Prima Tek II, L.L.C. v. Klerk's Plastic

In the

United States Court of Appeals

For the Seventh Circuit

____________

No. 05-2247

PRIMA TEK II, L.L.C.,

Plaintiff-Appellant,

v.

KLERK’S PLASTIC INDUSTRIES, B.V. AND

KLERK’S PLASTIC PRODUCTS MANUFACTURING, INC.,

Defendants-Appellees.

____________

Appeal from the United States District Court

for the Southern District of Illinois.

No. 00 CV 583—G. Patrick Murphy, Judge.

____________

ARGUED JANUARY 8, 2008—DECIDED MAY 5, 2008

____________

Before FLAUM, RIPPLE, and MANION, Circuit Judges.

FLAUM, Circuit Judge. This case involves a licensing

dispute between two companies that operate in the pot

cover business. Prima Tek II (“PTII”), in essence, gave

Klerk’s Plastic (“Klerks”) permission to use its technology

to create superior pot covers in exchange for a royalty

fee on each sale. The agreement between the parties

delineated the type of product that Klerks was to sell, and

it limited Klerks’s ability to sell to particular entities in

specified regions. PTII claims that Klerks breached this

2 No. 05-2247

agreement, and, in addition to damages, seeks to have

Klerks held in contempt. The district court held that there

were no material breaches of the licensing agreements,

and that PTII failed to prove damages. We affirm.

Background

In January of 1986, Klerks entered into a non-exclusive

license agreement with Highland Supply Corporation

(“Highland”). This agreement authorized Klerks to manu-

facture and sell certain flower pot covers1 subject to

patents and patent applications in the United States and

Holland. The two parties entered into a similar licensing

agreement in 1987 authorizing Klerks to sell flower pot

covers in Canada. Soon thereafter, Highland assigned

its rights under the agreements to PTII. Both companies

met on July 20, 2000, to discuss Klerks rights and obliga-

tions under the licenses as certain patents were about to

expire. Four days later, PTII filed suit seeking damages

resulting from an alleged breach of the license agree-

ments. The agreements generally control what types of

pot covers Klerks can sell, to whom it can sell the

covers, and where the covers can be sold.

On September 23, 2000, the parties arrived at an agree-

ment where they amended the license agreements and

1

Throughout the briefs and record, the parties refer to the

objects at issue in this case as both “pot covers” and “plant

covers.” Pot covers and plant covers are obviously different, in

that one covers pots and the other covers plants. Exhibits in

the record seem to suggest that we are dealing with pot covers.

However, for purposes of this opinion, we too will refer to

pot covers and plant covers interchangeably, since the distinc-

tion does not bear on the issues.

No. 05-2247 3

settled the litigation. After PTII filed a motion to enforce

this settlement agreement, the trial court issued an order on

April 5, 2001 (the “April 5 Order”), incorporating the

settlement agreement and licenses and dismissing the

lawsuit while maintaining limited jurisdiction to enforce

its order. PTII thereafter alleged that Klerks had breached

provisions of the licenses, and on October 22, 2001, the

trial court granted PTII’s request for post-judgment

discovery. At that point, PTII terminated the licenses and

Klerks stopped manufacturing and selling pot covers.2

The language of the licenses, which is in part what is

at issue in this case, provides that:

PTII hereby grants to KLERKS HOLLAND the non-

exclusive license to manufacture and sell only in

Holland and only in the United States UPGRADE

PLANT COVERS only to CUSTOMERS under the

trademark rights referred to in Article II and using or

incorporating the technology referred to in paragraph

1.5 which are absolutely essential for KLERKS HOL-

LAND to make and sell UPGRADE PLANT COVERS.

The term “customers” is defined as:

(a) horticultural growers of potted plants for use on

such potted plants and (b) retail food supermarkets.

The term “retail food supermarkets” means a retail

business whose entire business primarily is the retail

sale of food products, that is, considering the total

sales of the consolidated business, at least eighty

percent (80%) of such sales are for food products. The

term “CUSTOMERS” specifically (but not by way of

2

It appears that Klerks actually ceased all manufacturing and

selling of pot covers on June 21, 2002.

4 No. 05-2247

limitation) excludes EXCLUDED CUSTOMERS (de-

fined below).

“Excluded customer” means:

any customer who is not a horticultural grower of

potted plants or a retail food supermarket. EXCLUDED

CUSTOMERS specifically includes (but not by way

of limitation) businesses such as variety chains,

mass merchandisers, discount chains, drug chains,

buying clubs, craft and hobby stores, garden centers,

and home improvement centers such as (but not by

way of limitation) Lowe’s, Home Depot, Wal-

Mart . . . whether or not marketed at retail store

sites, central buying offices or via catalogs or via

electronic means by a website or via any other market-

ing channel. KLERKS will not, to its best knowledge,

sell plant covers to a CUSTOMER who resells those

plant covers to an EXCLUDED CUSTOMER. KLERKS

shall not (directly or indirectly) sell UPGRADE PLANT

COVERS to anyone who is not a CUSTOMER and

specifically cannot sell to any EXCLUDED CUSTOM-

ERS.

In total, between April 5, 2001 (when the order was issued)

and June 21, 2002, Klerks sold more than 30 million plant

covers for a total of $4,805,627.16 in 1,736 different trans-

actions. As a part of these transactions, Klerks paid PTII

a total of $418,635 in royalties.

After completing its post-judgment discovery, on August

13, 2004, PTII filed a renewed motion urging the court

to hold Klerks in contempt. PTII claimed that Klerks

“knowingly manufactured, offered for sale [and] sold . . .

(i) unlicensed plant covers, (ii) plant covers outside the

licensed geographic territories, (iii) [to un]authorized

No. 05-2247 5

customers, and (iv) [incorrectly marked] plant covers . . . .”

In addition to asking the court to hold Klerks in con-

tempt, PTII also sought proceeds from any and all sales

made in violation of the April 5 Order, settlement agree-

ment, and licenses. The district court made a judgment

on partial findings pursuant to Federal Rule of Civil

Procedure 52(c) ruling in favor of Klerks. It held that

PTII failed to meet its burden of producing clear and

convincing evidence that Klerks should be held in civil

contempt for violations of the April 5 Order. The district

court also found that while Klerks did breach certain

provisions of the license agreements, these breaches

were not material, and PTII did not prove any damages

that resulted from these breaches.

Discussion

PTII raises three issues on appeal. First, it asserts that

Klerks in fact did engage in material breaches of the license

agreements attached to the April 5 Order. Second, with

respect to these breaches, PTII maintains that it has

shown damages with sufficient clarity. Third, it con-

tends that Klerks should have been held in contempt

for alleged violations of the April 5 Order. We analyze

each issue in turn.

A

PTII must prove by a preponderance of the evidence

that Klerks breached the contract. Austin v. Illinois, 54 Ill.

Ct. Cl. 375 (2002). We review “de novo a district court’s

determination of the meaning of an ambiguous contract

term . . . as well as the court’s factual findings following

a bench trial.” Central States, Southeast and Southwest

6 No. 05-2247

Areas Pension Fund v. Kroger Co., 226 F.3d 903, 910 (7th Cir.

2000). PTII contends that the district court used the

wrong standard in assessing whether a material breach

occurred here. It argues that the court used a clear error

standard instead of the required preponderance of the

evidence standard. However, the trial transcript makes

it clear that the district court understood that the con-

tempt standard is clear error and the breach standard is

preponderance of the evidence.3 Moreover, apart from

the district court’s statement on what standard it used in

its order, the record reflects—as the district court con-

cluded—that PTII was not entitled to damages because

it produced virtually no evidence of any material breaches

or damages. This clears both standards.

To be sure, Klerks did breach portions of the agree-

ment, but these breaches were not material. Specifically,

its sales to Impack Corporation ($2,067), Dunstan AS

Groome ($338.40), Kinney Bonded Warehouse ($303.74),

Sea Venture Overseas ($60.21), and St. John’s Shipping

($466.54) were made outside of authorized territories. Also,

Klerks manufactured some nonconforming pot covers by

improperly reversing the film in its machines. Such pro-

duction, however, was promptly stopped. Overall, while

some sales violated the terms of the license, more than

99 percent did not. There were no material breaches, and

a party can only be held liable for damages resulting

3

When orally addressing the parties during a hearing, the trial

judge stated as follows: “Both parties have told me I can . . .

award damages for . . . breach of contract irrespective of find-

ing . . . contempt. Now, of course, the standard is entirely

different. One is a mere preponderance of the evidence and

one is clear and convincing.”

No. 05-2247 7

from a material breach.4 Pacini v. Regopoulos, 281 Ill.

App.3d 274, 279 (1996) (finding no breach of an occupancy

guarantee because 94.9953% occupancy rate was tanta-

mount to a 95% occupancy rate); Rubloff CB Machesney v.

World Novelties, 363 Ill. App.3d 558, 564 (2006) (listing

several factors relating to a finding of materiality: 1) the

extent to which the non-breaching party was deprived of

the benefit that it reasonably expected; 2) the extent to

which the non-breaching party can be adequately com-

pensated for the part of that benefit of which it will be

deprived; 3) the extent to which the breaching party

will suffer forfeiture; 4) the likelihood that the breaching

party will cure its failure; 5) the extent to which the breach-

ing party’s behavior comports with standards of good

faith and fair dealing).

PTII tries to argue that Klerks breached the agreement

in additional ways that the district court either over-

looked or failed to appreciate. In each case, PTII either

mischaracterizes the facts or uses faulty logic. First, it at-

tempts to label several of Klerks’s sales as sales to gar-

den centers, which are excluded customers according to the

agreement. However, PTII’s own witness admitted that

he had no evidence that the entities that they considered

to be garden centers were anything other than horticul-

tural growers of plants,5 which are not excluded customers.

4

A more significant hurdle for PTII is that it has not proven

damages with sufficient clarity, as detailed below.

5

The district court properly looked to the dictionary for

guidance on defining “horticultural grower,” (since it is not

defined in the license) and found that it refers to an entity

that cultivates a fruit or other product. This is more consis-

(continued...)

8 No. 05-2247

Second, PTII maintains that Klerks breached the license

agreements by manufacturing and selling $2,762,459.66

of pot covers with “skirt angles” outside the specifica-

tions of the agreements. The license requires that “plant

covers [have] the appearances and [be] made exactly like

the samples covers Exhibits A (standard cover) and A1

(brite cover) attached hereto and made a part hereof,

and with the skit extending upwardly and outwardly

from the base at an angle from about 30 degrees to about

55 degrees from horizontal.” More simply, visualize

your everyday flower pot. In most cases, as you move

further up the pot from bottom to top, it gets wider. The

rate at which the pot widens—or the angle—is the “skirt

angle.” The district court found that the pot covers con-

formed to the skirt angle provisions. In addition, it

found that these specific measurements were selected by

the parties to reflect Klerks’s existing manufacturing

process, Klerks did not change this process, and PTII

never complained about the skirt angles until after Klerks

ceased making pot covers. What is essential to the dis-

pute here is that each party has its own expert that

claims that a particular method of measuring the skirt

angle is superior. PTII’s expert stated that he measured

the angle at the intersection of the skirt and the base (the

“break angle”) and found many to be outside of the 30 to

55 degree range. Nevertheless, this expert agreed that there

could be other ways to measure the angle, and Klerks’s

own expert measured the angles using a different method

5

(...continued)

tent with the plain meaning of the term than PTII’s proposed

contextual definition, which narrowly defines the term as

“large wholesale commercial growers.”

No. 05-2247 9

(not just focusing on the break angle) and found them to

be in compliance. Given the conflicting testimony, the

fact that the licenses did not state a procedure for meas-

uring the angles, that each expert offered a reasonable

procedure, and both experts were well-qualified, it was

reasonable for the district court to conclude that the

skirt angles were within the permissible range.

Third, PTII asserts that Klerks sold $6,000 of lace plant

covers in violation of the licenses. The district court

held that the sales did not violate the licenses for two

reasons. First, the license agreements incorporate a

patent that permitted the production of lace covers.

Second, the lace covers fit within the definition of “Up-

grade B Plant Covers,” which Klerks was permitted to

sell. PTII argues that the 1986 license as amended does

not grant Klerks permission to sell lace style covers be-

cause the patent is not included. Even if this were

true—and it is not clear whether it is—PTII’s argument

still falls short because the lace covers appear to conform

to the definition of Upgrade B Plant Covers. These covers

are described as ones made from a non-matted polymer

film, with a four-cornered skirt, “having a printed pat-

tern only on the outside and with a solid color inside.”

Both parties agree that these covers have printed patterns

on the outside. The question is whether the film has a

solid color on the inside. The inside layer of these covers

is clear, which is technically colorless. But the key idea

is that the printed pattern is on the outside, not the inside,

even though it can be seen from the inside because the

inside layer is clear. Further, the fact that some of the

printed pattern can be seen on the inside does not violate

the license because the covers attached to the licenses

shown as Exhibits B and B-1 have printed patterns

10 No. 05-2247

clearly visible from the inside of the pot cover. Thus,

the district court did not commit any clear error in hold-

ing that the lace plant covers qualify as Upgrade B Plant

Covers.

Fourth, PTII claims that the district court erred in hold-

ing that Klerks “did not use any Highland or PTII technol-

ogy to make Sleeve products. In fact, neither Highland

nor PTII . . . transferred any technology” to Klerks.

Whether or not this finding is correct is irrelevant, be-

cause it was used to support two conclusions that PTII

does not dispute. First, it was used to bolster the idea

that plant sleeves (which Klerks now sells instead of pot

covers) did not use any technology in violation of the

agreements. Second, it was used to demonstrate that

Exhibit X to the licenses was the only item of technology

that PTII proved at trial was subject to the “return” provi-

sion of the licenses. The district court simply con-

cluded that plant sleeves do not contain any Exhibit X

technology, which PTII does not dispute. Moreover,

PTII failed to prove that Klerks did not return any tech-

nology to it.

Finally, PTII makes a number of arguments with little

to no support in the record. For instance, it nakedly

asserts that Klerks made sales to non-supermarket re-

tailers, which is not permitted, but it does not cite to

anything in the record to support this point. In addition,

PTII takes issue with the district court’s conclusion

that PTII failed to prove that Klerks made or sold any

pot covers with a matted polymer film. The district

court relied on its own observations and its own determi-

nations with respect to the credibility of PTII’s expert

witness to arrive at this conclusion, and PTII does not

offer any reason to doubt the correctness of its analysis.

No. 05-2247 11

PTII also disputes the district court’s finding that Klerks

did not materially breach an August 30, 2001 agreement

because it shipped unlabelled covers from September 4

through September 12, 2001. Pursuant to the agreement,

the covers had to be marked with a label as prescribed

by PTII. But PTII made compliance difficult, in that it

kept switching the labeling requirements, which cost

Klerks almost $500,000. Given the cost and time associated

with meeting PTII’s mercurial demands, the agreement

stated that Klerks could ship unmarked covers through

September 4th. Klerks went over by eight days. The

district court did not abuse its discretion in declaring

that this was not a material breach, especially since PTII

did not suffer any identifiable harm.

B

Even if PTII could somehow show a material breach,

it would still fall short of winning on its claim because it

has not proven damages. PTII makes two arguments

here. First, it contends that it should have been awarded

nominal damages even if it could not prove actual dam-

ages. Second, it argues that it did in fact prove actual

damages. With respect to the first point, Illinois law is

clear: “[m]erely showing that a contract has been breached

without demonstrating actual damages dose not suffice . . .

to state a claim for breach of contract.” TAS Distrib. Co. v.

Cummins Engine Co., 491 F.3d 625, 631 (7th Cir. 2007).

More importantly, PTII never sought damages from

Klerks—it only sought to require Klerks to “disgorge” the

entire proceeds of every sale it contend was in violation

of the licenses (plus treble damages and attorneys’ fees).

With respect to the second point, Illinois law is again

clear: damages for unjust enrichment are not awardable

12 No. 05-2247

when, as here, there is a contract between the parties on

the subject in dispute. La Throp v. Bell Fed. Sav. & Loan

Assoc., 68 Ill.2d 375, 391 (1977). PTII did not prove in its

proceedings below that it lost any sales, profits, or

royalty income as a result of the alleged violations, and

it provided no proof that any of the violations damaged

its business in any concrete way. Indeed, PTII does not

actually make anything—its business is to license and

collect royalties from sales made by others. And we

know from the record that Klerks paid royalties on every

sale. PTII could claim that it would have given the

license to another party that could have made sales, but

it provides no evidence to show that its royalties would

have been any higher.

In the alternative, PTII submits that this court should

fashion an equitable remedy and award Klerks’s gross

sales as a measure of damages. See Leman v. Krentler-Arnold

Hinge Last Co., 284 U.S. 448 (1932); Connolly v. J.T. Ventures,

851 F.2d 930, 933 (7th Cir. 1988). But what PTII does not

recognize is that in cases where such a remedy has been

crafted, the court also found the breaching party in con-

tempt, which is not the case here. Klerks’s breaches

were not material, and there is no suggestion that it did

not deal with PTII in good faith.

Both Klerks and the district court posit that PTII suf-

fered no theoretical damages—and actually gained—

from the breaches that were alleged to have occurred

because royalties were paid on each transaction. This is

not accurate. If we suppose, for instance, that Klerks did

actually manufacture covers with angles outside the

permissible range, then it does not follow that PTII only

benefitted because it was still paid a royalty on the trans-

actions. This is because PTII could have made additional

No. 05-2247 13

revenue by forcing Klerks to pay a higher fee for a less

restrictive angle range. In addition, the cost of losing

control over whom the licensee can sell to and where

they can sell implicates market share and quality control

issues.6 All of these types of harms are capable of being

made concrete. Unfortunately for PTII, it was unable to

prove any material breaches, or any concrete damages

that flowed from these breaches. Transportation & Transit

Assocs., Inc. v. Morrison Knudsen Corp., 255 F.3d 397, 401

(7th Cir. 2001) (“the party claiming the breach must

establish the amount of damages. The demonstration

need not be precise, . . . but the plaintiff must have a

sensible basis for its claim.”).

C

We do not disturb a district court’s decision regarding

a contempt petition unless we find that it abused its

discretion. Stotler & Co. v. Able, 870 F.2d 1158, 1163 (7th Cir.

1989). Put another way, we “must affirm if the district

court’s determination is plausible in light of the record

in its entirety.” Zeige Distrib. Co., Inc. v. All Kitchens, Inc.,

63 F.3d 609, 612 (7th Cir. 1995) (citations omitted).

6

Even beyond harms to the particular licensor, there is a

social loss associated with reading licenses in an overly liberal

manner. Interpreting licenses loosely could lead to higher

degrees of uncertainty with respect to a licensor’s ability to

carve up markets, which in turn could push up the price of

licenses as a whole. In addition, companies like PTII would

be less inclined to innovate and create new technology if they

could not properly define the contours of precisely what

their licensees can do with the technology.

14 No. 05-2247

Contempt is a unique civil sanction because its aim is

both coercive and compensatory. U.S. v. United Mine

Workers, 330 U.S. 258, 303-04 (1947).7 To sustain its con-

tempt claim, PTII has the burden of proving all of the

following elements by clear and convincing evidence:

(1) the Order sets forth an unambiguous command;

(2) Klerks violated that command; (3) Klerks’s violation

was significant, meaning it did not substantially comply

with the Order; and (4) Klerks failed to take steps to

reasonable and diligently comply with the Order. Goluba

v. School Dist. of Ripon, 45 F.3d 1035, 1037 (7th Cir.

1995); Stotler, 870 F.2d at 1163.

Starting with the last prong, it is pellucid that Klerks

took reasonable and diligent steps to comply with the

April 5 Order. Indeed, shortly after the Order was

issued, Klerks’s management met with its attorneys to

review its rights and responsibilities. It instituted policies

that were more restrictive than the licenses themselves.8

It also held quarterly meetings to review compliance

issues. Klerks communicated these policies internally

and externally, and conducted meetings with sales staff

and its customer service department to inform them of

restrictions. It even went so far as to directly inform its

customers and distributors of the restriction limiting

sales of pot covers to horticultural growers and retail

food supermarkets. This list is meant to be illustra-

tive—it is by no means exhaustive. PTII’s sole counter-

7

The coercive element is not in play here because, as noted

earlier, Klerks is no longer in the plant cover business.

8

For instance, Klerks decided that it would not sell pot

covers to any grower who is using the pot covers on plants

that would be sold to mass merchandisers.

No. 05-2247 15

argument here is the evidence that it offers that suggests

that some of Klerks’s employees (e.g., salesmen) were

not aware of some of the new policies that Klerks imple-

mented in order to ensure compliance. While this is in-

deed countervailing evidence, on balance, it does not add

up to a finding that the district court abused its discretion

in concluding that Klerks took reasonable and diligent

steps to comply with the April 5 Order.

With respect to the third prong, PTII is unable to prove

by clear and convincing evidence that Klerks failed to

substantially comply with the April 5 Order. The parties

disagree as to how many of the 1,736 transactions at

issue contravene the Order. As explained in greater detail

above, some of these transactions indeed did not com-

ply. However, we ultimately agree with the district court

that “[t]he quantity of nonconforming pot covers sold is

a fraction of 1% of total pot cover sales by Klerks.”

With respect to the first two prongs, PTII again fails to

prove by clear and convincing evidence that Klerks vio-

lated an unambiguous command contained in the April 5

Order. The district court correctly found that on a num-

ber of issues (e.g., sales of matted covers, lace covers, etc.)

that PTII did not meets its burden. In addition, the order

must be unambiguous, which is not the case here with

respect to definitions of “customers” and “excluded

customers.” For instance, PTII forbade the sale of plant

covers to a customer who then resells the plant cover (even

if it is on a potted plant) to an excluded customer. The

problem with this position is that it would render the

entire April 5 Order useless, because it would preclude

Klerks from selling plant covers to horticultural growers

and retail food supermarkets since they themselves then

sell to individuals (i.e., the ultimate end-users), who are

16 No. 05-2247

excluded customers. Klerks interpretation of “resells” is

more reasonable, in that it refers only to resales of the

plant covers alone, not resales of the plant covers at-

tached to potted plants.

Notwithstanding PTII’s inability to meet the standards

set out for holding a party in contempt, we have held

that remedial sanctions are limited to provable losses

sustained by the non-breaching party as a result of the

violation of the order. Autotech Techs. LP v. Integral Research

and Dev. Corp., 499 F.3d 737, 752 (7th Cir. 2007). As we

have explained above, PTII failed to prove any such loss.

Conclusion

For the foregoing reasons, we AFFIRM the judgment of

the district court.

USCA-02-C-0072—5-5-08