WSS+ Answer (Amended) to amended Complaint (Wireless) - KEN KYRE

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IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA Case No. 1:20-CV-834 SMARTSKY NETWORKS, LLC, ) ) Plaintiff, ) ) v. ) AMENDED ANSWER ) OF WIRELESS SYSTEMS WIRELESS SYSTEMS ) SOLUTIONS, LASLO GROSS, SOLUTIONS, LLC, DAG ) AND SUSAN GROSS WIRELESS LTD, DAG ) TO AMENDED COMPLAINT, WIRELESS USA, LLC, LASLO ) AND COUNTERCLAIMS GROSS, SUSAN GROSS, and ) DAVID D. GROSS, ) ) Defendants. ) Defendants Wireless Systems Solutions, LLC (hereinafter “WSS”), Laslo Gross (hereinafter “Laslo”), and Susan Gross (hereinafter “Susan”) (collectively referred to as “these answering Defendants”), by and through their counsel, and pursuant to Rule 15(a)(1)(A) of the Federal Rules of Civil Procedure, hereby amends their previously filed Answer (ECF Doc. 89) that responded to and answered the amended Complaint of Plaintiff SmartSky Networks, LLC (hereinafter “SmartSky”). (SmartSky had filed and served an amendment to its initial Complaint, and therefore the initial Complaint is an amended Complaint, with additional factual allegations and claims (Counts). References below to “SmartSky’s amended Complaint” is to the initial Complaint as amended, including the amendment to the initial Complaint.) Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 1 of 103 FOURTH FURTHER DEFENSE 4. SmartSky breached the Teaming Agreement by failing to perform its obligations as expected. FIFTH FURTHER DEFENSE 5. SmartSky fraudulently induced WSS to enter in the Teaming Agreement and SOW 3, and to accept purchases orders, with no intention to fully honor its obligations thereunder, as set forth in detail in the Counter- claims below. SIXTH FURTHER DEFENSE 6. With respect to SmartSky’s Count Fifteen alleging a violation of the Lanham Act, 15 U.S.C. § 1125(a)), for false advertising, these answering Defendants plead the doctrine of SmartSky’s unclean hands, including SmartSky having committed the same type of conduct of which they complain about these answering Defendants. FURTHER RESPONDING TO SMARTSKY’S AMENDED COMPLAINT, WSS ASSERTS THE FOLLOWING COUNTERCLAIMS: COUNTERCLAIMS PARTIES, JURISDICTION, AND VENUE 1. WSS is a limited liability company organized and existing under the laws of North Carolina, having its principal office in Morrisville, North Carolina. 62 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 62 of 103 2. SmartSky is a limited liability company organized and existing under the laws of Delaware, having its principal office in Morrisville, North Carolina. 3. This Court has jurisdiction over SmartSky pursuant to, at least, N.C. Gen. Stat.§ 1-75.4(1) and (5), and because SmartSky has submitted itself to jurisdiction because it filed the present lawsuit. This Court has juris- diction over any causes of action that the Arbitration Panel decides is not to be arbitrated in the AAA Arbitration Proceeding captioned SmartSky Networks, LLC vs. Wireless Systems Solutions, LLC, AAA Case No. 01-20- 0014-8647. 4. Although WSS believes that all of the below Counterclaims are to be decided by binding arbitration pursuant to the Teaming Agreement, it is asserting these Counterclaims in this Court as a precaution as to what the Arbitration Panel will decide as to arbitrability, and as a basis for what claims are to be decided by the Arbitration Panel. (WSS notes that SmartSky asserted claims in its Complaint that SmartSky has submitted for arbitra- tion.) 5. Venue is proper pursuant to N.C. Gen. Stat. § 1-82. 63 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 63 of 103 FACTUAL BACKGROUND 6. Laslo Gross began his career in telecommunications at AT&T in the early 1980s. By the 1990s, Laslo and Susan Gross had started their own technology businesses that developed and implemented software protocols for various wireless technologies, including GSM, 3G, 4G LTE, and more. Their companies developed and designed products to provide functionality and improvements to the wireless transmission of voice and data packets and provided wireless technology consulting services both for large telecommuni- cations providers and for customers in military defense. Their companies’ expertise was so extensive that these companies wrote software for the testing equipment used to test wireless devices. This is a significant accom- plishment as software used in test equipment is the benchmark against which both wireless devices and products are verified. 7. Shortly after Laslo and Susan moved to North Carolina in late 2014, they started WSS. Capitalizing on its deep knowledge and experience, WSS develops cellular capabilities for customers, with a focus on niche markets, such as private LTE networks. Consistent with the Grosses’ prior companies, WSS designs, develops, and sells products that make the wireless transmissions work – and work better – so that data packets are properly 64 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 64 of 103 packaged, transmitted, received, and decoded by wireless telecommunication devices. 8. Upon information and belief, in contrast to WSS, SmartSky has never actually sold a product that works properly. Founded in 2011, Smart- Sky has been an interest of venture capitalists, and it has devoted its ener- gies to applying for patents and engaging in patent litigation. However, SmartSky has not actually developed, produced, fielded, and sold an air-to- ground (ATG) system in its 9+ year history. The only working products SmartSky has fielded in significant quantities are the products WSS sold to it. 9. SmartSky’s relationship with WSS began when SmartSky was already in a contractual relationship with Harris Corporation. Around the start of December 2017, SmartSky contacted WSS because WSS had prior experience in advanced cellular communications signal processing and had proven products that could be deployed in the air-to-ground system that SmartSky was seeking to deploy. Specifically, WSS had developed and deployed its own Remote Radio Heads and Baseband Units for customers such as the United States Army, Booz Allen, and others. WSS’s extensive experience in wireless communications, and the depth of its engineering 65 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 65 of 103 expertise, made WSS an attractive candidate to SmartSky, a fact touted by SmartSky to its Board of Directors at the time it first contracted with WSS. 10. SmartSky initially engaged WSS to conduct a study to analyze and solve one of the technical challenges that had arisen during the course of SmartSky’s work with Harris Corporation (“Harris”) and its myriad subcon- tractors (i.e., Tektelic, Commagility, Mimoon GmBH, Cambridge Consulting, and Avidyne). Namely, SmartSky sought WSS’s assistance with a study that would assess the feasibility of removing and/or mitigating the interference it was encountering in its 2.4MHz ISM band. 11. Before the study reached an end, however, SmartSky had a falling out with Harris. Harris decided to disengage from its relationship with SmartSky, although SmartSky now claims that Harris fell behind in its schedule. In fact, the system they were working on did not function properly and it is an open question whether it would have ever worked. As one example, the system could not maintain a stable connection and, conse- quently, had to be rebooted when the system crashed, which WSS was informed by SmartSky happened on a regular basis. SmartSky and Harris could get neither the air nor ground component of the system running suffi- ciently, leading one SmartSky executive to lament in his request for help 66 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 66 of 103 from WSS that he was “between the proverbial rock and hard place, with the proverbial gun to my head.” 12. As a result, SmartSky sought an engagement with WSS in which WSS would supply products and ancillary services that, when integrated with SmartSky’s “own” products and services, would help in the development of an air-to-ground (“ATG”) broadband solution for aviation. In the early time period of the relationship, it was possible that WSS might simply provide consultation to analyze the prior Harris system and then perform work to improve it, but it was also possible that WSS would instead supply products based upon its own designs that did not make use of the Harris/SmartSky prior work. 13. So, from the outset, it was acknowledged that WSS was not a mere substitution for Harris’s role in the project, i.e., WSS was not a contract or design-build manufacturer developing a system for SmartSky. 14. This was acknowledged by SmartSky to its Board of Investors and was also made mention in the Teaming Agreement which plainly recites SmartSky’s acknowledgement that WSS was already in the wireless technol- ogy business and that WSS would keep and retain rights to WSS’s existing technology plus improvements, modifications, and enhancements thereto, unless the Statements of Work specifically transferred rights to SmartSky. 67 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 67 of 103 This was particularly important given WSS’s prior expertise and develop- ment and/or design of multiple components for such a system. 15. Around spring 2018, SmartSky approached WSS about entering into a long-term contractual relationship pursuant to which WSS would supply certain products and ancillary services for a contemplated ATG broad- band solution which included, among other things, a network operations center. As inducement for entering into this relationship, SmartSky repre- sented to WSS that it would enter into a long-term agreement, order a certain number of products, protect WSS’s intellectual property (“IP”) rights, adhere to a Supply and Maintenance agreement, and provide WSS with the Network Operations Center management function for its to-be-created mobile network. 16. SmartSky also represented to WSS that it would provide prompt and timely payment for all products supplied by WSS. Specifically, SmartSky represented that it would order, and provide prompt and timely payment for, at least 1,000 Airborne Radio units (“ABRs”), 1,548 Remote Radio Heads (“RRHs”), and 516 Baseband Units (“BBUs”), which numbers were later increased to 2,275 RRHs and 760 BBUs. 17. Based upon SmartSky’s representations, WSS agreed to reduce the overall price for units by $20,000,000 in return for SmartSky’s promises 68 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 68 of 103 to provide and pay for WSS providing the Network Operations Center management function. 18. In addition, based upon SmartSky’s representations and to bene- fit SmartSky’s cash flow, WSS agreed to a payment schedule that was spread over the course of the arrangement, i.e., as products were delivered, even though WSS would correspondingly incur substantial expenses at the early stages of the program. WSS agreed to this arrangement based on SmartSky’s implicit representations that SmartSky would be a “good partner” for WSS and based on WSS’s business principles that dictated it would do the same for SmartSky. 19. Because WSS was a product vendor to SmartSky versus Harris, who was a development contractor for hire, WSS did not request large upfront payments for product development. Rather, it requested deposits on products to be delivered versus the Harris model which required massive upfront Non-Recurring Engineering payments to eliminate development risk. 20. Based on SmartSky’s representations that it intended to produce a full broadband aviation system and that it intended to partner with WSS in this project, WSS agreed to provide products and consultation work for SmartSky. SmartSky also issued purchase orders to WSS which carried their own terms and conditions. 69 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 69 of 103 21. WSS began delivery of BBUs under Purchase Order (hereinafter “P.O.”) 2129 (dated June 13, 2018) around early summer of 2018. By November 2018, WSS had delivered 516 units to SmartSky, which was the contracted amount provided for in the original P.O. 2129. The final delivery of 100 BBUs under this P.O. was made in November 2018. However, Smart- Sky requested that WSS not bill it for those units as they wanted to avoid paying property tax on the units even though the BBUs were in their posses- sion as of November 2018. 22. A P.O. for the ABRs was not issued until October 2018, and it was only issued for 300 units, not the 1,000 units that SmartSky had origi- nally committed to order. (This P.O. was received months after WSS had been working on the ABR product, since around the early summer of 2018.) In its correspondence to SmartSky in September 2018, WSS had to ask for the P.O. (which was P.O. 2547). At the time of WSS’s request for a P.O., SmartSky’s financial management had no idea why the P.O. had not been issued despite WSS having performed work on this product for several months. Even after the P.O. was issued, the corresponding deposit associated with this P.O. was not received until May 23, 2019. 23. Although WSS conveyed to SmartSky that the P.O.s for the ABRs should be broken up into an initial 300 units with another P.O. for 700 units, 70 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 70 of 103 SmartSky took advantage of WSS’s goodwill and interpreted this to mean that they would only provide WSS with a P.O. for 300 units, but they expected the same pricing. 24. WSS did not receive a P.O. for the next 700 units until October 2019, despite having worked on the project since around early summer of 2018. To add insult to injury, the delivery and acceptance of the remaining 700 units was made contingent by SmartSky on unrelated deliveries associ- ated with the ground network. This was a stalling tactic on SmartSky’s part. 25. Similar tactics were employed on WSS’s repeated requests for payment of Support and Maintenance. Although WSS had delivered 516 Baseband Units by November of 2018, SmartSky fielded these units but never paid WSS for Support and Maintenance. When asked, SmartSky provided multiple excuses, all of which culminated in SmartSky not agreeing to pay for Support and Maintenance until the complete Network was “up and running,” despite having obtained investor funding based on “fielded units that were up and running.” 26. In the fall of 2018, SmartSky approached WSS to provide an equity investment. SmartSky’s focus was basically a reduction in the pricing that they would be paying to WSS for products delivered. Draft P.O.s for 71 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 71 of 103 these units were circulated to WSS but ultimately, WSS did not opt to invest as WSS did not have confidence in SmartSky’s ability to survive. 27. A review of SmartSky’s investor package that was provided in the fall of 2018 confirmed this decision, and caused WSS to have concerns about SmartSky’s cash flow. 28. This concern was further increased in a meeting in December 2018, between Haynes Griffin for SmartSky and Laslo for WSS, wherein Griffin asked Laslo about the possibility of investing in SmartSky. (This was at least the second time SmartSky asked WSS to invest.) Laslo responded by asking who was responsible at SmartSky for profit and loss, but SmartSky had no credible response after seven years as an operating company except to say that “we are going to make a lot of money.” 29. As indicated above, with respect to ordering and producing products, SmartSky provided WSS with purchase orders for Ground Units (comprised of BBUs and RRHs) and Airborne Units (comprised of ABRs). Over time, SmartSky provided at least eight purchase orders for varying quantities for the Ground Units (including P.O.s 2129 and 3261, 3262, 2897, 3272, 3263, 3273, and 3264) and two purchase orders for Airborne Units, as well as purchase orders for products associated with testing and upgrading units after deployment, as well as support tools. 72 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 72 of 103 30. This does not include P.O.s for the Airborne Units and the Smart- Cart that were re-issued in the spring of 2020. 31. SmartSky segregated these purchase orders as they identified separate and distinct product categories and the delivery of each of these products was intended to be staged in different time periods as the network was rolled out. The amount of the purchase orders from SmartSky aggre- gated nearly $41,500,000 for products and $13,100,000 in Statememnts of Work (“SOWs”) and, as such, WSS became SmartSky’s principal vendor. 32. Specifically, the P.O.s consisted of $13,100,00 in SOWs, $26,185,826 of ground units, $12,460,000 of airborne units, and $2,850,100 for support tools. 33. WSS’s deliverables under the agreements between WSS and SmartSky were products, plus certain ancillary services like software support and maintenance for the products. 34. WSS was not hired by SmartSky to “develop” SmartSky products. WSS was providing and being paid for products produced by WSS based on WSS IP that were sold under P.O.s, not for the production of designs that SmartSky would then manufacture. 35. To this end, WSS delivered 522 BBUs and 708 RRH units. WSS has on hand an additional 90 completed BBUs and 459 RRHs which were to 73 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 73 of 103 be delivered to SmartSky but SmartSky has not accepted shipment for and/or arranged payment for these products that were ordered under the various P.O.s. 36. Similarly, SmartSky did not notify WSS of any potential changes in schedule and/or modifications to the P.O.s which would necessitate any changes to the production schedule. 37. In fact, it was only by coincidence that WSS learned in April 2020 that SmartSky did not have adequate funding in place to be able to accept and pay for products that had been produced and were ready for delivery. 38. SmartSky was only able to confirm that funding was in place in July 2020 but the line of credit was not sufficient to accept delivery for all of the Ground units that had been ordered. Also. no delivery schedule was provided for these products. 39. Currently, WSS is holding approximately $13,000,000 in inven- tory comprised of finished products, work in process, and inventory associ- ated with SmartSky’s orders. 40. SmartSky has not indicated how they will pay for this inventory, rather resorting to subterfuge that WSS has misappropriated SmartSky’s IP to divert attention away from its failure to pay for products ordered and committed to. 74 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 74 of 103 41. Finally, SmartSky is seeking to enjoin WSS from having the ability to sell any products by falsely claiming they are, or are based on, SmartSky IP. 42. On information and belief, WSS believes that SmartSky sought to improperly induce WSS by way of the following: a. Induced WSS to begin work on a product that SmartSky commit- ted to but did not place an order for several months, reduced the quantity, and delayed payment of a proper deposit. b. Sent a second P.O. for products which it did not provide a deposit for and did not schedule delivery despite all orders being labelled as “time is of the essence.” c. Induced WSS to sign an agreement that was overly broad, and restrictive with the promise that the agreement would be modi- fied following review with its investors. d. Failed to abide by the terms of the Teaming Agreement that applied to their performance, i.e., follow on Sub Agreements for a Long Term Supply Agreement, a Long Term Development Agree- ment, a Support and Maintenance Agreement, and the manage- ment of the Network Operations Center. 75 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 75 of 103 e. Re-issued P.O.s in an attempt to re-classify IP and claim it as their own. f. Prevented WSS from performing under the Teaming Agreement so that SmartSky could invoke “right to cover” and thereby try to misappropriate WSS IP. g. Ignored the terms of the Teaming Agreement when it suited SmartSky to do so, e.g., the Test Software License Agreement and ACS/EMS Software License Agreement. 43. SmartSky, through its misrepresentations, induced WSS to begin work on the Airborne Unit product in the spring of 2018. The initial amount of the units that SmartSky indicated it would be ordering was 1,000 units. However, the initial order that was received was for only 300 units. Although WSS had indicated that the order should be divided into two elements (300 units and then 700 units), SmartSky did not issue either P.O. until long after WSS began work on this product, it provided a P.O. only when requested, and it provided a deposit for the initial 300 units a year after WSS had begun work on this product. When the remaining 700-unit P.O. was provided in October 2019, it was conditional and linked to delivery and deployment of ground units, P.O.s that had previously never been linked. No deposit for the 700 units that were ordered was provided. 76 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 76 of 103 44. SmartSky also sought to induce WSS into working on products by misrepresenting that WSS would be provided the role of managing the Network Operations Center. Based on SmartSky’s representations, the pricing that was provided by WSS was reduced and the deposits for these products were not front loaded. 45. SmartSky sought to induce WSS to reduce its pricing by an equity investment. This was ultimately unsuccessful. 46. SmartSky induced WSS in producing products that it would or could not commit to as no defined delivery dates were indicated on P.O.s (with the exception of 23 Engineering/DO-160 Certification Units in April 2020. 47. WSS had to ask for Support and Maintenance payments which were never made despite WSS’s delivery and fielding of products (BBUs) that had been in place for more than one year. 48. WSS had to ask for deposits on equipment. Deposits for the Airborne Units and the Ground units were not made until seven and ten months, respectively, after the placement of P.O.s. 49. SmartSky asked WSS to perform tasks that were outside the original scope of the products, including assistance with D0-160 certification, fixing errors in documentation where SmartSky had a mismatch between the 77 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 77 of 103 documentation that had been submitted to the FAA which did not conform with the actual product (which is an egregious violation of FAA rules). 50. Of the P.O.s that were provided (with the exception of 23 engi- neering and certification units), none contained delivery dates. And, when WSS pressed SmartSky for delivery dates, SmartSky either failed to provide dates or agreed to only token quantities of units. As an example, in May 2020, Ryan Stone of SmartSky provided a schedule for the delivery of 90 BBUs that had been available since March 2020. The schedule provided was as follows: May 29,2020: 56 BBUs July 10, 2020: 34 BBUs October 2, 2020: 40 BBUs December 6,2021: 45 BBUs February 7, 2021: 45 BBUs In other words, SmartSky was trying to “slow pedal” the delivery of equip- ment based on its projected cash flow which was dependent on investor fund- ing. 51. WSS has provided SmartSky 522 BBUs out of a total of 760 units that were ordered. WSS has on hand an additional 90 BBUs for the past nine 78 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 78 of 103 months which WSS has been waiting for SmartSky to pick up and pay. WSS has not been paid for those 90 BBUs. 52. WSS has provided SmartSky 708 RRHs out of a total of 2,275 units that were ordered. WSS has on hand an additional 459 RRHs for which WSS has been waiting for six months for SmartSky to pick up and pay. WSS has not been paid for those 459 RRHs. 53. WSS has also been prepared to provide ABRs. SmartSky has placed orders for 1000 ABRs, but has improperly sought to modify the terms of acceptance for these ABRs. 54. WSS has learned subsequently (from market assessment) that considering the amount of ABRs that have been and are currently being sold, it is evident that there is no way that SmartSky could have ever accepted 1,000 units, let alone 300 units, in the next year or even two years. Therefore, when SmartSky ordered 1,000 ABRs, it knew it could not accept all of them within a reasonable time frame. WSS would be, and is, stuck holding inven- tory for which SmartSky did not pay. Had SmartSky been honest with WSS about not being able to accept 1,000 ABRs, it would not have agreed to produce them. 79 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 79 of 103 55. On information and belief, at the time that SmartSky and WSS were negotiating the arrangement for WSS to provide components to Smart- Sky’s ATG system, SmartSky had no intention of complying with the terms of any agreement or otherwise abiding by the representations it made to WSS during this process. Contrary to those misrepresentations, SmartSky actually entered into this arrangement with WSS to give the illusion of productivity to SmartSky’s current and potential investors, thereby promoting further investment and cash flow into SmartSky’s business. SmartSky had no inten- tion of bearing the expenses associated with complying with its obligations under any written agreement with WSS. This has become evident by Smart- Sky’s conduct since entering into the Teaming Agreement, including its refusal to provide delivery dates, refusing to provide adequate evidence that it could pay for all that it had ordered, re-issuing P.O.s with the intent to re- classify products and claim the IP as their own, and asserting additional requirements not required under the contracts so as to prevent WSS from delivering products with the ultimate aim of claiming not only products produced for SmartSky but also WSS IP. 56. That is, WSS bore the expense of purchasing inventory and com- ponents for products that SmartSky had ordered but willfully decided not to 80 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 80 of 103 accept. Currently, there are outstanding orders from SmartSky that aggre- gate approximately $24,000,000, and there is about $13,000,000 in inventory, work in process, and finished product SmartSky has refused to accept deliv- ery and pay for and seeks to enjoin WSS from selling these products based on an inaccurate claim that the products are based on SmartSky IP. This excludes Support and Maintenance. 57. WSS reasonably relied on SmartSky’s misrepresentations in negotiating the terms of the agreements between the parties, specifically as they related to P.O.s and the management of a Network Operations Center. On information and belief, SmartSky knowingly, intentionally, and falsely represented to WSS that it would move forward with orders in order to induce WSS to agree to SmartSky’s desired terms. 58. Upon information and belief, WSS was used as a pawn to enable SmartSky to meet certain milestones that were required in order to obtain the “next round” of funding from investors 59. In addition, on information and belief, SmartSky had no inten- tion of paying the support and maintenance expenses contemplated by the parties’ agreement. 60. SmartSky has failed to pay for Support and Maintenance on any delivered units, contrary to standard industry practices. SmartSky was 81 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 81 of 103 aware that Support and Maintenance on delivered products would be required as early as summer 2018, yet they failed to make those payments despite the fact that units had been fielded. 61. Per the terms and conditions of the purchase orders and contracts, SmartSky was obligated to notify WSS in the event of any projected modifications to the purchase orders and/or changes. 62. SmartSky has failed to notify WSS of changes, except with respect to SmartSky’s eventual attempted repudiation and cancellation. 63. WSS has made purchases and expenditures for work in progress and components in connection with the contracts with SmartSky, which, together with the 90 BBUs and 459 RRHs that have been available for deliv- ery to SmartSky since March 2020 and June 2020, respectively, and for which SmartSky has refused to accept delivery, aggregate more than $13,000,000. 64. However, around April 2020, WSS was advised by SmartSky’s leasing company that the leasing company had not received a request from SmartSky for a credit line increase. 65. Furthermore, WSS was not notified of an increase in SmartSky’s credit line until July 23, 2020, but even that was still insufficient to cover the 82 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 82 of 103 amount of product ordered under the P.O.s (i.e., covering only the next $5,000,000 in deliveries). There would be another $10,000,000 required. 66. SmartSky has also breached its obligation, reflected in section 5.02(b) of the Teaming Agreement, to pay WSS on an annual basis for maintenance of delivered products, at a rate of 18% of the price of each purchased product and beginning with delivery of such product. Despite requests for payment and delivery of such product, SmartSky has not paid such amounts. SmartSky owes WSS at least $4,293,090 for maintenance on delivered products. Five years of maintenance would be over $30,000,000. Yet, when SmartSky needed a product, maintenance was paid, e.g., the Test Software that was required for certification purposes. (This software was paid for in full and the required Support and Maintenance was paid in advance in March 2020.) 67. On or around June 2020, WSS was contacted by Price Water- house Coopers (“PWC”) (a management consulting firm) who was inquiring on behalf of the SmartSky board if WSS believed that the SmartSky manage- ment were competent to make the transition from a development company to an operational company. WSS explained the issues that WSS were having with SmartSky; in particular, SmartSky had claimed that WSS’s “System” did not work (which was not true). 83 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 83 of 103 68. WSS communicated the issues that it was having to PWC and a demonstration was shown to the PWC consultant as well as an independent consultant from the Wireless Center that showed a working system in the lab (as required by the Blackbird Requirements 5.3). PWC informed WSS at the time (which was later confirmed in a conference call to members of the SmartSky Board of Directors) that the issues between the two companies were commercial in nature, not technical. 69. WSS sent a letter dated June 26, 2020, to SmartSky stating that “[a]n October/November 2020 product launch is feasible and doable, with respect to WSS’s activities.” 70. At this point, though, WSS learned that SmartSky had all of a sudden “moved the goalposts” in terms of what was expected to be delivered. SmartSky asserted that WSS was now responsible for the delivery of a full system to be tested in the air, despite the fact that WSS did not have the requisite interfaces to be able to do so. This was the first time, but not the last time, WSS discovered that SmartSky was trying to conflate the SOWs with the P.O.s, and WSS believes this was done intentionally. 71. Upon information and belief, SmartSky expected WSS to continue to expend resources and incur obligations knowing that SmartSky could not or would not have the ability to accept and pay for its orders. 84 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 84 of 103 72. WSS has satisfied its currently due contractual obligations to SmartSky and has been willing to perform its contractual obligations. 73. SmartSky’s failure to abide by its contractual obligations, includ- ing its refusal to pay contractually obligated amounts due, constitute one or more breaches of contract, resulting in damage to WSS. Such breaches have not been cured despite sufficient notice from WSS to SmartSky of such breach. SmartSky’s breaches include, but are not limited to, the following: a. Failure to accept and pay $1,260,000 for 90 BBUs; b. Failure to accept and pay $3,136,498.47 for 459 RRHs; c. Failure to pay maintenance and support of $2,630,880 for 522 BBUs provided in 2018; d. Failure to pay for maintenance and support of $870,840 for 708 RRHs provided in March 2020; e. Failure to pay maintenance and support of $226,800 for 90 BBUs ready for pick up; f. Failure to pay maintenance and support of $564,570 for 459 RRHs ready for pick up; g. Failure to pay $700,000 for task area 3 under SOW 3; h. Failure to pay $290,862 for outstanding labor, cables, tariffs, and redesigns; i. Failure to pay $130,400 for SFPs; j. Failure to pay $1,000,000 for SmartCart; 85 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 85 of 103 k. Failure to pay maintenance and support of $270,000 for Smart- Cart; and l. Failure to pay $84,846 for additional tariffs. 74. By around March or April 2020 (and even before then), WSS observed and learned information that reasonably caused it to fear that SmartSky would not perform under the parties’ contract, namely that SmartSky would not pay for products and other services when due. WSS’s grounds for insecurity include the following: a. SmartSky failed for months, despite requests, to provide a sched- ule for delivery of Airborne Units ordered (with such schedule to be consistent with the parties’ expectations), indicating inability to pay; b. SmartSky refused delivery of Ground Units ordered, indicating inability to pay; c. SmartSky had only expressed interest in token (less than the available quantity) deliveries of units, indicating inability to pay; d. SmartSky created pretexts rather than schedule deliveries and thus payments; 86 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 86 of 103 e. SmartSky sought demonstrations when units had been demon- strated previously multiple times, even demonstrated in connec- tion with a flying drone, and a SmartSky person was at WSS’s site for an extended time; f. SmartSky refused to execute an End User License Agreement for SmartCart products, indicating inability to pay; g. SmartSky failed to respond to issues concerning product delivery and payment scheduling; h. There were no defined delivery dates on any of the P.O.s (with the exception of the Airborne Engineering/Certification Unit P.O.s in 2020), although the P.O.s indicated that “Time was of the essence.” i. SmartSky had inadequate financing lines in place to allow for payment (only between $1,000,000 and about $4,400,000, as compared to the over $25,000,000 (before including support and maintenance) that WSS was or would be due; j. It took SmartSky a month after WSS notified SmartSky of certain product availability on July 23, 2020 to notify WSS that its line of credit had increased – to just over $4,400,000, well short of the about $14,000,000 in Ground Units already ordered; 87 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 87 of 103 k. SmartSky was not being extended credit by other vendors and that it was being required by others to pay immediately for products; l. SmartSky inaccurately asserted linkages between P.O.s and requested deliverables that are not included in the contracts or other requirements; m. SmartSky refused to put money in an escrow or obtain a letter of credit; n. SmartSky failed to provide other adequate assurances that it would and could perform and pay WSS; o. SmartSky did not show WSS verified financial statements and did not otherwise sufficiently indicate its plan to have or obtain funds; and p. SmartSky flatly refused to indicate how else it would pay WSS the monies that WSS would be due if/when the airborne units were provided upon WSS’s continued fulfillment of its obliga- tions, which obligations WSS was ready and willing to fulfill. 75. Based on the growing list of indications that SmartSky would not be able to pay amounts as they became due, WSS exercised its contractual 88 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 88 of 103 right to demand adequate assurance of performance from SmartSky. Specifi- cally, consistent with N.C. Gen. Stat. § 25-2-609 and other applicable law, WSS requested that SmartSky provide adequate assurance that it could provide timely payment of products and services. 76. SmartSky has not provided such assurances, nor made payment of amounts owed. Instead, SmartSky just asserted that it would be able to pay, refusing to provide actual, adequate, and acceptable assurances or proofs. SmartSky falsely claimed that it was under no obligation to provide such assurance. 77. On information and belief, SmartSky has refused to provide those assurances, and has instead purported to fabricate previously non-existent “requirements” for its acceptance of WSS’s products and services, in order to impede WSS’s discovery of SmartSky’s inability to comply with its obligations under the agreement. 78. SmartSky has also falsely asserted WSS’s misappropriation of WSS IP to distract from its failure to accept and pay for products. This mis- appropriation claim was only asserted after WSS filed a lawsuit in State Court for non-payment on September 3, 2020. 79. WSS has come to understand that at the time that SmartSky and WSS were negotiating this arrangement, SmartSky had no intention of fully 89 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 89 of 103 complying with the terms of any such agreement or otherwise abiding by the representations it made to WSS during the contracting process. Contrary to those misrepresentations, SmartSky actually entered into this arrangement with WSS to give the illusion of productivity to SmartSky’s current and potential investors, thereby promoting further investment and cash flow into SmartSky’s business. SmartSky had no intention of bearing the expenses associated with complying with its obligations under any such agreement. 80. Among other activities, and as already asserted, SmartSky pressured WSS to execute a Teaming Agreement with SmartSky with the representation and promise that the parties’ agreement would be renegoti- ated after SmartSky showed the initial Teaming Agreement to its investors. SmartSky has not honored that promise and has, instead, stonewalled subse- quent attempts at negotiation. In addition, on information and belief, Smart- Sky has never intended to pay the support and maintenance expenses contemplated by the parties’ agreement. And in practice, SmartSky has failed to pay for support and maintenance on any delivered units, contrary to standard practices. 81. This Teaming Agreement was created so that SmartSky could show their investors that they had WSS “locked up” as a supplier (to avoid 90 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 90 of 103 another Harris situation). But, SmartSky subsequently has not honored its promise and representation. 82. The Teaming Agreement also seeks to conflate P.O.s and SOWs. 83. Specifically, SmartSky seeks to assert its ownership of the products, i.e., in SmartSky’s estimation, this includes any product produced under any P.O. However, this would necessitate the inclusion of an SOW for these products formerly produced based on a standalone P.O. 84. Because the Teaming Agreement claims to only focus on those P.O.s issued subsequent to the Teaming Agreement and/or with regard to the P.O. associated with SOW 3, the formerly standalone P.O.s would need to be re-issued. In addition, in order for SmartSky to be able to attempt to claim WSS IP as its own, an SOW would need to be included with formerly standalone P.O.s. 85. Therefore, in March, April, and May 2020, SmartSky re-issued new P.O.s that were heretofore standalone P.O.s but suddenly had SOWs attached to them. These included P.O.s for the SmartCart Units as well as P.O.s for the Airborne Units. 86. Specifically, with regard to the SmartCart, SmartSky issued a new P.O. 4424 on 3/20/2020 which now had an SOW attached. This would be 91 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 91 of 103 an attempt by SmartSky to claim the IP associated with this product as part of Developed IP that SmartSky would assert it then owned. 87. On April 16, 2020, SmartSky re-issued P.O. 2547 (for the Airborne Units – the “jewel in the crown” of SmartSky products) with an SOW attached. This consisted of 23 Engineering and Certification Units (with defined delivery dates) and 277 Airborne Units with a delivery date of “TBD.” 88. On May 15, 2020, the above P.O. 2547 was modified again and two additional P.O.s (4529 and 4530) were added (with corresponding SOWs) for 13 Engineering Units and 10 DO-160 Units and the P.O. for the Airborne Units was reconverted back to a standalone P.O. for 300 Airborne Units with no delivery date. 89. However, there was no SOW attached to the P.O. for the Airborne Units, and therefore SmartSky cannot even attempt to claim ownership of WSS IP for the Airborne Units. 90. SmartSky asserts that P.O. 2129 (originally issued in June 2018) for the Ground Units was covered under SOW 3, and therefore, is subject to certain IP rights. However, there are seven other P.O.s for Ground Units. Also, P.O. 2129 was issued as a standalone P.O. with only Terms and Condi- tions associated with it. 92 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 92 of 103 91. SmartSky has asserted that WSS failed to make the deliveries under SOW 3 and that WSS did not invoice SmartSky for this deliverable, and therefore, this is not a valid debt. However, WSS did make this delivery in 2019, and according to Section 3.07 of the Teaming Agreement, the deliv- ery would be deemed accepted within 15 days of delivery unless SmartSky rejected the deliverable and specified in detail the reasons for such rejection. Furthermore, under this same clause, no title and/or rights would be trans- ferred to SmartSky until payment was made for this deliverable. 92. SmartSky neither rejected the deliverable or specified the reason for any such rejection, and did not pay the invoice that was submitted twice for this deliverable. 93. Therefore, SmartSky’s assertion that P.O. 2129 falls under SOW 3 cannot be perfected because SmartSky failed to pay for the final install- ment due under SOW 3. 94. The significance of all of the above is that although SmartSky has claimed on multiple occasions that WSS is seeking to misappropriate Smart- Sky’s IP, it is SmartSky who is actually improperly seeking to misappropriate and effectively “grab” WSS’s IP. 95. The Teaming Agreement permits WSS to operate independently and pursue development of products as long as it does not use SmartSky’s 93 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 93 of 103 confidential information or IP, and WSS has not done so with the products it has produced. 96. When SmartSky determined that it was not in its best interests to adhere to the Teaming Agreement, it chose to ignore that agreement. 97. This is evident in the Test Software License Agreement and the ACS/EMS Software License Agreement that were executed in December 2019. It was determined that this software was required in order for Smart- Sky to be able to go through certification of the alpha unit products that WSS had delivered. Because SmartSky needed this software, it viewed the Team- ing Agreement dictates as not applicable. SmartSky paid for the Test Soft- ware as well as support and maintenance in advance. 98. WSS has sought to deliver what has been produced but SmartSky has failed to follow through on its obligations, i.e., to accept and pay for products that have been produced and WSS has sought to deliver. According to the Teaming Agreement, SmartSky is obligated to compensate WSS for products it produced for SmartSky and/or services it provided to SmartSky. 99. At the time of SmartSky’s attempted and unwarranted repudia- tion in the summer of 2020, WSS had fully or at least substantially complied with its obligations then due. As with any network deployment of products, 94 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 94 of 103 final tweaks would be done in the field. As the products were to be incorpo- rated with and into SmartSky’s system, both parties would have worked on such matters. However, SmartSky shut down WSS’s access to various sites and otherwise breached the Teaming Agreement. SmartSky’s repudiation – and continued repudiation – relieved WSS of its responsibility to continue sinking money into the project when there was not reasonable assurance of payment. 100. After SmartSky had already repudiated its agreements with WSS, and after WSS sent a letter dated July 29, 2020, to SmartSky noting that SmartSky had breached and repudiated various terms of the Teaming Agreement, SmartSky then sent to WSS a notice of breach. SmartSky’s claim in the notice was that WSS was unable to deliver is a ruse that obscures SmartSky’s intentional impediments to WSS’s performance. The reason for the ruse is that the breach related to a failure of WSS equipment to interop- erate with SmartSky’s CWAP. The reason that this is a ruse is because SmartSky had failed to pay for Support and Maintenance on the CWAP so no one would have been able to interoperate. This failure rests entirely with SmartSky. 101. Because of SmartSky’s breach, WSS filed a lawsuit against SmartSky in State Court on September 3, 2020. 95 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 95 of 103 102. On September 4, 2020, SmartSky sought to terminate the Team- ing Agreement for cause. However, it was only after WSS’s filing of its lawsuit that SmartSky sent notice of its terminatation of the Teaming Agree- ment. FIRST CLAIM FOR RELIEF (Breach of Contract) 103. The allegations of paragraphs 1 through 102 are realleged and incorporated herein by reference. 104. WSS and SmartSky entered into valid, enforceable contracts, including purchase orders and the Teaming Agreement. 105. SmartSky breached its obligations owed to WSS under the agree- ments by, inter alia, refusing to honor the parties’ agreed-upon production, delivery, and payment schedules, failing to accept and pay for products produced by WSS, by refusing to honor the 18% maintenance payment that it had promised to SmartSky, and failing to pay what it owes WSS has described above. SmartSky’s breaches also include those breaches asserted above and not specified in this paragraph. 106. SmartSky also breached the parties’ contract when it refused to provide adequate assurance of performance, thereby repudiating the agree- ment. 96 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 96 of 103 107. As a result and consequence of SmartSky’s breach of contract, WSS has been harmed and damaged in excess of $75,000. SECOND CLAIM FOR RELIEF (Breach of Good Faith and Fair Dealing) 108. The allegations of paragraphs 1 through 107 are realleged and incorporated herein by reference. 109. As a party to contracts with WSS, and under the common law and N.C. Gen. Stat.§ 25-1-304, SmartSky owed WSS a duty of good faith and fair dealing such that SmartSky would not engage in conduct that interfered with WSS receiving the benefit of its bargain with SmartSky. SmartSky’s duty of good faith and fair dealing required it to act fairly and in good faith in carrying out its obligations toward WSS and in executing and implementing the contracts with WSS. 110. By the conduct describe above, including, but not limited to, SmartSky’s misleading conduct at the outset of contract negotiations, its failure to order and/or accept delivery of goods and services that WSS had produced for SmartSky, its refusal to honor the parties’ maintenance agree- ment, its refusal to respond to WSS’s requests for reasonable assurance of performance, and its belated invention of unsupported “requirements,” 97 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 97 of 103 SmartSky breached SmartSky’s duty of good faith and fair dealing under the parties’ agreement. 111. As a result and consequence of SmartSky’s breach of its duty of good faith and fair dealing, WSS has been harmed and damaged in excess of $75,000. THIRD CLAIM FOR RELIEF (Unfair and Deceptive Trade Practices) 112. The allegations of paragraphs 1 through 111 are realleged and incorporated herein by reference. 113. SmartSky’s conduct, as alleged above, constitutes unfair and deceptive trade practices in violation of N.C. Gen. Stat. § 75-1.1 et seq. (here- inafter “the UDTP Act”). 114. SmartSky’s unfair and deceptive conduct affected commerce in North Carolina by, among other things, causing injury to WSS, a company doing business in North Carolina. 115. SmartSky’s wrongful, malicious, unfair, and deceptive conduct, including inducing WSS to contract with it and inducing WSS to continue to continue performing under the contract knowing or having reason to know that SmartSky would be unable to fully pay what it owed and would owe 98 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 98 of 103 WSS, making promises about revising and renegotiating the Teaming Agree- ment with no intention to do so but with the purpose of inducing WSS to enter into the Teaming Agreement, ordering items that it did not intend to receive and pay for, refusing to provide delivery dates of products, seeking to create a scenario where it would misappropriate WSS’s IP without compensa- tion to WSS. 116. As a result and consequence of SmartSky’s unfair and deceptive trade practices, WSS has been harmed and damaged in excess of $75,000. 117. WSS is entitled to recover treble damages from SmartSky for its unfair and deceptive trade practices, in addition to reasonable attorneys’ fees. FOURTH CLAIM FOR RELIEF (Fraudulent Inducement) 118. The allegations of paragraphs 1 through 117 are realleged and incorporated herein by reference. 119. As described above, SmartSky misrepresented and concealed its intentions to not fully comply with contracts it sought to enter into with WSS, it made promises about revising and renegotiating the Teaming Agreement with no intention to do so but with the purpose of inducing WSS to enter into the Teaming Agreement, it misrepresented to WSS that it would order and 99 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 99 of 103 pay for a certain amount of products but with no intention of actually accept- ing all such products, and it misrepresented at various times its ability to pay for all products produced and to be produced by WSS. 120. The fraudulent inducement was not only with respect to initially inducing WSS to enter into contracts with SmartSky, but to induce WSS to continue complying with the contracts and producing products. 121. SmartSky’s misrepresentation and concealment were reasonably calculated to deceive and made with the intent to deceive, and which did deceive WSS. 122. SmartSky’s misrepresentation and concealment directly and proximately caused injury to WSS in excess of $75,000.00. WHEREFORE, WSS, Laslo Gross, and Susan Gross having answered SmartSky’s amended Complaint, and WSS having asserted Counterclaims, these answering Defendants request the Court: (1) That SmartSky have and recover nothing of them in this lawsuit; (2) That SmartSky’s claims against these answering Defendants be dismissed from this lawsuit; (3) That all claims asserted by SmartSky and WSS in this lawsuit be decided by binding arbitration; 100 Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 100 of 103