Composite Innovation Grp. v. Mich. State Univ.
| Decision Date | 23 September 2021 |
| Docket Number | 353480 |
| Parties | COMPOSITE INNOVATION GROUP, LLC, and ATOMIC COMPOSITES, LLC, Plaintiffs-Appellants, v. MICHIGAN STATE UNIVERSITY and RICHARD CHYLLA, Defendants-Appellees, |
| Court | Court of Appeal of Michigan — District of US |
UNPUBLISHED
Court of Claims LC No. 19-000101-MK
Before: Cavanagh, P.J., and K. F. Kelly and Redford, JJ.
In this appeal involving the Court of Claims act (COCA), MCL 600.6401 et seq., and the government tort liability act (GTLA), MCL 691.1401 et seq., plaintiffs Composite Innovation Group, LLC, (CIG) and Atomic Composites, LLC (Atomic) appeal as of right the order of the Court of Claims granting summary disposition in favor of defendant Richard Chylla, pursuant to MCR 2.116(C)(7). Plaintiffs also challenge the court's earlier order granting summary disposition in favor of defendant Michigan State University (MSU), pursuant to MCR 2.116(C)(7). On appeal, plaintiffs contend that the court erred by dismissing their claims against MSU on the grounds that plaintiffs failed to comply with the verification and notice requirements MCL 600.6431(1) and by dismissing their claims against Chylla on governmental immunity grounds.
Pursuant to our Supreme Court's decision in Progress Mich. v Attorney General, 506 Mich. 74, 98-99; 954 N.W.2d 475 (2020) (Progress II), holding that the failure to verify a complaint has no bearing on whether a plaintiff has satisfied the statutory notice period stated in MCL 600.6431(1), we reverse the Court of Claims' order granting summary disposition in favor of MSU and remand for further proceedings. However, because the court correctly ruled that governmental immunity applies to plaintiffs' claims against Chylla, we affirm the order granting summary disposition of plaintiffs' claims against him.
I. BACKGROUND
In June 2011, MSU entered into an agreement with the United States Army Research Laboratory (ARL) to research and develop composite materials for use in high performance air and ground vehicles employed in hazardous environments. This research led to the development of composite materials employing nanoparticles to divert energy caused by impact.
In July 2013, MSU and CIG entered into an exclusive licensing agreement (ELA), signed by Chylla on behalf of MSU, that stated that MSU "holds certain patent rights that it desires to have perfected and exploited for commercial purposes" and that CIG "wishes to obtain the exclusive right to exploit such patent rights commercially." The agreement defined "patent rights" as "(a) all of the University's rights in the patents and patent applications listed on Schedule 1 and (b) all of the University's rights in in all divisions, continuations, reissues, renewals re-examinations, foreign counterparts, substitutions, or extensions thereof." Schedule 1 of the agreement did not identify any patent application serial numbers or patent grant numbers, but merely listed an MSU reference number. The agreement detailed the licensing fees and royalty payments to be paid by CIG, required MSU to prepare, prosecute, and maintain the patent applications and patent rights, and required CIG to reimburse MSU for all patent costs.
In 2014, CIG formed Atomic and, in November of that year, Atomic and MSU entered into a services agreement under which Atomic paid MSU to perform tests on a composite material. In December 2016, MSU and CIG executed a First Amendment to Exclusive License Agreement (First Amendment), signed by Chylla, as Executive Director of MSU Technologies, and Edmund J. Swain, as founder of CIG and CEO of Atomic. This amendment replaced several deadlines of the original agreement and acknowledged Atomic as a sublicensee.
On April 5, 2018, MSU sent a notice of default to CIG, stating that CIG had failed to meet several obligations under the ELA and the First Amendment. According to MSU, CIG had failed to make a payment due in 2017 and had submitted a deficient business plan. On May 2, 2018, Chylla and CIG founder Edmund Swain met to discuss the default notice and agreed to extend the period of time for CIG to cure the default to June 29 2018. MSU terminated the ELA on that date.
On June 28, 2019, plaintiffs filed a complaint in the Court of Claims. The complaint, a lengthy and convoluted recitation of alleged facts supporting plaintiffs' claims, included allegations regarding the Bayh-Dole Act, 35 USC 200 et seq., [1] and defendants' alleged failure to comply with various provisions of the act. The plaintiffs alleged fraudulent misrepresentation against both defendants (Count I), fraud in the inducement against both defendants (Count II), breach of the ELA by MSU (Count III), breach of the services agreement (Count IV), "tortious interference" (Count V), and unjust enrichment (Count VI).
In lieu of answering the complaint, on August 13, 2019, defendants filed a motion for summary disposition pursuant to MCR 2.116(C)(7) (), and MCR 2.116(C)(8) (). Defendants asserted that the entire complaint must be dismissed because it was not verified as required by the COCA and the one-year notice period prescribed in MCL 600.6431(1) is strictly enforced, citing Fairley v Dep't of Corrections, 497 Mich. 290 871 N.W.2d 129 (2015), and Progress Mich. v Attorney General, 324 Mich.App. 659; 922 N.W.2d 654 (2018) (Progress I), rev'd 506 Mich. 74 (2020). Noting that defendants had not filed a written claim or notice of intent to file a claim before filing their complaint, defendants asserted that plaintiffs' claims accrued no later than June 29, 2018, the date that MSU terminated the ELA. Thus, they argued, because the unverified complaint was filed on June 28, 2019, one day before expiration of the one-year notice period of MCL 600.6431, the defect could not be cured and each of the claims against MSU must be dismissed. Defendants also asserted that plaintiffs alleged Chylla misrepresented facts while negotiating the ELA and during discussions leading to the termination of the ELA, but did not allege that he was acting outside the scope of his employment with MSU, and therefore, the claims against Chylla must also be dismissed pursuant to MCR 2.116(C)(7). Defendants also sought summary disposition on the fraudulent misrepresentation, fraud in the inducement, and tortious interference claims based on governmental immunity and sought dismissal of the breach of contract and tortious interference claims pursuant to MCR 2.116(C)(8). Defendants supported their motion with a declaration of Chylla that was not notarized, explaining his responsibilities as Executive Director of MSU Technologies and denying any communication with plaintiffs before May 2018.
On August 27, 2019, plaintiffs filed a verified amended complaint, adding specific factual allegations in avoidance of defendants' assertions of governmental immunity and failure to comply with the notice requirement of MCL 600.6431. Plaintiffs alleged that MSU and Chylla were not engaged in governmental functions or, to the extent that they were engaged in governmental functions, these were proprietary functions not protected by governmental immunity. In response to defendants' claims that they failed to comply with the notice requirement of MCL 600.6431(1), plaintiffs alleged that MSU, Chylla, and others fraudulently concealed the existence of plaintiffs' claims by terminating the ELA and by providing false or incomplete information to plaintiffs, even in response to direct inquiries from plaintiffs. Plaintiffs deleted the count alleging breach of the services agreement, but added counts alleging silent fraud, negligent misrepresentation, and innocent misrepresentation.
That same day, plaintiffs also filed a response to defendants' motion for summary disposition. Plaintiffs contended that the amended complaint was filed within the one-year period stated in MCL 600.6431(1), citing MCL 600.5855, which provides that when the existence of a claim is fraudulently concealed, an action may be commenced within two years of the time the plaintiff discovers, or should have discovered, the existence of the claim. Plaintiffs asserted that they did not discover the existence of their claims until they received Freedom of Information Act (FOIA), 5 USC 551 et seq., responses from the Department of the Army and the ARL between August 30, 2018 and April 25, 2019. Thus, plaintiffs contended, the August 27, 2019 verified amended complaint was filed within the one-year period of MCL 600.6431.
Citing MCL 691.1407(1), plaintiffs asserted that governmental actors are immune from tort liability only when engaged in the exercise or discharge of a governmental function and that in this case "there is no dispute that MSU technologies was functioning as a market player committed to generating revenue through a private agreement with a private party, rather than performing a governmental function." Plaintiffs also asserted that, pursuant to MCL 691.1413, governmental immunity does not apply in this case because defendants were engaged in a proprietary function. Moreover, plaintiffs argued, Chylla is not immune from tort liability as an officer of a governmental agency because he was not engaged in a governmental function and he acted in an intentionally fraudulent manner; thus, he failed to satisfy the three criteria set forth in MCL 691.1407(2). Finally, plaintiffs asserted that they had alleged sufficient facts to support their claim for tortious interference, noting that Michigan courts have held that unethical and fraudulent conduct may support such a claim.
Before the first motion was decided, defendants filed a second motion for summary disposition, once again asserting that each of plaintiffs' claims should be dismissed...
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