United States District Court, N.D. California
FINDINGS OF FACT, CONCLUSIONS OF LAW, ORDER FOR RELIEF FOLLOWING BENCH TRIAL, AND REFERRAL TO DEPARTMENT OF JUSTICE
WILLIAM ALSUP, District Judge.
This order resolves this satellite litigation over a settlement agreement that blew up. This order includes the findings of fact and conclusions of law following a three-day bench trial.
FINDINGS OF FACT
1. N'-Lauroyl-L-lysine ("LL") is a chemical derivative of the amino acid L-lysine. LL is a powder used in the personal-care industry, including in cosmetics.
2. At all material times, Raymat Materials, Inc. was a supplier of chemical products, including LL. Dr. Jibing Lin was the president and Jim Turner was the director of sales and marketing. Dr. Lin is a chemist with a Ph.D. in organic chemistry.
3. At all material times, A&C Catalysts, Inc. was a distributor and manufacturer of chemical products. It did not, however, manufacture LL. Abraham Goldstein was the president of A&C Catalysts and John Wolfe was the director of sales and marketing at Daryalabs, Inc., which was owned by A&C Catalysts.
4. At all material times, Ajinomoto Co., Inc., located in Japan, and Raymat were the only two suppliers of LL on a commercial scale.
5. Ajinomoto previously held the rights to a LL patent, now expired. Dr. Lin (Raymat) spent six months in the lab and ten months scaling up the LL manufacturing process based, in part, on the Ajinomoto patent.
6. In 2008, A&C Catalysts refused Raymat's offer to jointly invest money in a plant in China to make LL. Raymat nevertheless went ahead and made arrangements with Yantai Justaware Pharmaceutical Co., Ltd., located in Yantai, China ("the Yantai plant") to manufacture LL. The Yantai plant became Raymat's contract (or "toll") manufacturer. Nevertheless, there was no written agreement between Raymat and the Yantai plant, only a "handshake agreement" for Yantai's manufacturing of LL for Raymat.
7. Even though Dr. Lin spent "weeks and weeks" at the Yantai plant "debugging the [LL] production problems, " Raymat had (and has) no ownership in the Yantai plant. Nor did (or does) Raymat own any of the equipment at the Yantai plant. The Yantai plant stopped producing LL in 2012. Raymat continued to sell LL from its inventory.
8. In 2013, Raymat sued A&C Catalysts regarding an exclusive supply agreement, wherein Raymat had agreed to sell LL exclusively to A&C Catalysts so long as A&C Catalysts met certain minimum purchases. Raymat Materials, Inc. v. A&C Catalysts, Inc., No. 13-567 (N.D. Cal.). A&C Catalysts filed counterclaims and a third-party complaint against Protameen Chemicals, Inc. Protameen was a distributor of chemical products, including LL. (Protameen, however, is not a party to this satellite litigation.)
9. In the original litigation, Raymat designated as "Highly Confidential - Attorney's Eyes Only" the formal name of the Yantai plant and the name of the contact person at the plant. Both names were referenced in the deposition of Dr. Lin taken by counsel for A&C Catalysts. Counsel for A&C Catalysts then filed a public declaration, dated April 13, 2014, which stated (TX 19) (internal citations omitted; emphasis added):
During the March 17, 2014 deposition of Jibing Lin of Raymat, A&C learned (1) that Raymat does not manufacture Lauroyl Lysine itself, but instead contracts with a manufacturing facility in China for all of its Lauroyl Lysine production, and has no ownership in that manufacturing facility ; (2) the name of that manufacturing facility; and (3) that Mr. Lin had a "handshake deal" with that manufacturing facility for production of Lauroyl Lysine, and had a written contract with another manufacturing facility in China for production of Lauroyl Lysine, which Raymat has not produced to A&C.
In other words, A&C Catalysts knew of the plant in China but did not know the formal name of the plant until later.
10. On May 29, 2014, the parties and their counsel appeared for a settlement conference before our Magistrate Judge Donna Ryu. At the settlement conference, key negotiations occurred party-to-party without the presence of counsel, because Attorney James Li was counsel of record for both Raymat and Protameen and possibly had a conflict. Jibing Lin and Jim Turner negotiated on behalf of Raymat, and Abraham Goldstein and John Wolfe negotiated on behalf of A&C Catalysts.
11. In pertinent part, A&C Catalysts proposed that Raymat leave the LL business with the idea that A&C Catalysts would manufacture LL in its New Jersey plant. Raymat responded that if it were to leave the LL business, A&C Catalysts should buy its "LL manufacturing process." Both sides understood this as a reference to the manufacturing process used at the Yantai plant to make the type of LL Raymat had been selling to A&C Catalysts.
12. Mr. Lin further offered to introduce Mr. Goldstein to the Yantai plant during a three-day trip to China for the price of $25, 000 plus travel expenses (although this offer was not made part of the settlement agreement and the offer was never acted upon or accepted).
13. During the settlement negotiations, "production records, " "plant records, " "batch sheets, " "quality control records, " and a "list of equipment" were never mentioned. The LL "production records" at the Yantai plant were voluminous, numbering in the thousands of pages.
14. Magistrate Judge Ryu then placed the settlement terms between A&C Catalysts and Raymat on the record, all of which is now reproduced (TX 20):
These two appearing parties have also reached a settlement agreement in this case in full resolution of the claims between the two parties. I'm going to state the material essential terms of the agreement and have the parties give their agreement on the record. Once they do, these parties are fully bound by the terms and the terms are fully enforceable. It doesn't matter whether the parties end up reducing this to writing.
So here are the material essential terms of the agreement between Raymat and ACC. The parties agree to dismiss all claims against each other in this action, with prejudice. The parties agree to a mutual release of all claims against each other, known and unknown, including a waiver of California Civil Code 1542. However, this release does not extinguish Raymat's obligation, or Raymat's counsel's obligation, to pay fees to ACC as ordered by Judge Alsup in docket number 110 in this case. The parties agree that the terms of this agreement are confidential and it can only be shared with their legal and financial advisors.
Raymat and Doctor Lin agree to leave the LL business entirely and worldwide for a period of ten years. Raymat and Doctor Lin cannot operate LL business through any subsidiary or shadow company during that time, including but not limited to, working with the Yantai plant to produce LL, or to introduce anyone to the LL business using the Yantai plant .
Raymat and Doctor Lin cannot disclose the LL manufacturing process to anyone during this ten-year period, except for ACC . If Raymat or Doctor Lin violate the ten-year ban, then ACC can sue them for breach of contract with a liquidated damage clause of $2, 000, 000. If such a breach of contract is pursued, the prevailing party shall be entitled to seek reasonable attorney's fees.
ACC agrees to purchase Raymat's remaining LL inventory, which is estimated to be 7200 kilograms, at a price of $41.80 per kilogram, which is the same price that was provided by Raymat to Protameen. This comes to a total of $300, 960, which ACC will put in an escrow account by June 6, 2014. Raymat will ship the remaining LL inventory product to ACC within one week of notification that the proceeds are in escrow. After receipt of the product ACC will have seven business days to reject any LL product due to non-conforming quality. If no rejection of product takes place during that time, the escrow funds will then be wired to Raymat, per Raymat's wire instructions.
In addition, ACC will pay $150, 000 to Raymat to purchase Raymat's LL manufacturing process, along with documentation of that process, in both English and Chinese, as well as eight hours of support time for teleconferencing with Doctor Lin . The manufacturing process will be provided to ACC by no later than August 29th, 2014 and ACC will pay Raymat the $150, 000 by no later than August 29th, 2014.
With respect to the settlement agreement, if either party pursues an action to enforce the settlement contract, the prevailing party shall be entitled to reasonable attorney's fees. And I should correct my earlier statement about attorney's fees having to do with an action for breach of contract if Raymat or Doctor Lin violates the ten-year bar. Let me restate that in the same way that if such an action for breach of contract takes place, then the prevailing party shall be entitled to reasonable attorney's fees.
The bolded sentences were not bolded in the transcript, of course, and the bolding above is only to alert the reader to passages of interest in resolving this dispute.
15. The parties then agreed on the record to be bound by the settlement agreement. A stipulation of dismissal was filed and the file was closed.
16. In August 2014, A&C Catalysts transferred $150, 000 to its counsel to hold "in escrow."
17. From May 29 to August 25, 2014, A&C Catalysts never inquired to Raymat about equipment.
18. Counsel for A&C Catalysts then sent counsel for Raymat the following email, dated August 25, 2014, which stated in relevant part (TX 211) (emphasis added):
I wanted to inform you that pursuant to the settlement terms reached between the parties in the above-captioned matter, I have received and deposited $150, 000 into my escrow account as consideration for the sale of the process and technology for LL from Raymat.
Kindly call me to discuss the protocol for transferring the process equipment, technology and all documents to AC&C and in return ...