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Kdh Electronic Systems, Inc., et al. v. Curtis Technology Ltd.

November 3, 2011

KDH ELECTRONIC SYSTEMS, INC., ET AL.
v.
CURTIS TECHNOLOGY LTD., ET AL.



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

MEMORANDUM

TABLE OF CONTENTS

Page

I. Procedural Background. . . . . . . . . . . . . . . . . . . 2

A. Complaint and Consent Orders .. . . . . . . . . . . . 2

B. The Court's Decisions.. . . . . . . . . . . . . . . . 3

C. Voluntary Dismissal Request and Counterclaims.. . . . 3

II. Factual Background.. . . . . . . . . . . . . . . . . . . . 4

A. Agreements Between CTL and KDHE.. . . . . . . . . . . 4

B. Orders from Oceanscan.. . . . . . . . . . . . . . . . 5

C. Development of the T-3 System.. . . . . . . . . . . . 6

D. The Drexel Contract.. . . . . . . . . . . . . . . . . 7

III. Lack of Personal Jurisdiction over the Channel Counterclaim Defendants . . . . . . . . . . . . . . . . . . . . . . . . 8

A. Standard. . . . . . . . . . . . . . . . . . . . . . . 8

B. Analysis. . . . . . . . . . . . . . . . . . . . . . . 9

IV. Failure to State a Claim.. . . . . . . . . . . . . . . . 13

A. Standard. . . . . . . . . . . . . . . . . . . . . . 13

B. Analysis. . . . . . . . . . . . . . . . . . . . . . 14

1. Statute of Limitations.. . . . . . . . . . . . 14

2. Edwin Knell. . . . . . . . . . . . . . . . . . 14

3. Contracts Claims (Counts I through V). . . . . 15

a. Counts I and III as to Non-Parties to the Contracts.. . . . . . . . . . . . . . . . 16

b. Count I as to KDHE. . . . . . . . . . . . 19

c. Count III as to KDHE. . . . . . . . . . . 23

d. Count II. . . . . . . . . . . . . . . . . 24

e. Count IV. . . . . . . . . . . . . . . . . 27

f. Count V.. . . . . . . . . . . . . . . . . 30

4. Torts Claims.. . . . . . . . . . . . . . . . . 31

a. Choice of Law.. . . . . . . . . . . . . . 31

b. Gist of the Action Doctrine and Economic Loss Rule. . . . .. . . . . . . . . . . . . . 33

c. Fraudulent Inducement to Contract (Count VI), Fraudulent Misrepresentation (Count XIII) & Negligent Misrepresentation (Count XIV).. 34

d. Law of the Case: Unjust Enrichment (Count VII) & Conversion (Count XVII) .. . . . . 38

e. Tortious Interference with Contract against the KDH Counterclaim Defendants (Count VIII) & Tortious Interference with Contract against Channel Technologies Group (Count X) .. . 39

f. Commercial Disparagement (Count IX).. . . 43 g. Unjust Enrichment against Channel Technologies Group (Count XI) .. . . . 44

h. Lanham Act (Count XII) & Unfair Competition (Count XVI).. . . . . . . . . . . . . . . 45

ii

i. Pennsylvania Uniform Trade Secrets Act Violation (Count XV). . . . . . . . . . . 47

j. Conspiracy (Count XVIII). . . . . . . . . 47

k. Failure to Include Flow-Down Clauses (Count XIX) .. . . . . . . . . . . . . . . . . . 49

iii

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

CIVIL ACTIONNO. 08-2201

KDH ELECTRONIC SYSTEMS, INC., et al. v. : CURTIS TECHNOLOGY LTD., et al.

MEMORANDUM

McLaughlin, J.

November 3, 2011

This action involves a contract dispute over the development of a sonar system called the T-3. Over two years after the initiation of this litigation, the defendants / counterclaim plaintiffs, Curtis Technology Ltd. ("CTL") and its CEO, Dr. Thomas Curtis, filed nineteen counterclaims against KDH Electronics, Inc. ("KDHE"), KDH Defense Systems, Inc. ("KDHD"), David Herbener, Edwin Knell, Channel Technologies Inc., and Channel Technologies Group.*fn1 The counterclaims include claims for breach of contract, fraudulent inducement to contract, unjust enrichment, tortious interference with contract, commercial disparagement, violation of the Lanham Act, fraudulent and negligent misrepresentation, violation of the Pennsylvania Uniform Trade Secrets Act, unfair competition, conversion, conspiracy, and failure to include "flow down" clauses pursuant to the federal regulations.

The counterclaim defendants move to dismiss for lack of personal jurisdiction over the Channel Counterclaim Defendants and for failure to state a claim. Counterclaim Defs.' Mot. to Dismiss Pls.' Counterclaims ("MTD"). The Court denies the motion to dismiss for lack of personal jurisdiction without prejudice and grants the motion to dismiss for failure to state a claim in part and denies it in part.

I. Procedural Background

A. Complaint and Consent Orders

KDHE and KDHD (the "KDH entities" or "plaintiffs") filed their complaint against CTL, Dr. Thomas Curtis, and Michael Curtis on May 12, 2008. The plaintiffs alleged breach of a Teaming Agreement entered into in April 2006, which outlined the roles played by each party in the design, testing, and manufacture of the T-3 sonar system. The plaintiffs requested, among other relief, a preliminary injunction ordering the defendants to turn over all engineering and programming specifications for the T-3 system.

After the filing of the complaint, the parties entered into two consent orders in June and August 2008 designed to provide the information needed for design, redesign, testing and manufacturing of the T-3 system to the KDH entities.

B. The Court's Decisions

On December 23, 2008, this Court issued a memorandum and order finding that KDH owned the T-3 system and the "Curtis Deliverables," as defined in the Teaming Agreement.*fn2 Mem. & Order, Dec. 23, 2008 (hereinafter "Dec. 2008 Decision") (ECF No. 41) at 9, 11. On March 3, 2009, after considering the parties' briefs, the Court issued a memorandum and order finding that the Defense Federal Acquisition Regulations did not impact the Court's Dec. 2008 Decision. Finally, on March 19, 2010, the Court granted the defendants' motion to dismiss for lack of personal jurisdiction over defendant Michael Curtis, and denied the motion as to Dr. Thomas Curtis.

C. Voluntary Dismissal Request and Counterclaims Following the Court's decisions, the plaintiffs filed a motion for voluntary dismissal without prejudice in May 2010. After retaining new counsel, the defendants opposed the motion and requested leave to file counterclaims, which the Court granted. Thus, over two years after the initiation of this case, the defendants/counterclaim plaintiffs filed their counterclaims on October 15, 2010, bringing four new parties into the litigation. Both sides have switched counsel since the beginning of the litigation.

II. Factual Background*fn3

A. Agreements Between CTL and KDHE

Dr. Thomas Curtis, a distinguished British sonar scientist, is the CEO of CTL, a company that sells high-tech processing modules for sonar, radar, and telecommunications applications. In 2005 and 2006, CTL and KDHE entered into a series of three agreements regarding the T-3, a sonar system for detecting underwater threats: (1) the Confidentiality Agreement, which provided for non-disclosure of Curtis's intellectual property; (2) the Consulting Agreement, which provided payments to CTL in exchange for consulting services to KDHE; and (3) the Teaming Agreement, for joint development and production of the T-3 system. Counterclaim ¶¶ 14, 18, 23-24, 34.

The Teaming Agreement, which contained an integration clause, restricted the parties from disclosing confidential information about the T-3 product except to accomplish the purposes of the agreement. In addition, the agreement prohibited CTL from working with others to compete with the T-3 system. Lastly, it required KDHE to make its best efforts to select CTL as the subcontractor to perform work required under any prime contracts awarded to KDHE. Id. Ex. D §§ 4, 7, 8, 9, 20.

When entering these agreements, CTL relied upon representations that KDHE made to the U.S. Department of Defense regarding its qualifications for developing sonar systems, as well as market projections provided by KDHE ...


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