Advanced Recovery Systems v. American Agencies et al
MEMORANDUM DECISION AND ORDER granting 463 American Agencies' Motion for Punitive Damages, Litigation Expenses, and Prejudgment Interest; denying 468 Defendants' Renewed Motion for Judgment as a Matter of Law. The Court requests that American Agencies submit a Final Judgment to the Court within 5 days of the date of this Order incorporating the awards granted in this Order. Signed by Judge Dale A. Kimball on 9/6/2017. (eat)
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
ADVANCED RECOVERY SYSTEMS,
Case No. 2:13CV283DAK
AMERICAN AGENCIES, LLC, ET AL.,
Judge Dale A. Kimball
This matter is before the court on post-trial motions: (1) Advanced Recovery Systems,
LLC (“ARS”), Kinum, Inc., Scott Mitchell, Blake Reynolds, and Brent Sloan’s (collectively,
“Defendants”)1 Renewed Motion for Judgment As a Matter of Law Under Federal Rule of Civil
Procedure 50(b) and Alternative Motion for New Trial Under Federal Rule of Civil Procedure
59(a); and (2) American Agencies, LLC’s (“AA”) Motion and Petition for Punitive Damages,
Litigation Expenses, and Prejudgment Interest. The parties have fully briefed the motions. The
court concludes that a hearing would not significantly aid in its determination of the motions.
Accordingly, the court issues the following Memorandum Decision and Order based on the
memoranda submitted by the parties, as well as the law and facts relevant to the motions.
Because only counterclaims proceeded to trial, the parties agreed to switch the original
plaintiff/defendant designations in this case.
Defendants’ Renewed Motion for Judgment As a Matter of Law
Alleging that this litigation improperly went against them at every turn, Defendants assert
over thirty grounds for judgment as a matter of law. Of those thirty-nine grounds, however, only
eleven were raised in Defendants’ original Rule 50(a) motion for judgment as a matter of law. It
is well established that “[a]rguments presented in a Rule 50(b) motion cannot be considered if
not initially asserted in a Rule 50(a) motion.” Perez v. El Tequila, LLC, 847 F.3d 1247, 1255
(10th Cir. 2017). “The renewed motion under Rule 50(b) cannot assert grounds for relief not
asserted in the original motion.” Marshall v. Columbia Lea Reg’l Hosp., 474 F.3d 733, 738-39
(10th Cir. 2007). This rule promotes fairness and completeness by “ensuring an opposing party
has sufficient notice of an alleged error so that it may be cured before the party rests its case.”
United Int’l Holdings, Inc. v. Warf (Holdings) Ltd., 210 F.3d 1207, 1229 (10th Cir. 2000). While
“[t]echnical precision is unnecessary,” Rule 50 requires that the grounds of the original motion
“be stated with sufficient certainty to apprise the court and opposing counsel of the movant’s
position with respect to the motion.” Id. According to this precedent, this court will not consider
the arguments in Defendants’ Rule 50(b) renewed motion that were not adequately raised in their
Rule 50(a) motion.2
With respect to the arguments properly raised, the court notes that relief under Rule 50(b)
Leading up to trial and throughout trial, the court was exceedingly lenient in allowing
Defendants to raise issues that were untimely and should have been procedurally barred.
However, at this stage of the litigation, precedent is clear that Defendants must be bound to the
issues that they properly raised. Likely because of the leniency the court had previously shown
with respect to untimely raised matters, AA opposed each of the procedurally barred issues. The
court notes that if it had been proper to address these issues, the court would have adopted AA’s
analysis on each point.
is “appropriate in very limited circumstances.” Gulf Coast Shippers Ltd. P’ship v. DHL Express
(USA), Inc., 2016 WL 6821798, at *1 (D. Utah Sept. 6, 2016). Rule 50(b) relief is to be
“cautiously and sparingly granted.” Weese v. Schukman, 98 F.3d 542, 547 (10th Cir. 1996). A
party is entitled to judgment as a matter of law “only if the evidence points but one way and is
susceptible to no reasonable inferences which may support the opposing party’s position.”
Phillips v. Hillcrest Med. Ctr., 244 F.3d 790, 796 (10th Cir. 2001).
“‘[I]n entertaining a motion for judgment as a matter of law . . . the court must draw all
reasonable inferences in favor of the nonmoving party, and it may not make credibility
determinations or weigh the evidence. Credibility determinations, the weighing of evidence, and
the drawing of legitimate inferences from the facts are jury functions, not those of a judge. Thus,
although the court should review the record as a whole, it must disregard all evidence favorable
to the moving party that the jury is not required to believe.’” Flitton v. Primary Residential
Mrtg., Inc., 238 Fed. Appx. 410, 415-16 (10th Cir. 2007) (quoting Reeves v. Sanderson Plumbing
Products, Inc., 530 U.S. 133, 150-51 (2000)) (overturning district court’s grant of post-trial
motion for judgment on pleadings).
As an initial matter, Defendants generally attack the court’s preliminary instruction to the
jury because it informed the jury of prior rulings by the court. However, the preliminary
instruction merely gave the jury context for its role in this litigation. The jury had to be informed
of rulings as to liability made as a matter of law at the summary judgment stage if the jury was to
assess damages on the same claim. To the extent that the preliminary instruction stated facts,
those facts were undisputed facts at the summary judgment stage. Defendants’ desire to relitigate
those facts at trial was procedurally improper. The court has routinely given similar preliminary
instructions in other cases and does not believe that the instruction in this case prejudiced the jury
against Defendants. The jury was fully instructed as to how to rule on each issue put before it
and the court must assume that the jury followed all the instructions the court gave it.
A. Interference with Contract Claim
Defendants argue that they are entitled to judgment as a matter of law on AA’s claim for
tortious interference with contract because (1) it was legally impossible after June 10, 2013 for
Kinum or its officers to interfere with the ARS-AA License Agreement if Kinum and ARS
merged, (2) even if the court reverses the jury’s successor liability verdict, AA failed to prove the
existence of a valid contract after June 10, 2013, with which Defendants could have interfered,
(3) AA failed to offer sufficient evidence of inducement by any Defendant before June 10, 2013,
(4) AA failed to offer sufficient evidence that Kinum possessed the requisite knowledge of the
AA-ARS License Agreement before June 10, 2013, and (5) AA failed to offer sufficient evidence
to prove that Reynolds and Mitchell acted outside the scope of their duties as officers of ARS
before the June 2012 transaction. The only two issues Defendants raised in their Rule 50(a)
motion and that are properly before the court are whether Kinum had the requisite knowledge
and whether Reynolds and Mitchell acted within the scope of their duties as officers. As
explained by the precedent above, the court will not consider the issues Defendants failed to raise
in their Rule 50(a) motion.
(A) Kinum’s Knowledge
When viewed in the light most favorable to AA, there is substantial evidence in the
record to support the jury’s verdict that Kinum tortiously interfered with the AA-ARS License
Agreement. With respect to the tortious interference with contract claim, the court instructed the
jury, among other things, that AA had to prove that (1) Kinum either knew or should have known
of the existence of the AA-ARS License Agreement, (2) Kinum’s acts in inducing ARS to breach
the contract with AA were intentional, and (3) the proximate result of Kinum’s acts was that
ARS was induced to breach the AA-ARS License Agreement.
The following evidence supports the jury’s determination that Kinum “induced” ARS to
breach the AA-ARS License Agreement: (1) Kinum offered ARS’ officers shares in Kinum,
positions at Kinum, monthly base salaries, and cash payments to induce the officers to sell their
individual interests in ARS in violation of AA’s rights of first refusal; (2) Kinum agreed to pay,
and did pay, for ARS’ lawsuit against AA to induce ARS to sell itself to Kinum in violation of
AA’s rights of first refusal.
There was substantial circumstantial evidence that Fidelis officers were aware that AA
had a right of first refusal to purchase ARS. In mid-April 2013, Bruce Klinger learned that
Mitchell and Reynold’s plan to purchase AA fell through. At this time Klinger and Rick Rainho
had telephone conversations with Sloan, Mitchell, and Reynolds who were preparing to sue AA
for an alleged breach of contract that would, if successful, relieve ARS of the obligation to give
AA a right of first refusal. Prior to the sale of ARS to Kinum, Sloan, Mitchell, and Reynolds
sought and received legal advice regarding the enforceability of AA’s right of first refusal.
Klinger was aware that ARS’ attorneys had taken the position that AA’s alleged breach would
relieve ARS’ of giving AA a right of first refusal and that the lawsuit was pending at the time of
Kinum’s purchase. In acknowledging that he knew ARS was able to sell itself to Kinum if there
was a breach, Klinger also reveals his awareness that if there was no breach, ARS was not able to
sell to Kinum. A jury could conclude that Klinger admitted to knowing that AA had a right of
first refusal and that ARS would violate that right by selling to Kinum before the breach of
contract issue was adjudicated.
It is undisputed that as of the effective date of the Fidelis Shareholder Agreement at least
four of Kinum’s six officers, prior to the sale of ARS, had known they would be interfering with
AA’s contractual rights absent some legal justification for the sale. Defendants’ mistaken belief
that AA breached the License Agreement first did not render Defendants’ interference
unintentional or justify Defendants’ actions. Commil USA, LLC v. Cisco Sys., Inc., 135 S. Ct.
1920, 1930 (2015).
In addition, Kinum is liable for the tortious acts of interference by its incorporators
because Kinum accepted the benefits of their tortious conduct. While it is “the general rule that
corporations are usually exempt from liability for the torts of their promoters or incorporators,”
this rule, “like most rules . . . has its exceptions.” Nanodetex Corp. v. Defiant Techs., 349 Fed.
Appx. 312, 2009 WL 3303709, at *8 (10th Cir. 2009) (unpublished). For example, “corporations
are usually prevented from retaining the benefits of wrongful conduct while escaping liability for
it.” Id. In this case, after June 10, 2013, Kinum knowingly retained the benefits of the sale of
ARS even though the majority, if not all, of Kinum’s officers knew of AA’s right of first refusal
in the AA-ARS License Agreement. As such, the individual Defendants’ pre-incorporation
knowledge of the interference with AA’s contractual right is imputed to Kinum, which retained
the benefits of that tortious interference.
(B) Reynolds and Mitchell
Defendants claim that AA failed to offer sufficient evidence to prove that Reynolds and
Mitchell acted outside the scope of their duties as officers of ARS before the June 2012
transaction. However, in effectuating ARS’ sale to Kinum, Mitchell and Reynolds acted as
shareholders of ARS, not officers. In executing the Fidelis Shareholder Agreement–the
document by which Kinum was organized and purchased ARS–Mithcell and Reynolds never
signed in their capacity as officers of ARS. The Fidelis Shareholder Agreement refers to them
only as “ARS Shareholders,” and they signed the Agreement in their capacities as new
“shareholders” of Kinum. The jury found that ARS and Kinum merged. As such, Mitchell and
Reynolds acted as ARS shareholders, owners in their personal capacities, when they effected the
merger of ARS with Kinum. While Defendants have asserted that the sale of ARS was a mere
asset sale, they jury found a merger. Rather than acting as officers for the general well being of
ARS as a whole, the jury could have concluded from the evidence that Mitchell and Reynolds
acted for purely personal reasons in selling their individual shares in exchange for compensation
form Kinum. As a consequence of the transaction, ARS ceased to exist. The jury had evidence
from which to conclude that Mitchell and Reynold’s sale of ARS was not a corporate act by its
officers, but a sale of its shares by its shareholders acting in their personal capacities. Therefore,
holding Mitchell and Reynolds accountable for their interference would not have a chilling effect
on the actions of corporate officers.
Defendants also argue that if the court does not grant judgment as a matter of law on
AA’s contractual interference claim in full, a new trial is necessary on the claim based solely on
allegations prior to June 10, 2013. Defendants ask the court to order a new trial focused strictly
on the allegations pre-dating June 10, 2013, because there is no way to know whether or to what
extent the jury based its verdict on Defendants’ later conduct. At trial the parties disputed
whether Kinum merged with ARS. If the jury had determined there was no merger, Kinum
would have interfered with AA’s contractual rights by inducing ARS to sell the ARS Software to
Sajax. Therefore, there was no basis for preventing AA from arguing that the February 2014 sale
to Sajax was also evidence of Defendants’ interference. Defendants could have asked the court
to instruct the jury that Kinum could not have been liable for any alleged acts of interference after
the date of any merger, but they did not. Defendants failure to request the instruction or to make
such an argument to the court during trial is not a basis for a new trial. Rather, Defendants’
position on the issue is waived. Defendants reliance on United States v. McKye, 734 F.3d 1104,
1110 n.6 (10th Cir. 2013), a criminal case, is misplaced in this civil setting.
In addition, Defendants contend that judgment as a matter of law is proper on AA’s claim
for consequential damages based on its tortious interference with contract claim because recovery
of fees incurred in pursuit of damages against a defendant is categorically precluded by the thirdparty tort rule. However, this issue was not raised in Defendants’ Rule 50(a) motion, and the
court will not consider it.
Furthermore, Defendants argue that judgment as a matter of law is proper on AA’s claim
for punitive damages in relation to its interference with contract claim because AA did not
present clear and convincing evidence that Defendants acted as a result of willful and malicious
or intentionally fraudulent conduct or with a knowing and reckless indifference toward AA’s
rights. Specifically, Defendants assert that (1) punitive damages are improper because it is
undisputed that Defendants acted in reliance on the advice of counsel, (2) AA offered no
evidence at trial refuting the testimony at trial that Kinum’s officers lacked the requisite
knowledge to support an award of punitive damages, (3) AA relies on Defendants’ acts related to
other claims to show a reckless disregard for AA’s rights, and (4) AA offered no evidence of the
aggravating circumstances required to award punitive damages under Utah law. The only
grounds stated in Defendants’ Rule 50(a) motion against an award of punitive damages for AA’s
tortious interference with contract claim was that Defendants believed that AA had materially
breached the AA-ARS License agreement and that ARS had terminated that agreement. In their
Rule 50(b) motion, Defendants appear to abandon that argument and instead raise several new
grounds for overturning the jury’s punitive damages verdict. None of these arguments were
raised in Defendants’ Rule 50(a) motion and are not properly before the court.
However, to the extent that Defendants claim in its Rule 50(a) motion could be construed
to be the same as the Rule 50(b) argument that Defendants could rely on counsel’s advice
regarding the breach, the court will address that issue. The law does not support a ruling that
relying on the advice of counsel makes you immune from a punitive damages award. In fact, the
jury could have reasonably inferred that Defendants sought legal advice as a cloak to their
reckless behavior toward AA. See Quinby v. WestLB AG, 2008 WL 3826695, at *2 (S.D.N.Y.
Aug. 15, 2008) (“Seeking advice of counsel does not as a matter of law preclude a punitive
damage award; indeed, such consultation may instead establish that a defendant knew about the
legal consequences of its actions.”). In this case, while Defendants claim to have relied on
counsel’s advice, they did not openly inform AA that it was taking such action on advice of
counsel. Rather, they concealed their actions from AA. The court cannot second-guess how the
jury chose to view such evidence. Accordingly, Defendants have failed to demonstrate that they
are entitled to judgment as a matter of law on this issue.
B. Civil Conspiracy Claim
Defendants also argue that judgment as a matter of law on AA’s claim for civil
conspiracy to interfere with the AA-ARS License Agreement because (1) conspiracy cannot be
proven without a showing that an underlying tort was committed, (2) AA has not offered
sufficient evidence in support of the elements of civil conspiracy, and (3) AA has not shown that
it sustained damage as a proximate result of the conspiracy’s activities. Only the first of these
arguments were made in Defendants’ Rule 50(a) motion. Therefore, it is improper for the court
to address the remaining issues.
Although Defendants claim that there is no underlying tort as a basis for the conspiracy,
the court has already addressed that there was substantial evidence at trial of Defendants’ tortious
interference with AA’s contractual rights under the AA-ARS License Agreement. Therefore,
Defendants’ argument does not provide grounds for a judgment as a matter of law.
C. Trade Secret Misappropriation Claim
Defendants further argue that they are entitled to judgment as a matter of law on AA’s
claim for trade secret misappropriation because (1) the court should reverse its summary
judgment ruling the ARS and Kinum misappropriated AA’s trade secrets, (2) AA failed to
present evidence that any of the individual defendants personally participated in any activity that
would qualify as misappropriation of trade secrets under Utah’s trade secret act, and (3) AA’s
evidence regarding lost profits damages failed to rise above speculation or provide a reasonable
estimate of damages. Defendants did not raise the issue regarding lost profits in their Rule 50(a)
motion. Therefore, the court will not consider that issue.
(A) Reconsideration of Prior Ruling
Defendants ask this court for the third time to reconsider its summary judgment ruling
with respect to the trade secrets claim. Defendants’ request is necessarily brought under Federal
Rule of Civil Procedure Rule 59. However, “[p]rocedurally, a Rule 59(e) motion ‘is not
appropriate to revisit issues already addressed or advance arguments that could have been raised
in prior briefing.’” Headwater Res., Inc. v. Illinois Union Ins., 770 F.3d 885, 900 (10th Cir. 2014).
Defendants argue that Kinum never acquired AA’s data from ARS and, therefore, never
disclosed it to Sajax, and that Kinum never used AA’s data within the meaning of the Utah trade
secrets act. These arguments were available to Defendants during the summary judgment
briefing and are procedurally improper.
In any event, the request for reconsideration also fails on the merits. The summary
judgment record and the trial record support the court’s conclusion that Kinum acquired AA’s
data from ARS. Defendants did not dispute this on summary judgment. Kinum admitted the
following undisputed facts: (1) ARS had the ability to allow or deny access to the AA Data
housed in the ARS Software; (2) On or about June 13, 2013, Kinum acquired from ARS all of
the AA Data when Kinum acquired the ARS Software, which housed all of the AA Data; and (3)
Kinum knew that if AA’s access to the ARS Software and AA Data were cut off, there would be
damage to AA’s customers. Defendants admitted that by possessing and controlling access to
AA’s data, Kinum had acquired AA’s data.
Defendants assert that evidence offered at and admission made during trial warrant
reconsideration fo the court’s findings at the summary judgment stage. Defendants point to Jeff
Baker’s testimony that other Kinum personnel did not have “credentials” to see AA’s data.
However, Jeff Baker’s testimony was consistent with his deposition testimony that was before
the court on summary judgment. Jeff Baker’s testimony was not new, uncontradicted, or
exculpatory. Sloan admitted to the jury that he had testified in his deposition that ARS could
have gone in and looked at any and every AA client because his company was providing the
database. Even if Baker was the only Kinum employee to access AA’s data, this is still evidence
that Kinum acquired AA’s data. Baker was Kinum’s agent and acted under Kinum’s direction.
As Kinum’s agent, Baker accessed AA’s data. AA never authorized Baker to access AA’s data
on behalf of Kinum. Through its agents–Baker, the Colorado hosting company, and Base Camp
Franchising’s IT personnel–Kinum also controlled access to AA’s data and made decisions about
the security of AA’s data. AA could not even access its own data without Kinum’s, and later
Sajax’s, consent. The summary judgment record and trial record also support the conclusion that
Kinum used AA’s data to perform services and collect $20,000 monthly payments. AA had no
choice but to continue to do business with Kinum because Kinum had complete control of AA’s
data. Defendants do not dispute that Kinum used the ARS Software to collect monthly payments
from AA and that the ARS Software used the AA data in the course of performing its letter
service functions. Moreover, the summary judgment record and the trial record support the
court’s prior conclusion that Kinum disclosed AA’s data to Sajax. Defendants did not dispute
that Kinum disclosed AA’s data to Sajax until after this court found that the data was a trade
secret and ARS and Kinum were liable for misappropriating AA’s trade secrets. Defendants rely
on evidence at trial to dispute Kinum’s purpose in giving Sajax access to AA’s data, not the fact
that Kinum gave Sajax access. Kinum knew that Sajax was a competitor of AA’s and knew that
its disclosure of AA’s data to Sajax was not authorized by AA. Given this evidence, the court
finds no basis for reconsidering its prior rulings.
(B) Individual Defendants
Defendants argue that Aa had to prove each element of a UTSA claim was met as to each
individual defendant. This is correct, however, Defendants fail to acknowledge Utah case law
that a corporate director, officer, or owner is liable for the corporation’s tortious conduct “of his
own or in which he participates.” Armed Forces Ins. Exch. V. Harrison, 70 P.3d 35, 41 (Utah
2003). A corporate officer must participate in “all the essential elements” of the corporation’s
tort. Id. at 44. The Utah Supreme Court makes clear that an officer can also be liable for tortious
conduct in which he participates, not just his own tortious conduct. Thus, the correct standard is
that an officer of a corporation is liable for the officer’s own tortious conduct and also for the
corporation’s torts in which he participates in all the essential elements.
In this case, the Defendants dispute whether there was substantial evidence as to the
individual Defendants’ knowledge of Kinum’s acquisition, use, and disclosure of AA’s tradesecret protected data. Defendants do not dispute that Sloan, Mitchell, and Reynolds knew the
ARS Software housed AA’s data. There was substantial evidence at trial that each of the
individual Defendants knew Kinum acquired AA’s data and controlled access to it without AA’s
knowledge, that the data was being used with the Software, that Kinum was receiving payments
from AA, and that Kinum eventually sold the ARS Software, which they knew included the AA
data, to Sajax.
Defendants, however, argue that Sloan, Mitchell, and Reynolds never accessed AA’s data
and thus did not learn the secret. The UTSA defines improper acquisition 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.” Utah Code Ann. § 13-24-2(2)(a). Nothing in this provision
requires the individual Defendants to have knowledge of the trade secret. The provision only
requires knowledge or a reason to know that the trade secret was acquired by improper means.
There was substantial evidence at trial that Sloan, Mitchell, and Reynolds knew that Kinum
acquired AA’s data secretly and without AA’s authorization.
Courts recognize that one need not comprehend or know what a particular trade secret is
in order to know that a trade secret has be acquired. “Although the UTSA uses the phrase
‘knowledge of the trade secret,’ there is no authority that this phrase creates an element of
comprehension. Rather, this phrase is generally understood to reflect knowledge that the trade
secret was derived through improper means.” ClearOne Communications, Inc. v. Chiang, 2007
WL 4376125, at *2 n.3 (D. Utah Dec. 13 2007).
Defendants reliance on Silvaco Data Sys. v. Intel Corp., 184 Cal. App. 4th 210, 217
(2010), as modified on denial of reh’g, (May 27, 2101), does not support their position. The
defendant in Silvaco never possessed the plaintiff’s trade secret, only executable object code
made from the trade secret source code. The Silvaco court recognized that “[t]o ‘know’ a thing is
to have information of that thing at one’s command, in one’s possession, subject to study,
disclosure, and exploitation. To say that one ‘knows’ a fact is also to say that one possesses
information of that fact.” Id. at 226. The court also noted that possession, not knowledge, was
an element of a trade secrets cause of action under the Restate of Unfair Competition. Id. Unlike
the defendant in Silvaco, Defendants had possession of and access to AA’s trade secrets. There
was also circumstantial evidence the jury could have relied upon to find that Defendants did
access the AA data. Because there was substantial evidence for the jury to discredit the
Defendants’ testimony that they protected and never accessed AA’s client data, Defendants’
motion for judgment as a matter of law on this issue fails.
D. Implied Covenant of Good Faith and Fair Dealing Claim
Defendants also contend that judgment as a matter of law is proper on AA’s claim for
breach of the implied covenant of good faith and fair dealing claim because (1) damages for
breach of the implied covenant of good faith and fair dealing and breach of contract are an
impermissible double recovery, and (2) AA’s recovery for breach of the implied covenant of
good faith and fair dealing is legally impossible because AA failed to introduce evidence of
“intentionality” by any Defendant.
(A) Double Recovery
Defendants assert that the $50,000 jury award for breach of the implied covenant of good
faith and fair dealing claim is an impermissible double recovery for the same alleged harm as
AA’s breach of contract claim. However, the breach of contract claim was based on ARS’
breach of AA’s right of first refusal under the AA-ARS License Agreement. AA’s breach of the
implied covenant of good faith and fair dealing claim is based on evidence that ARS rewrote
RILAs to eliminate the $25,000 license fee, to reduce the $600,000 sales quotas, and otherwise to
enter improper side agreements. This verdict is, therefore, not based on the same harm. Each of
ARS’ breaches caused distinct pecuniary losses. AA may recover for each of these distinct
losses. Therefore, there is no basis for judgment as a matter of law on this issue.
Defendants also argue that ARS cannot be liable for intentionally destroying or injuring
AA’s rights under the contract because Defendants presented evidence that they acted under the
honest and good faith belief that AA had materially breached the AA-ARS License Agreement.
Defendants, therefore, contend that AA cannot prove that any Defendant acted in a way that
destroyed or injured AA’s rights under the AA-ARS License Agreement at any time after the
filing of this lawsuit. However, Defendants’ argument mistakenly assumes that AA’s claim is
based on Defendants’ actions after the filing of the lawsuit. At trial, AA’s claim for breach of the
implied covenant of good faith and fair dealing was based on conduct prior to the filing of the
lawsuit when ARS was rewriting RILAs. While the parties disputed whether Mitchell and
Reynolds had the authorization to make such changes, there was sufficient evidence for the jury
to conclude that the changes were intentionally made, were not authorized, and injured AA’s
rights under the AA-ARS License Agreement.
E. Interference with Business Relations Claim
Defendants assert that judgment as a matter of law is proper on AA’s claim for
interference with business relations because (1) it cannot be based on the same conduct
supporting AA’s trade secret claim, (2) the jury had no basis for deciding whether ARS’ lawsuit
against AA was unfounded, (3) AA offered no evidence that the alleged alteration of the RILA
agreements has any causal connection to the data conversion, (4) and the jury’s damages award is
not supported by the evidence. Defendants did not raise any of these issues in their Rule 50(a)
motion and, therefore, the court will not consider them.
However, Defendants did properly raise whether punitive damages could be awarded in
relation to its interference with business relations claim. Defendants argue that AA did not
present clear and convincing evidence that Defendants’ alleged interference was the result of
willful and malicious or intentionally fraudulent conduct or conduct that manifests a knowing
and reckless indifference for AA’s rights. Defendants’ arguments refer to the same reasons they
cite on the issue of punitive damages for the interference with contract claim. Defendants’
arguments fail for the same reasons the court set forth above. There was evidence at trial the jury
could rely upon in finding Defendants recklessly indifferent to AA’s relationships with its
customers when they interfered with those relationships to their own advantage.
F. Civil Conspiracy to Interfere with Business Relations Claim
Defendants contend that judgment as a matter of law is warranted on AA’s claim for civil
conspiracy to interfere with business relations for the same reasons they raised with respect to
AA’s other civil conspiracy claim. Again, these new arguments were not raised in Defendant’s
Rule 50(a) motion and the court will not consider them.
G. Copyright Infringement Claim
Defendants argue that they are entitled to judgment as a matter of law on AA’s copyright
claim because (1) there is no evidence of originality in AA’s collection letter or service contract,
and (2) there is no evidence that any Defendant actually used AA’s collection letter or service
contract. The only issue properly before the court is whether there was evidence that any of the
Defendants used AA’s letter or service contract.
To show the second element of “copying,” a plaintiff must prove that its works were, in
fact, copied and that the copied elements are protectable. Country Kids ‘N City Slicks v. Sheen,
77 F.3d 1280, 1284 (10th Cir. 1996). The fact of copying can be proved by either direct evidence
or, as is more often the case because direct evidence of copying is rarely available, circumstantial
evidence of access and substantial similarity. Autoskill Inc. v. Nat’l Educ. Support Sys., Inc., 994
F.2d 1476, 1489 (10th Cir. 1993).
Defendants argue that they did not copy “protectable” elements after applying the
abstraction-filtration-comparison. However, there was substantial evidence that Defendants
copied AA’s works verbatim. Side-by-side comparisons of AA’s and Kinum’s letters and
agreements show word-for-word copying and common errors. Defendants, therefore, by copying
everything, necessarily copied protectable elements of AA’s copyrighted works. The
comparisons could be considered direct evidence of copying and an abstraction-filtrationcomparison test to determine substantial similarity is unnecessary. Storagecraft Tech. Corp. v.
Kirby, 2011 U.S. Dist LEXIS 76370, at *19 n.1 (D. Utah July 3, 2011). Therefore, Defendants
have not established that they are entitled to judgment as a matter of law on this issue.
Defendants argument that they did not use the copies in their custody and possession was
not raised in Defendant’s Rule 50(a) motion and has not been properly preserved.
H. Unjust Enrichment Claim
Defendants argue that judgment as a matter of law is appropriate on AA’s unjust
enrichment claims because (1) AA presented no evidence that any of the individual Defendants
received any benefit from the alleged use of ARS’ software or AA’s materials, (2) unjust
enrichment is redundant of AA’s breach of contract claim, (3) the claim is preempted by the Utah
trade secrets act, (4) AA’s damages model was flawed, and (5) there was no evidence that Kinum
was unjustly enriched.
Defendants argument that there was insufficient evidence to support the jruy’s verdict on
AA’s unjust enrichment claim is without merit. Kinum earned revenues while enjoying the
unjust use and possession of the ARS Software and other AA materials. Kinum was enriched
through the receipt of these revenues and the individual Defendants were enriched through the
concomitant increase of value in their shares of Kinum. The court cannot speculate on what the
jury understood. The court can only determine whether there was evidence in the record at trial
to support the jury’s verdict. There was substantial evidence at trial that Defendants’ unjust
enrichment was earned from Defendants’ exploitation of the ARS software. While Defendants
attempted to refute AA’s experts, the jury was entitled to believe AA’s expert testimony. There
was also conflicting testimony on the time period of Defendants’ use of the ARS Software.
However, Rule 50 does not provide a mechanism for overturning a verdict based on a
disagreement with the jury’s interpretation of evidence. On a Rule 50 motion, the court must
view all of the evidence in the light most favorable to the nonmoving party.
In addition, the court does not believe that the jury’s award for unjust enrichment and the
court’s award for contract breach constitute a double recovery. AA is entitled to receive the
benefit of the contract rights from ARS as well as to require Defendants to disgorge any benefit
they gained from use of what rightfully belonged to AA. Furthermore, the UTSA and Copyright
Act do not preempt AA’s unjust enrichment claim because the unjust enrichment claim is based
on Defendants’ use of the ARS Software, not the AA data. Accordingly, the court finds no bases
for granting Defendants’ motion for judgment as a matter of law on AA’s unjust enrichment
I. Successor Liability Claim
Defendants further argue that judgment as a matter of law is proper on AA’s successor
liability claim because the evidence at trial showed that the June 2013 transaction between ARS
and Kinum was nothing more than an asset purchase in which Fidelis bought the ARS Software
and Sajax is ultimately ARS’ successor. Defendants again ask the court to weigh the evidence
presented to the jury. Defendants simply cite to testimony of their witnesses who claimed that
the transaction between ARS and Kinum was an asset purchase rather than a merger. However,
Defendants ignore Kinum’s contemporaneous letter describing the transaction as a merger. In
addition, Defendants do not review each of the elements for de facto merger with the evidence
presented at trial. Accordingly, Defendants have not established that judgment as a matter of law
is appropriate on the successor liability claim.
Defendants argument that Sajax became ARS’ successor through the sale of the ARS
Software to Sajax was not raised in Defendants’ Rule 50(a) motion and is not properly preserved.
Based on the above reasoning, Defendant’s Renewed Motion for Judgment As a Matter
of Law Under Federal Rule of Civil Procedure 50(b) and Alternative Motion for New Trial
Under Federal Rule of Civil Procedure 59(a) is denied.
AA’s Motion for Punitive Damages, Litigation Expenses and Prejudgment Insterest
AA moves for an award of punitive damages, litigation expenses, and prejudgment
A. Punitive Damages
Under Utah law, punitive damages may be awarded: (1) where compensatory or general
damages are awarded; and (2) “it is established by clear and convincing evidence that the acts or
omissions of the tortfeasor are the result of willful and malicious or intentionally fraudulent
conduct, or conduct that manifests a knowing and reckless indifference toward, and a disregard
of, the rights of others.” Utah Code Ann. § 78B-8-201(1)(a).
Defendants contend that punitive damages are improper and unwarranted in this case. In
Stewart v. Stoller, 2014 WL 4851861, at *9 (D. Utah Sept. 29, 2014), the court found that
“[e]ven when the minimum statutory prerequisites are met, punitive damages are still proper only
in rare, ‘exceptional cases.’” But Stewart involved a case in which the statutory prerequisites
were not met. In contrast, the jury found that the statutory prerequisites were met in this case.
The jury found against ARS, Kinum, Sloan, Mitchell, and Reynolds for interference with
contract, conspiracy to interfere with contract, interference with business relations, and
conspiracy to interfere with business relations, and awarded compensatory damages on those
claims. The jury also found that these defendants’ interference was willful and malicious, was
intentionally fraudulent, or manifested a knowing and reckless indifference toward, and a
disregard of, AA’s rights. Therefore, AA is entitled to an award of punitive damages under Utah
Punitive damages should be “both reasonable and proportionate to the amount of harm to
the plaintiff and to the general damages recovered.” State Farm Mut. Auto. Ins. Co. V. Campbell,
538 U.S. 408, 426 (2003). Utah courts consider the following factors with respect to the
appropriate amount of punitive damages: “(i) the relative wealth of the defendant; (ii) the nature
of the alleged misconduct; (iii) the facts and circumstances surrounding such conduct; (iv) the
effect thereof on the lives of the plaintiff and others; (v) the probability of future recurrence of
the misconduct; (vi) the relationship of the parties; and (vii) the amount of actual damages
awarded.” Lawrence v. Intermountain, Inc., 2010 UT App 313, ¶ 18.
(1) Relative Wealth
With respect to the relative wealth of the Defendants, the court must consider whether a
punitive damages award is called for to punish Defendants for their misconduct, given what is
known of their wealth. Smith v. Fairfax Realty, Inc., 2003 UT 41, ¶ 33. There is little evidence
as to the relative wealth of each Defendant. However, “the introduction of evidence as to the
relative wealth of the defendant is not a technical prerequisite to an award of punitive damages.”
Lawrence, 2010 UT App at ¶ 20. There is financial information for Kinum for the years 2013 to
2015 demonstrating yearly income between $438,087 and $967,560.30, and assets between $306,
485 and $390,663. The individual defendants did not produce financial documents. But, Sloan
testified that he had seen Mitchell’s financial documents and that his net worth was a few million
dollars whereas Sloan’s net worth greater than his. Sloan has invested approximately $1.5
million in Kinum from personal resources and companies he controls.
The evidence presented as to wealth does not support a punitive damages award against
Kinum because the compensatory damages awards are significant in relation to Kinum’s revenue
and assets. The compensatory damages would not merely be absorbed as a cost of business. See
Behrens v. Raleigh Hills Hosp., Inc., 675 P.2d 1179, 1187 (Utah 1983); Gleave v. Denver & Rio
Grande R.R. Co., 749 P.2d 660, 671 (Utah Ct. App. 1988). The only individual defendant the
court concludes has a relative wealth supporting an award of punitive damages is Sloan. There is
no evidence as to Reynolds and the evidence regarding Mitchell is a statement from Sloan.
Sloan, however, has presented evidence of having several million dollars, has invested in Kinum,
and has funded most of the litigation.
(2) Nature and Facts and Circumstances of Defendants’ Misconduct
The jury found that Defendants engaged in conduct above and beyond the conduct
necessary for liability on the interference claims. The jury’s verdict was supported by evidence
of Defendants’ secretive and covert manner and the pains Defendants’ took to conceal their
actions from AA. Therefore, this factor weighs in favor of punitive damages as to each of the
(3) Effect on AA and Others
There was evidence that Defendants’ interference with AA’s contract rights has a
significant effect on AA’s business. AA ceased growing, incurred conversion costs, and suffered
lost profits. The intangible effects on AA’s business are not entirely captured in the jury’s
compensatory damages award. Therefore, there is a basis under this factor for imposing punitive
(4) Probability of Future Occurrence
AA seeks punitive damages in part due to Defendants’ failure to acknowledge that they
engaged in misconduct with respect to AA’s contractual rights. Defendants view the case in
terms of technical mistakes whereas AA insists that there is a likelihood that Defendants will
repeat their misconduct if not sufficiently punished. Defendants cannot deny that the jury found
a knowing or reckless indifference to AA’s contractual rights. Therefore, Defendants continued
denial of such findings does support a deterrence to prevent such actions in the future.
(5) Relationship of Defendants and AA
AA argues that the nature of Defendants’ relationship with AA also supports a significant
punitive damages award because Mitchell and Reynolds exploited the close relationship they had
with AA with the knowing assistance of Sloan and Kinum. Defendants did not attempt to argue
against AA’s position on this factor. The court agrees with Aa that there was evidence at trial
supporting an award of punitive damages on these grounds.
After considering each of these factors, AA asks the court to employ the single-digit
multiplier of punitive damages to compensatory damages recommended by the Supreme Court.
See State Farm, 538 U.S. at 425. However, in weighing each of the factors as to each of the
Defendants the court concludes that, while punitive damages are appropriate, the compensatory
damages awarded are in large part sufficient to both compensate AA and deter Defendants from
engaging in similar conduct in the future. Based on the court’s consideration of all the relevant
factors above, the court awards AA punitive damages against Kinum in the amount of $50,000,
against Sloan in the amount of $100,000, against Mitchell in the amount of $50,000, and against
Reynolds in the amount of $50,000.
B. Third-Party Litigation Exception
Under Utah law, a party can recover attorney fees as consequential damages arising from
a tort where a defendant’s misconduct “foreseeably caused the plaintiff to incur attorney fees in
litigation with a third party.” Gardiner v. York, 2006 UT App 496 ¶ 6 n.4. “It is settled that
when the natural consequences of one’s [tortious conduct] is another’s involvement in a dispute
with a third party, attorney fees reasonably incurred in resolving the dispute are recoverable from
the [tortfeasor] as an element of damages.” South Sanpitch Co. v. Pack, 765 P.2d 1279, 1282
(Utah Ct. App. 1988). This type of an attorney fee award is known as the third-party litigation
In this case, the second question on the Special Verdict form asked the jury if attorney’s
fees should be awarded to AA as consequential damages under its Tortious Interference with
Contract cause of action. The jury answered, “yes.” The jury found liability on the claim against
Kinum, Sloan, Mitchell, and Reynolds.
Because the jury found first party liability against each of the Defendants on this claim,
Defendants argue that the third-party litigation rule does not apply because none of the parties are
third parties. Defendants, however, failed to raise this objection to the proposed jury instructions
and have waived this argument. Black v. M & W Gear Co., 269 F.3d 1220, 1232 (10th Cir. 2001)
(“In a civil case each party must live with the legal theory reflected in [the jury] instructions to
which it does not object.”).
AA agrees that, with respect to each Defendant, AA cannot recover attorney fees incurred
from that Defendant. However, AA can recover from each Defendant the attorney fees
foreseeably incurred against the other Defendants based on each individual Defendant’s
interference. Each Defendant had to engage in some conduct in order for the jury to find against
it on the interference claim. The question then is whether that interference foreseeably resulted
in litigation expenses against another party. The jury answered that question of foreseeability,
“yes.” The fact that AA joined its causes of action in one lawsuit should not work to its
disadvantage. The court agrees with AA that there should be no incentive for parties to bring
multiple lawsuits to qualify for attorney fees. Simply naming a party to the same lawsuit cannot
be a basis for determining whether the exception applies, especially in complex commercial
disputes such as the present case. The court, therefore, concludes that the exception applies in
this case with respect to each Defendant.
In this case, AA’s claims were inextricably intertwined with Defendants’ interference
with AA’s right of first refusal and exclusivity. In such cases, the Supreme Court has recognized
that it can be unreasonable to attempt to allocate attorney fees to particular claims. “Much of
counsel’s time will be devoted generally to the litigation as a whole, making it difficult to divide
the hours expended on a claim-by-claim basis. Such a lawsuit cannot be viewed as a series of
discrete claims. Instead the district court should focus on the significance of the overall relief
obtained by the plaintiff in relation to the hours reasonably expended on the litigation.” Hensley
v. Eckerhart, 461 U.S. 424, 435 (1983). In this case, the claims overlap and the liability for each
Defendant overlaps. The court has already determined that Defendants’ liability for damages
from their interference with contract claim would be joint and several and the jury found
Defendants liable for conspiracy, which also imposes joint and several liability.
AA asks the court for attorney fees in the amount of $1,564,026.83, which represents
expenses related to litigation with Sloan, Kinum, and Sajax prior to November 6, 2014, and
attorney fees incurred since November 6, 2014, the date AA amended its counterclaim to plead
tortious interference with its rights of first refusal and exclusivity. In considering an award of
attorney fees as special damages, the court employs the lodestar method if calculating fees. USA
Power, LLC v. PacifiCorp, 372 P.3d 629, 662-63 (Utah 2016).
AA’s petition for attorney fees complies fully with the lodestar formula. AA has
demonstrated the fees AA incurred and were actually paid, the reasonableness of the fees, and the
reasonableness of the hourly rates for each attorney in the Utah market. Defendants do not
specifically dispute any of these matters. Accordingly, the court awards AA $1,564,026.83 in
attorney fees against Defendants, to be paid jointly and severally.
C. Prejudgment Interest
AA argues that it is entitled to prejudgment interest on the amount of damages the court
awarded AA for ARS’ breach of contract. Utah law governs the determination of when it is
appropriate to award prejudgment interest. BC Tech, Inc. v. Ensil Int’l Corp., 464 F. App’x 689,
705 (10th Cir. 2012). Under Utah law, “an award of prejudgment interest simply serves to
compensate a party from the depreciating value of the amount owed over time and, as a corollary,
deters parties from intentionally withholding an amount that is liquidated and owing.” Trail
Mountain Coal Co. v. Utah Div. of State Lands & Forestry, 921 P.2d 1365, 1370 (Utah 1996).
“Plaintiffs are entitled to damages for the loss of use of the money that, but for the . . . breach and
ensuing delay, would have been paid to plaintiffs in satisfaction of their . . . claim.” Kraatz v.
Heritage Imps., 2003 UT App 201, ¶ 75. An award of prejudgment interest is appropriate “when
‘the loss ha[s] been fixed as of a definite time and the amount of the loss can be calculated with
mathematical accuracy in accordance with well-established rules of damages.” Iron Head Const.
Inc. v. Gurney, 2009 UT 25, ¶ 11.
In the court’s Memorandum Decision and Order, dated September 28, 2016, the court
awarded AA $1,549,595.40 in damages against ARS for violating AA’s rights of first refusal and
exclusivity. AA argues that it is entitled to prejudgment interest from the date ARS was sold to
Kinum because that is the date when damages were subject to mathematical calculation.
Defendants, however, contend that AA’s loss was not fixed according to Utah law until the court
decided the amount on September 28, 2016 in its Memorandum Decision and Order on summary
At summary judgment, the court determined the damages based on Defendants’ expert’s
valuation of ARS minus the purchase price Sajax paid to Kinum for the ARS Software. Sajax
did not purchase the ARS software from Kinum until February 7, 2014. The court then added
$115,789 in damages based on AA’s estimated overpayment for the breach of the exclusivity
provision. This amount was not calculable until January 2015 when AA made its last payment.
Accordingly, the court awards AA prejudgment interest against ARS (1) on the award of
$1,433,806 at the rate of 2.13% from February 7, 2014 to the date of this Order and (2) on the
award of $115,789.40 at the rate of 2.27% from January 1, 2015 to the date of this Order.
Based on the above reasoning, Defendants’ Renewed Motion for Judgment As a Matter
of Law Under Federal Rule of Civil Procedure 50(b) and Alternative Motion for New Trial
Under Federal Rule of Civil Procedure 59(a) is DENIED and AA’s Motion and Petition for
Punitive Damages, Litigation Expenses, and Prejudgment Interest is GRANTED as more
specifically detailed above. The court requests that AA submit a Final Judgment to the court
within five days of the date of this Order incorporating the awards granted in this Order.
DATED this 6th day of September, 2017.
BY THE COURT:
DALE A. KIMBALL,
United States District Judge
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