Argued May 29, 2015
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 13 C 407 -- John W. Darrah, Judge.
For Vdf Futureceuticals, Inc., Plaintiff - Appellant: A. Colin Wexler, Attorney, Stephanie J. Harris, Attorney, W. Kyle Walther, Goldberg Kohn Ltd., Chicago, IL.
For Stiefel Laboratories, Inc., J& J Technologies, LC, Defendants - Appellees: Anne Grignon, Attorney, Reed Smith Llp, Los Angeles, CA; Jennifer Ilkka, Attorney, Reed Smith Llp, Chicago, IL; Raymond A. Cardozo, Attorney, Reed Smith Llp, San Francisco, CA.
For Joseph A. Lewis, II, Defendant - Appellee: Edwin E. Brooks, Attorney, Mcguirewoods Llp, Chicago, IL; Nathaniel Lyle Story, Esq., Attorney, Courtney Moates Paulk, Attorney, Hirschler Fleischer PC, Richmond, VA.
Before POSNER, EASTERBROOK, and SYKES, Circuit Judges.
Posner, Circuit Judge.
In this needlessly complex case (the plaintiff's complaint is 33 pages long and consists of 184 paragraphs), with federal jurisdiction based on diversity of citizenship and the governing substantive law that of Illinois, the parties are wrangling over a license agreement. The agreement--40 pages of fine print, including numerous amendments--is between the plaintiff, VDF FutureCeuticals, Inc., and one of the three defendants, J& J Technologies, LC (the other two defendants are Stiefel Laboratories, Inc., and Joseph A. Lewis II). VDF has trademark and patent rights in " CoffeeBerry," an extract from the whole fruit (not just the bean) of the coffee plant.
The agreement licensed J& J (managed by defendant Lewis, formerly a 45 percent owner of the company, as was another of the company's three owners) to make and sell CoffeeBerry-based skin-care products to which VDF has the intellectual property rights. In other words, the agreement licensed J& J to " commercialize" VDF's intellectual property. The license required J& J to remit to VDF, as royalties, 15 percent (later raised to a third) of any revenues that J& J obtained from selling the licensed product, and of any royalties that J& J received from firms to which it granted sublicenses. All the royalties received by VDF would be what are called " running royalties," that is, royalties based on the number of sales by the licensee (J& J), or by sublicensees of the licensed product. Regarding sublicensees, the license permitted J& J to sublicense its rights under the license " in the exercise of [J& J's] sole discretion and judgment" (altered to " in the exercise of its best judgment" by an amendment in 2006).
The license also required J& J to pay VDF, at a minimum, a specified alternative quarterly royalty in order to protect VDF in the event that the running royalties fell below a specified level in particular quarters. The license provided that it could not be assigned without VDF's written permission, but it did not forbid a change of control of J& J, and this omission has turned out to be critical.
The license was issued in 2004. Two years later J& J sublicensed defendant Stiefel, a subsidiary of GlaxoSmithKline. Stiefel was a natural to become involved in VDF's business because it's a manufacturer of dermatological products and VDF hoped CoffeeBerry would become an ingredient of such products.
Four years later, J& J's three owners sold their ownership interests to Stiefel for $8.5 million (a third of which was held back pending VDF's written acknowledgement of the membership change, but we can ignore that detail). J& J thereupon became a Stiefel subsidiary and, VDF claims, obligingly agreed to reduce Stiefel's royalty obligation (remember that Stiefel was J& J's sublicensee) and otherwise hurt itself, for example by abandoning, when Stiefel terminated the sublicense that J& J had given it, the right under the sublicense to a $1 million termination fee.
Stiefel's internal documents state that its reasons for buying J& J's stock rather than taking an assignment of J& J's license from VDF were both to avoid having to get VDF's permission for an assignment and (since Stiefel would now control J& J) to reduce the royalties that Stiefel would have to pay for its marketing of CoffeeBerry. Two months after buying J& J's stock, Stiefel engineered an amendment to the sublicence agreement (that is, the agreement that made Stiefel a sublicensee of J& J) that reduced the alternative minimum royalties that Stiefel owed J& J. The effect was to divert part of the license-revenue stream from VDF and J& J to Stiefel.
Two years later (2012) VDF filed this lawsuit, charging J& J, Stiefel, and Lewis with having committed a variety of unlawful acts. These included multiple breaches of contract, including what VDF contends was the de facto assignment of J& J's license to Stiefel without VDF's approval, breach of the common law duty of good faith and fair dealing in the performance of a contract, failure to use " commercially reasonable efforts to make, use, sell, and otherwise commercialize" the licensed products (in other words, failure to use " best efforts" to promote those products), failure to pay VDF a third of the $8.5 million purchase price for J& J's stock as an advance royalty, and ultimately shutting down J& J's business to cut off royalties to VDF. The complaint also asks that the veil be pierced so that Lewis and Stiefel can be charged with J& J's misdeeds. Those two defendants are further charged with conspiring to appropriate the royalties and other contract payments due VDF under the license agreement. In addition, Lewis is charged with unjust enrichment and conversion as a ...