Message: "tortious interference by digEcor"
Item 1. Legal Proceedings
Business Litigation
In May 2006, we announced that a complaint had been filed against our Company and certain of our officers and employees by digEcor, Inc. in the Third Judicial District Court of Utah, County of Salt Lake. The complaint alleged breaches of contract, unjust enrichment, breaches of good faith and fair dealing, fraud, negligent misrepresentation, and interference with prospective economic relations. digEcor sought, among other things, an injunction to prevent our Company from selling or licensing certain digital rights management technology and "from engaging in any competition with digEcor until after 2009." digEcor also sought "actual damages" of $793,750 and "consequential damages...not less than an additional $1,000,000." This action was related to a purchase order we placed for this customer in the normal course of business on November 11, 2005 for 1,250 digEplayers(tm) with our contract manufacturer, Maycom Co., Ltd.. Maycom was paid in full for the order by both e.Digital and digEcor by March 2006, but Maycom failed to timely deliver the order. We recorded an impairment charge of $603,750 in March 2006 for deposits paid to Maycom due to the uncertainty of obtaining future delivery. In October 2006 we received delivery from Maycom of the delayed 1,250-unit digEplayer order and delivered the order to digEcor. We recognized $713,750 of revenue from this order and reversed an impairment charge of $603,750 in our third fiscal 2007 quarter. We have answered digEcor's complaint and are pursuing certain counterclaims.
In January 2007, the Court ruled on certain motions of the parties. In its ruling, the Court dismissed digEcor's unjust enrichment, fraud, negligent misrepresentation, tortious interference and punitive damage claims. The Court further acknowledged the delivery of the 1,250-unit order and a partial settlement between the parties reducing digEcor's claim for purchase-price or actual damages from $793,750 to $94,846 with such amount still being disputed by e.Digital. digEcor's contract and damages claims remain in dispute. digEcor has subsequently amended its Complaint to assert an alternative breach of contract claim, and claims for federal, state and common law unfair competition, and sought an injunction prohibiting us "from engaging in any competition with digEcor until after 2013."
In April 2007 we filed a second amended counterclaim in the United States District Court of Utah seeking a declaratory judgment confirming the status of prior agreements between the parties, alleging breach of our confidential information and trade secrets by digEcor, seeking an injunction against digEcor's manufacture and sale of a portable product based on our technology, alleging breach of duty to negotiate regarding revenue sharing dollars we believe we have the right to receive and tortious interference by digEcor in our contracts with third parties. We intend to vigorously prosecute these counterclaims. There can be no assurance, however, that we will prevail on any of our counterclaims.
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In April 2007 digEcor filed a motion for summary judgment seeking enforcement of an alleged non-compete provision and an injunction prohibiting us from competing with digEcor. In October 2007 the Court denied, without prejudice, digEcor's motion for partial summary judgment and request for injunction. The foregoing and other findings of the Court may be subject to appeal by either party.
In September 2008 digEcor filed their third request for a partial summary judgment again seeking enforcement of the alleged non-compete provision. digEcor also asked the Court to rule on issues surrounding the delayed 1250-unit order and e.Digital's alleged breach of a 2002 contract between the parties.
In September 2008 we filed a summary judgment motion seeking a ruling (i) that the alleged non-compete provision is unenforceable and /or superseded by the 2002 agreement between the parties, and (ii) that the we have not breached any alleged non-compete provisions or the 2002 agreement. We also asked the Court to dismiss digEcor's unfair competition claims and limit digEcor's damages claim.
The case has now completed the discovery phase. We believe that we have substantive and multiple defenses and intend to vigorously challenge the remaining matters and pursue all counterclaims. However, there can be no assurance we will prevail in our counterclaims or in our defense of digEcor's remaining claims.
We are also unable to determine at this time the impact this complaint and matter may have on our financial position or results of operations. We have an accrual of $80,000 as an estimate of our obligation related to the remaining general damage claim and we intend to seek restitution from Maycom for any damages we may incur. Recovery from Maycom is not assured. Maycom is not involved in the design, tooling or production of our proprietary eVU mobile product. Moreover, we do not presently plan or expect to produce or sell digEplayer models to digEcor or other customers in the future
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