Vanderbilt brings claims for trademark infringement in violation of § 32(1) of the United States Trademark Act,
I. Factual Allegations
A. Vanderbilt, Faculty Research, and Professor Hasselbring
Vanderbilt is a private, non-profit Tennessee university known in part for bringing research innovations into the world marketplace. (Doc. No. 85 at ¶¶ 1, 7.) Tenure-track faculty are expected and encouraged to research, write, and create, and these activities fall within the scope and purpose of their employment. (Id. at ¶ 8.) Vanderbilt contends that the technology and other creative works that its faculty create in their areas of study and research are "works for hire" under Tennessee law and federal copyright law. (Id. ) Accordingly, as part of their employment, Vanderbilt faculty are subject to a written policy ("Technology Policy"), that provides, among other things, that almost all innovations in technology as defined by Vanderbilt ("Vanderbilt Technology") created by faculty members are assigned to and owned by Vanderbilt. (Id. at ¶ 9.) Under the Technology Policy in effect until 2016, "[a]ll rights in non-scholarly Literary and Artistic Works created with the use of University funds or facilities, or that capitalize on an affiliation with the University, are granted to the University, and income distribution shall be handled in the same manner as technology. Commercial use of the University's name and marks requires prior University approval." (Doc. No. 85-2 at 10.) A superseding Technology Policy further explains that "Vanderbilt Technology" is broadеr than patentable intellectual property, and "includes tangible or intangible inventions, in the patent sense, whether or not reduced to practice, and research results whether or not patentable or copyrightable. These research results include, for example, computer programs, integrated circuit designs, industrial designs, databases, technical drawings, biogenic materials, and other technical creations." (Doc. No. 85-1 at 4.)
Vanderbilt relies upon its Center for Technology, Transfer and Commercialization ("CTTC") to protect and commercialize, as appropriate, the intellectual property
To facilitate this process and safeguard Vanderbilt's rights, faculty are subject to Vanderbilt's Conflict of Interest Policy ("COI Policy"). (Doc. No. 85-4.) Under the COI Policy, Vanderbilt faculty are required, prior to undertaking consulting or any other activity or commitment that may create a potential conflict of interest, to disclose the activity or commitment in writing to the appropriate dean (and department chair), in sufficient detail and with appropriate documentation such that the dean and the department chair can determine whether a potential conflict exists. (Doc. No. 85 at ¶¶ 20, 51.) In addition, faculty members are required to file annual reports disclosing consulting and other outside business relationships that they engage in during the year, including the number of days devoted to the activities. (Id. at ¶¶ 21, 52.)
Hasselbring, a Tennessee resident, is currently an Emeritus Professor of Special Education in the Department of Special Education at Vanderbilt.
B. Hasselbring's Development of Read 180 and Vanderbilt's License to Scholastic
Hasselbring's area of research and study at Vanderbilt was, among other things, the use of technology to enhance learning for students with disabilities. (Id. at ¶ 23.) Beginning in 1985, Hasselbring and members of the Learning and Technology Center at Vanderbilt developed software that used student performance data to individualize and differentiate the path of computerized reading instruction in order to identify and help elementary and middle school students reading below grade level. (Id. at ¶ 24.) According to the Complaint, this software, which became the prototype for Read 180, was owned by Vanderbilt pursuant to the Technology Policy. (Id. )
Between 1994 and 1998, Hasselbring and his Vanderbilt team tested their work in Orange County, Florida. (Id. at ¶ 25.) The Orange County Literacy Project successfully used the Read 180 prototype with more than 10,000 struggling students. (Id. ) Vanderbilt alleges that, at that time, the Read 180 intellectual property consisted of (1) a software-based multimedia instructiоnal program designed to provide daily computer-based compensatory instruction for middle school aged students (the "Software"); (2) an interactive multimedia CD-ROM
Scholastic is a for-profit New York corporation that describes itself as the world's largest publisher and distributor of children's books and a leading provider of children's print and digital instruction materials sold throughout the United States. (Id. at ¶ 3.) The positive results with Read 180 in Orange County, Florida, led Scholastic to partner with Vanderbilt to license the software and launch Read 180 as a commercial product. (Id. at ¶ 25.) Accordingly, Vanderbilt and Scholastic entered into the License effective January 1, 1997. (Id. at ¶ 28.) Vanderbilt granted Scholastic an exclusive, royalty-bearing license to the Read 180 Materials for the purpose of producing and marketing a literacy program (the "Read 180 Literacy Program") throughout the world that would embody the Read 180 Materials. (Id. at ¶ 29.) In exchange, Scholastic was to pay Vanderbilt escalating royalties on net sales as defined in the License. (Id. at ¶ 30.) According to the Complaint, Vanderbilt and Scholastic recognized that Scholastic's development of the Read 180 Materials to a marketable state would likely result in the future creation of Derivative Products that were unknown and unforeseen at the time of contracting. (Id. at ¶ 31.) So that Vanderbilt could receive royalties on the Derivative Products, the parties agreed to the following language in Paragraph 6.2 of the License:
The parties recognize and agree that future improvements may result in products different in form, content, or medium from the [Read 180] Materials delivered to Scholastic under this Agreement. It is the express intent of the parties that regardless of the form of future improvements or derivative works, Vanderbilt shall receive royalties pursuant to Section 9 [of the License] on all software products based on or derived from the [Read 180] Materials, pro rata, pursuant to the future mutual agreement of the parties as to the amount of the Materials incorporated into such products.
(Id. )
The Complaint alleges that, according to internal marketing materials, a number of other products have been based on or derived
C. Sale to HMH and Vanderbilt's Audit
HMH is a for-profit Massachusetts corporation engaged in the business of publishing, marketing and selling pre-kindergarten through grade 12 educational content and related services. (Id. at ¶ 4.) On May 15, 2015, Vanderbilt received a letter from Scholastic announcing the sale of Scholastic's Education Technology and Services business to HMH and requesting Vanderbilt's consent to the assignment of the License to HMH. (Doc. No. 85-5.) Vanderbilt consented to the assignment on May 27, 2015, under which HMH would assume all rights and obligations under the License. (Doc. No. 85 at ¶ 34.) According to the Complaint, in connection with the sale, Scholastic and HMH made certain public representations about total sales and value of Read 180 products that were extremely surprising to Vanderbilt. (Id. at ¶ 35.) Specifically, press reports indicated that sales of the Read 180 Literacy Program exceeded one billion dollars, far greater than the sales figures for which Vanderbilt had been paid royalties under the License. (Id. ) In 2016, after reviewing publicly-available financial information concerning the sale of Scholastic to HMH and the value of Read 180, Vanderbilt exercised its right under Paragraph 9.4 of the License to have the books and records of Scholastic/HMH audited with respect to performance under the License, and it retained the accounting firm RSM US LLP ("RSM") for this task. (Id. at ¶ 36.)
In June 2016, RSM produced an initial audit report that covered the period of June 1, 2010 through May 31, 2015. (Id. at ¶ 37.) RSM first estimated that Vanderbilt had been underpaid by at least $ 5.5 million for this five-year period for products that Scholastic and HMH had already agreed were royalty-bearing. (Id. at ¶¶ 37-38.) Second, RSM estimated that as much as $ 25 million in royalties could be owed on the Derivative and Ancillary Products - specifically, on sales of products derived from the Vanderbilt's licensed materials, including, but not limited to, System 44, FASTT Math, MATH 180, iRead, Expert 21, and Scholastic U. (Id. at ¶¶ 37, 39.) RSM also reached several additional conclusions: (1) Scholastic and HMH failed to pay Vanderbilt for any royalties generated by Canadian sales of Read 180; (2) Scholastic and HMH failed to pay royalties for the complete Read 180 Literacy Program as required by the License because they impermissibly carved out sales of certain
D. Vanderbilt's Review of Hasselbring's Conduct
Given RSM's audit findings, Vanderbilt (1) reviewed Hasselbring's conduct regarding his relationship with Scholastic and HMH, the License, the Read 180 Literacy Program, and the Derivative/Ancillary Products, and (2) evaluated Hasselbring's compliance with Vanderbilt's Technology Policy, COI Policy, and fiduciary obligations to the University. (Id. at ¶ 45.) According to the Complaint, Vanderbilt discovered that Hasselbring had negotiated and entered into a number of undisclosed agreements with Scholastic or HMH for the sharing or creation of intellectual property and Vanderbilt Technology, most of which, if not all, Vanderbilt claims that it owns pursuant to the Technology Policy (collectively the "Undisclosed Hasselbring/Scholastic/HMH Agreements"). (Id. at ¶¶ 46-50.) In addition, Vanderbilt alleges that it discovered that, in 2012, 2013, and 2014, Hasselbring incorrectly answered "no" when asked on his Vanderbilt COI Disclosure if he had a relationship with a business that had a contractual relationship with Vanderbilt or that paid royalties to him directly. (Id. at ¶ 51.) Vanderbilt claims Hasselbring knew those representations were false and that Vanderbilt would rely upon them. (Id. ) According to Vanderbilt, Hasselbring also answered "no" when asked if he was involved in an activity or relationship directly or indirectly involving Vanderbilt that created a conflict of interest/commitment or the appearance of a conflict of interest/commitment under Vanderbilt's COI Policy. (Id. at ¶ 52.) Once again, Vanderbilt claims Hasselbring knew that representation was false and that Vanderbilt would rely upon it. (Id. ) Vanderbilt alleges that these attempts by Defendants to circumvent Vanderbilt's policies, obtain title to Vanderbilt Technology, and avoid paying a royalty to Vanderbilt, were on-going and continued even after HMH purchased Scholastic. (Id. at ¶ 54.)
In addition, the Complaint alleges that the Undisclosed Hasselbring/Scholastic/HMH Agrеements (1) contained warranties representing that Hasselbring had the right to convey the Vanderbilt Technology he was supplying; (2) contained non-compete language preventing Hasselbring from otherwise monetizing the Vanderbilt Technology by creating similar products; (3) were styled as "consulting agreements" in order to hide the fact that Hasselbring was authoring technology that belonged to Vanderbilt under its Technology Policy or because the Technology was related to or derived from Read 180 Materials, and despite that Scholastic, HMH, and Hasselbring all knew that Hasselbring was not permitted under Vanderbilt's employment policies to directly convey intellectual property in exchange for a royalty; and (4) directed millions of dollars in on-going royalty payments to Hasselbring without providing any payment to Vanderbilt for the use of the Vanderbilt Technology or other intellectual property. (Id. at ¶¶ 55, 56.) Vanderbilt claims Hasselbring continues to improperly earn millions of
E. Trademarks
The Complaint also alleges that Scholastic and HMH improperly used Vanderbilt's intellectual property, registered name, logo, and associated goodwill in the design, development, marketing, and promotion of the products discussed above, for the purpose of falsely implying to consumers that Vanderbilt was a source of or sponsor of the products or was in some way affiliated with the products. (Id. at ¶ 65; see also
II. Legal Standard
To survive a Rule 12(b)(6) motion, " 'a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal,
III. Analysis
A. Trademark Infringement Claim under the Lanham Act (Count Three)
The Lanham Act makes any person who uses "any word, term, name, symbol, or device" in a way that is "likely to cause confusion, or to cause mistake, or to deceive as to ... affiliation, connection, or association" liable to a senior trademark owner. Sazerac Brands, LLC v. Peristyle, LLC,
Generally, the courts evaluate whether a plaintiff has demonstrated a likelihood of consumer confusion by means of "an eight-factor, nothing-is-off-the-table,
The threshold "trademark use" inquiry is the sole basis for Scholastic and HMH's argument to dismiss Count III. They contend that any references to "Vanderbilt" in the context of the Derivative or Ancillary Products are made in a "non-trademark" way, primarily for the innocent purpose of identifying Hasselbring. Vanderbilt responds that, by using Vanderbilt's trademarks, Scholastic and HMH create the type of consumer confusion that is actionable under the Lanham Act. Factual statements about the past experience of an employee are not per se barred by the Lanham Act. See, e.g., Review Directories Inc. v. McLeodUSA Publ'g Co.,
The Complaint lists a family of trademarks that Vanderbilt has registered "for numerous classes of goods and services." (Doc. No. 85 at ¶ 66.) The list is comprised of twelve marks - nine of which are stylized Vanderbilt logos and three of which are "Vanderbilt" or "Vanderbilt University." (Id. ) Vanderbilt sets forth several alleged improper uses of those trademarks in marketing and promotional materials for Derivative or Ancillary Products, as follows:
a. The website for the System 44 program states that "at the heart of this adaptive technology" is the FASTT algorithm developed by Hasselbring "in partnership with his team at Vanderbilt University." (Doc. No. 85 at ¶ 61(A)(a).)
b. That System 44 "grew out of seminal research on cognition and technology ... conducted by Dr. Hasselbring at Vanderbilt University." (id. at ¶ 61(A)(a)(ii).)
c. That "System 44 has relied on the research-based design of Dr. Hasselbring and his work through Vanderbilt University" and "leverages the power of research-based instructional practices and adaptive, personalized technology driven by the FASTT algorithm Dr. Hasselbring helped to pioneer with READ 180." (Id. at ¶ 61(A)(a)(iii).)
d. Advertising for the FASTT Math program states that "FASTT Math is the result of over two decades of research conducted by Dr. Ted Hasselbring, Co-Director of the Learning Technology Center at Vanderbilt University. This research on using technology to provide instruction and intervention is the basis of the FASTT algorithm." (Id. at ¶ 61(B)(b).) Until December 2017, this statement was also accompanied by a version of the Vanderbilt "V" logo as illustrated below:
(Id. at ¶ 61(B)(c).)
e. The website for the Math 180 program lists Hasselbring as Lead Author and states that he is a professor at Vanderbilt who used "his expertise" earned from twenty-five (25) years of research. (Id. at ¶ 61(C)(b).)
Vanderbilt alleges that, for a significant period of time, Scholastic and HMH marketed Derivative or Ancillary Products by means of these and other advertisements and promotional materials. That is an alleged business use in an effort to sell products that Scholastic and HMH, not Vanderbilt, created. The Complaint further alleges that Scholastic and HMH not only used Vanderbilt trademarks, but did so in a manner that suggested the substantial involvement of Vanderbilt. This is most evident in the marketing of the FASTT Math program. (Doc. No. 85 at ¶ 61(B)(b).) Scholastic and HMH promoted that "FASTT Math is the result of over two decades of research conducted by Dr. Ted Hasselbring, Co-Director of the Learning Technology Center at Vanderbilt University. This research on using technology to provide instruction and intervention is the basis of the FASTT algorithm."
The Court finds that, on a robust reading of the Complaint and drawing all inferences in favor of the plaintiff, Vanderbilt has stated a Lanham Act trademark infringement claim. Direct references to twenty years of Vanderbilt research as the basis for specific Derivative or Ancillary Prоducts, taken together with Hasselbring's well-known position at Vanderbilt and his Vanderbilt team, constitute plausible allegations that Defendants created a likelihood of confusion in the mind of consumers regarding whether Vanderbilt approved or produced the Derivative or Ancillary products.
For these reasons, the motion to dismiss Count Three will be denied.
B. Unfair Competition Claim Under the Lanham Act (Count Four)
While much of the Lanham Act addresses the registration, use, and infringement of trademarks and related marks, § 43(a) is one of the few provisions that goes beyond just trademark protection. See
Any person who, on or in connection with any goods or services, or any container for gоods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which -
(A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, ...
Every court of appeals to consider the issue has found that § 43(a) encompasses "reverse passing off," which occurs when a producer misrepresents someone else's goods or services as his own.
At issue in Dastar was the repackaging of videos available in the public domain that had once been produced by another company. Id. at 31,
In 2015, the Court of Appeals highlighted the principles of Dastar in
In this district, Judge Aleta Trauger has described the holding of Dastar as "quite simple." Brainard,
Vanderbilt alleges that Defendants have misappropriated copyrightable Vanderbilt Technology and intellectual property, including computer programs, without disclosure to Vanderbilt; incorporated some combination of that Vanderbilt Technology and intellectual property into the Derivative and Ancillary Products; and sold those products. (Doc. No. 85.) However, no matter what degree of intellectual property and creative content Vanderbilt alleges Defendants misappropriated and used to create the Derivative or Ancillary Products, Vanderbilt has not alleged, as required, either that Defendants were (1) selling actual repackaged Vanderbilt products or (2) passing their products off as actually physically produced by Vanderbilt. Under the consistent line of precedent from Dastar to Kehoe to Brainard, Vanderbilt has therefore not alleged that it is the "origin" of the Derivative or Ancillary Products because it did not produce or manufacture them. Rather, Scholastic and HMH produced and sold the Derivative or Ancillary Products and are thus the alleged "origin" of the Derivative or Ancillary Products, regardless of whether they incorporated Vanderbilt's copyrightable intellectual property. Accordingly, Vanderbilt's § 43(a) claim is untenable. Dastar,
Vanderbilt's arguments to the contrary are unconvincing. First, Vanderbilt's contention that Dastar is simply "unpersuasive" is wholly without merit in light of
Finally, Vanderbilt essentially contends that this claim should be allowed to proceed as a false association claim and not just a false origins claim. (See Doc. No. 96 at 13.) This argument also fails. As an initial matter, false association under
For these rеasons, Vanderbilt's unfair competition Lanham Act § 43(a) claim is precluded by Dastar and its progeny. Count Four will therefore be dismissed.
C. Declaratory Judgment Act Claim (Count Two)
Vanderbilt also brings a federal claim for "a declaratory judgment that it owns an interest in the intellectual property comprising the Derivative [or] Ancillary Products."
(1) whether the declaratory action would settle the controversy;
(2) whether the declaratory action would serve a useful purpose in clarifying the legal relations in issue;
(3) whether the declaratory remedy is being used merely for the purpose of "procedural fencing" or "to provide an arena for res judicata";
(4) whether the use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and
(5) whether there is an alternative remedy which is better or more effective.
Grand Trunk W. R.R. Co. v. Consol. Rail Co.,
The Copyright Act requires authors to intend to create a joint work. Hemby v. Winans, No. 3:06-0979,
The Complaint contains allegations that Scholastic and HMH knew of the obligations imposed by Hasselbring's employment relationship with Vanderbilt, and therefore knew that Vanderbilt would have an ownership interest in any Derivative or Ancillary Products that used Vanderbilt Technology or intellectual property created or conveyed by Hasselbring. To the extent Scholastic and HMH knowingly used Vanderbilt Technology and intellectual property in the Derivative or Ancillary Products, they intended a result in which Vanderbilt would be a co-owner, nevertheless they took steps to avoid compensating Vanderbilt by means of subterfuge. As just one specific example, Vanderbilt alleges that "the Undisclosed Hasselbring Scholastic/HMH
Given that the claim is legally viable, the Court considers the Grand Trunk factors. Here, the third and fourth factors have no particular relevance, but the first, second, and fifth factors favor continuing to exercise jurisdiction over Vanderbilt's declaratory judgment claim. There is an ongoing controversy between Vanderbilt and Defendants concerning alleged violations of Vanderbilt's rights, a significant part of which involves the use of Vanderbilt Technology and intellectual property in the Derivative or Ancillary Products. This cause of action will therefore help settle the controversy. It is almost always the case that if a declaratory judgment will help settle the controversy, then it will help clarify the legal relations in issue. Scottsdale Ins. Co. v. Flowers,
The Sixth Circuit has "never indicated how the Grand Trunk factors should be balanced." Scottsdale,
D. Tortious Interference with Contract Claim (Count Seven)
The elements of the tort of tortious interference with contract "are quite clear under Tennessee law." Keith v. Aerus, LLC, No. 2:09-cv-297,
Scholastic and HMH contend that Vanderbilt has not adequately alleged the intent or malice elements. "[K]nowledge alone by [a] defendant is [not] sufficient to show intent and malice. It may be a factor relevant to the question of intent, but simple knowledge of [a] contract cannot be automatically equated with intent to induce a breach. What [a] plaintiff must allege is plausible facts to show an intent to induce a breach." Keith,
Vanderbilt alleges: (1) it had a legal contract with Hasselbring; (2) Scholastic and HMH were aware of that contractual relationship and of the policies it entailed; (3) Scholastic and HMH acted intentionally to circumvent that contractual relationship by means of disguised "consulting agreements" with Hasselbring for the purpose of gaining access to his work product; (4) as a result, Hasselbring did not comply with the Vanderbilt Technology Policy and COI Policy as required by his Employment Agreement with Vanderbilt; (5) Hasselbring, Scholastic, and HMH improperly developed the Derivative or Ancillary Products outside the scope of the License using Vanderbilt Technology and intellectual property provided by Hasselbring; and (6) Vanderbilt was grossly underpaid royalties on the Derivative and Ancillary Products that the Defendants earned outside the scope of the License. (See Doc. No. 85 at ¶¶ 18-22; 27-64; 110-115.) The Complaint does not contain factually insignificant allegations or "formulaic recitations," as Scholastic and HMH contend. Indeed, Vanderbilt's allegations contain substantial factual detail relevant to this claim. For example, there are no less than 15 paragraphs of allegations concerning the Defendants' alleged attempts to circumvent Hasselbring's contractual obligations to Vanderbilt by means of undisclosed consulting agreements. (Id. at ¶¶ 45-59.) Indeed, when the Complaint alleges the "conspiratorial attempts by Defendants to circumvent Vanderbilt's policies, obtain title to the Technology, and avoid paying a royalty" (id. at ¶ 54), the very policies referenced are in force by means of the contract between Hasselbring and Vanderbilt, (id. at ¶¶ 21-22).
Vanderbilt has alleged enough plausible facts, taken as a whole, to allow sufficient reasonable inferences that Scholastic and HMH
E. Tennessee Consumer Protection Act Claim (Count Eight)
Vanderbilt alleges that Scholastic and HMH violated the Tennessee Consumer Protection Act ("TCPA"),
When considering a motion to dismiss on the ground of a statute of limitations, the Court must decide whether "it is apparent from the face of the complaint that the limit for bringing the claim[s] has passed." Bishop v. Lucent Techs., Inc.,
The Complaint alleges that, after public statements made in connection with the sale of Scholastic's Education Technology and Services business to HMH, Vanderbilt engaged RSM to audit the books and records of Scholastic and HMH under the terms of the License. (Doc. No. 85 at ¶¶ 34-36.) On June 9, 2016, RSM produced an initial report that "detailed findings for the audit period of June 1, 2010 through May 31, 2015." (Id. at ¶ 37.) In this report, "RSM estimated that Vanderbilt had bеen underpaid by at least $ 5.5 million for this five-year period only and estimated that as much as $ 25 million in royalties could be due on the Derivative and Ancillary Products." (Id. ) More specifically, the RSM report detailed conclusions that Scholastic and HMH had (1) failed to pay full royalties under the License for products that had been previously agreed to be royalty-bearing; (2) failed to pay royalties for Derivative or Ancillary Products; (3) failed to pay royalties on any Canadian sales of Read 180; (4) improperly "carved-out" sales of certain Read 180 components to reduce royalty payments; and (5) made improper deductions from royalties for supposed shipping and handling costs. (Id. at ¶¶ 38-42.) RSM identified "additional information" that it would need to "fully analyze and calculate the total amounts due" to Vanderbilt to remedy these "underpaid
Based on these clear allegations, the Court finds that Vanderbilt "discovered" the unlawful acts or practices it alleges under the TCPA no later than the delivery of RSM's audit report on June 9, 2016. The RSM audit report reasonably put Vanderbilt on notice that it needed to protect its rights under the TCPA in a timely fashion. Vanderbilt argues that the statute of limitations was not triggered on June 9, 2016 because "its investigation was ongoing" and "was not complete" because it had "no definitive information" and RSM needed additional information to calculate the amounts due. (Doc. No. 96 at 18-19.) It is bold indeed to feature the RSM report so prominently in the Complaint and then dismiss it here as apparently having so little import. More importantly, Vanderbilt misunderstands the law. It is not the "date of the ascertainable loss" that begins that running of the statute of limitations under the TCPA. Town of Smyrna, Tenn. v. Mun. Gas Auth. of Ga.,
Vanderbilt also contends that it is excused from any time bar by the Tolling Agreement between the parties. (Doc. Nos. 96 at 19; 56-1.) Although not clearly worded, this is essentially an argument for application of the doctrine of equitable estoppel, which tolls the running of the statute of limitations where the defendant has "misled the plaintiff into failing to file [his] action within the statutory period of limitations." Norton v. Everhart,
This action was not filed until January 16, 2018, over six months past the statute of limitations for Vanderbilt's TCPA claim. Count Eight is therefore time-barred and will be dismissed.
F. Fraud Claim (Count Nine)
Tennessee recognizes two theories of fraud: fraud and fraudulent concealment. To plead fraud, a plaintiff must show the following elements: (1) the defendant made a representation of an existing or past fact; (2) the representation was false when made; (3) the representation was in regard to a material fact; (4) the false representation was made either knowingly or without belief in its truth or recklessly; (5) plaintiff reasonably relied on the misrepresented fact; and (6) plaintiff suffered damage as a result of the misrepresentation. Dixon v. Producers Agric. Ins. Co.,
Scholastic/HMH and Hasselbring have separately moved for the dismissal of Vanderbilt's fraud claims. Scholastic and HMH argue that this claim is deficient bеcause it (1) is improperly based on intentional breach of contract and (2) fails to satisfy the pleading standards imposed by Federal Rule of Civil Procedure 9(b). Hasselbring contends that the reliance alleged by Vanderbilt's did not cause the required damages.
i. Scholastic and HMH
Vanderbilt brings two fraud claims against Scholastic and HMH. First, it alleges that "Scholastic and HMH ha[d] a contractual duty to Vanderbilt under Section 9.2 of the License (as well as the contractual duty of good faith and fair dealing) to provide Vanderbilt with a complete and accurate list of Derivative Products that were derived from or based on the Read 180 Literacy Program and to provide an accurate and truthful accounting of the revenue generated from such products." And it alleges that they "knowingly made false representations and concealed material facts to Vanderbilt regarding the sales of Derivative Products that were derived from or based on the Read 180 Literacy Program, and the amount of revenue generated by such royalty bearing products for the purpose of deceiving and misleading Vanderbilt and preventing Vanderbilt from receiving what it was owed for its contribution to Read 180." (Doc. No. 85 at ¶¶ 127-128.) In other words, Vanderbilt alleges that Scholastic and HMH provided false information concerning products and sales in breach of Section 9.2 of the License. This is a breach of contract claim,
Vanderbilt next alleges that Scholastic, HMH, and Hasselbring together engaged in fraudulent conduct to "circumvent" the License to obtain Vanderbilt Technology and intellectual property and to deprive Vanderbilt of its right to control the use thereof. (Doc. No. 85 at ¶ 129.) This claim is supported by allegations detailing how the three Defendants executed deceptive "consulting agreements" designed to hide the true nature of their actions. (Id. at ¶¶ 130-141.) As an initial matter, these allegations are still plagued by reference to breach of the License (See
Equally as problematic is that Vanderbilt fails to allege reliance concerning the Scholastic/HMH-Hasselbring consulting agreements. See Shah v. Racetrac Petroleum Co.,
Accordingly, the fraud claim against Scholastic and HMH must be dismissed. To the extent the Complaint can be read to include a fraudulent concealment claim against these Defendants, it too will be dismissed.
ii. Hasselbring
To the extent the fraud claim against Hasselbring is based on the allegations discussed above, it is not viable. However, Vanderbilt has additional allegations against Hasselbring. Vanderbilt
Hasselbring contends that Vanderbilt has not alleged any damages resulting from reliance on these alleged misstatements. Hasselbring's argument - premised on two cases from New York and Illinois - is that the allegations "amount to a mere complaint that Vanderbilt couldn't sue earlier," which does not give rise to a fraud action. As a fallback position, Hasselbring argues that Vanderbilt's damages are too speculative in any event. The Court does not agree. Vanderbilt has alleged that it relied upon Hasselbring's representations that he was not engaged in royalty-earning activity with Vanderbilt-contracted entities. Vanderbilt has further alleged that it was damaged by Hasselbring's misrepresentations because it was unable to, upon learning of Hasselbring's actions, act to protect its rights. (Id. at ¶ 141.) In other words, Vanderbilt alleges that it would have been able to exploit the Vanderbilt Technology and intellectual property in a different manner if Hasselbring had not been deceptive. With all inferences drawn in favor of Vanderbilt, this damage could include lost royalties, negotiating leverage, market intelligence, and market share. At this stage, this is sufficient to allege reliance and resulting damages.
Accordingly, the fraud and fraudulent concealment claims against Hasselbring shall proceed.
G. Unjust Enrichment Claim (Count Ten)
In Tennessee, unjust enrichment is a quasi-contractual claim by which a court may impose a contractual obligation where one does not exist. Cole v. Caruso, No. W2017-00487-COA-R3-CV,
Scholastic/HMH and Hasselbring separately move for dismissal of Vanderbilt's unjust enrichment claim on the ground that it is preempted by the Copyright Act. Section 301 of the Copyright Act broadly preempts certain state law claims. It states: "[A]ll legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified in § 106 in works of authorship that ... come within the subject matter of copyright ... are governed exclusively by this title.... [N]o person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.
The Court of Appeals has held that, under § 301, a state common law or statutory claim is preempted if: (1) the work is within the scope of the subject matter of copyright, as specified in
The "subject matter" requirement is satisfied if a work fits within the general subject matter of Sections 102 and 103 of the Copyright Act, regardless of whether it qualifies for copyright protection....
The second step of analysis - the "general scope" or "equivalency" requirement - asks whether "the state common law or statutory action at issue asserts rights that are the same as those protected under § 106 of the Copyright Act. Equivalency exists if the right defined by state law may be abridged by an act which in and of itself would infringe one of the exclusive rights set forth in § 106. To determine whether an act abridging the state right would necessarily infringe upon a right protected by the Copyright Act, the Sixth Circuit hasadopted the "extra element" test. Under this test, if an extra element is required instead of or in addition to the acts of reproduction, performance, distribution or display in order to constitute a state-created cause of action, there is no preemption, provided that the extra element changes the nature of the action so that it is qualitatively different from a copyright infringement claim. The existence of an extra element precludes preemption only where the element changes the nature, rather than the scope, of the action.
Brainard,
"The Court of Appeals for the Sixth Circuit has joined other circuits in holding that claims for unjust enrichment are preempted by the Copyright Act." Diamond v. Gillis,
Accordingly, in Murray Hill Publications, when faced with unjust enrichment claims that involved no more than that the defendant allegedly misappropriated the plaintiff's motion picture and related proprietary ideas, concepts, strategies, and marketing tie-ins, and there was no promise to pay, the Court of Appeals held the claims to be preempted by the Copyright Act because they depended on "nothing more than ... unauthorized use of plaintiffs' work." Id. at 638. In another example, in Ritchie, a group alleged that musician Kid Rock performed certain songs that they co-owned, and breached various contracts by transferring to other parties the right to publish, record and distribute those songs. Ritchie,
The Court applies this analytical rubric to Vanderbilt's allegations. First, the Complaint alleges that the Vanderbilt Technology and intellectual property at issue here, including computer programs, constitute original works of creativity and authorship that have been reduced to a tangible form and are copyrightable and protectable under the Copyright Act. (Doc. No. 85 at ¶ 80.) Indeed, computer programs do "fall under the [Copyright] Act's protection of 'literary works' " under § 102(a). Digital Filing Sys., LLC v. Aditya Int'l,
The Court then looks to determine if the alleged infringement would violate Tennessee law of unjust infringement and if there is an "extra element required that "changes the nature of the action so that it is qualitatively different from a copyright infringement claim." Wrench,
To the extent that Scholastic and/or HMH incorporated the [m]isappropriated Vanderbilt [t]echnology and [i]ntellectual [p]roperty or the confidential Read 180 Materials into the Ancillary Products that are otherwise outside the License Agreement, Scholastic and HMH have been unjustly enriched by their use of the Vanderbilt Technology and [i]ntellectual [p]roperty due to Hasselbring's unlawful conveyance of it to them. Moreover, upon information and belief, they have received millions of dollars from sales of the products containing Vanderbilt's misappropriated intellectual property.
As a result of the Undisclosed Hasselbring Scholastic Agreements, Hasselbring has realized millions of dollars in royalty payments for the Ancillary Products, which contain [m]isappropriated Vanderbilt [t]echnology and [i]ntellectual [p]roperty and/or the confidential Read 180 Materials. Th[ose] ... [m]aterials were not owned by Hasselbring and, therefore, he had no right to convey them to Scholastic and/or HMH. Moreover, through that conduct, Hasselbring abused his position and relationship with Vanderbilt and frustrated Vanderbilt's ability to enforce its contractual rights and to negotiate additional contractual rights.
All three Defendants have been unjustly enriched at Vanderbilt's expense, and it would be inequitable for them to retain these benefits. Vanderbilt is entitled to a judgment for the benefit that Defendants unjustly received by virtue of their concerted efforts to deprive Vanderbilt of its intellectual property and that Hasselbring improperly received through his contractual and fiduciary relationship with Vanderbilt.
(Doc. No. 85 at ¶¶ 144-146.) This claim alleges the unauthorized use of Vanderbilt Technology and intellectual property in the Derivative or Ancillary Products. There is no allegation of any promise by Scholastic or HMH, in wоrd or deed, to pay Vanderbilt for its alleged use of the misappropriated materials in the Derivative or Ancillary Products. Indeed, to the contrary, the Complaint is a tale of Scholastic and
Vanderbilt argues that it can escape this conclusion because it alleges that (1) Hasselbring abused his position and relationship with Vanderbilt and (2) Scholastic and HMH were aware of Hasselbring's duties to Vanderbilt and conspired with him to violate them. Accordingly, Vanderbilt contends that allegations of breach of fiduciary duty add an extra element that makes the unjust enrichment claim "distinguishable from a garden-variety copyright claim." (Doc. No. 97 at 12.) The Court does not agree. In making such an allegation, Vanderbilt relies on both (1) the Employment Agreement and resulting relationship between it and Hasselbring and (2) the License, which are two actual contracts. But recovery on a theory of unjust enrichment is premised upon whether there is "no existing, enforceable contract between the parties covering the same subject matter." Crye-Leike, Inc. v. Carver,
For these reasons, the Court finds Vanderbilt has brought an implied-in-law unjust enrichment claim concerning copyrightable subject matter. It is therefore preempted by the Copyright Act. See, e.g.,
H. Claim for Accounting (Count Eleven)
Finally, Vanderbilt brings a cause of action for the equitable relief of an accounting of (1) all monies earned under the License for all products derived from or related to Read 180 and (2) the gross and net sales of Derivative or Ancillary Products that contain Vanderbilt Technology and intellectual property. (Doc. No. 85 at ¶¶ 148-149.) Scholastic and HMH move to dismiss this claim on two grounds. First, they argue that Vanderbilt has adequаte remedies at law as part of its breach of contract claim. Second, they contend that, to the extent Vanderbilt seeks an accounting concerning Ancillary Products outside the scope of the License, this alternative ground for an accounting is pre-empted by the Copyright Act because Vanderbilt has alleged that the Vanderbilt Technology and intellectual property contain copyrightable works.
"An accounting is a species of disclosure, predicated upon the legal inability of a plaintiff to determine how much, if any, money is due him from another." Bradshaw v. Thompson,
Vanderbilt's justifications for a separate accounting cause of action do not pass muster. As an initial matter, to the extent Vanderbilt seeks an accounting to determine how much money was earned "under the License for all products derived from or related to Read 180," this is redressed through Vanderbilt's breach of contract claim on the same subject matter. (See Doc. No. 85 at ¶ 70, Count One - Breach of Contract ("HMH and Scholastic failed to properly remit to Vanderbilt a proper accounting of products sold or licensed pursuant to the License.").) Under the Federal Rules of Civil Procedure, Vanderbilt has a liberal discovery right under its breach of contract claim to determine the extent to which Scholastic and HMH allegedly misreported the sales of Read 180. Vanderbilt does not argue that the Read 180 accounts are so "greatly compliсated" that the discovery process is insufficient. Digital 2000, Inc.,
Vanderbilt also seeks an accounting regarding the sales of any Derivative or Ancillary Products that fall outside the License and, thus, the breach of contract claim. This part of Vanderbilt's accounting claim fails as well because it is premised on the allegations that Defendants infringed on protected Vanderbilt Technology and intellectual property. See Martinez v. McGraw, No. 3:08-0738,
Neither Martinez v. McGraw, No. 3:08-0738,
Vanderbilt "may be entitled to an accounting for profits as a remedy" for one of its remaining claims. Baglama v. MWV Consumer and Office Prods., No. 3:13-cv-276,
For these reasons, Vanderbilt's independent cause of action for an accounting will be dismissed.
IV. Conclusion
For the foregoing reasons, (1) Scholastic and HMH's Motion to Dismiss (Doc. No. 87) will be granted in part and denied in part, and (2) Hasselbring's Motion to Dismiss (Doc. No. 89) will be granted in part and denied in part. Specifically, the motions are granted concerning Counts 3, 8, 9 (as to Scholastic and HMH), 10, and 11, and denied regarding Counts 2, 4, 7, and 9 (as to Hasselbring).
Counts 1, 5, and 6 were not addressed by these motions and remain pending.
In sum, therefore, Counts 1, 2, 4, 5, 6, 7, and 9 (as to Hasselbring) remain pending against the Defendants in this action.
An appropriate order will enter.
Notes
Mitchell Baker, former manager of the technology legal group of Netscape, CEO of the Mozilla Foundation and member of the Internet Hall of Fame. See https://www.internethalloffame.org//blog/2012/05/10/mozillas-mitchell-baker-being-alternative-microsoft-google-and-apple (last accessed May 16, 2019).
Counts One (Breach of Contract by Scholastic and HMH), Five (Breach of Contract by Hasselbring), аnd Six (Breach of Duty of Loyalty by Hasselbring) are not addressed by these motions and remain pending.
"[A]s a general rule, matters outside the pleadings may not be considered in ruling on a 12(b)(6) motion to dismiss," Weiner v. Klais & Co.,
Vanderbilt first hired Hasselbring as an Assistant Professor in its Peabody College in 1982. (Id. at ¶ 17.) He was promoted to Associate Professor in 1984 (id. at ¶ 18), and, after a five-year stint at the University of Kentucky from, 2000-2005, he returned to Vanderbilt as a Research Professor (id. at ¶ 19).
Vanderbilt and Scholastic also expressly agreed in Paragraph 4.2 of the License that "Scholastic may, subject to Vanderbilt policies on outside employment and conflicts of interest, negotiate a consulting arrangement with Hasselbring for consulting on Scholastic's development or marketing of the literacy program." (Doc. No. 85 at ¶ 32.) Vanderbilt avers that it provided Scholastic with a copy of the relevant Vanderbilt policies at or around the time the parties entered into the License. (Doc. No. 85 at ¶ 32.) The policies have also been publicly available on Vanderbilt's website for nearly twenty years. (Id. )
This would include, for example, rBooks (student work texts), teaching guides, and data and assessment systems. (Doc. No. 85 at ¶ 41.)
This "threshold" test has drawn criticism. See Kelly-Brown v. Winfrey,
On a motion to dismiss, the Court simply cannot accept Defendant's numerous bald assertions to the contrary (e.g., "nothing in the [Complaint] suggests that Defendants represented to consumers that Vanderbilt created or endorsed Hasselbring's work, much less Defendant's products" (Doc. No. 101 at 2)), which would require inference upon inference against Vanderbilt to place Defendants, in their own words, "on the right side of that distinction." (Id. ).
This is in contrast to "passing off," which occurs when a producer misrepresents his own goods or services as someone else's. Dastar,
Vanderbilt brings a claim for declaratory judgment because, as purported co-owner, it cannot bring a copyright infringement claim. Severe Records, LLC v. Rich,
Scholastic and HMH also argue, as an initial matter, that a claim to co-ownership claim is foreclosed to some degree by the License itself. However, the "Improvements" section of the License is far from clear. It grants Scholastic and HMH ownership in "all proprietary rights, including copyright, in the future improvements" they make to the Vanderbilt's materials, but not to "the underlying Software." (Doc. No. 11 at ¶ 6.2.) The Court cannot say at this stage of the case (i.e., before being presented with evidence regarding whether the underlying software was used in any particular Derivative or Ancillary Products) that this provision allows for, or precludes, any specific claim to ownership.
Because HMH succeeded to Scholastic's rights and obligations, it is not appropriate (as Defendants аrgue in the reply) to dismiss HMH from liability on this claim simply because Scholastic was the corporate entity allegedly involved in the initial efforts to lure Hasselbring away from fidelity to his alleged contractual obligations to Vanderbilt. Moreover, the Complaint specifically alleges that the "conspiratorial attempts" to circumvent the Hasselbring-Vanderbilt relationship "were on-going and continued even after HMH purchased Scholastic." (Doc. No. 85 at ¶ 54.)
Scholastic and HMH suggest that warranties provided to them by Hasselbring in third-party agreement(s) absolve liability because they bely the knowledge element. (Doc. No. 88 at 12.) Any such exculpatory evidence, however, is not properly before the Court at this juncture. Hasselbring's third-party agreements are not attached to the Complaint or motion to dismiss, and they are not so integral to the Complaint that the Court may consider them without converting this to a motion for summary judgment. Jackson,
Contracts implied in law "unlike true contracts, are not based upon the apparent intention of the parties to undertake the performance in question, nor are they promises." Brainard,
Vanderbilt's argument is at odds with Brainard. In a separate section of Brainard discussing common law misappropriation, Judge Trauger did note that claims for misappropriation of trade secrets are sometimes not preempted because they involve "a breach of an implied duty of trust." Brainard,