Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-14-03232/USCOURTS-ca7-14-03232-0/pdf.json

Parties Involved:
J&J Technologies, LC
Appellee
Joseph A. Lewis II
Appellee
Stiefel Laboratories, Inc.
Appellee
VDF Futureceuticals, Inc.
Appellant

Document Text:

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 14-3232

VDF FUTURECEUTICALS, INC.,

Plaintiff-Appellant,

v.

STIEFEL LABORATORIES, INC., et al.,

Defendants-Appellees.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 13 C 407 — John W. Darrah, Judge.

____________________

ARGUED MAY 29, 2015 — DECIDED JULY 10, 2015

____________________

Before POSNER, EASTERBROOK, and SYKES, Circuit Judges.

POSNER, Circuit Judge. In this needlessly complex case (the 

plaintiff’s complaint is 33 pages long and consists of 184 paragraphs), with federal jurisdiction based on diversity of citizenship and the governing substantive law that of Illinois, 

the parties are wrangling over a license agreement. The 

agreement—40 pages of fine print, including numerous 

Case: 14-3232 Document: 41 Filed: 07/10/2015 Pages: 9
2 No. 14-3232

amendments—is between the plaintiff, VDF FutureCeuticals, 

Inc., and one of the three defendants, J&J Technologies, LC 

(the other two defendants are Stiefel Laboratories, Inc., and 

Joseph A. Lewis II). VDF has trademark and patent rights in 

“CoffeeBerry,” an extract from the whole fruit (not just the 

bean) of the coffee plant.

The agreement licensed J&J (managed by defendant Lewis, formerly a 45 percent owner of the company, as was another of the company’s three owners) to make and sell CoffeeBerry-based skin-care products to which VDF has the intellectual property rights. In other words, the agreement licensed J&J to “commercialize” VDF’s intellectual property.

The license required J&J to remit to VDF, as royalties, 15 percent (later raised to a third) of any revenues that J&J obtained from selling the licensed product, and of any royalties 

that J&J received from firms to which it granted sublicenses. 

All the royalties received by VDF would be what are called

“running royalties,” that is, royalties based on the number of 

sales by the licensee (J&J), or by sublicensees of the licensed 

product. Regarding sublicensees, the license permitted J&J to 

sublicense its rights under the license “in the exercise of 

[J&J’s] sole discretion and judgment” (altered to “in the exercise of its best judgment” by an amendment in 2006).

The license also required J&J to pay VDF, at a minimum, 

a specified alternative quarterly royalty in order to protect 

VDF in the event that the running royalties fell below a specified level in particular quarters. The license provided that it 

could not be assigned without VDF’s written permission, but

it did not forbid a change of control of J&J, and this omission 

has turned out to be critical.

Case: 14-3232 Document: 41 Filed: 07/10/2015 Pages: 9
No. 14-3232 3

The license was issued in 2004. Two years later J&J sublicensed defendant Stiefel, a subsidiary of GlaxoSmithKline.

Stiefel was a natural to become involved in VDF’s business

because it’s a manufacturer of dermatological products and 

VDF hoped CoffeeBerry would become an ingredient of 

such products.

Four years later, J&J’s three owners sold their ownership 

interests to Stiefel for $8.5 million (a third of which was held 

back pending VDF’s written acknowledgement of the membership change, but we can ignore that detail). J&J thereupon 

became a Stiefel subsidiary and, VDF claims, obligingly

agreed to reduce Stiefel’s royalty obligation (remember that 

Stiefel was J&J’s sublicensee) and otherwise hurt itself, for 

example by abandoning, when Stiefel terminated the sublicense that J&J had given it, the right under the sublicense to 

a $1 million termination fee.

Stiefel’s internal documents state that its reasons for 

buying J&J’s stock rather than taking an assignment of J&J’s 

license from VDF were both to avoid having to get VDF’s 

permission for an assignment and (since Stiefel would now

control J&J) to reduce the royalties that Stiefel would have to 

pay for its marketing of CoffeeBerry. Two months after buying J&J’s stock, Stiefel engineered an amendment to the sublicence agreement (that is, the agreement that made Stiefel a 

sublicensee of J&J) that reduced the alternative minimum 

royalties that Stiefel owed J&J. The effect was to divert part 

of the license-revenue stream from VDF and J&J to Stiefel.

Two years later (2012) VDF filed this lawsuit, charging 

J&J, Stiefel, and Lewis with having committed a variety of 

unlawful acts. These included multiple breaches of contract, 

including what VDF contends was the de facto assignment

Case: 14-3232 Document: 41 Filed: 07/10/2015 Pages: 9
4 No. 14-3232

of J&J’s license to Stiefel without VDF’s approval, breach of 

the common law duty of good faith and fair dealing in the 

performance of a contract, failure to use “commercially reasonable efforts to make, use, sell, and otherwise commercialize” the licensed products (in other words, failure to use 

“best efforts” to promote those products), failure to pay VDF 

a third of the $8.5 million purchase price for J&J’s stock as an 

advance royalty, and ultimately shutting down J&J’s business to cut off royalties to VDF. The complaint also asks that 

the veil be pierced so that Lewis and Stiefel can be charged 

with J&J’s misdeeds. Those two defendants are further 

charged with conspiring to appropriate the royalties and 

other contract payments due VDF under the license agreement. In addition, Lewis is charged with unjust enrichment

and conversion as a result of that appropriation and with 

breach of fiduciary duty to VDF, and Stiefel with tortious 

interference with the VDF license. And for good measure all 

three defendants (Stiefel, Lewis, and J&J) are charged with 

conspiring to interfere with the license.

The district judge granted summary judgment in favor of 

the defendants with respect to two of VDF’s claims: that the 

defendants had engineered an unauthorized assignment of 

the J&J license and that the $8.5 million that Stiefel had paid 

to acquire J&J was really a purchase of J&J’s anticipated sales 

revenue under the license agreement and a third of that revenue should therefore have gone to VDF as advance royalties.

The district judge certified his ruling for an immediate 

appeal even though VDF’s numerous other claims against 

the defendants remain pending in the district court unresolved. Fed. R. Civ. P. 54(b) provides that “when an action 

Case: 14-3232 Document: 41 Filed: 07/10/2015 Pages: 9
No. 14-3232 5

presents more than one claim for relief ... the court may direct entry of a final judgment as to one or more, but fewer 

than all, claims ... only if the court expressly determines that 

there is no just reason for delay.” If the court does enter final 

judgment, the judgment is immediately appealable, just like 

a conventional final judgment—one that winds up the entire 

case in the trial court—provided that the claim or claims resolved by the judgment do not so overlap claims remaining 

in the district court as to create needless duplication of effort

to resolve the parties’ entire dispute. Olympia Hotels Corp. v. 

Johnson Wax Development Corp., 908 F.2d 1363, 1366–68 (7th 

Cir. 1990); Spiegel v. Trustees of Tufts College, 843 F.2d 38, 44–

46 (1st Cir. 1988); 10 Wright & Miller, Federal Practice & Procedure § 2657 (3d ed.). An example of needless duplication is

the appeal to this court of a claim that might be undercut by 

the resolution of a factual dispute not yet decided by the district court.

There is some overlap in this case between the claims before us on appeal and those yet to be resolved in the district 

court. The overlap arises from the fact that all the claims ultimately derive from Stiefel’s purchase of all the stock of J&J.

But the overlap is far from complete, because VDF’s assignment and advance-royalty claims, the only ones before us on 

this appeal, focus on the sale of J&J’s stock to Stiefel, while 

VDF’s best-efforts claim, along with related claims pending 

in the district court (most of which appear to be similar to 

and may be encompassed by the best-efforts claim), focus on 

events that took place after the sale of J&J’s stock by its owners to Stiefel.

In addition the claims pressed in this appeal have been 

fully briefed and argued, are ripe for decision, and are easily 

Case: 14-3232 Document: 41 Filed: 07/10/2015 Pages: 9
6 No. 14-3232

resolved; as we’re about to see, they have no merit and thus 

were properly dismissed by the district court. Remaining for 

trial are stronger claims by VDF pending in the district 

court. The claim for breach of the best-efforts clause in the 

license agreement is particularly strong because how could

J&J be found to have been exerting “commercially reasonable efforts to make, use, sell, and otherwise commercialize” 

CoffeeBerry, as the license obligated it to do, when as a result of its becoming owned by Stiefel it reduced its royalty 

payments to VDF without compensation?

Were we to dismiss the appeal we might well see in a 

subsequent appeal the same two claims before us in this appeal. For even if VDF prevails on other claims in the district 

court, it might challenge that court’s dismissal of the claims 

before us in the present appeal in the hope of obtaining 

greater damages by proving more violations.

So we turn to the two claims before us—that the defendants effected an unauthorized assignment to Stiefel of the 

license that VDF had granted to J&J and that the $8.5 million 

that Stiefel paid to acquire J&J was a purchase of J&J’s anticipated royalty revenue under the license and so a third of the

$8.5 million should have gone to VDF as advance royalties.

A fatal problem with the first claim is that by failing to place 

any restrictions on who could own its licensee J&J, VDF exposed itself to being taken advantage of by a change of ownership at J&J that would result in operating changes and alter its relationship to VDF. Had Stiefel bought J&J’s license,

or instead bought J&J and dissolved the company so that

when the dust settled all that Stiefel would have obtained 

from the purchase was the license, Stiefel would have violated the terms of the license by obtaining it without VDF’s 

Case: 14-3232 Document: 41 Filed: 07/10/2015 Pages: 9
No. 14-3232 7

consent. Baxter Healthcare Corp. v. O.R. Concepts, Inc., 69 F.3d 

785, 788–89 (7th Cir. 1995) (Illinois law). That didn’t happen.

J&J remained in existence after its acquisition by Stiefel, as 

VDF’s licensee and Stiefel’s sublicensor.

It’s true as we’ve seen that the agreement between J&J 

and Stiefel to reduce the alternative minimum royalties 

owed by Stiefel to J&J reduced the income that VDF received

from the license. But Stiefel’s negotiations that had led to 

this untoward consequence for VDF had been not with J&J 

but with its three owners. This makes a difference so far as 

Stiefel’s allegedly malign interference with and manipulation of J&J are concerned. A change in ownership is likely to 

result in a change in operations. That the change in how J&J 

was operated was adverse to the licensor’s interests is why 

with clearer foresight VDF would have included restrictions 

in the license on changes in the ownership of its licensee, 

J&J. Its failure to do so was fatal, because “the courts have 

held that the sale of all the stock in a closely held corporation 

whose principal asset is a contract does not violate a nonassignment clause even when the stock is sold to a person to 

whom, previously, the counterparty had explicitly refused 

that the contract be assigned. If the counterparty to a contract with a corporation wishes to limit the persons to whom 

ownership or control of the corporation can be sold, it must 

do this through specific language to that effect in the contract (a ‘change of control’ clause); a nonassignment clause 

will not suffice.” Kenneth Ayotte & Henry Hansmann, “Legal Entities as Transferable Bundles of Contracts,” 111 Michigan Law Review 715, 724 (2013). “[T]he mere change of stock 

ownership would not nullify a non-assignable license, absent a change in control provision.” Elaine D. Ziff, “The Effect of Corporate Acquisitions on the Target Company’s LiCase: 14-3232 Document: 41 Filed: 07/10/2015 Pages: 9
8 No. 14-3232

cense Rights,” 57 Business Lawyer 767, 789 (2002); see Baxter 

Healthcare Corp. v. O.R. Concepts, Inc., supra, 69 F.3d at 788–

89.

Were this not the rule, routine anti-assignment clauses 

would impede liquidity in the market for corporate control.

Sizeable corporations are likely to be party to many contracts, often containing anti-assignment clauses similar to the 

one in VDF’s license to J&J. Were such clauses interpreted to 

prohibit changes in the control of an acquired corporation, 

acquirers (such as Stiefel in this case) would have to negotiate (and therefore pay something) for the consent of the licensors of the acquired corporation to any changes in the 

control of the licensee that the acquirer wanted to make.

This analysis doesn’t leave VDF remediless, because the 

license it granted J&J required J&J to use its best efforts to 

promote the sale of VDF’s products and to remit the royalties generated by those sales to VDF; and J&J, under the influence of Stiefel and Lewis, may have done neither. But that 

is an issue that the district court has yet to address.

VDF’s second claim in this appeal is that the $8.5 million 

that Stiefel paid J&J’s owners for their stock constituted advance royalties, a third of which therefore were owed to 

VDF. Although Stiefel’s willingness to pay that price was (as 

Stiefel’s own documents confirm) based on a forecast of 

J&J’s future royalty receipts from sales of CoffeeBerry, the 

license that VDF had granted J&J limited the royalties that 

J&J would owe VDF to money “based on the actual sale of 

[CoffeeBerry] Products by Licensee or its sublicensees which 

are actually collected by Licensee.” J&J’s owners sold stock, 

not CoffeeBerry products, to Stiefel, and they rather than J&J 

received the $8.5 million that Stiefel paid for their company’s 

Case: 14-3232 Document: 41 Filed: 07/10/2015 Pages: 9
No. 14-3232 9

stock. VDF’s interpretation of the royalty provision in the 

license would require a seller of corporate stock to pay a portion of the purchase price to the corporation’s licensors, a 

portion estimated from the expected cash flow from exploiting the acquired corporate assets to generate revenue. See 

Ben McClure, “Digging into the Dividend Discount Model,” 

Investopedia, www.investopedia.com/articles/fundamental/04

/041404.asp (visited July 9, 2015). Such a requirement, involving complex and contestable financial estimations,

would be another impediment to the smooth operation of 

the market in corporate control.

The appeal, in short, has no merit, and the decision appealed from is therefore

AFFIRMED.

Case: 14-3232 Document: 41 Filed: 07/10/2015 Pages: 9