Last month, we delivered three remarkable post-trial decisions in three different cases from three different states, all centered on disputes between co-owners of businesses over the ownership and exploitation of the company’s core intellectual property. Although each case arises from a unique set of facts, they all have in common that they do not attribute ownership of intellectual property through clear contractual commitments. ex ante and / or failures to exercise due diligence at the start or during the life of the business.
The first highlighted case is from New York City, involving an extremely high-stakes financial dispute between family members including minority and majority shareholders of famous Palm restaurants located in the United States and elsewhere. The second case comes from Delaware, in which the court ordered the dissolution of a limited liability company whose 50% member who had licensed the patented technology on which its entire business plan was based to the LLC, in in the end, did not own the rights. In the third case, from Arkansas, the judge dismissed a third party’s claims by an LLC member for copyright infringement and dissolution after finding he was fairly precluded from enforcing his rights. author of the company’s main software products.
Derivative Suit Over Palm Restaurant IP Wins $ 120 Million Prize
The original Palm Restaurant was founded in Manhattan in 1926 by Pio Bozzi and John Ganzi, who ran it with their wives. Today, despite the ubiquity of Palm-brand restaurants in the United States and around the world, the original company formed by Pio and John, now owned by third-generation family members, does not operate a only restaurant. Rather, its only asset consists of Palm’s extremely valuable intellectual property consisting of a series of trademarks and service marks, and design elements, including its menu and the distinctive decor of the restaurant, all of which are licensed. licensed to independent Palm restaurant operators as well as jointly owned or investor owned Palm restaurants by two family members, Bruce Bozzi and Walter Ganzi, who also own 80% of the original Palm company which owns intellectual property, which I will call Palm IP Corp.
Herein lies the seeds of a successful derivative shareholder lawsuit filed in 2012 by the other 20% of Palm IP Corp. shareholders, accusing Bruce and Walter of breaching their fiduciary duty as majority owners of Palm IP by granting the intellectual property to Palm restaurants they own and, through their separate management company, to Palm restaurants they do not own, at a tiny fraction of the value of the intellectual property compared to industry standards. Specifically, for over 40 years, Bruce and Walter on behalf of Palm IP charged a fixed annual licensing fee of $ 6,000 to each of the new Palm restaurants they owned (which, between 2006 and 2017, reported to the total $ 1.5 billion), and a fixed $ 12,000 fee to their separate management company which, in turn, charged exponentially higher market-rate licensing fees to independent Palm-branded restaurants. .
In a post-trial decision drafted by Manhattan Commercial Division Judge Andrea Masley in Ganzi vs. Ganzi, 2018 NY Slip Op 32961 (U) [Sup Ct NY County Nov. 13, 2018], the court concluded that in 1982, when informed by their trademark attorney, the defendants knew that the license fees of $ 6,000 quickly became unreasonable; that the plaintiffs were unaware of the unfair licensing and sublicence agreements entered into by the defendants; that corporate formalities ceased to be followed when the defendants took over Palm IP Corp. ; that the accused “treated [Palm IP Corp.] like theirs without regard for other shareholders ”; and that the self-operation of the accused “is a classic example of fiduciary misconduct”.
The opinion of Masley J. also considered and rejected each of the defenses claimed by the defendants to liability on the basis of limitation period, time limits, acquiescence, ratification and equitable estoppel.
On the issue of remedies, Judge Masley agreed with the plaintiffs ‘damages experts to use a weighted average royalty rate of 5%, comparable to the rates charged by other restaurant brands and consistent with the clients’ own presentations. defendants to bankers and public documents. Based on the plaintiffs’ expert assessments, the court awarded Palm IP Corp. over $ 70 million in damages. With pre-judgment interest dating back to 2006, plus a few million in damages on other claims, the total damages amount would be approximately $ 120 million.
That, my friends, is a lot of surfing and turf.
Court Dissolves LLC established to commercialize patented technology owned under a counterfeit license given by 50% of the members
After a day-long trial with just two live witnesses, 11 exhibits and a dossier described by Vice Chancellor Laster as “thankfully sparse,” the Delaware Court of Chancellery in Decco US Post-Harvest, Inc. v Mirtech, Inc., CA n ° 2018-0100-JTL [Del Ch Nov. 28, 2018], ruled that the LLC in question in a successful dissolution case brought by a 50% member no longer had a viable business because the patented technology upon which its sole business purpose was based, and which had been licensed by the other member at 50%, was not in the ability of the other member to license because it had already granted all rights to the technology to a third party.
Essentiv LLC was formed in 2016 as a joint venture between Plaintiff Decco and Defendant MirTech to market products based on a gas known as 1-MCP used to delay ripening of fruits and other products. MirTech, which said it owns the patent rights to certain inventions using 1-MCP, granted the LLC a license to use the patented rights.
Six years earlier, however, MirTech and a company called AgroFresh had reached an agreement calling for joint ownership of “all inventions designed or practiced jointly by the parties”. A year later, MirTech ceded exclusive ownership of all these rights to AgroFresh, including a series of inventions known as RipeLock patents. MirTech informed Decco that it had partnered with AgroFresh to produce RipeLock but, remarkably, Decco did not ask to see any of MirTech’s agreements with AgroFresh.
Shortly after Essentiv brought to market with its first 1-MCP product, AgroFresh (along with MirTech and Decco) was met with an infringement action as the owner of the patented RipeLock technology that Essentiv used to its own product called TruPick. In 2017, the court ruled in favor of AgroFresh, after which Essentiv agreed to stop all commercial activity related to TruPick. In a subsequent consent judgment, MirTech agreed to pass judgment against her on 20 different counts of wrongdoing, including intentional forgery, fraud and trade secret misappropriation.
Decco filed a lawsuit to dissolve Essentiv after MirTech rejected its voluntary dissolution proposal due to the company’s loss of its only technology. The director of MirTech filed a counterclaim (the word “chutzpah” comes to mind) asking for payment of his salary under a consulting agreement, which VC Laster rejected before proceeding to trial. dissolution of Decco.
In just a few pages, the court concluded that the consent judgment “prevented the company from continuing to sell TruPick”; that the company “does not intend to develop other products”; and that “there is no viable 1-MCP activity” and “no viable non-1-MCP activity”. It therefore follows, according to the court, that “it is not reasonably possible for the Company to carry on its activities” and that the dissolution is required by virtue of Delaware LLC Act § 18-802.
Court dismisses LLC’s dissolution request arising from copyright dispute with minority member
Just four months ago, I wrote about an Arkansas federal court ruling denying the dueling summary judgment motions in the Oliver vs. Johanson Case involving what I have called an existential crisis triggered by a dispute between members of an LLC over the ownership of the company’s primary software product. A lawsuit was needed, the court ruled, to resolve factual disputes over whether the software created by the plaintiff, a third party member of the LLC, and copyrighted on its behalf, was a work made. for rental and / or was a derivative of prior copyrighted software. by the company.
A test bench followed, and last month the court issued its opinion Noting that the applicant created the original versions of its company software as an independent contractor; that the works were not made to be hired; and therefore the copyright on the programs which are vested in it. The court then found that the company’s current software product was a derivative work jointly owned by the plaintiff and another programmer.
Sounds like lights out for the business, doesn’t it? Wrong. The court then found that the company held an “implicit, non-exclusive irrevocable license to continue to use the software.” The tribunal based its conclusion on the evidence that, from the start of his affiliation with the company, the complainant “intended for his work to be used, copied and distributed” by the company, including by inserting notices of copyright in favor of the company in the code.
The court further ruled that the plaintiff was fairly time-barred from bringing a copyright infringement action against the company based on the length of time the software was used by the company with the plaintiff’s full knowledge and participation. and even his encouragement when he announced his resignation. On the other hand, the court prohibited the plaintiff from distributing software unless it first removes or is able to allow the majority members to license a trade secret methodology into the software developed. by the applicant.
Finally, the court dismissed the plaintiff’s request for judicial dissolution of the LLC, ruling that the defendants “now understand” that the plaintiff has remained a third of the members “despite his resignation” and “have testified under oath that they are ready. to continue to work with “the applicant on the success of the business, and because the company’s financial statements” show that it is largely a profitable and successful business. “
The court then offered some advice:
As we hope now, the only way for parties to be successful with their software or business operations in the future is to start making decisions the way they were before: together.
Does anyone want to bet?