Square, Inc. et al v. REM Holdings 3, LLC

Filing 291

AMENDED MEMORANDUM AND ORDER re Memorandum and Order (doc. #285). Signed by District Judge Stephen N. Limbaugh, Jr on 1/11/16. (CSG)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
ROBERT E. MORLEY, JR., et al.
Plaintiffs,
vs.

SQUARE, INC., et al.,
Defendants.

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Case No. 4:14cv172
Case No. 4:10cv2243 SNLJ
CONSOLIDATED

and
SQUARE, INC., et al.
Plaintiffs,
vs.
REM HOLDINGS 3, LLC,
Defendant.

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AMENDED MEMORANDUM & ORDER
This matter is before the Court on plaintiffs motion to compel (#276). Plaintiffs
Robert Morley (“Morley”) and his company REM Holdings 3, LLC (“REM”)
(collectively, “Morley”) brought this action against defendant Square, Inc. and its
founders, defendants Jack Dorsey and James McKelvey (collectively, “Square”).1

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This matter consists of two consolidated actions. Case No. 4:10-cv-2243 has been stayed in its
entirety pending resolution of patent issues by the Patent and Trademark Office. Morley and his company
are the defendants in that case. Morley and his company are the plaintiffs in Case No. 4:14-cv-172; the

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Defendants filed a response on December 17, 2015; plaintiffs replied on December
28, 2015. Defendants have agreed to produce some documents that plaintiffs seek
through their motion to compel. Each remaining category of documents plaintiff seeks
will be discussed below.
I.

Documents Related to Dorsey’s Affiliated Companies
In documents related to Square, Inc.’s initial public offering, Square revealed that

defendant Dorsey has significant involvement with two companies that are closely
affiliated with Square: West Studios, LLC and Start Small Foundation. West Studios
provided $1.2 million in “consulting services” to Square. Dorsey is a managing member,
has a direct ownership interest, and shares voting and dispositive power over the shares
given to the company in connection with its consulting arrangement with Square. The
Start Small Foundation is a charitable fund to which Dorsey has given equity in Square
(and he intends to give more). After negotiations, defendants eventually revealed that
Dorsey accepts a minimal salary from Square ($25,000 was the highest he received in a
year), but they did not disclose Dorsey’s relationship with West Studios or Start Small.
Plaintiffs argue that they are entitled to information regarding Dorsey’s connections to and
benefits obtained from those organizations because the information is relevant to Dorsey’s
financial gains from the Square business. Plaintiffs seek an order requiring Square to

complaint in that matter includes three patent-related counts that are currently stayed, but a number of
state-law counts are active and are the subject of discovery disputes addressed in this Memorandum &
Order.

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“produce any documents related to Dorsey’s relationship to these entities, and
compensation, benefits, perquisites, or tax advantages obtained from those associations.”
It appears undisputed that Dorsey has a financial stake in West Studios and that
West Studios obtained $1.2 million from Square. Because Dorsey’s financial gains from
Square --- either direct or indirect --- are relevant to Morley’s claims, the Court agrees that
Dorsey’s relationship with West Studios is relevant to the case. But Dorsey’s relationship
with the foundation that merely holds stock in Square is not. Furthermore, the scope of
plaintiffs’ request --- i.e., “any documents related to” his relationship with that entity --- is
overly broad and burdensome. Defendants shall produce documents sufficient to show
Dorsey’s relationship to West Studio, Square’s relationship with West Studio, and
Dorsey’s compensation, benefits, perquisites, and tax advantages since 2009. Defendants
shall also produce documents sufficient to show how much stock Dorsey transferred to
Start Small. A “scorched-earth” document production requested by plaintiffs is not
necessary. However, defendants shall respond to relevant interrogatories in good faith
and in accordance with this memorandum and order.
III.

Requests for Admission
Plaintiffs propounded on defendants a series of requests for admission and

corresponding interrogatories to determine whether Square disputes application of certain
legal principles to the facts of this case. Plaintiffs say that defendants refused to respond
to certain of those Requests on the grounds that they seek legal conclusions.

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Federal Rule of Civil Procedure 36(a)(1)(A) states that a request to admit may relate
to “facts, the application of law to fact, or opinions about either.” The Advisory
Committee Notes from the 1970 Amendment observe that “an admission of a matter
involving the application of law to fact may, in a given case, even more clearly narrow the
issues.” The Committee Notes provides an example of such an admission as being
whether an employee acted in the scope of his employment. Such an admission may
remove a major issue from the trial. The Notes further opine that although courts have
been “divided on whether an answering party may properly object to a request for
admission as to matters which the party regards as ‘in dispute,’ … The proper response in
such cases is an answer.”
Two categories of requests to admit are at issue here. The first category includes
the following requests:
Request No. 54: Admit that the assets [transferred by McKelvey and
Dorsey when incorporating Square] were, prior to assignment to Seashell,
Inc., assets of an implied or express partnership between at least Mr.
McKelvey and Mr. Dorsey.
Request No. 55: Admit that the assets [transferred by McKelvey and Dorsey
when incorporating Square] were, prior to assignment to Seashell, Inc.,
assets of an implied or express partnership between Dr. Morley, Mr.
McKelvey, and Mr. Dorsey.
Request No. 108: Admit that before the incorporation of Seashell, Inc., Mr.
McKelvey owed fiduciary duties to Mr. Dorsey.
Request No. 109: Admit that, before the incorporation of Seashell, Inc., Mr.
Dorsey owed fiduciary duties to Mr. McKelvey.
Request No. 110: Admit that, before the incorporation of Seashell, Inc., Mr.
McKelvey owed fiduciary duties to Dr. Morley.

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Request No. 111: Admit that, before the incorporation of Seashell, Inc., Mr.
Dorsey owed fiduciary duties to Dr. Morley.
Request No. 120: Admit that, regardless of the numbers of shares he owns,
Jack Dorsey owes fiduciary duties to Square, Inc.
Plaintiffs say defendants refused to respond to these requests, but defendants say
that they did respond to Requests 54, 55, 110, and 111, denying them to the extent they
seek factual information. Defendants contend that Requests 108 and 109 improperly call
for a conclusion about one of the ultimate issues in the case: i.e., whether an implied or
express partnership existed. Similarly, defendants say Request 120 seeks admission of a
legal conclusion and refuse to answer.
Defendants have denied Requests 54, 55, 110, and 111. There is thus nothing to
compel. As for Requests 108, 109, and 120, the parties each cite cases in support of their
contentions regarding the propriety of using Rule 36 requests to address “legal
conclusions.” Although ample caselaw exists regarding the application of Rule 36
requests, district courts may exercise broad discretion with regard to such discovery
motions. Sommerfield v. City of Chicago, 251 F.R.D. 353, 355-56 (N.D. Ill. 2008)
(collecting cases). The absence of hard-and-fast rules means that decisions in other cases
involving requests to admit are “seldom dispositive.” Id. at 356. Furthermore, there is
room for disagreement among the courts. For example, one district court observed that
“Requests for admission ... are not objectionable even if they require opinions or
conclusions of law, as long as the legal conclusions relate to the facts of the case.” First
Options of Chicago, Inc. v. Wallenstein, No. CIV. A. 92-5770, 1996 WL 729816, at *3

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(E.D. Pa. Dec. 17, 1996) (quoting Audiotext Comms. Network., Inc. v. U.S. Telecom, Inc.,
No. CIV.A. 9402395-GTV, 1995 WL 625744, at *6 (D. Kan. Oct. 5, 1995)). That court
upheld requests for admissions regarding whether a fiduciary duty was owed under certain
facts. Another court observed that “The line between a request to admit a pure legal
conclusion and the application of law to fact can be murky because the application of law
to fact necessarily incorporates an admission as to what the law is.” Aventure Commc'ns
Tech., L.L.C. v. MCI Commc'ns Servs., Inc., No. 5:07-CV-04095-JEG-RA, 2008 WL
4280371, at *1 (N.D. Iowa Sept. 16, 2008).
An example of a request to admit a pure legal conclusion may be where a party asks
the other to admit that it breached an agreement. OpenMethods, LLC v. Mediu, LLC, No.
10-761-CV-W-FJG, 2012 WL 2736471, at *2 (W.D. Mo. July 9, 2012) (holding such
requests to admit were not permitted); see also Pitts v. City of Cuba, No. 4:10CV00274
ERW, 2012 WL 3765086, at *2 (E.D. Mo. Aug. 30, 2012) (disallowing request to admit
that a party had not conspired to deprive others of rights or to obstruct justice). But similar
requests for admission have been allowed in other cases because law was being applied to
facts of the case. E.g., Parsons v. Best Buy Stores, L.P., No. 3:09-CV-00771, 2010 WL
2243980, at *2 (S.D.W. Va. May 19, 2010) (permitting request to admit that an employee
was negligent for failing to secure a load to a pallet); Aventure, 2008 WL 4280371, at *1
(allowing request to admit that party had refused payment of tariff rates within the “safe
harbor” by refusing to pay invoices).

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Because requests to admit involving legal questions must be connected to the facts
of the case, courts do not permit “hypothetical” questions within requests for admission.
Abbott v. United States, 177 F.R.D. 92, 93 (N.D.N.Y. 1997) (collecting cases). The “core
principle is that the requests for admission must be simple, direct and concise so [the
requests] may be admitted or denied with little or no explanation or qualification.”
Sommerfield v. City of Chicago, 251 F.R.D. 353, 355 (N.D. Ill. 2008) (citing United Coal
v. Powell Construction, 839 F.2d 958, 967-68 (3rd Cir. 1988)). “Hypothetical” requests are
not easily answered, and they do not serve Rule 36’s purpose, which is to “allow the parties
to narrow the issues to be resolved at trial by effectively identifying and eliminating those
matters on which the parties agree.” Id. Ultimately, requests for admissions requiring
application of law to the facts of a case are permitted to clarify an opponent’s legal theories,
but purely hypothetical questions not connected to facts of the case are not allowed. See
Abbott, 177 F.R.D. at 93.
Here, Requests 108 and 109 seek admissions regarding whether Dorsey and
McKelvey owed fiduciary duties to one another. These are not purely legal conclusions
because they are focused on the individuals involved in this case --- they are not, e.g.,
statements about what a fiduciary duty is. As one court opined, “[t]here are cases that
have declined to compel defendants to go through what is perceived to be a useless
exercise,” “[b]ut that is not the same thing as saying that the questions are impermissible.”
Sommerfield, 251 F.R.D. at 356. Requests 108 and 109 are uncomplicated. They do not
seek admission of legal conclusions unrelated to the facts of this case. They properly seek

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to clarify the defendants’ legal theories as applied to this case. Useless exercise or not,
Requests 108 and 109 are not impermissible, and defendants shall answer them.
Request 120 is more complicated, however, as it appears to ask for an admission
divorced from the facts of this case: “Admit that, regardless of the numbers of shares he
owns, Jack Dorsey owes fiduciary duties to Square, Inc.” In fact, discovery has revealed
that Dorsey owns significant shares in Square. Because Request 120 does not seek to
apply law to the facts of the case, the Court will sustain defendants’ objection to
responding to Request 120.
The second category of requests, Requests 74-79, include
72. Admit that, if Defendants are found to have breached a fiduciary duty to
Dr. Morley, that breach was perpetrated jointly by Messrs. Dorsey and
McKelvey.
73. Admit that, if Defendants are found to have breached a joint venture
with Dr. Morley, that breach was perpetrated jointly by Messrs. Dorsey and
McKelvey.
The subsequent requests, Requests 74-79, ask the same question for each of
Morley’s other claims: unjust enrichment, negligent misrepresentation, fraud, fraudulent
nondisclosure, misappropriation of trade secrets, and falsely claiming co-inventorship.
Defendants denied the requests because they contain incomplete hypothetical
questions and fail to identify facts that would give rise to the legal conclusions sought.
However, Interrogatory 29 further required defendants, for any such denials, to “describe
in detail the basis for your contention that the alleged conduct was not committed jointly.”

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Defendants refused to respond to the interrogatory for the same reason it denied Requests
72-79.
Defendants state that they denied the requests because they use the term “if.”
Another court has allowed requests for admissions to be made in such a fashion, holding
that use of the term “if” does not necessarily create an improper hypothetical. Clean
Earth of Maryland, Inc. v. Total Safety, Inc., No. 2:10-CV-119, 2011 WL 4832381, at *3
(N.D.W. Va. Oct. 12, 2011). The defendants were of course well within their rights to
deny the requests for admission, as they have done. Whether defendants were required to
explain their reason for denying the requests in detail, however, is a different question.
An interrogatory may ask for an “opinion” or the “application of law to fact.” Fed. R. Civ.
P. 33(a)(2). Interrogatory 29 essentially asks why defendants contend that Dorsey and
McKelvey did not act “jointly” when they engaged in certain acts. This is an answerable
question. The Court understands that defendants do not want to be limited to their
answers as the case progresses, but defendants may appropriately tailor their responses to
avoid that problem. Defendants shall respond to Interrogatory 29.
IV.

Fiduciary Obligations
Plaintiffs propounded document requests seeking evidence of equity distributions in

other entrepreneurial endeavors involving Dorsey and McKelvey, including the companies
Twitter, Mira Corporation, and Third Degree Glass Factory. Defendants withhold these
documents under a relevance objection. Plaintiffs state that a central issue in this case is
the extent to which Dorsey and McKelvey breached their fiduciary duties to Morley by

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taking Square’s equity for themselves. Plaintiffs say that showing the distribution of
equity among the founders of those other companies and the contributions of those
founders are relevant to the general fairness of the distribution of equity in Square. The
documents also relate, plaintiffs say, to Dorsey’s and McKelvey’s personal awareness of
the proper exercise of fairness among founders in a start-up company. But this case is
about the circumstances surrounding the formation of Square in 2009, not the formation of
tangential corporations having nothing to do with plaintiffs. To delve into all the facts and
circumstances of the formation and equity distributions for Twitter, Mira Corporation, and
Third Degree Glass Factor would require significant resources and still would result in an
apples-versus-oranges comparison. That information is too tangential to be relevant to
this case.
Accordingly,
IT IS HEREBY ORDERED that plaintiffs’ motion to compel (#276) is GRANTED
in part and DENIED in part, as described herein.
Dated this

11th

day of January, 2016.

____________________________________
STEPHEN N. LIMBAUGH, JR.
UNITED STATES DISTRICT JUDGE

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