Court Opinion

ID: 3001649
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:19:06.889695+00
Date Added: 2024-06-11T12:29:47.994463
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

No. 05-2247
PRIMA TEK II, L.L.C.,
                                              Plaintiff-Appellant,
                               v.

KLERK’S PLASTIC INDUSTRIES, B.V. AND
KLERK’S PLASTIC PRODUCTS MANUFACTURING, INC.,
                                           Defendants-Appellees.
                        ____________
           Appeal from the United States District Court
               for the Southern District of Illinois.
            No. 00 CV 583—G. Patrick Murphy, Judge.
                        ____________
       ARGUED JANUARY 8, 2008—DECIDED MAY 5, 2008
                        ____________

  Before FLAUM, RIPPLE, and MANION, Circuit Judges.
   FLAUM, Circuit Judge. This case involves a licensing
dispute between two companies that operate in the pot
cover business. Prima Tek II (“PTII”), in essence, gave
Klerk’s Plastic (“Klerks”) permission to use its technology
to create superior pot covers in exchange for a royalty
fee on each sale. The agreement between the parties
delineated the type of product that Klerks was to sell, and
it limited Klerks’s ability to sell to particular entities in
specified regions. PTII claims that Klerks breached this
2                                                 No. 05-2247

agreement, and, in addition to damages, seeks to have
Klerks held in contempt. The district court held that there
were no material breaches of the licensing agreements,
and that PTII failed to prove damages. We affirm.

                        Background
   In January of 1986, Klerks entered into a non-exclusive
license agreement with Highland Supply Corporation
(“Highland”). This agreement authorized Klerks to manu-
facture and sell certain flower pot covers1 subject to
patents and patent applications in the United States and
Holland. The two parties entered into a similar licensing
agreement in 1987 authorizing Klerks to sell flower pot
covers in Canada. Soon thereafter, Highland assigned
its rights under the agreements to PTII. Both companies
met on July 20, 2000, to discuss Klerks rights and obliga-
tions under the licenses as certain patents were about to
expire. Four days later, PTII filed suit seeking damages
resulting from an alleged breach of the license agree-
ments. The agreements generally control what types of
pot covers Klerks can sell, to whom it can sell the
covers, and where the covers can be sold.
 On September 23, 2000, the parties arrived at an agree-
ment where they amended the license agreements and

1
   Throughout the briefs and record, the parties refer to the
objects at issue in this case as both “pot covers” and “plant
covers.” Pot covers and plant covers are obviously different, in
that one covers pots and the other covers plants. Exhibits in
the record seem to suggest that we are dealing with pot covers.
However, for purposes of this opinion, we too will refer to
pot covers and plant covers interchangeably, since the distinc-
tion does not bear on the issues.
No. 05-2247                                                 3

settled the litigation. After PTII filed a motion to enforce
this settlement agreement, the trial court issued an order on
April 5, 2001 (the “April 5 Order”), incorporating the
settlement agreement and licenses and dismissing the
lawsuit while maintaining limited jurisdiction to enforce
its order. PTII thereafter alleged that Klerks had breached
provisions of the licenses, and on October 22, 2001, the
trial court granted PTII’s request for post-judgment
discovery. At that point, PTII terminated the licenses and
Klerks stopped manufacturing and selling pot covers.2
  The language of the licenses, which is in part what is
at issue in this case, provides that:
    PTII hereby grants to KLERKS HOLLAND the non-
    exclusive license to manufacture and sell only in
    Holland and only in the United States UPGRADE
    PLANT COVERS only to CUSTOMERS under the
    trademark rights referred to in Article II and using or
    incorporating the technology referred to in paragraph
    1.5 which are absolutely essential for KLERKS HOL-
    LAND to make and sell UPGRADE PLANT COVERS.
The term “customers” is defined as:
    (a) horticultural growers of potted plants for use on
    such potted plants and (b) retail food supermarkets.
    The term “retail food supermarkets” means a retail
    business whose entire business primarily is the retail
    sale of food products, that is, considering the total
    sales of the consolidated business, at least eighty
    percent (80%) of such sales are for food products. The
    term “CUSTOMERS” specifically (but not by way of

2
  It appears that Klerks actually ceased all manufacturing and
selling of pot covers on June 21, 2002.
4                                               No. 05-2247

    limitation) excludes EXCLUDED CUSTOMERS (de-
    fined below).
“Excluded customer” means:
    any customer who is not a horticultural grower of
    potted plants or a retail food supermarket. EXCLUDED
    CUSTOMERS specifically includes (but not by way
    of limitation) businesses such as variety chains,
    mass merchandisers, discount chains, drug chains,
    buying clubs, craft and hobby stores, garden centers,
    and home improvement centers such as (but not by
    way of limitation) Lowe’s, Home Depot, Wal-
    Mart . . . whether or not marketed at retail store
    sites, central buying offices or via catalogs or via
    electronic means by a website or via any other market-
    ing channel. KLERKS will not, to its best knowledge,
    sell plant covers to a CUSTOMER who resells those
    plant covers to an EXCLUDED CUSTOMER. KLERKS
    shall not (directly or indirectly) sell UPGRADE PLANT
    COVERS to anyone who is not a CUSTOMER and
    specifically cannot sell to any EXCLUDED CUSTOM-
    ERS.
In total, between April 5, 2001 (when the order was issued)
and June 21, 2002, Klerks sold more than 30 million plant
covers for a total of $4,805,627.16 in 1,736 different trans-
actions. As a part of these transactions, Klerks paid PTII
a total of $418,635 in royalties.
   After completing its post-judgment discovery, on August
13, 2004, PTII filed a renewed motion urging the court
to hold Klerks in contempt. PTII claimed that Klerks
“knowingly manufactured, offered for sale [and] sold . . .
(i) unlicensed plant covers, (ii) plant covers outside the
licensed geographic territories, (iii) [to un]authorized
No. 05-2247                                                 5

customers, and (iv) [incorrectly marked] plant covers . . . .”
In addition to asking the court to hold Klerks in con-
tempt, PTII also sought proceeds from any and all sales
made in violation of the April 5 Order, settlement agree-
ment, and licenses. The district court made a judgment
on partial findings pursuant to Federal Rule of Civil
Procedure 52(c) ruling in favor of Klerks. It held that
PTII failed to meet its burden of producing clear and
convincing evidence that Klerks should be held in civil
contempt for violations of the April 5 Order. The district
court also found that while Klerks did breach certain
provisions of the license agreements, these breaches
were not material, and PTII did not prove any damages
that resulted from these breaches.

                        Discussion
  PTII raises three issues on appeal. First, it asserts that
Klerks in fact did engage in material breaches of the license
agreements attached to the April 5 Order. Second, with
respect to these breaches, PTII maintains that it has
shown damages with sufficient clarity. Third, it con-
tends that Klerks should have been held in contempt
for alleged violations of the April 5 Order. We analyze
each issue in turn.

                             A
  PTII must prove by a preponderance of the evidence
that Klerks breached the contract. Austin v. Illinois, 54 Ill.
Ct. Cl. 375 (2002). We review “de novo a district court’s
determination of the meaning of an ambiguous contract
term . . . as well as the court’s factual findings following
a bench trial.” Central States, Southeast and Southwest
6                                                  No. 05-2247

Areas Pension Fund v. Kroger Co., 226 F.3d 903, 910 (7th Cir.
2000). PTII contends that the district court used the
wrong standard in assessing whether a material breach
occurred here. It argues that the court used a clear error
standard instead of the required preponderance of the
evidence standard. However, the trial transcript makes
it clear that the district court understood that the con-
tempt standard is clear error and the breach standard is
preponderance of the evidence.3 Moreover, apart from
the district court’s statement on what standard it used in
its order, the record reflects—as the district court con-
cluded—that PTII was not entitled to damages because
it produced virtually no evidence of any material breaches
or damages. This clears both standards.
   To be sure, Klerks did breach portions of the agree-
ment, but these breaches were not material. Specifically,
its sales to Impack Corporation ($2,067), Dunstan AS
Groome ($338.40), Kinney Bonded Warehouse ($303.74),
Sea Venture Overseas ($60.21), and St. John’s Shipping
($466.54) were made outside of authorized territories. Also,
Klerks manufactured some nonconforming pot covers by
improperly reversing the film in its machines. Such pro-
duction, however, was promptly stopped. Overall, while
some sales violated the terms of the license, more than
99 percent did not. There were no material breaches, and
a party can only be held liable for damages resulting

3
   When orally addressing the parties during a hearing, the trial
judge stated as follows: “Both parties have told me I can . . .
award damages for . . . breach of contract irrespective of find-
ing . . . contempt. Now, of course, the standard is entirely
different. One is a mere preponderance of the evidence and
one is clear and convincing.”
No. 05-2247                                                   7

from a material breach.4 Pacini v. Regopoulos, 281 Ill.
App.3d 274, 279 (1996) (finding no breach of an occupancy
guarantee because 94.9953% occupancy rate was tanta-
mount to a 95% occupancy rate); Rubloff CB Machesney v.
World Novelties, 363 Ill. App.3d 558, 564 (2006) (listing
several factors relating to a finding of materiality: 1) the
extent to which the non-breaching party was deprived of
the benefit that it reasonably expected; 2) the extent to
which the non-breaching party can be adequately com-
pensated for the part of that benefit of which it will be
deprived; 3) the extent to which the breaching party
will suffer forfeiture; 4) the likelihood that the breaching
party will cure its failure; 5) the extent to which the breach-
ing party’s behavior comports with standards of good
faith and fair dealing).
  PTII tries to argue that Klerks breached the agreement
in additional ways that the district court either over-
looked or failed to appreciate. In each case, PTII either
mischaracterizes the facts or uses faulty logic. First, it at-
tempts to label several of Klerks’s sales as sales to gar-
den centers, which are excluded customers according to the
agreement. However, PTII’s own witness admitted that
he had no evidence that the entities that they considered
to be garden centers were anything other than horticul-
tural growers of plants,5 which are not excluded customers.

4
  A more significant hurdle for PTII is that it has not proven
damages with sufficient clarity, as detailed below.
5
  The district court properly looked to the dictionary for
guidance on defining “horticultural grower,” (since it is not
defined in the license) and found that it refers to an entity
that cultivates a fruit or other product. This is more consis-
                                                  (continued...)
8                                              No. 05-2247

  Second, PTII maintains that Klerks breached the license
agreements by manufacturing and selling $2,762,459.66
of pot covers with “skirt angles” outside the specifica-
tions of the agreements. The license requires that “plant
covers [have] the appearances and [be] made exactly like
the samples covers Exhibits A (standard cover) and A1
(brite cover) attached hereto and made a part hereof,
and with the skit extending upwardly and outwardly
from the base at an angle from about 30 degrees to about
55 degrees from horizontal.” More simply, visualize
your everyday flower pot. In most cases, as you move
further up the pot from bottom to top, it gets wider. The
rate at which the pot widens—or the angle—is the “skirt
angle.” The district court found that the pot covers con-
formed to the skirt angle provisions. In addition, it
found that these specific measurements were selected by
the parties to reflect Klerks’s existing manufacturing
process, Klerks did not change this process, and PTII
never complained about the skirt angles until after Klerks
ceased making pot covers. What is essential to the dis-
pute here is that each party has its own expert that
claims that a particular method of measuring the skirt
angle is superior. PTII’s expert stated that he measured
the angle at the intersection of the skirt and the base (the
“break angle”) and found many to be outside of the 30 to
55 degree range. Nevertheless, this expert agreed that there
could be other ways to measure the angle, and Klerks’s
own expert measured the angles using a different method

5
  (...continued)
tent with the plain meaning of the term than PTII’s proposed
contextual definition, which narrowly defines the term as
“large wholesale commercial growers.”
No. 05-2247                                                 9

(not just focusing on the break angle) and found them to
be in compliance. Given the conflicting testimony, the
fact that the licenses did not state a procedure for meas-
uring the angles, that each expert offered a reasonable
procedure, and both experts were well-qualified, it was
reasonable for the district court to conclude that the
skirt angles were within the permissible range.
   Third, PTII asserts that Klerks sold $6,000 of lace plant
covers in violation of the licenses. The district court
held that the sales did not violate the licenses for two
reasons. First, the license agreements incorporate a
patent that permitted the production of lace covers.
Second, the lace covers fit within the definition of “Up-
grade B Plant Covers,” which Klerks was permitted to
sell. PTII argues that the 1986 license as amended does
not grant Klerks permission to sell lace style covers be-
cause the patent is not included. Even if this were
true—and it is not clear whether it is—PTII’s argument
still falls short because the lace covers appear to conform
to the definition of Upgrade B Plant Covers. These covers
are described as ones made from a non-matted polymer
film, with a four-cornered skirt, “having a printed pat-
tern only on the outside and with a solid color inside.”
Both parties agree that these covers have printed patterns
on the outside. The question is whether the film has a
solid color on the inside. The inside layer of these covers
is clear, which is technically colorless. But the key idea
is that the printed pattern is on the outside, not the inside,
even though it can be seen from the inside because the
inside layer is clear. Further, the fact that some of the
printed pattern can be seen on the inside does not violate
the license because the covers attached to the licenses
shown as Exhibits B and B-1 have printed patterns
10                                             No. 05-2247

clearly visible from the inside of the pot cover. Thus,
the district court did not commit any clear error in hold-
ing that the lace plant covers qualify as Upgrade B Plant
Covers.
  Fourth, PTII claims that the district court erred in hold-
ing that Klerks “did not use any Highland or PTII technol-
ogy to make Sleeve products. In fact, neither Highland
nor PTII . . . transferred any technology” to Klerks.
Whether or not this finding is correct is irrelevant, be-
cause it was used to support two conclusions that PTII
does not dispute. First, it was used to bolster the idea
that plant sleeves (which Klerks now sells instead of pot
covers) did not use any technology in violation of the
agreements. Second, it was used to demonstrate that
Exhibit X to the licenses was the only item of technology
that PTII proved at trial was subject to the “return” provi-
sion of the licenses. The district court simply con-
cluded that plant sleeves do not contain any Exhibit X
technology, which PTII does not dispute. Moreover,
PTII failed to prove that Klerks did not return any tech-
nology to it.
  Finally, PTII makes a number of arguments with little
to no support in the record. For instance, it nakedly
asserts that Klerks made sales to non-supermarket re-
tailers, which is not permitted, but it does not cite to
anything in the record to support this point. In addition,
PTII takes issue with the district court’s conclusion
that PTII failed to prove that Klerks made or sold any
pot covers with a matted polymer film. The district
court relied on its own observations and its own determi-
nations with respect to the credibility of PTII’s expert
witness to arrive at this conclusion, and PTII does not
offer any reason to doubt the correctness of its analysis.
No. 05-2247                                               11

PTII also disputes the district court’s finding that Klerks
did not materially breach an August 30, 2001 agreement
because it shipped unlabelled covers from September 4
through September 12, 2001. Pursuant to the agreement,
the covers had to be marked with a label as prescribed
by PTII. But PTII made compliance difficult, in that it
kept switching the labeling requirements, which cost
Klerks almost $500,000. Given the cost and time associated
with meeting PTII’s mercurial demands, the agreement
stated that Klerks could ship unmarked covers through
September 4th. Klerks went over by eight days. The
district court did not abuse its discretion in declaring
that this was not a material breach, especially since PTII
did not suffer any identifiable harm.

                             B
   Even if PTII could somehow show a material breach,
it would still fall short of winning on its claim because it
has not proven damages. PTII makes two arguments
here. First, it contends that it should have been awarded
nominal damages even if it could not prove actual dam-
ages. Second, it argues that it did in fact prove actual
damages. With respect to the first point, Illinois law is
clear: “[m]erely showing that a contract has been breached
without demonstrating actual damages dose not suffice . . .
to state a claim for breach of contract.” TAS Distrib. Co. v.
Cummins Engine Co., 491 F.3d 625, 631 (7th Cir. 2007).
More importantly, PTII never sought damages from
Klerks—it only sought to require Klerks to “disgorge” the
entire proceeds of every sale it contend was in violation
of the licenses (plus treble damages and attorneys’ fees).
  With respect to the second point, Illinois law is again
clear: damages for unjust enrichment are not awardable
12                                                No. 05-2247

when, as here, there is a contract between the parties on
the subject in dispute. La Throp v. Bell Fed. Sav. & Loan
Assoc., 68 Ill.2d 375, 391 (1977). PTII did not prove in its
proceedings below that it lost any sales, profits, or
royalty income as a result of the alleged violations, and
it provided no proof that any of the violations damaged
its business in any concrete way. Indeed, PTII does not
actually make anything—its business is to license and
collect royalties from sales made by others. And we
know from the record that Klerks paid royalties on every
sale. PTII could claim that it would have given the
license to another party that could have made sales, but
it provides no evidence to show that its royalties would
have been any higher.
  In the alternative, PTII submits that this court should
fashion an equitable remedy and award Klerks’s gross
sales as a measure of damages. See Leman v. Krentler-Arnold
Hinge Last Co., 284 U.S. 448 (1932); Connolly v. J.T. Ventures,
851 F.2d 930, 933 (7th Cir. 1988). But what PTII does not
recognize is that in cases where such a remedy has been
crafted, the court also found the breaching party in con-
tempt, which is not the case here. Klerks’s breaches
were not material, and there is no suggestion that it did
not deal with PTII in good faith.
  Both Klerks and the district court posit that PTII suf-
fered no theoretical damages—and actually gained—
from the breaches that were alleged to have occurred
because royalties were paid on each transaction. This is
not accurate. If we suppose, for instance, that Klerks did
actually manufacture covers with angles outside the
permissible range, then it does not follow that PTII only
benefitted because it was still paid a royalty on the trans-
actions. This is because PTII could have made additional
No. 05-2247                                                   13

revenue by forcing Klerks to pay a higher fee for a less
restrictive angle range. In addition, the cost of losing
control over whom the licensee can sell to and where
they can sell implicates market share and quality control
issues.6 All of these types of harms are capable of being
made concrete. Unfortunately for PTII, it was unable to
prove any material breaches, or any concrete damages
that flowed from these breaches. Transportation & Transit
Assocs., Inc. v. Morrison Knudsen Corp., 255 F.3d 397, 401
(7th Cir. 2001) (“the party claiming the breach must
establish the amount of damages. The demonstration
need not be precise, . . . but the plaintiff must have a
sensible basis for its claim.”).

                               C
  We do not disturb a district court’s decision regarding
a contempt petition unless we find that it abused its
discretion. Stotler & Co. v. Able, 870 F.2d 1158, 1163 (7th Cir.
1989). Put another way, we “must affirm if the district
court’s determination is plausible in light of the record
in its entirety.” Zeige Distrib. Co., Inc. v. All Kitchens, Inc.,
63 F.3d 609, 612 (7th Cir. 1995) (citations omitted).

6
   Even beyond harms to the particular licensor, there is a
social loss associated with reading licenses in an overly liberal
manner. Interpreting licenses loosely could lead to higher
degrees of uncertainty with respect to a licensor’s ability to
carve up markets, which in turn could push up the price of
licenses as a whole. In addition, companies like PTII would
be less inclined to innovate and create new technology if they
could not properly define the contours of precisely what
their licensees can do with the technology.
14                                               No. 05-2247

  Contempt is a unique civil sanction because its aim is
both coercive and compensatory. U.S. v. United Mine
Workers, 330 U.S. 258, 303-04 (1947).7 To sustain its con-
tempt claim, PTII has the burden of proving all of the
following elements by clear and convincing evidence:
(1) the Order sets forth an unambiguous command;
(2) Klerks violated that command; (3) Klerks’s violation
was significant, meaning it did not substantially comply
with the Order; and (4) Klerks failed to take steps to
reasonable and diligently comply with the Order. Goluba
v. School Dist. of Ripon, 45 F.3d 1035, 1037 (7th Cir.
1995); Stotler, 870 F.2d at 1163.
  Starting with the last prong, it is pellucid that Klerks
took reasonable and diligent steps to comply with the
April 5 Order. Indeed, shortly after the Order was
issued, Klerks’s management met with its attorneys to
review its rights and responsibilities. It instituted policies
that were more restrictive than the licenses themselves.8
It also held quarterly meetings to review compliance
issues. Klerks communicated these policies internally
and externally, and conducted meetings with sales staff
and its customer service department to inform them of
restrictions. It even went so far as to directly inform its
customers and distributors of the restriction limiting
sales of pot covers to horticultural growers and retail
food supermarkets. This list is meant to be illustra-
tive—it is by no means exhaustive. PTII’s sole counter-

7
  The coercive element is not in play here because, as noted
earlier, Klerks is no longer in the plant cover business.
8
  For instance, Klerks decided that it would not sell pot
covers to any grower who is using the pot covers on plants
that would be sold to mass merchandisers.
No. 05-2247                                                 15

argument here is the evidence that it offers that suggests
that some of Klerks’s employees (e.g., salesmen) were
not aware of some of the new policies that Klerks imple-
mented in order to ensure compliance. While this is in-
deed countervailing evidence, on balance, it does not add
up to a finding that the district court abused its discretion
in concluding that Klerks took reasonable and diligent
steps to comply with the April 5 Order.
  With respect to the third prong, PTII is unable to prove
by clear and convincing evidence that Klerks failed to
substantially comply with the April 5 Order. The parties
disagree as to how many of the 1,736 transactions at
issue contravene the Order. As explained in greater detail
above, some of these transactions indeed did not com-
ply. However, we ultimately agree with the district court
that “[t]he quantity of nonconforming pot covers sold is
a fraction of 1% of total pot cover sales by Klerks.”
   With respect to the first two prongs, PTII again fails to
prove by clear and convincing evidence that Klerks vio-
lated an unambiguous command contained in the April 5
Order. The district court correctly found that on a num-
ber of issues (e.g., sales of matted covers, lace covers, etc.)
that PTII did not meets its burden. In addition, the order
must be unambiguous, which is not the case here with
respect to definitions of “customers” and “excluded
customers.” For instance, PTII forbade the sale of plant
covers to a customer who then resells the plant cover (even
if it is on a potted plant) to an excluded customer. The
problem with this position is that it would render the
entire April 5 Order useless, because it would preclude
Klerks from selling plant covers to horticultural growers
and retail food supermarkets since they themselves then
sell to individuals (i.e., the ultimate end-users), who are
16                                                No. 05-2247

excluded customers. Klerks interpretation of “resells” is
more reasonable, in that it refers only to resales of the
plant covers alone, not resales of the plant covers at-
tached to potted plants.
  Notwithstanding PTII’s inability to meet the standards
set out for holding a party in contempt, we have held
that remedial sanctions are limited to provable losses
sustained by the non-breaching party as a result of the
violation of the order. Autotech Techs. LP v. Integral Research
and Dev. Corp., 499 F.3d 737, 752 (7th Cir. 2007). As we
have explained above, PTII failed to prove any such loss.

                        Conclusion
  For the foregoing reasons, we AFFIRM the judgment of
the district court.

                     USCA-02-C-0072—5-5-08