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Toshiba Corporation v. American Media International

September 4, 2012

TOSHIBA CORPORATION, PLAINTIFF,
v.
AMERICAN MEDIA INTERNATIONAL, LLC, DEFENDANT.



The opinion of the court was delivered by: Denise Cote, District Judge:

OPINION AND ORDER

Toshiba Corporation ("Toshiba") brings this action against American Media International LLC ("AMI") asserting breach of a contract for royalties in connection with the production and licensing of certain DVD products. AMI has counterclaimed, asserting its own claims of breach of contract and violation of the duty of good faith and fair dealing. On July 13, 2012, Toshiba moved for judgment on the pleadings with respect to its breach of contract claims pursuant to Rule 12(c), Fed. R. Civ. P., and for dismissal of AMI's counterclaims pursuant to Rule 12(b)(6). For the reasons that follow, the motions, which are treated as motions for summary judgment, are granted.

BACKGROUND

The following facts are undisputed. Toshiba, a Japanese corporation with its principal place of business in Tokyo, is an international electronics firm that, as relevant here, serves as the authorized licensor for a group of companies known as the DVD Patent Licensing Group (the "Licensing Group") that owns numerous patents essential for the manufacture of DVD products. AMI is a limited liability company established under the laws of Nevada with its principal place of business in North Carolina that produces and sells DVDs.

In February 2004, Toshiba and AMI executed a contract and accompanying letter agreement (collectively, the "Agreement") that granted AMI the right to manufacture, import and offer for sale DVD products using the Licensing Group's proprietary technology. The Agreement, which was retroactively effective to January 1, 2004, had two principle components. First, in exchange for Toshiba's releasing it from "any and all claims of infringement of the DVD Patents . . . for the period prior to the Effective Date" of the Agreement, AMI agreed to pay back royalties in amounts that varied from $0.75 to $0.05 depending on the date of infringement (the "Back Royalties"). Second, AMI agreed on a going-forward basis to report and pay royalties to Toshiba in the amount of $0.05 per disc that AMI produced. Under the Agreement, royalty reports were to be made on a semi-annual basis and payments were due 90 days after the conclusion of each reporting period; any late payment was subject to a two-percent-per-month interest rate. The Agreement obligated AMI "to keep accurate books with respect to sales, other transfers, and royalties, and to permit Licensor to audit those books no more than once annually" (the "Audit Clause"). The Agreement also included the following "Most Favored Rates (MFR) Clause:"

[Article] 6.1 Except as provided in Article 6.1.1 of this Agreement, in the event that Licensor grants a DVD Patent license to another party with royalty rates more favorable than those set forth in . . . Exhibit 3, whether or not such more favorable royalty rates are on terms and conditions that are different from those set forth herein, Licensor shall send written notice to Licensee specifying the more favorable royalty rates and any terms and conditions that are different from those set forth herein within thirty (30) days of the granting of DVD Patent License providing for such more favorable royalty rates. Licensee shall be entitled to an amendment of this Agreement to the extent of providing for royalty rates as favorable as those available to such other party within thirty (30) days of receipt of such written notice from Licensor by sending written notice to Licensor requesting such amendment; provided, however, Licensee also agrees to be bound by any terms and conditions under which such more favorable royalty rates are made available to such other party, including any additional benefits to Licensor that may be included among the terms and conditions corresponding to such royalty rates. Any amendment made pursuant to this Article 6.1 shall be effective as of the date it is made, and such more favorable royalty rates shall not be retroactively applicable in favor of Licensee, and shall not be a basis for claiming any refund of royalties paid prior to such effective date.

6.1.1 Article 6.1 shall not apply to:

6.1.1.2 Determination by Licensor of back royalties owed by a Licensee; Article 6.4 of the Agreement provided that any dispute between the parties "arising out of or in connection with the interpretation or execution of [the] Agreement" would be litigated in New York and would be governed by New York law.

It appears that AMI initially complied with its reporting and payment obligations. In March 2006, however, AMI failed to make the payment due for the July to December 2005 reporting period. Indeed, despite continuing to submit reports in which it calculated and reported the royalties it owed, AMI failed to make any payments to Toshiba for the twelve semiannual periods extending from July 1, 2005 through June 30, 2011. Throughout 2008 and again in late-2011, Toshiba sent AMI numerous e-mails in an effort to obtain payment of the outstanding royalty balance, which came to total $468,139.70 based on the rate fixed by the Agreement and exclusive of interest. AMI never suggested in response to these communications that it was entitled to a more favorable royalty rate or that Toshiba had failed to perform its obligations under the Agreement.

Also during the relevant period, Toshiba posted on its website and sent form letters on three different occasions to existing licensees, including AMI, offering reduced royalty rates. In a letter dated March 1, 2005, Toshiba offered to reduce the royalty rate applicable to AMI from $0.05 to $0.045; a letter of January 25, 2008 offered a rate of $0.04; and a letter of December 20, 2011 offered a further-reduced rate of $0.0375 to licensees whose accounts were not overdue. AMI never responded to any of these offers and, indeed, continued to report its royalty obligations using a rate of $0.05 per disc.

Having failed to obtain payment from AMI, Toshiba commenced this action on February 1, 2012. On March 15, AMI filed an answer in which it denied liability and asserted counterclaims for breach of contract and breach of the implied duty of good faith and fair dealing. After Toshiba moved to dismiss the counterclaims as inadequately pled, AMI filed an amended answer on April 25 ("Amended Answer"). The Amended Answer acknowledged that AMI had entered into the Agreement with Toshiba, that it had submitted royalty reports for the July 2005 - June 2011 period, and that it had failed to pay the royalties calculated in the reports. AMI denied, however, that Toshiba's complaint accurately described the rates due under the Agreement. AMI asserted eight defenses to Toshiba's breach-of-contract claim and re-pled its own breach-of-contract and good-faith-and-fair-dealing counterclaims. In support of its counterclaims, AMI made the following assertions:

If Toshiba licensed its patented DVD technology at royalty rates more favorable than the rates in the License Agreement, Article 6.1 of the License Agreement required Toshiba to notify AMI and make those more favorable rates available to AMI. Toshiba has not provided such notice to AMI, and has not offered AMI the opportunity to pay lower rates. Competitors of AMI sell DVD disks at prices below the price AMI could profitably sell DVD disks under the terms of the License Agreement. At these prices, AMI could not cover the raw material costs and the royalty set forth in the License Agreement. AMI, therefore, is informed and believes that Toshiba provided more favorable licensing arrangements to other parties without making these more favorable terms available to AMI, in breach of Article 6.1 of the License Agreement. [ . . . ]

Based on the competition AMI is encountering in the market place described in Paragraph 6 and the fact that Toshiba did not audit AMI's books, among other things, AMI is informed and believes that AMI's competitors are underreporting sales and therefor [sic] paying effective royalty rates that are less than the royalty rates set forth in the License Agreement. This outcome-which destroys the benefits AMI negotiated for in Article 6.1 of the License Agreement-results from Toshiba's failure to audit the books of its licensees (i.e. AMI's competitors).

The Court held a conference pursuant to Rule 16, Fed. R. Civ. P., on May 4, 2012. At the conference it was agreed that the parties would confer regarding any targeted discovery that was necessary to established any reduced-rate offers that Toshiba had made to licensees after the date of the Agreement. The parties agreed that Toshiba would immediately produce documentation reflecting any offers to license DVD technology to third parties at rates lower than those paid by AMI since the signing of the Agreement. Toshiba's commitment to produce these materials was memorialized in a May 15 letter to AMI. Enclosed with the May 15 letter were copies of offer letters sent to all licensees, including AMI, in 2005, 2008, and 2011, informing them of the rate adjustments described above. Counsel for Toshiba affirmed that, "[a]side from these three offers," the company "has ...


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