UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF ILLINOIS PEORIA DIVISION
December 15, 2010
TAS DISTRIBUTING COMPANY, INC., PLAINTIFF,
CUMMINS, INC., DEFENDANT.
The opinion of the court was delivered by: Joe Billy Mcdade United States Senior District Judge
Wednesday, 15 December, 2010 04:18:46 PM
Clerk, U.S. District Court, ILCD
OPINION and ORDER
Before the Court are the Cross-Motions for Summary Judgment (Docs. 258 and 261) on the only remaining issue in this case, damages as to Count II of the Fifth Amended Complaint (Doc. 205). For the reasons set forth below, Defendant's Motion is DENIED and Plaintiff's Motion is GRANTED.
The Court assumes familiarity with the facts underlying the Fifth Amended Complaint. In Count II, TAS accuses Cummins of failing to live up to its end of a bargain and pay royalties for each Retrofit Product sold by Cummins from April 1, 1998 to April 30, 2010. In an Order dated March 30, 2009 (Doc. 141) this Court found that Cummins breached the Intellectual Property License Agreement ("License Agreement") by failing to both provide monthly royalty compliance reports (as provided in section 6(e) of the License Agreement) and by failing to make royalty payments (as provided in section 5(a) of the License Agreement). At that time, the Court made no finding on actual damages. On December 10, 2009, however, this Court went on to find that according to section 6(c) of the License Agreement, Cummins is entitled to credit against "future royalty obligations" to the extent that the minimum royalty payments (which were paid during the first five years of the agreement) exceeded actual royalty payments (Doc. 217).
There is no dispute that Cummins made minimum royalty payments, in the amount of $1 million, during Years 1 through 5 of the License Agreement. There is also no dispute as to the number of retrofit units sold by Cummins. From April 1, 1998 to April 30, 2010, Cummins sold 13,681 such Retrofit Products.
The parties' dispute centers on whether sales of Original ECM Product*fn1 may be counted towards the minimum royalty offset that Cummins seeks. The parties also dispute whether TAS is entitled to prejudgment interest.
The License Agreement between the parties has three sections that are relevant to the present Motions. Section 5(a) of the License Agreement provides that:
From and after the Retrofit Stand-Alone Date, Licensee shall pay a royalty to Licensor for every Retrofit Product sold by Licensee, whether sold under the Cummins Brand or some other name, at the rate of: one hundred dollars ($100) per unit sold by Licensee in the first year commencing with the Retrofit Stand-Alone Date; one hundred and twenty-five dollars ($125) per unit sold by Licensee in the second year commencing with the first anniversary of the Retrofit Stand-Alone Date; and one hundred dollars ($100) per unit sold by Licensee in each year thereafter, commencing with the successive anniversaries of the Retrofit Stand-Alone Date. Royalties shall be paid on a monthly basis, with the first month beginning on the Retrofit Stand-Alone Date, within thirty (30) days after the close of each month.
Section 5(b) contains a royalty obligation with respect to the Original ECM Product that is based not on year but rather on number of units sold.*fn2 Both parties appear to agree that the "Retrofit Stand-Alone Date" referenced in the License agreement refers to March 31, 1998.*fn3 From April 1, 1998 to March 31, 1999, Cummins sold no Retrofit Products (Doc. 260, p. 5). From April 1, 1999 to March 31, 2000, Cummins sold 752 Retrofit Products (Id.). From April 1, 2000 to April 30, 2010, Cummins sold 12,929 Retrofit Units (TAS' Statement of Undisputed Material Facts (TSUMF) 3).*fn4 Based on Section 5(a) of the License Agreement (alone), this amount would have generated $1,386,900 in royalty payments over this time period (April 1, 1998 to April 30, 2010).*fn5
Section 6(a) of the License Agreement covers minimum royalty obligations.
The section provides:
Licensee covenants and agrees that, if Licensee shall have any of the rights granted to Licensee in Sections 3 and 4 of this License Agreement with respect to any of the Subject Technology or Related Intellectual Property, Licensee shall make, for each of the five (5) years commencing with the later of July 1, 1997 or the Decision Date in the Pending TAS Action or though [sic] settlement with DDC (the "Royalty Commencement Date"), either (i) actual royalty payments of at least a total of the minimum royalty payments to Licensor according to the schedule below; or, if Licensee does not generate sufficient sales to meet the minimum royalty payments, (ii) payments within 30 days after the close of each year in addition to actual royalty payments for a total of the minimum royalty payments according to the schedule below.
Schedule of Minimum Royalty Payments
Year 1 $100,000 Year 2 $300,000 Year 3 $200,000 Year 4 $200,000 Year 5 $200,000 It is undisputed that the minimum royalty obligation period began on March 31, 1998 and ran through April 1, 2003. It is further undisputed that Cummins paid the $1,000,000 minimum royalty obligation consistent with the terms of the License Agreement. During this same time period, Cummins sold 1,339 Retrofit Products (752 of which were sold from March 31, 1999 to April 1, 2000 -- at the higher $125 per product rate). The total actual royalty amount for Retrofit Products during this time period is $152,700.00 (March 31, 1998 to April 1, 2003).
The final relevant section is 6(c):
To the extent that minimum royalty payments made by Licensee exceed actual royalties paid by Licensee in a given year, such payments above and beyond actual royalties shall be credited against Licensee's future royalty obligations, provided that Licensee shall make the requisite yearly minimum payments specified in sections [sic] 6(a) of this Agreement.
Of particular relevance is that this section is silent as to whether the credit would go to royalty payments for the Retrofit Product and/or the Original ECM Product.
There is no dispute that Cummins paid royalties in the amount of $13,200 for 132 Retrofit Products sold in April and May, 2003 (TSUMF 2). There is also no dispute that Cummins offered $136,225 to TAS on November 16, 2007, $28,467.50 on December 21, 2007, and $392,000 on July 10, 2009, adding up to a total of $556,692.50, as additional payment for any unpaid royalties it may owe on the sale of Retrofit Products. TAS refused to accept the payment.
Summary judgment should be granted where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party has the responsibility of informing the Court as to portions of the record that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The movant may meet this burden by demonstrating "that there is an absence of evidence to support the nonmoving party's case." Id. at 325.
Once the movant has met its burden, to survive summary judgment the "non-movant must show through specific evidence that a triable issue of fact remains on issues on which [s]he bears the burden of proof at trial." Warsco v. Preferred Tech. Group, 258 F.3d 557, 563 (7th Cir. 2001); See also Celotex Corp., 477 U.S. at 322-24. "The non-movant may not rest upon mere allegations in the pleadings or upon conclusory statements in affidavits; it must go beyond the pleadings and support its contentions with proper documentary evidence." Chemsource, Inc. v. Hub Group, Inc., 106 F.3d 1358, 1361 (7th Cir. 1997).
This Court must nonetheless "view the record and all inferences drawn from it in the light most favorable to the [non-moving party]." Holland v. Jefferson Nat. Life Ins. Co., 883 F.2d 1307, 1312 (7th Cir. 1989). In doing so, this Court is not "required to draw every conceivable inference from the record -- only those inferences that are reasonable." Bank Leumi Le-Isreal, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir. 1991). Therefore, if the record before the court "could not lead a rational trier of fact to find for the non-moving party," then no genuine issue of material fact exists and, the moving party is entitled to judgment as a matter of law. McClendon v. Indiana Sugars, Inc., 108 F.3d 789, 796 (7th Cir. 1997) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)). However, in ruling on a motion for summary judgment, the court may not weigh the evidence or resolve issues of fact; disputed facts must be left for resolution at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986).
As indicated above, the parties dispute centers around the total royalties due and owing TAS as of April 30, 2010, the dollar amount of the minimum royalty credit that Cummins is entitled to, and whether TAS is entitled to prejudgment interest.
I. Contractual Credit and Amount Owed by Cummins to TAS
TAS argues that Cummins is entitled to no minimum royalty credit because the actual royalties due on the sale of Retrofit and Original ECM products exceed the minimum royalty payments made by Cummins. To support this argument, TAS points out that from April, 2000 to February, 2010, Cummins sold 195,128 ISX and ISM engines "that contained ICON code that could be enabled by an OEM." TAS further points out that this figure is conservative in light of this Court's conclusion that the engine ECM's, themselves, are "Original ECM Products" that would presumably generate a royalty to TAS. TAS does not specifically refer to sales data for the entire minimum royalty time period, March 31, 1998 to April 1, 2003; however, for the years 2000 to 2003, Cummins sold 37,241, 24,320, 28,937, and 7,806 Original ECM Products, respectively. These sales would have generated $5,181,430 in royalty payments*fn6 , which, coupled with the sales and royalties on the Retrofit Products during the same time period, exceed the minimum royalty amount paid by Cummins. According to TAS' calculations, Cummins therefore owes $1,360,575 in royalty payments for Retrofit Products sold.*fn7
Cummins on the other hand, argues that any royalties with respect to Original ECM Products cannot count to towards the minimum royalty credit because TAS is barred from making such claims by this Court's prior Order. According to Cummins, actual sales of the Retrofit Products and Integrated ICON from April 1998 to 2003 equaled 2,315 (1,339 and 976, respectively). This would have generated $250,300 in royalties to TAS during that time period ($152,700 and $97,600, respectively). Cummins then concludes that because it paid the $1,000,000 minimum royalty amount from April 1998 to April 2003 and it owed only $250,300 in actual royalties on Retrofit Products and Integrated ICON, it was entitled to a credit of $749,700 against all royalties due after April 1, 2003. This amount ($749,700), coupled with actual royalties paid after April 1, 2003, $13,200, when subtracted from the total amount of actual royalties due on Retrofit Products sold from April 2003 to April 2010 (that is, after the minimum royalty period)*fn8 would generate the amount of $471,300 due and owing to TAS.
The Court finds TAS' argument persuasive: Merely because it is barred from seeking relief from this Court and recovering royalties on Count I does not negate the terms of the contract which call for royalties on Original ECM Products and for those royalties to be included in the offset occasioned by the credit that Cummins may be entitled to pursuant to Section 6(c) of the License Agreement.
The doctrine of res judicata bars subsequent litigation on a claim that has already been adjudicated. See Altair Corp. v. Grand Premier Trust and Inv., Inc., 742 N.E.2d 351, 355 (Ill. App. Ct. 2000). The justification for the doctrine is to prevent a defendant from being harassed by multiple suits and to conserve resources that would be expended on duplicative lawsuits. Id. The Court is unaware of any authority that would bar TAS from recovering damages on a claim that is not found barred by res judicata even though those damages must be calculated using the potential damages of a claim that is barred by res judicata. In addition, as far as the Court is aware, the issue of what sales of Retrofit or Original ECM Products would be subject to the credit contained in section 6(c) of the License Agreement has never been litigated such that issue preclusion would apply. Merely because TAS is barred from filing suit to recover damages related to the Original ECM Product does not prevent it from using those damages in calculating the amount due, pursuant to the License Agreement, on the sale of Retrofit Products.
Cummins goes on to argue that the phrase "actual royalties paid" in section 6(c) of the License Agreement would prevent TAS from asserting that actual royalties that are due, but not paid, are also subject to the credit. As quoted above, the section 6(c) License agreement provides that:
To the extent that minimum royalty payments made by Licensee exceed actual royalties paid by Licensee in a given year, such payments above and beyond actual royalties shall be credited against Licensee's future royalty obligations, provided that Licensee shall make the requisite yearly minimum payments specified in section 6(a) of this Agreement.
Cummins' construction of this section, and, in particular, the weight given to the word "paid" would not be in accordance with the intent of the parties. In construing a contract, the Court is required to give meaning to the intent of the parties as evidenced by the language contained in an unambiguous contract. Buenz v. Frontline Transp. Co., 882 N.E.2d 525, 528-529 (Ill. 2008) ("The Cardinal rule of contract interpretation is to discern the parties' intent from the contract language."). Section 5 of the License Agreement mandates the payment of actual royalties on a monthly basis. The parties must have intended, then, that any such credit that Cummins would be entitled to pursuant to section 6(c) necessarily would take into account those actual royalty payments that Cummins should have made. As aptly stated by the Illinois Court of Appeals many years ago:
The argument of the defendant is based largely upon the first clause in the agreement, viz: "In consideration of your having secured," etc. In Walker v. Douglas, 70 Ill. 445 [1873 WL 8626 (Ill. 1873)], it is said to be a familiar elementary principle of construction that it is the duty of the court to discover and give effect to the intention of the parties, so that performance of the contract may be enforced according to the sense in which they mutually understood it at the time it was made; and where the intention of the parties to the contract is sufficiently apparent, effect must be given to it in that sense, though violence be done thereby to its words. The mere use of the past tense in the form should not blind us to the actual intent of the parties. Roberts v. Howe, 178 Ill.
App. 1, 1913 WL 2084, *2 (Ill. App. Ct. 1913).
It is apparent that TAS and Cummins intended the credit to extend to the actual royalty payments that Cummins owed TAS, regardless of whether those royalties were paid in a timely manner by Cummins. The mere use of the word "paid" and the meaning attributed to this word does not blind this Court to the actual intent of the parties as evidenced by the contract as a whole.
In light of the foregoing, then, Cummins is entitled to credit only to the extent that the minimum royalty obligation for a given year exceeded the actual royalty amount that was due and owning on sales of both the Retrofit Product and the Original ECM Product (as defined by Cummins and the Court) for that year. According to Cummins' Exhibit 1A the following table represents sales of Retrofit and Original ECM Products sold during the first five years of the agreement (April 1, 1998 to March 31, 2003):
Chart 1 Year Retrofit Original Products Sold ECM Products Sold (as defined by Cummins) Year 1 0 0 Year 2 752 0 Year 3 227 71 Year 4 88 220 Year 5 272 685 TOTAL: 1339 976 (Doc.264, pp. 6-7)*fn9 .
According to TAS, the following Chart 2 represents sales of additional Original ECM Products:*fn10
Chart 2 Year Original ECM Products sold (as defined by the Court) Year 1 0 Year 2 9,310 Year 3 33,989 Year 4 25,406 Year 5 23,655 (Doc. 260, p. 48).
When Charts 1 and 2 are combined, Chart 3 represents the total sales of Retrofit and Original ECM Products:
Chart 3 Year Retrofit Products Original ECM TOTAL Sold Products Sold Year 1 0 0 0 Year 2 752 9,310 10,062 Year 3 227 34,060 34,287 Year 4 88 25,626 25,714 Year 5 272 24,340 34,612 TOTAL 1,339 93,336
According to the royalty schedule outlined in section 5 of the License Agreement,*fn11
the following royalties would be payable on the sales listed in Chart 3:
Year Royalties Due on Royalties Due on Original
Retrofit Products Sold ECM Products Sold Year 1 $0 $0 Year 2 $94,000 $590,500 Year 3 $22,700 $1,828,000 Year 4 $8,800 $1,406,300 Year 5 $27,200 $1,342,000 TOTAL $152,700 $5,166,800 The total actual royalties due for each year is thus:
Year Actual Royalties Due
Year 1 $0 Year 2 $684,500 Year 3 $1,850,700 Year 4 $1,415,100 Year 5 $1,369,200 According to Section 6(c), Cummins is entitled to a credit "against [its] future royalty obligation" of minimum royalties that exceed actual royalties, in a given year, provided that Cummins makes the "requisite yearly minimum payments . . ." Therefore, to the extent that Cummins is entitled to a credit, it can only be used after it has paid the minimum royalty amount of $1,000,000; i.e. it can only be applied after the minimum royalty period ends, after Year 5. As can be seen from Chart 6, the only year that the minimum royalty payments "exceed actual royalties paid" by Cummins is Year 1:
Year Actual Minimum
Royalties Due Royalties Paid
Year 1 $0 $100,000 Year 2 $684,500 $300,000 Year 3 $1,850,700 $200,000 Year 4 $1,415,100 $200,000 Year 5 $1,369,200 $200,000
Therefore, Cummins is only entitled to a $100,000 credit which will be applied after the minimum royalty payment period ends provided that Cummins made the requisite minimum royalty payments, which the parties agree it did. The next item that must be determined is how much Cummins owes TAS for Retrofit Products sold during the minimum royalty period when the payments made by Cummins are taken into account. The following chart represents the amount that Cummins owed TAS for each year:
Year Actual Minimum Amount Owed
Royalties Due Royalties Paid
Year 1 $0 $100,000 $0 Year 2 $684,000 $300,000 $384,000 Year 3 $1,850,700 $200,000 $1,650,700 Year 4 $1,415,100 $200,000 $1,215,100 Year 5 $1,369,200 $200,000 $1,169,200
Because the License Agreement does not provide a specific manner in
which credit or payments should be applied to sales of both the
Retrofit and the Original ECM Products, logic dictates that the credit
would be applied proportionally on each sale. For example, in Year 2,
Retrofit Products represented 7.5% of total sales.*fn12
It would seem to the Court, then, that 7.5% of the credit and
payments should be applied to that years' sale of Retrofit Products.
The following chart represents the number of Retrofit Products sold as
a percentage of the total number of products sold for each year.
Year Number of Total Products Retrofit Products
Retrofit Products Sold Sold as % of Total
Year 1 0 0
Year 2 752 10,062 7.5%
Year 3 227 34,287 0.7%
Year 4 88 25,714 0.3%
Year 5 272 34,612 1.1% Applying the percentage to the payments made each year provides the proportional amount of the payments that can be applied to the royalties due on sale of the Retrofit Products:
Year Retrofit Amount Amount to be Actual Royalties Difference:
Products Sold Paid Credited to Retrofit Due on Retrofit Royalties Due as % of Total Products Sold Products and Owing
Year 1 0 $100,000 $0 $0 $0 Year 2 7.5% $300,000 $22,500 $94,000 $71,500 Year 3 0.7% $200,000 $1,400 $22,700 $21,300 Year 4 0.3% $200,000 $600 $8,800 $8,200 Year 5 1.1% $200,000 $2,200 $27,200 $25,000
For Years 1 through 5, Cummins owed TAS $126,000 in royalties for Retrofit Products Sold.
Next, the minimum royalty credit must be applied since Cummins is entitled to a $100,000 credit towards royalties due on Retrofit and Original ECM Products*fn13
sold in Year 6 (and onward).
In Year 6 (April 1, 2003 to March 31, 2004), Cummins sold a total of 2,276 Retrofit Products.*fn14 Also in Year 6, Cummins sold 8,448 Original ECM Products.*fn15
Chart 10 represents the royalties owed on those amounts in Year 6:
Amount Sold Royalties Due
Retrofit Products 2,276 $227,600 Original ECM Products 8,448 $547,400
Retrofit Products accounted for 21.2% of the total products sold in Year 6. Applying the $100,000 credit proportionally to the number of Retrofit Products (in the same manner as Chart 9) reveals that $21,200 of the $100,000 credit should be applied to the royalties due on Retrofit Products sold in Year 6. This amount, $21,200, coupled with the $13,200 that Cummins paid for Retrofit Products sold in April and May, 2003, and subtracted from the total amount due ($227,600) equals $193,200. After Year 6, Cummins owed the full amount of royalties on each Retrofit Product Sold. Chart 11 represents the total amount of royalties due on Retrofit Products sold from April, 1, 1998 to April 30, 2010.
Date Retrofit Products Sold Royalties Due April 1, 1998 to 1339 $126,000 March 31, 2003
April 1, 2003 to 2276 $193,200 March 31, 2004
April 1, 2004 to 10,066 $1,006,600
April 30, 2010
TOTAL 13,681 $1,325,800
It is the finding of this Court that Cummins owes $1,325,800*fn16 in royalties to TAS on the sale of Retrofit Products sold by Cummins from April 1, 1998 to April 30, 2010.
II. Prejudgment Interest
Illinois' Interest Act provides:
Creditors shall be allowed to receive at the rate of five (5) per centum per annum for all moneys after they become due on any bond, bill . . .or other instrument of writing . . . and on money withheld by an unreasonable and vexatious delay of payment. 815 Ill. Comp. Stat. § 205/2.
An award of interest is within the discretion of the Court. Illinois Health Maintenance Organization Guar. Ass'n v. Shapo, 826 N.E.2d 1135, 1157 (Ill. App. Ct. 2005); Marcheschi v. Illinois Famers Ins. Co., 698 N.E.2d 683, 688-689 (Ill. App. Ct. 1998). Prejudgment interest can be awarded when the amount is easily computed. New Hampshire Ins. Co. v. Hanover Ins. Co., 696 N.E.2d 22, 28 (Ill. App. Ct. 1998). However, "[w]hen a written instrument establishes an amount due and the time for payment, the creditor has a right to interest." Milligan v. Gorman, 810 N.E.2d 537, 541 (Ill App. Ct. 2004). Neither party suggests that the contract at issue is not an "instrument of writing" as used by the Act. See PPM Finance, Inc. v. Norandal USA, Inc., 392 F.2d 889, 895 (7th Cir. 2004) (noting three elements: "(1) a written instrument that establishes indebtedness; (2) a specific or inherent due date; and (3) that the indebtedness is subject to easy calculation.").
The parties' main argument centers on whether there is a "good faith" exception to the award of prejudgment interest under the Act. Cummins relies on Liu v. Price Waterhouse LLP, 302 F.3d 749, 757 (7th Cir. 2002) for the proposition that "if payment is being withheld in good faith, because of a genuine and reasonable dispute, interest will not be awarded." Id. at 757. In so finding, the Seventh Circuit relied on Gen. Dynamics Corp. v. Zion State Bank & Trust Co., 427 N.E.2d 131, 134 (Ill. 1981) and the limitation contained in Weidner v. Szostek, 1614 N.E.2d 879 (Ill. App. Ct. 1993). In Zion State Bank, the Illinois Supreme Court held that a good faith dispute as to the terms of a contract would disallow prejudgment interest. Id. at 133-134. Weidner limited the holding in Zion State Bank to instances when a prejudgment interest claim is statutory rather than contractual. Importantly, both Liu and Zion State Bank cite to that portion of the Act where prejudgment interest is sought because of "unreasonable and vexatious delay in payment." See Liu, 302 F.3d at 757; Zion State Bank, 427 N.E.2d at 133.
Naturally, a good faith dispute would belie any claim that payment was unreasonably withheld.
In this case, however, TAS seeks damages pursuant to the "written instrument" portion of the Act. Cummins has presented no direct authority that a "good faith" exception would apply to that section of the Act. Indeed, the cases cited above indicate that prejudgment interest should be awarded in instances such as this; and, certainly, the award of such interest is within the discretion of this Court.
The Court finds that prejudgment interest should be awarded for a number of reasons. First, Cummins was aware, at least from October, 2005 (the date that Cummins claims the credit ran out), that it owed TAS for the sale of Retrofit Products sold. Notwithstanding this knowledge, Cummins did not tender a check until November 16, 2007, some two years later, and coupled that tender with a "request" the TAS dismiss Counts I and II of the lawsuit. Cummins clearly owed royalties on Retrofit Products sold such that coupling its payment obligation with a request, no matter how worded, is not what the Court would consider "good faith." Second, Cummins' tender of two additional checks does not cover the amount due and owing as found by this Court. Finally, the award of prejudgment interest will give effect to the purpose of the Act: to fully compensate TAS for its loss and to place it in the same position had Cummins lived up to its end of the bargain in a timely manner. See e.g. PPM Finance, Inc., 392 F.3d at 895; Neumann v. Neumann, 777 N.E.2d 981, 985 (Ill. App. Ct. 2002)).
The computation of this interest, however, is a different matter because the Court's award of damages differs from the parties. The parties shall provide the Court, within 10 days of the date of this Order, a prejudgment interest calculation consistent with the findings set forth above and the percentage provided by the Act.
For the foregoing reasons, Defendant's Motion (Doc. 261) is DENIED and Plaintiff's Motion (Doc. 258) is GRANTED.*fn17
TAS is awarded $1,325,800, plus prejudgment interest to be calculated by the parties, on Count II of the Fifth Amended Complaint (Doc. 205).
The Clerk of Court is DIRECTED to withhold the entry of judgment in this matter until so directed by the Court.
Entered this 15th day of December, 2010