Chattanooga Corp. v. Klingler

• Decision Date: 03 December 1981
• Docket Number: No. Civ-1-81-145.,Civ-1-81-145.
• Citation: 528 F. Supp. 372
• Parties: CHATTANOOGA CORPORATION v. Dale H. KLINGLER, Harlan B. Jensen, Thomas H. Church, Richard Wilkins, Lewis C. Duncan, M. D. and James W. Sauder.
• Court: U.S. District Court — Eastern District of Tennessee

528 F. Supp. 372

CHATTANOOGA CORPORATION v. Dale H. KLINGLER, Harlan B. Jensen, Thomas H. Church, Richard Wilkins, Lewis C. Duncan, M. D. and James W. Sauder.

No. Civ-1-81-145.

United States District Court, E. Tennessee, S. D.

December 3, 1981.

COPYRIGHT MATERIAL OMITTED

John B. Phillips, Jr. and Hoyt O. Samples, Stophel, Caldwell & Heggie, Chattanooga, Tenn., for plaintiff.

Hugh J. Moore, Jr., Witt, Gaither & Whitaker, Chattanooga, Tenn., V. Frank Asaro, Asaro & Associates, San Diego, Cal., for defendants.

OPINION

FRANK W. WILSON, Chief Judge.

This lawsuit arises out of the purchase by a Tennessee corporation of the corporate assets of a California corporation. Included within the assets purchased were four patents. A portion of the purchase price consisted of the payment by the purchaser of patent royalties to the sellers. The plaintiff contends that it no longer markets a product that comes within the patent claims and seeks a declaration relieving it of the payment of further patent royalties.

The case is presently before the Court upon a motion to dismiss filed on behalf of each defendant, or in the alternative, a motion to change the venue of the lawsuit. The defendants having initiated arbitration proceedings in California that are related to the matters here sought to be litigated, the case is also before the Court upon the plaintiff's motion for a preliminary injunction staying the California arbitration proceedings.

Before considering the plaintiff's motion for an injunction, it will be necessary for the Court to decide the jurisdiction and venue questions. It may also be appropriate for the Court to consider whether this declaratory judgment action should be dismissed as a matter of judicial discretion. A review of the facts is necessary.

Vari-Temp Manufacturing Corporation, until its dissolution in 1977, was a California corporation with its principal place of business and only office in San Diego County, California. This office served as corporate headquarters, sales office, and manufacturing facility. Vari-Temp had some distributors who operated outside San Diego County, but none in Tennessee. These distributors handled other products besides those of Vari-Temp and Vari-Temp conducted none of its normal ongoing business in Tennessee and was not qualified to do business in Tennessee. Defendant Klingler resides in San Diego County, California, and was president of Vari-Temp. Defendant Sauder resides in Reno, Nevada, and was also active in the affairs of Vari-Temp. The other four defendants in this case were the sole remaining shareholders of Vari-Temp but they were only passive investors. Duncan resides in San Diego County, California. Jensen and Church reside in Burley, Idaho, and Wilkins in Alto Loma, California. Klingler owned a controlling interest in Vari-Temp while the other defendants owned varying amounts up to a 15% interest.

In July, 1977, the president of Chattanooga Corporation contacted Vari-Temp about the possible sale of Vari-Temp's assets, including its patent rights. Negotiations were conducted in St. Louis, Salt Lake City, Chattanooga, and finally concluded in San Diego. Only Klingler went to Chattanooga at plaintiff's request to conduct negotiations on behalf of all the defendants. Miscellaneous phone calls and correspondence between the parties also took place and had Chattanooga as its origin or destination.

To accomplish the sale of assets, Vari-Temp was dissolved on August 22, 1977, and its assets distributed to the six shareholders. On August 31, 1977, in San Diego, California, the six former shareholders sold the former assets of Vari-Temp to Chattanooga Corporation as specified in a Memorandum of Sale which was to be governed by the laws of California. A Bill of Sale and Assignment transferred title to the assets and patents from the defendants to Chattanooga Corporation. Defendants Klingler and Sauder were briefly employed by Chattanooga Corporation to assure a smooth transition but such employment ended in 1977. Sauder's employment contract was executed and performed completely in California, but Klingler made two trips to Chattanooga in the course of his employment. Chattanooga Corporation has made payments of $205,000 as "minimum royalties" as required by the Memorandum of Sale, ¶ 7, but seeks to be relieved of any further payments on the ground that it is not manufacturing products which utilize the patented inventions. The patents relate to inventions used in cold therapy apparatus which is useful in the field of physical therapy. Service was had on the defendants under the Tennessee Long Arm Statute through the Secretary of State as allowed by F.R.C.P. 4.

The first question to be faced is one of jurisdiction. Subject matter jurisdiction is not disputed. If the case arises under patent law, as plaintiff contends, then this Court has jurisdiction under the federal question provision, 28 U.S.C. § 1331. If the case instead arises under contract law, as defendants contend, then the Court has diversity jurisdiction under 28 U.S.C. § 1332.

The question of in personam jurisdiction is more difficult. In a diversity case, the jurisdictional reach of a United States District Court is determined by the law of the state where the court is located, Pickens v. Hess, 573 F.2d 380 (6th Cir. 1978). In a federal question case, the District Court's power to exercise in personam jurisdiction is limited to that provided by the Federal Rules of Civil Procedure, and because it was necessary to utilize state long-arm provisions to obtain service of process, in personam jurisdiction is also limited by the Tennessee Long Arm Statute. See Wells Fargo & Co. v. Wells Fargo Exp. Co., 556 F.2d 406 (9th Cir. 1977); Navarro v. Sedco, Inc., 449 F.Supp. 1355 (S.D.Tex. 1978). As a result, whether the case is properly a diversity case or a patent case, the Tennessee Long Arm Statute, TCA § 20-2-214, will be applicable. That broadly phrased statute is limited only by Fourteenth Amendment due process considerations, Nicholstone Book Bindery, Inc. v. Chelsea House Publishers, 621 S.W.2d 560 (Tenn.1981).

The Supreme Court has recently reaffirmed its holding in International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), that a state cannot exercise personal jurisdiction over a nonresident defendant unless "minimum contacts" exist between the defendant and the forum state. World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980). International Shoe was a landmark in jurisdictional thinking as it expanded jurisdiction far beyond the strictly territorial notions espoused by Pennoyer v. Neff, 95 U.S. 714, 24 L.Ed. 565 (1877). In Pennoyer, States were held to be unable to extend their process beyond their territorial limits, in the usual case. Any extra-territorial reach by a state's courts was viewed as an encroachment on the rights of the other states and was to be "resisted as usurpation."

In light of the harsh limitations of Pennoyer, the International Shoe decision was a welcome addition to the states' jurisdictional powers. The new test for jurisdiction stated that:

"... due process requires only that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend `traditional notions of fair play and substantial justice.'" 326 U.S. at 316, 66 S.Ct. at 158.

The nature of the minimum contacts required to satisfy due process considerations was explained in McGee v. International Life Insurance Co., 355 U.S. 220, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957) and Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958). In McGee, California was allowed to assert jurisdiction over a Texas insurance company whose only contacts with the state consisted of mailing an insurance contract to a California resident and receiving his mailed premium payment. The Court was influenced by the following factors: (1) the suit was based on a contract which had substantial connection with California; (2) California had a manifest interest in providing effective means of redress to its residents when insurers refused to pay claims; (3) the inability of small or moderate individual claimants to afford the cost of an action in a foreign forum; and (4) the crucial witnesses' location in California.

In Hanson the Court indicated that not all restrictions upon the exercise of personal jurisdiction were to be abandoned. The case involved Delaware's refusal to accord full faith and credit to a Florida probate decision purporting to decide the distribution of the corpus of a Delaware trust. The Court held that Florida could not exercise jurisdiction over the Delaware trust company based on contacts which were only minor matters of trust administration conducted by mail. Chief Justice Warren, in his majority opinion, noted that the restrictions on personal jurisdiction were a consequence of territorial limitations on the power of the respective states, at p. 251, 78 S.Ct. at p. 1238. In this regard he found that Florida did not have a substantial connection with the contract on which the suit was based, at p. 253, 78 S.Ct. at p. 1239. A critical portion of the opinion read:

"The unilateral activity of those who claim some relationship with a nonresident defendant cannot satisfy the requirement of contact with the forum State. The application of that rule will vary with the quality and nature of the defendant's activity, but it is essential in each case that there be some act by which the defendant purposefully avails itself of the privilege of conducting business within the forum State, thus invoking the benefits and protections of its laws." Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 1239, 2 L.Ed.2d 1283 (1958).

In Kulko v. California Supreme Court, 436 U.S. 84, 98 S.Ct. 1690, 56 L.Ed.2d 132 (1978),...