Free Answer to Complaint - District Court of Delaware - Delaware

Case 1:05-cv-00886-JJF

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IN THE UNITD STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
BSQUARE CORPORATION
) ) ) ) ) C. A. No. 05-886-JJF
)

Plaintiff,
v.

DATA EVOLUTION CORPORATION,
Defendant.

)
)

)

ANSWER AND COUNTERCLAIM
Defendant Data Evolution Corporation ("Data Evolution") by and through its attorneys
answers the Complaint of plaintiff Bsquare Corporation ("Bsquare") as follows:

i. PARTIES
1.

Data Evolution is without knowledge or information sufficient to form a belief as

to the truth of the averment of this paragraph.
2.

Admitted.

II. VENUE AND JURISDICTION
3.

Admitted that venue and jurisdiction are appropriate in this court.
III. FACTUAL BACKGROUND

4.

Admit that the paries are paries to a contract that forms the basis of the dispute

in this litigation. Admit generally that Bsquare was to provide certain services to Data Evolution
in connection with the development of the next version of the ClioCI tablet computer, that is

owned and sold by Data Evolution, pursuant to the terms and conditions contained in the contract
between the paries. Data Evolution denies all remaining allegations of paragraph 4.

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5.

Deny the allegations of paragraph 5 and refer to the terms of the contract between

the paries for the complete terms of the agreement between the paries.
6.

Admit that one of Bsquare's project quotes estimated that its work would cost

Data Evolution approximately $330,675.

Admit that Bsquare subsequently increased its

estimated cost to complete the required work. Admit that Bsquare proposed certain Change of
Scopes and that the paries agreed to Change of Scope 6 that ultimately increased the projected
cost to Data Evolution over the original estimates provided by Bsquare.

The remaining

allegations of paragraph 6 are denied.
7.

Admit that Bsquare sent a letter to Data Evolution dated June 9, 2005 in which

Bsquare stated, among other things, that it was stopping work on the project. The remaining
allegations of paragraph 7 are denied.
8.

Admit that Data Evolution has refused to pay to Bsquare the amounts it has

demanded because such amounts are not due. The remaining allegations of paragraph 8 are
denied.
9.
Admit that the paries engaged in a mediation proceeding that included a

mediation conference on October 8, 2005 in Wilmington, Delaware and that the parties have
been unable to settle their dispute. The remaining allegations of paragraph 9 are denied.

IV. Breach of Contract
10.

Denied.

V. Misappropriation of Intellectual Property
11. 12.

Denied. Denied.

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Vi. Prayer

13.

Denied that Bsquare is entitled to any relief and respectfully request that its

claims be dismissed with prejudice.

AFFIRMATIVE DEFENSES
14.

Plaintiff's claims are bared by its material breach of the contracts between

Bsquare and Data Evolution.
15. 16.

Plaintiff is bared from the relief it seeks by its unclean hands.

Plaintiff is bared from the relief it seeks by its bad faith in the performance of the

contracts between the paries.
17.

Plaintiff's claims are subject to recoupment and set-off rights of Data Evolution.

18.

Plaintiff is bared from the relief it seeks because it would be unjustly enriched as

it has failed to deliver anything of value to Data Evolution.

COUNTERCLAIM

Data Evolution Corporation ("Data Evolution") hereby fies this counterclaim against
Bsquare Corporation ("Bsquare") and in support thereof states as follows:
A.
THE

PARTIES
Data Evolution is a Delaware corporation which manufactures, markets and sells

1.

computer hardware products that focus on niche markets, such as healthcare, education, data
capture and sales automation. Its primary products are the ClioCI, a convertible tablet computer,

and the Cathena, a notebook computer.

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2.

The Clio, which runs Microsoft's Windows CECI operating system, features an

award-winning, patented Swing Top pivoting arm and a 9.4" LCD screen with 1800 screen
rotation that gives the user the freedom to change configurations as applications dictate.
3.

Originally introduced in 1998, the Clio has won numerous awards, has been

featured in hundreds of aricles and has appeared on the cover of Business Week and other
magazines. The Cathena has the look and feel of a traditional ultra-light notebook computer

while offering features of a high-performance Windows CE product, such as instant-on, no hard
drive, extended battery life, and low support costs.
4.

Bsquare is a public company incorporated in the State of Washington. Bsquare

provides software and customized consulting and engineering services to Windows-based smar
device makers. As of February 28, 2005, Bsquare had 110 employees, including 58 employees

in professional engineering services.
5.

During the fourth quarer of 2004 and the first quarter of 2005, Bsquare suffered a

revenue shortfall as a result of a decline in orders from its largest customer, Cardinal Healthcare,

which had provided 19% of Bsquare's revenue in 2004. On March 4,2005, Bsquare announced
that Cardinal had discontinued its relationship with Bsquare in favor of a competitor. In a March
3, 2005 earings conference call, Brian Cowley, Bsquare's CEO, acknowledged that Bsquare

had underutilized engineers in its services business, explaining:

Specifically, for the last several quarers, our service capacity has been underutilized due to lower than expected sales volumes. As

bilable hours and revenues increase, there should be little
corresponding increase in service costs due to this capacity

availability.

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Thus, during the first half of 2005, Bsquare was trying to replace the revenue lost from Cardinal

and to increase the bilable hours for its underutilized engineering staff. As set forth below, it
misused the Data Evolution contract to help accomplish that goal.
B.

BACKGROUND OF THE AGREEMENT
6.

During 2004, Robert Sowah, Chief Executive Officer of Data Evolution,

approached Bsquare and requested an estimate for modifying the existing design of the Clio and

incorporating that revised design in a clamshell case for the Cathena. The revamping of the Clio

from generation 1 to generation 2 would include the addition of features such as a larger screen,
new keyboard, new ports, including a USB port, as well as other modifications.
7.
Bsquare's competition for the Data Evolution work, Wistron, proposed a

complete

end-to-end

solution

to

Data

Evolution,

including

mechanical

design,

electrical/hardware design software design and prototyping, as well as a source for
manufacturing. To compete with Wistron, Bsquare also had to provide a complete solution,
including tasks that would be performed by third paries.
8.

To induce Data Evolution to award Bsquare the contract, Bsquare submitted

detailed project quotes including the estimated costs and the estimated hours for the different

phases of the project. For example, in version #4 of its Project Quote, Bsquare estimated that its

work on the project would take 2,754 hours, which at a blended labor rate of $120 per hour
would cost Data Evolution $330,675.
9.

While Data Evolution initially hoped to have delivery in 2004, Bsquare could not

commt to complete the Clio project until

late March/early April primarily because the mother

board to be used contained a graphics chip that, by the time the Clio would have come to market,

would have been obsolete.

By moving the date back, the next generation chip could be

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incorporated. Based on Bsquare's estimate and schedule, Data Evolution awarded the contract to
Bsquare.

c.

THE MASTER AGREEMENT
10.
Data Evolution and Bsquare entered into a Master Professional Engineering

Services Agreement dated as of January 18, 2005 (the "Agreement"). The Agreement provides

in Section 1.3 that Data Evolution is developing a computer device that incorporates Windows
CE and is retaining Bsquare to provide certain custom adaptation development services.
11.

Section 3.1.1 of the Agreement provides that Bsquare wil furnish Data Evolution

with Services substantially in accordance with the Statement of Work and that the paries wil
use good faith and commercially reasonable efforts to perform the obligations specified in the
Statement of Work to enable compliance with the schedule.
12.

Section 4 of the Agreement requires Bsquare to use "good faith and commercially

reasonable efforts to deliver the Bsquare Deliverables according to the schedule contained in the
Statement of

Work."
13.

Section 6 of the Agreement states that "Data Evolution shall pay Bsquare the

service compensation described on Exhibit C in accordance with the terms set forth therein."
Exhibit C provided that Data Evolution would pay Bsquare on a time and materials basis at a rate
of $120 per person per hour.
14.

Exhibit A to the Agreement was the Statement of Work, which "defines the work

necessary to deliver a product that meets the Data Evolution Requirements for the Clio V2
device."
15.

The project was divided into four phases: Phase 1: Feasibilty and Risk Analysis;

Phase 2: Architecture Specification; Phase 3: First Prototype Development; Phase 4: Production

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Design Development. The Statement of Work details the specific tasks to be done during each
phase. Adjustments by Bsquare and Data Evolution to the Statement of Work were to be done
through the use of the Change of Scope ("COS") procedure outlined in the Statement of

Work.

16.

Originally the feasibility study period was to take thirty days. At Bsquare's

request, that period was extended to 60 days so that Bsquare was sure it understood the scope of
the task and the work that would be involved before it provided its time and cost estimates.
17.

Section 5.1.1 provides that Pre-existing Work, which is defined as "computer

code or materials developed or otherwise obtained by or for" Data Evolution or its affiiates or
Bsquare or its affiiate, shall remain the sole property of the party providing that Pre-existing

Work.
18.

Section 5.1.2 provides:
Upon receipt of full payment of the fees and expenses due

hereunder, Bsquare assigns COMPANY joint ownership in all rights in any computer code or materials (other than Pre-existing Work, third pary intellectual property and any derivative work thereof, and other than the board design, rights to which are more fully described in Section 5.1.3 below) developed by Bsquare (or
in collaboration with COMPANY) and provided to COMPANY in
the course of performance of this Agreement (Developments).
19.

Under Section 5.1.3, all rights in the physical1ayout of the board design that is

developed under the Agreement are to be vested solely in Data Evolution, subject to Bsquare's

ownership rights in its Pre-existing Work in the Sierra Board. Significantly, neither Section

5.1.1 nor Section 5.1.3 is subject to any requirement of full payment to Bsquare.
20.

Section 5.2 provides that the ownership rights in Section 5.1 are subject to various
Section 5.2.1 gives Bsquare a temporary, non-exclusive license to use Data

use rights.

Evolution's Pre-existing Work while performing Services under the Agreement. It does not give

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Bsquare any ownership rights in Data Evolution's Pre-existing Work or any use rights when
Bsquare is not performing services under the Agreement.
21.
Section 5.2.1 also provides:
Upon receipt of full payment of the fees and expenses due

hereunder, Bsquare grants COMPANY a non-exclusive perpetual
license to use, reproduce and modify any Bsquare Pre-existing Work that may be incorporated as part of the Services delivered to COMPANY hereunder, and to distribute the object code version of such Bsquare Pre-existing Work.
22.

Section 8.1 of the Agreement provides: A pary shall be in default under this Agreement (a "Default") if such pary: (a) materially fails to perform or comply with any provision of this Agreement; ...

23.

Section 8.2 grants the non-defaulting pary the right to terminate the Agreement

upon 30 days' written notice to the defaulting pary of breaches of any provision of the
Agreement. Termination is effective 30 days after notice if the defaults have not been cured.
D.

BSQUARE'S UNSATISFACTORY PERFORMANCE
24.

As the project unfolded, it became clear that Bsquare had underestimated the level

of effort and skills required and was not managing the project effciently. This led to repeated
and material increases in the cost estimate and multiple extensions of the schedule.
25.

Bsquare designated Carlos Ribas as project manager. It turned out he was not a

project manager by profession, but an engineer.

Moreover, Mr. Ribas did not live near

Bsquare's principal place of business in Bellevue, Washington, but in San José, California. Mr.

Ribas purportedly put 383 bilable hours into the project before he found another job and
disappeared from the project in early February, 2005 without advance notice to Data Evolution.
26.

In early January 2005, Bsquare completed Phase 1 of the project, the feasibility

and risk study of critical features (the "Feasibility Study"). Change of Scope ("COS") 1 through
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4 in Januar, 2005 raised the Bsquare labor cost to $385,200, representing 3210 bilable hours.

On February 14, 2005 Bsquare proposed another $28,880 of additional labor costs. These
additions were embodied in COS 5. The additional 174 hours under COS 5 brought the New
Project Total for "Bsquare Labor only" to $406,080 for 3,384 hours.
27.

When it tendered its invoice dated February 25 2005, Bsquare had already biled

for 1,739.50 hours, totaling $208,740. By March 7, 2005, Bsquare was proposing an additional
increase which would bring Bsquare labor to 4,734 hours at a cost of $568,080. This was

$237,600 and 1,980 hours over Bsquare's original bid amount; a 72% increase.
28.

Data Evolution was alared by Bsquare's inability to produce results at the

agreed-upon cost and on the agreed-upon schedule. Mr. Sowah requested a meeting to review the
schedule and the budget. The high-level meeting took place at Bsquare on March 15, 2005.

During the meeting, Mr. Sowah expressed Data Evolution's dissatisfaction with the increase in

budget and push-back of the schedule. Bsquare was by then quoting a completion date of May

13, 2005 for Phase 3 of the Clio only and had increased its estimate of the overall cost of the
project to over $1 milion.
29.
In a budget chronology prepared for the March 15, 2005 meeting, Bsquare

asserted that a total of 4,734 hours would be needed to complete the project, an increase of 1,350

hours over the 3,384 hours reflected in the total Bsquare time under COS 5. However, in support

of the purported need for increased hours, Bsquare only cited "892 hours in Change of Scope
Activities" and "110 hours misbid"-a total of 1,002. Thus, even under Bsquare's scenario, the

hours should only have increased from 3,384 to 4,386, not 4,734, and the cost should have
increased to $526,320, not $568,080.

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30.

In asserting that still more hours were needed, Bsquare claimed that while the

budget assumed 18 hours of project management time per week, the use of significantly more
third-pary suppliers would necessitate 10 additional engineering manager/project manager

("EM/M") hours per week. Bsquare claimed that 420 additional EM/M hours were necessary.
However, even under Bsquare's ever-longer schedule, the project was not to last an additional

42

weeks. Bsquare either mistakenly or deliberately overstated the additional hours of project

management it claimed would be necessary.
31.

Ultimately it was agreed that COS 6 would be for a maximum of 1,192 hours.

This would increase the number of hours from 3,384 hours under COS 5 to 4,576 hours under
COS 6. This would increase the value of bilable hours of Bsquare from $406,080 under COS 5

to $549,120 under COS 6.

However, Bsquare agreed to write down 510 hours so that a

maximum of 682 additional hours would be biled to Data Evolution. Thus, the maximum total
hours Data Evolution would pay for was 4,066, which at $120 per hour is a total cost of
$487,920.
32.

Mr. Sowah made it clear at the March 15 meeting that Data Evolution did not

want any more surprises. He specifically asked whether Bsquare had accounted for all the work
and if there were any additional dollars to be added to the Bsquare portion. Bsquare assured him

that this was everything to completion. Mr. Sowah stated at the end of the meeting that he
expected no additional costs. Mr. Sowah was adamant that the cost of the Bsquare portion of the
project was not to increase.
33.

The agreement reached on March 15, 2005 was reflected in COS 6 dated March

16, 2005. COS 6 covers "Program management, design validation, upgrade to M-Systems G3

chip and Electrical Tasks." It provides that:

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The items in this Change of Scope were discussed and agreed to on

March 15, 2005. Total hour increase is 1192 hrs. Bsquare has agreed to write down 510 hours. Data Evolution (DE) is
responsible for up to 682 hours of this change of scope.
34.

Data Evolution specifically changed the proposed wording of COS 6 to indicate

plainly that it would pay "up to" 682 additional Bsquare hours for the COS tasks if those hours

were necessary. However, if the tasks contemplated by COS 6 were accomplished in less than
682 hours, then Data Evolution would only pay for the lesser number of hours actually needed.
35.

COS 6 set the New Project Total for Bsquare at $487,920. In COS 6, Bsquare

and Data Evolution agreed on a precise maximum number of additional hours for which Data
Evolution would pay (682 hours) in order to have Bsquare complete the project. On page 2 of

COS 6, Bsquare acknowledged deficiencies in its performance, including failing to check items
during budget preparation and failing to re-budget after the Feasibility Study.
36.

Bsquare agreed that it would write off 510 hours: 110 hours for poor bidding and

150 hours poor execution on electrical design tasks, 40 hours for poor execution in locating a
keyboard and 210 hours of EM/M time. The poor bidding and poor execution write offs totaled

300 hours. The EM/M write-down was the balance of the 510 hours Bsquare had agreed to
write off.
37.

Despite the agreement at the March 15 meeting, as reflected in COS 6, Bsquare

continued to insist that hundreds and then thousands of additional hours were necessary to
complete the project and that Data Evolution must pay far beyond the hours it had agreed to pay.

In April, 2005, Bsquare increased its cost estimate from $487,920 to over $700,000, an increase

of over $350,000 from Bsquare's original estimate and over $200,000 from the price it had
agreed to at the March 15 meeting.

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38.

In March through May, 2005, Bsquare sent Data Evolution the following invoices

for consulting services on the Clio project:
Hours 773 824 428.25 491.25 2516.5

3/25/05 4/29/05 5/13/05 5/27/05

Clio Clio Clio

Amount $92,760 98,880 51,390 58,950 $301,980

On June 17,2005, Bsquare invoiced another 351.75 hours ($42,210), bringing the post-March 15

total bils to 2,868.25 and $344,190.
39.

Even deducting the 300 hour ($36,000) write-off for poor bidding and execution

and the $960 credit for the 8 hour overcharge, Bsquare had biled 4,533.75 hours and

$542,388.75 by June 17,2005.

40.

And the end was nowhere in sight. On June 8, 2005, Bsquare provided Data

Evolution with an estimate of the additional hours just to complete Phase 3 of the project:
Software Hardware Project Total
477 874
104 1455

At $120 per hour, it would cost Data Evolution an additional $174,600-assuming, contrary to
prior experience, that Bsquare could actually complete the task and complete it in the number of
hours promised.

41.

On June 15,2005, Bsquare stated that an additional

660 hours would be necessary

just to complete the software portion of Phase 4 of the Clio project.
42.

Bsquare's slow performance created serious problems for Data Evolution. On

May 12, 2005, Mr. Sowah informed Bsquare that a representative of Exxon, which was

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interested in 14,000 Clios, was "blowing a gasket" because Bsquare had not delivered a
breadboard (i.e. development board) as promised.
43.

A Data Evolution OEM customer, who had waited for the Clio for months, finally

launched their software package bundled with a competitor's product because they could wait no
longer.
44.

The last straw for Data Evolution was when it became apparent that Bsquare's

ineptitude and tardiness might prevent Data Evolution from having its prototype new products in
time for an important educational trade show in Philadelphia in late June 2005. This was

paricularly troubling because this critical trade show was known to Bsquare from the inception
of the project and was a major driving force behind the scheduling.
45.

On June 9, 2005, Bsquare sent a Notice of Default claiming that Data Evolution

had commtted a material breach of the Agreement by not paying $198,567.26 of invoices sent

by Bsquare. Bsquare stated that it was stopping work on the Cathena project effective June 10,
2005 and that "Data Evolution wil not be receiving any deliverables from Bsquare in relation to
the upcoming trade show that we have discussed."
46.

Data Evolution, with Bsquare's consent and approval, hired A7 Engineering to

evaluate the status of the Clio/Cathena project. Randy Moore, an A 7 engineer, traveled to

Bsquare on June 29-30, 2005. Moore was surprised that the hardware platform, instead of

appearing ready for delivery within weeks, appeared to be first pass hardware that was not
packaged in an enclosure with possible cutouts for debug connectors.
47.

Bsquare claimed the hardware was a first revision, but conceded that there would

be at least one more revision and there was a 40% to 60% chance two revisions would be

necessary. Bsquare claimed that the hardware was approximately 50% validated. A list of tasks

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it provided to Moore stated "Hardware Validation-48% complete" and "Hardware Validation
Test Plan-56% complete." Mr. Moore's opinion was that the level of validation was not clear

and he could not understand how hardware validation could be quantified without having a

complete or close-to-completed test plan.
48.

Bsquare produced to Moore a single page of tasks to complete Phase 3. This

surprised the A7 engineer because even in a well-managed project that is 80-90% completed,

there typically would be multiple pages with detailed descriptions of specific tasks. He was

surprised by the lack of details and the low level of breakdown for the tasks. The project
schedule Bsquare presented to Mr. Moore was also deficient because it lacked detailed task
descriptions, items for some of open issues and testing items. A 7 also identified numerous other

problematic issues in its review.
49.

Mr. Moore concluded that Bsquare's estimation effort and tracking was poor and

that Bsquare had done a poor job of setting expectations and clarifying risk. Bsquare had

misevaluated the project as merely tweakng a working design. A7 concluded that Bsquare's
work was so internalized and individualized that Data Evolution could not successfully have
another firm complete the project.
50.

On July 8, 2005, Bsquare sent a Second Notice of Default claiming that Data

Evolution owed an additional $383,235.40 beyond the $198,567.26 previously demanded. Of

course, Bsquare's demand for payment of nearly $600,000 beyond the almost $300,000 Data
Evolution had already paid would mean the project, which was no where near completed, would
cost several times what Bsquare had represented it would.
51.

On July 14, 2005, Data Evolution responded to Bsquare's purported default

notices. The July 14, 2005 letter notified Bsquare that, because of Bsquare's cessation of work,

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and its complete inability to meet its stated obligations, budgetary constraints and deadlines,

Bsquare was in default of the terms and conditions of the Agreement. The letter noted that
Bsquare's performance had been chronically over budget and over time in all phases and noted
that Bsquare's last estimate in June 2005 would put the cost ofthe project and time completion at

almost three times Bsquare's original estimates. The letter repeated Data Evolution's request
that Bsquare provide copies of original timesheets supporting the amounts Bsquare had invoiced,

including full descriptions of the work performed, the date it was performed, the time spent and
the identify of the timekeeper.
52.

On July 15, 2005, Bsquare sent a Notice of Termnation. Bsquare claimed that in

providing services to Data Evolution intellectual property had been generated that is "very
valuable to Bsquare" and claimed that all such intellectual property was owned exclusively by

Bsquare and that Data Evolution had no rights whatsoever in this intellectual property. Bsquare
demanded that Data Evolution:
1. Termnate any and all of Data Evolution's use of any

intellectual property developed for or provided to Data Evolution by Bsquare or its suppliers under the Agreement ("Bsquare IP");
2. Terminate all use of any item. tooL component. etc. that

was developed and or modified for Data Evolution and which used
any Bsquare IP;
3. Notify all of its vendors to stop all use of any Bsquare IP;

and
4. Return to Bsquare all Bsquare IP that Data Evolution or its

vendors have, including. but not limited to, the following:
a. All Bsquare Pre-existing Work (defined in the

Agreement as code or materials developed or otherwise obtained

by or for Bsquare or its affiliates independently of the Agreement);
b. All Bsquare developments (defined in the Agreement as computer code or materials, other than Pre-existing

Work. third pary intellectual property and any derivative work
thereof. and other than the board design (the current rights to
which are subject to interpretation under the Agreement),

developed by Bsquare in collaboration with Data Evolution and

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provided to Data Evolution in the course of performance of the

Agreement);
c. All intellectual property developed by Bsquare's
suppliers, who include, but are not limited to, Synapse Strategic

Development, LLC, Rosslare American, Inc. and its subsidiaries,

American Panel Corporation, Fujitsu, Flex Interconnect Technologies, Arrk Product Development Group, Safety
Engineering Laboratory and West Coast Design. (Emphasis added. )

53.

Paragraph 4a of the letter appears to reflect Bsquare's overbroad interpretation of

Section 5.1.1 of the Agreement. Paragraph 4b is apparently Bsquare's overbroad interpretation

of Section 5.1.2 (including a transparent attempt to make Data Evolution's plain and exclusive
right under Section 5.1.3 to the board design "subject to interpretation under the Agreement").
The assertion in paragraphs 1 and 4c that intellectual property developed by Bsquare's suppliers
constitutes Bsquare IP has no basis in, and is contrary to, the provisions of the Agreement.

Similarly, there is no basis in the Agreement for Bsquare's claim that Data Evolution may not use
any item, tool, component, etc. that was developed and/or modified for Data Evolution and

which used any Bsquare IP
54.
In a two-page, 16 item char, Bsquare's letter claimed the Bsquare IP included

"but is not limited to" work done by 11 suppliers and vendors. After the first 15 items claim

ownership of virtually everything Bsquare touched, item 16 claims as Bsquare IP
"Miscellaneous," which it describes as including:
Any and all other:
. Supplier lists

. Components lists

. Mock-ups
. Test scripts

. Documentation
. Purposefully or intentionally retained know-how.

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Thus, Bsquare claims as its property various lists, unidentified documents and unspecified knowhow that 11 suppliers "potentially" have.
55.

The letter admitted that Bsquare had contacted Data Evolution's suppliers "to put

them on notice that they are to stop all use of any Bsquare IP that they may have in their

possession and that they are to return all such IP to Bsquare immediately." Bsquare then
threatened Data Evolution with litigation.
56.

Bsquare also sent threatening letters to numerous suppliers, some of whom were

suppliers to Data Evolution before its involvement with Bsquare or were suppliers located by
Data Evolution to work on the project. Bsquare's letters noted prior phone discussions with the

suppliers concerning Bsquare's dispute with Data Evolution regarding the Clio NXT and
Cathena Projects. The letters assert that the suppliers "may possess intellectual property relating

to these projects that is exclusively owned by Bsquare ("Bsquare IP")." Bsquare misstates the
terms of the Agreement, claiming that:

Under the written agreement between Bsquare and Data Evolution, Data Evolution currently has no right to use the Bsquare IP or to provide the Bsquare IP to others to use.

57.

The letters threaten that "pending resolution of the dispute between Bsquare and

Data Evolution, you have no right to use the Bsquare IP." Bsquare directs the suppliers to:

. . .
58.

Stop all uses of the Bsquare IP; Stop all use of any items (including tooling) that were

developed or modified using any Bsquare IP, and refrain from transferring such to any pary without express written
consent of Bsquare; and Return all Bsquare IP in your possession to Bsquare.

Bsquare provided to Data Evolution on September 23, 2005, a so-called "bTime

Report" that, according to a letter from Bsquare's counsel, is purportedly taken "directly from

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Bsquare's time tracking system." Significantly, the letter states that "(t)he time was entered each
week by each Bsquare timekeeper." Thus, it appears there were no daily time

sheets of activities

but that at the end of the work week, each timekeeper simply entered the number of hours he or

she claimed to have worked on a given project. Of course, underutilzed engineers would have
every incentive to be generous in giving their end-of-week estimate of hours. Indeed, virtually
all the figures on the report are whole hours, and there are numerous entries for "40" hours where
a given engineer (~ Carlos Ribas, David Cagle, Chris Neugerbauer, Chris Walsh, Eric Black,

Kim Mui) apparently claims to have worked every minute of every hour of every workday on the
Data Evolution project.
59.

Counsel's letter claims that the enclosed "Detailed Task Resource Break-down by

Week" is "a more detailed version" of the bTime Report. However, the bTime Report contains

no information on the specific tasks performed. The breakdown appears to have been created
after the fact.

There is no showing that the tasks performed on a given day were

contemporaneously recorded. Again, virtually all the entries are whole numbers and many of

them are very round numbers. In short, the breakdown does not have the look or feel of a
contemporaneous recording of time and tasks. Importantly, Bsquare has never provided to Data
Evolution any time

sheets of individual timekeepers though Data Evolution, beginning in early

2005, repeatedly requested that back-up.

60.

The bTime Report reflects a total of 4,876 hours Bsquare claims to have spent on

the Data Evolution project, including 2,514.25 hours after the week of March 13-18,2005 (i.e.
after the March 15 meeting and COS 6). Yet Bsquare never completed the project and claimed
that thousands of additional hours would be necessary to complete it.

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61.

Data Evolution has been significantly damaged by Bsquare's conduct. All the

work the Bsquare has done to date is of no value to Data Evolution. In effect, Data Evolution

must star from ground zero in order to complete the work that Bsquare was hired to perform.
As a result all amounts paid to Bsquare, which to date are approximately $287,000, constitute

direct damages recoverable by Data Evolution.
62.

As set forth above, Data Evolution lost an OEM contract. It also has had to delay

and is at risk to lose a contract with Exxon because of the delays occasioned by Bsquare's
conduct. Bsquare is liable to Data Evolution for all lost profits that otherwise could have been
eared under those prospective contracts.

63.

Data Evolution projected that it could sell 50,000 units per year once

manufacturing had begun. Each unit was projected to generate approximately $200 in profit.

Thus, Data Evolution has lost and continues to lose over $800,000 per month in every month that
its product launch is delayed. Bsquare is liable for all such lost profits.
64.

Data Evolution also paid $200,000 to a third pary who was to serve originally as

a manufacturer, and subsequently agreed to provide design services. Because of Bsquare's

conduct that third party has refused to provide those services to Data Evolution requiring Data
Evolution to seek out an alternative. The amounts paid to that third pary constitute damages to
Data Evolution resulting from Bsquare's actions.
65.
Furthermore, Data Evolution has suffered serious damage to its goodwil as a

result of the delays and disruptions caused by Bsquare's actions. By was of example, on June 9,
2005 (the date on which Bsquare sent notice that it was discontinuing work) Data Evolution's

stock, which trades over the counter, closed at $1.20 per share. From that date forward, its stock

price slowly and steadily declined until by January of 2206 it was trading in the mid $0.20 per

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share range -- an 83% decline. That decline equates to a drop in Data Evolution's market

capitalization of approximately $20 million. Bsquare is liable to Data Evolution for any loss to

the value of its business occasioned by the loss of goodwil resulting from the delays and
disruptions caused by Bsquare's wrongful conduct.

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COUNT I

BREACH OF THE MASTER AGREEMENT
66.

Data Evolution repeats the allegations of the foregoing paragraphs as if set forth

herein.
67.

Data Evolution relied on Bsquare's claimed competence to perform the software

and hardware development and other tasks necessary for the project. It turned out that Bsquare

did not have the competence it promised. It did not have the skill set to do the hardware
development. Bsquare expected Data Evolution to pay for Bsquare to get up the learning curve

in order to develop the competence to perform the contract. However, Data Evolution was not

paying Bsquare to give "on the job training" to Carlos Ribas and others. Bsquare certainly did
not have the capability of performing the contract for anywhere near the amount it estimated to
get the contract.
68.

Bsquare breached the Agreement through its repeated failure to perform its
Bsquare materially failed to perform its

obligations in a timely and competent manner.

obligations pursuant to the Agreement. Bsquare did not, as required by Section 3.1.1 of the

Agreement, provide Data Evolution with services that were substantially in accordance with the

Statement of Work as modified by the Changes of Scope. Bsquare also failed to perform its
obligations in a manner that enabled compliance with the established schedule.
69.

Bsquare never produced what it promised and failed to meet the schedule for

performance again and again. Because Bsquare's work was incomplete and inadequate, what it

did produce was and is of little or no value to Data Evolution. Bsquare only completed phase 1
and produced few deliverables through its parial efforts on Phases 2, 3 and 4. This was not a

piecemeal project but an integrated project where successful completion of all phases was

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necessary to produce a viable product for Data Evolution. Data Evolution's contracts with

Exxon and others have been

jeopardized because of

Bsquare's lack of

performance.

70.

Bsquare also breached its obligation of good faith and fair dealing under the

agreement by, among other things, misrepresenting its capabilities and competence to perform its

obligations under the contract and its invoicing of Data Evolution for hours that were inflated
and/or unnecessary.

COUNT II

BREACH OF THE MARCH 15,2005 AGREEMENT AND COS 6
71.

Data Evolution repeats the allegations of the foregoing paragraphs as if set forth

herein.
72.

Bsquare did not honor its agreement to write off 510 hours, as reflected in COS 6.

On March 25, 2005, Bsquare did provide a $36,000 credit for 300 hours. This apparently

represented the missed bid (110 hours) and poor execution (190 hours) Bsquare had
acknowledged. However, Bsquare never wrote off

210 hours ofEM/M as it specifically agreed

to do in COS 6.
73.

In COS 6, Bsquare asserted that for the remainder of the project an additional 10

hours per week of project management would be needed in addition to the 18 hours per week

assumed in the budget. Bsquare's bTime Report shows Michael Kahn biled 202 hours for
project management from March 20 to June 3, 2005, an average of 18.36 hours per week. Tim

Harington biled 54 hours for project management in that period, an average of 4.9 hours per
week. Bsquare recorded only approximately 23 hours per week (not 28 hours) for project

management and apparently biled all of it to Data Evolution. In COS 6, Data Evolution agreed

it would pay for up to 682 additional hours if needed to COS 6 tasks, including up to 210
additional hours beyond the 18 hours per week budgeted for project management.

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74.

Through June 3, 2005, Bsquare had recorded only 56 hours of project

management beyond the budgeted 18 hours per week. Even including 11.5 hours from the week

of June 5 2005 (when the "project management" was probably directed in large par to
terminating the project), Data Evolution could only be required to pay 67.5 additional hours for

additional project management under COS 6. Therefore, the maximum hours and amount Data
Evolution could have been obligated to pay as of the time Bsquare terminated was 3,923.5 hours

(i.e. 4,066 - 142.5) and $470,820 ($487,920-$17,100)-ifBsquare had finished the project. Yet,
through its June 17, 2005 invoice, Bsquare had already biled for 4,553.75 hours and

$542,388.75. Of course, Bsquare was a long way from finishing the project (at least 1,455 hours
and an additional $174,600 according to its June 8, 2005 estimate). Therefore, Bsquare plainly

breached the Agreement by charging Data Evolution far in excess of the agreed-upon hours and
amount.

COUNT III
TORTIOUS INTERFERENCE IN DATA EVOLUTION'S BUSINESS
75.

Data Evolution incorporates the allegations of the foregoing paragraphs herein by

reference.
76.

Bsquare has breached several provisions of Section 5 of the Agreement by

claiming exclusive ownership of the board design, Pre-existing Work of Data Evolution and its

affliates, third-pary intellectual property and worked derived from such Pre-existing Work and
intellectual property. Its conduct towards third party suppliers to Data Evolution also constitutes
bad faith tortious interference with Data Evolution's business and business relationships.
77.
Under the Agreement, Bsquare has no rights in:

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(a)

Pre-existing Work, which includes any materials that were developed or
otherwise obtained by or for Data Evolution or its affliates. Agt. §§5.1.1, 5.1.2, 5.2.1.

(b)

materials that are derived from Data Evolution's Pre-existing Work. Id. §§5.1.2,

5.2.1.
(c)

third-pary intellectual property and work that is derived from third-pary
intellectual property. Id. §5.1.2:.

(d)

materials that were not developed by Bsquare or in collaboration with Data

Evolution, such as materials developed by third paries or in collaboration with
third paries. Id.
(e) the board design developed under the Agreement (subject to Bsquare's ownership

of Pre-existing Work in the Sierra board). Id. §5.1.3.
78.

The items identified as Bsquare IP in Bsquare's July 15,2005 letter and the letters

to suppliers indicate that Bsquare is claiming exclusive ownership of, and the ability to preclude
use of, information, material and documents that do not belong to Bsquare under the Agreement.
79.

Bsquare's July 15,2005 letter and its letters to the suppliers admit that most of the

information and material Bsquare claims as its intellectual property is in the possession of the
third-pary suppliers. Indeed, most of it is information generated by and/or material produced by

these third paries.
80.

Bsquare claims in its July 15, 2005 letter that "intellectual property developed or

provided to Data Evolution" by suppliers constitutes "Bsquare I.P." It further claims that
Bsquare I.P. includes "(a)ll intellectual property developed by Bsquare's suppliers." Bsquare's
July 15, 2005 letter and its letters to suppliers insist that Data Evolution and the suppliers cease

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using Bsquare I.P. and return the Bsquare I.P. to Bsquare. Because Bsquare claims that all
intellectual property developed by the suppliers constitutes intellectual property of Bsquare, it is

asserting that third-party suppliers cannot use their own intellectual property and must turn that
intellectual property over to Bsquare. This proposition is not only absurd, it is directly contrary

to the plain terms of the Agreement.
81.

Section 5.1.2 entitles Data Evolution to joint ownership of computer code or

materials "developed by Bsquare (or in collaboration with COMPANY) and provided to
Company in the course of performance of this Agreement ("Developments")." "Developments"
does not include materials produced by third-party suppliers and certainly does not include third-

pary intellectual property. Indeed, Section 5.1.2 specifically cares out "third-pary intellectual
property and any derivative work thereof." The Agreement correctly recognized that Bsquare

could not assign to Data Evolution joint ownership of third-pary intellectual property or any
work derived therefrom for the simple reason that Bsquare does not have any ownership rights in
such materials.

Significantly, neither Bsquare's July 15 letter, nor its letters to suppliers,

identifies any agreement by the third-pary suppliers that their work (much less their intellectual

property) belongs to Bsquare. Bsquare's assertion of ownership rights in third-pary intellectual
property and work derived therefrom constitutes a material breach of Section 5.1.2 of the
Agreement.
82.

Many of the 16 items Bsquare claims to own in its July 15, 2005 letter are

materials and information generated by third-pary suppliers, not Bsquare. For example, in items
7 and 9 of its laundry list of Bsquare I.P., Bsquare claims that the inverter specification and

custom touch-panel mechanical and assembly drawings in the possession of American Panel
Corporation ("APC") belong to Bsquare. Bsquare's letter to APC claims as Bsquare IP:

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. APC drawings derived from the Bsquare inverter . APC drawings delivered from Synapse Mechanical
Drawings for the custom touch panel assembly and the Clio NXT custom invertor.
specification.

Thus, Bsquare is claiming to be the exclusive owner of drawings that were done by APC and

even APC drawings delivered from drawings by Synapse.
Bsquare's role in the inverter as "LCD + Inverter admin."
functioning in an administrative capacity.
83.

Moreover, COS 5 describes
In other words, Bsquare was

Bsquare also claims a battery specification for a three cell Moli Energy Lithium

Ion smar battery pack is Bsquare I.P. Data Evolution is hardly precluded from using cells

manufactured by Moli, which is a battery cell manufacturer. The Purchase Request Bsquare
submitted for Rosslare stated that:

Rosslare America wil design and supply the CLIO NXT battery
pack, including battery cells, circuit board and mechanics.

Thus, the battery pack was designed and produced by' Rosslare, not Bsquare. Moreover, the
Purchase Request explains that the development expenses covered by the Purchase Request are

the "cost of prototypes." It contains no indication that Bsquare wil be the exclusive owner of
any of Rosslare's work. In fact, Bsquare had no relationship with Rosslare. Rosslare was under
contract with Data Evolution and Data Evolution paid Rosslare directly for its work. The paries
never intended that Bsquare would have any right to Rosslare's work.
84.

Bsquare also claims that Data Evolution has no ownership rights or right to use (i)

any intellectual property developed for or provided to Data Evolution by Bsquare, (ii) any item,
tool, component, etc. that was developed and/or modified for Data Evolution and which used any
Bsquare I.P. and (iii) all Bsquare Developments.

Once again, Bsquare has breached the

Agreement by asserting ownership rights and rights to restrict use in violation of the plain terms
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of the Agreement. Section 5.1.1 of the Agreement provides that all rights in any computer code

or materials developed or otherwise obtained by or for Data Evolution or its affiiates
independently of the Agreement constitutes "Pre-existing Work that shall remain the sole
property of Data Evolution." Thus, for example, the elements and components of the existing

Clio constitute Pre-existing Work of Data Evolution which it and/or its affilates owned.
Furthermore, under Section 5.1.2, Pre-existing Work and any derivative work thereof are
explicitly excluded from the definition of Bsquare Developments.
85.

The flex cable to which item 4 of Bsquare's claimed I.P. relates was based on the

original flex cable design supplied by Data Evolution. Thus, the changes to the cable are
derivative work based on Pre-existing Work of Data Evolution and third-pary intellectual
property and derivative work. On April

21, 2005, Data Evolution authorized a Purchase Request

for Flex Interconnect Technologies to produce 20 flex cables for $1,800 plus $1,000 for tooling
and test. Notwithstanding these facts, Bsquare claims it owns the cables Flex produced.
86.

In item 8 of its I.P. claims, Bsquare asserts that tooling documentation related to

modifications to the molds and other tooling used for manufacturing the Clio plastic components

is owned by Bsquare. The molds are Pre-existing Work of Data Evolution and its affiliates. Any
documents showing changes, modifications or additions to support the Data Evolution molds are

derived from Data Evolution Pre-existing Work and do not belong to Bsquare. Bsquare's letter
to Cascade Quality Molding claims that Bsquare is the exclusive owner and has the sole right to
use:

Clio NXT Mechanical Tooling Files modified or produced by
Synapse.

Thus, Bsquare claims to be the exclusive owner of material produced by Synapse, not Bsquare,
that was a derivation of Data Evolution's Pre-existing Work.
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87.

The Clio Architecture Specification, (item 11) and Clio NXT Specification (item

12) were based on information Data Evolution gave Bsquare through e-mails, fies, phone calls

and face-to-face meetings. These items are derived from Pre-existing Work of Data Evolution,
including the original specs for the Clio NXT, which were sent to Bsquare in June, 2004.
88.

In item 13 of its list of Bsquare I.P., Bsquare claims to own "Mechanical Design

Assets," including a database of ProÆ CAD models, solid model pars and assemblies, PCB
mechanical outlines and the database of battery housing developed in cooperation with the
battery manufacturer Rosslare. These materials were developed based on Pre-existing Work

supplied by Data Evolution in the form of files, drawings, etc.
89.

Bsquare item 14 claims ownership of Clio and Cathena prototypes for

demonstration and/or development uses. A majority of the components for the prototypes were
supplied by Data Evolution. Moreover, the prototypes are a derivative of the original Clio units,
which are Pre-existing Work of Data Evolution.
90.

Bsquare compounds its breach of the Agreement by specifically claiming in the

first several items of its 16-item list of claimed Bsquare I.P. that it has ownership rights in the
physical design of the board. It further breached the Agreement by claiming in its July 19, 2005

letter to BreconRidge that the main board design was "exclusively owned by Bsquare." Section

5.1.3 gives Data Evolution sole rights in the layout of the board design developed under the
Agreement, subject only to Bsquare's rights in the Sierra board.
91.
The first two categories of purported Bsquare I.P. are the main board's
layout of the

schematics, board fies and physical design of the Clio and Cathena. The physical

Clio main board is based on Data Evolution supplied files. Those original files, Gerbers and
assembly information also included information such as keyboard, flex cable, battery, I/O ports,

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PMCIA circuits, etc. While certain ports were moved or added, this was a modification of the
original Data Evolution board. Given Data Evolution's sole ownership of the physical

layout of

the board design under §5.1.3 and ownership rights in Pre-existing Work and work derived

therefrom, Bsquare does not own the board schematics, board fies and physical design
information it claims to own in its July 15, 2005

letter and July 19, 2005 letter to BreconRidge.

92.

According to a Februar 2, 2005 e-mail from Bsquare and an accompanying

Purchase Request, West Coast Design was to provide "PC board layout services," which were to

include LED flex designs. Despite Data Evolution's plain right under Section 5.1.3 to the layout

work performed by West Coast, Bsquare claimed in item 5 of its July 15, 2005 letter that the
"LED flex schematic and layout" done by West Coast is "Bsquare IP."
93.

Bsquare's purpose in attacking Data Evolution's past and prospective suppliers is

plain-to prevent Data Evolution from developing its products. Basically, Bsquare claims that if
it had any contact with a third-pary supplier, that anything and everything produced by that

supplier belongs exclusively to Bsquare.
94.

Bsquare plainly knew that Data Evolution had a business expectancy of using the

suppliers to provide components and related services for the development of the Clio and the
Cathena. Bsquare intentionally sought to terminate those relationships by improperly threatening

that the suppliers would violate Bsquare's intellectual property rights. Bsquare's threats caused

Rosslare, Data Evolution's battery manufacturer, to be unwiling to work with Data Evolution.
Those threats have also made it more difficult for Data Evolution to work with other suppliers.
95.

Through its conduct Bsquare has tortiously interfered in Data Evolution's

business.

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COUNT iv

FRAUD IN THE INDUCEMENT
96.

Data Evolution incorporates the allegations of the foregoing paragraphs herein by

reference.
97.
As set forth above, Bsquare misrepresented its competence to complete the

project in accordance with the terms of the Agreement.
98.

Bsquare further misrepresented the time and cost required for it to complete the

project. Given the level of the overrns in costs, Bsquare's representations cannot be attributed

to simple mistake or miscalculation. Bsquare either knew that it was underestimating the time
and cost to complete the project in order to obtain the contract, or Bsquare should have known or

was grossly negligent in not knowing that it could not complete the contract as represented to
Data Evolution.
99.
In reliance on these misrepresentations, Data Evolution entered into the

agreement with Bsquare.
100.

Data Evolution has been damaged by its reliance on Bsquare's representation by

the loss of prospective contracts and having incurred numerous unnecessary and wasteful
expenses, including all the amounts paid to Bsquare.

WHEREFORE, Data Evolution requests that an order and judgment be entered against
Bsquare granting the following relief:
(1)

Declaring that Bsquare breached its contracts with Data Evolution

and that Data Evolution has no further obligations under the contracts;
(2)

Ordering Bsquare to provide to Data Evolution all work product it

has created in connection with the project;

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(3)

Enjoining Bsquare from interfering with Data Evolution's

business, including making any representation that it has rights to any of the
relevant intellectual property belonging to Data Evolution;
(4)

Awarding to Data Evolution damages as a result of Bsquare's

wrongful conduct, including a refund of all amounts paid by Data Evolution to
Bsquare; Data Evolution's lost profits occasioned by the delay in launching Data
Evolution's products; all additional costs incurred by Data Evolution to complete

the work that was to have been performed by Bsquare; and any reduction in the
value of Data Evolution's good wilL.

(5)
because of

A warding Data Evolution its attorneys fees and costs of this suit

Bsquare's bad faith conduct; and
(6)
A warding such other relief as the Court deems just and proper.

PRICKETT, JONES & ELLIOTT, P.A.

By:
'chael anraha (Bar ID #941)
ruce E. ; eson (Bar ID #2931)

J. Clayton' they (Bar ID #4378) 1310 N. King Street P. O. Box 1328 Wilmington, DE 19899-1328 (302) 888-6500
Attorneys for Defendant Data Evolution Corporation

Dated: January 27,2006

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CERTIFICATE OF SERVICE
I, Bruce E. Jameson, hereby certify that on this 27th day of January, 2006, I caused a
copy of the foregoing Answer and Counterclaim to be served via CMÆCF electronic fiing
upon the following counsel of record:
Jonathan L. Parshall, Esquire Murphy, Spadaro & Landon
10 11 Centre Road, Suite 210\

Wilmington, DE 19805

D. #2931)

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