Reuben H. Donnelley Corp. v. Mark I Marketing Corp., 94 Civ. 6756 (WCC).

• Decision Date: 28 July 1995
• Docket Number: No. 94 Civ. 6756 (WCC).,94 Civ. 6756 (WCC).
• Citation: 893 F. Supp. 285
• Parties: The REUBEN H. DONNELLEY CORPORATION, Plaintiff, v. MARK I MARKETING CORPORATION, Mark I Marketing Corporation of America, and Wallace Edwards, Defendants.
• Court: U.S. District Court — Southern District of New York

893 F. Supp. 285

The REUBEN H. DONNELLEY CORPORATION, Plaintiff, v. MARK I MARKETING CORPORATION, Mark I Marketing Corporation of America, and Wallace Edwards, Defendants.

No. 94 Civ. 6756 (WCC).

United States District Court, S.D. New York.

July 28, 1995.

COPYRIGHT MATERIAL OMITTED

Willkie Farr & Gallagher, New York City (David L. Foster, Stacey E. Paradise, of counsel), Fish & Neave, New York City (Thomas L. Secrest, of counsel), for plaintiff.

Jaroslawicz & Jaros, New York City (David Jaroslawicz, Robert J. Tolchin, of counsel), for defendants.

OPINION AND ORDER

WILLIAM C. CONNER, Senior District Judge:

Plaintiff Reuben H. Donnelley Corporation ("RHD") brings this action against defendants Mark I Marketing Corporation ("Mark I"), Mark I Marketing Corporation of America ("Mark I-A"), and Wallace Edwards for a declaration that it is not infringing United States patent no. 4,554,241, that the patent is invalid, that it is not in violation of a licensing agreement (the "Agreement") between it and Mark I-A, that it does not owe defendants any royalties under the Agreement, and for the return of certain royalties paid to defendants under the Agreement. In their answer, defendants counterclaim for an accounting under the Agreement, for fraud and breach of contract, and for an injunction against plaintiff's use of a process covered by the Agreement. Plaintiff has moved under Fed.R.Civ.P. 12(b)(6) to dismiss all but defendants' counterclaim for an accounting for failing to state claims on which relief can be granted. For the reasons stated below, we grant plaintiff's motion in part, but allow defendants thirty days from the date of this opinion and order to amend their counterclaims to overcome the pleading inadequacies discussed below.

BACKGROUND

A widely used method of color printing, known as the four-color process, utilizes four different colors of transparent ink (Cyan, Magenta, Yellow, and Black) superimposed on each other, to produce a full-color image. In the 1970s, Defendant Wallace Edwards developed a process utilizing two colors of opaque ink layered on colored paper to produce a full-color or near full-color image. Because the two-color process, entitled Markolor, requires less ink than the four-color process, it can be used on thinner paper and is ideal for use in printing telephone yellow page advertisements.

Defendant Edwards applied for and received a Canadian patent covering the Markolor process, No. 1,168,508 ("the '508 patent"), on June 5, 1984, and a related United States patent, No. 4,554,241 ("the '241 patent"), on November 19, 1985. Edwards then assigned all rights to the '241 patent to Mark I.

Prior to receiving the '241 patent, on October 25, 1984 Mark I-A, an affiliate of Mark I, entered into a licensing agreement (the "Agreement") with RHD, granting it a fifteen-year renewable exclusive license to promote and market the Markolor process embodied in the '508 patent and other then pending or future acquired patents. In exchange, RHD agreed to pay a flat licensing fee in addition to a portion of its revenue from sublicensing the use of the process. RHD also covenanted to "use its best efforts to reasonably promote sales of the Markolor Process so that the benefits to be derived by RHD and Mark I-A were maximized." That agreement was amended in 1987 and again in 1990; the later amendment narrowing RHD's exclusivity to the United States and Great Britain and adjusting the fees paid by RHD to Mark I-A.

Subsequently, RHD began using and marketing a printing process allegedly not covered under the terms of the Agreement (the "Four Color Process"). Mark I and Mark I-A, contending that the so-called Four Color Process was indistinguishable from the Markolor process covered by the Agreement, the '508 patent, and the '241 patent, repeatedly demanded that RHD pay royalties for its use and promotion of the process. In response, RHD filed this suit against Mark I, Mark I-A, and Edwards seeking a declaration that its use of the Four Color Process does not infringe the '241 patent, that the '241 patent is invalid, that it is not in breach of the Agreement, and that it does not owe Mark I-A royalties for using and promoting the Four Color Process. In addition, RHD seeks the return of certain royalties mistakenly paid under the Agreement.

The defendants have counterclaimed for an accounting pursuant to the Agreement, for breach of contract for RHD's failure to pay royalties for using the Markolor process, for breach of contract for RHD's failure to use its best efforts to promote sales of the Markolor process to others, for fraud based on RHD's concealment of its use of the Markolor process, and for an injunction against RHD's ongoing and future use of the Markolor process. In addition to seeking compensatory damages, defendants seek punitive damages for plaintiff's bad faith and fraud, and attorneys fees pursuant to 35 U.S.C. § 285 in light of the alleged frivolity of RHD's declaratory judgment suit.

Prior to answering defendants' counterclaims, plaintiff filed the instant motion to dismiss defendants' second through fifth counterclaims under Rule 12(b)(6), Fed. R.Civ.P., for failing to state claims on which relief can be granted. In response, contending that no case or controversy exists concerning the '241 patent, defendants cross-moved to dismiss plaintiff's patent infringement and validity declaratory judgment claims. Defendants having voluntarily withdrawn their cross-motion, we must now decide the legal viability of defendants' second through fifth counterclaims as pled. We address each of plaintiff's arguments in the order presented to the Court.

A. FRAUD

The parties have proceeded on the assumption that New York law controls defendants' common law claims, including their fraud cause of action. Because the parties to the Agreement, RHD and Mark I-A, have their principal places of business in New York, the alleged wrongful conduct apparently took place in New York, and the Agreement, out of which the instant dispute arises, contains a New York choice of law provision, we do likewise.

To maintain an action for fraud under New York law, a plaintiff must allege "(1) that the defendant made a misrepresentation (2) as to a material fact (3) which was false (4) and known to be false by the defendant (5) that was made for the purpose of inducing the plaintiff to rely on it (6) that the plaintiff rightfully did so rely (7) in ignorance of its falsity (8) to his injury." Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir.1994) (quoting Murray v. Xerox Corp., 811 F.2d 118, 121 (2d Cir.1987)). However, when the alleged fraud is not separate and distinct from a failure to perform under a contract, the claim is treated as one sounding in contract rather than tort. Trusthouse Forte (Garden City) Management v. Garden City Hotel, Inc., 106 A.D.2d 271, 272, 483 N.Y.S.2d 216, 218 (N.Y.App.Div.1984); Vista Co. v. Columbia Pictures Indus. Inc., 725 F.Supp. 1286, 1294 (S.D.N.Y.1989); Airlines Reporting Corp. v. Aero Voyagers, Inc., 721 F.Supp. 579, 582 (S.D.N.Y.1989).

Plaintiff first asserts that defendants' purported fraud counterclaim is actually a breach of contract claim, and must be dismissed under New York law. Because defendants allege only that plaintiff's fraudulent scheme consisted of concealing its use of the Markolor process from Mark I-A to avoid paying royalties under the Agreement, conduct also constituting a breach of contract, plaintiff argues that "the only fraud charged relates to a breach of contract" and that therefore the rule articulated in Trusthouse controls. Trusthouse, 106 A.D.2d at 272, 483 N.Y.S.2d at 218.

Defendants counter by arguing that plaintiff breached fiduciary duties in addition to contractual duties it owed to Mark I-A and is therefore liable for constructive fraud. In addition, defendants contend that plaintiff's concealment of its breach constitutes a separate claim for ordinary fraud.

First, citing Mandelblatt v. Devon Stores, 132 A.D.2d 162, 167-68, 521 N.Y.S.2d 672, 676 (N.Y.App.Div.1987), which recognized the principle that "the same conduct which may constitute a breach of a contractual obligation may also constitute a breach of a duty arising out of the relationship created by contract but which is independent of the contract itself," defendants contend that plaintiff has breached an independent fiduciary duty arising out of the contract by using the Markolor process without paying royalties and/or failing to promote the Markolor process as contractually required. We do not agree.

Under New York law, a fiduciary relationship arises when one has reposed trust or confidence in the integrity or fidelity of another who thereby gains a resulting superiority of influence over the first, or when one assumes control and responsibility over another. Teachers Ins. & Annuity Ass'n of America v. Wometco Enterprises, Inc., 833 F.Supp. 344, 349-50 (S.D.N.Y.1993). Whether one party is a fiduciary of another depends on the relationship between the parties. For example, the attorney/client and doctor/patient relationships are sufficiently rooted in trust and confidence to trigger super-contractual fiduciary duties. Krouner v. Koplovitz, 175 A.D.2d 531, 532, 572 N.Y.S.2d 959, 961 (N.Y.App.Div.1991) (attorney/client); Tighe v. Ginsberg, 146 A.D.2d 268, 271, 540 N.Y.S.2d 99, 100 (N.Y.App.Div. 1989) (doctor/patient). However, "a conventional business relationship does not create a fiduciary relationship in the absence of additional factors ..." Feigen v. Advance Capital Management Corp., 150 A.D.2d 281, 283, 541 N.Y.S.2d 797, 799 (N.Y.App.Div.1989) (citing Payrolls & Tabulating, Inc. v. Sperry Rand Corp., 22 A.D.2d 595, 598, 257 N.Y.S.2d 884, 887 (N.Y.App.Div.1965)).

Defendants have not established that the contractual relationship between Mark I-A and RHD gave rise to any fiduciary duties on the part of RHD.¹ Defendants point to no "duties," apart from those specifically...