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PROTOCOMM CORP. v. NOVELL

September 25, 2001

PROTOCOMM CORP., PLAINTIFF,
V.
NOVELL ADVANCED SERVICES, INC., ET AL., DEFENDANTS



The opinion of the court was delivered by: Lowell A. Reed, Jr., Senior District Judge.

MEMORANDUM

Two motions are presently before this Court in this third generation lawsuit which sprung from a breach of contract dispute between plaintiff ProtoComm Corporation ("ProtoComm") and Fluent, Inc., ("Fluent"), now Novell Advanced Services ("Novell").*fn1 Defendants Technology for Information and Publishing, L.P., David L. Nelson, Cornelius A. Ferris, and Premkumar Uppaluru (collectively referred to as "Former Fluent Shareholders") filed a motion for summary judgment (Document No. 67), pursuant to Federal Rule of Civil Procedure 56, and ProtoComm and remaining defendants Aenas Venture Corporation, ASCII Corporation, Cirrus Logic, Inc., FIP Associates Ltd. and FIP II, Ltd., and Intel Corporation (collectively referred to as "settling defendants") filed a joint motion to dismiss with prejudice all claims of plaintiff against such defendants (Document No. 76), pursuant to Federal Rule of Civil Procedure 41(a)(2) to which the Former Fluent Shareholders (also referred to as "non-settling defendants") object.

Upon consideration of the motions, responses and replies thereto, and for the reasons set forth below, I will deny in part and grant in part the motion for summary judgment and grant the joint motion to dismiss.

I. Background*fn2

This lawsuit has its roots in a case brought by ProtoComm against Fluent which alleged a breach of a contract to develop a video server software. ("ProtoComm I"). On July 24, 1996, a jury returned a verdict in favor of ProtoComm and against Fluent for $12.5 million. The Court of Appeals for the Third Circuit affirmed the verdict on October 29, 1997. The details of ProtoComm I and the suit which followed, ProtoComm II, have been detailed at length by this Court and will not be repeated here. The following background is relevant to this case, ProtoComm III, which involves at its core a complex transaction whereby Novell acquired Fluent while the ProtoComm I case was pending.

In or around January, 1993, Novell began investigating the possibility of investing in Fluent. (Mem. from Charlie York to Darrel Miller, David Bradford and Jim Tolonen, dated Jan. 8, 1993, Pl.'s Ex. 10; Mem. from Charlie York to Darrel Miller, David Bradford, Jim Tolonen and Jan Newman, dated Jan. 18, 1993, Pl.'s Ex. 12; Mem. from Charlie York to Ray Noorda, Darrel Miller, David Bradford, Jan Newman and John Edwards, dated Feb. 1, 1993, Pl.'s Ex. 13.) In February, 1993, Novell appeared "positive" toward making such an investment. (Pl.'s Ex. 13 explained supra.) This investment would go into Fluent's treasury. (Dep. of Neil Ferris at 51, Pl.'s Ex. 3.)

The ProtoComm I suit was filed on January 29, 1993. Upon discovering the lawsuit, Novell told Fluent that the investment activities would cease until the suit was settled. (Mem. from Charlie York to Ray Noorda, Darrel Miller, David Bradford, Jan Newman and John Edwards, dated Feb. 8, 1993, Pl.'s Ex. 14; Mem. from Charlie York to Roy Noorda, Darrel Miller, David Bradford, Jim Tolonen, Jan Newman and John Edwards, dated Feb. 17, 1993, Pl.'s Ex. 15.)

On March 19, 1993, David Bradford ("Bradford"), Novell's Senior Vice President and General Counsel, sent a draft letter of intent to Cornelius Ferris ("Ferris"), Fluent's President; the letter contemplated that the acquisition would take the form of an asset purchase. (Pl.'s Ex. 17.) On April 28, 1993, Bradford sent a letter of intent to Ferris; the letter contemplated that the acquisition would take the form of a stock sale in which Fluent would become a wholly owned subsidiary of Novell. (Pl.'s Ex. 18.) The letter of intent required as a condition precedent to the acquisition that "the lawsuit with ProtoComm be provided for to Novell's satisfaction." (Id. at 3.)

Where the April 28, 1993 letter of intent had included the language that Novell would acquire "all of the business, assets, and obligations of Fluent," the actual agreement, dated June 4, 1993, excluded such language. (Pl.'s Ex. 28.) The agreement did retain language providing that the ProtoComm litigation "shall have been resolved to the satisfaction of Fluent and Novell." (Id. at 5.2(j) and 5.3(e).) The proxy statement furnished to Fluent's stockholders in connection with the solicitation of proxies by Fluent's Board approving the agreement, introduces the acquisition as a ""merger" constituting "a liquidation of the Company under the Charter." (Pl.'s Ex. 38 at 2.) On July 2, 1993, Paul Desjourdy, Fluent's attorney, sent a letter to Betty Depaola at Novell, detailing the disbursement of payments as a result of the acquisition. (Pl.'s Ex. 26.) The payment included, inter alia, employee bonus payments and note-holder payments. (Id.) Neither Bradford nor Cameron Read, Fluent's counsel for the transaction, could recall at their depositions why the acquisition evolved into a cash-for-stock transaction. (Dep. of Bradford at 231, 237, Pl.'s Ex. 11; Dep. of Read at 38, Pl.'s Ex. 25.)

The ProtoComm I lawsuit was discussed during at least three Board meetings. (Minutes from Feb. 4, 1993 at 1, Pl.'s Ex. 32; Minutes from Feb. 26, 1993 at 2, Pl.'s Ex. 33; Minutes from Mar. 22, 1993 at 1, Pl.'s Ex. 33.) The files of Read contained the complaint and the underlying agreement, as well as other ProtoComm related documents. (Dep. of Read at 18-31, Pl.'s Ex. 25.) Ferris originally testified at his deposition that at the final hours before the deal, Bradford requested that the deal be redone to set aside money for the potential judgment in the ProtoComm I suit. (Dep. of Ferris at 44-45, Pl.'s Ex. 43.) Ferris pleaded with Bradford not to make this change, and Bradford acquiesced. (Id.) Ferris later recanted this testimony. (Dep. of Ferris at 54-55, Pl.'s Ex. 3.) In June, 1993, Rob Hicks, an associate counsel at Novell, sent a fax to Dan Heist, President of ProtoComm, proposing a settlement in the ProtoComm I litigation. (Defs.' Ex Bl7a.) David Smith, on behalf of ProtoComm, sent a counter proposal. (Defs.' Ex. B22.) A second proposal was then made by Novell. (Defs.' Ex. B52.)

On July 7, 1993, the acquisition occurred. Novell paid $18.5 million and assumed $3 million in liabilities. (Novell 1993 10-K, Pl.'s Ex. 47.) The litigation had not ended at the time of the closing.*fn3 (Dep. of Bradford at 88, Defs.' Ex. A.) On August 9, 1993, Ernst & Young sent Novell an asset valuation study of Fluent, in which the assets were valued at $21.55 million (Pl.'s Ex. 51 at 2.) Eventually, Fluent's assets, including, inter alia, Fluent's intellectual property and technology patents, as well as Fluent employees, were transferred to Novell. It is unclear to this Court when the transfer began. It seems that at least some employees were transferred onto the Novell payroll soon after the closing. (Fluent's Quarterly Tax Returns for September 30, 1993, Pl.'s Ex. 62; Fluent's Quarterly Tax Returns for December 31, 1993, Pl.'s Ex. 63.) It appears the technology assets were transferred by May, 1994. (Digital media data stream network management system, patent filed by Novell on Feb. 3, 1993, Pl.'s Ex. 53; assigned on Mar. 10, 1994, Pl.'s Ex. 54; trademarks assigned May 9, 1994, Pl.'s Ex. 55-56.)

ProtoComm's claim is essentially as follows: Although defendants called Novell's acquisition of Fluent a stock purchase, in reality, it was an asset sale designed to leave Fluent an empty shell and ProtoComm holding an uncollectible judgment. Fluent's assets were conveyed to Novell, and the purchase price was paid out either as a fraudulent conveyances or illegal dividends or both to Fluent's shareholders. Fluent was then left with nothing but obligations to ProtoComm.

The Former Fluent Shareholders essentially contend the following: On July 7, 1993, Novell purchased all of the outstanding stock of Fluent from the Fluent shareholders. After the stock sale occurred, Fluent became a wholly owned subsidiary of Novell and the stock sale ownership of Fluent passed to Novell. It was only after Novell's sales of Fluent's products were deemed disappointing that steps were taken to consolidate Fluent with Novell and to transfer the assets.

ProtoComm's claims against the Former Fluent Shareholders survived a motion to dismiss. See ProtoComm Corp. v. Novell, Inc., 55 F. Supp.2d 319 (E.D.Pa. 1999) ("ProtoComm III").

II. Motion for Summary Judgment

A. Legal Standard

In deciding a motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure, the "test is whether there is a genuine issue of material fact and, if not, whether the moving party is entitled to judgment as a matter of law." Medical Protective Co. v. Watkins, 198 F.3d 100, 103 (3d Cir. 1999) (citing Armbruster v. Unisys Corp., 32 F.3d 768, 777 (3d Cir. 1994)). "As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Furthermore, "summary judgment will not lie if the dispute about a material fact is `genuine, ' that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 250, 106 S.Ct. 2505.

The facts should be reviewed in the light most favorable to the non-moving party. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962)). The nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts," Matsushita, 475 U.S. at 586, 106 S.Ct. 1348, and must produce more than a "mere scintilla" of evidence to demonstrate a genuine ...


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