It must be time for a "positive spin" soooooooooo, as PTSC's interests in the patents aren't being questioned(see below)and TPL have been authorized to license the portfolio on their behalf, how does the alleged spat between Moore and TPL affect the said licensing?

Long Fish v. Nanotronics Corp.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS


California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.


The trial court in this case granted the defendants' motions for summary adjudication. The plaintiff, Janet Long Fish, thereafter abandoned her remaining claims and judgment in favor of the defendants was entered.


Like the trial court we find Fish cannot prevail on the claims she asserts on appeal. Under the terms of the Technology Transfer Agreement which is the subject of Fish's claims, Fish was entitled to fixed royalties only on products produced by the other party to the Technology Transfer Agreement, defendant and respondent Nanotronics Corporation (Nanotronics). Fish was not entitled to fixed royalties on products produced by third parties. Thus she had no claim against either Nanotronics or defendant and respondent Patriot Scientific Corporation (Patriot), which, in a bona fide transaction, purchased the assets of Nanotronics and then brought products to market employing the technology which was the subject of the Technology Transfer Agreement.


FACTUAL BACKGROUND


Janet Long Fish is the trustee of a trust established by her son Russell Fish. Russell Fish was the co-inventor of a semi-conductor technology known as Sh-Boom. Russell Fish transferred his interest in the Sh-Boom technology to the trust and thereafter acted on behalf of the trust. Under the terms of an agreement with the other co-inventor of Sh-Boom, Charles Moore, the trust and Moore each had the right to sell or license the technology, subject to an obligation to pay royalties to the other.


In 1991 Russell Fish conducted a lengthy series of negotiations with a venture capitalist, Helmut Falk. The result of the negotiations between Russell Fish and Falk were two agreements executed in August 1991. Under the first agreement, entitled Technology Transfer Agreement, the Fish trust transferred all of its interest in the Sh-Boom technology to Nanotronics, which was wholly owned by Falk. Under the terms of the sale, the Fish trust would receive royalties on any products Nanotronics sold which employed the Sh-Boom technology. In addition to royalties on products sold by Nanotronics, the Fishes were given 25 percent of any "up-front licensing fee" Nanotronics received from a third party, between 25 percent and 50 percent of any ongoing licensing fees Nanotronics received on the technology, and an option to buy Nanotronics stock in the event it was sold or merged with another company.


The second agreement was a Development Agreement, under which the Fish trust agreed to assemble a group of engineers whose goal would be to develop and market commercial applications of the Sh-Boom technology. Under the Development Agreement, Nanotronics agreed to finance the development effort and in particular to pay the trust $10,000 a month for development work performed by Russell Fish.


Between 1991 and 1994 Nanotronics spent $1 million trying to develop products using the Fish technology. However, its efforts were not successful.


In 1994 Nanotronics sold all of its assets, which consisted almost entirely of the Sh-Boom technology, to another company, defendant and respondent Patriot. In return Nanotronics received five million shares of restricted Patriot stock and a contingent right to an additional five million shares. Under the terms of the asset sale, Patriot agreed to name Falk to its board of directors and cause him to be elected chairman.


The asset sale to Patriot triggered the Fish trust's right to acquire stock in Nanotronics, which the trust in fact exercised.


The following year Falk was diagnosed with cancer and decided to dissolve Nanotronics. By way of the dissolution of Nanotronics, the Fish trust received Patriot shares in exchange for the Nanotronics shares it had received the previous year. Before he died, Falk assigned the Patriot shares he was to receive in the dissolution to his own family trust. Defendant and respondent Gloria H. Felcyn is the trustee of the Falk trust.


Between 1994 and 1996 Patriot invested $2.7 million in the Sh-Boom technology and in 1996 was able to commercially market a microprocessor chip which used it.


Shortly after Patriot's apparent success with the technology, the Fish trust demanded royalties from Patriot under the terms of the 1991 Technology Transfer Agreement. Patriot refused to pay the Fish trust any royalties on the grounds that in purchasing Nanotronics's assets it had not assumed the obligations of the Technology Transfer Agreement.


PROCEDURAL HISTORY


Fish filed a complaint against Nanotronics, Patriot and Felcyn in her capacity as trustee of the Falk trust. The Fish trust's complaint alleged nine causes of action, including declaratory relief, breach of contract, rescission, constructive trust, breach of fiduciary duty, fraudulent transfer, unfair competition, unjust enrichment, and tortious interference with contractual relations. The trust asserted Nanotronics and Patriot were directly liable for royalties under the Technology Transfer Agreement or, in the alternative, Patriot was liable on theories of fraudulent transfer and unfair competition. The defendants answered the complaint and filed a cross-complaint for declaratory relief with respect to their obligations under the Technology Transfer Agreement.


Following discovery, the parties filed cross-motions for summary adjudication. The trial court denied the Fish trust's motion and granted the defendants' motion. The trial court found the Technology Transfer Agreement only required payment of royalties on products sold by Nanotronics itself and because Nanotronics had not sold any Sh-Boom products, no royalties were due. The trial court declined to imply that under the Technology Transfer Agreement Nanotronics could transfer the Sh-Boom technology to a third party only if it protected the Fish trust's right to royalties on products sold by the third party. The trial court also found Nanotronics's asset sale to Patriot was not a fraudulent transfer and did not amount to unfair competition within the meaning of Business and Professions Code section 17200. Although the trial court's ruling did not dispose of all of the Fish trust's claims, the trust stipulated to dismissal of its remaining claims with prejudice and a final judgment in favor of the defendants was entered. The trust filed a timely notice of appeal.


DISCUSSION


I.


Summary judgment may be granted only when a moving party is entitled to a judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) In Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826 (Aguilar), the Supreme Court clarified the law courts must apply in California in ruling on motions for summary judgment. Where the motion is brought by a plaintiff, the plaintiff bears the burden of proving each element of the cause of action entitling him to judgment on that cause of action. (Aguilar, supra, 25 Cal.4th at p. 849.) "'Once the plaintiff . . . has met that burden, the burden shifts to the defendant . . . to show that a triable issue of one or more material facts exists but, instead,' must 'set forth the specific facts showing that a triable issue of material fact exists as to that cause of action or a defense thereto. The defendant . . . may not rely upon the mere allegations or denials' of his 'pleadings to show that a triable issue of material fact exists as to that cause of action or a defense thereto.' [Citation.]" (Id. at p. 849.)


Where the motion is brought by a defendant, the defendant will bear the burden of persuasion that "'one or more elements of'" the "'cause of action'" in question "'cannot be established,'" or that "'there is a complete defense'" thereto. (Aguilar, supra, 25 Cal.4th at p. 850, citing § 437c, subd. (o)(2).) In Aguilar the Supreme Court established that summary judgment law in California does not require a defendant conclusively negate an element of the plaintiff's cause of action. Rather, in accordance with federal law, "All that the defendant need do is to 'show that one or more elements of the cause of action . . . cannot be established' by the plaintiff. [Citation.] In other words, all that the defendant need do is to show that the plaintiff cannot establish at least one element of the cause of action - - for example, that the plaintiff cannot prove element X. Although he remains free to do so, the defendant need not himself conclusively negate any such element -- for example, himself prove not X." (Aguilar, supra, 25 Cal.4th at pp. 853-854, fns. omitted.)


In meeting its burden a defendant must present evidence, in the form of affidavits, declarations, admissions, answers to interrogatories, depositions, or matters of which judicial notice must be taken. (Aguilar, supra, 25 Cal.4th at p. 855; Code Civ. Proc., § 437c, subd. (b).) In addition to presenting evidence which negates an element of plaintiff's cause of action, " he defendant may also present evidence that the plaintiff does not possess, and cannot reasonably obtain, needed evidence -- as through admissions by the plaintiff following extensive discovery to the effect that he has discovered nothing." (Aguilar, supra, 25 Cal.App.4th at p. 855, fn. omitted.)


Once a defendant has met its burden of showing a cause of action has no merit, "'the burden shifts to the plaintiff . . . to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. The plaintiff . . . may not rely upon the mere allegations or denials' of his 'pleadings to show that a triable issue of material fact exists but, instead,' must 'set forth the specific facts showing that a triable issue of material fact exists as to that cause of action or a defense thereto." (Aguilar, supra, 25 Cal.4th at p. 849.)


The plaintiff's burden in defeating a motion for summary judgment is only a burden of production and only a burden of making a prima facie showing of a triable issue of fact. (Aguilar, supra, 25 Cal.4th at p. 850.) "A prima facie showing is one that is sufficient to support the position of the party in question." (Id. at p. 851.)


In broadly outlining the law of summary judgment, the Supreme Court stated: "If a party moving for summary judgment in any action . . . would prevail at trial without submission of any issue of material fact to a trier of fact for determination, then he should prevail on summary judgment. In such a case . . . the 'court should grant' the motion 'and avoid a . . . trial' rendered 'useless' by non-suit or directed verdict or similar device." (Aguilar, supra, 25 Cal.4th at p. 855.)


With these procedural principles in mind, we turn to each of the Fish trust's three alternative theories of liability: Nanotronics's liability for breach of contract, Patriot's liability on the agreement and unfair competition.


II.


Both in the trial court and on appeal, the Fish trust asserted that under the express and implied provisions of the Technology Transfer Agreement, Nanotronics was required to pay it royalties on products sold by Patriot. We find no such liability.


A. Liability Under the Express Terms of Technology Transfer Agreement


The Technology Transfer Agreement defines the Fish trust as the "Trust" and Nanotronics as the "Company." Section 3.1 of the Technology Transfer Agreement states in pertinent part: " he Company shall pay the Trust a royalty on each Basic Sh-Boom Microprocessor sold by it . . . in accordance with the following schedule." The schedule of royalty payments then sets forth specific dollar amounts Nanotronics would pay the trust during the term of the agreement and guaranteed minimum royalty payments once production began. Under each provision of the royalty schedule, Nanotronics's royalty obligation is limited to each microprocessor "sold by it."


Section 3.2 states in pertinent part: "The Company shall pay the trust royalties on each unit of each type of Enhanced Product sold by it during the Royalty Years." The schedule of royalties for enhanced products was also in fixed dollar amounts over the term of the agreement, but without any guaranteed minimum royalty following commencement of production.


Section 3.3 of the agreement states: "The Company shall pay the Trust royalties on income from licensing (as opposed to sales) of the Basic Sh-Boom Microprocessor or Enhanced Products as set forth in this Section 3.3." Section 3.3.1 in turn provides: "The Company shall pay the Trust 25% of each one-time, 'upfront' license fee it receives from any licensee of the Sh-Boom Microprocessor or any Enhanced Product." Section 3.3.2 provides: "The Company shall pay the Trust royalties on ongoing royalty payments (i.e., royalty licenses) it receives from licensees ('Royalty Income') in accordance with this Section 3.3.2." Subdivisions of section 3.3.2 then provide the Trust with 50 percent of any license fees the Company receives for licensing the basic technology and lesser percentages for licenses of enhanced products.


As the defendants point out, under a literal reading of these provisions, only Nanotronics's royalty obligation is expressly and repeatedly limited to microprocessors "it sold." (Italics added.) Such a literal interpretation is supported by the separate treatment of third party license fees. In treating such license fees separately, the face of the agreement makes it clear that the parties understood there were two ways in which Nanotronics might attempt to exploit the value of the Sh-Boom technology: by developing and selling its own products and by permitting the technology to be used by third parties. In recognizing each method of realizing value and treating them separately, the face of the Technology Transfer Agreement makes it plain the parties agreed products sold by Nanotronics and products sold by third parties would give rise to entirely distinct obligations. This in turn lends considerable support to the defendants' contention that the royalty obligations set forth in such detail in sections 3.1 and 3.2 of the agreement were limited to products sold by Nanotronics.


Because the defendants' interpretation of the royalty provisions is faithful to the literal language of the agreement and consistent with the closely related licensing provisions, the defendants' interpretation is supported by rules of construction which require consideration of both the language of an instrument and the larger context in which the language appears in the instrument. (Civ. Code, §§ 1638, 1639, 1641; see Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264- 1265.)


In attempting to avoid the defendants' literal reading of the agreement, the Fish trust argues the Technology Transfer Agreement is ambiguous with respect to whether in addition to a share of any licensing fees earned from third parties the trust was also to be paid royalties for third party use of the Sh-Boom technology. Because of the ambiguity it asserts, the trust argues statements made by both Russell Fish and his mother should be considered by a finder of fact. The Fish trust's attempt to create a triable issue of fact is unpersuasive.


Because the Technology Transfer Agreement contains an integration clause, the Fish trust cannot rely upon any collateral oral or written agreements Russell Fish and Falk may have entered into. (See Bionghi v. Metropolitan Water Dist. (1999) 70 Cal.App.4th 1358, 1364.) Admittedly, when, as here, an agreement is an integrated document, parol evidence may still be offered to assist the court in deciding whether the terms the agreement are potentially ambiguous. (Ibid.) "' ational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. [Citations.] Such evidence includes testimony as to the "circumstances surrounding the making of the agreement . . . including the object, nature and subject matter of the writing . . . " so that the court can "place itself in the same situation in which the parties found themselves at the time of contracting." [Citations.] If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, "is fairly susceptible of either one of the two interpretations contended for . . . " [citations], extrinsic evidence relevant to prove either of such meanings is admissible.' [Citation.]" (Id. at pp. 1364-1365, quoting Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 39-40.)


The Fish trust, however, has not presented any extrinsic evidence which supports its contention third party use of the Sh-Boom technology gives rise to any of the royalty obligations set forth in sections 3.1 and 3.2 of the technology agreement. In particular, the deposition statements of Russell Fish and Janet Long Fish, to the effect they never intended to forego royalties from third parties, are not admissible because there is no evidence any such intention on the part of the Fishes was ever communicated to Falk or anyone else acting on behalf of Nanotronics. " vidence of the undisclosed subjective intent of the parties is irrelevant to determining the meaning of contractual language." (Winet v. Price (1992) 4 Cal.App.4th 1159, 1166, fn. 3.) Moreover, the Fish trust has not cited and we have not discovered any other circumstance surrounding negotiation of the Technology Transfer Agreement which lends support to the notion the Fishes and Falk agreed the trust would be paid both a share of license fees received from third parties and royalties on products sold by third parties.


Because there is no admissible extrinsic evidence in the record, interpretation of the contract is, as the defendants contend, a question of law which we are required to resolve. (Winet v. Price, supra, 4 Cal.App.4th at p. 1166.) As we have seen, because the defendants' literal interpretation of the royalty clauses is wholly consistent with the related licensing clauses, it is supported not only by the logic of the agreement but also by familiar rules of construction. (See Civ. Code, §§ 1638, 1639, 1641.) Thus, we construe the royalty provisions as the defendants suggest: as limited to products sold by Nanotronics.

Because Nanotronics never sold any Sh-Boom products, the Fish trust has no claims against Nanotronics under the express terms of the Technology Transfer Agreement.


B. Implied Provisions


As we have indicated, as an alternative to its contention royalties are required by the express terms of the Technology Transfer Agreement, the Fish trust argues that an obligation to pay royalties on products sold by third parties, such as Patriot, should be implied.


"The rules which govern implied covenants have been summarized as follows: '(1) the implication must arise from the language used or it must be indispensable to effectuate the intention of the parties; (2) it must appear from the language used that it was so clearly within the contemplation of the parties that they deemed it unnecessary to express it; (3) implied covenants can only be justified on the grounds of legal necessity; (4) a promise can be implied only where it can be rightfully assumed that it would have been made if attention had been called to it; (5) there can be no implied covenant where the subject is completely covered by the contract.' [Citations.]" (Lippman v. Sears, Roebuck & Co. (1955) 44 Cal.2d 136, 142, quoting Cousins Inv. Co. v. Hastings Clothing Co. (1941) 45 Cal.App.2d 141, 149.)


In Lippman v. Sears, Roebuck & Co. a commercial lease required a relatively small minimum rent with the bulk of the tenant's rental obligation calculated as a percentage of the tenant's retail sales. The lease further provided, in the event the tenant assigned, sublet or abandoned the premises, the tenant would be liable for the average rent paid in the previous 12 months. When the tenant converted its store from retail sales to storage, the court found, in light of the insubstantial nature of the minimum required rental, the tenant had breached an implied covenant to remain in the retail sales business. The court further found that the tenant was liable to the landlord in the amount of the average rent paid in the previous 12 months. (44 Cal.2d at p. 145.) The court found the lease provisions with respect to rent due on assignment or abandonment in effect "liquidated the damages to the lessor from a loss of a percentage of the income from the lessee's business if it ceased to occupy the premises. It is a reasonable implication from these provisions that the parties agreed upon the same measure of damages when that loss resulted from an abandonment of the integral purpose for which the lease was made." (Id. at pp. 146-147.)


In Ellis v. Chevron, U.S.A., Inc. (1988) 201 Cal.App.3d 132, 140- 141, we refused to imply a covenant which would have permitted a commercial tenant to continue its business after expiration of a 20-year lease. In particular, although at the end of the 20-year term the lease gave the existing tenant the right to meet any competing offer on the premises, we refused to limit the type of competing offers the landlord could consider. We found at the end of the lease term the landlord was free to attempt to exploit the value of his land in any commercially reasonable manner. " he purpose of lease . . . , was to permit the [landlord] to exploit the value of his land after having given up that right for an extended period of time. Under the terms of the [lease] . . . [the tenant's] ability to continue its business beyond the term of the lease was made subordinate to that opportunity. Given this purpose the only duty which may be implied under the covenant [of good faith and fair dealing] is a duty on the part of [the landlord] to act in a commercially reasonable manner." (Ellis v. Chevron, U.S.A., Inc., supra, 201 Cal.App.3d at p. 140.)


In sum then, under the implied covenant cases, any implied covenant must be consistent with the language of the contract and its overall purposes. (See Lippman v. Sears, Roebuck & Co., supra, 44 Cal.2d at p. 142; Cousins Inv. Co. v. Hastings Clothing Co., supra, 45 Cal.App.2d at p. 149; Ellis v. Chevron, U.S.A., Inc., supra, 201 Cal.App.3d at p. 140.) Here, there is no basis upon which we can imply an obligation to pay royalties under sections 3.1 and 3.2 whenever a third party makes use of the Sh-Boom technology. Such a covenant would not only contravene the literal language of the agreement, but also discourage any effort by Nanotronics to fully exploit the value of the technology. As we have seen, the literal language of the contract limits application of the strict royalty schedule to products sold by Nanotronics. As between the Fish trust and Nanotronics, this royalty provision protects the Fish trust from the manufacturing and marketing risks which Nanotronics would bear with respect to products it sells. However, under the agreement the royalty obligation only arises once Nanotronics makes the decision to bear those risks and commence production. In the event Nanotronics decided, in light of its royalty obligations, the risks were not worth the potential profit, no royalties would be due. However, the terms of the agreement make it clear the purpose of the agreement was not limited to production by Nanotronics of ShBoom products. Rather, the agreement makes it clear that its overall purpose was to realize value from the technology and share that value between the Fish trust and Nanotroncs. To the larger end of realizing value, we have seen, in the event Nanotronics was unable or unwilling to commence production, Nanotronics could still attempt to create profits for both itself and the Fish trust by licensing the technology to third parties on selling its assets to another corporation. As we have seen under the agreement, Nanotronics was required to share between 25 percent and 50 percent of any third party licensing fees with the trust and to provide the Fish trust with an opportunity to purchase Nanotronics shares in the event of a sale or merger. If we were to imply a covenant the trust could also recover the fixed royalties set forth in sections 3.2 and 3.3, we would substantially diminish any incentive Nanotronics had to license the technology to third parties or sell the corporation.


In sum then, there is no basis upon which to recognize any implied covenant to pay royalties on products sold by a third party such as Patriot.


III.


As an alternative to its contention the Technology Transfer Agreement requires royalty payments for third party use of the Sh-Boom technology, the Fish trust contends that in acquiring Nanotronics's assets, Patriot stepped into Nanotronics's shoes and is directly liable for royalties under the Technology Transfer Agreement.


"As a general rule, 'where one corporation sells or transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the former unless (1) the purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape liability for debts.' [Citation.]" (Chaknova v. Wilbur-Ellis Co. (1999) 69 Cal.App.4th 962, 967.)


None of these exceptions to the general rule apply here. In acquiring Nanotronics, Patriot expressly disavowed any liability for Nanotronics's obligations to the Fish trust. Both Nanotronics and Patriot existed as separate entities before the sale and continued to exist separately for more than a year after the sale. Thus there was no actual merger or continuation of Nanotronics's business by Patriot. The Fish trust has not suggested the Sh-Boom technology had a value which exceeded the value of the Patriot stock Nanotronics received and there is no dispute Patriot devoted substantial funds and additional time to the Sh-Boom technology. Given these circumstances there is no equitable basis upon which a court could find a de facto merger.


We also reject the Fish trust's claim the purpose of the asset acquisition was to defraud the trust by delaying or hindering the trust's ability to recover royalties under the terms of the Technology Transfer Agreement. (See Civ. Code, § 3439.04.) There is no dispute that by the time Patriot acquired the Sh-Boom technology, Falk and Nanotronics had expended three years and $1 million in attempting to develop the technology and they were not then in a position to market any products or make any further investment in the technology. In light of these circumstances, the Fish trust cannot establish that at the time of the asset sale to Patriot the trust had any realistic expectation royalties would ever be forthcoming from Nanotronics. Thus the Fish trust cannot show the asset acquisition hindered or delayed payment of any amounts due or likely to become due. Although the terms of Patriot's asset acquisition agreement make it clear Nanotronics and Patriot were anxious to avoid claims by the Fish trust, the attempt to avoid claims is not evidence such claims would have had any merit.


In sum then there is no basis upon which to hold Patriot liable as a successor to Nanotronics.


IV.


Finally, reasserting the general unfairness of the transaction by which Patriot acquired and developed the Sh-Boom technology, the trust contends Patriot and Nanotronics are liable under the unfair competition provisions of Business and Professions Code section 17200. Having found no impropriety in the transaction, we find no liability under Business and Professions Code section 17200.


CONCLUSION


Like any other contract, the Technology Transfer Agreement assigned certain risks and certain benefits to the respective parties. As we have explained, with respect to the potential development of the Sh-Boom technology, the agreement provided Fish with fixed compensation for products sold by Sh-Boom and stock options in the event the corporation was sold. We are not in a position to alter that bargain by requiring Nanotronics to pay a fixed return on products sold by third parties. Moreover, because the record shows the Patriot asset acquisition was a bona fide arms-length transaction, Patriot cannot be held responsible for Nanotronics's obligations to Fish.


The judgment is affirmed.Respondents to recover their costs of appeal.


WE CONCUR:


KREMER, P. J.


NARES, J.

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