In re Avaya Inc.

• Decision Date: 06 May 2019
• Docket Number: 18-CV-6312 (JPO)
• Parties: IN RE: AVAYA INC., et al., Debtors.
• Court: U.S. District Court — Southern District of New York

602 B.R. 445

IN RE: AVAYA INC., et al., Debtors.

18-CV-6312 (JPO)

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

Signed May 6, 2019

Edward C. Donovan, Michael A. Pearson, Jr., Nathan S. Mammen, Kirkland & Ellis LLP, Washington, DC, Gregory Steven Arovas, James H.M. Sprayregen, Natasha Soyon Hwangpo, Kirkland & Ellis LLP, New York, NY, Jonathan S. Henes, Kirkland & Ellis LLP, Los Angeles, CA, for Debtors.

OPINION AND ORDER

J. PAUL OETKEN, United States District Judge

This is a bankruptcy appeal involving a telecommunications company and one of its former suppliers. At issue in this appeal is a procedure called claim estimation, which allows a bankruptcy court to estimate the value of a creditor's claims against a debtor for purposes of avoiding undue delay in the administration of the bankruptcy proceedings. See 11 U.S.C. § 502(c). Appellant-creditors SAE Power Incorporated and SAE Power Company (together, "SAE") contend that the Bankruptcy Court below committed reversible error in estimating the value of SAE's trade-secret, contract, and fraud claims against appellee-debtor Avaya, Inc. ("Avaya"). Because the bankruptcy court committed no such error, its decision is affirmed.

I. Background

The factual and procedural background of this dispute is largely set forth in the Bankruptcy Court's Memorandum Decision estimating SAE's claims against Avaya. In re Avaya Inc. , No. 17-10089, 2018 WL 1940381, at *1–6 (Bankr. S.D.N.Y. Apr. 23, 2018). The Court recounts below only those aspects of this case's factual and procedural background that are relevant to this appeal.

SAE is a manufacturer of electronic components and power supplies. Id. at *1. Avaya is a technology company specializing in communications systems. Id. Among Avaya's products is the G650 Media Gateway (the "G650"), which is a server designed to integrate land-line telecommunications systems with Voice-over-Internet-Protocol networks. Id. At issue in this appeal are certain component parts of the G650, specifically two power-supply units designed to convert AC voltage into DC voltage in order to power the G650. Id. SAE was the initial manufacturer of the G650's power-supply units, and SAE produced these units for Avaya from 2003 to 2008. Id. at *1–2. But by 2008, Avaya had opted to retain a different supplier, Delta Products Corporation ("Delta"). Id. at *2. SAE asserts that when switching suppliers, Avaya misappropriated SAE's trade secrets related to the functioning of the power-supply units. See id. at *1.

In January 2010, SAE filed suit against Avaya in the United States District Court for the District of New Jersey (see A-166–86¹ (SAE's initial complaint against Avaya)), and the amended complaint in that suit asserted, among other things, claims of breach of contract, unjust enrichment, fraud, and misappropriation of trade secrets (see A-188–230 (SAE's amended complaint)). As the Bankruptcy Court fairly summarized, "[t]he gravamen of SAE's claims was that Avaya misappropriated SAE's trade secrets by providing Delta with samples of SAE's [power-supply units] as well as SAE's plans and specifications to allow Delta to reverse engineer the [power-supply units]." In re Avaya Inc. , 2018 WL 1940381, at *2. In January 2011, the parties stipulated to the dismissal of SAE's federal suit on jurisdictional grounds, see id. , and SAE refiled its complaint in New Jersey Superior Court (see A-107–49 (SAE's state court complaint against Avaya)). On July 19, 2016, the New Jersey Superior Court granted partial summary judgment to Avaya, dismissing SAE's claims against Avaya to the extent that they "related to Avaya having provided SAE [power-supply units] to [Delta] or [Delta] having received, opened, inspected, tested, studied, or copied such SAE [power-supply units]," but allowing SAE to proceed to discovery on claims based on Avaya's alleged sharing of some of SAE's internal test reports and other confidential information with Delta.² (A-243.)

On January 19, 2017, Avaya initiated Chapter 11 bankruptcy proceedings, automatically staying SAE's New Jersey lawsuit. See In re Avaya Inc. , 2018 WL 1940381, at *2. SAE then filed with the Bankruptcy Court a proof of claim for its stayed "breach of contract, theft of trade secrets, [and] fraud" claims against Avaya, and, following various amendments to its proof of claim, SAE eventually valued those claims at $379,414,364.00, exclusive of interest. (A-247.) Avaya objected to SAE's claims, as well as to SAE's valuation of those claims. (A-69.) At a September 13, 2017 conference addressing Avaya's objections, the Bankruptcy Court resolved to estimate SAE's claims, and it directed the parties to confer and propose "an estimation procedure ... for distribution purposes." (A-327.)

On September 28, 2017, SAE and Avaya stipulated to an estimation procedure. (A-364–69.) The parties agreed to stipulate (for claim estimation purposes only) to certain of the factual allegations regarding liability that had been set forth by SAE in the underlying New Jersey proceedings, and they agreed that the amount of SAE's damages would be estimated by the Bankruptcy Court following a hearing that would consist exclusively of expert witness testimony. (A-366.) SAE agreed to produce any expert reports it intended to rely on in connection with the estimation hearing on or before October 5, 2017, and Avaya agreed to produce its expert reports on or before October 11, 2017. (A-367.) The parties further agreed that "[a]ll exhibits to be used in the hearing" would be "either identified in one of the expert reports to be submitted in accordance with [the stipulation's deadlines] or used in the depositions of an expert." (A-366.) SAE then submitted an economics expert report from Michael LoGiudice (A-1056–80), and Avaya submitted an economics expert report from Jonathan Arnold (A-985–1041) and a technical expert report from Mark Horenstein (A-577–647).

On October 13, 2017, SAE filed an "emergency" motion in limine to exclude Horenstein's expert testimony from the estimation hearing. (A-411–28.) The nub of SAE's objections to Horenstein's report was that Horenstein's report failed to properly assume the fact of Avaya's liability for the misappropriation of SAE's trade secrets, which contravened the parties' stipulation that Avaya would not attempt to contest liability at the estimation hearing. (See, e.g. , A-412, A-421.) Then, on October 15, 2017, SAE filed an amended version of LoGiudice's economics expert report. (A-1085–1102.) Soon thereafter, the parties agreed to the following changes to their proposed estimation procedures and deadlines: SAE would withdraw its motion in limine and Avaya would not object to LoGiudice's amended report, and the parties would forego the damages hearing they had previously stipulated to and instead allow the Bankruptcy Court to conduct its estimation on the papers alone. (A-502–03; see also A-505, A-533 ¶ 3.) The parties further agreed that SAE would serve no additional expert reports, that Avaya would be permitted to serve one final additional expert report from Arnold, and that on November 1, 2017, SAE and Avaya would each submit simultaneous briefing addressing the parties' expert reports and attached exhibits. (A-532–33 ¶¶ 1–2.)

When the November 1, 2017 briefing deadline arrived, SAE attached to its brief a declaration from one of its lawyers with a chart highlighting "factual errors in the report of Avaya's expert Dr. Horenstein." (A-1155 ¶ 6.) Although the chart did not cite any evidence or exhibits in support of SAE's objections to the Horenstein report (see generally A-1244–52), SAE's counsel represented to the Bankruptcy Court that her firm was "ready and willing to provide evidentiary support ... regarding the statements made in [the chart] upon ... request" (A-1155 ¶ 6). Then, on January 12, 2018, SAE submitted a declaration from Allan Brown, its Chief Technical Officer ("CTO"), explaining that he had prepared the chart that had been attached to SAE's claim-estimation brief and setting forth his qualifications for having done so. (A-1306–09.) Avaya moved to strike the Brown declaration on timeliness grounds, arguing that Brown's declaration was essentially an untimely expert rebuttal to Horenstein's report. (A-1316–22.) The Bankruptcy Court agreed with Avaya that Brown's declaration was untimely based on the parties' stipulated estimation procedures and briefing schedules. (See A-1353.) In describing the Brown declaration as a belated attempt to rebut Horenstein's report, the Bankruptcy Court also noted that aside from that declaration, SAE had failed to rebut Avaya's technical expert evidence with anything other than attorney argument; the Bankruptcy Court explained that if SAE had wanted to establish an evidentiary basis for those arguments, it should have moved to modify the parties' stipulated briefing schedule, in order to allow SAE to submit a rebuttal expert report past the deadline for the filing of such reports. (A1352–55.) SAE not having done so, the Bankruptcy Court granted Avaya's motion to strike the Brown declaration. (A-1357.)

With briefing on the estimation of SAE's claims against Avaya then closed, the Bankruptcy Court issued its Memorandum Decision estimating SAE's claims against Avaya ("the Opinion") on April 23, 2018. (A-1473–99.) For reasons already explained, the Bankruptcy Court explained that "the evidentiary record consist[ed] of the Horenstein Report , two reports by LoGiudice, two reports by [Avaya's] damages expert, Jonathan I. Arnold, and the exhibits attached to the parties' trial briefs," In re Avaya Inc. , 2018 WL 1940381, at *3, and noted that "SAE did not submit a report from a technical expert to rebut any of Horenstein's conclusions," id. at *4. Having thus defined the scope of the trial record, the Bankruptcy Court then assessed and summarized the facts and conclusions to be drawn from the parties' properly filed expert reports and exhibits. See id. at *3–6.

The Bankruptcy Court...