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Optical Air Data Systems LLC v. L-3 Communications Corp.

Superior Court of Delaware

January 23, 2019

OPTICAL AIR DATA SYSTEMS, LLC Plaintiff,
v.
L-3 COMMUNICATIONS CORPORATION, et al, Defendants.

          MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART L-3'S MOTION FOR SUMMARY JUDGMENT

          Eric M. Davis, Judge

         I. BACKGROUND

         Plaintiff and Counterclaim Defendant Optical Air Data Systems, LLC ("OADS")[1] is a technology-based small business that designs, engineers, and manufactures Light Detection and Ranging ("LIDAR") technology. Defendants and Counterclaim Plaintiffs' L-3 Communications Corporation, Display Systems Division, and L-3 Communications Avionics Systems, Inc. (collectively "L-3") wanted to purchase rights to OADS' technology. OADS and L-3 Parties engaged in due diligence. Subsequently, on March 31, 2016, L-3 and OADS entered into the Agreements (as defined below). L-3 and OADS disagreed about whether another contract (the "Gulfstream Agreement")[2] between OADS and Gulfstream Aerospace Corporation ("Gulfstream"), and an impact, if any, on the Agreements. After some discussions with OADS, L-3 sent a letter to OADS, terminating the Agreements due, in part, to the Gulfstream Agreement.

         a. Procedural Background

         On May 26, 2017, OADS initiated this civil action by filing a complaint against L-3. On March 13, 2018, OADS filed the First Amended Complaint (the "Amended Complaint"). In the Amended Complaint, OADS asserts causes of action (the "Counts") for: (i) breach of License Agreement-wrongfully terminated the agreement (Count 1"); (ii) breach of License Agreement-denying OADS of cure period ("Count 2"); (iii) breach of Services Agreement- failure to make payments ('Count 3"); (iv) breach of Services Agreement-wrongfully sent termination letter ("Count 4"); (v) fraud in the inducement and misrepresentation ("Count 5"); (vi) breach of the implied covenant of good faith and fair dealing ("Count 6"); (vii) breach of License Agreement-filing of cancellation notice to PTO ("Count 7"); (viii) intentional interference with prospective business opportunities-Gulfstream ("Count 8"); (ix) intentional interference with prospective business opportunities-Airbus and Airbus Helicopter (Count 9"); (x) conspiracy ("Count 10"); and (xi) defamation ("Count 11"). After briefing and argument on a motion to dismiss filed by L-3, the Court dismissed Counts 8 and 9.

         On July 6, 2016, L-3 filed is answer to the Amended Complaint and asserted six counterclaims (the "Counterclaims"). The Counterclaims are (i) Declaratory Relief Pursuant to Superior Court Rule 13 ("Counterclaim 1"); (ii) Unjust Enrichment ("Counterclaim 2"); (iii) Restatement (Second) of Torts § 552 ("Counterclaim 3"); Breach of Contract-Recessionary Damages ("Counterclaim 4"); Breach of Contract-Benefit of the Bargain Damages ("Counterclaim 5"); and Breach of the Implied Covenant of Good Faith and Fair Dealing ("Counterclaim 6"). Counterclaim 1 seeks a declaration that the Agreements are not valid, binding contracts due to OADS's alleged fraud in the inducement. L-3 has plead Counterclaims 4, 5 and 6 in the alternative if the Court does not find that the Agreements were rescinded and/or are void.

         On October 12, 2018, L-3 filed L-3's Motion for Summary Judgment. In addition, L-3 filed its Opening Brief in Support of its Motion for Summary Judgment (collectively with the motion, the "L-3 Motion"). The L-3 Motion seeks judgment in favor of L-3 on all of the Counts and the Counterclaims. OADS filed its Optical Air Data Systems, LLC's Answering Brief in Opposition of L-3's Motion for Summary Judgment (Volumes 1 and 2) (the "Opposition") and the Affidavit of Philip Rogers on November 12, 2018. On November 21, 2018, L-3 filed L-3's Reply Brief in Support of its Motion for Summary Judgment (the "Reply"). The Court held oral arguments on the L-3 Motion, the Opposition and the Reply at a hearing held on December 17, 2018 (the "Hearing").

         At the conclusion of the Hearing, the Court took the L-3 Motion under advisement. The Court also informed the parties of some preliminary assessments as to the strengths of some of the Counts and Counterclaims. Because the trial date for this civil action begins on January 28, 2019, the Court told the parties that a decision on the Motion may not be rendered prior to trial.

         On October 15, 2018, OADS filed Optical Air Data Systems, LLC's Opening Brief in Support of its Motion for Summary Judgment (the "OADS Motion"). OADS moved for summary judgment on Counterclaim 3, arguing that the Court lacks subject matter jurisdiction over a negligent misrepresentation claim. On November 15, 2018, L-3 filed L-3's Answering Brief in Opposition to Optical Air Data Systems, LLC's Motion for Summary Judgment. On November 21, 2018, OADS filed Optical Air Data Systems, LLC's Reply Brief in Support of its Motion for Summary Judgment. The Court heard oral argument on the OADS Motion at the Hearing. After the Hearing, the Court took the OADS Motion under advisement. On January 14, 2019, the Court entered judgment against L-3 on Counterclaim 3 but stayed the judgment to allow L-3 to transfer Counterclaim L-3 to the Delaware Court of Chancery.

         In order to assist the parties in trial preparation, the Court advised counsel in a telephone conference held on January 18, 2019 that it had arrived at a preliminary decision on the L-3 Motion. The Court provided the preliminary decision in order to assist the parties in trial preparation. For the reasons set out on January 18, 2019 telephone conference and set forth below, the Court will (i) enter judgment in favor of L-3 on Courts 5 and 6, (ii) narrow Counts 10 and 11 to communications with one non-party entity; and (iii) find that genuine issues as to material facts exist with respect to all remaining Counts and Counterclaims. Accordingly, the Court will GRANT in part and DENY in part the L-3 Motion.

         b. General Factual Background

         On August 2, 2013, Gulfstream and OADS entered into the Gulfstream Agreement. The Preamble to the Gulfstream Agreement provides:

WHEREAS, Gulfstream desires to establish a business agreement with OADS for the design and development of Optical Air Data System or as "Product(s)" and as further defined in Section 2; to the extent the Product(s) consist of various components, components may be referred to as Product(s) as the context so requires....[3]

         Section 1.1 of the Gulfstream Agreement further addresses its purpose, stating that "Gulfstream and OADS entered into this Agreement which contemplates the evaluation of a new system for potential use in an Aircraft."[4]

         Section 14.0 of the Gulfstream Agreement sets out the various intellectual property rights of the parties, and Section 14.2 specifically relates to intellectual property ownership.[5] Under the Gulfstream Agreement, OADS granted a non-exclusive, royalty-free, and worldwide license to Gulfstream for some of its LIDAR intellectual property.[6]

         Then, on December 23, 2013, UTC Aerospace Systems Company ("UTAS") and OADS entered into an agreement (the "UTAS Agreement").[7] According to OADS, the UTAS Agreement is a paid due diligence contract, allowing UTAS to test an OADS prototype unit. The UTAS Agreement provides, as background, that UTAS and OADS want to evaluate a long-term venture, OADS requires additional funding for air data sensor systems technology, and UTAS is interested in investing in such technology.[8] The UTAS Agreement does not grant either party licenses in the other party's existing technology;[9] however, any technology developed under the UTAS Agreement would be jointly owned by OADS and UTAS.[10] Through the UTAS Agreement, UTAS was to provide up to $3, 000, 000 in funding and would receive royalties.[11]

         Finally, on March 31, 2016, OADS and L-3 entered into three agreements: a General Terms of Agreement (the "GTA"); an Engineering Services Agreement (the "Services Agreement"); and a product Development and Licensing Agreement (the "Licensing Agreement") (collectively the "Agreements").[12]

         Under the Agreements, OADS granted to L-3 a worldwide, perpetual, irrevocable, transferable, and exclusive license to much of OADS's intellectual property related to LIDAR.[13] OADS, however, did reserve some rights to the LIDAR intellectual property. Section 2.1.2 of the License Agreement provides, in part, that:

Without prejudice to the non-complete terms of this Agreement, [OADS] specifically and expressly reserves to itself the right to make, have made, import, and use Licensed Technology for research and development, test and evaluation, and prototyping of the Licensed Technology and any Modifications, subject to [L-3's] rights in Section 2.2.1. Title to all Licensed Technology shall remain with [OADS].[14]

         L-3 conducted due diligence prior to signing any agreements. On November 12, 2016, L-3 filed a "Notice of Exclusive License Agreement" with the U.S. Patent and Trademark Office ("USPTO").

         On November 21, 2016, L-3 advised OADS that the License Agreement and Services Agreement were rescinded and terminated based upon section 23.2 of the License Agreement.[15]The letter also accused OADS of "material breaches and material misrepresentations."[16] OADS and L-3 agree that the November 21, 2016 letter rescinded the Licensing Agreement.[17] On February 13, 2017, L-3 filed a "Notice of Cancellation and Release Regarding Exclusive License Agreement" with the USPTO.

         II. STANDARD OF REVIEW

         The standard of review on a motion for summary judgment is well-settled. The Court's principal function when considering a motion for summary judgment is to examine the record to determine whether genuine issues of material fact exist, "but not to decide such issues."[18]Summary judgment will be granted if, after viewing the record in a light most favorable to a nonmoving party, no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law.[19] If, however, the record reveals that material facts are in dispute, or if the factual record has not been developed thoroughly enough to allow the Court to apply the law to the factual record, then summary judgment will not be granted.[20] The moving party bears the initial burden of demonstrating that the undisputed facts support his claims or defenses.[21] If the motion is properly supported, then the burden shifts to the non-moving party to demonstrate that there are material issues of fact for the resolution by the ultimate fact-finder.[22]

         Where the parties have filed cross motions for summary judgment and have not argued that there are genuine issues of material fact, "the Court shall deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motions."[23] Neither party's motion will be granted unless no genuine issue of material fact exists and one of the parties is entitled to judgment as a matter of law.[24]

         III. DISCUSSION

         a. Breach of Contract Claims and Counterclaims

         Under Delaware law, to prove a breach of contract claim, the plaintiff must show: (1) a contractual obligation; (2) a breach of that obligation; and (3) resulting damages.[25] A party harmed by a breach of contract is entitled to compensation that will place that party in the same position that the party would have been in if the other party had performed under the contract.[26]

         In the Complaint, OADS alleges: (i) L-3 breached the License Agreement because L-3 prematurely sent OADS a termination letter; (ii) L-3 breached the License Agreement because L-3 did not allow OADS a cure period; (iii) L-3 breached the Services Agreement by accepting work product without paying for the work product; (iv) L-3 breached the Services Agreement by prematurely sending the termination letter; and (v) L-3 breached the License Agreement by publishing an assignment and cancellation notice with the USPTO without the prior written consent of OADS. L-3 asks for summary judgment on these claims-Counts 1, 2, 3, 4 and 7.

         L-3 claims that OADS breached representations and warranties in the agreements which stated that L-3 had an exclusive and unencumbered right to LIDAR technology. L-3 breached the agreements because it had previously granted Gulfstream and UTAS similar licenses. In response, OADS argues that it did not breach the Agreements because Section 2.1.2 of the License Agreement permits OADS to do the type of research and development with the licensed intellectual property that it was doing with UTAS and Gulfstream. In addition, OADS alleges that it did not breach the Agreements because L-3 did not give OADS an opportunity to cure any alleged breaches.[27]

         "Courts in our State [Delaware] and beyond have recognized that contractual notice and cure provisions cannot be ignored no matter how urgently parties may seek to do so when prosecuting breach claims in litigation."[28] In Cornell Glasgow, LLC v. LaGrange Properties, LLC, [29] the Court found that the parties were subject to an unambiguous notice and cure provision and so the parties' failure to comply with the notice and cure provisions extinguished their breach of contract claims. But, the Court found that the Court will excuse parties' failure to comply with notice and cure provisions where complying with the notice and cure provisions would be futile. The Court cited In re Best Payphones, Inc.[30] in establishing a two-part test for determining whether a notice and cure provision was futile: (i) where "the defaulting party expressly and unequivocally repudiates the contract," or (ii) "where the actions of the defaulting party have rendered future performance of the contract by the nondefaulting party impractical or impossible."[31]

         Neither party disputes that the notice and cure provisions in the agreements are unambiguous. L-3 argues that providing an opportunity for OADS to cure its breach would have been futile. Specifically, L-3 argues that OADS failed to pay a creditor for more than 90 days and so triggered the default provision of in the UT AS/OADS agreement. This default provision grants UTAS an exclusive license to some of the LIDAR technology. So, L-3 claims that OADS could not cure its defects because it had granted two parties exclusive licenses. Similarly, L-3 argues that OADS could not cure the breach caused by its grant of rights to Gulfstream because OADS could not unilaterally terminate Gulfstream's rights.

         As was developed at the Hearing, the Court believes that questions of fact remain as to whether, given Section 2.1.2 of the Licensing Agreement, the Gulfstream Agreement-by its terms and use-violated Section 2.1.1 of the Licensing Agreement. Moreover, the Opposition provides a factual basis that OADS may have been able to cure defaults, if any, that related to the UTAS Agreement.

         Given this, the Court will not grant summary judgment on claims and counterclaims that relate to the Agreements-Counts 1, 2, 3, 4 and 7 or Counterclaims 2, 4, 5 and 6.

         Through Counterclaim 1, L-3 argues that it is entitled to a declaration that the Agreements are void because of OADS' fraud in the inducement. To plead a claim of fraud, L-3 must show (i) a false representation, usually one of fact. . .; (ii) OADS's knowledge or belief that the representation was false, or was made with reckless indifference to the truth; (iii) an intent to induce L-3 to act or to refrain from acting; (iv) L-3's action or inaction was taken in justifiable reliance upon the representation; and (v) damage to L-3 as a result of such reliance.[32]

         The Court finds that there are genuine questions of material fact as to whether OADS fraudulently induced L-3 to enter into the agreements. Specifically, there are questions of fact as to whether OADS knew that its representations in the Agreements were false or whether OADS genuinely believed that OADS' agreements with L-3 did not conflict with the agreements with Gulfstream and UTAS because the agreements with Gulfstream and UTAS were for research and development. In essence, the resolution of the contract claims between L-3 and OADS will resolve whether L-3 has a valid fraudulent inducement claim that voids the Agreements. As such, the Court will deny summary judgment on this counterclaim.

         b. The Court Will Grant Summary Judgment on Counts 5 and 6.

         L-3 spends some time setting out the legal and factual arguments as to why L-3 is entitled to summary judgment on Counts 5 and 6. In the Opposition, OADS makes a conclusory argument that L-3 terminated the agreements early because of fraudulent inducement and that L-3 breached the implied covenant of good faith and fair dealing. OADS argues that, as a result of this fraud and breach of the implied covenant, the Court should deny summary judgment on L-3's breach of contract claims. Most of OADS's factual basis for its arguments are contained in the footnotes and exhibits. As discussed at the January 18, 2019 telephone conference, the Court believes that there is no genuine issue as to material facts and L-3 is entitled to judgment as a matter of law on Counts 5 and 6.

         1. Count 5-Fraudulent Inducement

         The following elements must be pleaded to state a claim for fraud: (i) a false representation, usually of fact, made by the defendant; (ii) the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth; (iii) an intent to induce the plaintiff to act or to refrain from acting; (iv) the plaintiffs action or inaction was taken in justifiable reliance upon the representation; and (v) damage to the plaintiff as a result of such reliance.[33]

         Delaware courts have consistently held that to successfully plead a fraud claim, the allegedly defrauded plaintiff must have sustained damages as a result of a defendant's action.[34]The damages allegations, however, may not simply rehash the damages allegedly caused by breach of contract.[35] Moreover, plaintiff cannot "bootstrap a claim of breach of contract into a claim for fraud by alleging that a contracting party never intended to perform its obligations."[36]In other words, plaintiffs ...


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