TM Technologies Inc. v. Hand Technologies Inc.

          ORDER

          Honorable David C. Bury, Judge.

         The Court grants the Motion to Dismiss in part and denies it in part for the reasons explained below.

         I. Background

         TM 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^[1] of a carrier signal that allows for a higher data transfer rate. Id. The Company refers to the technology as “TM.” Id.

         The 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^[2]. Id. ¶64-66.

         The 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).

         The ESA 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. Id.

         The 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.

         Milestones 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 provisions.

         Shortly 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^[3] 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).

         As part 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 functional. Id.

         Hand 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^[4]”) 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.

         The 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.

         Finally, 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.)

         The 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.

         In their First Amended Answer (FAA), Defendants Alan Hand and Hand Tech (Hand Tech) have denied all allegations, asserted 20 affirmative defenses, and 12^[5] 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 XII).

         Defendants 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.

         II. Motion to Dismiss Counter-Claims

         In response to the counter claims, the Company filed a Motion to Dismiss under Rule 12(b)(6).

         To 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. ...