Prima Tek II v. Klerk's Plastic Industries, B.V.

• Decision Date: 05 May 2008
• Docket Number: No. 05-2247.,05-2247.
• Citation: 525 F.3d 533
• Parties: PRIMA TEK II, L.L.C., Plaintiff-Appellant, v. KLERK'S PLASTIC INDUSTRIES, B.V. and Klerk's Plastic Products Manufacturing, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

525 F.3d 533

PRIMA TEK II, L.L.C., Plaintiff-Appellant, v. KLERK'S PLASTIC INDUSTRIES, B.V. and Klerk's Plastic Products Manufacturing, Inc., Defendants-Appellees.

No. 05-2247.

United States Court of Appeals, Seventh Circuit.

Argued January 8, 2008.

Decided May 5, 2008.

J. William Lucco (argued), Lucco, Brown, Threlkeld & Dawson, Edwardsville, IL, for Plaintiff-Appellant.

Michael G. Adams, Parker, Poe, Adams & Bernstein, Charlotte, NC, for Defendants-Appellees.

Before FLAUM, RIPPLE, and MANION, Circuit Judges.

FLAUM, Circuit Judge.

This case involves a licensing dispute between two companies that operate in the pot cover business. Prima Tek II ("PTII"), in essence, gave Klerk's Plastic ("Klerks") permission to use its technology to create superior pot covers in exchange for a royalty fee on each sale. The agreement between the parties delineated the type of product that Klerks was to sell, and it limited Klerks's ability to sell to particular entities in specified regions. PTII claims that Klerks breached this agreement, and, in addition to damages, seeks to have Klerks held in contempt. The district court held that there were no material breaches of the licensing agreements, and that PTII failed to prove damages. We affirm.

Background

In January of 1986, Klerks entered into a non-exclusive license agreement with Highland Supply Corporation ("Highland"). This agreement authorized Klerks to manufacture and sell certain flower pot covers¹ subject to patents and patent applications in the United States and Holland. The two parties entered into a similar licensing agreement in 1987 authorizing Klerks to sell flower pot covers in Canada. Soon thereafter, Highland assigned its rights under the agreements to PTII. Both companies met on July 20, 2000, to discuss Klerks rights and obligations under the licenses as certain patents were about to expire. Four days later, PTII filed suit seeking damages resulting from an alleged breach of the license agreements. The agreements generally control what types of pot covers Klerks can sell, to whom it can sell the covers, and where the covers can be sold.

On September 23, 2000, the parties arrived at an agreement where they amended the license agreements and settled the litigation. After PTII filed a motion to enforce this settlement agreement, the trial court issued an order on April 5, 2001 (the "April 5 Order"), incorporating the settlement agreement and licenses and dismissing the lawsuit while maintaining limited jurisdiction to enforce its order. PTII thereafter alleged that Klerks had breached provisions of the licenses, and on October 22, 2001, the trial court granted PTII's request for post-judgment discovery. At that point, PTII terminated the licenses and Klerks stopped manufacturing and selling pot covers.²

The language of the licenses, which is in part what is at issue in this case, provides that:

PTII hereby grants to KLERKS HOLLAND the nonexclusive license to manufacture and sell only in Holland and only in the United States UPGRADE PLANT COVERS only to CUSTOMERS under the trademark rights referred to in Article II and using or incorporating the technology referred to in paragraph 1.5 which are absolutely essential for KLERKS HOLLAND to make and sell UPGRADE PLANT COVERS.

The term "customers" is defined as:

(a) horticultural growers of potted plants for use on such potted plants and (b) retail food supermarkets. The term "retail food supermarkets" means a retail business whose entire business primarily is the retail sale of food products, that is, considering the total sales of the consolidated business, at least eighty percent (80%) of such sales are for food products. The term "CUSTOMERS" specifically (but not by way of limitation) excludes EXCLUDED CUSTOMERS (defined below).

"Excluded customer" means:

any customer who is not a horticultural grower of potted plants or a retail food supermarket. EXCLUDED CUSTOMERS specifically includes (but not by way of limitation) businesses such as variety chains, mass merchandisers, discount chains, drug chains, buying clubs, craft and hobby stores, garden centers, and home improvement centers such as (but not by way of limitation) Lowe's, Home Depot, Wal-Mart . . . whether or not marketed at retail store sites, central buying offices or via catalogs or via electronic means by a website or via any other marketing channel. KLERKS will not, to its best knowledge, sell plant covers to a CUSTOMER who resells those plant covers to an EXCLUDED CUSTOMER. KLERKS shall not (directly or indirectly) sell UPGRADE PLANT COVERS to anyone who is not a CUSTOMER and specifically cannot sell to any EXCLUDED CUSTOMERS.

In total, between April 5, 2001 (when the order was issued) and June 21, 2002, Klerks sold more than 30 million plant covers for a total of $4,805,627.16 in 1,736 different transactions. As a part of these transactions, Klerks paid PTII a total of $418,635 in royalties.

After completing its post-judgment discovery, on August 13, 2004, PTII filed a renewed motion urging the court to hold Klerks in contempt. PTII claimed that Klerks "knowingly manufactured, offered for sale [and] sold . . . (i) unlicensed plant covers, (ii) plant covers outside the licensed geographic territories, (iii) [to un]authorized customers, and (iv) [incorrectly marked] plant covers. . . ." In addition to asking the court to hold Klerks in contempt, PTII also sought proceeds from any and all sales made in violation of the April 5 Order, settlement agreement, and licenses. The district court made a judgment on partial findings pursuant to Federal Rule of Civil Procedure 52(c) ruling in favor of Klerks. It held that PTII failed to meet its burden of producing clear and convincing evidence that Klerks should be held in civil contempt for violations of the April 5 Order. The district court also found that while Klerks did breach certain provisions of the license agreements, these breaches were not material, and PTII did not prove any damages that resulted from these breaches.

Discussion

PTII raises three issues on appeal. First, it asserts that Klerks in fact did engage in material breaches of the license agreements attached to the April 5 Order. Second, with respect to these breaches, PTII maintains that it has shown damages with sufficient clarity. Third, it contends that Klerks should have been held in contempt for alleged violations of the April 5 Order. We analyze each issue in turn.

A

PTII must prove by a preponderance of the evidence that Klerks breached the contract. Austin v. Illinois, 54 Ill. Ct. Cl. 375 (2002). We review "de novo a district court's determination of the meaning of an ambiguous contract term . . . as well as the court's factual findings following a bench trial." Central States, Southeast and Southwest Areas Pension Fund v. Kroger Co., 226 F.3d 903, 910(7th Cir.2000). PTII contends that the district court used the wrong standard in assessing whether a material breach occurred here. It argues that the court used a clear error standard instead of the required preponderance of the evidence standard. However, the trial transcript makes it clear that the district court understood that the contempt standard is clear error and the breach standard is preponderance of the evidence.³ Moreover, apart from the district court's statement on what standard it used in its order, the record reflects—as the district court concluded— that PTII was not entitled to damages because it produced virtually no evidence of any material breaches or damages. This clears both standards.

To be sure, Klerks did breach portions of the agreement, but these breaches were not material. Specifically, its sales to Impack Corporation ($2,067), Dunstan AS Groome ($338.40), Kinney Bonded Warehouse ($303.74), Sea Venture Overseas ($60.21), and St. John's Shipping ($466.54) were made outside of authorized territories. Also, Klerks manufactured some nonconforming pot covers by improperly reversing the film in its machines. Such production, however, was promptly stopped. Overall, while some sales violated the terms of the license, more than 99 percent did not. There were no material breaches, and a party can only be held liable for damages resulting from a material breach.⁴ Pacini v. Regopoulos, 281 Ill. App.3d 274, 279, 216 Ill.Dec. 433, 665 N.E.2d 493 (1996) (finding no breach of an occupancy guarantee because 94.9953% occupancy rate was tantamount to a 95% occupancy rate); Rubloff CB Machesney v. World Novelties, 363 Ill.App.3d 558, 564, 300 Ill.Dec. 464, 844 N.E.2d 462 (2006) (listing several factors relating to a finding of materiality: 1) the extent to which the non-breaching party was deprived of the benefit that it reasonably expected; 2) the extent to which the non-breaching party can be adequately compensated for the part of that benefit of which it will be deprived; 3) the extent to which the breaching party will suffer forfeiture; 4) the likelihood that the breaching party will cure its failure; 5) the extent to which the breaching party's behavior comports with standards of good faith and fair dealing).

PTII tries to argue that Klerks breached the agreement in additional ways that the district court either overlooked or failed to appreciate. In each case, PTII either mischaracterizes the facts or uses faulty logic. First, it attempts to label several of Klerks's sales as sales to garden centers, which are excluded customers according to the agreement. However, PTII's own witness admitted that he had no evidence that the entities that they considered to be garden centers were anything other than horticultural growers of plants,⁵ which are not excluded customers.

Second, PTII maintains that Klerks breached the license agreements by manufacturing and selling $2,762,459.66 of pot covers with "skirt angles" outside the specifications of the agreements. The license requires that "plant covers [have] the appearances and [be] made exactly like...