In this week's Alabama Law Weekly update, we report on two decisions. The first case is from the Alabama Supreme Court and considers whether an employee, who was a significant contributor in the creation of intellectual property patented by his employer, is entitled to a portion of the income that the employer received in a subsequent stock sale. The second decision is from the Eleventh Circuit Court of Appeals and considers the factors for bankruptcy courts to analyze when approving releases of claims against non-debtors, such as officers and directors of reorganized entities.
Richard M. Gilley v. Southern Research Institute, No. 1131238, CV-09-901412 (Ala. March 13, 2015) (interpreting a post-employment compensation agreement and determining that a stock sale does not generate “income” derived from a patent, as defined by the compensation agreement)
Richard M. Gilley (“Gilley”) was an employee of Southern Research Institute (“SRI”) and was a significant contributor in the development of a new process for encapsulating drugs used in the production of slow-release medications. SRI was granted a patent on this process in 1995, with Gilley being listed as one of the inventors thereof.
Upon Gilley's hiring, he executed a contract that acknowledged that any “improvements, inventions, and discoveries” made by him during his employment would be the sole and exclusive property of SRI. Despite such contract, SRI had an income sharing policy which stated that if SRI derived “intellectual property income” from such patents or inventions, it would share a portion of that income with employees and former employees that had made a significant contribution to the generation of that income. In 1996, SRI and Gilley terminated their employment relationship and executed a separation agreement that allowed Gilley to continue to be eligible after his employment for his normal share of the intellectual property payments made under the SRI income sharing policy.
In January 2005, SRI spun off Brookwood Pharmaceuticals, Inc. (“Brookwood”) to manage and develop SRI's drug-delivery unit. In connection with the spinoff, SRI transferred all aspects of its drug-delivery unit to Brookwood, including the patent that Gilley had assisted in developing. As part of this transaction, an asset transfer agreement was executed whereby Brookwood assumed the liability for all amounts payable to employees and former employees in connection with the revenues received as a result of the intellectual property. Following the spin-off, SRI entered into a stock purchase agreement in 2007 with SurModics, Inc. (“SurModics”) for the acquisition of 100% of SRI's stock in Brookwood. The terms of the agreement specifically provided for the continued payment of the royalties to employees and former employees of SRI and Brookwood. In 2009 and 2010, SurModics entered into two agreements for $3,500,000 and $250,000, respectively, to license intellectual property, including the patent that Gilley had assisted in obtaining; however, Gilley never received any funds in connection therewith.
Gilley filed suit against SRI, Brookwood and SurModics asserting claims that he had not been paid all of the amounts he was entitled to receive under his separation agreement, as well as breach of contract, breach of fiduciary duty, negligence and suppression. SRI was granted summary judgment on all of Gilley's claims and the claims against Brookwood and SurModics were settled. Following the settlement of such claims, Gilley appealed the SRI judgment.
On appeal to the Alabama Supreme Court, Gilley argued that SRI was obligated to share a portion of the income received when SRI transferred the patent to Brookwood in 2005 during the spin-off, as well as when SurModics purchased all of SRI's stock in Brookwood in 2007. With respect to the income attributable to the Brookwood spin-off, the court ruled that Gilley's complaint did not specifically assert that he was entitled to receive income from the spin-off transaction. As a result, the court did not address whether Gilley had a plausible claim for a share of the income generated from the spin-off and related asset transfer. With respect to the 2007 stock purchase by SurModics, however, the court held that the sale did not generate any “intellectual property income” that would impose an obligation on SRI to pay Gilley. The court based its decision on the fact that SRI terminated its ownership of the patent upon the transfer to Brookwood in 2005. As a result of SRI transferring its ownership of the patent, the court held that SRI could not derive any future income from the patent. As further support for its decision, the court noted that under Alabama law, shareholders in a corporation are not the owners of the corporation's property. As a result, SRI was not the owner of the patent in 2007 when it sold its stock to SurModics, and the income that was received in connection with that sale came solely from SRI's ownership of the Brookwood stock. Following such analysis, the court affirmed the summary judgment motion as to Gilley's claims against SRI.
In re Seaside Engineering & Surveying, Inc., 2015 WL 1061718 (11th Cir. March 12, 2015) (discussing the authority of bankruptcy courts to approve releases for non-debtors, such as officers, directors and members of entities implementing a plan of reorganization under Chapter 11.)
Seaside Engineering & Surveying, Inc. (“Seaside”) is a civil engineering and surveying firm that engages in technical mapping. The principals of Seaside included 5 individuals, which all branched out from their work with Seaside to enter the real estate development business through two wholly separate limited liability companies. To conduct such business, Vision Park-Properties, LLC (“Vision”) loaned money to each of the entities, with the principals providing personal guaranties thereon. The entities eventually defaulted on the loans and Vision filed suit to recover. Thereafter, several of the principals filed for Chapter 7 bankruptcy protection and listed the Seaside stock in their filings as being nonexempt. Within one of the principal's bankruptcy cases, the bankruptcy trustee conducted an auction to sell the principal's Seaside stock and the interest was acquired by Vision. Following the sale of this interest to Vision, Seaside filed for Chapter 11 bankruptcy protection.
As part of its reorganization plan under Chapter 11 protection, Seaside proposed to reorganize and continue operations as a new entity, Gulf Atlantic, LLC, which would be managed by several of the Seaside principals, and owned by irrevocable family trusts of each of the managers. The remaining equity owners in Seaside would receive promissory notes in exchange for their interest and would be excluded from ownership in Gulf Atlantic, LLC. As part of the reorganization plan, the bankruptcy court approved releases of claims against “non-debtors”, which included the officers, directors and members of Gulf Atlantic, LLC. Vision objected to the plan and appealed on a range of issues including the bankruptcy court's valuation of Seaside, as well as the composition of the reorganized entity.
In affirming this decision, the court spent significant time addressing the bankruptcy court's authority to release claims against non-debtors and the factors to consider in doing so. After analyzing the history of this issue in the Eleventh Circuit, as well as in sister circuits, the court concluded that the bankruptcy court did have the authority to issue such releases and that no discretion had been abused by the bankruptcy court in doing so. More importantly, the court specifically affirmed the use of a seven-factor test taken from the Sixth Circuit to determine if bankruptcy courts may bar claims by a non-consenting creditor (such as Vision) against a non-debtor. The factors of this test include the following: (1) there is an identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate; (2) the non-debtor has contributed substantial assets to the reorganization; (3) the injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against the parties who would have indemnity or contribution claims against the debtor; (4) the impacted class, or classes, has overwhelmingly voted to accept the plan; (5) the plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; (6) the plan provides an opportunity for those who choose not to settle to recover in full; and (7) the bankruptcy court made a record of specific factual findings supporting its conclusions. Upon application of these factors, the non-debtor releases and the reorganization plan were affirmed.