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Lexington Services Ltd. v. U.S. Patent No. 8019807 Delegate LLC

Court of Chancery of Delaware

October 26, 2018

Lexington Services Ltd.
v.
U.S. Patent No. 8019807 Delegate, LLC, and Florian Karrer,

          Submitted: October 4, 2018

          Marc S. Casarino, Esquire White and Williams LLP

          David E. Moore, Esquire Jonathan A. Choa, Esquire Alan R. Silverstein, Esquire Potter Anderson & Corroon LLP

         Dear Counsel:

         This letter opinion resolves Defendants Florian Karrer and U.S. Patent No. 8019807 Delegate, LLC's Motion to Dismiss the Verified Complaint of Plaintiff Lexington Services Ltd. For the reasons that follow, I stay this action.

         I. BACKGROUND

         All facts are drawn from the Verified Complaint (the "Complaint") and the documents incorporated therein. At this stage of the proceedings, I must take all of Plaintiff's well-pled facts as true and draw all reasonable inferences in its favor.

         Plaintiff Lexington Services Ltd. ("Lexington") is a Maltese company under the control of the Flannery family, including James Flannery.[1] Lexington and non-party Mortimer J. Walters are in the midst of a dispute over control of U.S. Patent 8, 019, 807 (the "Patent"). The Patent is "directed to methods and systems for integrating heterogeneous computer systems' components into a service broker system, which simplifies application connections between different types of application programs and interfaces within the application programs, typically enterprise level or wider."[2] Walters, who owned 20% of the company holding the Patent, and Flannery, who with his family invested in the same company, set out to monetize the patent, but they ended up in a court dispute in Ireland (the "Irish Litigation").[3] The Irish Litigation settled, resulting in (1) the Irish Settlement Agreement (the "Settlement Agreement"), which laid out the general terms of the settlement; (2) the Patent Security Agreement (the "Security Agreement"), which specifically defined the obligations of the parties; (3) Lexington taking title to the Patent; (4) Walters (through his company Anthology SA) taking a security interest in the Patent; and (5) Lexington paying a sum of money to Walters.[4] The Settlement Agreement gives Walters-or his nominee, as the security interest was assignable- "power to appoint a receiver or equivalent with a power of sale" if Lexington defaults.[5] The Settlement Agreement also requires Lexington to (1) provide annual accounting reports to Walters regarding its efforts to monetize the Patent and (2) not become insolvent.[6]

         Walters alleges that Lexington defaulted on its obligations under the Settlement Agreement by failing to provide reports and becoming insolvent.[7] On that basis, on March 8, 2017, Walters and U.S. Patent No. 8019807 Delegate, LLC ("Delegate") executed a Patent Assignment Agreement (the "PAA").[8] The PAA purports to transfer ownership of the Patent from Lexington to Defendant Delegate, which was organized to receive the Patent.[9] Defendant Karrer signed the PAA on behalf of Defendant Delegate.[10] Walters signed the PAA on behalf of Lexington.[11]This dispute centers on the validity of Walters' signature and whether this was a fraudulent transaction. Both issues depend on Walters' authority under the Security Agreement.

         II. THE LITIGATIONS

         On April 19, 2017, Lexington filed a Corrective Declaration for Recordation of Corrective Notice of Assignment ("Corrective Recordation") with the United States Patent and Trademark Office ("USPTO"), disputing transfer of title.[12] The USPTO recorded the Corrective Recordation but informed Lexington that it could not prevent future assignments.[13]

         Litigation soon commenced. On May 17, 2017, Lexington filed suit in the United States District Court for the Eastern District of Virginia, arguing that Walters signed the PAA fraudulently.[14] That court granted Walters, Delegate, and Karrer's motion to dismiss for lack of subject matter jurisdiction on August 30, 2017.[15]

         Lexington next challenged the PAA in Virginia state court. On September 5, 2017, Lexington filed a complaint against Walters, Delegate, and Karrer in the Virginia Circuit Court for the City of Alexandria.[16] On November 2, 2017, the Virginia state court dismissed the matter for lack of personal jurisdiction.[17]

         Meanwhile, non-parties Walters and Brian Connell attempted to proceed with a lawsuit in Ireland. On September 20, 2017, Walters and Connell filed suit in Ireland seeking an injunction to bar Flannery and Lexington from pursuing the Virginia state case.[18] On October 11, 2017, the Irish court denied the request for injunctive relief;[19] that case remains open but has not proceeded further.[20]

         On January 10, 2018, Walters and Campbell filed the most recent litigation in Ireland.[21] In that suit, Walters seeks "a declaration that the [Settlement Agreement] and the [Security Agreement] entitle him and Delegate to take possession of the [Patent]."[22]

         On March 8, 2018, Lexington filed the lawsuit currently pending before me.[23]First, Lexington asserts that Karrer and Delegate fraudulently transferred the ownership of the Patent from Lexington to Delegate because non-party Walters was not authorized to sign on behalf of Lexington. Second, Lexington contends that Karrer and Delegate's actions put a cloud on the title of the patent, causing Lexington to lose licensing revenue. Third, Lexington avers that Delegate and Karrer unlawfully attempted to take title, and this interfered with Lexington's future business prospects. Lexington seeks monetary, injunctive, and declaratory relief.

         III. ANALYSIS

         In this case, the parties chose foreign law-here, Irish law-and the forum-selection clause should be interpreted in accordance with the law chosen.[24] None of the relevant conduct occurred in Delaware. The parties, however, make only passing references to Irish law. Defendants Delegate and Karrer ("Defendants") note that

[t]o the extent the Court determines that the forum selection clause is to be interpreted according to Irish law, forum selection clauses are presumed exclusive under Irish law. As Irish law affords at least as much deference to the contracting parties as does Delaware law, interpretation thereunder compels the same result as does interpretation under Delaware law.[25]

         One assurance that forum-selection clauses are enforced under Irish law is not enough for me to rule on what Irish law requires. Here, as in Ashall Homes Ltd. v. ROK Entertainment Group, the Court does not have the knowledge of Irish law or the access to Irish sources necessary to decide a question of Irish law.[26] Thus, out of respect to the Irish courts, and because the parties have not cited Irish law to an appreciable extent, this analysis proceeds exclusively under Delaware law.[27]

         Delaware law favors the enforcement of forum-selection clauses. "Forum selection [ ] clauses are 'presumptively valid' and should be 'specifically' enforced unless the resisting party '[ ] clearly show[s] that enforcement would be unreasonable and unjust, or that the clause [is] invalid for such reasons as fraud or overreaching.'"[28] The Delaware Supreme Court affirmed that holding in National Industrial Group (Holding) v. Carlyle Investment Management, ruling that "[a] valid forum selection clause must be enforced."[29] "The courts of Delaware defer to forum selection clauses and routinely 'give effect to the terms of private agreements to resolve disputes in a designated judicial forum out of respect for the parties' contractual designation.'"[30] This Court typically will grant a motion to dismiss under Court of Chancery Rule 12(b)(3) based upon a forum-selection clause "where the parties 'use express language clearly indicating that the forum selection clause excludes all other courts before which those parties could otherwise properly bring an action.'"[31]

         A. Walters' Authority Under the Security Agreement is a Threshold Question

         Plaintiff's entire case hinges on the notion that Walters did not have the authority to transfer the Patent from Lexington to another entity. Plaintiff claims that non-party Walters and Defendant Karrer committed fraud, equitable fraud, fraudulent conveyance, conspiracy to defraud, tortious interference with prospective business prospects, and conversion when they conveyed title to the Patent. Plaintiff also seeks to quiet title and a declaratory judgment. Defendants respond that Walters had authority under the Security Agreement to transfer title from Lexington to Delegate; thus, Plaintiff's claims fail.

         Security Agreement Clause 11, entitled Powers of Receiver, lays out the powers that any receiver or delegate appointed by Walters or his assignee will have.[32] These include the power to "take immediate possession of" the Patent, to "sell, realise, or otherwise dispose of property and enter into, abandon, perform, repudiate, rescind, vary or cancel any contracts," and to "sell or assign . . . [the Patent] on any terms and conditions as he thinks fit."[33]

         Security Agreement Clause 14, entitled Power of Attorney, sets out more powers that any receiver or delegate will have.[34] This includes the power to

be the attorney of [Lexington] and, in its name, on its behalf and as its act and deed, to execute any documents and do any acts and things that pursuant to the Settlement Agreement: (a) [Lexington] is required to execute and do under this agreement; or (b) any attorney so appointed deems proper or desirable in exercising any of the rights, powers, authorities and discretions conferred by this agreement or by law on [Walters], any Receiver or any Delegate. [Lexington] ratifies and confirms, and agrees to ratify and confirm, anything that any of its attorneys may do in the proper and lawful exercise, or purported exercise, of all or any of the rights, powers, authorities and discretions referred to in clause 14.1.[35]

         Interpretation of the Security Agreement-particularly whether Lexington was in default on its Security Agreement obligations and whether Walters properly exercised his authority under the Security Agreement-is at the core of this dispute, and that interpretation must be decided before I can rule on any of Plaintiff's claims.

          B. The Settlement Agreement and the Security Agreement Contain Exclusive Forum-Selection Clauses

         The Settlement Agreement states that any dispute "arising out of or in connection with [this agreement] or its subject matter or formation" must be brought in Ireland.[36] The Settlement Agreement adds that "[t]his Agreement may be pleaded as a full and complete bar to any proceedings, or other legal action commenced or brought in ...


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