Consumers Supply Distributing, LLC v. Brands et al
ORDER granting 11 Plaintiff's Combined Motion to Amend First Amended Complaint and Motion to Remand. Signed by U.S. District Judge Karen E. Schreier on 8/1/17. (DJP)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
CONSUMER SUPPLY DISTRIBUTING,
ORDER GRANTING PLAINTIFF’S
MOTION TO AMEND FIRST
AMENDED COMPLAINT AND
REMAND CASE TO STATE COURT
TED M. BRANDS and LARRY
Plaintiff, Consumer Supply Distributing, LLC (CSD), brings this action
against defendants, Ted M. Brands and Larry Steinkamp. CSD alleges seven
counts against Brands and Steinkamp in its amended complaint:
misappropriation of trade secrets, breach of fiduciary duty and duty of loyalty,
conversion, unjust enrichment, tortious interference with contracts and
business relationships, and unfair competition. CSD moves to amend the
amended complaint to add Jeff Reinders and NewStar Sourcing and Services,
LLC as additional parties and to remand the case back to the Circuit Court of
Union County, South Dakota. Brands and Steinkamp resist CSD’s motion to
amend. For the reasons stated below, the court grants CSD’s motion.
The facts alleged by CSD in its proposed second amended complaint are
CSD manufactures, develops, sells, and distributes agricultural feed
products throughout the United States. Docket 11-1 at 3. Brands, Steinkamp,
and Reinders were all employees of CSD. Id. at 3-4. Brands, Steinkamp, and
Reinders had access to confidential information including stock status reports,
sales reports, customer lists, volume orders, key venders, key suppliers, and
pricing information. Id. Due to the time and resources used to assemble this
information, CSD considers this data important. Id. at 4. CSD limits its
employees’ access to this information to those that need it. Id. This information
is not public information. Id. Keeping this information confidential is important
to prevent a competitor from gaining an unfair advantage. Id.
On or about January 15, 2017, Brands resigned from his role as
Business Development Manager without giving notice to CSD. Id. at 5. Several
other members of CSD’s sales team resigned and became employed by NewStar
including Greg Lawfer, Keith Prohaska, Richard Pearl, Bill McPherson, Ron
Roering, and Keith Snyder. Id.
Steinkamp resigned without notice as a distribution salesperson for CSD,
on or about March 9, 2017, and Reinders resigned on December 15, 2016. Id.
at 2. After Brands and Steinkamp resigned, they took confidential, proprietary,
and trade secret information, including customer lists. Id. at 5. When all three
employees resigned, they accepted positions or developed a business
relationship with NewStar, another company that sells agricultural feed
products. Id. at 5-6.
CSD commenced this action against Brands and Steinkamp in state
court on March 7, 2017. Docket 1-1. The first amended complaint was dated
March 15, 2017. Id. Brands and Steinkamp filed a notice of removal on
April 11, 2017. Id. Removal was based on diversity jurisdiction. Id. CSD is a
corporation with its principal place of business in North Sioux City, South
Dakota, and is incorporated under the laws of Minnesota. Docket 11-1 at 1.
Brands resides in Oakland, Nebraska, and Steinkamp resides in Lake View,
Iowa. Id. CSD now moves to amend its amended complaint to add parties and
claims. Docket 11. One of the defendants CSD seeks to add is Reinders, a
South Dakota resident. Id. Because Reinders is from Pickstown, South Dakota,
and CSD’s principal place of business is South Dakota, diversity jurisdiction
would be destroyed if the motion to amend is granted.
CSD moves to amend its complaint for a second time, arguing that there
are additional defendants subject to similar claims. “A party may amend its
pleading once as a matter of course within . . . 21 days after serving it.” Fed. R.
Civ. P. 15(a)(1)(A). “In all other cases, a party may amend its pleading only with
the opposing party's written consent or the court's leave.” Fed. R. Civ. P.
Generally, motions to amend are freely granted when justice so requires.
Fed. R. Civ. P. 15(a). This standard changes, however, when the plaintiff seeks
to amend its complaint and the amendment would destroy the court's subject
matter jurisdiction. In this situation, the Eighth Circuit Court of Appeals has
adopted the rationale of the Fifth Circuit Court of Appeals in Hensgens v. Deere
& Co., 833 F.2d 1179, 1182 (5th Cir. 1987):
‘The district court, when faced with an amended pleading naming a
new nondiverse defendant in a removed case, should scrutinize
that amendment more closely than an ordinary amendment. . . . In
this situation, justice requires that the district court consider a
number of factors to balance the defendant's interests in
maintaining the federal forum with the competing interests of not
having parallel lawsuits.’
Bailey v. Bayer CropScience L.P., 563 F.3d 302, 309 (8th Cir. 2009) (quoting
Hensgens, 833 F.2d at 1182).
“If after removal the plaintiff seeks to join additional defendants whose
joinder would destroy subject matter jurisdiction, the court may deny joinder,
or permit joinder and remand the action to the State court.” 28 U.S.C.
§ 1447(e). If the plaintiff can show that the new parties are indispensable,
joinder is required. Fed. R. Civ. P. 19. When the potential defendant is
dispensable, the district court may deny joinder and retain jurisdiction. Bailey,
563 F.3d at 308. This determination is made on a case-by-case basis. Id.
Should the amended complaint be amended to add Reinders and
NewStar as defendants under the three factor test?
Both parties agree that Brands, Steinkamp, Reinders, and NewStar
(collectively referred to as defendants) are joint tortfeasors and are merely
permissive parties. Hence, this court must “ ‘balance the defendant’s interest in
maintaining the federal forum with the competing interest of not having
parallel lawsuits.’ ” Bailey, 563 F.3d at 309 (quoting Hensgens, 833 F.2d at
1182). To determine whether a case should maintain a federal forum, the court
should address three factors: “ ‘(1) the extent to which the joinder of the
nondiverse party is sought to defeat federal jurisdiction, (2) whether [the]
plaintiff has been dilatory in asking for amendment, and (3) whether [the]
plaintiff will be significantly injured if amendment is not allowed.’ ” Bailey, 563
F.3d at 309 (quoting Le Duc, 777 F.Supp. at 12).
CSD alleges that it is adding Reidners and NewStar as defendants
because it has viable claims against them arising from the same subject matter
– not to defeat federal jurisdiction. Brands and Steinkamp argue that CSD
knew or should have known about its claims against Reinders and NewStar
before CSD filed this suit and CSD is adding Reinders and NewStar for the
purpose of destroying federal jurisdiction. Docket 13 at 7. Even though CSD
should have known about its claim against Reinders and NewStar, this court
has previously stated that even if a party should have known about a claim
that does not mean a party’s motion to amend is sought to destroy diversity.
See Smith v. Polaris Indus., Inc., 4:15-CV-04165-KES, 2016 WL 4046735, at *2
(D.S.D. July 28, 2016) (finding that Smith’s motion to amend may not be
seeking to destroy diversity even if she should have known about the claim
before filing her complaint). Here, CSD alleges viable claims that are related to
and come from the same subject matter as the pending action. CSD alleges
that Reinders worked with both Brands and Steinkamp. Docket 11-1 at 16.
These parties were employees of CSD, and they formed a business relationship
with NewStar after resigning from CSD. Id. Because many of the claims are
identical, relevant, and arise from the same factual scenario, this factor weighs
in favor of CSD.
As to the second factor, CSD filed its motion to amend twenty-one days
after removal. Docket 17 at 6. “[P]ermission to amend may be withheld if the
plaintiff does not have at least colorable grounds for relief, or if [it] is guilty of
undue delay, bad faith, dilatory motive, or if permission to amend would
unduly prejudice the opposing party.” Williams v. Little Rock Mun. Water Works,
21 F.3d 218, 224 (8th Cir. 1994) (citing Foman v. Davis, 371 U.S. 178, 182
In Hofmann, the plaintiff filed a motion of amend his complaint thirteen
days after he discovered new evidence. Hofmann v. Enter. Leasing Co. Minn.,
LLC, No. 13-CV-255 (JNE/SER), 2014 WL 12601038, at *6 (D. Minn. Oct. 15,
2014)). The court found this motion timely. See id.
Here, CSD states that it discovered new evidence in early April 2017.
CSD instructed its attorneys to file the second amended complaint on April 10,
2017, preceding the filing of the notice of removal on April 11, 2017. The
motion to amend the amended complaint was filed just 56 days after the date
on the initial complaint. Docket 17 at 6. Similar to Hofmann, CSD discovered
new evidence and filed its motion to amend within twenty-one days of the
discovery. The court finds that CSD was not dilatory in filing its second
amended complaint. Thus, this factor weighs in favor of CSD.
With regard to the third factor, “ ‘It has long been the rule that it is not
necessary for all joint tortfeasors to be named as defendants in a single
lawsuit.’ ” Bailey, 563 F.3d at 308 (quoting Temple v. Synthes Corp., Ltd., 498
U.S. 5, 7, 111 S.Ct. 315, 112 L.Ed.2d 263 (1990)). This court has previously
recognized that a party will not be significantly injured if joint tortfeasors are
not added to a case. Smith, 2016 WL 4046735, *3. Because Reinders and
NewStar are joint tortfeasors according to the second amended complaint, this
factor weighs in favor of Brands and Steinkamp.
In weighing the three factors, this court finds that the facts of this
situation weigh in favor of granting the motion to amend in the interest of
judicial efficiency. If this case is not remanded, CSD stated it intends to file
another lawsuit in state court against Reinders and NewStar. Docket 17 at 8.
Both parties recognize that if the motion is denied there will be parallel state
and federal litigation on the same issues. In the interest of judicial efficiency,
CSD’s motion to amend the first amended complaint should be granted, unless
the amendment would be futile.
Are CSD’s claims against Reinders and NewStar futile?
A motion to amend may be denied if the amendment would be futile.
Williams, 21 F.3d at 225 (citing Foman, U.S. at 182). Brands and Steinkamp
argue that because CSD does not state a plausible claim for its causes of action
against Reinders and NewStar, the motion to amend should not be granted. “A
determination that an amendment is futile means the Court has reached the
legal conclusion that the amended complaint could not withstand a motion to
dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure.” Onnen v.
Sioux Falls Indep. Sch. Dist. #49-5, No. 4:07-CV-4174-JES at *3 (D.S.D. Dec.
17, 2009) (citing Cornelia I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d
778, 781-82 (8th Cir. 2008).
“To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible on
its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). Inferences are construed in favor of the
nonmoving party. Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 595 (8th Cir.
A. CSD’s aiding and abetting claim against Reinders and NewStar is
plausible and would survive a motion to dismiss.
The South Dakota Supreme Court recognizes a claim for aiding and
abetting the breach of a fiduciary duty. Chem-Age Indus., Inc. v. Glover, 652
N.W.2d 756, 773 (S.D. 2007). The South Dakota Supreme Court cites to the
Restatement Second of Torts with approval. Id. The Restatement Second of
For harm resulting to a third person from the tortious conduct of
another, one is subject to liability if he: (a) does a tortious act in
concert with the other or pursuant to a common design with him,
or (b) knows that the other's conduct constitutes a breach of duty
and gives substantial assistance or encouragement to the other so
to conduct himself, or (c) gives substantial assistance to the other
in accomplishing a tortious result and his own conduct, separately
considered, constitutes a breach of duty to the third person.
Restatement (Second) Torts § 876 (1979).
Here, CSD alleges that NewStar knew or had reason to know that
Reinders, Brands, and Steinkamp planned to leave CSD. Docket 11-1 at 14.
Furthermore, CSD alleges that NewStar knew or should have known that
Reinders, Brands, and Steinkamp would solicit employees from CSD and would
interfere with CSD’s business by being involved with prospective customers,
business associates, vendors, suppliers, and employees. Id. at 15. When
viewing the facts and inferences in the light most favorable to the nonmoving
party, CSD states a plausible claim. As a result, this claim would survive a
motion to dismiss and is not futile.
B. CSD’s civil conspiracy claim against Reinders and NewStar is
plausible and would survive a motion to dismiss.
“ ‘A civil conspiracy is fundamentally an agreement to commit a tort.’ ”
Kirlin v. Halverson, 758 N.W.2d 436, 455 (S.D. 2008) (quoting Reuben C. Setliff,
III, M.D., P.C., v. Stewart, 694 N.W.2d 859, 867 (S.D. 2005)). To establish a civil
conspiracy claim, the plaintiff must show: (1) two or more persons; (2) an object
to be accomplished; (3) a meeting of the minds on the object or course of action
to be taken; (4) the commission of one or more unlawful overt acts; and
(5) damages as the proximate result of the conspiracy. Reuben, 694 N.W.2d at
In this case, CSD is alleging that Brands, Steinkamp, Reinders, and
NewStar participated in tortious activity. See Docket 11-1. CSD alleges in its
second amended complaint that the defendants had discussions with each
other to commit torts and that the defendants went in with the intention to
accomplish the tortious activity of misappropriation of trade secrets, breach of
fiduciary duty, conversion, and tortious interference of business relationships
or expectancies. Id. at 16. Lastly, CSD alleges that it will suffer damages from
these tortious actions. Id. Viewing the facts and inferences in favor of the
nonmoving party, CSD states a plausible claim for civil conspiracy;
consequently, this claim would survive a motion to dismiss and is not futile.
C. CSD alleges enough facts regarding misappropriation to survive a
motion to dismiss on misappropriation of trade secrets and
Defendants argue that CSD does not allege sufficient facts to support
misappropriation. South Dakota Codified Law defines misappropriation as
“acquisition of a trade secret of another by a person who knows or has reason
to know that the trade secret was acquired by improper means” or “disclosure
or use of a trade secret of another without express or implied consent.”
S.D.C.L. § 37-29-1(i)-(ii). In CSD’s second amended complaint, CSD makes
allegations that defendants misappropriated trade secrets. See Docket 11-1.
Here, CSD alleges that defendants had access to CSD’s confidential
information in their roles within the company. Id. at 3-4. CSD limits which
employees can see this information. Id. at 4. Additionally, CSD alleges that
defendants downloaded this confidential information onto a storage device. Id.
at 5-6. After viewing the facts alleged in the second amended complaint and
determining all reasonable inferences in favor of the nonmoving party, CSD has
alleged sufficient facts to show misappropriation. Because sufficient facts are
alleged, the claims of misappropriation of trade secrets and unjust enrichment
would survive a motion to dismiss and are not futile.
D. CSD alleges enough facts regarding improper solicitation of its
employees that the claims of breach of fiduciary duty and duty of
loyalty are not futile and survive a motion to dismiss.
Under South Dakota law, a plaintiff must prove four elements to
establish a breach of fiduciary duty claim. Waldner v. James, No. Civ. 12-4153KES, 2014 WL 4160037, at *3 (D.S.D. August 19, 2014). The elements include
the following: “ ‘(1) that the defendant was acting as plaintiff's fiduciary; (2) that
the defendant breached a fiduciary duty to plaintiff; (3) that plaintiff incurred
damages; and (4) that the defendant's breach of the fiduciary duty was a cause
of plaintiff's damages.’ ” Id. (quoting Chem–Age, 652 N.W.2d at 772).
The United States Supreme Court quotes the Restatement (Second) of
Agency when addressing the duty of loyalty. Maples v. Thomas, 565 U.S. 266,
284 (2012). “[T]he authority of an agent terminates if, without knowledge of the
principal, he acquires adverse interests or if he is otherwise guilty of a serious
breach of loyalty to the principal.” Restatement (Second) of Agency § 112
(1957). “ ‘[T]he agent commits a breach of duty [of loyalty] to his principal by
acting for another in an undertaking which has a substantial tendency to
cause him to disregard his duty to serve his principal with only his principal’s
purposes in mind.’ ” Maples, 565 U.S. at 284 (quoting Restatement (Second) of
Agency § 394, Comment a (1957)).
Defendants argue that CSD does not allege sufficient facts stating
improper solicitation. But CSD alleges that defendants solicited its employees
and lists several employees who left the company and went to work for
NewStar. Docket 11-1 at 5-6. CSD also alleges that defendants downloaded
trade secret information and that they were using it for their benefit at
NewStar. Id. Additionally, CSD alleges, and a reasonable inference can be
made, that Reinders solicited Brands and Steinkamp because the resignations
were close in time. See Docket 11-1.
After viewing the alleged facts and inferences in the light most favorable
to the nonmoving party, CSD, a plausible claim is stated. Thus, the claims of
breach of fiduciary duty and duty of loyalty and unfair competition are not
futile, and would survive a motion to dismiss.
E. CSD alleges sufficient facts for a claim of unfair competition and
tortious interference with business relationships to survive a
motion to dismiss.
The tort of unfair competition does not have specific elements, “it
describes a general category of torts which courts recognize for the protection
of commercial interests.” Setliff v. Akins, 616 N.W.2d 878, 887 (S.D. 2000)
(quoting Rehab. Specialists, Inc. v. Koering, 404 N.W.2d 301, 305 (Minn. Ct.
App. 1987)). Improper use of trade secrets can be the foundation for an unfair
competition claim. Setliff, 616 N.W.2d at 888 (citing United Wild Rice, Inc. v.
Nelson, 313 N.W.2d 628, 632 (Minn. 1982)). In order to prove a tortious
interference with business relationships claim one must prove:
(1) the existence of a valid business relationship or expectancy;
(2) knowledge by the interferer of the relationship or expectancy;
(3) an intentional and unjustified act of interference on the part of
the interferer; (4) proof that the interference caused the harm
sustained; and, (5) damage to the party whose relationship or
expectancy was disrupted.
McGreevy v. Daktronics, Inc. 156 F.3d 837, 841 (8th Cir. 1998).
Defendants argue that CSD did not allege sufficient facts to support
improper contact with its customers. But CSD alleges that defendants
downloaded the confidential documents and used them for their benefit while
employed at NewStar. Docket 11-1 at 4-6. CSD also alleges that defendants
used its trade secrets to contact its customers to solicit business. Id. at 10. Not
only does CSD allege defendants knowingly solicited its current customers, but
prospective ones as well. Id. at 10-11. After viewing these facts and inferences
in favor of the nonmoving party, the court finds that CSD alleges a plausible
claim of unfair competition and tortious interference of a business relationship.
Thus, these claims are not futile and would survive a motion to dismiss.
CSD has shown that it did not seek to amend its complaint to destroy
subject matter jurisdiction and that it was not dilatory in filing its amendment.
Additionally, this court finds that Reinders and NewStar are joint tortfeasors,
and therefore are merely permissive parties. Moreover, CSD’s claims are not
futile and would survive a motion to dismiss. In the interest of avoiding parallel
litigation and promoting judicial efficiency, it is
ORDERED that plaintiff’s motion to amend (Docket 11) is granted.
DATED this 1st day of August, 2017.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
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