Opinion
Civil Action No. 19-cv-00067-RM-NRN
04-24-2019
DAVID L. HILDEBRAND, an individual, Plaintiff, v. WILMAR CORPORATION, a Washington corporation, Defendant.
REPORT AND RECOMMENDATION ON DEFENDANT'S MOTION TO DISMISS (DKT. #20)
This matter comes before the Court on Defendant's Motion to Dismiss. (Dkt. #20.) Plaintiff filed a response. (Dkt. #22). Defendant filed a reply. (Dkt. #24). Judge Moore referred the Motion to me on March 18, 2019. (Dkt. #29). I heard argument from the Parties on April 12, 2019. Having reviewed the briefs, relevant caselaw, and considered the arguments of the Parties, I recommend that the Motion to Dismiss be DENIED.
I. FACTUAL BACKGROUND
This is a lawsuit brought by a patent holder, David L. Hildebrand, against an alleged patent infringer/licensee, Wilmar Corporation ("Wilmar"), for unpaid royalties and for an accounting.
In 2009, Mr. Hildebrand filed suit in this District against this same defendant, Wilmar, for infringement of U.S. Patent No. 5,737,981 (the "'981 Patent"). See Hildebrand v. BJ's Tools, et al., No. 09-cv-00349-REB-MEH (D. Colo. Feb. 19, 2009). The '981 Patent covers special reverse-threaded sockets intended to assist in extracting hard to remove (think "stripped") nuts. Wilmar allegedly sold the products using the patented technology as an "Emergency Lug Nut Remover Socket Set."
Mr. Hildebrand's 2009 lawsuit was settled via a Settlement Agreement dated March 2, 2009 (the "Settlement Agreement"), signed by Mr. Hildebrand, as Patent Owner, and Nevil Hermer, as President of Wilmar Corporation. (Dkt. #2.) The Settlement Agreement was attached, under restriction, to the Complaint in this case. (Id.)
Material terms of the Settlement Agreement included the following:
(1) Wilmar agreed to pay Hildebrand a lump sum of $25,000 "for past and current infringing acts."
(2) Hildebrand agreed to grant Wilmar a non-exclusive license "to any future and-or continued sale of Products covered" under the '981 Patent.
(3) In consideration for the license, Wilmar agreed to pay an "ongoing royalty in the amount of 15% of the Gross Selling Price of Products sold and covered" by the '981 Patent. (Id. at 2.) Importantly, Wilmar also agreed to continue to pay Hildebrand "an ongoing reduced royalty/fee of 5% following the expiration of the ['981] Patent, under the terms of" the Agreement. (Id. at 4) (emphasis added).
(4) The royalties were to be paid quarterly, and "be accompanied by a report of the gross sales of Products sold during the quarter being reported." (Id.)
(5) The Agreement was to terminate thirty days after Wilmar's certification that it had decided to stop selling products embodying the '981 Patent. (Id. at 5.)
Mr. Hildebrand alleges that the post-expiration payments were intentional, and designed to make up for taking a lower royalty during the patent's pendency. As alleged in the Complaint, Mr. Hildebrand "accepted significantly less for lost profits during the term of the patent in exchange for payments to be paid after the expiration of the patent." (Dkt. #3 at ¶ 7.)
In 2017, Mr. Hildebrand, pro se, filed a second suit against Wilmar, Hildebrand v. Wilmar Corporation, No. 17-cv-02821-PAB-SKC (D. Colo. Nov. 22, 2017), purportedly seeking damages for patent infringement. In truth, the claims in that case were very similar to the claims being asserted in this case with the Settlement Agreement being mentioned, and Mr. Hildebrand asserting that he had "not received proper compensation" or "accounting reports as agreed upon." See Compl., No. 17-cv-02821-PAB-SKC (Dkt. #1 at 3). But that case was treated by this Court as a patent infringement case, rather than a breach of contract case, and was eventually dismissed without prejudice for improper venue when Judge Brimmer accepted Judge Hegarty's dismissal recommendation. See Order of September 13, 2018, Case No. 17-cv-02821-PAB-SKC (Dkt. #35).
So, this is the third suit by Mr. Hildebrand against Wilmar—this time pitched as a breach of contract claim, with the contract at issue being the Settlement Agreement.
Mr. Hildebrand claims that Wilmar breached the Settlement Agreement by failing to pay all the required royalties or fees under the Agreement. (Dkt. #3 at ¶ 8.) In his first claim for relief, Mr. Hildebrand seeks damages for breach of contract. (Id. at ¶¶ 10-15.) In his second claim, Mr. Hildebrand seeks an accounting, claiming that under the Agreement, Mr. Hildebrand has a right to inspect Wilmar's sales records, and also was entitled to receive quarterly reports of sales of the Product, which Wilmar never provided. (Id. at ¶¶ 16-21.)
It appears undisputed that the '981 Patent expired on September 20, 2015. Patents expire 20 years after the earliest priority date. See 35 U.S.C. § 154 (a)(2). The '981 Patent has a priority date of September 20, 1995. Thus, it expired on September 20, 2015.
II. WILMAR'S MOTION TO DISMISS
Wilmar has moved to dismiss this third lawsuit brought by Mr. Hildebrand for failure to state a claim under Rule 12(b)(6). (Dkt. #20.) Attached to Wilmar's Motion as an exhibit is the declaration of Wilmar's Chief Financial Officer ("CFO"), Mark Steffen, which includes the sworn statement that "Wilmar paid Mr. Hildebrand all royalties owed pursuant to the Settlement Agreement until the expiration of U.S. Patent No. 5,737,981." (Dkt. #20-1 at ¶ 3.) Of course, on a motion to dismiss for failure to state a claim, I am not permitted to consider such affidavits. The Court must limit its consideration to the four corners of the Complaint, any documents attached thereto, and any external documents that are referenced in the Complaint and whose accuracy is not in dispute. Oxendine v. Kaplan, 241 F.3d 1272, 1275 (10th Cir. 2001); Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 (10th Cir. 2002); Dean Witter Reynolds, Inc. v. Howsam, 261 F.3d 956, 961 (10th Cir. 2001).
Beyond the affidavit, Wilmar makes three arguments. First, Wilmar asserts that under the Twombly and Iqbal line of cases, Mr. Hildebrand has failed to include factual allegations in the Complaint that raise a right to relief above the speculative level. See Bell Atlantic corp. v. Twombly, 550 U.S. 544, 555 (2007) (explaining that "[f]actual allegations must be enough to raise a right to relief above the speculative level" on the assumption that all the allegations of the complaint are true); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (noting that to survive motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face'") (quoting Twombly, 550 U.S. at 570). In other words, Wilmar argues that Mr. Hildebrand has failed to allege a plausible claim to relief because the pled facts do not allow the "court to draw the reasonable inference that the defendant is liable for the misconduct alleged." (Dkt. #20 at 3 (quoting Iqbal, 556 U.S. at 633).) Wilmar argues that "a claim must include facts sufficient to identify how defendant breached the contract to create a plausible claim as to why the defendant owes the plaintiff money," and that is lacking here. (Id. at 4.)
Second, Wilmar presumes that Hildebrand must be seeking payments for royalties after the expiration of the '981 Patent because, Wilmar insists (citing the Steffen affidavit), it paid royalties pursuant to the Settlement Agreement up until the Patent's expiration in 2015. Moreover, if Mr. Hildebrand is seeking money for unpaid royalties after the expiration of the '981 Patent, then such a claim must fail because, per Supreme Court precedent, it is against public policy to enforce a patent royalty agreement that calls for continuing royalty payments after the patent has expired. See Brulotte v. Thys Co., 379 U.S. 29, 32 (1964) ("We conclude that a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se."). See also Kimble v. Marvel Entm't, LLC, 135 S. Ct. 2401, 2407 (2015) (declining to overrule Brulotte).
Finally, Wilmar argues that Mr. Hildebrand's accounting claim should be dismissed because of the inadequacy of the breach of contract claim, and the fact that a claim for accounting is not a separate cause of action but is an equitable remedy tied to a breach of contract claim.
III. ANALYSIS
I will address each of Wilmar's arguments in turn. First, I disagree that Mr. Hildebrand has failed to plead a plausible claim for relief under Iqbal and Twombly. Mr. Hildebrand's Complaint identifies the contract at issue, identifies what he is allegedly entitled to under the contract, and alleges that he did not receive what he was promised under the contract. As he asserts in the Complaint, "Defendant breached the contract by failing to pay Plaintiff all the fees owed to Plaintiff under the contract." (Dkt. #3 at ¶ 8.) Mr. Hildebrand also alleges that under the Settlement Agreement, he was entitled to inspect Wilmar's records of product sales and receive quarterly reports, and that Wilmar violated these terms by not allowing him to inspect the records and "fail[ing] to produce the quarterly reports." (Id. at ¶¶ 17-20.) These allegations are plain, simple, and entirely plausible.
By providing a copy of the Settlement Agreement at issue, and identifying the provisions of the Agreement allegedly breached, Mr. Hildebrand has met the requirement of providing a "short and plan statement of the grounds showing the pleader is entitled to relief." Fed. R. Civ. Pro. 8(a)(2). His complaint also meets the "factual plausibility" requirement laid out in Iqbal: "A claim has factual 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." 556 U.S. at 678. With Wilmar not having provided reports of sales (which Wilmar does not dispute), it is entirely plausible that Wilmar has not paid Mr. Hildebrand money that he is entitled to under the terms of the Settlement Agreement. As the Court reminded us in Twombly, the pleading standard Rule 8 announces does not require "detailed factual allegations." 550 U.S. at 555.
Defendant cites an unpublished decision, Coonce v. CSAA Fire & Cas. Ins. Co., No. 18-7000, 2018 WL 4203386 (10th Cir. Sept. 4, 2018), to suggest that Mr. Hildebrand has not plausibly pled a breach of contract claim. In addition to being unpublished, Coonce was an insurance coverage case, very dissimilar to the facts presented here. In Coonce, the plaintiff had failed to allege that the circumstances of her loss (a collapsed roof) came within the insurance policy's terms of coverage. The Coonce decision has little, if any, relevance to Mr. Hildebrand's simple breach of contract case.
Further, that Mr. Hildebrand sufficiently pled a breach of contract claim is established, in part, by the fact that Wilmar submitted an affidavit by its CFO contradicting the factual allegations contained in the Complaint. (Dkt. #20-1.) This shows that Wilmar has sufficient notice of Mr. Hildebrandt's claims to formulate a response. Rule 8 requires enough factual detail to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Twombly, 550 U.S. at 545 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Mr. Hildebrand claims he was not paid what he was owed under the Settlement Agreement. CFO Steffen swears that Wilmar paid everything that was owed. Fair enough. But this factual dispute is not a basis for dismissal under Rule 12(b)(6).
Second, on the issue of Mr. Hildebrandt unlawfully seeking royalties for sales of products embodying the patented technology, Wilmar's point is well-taken. Under the precedents of Brulotte and Kimble, any contractual provision that seeks patent royalties after the expiration of the patent is per se unlawful. Mr. Hildebrand's counsel at oral argument tried to differentiate this case from those Supreme Court cases, but there is no distinction to be made. Kimble, in particular, is on all fours with the present circumstances. In Kimble, the Marvel Entertainment company ("Marvel"), owners of the Spiderman franchise, infringed on a patent owned by Mr. Kimble which involved a web-slinging toy, allowing children to simulate the web-shooting technique of the superhero Spiderman. After being sued for infringement, Marvel settled with the patent holder and included a provision in the settlement agreement for the purchase of the patent for a lump sum and a 3% royalty on future sales of the web-blaster toy. But the royalty provision had no end date. Following the rule articulated in Brulotte, the Court found the provision illegal because it imposed a patent royalty obligation after the expiration of the patent, when patented technology by statute becomes public property. As Justice Kagan explained in Kimble, the Brulotte decision is "simplicity itself to apply. A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice." 135 S. Ct. at 2411.
Here, at oral argument, Mr. Hildebrand's counsel acknowledged that he was likely seeking some payments for royalties on post-expiration sales. He made arguments about how these "royalty" payments were really deferred payments in exchange for accepting lower payments during the term of the patent. But the Settlement Agreement does not provide a termination date for the post-expiration payments. And this is exactly the kind of post-expiration royalty agreement that the Supreme Court found unlawful in Kimble. There are good arguments, both economic and legal, against the rule laid out in Brulotte and reaffirmed in Kimble, many of which are articulated in Justice Alito's Kimble dissent. See, e.g., Kimble, 135 S. Ct. at 2416 (Alito, dissenting) (explaining that there are "good reasons why parties sometimes prefer post-expiration royalties over upfront fees, and why such arrangements have pro-competitive effects"). But Justice Alito's dissenting opinion only got two additional votes beyond his. The law is what the Kimble majority says it is, and I am bound to follow that law. "All other American courts, state and federal, owe obedience to the decisions of the Supreme Court of the United States on questions of federal law, and a judgment of the Supreme Court provides the rule to be followed in all such courts until the Supreme Court sees fit to reexamine it." 1B James Wm. Moore, et al., Moore's Federal Practice ¶ 0.402[1], at I-10 (footnote omitted) (2d ed. 1996). It is the Supreme Court's prerogative, not mine, to overrule Brulotte and Kimble. See United States v. Hatter, 532 U.S. 557, 567 (2001) (noting it is the Supreme Court's prerogative "alone" to overrule one of its precedents). Mr. Hildebrand therefore may not pursue any post-expiration royalties via this breach of contract action.
It does not follow from this conclusion, however, that this case must be dismissed. Mr. Hildebrand has alleged that he was not paid appropriately. He does suggest in his Opposition to the Motion to Dismiss that he is interested in post-expiration royalties. (Dkt. #22 at 5 ("[T]here is no dispute that Defendant has failed to pay any fees for selling Plaintiff's product after the term of the patent expired.").) But he also alleges that he never received any of the sales reports he had been promised, whether pre-expiration or post. And at oral argument, Mr. Hildebrand's counsel confirmed that he was seeking pre-expiration payments as well. Thus, based on his Complaint, Mr. Hildebrand may be entitled to additional royalty payments for the period leading up to the expiration of the patent on September 20, 2015.
At oral argument, Wilmar's counsel insisted that the statute of limitations had run on any pre-expiration royalties to which Mr. Hildebrand may have been entitled, citing Colorado's three-year statute of limitations for breach of contract actions. However, Colorado has two different statutes of limitations for contract cases: six years where the amount of damage may be easily determinable (see Colo. Rev. Stat. § 13-80-103.5(1)(a)), and three years for other contract breach claims (see Colo. Rev. Stat. § 13-80-101(1)(a)).
Courts apply the six-year statute of limitations in § 13-80-103.5(1)(a) to breach of contract claims where the parties' agreement or other extrinsic evidence in existence at the time of the loss provides a clear method for calculating the amount owed. See, e.g., Torres-Vallejo v. Creativexteriors, Inc., 220 F. Supp. 3d 1074, 1086 (D. Colo. 2016) (finding that the plaintiff's "FLSA, Colorado Minimum Wage, and breach of contract claims [were] based on entitlement to an hourly wage and [were] therefore claims for amounts that [were] 'easily calculable,'" but that the plaintiff's quantum meruit claim was subject to a three-year statute of limitations); Wornicki v. Brokerpriceopinon.com, Inc., No. 13-cv-03258-PAB-KMT, 2015 WL 1403814, at *3 (D. Colo. Mar. 23, 2015) (finding the six-year statute of limitations applicable to a breach of contract claim where "the work orders at issue . . . state[d] a precise amount that real estate professionals would be paid for performing the work requested"); Robert W. Thomas & Anne McDonald Thomas Revocable Trust v. Inland Pac. Colo., LLC, No. 11-cv-03333-WYD-KLM, 2012 WL 2190852, at *4 (D. Colo. June 14, 2012) (finding that the six-year statute of limitations applied to unjust enrichment claim where "the promissory note set forth a method for determining the amount due to the trust"); BMGI Corp. v. Kirzhner, No. 11-cv-00599-LTB-MEH, 2011 WL 6258481, at *6 (D. Colo. Dec. 15, 2011) (applying the six-year limitations period to unjust enrichment claim where the claim was based on assertion that defendant had failed to repay a loan having a "specified sum and due date"); compare with Farley v. Family Dollar Stores, Inc., No. 12-cv-000325-RBJ-MJW, 2013 WL 500446, at *3 (D. Colo. Feb. 11, 2013) (finding that damages were not liquidated or easily ascertainable where "there [was] a dispute as to the mutual understanding of the parties and thus what overtime compensation, if any, the plaintiff [was] owed"); Rotenberg v. Richards, 899 P.2d 365, 368 (Colo. App. 1995) (finding that a quantum meruit claim seeking "reasonable compensation for the services rendered in an amount to be determined by the fact finder" was not "determinable" for purposes of § 13-80-103.5).
Here, because the issue has not been briefed, I am not prepared to say, one way or another, whether the six-year or three-year statute of limitations applies. But I will note that the Settlement Agreement does appear to provide an easy formula for calculating the amount owed to Mr. Hildebrand: "15% of the Gross Selling Price of Products sold and covered by said Hildebrand Patent." (Dkt. #2, Section 2.1.) And, "an amount is either liquidated or determinable for purposes of § 13-80-103.5(1)(a) if an agreement sets forth a method for determining the amount due, regardless of the need to refer to facts external to the agreement." Interbank Inv., L.L.C. v. Vail Valley Consol. Water Dist., 12 P.3d 1224, 1230 (Colo. App. 2000) (citing Rotenberg v. Richards, 899 P.2d 365 (Colo. App. 1995)). An agreement that "clearly sets forth a method for determining the amount due, [. . .] is sufficient to invoke the six-year statute of limitations." Stillwater Mining Co. v. Power Mount, Inc., No. 14-cv-2475-WYD-CBS, 2016 WL 9735770, at *4 (D. Colo. Aug. 16, 2016). I will also note the Colorado state court principle that where there is a substantial question as to which of two or more statutes of limitations should apply, that doubt should be resolved in favor of the statute containing the longer limitations period. Reg'l Transp. Dist. v. Voss, 890 P.2d 663 (Colo.1995) (citing Thiel v. Taurus Drilling Ltd., 710 P.2d 33, 40 (Mont. 1985)).
If Colorado's six-year statute of limitations applies to Mr. Hildebrand's breach of contract claims, then his claims for unpaid or inadequate royalties extend back before the September 20, 2015 expiration of the '981 Patent. This lawsuit was filed in Colorado state court on December 10, 2018, which means that Mr. Hildebrand may have viable claims for unpaid or underpaid royalties from December 10, 2012 through September 20, 2015. Therefore, I am not prepared to recommend dismissal of Mr. Hildebrand's breach of contract claim.
Finally, because Mr. Hildebrand's claim for an accounting is derivative of his breach of contract claim (which survives), I will not recommend dismissal of the accounting claim either. See Patterson v. BP Am. Prod. Co., 159 P.3d 634, 642 (Colo. App. 2006) (explaining that where an accounting claim is ancillary to a breach of contract claim because its main purpose is to facilitate an accurate calculation of damages once a breach of contract is found, it would be unreasonable to preclude the accounting claim simply because the plaintiff did not request one from the breaching party before the underlying breach of contract claim was adjudicated), rev'd on other grounds, 185 P.3d 811 (Colo. 2008).
IV. CONCLUSION
Therefore, and for the reasons stated above, I RECOMMEND that Defendant's Motion to Dismiss (Dkt. #20) be DENIED. However, and as explained above, I also RECOMMEND that Plaintiff be barred from seeking damages for unpaid royalties after September 20, 2015, the date the '981 Patent expired.
IT IS ORDERED that pursuant to Fed. R. Civ. P. 72 , the parties shall have fourteen (14) days after service of this Recommendation to serve and file any written objections in order to obtain reconsideration by the District Judge to whom this case is assigned. A party's failure to serve and file specific, written objections waives de novo review of the Recommendation by the District Judge, Fed. R. Civ. P. 72(b); Thomas v. Arn , 474 U.S. 140, 147-48 (1985), and also waives appellate review of both factual and legal questions. Makin v. Colo. Dep't of Corr., 183 F.3d 1205, 1210 (10th Cir. 1999); Talley v. Hesse , 91 F.3d 1411, 1412-13 (10th Cir. 1996). A party's objections to this Recommendation must be both timely and specific to preserve an issue for de novo review by the District Court or for appellate review. United States v. One Parcel of Real Prop., 73 F.3d 1057, 1060 (10th Cir. 1996). Date: April 24, 2019
/s/_________
N. Reid Neureiter
United State Magistrate Judge