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Compak Companies, LLC v. Johnson

June 1, 2009

THE COMPAK COMPANIES, LLC, PLAINTIFF,
v.
JIMMIE L. JOHNSON, ET AL., DEFENDANTS.



The opinion of the court was delivered by: John F. Grady, United States District Judge

MEMORANDUM OPINION

Before the court are the bankruptcy court's proposed findings of fact and conclusions of law with respect to the defendants' motion for summary judgment. Except as modified below, we accept the bankruptcy court's recommendations and we grant defendants' motion for summary judgment on Counts I and II of plaintiff's complaint.

BACKGROUND

BMJ Partners ("BMJ") purchased certain assets "free and clear of all liens, claims, encumbrances and interests" from bankruptcy debtors Compak Corporation ("Compak") and Communion Packaging Company ("CPC") pursuant to 11 U.S.C. § 363. BMJ then assigned those assets to the plaintiff, The Compak Companies, LLC ("TCC"). TCC alleged in its complaint that defendant Jimmie Johnson, Compak's founder and former principal, wrongfully obtained "legal title" to certain patents that rightfully belonged to Compak.*fn1 Johnson, in turn, assigned the patents to PatPak Corporation (another company formed and controlled by Johnson), which licensed the patents to Compak. He then caused PatPak and Compak to sublicense the patents to defendant DuoTech Holdings, LLC ("Holdings"). These machinations were all part of Johnson's alleged scheme to retain the benefits of the patents in the face of his companies' impending insolvency. TCC's legal theory has changed somewhat, but it is ostensibly still pursuing a constructive-trust claim against whichever party or parties hold legal title to the patents-in-suit (Count I) and a patent-infringement claim against Holdings and its affiliate DuoTech Packaging, LLC ("Packaging," and in conjunction with Holdings, "DuoTech") (Count II). We referred those counts to the bankruptcy court because, we concluded, they were "related to" Compak's bankruptcy. See The Compak Co., LLC v. Johnson, No. 03 C 7427, 2004 WL 2034083, *3 (N.D. Ill. Sept. 2, 2004); see also 28 U.S.C. § 157(a) (authorizing district courts to refer to a bankruptcy court matters that are "related to a case under title 11."). DuoTech and defendant Bruce Carlson, the president of Holdings and the manager of Packaging (collectively, the "DuoTech Defendants"), have moved for summary judgment on both counts. Because the issues raised in Counts I and II are not "core" bankruptcy matters as defined in 28 U.S.C. § 157(b), this court must enter final judgment "after considering the bankruptcy judge's proposed findings and conclusions." See 28 U.S.C. § 157(c)(1). The bankruptcy court has reviewed the parties' summary-judgment submissions and recommends that we grant defendants' motion for summary judgment.*fn2 We review de novo "those matters to which any party has timely and specifically objected." Id. Before addressing those matters, a brief summary of the parties' dispute will be helpful.

On April 7, 1992, Johnson applied for a patent for a container designed to hold wine and communion wafers for religious services. (Findings of Fact ¶ 9.) Several months later Johnson assigned to Compak all of his "right, title and interest in any intellectual property rights whatsoever he owns in any manufacture of packaging of sacramental wine, juice and/or communion wafer or other such food product and any invention related thereto including, without limitation," Johnson's patent application. (Id. at ¶ 10; see Bill of Sale for Personal Property, dated July 9, 1992, attached as Ex. 4 to TCC's App. of Ex.) The USPTO granted Johnson's application and issued U.S. Patent No. 5,246,106 (the "'106 patent") on September 21, 1993. (Findings of Fact ¶ 9.) Between 1993 and 1998 the USPTO issued three other patents to Johnson: U.S. Patent Nos. 5,456,351 (the "'351 patent"), 5,584,388 (the "'388 patent") and 5,746,312 (the "'312 patent," and together with the '351 and '388 patents, the "Subsequent Patents"). (Id. at ¶ 11.) Neither side has challenged the bankruptcy court's conclusion that the Subsequent Patents are "related to the ideas and inventions which are the subject of the '106 patent." (Conclusions of Law ¶ 1 (Count II).) Notwithstanding his earlier agreement with Compak, Johnson purported to assign the Subsequent Patents to PatPak.*fn3 PatPak and Compak then executed an agreement in May 1997 (the "PatPak License") granting Compak a license to use certain intellectual property in its business, including the '351 and '388 patents and the application that the USPTO would later grant as the '312 patent. (PatPak License, attached as Ex. 26 to TCC's App. of Ex., at 1-3.)

In 2001, Compak entered into a series of agreements with Holdings, Johnson and PatPak purporting to grant Holdings a license to use all four patents. (See Findings of Fact ¶¶ 12-15; TCC's App. of Ex. at Ex. 30-32, 42.) Only two of these agreements are relevant here: (1) an Agreement, dated July 9, 2001, between Compak and "Duo-Tech;" and (2) a License Agreement, dated August 29, 2001, between Holdings, Compak, PatPak and Johnson. (See Findings of Fact ¶¶ 13-14; see also TCC's App. of Ex. at Ex. 32 and 42.) The July 2001 Agreement refers to all four patents as the "Process" and recites that Compak is the "sole assign of the Process by the inventor, Jimmie L. Johnson." (Agreement, dated July 9, 2001, § 1.) The August 2001 License Agreement recites that Compak is the "sole and exclusive owner of" the '106 patent, and the "sole and exclusive licensee of" the Subsequent Patents from PatPak. (License Agreement, dated August 29, 2001, §§ 1, 8, 22.) Both agreements purport to grant Holdings or "Duo-Tech" the right to use all four patents that defendants are alleged to infringe. (Findings of Fact ¶ 15.) But they do differ substantially in their terms: among other differences, the July agreement contains minimum-royalty requirements not present in the August agreement.

Compak filed for chapter 11 bankruptcy on June 10, 2002; CPC filed approximately four months later and the bankruptcy court consolidated the two cases. (Id. at ¶ 3.) Compak's amended schedule of executory contracts and unexpired leases, which Compak filed with the bankruptcy court on August 9, 2002, listed "DuoTech" as a party to an executory contract identified as a "patent license" and included an address for that company. (Id. at ¶ 16; see First Am. Summary of Schedules, attached as Ex. I to Supp. in Support of DuoTech Defs.' Mot. for Summ. J., at Schedule G.) On February 28, 2003, Compak filed its "Motion to Sell Business Real and Personal Property and to Shorten Notice Period" (the "Sale Motion"). (Findings of Fact ¶ 17.) The notice of the Sale Motion (the "Notice") consisted of a copy of the motion and a copy of a proposed asset purchase agreement between Compak and a stalking-horse bidder. (Id. at ¶ 18.) Compak did not send the Notice to Holdings, and Holdings was not represented at the Sale Motion hearing. (Id. at ¶ 19; Conclusions of Law ¶ 10 (Count II).) BMJ was the successful bidder at a public auction for the debtors' assets and the bankruptcy court entered an order approving the sale on March 24, 2003 (the "Sale Order"). (Findings of Fact ¶ 4.) The Sale Order authorized the debtors to sell their "Business Assets" - defined as "substantially all of [their] business real and personal property, excluding bankruptcy causes of action and related claims and cash" - to BMJ "free and clear of all liens, claims, encumbrances and interests." (Sale Order, attached as Ex. 62 to TCC's App. of Ex., ¶¶ 6 and G.) The Sale Order also attached and incorporated the Asset Purchase Agreement between Compak and the stalking-horse bidder. (See id. at ¶ G ("The Debtors are authorized to sell the Business Assets to BMJ pursuant to sections 363 and 105 of the Bankruptcy Code and on terms substantially comparable to those of the Asset Purchase Agreement attached hereto[.]").) That Agreement lists "Assets to be Sold by Compak" and specifically identifies the '106 patent as well as Compak's "right, title and interest in and under all Leases, Contracts and Permits, which are being assigned to and assumed by Purchaser."

(Sale Order at Ex. A, ¶ 1.) BMJ assigned the purchased assets to TCC in April 2003. (Findings of Fact ¶ 5.)

The debtors' chapter 11 reorganization was converted to a chapter 7 liquidation on April 3, 2003. (Id. at ¶ 3.) Approximately six months later Packaging filed an interpleader complaint in the bankruptcy court against the debtors' chapter 7 trustee, BMJ, PatPak and Johnson alleging that it did not know which party was owed royalties under the August 2001 license. (The record is curiously silent concerning when and how DuoTech actually learned of the sale.) The bankruptcy court has approved a settlement in the interpleader action between DuoTech and the trustees for the Compak and Johnson estates. That agreement, assuming it was consummated, transferred to DuoTech whatever rights and interests the trustees may have had in the patents-in-suit and related property. (See Order Approving Compromise and Settlement of Claims, dated November 29, 2007, at Ex. A (hereinafter, the "Settlement Order.").)

We turn now to the parties' objections to the bankruptcy court's proposed findings of fact and conclusions of law.

DISCUSSION

A. Whether the August 2001 License Was Invalid Ab Initio

The bankruptcy court has concluded that it is irrelevant whether the August 2001 license is invalid, as TCC contends, because in that event the July 2001 agreement would still be effective.*fn4 (Conclusions of Law ¶ 6 (Count II).) And because both agreements purport to grant DuoTech the right to use all four patents, defendants are entitled to summary judgment on TCC's patent infringement claim so long as one of the two licenses survived the bankruptcy sale. (Id. at ¶¶ 7-8.) But the July Agreement includes minimum-royalty requirements, not included in the August license, that DuoTech apparently did not satisfy in the contract's first two years. (See Interpleader Compl. ¶ 27 (alleging that DuoTech anticipated making its first royalty payment as a result of "certain pending sales" in September 2003).) Under the July Agreement, "[f]ailure to pay royalties that are due shall render this Agreement null and void." (License Agreement, dated August 29, 2001, § 3); see B. Braun Medical, Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997) ("[V]iolation of valid conditions entitles the patentee to a remedy for either patent infringement or breach of contract.") (emphasis added). We agree with TCC that the July 2001 agreement was binding (see supra n. 2); the document is complete on its face and expressly states that it "becomes a complete and binding Contract upon its acceptance as signified by the signatures below." (See Agreement, dated July 9, 2001, at 2.) But the August 2001 agreement did not merely purport to modify the earlier agreement - the parties mutually agreed that it "superced[ed] any preexisting agreements between" the parties concerning the license's subject matter. (License Agreement, dated August 29, 2001, ¶ 19); cf. Doyle v. Holy Cross Hosp., 708 N.E.2d 1140, 1145 (Ill. 1999) (concluding that the defendant's unilateral insertion of an additional contract term was not supported by consideration). And it did more than simply alter the minimum royalty requirement - it added additional parties (PatPak and Johnson) and provisions, some of which are mutually beneficial. (See, e.g., License Agreement, dated August 29, 2001, ΒΆΒΆ 7 (confidentiality) and 14 (insurance and ...


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