Tuesday, September 22, 2020

Supreme Court of New Hampshire, Mentis Sciences, Inc. v. Pittsburgh Networks, LLC, Docket No. 2019-0548

 

Contract:

Lost Data

Consequential Damages v. Direct Damages

Limitation of Liability Clause

Limitation of Liability Clause Precludes the Plaintiff from Recovering Consequential Damages

Can A Limitation of Liability Clause Preclude Recovery of Any Damages Resulting from Any Breach?

Contract Drafting

New Hampshire Law

Negligence:

Economic Loss Doctrine

Negligence (Tort) Claim v. Contract Claim

 

The plaintiff, Mentis Sciences, Inc., appeals an order of the Superior Court (McNamara, J.) dismissing its claims for damages representing the cost of recreating lost data and lost business and negligence against the defendant, Pittsburgh Networks, LLC. The plaintiff argues that the trial court erred by: (1) concluding that the damages representing the cost of recreating lost data and lost business were consequential; (2) concluding that the limitation of liability clause in the parties’ contract is enforceable; and (3) dismissing its claim for negligence. We affirm because the damages sought by the plaintiff are consequential and the limitation of liability clause precludes the plaintiff from recovering consequential damages. We also conclude that the economic loss doctrine bars the plaintiff’s negligence claim.

 

In 2010, the defendant began providing the plaintiff with technological support or “IT” services. In 2014, the parties executed a “Service Agreement” in which the defendant agreed to provide the plaintiff with services including “monitoring of computers and network, data backup, network services, antivirus, and comprehensive maintenance and support for servers, PC’s and the network,” and the plaintiff agreed to pay the defendant an annual fee of $15,864. The parties’ contract included the following limitation of liability clause: “The Service Provider shall not be liable for any indirect, special, incidental, punitive or consequential damages, including but not limited to loss of data, business interruption, or loss of profits, arising out of the work performed . . . by the Service Provider.”

 

In August 2014, the defendant notified the plaintiff that a drive in one of its servers had failed and would need to be replaced. The defendant thereafter provided the plaintiff a summary of the problem: a “Redundant Array of Independent Disks” controller malfunctioned, causing the corruption of some of the plaintiff’s data. The defendant attempted to recover the corrupted data; however, the data was permanently lost because the defendant had failed to properly back it up.

 

According to the trial court, the plaintiff could only recover “what it expected to receive, the fair market value of the defendant’s services, which is probably close to . . . the contract price.” The trial court also concluded that the plaintiff’s negligence claim was precluded by the economic loss doctrine. Accordingly, the trial court dismissed the plaintiff’s damages claims for the cost of recreating the lost data and lost business and its negligence claim. Thereafter, in a ruling that is not the subject of this appeal, the trial court awarded the plaintiff $40,000 in direct damages. This appeal followed.

 

(…) A party’s expectation interest is comprised, in part, of “the loss in the value to him of the other party’s performance caused by its failure or deficiency,” in addition to “any other loss, including incidental or consequential loss, caused by the breach.” Restatement (Second) of Contracts, § 347(a)-(b), at 112. Thus, according to the principles we explain further below, a party’s expectation interest may be fulfilled by an award of both direct and consequential damages. See Joseph M. Perillo, Corbin on Contracts § 55.3, at 10 (rev. ed. 2005) (“Placing a party in the same economic position as performance would have sometimes requires a grant of general [or direct] damages coupled with consequential damages.”).

 

The line dividing what may be considered direct versus consequential damages “is not capable of exact determination.” Id. § 56.6, at 105. However, we find the following principles instrumental when divining the difference. Direct damages “are based on the value of the performance itself,” whereas consequential damages are based “on the value of some consequence that performance may produce.” Dan B. Dobbs & Caprice L. Roberts, Law of Remedies: Damages — Equity — Restitution § 12.4, at 811 (3d ed. 2018); see Restatement (Second) of Contracts, § 347(a)-(b), at 112; see also Schonfeld v. Hilliard, 218 F.3d 164, 176 (2d Cir. 2000) (describing consequential damages as those that “seek to compensate a plaintiff for additional losses (other than the value of the promised performance) that are incurred as a result of the defendant’s breach”). Thus, consequential damages “are not based on the capital or present value of the promised performance but upon benefits it can produce or losses that may be caused by its absence.” Dobbs & Roberts, supra § 12.2, at 804; see Restatement (Second) of Contracts, supra § 347 cmt. c at 114 (“Consequential losses include such items as injury to person or property resulting from defective performance.”); see also KC Properties v. Lowell Inv. Partners, 280 S.W.3d 1, 10 (Ark. 2008) (describing consequential damages as those that flow “from some of the consequences or results of the breach”).

 

Applying these principles to the plaintiff’s claim for damages representing the cost of recreating the data and lost business, we conclude that such damages are consequential. Pursuant to the parties’ contract, the defendant agreed to provide services to maintain and manage the plaintiff’s network infrastructure. Even if we assume, as the plaintiff asserts, that the defendant explicitly agreed to provide data protection or backup services, we would conclude that the damages the plaintiff seeks are consequential. The cost of recreating the lost data does not represent the value of the performance of maintaining and managing the plaintiff’s network or data. Rather, this cost represents an amount necessary to repair a loss that was caused by the absence of the performance of those services, and, accordingly, is consequential in nature.

 

Similarly, the business and profits that the plaintiff lost because it cannot use the data to bid on projects do not represent the value of the defendant’s performance. Lost profit damages may be direct or consequential, depending upon the circumstances. See Atlantech Inc. v. American Panel Corp., 743 F.3d 287, 293 (1st Cir. 2014) (discussing when lost profit damages may be considered direct or consequential); see also Kerr S.S. Co. v. Radio Corporation of America, 157 N.E. 140, 141 (N.Y. 1927) (“Damage which is general [or direct] in relation to a contract of one kind may be classified as special [or consequential] in relation to another.”). Here, the claimed lost profit damages are not direct because the profits lost were not inherent in the contract; that is, the plaintiff did not stand to earn these profits as a direct result of its contract with the defendant. See Penncro Associates, Inc. v. Sprint Spectrum, L.P., 499 F.3d 1151, 1156 (10th Cir. 2007) (explaining that one situation in which lost profit damages are considered direct is “if a services contract is breached and the plaintiff anticipated a profit under the contract”); see also Atlantech, 743 F.3d at 293 (providing as an example of lost profits that are direct damages “a general contractor suing for its remaining contract price less saved expenses”). Rather, what the plaintiff gained from the contract was the defendant’s services. The plaintiff’s profits were anticipated as a result of its bidding and participating in other “projects,” which relied upon actions and contingencies that would have taken place outside of its contract with the defendant. Accordingly, the lost profit damages the plaintiff seeks are consequential. See Atlantech, 743 F.3d at 293 (determining that the lost profit damages sought by the plaintiff were consequential because “they depend on contingencies beyond the terms of the contract itself”); Penncro, 499 F.3d at 1156 (explaining that lost profits damages are considered consequential if the breach precluded the plaintiff “from performing other work . . . from which it expected to make a profit”).

The cases relied upon by the plaintiff provide no support for its argument that the damages it seeks are direct rather than consequential.

 

Can a limitation of liability clause preclude recovery of any damages resulting from any breach?

(…) Orthopaedic Center of South Florida, P.A. v. Stryker Corporation, 08-60742-CIV-DIMITROULEAS, 2008 WL 11331981 (S.D. Fla. Sept. 16, 2008). There, the United States District Court for the Southern District of Florida, applying Florida law, concluded that a limitation of liability clause that precluded recovery of “direct, special, incidental or consequential damages resulting from any breach of warranty or condition, or under any other legal theory,” was unenforceable. The court reasoned that a reasonable person would not understand that the clause “contracts away any meaningful remedy” for a breach and enforcing the clause “would allow the Defendants to breach provisions of the contract through its own negligent behavior, with impunity, thereby rendering specific provisions of the contract meaningless.”

 

In sum, we conclude that the damages representing the cost of recreating the data and lost profits are consequential. Because we also conclude that the limitation of liability clause, which precludes recovery of consequential damages, is enforceable, the plaintiff is unable to recover those damages.

 

Negligence:

The economic loss doctrine is a “judicially-created remedies principle that operates generally to preclude contracting parties from pursuing tort recovery for purely economic or commercial losses associated with the contract relationship.” Plourde Sand & Gravel v. JGI Eastern, 154 N.H. 791, 794 (2007). The doctrine recognizes that contract and warranty law are better suited than tort law for “dealing with purely economic loss in the commercial arena.” Id. Allowing a contracting party to sue in tort “when a transaction does not work out as expected” in effect allows that party to “rewrite the agreement to obtain a benefit that was not part of the bargain.” Id. Accordingly, the doctrine “precludes a harmed contracting party from recovering in tort unless he is owed an independent duty of care outside the terms of the contract.” Wyle v. Lees, 162 N.H. 406, 410 (2011).

 

In Wyle, we determined that the economic loss doctrine did not bar the plaintiff’s negligent misrepresentation claim because the misrepresentations induced the plaintiff to enter into a contract. Id. at 411-12. The plaintiff argues that the defendant “negligently misrepresented to the plaintiff that it was routinely backing up the plaintiff’s data.” However, in Wyle we endorsed a distinction between negligent misrepresentation claims “that center upon an alleged inducement to enter into a contract from those that focus upon performance of the contract.” Id. at 411. When a negligence claim is “based merely upon the breach of a contractual duty,” the claim will not lie. Id. On the other hand, when “the misrepresentation of present fact serves as an inducement for the contract,” the negligence claim is not duplicative of the breach of contract claim. Id.

 

For the reasons stated above, we affirm the trial court’s dismissal of the plaintiff’s damages claims representing the cost of recreating its lost data and lost business and its negligence claim.

 

 

(Supreme Court of New Hampshire, September 22, 2020, Mentis Sciences, Inc. v. Pittsburgh Networks, LLC, Docket No. 2019-0548)

U.S. Court of Appeals for the Seventh Circuit, Servotronics, Inc. v. Rolls-Royce PLC and The Boeing Company, Docket No. 19-1847

Discovery

 

Evidence

Application to Obtain Discovery for Use in Foreign Proceedings

In Private Foreign Arbitrations?

Ex Parte Application

Letter Rogatory

Letter of Request

Subpoena

Motion to Quash

 

Circuit Split: Section 1782(a) of Title 28 does not authorize the district courts to compel discovery for use in private foreign arbitrations (Second, Fifth and Seventh Circuit).

 

 

Section 1782(a) of Title 28 authorizes the district court to order a person within the district to give testimony or produce documents “for use in a proceeding in a foreign or international tribunal.” This case asks whether a private foreign arbitration is “a proceeding in a foreign or international tribunal” within the meaning of the statute.

 

Two decades ago, the Second and Fifth Circuits answered this question “no,” holding that § 1782(a) authorizes the district court to provide discovery assistance only to state-sponsored foreign tribunals, not private foreign arbitrations. Nat’l Broad. Co. v. Bear Stearns & Co., 165 F.3d 184, 191 (2d Cir. 1999); Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880, 883 (5th Cir. 1999).

 

More recently, the Sixth Circuit reached the opposite conclusion, Abdul Latif Jameel Transp. Co. v. FedEx Corp. (In re Application to Obtain Discovery for Use in Foreign Proceedings), 939 F.3d 710, 714 (6th Cir. 2019), and the Fourth Circuit agreed, Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 214 (4th Cir. 2020). We join the Second and Fifth Circuits and hold that § 1782(a) does not authorize the district court to compel discovery for use in a private foreign arbitration.

 

(…) The parties agreed to conduct the arbitration in London.

 

Servotronics thereafter filed an ex parte application in the U.S. District Court for the Northern District of Illinois asking the court to issue a subpoena compelling Boeing to produce documents for use in the London arbitration. The application invoked 28 U.S.C. § 1782(a), and the judge initially granted it and issued the requested subpoena. Rolls-Royce intervened and moved to quash the subpoena, arguing that § 1782(a) does not permit a district court to order discovery for use in a private foreign commercial arbitration. Boeing intervened and joined the motion to quash. The judge reversed course and quashed the subpoena. She agreed with Rolls-Royce and Boeing that § 1782(a) does not authorize the court to provide discovery assistance in private foreign arbitrations. Servotronics appealed. Rolls-Royce and Boeing jointly defend the judge’s ruling.

 

Sections 1781 and 1782 of Title 28 govern the district court’s authority to provide discovery assistance in litigation in foreign and international tribunals. Section 1781 describes a formal judicial instrument known as a “letter rogatory”—a letter of request “issued by one court to a foreign court, requesting that the foreign court (1) take evidence from a specific person within the foreign jurisdiction ... and (2) return [it] ... for use in a pending case.” Letter of Request, BLACK’S LAW DICTIONARY (11th ed. 2019).

 

Letters rogatory are transmitted through diplomatic agencies; the statute provides that the State Department may, either “directly, or through suitable channels, ... receive a letter rogatory issued, or request made, by a foreign or international tribunal, to transmit it to the tribunal, officer, or agency in the United States to whom it is addressed,” and “receive and return it after execution.” 28 U.S.C. § 1781(a)(1). The assistance is reciprocal; tribunals in the United States may issue letters rogatory through the State Department to a “foreign or international tribunal, officer, or agency.” Id. § 1781(a)(2).

 

(…) The order may be made pursuant to a letter rogatory issued, or request made, by a foreign or international tribunal or upon the applica- tion of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court.

 

(…) For several reasons, we side with the Second and Fifth Circuits in this interpretive debate. First, the word “tribunal” is not defined in the statute, and dictionary definitions do not unambiguously resolve whether private arbitral panels are included in the specific sense in which the term is used here. (…) In short, canvassing dictionary definitions is inconclusive. In both common and legal parlance, the phrase “foreign or international tribunal” can be understood to mean only state-sponsored tribunals, but it also can be understood to include private arbitration panels. Both interpretations are plausible.

 

(…) Harmonizing this statutory language and reading it as a coherent whole suggests that a more limited reading of § 1782(a) is probably the correct one: a “foreign tribunal” in this context means a governmental, administrative, or quasi-governmental tribunal operating pursuant to the foreign country’s “practice and procedure.” Private foreign arbitrations, in other words, are not included.

 

(…) The discovery assistance authorized by § 1782(a) is notably broader than that authorized by the FAA. Most significantly, the FAA permits the arbitration panel—but not the parties—to summon witnesses before the panel to testify and produce documents and to petition the district court to enforce the summons. 9 U.S.C. § 7. Section 1782(a), in contrast, permits both foreign tribunals and litigants (as well as other “interested persons”) to obtain discovery orders from district courts. If § 1782(a) were construed to permit federal courts to provide discovery assistance in private foreign arbitrations, then litigants in foreign arbitrations would have access to much more expansive discovery than litigants in domestic arbitrations. It’s hard to conjure a rationale for giving parties to private foreign arbitrations such broad access to federal-court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations.

 

(…) For the foregoing reasons, we join the Second and Fifth Circuits in concluding that § 1782(a) does not authorize the district courts to compel discovery for use in private foreign arbitrations.

 

 

(U.S. Court of Appeals for the Seventh Circuit, September 22, 2020, Servotronics, Inc. v. Rolls-Royce PLC and The Boeing Company, Docket No. 19-1847)

Wednesday, August 26, 2020

U.S. Court of Appeals for the Ninth Circuit, Global Commodities Trading Group, Inc. v. Beneficio De Arroz Choloma, S.A., a Honduran Company, Docket No. 18-16026

 

Jurisdiction

 

Personal Jurisdiction

 

Specific Jurisdiction Over Employees

 

Forum Non Conveniens

 

Import

 

Incoterms

 

CIF Contracts

 

California Law

 

 

The panel reversed the district court’s order dismissing for lack of personal jurisdiction, vacated its orders on the parties’ remaining motions, and remanded with instructions to deny the forum non conveniens motion in an action brought by Global Commodities Trading Group, Inc. (“Global”), a California corporation, against Beneficio De Arroz Choloma, S.A. (“Bachosa”), a Honduran corporation, and two of its officers to recover losses on contracts.

 

Global is a California corporation with its headquarters in Placer County, California. At the time of the events giving rise to this action, it was engaged in the business of international sales of agricultural commodities. Bachosa is a corporation organized under the laws of Honduras with its principal place of business in Choloma, Cortés, Honduras. It is engaged in the business of importing and processing rice and corn from countries including the United States. Bachosa has no offices, real property, or employees in California.

 

From 2008 through 2012, Bachosa purchased approximately 137,450 metric tons of agricultural commodities from Global for more than $50 million pursuant to hundreds of separately negotiated contracts. The contracts generally were cost, insurance, freight (“CIF”) contracts, meaning Global’s contractual performance was considered complete when the goods were loaded at the point of shipment. Global and Bachosa primarily negotiated their contracts by phone and email.

 

(…) Following the alleged January meeting in California, Global arranged for shipment under the contracts. The United States Department of Agriculture issued an inspection certificate for the rice and corn in Woodland, California. The goods were shipped from the United States from Port of Darrow, Louisiana to Puerto Cortes, Honduras on the MV UBC Sacramento on January 19, 2012.

 

(…) See, e.g., Boschetto v. Hansing, 539 F.3d 1011 (9th Cir. 2008) (holding that a single eBay sale to a California resident did not give rise to personal jurisdiction there).

 

Specific jurisdiction over Andonie and Jarufe presents a different question: when may a court exercise jurisdiction over individuals based on their contacts with a forum on behalf of a corporation?

 

We noted that the Supreme Court had allowed the exercise of specific jurisdiction over employees based on actions they took on behalf of a corporation. See, e.g., Calder v. Jones, 465 U.S. 783, 790 (1984) (“their status as employees does not somehow insulate them from jurisdiction”); Keeton, 465 U.S. at 781 n.13. As a matter of Arizona law, we held that the state’s long-arm statute allowed the exercise of personal jurisdiction to the limits of the federal Constitution, and therefore did not shield corporate officers from jurisdiction over their persons based on actions within the scope of their employment. Davis, 885 F.2d at 522.

 

California’s long-arm statute, like Arizona’s, imposes no limitations on personal jurisdiction beyond those required by due process. See Picot, 780 F.3d at 1211.

 

Although their status as officers of Bachosa does not foreclose personal jurisdiction over Andonie and Jarufe, their status also does not guarantee it. Personal jurisdiction over an individual who acts as an agent of a third party must be assessed on the individual’s actions alone.

 

(…) Our statement in Forsythe that “a corporate officer who has contact with a forum only with regard to the performance of his official duties is not subject to personal jurisdiction in that forum,” Forsythe, 576 F.2d at 783–84, is clearly irreconcilable with the Supreme Court’s decisions subjecting corporate employees to suit in exactly those circumstances. See Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en banc); see also Davis, 885 F.2d at 521 (rejecting the fiduciary shield doctrine based on Calder and Keeton). However, our holding in Forsythe that a personal guaranty of a corporation’s debt may give rise to personal jurisdiction over a corporate officer remains good law.

 

We decide questions of forum non conveniens as a matter of federal law even in cases where state or foreign substantive law governs. Ravelo Monegro v. Rosa, 211 F.3d 509 (9th Cir. 2000). “To prevail on a motion to dismiss based upon forum non conveniens, a defendant bears the burden of demonstrating an adequate alternative forum, and that the balance of private and public interest factors favors dismissal.” Ranza, 793 F.3d at 1076 (quoting Carijano v. Occidental Petroleum Corp., 643 F.3d 1216, 1224 (9th Cir. 2011)). “Forum non conveniens is an exceptional tool to be employed sparingly . . . .” Ravelo Monegro, 211 F.3d at 514. To succeed, a defendant must make “a clear showing of facts which . . . establish such oppression and vexation of a defendant as to be out of proportion to plaintiff’s convenience.” Id. (alteration in original) (quoting Cheng v. Boeing Co., 708 F.2d 1406, 1410 (9th Cir. 1983)).

 

We hold that the balance of private and public interest factors does not favor dismissal. Both sides identify witnesses for whom appearance in their home country would be more convenient. Most of the key documentary evidence, although originally in Spanish, has already been translated into English. The defendants contend that evidence related to Honduran importation permits and the demurrage charges incurred by the Sacramento would be more easily accessible in Honduras. However, evidence related to the negotiations in California would be more easily accessible in California. That some witnesses would prefer to appear in Honduras falls well short of a clear showing of facts which establish such oppression and vexation of a defendant as to be out of proportion to plaintiff’s convenience. Ravelo Monegro, 211 F.3d at 514. Moreover, Global submitted evidence of significant safety concerns with travel to Honduras, particularly for those who travel to the country for the purpose of collecting debt owed by Honduran companies.

 

A plaintiff’s choice of forum—particularly a plaintiff’s “home forum”—is entitled to considerable deference. Ranza, 793 F.3d at 1076 (quoting Piper Aircraft Co. v. Reyno, 454 U.S. 235, 255 (1981)); see also Ravelo Monegro, 211 F.3d at 512 (noting that dismissal for forum non conveniens is typically only appropriate where a plaintiff chooses a forum wholly unrelated to the dispute). This case presents no more than the ordinary burdens any foreign defendant will bear when called to defend an action in the United States against a domestic plaintiff. Those burdens are insufficient to overcome the presumption in favor of Global’s choice of its home forum.

 

The panel held that the district court had specific personal jurisdiction over the corporate defendant.

 

 

(U.S. Court of Appeals for the Ninth Circuit, August 26, 2020, Global Commodities Trading Group, Inc. v. Beneficio De Arroz Choloma, S.A., a Honduran Company, Docket No. 18-16026, For Publication)

Friday, August 21, 2020

U.S. Court of Appeals for the Sixth Circuit, Ecimos, LLC v. Carrier Corp., Docket No. 19-5436/5519

 

 

Copyright Infringement

 

Copyright on Database-Script Source Code

 

Software

 

Hardware

 

Abstraction-Filtration Test

 

Permanent Injunction – Stayed – Special Master

 

Trade Secret

 

Licensing Terms

 

Contract Drafting

 

Carrier and ECIMOS once had a long-standing business relationship that has now deteriorated. Carrier is a leading manufacturer of residential Heating, Ventilation, and Air Conditioning (“HVAC”) systems and ECIMOS once produced the quality-control system that tested completed HVAC units at the end of Carrier’s assembly line. The present dispute centers on Carrier’s alleged infringement of ECIMOS’s copyright on its database-script source code—a part of ECIMOS’s software that stores test results. ECIMOS alleges that Carrier improperly used the database—indeed copied certain aspects of the code—to aid a third-party’s development of a new testing software that Carrier now employs in its Collierville, Tennessee manufacturing facility. ECIMOS sued for copyright infringement and breach of contract and won a $7.5 million jury award.

 

ECIMOS also filed a post-trial motion and asked the court to enjoin Carrier from using or disclosing ECIMOS’s trade secrets and from using its third-party-developed database until a new, non-infringing database could be developed from scratch. ECIMOS also moved to amend the jury award so that it could receive even more damages from Carrier. The district court: (1) enjoined Carrier from using its new database, but stayed the injunction until Carrier could develop a new, non-infringing database subject to the supervision of a special master; (2) enjoined Carrier from disclosing ECIMOS’s trade secrets, but also held that certain elements of ECIMOS’s system were not protectable as trade secrets (such as ECIMOS’s assembled hardware) and thus did not enjoin Carrier from using ECIMOS’s system; and (3) rejected ECIMOS’s motion to amend the jury award. ECIMOS now appeals those decisions.

 

In 2004, ECIMOS began formally incorporating licensing terms into the proposals that it sent to Carrier. These terms prohibited the “unauthorized copying, reverse engineering, decompiling, disassembling, decrypting, translating, renting, sub-licensing, leasing, distributing, and/or creating derivative works based on the software, in whole or in part.” This 2004 iteration of the Carrier-ECIMOS contract is the operative contract that underlies the contract-breach-damages argument on appeal.

 

(…) However, Carrier never accepted the proposal. Instead, in early 2015, Carrier accelerated its work with Amtec to develop a new, competing quality-control system. This Amtec-developed system included both a software application (the “Runtest Execution System” or “RES”) and a new storage database (the “Manufacturing Execution System” or “MES”). For simplicity’s sake, we will refer to all components of the Amtec-developed system as the “RES.” The RES went live at Carrier’s Collierville plant in October 2015.

 

Copyright-Infringement

To succeed on a copyright-infringement claim, a plaintiff must establish “(1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.” Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361 (1991). The first part “tests the originality and non-functionality of the work” to ensure that it is a protectable expression rather than an unprotectable idea. Registration of a valid copyright (as ECIMOS has done for its IPCS database) is prima facie evidence that the work is entitled to protection. Lexmark, 387 F.3d at 534. The second part of the analysis “tests whether any copying occurred (a factual matter) and whether the portions of the work copied were entitled to copyright protection (a legal matter).” Ibid. It is undisputed that ECIMOS holds a valid copyright in its IPCS database-script source code. However, Carrier contends that it did not infringe upon any protectable element of that copyright, and that—even if it did—any copying was de minimis and was not actionable as a matter of law.

 

(…) This court’s dictates for an “abstraction-filtration comparison” when evaluating whether there has been a copyright infringement in cases where evidence of direct copying—the actual sale of copyrighted material— is sparse. See Kohus v. Mariol, 328 F.3d 848, 855 & n.1 (6th Cir. 2003). Developed by the Second Circuit in its opinion in Computer Associates Int’l, Inc. v. Altai Inc., 982 F.2d 693, 706 (2d Cir. 1992), the comparison proceeds (by most accounts) in three steps. First, protectable expression is separated from abstract ideas. For example, the general function of a computer program—at the highest level—is an unprotectable idea, but the code of the program that expresses a unique way to achieve the goals of the program is generally considered a protectable form of expression. Id. at 706–07. Next, unprotectable elements of the work are “filtered” out from the protectable expressive form. These unprotectable elements include “elements dictated by efficiency,” “stock” elements that are common or expected in any type of code on that subject, and elements from the public domain. Id. at 707–10. Finally, once the unprotectable elements of the work are filtered out, the remaining elements of both programs are compared to see if they are substantially similar. Id. at 710–11.

 

De Minimis

See Ringgold v. Black Ent. Television, Inc., 126 F.3d 70, 74 (2d Cir. 1997) (“De minimis in the copyright context can mean what it means in most legal contexts: a technical violation of a right so trivial that the law will not impose legal consequences.”).

 

Damages - Valuation

(…) The only copyright that was infringed was ECIMOS’s database-script source code. Even if the IPCS hardware and software applications were linked to the database, there is no evidence that the database, by itself, had a fair-market value of anywhere close to $1 million. Although ECIMOS provided Carrier with the 2014 proposal for a system upgrade, which totaled more than $1 million, there was nothing in the proposal that adverted to ECIMOS’s valuation of the database. The only reasonable basis upon which to calculate the amount is ECIMOS’s valuation of how much its IPCS software (which included the database) was worth on a license-per-station basis. This amount was $50 per month for each of the 103 runtest stations at Carrier’s Collierville plant. When this rate is factored alongside the amount of time that the infringement was ongoing at Collierville before trial (32 months—from the time that the infringing RES database went live at Collierville to the time that the trial started), the maximum supportable amount of actual copyright damages is $164,800.

 

(…) There is ample evidence to conclude that ECIMOS met its burden of presenting proof of Carrier’s gross revenues, and that it was reasonably related to the infringement. The jury was presented with Carrier’s financial records from October 2015 to December 2016, and the jury heard testimony that the records were “created by Carrier’s finance department” and were prepared “in accordance with Generally Accepted Accounting Principles.” The testimony discusses estimates of Carrier’s monthly revenues, costs, and liabilities for the period in question. ECIMOS also limited its revenue presentation to the Collierville plant and, notably, Carrier does not dispute that Carrier’s estimates of its gross revenue or profits were accurate. Thus, ECIMOS clearly met its burden of presenting “proof only of the infringer’s gross revenue.” 17 U.S.C. § 504(b). (…) In our case, there is no dispute as to the fact that every Carrier HVAC unit would have undergone tests on the IPCS—and thus would have necessarily utilized aspects of the database where the test results were stored—before being shipped for sale. Thus, the impact of ECIMOS’s intellectual property on Carrier’s profits likely had an even larger impact than the copyrighted photograph had on Hustler’s profits in Balsley and yet the jury concluded that only 0.4% of Carrier’s revenues were attributable to its infringing use of the IPCS database. This is not excessive.

 

(…) ECIMOS is already being compensated for any post-trial use of its copyright by Carrier. The district court’s post-trial injunction requires Carrier to pay the equivalent of a licensing fee ($50 per month) for a period beginning August 1, 2018 for each runtest station in its Collierville plant, and continuing until Carrier stops using its RES database. The $50 per station per month is a reasonable rate that was based on ECIMOS’s quoted figure for licensing fees in its 2014 proposal to Carrier. In short, the district court concluded that requiring Carrier to pay licensing fees for continued use of the RES database would put ECIMOS in no worse a position than if Carrier had actually obtained a valid license for use of the database at each runtest station. This is not unreasonable.

 

(…) The licensing fee of $50/month for the use of 103 stations for the 87 months from April 2011 through June 2018 adds up to $448,050, not $474,150. The $474,150 number is likely calculated from the $50/month licensing fee for 109 stations for 87 months. However, on appeal it appears that Carrier’s use of the ECIMOS system at only 103 stations is undisputed.

 

(…) It may be helpful to re-summarize the facts. In 2004, ECIMOS began incorporating terms into its IPCS licensing contract that prohibited the “unauthorized copying, reverse engineering, decompiling, disassembling, decrypting, translating, renting, sub-licensing, leasing, distributing, and/or creating derivative works based on the software, in whole or in part.” The terms also stated that “the Software may not be duplicated or copied” except for specific purposes, and that “no part of the software . . . may be reproduced or transmitted in any form or by any means.” It is undisputed that, in 2011, Carrier installed the VB6 software directly onto Windows 7, which the jury found to be a breach of the parties’ licensing contract. In 2014, ECIMOS proposed to sell Carrier an upgrade to the entire IPCS, which it quoted as costing a total of $1,021,000. The $1,021,000 figure included a $118,000 fee for “Software migration from VB6 to VB.net” for all runtest stations, as well as assorted other fees for: (1) software licensing (quoted at $600/year per station, which is $50/month); (2) specialized licensing fees (for special programs associated with VB.Net); and (3) hardware-repair fees to the runtest stations.

 

Permanent Injunction

(…) After trial, the district court granted a permanent injunction enjoining Carrier from using its RES database. However, it stayed the injunction until Carrier could implement a new, non-infringing database, meaning that Carrier was permitted to continue using the RES—subject to its payment of licensing fees—until then. The district court appointed a special master to oversee the process.

 

Trade Secret

(…) Here, ECIMOS voluntarily disclosed its assembled hardware to third parties, including Carrier, by selling it as a product. Indeed, ECIMOS claimed throughout trial that it had customers other than Carrier, and so it is safe to presume that other third parties also received the hardware. Put simply, ECIMOS’s hardware was a marketed product that was sold and freely shared, and it is not a trade secret.

 

 

 

(U.S. Court of Appeals for the Sixth Circuit, August 21, 2020, Ecimos, LLC v. Carrier Corp., Docket No. 19-5436/5519, Recommended for Publication)

 

Monday, August 17, 2020

California Court of Appeal, T.A.W. Performance, LLC v. Brembo, S.P.A., Docket No. A157400, A157841

 

Personal Jurisdiction

 

California Law

 

Contract Drafting

 

Exclusive Distribution Agreement

 

Role of the Choice of Law Provision

 

California Franchise Act

 

Export

 

Motion to Quash Service of the Summons

 

 

On July 1, 2014, Brembo, an Italian joint stock corporation with its headquarters in Italy, and TAW, a California limited liability company with its principal office in North Carolina, entered into a written “Exclusive Distribution Agreement” (hereinafter the agreement).  Brembo manufactured brake systems for vehicles (hereinafter referred to as products), which were exported for international sale.  Under the agreement, TAW was appointed as the sole and exclusive distributor of Brembo’s products to be resold by TAW to third parties within the “Territory” of the United States, Canada, and Mexico.

 

The agreement had a five-year term, from July 1, 2014 to June 30, 2019. Early termination could be effectuated by either party giving at least one (1) year’s notice in writing. In the event of a dispute not resolved by mediation, the parties consented “to the exclusive jurisdiction of the state and federal courts of the State of New York for all disputes or controversies which may arise between the Parties out or in connection with this Agreement or its construction, interpretation, effect, performance or non-performance, or the consequences thereof. Each Party agrees that such courts, to the exclusion of all other courts, tribunals and administrative bodies, shall have exclusive jurisdiction with respect to any and all such disputes and controversies and that any and all such disputes and controversies shall be determined only by litigation in one of such courts . . ..” The parties also agreed that the agreement and “any dispute or claim arising out of or in connection with it or its subject matter or formation” would be governed by the laws of the State of New York.

 

In 2018, while Brembo’s New York state lawsuit was pending, TAW filed this California lawsuit seeking monetary damages based on Brembo’s alleged wrongful termination of the agreement without cause. In its first amended complaint (FAC), TAW alleged it was a “California limited liability Company, formerly headquartered in Sonoma California, currently located in Cramerton, North Carolina with offices in Sonoma, California” and that “Richard Martin is the principal and controlling member of TAW. He is a United Kingdom citizen and non- immigrant alien, living in the United States pursuant to a valid E-2 Visa, who at all relevant times has been residing in Sonoma, California.” TAW further alleged Brembo was “an Italian corporation located in Italy that does business in the State of California by and through subsidiaries and California based distributors.”

 

The FAC included causes of action for breach of contract and violations of California’s Franchise Relations Act (Bus. & Prof. Code
§ 20001(a)-(c)) (Franchise Act).

 

Brembo moved to quash service of summons on the ground it did not have sufficient contacts with California for the court to exercise either general or specific jurisdiction.

 

A court may assert general jurisdiction over foreign (sister-state or foreign-country) corporations to hear any and all claims against them when their affiliations with the State are so ‘continuous and systematic’ as to render them essentially at home in the forum State. [Citation.]” (Goodyear Dunlop Tires Operations, S.A. v. Brown (2011) 564 U.S. 915, 919 (Goodyear).)

 

In contrast to general jurisdiction, specific jurisdiction “depends on an ‘affiliation between the forum and the underlying controversy,’ principally, activity or an occurrence that takes place in the forum State and is therefore subject to the State’s regulation. [Citations.] In contrast to general, all-purpose jurisdiction, specific jurisdiction is confined to adjudication of ‘issues deriving from, or connected with, the very controversy that establishes jurisdiction.’ [Citation.]” (Goodyear, supra, 564 U.S. at p. 919.) In other words, “when determining whether specific jurisdiction exists, courts consider the ‘ “ ‘relationship among the defendant, the forum, and the litigation.’ ” ’ ” (Pavlovich v. Superior Court (2002) 29 Cal.4th 262, 269 (Pavlovich), quoting Helicopteros Nacionales de Colombia, S.A. v. Hall (1984) 466 U.S. 408, 414 (Helicopteros), quoting Shaffer v. Heitner (1977) 433 U.S. 186, 204 (Shaffer).)

 

Thus, “a court may exercise specific jurisdiction over a nonresident defendant only if: (1) ‘the defendant has purposefully availed himself or herself of the forum benefits’ (Vons, supra, 14 Cal.4th at p. 446); (2) ‘the “controversy is related to or ‘arises out of’ the defendant’s contacts with the forum” ’ (ibid., quoting Helicopteros, supra, 466 U.S. at p. 414); and (3) ‘ “the assertion of personal jurisdiction would be reasonable in that it would comport with ‘fair play and substantial justice.’ ” ’ (Vons, supra, 14 Cal.4th at p. 447, quoting Burger King Corp. v. Rudzewicz (1985) 471 U.S. 462, 472-473 [85 L.Ed. 528, 105 S. Ct. 2174] (Burger King)).” (Pavlovich, supra, 29 Cal.4th p. 269.)

 

Pertinent to the matter before us, the Burger King court specifically found that a choice of law provision by which the parties stipulated “in advance to submit their controversies for resolution” in a specific jurisdiction may be germane to the jurisdictional analysis. (Id. at p. 472, fn. 14; see Id. at pp. 482-483 [Burger King court admonished Court of Appeals for failure to give adequate consideration to choice of law provision in parties’ franchise agreement in determining question of personal jurisdiction over defendant franchisee].)

 

While the parties had a prior relationship in California, six months before and at the time of the execution of the 2014 agreement the parties’ relationship was no longer “California-directed in any meaningful sense.” (Halyard Health, supra, 43 Cal.App.5th at p. 1076.) TAW had moved its principal place of business to North Carolina and the distribution agreement was not limited to California but included the entirety of the United States, Canada, and Mexico. Under the agreement, Brembo shipped its products to TAW’s principal place of business in North Carolina. Of particular significance given the 2014 agreement’s anticipation of nationwide and international distribution of Brembo products through resales by TAW, Brembo made a commercially reasonable effort “to alleviate the risk of burdensome litigation” in any portion of the designated distribution territory by including choice of law and forum selection clauses limiting the forum in which TAW could file a lawsuit to New York. (World-Wide Volkswagen, supra, 444 U.S. at p. 297.)

 

We see no merit to TAW’s assertion that Brembo’s shipment of its products to North Carolina is insignificant, compared to where the products were eventually resold by TAW (i.e. California), because pursuant to the Uniform Commercial Code title to the goods passed to TAW in California where TAW was required to pay state excise taxes on the products it resold in the state. As our high court has admonished, we do not look at TAW’s contacts with California, but instead limit our analysis to an evaluation of Brembo’s contacts with the state. Even assuming title to the goods passed to TAW in California, we fail to see how that circumstance demonstrates that Brembo purposefully availed itself of the benefits and protections of the laws of California. Simply put, TAW’s unilateral resale of Brembo’s products in California is not sufficient to demonstrate that Brembo purposefully availed itself of the privilege of conducting business in California.

 

Choice-of-law and forum selection clauses, “standing alone”, are not dispositive, and may be discounted where a foreign corporation’s other minimum contacts establish jurisdiction in the forum state. However, they may “reinforce” whether or not a foreign corporation has made such “a deliberate affiliation with the forum state” as to support a conclusion that it should have reasonably foreseen “possible litigation there.”

 

Here, Brembo’s contacts with the United States were already directed away from California before the parties entered into the agreement. TAW had moved its principal place of business to North Carolina, Brembo was shipping its products to North Carolina, and TAW’s resale of Brembo’s products was expanded to include the entirety of the United States, Canada, and Mexico. Given these circumstances, Brembo made a concerted effort to “alleviate the risk of burdensome litigation” (World-Wide Volkswagen, supra, 444 U.S. at p. 297) by limiting dispute resolution to New York.

 

(…) Whether or not the enforceability of the parties’ 2014 agreement is governed by California law has nothing to do with whether enforceability may be determined by a California court.

 

Lastly, we are not persuaded by TAW’s assertions that the trial court abused its discretion by refusing to consider Brembo’s direct sales, marketing, advertising, and issuance of warranties for its products that were resold by TAW to California consumers as relevant factors. Such evidence would not be relevant, let alone material, to the subject of this lawsuit, Brembo’s alleged wrongful termination of the agreement. The controversy therefore lacks any substantial connection to Brembo’s purported contacts with California through its direct sales, marketing and advertising activities and its issuance of warranties for its products sold in California.

 

(Halyard Health, supra, 43 Cal.App.5th at p. 1073; see Id. at p. 1069 [specific jurisdiction not demonstrated where, among other factors, defendant foreign corporation’s California “sales” in the millions were not sufficiently connected to the gist of plaintiff’s declaratory relief action concerning the meaning and enforceability of an indemnification clause in the parties’ agreement].)

 

 

(California Court of Appeal, August 17, 2020, T.A.W. Performance, LLC v. Brembo, S.P.A., Docket No. A157400, A157841, Certified for Partial Publication)