Breatie and Osborn Llp v. Patriot Scientific Corp.

Decision Date09 May 2006
Docket NumberNo. 05 Civ. 6425(PKL).,05 Civ. 6425(PKL).
Citation431 F.Supp.2d 367
PartiesBEATIE AND OSBORN LLP, Plaintiff, v. PATRIOT SCIENTIFIC CORPORATION, Jeffrey Wallin and Lowell Giffhorn, Defendants.
CourtU.S. District Court — Southern District of New York

Russel H. Beatie, Matthew P. Heiskell, Beatie and Osborn LLP, New York, New York, for Plaintiff.

Jared B. Stamell, Stamell & Schager, LLP, New York, New York, Charles T. Hodge, Post, Kirby, Noonan & Sweat LLP, San Diego, California, for Defendants.


LEISURE, District Judge.

Plaintiff Beatie and Osborn, LLP ("B & O"), a New York law firm, brings this suit to collect unpaid fees from its former client, Patriot Scientific Corporation ("Patriot"), a California technology company. B & O filed the complaint against Patriot and individual defendants Jeffrey Wallin and Lowell Giffhorn in the Supreme Court for the State of New York, County of New York. B & O sues Patriot for breach of a retainer agreement, breach of a subsequent fee agreement, and damages under theories of quantum meruit and unjust enrichment. B & O also sues Wallin and Giffhorn for tortious interference with the retainer agreement and the fee agreement. Defendants removed the action to this Court based on diversity jurisdiction and subsequently moved to dismiss on various grounds or, in the alternative, transfer the case to the Southern District of California. Meanwhile, plaintiff has moved to remand this action to state court on the ground that defendants failed to follow the proper removal procedure. For the reasons set forth below, plaintiffs motion is denied, and defendants' motions are granted in part and denied in part.


B & O is a limited liability partnership organized under the laws of New York, and maintains its principal place of business on the island of Manhattan. (Compl.¶ 3.) Patriot is incorporated under the laws of Delaware and maintains its principal place of business in San Diego, California. (Compl.¶ 6.) Patriot is engaged in the business of developing, licensing, and owning intellectual property, integrated circuits, and systems level engineering. (Compl.¶ 7.) Wallin is a California resident `who, during the relevant time, was the chief executive officer of Patriot. (Compl.¶ 8.) Giffhorn, also a California resident, was the chief financial officer and a member of the board of directors of Patriot during the relevant time. (Compl.¶ 9.)

One of Patriot's key assets is the patent rights to a microprocessor technology known as a "High Performance Microprocessor Having Variable Speed System Clock" (the "'336 Patent"). (Compl.¶ 7.) In 2002, recently having begun a program of licensing and infringement litigation to respond to the unauthorized use of Patriot's patented technology (Compl.¶ 14), Patriot, through various representatives, approached Russel H. Beatie, a member of B & O, about retaining the firm to help Patriot negotiate license agreements and prosecute infringement claims based on Patriot's portfolio of patents, including the '336 Patent (Compl.¶ 15). In the summer of 2002, a Patriot board member1 asked Beatie if B & O would act as lead counsel for Patriot in its licensing and infringement litigation program. (Compl.¶ 18.) Beatie agreed on the conditions (1) that he could associate John E. Lynch, Esq., a patent specialist and personal friend of Beatie's, as co-counsel; and (2) that he and Lynch could investigate the merits of the litigation program thoroughly. (Compl.¶ 19.) After a number of telephone conferences in which Wallin and Beatie discussed terms and conditions, Patriot sent B & O the final terms for a retainer agreement on October 1, 2002. B & O and Patriot entered into the retainer agreement (the "Retainer Agreement") on November 1, 2002. (Compl.¶ 34.) The Retainer Agreement provided that:

This agreement and related matters not covered by the specifics of this agreement shall be governed by the laws of the State of New York, disputes shall be resolved in the federal or state courts of the City and State of New York, and the parties to this agreement consent to jurisdiction and venue in the City and State of New York.

(Compl. Ex. A ¶ 7.) Around the time the Retainer Agreement was executed, Lynch and Beatie interviewed Patriot's former patent counsel for the company's invention and patent prosecution process, Willis E. Higgins, Esq., who at that time was practicing in retirement in Maine.2 (Compl.¶ 27.) On February 27, 2004, Patriot and B & O entered into an agreement (the "Fee Agreement") specifying the manner by which Patriot was to pay for fees and expenses related to the patent litigation undertaken by B & O. (Compl.¶ 43.)

As Patriot's lead counsel, B & O filed five actions for patent infringement against alleged infringing manufacturers. (Compl. ¶ 46; Beattie Aff. ¶ 19.) B & O also defended Patriot in a related declaratory judgment action in the Northern District of California. (Beattie Aff. ¶ 20.) In addition, in order to pursue the infringement actions, B & O filed a separate action in the Northern District of California (the "Inventorship Action") against Charles H. Moore, a co-inventor of Patriot's technology, and Moore's successors-in-interest for declaratory judgment on inventorship and ownership of the '336 Patent and its family of patents. (Compl.¶ 46.)

B & O claims that it was forced to file the Inventorship Action subsequent to the infringement actions because Patriot had misrepresented key facts regarding the '336 Patent during the negotiation of the Retainer Agreement. According to B & O, prior to executing the Retainer Agreement in November 2002, Beatie and Lynch had insisted that Wallin and Giffhorn arrange meetings with Moore and Russell H. Fish, III, the co-inventor of Patriot's technology, with the goal of enlisting their cooperation and assistance with Patriot's licensing and infringement program. (Compl.¶ 29.) B & O alleges that Wallin and Giffhorn declined to arrange any such meetings, instead assuring Beatie and Lynch (1) that Moore would cooperate and would support Patriot's program and (2) that Fish's cooperation was unnecessary because Patriot owned all the rights that Fish had ever had in the patents in question. (Compl.¶¶ 30-31.) Wallin and Giffhorn assured Beatie and Lynch that they had resolved all inventorship issues in favor of Patriot and that Patriot had clear title to the patents in its portfolio, including the '336 Patent. (Compl.¶ 33.) However, in December 2002, Wallin and Giffhorn revealed that inventorship and ownership of the '336 Patent had been recorded inaccurately in the Patent and Trademark Office, and that Moore, through an agent, claimed an undivided one-half interest in all the patents in Patriot's portfolio, including the '336 Patent. (Compl.¶ 36.) A review by B & O showed that inventorship of other patents in Patriot's portfolio was also unresolved. (Compl.¶ 39.)

The relationship between B & O and Patriot ultimately fell apart. During discovery in the Inventorship Action, Patriot moved to disqualify B & O on the ground that Beatie and Lynch had breached Moore's attorney-client privilege when Lynch interviewed Higgins. (Compl.¶ 62.) The Honorable Jeremy D. Fogel, U.S. District Judge for the Northern District of California, barred Higgins' testimony and disqualified B & O. (Compl.¶ 63.) B & O offered to prepare and file, free of charge, a mandamus petition appealing the district court's decision. (Compl.¶ 64.) Wallin and Giffhorn refused to authorize B & O to file the petition, giving no reason for their refusal. (Compl.¶ 65.) B & O alleges that Wallin and Giffhorn refused to seek review because they wanted to tell Patriot's board of directors that, with the disqualification of B & O in place, Patriot had no obligation to pay B & O. (Compl.¶ 67.)

On June 7, 2005, Patriot announced that it had settled the Inventorship Action. (Compl.¶ 70.) Under the terms of the settlement (the "Settlement"), Patriot granted the defendants in that action responsibility for the commercialization and licensing of the patent portfolio, from which program Patriot will receive payments in addition to sharing revenue. (Compl.¶¶ 71-72.) In addition, Patriot entered into a license agreement (the "License Agreement") with semiconductor company Advanced Micro Devices, Inc. on February 21, 2005. (Compl.¶ 57.) B & O now claims that, pursuant to the terms of the Retainer Agreement, it is entitled to a share of the payments Patriot receives under the Settlement and the Licensing Agreement. (Compl.¶¶ 74-83.)

I. Subject Matter Jurisdiction

Patriot argues that the Court lacks subject matter jurisdiction because B & O is bound by the California Mandatory Fee Arbitration Act ("MFAA"), which requires that an attorney provide notice to a client of its right to arbitrate fee disputes before an attorney may sue the client for fees in court.3 (See Mem. Law Supp. Def. Patriot's Mot. Dismiss 7-8.) B & O, however, argues that its claims under the Retainer Agreement are governed by New York law, not California law and the MFAA, and that therefore it had no obligation to provide notice. (See Mem. Law Opp'n Def. Patriot's Mot. Dismiss 5.)

A. Choice of Law

A federal court sitting in diversity applies the conflict-of-law rules of the forum state. Fed.R.Evid. 501; Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). In cases arising from contracts that include a choice-of-law clause, New York courts follow the test set forth in the Restatement (Second) of Conflicts of Laws.4 Accordingly, New York courts may refuse to enforce a choice-of-law clause only where (1) the parties' choice has no reasonable basis or (2) application of the chosen law would violate a fundamental public policy of another jurisdiction with...

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