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ITyX Solutions, AG v. Kodak Alaris, Inc.

United States District Court, D. Massachusetts

May 25, 2018

KODAK ALARIS INC., Defendant; Counterclaim Plaintiff,



         Plaintiff ITyX Solutions AG (“ITyX AG”) and Defendant Kodak Alaris, Inc. (“Kodak”) engaged in a strategic partnership to develop and market “intelligent document recognition” software products. After the relationship soured and a commercial dispute arose between them, ITyX AG filed this lawsuit against Kodak for breach of contract, declaratory judgment, and injunctive relief. [ECF No. 1] (“Complaint”). Kodak in turn brought counterclaims for breach of contract, breach (and aiding and abetting the breach) of a fiduciary duty, tortious interference with contractual and business relations, and declaratory judgment against ITyX AG as well as the related parties ITyX Systemwicklung OHG (“ITyX OHG”), ITyX Technology GMBH (“ITyX Technology”), ITyX AG's CEO Süleyman Arayan, and ITyX AG's co-founder Heiko Groftschik (the “Counterclaim Defendants, and collectively with ITyX AG, the “ITyX Parties”). [ECF No. 122] (“Counterclaims”).

         Currently pending before the Court are (1) ITyX Technology's motion for judgment on the pleadings [ECF No. 158]; (2) ITyX AG's motion for partial summary judgment [ECF No. 182]; (3) Counterclaim Defendants' motion for summary judgment [ECF No. 185]; and (4) Kodak's motion for summary judgment [ECF No. 187]. A hearing on the pending motions was held on May 20, 2018. [ECF No. 236]. For the following reasons, the motion for judgment on the pleadings is DENIED; ITyX AG's motion for partial summary judgment is DENIED; Counterclaim Defendants' motion for summary judgment is DENIED; and Kodak's motion for summary judgment is GRANTED in part DENIED in part.

         I. BACKGROUND

         Except as otherwise noted, the following undisputed facts are taken from the ITyX Parties' Joint Statement of Material Facts Not in Dispute [ECF No. 184] (“ITyX Facts”), and the Statement of Undisputed Material Facts in support of Kodak's motion [ECF No. 189] (“Kodak Facts”).

         A. Intelligent Document Recognition

         ITyX AG is a German software company that created an intelligent document recognition (“IDR”) software suite. ITyX Facts ¶¶ 1-3. IDR software products interpret documents, extract text-based content from them, and organize that content for the user. Id. ¶ 2. Text-based content exists in either a structured or unstructured form. Kodak Facts ¶¶ 1-2. Unstructured content is not strictly ordered or oriented, such as with e-mails, text messages, and social media. Id. ¶ 2. Structured content always appears in the same place, as in forms and invoices. Id. Before the IDR process begins, information in a document must be “captured” so that it can be accessed and integrated into a user's information systems. Id. ¶ 3. This “capture” phase involves scanning a document and saving it as a digital image, and may also involve processes like optical character recognition. Id. IDR generally refers to the post-capture steps of automatic classification, extraction, and validation of the text-based content. Id. ITyX AG's software suite uses an ITyX AG-created platform to carry out these IDR processes. ITyX Facts ¶ 3.

         B. Master Agreement

         In 2011, ITyX AG and Eastman Kodak Company (“EKC”) began discussing a potential business relationship and, on January 18, 2012, entered into a contract titled the “Master Agreement” [ECF No. 190-3]. ITyX Facts ¶¶ 4-5. The day after executing the Master Agreement, EKC filed for bankruptcy. Id. ¶ 6. One and a half years later, in September 2013, Kodak stepped into the shoes of EKC as the counterparty to the Master Agreement.[1] Id. ¶¶ 6-7.

         The Preamble to the Master Agreement recites that the parties intend to enter into a “strategic partnership” in the IDR market and describes an arrangement whereby ITyX AG will license certain software to Kodak, and Kodak will integrate that software into a Kodak-branded product. Master Agreement at 5; ITyX Facts ¶ 5. Because IDR was a new market for Kodak, the parties anticipated that it would take about three years for Kodak to build a successful business. Master Agreement at 5. During that time Kodak was to invest in a team to deliver and market the product under the Kodak brand, but with ITyX AG providing the product itself and “significant technical assistance and market knowledge to enable the Kodak team to achieve success.” Id.

         The Master Agreement refers to the Kodak-branded product, which was eventually marketed under the name “Info Insight, ” as the “Kodak Product” or the “Kodak IDR Product.” Master Agreement at 6; ITyX Facts ¶¶ 12-13. The Kodak Product, which incorporates proprietary methods and algorithms for IDR classification and extraction, is best applied to documents with unstructured text-based content, whereas traditional methods of IDR classification and extraction are best suited for structured content. Kodak Facts ¶¶ 4-7. Section 1.2 of the Master Agreement more specifically defines the “Kodak Product” as:

the product, product family, and components of products, more particularly described as the Kodak IDR Product, that Kodak intends to distribute to [end users] and will include or incorporate the Licensed Software but only as described in Appendix A Exhibit 1 . . . (but not any Licensed Software described in [Appendix A Exhibit 2]) supplied by [ITyX AG] and as developed pursuant to this Agreement.

         Master Agreement at 6. The technical and functional features of the “Licensed Software” are described in more detail in Appendix A to the Master Agreement. Id. at 5, 6, 40.

         The Master Agreement, which is governed by New York substantive law, has an initial term of five years commencing on January 18, 2012 and “automatically renew[s] on its anniversary date for successive two-year periods . . . thereafter unless otherwise terminated as provided [in the Master Agreement].” Id. at 7. Either party may terminate the Master Agreement for cause “after a material breach by the other Party” and by giving written notice to the defaulting Party, “specifying the default in reasonable detail, ” unless “the defaulting Party cures the default within 30 days after receipt of the [default notice] or, if such default cannot be cured within such time, the defaulting Party does not promptly start diligently and continuously in good faith to cure the default.” Id. at 9. Other provisions of the Master Agreement will be discussed herein as necessary.

         C. Investment Framework Agreement

         In June 2014, Kodak's parent company, Kodak Alaris Holdings (“KAH”) entered into an Investment Framework Agreement [ECF No. 190-29] (“IFA”) with ITyX OHG, ITyX Technology, and Mr. Arayan, the ITyX AG CEO, to acquire 25.1% of ITyX Technology. ITyX Facts ¶ 28. In accordance with the IFA, ITyX Technology was to acquire ITyX AG and another affiliated company. Id ¶ 29. In exchange, KAH would invest €12.6 million directly with ITyX Technology over the course of 16 months as follows: KAH would pay €4 million on April 1, 2015 and €4 million on October 1, 2015, as well as €50, 000 each month for the twelve months following the execution of the IFA. Id ¶ 30. If KAH defaulted on its payment obligations under the IFA for more than 30 days, ITyX OHG and ITyX Technology could exercise a “call option” and purchase all of KAH's shares of ITyX Technology in exchange for waiving all of KAH's outstanding obligations under the IFA for an additional €1. Id ¶ 31.

         D. Default Under the IFA and Exercise of the Call Option

         In June 2015, by which time the relationship between Kodak and ITyX AG was already deteriorating, KAH failed to timely make one of the monthly payments required under the IFA. Id ¶¶ 42-43. On November 23 or 24, 2015, ITyX OHG gave written notice to KAH that it was exercising the call option due to the missed monthly payment, and KAH's rejection of ITyX Technology's request for an investment of an additional €2 million into ITyX Technology.[2] Id ¶ 44; [ECF No. 209-45] (“Exercise Notice”). Kodak asserts that soon after KAH learned of the inadvertently missed payment, it paid the missing amount to ITyX OHG but that ITyX OHG declined to withdraw the Exercise Notice. [ECF Nos. 212 at 7-8]; [ECF No. 213 at ¶ 48].

         On December 18, 2015, KAH sent a letter to ITyX OHG and ITyX Technology, which (1) stated that KAH did not need to comply with the call option, (2) terminated the IFA for cause, and (3) noticed KAH's withdrawal as a shareholder of ITyX Technology. ITyX Facts ¶ 45; [ECF No. 209-44] (“December 18 KAH Notice”). KAH asserted that by sending the Exercise Notice, ITyX OHG “ha[d] severely and intentionally violated its fiduciary duties owed to [KAH] under the [IFA] and as a co-shareholder of [ITyX Technology];” that the call option, which triggered the purchase of KAH's shares of ITyX Technology worth at least €12.6 million for just €1, was immoral and void; and that the Exercise Notice had permanently destroyed the relationship of trust between the parties. December 18 KAH Notice at 3-4.

         On that same day, December 18, 2015, Kodak notified ITyX AG by letter that the exercise of the call option “also constitute[d] a material breach” of the Master Agreement and related follow-on agreements, which could not be cured and thereby voided the contracts. [ECF No. 81-20] (“December 18 Kodak Notice”); ITyX Facts ¶ 46. The letter also conveyed that even if there was no breach of the Master Agreement, Kodak was exiting the IDR business as provided for in the exceptions to Kodak's exclusivity obligations under the Master Agreement. ITyX Facts ¶ 47.


         ITyX AG filed this lawsuit on February 15, 2016. [ECF No. 1] (“Complaint”). Count I seeks a declaratory judgment that Kodak's purported termination of the Master Agreement was not effective, and that the Master Agreement is still binding on the parties. Compl. ¶¶ 117-18. Count II requests injunctive relief in the form of an order enjoining Kodak from developing or marketing products that compete with the Kodak Product. Id ¶ 127. Counts III and IV seek damages for Kodak's allegedly improper termination of the Master Agreement and the related follow-on agreements. Id. ¶¶ 129-47.

         Shortly after filing the Complaint, ITyX AG moved for a preliminary injunction to enjoin Kodak from engaging in the IDR business and from marketing and selling (1) “Capture Pro” software (which contains IDR functionality, but pre-dated the Master Agreement), (2) a second-generation version of Capture Pro, “Capture 2.0, ” and (3) large document scanners equipped with IDR software named “Synergetics.” [ECF No. 23]. The Court allowed ITyX AG to engage in some expedited discovery in connection with the motion for a preliminary injunction [ECF No. 34], but ultimately denied the motion, because ITyX AG failed to show any imminent risk of irreparable harm from the alleged competition with Capture Pro, Capture 2.0, or Synergetics. [ECF No. 100].

         Sometime in March 2016, ITyX OHG filed a lawsuit in the District Court of Frankfurt am Main, Germany related to its exercise of the call option. [ECF No. 78 at 6]. On April 6, 2016, KAH filed its own lawsuit in the District Court of Frankfurt am Main, Germany naming ITyX OHG, ITyX Technology, and Mr. Arayan as defendants and alleging (1) that the call option was null and void under German law, and (2) that the defendants breached their fiduciary duties to KAH by sending the Exercise Notice. Id.

         On April 15, 2016, Kodak filed a motion to dismiss the Complaint or to stay this action pending the resolution of the two related lawsuits filed in Germany. [ECF No. 38]. This Court denied the motion to dismiss or stay the action, because it was “not prepared to find that the parties and/or contractual relationships at issue [were] sufficiently aligned, ” or that the legal issues in the cases in Germany were similar enough to the issues in this case, to warrant a stay. [ECF No. 78 at 9].

         On March 20, 2018, the District Court of Frankfurt am Main issued a written decision on KAH's lawsuit. [ECF No. 223-1]. According to the Counterclaim Defendants' representations and a certified English translation of the decision, KAH's claims that ITyX OHG breached its fiduciary duty by sending the Exercise Notice were dismissed. [ECF Nos. 220, 222, 222-1, 223, 223-1]. Because the German court's decision is apparently on appeal, the Court will not treat the German court's decision as final at this time.


         Summary judgment is appropriate where “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56. An issue is considered “genuine” when “the evidence of record permits a rational factfinder to resolve it in favor of either party.” Borges ex rel. S.M.B.W. v. Serrano-Isern, 605 F.3d 1, 4-5 (1st Cir. 2010) (citing Medina-Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)). A fact is considered “material” when “its existence or nonexistence has the potential to change the outcome of the suit.” Id. at 5 (citing Martínez v. Colón, 54 F.3d 980, 984 (1st Cir. 1995).

         “To succeed in showing that there is no genuine dispute of material fact, the moving party must direct [the Court] to specific evidence in the record that would be admissible at trial.” Ocasio-Hernández v. Fortuño-Burset, 777 F.3d 1, 4 (1st Cir. 2015). “That is, it must ‘affirmatively produce evidence that negates an essential element of the non-moving party's claim, ' or, using ‘evidentiary materials already on file . . . demonstrate that the non-moving party will be unable to carry its burden of persuasion at trial.'” Id. at 4-5 (citing Carmona v. Toledo, 215 F.3d 124, 135 (1st Cir. 2000)). Once the moving party has laid out its basis for summary judgment, the burden shifts to the party opposing summary judgment to demonstrate, “with respect to each issue on which she would bear the burden of proof at trial, . . . that a trier of fact could reasonably resolve that issue in her favor.” Borges, 605 F.3d at 5.

         On a motion for summary judgment, the Court reviews “the entire record in the light most hospitable to the party opposing summary judgment.” Podiatrist Ass'n, Inc. v. La Cruz Azul De P.R., Inc., 332 F.3d 6, 13 (1st Cir. 2003). Where inferences are to be drawn from the stated facts, those inferences “must be viewed in the light most favorable to the party opposing the motion.” Oleskey ex rel. Boumediene v. U.S. Dep't of Def.,658 F.Supp.2d 288, 294 (D. Mass. 2009) (citing Founding Church of Scientology of Wash., D.C., Inc. v. Nat'l Sec. Agency, 610 F.2d 824, 836 (D.C. Cir. 1979)). The Court, however, ‚Äúsafely may ignore ...

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