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ARISTA TECH. v. ARTHUR D. LITTLE ENTERPRISES

December 28, 2000

ARISTA TECHNOLOGIES, INC., PLAINTIFF,
V.
ARTHUR D. LITTLE ENTERPRISES, INC., JERRY IGGULDEN, INVENTION MANAGEMENT ASSOCIATES, INC. AND DESIGN LABS, INC., DEFENDANTS. ARTHUR D. LITTLE ENTERPRISES, INC., THIRD-PARTY PLAINTIFF, V. MICHAEL HARVEY AND CHAMBORD TECHNOLOGIES, INC,. THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Spatt, U.S. District Judge.

MEMORANDUM OF DECISION AND ORDER

This case arose out of a dispute between Arista Technologies, Inc. (the "plaintiff' or "Arista") and Arthur D. Little Enterprises (a "defendant" or "ADLE") regarding the licensing agreement of patented technology owned by ADLE. The technology in question, known as "video spot remover" ("VSR") technology, permits video cassette recorders ("VCRs") to skip past commercials in videotaped television programs when the videotapes are played back.

I. BACKGROUND

A. Factual Background

The following facts are taken from the Amended Complaint. In March 1993, defendant Jerry Iggulden ("Iggulden"), the owner and sole shareholder of defendant Invention Management Associates ("IMA"), and purported inventor of the VSR technology, assigned his rights to the technology to defendant ADLE, with the understanding that ADLE would develop it into something that could be integrated into a consumer product. On March 19, 1993, ADLE licensed the VSR System to plaintiff Arista, reserving for itself the right to license the technology to VCR manufacturers for incorporation directly into VCRs. At the time of license, ADLE told Arista that the VSR System worked.

Arista hired third-party defendant Michael Harvey ("Harvey"), who was doing business as third-party defendant Chambord Technologies, Inc. ("Chambord"), to be its project manager and to supervise the integration of the VSR System into the consumer product called "Commercial Brake," which is a device, separate and apart from a VCR, that attaches to a television and performs the commercial-skipping functions of the VSR System. Harvey, a former ADLE engineer, retained a team of engineers from Arthur D. Little ("ADL"), ADLE's parent corporation, to assist him in developing the VSR System technology. In May 1993, after a meeting with the ADL engineers, Harvey concluded that the VSR System technology described in ADLE's `091 patent, did not work as promised; was inadequate to create a viable consumer product; and would require extensive engineering to develop it to a point where it would be suitable for integration into a consumer product.

Later that month, Harvey fired the ADL team and hired Kyle Fields ("Fields") and his company defendant Design Labs, Inc. ("Design Labs") to develop the VSR System for Commercial Brake. After an initial review of the technology, Fields concluded that it was virtually useless, and, therefore, Design Labs began working from scratch.

Meanwhile, Iggulden agreed to help Arista make Commercial Brake in exchange for a fee of $10,000 per month for ten months; reimbursement of travel, entertainment, and other expenses, and 40% of the net profits on products sold by the venture. Iggulden was to provide Arista with consulting and management services for the development and marketing of the venture's product.

As a result of the relationship between Iggulden and Arista, Iggulden gained confidential information regarding Arista's marketing research, including the results of consumer focus group studies. According to Arista, Iggulden gave this information to ADLE, which, in turn, used it to undermine Arista's marketing of Commercial Brake and to benefit ADLE's own competing efforts to license the VSR System to VCR manufacturers.

Arista asserts that after Harvey hired Fields and Design Labs to develop the VSR System, Iggulden "mounted a tireless and successful effort to obtain Arista's confidential technology for ADLE without any compensation for Arista as required by the license" (Amended Complaint, ¶ 47). Iggulden was included in an August 18, 1993, meeting to discuss Arista's marketing plans. Iggulden claimed that the purpose of the meeting was so that everyone could "read from the same script," but according to the plaintiff, Iggulden actually used this meeting to send Arista's marketing plans to ADLE.

Also in 1993, Iggulden threatened Arista that if it did not sign an Invention Rights and Disclosure Agreement, which would have permitted Design Labs to give the technology it had developed for Arista directly to ADLE, then ADLE would "conduct a very public launch" of its own version of the VSR System at the same time and place as the planned launch of Commercial Brake. Arista approached ADLE and asked for assurances that it would not conduct a simultaneous launch of a competing product, and ADLE promised that it would not do so. Based on ADLE's assurances, Arista chose to continue giving Iggulden confidential marketing and technical information. Ultimately, at the January 1994 Consumer Electronics Show ("CES"), Arista launched Commercial Brake, and ADLE, together with Iggulden, introduced its version of the VSR technology. Iggulden, who was being paid by Arista to promote their product, used Arista's booth and resources at the CES to promote ADLE's product and to conduct meetings with VCR manufacturers on licensing of the VSR technology.

On January 24, 1994, Fields entered into another contract with Harvey, obligating Design Labs to continue its work for Arista in exchange for a fee of $20,000 per month. Meanwhile, Iggulden began trying to persuade Fields and Design Labs to work for ADLE. Iggulden's patent attorney sent Fields copies of Arista's license with ADLE and Arista's confidential contract with Harvey and promised to indemnify Design Labs and Fields against any legal claims by Arista and Harvey.

Throughout February and March 1994, Fields and ADLE exchanged drafts of contracts, and on March 14, 1994, Fields signed a contract whereby Fields and Design Labs would help ADLE develop the VSR System so that it could be integrated into VCRs. Pursuant to the contract, ADLE would pay Fields the sum of $10,000 per month, and Fields would be able to work directly with the VCR manufacturers. On March 15, 1994, Fields signed an agreement with ADLE, promising to keep secret the existence of their March 14 contract.

From March through August 1994, Design Labs was working for Arista and ADLE, though Arista was unaware that Design Labs was also working for ADLE. During this five-month period, Design Labs disclosed to ADLE all of the intellectual property Design Labs had acquired from Arista as a result of working for Arista. In addition, Design Labs assigned to ADLE all of their rights in patent applications that had been filed based on Arista's intellectual property. On August 19, 1994, ADLE increased the compensation to Design Labs to the sum of $25,000 per month. On August 20, 1994, Fields provided Arista with written notice that Design Labs was terminating its work for Arista on the ground that it owed the company a few thousand dollars.

B. Procedural History

On January 10, 1996, this Court granted ADLE's motion to compel arbitration and stayed the court proceedings pending the arbitration decision. In addition, the Court denied Arista's motion to amend the complaint, with leave to renew following the arbitrator's decision regarding the arbitrability of the respective claims.

On May 16, 1996, the arbitrator held that all of the claims were arbitrable with the exception of those claims involving the validity of various patents. In August 1996, Arista renewed its motion to amend the complaint. In a letter, dated February 5, 1997, the Court directed that the motion be withdrawn, without prejudice and with leave to renew after a decision by the arbitrator.

On July 29, 1997, the arbitrator held that although Arista materially breached the license by failing to pay royalties, neglecting to put ADLE's patent number on the technology, and failing to disclose certain technological advances, ADLE must pay Arista approximately $700,000 for the technology it appropriated from Arista without repaying their costs. The arbitrator did not find that ADLE had committed fraud, breached the license, misappropriated Arista's technology, tortiously interfered with the contract, or violated Massachusetts law. After the Award of Arbitration was issued, Arista and ADLE requested reconsideration and modification on various different grounds. In response, the arbitrator issued a Supplemental Order on August 15, 1997, and a Modified Award on December 17, 1997 (all three awards collectively will be referred to as the "Arbitration Award").

On November 13, 1998, the Court granted ADLE's motion to confirm the Arbitration Award and directed the Clerk of the Court to close the case. See Arista v. Arthur D. Little Enterprises, Inc., 27 F. Supp.2d 162 (E.D.N.Y. 1998). On November 12, 1999, the Court granted Arista's motion to amend the complaint and directed the Clerk of the Court to re-open the case, but denied Arista's motion for a permanent injunction.

Arista alleges five counts in its Amended Complaint. In the first count, Arista claims that Iggulden breached his contract with Arista by failing to render any services of value to the plaintiff and breached its implied covenant of good faith and fair dealing by intentionally and maliciously harming Arista. As a second count, Arista alleges fraud and fraudulent non-disclosure by Iggulden on the grounds that (1) Iggulden falsely described the quality, nature, and extent of the services he was providing Arista, and Arista continued to pay Iggulden based on those false representations; (2) Iggulden facilitated the secret diversion of Arista's intellectual property from Design Labs to ADLE; and (3) Iggulden knew that ADLE planned to launch a competitive product on the same date that Arista launched "Commercial Brake" but failed to disclose this fact in violation of the implied covenant of good faith and fair dealing in the IMA contract. In the third count, Arista claims fraudulent non-disclosure by Design Labs, which Arista alleges failed to inform it that Design Labs was performing competing work for ADLE. In its fourth cause of action, Arista claims that Design Labs breached its contract with Arista, because Design Labs agreed to assign all of its inventions to Harvey and Arista and to keep Arista's intellectual property and trade secrets confidential, but Design Labs failed to do so. As a fifth cause of action, Arista seeks a judgment declaring the "091 Patent belonging to ADLE to be void and invalid.

Presently before the Court are (1) a motion to dismiss Count II of the Amended Complaint by defendants Iggulden and IMA on the ground that it fails to plead fraud with the particularity required by Federal Rule of Civil Procedure 9(b); (2) a motion to dismiss the Amended Complaint by defendant Design Labs; (3) a cross-motion to for leave to file a Second Amended Complaint by plaintiff Arista; and (4) a motion to dismiss the Section Amended Complaint by defendant ADLE.

II. DISCUSSION

A. Motion to Dismiss Count II of the Amended Complaint by Defendants Iggulden and IMA for Failure to Plead Fraud With Particularity

Arista raises two claims in Count Two of the Amended Complaint: a fraudulent misrepresentation claim (see Amended Complaint ¶ 75), and a fraudulent nondisclosure claim (see Amended Complaint ¶ 76). In their original motion papers, Iggulden and IMA moved to dismiss both claims. However, at oral argument held on December 22, 2000, Iggulden and IMA withdrew their motion to dismiss the fraudulent nondisclosure claim. Accordingly, the Court addresses only the motion to dismiss the fraudulent misrepresentation claim.

When pleading a claim for fraud or misrepresentation, the plaintiff must aver the alleged fraudulent acts with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure. See Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986); Asdourian v. Konstantin, 77 F. Supp.2d 349, 353 (E.D.N.Y. 1999). To satisfy the particularity requirement of Rule 9(b), the "the complaint must allege the time, place, speaker, and sometimes even the content of the alleged misrepresentation." Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990); Di Vittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987); Luce, 802 F.2d at 54.

Although "knowledge" and "condition of mind" may be stated in general terms (see Fed.R.Civ.P. 9(b)), "the relaxation of Rule 9(b)'s specificity requirement for scienter `must not be mistaken for license to base claims of fraud on speculation and conclusory allegations.'" Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (quoting O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991)); Ouaknine, 897 F.2d at 79-80. Thus, allegations of scienter are sufficient when they are "supported by facts giving rise to a `strong inference' of fraudulent intent." Ouaknine, 897 F.2d at 80; see Shields, 25 F.3d at 1128; O'Brien, 936 F.2d at 676. The "strong inference of fraud," in turn, may be established either "(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Shields, 25 F.3d at 1128 (citing In re Time Warner Inc. Securities Litig., 9 F.3d 259, 268-69 (2d Cir. 1993)); Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987).

After examining the Amended Complaint and hearing oral argument, the Court finds that Arista has adequately pled fraud with respect to only one statement allegedly made by Iggulden. The Amended Complaint states the following ...


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