POET, LLC et al v. Nelson Engineering, Inc. et al
Filing
155
POST-HEARING ORDER granting in part and denying in part 80 Motion for Summary Judgment; granting 82 Motion to Sequence the Trial ; granting 147 Motion to Amend/Correct ( Pretrial Conference set for 7/15/2019 at 9:00 AM in Sioux Falls Courtroom 1 - Room 203A before U.S. District Judge Lawrence L. Piersol ). Signed by U.S. District Judge Lawrence L. Piersol on June 6, 2019. (DLC)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
s
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POET, LLC, POET RESEARCH, INC., *
and POET PLANT MANAGEMENT,
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LLC,
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CIV 17-4029
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Plaintiffs,
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vs.
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POST-HEARING ORDER
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NELSON ENGINEERING, INC.,
JERRY BAKER, KEVIN HOWES, and
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HOMELAND ENERGY SOLUTIONS,
LLC.
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, *
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Defendants.
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Plaintiffs, POET,LLC,POET Research, Inc., and POET Plant Management(collectively,
"POET"),brought this action for injunctive reliefand damages against two ofits former employees,
Jerry Baker(Baker)and Kevin Howes(Howes), and the businesses the men joined some time after
they left POET,Nelson Engineering,Inc.(NEI)and Homeland Energy Solutions,LLC(Homeland)
(collectively,the"Defendants"). Baker and NEI counterclaimed againstPOET,seeking declaratory
reliefand damages. Pursuant to Federal Rule ofCivil Procedure 56,POET(doc. 80),Baker and NEI
(doc, 79), and Howes and Homeland (doc. 91)all move for summaryjudgment on various claims.
The parties also filed a number of additional motions.
At a hearing on May 31, 2019, the Court heard argument on the motions. Appearing on
behalf ofPOET were Tara Norgard, Alexandra Olson, Jamie Hendrickson, Sander Morehead and
Marty Jackley. Mitchell Peterson and Shane Eden appeared on behalf of Baker and NEI.
Representing Howes and Homeland were Alexander Johnson and Tyler Haigh.
BACKGROUND
POET commenced this lawsuit against Baker and NEI after learning NEI was marketing a
process called Hydrolysis Utilization("HU")to address the volume drop and additional headspaee
in fermentors caused by the release of carbon dioxide. POET later amended its complaint to add
Howes and Homeland as defendants. POET claims that Baker and Howes misappropriated trade
secrets and confidential information,including but not limited to POET's Delayed Dilution("DD")
technology,and used those to develop HU Which POET contends is exactly the same as POET's DD.
POET alleges that (1) all Defendants violated the Defend Trade Secrets Act, 18 U.S.C.
§ 1831
seq.\(2)all Defendants violated the South Dakota Uniform Trade Secret Act,SDCL 37-
29,the Iowa Uniform Trade Secret Act,lA Code 550.2-.4, and the Minnesota Uniform Trade Secret
Act, Minn. Stat. 325C.01-.03;(3)Baker breached a confidentiality agreement with POET;(4)Baker
breached a duty ofloyalty to POET; NEItortiouslyinterfered with the confidentiality agreements
(5)
between POET and Baker and Howes;(6) Howes breached a confidentiality and a non-compete
agreement with POET;(7) Howes breached a duty of loyalty to POET;(8) Homeland tortiously
interfered with the confidentiality agreement between Howes and POET.(Doe. 45.)
Defendants Baker and NEI filed an amended counterclaim against POET for defamation,
tortious interference with business relationships, tortious interference with NEI's contractual rights
with Glacial Lakes Energy, and declaratory relief. (Doc. 21.)
POET moves for summary judgment on the breach of contract claims against Baker and
Howes and the tortious interference claims againstNEIand Homeland.POET also requests summary s
judgment on Baker and NEI's counterclaim alleging that POET tortiously interfered with NEI's
contract with Glacial Lakes.Energy. Baker and NEI do not object to summaryjudgment in favor of
POET on the counterclaim for tortious interference with the Glacial Lakes Energy contract.
Baker and NEI move for summary judgment on POET's misappropriation oftrade secrets
claims under both federal and state law. Baker requests summary judgment on POET's breach of
contract and breach of duty of loyalty claims against him. NEI asks for summary judgmerit on
POET's claim that it tortiously interfered with Baker's contract with POET.
Howes moves for summary judgment on the portion of POET's breach of contract claim
alleging he breached a noncompete agreement. Howes and Homeland also ask for summary
judgment on POET's claim that Homeland was unjustly enriched.
DISCUSSION
I. Baker and NEI's motion for summary judgment on POET's misappropriation of trade
secrets claims under both federal and state law is denied.
Baker and NEI argue that POET has failed to sufficiently describe what the trade secret is
as a matter oflaw.POET asserts that their trade secret is a process ofcombined elements,that they
have sufficiently described it and, at a minimum,there is a fact dispute about whether a trade secret
exists, together with other factual disputes on material issues. Viewing the record in the light most
favorable to POET, for the reasons stated at the hearing on May 31, the Court finds that fact
questions exist and that Baker and NEI are not entitled to summary judgment on the
misappropriation oftrade secrets claims.
II. Is the Issue Whether a Trade Secret Exists a Question of Law for the Court?
At the hearing, the Court eited AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp., 663
F.3d 966, 972(8th Cir. 2011). There, the Eighth Circuit stated,"Though the existence of a trade
seeret is a fact-intensive inquiry, it is ultimately a question oflaw determined by the court." Id. at
971
Steve Silveus Ins., Inc. v. Goshert, S73 N.E.2d 165, 179(Ind. Ct. App.2007); Lyn-^Flex
West, Inc. V. Dieckhaus, 24 S.W.3d 693,698(Mo. Ct. App.1999)). In a 2014 decision, the Eighth
Cireuit reviewed the issue "whether the jury correctly found that Hallmark's PowerPoint
presentations constituted trade secrets under Missouri law." Hallmark Cards, Inc. V. Monitor
Clipper Partners, LLC,758 F.3d 1051,,1056 (8th Cir. 2014). Later, in 2015, the Indiana Court of
Appeals acknowledged that there is tension between "who is to determine whether information is
a trade secret," but the eourt determined it was not neeessary to decide at that time "whether
information constitutes a trade secret is a matter oflaw or a question offact." Think Tank Software
Developmnet Carp, v. Chester, Inc., 30 N.E.3d 738,746(Ind. Ct. App. 2015).
In Weins v. Sporleder, 569 N.W.2d l6(S.D. 1997), the South Dakota Supreme Court held
that it is a question of law whether a trade secret is "information, including a formula, pattem,
compilation, program, device, method, technique or process." Id. at 20(citing SDCL 37-29-1(4)).
The court held that the remaining subsections ofthe South Dakota Trade Secrets Act are questions
offact. M
After the Court cited these cases,the parties requested time to research and brief: 1)whether
it is for the court or the jury to decide if a trade secret exists, and 2) if the court is to make a
preliminary decision if a trade secret exists before submitting that issue to the jury for purposes of
closing the court or records during trial, whether a lower burden or standard of proof applies to the
Court's decision on that issue.
After receiving the written argument and authority from the parties, the Court will decide
before the July 15 hearing whether the existence of a trade secret is a question oflaw for the Court
or a question offact for thejury, or a mixed question as is the case at least under South Dakota law.
See Weins, supra.
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There are two reasons for a trade secret determination by the Court. The Court has to make
a preliminary trade secret determination on the court closure question. Ifthe Court determines that
there is no trade secret, then there is no basis for closing the records or portions ofthe trial. It is for
this purpose thatthe Court has suggested that possibly the Court should consider a lower burden of
proof. The Court made this suggestion given the fact that "trade secrets partake of the nature of
property, the value of which is completely destroyed by disclosure." In re Iowa Freedom ofInfo.
Council, 724 F.2d 658,664(8th Cir. 1983). The information claimed to be a trade secret has to be
preserved for appellate review,among other concerns,thus a lower standard for finding atrade secret
for this purpose appears to be warranted. The briefing to be reeeived from the parties will assist the
Court in making this determination.
The second reason for the Court to make a pretrial determination of whether or not a trade
secret exists is for the purpose ofdetermining what issues get submitted to thejury.Ifafter receiving
the requested briefing, the Court concludes that the existence ofa trade secret is a law question,then
the Court will hear evidence on that issue on July 15. If it is instead a jury question, then evidence
on whether there is a trade secret will still be heard on July 15 with regard to the Court closure issue
discussed above. Ifthe trade secret issue is a mixed issue oflaw and fact, then on July 15 the Court
will hear evidence on the law issue with the two factual issues to be presented to thejury ifthe Court
finds for POET on the law issue.
III. POET'S Breach of Contract Claims against Baker and Howes
POET, Baker and Howes all move for summary judgment on POET's breach of contract
claims. Howes limits his request for summary judgment to POET's allegation that he breached a
noncompete clause in the agreement.For the following reasons, as discussed at the hearing,no party
is entitled to summary judgment on the breach of contract claims.
The Court addressed the fact that there are no copies of employment agreements allegedly
signed by Baker and Howes in the record. Even though Baker,and Howes each admit they signed an
employment contract, the terms of the actual contracts are not clear. According to the declaration
ofPOET employee Rod Pierson, the signed versions ofBaker and Howes' agreements were lost in
the process of converting from paper personnel files to electronic files. (Doe. 106, Pierson
Declaration at 13.) POET has copies of what it alleges are the unexecuted agreements.(Pierson
Dee. at TITI4, 11; Exhibits A , C) Pierson avers that the unexecuted agreements Baker and Howes
signed are similar in form and content to Other employment agreements used by POET around the
time the two men were hired. (Pierson Dec. at ^ 6.) POET produced a copy of the executed
employment agreement ofJames Schwartz, who was hired by POET less than a year after Baker for
a similar position. (7^/.). Pierson. notes that the provisions outlining the eonfidentiality and
noncompete obligations in Schwartz's agreement are identical to those signed by Baker and Howes.
{Id at
6, 12.) He believes Exhibit A attached to his declaration is identical to the version Baker
signed, and that Exhibit C is identical to the version Howes signed. {Id. at
4, 11.) ^
To establish a breach ofcontract under South Dakotalaw,POET must prove: 1)the existence
of an enforceable promise; 2) that defendants breached the contract; and 3) that POET suffered
damages as a result ofthe breach. See, e.g., McKie v. Huntley,620 N.W.2d 599,603 (S.D. 2000).
"The proponent has the burden 'to prove the contract by evidence so clear aiid satisfactory' that no
doubt remains." Baker v. Masco Builder Cabinet Grp.,Inc.,9\lB. Supp.2d 814,821 (D.S.D.2012)
(quoting/« re Estate ofNeiswender,616 N.W.2d 83, 86(S.D. 2000)).
Rule 1004 ofthe Federal Rules ofEvidence provides that the "original is not required, and
other evidence ofthe contents ofawriting...is admissible if...[a]ll originals are lost or destroyed,
and not by the proponent acting in bad faith," Fed R. Evid. 1004(a). Where an original is not
available there are some circumstances in which secondary evidence may be offered to prove the
contents of a writing. See United States v. Standing Soldier, 538 F.2d 196,203 (8th Cir. 1976). In
United States v. Gerhart, 538 F.2d 807(8th Cir. 1976), the Eighth Circuit stated that, under Rule
1004, the court retains the authority to decide "preliminary questions such as authenticity, lack of
an original and whether the proponent has presented a sufficient foundation so that a 'reasonable
juror couldbe convinced' that the secondary evidence correctly reflects the contents ofthe original."
Id. at 809. The Eighth Circuit refused to require the proponent of secondary evidence to make a
"clear and convincing" showing that the secondary evidence is accurate and trustworthy in order for
it to be admissible. Id. Instead, the Court held that the appellant's attacks on the sufficiency ofthe
evidence and the credibility ofthe government's witnesses were relevant to the weight, rather than
the admissibility,ofthe secondary evidence.Id. Any kind ofsecondary evidence is perrnissible once
Rule 1004's conditions are met,"ranging from photographs and handwritten copies to oral testimony
of a witness whose credibility is suspect." Id. at 809 n. 2 (quoting 5 J. Weinstein, Evidence P
1004(01), at 1004-4,1004-5 (1975)).
During the May 31 hearing, the Court explained that more information is needed about the
employment contracts in order for the Court to decide the "preliminary questions such as
authenticity,lack of an original and whether the proponent has presented a sufficient foundation so
that a 'reasonable juror could be convinced' that the secondary evidence correctly reflects the
contents ofthe original." Gerhart, 538 F.2d at 809. A hearing will be held on this issue on July 15,
and POET will be allowed to present additional evidence regarding the contracts with Baker and
Howes.
IV. POET'S Motion to Sequence the Trial
POET proposes that Counts I (defamation) and II (tortious interference with business
relationships) ofthe Amended Counterclaim asserted by Baker and NEI be tried in a second phase
ofthe case, after POET's claims in the Amended Complaint are decided by the jury. The Court will
grant this motion.
Sequencing the trial in this case will alleviate the possibility of confusing the jury, as there
will be different time frames,differenttypes ofclaims and fewer parties involved in the second phase
ofthe trial. In addition, the difficulties involved with the issue of whether to close the courtroom to
the public likely will not apply during the second phase, of the trial. There will be no prejudice to
any party by sequencing the trial.
As explained during the May 31 hearing,ifPOET prevails on the trade secrets claims during
the first phase ofthe case, it is possible that the second stage ofthe trjal will not be needed. When
the lawyers conduct voir dire at the beginning of phase,one of the trial, they should include the
claims in the Amended Complaint and the Amended Counterclaim, but the lawyers are directed not
to say anything in front of the jury intimating that the jury may not need to consider the
counterclaims if they find in favor ofPOET during the first phase of the trial.
V. Baker's Motion for Summary Judgment on POET's Breach of Duty of Loyalty Claim
The Court reserves ruling on this issue.
VI. POET'S Motion for Summary Judgment on Tortious Interference With Contract Claims
Against NEI and Homeland
This motion is denied. POET needs to establish the existence and terms ofthe employment
contracts with Baker and Howes before a determination can be made whether NEI or Homeland
tortiously interfered with the contracts. If the Court decides the issue can be submitted to the jury,
the Court finds that there are issues of fact to be decided by.the jury regarding these claims, thus
precluding summaryjudgment.
VII. Howes and Homeland's Motion for Summary Judgment on POET's Claim of Unjust
Enrichment and Motion to Limit Testimony of POET's Damages Expert,Dr. Jesse David
Howes and Homeland argue that Dr. David's damages calculations for POET's unjust
enrichment claim are too speculative as a matter of law. In addition. Homeland aSserts that the
undisputed material facts prove Homeland was not unjustly enriched as a matter oflaw because its
ethanol production actually decreased with the use ofHU technology. POET disagrees that the facts
support these propositions. The Court takes these motions under advisement.(Docs. 91 and 95.)
VHI. Howes' Motion for Summary Judgment on POET's Breach of Non-Compete Clause
Howes argues there is no signed copy ofthe agreement.In addition,he contends that the non-
compete clause in the exemplar provided by POET is too broad as a matter of law under South
Dakota law. This motion is also denied because,as explained above,there are material issues offact
regarding the terrns ofthe non-compete agreement.
IX. POET's Motion to Exclude Certain Testimony of Dr. Rivers
In accordance with the Court's rulings at the May 31 hearing. Dr. Rivers will be allowed to
testify about industry-wide standards or practices for protecting confidential information, but he
carmot testify about whatever he happens to think should be done to protect confidential information
or trade secrets aside fi-om what are industry-wide standards or practices. The jury will decide
whether POET took reasonable steps to protect the trade secrets.
Dr. Rivers may testify about the technology at issue, the ideas disclosed in the '799 patent
and how it overlaps with HU technology,but he cannot testify that Baker and Howes used the patent
and not DD technology to develop HU, or give any other opinions that would bolster Baker or
Howes^ statements.
Counsel for NEI and Baker stated that they do not intend to have Dr. Rivers testify about the
counterclaims against POET.
Any other testimony from Dr. Rivers will be ruled oh if there is an objection at trial.
X.POET'S Motion to Exclude Testimony of Non-Retained Experts
POET moves to exclude any expert testimony by non-retained experts because Baker and
NEI did not comply with the disclosure requirements of Federal Rule of Civil Procedure 26(a)(2).
At the hearing on May 31,POET focused on the counterclaim damages. POET believes the damage
calculations prepared by Baker for the counterclaims and that the testimony of Baker and Tiffany
Trottman about the damages are actually expert opinions.POET asserts thatthe defendants are trying
"to masquerade expert opinion under the guise offact witnesses."(Doc. HI,Reply brief at 9.)
The lawyers for Baker and NEI stated in their brief and at the May 31 hearing that they
identified fact witness opinions and testimony as "expert" testimony only "out of an abundance of
caution to preserve its rights and avoid unnecessary evidentiary disputes."(Doc. 119,Response Brief
at 21.) They believe all the witness testimony is lay testimony admissible under Rule 701 of the
Federal Rules ofEvidence. The witnesses will not testify to anything other than what was revealed
in their depositions.
Baker is one of the owners of NEI. This Court has allowed owners to testify as to the
company's lost profits. See, e.g., Diesel Machinery,Inc. v.. B.R. Lee Industries, Inc., 418 F.3d 820
(8th Cir. 2005). At the hearing, the Court directed the lawyers for Baker and NEI to provide the
Court with Baker's deposition testimony and any other documentation regarding counterclaim
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damages. The Court will rule on the admissibility of the counterclaim damage testimony and
evidence after reviewing the documents.See,e.g., USSalt,Inc. v. Broken Arrow,Inc.,563 F.3d687,
690(8th Cir. 2009)(rejecting testimony by company president where "record demonstrate[d] that
[he] could not identify any customer interested in buying ... a specific amount of[the product] at a
specific price").
XI. NEI's Tortious Interference Counterclaim Against POET Regarding Glacial Lakes
NEI does not oppose POET's motion for summaryjudgment on Count III ofthe Amended
Counterclaim alleging thatPOET tortiouslyinterfered with NETs confidentiality and non-disclosure
agreement with Glacial Lakes. Accordingly, the Court will grant POET's motion for summary
judgment on the tortious interference counterclaim.
XII. Motion to Amend/Correct Scheduling Order
The Court will have a pretrial hearing on July 15,2019. A hearing will be held on the issues
involving whether the courtroom should be closed to protect trade secrets,including any objections
by the public and the media as set forth in this Court's Order issued on May 30,2019.(Doc. 150.)
In addition,POET will be allowed to present evidence regarding the contracts with Baker and Howes
during the pretrial hearing on July 15.
The Scheduling Order will be amended as follows:
• On or before June 28, 2019, the parties shall submit Rule 26(a)(3) witness lists,
designations ofwitnesses whose testimony will be presented by deposition, and trial
exhibit lists.
• On or before July 12, 2019, the parties shall file objections, if any, under Rule
26(a)(3).
•
On or before June 28, 2019, the parties shall file all motions in limine, with
supporting authority.
• Responses to motions in limine shall be due on or before July 9, 2019.
• Replies to motions in limine responses shall be due on or before July 16, 2019.
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Briefs on motions in limine shall not exceed twenty-five pages.
IT IS ORDERED that:
1. NEI and Baker's motion for summaryjudgment, doc. 79, is denied as to POET's
federal and state misappropriation oftrade secrets claims,POET's breach ofcontract
claim, and POET's claim that NEI tortiously interfered with Baker's contract. The
Court reserves ruling on the claim against Baker for breach of the duty of loyalty.
2. POET's motion for summary judgment, doc. 80, is denied as to the breach of
contract claims against Baker and Howes and the tortious interference with contract
claims against NEI and Homeland. It is granted as to Count 111 of the Amended
Counterclaim alleging tortious interference with NETs agreement with Glacial Lakes.
3. Howes and Homeland's motion for summary judgment, doc. 91, is denied as to
POET's breach ofcontract claim.The Court reserves ruling on the unjust enrichment
claim.
4.POET's motion to sequence the trial, doc. 82, is granted.
5. POET's motion to exclude certain testimony of Dr. Douglas Rivers, doc. 103, is
granted to the extent set forth in this Order. All other objections to Dr. Rivers'
testimony will be ruled on at trial.
6. Thejoint motion to amend/correct the scheduling order,doc. 147,is granted to the
extent set forth in this Order.
7. A pretrial hearing will be held at 9:00 a.m on Monday,July 15,2019. The pretrial
conference that was scheduled for Monday, June 24, 2019, is cancelled.
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8. The Court will decide before the July 15 hearing whether the existence of a trade
secret is a question of law for the Court, a question of fact for the jury, or a mixed
question of law and fact.
9. The Court will provide notice to the public and the media prior to the July 15
hearing so they may appear and object to any closure of portions ofthe trial or access
to transcripts and documents. There is a mediation scheduled for June 13, 2019. If
the mediation is not successful, the Court will provide a copy of this Order to the
Argus Leader and the three local television stations.
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10. The order of presentation on July 15 will be the presentation of evidence
regarding the existence and terms of the employment contracts with Baker and
Howes starting at 9:00 a.m., to be immediately followed by hearing any objections
the public or the media may have concerning the requested partial closing of the
courtroom and the restriction of access to documents and transcripts dealing with
claimed trade secrets. Next will be a hearing on the existence of claimed trade
secrets.
11. The parties shall submit briefs regarding whether it is for the court or the jury to
decide if a trade secret exists for both purposes as described by the Court in part II
ofthe above discussion. The parties also shall briefthe statute oflimitations defense
asserted by Howes.
Plaintiffs' briefis due on Jime 14,Defendants' responsive briefs are due on Jxme 26,
and Plaintiffs' reply is due on June 28.
Dated this ^ day ofJune, 2019.
BY THE COURT:
AfPoihp/tP^ LQjl\
Lawrence L. Hersol
United States District Judge
ATTEST:
MATTHEW W.THELEI
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