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ALCATEL SPACE v. LORAL SPACE & COMMUNICATIONS

April 26, 2001

ALCATEL SPACE, S.A., AND ALCATEL SPACE INDUSTRIES, S.A., PLAINTIFFS,
V.
LORAL SPACE & COMMUNICATIONS LTD., LORAL SPACE & COMMUNICATIONS CORP., LORAL SPACECOM CORP., AND SPACE SYSTEMS LORAL, INC., DEFENDANTS.



The opinion of the court was delivered by: Scheindlin, District Judge.

  OPINION AND ORDER

On March 16, 2001, Alcatel Space S.A. and Alcatel Space Industries, S.A. (collectively "Alcatel") filed an action against Loral Space & Communications Ltd. ("Loral"), Loral Space & Communications Corp. ("LSCC"), Loral Spacecom Corp. ("LSC"), and Space Systems Loral, Inc. ("SS/L"), seeking to preliminary enjoin defendants from acting in derogation of two agreements executed by the parties: the April 22, 1991 Operational Agreement (the "Operational Agreement") and the June 23, 1997 Alliance Agreement (the "Alliance Agreement").*fn1 Plaintiffs also seek, inter alia, (1) a declaration that the Agreements remain in full force and effect until lawfully terminated and that defendants must fully perform their contractual obligations under the Agreements; and (2) an order requiring defendants to proceed to arbitration as provided for in the Agreements. On March 29, 2001, defendants cross-moved to dismiss the Complaint and to compel arbitration.

Since suit was filed, plaintiffs have requested arbitration and defendants have consented to arbitrate this dispute. See 4/11/01 Transcript of Oral Argument ("4/11/01 Tr.") at 3. The arbitral tribunal will decide whether any party has breached the Agreements and whether they remain in full force and effect. Accordingly, the Court need only address plaintiffs' request to preliminarily enjoin defendants from acting in derogation of the Agreements, pending a decision by the arbitral tribunal.

On March 30, 2001, the parties stipulated to an order preserving the status quo until April 26, 2001.*fn2 Oral arguments were held on March 21 and April 11, 2001.*fn3 For the reasons that follow, plaintiffs' motion for a preliminary injunction is granted.

I. BACKGROUND

A. The Parties

Alcatel Space, S.A. is a French societe anonyme, and is the sole owner of Alcatel Space Industries, S.A., also a French societe anonyme, which ranks among the world's leading space systems manufacturers. See Complaint ¶¶ 8, 9. Loral Space & Communications Ltd., a Bermuda company with its principal place of business in New York, New York, manufactures and operates geosynchronous and low-earth orbit satellite systems and develops satellite-based networks for communications and information services.*fn4 See id. ¶ 10. SS/L is a Delaware corporation with its principal place of business in Palo Alto, California, and is an indirect, wholly-owned subsidiary of Loral. See id. In the satellite industry, SS/L is a "prime contractor", which is the entity responsible for the design, construction, and delivery of the satellite. See 3/29/01 Declaration of C. Patrick Dewitt, Chief Operating Officer of SS/L, in Support of Defendants' Opposition to Plaintiffs' Motion for an Injunction Pending Arbitration and in Support of Cross-Motion to Compel Arbitration ("Dewitt Decl.") ¶ 4; see generally Complaint ¶ 14.

B. The Agreements

On April 22, 1991, Alcatel, Loral Corporation (Loral's predecessor), and other European satellite companies entered into the Operational Agreement.*fn5 See id. ¶ 17. The Operational Agreement provided for the marketing and manufacture of satellite systems through and with SS/L. See id.; see also Operational Agreement, Ex. 1 to 3/15/01 Declaration of Gerard Barkats, Alcatel's Member on the Management Liaison Committee, in Support of Plaintiffs' Order to Show Cause ("Barkats Decl."), at 1 (stating that the parties entered into the Operational Agreement out of their "desire to advance the business of SS/L . . ."). At the time the parties agreed to promote SS/L through the Operational Agreement, the Strategic Participants purchased 49% of SS/L's common stock while Loral owned 51% of SS/L's stock. See Complaint ¶ 18. At the same time, the parties entered into a Stockholders Agreement giving the Strategic Participants important rights with respect to SS/L. See id.

In 1997, at Loral's request, the Strategic Participants exchanged all of their SS/L shares for Loral stock.*fn6 See id. ¶ 20. As a result, SS/L became a wholly-owned subsidiary of Loral. See Dewitt Decl. ¶ 6. As the Strategic Participants were no longer stockholders of SS/L, the Stockholders Agreement was terminated and the parties entered into the Alliance Agreement. See id.

The Alliance Agreement continued many of the rights and protections established in the Operational Agreement and the 1991 Stockholders Agreement, including the creation of a Management Liaison Committee ("MLC"), on which each Strategic Participant is a member. See Alliance Agreement, Ex. 3 to Barkats Decl., § 4.2. The Alliance Agreement also gave the Strategic Participants additional rights, several of which are implicated in this dispute:

(1) Prior Approval Rights — section 3.2(b) lists approximately nineteen matters on which SS/L cannot act without first obtaining approval from the SS/L Board of Directors ("SS/L Board"), on which the Strategic Participants sit. Included among these nineteen matters are transactions such as "any merger, consolidation, recapitalization or other reorganization" of SS/L, and "any issuance or sale of SS/L's capital stock." Alliance Agreement §§ 3.2(b)(i) and (b)(xii). In addition, three provisions regulate transactions with a particular third party ("the Prohibited Third Party"). See id. §§ 3.2(b)(v), (b)(vi) and (b)(viii). Section 3.2(b)(vi), in particular, prohibits Loral and SS/L from providing to the Prohibited Third Party "any confidential SS/L information" without first seeking approval by the SS/L Board.*fn7
(2) Access to Information Rights — sections 4.2(e) and 6.4 require Loral to cause SS/L to give the members of the MLC certain information concerning SS/L;
(3) Rights Upon Share Transfer — Article V grants the Strategic Participants certain contractual rights in the event that Loral should transfer SS/L shares to a third party.

In 1998, Alcatel purchased the interests of one of the Strategic Participants. See Complaint ¶ 24. Because two other Strategic Participants withdrew from the Agreements, Alcatel became the sole remaining Strategic Participant entitled to exercise the rights enumerated in the Alliance Agreement. See id.

C. The Parties' Performance Under, and Alleged Breaches of, the Agreements

Between 1994 and 2000, Barkats regularly received from SS/L, in his capacity as a member of the MLC, material prepared in SS/L's ordinary course of business, including, inter alia, SS/L's annual Strategic Plan, financial data and projections, and monthly reporting of SS/L's ongoing satellite programs. See Barkats Decl. ¶ 12. SS/L also routinely informed Barkats when it believed materials, documentation, or meetings to which Barkats was otherwise entitled contained information sensitive to potential competition between SS/L and Alcatel. See id. ¶ 14. With Barkats' consent, the competitively-sensitive information was removed and Barkats left the room during the pertinent parts of SS/L meetings. See id.

Since entering into the Alliance Agreement, Alcatel's satellite business has grown considerably.*fn8 See Dewitt Decl. ¶ 7. Of the approximately 36 commercial geosynchronous communication satellite contract opportunities in the world market last year, Alcatel was the successful bidder for ten of these projects while SS/L was the successful bidder on six. See id. ¶ 8. Alcatel and SS/L, however, attempted to minimize their direct competition. For example, SS/L did not submit a bid for any of the ten satellite contracts won by Alcatel, nor did Alcatel submit a bid for five of the six satellite projects won by SS/L prior to October 2000.*fn9 See Barkats Supp. Decl. ¶ 8. Nevertheless, the number of joint projects between Alcatel and SS/L has declined over the past several years. See Dewitt Decl. ¶ 9. Currently, the companies are cooperating on only one active satellite program entered into in 1997. See id.

In response to these changing conditions, for the past fifteen to eighteen months, Loral has removed an increasing amount of competitively-sensitive material from the packets Barkats received. See id. ¶ 10. Since October 2000, SS/L has denied Barkats, over his protest, all access to SS/L information, as well as participation at meetings. See Barkats Decl. ¶¶ 15-17; Complaint ¶ 25. Additionally, the SS/L Board has not met since June 1999, even though section 3.1 of the Alliance Agreement requires two SS/L Board meetings per year. See Barkats Decl. ¶ 18; Complaint ¶ 26.

On February 22, 2001, Loral sent a letter to Alcatel alleging that Alcatel had materially breached the Operational Agreement by teaming up with another company, without SS/L's written consent, to pursue a bid for a satellite project for which SS/L was contemplating submitting a bid. See Complaint ¶ 28; 2/22/01 Letter from Eric J. Zahler, Loral's President and Chief Operating Officer, to Jean Claude Husson, President and Chief Executive Officer of Alcatel Space Industries ("2/22/01 Termination Letter"), Ex. 5 to Barkats Decl., at 1. The letter then purported to "terminate" the Operational Agreement "effective immediately," and to provide Loral's notice of termination of the Operational Agreement, to take effect twelve months later, pursuant to section 7(v) of the Operational Agreement. 2/22/01 Termination Letter at 1-2; see also Complaint ¶ 28.

On February 23 and February 28, 2001, Alcatel responded to Loral's letter and explained that Alcatel had not breached the Agreements, that the Agreements do not provide for immediate termination, and that any dispute involving the Agreements or their breach must be submitted to arbitration. See Barkats Decl. ¶ 25; 2/28/01 Letter from Marc Jany, Alcatel's Senior Vice President and General Counsel, to Zahler, Ex. 6 to Barkats Decl. On March 5, 2001, Loral purported to withdraw without prejudice the immediate termination of the Operational Agreement, but maintained that the one-year notice of termination had been effected. See Complaint ¶ 30; 3/5/01 Letter from Zahler to Jany ("3/5/01 Zahler Letter"), Ex. 7 to Barkats Decl.

As the alliance has been winding down, Loral has been pursuing "new strategic business opportunities for it and its subsidiaries." 3/29/01 Declaration of Eric J. Zahler in Support of Defendants' Opposition to Plaintiffs' Motion for an Injunction Pending Arbitration and in Support of Cross-Motion to Compel Arbitration ("Zahler Decl.") ¶ 10. Indeed, "[a]t this time, Loral has engaged in discussions with [the Prohibited Third Party] regarding a possible transaction involving SS/L." Id. ¶ 13. Loral and the Prohibited Third Party have each signed nondisclosure agreements and "some non-public financial information concerning SS/L has been exchanged, including five-year financial projections." Id.

II. DISCUSSION

"To obtain a preliminary injunction, [plaintiffs] must establish: (1) the likelihood of irreparable injury in the absence of such an injunction, and (2) either (a) likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation plus a balance of hardships tipping decidedly in [plaintiffs'] favor." TCPIP Holding Co. v. Haar Communications, Inc., 244 F.3d 88, 92 (2d Cir. 2001) (quotation marks omitted). Because the irreparable harm analysis turns on plaintiffs' rights ...


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