Opinion
No. 03 Civ. 1548 (GBD) (AJP).
October 13, 2004
OPINION AND ORDER
Presently before the Court are the parties' cross-motions for partial summary judgment as to the proper interpretation of their "License Agreement." (Dkt. Nos. 29-36, 41-46, 48, 50-56.) The parties consented to decision of the summary judgment motions by a Magistrate Judge pursuant to 28 U.S.C. § 636(c). By prior Order, I indicated my intent to deny the motions with an opinion to follow. (Dkt. No. 47.) This is the promised Opinion.
THE PARTIES' LICENSE AGREEMENT
On or about February 13, 2001, plaintiff J.S. Nicol, Inc. ("Nicol" or "JSN") and defendant Peking Handicraft, Inc. ("Peking" or "PHI") entered into the License Agreement, the differing interpretations of which are at the heart of this lawsuit. (See Dkt. No. 20: Peking Answer Counterclaims Ex. A: 2/13/01 License Agreement.)
The License Agreement begins with a "Whereas" clause that "JSN [Nicol] desires to grant to PHI [Peking] the right to use the artwork in connection with the manufacture, sale, distribution and promotion of the articles as described below." (License Agmt., last Whereas clause, emphasis added.)
Under the heading "Term and Exclusivity," the License Agreement provides:
1. Term and Exclusivity. (a) The term of this agreement shall commence from the date that the last party executes this agreement and end on the third anniversary of such date (the "Initial Term"), and thereafter shall continue from year to year for additional one-year terms (the "Additional Terms"), unless and until either party shall give notice of such party's intent to terminate not less than 90 days prior to the end of the then-current Initial Term or Additional Term, which termination shall be effective at the expiration of said term, or until sooner terminated as hereinafter set forth. Upon termination of this Agreement, PHI shall be entitled to distribute any remaining inventory of Licensed Products bearing the Artwork and to honor any contractual commitments then in effect to provide Licensed Products bearing the Artwork subject to the survival provisions set forth in Section 14 below.
(b) PHI will direct JSN as to the accounts and Licensed Products for which JSN will develop Artwork (the "Exclusive Accounts"). PHI shall not present designs to the Exclusive Accounts that would compete with JSN Artwork produced for PHI.
(c) JSN will provide artwork to PHI during the Initial Term and any Additional Terms on an exclusive basis, with the exception of existing JSN agreements as described in Exhibit C hereto. JSN will create and deliver an amount of artwork adequate for each of the Exclusive Accounts as determined by mutual agreement of JSN and PHI in advance of each account presentation. Upon acceptance by PHI of any item of artwork of JSN, (i) the parties will amend Exhibit A to include such item, which thereupon will become "Artwork" for all purposes of this Agreement, and (ii) JSN will deliver to PHI the original Artwork necessary for PHI to reproduce the Artwork on the Licensed Products (the "Original Artwork"). JSN will participate with PHI in presentations and visits to Exclusive Accounts as necessary, and at such times and with such frequency as may be mutually agreed to by JSN and PHI.
(License Agmt. ¶ 1(a)-(c), emphasis added.) The "Grant of License" section provides:
3. Grant of License. JSN hereby grants to PHI an exclusive worldwide license to use, reproduce, display and distribute the Artwork described in Exhibit A hereto on the products described in Exhibit B hereto ("Licensed Products") and in connection with the manufacture, sale, distribution and promotion of the Licensed Products commencing upon the date identified above for so long as this Agreement is in effect. Additional products may be added to Exhibit B from time to time upon the mutual agreement of the parties as evidenced by the amendment of Exhibit B, at which time such additional products shall become "Licensed Products" for all purposes of this Agreement. All rights not specifically transferred by this Agreement are reserved by JSN.
(License Agmt. ¶ 3.)
"Licensed Products" are identified in Exhibit B as "All bedding products including but not limited to: Quilts, Comforters, Shams, Duvets, Window Treatments and coordinated products." (License Agmt., Ex. B.)
The list of "Existing JSN Agreements" include not only companies for bedding products, but also agreements with other companies for greeting cards, paper products, wall coverings and rugs. (License Agmt., Ex. C.)
The License Agreement calls for an advance against a "nonrefundable royalty of five percent (5%) of the Net Sales of the Licensed Products bearing the Artwork." (License Agmt. ¶ 6.)
The License Agreement provides that Nicol retains the copyright in the Artwork (License Agmt. ¶ 4), and requires Peking to return the Original Artwork to Nicol after non-acceptance or, for accepted designs, after production (id. ¶ 5).
Finally, the License Agreement provides for survival of certain provisions upon termination of the Agreement for "breach":
14. Breach. If either party deems the other to be in breach of this Agreement, it shall notify that party in writing and allow a period of thirty days from receipt of notice within which remedy of such breach may be made if the same is remediable within thirty days, or within a reasonable time if remedy cannot physically be accomplished within thirty days. If the party in breach fails to cure a breach within such time, the non-breaching party may immediately terminate this Agreement. Sections 2, 4, 5, 6(a), 8, 9, 12 and 23 shall survive the termination of this Agreement to the extent such provisions remain applicable following termination.
(License Agmt. ¶ 14.)
ANALYSIS
The standards for contract interpretation, and for summary judgment in such cases, are set out in my prior opinions and will not be separately set forth herein. See, e.g., Chevron TCI, Inc. v. Talleyrand Assoc., LLC, 03 Civ. 4043, 2003 WL 22977498 at *4-7 (S.D.N.Y. Dec. 19, 2003) (Peck, M.J.) ( cases cited therein). I. PEKING'S PARTIAL SUMMARY JUDGMENT MOTION AS TO "EXCLUSIVITY"
My prior opinions dealt with the standard under New York law, while the License Agreement here is governed by Virginia law. (License Agmt. ¶ 22.) The parties agree, however, that Virginia's rules of contract interpretation are the same as New York's. (E.g., Dkt. No. 34: Peking 2/20/04 SJ Br. at 12 n. 7; Dkt. No. 32: Nicol 2/20/04 SJ Br. at 8; Dkt. No. 44: Nicol 3/11/04 Opp. Br. at 10 n. 7; Joint Pretrial Order Ex. B: Stmt. of Uncontested Law ¶¶ 1-2.)
Peking seeks summary judgment that Nicol breached the License Agreement by providing artwork to third parties not designated in Exhibit C to the License Agreement, in breach of Peking's alleged exclusivity under the Agreement. (See, e.g., Dkt. No. 34: Peking 2/20/04 SJ Br. at 1, 12-17.)
The threshold question is whether the License Agreement is unambiguous or ambiguous. The Court finds that it is ambiguous.
Peking reads the License Agreement not as licensing Nicol designs to it, but as requiring Nicol to supply Peking with artwork on a full time basis including artwork for products that the License Agreement did not cover. (See, e.g., Dkt. No. 44: Nicol 3/11/04 Opp. Br. at 1-2.) In essence, Peking believes the contract to require Nicol to be an exclusive designer for Peking. The License Agreement, however, is drafted as a license agreement, not as an exclusive design services contract. It did not provide that Nicol would spend all of her time, or a substantial part of it, designing artwork for Peking, as an exclusive services contract would. Peking also ignores the "Whereas" clause that Nicol "desires to grant to [Peking] the right to use the artwork in connection with the manufacture, sale, distribution and promotion of the articles as described below," i.e., for bedding products. The License Agreement further provided that Nicol could continue to supply artwork to satisfy its existing contracts with others (License Agmt. ¶ 1(c) Ex. C) — and the Agreement did not place any restrictions on the amount of time Nicol would be spending designing artwork pursuant to those agreements.
The Court finds that the License Agreement is ambiguous as to whether Nicol was designing exclusively for Peking or only giving Peking exclusivity as to designs for bedding, while allowing Nicol to create designs for non-bedding products for others.
The extrinsic evidence of the parties' intent is also in dispute, and thus the interpretation of the "exclusivity" issue in the contract must be resolved by the jury at trial, not the Court on summary judgment. For example, Peking recognized that Nicol could create designs for coordinated, multi-product programs — and Nicol did so with Peking's participation. (See Dkt. No. 44: Nicol 3/11/04 Opp. Br. at 6-9.) The parties' conduct, in connection with the multi-product programs and otherwise, is evidence from which a jury could reject Peking's exclusivity argument. (See id. at 18-20.) On the other hand, there is evidence, according to Peking, that the parties discussed true exclusivity, and that Peking was assured that Nicol's obligation to existing customers was "minor." (See, e.g., Dkt. No. 34: Peking 2/20/04 SJ Br. at 3.) Peking also asserts that it "compensated [Nicol] for acting as its exclusive outside design source . . . [by] non-refundable advances on royalties that were three times the highest non-refundable advance received by [Nicol] from other manufacturers at that time or subsequently." (Id. at 17.)
In short, the License Agreement is ambiguous and the extrinsic evidence is disputed. Summary judgment on the issue of the License Agreement's "exclusivity" is inappropriate and isDENIED. II. THE PARTIES' CROSS-SUMMARY JUDGMENT MOTIONS AS TO PARAGRAPH 1(A) RE SELL-OFF RIGHTS
The parties cross-move as to Peking's rights under paragraph 1(a) of the License Agreement to sell-off remaining inventory after termination by breach. (Compare, e.g., Dkt. No. 34: Peking 2/20/04 SJ Br. at 21-24, with, e.g., Dkt. No. 32: Nicol 2/20/04 SJ Br. at 7-13.)
Paragraph 1(a) deals with the term of the agreement and also provides that:
Upon termination of this Agreement, [Peking] shall be entitled to distribute any remaining inventory of Licensed Products bearing the Artwork and to honor any contractual commitments then in effect to provide Licensed Products bearing the Artwork subject to the survival provisions set forth in Section 14 below.
(License Agmt. ¶ 1(a).) Paragraph 14 provides that in the event either party breaches the agreement, "Sections 2, 4, 5, 6(a), 8, 9, 12 and 23 shall survive the termination of this Agreement to the extent such provisions remain applicable following termination." (License Agmt. ¶ 14.)
Peking reads these provisions as allowing Peking to sell-off inventory pursuant to paragraph 1(a) whether the License Agreement terminates at the end of its term or because of Nicol's (alleged) breach. (See, e.g., Dkt. No. 34: Peking SJ Br. at 21-23.) Nicol, in contrast, claims that paragraph 1(a) relates only to expiration of the contract term and not to termination upon breach, and that paragraph 14, which provides for "termination" of the agreement in the event of a breach, controls; Nicol also insists that since Peking breached the contract, Peking should not have any rights under paragraph 1(a). (See, e.g., Dkt. No. 32: Nicol 2/20/04 SJ Br. at 7-12.)
The application of paragraph 1(a) in the case of a breach depends on which party is in breach — an issue that is so hotly disputed that it is not the subject of the cross-summary judgment motions. If Peking is in breach, the contract is terminated pursuant to paragraph 14 — an immediate termination of the contract. (See also License Agmt. ¶ 8(b).) If Nicol is in breach, however, Peking should be able to terminate outright pursuant to paragraph 14 (thus ending any royalty or other obligations) or utilize paragraph 1(a), with the requirement of paying actual royalties on such products sold. The issues, inter alia, of: (1) who breached, (2) whether Peking's post-termination sales exceeded the scope of its paragraph 1(a) sell-off rights, and (3) whether Peking's failure to pay royalties for post-termination sales should deprive it of any paragraph 1(a) rights, all remain for trial.
For example, if Nicol intentionally breached shortly before the contract had run its normal course, it would be unfair to deprive Peking of its paragraph 1(a) sell-off rights.
CONCLUSION
For the reasons set forth above, the parties' cross-motions for summary judgment are DENIED. Counsel shall promptly contact Judge Daniel's chambers to schedule a trial ready date. (If the parties wish a fixed trial date, they can obtain it before me by consenting to trial before me and a jury pursuant to 28 U.S.C. § 636(c).)
SO ORDERED.