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Avaya Inc. v. Telecom Labs, Inc.

United States District Court, D. New Jersey

January 7, 2014

AVAYA INC., Plaintiff/Counterdefendant,

Robert T. Egan, Esq., Lloyd Freeman, Esq., Mark Oberstaedt, Esq., Christine S. Baxter, Esq., Trevor J. Cooney, Esq., Erin R. Carroll, Esq., Julie A. Robinson, Esq., ARCHER & GREINER, PC, Haddonfield, NJ, Counsel for Plaintiff/Counterdefendant.

Lawrence Scarborough, Esq., Kathleen S. Callahan, Esq., Jacob A. Kramer, Esq., Daniel T. O'Connor, Esq., J. Michael Cooper, Esq., Daniel I. Prywes, Esq., Desmonne A. Bennett, Esq., Pro Hac Vice, BRYAN CAVE LLP, Washington, DC, Counsel for Plaintiff/Counterdefendant.

Anthony P. Larocco, Esq., Charles F. Rysavy, Esq., Kathy D. Helmer, Esq., Dana B. Parker, Esq., Michael E. Waller, Esq., Robert F. Pawlowski, Esq., Mark D. Marino, Esq., Ashley L. Turner, Esq., Benjamin I. Rubinstein, Esq., Stacey A. Hyman, Esq., Scott G. Kobil, Esq., Matthew S. Sachs, Esq., K&L GATES LLP, Newark, NJ, Counsel for Defendants/Counterclaimants.

Douglas F. Broder, Esq., Anthony P. Badaracco, Esq., Daniel A. Pincus, Esq., Pro Hac Vice, K&L GATES LLP, New York, NY, Counsel for Defendants/Counterclaimants.


JOSEPH E. IRENAS, District Judge.

Plaintiff in this seven-year-old case is Avaya Inc. ("Avaya"), a leading manufacturer of telecommunications equipment. Defendants are Telecom Labs Inc. ("TLI"), ("Team"), Continuant Inc. ("Continuant"), Douglas Graham ("D. Graham"), Scott Graham ("S. Graham"), and Bruce Shelby ("Shelby"), [1] competitors of Avaya in the highly profitable post-warranty maintenance market for Avaya-made PBX telephone systems.[2] A jury trial began on September 17, 2013 and is expected to continue through February 2014. Pending before the Court are Defendants' seven motions for judgment as a matter of law under Fed.R.Civ.P. 50, filed after Avaya finished presenting its affirmative claims.

Avaya filed the instant suit in 2006 against the corporate defendants, all of which are run and operated by D. Graham.[3] Upon being sued, Defendants counterclaimed, resurrecting antitrust violations first filed in a separate lawsuit in 2003. Days before jury selection was to begin, and after seven years of contentious litigation, (see Dkt. Nos. 1-1004), Avaya withdrew with prejudice six substantive claims: (i) misappropriation of trade secrets; (ii) tortious interference with contractual relations; (iii) violations of the Digital Millennium Copyright Act ("DMCA"); (iv) false advertising/violation of the Lanham Act; (v) trade libel/commercial disparagement; and (vi) respondeat superior/breach of duty of loyalty. Avaya tried its remaining causes of action, breach of contract, fraud, and iterations of unfair competition, [4] in a jury presentation that lasted two months, involved 35 witnesses, and spanned over 6, 000 pages of transcript.

Avaya's claims center around TLI/C's use of a series of software commands on its customers' systems, the use of which enables TLI/C to compete with Avaya in the maintenance market. Avaya alleges that such use, and the means TLI/C utilized to access the commands, is unlawful. But Avaya failed to introduce a legally sufficient evidentiary basis for the jury to conclude that this is so. For liability to lie on Avaya's breach of contract claim, the jury would have to interpret the clear terms of two unambiguous contracts in contravention of their plain and ordinary meanings. And in order to find TLI/C accountable in tort and equity, the jury would be forced to deem unlawful harmless misrepresentations and ordinary commercial competition. These are claims the law cannot support. Accordingly, Defendants' motions will be granted.


Avaya manufactures, sells, and maintains PBX systems for medium and large-sized companies.[5] (Tr. 802)[6] It invests heavily in the development of its PBX, which consists of hardware purchased by the customer and licensed software. To sell and maintain these systems, Avaya utilizes both full-time sales personnel, referred to as "Avaya badged salesmen" who transact "directly" with customers, and small retail businesses, currently referred to as "authorized Business Partners" ("BPs") that comprise Avaya's "indirect channel" to customers.[7] To become a BP, a company must sign a form contract drafted by Avaya. Beginning in 1996, TLI took part in Avaya's indirect channel, focusing on equipment sales in the northwest of the United States. (See, e.g., Tr. 4679-80)

In 1999, Avaya began relying more heavily on its indirect channel to generate sales and provide maintenance to new customers. (Tr. 2018) A downturn in the telecommunications market in 2000 led to substantial layoffs, which further propelled the company's transition. (Tr. 2018) Avaya consequently encouraged BPs (then called Dealers) to enter the maintenance market, providing them training and subsidizing the hiring of former Avaya engineers. (Tr. 2787) TLI took advantage of Avaya's offerings and entered the maintenance market, officially signing its first customer in 2001. (Tr. 2787) Soon thereafter, with Avaya's encouragement, TLI began investing "millions" in its maintenance business.[8] (Tr. 3302)

In order to maintain a PBX, a technician must be able to access the PBX's "on-demand maintenance commands" ("ODMCs"). (Tr. 832, 1057-60) ODMCs are a software function installed on the PBX that allow a technician to enter key-based instructions and troubleshoot any problem the system is experiencing.[9] (Tr. 831)

Somewhat counterintuitively, a customer does not gain access to ODMCs upon purchasing the system. Rather, because of how Avaya programs the machine, a user can only access ODMCs by entering (i) a restricted login, or (ii) a customer login when the customer has previously been granted access.[10]

Of the restricted logins, there are four - three reserved for Avaya personnel[11] and one referred to as "DADMIN, " or Definity Administration, and used by authorized BPs.[12] A DADMIN login only allows a user access if the login itself has been enabled on the PBX. (Tr. 890-91) Before activating a DADMIN login, Avaya requires the customer and the BP servicing the machine to sign a DADMIN Request Form stating that the customer authorizes Avaya to allow the named BP access. (E.g., P-00348) Once received, Avaya issues the BP an enabled login.

Avaya only grants a customer login access to ODMCs if the customer subscribes to Maintenance Assist, a yearly contract in which the customer pays Avaya for access.[13] Specifically, when a customer subscribes to Maintenance Assist, Avaya enables Maintenance Software Permissions ("MSPs") on the customer's PBX, thereby deactivating the lock blocking access.[14]

In 2000-01, Avaya encouraged BPs to perform maintenance on customers' PBXs. However, by 2002, Avaya did an about-face and adopted policies limiting BPs', customers', and independent maintenance providers' ability to perform maintenance.[15] Towards the end of 2002, for example, Avaya began using a new form contract with BPs, termed the Avaya One contract, that contained an expanded noncompete provision in which BPs agreed to refrain from soliciting maintenance business from certain prospective Avaya customers.[16] (Tr. 1650, D-01223, Reseller Product Group Attachment § 3.2) The noncompete provision was one way Avaya tried to protect its share of the maintenance market following the company's downsizing and the resulting increase in competition from BPs.

TLI began negotiating its Avaya One contract in late 2002, (Tr. 5051), and signed the agreement on March 21, 2003. (D-01223) However, TLI's agreement was amended by hand, modifying the noncompete to allow TLI to solicit maintenance business from many Avaya customers.[17] (Id.) of the approximately 300 Avaya One agreements signed, TLI's was the only one to be modified. (Tr. 1895)

When Linda Schumacher, then Head of Global Sales Operations for Avaya, learned of the modification, she was "shocked and extremely concerned." (Tr. 1893) She informed Avaya's management immediately, and on July 31, 2003, only four months after it executed the agreement, Avaya notified TLI that it was terminating the contract. (D-4643)

The contract provided for 60-days notification for a termination without cause. (D-01223, § 17.1) Consequently, between July 31 and September 30, Avaya contacted TLI's maintenance customers to inform them of TLI's soon-to-be de-authorized status, (Tr. 2125), and TLI, with its future access to restricted logins in doubt, began looking for ways to ensure access to its customers' ODMCs. On September 30, 2003, TLI's contract with Avaya terminated, and TLI became an unauthorized maintenance provider.

Two weeks later, TLI sued Avaya in federal court, alleging antitrust violations and seeking a preliminary injunction compelling Avaya to allow TLI access to the ODMCs on its customers' machines. (P-01981, ¶ 19) TLI's application was denied, (3:03-cv-04961 (SRC), Dkt. No. 20), and several months later, on July 7, 2004, TLI voluntarily withdrew its case. (3:03-cv-04961 (SRC), Dkt. No. 31)

Without any relief from the court, Defendants began obtaining access to their customers' ODMCs in a variety of ways.

TLI/C accessed some of its customers' PBXs from the passwords and logins it received while a BP, and some passwords were available on the internet. (Tr. 2915) Additionally, some customers had purchased MSPs for the life of their machines during Avaya's initial offering of MSPs, enabling TLI/C to access those customers' ODMCs through their customer logins. (Tr. 3216)

Approximately 70 times, Defendants had a customer sign a blank DADMIN Request Form and then asked an authorized BP to fill-out, sign, and submit the form on TLI/C's behalf. (Tr. 2768-2927; 2976-2978; 2978-2979; 3051; 4659-4660; P-01147; P-01961; P-00757; P-01220; P-01042) The compliant BP became the BP of record, although Defendants provided the maintenance and kept the revenue. (Id.) These BPs participated either for a fee or without charge, hoping to profit from any subsequent parts or equipment sales to the customer. (Tr. 3051, 3403)

Defendants also used two former Avaya employees to obtain access to their customers' ODMCs. One, David Creswick, helped "hack" and "crack" into customers' phones to obtain maintenance passwords, activate MSPs, enable DADMIN logins, and change passwords.[18] (Tr. 2669-70; 2690-97; 2700, 2708-10; 2767; 2768; 3065-71; 3103; 3217-18; 3340; 4660-61; 6533; P-01197; P-02212; P-00657; P-02233) Creswick retrieved the passwords by accessing data the PBX automatically stores, referred to as "translations, " (Tr. 3067), and was paid between $200 and $300 each time he helped. (Tr. 2718)

TLI/C also worked with former Avaya employee Harold Hall, who kept, without Avaya's permission, Avaya-developed software that allowed a technician to generate a password to login to systems to enable DADMIN passwords. (Tr. 6577; 6579; 6581; 6580; 6581; 6582; 6584). Hall used this software to generate between 40 and 60 passwords. (Id.; Avaya Br. [1121] at 28-29)

TLI/C, aware of Avaya's continuing attempt to block its access to ODMCs, an attempt that, if successful, would effectively terminate TLI/C's maintenance business, kept the means by which it accessed ODMCs a secret from its clients and, more importantly, Avaya. (Tr. 2771; 2884-85; 3230-31; 6433-34; 3071; 2976-78; 3233-37)

Avaya brought the instant suit on June 2, 2006. TLI/C never moved to dismiss, and only sought summary judgment on Avaya's DMCA claim, a motion that was granted in part.[19] The remains of Avaya's DMCA claim, along with five other claims, were withdrawn with prejudice September 3, 2013. (Dkt. No. 1005) Opening arguments at trial began September 17, 2013, and Avaya rested November 12, 2013. (Tr. 6598) Defendants did not put on a defense but proceeded directly to their counterclaims.


Federal Rule of Civil Procedure 50(a) states:

If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may: (A) resolve the issue against the party; and (B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.

Fed. R. Civ. P. 50(a)(1). A motion for a "Rule 50 directed verdict... may be granted only if, as a matter of law, viewing all the evidence which has been tendered and should have been admitted in the light most favorable to the party opposing the motion, no jury could decide in that party's favor." L.P.P.R., Inc. v. Keller Crescent Corp., ___ Fed.Appx. ___, 2013 WL 3814969, at *5 (3d Cir. July 24, 2013) (quoting Tigg Corp. v. Dow Corning Corp., 822 F.2d 358, 361 (3d Cir. 1987)). "Although judgment as a matter of law should be granted sparingly, a scintilla of evidence will not enable the non-movant to survive a Rule 50 motion." Goodman v. Pennsylvania Turnpike Com'n, 293 F.3d 655, 665 (3d Cir. 2002).


Defendants submitted seven motions for judgment as a matter of law, six seeking to strike each of Avaya's substantive claims and one seeking a finding regarding the licensing agreements Defendants' customers entered into upon purchasing their PBXs. In light of Avaya's failure to prove both unlawful conduct and injury-in-fact, all motions attacking Avaya's claims will be granted. Additionally, because the granting of the motions precludes a finding of liability on any primary cause of action, the Court will dismiss Avaya's derivative civil conspiracy claim. The Court first resolves Defendants' motion regarding the customers' licensing agreements, and then turns to those motions addressing Avaya's substantive claims.


TLI/C moves for a ruling that Avaya failed to prove the software licensing agreements entered into by TLI/C's 470 customers upon purchasing their PBXs prohibited them from allowing TLI/C to access the ODMCs on their systems. (Defs.' Mot. [1101] at 2) The motion will be granted.

TLI/C so moves because Avaya, in its case-in-chief, put forward its interpretation of the agreements to cast Defendants' conduct in an unlawful and violative light. (Tr. 615 (telling the jury that the licensing agreements "do not allow unauthorized service providers like TLI to use the software that Avaya developed."))[20] In so doing, however, Avaya introduced only two incomplete sets of the unknown number of licensing agreements, (P-01485; P-01765), and supplemented this showing with unsigned contracts and executed agreements signed by third parties unrelated to Avaya's claims. (P-00177; P-01323)

Avaya argues that the requested ruling is unnecessary, because a finding as to the contracts is not required for liability to be imposed on any of its claims. (Avaya Br. [1112] at 4), and in fact inappropriate, because Avaya will not be asking the jury to determine whether Defendants' customers violated the licensing agreements by allowing Defendants access. (Tr. 6671-72; Avaya Br. [1112] at 4-12)

Failing to rule on the legal implications of the agreements, however, presents two problems. First, it allows Avaya, which introduced the agreements as evidence of Defendants' unlawful conduct, to present a tortious interference with contractual relations claim under the guise of tortious interference with economic gain, and thereby evade the burden of proving actual breach.[21] See Nostrame v. Santiago, 213 N.J. 109, 122 (2013) (holding that a tortious interference with contractual relations claimant must prove that defendant "induc[ed] or otherwise caus[ed] the third person not to perform the contract"). Second, refraining from deciding the meaning of the licensing agreements, which utilize unambiguous terms ripe for judicial construction, [22] allows the lay opinions of Avaya employees and Defendants, individuals who are not themselves parties to the agreements, to replace the Court as expositor of the contracting parties' legal obligations.[23] The importance of both of these issues is heightened because the customers' licensing agreements are the only grounds on which Avaya could argue that Defendants' use of the ODMCs is itself violative of a legal obligation, in light of the fact Avaya dropped its claims for misappropriation of trade secrets, violations of the DMCA, and violation of the Lanham Act. (See Tr. 6602)

Consequently, based on the limited evidence Avaya introduced, addressed herein, the Court holds that Avaya failed to prove Defendants' customers violated their licensing agreements by allowing Defendants access to the ODMCs on their PBXs. Furthermore, based on the agreements' unambiguous language, Defendants' customers were allowed to both access ODMCs on their own PBXs and allow Defendants access where such access was for the benefit of the customers. Accordingly, Defendants' motion will be granted.

With periodic updates, Avaya and its predecessors used three main versions of licensing agreements to direct customers' use of the PBX software: one from 1990 to 2003; another from 2003 to 2007; and a third starting in 2007. (Avaya Br. [1132] at 17-23; Defs.' Br. [1101] at 5-16)

Licensing agreements used from 1990 to 2003 granted the purchaser "a personal, non-transferable and non-exclusive right to use, in object code form, all software and related documentation furnished under this agreement." (E.g., P-01499) The agreement obligated the customer to "use [its] best efforts to ensure that [] employees and users of all software licensed under this Agreement comply with these terms and conditions." (Id.) This grant, contained in a section titled "SOFTWARE LICENSE, " made no mention of restricted software, and did not address ODMCs or maintenance software at all. In 1996, while still using the same version of the licensing agreement, Avaya added the following clause, sanctioning the use of third-party maintenance providers: "The decision to acquire hardware, software (in any form), supplies or services from parties other than Lucent ("Third Party Products") is yours even if Lucent helps you identify, evaluate or select them." (E.g., P-00581-1)[24]

Licensing agreements regularly used by Avaya between 2003 and 2007 again contained a broad right to use the PBX's software, [25] and featured a new clause that again permitted use by third-party users: "Customer will make the Software available only to employees, contractors, or consultants with a need to know, who are obligated to ...

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