Notice: This opinion is subject to formal revision before publication in the
Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify the
Clerk of any formal errors in order that corrections may be made before the
bound volumes go to press.
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 11, 2008 Decided April 18, 2008
No. 07-7065
JOHN E. DRAIM, ET AL.,
APPELLEES
v.
VIRTUAL GEOSATELLITE HOLDINGS, INC.,
DELAWARE CORPORATION AND
MOBILE COMMUNICATIONS HOLDINGS, INC., DELAWARE
CORPORATION,
APPELLANTS
Appeal from the United States District Court
for the District of Columbia
(No. 01cv02690)
Thomas E. Patton argued the cause and filed the briefs for
appellants. Neal Goldfarb entered an appearance.
Mary C. Zinsner argued the cause and filed the brief for
appellee.
2
Before: ROGERS, BROWN and GRIFFITH, Circuit Judges.
Opinion for the Court by Circuit Judge ROGERS.
ROGERS, Circuit Judge: John E. Draim sued Virtual
Geosatellite Holdings, Inc. and Mobile Communications
Holdings, Inc. (collectively “Virtual Geo”) for breach of
contract by failing to pay him bonuses upon issuance of certain
patents. Virtual Geo interposed three defenses, including that
Draim was not entitled to the bonuses because he had breached
his employment contract. The magistrate judge rendered
judgment for Draim on all but one of his bonus claims.
However, although finding that a contract existed, requiring that
Draim assign to Virtual Geo ownership rights in all the work
performed as its employee in return for certain bonuses, the
judge never determined whether Draim’s conduct breached the
contract and thereby disqualified him from collecting under it.
Accordingly we reverse.
I.
The underlying dispute arises from Draim’s claimed
entitlement to bonuses for patents that were issued based on
applications filed while he was employed by Virtual Geo. In
1992, Draim began working as a consultant for Mobile
Communications Holdings, Inc. (“Mobile”). He signed an
employment contract with its president, David Castiel, under
which Draim agreed to assign to Mobile all rights in his
inventions conceived during the term of the contract and Mobile
agreed to pay Draim a bonus of up to $2,000 upon the filing of
a patent application, and a bonus of up to $10,000 upon the
successful issuance of any patent. According to the contract,
each bonus would be divided by the number of co-inventors
listed on the patent application. Draim worked for Mobile as a
consultant through June 1997.
3
In July 1997, Draim became a salaried employee of Mobile
and its affiliate Virtual Geosatellite Holdings, Inc., but a written
employment contract was never signed. Instead, during Draim’s
employment, the parties continued to operate with the
understanding that Draim’s inventions would be assigned to
Virtual Geo and that he would be paid up to $2,000 for each
patent application and up to $10,000 for each successful
issuance of a patent. At some point during Draim’s
employment, the maximum bonus for filing a patent application
increased to $2,500 and the maximum bonus for the issuance of
a patent increased to $12,500.
On May 24, 2000, Draim terminated his employment and
one day later began to work for VGS, Inc., a Delaware
corporation created by Peter Sahagen, a minority shareholder of
Virtual Geosatellite, LLC, in which Virtual Geosatellite
Holdings, Inc. is a member; VGS later became known as Space
Resources America Corporation (“Space Resources”). Around
the time of Draim’s resignation, several other Virtual Geo
employees also left to work for VGS. During the summer of
2000, Castiel and Sahagen were engaged in litigation before the
Delaware Chancery Court regarding Sahagen’s attempt to merge
Virtual Geosatellite, LLC into VGS. On August 31, 2000, the
Delaware Chancery Court invalidated the merger and enjoined
VGS from continuing to assert ownership or control over Virtual
Geo’s property.
At the time Draim terminated his employment with Virtual
Geo, there were numerous outstanding patent applications in
which he was a named inventor. These applications have since
resulted in the issuance of eleven patents, all of them naming
Virtual Geo as assignee. Draim is listed as either the sole
inventor or as one of three or four inventors on these patents.
Two of these patents are divisional patents, which occur when
the U.S. Patent and Trademark Office (“Patent Office”) breaks
4
down a single application into different parts resulting in the
issuance of multiple patents. See 35 U.S.C. § 121. Draim has
not been paid a bonus for the issuance of any of these patents.
Also, in February 2000, three months before Draim
resigned, Draim and Castiel filed a provisional patent
application for an invention called the “168 slot” invention. A
provisional patent application is essentially a placeholder filed
with the Patent Office after which an applicant has one year to
file the actual patent application. In this application, Castiel and
Draim were listed as co-inventors. In November 2000, Space
Resources filed an “interfering” patent application for the “168
slot” invention, naming Draim as the sole inventor.
Subsequently, in February 2001, Castiel filed an application for
the same invention, but did not name Draim as an inventor.
Ultimately the patent was issued to Virtual Geo as assignee and
Draim was not listed as an inventor. Draim was never paid a
bonus for the issuance of the “168 slot” patent.
In October 2001, Draim sued Virtual Geo in the district
court for the Eastern District of Virginia; the case was
transferred to the District of Columbia pursuant to 28 U.S.C. §
1631. Virtual Geo, in turn, sued Draim in the D.C. Superior
Court; this case was removed to the federal court pursuant to 28
U.S.C. § 1441(a) and consolidated with Draim’s complaint. In
2005, the parties agreed to limit their claims to whether Draim
is entitled to bonus payments for patents in which he is a named
inventor that issued after he resigned from Virtual Geo. Virtual
Geo interposed three defenses: (1) Draim has already been paid
more than he is entitled to receive; (2) Draim is not entitled to
payments on divisional patents; and (3) Draim breached his
employment agreement and “cannot seek the fruits of an
agreement which he willfully breached.” Joint Pretrial
Statement at 4 (Mar. 17, 2006).
5
On May 15, 2006, a magistrate judge awarded Draim
bonuses for the patents issued after his resignation.1 The judge
denied him a bonus for the “168 slot” patent because his
employment contract did not address provisional patent
applications. Rejecting Virtual Geo’s defenses that Draim had
already been paid more than he was entitled to receive under his
employment contract and that Draim was not entitled to bonuses
on divisional patents, the magistrate judge found that “even if
Draim owed a fiduciary duty to [Virtual Geo], . . . enforcement
of the contract cannot be denied on the ground that Draim
breached any such fiduciary duty by participating in a
conspiracy.” Draim v. Virtual Geosatellite Holdings, Inc., 433
F. Supp. 2d 99, 103 (D.D.C. 2006).2
1
Although the allegation in the complaint that Draim is a
resident of Virginia was insufficient to establish subject matter
jurisdiction based on complete diversity, see Novak v. Capital Mgmt.
& Dev. Corp., 452 F.3d 902, 906 (D.C. Cir. 2006), we grant his
unopposed motion to amend paragraphs 3 and 6 of his complaint to
allege, respectively, that “Plaintiff Draim is an individual who is
resident in, and a citizen of, the Commonwealth of Virginia” and
“Defendant Castiel is an individual who resides in, and is a citizen of,
Washington, D.C.” Dist. of Columbia ex rel. Am. Combustion Inc. v.
Transamerica Ins. Co., 797 F.2d 1041, 1044 (D.C. Cir. 1986); see also
Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826 (1989); 28
U.S.C. § 1653.
2
The magistrate judge denied Virtual Geo’s motion for a
new trial, which was based on the Patent Office’s subsequent grant of
Virtual Geo’s ex parte request for reexamination of a patent issued to
Draim and assigned to Space Resources as being duplicative of a
Virtual Geo patent, finding that the reexamination was not newly
discovered evidence and that any relief must be sought pursuant to
Fed. R. Civ. P. 60. The judge denied Virtual Geo’s Rule 60(b) motion
for lack of jurisdiction after Virtual Geo had filed a Notice of Appeal,
see Draim v. Virtual Geosatellite Holdings, Inc., No. 01-2690, 2007
WL 2774703 (D.D.C. Sept. 24, 2007), and upon reconsideration
6
II.
If Draim engaged in conduct that constituted a material
breach of his employment contract, then he is not entitled to
payment of bonuses under the contract. “A total breach may be
. . . by such a material failure of performance when due as to go
to the essence and frustrate substantially the purpose for which
the contract was agreed to by the injured party.” Keefe Co. v.
Americable Int’l, Inc., 755 A.2d 469, 475 (D.C. 2000) (quoting
San Carlos Irrigation & Drainage Dist. v. United States, 23 Cl.
Ct. 276, 280 (1991)) (internal quotation marks omitted); see also
23 WILLISTON ON CONTRACTS § 63.3 (4th ed.)
Although the written employment contract expired before
Draim’s resignation from Virtual Geo, the magistrate judge
found that the parties continued to operate under the
understanding articulated in the contract and neither party
disputes this finding on appeal.3 At trial, Paragraph 9 of the
employment contract was the primary basis for the underlying
dispute.4 During his opening argument, Draim’s counsel stated
denied the motion as untimely, Memorandum Order, Dist. Ct. Docket
No. 107 (Nov. 26, 2007). Virtual Geo again moved for
reconsideration.
3
This court will set aside the district court’s findings of fact
only if they are clearly erroneous, Fed. R. Civ. P. 52(a), while the
district court’s conclusions of law are reviewed de novo, see Teva
Pharms., USA, Inc. v. FDA, 182 F.3d 1003, 1007 (D.C. Cir. 1999).
4
Paragraph 9 states:
Consultant shall treat as proprietary any information
belonging to Client, its affiliated companies, or any
third parties, disclosed to Consultant in the course of
Consultant’s services. Consultant assigns and agrees
7
that the trial involved “a single fairly straightforward claim by
Mr. Draim against the corporate defendant for approximately
$82,000 for patents that issued since May of 2000 and for which
he has not been paid.” Trial Tr. at 2 (Apr. 18, 2006). Draim
proffered the employment contract as an exhibit. Virtual Geo,
in turn, argued that Draim had breached his employment
contract, asserting that “a party who breaches an agreement or
contract or a duty is not entitled to the benefits of that same
agreement.” Id. at 7. According to Virtual Geo, Draim
participated in a conspiracy to misappropriate its intellectual
property, and “[t]herefore, he has violated the terms of his
[employment contract].” Id.
Upon cross examination, Virtual Geo confronted Draim
to assign to Client or its nominee all rights in
inventions or other proprietary information conceived
by Consultant during the term of this Agreement with
respect to any work which Consultant performs, and
is financially compensated for by Client or the
Corporation, under this Agreement. In addition, the
Corporation will pay Consultant an amount not to
exceed $2,000 as a bonus upon the completion of
successful filing for any one patent. The actual
amount will be determined in inverse proportion to
the number of co-inventors listed in the patent
application(s). If Consultant is the sole inventor, the
full $2,000 will be paid. Likewise, upon successful
issuance of any one patent, the Corporation will pay
Consultant an additional bonus not to exceed
$10,000, the actual amount of the bonus being
determined in inverse proportion to the number of co-
inventors listed in the patent(s).
Employment Contract at 2-3 (Nov. 1, 1992), Dist. Ct. Docket No. 40-
1, Exhibit 1 (Apr. 1, 2003).
8
with the fact that he developed substantial intellectual property
while its employee and that his “agreement with Virtual Geo did
require [him] to maintain that proprietary information as Virtual
Geo’s property.” Id. at 32. Virtual Geo questioned Draim about
his attempts to obtain patent rights to Virtual Geo’s intellectual
property on behalf of his new employer, establishing its breach
of contract defense. Specifically, Virtual Geo presented Draim
with a VGS marketing brochure containing some of Virtual
Geo’s proprietary information and questioned him about the
extent of his participation in creating that document. See id. at
54-55. Castiel testified on direct examination regarding the
requirement in the employment contract that Draim assign all
inventions conceived during his employment to Virtual Geo and
proffered his understanding that Draim’s conduct after his
resignation breached this provision. At trial, Virtual Geo also
alluded to Draim’s violations of Paragraphs 8 and 10 of the
employment contract.5 Id. at 88-89, 98-99. During closing
5
Paragraph 8 states:
During the time of this Agreement, Consultant shall
not enter into any activity, employment, or business
arrangement which conflicts with Client’s interest or
Consultant’s obligations under this Agreement. In
view of the sensitive nature of Consultant’s status,
Client shall have the option of terminating this
Agreement at any time if, in its sole judgment, a
conflict of interest exists or is imminent. . . .
Consultant shall advise Client of its position with
respect to any activity, employment, or business
arrangement contemplated by Consultant which may
be relevant to this Paragraph. For this purpose
Consultant agrees to disclose any such plans to Client
prior to implementation.
Employment Contract at 2. Paragraph 10 allowed either party to
9
arguments, both parties identified the enforcement and potential
breach of the employment contract as central to the resolution of
the case.
Virtual Geo complemented its breach of contract defense
with assertions that Draim participated in a conspiracy to
misappropriate its property, breached a fiduciary duty, and
violated the Delaware court’s injunction. These claims,
however, were relevant only as they related to Draim’s potential
breach of Paragraph 9 of the employment contract. According
to Virtual Geo, “[t]he terms of his employment agreement
essentially continued,” and Draim “breached his employment
obligations” by participating in his new employer’s attempts “to
assert control over Virtual Geo[’s] . . . patent portfolio,
intellectual property, [and] proprietary information.” Id. at 161.
Despite the trial record of Virtual Geo’s defense that Draim
had breached the employment contract, the magistrate judge
never made a finding on this defense to enforcement of the
patent bonuses. The order awarding bonuses to Draim provides
no analysis of his conduct with regard to any contractual
provision. Instead, the magistrate judge decided only that Draim
did not violate any fiduciary duty by participating in a
conspiracy. But the potential breach of a fiduciary duty is
beside the point, and Draim’s alleged participation in a
conspiracy does not resolve whether his conduct breached the
employment contract. In the absence of a breach of contract
finding, the judgment cannot stand.
Accordingly, we reverse and remand the case to the district
court.
terminate the contract upon thirty days’ notice by registered or
certified mail. Id. at 3.