Linzer Products Corp. v. Sekar

499 F.Supp.2d 540

LINZER PRODUCTS CORPORATION, Plaintiff, v. Chandra SEKAR, Defendant.

No. 06 Civ. 13218(SAS).

United States District Court, S.D. New York.

July 23, 2007.

COPYRIGHT MATERIAL OMITTED

Keith A. Walter, Esq., Ratner Prestia P.C., Wilmington, DE, Donald L. Rhoads, Esq., Vito J. DeBari, Esq., Kramer Levin Naftalis & Frankel LLP, New York, NY, for Plaintiff Linzer Products Corporation.

Adam B. Landa, Esq., Rachel L. Izower, Esq., Greenberg Traurig LLP, New York, NY, for Defendant Chandra Sekar.

OPINION AND ORDER

SCHEINDLIN, District Judge.

I. INTRODUCTION

Chandra Sekar ("Sekar") invented an inexpensive industrial process for manufacturing plastic paint rollers. In 1996, Sekar was awarded a patent (the "'790 Patent") for this invention, giving him the right to exclude others from using his process (the "'790 process") to manufacture paint rollers.¹ In 1998, Sekar entered into a license agreement (the "Agreement" or "1998 Agreement") with Linzer Products Corporation ("Linzer"), a manufacturer of paint rollers, permitting Linzer to use his '790 process in exchange for royalties.² Shortly thereafter, Linzer began using the '790 process to manufacture one-ply paint rollers, paying royalties to Sekar for each roller.

In 2000, Sekar was awarded a second patent (the "'134 Patent") for another invention, a process for manufacturing plastic paint rollers having two or more layers (the "'134 process").³ With Sekar's knowledge and assistance, Linzer began manufacturing two-ply paint rollers (in addition to its one-ply roller production). Accordingly, Linzer also began paying royalties for its two-ply roller production at the same rate it had paid for its one-ply rollers.

The parties operated amicably on these terms until 2006, when they began to disagree about the amount of royalties owed. Linzer claimed that it had no obligation to pay any royalties for its use of the two-ply process because this process was not covered by the '790 Patent. As explained below, the relationship deteriorated, and Sekar eventually threatened to sue Linzer if Linzer refused to negotiate new royalty terms for its use of the two-ply process.

Instead of waiting for Sekar to sue, Linzer filed this lawsuit, bringing a number of state and federal claims against Sekar including: (1) breach of the covenant of good faith and fair dealing; (2) breach of warranty; (3) breach of contract; (4) unjust enrichment; and (5) various antitrust violations under both federal and state law. Linzer also asks the Court for several declaratory judgments relating to (1) the parties' rights with respect to the Agreement; (2) the alleged unenforceability of certain provisions of the Agreement in light of principles of patent law and federal and state antitrust law; and (3) the alleged invalidity of the patents-in-suit.

Pursuant to Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6), Sekar moves to dismiss most, but not all, of these claims.⁴ For the following reasons, Sekar's motion to dismiss is granted in part and denied in part.

II. BACKGROUND

A. Sekar Invents the '790 Process

Linzer is a New York corporation in the business of manufacturing paint application products, including paint rollers. Sekar is an individual residing in New York. Sekar invented a process for manufacturing paint rollers from a thermoplastic called polypropylene and received the '790 Patent for that process in 1996. Sekar is a joint owner of the '790 Patent with Newell Operating Company ("Newell").⁵ Newell manufactures plastic products and competes with Linzer in the paint-roller market.⁶

B. Linzer and Sekar Execute the 1998 Licensing Agreement

In April 1998, Linzer and Sekar executed the Agreement, granting Linzer a royalty-bearing license to use the '790 Patent to manufacture "Licensed Products."⁷ It also grants Linzer royalty free licenses to use Sekar's related knowledge and trade secrets,⁸ and any of Sekar's future inventions relating to polypropylene paint roller manufacturing.⁹ The Agreement also included a sale of two machines for manufacturing paint rollers to be delivered and installed by Sekar at Linzer's facilities.¹⁰ In addition, each party made express warranties to the other. Sekar warranted that "[a]s of the Agreement Date ... he [was] not aware of anything that would effect [sic] the validity of the Patent Rights...."¹¹ Linzer warranted "that during the Term of this Agreement it shall not manufacture or sell any Polypropylene Paint Roller unless it is a Licensed Product."¹² Finally, the Agreement provides that certain rights and obligations will survive termination of the Agreement, including Linzer's royalty-free licenses to Sekar's knowledge, trade secrets, and future inventions.¹³

Pursuant to the Agreement, Sekar delivered and installed two machines at Linzer facilities, which Linzer used to manufacture one-ply rollers. The process that these machines employed (the "Linzer one-ply process") was similar, though not identical, to Sekar's '790 process.

C. Sekar Invents the Multi-Ply '134 Process

Sekar later invented another process for manufacturing paint rollers, for which he received the '134 Patent in December 2000.¹⁴ This process is used to produce multi-layer or multi-ply paint rollers. In 2002, with Sekar's assistance, Linzer implemented a two-ply roller production process (covered by the '134 Patent) and began producing two-ply rollers.¹⁵ Linzer paid royalties for its two-ply roller production at the same royalty rate that the Agreement set for Linzer's use of the one-ply process.¹⁶

D. Linzer and Sekar Dispute Their Obligations Under the Agreement

Linzer and Sekar performed the Agreement to the satisfaction of both parties until February 2006, when Sekar began an audit of Linzer's royalty payments.¹⁷ Responding to the audit, Linzer instituted its own review of the terms of the Agreement to verify which of Linzer's processes were covered by the '790 and '134 Patents. After this review, Linzer took the position that its royalty payments for its two-ply process had been paid mistakenly. Linzer's position was — and is — that its two-ply process was within the scope of the '134 Patent (which it had a royalty-free license to use), and not within the scope of the '790 Patent (which it had a royalty-bearing license to use). Sekar disagreed, responding that Linzer's two-ply process was covered by both the '134 and '790 Patents, and therefore royalties were owed.¹⁸ The parties began a series of discussions to resolve their differences. At the same time, Linzer obtained an opinion of counsel that the '790 Patent was invalid and another opinion that Linzer's two-ply process did not infringe the '790 Patent. Linzer provided these opinions of counsel to Sekar in August and September 2006 under a written agreement pursuant to Rule 408 of the Federal Rules of Evidence regarding inadmissibility of communications made in settlement negotiations.¹⁹

Sekar responded to these opinions in a letter to Linzer's general counsel. As to the invalidity opinion, Sekar responded that he "is not persuaded that there is any serious likelihood that the '790 Patent would be held to be invalidated in the event of a challenge.²⁰ Regarding noninfringement, Sekar noted that if Linzer's opinion was correct (i.e., Linzer's two-ply process was outside the scope of the '790 Patent) then Linzer was in breach of its warranty that it would not manufacture paint rollers other than Licensed Products (i.e., rollers made by the process of the '790 Patent).²¹ Sekar also cautioned that while Linzer's prior breach of its warranty may have been inadvertent, Linzer was now on notice, therefore any continued use of its two-ply process would be willful.²² Sekar also gave a 40-day notice of termination pursuant to the termination provisions of the Agreement, stating that the notice was "a mere formality since Linzer's breach of warranty is non-curable[,]" implying that such notice was unnecessary, and adding that "[n]evertheless, at present, Mr. Sekar does no[t] intend to terminate the agreement before expiration of the 40-day notice period."²³ Sekar suggested terms under which Linzer would pay breach damages and proposed that the parties renegotiate the Agreement to include explicit terms licensing Linzer's two-ply roller production under the '134 Patent (at a much higher royalty rate than Linzer had been paying). In a November 2006 letter, Sekar also stated that he would be "happy to meet with Linzer to discuss renegotiation of the License Agreement[,]" but that Sekar "want[s] it to be clear that if we [Linzer and Sekar] cannot reach agreement, Mr. Sekar intends to let a Court decide the legal issues."²⁴

E. Linzer's Lawsuit

Linzer chose not to wait for Sekar to sue for breach and/or patent infringement. Linzer sued in November 2006, and filed its Amended Complaint in December. The Amended Complaint contains eighteen claims, fourteen of which Sekar now moves to dismiss. Many of the claims in Linzer's Amended Complaint seek a declaratory judgment of the parties' rights under their License Agreement, a common feature of suits brought against patent holders and their licensees.²⁵

The claims in the Amended Complaint are arranged, with no apparent organizing principle, into Counts numbered I through XIII (including Counts VII(A)-(F)). Each of the parties' briefs adds to this confusion by addressing the claims in a seemingly random order that corresponds neither to the Amended Complaint nor to the preceding briefs. To make sense of the issues raised by the briefs, this Opinion will group the claims as follows: (1) claims that arise under contract law, (2) claims that seek a declaratory judgment of the parties' rights under the 1998 Agreement (including some such claims that are based on antitrust law), and (3) claims that arise under patent law.

III. LEGAL STANDARDS

A. Rule 12(b)(1) Motion to Dismiss

Rule 12(b)(1) provides for the dismissal of a claim when the federal court "lack[s] ......