Nashville at law: Tech company sues Indian outsourcer

Also: Rich Roberts dam case and Goo Goo maker's fishy candy lawsuit both may settle [From our print edition featured in Monday's City Paper]

Email | Print By E. Thomas Wood

11-02-2009 12:07 AM —

A dispute between a Nashville firm and two key vendors located in India recently made its way into the court system here, illustrating some of the hazards inherent in the now common practice of offshore technology development and manufacturing.

Smartvue Corp., which produces wireless video surveillance systems, filed suit in Davidson County Chancery Court on October 19 against Bangalore-based Mistral Software Pvt. Ltd. and Nest Power Electronics Pvt. Ltd., headquartered in the southern Indian city of Cochin.

In its complaint, Smartvue describes a product-development process gone wrong. It contracted with Mistral some time ago to develop software and hardware for its S8 Camera and a network video recorder. The parties blew through an original budget of $858,000, and Smartvue ultimately paid Mistral $1.46 million for the project.

Mistral then introduced Smartvue to Nest as its recommended manufacturer. Smartvue ordered 1,700 cameras and 350 recorders from Nest, the first of them to be delivered in January 2009.

"Nest was unable to manufacture a properly working S8 Network Video Recorder and therefore could not meet the production demands placed upon it," the lawsuit asserts. "Nest blamed Mistral on the completion delays of the orders because of a faulty design of the S8 Network Video Recorder. Mistral blamed Nest on poor manufacturing of the designed product. In addition to issues with the S8 Network Video Recorders, Nest was late delivering the S8 Cameras as well."

After trips to India and other efforts to fix the problems, Smartvue ultimately gave up on the two vendors and cancelled its purchases.

"Smartvue was unable to fulfill a number of customer orders," the lawsuit says. "Smartvue does not anticipate being able to win back these customer orders either, causing significant damage to Smartvue."

The filing does not say how Smartvue planned to price the S8 suite, but earlier versions of its surveillance cameras have sold for more than $2,000 each, and its recorders have been priced at $4,500 and up. Given the numbers the company ordered, the retail value of the products is likely to have exceeded $5 million.

Accusing both firms of breach of contract, Smartvue is asking the court to enforce an arbitration clause in its contract with Mistral and to assess damages against Nest.

The lawsuit says Nest has claimed Smartvue owes payment for the work it did. So Smartvue also wants a court order that it does not owe Nest anything.

The plaintiff's attorneys are Tim Warnock and Sal Hernandez of Riley Warnock & Jacobson PLC. Representatives of the two Indian companies did not respond to requests for comment.

Bill McComas, a partner at the Baltimore law firm Shapiro Sher Guinot & Sandler who has written about legal issues involving technology outsourcers, reviewed the complaint at the request of NashvillePost.com and said it illustrates an important maxim for those thinking of sending work offshore.

"Be careful who you're dealing with as an outsourcer," McComas said. "They may or may not be in a jurisdiction where you can enforce a claim against them if you need to." He said he has seen lawsuits in which "the outsourcer voluntarily submitted to the jurisdiction of the U.S. because they wanted to be able to keep doing work here," but there's no way to be sure what stance the vendor will take in litigation.

McComas observed that the Smartvue case reflects a common dilemma in the development of projects involving both hardware and software: "You can end up with people pointing at each other." It might have been best in this instance, he said, for Smartvue to enter into a contract only with Mistral while making that company responsible for subcontracting the manufacturing work.

Other legal news of late:

United States District Court

U.S.A. v. Richardson M. Roberts. Notice filed Oct. 28. A settlement may be near in the Environmental Protection Agency's case against Nashville entrepreneur Roberts. The feds sued in September, seeking potentially huge civil penalties against him for constructing a large dam on farm land he owns in Humphreys County. Roberts built it without state or federal permits, and EPA said he then defied an order to restore the property's wetlands and streams.

Government attorneys told the court that the two sides met on October 26 "to discuss a potential resolution of this action without the need for further litigation" and that the meeting was "productive." EPA plans to put a settlement proposal in front of Roberts by early December.

"The United States is hopeful that the current discussions will result in the settlement of the claims against Defendant," the filing said. Proceedings in the case are on hold pending the result of the talks.

Defendant's attorney: J.W. Luna of Nashville. For the plaintiff: Assistant U.S. Attorney Lisa S. Rivera, with lawyers from the Environment and Natural Resources Division, Department of Justice.

U.S.A. v. Karen Liane Miller. Filed Oct. 27. The Internal Revenue Service accuses a local tax preparer of being part of a nationwide tax-protesting movement whose adherents are said to have requested some $3.3 trillion in bogus refunds over the past few years.

The IRS says Miller's clients have employed a so-called "redemption scheme" to take more than $8 million in illegal deductions, $1.17 million of which it paid out in refunds. "Redemption scheme promoters are tax defiers who falsely tell customers that the federal government maintains ‘secret' accounts of money for its citizens," the agency said in announcing the lawsuit. "Promoters claim to be able to help customers access the secret funds by filing the false IRS forms."

Redemptionists claim those funds are held in trusts known only to the elite figures who control the U.S. economy. In early October, Miller recorded a "public notice, declarations and lawful protest" with the Davidson County Register of Deeds in which she denies that any "trust created by the United States through the Federal Reserve Bank Act of 1913 was ever duly ratified by Karen Liane Miller." Under redemption theory, she would thus be entitled to offset the proceeds of her "trust" against any federal tax liabilities.

The government filed similar legal actions last week in Los Angeles, Panama City, Salt Lake City and Pocatello, Idaho.

The IRS wants the court to impose an injunction on Miller, preventing her from filing tax returns for others or asserting the "redemption" concept in her own filings. The court can also impose monetary penalties on preparers for filing "frivolous" returns.

For the plaintiff: Assistant U.S. Attorney Michael L. Roden, along with Department of Justice Tax Division attorney Brian H. Corcoran.

Standard Candy Co. v. NutraBella Inc. Motion for settlement conference filed Oct. 28. The maker of Nashville's iconic Goo Goo Clusters and a California producer of foods for pregnant women may be ready to clear the air after a stink arose over fish-flavored candy.

NutraBella had asked Standard to put docosahexaenoic acid, or DHA, into a batch of candies because the substance is thought to have special nutritional benefits for expectant mothers. Standard said it warned that the stuff could come out tasting fishy if they included DHA, and a spat arose when, sure enough, it did.

"The parties have exchanged settlement offers," the motion states, "and it appears that an opportunity exists for the parties to resolve this dispute without the expense of protracted discovery and litigation."

Defendant's attorney: Donna Roberts, from the Nashville office of Stites & Harbison. Plaintiff's attorneys: Rhea Bucy, Scott Derrick and Tom Russell, Gullett, Sanford, Robinson & Martin.

United States Bankruptcy Court

Mainstream Development LLC. Chapter 11 petition filed Oct. 27, with most disclosures yet to be filed. Assets: $1 million to $10 million. Debts: $1 million to $10 million.

Franklin attorney William S. Carman Sr. is listed as chief manager of this real estate company. It lists six unsecured creditors who are owed a total of $1.26 million, including a $425,000 debt to Carman personally.

Debtor's attorney: Elliott W. Jones of Drescher & Sharp P.C.