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Advanced Recovery Systems, LLC v. American Agencies, LLC

United States District Court, D. Utah, Central Division

September 6, 2017



          DALE A. KIMBALL United States District Judge

         This matter is before the court on post-trial motions: (1) Advanced Recovery Systems, LLC (“ARS”), Kinum, Inc., Scott Mitchell, Blake Reynolds, and Brent Sloan's (collectively, “Defendants”)[1] Renewed Motion for Judgment As a Matter of Law Under Federal Rule of Civil Procedure 50(b) and Alternative Motion for New Trial Under Federal Rule of Civil Procedure 59(a); and (2) American Agencies, LLC's (“AA”) Motion and Petition for Punitive Damages, Litigation Expenses, and Prejudgment Interest. The parties have fully briefed the motions. The court concludes that a hearing would not significantly aid in its determination of the motions. Accordingly, the court issues the following Memorandum Decision and Order based on the memoranda submitted by the parties, as well as the law and facts relevant to the motions.


         Defendants' Renewed Motion for Judgment As a Matter of Law

         Alleging that this litigation improperly went against them at every turn, Defendants assert over thirty grounds for judgment as a matter of law. Of those thirty-nine grounds, however, only eleven were raised in Defendants' original Rule 50(a) motion for judgment as a matter of law. It is well established that “[a]rguments presented in a Rule 50(b) motion cannot be considered if not initially asserted in a Rule 50(a) motion.” Perez v. El Tequila, LLC, 847 F.3d 1247, 1255 (10th Cir. 2017). “The renewed motion under Rule 50(b) cannot assert grounds for relief not asserted in the original motion.” Marshall v. Columbia Lea Reg'l Hosp., 474 F.3d 733, 738-39 (10th Cir. 2007). This rule promotes fairness and completeness by “ensuring an opposing party has sufficient notice of an alleged error so that it may be cured before the party rests its case.” United Int'l Holdings, Inc. v. Warf (Holdings) Ltd., 210 F.3d 1207, 1229 (10th Cir. 2000). While “[t]echnical precision is unnecessary, ” Rule 50 requires that the grounds of the original motion “be stated with sufficient certainty to apprise the court and opposing counsel of the movant's position with respect to the motion.” Id. According to this precedent, this court will not consider the arguments in Defendants' Rule 50(b) renewed motion that were not adequately raised in their Rule 50(a) motion.[2]

         With respect to the arguments properly raised, the court notes that relief under Rule 50(b) is “appropriate in very limited circumstances.” Gulf Coast Shippers Ltd. P'ship v. DHL Express (USA), Inc., 2016 WL 6821798, at *1 (D. Utah Sept. 6, 2016). Rule 50(b) relief is to be “cautiously and sparingly granted.” Weese v. Schukman, 98 F.3d 542, 547 (10th Cir. 1996). A party is entitled to judgment as a matter of law “only if the evidence points but one way and is susceptible to no reasonable inferences which may support the opposing party's position.” Phillips v. Hillcrest Med. Ctr., 244 F.3d 790, 796 (10th Cir. 2001).

         “‘[I]n entertaining a motion for judgment as a matter of law . . . the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence. Credibility determinations, the weighing of evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge. Thus, although the court should review the record as a whole, it must disregard all evidence favorable to the moving party that the jury is not required to believe.'” Flitton v. Primary Residential Mrtg., Inc., 238 Fed.Appx. 410, 415-16 (10th Cir. 2007) (quoting Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 150-51 (2000)) (overturning district court's grant of post-trial motion for judgment on pleadings).

         As an initial matter, Defendants generally attack the court's preliminary instruction to the jury because it informed the jury of prior rulings by the court. However, the preliminary instruction merely gave the jury context for its role in this litigation. The jury had to be informed of rulings as to liability made as a matter of law at the summary judgment stage if the jury was to assess damages on the same claim. To the extent that the preliminary instruction stated facts, those facts were undisputed facts at the summary judgment stage. Defendants' desire to relitigate those facts at trial was procedurally improper. The court has routinely given similar preliminary instructions in other cases and does not believe that the instruction in this case prejudiced the jury against Defendants. The jury was fully instructed as to how to rule on each issue put before it and the court must assume that the jury followed all the instructions the court gave it.

         A. Interference with Contract Claim

         Defendants argue that they are entitled to judgment as a matter of law on AA's claim for tortious interference with contract because (1) it was legally impossible after June 10, 2013 for Kinum or its officers to interfere with the ARS-AA License Agreement if Kinum and ARS merged, (2) even if the court reverses the jury's successor liability verdict, AA failed to prove the existence of a valid contract after June 10, 2013, with which Defendants could have interfered, (3) AA failed to offer sufficient evidence of inducement by any Defendant before June 10, 2013, (4) AA failed to offer sufficient evidence that Kinum possessed the requisite knowledge of the AA-ARS License Agreement before June 10, 2013, and (5) AA failed to offer sufficient evidence to prove that Reynolds and Mitchell acted outside the scope of their duties as officers of ARS before the June 2012 transaction. The only two issues Defendants raised in their Rule 50(a) motion and that are properly before the court are whether Kinum had the requisite knowledge and whether Reynolds and Mitchell acted within the scope of their duties as officers. As explained by the precedent above, the court will not consider the issues Defendants failed to raise in their Rule 50(a) motion.

         (A) Kinum's Knowledge

         When viewed in the light most favorable to AA, there is substantial evidence in the record to support the jury's verdict that Kinum tortiously interfered with the AA-ARS License Agreement. With respect to the tortious interference with contract claim, the court instructed the jury, among other things, that AA had to prove that (1) Kinum either knew or should have known of the existence of the AA-ARS License Agreement, (2) Kinum's acts in inducing ARS to breach the contract with AA were intentional, and (3) the proximate result of Kinum's acts was that ARS was induced to breach the AA-ARS License Agreement.

         The following evidence supports the jury's determination that Kinum “induced” ARS to breach the AA-ARS License Agreement: (1) Kinum offered ARS' officers shares in Kinum, positions at Kinum, monthly base salaries, and cash payments to induce the officers to sell their individual interests in ARS in violation of AA's rights of first refusal; (2) Kinum agreed to pay, and did pay, for ARS' lawsuit against AA to induce ARS to sell itself to Kinum in violation of AA's rights of first refusal.

         There was substantial circumstantial evidence that Fidelis officers were aware that AA had a right of first refusal to purchase ARS. In mid-April 2013, Bruce Klinger learned that Mitchell and Reynold's plan to purchase AA fell through. At this time Klinger and Rick Rainho had telephone conversations with Sloan, Mitchell, and Reynolds who were preparing to sue AA for an alleged breach of contract that would, if successful, relieve ARS of the obligation to give AA a right of first refusal. Prior to the sale of ARS to Kinum, Sloan, Mitchell, and Reynolds sought and received legal advice regarding the enforceability of AA's right of first refusal. Klinger was aware that ARS' attorneys had taken the position that AA's alleged breach would relieve ARS' of giving AA a right of first refusal and that the lawsuit was pending at the time of Kinum's purchase. In acknowledging that he knew ARS was able to sell itself to Kinum if there was a breach, Klinger also reveals his awareness that if there was no breach, ARS was not able to sell to Kinum. A jury could conclude that Klinger admitted to knowing that AA had a right of first refusal and that ARS would violate that right by selling to Kinum before the breach of contract issue was adjudicated.

         It is undisputed that as of the effective date of the Fidelis Shareholder Agreement at least four of Kinum's six officers, prior to the sale of ARS, had known they would be interfering with AA's contractual rights absent some legal justification for the sale. Defendants' mistaken belief that AA breached the License Agreement first did not render Defendants' interference unintentional or justify Defendants' actions. Commil USA, LLC v. Cisco Sys., Inc., 135 S.Ct. 1920, 1930 (2015).

         In addition, Kinum is liable for the tortious acts of interference by its incorporators because Kinum accepted the benefits of their tortious conduct. While it is “the general rule that corporations are usually exempt from liability for the torts of their promoters or incorporators, ” this rule, “like most rules . . . has its exceptions.” Nanodetex Corp. v. Defiant Techs., 349 Fed.Appx. 312, 2009 WL 3303709, at *8 (10th Cir. 2009) (unpublished). For example, “corporations are usually prevented from retaining the benefits of wrongful conduct while escaping liability for it.” Id. In this case, after June 10, 2013, Kinum knowingly retained the benefits of the sale of ARS even though the majority, if not all, of Kinum's officers knew of AA's right of first refusal in the AA-ARS License Agreement. As such, the individual Defendants' pre-incorporation knowledge of the interference with AA's contractual right is imputed to Kinum, which retained the benefits of that tortious interference.

         (B) Reynolds and Mitchell

         Defendants claim that AA failed to offer sufficient evidence to prove that Reynolds and Mitchell acted outside the scope of their duties as officers of ARS before the June 2012 transaction. However, in effectuating ARS' sale to Kinum, Mitchell and Reynolds acted as shareholders of ARS, not officers. In executing the Fidelis Shareholder Agreement-the document by which Kinum was organized and purchased ARS-Mithcell and Reynolds never signed in their capacity as officers of ARS. The Fidelis Shareholder Agreement refers to them only as “ARS Shareholders, ” and they signed the Agreement in their capacities as new “shareholders” of Kinum. The jury found that ARS and Kinum merged. As such, Mitchell and Reynolds acted as ARS shareholders, owners in their personal capacities, when they effected the merger of ARS with Kinum. While Defendants have asserted that the sale of ARS was a mere asset sale, they jury found a merger. Rather than acting as officers for the general well being of ARS as a whole, the jury could have concluded from the evidence that Mitchell and Reynolds acted for purely personal reasons in selling their individual shares in exchange for compensation form Kinum. As a consequence of the transaction, ARS ceased to exist. The jury had evidence from which to conclude that Mitchell and Reynold's sale of ARS was not a corporate act by its officers, but a sale of its shares by its shareholders acting in their personal capacities. Therefore, holding Mitchell and Reynolds accountable for their interference would not have a chilling effect on the actions of corporate officers.

         Defendants also argue that if the court does not grant judgment as a matter of law on AA's contractual interference claim in full, a new trial is necessary on the claim based solely on allegations prior to June 10, 2013. Defendants ask the court to order a new trial focused strictly on the allegations pre-dating June 10, 2013, because there is no way to know whether or to what extent the jury based its verdict on Defendants' later conduct. At trial the parties disputed whether Kinum merged with ARS. If the jury had determined there was no merger, Kinum would have interfered with AA's contractual rights by inducing ARS to sell the ARS Software to Sajax. Therefore, there was no basis for preventing AA from arguing that the February 2014 sale to Sajax was also evidence of Defendants' interference. Defendants could have asked the court to instruct the jury that Kinum could not have been liable for any alleged acts of interference after the date of any merger, but they did not. Defendants failure to request the instruction or to make such an argument to the court during trial is not a basis for a new trial. Rather, Defendants' position on the issue is waived. Defendants reliance on United States v. McKye, 734 F.3d 1104, 1110 n.6 (10th Cir. 2013), a criminal case, is misplaced in this civil setting.

         In addition, Defendants contend that judgment as a matter of law is proper on AA's claim for consequential damages based on its tortious interference with contract claim because recovery of fees incurred in pursuit of damages against a defendant is categorically precluded by the third-party tort rule. However, this issue was not raised in Defendants' Rule 50(a) motion, and the court will not consider it.

         Furthermore, Defendants argue that judgment as a matter of law is proper on AA's claim for punitive damages in relation to its interference with contract claim because AA did not present clear and convincing evidence that Defendants acted as a result of willful and malicious or intentionally fraudulent conduct or with a knowing and reckless indifference toward AA's rights. Specifically, Defendants assert that (1) punitive damages are improper because it is undisputed that Defendants acted in reliance on the advice of counsel, (2) AA offered no evidence at trial refuting the testimony at trial that Kinum's officers lacked the requisite knowledge to support an award of punitive damages, (3) AA relies on Defendants' acts related to other claims to show a reckless disregard for AA's rights, and (4) AA offered no evidence of the aggravating circumstances required to award punitive damages under Utah law. The only grounds stated in Defendants' Rule 50(a) motion against an award of punitive damages for AA's tortious interference with contract claim was that Defendants believed that AA had materially breached the AA-ARS License agreement and that ARS had terminated that agreement. In their Rule 50(b) motion, Defendants appear to abandon that argument and instead raise several new grounds for overturning the jury's punitive damages verdict. None of these arguments were raised in Defendants' Rule 50(a) motion and are not properly before the court.

         However, to the extent that Defendants claim in its Rule 50(a) motion could be construed to be the same as the Rule 50(b) argument that Defendants could rely on counsel's advice regarding the breach, the court will address that issue. The law does not support a ruling that relying on the advice of counsel makes you immune from a punitive damages award. In fact, the jury could have reasonably inferred that Defendants sought legal advice as a cloak to their reckless behavior toward AA. See Quinby v. WestLB AG, 2008 WL 3826695, at *2 (S.D.N.Y. Aug. 15, 2008) (“Seeking advice of counsel does not as a matter of law preclude a punitive damage award; indeed, such consultation may instead establish that a defendant knew about the legal consequences of its actions.”). In this case, while Defendants claim to have relied on counsel's advice, they did not openly inform AA that it was taking such action on advice of counsel. Rather, they concealed their actions from AA. The court cannot second-guess how the jury chose to view such evidence. Accordingly, Defendants have failed to demonstrate that they are entitled to judgment as a matter of law on this issue.

         B. Civil Conspiracy Claim

         Defendants also argue that judgment as a matter of law on AA's claim for civil conspiracy to interfere with the AA-ARS License Agreement because (1) conspiracy cannot be proven without a showing that an underlying tort was committed, (2) AA has not offered sufficient evidence in support of the elements of civil conspiracy, and (3) AA has not shown that it sustained damage as a proximate result of the conspiracy's activities. Only the first of these arguments were made in Defendants' Rule 50(a) motion. Therefore, it is improper for the court to address the remaining issues.

         Although Defendants claim that there is no underlying tort as a basis for the conspiracy, the court has already addressed that there was substantial evidence at trial of Defendants' tortious interference with AA's contractual rights under the AA-ARS License Agreement. Therefore, Defendants' argument does not provide grounds for a judgment as a matter of law.

         C. Trade Secret Misappropriation Claim

         Defendants further argue that they are entitled to judgment as a matter of law on AA's claim for trade secret misappropriation because (1) the court should reverse its summary judgment ruling the ARS and Kinum misappropriated AA's trade secrets, (2) AA failed to present evidence that any of the individual defendants personally participated in any activity that would qualify as misappropriation of trade secrets under Utah's trade secret act, and (3) AA's evidence regarding lost profits damages failed to rise above speculation or provide a reasonable estimate of damages. Defendants did not raise the issue regarding lost profits in their Rule 50(a) motion. Therefore, the court will not consider that issue.

         (A) Reconsideration of Prior Ruling

         Defendants ask this court for the third time to reconsider its summary judgment ruling with respect to the trade secrets claim. Defendants' request is necessarily brought under Federal Rule of Civil Procedure Rule 59. However, “[p]rocedurally, a Rule 59(e) motion ‘is not appropriate to revisit issues already addressed or advance arguments that could have been raised in prior briefing.'” Headwater Res., Inc. v. Illinois Union Ins., 770 F.3d 885, 900 (10th Cir. 2014). Defendants argue that Kinum never acquired AA's data from ARS and, therefore, never disclosed it to Sajax, and that Kinum never used ...

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