Holland Loader Co. v. Flsmidth A/S

• Citation: 313 F.Supp.3d 447
• Decision Date: 02 May 2018
• Docket Number: 1:16–cv–6706–GHW
• Parties: HOLLAND LOADER COMPANY, LLC, Plaintiff, v. FLSMIDTH A/S, Defendant.
• Court: U.S. District Court — Southern District of New York

313 F.Supp.3d 447

HOLLAND LOADER COMPANY, LLC, Plaintiff,

v.FLSMIDTH A/S, Defendant.

1:16–cv–6706–GHW

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

Signed May 2, 2018

David Keith Isom, Isom Law Firm PLLC, Sandy, UT, Jennifer M. Riley, Michael V. Rella, Murphy & McGonigle PC, New York, NY, for Plaintiff.

Stephen M. Harnik, Armin Kaiser, Harnik Law Firm, New York, NY, for Defendant.

MEMORANDUM OPINION AND ORDER

GREGORY H. WOODS, United States District Judge:

After devoting his life to mining, mining engineer Steven Svatek seized a golden opportunity to provide for his retirement. Struggling to build the success of his company, a small firm that lacked the resources to promote and sell its bulk materials handling products, Svatek accepted the offer of an internationally established mining systems provider to purchase his company's intellectual property so that the global behemoth could market and develop it. In acquiring the intellectual property, Defendant FLSmidth A/S agreed to use commercially reasonable efforts to actively promote the acquired products and to develop new technology based on the acquired intellectual property. Svatek's company, Plaintiff Holland Loader Company, LLC, was to receive a percentage of Defendant's sales of the products during a five-year earnout period provided for by the parties' contract. As part of the negotiated deal, Svatek also accepted an employment position with one of Defendant's subsidiaries and contributed to a key aspect of Defendant's developing business as Defendant's only U.S. mining engineer.

It was not long before Svatek saw his dream begin to crumble. Although Defendant entered into licensing agreements with each of its more than fifty subsidiaries to allow the entirety of its company to develop and promote the Holland Loader products, little more was done to market and design the products. Rather, it became increasingly clear that Defendant's motivation in contracting with Plaintiff was to acquire, not the intellectual property, but the expertise that Svatek could bring to its business. After little performance, and with two years of the earnout period remaining, Defendant officially tabled any efforts in connection with the Holland Loader products and terminated Svatek's employment, while retaining its rights to the intellectual property.

Plaintiff brought this suit, alleging that Defendant breached the parties' contract by failing to use commercially reasonable efforts to actively promote and develop the acquired assets. The Court held a bench trial from February 5 to February 8, 2018. Having considered the parties' pretrial submissions and the evidence presented at trial, the Court concludes that Plaintiff has shown by a preponderance of the evidence that Defendant breached its obligation under the contract. Nonetheless, because Plaintiff has failed to prove its damages with a sufficiently reasonable degree of certainty, the Court is constrained to enter judgment in favor of Defendant. Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, the Court makes the following findings of fact and conclusions of law.

I. FINDINGS OF FACT

A. The Parties and their Products

Plaintiff Holland Loader Company LLC ("HLC") is a limited liability company organized under the laws of Colorado with its principal place of business in Colorado. HLC produces equipment used in bulk materials handling. Its products consist of large material handling equipment used in civil engineering and surface mining projects. These products include belt loaders and unidirectional loaders that are used as excavation machines. They are propelled by bulldozers or are self-propelled and cut into earthen material in order to loosen it. The loaders then collect the loosened material and discharge it. The discharged material may be conveyed into a truck or trailer or deposited directly onto the ground. HLC's other featured product, the dozer trap, is a stationary belt loader. Bulldozers push material into the dozer trap, which collects and discharges it. The HLC product line also features off-road trucks and trailers, as well as traveling conveyors that receive, transport, and deposit material a short distance. HLC's president and managing member, Steven Svatek, is an experienced mining engineer who, on January 1, 2006, acquired over ninety-seven percent of HLC's membership interests, which he still holds today.

Defendant FLSmidth A/S ("FLS A/S") is a Danish corporation with its principal place of business in Denmark. Defendant is the parent company of over fifty subsidiaries worldwide. The FLSmidth company ("FLS")¹ has operated for 135 years and is an established supplier of bulk materials handling products in the global mining market. FLS sells customized systems and solutions for minerals and mining applications. Defendant, as the parent company, holds any intellectual property owned or obtained by the FLS family and enters into licensing agreements with each of its subsidiaries. Among those licensing agreements are a technology license agreement, a trademark license agreement, and a research and development agreement. FLS A/S itself performs no sales or engineering work. Rather, the licensing agreements permit all of Defendant's subsidiaries to develop, promote, and sell all of the FLS technologies.

FLS uses timekeeping software to track its employees' work hours and project expenses. Charge codes are typically assigned to (1) project execution, i.e. , post-sale detailed engineering work based on a customer's technical requirements, (2) approved research and development ("R & D") projects, or (3) "overhead," also known as "general admin." Generally, project execution is prioritized at the expense of internal R & D projects. Defendant manages the allocation of R & D funds based on requests by its subsidiaries. All projects and product lines compete for funding on a global level, based on FLS's R & D budget. Allocations are made based on an analysis of the project or product's impact on FLS's global business. In order to make informed allocation decisions, Defendant requires its subsidiaries to submit a business case for all R & D funding requests. Defendant evaluates the competing business cases and makes R & D allocations considering the individual project's attractiveness to the market, past sales performance, revenues, profitability, and FLS's ability to sell a product line.

Every subsidiary also has its own limited budget for purposes of internal projects and general expenses. If Defendant decides not to allocate part of its global R & D budget to a project, or if an R & D request is pending, a subsidiary may decide, nonetheless, to finance and proceed with that project using its own overhead. Overhead charges encompass all internal expenses without distinguishing between individual items.

At FLS Spokane, Inc., the subsidiary located in Spokane, Washington and the center of much of the conduct at issue in this case, R & D Department Manager Willem Fourie devised an internal financing mechanism for projects without pre-approved R & D or project execution charge codes, whereby engineers could work on the project and charge their time accordingly. These time entries would then either be booked to project execution if the product in question was sold, or to R & D if global funds were subsequently assigned. If neither was the case, any expenses related to that internal project would be charged to overhead.

B. The Parties Test the Soil for a Long-term Relationship

Prior to 2012, HLC's ability to grow as a business was limited. The company's promotional and sales capacity was not up to industry standards, and the company was unable to offer potential customers the substantial financial and commercial guarantees that they demanded. Because of its limited resources, HLC was only able to sell one belt loader, two used trailers, and spare parts between 2002 and May 2012. The belt loader was sold with a refurbished frame at a price of approximately $500,000. The company also owed an internal debt in the approximate amount of $500,000.

In 2005 or 2006, Svatek met Darrell White, former president and CEO of FLS Spokane, at a mining trade show in Las Vegas. White was impressed with Svatek's expertise as a mining engineer and on several occasions retained Svatek as a consultant. In 2007, FLS engaged Svatek's consulting services in connection with a mining project in Australia. Shortly thereafter, Svatek and White began talks regarding a possible acquisition of HLC by FLS. These talks went on over the course of four years, during which Svatek continued to consult with FLS.

In the spring of 2012, after several rounds of negotiation between White and Svatek, White worked with members of the FLS group executive management team to draft a memorandum proposal to be presented to the FLS board of directors recommending the acquisition of Holland Loader products. That memorandum, dated April 30, 2012, identified new technology, a bidirectional loader, that could be developed based on Holland Loader intellectual property by incorporating the existing unidirectional loader. The machine would save the user time by cutting down the line in one direction and then continuing to cut on the return trip, rather than making the return trip without performing additional cutting. The executive management team projected that a prototype of the bidirectional loader would cost approximately $1 million in research and development (R & D) funds and that once marketed, the machine would sell for approximately $15 million.

The April 30, 2012 memorandum also included projections of revenue expected on an annual basis from FLS's acquisition of the Holland Loader products. According to those projections, $1.5 million in gross revenue was expected by the end of 2012, with the figure reaching $30 million in 2015 and $36 million in 2016. As Darrell White acknowledged at trial, however, those figures were not based on any historical data. Rather, the...