The opinion of the court was delivered by: Dean D. Pregerson United States District Judge
ORDER GRANTING MOTION TO COMPEL ARBITRATION [Motion filed on January 30, 2009]
This case involves a dispute over patent royalty payments, and an alleged settlement agreement where the parties agreed to divide those royalties. The patents in this case deal with the image quality produced by video recorders. Plaintiff 24P owns a patent which allows a video recorder to record images in a manner which simulates the appearance of film. (Compl. ¶ 8.) Defendants Przyborski Productions and Keystone Computer Resources manage a different patent which adds the quality of film "grain" to video recordings. (Compl. ¶ 10.) The current dispute between the parties and the subject of Defendants' instant motion is whether they agreed to arbitrate their current dispute.
On November 7, 2005, the parties entered a License Agreement where Plaintiff agreed to pay Defendants 40% of royalty payments resulting from sales of their "pooled" patents, while reserving 60% to itself (a 60/40 split). (Compl. ¶ 17 Ex. A. ¶ 5.1.) However, in the event that Plaintiff brought suit against a third-party for infringement of patents at its own expense and the parties settled, then Plaintiff agreed to pay Defendants 30% (a 70/30 split) of any settlement royalty payment. If Defendants' patents were not at issue in a settlement, Plaintiff agreed to pay Defendants 10% (a 90/10 split) of settlement royalties. (Compl. ¶ 17 Ex. A ¶ 12.3.)
Before this License Agreement was negotiated and signed, in the spring of 2005, Plaintiff entered discussions with a large electronics manufacturer ("Electronics Manufacturer") regarding a license of the parties' patent pool. (Schermer Decl. ¶ 6.) These discussions eventually fell through, and Plaintiff informed Defendants that it intended to sue the Electronics Manufacturer (Compl. ¶ 20); and that it wanted Defendants to sign the above License Agreement before proceeding with the suit. (Schermer Decl. Ex. 5.) In requesting that Defendants sign the License Agreement in anticipation of the lawsuit, Plaintiff allegedly stated that Defendants would receive 40% (i.e., not 30% or 10%) "in connection with [the Electronics Manufacturer]". (Schermer Decl. ¶ 8 Ex. 2.) Defendants then signed the License Agreement, with the terms as described above (i.e., with options other than only a 60/40 split). Defendants did not participate in the suit against the Electronics Manufacturer. (Schermer Decl. ¶ 17, 26.)
Plaintiff then reached a tentative settlement agreement with the Electronics Manufacturer (the "Manufacturer Settlement"), and asked Defendants to execute various agreements in connection with the Settlement under a 70/30 split. (Schermer Decl. Ex. 3.) Defendants refused to sign the supporting agreements under a 70/30 split, and argued that they were entitled to a 60/40 split, pursuant to Plaintiff's correspondence. (Schermer Decl. Ex. 5.) At this point, on April 5, 2006, Plaintiff offered to split the proceeds from Manufacturer Settlement under either:
1) a 70/30 split, with no termination of the License Agreement; or
2) a 60/30 split with "the remaining 10% being escrowed and arbitrated," and termination of the License Agreement as to all future license deals.
(Schermer Decl. Ex. 6.) On April 6, 2006, Defendants sent Plaintiff an email that "proposed" that Defendants would sign documents supporting the Manufacturer Settlement, the parties would split the Settlement 60/30, and that the remaining 10% would "get put into a bank account as an escrow" - pursuant to an arbitration and escrow agreement, which Defendants stated that the parties "will enter." (Schermer Decl. Ex. 7.) Defendants then proposed approximately five paragraphs of terms relating to the parties' arbitration agreement. (Id.)
There is no further correspondence from the parties indicating acceptance of Defendants' proposed escrow and arbitration terms. Nevertheless, Defendants then executed the documentation required to support the Manufacturer Settlement, Plaintiff finalized the Manufacturer Settlement, Plaintiff paid Defendant 30% of the proceeds, and Plaintiff terminated the License Agreement. However, as represented by Plaintiff at oral argument, Plaintiff actually paid itself 70% and apparently did not put any funds into escrow (even though Defendants allege that Plaintiff's counsel represented to them that the 10% had been deposited in a bank account pending resolution of the dispute).
Approximately one year later, on December 18, 2007, the parties still did not have a signed arbitration agreement, but had agreed that the amount at issue regarding the disputed 10% totaled $458,220.20. (Schermer Decl. Ex. 15.) The parties continued to negotiate arbitration terms until November 2008. On November 11, 2008, Defendants sent Plaintiff's counsel an email stating: "Please send us your client's final position by November 15; if we do not hear from you by then, we will move forward with the litigation."*fn1
(Gelfound Decl. Ex. 10.) Plaintiff did not respond to this email, and instead filed suit in this Court on December 2, 2008. Accordingly, there has never been a signed arbitration agreement between the parties.
Currently, Plaintiff argues that it agreed to a 60/30 split (with immediate termination of the License Agreement), while separating and putting aside the question of whether to arbitrate the remaining 10%.*fn2 Defendants argue that the parties agreed to a 60/30 split (with immediate ...