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TOPPS COMPANY, INC. v. STANI

August 2, 2005.

THE TOPPS COMPANY, INC., Plaintiff,
v.
CADBURY STANI S.A.I.C. f/k/a PRODUCTOS STANI SOCIEDAD ANONIMA INDUSTRIAL Y COMMERCIAL, Defendant.



The opinion of the court was delivered by: CHARLES HAIGHT, District Judge

[EDITOR'S NOTE: This case is unpublished as indicated by the issuing court.] MEMORANDUM, OPINION AND ORDER

This diversity case is before the Court on the motion of defendant Cadbury Stani S.A.I.C.*fn1 ("Stani") for partial summary judgment on the claims and prayed-for damages of plaintiff The Topps Company, Inc.*fn2 ("Topps").*fn3 The rights and obligations of the parties are governed by New York substantive law pursuant to a forum selection clause in the 1980 contract between them. Ebert Aff., Exhibit A, ¶ 31.

I. BACKGROUND

  In October 1957, Stani and Topps — at that time, two family owned enterprises — entered into a licensing contract whereby Topps granted Stani the exclusive right to "manufacture, sell, and distribute chewing gum under the Topps brands" in Argentina, Bolivia, Chile, Paraguay and Uruguay (collectively "the Territory"). 1957 License Agreement, in Orr Aff., Ex. A, ¶¶ 1, 7 (hereinafter the "Original License Agreement"). Topps agreed to share with Stani "the know-how, formulae, processes and techniques (hereinafter collectively called Topps processes) used by Topps." Id. In return, Stani agreed to pay Topps royalties based on the sales of the licensed products. Id. at ¶¶ 8-10. The Original License Agreement, which provided for an expiration date in October 1977, was signed by Joseph Shorin, at that time the President of Topps, and by Arnoldo Stanislavsky, president of Stani (and notarized by Edward Shorin, Joseph's brother, and future contract signatory and vice president of Topps). Id. at ¶ 13.

  In 1976, the parties signed a second Licensing Agreement (the "1976 Agreement") in which they expressed a mutual desire to continue their licensing relationship. See 1976 Agreement, in Orr Aff., Ex. B. The 1976 Agreement was expressly replaced and superceded in 1980 by the Amended and Restated License Agreement (the "1980 Agreement"). See 1980 Agreement, in Orr Aff., Ex. C.

  The 1980 Agreement reiterated the basic arrangement: Topps agreed to provide Stani with an exclusive license to manufacture and sell a group of Topps licensed products in the Territory in return for royalty payments. Furthermore, Topps agreed to provide Stani with the "Topps Technology" necessary to that end. Because what constitutes Topps Technology is central to this dispute, I recite the capacious contractual definition in full:
(1) . . . (a) "Topps Technology" means the specialized knowledge and experience of Topps applicable to the manufacture and/or sale of Licensed Products, such as (but not limited to):
(i) manufacturing technology consisting of formulae, recipes, processes, equipment utilization, labour and equipment standards, ingredient specifications, factory management and production planning techniques, factory facility design and layout and quality control procedures, including gum base technology, and
(ii) marketing technology consisting of finished product design, packaging material design and specifications, promotional and advertising techniques, marketing techniques and sales force management techniques, (iii) all other elements of Topps' knowledge and experience in the confectionary industry applicable to Licensed Products currently being produced by Topps or future products produced by Topps.
1980 Agreement, ¶ 1(a) in Orr Aff., Ex. D.

  The 1980 Agreement — signed by Stanislavsky, Stani's president, and Edward Shorin, Topps' vice president — further provided that Topps Trademarks and Technology remained the exclusive property of Topps and obligated Stani "not to disclose to third parties any information relating directly or indirectly to the Topps Technology." Id. at ¶¶ 3, 12, 27. In consideration of the license and rights granted to Stani, it agreed to pay Topps a license fee, or royalty payment, of 3% of the annual net sales of the licensed products. Id. at ¶ 20. The 1980 Agreement also gave Topps the right to inspect the manufacturing process of licensed products and required Stani to provide Topps with regular license fee statements to enable Topps to "confirm? the accuracy of license fee calculation[s]." Id. at ¶ 21. Topps also maintained the right to inspect Stani's "books of account" relating to Stani's sales of the licensed products. Id. at ¶ 23. Upon expiration of the 1980 Agreement in April 1996, Stani's right to employ Topps Trademarks and Technology would cease. Id. at ¶¶ 6, 25(b)(ii).

  In January 1985, Stanislavsky wrote a letter to Arthur Shorin, Topps' president, in which he suggested that the parties "reconsider? some aspects of our business relationship." Orr Aff., Ex. D, at 1. Stanislavsky observed that while the original arrangement provided for royalties to be paid on all products Topps licensed to Stani, due to changes in the consumer market, the state of technology, and Stani's sales "the sole consideration has become the use of the trademark Bazooka [chewing gum]," which accounted for 75% of Stani's "turnover in gum." Id. In other words, Stani contended that because it was no longer relying on Topps Technology, Stani's payment of royalties to Topps for the sales of its non-Bazooka licensed products was putting those non-Bazooka products at a competitive disadvantage. Id. The primary non-Bazooka licensed product was a chewing gum called Beldent.

  As a result of Stanislavsky's January 1985 letter, in May 1985 the parties entered into an Amendment to Amended and Restated License Agreement (the "1985 Amendment"). 1985 Amendment, in Orr Aff., Ex. E. The 1985 Amendment was signed by Arthur Shorin and Stanislavsky. Id. at 4. Noting that "Topps and Stani attribute the durable quality of the[ir] association to the willingness of the parties to alter contract terms and conditions in order to reflect changed circumstances," the parties amended the 1980 Agreement to address Stanislavsky's concerns, as expressed in his January letter, that Beldent and other non-bazooka products were at a competitive disadvantage because of the royalty payments. Id. at 1. First, the 1985 Amendment excluded all non-Bazooka products from license fee calculations once the total license fees on those products reached $350,000. Id. at ¶ 4. The 1985 Amendment also provided that "[a]ll other terms and conditions of the [1980] Agreement not specifically altered by this Amending Agreement are to remain unchanged." Id. at ¶ 8.

  Precisely what event or events precipitated the deterioration of the parties' relationship is not clear, though it appears to be related to the 1993 acquisition of Stani by Cadbury Schweppes, PLC. On or about November 18, 1993, Cadbury Schweppes purchased a majority interest in Stani. Fourth Amd. Compl., ¶ 4. According to Topps, both during the course of and after this transaction, Stani illicitly shared Topps Technology with Cadbury Schweppes, and then endeavored to conceal its misdeeds from Topps. Id. at ¶¶ 17-19.

  Topps' Fourth Amended Complaint alleges five Claims.*fn4 Topps' First Claim, for breach of contract, asserts that Stani breached the 1980 Agreement with Topps by (i) disclosing Topps Technology to Cadbury Schweppes during the due diligence phase of the Cadbury/Stani transaction, in contravention of ¶ 12; (ii) continuing to use Topps Technology after the expiration of the agreement, in contravention of ¶ 25(b)(i); and (iii) disclosing Topps Technology to Cadbury after the expiration of the agreement, in contravention of ¶¶ 3, 12, and 25(b)(i). Topps demands damages exceeding $250 million and disgorgement of Stani's profits.

  Topps' Second Claim, for misappropriation of trade secrets, is based upon Topps' assertions that through, inter alia, "reverse engineering," Stani misappropriated Topps Technology in violation of both the agreement and the parties' confidential relationship. Stani is also alleged to have used and disclosed the technology to Cadbury both before and after the expiration of the agreement, and then deliberately concealed the use and disclosure from Topps. Topps demands damages exceeding $250 million and disgorgement of Stani's profits.

  Topps Third Claim is a prayer for injunctive relief in the form of a permanent injunction against the future use and dissemination of Topps Technology by Stani.

  Topps' Fourth Claim, for fraudulent inducement, is grounded in the representations made in Stanislavsky's January 1985 letter — now alleged by Topps to be false — regarding the sources of Stani's gum manufacturing technology and the percentage of its net sales attributed to Bazooka. Specifically, Stani's letter stated that they were no longer using Topps Technology in the production of Beldent and all other non-Bazooka gum products, and that those non-Bazooka products accounted for less than 25% of Stani's net sales. Topps claims that these fraudulent representations induced Topps to agree to the 1985 Amendment. Topps requests judgment (i) declaring the Amendment a nullity, and (ii) estopping Stani from claiming that the 1985 Amendment altered the Agreement allowing Stani to use Topps Technology after the 1996 expiration of the Agreement. Topps also includes an estoppel demand in its Fourth Claim, endeavoring to preclude Stani from arguing that the 1985 Amendment altered the 1980 Agreement.

  Because the 1985 Amendment terminated royalties on non-Bazooka products (primarily Beldent) after such royalty payments reached $350,000, Topps' Fifth Claim prays for lost royalties for the period between 1987, when the aggregate royalty payments reached the $350,000 threshold, and 1996, when the Agreement expired.

  Topps also requests punitive damages, interest, and costs.

  Following extensive discovery, Stani now moves for partial summary judgment on Topps' Fourth and Fifth Claims and seeks to limit damages.

  First, Stani claims that Topps' Fourth and Fifth Claims are time barred because they were not filed within the applicable statute of limitations period, which in New York is within six years from the accrual of the cause of action or two years from the time the plaintiff discovered the fraud or should have discovered it. Stani claims, first, that Topps had actual knowledge of the alleged fraud — fraud which Stani denies occurred — more than two years prior to the date on which Topps filed its fraudulent inducement claim. Alternatively, Stani contends that even if Topps did not have actual knowledge of the fraud, Topps by the exercise of reasonable diligence could have discovered the fraud more than two years prior to its filing of this suit. In other words, Stani contends that Topps had either actual or constructive knowledge of Stani's allegedly-fraudulent representations more than two years before Topps' inclusion of its fraudulent inducement claim in this action. Second, Stani claims that punitive damages are not available to Topps on any claim. Under New York law, according to Stani, a prerequisite for the award of punitive damages arising out of a contractual relationship is that defendant engage in a pattern of activity directed against the general public ("public harm"). Because Topps fails to allege that Stani committed a public harm, punitive damages are not available. Moreover, Stani claims that Topps cannot demonstrate that Stani's management possessed the requisite level of egregiousness that would warrant punitive damages.

  Finally, Stani asserts that disgorgement is not an available remedy for Topps' First and Second claims (breach of contract and misappropriation). Emphasizing the overlapping nature of the two claims, Stani argues that disgorgement is not recoverable on Topps' breach of contract claim, and that disgorgement on the misappropriation claim would be unjust because Stani's own endeavors added value to the allegedly misappropriated trade secrets. Rather, Stani contends, the Court should apply the "reasonable royalty" damage measure, which Stani contends is the 3% of net profits agreed upon in the 1980 Agreement.

  Topps resists all aspects of Stani's motion. After the parties submitted extensive briefs and voluminous evidentiary material, the ...


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