United States District Court, D. Arizona
Honorable David C. Bury, Judge.
Court grants the Motion to Dismiss in part and denies it in
part for the reasons explained below.
Technologies (the Company) is a tech company that began
developing a type of radio carrier signal to increase
bandwidth over existing networks. (First Amended Complaint
(FAC) (Doc. 37) at ¶2.) This waveform technology is
based on Transpositional Modulation of a carrier signal that
allows for a higher data transfer rate. Id. The
Company refers to the technology as “TM.”
Company advanced TM to the point where it worked in an analog
format in 2013, but for modern uses TM would need to be
viable in a digital format. Id. ¶64-65. In
order to further develop TM, the Company engaged with Alan
Hand and his tech company, Hand Technology, Inc. (Hand Tech),
to develop TM in a digital format and engineer the hardware
that would be necessary to demonstrate TM IP. Id.
agreement between the Company and Hand Tech was executed in
stages and, collectively, referred to as the Engineering
Service Agreement (ESA). Id at ¶83, ¶96.
In the initial stage, Hand Tech agreed to determine whether
TM could be converted to a useable digital format.
Id at ¶83. As part of this initial agreement
(Phase One Contract), Hand signed an Invention Assignment
Agreement (IAA (Doc. 1-2, Ex. A) at 3-5, dated 6/17/2015), a
Non-Disclosure Agreement (NDA (Doc. 1-2, Ex. B) at 7-9, dated
6/11/2015), and the Engineering Service Agreement, (ESA (Doc.
1-2, Ex. C) at 11-20, dated 3/1/2016).
was signed March 1, 2016, memorializing the prior oral
agreement by the Company to pay, and its initial payment of,
$625, 000 for Phase One work, and setting out the remainder
of the Phase One work to be completed by March 24, 2016, with
a Milestone 1, payment of $400, 000. A month before the end
of Phase One, Hand Tech had communicated to the Company that
TM could be translated into a digital format and the effort
should be made to develop TM for the market. (FAC (Doc. 37)
at ¶87.) The ESA, accordingly, included “Phase
Two” contract provisions, which reflected Milestones
2-4 payments for a fixed price total of $2, 000, 000 to
complete development of TM IP and four radios (2 systems)
capable of demonstrating TM IP to prospective customers. (ESA
(Doc 1-2 Ex C) at 18-19). The four milestones set specific
deliverables to be completed by a certain date corresponding
to payments to be made by the Company to Hand Tech.
contract also had a provision for changing to an hourly rate
if it became more equitable for the parties. Id. In
order to migrate to an hourly rate, the contract called for
both parties to sign a written agreement with a not-to-exceed
value. The billing rates that were to be used if the contract
migrated to an hourly rate were predetermined in the ESA
Contract. Id. at 20.
1 and 2 required reporting on the simulation of TM and an IP
module plan for 1 and completed design and layout for the PC
board for 2. Id. at 19. For Milestones 1 and 2, Hand
Tech was to be paid $400, 000 dollars each. Id. The
Company made the payments when they received invoices from
Hand Tech indicating Milestones 1 and 2 had been reached. The
Company made the last of the two payments on May 12, 2016. At
that point, the Company had paid a total of $1, 425, 000 to
Hand Tech leaving a balance of $575, 000 for the completion
of the final two milestones per the Phase Two contract
after Milestone 2 was attained, on May 31, 2016, Alan Hand
told the Company that he was able to add Amplitude Modulation
to the Transpositional Modulation to increase the number of
bit/s/Hz the signal could carry from 12 Bit/s/Hz to
16 Bit/s/Hz. (FAC (Doc. 37) at 14, ¶103.) In an email
sent on May 31, 2016, from Hand to Dan Hodges (CEO of TM
Tech), Hand stated that Hand Tech is adding Amplitude
Modulation to TM (combined notation TM-A) in the simulations
and the FPGA implementation, which involved research and
development outside the scope of the phase two contract. The
addition would cost between $250, 000 to $300, 000.
Id. In a response email, the Company agreed to pay
an additional $250, 000 because they were intending to add
Amplitude Modulation in a later phase, and because the
“team greatly exceeded the allotted hours.”
Id at 24. It appears that the parties intended the
emails to create a Contract Addendum (email Contract
Addendum). (Doc. 1-2, Ex. D) at 23-24, dated 5/31/2016).
of the addition, Hodges noted, the Company still needed the
programming and data for Transpositional Modulation only.
Id. It is from this point in time that the
disagreements between the parties ensued. The
Plaintiff’s claim that Phase Two Milestones 3 and 4
were never met. (FAC (Doc. 37) at 16, ¶116-118. Hand
Tech, despite repeated assurances that they were almost
complete, continued to delay the delivery of the radio units
past the contract’s timeline. Id. ¶119.
The Company asserts that in November 2016, another amendment
was required to establish a new timeline for a list of items
to be completed, which included the Phase Two engineering of
the 16 Bit/s/Hz version of TM-A and the additional payment of
$250, 000. Id. ¶¶ 19, 119 They also claim
that what Hand Tech delivered to the Company failed to meet
the requirements specified in the Phase Two contract;
Specifically, they only delivered one of the four radio units
called for, and the unit was not up to specifications.
Id. ¶125-26. The radio was only capable of 12
Bit/s/Hz and did not have enough ports to verify that it was
presents a different story. According to Hand, Hand Tech
delivered on the Phase Two contract, but the work required
was beyond what was originally conceived of under the
contract and the Company turned down the higher bit version
because of other issues it created. The contract was for the
construction of the technology TM had already patented. (FAA
(Doc. 47) at 20, ¶109-17); (Hodges Decl. (Doc. 1-2, Ex
K) at 38). Once Hand Tech began work, it discovered that one
of the components (the “sepex” or
“Demodulator”) did not function the way it was
supposed to, and Hand Tech had to spend significant time on
research and development for reengineering. (Hodges Decl.
(Doc. 1-2, Ex K) at 38.) This R&D time is part of what
they are billing for at an hourly rate because it was not
part of the original contract. Id. After several
months of development, Hand Tech produced a radio system for
testing with a combined capacity of 12 bits/Hz, and all the
software and data was provided to the Company as specified.
Id. At that point, Hand Tech claims the Phase Two
contract obligations were completed.
email Contract Addendum, according to Hand, was only to test
the possibility of increasing the capacity of TM by adding
Amplitude Modulation to create TM-A. Id. at 39. He
specifically told the Company that it would be a hit or miss
experiment, but initial modeling was promising. Id.,
Exs. K at 39, D at 23. After Hand Tech built the TM-A
version, he notified the Company that it was functional, but
it increased the signal-to-noise ratio (SNR)
significantly, which means in order to implement it a
stronger and larger antenna system would be required. (Hodges
Decl. (Doc. 1-2), Ex. K at 39.) The Company declined to
pursue it further and the performance required by the email
Contract Addendum was completed. Id.
Hand Tech claims that after the Company denied the TM-A
technology with the high SNR, they changed the requirements.
They told Hand Tech they needed a 16 bits/Hz version of TM-A
without the SNR increase. Hand Tech successfully
developed a system capable of this, but according to Hand,
the relationship was no longer governed by the Phase Two
Contract or the email Contract Addendum. Id. The
system they developed is what Hand Tech refers to as the
“Unbalanced Side Lobe Modulation, ” and the
Company has made no additional payments for the development
of this technology. Id. Hand Tech is now withholding
this version and threatening to sell it, if the Company
refuses to pay for the additional work. (Hodges Decl. (Doc.
1-2), Ex. L at 47.)
Company filed suit against Hand Tech alleging fraud, breach
of contract for both the Phase Two ESA Contract and the email
Contract Addendum, misappropriation of trade secrets,
misappropriation of confidential information, replevin,
conversion, and requests for preliminary and permanent
injunctive relief. (FAC (Doc. 37) at 23-31,
¶¶178-230.) The Company also attempts to pierce the
corporate vail by naming Alan Hand and his wife in the
lawsuit, with the allegation that Alan Hand used the Company
payments to purchase a boat.
their First Amended Answer (FAA), Defendants Alan Hand and
Hand Tech (Hand Tech) have denied all allegations, asserted
20 affirmative defenses, and 12 counterclaims against the Company
including: breach of contract (Counts I and XII); unjust
enrichment (Counts II and VII), promissory estoppel (Count
III); negligent misrepresentation (Counts IV and VIII);
intentional misrepresentation (Counts V and IX), interference
with prospective advantage (Count VI); breach of escrow
duties (Counts X and XI), and specific performance (Count
TerraNova Capital Partners and TerraNova Capital Equities,
Inc (TerraNova) have not been served. TerraNova is named in
Counts III through XI. Hand Tech alleges that the Company
acted through its investment banker, TerraNova, an entity
responsible for raising investment capital for the Company,
and through John Steinmetz, Chairman and President of
TerraNova and a member of the Company’s board of
directors. Hand Tech has not served TerraNova and did not
name Steinmetz as a Defendant.
Motion to Dismiss Counter-Claims
response to the counter claims, the Company filed a Motion to
Dismiss under Rule 12(b)(6).
survive a motion to dismiss, the party must plead facts with
sufficient particularity so that its claim to relief is more
than just conjecture. Ashcroft v. Iqbal, 556 U.S.
662, 677-78 (2009). “All allegations of material fact
in the complaint are taken as true and construed in the light
most favorable to the nonmoving party.” Shannon v.
Verizon Wireless, LLC., WL 7755354 (D. Ariz. 2015). The
allegations “may not simply recite the elements of a
cause of action but must contain sufficient allegations of
underlying facts to give fair notice and to enable the
opposing party to defend itself.” Id.