In Re: Nortel Networks Inc.

In re: NORTEL NETWORKS, INC., et al., Debtors In re: NORTEL NETWORKS LTD., et a., Debtors NORTEL NETWORKS, INC. and NORTEL NETWORKS LIMITED, et al., Plaintiffs, v. COMMUNICATIONS TEST DESIGN, INC., Defendant.

Case No. 09-10138 (KG)

Case No. 09-10164 (KG)

Adv. Pro. No. 10-53065 (KG)

Re: D.I. 22

Re: D.I. 96

D.I. 27

Adv. Pro. No. 10-5306

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

Date: March 22 , 2011

OPINION DENYING DEFENDANT'S MOTIONS TO DISMISS

AMENDED COMPLAINTS & DENYING PLAINTIFFS'

MOTION TO DISMISS COUNTERCLAIMS¹

Defendant Communications Test Design, Inc. ("CTDI") has moved to dismiss the Amended Complaints of Nortel Networks, Inc. ("NNI") and Nortel Networks Limited ("NNL" and, collectively with NNI, the "Nortel Plaintiffs" or the "Plaintiffs") under Fed. R. Civ. P. 12(b)(6) or, if such relief is denied, to dismiss the counts alleging fraud pursuantto Fed. R. Civ. P. 9(b).² The Nortel Plaintiffs have moved to dismiss the counterclaims asserted by CTDI in its Answers to the Amended Claims under Fed. R. Civ. P. 12(b)(6).

For the reasons set forth below, CTDI's Motions to Dismiss the Amended Complaints and request to dismiss the counts alleging fraud are DENIED. The Nortel Plaintiffs' Motions to Dismiss Counterclaims are DENIED. However, although not dismissing CTDI's counterclaims, the Court will specify in its Order that the counterclaims may not serve as a basis for affirmative recovery against Plaintiffs.

JURISDICTION

The Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 157 and 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. § 1409.

BACKGROUND

I. Procedural History

NNI and affiliated entities filed for protection under Chapter 11 of the Bankruptcy Code on January 14, 2009. NNI initiated the present adversary proceeding on September 21, 2010, and filed an Amended Complaint (D.I. 20) on November 12, 2010. On November 15, 2010, CTDI filed a Motion to Dismiss the Amended Complaint (D.I. 22), which is presently before the Court.

Nortel Networks Corp. and affiliated entities, including NNL, filed petitions for recognition of certain Canadian proceedings under Chapter 15 of the Bankruptcy Code.This Court granted such recognition by Order entered February 27, 2009. On September 21, 2010, NNL filed a complaint against CTDI, which it subsequently amended (D.I. 25). CTDI filed a Motion to Dismiss Amended Complaint (D.I. 27)(together with the Motion to Dismiss Amended Complaint of NNI, the "Motions").

On December 10, 2010, the Court consolidated the Nortel Plaintiffs' adversary proceedings. While substantially identical, the complaints differ in that NNL's complaint includes additional causes of action related to intellectual property, as NNL holds the intellectual property rights for the various Nortel entities, including NNI.

CTDI filed its Answers to the Amended Complaints (D.I.'s 53 & 54) on January 3, 2011. The Answers assert counterclaims against Plaintiffs, which Plaintiffs move to dismiss (NNI D.I. 96).

Court heard argument on the Motions to Dismiss Amended Complaints on January 5, 2011. The parties submitted post-hearing letter-briefs. On March 1, 2011, the parties submitted that the Nortel Plaintiffs' Motion to Dismiss CTDI's Counterclaims was also ready for disposition.

II. Contractual History

Nortel contracted with CTDI for repair of, and related services for, certain Nortel products. Various agreements between the parties granted CTDI access to propriety intellectual property, trade secrets, and technical information, and also permitted CTDI to purchase proprietary components from Nortel.

The following are the underlying agreements (collectively, the "Agreements") between the parties:

• Technical Information Agreement (1994): CTDI to repair and update Nortel telsets.

• Asset Purchase Agreement (July 1999): Sale of Nortel's Nashville, TN facility and on-site parts to CTDI.

• Master Contract Repair Services Agreement (September 1999): CTDI to repair Nortel products and to provide repair services to Nortel directly.

• Alliance Agreement (2006): Established and defined business processes in support of joint marketing and provision of repair services to certain customers.

• Technical Information License Agreement (2006): CTDI given limited license to use Nortel's "know-how."

• MCRSA Amended (September 2007): CTDI to repair Nortel telsets for 3rd parties with royalty payments to Nortel.

CTDI'S MOTIONS TO DISMISS THE NORTEL PLAINTIFFS'

AMENDED COMPLAINTS

I. The Amended Complaints

The Nortel Plaintiffs allege that CTDI breached the Agreements by using Nortel's proprietary information and components to manufacture Nortel products "from scratch" and to refurbish or re-manufacture Nortel products and sell them to third parties. Nortel further alleges that CTDI's fraudulent activities were willful and malicious.

A. Claims for Relief

In their Amended Complaints, the Nortel Plaintiffs assert the following causes of action:

• Misappropriation of Trade Secrets (NNI Count I; NNL Count I)

• Fraud (NNI Count II; NNL Count VII)

• Breach of Contract (NNI Count III; NNL Count V) • Breach of the Implied Covenant of Good Faith and Fair Dealing (NNI Count IV; NNL Count VI)

• Unjust enrichment (NNI Count V; NNL Count VIII)

NNL pleads the following additional claims related to Nortel's intellectual property rights, which are held by NNL (collectively, the "Trademark Claims"):

• Trademark Infringement (NNL Count II)

• Dilution of Famous Mark (NNL Count III)

• False Designation of Origin (NNL Count IV)

B. Alleged Damages

The Nortel Plaintiffs state that the limited information they have regarding CTDI's allegedly fraudulent activities establishes resultant direct losses to Nortel of at least $44,000,000 in lost sales. The Nortel Plaintiffs also allege that CTDI was unjustly enriched by greater than $30,000,000 from the sale of counterfeit goods to over 40 customers from 2005 through 2009, and that CTDI improperly sold millions of dollars of Nortel circuit packs without compensating Nortel. The Nortel Plaintiffs assert that compensatory damages plus exemplary and punitive damages-to which Nortel is entitled if CTDI's activities are found to be willful and malicious-will be greater than $130,000,000.

II. CTDI's Motion to Dismiss Amended Complaint

On November 15, 2010, CTDI filed its Motions to Dismiss Amended Complaints. In its Motions, CTDI sets forth numerous grounds upon which the Amended Complaints, or portions thereof, should be dismissed. The Court will examine each in turn.

III. Judicial Estoppel

In its Motions to Dismiss, CTDI argues that the Nortel Plaintiffs' claims against CTDI are barred under the doctrine of judicial estoppel. CTDI asserts that the NortelPlaintiffs' current arguments are irreconcilably inconsistent with their previous claims in litigation with Atlanta Telephone Co. ("ATC") and in separate litigation with SWB of Nashville, Inc. ("SWB").

A. Background

According to Plaintiffs, in July 2008 one of ATC's customers communicated with them. The customer had received 3,700 Nortel telsets from ATC that were advertised as new, but, according to the customer, clearly were not. During resulting litigation, Nortel v. ATC (N.D. Ga.), ³ Nortel learned that ATC had acquired the telsets from SWB. Through subsequent litigation against SWB (E.D. Tenn.), ⁴ Nortel learned that the counterfeit telsets that SWB passed on to ATC originally came from CTDI. Nortel then exercised its right under the Master Contract Repair Services Agreement to conduct an audit of CTDI's records. The audit allegedly showed that CTDI engaged in fraudulent activities in breach of its contracts with Nortel, and engaged in a cover-up of same. Nortel asserts that it was not aware of CTDI's fraudulent activities prior to the SWB litigation, due to CTDI's willful concealment and repeated misrepresentations.

CTDI argues that in Nortel's prior litigations against ATC and SWB, it claimed that ATC and SWB were the sources of the counterfeit telsets, which is inconsistent with its current claims against CTDI.

Nortel counters that the earlier lawsuits did not allege that only ATC and SWB were guilty of improper conduct, nor did they allege that the conduct that formed the basis ofthe ATC and SWB lawsuits was the only improper conduct that occurred. Nortel argues that it only learned of CTDI's improper conduct through the ATC and SWB litigations, and that it should not be disadvantaged by CTDI's fraudulent concealment.

B. Legal Standard

Judicial estoppel is an equitable doctrine, imposed at the court's discretion. State of New Hampshire v. State of Maine, 532 U.S. 742 (2001). There are no inflexible prerequisites and no exhaustive formula that a court must apply. But there are several factors that typically inform a court's decision whether to apply the doctrine of judicial estoppel:

• whether the party's later position is clearly inconsistent with its position in the prior court action;

• whether the earlier court was persuaded to accept the earlier position, such that a decision by a later court accepting an inconsistent position results in the perception that one of the courts was misled;

• whether the party seeking to assert the inconsistent positions would derive an unfair advantage therefrom.

See Id. (internal citations omitted).

The Third Circuit Court of Appeals has held that:

[j]udicial estoppel may be imposed only if:

(1) the party to be estopped is asserting a position that is irreconcilably inconsistent with one he or she asserted in a prior proceeding;

2) the party changed his or her position in bad faith, i.e., in a culpable manner threatening to the court's authority or integrity; and

3) the use of judicial estoppel is tailored to address the affront to the court's authority or integrity.

Montrose Med. Grp. Participating Sav. Plan v. Bulger, 243 F.3d 773, 777-78 (3d Cir. 2001), quoted by Dam Things from Denmark, a/k/a Troll Company ApS v....