Note 12 - Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Notes

Note 12 - Commitments and Contingencies

NOTE 12 COMMITMENTS AND CONTINGENCIES

INFRINGEMENT

On October 13, 2009, the U.S. Patent and Trademark Office (“PTO”) issued U.S. Patent No. 7,601,858, titled "Method of Processing Ethanol Byproducts and Related Subsystems” (the ’858 Patent) to GS CleanTech Corporation, a wholly-owned subsidiary of GreenShift Corporation. On October 27, 2009, the PTO issued U.S. Patent No. 7,608,729, titled "Method of Freeing the Bound Oil Present in Whole Stillage and Thin Stillage” (the ’729 Patent) to GS CleanTech. Both the ‘858 Patent and the ‘729 Patent relate to the Company’s corn oil extraction technologies.

On October 13, 2009, GS CleanTech filed a legal action in the United States District Court, Southern District of New York captioned GS CleanTech Corporation v. GEA Westfalia Separator, Inc.; and DOES 1-20, alleging infringement of the ‘858 Patent ("New York I Action"). On October 13, 2009, GS CleanTech filed a Motion to Dismiss with the same court relative to a separate complaint filed previously by Westfalia captioned GEA Westfalia Separator, Inc.  v. GreenShift Corporation that alleged (1) false advertising in violation of the Lanham Act § 43(a); (2) deceptive trade practices and false advertising in violation of New York General Business Law §§ 349, 350 and 350-a; and (3) common law unfair competition ("New York II Action"). On October 13, 2009, Westfalia filed its First Amended Complaint in the New York II Action to include as a plaintiff, ethanol production company Ace Ethanol, LLC , and to add claims seeking a declaratory judgment of invalidity and non-infringement of the ‘858 Patent.  On October 13, 2009, ICM, Inc. filed a complaint in the United States District Court, District of Kansas in the matter captioned ICM, Inc. v. GS CleanTech Corporation and GreenShift Corporation, alleging unfair competition, interference with existing and prospective business and contractual relationships, and deceptive trade practices and also seeking a declaratory judgment of invalidity and non-infringement of the ‘858 Patent.

On October 15, 2009, in the New York I Action, GS CleanTech filed a Notice of Filing First Amended Complaint for infringement of the ‘858 Patent, along with a copy of the First Amended Complaint, which added ICM, Ace Ethanol, Lifeline Foods LLC and ten additional DOES as defendants in the New York I Action. On October 23, 2009, GS CleanTech's First Amended Complaint in the New York I Action was entered by the court. On November 5, 2009, in ICM’s Kansas lawsuit, GS CleanTech filed a motion to dismiss or, in the alternative, to transfer the Kansas case to New York for inclusion in the New York I Action. Also on November 5, 2009, in ICM’s Kansas lawsuit, ICM filed a motion to enjoin CleanTech and GreenShift from prosecuting the claims against ICM in the New York I Action.

During February 2010, GS CleanTech commenced a legal action in the United States District Court, Southern District of Indiana captioned GS CleanTech Corporation v. Cardinal Ethanol, LLC, and a separate legal action in the United States District Court, Northern District of Illinois captioned GS CleanTech Corporation v. Big River Resources Galva, LLC and Big River Resources West Burlington, LLC. ICM sold Cardinal and Big River the equipment that each of Cardinal and Big River have used and are using to infringe the ‘858 Patent as alleged by GS CleanTech. ICM has assumed the defense of each of the above matters.

During May 2010, GS CleanTech commenced the following additional actions: GS CleanTech Corporation v. Lincolnland Agri-Energy, LLC, in the United States District Court, Northern District of Illinois; GS CleanTech Corporation v. Al-Corn Clean Fuel, LLC; Chippewa Valley Ethanol Company, LLLP; Heartland Corn Products, LLC and Bushmills Ethanol, Inc., in the United States District Court, District of Minnesota; GS CleanTech Corporation v. United Wisconsin Grain Producers, LLC, in the United States District Court, Western District of Wisconsin; GS CleanTech Corporation v. Iroquois BioEnergy Company, LLC, in the United States District Court, Northern District of Indiana; GS CleanTech Corporation v. Blue Flint Ethanol, LLC, in the United States District Court, District of North Dakota; and, GS CleanTech Corporation v. Lincolnway Energy, LLC, in the United States District Court, Northern District of Iowa.

On May 6, 2010, GreenShift submitted a "Motion to Transfer Pursuant to 28 U.S.C. § 1407 for Consolidated Pretrial Proceedings" to the United States Judicial Panel on Multidistrict Litigation (the "Panel") located in Washington, D.C. In this motion, GreenShift moved the Panel to transfer and consolidate all pending suits involving infringement of GreenShift’s patents to one federal court for orderly and efficient review of all pre-trial matters. On August 6, 2010, the Panel ordered the consolidation and transfer of all pending suits in the U.S. District Court, Southern District of Indiana for pretrial proceedings (the "MDL Case").

On July 14, 2010, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Adkins Energy, LLC, in the United States District Court, Northern District of Illinois alleging infringement of the ‘858 Patent.  On August 4, 2010, Adkins filed an answer to the complaint and included counterclaims seeking a declaratory judgment that Adkins does not infringe the '858 Patent and that the '858 Patent is invalid, and also alleging breach of contract.  On November 30, 2010, the Adkins action was transferred to the MDL Case. 

On October 14, 2010, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Flottweg Separation Technology, Inc. and Flottweg AG, in the United States District Court, District of Connecticut alleging infringement of the ‘858 Patent. On November 15, 2010, GS CleanTech filed an amended complaint alleging that Flottweg Separation Technology, Inc., has infringed the ‘858 Patent.  On November 15, 2010, the Flottweg action was transferred to the MDL Case.

As part of the MDL Case, on November 15, 2010, GS CleanTech amended its complaint filed in the New York I Action to include a claim of patent infringement personally against the founder, CEO and President of ICM, and ICM amended its complaint filed in the Kansas action to include a claim seeking a declaratory judgment that the '858 Patent is unenforceable. On November 30, 2010, in the MDL Case, GS CleanTech filed a motion to dismiss ICM's amended complaint (including its claim seeking a declaratory judgment that the '858 Patent is unenforceable) or, in the alternative, to transfer the Kansas case to New York for inclusion in the New York I Action.  ICM has opposed the motion to dismiss. On December 10, 2010, in the MDL Case, GS CleanTech filed motions to strike the affirmative defenses that the '858 Patent is unenforceable asserted by Cardinal Ethanol, LLC; Big River Resources Galva, LLC; and Big River Resources West Burlington, LLC; and Lincolnland Agri-Energy, LLC. Each defendant has opposed the respective motion to strike. On February 14, 2011, GS CleanTech notified the court in the MDL Case that it will not be proceeding with a motion for preliminary injunction. On February 24, 2011, in the MDL Case, in connection with its breach of contract counterclaim against GreenShift Corporation, Adkins Ethanol, LLC filed a motion for judgment on the pleadings or in the alternative partial summary judgment on the issue of liability on the issue of breach of contract and partial summary judgment on the issue of damages.   On March 24, 2011, GreenShift filed an opposition to Adkins’ motion.

All of the parties in the MDL Action filed their respective briefs with the Court in connection with proposed claim construction for certain claim limitations in the '858 Patent.  A hearing on the claim construction matter was then held by the Court in the MDL Action on August 22, 2011. On September 29, 2011, the Court issued its ruling with respect to claim construction. 

On December 2, 2011, the Court clarified its earlier claim construction order.  On February 6, 2012, the Court granted the Company’s motion to amend its various complaints to include the recently issued U.S. Pat. No. 8,008,516 (the “‘516 Patent”).  On February 27, 2012, the Company filed amended complaints alleging that the Defendants infringed the ‘516 Patent.

On May 23, 2012, several defendants filed motions for summary judgment of noninfringement.  The Company filed oppositions against the defendants’ motions for summary judgment of noninfringement on July 25, 2012, and July 30, 2012, and filed its own motions for summary judgment of infringement on September 14, 2012.  On June 20, 2012, the Company dismissed with prejudice all claims asserted against Amaizing Energy Atlantic, LLC; Amaizing Energy Cooperative; Amaizing Energy Denison, LLC Amaizing  Energy Holding Company pursuant to a settlement agreement.  The Court approved this dismissal on August 1, 2012. 

On August 6, 2012, the Court granted the Company’s motion to amend its various complaints to include the recently issued U.S. Pat. No. 8,168,037 (the “‘037 Patent”).  On August 31 2012, the Company filed amended complaints alleging that certain Defendants infringed the ‘037 Patent.  On November 7, 2012, the Court granted the Company’s motion to amend its various complaints to include other patents directed to similar technology.  On November 9, 2012, the Company filed amended complaints alleging that the Defendants infringed U.S. Pat. No. 8,008,517 (the “‘517 Patent”) and U.S. Pat. No.8,283,484 (the “‘484 patent).

On November 19, 2012, the Court denied Adkins Energy, LLC’s Motion for judgment on the pleadings or, in the alternative, for partial summary judgment on the issue of liability for breach of contract, and for partial summary judgment on one part of Adkins’ damages.  The Court found that Adkins had not established its substantial performance under the contract or that the Company breached its terms with Adkins.

On January 29, 2013, the Court issued a supplemental order on claim construction.   Because this order modified the Court’s earlier claim construction, the Court stayed all briefing in the pending summary judgment motions regarding infringement.

On February 12, 2013, the Company filed a motion for summary judgment against Adkins’ counterclaims of breach of contract (and related defenses).  Adkins filed its opposition on March 22, 2013.  On May 21, 2013, the Court denied the Company’s motion for summary judgment against Adkins’ counterclaims of breach of contract (and related defenses).

On February 27, 2013, the Court dismissed a number of unfair competition claims asserted by ICM against the Company, but the Court allowed ICM to proceed with a federal Lanham Act claim against the Company.

On May 8, 2013, the Court issued an order on claim construction for the ‘037 Patent.

On May 24, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Pacific Ethanol, Inc., in the United States District Court, Eastern District of California alleging infringement of the ‘858 Patent.  On July 18, 2013, Pacific filed an answer to the complaint and included counterclaims seeking a declaratory judgment that Pacific does not infringe the '858 Patent and that the '858 Patent is invalid and unenforceable.  On August 8, 2013, GS CleanTech answered Pacific’s counterclaims.

On June 7, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Guardian Energy, LLC, in the United States District Court, District of Minnesota alleging infringement of the ‘858, ‘516, ‘517, and ‘484 Patents. 

On July 12, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Western New York Energy, LLC, in the United States District Court, Western District of New York alleging infringement of the ‘858, ‘516, ‘517, and ‘484 Patents. 

On July 19, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Little Sioux Corn Processors, LLLP, in the United States District Court, Northern District of Iowa alleging infringement of the ‘858, ‘516, ‘517, and ‘484 Patents. 

On August 5, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Southwest Iowa Renewable Energy, LLC, in the United States District Court, Southern District of Iowa alleging infringement of the ‘858, ‘516, ‘517, and ‘484 Patents. 

On August 10, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Homeland Energy Solutions, LLC, in the United States District Court, Northern District of Iowa alleging infringement of the ‘858, ‘516, ‘517, ‘484 and ‘037 Patents. 

On September 10, 2013, GS CleanTech commenced an action entitled GS CleanTech Corporation v. Aemetis, Inc. and Aemetis Advanced Fuels Keyes, Inc., in the United States District Court, Southern District of Indiana alleging infringement of the ‘858 Patent.   On September 13, 2013, Aemetis filed an answer to the complaint and included counterclaims seeking a declaratory judgment that Aemetis does not infringe the '858 Patent and that the '858 Patent is invalid and unenforceable.

On July 23, 2013, GS CleanTech filed motions for summary judgment of infringement of the ‘858, ‘516, ‘517, and ‘484 Patents against the following defendants: Ace Ethanol, LLC, Adkins Energy, LLC, Al-Corn Clean Fuel, Big River Resources Galva, LLC, Big River Resources West Burlington, LLC, Blue Flint Ethanol, LLC, Bushmills Ethanol, Inc., Cardinal Ethanol, LLC, Chippewa Valley Ethanol Company, LLLP, Heartland Corn Products, Iroquois Bio-Energy Company, LLC, Lincolnland Agri-Energy, LLC, Lincolnway Energy LLC, and United Wisconsin Grain Producers, LLC.

On September 23, 2013, the above Defendants filed their oppositions (and cross-motions) asserting their non-infringement and invalidity positions regarding the ‘858, ‘516, ‘517, and ‘484 Patents.

There have been no other substantive rulings on the merits on any of the actions included in the MDL Case and Management is unable to characterize or evaluate the probability of any outcome at this time. The Company intends to take all necessary steps to bring infringement of its patents to an end, including filing additional lawsuits involving any and all infringing use of the Company’s patents. The Company further plans to seek additional relief for instances of willful infringement. The Company’s position is that any infringing ethanol producer is liable for any infringing use of the Company’s patented technologies beginning on the publication date of the application that led to the ‘858 Patent.

OTHER MATTERS

On June 28, 2010 JMJ Financials commenced an action entitled JMJ Financial v. GreenShift et. al., in the Circuit Court of the 11^th Judicial Circuit in and for Miami-Dade County, State of Florida, alleging breach of contract and other causes of action for which the plaintiff seeks damages of about $300,000 plus costs. In January 2013 judgment in the amount of $600,026 was entered by default against GreenShift and its co-defendants.  The Company is currently negotiating a settlement with the plaintiff. 

On September 10, 2012, Long Side Ventures commenced an action entitled Long Side Ventures and Sunny Isles Ventures, LLC, LLC v. GreenShift et. al., in the United States District Court for the Southern District of New York,  alleging breach of contract and other causes of action for which the plaintiff seeks damages of about $250,000 plus costs. The Company intends to vigorously defend this action. At this stage of the proceedings, we cannot evaluate the likelihood of an unfavorable outcome in excess of the amounts previously accrued.

The Company is also involved in various collection matters for which vendors are seeking payment for services rendered and goods provided. The Company and its subsidiaries are party to numerous matters pertaining to outstanding amounts alleged to be due. Management is unable to characterize or evaluate the probability of any outcome at this time.

Under the Company’s insurance programs, coverage is obtained for catastrophic exposures, as well as those risks required to be insured by law or contract. There is a $2,500 deductible per occurrence for environmental impairments. Environmental liability insurance is carried with policy limits of $1,000,000 per occurrence and $2,000,000 aggregate.

The Company is party to employment agreements with Kevin Kreisler, the Company’s Chairman, Ed Carroll, the Company’s Chief Executive Officer and Chief Financial Officer, David Winsness, the Company’s Chief Technology Officer, Greg Barlage, the Company’s Chief Operating Officer, and Richard Krablin, the Company’s Vice President. Each agreement also included terms for reimbursement of expenses, periodic bonuses, four weeks’ vacation and participation in any employee benefits provided to all employees of GreenShift Corporation.

The Company’s Articles of Incorporation provide that the Company shall indemnify its officers, directors, employees and agents to the full extent permitted by Delaware law. The Company’s Bylaws include provisions to indemnify its officers and directors and other persons against expenses (including attorney’s fees, judgments, fines and amounts paid for settlement) incurred in connection with actions or proceedings brought against them by reason of their serving or having served as officers, directors or in other capacities.  The Company does not, however, indemnify them in actions in which it is determined that they have not acted in good faith or have acted unlawfully. The Company is further subject to various indemnification agreements with various parties pursuant to which the Company has agreed to indemnify and hold such parties harmless from and against expenses and costs incurred (including attorney’s fees, judgments, fines and amounts paid for settlement) in connection with the provision by such parties of certain financial accommodations to the Company. Such parties indemnified by the Company include YA Global Investments, L.P., YA Corn Oil Systems, LLC, Viridis Capital, LLC, Minority Interest Fund (II), LLC, Acutus Capital, LLC, and various family members of the Company’s chairman that have provided the Company with cash investments.