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Nordetek Environmental, Inc. v. RDP Technologies

January 8, 2010

NORDETEK ENVIRONMENTAL, INC., ET AL.
v.
RDP TECHNOLOGIES, INC.



The opinion of the court was delivered by: Dalzell, J.

MEMORANDUM

This litigation involves a complex business dispute arising from a simple and ancient cause, enmity between brothers. As the accounts from Biblical times through films like The Godfather have rehearsed, fraternal venom is a potent poison, as will shortly be on display here.

On December 17 and 18, 2009, we convened on an expedited basis a hearing on cross-motions for preliminary injunction that the two brothers or their respective firms had filed. After considering the testimony from that hearing and the voluminous documentary record adduced therein, together with the parties' detailed pre- and post-hearing submissions, we offer the following analysis of that record and the law, which will constitute our findings of fact and conclusions of law within the meaning of Fed. R. Civ. P. 52(a)(2).

I. Factual Background

A. History and Business of RDP Technologies, Inc.

Defendant RDP Technologies, Inc. ("RDP") is a family business that is now jointly owned by plaintiff Paul Christy (43%) and his older brother, Dick Christy (57%). The brothers' father and Dick founded the business in 1978, and they named it after the three Christy brothers, R[obert] (who at one time owned 10%), D[ick] and P[aul].*fn1 Dick has been the President and majority shareholder of RDP from its inception, and Paul served as its Secretary and Treasurer until at least June of 2008.*fn2 Stip. Facts, Pl. Supp. Br. Ex. D ("Stip. Facts"), at ¶¶ 3-4, 13-16. The brothers' father initially owned 49% of RDP, but in 1982 he decided to give his shares to Rob and Paul.*fn3

According to Paul, RDP "sells components that go into water and waste water treatment plants," and its target market is "[w]ater and sewer authorities throughout the United States." Paul Christy Dep. at 296. The parties also stipulated to the fact that "RDP sells water and wastewater treatment equipment, and provides the engineering services necessary to design and install this equipment." Stip. Facts at ¶ 2. The Tekkem lime slakers at the center of this dispute are used primarily for water treatment, rather than wastewater treatment, but they could be used in either setting. Paul Christy Dep. at 295.

B. 1995 Shareholder Agreement

On July 1, 1982, the three brothers and RDP entered into a Corporate Stock Redemption Agreement that was superseded on November 1, 1995 by an amended agreement among them. Amended and Restated Shareholder Agreement, Ex. D-1*fn4 ("1995 Agreement"). This document allocated 4,100 shares, or 51%, of RDP's common stock to Dick, 3,145 shares, or 39%, to Paul, and 800 shares, or 10%, to Robert.

The 1995 Agreement had at § 9 an extensive "Restrictive Covenant and Trade Secret/Confidential Information" provision. In essence, § 9 provided that if any shareholder's employment at RDP terminated "for any reason" then "that Shareholder shall not engage either directly or indirectly in any manner or capacity whatsoever (including principal, agent, partner, officer, director, shareholder, employee, consultant or otherwise) in any business competitive with the business" of RDP "in the United States, Canada or anywhere in the world that the Corporation is currently doing business." Id. § 9(b). The Agreement imposed this non-competition covenant ("NCC") on a terminated shareholder "[f]or a period of two years after the date on which" the terminated shareholder has left RDP's employ. Id. The 1995 Agreement also restricted the shareholders from using or disclosing RDP's confidential information. Id. at § 9(c). The brothers acknowledged that any violation of the non-compete or confidentiality provisions "would result in irreparable injury" to RDP. Id. at § 9(d). And § 10 of that Agreement explicitly provided that the signatories "agree that the subject matter of this Agreement is unique and that the remedy at law for any breach of any of the terms of this Agreement would be inadequate." Id. at § 10. Lastly, the Agreement provided at § 15(b) that it could only be amended if "made in writing and signed by all Parties hereto," i.e., by the three shareholders and RDP. Id. at § 15(b).

Paul testified that the 1995 Agreement did not change his job responsibilities or number of shares and that he did not receive additional compensation in exchange for signing it. But the 1995 Agreement barred RDP from terminating the employment of Rob and Paul except for cause, death, or disability. Dick could only be terminated for death or disability. Id. at § 5(d). Dick testified that Paul wanted to revise the shareholder agreement to limit RDP's ability to fire him and that this provision was not in the 1982 agreement. The 1995 Agreement also obligated RDP to repurchase the shares of a shareholder whose employment terminated. Stip. Facts at ¶ 34 (stating that Paul "is entitled to have his shares of RDP stock repurchased" pursuant to the 1995 Agreement "[a]s a result of his resignation from RDP").*fn5 Indeed, on November 12, 2009 RDP sent Paul a Judgment Note for $574,371.35, which it believes is the value of Paul's shares. Ex. D-17. Paul has, so far as we can tell, not done anything with the Note or accompanying documents. See Paul Christy Dep. at 161-63. The mutual NCC, the limitations on RDP's ability to terminate a shareholder's employment, and RDP's repurchase obligations were apparently not in place until the 1995 Agreement. There is no evidence in the record to the contrary.*fn6 Paul agrees that all three brothers were bound by the 1995 Agreement, including the NCC in ¶ 9. Paul Christy Dep. at 129, 137.

On May 5, 1997, Robert Christy decided to sell his ten percent interest, or 800 shares, back to RDP. See Ex. D-70. Notably, but unsurprisingly, this document was only signed by its parties, Robert W. Christy, Jr. and RDP; Paul signed the document not as a party but to attest his brother Dick's signature as President of RDP. Because all parties to the 1995 Agreement did not sign the 1997 document, it did not constitute an amendment of the 1995 Agreement*fn7 though, to be sure, the net result was that RDP's ownership became the current 57% - 43% split between Dick and Paul.

C. RDP's Business and Its Relationship with Stephansen

RDP has been, and remains, in the business of selling and servicing water treatment and wastewater treatment equipment throughout much of the United States. Although RDP usually deals with general contractors in the course of its business, the ultimate consumers of its products are ordinarily municipalities like the City of Ann Arbor, Michigan, which intervened in support of RDP in this litigation.*fn8

The purification of water and the treatment of wastewater to assure environmental protection are complicated tasks. Lime slakers, which are at the center of this dispute, prepare powdered lime to make it usable for water purification. Lime changes the pH of the water and removes minerals, which makes the water softer. There are a number of technologies --slakers and other techniques -- available to accomplish such treatment, but one such technology is produced by an entity known as TEKKEM P.R. Stephansen A.S., a Norwegian corporation based in Borgen, Norway, whose principal is one Poju R. Stephansen. We refer to this bundle of technology as "Tekkem." It is undisputed that Tekkem, though by far the most expensive technology for this purpose, is also quite effective in water treatment, which is its primary use in the United States.*fn9 Indeed, as much as a third of the projects RDP enters into uses Tekkem. RDP has never used nonTekkem slakers, but Dick testified that other companies make slakers and that RDP could use them. See also Paul Christy Dep. at 305 (other companies besides Tekkem make slakers in the United States). RDP also has other lines of business (for example, in wastewater treatment) that do not use Tekkem.

Pertinent to the current controversy, since August 15, 1997 RDP has been a party to License Agreements for Tekkem, most recently in the iteration dated January 25, 2001. License and Distribution Agreement, Ex. D-18 ("2001 License Agreement"). That agreement provides for a royalty beginning at $3,000 per slaker with a five percent annual increase on that part of the fee after the year 2000. Id. at Exhibit A. It also provides for an additional royalty of "2 per cent of gross value" of RDP's contracts involving Tekkem technology (the "Two Percent Calculation"). Id. Stephansen required RDP to sell a minimum number of slakers per year, and if RDP did not do so its license could become non-exclusive. Id. at § 3(c). But if RDP failed to make other payments to Stephansen, such as the fees from the Two Percent Calculation, Stephansen could terminate the license after notice and a thirty-day period to cure the default. Id. at § 12(c).

The 2001 License Agreement required RDP to submit quarterly reports and pay royalties within thirty days of the end of each quarter. Id. at §§ 5(c), 9. But, in practice, Paul -- who always prepared these reports for Stephansen and approved royalty payments -- sent the reports about once a year. RDP would usually wait for direction from Stephansen regarding when and where to send the royalty payments. RDP wired the money to accounts in Norway and the Canary or Cayman Islands, paid Stephansen's airplane repair bills in the United States, and even gave Stephansen a royalty check to cash in the United States. Paul Christy Dep. at 207-10. On at least one occasion, Paul requested -- and Stephansen granted -- a thirty-to-sixty day extension for RDP's royalty payments. Paul testified that the exact timing of the reports and payments was not "a big deal." Emails between Paul and Stephansen or his employees show that Stephansen was often flexible about the timing of RDP's reports and payments. See Ex. D-33. See also Paul Christy Dep. at 205-06, 214 (confirming that Stephansen was "pretty flexible" about the timing of payments and that Paul knew this).

RDP developed some of its own technology to deal with its customers' concerns with the Tekkem slakers, for example, with the buildup of grit in the system. By August 26, 2008, RDP had secured U.S. Patent No. 7,416,673 (the "'673 patent"), which Paul and RDP employee Michael Quici filed on March 31, 2006 and assigned to RDP. The '673 patent is for "[a] method and apparatus . . . for conveying lime slurry, removing and controlling the amount of grit" that accumulates in the water purification process. See Ex. P-9 at 1. Because RDP had developed the grit removal technology underlying the '673 patent, Dick decided that grit removal should be excluded from the Two Percent Calculation. When Dick told Paul about this idea, Dick explained that RDP should not pay royalties on the "grit classifier" because "[i]t was something that we [RDP] had developed." Paul Christy Dep. at 218-19. Paul disagreed and thought this would conflict with the 2001 License Agreement because in his mind the grit classifier was part of the slaking system.*fn10 Id. at 218-21. See also Dick Christy Dep., Pl. Supp. Br. Ex. A, at 62 (stating that Paul "questioned" this judgment). Dick nonetheless implemented this decision by at least 2008, although it is not clear in the record when, precisely, this happened. RDP may have omitted other items from the Two Percent Calculation as well, such as the "platforms" and installation. But the '673 patent was the primary issue that the parties discussed at the hearing with respect to the Two Percent Calculation.*fn11 Quici, a current Director of RDP who has been with the company for about twenty-five years, testified that the dosing system and fine grit classifier were usually excluded from the Two Percent Calculation.

Paul claims that he did not know until early 2009 that RDP changed the Two Percent Calculation because the total royalties for the first projects on which this change was made did not appear in RDP's accounting system until that time. Paul did not talk to Dick about this issue when it came to his attention again in early 2009. Moreover, Paul himself instructed others at RDP not to include installation or the soda ash system in the Two Percent Calculation. See Ex. D-32, D-61; Paul Christy Dep. at 187-197. He testified that the soda ash system was separate from the slaker system and that Stephansen should not get royalties on the soda ash system because it did not use Tekkem. According to Paul, Stephansen occasionally -- but not usually -- received a royalty on the installation costs because the contractor typically installed the equipment.

On behalf of RDP, Paul negotiated the 1997 and 2001 licensing agreements with Stephansen, and it seems undisputed that until Paul's departure he was the shareholder primarily entrusted with maintaining RDP's relationship with Stephansen. Indeed, it was quite evident from the testimony that by 2009 Paul had achieved a very close relationship with Stephansen, so much so that he often had conversations and dealings with the Norwegian principal about which his brother Dick knew nothing. According to Paul, Stephansen spent Thanksgiving with Paul's family one year, and Paul also stayed at Stephansen's home during his visit to Norway in August of 2009, which we describe more fully below.*fn12 Paul Christy Dep. at 175-76.

D. Enmity Between Brothers and Conflict With Stephansen

In recent years, the relationship between younger and older brother became so strained that they were barely on speaking terms. Paul moved to California in September of 2008, in effect to set up a West Coast office of RDP, and operated as much as possible independently of Dick. See Paul Christy Dep. at 20. Dick declared that this plan was "abandoned" in his email to Paul on January 16, 2009, and Paul says that he started going back and forth more between Pennsylvania and California at that time. Ex. D-50; Paul Christy Dep. at 63. According to Paul, he "officially" returned to Pennsylvania to work in June of 2009. Paul Christy Dep. at 63.

It is evident that in 2009 the brothers' relationship deteriorated from frigid to belligerent. By this time, an opportunity presented itself for Paul to administer what he regarded as a coup de grâce against RDP and Dick by exploiting his relationship with Stephansen. Without informing anyone at RDP, including Dick, in May or June of 2009 Paul sent to Stephansen a list of eleven Tekkem-involved projects where Stephansen was paid less than the full two percent on the total gross project price.*fn13 Paul testified that he disagreed with Dick's decision to change the Two Percent Calculation but thought that Dick created the problem and should fix it. He also said that he did not want to submit "false" numbers to Stephansen. This gratuitous information resulted in a telephone conversation that Stephansen had with Paul in early July of 2009, during which Paul reported that Stephansen was "rather upset." Paul told Stephansen that Dick had changed the method of the Two Percent Calculation but did not explain why. Paul never disclosed this conversation to Dick.*fn14

Paul's report to Stephansen also led to Stephansen's July 7, 2009 email to Paul whose text stated, in full:

Tekkem Slaker Fee Schedule and our Licence Distribution Agreement The plus 5 per cent increase in slaker fee per year to compensate for assumed Inflation, based on the value of US $3000 for the year 2000, has never been fulfilled. This must be corrected now and calculated from year 2000. To compensate for lost Interest over time we want now instead of 5 per cent, 7 per cent. Also when checking your Tekkem Slaker Fee Schedule we find several incorrect values from the 2 per cent system royalty from the following projects[.]

Ex. D-19.

Thereupon, Stephansen listed projects pursuant to which he claimed there was a total shortfall of $39,225 in addition to the discrepancy regarding the per slaker royalty. Paul said that both he and Stephansen neglected to calculate the five percent increase, and he thought that RDP would pay Stephansen for that discrepancy as well as the supposedly low fee for the Two Percent Calculation. Given the tone of Paul's undisclosed phone conversation with Stephansen, he was not surprised to receive Stephansen's email.

Paul never responded to the July 7 email, but transmitted it to his older brother the next day. See id. The complete text of that email stated:

Dick,

I am forwarding an e-mail I received from Stephansen yesterday.

Paul Christy RDPTech.com Id. Paul did not tell Dick that he thought RDP should pay the disputed amount of the Two Percent Calculation, but at some point he left Dick a voicemail informing him that he should take care of the issue.

On July 24, 2009, Dick sent an email to Stephansen, which began with the following paragraph:

Stephansen,

Paul sent me your email and asked me to resolve this question. I am not sure why Paul asked me to do this because he has managed the accounting and book keeping for the past 30 years. Nonetheless a mistake has been ...


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