Delivermed Holdings, LLC v. Schaltenbrand

• Decision Date: 07 October 2013
• Docket Number: 12–3774.,Nos. 12–3773,s. 12–3773
• Citation: 734 F.3d 616
• Parties: DELIVERMED HOLDINGS, LLC, et al., Plaintiffs–Appellants, v. Michael SCHALTENBRAND, Joey Siddle, and Medicate Pharmacy, Inc., Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

734 F.3d 616

DELIVERMED HOLDINGS, LLC, et al., Plaintiffs–Appellants,

v.Michael SCHALTENBRAND, Joey Siddle, and Medicate Pharmacy, Inc., Defendants–Appellees.

Nos. 12–3773, 12–3774.

United States Court of Appeals, Seventh Circuit.

Argued May 28, 2013.

Decided Oct. 7, 2013.

Aud Courtney Cox, Attorney, Sandberg Phoenix & Von Gontard, Carbondale, IL, for Plaintiffs–Appellants.

Kevin J. Stine, Attorney, Laura Schrick, Attorney, Mathis Marifian & Richter, Ltd., Belleville, IL, for Defendants–Appellees.

Before EASTERBROOK, WILLIAMS, and HAMILTON, Circuit Judges.

WILLIAMS, Circuit Judge.

Mark Swift, Michael Schaltenbrand, and Joey Siddle entered into an informal partnership arrangement in which they agreed to operate a mailorder pharmacy and to divide any profits they earned among themselves according to agreed-upon percentages. Over the next four years, the partners used this lack of structure to conceal their efforts to enrich themselves at the expense of their business. When the partners had a fundamental disagreement over the direction of their venture, one partner, Swift, caused two lawsuits to be filed against his other partners, Schaltenbrand and Siddle. The cases were consolidated and over the next two-and-a-half years, lawyers for the partners racked up attorneys' fees attempting to sort out the precise parameters of the oral agreement among the partners. Ultimately, the district court listened to fourteen days of testimony before ruling against Swift on most of his claims.

Swift and his allies (whom he paid to file suit against his partners) now appeal the trial court's ruling. They contend that the district court erred in issuing a declaratory judgment invalidating a copyright registration that Swift's marketing company, DeliverMed Holdings, LLC, obtained for a logo used by the partnership. We must agree with Swift on this issue. We have no problem with the district court's finding that Swift misrepresented a material fact in DeliverMed's application to register a copyright in the logo. But the district court erred in invalidating DeliverMed's copyright registration without first consulting the Register of Copyrights as to the significance of the inaccurate information Swift knowingly provided. Because the Copyright Act requires courts to perform this curious procedure before invalidating a registration because of a fraud on the Copyright Office, we reverse this part of the court's judgment and remand for further proceedings.

We affirm the remainder of the district court's judgment. We are not persuaded by DeliverMed's challenge to the district court's award of attorneys' fees to Schaltenbrand and Siddle for their successful defense of DeliverMed's copyright infringement claim. Infringement defendants are presumptively entitled to such fees and Swift's deliberate efforts to deceive the Copyright Office serve only to solidify the case for the court's award. Furthermore, we will not overturn the district court's finding that Swift failed to prove Schaltenbrand and Siddle breached their obligation to provide him with a share of the partnership's profits. Although Swift maintains that he was entitled to more than the over $1 million he received in distributions from an unprofitable venture, he has not provided any reliablebasis to show a deficiency between what he received and what he was owed. Finally, Swift raises a number of fraud claims on appeal but he waived them by declining to include them in the final pretrial order in this case.

I. BACKGROUND

Mark Swift had an idea. Swift's marketing firm, DeliverMed Holdings LLC, specialized in helping pharmacies attract new customers for their mail-order pharmacy services. With the marketing skills he used to help DeliverMed's clients, Swift believed he could create his own successful mailorder pharmacy business. But Swift could not do this alone. He needed a partner, a pharmacy that would service the customers that he identified and solicited. This joint venture would then, Swift hoped, secure a lucrative contract with the State of Illinois to provide mail-order pharmacy services to Medicaid patients.

Swift eventually found a pharmacy willing to partner with him. In spring 2005, Swift got in touch with an acquaintance of his named Joey Siddle. Siddle told Swift that Siddle's boss, Michael Schaltenbrand, was interested in a business relationship. Schaltenbrand was the president and owner of Medicate Pharmacy, Inc., a retail pharmacy company with two Southern Illinois locations. In discussions with Schaltenbrand, Swift outlined his vision for Medicate and DeliverMed. Essentially, Swift suggested that Medicate would deliver mail-order services to customers that DeliverMed found using various marketing strategies.

In July 2005, Swift, Schaltenbrand, and Siddle entered into an oral general partnership agreement creating a joint venture along the lines Swift proposed. The partnership had a specific purpose: to develop a list of mail-order pharmacy customers, provide services to those customers, divide the profits from that business, and eventually sell the book of customers to another pharmacy. The partners agreed to use income from the business to reimburse DeliverMed and Medicate for any costs resulting from pursuing the partnership's business. Any remaining profits were to be split among the partners according to agreed-upon percentages.

The partnership enjoyed early success as its partners worked together for the good of their new venture. Just as Swift hoped, the partnership secured a contract with the State of Illinois to provide mail-order services to Medicaid patients. With Swift's consent, Medicate began using the DeliverMed name to identify the mail-order services that the pharmacy provided to Illinois Medicaid patients and other customers on behalf of the partnership.

Soon after the partnership started gaining steam, however, the partners began exploiting their informal arrangement for personal gain. Swift, Siddle, and Schaltenbrand repeatedly requested (and received) profit distributions that far exceeded the amounts to which they were entitled under the agreement. Despite the fact that the partnership was a money-losing enterprise, the partners continually found the funds for distributions. For example, evidence presented to the district court indicated that, from 2005 to 2009, the partnership operated at a net loss of over $400,000. During this same period, however, Swift, Schaltenbrand, and Siddle received nearly $4 million in combined distributions. Swift even persuaded Schaltenbrand to take out loans to facilitate these unjustified payments to the partners. For his part, Swift concealed his excessive demands (which he knew had no basis in the actual profitability of the partnership) by commingling them with DeliverMed's requests for cost reimbursements. Swift and Schaltenbrand each became aware of the other's excessive distributions, but neither of them cared. So long as each partner was able to obtain his own unjustified share of partnership funds, no one made a fuss.

In between raids of partnership coffers, the partners occasionally found time to tend to their mail-order pharmacy business. In 2008, Swift decided that the partnership needed a logo to market its services. Swift retained an advertising company, Deeter Associates, for help in designing the logo. After discussing the matter with Swift, Linda Deeter, the Executive Vice President of Deeter Associates, asked an independent graphic designer, Allan Kovin, to design the logo. Deeter entered into an oral agreement with Kovin to design the logo as an independent contractor. The agreement did not contemplate a transfer of copyright in the logo to Swift, DeliverMed, or the partnership. Although Swift and Linda Deeter provided some direction and ideas as to the logo design, Kovin was the sole creator of the DeliverMed logo, a graphic depiction of a house and a pestle. Beginning in summer 2008, Medicate began using the house and pestle logo to identify the mail-order services it provided on behalf of the partnership.

After an intra-partnership dispute over the direction of the business, relations among the partners reached a breaking point in summer 2009. A split formed within the partnership: DeliverMed and Swift had one plan for the joint venture while Medicate, Schaltenbrand, and Siddle had another. The two sides attempted to resolve their differences but were unsuccessful.

Anticipating the partnership's demise, Swift began taking steps to secure a resolution that was favorable to his interests. On September 1, 2009, Swift's attorney sent a letter to Schaltenbrand indicating that Swift was amenable to a purported request from Schaltenbrand to dissolve the partnership. When Schaltenbrand and Siddle declined to initiate dissolution proceedings in response to the letter, Swift set out to destroy the partnership's mail-order operation and force his partners to the bargaining table. For example, Swift diverted incoming customer calls away from the partnership's phone lines. At Swift's direction, callers were connected either to Swift's personal cell phone or to a rival mailorder pharmacy. Swift later jeopardized the partnership's financing by falsely informing its lender that he and DeliverMed had initiated involuntary bankruptcy proceedings against Medicate. In addition, Swift also arranged for the partnership's customers to be contacted and encouraged to fill their prescriptions with other pharmacies.

On February 2, 2010, Swift filed suit against Schaltenbrand, Siddle, and Medicate (collectively, “Defendants”), asserting a litany of federal and state-law claims (“Swift Action”). Among other claims, Swift alleged that his partners breached the partnership agreement by failing to provide Swift with the share of the partnership's profits to which he was entitled. A month later, DeliverMed, Deeter Associates, and Linda Deeter (collectively, “DeliverMed Plaintiffs”) filed suit against ...