Posted by Qi Zhou.
In an article by Aaron S. Applebaum, Eastern District of Pennsylvania Bankruptcy Conference Case Problem Series: Eagle Technologies, describes the bankruptcy case of a fictitious sports equipment company founded by former professional football players “Carson” and “Fletcher.”
Carson and Fletcher retire from lucrative professional football careers and decide to go into business for themselves. They form Eagle Technologies, LLC, a Delaware limited liability company, in which Carson and Fletcher each hold 50% membership interests.They perceive an untapped market for improved football helmets. Carson creates new helmet designs while Fletcher looks for funding. Carson soon realizes, however, that without medical training, he cannot tell if the new helmets are actually safer. Investors suggest Carson and Fletcher invest their own money into years of R&D, and come back when they have a product ready.
Carson and Fletcher confer and decide to turn to Plan B. Instead of designing new helmets, they will duplicate an existing design and find a way to build it more cheaply. Carson gets a computer hacker to steal proprietary designs from a chief competitor, Giant Helmets, Inc., and Fletcher develops contacts with companies overseas who can develop components to mirror the stolen designs at a fraction of the cost incurred by Giant. They take their “new design” and supply contracts to an institutional lender, Cowboy Bank, N.A. Cowboy sees potential, and signs a letter of intent to loan $100 million to Eagle, secured by substantially all of Eagle’s assets and personally guaranteed by Carson and Fletcher.
Eagle submits its design to the patent and trademark office, and Fletcher bribes the patent office to obtain approval. With patent and apparent CPSC preliminary approval in hand, Cowboy funds the loan and Eagle is off and running. Eagle puts the stolen designs into development, and by outsourcing all components of the equipment, Eagle easily undercuts Giant and all its other competitors. and successful business.
Unfortunately, Giant sues Eagle, Fletcher and Carson for patent infringement, conversion and a host of other civil causes of action. Eagle also finds itself as a target of multi-district class action litigation, as the cheap foreign parts were poor substitutes for the quality components usually used in Giant’s helmet designs, and football players started experiencing worse and more frequent brain injuries than ever before. To top it off, the Federal Government commences criminal prosecution against Carson, Fletcher, Nelson and Kelsey as questions arise concerning Eagle’s CPSC approval process. Eagle’s mounting legal expenses put a strain on liquidity, and Eagle misses two scheduled loan payments to Cowboy.
Qi is an accounting major at the Stillman School of Business, Seton Hall University.