JT IP Holding, LLC v. Thomas Florence, Flopack, LLC

JT IP HOLDING, LLC, and JEFFREY S. ELDREDGE, Plaintiffs, v. THOMAS FLORENCE, FLOPACK, LLC,and, KIMBERLY PERRY, Defendants.

Civil Action No. 20-cv-10433-IT

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

September 1, 2020

MEMORANDUM & ORDER

TALWANI, D.J.

Before the court is Defendants Thomas Florence, FloPack, LLC, and Kimberly Perry's Motion to Dismiss [#27]. For the reasons set forth below, Defendants' motion is DENIED IN PART and GRANTED IN PART.

I. Facts Alleged in the Complaint

In 2017, Plaintiff Jeffrey S. Eldredge and Defendant Thomas Florence formed JT IP Holding, LLC ("JT IP") to develop and market several products that relate to water management devices. Am. Compl. ¶ 12 [#22]; Am. Compl., Ex. D, JT IP Operating Agreement 5 [#22-5]. Eldredge and Florence were both members and managers of JT IP and held 50% voting interests in any and all matters relating to JT IP. Id. ¶ 14. JT IP's Operating Agreement initially called for Eldredge to hold a 1/3 ownership stake and Florence to hold a 2/3 ownership stake, with Eldredge contributing $50,000 in cash and Florence contributing $100,000 in sweat equity and payment of half of JT IP's bills and costs. Id. ¶¶ 13, 17. Florence also promised to transfer several trademarks to JT IP as part of his initial contribution, but failed to do so. Id. ¶¶ 18-23.

Eldredge alleges that during the course of their dealings in JT IP, he and Florence worked together to improve upon an invention that Florence had previously patented. Id. ¶¶ 33-37. On January 6, 2018, Florence applied to the United States Patent and Trademark Office ("USPTO") for a patent for this new improvement and simultaneously assigned the patent application to JT IP. Id. ¶¶ 43, 45 (citing Ex. E, Patent Application [#22-6]; Ex. G, Patent Assignment [#22-8]). The only inventor listed on the patent application is Florence. Id. ¶ 46. Florence represented to Eldredge that his work on the invention did not warrant Eldredge being listed as an inventor and that he did not have to be listed as an inventor to protect his interests in the Patent. Id. ¶ 47. On July 30, 2019, the USPTO issued U.S. Patent No. 10,364,563 (the '563 Patent) to Florence for the invention. Id. ¶ 9.

On October 1, 2019, Florence filed a purported assignment of the '563 Patent to Defendant FloPack, LLC (FloPack). Id. ¶ 71. FloPack is a Massachusetts company, formed in October 2019, with a principal place of business in Massachusetts. Id. ¶¶ 4, 77. Kimberly Perry is an individual residing in Massachusetts, Florence's daughter, and FloPack's Member and only Manager. Id. ¶¶ 5, 77.¹ Eldredge was not made aware of this assignment and the assignment was not approved by Eldredge as required by the JT IP Operating Agreement. Id. ¶¶ 71-74.

In November 2019, after the '563 Patent was allegedly assigned to FloPack, Eldredge and Florence met, accompanied by Perry, to discuss the JT IP business and the ownership of the '563 Patent. Id. ¶ 68. At the meeting, Florence denied that Eldredge had any role in the invention anddeclined to discuss the assignment of the '563 Patent to JT IP. Id. ¶ 70. At the time of the meeting, Eldredge was still not aware that Florence had already purportedly assigned the '563 Patent to FloPack. Id. ¶ 71.

II. Legal Standard

To survive a motion to dismiss, the well-pleaded facts in Plaintiff's complaint must "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). In reviewing a complaint under a Fed. R. Civ. P. 12 motion to dismiss, the court "must distinguish 'the complaint's factual allegations (which must be accepted as true) from its conclusory legal allegations (which need not be credited).'" Garcia-Catalan v. United States, 734 F.3d 100, 103 (1st Cir. 2013) (quoting Morales-Cruz v. Univ. of P.R., 676 F.3d 220, 224 (1st Cir. 2012)). The plausible factual allegations, taken as true, must ultimately be able to support the legal conclusion that underlies each claim for relief. See Haley v. City of Boston, 657 F.3d 39, 46 (1st Cir. 2011). Although the court ordinarily only considers the complaint's plausible factual allegations on a motion to dismiss, the First Circuit has recognized a narrow exception to this rule for "documents the authenticity of which are not disputed by the parties; for official public records; for documents central to plaintiffs' claim; or for documents sufficiently referred to in the complaint." Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993). Here, the parties do not dispute the authenticity of several of the documents attached to the complaint, including JT IP Holding LLC's Operating Agreement [#22-5].

III. Discussion

Defendants make six arguments in their motion to dismiss: (A) that all derivative claims should be barred, (B) that Eldredge's inventorship claim is insufficiently pleaded, (C) that Plaintiffs cannot bring a patent infringement claim, and to the extent they have done so theirpleading is insufficient, (D) that Plaintiffs' Lanham Act claim is insufficiently pleaded, (E) that the court should decline to exercise supplemental jurisdiction over the state law claims, and (F), that Plaintiffs' pleadings are insufficient as to Defendants Perry and FloPack. The court addresses these arguments in turn.

A. Whether Eldredge's Derivative Claims are Proper (Counts II, III, IV, V, VI, VII, XI)

Defendants argue that Eldredge's derivative claims on behalf of JT IP are improperly raised since Eldredge has not complied with requirements for bringing derivative actions under Fed. R. Civ. P. 23.1. Defendants raise three lines of argument: (i) Eldredge has not complied with Fed. R. Civ. P. 23.1(b)(3)'s requirement that plaintiffs filing derivative suits first make an effort to obtain the desired action from the directors or comparable authority (the "demand requirement"); (ii) that Eldredge is not properly positioned to bring this lawsuit under the JT IP Operating Agreement [#22-5] because the Operating Agreement requires a vote of 100% of the members before the company takes any action that may bind it; and (iii) that Eldredge cannot bring claims belonging to the JT IP in his own name. These three arguments are addressed in turn.

i. Eldredge's Compliance with FRCP 23.1(b)(3)'s Demand Requirement

Defendants argue that before bringing his derivative action, Eldredge failed to first exhaust his intracorporate remedies as required by Fed. R. Civ. P. 23.1(b)(3).² Mem. Supp. Mot. Dismiss 5 [#28]. Eldredge counters that these claims are properly pleaded since, under the circumstances present here, the demand requirement can and should be excused since a demandwould be futile. See Opp. Mot. Dismiss [#29]. The court agrees with Eldredge; here, the demand requirement should be excused.

Fed. R. Civ. P. 23.1 expressly contemplates that the demand requirement may be excused for reasons such as futility. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96-97 (1991). In evaluating whether excusal from this pleading requirement is appropriate, courts apply "state law to determine whether the facts alleged are sufficient to demonstrate that the demand . . . was adequate or would have been futile and thus should be excused." Bryceland v. Minogue, No. 13-cv-10212-FDS, 2013 WL 3208613, at *2 (D. Mass. June 21, 2013) (citing Kamen, 500 U.S. at 96-97). The Massachusetts Supreme Judicial Court has set forth that the demand requirement gives way where "a majority of directors are alleged to have participated in wrongdoing, or are otherwise interested" since in such instances the demand would be "futile." Harhen v. Brown, 730 N.E.2d 859, 865 (Mass. 2000) (citing Bartlett v. New York, N.H. & H.R.R., 109 N.E. 452, 454 (Mass. 1915) (holding plaintiff not required to make demand on board of directors when demand would be "useless" or "an idle ceremony" because of board's interested status)).

Here, the allegations set forth in the complaint establish that the demand requirement would serve no purpose besides mere formality and thus the requirement is subject to being excused under the standards set forth by the Massachusetts Supreme Judicial Court in Harhen. 730 N.E.2d at 865. The complaint plausibly alleges that Florence engaged in the wrongdoing identified in the complaint and raises a significant prospect that Florence may be adjudged liable to the corporation or its shareholders. See id. at 865 & n.5 (adopting definition of "interested" found in 1 ALI Principles of Corporate Governance: Analysis and Recommendations § 1.23 [1994]). Furthermore, where the demand requirement "protects the court from unnecessarily hearing a case that is not ripe for decision or that might be mooted by subsequent board action[,]. . . provides an opportunity for the board to determine if it will pursue other remedies or take other appropriate corrective actions[,] . . . [and] permits the corporation to take over the suit and control the litigation," Plaintiff plausibly alleges the demand requirement would not effectuate its goals if applied here. Diamond v. Pappathanasi, 935 N.E.2d 340, 351 (Mass. App. Ct. 2010) (quoting 2 ALI Principles of Corporate Governance: Analysis and Recommendations § 7.03 comment c [1994]); see also Billings v. GTFM, LLC, 867 N.E.2d 714, 720 & n.19 (Mass. 2007) (finding demand requirement is excused where "complaint also noted the futility of making demand on the other members that they authorize the company to proceed against them directly."). Accordingly, based on the allegations set forth in the Amended Complaint, the court finds the demand requirement should be excused.

ii. Eldredge's Authority to Bring a Derivative Action on Behalf of JT IP

Defendants also challenge Eldredge's authority to bring a derivative action on behalf of JT IP. Defendants argue that the JT IP Operating Agreement [#22-5] provides that litigation may only be instituted by unanimous vote of the members and that in the case of a deadlock, the members must submit to mediation or arbitration to resolve...