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Connell v. Kln Steel Products Ltd.

March 16, 2009

MICHELLE D. CONNELL AND HI-TECH BEDS SYSTEMS CORPORATION, A WYOMING CORPORATION PLAINTIFFS,
v.
KLN STEEL PRODUCTS LTD., A TEXAS LIMITED PARTNERSHIP, KLN STEEL PRODUCTS CO. AND CLARK/BLINDERMAN/KNIGHT, LLC, AN ILLINOIS LIMITED LIABILITY COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Michelle D. Connell ("Connell") and Hi-Tech Beds Systems Corporation ("Hi-Tech") filed suit against KLN Steel Products, Ltd. ("KLN") and Clark/Blinderman/Knight, LLC ("Clark") alleging patent infringement (Count One), Illinois state law claims of misappropriation of trade secrets (Count Two), unfair competition (Count Three) and interference with prospective business relationships (Count Four) after Clark and the United States Navy awarded contracts for the supply of beds known as "racks" for new recruit barracks at the Great Lakes Naval Base to KLN rather than Hi-Tech. Defendants filed a Motion for Summary Judgment on all of Plaintiffs' claims. This Court held that a dispute of material fact existed as to whether the Navy had authorized and consented under 28 U.S.C. § 1498 to any patent infringement on KLN's part. In that decision, this Court found that the Navy was an indispensable party to the dispute because if the Navy directed the infringement, Defendants were not liable pursuant to 28 U.S.C. § 1498. The Court then transferred the matter to the Court of Federal Claims. This Court did not consider Defendants' Motion for Summary Judgment on Plaintiffs' state law claims but rather transferred it as well to the Court of Federal Claims.

Plaintiffs appealed that decision to the Federal Circuit, and it reversed. The Federal Circuit relied on its decision in Fisherman's Harvest, Inc. v. PBS & J, 490 F.3d 1371 (Fed.Cir. 2007), which was decided while appeal was pending in this case and held for the first time that a court that can not transfer a case to the Court of Claims under 28 U.S.C. § 1404 because the Court of Claims is not a "district or division" as defined therein. The Federal Circuit further held that this Court could not, as an alternative, transfer the case under 28 U.S.C. § 1631, governing transfer for want of jurisdiction, because this Court had jurisdiction. See Connell v. KLN Steel Prod. Co., Ltd., 225 Fed.Appx. 519, *2 (C.A.Fed. 2007). In addition, the Federal Circuit found that the Navy was not an indispensable party to the dispute. Id. at *3. The case was remanded to this Court. Id.

After the remand, in spite of remaining out of the dispute for four years, the Navy moved to intervene. This Court granted the motion, finding that although the Navy was not an indispensable party, permissive intervention was proper. The Navy then filed a Motion for Summary Judgment on Count One of Plaintiffs' Complaint (patent infringement) arguing that it authorized and consented to any infringement. Defendants joined in the Navy's Motion on Count one and filed a Motion for Summary Judgment on Counts Two (misappropriation of trade secrets), Three (unfair business practices and competition) and Four (interference with prospective business relationships). For the reasons stated below, the Navy's Motion for Summary Judgment is granted and the Defendants' Motions for Summary Judgment are granted in part and denied in part.

RULE 56 VIOLATIONS

Plaintiffs and Defendants bring several motions to strike. Specifically, Defendants move to strike Plaintiffs' Responses to their Rule 56.1 Statements and Statements of Additional Fact, the Declarations of Michelle Connell, Fred Meyer and David Stinson, and the Expert Report of Dr. Ralph Nash and Plaintiffs move to strike Defendants' Replies to their responses to Defendants' Rule 56.1 Statements of Fact and a related Appendix. The Court will address the Motion to Strike the Expert Report of Dr. Ralph Nash below As for Defendants' motion, Defendants argue that this Court should strike Plaintiffs' responses to its Rule 56.1 Statements and Statements of Additional Facts because they filed responses that include improper denials, improper citation, and attorney argument and because they filed in excess of 40 Statements of Additional Fact without first seeking leave of this Court.

Local Rule 56.1 allows a party opposing summary judgment to file a response to the movant's Statement of Facts including: 1) a response to each of the movant's statements of fact including specific references to materials relied upon and 2) no more than forty statements of additional facts. L.R. 56.1(3). Nonconformity with the Local Rules and the standing orders of the Court is not without consequence. Green v. Harrah's Illinois Corp., No. 03 C 2203, 2004 U.S. Dist. LEXIS 7569, at *8 (N.D. Ill. Apr. 29, 2004) (refusing to consider statements of fact in excess of the number permitted by Local Rule 56.1). The Seventh Circuit has "repeatedly held that a district court is entitled to expect strict compliance with Rule 56.1." Ammons v. Aramark Uniform Servs., Inc., 368 F.3d 809, 817 (7th Cir. 2004) (citing Bordelon v. Chicago School Reform Bd. of Trustees, 233 F.3d 524, 527 (7th Cir. 2000)). "A district court does not abuse its discretion, when, in imposing a penalty for a litigant's non-compliance with Local Rule 56.1, the court chooses to ignore and not consider the additional facts that a litigant has proposed." Cichon v. Exelon Generation Co., L.L.C., 401 F.3d 803, 809-10 (7th Cir. 2005).

Accordingly, this Court will not consider portions of the parties' submissions that do not conform to L.R. 56.1. Specifically, this Court has not considered improper argument or improper citations in Plaintiffs' responses to Defendants' Statements of Fact and has considered only the first forty statements of additional fact submitted by Plaintiffs in opposition to each of Defendants' motions for summary judgment.

Defendants also move to strike the Declarations of Michelle Connell, Fred Meyer ("Meyer") and David Stinson ("Stinson"), objecting to various statements therein as irrelevant, hearsay or conclusory. This Court declines to strike the declarations in their entirety, however, it has considered Defendants' objections to the material in its evaluation of the Statements of Fact and note below any significant statements it strikes.

Last, Plaintiffs argue that this Court should strike Defendants' Reply to their Response to Defendant's Statement of Facts and an additional appendix filed with that reply. Because a reply to the non-movant's response to the movant's Statement of Facts is not contemplated by Local Rule 56.1, the motion to strike Defendants' replies is granted. The Court has, however, considered the Appendix to the extent that it related to Defendants' responses to Plaintiffs' additional facts, as defendants are entitled to dispute those facts.

STATEMENT OF FACTS

Connell is the owner of U.S. Patent No. 6,611,973 entitled BED STRUCTURE WITH STORAGE AREA, which simulates a bed called a "rack" used on Navy ships. Pl. 56.1 at rr; Navy 56.1 at 3-4; KLN 56.1 at 9.*fn1 Connell filed her provisional patent application for Hi-Tech's SB-200 bed on May 15, 2001. KLN 56.1 at 57. The application was published and became part of the public record on December 19, 2002. KLN 56.1 at 58. The patent issued on September 2, 2003. Navy 56.1 at 10.

KLN is a family-owned limited partnership that sells steel furniture including bunk beds. KLN 56.1 at 1-2. KLN has sold furniture to the Great Lakes Naval Base since 1966. Id. at 3. In 1998 and 1999, it sold thousands of metal beds to the Naval Training Center at the Naval Base. Id. Clark is a general contractor for large construction projects that contracts with the U.S. Government. Id. at 5. Hi-Tech is a Wyoming Corporation. Id. at 7. Hi-Tech and KLN compete in selling bunk beds. Id. at 8. Both Hi-Tech and KLN attempted to procure contracts to supply beds for the recruit barracks at the Great Lakes Naval Base.

Beginning in 1998, Hi-Tech developed a prototype bed for the recruit barracks with the involvement of the Navy. In order to design the bed, Hi-Tech first worked with Commander Jay Van Duzer ("Van Duzer") who showed Hi-Tech representative Judith Deming a mock-up ship at the Naval base that contained an example of the type of bed the Navy was looking to place in its barracks. Id. at 26. As Hi-Tech developed its SB-200 bed, the Navy provided guidance as to what it wanted and Hi-Tech incorporated the Navy's suggestions. Id. at 27. Although Hi-Tech relied on the Navy to keep the prototype confidential they never entered into a confidentiality agreement. As for future sales of the prototype bed, Hi-Tech and the Navy never entered into a design contract for the design of a specific product nor did they sign an exclusivity agreement. Id. at 31-32. Hi-Tech was not promised long term sales without competition nor assured of a supply agreement if the prototype performed well. Id. at 38, 42. Lieutenant Brian Lindoefer ("Lindoefer") never told Stinson that Hi-Tech would supply the beds if the prototypes performed well. Id. at 38, 42. Indeed, under the Federal Acquisition Regulations ("FARS"), Defense Federal Acquisition Regulation Supplement ("DFARS") and the General Services Administration ("GSA"), there is open competition between products offered on the GSA schedule. Id. at 32. Similarly, the National Furniture Center for GSA is required to seek maximum competition in meeting the government's requirements. Id. at 34. Hi-Tech understood that every contract for beds with the Navy was separate and required an independent bid process. Id. at 59.

Also in 1998, KLN Salesman Neil Croak ("Croak") began developing a relationship with the Great Lakes Naval Base and eventually learned of the Navy's need for beds for new recruit training buildings. Id. at 60. Gene Ignacio, a Navy employee, told Croak that the Navy wanted a bed similar to those on ships. Id.

Beginning in 1999, Hi-Tech provided sample bed racks to the Navy. Id. at 35. These prototype SB-200 beds were stored in a non-secure warehouse. Id. at 37. Although access to the prototype racks was somewhat limited, the beds were not treated by the Navy as "procurement sensitive." Id. at 37. "Procurement sensitive" identifies information received by the Navy after requisition for a particular already-developed product and requires that the information remain confidential and not be disseminated publicly. Id. at 37. None of the beds that Hi-Tech delivered to the Navy were marked as confidential or as trade secrets. Id. at 44, 55. Further, Lieutenant Daniel Cook ("Cook") reviewed a drawing of the Hi-Tech prototype bed that was not marked confidential. Id. at 44. Van Duzer did not recall having any conversations with Hi-Tech about the prototypes being confidential nor were there any marking on the beds themselves indicating that they were confidential. Id. at 45. Instead, he recalled that the Navy kept the beds where various recruits could test them and hundreds of people saw them. Id. at 45-46.

Numerous individuals saw the prototype beds in a training classroom on the Great Lakes base called the Starr room. See Id. at 41, 45-46. The Starr classroom in which the Navy stored the Hi-Tech prototype was occasionally locked to keep recruits from wandering in and out, but generally the Navy allowed access to the room and various persons were shown the bed including a reporter gathering information for an article he was writing about boot camp who later published a photograph of the bed. Id. at 39, 40, 43

On August 15, 2000, the Navy issued Request for Proposal ("RFP") N68950-00-R-0227 soliciting bids for the design and construction of two recruit barracks at the Navy's Recruit Training Command ("RTC") in Great Lakes, Illinois. KLN 56.1 at 10. After receiving bids, the Navy awarded the Contract No. N68950-00-C-227 (the "227 contract") for the design and construction of two barracks at the RTC to Clark. Id. at 11. The Navy informed Clark that it wanted to add bunk beds to the barracks via a modification or change order to the 227 contract. Id. at 13.As such, Clark took proposals from Hi-Tech and KLN for the supply of racks. Id. The Navy preferred that the racks be purchased from the GSA schedule. Id.

By August of 2001, Clark's interior designer indicated in its furniture package submitted to the Navy that it would supply Hi-Tech's SB-200 bed. Pl. 2nd at f. The Navy was authorized and prepared to purchase the SB-200 without going through GSA Federal Supply Schedules so long as it was the only such product on the market. Id. at g.

Croak gained access to the prototype with the help of his friend, Navy employee June Huffman ("Huffman"), who had no involvement in the procurement of the beds Pl. 2nd 56.1 at n, o. Huffman did not think that the bed was confidential. KLN 56.1 at 52. At least one other Navy employee knew that she showed the bed to Croak because he accompanied them to the classroom to see the bed. Id. at 52, 62. At that point, the bed was in an unguarded room and bore no signs that it was confidential. Id. at 51. Croak took photographs of the bed and sent them to KLN's engineers who used them to develop a bed. Pl. 2nd 56.1 at k, l.

KLN's owner, David Ladensohn ("Ladensohn"), sent an email to Neil Croak on September 5, 2001, informing Croak that KLN did not intend to violate any patents in making its beds and that in any case "its really KLN's risk and not the Navy's." Pl. 56.1 at cc. Croak contacted persons at the Navy and KLN to inform them that KLN was not trying to copy Hi-Tech's bed but rather could build a better bed at a cheaper price. Id. at dd. On September 18, 2001, after becoming aware of KLN's efforts, Connell and Meyer wrote a letter to David DeMoske, the Navy's director of acquisition for the Great Lakes Base outlining the facts they knew about KLN's activities that they considered improper. Id. at ee. Several Navy officers and Steve Maslen ("Maslen") of Clark expressed to Connell or Meyer that any patent issues were a problem between Hi-Tech and KLN and not the Navy. Id. at p (Lindoefer), q (Maslen), r (Lieutenant Bendixon), s (Stringer), t (Merritt), x (Stringer), y (Cook), bb (Navy contracting officer).*fn2

In August or September of 2001, Clark employee Mike Schinzlein told Croak that the Project Committee for the prototype barracks had decided to use Hi-Tech's bed. Pl. 2nd 56.1 at I. He said that Hi-Tech's prototype was patent pending and that the Navy did not want to cause any legal issues by seeking the development of a different bed. Id. Croak wrote in his notes that KLN should not lose interest in the project yet. Id. at j. In addition, Ladensohn sent an email to Croak stating that KLN had no intention of violating any patents, although he doubted that Hi-Tech had actually filed a patent application. Id. In any case, Ladensohn stated that "its really KLN's risk and not the Navy's." Id. During the procurement process for the prototype barracks, around November of 2001, KLN presented a version of the 7301 SSLD bed to the Navy for its evaluation and/or purchase. KLN 56.1 at 63. The Navy found that this bed, however, "missed the mark" and chose to order Hi-Tech's bed. Id. at 64.

The solicitation/contract/order for commercial items executed by Hi-Tech on November 27, 2001 informed Hi-Tech that their bid proposal and pricing information relative to the 227 contract would be published on GSA Advantage!, a web site accessible to the public. KLN 56.1 at 53. Plaintiffs additionally disclosed pricing information on their bed to GSA prior to April 1, 2002. Id. at 54. On February 28, 2002, the Navy completed "Technical Evaluation Report-Best Value Method of Procurement" for the first two prototype buildings wherein it evaluated both Hi-Tech and KLN's beds. Pl. 56.1 at ff. The Navy determined that Hi-Tech's bed was the best value. Id. The first two barracks, including the beds, were delivered to and accepted by the Navy on or around January 25, 2004 and March 16, 2004, respectively. Navy 56.1 at 11.

Connell acknowledged that once it was awarded the contract in March of 2002, Hi-Tech's bed would no longer be secret and it would be reasonable for competitors to find out about it. KLN 56.1 at 56. However, when Hi-Tech won the contract to supply beds for the prototype barracks, it entered into an agreement with Clark. Pl. 2nd 56.1 at v. That contract stated, in part:

Both parties acknowledge and agree because of the proprietary nature of the product being supplied in the purchase order, at no time will CLARK provide to any parties for reasons other than coordination, plans or pricing information related to this purchase order. At no time will CLARK provide any information related to plans or pricing information to any persons or entities that may be a competitor for this type of work.

Id.

KLN requested and received a debriefing from the Navy in March of 2002. Id. at 66. KLN received feedback as to how it could improve its bed in order to effectively compete in future contracts. Id. After the debriefing, KLN representatives were allowed to view Hi-Tech's SB-200 bed. Id. at 67. Ladensohn reported to KLN employees that during the testing of their bed, the safety rails broke off easily and their coat hooks failed. Pl. 2nd 56.1 at x. He stated that, since they copied Hi-Tech's hooks, they clearly missed a round of market intelligence. Id.

KLN also filed a FOIA request in order to learn about Hi-Tech's beds. Pl. 56.1 at gg. The Navy, however, denied the FOIA request. Pl. 2nd 56.1 at y. KLN received additional input from the Navy regarding the improvement of its 7301 SSLD bed. KLN 56.1 at 68. It used its previous B-1 Bed design as a prototype for a new model. Id. Lieutenant Cook and Sam Stringer of the Navy reviewed and worked with KLN's drawings and specifications so that the 7301 SLLD would possess the salient characteristics established by the Navy to improve it for the bid process. Id. at 69. As a result, KLN made modifications to its 7301 SSLD and presented the new prototype to Clark and the Navy with a bid under the 006 contract. Id. at 70. At some point, Croak made a second trip to the Navy base to photograph Hi-Tech's beds at KLN's request. Pl. 2nd 56.1 at aa. In addition, John McBrayer, an engineer at KLN, inspected Hi-Tech's bed in the prototype barracks. Id. at bb.

On September 27, 2001, the Navy issued RFP No. 68950-01-R-0006 (the "006 RFP") for the construction of training barracks at its RTC in Great Lakes on September 27, 2001. Navy 56.1 at 6; KLN 56.1 at 16. The RFP contained an FAR 52.227-1 "Authorization and Consent" clause. Id. The clause stated:

(a) the Government authorizes and consents to all use and manufacture, in performing this contract, or any subcontract at any tier, of any invention described in and covered by a United States patent (1) embodied in the structure or composition of any article the delivery of which is accepted by the Government under this contract or (2) used in machinery, tools, or methods whose use necessarily results from compliance by the Contractor or a subcontractor with (I) specifications or written provisions forming a part of this contract or (ii) specific written instructions given by the Contracting Officer directing the manner of performance. The entire liability to the Government for infringement of a patent of the United States shall be determined solely by the provisions of the indemnity clause, if any, included in this contract or any subcontract hereunder (including any lower-tier subcontract), and the Government assumes liability for all other infringement to the extent of the authorization and consent hereinabove granted.

(b) The Contractor agrees to include, and require inclusion of, this clause, suitably modified to identify the parties, in all subcontracts at any tier for supplies or services (including construction, architect-engineer services, and materials, supplies, models, samples, and design or testing services expected to exceed the simplified acquisition threshold); however, omission of this clause from any subcontract, including those at or below the simplified acquisition threshold, does not affect this authorization and consent.

The Navy awarded the 006 contract to Clark on May 20, 2002. Navy 56.1 at 7. Section E2000 of the 006 contract, addressing movable furnishings for the barracks, stated: "All movable furnishings shall be purchased from government sources, primarily General Services Administration Federal Supply Schedules, in accordance with the Federal Acquisition Regulations (FAR) Part 8, Required Sources of Supply." Id. at 8. According to Section E2000, the government would provide a budget for movable furnishings at a later date which would be determined by summing the cost of the furnishings according to the GSA schedule, a 5% administrative fee, and any shipping charges not included in the GSA price. Id. The 006 contract obligated Clark to purchase beds using a best value procurement analysis. Pl. 56.1 at n.

Upon the request of U.S. Navy Director of Acquisitions, David DeMoske, Lieutenant Commander Lindoerfer prepared a list of "salient characteristics" of the desired beds for Clark's use in purchasing racks off of the GSA supply schedules. Id. at d. The salient characteristics were prepared in part to ensure that the characteristics of proposed racks did not mirror Hi-Tech's prototype bed and to avoid any liability to Hi-Tech. Id. at e. Lindoefer emailed the salient characteristics to Maslen on April 11, 2003. Id. at v. He told Maslen that the same characteristics would apply for future barracks, that there were at least two acceptable products on the GSA schedule and that the Navy was looking for the best price. Id. at v.

In May of 2003, Clark sent out letters soliciting bid information for presentation to the Navy related to supplying racks for the barracks. KLN 56.1 at 19. Four companies, including Hi-Tech and KLN, submitted bids. Id. at 20. Clark compiled pertinent information into a spreadsheet and submitted the proposals and the spreadsheet to the Navy for its review. Id. In addition, both HiTech and KLN submitted samples of their respective racks to the Navy. Id. at 21. Lieutenant Cook, a member of the committee that evaluated the ...


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