1 William E. Halle (State Bar No. 150686)
`Amy W. Larkin (State Bar No. 143605)
`2 O’NEILLLP
`19900 MacArthur Boulevard
`3 Suite 1050
`Irvine, California 92612
`4 Telephone: (949) 798-0500
`Facsimile: (949) 798-0511
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`5
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`Attorneys for Respondent and Counterclaimant
`6 PATENTRATINGS, LLC
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`AMERICAN ARBITRATION ASSOCIATION
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`OCEAN TOMO, LLC,
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`Arbitration No. 73 117 Y 00047 11
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`Claimant and Counter-respondent,
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`And
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`PATENTRATINGS’ ARBITRATION
`BRIEF
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`PATENTRATINGS, LLC,
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`Respondent and Counterclaimant.
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`TABLE OF CONTENTS
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`PAGE
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`I.
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`II.
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`III.
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`INTRODUCTION
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`RELEVANT FACTS
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`CLAIMS ASSERTED IN ARBITRATION
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`A. OT’s Claims
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`B. PRClaims
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`IV.
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`ARGUMENT
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`A. OT’ s Primary Demand For Arbitration Lacks Merit
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`1. Principles of Contract Interpretation Defeat OT’ s Claim
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`2. OT Has Waived Any Right And/Or Is Estopped to Recover
`the Disputed Costs
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`3. The Supplemental License Agreement Limits PR’ s Liability
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`4. Novation
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`B. OT Damages Assertion Supports A Finding That The Disputed
`Costs Were To Be Borne By OT
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`C. OT’s Claim Respecting The Supplemental License Agreement Fails
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`D. OT’s Second Supplemental Demand Should Be Moot
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`E. OT’s Claim Regarding The patentratings.com URL Is Baseless
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`F. OT’s Effort To Foist Costs Onto PR In Violation Of The Amendment
`Justifies PR’ Termination Of The License Agreement
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`V.
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`CONCLUSION
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`1
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`3
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`TABLE OF AUTHORITIES
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`PAGE
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`16
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`28.29
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`19
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`20
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`17, 18
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`16
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`22
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`16
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`20
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`21
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`27
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`16
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`1 2
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`3 STATE CASES
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`4 Bohman v. Berg,
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`5
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`54Ca1.2d787(1960)
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`6 Brown v. Grimes,
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`7
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`192 CaLApp. 4th265 (2011)
`
`8 Citizens for Goleta Valley v. HTSanta Barbara,
`
`9
`
`ll7Cal.App.4th 1073 (2004)
`
`10 Crestline Mobile Homes Mfg. v. Pacific Fin. Corp.,
`
`11
`
`54Cal.2s773(1960)
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`12 Employers Reinsurance Co. v. Superior Court,
`
`13
`
`161 Cal. App. 4th 906 (2008)
`
`14 Kennecott Corp. v. Union Oil Co.,
`
`15
`
`196Ca1.App.3d1179(1987)
`
`16 Northern Counties Bank v. Himovitz & Sons Livestock Co.,
`
`17
`
`216Ca1.App.2d849(1963)
`
`18 Oceanside 84 Ltd. v. Fidelity Federal Bank,
`56Ca1.App.4th1441(1997)
`
`19
`
`20 Panno v. Russo,
`
`21
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`Cal.App.2d408(1947)
`
`22 Platt Pacific, Inc. v. Andelson,
`
`23
`
`6Cal. 4th307 (1993)
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`24 Sackett v. Spindler,
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`25
`
`248 Cal. App. 2d220 (1967)
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`26 Stewart Title Co. v. Herbert,
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`6Cal.App.3d957(1970)
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`27
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`28
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`27,28
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`17
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`16
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`22
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`22
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`16
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`1 Superior Motels, Inc. v. Rinn Motor Hotels, Inc.,
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`2
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`195 Cal.App. 3d 1032 (1987)
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`3 Universal Sales Corporation, Ltd., v. California Press Mnfg. Co.,
`
`4
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`2OCal.2d751 (1942)
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`5 Western Camps, Inc. v. Riverway Ranch Enterprises,
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`70 Cal. App. 3d714(1977)
`
`OTHER SOURCES
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`6
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`7 8
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`9 Ca1.Civ.Code 1530
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`10 Cal.Civ.Code1532
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`11 Cal.Civ.Code 1636
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`12
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`13
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`14
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`15
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`17
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`2
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`3
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`I.
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`INTRODUCTION
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`Respondent and counterclaimant PatentRatings, LLC (“PatentRatings” or “PR”)
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`4 developed and owns innovative patents and other intellectual property (the “Intellectual
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`5 Property”) which it has licensed to claimant and counterclaimant Ocean Tomo, LLC
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`6
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`7
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`(“Ocean Tomo” or “OT”) under various license agreements. The legal and contractual
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`relationship between PR and OT is properly stated as “Licensor” and “Licensee” — that is
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`8 PR owns certain rights and OT pays royalties to use those rights. As OT’ s founder and
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`9 Managing Director James Malackowski succinctly explained in 2009 “[PR] is a separate
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`10
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`11
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`company that is an IP holding firm[....]. They own the rights and we pay them.” PR has
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`no employees and no business operations whatsoever other than licensing its Intellectual
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`12 Property and collecting royalties.
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`13
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`14
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`15
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`16
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`17
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`Through this arbitration action, OT seeks to turn this relationship on its head by
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`contriving to interpret the parties’ various agreements to put PR in a new role as
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`software/data provider and to put OT in a new role as software/data consumer. Pushing
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`this contrived relationship through a tortured breach of warranty theory, OT asks this Panel
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`to require PR to pay millions of dollars in costs (the “Disputed Costs”) incurred by OT for
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`18 development and maintenance of essentially all software, data, systems and other overhead
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`19
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`supporting the current operations of OT’s business unit known as Ocean Tomo Patent
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`20 Ratings (“OTPR”). The Disputed Costs were incurred over a period of years from 2007 to
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`21
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`the present at the exclusive direction, and for the primary benefit of, OT. (OT collects all
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`22 revenues and pays PR a royalty.)
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`23
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`At no time prior to this dispute did OT ever dispute these costs; it never demanded
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`24 repayment or even notified PR that the costs were being incurred purportedly on PR’s
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`25 behalf. If successful, OT’ s claim would vastly alter the economics of the parties’
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`26 relationship as laid out in their many agreements.
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`27
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`28
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`The precise legal focus of this dispute distills in large part to interpretation of two
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`contractual provisions — one in the July 2007 “Amendment” to the parties’ initial 2004
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`1 License Agreement by which the parties agreed to cap further expenses incurred as debt to
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`2 PR, and one in the May 2006 Supplemental License Agreement which provides PR with a
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`3 unilateral right to terminate that agreement under certain conditions. As explained below,
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`4
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`5
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`6
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`7
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`the interpretation of these provisions offered by OT flies in the face of the express
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`language of the agreements, documentary evidence of the parties’ intentions respecting
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`them and, perhaps most importantly, the parties’ years-long conduct.
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`Offering the theory that it does, OT is essentially asking the Panel to require PR to
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`8 bear not only seven figures of historical expenses, it also seeks to put to PR future
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`9
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`expenses incurred by OT in its ever evolving and enormously expanding use of the
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`10
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`11
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`Intellectual Property. This interpretation is not consistent with the language of the
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`agreements, and disregards the fact that OT has, for years, paid these costs without
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`12 complaint or any intimation whatsoever that PR was somehow ultimately responsible.
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`13 OT’ s proposed interpretation would lead to an absurdly unfair result under any sense of
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`14
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`15
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`law or equity.
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`The bare naked truth here is that OT made a deal with PR that it later decided it did
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`16 not like. Now it seeks to renege on the deal (or at least renegotiate it) using the hammer of
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`17
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`18
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`19
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`arbitration to essentially litigate PR into submission. PR will show at the hearing that OT
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`commenced this baseless arbitration as a calculated strategy to cut the royalty expenses
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`associated with its ever expanding use of the Intellectual Property. OT believed that if it
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`20 could somehow convince an arbitration panel that PR should bear any portion of the
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`21 Disputed Costs (even a small “split-the-baby” portion) it would drive PR into bankruptcy
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`22 because PR is a very small company with very small resources compared to OT. Such a
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`23
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`result would allow OT to foreclose on PR’ s Intellectual Property under a separate security
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`24 agreement between the parties. OT would then own outright all of the Intellectual
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`25 Property it currently licenses for a substantial recurring royalty. At worst, the strategy
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`26 would not succeed and OT would be no worse off because the parties’ status quo would
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`27 remain intact.
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`PR submits that OT should not be allowed to profit from its ruthless and outrageous
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`2 behavior. For the foregoing reasons, amplified below, PR expects that the Panel will
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`conclude that OT’ s claims should be denied and the license agreements should be declared
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`terminated.
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`II.
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`RELEVANT FACTS
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`In 2001, PR developed and patented the intellectual property rights to various
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`software, algorithms and techniques for statistically analyzing and valuing patents (the
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`“Intellectual Property”). At base, the Intellectual Property objectively assigns a numerical
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`10
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`score (dubbed an “IPQ score”) to what was previously a very complex and subjective
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`11 matter — the estimated or expected value of a patent. The inventor of the Intellectual
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`12 Property, Mr. Barney, recognized that it would have a variety of important and valuable
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`13 uses in the consulting and financial sectors.
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`14
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`15
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`PR soon established itself as a leading authority on rating and valuing patents using
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`its patented statistical techniques. PR established a distribution partnership with Lexis
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`16 Nexis, one of the largest data providers in the world. PR began selling consulting services
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`17
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`and reports to such well-known clients as Boeing, Kimberly-Clark, Rockwell Scientific,
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`18 Samsung, Motorola and the United States Internal Revenue Service. From 2002 to 2004
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`19 PR’s annual revenues grew from less than a few thousand dollars in 2002 to $94,400 in
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`20 2003 and $150,100 in 2004. PR internally funded this growth so that by the end of 2004,
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`21 PR was a small, fast-growing company with positive cash flow and no debt.
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`22
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`23
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`Others became interested in acquiring the rights to use the Intellectual Property. In
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`July of 2004, PR entered into a license agreement with Rosebay Capital Management,
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`24 LLC (“Rosebay”). That agreement granted Rosebay the exclusive right to use the
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`25
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`Intellectual Property for the purpose of conducting securities valuation analyses, for
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`26 buying, selling and trading stocks and other securities and for creating stock indexes based
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`27 upon this analysis (the “Investment Rights”).
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`In about this same timeframe, James Malackowski of OT learned of PR and its
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`2 unique propriety system for statistically rating and valuing patents. OT began in 2003 with
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`3
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`remarkably ambitious goals: to turn the “murky world of patents” into a “vibrant, open
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`4 market similar to those for oil and stocks.” Mr. Malackowski grandly envisioned that OT
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`5 would conduct live auctions of patents, devise an index of patent-rich stocks called the
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`6
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`7
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`8
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`9
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`“Ocean Tomo 300,” launch a web site of classified ads from patent holders, broker
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`technology deals for major companies, and create funds that would allow people to invest
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`in patents.
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`Mr. Malackowski recognized that OT needed what PR had to offer. In 2004, Mr.
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`10 Malackowski emailed Mr. Barney “[t]he concept of patent ratings is one we feel is needed
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`11
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`in the marketplace and accordingly we have been considering the best means to address the
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`12 opportunity. ... I find your approach to be well thought out, [however] we view the
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`13 potential client solution to be broader than what you present to the public.” Mr.
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`14 Malackowski was keenly interested in locking up the license rights to the Intellectual
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`15 Property for OT; in subsequent communications, he explained to Mr. Barney how he
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`16 believed OT could leverage and exploit the Intellectual Property on a vastly larger scale
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`17
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`and generate more revenues and more profits for PR than PR could ever achieve on its
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`18 own.
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`19
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`Mr. Barney was persuaded by Mr. Malackowski’s overtures and, on July 14, 2004,
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`20 Mr. Barney, PR and OT executed a three-way term sheet that provided: 1) OT would
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`21
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`acquire a 25% interest in PR; 2) Mr. Barney would acquire a —6.8% interest in OT; 3) PR
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`22 would enter into a limited exclusive license agreement with OT; and 4) Mr. Barney would
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`23 become a full-time employee of OT. Several agreements reflecting these terms were
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`24 negotiated over the next few months.
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`25
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`26
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`OT began making profitable use of the Intellectual Property even before the parties
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`signed the initial agreements. OT employees frequently asked Mr. Barney to evaluate,
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`27 through the algorithm underlying the Intellectual Property, patents that were pertinent to
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`28 OT’s clients and prospective clients; OT was quickly learning how valuable and useful the
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`Intellectual Property could be for its business.’
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`On December 30, 2004 the final documents implementing the Term Sheet were
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`executed as part of a single integral transaction. The underlying License Agreement
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`[Exhibit A], which was made retroactively effective as of September 1, 2004, granted OT a
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`limited exclusive license to use the Intellectual Property for its own internal use and for
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`6 uses relating to merchant banking services. In return, OT promised to pay to PR 100% of
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`7
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`8
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`any revenues actually collected from the sale of products and services that used or
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`incorporated the Intellectual Property to its clients and customers.
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`(As a limited exclusive
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`9 grant, the License Agreement specifically excluded the Investment Rights held by
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`10 Rosebay.) Mr. Barney ceased employment with PR and became a full-time OT executive
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`11
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`12
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`13
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`effective January 1, 2005. This left PR as a shell or holding company with no operations
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`and no employees.
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`With the transaction consummated, OT began efforts to exploit the Intellectual
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`14 Property. For instance, OT decided it wanted to build a “web platform” so that OT and its
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`15
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`16
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`customers could directly access and retrieve ratings, scores and other proprietary
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`information themselves over the Internet. OT believed that corporate subscribers would be
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`17 willing to pay significant fees to access a proprietary database of scores, ratings and
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`18
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`statistical valuations for patents just as Wall Street securities analysts and traders paid tens
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`19 of thousands of dollars per month per user to access proprietary financial data from
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`20 Bloomberg. This began a rapid process by which OT started to integrate
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`s Intellectual
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`21
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`22
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`1 For example, Mr. Barney received an urgent e-mail in October 2004 requesting IPQ scores for 6
`patents owned by Commerce One, an “e-commerce” company being liquidated in a bankruptcy
`23
`sale. The IPQ scores indicated Commerce One’s patents were likely very valuable (AIA+ rated).
`24 OT successfully used this information to persuade the bankruptcy judge to auction the patent
`assets separately from the company’s other assets with OT as the selling agent. OT conducted a
`live auction, selling the patents for a surprising $15.5 million and netting itself over $1.5 million in
`25
`commissions.
`In a congratulatory email, then OT managing director Dean Becker, commented: “I
`26 think we should take out a full page ad in the WSJ and say that the bankruptcy court valued [thej
`patents [at] Zero and we OT, using our PT and in-house, legal, valuators and anylists [sic],
`27 convinced the judge that [the] patents had GREAT value and sold them for 15.5 million CASH in
`60 days!”
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`1 Property into nearly every facet of its business. As Mr. Malackowski aptly stated, PR is
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`2
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`3
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`4
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`the “the only objective method for valuing patents” and “the glue that holds OT together.”
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`Unfortunately, OT’ s ambitions quickly extended well beyond the humble
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`capabilities of PR’ s database system and infrastructure as it existed in 2004. The PR
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`5 database was programmed in MS-Access (a simple consumer database program distributed
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`6
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`7
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`as part of the standard MS-Office Suite). The existing system would not support OT’s
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`expanded enterprise use, as it was accessible by only a single person at a time on a single
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`8 machine. The process of collecting and processing the additional raw data to produce and
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`9 update the IPQ scores and other proprietary data was slow and tedious; Mr. Barney would
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`10 update the database only on an as-needed or ad hoc basis, often with six or more months
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`11
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`elapsing between updates. The existing database also had no “user interface,” such that the
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`12 data (primarily, IPQ scores) could be accessed only by programming and executing queries
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`13
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`in the database. This status quo worked well for PR’ s business needs. OT, however,
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`14 needed to expand the system’s capabilities for its contemplated business applications.
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`15 Because OT wanted access for itself and its customers through the Internet, it quickly
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`16 directed efforts to the design and support of new infrastructure. It commenced substantial
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`17
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`renovation of the system to allow for the web-based user interface it wanted for its
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`18 business needs.
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`19
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`In early 2005, Mr. Barney distributed a limited number of working copies of PR’s
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`20 MS-Access database to OT’ s Chicago and San Francisco offices, and Barney trained
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`21
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`selected personnel how to access and use the data. At least three different versions of the
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`22 PR database (known as Module#1, Module#2 and Module#3) were distributed containing
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`23
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`successive data updates produced by Barney. The final version (Module #3) was delivered
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`24 in August of 2005. The delivery of these MS-Access modules provided a temporary
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`25
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`26
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`solution to OT’ s desires regarding direct access to the Intellectual Property.
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`The License Agreement provided that all improvements or enhancements to the
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`27 Intellectual Property would belong to PR. With both parties recognizing that PR had
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`28 neither the need or desire for the improvements, nor the capital or revenues to pay for
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`1
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`2
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`them, OT suggested an agreement with PR by which OT could control PR and cause it to
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`“borrow” money to pay for the improvements on the rapid pace OT desired for its plans.
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`3 After several months of operating under the License Agreement, this recognition
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`4 culminated in the May 31, 2005 Management Services Agreement by which OT assumed
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`5
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`sole management authority over PR.
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`[Exhibit B] This included the authority for OT to
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`6 make loans for working capital to PR up to a total $1,500,000 over the next eighteen
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`7 months to develop and implement the improvements desired by OT.
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`8
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`Operating under the Management Services Agreement, OT hired and managed all
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`9 of the personnel and contractors engaged to build OT’ s desired improvements, which
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`10
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`improvements eventually became the Ocean Tomo PatentRatings (“OTPR”) system that
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`11 OT uses currently. OT scrapped PR’ s original MS-Access database, and all of the relevant
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`12 data was copied over to multiple hosted servers running enterprise-level database software
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`13
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`(MicroSoft SQL). All of the software code used to collect, process and update PR’s
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`14 database was completely eliminated and rewritten in C+, SQL and Pen. A completely new
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`15 web user interface was designed and built for delivering proprietary data over the Internet.
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`16 OT employed a team of full-time and part-time programmers, database managers and data
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`17
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`entry and data quality control personnel to manage and maintain the OTPR system.
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`18 Although OT changed the entire infrastructure for accessing the Intellectual Property, the
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`19 underlying ratings algorithm itself — the mathematical formula at the core of the
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`20 Intellectual Property that calculates IPQ scores — remained unchanged.
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`21
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`In June 2005, OT secured a $200 million investment from billionaire Ross Perot to
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`22 back a private equity fund created and managed by OT to buy companies with undervalued
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`23 patent portfolios as determined by the PR algorithm. As Malackowski reported to Barney
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`24 and others at the time of the initial meeting:
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`25
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`26
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`I spoke to Hays at Perot. He reported that your meeting could not have gone
`any better and Steve (they) are totally on board with PatentRatings toolset.
`Should have a proposal shortly after we get them the underlying data.
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`27 News of the Perot investment and the new private equity fund set up by OT was widely
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`28 reported by the media, including several feature articles appearing in the Wall Street
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`Journal and in Forbes.
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`Riding this momentum, UT recruited and hired Keith Cardoza as a Managing
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`3 Director in late 2005 to investigate possible financial investment strategies that might be
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`4 built around the OTPR system.2 Mr. Cardoza was particularly interested using the OTPR
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`system and the proprietary metrics that could be generated by
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`s algorithm as part of an
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`6 overall financial investment strategy.
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`By early 2006, Mr. Cardoza became convinced that UT could create an investment
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`fund of patent-rich stocks, based on IPQ scores and other proprietary data generated by the
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`9 UTPR system (which was still being built at the time), believing UT could attract
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`investments of one billion dollars or more into such a fund. Mr. Cardozo also believed that
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`11 UT could launch a new equity index (like the Russell-1000 or S&P-500) and related
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`investment products based on IPQ scores and other proprietary data to be accessed through
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`the new UTPR system. But UT needed the license rights held by Rosebay for this purpose.
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`14 This began efforts to obtain the Rosebay Investment Rights specifically excluded from the
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`15 originally-executed License Agreement.
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`16
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`After several months of intense negotiation, Rosebay and PR were ultimately
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`17 persuaded to enter into a new agreement with UT. Intense negotiations ensued between
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`18 UT and Rosebay.
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`(Mr. Barney, who holds an ownership interest in Rosebay, made a
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`19 deliberate point of disassociating himself from the negotiations.) Despite the difficulties,
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`20 PR and Rosebay agreed in April of 2006 to indefinitely suspend the “Research Supply
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`21 Agreement” between PR by a “Data License Agreement” between PR and Rosebay. This,
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`22 in turn, allowed PR to grant to UT the desired license to the Investment Rights.
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`2 Mr. Cardoza was an imminently respected figure in the financial investment community. He
`chaired The Boeing Company’s Investment Strategy and Asset Allocation Committee where
`returns exceeded an annual average of 15% under his direction. He coordinated a team of
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`investment experts responsible for $41 billion in pension assets and $24 billion in 40 1(k) assets.
`26 Prior to joining The Boeing Company, Mr. Cardoza managed portfolios for the $9 billion Illinois
`State Board of Investment Fund for six years. Mr. Cardoza also served on the board of Directors
`of the CFA Society of Chicago and previously served as a public governor of the Chicago Stock
`Exchange.
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`#107697v6
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`By Supplemental License Agreement dated May 18, 2006 [Exhibit C), PR licensed
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`2 OT a limited exclusive license to the Investment Rights. Having obtained those rights, OT
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`started building additional improvements to the OTPR system, expanding use of the
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`Intellectual Property and developing additional tools and infrastructure OT desired for
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`reaching its ever-broadening business objectives.
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`In January 2007, OT launched the 0T300 index as the industry’s first index based
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`7 on the value of intellectual property. (The 0T300 index represents a diversified portfolio
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`8 of 300 companies that own the most valuable patents, as determined by the OTPR system,
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`relative to their book value.) That index is currently priced and published by the NYSE
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`10 Euronext (NYSE Euronext: OTPAT). Two related Indexes, the Ocean Tomo 300® Patent
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`11 Growth Index (NYSE Euronext: OTPATG) and the Ocean Tomo 300® Patent Value Index
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`(NYSE Euronext: OTPATV), complete the suite of indexes. According to OT press-
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`releases and other published materials, the 0T300 was recognized by the New York Stock
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`14 Exchange as “the first major, broad-based market equity index to be launched in 35 years,
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`15
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`following the progression from the Dow Jones Industrial Average in 1896, to the Standard
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`16 & Poor’s 500 in 1957 and then to the NASDAQ Composite Index in 1971.”
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`The 0T300 was an immediate success and brought significant media attention to
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`18 OT and its OTPR system. The media lauded OT as an innovative market leader in the
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`investments sector and for its unique investment strategies focusing on intellectual
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`20 property. In April 2007, Mr. Cardoza wrote to Mr. Barney:
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`Our second IPO is happening tomorrow. The Claymore/Ocean Tomo Growth Index
`ETF, which will track the Ocean Tomo 300 Patent Growth Index goes live
`tomorrow at 6:30 Pacific time. The symbol will be OTR for Ocean Tomo Ratings,
`in honor of PatentRatings. Did you ever think that when you created PatentRatings
`you would have provided the catalyst to create a new asset class? This morning I
`was reminded of the article below that compared what you have done for the
`financial markets is what Einstein did for physics. If PatentRatings is this powerful
`now, can you imagine the worlds of investment opportunities it will open up five
`years from now... ten years from now?? I think it so cool that when your future
`grandchildren eventually study business, it will be their grandfather that they read
`about who transformed the way we value corporate assets. Thanks for all that
`you’ve created.
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`#107697v6
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`1 The 0T300 Index performed phenomenally well, and OT was able to successfully leverage
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`2
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`that performance in virtually all of its marketing and sales efforts across all of its business
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`3 units.
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`OT soon started developing a suite of similar financial products and derivative
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`financial instruments (with names like OTAM, TTB, IPXI, Royalty Trust), all feeding off
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`6 of data and proprietary metrics produced by the OTPR system. While exciting, the new
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`7 development work placed enormous additional demands on the OTPR system and greatly
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`increased the cost to develop and maintain the system. In particular, accurately producing
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`the financial and corporate data necessary to compile and publish publicly traded financial
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`indexes based on underlying patent value presented a huge challenge and expense; the
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`timeliness and level of accuracy OT needed to create and maintain support these “public
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`facing” (high public visibility) products went well beyond anything that had been
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`contemplated when OT and PR entered into the original License Agreement and the
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`14 Supplemental License. The cost and expense of continuing to build and maintain the
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`15 OTPR system had also soared well beyond anything the parties had ever contemplated.
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`The expenses became a point of considerable contention. OT insisted that it had
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`“loaned” PR in excess of $2 million (although the Management Services Agreement
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`capped the available loans at $1.5 million). Mr. Barney requested accountings to
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`substantiate this sum, but never received any such accounting. This reflected the general
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`20 practices of OT to proclaim and manipulate its finances and accountings in a variety of
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`21 ways, not to reflect reality but, instead, to push the OT agenda item of the moment.
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`By mid-2007, Mr. Barney had become highly dissatisfied with the state of affairs
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`23 between OT and PR. He had no day-to-day control over the business he founded or the
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`24 “loans” that OT continued to foist upon PR at an increasingly alarming rate, all to feed
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`25 OT’s seemingly insatiable business desires. OT failed to provide PR with accountings
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`26 evidencing for the “loans” despite multiple requests. Mr. Barney frequently noted
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`27 expenditures allocated to building the OTPR system, which should have been borne solely
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`28 by OT. Mr. Barney therefore decided that he did not want to merely restate the parties’
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`current arrangement (as had been suggested by OT’ s in-house counsel); he wanted to
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`change it dramatically. Mr. Barney wanted to regain control of his company and to end the
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`trend of PR assuming debt for OT’ s costs of doing business.
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`Mr. Barney therefore informed OT that he intended to exercise PR’ s right to
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`terminate the Management Services Agreement and cease further “loans” to PR. After a
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`6 heated debate between Mr. Barney and Mr. Malackowski, OT agreed to terminate the
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`7 Management Services Agreement, to take over all further operating costs of building and
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`8 maintaining the OTPR system, to market and sell the system and the proprietary data to its
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`clients for a reasonable fee, and to simply pay PR a royalty for use of the Intellectual
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`10 Property.3 In exchange, PR executed a promissory note for $1.5 million representing the
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`costs OT claimed it had incurred under the Management Services Agreement. This
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`agreement was embodied in a document central to this arbitration, a July 19, 2007
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`agreement simply titled “Amendment.” [Exhibit D]
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`The parties acknowledged that, other than changes referenced in the Amendment,
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`they intended to continue their uninterrupted performance under the terms of the Licensee
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`16 Agreement and the Supplemental License Agreement (OT would continue to pay for
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`17 operation and expansion of its OTPR division). But, critically, they agreed that no further
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`18 debt would accrue to PR. Paragraph G of the Amendment provides, “PR and OT hereby
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`agree to enter into that certain Secured Promissory Note of even date herewith to evidence
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`20 all loans and advances made by, or issued on behalf of, OT to PR pursuant to Section 2.1
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`21 of the Management Agreement (the ‘Note’) and that payment of Revenues shall be subject
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`22 to said Note. PR hereby agrees and acknowledges that in consideration for entering into
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`this Agreement, OT will no longer increase the Principle due under the Note (nor accrue
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`24 any interest thereon) for further investments made by OT for any Improvements.”
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`The amount of the royalty was either 13.25% to 25%, depending upon the particular use of the
`Intellectual Property.
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`#107697 v6
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`The parties’ statements preceding the Amendment reveal demonstrate that PR was
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`to incur no further liability for OT’ s use of the Intellectual Property. By email dated May
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`11, 2007, Mr. Malackowski explained the new agreement: “This will not change any of the
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`4 current economics except to eliminate the further growth of the current debt obligation.
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`5 Although no incentive should be necessary for OT to offer PR, the docs cap the loan
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`6
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`agreement at the $1 .5M so thatfurther spending does not need to be repaid before the
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`7 PR, LLC shareholders start do [sic] see dividends.]. This is a material financial give on
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`8 our part for absolutely no consideration other than the convenience of dealing with the
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`9 potential OT partners, which is to our mutual benefit as well as PR shareholders.” Mr.
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`10 Malackowski affirmed this in an email dated July 2, 2007: “We are going to cap the debt at
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`its current level not to exceed $l.5M even though significantfurther investment is
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`required to get to breakeven.”
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`The parties’ intentions respecting further spending were made clear: OT would
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`continue to spend money for its expanding business needs, and PR would cease such
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`expenditures.
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`For an appreciable period of time, Mr. Malackowski’s grand vision appeared to be
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`coming to fruition. OT was developing patent-related financial indexes with great success.
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`18 Those things that had seemed to be mere possibilities were becoming realities, and it was
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`energizing to those invol