Richard Raysman and Peter Brown

On Nov. 27, 2018, a federal jury sitting in the U.S. District for the District of Massachusetts issued a verdict finding that a multinational company that produces imaging products breached a joint venture agreement, associated with a previously executed master license agreement concerning software, for failing to make contractually-required payments. See ITyX Solutions v. Kodak Alaris, No. 1:16-cv-10250 (D. Mass. Nov. 27, 2018). After deliberating for only two hours, the jury found the multinational owed nearly $7.5 million damages.

The verdict followed a May 2018 decision by the same court denying both parties' motions for summary judgment, including plaintiff's motion for a declaratory judgment that the defendant could not sua sponte terminate the software agreement. Of particular note, the denial of this motion hinged in part on the court's inability at that stage of the case to decide whether the software agreement constituted a joint venture. Therefore, the court could also not decide whether the defendant had properly terminated the agreement.

Facts and Procedural Background

Plaintiff ITyX AG is a German software company that created “intelligent” software for document recognition (the Software). On Jan. 18, 2012, Eastman Kodak (EKC) and ITyX entered into a Master Agreement (the Agreement) that allegedly amounted to a “strategic partnership” to develop and market the Software. The next day EKC declared bankruptcy and in September 2013, defendant Kodak Alaris Inc. (Kodak) stepped into the shoes of EKC as the counterparty to the Agreement. Accordingly, the Agreement entailed ITyX licensing the Software to Kodak for use in Kodak-branded products. Kodak agreed to exclusively distribute this product while the Agreement remained in effect. However, the Agreement excepted Kodak from its exclusivity obligations in the event it “exited” the business in which it had sold the Kodak-branded product. The Agreement had a term of five years, with automatic renewals for two years unless otherwise terminated.

In June 2014, Kodak's parent company, Kodak Alaris Holdings (KAH), signed an Investment Framework Agreement with various ITyX entities (the IFA) wherein KAH would invest roughly €13 million in an ITyX entity, ITyX Technology GMbH (ITyX Technology), that previously purchased ITyX via an intercompany sale. Payments to be made by KAH under the IFA were divided into lump sum payments in April and October 2015, as well as monthly payments in the 12-month period subsequent to the execution of the IFA. If KAH defaulted on its monthly payment requirements under the IFA, ITyX Technology could exercise a “call option” (the Option) to purchase all of KAH's shares in ITyX Technology in return for releasing KAH's outstanding payment obligations under the IFA.

In June 2015, KAH failed to timely remit a payment due under the IFA. ITyX notified KAH that, as a result, it was exercising the Option. KAH and Kodak, in turn notified ITyX that: (1) KAH did not need to comply with the Option; (2) it terminated the IFA for cause; and (3) it terminated the Master Agreement, as the exercise of the Option constituted a material breach thereunder which was not subject to cure.

On Feb. 15, 2016, ITyX filed an action for a declaratory judgment with the U.S. District Court for the District of Massachusetts seeking, inter alia, a declaration that Kodak's purported termination of the Master Agreement was ineffective, and therefore the Master Agreement remained binding. Kodak moved for summary judgment. ITyX also sought a preliminary injunction preventing Kodak from selling any products in that incorporated the Software, which was denied on grounds that ITyX failed to show neither imminent nor irreparable harm.

Legal Analysis and Conclusions

Kodak first argued that ITyX lacked constitutional standing because ITyX could not license the Software, as the intellectual property underlying the Software was technically owned by a non-party affiliate of ITyX. The court rejected Kodak's argument, as Kodak failed to raise the argument in its briefing. The court held that Article III constitutional standing was irrelevant to the alleged lack of authority of ITyX under the Master Agreement, and in the alternative, a dispute of material fact arose with respect to whether affiliate agreements between ITyX and the non-party affiliate permitted ITyX to license the Software.

With respect to Kodak's motion for summary judgment, as a threshold issue, the court held that it could not determine whether the Agreement constituted a joint venture. Rather, a genuine dispute of material fact existed as to whether the Agreement formalized a joint venture.

While the Agreement characterized the parties' relationship as a “strategic partnership”, it also designated ITyX as an “independent contractor and nothing herein shall be construed to make [ITyX] or any of its employees, director or representatives, the agent, employee or servant of Kodak.” Accordingly, neither party offered dispositive evidence, and the determination of an intent to form a joint venture between the parties, or lack thereof, should be sent to a jury.

Consequently, the court could not adjudicate whether ITyX exercising the Option in the IFA was an invalid basis for Kodak to terminate the Agreement. In addition, assuming for the sake of argument that Kodak failed to comply with the notice and opportunity to cure provisions of the Agreement, a triable issue of fact materialized concerning whether compliance would be futile. In support of this claim, Kodak claimed that even if ITyX had not breached the Agreement, it was exiting the area of business relevant to the Software. The court denied summary judgment on ITyX's request for a declaratory judgment.

A jury trial ensued on certain of the parties' counts, including ITyX's declaratory judgment claim that the Agreement remained in effect notwithstanding Kodak's purported termination. Following a 10-day trial, on Nov. 26, 2018, the jury deliberated for only two hours before returning a verdict largely in ITyX's favor. The jury concluded that while Kodak did not breach the Agreement by terminating it at the end of 2015, Kodak breached the IFA by not making the contractually-required payments owed in 2016. The jury awarded ITyX's nearly $7.5 million in damages.

Richard Raysman is a partner at Holland & Knight and Peter Brown is the principal at Peter Brown & Associates. They are co-authors of “Computer Law: Drafting and Negotiating Forms and Agreements” (Law Journal Press).