IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLIN A Case No. 1:20 - CV - 834 SMARTSKY NETWORKS, LLC, Plaintiff, v. WIRELESS SYSTEMS SOLU TIONS, LLC, DAG WIRE LESS LTD, DAG WIRE LESS USA, LLC, LASLO GROSS, SUSAN GROSS, and DAVID D. GROSS, Defendant s ) ) ) ) ) ) ) ) ) ) ) ) ) ) AMENDED ANSWER OF WIRELESS SYSTEMS SO LUTIONS, LASLO GROSS, AND SUSAN GROSS TO AMENDED COMPLAINT , AND COUNTERCLAIMS Defendants Wireless Systems Solutions, LLC (hereinafter “ WSS ” ), Laslo Gross (he reinafter “ Laslo ” ), and Susan Gross (hereinafter “ Susan ” ) (col lectively 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 fil ed Answer (ECF Doc. 89) that respond ed to and answer ed the amended Complaint of Plaintiff SmartSky Networks, LLC (hereinafter “ SmartSky ” ). (SmartSky ha d filed and served an amendment to its initial Complaint, and therefore the initial Complaint i s an amend ed Complaint, with additional factual allegations and claims (Counts). References below to “ SmartSky ’ s amended Complaint ” is to the initial Com plaint 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 62 FOURTH FURTHER DEFENSE 4. SmartSky breached the Teaming Agreement by failing to perform its obligati ons as expected. FIFTH FURTHER DEFENSE 5. SmartSky fraudulent ly 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 - clai m s below. SIXTH FURTHER DEFENSE 6. With respect to SmartSky ’ s C ount Fifteen alleging a violation of the Lanham Act, 15 U.S.C. § 1125(a)), for false advertising, these a nswering Defendants plead the doctrine of SmartSky ’ s unclean hands , including SmartSky having committed the same type of conduct of which they compla in about these a nswering Defendants. FURTHER RESPONDING TO SMARTSKY ’ S AMENDED COMPLAINT, WSS ASSERT S THE FOLLOWING COUNTERCLAIMS: COUNTERCLAIM S PARTIES, JURISDICTION, AND VENUE 1. WSS is a limited liability company organized and existing under the laws of No r th Carolina, having its principal office in Morrisville, North Carolina. Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 62 of 103 63 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 o ve r SmartSky pursuant to, at least, N.C. Gen. Stat.§ 1 - 75.4(1) and (5), and because SmartSky has submitted it self to jurisdiction because it filed the prese nt lawsuit. This Court has juris - diction over any causes of action that the Arbitration Panel decides i s not to be arbitrated in the AAA Arbitration Proceeding captioned SmartSky Net works, LLC vs. Wireless Systems Solutions, LLC, AAA Case No. 01 - 20 - 0014 - 864 7. 4. Although WSS believes that all of the below Counterclaims are to be decided by binding arbitratio n p ursuant 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 ar bitrability, and as a basis for what claims are to be decided by the Arbitration Panel. (WSS note s t ha t 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. Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 63 of 103 64 F ACTU AL BACKGROUND 6. Laslo Gross began his career in telecommunications at AT&T in the early 1980s. By the 199 0s, La slo 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 funct iona li ty and im provements to the wireless transmission of voice and data packets and pro vided wireless technology consulting services both for large tele communi - cations providers and for customers in military defense. Their companies ’ ex pertise was so exten sive t hat these companies wrote software for the test ing 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. Short ly a ft er 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 mar kets , such as private LTE networks . Consistent wi th t he Grosses ’ prior companies, WSS designs, develops, and sells products that make the wireless transmissions work – and work better – so that data packets are properly Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 64 of 103 65 packaged, transmitted, received, and decoded by wireless telecommunication devices. 8. U pon in formation 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 p aten t litigatio n. 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. Smar tSky ’ s relation ship with WSS began when SmartSky was al ready in a contractual relationship with Harris Corporation. Around the start of December 2017, SmartSky contacted WSS because WSS had prior ex perience in advanced cellular communications signal proces sing a nd had pr oven products that could be deployed in the air - to - ground system that Smart Sky was seeking to deploy. Specifically, WSS had developed and de ployed its own Remote Radio Heads and Baseband Units for c ustomers such as the United States Army, Booz A ll en, and others. WSS ’ s extensive ex perience in wireless communications, and the depth of its engineering Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 65 of 103 66 ex pertise, made WSS an attractive candidate to SmartSky, a fact touted by SmartSky to its Board of Dire ctors 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 s ubcon - tractors (i.e. , Tektelic, Commagility, Mim oo n 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 en d, however, SmartSky had a fall ing 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 we re working on did not function properly an d it is an open question whether it would have ever worked. As one exam ple, the system could not maintain a stable connection and, conse - quently, had to be rebooted when the system crashed , which WSS was in formed by SmartSky happened on a regular basis Sma rt Sky 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 he lp Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 66 of 103 67 from WSS that he was “ between the proverbial roc k and hard place, with the proverbial gun t o 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 ” prod ucts and services, would help in the develo pment of an air - to - ground ( “ ATG ” ) broadband s olution for aviation. In the early time period of the relationship, it was possible that WSS might simply provide con sultation to analyze the prior Harris system and th en perform work to im prove it, but it was a lso possible that WSS would instead supply pr oducts 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 manufa ct urer developing a system for SmartSky. 14. T his was acknowledged by SmartSky to its Board of Investors and wa s also made mention in the Teaming Agreement which plainly recites SmartSky ’ s acknowledgement that W SS was already in the wireless technol - ogy busine ss and that WSS would keep and retain rights to WSS ’ s existing technology plus improvements, modifications , and enhancements thereto, un less the S tatements of W ork specifically transferred rights to SmartSky. Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 67 of 103 68 This was particularly important given WSS ’ s pri or expertise and develop - ment and/or design of multiple components for such a system. 15. Around sp ring 2018, SmartSky approached WSS about entering into a long - term contractual relationship pursuant to which WSS w ould sup ply certain products and ancillary serv ic es for a contemplated ATG broad - band solution which included, among other things, a network o perations cen ter. As inducement for entering into this relationship, SmartSky repre - sented to WSS that it would ente r into a long - term agreement, order a cer tain n um ber of products, protect WSS ’ s intellectual property ( “ IP ” ) rights, adhere to a S upply and M aintenance agreement, and p rovide WSS with the Network Operations Center management function for its to - be - created mobile network. 16. SmartSky a lso represented to W SS that it would provide prompt and timely payment for all products supplied by WSS. Specifically, SmartSky represented t hat it would order, and provide prompt and timely payment for, at least 1,000 Airborne Radio units ( “ ABRs ” ), 1,548 Remote Radio Heads ( “ R RHs ” ), and 516 Baseband Units ( “ BBUs ” ), which numbers were later in creased to 2,275 RRHs and 760 BBUs. 17. Based upon SmartS ky ’ s representations, WSS agreed to reduce the overall price for units by $2 0,000,000 in return for SmartSky ’ s prom ises Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 68 of 103 69 to provide and pa y for WSS providing the Network Operations Center man agement 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 ar rangement, i.e., as pr oducts 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 par tner ” for WSS and b ase d 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 up front payments for prod uct development. Ra the r, it requested deposits on products to be delivered versus the Harris model which required massiv e up front Non - Recurring Engineering payments to eliminate development risk. 20. Based on SmartSky ’ s representations that it intended to produce a full broa dba nd aviation system and that it intended to partner with WSS in this project, WSS agreed to prov ide products and consultation work for Smart Sky . SmartSky also issued purchase orders to WSS which carried their o wn terms and condition s Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 69 of 103 70 21. WSS began delivery of BBUs under Purchase Or der (here inafter “ P.O. ” ) 2129 (dated June 13, 2018) around early summer of 2018. By Novem ber 2018, WSS had delivered 516 units to SmartSky , which was the contracted amount provided for in the origina l 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 a s of November 2018. 22. A P .O. for the ABRs was not issued until O ctober 2018, and it was only issued for 300 units, not the 1,000 units that S martSky had origi - nally committed to order. (T his P.O. was received m onths after WSS had been working on the ABR product , since around the early summer o f 2018 ) In its correspondence to S martSky 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., Sma rtSky ’ s financial managem ent had no idea why the P.O. had n ot been i s sued despite WSS having perfor med 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. A lthough 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 , Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 70 of 103 71 SmartSky took advantage of WSS ’ s goo dwill and inte rpreted this to mean th at they would only provide WSS with a P.O. for 300 units, but they ex pected the same pricing. 24. WSS did not receive a P.O. for the nex t 700 units until October 2019 , despite having worked on the project since around early summer of 2018 To add insult to injury, t he delivery and acceptance of th e remaining 700 units was made contingent by SmartSky on unrelated deliveries associ - ated with the ground network. This was a stalling ta ctic 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 un its but never paid WSS for Support and Mai ntenance . When asked, S martSky pro vided 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 runni ng ” 26. In the fall of 2018, SmartSky approached WSS to provide an eq uity investment. SmartSky ’ s focus was basically a reduction in the pricing that they would be paying to WSS for products del ivered. Draft P.O.s for Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 71 of 103 72 these units were c irculated to WSS but u l timately , WSS did not opt to invest as WSS did not have confidence in SmartSky ’ s ability to sur vive. 27. A review of SmartSky ’ s investor package that was provided in the fall of 2018 confirmed this decision , and caused WSS to have conc erns about SmartSky ’ s c ash flow. 28. This concern was further increased in a meeting in December 2018, between Haynes Griffin for SmartSky and Laslo for WSS, wherein Grif fin asked La slo about the possibili ty of investi ng in SmartSky. (This was at least the second time SmartSky aske d 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 ex cept to say t hat “ we are going to make a lot of money. ” 29. As indicated above, with respect to ordering and produc ing prod ucts, SmartSky provided WSS with purchase orders for Ground Units (comprised of BBUs and RRHs) and Airborne Units (comprised of ABRs). Ov er time, Smar tSky provided at least eight purchase order s 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 purch ase orders for products associated with testing and upgrading units after deployment , as well as support tools Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 72 of 103 73 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 t hese purchase orders as they identified separa te and distinct product cate gories 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 a ggre - gated nearly $41 ,50 0,000 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 d e liverables 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 bein g pa id for products produced by WSS based on WSS IP that w ere 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 complet ed BBUs and 459 RRHs which were to Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 73 of 103 74 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 a ny potential changes in sch edule 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 b e able to accept and pay fo r products t hat 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 s ufficient to accept delivery for all of the Ground units that had been ordered. A l so. no delivery s chedule was pro vided for these products. 39. Currently, WSS is holding approximately $ 13,000,000 in in ven - tory comprised of finished products, work in process , a nd inventory associ - ated wit h SmartSky ’ s orders. 40. SmartSky h as not indicated how they will pay for t his inventory, rather resorting to subterfuge that WSS has misappropriated SmartSky ’ s IP to divert attentio n away from its failure to pay for products ordered and c om mitted to. Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 74 of 103 75 41. Finally, Smar tSky is seeking to enjoin WSS from having the abil ity 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 b y way of the following: a. In duc ed 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. Sen t a second P.O. for products which it did not provide a deposit for and did not sc hedule delivery despite all orders being labelled as “ time is of th e essence ” c. Induced WSS to sign an agreement t hat was overly broad, and re strictive with the promise that the agreement would be modi - fied foll owing review with its inves tors. d. Fail ed to abide by the terms of the Teaming Agreement that ap plied to their per formance , i.e. , follow on Sub Agreements for a Long Term Supply Agreement, a Long Term Development Agree - ment, a Support and Maintenance Agreeme nt , and the manage - ment of th e Network Operations Center. Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 75 of 103 76 e. Re - issued P.O.s in an attempt to re - classify IP and cla im it as their own f. Prevent ed WSS from performing under the Teaming Agreement so that SmartSky could invoke “ right to cover ” and thereby try to misapprop riate WSS IP g. Ignore d the te rms of the Teaming Agreement when it suited SmartSky to do so , e.g., the Te st Software License Agreement and ACS/EMS Software License Agreement 43. SmartSky , through its misrepresentations, induced WSS to begin work on the Airborne Unit p roduct in the spring of 2018. The initial amount of the units that SmartSky indicated it would b e 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 divi ded into two elements (300 units and then 700 units) , SmartSky did not issue either P.O. until long aft er 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 Oc tober 2019 , it was conditiona l and linked to delivery and deployment of ground units, P.O.s that had previously never been linked. No deposit for the 700 units tha t were ordered was provided Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 76 of 103 77 44. SmartSky also sought to induce WSS into working on products by misreprese nting that WSS woul d be provided the role of managing the Net work Operations Center. B ased on SmartSky ’ s representations, the pric ing that was provid ed by WSS was reduced and t he deposits for these products were not front loaded. 45. SmartSky sought to induce WSS to reduce its pricing by an eq uity investment. This was ultimately unsuccessful. 46. SmartSky induced WSS in producing products that it would or could not comm it to as no d efined delivery dates were indicated on P.O.s (with the exception of 23 Engineering/DO - 160 Certificat ion Units in April 2020 47. WSS had to ask for Support and Mai ntenance payments which wer e 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 Air borne Units and the Ground units were not made un til seven and ten months , respective ly , 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 certi fication, fixing errors in documentation where SmartSky had a misma tch between the Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 77 of 103 78 documentati on 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 provid e d (with the exception of 23 engi - neering and certification units ) , none contain ed 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 BB Us 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 tota l of 760 units that were or dered. WSS has on hand an additional 90 BBUs for the past nine Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 78 of 103 79 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 7 08 RRHs out of a total of 2,275 units that were or dered. W SS 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 ABR s. SmartSky has placed orders for 1000 ABRs , but h as imp roper ly 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 eviden t 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 ho lding 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 pro duce them. Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 79 of 103 80 55. On information and belief, at the time that SmartSky and WSS were negotiating the arrange ment for WSS to prov ide c omponents to Smart - Sky ’ s ATG system, SmartSky had no intention of complying with the terms of any agreement or otherwise abiding by the repr esentations it made to WSS during this process. Contrary to those misrepresentations, SmartS ky actually entered into this arrangement with WSS to give the illusion of productivity to SmartSky ’ s current and potential investors, thereby promoting further in v estment and cash flow into SmartSky ’ s business. SmartSky had no inten - tion of bearing the exp enses associated wit h com plying with its obligations under any written agreement with WSS. This has become evident by Smart - Sky ’ s conduct since entering into the Tea ming Agreement, including its re fusal to provide delivery dates, refusing to provide adequate evidence that it c ould 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 addit ional re quirements not required under the contracts so as to prevent WSS from de livering products with the ulti mate aim of claiming not only products pro duced for SmartSky but also WSS IP. 56. That is, WSS bore the expense of purchasing inventory and com - ponents for products that SmartSky h ad ordered but willfully decided not to Case 1:20-cv-00834-NCT-LPA Document 116 Filed 12/06/20 Page 80 of 103