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Document Sec. Sys., Inc. v. Coupons.com, Inc.

United States District Court, W.D. New York

October 28, 2014

DOCUMENT SECURITY SYSTEMS, INC., Plaintiff,
v.
COUPONS.COM, INC., Defendant

October 27, 2014

For Plaintiff: Paul F. Keneally, Esq., Underberg & Kessler, LLP, Rochester, New York; Timothy J. Haller, Esq., Christopher J. Lee, Esq., David J. Mahalek, Esq., Robert A. Conley, Esq., Joseph A. Culig, Esq., Niro, Haller & Niro, Chicago, Illinois.

For Defendants: Neil A. Goteiner, Esq., Jessica Nall, Esq., Farella, Braun and Martel LLP, San Francisco, California.

Page 486

DECISION AND ORDER

CHARLES J. SIRAGUSA, United States District Judge.

INTRODUCTION

This is an action asserting a claim for breach of contract, relating to a commercial non-disclosure agreement. Now before the Court is Defendant's motion (Docket No. [#89]) for summary judgment. Defendant's application is granted and this action is dismissed.

BACKGROUND

Plaintiff is a corporation that provides " anti-counterfeiting, authentication and massserialization technologies" to other businesses. Amended Complaint [#14-3] ¶ 6. Defendant produces digital and printed store coupons. Between 2003 and 2008, Plaintiff provided Defendant with " safety paper" for printing coupons. However, Plaintiff was also interested in selling Defendant certain anti-counterfeiting technology.

In connection with this ongoing business arrangement, the parties signed two nondisclosure agreements (" NDAs" ), one in 2003, and one in 2005. Id., Exs. A & B. The pertinent 2005 NDA (" the " NDA" or " the agreement" ), which Plaintiff drafted, indicated that Plaintiff was disclosing confidential information to Defendant for the following purpose: " To evaluate a potential

Page 487

business relationship regarding . . . technology and trade secrets of [Plaintiff] related to document printing security features." Id., Ex. B. The NDA stated that Defendant could only use disclosed " Confidential Information" for that purpose.

The NDA indicated, however, that such " Confidential Information" did not include the following types of information:

a) [information that] was known by the Recipient prior to disclosure, as evidenced by its business records; b) [information that is] lawfully received free of restriction from another source having the right to so furnish such confidential information; c) [information that is] independently developed by or for the Recipient without reference to or use of Confidential Information; d) [information that is] lawfully in the public domain other than through a breach of th[e] Agreement; e) [information that] Discloser agrees in writing is free of such restrictions; f) [information that] is disclosed by the Discloser to a third party without a duty of confidentiality on such third party; or g) [information that] is required or compelled by law to be disclosed, provided that the Recipient gives all reasonable prior notice to the Discloser to allow it to seek protective or other court orders.

Nall Declaration [#90], Ex. 6.

The agreement is strictly a non-disclosure agreement, not a license, and it specifically indicates that " [n]o license is either granted or implied by the conveying of Confidential Information to the Recipient." Moreover, as already discussed, the agreement did not envision that Defendant would use the disclosed information for any purpose other than considering whether to purchase Plaintiff's products. Consequently, the parties never negotiated royalties concerning the commercial use of Plaintiff's technology, and the agreement does not expressly provide for the payment or calculation of royalties in the event of a breach of the agreement. Rather, in terms of potential remedies, the agreement indicates only that

any violation or threat of violation [of the agreement] will result in irreparable harm to Discloser for which damages would be an inadequate remedy and therefore in addition to its rights and remedies otherwise available at law, Discloser may seek equitable and administrative relief . . . to prevent any unauthorized use or disclosure.

Id.

At some time prior to 2006, Plaintiff developed the specific anti-copying technology that is the basis of this lawsuit. The technology, known as " Block-Out," is an image that is placed on a printed or digital document, and is designed to prevent photocopying of the document. Plaintiff developed the Block-Out anti-copying mechanism from a design that is widely used on currencies, including U.S. currency, and is commonly referred to as the " EURion pattern." The EURion pattern consists of a pattern of five rings. The anti-copying effect of the pattern is due to the fact that certain commercial-grade photocopiers contain a mechanism, called an " Omron chip," that recognizes the EURion five-ring pattern, and prevents copying of documents containing the pattern. However, many copiers, including the Court's color copier/fax/scanner,[1] and most if not all home printers and scanners, do not contain such a mechanism. Nor, in almost all cases, does the EURion pattern prevent the copying of black-and-white documents, and almost all, if not all, retailers accept black-and-white

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printed coupons. Consequently, the EURion pattern, and the Block-Out technology derived from that pattern, have limited utility for preventing the counterfeiting of coupons.[2]

The parties dispute exactly what constitutes the Block-Out technology and how it differs from the EURion pattern used on currencies. For example, Defendant essentially maintains that Block-Out consists of a five-ring image, which can readily be observed as being just a slightly-enlarged version of the EURion pattern. Plaintiff acknowledges that the anti-copying aspect of the Block-Out image is essentially the same as the EURion pattern, though optimized, by having slightly enlarged rings, so as to ensure that the image triggers copiers' anti-copying mechanism regardless of the type of printing method. In that regard, Plaintiff maintains that certain copying procedures may cause the rings to appear slightly smaller, which can affect whether a copier's Omron chip is activated. However, Plaintiff maintains that its Block-Out technology consists of more than just the five-ring image, and that Defendant " is conflating the printed Block-Out pattern [with] the underlying electronic Block-Out file," [3] which, Plaintiff maintains, consists of " thirteen (13) separate items of Confidential Information." [4] Such items of information pertain to things such as the ideal location for placement of the anti-copying pattern on a coupon and the color of ink to be used.

The parties also dispute whether the Block-Out technology is covered by the NDA. On this point, Defendant maintains that the Block-Out technology is not covered by the NDA, since it is nothing more than the EURion pattern which is in the public domain, and therefore is not novel. Alternatively, Defendant contends that even if the Block-Out technology is not the same as the EURion pattern, it was nevertheless in the public domain since Plaintiff used the Block-Out image on publicly-available printed materials such as coupons. Defendant maintains, in that regard, that the image could be easily copied by anyone wishing to do so. Plaintiff, though, disputes that the image is easily copied, and reiterates that Block-Out consists of the image along with the underlying electronic information about how to make the image, which is novel and not publicly-available, and which is therefore covered by the NDA.

In any event, Plaintiff maintains that in or about late July, 2006, it provided Defendant with a disc containing Block-Out technology, as well as the instructions for how to use the technology. Plaintiff further maintains that it offered to license the information to Defendant.[5] Such " offer" apparently consisted of Plaintiff providing Defendant with a sample of the technology to try out. However, the parties never actually discussed or negotiated possible royalties for the technology,[6] because Defendant informed Plaintiff that it was not interested in using the technology.

However, within a few months thereafter, Defendant began utilizing an anti-copying image, on its coupons, that also

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essentially consists of the EURion five-ring pattern. In that regard, Defendant maintains that it merely copied the EURion five-ring pattern from U.S. currency, which is admittedly in the public domain, and used the image to create its own anti-copying image. In fact, Defendant maintains that it created its anti-copying image before Plaintiff ever provided the disc containing the Block-Out image.

Plaintiff counters that Defendant blatantly stole its Block-Out technology, and has used it since that time without paying Plaintiff anything. Plaintiff believes that Defendant copied the Block-Out technology based, in part, on its expert's opinion that Defendant's five-ring pattern more closely resembles Plaintiff's enlarged /optimized EURion pattern than it does the basic EURion pattern found on currency. However, Defendant's expert contends just the opposite, and maintains that Plaintiff's expert's opinion is based on flawed and subjective methods.

Nevertheless, relatively soon after Defendant began using its EURion-type anti-copying technology, the exact date of which is disputed,[7] Plaintiff at least had a strong suspicion that Defendant was using the Block-Out technology without paying for it. Plaintiff contends, though, that since it was not absolutely sure that Defendant was using Block-Out, and since it had more pressing business matters to address, it did not in any way notify Defendant about its suspicions. According to Plaintiff, it was not until several years later, in approximately 2010, that it became convinced that Defendant was improperly using Block-Out.

On October 24, 2011, Plaintiff commenced this action. At present, the only remaining cause of action is Plaintiff's claim that Defendant breached the NDA by using the Block-Out technology. The Court has already determined that the law of New York State applies to this breach of contract claim.[8]

Plaintiff argues that it is entitled to damages consisting of " lost profits." Plaintiff further argues that such lost profits consist solely of an amount of money that Defendant should have paid to Plaintiff as a reasonably royalty for the use of the Block-Out technology.[9] As already mentioned, the parties never actually negotiated any type of royalty. Nevertheless, Plaintiff contends that such lost-profit-royalty damages amount to approximately $6.7 million. Plaintiff maintains that it arrives at this figure by extrapolating from what other clients were willing to pay to license similar technology. However, Plaintiff has licensed its security technology

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to only a small handful of clients.[10] More specifically, Plaintiff has only licensed Block-Out to five clients.[11] Furthermore, of those, Plaintiff's own expert contends that only two clients are proper comparators for determining what a reasonable royalty would have been for Defendant: Arc Worldwide (" ARC" ) and RR Donnelley and Sons (" RRD" ). Of those two, Plaintiff contends that its license agreement with Arc " was very comparable to what a license with Coupons.com would have looked like." [12]

However, Defendant maintains that " reasonable royalty" damages are not recoverable for a breach of contract under New York law, and that in any event, neither the ARC agreement nor the RRD agreement is helpful in determining a reasonable royalty as to Defendant. At the outset, in that regard, Defendant notes that the parties' NDA was executed in 2005, while Plaintiff never actually licensed Block-Out to anyone in the coupon industry until 2010.[13] Consequently, Defendant contends, an agreement between Defendant and Plaintiff would have been negotiated amidst very different market conditions. Furthermore, Defendant argues, ARC cancelled its license agreement within a few months, after paying Plaintiff only approximately three thousand dollars, because it found that Block-Out was neither effective nor worth the cost, given that it did not work with the vast majority of home printers and scanners.[14] Defendant further contends that ARC's licensing agreement is a poor comparator for the following reasons: 1) it contemplated ARC issuing a much smaller volume of digital coupons than Defendant issues, resulting in a monthly licensing fee of only approximately $1,500 per month, whereas Defendant would have presumably paid a smaller license fee per-transaction due to its substantially higher volume; [15] 2) it envisioned that ARC would use Block-Out on coupons for a narrow category of products, namely, Marlboro tobacco products, while Defendant issues coupons for a wide variety of products; and 3) it required Plaintiff to provide ARC with additional services that were never provided to, or required by, Defendant.[16] Defendant similarly contends that the ...


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