EZ Tag Corp. v. Casio America, Inc.

Citations: 861 F. Supp. 2d 181; 2012 WL 955511; 2012 U.S. Dist. LEXIS 39315Docket: No. 11 Civ. 4685 (DAB)

Court: District Court, S.D. New York; March 7, 2012; Federal District Court

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EZ Tag Corporation filed a lawsuit against Casio America, Inc. and Casio Computer Co. Ltd. under Section 2-312 of the New York Uniform Commercial Code, seeking attorney’s fees and costs from defending a patent infringement lawsuit initiated by Raylon LLC in the Eastern District of Texas. The infringement claim pertained to United States Patent No. 6,655,589, which involved a hand-held device for printing traffic citations. EZ Tag, having purchased these devices from Casio, resold them to law enforcement agencies in New York. After Raylon's lawsuit commenced, EZ Tag requested indemnification from Casio, which was refused, resulting in EZ Tag incurring $152,579.00 in legal expenses. The court ultimately granted summary judgment in favor of EZ Tag and Casio in the Raylon case, determining there was no infringement. Despite this, Casio again declined to indemnify EZ Tag for its legal costs.

The court addressed the legal standard for dismissing a claim under Federal Rule of Civil Procedure 12(b)(6), stating that a plaintiff must present sufficient facts to establish a plausible claim. The explanation included the necessity for factual content that allows reasonable inferences of liability, emphasizing that mere possibility is insufficient. Legal conclusions must be supported by factual allegations for a complaint to survive a motion to dismiss. The court can consider the complaint and any related documents in its analysis.

EZ Tag asserts that Casio is obligated to indemnify it for defending against Raylon's patent infringement lawsuit, citing Section 2-312 of the New York Uniform Commercial Code (NY-UCC), which mandates that a merchant seller warrants goods will be free from third-party claims of infringement. NY-UCC Sections 2-714 and 2-715 outline the buyer's remedies for such warranty breaches, including the measure of damages based on the difference in value between accepted goods and warranted goods, along with recoverable incidental and consequential damages. However, case law suggests attorney’s fees and litigation expenses are generally not recoverable under these sections unless there is evidence of bad faith or specific contractual provisions allowing for such recovery. Relevant cases, such as CGS Industries and In re O.P.M. Leasing Svcs., support this interpretation. Furthermore, even if attorney’s fees were considered remedies for breach, they would be inappropriate here as the claims in the Raylon Action do not meet the NY-UCC's definition of "rightful." No jurisdiction has defined a claim as "rightful" following a finding of non-infringement, as demonstrated by court precedents. The summary judgment and denial of sanctions in the Raylon Action further indicate that the claims cannot be deemed "rightful" by any established legal definitions.

The court articulated a framework for evaluating claims of patent infringement, positioning them on a continuum from frivolous to proven liability. In *Sun Coast Merchandise Corp. v. Myron Corp.*, the court emphasized that a third-party infringement claim must cast a "substantial shadow" on the buyer's ability to utilize the goods for it to be deemed "rightful," which implies a significant likelihood of litigation. EZ Tag contended that a non-frivolous claim suffices for a warranty breach, but the court disagreed, indicating that a claim must possess merit beyond being non-frivolous. The court scrutinized the Raylon Action, finding its claims, while not frivolous enough to warrant sanctions, lacked substantial merit, thus failing to adversely affect EZ Tag’s use of the goods. Consequently, Raylon’s infringement claim did not meet the "rightful" standard under NY-UCC 2-312(3), absolving Casio of any duty to indemnify EZ Tag.

Regarding common law indemnification, the court noted that EZ Tag did not defend its claims and highlighted that such claims fail if the party seeking indemnification hasn’t been held liable. Since EZ Tag prevailed in the Raylon Action, its common law indemnification claim could not proceed.

The court addressed the issue of leave to replead, asserting that while amendments are typically permitted, they may be denied if deemed futile. Given the claims in the Raylon Action were found not "rightful," the court ruled that further amendment would be futile and denied the request to replead. 

Ultimately, the court granted the Motion to Dismiss, dismissing the Complaint with prejudice and without leave to amend, and directed the closure of the case docket. Additionally, the court noted that it did not need to address the service of process issue since the dismissal was granted under Rule 12(b)(6) for both defendants.