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Orange County Choppers, Inc. v. Olaes Enterprises

July 27, 2007

ORANGE COUNTY CHOPPERS, INC., A NEW YORK CORPORATION, PLAINTIFF-COUNTERDEFENDANT,
v.
OLAES ENTERPRISES, INC. D/B/A ODM, A CALIFORNIA CORPORATION, DEFENDANT-COUNTERPLAINTIFF,
v.
VENDING SUPPLY, INC., A NEVADA CORPORATION, AND INTERBRAND LLC, A DELAWARE LIMITED LIABILITY CORPORATION, ADDITIONAL COUNTERDEFENDANTS.



The opinion of the court was delivered by: Conner, Sr. D.J.

OPINION AND ORDER

Plaintiff Orange County Choppers, Inc. ("OCC")*fn1 brings this action against Olaes Enterprises, Inc. d/b/a ODM ("ODM")*fn2 for breach of contract and unjust enrichment. OCC and ODM entered into a licensing agreement pursuant to which ODM agreed to pay royalties to OCC in return for a license to use OCC's trade name and trademarks in designing T-shirts and other apparel. OCC alleges that ODM breached the license agreement by failing to pay $846,723.99 in royalties due under the contract. ODM, in turn, brings copyright infringement claims against OCC, Vending Supply, Inc. ("VSI")*fn3 and Interbrand LCC,*fn4 pursuant to 17 U.S.C. §§ 101, et seq., alleging that they marketed and sold designs on which ODM owns copyrights. In addition, ODM asserts a litany of counterclaims against OCC for breach of contract, unjust enrichment, unfair competition, breach of the implied covenant of good faith and fair dealing and tortious interference with contractual relations. OCC, VSI and Interbrand now move pursuant to FED. R. CIV. P. 12(b)(6) for dismissal of all but one of ODM's claims. For the following reasons, their motion is granted in part and denied in part.

BACKGROUND

The following facts are taken from ODM's Counterclaims and the relevant provisions of the licensing agreement between the parties.*fn5 OCC is a well-known custom motorcycle manufacturer and is featured on "American Choppers," a reality television show on the Discovery Channel. It also sells apparel featuring its trade name and logos, including T-shirts, hats, sweatshirts and sun glasses. (See Complt.; http://orangecountychoppers.com.) ODM is a graphic design company that creates, markets and sells graphic designs and artwork incorporating companies' trade names and trademarks in accordance with various licensing agreements. (See Counterclaims ¶ 6.) It has worked with hundreds of licensors, including companies such as General Motors and Corona Beer. (See id.)

I. The Consumer Product License Agreement

On March 1, 2003, OCC and ODM entered into the "Consumers Product License Agreement" (the "Agreement"). The Agreement granted ODM the exclusive right and license to use OCC's logos, trademarks and controlled designs (hereinafter, the "OCC Property") in connection with the manufacture, distribution, sale and advertising of T-shirts, fleeces, jerseys, caps and beanies (hereinafter, the "Licensed Products").*fn6 (See Neidl Aff'm, Ex. A (Agreement ¶¶ 1(l), (r), 2(a)(i)).)

In return, ODM agreed to pay OCC royalties in the amount of eight or ten percent of the net sales price on all products sold featuring OCC Property.*fn7 (See id. (Agreement ¶ 4).) The Agreement became effective on April 1, 2003 and expired on December 31, 2005. (See id. (Agreement ¶ 3).)

A. Approval of Designs

The Agreement provided OCC the right to approve all designs proposed by ODM prior to distribution. (See id. (Agreement, Standard Terms and Conditions, ¶ A(2)(d)).) Specifically, OCC could disapprove a proposed design if, "in its sole and unfettered discretion," it would "impair the value and goodwill" of OCC Property. (See id.) Moreover, OCC had the right to disapprove a proposed design for any "reasonable cause," including if it did not satisfy the general quality standards of OCC, failed to accurately depict OCC Property, was unethical, immoral or offensive to good taste, or failed to carry proper copyright, trademark or other required notices. (See id.) OCC was required "to use reasonable efforts to notify [ODM] in writing of its approval or disapproval of any materials submitted to it . . . within fifteen [] days after its receipt of such materials, and . . . in the case of its disapproval, to notify [ODM] in writing of its reasons for disapproval." (See id. ¶ (A(2)(e)).) "In the event [OCC] fail[ed] to approve or disapprove of any materials submitted . . . within twenty [] days after [its] receipt of such materials . . ., the materials [were] automatically deemed disapproved." (See id.)

B. Duty to Provide Royalty Statements

Pursuant to the Agreement, ODM was obligated to furnish a royalty statement within thirty days after the close of each month along with the royalty payments then due.*fn8 (See Neidl Aff'm, Ex. A (Agreement, Standard Terms and Conditions, ¶ C(5)),Ex. B.) Specifically, the Agreement provided:

[ODM] shall furnish to [OCC] . . . a full and complete statement, duly certified by an officer of [ODM] to be true and accurate, showing the number of each type of Licensed Product sold during the calendar [month] in question, the total gross sales revenues for each such Licensed Product, an itemization of all allowable deductions, if any, the Net Sales Price for each Licensed Product sold and the amount of royalties due with respect to such sales together with such other pertinent information as [OCC] may reasonably request from time to time. . . . [ODM] will keep accuarate books of account and records covering all transactions relating to the rights and licenses granted under this Agreement including sales of Licensed Products[] . . . . (See id., Ex. A (Agreement, Standard Terms and Conditions, ¶¶ C(5), C(8)).) The Agreement further provided that "[t]he receipt or acceptance by [OCC] . . . of any royalty statements furnished pursuant to this Agreement, or the receipt or acceptance of any royalty payments made, shall not preclude [OCC] from questioning their accuracy at any time." (See id. (¶ C(6)).)

C. Trademark and Copyright Rights

The Agreement also contained separate sections entitled "Trademark Protection" and "Copyright Provisions" that governed the intellectual property rights of the respective parties. (See id. (¶¶ D(1), E).) The trademark section, in particular, provided that "[a]ll uses of the [OCC] Property [by ODM] will inure to the exclusive benefit of [OCC], which will own all rights, including trademark rights, created by such uses of the Property, together with the goodwill of the business in connection with which such trademarks are used." (See id. (¶ D(1)).) The copyright section provided:

[OCC] and [ODM] acknowledge and agree that to the extent that [ODM's] graphic designs, including, but not limited to, the creative elements contained therein can be separated from [OCC's] Property, [ODM] shall retain ownership of the graphic designs and/or creative elements; however, if such graphic designs created by [ODM] cannot be separated from [OCC's] Property, [OCC] shall own the graphic designs. (See id. (¶ E).)

II. The Parties' Allegations

On August 10, 2006, OCC filed an action in New York State Supreme Court and alleged that ODM underpaid royalties due under the Agreement in the amount of $846,723.99. (See Complt. "Wherefore.") ODM removed the action to federal court and asserted fourteen counterclaims, thirteen of which OCC now moves to dismiss.*fn9

A. OCC's Alleged Unauthorized Distribution of the Designs to VSI, Interbrand and Other OCC Licensees

First, ODM alleges that it owns copyrights in the various designs that it created pursuant to the Agreement and that OCC infringed these copyrights by providing ODM's designs to other OCC licensees, including VSI and Interbrand, without its permission. (See Counterclaims ¶ 17.) Specifically, ODM claims that OCC provided ODM's designs to approximately fifty of OCC's licensees, which then advertised or sold merchandise containing designs that were substantially similar to those owned by ODM. (See id. ¶¶ 18-19.) Attached as exhibits to ODM's Counterclaims are advertisements for VSI and Interbrand merchandise featuring the designs created by ODM. (See id., Exs. B, C.)

B. OCC's Alleged Breach of the Agreement's Exclusivity Provision

Second, ODM asserts claims for breach of contract, unjust enrichment and unfair competition against OCC, alleging that it licensed other entities to use the OCC logos, trademarks and other controlled designs in connection with the manufacture, distribution sale and advertisement of the Licensed Products (i.e., T-shirts, fleeces and jerseys) in violation of the Agreement's exclusivity provision. (See Counterclaims ¶¶ 52-56; Neidl Aff'm, Ex. A (Agreement ¶ 2(a)(i)).) It claims that "[b]y double- and triple-licensing to produce Licensed Products as defined in the [] Agreement, OCC took a property right belonging to ODM and used ODM's property for its own commercial advantage." (See Counterclaims ¶ 62.)

C. OCC's Alleged Withholdings of Design Approval

Third, ODM alleges that OCC intentionally delayed its approval of ODM's designs in violation of ¶ A(2)(e) of the Standard Terms and Conditions of the Agreement. (See id. ¶¶ 65-75.) It claims that "OCC breached its contractual obligations under the [] Agreement by failing to use 'reasonable efforts' to approve or disapprove ODM's designs with fifteen days after receipt of such materials[,]" but rather, "delayed approval . . . to force renegotiation of the [] Agreement in order to try to obtain more money and concessions from ODM than the parties had agreed to." (See id. ¶¶ 70, 71.) In particular, ODM alleges that it "was coerced into signing three amendments to the [] Agreement to limit the scope of ODM's license with OCC and to agree to various other concessions in exchange for OCC's approval of its designs." (See id. ¶ 71.) Furthermore, according to ODM's allegations, "when [it] refused to sign other amendments to the [] Agreement to carve out exceptions to its exclusive license rights, OCC's authorized Agent threatened to hold back approvals and to make certain that ODM's agreement with OCC would not be renewed." (See id. ¶ 72.)

D. Overpayment of Royalties

Fourth, ODM asserts claims for breach of contract and unjust enrichment against OCC, alleging that it mistakenly overpaid royalties to OCC and that OCC has refused to return the monies. (See id. ΒΆΒΆ 80-89.) Specifically, ODM alleges that it inadvertently failed to characterize certain sales to J.C. Penney and other retailers as "mass market" and, as a result, mistakenly paid ten percent royalties ...


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