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L-3 Communications Corp. v. OSI Systems

February 23, 2007

L-3 COMMUNICATIONS CORPORATION, PLAINTIFF,
v.
OSI SYSTEMS, INC., DEFENDANT.



The opinion of the court was delivered by: Honorable Paul A. Crotty, District Judge

MEMORANDUM OPINION AND ORDER

After 16 days of trial and two days of deliberation, the jury returned a verdict in favor of OSI Systems, Inc. ("OSI") on its counterclaim against L-3 Communications Corporation ("L-3") in the amount of $33 million in compensatory damages and $92.6 million in punitive damages against L-3. The jury also found that OSI had breached its obligation under the parties' confidentiality agreement and awarded L-3 nominal damages of $1. L-3 now moves for judgment as a matter of law under Federal Rule of Civil Procedure 50(b) or, in the alternative, a new trial or remittitur, pursuant to Federal Rule of Civil Procedure 59. L-3 contends that there was a fatal error of law in charging the jury that a fiduciary duty existed between L-3 and OSI; that the compensatory damages were excessive, and that the punitive damages were inappropriate.

FACTUAL BACKGROUND

In the Summer of 2001, PerkinElmer, Inc. ("PEI") decided to put its Security Detection Business (the "Business") up for sale.*fn1 Both L-3 and OSI had discussions with PEI and PEI's investment banker, William Blair & Company. William Blair & Company prepared an offering memo ("the Blair memo") which provided specific information on the product lines being offered, as well as specific financial information.

OSI met with others to discuss a potential bid for the PEI Business. In October, 2001, OSI's Chief Executive, Deepak Chopra, met with L-3's top executives: the CEO, Frank Lanza, the CFO, Robert LaPenta, and the President of L-3's fledgling security detection business, Joseph Paresi.*fn2 The discussions continued and eventually in November, 2001, L-3 and OSI entered into a Letter of Intent in which they agreed to jointly bid for the Business and, after acquisition, divide the Business, with L-3 to get the Automated and Cargo product lines and OSI to get the conventional and Argus lines. The parties felt that this proposed division closely approximated their existing lines of business. L-3 wanted access to the higher tech, higher profit margin products; OSI wanted the volume associated with the Conventional line of business.

This agreement was embodied in a letter of intent ("LOI"), dated November 27, 2001. In light of the fact that OSI had been talking with others about the PEI transaction, L-3 insisted that the LOI include a provision that "neither party shall cooperate with any third-party in connection with a separate bid for the purchase of the Business . . . nor make a separate bid for the purchase of the Business." PEI, however, did not want to deal with a "double-headed" entity and insisted on dealing with a single party. While the LOI provided for a "newco" consisting of OSI and L-3 to bid for PEI's Business, L-3 claimed experience and expertise in negotiating acquisitions and it took the lead on behalf of itself and OSI. Under this arrangement, L-3 would negotiate and purchase the Business, and thereafter divide the Business between them, as the parties contemplated.

OSI was assured by L-3's CEO that it need have no concern about L-3 placing itself in the primary negotiating position with PEI. Mr. Lanza testified at trial as follows:

(1) . . . I had an obligation in all fairness to make sure that he [Deepak Chopra, OSI's CEO] got [the Conventional Business]. That is what was binding to Frank Lanza, that I would make sure I did nothing to jeopardize him buying the conventional business he wanted.

(Tr. 143-94.)

(2) We were going to buy this company [PEI] equally. We thought it was like a 50-50 deal and I would approach it as if he were my partner to make sure I did nothing that would affect his business and vice-versa. So it's more of a fairness treatment in a partnership.

(Tr. 150.)

(3) [That Mr. Chopra would have the same rights as if OSI had been on the L-3/PEI contract], Yeah, I agreed. I had an obligation to protect his company and my company, in all fairness, and I agreed to do that . . . . I knew personally I made a handshake with the man to do what I was going to do and I was going to do as well to protect his company as well as my company.

(Tr. 347-48.)

These were not the only statements the jury heard from L-3 concerning the beginning of the L-3/OSI relationship. Mr. Cambria testified to the same effect.

The trial testimony was entirely consistent with Mr. Lanza's pretrial deposition, which served as the basis for Judge Chin's legal determination that on the facts of this case, L-3 owed OSI a fiduciary duty, the exact scope and duration of which required factual determinations by a jury.

On December 24, 2001, L-3 and PEI entered into a Master Purchase Agreement. Several days later, L-3 advised OSI that it had entered into this agreement. In the first half of 2002, L-3 and OSI had periodic discussions about the acquisition. The leading impediment to closing the deal was the Department of Justice's review of the proposed transaction under the Hart-Scott-Rodino Act.*fn3 In June 2002, L-3 closed the transaction for PEI's Business. L-3 sent OSI a revised purchase agreement. The proposed agreement did not state and was not clear concerning what OSI was to receive from L-3 in the Conventional and Argus product lines. L-3 had always been concerned that some of the technology utilized in the Conventional and Argus lines could also be used in the Cargo and Automated lines. Unless it could restrict OSI in the use of this technology, L-3 feared that it would be creating a business risk for itself. In August 2002, L-3 and OSI signed a non-binding Amended Letter of Intent ("Amended LOI"), and a Confidentiality Agreement. The Amended LOI required the parties to negotiate in good faith toward a binding agreement to split the Business between them. The Amended LOI stated that a binding commitment between the parties would result only from the execution of a definitive agreement.

The jury also heard testimony that at least as early as 2002, Joseph Paresi appeared not to share Mr. Lanza's and Mr. Cambria's views about the L3 -- OSI transaction. Mr. Paresi, the head of L-3's security systems division, opposed the proposed transaction with OSI, apparently detested Mr. Chopra, and was intent on killing the part of the deal that had L-3 conveying PEI's Conventional and Argus systems to OSI. Mr. Paresi preferred to keep all of the PEI assets for L-3, or failing that, to sell the Conventional and/or Argus assets to a third party, with whom Mr. Paresi had a better relationship.

Notwithstanding several attempts by Messrs. Lanza and Cambria at reining Mr. Paresi in, he remained at the head of the deal, since it was his division which was going to get the newly acquired PEI assets. Indeed, as Mr. Lanza and Mr. Cambria were phased out of the deal by in or about June 2002, and a new negotiator L-3, Ron Mandler, was assigned to the matter, Mr. Paresi became the key man on the deal.

The parties did not reach a definitive agreement, however, and as it became clear that the deal was likely to collapse, the parties began their race to the courtroom door. L-3 filed first and sought a declaratory judgment that it has no further obligations to OSI, as well as nominal damages related to its contention that OSI breached the parties' confidentiality agreement. OSI counterclaimed against L-3 for breach of fiduciary duty, fraud, and a constructive trust, and sought money damages for the profits OSI would have obtained had it acquired a portion of the Business. Alternately, OSI sought to impose a constructive trust on that portion of the Business (i.e., the Conventional and Argus business lines) which it should have received, and/or the value of those assets, and/or disgorgement to OSI of L-3's profits from those assets.

PRIOR PROCEEDINGS

During the 3-1/2 year period from the commencement of litigation to the commencement of trial, this action received considerable judicial attention. United States District Judge Chin decided a motion to dismiss, 2004 WL 42276 (S.D.N.Y. Jan. 8, 2004); resolved a dispute concerning discovery expert witnesses, (unreported decision, May 3, 2004); decided cross-motions for summary judgment, 2005 WL 712232 (S.D.N.Y. Mar. 28, 2005); and decided a motion for sanctions (unreported decision, July 11, 2005). The matter was reassigned in August 2005, and thereafter this Court decided motions to bifurcate, to dismiss OSI's claim for a constructive trust, to realign the parties, to shift the burden of proof and to dismiss claims for damages, 418 F. Supp. 2d 380 (S.D.N.Y. 2005); a motion to compel discovery on the weighted average cost of capital (unreported decision, Feb. 6, 2006); as well as a number of motions in connection with the trial, including decisions on motions in limine, 2006 WL 988143 (S.D.N.Y. Apr. 12, 2006); motion on limiting opening statement concerning fiduciary obligations (unreported decision Apr. 24, 2006); and the final pretrial order (unreported decision, Apr. 25, 2006).

The critical ruling in the pretrial phase was Judge Chin's March 28, 2005 determination that [o]n the undisputed facts here, a reasonable jury could only find that L-3's commitment to OSI created a fiduciary duty. As L-3's chief executive officer admitted in his deposition testimony, L-3 agreed to submit a bid to PEI to purchase the Business on behalf of both parties, but in L-3's name only.

2005 WL 712232, at *7 (S.D.N.Y. Mar. 28, 2005) Judge Chin's decision was based on deposition testimony, but the same testimony was given at trial, both by Mr. Lanza and by L-3's General Counsel, Mr. Cambria. Recognizing that L-3 would gain access to information about the Business that OSI did not have, and told OSI that L-3 "intended to sell [OSI] the Conventional and Argus business." OSI agreed to this arrangement and thus L-3 undertook to act in part on OSI's behalf. Thus, the record shows as a matter of law that L-3 was in a position superior to OSI in respect to the purchase of the Business, and that OSI and L-3 entered into a confidential relationship, with L-3 accepting OSI's trust and confidence and agreeing to act on both of their behalf.

Id. at *3 (internal citations omitted). Judge Chin acknowledged that "[n]egotiating parties generally do not owe fiduciary duties to each other . . . But here OSI and L-3 went beyond negotiations as L-3 agreed to act on both their behalf. A fiduciary duty was created." Id. at *3 (internal citation omitted). The exact scope and the duration of that fiduciary obligation were fact questions which were to be addressed at trial.

The Court adhered to Judge Chin's ruling over L-3's strenuous, persistent objections during all phases of the pretrial proceedings-at trial, including jury instructions, and now in its post-verdict motion. In L-3's view, Judge Chin's decision was infected with fundamental legal error, and this Court's adherence to the decision contaminated the entire proceeding. That ruling, together with objections to compensatory and punitive damages, serve as the chief bases for L-3's motions pursuant to Federal Rules of Civil Procedure 50(b) and 59.

APPLICABLE LAW

In ruling on a motion for judgment as a matter of law, pursuant to Federal Rule 50(b), the Second Circuit defined its standard for review:

[C]onsider the evidence in the light most favorable to the nonmoving party (here, OSI), giving that party the benefit of all reasonable inferences the jury might have drawn it as favor. [Diesel v. Town of Lewisboro, 232 F.3d 92, 103 (2d Cir. 2000)] (noting that reviewing court cannot itself "assess the weight of conflicting evidence, pass on the credibility of witnesses or substitute (its) judgment for that of the jury"). On such a deferential review of the record, we will reverse the denial of a disappointed litigant's motion for judgment as a matter of law only if there is such a complete absence of evidence supporting the verdict that the jury's finding could only have been the result of sheer ...


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