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United States District Court, Southern District of New York

October 30, 2000


The opinion of the court was delivered by: Kaplan, District Judge.


Plaintiff, a citizen of Florida, is the holder of design patents on a number of hair accessories commonly known as "scrunchies." She brings this contract action against Claire's Stores, Inc. ("Stores"), a Delaware corporation headquartered in Florida, and its wholly owned subsidiary, Claire's Boutiques, Inc. ("Boutiques"), also a Delaware corporation but headquartered in Illinois. The complaint asserts two claims for relief. The first alleges breach of a written license agreement by Boutiques and the second breach of an alleged oral agreement by Stores in that each defendant allegedly failed to pay royalties due under the agreements on "products covered by [plaintiff's] patents" and failed to submit to royalty audits. Defendants have counterclaimed for a declaration that plaintiff's design patents are invalid.

The action was removed to this Court by defendants on the ground that plaintiff's claims depend upon a determination of the scope of plaintiff's patents and therefore lie within the exclusive jurisdiction of the federal courts, a proposition which plaintiff does not dispute. The matter now is before the Court on (1) defendants' motion to transfer the action to the Southern District of Florida pursuant to 28 U.S.C. § 1404(a), (2) plaintiff's cross-motion for partial summary judgment determining that (i) plaintiff and Stores have a valid oral agreement as alleged in the complaint, (ii) plaintiff and Boutiques have a valid written agreement pursuant to which Boutiques is obliged to pay royalties for both foreign and domestic sales of her licensed designs, (iii) defendants will not be heard to assert the invalidity of plaintiff's patents, and (iv) defendants breached their respective agreements with plaintiff by failing to permit her to audit their books and records, and (3) defendants' cross-motion for summary judgment dismissing plaintiff's second claim for relief and determining that the U.S. license agreement covers only sales of products in the United States.

In order fairly to evaluate the transfer motion, which requires consideration of the relative convenience to parties and witnesses of litigating this case here or in Florida, it is useful to determine whether any of the partially dispositive motions are meritorious, as only then can the Court focus on what really must be litigated further. Accordingly, the Court first takes up the parties' cross-motions.

Partial Summary Judgment Motions

The Oral Contract Claim

Plaintiff, in advance of discovery, seeks a determination that the oral agreement alleged in her claim against Stores exists and is valid. Stores contends that the contract was incapable by its terms of performance within one year and therefore is barred by the Statute of Frauds.*fn1 In any case, it argues, there is a triable issue of fact as to the existence of the alleged contract.

The terms of the alleged oral agreement were that "if [Stores] were to sell any of [plaintiff's] patented products outside the United States, it would pay [plaintiff] royalties on those sales in accordance with the terms set forth in the [written] License Agreement" between Boutiques and plaintiff.*fn2 Neither the alleged oral agreement nor the written agreement to which it allegedly referred stipulated any duration. And while the written License Agreement provided for termination by written agreement of the contracting parties, that adds nothing, as all contracts are terminable by mutual consent of the contracting parties. This alleged agreement thus comes within D & N Boening, Inc. v. Kirsch Beverages, Inc.,*fn3 which makes clear that an oral agreement of indefinite duration is barred by Section 5-701 unless it may be performed fully within one year. Termination by breach or, by necessary implication, by mutual consent is not performance.

Plaintiff nevertheless contends that defendants have partially performed and judicially admitted the existence of the oral agreement, either of which would be sufficient to take the alleged contract out of the Statute of Frauds.

Plaintiffs' judicial admission contention is without merit. Plaintiff relies on Section 5-701, subd. b.3(c), of the New York General Obligations Law, which provides that an admission of the existence of a contract in a "pleading, testimony or otherwise in court . . ." is sufficient evidence of the making of the contract. But plaintiff overlooks the fact that Section 5-701, subd. b, applies only to "qualified financial contracts" as there defined.*fn4 The alleged contract here at issue is not a qualified financial contract within the meaning of the statute.*fn5 And putting aside this inapplicable statute, even a clear admission*fn6 in unsigned testimony in an unrelated arbitration proceeding would not take the contract out of the Statute of Frauds.*fn7

The part performance argument is no more meritorious. Although part performance often will take an otherwise unenforceable contract out of the Statute of Frauds, this principle does not apply to a contract that is unenforceable because it is incapable of performance within one year.*fn8

Accordingly, defendants' motion for partial summary judgment dismissing the second claim for relief is granted on the ground that it is barred by the Statute of Frauds.

Plaintiff's Motion With Respect to Royalties on Foreign Sales

Plaintiff next seeks summary judgment determining that Boutiques is obliged to pay it a royalty pursuant to a written license agreement on all sales of products embodying plaintiff's designs, irrespective of where the sales occur. The argument, however, is without merit.

The license agreement in question granted to Boutiques a nonexclusive license for the sale of the "Licensed Products." "Licensed Products" was defined to mean hair bands "embodying the design" protected by the "Licensed Properties." "Licensed Properties" was defined to mean U.S. Design Patent No. 315,226 "and in addition the Rommy III will be included in the agreement at [Boutiques'] option." The royalty clauses provided:

"4.2. [BOUTIQUES] shall pay to [plaintiff] a continuing royalty of five percent (5%) of the net selling price as defined herein of all Licensed Products sold by [it] but not including sales to as a wholesalers, in the United States throughout the term hereof."

"4.3. [BOUTIQUES] shall pay to [plaintiff] a continuing royalty of eight percent (8%) of the net selling price as defined herein of all Licensed Products sold by [it] directly to as a wholesalers in the United States throughout the term hereof." (Strikeouts in original)

In these circumstances, plaintiff cannot reasonably suggest that the written license agreement unquestionably obliges Boutiques to pay her royalties on any sales it might make outside the United States. The license at least appears to be one to engage in activities that, save for its existence, would be within plaintiff's exclusive rights as a holder of U.S. patents, which of necessity are limited to the United States. The royalty clauses are susceptible of the interpretation that Boutiques' obligation was to pay royalties on Licensed Products sold by it in the United States. This interpretation draws particular strength from the appearance of the comma after the word "wholesalers" in Section 4.2, as the comma indicates that the phrase "but not including sales as wholesaler" is a parenthetical expression and that the phrase "in the United States" modifies "all Licensed Products sold by" Boutiques rather than "sales as a wholesaler." In consequence, the license agreement is ambiguous, and plaintiff is not entitled to partial summary judgment on this claim either. Plaintiff's Claim of Breach of the Audit Provisions of the Contracts

Inasmuch as defendants are entitled to dismissal of the oral contract claim on Statute of Frauds grounds and, absent that defense, there in any case would be an issue of fact as to whether there was any agreement between plaintiff and Stores, there certainly is no basis for summary judgment on plaintiff's claim that Stores breached the audit provisions of that alleged agreement.

The written license agreement between plaintiff and Boutiques does contain an audit provision. Plaintiff claims breach on the basis of an alleged refusal to give her accountant, Mr. Hargadon, access to defendants' books and records.*fn9 The only support given for that assertion in plaintiff's Rule 56.1 statement, however, is a reference to paragraph 10 of Exhibit C. Exhibit C, however, is defendants' answer, paragraph 10 of which merely admits that Mr. Hargadon requested "an audit" and that defendants denied the request. But the fact that defendants admit having denied that request does not necessarily establish the absence of a genuine issue of material fact as to whether Boutiques breached its agreement. They assert that the request sought access to far more than plaintiff was entitled to see. Indeed, it is not even clear that the records to which Mr. Hargadon sought access included the records that plaintiff was entitled to have him inspect. Accordingly, plaintiff is not entitled to summary judgment on this claim either.

Licensee Estoppel

Plaintiff seeks partial summary judgment dismissing defendants' third affirmative defense, which alleges:

"Each of Revson's Patents . . . is invalid for failure to meet the conditions for patentability set forth in Sections 103 and 112, of Title 35, United States Code."

She contends that they are estopped to assert the invalidity of the patents because they are licensees who neither ceased payment of royalties nor notified plaintiff that the reason for a cessation was the claimed invalidity of the patents. Plaintiff relies on Studiengesellschaft Kohle, M.B.H. v. Shell Oil Co.*fn10

In Lear v. Adkins,*fn11 the Supreme Court held that the doctrine of estoppel may not be employed by a patent licensee in defense of a claim by the licensor for unpaid royalties on the ground that the patent in question is invalid.*fn12 Nevertheless, the doctrine of licensee estoppel is not entirely dead. The Kohle case on which plaintiff relies stands for the proposition that a licensee is estopped to challenge the validity of a licensed patent in defense of a claim for unpaid royalties "until it (i) actually ceases payment of royalties, and (ii) provides notice to the licensor that the reason for ceasing payment of royalties is because it has deemed the relevant claims to be invalid."*fn13 But it does leave open the possibility that Lear, Inc. v. Adkins will be applied once the licensee stops paying royalties on the grounds of alleged invalidity. It therefore is important to examine just what is at issue here.

Plaintiff's first claim for relief seeks judgment against Boutiques in relevant part for unpaid royalties — royalties due and payable prior to the institution of this action. It is undisputed that Boutiques never ceased royalty payments prior to the filing of this suit on the ground of the alleged invalidity of the patents.*fn14 In consequence, Kohle seems directly applicable.

Although defendants concede that Kohle precludes them from recapturing any royalties previously paid, they seek to distinguish the case by contending that what is at issue here is plaintiff's assertion that she is entitled to royalties under the license agreement on products other than those for which royalties have been paid. In consequence, defendants argue, they should not be barred from challenging the validity of the patents to the extent that the patents apply to those other products.

Defendants' argument is unpersuasive. The Federal Circuit's rationale in Kohle was that a patent licensee who fails to assert a claim of invalidity benefits by retaining the protection of the licensed patent and deprives the public of the full and free use of the patented product by withholding a successful validity challenge. Accordingly, the licensee should not be permitted to avoid payment of royalties for any such period on grounds of patent invalidity. That rationale applies here, but it is important to recognize its limits.

Surely the consequence of Kohle is that Boutiques' assertion of invalidity is no defense to plaintiff's claim for royalties due in respect of sales made prior to the filing of the complaint. Hence, plaintiff's motion for partial summary judgment striking the third affirmative defense is well grounded. On the other hand, the complaint speaks as of the date of its filing. If Boutiques, which now has asserted invalidity in its answer, were to cease paying royalties on the ground of alleged patent invalidity, it arguably might assert invalidity in the event plaintiff subsequently were to claim, either here or in another suit, that it is entitled to royalties for a post-notification period. It is unnecessary, however, to resolve that point now.

The Transfer Motion

This action concededly could have been brought in the proposed transferee forum. In consequence, determination of defendants' transfer motion depends upon the convenience of parties and witnesses and the interest of justice, considerations that are evaluated in terms of the well known factors long ago set forth by Judge Weinfeld in Schneider v. Sears.*fn15

In this case, plaintiff is domiciled in Florida. Although she visits New York, her choice of forum in such circumstances is entitled to somewhat less weight than otherwise would be the case.

Given plaintiff's Florida domicile, Stores' Florida headquarters, and the fact that Boutiques is headquartered in Illinois, Florida clearly is a forum more convenient for the parties than New York. Indeed, all of the likely witnesses in this case reside in Florida or Illinois save for plaintiff's accountants and patent counsel, whose evidence promises to be of little or no importance and who in any case readily could travel to Florida at plaintiff's behest.

In all the circumstances, it seems relatively clear that this action has been brought in New York for the convenience of counsel rather than because it was more convenient for the litigants and witnesses. The interests of those companies and individuals would be served better by a trial in Florida than by one in New York. This is more than sufficient to overcome such weight as is properly accorded to plaintiff's choice of forum, given her Florida domicile, and the other factors she relies upon.


Defendants' motion to transfer this action to the Southern District of Florida for the convenience of parties and witnesses and in the interest of justice is granted. The cross-motions for summary judgment are denied in all respects save that (1) defendants' motion for summary judgment dismissing the second claim for relief, and (2) plaintiff's motion to strike defendants' third affirmative defense both are granted.


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