Induction Innovations, Inc. v. Pacholok
| Decision Date | 31 December 2015 |
| Docket Number | No. 13 CV 5102,13 CV 5102 |
| Parties | INDUCTION INNOVATIONS, INC., and SARGE HOLDINGS COMPANY, LLC, Plaintiffs, v. DAVID PACHOLOK, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
David Pacholok co-founded Induction Innovations, an Illinois corporation that manufactures and sells induction-heating products, with Thomas Gough. Pacholok and Gough are also the named inventors of two U.S. patents that concern induction-heating devices used for automotive repair. After several years at Induction, Pacholok agreed to resign his position as corporate officer and sell his stock in the company in exchange for a royalty on the sale of certain products. But Induction owed Pacholok a royalty only if relevant sales exceeded $1 million in a calendar year.
In 2013, Induction (and the assignee of Gough's ownership in the two patents, Sarge Holdings) sued Pacholok seeking, among other things, a declaratory judgment that no money is owed Pacholok under the royalty agreement. Induction filed a motion for summary judgment. For the reasons discussed below, Induction's motion is denied.
Summary judgment must be granted where there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). A genuine issue of material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Kvapil v. Chippewa Cnty, Wis., 752 F.3d 708, 712 (7th Cir. 2014) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)) (internal quotation marks omitted). In reviewing a summary-judgment motion, a court construes all facts, and draws all reasonable inferences from those facts, in favor of the non-moving party. United States v. P.H. Glatfelter Co., 768 F.3d 662, 668 (7th Cir. 2014) (quoting Laskin v. Siegel, 728 F.3d 731, 734 (7th Cir. 2013)).
Thomas Gough and David Pacholok are the named inventors of United States patents 6,563,096 and 6,670,590, which in general claim an induction-heating apparatus and a method for using induction heating in automotive repair. See [240] at 3 ¶ 9; [173-5].1 In 2000, Gough and Pacholok co-founded Induction Innovations,Inc., an Illinois corporation that makes and sells induction heaters for the automotive aftermarket. See [240] at 2 ¶ 1; id. at 3 ¶¶ 8, 10. Initially, Gough and Pacholok each owned fifty percent of the company's stock, with Gough acting as Induction's president and Pacholok serving as a corporate officer and director. See id. at 2 ¶ 3; id. at 3 ¶ 7. Pacholok later resigned his position with the company and relinquished his stock as part of a Stock Purchase Agreement. See id. at 2 ¶ 3; id. at 3 ¶ 11. Section 3 of the agreement provides:
[173-4] at 2-3. The agreement states that "the Corporation" means Induction Innovations, Inc., and defines "Patents" as "intellectual property consisting of United States Patents, numbers 6563096 and 6670590 and patent pending for issuance known as number US 11/260,351." Id. at 2.
In 2013, Induction filed a declaratory-judgment action against Pacholok, alleging that no royalties were owed under the agreement because in no calendar year since January 1, 2007 has Induction sold more than a million dollars of goods encompassed by Section 3(e). See Second Amended Complaint, [139] ¶¶ 56-57. Induction now moves for summary judgment on its no-royalties claim. [170].2
The parties agree that Illinois law applies to this dispute. Contract interpretation is a question of law. Hanover Ins. Co. v. Northern Building Co., 751 F.3d 788, 791 (7th Cir. 2014) (citation omitted). In Illinois, as elsewhere, the principal objective in construing a contract is "to give effect to the intent of the parties." Peoples Gas Light and Coke Co. v. Beazer East, Inc., 802 F.3d 876, 881 (7th Cir. 2015) (quoting Gallagher v. Lenart, 226 Ill.2d 208, 232 (2007)). The best indication of the parties' intent is the language of the contract itself. Id. (citing Gallagher, 226 Ill.2d at 233). If the language of the contract is reasonably susceptible to more than one meaning, it is ambiguous and the court may look to extrinsic evidence—i.e., evidence outside the four corners of the contract—todetermine the parties' intent. Gallagher, 226 Ill.2d at 233 (citing Farm Credit Bank of St. Louis v. Whitlock, 144 Ill.2d 440, 447 (1991); Quake Constr., Inc. v. Am. Airlines, Inc., 141 Ill.2d 281, 288 (1990)); see also Davis v. G.N. Mortg. Corp., 396 F.3d 869, 878 (7th Cir. 2005).
Section 3(e) of the agreement states that Induction agrees to pay Pacholok a "[r]oyalty on goods sold by the Corporation with the license to utilize one or more of the Patents." [173-4] at 3. Although the phrasing is somewhat clumsy, the meaning of this clause is clear. "Patents" is explicitly defined in the contract to mean the '096 and '590 patents (and a pending US patent application not at issue here). "[W]ith the license to utilize one or more of the Patents" is a modifier, and it is modifying one of two things: (1) "goods sold" (such that only "goods sold . . . with the license to utilize . . . the Patents" count toward the royalty base); or (2) "the Corporation" (such that only goods sold by "the Corporation with the license to utilize . . . the Patents," as opposed to some other corporation, are relevant). The second interpretation is not a plausible one. Like the word "Patents," "Corporation" is also explicitly defined in the agreement: here, it means Induction Innovations. See id. at 2. So there is no need to clarify which "corporation" is the operative one in Section 3(e), and "with the license to utilize . . . the Patents" must therefore refer to "goods sold." See Peoples Gas, 802 F.3d at 881-82 (internal quotation marksomitted); Nautilus Ins. Co. v. Bd. of Dirs. of Regal Lofts Condo. Ass'n, 764 F.3d 726, 735 (7th Cir. 2014) (similar) (also applying Illinois law).
The parties agree that "goods sold . . . with the license to utilize one or more of the Patents" concerns the sale of goods covered by the '096 or '590 patent—that is, goods embodying one or more of the patented inventions. See [171] at 8-9; [240] at 26. This is a sensible reading, and the most reasonable one in context. To "utilize" means "to make use of," to "turn to practical use or account." See Merriam-Webster Online Dictionary, http://www.merriam-webster.com/dictionary/utilize (last visited December 30, 2015). Thus, a "license to utilize" the patents is a license to practice the patented inventions. The "license" is not explicitly defined. The Stock Purchase Agreement mentions no other license to practice the patents at issue (for example, a license that exists separately from the agreement3 and limits the rights granted to certain modes of practicing the inventions), and this leads to two conclusions. First, the license described in Section 3(e) is broad—it encompasses the full spectrum of rights otherwise afforded only to the patentee. Second, the license is effected through that same section of the agreement—in other words, in exchange for royalty payments, Pacholok agrees under Section 3(e) not only to return his stock, but also to grant Induction an unlimited license to practice the '096 and '590patents. To the extent such practice results in a sale (by Induction, and covered by other provisions of the contract), that sale must be counted toward the royalty base.
The contract also provides that royalties on "goods sold by the Corporation" must be calculated "without regard to future products and accessories." [173-4] at 3. Induction argues that the "without regard to" clause is a carve-out that excludes from the royalty base all sales of "future products and accessories." See [171] at 8. Pacholok agrees that the phrase "without regard to" may signal an exclusion, but argues that the term may instead mean that "future products and accessories" should be included in the royalty base. See [240] at 23. Pacholok does not explain how he arrives at this alternative interpretation, but presumably he means that "without regard to" could in this case mean "no matter whether" or "whether or not"—such that the agreement provides for a royalty on the sale of patented goods whether or not they are "future products and accessories." This construction effectively reads "without regard to . . . " out of the contract, and it is not, consequently, a reasonable interpretation. See Land of Lincoln Goodwill Indus., Inc. v. PNC Fin. Servs. Grp., Inc., 762 F.3d 673, 679 (7th Cir. 2014) (). For this clause to have meaning, "without regard to" must be read as "not including." Thus, sales of...
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