Direct Line Corporation v. Carrington et al

Filing 230

REPORT AND RECOMMENDATION: The Magistrate Judge recommends that a judgment be entered for pltf against deft in the amount of $1,487,260.22; that the Court enter an Order granting pltf injunctive relief; and that deft be required to comply with that injunctive Order within 30 days from its entry. Signed by Magistrate Judge E. Clifton Knowles on 12/17/12. (xc:Pro se party by regular and certified mail.)(DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(rd)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION

DIRECT LINE CORPORATION,
Plaintiff,

vs.

MICHAEL L. CARRINGTON and
JOHN DOES(S),
Defendants.

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CASE NO. 3:10-0423
JUDGE TRAUGER/KNOWLES

REPORT AND RECOMMENDATION
Judge Trauger previously entered a default against Defendant Michael L. Carrington, and
remanded this action to the undersigned for a determination of the damages to be awarded to
Plaintiff. Docket No. 153. In her Order, Judge Trauger stated in relevant part:
The court finds that Mr. Carrington’s failure to cooperate in
discovery is due to willfulness and that the plaintiff, who filed suit
over two years ago and is still struggling to receive written
discovery, has been prejudiced. Mr. Carrington has been
threatened with severe sanctions, including default, on more than
one occasion in this action, and certainly less drastic sanctions
have been attempted for many months, without success. . . . This
court finds . . . that this defendant has attempted to thwart the
judicial process and engaged in a pattern of contumacious conduct
justifying the entry of default against him.
Id., p. 3-4.
On August 13, 2012, the undersigned entered an Order setting a damages Hearing for
October 2, 2012, requiring that Plaintiff submit an appropriate Motion and Affidavit establishing
its damages, and providing that Defendant could file a Response within fourteen (14) days of the

filing of the Motion. Docket No. 156. Plaintiff submitted a timely Motion for Damages and
Other Relief (Docket No. 162), a supporting Memorandum (Docket No. 163), the Affidavit of
David Downs (Docket No. 164), and the Affidavit of Rita B. Brown (Docket No. 165). Plaintiff
also filed a Motion for Attorney’s Fees and supporting material. Docket Nos. 166-71.
Between the time Judge Trauger referred the damages issued to the undersigned and the
time of the Hearing, Defendant sought to have the Hearing continued twice (Docket Nos. 203,
210), he filed a Motion for Additional Time to File an “Answer” to the instant Motion (Docket
No. 176), and he filed a Motion for an Extension of Time to File an Affidavit (Docket No. 197).
The undersigned granted the Motion for Additional Time to File an Answer and rescheduled the
Hearing to October 31, 2012. The Court denied Defendant’s “Motion for Additional Time to
File Affidavit” (Docket Nos. 197, 201), noting in part that Plaintiff could present sworn
testimony live at the October 31 Hearing and that he did not need to submit an Affidavit. Docket
No. 201, p. 3.
On October 29, 2012, the Court received a voice mail message from Defendant advising
that he was in Baltimore, that his flight had been cancelled because of Hurricane Sandy, and that
he did not expect the flight to be rescheduled before the October 31 Hearing. Docket No. 203.
The undersigned, therefore, continued the Hearing (Docket No. 203), and on November 9, 2012,
entered an Order resetting the Hearing to December 11, 2012 (Docket No. 207).
More than two weeks later, Defendant filed a “Motion for Continuance of Hearing to a
Date Between January 9th, 2013 and January 18th, 2013.” Docket No. 210. That Motion stated
in relevant part as follows:
I have business commitments that cannot be moved again. . . . I
originally requested a continuance of the Hearing date as last
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scheduled and when the court denied that request1 I had already
rescheduled the client’s commitment and cannot delay it again. . . .
I told the court clerk . . . that I need a minimum of 2 weeks notice
and to please check availability before issuing an order since my
year ending is the busiest time of the year for me.
Docket No. 210, p. 1 (footnote added).
The undersigned denied the referenced Motion. Docket No. 213. Defendant sought a
review of that Order by Judge Trauger (Docket No. 215), but Judge Trauger denied the Motion
(Docket No. 217).
Despite the Court’s granting Defendant additional time to file an “Answer” to the instant
Motion, Defendant never did so. Despite the Court’s continuing the damages Hearing twice,
Defendant did not appear at the December 11 Hearing.2 Thus, Defendant has never properly
contested the matters set forth in the instant Motion, Memorandum, and Affidavits.3
The Affidavit of David Downs, the owner and Chief Executive Officer of Plaintiff,
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Despite Plaintiff’s reference to the Court’s denial of a request for a continuance of the
Hearing date, at the time Defendant made that statement the Court had not denied any “request”
for a continuance of the Hearing date.
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Defendant did, however, leave a voice mail message on December 11, 2012, at
approximately 8:50 a.m. for Courtroom Deputy Holly Vila. (The Hearing had been scheduled
for 10:30 a.m. on that date.) A transcript of that voice mail has been filed as Docket Entry No.
221.
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While Defendant has filed a number of documents since the instant Motion was filed,
he has never addressed the Motion itself. He has, however, made general statements regarding
the Affidavit of David Downs. For example, he has stated that the Affidavit “contains many
misstatements/lies that opposing Affidavits will prove up.” Docket No. 176, p. 1. He has also
referred to “perjury on David Downs’ affidavit.” Docket No. 197, p. 1. In addition, Defendant
filed a “pre-affidavit,” in which he made a general statement that the Affidavit of David Downs
was “false as to allegations of wrong doing,” and was “a testament of facts from David Downs
and is a fraudulent attempt to perjure himself to state a rationale for damages.” Docket No. 198,
p. 2.
Defendant did not provide any factual support for those statements.
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establishes the following facts. Docket No. 164. Plaintiff hired Defendant on or about January
15, 2004, to be a Marketing Representative and Project Manager. He was ultimately promoted
to Executive Vice President. His principal responsibilities were marketing and intellectual
technology. He was charged with developing an online catalog and a web-based marketing
program to manage dealer websites. He was also responsible for maintaining Plaintiff’s
electronic files and company data base. Defendant had access to, and a responsibility to
maintain, information relative to virtually every aspect of Plaintiff’s business with respect to
sales, marketing, Plaintiff’s products, contacts, reports, websites, vendors, etc. He spent
approximately 80% of his time developing the web-based marketing program.
From the date of his hire to the date of his termination, Defendant earned a total of
$569,752.64. In addition to this amount, Plaintiff invested roughly an additional $287,928 in
order to develop an online catalog (also known as a buyer’s guide) to be used for the web
program. The amount of $287,928 is also confirmed in the Affidavit of Rita B. Brown. Docket
No. 165.
During each of the first four years of developing the catalog and web-based marketing
program, from 2006 to 2009, Plaintiff obtained an average of 870 leads per year. Approximately
10% of those leads resulted in orders averaging $10,000 each. With an average of 87 orders per
year, at $10,000 each, Plaintiff grossed approximately $870,000 in total orders each year. Of
this amount, Plaintiff generated 25% profit, or $217,500 per year. Plaintiff reasonably
anticipated that the program would continue to generate leads in excess of at least $650,000 over
the course of 2010, 2011, and 2012. Upon losing the ability to access and maintain their web
program, as discussed below, Plaintiff lost its ability to bring in this yearly revenue.

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After Defendant was terminated for serious misconduct in January 2010, he refused to
return Plaintiff’s equipment which contained important files and information that he was charged
with maintaining. He failed to return a company-owned cell phone SIM card, claiming to have
returned it to AT&T. He also reset his company laptop to factory settings and returned it with a
new hard drive. He stated that he threw the original laptop hard drive, which contained
Plaintiff’s confidential and proprietary information, into the Loudoun County, Virginia, trash
dump. Defendant also deleted over 3,000 files that contained valuable trade secret information
from his company desktop computer. These items contained important passwords, procedures,
and files. In addition, Defendant continued to operate his own websites that contained repeated
and unauthorized uses of Plaintiff’s DIRECT LINE and CLASSICSTAK trademarks and other
intellectual property. Defendant linked his website to Plaintiff’s websites in order to redirect
Internet traffic from Plaintiff to Defendant’s own 1-800 number and email address.
Plaintiff states that it “invested nearly seven years and over $800,000 to create its online
catalog and web-based marketing program to bring in sales leads only to have the entire program
hijacked by Carrington on his termination.”
Plaintiff attempted to recreate the web program from scratch, but it became apparent that
doing so was too expensive and time-intensive. Additionally, the online catalog was an integral
part of the web program, and without the web program, the online catalog was rendered
worthless. Therefore, in March 2011, Plaintiff was forced to abandon and shut down the webbased marketing program that it had hired Defendant to develop. Moreover, Plaintiff states that
much of the trade secret and confidential and proprietary information Defendant took has
become stale and that even if it were returned, it would not be worth what it once was.

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Mr. Downs attempted to resolve these issues with Defendant in or about January-March
2010. Defendant, however, tried to get more money from Plaintiff by holding “hostage” the
passwords, access codes, and intellectual property. He made resolution impossible, and Plaintiff
was forced to initiate the instant action.
Plaintiff sued Defendant for trademark infringement (15 U.S.C. § 1114), unfair
competition (15 U.S.C. § 1125(a) and the common law of Tennessee), theft and misappropriation
of trade secrets in violation of the Tennessee Uniform Trade Secrets Act (T.C.A. § 47-25-1701
et. seq.), breach of fiduciary duty, breach of duty of loyalty, breach of duty of trust, breach of
duty against self-dealing, tortuous interference with a business relationship, conversion, and
unjust enrichment. Plaintiff also sought injunctive relief pursuant to 15 U.S.C. § 1116 and
T.C.A. § 47-25-1703. Plaintiff additionally sought attorneys’ fees under T.C.A. § 47-25-1705.4
In the instant Motion, Plaintiff sought the following injunctive relief:
1. That Carrington be required to transfer, at his cost, to Direct Line, and provide
Direct Line with, all URL’s (domain names) acquired by Carrington or Direct
Line, and/or URLs for websites containing terms relating to high density storage
including, without limitation those URLs listed in Exhibit A to the Motion for
Damages and Other Relief;
2. That Carrington be required to provide to Direct Line all passwords and/or
log-in information necessary to access all websites and software relating to high
density storage including, without limitation, the following:

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The Court will address the attorneys’ fees issue in a separate Report and
Recommendation.
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a. Access to the online web program; and
b. Access to the online catalog;
3. That Carrington be required to provide Direct Line with all copy, graphics,
photographs, online catalog (i.e. buyer’s guide), and any other confidential and/or
proprietary Direct Line information in his possession;
4. That Carrington be required to remove from his websites and be enjoined from
using any and all materials obtained from Direct Line, including but not limited
to:
a. Using Direct Line’s trade secrets, including passwords or
electronic files;
b. Direct Line’s 1-800 phone numbers or any similar phone
numbers Carrington has established or used in furtherance of his
illegal activities.
5. That Carrington be prohibited from creating or maintaining web programs to
generate leads for high density storage products.
6. Engaging in any conduct that infringes upon the DIRECT LINE or
CLASSICSTAK trademarks;
7. Engaging in any conduct that dilutes or is likely to dilute the DIRECT LINE or
CLASSICSTAK trademarks;
8. Engaging in any advertising that tends to, in a false or misleading manner,
associate Carrington’s services with Direct Line or with Direct Line’s goods and
services;

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9. Engaging in any advertising that tends to adversely affect the public’s
perception of Direct Line or Direct Line’s services.
Docket No. 163, p. 5-6.
At the Hearing, Plaintiff’s counsel requested that Defendant be required to comply with
this injunctive Order within thirty (30) days of the entry of the Order.
Plaintiff also sought monetary damages in the amount of $1,487,460.22. That amount
includes $287,928.00 that Plaintiff expended to develop the on-line catalog, and $455,802.11,
which amounts to 80% of Defendant’s total earnings (based upon Plaintiff’s statement that
Defendant spent approximately 80% of his time working for Plaintiff developing the web-based
marketing program). These amounts total $743,730.11. Plaintiff sought a doubling of this
amount to $1,487,460.22 pursuant to T.C.A. § 47-25-1704(b), which is part of the Uniform
Trade Secrets Act (T.C.A. § 47-25-1701, et. seq.), and which provides, “If willful and malicious
misappropriation [of trade secrets] exists, the court may award exemplary damages in an amount
not exceeding twice any award made under subsection (a).” T.C.A. § 47-25-1704(b).
The Act provides broad protection of trade secrets, as well as damages and injunctive
relief for misappropriation of trade secrets. The Act defines “trade secret” as:
information, without regard to form, including, but not limited to,
technical, nontechnical or financial data, a formula, pattern,
compilation, program, device, method, technique, process or plan
that:
(A) Derives independent economic value, actual or
potential, from not being generally known to and
not being readily ascertainable by proper means by
other persons who can obtain economic value from
its disclosure or use; and
(B) Is the subject of efforts that are reasonable
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under the circumstances to maintain its secrecy.
T.C.A. § 47-25-1702(4).
The Act defines “misappropriation” as follows:
(2) “Misappropriation” means:
...
(B) Disclosure or use of a trade secret of another
without express or implied consent by a person
who:
...
(ii) At the time of disclosure or use, knew or had
reason to know that person’s knowledge of the trade
secret was:
(b) Acquired under circumstances giving rise to a
duty to maintain its secrecy or limit its use; or
(c) Derived from or through a person who owed a
duty to the person seeking relief to maintain its
secrecy or limit its use . . . .
T.C.A. § 47-25-1702(2).
The Act provides for injunctive relief and also states, “In appropriate circumstances,
affirmative acts to provide a trade secret may be compelled by court order.” T.C.A. § 47-251703(a), (c). The Act also provides for the recovery of damages as follows:
In addition to or in lieu of the relief provided by § 47-25-1703, a
complainant is entitled to recover damages for misappropriation
except to the extent that defendant can show a material and
prejudicial change of position prior to acquiring knowledge or
reason to know of misappropriation and such renders a monetary
recovery inequitable. Damages can include both the actual loss
caused by misappropriation and the unjust enrichment caused by
misappropriation that is not taken into account in computing actual
loss. In lieu of damages measured by any other methods, the
damages caused by misappropriation may be measured by
imposition of liability for a reasonable royalty for a
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misappropriator’s unauthorized disclosure or use of a trade secret.

T.C.A. § 47-25-1704(a).
Plaintiff cogently argues that, because Defendant has refused to cooperate in discovery, it
is limited in the damages it can seek to those for which all proof lies with Plaintiff. Therefore,
Plaintiff seeks only the most direct and easy-to-prove damages. Plaintiff argues that the amount
it paid for the online catalog ($287,928) is recoverable as damages because Plaintiff has been
unable to access or maintain the web program. Additionally, Plaintiff argues that Defendant was
unjustly enriched because he received leads from the dealer network during the time he kept
Plaintiff from accessing its own network. Plaintiff has been unable to quantify that amount
because of Defendant’s lack of cooperation in discovery. As Plaintiff argues, at least one court
has recognized that amounts expended by a successful trade secret claimant for research and
development are appropriately recoverable as damages, as either an amount lost by the claimant
or as unjust enrichment derived by the appropriating party. Hauck Mfg. Co. v. Astec Industries,
Inc., 2004 WL 5523286 (E.D. Tenn.). Additionally, Plaintiff paid Defendant $455,802.11 to
develop the online dealer network. That amount, therefore, is recoverable as either the amount
that Plaintiff expended without benefit or the amount that Defendant was unjustly enriched.
As discussed above, the Act allows the doubling of any award made under T.C.A. § 4725-1704(a) if willful and malicious misappropriation exists. There is no question that Defendant
committed willful and malicious misappropriation of Plaintiff’s trade secrets. The undisputed
evidence shows that: he failed to return a company-owned cell phone SIM card; he reset his
company laptop to factory settings and returned it with a new hard drive; he stated that he threw
the original laptop hard drive, which contained Plaintiff’s confidential and proprietary
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information, into the Loudoun County, Virginia, trash dump; he deleted over 3,000 files that
contained valuable trade secret information from his company desktop computer; he operated his
own websites that contained repeated and unauthorized uses of Plaintiff’s trademarks and other
intellectual property; and he linked his website to Plaintiff’s websites in order to redirect Internet
traffic from Plaintiff to Defendant’s own 1-800 number and e-mail address. Thus, Plaintiff is
entitled to a doubling of its damages.
For the foregoing reasons, the undersigned recommends that a judgment be entered for
Plaintiff against Defendant in the amount of $1,487,460.22; that the Court enter an Order
granting Plaintiff the injunctive relief set forth above; and that Defendant be required to comply
with that injunctive Order within thirty (30) days from the date of its entry.
Under Rule 72(b) of the Federal Rules of Civil Procedure, any party has fourteen (14)
days after service of this Report and Recommendation in which to file any written objections to
this Recommendation with the District Court. Any party opposing said objections shall have
fourteen (14) days after service of any objections filed to this Report in which to file any
response to said objections. Failure to file specific objections within fourteen (14) days of
service of this Report and Recommendation can constitute a waiver of further appeal of this
Recommendation. See Thomas v. Arn, 474 U.S. 140, 106 S.Ct. 466, 88 L. Ed. 2d 435 (1985),
reh’g denied, 474 U.S. 1111 (1986); 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72.

E. Clifton Knowles
United States Magistrate Judge
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