Hytera bankruptcy filings reveal plan to sell U.S. divisions, but Motorola Solutions asks court to block effort

LMR manufacturer Hytera has asked a bankruptcy court’s permission to sell its U.S. business units in a Chapter 11 auction, but Motorola Solutions is trying to block the effort, claiming that the Hytera legal maneuver is simply an effort to avoid paying a $764.6 million federal-court award to Motorola Solution.

These positions are evident in the legal filings before the U.S. Bankruptcy Court for the Central District of California-Santa Ana Division, where Hytera Communications America (West) and Hytera America—the two primary U.S. divisions of China-based Hytera Communications—filed for Chapter 11 bankruptcy.

Sparking the need for the bankruptcy filing was a U.S. federal-court ruling that obligates Hytera to pay $345.8 million in compensatory damages and $418.8 million in punitive damages for using stolen Motorola Solutions trade secrets and copyrighted software code to build its popular DMR product portfolio. Hytera has announced plans to appeal the ruling.

On Feb. 14, the jury unanimously voted for the $764.6 million award—the full amount requested by Motorola Solutions—and Judge Charles Norgle upheld the award, which reportedly was described as a “bankrupting amount” by a Hytera attorney during closing arguments.

Indeed, Hytera Communications America (West) and Hytera America—as well as holding company, HYT North America—filed for Chapter 11 protection on May 26 and are dubbed “the Debtors” in the legal filings. This bankruptcy case does not include Hytera Communications, the parent Hytera organization based in China that remains a party to the Motorola Solutions lawsuit.

Although the bankruptcy filing did not happen until May, Hytera realized in March that the companies’ “operations are not sustainable for the long term,” according to an initial bankruptcy filing from Ni Huang, president and CFO of Hytera Communications America (West) and Hytera America. With this in mind, Hytera turned to investment banker Imperial Capital in an effort to find a buyer.

“Imperial … has now contacted more than 90 potentially interested parties, including both strategic and financial buyers, and has provided them a teaser document,” according to Huang’s filing on May 28.

“The Debtors are hopeful that they will soon be able to identify a suitable stalking horse purchaser and commence a court-supervised … auction process for the sale of substantially all of the Debtors’ assets. The Debtors believe that an open and transparent auction and sale process is the best way to maximize value for stakeholders.”

Today, attorneys for Motorola Solutions asked the court to dismiss the bankruptcy filing, describing it as part of a “bad-faith” effort by Hytera to avoid paying the $764.6 million award amount, noting that Hytera has refused to post an appellate bond.

“This bankruptcy is another tactic in the Debtors’ illegal campaign, this time to avoid responsibility and evade judgment, all the while continuing to make illegal sales of Hytera products throughout the United States (and around the world),” according to the Motorola Solutions motion to dismiss the bankruptcy case.

“This is not in dispute: the Debtors made clear in their first-day declaration that the sole basis for this bankruptcy was the judgment entered against them and that they will ‘vigorously appeal the Motorola Judgment,’ (which accounts for 97.5% of their liabilities), yet they have failed to post an appeal bond, and instead filed for bankruptcy.”

In addition to the $764.6 million federal-court award, a pending federal-court decision on a worldwide injunction request remains problematic for any potential bidder for the Hytera U.S. divisions, according to the Motorola Solutions filing.

“During the [July 7 meeting with creditors], the Debtors stated that three entities have made offers in response to the Debtors’ marketing process; however, the Debtors could not identify any specific entity that made an offer, what the offer encompassed, whether the offer included DMR products subject to Motorola’s motion for a permanent injunction, or any other substantive information (other than that one of the entities is a Hytera affiliate),” according to the Motorola Solutions motion for dismissal.

“That is not surprising: no genuine strategic buyer or investor would rationally purchase the Debtors’ assets (absent a massive discount detrimental to all creditors) with the cloud of Motorola’s motion to permanently enjoin Hytera China around the world from making, selling, or importing DMR products hanging overhead in the Illinois Trade Secret Case. Indeed, until the scope of injunctive relief is determined, no reasonably-reliable financial forecast of the Debtors’ business could be generated.

“Simply put, dismissing this case—or suspending it until the scope of injunctive relief is resolved—is a prerequisite to a legitimate marketing and sales process in order for the Debtors to obtain the highest sale price, which will benefit all creditors, and the Debtors. Indeed, the Debtors’ legitimate interests are better served by suspension, because the Northern District of Illinois will clarify what Hytera assets may be sold, and which may not.”

Absent the massive federal-court award to Motorola Solutions, the Hytera U.S. divisions would remain viable businesses—a fact acknowledged in the Motorola Solution motion for dismissal. For the year ending on Dec. 31, 2019, the two primary Hytera U.S. divisions generated combined revenues of $42.9 million, although the net operating income resulted in a loss of about $100,000, according to the Huang declaration.

This year proved to be much more difficult—not surprising, given the negative federal-court ruling and the sharp decline in U.S. enterprise spending as a result of measures taken in response to the COVID-19 pandemic. Hytera reported that its two primary North America divisions have seen gross revenues fall more than 40% through May 26, according to Chapter 11 bankruptcy documents.

During the federal-court trial that began last November, Hytera attorneys acknowledged that three former Motorola (the company had not yet changed its name to Motorola Solutions at the time) employees—Samuel Chia, Y.T. Kok and G.S. Kok—accessed more than 7,000 Motorola documents prior to each of them leaving and joining Hytera shortly in 2008. However, Hytera attorneys described the three engineers as “bad apples” who did not share with anyone else at Hytera that the DMR trade secrets and software were taken from Motorola.

Hytera attorneys have asked for a new trial and argue that the award to Motorola should be reduced significantly, if the decision is not reversed. In contrast, Motorola Solutions asks that the financial award that China-based Hytera should pay should be increased by including the profits that Hytera has realized during the time since the trial started, interest and attorney fees.

Hytera also has argued that an injunction issued by a U.S. federal court only should apply within the U.S., which would mean Hytera could sell the DMR products in other countries. But Motorola Solutions asserts that language in the Defend Trade Secrets Act (DTSA) supports granting worldwide injunction in this case, because Hytera engaged in an “act in furtherance of the offense” in the U.S. through its participation in U.S. trade shows.