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Eprotec Preservation, Inc v. Engineered Materials

March 9, 2011

EPROTEC PRESERVATION, INC, PLAINTIFF,
v.
ENGINEERED MATERIALS, INC, AND KEITH DONALDSON, DEFENDANTS.



The opinion of the court was delivered by: Debevoise, Senior District Judge

NOT FOR PUBLICATION

OPINION

This matter concerns the rights to an anti-corrosion technology called "Intercept" and allegations of bad faith conduct in the licensing of that technology. Plaintiff Eprotec Preservation, Inc. ("Eprotec") claims that Defendants Engineered Materials, Inc. ("EMI") and Keith Donaldson mislead it about the properties of the Intercept technology that it licensed from EMI and deliberately interfered in its efforts to raise money on the basis of its exclusive license to the technology. Plaintiff seeks damages under an encyclopedia of theories including: breach of the license agreement; breach of contract; common law fraud; violation of the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 et. seq.; tortuous interference; misappropriation of trade secrets; and breach of fiduciary duty.

Presently before the Court is Defendants' Motion for an order compelling arbitration pursuant to section 4 of the Federal Arbitration Act ("FAA") (9 U.S.C. § 4) and for a stay of the action pursuant to Section 3 of the FAA (9 U.S.C. § 3). Defendants also seek attorney's fees for the costs associated with bringing this motion. For the reasons set forth below, Defendants' Motion is GRANTED with respect to Count One (breach of license agreement), Counts Two and Three (breach of contract), and Count Four (Consumer Fraud). Defendants' Motion is DENIED with respect to the remaining Counts, and with respect to Attorney's fees. What remains of this matter will be STAYED pending the outcome of the currently pending arbitration.

I. BACKGROUND

Intercept is a reactive copper polymer developed by John Franey at Bell Labs in 1986.*fn1

(Def. Ex. J ¶ 8). For many years, Intercept has been marketed as an anti-corrosion product for industrial and consumer use. Id. at ¶ 11. In essence Intercept is a thin film that reacts with and neutralizes corroding gases in the atmosphere to prevent the tarnish or decay of metals, electronics, optics, plastics, or other products on which it is placed. Id. at ¶ 8.

The rights to the Intercept technology were transferred to Defendant EMI in 1995 pursuant to an agreement with AT&T Corp, then the parent of Bell Labs.*fn2 Id. at ¶ 10. EMI subsequently registered the trademarks Static Intercept® and Corrosion Intercept® for use in promoting products based on the technology. Id. EMI currently markets the Intercept technology for industrial use via a variety of business partners throughout the world. Id. at ¶ 11.

In 1998 EMI began to supply the Intercept film to Intercept Preservation Products, L.L.C. ("IPP"), a company formed for the purpose of marketing Intercept for use in consumer products. Id. at ¶ 12-13. Initially, EMI owned a substantial portion of IPP, but in 1999, EMI's stake in the company was reduced to 6%. Id. at ¶ 14. In 2002, IPP and EMI signed an agreement (the "2002 Agreement") which gave IPP certain exclusive distribution rights over the sale of Intercept in the consumer market. (Def. Ex. B). This agreement was revised in 2006 (the "2006 Agreement"). (Def. Ex. C).

Under the terms of the 2002 and 2006 Agreements, EMI granted IPP/Eprotec "exclusive rights to the world wide use, manufacture, distribution and sale" of the Intercept technology for consumer market applications, as well as the use of associated trademarks. Id. In addition, each agreement contained a broad arbitration clause. The 2002 Agreement and 2006 Agreement each stated that:

A. Arbitration. Disputes between or among EMI, and IPP or its designee arising under the provisions of this Agreement shall be submitted to a single arbitrator located within the State of New Jersey, in accordance with the rules of the American Arbitration Association. The award of the arbitrator may, at the election of the prevailing party, be entered as a judgment in the Superior Court of New Jersey. The arbitration of disputesshall otherwise be governed by the provisions of N.J.S.A. 2a: 24-1 et seq.

The administrative fees of the American Arbitration Association and the fees of the arbitrator shall be shared equally by the parties to the arbitration.

In or about March 2008, Optivest, a Bergen County-based private equity firm, acquired IPP and renamed the company Eprotec Preservation, Inc. (Def. Ex. J ¶ 22). Plaintiff Eprotec claims in its complaint to have merged into IPP. (Complaint ¶ 9).

On September 23, 2008, EMI and Eprotec entered into a new license agreement (the "2008 Agreement"). (Def. Ex. A). The 2008 Agreement is less artfully drafted than the previous agreements*fn3 , but it also grants Eprotec a broad exclusive license to sell and market the Intercept technology and associated intellectual property for use in the consumer industry. Id. The Agreement also provides that:

This Agreement, and all transactions contemplated hereby, shall be governed by, construed and enforced in accordance with the laws of the State of New Jersey. THE PARTIES herein waive trial by jury and agree to submit to arbitration under the rules of the American Arbitration rules in the State of New Jersey and agree to abide by the decision of the arbitrator. THE PARTIES agree to reimburse the prevailing party's reasonable attorney's fees, and all other expenses, in addition to any other relief to which the prevailing party may be entitled. In such event, no action shall be entertained by said court of competent jurisdiction if filed more than one (1) year subsequent to the date the cause(s) of action actually occurred.

From the beginning, the business relationship between IPP and EMI has involved cross-ownership, joint ventures, and overlapping personnel. As stated above, before 1999, EMI owned a significant stake in IPP. (Def. Ex. J ¶ 12, 14). In addition, Defendant Keith Donaldson, the principal of EMI, was a shareholder of Eprotec and served on Eprotec board of directors until September of 2009. Id. at 24, 42. Moreover, on January 12, 2007, EMI and IPP, along with an individual investor, formed Intercept Food & Wine LLC ("IFW"), an entity created for the purpose of investigating and marketing Intercept technology for use in the food and beverage industry. Id. at 20.

The basic facts of the dispute are heavily contested by the parties, but it is clear that following the absorption of IPP, Eprotec began to contemplate raising capital through a private offering. (Complaint ¶ 18). In order to do so, Eprotec wanted to be able to claim that Intercept had properties that would make it useful in preventing food and beverage spoilage. Id. at 20. In November of 2007 Intercept films had been tested to determine whether they could remove excess chlorides from cork. (Def. Ex. J ¶ 19-21). In March of 2008, Intercept films were further tested to determine whether they had anti-microbial properties, either by themselves, or when coupled with known anti-microbial agents. Id. at ¶ 25. It has since become clear to both parties that either Intercept does not have anti-microbial qualities, or that development of those antimicrobial properties will require vastly more time and expense than originally anticipated. (Complaint ¶ 40).

The relations between Eprotec and Defendants collapsed in mid 2009. The parties each allege significant bad faith conduct against the other. Plaintiff claims, inter alia, that EMI and Donaldson lied to it about the anti-microbial properties of the Intercept technology, ignored the exclusivity provisions of the license agreement, refused to supplement the license agreement after promising to do so, and deliberately interfered with its efforts to raise capital via a private placement. (Complaint ¶ 40-44). Defendants claim that IPP/Eprotec extracted its license agreements through deception and threats of violence, breached its duty to diligently market and sell Intercept technology to consumers, improperly folded IFW into its operations, and failed to pay $12,000 due for the cork testing experiments. (Def. Ex. J ¶ 15, 38, 41, 45).

On January 28, 2010, EMI sent a notice to Eprotec purporting to cancel the 2008 Agreement. Id. at 46. On October 4, 2010, Plaintiff filed the instant action. (Doc. No 1). After informing Plaintiff that it believed that the dispute was subject to mandatory arbitration, on December 8, 2010, EMI commenced an arbitration proceeding against Eprotec before the American Arbitration Association ("AAA"). (Pizzi Aff. ¶ 5). On December 13, 2010, AAA acknowledged receipt of EMI's Demand for Arbitration and assigned the arbitration Case No. 18 117 01813 10, Engineered Materials, Inc. and Eprotec Preservation, LLC (the "AAA Arbitration"). Id. ¶ 6.

On the basis of these facts, Defendants now move for an order pursuant to 9 U.S.C. ยงยง 3-4 compelling arbitration and staying or dismissing this proceeding. Defendants also seek attorney's fees for the costs associated with bringing this motion. Plaintiff ...


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