Air Lease: Competitive Threat Drove AIG Lawsuit

 - April 26, 2012, 10:35 AM
Steven Udvar-Hazy resigned from ILFC in February 2010 to start Air Lease Corp. (Photo: Gregory Polek)

Steven Udvar-Hazy’s Air Lease Corporation (ALC) attributes a trade secrets lawsuit filed against it on April 24 by American International Group and its subsidiary, International Lease Finance Corp., to what it characterizes as ILFC’s inability to compete effectively and its perception of Air Lease as a “growing threat.”

The lawsuit, filed in California Superior Court for the County of Los Angeles, names Air Lease, ILFC founder Udvar-Hazy and several ALC executives at one time employed by ILFC as defendants against 13 separate complaints, including misappropriation of trade secrets, breach of fiduciary duty and breach of loyalty.

Calling it “a case about theft of business,” AIG and ILFC accuse Udvar-Hazy and the others named in the suit of stealing and downloading several thousand electronic files containing trade secrets, which, the lawsuit alleges, ALC used as a “blue print” for customer communications, contracts, pricing, marketing and other strategies on which it built its business.

Udvar-Hazy and ILFC co-founders Louis and Leslie Gonda sold the company to AIG in 1990 for $1.3 billion. Following the sale, Udvar-Hazy continued to run the company until he stepped down as chairman in December 2009 and resigned as CEO in February 2010 to establish his own leasing company, now known as Air Lease Corp.

The lawsuit describes a web of intrigue beginning with Udvar-Hazy’s denied request to participate with investors in bidding for ILFC after AIG decided to sell the subsidiary to help raise capital to repay its $85 billion loan from the U.S. Federal Reserve. Following AIG’s decision not to accept any of the bids, the company in “August or September 2009” decided it would sell a fleet of ILFC’s aircraft to increase its liquidity for continued operations. A consortium of investors that previously bid for all of ILFC called OGC then expressed an interest in acquiring the fleet, and asked AIG for permission to speak with Udvar-Hazy. AIG agreed, but required Udvar-Hazy to step down as chairman to avoid a potential conflict of interest.

But because Udvar-Hazy continued in his role as CEO, he remained bound by fiduciary duties that prohibited him from recruiting ILFC employees to work for the new company formed by OGC to acquire the ILFC assets (known as Newco), securing contracts with ILFC’s customers on Newco’s behalf and using or taking ILFC’s confidential, proprietary information, the suit alleges. In fact, according to the suit, a special committee formed to negotiate on behalf of ILFC led by new chairman Doug Steenland “made clear” to OGC and Udvar-Hazy that it would not allow them to speak with ILFC employees—including then-ILFC and current Air Lease COO John Plueger—about working for Newco.

Although by September and October 2009 the special committee had negotiated exclusively with OGC to sell the fleet of airplanes, the sides remained far apart on the terms, so the committee decided to institute a formal bidding process to allow other investors to make offers. According to the suit, Udvar-Hazy on Jan. 19, 2010, learned that ILFC rejected OGC’s bid, and resorted to a so-called “Plan B” under which he and another group of investors would negotiate directly with ILFC to buy a smaller fleet of airplanes. On January 22 Udvar-Hazy officially incorporated Air Lease Corp.

According to the suit, on January 30 the special committee proposed to allow Udvar-Hazy to bid on a certain block of airplanes provided he adhered to the same “ground rules” ILFC demanded of the Udvar-Hazy/Newco team, meaning he couldn’t solicit ILFC employees to work for ALC. Udvar-Hazy did not accept the proposal because he already violated the prohibitions, the suit alleges. Finally, in February 2010, Udvar-Hazy retired from ILFC to start his own leasing company.

Subsequently, according to the suit, Udvar-Hazy and several of the executives he eventually recruited to join him conspired to divert lucrative deals to ALC while those executives still worked for ILFC.

As a result, ILFC and AIG claim entitlement to “a substantial portion of ALC’s business,” which might amount to “several hundreds of million dollars or more.”

“We regret having to file this suit, but the defendants’ misconduct left us no choice but to go to court to protect our rights and the rights of our shareholders, including our largest shareholder, the American taxpayer,” said ILFC in an e-mailed statement sent to AIN.

For its part, ALC characterized the suit as a means to compensate for ILFC’s alleged business failings.

“Since Air Lease Corporation’s founding in 2010, it has experienced terrific success in the marketplace and among investors,” said Air Lease in a statement. “In contrast, following AIG’s financial collapse, its subsidiary International Lease Finance Corporation has struggled with an aging fleet, heavy debt load, and loss of talent, and has failed to complete a planned IPO. Unable to compete effectively and perceiving Air Lease as a growing threat, AIG/ILFC has now resorted to a baseless trade secrets lawsuit that Air Lease will vigorously contest and defeat.”

Similarly, in a written retort, ILFC characterized ALC’s statement as a diversionary tactic. “Our performance speaks for itself,” said ILFC. “ALC’s spurious allegations are a smoke screen designed to distract attention from its illegal conduct and inability to compete within the boundaries of the law.”