Koch v. SKF USA, Inc. et al

Filing 15

MEMORANDUM OPINION AND ORDER re 1 Bankruptcy Appeal; United States Bankruptcy Court Judge Robert J. Kressels May 22, 2012 Order is AFFIRMED (Written Opinion). Signed by Judge Ann D. Montgomery on 09/17/2012. (TLU)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
In re Kevin B. Koch, Debtor.
Kevin B. Koch,
Appellant,
MEMORANDUM OPINION
AND ORDER
Civil No. 12-01606 ADM

v.
SKF USA, Inc.,

Appellee.
______________________________________________________________________________
Jamie R. Pierce, Esq., Hinshaw & Culbertson LLP, Minneapolis, MN, on behalf of Appellant
Kevin B. Koch.
Robert T. Kugler, Esq. and Edwin H. Caldie, Esq., Leonard, Street and Deinard, P.A.,
Minneapolis, MN, and Stephen J. Sundheim, Esq., Pepper Hamilton LLP, Philadelphia, PA, on
behalf of Appellee SKF USA, Inc.
______________________________________________________________________________
I. INTRODUCTION
This matter is before the undersigned United States District Judge on Appellant Kevin B.
Koch’s (“Koch”) appeal [Docket No. 1] of United States Bankruptcy Court Judge Robert J.
Kressel’s May 22, 2012 Order [Docket No. 1, Attach. 3]. Judge Kressel ruled that a judgment
debt owed by Koch for misappropriation and use of Appellee SKF USA, Inc.’s (“SKF”) trade
secrets was nondischargeable as a debt for a willful and malicious injury under § 523(a)(6) of the
Bankruptcy Code. For the reasons set forth below, the decision of the Bankruptcy Court is
affirmed.
II. BACKGROUND
Koch was formerly employed by Preventative Maintenance Company, Inc. (“PMCI”) as
a technical reliability engineering manager. Mem. Op. & Order, SKF v. Bjerkness, No. 08 C

4709 (N.D. Ill. Aug. 9, 2010) [Docket No. 3, Attach. 1, Tab 3] (“Trial Ct. Op.”) at APP. 16.
PMCI was a “reliability services” business, which monitored the performance of clients’
industrial equipment to improve equipment functioning and to avoid unexpected equipment
failures. Id. SKF acquired PMCI in January of 2007 for $22 million, and Koch became an
employee of SKF. Id. at APP. 16, 28. As an SKF employee, Koch signed a secrecy agreement
that prohibited him from disclosing SKF’s “technical or proprietary information, trade secrets
and confidential business matters” during or after his employment with SKF. Id. at APP. 17.
In May 2008, Koch’s co-worker, Dale Bjerkness, left SKF and formed a competing firm
named Equipment Reliability Services, Inc. (“ERSI”). Id. at APP. 15, 17. Over the following
two months, Koch and two other co-workers, Joseph J. Sever and Walter Remick, Jr., resigned
from SKF to work at ERSI. Id. at APP. 17. Prior to leaving SKF, Koch, Bjerkness, Sever and
Remick transferred electronic files from SKF to their own computer storage devices. Id. Koch
personally transferred 7,000 files during his last days at SKF. Mem. Op. & Order, SKF v.
Bjerkness, 636 F. Supp. 2d 696, 704 n.2 (N.D. Ill. 2009) (“SKF I”). The transferred files were
accessed by ERSI at the time ERSI was making proposals and providing services to former SKF
customers. Trial Ct. Op. at APP. 18.
On September 19, 2008, SKF filed an action in the United States District Court for the
Northern District of Illinois (the “Illinois Court”) against Koch, Bjerkness, Sever and Remick
(collectively, “Defendants”) seeking an injunction and other relief under the Illinois Trade
Secrets Act (“ITSA”). Id. at APP. 19. At the preliminary injunction hearing, Defendants
admitted to taking SKF’s information without SKF’s authorization, but contended “they could
easily have generated all the information that they transferred on their own, and that copying that

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information simply provided a ‘shortcut.’” SKF I, 636 F. Supp. 2d at 704.
In January 2010, Judge Rebecca R. Pallmeyer of the Illinois Court held a bench trial on
SKF’s claim for damages under ITSA. Trial Ct. Op. at APP. 19. To prevail on its ITSA claim,
SKF was required to “demonstrate that the information at issue was a trade secret, that it was
misappropriated and that it was used in the defendant’s business.” Id. at APP. 22 (quoting
Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714, 721 (7th Cir. 2003)). The
evidence adduced at trial included Koch’s testimony that during his employment with PMCI and
SKF he had learned and memorized a database pattern used by SKF to collect, organize, and
present data from a customer’s machinery. Id. at APP. 19-21. Koch further testified that he
recreated and used this database pattern at ERSI. Id. at APP. 20-21.
The Illinois Court found that the database pattern and other information taken by
Defendants constituted trade secrets because the information was not widely known in the
industry, gave SKF a competitive advantage, derived economic value from remaining secret, and
because SKF made reasonable efforts to maintain the secrecy of the information taken. Id. at
APP. 23-25. Thus, Defendants were found to be jointly and severally liable for violating the
ITSA. Id. at APP. 26, 30.
The Illinois Court next determined the amount of compensatory damages to award SKF,
and analyzed whether exemplary (punitive) damages were warranted. Compensatory damages
under ITSA “can include both the actual loss caused by the misappropriation and the unjust
enrichment caused by misappropriation that is not taken into account in computing actual loss.”
Id. at APP. 26 (quoting 765 ILCS 1065/4(a)). SKF was not awarded damages for lost business,
because SKF had failed to show a link between Defendants’ misappropriation of trade secrets

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and SKF’s loss of customers to ERSI. Id. at APP. 27. Nevertheless, the Illinois Court found that
“[e]ven if SKF cannot prove such a link, it is still entitled to damages for the harm of the
misappropriation of its trade secrets; that is the injury under ITSA. ‘The harm that results from
wrongful misappropriation of information results from the defendant’s use of that information.’”
Id. (quoting U.S. Gypsum Co. v. Lafarge N. Am. Inc., No. 03 C 6027, 2009 WL 3871824, at *1
(N.D. Ill. Nov. 16, 2009) (alteration omitted)). Accordingly, Defendants were found to be liable
for compensatory damages for the unjust enrichment caused by the misappropriation, because
“the information taken was subject to trade secret protection in part because of its economic
value,” and “taking SKF’s trade secrets gave Defendants’ business an advantage it would not
otherwise have had.” Id. at APP. 28. SKF was thus awarded compensatory damages of
$41,068.40, which equaled the amount of profits ERSI earned from servicing its customers using
SKF’s trade secrets. Id. at APP. 28-29.
ITSA also allows a court to award exemplary damages including attorney fees if “willful
and malicious misappropriation exists.” Id. at APP. 29 (quoting 765 ILCS 1065/4(b)). The
Illinois Court found the misappropriation was willful and malicious because the “Defendants
admitted to taking thousands of files, they knew that they had no permission to do so, and they
were not immediately forthcoming when SKF demanded the return of the files.” Id.
Accordingly, exemplary damages of $40,000 for punishment and deterrence were awarded, as
well as attorney fees and costs of $1,122,319.98.1 Id. at APP. 30; Judgment, Nov. 8, 2011

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The issue of the reasonableness of SKF’s attorney fees was fully litigated and finally
determined in the Illinois action. See SKF v. Bjerkness, Nos. 08 C 4709, 09 C 2232, 2011 WL
4501395 (N.D. Ill. Sept. 27, 2011). The amount of the judgment for attorney fees is not at issue
here; rather, the only issue is whether the judgment is dischargeable in bankruptcy.
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[Docket No. 6, Attach. 1] at APP. 80. Defendants have paid SKF the compensatory damages
and $40,000 of the exemplary damage award. The judgment for attorney fees remains unpaid.
On January 5, 2012, Koch filed for bankruptcy relief under Chapter 7 of the Bankruptcy
Code. SKF filed an adversary complaint against Koch, claiming the judgment debt for attorney
fees was excepted from Koch’s bankruptcy discharge because it arose from a willful and
malicious injury. On a motion for summary judgment by SKF, the Bankruptcy Court accorded
collateral estoppel effect to the findings in the Illinois action and concluded they satisfied the
“willful” and “malicious” requirements for excepting a debt from discharge under § 523(a)(6) of
the Bankruptcy Code. Tr. of May 22, 2012 Bankruptcy Ct. H’rg [Docket No. 3, Attach. 1, Tab
1] (“Bankruptcy Ct. Tr.”) at APP. 10-11. Accordingly, the Bankruptcy Court granted summary
judgment to SKF on its claim that the judgment debt is not dischargeable. Id. at APP. 11.
Koch now appeals, arguing Judge Kressel of the Bankruptcy Court erred in finding the
“malicious” requirement of § 523(a)(6) was satisfied. Koch contends this requirement was not
met because: (1) Judge Pallmeyer found SKF had not been harmed by Defendants’ conduct; (2)
the Bankruptcy Court drew a factual inference in SKF’s favor on the issue of intent when Koch,
as the nonmoving party, was entitled to have all inferences drawn in his favor; and (3) the
Bankruptcy Court wrongly applied collateral estoppel to the issue of intent. Koch also argues
the Bankruptcy Court erred in determining that all of the debt owed by Koch to SKF was
excepted from the bankruptcy discharge.
III. DISCUSSION
A.

Standard of Review
A district court reviews a bankruptcy court’s legal conclusions de novo and its findings of

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fact for clear error. Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir. 1987). A bankruptcy
court’s entry of summary judgment is reviewed by a district court de novo. Tudor Oaks Ltd.
P’ship v. Cochrane (In re Cochrane), 124 F.3d 978, 981 (8th Cir. 1997). Summary judgment is
proper “if the movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 252 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In deciding
a motion for summary judgment, a court views the evidence in the light most favorable to the
nonmoving party. Ludwig v. Anderson, 54 F.3d 465, 470 (8th Cir. 1995). The nonmoving party
may not “rest on mere allegations or denials, but must demonstrate on the record the existence of
specific facts which create a genuine issue for trial.” Krenik v. Cnty. of Le Sueur, 47 F.3d 953,
957 (8th Cir. 1995).
B.

Analysis
“The collateral estoppel doctrine applies in bankruptcy proceedings brought under §

523(a)(6).” Sells v. Porter (In re Porter), 539 F.3d 889, 894 (8th Cir. 2008) (citing Hobson
Mould Works, Inc. v. Madsen (In re Madsen), 195 F.3d 988, 989 (8th Cir. 1999)). A party
asserting collateral estoppel must show the following elements:
(1) the party sought to be precluded in the second suit must have been
a party, or in privity with a party, to the original lawsuit; (2) the issue
sought to be precluded must be the same as the issue involved in the
prior action; (3) the issue sought to be precluded must have been
actually litigated in the prior action; (4) the issue sought to be
precluded must have been determined by a valid and final judgment;
and (5) the determination in the prior action must have been essential
to the prior judgment.
Id. (quoting Robinnette v. Jones, 476 F.3d 585, 589 (8th Cir. 2007)).
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Section 523(a)(6) of the Bankruptcy Code bars the discharge of “debts . . . for willful and
malicious injury by the debtor to another entity.” 11 U.S.C. § 523(a)(6). In determining whether
a debt is excepted from discharge under § 523(a)(6), courts must “first determine exactly what
‘injury’ the debt is ‘for,’ and then determine whether the debtor both ‘willful[ly] and
malicious[ly]’ caused that ‘injury.’” Blocker v. Patch (In re Patch), 526 F.3d 1176, 1181 (8th
Cir. 2008) (alterations in original).
1.

Injury

“Injury” under § 523(a)(6) means the “invasion of the legal rights of another, because the
word ‘injury’ usually connotes legal injury . . . in the technical sense.’” In re Porter, 539 F.3d at
894 (quoting Geiger v. Kawaauhau (In re Geiger), 113 F.3d 848, 852 (8th Cir. 1997), aff’d, 523
U.S. 57 (1998)). Here, Koch’s misappropriation of SKF’s trade secrets in violation of the ITSA
is the “injury” from which the debt (i.e., the judgment for attorney fees) arose. See Bankruptcy
Ct. Tr. at APP. 9-10.
2.

Willful

For the purposes of § 523(a)(6), “the term willful means deliberate or intentional.” In re
Madsen, 195 F.3d at 989. The Illinois Court found “[t]he individual Defendants admitted to
taking thousands of files, they knew that they had no permission to do so, and they were not
immediately forthcoming when SKF demanded the return of the files.” Trial Ct. Op. at APP. 29.
Therefore, Koch’s injury to SKF was willful.
3.

Malicious

An injury is “malicious” under § 523(a)(6) if the debtor’s actions are “targeted at the
creditor . . . at least in the sense that the conduct is certain or almost certain to cause financial

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harm.” Barclays Am./Bus. Credit, Inc. v. Long (In re Long), 774 F.2d 875, 881 (8th Cir. 1985).
Malice requires a level of culpability going beyond an intentional violation of another’s legal
rights; the debtor must also expect that harm is certain or substantially certain to occur. Id.
“While intentional harm may be very difficult to establish, the likelihood of harm in an objective
sense may be considered in evaluating intent.” Id.
Defendants “chose to take and use” trade secrets owned by SKF. Trial Ct. Op. at APP.
28. As such, Defendants’ actions were targeted at SKF. Additionally, Defendants took
thousands of SKF files knowing they were not permitted to do so and used SKF’s trade secrets at
ERSI to save time and service ERSI customers. Id. at APP. 19, 29. Defendants’ conduct was
certain to harm SKF by destroying the secrecy of trade secrets for which SKF had paid
considerable value, and by giving SKF’s competitor an advantage it would not have otherwise
had. Thus, Koch and the other Defendants “act[ed] with malice by intending or fully expecting
to harm the economic interests” of SKF. In re Long, 774 F.2d at 882; see also Engler Eng’g
Corp. v. Balta (In re Balta), 151 B.R. 506, 508 (Bankr. E.D. Mo. 1993) (giving collateral
estoppel effect to a Florida Court’s findings that a debtor intentionally misappropriated and used
trade secrets, and concluding such findings satisfied the Eighth Circuit’s definition of “willful
and malicious” under § 523(a)(6)). Therefore, as the Bankruptcy Court correctly concluded, the
findings in the Illinois action establish as a matter of law that Koch’s injury to SKF was
malicious.
Koch argues the malice requirement has not been satisfied because SKF was found not to
have been harmed by Defendants’ conduct. Appellant’s Br. at 1-2 ¶¶ 2,7-9. Koch contends the
finding was limited to unjust enrichment, as SKF had not shown a link between Defendants’

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misappropriation and SKF’s loss of customers. Koch insists unjust enrichment does not satisfy
the “harm” required for an injury to be “malicious” under § 523(a)(6).
This argument ignores the express finding that SKF had been harmed by Defendants’
conduct despite SKF’s inability to prove that the misappropriation caused SKF to lose
customers: “Even if SKF cannot prove such a link, it is still entitled to damages for the harm of
the misappropriation of its trade secrets; that is the injury under ITSA. The harm that results
from wrongful misappropriation of information results from the defendant’s use of that
information.” Trial Ct. Op. at APP. 27 (emphases added) (alteration and internal quotation
marks omitted).
Defendants’ use of SKF’s information harmed SKF by reducing the economic value of its
trade secrets. “[T]he information taken was subject to trade secret protection in part because of
its economic value.” Id. at APP. 28. “SKF paid $22 million for PMCI in order to obtain the
existing company’s valuable resources, which included the trade secrets that Defendants
misappropriated.” Id. The economic benefit of SKF’s trade secrets derived from their continued
secrecy. Id. at APP. 23. The trade secrets no longer continued to be secret when Defendants
used them to service customers at ERSI. Defendants’ use of SKF’s trade secrets also harmed
SKF by unfairly altering the competition between SKF and ERSI. See id., at APP. 23 (“[T]aking
SKF’s trade secrets gave Defendants’ business an advantage it would not otherwise have had.”).
These findings establish Defendants were unjustly enriched at SKF’s expense. See HPI Health
Care Servs. Inc. v. Mt. Vernon Hosp., Inc., 131 Ill.2d 145, 160 (Ill. 1989) (stating unjust
enrichment occurs when a defendant “retain[s] a benefit to the plaintiff’s detriment”) (emphasis
added). Accordingly, the compensatory damages were awarded for harm caused by Defendants’

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actions.
Koch also argues the Bankruptcy Court erred by concluding that the Illinois Court, in
finding Koch intended to take business from SKF, “implicitly” found malice. See Bankruptcy
Ct. Tr. at APP. 10. Koch contends the implicit finding equates to an inference, and that Koch, as
the nonmovant on a summary judgment motion, was entitled to have all inferences drawn in his
favor. Koch urges he is entitled to the inference “that when Koch actually took the trade secrets
he did not intend to use them against SKF, and when he did use them, he reasonably believed it
would simply save him time but would cause no harm to SKF.” Appellant’s Br. at 8.
This argument lacks merit for at least two reasons. First even if Koch intended only to
use SKF’s trade secrets to “save him time,” this use was certain to harm SKF by destroying the
secrecy of its protected information and unfairly altering the competition between SKF and
ERSI. Thus, Koch’s intent was malicious under § 523(a)(6). Second, the Bankruptcy Court did
not draw a factual inference when it concluded that the Illinois Court’s findings implicitly
satisfied the maliciousness requirement of § 523(a)(6). Instead, it applied the substance of the
findings to “the substance of what 523(a)(6) requires” and determined “that they line up here and
that . . . the [Illinois] court found implicitly both willfulness and maliciousness.” Bankruptcy Ct.
Tr. at APP. 10. This analytical approach is often used by courts to determine whether a trial
court or jury’s factual findings meet the legal requirements of § 523(a)(6). See, e.g., Johnson v.
Miera (In re Miera), 926 F.2d 741, 744 (8th Cir. 1991) (stating “the district court properly
affirmed the bankruptcy court’s holding that the state court judgment against [the debtor]
implicitly contained a finding of malice”) (emphasis added); In re Porter, 539 F.3d at 894-95
(applying jury’s factual findings to elements of § 523(a)(6) to conclude the jury “necessarily

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found” debtor willfully injured plaintiff). Therefore, the Bankruptcy Court did not err in
concluding the Illinois Court “implicitly” found malice.
Koch further argues the Bankruptcy Court erred in applying collateral estoppel to
conclude Koch acted with malicious intent. Appellant’s Br. at 1 ¶¶ 3-4, 6. Koch contends the
“[t]he issue of intent was not actually before the [Illinois] Court, as intent is irrelevant under the
ITSA.” Appellant’s Reply Brief [Docket No. 12] at 4. However, the issue of intent was actually
and necessarily litigated in the Illinois action when determining the issue of exemplary damages,
because Judge Pallmeyer was required to determine whether the misappropriation was “willful
and malicious” as that phrase is interpreted under the ITSA. Trial Ct. Op. at APP. 29. She found
the “Defendants admitted to taking thousands of files, they knew that they had no permission to
do so, and they were not immediately forthcoming when SKF demanded the return of the files.”
Id. Additionally, Defendants themselves admitted that they used SKF’s trade secrets at ERSI
believing it would save them from taking the time to generate that information. Therefore,
Defendants’ intent was actually litigated and finally determined in the Illinois action and
essential to the judgment for exemplary damages. As such, the Bankruptcy Court properly
applied collateral estoppel to the issue of whether Koch acted with malicious intent for the
purposes of § 523(a)(6).
4.

All debt from § 523(a)(6) injury excepted from discharge

The final issue raised by Koch on appeal is “[w]hether the bankruptcy court erred in
finding that all of the debt claimed to be nondischargeable was in fact nondischargeable.”
Appellant’s Br. at 1 ¶ 5. Koch’s only mention of the issue beyond identifying it as an appeal
issue is his assertion that “[a] defendant in a Section 523(a)(6) action should not be liable for

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over $1,000,000 in attorney’s fees for allegedly intending to cause harm, when there is nothing
illegal about the cause of the harm, and when the defendant never caused the harm allegedly
intended.” Id. at 10 (quotation marks omitted) (emphases in original).
Section 523(a)(6) bars the discharge of “any debt . . . for willful and malicious injury by
the debtor to another entity.” 11 U.S.C. § 523(a)(6) (emphasis added). This provision “does not
distinguish between debts which are compensatory in nature and those which are punitive. The
language of section 523(a)(6) is directed at the nature of the conduct which gives rise to the debt,
rather than the nature of the debt.” In re Miera, 926 F.2d at 745. Thus, all damages stemming
from a willful and malicious injury are nondischargeable under § 523(a)(6). Id. The attorney
fees at issue here were awarded as exemplary damages based on Koch’s willful and malicious
injury to SKF. Accordingly, the judgment debt for attorney fees is a nondischargeable debt
under § 532(a)(6).
In sum, the Bankruptcy Court properly granted summary judgment to SKF because the
findings in the Illinois action are entitled to collateral estoppel effect and establish as a matter of
law that the debt arising from Koch’s misappropriation of SKF’s trade secrets was for a willful
and malicious injury under § 523(a)(6).
IV. CONCLUSION
Based on the foregoing, and all the files, records and proceedings herein, IT IS
HEREBY ORDERED that:
1. Koch’s Appeal [Docket No. 1] is DENIED;

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2. The Bankruptcy Court’s Order of May 22, 2012 is AFFIRMED.
LET JUDGMENT BE ENTERED ACCORDINGLY.
BY THE COURT:

s/Ann D. Montgomery
ANN D. MONTGOMERY
U.S. DISTRICT JUDGE
Dated: September 17, 2012.

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