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Neblett v. Brothers

United States District Court, E.D. Kentucky, Northern Division, Covington

July 3, 2018




         This matter is before the Court on various motions for summary judgment (Docs. 199, 201, 208, 209).

         The 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.

         Factual and Procedural Background

         A. Defendants' Sales of Rad-Chips to Valley Forge

         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).

         At all 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 Brothers.

         1. Avnet/Xilinx

         Avnet, 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.

         From 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 Border Protection.

         When 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 Forge.

         Xilinx 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).

         In July 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 evaluated.

(Doc. 224-1).

         In 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.

         On 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).

         On 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 verify?

(Doc. 199-28 at 2635 (bold added).

         Bear 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 next review.


         After 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).

         In 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.).

         In 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 working on?

(Doc. 203-23 at 3283). This query was forwarded to Avnet and Bear VAI, who in turn communicated with Xilinx's Khona. Khona responded:

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).

         Upon receipt of this information, Xilinx's Export Compliance responded:

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 not yet.

(Doc. 203-23 at 3280) (emphasis added).

         That 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 is exported.

(Doc. 203-17 at 3234) (emphasis added). Brothers responded: “[O]f course.” (Id.).

         On June 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 introduction?

(Doc. 224-1 at 4043).

         The next morning, Seger forwarded the message to Brothers, stating:

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.


         On 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).

         2. Aeroflex/Quality Components

         Another company called Aeroflex also sold rad chips to Valley Forge through its representative Quality Components (“QC”).[1]

         In an 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).

         This 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 ...

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