Avko Educ. Research Found. Inc. v. Wave 3 Learning Inc.

• Decision Date: 15 October 2015
• Docket Number: Case No. 15-cv-3393
• Parties: AVKO EDUCATIONAL RESEARCH FOUNDATION INC., Plaintiff, v. WAVE 3 LEARNING INC. and THOMAS MORROW d/b/a SEQUENTIAL SPELLING, Defendants.
• Court: U.S. District Court — Northern District of Illinois

AVKO EDUCATIONAL RESEARCH FOUNDATION INC., Plaintiff, v. WAVE 3 LEARNING INC. and THOMAS MORROW d/b/a SEQUENTIAL SPELLING, Defendants.

Case No. 15-cv-3393

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

October 15, 2015

Judge John W. Darrah

MEMORANDUM OPINION AND ORDER

On March 24, 2015, Plaintiff AVKO Educational Research Foundation Inc. filed a First Amended Complaint ("FAC") against Defendants Wave 3 Learning Inc. ("Wave 3") and Thomas Morrow d/b/a Sequential Spelling ("Morrow"). The First Amended Complaint alleges violations of the Lanham Act, copyright infringement, and several claims under Illinois law. Defendants filed Motions to Dismiss [20, 21] pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim for which relief can be granted. For the reasons discussed below, Defendants' Motions to Dismiss [20, 21] are granted in part and denied in part.

BACKGROUND

AVKO is a Michigan domestic nonprofit corporation with its principal place of business in Birch Run, Michigan. (FAC ¶ 1.) AVKO is also a 501(c)3 no-profit organization. (Id. ¶ 11.) AVKO's president is Donald J. McCabe. (Id ¶ 1.) Wave 3 is a Nevada corporation with its principal place of business in Arlington Heights, Illinois. (Id. ¶ 2.) Thomas Morrow is the CEO of Wave 3. (Id.) Morrow resides in Arlington Heights, Illinois, and does business as Sequential Spelling. (Id. ¶ 3.)

McCabe is the author of To Teach a Dyslexic, Sequential Spelling™, The Patterns of English Spelling, Word Families in Sentence Context, and many other instructional and reference materials. (Id. ¶ 7.) In 1975, McCabe transferred all existing copyrights and trademarks to AVKO. (Id. ¶ 9.) Since that time, McCabe has created over forty works, and AVKO owns the copyright to those works. (Id.) McCabe's son has also created seven works as an AVKO employee, and AVKO owns the copyright to those works. (Id.) AVKO has used the Sequential Spelling™ trademark continuously since 1975. (Id. ¶ 10.) AVKO has developed significant goodwill in its Sequential Spelling™ trademarks and related marks. (Id.)

In 2009, McCabe met Morrow, who was, at that time, the CEO of Home School Holdings, Inc. ("HSH"). (Id. ¶ 15.) AVKO and HSH entered into discussion for AVKO to license publishing rights to HSH. (Id. ¶ 16.) Eventually, AVKO and HSH entered into a contract (the "2009 contract"). (Id. ¶ 17.) The terms of the contract included the following relevant terms:

a. HSH agreed to pay AVKO a total of $600,000, with an initial payment of $50,000 in cash and stock in HSH worth $250,000 and a second payment paid to AVKO once HSH made $300,000 in gross revenue, paid in $50,000 in cash and $250,000 in HSH stock;

b. AVKO would be paid an additional $10,000 in cash and an additional $10,000 in HSH stock for each additional $300,000 in revenue made by HSH;

c. HSH must make every publication and instructional aid of [AVKO's copyrighted materials] available for purchase, both in print and electronically;

d. HSH would provide AVKO with desk copies of any updated materials;

e. AVKO has the right to audit the books and records of HSH at any time after closing; and,

f. The agreement "immediately terminates and the right to publish [AVKO's copyrighted materials] reverts to AVKO if HSH does not make the payments listed in this agreement or if HSH violates any provision of this agreement."

(Id.)

On November 7, 2009, Morrow filed for personal bankruptcy and declared that HSH's stock was worthless. (Id. ¶ 19.) Morrow did not tell AVKO that he had gone into bankruptcy orthat HSH's stock was worthless. (Id. ¶ 20.) On December 18, 2009, Morrow informed AVKO that 5,000,000 shares of stock would be entered into a shareholder registry for AVKO; but these shares were never entered into the registry. (Id. ¶ 21.) At the time of the represented entry of the shares, they were valued at $0.001 per share, which represented $5,000 of the initial $250,000 worth of stock required by the contract. (Id.)

Morrow never signed the 2009 contract but did file it with the SEC . (Id. ¶ 23.) In HSH's Form 8K, filed on January 5, 2010, Morrow claimed that HSH paid AVKO $300,000 ($50,000 in cash and $250,000 in shares at $0.05 per share) to acquire publishing rights from AVKO and that the works generated $311,000 in revenue for the fiscal year ending on June 30, 2009. (Id.) Six months later, HSH and AVKO met to discuss a new contract, which would have had the same terms as the 2009 contract. (Id. ¶ 24.) Two weeks before signing the new contract, Morrow sent AVKO an email, offering a one-eighth ownership in a new company in lieu of the stock requirement for HSH. (Id. ¶ 25.) On June 3, 2010, Morrow sent a subscription agreement that would require AVKO to purchase HSH shares at $0.05 per share, despite the share's actual value of less than $0.01. (Id. ¶ 26.) AVKO did not sign the subscription agreement. (Id.)

On June 4, 2010, AVKO and HSH executed a licensing agreement (the "2010 contract"). (Id. ¶ 27.) The 2010 contract contained the same relevant terms, as listed above, as the 2009 contract. (Id.) HSH paid AVKO $50,000 but did not provide AVKO the required $250,000 in HSH stock for the initial payment. (Id. ¶ 28.) HSH did not provide the remaining $300,000 or any ongoing royalties as provided by the 2010 contract. (Id.) Morrow then proposed a new contract to AVKO with the same terms as the 2010 contract but substituting Wave 3 for HSH. (Id. ¶ 30.) This proposed agreement replaced the $250,000 in HSH stock with a 7.5 percentownership stake in Wave 3. (Id.) AVKO declined this offer. (Id.) On June 17, 2010, Morrow resigned as CEO of HSH. (Id. ¶ 31.) HSH paid Morrow $1,000 for his 149,429,743 shares in the company, resulting in a value of $0.000007 per share. (Id.)

On June 18, 2010, Morrow incorporated Wave 3 Learning Inc. and informed McCabe that AVKO was a founding shareholder of Wave 3. (Id. ¶ 32.) AVKO is not and has never been a founding shareholder of Wave 3. (Id. ¶ 33.) Morrow proposed two more contracts, seeking to acquire AVKO's copyrights and trademarks, both of which were rejected by AVKO. (Id. ¶ 34.) On or about July 4, 2010, Morrow attempted to have AVKO sign a trademark and copyright assignment, which AVKO declined to do. (Id. ¶ 25.) In December 2010, Wave 3 allegedly discovered that someone was cybersquatting on the website www.sequentialspelling.com. Wave 3 again demanded that AVKO sign over its copyrights and trademarks and AVKO declined again. (Id. ¶ 36.) On March 4, 2011, Morrow emailed McCabe, notifying him of Morrow's intent to file suit against AVKO. (Id. ¶ 37.) Morrow made several more attempts to get AVKO to sign a contract and sent a threatening e-mail to McCabe's grandson. (Id. ¶ 38.)

Wave 3 began claiming in its marketing that it held an exclusive license to AVKO's copyrighted and trademarked materials. (Id. ¶ 39.) On June 6, 2011, AVKO warned Wave 3 that they would sue for copyright infringement unless Wave 3 ceased claiming AVKO's copyrights. (Id. ¶ 40.) Wave 3 responded that it had purchased AVKO's copyrighted materials for $50,000 through a June 22, 2010 contract. However, there was no contract executed between Wave 3 and AVKO; and Wave 3 did not exist when the 2010 contract was executed or when AVKO received a $50,000 payment on June 3, 2010. (Id. ¶ 41.)

AVKO filed suit in Michigan's Saginaw County Courthouse against Morrow, Wave 3 Learning, HSH, and Home School, Inc. which was subsequently removed to the Eastern Districtof Michigan. (Id. ¶ 43.) The federal court found that there was an implied license between AVKO and Wave 3 and that, thus, there was no copyright infringement. (Id. ¶ 46.) The court also found that Morrow was not personally liable for breach of contract because he signed the 2010 contract on behalf of HSH. (Id.) Wave 3 continued to use AVKO's copyrighted materials without paying any licensing fees. (Id. ¶ 47.) AVKO formally terminated the license between the parties on or about June 11, 2013. (Id. ¶ 49.) Defendants continued using, distributing, and reproducing AVKO's copyrighted materials without paying any licensing fees and without authority from AVKO. (Id. ¶ 50.)

On March 19, 2014, Wave 3 filed a declaratory judgment in the Northern District of Illinois, seeking a declaration that it owns the copyrights to AVKO's copyrighted materials. (Id. ¶ 51.) The complaint was dismissed without prejudice because there was no assignment transferring ownership of the copyrighted material from AVKO to Wave 3. (Id. ¶ 52.) Wave 3 filed an amended complaint, including an assignment allegedly transferring ownership of the copyrighted material from Morrow to Wave 3, dated August 14, 2014. On February 25, 2015, the court dismissed Wave 3's second complaint because Wave 3 had not shown it owned the copyrights to the copyrighted material and thus lacked standing to file the complaint. (Id. ¶ 55.)

Two weeks after the court dismissed the second complaint, Wave 3 informed AVKO that it would file a new lawsuit unless AVKO agreed to assign its copyrights and trademarks to Wave 3 at no cost. (Id. ¶ 56.) AVKO declined. (Id.) One of AVKO's distributors, Inquisicorp, Inc., informed AVKO that it would not enter into a publishing agreement with AVKO due to Defendants' threats and litigation. (Id. ¶ 57.) AVKO has lost and continues to lose business because potential business partners will not do business with AVKO due to Defendants' actions. (Id. ¶ 58.)

Defendants use the Sequential Spelling™ trademarks and advertise that they own and/or have an exclusive license to AVKO's copyrighted material at trade shows and other home-school and educational material outlets. (Id. ¶ 60.) Wave 3's website expressly claims that they have an exclusive license to AVKO's copyrighted material and uses Sequential Spelling™ trademarks in direct competition with AVKO. (Id. ¶ 59.) Defendants sell materials with Sequential Spelling™ trademarks on them on multiple websites. (Id. at ¶ 63.) Wave 3's customers have contacted...