Barranco v. 3D Systems Corporation et al
Filing
391
FINDINGS OF FACT AND CONCLUSIONS OF LAW AND ORDER. "IT IS HEREBY ORDERED that:1. Barranco breached the Non-Compete Provision of the PSA.2. As a result of Barranco's breach, 3D Systems is entitled to invoke the equit y jurisdiction of this Court and to demand an equitable accounting.3. Having performed an equitable accounting, this Court finds Barranco received no earnings, profits, or other benefits arising from his breach of the Non-Compete Provision.4. F ashioning complete relief in this case requires that Barranco disgorge, and 3D Systems recover:$229,117.94 - Salary$233,333.33 - Up Front Payment $ 0.00 - Royalty Payments$ 60,409.00 - Buyout P ayment$522,860.24 - Total5. 3D Systems is entitled to recover prejudgment interest beginning on August 3, 2011. 6. 3D Systems is entitled to recover post-judgment interest as permitted by statute.Purs uant to Federal Rule of Civil Procedure 54, judgment shall enter in favor of 3D Systems on its breach of contract counterclaim in the amount of $522,860.24." IT IS SO ORDERED. Signed by JUDGE LESLIE E. KOBAYASHI on 3/30/2018. (afc)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
)
)
Plaintiff,
)
)
vs.
)
)
)
3D SYSTEMS CORPORATION, a
Delaware corporation, 3D
)
)
SYSTEMS, INC., a California
corporation, ABRAHAM
)
)
REICHENTAL, DAMON GREGOIRE,
)
)
Defendants.
_____________________________ )
RONALD BARRANCO,
CIVIL NO. 13-00412 LEK-RLP
FINDINGS OF FACT AND CONCLUSIONS OF LAW AND ORDER
Following a jury trial, this matter came on for a oneday bench trial on the issue of equitable accounting on
November 20, 2017.
Plaintiff/Counterclaim Defendant Ronald
Barranco (“Plaintiff” or “Barranco”) was represented by Mark Poe,
Esq., and Patrick Shea, Esq.
Defendants/Counterclaimants 3D
Systems Corporation and 3D Systems, Inc. (“Defendants” or “3D
Systems”), were represented by Thomas Benedict, Esq., Dawn T.
Sugihara, Esq., and Nikole Setzler Mergo, Esq.
The Court, having
considered the declarations and evidence admitted into evidence,
the testimony at trial, and the arguments of counsel, makes the
following Findings of Fact and Conclusions of Law and Decision
pursuant to Fed. R. Civ. P. 52.
Any finding of fact that should
more properly be deemed a conclusion of law and any conclusion of
law that should more properly be deemed a finding of fact shall
be so construed.
BACKGROUND
Plaintiff originally filed his Complaint on August 23,
2013, asserting diversity jurisdiction pursuant to 28 U.S.C.
§ 1332 and venue pursuant to 28 U.S.C. § 1391(b).
[Dkt. no. 1.]
Plaintiff alleged claims against 3D Systems for breach of
contract (“Count I”), breach of employment agreement
(“Count II”), breach of the implied covenant of good faith and
fair dealing (“Count III”), fraud (“Count IV”), negligent
misrepresentation (“Count V”), unjust enrichment (“Count VI”),
and rescission (“Count VII”).
Plaintiff’s claims arose from a
Purchase and Sale Agreement (“PSA”) regarding certain web
domains.1
[Id.]
On August 19, 2014, Defendants filed counterclaims, and
on September 8, 2014, filed amended counterclaims.
nos. 89, 101.]
[Dkt.
On November 5, 2014, Defendants filed their
Amended Counterclaims Against Plaintiff (“Second Amended
Counterclaims”).
[Dkt. no. 118.]
In the PSA, Barranco agreed
not to compete with 3D Systems for a five-year period (“NonCompete Provision”).
[PSA at § 6.]
Defendants’ Second Amended
Counterclaims alleged breach of contract for violation of the
1
A copy of the PSA was received in evidence. [Decl. of
Andrew M. Johnson (“Johnson Decl.”), filed 11/17/17 (dkt. no.
374), Exh. 1 (“PSA”).]
2
Non-Compete (“Non-Compete Counterclaim”) and for failure to
completely convey all of the assets purchased under the PSA
(“Failure to Convey Counterclaim”).
On March 17, 2014, Plaintiff’s Count II was dismissed.
[Order Denying Defs.’ Motion to Dismiss Pursuant to Fed. R. Civ.
P. 12(b)(2) or, in the Alternative, to Transfer Pursuant to 28
U.S.C. § 1404 (“3/17/14 Order”), dkt. no. 37.2]
2015, Counts IV, V, and VII were dismissed.
remaining claims were Counts I, III, and VI.
On January 30,
Plaintiff’s
[Order Granting in
Part and Denying in Part Defs.’ Motion for Summary Judgment on
All Claims Against Them (“1/30/15 Order”), dkt. no. 140.3]
On May 17, 2016, a jury trial commenced.
dkt. no. 250.]
[Minutes,
On May 26, 2016, the case went to the jury.
[Minutes, dkt. no. 278.]
On May 27, 2016, the jury reached a
verdict in favor of Defendants on all claims brought by
Plaintiff.
[Special Verdict Form, dkt. no. 282.]
The jury found
for Defendants on their Non-Compete Counterclaim against
Plaintiff.
[Id.]
Specifically, the jury answered “yes” to the
following question:
“Did Barranco breach his promise not to
engage in competition with 3D Systems for five years after
signing the PSA?”
[Id. at 6.]
The jury also found 3D Systems
2
The 3/17/14 Order is available at 6 F. Supp. 3d 1068.
3
The 1/30/15 Order is available at 2015 WL 419687.
3
did not “promise to invest substantial resources into the Primary
Domains.”4
[Id. at 2.]
Plaintiff was granted judgment as a matter of law on
the Failure to Convey Counterclaim after Defendants conceded they
had not offered sufficient evidence of actual damages.
[EO:
Court Ruling Regarding the Remaining Issues in this Case, filed
6/22/16 (dkt. no. 287) (“6/22/16 EO Ruling”).]
On May 9, 2017,
this Court denied Plaintiff’s oral motion for judgment as a
matter of law on Defendants’ Non-Compete Counterclaim.
[Order
Denying Pltf.’s Oral Motion for Judgment as a Matter of Law
(“5/9/17 Order”), dkt. no. 300.5]
The 5/9/17 Order concluded the
jury’s verdict was supported by evidence showing Barranco
violated the Non-Compete Provision.
2017 WL 1900970, at *4.
Under its terms, Barranco could breach the Non-Compete Provision
by developing a competing product, or assisting another entity in
developing or providing a competing product.
Id.
Therefore, the
jury’s verdict did not require support from evidence showing the
violation of the Non-Compete Provision caused Plaintiff to be
benefitted, or Defendants to be harmed.
See id. at *4-5.
4
The
Plaintiff’s claims were premised on the theory that, if 3D
Systems had made substantial investments in the Primary Domains,
future growth in the Primary Domains’ sales and Plaintiff’s
royalty payments would have been more likely. 1/30/15 Order,
2015 WL 419687, at *1. The parties disputed whether 3D Systems
made such a promise. Id. at *10.
5
The 5/9/17 Order is available at 2017 WL 1900970.
4
Court also found the issues related to the Non-Compete
Counterclaim were “complex enough to merit an equitable
accounting,” and an equitable accounting to determine recovery,
rather than a jury finding to determine damages, was appropriate.
Id. at *4-5.
The jury made no finding as to which particular conduct
or incidents breached the Non-Compete Provision.
At the
November 20, 2017, non-jury trial, Defendants argued the jury’s
finding of liability on the Non-Compete Counterclaim was based on
“the website that [Barranco] developed for [Christopher]
Breault”; “the divulgement of the Quickparts technology”; and
“the online quoting engine that Mr. Barranco developed.”
[Trans.
of Non-Jury Trial (“11/20/17 Trans.”), filed 12/5/17 (dkt. no.
386), at 131.]
In closing arguments at the jury trial,
Defendants identified the same three bases for finding liability
on their Non-Compete Counterclaim.
[Trial - Day 5 Trans. (“Day 5
Trans.”), filed 10/13/17 (dkt. no. 340), at 77.]
Based on the jury’s finding of a breach of the NonCompete Provision and pursuant to the PSA, Defendants are
entitled to “an equitable accounting of earnings, profits and
other benefits arising from such violation.”
[PSA at § 6(f).]
The sole issue remaining for adjudication is the recovery due
Defendants because of Plaintiff’s violation of the Non-Compete
Provision.
5
For the non-jury trial, in lieu of direct testimony,
Defendants presented the declarations of Michael White; Anand
Parikh; Ronald Hollis, Ph.D.; and Andrew Johnson.
373-76.]
In lieu of direct testimony, Plaintiff presented his
declaration and the declaration of James Ketner.
70.]
[Dkt. nos.
[Dkt. nos. 369-
Plaintiff sought to present the declaration Tory Sirkin,
but that declaration was stricken.
(dkt. no. 383).]
[Minutes, filed 11/20/17
The Court also heard live testimony from
Plaintiff, Dr. Hollis, Mr. Johnson, and Mr. Ketner.
Mr. White,
Mr. Parikh, and Mr. Sirkin did not provide live testimony.
[Id.]
All exhibits indicated by stipulation, were admitted as evidence.
[Dkt. no. 380.]
Plaintiff argued Defendants’ recovery should be zero
because some of the conduct at issue did not violate the NonCompete Provision, and because none of the conduct caused him to
receive any earnings, profits, or other benefits.
Defendants
sought to recover $5,000,000 as the inherent value of the
technology Plaintiff accessed, as well as disgorgement of the
entirety of Plaintiff’s salary and all consideration paid to
Plaintiff pursuant to the PSA.
FINDINGS OF FACT
I.
Testimony and Exhibits
1.
3D printing is a process whereby three-dimensional
solid objects are created through a process called additive
6
manufacturing.
Both stereolithography and laser sintering are
additive manufacturing processes used in three-dimensional
printing.
[Direct Testimony of Ron Barranco (“Barranco Decl.”),
filed 11/17/17 (dkt. no. 369), at ¶ 7.]
3D printing contrasts
with traditional “subtractive” manufacturing processes, in which
a final part is formed by subtracting from a solid block of
material, through cutting, grinding, or other subtractive
processes.
2.
[Id.]
In 1998, Barranco launched the website domain name
stereolithography.com (“SLAC”).
[Id. at ¶ 3.]
In 2009, Barranco
launched the website domain name lasersintering.com (“LSCOM” or
“LS.com”).
[Id. at ¶ 4.]
The purpose of SLAC and LSCOM
(collectively “Primary Domains”) was to allow consumers to have a
3D object created through additive manufacturing processes.
Through the Primary Domains, a consumer with a design for an
object can obtain a quote for the manufacturing of the item and
have the object made using 3D printing techniques.
[Id. at ¶¶ 3-
4.]
A.
The Evolution of 3D Systems’ Parts Business
3.
In December 2007, 3D Systems hired Michael White
to create a website that would allow for the instant online
quotation (“IOQ”) and ordering of 3D printed parts.
[Decl. of
Michael White (“White Decl.”), filed 11/17/17 (dkt. no. 376), at
7
¶ 19.]
At the time, less than five (5) sites in the world were
able to accomplish that task.
4.
[Id.]
From December 2007 to mid-2008, Mr. White worked to
build and improve the website.
[Id. at ¶¶ 20-23.]
3D Systems
launched the new internal quoting tool in June/July 2008.
at ¶ 21.]
In October 2009, 3D Systems’ parts service was
rebranded as 3dproparts.com.
5.
[Id.
[Id. at ¶ 23.]
In April 2010, 3D Systems acquired a company called
DPT-Fast, which was one of the first companies to quote, and take
orders for, rapid prototyping parts online.
B.
[Id. at ¶ 24.]
Quickparts Technology
6.
In 1999, Dr. Hollis founded Quickparts and served as
its president and chief executive officer (“CEO”).
Quickparts
was the industry standard and market leader for the acquisition
of custom manufactured parts in the 3D printing market.
[Decl.
of Ronald L. Hollis (“Hollis Decl.”), filed 11/17/17 (dkt.
no. 373), at ¶ 6.]
7.
In 2008, Dr. Hollis was awarded a United States patent
for the invention of Instantaneous Quotation System for CustomManufactured Parts, U.S. Patent No. 7,305,367, known as
“QuickQuote.”
[Id. at ¶ 10.]
With the QuickQuote technology,
Quickparts was able to provide product designers with an instant
online quote for the manufacturing of the designers’ custom parts
from prototype to production.
By having an internet interface,
8
Quickparts expanded the market for 3D printer users by making it
easy for everyone to experience the power of additive
manufacturing.
8.
[Id. at ¶¶ 10-11.]
In February 2011, 3D Systems acquired Quickparts,
purchasing all of Quickparts’ outstanding shares in a cash
transaction, paying $15.9 million, net of cash acquired, at
closing, and a deferred payment of $7.2 million.
[Id. at ¶ 1;
Johnson Decl. at ¶ 16; Decl. of Anand Parikh (“Parikh Decl.”),
filed 11/17/17 (dkt. no. 375), at ¶ 20.]
The annual revenue of
Quickparts at the time of the acquisition was $24 million.
[Johnson Decl. at ¶ 18.]
9.
system.
Quickparts is an additive manufacturing e-commerce
The Quickparts website used patented technology to
generate instant online price quotes for custom manufactured
parts based on volume and geometry (“QP Technology”).
3D Systems
acquired Quickparts to improve the instant online quoting process
it had been developing since 2007.
[White Decl. at ¶¶ 19-28.]
The QP Technology was superior to the quoting technology 3D
Systems had developed internally through 3dproparts.com and had
acquired through the acquisition of DPT-Fast in 2010.
[Johnson
Decl. at ¶ 19; White Decl. at ¶ 28.]
10.
At the time of acquisition, Quickparts was the most
valuable intellectual capital 3D Systems had for its online parts
9
business, due to the QP Technology.
[White Decl. at ¶ 30; Parikh
Decl. at ¶ 24.]
C.
The PSA and Non-Compete Provision
11.
On April 18, 2011, Barranco and 3D Systems executed the
PSA, which was effective on April 19, 2011, for the purchase of
the Primary Domains by 3D Systems.
¶ 28.]
[PSA at § 1; Johnson Decl. at
In consideration for the PSA, Barranco granted 3D Systems
entitlement to:
title and possession of the Primary Domains; the
instant online quoting system used by the Primary Domains;
customers and customer lists; and existing license and royalty
agreements.
[PSA at § 1.]
3D Systems also received Barranco’s
promises under the Non-Compete Provision.
12.
Barranco:
[PSA at § 6.]
In consideration for the PSA, 3D Systems promised
an immediate cash payment of $250,000.00 (“Up Front
Payment”); [PSA at § 1; Johnson Decl. at ¶ 30;] royalty payments
based on sales generated by the Primary Domains (“Royalty
Payments”); [PSA at § 3;] and a right to exercise a buyout, which
would terminate the right to Royalty Payments and grant
entitlement to a lump sum payment (“Buyout”), [id. at § 4].
13.
The Royalty Payments were calculated as fifty percent
of revenue not generated by 3D Systems and received through the
Primary Domains, and five percent of revenue generated by 3D
Systems and received through the Primary Domains.
10
[Id. at § 3.]
14.
2009.
Mr. Sirkin testified he leased LSCOM from Barranco in
[Trial - Day 2 Trans. (“Day 2 Trans.”), filed 10/13/17
(dkt. no. 337), at 110.]
Because Barranco had generated the
sales from LSCOM, 3D Systems paid him fifty percent of the LSCOM
royalties.
3D Systems generated the sales from SLAC, and paid
Barranco five percent of the gross SLAC sales.
[Stipulation
Regarding Royalty Payments, filed 5/26/16 (dkt. no. 275).]
15.
The Royalty Payments totaled $210,996.02.
Decl. at ¶ 44.]
[Johnson
Of this total, from April 2011 to February 2016,
$177.799.29 were from LSCOM, and $28,893.21 were from SLAC.
An
additional, combined total of $3,403.52 was paid for the period
March 2016 to August 2016.
16.
[Id. at ¶ 32.]
The PSA provided the amount owed under the Buyout would
be calculated as the net present value of the next five years of
royalty payments, assuming the royalty payments remained at the
average level of the previous two years.
17.
[PSA at § 4.]
On August 10, 2016, Barranco exercised the Buyout.
[Johnson Decl. at ¶ 34.]
3D Systems issued Barranco a check in
the amount of $120,818.00 (“Buyout Payment”).
[Id.]
The Buyout
Payment was calculated based on royalty payments during the
period from August 2014 to July 2016.
In that period, the
average annual royalties were $4,666.00 from SLAC and $20,729.00
from LSCOM.
The total Buyout Payment consisted of $22,597.00
attributable to SLAC, and $98,221.00 attributable to LSCOM.
11
[Johnson Decl., Exh. 5 at 4 (spreadsheet calculating Buyout
Payment).6]
18.
Payment.
Barranco did not cash the check tendering the Buyout
However, the amount of the Buyout Payment is still owed
pursuant to the PSA.
19.
[11/20/17 Trans. at 92-93.]
The PSA contains the Non-Compete Provision which
prohibited Barranco from 1) engaging in any competition; or
2) becoming an employee, agent or consultant of, or acquiring or
having any proprietary or other equity interest in, or otherwise
participating or assisting in, the business of any person, firm
or business that engaged in competition for five years from the
effective date of the PSA.
20.
[PSA at § 6.]
Under the Non-Compete Provision, “‘Competition’ means
the development, design, offering, marketing, sale or provision
of services and products that have been developed, designed,
offered, marketed, sold or otherwise provided by the [purchased
web] Domains prior to the Effective Date.”
21.
[Id.]
The Non-Compete Provision prohibited more than just
monetization of a competing product; among other things, it
prohibited the development and design of competing products and
services.
[Id.; 11/20/17 Trans. at 92.]
6
Exhibit 5 to the Johnson Declaration is a copy of Trial
Exhibit 384, and consists of multiple documents that are not
consecutively paginated. All citations to Exhibit 5 refer to the
page numbers assigned by the district court’s electronic filing
system.
12
22.
The Non-Compete Provision specifically contemplated
Barranco’s employment and incorporated by reference his separate
employment agreement: “provided that Mr. Barranco may provide
services under his respective employment agreement with 3D
Systems without violating this covenant.”
23.
[PSA at § 6(b).]
The confidentiality portion of the Non-Compete
Provision governed Barranco’s disclosure of “any secret or
confidential information . . . of or belonging to the Acquired
Assets.”
[Id. at § 6(e).]
and SLAC web domains.
24.
The Acquired Assets were the LSCOM
[Id., Exh. A (listing Acquired Assets).]
Before agreeing to the Non-Compete Provision, the
parties considered factors including the consideration exchanged
for the Acquired Assets, Barranco’s access to confidential
information relating to the Acquired Assets, and 3D Systems’
interest in protecting the value of the Acquired Assets.
[PSA at
§ 6(c).]
25.
In the Non-Compete Provision, Barranco promised 3D
Systems he would not compete directly or indirectly, such as by
participating or assisting in the business of any person or
entity engaged in competition with 3D Systems.
[Id. at § 6(b).]
Barranco was aware when he executed the PSA that he had an
affirmative obligation not to compete with 3D Systems and could
not develop products that could compete with 3D Systems for a
13
period of time.
[Trial - Day 1 Trans. (“Day 1 Trans.”), filed
10/13/17 (dkt. no. 336), at 162.]
26.
Violation of the Non-Compete Provision entitles 3D
Systems “to preliminary and injunctive relief as well as to an
equitable accounting of earnings, profits and other benefits
arising from such violation.”
27.
[Id. at § 6(f).]
The equitable accounting remedy is “not exclusive,” and
is cumulative with 3D Systems’ other rights and remedies “at law,
in equity, by contract or otherwise.”
28.
[Id. at § 6(g).]
The Non-Compete Provision expired on April 18, 2016.
[Id. at § 6(b).]
D.
Significance of the Non-Compete Provision to the PSA
29.
Mr. Johnson is the vice president and chief legal
officer of 3D Systems.
[Johnson Decl. at ¶ 2.]
the PSA on behalf of 3D Systems.
Johnson drafted
[Trial - Day 3 Trans. (“Day 3
Trans.”), filed 10/13/17 (dkt. no. 338), at 32.]
30.
Johnson stated 3D Systems would not have entered into
the PSA with Barranco, nor would it have paid him the
consideration thereunder, without the Non-Compete Provision.
[Johnson Decl. at ¶ 31.]
Johnson testified the critical part of
the Non-Compete Provision for 3D Systems was not “just sales,”
and explained:
if you’re working for us or if you sell us a
business or assets, we are asking for a covenant
that you’re not developing, you’re not designing
things that are competitive with 3D Systems. To
14
buy something and to have him competing by working
against us on the side completely negates a huge
part of the value that we’ve paid for.
[Day 3 Trans. at 70.]
31.
Johnson testified that, in negotiating the PSA,
Barranco never objected to or asked questions about the NonCompete Provision.
32.
[Id.]
Damon Gregoire is the chief financial officer and
senior vice president of 3D Systems.
[Day 2 Trans. at 61.]
Mr. Gregoire stated that, in negotiating the PSA, 3D Systems
concluded the Primary Domains were not “worth nearly what
[Barranco] thought.”
[Id. at 79.]
Despite this, the deal went
through because 3D Systems reduced its exposure to the risk that
the Primary Domains would not generate sufficient earnings.
Over
the course of negotiations, the up front consideration was
reduced, and most of 3D Systems’ obligation consisted of
royalties, contingent on future sales.
[Id. at 76 (“ultimately
the way the deal was done was based on a small upfront payment
and royalties so there is not a lot of risk to it”); id. at 77
(“So we didn’t have the information to evaluate [the Primary
Domains] as a business . . . if you base it on a very small
upfront royalty, again, that lowers your risk.”); id. at 104-05
(“it’s a small upfront payment . . . $250,000, and we were paying
royalties going forward.
So if they don’t deliver, [we] are not
paying.”).]
15
E.
Value of the QP Technology
33.
Dr. Hollis, founder of Quickparts and inventor of
Quickquote, opined that the value of the QP Technology was
$5,000,000.
34.
[Hollis Decl. at ¶ 20; 11/20/17 Trans. at 63-65.]
In quantifying the value of the QP Technology,
Dr. Hollis considered the following factors:
the total amount
spent for research, development, and technology; and a premium of
two to three times that amount, representing the brain power and
innovation required to develop the code.
35.
[Hollis Decl. at ¶ 17.]
Because of its deal to acquire Quickparts, 3D Systems
retained Houlihan Lokey Financial Advisors, Inc. (“Houlihan
Lokey”) to perform a confidential valuation of the assets of
Quickparts as of February 22, 2011 (“Valuation Date”).
[11/20/17
Trans. at 102-03.]
36.
Houlihan Lokey is an international investment bank that
provides advisory services in the areas of mergers and
acquisitions, capital markets, financial restructuring and
valuation.
[Johnson Decl. at ¶ 20.]
In 2010, the firm was
ranked the number one mergers and acquisitions (“M&A”) advisor
for United States transactions.
37.
[Id.]
Houlihan Lokey’s report, entitled “Valuation Analysis
of Certain Assets of Quickparts.com, Inc. as of February 22,
2011,” was generated as a result of 3D Systems’ retention and
16
assignment.
[11/20/17 Trans. at 102-03; Johnson Decl., Exh. 3
(“Houlihan Lokey Report”).]
38.
The intangible assets included in the Houlihan Lokey
analysis of Quickparts consisted of trade names, trademarks,
customer relationships, non-compete agreements, backlog and
developed technology (“Intangible Assets”).
[Houlihan Lokey
Report at 4.]
39.
The technology Quickparts developed was one of the
Intangible Assets Houlihan Lokey evaluated.
[Id. at 27.]
The
Quickparts technology Houlihan Lokey valued was the QP
Technology, namely the Quickquote technology used to generate
instant quotes to customers and potential customers.
[Id.;
Johnson Decl. at ¶ 22.]
40.
Houlihan Lokey opined that, as of February 22, 2011,
the fair value of the QP Technology was $4.73 million.
Decl. at ¶¶ 24-26; Houlihan Lokey Report at 7, 53.]
[Johnson
Houlihan
Lokey valued the total of Quickparts’ Intangible Assets,
including the QP Technology, at $12.27 million.
[Houlihan Lokey
Report at 7.]
41.
3D Systems used Houlihan Lokey’s conclusions for
financial reporting purposes and to assist the management of 3D
Systems in allocating the purchase price among the acquired
assets of Quickparts.
[Johnson Decl. at ¶ 21.]
17
42.
The QP Technoloy is a labor-saving technology.
3D
Systems told Houlihan Lokey that the QP Technology would allow it
to avoid the salary expense of sixteen 3D Systems employees who
would otherwise “manage its quoting activities.”
Report at 52.]
[Houlihan Lokey
Houlihan Lokey derived its valuation of $4.37
million as the net present value of the expected salary savings,
adjusted for taxes.
43.
[Id. at 53.]
Houlihan Lokey used a discount rate of 23%, meaning
that the salary savings occurring in future years were calculated
to have a present value worth 23% less for each year farther out
in the future that the benefit occurs.
[Id.]
Houlihan Lokey
stated the QP Technology, which it evaluated on February 22,
2011, “undergoes approximately 20% worth of updates annually.
As
such, by 2018, the [value of the QP Technology] is estimate to be
de minimis.”
44.
[Id. at 52.]
At the time of the Quickparts acquisition, 3D Systems
valued the QP Technology at $4.73 million.
[Johnson Decl. at
¶ 25.]
F.
Violations of the Non-Compete Provision
Barranco’s Use of Private Email
45.
In an email to Sirkin sent August 3, 2011 (“8/3/11
Email”), Barranco discussed technical details of the LSCOM
website.
[Trial Exh. 291 at 1.]
18
46.
Barranco added to the 8/3/11 Email:
“PS; do not send
any email to Stereolithography.com any longer.
monitored by 3D.
This can be
NO, they cannot monitor LSCOM.”
[Id. (emphasis
in original).]
Breault’s Pro SLA website
47.
Mr. Breault no longer managed the SLAC web domain after
Barranco sold it to 3D Systems.
Barranco offered to help
Mr. Breault get a new website so he could start making money
again.
[Day 2 Trans. at 51.]
Thereafter, Barranco provided
Mr. Breault $5,200.00 to build a website named Pro SLA so
Mr. Breault could “get back involved in doing prototyping.”
[Id.
at 58.]
48.
Mr. Breault understood SLA to mean stereolithography.
[Id. at 10.]
Barranco testified that SLAC is short for “SLA” dot
com, which in turn is short for “stereolithography.com.”
Trans. at 18.]
[Day 1
The Pro SLA website was competitive to 3D Systems
with respect to stereolithography.
The QP Emails
49.
Mr. Johnson testified that Barranco, as an employee of
3D Systems, had or was given access to the QP Technology, which
was copyrighted, highly confidential and proprietary to 3D
Systems.
[Johnson Decl. at ¶ 42.]
3D Systems would never have
allowed Barranco access to the QP Technology if he had not agreed
to the Non-Compete Provision of the PSA.
19
[Id.]
50.
Sometime prior to February 19, 2012, Barranco obtained
and provided the QP Technology to David Pham.
1-3.]
[Trial Exh. 319 at
Barranco described Mr. Pham, who was not a 3D System
employee, as his “personal programmer.”
51.
[Day 1 Trans. at 163.]
In emails transmitting the QP Technology to Mr. Pham
and to Barranco’s son, R.J. Barranco (“QP Emails”), Barranco
stated:
“using this in my system is a side project to me and not
what I am being asked for with my ‘job’ . . .
I am trying ot
[sic] get the QP formula into my system for a different reason
than the task assigned to me.”
[Hollis Decl., Exh. 1 (QP Emails)
at 3;7 Day 1 Trans. at 184-85.]
52.
The proprietary QP Technology that enabled the
Quickquote patent was attached to the QP Emails.
[Parikh Decl.
at ¶ 14; White Decl. at ¶ 33; Hollis Decl. at ¶ 16; 11/20/17
Trans. at 61-63 (Hollis).]
The QP Technology contained in the QP
Emails is the most important part of the quoting/ordering
process.
[Parikh Decl. at ¶ 15; Hollis Decl. at ¶ 16.]
The
quoting/ordering process will not work without the software code
contained in the QP Emails.
[Parikh Decl. at ¶¶ 15-17.]
7
A copy of Trial Exhibit 319 is submitted as Exhibit 1 to
the Hollis Declaration. The QP Emails appear on this district
court’s electronic filing system as a single document that is not
consecutively paginated. All citations to the QP Emails refer to
the page numbers assigned by the electronic filing system to
Exhibit 1 of the Hollis Declaration.
20
53.
Mr. Johnson testified that Barranco neither had
authorization from 3D Systems to share the QP Technology with
anyone, including third party non-employees, nor permission to
use the QP Technology in a new, more powerful quoting system.
[Johnson Decl. at ¶¶ 25, 43.]
54.
As of February 19, 2012, at Barranco’s direction,
Mr. Pham had done an extensive analysis and provided Barranco
with a breakdown of the QP Technology.
Exh. 318 at 1.]
[QP Emails at 1-3; Trial
On February 20, 2012, Mr. Pham explained to
Barranco that he could convert the QP Technology into his new
system by loading the xml data into a db form and getting prices
through the system.
55.
[QP Emails at 2.]
In an email on February 21, 2012 (“2/21/12 Email”),
Barranco stated:
“This is why I gave David [Pham] a second
project of slightly less importance which is the inserting the QP
formula or converting the QP formula to php so we can actuall
[sic] install the formula into our new ‘pricing engine’ which
David did a nice job of building.”
[Trial Exh. 318 at 1.]
Barranco testified that Mr. Pham “tunneled” the QP Technology
into his server for him and was “instrumental in the transferring
of the code that was sent to me through our virtual private
network onto our server where I had control of it.”
Trans. at 21.]
21
[11/20/17
56.
The QP Technology was not of or belonging to the
Acquired Assets under the PSA.
Dr. Hollis testified that 3D
Systems acquired the QP Technology from Quickparts in February
2011.
[Hollis Decl. at ¶¶ 10-13.]
New Quoting Engine Development
57.
Mr. Sirkin testified that Barranco developed a new,
more powerful quoting engine.
[Day 2 Trans. at 144-45.]
Mr. Sirkin testified that Barranco intended him “to be able to
use his new and more powerful quoting engine” in the 3D printing
industry and on the web domains Mr. Sirkin owned.
at 145-46.]
Mr. Sirkin testified that, in June and July of 2013,
Barranco asked him to test the new quoting engine.
58.
[Day 2 Trans.
[Id. at 146.]
On March 19, 2013, in response to Mr. Sirkin’s
criticisms that LSCOM’s quoting engine, which was originally
created by Barranco, was “jacked up” and “buggy,” Barranco
responded:
“FYI I haven’t been wasting any time on the other one
I will show you something cool soon[.]”
59.
[Trial Exh. 322 at 1.]
In emails between Barranco and Mr. Sirkin on April 26,
2013 (“4/26/13 Emails”), Barranco agreed he would be able to put
IOQ technology into a web domain Mr. Sirkin owned after Barranco
filed suit against 3D Systems.
[Trial Exh. 324 at 2.]
Barranco
explained he had multiple sources for “IOQ for rtv molding,” and
among them, “one i copied from QP and Forecasts.”
(emphasis added).]
22
[Id. at 1
60.
On April 27, 2013, Barranco emailed Mr. Sirkin:
“This
weekend I am working specifically on a version of the new quote
system that would eventually be for LSCOM . . . .
Do you have
access to any [process formulas, such as] the spreadsheet type
that sales may use[?]”
61.
[Trial Exh. 323 at 1.]
On June 27, 2013, Barranco emailed Mr. Sirkin and
Mr. Pham with a subject line of “Test new system” and wrote:
“Please take some time and start looking at the new system. . . .
I dont ythink u xan beak [sic] anything.”
62.
[Trial Exh. 325 at 1.]
On July 9, 2013, Mr. Sirkin, Mr. Pham, and Barranco
coordinated a run-through and demonstration of the new quoting
system.
[Trial Exhs. 326, 327.]
63.
On September 19, 2013, upon receiving a marketing email
entitled “Quickparts Now Accepts Common 3D CAD files for online
quoting,” Mr. Sirkin asked Barranco:
engine do this?”
“Can your new quoting
[Trial Exh. 331 at 1.]
Barranco responded and
provided a list of functions of his new quoting engine.
64.
[Id.]
In emails sent September 24 and 25, 2013, Barranco told
Mr. Pham, “If ever you thought you could pull off a system . . .
now is the time. . . .
This is either leased or shelved again, I
will have to decide by this weekend.”
Barranco:
Mr. Pham replied to
“i work only on your [new quoting] system night and
day man.. [sic]
i dont’ [sic] even go out on weekends becaues
[sic] of this damn thing.”
[Trial Exh. 332 at 1.]
23
65.
In January 2014, discussing a trip to Hawai`i,
Mr. Sirkin told Barranco that “[i]t would be awesome to have that
trip also include a discussion of our bright future with 3D out
of our lives.”
66.
[Trial Exh. 334.]
In the 4/26/13 Emails, supra Finding of Fact ¶ 59,
Mr. Sirkin asked Barranco:
“You think 3D will have an issue with
a domain that you supplied IOQ to and that I run and potentially
pay you commission on?”
[Trial Exh. 324 at 2.]
Barranco replied
that the existing contract allows him “to lease quote engines to
whomever I want., [sic] I just have to split the royalties.”
[Id. at 1.]
67.
At the jury trial, Mr. Gregoire, testified that
Barranco “had plenty of other ideas and ways to monetize or he
thought monetize other web properties, web development or to
further things, and we said that would be great.
If we decide
together to do these, we will split any royalty revenues that the
company would get 50/50 with you.”
G.
[Day 2 Trans. at 84.]
Mr. Sirkin Cancels the LSCOM License
68.
Because of the problems Mr. Sirkin had with the LSCOM
quoting engine, he wanted to use the QP Technology.
Decl. at ¶ 40.]
[Johnson
Mr. Sirkin believed that he was entitled to the
QP Technology pursuant to the terms of his licensing agreement
and asked 3D Systems to provide it to him.
24
[Id.]
69.
Mr. Johnson, on behalf of 3D Systems, explained to
Mr. Sirkin that he was not entitled to use the QP Technology.
[Day 3 Trans. at 86–87.]
3D Systems was open to the concept of
licensing the QP Technology to Mr. Sirkin for a fee, but
Mr. Sirkin did not pursue it.
[Id.]
Instead, in September 2015,
Mr. Sirkin terminated his agreement with 3D Systems to license
LSCOM.
At that time, he told Mr. Johnson:
“The instant quoting
on LS.com is so dated that it hardly ever worked anyhow, which is
why we moved away from this agreement in the first place.”
[Trial Exh. 367.]
H.
Barranco’s Interaction with Galenfeha, Inc.
70.
In late December 2016, eight months after the
expiration of the Non-Compete Provision, Galenfeha, Inc.
(“Galenfeha”) CEO, James Ketner told Barranco he needed to find a
profitable company to merge with Galenfeha to give value to its
common stock.
[Direct Testimony of James Ketner (“Ketner
Decl.”), filed 11/17/17 (dkt. no. 370), at ¶ 3.]
71.
Galenfeha is headquartered in Fort Worth, Texas, and
reportedly generates revenue by earning royalties from products
it developed, providing consulting services, and directly
investing in a diversified group of businesses.
72.
[Id. at ¶ 2.]
Barranco told Mr. Ketner he knew somebody in the
additive manufacturing industry who might be willing to sell
their company.
[Id. at ¶ 3.]
The potential acquisition that
25
Barranco identified was Additive Manufacturing, LLC (“Additive
Manufacturing”), which is owned by Mr. Sirkin.
73.
[Id. at ¶ 4.]
Barranco testified that, in January 2017, a proposed
transaction was announced between Mr. Sirkin’s Additive
Manufacturing and Galenfeha for $14 Million (“Galenfeha
Transaction”).
74.
[11/20/17 Trans. at 30.]
For the acquisition, Mr. Sirkin represented to
Mr. Ketner that he was bringing a fully operational online
quoting engine to Galenfeha.
new quoting system.
[Id. at 116-117 (“We don’t need any
What we have is working just fine.
Why do
we want to pay for a new quoting system?”); Ketner Decl. at ¶ 7.]
75.
At the time the Galenfeha Transaction was announced,
Barranco was named the Chief Technology Officer (“CTO”) of
Galenfeha.
76.
[11/20/17 Trans. at 30.]
Barranco was named Galenfeha’s CTO in order to assist
with opportunities for fundraising.
[Ketner Decl. at ¶ 5.]
The
press release announcing Barranco as CTO provided a quote from
Barranco stating:
“[T]he company is exactly what I was looking
for in order to bring recently developed technology into the
marketplace . . . .
[T]he new technology I bring to Galenfeha
will position us for significant growth in the near future.”
[11/20/17 Trans. at 30-31.]
77.
Mr. Ketner testified that, ultimately, the Galenfeha
Transaction fell through because the auditors could not confirm
26
the accuracy of the revenue numbers reported by Additive
Manufacturing.
78.
[11/20/17 Trans. at 110.]
Barranco testified that, as a result of introducing
Mr. Sirkin and Mr. Ketner and proposing the Galenfeha
Transaction, he purchased Galenfeha stock.
As of November 20,
2017, Barranco is down approximately $60,000 on his Galenfeha
stock.
[Id. at 43-44.]
79.
Barranco and Mr. Ketner testified that Barranco
received no earnings, profits, or other benefits from his
interactions with Galenfeha.
[Id. at 31 (Barranco), 117-118
(Ketner).]
I.
Salary Paid to Barranco
80.
3D Systems paid Barranco $280,033.00 in salary from
April 2011 to February 2013.
[Johnson Decl. at ¶ 38; 11/20/17
Trans. at 37.]
81.
Mr. Johnson testified that, after learning about the QP
Emails during discovery in this litigation, he concluded that
Barranco “had stolen” the QP Technology.
[Day 3 Trans. at 89.]
Mr. Johnson also testified that, if 3D Systems had known of the
QP Emails, “[Barranco] would have been fired for cause.”
[11/20/17 Trans. at 84.]
82.
Mr. Johnson testified 3D Systems hired Barranco to
perform other tasks before the PSA was executed, but after the
27
PSA was executed, Barranco’s responsibilities included working on
the Primary Domains.
83.
[Id. at 74.]
Mr. Johnson testified that Barranco’s title at 3D
Systems was “Manager of Print3D.”
[Id. at 75.]
The PSA does not
offer Barranco employment because, before the PSA was executed,
Barranco “was hired as manager for Print 3D as part of his
responsibilities, but like any employee, he had multiple
responsibilities, including working on the domains.”
J.
[Id.]
Lack of Earnings, Profits, or Other Benefits
84.
Barranco testified that he has received no “earnings,
profits, or other benefits from the development of, or
participation in, any services and products that were developed,
designed, offered, marketed, or sold provided by the Domains
prior to the effective Date.”
85.
[Barranco Decl. at ¶ 23.]
Barranco testified that, in the 2014, 2015, and 2016
tax years, his taxable income consisted only of the Royalty
Payments and the Buyout Payment.
[Id. at ¶¶ 24-27.]
Barranco’s
tax returns were received in evidence, and corroborate that
testimony.
[Trial Exhs. 50-52; Minutes, filed 2/5/2018 (dkt.
no. 389) (admitting certified tax returns into evidence).]
II.
Findings
Having considered the declarations, jury trial
testimony, non-jury trial testimony, and exhibits submitted by
the parties, the Court finds as follows:
28
A.
Payments Beteween the Parties
86.
3D Systems paid Barranco $280,033.00 in salary for work
from April 2011 to February 2013.
87.
Under the PSA, Barranco received:
an Up Front Payment
of $250,000.00; total Royalty Payments of $210,996.02; and a
Buyout Payment of $120,818.00.
B.
Value of the QP Technology
88.
The Houlihan Lokey methodology credibly estimates the
value of the QP Technology to 3D Systems at the time of the
Valuation Date.
Specifically, the Court finds 3D Systems could
expect a flow of future cost savings as a result of using the QP
Technology, rather than sixteen salaried employees, to manage its
quoting activities.
The Court therefore finds, as of
February 22, 2011, the net present value of the future benefits
3D Systems expected from the QP Technology was $4.73 million.
89.
The Court makes no finding as to the value of the QP
Technology today.
The February 2011 estimate of saving the
salaries of sixteen employees is stale.
No evidence shows what
benefits the QP Technology causes today, whether it is still in
use, or whether similar or superior quoting engines are now
available.
No evidence shows how the February 2011 or February
2012 version of the QP Technology compares to the current
version.
29
90.
The Houlihan Lokey report shows users of the QP
Technology experience benefits to the extent the QP Technology
causes labor savings.
C.
Violations of the Non-Compete Provision
Barranco’s Use of Private Email
91.
The 8/3/11 E-Mail is part of conduct violating the Non-
Compete Provision.
Breault’s Pro SLA website
92.
Barranco and Mr. Breault credibly testified that
Barranco provided Mr. Breault $5,200.00 to help Mr. Breault
obtain a new website.
93.
The record does not indicate precisely when Barranco
helped Mr. Breault obtain a new website, but it is clear this
occurred soon after the Effective Date of the PSA.
94.
Mr. Breault’s website was named Pro SLA.
refers to stereolithography.
This name
The SLAC web domain name, one of
the Primary Domains, also refers to stereolithography.
95.
Barranco’s involvement with the Pro SLA website
assisted Mr. Breault with the development of a product or service
competing with SLAC, and therefore violated the Non-Compete
Provision (“Pro SLA Violation”).
96.
There is no evidence Barranco received any earnings,
profits, or other benefits arising from the Pro SLA Violation.
No evidence shows Barranco’s involvement with the Pro SLA website
30
caused him to receive:
salary or wages; royalties or sales
commissions; any property interest in anything related to the Pro
SLA website.
The QP Emails
97.
The QP Emails show, at least from February 19 to 21,
2012, Barranco worked with Mr. Pham and R.J. Barranco to develop
or design instant online quoting.
98.
The QP Emails show at least a portion of Barranco’s
development effort was undertaken independently, and not as part
of his employment with 3D Systems.
Therefore, the development
effort is not covered by the exception allowing Barranco to
“provide services under his [] employment agreement with 3D
Systems.”
99.
[PSA at § 6(f).]
The parties intended the confidentiality portion of the
PSA to govern only disclosures of confidential information that
is of, or belonging to, the Primary Domains.
The QP Technology
was not of, or belonging to, the Primary Domains.
The QP Emails
therefore did not violate the confidentiality portion of the NonCompete Provision.
100. The Primary Domains offered instant online quoting
before Barranco conveyed them to 3D Systems under the PSA.
Therefore, Barranco’s development effort violated the Non-Compete
Provision of the PSA (“QP Emails Violation”).
31
101. No evidence shows Barranco received any earnings,
profits, or benefits arising from the QP Emails Violation.
102. Mr. Johnson credibly testified that, after learning of
the QP Emails, 3D Systems conducted an investigation because it
was concerned that it had lost the ability to control the use and
further dissemination of the QP Technology.
Mr. Johnson also
credibly testified that he was not aware of any evidence of use
or further dissemination of the QP Technology because of
Barranco.
This testimony occurred five years and nine months
after Barranco sent the QP Emails.
No evidence shows any further
use or dissemination of any portion of the QP Technology.
103. Barranco gained access to the QP Technology in his
capacity as an employee of 3D Systems.
Barranco’s access to the
source code attached to the QP Emails occurred prior to, and not
because of, the QP Emails Violation.
104. Dr. Hollis credibly authenticated the source code
attached to the QP Emails as being some portion of the QP
Technology source code.
However, on cross-examination,
Dr. Hollis could not say what the function of that code was, or
whether it was a significant part of the QP Technology.
This
Court therefore makes no findings as to the relationship between
the source code attached to the QP Emails and the QP Technology.
Specifically, this Court can make no inference, based on the QP
Technology, as to:
the inherent value of the source code
32
attached to the QP Emails; the benefits of possessing or using
the attached source code; or the harm disclosing that source code
might cause 3D Systems, either in February 2012 or now.
New Quoting Engine Development
105. Barranco’s efforts to develop a new quoting engine
were efforts to develop or design a product or service that would
compete with the quoting engine Barranco sold to 3D Systems under
the PSA, and were therefore prohibited under the Non-Compete
Provision (“Quoting Engine Development Violation”).
106. The Quoting Engine Development Violation occurred at
least beginning on March 19, 2013, and persisted at least until
September 25, 2013.
107. No evidence shows the Quoting Engine Development
Violation resulted in any product or service that was ever
commercialized.
108. No evidence shows the Quoting Engine Development
Violation caused Barranco to receive:
salary or wages; royalties
or sales commissions related to the use of a new quoting engine;
any money from selling or licensing a new quoting engine; or
ownership of any intellectual property rights.
D.
The Galenfeha Transaction
109. There is no evidence Barranco brought any technology to
Galenfeha that he designed or developed in violation of the NonCompete Provision.
33
110. Mr. Ketner and Barranco credibly testified that the
Galenfeha Transaction fell through, and Barranco received no
earnings, profits, or other benefits because of his involvement
with Galenfeha.
111. Barranco credibly testified that he lost money on
Galenfeha stock, is no longer Galenfeha’s CTO, and was not paid
during his tenure as CTO.
E.
Effects Caused by the Violations
112. In light of evidence showing Barranco’s income in 2014,
2015, and 2016 consisted only of payments made pursuant to the
PSA, there is no evidence that Barranco obtained earnings,
profits, or other benefits that could be attributed to any
enhanced stature because of any of the 8/3/11 Email, Pro SLA
Violation, QP Emails Violation, or Quoting Engine Development
Violation (collectively, “Violations”).
113. There is no evidence the Violations diminished the cost
savings the QP Technology caused 3D Systems or otherwise harmed
3D Systems’ use and enjoyment of the QP Technology.
114. No evidence shows Barranco caused 3D Systems to lose
sales, to lower its prices, or to suffer reduced profit margins.
115. Mr. Johnson credibly testified 3D Systems would have
fired Barranco for cause if it had learned of the QP Emails while
Barranco was still an employee.
There is evidence that shows the
QP Emails Violation would have caused Barranco not to receive
34
some of the payments he did receive from 3D Systems.
Specifically, if 3D Systems had discovered the QP Emails
Violation, Barranco would have been fired for cause and would not
have received his full salary.
F.
Barranco’s Salary
116. Of the four Violations, the 8/3/11 Email, the Pro SLA
Violation, and the QP Emails Violation occurred while Barranco
was employed by 3D Systems, and the Quoting Engine Development
Violation occurred afterward.
117. Mr. Johnson credibly testified 3D Systems would have
fired Barranco for cause if it had learned of the QP Emails while
Barranco was still an employee.
118. The Non-Compete Provision specifically contemplated
Barranco’s employment with 3D Systems and incorporated by
specific reference his employment agreement, and thus the PSA
incorporated Barranco’s employment agreement.
119. Barranco’s salary was consideration for his employment
agreement as well as the Non-Compete Provision.
120. Of the $280,033.00 in salary Barranco received for work
from April 2011 to February 2013, because the 8/3/11 Email was
the first violation of the Non-Compete Provision and the February
2012 QP Emails were grounds for termination with cause,
35
$229,117.91 represents the amount of Barranco’s unjust
enrichment.8
G.
Consideration Attributable to the Non-Compete Provision
121. Barranco possessed confidential information about the
Primary Domains sold under the PSA.
122. Mr. Johnson credibly testified that, if Barranco were
to compete against the assets conveyed under the PSA, this would
undermine the value of the assets 3D Systems had purchased.
123. Mr. Johnson credibly testified that, without the NonCompete Provision, 3D Systems would not entered into the PSA to
acquire the Primary Domains from Barranco or have offered him the
consideration that it did.
124. Mr. Johnson credibly testified that, over the course of
negotiating the PSA, Barranco could have objected to the NonCompete Provision, but he did not.
125. 3D Systems valued both the covenant not to sell
competing products or services for five years (“No-Sales
Covenant”) and the covenant not to develop or design competing
products or services for five years (“No-Development Covenant”)
contained within the Non-Compete Provision.
126. The No-Sales Covenant primarily benefits 3D Systems
during the first five years after the Effective date of the PSA,
8
$229,117.91 is $12,728.77 per month for 18 months in which
violations of the Non-Compete Provision occurred.
36
before the Non-Compete Provision has expired.
During that time,
the No-Sales Covenant prohibits Barranco from selling in
competition with the Acquired Assets.
127. The No-Development Covenant primarily benefits 3D
Systems after the first five years, when the Non-Compete
Provision is recently expired.
The No-Development Covenant
prevents Barranco from immediately entering the market and
selling in competition with 3D Systems by delaying Barranco’s
entry until he can first develop and design a competing product.
It thereby further extends the period during which the Acquired
Assets are protected from Barranco selling a competing product or
service.
This extra benefit is of limited duration:
after
Barranco takes the time necessary to develop or design a
competing product, he can enter the market and sell in
competition with the Primary Domains.
128. The No-Development Covenant also protects 3D Systems
against risks that arise from the difficulty of detecting and
proving violations and of detecting and proving the earnings that
arise from such violations.
The No-Development Covenant deters
the undertaking independent development efforts, which if
successful, might cause temptation to disregard the Non-Compete
Provision and to sell in competition.
129. The No-Development Covenant is a detrimental promise
made by Barranco.
Some portion of the consideration Barranco
37
received under the PSA compensates Barranco for the
No-Development Covenant.
If the PSA had omitted the No-
Development Covenant, Barranco would have received a lesser
consideration in exchange from 3D Systems.
130. Because the Buyout right benefits Barranco in
proportion to expected later-year sales, the Buyout Payment is
the part of the consideration most related to the No-Development
Covenant.
131. The Royalty Payments, which are proportional to actual
sales in the inner years of the agreement, are the part of the
consideration most related to the No-Sales Covenant, which only
protects sales during the first five years.
132. At least some part of the consideration exchanged under
the PSA supports Barranco’s No-Development Covenant.
133. Not all of the consideration is for the breached NoDevelopment Covenant.
The consideration Barranco received also
supports his conveyance of the Acquired Assets to 3D Systems and
his agreement to split the revenues generated by the Acquired
Assets.
The August 10, 2016 Buyout Payment is also consideration
for the termination of Barranco’s right to receive any royalties
based on the revenues from the Acquired Assets.
134. Of Barranco’s $120,818.00 Buyout Payment, $22,597.00 is
attributable to Barranco’s right to a 5% royalty on the SLAC web
domain, and $98,221.00 is attributable to Barranco’s right to 50%
38
of royalties from the LSCOM web domain.
Because 3D Systems
retains title and possession of the Primary Domains, it would
effect an unfair penalty for Barranco to forfeit all of the
consideration he received for conveying the Primary Domains to 3D
Systems.
Further, 3D Systems received its 95% and 50% share of
the revenues generated by the Primary Domains before Barranco
exercised the Buyout on August 10, 2016, and 100% of the revenues
generated after exercise of the Buyout.
135. The jury found 3D Systems did not promise to invest
substantial resources into the Primary Domains.
136. Evidence of the Violations shows Barranco breached the
No-Development Covenant starting from at least August 3, 2011,
four months after the Non-Compete Provision was effective.
137. Barranco would be unjustly enriched if he retained the
portion of the consideration attributable to the No-Development
Covenant when he subsequently breached that promise.
138. Of the $120,818.00 Buyout Payment, some part is
consideration for the expected earnings the Primary Domains will
generate.
Some part is consideration for the protection of those
earnings attributable to the No-Sales Covenant and the
No-Development Covenant contained in the Non-Compete Provision.
139. Given that Barranco violated the No-Development
starting from at least August 3, 2011, four months after the NonCompete Provision was effective, it would be unjust for Barranco
39
to retain the entire $120,818.00 Buyout Payment.
The portion of
the Buyout Payment representing Barranco’s unjust enrichment is
$60,409.00.
140. Of the $250,000.00 Up Front Payment, some part is
consideration for:
1) the Primary Domains’ expected earnings
during the first five years after the Effective Date; 2) the
protection of those earnings by the No-Sales Covenant; 3) the
Primary Domains’ expected earnings soon after the expiration of
the Non-Compete Provision; 4) the protection of those earnings by
the No-Development Covenant; and 5) the Primary Domains’ expected
earnings long after the expiration of the Non-Compete Provision,
for which the No-Development Covenant affords no extra
protection.
141. Because Barranco breached the No-Development Covenant
starting from at least August 3, 2011, four months after the
Non-Compete Provision was effective, it would be unjust for
Barranco to retain the entire $250,000.00 Up Front Payment.
The
portion of the Up Front Payment representing Barranco’s unjust
enrichment is $233,333.33, or $4,166.66 per month for each of the
56 months following the initial breach.
142. Barranco received Royalty Payments, based on the
revenues generated by the Acquired Assets at rates set in the
PSA.
Of the $210,996.02 in Royalty Payments, no part represents
40
the consideration for the No-Development Promise, and therefore
Barranco is not unjustly enriched by its retention.2332233
143. The total amount of Barranco’s unjust enrichment
related to the Violations is $522,860.24.
See supra, Findings of
Fact ¶¶ 120, 138-41.
CONCLUSIONS OF LAW
A.
Jurisdiction and Venue
1.
This Court has jurisdiction pursuant to 28 U.S.C.
§ 1332 and venue pursuant to 28 U.S.C. § 1391(b).
B.
Choice of Law
2.
The PSA is governed under Hawai`i law.
See 1/30/15
Order, 2015 WL 419687 (analyzing PSA under Hawai`i contract law);
see also Arrowood Surplus Lines Ins. Co. v. Paul Ryan Assocs.,
Inc., CIVIL 13-00505 LEK-KSC, 2014 WL 12597419, at *2 (D. Hawai`i
Oct. 31, 2014) (discussing Hawai`i choice-of-law analysis)
(citing Mikelson v. United Servs. Auto. Ass’n, 107 Hawai`i 192,
198, 111 P.3d 601, 607 (2005)).
3.
State law governs what equitable remedies are available
for breach of contract.
Compare Eckard Brandes, Inc. v. Riley,
338 F.3d 1082, 1088 (9th Cir. 2003) (disgorgement available for
breach of contract under Hawai`i law), with Hoffman v. L & M
Arts, 838 F.3d 568, 585 (5th Cir. 2016) (disgorgement not
available, notwithstanding availability of disgorgement as remedy
for certain causes of action arising under federal law, because
41
available remedies for breach of contract were controlled by
“Texas courts’ singular focus on compensating a plaintiff for its
losses”).
C.
Law of the Case
4.
The Non-Compete Provision of the PSA is reasonable and
enforceable.
See 5/9/17 Order, 2017 WL 1900970, at *5 (citing
UARCO Inc. v. Lam, 18 F. Supp. 2d 1116, 1121 (D. Hawai`i 1998));
see also 7’s Enters., Inc. v. Del Rosario, 111 Hawai`i 484, 493 &
n.15, 143 P.3d 23, 32 & n.15 (2006) (employee’s access to “trade
secrets, confidential information, or special customer
relationships” weighs in favor of reasonableness of non-compete
provision).
5.
3D Systems “drafted the PSA, and ‘contracts are
construed against the drafter.’”
1/30/15 Order, 2015 WL 419687,
at *7 (quoting Kutkowski v. Princeville Prince Golf Course, LLC,
129 Hawai`i 350, 360 n.9, 300 P.3d 1009, 1019 n.9 (2013)).
6.
“[S]ince the PSA is not fully-integrated, the Court may
look to extrinsic evidence to determine [its] complete terms.”
Id.
The parties executed the PSA three days after they executed
an employment agreement.
Id. at *5.
“[T]he sequencing of the
purported contract documents is [not] determinative” as to
whether “the parties intended [the PSA] to fully incorporate all
of the agreements that came before it.”
42
Id. at *6.
D.
Interpretation of Contracts
7.
“Contract terms are interpreted according to their
plain, ordinary, and accepted sense in common speech.
The
court’s objective is to ascertain and effectuate the intention of
the parties as manifested by the contract in its entirety.”
Hawaiian Ass’n of Seventh-Day Adventists v. Wong, 130 Hawai`i 36,
45, 305 P.3d 452, 461 (2013) (internal citations and quotation
marks omitted).
8.
The Hawai`i Supreme Court has stated:
In general, parties may contract as they wish, and
courts will enforce their agreements without
passing on their substance. . . . The principle
of freedom of contract is itself rooted in the
notion that it is in the public interest to
recognize that individuals have broad powers to
order their own affairs by making legally
enforceable promises.
City Express, Inc. v. Express Partners, 87 Hawai`i 466, 470 n.4,
959 P.2d 836, 840 n.4 (1998) (internal quotation marks omitted)
(ellipse in original) (quoting Restatement of Contracts (Second)
Introductory Note to Chapter 8 (1979)).
“Contracting parties are
free to adjust their respective obligations to satisfy their
mutual expectations.”
9.
Id. at 470, 959 P.2d at 840.
The supreme court has stated:
Where the language of a contract is susceptible of
two constructions, one of which makes it fair,
customary and such as prudent men would naturally
execute, while the other makes it inequitable,
unusual, or such as reasonable men would not
likely enter into, the interpretation which makes
43
a fair, rational and probable contract must be
preferred.
Amfac, Inc. v. Waikiki Beachcomber Inv. Co., 74 Haw. 85, 110, 839
P.2d 10, 25 (1992) (citations and internal quotation marks
omitted).
10.
The Ninth Circuit has stated:
When interpreting state law, federal courts are
bound by decisions of the state’s highest court.
In the absence of such a decision, a federal court
must predict how the highest state court would
decide the issue using intermediate appellate
court decisions, decisions from other
jurisdictions, statutes, treatises, and
restatements as guidance.
PSM Holding Corp. v. Nat’l Farm Fin. Corp., — F.3d —,
No. 15-55026, 2018 WL 1178071, at *8 (9th Cir. Mar. 7, 2018).
E.
Incorporation of Other Writings
11.
The Hawai`i Intermediate Court of Appeals (“ICA”) has
stated:
In order to effectively incorporate by reference a
separate writing, or a portion thereof, into a
contract, the language used . . . must explicitly,
or at least precisely, identify the written
material being incorporated and must clearly
communicate that the purpose of the reference is
to incorporate the referenced material into the
contract (rather than merely to acknowledge that
the referenced material is relevant to the
contract, e.g., as background law or negotiating
history). At common law, in order to uphold the
validity of terms incorporated by reference it
must be clear that the parties to the agreement
had knowledge of and assented to the incorporated
terms.
Although it is clear that whether one
agreement has incorporated another has factual
44
components, whether material has been incorporated
presents a question of law.
Safeway, Inc. v. Nordic PCL Const., Inc., 130 Hawai`i 517, 527,
312 P.3d 1224, 1234 (Ct. App. 2013) (brackets, internal
citations, and quotation marks omitted).
12.
In light of this Court’s factual finding, the Court
concludes the PSA does incorporate the parties’ employment
agreement.
F.
See supra Findings of Fact ¶¶ 22, 118.
Equitable Accounting
13.
An accounting is ordinarily a two-step proceeding.
The
first step is to determine the right to an accounting, and the
second being to determine the appropriate amount owed.
Accounting § 57.
1A C.J.S.
“An accounting does not yield a judgment for
damages, but rather seeks to restore to the plaintiff what is
rightfully his or hers.”
14.
Id. at § 69.
The jury’s verdict determined the right to an
accounting.
Pursuant to the PSA, 3D Systems is entitled to “an
equitable accounting of earnings, profits and other benefits
arising from such violation(s).”
15.
[PSA at § 6(f).]
In light of this Court’s Findings of Fact, 3D Systems
is entitled “to an equitable accounting of earnings, profits and
other benefits arising from” the Violations.
45
See id.
G.
Forfeiture and Penalty Disfavored
16.
The principle of avoiding forfeiture when possible is
firmly established Hawai`i precedent.
See Santiago v. Tanaka,
137 Hawai`i 137, 157, 366 P.3d 612, 632, (2016) (“equity abhors
forfeitures” (citing Jenkins v. Wise, 58 Haw. 592, 597, 574 P.2d
1337, 1341 (1978)); Hawaiian Ass’n of Seventh-Day Adventists, 130
Hawai`i at 49, 305 P.3d at 465 (“[e]quity does not favor
forfeitures, and where no injustice would thereby be visited upon
the injured party, equity will award him compensation rather than
decree a forfeiture against the offending party.” (brackets,
internal citation, and quotation marks omitted)); Caldeira v.
Sokei, 49 Haw. 317, 325, 417 P.2d 823, 828 (1966) (“Cases are
legion holding that the courts abhor a forfeiture and they will
construe a clause as a covenant rather than a condition if it is
possible to do so.” (citations and internal quotation marks
omitted)); In re Miller’s Tr., 48 Haw. 238, 245, 397 P.2d 443,
447 (1964) (“Equity will not imply a provision for penalty or
forfeiture where none is expressed.”).
17.
In light of the absence of any factual findings that
Barranco’s access to the QP Technology benefitted him, or harmed
3D Systems, and in the absence of any contractual provision
specifying such harm or benefit, an award based on access to the
QP Technology would amount to an improper penalty.
46
18.
In light of the absence of any factual findings
regarding what benefit 3D Systems received from Barranco’s
employment, ordering disgorgement of the entirety of his salary
earned over twenty-two months would amount to a penalty and
forfeiture.
19.
Because 3D Systems received title to the Primary
Domains and the flow of earnings they generated, disgorging the
entirety of the consideration Barranco received for selling the
Primary Domains would effect an improper forfeiture and penalty.
3D Systems’ requested disgorgement order would leave Barranco
without title to the Primary Domains and with nothing for having
conveyed them to 3D Systems, and would leave 3D Systems to retain
these assets with its costs fully refunded.
H.
Earnings, Profits, and Benefits Arising from the Violations
20.
“The phrase ‘arising out of’ is ordinarily understood
to mean ‘originating from,’ ‘having its origin in,’ ‘growing out
of,’ or ‘flowing from.’
In the insurance context, this phrase is
often interpreted to require a causal connection between the
injuries alleged and the objects made subject to the phrase.”
C. Brewer & Co. v. Marine Indem. Ins. Co. of Am., 135 Hawai`i
190, 193, 347 P.3d 163, 166 (2015) (some internal quotation marks
omitted) (quoting Am. Guar. & Liab. Ins. Co. v. 1906 Co., 129
F.3d 802, 807 (5th Cir. 1997)).
In the insurance context, the
“causal requirement” that an injury “aris[e] out of” a particular
47
incident “has been held to be more than ‘but-for’ causation, but
less than legal, proximate cause.”
Oahu Transit Servs., Inc. v.
Northfield Ins. Co., 107 Hawai`i 231, 237 n.11, 112 P.3d 717, 723
n.11 (2005).
21.
For particular funds to be earnings, profits, or
benefits “arising from” the Violations, their receipt must be
caused by the Violations.
See id.
The causal requirement is
“more than ‘but-for’ causation, but less than legal, proximate
cause.”
22.
See id.
A “but for” cause is “that without which the [thing]
would not have occurred.”
Knodle v. Waikiki Gateway Hotel, Inc.,
69 Haw. 376, 392, 742 P.2d 377, 387 (1987) (internal citation and
quotation marks omitted).
23.
The Violations are not a but for cause of Barranco’s
receipt of the payments from 3D Systems.
24.
See id.
In tort, a defendant’s conduct is the legal cause, or
proximate cause, of a plaintiff’s injury if the “defendant’s
conduct was a substantial, as opposed to a negligible or trivial,
factor in causing the harm.
In other words, a substantial factor
is one that a reasonable person would consider to have
contributed to the harm.”
O’Grady v. State, 140 Hawai`i 36, 47,
398 P.3d 625, 636 (2017).
25.
The Violations were not a proximate cause of Barranco’s
receipt of the payments from 3D Systems.
48
See id.
26.
Because the Violations were neither the but for cause
nor a proximate cause of Barranco’s receipt of his salary
payments, Up Front Payment, Royalty Payments, and Buyout Payment,
these payments did not “aris[e] from” the Violations.
See Oahu
Transit, 107 Hawai`i at 237 n.11, 112 P.3d at 723 n.11.
27.
“It is clear under Hawaii law that employees owe their
employer a duty of loyalty.”
Eckard Brandes, 338 F.3d at 1085
(citing Stout v. Laws, 37 Haw. 382, 392 (1946)).
While 3D
Systems’ Non-Compete Counterclaim did not specifically assert a
claim for breach of the duty of loyalty, the Non-Compete
Provision implies this duty.
The PSA is an asset purchase
agreement which was contingent upon Barranco’s employment with 3D
Systems and specifically made reference to his employment
agreement.
A duty of loyalty may be implied into an employment
agreement, especially when read in conjunction with the specific
language of the Non-Compete Provision.
This Court concludes that
any violation of duties Barranco owed to 3D Systems under the
employment agreement, but not under the PSA, are pertinent to
determining what earnings, profits, and other benefits Barranco
received arising from the Violations.
See 7’s Enters., 111
Hawai`i at 489, 143 P.3d at 28 (“A court’s decision to invoke
equitable relief, such as the ‘unclean hands’ doctrine, is a
matter within its discretion.” (citing Ueoka v. Szymanski, 107
Hawai`i 386, 393, 114 P.3d 892, 899 (2005) (stating that “[t]he
49
relief granted by a court [in] equity is discretionary and will
not be overturned on review unless the [trial] court abused its
discretion”))); Schmidt v. Fid. Nat’l Title Ins. Co., Civil
No. 07-00356 HG-LEK, 2009 WL 10676787, at *20 (D. Hawai`i
Sept. 30, 2009) (equitable lien against defendants’ property
appropriate where “it is clear that [plaintiff] would not have
made the loan if the [defendants] had disclosed the foreclosure
judgments”); see also Keystone Fruit Mktg., Inc. v. Brownfield,
352 F. App’x 169, 172 (9th Cir. 2009) (citing Restatement
(Second) of Agency § 393, cmt. e. (1958) (an employee is
“not . . . entitled to solicit customers for [a] rival business
before the end of his employment[,] nor can he properly do other
similar acts in direct competition with the employer’s business”)
(alteration in Keystone)).
Any breach of the duty of loyalty
does not, by itself, give rise to a remedy in restitution, but is
highly relevant background information when fashioning an
equitable remedy appropriate to the facts of this case.
See Sato
v. Wahiawa-Cent. Oahu Health Ctr., Inc., No. CAAP-13-0000042,
2015 WL 1231272, at *23 (Haw. Ct. App. Mar. 17, 2015).
I.
Scope of Equitable Jurisdiction
28.
The supreme court has stated:
A complaint in equity is an appeal to the exercise
of the equity court’s sound discretion. Equity
jurisprudence is not bound by strict rules of law,
but can mold its decree to do justice, and a court
of equity, once having assumed jurisdiction, may
retain the case to afford complete relief.
50
Beneficial Haw., Inc. v. Kida, 96 Hawai`i 289, 312, 30 P.3d 895,
918 (2001) (internal citations and quotation marks omitted); see
also Jenkins, 58 Haw. at 598, 574 P.2d at 1342 (court sitting in
equity “has the plenary power to fashion a decree to conform to
the equitable requirements of the situation”); 1A C.J.S.
Accounting §69 (“A court of equity, having obtained jurisdiction
for the purpose of an accounting, will settle the whole matter,
and grant such incidental relief as may be necessary.”).
29.
The supreme court has stated:
“[W]herever justice requires compensation to be
given for property or services rendered under a
contract, and no remedy is available by an action
on the [] contract, restitution of the value of
what has been given must be allowed.”
[12 Williston, Contracts §] 1479 [(3d ed. 1970)].
Where performance of a contract by one party
becomes excusably impossible and “the other party
has partly or wholly performed without receiving
compensation, justice requires the imposition of a
quasi contractual obligation on the party
receiving such performance to pay its fair value.”
6 Williston, Contracts [§] 1972 (rev. ed. 1938).
To the same effect are 5 Corbin, Contracts s 1102
(1964) and Restatement of Contracts s 468 (1932).
Bishop Tr. Co. v. Kamokila Dev. Corp., 57 Haw. 330, 334, 555 P.2d
1193, 1196 (1976).
30.
“[R]estitution is appropriate in situations . . . where
an express contract does not fully address an injustice.”
Porter
v. Hu, 116 Hawai`i 42, 55, 169 P.3d 994, 1007 (Ct. App. 2007).
31.
This Court concludes that, “having assumed
jurisdiction” to conduct an equitable accounting of the earnings,
51
profits, and other benefits arising from Barranco’s violation of
the Non-Compete Provision, it “may retain the case to afford
complete relief.”
P.3d at 918.
See Beneficial Haw., 96 Hawai`i at 312, 30
Because the fact-finder has already found a breach
of contract, this Court has discretion to award contract remedies
“and/or equitable relief in the form of disgorgement.”
See
Hawaiian Ass’n of Seventh-Day Adventists, 130 Hawai`i at 49, 305
P.3d at 465.
32.
This Court may appropriately consider awarding
equitable remedies, in addition to an equitable accounting, where
it concludes “[the PSA] does not fully address an injustice.”
See Porter, 116 Hawai`i at 55, 169 P.3d at 1007.
33.
“[E]quity regards the substance rather than the
form. . . .
Equity goes behind the form of the transaction in
order to give effect to the intention of the parties . . . .”
Rand v. Rand, No. CAAP–12–0000555, 2016 WL 383158, at *8 (Hawai`i
Ct. App. Jan. 29, 2016) (alteration and ellipses in Rand)
(citation and quotation marks omitted).
This Court, therefore,
may disregard the “form” of the PSA, insofar as it does not
identify separate consideration for the conveyance of assets and
the Non-Compete Provision, in order to “regard[] the substance”
of the transaction and “give effect to the intention of the
parties,” insofar as a promise to convey assets and a promise not
52
to compete are both detrimental promises, each requiring support
by valuable consideration.
J.
See id.
Effect of Jury Verdict
34.
“‘When a jury is called upon to make findings in
connection with both legal and equitable matters resting upon the
same set of facts, the trial court is bound by the jury’s
findings of fact when making its equitable determinations.’”
Porter, 116 Hawai`i at 58, 169 P.3d at 1010 (quoting SCI
Management Corp. v. Sims, 101 Hawai`i 438, 452 n.12, 71 P.3d 389,
403 n.12 (2003)).
K.
Equitable Versus Legal Restitution
35.
“[A]n equitable remedy may be invoked, . . . [like] in
the federal courts, . . . ‘only when legal remedies [are]
inadequate.’”
Id. (quoting Beacon Theatres, Inc. v. Westover,
359 U.S. 500, 509, 79 S. Ct. 948, 956, 3 L. Ed. 2d 988 (1959)
(footnote omitted)).
36.
The Ninth Circuit has stated:
Monetary restitution is appropriately
characterized as equitable when it is intended “to
restore to the plaintiff particular funds . . . in
the defendant’s possession.” [Honolulu Joint
Apprenticeship & Training Comm. of United Ass’n
Local Union No. 675 v.] Foster, 332 F.3d [1234,]
1237 [(9th Cir. 2003)] (quoting Great-West Life &
Annuity Ins. Co. v. Knudson, 534 U.S. 204, 214,
122 S. Ct. 708, 151 L. Ed. 2d 635 (2002)). But
monetary restitution is appropriately
characterized as legal in actions that simply seek
to impose general personal liability on a
defendant for money allegedly owed to the
plaintiff. Id. at 1238.
53
Bayer v. Neiman Marcus Grp., Inc., 861 F.3d 853, 866 (9th Cir.
2017).
37.
Where the particular funds have not been spent, but
have been mingled with other funds, an equitable lien can be
enforced against the mingled mass.
Bilyeu v. Morgan Stanley Long
Term Disability Plan, 683 F.3d 1083, 1095–96 (9th Cir. 2012).
38.
The Plaintiff or Counterclaimant has “[t]he burden to
show the [particular funds subject to restitution] remain in [the
defendant’s] possession.”
See id. at 1094 n.5 (citing
Restatement (First) of Restitution § 215 cmt. b (1937) (“A person
whose property is wrongfully taken by another is not entitled to
priority over other creditors unless he proves that the wrongdoer
not only once had the property or its proceeds, but still has the
property or its proceeds or property in which the claimant’s
property or its proceeds have been mingled indistinguishably.”)).
39.
An order disgorging funds related to Barranco’s Salary,
Up Front Payment, Buyout Payment, and Royalty Payments is
appropriately equitable and not legal because it would “restore
. . . particular funds” and would not “impose general personal
liability.”
See Bayer, 861 F.3d at 866 (citation and internal
quotation marks omitted).
40.
Under Hawai`i law, the trial court may properly
“conduct[] a jury trial on the matters triable to a jury and also
impose[] an equitable remedy upon determining that the contract
54
remedies available did not adequately address Defendants’ unjust
enrichment (a matter within the [trial] court’s discretion).”
Porter, 116 Hawai`i at 56, 169 P.3d at 1008.
41.
Because 3D Systems’ damages at law for breach of the
Non-Compete Provision would not be “ascertainable or remediable
by reference to the contractual remedies provided for, equitable
remedies [are] appropriate.”
42.
See id. at 57, 169 P.3d at 1009.
Where an unjust enrichment claim is tried to the court,
it is “an equity action within the realm of assumpsit.”
Id. at
66, 169 P.3d at 1018.
L.
Unjust Enrichment
43.
“Hawaii’s appellate case law explains the policy behind
and purpose of restitution under Hawaii law.
That purpose is to
deter wrongdoers from benefitting or profiting from their illegal
conduct.”
Exec. Risk Indem., Inc. v. Pac. Educ. Servs., Inc.,
451 F. Supp. 2d 1147, 1156 (D. Hawai`i 2006) (citing Peine v.
Murphy, 46 Haw. 233, 242–43, 377 P.2d 708, 714 (Haw. 1962); Hong
v. Kong, 5 Haw. App. 174, 181, 683 P.2d 833, 840 (1984) (noting
that “restitution is aimed at depriving the fraudulent party of
benefits obtained by the tort”)).
44.
The ICA has stated:
[The] best explanation of unjust enrichment has
been as follows:
It is a truism that “[a] person confers a
benefit upon another if he gives to the other
possession of or some other interest in
55
money, land, chattels, or cho[]ses in action,
. . . or in any way adds to the other’s
security or advantage.” Restatement of
Restitution § 1 comment b (1937). One who
receives a benefit is of course enriched, and
he would be unjustly enriched if its
retention would be unjust. Id. § 1
comment a. And it is axiomatic that “[a]
person who has been unjustly enriched at the
expense of another is required to make
restitution to the other.” Id. § 1. We
realize unjust enrichment is a broad and
imprecise term defying definition. But in
deciding whether there should be restitution
here, we are guided by the underlying
conception of restitution, the prevention of
injustice. See A. Denning, The Changing Law
65 (1953).
Porter, 116 Hawai`i at 55, 169 P.3d at 1007 (quoting Durette v.
Aloha Plastic Recycling, Inc., 105 Hawai`i 490, 502, 100 P.3d 60,
72 (2004)).
45.
“‘[I]n the damage action the [objective is] to recover
for the harm done to him, whereas in the restitution action [it
is] to recover the gain acquired by the defendant through the
wrongful act.’”
Id. at 56, 169 P.3d at 1008 (quoting 1 George E.
Palmer, The Law of Restitution § 2.1, at 51 (1978)).
46.
“A valid ‘claim for unjust enrichment requires only
that a plaintiff prove that he or she conferred a benefit upon
the opposing party and that the retention of that benefit would
be unjust.’”
Id. at 55, 169 P.3d at 1007 (quoting Durette, 105
Hawai`i at 504, 100 P.3d at 74 (internal quotation marks,
citation, and brackets omitted)).
56
47.
This Court has stated:
Generally, “[a]n action for unjust enrichment
cannot lie in the face of an express
contract.” Porter v. Hu, 116 Hawai`i 42, 169
P.3d 994, 1006 (Haw. App. 2007); State Farm
Fire & Cas. Co. v. Chung, 882 F. Supp. 2d
1180, 1192 (D. Haw. 2012). Thus, “[w]here
the parties to a contract have bargained for
a particular set of rights and obligations,
all claims involving those express rights and
obligations properly lie in contract law and
not in equity.” Keahole Point Fish LLC v.
Skretting Canada, Inc., 971 F. Supp. 2d 1017,
1040 (D. Haw. 2013).
Balboa v. Hawaii Care & Cleaning, Inc., 105 F.
Supp. 3d 1165, 1174 (D. Hawai`i 2015) (alterations
in Balboa). Here, the parties do not dispute that
a purchase and sale agreement was executed, and
that each is alleging breach of that contract.
[Minutes, filed 5/23/16 (dkt. no. 262), at 1-2 (granting judgment
as a matter of law to 3D Systems on Barranco’s claim for unjust
enrichment claim.]
48.
An exception to the general rule exists so “that
restitution is appropriate . . . where an express contract does
not fully address an injustice.”
P.3d at 1007.
Porter, 116 Hawai`i at 55, 160
The ICA has explicitly rejected the proposition
that “unjust enrichment can never exist where the adverse parties
have some type of express contract.”
Id. at 55 n.7, 160 P.3d at
1007 n.7 (emphasis added).
49.
In jurisdictions with a contrary rule, that “tools of
equity . . . are used only when no express contract is present,”
courts “hold[] that lost profits is the appropriate measure of
57
damages in suits concerning breaches of covenants not to
compete . . . [and] unjust enrichment is not an appropriate
measurement in these actions.”
TruGreen Cos. v. Mower Bros.,
Inc., 199 P.3d 929, 933 (Utah 2008) (citations omitted).
Other
courts have concluded that, for breach of a non-compete
agreement, “[r]estitution, or a refund of the consideration
paid,” is an appropriate remedy, and is available as an
alternative damages measured as the lost profits of the
non-breaching party.
Foti Fuels, Inc. v. Kurrle Corp., 90 A.3d
885, 897 (Vt. 2013) (citing Morris v. Homco Int’l, Inc., 853 F.2d
337, 346 (5th Cir. 1988)).
This Court predicts the Hawai`i
Supreme Court would also conclude that a “defendant is entitled
to claim the return of the consideration as an alternative form
of contractual relief if the jury concludes that plaintiff
breached the terms of the noncompetition agreement.”
50.
See id.
This case falls within the exception recognized in
Porter so that unjust enrichment applies in the face of an
express contract.
51.
In Porter, the trial court “recognized that the
contract did not expressly address the compensation of an agent
who wrongfully lost his book of business as a result of the
parent insurer’s misconduct.”
1007.
116 Hawai`i at 55, 169 P.3d at
The ICA rejected the defendant’s claim “that the contract
between the parties provided . . . adequate redress” because “the
58
contract [did not] actually address[] a situation like this —
where Defendants are alleged to have wrongfully subverted the
contractual relationship to deprive Plaintiffs of their book of
business.”
52.
Id. at 55-56, 169 P.3d at 1007-08.
This Court concludes the PSA does not address the issue
here, where violations of the Non-Compete Provision stopped short
of commercial exploitation and no earnings, profits, or other
benefits have yet arisen from the violation.
See id. at 55 &
n.7, 169 P.3d at 1007 & n.7.
53.
“Under Hawai`i law, attorney’s fees are available in
‘all actions in the nature of assumpsit.’”
Eckard Brandes, 338
F.3d at 1087 (quoting Haw. Rev. Stat. § 607–14).
To the extent
the entirety of 3D Systems’ attorneys’ fees cannot be fully
recovered under the assumpsit statute, Haw. Rev. Stat. § 607-14,
no injustice occurs.
See Piedvache v. Knabusch, 88 Hawai`i 115,
119, 962 P.2d 374, 378 (1998) (“[I]t is . . . clear that [the
assumpsit statute] was not intended to render inoperative a
contract governing the allocation of expenses and attorney’s fees
in litigation which involves only an adjudication of rights and
in which no monetary liability is in issue.” (emphasis omitted)
(quoting Food Pantry, Ltd. v. Waikiki Business Plaza, Inc., 58
Haw. 606, 621, 575 P.2d 869, 879–80 (1978) (construing
predecessor statute, § 607-17))); Fought & Co. v. Steel Eng’g &
Erection, Inc., 87 Hawai`i 37, 50–51, 951 P.2d 487, 500–01 (1998)
59
(“Normally, pursuant to the ‘American Rule,’ each party is
responsible for paying his or her own litigation expenses.
This
general rule, however, is subject to a number of exceptions:
attorney’s fees are chargeable against the opposing party when so
authorized by statute, rule of court, agreement, stipulation, or
precedent.”).
3D Systems could have negotiated, but did not
negotiate, a contractual provision to allocate expenses when
litigation was required to enforce the Non-Compete Provision
before any recoverable earnings, profits, or other benefits had
arisen.
54.
Hawai`i “contract law allows — and at times even
encourages — intentional breaches of contract.”
Francis v. Lee
Enters., Inc., 89 Hawai`i 234, 243, 971 P.2d 707, 716 (1999)
(citing R. Posner, Economic Analysis of Law § 3.8 (1972)).
This
“amoral view” favors “‘efficient’ breaches of contract, i.e.,
breaches where the gain to the breaching party exceeds the loss
to the party suffering the breach.”
Id.
constitutes a morally neutral act. . . .
“[B]reaching a contract
[T]he duty to keep a
contract at common law means a prediction that you must pay
damages if you do not keep it—and nothing else.”
Id. (internal
citation and quotation marks omitted).
55.
No part of this Court’s restitutionary award may aim to
punish Barranco based on a moral view of the value of keeping
contract promises.
See id.
Consistent with the “policy
60
considerations . . . of contract law,” see id., equity also
abhors the forfeiture of any part of the consideration Barranco
justly received for the assets he conveyed and the promises he
did keep.
Equity does not allow this Court’s disgorgement order
to exceed the portion of the consideration received attributable
to the promises Barranco breached.
56.
To support an equitable award, 3D Systems must have
adduced the evidence at trial showing the consideration paid
which supports the equitable award.
Any excess recovery “would
provide [3D Systems] a remedy inconsistent with the fundamental
precepts of restitution, for it would give [3D Systems] more than
they had.”
See Beneficial Haw., 96 Hawai`i at 316, 30 P.3d at
922 (internal citation and quotation marks omitted).
57.
3D Systems has meet its evidentiary burden.
See id.
The record shows the amount of consideration paid under the PSA
and how each component of the consideration was calculated.
The
record also shows the parties actively considered discounting
uncertain future benefits under the PSA by making net present
value calculations.
58.
The twenty three percent discount rate used in the
Houlihan Lokey Report, and relied on by 3D Systems, provides an
appropriate guidepost for the Court to compare payments occurring
in different time periods.
61
59.
3D Systems is entitled to total disgorgement of
$483,758.83, representing the portion of the payments for which
it would be unjust for Barranco to retain because it is
attributable to the promises he breached.
M.
Punitive Damages
60.
Hawai`i courts refuse to allow punitive “damages in
contract actions unless the conduct constituting the breach is
also a tort for which punitive damages are recoverable.
Traditionally, damages for breach of contract have been awarded
to compensate the aggrieved party rather than to punish the
breaching party.”
Id. at 241, 971 P.2d at 714 (internal
citations and quotation marks omitted).
61.
N.
Punitive damages are not appropriate in this case.
Pre- and Post-Judgment Interest
62.
“In diversity actions, state law determines the rate of
prejudgment interest, and postjudgment interest is governed by
federal law.”
Am. Tel. & Tel. Co. v. United Computer Sys., Inc.,
98 F.3d 1206, 1209 (9th Cir. 1996) (citation omitted); see also
In re Cardelucci, 285 F.3d 1231, 1235 (9th Cir. 2002) (“It has
long been the rule that an award of post-judgment interest is
procedural in nature and thereby dictated by federal law.”).
63.
This Court has discretion to award prejudgment interest
in equity when a judgment is delayed.
See Eckard Brandes, 338
F.3d at 1088 (citing Kalawaia v. AIG Haw. Ins. Co., 90 Hawai`i
62
167, 977 P.2d 175, 180 (1999)).
Pre-judgment interest is awarded
“to correct injustice when a judgment is delayed for a long
period of time for any reason.”
Schmidt v. Bd. of Dirs. of Ass’n
of Apartment Owners of Marco Polo Apartments, 73 Haw. 526, 534,
836 P.2d 479, 484 (1992).
64.
In contract cases, Hawai`i law provides the court
discretion to award prejudgment interest and “to designate the
commencement date to conform with the circumstances of each case
. . . [as early as] the date when the breach first occurred.”
Haw. Rev. Stat. § 636-16.
“Interest at the rate of ten per cent
a year, and no more, shall be allowed on any judgment recovered
before any court in the State, in any civil suit.”
Haw. Rev.
Stat. § 478-3.
65.
Prejudgment interest is awarded from August 3, 2011,
the date of the first breach of the Non-Compete Provision.
66.
The rate of post-judgment interest is governed by 28
U.S.C. § 1961, which provides:
“[s]uch interest shall be
calculated from the date of the entry of the judgment, at a rate
equal to the weekly average 1-year constant maturity Treasury
yield, as published by the Board of Governors of the Federal
Reserve System, for the calendar week preceding the date of the
judgment.”
63
ORDER REGARDING FINDINGS OF FACT AND CONCLUSIONS OF LAW
AND NOW, following the conclusion of a bench trial in
this matter, and in accordance with the foregoing Findings of
Fact and Conclusions of Law, it is HEREBY ORDERED that:
1.
Barranco breached the Non-Compete Provision of the PSA.
2.
As a result of Barranco’s breach, 3D Systems is
entitled to invoke the equity jurisdiction of this Court and to
demand an equitable accounting.
3.
Having performed an equitable accounting, this Court
finds Barranco received no earnings, profits, or other benefits
arising from his breach of the Non-Compete Provision.
4.
Fashioning complete relief in this case requires that
Barranco disgorge, and 3D Systems recover:
$229,117.94
$233,333.33
$
0.00
$ 60,409.00
$522,860.24
5.
-
Salary
Up Front Payment
Royalty Payments
Buyout Payment
Total
3D Systems is entitled to recover prejudgment interest
beginning on August 3, 2011.
6.
3D Systems is entitled to recover post-judgment
interest as permitted by statute.
Pursuant to Federal Rule of Civil Procedure 54,
judgment shall enter in favor of 3D Systems on its breach of
contract counterclaim in the amount of $522,860.24.
IT IS SO ORDERED.
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DATED AT HONOLULU, HAWAII, March 30, 2018.
/s/ Leslie E. Kobayashi
Leslie E. Kobayashi
United States District Judge
RONALD BARRANCO VS. 3D SYSTEMS CORP., ET AL.; CIVIL 13-00412 LEKRLP; FINDINGS OF FACT AND CONCLUSIONS OF LAW AND ORDER
65
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