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Preston v. Nagel

United States District Court, D. Massachusetts

February 9, 2016

JOHN PRESTON, directly and derivatively, as shareholder of ELECTROMAGNETICS CORPORATION, a Delaware corporation, and CONTINUUM ENERGY TECHNOLOGIES, LLC, a Delaware limited liability company, Plaintiffs,
v.
CHRISTOPHER NAGEL, and IDL DEVELOPMENT, LLC, Defendants, and ELECTROMAGNETICS CORPORATION, a Delaware corporation, Nominal party.

MEMORANDUM OF DECISION

WILLIAM G. YOUNG DISTRICT JUDGE

I. INTRODUCTION

On November 13, 2015 this Court took under advisement the Plaintiffs' motion to remand this action to the Superior Court of Massachusetts sitting in and for the County of Middlesex.

The Plaintiffs -- John Preston, directly on his own behalf, and derivatively, as shareholder of Electromagnetics Corporation (''ELC"), a Delaware corporation, and Continuum Energy Technologies, LLC (''CET"), a Delaware limited liability company -- commenced the current action by filing a verified complaint in the Massachusetts Superior Court. Notice Removal, Ex. 1, part 1, Verified Compl. Jury Demand ("Compl.")/ ECF No. 1-3; State Court R., Ex. A, part 1, Docket Report 1, ECF No. 3 9-1. The complaint alleged fifteen counts against Christopher Nagel, IDL Development, LLC ("IDL") (collectively the "Defendants")/ and ELC, [1] including declaratory judgment, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, breach of the implied covenant of good faith and fair dealing, tortious and intentional interference with contract and advantageous business relations, conversion, unfair and deceptive trade practices under Mass. Gen. Laws 93A, constructive trust, and injunctive relief. Compl. ¶¶ 89-168. Upon joint request by both parties, the Regional Administrative Justice for Middlesex County assigned Justice Peter B. Krupp to preside over the case proceedings. Docket Report 10, 13.

On October 16, 2015, the Defendants filed a Notice of Removal. Notice Removal, ECF No. 1. The same day, the Defendants answered the Plaintiffs' complaint and counterclaimed seeking declaratory judgment for non-infringement of eleven ELC patents by Nagel and IDL. Notice Removal, Ex. 3, Ans. Countercl. Defs.' Christopher Nagel IDL Development, LLC Pis.' Verified Compl. Jury Demand ("Defs.' Ans.'7)/ ECF No. 1-3. At the time of that filing, several motions filed by the Plaintiffs were pending in state court, Docket Report 2-3, and Justice Krupp had already issued two orders for preservation of an encrypted hard drive that was in Nagel's possession and with which Nagel had interfered.[2] Mem. Supp. Pis.' Mot. Remand ("Pis.' Mem. Remand"), Ex. 3, Joint Request Special Assignment Hon. Peter B. Krupp, Ex. B, Mem. Order Regarding Preservation Encrypted Hard Disk Briefing Schedule ("September 21 Order"), ECF No. 33-3; id., Ex. 6, Mem. Order Pis.' Emergency Mot. Compel Compliance Court Order Regarding Production Encrypted Hard Disk, Defs.' Cross-Mot. Protect Privileged Confidential Docs. ("September 28 Order"), ECF No. 33-6. On November 5, 2015, twenty days after the Defendants requested removal of the case to this Court, the Plaintiffs filed a motion to remand. Pis.' Mot. Remand, ECF No. 32. The parties fully briefed the issue and the Court held an oral hearing on the Plaintiffs' motion on November 12, 2015. Pis.' Mem. Remand; Defs.' Opp'n Pis.' Mot. Remand ("Defs.' Opp'n"), ECF No. 38; Mem. Electromagnetics Corporation Connection Pis.' Mot. Remand, ECF No. 37; Tr. Hearing, ECF No. 40.

II. BACKGROUND

Answering the questions of law inherent in the adjudication of the parties' motions requires giving an overview of the factual background as recited in the Plaintiffs' complaint. The latter is by no means an easy task, since the complaint is far from a model of clarity. It is, however, the Court's role to fathom some order out of chaos.

The underlying dispute has its roots in the unravelling of a lengthy business relationship between Preston and Nagel. The relationship, which dated to the late 1980s, resulted in the joint start-up of several successive companies with the intent of exploiting a technology developed by Nagel that converted certain waste materials into marketable products such as industrial gases, metal alloys, and ceramics. Compl. ¶ 18. After the first jointly-founded company failed to take off, id. ¶ 19, part of its assets were sold to a second company and later assigned to Nagel. Id. ¶¶ 20-21.

On June 3, 1999, Preston and Nagel formed both ELC[3] and CET[4] as "affiliated companies" with "overlapping ownership and management[.]" Id. ¶¶ 24-25. Preston and Nagel are both shareholders of ELC, and its only two directors. Id. ¶¶ 12, 15, 74. As of July 1, 2015, Preston was Vice-President of ELC while Nagel was its President. Id. ¶ 75. Upon formation of ELC, Nagel assigned these assets -- characterized by the Plaintiffs as "intellectual property rights . . . including the ability to patent technologies developed within certain fields[, ]" id. ¶ 23 -- to ELC.

Nagel and Preston formed CET with the purpose of "researching, developing, and attempting to commercialize technology covered and protected by various patents titled to ELC[.]" Id. ¶ 25. According to a cross-licensing agreement between ELC and CET ("ELC/CET License Agreement"), CET acquired a perpetual, royalty-free license to ELC's "most valuable intellectual property rights acquired by ELC (including, without limitation, the use of electromagnetic chemistry to modify and/or manufacture elements)." Id. ¶¶ 26-27; Pis.' Mem. Remand, Ex. 1, License Collaboration Agreement ("ELC/CET License Agreement") 4, ECF No. 33-1. "ELC retained the right to develop the intellectual property for waste related and certain other product applications." Id. ¶ 27. This set-up allowed CET to "exploit ELC's patents and other intellectual property" and permitted "ELC to continue to obtain additional patents that CET filed based on advancements on its intellectual property." Id. ¶ 30. Under the ELC/CET License Agreement, ELC and CET also agreed to non-compete and confidentiality provisions. Id. ¶ 29. Nagel also agreed to various confidentiality clauses and protection for ELC's and CET's proprietary information as a signatory of various other employee and operating agreements with ELC and CET. Id. ¶¶ 36-41, 44-54.

Following unrelated third-party litigation, the relationship between Preston and Nagel deteriorated. Id. ¶¶ 60-61. Nagel formed IDL on December 19, 2014, and resigned as managing member of CET effective January 16, 2015. Id. ¶¶ 62-63. In May 2015, Nagel circulated a proposal to CET's shareholders that contemplated a "complete restructuring of the [existing] business entanglements" and a termination of the ELC/CET License Agreement, to be replaced with a more narrow "technology/patent agreement." Id. ¶¶ 64-65. According to the Plaintiffs, the proposal reflects that "Nagel knew he needed CET's permission to carry out his proposed platinum venture, because he was planning to use ELC's licensed intellectual property to do so." Id. ¶ 66.

The Plaintiffs plead that "Nagel and IDL are utilizing and exploiting without a license the intellectual property rights of ELC and CET, as licensee/7 that Nagel has disclosed to IDL confidential and proprietary information belonging to ELC and CET, that IDL has raised money "to pursue the manufacture of platinum using ELC's technology[, ] " that Nagel and IDL are using electromagnetic chemistry to "modify elements and to manufacture platinum[, ]" this being "the core of all of the most valuable intellectual property developed by ELC and CET" and that "Nagel and IDL are competing with ELC and CET[.]" Id. ¶¶ 67-69.

Relatedly, the Plaintiffs allege that, when Nagel left CET for IDL, he took with him from CET's headquarters documents and an encrypted hard drive that included experimental runs and other technical data that is "essentially irreplaceable without Nagel's cooperation, " hired CET's entire team of researchers, rendering CET unable to conduct experiments. Id. ¶¶ 70, 72-73. According to the Plaintiffs, in an effort to have the patents lapse and allow "ELC's patented technologies"(including those within the scope of the ELC/CET License Agreement) to be used by Nagel and IDL, Nagel also directed ELC to fail to pay its patent fees, leaving ELC's license to CET "worthless" and himself "free to do as he wishes with the intellectual property[, ]" and removed Preston from ELC's officer list in violation of ELC's by-laws in order to advance his wrongful conduct. Id. ¶¶ 59-60, 71, 74-88.

III. ANALYSIS

The Defendants removed the case to this Court under 28 U.S.C. §§ 1331 and 1338, as authorized by 28 U.S.C. §§ 1441, 1446, and 1454. Notice Removal 1. The Defendants asserted that removal of the case was proper because: 1) questions of law arising under an Act of Congress related to patents were raised in both the Plaintiffs' complaint and the Defendants' counterclaims, and 2) ELC is a ...


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