Island Intellectual Prop. LLC v. Reich & Tang Deposit Solutions, LLC

• Decision Date: 14 June 2017
• Docket Number: 651702/2015.
• Citation: 57 Misc.3d 195,60 N.Y.S.3d 744
• Parties: ISLAND INTELLECTUAL PROPERTY LLC and Double Rock Corporation, Plaintiffs, v. REICH & TANG DEPOSIT SOLUTIONS, LLC, Reich & Tang Asset Management, LLC, and Michael Lydon, Defendants.
• Court: New York Supreme Court

57 Misc.3d 195

60 N.Y.S.3d 744

ISLAND INTELLECTUAL PROPERTY LLC and Double Rock Corporation, Plaintiffs,

v.REICH & TANG DEPOSIT SOLUTIONS, LLC, Reich & Tang Asset Management, LLC, and Michael Lydon, Defendants.

651702/2015.

Supreme Court, New York County, New York.

June 14, 2017.

Kelley Drye & Warren LLP, for plaintiffs.

Forchelli, Curto, Deegan, Schwartz, Mineo & Terrana, LLP and Paul Hastings LLP, for defendants.

SHIRLEY WERNER KORNREICH, J.

Motion sequence numbers 001, 002, and 003 are consolidated for disposition.

Defendants Reich & Tang Deposit Solutions, LLC (RTDS), Reich & Tang Asset Management, LLC (RTAM) (collectively, Reich & Tang) and Michael Lydon move, pursuant to CPLR 3211, and as limited by the parties' briefs and stipulations, to dismiss the fraud claim pleaded in the complaint. Seq. 001.¹ Plaintiffs Island Intellectual Property LLC (Island) and Double Rock Corporation (Double Rock) oppose the motion to dismiss and cross-move, pursuant to CPLR 3211(c), for partial summary judgment on their breach of contract and indemnification claims. Defendants also move, pursuant to CPLR 2201, to stay this action pending final adjudication of related, subsequently filed actions in Delaware federal district court. Seq. 002. Plaintiffs oppose a stay. Finally, plaintiffs move, pursuant to CPLR 2701(1), (1) to compel defendants to deposit royalty payments into court; and (2) for an accounting. Seq. 003. Defendants oppose this motion. For the reasons that follow, plaintiffs' cross-motion for partial summary judgment and motion to compel an accounting are granted, and the remainder of the parties' motions are denied.

Factual Background & Procedural History

The facts relevant to this decision are drawn from the complaint (see Dkt. 8) and the documentary evidence submitted by the parties.

This case concerns the sale of plaintiffs' business to defendants. A small percentage of the purchase price was paid, with the balance to be paid over time as an "earn-out" in the form of royalty payments under a patent license. It is undisputed that defendants refuse to pay plaintiffs the full amount of the earn-out. Their proffered excuse is the supposed invalidity of the business' patents. However, defendants do not dispute that, under the governing contracts discussed herein, payments may not be withheld unless and until all patents are declared invalid. That has not occurred.² Nonetheless, relying on their belief that all of the patents will eventually be declared invalid under Alice Corp. Pty. Ltd. v. CLS Bank Int'l, ––– U.S. ––––, 134 S.Ct. 2347, 189 L.Ed.2d 296 (2014), defendants argue that their federal right under the Lear doctrine to withhold royalty payments for invalid patents preempts the contracts' provision to the contrary. See Lear v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969).³ Defendants contend that they need not pay royalties until their patent invalidity claims are adjudicated in federal court in Delaware and, therefore, seek a stay of this action until the Delaware proceedings conclude. The court disagrees with defendants' position. Accordingly, dismissal and a stay are denied and partial summary judgment is granted to plaintiffs. However, plaintiffs' request for what is effectively judgment enforcement relief is denied.

The complaint alleges:

Reich & Tang is an investment management firm that provides deposit, liquidity, and cash management services to banks, broker-dealers, investment advisors, institutional investors, and public entities. Prior to the transaction at issue, Reich & Tang's cash management business principally involved money market funds, which are short-term mutual funds that invest in government securities, certificates of deposit, asset-backed commercial paper, and other liquid securities. Between 2007 and 2009, Reich & Tang's cash management business became very challenging due to (i) very low money market rates, which were brought on by Federal Reserve policies instituted in response to the deepening financial crisis, and (ii) restrictive new parameters proposed by regulators for money

market funds. In order for Reich & Tang to remain viable, it needed to refocus its cash management business on FDIC-insured cash management products, which tend to be more profitable and less influenced by money market rates. In 2009, Reich & Tang expressed an interest in purchasing Double Rock's FDIC insured cash management business (operated through multiple Double Rock subsidiaries including LIDs Capital LLC), which was very valuable with approximately $12 billion in assets at the time. As Double Rock initially was not then interested in selling its cash management business, Reich & Tang elected to become a private label client, meaning Double Rock would manage Reich & Tang's investment assets under the Reich & Tang brand. Pursuant to this private label client relationship with Double Rock, [RTDS] entered into an Insured Deposit Agreement with Double Rock's subsidiary, LIDs Capital LLC, on October 8, 2009. The same day, as part of the same transaction, [RTDS] entered into a License Agreement with [Island], pursuant to which [Island] granted [RTDS] a non-exclusive license to use [Island] FDIC-insured related patents. (Complaint ¶¶ 11–16 [emphasis added; paragraph breaks and numbering omitted].)⁴

After a year of operating as a licensee, "Reich & Tang offered to acquire from Double Rock its entire FDIC-insured cash management business, including its $12 billion of assets under management." Complaint ¶ 19. The parties agreed that $15 million would be paid and the balance of the purchase price would follow in the form of earn-out payments made pursuant to "an ancillary license agreement with [Island], Double Rock's intellectual property affiliate." Complaint ¶ 20. The license payments constituted the bulk of the consideration for the sale of Double Rock's FDIC-insured cash management business. Double Rock alleges that since:

the value of its business far exceeded the [$15 million] upfront payment, Double Rock never would have agreed to sell for an upfront cash payment equal to only a fraction of that business' true value,

had the purchaser, Reich & Tang, not also agreed to enter into an ancillary license agreement conveying payments equal to the balance of that business' value. In this case, Double Rock projected that the Amended License Agreement would yield approximately $92 million in royalty payments over the course of the license. Complaint ¶ 22.

The contracts governing the transaction are: (1) an Asset Purchase Agreement dated as of December 22, 2010, controlling Reich & Tang's acquisition of the Business (as defined in the APA) from Double Rock [see Dkt. 13 (the APA) ]; and (2) a license agreement between Island and RTDS, the operative version being the Amended and Restated License Agreement, dated January 3, 2011,⁵ controlling the payments RTDS must make to Island for use of the 52 Licensed Patents (the Licensed Patents) listed on Exhibit A thereto.⁶ See Dkt. 14 (the ALA) at 25. Both contracts are governed by New York law.

The APA defines Acquired Assets to mean:

the following assets of the Seller Parties [defined to include Double Rock] used, or held for use, in connection with the Business [defined to include Double Rock FDIC-insured businesses], and only the following assets: (i) all of the Seller Parties' rights, privileges and powers with respect to the Business for the Customer Deposits, (ii) all goodwill of the Business, (iii) Customer lists and other similar property rights used principally in connection with the conduct of the Business (including the right to represent to third parties that Buyer is the successor to the Business), to the extent used in the Business (it being agreed and understood that to the extent used in the Business and other businesses of Double Rock Corporation, only copies of the same will be included within the Acquired Assets), (iv) all Contract rights of the Seller Parties with respect to the Business under each Transferred Contract, including rights to receive fee

income, revenues and other payments and reimbursements payable in respect of the operation of the Business after the Closing Date (and only in respect of the operation of the Business after the Closing Date), (v) the Books and Records, (vi) any rights of the Seller Parties with respect to goods and services to be provided in connection with the Business on or after the Transitional Services Termination Date that have been prepaid by the Seller Parties (other than insurance policies, which shall not constitute Acquired Assets), whether or not such rights exist as of the Closing Date (the "Prepaid Expenses"), (vii) all trademarks, servicemarks, uniform resource locators, domain names and toll-free telephone numbers used in the operation of the Business to the extent set forth on Schedule 1.1(c), (viii) all business methods and know how related exclusively to the operation of the Business, (ix) all restrictive covenants in the Seller Parties' favor relating to the Business, (x) claims, causes of action, choses in action, rights of recovery, rights of set off and rights of recoupment to the extent relating to any right, property or asset included in clauses (i) through (ix) above relating to the Business on or after the Closing Date (but excluding Tax refunds or other rights with respect to Retained Liabilities), or against any party to a Transferred Contract to the extent relating to the subject matter of such Transferred Contract for actions relating to such Transferred Contract on or after the Closing Date and (xi) 100% of the outstanding limited liability company interests of Stable and Stable II; provided, however, that, for the avoidance of doubt, the Acquired Assets shall not include any of the Licensed Intellectual Property or any of the Excluded Assets. See Dkt. 13 at 11 (emphasis added).

In other words, the entire Business, and virtually all of its attendant rights and assets, were sold....