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Las Vegas Sands Corp. v. Ace Gaming, LLC

2010 WL 2026062 (U.S. Dist. Ct. D. N.J. 2010)

LICENSE AGREEMENTS; LIQUIDATED DAMAGES — Termination fees based on what the remaining licensee’s fee would have been under a trademark license are not unenforceable liquidated damages because the licensee would have to have paid the license fees had the license agreement not been terminated by reason of the licensee’s default.

The owner of a hotel trademark granted a license for its use on a casino hotel in Atlantic City. In exchange, the licensee agreed to make royalty payments. The agreement’s exclusive area extended to Atlantic City’s municipal limits. Disputes between the parties began around the time the licensee publicly announced that it had signed an agreement to sell its hotel. The hotel permanently closed prior to the closing of title. Around the time of the announcement, the licensor invoked its right under the License Agreement to audit the licensee’s books, records, and accounts with respect to computing royalties. The auditor concluded that the licensee underpaid royalties when it excluded rooms in a historic building attached to, and operated by, its hotel. In between the time the hotel closed and the day the property was sold, the licensor sent the licensee a formal termination letter seeking unpaid royalty payments. The licensor followed by filing a breach of contract suit in the United States District Court against both the licensee and its parent holding company, seeking recovery under the license agreement. All parties moved for summary judgment.

The hotel argued that the licensor’s claim for termination fees under the agreement constituted unenforceable liquidated damages. The Court held that the termination fees were enforceable because the hotel had agreed to pay the royalties for a term of years from the starting date even absent any breach under the agreement. For example, the hotel would have been obligated to pay the fees if it simply elected to stop using the licensor’s trademark. The Court viewed the fees as financial protection for the licensor.

The Court also held the licensor did not breach the agreement when it sent the termination letter even though, under one contract clause, termination could occur only after a minimum 60 days of suspended operations. The Court dismissed the hotel’s argument, finding evidence that the hotel had shut its operation – in fact the hotel’s employees were informed by the hotel that it would close for more than twelve months. Additionally, the licensor was excused from performing under the agreement from the date it discovered its licensee had breached the license agreement by failing to include certain rooms in its royalty calculations.

The Court also held that the licensor did not breach the agreement or breach any implied covenant of good faith and fair dealing when it, the licensor, took steps to open a hotel under its trademark in neighboring Pennsylvania. The relevant agreement clearly limited the licensee’s exclusive right to use the trademark only to the boundary of Atlantic City. By opening in Pennsylvania, the licensor did not undermine the licensee’s exclusive rights in Atlantic City.

The Court found sufficient evidence to conclude the historical building operated under the trademark, thereby entitling the licensor to royalties from that building’s rooms. Trademark logos stood in front of the historical building and on a linkway between the buildings. The historical building was connected to the hotel’s parking garage in two places. The licensee managed and operated the historical building pursuant to a lease agreement, and in a request to expand the of the hotel’s casino, it asked the state commission to consider the historical building part of the hotel. Further, the two properties shared a common computer system, front desk administration, housekeeping staff, reservations staff, and sales staff. Lastly, the licensee did not distinguish between the properties when it reported its hotel room revenue to the government.

The Court dismissed the parent company from the litigation, finding that it could not be held liable under a corporate veil theory or agency theory. Under the corporate veil theory, a parent company can be held liable for the acts of a subsidiary if it so dominates the subsidiary to the point that the subsidiary has no separate existence and is only a conduit for the parent, or the parent company has used the subsidiary to perpetrate a fraud or injustice or otherwise circumvent the law. The Court concluded that the licensor did not establish factors supporting this kind of significant control. Evidence of significant control would be if the subsidiary had been grossly undercapitalized, it its actions were controlled day-to-day by the parent company’s directors, officers or personnel, or if it failed to observe corporate formalities, was insolvent or lacked corporate records. Specifically, the Court held the licensor presented no evidence that the licensee and its parent company commingled funds or that the parent company, rather than the licensee, actually paid royalties due under the license agreement. The Court also held that no agency relationship existed, as the parent company never agreed, either explicitly or implicitly, to have the licensee act on its behalf when the licensee entered into the license agreement.

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