Yoe v. Crescent Sock Co., Case No. 1:15-cv-3-SKL

• Decision Date: 14 November 2017
• Docket Number: Case No. 1:15-cv-3-SKL
• Parties: ROBERT H. YOE, III, et al., Plaintiffs, v. CRESCENT SOCK COMPANY, et al., Defendants.
• Court: U.S. District Court — Eastern District of Tennessee

ROBERT H. YOE, III, et al., Plaintiffs, v. CRESCENT SOCK COMPANY, et al., Defendants.

Case No. 1:15-cv-3-SKL

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TENNESSEE AT CHATTANOOGA

November 14, 2017

MEMORANDUM AND ORDER

Before the Court is a motion for summary judgment and supporting memorandum filed by Defendants Crescent Sock Company ("Crescent"), Omni Wool, LLC ("Omni Wool"), Catherine Burn Allen ("Allen"), and Sandra Burn Boyd ("Boyd," and collectively, "Defendants") on September 15, 2017 [Docs. 320 and 325¹]. Defendants also filed a statement of undisputed material facts. [Doc. 323²]. Plaintiffs Robert H. Yoe, III ("Yoe"), and Yoe Enterprises, Incorporated ("YEI," and collectively, "Plaintiffs"), filed a response to the motion [Doc. 382], andDefendants filed a reply [Doc. 394]. Also before the Court is a motion for partial summary judgment and supporting memorandum filed by Plaintiffs [Docs. 322 and 326]. Defendants filed a response [Doc. 377], and Plaintiffs filed a reply [Doc. 395]. These matters are now ripe.

For the reasons stated below, Defendants' motion [Doc. 320] will be GRANTED IN PART AND DENIED IN PART. Plaintiffs' motion for partial summary judgment [Doc. 322] will be DENIED.

I. BACKGROUND

This case has a complicated factual and procedural background in both state and federal court, some of which has been detailed in prior orders of the Court. Given that this case already has in excess of 450 docket entries—constituting more than 15,500 pages—in the federal case alone, it is impossible to fully summarize that background here. However, the Court will discuss the factual and procedural background to provide context and to the extent needed to explain the Court's rulings on the pending motions for summary judgment.

A. The Parties

This case arises out of a soured business relationship between Defendants and Plaintiffs. Defendant Crescent is a sock manufacturing company. Plaintiff Yoe was hired in 2000 to serve as Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of Crescent. Defendants Allen and Boyd³ are part owners of Crescent, and have worked there throughout their adult lives.⁴Yoe owns (and at all relevant times owned) Plaintiff YEI, which holds intellectual property rights to certain sock brands manufactured by Crescent during Yoe's employment at Crescent. At issue in this case are the FITS and Game Knits brand socks that Yoe developed while at Crescent. In September 2012, Crescent and YEI entered into an agreement⁵ (the "Business Agreement") which memorialized prior agreements and the parties' business relationship as follows:

(1) "Any and all new brands, and other intellectual property relating to such new brands, that are developed, registered, trademarked, invented, started, conceived or designed by Crescent, Yoe and/or YEI from January 1, 2009 through the termination of Yoe's employment with Crescent ('the Intellectual Property') shall be 100% owned by YEI";

(2) Crescent will pay royalty payments to YEI relative to the FITS brand at a rate of $1.00 in 2013 and 2014, and beginning in 2015 and each year thereafter, "5% of Net Sales"; and

(3) With regard to licensing of the YEI-owned brands, Crescent and YEI agreed that, "[o]n or before 1 year after the execution of [the Business Agreement], YEI and Crescent will enter into an agreement for licensing/manufacturing/sourcing relative to the Intellectual Property which includes terms and conditions similar to the LIG contract" and which incorporates the royalty payment schedule.

[See Business Agreement, Doc. 24-3].

B. State Court Litigation

On September 4, 2013, Yoe and five other Crescent employees who worked with the FITS brand were fired without cause. The day before, Crescent had filed a lawsuit in the McMinnCounty, Tennessee Chancery Court ("Chancery Court Case"), seeking a declaration that certain employment contracts between Yoe and Crescent (which provided for, among other things, a $2 million severance payment to Yoe upon termination without cause) and the Business Agreement were void and unenforceable. Crescent alleged that the Business Agreement was "unfair, unsupported by consideration, usurp[ed] corporate opportunity, and constitute[d] a breach of fiduciary duty by Mr. Yoe." [Doc. 24-4 at Page ID # 117].

Yoe filed an answer in the Chancery Court Case on September 19, 2013, noting that YEI was the real party in interest to the Business Agreement [id. at Page ID # 157-60]. Yoe and YEI⁶ alleged that "[i]n 2009, in order to induce Mr. Yoe to continue with Crescent, Crescent granted to Yoe Enterprises the ownership of the intellectual property rights of all new brands. The grant of ownership rights in the intellectual property was memorialized in an amendment to the [employment contracts] and subsequently [the] Business Agreement dated September 4, 2012 between Crescent and Yoe Enterprises." [Id. at Page ID # 165]. Yoe and YEI asserted counterclaims for breach of the Business Agreement and "Patent and Intellectual Property Infringement" against Crescent, claiming that:

[Count III - breach of the Business Agreement]

33. Yoe Enterprises is the party to the Business Agreement dated September 4, 2012 by and among Yoe Enterprises and Crescent whereby Yoe Enterprises is named the 100% owner of all intellectual property and new brands developed by Mr. Yoe and/or Yoe Enterprises, Inc. from January 1, 2009. Crescent is licensed to manufacture the intellectual property owned by Yoe Enterprises, including the FITS®, . . . and Game Knits® brands in addition to other brands, and Crescent pays certain royalties to Yoe Enterprises relative to the sales of these brands.

34. Pursuant to the Business Agreement with Yoe Enterprises, Crescent has been marketing and manufacturing the FITS® brand products andreaping significant benefits in terms of sales and gaining customers due to the superiority of the FITS® brand products. Crescent now seeks to void the Business Agreement in violation of the terms of the parties' agreement.

35. Crescent's actions constitute bad faith and a breach of the Business Agreement.

36. As a direct and proximate cause of Crescent's bad faith and breach of the Business Agreement, Yoe Enterprises has sustained damages in an amount to be determined at trial.

[Count IV - patent and intellectual property right infringement]

. . . .

38. Pursuant to the [Business Agreement] with Yoe Enterprises, the owner of the FITS® brand and other brands, Crescent has the non-exclusive temporary license and right to market, manufacture and sell FITS® brand products and the other products. However, such license requires that the FITS® brand products be manufactured in strict accordance with the specific technology, specifications and patents for FITS® brand products.

39. Upon information and belief, Crescent is continuing to manufacture socks under the FITS® brand name but may change the manner in which the socks are manufactured, including but not limited to using a different yarn, in violation of the specific technology, specifications and patents governing the FITS® brand.

40. A deviation by Crescent from the specifications, proprietary manufacturing processes and patents governing the FITS® brand constitutes an infringement on the intellectual property rights and patent rights of Yoe Enterprises.

41. Crescent's acts of infringement have been and continue to be willful.

42. The unauthorized and infringing use by Crescent of Yoe Enterprises' patented FITS® brand product has caused and will cause irreparable harm, damage and injury to Yoe Enterprises. In addition, Crescent has unlawfully and wrongfully derived and will continue to derive income from its infringing acts.

[Doc. 24-4 at Page ID # 168-69]. Yoe and YEI also asserted counterclaims against Crescent for breach of Yoe's employment contract for failure to pay his "post-termination compensation," and quantum meruit/unjust enrichment [Doc. 24-4 at Page ID # 162-67]. Yoe and YEI also assertedthird party claims against Boyd and Allen for inducement of breach of Yoe's employment contracts, inducement of breach of the Business Agreement, and negligent and/or intentional misrepresentation [id. at Page ID # 170-75].

On or around the same time that Yoe and YEI filed their answer, counterclaims, and third-party claims in the Chancery Court Case, they obtained an injunction that provides, in relevant part:

It appearing to the Court that the parties to this cause have agreed on the terms of the Temporary Injunction, that because of the uniqueness of the brand of sock known as FITS®, and because the value of this brand of sock may be compromised and/or lost if this injunction is not granted, it is hereby:

ORDERED, ADJUDGED AND DECREED that:

1. Crescent Sock Company, its agents, employees, successors, officers and directors, and all other persons in concert or participation with such entities, are enjoined from marketing the FITS® brand products . . . unless each and every product has been manufactured using the proper materials, proper packaging, proper technology for manufacturing FITS®, proper manufacturing processes, and using all of the same specifications required to manufacture FITS® that were in place as of August 15, 2013 and using all of the same specifications as required by the patents held by Yoe Enterprises.

2. Crescent Sock Company, its agents, employees, successors, attorneys, officers and directors and all other entities in active concert or participation with such entities, are hereby enjoined and required to fulfill any and all orders for FITS® and Jacks® products in a timely and appropriate manner, all as required by orders for such products, to the extent that said orders do not exceed the operating capacity of the Company as it existed on September 4, 2013, using the correct and proper materials, packaging, technology, manufacturing specifications and specifications as set forth above. Further, the Company shall use its best faith efforts to maintain adequate levels of inventory and

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