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Diamond Services Management, LLC v. Fable Jewelry Co.

November 20, 2012


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.



Plaintiff Diamond Services Management, LLC ("Diamond") brings this action against Fable Jewelry Company, Inc. ("Fable").*fn1 Diamond asserts two causes of action: (1) breach of contract (Count One); and (2) breach of the covenant of good faith and fair dealing (Count Two). Pursuant to Federal Rule of Civil Procedure 56, Diamond now moves for summary judgment on Count One. For the following reasons, Diamond's motion is granted, and Count Two is dismissed sua sponte.


A. The License Agreement

Diamond is a Delaware Limited Liability Corporation that has the exclusive right to sublicense certain patents relating to methods for manufacturing tungsten rings (the "Licensor Patents").*fn3 Fable is a Utah corporation that is in the business of designing, manufacturing, marketing, and selling jewelry throughout the United States.*fn4 On October 1, 2008, Diamond and Fable entered into a license agreement (the "License Agreement") through which Diamond granted Fable a "non-exclusive, non-transferable, non-assignable license under the Licensor Patents to make, use, import, offer for sale and sell licensed products" in the United States.*fn5

In consideration for receiving this license, the License Agreement obligates Fable topay Diamond royalties (the "Royalty Payments") for each unit of product incorporating the Licensor Patents (the "Licensed Products") on a quarterly basis over annual periods running from October 1st to September 30th (the "Annual Period").*fn6 The Royalty Payments are calculated by multiplying the number of units Fable sold during the Annual Period by a dollar amount specified in the License Agreement.*fn7 Additionally, the License Agreement provides that the Royalty Payments for each quarter must not be below a certain amount (the "Minimum Royalties").*fn8 During the first Annual Period -- running from October 1, 2008 to September 30, 2009*fn9 -- the Minimum Royalties were set at a flat fifty thousand dollars per quarter.*fn10 For subsequent Annual Periods, the Minimum Royalties per quarter are set to seventy percent of one quarter of the units sold during the previous Annual Period, multiplied by the appropriate quarterly rate.*fn11

The License Agreement further provides that, following the second quarter of the second Annual Period, the Minimum Royalties per quarter must be "paid in advance, on or before the first day of such quarter . . . ."*fn12 Additionally, the License Agreement obligates Fable to pay the difference between the Royalty Payments and the Minimum Royalties (the "True-Up Royalties") within thirty calendar days of the end of each quarter, and to provide to Diamond a detailed written report of the calculations, subtotals, and amounts due and payable of the Minimum and True-Up Royalties at the time they are made.*fn13

B. Fable Stops Paying Royalties

Fable performed under the License Agreement for the first two Annual Periods and the first two quarters of the next Annual Period,*fn14 but began to "fall behind on Royalty Payments at least as early as April 2011."*fn15 Fable has failed to fully pay the Minimum Royalties and the True-Up Royalties for the third quarter of the Third Annual Period, and Fable has not paid any royalties for the next five quarters.*fn16 Fable has provided Diamond with Licensed Product sales data for the third Annual Period, but not the fourth Annual Period.*fn17 Consequently, Diamond is capable of calculating the True Up Royalties and the Minimum Royalties Fable owes it for the third Annual Period, but can calculate only the Minimum Royalties for the fourth Annual Period. By Diamond's calculation, based on the formula set forth in the License Agreement and the sales data provided by Fable, Fable owes $255,109.96 in unpaid royalties, exclusive of the True-Up Royalties for the fourth Annual Period that Diamond is unable to calculate without Fable's fourth Annual Period sales figures.*fn18

On or around January 19, 2012, Diamond sent a letter to Fable notifying Fable of the breach of its obligations under the contract and demanding that Fable make its outstanding royalty payments.*fn19 The License Agreement provides Fable with ten days from the date of receipt of a letter notifying it of a breach of its payment obligations to cure such breach,*fn20 but Fable failed to cure the alleged breach within ten days of receipt of Diamond's letter.*fn21 Subsequently, on May 4, 2012, Diamond instituted this action to recover the unpaid royalties from Fable.

C. Fable's Contentions

Fable's 56.1 Statement does not dispute the facts set forth in Diamond's 56.1 Statement. Instead, Fable's 56.1 Statement repeatedly asserts that, because the royalty rates in the License Agreement were not "negotiated or performed in good faith or in a manner dealing fairly with Fable," they should be reduced or offset.*fn22 Fable's 56.1 Statement sets forth the following "additional material facts." Prior to October 2008, Fable learned that Diamond was licensing "certain tungsten ring technology patented by Trent West."*fn23 Fable then began negotiations with Diamond regarding these patents.*fn24 In the course of these negotiations, Fable requested a "most favored nation type clause," but Diamond declined, assuring Fable that it would be treated fairly.*fn25 Fable also requested a provision that would require Diamond to stop third party infringement on the Licensor Patents, but Diamond declined this request as well, assuring Fable that "rampant infringement would not be permitted."*fn26

The terms of the License Agreement require Fable to pay Diamond between forty and fifty-five dollars for each tungsten ring Fable sells.*fn27 This rate requires Fable to sell its rings for at least one hundred and ten dollars to turn a profit.*fn28 However, after entering the License Agreement, Fable attended trade shows where vendors were selling tungsten rings at substantially ...

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