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REUBEN H. DONNELLEY CORP. v. MARK I MKTG. CORP.

May 16, 1996

THE REUBEN H. DONNELLEY CORPORATION, Plaintiff, against MARK I MARKETING CORPORATION, MARK I MARKETING CORPORATION OF AMERICA, and WALLACE EDWARDS, Defendants.


The opinion of the court was delivered by: CONNER

 Conner, Sr. D.J.:

 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 ("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 original answer, defendants counterclaimed 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 moved to dismiss all but defendants' counterclaim for an accounting for failing to state claims on which relief can be granted. This Court granted plaintiff's motion in part, but allowed defendants leave to amend their counterclaims to overcome the pleading inadequacies. See Reuben H. Donnelley Corp. v. Mark I Marketing Corp., 893 F. Supp. 285 (S.D.N.Y. 1995). In their amended answer, defendants again have counterclaimed 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. Pursuant to Rules 12(b)(6), 12(f), and 9(b) of the Federal Rules of Civil Procedure, plaintiff has moved to dismiss defendants' first, fourth and fifth counterclaims. For the reasons discussed below, plaintiff's motion is granted in part.

 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 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 covered by 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. Furthermore, RHD 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." RHD also agreed to permit "[Mark I-A] and its employees and accountants . . . to inspect RHD's books, records and material relating to licensing, royalty and other fee revenues. . . ." 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 which RHD maintains is 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, and 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.

 In their original answer, defendants counterclaimed (1) for an accounting pursuant to the Agreement, (2) for breach of contract for RHD's failure to pay royalties for using the Markolor process, (3) for breach of contract for RHD's failure to use its best efforts to promote sales of the Markolor process to others, (4) for fraud based on RHD's concealment of its use of the Markolor process, and (5) for an injunction against RHD's ongoing and future use of the Markolor process. In addition to seeking compensatory damages, defendants sought 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.

 Defendants have filed an amended answer in which they re-assert all their original counterclaims in amended form as permitted by our prior opinion. Plaintiff now has moved to dismiss defendants' first, fourth, and fifth counterclaims in which defendants assert claims for an accounting, for fraud, and for injunctive relief.

 DISCUSSION

 The parties have proceeded on the assumption that New York law controls defendants' common law claims. Because the parties to the Agreement 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 ...


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