Protection Capital, LLC v. IP Co., LLC ( 2020 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 PROTECTION CAPITAL, LLC, a 11 CASE NO. 18cv1880-L-WVG Delaware limited liability company, 12 ORDER GRANTING Plaintiff, 13 PLAINTIFF’S MOTION FOR v. PARTIAL SUMMARY 14 JUDGMENT [DOC. 36] 15 IP CO., LLC, a Georgia limited liability company; GLOCOM, INC., 16 a Virginia Corporaiton, 17 Defendants. 18 19 Pending before the Court is Plaintiff Protection Capital, LLC’s (“PPC”) 20 Motion for Partial Summary Judgment, or in the Alternative, for an Order 21 Treating Specified Facts as Established (“MSJ”) filed pursuant to Federal Rule of 22 Civil Procedure 56. Doc. 36. Defendants IP Co., LLC (“IPCO”) and Glocom, 23 Inc. (“Glocom”) opposed the MSJ on one ground. See Doc. 40. Pursuant to Civil 24 Local Rule 7.1.d.1, the Court has decided this motion without oral argument. For 25 the following reasons, the Court GRANTS PPC’s MSJ in its entirety. 26 Background 27 This case arises from IPCO’s failure to continue payments to PPC pursuant 1 executed on April 30, 2007. Under the Note, IPCO had access to unsecured loans 2 of up to a maximum aggregate balance of $500,000 between 2007 and 2012. 3 Under the Purchase Agreement, IPCO and its affiliates were required to pay PPC 4 five percent (5%) of all “products, proceeds and amounts received” with respect 5 to the intellectual property identified in the Purchase Agreement. Between 2008 6 and 2017, IPCO remitted the five percent (5%) owed to PPC under the Purchase 7 Agreement without any form of protest or reservation of rights. 8 In 2017, Glocom purchased all of IPCO’s membership interests with 9 knowledge of IPCO’s continuing financial obligations to PPC under the Note and 10 Purchase Agreement. PPC alleges that, after acquisition, Glocom instructed 11 IPCO to breach its financial obligations to PPC under the Purchase Agreement. 12 Due to IPCO’s failure to pay PPC since the Glocom acquisition, between 13 $150,000 and $500,000 is owed by IPCO to PPC at minimum. PPC has since 14 provided IPCO with written notice of default and demand for payment. 15 On August 8, 2018, PPC filed the original complaint against IPCO. 16 Subsequently, the Court found good cause to grant PPC leave to amend its 17 complaint twice. See Docs. 20, 26. PPC filed the operative Complaint on May 18 31, 2019, alleging IPCO is liable for (1) Breach of Contract; (2) For an 19 Accounting, and (3) For Declaratory Relief. See Doc. 31. 20 On July 19, 2019, PPC filed the instant motion, seeking a grant of partial 21 summary judgment with the following relief: (1) requiring IPCO to provide 22 quarterly reports on revenues received by it, SIPCO, and other affiliates, and by 23 any and all transferees of relevant patents, then remit five percent (5%) thereof to 24 Protection Capital within thirty (30) days; (2) finding that IPCO owes PPC, 25 through the end of calendar year 2018, the sum of $595,866.02 with interest 26 thereon at the contract rate; (3) ordering that IPCO, SIPCO, other affiliates, and 27 any and all transferees of the relevant patents to make available, at a reasonable 1 received from the intellectual property subject to the Purchase Agreement; and 2 (4) declaring (a) the Purchase Agreement valid and enforceable; and (b) IPCO 3 must report quarterly on revenues received by it, SIPCO, other affiliates, and 4 transferees, then remit five percent (5%) thereof to PPC within 30 days. See Doc. 5 36 at 2-3. The first two requests relate to PPC’s first claim for relief (Breach of 6 Contract), the third request relates to PPC’s second claim for relief (For an 7 Accounting), and the fourth request relates to PPC’s Declaratory Relief claim. 8 See id. In opposition, IPCO solely contends that it has raised a genuine dispute 9 of material fact with respect to unconscionability, IPCO’s thirteenth affirmative 10 defense, pursuant to Cal. Civ. Code section 1670.5. See Doc. 40. This motion has 11 been fully briefed and is ready for disposition. 12 Legal Standard 13 Summary judgment is appropriate under Federal Rule of Civil Procedure 14 56 "if the movant shows that there is no genuine dispute as to any material fact 15 and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); 16 Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The party seeking summary 17 judgment bears the initial burden of establishing the absence of a genuine issue 18 of material fact. Celotex, 477 U.S. at 323. 19 Where “the party moving for summary judgment would bear the burden of 20 proof at trial, it must come forward with evidence which would entitle it to a 21 directed verdict if the evidence went uncontroverted at trial.” See C.A.R. Transp. 22 Brokerage Co., Inc. v. Darden Restaurants, Inc., 213 F.3d 474, 480 (9th Cir. 23 2000) (citations omitted). In this instance, the moving party must first establish 24 that no genuine issue of fact exists on an issue material to its case. See id. 25 Conversely, where the moving party does not have the ultimate burden of 26 persuasion at trial, it “has both the initial burden of production and the ultimate 27 burden of persuasion on a motion for summary judgment.” Nissan Fire & Marine 1 (citation omitted) (emphasis added). To satisfy its burden of production, the 2 moving party must either produce evidence negating an essential element of the 3 nonmoving party’s claim or show that the nonmoving party does not have enough 4 evidence of an essential element to carry its ultimate burden of persuasion at trial. 5 See Celotex, 477 U.S. at 331. As such, the moving party would be entitled to 6 summary judgment as a matter of law if the nonmoving party does not present 7 sufficient evidence to support its claim. See Anderson v. Liberty Lobby, Inc., 477 8 U.S. 242, 249 (1986). 9 If the moving party fails to discharge its initial burden, summary judgment 10 must be denied and the court need not consider the nonmoving party’s evidence. 11 Adickes v. S.H. Kress & Co., 398 U.S. 144, 159–60 (1970). If the moving party 12 meets the initial burden, the nonmoving party cannot defeat summary judgment 13 merely by demonstrating “that there is some metaphysical doubt as to the material 14 facts.” Matsushita Elect. Indus. Co., Ltd. v Zenith Radio Corp., 475 U.S. 574, 15 586 (1986). Rather, the nonmoving party must “go beyond the pleadings” and by 16 “the depositions, answers to interrogatories, and admissions on file,” designate 17 “specific facts showing that there is a genuine issue for trial.” Celotex, 477 U.S. 18 at 324 (quoting Fed. R. Civ. P. 56(e)). 19 Discussion 20 In the instant motion, PPC seeks an order establishing that IPCO owes PPC 21 $595,866.02 under the Purchase Agreement for revenues earned through calendar 22 year 2018. Doc. 36-1 at 24. Although PPC challenged, inter alia, whether 23 genuine issues of material facts existed related to multiple defenses raised by 24 IPCO in its’ Answer1, IPCO only contests whether the Purchase Agreement is 25 1 PPC contends that IPCO cannot present evidence creating a genuine issue of material fact as to any 26 alleged lack of actual authority or its apparent authority to be bound to the Purchase Agreement as written and performed. See Doc. 36-1. PPC claims IPCO cannot show genuine issues of material fact 27 exist concerning the following affirmative defenses: (1) Fraud, Duress, and Undue Influence; (2) Estoppel/Waiver; (3) Payment; (4) Lack of Consideration; (5) Failure of Condition Precedent; (6) 1 unconscionable as a matter of law. As such, the Court finds that IPCO concedes 2 to the validity of PPC’s other contentions raised in the instant motion and will 3 only address the unconscionability issue. 4 “If the court as a matter of law finds the contract or any cause of the contract 5 to have been unconscionable at the time it was made the court may refuse to 6 enforce the contract[.]” Cal. Civil Code section 1670.5. Generally, the procedural 7 and substantive signs of an unconscionable contract include onerous terms due to 8 unequal bargaining power and one-sided results. Armendariz v. Found. Health 9 Psychcare Servs., Inc., 99 Cal.Rptr.2d 745, 767 (2000). “The prevailing view is 10 that [procedural and substantive unconscionability] must both be present in order 11 for a court to exercise its discretion to refuse to enforce a contract or clause under 12 the doctrine of unconscionability.” Id. (citing Stirien v. Supercuts, Inc., 60 13 Cal.Rptr.2d 138, 145 (1997)). However, both elements need not apply with equal 14 force; courts evaluate the overall impact of any procedural irregularities in 15 contract formation and unreasonableness of the substantive terms on a sliding 16 scale. Id. 17 PPC contends the Purchase Agreement is not unconscionable as a matter 18 of law. Doc. 36-1 at 22. PPC provides that, at the time of contracting, the 19 following circumstances existed: (1) both parties were sophisticated and well- 20 represented; (2) the contract was executed after a three-month negotiation period; 21 (3) it was possible that PPC would lose the unsecured $500,000 investment with 22 no right of recourse against IPCO; (4) a significant likelihood of non-payment 23 pursuant to the Purchase Agreement existed; and (5) the payment provision was 24 plainly evident, not hidden, in the contract and honored for ten (10) years. Doc. 25 36-1 at 23. As such, the Court finds that PPC has carried its burden to show that 26 that IPCO does not have enough evidence to prove unconscionability at trial. 27 violated neither California’s Usury Laws nor California’s Finance Lenders Law. See id. None of these 1 Procedural Unconscionability 2 a. Representation 3 IPCO contends that a genuine issue exists as to whether Michael S. Kagnoff 4 and James Robbins assumed an attorney-client or fiduciary relationship when 5 they agreed to provide IPCO “strategic advice.” Doc. 40 at 22. “An attorney- 6 client relationship exists for purposes of the privilege whenever a person consults 7 an attorney for the purpose of obtaining the attorney’s legal service or advice.” 8 Kerner v. Superior Court, 141 Cal.Rptr.3d 504, 529 (2012) (citation omitted). 9 However, “[i]t is settled that the attorney-client privilege is inapplicable where 10 the attorney merely acts as a negotiator for the client, gives business advice or 11 otherwise acts as a business agent.” Zurich Am. Ins. Co. v. Superior Court, 66 12 Cal.Rptr.3d 833, 846 (2007) (citation omitted). IPCO provides no direct evidence 13 that either Mr. Kagnoff or Robbins ever represented IPCO, its affiliates, or any 14 IPCO’s principals. In fact, Mr. Kagnoff declares that, at the time of contracting, 15 IPCO had an experienced and well-respected corporate transaction and securities 16 attorney, Oliver Lee, as one of its principals. Doc. 36-4 at 2. Kagnoff also notes 17 Mr. Lee’s business acumen, experience, and ability to protect IPCO’s interests 18 during negotiations. Id. To the extent PPC’s principals offered IPCO any 19 strategic business advice prior to execution of the Note and Purchase Agreement, 20 no attorney-client relationship was created. Thus, the Court finds that no attorney- 21 client relationship commenced between PPC’s principals and IPCO and both 22 parties were well represented during negotiations. Therefore, no procedural 23 unconscionability existed on this ground. 24 b. Bargaining Position 25 IPCO intimates that unequal bargaining power existed in negotiations 26 because Mr. Robbins and Kagnoff were aware of IPCO’s dire financial position. 27 Doc. 40 at 25. The Court interprets IPCO’s contention as it claiming its’ assent 1 can excuse an innocent party’s contractual obligations when the other contracting 2 party does a wrongful act which is sufficiently coercive to cause a reasonably 3 prudent person faced with no reasonable alternative to succumb to the 4 perpetrator’s pressure.” Hicks v. PGA Tour, Inc., 897 F.3d 1109, 1119 (9th Cir. 5 2018) (citations omitted). Economic duress exists when there is: “(1) a 6 sufficiently coercive wrongful act on the part of the defendant; (2) no reasonable 7 alternative on the part of the [party under duress]; (3) knowledge of the [party 8 under duress]’s economic vulnerability; and (4) actual inducement to contract.” 9 Tanner v. Kaiser Found. Health Plan, Inc., 2016 WL 4076116, at *4 (N.D. Cal. 10 Aug. 1, 2016). 11 The record indicates that IPCO was involved in several lawsuits 12 challenging patents to various wireless mesh networking technologies prior to the 13 initial meeting with PPC. Doc. 36-4 at 2. The record also reveals that PPC’s 14 principals were aware that IPCO needed urgent funding for patent registrations, 15 licensing activities, and ongoing litigation. Id. During the three months of 16 negotiations, it became apparent that IPCO’s survival and its intellectual property 17 was at risk. Id. However, IPCO has not presented evidence of any wrongful or 18 coercive act committed by PPC in negotiation. Likewise, IPCO fails to set forth 19 evidence that it had no reasonable alternative for financing besides PPC. 20 Notwithstanding, while IPCO could be viewed as a vulnerable negotiating party, 21 PPC risked losing the money the entire line of credit created under the Note if 22 IPCO could not repay. Therefore, IPCO’s assent to the Note and Purchase 23 Agreement was not obtained by economic duress. 24 Accordingly, the Court finds that IPCO has not satisfied its burden to show 25 a genuine issue exists as to procedural unconscionability here. 26 Substantive Unconscionability 27 a. Percentage Profit Sharing 1 provision of the Purchase Agreement is substantively unconscionable. Doc. 40 at 2 27. IPCO first frames the percentage payment as an interest rate for the initial 3 line of credit then frames the percent payment as the cost of legal services. Id. at 4 27-29. Due to the Court’s finding above that no attorney-client relationship was 5 created between PPC’s principals and IPCO, the Court only discusses the interest 6 rate contention here. 7 The California Supreme Court instructs that unconscionability “is a flexible 8 doctrine,” that “requires more than just looking at one particular term in a 9 contract, comparing it to a fixed benchmark, and declaring the term 10 unconscionable.” De La Torre v. CashCall, Inc., 236 Cal.Rptr.3d 353, 364 11 (2018). “An interest rate is the price charged for lending a particular amount of 12 money to a given individual or entity.” Id. at 359. “[T]o declare an interest rate 13 unconscionable means only that—under the circumstances of the case, taking into 14 account the bargaining process and prevailing market conditions—a particular 15 rate was overly harsh, unduly oppressive, or so one-sided as to shock the 16 conscience.” Id. at 359, 366. 17 IPCO fails to set forth evidence to show that the five percent gross profit- 18 sharing provision is either interest or unconscionable. The Note obligated IPCO 19 to pay PPC the principal line-of-credit sum of up to $500,000, or a lesser amount 20 if that amount was advanced, along with any “accrued and unpaid interest” at the 21 rate of six percent (6%) per year before April 30, 2012. See Doc. 43 at 3. With 22 that in mind, the five percent (5%) profit-sharing provision therefore could not 23 act as interest here as it was not the price PPC charged for establishing the line of 24 credit for IPCO. In fact, the Court believes the profit-sharing provision is more 25 akin to a royalty fee than interest. Notwithstanding, it has not been shown that 26 the provision unreasonably favors PPC or that its manifestation is unexpectedly 27 harsh. During 2015-2017, IPCO paid PPC $2,000,246.30 under the profit-sharing 1 |{intellectual property revenue. Doc. 43 at 5. The percentage payment is not 2 || variable. As such, IPCO has not established through evidence how keeping 95% 3 || of its’ gross profits is conscience shocking. Therefore, the Court finds the five 4 || percent (5%) profit-sharing provision is not substantively unconscionable. 5 Conclusion 6 For the foregoing reasons, the Court GRANTS PPC’s Motion for Partial 7 ||Summary Judgment in its entirety. As such, the Court hereby orders as follows: 8 (1) On the Breach of Contract claim, IPCO shall provide quarterly reports 9 it has received since the 2018 year regarding the revenues of IPCO and 10 SIPCO, other affiliates, and patent transferees and remit five percent 11 (5%) thereof to PPC within thirty (30) days; 12 (2) On the Breach of Contract claim, IPCO shall remit to PPC $595,866.02, 13 with interest at the contract rate, to satisfy its 2018 financial obligations 14 under the Purchase Agreement; 15 (3) On the Accounting claim, IPCO, SIPCO, other affiliates, and any 16 transferees of the relevant patents shall make available, at a reasonable 17 time and location, the books and records of each company reflecting all 18 revenue received from the intellectual property subject to the Purchase 19 Agreement; and 20 (4) The Court declares the Purchase Agreement valid and enforceable; 21 thus, IPCO shall report quarterly on revenues received by it, SIPCO, 22 other affiliates, and transferees, then remit five percent (5%) thereof to 23 PPC within 30 days. 24 || Date: January 28, 2020 25 Sa 20 Wy James lug) 27 United States District Judge 28