Epic-Farnborough partnership goes awry

 - September 25, 2006, 6:44 AM

A two-year-old, previously undisclosed partnership between Epic Aircraft parent Aircraft Investor Resources (AIR) and Farnborough Aircraft Corp. Ltd. (FACL) has ended in legal action and bitter recriminations. The companies had been cooperating in the joint development of their respective Epic LT and Farnborough F1 turboprop-single designs.

UK-based FACL is suing AIR of Las Vegas and its CEO, Rick Schrameck, for up to $100 million in damages, alleging that AIR has failed to honor the terms of the two companies’ September 2003 design, development, construction and certification (DDCC) agreement. In particular, FACL alleges that AIR failed to deliver the F1 prototypes that FACL paid it to help build and that AIR has sought to extract additional, unjustified payments from FACL by threatening to destroy the first prototype aircraft and associated tooling.

Under the terms of the DDCC contract, the companies agreed to develop the Epic LT in parallel with the ostensibly similar F1. The intention was that the Epic LT would be offered as a kit-built model under an experimental certificate, while the F1 would have a slightly larger cabin at FACL’s option and be built to higher specifications to achieve full type certification.

Separately, AIR is attempting to use legal action in the U.S. to try to break up the fledgling joint venture between FACL and Abu Dhabi-based Gulf Aircraft Maintenance Company (Gamco) to develop the F1 under the new name Kestrel JP100. In November, Gamco and FACL signed a memorandum of understanding (MOU) at the Dubai airshow to form the Gulf Aircraft Partnership.

AIR filed a counter- suit after the MOU was announced to sue Gamco, alleging that it would be misappropriating its intellectual property by developing the F1 with FACL. However, the papers have not yet been served. AIN has been told that Gamco has since suspended its proposed partnership with FACL, although the two companies are still in dialogue over the situation.

The Federal Circuit Court in Eugene, Ore., on January 31 was due to hold an injunction hearing filed by FACL seeking to force AIR and Schrameck to hand over the F1 prototype, along with all associated designs, components and tooling. Meanwhile, the wider case of alleged breaches of the original DDCC agreement is due to go to court arbitration over the next few weeks.

Under the terms of the DDCC deal, FACL agreed to pay AIR $1.2 million for the F1 prototype, with this figure to increase to $1.34 million if the aircraft was subsequently to be built to an accelerated timetable, which was the case. In court papers filed in November, FACL claims that it has already paid AIR some $1.638 million and it complains that AIR has repeatedly sought to invoice it for additional sums that are not properly supported by detailed receipts, bringing the total claimed to more than $2 million. For example, according to FACL, AIR’s original estimate for the tooling that would be required to build the F1 prototype was $350,000 and yet it subsequently sought to bill for more than $1 million.

The court papers show that in February 2004, FACL told AIR that it wanted to temporarily suspend work on the F1 prototype because of “a shortfall in funding,” as it was entitled to do under the terms of the DDCC. The UK company subsequently asked for work to resume in August 2004. It alleges that around this time, Schrameck sought to impose a new verbal agreement between the partners. But FACL insisted that the DDCC agreement was, and still is, in force legally and that it could not be superseded by any verbal agreement.

AIR was supposed to have delivered the F1 prototype to FACL last July, but it has yet to do so. According to Schrameck, the August 2004 verbal “agreement” consisted of “seller-customer” terms in which AIR was to build one or two “stretched Epic LTs” for FACL.

Intellectual Property

Under the terms of the DDCC agreement, both sides were assured of retaining full intellectual property rights over their respective programs–even in the event of arbitration. They are barred from sharing any such information with any third party other than aviation authorities, consultants, subcontractors and suppliers. Under the terms of its subsequent Gulf Aircraft Partnership MOU, Gamco is clearly defined as a subcontractor.

Schrameck has alleged that FACL is seeking to take the Epic LT design into its new partnership with Gamco. However, FACL insists that it is the F1 design– with its 27-percent larger fuselage–that it intends to take to market as the Kestrel JP100.

The AIR chief executive has also argued that FACL contributed “little or nothing” to the development of the Epic LT and the F1. But FACL has estimated that its engineering team (consisting of between four and eight engineers permanently working between Epic’s Bend, Ore. 100,000-sq-ft production facility and FACL’s UK headquarters) did the majority of engineering design work on both aircraft.

In court submissions, Schrameck has alleged that FACL engineers “surreptiously accessed and downloaded AIR’s proprietary information.” But FACL insists that its engineers have never surreptiously accessed any information from AIR’s computers and, in any event, they claim that they are entitled to see or use all information under the DDCC terms.

In mid-November the parties reached an interim settlement agreement to resolve their disputes relating to the DDCC. Under this settlement, FACL would dismiss the lawsuit and make interim payments to AIR, while AIR would immediately resume work on the F1 prototype and complete it “as expeditiously as possible.” Further, the parties agreed to arbitrate their remaining disputes over payments owed and intellectual property rights.

FACL did, in fact, wire $100,000 to AIR the next day, though it failed to dismiss the complaint on or about November 16 as required by the settlement. According to court documents filed by FACL, AIR did not resume work on the F1 prototype and has “excluded FACL personnel from working on the F1.” FACL also said that AIR “dismantled the aircraft and moved it along with tooling…to an undisclosed location.”

In a January 12 filing, AIR said it discovered just days after signing the November settlement agreement that FACL had formed a partnership with Gamco and was at the Dubai airshow advertising an airplane–the Kestrel JP100–“that was nearly identical to AIR’s Epic aircraft.” According to the court documents, AIR said it would have never entered into the settlement agreement had it known that FACL had signed an MOU with Gamco.

“The only distinction between…[the two aircraft] is that the Kestrel JP100 fuselage is approximately 20 inches longer and slightly wider,” the document continues. “Otherwise, the Kestrel JP100 represents the exploitation of AIR intellectual property and trade secrets” used to design and build the Epic LT.

Therefore, AIR has refused to continue work on the F1 prototype or hand the aircraft over to FACL to prevent the UK company from “reverse engineering” the aircraft and thus “manufactur[ing] and sell[ing] copies of the Epic (the Kestrel JP100), in direct competition with AIR.” Specifically, AIR claims that the F1/Kestrel JP100 illegally incorporates the Epic’s planform, fuselage shape, leading-edge wing elliptical form and stabilizer planform, as well as lay-up schedules and carbon-fiber components.

AIR contends that the parties “expressly understood that the F1 prototype was not being built so that FACL or its related entities could copy, manufacture and sell an airplane identical in design and configuration” to the Epic LT. Because, as AIR contends, “FACL has admitted that the Kestrel JP100 is virtually identical to the Epic,” AIR in late November removed the wings from the F1 prototype and moved the aircraft to a “secure location” to prevent FACL from gaining AIR’s intellectual property and using that data to “irreparably” harm the U.S. company.

Furthermore, AIR is seeking monetary damages, as well as its attorney fees, because it contends that FACL breached the DDCC agreement by misappropriating trade secrets. “AIR cannot calculate the precise amount of actual damages at the present time,” though it believes it is “entitled to recover its actual damages… [and FACL’s, Gamco’s and Gulf Aircraft Partnership’s] unjust enrichment,” according to court documents AIR filed.

“FACL is pursuing all available legal remedies to seek delivery of the F1 prototype and recover intellectual property and substantial damages for the interference with FACL’s business,” an FACL spokesman concluded. Neither AIR nor Schrameck would comment beyond what’s in the court papers.