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Luminara Worldwide, LLC v. Liown Electronics Co. Ltd.

United States District Court, D. Minnesota

April 20, 2015

Luminara Worldwide, LLC, Plaintiff,
v.
Liown Electronics Co. Ltd., Liown Technologies/Beauty Electronics, LLC, Shenzhen Liown Electronics Co. Ltd., Boston Warehouse Trading Corp., Abbott of England (1981), Ltd., BJ's Wholesale Club, Inc., Von Maur, Inc., Zulily, Inc., Smart Candle, LLC, Tuesday Morning Corp., Ambient Lighting, Inc., The Light Garden, Inc., and Central Garden & Pet Co., Defendants.

Daniel R. Hall, Joseph W. Anthony, and Courtland C. Merrill, Anthony Ostlund Baer & Louwagie PA, 90 South 7th Street, Suite 3600, Minneapolis, MN 55402; Ryan S. Dean, Fish & Tsang LLP, 2603 Main Street, Suite 1000, Irvine, CA 92614, for Plaintiff.

Devan V. Padmanabhan, Erin O. Dungan, Nadeem Schwen, Brooks F. Poley, Lukas Dustin Jonathon Toft, and Paul J. Robbennolt, Winthrop & Weinstine, PA, 225 South 6th Street, Suite 3500, Minneapolis, MN 55402-4629, for Defendants Liown Electronics Co. Ltd., Liown Technologies/Beauty Electronics, LLC, and Shenzhen Liown Electronics Co. Ltd.

Devan V. Padmanabhan, Nadeem Schwen, Brooks F. Poley, Lukas Dustin Jonathon Toft, and Paul J. Robbennolt, Winthrop & Weinstine, PA, 225 South 6th Street, Suite 3500, Minneapolis, MN 55402-4629, for Defendants Boston Warehouse Trading Corp., Abbott of England (1981), Ltd., Von Maur, Inc., Zulily, Inc., Smart Candle, LLC, Tuesday Morning Corp., The Light Garden, Inc., and Central Garden & Pet Co.

Devan V. Padmanabhan, Nadeem Schwen, Brooks F. Poley, Lukas Dustin Jonathon Toft, and Paul J. Robbennolt, Winthrop & Weinstine, PA, 225 South 6th Street, Suite 3500, Minneapolis, MN 55402-4629; Michael J. Pape, Fish & Richardson PC, 60 South 6th Street, Suite 3200, Minneapolis, MN 55402, for Defendant BJ's Wholesale Club, Inc.

Lukas Dustin Jonathon Toft and Paul J. Robbennolt, Winthrop & Weinstine, PA, 225 South 6th Street, Suite 3500, Minneapolis, MN 55402-4629, for Defendant Ambient Lighting, Inc.

MEMORANDUM OPINION AND ORDER

SUSAN RICHARD NELSON, District Judge.

I. INTRODUCTION

This matter is before the Court on (1) Defendants Liown Electronics Co. Ltd., Shenzhen Liown Electronics Co. Ltd., and Liown Technologies/Beauty Electronics, LLC's (collectively, "Liown" or the "Liown Defendants") Motion to Dismiss First Amended Complaint [Doc. No. 18]; (2) Defendants Abbott of England (1981), Ltd. and Boston Warehouse Trading Corp.'s Motion to Dismiss First Amended Complaint [Doc No. 46]; (3) The Liown Defendants and Defendants Abbott of England (1981), Ltd. and Boston Warehouse Trading Corp.'s Motion to Dismiss Second Amended Complaint [Doc. No. 94]; (4) Defendant Tuesday Morning Corp.'s Motion to Dismiss Second Amended Complaint [Doc. No. 111]; (5) Defendant Central Garden & Pet Co.'s Motion to Dismiss Second Amended Complaint [Doc. No. 113]; (6) Defendant Zulily, Inc.'s Motion to Dismiss Second Amended Complaint [Doc. No. 114]; (7) Defendant The Light Garden, Inc.'s Motion to Dismiss Second Amended Complaint [Doc. No. 116]; (8) Defendants BJ's Whole Sale Club, Inc., Smart Candle, LLC, and Von Maur, Inc.'s Motion to Dismiss Second Amended Complaint [Doc. No. 128]; and (9) Defendants' Motion to Dismiss Third Amended Complaint [Doc. No. 135]. For the reasons set forth below, the Court denies all nine motions.

II. BACKGROUND

A. The Parties and Claims

Originally, two Plaintiffs, Candella, LLC (hereinafter, "Candella") and Luminara Worldwide, LLC (hereinafter, "pre-merger Luminara"), filed this patent infringement lawsuit against Liown Electronics Co. Ltd., Liown Technologies/Beauty Electronics, LLC, and Shenzhen Liown Electronics Co. Ltd. (hereinafter, "the Liown Defendants"). (See Compl. ¶ 12 [Doc. No. 1].) The Liown Defendants are all companies formed under the laws of the People's Republic of China, and have places of business in China. (See Third Am. Compl. ¶ 8 [Doc. No. 131].)

Until December 31, 2014, Candella was a California limited liability company that was the "exclusive licensee possessing all substantial right, title and interest to patents issued by the United States Patent and Trademark Office for inventions relating to flameless candles." (See id. ¶ 5.) Pre-merger Luminara was a Delaware limited liability company that "obtained from Candella the exclusive right to make, use and sell products utilizing Candella's licensed flameless candle technology." (See id. ¶ 6.) Candella owned 50% of pre-merger Luminara, and Candella's only revenues came from 60% of pre-merger Luminara's profits from selling the patented products at issue. (See Merrill Decl., Ex. 14 "Motion Hearing Transcript" at 11:5-6 [Doc. No. 37-4].)

On September 10, 2014, Plaintiffs filed a First Amended Complaint, which amended the list of Defendants and the list of patents-in-suit. (See generally First Am. Compl. [Doc. No. 13].) The newly added Defendants included Boston Warehouse Trading Corp. and Abbott of England (1981), Ltd. (See generally First Am. Compl. [Doc. No. 13].) Boston Warehouse Trading Corp. and Abbott of England (1981), Ltd. both import into the United States and sell throughout the United States flameless candles manufactured by Liown, which allegedly infringe Plaintiffs' patents. (See id. ¶¶ 9, 10.)

Plaintiffs alleged three counts against Defendants. In Count I, they stated a claim for patent infringement, alleging that Defendants "have been, and still are, directly infringing, either literally or under the doctrine of equivalents, " claims of four patents: (1) United States Patent No. 7, 837, 355 ("the '355 patent"), (2) United States Patent No. 8, 070, 319 ("the '319 patent"), (3) United States Patent No. 8, 534, 869 ("the '869 patent"), and (4) United States Patent No. 8, 696, 166 ("the '166 patent"). (See id. ¶ 16 [Doc. No. 13].)

In Count II, Plaintiffs sought a declaratory judgment of non-infringement. (See id. ¶¶ 21-34.) Specifically, they sought a judgment from the Court that its candles do not infringe any valid claim of the Liown Defendants' U.S. Patent No. 8, 789, 986 ("the '986 patent"). (See id. ¶ 33.) Plaintiffs claim that the '986 patent is based on the exact Artificial Flame Technology that Candella disclosed to the Liown Defendants in a non-disclosure agreement. (See Pl.'s Mem. at 16 [Doc. No. 36].) Because Liown threatened to enforce its '986 patent against Plaintiffs, and because Plaintiffs argue that the intellectual property underlying the '986 patent was stolen from them, Plaintiffs seek a declaratory judgment of non-infringement. (See First Am. Compl. ¶ 33 [Doc. No. 13].)

In Count III, Plaintiffs sought a declaratory judgment of invalidity. (See id. ¶¶ 35-39.) Specifically, Plaintiffs argue that because the intellectual property underlying the '986 patent was stolen from them, the '986 patent is "invalid for failure to satisfy one or more of the conditions of patentability set forth in Title 35 of the United States Code." (See id. ¶ 37.)

B. Underlying Contracts

1. Disney-Candella Contract

Candella became the "exclusive licensee" for "Artificial Flame Technology" as a result of entering into an Intellectual Property License Agreement ("Agreement") with Disney Enterprises, Inc. (hereinafter, "Disney"). Candella and Disney first entered into the Agreement in 2008. (See Poley Decl., Ex. E "2008 Candella-Disney Agreement" [Doc. No. 22-2].) The parties renewed and updated their Agreement in 2012. (See Poley Decl., Ex. H "2012 Candella-Disney Agreement" [Doc. No. 22-4].)

Disney and Candella have updated the 2012 Agreement through four separate amendments. (See Poley Decl., Ex. I "First Amendment" [Doc. No. 22-4]; Merrill Decl., Ex. 1 "Second Amendment" [Doc. No. 37-1]; Ex. 3 "Third Amendment" [Doc. No. 37-1]; Ex. 2 "Fourth Amendment" [Doc. No. 37-1].) Each amendment consecutively builds on the others. Therefore, in order to interpret the Agreement accurately, the Court references the 2012 Agreement, and all four amendments, as needed.

When the parties first executed the 2012 Agreement, the licensed patents covered by the Agreement included the Disney Patents related to the Artificial Flame Technology, "including, but not limited to [the '455 patent], together with any and all corresponding patents." (See Ex. H, "2012 Agreement" at 2 [Doc. No. 22-4].) Therefore, any other patents that Disney had, which related to the Artificial Flame Technology, were automatically subject to this Agreement and its subsequent amendments. As of September 9, 2014, the date the Fourth Amendment was fully executed, Disney's Artificial Flame Technology patents included (1) United States Patent No. 7, 837, 355 ("the '355 patent"), (2) United States Patent No. 8, 070, 319 ("the '319 patent"), (3) United States Patent No. 8, 534, 869 ("the '869 patent"), and (4) United States Patent No. 8, 696, 166 ("the '166 patent"). (See Merrill Decl., Ex. 2 "Fourth Amendment" at 5 [Doc. No. 37-1]; see also Third Am. Compl. ¶ 20 [Doc. No. 131].) The parties refer to these four patents as the "Schedule A Patents" or the "Disney Patents."

Pursuant to the 2012 Agreement and the four subsequent amendments, Candella was assigned a bundle of rights, and Disney retained certain rights. Below, the Court separately outlines the rights of Candella and Disney.

a. Candella's Rights

Pursuant to the 2012 Agreement, Disney granted Candella the right to a "worldwide... exclusive license, with the exception of Disney's reserved rights in Section 2.2... only to the limited extent necessary to make, have made, use, sell, offer for sell, and import the [patents-in-suit]." (See Poley Decl., Ex. H "2012 Disney-Candella Agreement" § 2.1 [Doc. No. 22-4].) Although the Agreement initially provided that this exclusive license was non-assignable, non-sublicensable, and non-transferable, the First Amendment to the Agreement omitted this limitation from the Agreement. (See Poley Decl., Ex. I "First Amendment" §§ 2(b), (c) [Doc. No. 22-4].)

Now, Candella has the right to "grant sublicenses under the Schedule A Patents provided that as to each sublicense, Candella provides [Disney] with at least thirty (30) days prior written notice of an intention to grant the sublicense including the identity of the sublicensee and a copy of the sublicense agreement to be executed, and provides [Disney] with a fully executed copy of the sublicense agreement... within thirty (30) days after its execution." (See id. § 2(b).) Candella also has the right to assign its rights "with the consent of [Disney], " but Disney cannot unreasonably withhold its consent. (See id. § 2(c).) Candella must also provide Disney "with a fully executed copy of the assignment agreement... within thirty (30) days after its execution." (See id.)

Additionally, Candella has the "sole and exclusive right to enforce the [patents-in-suit] against third parties, including the sole and exclusive right to sue... in its own name and without joining [Disney], for past, present or future infringement of the [patents-in-suit].... Candella agrees to provide [Disney] with at least thirty (30) days prior written notice of an intention to sue a third party including the identity of the third party." (See Merrill Decl., Ex. 2, "Fourth Amendment" § 2(a) [Doc. No. 37-1].) Although Candella must provide Disney with prior written notice of its intent to sue, Candella does not need prior written approval from Disney in order to sue an alleged infringer. (See Poley Decl., Ex. I, "First Amendment" § 13(d) (stating that section 13.2 of the 2012 Agreement, which mandated that Candella receive prior written approval from Disney in order to sue, no longer applies) [Doc. No. 22-4].)

If Candella successfully sues for patent infringement, Disney is entitled to [REDACTED\] royalty on monies paid to Candella via settlement or judgment. (See id. § 3(b).) Candella also agreed to keep Disney "fully informed of the progress of any litigation relating to Candella's enforcement" of the patents-in-suit; "to promptly provide [Disney] with copies of all substantive papers filed and orders issued in such litigation;" and to provide Disney "with a reasonable opportunity to review and provide comments on any papers prior to being filed by Candella that relate to a challenge to the validity or enforceability of the [patents-in-suit]." (See Merrill Decl., Ex. 2, "Fourth Amendment" § 2(a) [Doc. No. 37-1].) Although the Agreement provides for Disney to remain apprised of the state of the litigation, Candella still has the "sole and exclusive right to sue" and has the "discretion to select legal counsel to represent itself and [must] pay all legal fees and costs of enforcement." (See id.) Also, Disney agreed to be bound "by any judgment that may be rendered in any suit with respect to the validity, the enforceability, and infringement" of any of the Schedule A Patents. (See id.)

The Agreement is set to expire on April 30, 2020, but either party is permitted to terminate the Agreement if both parties agree to do so, or if either party "material[ly] breach[es]" a term of the contract. (See Poley Decl., Ex. H "2012 Disney-Candella Agreement" §§ 7.2.1, 7.2.2 [Doc. No. 22-4].) Candella may also choose to renew its license for the remainder of the lives of the patents, plus six years. (See Merrill Decl., Ex. 1 "Second Amendment" § 2 (amending § 7.1 of the 2012 Disney-Candella Agreement) [Doc. No. 37-1].)

b. Disney's Retained Rights

Although Candella acquired several rights through the 2012 Agreement and subsequent amendments, Disney also retained certain rights. For instance, Disney retained formal "ownership" of, or "title to, " the patents-in-suit. (See Poley Decl., Ex. H "2012 Disney-Candella Agreement" § 9.1 [Doc. No. 22-4].) Disney also retained responsibility for maintenance of the patents-in-suit. Specifically, it controlled and remained responsible for "all costs and expenses related to the preparation, prosecution, maintenance and all other activities related to the patent applications and issued patents associated with the Licensed Intellectual Property (as applicable)." (See id. § 12.)

Pursuant to the Agreement, Disney also retained the right to receive royalty payments:

equal to [REDACTED\] of Licensee's Gross Revenue for all Licensed Products manufactured during the Term (the "Royalty Payments"). The Royalty Payments [were] reduced to [REDACTED\] for all Licensee's cumulative Gross Revenue in excess of [REDACTED\] and [were further] reduced to [REDACTED\] for all Licensee's cumulative Gross Revenue in excess of [REDACTED\]

(See id. § 5.1) (bold in original). Candella also was required to make additional [REDACTED\] royalty payments to Disney on any "Sub-licensee's Gross Revenue' from any products made or sold by or for the sublicensee under the sublicensee granted by Candella." (See Poley Decl., Ex. I, "First Amendment" § 3(a) [Doc. No. 22-4].) Additionally, as noted above, Disney also had the right to receive [REDACTED\] royalties on any monies paid to Candella to satisfy a settlement or judgment as a result of litigation Candella entered to enforce the patents-in-suit. (See id. § 3(b).)

Most importantly, Disney retained the nonexclusive right for itself, and its Affiliates, to "make, have made, use, sell, offer for sale and import the Licensed Products, within and outside the Product Categories" throughout the world. (See Poley Decl., Ex. H, "2012 Disney-Candella Agreement" § 2.2 [Doc. No. 22-4].) The Agreement defined the term "Affiliate" to mean:

any entity controlling or controlled by or in common control with a Party.
where "control" is defined as the ownership of at least 50% of the equity or beneficial interest of such entity or the right to vote for or appoint a majority of the board of directors or other governing body of such entity.

(See id. § 1.) Furthermore, for purposes of determining which entities retained the right to make, use and sell the products at issue, "the term Affiliate' [did] not include an entity operated under license from the Walt Disney company where such license [was] only a license to Artificial Flame Technology." (See id. § 2.2.) In other words, Disney was not permitted to license the Artificial Flame Technology to a company merely for the purposes of licensing the patents.

2. Candella-Luminara Contract

After acquiring the rights outlined above, Candella entered into an Exclusive Sourcing and Distribution Agreement with pre-merger Luminara on October 6, 2010, which was later replaced with an agreement dated March 31, 2011. (See Pl.'s Mem. at 7 [Doc. No. 36].) On February 3, 2014, Candella, the Principal, and pre-merger Luminara, the Distributor, entered into an Amended and Restated Exclusive Sourcing and Distribution Agreement (hereinafter, "the Sublicense"), which superseded and replaced any prior agreement between the two parties. (See generally Merrill Decl., Ex. 4 "Sublicense" [Doc. No. 37-1].)

a. Pre-Merger Luminara's Rights

The Sublicense provided that pre-merger Luminara "hereby accepts appointment, as [Candella's] exclusive sourcing agent and exclusive distributor during the term of this Agreement with the exclusive right to manufacture, have manufactured, sell, promote, and otherwise distribute Products to Customers in the Territory." (See id. § 2.01.)

Candella also granted to pre-merger Luminara the "right to exclude all others, from making, using, or selling any product that uses any Intellectual Property licensed by [Candella] under the Disney License or any Intellectual Property owned or otherwise held by [Candella]." (See id.) Specifically, the Sublicense provided that pre-merger Luminara "may institute any proceedings against... third party infringers and join [Candella] as a plaintiff in such action." (See id. § 11.03.) According to the Sublicense:

[e]ach party agrees to cooperate fully with the other party in any action taken against such third parties, provided that all expenses of such action shall be borne by the party instigating the action and all damages which may be awarded or agreed upon in settlement of such action shall accrue first to the party taking the action in an amount sufficient to cover all costs and expenses of such action, and thereafter to [Candella.]

(See id.) Therefore, even if pre-merger Luminara had successfully brought suit against an infringer, Candella would have the rights to all damages, excluding the amount needed to cover pre-merger Luminara's costs and expenses of litigation. Moreover, the Court notes that pre-merger Luminara's right to exclude all others was shared with Candella. The Sublicense gave Candella and pre-merger Luminara both the right to sue for patent infringement. (See id. § 11.03.)

Additionally, the Sublicense prohibited either party from assigning or otherwise transferring its rights and obligations "except with the prior written consent of the other party." (See id. § 16.02.) Withholding of consent need not be reasonable. (See id.) Accordingly, Candella could have chosen to unreasonably withhold consent for pre-merger Luminara to transfer its rights, and vice-versa. (See id.)

Finally, the Sublicense provided that either party could terminate the Sublicense "in the event the other party [was] in material breach." (See id. § 12.02(a).) Either party could also terminate the Sublicense if the other party filed for bankruptcy or became insolvent. (See id. § 12.02(b).)

b. Candella's Retained Rights

As for Candella's rights, the Sublicense explicitly stated that "[Candella] shall own all rights and licenses to Intellectual Property." (See id. §11.01.) Pre-merger Luminara "acknowledge[d] that under no circumstances [would] it acquire any ownership rights of any Intellectual Property owned by [Disney], which [was] licensed to [Candella] under the Disney License." (See id.)

Candella also agreed to, at its own expense, "defend [pre-merger Luminara] and its affiliates... against all claims that are based upon allegations (i) that the Artificial Flame Technology and any related Intellectual Property infringes any third party's intellectual property." (See id. § 9.02.) As part of this agreement, Candella promised to "indemnify" pre-merger Luminara "against any and all costs, losses, damages and expenses arising from or related to such claims." (See id.)

As noted above, Candella also retained its right to "institute any proceedings against such third party infringers and join [pre-merger Luminara] as a plaintiff in such action." (See id. § 11.03.) Although pre-merger Luminara also had the right to sue to enforce the patents, Candella kept all damages from successful litigation, excluding litigation costs and expenses. (See id.) The Sublicense also required pre-merger Luminara to pay "Distribution Payments" or royalties to Candella on its cumulative gross revenue. (See id. § 7.01.)

Finally, in addition to having the right to terminate the Sublicense in the event that pre-merger Luminara materially breached the contract, filed for bankruptcy, or became insolvent, Candella also had the right to terminate this Sublicense if the Disney License was terminated. (See id. § 12.02(c).)

3. Plaintiffs' Relationship with the Liown Defendants

Plaintiffs explain in their response brief that, in "February 2010, Candella sought a factory capable of manufacturing its flameless candles." (See Pl.'s Mem. at 9 [Doc. No. 36].) "On February 16, 2010, Candella entered into a non-disclosure agreement (NDA') with Liown to facilitate negotiations for Liown to manufacture Luminara's candle." (See id.) In the following weeks, Candella showed Liown a prototype candle, discussed the candle's design, and shared detailed design drawings with Liown as part of the negotiations process. (See id.)

By June 2010, negotiations with Liown "broke down, " and "Liown [allegedly] surreptitiously filed a patent application in China on June 28, 2010 claiming ownership of the Artificial Flame Technology that Candella had disclosed to Liown under the terms of the NDA." (See id.) Liown also filed for patent protection in the United States and was eventually issued the '986 patent. (See id.) Plaintiffs argue that the '986 patent claims "the same features Candella disclosed to Liown under the NDA in 2010." (See id. at 10 (citing Poley Decl., Ex. O "'986 Patent" [Doc. No. 22-6]).) In previous patent infringement litigation, Liown conceded that the earliest conception date for the invention underlying the '986 patent was February 25, 2010. (See Merrill Decl., Ex. 21, "Interrogatories and Answers" at 7 [Doc. No. 37-4].)

Liown allegedly began selling flameless candles in the United States in 2012. (See Pl.'s Mem. at 10 [Doc. No. 36].) Candella filed a lawsuit against the Liown Defendants alleging patent infringement in November 2012. (See id.) Liown moved to dismiss the action on standing grounds. (See id.) Before the district court judge assigned to the case could issue a ruling, the parties entered into a settlement agreement in November 2013. (See id. (citing Merrill Decl. ¶ 3 [Doc. No. 37]).) Soon after, the '986 patent was issued on July 29, 2014. (See Poley Decl., Ex. O "'986 Patent" [Doc. No. 22-6].) A few days later, on August 5, 2014, Liown notified pre-merger Luminara by letter that it would no longer comply with the terms of the settlement because it felt it was "time to part ways." (See Merrill Decl., Ex. 22 "Letter from Liown to David Baer" [Doc. No. 37-4].) Plaintiff read this letter as Defendants threatening to sue Plaintiffs for infringing Liown's '986 patent. (See Third Am. Compl. ¶ 33 ("In the [August 2012] letter, counsel for Liown... threatened enforcement of future patent rights.") [Doc. 131].)

The same day, Plaintiffs filed this suit. (See generally Compl. [Doc. No. 1].) The next day, on August 6, 2014, Liown filed its own Complaint in an action titled Shenzhen Liown Electronics Co., Ltd. v. Luminara Worldwide, LLC, et al., No. 14-cv-3112 (SRN/FLN). The Liown Complaint includes two causes of action: a claim for infringement of the 986 patent against all defendants, and a claim against the Luminara Defendants for tortious interference with existing and prospective business ...


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