United States District Court, E.D. Kentucky, Northern Division, Covington
JOHN P. NEBLETT PLAINTIFF
LOUIS J. BROTHERS, ET AL. DEFENDANTS
MEMORANDUM OPINION AND ORDER
WILLIAM O. BERTELSMAN UNITED STATES DISTRICT JUDGE.
matter is before the Court on various motions for summary
judgment (Docs. 199, 201, 208, 209).
Court previously heard oral argument on these motions and
took the matter under submission. After further study, the
Court now issues the following Memorandum Opinion and Order.
and Procedural Background
Defendants' Sales of Rad-Chips to Valley
Forge Composite Technologies, Inc. (“Valley
Forge”) was a publicly traded company with its
principal place of business in Covington, Kentucky. Valley
Forge was purportedly engaged in the production and sale of
momentum wheels used by spacecraft for altitude control. In
addition, following the terrorist attacks on September 11,
2001, Valley Forge stated in public filings that it was
developing homeland security and counter-terrorism products,
including a personal screening system called
“ODIN” and a system to detect narcotics,
explosives and bio-chemical weapons called
“THOR.” (See Doc. 215-17, Investor
Information). Ultimately, however, the THOR and ODIN systems
proved unviable, and Valley Forge never sold a THOR or ODIN
device or generated sales, income or profit from them.
(Brothers Plea Agreement, Doc. 199-18 at 5; Brothers Depo.
Doc. 199-2 at 63).
relevant times, Louis Brothers (“Brothers”) was
Valley Forge's Chief Executive Officer, Chief Financial
Officer, and Chairman of the Board of Directors.
Brothers' wife, Rosemary, was the company's
bookkeeper. Other employees were Kyle Seeger, an engineer;
Keith McClellan, General Counsel; Larry Wilhide,
Vice-President of Engineering; and Jim Carr, a friend of
Inc. serves customers in the electronics industry. At all
relevant times, Avnet served as a manufacturing
representative for a company called Xilinx, Inc.
(“Xilinx”). In August 2009, Avnet extended credit
to Valley Forge so it could purchase goods through Avnet.
2009 to 2013, Valley Forge purchased from Xilinx, through
Avnet, electronic components known as radiation hardened
chips (“rad-chips”). Rad-chips are designed to
resist radiation levels found in space, high altitudes, and
nuclear facilities. At the time of these sales, rad-chips
were classified as defense articles and their export was
regulated by the Arms Export Control Act
(“AECA”), 22 U.S.C. §§ 2778-80, the
International Traffic in Arms Regulations
(“ITAR”), 22 C.F.R. parts 120-30, the Export
Administration Act of 1979 (“EAA”), 50 U.S.C. app
§§ 2401-10, and the Export Administration
Regulations (“EAR”), 15 C.F.R. parts 730-74.
These regulations required any person intending to export
defense articles to obtain governmental approval and to file
“end-user” certificates with U.S. Customs and
Valley Forge purchased rad-chips from Avnet, Avnet would
obtain the chips from Xilinx. Avnet managed the customer
relationship between Xilinx and Valley Forge, and it provided
salespeople and engineering personnel to work with Valley
also contracted with Bear VAI, an independent sales
representative company based in Kentucky, to service the
Valley Forge account. (Chetan Depo. Doc. 203-7 at 3185).
Jason Meyer of Bear VAI occasionally visited Valley
Forge's office, but Brothers never told Meyer what Valley
Forge was doing with the microchips. (Brothers Depo. 57).
2009, Valley Forge placed a large order with Avnet. On July
23, 2009, Avnet's customer care department emailed
Brothers and asked for additional information, including end
user data. Brothers responded:
End User (OEM) is Valley Forge until we build it into our
product. It could be shipped worldwide. We do not want
restricted  ITAR restricted product.
Project information: Momentum Wheels and control system for
our miniature particle accelerators. May be used in our
nuclear explosion detection product but that will be
August 2009, Evelyn Morales of Xilinx circulated an email to
Xilinx distributors, sales representatives, and customers
informing them of new ITAR requirements for certain products.
(Doc. 2203-18 at 3241-46). This email specifically noted that
ITAR prohibited the export of certain products to China.
(Id. at 3243). It also attached a sample end-user
certificate that customers would be required to complete, as
well as a list of products subject to ITAR regulations. This
email triggered queries about whether Valley Forge's
order was subject to these requirements.
August 6, 2009, Jason Meyer of Bear VAI stated: “If
these are space-grade devices and being exported, then they
will need to complete the forms before they can purchase. The
customer will have to advise.” (Doc. 203-18 at 3239).
August 27, 2009, Kimberly Marriott of Avnet met with Valley
Forge and reported back to Bear VAI:
I met with the customer today and here is what I found out.
Valley Forge is a company that has been in a R&D phase
since 911. . (sic) Valley Forge is a fully funded
company and ready to start this application which is
a Security System for Cargo's called Baldur. The
eau is 500 to 1k but the dollar revenue is 3 to 4 million.
There [sic] design is done at the Covington
location. Prototypes is schedule for December
“09” and production soon thereafter.
Question. . . Do they need to fill out forms for this itar??
It's not Space related . . . just wanted to make sure. OR
do you think I need to send this [to] someone at Xilinx to
(Doc. 199-28 at 2635 (bold added).
VAI forwarded this information to Chetan Khona, Regional
Sales Manager at Xilinx, who responded:
Per the instructions, this in [sic] not a part on
the list of parts that Xilinx has requested us to fill out
for ITAR purposes. Having said that, it is eerily close so if
Hanneke or Evelyn want to comment, that is fine.
I would move forward as if no ITAR requirements are needed.
Nice opp - I don't have too many $3-4M opps fall out of
the sky on our lap. Let's be sure to set a goal to learn
more about this opp as a branch initiative for growth at the
further correspondence, Gary Brady of Avnet emailed Brothers
that Chetan Khona of Xilinx had informed him that
“paperwork is not necessary” but if “we
find out otherwise we can always work the issue at that
time.” (Doc. 203-18 at 3237).
January 2010, Valley Forge placed another order with Avnet,
which caused Kimberly Marriott of Avnet to ask him
“what application this is Baldur or Thor
perhaps.” (Doc. 224-1 at 4041). Brothers responded
“All products.” (Id.).
September 2010, Xilinx's Export Compliance department
raised a question about one of the end-user certificates
submitted by Valley Forge:
[A] statement of “Research and Development for data
acquisition system in radiated environment” seems a
little generic. Is our sales person knowing and comfortable
with what they use these devices with, or do we happened
[sic] to know the end (satellite) program they are
(Doc. 203-23 at 3283). This query was forwarded to Avnet and
Bear VAI, who in turn communicated with Xilinx's Khona.
To answer your question below, these devices are going into
body and cargo scanner equipment. Body scanning as in airport
scanner and cargo scanning as counter-terrorism equipment.
These are not space applications.
Attached is more info on the company.
(Doc. 203-23 at 3281).
receipt of this information, Xilinx's Export Compliance
So does Valley Forge develop and sell body and cargo scanners
with our ITAR FPGAs? By signing our EUC, they have
acknowledged that they would be responsible to inform their
customers with the ITAR nature of our and their devices and
apply ITAR license if their products are ever to be exported.
I will approve the PO based on this understanding,
please communicate this message to the customer if we have
(Doc. 203-23 at 3280) (emphasis added).
same day, Gary Brady of Avnet emailed Brothers about the
above questions from Xilinx:
Just a quick note that Xilinx questioned the End Use Cert.
that you filled out. Thanks to Jason and Chetan; they gave
some more details concerning your product and Xilinx did
approve. However, Xilinx did want us to remind you
that by signing their EUC you have acknowledged that you
would be responsible to inform your customers with the ITAR
nature of the product and apply ITAR license if your product
(Doc. 203-17 at 3234) (emphasis added). Brothers responded:
“[O]f course.” (Id.).
6, 2011, Kimberly Marriott of Avnet emailed Brothers and Kyle
Seger at Valley Forge:
Peter Hache from Xilinx who is Chetan Konan's manager
will be coming through the territory the week of July
11th. Peter would like to stop in and introduce
himself preferably Wednesday 7/13 at 2:30. Jason Meyer the
rep and Myself would also be in attendance for the requested
meeting. May I ask if you both can allow a few minutes out of
your busy schedule to meet with Peter for a quick
(Doc. 224-1 at 4043).
next morning, Seger forwarded the message to Brothers,
This Peter guy is one of the top guys in Xilinx. He's
Chetan's boss. While I was on the phone with Kim, she was
saying he wants to come in because he's getting
suspicious and is trying to find out what all the parts are
being used for.
Figured I'd let you know.
October 2012, Jason Meyer of Bear VAI sent Brothers an email
regarding an end-user certificate that Valley Forge had
submitted for a purchase from Avnet:
Lou - here is the hold up. End user cannot state TBD. It has
to state a U.S. entity.
If you like, you could list Valley Forge, or state same as
above, sign and date.
(Doc. 224-1 at 4044). Brothers responded that he would
“take care” of it, and the next day Valley Forge
submitted an end-user certificate that listed Valley Forge as
the end user and “THOR-LVX” as the specific end
use. (Doc. 203-6 at 3152).
company called Aeroflex also sold rad chips to Valley Forge
through its representative Quality Components
email dated January 14, 2008, Brothers requested a quote for
certain chips from John McDonough at QC, stating “We
only want parts that are unregulated.” (Doc. 199-27 at
2618). Aeroflex, through QC, responded with a quote that
noted that completed State Department End User Certificates
would be required for the purchase of any ITAR-regulated
items. (Doc. 199-27 at 2617-2633). Those certificates
required Valley Forge to agree to comply with U.S. export
laws governed by ITAR. (Id. at 2633).
January 2008 inquiry did not result in any purchase by Valley
Forge from Aeroflex. (Rush Decl. Doc. 215-4 at 3635). It was
not until June 2009 - a year and a half later - when Aeroflex
shipped its first ...