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At a time when the Florida Legislature is grappling with a huge budget shortfall, the state Department of Transportation has paid hundreds of thousands of dollars in legal costs to defend four highway contractors who lost a federal patent infringement suit last year — and has promised to cover the $9.5 million verdict against them if they lose their appeal. Last February, a federal jury in Fort Lauderdale, Fla., found that the four contractors had infringed on State Contracting & Engineering Corp.’s patented way of building highway noise barrier walls. The anti-noise walls were built along I-95 and Florida’s Turnpike in Miami-Dade, Broward and Palm Beach counties. The FDOT has posted a $10.2 million cash appeal bond on behalf of the four defendants, two of whom were Republican Party campaign contributors last year. The department paid those millions to the court registry even though the state is not a party to the lawsuit that was brought by State Contracting, which is based in Hollywood, Fla. The FDOT, with approval from Secretary of Transportation Thomas F. Barry Jr., funded the bond by establishing, with unusual speed, a little-explained project using money taken from two other state highway funds. The defendants are Hubbard Construction Co. of Winter Park, Murphy Construction Co. of West Palm Beach, Condotte America Inc. of Miami and Community Asphalt Corp. of Hialeah, Fla. The case was tried in U.S. District Court in Fort Lauderdale last February before Judge William P. Dimitrouleas. In addition, the Department of Transportation has agreed to cover the legal costs and indemnify nine more private contractors in another, nearly identical federal patent infringement suit brought by State Contracting. FDOT is the lone defendant in a third suit filed by State Contracting in Broward Circuit Court. A lawyer for the plaintiff in the state court suit says his client is seeking $100 million in lost profits and lost business value. What prompted the FDOT to post the appeal bond, cover the legal fees and promise to pay the damages incurred by the private contractors began with FDOT’s eagerness a decade ago to use State Contracting’s cost-saving construction techniques — and a willingness to change the rules. FDOT rules, specifically Section 7-3 of the department’s standard specifications, say that contractors required to use patented designs and processes “shall” obtain the legal right to do so from the patent holder in advance. To overcome that rule in the case of State Contracting’s patented techniques for building noise barrier walls, FDOT officials in 1992 added a “special provision” to contracts. “For this project,” the provision said, “if any patent or license fees are found to be legally required or due to anyone for use of the sound barrier wall called for by the plans, any such fees or royalties required and paid by the contractor will be reimbursed by the department.” There is no provision in state law for state government to pay legal fees for contractors. And government departments and agencies in Florida, including the Department of Transportation, have no legal authority to indemnify private parties. “Not without express legislative authority,” FDOT attorney E. Clay McGonagill said in trial testimony last year. Rather, McGonagill says, the agency’s power flows from its general contracting authority. “It’s extraordinarily rare if not unprecedented for the state of Florida to intervene on behalf of a private road contractor and to assume potential liabilities of up to $10 million,” said Dominic M. Calabro, president of Florida TaxWatch, a nonprofit government watchdog group in Tallahassee. “It’s especially difficult to understand why the state would do that when we are facing such a significant multibillion-dollar fiscal challenge. Even if it’s legal, why would you do it?” “Why would the state gratuitously, without any justified benefit, put itself out to create potential liability for taxpayers?” asked state Sen. Ron Klein, D-Boca Raton, vice chair of the Senate Transportation Committee. “If there is a good reason, I’d like to know about it.” Klein promised to raise the issue at the Senate transportation committee meeting next week. FINDING THE CASH The Department of Transportation posted the $10.2 million cash appeal bond on behalf of the contractors last July, court records show. Three top state transportation administrators, including outgoing Secretary Barry, approved the payment on behalf of the contractor-defendants, FDOT attorney McGonagill said under oath this month in a related federal patent infringement lawsuit filed by State Contracting. To come up with the cash, state records show, FDOT officials in Tallahassee created and funded “financial project 4136061.” The project then was inserted into the state’s five-year highway construction work program under the description “Patent Infringement Claim for Noise Wall Supports.” FDOT program managers established the project in a matter of days, state records show. Usually, the review process for projects in the department work program takes months, according to general information about the work program posted online by the department. McGonagill, who appeared as a defense witness for the contractors at the trial last year, is named in state records as one of the two managers of financial project 4136061. “I’m not a ‘manager,’ as that might normally be understood in government or corporate positions,” McGonagill told the Miami Daily Business Review. He declined to elaborate. According to state records, at least $21.2 million was deposited into the project’s account last year. A July 3, 2002, e-mail from Henry Lewis, an FDOT program development official, said money in the account came from two state sources: the Florida Intrastate Highway System and the Intrastate Construction Budget. Lewis did not return two phone calls seeking comment. The other $11 million of the $21.2 million project fund was put there in that account in case it’s needed to pay off a judgment in the lawsuit State Contracting has pending against the nine other contractors, said McGonagill and Stefan V. Stein, the Tampa, Fla., lawyer who represents the four contractor-defendants who lost the suit last year. “We’re very optimistic about our chances on appeal and are pursuing that very aggressively,” said Stein, who heads Holland & Knight’s national intellectual property practice. Barry, who ended his five-year tenure as transportation secretary Friday, declined to explain his decision to pay the $10.2 million on behalf of the FDOT contractors or to discuss his department’s policy regarding the use of public funds for the benefit of private parties. “I’m not at liberty,” Barry said. “I can’t or won’t talk about it.” He also said he would not authorize anyone else familiar with the matter to speak about it. Christine W. Speer and Kenneth Morefield, the two Florida assistant secretaries of transportation who signed off the appeal bond along with Barry, did not return phone calls seeking comment. McGonagill told the Review that FDOT has no policy governing the use of public funds to defend and indemnify private entities. “This is a very unique circumstance, and the department looked at that unique circumstance, just like it does often in specific project issues as well as specific litigation,” he said. Federal court records show that the FDOT’s generosity toward those contractor-defendants goes well beyond putting up the $10.2 million as security to allow the appeal to proceed. The department has paid hundreds of thousands of dollars to the Holland & Knight law firm to defend the contractors in court — as much as $600,000, according to State Contracting attorneys John H. Faro and Richard S. Ross. If the appeal fails, top department officials have written letters promising the contractors that the state will pay the full $9.5 million judgment — $9.3 million in unpaid royalties plus interest. McGonagill acknowledged that the FDOT had made written pledges to compensate the contractors for losses in the case. But in testimony at last year’s trial, he distanced himself and the department from the word indemnify. The letters aren’t “indemnification letters,” he said, “because they are not tantamount to indemnification. They are simply advising that we will be responsible for any judgment. The Department of Transportation expressly does not indemnify.” That’s hard to figure. The definitions of “indemnify” in Black’s Law Dictionary include “to restore the victim of a loss, in whole or in part, by payment, repair or replacement” and “to give security for the reimbursement of a person in case of an anticipated loss falling upon him” — which McGonagill has said is precisely what the state promised to do. In a Feb. 11 deposition, McGonagill said FDOT had the power to undertake those financial obligations for the contractors under its “general contracting authority.” On the other hand, McGonagill said he was “not aware of any written contract or written agreement whereby the department agreed to post the bond.” In the same deposition, McGonagill said it is in Florida’s “best interests” to pay the contractors’ legal fees and post the appeal bond because the state has agreed to be responsible for any damages. RIGHTS FIGHT The dispute that triggered the federal lawsuit by State Contracting against the highway contractors dates to 1990 and a separate FDOT road construction project involving the installation of anti-noise walls by another company, State Paving. Court records state that during that job, State Paving found a better way to build those walls and convinced the FDOT to accept it. One of State Contracting’s attorneys, Fort Lauderdale solo attorney Richard S. Ross, said State Paving and FDOT split the considerable dollar savings from the new post-and-pile driving technique, which cut in half the number of steps needed to erect the walls. Two years later, after patenting the process, State Paving asserted its rights to the design it had developed, and demanded royalties from both FDOT and its other contractors. The FDOT countered by saying the rules under which it agreed to accept the modified design gave the state the right to use the patented design free of charge on any future FDOT projects. FDOT was so sure of its position that in 1992, it added its unusual “special provision” to all subsequent contracts involving the use of the patented anti-noise designs. Contractors were instructed “not to include any royalties or fees associated with the alleged patent rights in [their] bid price for the sound wall, and that if any such royalties or fees were ultimately determined to be legally required … that such would be the responsibility of FDOT. FDOT was hopeful that there would be no litigation,” said a memo prepared by FDOT attorney McGonagill. State Contracting and its owner, Timothy M. Smith, subsequently acquired certain assets from State Paving, including the assignment of the patented techniques for building those noise barriers. State Contracting filed suit in 1997 after the company had failed in efforts to convince the FDOT to honor the patents, Ross said. The suit named FDOT and the contractors. Ross and his co-counsel, Miami solo lawyer John Faro, said the FDOT’s actions have sent State Contracting’s business into a prolonged tailspin. State Contracting, they said, has lost out on more than $230 million in construction contracts it should have been entitled to because of its ownership of the patents. And during that time, they said, the number of employees at State Contracting has shrunk from 175 to 12. At first, State Contracting didn’t do well in court. In 1998, Dimitrouleas ruled the FDOT was immune to suit in federal court and summarily dismissed the lawsuit against the state agency. Then, in 2000, Dimitrouleas summarily dismissed the complaint against the contractors. But State Contracting appealed on both issues. In September 2001, a unanimous three-judge panel of the U.S. Court of Appeals for the Federal Circuit in Washington, D.C., said Dimitrouleas had erred in granting summary judgment to the private contractors and ordered them to go to trial. The defendants had no right under their contracts with FDOT to use State Contracting’s patented construction techniques, the appellate panel said. After an eight-day trial last February, a federal jury in Fort Lauderdale ruled in favor of State Contracting. The jury found that seven contractor-defendants had “literally infringed” on the sound barrier wall patents. Only four of those contractors were ordered to pay money damages: Hubbard Construction, $5.4 million; Murphy Construction, $2.8 million; Condotte America, $1.1 million; and Community Asphalt, $200,000. Hubbard Construction contributed $76,500 to the Florida Republican Party and Republican Gov. Jeb Bush, state election records show. Community Asphalt contributed $2,500 to Florida’s GOP, plus $1,000 to Republican candidates. The posting of the appeal bond means that State Contracting can’t collect those money damages until the case is resolved on appeal. The appeal is once again before the U.S. Court of Appeals for the Federal Circuit, which hears all patent appeal cases. The defendants found to have infringed — but were not ordered to pay damages — are the Hardaway Co. of Columbus, Ga.; Balfour Beatty Construction Inc. of Atlanta; and Hanson Pipe & Products Southeast Inc. of Venice, Fla. All seven contractor-defendants are “permanently enjoined and restrained” by Judge Dimitrouleas from infringing further on State Contracting’s patents. TAXPAYERS FACE FURTHER PERIL Beyond the costs and liabilities connected with that lawsuit, Florida’s taxpayers face further financial peril from the FDOT’s decision to disregard State Contracting’s patents for erecting noise barrier walls. In a case dubbed “Fed 2,” and filed last year, State Contracting has sued nine more private contractors in U.S. District Court in Fort Lauderdale, alleging patent infringement. The case is once again before Dimitrouleas. Again, the FDOT is picking up the tab for Holland & Knight to represent those other contractors. “In connection with such defense, FDOT intends to be responsible for any judgment, after exhaustion of any appeals,” said one letter last March to a contractor from FDOT General Counsel Pamela S. Leslie. Leslie’s letter does not set any cap on the state’s exposure. Those contractor-defendants are: Bergeron Land Development Inc. of Fort Lauderdale; the DeMoya Group of Miami; Atlantic Underground Construction Corp. of West Palm Beach; Soundcore Inc. of Lake Worth; Cement Industries Inc. of Fort Myers; Impressions of Florida Inc. and PCL Civil Constructors Inc. of Tampa; and Modern Continental South Inc. of Pelzer, S.C.; and Gilbert Southern Corp. of Omaha, Neb. A third lawsuit by State Contracting in Broward Circuit Court accuses the FDOT of wrongly taking its patent without permission and converting it to the department’s use. It filed that suit in 1998 after Dimitrouleas ruled that the doctrine of sovereign immunity barred suit against the FDOT in federal court. The lawsuit is stayed, pending a final resolution in the original federal case. Ross said the FDOT’s decision not to pay royalties saved the state millions of dollars in constructions costs — at least temporarily. The contractor-defendants that went along also benefited, he said. First, they gained by using State Contracting’s patented techniques on state road building jobs without paying for them. The second advantage was that they got to bid on more than $200 million worth of projects that only State Contracting — by virtue of state design standards requiring the use of State Contracting’s patented construction techniques — should have been eligible to bid on, Ross said. “We will be seeking in excess of $100 million for lost profits and lost business value,” Ross said. Law editor Harris Meyer contributed to this report.

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