In re Power Swing Partners
| Decision Date | 30 July 1980 |
| Docket Number | 80-00084-M.,Bankruptcy No. C80-0022-M |
| Citation | 9 BR 512 |
| Parties | In re POWER SWING PARTNERS, dba Power Swing, a California Limited Partnership, Debtor. Bryan J. GRUNEWALD, Plaintiff, v. POWER SWING PARTNERS, Defendant. POWER SWING PARTNERS, Defendant and Third Party Plaintiff, v. Bryan J. GRUNEWALD; Grunewald Enterprises; Sunland Marketing, Inc., a California Corporation; Nancy J. Freitas, Third Party Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of California |
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Everett G. Barry, Jr., of Freshman, Mulvaney, Marantz, Comsky, Forst, Kahan & Deutsch, San Diego, Cal., for debtor.
David R. Thompson of Thompson, Crawford & Kellers, San Diego, Cal., for Grunewald, Grunewald Enterprises and Freitas.
Ludlow S. Butler, Jr., San Diego, Cal., for Sunland Marketing.
On January 17, 1980, the debtor, Power Swing Partners, filed for protection under Chapter 11 of the United States Bankruptcy Code. On February 4, 1980, the plaintiff, Mr. Bryan J. Grunewald, filed a complaint naming the debtor as defendant and seeking an accounting, injunctive relief and an award of damages. The complaint asserted claims of breach of a license agreement, trademark infringement and unfair competition.1 On March 10, 1980, the debtor answered the complaint and filed a counterclaim against Mr. Grunewald and a third party complaint naming Grunewald Enterprises, Sunland Marketing, Inc., and Ms. Nancy J. Freitas as third party defendants. This counterclaim and third party complaint charged patent and trademark infringement, unfair competition, conspiracy and sought injunctive and declaratory relief. A trial was commenced before this Court on May 12, 1980, with final arguments being heard on June 20, 1980. This opinion is filed to announce this Court's decision on the issues presented.
When Mr. Grunewald was ten years old he was a Little League baseball player and canoeing enthusiast. While on a canoeing trip in his native Minnesota he conceived of the concept of swinging a canoe paddle in order to help maintain his baseball batting skills. He could see that the air resistance to the swinging paddle could build up the muscles used by a baseball batter. However, he noted that the paddle had serious drawbacks in that it provided too large a mass, and it tended to lose air resistance as it was rotated in the normal baseball swinging motion. He determined to improve upon this concept, but continued to privately use the canoe paddle from time to time even while playing baseball at Penn. State University.
After Mr. Grunewald left college he was inactive in the baseball field until he moved to San Diego in 1968. After several seasons play in semiprofessional baseball he decided, in 1971, to fulfill his boyhood dream of perfecting his air resistance exerciser. Working alone for three weeks in a garage behind a friend's house he constructed a prototype device, which he named the "Power Swing".2
Mr. Grunewald showed his creation to several friends in the early summer of 1971, and shortly thereafter he commenced the patent application process. On August 19, 1971, a firm called the Washington Patent Office Search Bureau caused his first patent application to be filed with the Patent and Trademark Office ("PTO"). This application was rejected, causing Mr. Grunewald to employ patent attorney Neil F. Martin to assist him in securing a patent. Mr. Martin caused a supplemental application to be filed on April 3, 1972, which resulted in patent No. 3,809,397 being issued on the Power Swing, by the PTO on May 7, 1974.
In the meantime Mr. Grunewald contracted with Leach Industries in February of 1972, for the production of 1,500 plastic units for use on baseball bats. Later, in 1973, he contacted advertising man Donald C. Wilson, who aided him in producing a nationwide advertising mailing. This effort failed due to the limited financial resources available to the inventor. He entered into several marketing arrangements over the next several years which were all unsuccessful. However, Grunewald was able to develop several adaptations of his device for use in golf and racquetball.
On April 27, 1977, Mr. Grunewald and Grunewald Enterprises3 granted an exclusive license to manufacture and sell Power Swing exercisers in the United States, Japan and Canada to Mr. Michael R. Krupp. This written licensing agreement provided for a complex royalty calculation formula with minimum annul royalties starting on August 1, 1977, as follows:
MINIMUM
ROYALTY
YEAR DUE
1st $12,500
2nd 20,000
3rd 37,500
4th 50,000
5th 62,500
6th and remaining 75,000
In addition, the agreement provided for the possibility that the patent might be declared invalid. If invalidity were found, then no minimum royalties would be due and the licensee would only be required to pay a $.25 royalty per unit sold for use of any trademark rights.
The agreement further provided that the licensee must be given sixty (60) days advance written notice of any intent to terminate because of any default by the licensee. The licensee was then granted sixty (60) days to cure any default and the licensee had the right to immediately demand that the matter be submitted to arbitration if he disagreed with the allegations of default.
Mr. Krupp assigned his rights under the licensing agreement to the debtor. This partnership raised over $400,000 in capital contributions and a bank loan and devoted it all towards developing and marketing the Power Swing line of exercise devices. In 1978, Mr. Stephen A. Stephenson became the debtor's general partner. He had been assisting Mr. Krupp since the exclusive license was granted.
The first four quarterly payments on the minimum royalties were made on a timely basis. Thereafter, the minimum royalty payments were not paid on time. This caused Mr. Grunewald to become concerned and on January 12, 1979, he wrote to the debtor indicating his displeasure. On February 15, 1979, Mr. Grunewald, for himself and Grunewald Enterprises, entered into an amendment of the exclusive licensing agreement with the debtor. This amendment recognized Mr. Krupp's assignment of his rights to the debtor. Additionally, Mr. Grunewald forgave $7,000 of the overdue minimum royalties required under the agreement.
Difficulties continued between the parties resulting in Mr. Grunewald sending a written termination notice to the debtor on March 15, 1979. Mr. Grunewald gave written notice of the withdrawal of the termination notice when the debtor paid him $1,000 in cash and provided him with a promissory note for another $3,000, all representing payments on accrued royalties.
Mr. Grunewald was continually concerned that the debtor was not pursuing an adequate promotional and marketing program. On many occasions he met with Mr. Stephenson or Mr. John Grandona, who became the debtor's General Manager in April of 1979. These meetings concerned themselves with discussions, occasionally acrimonious, on improving marketing efforts and the payment of back royalties. These continuing problems resulted in Mr. Grunewald becoming increasingly frustrated and irritated.
While Mr. Grunewald was still hopeful that the various problems could be resolved, he delivered another written termination notice on June 11, 1979, at which time $6,000 in royalty payments were overdue. In this letter he referred to the delinquent royalty payments and requested that the debtor prepare a plan outlining proposed changes placing the debtor on a firm financial basis. This termination notice was greeted with consternation by the debtor. It was followed up by several notes from Mr. Grunewald wherein he listed several actions he insisted be accomplished, including an adequate guarantee of his royalty payments.
Mr. Stephenson was hopeful that the debtor could again satisfy Mr. Grunewald's demands and appointed a "task force" to create a viable plan for submission to the Grunewald interests. On his part, while frustrated with the debtor, Mr. Grunewald was hopeful that the problems could be solved and funds raised to pay the royalties on a regular basis, as he did not want to start on yet another new distribution arrangement. The parties again had a number of discussions concerning their problems and various alternatives were suggested, including higher royalties being assessed on foreign sales. Stephenson and Grunewald conferred on the overdue royalty payments with the latter suggesting that the partners sell some of their personal assets to pay the back royalties. Stephenson remained hopeful that a further extension of time would be granted.
The negotiations culminated in a meeting on July 11, 1979, at the debtor's headquarters between Mr. Grunewald, along with his associate Mr. Wilson and the principal managers of the debtor, and several of the debtor's limited partners. They discussed methods to be employed to increase sales volume and to raise the funds for the royalties due. Mr. Grunewald indicated he expected to be paid $15,000 before the termination deadline and Mr. Stephenson assured him that he would be paid. Mr. Grunewald was noncommittal regarding the debtor's proposals and gave no indication that he would extend the termination deadline.
The limited partners made it clear that while they would invest more funds for a further marketing effort, they would not put up cash to cover back royalty obligations. Also, the debtor's business continued to deteriorate with the firm being besieged by unpaid suppliers and creditors. Mr. Grunewald kept up...
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