Hytera parent cites financial health, but unable to make royalty payment to Motorola Solutions

Hytera Communications claims it has not made a court-ordered royalty payment of $49 million to Motorola Solutions because the China-based LMR manufacturer’s parent company does not have access to the assets of its subsidiaries around the world, according to a recent filing in a federal district court.

Hytera Communications Corp. (HCC) made the filing earlier this month in response to Motorola Solutions’ request that U.S. District Court Judge Martha Pacold find Hytera in contempt of court for failing to make the lump-sum royalty payment that was due last summer. After missing the deadline to make the royalty payment in cash, Hytera Communications offered to compensate Motorola Solutions with shares of Hytera stock valued at more than the royalty amount owed.

Judge Pacold, who assumed the contentious civil case after last year’s retirement of U.S. District Court Judge Charles Norgle, asked for legal briefings from attorneys for both Hytera and Motorola Solutions before she rules on the contempt-of-court issue. Pacold also has been asked to rule whether Hytera Communications’ offer to meet its royalty obligations with company stock—instead of cash—is a suitable compensation.

No matter how Pacold rules, Motorola Solutions will not receive any compensation in the near future. Instead, Hytera Communications would make “payments” into an escrow account, where the compensation would be held until all legal appeals of the matter have been exhausted. Motorola Solutions would receive the compensation only if Hytera’s appeals fail; otherwise, the assets in escrow would be returned to Hytera Communications.

In seeking a contempt finding against Hytera, Motorola Solutions attorneys have argued that Hytera Communications could make the royalty payment in cash, because the Hytera parent company “possesses vast financial assets,” including $122 million in cash and more than $881 million in net assets, according to public financial statements.

Hytera Communications’ attorneys acknowledge the financial figures but strongly disagree with the assertion that the China-based parent company is in a position to use those assets to make a royalty payment.

“As Motorola is aware, however, [the notion that Hytera Communications is able to make the royalty payment in cash] is simply not the case,” according to Hytera’s legal brief that was filed on Jan. 12.

“This consolidate financial data include the assets of the entire Hytera corporate family—consisting of HCC and more than 30 separate and distinct corporate entities. As HCC has previously demonstrated, however, the money and other assets of its non-party subsidiaries simply do not belong to the parent HCC. The only way for Motorola to reach those assets is by piercing the corporate veil, and it would have to file a separate lawsuit.”

Of course, Hytera Communications’ two U.S. subsidiaries were parties to the original suit filed by Motorola Solutions alleging that Hytera used trade secrets and copyrighted software stolen from Motorola to develop its successful portfolio of DMR products. After losing the case and being required to pay more than $700 million to Motorola in March 2020, the two Hytera subsidiaries in the U.S. declared bankruptcy two months later and were combined into a new company, Hytera US—an entity that the bankruptcy judge ruled was not liable for previous litigation awards.

As a result, the lone Hytera entity remaining in the case is Hytera Communications, the parent company based in China—a fact that impacts the ability of Hytera Communications to issue corporate bonds to raise the money necessary to make the royalty payment in cash, according to the court document. “Any issuance of corporate bonds must first be approved by HCC’s Chinese regulators,” Hytera’s filing states. “The bond’s prospectus restricts how the investor funds may be used … Thus, even assuming there were any funds left from the prior issuances of corporate bonds, such funds could not have been used for this non-designated purpose and could not be used for non-operating expenditures.

“Moreover, Motorola provides no explanation for how HCC could satisfy the regulatory requirements for issuing additional corporate bonds to cover the escrow amount here, much less any proof that HCC’s regulators would even approve such an application. Any investor is going to want a return on its investment—which is not possible when the funds are being paid into a non-interest-bearing escrow account pending the appeal.”

Hytera’s filing also notes that the Hytera Communications parent company cannot simply sell non-liquid assets to raise the cash needed to make the royalty payment in cash, although much of the explanation in public version of this section is redacted.

Given the circumstances, “contempt is not warranted here,” according to the Hytera filing.

This is a very different conclusion than the position asserted by Motorola Solutions attorneys requesting that Judge Pacold find Hytera Communications in contempt of court for not making the lump-sum royalty payment in cash to the escrow account.

Motorola Solutions filings repeatedly have noted that Hytera Communications cited the royalty order as an alternative to an injunction order that would have halted much of Hytera’s DMR sales, at least in the U.S. With this in mind, Motorola Solutions has asked that Judge Pacold find Hytera Communications in contempt and recommended a “severe” penalty for the China-based LMR manufacturer.

“Given that Hytera has proven that it will say and do anything to avoid taking responsibility for its actions—including suborning perjury during the jury trial, bankrupting its U.S.-based subsidiaries to avoid paying the judgment, refusing to post an appeal bond, refusing to provide Citation discovery, and now refusing to pay the Court-ordered royalty it had promised in exchange for avoiding an injunction—the nature of the sanctions required here must be severe,” according to a Motorola Solutions brief filed in December. “In addition to imposing the 1% penalty per month contemplated by the Royalty Order, temporarily enjoining Hytera’s sales of products in the United States and seizing Hytera US, Inc. (property that Hytera does not dispute that it ultimately owns) is necessary because, otherwise, Hytera will not comply.”

This civil case between Hytera Communications and Motorola Solutions is separate from the criminal case filed by the U.S. Department of Justice against Hytera Communications and seven former Hytera employees that alleges Hytera Communications and the former employees—each of whom worked for Motorola immediately prior to joining Hytera—conspired to steal Motorola DMR secrets that were used to develop Hytera’s DMR portfolio. The trial in that case is expected to begin in February 2024.