Williams-Sonoma Direct, Inc. v. Arhaus, LLC d/b/a Arhaus Furniture et al

Filing 160

ORDER denying in part 111 Timothy Stover's Motion to Dismiss and in the Alternative for Summary Judgment; and ORDER denying in part 115 Arhaus, LLC's Motion to Dismiss or in the Alternative Motion for Summary Judgment. Signed by Judge Jon Phipps McCalla on 1/30/2015. (McCalla, Jon)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TENNESSEE
WESTERN DIVISION
WILLIAMS-SONOMA DIRECT, INC.
and WILLIAMS-SONOMA RETAIL
SERVICES, INC.,
Plaintiffs,
v.
ARHAUS, LLC d/b/a ARHAUS
FURNITURE and TIMOTHY STOVER,
Defendants.

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No. 2:14-cv-02727-JPM-tmp

ORDER DENYING IN PART DEFENDANT TIMOTHY STOVER’S MOTION TO
DISMISS AND IN THE ALTERNATIVE FOR SUMMARY JUDGMENT (ECF NO. 111)
AND
ORDER DENYING IN PART DEFENDANT ARHAUS, LLC’S MOTION TO DISMISS
OR IN THE ALTERNATIVE MOTION FOR SUMMARY JUDGMENT AS TO THE
SECOND AMENDED COMPLAINT (ECF NO. 115)

Before the Court are two motions: first is Defendant
Timothy Stover’s Motion to Dismiss and in the Alternative Motion
for Summary Judgment, filed November 5, 2014 (ECF No. 111); and
second is Defendant Arhaus, LLC’s Motion to Dismiss or in the
Alternative Motion for Summary Judgment as to the Second Amended
Complaint, filed November 10, 2014 (ECF No. 115) (together, “the
Motions”).

In this Order, the Court addresses the Defendants’

motions to dismiss this action under Rule 12(b)(1) and (7) of
the Federal Rules of Civil Procedure and reserves ruling as to
Defendants’ motions for summary judgment.

For the reasons stated below, the Motions are DENIED IN
PART: the Court denies Defendants’ motions under Rule 12(b)(1)
and (7) of the Federal Rules of Civil Procedure.
I.

BACKGROUND
A.

Factual Background

The facts relevant to the determination of the Motions are
as follows.

Plaintiff Williams-Sonoma Direct, Inc. (“WSDI”)

initiated this action through the filing of a Complaint on
September 18, 2014.

(ECF No. 1.)

subsidiary of Williams-Sonoma, Inc.

WSDI is a wholly owned
(Prelim. Inj. Hr’g Tr.

42:16–42:19, Oct. 24, 2014, ECF No. 108 (testimony of Julie
Whalen).)

WSDI asserted four theories of liability: violation

of the Tennessee Uniform Trade Secrets Act (“TUTSA”), breach of
contract, breach of the duty of loyalty, and tortious
interference with contract.

(See Compl. ¶ 1.)

Specifically,

WSDI alleged that Arhaus, LLC d/b/a Arhaus Furniture (“Arhaus”),
Jessica Daugherty, Timothy Stover, and Brad Voelpel violated the
TUTSA, and that Arhaus and Stover were continuing to violate the
TUTSA at the time this action was filed.

(Id. ¶¶ 48–58.)

WSDI’s breach of contract claims were against Daugherty, Stover,
and Voelpel.

(Id. ¶¶ 59-67.)

breached his duty of loyalty.

WSDI alleged that Voelpel
(Id. ¶¶ 68-71.)

Last, WSDI

brought tortious interference of contract claims against Arhaus
and Stover.

(Id. ¶¶ 72-78.)
2

WSDI filed a Second Amended Complaint on October 22, 2014.
(ECF No. 83.)

The Second Amended Complaint added Williams-

Sonoma Retail Services, Inc. (“WSRSI”) as a plaintiff, and added
a breach of duty of loyalty claim against Stover (id. ¶ 74).
WSRSI is a wholly owned subsidiary of Williams-Sonoma, Inc.
(Prelim. Inj. Hr'g Tr. 176:19-176:21, Oct. 24, 2014, ECF No. 108
(testimony of Steve Anderson).)
It is undisputed that while Daugherty, Stover, and Voelpel
were employed at Williams-Sonoma, they signed the WilliamsSonoma, Inc. Code of Business Conduct and Ethics (“Code of
Conduct”) (Anderson Decl. Ex. A, ECF No. 13-6).

Four provisions

of the Code of Conduct are relevant in this case.

First, the

contract states that “references in the Code of Conduct to we,
us, our, Williams-Sonoma, WSI or the Company are generally
intended to mean Williams-Sonoma, Inc. and all its affiliates,
divisions, brands, and subsidiaries, including its global
subsidiaries, stores and offices.”

(Id. at PageID 94.)

Second,

the Code of Conduct states that it “also serves as an agreement
between you and the Company.”

(Id. at PageID 95.)

Third, the

contract states how employees are to protect confidential
information and defines confidential information:
As associates of the Company, and for the benefit of
ourselves as well as the Company, we each have a duty to
safeguard our Company’s trade secrets and Confidential
Information and to refrain from any improper dealings with
the confidential information of any other company,
3

including our competitors. Associates may not disclose
Confidential Information either while an employee of WSI or
at any time after employment ends, regardless of the reason
why employment ends. “Confidential Information” includes,
but is not limited to, all confidential, proprietary and
trade secret information that is not generally known and
that therefore has economic value to the Company. This
information includes all information, whether in written,
oral, electronic, magnetic, photographic or any other form,
that relates to: the Company’s past, present and future
businesses, products, product specifications, designs,
drawings, concepts, samples, intellectual property,
inventions, know-how, sources, costs, pricing,
technologies, customers, vendors, other business
relationships, business ideas and methods, distribution
methods, inventories, manufacturing processes, computer
programs and systems, employees, hiring practices,
compensation, operations, marketing strategies and other
technical, business and financial information. Confidential
Information also includes the identity, capabilities and
capacity of vendors and of former vendors or others that
were considered but rejected and any non-public, personal
information about any associates, customers, contractors,
vendors or other parties, including, but not limited to,
social security, driver’s license, credit or debit card
number or payment card numbers.
Additionally, associates may not bring or use any other
company’s confidential information to WSI. All associates
must acknowledge by signing this Code of Conduct that they
have not brought any such confidential information from
prior employers to WSI.
(Id. at PageID 103-04.)

Fourth, the Code of Conduct includes a

non-solicitation provision:
As part of our duty to safeguard the Company’s trade
secrets and Confidential Information, associates may not,
either during their employment with the Company or for
twelve months afterward, directly or indirectly recruit,
solicit or induce, or attempt to induce, any employee,
consultant or vendor of the Company to terminate employment
or any other relationship with the Company. Additionally,
former associates may not use Confidential Information to
recruit, solicit, retain or hire any of the Company’s
employees, consultants or vendors. By signing this Code of
4

Conduct, associates acknowledge that the restrictions
contained in this paragraph are necessary for the
protection of the business and goodwill of the Company and
are considered to be reasonable for that purpose, and agree
to be bound by such restrictions.
(Id. at PageID 104.)
In the Second Amended Complaint (ECF No. 83), Plaintiffs’
allegations may be generally described as follows.

While

working for Plaintiffs, Daugherty, Stover, and Voelpel each
signed the Code of Conduct.

Stover resigned from WSDI on July

18, 2014 and left on July 21, 2014.

(Id. ¶ 30.)

He joined

Arhaus approximately two weeks later as Arhaus’ Chief Supply
Chain Officer.

(Id.)

Before leaving, Stover directed his

employees to do work for him “that he would use at Arhaus.”
(Id. ¶ 74.)

When he left, he took over one hundred confidential

documents with him.

(Id. ¶ 30.)

Plaintiffs allege that:

Stover immediately began unlawfully soliciting WSDI
employee Daugherty and WSRSI employee Voelpel (along with
several other WSDI employees) to violate their agreements
with WSDI and provide Stover with WSDI’s confidential and
trade secret information for Stover’s use at Arhaus.
Starting at the end of July and through September 2014,
Daugherty and Voelpel willfully participated in Stover’s
unlawful plan. Daugherty used her WSDI and personal email
accounts to forward Stover, without authorization, WSDI’s
confidential information. Voelpel similarly used his
company and personal email accounts to forward Stover,
without authorization, WSDI’s confidential information.
(Id.)

5

B.

Procedural Background

WSDI filed its Complaint on September 18, 2014 (ECF No. 1)
and a Motion for Temporary Restraining Order on September 19,
2014 (ECF No. 13).

Judge Samuel H. Mays, Jr. held a hearing on

the Motion for Temporary Restraining Order on September 29 and
30, 2014.

(ECF Nos. 52, 54.)

Arhaus and Stover filed a Joint

Motion to Dismiss on September 26, 2014.

(ECF No. 31.)

On

September 29, 2014, WSDI amended the Complaint so as to correct
a technical pleading defect.

(ECF No. 51.)

On September 30,

2014, Judge Mays issued an order granting in part and denying in
part the Motion for Temporary Restraining Order.

(ECF No. 56.)

The order required all defendants to preserve evidence, and
ordered defendants not to acquire, access, disclose, or use any
of WSDI’s trade secrets -- or to attempt to do so.
4.)

(Id. at 3-

The order further restrained Daugherty and Stover from:

acquiring, accessing, disclosing or using, or attempting to
acquire, access, disclose, or use WSDI’s or its derivatives’
confidential information; and from soliciting employees of WSDI,
its parents, subsidiaries, or affiliates.

(Id. at 4.)

On October 14, 2014, the Court set a preliminary injunction
hearing and, by consent, extended the TRO.

(ECF No. 73.)

Plaintiffs filed their Second Amended Complaint on October 22,
2014, which added WSRSI as a plaintiff.

(ECF No. 83.)

Plaintiffs then filed a Supplemental Brief in Support of Motion
6

for Preliminary Injunction on October 23, 2014.

(ECF No. 92.)

Defendants each filed briefs in opposition to a preliminary
injunction also on October 23, 2014.

(ECF Nos. 94–100.)

The

Court held a preliminary injunction hearing on October 24 and
25, 2014 and December 10, 2014.

(ECF Nos. 102, 104, 1 141.)

By

consent of the parties (see ECF No. 106), on November 3, 2014,
the Court extended the TRO until an order is issued regarding
the Plaintiffs’ request for preliminary injunction.

(ECF No.

109.)
Stover filed a Motion to Dismiss and in the Alternative
Motion for Summary Judgment on November 5, 2014.

(ECF No. 111.)

Arhaus filed a Motion to Dismiss or in the Alternative Motion
for Summary Judgment on November 10, 2014.

(ECF No. 115.)

Plaintiffs filed their response to these motions on December 11,
2014.

(ECF No. 134.)

By joint motion of Plaintiffs and Voelpel (ECF No. 121),
the Court granted a Permanent Injunction and Judgment as to
Voelpel on December 3, 2014.

(ECF Nos. 128, 129.)

Similarly,

by joint motion of Plaintiffs and Daugherty (ECF No. 132), the
Court granted a Permanent Injunction and Judgment as to
Daugherty on December 19, 2014.

(ECF No. 146.)

1

The ECF Docket incorrectly lists the second day of the preliminary
injunction hearing as October 28, 2014; the second day of the hearing was in
fact held on Saturday, October 25, 2014.

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II.

LEGAL STANDARD
Pursuant to Rule 12(b)(1), a defendant may move to dismiss

a plaintiff’s complaint for “lack of subject-matter
jurisdiction.”

Fed. R. Civ. P. 12(b)(1).

“A Rule 12(b)(1)

motion can either attack the claim of jurisdiction on its face,
. . . or it can attack the factual basis for jurisdiction
. . . .”

DLX, Inc. v. Kentucky, 381 F.3d 511, 516 (6th Cir.

2004).
A facial attack is a challenge to the sufficiency of
the pleading itself. On such a motion, the court must
take the material allegations of the petition as true
and construed in the light most favorable to the
nonmoving party. A factual attack, on the other hand,
is not a challenge to the sufficiency of the
pleading’s allegations, but a challenge to the factual
existence of subject matter jurisdiction.
On such a
motion, no presumptive truthfulness applies to the
factual allegations, and the court is free to weigh
the evidence and satisfy itself as to the existence of
its power to hear the case.
But the fact that the
court takes evidence for the purpose of deciding the
jurisdictional issue does not mean that factual
findings are therefore binding in future proceedings.
United States v. Ritchie, 15 F.3d 592, 598 (6th Cir. 1994)
(citations omitted).

Where a Rule 12(b)(1) motion challenges

the factual basis for jurisdiction, “a trial court has wide
discretion to allow affidavits, documents and even a limited
evidentiary hearing to resolve disputed jurisdictional facts.”
Williams v. Hooah Sec. Servs., LLC, 729 F.Supp.2d 1011, 1012
(W.D. Tenn. 2010) (quoting Ohio Nat. Life Ins. Co. v. United

8

States, 922 F.2d 320, 325 (6th Cir.1990)) (internal quotation
marks omitted).
III. ANALYSIS
Plaintiffs’ Second Amended Complaint asserts four grounds
for relief:

(1) that all Defendants have engaged in actual and

threatened misappropriation of trade secrets in violation of the
TUTSA; (2) that Defendants Daugherty, Stover, and Voelpel have
breached contracts; (3) that Brad Voelpel and Timothy Stover
breached the duty of loyalty; and (4) that Defendants Stover and
Arhaus engaged in tortious interference with contract.

(ECF

No. 83.)
Defendants argue that the Court lacks diversity
jurisdiction to hear this claim.

Each of the motions contain

the same basic argument: (1) Williams-Sonoma, Inc. is a Delaware
Corporation; (2) Arhaus is a citizen of Delaware, among other
states; (3) Williams-Sonoma, Inc. is either “the real party in
interest” or an indispensable party; (4) joinder or substitution
of Williams-Sonoma, Inc. would destroy diversity; (5) diversity
jurisdiction was improperly or collusively manufactured in
violation of 28 U.S.C. § 1359; and (6) therefore, the case must
be dismissed for lack of subject matter jurisdiction.
Nos. 111-1, 116.)

(See ECF

Premises (1), (2), and (4) are undisputed.

The Court therefore focuses its analysis on whether WilliamsSonoma, Inc. is either the real party in interest or an
9

indispensable party, and whether diversity jurisdiction was
manufactured.

For the reasons described below, the Court finds

that Williams-Sonoma, Inc. is neither the real party in interest
nor an indispensable party.

Further, the Court finds no

impropriety or collusion in violation of 28 U.S.C. § 1359.
A.

Real Party in Interest

According to Rule 17(a)(1), “an action must be prosecuted
in the name of the real party in interest.”
17(a)(1).

Fed. R. Civ. P.

“The effect of this passage is that the action must

be brought by the person who, according to the governing
substantive law, is entitled to enforce the right.”

6A Wright,

Miller & Kane, Federal Practice & Procedure § 1543 (3d ed.
2010).

“To determine whether the requirement that the action be

brought by the real party in interest has been satisfied, the
court must look to the substantive law creating the right being
sued upon to see if the action has been instituted by the party
possessing the substantive right to relief.”

§ 1544.

The Court

therefore considers each of Plaintiffs’ grounds for relief in
turn to determine if the action has been properly instituted by
a party possessing the substantive right to relief.

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1.

Trade Secrets

Trade secrets are protected in Tennessee by the Tennessee
Uniform Trade Secrets Act (“TUTSA”).
25-1702(1) et seq. (West 2014).

See Tenn. Code Ann. § 47-

“TUTSA lists three requirements

for information to be considered a trade secret: (1) the
information must derive independent economic value from not
being generally known, (2) others could obtain economic value
from its disclosure or use, and (3) efforts have been made to
maintain its secrecy.”

J.T. Shannon Lumber Co. v. Barrett,

2:07-cv-2847-jpm-cgc, 2010 WL 3069818, at *4 (W.D. Tenn. Aug. 4,
2010) (citing Tenn. Code Ann. § 47-25-1702(4)).
TUTSA prohibits misappropriation of trade secrets,
providing for both injunctive relief and damages.
1702–1704.

§§ 47-25-

“Misappropriation” means, in relevant part, either

acquisition by a person who knows or has reason to know the
trade secret was acquired by improper means, or disclosure
without consent of a trade secret by a person who knows or has
reason to know that it was acquired under circumstances giving
rise to a duty to maintain its secrecy or limit its use.
25-1702(2).

§ 47-

“Improper means” include “theft, bribery,

misrepresentation, breach or inducement of a breach of a duty to
maintain secrecy or limit use, or espionage through electronic
or other means.”

§ 47-25-1702(1)(a).

11

Who has the right to bring a trade secret claim appears to
be a question that has not been decided under Tennessee law.
Many courts, however, have construed analogous Uniform Trade
Secrets Act statutes.

See Metso Minerals Indus. v. FLSmidth-

Excel LLC, 733 F. Supp. 2d 969, 978 (E.D. Wis. 2010) (collecting
cases).

Courts that have considered this question have

generally

come to the same conclusion: a party has standing to

bring a trade secrets claim if it has possession of the trade
secret.

See id.

Defendants’ argument is that Plaintiffs have

no right to enforce a trade secrets claim because it is WSI that
owns the trade secrets at issue.
116 at 10.)

(ECF No. 111-1 at 7; ECF No.

In DTM Research, L.L.C. v. AT & T Corp., the Fourth

Circuit addressed this argument in construing an analogous
statute:
[T]he question of whether “fee simple ownership” is an
element of a claim for misappropriation of a trade secret
may not be particularly relevant in this context. While
trade secrets are considered property for various analyses,
the inherent nature of a trade secret limits the usefulness
of an analogy to property in determining the elements of a
trade-secret misappropriation claim. The conceptual
difficulty arises from any assumption that knowledge can be
owned as property. The “proprietary aspect” of a trade
secret flows, not from the knowledge itself, but from its
secrecy. It is the secret aspect of the knowledge that
provides value to the person having the knowledge. The
Maryland Uniform Trade Secrets Act thus defines a trade
secret as information that has value because it is not
“generally known” nor “readily ascertainable.” While the
information forming the basis of a trade secret can be
transferred, as with personal property, its continuing
secrecy provides the value, and any general disclosure
destroys the value. As a consequence, one “owns” a trade
12

secret when one knows of it, as long as it remains a
secret. Thus, one who possesses non-disclosed knowledge
may demand remedies as provided by the Act against those
who “misappropriate” the knowledge.
245 F.3d 327, 332 (4th Cir. 2001) (citations omitted).
Fourth Circuit’s logic is persuasive.

The

The Court finds that “the

focus is appropriately on the knowledge, or possession, of the
trade secret, rather than on mere ‘ownership’ in the traditional
sense of the word.”

DaimlerChrysler Servs. v. Summit Nat., No.

02-71871, 2006 WL 1420812, at *8 (E.D. Mich. May 22, 2006),
aff’d sub nom. Daimler-Chrysler Servs. N. Am., LLC v. Summit
Nat., Inc., 289 F. App’x 916 (6th Cir. 2008).
The Court finds that WSDI and WSRSI possessed trade secrets
and thus each has a substantive right to relief.

Plaintiffs

have put forth substantial proof to show that WSDI and WSRSI
possessed information that derived independent economic value by
virtue of not being known, and it is that information that they
allege was misappropriated by Defendants.

(See, e.g., Prelim.

Inj. Hr’g Tr. 109:13–127:22, Oct. 24, 2014, ECF No. 108
(testimony of Steve Anderson) (describing a complex,
confidential RFP process for ocean carriers that was allegedly
taken by Defendants); Anderson Decl. ¶ 3, ECF No. 138
(describing the ocean carrier RFP process as having been
developed by both WSRSI and WSDI)).

Defendants have failed to

put forth any persuasive argument that WSDI and WSRSI did not

13

possess trade secrets that they have alleged were
misappropriated.

Instead, Defendants argue that WSI also

possessed the same trade secrets.
ECF No. 116 at 8–9.)

(See ECF No. 111-1 at 9–10;

Multiple entities, however, can possess

the same trade secret, so long as the knowledge is not
“generally known.”

See DTM Research, L.L.C., 245 F.3d at 332.

Accordingly, the Court finds that, for the purposes of this
order, Plaintiffs have established by a preponderance of the
evidence that they are real parties in interest pursuant to Rule
17(a)(1) with the substantive right to pursue their trade
secrets claims under the TUTSA.
2.

Breach of Contract

With the exception of third-party beneficiary claims, those
who are not parties to a contract in the State of Tennessee
generally have no right to sue for its breach.

Owner-Operator

Independent Drivers Association, Inc. v. Concord EFS, Inc., 59
S.W.3d 63, 68 (Tenn. 2001).

Therefore, under Tennessee contract

law, only those who are parties to a contract or third-party
beneficiaries thereof have a substantive right to enforce a
contract.
The Court finds that Plaintiffs have a substantive right to
bring a breach of contract action against Defendants Daugherty,
Stover, and Voelpel.

In order to find that a plaintiff has a

right to enforce a contract, the court must make two findings:
14

first, that there is in fact a contract; and, second, that the
plaintiff was a party to, or third-party beneficiary of, that
contract.

In this case, the purportedly breached contract was

the “Williams-Sonoma, Inc. Code of Business Conduct and Ethics”
(“Code of Conduct”) (ECF No. 13-6).
The Court finds that the Code of Conduct is a contract
under Tennessee law.

A document such as an employee handbook is

contractually binding under Tennessee law when it “contain[s]
specific language showing the employer’s intent to be bound by
the handbook’s provisions.”

Reed v. Alamo Rent-A-Car, Inc., 4

S.W.3d 677, 687 (Tenn. Ct. App. 1999) (quoting Rose v. Tipton
Cnty. Pub. Works Dep’t, 953 S.W.2d 690, 692 (Tenn. Ct. App.
1997)).

The Code of Conduct specifically states that it “serves

as an agreement between you and the Company” (ECF No. 13-6 at
PageID 95) and that the agreement is “in exchange for your
employment, and the payment to you of salary, bonus, equity
awards, and other compensation” (id.).

Because the language

unambiguously shows an intent to be bound, the Code of Conduct
is a contract.
At the TRO hearing, the individual Defendants did not
contest that they each signed the Code of Conduct.

The

individual Defendants were thus parties to the contract.
To determine whether Plaintiffs were parties to the Code of
Conduct, the Court looks to the language of the contract itself.
15

There are three provisions in the Code of Conduct relevant to
determining whether or not Plaintiffs were parties to the
contract:
1.

References in the Code of Conduct to we, us, our,
Williams-Sonoma, WSI or the Company are generally
intended to mean Williams-Sonoma, Inc. and all its
affiliates, divisions, brands and subsidiaries,
including its global subsidiaries, stores and offices.
(Id. at PageID 94.)

2.

This Code of Conduct also serves as an agreement
between you and the Company. (Id. at PageID 95.)

3.

[W]e ask you to enter into this agreement, in exchange
for your employment, and the payment to you of salary,
bonus, equity awards and other compensation. (Id.)

It is not contested that WSDI and WSRSI are subsidiaries of WSI.
Therefore, references to “the Company” in the contract also
include WSDI and WSRSI.

The Code of Conduct specifically states

that it serves as an agreement between the employee “and the
Company,” which includes WSDI and WSRSI.

Plaintiffs are

therefore parties to the contract and thus real parties in
interest pursuant to Rule 17(a)(1) with the substantive right to
pursue their breach of contract claims against Daugherty,
Stover, and Voelpel.
3.

Fiduciary Duty of Loyalty

Under Tennessee law, an employee owes his employer a
fiduciary duty of loyalty: “An employee must act solely for the
benefit of the employer in matters within the scope of his
employment.

The employee must not engage in conduct that is
16

adverse to the employer’s interests.”

Efird v. Clinic of

Plastic & Reconstructive Surgery, P.A., 147 S.W.3d 208, 219
(Tenn. Ct. App. 2003) (internal quotation marks omitted).

Thus,

in order to bring an action for a breach of a fiduciary duty of
loyalty, a plaintiff must have an employment relationship with
the defendant.

Under Tennessee law, “[a]n employment

relationship is essentially contractual.”

Vargo v. Lincoln

Brass Works, Inc., 115 S.W.3d 487, 491 (Tenn. Ct. App. 2003).
“An employment agreement may be written, oral, or a combination
of the two.”

Id.

“If written, it may be memorialized in a

single document or in a series of documents.”

Id.

The Court finds, for the purposes of this order, that WSDI
and WSRSI had employment relationships, respectively, with
Stover and Voelpel.

The Code of Conduct was a document that

memorialized part of Stover’s and Voelpel’s employment, as it
was entered into “in exchange for [their] employment, and the
payment to [them] of salary, bonus, equity awards and other
compensation.”

(ECF No. 13-6 at PageID 95.)

Arhaus and Stover

argue that Stover and Voelpel were in fact employed by WSI.
(ECF No 111-1 at 11–12, 13; ECF No. 116 at 9–10.)

Defendants’

arguments, however, are unpersuasive; nothing in Tennessee law
suggests that an employee may only have one employer.

Indeed,

the Tennessee workers’ compensation statute expressly provides
that an employee may have joint employers.
17

See Moore v. Howard

Baer, Inc., No. M200802357WCR3WC, 2009 WL 3321377, at *3 (Tenn.
Workers Comp. Panel Oct. 15, 2009).

In the instant case, both

Stover and Voelpel signed the Code of Conduct with WSDI and
WSRSI respectively.
Voelpel by WSRSI.

Further, Stover was paid by WSDI and
(Prelim. Inj. Hr’g Tr. 45:23–45:24, Oct. 24,

2014, ECF No. 108; id. at 46:12–46:14.)

Although there is

evidence that WSI employed Stover and Voelpel, (see Prelim. Inj.
Hr’g Exs. 42–49), the evidence suggests that WSI may be a joint
employer -- not a sole employer.

(See also Prelim. Inj. Hr’g

Ex. 50 (showing both “Williams-Sonoma, Inc.” and “WilliamsSonoma Direct, Inc.” in the “Employer’s name” section of
Stover’s W-2 forms in 2011, 2012, and 2013).)

Accordingly,

Plaintiffs are real parties in interest pursuant to Rule
17(a)(1) with the substantive right to pursue their breach of
the fiduciary duty of loyalty claims against Stover and Voelpel.
4.

Tortious Interference with Contract

“Tennessee undoubtedly does recognize both a statutory and
common law action for unlawful inducement of a breach of
contract.”

Quality Auto Parts Co. v. Bluff City Buick Co., 876

S.W.2d 818, 822 (Tenn. 1994) (citing Tenn. Code Ann. § 47–50–109
(1988 & Supp. 1993); Polk & Sullivan, Inc. v. United Cities Gas
Co., 783 S.W.2d 538, 543 (Tenn. 1989)).

The elements of the

statutory and common law actions are the same.

See id.

“In

order to establish such a cause of action, a plaintiff must
18

prove that there was a legal contract, of which the wrongdoer
was aware, that the wrongdoer maliciously intended to induce a
breach, and that as a proximate result of the wrongdoer’s
actions, a breach occurred that resulted in damages to the
plaintiff.”

Id.

In this context, malicious intent “simply

means a willful violation of a known right . . . .”

Riggs v.

Royal Beauty Supply, Inc., 879 S.W.2d 848, 851 (Tenn. Ct. App.
1994).
The Court finds that Plaintiffs have the right to bring
claims of tortious interference with contract against Arhaus and
Stover.

There was a legal contract in this case between

Plaintiffs and Daugherty and Voelpel.

See supra Part III.A.2.

Further, Plaintiffs have alleged that Arhaus and Stover were
aware of the contract and that they suffered damages as a
result.

Accordingly, Plaintiffs are real parties in interest

pursuant to Rule 17(a)(1) with the substantive right to pursue
their tortious interference with contract claims against Arhaus
and Stover.
B.

Indispensable Party

Defendants contend that WSI is an indispensable party under
Rule 19, and that this action must therefore be dismissed under
Rule 12(b)(7).

(ECF No 111-1 at 8–9; ECF No. 116 at 11-16.)

“The current phrasing of Rule 19 reflects the 1966
amendment of the rule.

The changes eschew rigid application and
19

adopt a more pragmatic approach.”

Glancy v. Taubman Centers,

Inc., 373 F.3d 656, 665 (6th Cir. 2004).
parties would be before the court.
pragmatic approach . . . .”

“Ideally, all . . .

Yet Rule 19 calls for a

Smith v. United Bhd. of Carpenters,

685 F.2d 164, 166 (6th Cir. 1982).

“Thus, the rule should be

employed to promote the full adjudication of disputes with a
minimum of litigation effort.”

7 Charles Alan Wright, Arthur R.

Miller & Mary Kay Kane, Federal Practice & Procedure Civil
§ 1602 (3d ed. 2001).
“As the Fifth Circuit indicated in Schutten v. Shell Oil
Company,[ 421 F.2d 869, 873 (5th Cir. 1970),] the essence of
Rule 19 is to balance the rights of all those whose interests
are involved in the action.”

Id.

According to the Schutten

court:
The plaintiff has the right to “control” his own litigation
and to choose his own forum. This “right” is, however,
like all other rights, “defined” by the rights of others.
Thus the defendant has the right to be safe from needless
multiple litigation and from incurring avoidable
inconsistent obligations. Likewise the interests of the
outsider who cannot be joined must be considered. Finally
there is the public interest and the interest the court has
in seeing that insofar as possible the litigation will be
both effective and expeditious.
421 F.2d at 873.
The Sixth Circuit uses a three-part test to determine
whether a party is indispensable under Rule 19.

Laethem Equip.

Co. v. Deere & Co., 485 F. App’x 39, 43 (6th Cir. 2012).

20

“First, the court must determine whether the person or entity is
a necessary party under Rule 19(a).”

Glancy v. Taubman Centers,

Inc., 373 F.3d 656, 666 (6th Cir. 2004).

“Second, if the person

or entity is a necessary party, the court must then decide if
joinder of that person or entity will deprive the court of
subject matter jurisdiction.”

Id.

“Third, if joinder is not

feasible because it will eliminate the court’s ability to hear
the case, the court must analyze the Rule 19(b) factors to
determine whether the court should in equity and good conscience
dismiss the case because the absentee is indispensable.”

Id.

(internal citation and quotation marks omitted).
1.

WSI as a Necessary Party

A party is necessary under Rule 19 if either:
(1) in the party’s absence, the court cannot accord
complete relief among existing parties, Fed. R. Civ. P.
19(a)(1)(A), or (2) if the party claims an interest
relating to the subject of the action and disposing of the
action in the party’s absence may (i) as a practical matter
impair or impede the party’s ability to protect the
interest; or (ii) leave an existing party subject to a
substantial risk of incurring multiple or otherwise
inconsistent obligations because of the interest, Fed. R.
Civ. P. 19(a)(1)(B).
Laethem Equipment, 485 F. App’x at 44.

Neither Defendants nor

Plaintiffs argue that the Court cannot accord complete relief
among existing parties.

At issue in this case is whether WSI is

a necessary party under Rule 19(a)(1)(B).

To demonstrate that

WSI is a necessary party, the burden is therefore on the

21

Defendants to demonstrate (1) that WSI “claims an interest
relating to the subject of the action,” and either (2) that
proceeding in WSI’s absence may “as a practical matter impair or
impede [WSI’s] ability to protect the interest” or (3) that
proceeding in WSI’s absence may “leave an existing party subject
to a substantial risk of incurring multiple or otherwise
inconsistent obligations.”

Before analyzing the facts of this

case, the Court first considers the legal requirements of each
of these conditions to establish an absent party as a necessary
party.
a.

“Claims an Interest”

Courts disagree about the import of the phrase “claims an
interest relating to the subject of the action” in Rule
19(a)(1)(B), interpreting it in one of two ways.

The first set

of cases interprets the phrase as a requirement that the absent
party affirmatively assert an interest in the subject matter of
the litigation.

E.g., Peregrine Myanmar Ltd. v. Segal, 89 F.3d

41, 49 (2d Cir. 1996); Northrop Corp. v. McDonnell Douglas
Corp., 705 F.2d 1030, 1043 (9th Cir. 1983).

The second set of

cases indicate that the phrase requires that the absent party
simply have a legal interest in the subject of the action.

See,

e.g., Shermoen v. United States, 982 F.2d 1312 (9th Cir. 1992);
Pulitzer-Polster v. Pulitzer, 784 F.2d 1305, 1310 (5th Cir.
1986).

In contrast to the first set of cases, however, cases in
22

the second set tend not to analyze the meaning of the phrase,
eliding a discussion of the meaning of the text.

Instead, these

cases follow a different pattern by first recognizing that an
absent party has a legal interest and then moving on to a
determination of subsections (i) and (ii) of Rule 19(a)(1)(B).
Peregrine Myanmar Ltd. v. Segal, 89 F.3d 41, 43 (2d Cir.
1996), is an example of a case of the first type.

In Segal, two

companies based in Myanmar sued a former officer and director of
the companies.

Some of the allegations implicated a joint

venture agreement to which the Myanmar Ministry of Fisheries was
a party.

Segal made a motion to dismiss under Rule 12(b)(7),

arguing that the Ministry was an indispensable party under
Rule 19.

The Second Circuit found that “Segal’s argument fails

here if only because the Ministry has not ‘claim[ed] an interest
relating to the subject of the action.’” 89 F.3d at 49 (quoting
Rule 19(a)(1)(B)).

The Segal court indicated that it was

irrelevant whether the Ministry could be affected by the court’s
judgment because “[it] is the absent party that must ‘claim an
interest.’”

Id. (quoting Rule 19(a)(1)(B)).

Because the

Ministry had not made a claim relating to the subject of the
action, the Second Circuit found that it was not a necessary
party under Rule 19(a)(1)(B).

23

Shermoen v. United States, 982 F.2d 1312 (9th Cir. 1992)
provides an example of the second type of case, 2 in which
establishing that an absent party has a legal right related to
the subject of the action is sufficient to establish that the
absent party “claims an interest.”

In Shermoen, the Ninth

Circuit considered an appeal from the District Court for the
Northern District Court of California.

The District Court had

dismissed the action under Rule 19 for failure to join an
indispensable party.

Shermoen concerned a suit filed by seventy

individual Native Americans and the Coast Indian Community of
Yurok Indians of the Resighini Rancheria against the United
States, in which the plaintiffs sought, inter alia, a
declaration that the Hoopa-Yurok Settlement Act was
unconstitutional.

982 F.2d at 1314.

were not parties to the action.

Id.

The Hoopa and Yurok tribes
Intervenors in the action

argued that the absent tribes were indispensable parties, and
the district court agreed.

Id. at 1316–17.

In reviewing the

district court’s decision, the Ninth Circuit articulated two
prongs to the determination of whether a party is “necessary”
under Rule 19(a): “a court must consider whether ‘complete
relief’ can be accorded among the existing parties, and whether
the absent party has a ‘legally protected interest’ in the
2

Although Shermoen is of the second type, case law of the first type also
exists in the Ninth Circuit, both before and after Shermoen. See Northrop
Corp. v. McDonnell Douglas Corp., 705 F.2d 1030, 1043 (9th Cir. 1983); United
States v. Bowen, 172 F.3d 682, 689 (9th Cir. 1999).

24

subject of the suit.”

Id. at 1317 (quoting Makah Indian Tribe

v. Verity, 910 F.2d 555, 558 (9th Cir. 1990)).

With respect to

the second prong, the Shermoen court stated, “the finding that a
party is necessary to the action is predicated only on that
party having a claim to an interest . . . .”

Id.

Without any

finding that the absent tribes had actually affirmatively
indicated any interest in the suit, the Ninth Circuit still
found the absent tribes necessary parties: “In this case, the
absent tribes have an interest . . . .

The district court was

therefore correct in concluding that the tribes were necessary
parties.”

Id.

The limited relevant Sixth Circuit precedent indicates that
the Sixth Circuit follows the second approach.

In Jenkins v.

Renau, 697 F.2d 160 (6th Cir. 1983), the plaintiff, as an heir
at law, employed defendant attorneys to bring an action against
a nursing home following the death of his mother.

At the time

the lawsuit was filed, Jenkins had a sister who was the only
other heir but not a party to the suit.

Id. at 161.

The

defendants filed a motion to dismiss for failure to join an
indispensable party as required by Rule 19.

Id.

The Sixth

Circuit found that the sister had a legal interest in the
subject of the action, and found that she was a necessary party
under Rule 19(a).

Id. at 162–63.

Because the Jenkins court

never even considered whether the sister had affirmatively
25

indicated any interest in the suit while still finding her to be
a necessary party, an affirmative claim does not appear to be
required in the Sixth Circuit for Rule 19(a)(1)(B) to apply; all
that is necessary under Rule 19(a)(1)(B) is a finding that an
absent party has a legal interest in the subject of the action. 3
b.

“May as a Practical Matter Impair or Impede
[WSI’s] Ability to Protect the Interest”

Once an absent party is shown to “claim an interest,” one
of two showings must be made to demonstrate that absent party is
a necessary party.

The first showing is that proceeding without

the absent party may “as a practical matter impair or impede the
party’s ability to protect the interest.”
19(a)(1)(B)(i).

Fed. R. Civ. P.

The most apparent risk to the absent party,

WSI, is the possibility of preclusive effect of any judgment in
this case or the creation of otherwise adverse persuasive
precedent.

Many courts considering this risk have found that it

amounts, as a practical matter, to impairing the absent party’s
interest.

See, e.g., Global Disc. Travel Servs., LLC v. Trans

World Airlines, Inc., 960 F. Supp. 701, 708 (S.D.N.Y. 1997)
(opinion of Sotomayor, J.) (holding that the creation of
“persuasive authority for another court’s interpretation of the
3

Plaintiffs cite a case out of the Middle District of Tennessee that came to
a contrary conclusion to argue that this Court should require an affirmative
claim. (ECF No. 135 at 20 (citing Harvill v. Harvill, No. 3:12-CV-00807,
2013 WL 1245729, at *4 (M.D. Tenn. Mar. 27, 2013).) The court in Harvill,
however, failed to cite Jenkins or, indeed, any Sixth Circuit case in its
Rule 19(a) analysis. Accordingly, this Court declines to follow the rule in
Harvill.

26

contract” at issue would “undoubtedly have a practical effect on
any subsequent action brought by” the absent party); Janney
Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 409
(3d Cir. 1993) (“If issue preclusion or collateral estoppel
could be invoked against [the absent party] in other litigation,
continuation of the federal action could ‘as a practical matter
impair or impede’ [the absent party’s] interests and so Rule
19(a)[(1)(B)(i)] would require its joinder if joinder were
feasible.”); HS Res., Inc. v. Wingate, 327 F.3d 432, 439 (5th
Cir. 2003) (“[T]he presence of the [absent parties] is not
required unless the judgment ‘effectively precludes them from
enforcing their rights and they are injuriously affected by the
judgment.’” (quoting Hilton v. Atl. Ref. Co., 327 F.2d 217, 219
(5th Cir. 1964))); see generally William J. Katt, Comment, Res
Judicata and Rule 19, 103 Nw. U. L. Rev. 401, 417 (2009).

Other

circuits hold that so long as the absent party’s interests are
adequately represented, the absent party’s interests are not
impaired by non-joinder.

Nat’l Union Fire Ins. Co. of

Pittsburgh, Pa. v. Rite Aid of S.C., Inc., 210 F.3d 246, 250-51
(4th Cir. 2000) (“If [a present party] is able adequately to
represent [the absent party’s] interest, we would be inclined to
conclude that [the absent party’s] ability to protect its
interest is not impaired or impeded by its absence from this
suit.”); see also Katt, supra at 417 n.126 (explaining that the
27

First and Ninth Circuits have conflicting precedent on this
issue, some following the former approach and some following the
latter).
It is not clear which approach the Sixth Circuit follows.
According to Judge Moore in a section of Glancy v. Taubman
Centers, Inc. that failed to obtain a majority of the panel,
“[a]dequate representation should be considered as a part of the
Rule 19(b) analysis, and not the threshold Rule 19(a) analysis.”
373 F.3d 656, 668 (6th Cir. 2004).

The implication is that to

the extent an absent party could be impaired by preclusive
effects of a judgment in a case sub judice, it is not
appropriate for a court to consider the potentially ameliorative
effects of adequate representation when considering Rule 19(a).
This would suggest that the Sixth Circuit follows the former
approach.
A different result, however, was reached by the Sixth
Circuit in an unpublished opinion when the issue arose in
American Express Travel Related Service, Co., Inc. v. Bank OneDearborn, N.A.

195 Fed. App’x 458 (6th Cir. 2006).

In that

case, the third-party defendant, the Federal Reserve Bank of
Chicago (“FRBC”) moved to dismiss for failure to join Plus
International Bank (“Plus”).

Id. at 459.

Under the regulation

at issue, a finding of liability as to FRBC necessarily rendered
the Plus liable to FRBC.

Id. at 460.
28

Plus therefore assumed

FRBC’s defense of the litigation.

Id.

As a result, the Sixth

Circuit found that “Plus’s interests [were] virtually identical
to those of FRBC, and its defense of FRBC [would] allow Plus to
protect its interests.”

Id. at 461.

Further, the Sixth Circuit

found that “Plus’s interests [were] adequately represented by
FRBC, and Plus would not be disadvantaged by not being joined as
a party.”

As a result, the court held that the district court

had abused its discretion in finding that Plus was a necessary
party.

Id.

This Court finds the reasoning in American Express Travel
Related Service, Co., Inc. to be highly persuasive.

Rule

19(a)(1)(B) directs a court to consider whether proceeding
without an interested absent party

may “as a practical matter

impair or impede the party’s ability to protect the interest.”
The key language in Rule 19(a)(1)(B)(i) is “as a practical
matter.”

Rule 19(a) “recognizes the importance of protecting

the person whose joinder is in question against the practical
prejudice to him which may arise through a disposition of the
action in his absence.”

Fed. R. Civ. P. 19(a) advisory

committee’s note (emphasis added).

If an absent party is

adequately represented, then there is no practical prejudice to
the absent party. 4

4

The Court agrees with Stover that a contrary result has been reached in many
other cases involving an absent joint obligee on a contract. (See ECF No.
111-1 at 5.) According to Wright, Miller, & Kane, joint obligees to a

29

c.

“Substantial Risk of Incurring Multiple or
Otherwise Inconsistent Obligations”

Plaintiffs argue that an absent party is necessary under
Rule 19(a)(1)(B)(ii) only if there is a risk that an existing
party could be subject to incompatible obligations.
agrees.

The Court

“While it is true that the Federal Rules encourage the

joinder of parties where such joinder would appear to avoid
multiple actions or unnecessary delay and expense, this practice
should not penalize bona fide litigants who have a valid cause
of action, choose the forum which they think proper, and ask for
specific relief.”
(3d Cir. 1980).
‘results.’

“Rule 19 does not speak of inconsistent

Rather, it speaks in terms of inconsistent

‘obligations.’”
1984).

Field v. Volkswagenwerk AG, 626 F.2d 293, 302

Bedel v. Thompson, 103 F.R.D. 78, 81 (S.D. Ohio

Consequently, whether a party faces the possibility of

multiple actions -- and potentially even logically inconsistent

contract “usually have been held indispensable parties and their nonjoinder
has led to a dismissal of the action.” 7 Charles Alan Wright, Arthur R.
Miller & Mary Kay Kane, Federal Practice & Procedure § 1613 (3d ed. 2001);
see also Ryan v. Volpone Stamp Co., 107 F. Supp. 2d 369, 387 (S.D.N.Y. 2000)
(“It is well-established that a party to a contract which is the subject of
the litigation is considered a necessary party.”); Ragan Henry Broad. Grp.,
Inc. v. Hughes, No. CIV. A. 91-CV-6157, 1992 WL 151308, at *2 (E.D. Pa. June
19, 1992) (“Generally, where rights sued upon arise from a contract, all
parties thereto must be joined.”); Travelers Indem. Co. v. Household Int’l,
Inc., 775 F. Supp. 518, 527 (D. Conn. 1991) (“The court’s research has failed
to find any case on similar facts that has held that a party to a contract is
not an indispensable party. In fact, the precedent supports the proposition
that a contracting party is the paradigm of an indispensable party.”). Each
of the cited cases that reached a contrary result, however, is
distinguishable from the instant case, as each involved an absent party that
was not likely to be precluded from future litigation. Accordingly, the
Court follows the guidance of the Sixth Circuit given in American Express
Travel Related Service, Co., Inc.

30

judgments -- is irrelevant if the party is not at risk of
inconsistent obligations.

See, e.g., id.; Field, 626 F.2d

301-02; 4 Moore’s Federal Practice § 19.03[4][d] (Matthew Bender
3d ed.).
d.

Necessary Party Analysis

Rule 19(a)(1)(B)’s threshold condition -- that WSI claim an
interest in the subject matter of this action -- is easily met.
See Ente Nazionale Idrocarburi v. Prudential Sec. Grp., Inc.,
744 F. Supp. 450, 458 (S.D.N.Y. 1990) (holding that absent party
had “real interests that are clearly at stake in this action”
where absent party “has clear rights and affirmative obligations
under the contract which [the court] must construe”).

WSI also

possessed the trade secrets in this case and was also a party to
the Code of Conduct.

WSI is not, however, a necessary party

under either Rule 19(a)(1)(B)(i) or (ii).
i.

Rule 19(a)(1)(B)(i)

Proceeding in the absence of WSI would not, as a practical
matter, impair or impede its ability to protect its interest.
As will be explained below, WSI is adequately represented in
this litigation.

Therefore, even though there is a substantial

risk of preclusive effect as to WSI (as will be explained in the
next section, infra), it is not a necessary party.

In American

Express Travel Related Service, Co., Inc., the Sixth Circuit

31

applied the Ninth Circuit’s test to determine whether an absent
party was adequately represented:
whether the interests of a present party to the suit are
such that it will undoubtedly make all of the absent
party’s arguments; whether the party is capable of and
willing to make such arguments; and whether the absent
party would offer any necessary element to the proceedings
that the present parties would neglect.
195 F. App’x at 461 (quoting Shermoen, 982 F.2d at 1318)
(internal quotation marks omitted).
The Court finds that the interests of Plaintiffs are such
that they will undoubtedly make all the arguments that WSI would
make for two reasons.

First, it is apparent that WSI is

controlling the litigation on behalf of WSDI and WSRSI.

High-

level executives at both WSRSI and WSDI report directly to a Csuite executive of WSI.

(See Prelim. Inj. Hr’g Tr. 64:9–64:13,

Oct. 24, 2014, ECF No. 108.)
subsidiaries of WSI.

Plaintiffs are wholly owned

(See id at 42:16–42:19, 176:19-176:21.)

Further, each entity exists solely to provide services to WSI.
(See id. at 176:22–177:1; 178:11–179:12.)

Because of the close

corporate relationship of the entities with WSI and their status
as wholly owned subsidiaries, it is apparent that WSI is
controlling this litigation.
Second, the nature of the injuries to Plaintiffs that are
alleged are such that WSI has been harmed in an identical
manner.

The trade secrets were both WSI’s and its subsidiaries’

32

and it was a party to the same contract with Stover, the Code of
Conduct, as were Plaintiffs.

In light of the foregoing,

Plaintiffs will undoubtedly make all of the arguments that WSI
would.

Additionally, because it is apparent that WSI is

controlling this litigation, Plaintiffs are able and willing to
make those arguments.

Last, Defendants have advanced no

evidence that WSI would offer any necessary element to the
proceedings that the present parties would neglect.

WSI is

therefore adequately represented in this litigation such that
proceeding in its absence does not, as a practical matter, risk
impairing or impeding WSI’s ability to protect its interest.
ii.

Rule 19(a)(1)(B)(ii)

The Court also finds that WSI is not a necessary party
under Rule 19(a)(1)(B)(ii).

Plaintiffs argue that there is no

substantial risk to WSI of “of incurring multiple or otherwise
inconsistent obligations.”

(ECF No. 135 at 20–21.)

According

to Plaintiffs, the only obligation that another court could
issue that would be inconsistent with the obligations sought in
this case would be an order for the defendants to use or
disseminate Plaintiffs’ trade secrets and confidential
information.

(Id. at 22 n.14.)

The Court disagrees.

In a case

such as this, any injunctive relief awarded is likely to be
lengthy, technical, and detailed.

Were injunctive relief to be

awarded, the Court agrees that part of that relief would likely
33

be an order not to use or disseminate Plaintiffs’ trade secrets.
Exactly how Defendants would be required to go about that would
include technical details, including the specifics of thirdparty monitoring and mechanisms for securing and removing such
information.
Rule 19(a)(1)(B)(ii) does not, however, direct a court to
look to whether there is some risk of substantially inconsistent
obligations; instead, Rule 19(a)(1)(B)(ii) directs a court to
determine whether there is a substantial risk of any
inconsistent obligations.

“Inconsistent obligations occur when

a party is unable to comply with one court’s order without
breaching another court’s order concerning the same incident.”
Delgado v. Plaza Las Americas, Inc., 139 F.3d 1, 3 (1st Cir.
1998).

It does not matter that such inconsistent obligations

may be de minimis.

If an existing party has a substantial risk

of conflicting obligations due to the absence of some party,
then Rule 19 requires a court to find the absent party a
necessary party.
In this case, no such substantial risk is present for two
reasons.

First, the Court finds that a judgment in this case is

likely to have preclusive effect against WSI.

Although a

finding of preclusive effect of a judgment against a nonparty
“runs up against the ‘deep-rooted historic tradition that
everyone should have his own day in court’ . . . , the rule
34

against nonparty preclusion is subject to exceptions.”

Taylor

v. Sturgell, 553 U.S. 880, 892–93 (2008) (quoting Richards v.
Jefferson Cnty., Ala., 517 U.S. 793, 798 (1996)).

In Taylor,

the Supreme Court listed six exceptions to the general rule, at
least one of which is applicable to this case 5: when the nonparty
“‘“assume[d] control’ over the litigation in which that judgment
was rendered,” id. at 895 (quoting Montana v. United States, 440
U.S. 147, 154 (1979)).

“‘[T]o have control of litigation

requires that a person have effective choice as to the legal
theories and proofs to be advanced in behalf of the party to the
action.’”

Becherer v. Merrill Lynch, Pierce, Fenner, & Smith,

Inc., 193 F.3d 415, 423 (6th Cir. 1999) (quoting Benson & Ford,
Inc. v. Wanda Petroleum Co., 833 F.2d 1172, 1174 (5th Cir.
1987)).

Examples of such control include “‘president/sole

shareholder and his or her company, a parent corporation and its
subsidiary, an indemnitor and its indemnitee, or a liability
insurer and an insured.’”

Living Care Alternatives of

Kirkersville, Inc. v. United States, 247 F. App’x 687, 698 (6th
Cir. 2007) (quoting Becherer, 193 F.3d at 423).

Because

Plaintiffs are wholly owned subsidiaries of the absent party at
5

One of the exceptions listed was when the nonparty was “‘adequately
represented by someone with the same interests who [wa]s a party’ to the
suit,” id. at 894 (quoting Richards, 517 U.S. at 798) (alterations in
original). For the reasons stated in the Rule 19(a)(1)(B)(i) analysis, this
exception may well apply in this case; however, because there is clear case
law as to the control exception in Taylor, the Court declines to make a
finding as to whether adequate representation would have preclusive effect as
to WSI.

35

issue in this case -- and because they have such a close
corporate relationship with the parent corporation -- the Court
finds that it would be highly likely that any judgment in this
court would have preclusive effect against WSI.

Plaintiffs,

therefore, are not at risk of inconsistent obligations due to
the high likelihood they would prevail with respect to asserting
preclusion in any possibly subsequent litigation by WSI.
Second, the very issues that are being litigated in this
case are the issues that would likely be litigated in a
subsequent case by WSI.

As noted above, the trade secrets were

both WSI’s and its subsidiaries’ and it was a party to the same
contract with Stover, the Code of Conduct, as were Plaintiffs.
Therefore, any issue that WSI would be likely to raise in a
subsequent suit involving the incidents concerning this case are
likely to have been actually litigated, and thereby subject to
preclusion to the extent it applies.
Because WSI is likely to be precluded from relitigating the
issues before the Court, Defendants are not at substantial risk
of inconsistent obligations.

Accordingly, WSI is not a

necessary party under Rule 19(a)(1)(B)(i).
e.

WSI Not an Indispensable Party

Because WSI is not a necessary party under Rule
19(a)(1)(A), (B)(i), or (B)(ii), the Court finds that WSI is not

36

a necessary party.

Moreover, because WSI is not a necessary

party, WSI is also not an indispensable party.
C.

No Improper or Collusive Creation of Subject-Matter
Jurisdiction

Section 1359 of Title 28 of the United States Code directs
that “[a] district court shall not have jurisdiction of a civil
action in which any party, by assignment or otherwise, has been
improperly or collusively made or joined to invoke the
jurisdiction of such court.”

Where a case involves a fiduciary

relationship, which the Court assumes is present between
Plaintiffs and WSI for the purposes of this analysis, the party
arguing against a violation of § 1359 “must show that the
primary purpose for the appointment of the fiduciary is not to
manufacture diversity of citizenship.”
F.2d 1034, 1038 (6th Cir. 1983).

Gross v. Hougland, 712

“In the course of such an

inquiry, several factors may be material: the court should
consider, among other things, whether the fiduciary has duties
other than prosecuting the lawsuit; whether the fiduciary is the
‘natural’ representative; whether the appointment was in fact
motivated by a desire to create diversity jurisdiction; and
whether the suit is local in character.”

Id. at 1038–39.

There

is nothing in the record to suggest -- and Defendants do not
argue -- that the creation of Plaintiffs as corporate entities
was performed in order to defeat diversity.

37

Nor is there any

evidence that any right was transferred or assigned in this
case.

Further, the evidence in the record suggests that

Plaintiffs have existed as separate entities for years before
this action began.

The Court therefore finds no violation of

§ 1359 in this case.
IV.

CONCLUSION
For the reason stated above, Defendants’ motions to dismiss

under Rules 12(b)(1) and 12(b)(7) in Defendant Timothy Stover’s
Motion to Dismiss and in the Alternative Motion for Summary
Judgment (ECF No. 111) and Defendant Arhaus, LLC’s Motion to
Dismiss or in the Alternative Motion for Summary Judgment as to
the Second Amended Complaint (ECF No. 115) are DENIED.
IT IS SO ORDERED, this 30th day of January, 2015.

/s/ Jon P. McCalla
JON P. McCALLA
UNITED STATES DISTRICT JUDGE

38