Mach. Project, Inc. v. Pan Am. World Airways, Inc.

• Decision Date: 28 July 2016
• Docket Number: Civil Action No. 14-10022-NMG
• Citation: 199 F.Supp.3d 382
• Parties: MACHINE PROJECT, INC. and Kinser Chiu, Plaintiffs, v. PAN AMERICAN WORLD AIRWAYS, INC. and Anthony Lucas, Defendants.
• Court: U.S. District Court — District of Massachusetts

199 F.Supp.3d 382

MACHINE PROJECT, INC. and Kinser Chiu, Plaintiffs,

v.PAN AMERICAN WORLD AIRWAYS, INC. and Anthony Lucas, Defendants.

Civil Action No. 14-10022-NMG

United States District Court, D. Massachusetts.

Signed July 28, 2016

Ronald M. Davids, Young B. Han, Davids & Cohen, PC, Wellesley, MA, for Plaintiffs.

Luke Connelly, Winston & Strawn LLP, New York, NY, Joshua A. Lewin, Bowditch and Dewey, Boston, MA, for Defendants.

MEMORANDUM & ORDER

GORTON, Judge.

Machine Project, Inc. ("MPI") and Kinser Chiu ("Chiu") (jointly "plaintiffs") bring claims against Pan American World Airways, Inc. ("Pan Am") and Anthony Lucas ("Lucas") (jointly "defendants") for breach of contract and fraud. Pending before the Court is defendant Pan Am's motion to dismiss for lack of subject matter jurisdiction. For the reasons that follow, the motion will be denied.

I. Background

A. Factual Background

Plaintiff MPI is a New York corporation with its principal place of business in New York. Co-plaintiff Chiu was President and 50% owner of MPI. Defendant Pan Am is a Delaware corporation with its principal place of business in New Hampshire. Co-defendant Lucas was Secretary and 50% owner of MPI. Both Chiu and Lucas are residents of New Jersey.

1. The Parties' Agreement

In September, 2005, Pan Am and Machine Ltd. (the predecessor in interest to MPI) entered into a Merchandising License Agreement ("the 2005 MLA") which, inter alia, granted Machine Ltd. the right to authorize others to use Pan Am's trademarks in certain territories. Lucas, who at that time was President of Machine Ltd., signed the 2005 MLA on behalf of Machine Ltd.

Plaintiffs allege that shortly after the signing of the 2005 MLA, Lucas approached Chiu to seek his assistance in reviving and developing the Pan Am brand, and that in April, 2006, Lucas and Chiu formed a joint venture whereby Chiu agreed to "help" in the development of the Pan Am brand in exchange for a 50% ownership stake in Machine Ltd. Lucas and Chiu later formed MPI as the new corporate entity through which they intended to carry out their joint venture.

In April, 2007, Pan Am and MPI entered into a new Merchandising License Agreement ("the 2007 MLA") which is at issue in the instant action. The 2007 MLA, which Chiu and Lucas executed on behalf of MPI, provided MPI with, inter alia, the

exclusive, sublicensible right...to use [Pan Am's trademarks] in the Territory on Merchandising Products and in connection with the sale, distribution, advertising and promotion of Merchandising Products in the Territory.

The 2007 MLA also established annual gross revenue requirements for MPI to reach, and provided that, in the event MPI failed to meet such requirements, Pan Am would have the option to collect from MPI the royalty that would have been due from MPI if the requirements for such "Royalty Year" had been satisfied, or to terminate the agreement upon 30 days prior written notice to MPI.

The 2007 MLA further provided that it could be terminated by either party upon 30 days written notice in the event that a breach of a material provision were not cured during that 30-day notice period. Finally, the 2007 MLA contained a forum selection clause which provided that:

All disputes under this Agreement shall be resolved by the courts located in the State of Massachusetts in Boston, Massachusetts, including the United States District Court for the District of Massachusetts and each of the parties consents to the jurisdiction of such courts, agrees to accept service of process by mail and hereby waives any jurisdiction or venue defenses otherwise available to it.

Plaintiffs allege that following the execution of the 2007 MLA:

1) Chiu invested significant time and capital into developing the Pan Am brand but that it became known to him that a third party had registered Pan Am trademarks and was selling Pan Am branded products in Japan (a region which plaintiffs purport fell within the "Territory" specified in the 2007 MLA);

2) such third party activity prevented MPI from entering the Japanese market;

3) the "trademark problem" was known to Lucas and Pan Am but they did not inform Chiu about the problem and Chiu continued to finance the MPI venture; and

4) without being able to enter the Japanese market, MPI's sales dropped and defendants began discussing the possibility of ousting Chiu.

By the fall of 2007, Pan Am was ostensibly dissatisfied with the progress of the branding program and allegedly took actions in concert with Lucas to "oust Chiu and deprive him of the fruits of the 2007 MLA." Specifically, plaintiffs allege that Lucas made misrepresentations that Chiu would be willing to sell his interest in MPI and, in early 2008, retroactively filled out and backdated corporate forms to indicate that Lucas was MPI's sole shareholder.

In March, 2008, Pan Am sent a Notice of Termination of the 2007 MLA to Lucas and took the position that it was entitled to do so because, inter alia, the minimum gross revenue requirements set forth in the 2007 MLA had not been met. Plaintiffs allege that Chiu's requests to Pan Am to provide him a copy of the Notice of Termination were denied, and that Pan Am claimed it did not need to provide such notice because Chiu did not have a proprietary interest in MPI. By August, 2008, Pan Am had allegedly hired Lucas as its "Head of Marketing" and his wife as a "merchandising and design manager" to accomplish precisely what MPI was contracted to do under the 2007 MLA.

2. The 2008 State Court Action

In May, 2008, Chiu and MPI commenced an action in the Supreme Court of the State of New York for New York County against Lucas and Pan Am for breach of the 2007 MLA, wrongful termination of the 2007 MLA and injunctive relief. Pan Am and Lucas removed the case to the United States District Court for the Southern District of New York but it was later remanded to state court for lack of diversity jurisdiction in that Chiu and Lucas were both residents of New Jersey. Pan Am subsequently moved to dismiss the complaint on the grounds that the action had to be litigated in the courts of Boston, Massachusetts in accordance with the forum selection clause of the 2007 MLA.

3. The 2008 Federal Action

In June, 2008, Pan Am brought an action against Chiu and Chiu's company Vetements, Inc. ("Vetements") in the United States District Court for the Southern District of New York ("the 2008 action"), alleging that Chiu and Vetements infringed Pan Am's trademarks by continuing to sell Pan Am-branded products after Pan Am announced its termination of the 2007 MLA. In November, 2009, Chiu and Vetements filed a motion to dismiss that action for failure to name MPI and Lucas as parties. In so moving, Chiu and Vetements argued that in order for Pan Am to prevail on its claim that Pan Am's trademark rights were infringed, it must first establish that the 2007 MLA was rightfully terminated, and that such a determination could not be made without MPI and Lucas in the lawsuit. In September, 2010, the court found that Lucas and MPI were necessary parties and ordered that they be joined to the 2008 action.

In November, 2010, Chiu, Vetements, and MPI asserted counterclaims alleging that Pan Am and Lucas were part of an unlawful scheme to defraud Chiu with respect to the geographic scope of the 2007 MLA. In April, 2012, the court permanently enjoined Vetements from manufacturing or selling goods bearing any trademarks owned by Pan Am and dismissed all counterclaims against Pan Am on improper forum grounds (citing the 2007 MLA's forum selection clause) and for lack of standing.

B. Procedural History

Plaintiffs brought this action in January, 2014. Their complaint contains five counts: Count I alleges Pan Am breached its contract with MPI by failing to provide 1) an opportunity to cure as provided in the 2007 MLA, 2) a full "Royalty Year" to meet the minimum revenue requirement and 3) a statement of reasons for why it was terminating the contract. Count II alleges Pan Am breached the covenant of good faith and fair dealing with plaintiffs by engaging in the conduct described in Count I, failing to deliver on a promise that Japan would be covered within the geographic area of the license and taking the position that Chiu had no ownership stake in MPI. Count III alleges fraud against Pan Am and Lucas for their intentional or reckless misrepresentations to Chiu and MPI that Pan Am possessed exclusive rights to market and sell its branded products in Japan and for acting to exclude Chiu from the venture. Counts IV and V allege breach of fiduciary duty and tortious interference with contractual relations, respectively, against Lucas.

In March, 2014, this Court entered default judgment against Lucas for failing to appear pursuant to Fed. R. Civ. P. 55(a).

In April, 2016, Pan Am moved to dismiss all claims for lack of federal subject matter jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1), on the grounds that 1) the shared New Jersey citizenship of plaintiff Chiu and defendant Lucas destroys the complete diversity requirement under 28 U.S.C. § 1332(a)(1) and 2) the doctrine of judicial estoppel bars plaintiffs from attempting to cure that jurisdictional defect by voluntarily dismissing defendant Lucas. MPI filed a notice of voluntary dismissal of defendant Lucas that same day.

II. Analysis

A. Subject Matter Jurisdiction

1. The Legal Standard

Federal district courts have limited subject matter jurisdiction and must be authorized by Congress to hear a case. See Gonzalex – Cancel v. Progresista, 696 F.3d 115, 119 (1st Cir.2012). Plaintiffs submit that this Court has jurisdiction over the instant action pursuant to 28 U.S.C. § 1332 which provides federal district courts with jurisdiction over civil suits between diverse parties where the amount in controversy exceeds $75,000 (i.e. "diversity jurisdiction").

To maintain an action in federal court based upon diversity jurisdiction, there must be complete diversity, meaning that no plaintiff can be a citizen of the same state as any of...