U.S. Court of Appeals for the Seventh Circuit, REXA, Inc. v. Mark V. Chester and MEA, Inc., Docket No. 20-2953

Assignment

Breach of an Implied Contractual Obligation (of Employee) to Assign Patent Rights (to Employer, Then to Successor Corporation)

 

May Employer’s Rights Under a Written Employment Agreement Be Assigned Without the Employee’s Consent?

 

May an Implied-In-Fact Contractual Obligation Regarding Intellectual-Property Rights Be So Assigned?

 

Successor Corporation

 

Patent Law

 

Illinois Law

 

Wisconsin Law

 

Common Law of Massachusetts (Contract Formation)

 

 

 

 

(…) REXA also challenges the district court’s grant of summary judgment to Chester on Count IV, REXA’s claim for breach of an implied-in-fact contractual obligation to assign any patent rights in connection with the patent application. In evaluating such a claim, federal courts “apply state-law principles of contract formation to determine whether an implied contract existed.” Farmers Edge Inc. v. Farmobile, LLC, 970 F.3d 1027, 1031 (8th Cir. 2020) (citing Teets v. Chromalloy Gas Turbine Corp., 83 F.3d 403, 407 (Fed. Cir. 1996)). The parties agree that REXA’s claim for breach of an implied-in-fact contract arises under the common law of Massachusetts, where Koso employed Chester.

 

 

Massachusetts law provides that if an employer “contemplates the discovery of an invention” and contracts with an employee to build it such that the employee “must have reasonably understood that such inventions as resulted from his performance of the contract should belong to the employer,” the employee has “an implied obligation to assign any patents ... for said inventions to his employer.” Nat’l Dev. Co. v. Gray, 55 N.E.2d 783, 787 (Mass. 1944) (citations omitted). Subsequent cases have extended that proposition. When an employee—even if hired in a general capacity—is specifically “directed during the course of his employment to develop or perfect new or existing machinery or processes, his employer becomes the owner of resulting inventions and may compel the assignment of patents taken in the employee’s name.” Steranko v. Inforex, Inc., 362 N.E.2d 222, 233–34 (Mass. App. Ct. 1977); see also Silica Tech, L.L.C. v. J-Fiber, GmbH, 2009 WL 2579432, at *13 (D. Mass. Aug. 19, 2009) (same).

 

 

REXA is correct that the question of whether an employer’s rights under a written employment agreement may be assigned without the employee’s consent is materially distinct from whether an implied-in-fact contractual obligation regarding intellectual-property rights may be so assigned. The concerns that weigh against permitting a successor corporation to enforce a contract for employment, a personal service, do not necessarily apply to an implied contractual right to assign intellectual property. Chester and MEA do not sufficiently account for the differences between employment and intellectual-property rights. Notably, in other cases involving similar allegations, courts and parties have assumed that successors-in-interest may enforce the type of implied-in-fact contractual right at issue here.

 

 

Yet, we decline to hold that as a matter of Massachusetts law, an implied-in-fact obligation to assign patent rights may be transferred to a successor-in-interest. After all, state courts are the “ultimate expositors” of their own laws. Smart Oil, LLC v. DW Mazel, LLC, 970 F.3d 856, 863 (7th Cir. 2020) (citation omitted). “A federal court sitting in diversity must proceed with caution in making pronouncements about state law,” especially given that such pronouncements “inherently involve a significant intrusion on the prerogative of the state courts to control that development.” Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087, 1092 (7th Cir. 1999) (citations omitted). Here, there is no need to resolve the Massachusetts state-law issue concerning the transferability of implied-in-fact obligations to assign patents. Instead, we adjudicate REXA’s implied-in-fact contractual claim by applying a requirement common to all such claims.

 

 

As a general rule, “an individual owns the patent rights to the subject matter of which he is an inventor, even though he conceived it or reduced it to practice in the course of his employment.” Banks, 228 F.3d at 1359. But there are exceptions. In the archetypal case involving an inventor’s breach of an implied-in-fact contractual obligation, an employer may be entitled to ownership rights associated with “the inventions of employees hired to direct or to engage in inventive research.” Steranko, 362 N.E.2d at 233 (citations omitted). Also, when an employee is specifically “directed during the course of his employment to develop or perfect new or existing machinery or processes, his employer becomes the owner of resulting inventions and may compel the assignment of patents taken in the employee’s name.” Id. at 233–34. By adhering to this rule, Massachusetts follows the law of many other states. See, e.g., Teets, 83 F.3d at 408 (“Even if hired for a general purpose, an employee with the specific task of developing a device or process may cede ownership of the invention from that task to the employer.”) (applying Florida law); Goodyear Tire & Rubber Co. v. Miller, 22 F.2d 353, 356 (9th Cir. 1927) (applying federal common law).

 

 

The pertinent question is whether the employer “specifically directed” the employee to create the invention at issue. Farmers Edge, 970 F.3d at 1032; Teets, 83 F.3d at 408. “The primary factor courts consider in determining whether an employed to invent agreement exists is the specificity of the task assigned to the employee.” Farmers Edge, 970 F.3d at 1032 (quoting Skycam LLC v. Bennett, 900 F. Supp. 2d 1264, 1276 (N.D. Okla. 2012)). In Skycam, the court correctly reasoned that if the employee was not employed or specifically directed “to invent the entirety” of the system described in a claim of the patent application for which assignment is sought, the employer “is not entitled to ownership of the invention described therein.” 900 F. Supp. 2d at 1277.

 

 

 

(U.S. Court of Appeals for the Seventh Circuit, July 28, 2022, REXA, Inc. v. Mark V. Chester and MEA, Inc., Docket Nos. 20-2953, 20-3213, 21-2033)

 

 

California Court of Appeal, Second Appellate District, Rice v. Downs, Docket No. B307780

 

Security Interest

 

Security Agreement, Perfected by the Filing of a UCC Financing Statement Filed with the Secretary of State (Perfected before D. Moved for His Charging Order)

 

Charging Order (Not to Confuse with Judgment Lien on Personal Property)

 

Lien (Obtained Through a Charging Order)

Assignment (Deemed to be a Security Interest, Hence, to be Perfected by a Filling with the Secretary of State)

Collateral

 

 

Priority Between Statutory Lien and Prior Security Agreement?

 

Disgorgement

 

Order Disgorging $X. Payment to Attorney Legal Fees

 

Alter Ego Theory

 

Ethics

 

California Law

 

 

When a “money judgment is rendered against” a member of an LLC, but not against the LLC itself, the member’s interest in the LLC “may be applied toward the satisfaction of the judgment by an order charging the judgment debtor’s interest pursuant to Section . . . 17705.03 of the Corporations Code.” (Code Civ. Proc., § 708.310.)

 

 

 

 

APPEAL from an order of the Superior Court of Los Angeles County, Rupert A. Byrdsong, Judge.  Reversed and remanded with directions.

 

 

Appellant Glaser Weil Fink Howard Avchen & Shapiro, LLC (Glaser Weil), former counsel of plaintiff William Rice, appeals from an order disgorging a $450,000 payment to Glaser Weil by Triton Community Development LLC (Triton), an entity owned and controlled by Rice. The trial court concluded the payment should instead have gone to defendant and respondent Gary Downs, who had obtained an order charging Rice’s interest in Triton to satisfy an earlier judgment entered in Downs’ favor.

 

In contesting disgorgement, Rice and Glaser Weil asserted that before Downs had moved for the charging order, Glaser Weil had entered into agreements with Triton and Rice to ensure payment of Glaser Weil’s legal fees, and those agreements took precedence over the charging order. Specifically, Triton had agreed to become co-obligor on Rice’s debt to Glaser Weil, and Rice had also pledged his interest in Triton to Glaser Weil as security on his debt. Although Rice and Glaser Weil did not provide these agreements to the trial court, Rice and a Glaser Weil partner submitted declarations attesting to the agreements, along with a Uniform Commercial Code (UCC) financing statement filed with the Secretary of State referencing, among other things, Glaser Weil’s security interest in Triton.

 

Glaser Weil argued that Triton made the $450,000 payment for its own obligations as co-obligor on Rice’s debt, and therefore the payment was not a “distribution” to Rice subject to the charging order. Alternatively, if the payment was a distribution to Rice, Glaser Weil contended its security interest, perfected before Downs moved for his charging order, had priority over that order.

 

The trial court found that Triton was Rice’s alter ego, and rejected the argument that the payment was for Triton’s obligation as opposed to Rice’s debt. The court agreed in theory with Glaser Weil’s lien priority argument, but relied on its equitable authority to place the charging order ahead of Glaser Weil’s security interest.

 

Like the trial court, we conclude that when Rice, as sole managing member of Triton, directed the company to disburse funds to pay his legal bills, it constituted a distribution to him subject to the charging order.

 

We disagree with the trial court on the lien priority question, however, and hold that Glaser Weil’s security agreement, perfected by the filing of a financing statement, has priority over the later charging order. In the unpublished portion of the opinion, we further conclude there was no equitable basis to override Glaser Weil’s lien priority here, assuming arguendo a trial court can override a statutory lien priority by exercising its equitable power.

 

(…) Rice filed for Chapter 11 bankruptcy on January 27, 2020. During that proceeding, he filed a monthly operating report disclosing that in February 2020, Triton had paid $450,000 to Glaser Weil, the firm representing Rice in his litigation against Downs.

 

(…) Attached to Cypers’ declaration, however, was a UCC financing statement filed by Glaser Weil with the Secretary of State on July 15, 2019. The statement identified Rice as debtor and Glaser Weil as the secured party. Exhibit A to the financing statement described the collateral securing Rice’s debt to Glaser Weil. The collateral included, inter alia, “All of Debtor’s right, title and interest in the property described in that certain Pledge and Security Agreement dated June 27, 2019,” and “100% of Debtor’s membership interests in Triton Community Development LLC, a California limited liability company, together with the certificates (if any) evidencing the same . . . .”

 

The full description of the collateral is as follows: “All of Debtor’s right, title and interest in the property described in that certain Pledge and Security Agreement dated June 27, 2019, by Debtor, as pledgor, for the benefit of the Secured Party (‘Pledge and Security Agreement’), whether now owned by Debtor or hereafter acquired and whether now existing or hereafter coming into existence; 100% of Debtor’s membership interests in Triton Community Development LLC, a California limited liability company, together with the certificates (if any) evidencing the same; All ownership interests, membership interests, shares, securities, moneys, instruments or property representing a dividend, a distribution or return of capital upon or in respect of the Pledged Interests, or otherwise received in exchange therefor, and any warrants, rights or options issued to the holders of, or otherwise in respect of, the Pledged Interests; All rights of Debtor under the Relevant Documents or any other agreement or instrument relating to the Pledged Interests, including, without limitation, (i) all rights of Debtor to receive moneys or distributions with respect to the Pledged Interests due and to become due under or pursuant to the Relevant Documents, (ii) all rights of Debtor to receive proceeds of any indemnity, warranty or guaranty with respect to the Pledged Interests, (iii) all claims of Debtor for damages arising out of or for breach of or default under a Relevant Document, and (iv) any right of Debtor to perform thereunder and to compel performance and otherwise exercise all rights and remedies thereunder; and all proceeds of and to any of the property of Debtor described herein and in that certain Pledge and Security Agreement and, to the extent documenting any property described in said clauses or such proceeds, all books, correspondence, credit files, records, invoices and other papers. All Current Fees plus interest, all Costs plus interest and all Deferred Fees plus interest as defined in that certain Engagement Letter dated April 18, 2014, December 10, 2014, June 4, 2015, May 2, 2017 and June 27, 2019, by and between Debtor and Secured Party, as amended and modified (collectively ‘Engagement Letter’). All terms made here but not defined shall have the meaning given to such terms in the Pledge and Security Agreement and the Engagement Letter.”

 

(…) Glaser Weil’s argument focused on MDQ, LLC v. Gilbert, Kelly, Crowley & Jennett LLP (2019) 32 Cal.App.5th 702 (MDQ), a case involving priority between a charging order and a security interest granted by a judgment debtor to his attorneys. (See id. at pp. 704–705.) After taking a recess to review the case, the trial court stated, “It does appear that Glaser Weil is on the right side of the law with regard to having the priority, even over my charging order.

 

A. The Payment Was a Distribution Subject to the Charging Order

For the reasons that follow, we reject Glaser Weil’s position that the $450,000 payment was not a distribution subject to the charging order.

When a “money judgment is rendered against” a member of an LLC, but not against the LLC itself, the member’s interest in the LLC “may be applied toward the satisfaction of the judgment by an order charging the judgment debtor’s interest pursuant to Section . . . 17705.03 of the Corporations Code.” (Code Civ. Proc., § 708.310.)

 

Corporations Code section 17705.03, subdivision (a), empowers a court to “enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. A charging order constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.”

 

As used in Corporations Code section 17705.03, a “transferable interest” is “the right, as originally associated with a person’s capacity as a member, to receive distributions from a limited liability company in accordance with the operating agreement, whether or not the person remains a member or continues to own any part of the right.” (Corp. Code, § 17701.02, subd. (aa).) A “distribution” is “a transfer of money or other property from a limited liability company to another person on account of a transferable interest.” (Id., subd. (f).)

 

By emphasizing the statutory language referring to the LLC’s operating agreement, Glaser Weil appears to be limiting the reach of a charging order to distributions formalized under that agreement, such as dividends or other entitlements granted to members. This narrow reading disregards the reality that many LLCs, like Triton, are completely controlled by a single person who may distribute funds at his or her discretion. (See Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 224 [managing member with “near complete interest” in LLC “effectively has complete control over what the LLC does and does not do, including whether it makes any disbursements to its members”].) Under Glaser Weil’s interpretation, such entities easily could evade charging orders by eschewing formal distributions and instead taking funds out of the LLC as the need arose.

 

The language of the applicable statutes does not compel this result. Again, a charging order is against an LLC’s member’s “transferable interest,” defined as “the right, as originally associated with a person’s capacity as a member, to receive distributions from a limited liability company in accordance with the operating agreement . . . .” (Corp. Code, § 17701.02, subd. (aa).) When a managing member of an LLC directs the LLC to disburse funds for the managing member’s own purposes, the managing member does so based on the
“right . . . associated with his or her capacity as a member,” invoking powers “in accordance with the operating agreement.” (See ibid.) Put another way, the managing member has access to that money only by virtue of his or her status as managing member, just as members have the right to formal distributions by virtue of their status as members. We see no basis to treat the two types of disbursements differently, particularly when doing so would encourage evasion of charging orders.

 

We express no opinion as to how a charging order might affect disbursements made to a member for reasons other than membership, for example if the member were also an employee drawing a salary. Nor do we suggest that a charging order compels a managing member to disburse funds from an LLC, only that when the managing member does so for his or her own purposes, that disbursement is subject to a charging order (fn. 4).

 

(…) Given its unchallenged finding that Triton was Rice’s alter ego, the trial court could look past the corporate formalities and deem the transaction as Rice distributing money to himself from Triton to pay his legal bills. The fact that as a technical matter it was Triton that made the payment pursuant to its own purported obligations was immaterial because Triton and Rice were effectively one and the same.

 

B. Glaser Weil’s Security Interest Has Priority Over the Charging Order, But Remand Is Necessary To Determine the Terms of That Security Interest

Turning to Glaser Weil’s second argument, we agree that Glaser Weil’s security interest, perfected by filing the financing statement with the Secretary of State, has priority over the charging order that Downs later requested and obtained. We further agree there was no equitable basis for the trial court to override that priority. We therefore reverse the disgorgement order. Remand is necessary, however, for the trial court to determine the terms of Glaser Weil’s security interest. The trial court has yet to make this determination, having instead relied on its equitable authority to place the charging order ahead of Glaser Weil’s security interest.

 

“Other things being equal, different liens upon the same property have priority according to the time of their creation . . . .” (Civ. Code, § 2897.) Numerous statutes apply this general first-in-time principle to specific types of liens or security interests. For example, Commercial Code section 9322 governs priorities between competing security interests, ranking them “according to priority in time of filing or perfection.” (Com. Code, § 9322, subd. (a)(1).) Similarly, Code of Civil Procedure
section 697.590 governs priorities between judgment liens on personal property and security interests in the same property, ranking those interests “according to priority in time of filing or perfection.” (§ 697.590, subd. (b).)

 

We have not found, nor have the parties identified, a statute specifically addressing the priority of charging orders in relation to other liens and security interests.

 

As Glaser Weil correctly notes elsewhere, however, a charging order is not equivalent to a judgment lien on personal property, the subject of section 697.590. Judgment liens on personal property are created pursuant to section 697.510 by filing a notice with the Secretary of State. (§ 697.510, subd. (a); § 697.590, subd. (a)(1)(A).) Charging order liens, in contrast, are created under section 708.320 “by service of a notice of motion for a charging order . . . .” (§ 708.320, subd. (a).) “If a charging order is issued, the lien . . . continues under the terms of the order. If issuance of the charging order is denied, the lien is extinguished.” (Id., subd. (b).)

 

In the absence of a statute specifically addressing the priority of charging orders, we rely on the general first-in-time rule stated in Civil Code section 2897. (See Bluxome Street Associates v. Fireman’s Fund Ins. Co. (1988) 206 Cal.App.3d 1149, 1158; cf. Ahart, Cal. Prac. Guide: Enforcement of Judgments and Debts (The Rutter Group 2015) ¶ 6:1472.1 [citing Civil Code section 2897 in support of proposition that “Where judgment creditors have obtained charging order liens on the same interests, priority should be given to the first creditor that obtained a lien”].)

 

Under this principle, it is evident that Glaser Weil’s security interest has priority over Downs’ charging order. As stated, the priority of a security interest is determined “according to priority in time of filing or perfection.” (Com. Code, § 9322, subd. (a)(1).) A security interest is perfected by filing a financing statement with the Secretary of State. (Id., § 9310, subd. (a); id., § 9501, subd. (a)(2); MDQ, supra, 32 Cal.App.5th at p. 711.) Glaser Weil filed a financing statement with the Secretary of State in July 2019.

 

Downs obtained his lien several months later, in October 2019, when he served notice of his second motion for a charging order, which motion—in contrast to his first motion— was granted. (§ 708.320, subd. (a).) Glaser Weil’s earlier perfected security interest therefore has priority.

 

Our conclusion that Glaser Weil’s security interest has priority over the charging order is supported by MDQ, which to some degree presents the converse of the factual pattern in the instant case. The underlying litigation in MDQ concerned plaintiff Cleopatra Records, Inc. (Cleopatra), and defendant Floyd Mutrux. (MDQ, supra, 32 Cal.App.5th at p. 705.) The trial court issued a proposed statement of decision awarding Cleopatra over a million dollars. (Ibid.) Shortly thereafter, Mutrux assigned to his attorneys, the law firm of Gilbert, Kelly, Crowley & Jennett LLP (Gilbert Kelly), a portion of his economic interests in four LLCs “ ‘in consideration for legal services provided . . . and to be provided hereafter . . . .’ ” (Ibid.) In the assignment, Mutrux directed the LLCs to make specified percentages of payments due to Mutrux to Gilbert Kelly instead. (Ibid.) Gilbert Kelly did not file a UCC financing statement. (Id. at p. 707.)

 

Months later, the trial court entered judgment of just under a million dollars in favor of Cleopatra. (MDQ, supra, 32 Cal.App.5th at p. 706.) Cleopatra recorded a judgment lien under section 697.590. (Id. at p. 707.) Cleopatra then moved for a charging order against Mutrux’s interests in the LLCs, which the trial court granted, directing the LLCs “ ‘to pay any and all profits, distributions, disbursements or other payments otherwise due to” Mutrux to Cleopatra. (Id. at 706.)

 

The LLCs filed an interpleader action to resolve the competing interests of Cleopatra and Gilbert Kelly. (MDQ, supra, 32 Cal.App.5th at p. 706.) The trial court found that because Gilbert Kelly had never filed a financing statement, Cleopatra’s judgment lien had priority over Gilbert Kelly’s assignment. (Id. at p. 707.)

 

Our colleagues in Division Eight affirmed the trial court’s ruling. (MDQ, supra, 32 Cal.App.5th at p. 704.) The appellate court rejected Gilbert Kelly’s argument that the assignment was not a security interest: “While Gilbert Kelly’s assignment may differ from some other secured transactions, in that the collateral securing Mutrux’s obligation to Gilbert Kelly is being paid as it accrues to satisfy that obligation, rather than securing payment from another source, Gilbert Kelly offers us no rationale under which we can conclude that it is not a security interest within the meaning of the California Uniform Commercial Code.” (Id. at p. 710.)

 

Downs argues that Glaser Weil did not notify him of the security interest, but he identifies no authority that Glaser Weil had an obligation to do so. As discussed, the law requires that a secured party perfect its interest by filing a financing statement with the Secretary of State, a rule “premised upon the assumption that the filing . . . will permit prospective purchasers and encumbrancers to ascertain the existence of security interest in the property by checking a centralized record system.” (T & O Mobile Homes, Inc. v. United California Bank (1985) 40 Cal.3d 441, 448.) Thus Downs, like any other creditor, could look to that “centralized record system” to determine if there were any competing claims to Rice’s interest in Triton.

 

Ethics

(…) Nor does Downs or anyone else suggest it is inappropriate for a law firm to obtain a security interest to ensure payment of its fees, assuming the firm complies with all ethical and other requirements concerning contracts with clients.

 

 

Secondary sources: Ahart, Cal. Prac. Guide: Enforcement of Judgments and Debts (The Rutter Group 2015).

 

 

 

(California Court of Appeal, Second Appellate District, Dec 27, 2021, Rice v. Downs, Docket No. B307780, Certified for Partial Publication)

U.S. Court of Appeals for the Third Circuit, Walgreen Co v. Johnson & Johnson, Docket No. 19-1730

Assignment

 

Forum Selection Clause

 

Contract Provision Proscribing the Assignment of Any “Rights or Obligations Under” That Contract

 

Assignment of Federal Antitrust Claims. Barred by the Contract Provision?

 

Contract Provision Regarding Forum Selection Clause, Applicable in Antitrust Claims?

 

Distribution Agreement

 

New Jersey Law

 

Contract Drafting

 

 

 

(“Indirect” purchaser would lack antitrust standing).

 

This case raises the question of whether an assignment of federal antitrust claims is barred by a contract provision proscribing the assignment of any “rights or obligations under” that contract. The District Court answered in the affirmative and granted summary judgment against the appellants, who all want to assert antitrust claims they purportedly obtained by assignment from a party bound by the anti-assignment clause. We conclude that the District Court erred. The antitrust claims are a product of federal statute and thus are extrinsic to, and not rights “under,” a commercial agreement. Accordingly, we will reverse the grant of summary judgment and remand for further proceedings.

 

It is undisputed that New Jersey law governs the Distribution Agreement.

 

This appeal pertains to the scope of the anti-assignment language in Section 4.4 (the “Anti-Assignment Provision”) of the Distribution Agreement. In relevant part, the Anti-Assignment Provision states that “neither party may assign, directly or indirectly, this agreement or any of its rights or obligations under this agreement ... without the prior written consent of the other party.... Any purported assignment in violation of this section will be void.” (JA at 102 (emphasis added).)

 

In January 2018, Wholesaler assigned to Walgreen “all of its rights, title and interest in and to” its claims against Janssen “under the antitrust laws of the United States or of any State arising out of or relating to Wholesaler’s purchase of Remicade.

 

(…) It is undisputed that, if the Anti-Assignment Provision prevents the assignment, then, under the Supreme Court’s seminal decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), Walgreen, an “indirect” Remicade purchaser, would lack antitrust standing to assert claims against Janssen (…) In Illinois Brick, the Supreme Court created a “direct purchaser” rule for antitrust claims, “providing that only entities that purchase goods directly from alleged antitrust violators have statutory standing to bring a lawsuit for damages.” Wallach v. Eaton Corp., 837 F.3d 356, 365 (3d Cir. 2016). “The rule of Illinois Brick was founded on the difficulty of analyzing pricing decisions, the risk of multiple liability for defendants, and the weakening of private antitrust enforcement that might result from splitting damages for overcharges among direct and indirect purchasers.”

 

The statutory federal antitrust claims asserted in Walgreen’s complaint are extrinsic to, and not “rights under,” the Distribution Agreement. Applied to the Anti-Assignment Provision, the scope of which is limited to Wholesaler’s “rights under” the Distribution Agreement, it becomes evident that the provision has no bearing on Wholesaler’s antitrust claims, which rely only on statutory rights and do not implicate any substantive right under the Distribution Agreement. Accordingly, the Anti-Assignment Provision does not invalidate Wholesaler’s assignment of antitrust claims to Walgreen or otherwise present a bar to Walgreen’s standing to assert those antitrust claims against Janssen.

 

((…) The State has not brought the assigned claims based on any substantive right or duty found in the contract itself.)

 

(…) Courts that have considered the scope of anti-assignment clauses in the antitrust context often have looked to Section 322 of the Restatement (Second) of Contracts as part of their analysis.

 

(…) The terms “arise out of” and “arise under” are facially broader, more encompassing, and ultimately distinct from, the concept of “rights under” an agreement.

 

Regarding the application of New Jersey law to the Anti-Assignment Provision, Janssen correctly notes that neither Hartig nor any of the antitrust cases interpreting the scope of anti-assignment clauses that Walgreen cites (and which we find persuasive) applied New Jersey law. But that fact is not dispositive. Janssen cites no case, let alone a case applying New Jersey law, in which any court has found that federal antitrust claims fall within the scope of an anti-assignment clause prohibiting the assignment of “rights under” an agreement. Nor does Janssen identify any particular feature of New Jersey law that suggests it would diverge from the weight of authority on this issue. To the contrary, the New Jersey cases that Janssen does cite, in which anti-assignment clauses were held to foreclose statutory causes of action, are readily distinguishable. In each of those cases, unlike the antitrust claims at issue here, the statutory claims that were precluded by an anti-assignment provision all flowed from an underlying breach of one or more provisions of the contract containing the anti-assignment provision.

 

(…) Rini Wine Co. v. Guild Wineries & Distilleries, 604 F. Supp. 1055, 1057–59 (N.D. Ohio 1985) (forum selection clause applicable to “any action entered under the distributor agreement” encompassed antitrust claims where “the incident from which this dispute arises is indeed the termination of the distributor agreement,” and “Plaintiff has chosen to explain defendant’s conduct as an ‘unlawful combination and conspiracy’ in violation of federal and state antitrust laws in its complaint.”).

 

(…) Wallach did not involve a contractual anti-assignment provision. Instead, we addressed the entirely distinct question of whether the assignment of antitrust claims must be supported by consideration. Wallach, 837 F.3d at 361. In that context, we maintained our prior recognition that both contractual rights and non-contractual causes of action are assignable, and that the argument that non-contractual causes of action cannot be assigned rests “on an antiquated distinction between contractual rights and choses in action that no longer has a significant effect on the common law.” Id. at 369. Nowhere did we hold, or even suggest, that statutory antitrust claims are rights under a contract.

 

 

 

(U.S. Court of Appeals for the Third Circuit, February 21, 2020, Walgreen Co v. Johnson & Johnson, Docket No. 19-1730, Precedential)

U.S. Court of Appeals for the Tenth Circuit, Mrs. Fields Franchising, LLC v. MFGPC, Nos. 19-4046 & 19-4063

 

License Agreement

Drafting & Termination

Assignment of Rights

Specific Performance

Proof of Future Profits

Utah Law

 

Distribution Agreement

Trademark

Contract Drafting

 

Appeal from the United States District Court for the District of Utah
(D.C. No. 2:15-CV-00094-JNP-DBP)

 

The License Agreement and its relevant terms

 

Fields Franchising owns the rights to the “Mrs. Fields” trademark and licenses those rights to allow other entities to manufacture, sell, and distribute products using the “Mrs. Fields” trademark.

 

On April 30, 2003, MFOC entered into a Trademark License Agreement (License Agreement) with LHF, Inc. (LHF), an affiliate of MFGPC. Aplt. App., Vol. 1 at 25, 45 (copy of actual agreement). On June 30, 2003, LHF assigned all rights under the License Agreement to MFGPC, and MFGPC agreed to be bound by and perform in accordance with the License Agreement. Id. at 25, 69 (copy of assignment). The License Agreement granted MFGPC a license to develop, manufacture, package, distribute and sell prepackaged popcorn products bearing the “Mrs. Fields” trademark through all areas of general retail distribution. Id. at 46. The License Agreement prohibited MFOC from competing with MFGPC by making Mrs. Fields branded popcorn or licensing the right to use the Mrs. Fields trademark for use on popcorn. Id., Vol. 5 at 866.

 

Section 5 of the License Agreement, entitled “LICENSE FEE AND ROYALTIES,” required MFGPC to pay MFOC an “initial license fee” comprised of two payments: (1) $50,000 on or before June 1, 2003; and (2) an additional $50,000 on the “first anniversary of the Agreement.” Id., Vol. 1 at 50. Section 5 also required MFGPC to pay MFOC “Guaranteed Licensing Fees and Running Royalties”:

 

Throughout the term (including Option Periods) of this Agreement the Running Royalty shall be 5% of Net Sales of Royalty Bearing Products. [MFGPC] shall remit such Running Royalties to [MFOC] on the last day of the month following the end of each calendar quarter covered by the Agreement. All Guaranteed Amounts and Running Royalties shall be non-refundable for any reason whatsoever.

 

Section 6 of the License Agreement, entitled “GUARANTEED ROYALTY,” required MFGPC to pay MFOC a “Guaranteed Royalty . . . per year on the Net Sales of Royalty Bearing Products during the initial term as set forth on the following schedule:

INITIAL TERM

Year 1 Year 2 Year 3 Year 4 Year 5

$ 0.00 $ 50,000 $ 100,000 $ 100,000 $ 100,000

 

Id. at 50. “Royalty Bearing Products” were defined in the License Agreement as “the food products described on Exhibit B hereto that are sold as prepackaged popcorn products using the Licensed Names and Marks.” Id. at 48. Exhibit B to the License Agreement stated that “Royalty Bearing Products” were “high quality, pre-packaged, popcorn products.” Id. at 67.

 

The License Agreement required MFGPC to “deliver to” MFOC quarterly and annual reports detailing “the amount of Royalty Bearing Products sold, including sufficient information and detail to confirm the royalties calculations.” Id. at 51. It also required MFGPC to “provide [MFOC] a monthly summary of all written consumer complaints received regarding the quality of the Royalty Bearing Products.” Id. at 52.

 

The “initial term” of the License Agreement began “upon the execution” of the License Agreement and “continued for a period of sixty (60) months (‘Initial Term’).” Id. at 57. The License Agreement stated that, “so long as [MFGPC] was not in material default and . . . had met and/or paid Running Royalties based on its Guaranteed Royalty,” the License Agreement “would then automatically renew for successive five year terms (‘Option Periods’) until such time as either party terminated the Agreement upon no more than twenty (20) days prior written notice to the other party.” Id.

 

The License Agreement stated, in pertinent part, that it could be terminated in the following manner:

(i) If [MFGPC] defaults in the payment of any Running Royalties then this Agreement and the license granted hereunder may be terminated upon notice by [MFOC] effective thirty (30) days after receipt of such notice, without prejudice to any and all other rights and remedies [MFOC] may have hereunder or by law provided, and all rights of [MFGPC] hereunder shall cease.

(ii) If [MFGPC] fails to pay its Guaranteed Royalty . . . , then, this Agreement and the license granted hereunder may be terminated upon receipt of such notice by [MFGPC], without prejudice to any and all other rights and remedies [MFOC] may have hereunder or by law provided, and all rights of [MFGPC] hereunder shall cease.

(iii) If [MFGPC] fails to perform in accordance with any material term or condition of this Agreement . . . and such default continues unremedied for thirty (30) days after the date on which [MFGPC] receives written notice of default, unless such remedy cannot be accomplished in such time period and [MFGPC] has commenced diligent efforts within such time period and continues such effort until the remedy is complete, then this Agreement may be terminated upon notice by [MFOC], effective upon receipt of such notice, without prejudice to any and all other rights and remedies [MFOC] may have hereunder or by law provided.

(v) If [MFOC] . . . files a petition in bankruptcy or for reorganization . . . , then this Agreement and the License granted hereunder may be terminated upon notice by [MFGPC], effective upon receipt of such notice, without prejudice to any and all other rights and remedies [MFGPC] may have hereunder or by law provided . . . .

(vi) If [MFOC] fails to perform in accordance with any material term or condition of this Agreement and such default continues unremedied for thirty (30) days after the date on which [MFOC] receives written notice of default, then this Agreement may be terminated upon notice by [MFGPC], effective upon receipt of such notice, without prejudice to any and all other rights and remedies [MFGPC] may have hereunder or by law provided.

 

MFOC’s assignment of its rights under the License Agreement

After entering into the License Agreement, MFOC assigned its rights and obligations under the License Agreement to Fields Franchising.

 

The renewal of the License Agreement

Fields Franchising and MFGPC continued to operate under the License Agreement through the end of 2014, a period of more than eleven years.

 

Fields Franchising’s notice of termination and MFGPC’s response

On December 22, 2014, Fields Franchising’s counsel sent a letter to MFGPC notifying MFGPC that Fields Franchising considered the License Agreement to not have automatically renewed in 2013 due to MFGPC’s failure to pay royalties.

 

(…) as Fields Franchising asserts in its opening brief, reading Section 16 as a whole “means that the License Agreement could be terminated without cause prior to each five-year renewal and mid-term, and with cause only upon specified circumstances and procedures.” Aplt. Br. at 31.

 

Thus, contrary to the district court’s finding, nothing in Section 16 afforded MFGPC a “perpetual license.”

 

Likelihood of success - specific performance

The district court concluded that MFGPC “met its burden of showing a likelihood that the court would order Fields Franchising to reinstate the License Agreement with MFGPC.” Aplt. App., Vol. V at 875. In support of this conclusion, the district court noted that, “under Utah law, a party seeking specific performance must prove 1) that a contract exists; 2) that the essential terms of the contract are clear and definite; and 3) that there is no adequate remedy at law.” Id. (citing Tooele Assocs. Ltd. v. Tooele City, 251 P.3d 835, 835 (Utah 2011) and South Shores Concession v. State, 600 P.2d 550, 552 (Utah 1979)). Focusing on the last prong of this test, the district court concluded that calculating “damages due to” Fields Franchising’s breach of the License Agreement would be “very difficult, if not impossible.” Id. at 876. More specifically, the district court concluded it was “highly unlikely” that “MFGPC could be made whole through an award of money damages because . . . it would be difficult if not impossible to accurately calculate the damages to MFGPC of being permanently deprived of the right to use the Mrs. Fields Trademark for popcorn . . . .” Id. at 876–77 (emphasis added). The district court also concluded that “no license for a comparable brand on such favorable terms could be obtained.” Id. at 877.

 

Fields Franchising argues on appeal, and we agree, that the district court’s likelihood of success analysis was flawed because it rested, in significant part, on the erroneous finding that the License Agreement afforded MFGPC a perpetual license. (…) Although we have no doubt that it would be difficult to calculate damages for a permanent deprivation of a license, that is simply not the case here. Rather, as this court previously noted, it appears that MFGPC’s damages will be limited to a period of approximately two-and-a-half years (i.e., the remainder of the third five-year term of the License Agreement). And, as we shall discuss below, we are not persuaded that calculating such damages will be impossible. Consequently, we conclude the district court erred in determining that MFGPC established a strong likelihood that it will prevail on its claim for specific performance.

 

(…) Generally speaking, “evidence of past profits in an established business” is the best “proof of future profits.” Palmer v. Conn. Ry. & Lighting Co., 311 U.S. 544, 559 (1941).

 

 

(U.S. Court of Appeals for the Tenth Circuit, Nov 7, 2019, Mrs. Fields Franchising, LLC v. MFGPC, Nos. 19-4046 & 19-4063, Publish)