MINNESOTA MINING & MANUFACTURING COMPANY, a corporation of Delaware, Appellee, v. ECO CHEM, INC., a corporation of Minnesota, George G. Rynne, an individual, et al., Appellants.
Appeal Nos. 83-1329, 84-1378.
United States Court of Appeals, Federal Circuit.
March 15, 1985.
757 F.2d 1256
DAVIS, Circuit Judge.
Similarly, the Advisory Committee Notes to Appellate Rules 3 and 4, citing Fallen as an illustration, advise that we should interpret the rules in accord with those cases dispensing “with literal compliance in cases in which it cannot fairly be exacted.” In the instant case, appellant Wright sought legal assistance from someone at the University of Indiana School of Law. Wright‘s legal papers were, however, misplaced. Although the district court held that the misplacement of legal papers constituted “good cause” for extending the time for appeal under
For the above-stated reasons, this appeal is
REMANDED.
Don W. Johnson, Dalton, Ga., argued for appellants. With him on the brief was John W. Adams, Minneapolis, Minn.
John D. Gould, Merchant, Gould, Smith, Edell, Welter & Schmidt, P.A., Minneapolis, Minn., argued for appellee. With him on the brief was Norman P. Friederichs, Minneapolis, Minn.
Before DAVIS, BENNETT and NIES, Circuit Judges.
This appeal discloses a continued series of efforts to avoid compliance with a default judgment of patent infringement against appellant Eco-Chem Inc. (ECI). In the court below (the United States District Court for the District of Minnesota) these attempts were unsuccessful. Nor do they prevail in this court. After fully appraising appellants’ points, we hold that the district court reached the right result in rejecting those efforts at avoidance or evasion that are now before us, and therefore we affirm the decisions below.
I.
The undisputed (or undisputable) facts are these:
Appellant Stephanie Rynne, her parents and her sister owned Conversion Chemical Co. (Conversion), which engaged in thе development, manufacture and sale of chemicals to the electroplating industry. Appellant George Rynne, Stephanie‘s husband, was a Conversion employee. Initially a development chemist, he rose through the ranks of Conversion and became vice president in charge of sales. He was familiar with all of Conversion‘s trade secrets and patented processes.
In 1974, appellee Minnesota Mining and Manufacturing Co. (3M) purchased Conversion in order to acquire its patented electroplating technology. As part of the sale, 3M acquired Conversion‘s United States Patent Nos. 3,171,765, 3,729,394, and 3,769,182, and Conversion‘s application for what later bеcame patent 4,070,165, each relating to methods of electroplating or refinishing metals. After the sale, George Rynne worked for 3M as a general sales manager in 3M‘s electroplating operation.
George Rynne left 3M in February 1977. The next month, George and Stephanie Rynne established appellant Eco-Chem, Inc. (ECI), a Minnesota corporation. Stephanie Rynne became president of ECI, George Rynne became Secretary-Treasurer. Stephanie owned 80% of ECI‘s stock; two salesmen each owned 10%. ECI entered the electroplating business, selling chemicals produced according to formulae developed by George Rynne whilе he worked at Conversion. In 1978, prior to the current suit, the Rynnes left Minnesota and moved to Georgia.
In January 1979, 3M filed this action against ECI, in the Minnesota district court, alleging that ECI had infringed the patents 3M acquired in the purchase of Conversion. After seven extensions of time, ECI finally answered, admitting jurisdiction and venue. 3M then served ECI with interrogatories and a request for production of documents. In the interim, the Rynnes decided to disband ECI. ECI‘s response to the discovery request then was (in full text):
Defendant, Eco-Chem, Inc. [ECI] is an inactive Minnesota corporation with no employees and with no operations in Minnesota or elsewhere. Consequently, Defendant is unable to respond to Plaintiff‘s First Set of Intеrrogatories and First Request for Production of Documents.
On 3M‘s motion, and after a hearing (at which ECI was represented by counsel), the district court (on December 11, 1979) entered a default judgment of patent infringement against ECI, pursuant to
After the institution of this suit the Rynnes established (late in 1979) Eco-Chem Ltd. (ECL), a Georgia corporation. The stockholders of ECI exchanged their stock for ECL shares. The Rynnes converted all of ECI‘s assets to ECL,2 including the formulae, customer lists, trademarks and in
On August 15, 1980, 3M moved in the Minnesota district court to add the Rynnes and ECL as parties to this suit pursuant to
By order and accompanying memorandum of March 16, 1984, the court awarded plaintiff damages in the amount of $235,906.28, which it then doubled pursuant to
In May 1983 the appellants moved the court under
On April 3, 1984, defendants filed a motion for a new trial or for modification of the default judgment under
II.
Appellants argue that the district court erred when it entered the original default judgment against ECI without first issuing an order compelling ECI to answer the interrogatories. The argument before us has turned on the nature of ECI‘s “response.” At issue is whether ECI‘s “response” to the interrogatories, set forth supra, constituted a complete failure to serve answers to the interrogatories, and thus permitted sanctions without such an order under
If we were to accept appellants’ argument, the full force of
The cases upon which appellants rely for the proposition that a prior order was necessary in this case before the court could enter a default judgment are inapposite. Special emphasis is placed on Laclede Gas Co. v. G.W. Warnecke Corp., 604 F.2d 561 (8th Cir. 1979). Appellants cite the following part of that opinion:
[Rule 37(d)] authorizes distriсt courts to “make such orders in regard to the failure as are just,” by reference including specifically the sanction provided in Rule 37(b)(2)(C) of dismissal of all or part of the action. Rule 37(b)(2)(C) allows dismissal as a sanction for failure to comply with the discovery orders of the trial court. A prior order, however, is essential. [Citation omitted].
604 F.2d at 565. But the point of this discussion was that, in those cases where a party has answered the interrogatories inadequately (as Warnecke had),
Appellants also say that, in these circumstances, the district court should not
III.
ECL and the Rynnes protest, in addition, that the trial court erred when it joined them as parties. (This issue was presented and preserved in their
A.
Transfer of Interest. In case of any transfer оf interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party. Service of motion shall be made as provided in subdivision (a) of this rule.10
The record clearly establishes that ECL was the transferee of ECI‘s assets, trademarks, customer lists and good-will.11 Indeed, ECL was merely a continuation of ECI, as evidenced by one-for-one transfer of ECL shares to ECI stockholders, the notification to ECI‘s customers that ECL had succeeded ECI, the application of ECL‘s name on inventory formerly owned by ECI, and the use of one bank account for both corporations during the transition period. See, Travis v. Harris Corp., 565 F.2d 443 (7th Cir. 1977) (“The indicia of ‘continuation’ are a common identity of stock, directors and stockholders and the existence of only one corporation at the completion of the transfer.“) The district court properly found that ECL became in effect a new corporate name for the same corporate body.
Conceding this, ECL argues that, being a Georgia corporation with no ties to Minnesota, the district court had no jurisdiction over it and could not assume jurisdiction under the guise of a joinder under
Other decisions have considered objections to in personam jurisdiction raised by parties substituted under
If the court had in personam jurisdiction over the substituted individuals in Bertsch and Ransom, then a fortiori the district court had jurisdiction here over a properly served corporation joined under
Moreover, the appellants’ argument regarding jurisdiction misperceives the nature of the joinder of a successor in interest under
The joinder did not alter the respective substantive rights of the transferor or of the transferee pendente lite, and, regardless of whether the transferee was made a party to the franchise depended on the outcome of the litigation between Television Reception and the transferor, Dunbar-Murphy & Co. [citations omitted]. Joinder merely represented a discretionary determination by the District Judge that Commonwealth Cable‘s presence would facilitate his conduct of the litigation.
Id. at 178; see also, Matter of Covington Grain Co., 638 F.2d 1362, 1364 (5th Cir. 1981) (“Rule 25(c) is not designed to create new relationships among parties to a suit but is designed to allow the [original] action to continue unabated when an interest in the lawsuit changes hands“); 7A Wright & Miller, Federal Practice and Procedure § 1958 at 664-65 (“The action may be continued by or against the original party, and
In the present case, neither 3M nor the court below says that ECL has infringed any patents. ECL did not even exist when the significant events took place. ECL thus was joined, not to determine its own liability, but merely because it succeeded to the assets from which 3M may satisfy its judgment. For these purposes, the court could properly join ECL as a party to the case.
The same reasoning applies to the question of venue. Venue relates to the locale in which a suit may properly be instituted, and not to the power of the court to hear the case or reach the parties. Neirbo Co. v. Bethlehem Corp., 308 U.S. 165, 167-68, 60 S.Ct. 153, 154-155, 84 L.Ed. 167 (1939). Thus, as the court stated in Dolgow v. Anderson, 45 F.R.D. 470, 472-73 (E.D.N.Y. 1968):
A line of cases long predating this venue provision and beginning at least with the opinion of Chief Justice Marshall in Mollan v. Torrance [supra], has firmly established the proposition that a federal court cannot be ousted of jurisdiction by a mere change of parties during the course of litigation.... This jurisdictional principle is a fortiori applicable to venue. Like jurisdiction, venue “once properly established * * * [is] unaffected by the change in parties, since it relates to the institution of the suit.” 4 Moore‘s Federal Practice ¶ 25.05 at p. 517 n. 1.
3M brought this case in the District of Minnesota consistently with the patent venue statute. Just as joinder of a new party does not disturb the district court‘s jurisdiction, we see no logical rationale for concluding that that joinder in any way disturbs venue properly established as an initial matter.
B.
Whether or not the Rynnes are direct successors in interest of ECI, and thus joinable as parties under
By ruling that the Rynnes were ECI‘s alter egos, the district court disregarded the fact that the Rynnes had еstablished ECI as a separate corporate entity. The corporate form is not readily brushed aside. However,
When substantial ownership of all the stock of a corporation in a single individual is combined with other factors clearly supporting disregard of the corporate fiction on grounds of fundamental equity and fairness, courts have experienced little difficulty and have shown no hesitancy in applying what is described as the “alter ego” or instrumentality theory in order to cast aside the corporate shield and to fasten liability on the individual stockholder.
1 W. Fletcher, Cyclopedia of the Law of Private Corporations § 41.35 (rev. ed. 1983) (footnote оmitted). One of the “other factors” to which courts have looked when “piercing the corporate veil” is whether insistence on the corporate form would enable the stockholder to avoid legal liability. “Posttort activity, when conducted to strip the corporation of its assets in anticipation of impending legal liability, may be considered in making the determination whether to disregard the corporate entity.” Id. § 45 (footnote omitted); See Rainbo Gold Mines v. Magnus, 371 F.2d 519 (10th Cir. 1966) (court may ignore corporate entity to satisfy a judgment).
The district court found, and the record fully supports the conclusion, that recognition of the separate corporate form is not required in this case. Stephanie Rynne owned 80% of ECI‘s stock, while the other 20% were in the hands of ECI‘s two salesmеn. George Rynne possessed all of the corporation‘s know-how. The Rynnes operated ECI without the oversight of a formal board of directors, without consulting with the minority stockholders, and without adhering to the corporate formalities which normally serve to buttress the recognition of the corporation as a separate entity. The district court also concluded that the Rynnes purposely manipulated ECI so as to thwart 3M‘s recovery of its judgment. This is precisely the situation in which courts feel most comfortable in using their equitable powers to sweep away the strict legal separation between corporation and stockholders. Id. The court below did not abuse its discretion in this regard.
The precedents establish that a court which has jurisdiction over a corporation has jurisdiction over its alter egos. In Lakota Girl Scout Council, Inc. v. Havey Fund-Raising Management, Inc., 519 F.2d 634 (8th Cir. 1975), the plaintiff charged defendant corporation and its chief executive officer with breach of contract. The individual defendant asserted that the court had no jurisdiction over him, as he lacked the requisite contacts with the state. The court flatly rejected this argument: “[I]f the corporation is Havey‘s alter ego, its contacts are his and due process is satisfied.” Id. at 637; see also, International Controls Corp. v. Vesco, 490 F.2d 1334, 1350 (2d Cir.), cert. denied, 417 U.S. 932, 94 S.Ct. 2644, 41 L.Ed.2d 236 (1974) (by using its equitable power to pierce the corporate veil the court had jurisdiction over a corporation by virtue of the activities of its dominant shareholder).
The courts have also held that piercing the corporate veil is appropriate in order to establish venue under the patent venue statutes. Almost fifty years ago, one court noted that “infringement within the district by a wholly owned subsidiary can be considered infringement by the parent corporation for the purposes of [venue] ... provided fraud upon or injustice to the plaintiff are present.” Acme Card System Co. v. Remington Rand Business Service, Inc., 21 F.Supp. 742 (D.Md. 1937). More recently, in Leach Co. v. General Sani-Can Manufacturing Co., 393 F.2d 183 (7th Cir. 1968), the court ruled that venue in a patent infringement case was proper with regard to one corporation by virtuе of the acts of another, intimately connected, corporation. The fact that these cases dealt with two corporations is of no moment. The patent venue statute makes no distinction between individuals and corporations, and we see no reason why venue is not proper with regard to individual stockholders (who are alter egos of the corporation) by virtue of the corporation‘s acts where venue would be proper as to a corporate parent or affiliate. Cf. Carolyn Chenilles, Inc. v. Ostow & Jacobs, Inc., 168 F.Supp. 894 (S.D.N.Y. 1958) (venue proper as to a corporation by virtue of the acts of its two stockholders). The district court held correctly that the venue аs to the Rynnes was proper.
IV.
Finally, appellants say that the district court erred in awarding damages and abused its discretion in denying their motion for a new trial. Their argument rests primarily on the contention that the district court ignored new evidence that the patents on which 3M sued were invalid because they were fraudulently obtained.15 Even aside from the cardinal fact that Con
For these reasons, the decisions of the district court denying appellants’ motions for relief from judgment and for a new trial are affirmed.
AFFIRMED.
NIES, Circuit Judge, concurring in part.
I join in the majority opinion except in Part III. In Scott v. Mego International, Inc., 519 F.Supp. 1118, 1126 (D.Minn. 1981), the court (interpreting the law of the forum) held that a parent corporation may subject itself to jurisdiction of the state of Minnesota by virtue of its subsidiary‘s activities there if one corporation is operated as an instrumentality or adjunct of the other, i.e., as an alter ego. In reaching this conclusion, the court relied on Lakota Girl Scout Council, Inc. v. Havey Fund-Raising Management Inc., 519 F.2d 634 (8th Cir. 1975), which held that, under Iowa law, a corporation and an individual were alter egos and could bе treated as one and the same for jurisdictional purposes.
The finding that ECL and the Rynnes are alter egos of ECI is not clearly erroneous. Thus, in personam jurisdiction and venue requirements with respect to ECL and the Rynnes are not independently required. Due process with respect to those parties is satisfied by affording a hearing to determine whether the parties were alter egos and, of course, by proper service of process. Zenith Corp. v. Hazeltine, 395 U.S. 100, 111, 89 S.Ct. 1562, 1570, 23 L.Ed.2d 129 (1969). No challenge is made that the hearing or service was inadequate.
In the absence of Minnesota precedent, I prefer to reserve a decision on the broader issue of substitution or addition of a party on the basis of being a successor in interest.
Notes
(a) Motion for Order Compelling Discovery. A party, upon reasonable notice to other parties and all persons affected thereby, may apply for an order cоmpelling discovery as follows:
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(2) Motion. If a deponent fails to answer a question propounded or submitted under Rules 30 or 31, or a corporation or other entity fails to make a designation under Rule 30(b)(6) or 31(a), or a party fails to answer an interrogatory submitted under Rule 33, or if a party, in response to a request for inspection submitted under Rule 34, fails to respond that inspection will be permitted as requested or fails to permit inspection as requested, the discovering party may move for an order compelling an answer, or a designation, or an order compelling inspection in accordance with the request. When taking a deposition on oral examination, the proponent of the question may complete or adjourn the examination before he applies for an order.
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(3) Evasive or Incomplete Answer. For purposes of this subdivision an evasive or incomplete answer is to be treated as a failure to answer.
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(b) Failure to Comply with Order.
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(2) Sanctions by court in which action is pending. If a party or an officer, director, or managing agent of a party or a person designated under Rule 30(b)(6) or 31(a) to testify on behalf of a party fails to obey an order to provide or permit discovery, including an order made under subdivision (a) of this rule or Rule 35, or if a party fails to obey an order entered under Rule 26(f), the court in which the action is pending may make such orders in regard to the failure as are just, and among others the following:
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(C) An order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or proceeding or any part thereof, or rendering a judgment by default against the disobedient party;
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(d) Failure of party to attend at own deposition or serve answers to interrogatories or respond to request for inspection. If a party or an officer, director, or managing agent of a party or a person designated under Rule 30(b)(6) or 31(a) to testify on behalf of a party fails ... (2) to serve answers or objections to interrogatories submittеd under Rule 33, after proper service of the interrogatories, or (3) to serve a written response to a request for inspection submitted under Rule 34, after proper service of the request, the court in which the action is pending on motion may make such orders in regard to the failure as are just, and among others it may take any action authorized under paragraphs (A), (B), and (C) of subdivision (b)(2) of this rule. In lieu of any order or in addition thereto, the court shall require the party failing to act or the attorney advising him or both to pay the reasonable expenses, including attorney‘s fees, caused by the failure, unless the court finds that the failure was substantially justified or that other cirсumstances make an award of expenses unjust.
The failure to act described in this subdivision may not be excused on the ground that the discovery sought is objectionable unless the party failing to act has applied for a protective order as provided by Rule 26(c).
Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.
Appellants’ rely on the holding in Panther Pumps & Equipment Co. v. Hydrocraft, Inc., 566 F.2d 8, 24 (7th Cir. 1977), cert. denied sub nom., Beck v. Morrison Pump Co., 435 U.S. 1013, 98 S.Ct. 1887, 56 L.Ed.2d 395 (1978), that Universal Spray Systems, Inc. could not be added (under Rule 25(c)) as a successor in interest, as support for their position that appellants could not be added in the present case. The difference between the two cases is that Universal Spray Systems, Inc. unlike appellants, was never served and therefore never before that district court.