L-3 Communications Corp. v. SafeNet, Inc.

45 A.D.3d 1, 841 N.Y.S.2d 82
CourtAppellate Division of the Supreme Court of the State of New York
DecidedAugust 30, 2007
StatusPublished
Cited by39 cases

This text of 45 A.D.3d 1 (L-3 Communications Corp. v. SafeNet, Inc.) is published on Counsel Stack Legal Research, covering Appellate Division of the Supreme Court of the State of New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
L-3 Communications Corp. v. SafeNet, Inc., 45 A.D.3d 1, 841 N.Y.S.2d 82 (N.Y. Ct. App. 2007).

Opinion

OPINION OF THE COURT

Gonzalez, J.

This appeal requires us to determine which of two competing forums, New York or Maryland, is the appropriate forum for litigation of this dispute over an exclusive licensing agreement. Specifically, we are asked to decide whether the forum selection clause in the parties’ agreement is mandatory or permissive, whether the Maryland action should be given priority based on the first-in-time rule, and whether defendant SafeNet’s wholly-owned subsidiary is a necessary party to this action (see CPLR 3211 [a] [4], [10]).

It is unnecessary for us to address the parties’ conflicting interpretations of the forum selection clause, since even if we found it to be permissive only, we would still hold that this action should not be dismissed in favor of the earlier-filed Maryland action, which itself has subsequently been dismissed. We further conclude that New York is an appropriate forum for this litigation and that justice requires that the action proceed, notwithstanding plaintiffs failure to join a necessary party.

The subject of this litigation is a March 2001 Joint Development and Licensing Agreement (Agreement) executed by plaintiff L-3 Communications Corporation and nonparty Cylink, which was acquired by SafeNet in February 2003, and fully merged into it in December 2005. Pursuant to the Agreement, Cylink granted L-3 an exclusive license to use Cylink’s encryption technology, known as “Nethawk,” to develop a Type 1 Virtual Private Network (VPN) encryptor. A Type 1 VPN encryptor, also known as a “network” encryptor, is a device that allows users to send and receive encrypted communications over the Internet. L-3 paid Cylink a $100,000 licensing fee for use of the Nethawk technology and agreed to make royalty payments based on a percentage of its revenue from sales of Type 1 VPN products. Subsequently, in accordance with the Agreement, L-3 used the Nethawk technology to develop a Type 1 VPN product named “RedEagle.”

The Agreement included two key provisions that are relevant to this appeal. The first is a noncompetition clause, in which Cylink expressly warranted that it “shall not develop, market [4]*4or sell, directly or indirectly, a product that competes with the product (or derivatives thereof in the same product family) in the field of use” (emphasis added).

The second provision is a combined choice of law, consent to jurisdiction, and forum selection clause. It reads as follows:

“Governing Law. This Agreement shall be governed in all respects, including as to validity, interpretation and effect, by the internal laws of the State of New York without giving effect to the conflict or choice of laws rules thereof. The Parties hereby irrevocably submit to the non-exclusive jurisdiction of the courts of the State of New York and the federal courts of the United States of America located in the Southern District of New York solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and hereby waive and agree not to assert as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such documents may not be enforced in or by said courts. All claims with respect to such action or proceeding shall be heard and determined in such a New York state or federal court. The parties hereby consent to and grant any such court jurisdiction over the person of the Parties and over the subject matter of any such dispute” (emphasis added).

In June 2002, the United States Department of Defense (DOD) contracted with nonparty Mykotronx, then a subsidiary of Rainbow Technologies, to develop a Type 1 link encryptor to be marketed as “KIV-7M.” Link encryptors differ from VPN encryptors in that they secure “point to point” communications, as opposed to network communications. KIV-7M was eventually released to the Type 1 market in 2005.

In December 2003, the Agreement between L-3 and Cylink was amended, whereby L-3 made a one-time payment of $3.4 million to SafeNet in exchange for a waiver of future royalty payments. In addition, L-3 alleges that during negotiations over the amendment SafeNet orally represented that neither it, nor [5]*5its wholly owned subsidiaries, would compete with L-3 in the relevant market.

In 2004, SafeNet acquired Rainbow Technologies and subsequently merged it into SafeNet in 2005. As a result of this acquisition, Mykotronx became a wholly-owned subsidiary of SafeNet. Also in 2004, Mykotronx and DOD amended their agreement to authorize Mykotronx to develop a network adapter card, known as a HAIPE blade, which would give the KIV-7M the ability to encrypt network communications in addition to its link (point to point) encryption capability. In 2005, DOD contracted to purchase up to $150 million worth of KIV-7M products and accessories from Mykotronx.

In April 2006, L-3 accused SafeNet of violating the Agreement’s exclusive license and noncompetition clauses by permitting its wholly-owned subsidiary Mykotronx to develop a product that both utilizes Nethawk technology and competes with L-3’s Type 1 VPN encryptor RedEagle. L-3 warned SafeNet that litigation would ensue unless SafeNet stopped developing these products in violation of the Agreement. Settlement discussions took place between the parties, during which L-3 produced a draft complaint that it would file in the event the dispute could not be resolved. SafeNet contends that during these same negotiations, it offered to allow an independent third party acceptable to L-3 to inspect the KIV-7M and HAIPE blade to confirm the absence of Nethawk technology, but L-3 refused the offer. SafeNet also requested a written explanation for L-3’s proposed legal claims, which L-3 provided, and SafeNet, according to L-3, promised to provide a written response.

Instead, on May 7, 2006, SafeNet and Mykotronx filed a preemptive declaratory judgment action against L-3 in Harford County, Maryland. The complaint sought a declaration that the KIV-7M and HAIPE blade neither used Nethawk technology nor violated the Agreement, that the Agreement did not prevent Mykotronx from developing or selling these products, and that SafeNet did not orally agree to be bound by the noncompetition provision of the Agreement.

On May 11, 2006, four days later, L-3 filed the instant New York action against SafeNet seeking injunctive relief and damages. Mykotronx, which apparently has no contacts with New York, was not named a defendant in the action. The complaint alleged causes of action for breach of contract relating to the exclusive license and noncompetition provisions, fraudulent inducement with respect to the amendment to the Agreement, and breach of the Agreement’s forum selection clause.

[6]*6On June 1, 2006, SafeNet moved to dismiss or stay the New York action, arguing that the Maryland action was filed first in time, that principles of comity and forum non conveniens dictate that these claims be litigated in Maryland, and that L-3 failed to join Mykotronx, a necessary party to this action. On the latter point, Mykotronx’s president submitted an affidavit demonstrating that the corporation is fully capitalized and maintains a separate corporate structure from SafeNet, its corporate parent.

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Cite This Page — Counsel Stack

Bluebook (online)
45 A.D.3d 1, 841 N.Y.S.2d 82, Counsel Stack Legal Research, https://law.counselstack.com/opinion/l-3-communications-corp-v-safenet-inc-nyappdiv-2007.