McClure v. Imperial Woodworking Company et al

Filing 56

RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE by Magistrate Judge Kristen L. Mix on 8/9/17 re 22 Motion to Dismiss Counterclaim, Fed. R. Civ. P. 12(b)(6). The Court respectfully RECOMMENDS that the Motion 22 be DENIED. (lgale, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 16-cv-02323-MSK-KLM
RILEY McCLURE,
Plaintiff,
v.
IMPERIAL WOODWORKING COMPANY, and
IMPERIAL WOODWORKING ENTERPRISES, INC.,
Defendants.
______________________________________________________________________
RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
______________________________________________________________________
ENTERED BY MAGISTRATE JUDGE KRISTEN L. MIX
This matter is before the Court on Plaintiff’s Motion to Dismiss Counterclaim, Fed.
R. Civ. P. 12(b)(6) [#22]1 (the “Motion”). Defendant Imperial Woodworking Enterprises, Inc.
(“Enterprises”) has filed a Response [#23] to the Motion, and Plaintiff filed a Reply [#28].
Pursuant to 28 U.S.C. § 636(b)(1) and D.C.COLO.LCivR 72.1(c), the Motion [#22] has
been referred to the undersigned for recommendation. See [#24]. The Court has reviewed
the entire case file and the applicable law, and is sufficiently advised in the premises. For
the reasons set forth below, the Court respectfully RECOMMENDS that the Motion [#22]
be DENIED.

1

“[#22]” is an example of the convention the Court uses to identify the docket number
assigned to a specific paper by the Court’s case management and electronic case filing system
(CM/ECF). The Court uses this convention throughout this Recommendation.

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I. Background
Plaintiff brings this lawsuit against Defendant Enterprises,2 which “is engaged in the
business of creating and building luxury retail and hospitality interior finishes and fixtures
on a global basis,” and Defendant Imperial Woodworking Company (“Imperial”), which “is
engaged in the business of creating and building prestigious architectural woodwork
projects on a global scale.” Compl. [#7] ¶¶ 6, 8. To summarize, Plaintiff alleges that he
was employed by Enterprises as its Vice President and Project Executive and that he is
owed bonuses that he was never paid following termination of his employment. Id. ¶ 10.
Plaintiff filed the Complaint in state court on August 10, 2016. See [#1-1]. On
September 14, 2016, Defendants removed the action to this Court. Notice of Removal [#1].
On September 21, 2016, Enterprises filed an Answer [#15], which included Counterclaims
against Plaintiff. Enterprises alleged that the following actions breached Plaintiff’s duty of
loyalty to Enterprises: Plaintiff refused to settle a fee dispute with a subcontractor due to
a “personal vendetta,” which resulted in a lawsuit filed against Enterprises; Plaintiff became
angry with a significant client, who then questioned Enterprises about the integrity of its
business; and Plaintiff purposefully sold a substantial project under market price in an
attempt to financially harm Enterprises.3 Additionally, Enterprises alleges that Enterprises
and Imperial have an exclusive relationship with Decca Furniture Limited (“Decca”), a
company located in Hong Kong that is “one of the few companies in the world that can
produce high-quality woodwork and accents at below-market prices.” Answer [#15] ¶¶ 11-

2

This Defendant is referred to as “Enterprises” for clarity throughout this Recommendation.

3

The Court construes all of the well-pled allegations in the Counterclaims in favor of
Enterprises, the non-moving party. See Barnes v. Harris, 783 F.3d 1185, 1191-92 (10th Cir. 2015).

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14. Enterprises further states that if it lost Decca as a supplier, its business would be
substantially harmed or destroyed. Id. ¶ 15. Enterprises alleges that Plaintiff flew to Hong
Kong to meet with Decca’s owner, Mr. Tsang, in January 2016 after “several months of
discussion” with him. Id. The alleged content of the discussions is that Plaintiff attempted
to solicit Mr. Tsang “to terminate Decca’s contract with [Enterprises] and conduct a
competing business in the United States, managed by [Plaintiff].” Id. ¶¶ 20, 28. Plaintiff
charged Enterprises for the cost of his travel to and lodging in Hong Kong. Id. ¶¶ 29, 30.
Enterprises brings Counterclaims against Plaintiff for (1) Breach of the Duty of
Loyalty, (2) Unjust Enrichment, and (3) Declaratory Judgment. See Answer [#15] at 18-21.
Plaintiff now moves to dismiss the Counterclaims. See Motion [#22].
II. Legal Standard
The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test “the
sufficiency of the allegations within the four corners of the complaint after taking those
allegations as true.” Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir. 1994); Fed. R. Civ.
P. 12(b)(6) (stating that a complaint may be dismissed for “failure to state a claim upon
which relief can be granted”). “The court’s function on a Rule 12(b)(6) motion is not to
weigh potential evidence that the parties might present at trial, but to assess whether the
plaintiff’s complaint alone is legally sufficient to state a claim for which relief may be
granted.” Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir.
1999) (citation omitted). To withstand a motion to dismiss pursuant to Rule 12(b)(6), “a
complaint must contain enough allegations of fact ‘to state a claim to relief that is plausible
on its face.’” Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Shero v. City of Grove, Okla., 510
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F.3d 1196, 1200 (10th Cir. 2007) (“The complaint must plead sufficient facts, taken as true,
to provide ‘plausible grounds’ that discovery will reveal evidence to support the plaintiff’s
allegations.” (quoting Twombly, 550 U.S. at 570)).
“A claim has facial plausibility when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “A pleading that offers labels and
conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor
does a complaint suffice if it tenders naked assertion[s] devoid of further factual
enhancement.” Id. (brackets in original; internal quotation marks omitted).
To survive a motion to dismiss pursuant to Rule 12(b)(6), the factual allegations in
the complaint “must be enough to raise a right to relief above the speculative level.” Christy
Sports, LLC v. Deer Valley Resort Co., 555 F.3d 1188, 1191 (10th Cir. 2009). “[W]here the
well-pleaded facts do not permit the court to infer more than the mere possibility of
misconduct,” a factual allegation has been stated, “but it has not show[n] that the pleader
is entitled to relief,” as required by Rule 8(a). Iqbal, 552 U.S. at 679 (second brackets
added; citation and internal quotation marks omitted).
III. Analysis
A.

Breach of Duty of Loyalty4
The parties disagree about the applicable test for breach of duty of loyalty. Plaintiff,

relying on the Restatement (Third) of Agency, argues that the elements are: (1) the

4

When a federal court sits in diversity, it is required to apply the most recent applicable
substantive state law pronounced by the state’s highest court. Mincin v. Vail Holdings, Inc., 308
F.3d 1105, 1108 (10th Cir. 2002). Thus, the Court applies Colorado law here.

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employee took an action, (2) which resulted in a material benefit from a third party to the
employee, (3) in connection with a transaction conducted or other actions taken on behalf
of the principal, (4) except that employees are privileged to “prepare for competition.” See
Motion [#22] at 2-3. Plaintiff argues that Enterprises has failed to sufficiently allege two of
these elements: that Plaintiff acquired any material benefit from his actions, and that
Plaintiff competed with Enterprises, as opposed to preparing for competition following
termination from the company. See id. at 3. Enterprises, on the other hand, cites to a
Colorado Court of Appeals case in order to argue that it has sufficiently alleged the
following elements: (1) the employee was acting as a fiduciary, (2) the employee breached
his fiduciary duty, (3) the employer suffered damages, and (4) the employee’s breach was
the proximate cause of the employer’s damages. See Response [#23] at 4 (citing Graphic
Directions v. Bush, 862 P.2d 1020, 1022 (Colo. App. 1993)).
Here, the Court applies a different test, which was articulated in Jet Courier Serv.,
Inc. v. Mulei, 771 P.2d 486, 499-500 (Colo. 1989). The Tenth Circuit Court of Appeals, in
applying Jet Courier, stated that “courts should focus on the following factors in determining
whether an employee’s actions rise to the level of a breach of loyalty: (1) the nature of the
employment relationship; (2) the impact or potential impact of the employee’s actions on
the employer’s operations; and (3) the extent of any benefits promised or inducements
made . . . to obtain their services in the competing business.” In re Prof’l Home Health
Care, Inc., 159 F. App’x 32, 34 (10th Cir. 2005). Furthermore, the factors must be weighed,
as no one factor is determinative. Id.
1. Solicitation of Decca
As an initial matter, Plaintiff contends that Enterprises’ claim is insufficiently pled
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because it has not alleged that Plaintiff obtained a material benefit. However, whether an
employee obtains a material benefit is not a factor – let alone an element – of the test that
the Court applies here. See Prof’l Home Health Care, 159 F. App’x at 34.
Plaintiff next contends that “[t]here is no precedent for finding a breach of the duty
of loyalty based upon an employee’s solicitation of an employer’s supplier absent
aggravating circumstances.” Reply [#28] at 2; see also Motion [#22] at 10. Plaintiff argues
that the cases cited by Enterprises addressed more egregious employee actions than are
present here. Id. However, Plaintiff’s position that aggravating circumstances are required
is unsupported. Whatever the circumstances present in the other cases, here the focus is
on a weighing of the factors articulated above. Plaintiff avers: “No allegation was made
by [Enterprises] that [Plaintiff] proposed that Decca stop supplying [Enterprises] with
product. No allegation was made by [Enterprises] that [Enterprises] could not obtain
product from a different supplier. No allegation was made by [Enterprises] that it would
suffer increased costs or delay if it was required to use a different supplier.” Reply [#28]
at 3. First, the Court finds this argument unconvincing because Enterprises has stated
almost exactly those allegations. See Answer [#15] ¶¶ 13, 15, 32 (“[D]uring his face-to-face
meeting with [Decca], [Plaintiff] proposed that Decca terminate its relationship with
Enterprises”; “Decca is a unique business partner . . . in that it is one of the few companies
in the world that can produce high-quality woodwork and accents at below-market prices”;
“If Enterprises were to lose Decca as a supplier, it would substantially harm, if not destroy,
Enterprises’ business.”). Second, Enterprises is only required to plead that Plaintiff’s
actions had an impact or potential impact on its business; it is not required to meet a higher
standard. See Prof’l Home Health Care, 159 F. App’x at 34.
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Lastly, Plaintiff argues that Enterprises’ allegations are insufficient to state a claim
because Plaintiff’s conduct amounted to one conversation with Decca that was ultimately
unsuccessful, and that Plaintiff was merely preparing to compete with his employer. See
Motion [#22] at 9, 13. However, determining whether an employee was merely preparing
for competition, as opposed to engaging in actual competition, requires an analysis of the
“nature of an employee’s preparations to compete to determine if they amount to
impermissible solicitation.” Jet Courier, 771 P.2d at 497. Whether the solicitation is
effective is irrelevant. Id.; Alexander & Alexander, Inc. v. Hall and Co., Inc., No. 88-A-1621,
1990 WL 8028, at *8 (D. Colo. Jan. 31, 1990). Additionally, to the extent that Plaintiff is
arguing that Enterprises must allege that an adverse impact actually occurred, his
argument lacks merit. See Prof’l Home Health Care, 159 F. App’x at 34 (considering both
the impact and the “potential impact” of employee’s actions on employer).
Here, Enterprises alleges that Plaintiff owed a duty to Enterprises, that he utilized
Enterprises’ resources to travel to Hong Kong and solicit Decca to terminate its relationship
with Enterprises, and that the loss of the relationship with Decca would cause Enterprises
substantial harm. See Answer [#15] ¶¶ 13, 15, 32. The Court finds that these allegations,
taken in a light most favorable to Enterprises, state plausible grounds for a breach of duty
of loyalty claim. See Prof’l Home Health Care, 159 F. App’x at 34; Shero, 510 F.3d at
1200.
2. Allegations with Respect to Underbidding and Failure to Resolve Disputes
Plaintiff contends that Enterprises’ allegations that Plaintiff underbid a project, and
failed to resolve disputes with a client and a subcontractor, are insufficient because Plaintiff
did not receive any material benefit from these events. Motion [#22] at 5, 7 (“Standing
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alone these allegations do not state a cause of action for breach of the duty of loyalty
because there is no allegation that [Plaintiff] received a material benefit as the result of his
actions.”). Plaintiff also argues that these allegations simply amounted to performance
failures, rather than a breach of duty of loyalty. See Motion [#22] at 6.
As addressed above, whether Plaintiff received a benefit directly as a result of these
actions is immaterial. Additionally, even if these alleged actions amount to performance
failures, the Colorado Supreme Court in Jet Courier recognized that there were
circumstances in which the duty of loyalty was breached through a failure to perform. See
Jet Courier, 771 P.2d at 492 (citing AGA Aktiebolag v. ABA Optical Corp., 441 F.Supp. 747,
754 (E.D.N.Y.1977) (finding that “employee is bound at all times during employment to
exercise the utmost good faith and loyalty in the performance of his duties”); Las
Luminarias of New Mexico Council of the Blind v. Isengard, 92 N.M. 297, 587 P.2d 444,
449 (App.1978) (stating that “employee has duty to use best efforts”)). Here, Enterprises
alleges specifically that the underbidding was an “attempt to financially harm Enterprises.”
Answer [#15] ¶ 25. It also alleges that Plaintiff’s responsibilities included “developing and
maintaining relationships” with clients and subcontractors, which indicates that a deliberate
failure to maintain those relationships could plausibly constitute a breach of duty of loyalty.
See id.¶ 19; Iqbal, 556 U.S. at 678. Accordingly, considering the relevant factors here, the
Court finds that Enterprises has sufficiently alleged a breach of duty of loyalty, and
dismissal of the claim at this time would therefore be premature. See Prof’l Home Health
Care, 159 F. App’x at 34.
B.

Unjust Enrichment
Plaintiff argues that Enterprises’ claim for unjust enrichment “is pled only as a
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remedy for breach of the duty of loyalty” and that it “cannot stand independently if the
counterclaim for breach of the duty of loyalty is dismissed.” Motion [#22] at 14. However,
as Enterprises points out, there are “limited situations in which a claim for unjust
enrichment may piggyback on certain tort claims.” See Response [#23] at 16. While tort
claims compensate plaintiffs in order to offset the harm done, unjust enrichment “provides
an equitable, restitution-based remedy that allows the plaintiff ‘to recover the gain acquired
by the defendant through the wrongful act.’ Thus, unjust enrichment entitles the wronged
plaintiff to recover not only compensation for his own injuries, but to also strip the tortfeasor
defendant of the benefits of having perpetrated the wrongful act.” See L-3 Commc’ns Corp.
v. Jaxon Eng’g & Maint., Inc., 125 F. Supp. 3d 1155, 1175 (D. Colo. 2015) (quoting Harris
Group, Inc. v. Robinson, 209 P.3d 1188, 1205 (Colo. App. 2009)). Accordingly, the Court
respectfully recommends that the Motion [#22] be denied with respect to Enterprises’
counterclaim for unjust enrichment.
C.

Declaratory Judgment
Plaintiff has not argued that Enterprises’ request for Declaratory Judgment should

be dismissed. Accordingly, the Court does not consider this counterclaim.5
IV. Conclusion
For the reasons stated above,
The Court hereby respectfully RECOMMENDS that the Motion [#22] be DENIED.

5

The Court also notes that Plaintiff argued in the Motion [#22] that Enterprises’
counterclaim stating that the allegations made were upon “information and belief” was somehow
insufficient. See Motion [#22] at 13-14. Although Enterprises addressed the argument in the
Response, see [#23] at 16, Plaintiff did not re-argue the issue in the Reply [#28]. Accordingly, the
Court does not consider this argument.

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IT IS FURTHER ORDERED that pursuant to Fed. R. Civ. P. 72, the parties shall
have fourteen (14) days after service of this Recommendation to serve and file any written
objections in order to obtain reconsideration by the District Judge to whom this case is
assigned. A party’s failure to serve and file specific, written objections waives de novo
review of the Recommendation by the District Judge, Fed. R. Civ. P. 72(b); Thomas v. Arn,
474 U.S. 140, 147-48 (1985), and also waives appellate review of both factual and legal
questions. Makin v. Colo. Dep’t of Corr., 183 F.3d 1205, 1210 (10th Cir. 1999); Talley v.
Hesse, 91 F.3d 1411, 1412-13 (10th Cir. 1996).

A party’s objections to this

Recommendation must be both timely and specific to preserve an issue for de novo review
by the District Court or for appellate review. United States v. One Parcel of Real Prop., 73
F.3d 1057, 1060 (10th Cir. 1996).

Dated: August 9, 2017

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