United States District Court, N.D. Georgia, Atlanta Division
OPINION AND ORDER
WILLIAM S. DUFFEY, JR. UNITED STATES DISTRICT JUDGE.
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 , Motion
to Strike Expert Reports of John Shurley and Richard Gottlieb
, Motion for Partial Summary Judgment of No. Damages
, and Motion for Partial Summary Judgment of No. Partial
Breach of Contract . Defendants XRT, Inc.
(“XRT”) and David Eugene Silverglate's
(together, “Defendants”) oppose each of those
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. ([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).
The Royalty Agreement
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)).
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
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.).
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
([120.3] at § 2(b)).
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.
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)).
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.
parties identified thirteen Existing Products for which there
is no dispute that a 5% royalty applies. ( at 2-3).
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:
parties identified seven Newly Developed Products for which
there is no dispute that a 3% royalty applies. ( at
to Defendants, Plaintiffs paid $2, 131, 413 in royalties over
the period from 2012 to 2016. ( at 9).
The Royalty Dispute
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)). ([120.6] at 13). The parties discussed the
issues raised in the demand letter, but were unable to
resolve their dispute. ( at ¶ 32).
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.
(). 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. ( at ¶ 3).
five months later, on June 1, 2016, XRT sent a “notice
of material breach” of the Royalty Agreement to Kids
II. ( 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).
same day XRT terminated the agreement, the Defendants filed
their Answer and Counterclaims. (). The Defendants
counterclaimed for breach of contract and breach of the
implied covenant of good faith and fair dealing. ( 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. ( at ¶¶
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. ().
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
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).
have filed several motions to challenge Defendants' claim
for accelerated damages. First, Plaintiffs move for Partial
Summary Judgment of No Material Breach , 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 , arguing that the damages
opinions offered were not timely disclosed. Finally,
Plaintiffs move for Partial Summary Judgment of No. Damages
, 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
also moved for Partial Summary Judgment of No. Partial Breach
of Contract , 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.