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Chabria v. EDO Western Corp.

February 20, 2007


The opinion of the court was delivered by: Judge Smith

Magistrate Judge Abel


Plaintiffs John Chabria ("Chabria"), Zenix, Inc. ("Zenix"), and Zenix Ltd. (collectively "Plaintiffs"), have brought this action seeking payment of approximately $1,154,000.00 in unpaid royalties. Plaintiffs assert New York common law causes of action for breach of express contract, breach of implied duty to act in good faith, promissory estoppel, fraudulent inducement and fraud. Defendant EDO Western Corporation ("EDO") has moved for dismissal of all claims under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted (Doc. 21). For the reasons that follow, the Court GRANTS in part and DENIES in part Defendant EDO's Motion to Dismiss.


For purposes of ruling on Defendant's Motion to Dismiss, the Court accepts as true the well-pleaded facts set forth in the Amended Complaint.

In 1998, Zenix was a leading developer, manufacturer and seller of high-frequency microwave component parts to the defense, aerospace and telecommunications industry. (Am. Compl. ¶ 1). Prior to December 9, 1998, Plaintiff Chabria was the CEO of Zenix. Id. Defendant EDO is a defense contractor with its headquarters in New York City and its manufacturing facilities in Salt Lake City, Utah. (Am. Compl. ¶ 5).

In June of 1998, representatives of Defendant EDO approached Plaintiff Chabria to solicit the acquisition of Zenix by EDO. (Am. Compl. ¶ 8). During the summer of 1998, EDO representatives presented a proposal to Plaintiff Chabria for EDO to acquire Zenix's assets for the sum of $2,000,000.00 and represented that EDO was a company that had been in business for years and would continue to market produce and sell the Zenix product line in order to generate the revenue to pay the full amount due for the acquisition of Zenix's assets. (Am. Compl. ¶ 12). Defendant EDO representatives told Plaintiff Chabria that EDO was not in the practice of acquiring businesses to shut them down. (Am. Compl. ¶ 14). EDO representatives further represented that it had performed market research and, based on that research, EDO could guarantee that it would keep the Zenix product line in the marketplace to generate enough revenue to pay the full amount. (Am. Compl. ¶ 15). Later in 1998, Plaintiff Chabria attended a meeting at EDO headquarters in New York City where he was again assured of the $2,000,000.00 price, that EDO would keep the Zenix product line in operation in order to generate the full amount, and even that EDO would spend $6,700,000.00 after purchasing Zenix in order to promote, sell and produce Zenix products. (Am. Compl. ¶ 16-17).

When news of Defendant EDO's negotiations with Plaintiff Chabria reached the microwave component industry, Plaintiff Chabria received a matching $2,000,000.00 offer from one of Zenix's customers, GHz Technologies, to purchase Zenix's assets. (Am. Compl. ¶ 19). Relying on Defendant EDO's previously discussed representations, Plaintiff Chabria declined GHz's offer and agreed to enter an asset purchase agreement with Defendant EDO. (Am. Compl. ¶ 21).

On December 9, 1998, Plaintiffs and Defendant EDO became parties to an Asset Purchase Agreement ("Agreement") by which Defendant EDO contracted to purchase "substantially all of the assets" of Zenix, Inc. (See Am. Compl., Ex A). The Agreement stated that the purchase price for the assets shall be $669,107.85. (Am. Compl., Ex A at 2.1). Defendant EDO paid this amount to Plaintiffs plus $130,892.15 to Zenix's equipment suppliers to pay off existing equipment leases. (Am. Compl. ¶ 24-25). The Agreement also required Defendant EDO to pay Plaintiffs a royalty in the amount of five percent of the gross sales from the Zenix product line. (Am. Compl., Ex A at 2.4(a)). This obligation terminated "at such time the aggregate amount of Royalty paid to [Plaintiffs] equals $1,200,000. Id. Under the Agreement, Seller was required not to compete with Defendant EDO for six years after the closing of the sale. (Am. Compl., Ex A at 6.4).

Plaintiffs allege that after the execution of the Agreement, Defendant EDO's representatives continued to represent and promise Plaintiffs that EDO would continue to market, produce and sell the Zenix product line so that EDO could make the promised $1,200,000.00 in royalty payments. (Am. Compl. ¶ 27).

Prior to the Agreement, the Zenix plant in Columbus, Ohio supplied the critical microwave components for radar systems in the AWACS aircraft used by the U.S. Air Force, U.S. Navy and NATO Fleet. (Am. Compl. ¶ 29). In June of 1999, over Plaintiff Chabria's objections, Defendant EDO closed the Zenix Columbus plant and moved all the equipment to Salt Lake City. (Am. Compl. ¶ 30). Because the Salt Lake City facility was not ready or equipped for manufacturing at the time the Columbus plant was closed, manufacturing was stopped. (Am. Compl. ¶ 31). This resulted in the total disruption of production and deliveries of products to former Zenix customers. (Am. Compl. ¶ 34).

Additionally, Defendant EDO, over Plaintiff Chabria's warnings about the negative impacts on production capability, decided to change production formulas and processes and to dispose of an estimated $500,000.00 worth of finished inventory and an estimated $200,000.00 worth of custom-made tooling, fixtures, dyes, and molds located in Columbus. (Am. Compl. ¶ 32). Zenix's former customers responded by demanding that Defendant EDO use the original Zenix formulations and processes to manufacture the critical components, but Defendant EDO refused. (Am. Compl. ¶ 35). Consequently, high-volume orders were cancelled. Id.

Around this same time, at Defendant EDO's direction, Plaintiff Chabria generated orders of over $20,000,000.00 worth of new requests for quotations from Zenix's customers for microwave product, but EDO's Salt Lake City plant was not properly equipped or staffed to provide the customers with sample products. (Am. Compl. ¶ 33). Consequently, the customers chose other vendors. Id.

In February, 2002, without notification to Plaintiff Chabria, Defendant EDO began its plan to remove the Zenix product line from production. (Am. Compl. ¶ 36). In an internal memorandum dated February 20, 2002, Defendant EDO observed the downturn in the market and discussed options for responding to the downturn including a "power down strategy" in which the Zenix line would not be permanently shut down, but would be temporarily taken off of the market. (Am. Compl. ¶ 38). In considering these options, one EDO representative noted that "there could be another $1,164k in royalty commission due to John [Chabria] depending on your view of the purchase agreement." Id.

In a May 2, 2002 letter, Defendant EDO notified Plaintiff Chabria that his employment would end on June 9, 2002, and reminded him not to compete until December 9, 2004. (Am. Compl. ¶ 40).

On June 25, 2002, an e-mail sent by an EDO employee confirmed that one advantage of the "power down" or "cold storage" of the Zenix line would be that Defendant EDO "will not have to deal with EDO's liability to John Chabria, since technically, the business is not closed." (Am. Compl. ¶ 41).

On or about July 18, 2002, Defendant EDO sent a letter to customers of the Zenix line informing the customers that the line "will not be available to the market until further notice." (Am. Compl. ¶ 42). From August 2002 through October 2002, Defendant EDO's representatives continued to represent and promise Plaintiff Chabria that EDO would continue to market, produce, and sell the Zenix product line so that it could make the remaining royalty payments. (Am. Compl. ¶ 43).

Thereafter, Defendant EDO dedicated space formerly used to produce Zenix products to produce a different line. (Am. Compl. ¶ 44). Defendant EDO also shut down the evaluation and testing laboratory for Zenix's microwave products, discontinued microwave research and development activity and laid off or transferred Zenix production personnel to other departments. Id. Finally, all of Zenix's customers were notified that the Zenix microwave products would not be made available after August of 2002. Id.

In October of 2005, Defendant EDO had not resumed production of the Zenix product line and Plaintiff Chabria demanded payment of $1,154,000.00. (Am. Compl. ¶ 46-47). Defendant EDO denied Plaintiff Chabria's requests for payment. (Am. Compl. ¶ 46).

On June 5, 2006, Plaintiff Chabria filed this action in the Franklin County Court of Common Pleas. On June 30, 2006, the action was removed to this Court pursuant to 28 U.S.C. § 1441(a). On November 16, 2006, Defendant EDO filed a motion to dismiss under Fed. R. Civ. P. 12(b)(6).


A motion to dismiss for failure to state a claim should not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). All well-pleaded allegations must be taken as true and be construed most favorably toward the nonmoving party. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). A 12(b)(6) motion to dismiss is directed solely to the complaint and any exhibits attached to it. Roth Steel Prods. v. Sharon Steel Corp., 705 F.2d 134, 155 (6th Cir. 1983). The merits of the claims set forth in the complaint are not at issue on a motion to dismiss for failure to state a claim. Consequently, a complaint will be dismissed pursuant to Fed. R. Civ. P. 12(b)(6) only if there is no law to support the claims made, or if the facts alleged are insufficient to state a claim, or if on the face of the complaint there is an insurmountable bar to relief. Rauch v. Day & Night Mfg. Corp., 576 F.2d 697, 702 (6th Cir. 1978). Rule 12 (b)(6) must be read in conjunction with Fed. R. Civ. P. 8(a) which provides that a pleading for relief shall contain "a ...

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