SMS Demag Aktiengesellschaft v. Material Sciences Corporation ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-2479
SMS D EMAG A KTIENGESELLSCHAFT,
Plaintiff,
v.
M ATERIAL S CIENCES C ORPORATION,
Defendant-Appellee.
A PPEAL OF: T ERRONICS D EVELOPMENT C ORPORATION,
Intervenor-Appellant.
Appeal from the United States District Court
for the Central District of Illinois.
No. 2:06-cv-02065—Michael P. McCuskey, Chief Judge.
A RGUED D ECEMBER 12, 2008—D ECIDED M AY 8, 2009
Before C UDAHY, F LAUM, and W OOD , Circuit Judges.
C UDAHY, Circuit Judge. In this diversity action, Terronics
Development Corporation (TDC) sues Material Sciences
Corporation (MSC) for breach of contract, seeking
2 No. 08-2479
damages and the return of certain patents TDC had
assigned to MSC. The district court granted MSC’s motion
for summary judgment in its entirety. We affirm the
dismissal of TDC’s damages claims, but reverse the
dismissal of TDC’s claim seeking the reassignment of
its patents.
I.
MSC is one of the largest liquid coating companies in
North America. It pre-paints the raw materials that are
used by commercial and industrial manufacturers in cars,
building supplies, industrial equipment and consumer
products. Beginning in the 1990s, MSC began working
with TDC—a small research and engineering company—to
develop a new process for coating metal materials using
powder-based paint. Like traditional powder coating
methods, TDC’s process—which the parties call the
“Powder Cloud” process—involves electrostatically
coating sheet metal by imparting different electric
charges to the powder paint and the metal substrate.
Also like other powder coating methods, the Powder
Cloud process wastes less coating material than tradi-
tional, liquid coating methods and eliminates the need
for solvents, thus minimizing the generation of hazardous
waste. TDC’s Powder Cloud process was apparently
innovative because it enabled a single apparatus to coat
products of different shapes, and to coat both sides of a
metal surface simultaneously. As a result, TDC’s Powder
Cloud technology seemed to promise both greater flexi-
bility and faster processing than traditional powder
coating processes.
No. 08-2479 3
In 1994, TDC granted MSC an exclusive license to use
and sublicense the Powder Cloud technology in exchange
for a fixed annual fee plus a variable fee based on MSC’s
sales. The parties renewed their licensing agreement in
1996, and TDC assigned its technology for a fixed term
to MSC in 1998. It is this third “technology assignment”
agreement (henceforth the Agreement) that is at issue
here. The Agreement was never formally executed, but
MSC concedes for the purpose of this appeal that the
agreement is enforceable. Four provisions of the Agree-
ment are worth mentioning at the outset: (1) TDC assigned
MSC title to five patents and six patent applications
relating to the Powder Cloud process; (2) MSC was re-
quired to purchase its powder coating equipment from
TDC unless TDC was unable to provide it; (3) MSC agreed
to purchase a fixed minimum amount of consulting
services and equipment from TDC during the years the
Agreement was in effect; and (4) the agreement would
expire in 2002, but could be renewed at MSC’s discre-
tion and would be renewed automatically if certain
sales goals were met.
In 1996, MSC sublicensed the Powder Cloud technology
to SMS Demag Aktiengesellschaft (SMS), giving SMS the
exclusive right to market this technology outside of North
America.1 After this initial success, however, the com-
mercialization of the Powder Cloud technology did not
proceed as the parties had expected. For one thing, MSC
1
SMS was the original plaintiff in this action, but is not a
party to this appeal.
4 No. 08-2479
did not meet any of the sales goals that would have
triggered the Agreement’s automatic renewal or variable
fee provisions. Further, because the technology was a
great deal more experimental than the parties had antici-
pated, TDC experienced significant cost overruns in
supplying the equipment and services MSC needed.
(As TDC’s CEO Ed Escallon would later remark, “[t]he
Hubble’s optics weren’t correct on launch.”) In 1996 and
again in 1997, TDC chose to meet these cost overruns
by borrowing against its expectation of future profits,
executing two promissory notes in favor of MSC—the
second superseding the first—for a total of $258,484
together with a 7% annual rate of interest. Under the
terms of the second Note, MSC was permitted “at its
sole discretion” to credit the fees due to TDC under the
Agreement against the outstanding balance under the
Note after April 2001.
It appears that by 1998, MSC began having serious
second thoughts about its commitment to the Powder
Cloud technology. Company records indicate that as a
result of “overcapacity” and “lower than expected sales,”
MSC decided to merge its “applied technology group,”
which had been responsible for commercializing the
Powder Cloud technology, into its liquid coating division.
In addition, MSC postponed plans to construct a stand-
alone powder coating facility, electing instead to add a
powder coating line to an existing, liquid coating facility
in Middletown, Ohio. The parties refer to this Middle-
town facility as “Line 15.” TDC elected not to supply
MSC with the equipment for Line 15.
No. 08-2479 5
The parties’ relationship came to an unpleasant end in
2002. In late 2001, Ed Escallon sent MSC a letter purporting
to memorialize an oral agreement providing for MSC to
cancel $100,000 of TDC’s debt under the Note. Escallon’s
letter stated that MSC agreed to forgive this debt to
compensate TDC after MSC elected not to purchase its
equipment for Line 15 from TDC. MSC did not respond to
Escallon’s letter. In April 2002, MSC sent TDC a letter
informing it that MSC was exercising its right under
the Note to credit the $250,000 technology assignment
fee MSC owed TDC for 2002 against the balance of the
Note, which at the time was about $350,000. Finally,
in May 2002, TDC sent MSC a letter notifying it that
it would “no longer provid[e] support to MSC activities.”
SMS, the original sub-licensee for the Powder Cloud
technology, commenced this action against MSC in
federal district court. TDC intervened, adding its own
breach of contract claim seeking $2,153,400 in damages
as well as the reassignment of four of its patents. MSC
counterclaimed against TDC for $103,843.52, based on
the outstanding balance on the Note as well as the cost of
the repair work for which TDC was paid but failed to
perform. The district court granted MSC’s motion for
summary judgment in its entirety, dismissing TDC’s
damages and equitable claims and granting judgment
for MSC on its counterclaims. On this appeal, TDC has
challenged only the dismissal of its claims.
II.
Summary judgment is appropriate when there are no
genuine factual disputes that require a trial. See Fed. R. Civ.
6 No. 08-2479
P. 56(c); Waldridge v. American Hoechst Corp., 24 F.3d 918,
920 (7th Cir. 1994). In evaluating a motion for summary
judgment, courts must view the evidence in the light
most favorable to the non-moving party. Reeves v.
Sanderson Plumbing Products, Inc., 530 U.S. 133, 150 (2000).
However, before a non-movant can benefit from a favor-
able view of the evidence, it must show that there is
some genuine evidentiary dispute. “Genuine,” in this
context, means “reasonably contestable.” Wallace v. SMC
Pneumatics, Inc., 103 F.3d 1394, 1396 (7th Cir. 1997). Put
otherwise, a factual dispute is “genuine” only if a rea-
sonable jury could find for either party. Reeves, 530 U.S. at
148; de la Rama v. Ill. Dep’t of Human Servs., 541 F.3d 681,
685 (7th Cir. 2008).
In the present case, TDC sought an order compelling
MSC to reassign TDC’s patents as well as approximately
$2.15 million in damages. TDC’s damages claim was
comprised of three sub-claims: (1) $250,000, which TDC
alleges it was owed as an “assignment fee” for 2002;
(2) $143,400, which was the amount of consulting services
and equipment MSC was required to purchase from
TDC in 2002; and (3) $1,760,000, which represents the
fees TDC would have been due from 2003 to 2006 if the
Agreement had been renewed.
The district court granted summary judgment for MSC
on all of TDC’s claims. We review this decision de novo.
Gates v. Caterpillar, Inc., 513 F.3d 680, 685 (7th Cir. 2008).
Under the terms of the Agreement, Illinois law controls.
We will consider TDC’s claims in reverse order.
No. 08-2479 7
A.
$1.76 million of TDC’s claimed damages represents the
money it would have been owed if the Agreement had
been renewed. By its terms, the Agreement ran from
April 1998 to April 2002. MSC was empowered to renew
the Agreement for an additional four-year term “at its
sole discretion.” While there is no dispute that MSC
did not expressly renew the Agreement, TDC argues
that MSC renewed the agreement implicitly “by perfor-
mance.” TDC makes two allegations in support of this
claim: first, it alleges that MSC extended SMS’s sub-license
in 2004; second, it claims that MSC continued to market
the Powder Cloud technology after the Agreement had
lapsed.
As to the first allegation, there is no evidence that MSC
affirmatively “extended” SMS’s sub-license after 2002.
Indeed, the copy of the sub-licensing agreement that was
made part of the record on appeal shows that MSC had
no need to “extend” the sub-license because the sub-
license would be renewed automatically until it was
cancelled. Nor was MSC required to terminate the sub-
license in 2002, when TDC repudiated the Agreement.
Section 10.6(a) of the Agreement provides that the ex-
piration or non-renewal of the Agreement would have
no effect on existing sub-licenses.
There is also no evidence to support TDC’s allegation
that MSC implicitly renewed the Agreement by con-
tinuing to market TDC’s technology after 2002. TDC
points to what appears to be a printout from a 2004 trade
publication, which it submitted in opposition to MSC’s
8 No. 08-2479
motion for summary judgment, but which it did not
authenticate. Even if we were to assume that the printout
is what it purports to be, the printout lends no support
to TDC’s cause. The publication describes, among other
things, how MSC worked with TDC to develop a powder
coating system, how MSC’s application process “uses
several patented elements to achieve . . . high-speed
capabilities” and how MSC continues to attempt to find
markets for coated products. Assuming that this pub-
lication is authentic, it does not suggest that MSC was
continuing to exploit the specific patents that TDC had
assigned to MSC through the Agreement.
The non-moving party is entitled to have only reason-
able inferences drawn in its favor. See Omosegbon v. Wells,
335 F.3d 668, 677 (7th Cir. 2003). In the present case, even
if MSC had continued to use its equipment to make and
sell powder-coated steel products, as the publication
indicates, there is no evidence to suggest—and it would be
unreasonable to infer—that MSC was infringing on
TDC’s patents in order to do so. Section 10.2 of the Agree-
ment requires MSC to stop manufacturing and selling
TDC’s equipment to others after the Agreement expires;
it does not require it to stop using equipment it had
already paid for to manufacture powder-coated products
to sell to third parties.
In short, there is no genuine issue of fact as to whether
MSC renewed the Agreement. Accordingly, the sum-
mary dismissal of TDC’s claim for fees from 2003 to 2006
was proper.
No. 08-2479 9
B.
TDC’s claim for $143,400 in damages based on the
consulting services and equipment that MSC was
required to purchase in 2002 is equally without merit.
Section 4.4 of the Agreement provides that “MSC will
guarantee minimum annual spending with [TDC] to
provide consulting services, equipment and engineering
for the non-renewable term of the agreement.” Specifically,
MSC was required to purchase $143,360 in services and
equipment from TDC in 2002. However, in May 2002,
TDC sent MSC a letter declaring that it was “no longer
providing support to MSC activities.” Under Illinois
law, “in the face of clear evidence of an intent to
repudiate, the non-repudiating party is no longer under
an obligation to perform.” In re C & S Grain Co., 47 F.3d
233, 237 (7th Cir. 1995) (citing Builder’s Concrete Co. v. Fred
Faubel & Sons, Inc., 373 N.E.2d 863, 868 (Ill. App. Ct. 3d
Dist. 1978)). After TDC declared its unwillingness to
perform under the Agreement, it was quite clearly not
entitled to payments it would otherwise have been
due under the Agreement.
Indeed, even if MSC had been the first party to breach
the Agreement—as we discuss below, it was not—TDC’s
complete repudiation of the Agreement would have
relieved MSC of its obligation to attempt to purchase the
equipment and services TDC declared itself unwilling to
provide. See Ahern v. Knecht, 563 N.E.2d 787, 792 (Ill. App.
Ct. 2d Dist. 1990) (“[S]ubstantial nonperformance . . .
warrants rescission.”).
10 No. 08-2479
C.
The final portion of TDC’s damages claim is for $250,000,
which represents the “guaranteed minimum fixed fee”
TDC alleges it is still owed for 2002. Section 3.1 of the
Agreement calls for MSC to pay TDC a fixed fee of
$250,000 by April 2002. However, in 1997, TDC borrowed
$258,484 from MSC to cover its cost overruns. By
April 2002, the balance under the Note was $349,773. And
on April 9, 2002, MSC gave TDC written notice of its
decision to “exercise its discretion [to] credit the Guaran-
teed Minimum (Fixed) Fees of $250,000 due under our
license agreement for this year against the outstanding
balance [under the Note].” The Note provides that “[a]fter
April 1st 2001, MSC may at its sole discretion credit
minimum fees due for that year to any remaining out-
standing balance.” Thus, MSC’s decision to credit the
$250,000 it owed TDC for 2002 against the balance
under the Note was entirely proper.
As best we can tell, TDC has affirmatively waived its
claim that it is still owed the full $250,000 fee, admitting
that it “may have erred in the amount [it had originally]
demanded.” (TDC Br. at 12.) However, TDC continues to
argue that it is still owed $100,000 of this $250,000
license fee. Unfortunately, TDC’s account of why it is
still owed this money is almost completely incompre-
hensible. In its appellate brief, TDC suggests that it was
owed this money for “consulting services” under
Sections 6.4 and 6.5 of the Agreement. But there is
nothing in Sections 6.4 or 6.5—or anywhere else in the
Agreement—that validates TDC’s claim that it is owed
No. 08-2479 11
this specific amount; the pleadings give the impression
that TDC made this number up out of whole cloth.
Even more puzzling than this is the fact that TDC claims
that this alleged $100,000 debt is related to MSC’s con-
struction of Line 15. It is undisputed that TDC elected not
to supply equipment for Line 15. As TDC’s CEO Ed
Escallon would later explain, “[TDC] had some
important market opportunities in designing and
building equipment unrelated to MSC, and did not want
to forgo them.” Thus, even though TDC had the right to
supply MSC with equipment, it waived this right,
which under the terms of the Agreement left MSC free
to supply Line 15 as it saw fit.
TDC’s claim becomes slightly more intelligible—but
only slightly—when considered in the context of
Escallon’s October 2001 letter to MSC. In his letter,
Escallon states that in April 1999, TDC granted MSC a
license to build Line 15 without TDC’s help in exchange
for “closing out the first 100,000 dollar note.” This was
apparently an oral agreement. Indeed, when Escallon
invited MSC to formally execute this alleged agreement
years later, MSC refused. Thus, even if there were
evidence of this alleged oral agreement, the agreement
would be invalid under Illinois’s version of the Uniform
Commercial Code, which requires that cancellation of a
Note must be in writing. See 810 Ill. Comp. Stat. § 5/3-
604(a).2
2
There is no merit to TDC’s argument that MSC is estopped
from relying on the U.C.C. because it failed to plead the U.C.C.
(continued...)
12 No. 08-2479
However, even if Escallon had alleged merely that
MSC had made an oral promise to pay TDC
$100,000—instead of alleging that MSC orally promised
to forgive a portion of the Note—summary judgment for
MSC still would have been proper. The principal problem
with TDC’s claim is that there is no evidence that MSC
ever promised TDC anything. Contrary to TDC’s claims
to the contrary, Escallon’s statements that he was
promised $100,000 is not evidence. See de la Rama, 541
F.3d at 685 (bare allegations insufficient to defeat a
motion for summary judgment); Drake v. Minn. Mining &
Mfg. Co., 134 F.3d 878, 887 (7th Cir. 1998) (bald assertions
do not give rise to genuine issues of fact); McDonnell v.
Cournia, 990 F.2d 963, 969 (7th Cir. 1993) (self-serving
assertions without more will not defeat a motion for
summary judgment).
2
(...continued)
as an affirmative defense in its answer. TDC’s second amended
complaint gave no notice of a separate claim for $100,000
based on this alleged oral agreement. Nor did TDC object to
MSC’s invocation of the U.C.C. below.
Nor, for that matter, is there any merit to TDC’s argument that
this U.C.C. provision does not apply here because MSC
cancelled only a portion of TDC’s debt. The statute does not
distinguish between total and partial discharge of a party’s
obligations under a Note. During oral argument, TDC’s attor-
ney was not able to point to any authority for its claim that
the statute should be read to apply only to a total discharge
of a debt.
No. 08-2479 13
TDC attempts to avoid this conclusion by relying on
Illinois’s doctrine of “past performance.” Under this
doctrine, performance under an oral agreement can
render such an agreement enforceable. See Meyer v.
Logue, 427 N.E.2d 1253, 1256 (Ill. App. Ct. 1st Dist. 1981);
Hills v. Hopp, 122 N.E. 510, 512 (Ill. 1919). TDC argues
that the oral agreement called for it to forego its right to
supply equipment for Line 15 in exchange for $100,000.
(To put this point less charitably, TDC alleges that it was
promised $100,000 in exchange for doing nothing.) TDC
claims that it lived up to its part of the alleged bargain:
it refrained from supplying MSC with equipment. It
argues that this “performance,” such as it is, is enough
to render MSC’s alleged oral promise enforceable.
This argument, of course, is unavailing. The justification
for the past performance doctrine is at least in part
that performance under an oral agreement typically
constitutes evidence that there actually was an agreement.
See Meyer, 427 N.E.2d at 1256 (“When one party fully
performs his part of the alleged oral contract . . . the courts
recognize that this very performance strongly indicates
the existence of a contract.”) (citing 2 Corbin on Con-
tracts § 430 (1950)); see also Carl A. Haas Auto. Imports, Inc.
v. Lola Card Ltd., 933 F. Supp. 1381, 1388 (N.D. Ill. 1996)
(noting that the past performance doctrine applies to
performance that is “clearly more consistent with the
existence of the agreement than with some other arrange-
ment.”). Where, as here, the alleged performance costs a
party nothing—or where the same party actually benefits
from its own alleged “performance”—then this perfor-
mance is no evidence at all of the existence of the agree-
ment.
14 No. 08-2479
In the present case, TDC alleges that it performed by
failing to exercise its right to supply equipment for
Line 15. However, Escallon admitted that TDC had no
interest in supplying the Line 15 equipment because
“[TDC] had some important market opportunities in
designing and building equipment unrelated to MSC, and
did not want to forgo them.” He also admitted that TDC
actually lost money supplying equipment to MSC.3 Because
TDC admits that it benefitted by forgoing its right to
supply equipment to Line 15, neither its “performance”
under the alleged oral agreement, nor Escallon’s self-
serving insistence that there was such an agreement, is
enough to give rise to a triable issue concerning
whether MSC owes TDC $100,000.
D.
While the district court properly granted summary
judgment for MSC on TDC’s damages claims, it was
error for the court to dismiss TDC’s claim seeking the
reassignment of certain of its patents. Section 10.2 of the
Agreement provides that “[i]f this Agreement is terminated
3
The following exchange occurred during MSC’s deposition of
TDC’s CEO: “Question: Now, the minimum consulting fees
and engineering fees that you are charging . . . that wasn’t all
profit, correct? Answer: Oh, my God. That was mostly loss . . .
Question: Had you agreed to provide $143,400 worth of
services for MSC . . . you’re saying your profit would have
been 15 to 20%, or a lot less than that? Answer: A lot less.
Question: Maybe nothing? Answer: Maybe nothing.”
No. 08-2479 15
or expires, MSC shall immediately cease manufacturing
and selling the Equipment . . . and shall return to [TDC]
all the Technology capable of being returned.” Section 1.12,
in turn, provides that “Technology includes but is not
limited to the patents . . . [and] patent applications,” which
were identified in exhibits to the Agreement. Read to-
gether, these provisions required MSC to reassign the
patents that were assigned to it under the Agreement
when the Agreement was terminated in May 2002.
MSC argues that it is not required to reassign TDC’s
patents because a different section of the Agreement,
section 10.6(b), requires it to reassign the patents “if the
agreement is terminated by MSC.” This provision
does not say that MSC is required to reassign the patents
only if MSC is the party breaching the Agreement. How-
ever, MSC argues that the insertion of this specific provi-
sion relating to the patents, in addition to the general
provision concerning “technology” reassignment, is
evidence that the parties intended to protect TDC’s inter-
ests if, but only if, MSC was the party in breach.
While this may have been what the parties intended, this
is not what they said. Under Illinois’s “four corners” rule,
if a written agreement is unambiguous, then the scope
of the parties’ obligations must be determined from the
contract language without reference to extrinsic evi-
dence. Air Safety, Inc. v. Teachers Realty Corp., 706
N.E.2d 882, 884 (Ill. 1999). Here, by its terms, the Agree-
ment requires MSC to reassign TDC’s patents if the
Agreement expires. Since these terms are unambiguous,
we must enforce the Agreement as written.
16 No. 08-2479
Unfortunately, there seems to be some uncertainty as
to which patents, precisely, TDC assigned to MSC, and
which patents MSC still retains. The Agreement was
never formally executed. While the parties concede for
the purposes of summary judgment that the Agreement
is enforceable, there are two different drafts of the Agree-
ment that were included in the record on appeal. TDC’s
second amended complaint attaches what appears to be
the earlier of the two drafts, which lists five patents and
six patent applications that TDC putatively assigned to
MSC. However, TDC identifies four different patents in its
second amended complaint, none of which were trans-
ferred to MSC under the draft of the Agreement that TDC
attached to its complaint. Further, the record on appeal
shows that MSC has abandoned at least five of TDC’s
patents with TDC’s consent, and that a sixth patent has
already been reassigned to TDC. Thus, we cannot deter-
mine based on this record whether MSC has actually
retained title to any of the patents TDC assigned to it, nor
can we determine if the patents TDC identifies in
its complaint actually ever belonged to TDC.
Although we remand this case for further pro-
ceedings, we do so in the expectation that the issues we
have identified can be resolved expeditiously. There is
factual support for TDC’s claim that it assigned MSC title
to certain patents in 1998. The sole questions that remain
to be determined are: first, which patents did TDC
assign to MSC; and second, has MSC retained title to
any of these patents. The district court has broad discre-
tion to determine the best method for resolving these
questions on remand.
No. 08-2479 17
III.
We affirm the district court’s dismissal of TDC’s claims
for damages, but reverse its dismissal of TDC’s equitable
claim for the reassignment of its patents and remand
for further proceedings consistent with this opinion.
A FFIRMED IN P ART, R EVERSED IN P ART
AND R EMANDED
5-8-09