Opinion
No. 1 CA-CV 17-0063
07-12-2018
SHASTA INDUSTRIES INC, Plaintiff/Appellee, v. SAMUEL JEPSON SUTTON II, et al., Defendants/Appellants.
COUNSEL Fennemore Craig, P.C., Phoenix By Patrick Irvine, Todd S. Kartchner, Courtney R. Beller, K. Cameron Johnson Counsel for Plaintiff/Appellee Mandel Young PLC, Phoenix By Taylor C. Young Counsel for Defendants/Appellants
NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE. Appeal from the Superior Court in Maricopa County
No. CV2016-002714
The Honorable Christopher T. Whitten, Judge
AFFIRMED
COUNSEL Fennemore Craig, P.C., Phoenix
By Patrick Irvine, Todd S. Kartchner, Courtney R. Beller, K. Cameron
Johnson
Counsel for Plaintiff/Appellee Mandel Young PLC, Phoenix
By Taylor C. Young
Counsel for Defendants/Appellants
MEMORANDUM DECISION
Presiding Judge Randall M. Howe delivered the decision of the Court, in which Judge Kenton D. Jones and Judge James B. Morse Jr. joined. HOWE, Judge:
¶1 Appellants Samuel Jepson Sutton II ("Sam"), Samuel Jepson Sutton III ("Jepson"), and Aspen Research, Ltd. ("Aspen") challenge the entry of a preliminary injunction barring them from using technologies covered within a disputed patent and contacting customers and distributors doing business with Appellee Shasta Industries, Inc. ("Shasta") regarding alleged infringement of said patent. For the following reasons, we affirm.
Because the individuals in this case share the same first, middle, and last names, we distinguish them by referring to either their first name or middle name.
FACTS AND PROCEDURAL HISTORY
¶2 Shasta is a pool construction and service business. Sam provided legal services to Shasta over a lengthy period, relating primarily to intellectual property matters, including a patent infringement dispute in 2007. Sam is also a stakeholder in Aspen, a research and development company.
¶3 Sam's son Jepson worked for Shasta for approximately ten years as its director of research and development. Jepson is also a shareholder in Aspen. While employed by Shasta, Jepson signed a "Patent & Trade Secret Agreement" under which he agreed that all "discoveries, inventions, improvements, [and] works . . . which are applicable to Shasta's business" would be Shasta's property. Jepson also signed a "Non-Solicitation and Confidential Information Agreement" through which he agreed to not disclose Shasta's confidential information to third parties.
¶4 In July 2008, Shasta and Aspen entered into an "Assignment Agreement" prepared by Sam under which Shasta assigned its rights in its "QuikPure3" technology to Aspen in exchange for Aspen's procuring a patent on it (the "QuikPure3 Agreement"). The QuikPure3 Agreement granted Shasta a "shop right license," which allowed it to continue to make, use, and sell equipment using the QuikPure3 technology, as well as an unlimited option to buy back any patents or patent applications Aspen procured on the QuikPure3 technology.
¶5 The parties later discussed entering into an assignment of the "'Eco Cam' or 'Quik Save System'" technology (referred to herein as "Eco Cam") under which Aspen would procure patents and grant Shasta a similar "shop right license." Sam prepared a second "Assignment Agreement" in December 2008, under which Shasta would assign to Aspen "its entire right[,] title and interest in and to any inventions conceived after September 1, 2007[,] that relate to the methods and apparatus for improved swimming pool cleaning and operational efficiency identified as [Eco Cam] . . . ." Shasta objected to the assignment language as too broad, and the December 2008 agreement was never executed. Shasta instead filed a provisional patent application covering Eco Cam in January 2009 (the "Eco Cam Application").
¶6 In January 2010, as the deadline to file a non-provisional Eco Cam application approached, Sam again approached Shasta regarding a possible Eco Cam assignment. Sam prepared a new "Assignment Agreement" that contained the assignment language quoted above and referenced a January 31, 2008 provisional application (the "2010 Agreement"). The 2010 Agreement provided that it would be governed by the laws of Arizona and granted Shasta a "shop right license" similar to the one described in the unsigned December 2008 draft, but limited Shasta's buyback option such that it would expire on February 1, 2012.
Shasta filed the Eco Cam provisional application on January 30, 2009. --------
¶7 Shasta and Aspen executed the 2010 Agreement effective January 21, 2010. Although Shasta did not execute the formal assignment attached to the 2010 Agreement, Aspen nonetheless received the Eco Cam Application assignment two days later. Sam did not advise Shasta to retain independent counsel to review the 2010 Agreement or obtain written consent from Shasta acknowledging that he was not acting as its attorney in the transaction. Shasta later contended that Sam pressured it to sign the 2010 Agreement as the non-provisional application deadline approached.
¶8 The Eco Cam Application matured into a patent in September 2012 (the "Eco Cam Patent"). Aspen then filed a continuation-in-part application relating to Eco Cam and covering what they called the "PPRP System," which resulted in another patent (the "PPRP Patent"). Sam and Jepson assigned their rights in the PPRP Patent to Aspen.
¶9 In 2014, Sam contacted Shasta alleging that its pool systems infringed upon the PPRP Patent. In March 2015, Sam, on behalf of Aspen, presented Shasta a license agreement under which Shasta would pay royalties to continue to use technologies covered by the PPRP Patent. Sam later offered, again on behalf of Aspen, to sell the patents at issue to Shasta for $1.75 million. Shasta refused to sign the license agreement and rejected the offer.
¶10 In February 2016, Sam notified Shasta that Aspen was "in the process of identifying Shasta's 2013-16 pool installations and its major distributors[]" and that it intended to "[provide] them with an opportunity to . . . determine if there are patent liability/damage issues that require resolution." Sam told Shasta these communications could have "possibly terminal effects" including "the undesirable prospect of Shasta's customers shifting their business to other suppliers while pursuing indemnification claims[] against Shasta for any independent counsel fees and damages."
¶11 Shasta's distributors then received a memorandum and an enclosed copy of the PPRP Patent and the 2010 Agreement from the "Patent Manager" at "PPRP Systems," an apparent d/b/a of Aspen using Aspen's mailing address on file with the Arizona Corporation Commission. The memo stated that "in January 2010, Shasta assigned any interest it might have claimed in the then undeveloped system now covered by the PPRP Patent[]" and sought a "reasonable royalty" for their past sales.
¶12 Shasta sued Sam, Jepson, and Aspen a few days later seeking, among other things, a declaration that the 2010 Agreement was voidable "because it was negotiated, drafted, and executed under Sam's undue influence[]" and "induced by material misrepresentations and/or concealments by Sam." Shasta also alleged that Sam breached his fiduciary duty by "failing to disclose the material changes he made to the 'shop right' and buyback provisions in the 2010 . . . Agreement" and by "acting as an agent for Aspen" in connection with the 2010 Agreement. Shasta further alleged that Jepson breached his "Patent & Trade Secret Agreement" and "Non-Solicitation and Confidential Information Agreement" by misappropriating Shasta's confidential information and resources to benefit Aspen.
¶13 Shasta moved for a temporary restraining order and preliminary injunction preventing Sam, Jepson, and Aspen from communicating with Shasta's customers and distributors and from using the technologies covered by the PPRP Patent. The parties stipulated to a temporary restraining order pending a hearing on the injunction. Following an evidentiary hearing, the trial court ruled that Sam's actions violated Ethical Rule ("ER") 1.8(a) of the Arizona Rules of Professional Conduct because he "never withdrew from this representation and never advised Shasta that he was not acting as its attorney or that it should seek independent counsel before entering into either the [QuikPure3] Agreement or the 2010 Agreement." The court noted that ER 1.8(a) provides that a lawyer shall not enter into a business transaction with a client unless (1) the transaction and terms are fully disclosed and fair and reasonable to the client; (2) the client is advised in writing of the desirability of seeking the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in a writing signed by the client, to the terms of the transaction and the lawyer's role, including whether the lawyer is representing the client in the transaction. On that basis, the court concluded that "the most likely result in this case is that the agreements between the parties would be declared void." Additionally, the court found that "[t]here is a high danger of irreparable harm if Defendants are allowed to continue to contact [Shasta's] costumers to threaten them with litigation[.]" The court then granted Shasta's application, and Sam and Jepson (collectively the "Suttons") timely appealed.
DISCUSSION
¶14 We review the grant of a preliminary injunction for an abuse of discretion. TP Racing, L.L.L.P. v. Simms, 232 Ariz. 489, 492 ¶ 8 (App. 2013). The trial court abuses its discretion if it applies the wrong preliminary injunction standard, bases its decision on an erroneous material finding of fact, or applies the appropriate preliminary injunction standard in a manner resulting in an abuse of discretion. Id. We are bound by the trial court's factual findings unless they are clearly erroneous. Ahwatukee Custom Estates Mgmt. Ass'n, Inc. v. Turner, 196 Ariz. 631, 634 ¶ 5 (App. 2000).
¶15 To obtain preliminary injunctive relief, the moving party must show a strong likelihood of success on the merits, a possibility of irreparable injury if the injunction is not granted, a balance of hardships weighing in his favor, and public policy favoring the requested relief. TP Racing, 232 Ariz. at 495 ¶ 21. The critical factor is relative hardship, for which the movant must show either (1) probable success on the merits and the possibility of irreparable injury or (2) the presence of serious questions and that the balance of hardships tips sharply in his favor. Id. The Suttons challenge the trial court's findings regarding likelihood of success, irreparable injury, and public policy.
1. Likelihood of Success on the Merits
¶16 The Suttons contend that the trial court did not determine that Shasta was likely to succeed in establishing rights in the PPRP Patent. They have specifically asserted that Aspen developed the PPRP System "[a]s the owner of the assigned rights and in reliance on this 2010 . . . Agreement[.]" Shasta, however, presented uncontested testimony that the PPRP Patent included Eco Cam, for which Shasta held a "shop right license," as well as pool cleaning technologies Shasta had used since the 1960s. Shasta also presented an email from Sam in which he represented that the unexecuted December 2008 draft, which contained the same assignment language as the 2010 Agreement, "would not transfer all [Shasta's] rights, patents, etc. to Aspen on anything that pertains to [its] cleaning system." This evidence strongly suggests that Shasta was likely to succeed in establishing rights in the PPRP Patent.
¶17 The Suttons next contend that the court did not make sufficient findings of fact that Jepson breached either his "Non-Solicitation and Confidential Information Agreement" or his "Patent & Trade Secret Agreement." The Suttons did not challenge the sufficiency of the court's findings below and therefore have waived this argument on appeal. See Trantor v. Fredrikson, 179 Ariz. 299, 300 (1994). In any event, the court's conclusion that the 2010 Agreement would likely be declared void did not depend on a breach of either of these agreements.
¶18 The Suttons also contend that the 2010 Agreement should have been found voidable, not void ab initio, based on Sam's ER 1.8(a) violations. See DiLuglio v. Providence Auto Body, Inc., 755 A.2d 757, 770 (R.I. 2000). They do not challenge the court's finding that Sam violated ER 1.8(a). Arizona has not yet determined whether an ER 1.8(a) violation renders a business transaction between lawyer and client void or voidable. Assuming without deciding that the 2010 Agreement would be voidable as the Suttons contend, it would be voidable at Shasta's option. See, e.g., Restatement (Third) of the Law Governing Lawyers § 126, cmt. a (business transactions with a client entered into without required written disclosure and consent are "voidable at the client's option[]"). Thus, we see no meaningful distinction between the two for purposes of the preliminary injunction before the Court.
2. Irreparable Injury
¶19 The Suttons also contend that Shasta presented no evidence to show that their communications with Shasta's customers "had resulted in any harm whatsoever[,]" much less the potential for irreparable harm, in the six months preceding the preliminary injunction hearing. They overlook, however, the parties' agreement four months before the hearing to "maintain the status quo" pending the hearing. They also overlook Sam's own words. He told Shasta in February 2016 that Aspen was "in the process of identifying Shasta's 2013-16 pool installations and its major distributors" and that it intended to contact them regarding potential infringement of the PPRP Patent. He specifically advised Shasta that these efforts could cause Shasta's customers to "shift[] their business to other suppliers while pursuing indemnification claims[] against Shasta for any independent counsel fees and damages." These representations supported the court's finding that Shasta faced a high danger of irreparable harm if the Suttons were allowed to continue to contact Shasta's customers to threaten them with litigation.
3. Public Policy
¶20 The Suttons contend that public policy weighs in their favor because federal patent law preempts Shasta's claims. But issues of patent ownership and assignment are state law matters. Enovsys LLC v. Nextel Commc'ns, Inc., 614 F.3d 1333, 1342 (Fed. Cir. 2010) ("Who has legal title to a patent is a question of state law."); Larson v. Correct Craft, Inc., 569 F.3d 1319, 1327 (Fed. Cir. 2009) (reaffirming that "questions of patent ownership are determined by state law[]"); Jim Arnold Corp. v. Hydrotech Sys., Inc., 109 F.3d 1567, 1577 (Fed. Cir. 1997) ("[A]n action to rescind or cancel an assignment is a state-law based claim[.]"). Additionally, the 2010 Agreement provided that it would be governed by the laws of Arizona. The Suttons do not contend that this provision, which Sam drafted, is ineffective. See Diamond Coating Techs., LLC v. Hyundai Motor Am., 823 F.3d 615, 618 (Fed. Cir. 2016) ("We treat an agreement granting patent rights as a contract and interpret its terms consistent with the choice of law provision in the agreement in question."). Furthermore, "[t]he rules promulgated by our supreme court to regulate the practice of law establish a portion of the public policy of the state, have the same force and effect as state statutes, and are equally binding." Levine v. Haralson, Miller, Pitt, Feldman & McAnally, P.L.C., 244 Ariz. 234, 237 ¶ 10 (App. 2018). For these reasons, we conclude that the court did not abuse its discretion in granting preliminary injunctive relief.
4. Attorneys' Fees and Costs on Appeal
¶21 Shasta requests its attorney fees incurred on appeal pursuant to A.R.S. § 12-341.01(A), which permits a discretionary award to the successful party in an action arising out of contract. An action arises out of contract if the duty allegedly breached was created by the contractual relationship and would not have existed but for the contract. Assyia v. State Farm Mut. Auto. Ins. Co., 229 Ariz. 216, 220 ¶ 12 (App. 2012). Although the court enjoined the Suttons based on ER 1.8(a) violations, Shasta's action for an injunction was based on precluding the enforcement of a contract. In our discretion, we award Shasta its reasonable attorneys' fees and taxable costs in an amount to be determined upon its compliance with Arizona Rule of Civil Appellate Procedure 21.
CONCLUSION
¶22 For the foregoing reasons, we affirm.