CO2 Technologies, Inc. v. Paper-Pak Industries

830 F. Supp. 2d 656, 2011 U.S. Dist. LEXIS 146501, 2011 WL 6357776

• Court: District Court, S.D. Iowa
• Decided: December 20, 2011
• Docket: No. 4:11-cv-203 RP-CFB
• Status: Published

Opinion

ORDER

ROBERT W. PRATT, District Judge.

Currently before the Court is a motion to dismiss filed by Defendant Paper-Pak Industries (“PPI”) on October 28, 2011. Clerk’s No. 25. Plaintiff C02 Technologies, Inc. (“C02”) filed a response in opposition to the motion on November 17, 2011. Clerk’s No. 30. PPI filed a reply on December 2, 2011. Clerk’s No. 37. C02 filed a sur-reply on December 12, 2011. Clerk’s No. 38-1.¹ The matter is fully submitted.

I. FACTUAL & PROCEDURAL BACKGROUND

On June 1, 2005, PPI and C02 entered into an agreement (hereinafter “the Agreement”) “related to C02’s proprietary technology and related ingredients that are effective in enhancing shelf life and limiting microbial growth with respect to various foods and other organic goods, including meat and poultry products.” Second Am. Compl. ¶ 13. Subject to certain restrictions, the Agreement grants PPI “a worldwide right and license to use the Technology and the Ingredients in the Meat and Poultry Market ... such license shall be exclusive (later amended to nonexclusive) for the Meat and Poultry Market in the U.S. and nonexclusive for the remainder of the world.” Id. ¶ 14; see also Clerk’s No. 22-1 at 1 (Agreement ¶ 2).

The Agreement defines “Technology” and “Ingredients” as follows:

Technology and Ingredients Defined. Licensor represents and warrants that It owns, or has the right to operate under and grant rights with respect to, the patents, related know-how and other technology described in Schedule A (the “Technology”). Licensor further represents and warrants that it owns, or otherwise has the right to make, use and sell (and to grant rights to make, use and sell) the products incorporating the Technology also described in Schedule A (the “Ingredients”).

Clerk’s No. 22-1 at 1 (Agreement ¶ 1). Schedule A describes the following “Technology” and “Ingredients”:

Technology: the technology covered by the claims of U.S. Patents 6,340,654 and 6,797,235 and the related proprietary know-how.

Ingredients:

Citric Acid

Cinnamic Acid

Calcium Carbonate Sodium Bicarbonate

Id. at 4.

Additionally, the Agreement states:

Notwithstanding the parties’ respective rights under this license Agreement, both Licensor and Licensee are entering into this License Agreement fully committed to work diligently and in good faith to support Licensee’s efforts to develop the relevant markets for “active pads”. In this spirit, Licensor and Licensee agree to refrain from any actions which would substantially inhibit the ability of either party from gaining the benefit from this License Agreement. Without limiting the generality of the foregoing, Licensee will respect the restrictions and other provisions set forth in Schedule B; and Licensor will not sell the Ingredients nor license the Technology (other than pursuant to obligations to the Existing Customers as defined in Schedule B) to any third party for use in the Meat and Poultry Market unless and until this License Agreement is terminated as provided herein.

Id. at 2 (Agreement ¶ 4(c)) (nonstandard punctuation in original). The Agreement also contains an integration clause providing that it “constitutes the entire agreement of the parties with respect to the subject matter hereof and may only be changed by written agreement signed by both parties.” Id. at 3 (Agreement ¶8).

In an August 21, 2005 email to the C02 Board of Directors, Ron Jensen (“Jensen”) stated, on behalf of PPI, that “[w]hile we do have constituents in our offering that are in addition to C02’s, none of these constituents have in any way impeded the launch of the C02 constituent.” Second Am. Compl. ¶ 20. In a January 16, 2006 email to C02 President Wes Boldt (“Boldt”), Jensen stated that “[a]s of today, we have 33 supermarket trials ongoing in January and February. These include some of the biggest players in the industry. All of these pads use C02 constituent.” Id. ¶ 21.

In February 2006, the parties agreed to modify certain terms of the Agreement in order to, inter alia, convert the license, which originally was an exclusive license, into a non-exclusive license. See Clerk’s No. 22-1 at 7. On June 21, 2007, Jensen sent a letter to Boldt stating that PPI “has devoted considerable resources and funds to the development of the market for our ULTRA ZAP® XTENDAPAK active pad, which is the sole product we sell using your [C02’s] active C02 generating ingredient.” Id. ¶ 22.

However, on February 4, 2011, “Charles Ruggiero, on behalf of [PPI] stated that ‘the XtendaPak™ product line does not use any technology covered by the ... Agreement’ and stated that ‘[w]e will need to address the return of past payments made by PPI to your client [i.e., C02].’ ” Id. ¶23. Around this same time, PPI began “manufacturing and selling pads containing the licensed Technology and Ingredients without C02’s consent to the produce industry and without paying a royalty for pads sold to the Meat and Poultry Industry.” Id. ¶ 25.

II. LAW AND ANALYSIS

To survive a Rule 12(b)(6) motion to dismiss for failure to state a claim, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). In reviewing a complaint, a court must “accept as true all of the factual allegations contained in the complaint,” and must draw “all reasonable inferences ... in favor of the plaintiff.” Schaaf v. Residential Funding Corp., 517 F.3d 544, 549 (8th Cir.2008) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). A viable complaint must include “enough facts to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 570, 127 S.Ct. 1955).

While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the “grounds” of his “entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.

Twombly, 550 U.S. at 570, 127 S.Ct. 1955. “The plausibility standard requires a plaintiff to show at the pleading stage that success on the merits is more than a ‘sheer possibility.’ It is not, however, a ‘probability requirement.’” Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009) (quoting Iqbal, 129 S.Ct. at 1949).

In Ashcroft v. Iqbal, the Supreme Court described a “two-pronged approach” for evaluating complaints challenged under Rule 12(b)(6). Iqbal, 129 S.Ct. at 1949-50. First, a court should divide the allegations between factual and legal allegations; factual allegations should be accepted as true, but legal allegations should be disregarded. Id. Second, the factual allegations must be parsed for facial plausibility. Id. at 1950. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 1949.

A. Count 1

In Count 1, C02 alleges that PPI: has breached, beginning in at least February of 2011, and continues to breach, the valid and enforceable ... Agreement of June 1, 2005, at least by manufacturing and selling pads containing the licensed Technology and Ingredients without C02’s consent to the produce industry and without paying a royalty for pads sold to the Meat and Poultry Industry in violation of paragraphs 2 and 3 of the ... Agreement.

Second Am. Compl. ¶ 25. PPI argues, that Count 1 should be dismissed “to the extent it is based on allegedly unauthorized sales” because “[t]he primary alleged conduct about which Count 1' complains—selling licensed technology outside the meat and poultry industry—does not breach any section of the Agreement.” Def.’s Br. at 1, 7 (Clerk’s No. 28-1).

In support of this argument, PPI notes that the Agreement contains no express “restriction on using the covered technology outside the meat and poultry markets.” Id. at 7 (internal quotation marks omitted). C02 does not seriously dispute this contention; however, it argues that it is still entitled to bring a claim for breach of contract. See Pl.’s Br. at 5 (Clerk’s No. 30). Specifically, C02 argues that in the Agreement, it “granted much more than a patent license,” including “the right to use proprietary know-how related to the patents and other technology.” See id. According to C02, “[i]n contrast to a license dealing solely with a patent, when the license is based upon a grant of technical information and the licensee exceeds the terms of the grant, the appropriate remedy is a suit for breach of contract based on an implied covenant not to do so.” Id. (citing Eli Lilly & Co. v. Emisphere Techs., Inc., 408 F.Supp.2d 668 (S.D.Ind. 2006) (comma omitted)).

In response, PPI argues that “the mere fact that the Agreement mentions ‘know-how’ ... does not trump the well-established rule against reading nonexistent covenants into a license agreement.” Def.’s Reply at 4 (Clerk’s No. 37). PPI asserts that “[cjourts will only imply covenants into an integrated contract ‘when the implied term is not inconsistent with some express term of the contract, and where there arises from the language of the contract itself ... an inference that it is absolutely necessaryl ] to introduce the term to effectuate the intention of the parties.’ ”² Def.’s Br. at 8 (quoting B & J Mfg. Co. v. Hennessy Indus., Inc., No. 73 C 2174, 1976 WL 21072, at *3 (N.D.Ill. Oct. 19, 1976) (ellipsis in PPI’s brief)).

As an initial matter, the law on this issue is not nearly as clear as PPI’s arguments suggest. PPI relies on one nonbinding³ line of eases where courts have refused to read negative covenants (i.e., covenants not to exceed the scope of the license) into patent licenses. See Def.’s Br. at 7-8 (citing B & J Mfg., 1976 WL 21072, at *3, and Fla. Canada Corp. v. Union Carbide & Carbon Corp., 280 F.2d 193, 194-95 (6th Cir.1960)). However, there is also non-binding authority that supports C02’s position. See Eli Lilly & Co. v. Emisphere Techs., Inc., 408 F.Supp.2d 668, 687-90 (S.D.Ind.2006) (discussing the various conflicting authorities including, e.g., Shaw v. E. I. DuPont De Nemours & Co., 126 Vt. 206, 226 A.2d 903 (1967), ajfd following rehearing, 152 U.S.P.Q. 723 (1967)). In this case, C02 alleges that it granted technical know-how in addition to the patent licenses.⁴ See Second Am. Compl. ¶ 13 (referring to a license of C02’s “proprietary technology,” not just license for the patents); id. ¶ 15 (alleging that C02 conveyed a right to use “related know-how,” not just a license for the patents). Therefore, C02’s claim falls outside the “straight patent license” cases upon which PPI relies.⁵ See B & J Mfg., 1976 WL 21072, at *1 (dealing with a license for patents only, not for related technical information); Fla. Canada Corp., 280 F.2d at 194 (dealing with a settlement agreement related to a previous patent license); see also Eli Lilly, 408 F.Supp.2d at 688 (“[Sjhould the license be based upon a grant of technical information, then the balance tips in the opposite direction. Here the licensor has granted more than a mere forbearance from suit. He has actually delivered a package of valuable information to the licensee. Should the licensee exceed the terms of the grant, the sole appropriate remedy is a suit for breach of contract based on an implied covenant not to do so.” (quoting Einhorn, Patent Licensing Transactions § 1.03[4] (2004)). In other words, contrary to PPI’s suggestion, not all of C02’s alleged rights could be fully and fairly vindicated by a claim for patent infringement. See Def.’s Br. at 7. For all of these reasons, and taking all of C02’s allegations as true, the Court simply cannot say that C02 has failed to state a plausible claim in Count 1. Therefore, Count 1 shall not be dismissed.

B. Count 2

In the alternative, C02 alleges that it entered into the Agreement, in part, “to penetrate the Meat and Poultry Market through [PPI]’s established market position.” ⁶ Second Am. Compl. ¶ 29. According to C02, PPI “did not penetrate the Meat and Poultry Market on behalf of C02” and, therefore, breached ¶ 4(c) of the Agreement. Id. ¶ 30. PPI argues that Count 2 should be dismissed because “the Agreement provides no recourse for disappointment in sales activity.”⁷ Def.’s Br. at 10. According to PPI, the Agreement “grants [it] the right to sell certain patented technology ... but it does not force PPI to sell anything, let alone specify a minimum sales level.” Id.

In response, C02 argues that its “primary reason for entering into the ... agreement and sharing its proprietary know-how with PPI was to take advantage of PPI’s established market position in order to penetrate the Meat and Poultry Market.” PL’s Br. at 6 (citing Clerk’s No. 22-1 at 1 (Agreement Preamble) (“WHEREAS, Licensor desires to penetrate the Meat and Poultry Market through Licensee’s established market position....”)). Thus, according to C02, “the benefit sought was to get C02’s product to the desired market more quickly than it could do ... by itself or through another licensee” and “[i]n this context, PPI agreed to refrain from any actions which would substantially inhibit the ability of either party from gaining the benefit from the ... Agreement.” Id. at 6-7 (citing Clerk’s No. 22-1 at 2 (Agreement ¶4(0))). C02 asserts that “PPI did not refrain as promised” because it “mislead C02 by indicating that PPI was developing C02’s technology for the Meat and Poultry Industry.” Id. at 7. However, “[a]fter relying upon these and other acts and statements, C02 learned on February 4, 2011 that PPI’s XtendaPak ™ product line does not use any of the technology covered by the ... Agreement.” Id. (citing Second Am. Compl. ¶ 23). C02 asserts that if it had “known its technology was not being promoted, [it] would have terminated the Agreement and licensed to others to promote the product,” but did not do so “as a result of the misleading statements.” Id. Thus, according to C02, it has stated a valid claim for breach of ¶4(0) of the agreement. See id.

As PPI points out in its reply, C02’s arguments do not entirely match its allegations. See Def.’s Reply at 7. C02 has not alleged that it relied on these misrepresentations—i.e., it would have terminated the Agreement (or taken other actions to penetrate the market) but for the alleged misrepresentations. See id.; Second Am. Compl. ¶¶ 1-32. In its sur-reply, C02 argues that it did not have to plead “reliance and ... inaction” because “they are not elements of a breach of contract claim.” Pl.’s Sur-Reply at 4.

Thus, as best as the Court can discern from C02’s rather opaque briefs, it appears that C02’s theory is that the Agreement required PPI to refrain from harming C02’s ability to benefit from the Agreement and that PPI did such harm by misleading C02 about its use (or rather, nonuse) of C02’s technology in PPI’s product development. See id. However, Count 2 does not actually allege that any of PPI’s statements were misleading. See Second Am. Compl. ¶23 (alleging that Ruggiero’s February 2011 statement was “in contrast to ... Jensen’s previous statements,” but not alleging that “Jensen’s previous statements” were either false or meant to mislead). Moreover, the plain language of Count 2 alleges that the breach is based upon a failure to “penetrate the Meat and Poultry Market,” with no mention of any misleading statements or actions. Id. ¶ 30 (emphasis added); see also id. ¶¶ 28-29, 31-32. Thus, Count 2 does not state a claim under the theory C02 currently asserts. Accordingly, Count 2 shall be dismissed.

III. CONCLUSION

For the foregoing reasons, “Defendant Paper-Pak Industries’ Motion to Dismiss Plaintiffs Second Amended Complaint” (Clerk’s No. 25) is GRANTED in part and DENIED in part. Count 2 is hereby dismissed without prejudice.

IT IS SO ORDERED.

1 . This filing is actually an attachment to C02's motion for leave to file a sur-reply. See Clerk's No. 38. On December 14, 2011, United States Magistrate Judge Celeste F. Bremer ordered the case manager to "detach and separately file” the sur-reply, see Clerk's No. 40; however, as of this writing, the sur-reply has not yet been separately filed. However, the Court considers C02's sur-reply to be submitted for the purposes of this order.

2 . PPI observes that, in Schedule B, the Agreement includes a number of express restrictions but does not list a restriction against sales outside the "Meat and Poultry Market.” See Def.’s Br. at 8-9. Therefore, PPI argues that an implied covenant not to exceed the scope of the license would be inconsistent with the terms of the Agreement. See id. at 9. The Court does not agree. PPI has failed to identify any “express term” of the contract that is actually inconsistent with an implied covenant not to exceed the scope of the license. See B & J Mfg. Co. v. Hennessy Indus., Inc., No. 73 C 2174, 1976 WL 21072, at *3 (N.D.Ill. Oct. 19, 1976).

3 . The Agreement states that it "shall be governed by the laws of Illinois.” Clerk’s No. 22-1 at 3 (Agreement ¶ 8). Neither party argues that some other state’s law should apply; therefore, the Court will apply Illinois law.

4 . PPI argues that the term "know-how” merely describes "the patented technology [C02] had the right to license.” See Def.'s Reply at 4. However, this argument contradicts the express terms of the agreement, which lists the patents and the "know-how” separately. Clerk’s No. 22-1 at 4. Moreover, because this is a motion to dismiss, the Court must take C02's allegations as true and cannot consider PPI's suggestion that, in fact, nothing more than the patent licenses were conveyed.

5 . These cases are distinguishable in other respects as well. For example, the agreement in Florida Canada Corp. expressly barred any implied covenants. See 280 F.2d at 195. And, importantly, the decision in B & J was based on the specific facts and circumstances of that case, including the plaintiff’s failure to present evidence on certain issues. See 1976 WL 21072, at *4. If anything, these cases—■ both of which were decided on motions for summary judgment—indicate that the existence of a negative implied covenant depends on the facts and evidence, not (as PPI suggests) on abstract principles of law. See id. at *3 (noting that "the circumstances under which [the agreement] was entered into” is relevant to determining whether a negative covenant exists); see also generally Eli Lilly & Co. v. Genentech, Inc., Nos. IP 87-219-C, IP 88-1463-C, 1990 WL 305392, at *3-5 (S.D.Ind. July 17, 1990) (discussing the fact-intensive nature of the analyses in Florida Canada Corp. and B & J).

6 . PPI repeatedly suggests that the mere fact that C02 pled this alternative theory of breach somehow undermines the viability of both of its breach of contract claims. E.g., Def.’s Br. at 9. This type of argument is entirely unpersuasive. Parties are expressly permitted to plead alternative claims, see Fed. R.Civ.P. 8(d)(2); therefore, the Court declines to read any negative implication into the fact that C02 has chosen to take advantage of this form of pleading.

7 . PPI also argues that Count 2 "is too vague to state a claim for relief: it is not clear whether Plaintiff is alleging that PPI failed to sell its technology within the Meat and Poultry market, that it failed to sell enough of PPI's technology, or that it otherwise failed to meet some unspecified and undefined standard of 'market penetration.' " Def.'s Br. at 9. Therefore, according to PPI, it "cannot defend against” Count 2. Id. However, if PPI truly believes that Count 2 is "so vague or ambiguous that [it] cannot reasonably prepare a response,” then it should have filed a motion for a more definite statement. See Fed.R.Civ.P. 12(e).