Metzger v. Idle Smart, Inc.
| Decision Date | 15 May 2023 |
| Docket Number | 2:22-cv-02043-EFM |
| Parties | WILLIAM METZGER and IBB, LLC, Plaintiffs, v. IDLE SMART, INC., Defendant. |
| Court | U.S. District Court — District of Kansas |
Before the Court is Defendant Idle Smart, Inc. (“Idle Smart”)'s Motion to Dismiss Count III of Plaintiffs William Metzger's and IBB, LLC's Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Count III of Plaintiffs' Complaint asserts a breach of contract and breach of good faith and fair dealing. For the reasons set forth below, the Court grants in part and denies in part Defendant's Motion.
Plaintiffs' claim for breach of duty of good faith and fair dealing arises out of the License and Assignment Agreement (the “Agreement”), which the parties entered into on July 25, 2012. In 2005, Metzger developed a system, the Idle Smart Unit, to control the cabin temperature of trucks, thus saving fuel, battery power, and extending the life of the truck's engine. On April 11, 2006, the U.S. Patent and Trademark Office issued a patent (the “Patent”) to Metzger for the Idle Smart Unit's technology. The expiration date for his Patent is January 3, 2025.
On July 25, 2012, Metzger entered into the Agreement with Idle Smart to license the use of Metzger's Patent. The Agreement assigned the Patent to Idle Smart, who in turn agreed to compensate both Metzger and IBB through royalty payment for the sale of any Idle Smart products that incorporated the Idle Smart Unit's technology.
On January 31, 2022, the Plaintiffs filed their Complaint, amending it twice since then. As it stands before the Court, the Second Amended Complaint alleges four counts: Count I is a breach of contract claim based on express breach as to Metzger; Count II is a breach of contract claim as to third party beneficiary and co-plaintiff IBB; Count III is a breach of contract claim based on breach of implied duty of good faith and fair dealing; and Count IV is for declaratory judgment.
In support of Court Three, Plaintiffs allege that the good faith and fair dealing spirit of the Agreement has been violated in six ways:
First, Plaintiffs allege the Agreement vested Idle Smart with sole discretion in marketing, promoting, and selling products incorporating the Idle Smart Unit technology, so that Idle Smart was obligated to do so in conformance with normal business practice. On that topic, the Agreement reads:
2.4 Idle Smart Rights. The parties acknowledge and agree that all business decisions including, without limitation, decisions relating to Idle Smart's research, development, regulatory strategy, registration, manufacture, sale, commercialization, design, price, distribution, marketing and promotion of the Product in the Territory, shall be within the sole discretion of Idle Smart. Nothing in this Agreement shall be construed as restricting Idle Smart's business or imposing on Idle Smart the duty to market and/or sell and exploit of, or in preference to, any other product, or in any way other than in accordance with Idle Smart's normal commercial practices.[2]
As to the second basis for Count III, Plaintiffs allege that Defendant knew the Patent protections would expire in 2025, limiting the time Metzger could reasonably expect to receive the benefits from the Agreement with Defendant. Defendant sought repeated extensions from Metzger, representing that Defendant intended to maximize profitability of the sales. Plaintiffs allege Defendant's actions resulted in a decrease of the Patent's useful life. Defendant allegedly sold products below market value and attempted to decrease the royalties owed to Plaintiffs through sales operations. These actions were allegedly contradictory to Defendant's representations to Metzger that Defendant was working to reach the $3,000,000 contractual threshold. According to Plaintiffs, Defendant attempted to allocate the sales price for the products at a rate that would have resulted in the sale of the Idle Smart units for a total of $5.00 each which is 0.2% of the retail price which Defendant had previously sold the same product.
As to the third and fourth issues, in contending that Defendant did not protect the Patent against others and did not develop products using the Patent and Metzger's technology, Plaintiffs allege Idle Smart's president Jeff Lynch notified Metzger that he had developed an improvement to the Patent in August 2016. On the topic of infringement, the Agreement provides that “Idle Smart shall have the sole right but not the obligation, to enforce at its expense, the Patent.” In October 2015, Lynch submitted a separate patent registration application for battery voltage monitoring. Plaintiffs allege that Lynch's improvement to the Idle Smart Unit included battery voltage monitoring technology based on Metzger's “No Operator” mode and improvements to the Idle Smart Unit. Metzger's “No Operator” mode allows the driver to leave the cab of the truck when the outside temperature is below 40 degrees Fahrenheit while the Idle Smart Unit continues to monitor engine coolant, oil, fuel temperatures, and battery voltage. This technology is an elective add on Metzger made to the Idle Smart Unit that uses the same components and technology in the original unit.
Plaintiff alleges Lynch acknowledged the ways in which his patent relied on Metzger's “No Operator” mode. He also told Metzger that Idle Smart would not seek the patent if it impacted Metzger's willingness to amend the contract to reduce the royalty payments. Metzger permitted Lynch to continue with Lynch's patent process if Defendant would honor the Original Agreement's $3,000,000 threshold. On October 11, 2016, Lynch filed his patent application for an Engine Start Stop System Based on Program Battery Voltage Levels. Lynch failed to reference or cite to Metzger's Patent as supporting content in his application. Lynch's patent application was granted on April 3, 2018.
Fifth, Plaintiffs allege that Defendant did not adequately provide sufficient royalty statements. Plaintiffs allege in the Complaint that Defendant never sent the 2020 4th quarter royalty statement. Plaintiffs argue that Defendant's duty to adequately calculate the royalties due to Plaintiffs under the Agreement implies the regular distribution of royalty statements, as does Metzger's right to verify the royalty statements. The Agreement does not have explicit language detailing ongoing royalty statements. However, the only reference to a royalty statement in the Agreement is within the discussion of the audit rights:
5.6 Records; Audit Rights. Idle Smart shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to Metzger hereunder. Such books of account shall be kept at Idle Smart's principal place of business. Such books and the supporting data shall be retained for three (3) years following the end of the calendar year to which they pertain, and, upon reasonable advance written notice to Idle Smart, open to the inspection of Metzger or its agents for the sole purpose of verifying Idle Smart's royalty statement[3] or compliance in other respects with this Agreement and not prior to the sale of the first 24 units of the Products. Metzger can request auditing of such books and supporting data no more than once each calendar year. Any such audit shall be conducted at Metzger's sole expense and during the normal business hours of Idle Smart by an independent certified public accountant selected by Metzger that is reasonable acceptable to Idle Smart.
On January 8, 2021, after Metzger had elected to exercise his right under the Agreement to an audit, Lynch informed Metzger that Idle Smart had conducted its own internal audit and determined it had overpaid royalties by more than $180,000. Metzger requested all the documentation Defendant relied upon to determine the overpayment. Plaintiffs allege that Defendant never provided 2020 4th quarter royalty statement which would have allowed Plaintiffs to verify the 4th Quarter 2020 royalty payment. Furthermore, when Metzger received a wire transfer for the 1st Quarter 2021 royalty payment, no royalty statement accompanied it. Then, when Metzger requested the 1st quarter 2021 royalty statement, Lynch responded that the statement would not be provided. Metzger continued to receive wire transfers for royalty payments for the 2nd, 3rd, and 4th quarters of 2021 without accompanying royalty...
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