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INTERVISUAL COMMUNS., INC. v. VOLKERT

September 4, 1997

INTERVISUAL COMMUNICATIONS, INC., Plaintiff,
v.
JOHN K. VOLKERT and ONE-UP, INC., Defendants.



The opinion of the court was delivered by: KEYS

 FINDINGS OF FACT1

 Plaintiff, Intervisual Communications, Inc., ("Intervisual"), is a Delaware corporation with its principal place of business in California. (Compl. at 2.) Intervisual markets interactive advertising devices, such as hand-assembled and machine-made "pop-ups" *fn2" and talking advertisements to marketing firms. (Compl. at 2.) Intervisual contracts with third parties to manufacture its advertising devices. (Compl. at 3.) Intervisual, under a succession of names, has operated in the hand-assembled pop-up market since 1962. *fn3" (R. at 20.)

 Defendant John Volkert is an Illinois resident. (Compl. at 2.) Mr. Volkert is the president of One-Up, Inc., ("One-Up"), a separately-named defendant. One-Up is a corporation with its principal place of business in Illinois. *fn4" (Compl. at 2.) Mr. Volkert is an inventor and a salesman, with many years of experience designing and manufacturing machine-made pop-ups. (R. at 217; Compl. at 3.) He began working for F.N. Volkert and Company, his family's bookbinding business, in 1958. (R. at 216.) Starting out as a factory worker, Mr. Volkert rose through the ranks and eventually became president of the company. (R. at 216.) In 1982, Mr. Volkert began working for Papermasters, Inc., and One-Up, developing and licensing patents relating to creative advertising concepts. (R. at 216.) Mr. Volkert, through One-Up, currently owns as many as fifteen patents involving pop-up products and methods for making pop-ups. *fn5" (R. at 265; Pl.'s 12(m) Statement, P 6.)

 Intervisual and Mr. Volkert first developed a business relationship in 1987, when Messrs. Volkert and Richwine met and talked about merging Intervisual and One-Up. (R. at 36.) However, according to Mr. Richwine, Mr. Volkert was "having some other legal problems" at that time, so talk of merging their companies "went away." (R. at 36.) Merger discussion resumed in 1990, and, even though Mr. Volkert was still involved in litigation, Intervisual and Mr. Volkert entered into an exclusive license agreement on October 21, 1991. *fn6" (R. at 36.)

 This exclusive license agreement, which was amended on January 24, 1992, and renegotiated on January 20, 1993, is the focus of the dispute between Intervisual and Mr. Volkert. The essence of the 1991 agreement was that Mr. Volkert granted Intervisual the exclusive right to use and market his patents, *fn7" in exchange for annual royalties on the sale of any products using one of his patents. Additionally, Mr. Volkert agreed to provide his expertise to help design and manufacture pop-ups, assist in training Intervisual's sales force, develop new concepts utilizing pop-ups, attend trade shows with Intervisual, and participate in sales presentations with Intervisual. (Joint Ex. 2, Art. II.)

 Specifically, the contract required Mr. Volkert to devote at least 1,380 hours per year to providing consulting services to Intervisual to support the exclusive license agreement. (Joint Ex. 2, Art. II.) In exchange, Intervisual would pay Mr. Volkert a non-refundable sum of $ 50,000 upon signing the agreement. (Joint Ex. 2, Art. III.) Twenty-five thousand dollars of this $ 50,000 advance was to be paid directly to Mr. Volkert, and $ 25,000 was to be escrowed to pay for Mr. Volkert's legal costs relating to pending litigation. *fn8" (Joint Ex. 2, Art. III-IV.) In addition, Intervisual agreed to pay Mr. Volkert a $ 100,000 advance against future royalty payments and an annual license fee of $ 5,000 for the duration of the agreement. (Joint Ex. 2, Art. III.) Intervisual also agreed to pay Mr. Volkert annual royalties in the amount of 7% for the first $ 3,000,000 of annual revenue for patented pop-ups, and 5% for all such revenues thereafter. (Joint Ex. 2, Art. III.) After the fifth anniversary of the agreement, the annual royalty rate dropped to 5% on all patented pop-up revenue. (Joint Ex. 2, Art. III.)

 The exclusive license agreement provided for termination, by either party, under a variety of circumstances. Mr. Volkert could terminate the agreement, upon 30-days' notice, if Intervisual did not meet a minimum level of annual sales of patented pop-ups for two consecutive years. *fn9" (Joint Ex. 2, Art. IV.) Intervisual had the right to terminate the agreement, upon giving Mr. Volkert twelve months' notice, after the tenth anniversary of the effective date of the agreement. (Joint Ex. 2, Art. IV.) Both parties could rightfully terminate the agreement "on thirty (30) days prior written notice if the other party is in breach of this Agreement," provided that the breaching party failed to cure "to the non-breaching party's reasonable satisfaction during such thirty (30) day period." *fn10" (Joint Ex. 2, Art. IV.) Otherwise, the agreement would last until the expiration of the last patent involved in the agreement. *fn11" (Joint Ex. 2, Art. IV.)

 After signing the 1991 agreement with Mr. Volkert, Intervisual was "excited" by the prospect of marketing in-line pop-ups, and planned to "aggressively sell them." (R. at 49.) Intervisual moved its office from Chicago to Northbrook, where Mr. Volkert was headquartered, in an effort to give its sales staff an opportunity to learn about machine-made pop-ups from Mr. Volkert. (R. at 54.) Not long after signing the agreement, however, the relationship between Mr. Volkert and Intervisual began to deteriorate. Mr. Volkert was displeased that Intervisual was "selling other products instead of just in-line pop-ups." (R. at 54.)

 As a result, Messrs. Richwine and Volkert negotiated, and signed, an amendment to the 1991 agreement on January 24, 1992. (R. at 57.) That amendment waived the previous requirement that Mr. Volkert completely resolve the pending litigation with Ib Penick and Webcraft before Intervisual would exercise its option to add the two patents at issue to the exclusive license agreement. (Joint Ex. 3.) Pursuant to the renegotiated agreement, Intervisual exercised its option to incorporate the two patents into its agreement with Mr. Volkert, and paid a $ 50,000 advance to Mr. Volkert immediately. (R. at 57.)

 Despite over $ 2,000,000 in sales of his patented pop-ups in 1992, Mr. Volkert continued to be "unhappy with Intervisual." (R. at 58-59.) According to Mr. Richwine, Mr. Volkert complained that Intervisual should be "putting all of [its] efforts . . . on selling in-line pop-ups." (R. at 59.) Eventually, Mr. Volkert's dissatisfaction grew to such an extent that he forced Intervisual to leave his office space in Northbrook. (R. at 59.) Again, as a result of Mr. Volkert's displeasure, Messrs. Volkert and Richwine negotiated another amended agreement on January 20, 1993. (R. at 61.)

 The 1993 agreement reduced the number of hours per year that Mr. Volkert was expected to devote to consulting services from 1,380 to 920. (Joint Ex. 1, Art. II.) The $ 100,000 and $ 50,000 advances against future royalties paid by Intervisual to Mr. Volkert pursuant to the 1991 and 1992 agreements, respectively, were deemed "non-refundable." (Joint Ex. 1, Art. III.) As a result, Mr. Volkert did not have to count those amounts against sales. (Joint Ex. 1, Art. III.) According to Mr. Richwine, "it was basically giving him another $ 150,000." (R. at 63.)

 Mr. Volkert's royalty schedule was altered such that Intervisual was required to pay him royalties at a rate of 6% on the first $ 1,000,000 in annual patented pop-up revenue, and 5% for all patented pop-up sales thereafter. (Joint Ex. 1, Art. III.) A provision was added to pay Mr. Volkert a royalty if non-pop-up pieces were sold that he had a role in developing. (Joint Ex. 1, Art. III.) Another provision was added allowing Mr. Volkert to terminate the agreement if Intervisual did not pay him a minimum royalty of $ 110,000 per year. (Joint Ex. 1, Art. IV.)

 Relations between Mr. Volkert and Intervisual remained strained, despite having amended the exclusive license agreement twice. On February 29, 1996, Mr. Volkert delivered a letter to Mr. Richwine, serving notice that he found Intervisual to be in breach of the exclusive license agreement. (Defs.' Answer and Countercl. at 6.) Mr. Volkert alleged, in his letter and subsequent pleadings, that Intervisual had breached the agreement by failing to use its "best efforts" to sell machine-made pop-ups, failing to pay royalties on a monthly basis, failing to provide access to verify invoice amounts, failing to subcontract with him on certain retail sales, failing to mark patented pieces, failing to pay royalties on particular jobs, failing to use him in sales presentations, and failing to deal in good faith where it maintained a minimum purchase contract for hand-made pop-ups with Carvajal, a manufacturer in Mexico. *fn12" (Joint Ex. 13; R. at 87-105.)

 On March 25, 1996, Intervisual's Director of Finance, Bruce Shiney, sent a letter to Mr. Volkert, addressing each of the breaches alleged in the February 29, 1996, letter. (Pl.'s Ex. 102.) On April 2, 1996, Mr. Volkert replied with a letter to Mr. Richwine, officially terminating the exclusive license agreement. (Pl.'s Ex. 103.) Mr. Volkert insisted that the breaches he had alleged were not cured to his reasonable satisfaction, as was required by the exclusive license agreement. (Pl.'s Ex. 103.)

 On September 24, 1996, Mr. Volkert, operating under the assumption that the agreement with Intervisual had been officially terminated, negotiated a non-exclusive license agreement between One-Up and The Lehigh Press, Inc., Cadillac Commercial Products Division ("Lehigh Press"). (Pl.'s Ex. 118.) One-Up granted Lehigh Press a non-exclusive license to many of the same patents *fn13" included in Mr. Volkert's agreement with Intervisual. (Pl.'s Ex. 118.) In exchange, Lehigh Press agreed to pay Mr. Volkert royalties of $ 45,000. (Pl.'s Ex. 118.) This amount was an advance against future royalties, expected to be earned by Mr. Volkert at a rate of 15% for the first $ 4 million in annual sales of patented pieces, and 10% for all such sales thereafter. (Pl.'s Ex. 118.)

 As a result of Mr. Volkert's attempted termination of the exclusive license agreement, Intervisual was quite reluctant to sell patented pop-ups. According to Mr. Richwine, Intervisual was leery of selling patented pop-ups because its "customers could get into a patent infringement lawsuit, because John Volkert owns the patents." (R. at 108.) As a result, Intervisual sold no patented pop-ups from April 1, 1996, through May 28, 1997. (R. at 108.) Even so, Intervisual attempted to uphold its end of the exclusive license agreement by placing Mr. Volkert's minimum annual royalty payment of $ 110,000 for 1996 "in escrow." (R. at 111-12.)

 Intervisual brought this action for a declaratory judgment that it did not breach its exclusive license agreement with Mr. Volkert, and that the agreement, therefore, remains in full force and effect. Further, Intervisual maintains that Mr. Volkert has tortiously interfered with its prospective economic advantage, and seeks damages for lost sales, as well as an injunction to prevent future interference. Mr. Volkert counterclaims for a declaratory judgment that Intervisual has breached the exclusive license agreement and that his termination of the agreement was rightful. Mr. Volkert also counterclaims for lost royalties and for an injunction against Intervisual's further use of his patents. Both parties plead for any additional relief the Court may deem fair and just.

 ANALYSIS

 I. Legal Standard for Entry of Judgment Under Declaratory Judgment Act

 The Declaratory Judgment Act, 28 U.S.C. § 2201(a) allows "any court of the United States, upon the filing of an appropriate pleading," to "declare the rights and legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." Any plea for declaratory judgment must satisfy the case or controversy requirement of Article III of the United States Constitution. In re: VMS Sec. Litig., 103 F.3d 1317, 1327 (7th Cir. 1996). Federal courts have discretion regarding whether to hear a declaratory judgment matter, even when jurisdictional requirements have been met. Id. However, the Declaratory Judgment Act should be construed to effectuate the purpose of the Act, which is "to afford relief from uncertainty and insecurity with respect to legal relations." Imperial Cas. and Indem. Co. v. Chicago Hous. Auth., 759 F. Supp. 446, 448 (N.D. Ill. 1991) (quoting Sears, Roebuck and Co. v. American Mut. Liab. Ins. Co., 372 F.2d 435, 438 (7th Cir. 1967)). Thus, if the declaratory judgment will clarify and settle the legal relations at issue and afford parties relief from insecurity and uncertainty, the declaratory judgment action is usually heard. Nucor Corp. v. Aceros Maquilas De Occidente, S.A. De C.V., 28 F.3d 572, 578 (7th Cir. 1994).

 In the instant case, it is clearly proper for this Court to render a judgment under the Declaratory Judgment Act. That there exists a case or controversy that satisfies the requirement of Article III of the Constitution is evidenced by the fact that injury and damages are claimed by both Intervisual and Mr. Volkert. Further, a ruling by this Court will serve to clarify the rights and obligations of all parties under the exclusive license agreement. Having determined that the Court may properly hear this case under the Declaratory Judgment Act, the Court turns to the gravamen of this action, which is whether Intervisual breached its contract with Mr. Volkert, as Mr. Volkert has alleged.

 A. Legal Standard for Breach of Contract

 For Intervisual to succeed in this declaratory judgment action, it must prove that it has not breached the exclusive license agreement with Mr. Volkert, and that, therefore, Mr. Volkert's allegations of breach of contract are without merit. For Mr. Volkert to prove a prima facie breach of contract claim, he would have to show that: 1) a valid contract with definite and certain terms exists between him and Intervisual; 2) he has performed his obligations under the contract; 3) Intervisual has failed to perform its contractual duties; and 4) he has suffered damages as a result of Intervisual's breach. See Hoopla Sports and Entertainment, Inc. v. Nike, Inc., 947 F. Supp. 347, 356 (7th Cir. 1996).

 The first element of a breach of contract claim, the existence of a valid contract, is not in dispute here. Both parties agree, at the very least, that the exclusive license agreement was in force and effect from October 21, 1991, through February 29, 1996. Hence, Intervisual cannot disprove Mr. Volkert allegation of breach of contract by claiming that a valid contract did not exist.

 The second element of a breach of contract claim, the requirement that Mr. Volkert perform his obligations under the contract, is very much in dispute. Hoopla Sports, 947 F. Supp. at 356. Intervisual maintains that Mr. Volkert has improperly terminated the exclusive license agreement. In so doing, Intervisual implicitly argues that Mr. Volkert cannot satisfy this second element of a breach of contract action and that, therefore, Mr. Volkert's breach of contract claim must fail. However, proof that Mr. Volkert has improperly terminated the exclusive license agreement and, therefore, has not performed his obligations under the contract, is dependent on the third element of a breach of contract -- whether Intervisual has breached the exclusive license agreement.

 Hence, the success or failure of Intervisual's plea for declaratory judgment turns on the third element of the breach of contract formula. To satisfy the third element necessary to maintain a breach of contract action, Mr. Volkert must show that Intervisual has failed to perform its contractual duties. Thus, if Intervisual can prove that it has not breached its contractual duties, Mr. Volkert's allegations of breach of contract must fail, and ...


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