Opinion ID: 2972628
Heading Depth: 2
Heading Rank: 2

Heading: analysis

Text: Even assuming, arguendo, that Mickowski’s patent judgment against VTC was revived on August 2, 2001, when the bankruptcy court purportedly vacated the confirmation order, we hold in the alternative that Visi-Trak Worldwide cannot be held liable for that judgment as a successor to VTC. Mickowski argues that, under federal common law, he needs to show only that Visi-Trak Worldwide had notice of Mickowski’s claim against its predecessor (VTC) and that there was “substantial continuity” in the operation of the business before and after the sale. See, e.g., EEOC. v. G-K-G, Inc., 39 F.3d 740, 748 (7th Cir. 1994) (citations omitted) (age discrimination case; finding substantial continuity where successor retained most of predecessor’s personnel, including most of its management personnel and all its salesmen, and did not institute major changes until a year after the acquisition); Upholsterers' Int’l Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323, 1329 (7th Cir. 1990) (suit for delinquent pension funds; holding that continuity of operations was established where successor employed substantially all of the predecessor’s workforce, including supervisory personnel; used the predecessor’s plant, machinery, and equipment and manufactured the same products; the successor completed the predecessor’s uncompleted work orders and agreed to honor warranty claims for goods sold by the predecessor; and several of the predecessor’s officers stayed on in the same positions under the successor’s management). Visi-Trak Worldwide counters that the “substantial continuity” test is not part of the federal common law and that, in any event, the “mere continuation” test for successor liability under Ohio common law governs. See Welco Indus., Inc. v. Applied Cos., 617 N.E.2d 1129, 1130-31 (Ohio 1993) (“A corporation that purchases the assets of another is not liable for the contractual liabilities of its predecessor corporation unless (1) the buyer expressly or impliedly agrees to assume such liability; (2) the transaction amounts to a de facto consolidation or merger; (3) the buyer corporation is merely a continuation of the seller corporation; or (4) the transaction is entered into fraudulently for the purpose of escaping liability.”) (emphasis added; citation omitted). Under Ohio common law, a corporation is not a mere continuation of the corporation whose assets it has purchased, just because it continues to provide the same services. Erdy v. Columbus Paraprofessional Inst., 599 N.E.2d 338, 341 (Ohio Ct. App. 1991). Under a “mere continuation” theory of successor liability, it is not enough to show that the purported successor has “the same physical plant, officers, employees and product line as” the purported predecessor. Welco, 617 N.E.2d at 1134 (holding that these facts are relevant only to the more expansive theory of successor liability of substantial continuity, which does not apply where one corporation has contracted to purchase the assets of another). Rather, “the basis of this [mere continuation] theory is the continuation of the corporate entity, not the business operation, after the transaction,” such as when one corporation sells its assets to another corporation with the same people owning both corporations. Welco, 617 N.E.2d at 1134 (citation omitted); see also id. at 1133 (rejecting a relaxation of the “mere continuation” theory of successor liability in which courts have imposed liability after a cash-for-assets transaction “on the basis of significant shared features between the predecessor and successor corporations”). “[T]he key element in establishing continuation is a common identity of stockholders, directors, and stock.” Erdy, 599 N.E.2d at 341 (citations omitted). Because Ohio law of successor liability arguably is more favorable to Visi-Trak Worldwide than the relaxed standard under federal common law, the application of federal or state common law No. 04-3889 Mickowski v. Visi-Trak Worldwide Page 8 could determine whether the district court appropriately granted summary judgment for Visi-Trak Worldwide. For the reasons discussed below, we hold that the district court properly held that Ohio law applies the relevant standard of successor liability and that the court correctly held that VisiTrak Worldwide is not VTC’s successor as a matter of Ohio law. Article I, Section 8 of the U.S. Constitution prescribes that Congress shall act “to promote the program of science and useful arts, by securing for limited times for authors and inventors the exclusive right to their respective writings and discoveries.” U.S. CONST. Art. I, § 8. The objective of the clause “was clearly to facilitate the granting of rights national in scope.” Goldstein v. California, 412 U.S. 546, 555 (1973). From this general statement in Goldstein, Mickowski argues that federal common law must guide this Court’s determination of Visi-Trak Worldwide’s potential successor liability for his patent judgment. Yet, Mickowski neglects to mention that the Court in Goldstein also held that “the subject matter to which [Article I, § 8] is addressed may … be of purely local importance and not worthy of national attention or protection,” id. at 558, that its subject matter “may at times be of purely local concern,” and that “[n]o conflict will necessarily arise from a lack of uniform state regulation,” id. at 560. Thus, Goldstein suggests that there need not be complete, national uniformity in the protection of patent rights. Mickowski also cites cases in which courts have applied federal common law to the issue of successor liability. See Bhd. of Locomotive Eng’rs v. Springfield Terminal R. Co., 210 F.3d 18, 26 (1st Cir. 2000) (Railway Labor Act case); Chicago Truck Drivers Union v. Tasemkin, Inc., 59 F.3d 48, 49 (7th Cir. 1995) (ERISA case); G-K-G, 39 F.3d at 747-48 (ADEA case); Leib v. Georgia Pac. Corp., 925 F.2d 240, 246 (8th Cir. 1991) (adopting federal common law approach for determining successorship liability for a claim under the Vietnam Era Veterans’ Readjustment Assistance Act that is similar to the approach used under the National Labor Relations Act). Because these cases arose in the context of labor law and pension litigation, they do not necessarily extend to the patent judgment enforcement context. To determine whether the standards for successor liability for a patent judgment derive from federal or state common law, this Court must apply the Supreme Court’s decision in Atherton v. Fed. Deposit Ins. Corp., 519 U.S. 213 (1997). In Atherton, the Resolution Trust Corporation (later replaced by the FDIC) sued several officers and directors of a savings association for violating the standard of care they owed the federally-chartered and federally-insured savings associations. The initial question for the Court was whether that standard of care was defined by federal common law. The Court explained that “federal common law” refers to “a rule of decision that amounts, not simply to an interpretation of a federal statute or a properly promulgated administrative rule, but, rather, to the judicial ‘creation’ of a special federal rule of decision.” Id. at 218 (citations omitted). Critically, the Court noted that “‘cases in which judicial creation of a special federal rule would be justified ... are ...‘few and restricted.’” Id. (quoting O'Melveny & Myers v. FDIC, 512 U.S. 79, 87 (1994)) (internal quotation marks and citation omitted). Further, the existence of related federal statutes does not automatically show that Congress intended courts to create federal common-law rules, “for ‘Congress acts… against the background of the total corpus juris of the states….’” Id. (quoting Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68 (1966) (other quotation marks and citation omitted)). “Thus, normally, when courts decide to fashion rules of federal common law, ‘the guiding principle is that a significant conflict between some federal policy or interest and the use of state law ... must first be specifically shown.” Id. (quoting Wallis, 384 U.S. at 68). “Indeed, such a ‘conflict’ is normally a ‘precondition.’” Id. (quoting O'Melveny, 512 U.S. at 87). With respect to the facts before it, the Court noted that Congress had passed numerous pieces of legislation concerning the formation, operation, and activities of federally-chartered banks, which are distinct from savings associations. Id. at 219. Congress also had enacted legislation concerning federally-chartered savings associations. Id. None of this legislation, however, even purported to set forth standards for corporate governance of savings associations. Id. Thus, the remaining No. 04-3889 Mickowski v. Visi-Trak Worldwide Page 9 question for the Court was whether “the application of state-law standards of care to such banks would conflict with, and thereby significantly threaten, a federal policy or interest.” Id. If so, then it would be appropriate to create federal common law on the issue (assuming that no federal statute controlled the issue). The Court found that there was no such conflict between state law standards and a federal policy or interest. Id. The Court rejected the FDIC’s argument about the need for uniformity, which purportedly would occur if federal common law supplanted state standards of fiduciary responsibility. Id. at 219-20. “To invoke the concept of uniformity… is not to prove its need,” remarked the Court. Id. at 220 (internal punctuation and citations omitted). In fact, there was no need for uniformity because the nation’s banking system had thrived despite disparities in matters of corporate governance. Id. The Court also held that the mere fact that savings associations in the case were federally-chartered did not in itself justify the application of federal common law. Id. at 221. The Court observed that numerous state laws (e.g., contract law, employment discrimination laws) apply to federally-chartered banks. Id. at 222-23. In the end, the Court found no significant conflict with, or threat to, a federal interest. Id. at 225. The Court therefore held that the case before it did not represent1 one of the few and restricted instances in which a federal court can create federal common law. Id. Attempting to distinguish Atherton, Mickowski argues that federal common law applies to a determination of successor liability because there is a conflict between state and federal law standards; and that the federal law standard is more encompassing than its Ohio common law counterpart. But the mere fact that the “substantial continuity” test of federal common law is more encompassing than the “mere continuation” test of state common law does not demonstrate a “significant conflict between some federal policy or interest and the use of state law.” Atherton, 519 U.S. at 218 (internal quotation marks and citation omitted). Mickowski has failed to show that there is a federal policy or interest in extending the substantial continuity test to the patent judgment enforcement context; to date, that test has largely been limited to the “few and restricted” areas of labor and employment law and pension benefits, where the need for a uniform, broader rule of successor liability is more apparent. See Bhd. of Locomotive Eng’rs, 210 F.3d at 26 (“National uniformity is essential in the interpretation of labor law.… If courts were to rely on state law to determine when veil piercing was appropriate, RLA collective bargaining agreements might include some companies in one state and other companies in a neighboring state.”); Moriarty v. Svec, 164 F.3d 323, 329 (7th Cir. 1998) (“The federalization of multiemployer plan contribution obligations evinces a strong congressional desire to minimize contribution losses and the resulting burden such losses impose on other plan participants. We emphasize[] that the state law of successor liability, which cuts off the obligation to pay a predecessor’s promised contributions, significantly conflicts with this federal interest and justifies a departure[.]”) (internal quotation marks and citation omitted); G-K-G, Inc., 39 F.3d at 748 (observing that federal common law doctrine of successor liability has been applied in the labor and employment context because “[u]sually the primary relief sought in such cases is nonmonetary and can be effective only if directed against the workers’ current employer”).2 An asserted need for absolute uniformity in the collection of patent judgments, without more, is insufficient in itself to justify resort to federal common law. Mickowski has failed to demonstrate 1 The Court went on to hold that a federal statute that authorizes a civil action against bank officers for gross negligence did not supplant state laws that impose stricter fiduciary obligations on bank officers. Id. at 227. 2 Notably, even in the realm of labor law, this Circuit has rejected the “substantial continuity” test, requiring the alleged successor to be the “alter ego” of the predecessor corporation or to have voluntarily assumed the obligations under the collective bargaining agreement. Southward v. S. Cent. Ready Mix Supply Corp., 7 F.3d 487, 493 (6th Cir. 1993). No. 04-3889 Mickowski v. Visi-Trak Worldwide Page 10 that the failure to3adopt a uniform federal standard for successor liability will somehow inhibit patent rights generally. Nor has Mickowski presented evidence that patent rights have failed to thrive despite the existence of more restrictive and/or varying state law standards for successor liability. There certainly is no reason to think that the state of Ohio will become a haven for companies seeking to avoid their obligations to pay patent judgments or, for that matter, any other type of unpaid judgment. Cf. Atchison, Topeka and Santa Fe Ry. Co. v. Brown & Bryant, Inc., 159 F.3d 358, 364 (9th Cir. 1997) (opining, without deciding, that federal common law standard for successor liability does not apply under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA): “There is no evidence that the application of state corporation law will frustrate this objective. No state provides a haven for liable companies. Nor is there reason to think that states will alter their existing successor liability rules in a ‘race to the bottom’ to attract corporate business.… It is unrealistic to think that a state would alter general corporate law principles to become a peculiarly hospitable haven for polluters.”) (citing Anspec Co. v. Johnson Controls, Inc., 922 F.2d 1240, 1250 (6th Cir. 1991) (Kennedy, J., concurring)). Particularly in light of Goldstein’s pronouncement that there need not be complete, national uniformity in the protection of patent rights, Mickowski has failed to 4make his case for resort to or the creation of federal common law regarding successor liability. The Supreme Court’s decision in United States v. Bestfoods, 524 U.S. 51 (1998) also militates against the application of the substantial continuity test from federal common law. Bestfoods involved a CERCLA action against the parent corporations of chemical manufacturers for the costs of cleaning up industrial waste generated by a chemical plant. The Court explored the question of whether a parent corporation that actively participated in, and exercised control over, the operations of a subsidiary may, without more, be held liable as an operator of a polluting facility owned or operated by the subsidiary. Bestfoods, 524 U.S. at 55. The Court initially observed that, under general corporate law principles, a parent corporation does not have liability beyond the assets of the subsidiary. Id. at 61-62. The Court further observed that, under corporate law principles, a parent company’s corporate veil may be pierced and the shareholder held liable for the subsidiary corporation’s conduct when, inter alia, the corporate form would otherwise be misused to accomplish certain wrongful purposes, most notably fraud, on the shareholder’s behalf. Id. at 62 (citations omitted). The Court then stated: 3 Mickowski’s citation to Clearfield Trust Co. v. United States, 318 U.S. 363 (1942), is misplaced because that case involved the federal government’s constitutional power regarding the regulation of commercial paper, where the need for a uniform federal standard is obvious See id. at 367 (“The rights and duties of the United States on commercial paper which it issues are governed by federal rather than local law. When the United States disburses its funds or pays its debts, it is exercising a constitutional function or power.… The authority to issue the check had its origin in the Constitution and the statutes of the United States and was in no way dependent on the laws of Pennsylvania or of any other state.”). This case does not involve the rights of the United States arising under a nationwide federal program, but a private citizen’s right to enforce a money judgment that happens to arise out of a federally-created property right in a patent. 4 A federal district court in Illinois reached a similar conclusion, holding: Here, Congress has enacted federal statutes governing patents, and there is no question patents are of paramount Constitutional importance. See U.S. CONST. art. I, § 8, cl. 8. However, the federal patent statutes do not set forth corporate standards regarding successor liability. Cf. Atherton, 519 U.S. at 219. Arachnid invokes the need for uniformity as justification for creating federal common law.… It has failed to justify such a need; corporations and other business organizations routinely deal with disparities in corporate governance. See Atherton, 519 U.S. at 220. In short, the court finds no significant conflict with, or threat to, a federal interest, and this is not one of those few and restricted instances in which federal common law should be created. Cf. id. at 225. Arachnid, Inc. v. Valley Recreation Prods., Inc., No. 98 C 50282, 2001 WL 1664052,  (N.D. Ill. Dec. 27, 2001). No. 04-3889 Mickowski v. Visi-Trak Worldwide Page 11 CERCLA is thus like many another congressional enactment in giving no indication that “the entire corpus of state corporation law is to be replaced simply because a plaintiff's cause of action is based upon a federal statute,” Burks v. Lasker, 441 U.S. 471, 478, 99 S. Ct. 1831, 1837, 60 L. Ed.2d 404 (1979), and the failure of the statute to speak to a matter as fundamental as the liability implications of corporate ownership demands application of the rule that “[i]n order to abrogate a common-law principle, the statute must speak directly to the question addressed by the common law,” United States v. Texas, 507 U.S. 529, 534, 113 S. Ct. 1631, 1634, 123 L. Ed.2d 245 (1993) (internal quotation marks omitted). Id. at 63. The Court therefore held that evidence that a parent corporation actively participated in, and exercised control over, the operations of a subsidiary was not sufficient to hold the parent liable as an operator of a polluting facility. Id. at 55. The Court rejected the proposition that CERCLA establishes a relaxed rule of derivative liability which “displace[s] or fundamentally alter[s] common-law standards of limited liability.” Id. at 70. Following Bestfoods, the Second Circuit in New York v. Nat’l Servs. Indus., Inc., 352 F.3d 682 (2d Cir. 2003), rejected the argument that federal common law provides the standards for successor liability in a CERCLA action. Instead of the federal common law standard of “substantial continuity,” the court applied the state common law rule of “mere continuation,” reasoning as follows: In considering the substantial continuity test, we take from Bestfoods the principle that when determining whether liability under CERCLA passes from one corporation to another, we must apply common law rules and not create CERCLA-specific rules.… [T]here is some prior precedent for the substantial continuity rule and the rule is generally presented as a variant of the mere continuation exception. However, the substantial continuity test is not a sufficiently well established part of the common law of corporate liability to satisfy Bestfoods’ dictate that common law must govern.…Within federal law, the substantial continuity doctrine is well established in the area of labor law. See, e.g., Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27, 43-45, 107 S. Ct. 2225, 96 L. Ed.2d 22 (1987). However, the labor law cases are particular to the labor law context and therefore have not been and cannot easily be extended to other areas of federal common law.… Perhaps if the substantial continuity doctrine were widely adopted among the states, it might be considered absorbed into federal common law and thus applied under CERCLA pursuant to the reasoning in Bestfoods in whatever states had not adopted it. However, at present the doctrine has been adopted by only a handful of states.… We thus find that the substantial continuity doctrine is not a part of general federal common law and, following Bestfoods, should not be used to determine whether a corporation takes on CERCLA liability as the result of an asset purchase. Id. at 685-87; see also United States v. Davis, 261 F.3d 1, 54 (1st Cir. 2001) (rejecting argument that federal “substantial continuity” test should apply to successor liability determination under CERCLA; rather, state common law applies). This Circuit similarly has declined to create federal common law and held that state common law provides the relevant standards for successor liability in a CERCLA action. See City Mgmt. Corp. v. U.S. Chem. Co., Inc., 43 F.3d 244, 250 (6th Cir. 1994) (citing Anspec, 922 F.2d at 1247-48). We agree with Visi-Trak Worldwide that Bestfoods and Nations Servs. Indus. are persuasive authority for the proposition that the substantial continuity test of federal common law likewise does not apply in the context of patent judgment enforcement. Because federal patent laws do not speak to the issue of successor liability, there is little basis to abrogate the general rule derived from state No. 04-3889 Mickowski v. Visi-Trak Worldwide Page 12 common law that substantial continuity is insufficient to impose liability. The substantial continuity test has gained widespread acceptance only in the narrow areas of labor law, employment discrimination law, and pension benefit litigation. Accordingly, state law is the appropriate reference for successor liability standards, in particular, Ohio’s “mere continuation” doctrine. As discussed above, under Ohio law, a corporation is not a mere continuation of the corporation whose assets it has purchased, even though it continues to provide the same services and has the same physical plant, officers, employees, and product line as the purported predecessor. Erdy, 599 N.E.2d at 341; Welco, 617 N.E.2d at 1134. Rather, the key element is identity of ownership: a common identity of stockholders, directors, and stock. Mickowski cannot make this showing. VTC’s stock was owned by thirteen different shareholders at the time that the bankruptcy proceedings commenced. By contrast, Visi-Trak Worldwide’s stocks is owned by two trusts: the Agape Virgineus trust, which owns 95%, and Agape TK trust, which owns 5%. Mickowski nevertheless argues that there is common ownership between Visi-Trak Worldwide and VTC because Kathleen Vann, who is the trustee of the Agape Virgineus trust is married to John Vann, her husband and former owner of over 53% of VTC’s stock. We disagree. Although there is no published Ohio decision on this point, an unpublished decision of the Ohio Court of Appeals held that a husband and wife are not the same individuals for purposes of determining identity of ownership. Semirale v. Rhea, No. 65906, 1994 WL 197219,  (Ohio Ct. App. May 19, 1994) (per curiam; unpublished). Mickowski has presented no Ohio authority to the contrary. Instead, he has submitted cases from Illinois, which purportedly hold that husband and wives can be considered the same owners for purposes of successor liability. Even assuming that resort to Illinois law would be appropriate, all of the cited cases are distinguishable. In Park v. Townson & Alexander, Inc., 679 N.E.2d 107, 109-10 (Ill. Ct. App. 1997), a husband and wife each owned 50% of the predecessor company’s stock, the wife asserted that she owned 100% of the successor’s stock, and the husband controlled the successor company. Inconsistently, a corporate tax return for the successor corporation indicated that the husband and wife each were 50% owners of the successor company. Id. at 110. By contrast, in the instant case, Kathleen Vann did not own any VTC stock, and there is no evidence suggesting that John Vann owns stock in Visi-Trak Worldwide. In Steel Co. v. Morgan Marshall Indus., Inc., 662 N.E.2d 595, 600 (Ill. Ct. App. 1996), a wife obtained 80% of the stock in the successor corporation by way of a gratuitous transfer from her husband, who had been the sole shareholder of the predecessor corporation and who became the chief executive officer of the successor. Here, by contrast, there is no evidence that Kathleen Vann obtained 95% of the shares of Visi-Trak Worldwide by way of a gratuitous transfer from her husband. Those shares were purchased by the Agape Virgineus Trust, and Mickowski has not submitted any evidence showing that the trust was funded at all by John Vann’s assets or by jointlyowned assets. In Lincoln Nat’l Life Ins. Co. v. Nicklau, Inc., No. 98-C-2453, 2000 WL 656683,  (N.D. Ill. May 17, 2000) (unpublished), two relatives (Dan and Tuan Nguyen) were the sole shareholders of the predecessor corporation, and Kim Nguyen, the wife of Dan, was the sole shareholder of the successor. In finding common ownership, the court relied on the fact that there was a “substantial continuity” between the two businesses. Id. at . As discussed above, however, the Ohio Supreme Court has rejected the substantial continuity test as a proxy for the mere continuation test. Accordingly, Nicklau is not persuasive authority. In conclusion, there is no genuine issue of material fact as to whether VTC and Visi-Trak Worldwide have common ownership. Accordingly, even assuming that Visi-Trak Worldwide cannot rely on the order confirming VTC’s bankruptcy, which discharged Mickowski’s patent No. 04-3889 Mickowski v. Visi-Trak Worldwide Page 13 judgment claim and which was in effect when Visi-Trak Worldwide purchased VTC’s remaining assets, Mickowski has failed to articulate a basis for holding Visi-Trak Worldwide liable as a successor to VTC’s liability for the unpaid patent judgment.