U.S. Trustee Recommends Court Dismiss Hytera Bankruptcy Case
Tuesday, August 25, 2020 | Comments

The U.S. Trustee for Region 16 of the United States recommended that a California bankruptcy court grant a Motorola Solutions motion to dismiss or alternatively suspend a bankruptcy case filed by the U.S. subsidiaries of Hytera Communications.

In May, Hytera America and Hytera (West), as well as HYT North America, filed for chapter 11 bankruptcy, citing damages awarded to Motorola in a theft of trade secrets and patent infringement case. In February, a jury for the U.S. District Court for the Northern District of Illinois awarded Motorola $764.6 million in damages from Hytera, after determining that Hytera had used Motorola’s proprietary information in its Digital Mobile Radio (DMR) products.

In July, Hytera’s U.S. subsidiaries asked the U.S. Bankruptcy Court for the Central District of California to approve a sale of the companies’ assets to a newly formed Hytera entity called Hytera US or any other higher bidder. At the same time, Motorola motioned the court to either dismiss or suspend the bankruptcy case, arguing that Hytera was using the bankruptcy case to delay post-trial proceedings in the Illinois lawsuit and continue selling products that use Motorola’s trade secrets.

Specifically, Motorola has asked the Illinois court to implement a permanent injunction against Hytera that would prevent it from selling or distributing any products determined to use Motorola trade secrets.

The court approve bidding and auction procedures and set a hearing to approve a potential sale for Aug. 27.

Hytera said in court filings that it hoped to sell the assets but had started the bankruptcy proceedings as a free fall in case a buyer could not be found. Motorola alleged that Hytera was only using the sale of its subsidiaries to avoid paying an appellate bond, to continue infringing Motorola’s trade secrets and to ‘launder the assets’ of its subsidiaries.

In a filing, U.S. Trustee for Region 16 Peter C. Anderson raised many of Motorola’s concerns in recommending that the court approve Motorola’s motion.

“It appears that the debtors’ sales process was designed primarily to sell their assets to an insider, namely a newly formed entity owned by their parent company, Hytera China,” Anderson wrote, citing discovery provided by Motorola in the case. “Under the proposed sale to the newly formed entity, that entity will hire all of the debtors’ employees, who will sit at the same desks and use the same computers to avoid affecting the ongoing operations of Hytera China in the United States.”

Anderson cited evidence that showed that Hytera’s investment banker had agreed that waiting for the permanent injunction’s scope to be determined first could generate more bids in the auction process but was told to move forward with the sale.

Anderson also noted that the Hytera subsidiaries had claimed that they had no culpability in the trade secret misappropriation, but discovery from Motorola showed the U.S. subsidiaries paid around $2.5 million to expert witnesses who testified for Hytera in the trade secrets trial.

Two other reasons Anderson cited for recommending grant of Motorola’s motion was that there was evidence to indicate that the U.S. subsidiaries had paid large bonuses to executives right before filing the bankruptcy cases and that Hytera continues to sell products using Motorola trade secrets.

Anderson said that it would be more efficient for the Illinois court to determine the scope of the injunctions against Hytera before moving forward with any bankruptcy proceedings. Additionally, Anderson noted that 97.5% of the claims against Hytera are from Motorola’s lawsuit and that until the size of the injunction is determined, the subsidiaries assets will be devalued, preventing them from receiving the most value in a sale.

Anderson also questioned the subsidiaries’ motives behind the bankruptcy cases and noted that bankruptcy is intended to be done in good faith.

“Debtors’ purpose for filing these cases appears unclear at best and nefarious at worst,” Anderson wrote. “The timing of the debtors’ filing of these cases indicates that they sought to avoid the filing of a bond to stay enforcement of the judgment against them. Further the debtors’ assets appear to have a substantial nexus to the unlawful activities set forth in the jury verdict. The debtors have admitted that, despite the judgment, they continue to sell Motorola’s product.”

The Illinois court’s decision on the permanent injunction was expected in late August or early September but it is unclear when that decision will occur because of the bankruptcy proceedings.

“The pending litigation between the debtors and their only meaningful creditor provides a more efficient path to the same result: the resolution of Motorola’s claims against the debtors,” Anderson concluded.

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