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From Antitrust Law Daily, January 8, 2015

Antitrust allegations about settlement pact did not prevent inventor from adding contract claims against co-inventor

By Linda O’Brien, J.D., LL.M.

In an action by the one of inventors of an insulating bottle cozy jacket to remove a co-inventor from a patent, the federal district court in Raleigh, North Carolina has granted the inventor leave to join an additional party and to amend his complaint to include a breach of a settlement agreement claim, despite contentions that the settlement agreement was anticompetitive (Crain v. DeBartolo, January 6, 2015, Dever, J.).

In 2007, Zachery Crain created a jacket, known as a “cozy,” that fit on bottles and other containers, had insulating properties, was moisture resistant, and was capable of displaying different looks. In 2008, he met Zachary DeBartolo and discussed a business arrangement in which DeBartolo would provide financial resources and business experience and Crain would work on product development. The parties formed Freaker, Inc. as equal partners, and DeBartolo initiated a patent application for the cozy design. In 2012, the U.S. Patent and Trademark Office issued U.S. Patent No. 8,104,636 (the “636 patent) to Crain and DeBartolo as joint inventors of an “insulating knit bottle cozy jacket.”

The business relationship deteriorated and DeBartolo sued Crain in state court, alleging fraud, breach of the partnership agreement, and other claims. In October 2013, the parties signed a settlement agreement providing that neither party would remove or replace the other party from the patent but not preventing either party from taking action to maintain or ensure the validity of the patent. In January 2014, Crain sued DeBartolo, seeking to remove DeBartolo as a joint inventor of the ‘636 patent. DeBartolo filed a counterclaim against Crain for breach of the settlement agreement. Subsequently, Crain moved to join an additional party and amend the complaint to include an additional claim.

Crain sought to join Freaker USA, the assignee of his interests in the ‘636 patent, and to add a breach of contract claim against DeBartolo. Crain contended that Freaker entered into agreements with two retailers to sell products covered by the patent. After DeBartolo received notice of the agreements, Kolder, Inc., DeBartolo’s licensee, solicited the retailers in order to sell products covered by the patent. Crain alleged that the conduct violated the settlement agreement.

Under state law, a party alleging breach of contract must prove the existence of a valid contract and a breach of the terms of the contract, the court explained. In this case, the parties did not dispute the validity of the settlement agreement; rather, they disputed the meaning of its terms and whether a breach occurred. The agreement allowed each party to license the patent without incurring a financial obligation to the other party. Upon licensing the patent, that party was required to notify the other party of the license agreement and the notified party was then prevented from soliciting the licensee during the term of the license agreement.

DeBartolo’s argument that an interpretation of the settlement agreement to prohibit Kolder’s solicitation of the two retailers would violate federal and state antitrust laws was rejected. The court noted that the settlement agreement did not prohibit all competition between Crain and DeBartolo in their efforts to license the patent, as each party was free to compete to make agreements with producers and distributors. The settlement agreement prohibited solicitation after a license agreement was signed by one of the parties.

Although the breadth of the solicitation ban may have been troubling concerning future competition for services, the court noted that DeBartolo failed to allege anticompetitive harm resulting from the settlement agreement or a relevant product or geographic market in which such harm might occur. Assuming that Crain’s allegations were true, Crain plausibly alleged a breach of contract by Kolder’s solicitation of the retailers and leave to amend the complaint would not denied based on DeBartolo’s vague and unsubstantiated allegations of antitrust violations, the court concluded.

The case is No. 7:14-CV-29-D.

Attorneys: Glenna L. Gilbert (Larkin Hoffman Daly & Lindgren Ltd.) for Zachery Michael Crain. Anthony J. Biller (Coats & Bennett, PLLC) for Zachary Michael DeBartolo.

MainStory: TopStory Antitrust NorthCarolinaNews

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