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Quantum Sail Design Group, LLC v. Jannie Reuvers Sails, Ltd.

United States District Court, W.D. Michigan, Southern Division

April 10, 2018

QUANTUM SAIL DESIGN GROUP, LLC, Plaintiff,
v.
JANNIE REUVERS SAILS, LTD, and LEADING EDGE SAILMAKERS, LTD, Defendants.

          OPINION REGARDING (1) CROSS-MOTIONS FOR SUMMARY JUDGMENT; (2) PLAINTIFF'S MOTION FOR SANCTIONS; AND (3) PLAINTIFF'S MOTION FOR LEAVE TO AMEND

          GORDON J. QUIST, UNITED STATES DISTRICT JUDGE.

         Plaintiff, Quantum Sail Design Group, LLC (Quantum), and Jannie Reuvers Sails, Ltd. (JRS)-a South African sailmaker-partnered for approximately sixteen years to manufacture and sell under the Quantum name high-end, custom-made, membrane sails used by top racing yachts and other sailing vessels. The relationship soured, eventually terminated, and Quantum filed the instant lawsuit alleging several claims, including breach of the parties' 2009 International Affiliates License Agreement (IALA) (Count I) and 2009 Trade Secret License Agreement (TSLA) (Count II). JRS responded with a number of counterclaims. Following a series of stipulations by the parties and rulings by this Court, Quantum was left with only the breach of the IALA and TSLA claims and only JRS and Leading Edge Sailmakers (LES) as Defendants. Eventually, the Court entered a stipulated order appointing a Special Master. Following an in-depth review, the Master issued his Report on or about January 30, 2017.

         It had been anticipated that the Master's Report might resolve the case, but that did not occur. Instead, the parties filed cross-motions for summary judgment based on the Report. In addition, Quantum filed a motion for sanctions essentially renewing its previous motion for sanctions, and a motion for leave to amend its complaint to add various individuals and entities as alter-egos of JRS.

         The Court heard oral argument on the motions on January 22, 2018, during which it indicated some rulings and took other issues under advisement. For the following reasons, the Court will grant Quantum's motion for summary judgment in part and deny it in part, and deny JRS's motion for summary judgment. In connection with those rulings, and based on the Master's Report, the Court concludes that Quantum is entitled to summary judgment as to JRS's liability for breach of the 2009 IALA and TSLA. However, because the Court has questions about certain conclusions in the Master's Report, it will refer the matter back to the Master for clarification of these issues and defer a ruling on damages pending a response from the Master. As for the remaining motions, the Court will grant Quantum's motion for sanctions in part and deny its motion to amend.

         I. Background

         A. The Parties' Relationship and 2009 IALA

         Quantum and JRS (through its owner Jannie Reuvers) began doing business together in 1995, when Quantum was located in Maryland. JRS manufactured sails for Quantum at JRS's shop in Cape Town, South Africa, and paid Quantum a royalty. By 1998, JRS had become Quantum's exclusive sail manufacturer, but the parties did not have a formal written agreement. Prior to the first IALA in 2005, JRS paid Quantum a 3% royalty for sails it sold bearing the Quantum logo. Quantum and JRS collaborated on pricing to allow Quantum a reasonable mark-up on sales.

         In 2005, the parties entered the first IALA, which contained many of the same provisions as the 2009 IALA (discussed below). Unlike the 2009 IALA, however, the 2005 IALA was only a license for the distribution and sale of sails to the public; JRS was authorized to continue manufacturing, delivering, and selling sails to JRS's present OEM (original equipment manufacturer) customers outside of JRS's local marketing area and to solicit and sell sails outside of its local marketing area, provided that JRS would only make sales within another licensee's local marketing area pursuant to an agreement with the other licensee. (ECF No. 214-2 at PageID.9663.) Under the 2005 IALA, Quantum affiliates (end customers) could place orders directly with JRS. JRS paid Quantum royalties of 1.5% for OEM sales and 5% for membrane sales. (Id. at PageID.9685; Master's Report (MR) ¶ 5.2.5.1.)

         In 2008-09, Quantum decided to change its business model. The change called for increased rates globally for Quantum-branded products and implementation of a centralized order and accounting system. Under this new system, all transactions would be handled through Quantum's global order system (GOS). Manufacturers were precluded from making direct sales outside their sales territories to Quantum affiliates and customers; instead, the affiliate or customer would place the order directly with Quantum, and Quantum would handle the pricing and payments for such sales and control the placement of the order with the manufacturer. (ECF No. 214-3 at PageID.9699.) Quantum would make such sales at its wholesale cost, which Quantum and the manufacturer would mutually determine, plus a percentage markup to be determined and retained by Quantum, in lieu of a royalty from the manufacturer. (Id.) Quantum was required to deposit 50% of the order price with the manufacturer prior to production, and to pay the balance within thirty days of shipment by the manufacturer. (Id.) The manufacturer was still permitted to make sales and provide pricing directly to customers located within its sales territory, but was required to submit an order form for such sales on the GOS. (Id. at PageID.9699-700.) For such in-territory sales, the manufacturer was required to pay Quantum a royalty of 8% on all sales pre-approved by Quantum as OEM or fleet sales and 15% for all other sales. (Id.)

         Quantum and JRS entered into the 2009 IALA on or about January 19, 2009. However, problems with the new system soon arose, primarily because none of the affiliates (Quantum's end customers) had signed the 2009 IALA (and apparently the new arrangement had not been communicated to the affiliates), and Quantum lacked a fully-operational accounting system to handle the new ordering procedures. The first affiliate did not sign the new IALA until July 8, 2009, and the last affiliate signed on February 3, 2010. (MR ¶¶ 5.2.6.2, 5.2.6.3.) During the first two months of the agreement, Quantum did not issue invoices to JRS, and JRS did not receive payment from Quantum. (MR ¶ 5.2.7.1.) On February 27, 2009, Quantum sent an email to JRS stating that it would take time to “sort [the affiliates'] contracts out” and that “the pricing stays as is until they sign new contracts.” (MR ¶ 5.2.6.1.) On April 3, 2009, Quantum issued a unilateral interim policy proposal which waived the restrictions on manufacturers dealing directly with affiliates and customers and made JRS responsible for invoicing and collecting funds. In other words, JRS was required to invoice and collect its wholesale price, plus the Quantum mark-up. (MR ¶ 5.2.7.4.)

         On April 7, 2009, Craig Middleton of JRS emailed Quantum regarding the interim proposal noting that, although it referred to a price list, no copy of a price list was included. Middleton also indicated that JRS would be meeting with its bankers to determine whether the proposed arrangement would comply with South African law. (MR ¶ 5.2.7.6.) Because of South Africa's laws governing the outflow of monies from that country to other countries, manufacturing agreements such as the 2005 and 2009 IALAs must be submitted and approved by the South African Department of Trade & Industry (DTI) and the South African Reserve Bank (SARB). On April 29, 2009, Belinda Reuvers advised Quantum that before its proposed arrangement could be approved by the DTI and SARB, JRS needed to submit a signed copy of the 2009 IALA to the DTI and the SARB. She also stated, “[a]t the moment, you [sic] e-mail re account of International Affiliate orders through South Africa is contrary to DTI & SARB ruling.” (MR ¶¶ 5.2.8.1, 5.3.8.2.) On May 1, 2009, the DTI informed JRS that a Certificate of Approval was denied because the IALA was a manufacturing agreement and the 15% royalty exceeded the “maximum permissible being 6% of the net ex-factory selling price” and the TSLA, being a technology agreement, must be based on actual performance. (MR ¶ 5.2.8.5; ECF No. 191-2 at PageID.4747.) The DTI said that “[t]hese should be renegotiated and royalties should not be paid out on the strength of these agreements.” (Id.)

         On October 23, 2009, JRS received a legal opinion from its attorneys that the 2009 IALA “structure, as currently conducted, is unlawful and constitutes a breach of various legislation enacted.” (MR ¶ 5.2.8.16; ECF No. 191-2 at PageID.4753.) Subsequently, Belinda Reuvers notified Quantum that the procedure set forth in paragraph 6(i) of the 2009 IALA should be followed. (MR ¶ 5.2.8.17.) Although Quantum requested clarification of the issue, and the parties continued to attempt to resolve it, including through amendments to the IALA, the issue was never resolved, and the parties continued their practice of setting off accounts payable against accounts receivable, at least through 2012, when Quantum finally had its accounting system in place. In addition, JRS never received a Certificate of Approval from SARB and DTI.

         B. The Master's Report

         The Stipulated Order defined the Master's engagement as follows:

Perform an accounting and prepare a written report with recommended findings of facts (the “Report”) on two issues: (i) royalties [JRS] owes [QSDG], if any, under the [QSDG] International Affiliates License Agreement (Dkt. 1 Ex. A); and (ii) the amount [QSDG] owes JRS, if any, based on the allegations in Count I of JRS's Counter-Complaint (Dkt. 42 at p. 79, et seq.).

(ECF No. 169 at PageID.3077.) On October 27, 2015, Quantum filed a motion for sanctions. Quantum argued that sanctions were appropriate because JRS, through Jannie Reuvers, submitted a false affidavit in this case representing that LES had not conducted business since 2004 and operated wholly independent of JRS, and JRS fabricated invoices for sales to Quantum's Norwegian affiliate and others, which, for example, altered the customer name or product that was actually sold. Following a hearing on the motion, the Court entered an Order Amending the Stipulated Order, which provided:

The Master shall have the authority to review and consider invoices and other documents obtained from Plaintiff's Norwegian affiliate evidencing sales between the Norwegian affiliate, Quantum Norway, and Defendant Leading Edge Sailmakers and/or Defendant Jannie Reuvers Sails (JRS) and/or anyone acting in concert with either or both of them, to determine whether Defendant JRS: (a) properly produced all records pertaining to royalties owed Plaintiff under the 2009 License Agreement; and (b) submitted false invoices to the Master for purposes for the accounting. The Master may consider such documents for any other purpose the Master deems necessary to completion of a fully-informed accounting.

(ECF No. 188 at PageID.4219.) In addition, the Order created a presumption: if the Master determined that JRS failed to produce all records or submitted false compilations, the Master was to presume that JRS engaged in a similar pattern or practice with regard to all of its other customers without requiring such proof from Quantum. JRS could rebut the presumption by producing evidence that its records for any given customer were true and accurate. (Id. at PageID.4220.)

         The Master issued his Report on or about January 30, 2017. The Report is 141 pages long, includes numerous appendices and exhibits, and details that JRS provided two royalty schedules, one in October 2015, and another one in April 2016. The Master found, among other things, that:

• JRS's 2015 royalty schedule is permeated with false information based on false invoices. (MR ¶ 6.7.1.)
• The April 2016 royalty schedule volunteered by JRS contains a sanitised version of the 2015 royalty schedule in that the false information had been rectified. (MR ¶ 6.7.2.)
• The scanning exercise conducted on behalf of Quantum was prematurely terminated and would have uncovered the full extent of concealment of transactions and falsifications of documents instead of a limited number of fake documents having to be relied upon in the sanctions application. (MR ¶ 6.7.3.)
• In spite of the false October 2015 compilation, “JRS and its local counsel have cooperated with the Master satisfactorily throughout the course of this investigation.” (MR ¶ 6.7.4.)
• [I]t is concluded that a pattern of concealment was established on the part of JRS and/or Belinda and Jannie Reuvers and we conclude that JRS has not rebutted the presumption. (MR ¶ 6.8.1.)
• JRS owes Quantum as royalties under the 2009 IALA $1, 119, 815.25. Quantum owes JRS the following amounts: (1) $580, 228.55 for balance on open trade account; (2) $215, 000 for refund of trade secret license fees; and (3) $119, 000 for refund of design fees. (MR ¶¶ 6.9.1, 6.9.2.)
• That the measure for loss of profits/damages to Quantum be fixed at 22.5%, as this appears to be the measure of losses set forth in Quantum's sanctions brief. (MR ¶ 6.10.2.)
• That the highest level for Quantum's potential damages is USD 2, 287, 128.92. (MR ¶ 6.10.3.)

         Regarding the fabricated LE invoices, the Master noted:

With the advent of Pricer 4 and the introduction of the new [Quantum] 30% markup, Belinda Reuvers was dissatisfied with the prospect of having to invoice at the mark-up prices since JRS had already taken a number of orders for sails at the old prices months before the increase. Consequently she decided not only that she was going to assist Wind Design, who she knew had already sold the product ordered from JRS to its clients at the old prices, but was [sic] also felt compelled to hide the transactions from [Quantum] so that Wind Design could afford to pay them for the sails ordered. . . . On October 11, 2016 we conducted a final interview with Belinda and Jannie Reuvers. They admitted to us that, as matters progressed over the years, one of the main reasons for fabricating invoices was to hide transactions from ...

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