You are embroiled in a contentious trade secret lawsuit. In the midst of the litigation, your competitor files for bankruptcy and proposes to sell its assets. Do those assets include the trade secrets? Which court makes that determination?
In In re STAR Dynamics Corp., the U.S. Bankruptcy Court for the Southern District of Ohio grappled with these issues.[1] Specifically, the court considered whether it should abstain from hearing a pre-petition state court action and grant relief from the stay to allow the state court action to proceed.[2]
The debtor, STAR Dynamics Corp., develops, sells and services instrumentation radar systems for missile test ranges utilized by the U.S. and foreign governments.[3] Its competitor, BAE Systems Technology Solutions & Services Inc., is a U.S. subsidiary of a global-level defense contractor based in Great Britain and is engaged in the radar range business for the testing of missiles and other weaponry.[4]
BAE filed a complaint for injunctive relief and damages against the debtor in state court, alleging that five of its former employees went to work for the debtor in 2012 and took with them certain radar technology.[5] The debtor filed for bankruptcy and in its schedules, identified intellectual property, proprietary technology and radar products as property of the estate, some of which could be subject to BAE's claims.[6] The debtor also scheduled executory contracts that were the subject of the state court litigation.[7]
The debtor proposed to sell its business and obtained the appointment of an investment bank to arrange the sale.[8] BAE filed a motion for relief from the stay to continue litigation in state court, and following the debtor's removal of the action to federal court (which referred the case to the bankruptcy court), filed a motion to remand.[9]
In its analysis, the bankruptcy court noted that critical to any sale of the debtor is its ability to continue to bid on contracts and utilize technologies that were temporarily enjoined by, and subject to, the state court litigation.[10] The court's paramount concern was whether the dispute over who owns the technology and can market the technology could be adjudicated in a timely manner in the state court without jeopardizing the debtor's efforts to return to financial health.[11]
The court denied the motions to remand and for stay relief, concluding that it is unclear how the question of who owns what could be finally determined by the state court without undue delay, prejudice and harm to the debtor's efforts to complete a sale.[12] The court noted that there are other means to preserve BAE's interests in the property and resolve the dispute, including a Bankruptcy Rule 7001(2) proceeding to determine the validity, priority or extent of a lien or other interest; a Rule 7001(7) proceeding to obtain an injunction or other equitable relief; a Rule 7001(9) proceeding to obtain a declaratory judgment; and a Rule 7001(10) proceeding to determine a removed claim or cause of action.[13]
Under what circumstances a bankruptcy court would abstain remains to be seen. In this case, the bankruptcy court found that BAE's estimates of the time that was required to adjudicate the dispute in state court were overly optimistic in light of the remaining work to be done and the fact that the case had already been in state court for more than a year without any final resolution.[14] Further, even if trial were possible in time for the debtor to consummate a sale, the court found that there was no mention of the time and expense that would be required to aid a jury in understanding the technology, how to mitigate inadvertent disclosure during jury deliberations, or the time neded to complete any appeals.[15] However, if the state court proceeding were closer to a resolution, the result might be different.
[1] 504 B.R. 894 (Bankr. S.D. Ohio 2014).
[2] Id. at 896-98.
[3] Id. at 896.
[4] Id.
[5] Id.
[6] Id. at 897.
[7] Id.
[8] Id.
[9] Id. at 896-98.
[10] Id. at 897.
[11] Id. at 899-900.
[12] Id. at 900.
[13] Id.
[14] Id. at 899.
[15] Id.