The secret history of Forest City's prefab plans: partner modular firm charged with sneaky business, but settlement resolves lawsuit; case file reveals threat by FCR exec
I contacted Forest City's spokesman this morning to ask for comment on behalf of the company and its partner XSite and was told, "As of now, they will not comment." I will post updates should they develop.
Developer Forest City Ratner’s ambition to build modular towers at record-setting heights, which could make Atlantic Yards profitable and launch a new prefab business, has provoked curiosity, speculation, and concern since reports of such plans surfaced in March 2011.
After all, with modular construction, Forest City might cut costs and construction time considerably. Atlantic Yards, now likely to take decades, could be completed closer to the long-promised ten-year schedule, albeit with question marks about its durability, diminished spending on jobs, and lowered tax revenues.
And, previously unreported, the modular venture has a contentious, litigious history, which for months slowed Forest City's efforts.
Today, while Forest City still faces challenges to go modular, including union negotiations and investment to start a factory, it has cleared a major hurdle.
By virtue of a legal settlement in August involving its business partner, FCR gained the expertise and financial terms it sought for assistance "in the development and implementation of a system and methodology of designing, manufacturing, and constructing modular" high-rise buildings "in a cost effective manner."
The charges in the lawsuit, aired in numerous legal papers, were settled before adjudication, thus leaving the full story ambiguous. The judge did issue two temporary restraining orders, lending some credence to the plaintiff's claims of potential harm caused by FCR's partner, whose legal defense the developer apparently funded.
The essence of the lawsuit
From Forest City's perspective, it was trying to negotiate the right transaction with the right partner, figuring out how to build 35-story-plus towers at a time when the tallest modular building rises only 25 stories. (The taller the building, the more complex the challenge, given wind and seismic stresses.)
To the Kullman Buildings Corp., which lost a potential contract and apparently has since gone out of business, Forest City benefited from its partner's alleged sneaky tactics.
As Kullman alleged in its lawsuit, FCR "was effectively able to circumvent Kullman's refusal to turn over the ownership rights in this system by the fact that Kullman's key employees collaborated a plan to work directly with FCRC under the formation of a new rival company."
Kullman not only refused to give up some rights to proprietary technology, it sought a royalty rate higher than Forest City would pay, and its CEO sought to change another key contract feature.
Forest City ceased negotiations and soon signed a contract with a new firm, XSite Modular, which agreed to a deal with different contours, including a lower price and less control of intellectual property than Kullman had sought.
XSite is staffed by former Kullman employees recruited by the recently-fired Kullman second-in-command, even as at least one was participating in communications on behalf of the firm regarding the Forest City contract.
Kullman sued XSite and six employees. The defense, denying the allegations, pointed out that employees had not signed non-compete agreements and that Kullman had failed to identify specific proprietary technology.
While the plaintiff's claims likely overreached--if Forest City had already decided to drop Kullman, could the defendants have caused the loss of that future contract?--Kullman argued that the defendants, among other things, faced a common-law duty not to act against the interests of their employer while still working there.
Forest City was not named in the suit, nor did it provoke the formation of XSite. Still, FCR played a key role, supplying testimony and, according to documents in the suit, agreeing to pay the defendants' legal fees.
(Click on graphics to enlarge)
Charged sequence, shrouded settlement
Though Forest City's relationship with Kullman began in mid-2009, the lawsuit highlights negotiations that began in late December 2010. Forest City was discussing a second contract with Kullman, a Lebanon, NJ-based firm specializing in modular construction for the education, residential, healthcare, and hospitality industries, among others. (Here's Kullman's web site, via the Internet Archive.)
Kullman, also known as Kullman Offsite Construction, built the Shake Shack at Madison Square Park in Manhattan, among other projects, using modules produced in a factory, with fixtures installed, trucked to the site for swift construction.
The new contract involved helping Forest City create “a business entity to develop, own and implement a system of designing, manufacturing and constructing” modular buildings far taller than the four stories the company had previously built. The cost per square foot might be less than half that of conventional construction.
After some negotiations in January 2011, FCR decided against working with Kullman. In a sequence that provoked “concern” from a New Jersey judge, Forest City soon signed with XSite.
Kullman ultimately sued on multiple grounds, including unfair competition, employee piracy, and breach of duty of loyalty.
In court papers, FCR stated that the decision to drop Kullman was not related to the later decision to sign with XSite. Indeed, no evidence in the case file suggests that FCR instigated the formation of XSite.
Rather, the new firm was spurred by the firing of Kullman's second-in-command--who'd had a difficult, even toxic, relationship with her boss--and her recruitment of employees dissatisfied with the CEO and dismayed about the firm's financial instability.
However, the plaintiff charged that Forest City ultimately benefited from XSite's alleged improper behavior: for example, even as Kullman was seeking the FCR contract, a key Kullman staffer, later to join XSite, discussed the new firm's plans with XSite's president, both using Kullman’s online GoToMeeting account.
The defendants were either employed by or collecting compensation from Kullman as plans were finalized for the new company that would later win the contract Kullman had previously sought.
Did XSite behave improperly as charged, and did Forest City gain the fruits of that behavior? The judge never got to rule on that.
Nor did the judge evaluate XSite's defense, which, among other things, cited the alleged "erratic" behavior of Kullman CEO Avi Telyas, his firm's "unrealistic" demands, and a failure to identify proprietary technology.
The parties--Kullman, XSite, and the individual defendants-- settled in Superior Court in Hunterdon County, NJ, on August 16, three months after the suit was filed. The settlement requires confidentiality.
By then, both sides likely had reasons to reach a settlement. A temporary restraining order, which gave credence to the plaintiff's claims of potential harm, had since July 12 fully stalled the alliance between Forest City and XSite.
Kullman, however, faced a financial squeeze. Though settlement terms were not disclosed, the balance of forces, as I suggest below, favored XSite and Forest City.
High-stakes development and a threat
Documents in the case, examined after multiple visits to the case files in New Jersey, suggest how Forest City's pursuit of cost savings can get tense.
In a memo, Brooklyn architect James Garrison, who had been working with the New Jersey-based Kullman as a consultant, warned the firm to negotiate carefully, given that Forest City was “among the most ruthless and difficult developers in the city.”
Garrison shortly afterward withdrew from the project, saying the proposed compensation, in a package deal Kullman had presented to Forest City, was inadequate.
He conveyed his departure to FCR executive MaryAnne Gilmartin, the company's Atlantic Yards point person. Gilmartin, after communication with Telyas, had believed Garrison was on board, accepting a fee far lower than Forest City had, in a pre-recession (and non-modular) iteration of its plan, projected it might pay.
Gilmartin, angry at the breakdown in negotiations, issued a threat, which Garrison described in an email to Telyas. "I had an unpleasant conversation with MaryAnne," he wrote. "I was told they know the same people I know and they’ll make sure to fuck me whenever possible."
Settlement opens path to promised housing
Since the settlement, Forest City has been free to work with XSite, a firm and partnership not previously known to the public. XSite staffers agreed to work from Forest City’s MetroTech offices.
Beyond the under-construction arena, the developer promised 16 Atlantic Yards towers, most with subsidized housing, key to gaining political support. The towers have been delayed, so modular construction could be the key to progress.
Alternatively, the modular plan may be a tactic that pushes construction unions into concessions, just as Forest City temporarily halted construction on the Beekman Tower in Lower Manhattan to renegotiate union contracts.
Also, however serious its modular plans, Forest City may not take the risk of building its long-delayed first tower via such a emerging technology.
The developer in August filed a permit for that first tower (33 stories, 375,000 sf), at the northeast corner of Dean Street and Flatbush Avenue bordering the arena, but the document hints at conventional construction.
A paradigm shift?
Should Forest City figure out how to successfully build modular towers at record-setting heights, the developer could save tens of millions of dollars per building compared to conventional construction--though only after amortizing significant start-up factory costs.
FCR, according to documents in the suit, would become more than a developer, establishing a new factory “within a reasonable distance from the Atlantic Yards Project” to build modules not only for its own projects, but also for other developers. According to a New York Times report in March 2011, FCR was scouting manufacturing sites in Long Island City.
Success would mark a major advance for Forest City, which now builds conventionally, with well-compensated union labor and subject to weather and other site constraints that can impose delays and inhibit quality control. The impact on the community from prefab construction, a Forest City executive has suggested, would be diminished because of shorter construction timetables.
Apartment modules would be assembled in a factory where workers, though in a union, earn far less than union labor at outdoor construction sites. Modular construction, by addressing the vexing challenge of bringing more affordable high-rise buildings to New York City, might revolutionize the construction industry, the Observer suggested 3/17/11.
Developers are scrambling to save money, planning to negotiate directly with unions and even start their own construction companies, Crain's New York Business reported 9/18/11.
Potential negative consequences
While the cost savings from prefab could deliver profits to the developer, the lowered expenditures likely would upend projections of new Atlantic Yards tax revenue to the city and state, part of the justification for public subsidies.
A switch also might infuriate unions that vocally supported Atlantic Yards. That's why an FCR official said last month that talks were scheduled with a key union leader.
There's much to discuss. In March, the Building and Construction Trades Council of Greater NY told Patch, “We have obvious concerns about the safety and quality of modular construction for larger buildings as well as its impact on estimates for job creation, wages and benefits that have been central to the economic justification for projects advancing,”
Settlement savings speculation
Given that the judge in the lawsuit issued a full temporary restraining order in July, XSite, likely after consultation with Forest City, had incentive to reach settlement in August.
However, Kullman, which by that time had lost business, laid off nearly a quarter of its staff, and was expecting more layoffs, likely had even more incentive, given the battle against a team with deeper pockets.
The settlement terms--presumably money to Kullman, the plaintiff--were not made public. (I queried Kullman's lawyers and Telyas was told that the settlement requires confidentiality.)
However, should Forest City’s venture be even partly successful, the litigation may have been worth it. Compared to the contract Kullman sought--but to which Forest City never agreed--the deal XSite signed represented a significant discount, saving the developer $3 million for each of the first three planned towers, and more after that.
Crucially, with that contract Forest City keeps full ownership of emerging intellectual property: the design of the system to produce modular units for buildings of such heights. Kullman had wanted to share ownership of such methodology.
Though Kullman's lawyers asserted the potential damages were significant, the still speculative nature of very tall modular buildings would complicate that claim. Moreover, if Kullman was no longer in the running for the contract, that would diminish the alleged harm caused by its former employees.
XSite, unlike Kullman, may have been better positioned to sign a lower-value contract; as a small firm, it has a low overhead and single-client focus.
For Kullman, whatever the size of the settlement, it wasn't enough to make up for the lost contract and the firm's general financial troubles. (CEO Telyas, in a 1/28/11 email in the case file, had described the Forest City project as "the bulk of my time.") The firm's web site went dark in late September and its business phone doesn't work.
Kullman expected a deal from Forest City that went beyond the consulting work to which XSite agreed; a document from the plaintiffs indicated that Kullman had planned to produce the steel frames for the modules at its factory in New Jersey.
Big potential savings, but only if challenges met
It's unclear when and whether Forest City’s modular plans will come to fruition. Forest City's Gilmartin told the Observer that the developer will decide by the end of the year whether the first tower will be modular.
The modular payoff, though a gamble, could be dramatic. Rather than take 18 months or more to build a tower, Forest City aimed--in its initial Kullman study--to erect a 35-story building in under six months. (The new permit indicates a 33-story building.)
At a goal of $161 per square foot (sf), excluding such things as foundation work and elevators, modular construction would cost well below conventional construction costs--at least after the set-up costs for a factory were amortized. (Forest City officials have said modular would cut hard costs 20-25%.)
According to documents unearthed by Brooklyn Assemblyman Jim Brennan in 2007, Forest City at that point anticipated hard costs ranging from $259 to $369 per gross sf, even as other developers cited hard costs of $350 to $400 per sf, at least for high-end condos with union labor. For Atlantic Yards, Forest City would build both condos and mixed-income rentals, with the latter expected to cost less than condos.
Still, the path isn't simple. Brooklyn architect Garrison, who initially worked with Kullman as a consultant, warned in a memo in the case file that, ”to be cost effective, [modular buildings] require development totally outside of normal building practice.”
Garrison, who was not a party to the case, told me that he thinks modular faces significant challenges: "The American modular industry typically builds up to four stories. It has not yet built a 30-plus-story modular tower or anything nearly that tall. The challenges are those of engineering, assembly, and production. "
So, whatever team Forest City has assembled, it may still be early in the process. "Industrialized buildings hold great promise, but it's not going to happen overnight," observed Garrison. "Forest City is going to have to invest and get involved over a reasonably long time to get the outcome they want."
The Atlantic Yards twist
The story revealed in the legal filings confirms comments made by real estate analyst Richard Moore, in a 7/1/07 New York Times article about Atlantic Yards. While Forest City was known for careful planning, he observed, even the most skilled developers lack a crystal ball for long-term projects.
“I could see this project taking many forms over the years,” Moore told the newspaper.
Below, a more detailed reconstruction of the case.
Beginning in 2009
The modular option emerged on Forest City’s radar screen in 2009, the year when, in the wake of global economic turmoil, the developer made cost savings a priority. FCR successfully revised separate agreements with the Metropolitan Transportation Authority (MTA) and the Empire State Development Corporation (ESDC), saving well over $100 million.
Along with the arena, Forest City pledged to start the first residential tower (known as Building 2 or Tower Two) and deliver some of the promised affordable housing. But the building's been delayed more than a year, as Forest City sought new subsidies and other savings.
One potential solution was prefab, so the developer approached Kullman. “In late 2009, I was informed by Avi Telyas that a client was interested in looking at solutions for a modular building of 30-50 stories in Brooklyn,” stated Michael Pitt, an architect from the United Kingdom who worked with Kullman as a consultant, in legal papers.
Kullman had never built a structure above four stories. Pitt had designed a nine-story building in the UK, then the tallest modular building of its time. He then produced a 12-story building. Other designs were not built, but one described a 40-story building in London, “where an effective solution for buildings of this height was produced,” according to Pitt’s certification in the lawsuit.
Kullman, the world's oldest modular company, had a long but interrupted history in the prefab business.
Kullman Industries, established in 1927, was long known for building diners, but expanded to branch banks, equipment shelters, and even U.S. embassies. However, an embassy planned for Dushanbe, Tajikistan was ultimately canceled, provoking Kullman’s bankruptcy in 2005.
Telyas, who acquired and grew the robotics firm Bayside Motion Group in 1986, sold that company, then called Bayside Controls, to the much larger Parker Hannifin Corporation, in 2005.
In 2006, Telyas bought Kullman’s assets and renamed it Kullman Buildings, introducing lean manufacturing techniques to speed production. A Harvard Business School graduate and trustee of the Pratt Institute in Brooklyn, Telyas built a booming business in the first few years.
Perhaps its most prominent project (as in this YouTube video, screenshot at left), was the summer 2007 construction of five three-story dormitory buildings, installed in just ten working days at Muhlenberg College in Allentown, PA.
The FCR discussions that began in late 2009 led to a contract about five months later. On 5/20/10, the Atlantic Yards Development Company, an arm of Forest City, agreed to pay Kullman $173,000 to “provide schematic design services for a 35-story mixed-use residential tower utilizing Consultant’s Modular Insitu-Formed Concrete System (IFCS).”
Kullman hired Arup Design Engineers as structural engineer; Michael Pitt as architectural consultant; and Mohamed Al-Hussein as the crane specialist. That study, according to Pitt, analyzed five different concepts he provided, plus a variation of one concept with Arup-suggested modifications.
Kullman’s report, which analyzed the various options and made preliminary production and cost proposals, was completed by October 2010. It recommended proceeding with the option that included the Arup modification.
All documents produced were “works for hire,” Forest City’s property, though Kullman could retain ownership of pre-existing standards (documents, drawings, processes, specifications), “except to the extent modified or improved” in connection with the services contracted.
Ambitious next step
The next step for Forest City and Kullman would be the pre-construction plan. Under a new contract, which Kullman first proposed on 12/30/10, the firm would help Forest City create “a business entity to develop, own and implement a system of designing, manufacturing and constructing” tall modular buildings.
Two phases were contemplated. The first phase, R&D (research and development), would take six months. Kullman would work with Forest City and designated architectural, engineering, and technical team members to produce design details for the project; address and resolve factory start-up issues; determine staffing and overhead requirements; and develop a protocol to ensure that the project met building code requirements.
The contract also contemplated developing a strategy for local union negotiations, a sign that Forest City recognized a significant hurdle.
The second phase, the operations phase, could last many years. Forest City would operate a business to design and manufacture modular units, with consultation by Kullman.
Durign the R&D phase, Forest City would pay Kullman's costs. During the operations phase, the developer would pay a royalty fee, at least initially.
Developing the line
Kullman, according to its CEO, offered the ability to build a better factory. "Ultimately, I believe this will be one of our key competitive advantages in that we can design lines that will assemble modules in less hours than anyone else," Telyas wrote to Roger Krulak, a Forest City executive, on 1/3/11. "This is how Toyota kicks butt."
Part of that team, to report through Kullman, was architect Garrison, a veteran in modular projects and a 2010 winner of an AIA New York Chapter Design Award,
Garrison recognized the challenges ahead. In a detailed message to Telyas on 1/8/11, Garrison proposed design and construction changes in the proposed tower. “This alone illustrates our value to this project,” he wrote. “None of the alternative firms discussed can provide this level of service. Our knowledge... will make the building and factory production process much more efficient."
Garrison stressed the “care with which this building is detailed and put together.” He warned of a modular building built for the City University of New York by another team that could not be occupied because it was so “poorly executed.”
Cost pressures and IP
However, Garrison resisted Forest City’s cost constraints. The developer’s proposed $500,000 fee to his firm, as part of the Kullman consultant package, was “simply not enough for any firm to adequately complete the CD [construction documents] package for a 380K sf apartment bldg,” he wrote.
If an adequate fee were not available, he told Telyas, “then we have to consider an alternative delivery model.”
In that memo, Garrison added what seems, in hindsight, a prescient warning about intellectual property. “With regard to protecting future leverage with FCR it is imperative that we copyright and retain the ownership of documents,” he advised Telyas. “If they can use the documents you and I become unnecessary. If they want ownership of the documents there must be a whole different fee structure.”
"I understand the position Forest City has put us in but I fear that you are blinded by the desire for this deal," he cautioned Telyas. "FCR is among the most ruthless and difficult developers in this city. If it is not in their interest they will not honor their commitments and therefore any promises for the future are useless.
Developer "ruthless and difficult"?
Was Garrison exaggerating about Forest City? Consider the developer's success in revising the MTA and ESDC deals, or in failing to hire the promised Independent Compliance Monitor for the Atlantic Yards Community Benefits Agreement.
Also, the developer’s Ridge Hill project benefited from alleged corruption in Yonkers, and while Forest City gave a no-show job to a lobbyist who was later indicted, the company was not charged.
Forest City executive Bruce Bender in December 2010 was taped having a profane exchange with state Senator Carl Kruger, now charged with corruption. Bender wanted Kruger to deliver new subsidies for Atlantic Yards work the developer was expected to do.
Also, a Forest City partner in the effort to attract immigrant investors seeking green cards in exchange for Atlantic Yards investments was caught in several misrepresentations last year. However, neither that partner nor FCR have faced consequences from the federal agency in charge of the EB-5 immigration program.
Seeming progress, but architect withdraws
Telyas and Gilmartin continued to negotiate. In a 1/10/11 email, Telyas proposed a package that he said included significant discounts on some fees previously discussed.
Gilmartin seemed pleased. “This has been a huge lift all-around,” she responded later that day. “We appreciate this and look forward to working collaboratively with you to build a viable and long-term urban modular business.”
(Gilmartin, at left in photo by Adrian Kinloch, with ESDC staffers Steve Matlin and Rachel Shatz, at 7/22/09 informational meeting on Atlantic Yards.)
However, Garrison had not agreed to the $500,000 fee that Telyas and Gilmartin discussed. Telyas was pressuring him, so he decided to contact Gilmartin separately. Garrison told her he couldn’t make it work at the fee Forest City wanted.
"She basically became irate, and said my proposal was unreasonable," Garrison recalled in an interview. And then she issued the threat that Garrison reported in that 1/10/11 email to Telyas.
Did he take the threat seriously? "I don't, because they don't really know the same people as I do," Garrison observed. "But I do think it was delivered seriously."
Gilmartin's anger, acknowledged Garrison in response to my query, might have been provoked--as court documents indicate--by believing she'd been misled about his willingness to sign on. "But she knows what the market is," he said.
Gilmartin, admittedly "intense," is the city’s 35th most powerful woman, according to Crain’s New York Business. As a boss, she told The Real Deal, "I imagine at times I'm overbearing and exhausting. Hopefully at times, uplifting, funny and inspirational."
Was architect's proposal reasonable?
Garrison, a veteran in the modular field, said that Forest City offered $500,000, while the best he could do was $1 million, already a significant discount on typical fees.
The defense in the lawsuit saw the sequence differently, paraphrasing a statement by Gilmartin:
The next significant hurdle in the negotiation was the very high fee to Garrison Architects, brought to the project by Mr. Telyas. There were also issues as to whether Mr. Telyas was going to get a fee from Garrison. In mid-January, FCRC believed it had reached a deal with Mr. Telyas, but Garrison suddenly backed out, throwing the entire situation into flux.Did Garrison's seek a "very high fee"?
According the Atlantic Yards financial projections acquired by Assemblyman Brennan, Forest City in 2007 expected to spend more than twice as much--nearly $2.5 million--on its architectural base fees for Tower 2 (335,000 sf), and much more on related architectural costs. (Click on graphic to enlarge.)
However, those are not necessarily precisely comparable, given the different methodologies at issue.
Two days after his conversation with Gilmartin, on 1/12/11, Garrison formally withdrew from the project. In a cordial memo to three Forest City executives (but not Gilmartin), he wrote:
Having designed several modular buildings I can say that they are intricate and if they are to be cost effective require development totally outside of normal building practice. They are more like product or automobile design where assembly and detail may be considered together.He closed by noting that he’d made his firm’s work available to Telyas. “It will speed you on your way,” he wrote to the FCR executives. “Best of luck.”
For that reason they take more development time than a normal building....
Unfortunately we simply could not give the project the time we believed it requires to be successful within the fee limits prescribed... Mary Anne [Gilmartin] has explained that we may be able to make up any losses in the future but I hope you can understand that this simply is not possible given the size of our office.
Deputy fired, toxic history
Meanwhile, there was turmoil at Kullman, leading to the formation of XSite. On 1/13/11, Telyas fired his deputy, Amy Marks (aka Kulka-Marks), for what is described in one case document as insubordination that had "accelerated."
Marks, in a legal certification, stated that it was “without warning or cause” though she expected he'd take revenge on her for challenging his behavior.
The legal file presents an unresolved stew of charges and counter-charges. There was apparently a close, complex, and ultimately toxic relationship between Telyas and Marks, who previously headed sales and business development at her family’s construction business. She teamed with Telyas “when she saw a rare business opportunity," according to a 2008 article in Real Estate New Jersey and helped generate a 166% revenue increase at Kullman in two years.
In legal papers, Marks stated that Telyas relied heavily on her and used her as a personal confidant--but also was verbally abusive and discriminated against her as a woman. She filed a counter-claim charging gender discrimination, a hostile work environment, and retaliation. Other defendants backed Marks and blamed Telyas for the company's financial precariousness.
By contrast, an associate of Telyas, in an email message included in the file, lodged harsh criticisms of Marks's impact on the company and on Telyas personally.
The defendants' counter-claims were never evaluated. Kullman, in legal papers, did not address the counter-claims but called them a sideshow, arguing that the defendants' written certifications should be disregarded because they ignored a court order to appear for depositions, thus avoiding cross-examination about those issues.
Indeed, the judge severed the counter-claims from the core lawsuit, moving them to a separate court, a seeming rejection of the defense argument that "unclean hands" should preclude Kullman's effort to obtain equitable relief.
In another twist not fully explained in the documents I saw, Marks wasn’t fully fired. A few days after Telyas dismissed her, he offered to keep her on the payroll until she obtained a new job or decided to return to work.
Marks agreed, according to Kullman’s papers. (That episode was unmentioned in defense papers I saw.) Marks asked to be removed from Kullman's payroll on or around 2/9/11--well after she'd formed XSite and contacted Forest City. She was paid through 2/18/11, after the XSite contract was signed, according to Kullman's papers.
Shortly after Marks was fired, according to Kullman’s papers, she and co-defendant Michael Hathaway, Kullman's Director of Pre-Construction and Estimating, began what the plaintiffs alleged as a civil conspiracy.
Hathaway left work early the day Marks was fired, claiming a doctor's appointment, and on another, claimed a doctor’s appointment for his wife.
The defense, noting that planning to join a competitor is not a breach of the duty of loyalty, stated:
Plaintiffs will be unable to prove that any of the individual defendants did more than make plans to join a new employer, XSite, while they were employed at Kullman.Hathaway and Marks did admit they attended an online meeting using Kullman’s GoToMeeting account. During that 1/18/11 meeting, Marks stated, they "discussed my business plans, which were then in a very early stage of development." They did not discuss "any of Kullman's business information."
"Kullman cannot possibly maintain that such discussion caused it any damage," the defense stated, acknowledging that the firm could claim "a technical violation" of company policy regarding use of equipment. The implication was that they were discussing only preliminary issues, not how that new company might work with Forest City on the project currently being negotiated by Kullman and the developer.
The meeting, according to the plaintiff's lawyers, lasted more than three hours. Given that Forest City is now XSite’s only client, and the new company, according to Marks, has neither pushed to market itself nor create a website, it’s questionable that the potential to work with Forest City never came up.
But that issue never went to trial.
On the next day, 1/19/11, a third party spotted Marks and Hathaway meeting offsite and reported that to Kullman.
Getting closer to a deal
Kullman’s Telyas, however, still expected a deal. On 1/24/11, he sent Gilmartin a reminder regarding the unresolved agreement. "Also, it has been many months since we were paid for the work that we have completed to date," he wrote. "I need your assistance in processing a long overdue payment."
The next day, 1/25/11, apparently in response to communication from Gilmartin, Telyas sent suggested revisions to their draft agreement.
Gilmartin responded later that day with “proposed language to address your concerns.” Her tone was encouraging, as she wrote, “let’s plan to discuss tomorrow after the kickoff.”
Despite that sign of friendliness, in a certification in the lawsuit, Gilmartin stated, "Through the course of our discussions, we developed numerous concerns about proceeding with Kullman, and particularly about our interactions with Avi Telyas."
Not quite coming to terms
Gilmartin's proposed language went only part of the way to addressing Telyas’s goals and suggested that FCR and Kullman were never on the same page.
Though Forest City had initially proposed to pay Kullman royalty fees for eight years, on an annual basis, Gilmartin agreed to more generous terms: the firm would be paid fees for ten years, on a quarterly basis.
On the issue of intellectual property (IP), however, the parties remained at odds. Telyas, apparently mindful of Garrison’s warning, objected that the modular methodology be owned by Forest City.
The developer did not relent, but agreed that for ten years it would not license the proprietary IP to any other modular builder. If Kullman identified a potential modular project, Forest City would have the right of first refusal to do that work, or charge Kullman a license fee to use the proprietary IP.
Nor did the developer agree to Telyas’s request that, if the project under negotiation fell through, any newly developed IP would revert to Kullman.
The parties met at a 1/26/11 kickoff meeting in Forest City's offices in Brooklyn, but the issue of fees remained unresolved. Also, Telyas alarmed his hosts by indicating that he wanted to substitute his name for that of Kullman on the agreement.
Only individuals, not companies, can apply for patents, so Telyas may have been anticipating future processes would be eligible for a patent. It also may have been a belated recognition that Kullman's business--at least according to his adversaries in the lawsuit--was run with less attention to protecting IP than rival companies.
That change began to scotch the deal, according to Forest City. Gilmartin stated that, once Telyas at that 1/26/11 meeting indicated that he wanted to substitute himself as the party to the agreement, that gave the firm "further pause" about working with him.
In a message the next day, 1/27/11, Telyas cited a $161/sf target cost model, meeting Forest City's goal to cut construction costs roughly in half. He sought a royalty fee of $3500 per module. (A module is not an apartment--a building with 400 units could have 1000 modules.)
Telyas also requested that royalty fees be paid for 12 years, not ten, and wanted those fees to be applied not only to units produced by Forest City but also to units produced by others for the developer using the new system. He requested a minimum quarterly payment of $750,000.
Regarding IP, Telyas proposed that Forest City and "Inventor" (himself) would jointly own and retain patents and IP. However, if Forest City chose not to proceed beyond the R&D phase, he would get back the rights to the developed IP.
That proposal didn't fly. Such terms, Gilmartin stated, "were completely unacceptable," and FCR that day decided not to work with him.
Beyond that, XSite's lawyers argued in response papers, Kullman had no standing to claim that the defendants interfered with a hoped-for continuing relationship between Kullman and Forest City, because Telyas had already modified the contract to make himself the counter-party.
From contact toward contract
When was the competing bid hatched? The timeline is fuzzy; the plaintiff charged there was significant overlap between Kullman’s pending bid and XSite’s formation, while the defense emphasized a gap in time.
Marks, in her legal papers, stated, “Approximately two or more weeks after my [1/13/11] departure from Kullman, I searched the Internet for the contact information for some representatives of FCRC.” (Marks "had involvement" with the 2010 for FCR study, according to the plaintiff's papers, so she was known to the developer. Gilmartin stated she had met Marks only once.)
Two weeks exactly would mean the contact occurred on Thursday, 1/27/11, the day Forest City said it had decided to drop Kullman. However, documents in the case suggest that Marks made contact six days later, on Wednesday, 2/2/11.
Marks spoke to Gilmartin, who asked her to send her resume. A day later, Gilmartin called again, requesting her resume. Gilmartin invited Marks to meet with her and other Forest City staffers the next day, 2/4/11, on the 37th floor at 8 Spruce Street, Forest City's new, Frank Gehry-designed Lower Manhattan apartment tower.
At the meeting, according to Marks, she was told Forest City was done with Kullman. Marks said she planned to start her own company. Forest City asked her to consult on the Tower Two prefab project.
Marks already had been contacted by Kullman employees requesting that she keep them in mind if she left, she stated. So she knew she could put a team together, especially since no Kullman employees were subject to a non-compete agreement. Marks said she used no confidential information in the negotiation.
In an email later that day, Gilmartin thanked Marks “for making time today” and said she’d attached a document detailing the scope of work once planned by Kullman, a document previously sent by Telyas to Forest City. Because there was no attachment, Gilmartin actually sent the document the next day, Saturday, 2/5/11.
On Monday, 2/7/11, Marks and Hathaway went to Brooklyn for a meeting at Forest City’s offices. “My participation in the meeting was in the nature of an interview," stated Hathaway, "as Forest City was essentially considering hiring a team, on a consulting basis, to assist it with its project.” He took a personal day off.
Had Forest City decided by 1/27?
The defense papers, as well as a certification from Gilmartin, indicate that Forest City had decided to drop Kullman by 1/27/11.
However, the plaintiff's papers cite evidence that leaves a question mark. In a 2/7/11 message, Marks told Gilmartin she was bringing Hathaway with her to a meeting that day at MetroTech:
He is a member of my team and is familiar with the project as well. He is taking a day off from Kullman, so this would of course be confidential that we are meeting. I'm assuming Roger Krulak will not be meeting with us, since [Hathaway's] presence would get back to Avi [Telyas].If Krulak, another Forest City executive, was still in contact or discussions with Telyas, that suggests that FCR either hadn't yet decided to drop Kullman or, if it had, Krulak and/or Telyas had not been informed.
New company emerges
Marks, in a document dated 2/7/11 but mailed to Gilmartin 2/8/11, sent a consulting proposal on behalf of a firm at that point named “Prefab Tech.” The team was moving so fast the company didn't have a name.
That day, according to plaintiff's papers, Hathaway again left work early, claiming a dental appointment. The next day he took another sick/personal day.
On that day, 2/9/11, Marks established the firm XSite and claimed the web address XSiteModular.com, though no web site has been set up.
The XSite Modular Team is the most experienced team in the United States in modular building design, construction and installation. Our team has designed and installed modular buildings on five of the seven continents... If you think you are in a modular building, it’s not an XSite Modular building.There are, of course, no XSite Modular buildings yet, just buildings produced by the team members at other jobs. According to the plaintiff’s papers, "The photographic images utilized by XSite in its 'representative work' include photographic images of modular buildings designed and built by Kullman."
The promotional page offered two company addresses: one is Marks’s home address in New Jersey, the other, without a phone number, at One MetroTech Center in Brooklyn, home to Forest City.
Getting to the contract
On the same day Marks claimed the XSite web address, 2/9/11, she queried Gilmartin about when FCR would have a contract for her and Hathaway to review.
On 2/11/11, Gilmartin sent Marks two versions of the consulting agreement; in the second version, according to the plaintiff’s papers; Kullman was still identified as the consultant, so “[p]resumably, the XSite contract was nothing more than a modification of Kullman's proposal." The participation of Hathaway, still at Kullman, was a condition of the proposed agreement.
The contract was modified after further negotiations. In a 2/14/11 email with the subject line, “It’s contract day!” Marks sent a revised agreement, noting that Telyas’s name and Kullman had finally been excised from the document.
She noted that she had to bump salaries/benefits up to get two staffers to commit, given that they had not had raises in five years and seen a 10% salary cut at Kullman. Also, given that one staffer had to travel from Pennsylvania, Marks wrote, “quite frankly the Brooklyn commute takes some selling.”
"My goal is that everyone can resign as of Tuesday and we can start on March 1 as discussed," Marks wrote.
A different deal
In the final agreement, signed 2/15/11, XSite agreed to a target cost of $161/sf. The agreement would last 24 weeks, expiring on 8/12/11, but could be extended.
Forest City would pay a royalty fee of $500 for each modular unit, but only for the first three building and only for units constructed within five years. Forest City had tentatively agreed to a ten-year deal with Kullman, without specifying the fee, though Telyas sought $3500 per unit.
Forest City would keep all work product emerging from the alliance with XSite.
As part of the contract, XSite agreed that staff assigned to the R&D Phase would be present “during normal business hours in FCRC’s offices [in Brooklyn] not less than three (3) full business days per week, not including Fridays.”
Three Kullman staffers resigned on February 17; one, according to the plaintiff’s papers, collected contact information from KBC factory workers, potentially helping to establish a new factory.
Only in mid-March--a month after the XSite contract was signed--did word of Forest City Ratner’s modular plans reach the New York Times, which put the news on the front page 3/17/11, then ran a follow-up the next day.
The controversy did not mention Kullman’s battle with XSite, which had not surfaced publicly.
Rather, it concerned Forest City’s ambitious plan to build modular, given that the technology was untested at such heights, as well as the dismay expressed by construction unions at the loss of potential jobs.
The case goes to court
Kullman filed suit on 5/13/11 in state court in New Jersey, home to both companies. (As noted, XSite also has an office in Brooklyn.)
Gilmartin on 5/20/11 filed a certification arguing against a temporary restraining order (TRO), stating that FCR had terminated its negotiations with Kullman before talking with Marks.
However, Somerset County Superior Court Judge Allison Accurso that day issued a partial TRO, preventing the defendants from using confidential pricing information to compete with Kullman and to return any documents belonging to Kullman.
However, she did not stop XSite from working with Forest City.
The judge added, “I have some concern about documents that the individuals have retained admittedly without being requested that they return them."
“The other thing I have concern about is in terms of the timing," Accurso stated, "the circumstance of Ms. Kulka-Marks's being terminated from the company... which I believe was on January 13th, and Forest City Ratner deciding not to use Kullman and then enter into a contract with XSite are very, very close in time."
According to an affidavit from Telyas, Marks and her team were put in a position to design the tower for Forest City based on Kullman’s pre-existing studies and technology, and in violation of Kullman’s contractual and other intellectual property rights.
published a manual of its techniques.
Moreover, the defense said, Kullman had not objected to other former employees starting businesses in the same field.
According to Marks, Telyas often said he saw no reason to apply for patents, because “he felt the value wasn’t in the technology, it was in the ‘secret sauce’ of his management techniques.”
As for Kullman’s previous study for Forest City, according to the defense, the developer already fully owned the information, given that KBC's pre-existing techniques had been “modified or improved.”
Hathaway, who was said to have taken Kullman information, acknowledged that he made an entire copy of his office computer's desktop, including both personal and professional work.
That may seem glaring; his defense was that he was not aware that it was prohibited, as such actions were so common for departing Kullman employees that the IT department helped.
The defense stated:
Clearly, Kullman is having trouble identifying any confidential information because the construction process in the modular industry is relatively standardized, and the differences between companies lies in the service they provide to their clients, and in their ability to coordinate the client’s needs, with the design of the buildings, the domain of the architects and the engineers, and finally, work as a team to bring the project to fruition. This is the ability to develop personal relationships with clients and with the professionals, the ability to manage a project, and the ability to pull a project together in a timely fashion. These are not protectable interests; these abilities travel with the individuals who possess them, and clients are entitled to work with the companies that employ people whose abilities to accomplish these goals they respect. Clearly, here, FCRC, the one former client of Kullman, who decided, prior to meeting Ms. Marks, that it was not going to proceed to phase II of its project with Kullman, saw just those qualities in Ms. Marks, and because of these qualities, permitted her to build a team to assist them in breaking new ground in modular construction.(Emphasis added)
“Just those qualities” may also have included a greater willingness to meet Forest City's preferred contractual terms.
The response: IP emerging
To Kullman, the defense posture on intellectual property missed the point, In a brief, Kullman charged that key legal cases were “not even cited or addressed by defendants in their voluminous opposition papers.” The plaintiff's brief argued:
FCRC was effectively able to circumvent Kullman's refusal to turn over the ownership rights in this system by the fact that Kullman's key employees collaborated a plan to work directly with FCRC under the formation of a new rival company.Kullman's lawyers argued that, however public Kullman had been with its information, it was disingenuous for the defense to argue that the methodologies and processes to be developed in the future would not be proprietary.
After all, the plaintiff said, the XSite agreement referred to a future proprietary system that would be owned by Forest City, and required to be kept confidential.
That dispute over IP was never resolved in court.
As the suit proceeded during May and June 2011, Kullman laid off 45 employees--of about 200--due to the loss of work.
On 7/12/11, after further exchanges of legal papers, Judge Accurso intensified the TRO. She barred XSite from doing business with Forest City, thus fully stalling their modular partnership (see below).
Two days later, Kullman’s attorney tried to up the ante, sending the court a letter indicating that “non-parties may be liable to plaintiff,” citing Forest City, company CEO Bruce Ratner, and Gilmartin. However, they were never added to the suit.
Expedited discovery, in which each party requests information and documents from the other side, was supposed to occur later in July.
Instead, the parties moved toward settlement.
The day the lawsuit was settled, 8/16/11, Forest City filed for a building permit for Tower Two. As noted, the document does not point to modular construction.
Still, if there's a connection, the developer may have felt more confident about proceeding once the lawsuit was resolved.
Modular's long future
Long before Forest City got involved, Telyas and others in the field thought that modular had huge potential.
In 2007, at the Pratt Institute in Brooklyn, Kullman began a three-year sponsorship of the Kullman Center, an Innovation Lab dedicated to innovative ideas in industrialized construction. The center sponsored a spring 2008 symposium at Pratt.
“Industrialization of the building process has remained the great unfulfilled promise of our time,” wrote architect Garrison in his introduction to Kullman's modular manual. “We now face a crisis of affordability in the construction industry. As a culture we have largely failed to deliver high-performance and durable buildings at an affordable cost.”
Telyas, in a 2/27/09 article in the magazine On Earth, asserted, “Our goal is no less than trying to reinvent the construction industry." The narrator in the Muhlenberg video said Kullman was on a mission "to fundamentally change construction as we know it today."
His rival Marks, in a 2/15/11 email message to Gilmartin, thought similarly. “I am excited to be working with you and look forward to a long relationships with you as well as... everyone at FCRC," she wrote, after the XSite contract was signed. "We have an opportunity to really change the way FCRC builds high-rise buildings.”