Arista Technologies v. Arthur D. Little Enterprises

• Decision Date: 13 November 1998
• Docket Number: No. CV 95-789.,CV 95-789.
• Citation: 27 F.Supp.2d 162
• Parties: ARISTA TECHNOLOGIES, INC., Plaintiff, v. ARTHUR D. LITTLE ENTERPRISES, INC., Defendant.
• Court: U.S. District Court — Eastern District of New York

27 F.Supp.2d 162

ARISTA TECHNOLOGIES, INC., Plaintiff, v. ARTHUR D. LITTLE ENTERPRISES, INC., Defendant.

No. CV 95-789.

United States District Court, E.D. New York.

November 13, 1998.

Proskauer Rose LLP, New York, NY, for Plaintiff; Steven Kayman, Gregory S. McCurdy, of counsel.

Hamilton, Brook, Smith & Reynolds, Lexington, MA, for Defendant; David Brody, Deirdre Sanders, of counsel.

Paul Weiss Rifkind Wharton & Garrison, New York, NY, for Defendant; Robert S. Smith, of counsel

MEMORANDUM OF DECISION AND ORDER

SPATT, District Judge.

This case involves a dispute between Arista Technologies, Inc. (the "plaintiff" or "Arista") and Arthur D. Little Enterprises, Inc. (the "defendant" or "ADLE") regarding the licensing agreement of patented technology owned by ADLE. The technology in question, which may revolutionize the way we watch and video-tape our favorite television programs or sporting events, would miraculously allow video cassette recorders ("VCRs") to skip automatically past commercials in videotaped television programs when the videotapes are played back. No more Energizer Bunny parading across our television screen, no more giggling Pillsbury Dough Boy, and no more Michael Jordan hawking products for Haynes, Disney, Nike, McDonalds, or his latest movie. Unfortunately, however, the new technology that was developed in order to revolutionize the way we watch television, has become mired in a legal battle pitting Arista Technologies, the purchaser of the license of the "video spot remover" ("VSR Technology") against Arthur D. Little Enterprises, the owner of the technology.

Presently before the Court is ADLE's Motion to Confirm the Arbitration Award pursuant to section 9 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 9 and Arista's Motion to Confirm in Part and Vacate in Part the Arbitration Award pursuant to 9 U.S.C. §§ 6 and 10.

I. BACKGROUND

Arista and ADLE entered into a License Agreement (the "License") on March 19 1993. The technology in question enables VCRs to skip past commercial portions of recorded television programs when they are replayed for viewing. ADLE describes its technology, known as "video spot remover" or "VSR technology" as having two components, (1) a "stand alone" device that attaches to a consumer's VCR and provides the VCR with the commercial skipping feature, and (2) the technology by which manufacturers may incorporate the commercial skipping feature into the VCR itself prior to sale. The License gave Arista the right to market the "stand alone" device only while ADLE retained the right to license VSR technology to manufacturers who incorporated the technology directly within the VCR. The License had many provisions concerning the research and development obligations of the VSR technology. Specifically, the License called for both parties to disclose to the other any improvements or inventions related to the stand-alone product. In addition, the License specifically required Arista (referred to in the License as "ATI") to:

promptly disclose to ADLE, on an ongoing basis, all ATI Technology, as it is developed or acquired. Furthermore, Arista hereby grants to ADLE as non-exclusive, royalty-free, worldwide license to use the ATI Technology and to sublicense others to use the ATI Technology in connection with devices, systems and methods, other than Stand-Alone Devices, that embody the inventions.

(License at 2). The License did provide, however, that "If ADLE licenses ATI Technology to others, ADLE will pay ATI 50% of any gross proceeds from such licenses until Arista's provable technology development expense for the licensed ATI Technology is recouped; thereafter ADLE shall retain all such proceeds." (License at VIII.2). In addition, the License also required Arista to pay royalties to ADLE and to mark ADLE's patent number on their products. The exchange of technology, the repayment of technology expenses by ADLE to Arista, the royalties requirement, and the patent number obligation are the crux of the dispute between the parties.

After entering into the License agreement, Arista hired Michael Harvey of Chambord Technology to further design and develop the Stand-Alone product. ADLE maintains that they "urged Arista to keep the Stand-Alone product simple, so it would be low cost and easy for consumers to use." (ADLE's Memorandum in Opposition at 2). ADLE asserts that Arista ignored their advice and added complex technology to the Stand-Alone product, thus delaying production for almost two years. ADLE contends that they "lost the royalties it would have received on the simplified product which ADLE had urged Arista to design in 1993." Id. at 3. Due to their problems ADLE maintains that "Arista has sought to shift the risk and the blame to ADLE ... by seeking recision of the License" in September-October, 1995. Id. at 4. ADLE further contends that Arista "embarked on a deliberate strategy of refusing to honor the License requirement that it pay royalties, mark its product with ADLE's patent numbers, and disclose technical developments to ADLE." Id.

On the other hand, Arista maintains that they paid ADLE "$750,000 for the License based on representations that the technology was `proven' and could be developed into a customer product that could be sold to VCR owners for under $100." (Memorandum of Law in Support of Plaintiff's Motion at 1). Unfortunately for Arista, however, both the technology and the $100 estimate were never realized. Arista maintains that in response to their problems they hired Design Labs and Mr. Harvey in order to "salvage the product." Id. at 14. Thereafter, Arista claims that ADLE secretly hired Design Labs "to obtain the benefit of Arista's technology without compensating Arista as required by the License." (Declaration of Steven M. Kayman is Support of Arista Technologies' Motion at 4). Then, according to Arista, "ADLE licensed Arista's technology to Arista's competitors, the major VCR manufacturers, who incorporated it at little additional cost into VCRs before Arista's product came to market." Id. This caused Arista, in February 1995 to commence a lawsuit in the New York Supreme Court, Suffolk County, and to move for an order enjoining ADLE from unilaterally terminating the licensing agreement and a declaratory judgment that the product which ADLE was selling to other manufacturers was within the scope of the License and that Arista was therefore entitled to recover their manufacturing costs from ADLE's revenue.

On February 21, 1995, ADLE removed the action to this Court. Shortly thereafter, ADLE moved the Court for an order compelling the parties to arbitrate their dispute and staying the action pending arbitration. Arista cross-moved, and requested that the Court stay arbitration and proceed with the litigation, and that they be permitted to amend their complaint. On January 10, 1996, in a written decision, the Court granted ADLE's motion to compel arbitration and denied Arista's motion seeking permission to amend their complaint and to stay arbitration.

Both parties agreed that the arbitration would be conducted by Maurice L. Zilber, Esq. (the "Arbitrator"). The arbitration proceeded on March 17, 1997 and lasted until April 7, 1997, and included testimony from 20 different witnesses, 479 exhibits, and more than 200 pages of post-hearing briefs by the parties. On July 29, 1997, the Arbitrator submitted a six page decision, entitled, "Award of Arbitrator." The Arbitrator held that while Arista materially breached the License by failing to pay royalties, neglecting to put ADLE's patent number on the technology, and failing to disclose certain technological advances, ADLE must pay Arista approximately $700,000 for the technology it appropriated from Arista without repaying their costs. The Arbitrator did not find, however, that ADLE had committed a breach of License, fraud, misappropriation of Arista's technology, tortious interference with the contract, or a violation of Massachusetts Law.

Specifically, the Award of Arbitration held, in pertinent part, that:

1A. I find Arista Technologies, Inc.'s failure to pay royalties, properly mark products and to disclose improvements in a timely manner to be material breaches of the License Agreement and that, therefore, the license was properly terminated by Arthur D. Little Enterprises, Inc.

1B. I find ARISTA's work on the "MICRO" and associated discussions with VCR manufacturers did not breach any obligation it had to ADLE under the License Agreement.

1C. I find that any possible lapse in insurance coverage was not a material breach of the License Agreement.

1D. I find that ARISTA made good faith efforts to market a stand-alone device within the two-year period from the execution of the License Agreement.

1E. I find that ARISTA's commencement of a declaratory judgment proceeding in Federal Court was not a breach of the License Agreement.

1F. I find that ADLE did not fraudulently induce ARISTA to enter into the License Agreement.

1G. I find that ADLE did not breach its obligations to ARISTA under the License Agreement.

1H. I find that ADLE did not tortiously interfere with the relationship between ARISTA/Chanbord and Design Labs.

1I. I find that ADLE did not misappropriate ARISTA's trade secrets.

1J. I find that neither Party's activities here constituted a violation of M.G.L. Chapter 93A.

1K. I find that ARISTA developed significant items of "ATI Technology" whose "provable technology development expense" was $723,247.52.

1L. I find ADLE has licensed ATI Technology to its licensees.

Accordingly, I award $723,247.52 to ARISTA to be paid by ADLE at the rate of 50% of any gross proceeds from its licensees until such sum has been paid in full. ADLE shall account to ARISTA within thirty (30) days of this Award for any gross proceeds received through June 30, 1997 and shall account to ARISTA thereafter on or before thirty (30) days following the close of each semi-annual period,...