AL LABORATORIES, INC.v.BOU-MATIC, LLC

United States District Court, D. MinnesotaAug 2, 2004
Civ. File No. 02-4862(PAM/RLE) (D. Minn. Aug. 2, 2004)

Civ. File No. 02-4862(PAM/RLE).

August 2, 2004


MEMORANDUM AND ORDER


PAUL MAGNUSON, Senior District Judge

In November 2003, the Court declared that Defendant Bou-Matic, LLC ("Bou-Matic") was the owner of 41 trademarks and that Plaintiff AL Laboratories, Inc. ("AL") had a license to use these trademarks until June 27, 2005, subject to reasonable royalty and/or license fees. (See November 3, 2003, Order.) In July 2004, the parties tried to the Court the issue the amount of such reasonable royalty and/or license fees, if any, due to Bou-Matic by AL, for AL's use of the 41 product-name trademarks owned by Bou-Matic. Bou-Matic submits that the Court should impose at least a license fee of 7.3%, applicable from November 26, 2002 to June 27, 2005. AL contends that there was never an agreement to pay such fees, and that alternatively, such fees should be minimal and prospective in nature.

A. FACTS

AL is a manufacturer of dairy sanitation and udder hygiene chemicals. Prior to this dispute, AL sold these products to the Bou-Matic division of DEC International ("DEC"), who then re-sold AL's products to its dealers under Bou-Matic product names. In June 2000, the parties were bound by the Global Purchase Agreement ("Agreement"). Under the Agreement, payment was made by DEC dealers directly to DEC. This Agreement prevented AL from selling its products directly to DEC dealers without DEC's permission. If AL had DEC's permission and then sold products directly to DEC dealers, AL was required to pay DEC a 5% commission over the first $4000 of those sales.

In August 2001, DEC declared bankruptcy. During bankruptcy proceedings in October 2001, DEC and AL amended the Agreement (the "Amendment") to permit AL to sell AL products directly to the dealers. The purpose of this Amendment was to ensure that AL's chemicals were distributed to DEC dealers, despite DEC's bankruptcy. Under this Amendment, AL received payment directly from DEC dealers. This Amendment required AL to pay DEC an 8.5% commission on the sales that AL made in North America. (See Def. Ex. 2 ¶ 1(e).) The parties agreed that the Amendment would compensate DEC at roughly the same level as provided for in the Agreement and likewise compensate AL for taking on additional sales activities.

On September 4, 2002, Defendant Bou-Matic, LLC, a separate entity from DEC, purchased the Bou-Matic division of DEC's business. Following the purchase, DEC rejected the Amendment and the Agreement. Under paragraph 9 of the Amendment, this rejection gave AL a license to use the Bou-Matic product names until June 27, 2005. (See Def. Ex. 2 ¶ 9.) Following DEC's rejection, Bou-Matic and AL continued to operate under the Agreement and the Amendment while they negotiated a new contract. AL and Bou-Matic failed to agree on a new contract and stopped working together. Thereafter AL and Bou-Matic became competitors, with both parties selling dairy sanitation and udder hygiene products using Bou-Matic product names. This litigation followed.

AL contends that the parties did not discuss or contemplate any royalty or license fee for AL's use of the Bou-Matic product-name marks. AL submits that the Amendment's 8.5% commission rate was to provide DEC with the same level of profit it would have received under the Agreement and to compensate DEC for AL's use of the "BOU-MATIC" brand trademark. (See Def. Ex. 2 ¶ 5.) According to AL, the parties never contemplated or discussed that the 8.5% commission would apply to AL's use of the Bou-Matic product-name trademarks as permitted under paragraph 9 of the Amendment. Moreover, AL submits that there were never any negotiations about a license fee or royalty for AL's use of the Bou-Matic product-name trademarks. Thus, AL asserts that any reasonable royalty or license fee is zero.

Bou-Matic maintains that the 8.5% commission rate of the Amendment is the appropriate license fee or royalty for AL's use of the product-name trademarks. Bou-Matic focuses on three negotiations to support this contention: (1) negotiation of the Amendment between DEC and AL in 2001; (2) unsuccessful negotiations between Bou-Matic and AL in the fall of 2002; and (3) a hypothetical successful negotiation between Bou-Matic and AL in the fall of 2002. At the very least, Bou-Matic contends that the 8.5% commission rate is the appropriate starting place for the Court to determine a reasonable royalty, and that alternatively, a 7.3% rate is appropriate. (See Def. Ex. 21.)

B. LICENSE FEE

The sole issue before the Court is the license fee or royalty that AL owes Bou-Matic for the use of Bou-Matic product-name trademarks. Generally, reasonable royalties are awarded as a measure of damages for infringement of a patent or trademark. See Georgia Pacific v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) (applying in patent context); Sands, Taylor Wood v. Quaker Oats Co., 34 F.3d 1340 (7th Cir. 1994) (applying in trademark context). In the context of infringement, fifteen different factors aid the court in its royalty determination: (1) royalty rates received in prior licenses by the licensor; (2) prior rates paid by the licensee; (3) the nature and scope of the license, such as exclusive or nonexclusive; (4) the licensor's licensing policies; (5) commercial relationship between the licensor and licensee; (6) special value of the mark to the infringer; (7) duration of the trademark and term of the license; (8) profitability of the trademark; (9) utility and advantages of the trademark over prior marks; (10) benefits to those who have used the trademark; (11) the extent to which the infringer has used the mark; (12) reasonable royalties within the industry; (14) opinion testimony by experts; and (15) the amount that the licensor and licensee would have agreed upon in voluntary negotiations. See Georgia Pacific, 318 F. Supp. at 1120. In this case, the Court concluded that AL did not infringe Bou-Matic's product-name trademarks, but rather that AL had a valid license to use the product-name trademarks. Nonetheless, the analysis used in Georgia Pacific and Sands is useful to the Court.

Specifically, the parties submitted evidence of the relationship between AL and Bou-Matic, the value and benefits of the Bou-Matic product-name trademarks, expert opinion testimony, and a hypothetical agreement between the parties. Although this evidence pertains to some of the Georgia Pacific factors, the Court notes that neither party submitted evidence that specifically pertained to trademark license fees between competitors. For example, neither party submitted evidence of licenses between Bou-Matic and other competitors or between AL and other competitors, nor evidence of similar licenses used within the industry.

1. Relationship between Bou-Matic and AL

Bou-Matic maintains that the Amendment's 8.5% commission rate is the proper place for the Court to begin its analysis. AL and DEC operated under the terms of the Agreement and the Amendment. Pursuant to the Agreement, AL paid DEC a 5% commission on any sale AL made with DEC's permission. Under the Amendment, AL and DEC specifically agreed to an 8.5% commission rate that allowed DEC to perform financially at the same level had the bankruptcy not resulted. It also ensured that AL chemicals would continue to be distributed to DEC's customer base. This commission compensated DEC for both the sales AL made and AL's use of the "BOU-MATIC" brand name. (See Def. Ex. 2 ¶ 5.) At the time DEC and AL agreed to this commission rate, they were essentially partners; AL manufactured the chemicals that DEC sold under Bou-Matic product names.

Following the sale of DEC's assets to Bou-Matic, Bou-Matic and AL continued to operate as partners under the Agreement and the Amendment that governed DEC and AL's relationship. However, failed negotiations between AL and Bou-Matic terminated this partnership. Bou-Matic and AL became direct competitors. Although AL and Bou-Matic briefly operated under the Amendment and the 8.5% commission structure it imposed, they did so while Bou-Matic and AL were partners with one another. Thus, the commission agreement between business partners has little relevance to a license between competitors. The Court must determine what license fee Bou-Matic and AL would have agreed to on November 25, 2002, as competitors.

AL argues that if the Court relies on any hypothetical negotiations, it should temporally place those negotiations at the time the Amendment was negotiated in the fall of 2001. The Court disagrees. In the context of trade mark infringement, hypothetical negotiations are considered at the time the infringement began. Here, although DEC's rejection on September 4, 2002, gave rise to the license at issue, Bou-Matic and AL continued to operate under the terms of the Agreement, including the full payment of the 8.5% commission rate, until November 25, 2002. Any injury resulting to Bou-Matic for AL's failure to pay a license fee did not arise until November 25, 2002. Therefore, the relevant date for any hypothetical negotiations is November 25, 2002.

2. Benefit and Value of the Bou-Matic Product Trademarks

The parties submitted evidence on the value and benefits of the Bou-Matic product-name trademarks. According to Bou-Matic, the Bou-Matic product name was more valuable than the supplier of the product itself. Mr. Robert Kmoch, Bou-Matic's former president, testified that the individual Bou-Matic product names added significant value to the products. Despite the arrangement between DEC and AL, Mr. Kmoch maintained that customers associated dairy sanitation and udder hygiene products with Bou-Matic and not AL, because these customers were serviced by Bou-Matic dealers that drove Bou-Matic trucks and wore Bou-Matic uniforms. Both Mr. Kmoch and Mr. Todd Charnetzki, a Bou-Matic executive, testified that customers ordered products that they needed by referencing the Bou-Matic product name, rather than by the effect the product produced.

On the other hand, AL contends that the underlying chemical formulation and the effect of this formulation creates product value. Mr. Franck Monmot, AL's president, testified that customers referenced the particular effect of the product, not the Bou-Matic name, when purchasing products. AL contends that it continued to use the Bou-Matic product names after November 2002 to prevent customer confusion and to ensure safety in product use. Moreover, AL contends that AL personnel, not Bou-Matic personnel, responded to customer inquiries and monitored quality control. Finally, AL points out that the negotiations of paragraph 9 of the Amendment, which gave rise to the license, never included any reference to the payment of royalties or other fees for the use of Bou-Matic's product names.

After the Court's November 2003, Order and beginning in March 2004, AL began to implement a transition process with its products. Specifically, AL sought to phase out AL's use of the Bou-Matic product names on product labels while simultaneously introducing AL's new product names on product labels. AL expects this transition process to be complete in early fall 2004. When complete, AL's formulations will no longer reference the Bou-Matic product names. These labels will contain an AL product name and AL's product's chemical formulation. AL maintains that the purpose behind this gradual transition process is to promote customer awareness and safety.

Based on this evidence, the Court concludes that the Bou-Matic product-name trademarks have some value. Customers purchase dairy sanitation and udder hygiene products because those products are essential to the customer's business. These customers rely both on the chemical formulation of the products, as well as the trusted Bou-Matic name. AL cannot ignore that the "BOU-MATIC" brand trademark added value to its products, as evidenced by the commission structure in the Amendment. (See Def. Ex. 2 ¶ 5.) Although this commission payment was allegedly unrelated to the Bou-Matic product names, the payment of a commission indicates that AL recognized that it benefitted from an association with the "BOU-MATIC" brand name. Even though neither party discussed the payment of royalties or license fees during the negotiation of the Amendment, the Court notes that the Amendment's negotiations were between partners, not competitors. Moreover, the recent product-label transition scheme implemented by AL further supports that the Bou-Matic product-name trademarks provide some value to AL's chemical formulations. Regardless of AL's assertions, if the Bou-Matic product names were wholly valueless, no product label transition scheme would be necessary. Thus, the Court finds that the license fee or royalty AL owes Bou-Matic for AL's use of the Bou-Matic product-name marks must be greater than zero.

3. Expert Testimony

However, as noted above, the 8.5% commission rate proposed by Bou-Matic is not appropriate. This commission rate was agreed to between partners, not competitors. Bou-Matic relies on the testimony of its forensic damages expert, Dr. Joseph Kenyon. According to Dr. Kenyon, a reasonable royalty in this case is at least 7.3%.

Dr. Kenyon prepared his expert report prior to the Court's November 2003, Order. (See Def. Ex. 21.) Dr. Kenyon's report was premised on a finding that AL infringed Bou-Matic's trademarks. Although Dr. Kenyon reviewed various materials submitted by AL, Dr. Kenyon's report failed to consider all relevant deposition testimony. At trial, Dr. Kenyon testified that his analysis was based on the Georgia Pacific factors. However, Dr. Kenyon's report fails to acknowledge any of these factors or specify that he considered any of these factors. Moreover, Dr. Kenyon's report is premised on the 8.5% commission rate that AL and Bou-Matic considered prior to the termination of their partnership. Despite these deficiencies, the Court finds most fault with Dr. Kenyon's failure to reassess his calculations in light of the Court's Order. Because Dr. Kenyon's determinations are specific to a finding of infringement, the Court does not find Dr. Kenyon's testimony relevant to its determination.

4. Hypothetical Negotiations

Dr. Kenyon further proposed a hypothetical negotiation between AL and Bou-Matic between September 2002 and November 2002. At that time, AL and Bou-Matic were in the process of renegotiating the terms of their relationship. The evidence shows that the parties contemplated the 8.5% commission structure, and absent agreement, continued to operate in accordance with this commission structure until November 2002. However, failure to renegotiate any agreement terminated their partnership. Thus, Dr. Kenyon's analysis of a hypothetical negotiation between partners is not on point with a hypothetical negotiation between competitors.

5. Findings

As direct competitors, AL would not have agreed to pay Bou-Matic full commission for sales it made, but Bou-Matic likewise would not have agreed to allow AL to use its product-name trademarks for free. Bou-Matic has the burden to present relevant evidence on the amount of fees due to Bou-Matic for AL's use of the Bou-Matic product-name trademarks. Although the Court finds that Bou-Matic failed to present sufficient evidence of the specific amount of the license fee or royalty, Bou-Matic did establish that some license fee or royalty was appropriate. Because none of the evidence presented by the parties is particularly useful to the Court, the Court must determine the appropriate license fee.

As noted above, the 8.5% commission rate in the Amendment is not appropriate. This rate was negotiated between amicable parties in a partnership. The payment of commission is not the same as the payment of royalties, particularly between competitors. The 5% commission rate included in the Agreement is likewise inapposite. However, the distinction between the 8.5% commission rate of the Amendment and the 5% commission rate of the Agreement is helpful. Under the Agreement, AL owed DEC a 5% commission on sales that AL made. AL was permitted to make such sales only after it obtained consent from DEC. This structure prevented AL and DEC from directly competing with each another. Under the Amendment, the 8.5% commission rate compensated DEC, and then Bou-Matic, for both the profits of AL's sales and for AL's use of the "BOU-MATIC" brand trademark. Again, the Amendment prevented direct competition, and ensured that DEC's business would continue despite the bankruptcy. The difference between the two commission structures is 3.5%, and representative of the value of the "BOU-MATIC" brand trademark.

Of course, the value of the "BOU-MATIC" brand trademark and the value of Bou-Matic's various product-name trademarks is not the same. Thus, an appropriate license fee for the Bou-Matic product-name trademarks is less than 3.5%. The Bou-Matic product-name trademarks by themselves did not sell AL formulations. Even now, throughout this transition period, AL continues to sell its product formulations without the Bou-Matic product-name trademarks. Although AL's sales have dropped in the last year, there is no evidence to suggest that the loss is directly correlated to the removal of the Bou-Matic product names from AL labels. Thus, in light of all of the evidence, the Court concludes that an appropriate license fee or royalty is 3%. This fee shall be applied from November 25, 2002, until AL completely eliminates its use of the Bou-Matic product-name trademarks, but no later than June 27, 2005. This fee shall only apply to sales made in North America involving the 41 product trademarks listed in the Court's November 2003 Order.

C. LICENSE FEE APPLIED

The parties further dispute the net figure to which the license fee should apply. Bou-Matic contends that it is improper to deduct freight costs from the net figure, while AL asserts otherwise. Dr. Kenyon testified that deducting freight costs from the net figure was not reasonable unless the net sales figure included freight. Mr. Monmot testified that AL's net sales figure did include freight. AL receives one payment from the customer for both the cost of the product and the freight. AL receives an invoice from the freight company and pays the freight company in lump sums for the cost of freight related to its various customers. According to Mr. Monmot, rather than deducting the cost of freight from each customer's individual payment, AL deducts the average cost of transportation, 8.5%, from the net figure to reach net sales.

The Court agrees with AL that the 3% license fee shall apply to the sales figure that properly deducts the cost of transportation. The net sales from November 25, 2002 through May 31, 2004, are $6,261,712.00. (See Def. Ex. 19.) Three percent of these sales is $187,851.36. Bou-Matic is further entitled to make a monthly accounting of the payment of royalties within 30 days of each calendar month until AL completely phases out its use of the Bou-Matic product names, or at the latest through July 2005.

D. MOTION FOR RECONSIDERATION

Just prior to trial, Bou-Matic filed a Motion to Join AL's parent company, Hypred S.A., as a party. The Court denied the Motion because the only issue fully before the Court was the appropriate royalty that AL owed Bou-Matic on the 41 product trademarks used in North America. As Bou-Matic points out, the remaining issue before the Court involves the 26 trademarks used outside of North America. Bou-Matic maintains that Hypred is a necessary party because the remaining 26 trademarks are used by Hypred and not AL. Moreover, the submissions by both parties indicate that both Bou-Matic and AL believed Hypred to be a party to this litigation, despite the November 2003 Order. Because it appears that joinder of Hypred may be necessary, the Court finds that Bou-Matic has demonstrated "compelling circumstances" necessary for a Motion to Reconsider under Local Rule 7.1(g).

E. CONCLUSION

The Court finds that the appropriate royalty due to Bou-Matic for AL's use of the 41 Bou-Matic product-name trademarks in North America is 3%. Accordingly, IT IS HEREBY ORDERED that:

1. AL shall pay Bou-Matic royalties in the amount equal to 3% of all sales of the products bearing the 41 marks the Court previously declared owned by Bou-Matic, as set forth in this Order. The amount is $$187,851.36;
2. Bou-Matic's request for leave to file a Motion for Reconsideration is GRANTED. Any such Motion is due on or before August 11, 2004, and any Response is due on or before August 18, 2004.