Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_11-cv-02493/USCOURTS-azd-2_11-cv-02493-3/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

---

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

S.G.D. Engineering Limited,

Plaintiff, 

v. 

Lockheed Martin Corporation Incorporated, 

Defendant.

No. CV-11-02493-PHX-DGC

ORDER 

 Plaintiff has filed a motion for summary judgment. Doc. 109. The motion is fully 

briefed. For the following reasons, the Court will grant in part and deny in part Plaintiff’s 

motion.1

I. Background Facts. 

Toshiba contracted with the Japanese Ministry of Defense (“JMOD”) to provide 

components for F-15 fighter jets. On August 31, 2007, Toshiba entered into a contract 

(“Prime Contract”) with Defendant Lockheed Martin Corporation, Inc. to design and 

build a Synthetic Aperture Radar Reconnaissance Pod (“SRP”). The SRP was designed 

to attach externally to the belly of an F-15 airplane and provide target and intelligence 

imagery. The Prime Contract provides for liquidated damages measured at a rate of $1 

per $1,000 of the value of undelivered items for each full day that delivery is delayed. 

 

1

 The request for oral argument is denied because the issues have been fully briefed and oral argument will not aid the Court’s decision. See Fed. R. Civ. P. 78(b); 

Partridge v. Reich, 141 F.3d 920, 926 (9th Cir. 1998). 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 1 of 16
- 2 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

Liquidated damages are capped at five percent of the value of the undelivered items. In 

addition, Defendant can be liable for liquidated damages only to the extent Toshiba is 

assessed liquidated damages or price reductions by JMOD. 

 Defendant solicited bids from pod manufacturers, including Plaintiff S.G.D. 

Engineering, Ltd. Defendant did not include a liquidated damages clause in the bid 

request or the subcontract. Plaintiff won the subcontract. The parties agreed on a price 

of $5,870,680 for Plaintiff’s services, which would be paid in increments upon the 

completion of “milestones” identified in the statement of work (“SOW”). The 

subcontract required Plaintiff, among other things, to design, manufacture, acceptance 

test, and deliver a pod, and to submit extensive engineering reports for review by 

Defendant. A milestone would be deemed complete only when all deliverables and 

efforts specified in the SOW were delivered, accepted, verified, and approved by 

Defendant. Defendant reserved the right to terminate the subcontract for default or 

convenience. In the case of a termination for default, Defendant was required to 

compensate Plaintiff for work actually delivered and accepted. All performance on the 

contract was due on May 8, 2009. 

 In March 2008, Defendant notified Plaintiff that Boeing would conduct a 

functional flight test (“BFFT”) to determine whether the SRP was operational and to 

gauge its capabilities. Plaintiff submitted the necessary materials to Boeing. Boeing 

complained that there were significant deficiencies in the engineering reports submitted 

by Plaintiff, which delayed the BFFT and resulted in significant expenses for Defendant. 

Boeing did not approve the SRP for flight and did not conduct the BFFT until August 

2010. 

 The parties modified the subcontract to permit delivery of the SRP in October 

2009. Plaintiff delivered the SRP in October 2009, but the SRP was damaged during 

shipment. Defendant contends that Plaintiff provided grossly deficient engineering 

reports to accompany the SRP. Defendant asserts that the deficiencies represented a 

breach of the subcontract which delayed Defendant’s ability to satisfy its obligations 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 2 of 16
- 3 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

under the Prime Contract. Plaintiff asserts that other delays unrelated to Plaintiff’s 

performance accounted for Defendant’s inability to fulfill its obligations under the Prime 

Contract. The SRP was eventually shipped to Toshiba in September 2010. 

 After shipping the SRP, Plaintiff submitted invoices for the final three milestones 

of the subcontract. Defendant rejected the invoices, claiming that Plaintiff had not 

fulfilled its obligations under the milestones. The parties met in Goodyear, Arizona in 

November 2010 and reached an agreement to resolve the dispute and clarify what work 

Plaintiff needed to complete in order to be paid under the milestones. Plaintiff asserts 

that Defendant entered into the November 2010 agreement in bad faith because 

Defendant intended to induce Plaintiff to perform more work without paying. Defendant 

counters that Plaintiff simply failed to meet the deadlines established in the November 

2010 agreement. 

 In February 2011, JMOD terminated its contract with Toshiba due to delay. 

Toshiba did not cancel the Prime Contract, however, because it still hoped to sell the SRP 

to JMOD. Toshiba and Defendant identified a list of items that Defendant needed to 

perform to qualify for payment under the Prime Contract. Defendant therefore continued 

work with Plaintiff to reach remaining subcontract milestones. Plaintiff submitted its 

final engineering reports and drawings in June 2011. Defendant asserts that these reports 

were still deficient. In fact, Defendant alleges that it was so skeptical about the integrity 

of the data and quality of the calculations made by Plaintiff that Defendant hired a thirdparty to analyze the materials. The third-party indicated that the SRP’s properties as 

found and reported by Plaintiff were not substantiated by test data. On September 15, 

2011, Defendant terminated Plaintiff for default and refused to pay Plaintiff for the 

remaining milestones, asserting that Plaintiff still had not fully performed under the 

subcontract. Despite terminating Plaintiff for default, Defendant has represented to 

Toshiba that it is entitled to payment under the Prime Contract because the Prime 

Contract is complete subject to “final update.” 

 Plaintiff asserts claims for breach of contract and breach of the duty of good faith 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 3 of 16
- 4 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

and fair dealing. Plaintiff has been paid for all but three of the subcontract milestones, 

leaving an unpaid balance of $753,900. Defendant has counterclaimed for approximately 

$73 million in damages. These damages include the full price of the Prime Contract, 

liquidated damages under the Prime Contract, Boeing charges assessed to Toshiba, lost 

profits, and miscellaneous expenses incurred as a result of Plaintiff’s alleged failures. 

II. Legal Standard. 

A party seeking summary judgment “bears the initial responsibility of informing 

the district court of the basis for its motion, and identifying those portions of [the record] 

which it believes demonstrate the absence of a genuine issue of material fact.” Celotex 

Corp. v. Catrett, 477 U.S. 317, 323 (1986). Summary judgment is appropriate if the 

evidence, viewed in the light most favorable to the nonmoving party, shows “that there is 

no genuine dispute as to any material fact and the movant is entitled to judgment as a 

matter of law.” Fed. R. Civ. P. 56(a). Only disputes over facts that might affect the 

outcome of the suit will preclude the entry of summary judgment, and the disputed 

evidence must be “such that a reasonable jury could return a verdict for the nonmoving 

party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 

III. Analysis. 

 A. Defendant’s Motion to Supplement its Response. 

Plaintiff asserts that the evidence Defendant has offered to oppose summary 

judgment is inadmissible and may not be considered. Doc. 130 at 1; Orr v. Bank of Am., 

NT & SA, 285 F.3d 764, 773 (9th Cir. 2002) (holding that a court may consider only 

admissible evidence in ruling on a motion for summary judgment). Defendant has moved 

to supplement its response and statement of facts. Doc. 133. The Court will grant 

Defendant’s motion. The Federal Rules of Civil Procedure are “to be liberally construed 

to effectuate the general purpose of seeing that cases are tried on the merits.” Rodgers v. 

Watt, 722 F.2d 456, 459 (9th Cir. 1983). When a party fails to support an assertion of 

fact or fails properly to address another party’s assertion of fact as required by 

Rule 56(c), a court may afford an opportunity to support or address the fact. Fed. R. Civ. 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 4 of 16
- 5 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

P. 56(e)(1). Defendant does not seek to introduce new facts or make new arguments in 

its supplement. Instead, it presents previously proffered facts in a form that can be 

considered on a motion for summary judgment. 

 Plaintiff requests leave to make additional evidentiary objections to Defendant’s 

supplement. Doc. 135 at 2. The Court does not require additional briefing. 

B. Rule 30(b)(6) Deponents. 

 On November 12, 2012, Plaintiff served a notice of deposition pursuant to 

Rule 30(b)(6). Topic 58 identified in the notice required Defendant to designate a 

witness to testify regarding Plaintiff’s alleged deficient performance under the November 

2010 agreement. On December 10, 2012, Defendant designated Eric Marx as its 

deponent for topic 58. At the deposition, however, Mr. Marx testified that he did not 

know about Plaintiff’s deficient performance, had not performed any research, and did 

not interview any other employees to prepare. Subsequently, Defendant gave notice to 

Plaintiff regarding the designation of two witnesses, Clifford Middleton and George 

Locke, who could testify about topic 58. Plaintiff subsequently deposed Mr. Middleton 

and Mr. Locke. 

 Relying on Rainey v. American Forest & Paper Ass’n, Inc., 26 F.Supp.2d 82 

(D.D.C. 1998), Plaintiff argues that Defendant should be barred from relying on the 

depositions of Mr. Middleton and Mr. Lock. Doc. 130 at 5. In Rainey, the court refused 

to consider information contained in an affidavit that was introduced for the first time in 

opposition to summary judgment. The information differed drastically from testimony 

provided by the 30(b)(6) deponents who had testified on behalf of the defendant. Here, 

Defendant designated substitute deponents on topic 58 after it became apparent that the 

Marx deposition was unsatisfactory. Plaintiff deposed the witnesses, and did not seek to 

recover fees for the additional depositions. The merits relief it seeks is unwarranted 

where Defendant provided substitute deponents. 

/ / / 

/ / / 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 5 of 16
- 6 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

C. Summary Judgment. 

1. Breach of Contract and Covenant of Good Faith. 

Under Arizona law, “[i]nterpretation of a contract is a question of law for the court 

where the terms of a contract are found to be plain and unambiguous.” Chandler Med. 

Bldg. Partners v. Chandler Dental Grp., 855 P.2d 787, 791 (Ariz. Ct. App. 1993). 

Arizona law has adopted the concept of “substantial performance.” See SC34 v. Desert 

Mountain Master Ass’n, No. 1 CA-CV 11-0240, 2013 WL 1174135, at *11 (Ariz. Ct. 

App. March 21, 2013); Revised Arizona Jury Instruction (Civil), Contract 10, Substantial 

Performance. A party is entitled to relief if it has substantially performed the contract. 

See Restatement (Second) of Contracts § 237 cmt. d (1981). If the contract makes full 

performance a condition, however, substantial performance is not sufficient and a party 

who has substantially but not fully performed is not entitled to relief. Id. 

Arizona law implies a duty of good faith and fair dealing in every contract to 

assure that “neither party will act to impair the right of the other to receive benefits which 

flow from” their contractual relationship. Rawlings v. Apodaca, 726 P.2d 565, 569-70 

(Ariz. 1986). The duty prohibits “[a] variety of types of conduct characterized as 

involving ‘bad faith’ because they violate community standards of decency, fairness or 

reasonableness.” Restatement (Second) of Contracts § 205 cmt. a (1981). “[B]ecause a 

party may be injured when the other party to a contract manipulates bargaining power to 

its own advantage, a party may nevertheless breach its duty of good faith without actually 

breaching an express covenant in the contract.” Wells Fargo Bank v. Ariz. Laborers, 

Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 30 (Ariz. 

2002). The duty of good faith and fair dealing “preserve[s] the spirit of the bargain rather 

than the letter and guarantees the protection of the parties’ reasonable expectations, such 

being the basic purpose of contract law.” Bike Fashion Corp. v. Kramer, 46 P.3d 431, 

434 (Ariz. Ct. App. 2002) (quotation omitted). The duty to act in good faith does not, 

however, “alter the specific obligations of the parties under the contract. . . . Acts in 

accord with the terms of one’s contract cannot without more be equated with bad faith.” 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 6 of 16
- 7 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

Wells Fargo Bank, 38 P.3d at 30 (emphasis in original; quotation omitted). 

Applying Arizona law, and viewing the evidence in the light most favorable to 

Defendant, the Court concludes that Defendant has presented a genuine issue of material 

fact on Plaintiff’s claims for breach of contract and breach of the duty of good faith and 

fair dealing. 

 The subcontract grants Defendant significant discretion to modify material 

portions of the agreement. For example, subsection 4(a) permits Defendant to make 

changes within the general scope of the contract to “(i) drawings, design, or 

specifications; (ii) method of shipping or packing; (iii) place of inspection, acceptance, or 

point of delivery; and (iv) delivery schedule.” Doc. 110-2 at 10. Defendant also reserved 

the right to direct and coordinate Plaintiff’s performance under the subcontract with other 

efforts in Defendant’s larger effort to perform the Prime Contract, undoubtedly because 

any deficiencies or delays in Plaintiff’s performance could jeopardize Defendant’s 

performance of the Prime Contract. The subcontract states that “[Plaintiff] shall be 

compensated only for work actually delivered and accepted.” Doc. 110-2 at 11. The 

subcontract also provides that “[i]f [Plaintiff] delivers non-conforming [w]ork, 

[Defendant] may; (i) accept all or part of such [w]ork at an equitable price reduction; 

(ii) reject such [w]ork; or (iii) make, or have a third party make, all repairs, 

modifications, or replacements necessary to enable such [w]ork to comply in all respects 

with [c]ontract requirements and charge the cost incurred to [Plaintiff].” The Court 

construes these provisions as an election out of the substantial performance standard 

available under Arizona law. 

 Defendant sent Plaintiff a letter on September 6, 2011, informing Plaintiff that it 

would not be paid for the final three milestones. On September 15, 2011, Defendant sent 

another letter officially terminating the subcontract for default. Defendant has proffered 

evidence in the form of business records, meeting minutes, and deposition testimony 

from which a reasonable jury could conclude that Plaintiff is not entitled to payment 

because delivery was not accepted. Defendant’s evidence, if believed, also suggests that 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 7 of 16
- 8 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

Defendant terminated the subcontract in good faith because Plaintiff repeatedly failed to 

provide acceptable engineering reports required to substantiate claims about the SRP and 

entitle Plaintiff to payment under the final three milestones. 

 The Court’s conclusion is driven in part by its disagreement with Plaintiff as to 

what “accept” means in the context of this contract. Plaintiff seems to argue that 

Defendant’s receipt of the final engineering reports along with continuing physical 

custody over the reports constitutes acceptance. Doc. 130 at 4. But the subcontract 

expressly grants Defendant the ability to receive Plaintiff’s engineering reports, 

determine whether they are deficient, and cure their deficiencies, all without “accepting” 

Plaintiff’s performance. Plaintiff cites to the UCC in support of its interpretation of 

“acceptance,” but the UCC refutes Plaintiff’s interpretation. The UCC provides that 

acceptance of goods occurs when the buyer “signifies to the seller that the goods are 

conforming or that he will take and retain them in spite of their non-conformity,” or “fails 

to make an effective rejection,” or “does any act inconsistent with [Plaintiff]’s 

ownership” of the subject matter. Ariz. Rev. Stat. § 47-2606. Defendant has presented 

evidence that Plaintiff delivered defective engineering reports and that Defendant made 

an effective rejection. 

 Plaintiff asserts that it is entitled to payment regardless of whether it fully or 

substantially performed the final three milestones. Doc. 109 at 11. Plaintiff cites 

subcontract language providing that Defendant must reimburse Plaintiff for “[w]ork in 

process up to and including the date of termination.” Doc. 130 at 3l; Doc. 110-2 at 17. 

This citation is inapposite, however, because the quoted language secures Plaintiff’s right 

to remuneration only where Defendant terminates the subcontract for convenience. 

Defendant asserts that the subcontract was terminated for default, and has provided 

evidence to support its assertion. 

 Plaintiff argues that “[i]f [Defendant’s] interpretation of the [s]ubcontract and 

applicable contract law were correct, [Defendant] could terminate every subcontractor 

after reaching 99.9% completion without ever making a payment for the services 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 8 of 16
- 9 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

provided.” Doc. 130 at 5. But Plaintiff assented to subcontract terms that imposed 

exacting standards of quality on Plaintiff’s performance. The Court’s role is not to 

rewrite the parties’ agreement. So long as Defendant implemented the termination clause 

correctly and in good faith, the Court must enforce it. As mentioned above, Defendant 

has proffered evidence that would permit a rational jury to find that Plaintiff was in 

default when Defendant invoked the termination clause. Defendant’s valid exercise of its 

contractual rights is not a breach of the contract or the duty of good faith and fair dealing 

even if that decision imposes harsh consequences on Plaintiff.2

 

 Plaintiff argues that Defendant’s representation to Toshiba that the Prime Contract 

is complete subject to “final update” is logically inconsistent with Defendant’s contention 

that Plaintiff has not adequately performed the subcontract. Doc. 109 at 9; Doc. 130 at 4. 

This is a good jury argument. Because the subcontract entailed only a portion of the total 

work due under the Prime Contract, however, a jury might conclude that the Prime 

Contract was substantially performed even though the subcontract was not performed 

completely. Defendant has submitted evidence that the Prime Contract was “complete 

subject to final update” precisely because Plaintiff failed to properly perform the 

subcontract. 

 2. Damages. 

A party claiming breach must prove damages resulting from the breach. 

Chartone, Inc. v. Bernini, 83 P.3d 1103, 1111 (Ariz. Ct. App. 2004). Compensatory 

damages, which arise directly from the breach itself, are recoverable as a matter of 

course. So too are consequential damages, which are reasonably foreseeable 

consequences of breach less mitigated costs. See Restatement (Second) of Contracts 

 

2

 The subcontract does provide that “[Defendant] may require [Plaintiff] to deliver to [Defendant] any supplies and materials, manufacturing materials, and manufacturing drawings that [Plaintiff] has specifically produced or acquired for the terminated portion of this Contract. [Defendant] and [Plaintiff] shall agree on the amount of payment for these other deliverables.” Doc. 110-2 at 11. The subcontract thus appears to impose an obligation on Defendant and Plaintiff to agree on a price for the engineering reports notwithstanding their deficiencies when the contract is terminated for default. Plaintiff 

makes no argument that this provision has been breached. 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 9 of 16
- 10 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

§ 347 (1981); E-Z Livin’ Mobile Homes, Inc. v. Tommaney, 550 P.2d 658, 662 (Ariz. Ct. 

App. 1976). “[C]ertainty in amount of damages is not essential to recovery when the fact

of damage is proven.” Gilmore v. Cohen, 386 P.2d 81, 82 (Ariz. 1963) (emphasis in 

original; quotation omitted). The party claiming damages “should supply some 

reasonable basis for computing the amount of damage and must do so with precision as, 

from the nature of his claim and the available evidence, is possible.” Walter v. Simmons, 

818 P.2d 214, 221 (Ariz. Ct. App. 1991). 

As damages for its counterclaim, Defendant claims: (1) $1,340,244.50 in passthrough liquidated damages stemming from Plaintiff’s delay, which caused Defendant to 

breach the Prime Contract; (2) $640,177 in charges to Toshiba, passed through to 

Defendant, that were billed by Boeing engineers to correct the inadequate models and 

reports submitted by Plaintiff; (3) $1,429,518 for other costs incurred as a result of 

Plaintiff’s failures that were billed by Boeing to Toshiba and passed through to 

Defendant; (4) $30 million in lost profits stemming from JMOD’s termination of the 

contract with Toshiba; (5) $1,429,518.90 in expenses arising from Plaintiff’s delays 

relating to the BFFT; (6) $938,089 in expenses incurred in connection with the November 

2010 meeting; (7) $511,734 in expenses incurred internally to rectify errors in 

engineering reports submitted by Plaintiff; (8) $13,310 stemming from a faulty heat 

exchanger on the SRP; (9) $33,046 in expenses to travel to Israel; and (10) $26,092 in 

damages suffered by the SRP during shipment. 

 a. Liquidated Damages. 

 Defendant has produced evidence that liquidated damages might be assessed 

against Defendant by Toshiba in the future. In addition, Toshiba has withheld 

$2,596,000 in payments due to Defendant under the Prime Contract. Defendant asserts 

that it may recover the liquidated damages against Plaintiff because they stem from 

Plaintiff’s default. 

 Plaintiff contends that the liquidated damages cannot be recovered in this action 

for three reasons, but the Court need only address the first. Plaintiff argues that the 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 10 of 16
- 11 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

damages are speculative. Because it is uncertain whether Defendant will ever be held 

liable to Toshiba for liquidated damages, Plaintiff asserts that Defendant may not 

preemptively pass the liquidated damages through to Plaintiff. Defendant responds that 

Toshiba has assessed liquidated damages against Defendant in the amount of 

$1,340,244.50 and has withheld payment of $2,596,000 still due under the Prime 

Contract to cover these liquidated damages and other damages. 

 The Court concludes that Defendant’s claim for liquidated damages is speculative. 

Defendant makes clear that it is not assessing liquidated damages against Plaintiff – it has 

no right to do so under the subcontract – but instead is making a claim for consequential 

damages arising out of its expected payment of liquidated damages to Toshiba. In 

support of this claim, Defendant provides two letters it received from Toshiba. Doc. 122-

6, Ex. CC, DD. Although Defendant states that Toshiba has “assessed” liquidated 

damages against it, the letters describe the liquidated damages as a “claim.” Id. Toshiba 

states in the letters that it expects to be assessed liquidated damages by JMOD in the 

future, and notes that the amount of its claim may need to be recalculated “based on the 

actual rate of the Liquidated Damages . . . assessed to Toshiba.” Doc. 122-6, Ex. DD. 

The letters thus make clear that Toshiba has not been assessed and has not paid liquidated 

damages, and is merely making a claim against Defendant in the expectation that JMOD 

will seek liquidated damages at some future point. Likewise, Defendant has not been 

assessed and has not paid liquidated damages, and is merely making a claim in this case 

in the expectation that it will pay liquidated damages to Toshiba in the future. Until it 

actually pays such damages, Defendant’s claim clearly is speculative. 

 Defendant suggests that it has in fact paid such damages because Toshiba has 

withheld more than $2 million in payments to Defendant, but Defendant admits that 

Toshiba’s claim against Defendant exceeds the amount it has withheld. As a result, there 

currently is no way to determine whether Defendant ultimately will pay liquidated 

damages and, if so, the amount. Nor has Defendant presented evidence that the claimed 

liquidated damages would be entirely attributable to Plaintiff. Because Defendant cannot 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 11 of 16
- 12 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

recover speculative damages, the Court will enter summary judgment on the liquidated 

damages claim. 

 b. Boeing Charges. 

Defendant asserts that because Plaintiff consistently failed to submit adequate 

models and reports, Boeing engineers were required to correct Plaintiff’s submitted 

models, complete calculations, and perform other work necessary to obtain approval from 

Boeing’s certification board to permit the SRP to be used in the BFFT. Boeing charged 

Toshiba $640,177 for this additional, unanticipated work. Toshiba in turn claimed 

$640,177 in damages against Defendant. Doc. 122-6, Ex. DD. Boeing also charged 

Toshiba $1,429,518.90 for similar efforts related to the BFFT, and Toshiba claimed these 

costs from Defendant because they related to deficient performance of the Prime 

Contract. Id. The only evidence produced by Defendant to substantiate damages 

stemming from the Boeing charges is an email dated February 3, 2011, sent from a 

Toshiba employee. Id. Even assuming this email could survive a hearsay objection 

because it would be admissible under Federal Rule of Evidence 803(6) (see Doc. 133-1 at 

5), the email states that Toshiba is merely claiming the Boeing charges as damages and 

requests that Defendant “come to Japan and hold a face-to-face discussion in February 

2011 to settle these damages.” Id. Defendant has not provided any evidence describing 

the February 2011 settlement discussions, and has failed to demonstrate that these 

damages actually were assessed by Toshiba or paid by Defendant. Because the evidence 

produced by Defendant would not be sufficient for a reasonable jury to conclude that the 

Boeing charges have been paid by Defendant, the Court will grant Plaintiff summary 

judgment on the counterclaim for the Boeing charges. Anderson, 477 U.S. at 248. 

 c. Lost Profits. 

Defendant asserts a $30 million claim for lost profits stemming from JMOD’s 

termination of its contract with Toshiba. A party claiming lost profits must establish the 

lost profits with “reasonable certainty.” See Felder v. Physiotherapy Assocs., 158 P.3d 

877, 887 (Ariz. Ct. App. 2007). “[W]here it can be proven that profits were lost, doubts 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 12 of 16
- 13 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

as to the extent of the injury should be resolved in favor of the innocent [party] and 

against the wrongdoer.” Id. (quotation omitted). 

 Viewing the evidence in the light most favorable to Defendant, the Court 

concludes that Defendant has not submitted enough evidence to support its claim for lost 

profits. Defendant relies on testimony given by Gregg Johnson, one of its Rule 30(b)(6) 

deponents. When asked why Defendant was entitled to damages for lost sales, Mr. 

Johnson responded: “Again, you know, in discussions with Toshiba, both Toshiba and 

Lockheed Martin believe that there was – in the – in the meetings that I had with them, 

they stated up to five additional systems were – were in the plan, and they even showed 

us – or discussed with us the budget cycle on when those systems might be phased in.” 

Doc. 122-5 at 59. Even if Mr. Johnson could provide the same testimony at trial that he 

provided in the deposition, statements he attributes to Toshiba are inadmissible hearsay –

out-of-court statements offered for the truth of the matter asserted. Defendant also cites 

one agenda line from minutes of a 2010 meeting between Defendant and Toshiba which 

makes reference to “future pods.” Doc. 122-5 at 62. 

Aside from this inadmissible hearsay and a passing reference to future pods, 

Defendant provides no evidence to support its claim for lost profits. Defendant has 

produced no communications or commitment by JMOD or Toshiba concerning the need 

for future pods or indicating that Defendant would be the source of such pods. This 

evidence, which supports at most a weak expectation by Defendant that future work 

might be available, does not rise to the level of “reasonable certainty” required to recover 

lost profits. Felder, 158 P.3d at 887. Because the evidence produced by Defendant 

would not be sufficient for a reasonable jury to conclude that lost profits have been 

proven with reasonable certainty, the Court will grant Plaintiff summary judgment on the 

counterclaim for lost profits. Anderson, 477 U.S. at 248. 

 d. Miscellaneous Internal Expenses. 

Defendant has counterclaimed for a variety of miscellaneous internal expenses, 

including: (1) $1,429,518.90 relating to the BFFT; (2) $938,089 incurred in connection 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 13 of 16
- 14 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

with the November 2010 meeting; (3) $511,734 incurred internally to rectify errors in 

engineering reports submitted by Plaintiff; (4) $13,310 stemming from a faulty heat 

exchanger on the SRP; (5) $33,046 for travel to Israel; and (6) $26,092 in damage to the 

SRP during shipment. 

 As to the first amount, Defendant submits a letter from Toshiba claiming 

$1,429,518.90 in damages relating to the BFFT. This is the same letter discussed above 

with respect to Boeing charges and liquidated damages. Doc. 122-6, Ex. DD. The letter 

states only that Toshiba is making a “claim” against Defendant in this amount. The letter 

does not show that Defendant has incurred or will incur this expense, nor does it show 

that the claimed $1,429,518.90 is attributable entirely to Plaintiff. Defendant’s claim for 

this amount, as its claim for liquidated damages, is speculative. 

 As noted above, Defendant claims that Toshiba has withheld payments of 

$2,596,000, but this fact does not establish the damages caused by Plaintiff. It is not 

known today whether some or all of the $2,596,000 will be paid by Toshiba in the future. 

The Court noted above that the Prime Contract has not been terminated, and it appears 

Defendant is continuing to attempt to work with Toshiba in providing an SRP to the 

JMOD. But even if this amount is not paid by Toshiba in the future, one cannot know 

today how this amount would be allocated among the more than $3 million in damages 

Toshiba claims against Defendant, and what portion, if any, would be attributable to 

Defendant’s current claim for damages against Plaintiff. In other words, Defendant’s 

evidence presents little more than the possibility that Defendant will incur this 

$1,429,518.90 BFFT expense in the future, and even that possibility does not establish 

that Plaintiff was the cause of all of it. Because a reasonable jury could not conclude that 

Defendant has in fact been injured in the amount of $1,429,518.90 as a result of 

Plaintiff’s conduct, summary judgment will be granted on this amount. Anderson, 477 

U.S. at 248.3

 

 

3

 The Court pauses to note that Defendant is losing claims that it cannot prove because they are not ripe – the evidence today does not show that Defendant in fact will 

incur the damages claimed by Toshiba. Defendant nonetheless has chosen to assert the 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 14 of 16
- 15 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

 Defendant’s remaining categories of internal expenses fare no better. To support 

these claims, Defendant relies entirely on the deposition testimony of an accountant, 

Robin Barrett, and a list of activity codes used to calculate internal costs. Doc. 122-6 at 

40. Ms. Barrett’s testimony provided no evidence, however, that the various categories 

of expenses were in fact incurred as a result of Plaintiff’s alleged breach. She testified 

that she reviewed a list of accounting codes used by Defendant to track employee labor 

and expenses and the clients to whom they were billed, and that these lists were generated 

by requesting data from Defendant’s ledger system. Id. at 40. But she provided no 

testimony that the amounts recorded under these various accounting codes were in fact 

incurred because of Plaintiff’s breach. To the contrary, when asked for details about 

amounts listed under the various accounting codes, Ms. Barrett was unable to provide 

any. She repeatedly testified that she knew nothing more than the titles on the accounting 

codes and could provide no details about the work actually performed or the expenses 

actually incurred. See, e.g., Doc. 122-6 at 52, 54-55, 58, 61, 62-63, 65-67. What is more, 

the excerpt of Ms. Barrett’s deposition provided by Defendant is incomplete. It excludes 

all but two of the first 40 pages of the deposition, during which many terms were defined, 

and it omits most of the exhibits being discussed during the questioning. Doc. 122-6. 

The Court and its staff have read the deposition excerpt more than once and simply 

cannot find evidence linking the numbers about which Mr. Barrett testified to any breach 

by Plaintiff. Because no reasonable jury could conclude from this evidence that Plaintiff 

in fact caused the losses claimed by Defendant, the Court will enter summary judgment 

on the counterclaim for the following amounts: $938,089 incurred in connection with the 

November 2010 meeting; $511,734 incurred internally to rectify errors in engineering 

 claims now and has failed to make the showing necessary to resist summary judgment, resulting in their elimination by summary judgment. Defendant could have chosen to 

assert the claims in a later action after its obligations to Toshiba were clear, but it did not do so. Defendant cannot claim that it was forced to assert the claims in this case as 

compulsory counterclaims. The compulsory counterclaim rule applies only to claims that exist at the time a defendant serves its pleading. Claims that are not mature at that time 

need not be asserted. See Allan Block Corp. v. County Materials Corp., 512 F.3d 912, 

920 (7th Cir. 2008) (“Rule 13(a) does not require the defendant to file as a compulsory counterclaim a claim that hasn't accrued yet”) (citing cases). 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 15 of 16
- 16 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

reports submitted by Plaintiff; $13,310 stemming from a faulty heat exchanger on the 

SRP; $33,046 for travel to Israel; and $26,092 in damage to the SRP during shipment. 

Anderson, 477 U.S. at 248. 

IT IS ORDERED:

1. Plaintiff’s motion for summary judgment (Doc. 109) is granted on 

Defendant’s counterclaims for liquidated damages, lost profits, and the 

following internal expenses: (1) $640,177 relating to work performed by 

Boeing engineers and passed onto Defendant; (2) $1,429,518.90 relating to 

the BFFT; (3) $938,089 incurred in connection with the November 2010 

meeting; (4) $511,734 incurred internally to rectify errors in engineering 

reports submitted by Plaintiff; (5) $13,310 stemming from a faulty heat 

exchanger on the SRP; (6) $33,046 for travel to Israel; and (7) $26,092 in 

damage to the SRP during shipment. The motion is otherwise denied. 

2. Defendant’s motion to file under seal (Doc. 123) is granted. The Clerk is 

directed to accept for filing under seal the document lodged on the Court’s 

docket as Doc. 124. 

3. Defendant’s motion to supplement (Doc. 133) is granted. 

4. The Court will set a final pretrial conference by separate order. 

 Dated this 11th day of December, 2013. 

Case 2:11-cv-02493-DGC Document 139 Filed 12/12/13 Page 16 of 16