Edo Corp. v. Beech Aircraft Corp.

• Decision Date: 21 October 1988
• Docket Number: Civ. A. No. 85-2204-S.
• Citation: 715 F. Supp. 990
• Parties: EDO CORPORATION, Plaintiff, v. BEECH AIRCRAFT CORPORATION, Defendant.
• Court: U.S. District Court — District of Kansas

715 F. Supp. 990

EDO CORPORATION, Plaintiff, v. BEECH AIRCRAFT CORPORATION, Defendant.

Civ. A. No. 85-2204-S.

United States District Court, D. Kansas.

October 21, 1988.

Roger D. Stanton, Stinson, Mag & Fizzell, Overland Park, Kan., Richard D. Greene, Morris, Laing, Evans, Brock & Kennedy, Chartered, Wichita, Kan., John Cibinic, Annandale, Va., Calvin E. Thorpe, Thorpe, North & Western, Sandy, Utah, for plaintiff.

Paul B. Swartz, Jeff Kennedy, Robert Martin, Martin, Pringle, Oliver, Wallace & Swartz, Wichita, Kan., for defendant.

MEMORANDUM AND ORDER

SAFFELS, District Judge.

A trial on this matter was held to the court on August 29, 1988, through September 9, 1988. After considering the evidence presented at that trial along with the written submissions of the parties, the court is prepared to rule.

FINDINGS OF FACT

1. Plaintiff EDO Corporation ("EDO") is a New York corporation, having its principal place of business in the State of New York.

2. Fiber Science, Inc. was a California corporation and a wholly-owned subsidiary of EDO which merged with and into EDO in November 1983. As a result of the merger, EDO became the successor-in-interest to all contractual rights and obligations of Fiber Science, Inc. Fiber Science, Inc., and thereafter EDO's Fiber Science Division (both referred to hereinafter as "FSD") have maintained a principal place of business in Salt Lake City, Utah.

3. Defendant Beech Aircraft Corporation ("Beech") is a Delaware corporation, having its principal place of business in the State of Kansas.

4. Beginning in September, 1982, Beech and EDO entered into a series of research and development contracts related to a new composite aircraft, the Starship. Beech chose EDO's Fiber Science Division as a subcontractor on the Starship research and development program because of FSD's experience with composite filament winding. Composite filament winding is a state of the art process for constructing non-metal aircraft. FSD was to design and construct the main wing for the Starship.

5. The first contract between FSD and Beech provided that FSD would conduct a design study for the wing structure and propose a design to Beech. The parties entered into this first contract in late 1982. The second, third and fourth contracts provided for further design, development and construction of the Starship wing.

6. The contracts incorporated by reference termination clauses identical to those contained in the Armed Services Procurement Regulations (ASPR). The clause at issue here provides as follows:

The performance of work under this contract may be terminated, in whole or from time to time in part, by the buyer in accordance with this clause. Termination of work hereunder shall be effected by delivery to the seller of a Notice of Termination specifying the extent to which performance or work under the contract is terminated and the date upon which such termination becomes effective.

7. This "termination for convenience" clause entitled the terminated party to receive all of its direct costs related to the contract as of the termination date, along with any other direct costs related to termination of the contract, plus a reasonable profit.

8. The first contract between EDO and Beech also provided that all patent and inventive rights arising from the contract would become the property of Beech, except that "procedures, designs, processes and concepts which were unique to FSD and which were developed prior to this subcontract that FSD has documentation for shall be exempt. FSD will so indicate in the final report to Beech the procedures, designs, processes and concepts that are exempt."

9. The second, third, and fourth contracts contained similar language to that stated above, except that FSD was not required to set out the exempt procedures, designs, processes and concepts in writing.

10. The contracts in question also contained a non-competition clause. That clause provided:

For a period of six (6) years after the date of execution of this subcontract ... subcontractor shall not, except as authorized by contractor, provide to any third party, aircraft wing structure design consulting, manufacturing techniques, or manufacturing, tooling, or other technical information, or otherwise assist any such third party in the manufacturing of aircraft wing structures as the same relate to fixed wing aircraft having gross weights less than 85,000 lbs. or with respect to inventions, trade secrets, technical information or data which was developed pursuant to contracts with subcontractor and/or title to the same belongs to contractor per this contract.

In negotiating the contracts, the parties had also considered an alternative clause, which was more inclusive and prohibited EDO from doing work on any aircraft structure, wing or otherwise, for another manufacturer. That option was rejected by the parties, and the less restrictive clause was agreed upon instead.

11. After the December 1982 contract, FSD developed its design concept for the Starship main wing and presented the design study to Beech in April 1983. That study included a proposal that an "H" section concept be employed to attach spars to the wing skins.

12. FSD did not indicate in the report that the "H" section concept was proprietary to FSD or that the concept was exempt from the contractual provision bestowing upon Beech patent and inventive rights to all concepts and designs developed pursuant to the contracts. Nor did FSD indicate at a later time that the concept was proprietary to FSD or exempt for the contractual inventive rights clause.

13. Work under the contracts proceeded, and in late 1983, FSD began to gear up to produce the Starship main wing.

14. In late 1983, FSD was presented an opportunity to bid on a research and development project for an Italian company, Rinaldo Piaggio. Piaggio was developing an aircraft called the GP-180. Like the Starship, the GP-180 was a composite aircraft and was to employ a forward wing as a stabilizer, rather than the more conventional stabilizing back wing.

15. FSD was asked to bid on several components of the GP-180, including the forward wing and the wing tips and flaps on the main wing. FSD was not asked to bid on the main wing itself.

16. FSD officials were enthusiastic about the Piaggio opportunity, and began preparations to submit a bid. They also contacted Beech officials "out of courtesy" to advise them of the Piaggio opportunity.

17. Beech officials were strongly opposed to FSD pursuing the Piaggio opportunity. They cited the fact that Piaggio was a strong competitor of Beech, that the GP-180 would be a direct competitor of the Starship, and that it would be nearly impossible for FSD to keep work on the two projects separate. They also stated that they considered it a breach of the noncompetition clause in the contracts between EDO and Beech.

18. Beech President and Chief Executive Officer, Linden Blue ("Blue"), told FSD officials that if they passed up the Piaggio opportunity and continued to work with Beech, FSD could be assured that it would continue in a productive relationship with Beech for some time into the indeterminate future. He pointed out that working with Piaggio would amount to "consorting with the enemy" and that such an arrangement might alter and compromise FSD's good working relationship with Beech. However, when FSD President Robert Berrisford ("Berrisford") asked Blue for a written commitment to a long term relationship with FSD, Blue refused.

19. FSD ultimately decided to forego the Piaggio opportunity, and instead to continue working with Beech.

20. In early 1984, Beech began to reexamine the Starship project and its progress. Leading this reexamination was D. Brainerd Holmes ("Holmes"), President of Beech's parent company, Raytheon.

21. Holmes and several Beech employees with whom he consulted were dissatisfied with the progress of the Starship project. Holmes did not believe several aspects of the project, including the main wing, were proceeding on schedule. He and several technical advisors at Beech had growing concerns about the feasibility of FSD's proposal. They felt there were too many risks in the method by which FSD proposed the main wing be built. Overall, Holmes felt there were too many "unknowns" with the project, he questioned the use of many outside contractors, and he was concerned that Beech would not meet its schedule if they did not restructure the program and rid it of the risks.

22. At a meeting on March 20, 1984, Holmes discussed his concerns with the Beech engineering team. The engineering team expressed no confidence in completing the Starship program on schedule or in building the aircraft as originally proposed.

23. After discussing his concerns at that meeting, Holmes decided to order a restructuring of the Starship program. Part of the restructuring proposal was to bring the construction of the main wing "in house" at Beech and employ an alternative design developed for the main wing at Beech.

24. On that same day after the meeting, Blue notified FSD officials that Beech was terminating their contracts.

25. FSD immediately formed a termination team, which would determine all amounts Beech would owe FSD under the "termination for convenience" clause of the contracts.

26. After consultation with Beech officials, the parties agreed on almost all amounts owed FSD. However, the parties disagreed as to whether FSD was entitled to receive "unabsorbed overhead." Unabsorbed overhead is that amount of "fixed" costs incurred at FSD which could no longer be allocated to the Starship project as a portion of the cost of that project. Beech refused to pay any amounts attributable to unabsorbed overhead.

27. Beech subsequently applied for and received a patent on the "H" joint technology. This concept is now being employed in the Starship.

CONCLUSIONS OF LAW

In a Memorandum and Order dated June 16, 1988, this court disposed of...