Draim v. Virtual Geosatellite Holdings, Inc., 07-7065.

• Decision Date: 18 April 2008
• Docket Number: No. 07-7065.,07-7065.
• Citation: 522 F.3d 452
• Parties: John E. DRAIM, et al., Appellees, v. VIRTUAL GEOSATELLITE HOLDINGS, INC., Delaware Corporation and Mobile Communications Holdings, Inc., Delaware Corporation, Appellants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

522 F.3d 452

John E. DRAIM, et al., Appellees, v. VIRTUAL GEOSATELLITE HOLDINGS, INC., Delaware Corporation and Mobile Communications Holdings, Inc., Delaware Corporation, Appellants.

No. 07-7065.

United States Court of Appeals, District of Columbia Circuit.

Argued February 11, 2008.

Decided April 18, 2008.

Appeal from the United States District Court for the District of Columbia (No. 01cv02690).

Thomas E. Patton argued the cause and filed the briefs for appellants. Neal Goldfarb entered an appearance.

Mary C. Zinsner argued the cause and filed the brief for appellee.

Before: ROGERS, BROWN and GRIFFITH, Circuit Judges.

Opinion for the Court by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

John E. Draim sued Virtual Geosatellite Holdings, Inc. and Mobile Communications Holdings, Inc. (collectively "Virtual Geo") for breach of contract by failing to pay him bonuses upon issuance of certain patents. Virtual Geo interposed three defenses, including that Draim was not entitled to the bonuses because he had breached his employment contract. The magistrate judge rendered judgment for Draim on all but one of his bonus claims. However, although finding that a contract existed, requiring that Draim assign to Virtual Geo ownership rights in all the work performed as its employee in return for certain bonuses the judge never determined whether Draim's conduct breached the contract and thereby disqualified him from collecting under it. Accordingly we reverse.

I.

The underlying dispute arises from Draim's claimed entitlement to bonuses for patents that were issued based on applications filed while he was employed by Virtual Geo. In 1992, Draim began working as a consultant for Mobile Communications Holdings, Inc. ("Mobile"). He signed an employment contract with its president, David Castiel, under which Draim agreed to assign to Mobile all rights in his inventions conceived during the term of the contract and Mobile agreed to pay Draim a bonus of up to $2,000 upon the filing of a patent application, and a bonus of up to $10,000 upon the successful issuance of any patent. According to the contract, each bonus would be divided by the number of co-inventors listed on the patent application. Draim worked for Mobile as a consultant through June 1997.

In July 1997, Draim became a salaried employee of Mobile and its affiliate Virtual Geosatellite Holdings, Inc., but a written employment contract was never signed. Instead, during Draim's employment, the parties continued to operate with the understanding that Draim's inventions would be assigned to Virtual Geo and that he would be paid up to $2,000 for each patent application and up to $10,000 for each successful issuance of a patent. At some point during Draim's employment, the maximum bonus for filing a patent application increased to $2,500 and the maximum bonus for the issuance of a patent increased to $12,500.

On May 24, 2000, Draim terminated his employment and one day later began to work for VGS, Inc., a Delaware corporation created by Peter Sahagen, a minority shareholder of Virtual Geosatellite, LLC, in which Virtual Geosatellite Holdings, Inc. is a member; VGS later became known as Space Resources America Corporation ("Space Resources"). Around the time of Draim's resignation, several other Virtual Geo employees also left to work for VGS. During the summer of 2000, Castiel and Sahagen were engaged in litigation before the Delaware Chancery Court regarding Sahagen's attempt to merge Virtual Geosatellite, LLC into VGS. On August 31, 2000, the Delaware Chancery Court invalidated the merger and enjoined VGS from continuing to assert ownership or control over Virtual Geo's property.

At the time Draim terminated his employment with Virtual Geo, there were numerous outstanding patent applications in which he was a named inventor. These applications have since resulted in the issuance of eleven patents, all of them naming Virtual Geo as assignee. Draim is listed as either the sole inventor or as one of three or four inventors on these patents. Two of these patents are divisional patents, which occur when the U.S. Patent and Trademark Office ("Patent Office") breaks down a single application into different parts resulting in the issuance of multiple patents. See 35 U.S.C. § 121. Draim has not been paid a bonus for the issuance of any of these patents.

Also, in February 2000, three months before Draim resigned, Draim and Castiel filed a provisional patent application for an invention called the "168 slot" invention. A provisional patent application is essentially a placeholder filed with the Patent Office after which an applicant has one year to file the actual patent application. In this application, Castiel and Draim were listed as co-inventors. In November 2000, Space Resources filed an "interfering" patent application for the "168 slot" invention, naming Draim as the sole inventor. Subsequently in February 2001, Castiel filed an application for the same invention, but did not name Draim as an inventor. Ultimately the patent was issued to Virtual Geo as assignee and Draim was not listed as an inventor. Draim was never paid a bonus for the issuance of the "168 slot" patent.

In October 2001, Draim sued Virtual Geo in the district court for the Eastern District of Virginia; the case was transferred to the District of Columbia pursuant to 28 U.S.C. § 1631. Virtual Geo, in turn, sued Draim in the D.C. Superior Court; this case was removed to the federal court pursuant to 28 U.S.C. § 1441(a) and consolidated with Draim's complaint. In 2005, the parties agreed to limit their claims to whether Draim is entitled to bonus payments for patents in which he is a named inventor that issued after he resigned from Virtual Geo. Virtual Geo interposed three defenses: (1) Draim has already been paid more than he is entitled to receive; (2) Draim is not entitled to payments on divisional patents; and (3) Draim breached his employment agreement and "cannot seek the fruits of an agreement which he willfully breached." Joint Pretrial Statement at 4 (Mar. 17, 2006).

On May 15, 2006, a magistrate judge awarded Draim bonuses for the patents issued after his resignation.¹ The judge denied him a bonus for the "168 slot" patent because his employment contract did not address provisional patent applications. Rejecting Virtual Geo's defenses that Draim had already been paid more than he was entitled to receive under his employment contract and that Draim was not entitled to bonuses on divisional patents, the magistrate judge found that "even if Draim owed a fiduciary duty to [Virtual Geo], . . . enforcement of the contract cannot be denied on the ground that Draim breached any such fiduciary duty by participating in a conspiracy." Draim v. Virtual Geosatellite Holdings, Inc., 433 F.Supp.2d 99, 103 (D.D.C.2006).²

II.

If Draim engaged in conduct that constituted a material breach of his employment contract, then he is not entitled to payment of bonuses under the contract. "A total breach may be . . . by such a material failure of performance when due as to go to the essence and frustrate substantially the purpose for which the contract was agreed to by the injured party." Keefe Co. v. Americable Int'l, Inc., 755 A.2d 469, 475 (D.C.2000) (quoting San Carlos Irrigation & Drainage Dist. v. United States, 23 Cl.Ct. 276, 280 (1991)) (internal quotation marks omitted); see also 23 WILLISTON ON CONTRACTS § 63.3 (4th ed.)

Although the written employment contract expired before Draim's resignation from Virtual Geo, the magistrate judge found that the parties continued to operate under the understanding articulated in the contract and neither party disputes this finding on appeal.³ At trial, Paragraph 9 of the employment contract was the primary basis for the underlying dispute.⁴ During his opening argument, Draim's counsel stated that the trial involved "a single fairly straightforward claim by Mr. Draim against the corporate defendant for approximately $82,000 for patents that issued since May of 2000 and for which he has not been paid." Trial Tr. at 2 (Apr. 18, 2006). Draim proffered the employment contract as an exhibit. Virtual Geo, in turn, argued that Draim had breached his employment contract, asserting that "a party who breaches an agreement or contract or a duty is not entitled to the benefits of that same agreement." Id. at 7. According to Virtual Geo, Draim participated in a conspiracy to misappropriate its intellectual property, and "[t]herefore, he has violated the terms of his [employment contract]." Id.

Upon cross...