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Unipixel 1; CIT 0

|Includes:Uni-Pixel, Inc. (UNXL)

UniPixel Defeats CIT in Important First Round of Litigation

Last Tuesday, April 30, United States District Judge, Sim Lake, handed CIT/Carclo its first defeat in the ongoing litigation between CIT and UniPixel. Judge Lake granted UniPixel's motion for remand, rejecting Carclo's arguments to hear the case in Federal Court, and sending the case back to UniPixel's home-turf state court in the 284th Judicial District in Montgomery County, Texas.

As a reminder, in December 2012 CIT filed two suits in the UK against UniPixel alleging that UniPixel violated the terms of NDAs the companies had signed (most notably relying on the 2005 NDA), and alleging that UniPixel used CIT's technology in two of their own patent applications.

In January of this year UniPixel responded to the CIT suits with actions in the Montgomery County, Texas court. UniPixel asked that a Montgomery county judge issue a preliminary ruling affirming that CIT's claims should be addressed in Montgomery County, that CIT breached terms of their agreement by filing in the UK, that UniPixel did not violate terms of the NDAs, and that UniPixel should be compensated for all related costs.

CIT subsequently attempted to remove the UniPixel action from state court to federal court, causing Unipixel to file a motion to remand this case back to Montgomery County. As noted above, the federal judge has ruled in favor of Unipixel's motion to remand - UniPixel won this fight.

I spent some time with a lawyer and a couple other people close to these developments to understand the ramifications of the ruling. While on the surface this may seem to be a small victory, the reality is that it carries quite a bit of significance.

Texas HR 274, filed on 2/2/11, and signed into law by Governor Rick Perry on 6/17/11 empowers state trial courts to dismiss frivolous lawsuits immediately if there is no basis in law or fact for the lawsuit. The statute also authorizes the court to impose sanctions on a litigant who commences a frivolous action. This is commonly referred to as a "loser pays" law, and it is not applicable in federal district courts. In other words, if CIT wanted to drag this case out over a longer period of time, and reduce their chances of paying sanctions they would logically try to have the case removed to federal courts.

The remand to Montgomery County court creates a real risk for CIT and could cause the company to come to a more realistic assessment of the facts surrounding this case, leading them to drop all or part of their claims. While it's true that the UK also has a "loser pays" system, facing this obstacle on an opponent's home turf is another matter altogether.

Perhaps just as important, Judge Sim's ruling may influence the UK court's decision. Apparently the UK judge has been waiting for the US rulings before issuing his jurisdictional determination. The fact that a US District Judge rejected CIT's two principal arguments for keeping the matter in federal court is likely to carry weight in the UK court's determination. CIT had argued that the 2010 NDA didn't supersede the 2005 NDA (CIT is relying on the 2005 NDA because it is narrower in scope than the 2010 agreement, and it does not specify venue selection), and that UniPixel waived its rights to enforce the venue-selection clause when it relied on both the 2005 and 2006 NDAs in support of its claim against CIT. Judge Sim stated he was, "not persuaded by either argument."

Even if not for the US District Court ruling, the likelihood of all claims being heard in a Montgomery County court would still be high. The 2010 NDA specifically dictates that the agreement be governed by the laws of the state of Texas and that the "VENUE SHOULD LIE EXCLUSIVELY IN THE COURTS OF MONTGOMERY COUNTY TEXAS." It's the only section of the document laid out in all capital letters - making it very difficult for the judge to miss. The 2010 NDA also states, "This Agreement supersedes any and all prior agreements." The 2005 and 2006 NDAs did not specify jurisdictions.

Regardless of where the hearings take place, the fact remains that CIT's claims look weak at best. My best guess is that CIT eventually drops most or all of this fight to avoid monetary and reputational damage sometime after the venue is finalized.

The claims that form the very foundation of CIT's case rely on the notion that UniPixel uses CIT's technology that is "inkjet printed using piezoelectric drop-on-demand printheads" and that UniPixel uses CIT's proprietary ink material formulations. Yet these claims are at odds with the simple, indisputable facts surrounding UniBoss.

UniPixel does NOT use "inkjet printed using piezoelectric drop-on-demand printheads" in UniBoss's production process. Instead, UniPixel uses a proprietary flexographic micro-contact print methodology. You will not find an inkjet printhead anywhere near the UniBoss production process.

In addition, UniBoss does NOT use palladium acetate - one of two "primary components" in CIT's proprietary ink. How is it possible that UniPixel has stolen CIT's ink formula when UniPixel doesn't even use what CIT believes is one of the most critical components of its recipe? CIT accuses UniPixel of stealing its secret chocolate chip cookie recipe, but the claim doesn't even make sense - UniPixel is making crème brulee.

The fact that UniBoss does not rely whatsoever on these and other of the fundamental processes and materials necessary in CIT's proprietary methodology, make it highly unlikely that CIT will prevail in its claims. This is true whether those claims are heard in the UK or in Montgomery County, Texas. Furthermore, the fact that CIT would assert that UniBoss does rely on these technologies reveals how little CIT understands the UniBoss product and process. CIT's fundamental misunderstanding of the basic technologies used in UniBoss production leave the impression that its lawsuits are frivolous, and that they create a liability for CIT.

We may not know the final outcome of this conflict for months or years. Yet based on this initial ruling and the facts surrounding the litigation, it appears that UniPixel is in a good position to defend its ownership and use of the UniBoss technology, and to potentially recover costs and perhaps damages at the expense of CIT.

CIT's pursuit of what is arguably a frivolous lawsuit makes the firm look desperate and frightened. Why would CIT lash out at UniPixel with wildly inaccurate claims when CIT appears to have the lead in bringing product to market? What purpose does this serve? Why is CIT so threatened by the UniBoss technology? Perhaps they understand that a truly additive, roll-to-roll process will enjoy scale economies that XSense's production process cannot approach. If this is true then CIT is pursuing a perfectly logical strategy. In football (American football for all you Brits) we call it the Hail Mary.

Disclosure: I am long UNXL.

Stocks: UNXL