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GREEN MACHINE CORP. v. ALLEN ENGINEERING CORP.

May 31, 2001

GREEN MACHINE CORPORATION AND EDWARD A. ZUZELO, PLAINTIFFS/COUNTERCLAIM DEFENDANTS,
V.
ALLEN ENGINEERING CORPORATION, DEFENDANT/COUNTERCLAIM PLAINTIFF, V. MARILYNN C. ZUZELO ADDITIONAL COUNTERCLAIM DEFENDANT



The opinion of the court was delivered by: Brody, J.

MEMORANDUM AND ORDER

The matter before me requires that I determine the preclusive effect on the present action, if any, of a prior state court judgment by the Arkansas Circuit Court. On January 25, 1996, plaintiff/counterclaim defendant Green Machine Corporation ("GMC"), initiated a state court action against defendant/counterclaim plaintiff Allen Engineering Corporation ("AEC") in the Circuit Court of Greene County, Arkansas ("the Arkansas action").*fn1 AEC answered GMC's Arkansas complaint and asserted counterclaims against GMC. The Arkansas Circuit Court ultimately dismissed GMC's complaint without prejudice and entered a final judgment in favor of AEC on its counterclaims. On May 6, 1999, GMC, joined by Edward Zuzelo, president of GMC, initiated this federal action asserting patent infringement under 35 U.S.C. § 271*fn2 and various other state law claims. AEC now moves this court to limit GMC's claims under the doctrines of res judicata and collateral estoppel.

SUMMARY OF FACTS

GMC manufactures saws, saw blades, and arbors for cutting concrete. Edward Zuzelo is the President of GMC. GMC was created in 1994 when Cardinal Industries, Inc. ("Cardinal") divided into two separate and distinct companies. AEC sells saws and blades for cutting concrete. From GMC's inception in 1994 through October, 1995, AEC sold GMC's saws, blades and arbors.*fn3 By contract, GMC agreed to indemnify AEC for "any expenses or liability from any suit for patent infringement of any Chiuminatta patents as a result of its sale of [GMC's products.]" Complaint, Exhibit D. Edward A. Zuzelo and Marilyn C. Zuzelo both signed a personal guarantee to the indemnification agreement.

In July 1995, Chiuminatta Concrete Concepts, Inc., Edward Chiuminatta, and Alan Chiuminatta (collectively "Chiuminatta") sued Cardinal, GMC, and AEC for patent infringement in the United States District Court for the Central District of California, Western Division. AEC cross filed for indemnification by GMC pursuant to the indemnification agreement. GMC maintained that its contractual obligations to indemnify AEC had not matured, because AEC had not purchased the requisite number of saws from GMC.*fn4 In October, 1995, the business relationship between AEC and GMC came to an end. In December of 1995, AEC entered into a consent judgement with Chiuminatta in which AEC admitted infringement of the Chiuminatta patents by the GMC saw. AEC paid Chiuminatta $40,000.00 in judgement.

On January 25, 1996, GMC commenced the Arkansas action against AEC alleging that AEC owes GMC "$18,747.03 for goods, wares, merchandise and/or services rendered purchased by defendant and delivered to the defendant at their special request." Defendant's Motion, Exhibit A ("Arkansas Complaint"). AEC answered the complaint and asserted counterclaims against GMC:

"for the sum of $72,213.09 for credits for defective goods, wares, merchandise and/or services provided by plaintiff to defendant and for certain sums owed to the plaintiff by defendant under the terms of an indemnification agreement."

Defendant's Motion, Exhibit B ("Counterclaim"). GMC filed an Answer to AEC's counterclaim denying all material allegations.

Sixteen months later, on May 26, 1999, AEC amended its counterclaim in the Arkansas action. The Amended Counterclaim more fully set forth AEC's claim for indemnification with respect to the sums paid by AEC to Chiuminatta and AEC's allegation that GMC breached its warranty of title and warranty against infringement. The Amended Counterclaim was premised upon the Chiuminatta action and the written indemnification agreement between the parties. AEC alleged that:

• "The plaintiff, [GMC] sold the defendant saws totaling $13,861.00.
• On January 13, 1995, [AEC] and [GMC] entered into an Indemnification Agreement . . . The agreement was provided by [GMC] to [AEC] in consideration for [AEC] selling and distributing the saws manufactured by [GMC]. The plaintiff warranted in said indemnification agreement to the defendant that the saws did not infringe upon the patent of a third party, namely [Chiuminatta].
• Upon the attempts of [AEC] to distribute said saws, Chiuminatta initiated a federal lawsuit naming [AEC] as a defendant.
• As a result, the defendant in this action incurred $18,352.09 in attorney's fees from defending the patent infringement action.
• The defendant also paid a $40,000.00 judgment to Chiuminatta.
• As the saws in question did in fact infringe on the patent of Chiuminatta, they were of no use to [AEC] . . ."
• Separate and apart from the indemnification agreement, [GMC] warranted that the products would be delivered free of the rightful claim of any third person by way of infringement or the like."
• Since Green Machine supplied products which infringe any of the Chiuminatta patents asserted against Allen Engineering in the underlying federal action, then Green Machine has breached its warranty of title and warranty against infringement."

Defendant's Motion, Exhibit C ("Amended Counterclaim"). Based on these allegations, AEC sought judgment against GMC in the amount of $72,213.09 plus interest and costs. GMC filed a reply to the Amended Counterclaim denying all material allegations.

On May 6, 1999, GMC initiated this federal action against AEC. In the complaint, GMC alleges that:

• "Since in or before February 1994, through and including October 1995, GMC and AEC consistently engaged in an ongoing commercial relationship in which AEC performed as exclusive distributor of Saws, Blades and Arbors for GMC (the "Commercial Relationship") .
• The course of performance, course of dealing, and usage of trade were ratified by the parties in a letter of understanding ("Letter of Understanding"), a proposed agreement ("Proposed Agreement") and an indemnification agreement ("Indemnification Agreement"), all of which were drafted by GMC's former counsel John W. Logan, Jr. ("Logan") in or around the winter/spring of 1993-94 (hereinafter collectively referred to as the "Agreement"). AEC neither made nor expressed any objection to the Agreement . . .
• As GMC's exclusive distributor, AEC was entrusted with confidential information regarding the creation and design of the Saws, including the GM-150 (the "Confidential Information") . . .
• The Confidential Information is a trade secret ("Trade Secret")
• It is believed and therefore averred that despite GMC's entrustment of the Confidential Information to AEC, AEC has intentionally and maliciously duplicated the GM-150, all to its own gain and benefit, and to the serious detriment of Zuzelo and GMC . . .
• As exclusive distributor for GMC, AEC had a duty to use its best efforts to sell the GMC ...

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