VDF Futureceuticals, Inc. v. Stiefel Laboratories, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-3232
VDF FUTURECEUTICALS, INC.,
Plaintiff-Appellant,
v.
STIEFEL LABORATORIES, INC., et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 13 C 407 — John W. Darrah, Judge.
____________________
ARGUED MAY 29, 2015 — DECIDED JULY 10, 2015
____________________
Before POSNER, EASTERBROOK, and SYKES, Circuit Judges.
POSNER, Circuit Judge. In this needlessly complex case (the
plaintiff’s complaint is 33 pages long and consists of 184 par-
agraphs), with federal jurisdiction based on diversity of citi-
zenship and the governing substantive law that of Illinois,
the parties are wrangling over a license agreement. The
agreement—40 pages of fine print, including numerous
2 No. 14-3232
amendments—is between the plaintiff, VDF FutureCeuticals,
Inc., and one of the three defendants, J&J Technologies, LC
(the other two defendants are Stiefel Laboratories, Inc., and
Joseph A. Lewis II). VDF has trademark and patent rights in
“CoffeeBerry,” an extract from the whole fruit (not just the
bean) of the coffee plant.
The agreement licensed J&J (managed by defendant Lew-
is, formerly a 45 percent owner of the company, as was an-
other of the company’s three owners) to make and sell Cof-
feeBerry-based skin-care products to which VDF has the in-
tellectual property rights. In other words, the agreement li-
censed J&J to “commercialize” VDF’s intellectual property.
The license required J&J to remit to VDF, as royalties, 15 per-
cent (later raised to a third) of any revenues that J&J ob-
tained from selling the licensed product, and of any royalties
that J&J received from firms to which it granted sublicenses.
All the royalties received by VDF would be what are called
“running royalties,” that is, royalties based on the number of
sales by the licensee (J&J), or by sublicensees of the licensed
product. Regarding sublicensees, the license permitted J&J to
sublicense its rights under the license “in the exercise of
[J&J’s] sole discretion and judgment” (altered to “in the ex-
ercise of its best judgment” by an amendment in 2006).
The license also required J&J to pay VDF, at a minimum,
a specified alternative quarterly royalty in order to protect
VDF in the event that the running royalties fell below a spec-
ified level in particular quarters. The license provided that it
could not be assigned without VDF’s written permission, but
it did not forbid a change of control of J&J, and this omission
has turned out to be critical.
No. 14-3232 3
The license was issued in 2004. Two years later J&J subli-
censed defendant Stiefel, a subsidiary of GlaxoSmithKline.
Stiefel was a natural to become involved in VDF’s business
because it’s a manufacturer of dermatological products and
VDF hoped CoffeeBerry would become an ingredient of
such products.
Four years later, J&J’s three owners sold their ownership
interests to Stiefel for $8.5 million (a third of which was held
back pending VDF’s written acknowledgement of the mem-
bership change, but we can ignore that detail). J&J thereupon
became a Stiefel subsidiary and, VDF claims, obligingly
agreed to reduce Stiefel’s royalty obligation (remember that
Stiefel was J&J’s sublicensee) and otherwise hurt itself, for
example by abandoning, when Stiefel terminated the subli-
cense that J&J had given it, the right under the sublicense to
a $1 million termination fee.
Stiefel’s internal documents state that its reasons for
buying J&J’s stock rather than taking an assignment of J&J’s
license from VDF were both to avoid having to get VDF’s
permission for an assignment and (since Stiefel would now
control J&J) to reduce the royalties that Stiefel would have to
pay for its marketing of CoffeeBerry. Two months after buy-
ing J&J’s stock, Stiefel engineered an amendment to the sub-
licence agreement (that is, the agreement that made Stiefel a
sublicensee of J&J) that reduced the alternative minimum
royalties that Stiefel owed J&J. The effect was to divert part
of the license-revenue stream from VDF and J&J to Stiefel.
Two years later (2012) VDF filed this lawsuit, charging
J&J, Stiefel, and Lewis with having committed a variety of
unlawful acts. These included multiple breaches of contract,
including what VDF contends was the de facto assignment
4 No. 14-3232
of J&J’s license to Stiefel without VDF’s approval, breach of
the common law duty of good faith and fair dealing in the
performance of a contract, failure to use “commercially rea-
sonable efforts to make, use, sell, and otherwise commercial-
ize” the licensed products (in other words, failure to use
“best efforts” to promote those products), failure to pay VDF
a third of the $8.5 million purchase price for J&J’s stock as an
advance royalty, and ultimately shutting down J&J’s busi-
ness to cut off royalties to VDF. The complaint also asks that
the veil be pierced so that Lewis and Stiefel can be charged
with J&J’s misdeeds. Those two defendants are further
charged with conspiring to appropriate the royalties and
other contract payments due VDF under the license agree-
ment. In addition, Lewis is charged with unjust enrichment
and conversion as a result of that appropriation and with
breach of fiduciary duty to VDF, and Stiefel with tortious
interference with the VDF license. And for good measure all
three defendants (Stiefel, Lewis, and J&J) are charged with
conspiring to interfere with the license.
The district judge granted summary judgment in favor of
the defendants with respect to two of VDF’s claims: that the
defendants had engineered an unauthorized assignment of
the J&J license and that the $8.5 million that Stiefel had paid
to acquire J&J was really a purchase of J&J’s anticipated sales
revenue under the license agreement and a third of that rev-
enue should therefore have gone to VDF as advance royal-
ties.
The district judge certified his ruling for an immediate
appeal even though VDF’s numerous other claims against
the defendants remain pending in the district court unre-
solved. Fed. R. Civ. P. 54(b) provides that “when an action
No. 14-3232 5
presents more than one claim for relief … the court may di-
rect entry of a final judgment as to one or more, but fewer
than all, claims … only if the court expressly determines that
there is no just reason for delay.” If the court does enter final
judgment, the judgment is immediately appealable, just like
a conventional final judgment—one that winds up the entire
case in the trial court—provided that the claim or claims re-
solved by the judgment do not so overlap claims remaining
in the district court as to create needless duplication of effort
to resolve the parties’ entire dispute. Olympia Hotels Corp. v.
Johnson Wax Development Corp., 908 F.2d 1363, 1366–68 (7th
Cir. 1990); Spiegel v. Trustees of Tufts College, 843 F.2d 38, 44–
46 (1st Cir. 1988); 10 Wright & Miller, Federal Practice & Pro-
cedure § 2657 (3d ed.). An example of needless duplication is
the appeal to this court of a claim that might be undercut by
the resolution of a factual dispute not yet decided by the dis-
trict court.
There is some overlap in this case between the claims be-
fore us on appeal and those yet to be resolved in the district
court. The overlap arises from the fact that all the claims ul-
timately derive from Stiefel’s purchase of all the stock of J&J.
But the overlap is far from complete, because VDF’s assign-
ment and advance-royalty claims, the only ones before us on
this appeal, focus on the sale of J&J’s stock to Stiefel, while
VDF’s best-efforts claim, along with related claims pending
in the district court (most of which appear to be similar to
and may be encompassed by the best-efforts claim), focus on
events that took place after the sale of J&J’s stock by its own-
ers to Stiefel.
In addition the claims pressed in this appeal have been
fully briefed and argued, are ripe for decision, and are easily
6 No. 14-3232
resolved; as we’re about to see, they have no merit and thus
were properly dismissed by the district court. Remaining for
trial are stronger claims by VDF pending in the district
court. The claim for breach of the best-efforts clause in the
license agreement is particularly strong because how could
J&J be found to have been exerting “commercially reasona-
ble efforts to make, use, sell, and otherwise commercialize”
CoffeeBerry, as the license obligated it to do, when as a re-
sult of its becoming owned by Stiefel it reduced its royalty
payments to VDF without compensation?
Were we to dismiss the appeal we might well see in a
subsequent appeal the same two claims before us in this ap-
peal. For even if VDF prevails on other claims in the district
court, it might challenge that court’s dismissal of the claims
before us in the present appeal in the hope of obtaining
greater damages by proving more violations.
So we turn to the two claims before us—that the defend-
ants effected an unauthorized assignment to Stiefel of the
license that VDF had granted to J&J and that the $8.5 million
that Stiefel paid to acquire J&J was a purchase of J&J’s antic-
ipated royalty revenue under the license and so a third of the
$8.5 million should have gone to VDF as advance royalties.
A fatal problem with the first claim is that by failing to place
any restrictions on who could own its licensee J&J, VDF ex-
posed itself to being taken advantage of by a change of own-
ership at J&J that would result in operating changes and al-
ter its relationship to VDF. Had Stiefel bought J&J’s license,
or instead bought J&J and dissolved the company so that
when the dust settled all that Stiefel would have obtained
from the purchase was the license, Stiefel would have violat-
ed the terms of the license by obtaining it without VDF’s
No. 14-3232 7
consent. Baxter Healthcare Corp. v. O.R. Concepts, Inc., 69 F.3d
785, 788–89 (7th Cir. 1995) (Illinois law). That didn’t happen.
J&J remained in existence after its acquisition by Stiefel, as
VDF’s licensee and Stiefel’s sublicensor.
It’s true as we’ve seen that the agreement between J&J
and Stiefel to reduce the alternative minimum royalties
owed by Stiefel to J&J reduced the income that VDF received
from the license. But Stiefel’s negotiations that had led to
this untoward consequence for VDF had been not with J&J
but with its three owners. This makes a difference so far as
Stiefel’s allegedly malign interference with and manipula-
tion of J&J are concerned. A change in ownership is likely to
result in a change in operations. That the change in how J&J
was operated was adverse to the licensor’s interests is why
with clearer foresight VDF would have included restrictions
in the license on changes in the ownership of its licensee,
J&J. Its failure to do so was fatal, because “the courts have
held that the sale of all the stock in a closely held corporation
whose principal asset is a contract does not violate a nonas-
signment clause even when the stock is sold to a person to
whom, previously, the counterparty had explicitly refused
that the contract be assigned. If the counterparty to a con-
tract with a corporation wishes to limit the persons to whom
ownership or control of the corporation can be sold, it must
do this through specific language to that effect in the con-
tract (a ‘change of control’ clause); a nonassignment clause
will not suffice.” Kenneth Ayotte & Henry Hansmann, “Le-
gal Entities as Transferable Bundles of Contracts,” 111 Mich-
igan Law Review 715, 724 (2013). “[T]he mere change of stock
ownership would not nullify a non-assignable license, ab-
sent a change in control provision.” Elaine D. Ziff, “The Ef-
fect of Corporate Acquisitions on the Target Company’s Li-
8 No. 14-3232
cense Rights,” 57 Business Lawyer 767, 789 (2002); see Baxter
Healthcare Corp. v. O.R. Concepts, Inc., supra, 69 F.3d at 788–
89.
Were this not the rule, routine anti-assignment clauses
would impede liquidity in the market for corporate control.
Sizeable corporations are likely to be party to many con-
tracts, often containing anti-assignment clauses similar to the
one in VDF’s license to J&J. Were such clauses interpreted to
prohibit changes in the control of an acquired corporation,
acquirers (such as Stiefel in this case) would have to negoti-
ate (and therefore pay something) for the consent of the li-
censors of the acquired corporation to any changes in the
control of the licensee that the acquirer wanted to make.
This analysis doesn’t leave VDF remediless, because the
license it granted J&J required J&J to use its best efforts to
promote the sale of VDF’s products and to remit the royal-
ties generated by those sales to VDF; and J&J, under the in-
fluence of Stiefel and Lewis, may have done neither. But that
is an issue that the district court has yet to address.
VDF’s second claim in this appeal is that the $8.5 million
that Stiefel paid J&J’s owners for their stock constituted ad-
vance royalties, a third of which therefore were owed to
VDF. Although Stiefel’s willingness to pay that price was (as
Stiefel’s own documents confirm) based on a forecast of
J&J’s future royalty receipts from sales of CoffeeBerry, the
license that VDF had granted J&J limited the royalties that
J&J would owe VDF to money “based on the actual sale of
[CoffeeBerry] Products by Licensee or its sublicensees which
are actually collected by Licensee.” J&J’s owners sold stock,
not CoffeeBerry products, to Stiefel, and they rather than J&J
received the $8.5 million that Stiefel paid for their company’s
No. 14-3232 9
stock. VDF’s interpretation of the royalty provision in the
license would require a seller of corporate stock to pay a por-
tion of the purchase price to the corporation’s licensors, a
portion estimated from the expected cash flow from exploit-
ing the acquired corporate assets to generate revenue. See
Ben McClure, “Digging into the Dividend Discount Model,”
Investopedia, www.investopedia.com/articles/fundamental/04
/041404.asp (visited July 9, 2015). Such a requirement, in-
volving complex and contestable financial estimations,
would be another impediment to the smooth operation of
the market in corporate control.
The appeal, in short, has no merit, and the decision ap-
pealed from is therefore
AFFIRMED.