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Got I, LLC v. XRT, Inc.

United States District Court, N.D. Georgia, Atlanta Division

February 27, 2018

GOT I, LLC and KIDS II, INC., Plaintiffs,



         This matter is before the Court on Plaintiffs GOT I, LLC (“GOT I”) and Kids II, Inc.'s (“Kids II”) (together, “Plaintiffs”) Motion for Partial Summary Judgment of No. Material Breach [119], Motion to Strike Expert Reports of John Shurley and Richard Gottlieb [122], Motion for Partial Summary Judgment of No. Damages [148], and Motion for Partial Summary Judgment of No. Partial Breach of Contract [151]. Defendants XRT, Inc. (“XRT”) and David Eugene Silverglate's (together, “Defendants”) oppose each of those motions.

         I. BACKGROUND

         A. Facts

         This is a contract dispute regarding the royalties due under a Royalty Agreement [120.3] entered into by Plaintiffs and Defendants. GOT I, XRT (formerly known as Rhino Toys), and David Silverglate entered into an Asset Purchase Agreement [120.2] ("APA") on December 30, 2010. GOT I purchased from XRT all of the "Acquired Assets, " as that term is defined in Section 1.1 of the APA. The Acquired Assets included XRT's "OBALL" toy product line and related intellectual property. (Id.) The APA specified the estimated cash purchase price as $4, 500, 000.[1] ([120.2] at §3.1 (c)). The APA further required that Kids II, Got I, and XRT enter into the Royalty Agreement. ([120.2] at § 4.2(f)). The APA and the Royalty Agreement both provide that Delaware law governs the interpretation and construction of the contracts. ([120.2] at § 15.11; [120.3] at § 18).

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         1. The Royalty Agreement

         The Royalty Agreement incorporates the APA by reference. ([120.3] at 2). It explains that "all Royalty Payments made pursuant to this Agreement are part of the Purchase Price (as defined in the APA) for the Acquired Assets (as defined in the APA) pursuant to the APA." ([120.3] at § 2(d)).

         The Royalty Agreement provides for royalties to be paid by GOT I to XRT on three separate categories of products to be manufactured, marketed, and sold by Kids II: (i) ”Existing Product Lines”; (ii) “Newly Developed Product Lines”; and (iii) “Combined Product.” The Royalty Agreement defines Existing Product Line(s) as:

(i) the current product lines of Seller which were actually sold in the marketplace as of the Closing Date; (ii) former product lines of Seller which were previously sold in the marketplace prior to the Closing Date; and (iii) product lines currently under development by Seller but not yet sold in the marketplace as of the Closing Date. Products in these Existing Product Lines are referred to herein as “Existing Products” and are set forth on Schedule A attached hereto. Existing Product Line(s) shall encompass variations of Existing Products, such as different colors, sizes, materials, surface treatments, manufacturing methods, etc., that are cosmetic in nature, or do not alter the basic design or functionality of the Existing Products.

([120.3] at § 1(i)). Products in these Existing Product Lines are referred to herein as ‘Existing Products.'” (Id.).

         The Royalty Agreement defines Newly Developed Product Line(s) as:

[A]ny products developed by Kids II after the Closing Date that do not fall within the Existing Product Lines, and which are (1) based on or derived from Existing Products or any intellectual property or proprietary technology embodied therein, or (2) partially or wholly conceived by David Silverglate or a member of his product development team during his affiliation with Kids II as an employee or independent contractor, and accepted as commercially viable by Kids II.

([120.3] at § 1(j)). Products in the Newly Developed Product Lines are referred to herein as “Newly Developed Products.” (Id.).

         The Royalty Agreement provides for a third category of products referred to as “Combined Product”:

On Occasion, an Existing Product or Newly Developed Product may be included or incorporated with or into an existing product or a newly developed product of Kids II from a division other than Rhino Toys, in a saleable unit (a “Combined Product”).

([120.3] at § 2(b)).

         The Royalty Agreement states that certain royalties are due on Net Sales for all Existing Products, Newly Developed Products, and Combined Products exceeding an agreed upon sales threshold. ([120.3] at § 2)). The Royalty Agreement sets a 5% royalty rate for “Existing Products, ” a 3% royalty rate for “Newly Developed Products, ” and a calculated rate for “Combined Products.” The calculated rate for Combined Products is “based on the ratio of (i) the manufacturing Bill of Materials (BOM) cost of the Existing Product and/or Newly Developed Product to (ii) the total manufacturing BOM cost of the combined Product.” ([120.3] at § 2(b)). Given that formula, the calculated rate for Combined Products necessarily is lower than the 3% rate for Newly Developed Products.

         The Royalty Agreement states that royalties would run “[f]or a period of seventy-five (75) years.” ([120.3] at § 2(a)(ii)). The parties acknowledged, however, that “Existing Products and Newly Developed Products are not expected to remain commercially viable for seventy five (75) years, and nothing in this Agreement shall require Kids II to promote or market Existing Products or Newly Developed Products beyond the time they are commercially viable.” ([120.3] at § 2(a)(iii)).

         2. Royalties Paid

         Pursuant to the Royalty Agreement, Kids II manufactured, marketed, and sold Oball products identified in the Royalty Agreement as Existing Products. Kids II paid a 5% royalty on these products, which included variations on the original Oball as well as products incorporating the Oball “mesh, ” the linked loop structure of the Oball.

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         The parties identified thirteen Existing Products for which there is no dispute that a 5% royalty applies. ([116] at 2-3).

         Kids II also manufactured, marketed, and sold products that all parties agree are Newly Developed Products subject to a 3% royalty. These products include a variety of designs incorporating the Oball mesh:

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         The parties identified seven Newly Developed Products for which there is no dispute that a 3% royalty applies. ([116] at 2-3).

         According to Defendants, Plaintiffs paid $2, 131, 413 in royalties over the period from 2012 to 2016. ([133] at 9).

         3. The Royalty Dispute

         Over time, Kids II manufactured, marketed, and sold an increasing number of products having Oball features that all parties agree are not Existing Products. The parties disagreed on whether these new products should be categorized as Newly Developed Products subject to a 3% royalty or Combined Products subject to a calculated royalty rate less than 3%. On November 3, 2015, XRT sent a demand letter to GOT I acknowledging that, as of September 15, 2015, Plaintiffs had paid $1, 283, 411 in royalties, but claiming $193, 621 in unpaid royalties. ([120.6] at 13). That represented a 13.1 percent underpayment in royalties ($193, 621 in unpaid royalties divided by total royalties owed ($1, 283, 411 in paid royalties plus $193, 621 in unpaid royalties)).[2] ([120.6] at 13). The parties discussed the issues raised in the demand letter, but were unable to resolve their dispute. ([18] at ¶ 32).

         B. Procedural History

         On January 6, 2016, two months after receiving the demand letter, Plaintiffs filed this action seeking a declaratory judgment as to their rights under the Royalty Agreement. ([1]). Plaintiffs request a declaration that: (1) GOT I does not owe the unpaid royalties claimed in Defendants' November 2015 demand letter; and (2) the royalty rates that Defendants claim are due under the Royalty Agreement are incorrect. ([1] at ¶ 3).

         Almost five months later, on June 1, 2016, XRT sent a “notice of material breach” of the Royalty Agreement to Kids II. ([133] at 12). Kids II continued to assert that it had not miscategorized any products, prompting XRT to terminate the agreement on July 1, 2016. XRT stopped accepting royalty payments from Kids II in July 2016, returning 2016 Q2 and Q3 payments back to Kids II. (Id.). Kids II created an escrow account for those payments and future payments. ([145.1] at 81).

         The same day XRT terminated the agreement, the Defendants filed their Answer and Counterclaims. ([18]). The Defendants counterclaimed for breach of contract and breach of the implied covenant of good faith and fair dealing. ([18] at ¶¶ 37-48). The Defendants also sought declaratory relief concerning the appropriate royalties due under the Royalty Agreement as well as a declaration that, if Plaintiffs were not in material breach of the Royalty Agreement or APA, the Royalty Agreement is not terminated and remains in full force and effect. ([18] at ¶¶ 49-56).

         On September 20, 2016, the Defendants moved for partial summary judgment seeking an order that the term “intellectual property” as used in the definition of Newly Developed Products includes trademarks. ([47.1]). The Defendants claimed that a product that contains or attaches an embedded OBALL trademark, or other trademark used with an Existing Product, is a “Newly Developed Product Line.” The Court rejected that contention in a March 20, 2017, Order, denied the Defendants' motion, and granted Plaintiffs' cross-motion for partial summary judgment. The Court found that a product cannot be classified as a Newly Developed Product under the Royalty Agreement based solely on the use of a trademark. ([128]).

         Though the Court's Order granting Plaintiffs' cross-motion for summary judgment narrowed the issues, the Defendants' claimed underpayment continues to grow. According to Defendants, Plaintiffs improper categorization of products resulted in an $834, 851, or 28.14 percent, total underpayment of royalties for the period 2012 to 2016 as shown:

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         Defendants also seek accelerated damages for Plaintiffs' alleged material breach of contract in the form of the present value of its expected royalties for the 75-year duration of the Royalty Agreement, i.e. through 2085. The Defendants claim accelerated damages of $20, 958, 679 on the low end of its sales projections and $29, 456, 369 at the higher end of its sales projections. ([120.14] at 6).

         Plaintiffs have filed several motions to challenge Defendants' claim for accelerated damages. First, Plaintiffs move for Partial Summary Judgment of No Material Breach [119], arguing that the underpayment of royalties cannot, as a matter of law, constitute a material breach and accelerated damages thus are not an available remedy. Second, Plaintiffs move to strike the expert reports of Defendants' damages experts, John Shurley and Richard Gottlieb [122], arguing that the damages opinions offered were not timely disclosed. Finally, Plaintiffs move for Partial Summary Judgment of No. Damages [148], arguing that Defendants cannot establish an accelerated damages amount with reasonable certainty because Defendants' claimed damages are based only on unreliable and speculative expert testimony that is inadmissible under Daubert.

         Plaintiffs also moved for Partial Summary Judgment of No. Partial Breach of Contract [151], arguing that Plaintiffs elected to pursue only a claim for general material breach, and have waived a claim for a partial breach. Plaintiffs further contend that, at a minimum, the parties' dispute concerning product classification is a proper issue for summary judgment. (Id.).

         II. ...

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