LL You said

"The only thing that bothers me about the e.Digital filing is that they ask for nothing other than that digecor go away and let them market the evu. It seems that if digecor indeed perpetrated all the wrongs alleged that they would seek some sort of compensation as a result. Perhaps they plan on doing that in some other fashion? I have never tried an IP case and don't claim to be an expert in this kind of litigation but that is curious to me."

I skipped to the bottom line and bolded but there are requests for damages though out this filing.

This should make you feel better!

Larry

Case 2:06-cv-00437-TS-DN Document 78 Filed 04/27/2007 Page 1 of 18

James S. Jardine (1647)
Samuel C. Straight (7638)
RAY QUINNEY & NEBEKER, P.C.
36 South State Street, Suite 1400
Salt Lake City, Utah 84111
Telephone: (801) 532-1500
Attorneys for Defendant e.Digital Corporation

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
DIGECOR, INC., a Washington corporation,
Plaintiff,
v.
E.DIGITAL CORPORATION, a Delaware corporation; DOES 1 to 20, individuals;
Defendants. DEFENDANT’S SECOND AMENDED COUNTERCLAIM
Civil Case No. 02:06-CV - 00437
Judge Ted Stewart


Defendant e.Digital Corporation (“e.Digital”) hereby submits this Second Amended Counterclaim and alleges as follows:

Background Facts for the Declaratory Judgment Counterclaim

1. Counterclaimant e.Digital Corporation (“e.Digital”) is a Delaware corporation with its principal place of business in San Diego, California.

2. Counterclaim Defendant digEcor, Inc., formerly known as Aircraft Protective Systems, Inc. (“digEcor”) is a Washington corporation that originally had its principal place of business in Washington, but, upon information and belief, has recently moved its principal place of business to Springville, Utah, although much of digEcor’s business operations as relates to e.Digital still is centered in Seattle, Washington.

3. e.Digital and digEcor, including its predecessors, have entered into various agreements or business transactions and dealings, including the following written contracts:
(a) A “Nondisclosure Agreement,” executed April 2, 2002 (the “2002 NDA”);
(b) An “Agreement,” effective October 22, 2002 (the “2002 Agreement”);
(c) A “Purchase Order,” dated October 31, 2005, number CJ5LY9RCW (the “Purchase Order”); and
(d) A “Digital Rights Management Engineering Program Services Agreement, made November 11, 2005 (the “DRM”).

FIRST COUNTERCLAIM
(Declaratory Judgment)

4. digEcor has alleged breaches of the 2002 NDA, the 2002 Agreement, the Purchase Order, and the DRM in this matter, and, in particular, claims e.Digital is precluded by those agreements from marketing or selling its eVU units in the aviation and other industries.

5. This Court, therefore, has jurisdiction over this compulsory declaratory judgment counterclaim under 28 U.S.C. §§ 1332, 1367, 2201, and Rule 13(a) of the Federal Rules of Civil Procedure.

6. The portions of the 2002 NDA that relate to the digEplayer, the eVU, and this litigation, including but not limited to the non-competition clause in paragraph 6 of the 2002 NDA, were superseded by the 2002 Agreement pursuant to, inter alia, paragraph Q of the 2002 Agreement that states that the 2002 Agreement “constitutes the entire understanding and agreement between the parties with respect to the transactions contemplated herein and supercedes any and all prior oral or written communications with respect to the subject matter herein,” because the “subject matter” of the 2002 Agreement was the development and manufacture of portable in-flight entertainment devices and other products, including but not limited to the digEplayer.

7. digEcor’s decision in October 2005 to select Triad Engineering and Wolf Electronics to design and manufacture a next generation player to replace the digEplayer was notice to e.Digital that digEcor did not intend to “proceed with the production of the designed product” pursuant to Section J2 of the 2002 Agreement thereby expressly granting e.Digital “free and unrestricted access to market the design” thereby negating any noncompetition prohibition of the 2002 NDA.

8. The 2002 Agreement expired by its terms on October 22, 2005, including any and all restrictions, if any, on e.Digital’s ability to develop, manufacture, market and sell in-flight entertainment devices, whether or not based on or derived from e.Digital’s prior designs in the digEplayer.

9. Although e.Digital granted to digEcor in the 2005 DRM an “exclusive license” to the “DRM technology” in the “aircraft industry,” that license was limited by the DRM, as explained in the Addendum One thereto, to the adaptation of Random Block Encoding (“RBE”) to the digEplayer.

10. e.Digital designed the eVU independently from the digEplayer, and the eVU does not use the DRM technology or RBE as defined by the DRM.

11. In any event, as further alleged above in response to digEcor’s Complaint, digEcor has breached the Purchase Order and DRM and, therefore, is not entitled to enforce the terms of those agreements.

12. e.Digital is not in breach of the 2002 NDA, the 2002 Agreement, the Purchase Order or the DRM.

13. Therefore, e.Digital is entitled to a declaration that:

(a) The 2002 NDA was superseded by the 2002 Agreement with regard to the digEplayer, the eVU and/or the subject of this litigation and, therefore, does not limit or bar e.Digital’s rights to or activities regarding the eVU or the digEplayer, and e.Digital is not in breach of that agreement by the design, manufacture, marketing or sale of the eVU;

(b) The selection of Triad Engineering and Wolf Electronics to manufacture a replacement player granted e.Digital free and unrestricted access to market the digEplayer design pursuant to the terms of the 2002 Agreement.

(c) The 2002 Agreement expired by its terms on October 22, 2005 and, therefore does not limit or bar e.Digital’s current rights to or activities regarding the eVU or the digEplayer, and e.Digital is not in breach of that agreement by the design, manufacture, marketing or sale of the eVU;

(d) Any grant to digEcor of an exclusive license under the DRM is limited to the “DRM technology” as defined in Addendum One to the DRM to mean RBE technology, and that the DRM does not limit or bar e.Digital’s rights to or activities regarding the eVU because the eVU does not use RBE, and, therefore, e.Digital is not in breach of paragraph 2 of the DRM;

(e) digEcor is in breach of the Purchase Order and DRM and, therefore, is not entitled to enforce any exclusive license granted to it in the DRM against e.Digital; and

(f) e.Digital is not in breach of the Purchase Order or the DRM.

14. e.Digital is entitled to an injunction barring digEcor and its agents from alleging, asserting, declaring or implying that e.Digital is in breach of the 2002 NDA, the 2002 Agreement, the Purchase Order, and/or the DRM in any way, or that e.Digital is limited in any way by those agreements, any other agreement between e.Digital and digEcor, or any other right of digEcor, from manufacturing, marketing or selling the eVU

Additional Background Facts for the Confidential Information Counterclaims

15. The 2002 Agreement provided a “framework” for the development of future products by e.Digital for digEcor, and, correspondingly, digEcor agreed to “keep in confidence and prevent the disclosure to any person or persons of all technical information and data . . . which is designated in writing. . . to be of a proprietary or confidential nature” in accordance with the terms of that agreement.

16. digEcor periodically received e.Digital confidential information regarding the digEplayer and improvements thereto, including software applications and source code, schematics, block diagrams, documentation (“white papers”), and ‘hands-on’ instruction, subject to the confidentiality protections of the 2002 Agreement.

17. In late 2004 and early 2005, digEcor desired to develop a next generation digital in-flight entertainment system in contrast with the existing hand-held digEplayer (hereinafter the “digEsystem” project or player, later marketed as the “digEplayer XT”), and hired DeCuir Inc., as its consultant and agent, to locate and work with engineering firms to design that product.

18. digEcor and DeCuir approached e.Digital to develop the next generation system. e.Digital held numerous technical discussions with digEcor and DeCuir, including a face-to-face meeting on January 5, 2005. DeCuir signed a non-disclosure agreement with e.Digital on or about January 4, 2005. During this time e.Digital and digEcor also entered into legal negotiations on a development and manufacturing agreement concerning this new player.

19. During these and subsequent technical discussions and legal negotiations, e.Digital provided proprietary and confidential information to digEcor and DeCuir, protected by the 2002 Agreement, including, but not limited to, the following information:

(a) Media Player Architecture/Block Diagram, dated December 29, 2004 Rev. A) of existing and upgraded DigEplayers, (hereinafter “e.Digital Block Diagrams”), marked “CONFIDENTIAL AND PROPRIETARY INFORMATION” and bearing a copyright notice on or before January 5, 2005.

(b) Schematics, bill of materials, and related technical documentation related to the next generation player project in or about January 2005.

(c) Other confidential technical information from e.Digital regarding the ongoing next generation player project during the first four to five months of 2005 (hereinafter “e.Digital’s Other Technical Information”).

20. However, negotiations for an agreement to have e.Digital develop the next generation player terminated in or about May 2005 so that digEcor and its agents were not authorized to use e.Digital’s confidential information in connection with digEcor’s next generation player project.

21. Later in 2005, again at digEcor’s request, e.Digital submitted a Request For Proposal for digEplayer Manufacturing (“RFP”) to various manufacturers, including Wolf Electronics (“Wolf”), to locate a new manufacturer for the digEplayer. Wolf signed a non-disclosure agreement with e.Digital on or about September 9, 2005.

22. The RFP included embedded .PDF files with photographs of the exterior and interior of the existing DigEplayer, budgetary costing and sourcing information for the digEplayer, a bill of material for the main board and the Ethernet daughter board, detailed drawings for fabrication of the Main PC board and Ethernet daughter PC boards, which provided Wolf with all information needed to manufacturer the existing digEplayer (including all design improvements to date).

23. The RFP and associated information was communicated under express written and oral understandings of confidentiality, including the 2002 Agreement, as well as circumstances implying a duty of confidentiality, including the following express alternative statements on such documentation: (a) Each page of the RFP (with included the embedded .PDF files) contained a copyright notice and a legend stating that “[t]his document contains Proprietary and Confidential disclosures of e.Digital. Reproduction or distribution in any form without permission is strictly prohibited.”

(b) The drawings within the RFP contained a legend noting that “PROPRIETARY RIGHTS Of e.DIGITAL CORPORATION are involved in the subject matter of this material and all manufacturing, reproduction, use and sales rights pertaining to such subject matter are expressly reserve. It is submitted in confidence for a specified purpose, and the recipient, by accepting this material, agrees that this material will not be used, copied or reproduced in whole or in part, nor its contents revealed in any manner, or to any person, except for the purpose delivered.”

24. The information described in the preceding paragraphs 15, 18, and 20 through 22 shall be collectively referred to as e.Digital’s confidential information.

25. Upon information and belief, digEcor and its agents, including DeCuir and Wolf, have disseminated and/or used e.Digital’s confidential information in connection with the development of digEcor’s next generation player (“digEplayer XT”) in violation of the 2002 Agreement, other written and oral agreements of confidentiality, and implied duties of confidentiality. e.Digital’s belief is based on information including, but not limited to, the following:

(a) DeCuir told e.Digital at or shortly after the meeting on January 5, 2005, with the knowledge and consent of digEcor that the Block Diagrams contained “a lot of . . . information we can use for the [XT] product spec[ification]” due later that month, which would result in “less testing to do to help us [DeCuir and digEcor] develop the new Product Specification” – other words, to accelerate development and introduction of the digEplayer XT;

(b) DeCuir told e.Digital at or shortly after the meeting on January 5, 2005, with the knowledge and consent of digEcor that e.Digital’s Block Diagrams “will be of great assistance in helping us [DeCuir and digEcor] to baseline the current product” – again to accelerate development and introduction of the digEplayer XT;

(c) In a press release dated May 25, 2006, digEcor admitted that development of the digEplayer XT was derived from and based on “the best features of the [digEplayer] 5500,” and e.Digital believes most or all of such best features were based on or constituted the confidential information or trade secrets of e.Digital;

(d) digEcor has touted various features of the digEplayer XT, such as the 10 hour battery life, as similar or identical to the digEplayer 5500, which features are based on e.Digital’s confidential information or trade secrets; and

(e) Given the timing of the digEplayer XT project, and the unquestioned access to and knowledge of digEcor and its agents (including DeCuir, the engineering firm selected by digEcor, and/or Wolf) of e.Digital’s confidential information and trade secrets, it is unlikely that digEcor and its agents did in fact, or could have, eliminated e.Digital’s confidential information from consideration or use during the development process of digEcor’s next generation player.

SECOND COUNTERCLAIM
(Breach of Contract)

26. e.Digital incorporates by reference the allegations in the preceding paragraphs of this Counterclaim.

27. digEcor and its agents’ use (as alleged above) of e.Digital’s confidential information in the XT project breaches the 2002 Agreement and the other written, oral and/or implied agreements or duty of confidentiality of digEcor.

28. e.Digital is entitled to recover the damages caused by or the profits derived from digEcor’s breach of confidentiality in an amount to be established at trial.

THIRD COUNTERCLAIM
(Injunction)

29. e.Digital incorporates by reference the allegations in the preceding paragraphs of this Counterclaim.

30. digEcor’s improper use of e.Digital’s confidential information has caused and will continue to cause e.Digital irreparable harm.

31. e.Digital is entitled to an injunction against digEcor’s manufacture and/or sale of the XT based on digEcor and its agents’ improper use of e.Digital’s confidential information (as alleged above).

FOURTH COUNTERCLAIM
(Violation of Utah Trade Secrets Act)

32. e.Digital incorporates by reference the allegations in the preceding paragraphs of this Counterclaim.

33. Some or all of e.Digital’s confidential information that, upon information and belief, was used by digEcor or its agents in the digEplayer XT project, constituted trade secrets of e.Digital, which digEcor knew or had reason to know it had acquired under circumstances, including express agreements and notices of confidentiality, giving rise to a duty of confidentiality to maintain its secrecy or limits it use in connection with e.Digital’s design activities.

34. Upon information and belief, digEcor used or disseminated in violation of that duty without or beyond the scope of e.Digital’s consent, which constitutes misappropriation of e.Digital’s trade secrets under Utah Code Ann. § 13-24-2(2)(b).

35. e.Digital is entitled to an injunction against digEcor’s misappropriation of its trade secrets extending at least for a reasonable period of time in order to eliminate commercial advantage enjoyed by digEcor that otherwise would be derived from the misappropriation pursuant to Utah Code Ann. § 13-24-3(1).

36. e.Digital is entitled to damages of both the actual loss caused by digEcor’s misappropriation and digEcor’s unjust enrichment resulting from that misappropriation or, in the alternative, for a reasonable royalty for digEcor’s misappropriation pursuant to Utah Code Ann. § 13-24-4(1).

37. digEcor’s misappropriation was willful and malicious, thereby entitling e.Digital to an award of exemplary damages in an amount not exceeding twice any damages awarded pursuant to the preceding paragraph as well as attorney’s fees pursuant to Utah Code Ann. §§ 13-24-4(2), 5.

Additional Background Facts for Breach of Duty to Negotiate

38. The 2002 Agreement provided that the parties would participate in “revenue sharing for future markets, customers and/or added enhancements of peripherals and services for this [in-flight entertainment] device.”

39. In July 2004, e.Digital negotiated with digEcor regarding the appropriate split of “maintenance fees” and “cost of key parts used in the repair of the digEplayers,” which negotiations were confirmed in an email from e.Digital to digEcor dated July 19, 2004, concluding with an invitation from e.Digital that “if your team is in agreement with this maintenance structure, we’ll draft up a simple letter agreement.”

40. digEcor never responded with their indication of agreement or disagreement with the terms reached in these prior negotiations.

41. When Wencor purchased APS, e.Digital was told by Wencor that it didn’t matter what had been said in prior negotiations because Wencor was not going to split maintenance revenue and was taking over repairs of the DigEplayers from e.Digital.

42. digEcor has derived substantial revenues from markets, customers and services and has never accounted for revenues from which e.Digital is entitled to receive revenue sharing payments.


FIFTH COUNTERCLAIM
(Breach of Duty to Negotiate in Good Faith)

43. e.Digital incorporates by reference the allegations in the preceding paragraphs of this Counterclaim.

44. digEcor’s refusal to respond to terms tentatively agreed to in early negotiations, and their refusal to negotiate any further terms, constitutes bad faith and a breach of its duty to negotiate in good faith a split of maintenance revenues and other revenue sharing provisions breached under the express and implied terms in the 2002 Agreement.

45. e.Digital is entitled to damages for digEcor’s breach of its duty to negotiate in good faith.

Additional Background Facts for Sixth, Seventh, and Eighth Counterclaims

45. digEcor has made repeated harassing contacts with e.Digital customers and business associates making misrepresentations regarding e.Digital’s ability to serve the customers, the meaning of rulings made by this Court, and the stability of e.Digital’s business.

46. Among other misrepresentations, digEcor has incorrectly represented to e.Digital customers that a ruling by this Court may prohibit e.Digital from selling its digital media players, and thus the customers should purchase digital media players from digEcor instead of from e.Digital. The Court has made no such ruling.

47. digEcor has made harassing telephone calls to several of e.Digital’s customers seeking specific information about the exact terms of the customers’ contracts with e.Digital.

48. Several of e.Digital’s customers have stated that they have asked digEcor to stop making such contacts, and have complained to e.Digital about the contacts.

49. Several of e.Digital’s customers have contacted e.Digital requesting indemnification and other concessions with specific reference to claims made to them by digEcor about e.Digital.

50. Further, the misrepresentations and harassing contacts made by digEcor to e.Digital’s present and prospective business relations have damaged e.Digital’s ability to transact business with these parties and forced e.Digital to make contract concessions and incur current and prospective costs as a direct result.

51. digEcor contacted one prospective client of e.Digitals and threatened that if the company gave its business to e.Digital, digEcor would recall all of the players it had supplied to the company, and further disrupt their business.

52. As a result of digEcor’s improper threats to that company, e.Digital was not awarded that company’s business, which would have brought revenues of many millions of dollars.

53. On information and belief, digEcor has incorporated e.Digital’s technology into media players that also incorporate proprietary technology belonging to other parties, without the consent of such third parties or of e.Digital.

54. For example, digEcor is marketing products that contain significant sections of proprietary software code that is the property of DivX, Inc. On information and belief, digEcor is not licensed to use DivX’s code.

55. digEcor’s use of unlicensed proprietary technologies in media players that also incorporate e.Digital’s technology puts e.Digital at risk of suit by those other parties.
SIXTH COUNTERCLAIM
(Tortious Interference with Contractual and Expected Business Relations)

56. e.Digital incorporates by reference the allegations in the preceding paragraphs of this Counterclaim.

57. e.Digital has entered into a number of contracts with third parties, and expects to enter into contracts with other third parties. digEcor knows of the existence of these present and expected contractual relations.

58. By improper means and/or for improper purposes, digEcor has interfered with e.Digital’s existing and expected contractual relations.

59. Specifically, digEcor has contacted e.Digital’s customers business associates and made misrepresentations to them regarding e.Digital’s ability to serve its customers, its stability as a business, and the rulings of this Court.

60. As a result of these misrepresentations, some of e.Digital’s customers and business associates have refused to deal with e.Digital, or expressed doubt about their future relations with e.Digital, or sought to be released from their obligations with e.Digital.

61. As a direct and proximate result of digEcor’s conduct, e.Digital has been damaged in an amount to be proven at trial.

SEVENTH COUNTERCLAIM
(Defamation)

62. e.Digital incorporates by reference the allegations in the preceding paragraphs of this Counterclaim.

63. digEcor’s repeated harassing false statements to e.Digital’s existing and potential customers and business associates constitute the publication of false information about e.Digital.

64. digEcor published its false statements with knowledge that they were false, or without regard to the truth or falsity thereof.

65. digEcor’s false statements were not protected by any privilege.

66. digEcor published its false statements with malice.

67. digEcor made its false statements with knowledge that they would likely damage e.Digital.

68. As a direct and proximate result of digEcor’s false statements, e.Digital has in fact been damaged in an amount to be proven at trial.

EIGHTH COUNTERCLAIM
(Indemnification)

69. e.Digital incorporates by reference the allegations in the preceding paragraphs of this Counterclaim.

70. digEcor has put e.Digital at risk by selling media players that incorporate e.Digital’s technology alongside unlicensed proprietary technology of other parties, without the consent of those other parties or of e.Digital.

71. e.Digital has been injured by the increased risk caused by digEcor’s wrongful actions, and may suffer further injury if the owners of the unlicensed technology seek redress from e.Digital related to digEcor’s wrongful actions, over which e.Digital has no control.

72. As between digEcor and e.Digital, digEcor is responsible for any liability that arises from its use of unlicensed technology, as digEcor acted of its own accord and without e.Digital’s input or control.

73. e.Digital is entitled to a judgment that digEcor indemnify e.Digital for all costs, fees and judgments that result from any dispute arising as a result of digEcor’s wrongful use of unlicensed technology in its media players.

PRAYER FOR RELIEF

Wherefore, e.Digital prays for judgment against digEcor as follows:

1. Dismissing each and every claim in digEcor’s Complaint, with a declaration that digEcor take nothing against e.Digital thereunder;

2. Declaring that e.Digital is not in breach of any agreements with or any rights of digEcor, or is enjoined from marketing its eVU design in any market (as further explained above);

3. Awarding damages to e.Digital for digEcor’s breach of its agreements of confidentiality;

4. Awarding e.Digital damages for digEcor’s misappropriation of e.Digital’s trade secrets;

5. Enjoining digEcor’s manufacture or sale of their next generation digEplayer XT;

6. Awarding damages to e.Digital for digEcor’s breach of its duty to negotiate in good faith;

7. Enjoining digEcor’s tortious interference with e.Digital’s existing and prospective economic relations;

8. Awarding damages to e.Digital for digEcor’s tortious interference with e.Digital’s existing and prospective economic relations;

9. Enjoining digEcor’s defamatory statements;

10. Awarding damages to e.Digital for digEcor’s defamatory statements;

11. Declaring that digEcor shall indemnify e.Digital for any liability to e.Digital that might arise from digEcor’s use of unlicensed technology in its media players.

12. Awarding punitive or exemplary damages to e.Digital;

13. Awarding e.Digital its costs and attorneys’ fees incurred herein; and

14. For such other and further relief as the Court deems is just and proper.

DATED this 27th day of April, 2007.
RAY QUINNEY & NEBEKER, P.C.
/s/ Samuel C. Straight
James S. Jardine
Samuel C. Straight
Attorneys for Defendant