreement "as long as [they] were under the

understanding that [they] would change the royalty amount" to

reflect amounts that they had been discussing. Creason Dec., Ex. G

at 73:3-7. Mr. Shelton states that Mr. Chen responded, "No

problem." Id. at 73:7-12. Mr. Chen acknowledges that Mr. Shelton

called him on July 24, 2001 or the day after. According to Mr.

Chen, Mr. Shelton told him that the agreement was signed and

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executed, but that he wanted to talk about making a modification to

the agreement; however, Mr. Chen could not recall whether it was

the minimum royalty numbers that Mr. Shelton wanted to modify. Mr.

Chen states that he told Mr. Shelton that "it's not difficult to

make modification to the agreement" and that "we'll execute an

amendment and make the changes." Cleason Dec., Ex. F at 179:11-14.

On July 25, 2001, Mr. Shelton mailed the signed agreement back

to Mr. Chen. Along with the agreement was a memorandum regarding

"License Agreement & Changes" and a page containing sales

projections and royalties. The memorandum stated:

Enclosed you will find the signed "License Agreement." 

Attached are the changes in the sales forecast and royalty

numbers. As we agreed you lists [sic] the changes as

amendments to the original agreement. We did not discuss "B"

but it is my understanding that the way it is written this

covers any and all fishing lures made from your patented

formula. If I am incorrect in my assumption please advise and

we will discuss.

Creason Dec., Ex. B. 

Mr. Chen states that he called Mr. Shelton on the day he

received the signed agreement, memorandum and its attachment. 

Mr. Chen informed Mr. Shelton that the attachment was a

hypothetical forecast and that he was "not going to go along with

making any changes based on a forecast"; Mr. Chen refused to make a

modification to the agreement. Cleason Dec., Ex. F at 194:14-6. 

Mr. Shelton denies that this conversation took place.

After Mr. Shelton signed the agreement, Defendant moved

forward in developing a new fishing lure. Plaintiff provided

formulations to Defendant to assist in the development of the lure. 

In particular, Mr. Chen sent formulations to, and worked closely

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with, Don Rawlins, of Color Technologies, a firm Defendant used to

manufacture its fishing lures. According to Mr. Shelton,

"Everything was going good" and the new lure "performed extremely

well during a test." Cleason Dec., Ex. G at 76:15-20.

In March, 2002, Defendant sent Plaintiff a document entitled

"Amendment Number 1 to Patent License Agreement." See Graber Dec.

Ex. D. Although the amendment was dated "March __, 2002," it

designated April 26, 2001 as the effective date; April 26, 2001 was

the effective date of the license agreement. The amendment would

change the minimum royalty schedule in the license agreement to

match the lower minimum royalty schedule contained in the

memorandum that Mr. Shelton sent with the license agreement. Mr.

Shelton states that he sent the amendment because he and Mr. Chen

had agreed on these numbers, but Mr. Chen had not taken any action

on changing the original license agreement as they had discussed. 

Plaintiff never signed the amendment.

In July, 2002, Plaintiff filed four patent applications for

technology relating to fishing lures. The applications were

approved and the Patent and Trademark Office issued four patents,

listing Mr. Chen as the inventor and Plaintiff as the assignee. 

See U.S. Patent Nos. 6,794,440 (the '440 patent); 7,108,873 (the

'873 patent); 7,134,236 (the '236 patent); and 7,208,184 (the '184

patent) (AEI fishing lure patents).

According to Defendant's expert, Dalbert U. Shefte, the

material claim limitations recited in AEI fishing lure patents

include (1) fishing lure being life-like, soft, flexible and

capable of exhibiting buoyancy in water; (2) fishing lure being

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rupture resistant to dynamic stretching and shearing, resistant to

ball-up during casting, and resistant to tearing encountered during

hook penetration, casting, and presentation; (3) fishing lure

capable of exhibiting a hook-to-catch ratio greater than five; (4)

fishing lure having greater elongation, greater tear resistance, or

greater fatigue resistance than a conventional plastisol polyvinyl

chloride of corresponding rigidity; (5) fishing lure resistant to

tearing encountered during hook penetration followed by elongation

to 200% as compared to a conventional plastisol polyvinyl chloride

fishing bait of corresponding rigidity; and (6) one or more

foodstuffs selected from animal foodstuff, vegetable foodstuff and

microbiological foodstuff. 

Defendant contends that Mr. Shelton contributed to the

conception of the AEI fishing lure patents by conceiving of

material claim limitations in the patents and communicating them to

Mr. Chin. It claims that Mr. Shelton is thus a co-inventor and

should be listed as such on the patents. In particular, Mr.

Shelton states that he provided Mr. Chen:

with knowledge and information about the fishing industry,

also about the product line, about how--how flotation is an

advantage, how elongation is an advantage, how tear strength

is an advantage, how hook-to-set ratio is an advantage, how

the durability of the product is an advantage where the

customer will buy, you know, a bag of TPE products and catch

30, 40 fish per bag where he'd buy a bag of plastic products

and catch five to six fish a bag.

Graber Dec., Ex. A at 129:16-24. In addition, Mr. Sheldon claims

that he recommended that scent or flavors and oil be added to bait

and that he provided Mr. Chen with drawings of various fishing

lures. In addition, Mr. Sheldon claims to have tested the various

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inventions; Mr. Chen has not fished for thirty years.

From late 2002 through early 2004, Defendant made royalty

payments to Plaintiff. In 2004, Defendant stopped paying

royalties. Defendant contends that, on August 24, 2004, it

terminated the minimum royalty provision.

In 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 numerous counterclaims and a suit against Plaintiff

in South Carolina. Almost all of Defendant's counterclaims were

dismissed or withdrawn. The South Carolina action was transferred

to this Court and consolidated with this action. Defendant's

remaining counterclaims are for co-inventorship and unjust

enrichment. Defendant also asserts twelve affirmative defenses,

including a breach of the covenant of good faith and fair dealing,

negligent misrepresentation and a request for offset of the

royalties previously paid under the license agreement.

LEGAL STANDARD

Summary judgment is properly granted when no genuine and

disputed issues of material fact remain, and when, viewing the

evidence most favorably to the non-moving party, the movant is

clearly entitled to prevail as a matter of law. Fed. R. Civ.

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P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir.

1987).

The moving party bears the burden of showing that there is no

material factual dispute. Therefore, the court must regard as true

the opposing party's evidence, if supported by affidavits or other

evidentiary material. Celotex, 477 U.S. at 324; Eisenberg, 815

F.2d at 1289. The court must draw all reasonable inferences in

favor of the party against whom summary judgment is sought. 

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

587 (1986); Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d

1551, 1558 (9th Cir. 1991). 

Material facts which would preclude entry of summary judgment

are those which, under applicable substantive law, may affect the

outcome of the case. The substantive law will identify which facts

are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986).

Where the moving party does not bear the burden of proof on an

issue at trial, the moving party may discharge its burden of

production by either of two methods. Nissan Fire & Marine Ins.

Co., Ltd., v. Fritz Cos., Inc., 210 F.3d 1099, 1106 (9th Cir.

2000). 

The moving party may produce evidence negating an

essential element of the nonmoving party’s case, or,

after suitable discovery, the moving party may show that

the nonmoving party does not have enough evidence of an

essential element of its claim or defense to carry its 

ultimate burden of persuasion at trial. 

Id. 

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If the moving party discharges its burden by showing an

absence of evidence to support an essential element of a claim or

defense, it is not required to produce evidence showing the absence

of a material fact on such issues, or to support its motion with

evidence negating the non-moving party's claim. Id.; see also

Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 885 (1990); Bhan v.

NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991). If the

moving party shows an absence of evidence to support the non-moving

party's case, the burden then shifts to the non-moving party to

produce "specific evidence, through affidavits or admissible

discovery material, to show that the dispute exists." Bhan, 929

F.2d at 1409. 

If the moving party discharges its burden by negating an

essential element of the non-moving party’s claim or defense, it

must produce affirmative evidence of such negation. Nissan, 210

F.3d at 1105. If the moving party produces such evidence, the

burden then shifts to the non-moving party to produce specific

evidence to show that a dispute of material fact exists. Id.

If the moving party does not meet its initial burden of

production by either method, the non-moving party is under no

obligation to offer any evidence in support of its opposition. Id.

This is true even though the non-moving party bears the ultimate

burden of persuasion at trial. Id. at 1107.

Where the moving party bears the burden of proof on an issue

at trial, it must, in order to discharge its burden of showing that

no genuine issue of material fact remains, make a prima facie

showing in support of its position on that issue. UA Local 343 v.

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Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1471 (9th Cir. 1994). That

is, the moving party must present evidence that, if uncontroverted

at trial, would entitle it to prevail on that issue. Id.; see also

Int’l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th

Cir. 1991). Once it has done so, the non-moving party must set

forth specific facts controverting the moving party's prima facie

case. UA Local 343, 48 F.3d at 1471. The non-moving party's

"burden of contradicting [the moving party's] evidence is not

negligible." Id. This standard does not change merely because

resolution of the relevant issue is "highly fact specific." Id.

DISCUSSION

I. Plaintiff's Motion

Plaintiff moves for summary judgment in its favor on several

issues: Defendant's tenth affirmative defense for an offset of

royalties Defendant paid to Plaintiff; Defendant's counterclaim for

co-inventorship; and Defendant's counterclaim for unjust

enrichment. In addition, it moves for an adjudication that section

4.6 of the License Agreement is the applicable minimum royalty

schedule and an order that all issues will be tried to the Court. 

A. Offset for royalties paid

In its tenth affirmative defense, Defendant contends that any

award of damages to Plaintiff must be offset by sums received by

Plaintiff. Specifically, Defendant argues that it is entitled to

recover the royalties it paid under the agreement because the

licensed patents are invalid and the products Defendant sold were

not covered by the licensed patents. Plaintiff contends that

Defendant's offset argument fails as a matter of law.

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"It is well settled law that a determination that a patent

which is the subject matter of a License Agreement is invalid does

not entitle the licensee to recoup royalties already paid." Wang

Labs., Inc. v. Ma Labs., Inc., 1995 WL 729298, at *11 (N.D. Cal.);

see also Bristol Locknut Co. v. SPS Techs., Inc., 677 F.2d 1277

(9th Cir. 1982). As explained in St. Regis Paper Co. v. Royal

Industries, 552 F.2d 309, 314 (9th Cir. 1977), this rule is founded

upon policy considerations:

The possibility of obtaining a refund of all royalties

paid might induce a manufacturer to accept a license

based on a patent of doubtful validity, derive the

benefits of suppressed competition which the patent

affords, and challenge validity only after the patent's

expiration. The licensee would have a chance to regain

all the royalties paid while having enjoyed the fruits of

the license agreement.

This rationale applies equally to a licensee’s ability to recoup or

offset past royalties if the products made under the license

agreement are later determined to be non-infringing. Wang, 1995 WL

729298 at *11. This is especially true here, where Defendant held

the exclusive right to market products it held out as covered by

Plaintiff’s patents.

Defendant acknowledges that recouping past royalties is

generally not permitted by federal law. It argues nonetheless that

Plaintiff's motion attacking its offset defense should be denied

because of certain language in the license agreement.

The license agreement provides, "In the event any Licensed

Product is manufactured, directly or indirectly, solely using AEI

Technology, but without the protection of any valid Licensed

Patents in a given country covered by a license granted under this

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License Agreement, the royalty rate shall be Three percent (3%) for

Licensed Product." Creason Dec., Ex. A at § 4.2(c). Defendant

fails to explain why this language warrants an exception to the

general prohibition against the recovery of previously paid

royalties on the grounds of invalidity or non-infringement. Like

the license agreement in Wang, the agreement here provides that

there is no warranty or representation regarding the validity or

scope of the patent rights. Thus, Defendant, like the defendant in

Wang, "assumed the risk" that Plaintiff's patents "might, at some

future date, be found not to include the licensed products" or

might be found invalid. Wang, 1995 WL 729298 at *12.

The Court concludes that Defendant would not be entitled to

offset its royalty payments if Plaintiff's patents were found to be

invalid or if Defendant's products were found not to be covered by

the patents. Plaintiff's motion for partial summary judgment on

Defendant's tenth affirmative defense is granted.

B. Co-inventorship counterclaims 

As noted above, Defendant asserts a counterclaim under 35

U.S.C. § 256 for co-inventorship, arguing that the AEI fishing lure

patents erroneously fail to name Mr. Shelton as a co-inventor. 

Section 256 provides that a co-inventor omitted from an issued

patent may be added to the patent; it provides a means for

correcting inventorship. Plaintiff charges Defendant with failing

to offer any evidence that could establish a cause of action under

section 256 and, thus, it argues that Defendant's counterclaims for

co-inventorship fail as a matter of law. Defendant responds that

genuine issues of material fact exist, precluding summary judgment. 

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The Federal Circuit has explained that a "patented invention

may be the work of two or more joint inventors." Ethicon, Inc. v.

U.S. Surgical Corp., 135 F.3d 1456, 1460 (Fed. Cir. 1998) (citing

35 U.S.C. § 116). Each joint inventor, however, "must generally

contribute to the conception of the invention," id., because

inventorship "arises from conception, not development or reduction

to practice." PerSeptive Biosystems, Inc. v. Pharmacia Biotech,

Inc., 225 F.3d 1315, 1324 (Fed. Cir. 2000); Burroughs Wellcome Co.

v. Barr Labs., Inc., 40 F.3d 1223, 1227-28 (Fed. Cir. 1994)

(“Conception is the touchstone of inventorship, the completion of

the mental part of invention.”). As explained in Hybritech, Inc.

v. Monoclonal Antibodies, Inc., 802 F.2d 1367, 1376 (Fed. Cir.

1986), "Conception is the ‘formation in the mind of the inventor,

of a definite and permanent idea of the complete and operative

invention, as it is hereafter to be applied in practice.’" 

“Conception is complete when one of ordinary skill in the art could

construct the apparatus without unduly extensive research or

experimentation.” Sewall v. Walters, 21 F.3d 411, 415 (Fed. Cir.

1994). 

Each joint inventor need not "make the same type or amount of

contribution" to the invention and co-inventors need not

"physically work together or at the same time." 35 U.S.C. § 116;

Trovan Ltd. v. Sokymat Sa, Irori, 299 F.3d 1292, 1302 (Fed. Cir.

2002). Nor need a co-inventor make a contribution to every claim

of a patent; a "contribution to one claim is enough." Ethicon, 135

F.3d at 1461. But the co-inventor must perform at least "a part of

the task which produces the invention" and must have "conceived, as

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that term is used in the patent law, the subject matter of the

claims at issue." Id. at 1460-61. One does not qualify as a coinventor by merely providing the inventor with well-known

principles or by explaining "the state of the art without ever

having 'a firm and definite idea' of the claimed combination as a

whole." Id. at 1460 (quoting Hess v. Advanced Cardiovascular

Systems, Inc., 106 F.3d 976, 981 (Fed. Cir. 1997)). See also

Trovan, 299 F.3d at 1302 (explaining that "the basic exercise of

ordinary skill in the art, without an inventive act, does not make

one a joint inventor"). Indeed, an inventor “may use the services,

ideas, and aid of others in the process of perfecting his invention

without losing his right to a patent.” Shatterproof Glass Corp. v.

Libbey-Owens Ford Co., 758 F.2d 613, 624 (Fed. Cir. 1985). 

To establish co-inventorship, the alleged co-inventor must

prove his or her contribution to the conception of the claims by

clear and convincing evidence. Ethicon, 135 F.3d at 1461. The

alleged co-inventor's testimony "cannot, standing alone, rise to

the level of clear and convincing proof." Price, 988 F.2d at 1194. 

Rather, an alleged co-inventor must provide evidence to corroborate

his or her testimony. Ethicon, 135 F.3d at 1461. Whether the

alleged co-inventor's testimony has been sufficiently corroborated

is evaluated under a "rule of reason" analysis, which requires that

an "'evaluation of all pertinent evidence must be made so that a

sound determination of the credibility of the [alleged] inventor's

story may be reached.'" Id. (quoting Price, 988 F.2d at 1195

(alterations in original)). Corroborating evidence may take many

forms, including contemporaneous documents prepared by a putative

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inventor, circumstantial evidence about the inventive process and

oral testimony of someone other than the alleged inventor. Id.

The Federal Circuit instructs that "inventorship is determined

on a claim-by-claim basis." Trovan, 299 F.3d at 1302. An

inventorship analysis "begins as a first step with a construction

of each asserted claim to determine the subject matter encompassed

thereby." Id. The next step is "to compare the alleged

contributions of each asserted co-inventor with the subject matter

of the properly construed claim to then determine whether the

correct inventors were named." Id.

In construing claims, the Court looks first to the words of

the claim. Id. at 1305. The words of the claims of AEI fishing

lure patents are clear and not subject to more than one meaning. 

Indeed, the only term disputed by the parties is "selected shape,"

which is used in every claim of the '184 patent. Plaintiff

contends that the term "selected shape" does not limit or relate

the claims to any drawings. According to Plaintiff, "selected

shape" is any shape selected by a person skilled in the art who is

practicing the patent. The '184 patent states that the drawings

"are representative of fishing bait shapes." '184 patent at col.

11. 

Defendant contends that "selected shape" means those shapes

shown in the drawings found in the patent specification, and

provided by Mr. Shelton. See Playtex Products, Inc. v. Procter &

Gamble Co., 400 F.3d 901, 909 (Fed. Cir. 2005) (finding that, in

some circumstances, patent illustrations can support the

construction of a claim term). It is correct that the term

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"selected" may have a specific meaning. See Innova/Pure Water,

Inc. v. Safari Water Filtration Sys., 381 F.3d 1111, 1119 (Fed.

Cir. 2004) ("While not an absolute rule, all claim terms are

presumed to have meaning in a claim."). But the Court is not

persuaded that "selected" refers to those shapes provided in the

drawings in the specification. Defendant correctly notes that "the

specification is the single best guide to the meaning of a disputed

term." Phillips v. AWH Corp., 415 F.3d 1303, 1321 (Fed. Cir.

2005). Here, the specification provides that the drawings are only

"representations"; it does not provide that they are the selected

shapes, nor are the claims limited to the shapes provided in the

drawings. Therefore, the Court concludes that Plaintiff's

construction, i.e., "selected shape" is any shape selected by a

person skilled in the art who is practicing the patent, is the

proper construction.

Mr. Shelton claims that two contributions he made, in addition

to the "selected shapes," concerned incorporating food particles

into fishing lures and the characteristics of buoyancy, tear

resistance, set-to-catch ratio, elongation and softness. These

contributions to the inventions do not constitute the conception

necessary to establish co-inventorship. Mr. Shelton contributed

only "well-known principles." He acknowledges that the idea of

adding scents to fishing lures was "very common knowledge to

anybody in the fishing industry." Graber Dec., Ex. A at 133:25-

34:1. Further, it is not disputed that Mr. Chen could have learned

about the desirability of buoyancy, tear resistance, high set-tocatch ration, elongation and softness "by just talking to someone

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in the fishing industry." Graber Supp. Dec., Ex. 1 at 70:12-25. 

As noted above, an inventor does not lose his right to a patent

merely by using the service, ideas and aid of others in the process

of perfecting his invention. Shatterproof Glass Corp., 758 F.2d at

624.

Defendant also fails to provide corroboration for Mr.

Shelton’s testimony that he assisted in the conception of other

claims of AEI fishing lure patents. The only evidence Defendant

presents to corroborate its co-inventorship claim is the

declaration of Ms. Wahoup. She states only that, at various times,

including during 2002, she "witnessed conversations between Mike

Shelton and John Chen," including "communications from Mr. Shelton

describing and explaining essential characteristics of soft fishing

lures of the types utilized by Z-Man." Creason Dec., Ex. L. She

does not identify the claims to which Mr. Shelton allegedly

contributed. Defendant argues that, at this point in the

litigation, it is not required to present all of the factual

evidence of corroboration that it will present at trial. While

this may be true, Defendant is required to present enough evidence

to show that there is a material dispute of fact concerning whether

it can show by clear and convincing corroborated evidence that Mr.

Shelton is a co-inventor of AEI fishing lure patents. It does not. 

The Court grants summary judgment in favor of Plaintiff of

this issue as well.

C. Unjust enrichment counterclaim

Defendant's counterclaim for unjust enrichment is premised on

the theory that no contract was ever formed between the parties. 

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Defendant argues that Mr. Shelton's July 25, 2001 memo sent with

the signed license agreement constituted a counter-offer that was

never accepted. Plaintiff, however, contends that the facts

unequivocally establish that the parties entered into the license

agreement. 

Plaintiff argues that the fact that Defendant concedes that

its representatives signed the agreement ends the inquiry. The

California Supreme Court instructs, "The general rule is that when

a person with the capacity of reading and understanding an

instrument signs it, he is, in the absence of fraud and imposition,

bound by its contents, and is estopped from saying that its

provisions are contrary to his intentions or understanding.”

Jefferson v. Cal. Dept. of Youth Authority, 28 Cal. 4th 299, 303

(2002) (citation and inner quotations omitted). California law

further provides that "performance of the conditions of a proposal,

or the acceptance of the consideration offered with a proposal, is

an acceptance of the proposal." Cal. Civ. Code § 1584. Here,

there is no dispute that Defendant accepted Plaintiff's assistance

in developing its product and that it made payments under the

license agreement. Had Defendant believed there was no contract

between it and Plaintiff, but only an unaccepted counter-offer, it

would not have performed under the contract, nor expected Plaintiff

to do so.

Plaintiff points out that Defendant also admitted that it

entered into the agreement in its "Amendment Number 1 to Patent

License Agreement." See Graber Dec. Ex. D. The amendment states

that "AEI and company entered into that certain Patent License

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Agreement with an effective date of April 26, 2001." Id. In

addition, Plaintiff notes that Defendant admitted in its Answer,

Counter-Complaint and Jury Demand that it entered into the

agreement. This admission still carries weight, even though

Defendant later amended its answer and revoked its admission. 

Defendant concedes that it paid royalties, but it points out

that its royalty payments were consistent with the license

agreement and with the allegedly agreed upon lower minimum royalty

schedule included with Mr. Shelton's July 25, 2001 memorandum to

Mr. Chen. Defendant contends that Amendment Number 1 was merely a

document containing the terms to which AEI had earlier agreed and

that nothing should be made of the fact that it is labeled an

"amendment." These arguments are not persuasive.

Because Defendant's representatives signed the license

agreement and then sent the executed agreement back to Plaintiff,

and virtually all of the other evidence indicates that a contract

was formed between the parties, Defendant's counterclaim for unjust

enrichment fails as a matter of law. The Court grants summary

judgment in favor of Plaintiff on this ground. 

D. Minimum royalty schedule

Defendant asserts that, if the parties did enter into a

contract, the lower royalty schedule included in the July 25, 2001

memorandum is the applicable royalty schedule. Plaintiff contends

that this theory fails as a matter of law and that section 4.6 of

the agreement sets forth the applicable minimum royalties. It

argues that the alternative royalty schedule provided in the July

25, 2001 memorandum contradicts the schedule set forth in the

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parties' integrated contract. 

As noted above, the agreement here is integrated. California

law provides, "Terms set forth in a writing intended by the parties

as a final expression of their agreement with respect to such terms

as are included therein may not be contradicted by evidence of any

prior agreement or of a contemporaneous oral agreement." Cal. Civ.

Proc. § 1856. See also Casa Herrera, Inc. v. Beydoun, 32 Cal. 4th

336, 344 (2004) ("The parol evidence rule therefore establishes

that the terms contained in an integrated written agreement may not

be contradicted by prior or contemporaneous agreements. . . . the

rule necessarily bars consideration of extrinsic evidence of prior

or contemporaneous negotiations or agreements at variance with the

written agreement."). 

Defendant does not argue that the parol evidence rule would

not apply to the July 25, 2001 memorandum; it argues instead that

Plaintiff's reliance on the parol evidence rule is misplaced

because there is a dispute of fact regarding whether there is a

contract and the terms of the contract, if any. Again, however,

the Court has concluded that there is no genuine dispute of fact

concerning whether there is a contract. The minimum royalty

schedule contained in the July 25, 2001 memorandum was a

contemporaneous communication that may not be used to contradict

the terms of the integrated contract. Accordingly, those terms

will govern the parties’ contract-based claims.

E. Court trial or jury trial

The right to a jury trial in federal court is governed by

federal law and, under federal law, parties may contractually waive

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their right to a jury trial. Telum, Inc. v. E.F. Hutton Credit

Corp., 859 F.2d 835, 837 (10th Cir. 1988). As explained in Okura &

Co., Inc. v. Careau Group, 783 F. Supp. 482, 488 (C.D. Cal. 1991),

"While the right to civil jury trial is a fundamental

constitutional right, it may be waived by a contract knowingly and

voluntarily executed." Plaintiff contends that Defendant waived

its right to a jury. As noted above, the agreement provides "that

the parties expressly waive any right to a jury trial." 

Defendant contends that no contract with a jury waiver

provision was formed. It argues that Plaintiff cannot rely on a

jury trial waiver when there are material questions of fact

concerning whether the contract containing that waiver was formed. 

But as discussed above, the Court finds that no such material

questions of fact exist. A contract was in fact formed, and the

parties' contract-based claims are therefore covered by the jury

waiver clause in the license agreement. These claims will be tried

to the Court, not to a jury.

II. Defendant's Motion

Defendant seeks partial summary judgment in its favor that

Plaintiff cannot recover a trebling penalty under the agreement. 

Defendant argues that this is a contractual penalty, unenforceable

under California law, and further that it applies only to "running"

or sales-based royalties, which are not at issue here. 

A. Contractual Penalty

California law prohibits enforcement of contractual penalties. 

Ridgely v. Topa Thrift and Loan Assoc., 17 Cal. 4th 970, 977

(1998). Liquidated damages clauses, however, are enforceable, as

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long as they are reasonable. Cal. Civ. § 1671(b) ("a provision in

a contract liquidating the damages for the breach of the contract

is valid unless the party seeking to invalidate the provision

establishes that the provision was unreasonable under the

circumstances existing at the time the contract was made”). In

Ridgley, the California Supreme Court instructed, 

A liquidated damages clause will generally be considered

unreasonable, and hence unenforceable under section 1671(b),

if it bears no reasonable relationship to the range of actual

damages that the parties could have anticipated would flow

from a breach. The amount set as liquidated damages must

represent the result of a reasonable endeavor by the parties

to estimate a fair average compensation for any loss that may

be sustained. In the absence of such relationship, a

contractual clause purporting to predetermine damages must be

construed as a penalty.

17 Cal. 4th at 977 (citations and inner quotations omitted). Other

factors to consider are "the relative equality of the bargaining

power of the parties, whether the parties were represented by

lawyers at the time the contract was made, the anticipation of the

parties that proof of actual damages would be costly or

inconvenient, the difficulty of proving causation and

foreseeability, and whether the liquidated damages provision is

included in a form contract." Weber, Lipshie & Co. v. Christian,

52 Cal. App. 4th 645, 654-55 (1997). 

Defendant first points out that the license agreement refers

to a "penalty," not to liquidated damages. Whether the contract

uses the term "penalty" or "liquidated damages," however, is not

determinative. As explained in Weber, "A court will interpret a

liquidated damages clause according to its substance, and if it is

otherwise valid, will uphold it even if the parties have referred

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to it as a penalty." Id. at 656.

Defendant also contends that the trebling provision in section

5.7 does not represent the result of a reasonable endeavor by the

parties to estimate a fair compensation for any loss that may be

sustained. Defendant points out that in Harbor Island Holdings v.

Kim, 107 Cal. App. 4th 790, 796 (2003), the court concluded that a

contract provision that, "in the event of breach, any breach, the

rent would more than triple," lacked the necessary proportional

relation to the damages which may actually flow from the failure to

perform under the contract; therefore, the provision was a penalty

and was not enforceable. It argues that the only purpose of

section 5.7 is to penalize. Indeed, section 5.7 first requires

that Plaintiff determine the "amount of royalty underpayment due to

fraud or false statement" and then triple that amount and add

attorneys' fees and expenses.

Plaintiff responds that Defendant has not met its burden to

demonstrate that section 5.7 is unreasonable. It accuses Defendant

of presenting no evidence other than the agreement itself. The

agreement itself, however, can be sufficient to show that it

contains contractual penalties and not liquidated damages.

 Plaintiff also argues that section 5.7 is a permissible

liquidated damages clause. It points out that Defendant was

represented by in-house counsel and that the contract was

negotiated by the parties and is not a form contract. It argues

that the damages here are uncertain. This argument, however, is

not persuasive. As discussed above, the agreement requires that

the party compute the amount of royalty underpayment, which is the

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damage, and then triple it. 

Plaintiff's reliance on 35 U.S.C. § 284, the section of the

patent code that allows a court to increase the damages up to three

times the amount of the compensatory damages, is also misplaced. 

Treble damages and attorneys' fees are available in infringement

cases; at issue is an agreement licensing Plaintiff's patents. 

Section 5.7 of the contract cites section 284 of title 55. But

potential treble damages are not part of a parties' actual damages:

"The purpose of an enhanced damages award is punitive, and is meant

to punish behavior, such as willful infringement, that is properly

characterized as 'reprehensible' or 'egregious.'” Applera Corp. v.

MJ Research Inc., 372 F. Supp. 2d 233, 235 (D. Conn. 2005). 

The Court concludes that the treble damages portion of section

5.7 does not represent the result of a reasonable endeavor by the

parties to estimate a fair compensation for any loss that may be

sustained; it bears no reasonable relationship to the range of

actual damages that the parties could have anticipated would flow

from a royalty underpayment due to fraud or false statements. It

is a contractual penalty, not liquidated damages. The Court grants

partial summary judgment in favor of Defendant on this ground.

B. Running and Minimum Royalties 

Defendant further argues that partial summary judgment should

be granted in its favor on the ground that the portions of section

5.7 providing for trebling, attorneys’ fees and expenses do not

apply to minimum royalties, the only royalties at issue. It

argues, as it argued in its motion for judgment on the pleadings,

that the "fraud or false statements" trigger for the trebling

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provision applies only to fraud or false statements by the licensee

regarding "running," or sales-based, royalties. 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."

Plaintiff, however, emphasizes the phrase "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 denied Defendant's motion for judgment on the

pleadings, holding that, even if Defendant is correct that the

language of the contract supports its interpretation, 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. Plaintiff contends that the extrinsic

evidence supports its interpretation. Mr. Chen did not tell

Defendant that this provision only applied to sales. Mr. Chen

testified that he "did not mention sales." Graber Supp. Dec., Ex.

4 at 100:15. He stated, "I was not specific as to sale versus any

particular type of royalty. It was just cash, money . . . that's

the reason we put it here, to cover all monies owed." Id. at

100:15-23. Mr. Chen further testified that he discussed with

Defendant that it might have to pay three times the amount owed: "I

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pointed it out to them because I don't want them to be surprised

not having seen this, and we discussed it at meeting." Id. at

95:19-25. 

 Notwithstanding Mr. Chen's testimony, the wording of the

trebling portion of section 5.7 clearly contemplates the

possibility of the licensee fraudulently under-reporting sales, a

situation that would alter only the amount of running royalties

owed. Even if Mr. Chen intended the trebling provision to apply to

underpayment of minimum royalties as well, he did not clearly

communicate this intention to Defendant. His testimony about his

conversation with Defendant provides no indication that the parties

intended the provision to apply to both minimum and running

royalties. Absent such an indication of the parties’ intent, the

language of the contract governs.

Accordingly, the Court finds that the trebling provision does

not apply to underpayment of minimum royalties. In addition, the

attorneys’ fees and expenses provision in section 5.7 explicitly

covers only such fees and expenses incurred as a result of the

“fraud or false statements” that lead to under-reporting of sales. 

Thus, the Court finds that this portion of section 5.7 also does

not apply to underpayment of minimum royalties.

CONCLUSION

For the foregoing reasons, Plaintiff's motion for summary

judgment (Docket No. 150) is GRANTED IN PART and DENIED IN PART. 

Specifically, Plaintiff's motion for partial summary judgment on

Defendant's tenth affirmative defense is granted: Defendant will

not be entitled to an offset for its running royalty payments if

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Plaintiff's patents are found to be invalid or if Defendant's

products are found not to be covered by the patents. Summary

judgment in Plaintiff's favor is also granted as to Defendant's coinventorship counterclaims. Because, as a matter of law, a

contract was formed between the parties, Defendant's counterclaim

for unjust enrichment fails and the Court also grants summary

judgment in favor of Plaintiff on this ground. The parties'

contract-based claims will be governed by the minimum royalty

schedule contained in the integrated license agreement. These

claims are also covered by the jury waiver clause in the license

agreement; thus, any contract-based claims not resolved on summary

judgment will be tried before the Court, not before a jury. 

Defendant's cross-motion for partial summary judgment (Docket

No. 162) is GRANTED. Because the trebling provision in section 5.7

is a contractual penalty, it is not enforceable. Even if it were,

as a matter of contract interpretation, neither it nor the

provision concerning attorneys’ fees and expenses applies to unpaid

minimum royalty payments.

IT IS SO ORDERED.

Dated: 9/25/07 

CLAUDIA WILKEN

United States District Judge

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