Lexpath Technologies Holdings v. Brian Welch ( 2018 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 17-2604
LEXPATH TECHNOLOGIES HOLDINGS, INC.,
Appellant
v.
BRIAN WELCH; WELCH TECHNOLOGY SERVICES, LLC
On Appeal from the United States District Court
for the District of New Jersey
(District Court No.: 3-13-cv-05379)
District Judge: Honorable Peter G. Sheridan
Submitted under Third Circuit L.A.R. 34.1(a)
on April 17, 2018
Before: GREENAWAY, JR., RENDELL, and FUENTES, Circuit Judges
(Opinion filed: July 30, 2018)
O P I N I O N*
RENDELL, Circuit Judge:
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7
does not constitute binding precedent.
Defendant-Appellee, Brian Welch, left his employment as a network engineer with
Lexpath Holdings, Inc. (“Lexpath”) to form his own company, Welch Technology
Services, LLC (“WTS”). Lexpath sued Welch and WTS contending that, among other
things, Welch misappropriated trade secrets and confidential information. The jury found
for Welch and WTS on all counts. On appeal, Lexpath raises a plethora of issues,
challenging several of the District Court’s evidentiary rulings and denial of summary
judgment in its favor, as well as the jury’s verdict. For the following reasons, we will
affirm.
I. BACKGROUND
A. Facts
Welch worked for Lexpath as a network engineer. He did not sign a non-compete
or non-disclosure agreement with Lexpath. During his employment there, Welch
serviced three primary clients: Liberty Transportation Group (“Liberty”), EIMC, LLC
(“EIMC”), and Mental Health Association of New Jersey (“MHANJ”).
Welch left Lexpath on August 2, 2013. However, before resigning, he took
several steps to establish his new business, WTS. Welch officially formed WTS on June
21, 2013. On July 24, 2013, Welch spoke to his business contacts at Liberty, informing
them of his intentions to leave Lexpath and form WTS. Liberty requested a rate sheet
from Welch, which he provided on July 31, 2013. Moreover, on August 1, 2013, Welch
spoke with his contact at EIMC about leaving Lexpath and forming WTS. However, all
of Welch’s other contact with EIMC was done after he left Lexpath. Finally, in his last
week of employment with Lexpath, Welch informed an administrative assistant at
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MHANJ, Katie Koskie, of his intention to leave Lexpath. On August 2, 2013, Welch told
one of Lexpath’s principals, Martin Tuohy, that he was resigning and starting WTS.
Welch told Tuohy that he solicited business from Liberty and EIMC, and he thought they
would likely leave Lexpath for WTS. Within a few days of Welch’s resignation, Liberty
and EIMC moved their business to WTS.
After Welch’s resignation on August 2, 2013, he kept his work laptop, which he
had also used for personal use. Welch used the laptop after his resignation, but the
parties dispute whether he had permission to do so. On August 6, 2013, Lexpath’s
counsel sent Welch a letter outlining the claims that Lexpath was considering bringing
against Welch and WTS. Shortly thereafter, on August 13, 2013, Lexpath’s counsel
contacted Welch to inform him that Lexpath intended to initiate litigation, and to request
the return of the laptop. Welch returned the laptop, through counsel, about seven months
later.
For litigation support, Lexpath retained the services of Digital4NX to investigate
whether there was misappropriation of trade secrets and other confidential information.
On August 13, 2013, the same day that Lexpath told Welch it would sue, Welch ran a
program called CCleaner on the laptop to permanently delete files. Upon examining the
laptop, Digital4NX discovered that approximately 54,000 files had been deleted.
However, the forensic expert testified that he could not determine what types of data had
been deleted from the laptop.
B. Procedural History
3
On September 9, 2013, Lexpath filed suit against Welch and WTS. In its
complaint, Lexpath stated the following nine claims: (1) violation of the Computer Fraud
and Abuse Act (“CFAA) (18 U.S.C. § 1030); (2) breach of duty of loyalty; (3)
misappropriation of trade secrets; (4) unfair competition; (5) breach of the duty of
implied covenant of good faith and fair dealing; (6) tortious interference with prospective
economic advantage; (7) disparagement; (8) violation of New Jersey Trade Secrets Act
(N.J. Stat. Ann. §§ 56:15-1 to -9 (West 2012)); and (9) violation of the New Jersey
Computer Related Offenses Act (“CROA”) (N.J. Stat. Ann. § 2A:38A-1 (West 2010)).
Welch and WTS then counterclaimed seeking an award of damages for attorneys’ fees
and costs incurred in defending against the trade secrets claim, arguing it was made in
bad faith.
Following the completion of discovery, Lexpath moved for summary judgment
and spoliation sanctions in connection with Welch’s handling of the laptop. In support of
its motion, Lexpath submitted affidavits from Peter Reganato and Alan Feldman
repeating statements made by Liberty’s president, Donald Lusardi, that Welch had made
negative remarks to him about Lexpath.1 The District Court granted Welch’s motion to
exclude Reganato and Feldman’s testimony as inadmissible double hearsay. The Court
also entered an order (“Spoliation Order”) granting Lexpath’s motion for spoliation,
holding that it would “instruct the jury that they may presume that the lost information
was unfavorable to Defendants.” A. 1724.11 (emphasis added).
1
The District Court later denied Lexpath’s motion for reconsideration of this ruling.
4
Lexpath renewed its motion for summary judgment on the basis of “new facts
adduced at the spoliation hearing.” A. 2786. The District Court denied the motion,
noting the overwhelming number of material facts at issue. Moreover, it noted that any
factual determinations made in the Spoliation Order were solely for the purpose of
spoliation sanctions and were not binding on the jury, nor did they take any issues away
from the jury.
Before trial, Lexpath moved for the District Court to direct the jury to accept the
findings of the Spoliation Order as conclusive. For their part, Welch and WTS moved for
the Court to exclude the testimony of Koskie, the MHANJ employee. The Court denied
Lexpath’s motion, stating that it chose the least severe sanction by crafting an instruction
would tell the jury a “paragraph or two about spoliation” and instruct that the jury may
consider the lost information unfavorable to Welch. A. 3353. However, the Court
granted Welch’s motion, explaining that Koskie’s testimony was irrelevant and would
confuse the jury because Lexpath had not alleged any damages with regard to MHANJ.
At trial, during Lexpath’s opening argument, counsel told the jury that “Mr. Welch
destroyed evidence in the form of 53,000 computer files that were on a Lexpath laptop . .
. . His Honor has already ruled on that and will instruct you that you may presume that
the evidence he deleted would have been unfavorable to him.” A. 3389. After opening
arguments, the Court told the parties that it was “worried” that “the jury could have been
left with the impression that the Court had made a decision on the facts” and that
Lexpath’s statement “gave the inference to the jury that . . . they should take this fact as
being true.” A. 3411–12.
5
The Court then issued a corrective instruction that:
While the Court issued an order on spoliation, I did not make any final
decisions about the facts, I just said that the information could be admitted
into evidence. So, it’s your job during the course of this trial to determine
the weight and credibility of that testimony that you’ll hear, and those types
of issues are within your province to decide. So whatever you heard, I
made a decision on admission of evidence . . . .
A. 3420.
Later on at trial, Lexpath called its forensic expert to testify about the laptop, the
deleted files, and the CCleaner program. Before closing arguments, the Court told
counsel that it “had doubts as to whether or not a presumption was warranted” after
hearing the evidence, and that it would charge spoliation but not a presumption in
Lexpath’s favor. A. 4078–79. After some discussion, Lexpath’s counsel requested that
the Court “take the spoliation charge out of the instructions,” A. 4081, which the Court
did.
The jury found in favor of Welch and WTS on all counts, and determined that
Lexpath had asserted its misappropriation of trade secrets claim in bad faith. At no time
did Lexpath move for judgment as a matter of law under Federal Rule of Civil Procedure
50. This appeal followed.
II. DISCUSSION
On appeal, Lexpath assigns numerous errors to the District Court before and at
trial. The District Court had jurisdiction pursuant to 28 U.S.C. § 1331 & 1367, and our
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jurisdiction flows from 28 U.S.C. § 1291. We review each of Lexpath’s contentions in
turn.
A. Spoliation Instruction
We review the District Court’s denial of an adverse inference instruction for abuse
of discretion. McMunn v. Babcock & Wilcox Power Gen. Grp., Inc., 869 F.3d 246, 268
(3d Cir. 2017). “[W]here there is evidence that one party has destroyed or altered
evidence, the opposing party can obtain a ‘“spoliation inference,” that the destroyed
evidence would have been unfavorable to the position of the offending party.’” Id.(quoting Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 78 (3d Cir. 1994)).
Lexpath contends that the District Court abused its discretion by telling counsel it
would not give a spoliation instruction, reversing its previous ruling that it would instruct
the jury that “they may presume that the lost information [on Welch’s laptop] was
unfavorable to Defendants.” A. 1724. After hearing the evidence, the Court told the
parties that a presumption was not warranted, citing a lack of testimony as to whether
Lexpath was actually missing any pricing documents that could have been found on the
laptop, and Lexpath’s expert’s testimony that the deleted files could have been for
personal use. The Court told the parties that it would “charge[] spoliation, but I don’t
charge a presumption in favor of the plaintiff.” A. 4079.2 In response, Lexpath’s counsel
asked the Court to “take the spoliation charge out of the instructions.” A. 4081.
2
Although the details of the proposed charge are not in the record, we presume the Court
meant that it would tell the jury that it was up to them to determine whether or not
spoliation had occurred.
7
We conclude that there was no abuse of discretion when the Court: repeatedly
made clear to the parties before and at trial that “it was up to the jury to find whether
spoliation in fact occurred,” A. 4081, denied Lexpath’s pretrial motion to direct the jury
to accept as conclusive the facts in the Spoliation Order, and then—at Lexpath’s
request—declined to give a spoliation instruction.
To begin, a district court’s findings of fact in deciding a pretrial motion cannot
foreclose a jury from making its own factual findings. Cf. Lytle v. Household Mfg., Inc.,
494 U.S. 545, 552–53 (1990); Berry v. United States, 312 U.S. 450, 453 (1941) (“[Rule
50(b)] has not taken away from juries and given to judges any part of the exclusive power
of juries to weigh evidence and determine contested issues of fact—a jury being the
constitutional tribunal provided for trying facts in courts of law.” (footnote omitted)).3
The Spoliation Order merely stated that “the Court will instruct the jury that they may
presume that the lost information was unfavorable to Defendants.” A. 1724.11. This, the
least-harsh form of spoliation instruction, would not have required the jury to presume
the lost evidence was unfavorable. Nor did the Order state that the Court would instruct
the jury that spoliation had, as a matter of law, occurred. Lexpath correctly notes that it
did not assert, and therefore did not need to prove, a standalone tortious spoliation of
evidence claim. But that did not absolve it of its burden to show the jury that Welch had
control over the evidence and that he “intentionally or fraudulently lost or destroyed” it,
3
We have not yet spoken to the proper “division of fact-finding” labor, Nucor Corp. v.
Bell, 251 F.R.D. 191, 202 (D.S.C. 2008), between judges and juries when issuing a
spoliation sanction. We need not resolve this question on this appeal, however, because
we conclude that it was not an abuse of discretion to decline to give an adverse inference
charge under these circumstances.
8
Gumbs v. Int’l Harvester, Inc., 718 F.2d 88, 96 (3d Cir. 1983), if it wanted to rely on
spoliation to prove its substantive claims. Otherwise, as the Court had never indicated
that it would instruct the jury that as a matter of law, spoliation had occurred, there would
be no facts for the negative presumption to work on. Indeed, the Court repeatedly
reminded the parties before trial that “the facts should be tried by the jury.” A. 3354.
Nor could Lexpath have reasonably been surprised by the Court’s ruling that it
would not instruct the jury that Welch had deleted evidence, when the Court admonished
Lexpath’s counsel for telling the jury in its opening statement that “Mr. Welch destroyed
evidence . . . His honor has already ruled on that.” A. 3389. The Court immediately told
the parties its concern that “the jury could have been left with the impression that the
Court had made a decision on the facts,” A. 3411, and issued a corrective instruction to
the effect that the Spoliation Order did not remove the factual issue of spoliation from the
jury. Additionally, it was within the Court’s discretion to revisit its prior ruling upon
hearing the evidence presented at trial. See In re Pharmacy Benefit Managers Antitrust
Litig., 582 F.3d 432, 439 (3d Cir. 2009) (“[A] trial judge has the discretion to reconsider
an issue and should exercise that discretion whenever it appears that a previous ruling,
even if unambiguous, might lead to an unjust result.” (quoting Swietlowich v. Cty. of
Bucks, 610 F.2d 1157, 1164 (3d Cir. 1979))).
We identify no abuse of discretion in declining, at the party’s request, to
give an instruction after so warning the parties about the jury’s province to find
facts regarding Welch’s use of the laptop.
B. Jury Verdict
9
Lexpath next argues that the jury’s verdict should be vacated because it was
against the weight of the evidence and because Welch’s counsel “admitted liability” in
closing. We need not address the merits of the sufficiency of the evidence claim because
Lexpath failed to follow the proper procedure to challenge the sufficiency of the
evidence. A party urging a new trial on appeal must make a post-verdict Rule 50 motion.
Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc., 546 U.S. 394, 402–03 (2006).
Moreover, “[i]t is well settled that a party who does not file a Rule 50 motion for
judgment as a matter of law at the end of the evidence is not thereafter entitled to have
judgment entered in its favor notwithstanding an adverse verdict on the ground that there
is insufficient evidence to support the verdict.” Greenleaf v. Garlock, Inc., 174 F.3d 352,
364 (3d Cir. 1999). Lexpath’s failure to make a Rule 50 motion precludes it from
challenging the sufficiency of the evidence on appeal.
Alternatively, Lexpath contends that Welch’s counsel admitted that Welch
breached his duty of loyalty. At closing, his counsel stated that, by providing a rate sheet
to Liberty two days before resigning from Lexpath, Welch did something “that he wasn’t
supposed to do.” A. 4118. Standing alone, however, this concession does not mean that
the jury was irrational in finding for Welch on the breach of duty of loyalty claim. See
Lamorte Burns & Co. v. Walters, 770 A.2d 1158, 1168 (N.J. 2001) (stating that when
deciding a breach of duty of loyalty, the jury must consider “the employee’s level of trust
and confidence, the existence of an anti-competition contractual provision, and the
egregiousness of the conduct”).
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C. Statements of Reganato and Feldman
Lexpath also assigns error to the District Court’s ruling excluding statements by
Donald Lusardi to Peter Reganato and Allan Feldman as inadmissible “double hearsay.”
We review a district court’s evidentiary decisions for abuse of discretion and its legal
interpretation of the Federal Rules of Evidence de novo. United States v. Repak, 852
F.3d 230, 240 (3d Cir. 2017). We generally review a district court’s denial of a motion
for reconsideration for abuse of discretion, but our review is plenary “if the court’s denial
was based upon the interpretation and application of a legal precept.” Koshatka v. Phila.
Newspapers, Inc., 762 F.2d 329, 333 (3d Cir. 1985). Breaking down the facts into their
most basic form, we identify no abuse of discretion where the District Court denied
admission of testimony from two individuals that a third, non-testifying individual told
them that a fourth individual made disparaging remarks about the plaintiff.
Hearsay is an out-of-court statement offered for its truth. Fed. R. Evid. 801(c). At
trial, Lexpath sought to introduce testimony from Reganato and Feldman that Lusardi
told them that Welch made negative statements about Lexpath. His statements (repeated
by Lusardi to Reganato and Feldman) were allegedly to the effect that Lexpath was
incapable of handling the accounts following Welch’s departure. The District Court
determined this was double hearsay, which could only be admitted if each statement fit
into a hearsay exception. Fed. R. Evid. 805. The Court concluded that there was no
relevant exception for the second layer of hearsay (Lusardi’s statements to Reganato and
Feldman). The Court then denied Lexpath’s motion to reconsider.
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Even assuming, as Lexpath avers, that Welch’s statements are not hearsay because
they were not being offered to prove their truth (that Lexpath could not handle the
accounts without Welch), but rather for the fact that Welch made the statements to
Lusardi at all, that only takes care of the first level of hearsay. Lusardi’s statements to
Reganato and Feldman would still need to fit under a relevant exception to be admissible.
According to Lexpath, Lusardi’s statements show his state of mind and motive
when he decided to move Liberty’s business—specifically, that he credited Welch’s
negative remarks about Lexpath and thought he had no choice but to go with Welch. See
Lexpath Br. at 32–33 (citing Fed. R. Evid. 803(3)). But the conversations were not
contemporaneous with the decision to move Liberty’s business. Feldman said his
conversation with Lusardi happened at least three months later, and Reganato’s
conversation occurred at least a week later. Admitting these statements would therefore
have run afoul of the Rule 803’s prohibition on “including a statement of memory or
belief to prove the fact remembered or believed.” Fed. R. Evid. 803(3). Likewise,
Lexpath’s contention that the statements should have been admitted under Rule 807(a)’s
residual exception is without merit because they lack the exceptional indicia of
trustworthiness required.
D. Summary Judgment
Our review of the District Court’s denial of summary judgment is plenary, and we
apply the same test as the District Court did. Koshatka, 762 F.2d at 333. Summary
judgment is appropriate when “there is no genuine dispute as to any material fact and the
12
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see Shuker v.
Smith & Nephew, PLC, 885 F.3d 760, 770 (3d Cir. 2018).
Lexpath moved for summary judgment on its CFAA and CROA claims multiple
times. The District Court denied the motions, but did not issue a memorandum in either
instance. On appeal, Lexpath contends the District Court “erred in failing to recognize
that the determinations made in the Spoliation Order constituted law of the case.”
Lexpath Br. at 36. Lexpath argues that summary judgment was appropriate because
Welch violated both the CFAA and CROA when he knowingly ran CCleaner on the
laptop after the end of his employment with Lexpath. For the following reasons, we
disagree.
1. Summary Judgment on CFAA Claim
The District Court properly denied Lexpath’s motion for summary judgment with
respect to its CFAA claim. The CFAA permits civil recovery against a defendant who,
inter alia, “[i]ntentionally accesses a computer without authorization or exceeds
authorized access, and thereby obtains . . . information from any protected computer,” 18
U.S.C. § 1030(a)(2), or who “knowingly causes the transmission of a program,
information, code, or command, and as a result, intentionally causes damages without
authorization to a protected computer,” id. § 1030(a)(5)(A).
Lexpath argues that summary judgment was appropriate because Welch violated
the CFAA when he knowingly ran CCleaner on the laptop after the end of his
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employment. 4 Lexpath relies on the facts established in the Spoliation Order to show
that Welch was not authorized to use the laptop. However, as explained above, such
findings do not require a court to usurp the jury’s role as the trier of fact, and Lexpath has
pointed us to no authority suggesting otherwise. Moreover, the District Court determined
that whether Welch had permission to access and clean the laptop was ultimately an issue
of fact for the jury. For instance, after Welch left Lexpath, Tuohy asked for his continued
assistance regarding business matters, which arguably authorized Welch to use the
laptop. Given that there are genuine disputes of material fact as to whether Welch’s use
was authorized, the District Court properly denied Lexpath’s motion for summary
judgment.
2. Summary Judgment on New Jersey Computer Related Offenses Act
Claim
The District Court properly denied Lexpath’s motion for summary judgment as to
its claim under CROA. To recover under CROA, a plaintiff must show he was “damaged
in business or property by the defendant’s violation of the act.” N.J. Stat. Ann. § 2A:28A-
3. We have said that a plaintiff must demonstrate damages under CROA to sustain a
claim. In Re Nickelodeon Consumer Privacy Litig., 827 F.3d 262, 278 (3d Cir. 2016).
Expert fees paid in furtherance of litigation are considered litigation costs rather than
4
Lexpath also asserts that its expenditures to support litigation claims against Welch can
qualify as “loss” under § 1030(e)(11). While we have not spoken to whether litigation
costs are compensable losses under the statute, we need not reach that question here
because there was ample basis for the District Court to deny Lexpath’s motion for
summary judgment based on the genuine disputes of fact regarding other provisions of
the CFAA.
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damages. See Kowaleski v. Allstate Ins. Co., 569 A.2d 815, 819 n.4 (N.J. Super. Ct. App.
Div. 1990).
Lexpath contends that summary judgment was appropriate because Welch violated
CROA when he knowingly ran CCleaner on the laptop after the end of his employment.
Lexpath bears the burden to demonstrate a violation. See P.C. Yonkers, Inc. v.
Celebrations the Party & Seasonal Superstore, LLC, 428 F.3d 504, 509 (3d Cir. 2005).
However, instead of showing that Welch copied or misappropriated confidential
information, Lexpath asked the Court to adopt as final, for summary judgment purposes,
its findings of fact in the Spoliation Order. Its state-law motion therefore suffers the
same infirmity as its CFAA summary judgment motion, namely, that it asked the Court to
rely on factual findings from the Spoliation Order and take that issue away from the jury.
Moreover, Tuohy, in his deposition, stated that Welch gained his knowledge of
confidential information through his employment at Lexpath, and so there was no need
for Welch to take information from the laptop. Finally, Lexpath’s expenses were
incurred to support its litigation claims, which are considered litigation costs rather than
damages, and are not compensable losses under CROA. See Kowaleski, 569 A.2d at 819
n.4. Accordingly, there is no basis to disturb the District Court’s denial of summary
judgment.
E. Koskie Testimony
We review the District Court’s evidentiary rulings for abuse of discretion.
McMunn, 869 F.3d at 268. Before trial, the District Court granted Welch’s motion in
limine to exclude testimony from Katie Koskie of MHANJ, finding that it was irrelevant
15
and would confuse the jury because MHANJ remained a client of Lexpath’s. Lexpath
sought to call Koskie to testify to “disparaging statements made by Welch regarding
Lexpath and its employees.” A. 2910–11.
On appeal, Lexpath contends the exclusion was in error because Koskie’s
testimony was relevant to whether Welch was dissatisfied with his job at Lexpath and
whether he was beginning to compete with them. Perhaps. But, as the District Court
recognized, it is more likely that the jury would have interpreted it as propensity evidence
or been unduly confused by its content. This is especially so given that the testimony did
not purport to offer relevant evidence of solicitation of MHANJ, let alone Liberty or
EIMC. The Court appropriately exercised its discretion to exclude evidence, of limited
relevance, on the basis that it was offered to establish a party’s propensity to commit bad
acts. See Fed. R. Evid. 404(a).5
III. CONCLUSION
For the foregoing reasons, we will affirm the District Court’s judgment and orders.
5
Because we find no basis to remand, we need not address Lexpath’s recusal argument.
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