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Yoe v. Crescent Sock Co.

United States District Court, E.D. Tennessee, Chattanooga

November 14, 2017

ROBERT H. YOE, III, et al.., Plaintiffs,
v.
CRESCENT SOCK COMPANY, et al.., Defendants.

          MEMORANDUM AND ORDER

          SUSAN K. LEE UNITED STATES MAGISTRATE JUDGE

         Before the Court is a motion for summary judgment and supporting memorandum filed by Defendants Crescent Sock Company (“Crescent”), Omni Wool, LLC (“Omni Wool”), Catherine Burn Allen (“Allen”), and Sandra Burn Boyd (“Boyd, ” and collectively, “Defendants”) on September 15, 2017 [Docs. 320 and 325[1]. Defendants also filed a statement of undisputed material facts. [Doc. 323[2]. Plaintiffs Robert H. Yoe, III (“Yoe”), and Yoe Enterprises, Incorporated (“YEI, ” and collectively, “Plaintiffs”), filed a response to the motion [Doc. 382], and Defendants filed a reply [Doc. 394]. Also before the Court is a motion for partial summary judgment and supporting memorandum filed by Plaintiffs [Docs. 322 and 326]. Defendants filed a response [Doc. 377], and Plaintiffs filed a reply [Doc. 395]. These matters are now ripe.

         For the reasons stated below, Defendants' motion [Doc. 320] will be GRANTED IN PART AND DENIED IN PART. Plaintiffs' motion for partial summary judgment [Doc. 322] will be DENIED.

         I. BACKGROUND

         This case has a complicated factual and procedural background in both state and federal court, some of which has been detailed in prior orders of the Court. Given that this case already has in excess of 450 docket entries-constituting more than 15, 500 pages-in the federal case alone, it is impossible to fully summarize that background here. However, the Court will discuss the factual and procedural background to provide context and to the extent needed to explain the Court's rulings on the pending motions for summary judgment.

         A. The Parties

         This case arises out of a soured business relationship between Defendants and Plaintiffs. Defendant Crescent is a sock manufacturing company. Plaintiff Yoe was hired in 2000 to serve as Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of Crescent. Defendants Allen and Boyd[3] are part owners of Crescent, and have worked there throughout their adult lives.[4] Yoe owns (and at all relevant times owned) Plaintiff YEI, which holds intellectual property rights to certain sock brands manufactured by Crescent during Yoe's employment at Crescent. At issue in this case are the FITS and Game Knits brand socks that Yoe developed while at Crescent. In September 2012, Crescent and YEI entered into an agreement[5] (the “Business Agreement”) which memorialized prior agreements and the parties' business relationship as follows:

(1) “Any and all new brands, and other intellectual property relating to such new brands, that are developed, registered, trademarked, invented, started, conceived or designed by Crescent, Yoe and/or YEI from January 1, 2009 through the termination of Yoe's employment with Crescent (‘the Intellectual Property') shall be 100% owned by YEI”;
(2) Crescent will pay royalty payments to YEI relative to the FITS brand at a rate of $1.00 in 2013 and 2014, and beginning in 2015 and each year thereafter, “5% of Net Sales”; and
(3) With regard to licensing of the YEI-owned brands, Crescent and YEI agreed that, “[o]n or before 1 year after the execution of [the Business Agreement], YEI and Crescent will enter into an agreement for licensing/manufacturing/sourcing relative to the Intellectual Property which includes terms and conditions similar to the LIG contract” and which incorporates the royalty payment schedule.

[See Business Agreement, Doc. 24-3].

         B. State Court Litigation

         On September 4, 2013, Yoe and five other Crescent employees who worked with the FITS brand were fired without cause. The day before, Crescent had filed a lawsuit in the McMinn County, Tennessee Chancery Court (“Chancery Court Case”), seeking a declaration that certain employment contracts between Yoe and Crescent (which provided for, among other things, a $2 million severance payment to Yoe upon termination without cause) and the Business Agreement were void and unenforceable. Crescent alleged that the Business Agreement was “unfair, unsupported by consideration, usurp[ed] corporate opportunity, and constitute[d] a breach of fiduciary duty by Mr. Yoe.” [Doc. 24-4 at Page ID # 117].

         Yoe filed an answer in the Chancery Court Case on September 19, 2013, noting that YEI was the real party in interest to the Business Agreement [id. at Page ID # 157-60]. Yoe and YEI[6]alleged that “[i]n 2009, in order to induce Mr. Yoe to continue with Crescent, Crescent granted to Yoe Enterprises the ownership of the intellectual property rights of all new brands. The grant of ownership rights in the intellectual property was memorialized in an amendment to the [employment contracts] and subsequently [the] Business Agreement dated September 4, 2012 between Crescent and Yoe Enterprises.” [Id. at Page ID # 165]. Yoe and YEI asserted counterclaims for breach of the Business Agreement and “Patent and Intellectual Property Infringement” against Crescent, claiming that:

[Count III - breach of the Business Agreement]
33. Yoe Enterprises is the party to the Business Agreement dated September 4, 2012 by and among Yoe Enterprises and Crescent whereby Yoe Enterprises is named the 100% owner of all intellectual property and new brands developed by Mr. Yoe and/or Yoe Enterprises, Inc. from January 1, 2009. Crescent is licensed to manufacture the intellectual property owned by Yoe Enterprises, including the FITS®, . . . and Game Knits® brands in addition to other brands, and Crescent pays certain royalties to Yoe Enterprises relative to the sales of these brands.
34. Pursuant to the Business Agreement with Yoe Enterprises, Crescent has been marketing and manufacturing the FITS® brand products and reaping significant benefits in terms of sales and gaining customers due to the superiority of the FITS® brand products. Crescent now seeks to void the Business Agreement in violation of the terms of the parties' agreement.
35. Crescent's actions constitute bad faith and a breach of the Business Agreement.
36. As a direct and proximate cause of Crescent's bad faith and breach of the Business Agreement, Yoe Enterprises has sustained damages in an amount to be determined at trial.
[Count IV - patent and intellectual property right infringement]
. . . .
38. Pursuant to the [Business Agreement] with Yoe Enterprises, the owner of the FITS® brand and other brands, Crescent has the non-exclusive temporary license and right to market, manufacture and sell FITS® brand products and the other products. However, such license requires that the FITS® brand products be manufactured in strict accordance with the specific technology, specifications and patents for FITS® brand products.
39. Upon information and belief, Crescent is continuing to manufacture socks under the FITS® brand name but may change the manner in which the socks are manufactured, including but not limited to using a different yarn, in violation of the specific technology, specifications and patents governing the FITS® brand.
40. A deviation by Crescent from the specifications, proprietary manufacturing processes and patents governing the FITS® brand constitutes an infringement on the intellectual property rights and patent rights of Yoe Enterprises.
41. Crescent's acts of infringement have been and continue to be willful.
42. The unauthorized and infringing use by Crescent of Yoe Enterprises' patented FITS® brand product has caused and will cause irreparable harm, damage and injury to Yoe Enterprises. In addition, Crescent has unlawfully and wrongfully derived and will continue to derive income from its infringing acts.

[Doc. 24-4 at Page ID # 168-69]. Yoe and YEI also asserted counterclaims against Crescent for breach of Yoe's employment contract for failure to pay his “post-termination compensation, ” and quantum meruit/unjust enrichment [Doc. 24-4 at Page ID # 162-67]. Yoe and YEI also asserted third party claims against Boyd and Allen for inducement of breach of Yoe's employment contracts, inducement of breach of the Business Agreement, and negligent and/or intentional misrepresentation [id. at Page ID # 170-75].

         On or around the same time that Yoe and YEI filed their answer, counterclaims, and third-party claims in the Chancery Court Case, they obtained an injunction that provides, in relevant part:

It appearing to the Court that the parties to this cause have agreed on the terms of the Temporary Injunction, that because of the uniqueness of the brand of sock known as FITS®, and because the value of this brand of sock may be compromised and/or lost if this injunction is not granted, it is hereby:
ORDERED, ADJUDGED AND DECREED that:
1. Crescent Sock Company, its agents, employees, successors, officers and directors, and all other persons in concert or participation with such entities, are enjoined from marketing the FITS® brand products . . . unless each and every product has been manufactured using the proper materials, proper packaging, proper technology for manufacturing FITS®, proper manufacturing processes, and using all of the same specifications required to manufacture FITS® that were in place as of August 15, 2013 and using all of the same specifications as required by the patents held by Yoe Enterprises.
2. Crescent Sock Company, its agents, employees, successors, attorneys, officers and directors and all other entities in active concert or participation with such entities, are hereby enjoined and required to fulfill any and all orders for FITS® and Jacks® products in a timely and appropriate manner, all as required by orders for such products, to the extent that said orders do not exceed the operating capacity of the Company as it existed on September 4, 2013, using the correct and proper materials, packaging, technology, manufacturing specifications and specifications as set forth above. Further, the Company shall use its best faith efforts to maintain adequate levels of inventory and yarn on order and on hand to fulfill such orders .....

[Doc. 24-7 at Page ID # 272-73].

         Crescent filed an “amended and restated complaint” as well as an answer to Yoe and YEI's counterclaims on December 31, 2013; Boyd and Allen also filed answers to the third-party claims [Doc. 24-4 at Page ID # 189-204]. Crescent admitted that there were outstanding orders for FITS socks, and contended that it had “properly manufactured and marketed the FITS brand at great cost . . . without contribution from [Yoe and YEI].” [Id. at Page ID # 202]. Crescent continued to claim that the Business Agreement was not valid [id. at Page ID # 201].

         On January 10, 2014, Yoe and YEI filed an amended counterclaim and third-party complaint in the Chancery Court Case [Doc. 24-4 at Page ID # 216-48]. In this pleading, they reiterated their prior claims and allegations, and additionally alleged:

18. Pursuant to the contractual agreements between Mr. Yoe and Crescent and Yoe Enterprises and Crescent, Crescent specifically agreed to bear the ongoing costs associated with the new brands, including FITS®, Jacks®, and Game Knits® as well as other brands, and manufacture the product. As to the FITS®, Jacks®, and Game Knits® brands, Yoe Enterprises would grant Crescent a non-exclusive temporary license to market and manufacture the brands and Crescent would pay royalties to Yoe Enterprises . . . with other conditions similar to the LIG ‘Life is Good' contract. . . . .
21. Upon information and belief, Crescent intends to substitute yarn outside of the specifications in the manufacture of the FITS® sock either to satisfy their own needs or in order to reduce costs, among other changes. However, the use of a substitute yarn other than that required in the specifications, specific technology and manufacturing process and patents for FITS® socks will compromise the integrity of the FITS® socks and the FITS® brand and will result in irreparable harm to Yoe Enterprises as owner of the FITS® brand.
22. Upon information and belief, since terminating Mr. Yoe, Crescent has eliminated certain SKUs of FITS® product[s], changed the names of certain FITS® products, changed the packaging of products, ceased research and development of the FITS® products, is failing to use preexisting marketing practices including but not limited to preseason terms and conditions, sales collateral, and other sales support, is failing to maintain the proper levels of FITS® product[s] in the retail stores and proper inventory levels at Crescent, and is representing that Crescent is the owner of the FITS® brand. Each of these actions is causing irreparable damages to the FITS® bran[d] to Yoe Enterprises as owner of the FITS® brand and to Mr. Yoe as the CEO of Yoe Enterprises.

[Doc. 24-4 at Page ID # 220-21]. Yoe and YEI added claims against Crescent specifically for breach of the “license agreement, ” misfeasance, negligence, and “misappropriation/conversion of FITS® brand” relating to the changes and misrepresentations Crescent allegedly made with regard to the FITS® socks [id. at Page ID # 223-27]. Yoe and YEI also alleged that “Crescent owes a duty” to Yoe and YEI “to perform the obligations under the [employment contract] and Business Agreement with due care, ” and to “manufacture[], market and sell the FITS® product.” [id. at Page ID # 227]. Against the third party defendants Boyd and Allen, Yoe and YEI added claims for intentional interference with business relationship, and defamation specifically as to Yoe [id. at Page ID # 234]. Shortly thereafter, Yoe and YEI filed an amended answer to Crescent's amended and restated complaint [id. at Page ID # 249-52].

         In their answer to the amended counterclaim and third party complaint, Crescent, Boyd, and Allen generally denied Yoe and YEI's claims, but admitted that “on limited occasions, very small SKUs of FITS product have not been run where doing so would cost more than the value of the SKU itself, ” while also contending that “such action is not unusual, is good business practice, and would occur on occasion while Yoe was CEO of [Crescent] with Yoe's approval.” [Doc. 24-4 at Page ID # 208].

         In May 2014, Yoe and YEI voluntarily nonsuited a number of claims from their January 2014 amended countercomplaint in the Chancery Court Case, including their counterclaims for breach of the license agreement, patent and intellectual property infringement, misfeasance, negligence, misappropriation/conversion of the FITS® brand, and duty to perform with due care [Doc. 24-5]. At that point, the only remaining counterclaims were for breach of contract and quantum meruit relating to Mr. Yoe's employment contract, and the counterclaim related to Crescent's alleged breach of the Business Agreement with YEI. Notably, in addition to maintaining their claim for breach of the Business Agreement in the Chancery Court Case, they retained the paragraph containing the allegations that Crescent was making certain changes to the FITS® socks and that Crescent is “representing that [it] is the owner of the FITS® brand.” [see ¶ 22 quoted above, Doc. 24-4 at Page ID # 221]. The injunction also remained in place.

         Yoe and YEI also voluntarily nonsuited their defamation claim against Boyd and Allen from the third-party complaint [Doc. 24-5]. Later, in November 2014, they voluntarily nonsuited more claims from the amended third-party complaint in the Chancery Court Case, including their inducement of breach of contract claims relating to Yoe's employment contracts and the Business Agreement, and their intentional interference with business relationship claim [Doc. 24-6]. The only remaining third-party claims in the Chancery Court Case at that point were for negligent and/or intentional misrepresentation, which related specifically to Boyd and Allen's alleged misrepresentations concerning their authority to bind Crescent to Yoe's employment contracts and the Business Agreement [see Doc. 24-6; Doc. 24-4 at Page ID #233].

         Following a seven-day trial, the court entered an order on December 29, 2014 in the Chancery Court Case [Doc. 382-3]. The court concluded that the employment contracts and the Business Agreements were valid agreements and that Yoe was entitled to the $2 million severance payment. The court found that YEI obtained two patents related to FITS, and that Yoe “obtained other intellectual property rights associated with the FITS, Jacks and Gameknits brands, including trademark rights, domain rights and copyrights as to color, appearance, technology, packaging, and knitting machine specifications, ” which were “in the name of YEI.” [Doc. 382-3 at Page ID # 11088].

Concerning the Business Agreement, the court found:
In 2012 the parties were also having discussions as to the payment of royalties and licensing of the brand. The result of these discussions was the Business Agreement dated September 4, 2012, which further memorialized the prior agreements relating to the ownership of the new brands by YEI and the license to Crescent of the right to manufacture the brands.

[Id. at Page ID # 11094]. The court made other findings relevant to the “license agreement” between Crescent and YEI, including that it “requires no minimum payments, nor required marketing expenses, ” in contrast with other licensing agreements under which Crescent had previously operated [id. at Page ID # 11101]. The court further found that “Crescent has the exclusive ability and opportunity to manufacture the FITS brand socks pursuant to the terms of the agreement.” [Id.]. Finally, the Court concluded the following:

Did Crescent breach the April 14, 2009 Agreement with Mr. Yoe and the September 4, 2013 Business Agreement with YEI? The court finds that YEI is the owner of the respected brands in question, and by Crescent now claiming ownership of the brands, Crescent has in fact breached the contract agreement and/or the terms of the contract agreement.

[Id. at Page ID # 11115].

         The parties filed a number of post-judgment motions in the Chancery Court Case. On January 22, 2015, Crescent, Boyd and Allen[7] filed a motion to alter or amend the court's decision, in which they pointed out:

4. There is an Agreed Order for an injunction in this case which is possibly still in effect to some degree. The judgment of December 29, 2014, did not discuss the rights and obligations of the parties under the injunction in this case or whether such injunction is still valid. As such, this issue remains unresolved. . . . .
8. Further, while the judgment holds that the “Business Agreement” is valid, and represents a purported licensing agreement, the judgment does not declare various essential terms of the agreement between the parties, including the duration of the agreement and the parties' rights and duties under the agreement. As such, the issue of the parties' rights and liabilities under the licensing agreement are unresolved.

[Doc. 24-9 at Page ID # 332-33]. Crescent, Boyd and Allen requested the court to “either adjudicate all the issues between the parties, or in the alternative, . . . remove the designation of the judgment as a ‘Final Order' . . . .” [Id. at Page ID # 337].

         On February 12, 2015, Yoe and YEI filed a motion for an extension of the temporary injunction that required Crescent to continue properly manufacturing FITS [Doc. 24-10]. In that motion, Yoe and YEI argued, “it is imperative that the injunction remain in place and Crescent continue to manufacture the FITS brand in accordance with the terms of the current injunction until twelve months after the appeals process has been exhausted and a final order entered in the case.” [Id. at Page ID # 381-82]. Yoe and YEI also moved to alter or amend the state court judgment; they argued the court erred in concluding that Crescent had an “exclusive” license to manufacture FITS socks. See Crescent Sock Co. v. Yoe, No. E2015-00948-COA-R3-CV, 2016 WL 3619358, at *2 (Tenn. Ct. App. May 25, 2016).

         On April 23, 2015, the court entered an “Order Regarding Post Trial Motions, ” which states that the parties agreed to continue the injunction, but does not set forth a specific end date for the injunction [Doc. 56-1]. With regard to Crescent, Boyd and Allen's concerns about the Business Agreement, the court held:

The court finds, and noted at the hearing, that the trial of this case was tried over a period of several days, and the movant's attorneys had every opportunity to plead and to argue any issue pertaining to the licensing agreement that they chose to argue. However, they chose not to argue concerning the licensing agreement, and did not request any declaration from this court concerning the various essential terms of the agreement between the parties. Furthermore, this court requested that each of the parties set forth a statement of the issues along with their proposed findings of fact and conclusions of law at the conclusion of the trial. Neither side chose to mention and/or argue anything pertaining to the licensing agreement nor its various terms.

[Doc. 56-1 at Page ID # 628]. The court granted Yoe and YEI's motion to amend, finding that, indeed, Crescent “does not have the exclusive right to manufacture the brands owned by [YEI], ” due to the fact that Crescent had terminated Yoe without cause [id. at Page ID # 631]. Finally, the court awarded attorney fees, discretionary expenses, and prevailing party expenses to Yoe and YEI, collectively, in the amount of $765, 880.77 [id. at Page ID # 627].

         Crescent appealed portions of the December 29, 2014 order, as well as the court's decision that Crescent's license became non-exclusive upon Yoe's termination and the award of attorney fees and expenses to YEI and Yoe. In a May 2016 decision, the Tennessee Court of Appeals affirmed the chancery court in large part, reversing and remanding only on the issue of attorney fees and expenses awarded to YEI. The court of appeals found that, while Yoe was entitled to these fees and costs under the applicable agreements, YEI was not; the court of appeals therefore ordered the chancery court to subtract the portion of the award attributable to YEI. Crescent Sock Co., 2016 WL 3619358, at *9.

         On August 23, 2017, on remand, the chancery court entered a final judgment, indicating that the parties had settled the issue of attorney fees and costs payable to Yoe and YEI, and that Crescent, Boyd and Allen had satisfied the $2.9 million judgment [Doc. 300-4]. The entry of judgment further provides that “the Clerk shall close the case without prejudice to [Yoe and YEI] to reopen the case to enforce the non-monetary portion of the judgment.” [Id. at Page ID # 5681-82].

         C. Federal Court litigation

         As the trial proceedings in the Chancery Court Case drew to a close, the proceedings before this Court erupted. Since the filing of their original complaint on January 6, 2015, Plaintiffs have amended their complaint three times, parties and claims have been added and dropped, three rounds of motions to dismiss have been filed, and several rounds of discovery have been completed, culminating in the instant motions for summary judgment.

         Crescent continued manufacturing and selling FITS socks until February 28, 2016; shortly thereafter, Crescent began producing and selling Omni Wool Tactical socks, which Plaintiffs essentially claim is a copy of the FITS sock, [8] and which Plaintiffs claim Defendants unfairly began selling to former FITS customers as the new FITS sock [see Doc. 382 at Page ID # 11010; see also Doc. 321-1 (Allen Declaration)]. ...


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