Aquavit Pharmaceuticals, Inc. v. U-Bio Med, Inc.

Background

Aquavit sued U-Bio Med, Inc., Global Medi Products, and Nyun Shi Eum, also identified as Nyon-Sik Eum, for breach of contract and trademark infringement. Global Medi Products had not appeared. The dispute involved an injection device that allegedly had cosmetic applications and the parties’ competing claims about who was its authentic maker and distributor.

On July 14, 2013, the parties entered into an Exclusive Worldwide Licensing Agreement. The agreement allowed Aquavit, the licensee, to market and reproduce an injection device that Defendants purportedly invented. It required Aquavit to pay an annual royalty based on the number of devices sold and also allowed Aquavit either to manufacture the devices itself or purchase them from Defendants at a price guaranteeing Defendants a 40% margin. The agreement also included non-compete and non-solicitation provisions.

Defendants alleged that the agreement was unenforceable because it was unconscionable and resulted from fraud or mistake. They alleged that Aquavit knew Eum had a poor command of English, presented him with an English-language agreement without a Korean translation, and obtained his signature on an agreement that did not include the minimum purchase quantities Defendants had said were required. Defendants also alleged that Aquavit later transferred their design and other intellectual property to a third-party manufacturer, stopped purchasing devices from Defendants, and failed to pay royalties for devices made by that manufacturer.

Defendants asserted counterclaims for declaratory relief, unjust enrichment, breach of contract, and defamation. Aquavit moved to dismiss all counterclaims except defamation.

Declaratory-judgment counterclaim

Defendants sought a declaration that the licensing agreement was unenforceable based on lack of mutual consideration, unconscionability, fraudulent inducement, and unilateral mistake. The court held that this claim duplicated Defendants’ affirmative defenses and Aquavit’s breach-of-contract claim. Because resolving Aquavit’s contract claim on the merits would necessarily resolve the declaratory claim, the court dismissed the declaratory-judgment counterclaim without prejudice. The court stated that Defendants could seek to replead that claim if Aquavit’s contract claim were not resolved on the merits and Defendants continued to have an interest in a ruling on the agreement’s validity.

The court separately dismissed with prejudice the declaratory-judgment theory based on lack of mutual consideration. The court relied on its earlier conclusion that the parties’ later performance under the agreement cured any initial lack of consideration, and noted that Defendants’ amended counterclaims also alleged later performance.

Unjust-enrichment counterclaim

Defendants sought the benefits they allegedly would have received if Aquavit had continued buying devices from them instead of using their intellectual property to obtain devices from a third-party manufacturer. The court held that it was not premature to plead unjust enrichment and breach of contract in the alternative because the agreement’s validity remained disputed.

The court nevertheless dismissed the unjust-enrichment counterclaim with prejudice. It reasoned that the alleged conduct could have been addressed through the recognized tort of trade-secret misappropriation, but Defendants did not pursue that claim within the applicable limitations period. The court concluded that unjust enrichment could not be used instead of an untimely trade-secrets claim.

Breach-of-contract counterclaim

Defendants alleged that Aquavit breached the agreement by switching manufacturers and by failing to pay royalties. The court dismissed the part based on Aquavit’s decision to switch to a third-party manufacturer. The agreement gave Aquavit broad, expressly stated rights to exploit, sublicense, and reproduce Defendants’ injection technology, including the right to sublicense those rights to a third party. The court held that Defendants could not use the implied duty of good faith and fair dealing to eliminate rights that the agreement expressly granted.

The court allowed the claim to proceed insofar as it alleged failure to pay annual royalties. The agreement calculated annual royalties based on Aquavit’s total sales of covered injection devices, regardless of who manufactured them. Thus, Defendants plausibly alleged a contract breach if Aquavit continued using Defendants’ intellectual property to produce covered devices through a third-party manufacturer without paying the required royalties.

Aquavit also argued that Defendants could not pursue the contract claim because Defendants had materially breached, terminated, or failed to perform under the agreement. The court did not consider those assertions at the pleading stage because they were outside the allegations in the amended counterclaims.

Disposition

The court granted in part and denied in part Aquavit’s motion to dismiss. The declaratory-judgment counterclaim was dismissed without prejudice, except that its lack-of-consideration theory was dismissed with prejudice. The unjust-enrichment counterclaim was dismissed with prejudice. The breach-of-contract counterclaim was dismissed in part, with prejudice, as to the alleged breach based on switching to a third-party manufacturer, while the claim based on failure to pay annual royalties for continued use of Defendants’ intellectual property was allowed to proceed. The court directed the Clerk to terminate the pending motions at docket entries 121 and 150.