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Xlear, Inc. v. Wellspring Sales And Marketing, Inc.

United States District Court, D. Utah, Central Division

August 25, 2017

XLEAR, Inc., a Utah Corporation, Plaintiff,
WELLSPRING SALES AND MARKETING, Inc., a Maryland corporation, and HOPPY & COMPANY, Inc., a Florida corporation, Defendants.


          Clark Waddoups United States District Judge.

         In December 2016, the court granted Defendants' Motion to Dismiss this matter and reserved their request for attorneys' fees and costs pending further briefing from the parties. (See Dkt. No. 11.) After review of the parties' submissions and arguments at the previous hearing, as well as relevant legal authorities, the court now GRANTS Defendants' Motion for Attorneys' Fees, (Dkt. No. 4).


         At the outset, the court briefly recounts the relevant factual history that forms the basis for granting fees and costs in this case.

         On June 2, 2016, Plaintiff Xlear, Inc. (“Xlear”) filed a complaint in state court alleging Defendants Wellspring Sales and Marketing, Inc. (“Wellspring”) and Hoppy & Company, Inc. (“Hoppy”) (hereinafter jointly referred to as “Defendants”) breached contracts and implied covenants of good faith and fair dealing that Defendants had entered into with Wasatch Sales Force Management, LLC (“Wasatch”). (See generally Compl., Dkt. No. 5-1.) Xlear had previously “directed the formation” of Wasatch to manage brokerage contracts for the sale of Xlear's products. (See Id. at ¶¶ 8, 22, 41, 44.)[1] Xlear argued it was a third-party beneficiary of the Wasatch contracts because they entailed the sale of its products. (See, e.g., id. at ¶¶ 14, 20.)

         Xlear served the Defendants with the Complaint on June 23 and 25, 2016, respectively. (See Decl. of Jason Kerr ¶ 7, Dkt. No. 14-2; Dkt. No. 2-1 (return of service).) Defendants removed the case to federal court on July 22, 2016 and moved to dismiss it shortly thereafter, arguing that Xlear was not an intended third-party beneficiary to the Wasatch contracts. (Dkt. Nos. 2 & 4.) After a hearing, this court agreed and issued a ruling on the record finding that the contracts between Wasatch and Defendants were unambiguous and did not expressly or clearly designate Xlear as a third-party beneficiary. (See Dkt. Nos. 10 (Hr'g Min. Entry), 11 (Order), & 12 (Hr'g Tr.).)

         Defendants also sought their fees and costs for defending against this action. (See Dkt. No. 4 at 2, 15-16.) Defendants noted that they had just resolved, via a settlement with Wasatch, claims under the same contracts in a separate state court action litigated for over a year. (See id.; Kerr Decl. ¶¶ 4, 6.) Defendants had sued Wasatch in 2015, and Wasatch had counterclaimed asserting breaches of contract and implied covenants. (See Wasatch's Answer & Countercl., Ex. E, Dkt. No. 4-1.) Indeed, Wasatch's counterclaim mirrors much of Xlear's Complaint in this case, including similar factual allegations and the same contract claims, though re-pled as supporting Xlear's third-party beneficiary theory. (Compare Ex. E, pp. 9-23, Dkt. No. 4-1 with Dkt. 5-1.)

         The attorneys representing Wasatch in the 2015 action also represent Xlear in this action. (Kerr Decl. ¶ 5; see Dkt Nos. 4-1 & 5-1.) During the motion to dismiss hearing, Xlear's counsel admitted that no one had disclosed to the Defendants during the settlement negotiations that Xlear had previously filed the Complaint in this action asserting the same claims under the same contracts that Wasatch had previously asserted, relating to disputes that Wasatch was then settling. (See Hr'g Tr. 34:10-3, 35:3-5, 9-11, Dkt. No. 12.) Moreover, Xlear had not immediately attempted to serve the Defendants when it filed its Complaint on June 2, 2016. (See Id. at 35:6-8; Kerr Decl. ¶ 10.) Instead, service was effected less than two weeks after the Wasatch action settled on June 13, 2016. (Kerr Decl. ¶¶ 6-7.)

         Xlear's counsel argues that he was under no obligation to disclose anything about the pending lawsuit because Xlear could have, but did not, use the threat of the contract claims as a bargaining chip during the negotiations. (See Hr'g Tr. 35:17-25.) Xlear also argues that the Defendants should have known Xlear might still pursue these claims because Wasatch had voluntarily removed them from its case on the theory that they belonged to Xlear. (See Id. 36:16-37:1.) But Defendants' counsel counters that the Defendants had no knowledge at any time that Xlear intended to bring a separate lawsuit asserting the contract claims; rather, Defendants believed Wasatch withdrew those claims because Xlear's CEO had admitted during a 30(b)(6) deposition that Wasatch suffered no damages under the contracts. (See Id. 37:23-38:15; Kerr Decl. ¶ 12.)

         The parties' supplemental fees briefing further clarifies the parties' communications during the settlement negotiations. (See Dkt. Nos. 14, 15, 16, & 20.) On June 13, 2016, Defendants' counsel and Wasatch's counsel (Xlear's counsel in this case) discussed adding Xlear to the settlement agreement in addition to Wasatch. (Kerr Decl. ¶ 11.) During this discussion, counsel for Wasatch declined to add Xlear. (See Decl. of Kenneth A. Okazaki ¶ 11, Dkt. No. 7-2.)[2] Wasatch's counsel did not, however, disclose that he had already filed an action on behalf of Xlear asserting the same claims Wasatch had previously asserted and withdrawn, or otherwise give any indication that Xlear intended to pursue any claims against the Defendants after the settlement with Wasatch. (See Kerr Decl. ¶¶ 11, 13.)

         Xlear does not dispute these basic facts, but argues that counsel had no obligation to disclose the pending lawsuit because Xlear was not a party to the settlement negotiations and counsel was only acting on behalf of Wasatch during those conversations, not Xlear. (See Dkt. No. 15, pp. 4-8.) But though Xlear was not a party to the Wasatch action or settlement, both sides knew that Xlear was involved and closely associated with Wasatch. (See Kerr Suppl. Decl. ¶ 2.) Xlear's counsel appears to have represented both entities at various points during the litigation and had filed the Complaint against the Defendants on Xlear's behalf. Xlear's counsel further knew that the claims asserted on behalf of Xlear arose from and involved the same contracts and factual dispute Wasatch was settling with the Defendants. Defendants aver that they would not have entered into the settlement agreement with Wasatch if they had known they would be served with a lawsuit by Xlear days later. (Kerr Decl. ¶ 14; see Decl. of Hoppy Reodenbaugh, Ex. C, Dkt. No. 14-3; Decl. of Willam Van Vuren, Ex. D., Dkt. No. 14-4.)


         “Federal courts possess certain ‘inherent powers, ' not conferred by rule or statute, ” including “the ability to fashion an appropriate sanction for conduct which abuses the judicial process.” Goodyear Tire & Rubber Co. v. Haeger, ___ U.S. ___, 137 S.Ct. 1178, 1186 (2017) (first quoting Link v. Wabash R. Co., 370 U.S. 626, 630-31 (1962), then quoting Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991)). Where an attorney or party acts in bad faith, a district court may assess attorney's fees to reimburse legal fees and costs incurred by the other side. Id. While “inherent powers must be exercised with restraint and discretion, ” the Supreme Court recognizes the assessment of attorney's fees as “undoubtedly within a court's inherent power” and as less extreme than other inherent sanctioning power. Chambers, 501 U.S. at 44-45 (citing Roadway Express, Inc. v. Piper, 447 U.S. 752, 765 (1980)). “This sanction may attach in any bad-faith lawsuit, whether unreasonably filed or improperly continued.” Dreiling v. Peugeot Motors of Am., Inc., 850 F.2d 1373, 1382 (10th Cir. 1988) (citing Roadway, 447 U.S. at 766). “Both client and counsel may be held liable for attorney's fees.” Id. (citing Roadway, 447 U.S. at 766).

         The fee award may only compensate a party “‘for losses sustained'; it may not impose an additional amount as punishment for the sanctioned party's misbehavior.” Goodyear, 137 S.Ct. at 1186 (quoting Mine Workers v. Bagwell, 512 U.S. 821, 829 (1994)). “A fee award is so ...

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