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SMS Demag Aktiengesellschaft v. Material Sciences Corp.

November 21, 2007

SMS DEMAG AKTIENGESELLSCHAFT, PLAINTIFF,
v.
MATERIAL SCIENCES CORPORATION, DEFENDANT.
TERRONICS DEVELOPMENT CORPORATION, INTERVENOR-PLAINTIFF/COUNTER-DEFENDANT
v.
MATERIAL SCIENCES CORPORATION, INTERVENOR-DEFENDANT/COUNTER-PLAINTIFF



The opinion of the court was delivered by: Michael P. McCUSKEY Chief U.S. District Judge

OPINION

This case is before the court for ruling on the Motions for Summary Judgment (#65, #66) filed by Defendant Material Sciences Corporation (MSC). Following this court's careful consideration of the arguments of the parties and the documents provided by the parties, MSC's Motions for Summary Judgment (#65, #66) are GRANTED. However, this court's review has shown that the original Complaint (#1) filed by Plaintiff, SMS Demag Aktiengesellschaft (SMS Demag), did not adequately allege diversity jurisdiction. The Complaint (#1) alleges only that SMS Demag is a "foreign corporation." This is not adequate to show SMS Demag's citizenship. This court must assure that it has jurisdiction over this case before judgment can be entered. See Belleville Catering Co. v. Champaign Market Place, L.L.C., 350 F.3d 691, 693 (7th Cir. 2003).*fn1 MSC is directed to file, within 14 days, an affidavit setting out the citizenship of SMS Demag pursuant to 28 U.S.C. § 1332(c)(1). Once this court has confirmed that it has diversity jurisdiction over this case, judgment will be entered in favor of MSC and against SMS Demag as set out in this Opinion. As far as the Motion for Summary Judgment (#66) as to Terronics Development Corporation (Terronics), judgment will be entered in favor of MSC and against Terronics on Terronics' Second Amended Complaint. However, judgment cannot be entered in MSC's favor on its counterclaim until evidence is presented regarding the computation of damages.

FACTS*fn2

Plaintiff SMS Demag is one of the world's leading designers and suppliers of steel-making and steel-processing equipment, including steel-coating equipment. It owns substantial and valuable know-how and technical knowledge in the engineering and manufacture of rolling mills and processing lines of all kinds, and is active worldwide in engineering, building, and selling such equipment to the metal industry. Defendant MSC provides material-based solutions for electronic, acoustical/thermal, and coated metal applications. Intervenor-Plaintiff Terronics is engaged in the development of technology for the electrostatic deposition of liquid and powder materials to a moving substrate.

On April 11, 1994, MSC entered into a technology license agreement with Terronics. Under the terms of the agreement, Terronics granted to MSC the exclusive right to use and sublicense technology related to the electrostatic application of powder paint to various types of substrates. At approximately the same time, SMS Demag was attempting to develop an alternative color-coating process technology. The alternative technology that SMS Demag was attempting to develop represented a precursory stage in the electrostatic application of powder paint. Accordingly, SMS Demag became interested in marketing the powder-paint technology that was the subject of the technology license agreement between MSC and Terronics. Thus, in 1995, SMS Demag contacted MSC to obtain a license to market the technology. It is undisputed that, by that time, MSC had made extensive progress in the field of powder paint coating.

In 1996, SMS Demag visited MSC's facility in Elk Grove Village, Illinois, to observe the technology in practical operation. After this observation, SMS Demag told MSC that SMS Demag "consider[ed] [MSC's] development trendsetting and future-oriented." SMS Demag expressed an interest "in entering into a [license] [a]greement with [MSC]."

On July 10, 1996, following negotiations, MSC and SMS Demag entered into a written license agreement under which MSC granted to SMS Demag a worldwide right (excluding North America) and license for designing, constructing, using, and selling the technology. It is undisputed that, by that date, MSC was using the technology to successfully produce powder-paint coated steel coil under the brand name "POWDERBOND." In July 1996 alone, MSC had used the technology to successfully produce and sell approximately $26,000 worth of POWDERBOND brand coated steel coil. Overall, from 1996 to the present, MSC has used the technology to successfully produce and sell approximately $1,378,000 worth of POWDERBOND brand coated steel coil.

The license agreement between MSC and SMS Demag included written warranties. The Agreement also provided that "[t]his Agreement embodies the entire understanding of the parties and shall supersede all previous communications, representations or undertakings, either verbal or written, between the parties relating to the subject matter hereof."

Ronald Michaelis, Ph.D., testified at his deposition that, in 1996, he was product manager of the coating business for SMS Demag. Michaelis testified that he was involved in negotiating the license agreement with MSC to sell the technology. He testified that he understood the integration clause and "understood that any prior representations that were made to [him] if they weren't included in the agreement were not part of the agreement." He also testified that he understood that it was a "developing technology" and that MSC did not have large scale commercial success at that point with the technology. He further testified that the agreement did not include any "timetable" for things to develop in a certain amount of time and that "MSC didn't promise or guaranty in the agreement that SMS would have any commercial success with selling installations or technology after entering into the agreement."

Following the parties' execution of the license agreement, SMS Demag was unsuccessful in its attempts to market the technology to its customers. On April 12, 2004, MSC notified SMS Demag that MSC was terminating the license agreement effective six months from April 30, 2004. MSC provided this notification to SMS Demag pursuant to a January 26, 2004, amendment to the license agreement which allowed either party to terminate the license agreement upon six months written notice after April 30, 2004.

In the meantime, effective August 1, 1996, MSC and Terronics entered into a second technology license agreement. Under the terms of this agreement, Terronics granted MSC "an exclusive, worldwide right and license to make, have made, use, sell, offer to sell, and import the Technology, including the right to grant sublicenses thereunder." In exchange for the license, MSC agreed to pay Terronics certain fixed and variable fees, if applicable, over a period of several years.

In particular, MSC agreed to pay Terronics a fixed fee of $50,000 on April 1, 1997, followed by fixed fees of $150,000 on April 1 of each year from 1998 to 2001. MSC also agreed to pay Terronics variable fees, if applicable, each year based on the amount of sales achieved by MSC under the license. MSC, however, was not obligated to make any variable fee payment until its sales for any given year reached a level where the variable fee that would be payable exceeded the applicable year's fixed fee.

Under the August 1, 1996, agreement, Terronics agreed to provide MSC with "technical consulting and troubleshooting services concerning the Technology" and "production Equipment and Production Units that [MSC] require[d] for its own use, sales, or leasing." In addition, under a "TECHNOLOGY TRANSFER" section of the agreement, Terronics agreed to provide MSC all technical documentation to allow MSC to use the technology and the equipment and to support sublicenses and sales of the technology and the equipment, including schematics, theories of operation, performance, and component specifications. Finally, the parties included a provision stating that, if the agreement terminated or expired, MSC would "return to Terronics all the Technology capable of being returned, including all technical documents provided by Terronics hereunder and any copies thereof."

On November 20, 1996, Terronics executed a promissory note in favor of MSC by which Terronics promised to pay $100,000 to MSC, together with 7% interest compounded continuously, on or before November 1, 2001. Subsequently, on December 17, 1997, Terronics executed a second promissory note in favor of MSC, which incorporated the amount Terronics owed to MSC under the first promissory note ($100,000 plus accrued interest of $8,484) plus an additional principal amount of $150,000. The second promissory note thus terminated the first promissory note and, under the second promissory note, Terronics promised to pay $258,484 to MSC, together with 7% interest compounded monthly, on or before April 1, 2002. Under the terms of the second promissory note, MSC agreed to "continue to pay to Terronics the minimum fees as outline[d] in the . . . license agreement up to and including April 1st 2001 regardless of the outstanding balance due on the loan." Terronics, however, agreed that "[a]fter April 1st 2001, MSC may at its sole discretion credit minimum fees due for that year to any remaining outstanding balance."

On August 11, 1997, MSC proposed to Terronics that the second technology license agreement "be amended in order to permit MSC to prepare, prosecute, maintain, enforce, and defend all powder paint inventions." MSC thus proposed that "all powder paint inventions of MSC or Terronics be assigned to MSC." On August 13, 1997, Terronics responded to MSC's proposal, indicating that it was in "general agreement" with the proposal. Terronics, however, questioned, "[W]hat happens if MSC terminates the underlying [a]greement[?]" Terronics suggested that, "in such instance, the patents should be assigned back to Terronics." The parties' subsequent negotiations resulted in the creation of a written technology assignment and transfer agreement, the third written agreement between the parties. The written document, which stated that its effective date was August 1998, was never formally executed by the parties.*fn3

Under the terms of this third written agreement, Terronics assigned to MSC "all of its right, title, and interest in" certain patents and patent applications related to the technology. In exchange for the assignment, MSC granted back to Terronics "an exclusive, world-wide, royalty-free, irrevocable (except as elsewhere provided) right and license to make, have made, use, sell, and import" under the patents. MSC also agreed to be responsible for "preparing, filing, prosecuting, maintaining, enforcing, and defending" the patents.

Similar to the parties' earlier technology and license agreement, the third written agreement provided that MSC agreed to pay Terronics certain fixed fees in subsequent years. In particular, MSC agreed to pay Terronics $150,000 on April 1 of each year from 1999 through 2001. In addition, MSC agreed to pay Terronics a final fixed fee of $250,000 on April 1, 2002. MSC also again agreed to pay Terronics variable fees each year based on the amount of sales achieved by MSC, but MSC was not obligated to pay any variable fee unless it achieved sufficient sales to make the variable fee exceed the applicable fixed fee. Terronics again agreed to provide MSC with technical consulting services and equipment that MSC required for its use, sales, or leasing of the technology. In return, MSC agreed to purchase minimum amounts of consulting services and equipment each year from April 1, 1998 to March 31, 2003. It is undisputed that, under the terms of the third written agreement, the minimum amount due for services from April 1, 2002 to March 31, 2003 would be $143,360. The third written agreement also contained a "TECHNOLOGY TRANSFER" section identical to the one contained in the second technology license agreement.

The third written agreement stated, in section 10.1, that the agreement "shall commence on the Effective Date [August 1998] and it shall remain in full force and effect for five (5) years, unless earlier terminated." The agreement also included, in section 10.1.1, an automatic renewal provision. In Section 10.2, the parties stated that, if the agreement was terminated or expired, MSC "shall immediately cease manufacturing and selling the Equipment and shall immediately cease using the Technology, and shall return to Terronics all the Technology capable of being returned, including all technical documents provided by Terronics and any copies thereof." Section 10.2 further provided, however, that "[n]otwithstanding the foregoing, nothing herein shall preclude MSC from practicing under any patent or Technology owned or otherwise licensed to MSC."*fn4 Section 10.6(b) of the written agreement stated, "if this agreement is terminated by MSC for any reason, then MSC shall at its own cost reassign all patents transferred to MSC by Terronics . . . ." Section 10.6(a) provided that the "expiration, non-renewal or termination of this [a]greement shall have no effect on any license or sub-license of the Technology granted by MSC prior to and in effect on the date of such expiration, non-renewal or termination."

Following the parties' negotiation of the third written agreement, Terronics assigned several of its technology-related patents to MSC, and MSC paid Terronics its fixed-fee payments of $150,000 in 1999, 2000, and 2001. MSC did not, however, make any variable fee payments to Terronics during those years because it is undisputed that MSC never achieved sufficient sales to trigger an obligation to pay a variable fee.

On October 9, 2001, Terronics president, Eduardo C. Escallon, sent a letter to Doug Edwards of MSC. In the letter, Escallon stated that Terronics had experienced cost overruns in setting up a powder coating line, referred to by the parties as Line 15. Escallon stated that, at a meeting held on September 1, 2001, Terronics had proposed that the interest charges due on the promissory notes be deducted from the $250,000 payment due from MSC on April 1, 2002, and that the remaining principal plus interest be deducted from the $440,000 payment due from MSC in 2003. Escallon also stated that they had agreed to "clos[e] out the first 100,000 dollar note." Escallon stated that Terronics would "be pleased to sign a suitable Note document" that encompassed these terms. The letter included a signature line for Doug Edwards to indicate his agreement. It is undisputed that Edwards did not sign the letter. In his affidavit, Escallon stated that he met with Edwards on October 12, 2001, and "Edwards expressed his concurrence." Edwards stated in his affidavit that he "never expressed any concurrence with the October 9, 2001 memorandum." Edwards stated that he "refused to sign the memorandum because its contents are not true."

On February 10, 2002, in furtherance of Terronics' promise to provide MSC with technical consulting services and equipment that MSC required for its use, sales, or leasing of the technology, MSC and Terronics entered into an agreement pursuant to which Terronics agreed to modify an electrostatic powder coating assembly in exchange for payment of $32,180. On February 27, 2002, Terronics submitted an invoice for this work and, on February 28, 2002, MSC tendered a check to Terronics in the amount of $32,180. Escallon testified that this work was not completed and the equipment was never provided to MSC.*fn5

On April 9, 2002, as MSC's final fixed-fee payment of $250,000 became due, MSC sent a letter to Terronics stating that MSC would exercise its right under the promissory note to credit the amount of MSC's obligation against the outstanding balance of the promissory note, which MSC stated was $349,733.00 as of that date. On May 6, 2002 Terronics rejected MSC's credit of the $250,000 fixed-fee payment against the outstanding balance of the promissory note, and Terronics opined that MSC's failure to pay Terronics $250,000 constituted a "material breach" of the written agreement. Terronics further stated that, if MSC failed to pay $250,000 to Terronics within 90 days, Terronics would "consider the [a]greement terminated." On May 21, 2002, Terronics notified MSC that it would "no longer provid[e] support to MSC activities."

PROCEDURAL BACKGROUND

On May 14, 2004, SMS Demag filed a lawsuit against MSC in the Southern District of Illinois. On March 10, 2006, the parties entered into a stipulation whereby the parties agreed that the case in the Southern District would be dismissed without prejudice and the case would be refiled in the Central District of Illinois.

Therefore, on April 5, 2006, SMS Demag filed a Complaint (#1) against MSC in this court.*fn6 In Count I, SMS Demag alleged that MSC breached the written license agreement because MCS failed to ever build a North American Demonstration plant and, on or about April 12, 2004, abandoned powder cloud technology to the detriment of SMS Demag. In Count II, SMS Demag alleged that MSC breached the written license agreement when it "failed to make any reasonable adjustment to the end-user requirements such that SMS Demag AG could continue to convince customers to buy Powder Cloud technology," to the detriment of SMS Demag. In Count III, SMS Demag alleged that MSC breached express warranties contained in the written license agreement. Specifically, SMS Demag alleged in par. 93(a) of its Complaint that MSC failed to "[m]aintain the rights to the technology . . ., rights which do not infringe the rights of others." In par. 93(b) of its Complaint, SMS Demag alleged that MSC failed to "[t]ransfer to SMS [k]now how and technical data which [was] proven by production and without defect."

On June 14, 2006, this court entered an Opinion (#31) in which this court concluded that venue was proper in this court. This court also granted Terronics' Motion to Intervene (#26). Terronics' Intervenor Complaint (#32) against MSC was then filed in this court. Subsequently, Terronics was allowed to file a Second Amended Complaint (#54). Terronics' Second Amended Complaint alleged that this court has diversity jurisdiction because Terronics is a citizen of Indiana in that it is incorporated in Indiana and has its principal place of business in Indiana and MSC is a citizen of Illinois because it is incorporated in Illinois and has its principal place of business in Illinois.*fn7 In Count I of its Second Amended Complaint, Terronics alleged that MSC breached the written agreement by failing to pay fees due on April 1, 2002, in the amount of $250,000, by failing to pay $143,400*fn8 due in the year 2002, and by failing to pay the minimum guaranteed fee in the amount of $440,000 due on April 1, 2003, April 1, 2004, April 1, 2005, and April 1, 2006. Terronics sought damages for breach of contract in the total amount of $2,153,400 and also sought "an order compelling MSC to transfer the Technology back to Terronics, including re-assignment of the patents to Terronics." In Count II, Terronics alleged, in the alternative, that MSC was liable for quantum meruit. In Count III, Terronics also alleged, in the alternative, that MSC was liable for unjust enrichment. In Count IV, Terronics sought injunctive relief in connection with Count I, specifically a preliminary injunction compelling MSC to "transfer the Technology back to Terronics, including re-assignment of the patents to Terronics." Terronics sought a hearing on its request for a preliminary injunction.

On January 10, 2007, MSC filed its Answer to Second Amended Complaint and Counterclaim (#56). MSC also filed a Memorandum in Opposition to Terronics' Motion for Hearing on Preliminary Injunction (#57). On March 15, 2007, this court entered an Opinion (#61). This court granted Terronics' Motion for a Preliminary Injunction Hearing. Subsequently, a hearing was scheduled for June 28, 2007, at 9:30 a.m. On May 31, 2007, Magistrate Judge David G. Bernthal held a telephone status conference in this case. At that time, Judge Bernthal granted a joint oral motion to vacate the preliminary injunction hearing. A deadline of June 21, 2007, was set for the parties to submit Stipulated Facts and Memoranda regarding Terronics' request for a preliminary injunction. Judge Bernthal later extended the deadline and, on July 6, 2007, Terronics filed a Consent Motion to Withdraw Request for Preliminary Injunction (#64). Terronics stated that it "had intended to pursue commercialization of ...


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