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Cypress Advisors, Inc. v. Davis

United States District Court, D. Colorado

March 18, 2019

KENT MCCARTY DAVIS, Defendant, and KENT MCCARTY DAVIS, Counterclaim Plaintiff/Third-Party Plaintiff
CYPRESS ADVISORS, INC., and DEAN B. ZUCCARELLO, a Colorado citizen, Counterclaim and Third-Party Defendants.



         THIS MATTER comes before the Court pursuant to Cypress Advisor's (“Cypress”) Motion for Summary Judgment (# 141, 142, 144, 145) on the counterclaims asserted against it by Mr. Davis, Mr. Davis' response (# 152, 153), and Cypress' reply (# 158, 159); and Mr. Davis' Motion for Summary Judgment (# 143) on certain claims against him by Cypress, Cypress' response (# 150, 151), and Mr. Davis' reply (# 155, 156). Also pending are several motions to restrict public access (#148, #149, #154, #157, #160, #161) to the parties' various summary judgment filings.

         I. Jurisdictional Statement

         The Court exercises diversity jurisdiction in this matter pursuant to 28 U.S.C. § 1332.

         II. Relevant Factual Background

         The Court summarizes the pertinent facts herein, and elaborates as necessary in its analysis.

         Mr. Zuccarello owns Cypress, a business that provides financial advisory services to clients involved in purchasing and operating restaurant franchises. In 2000, Mr. Zuaccarello invited Mr. Davis to join the business, although there is some dispute between the parties as to precisely what form that joinder took. There is also some dispute between the parties about their precise agreement regarding Mr. Davis' compensation, but it is sufficient to observe at this point that, for most years until 2010, the general practice appears to be that each individual earned at least 25% of the revenues associated with any deal, regardless of how the work was initiated or performed, with the remaining amount allocated based on various factors.[1]

         In early 2011, Mr. Zuccarello notified Mr. Davis that he perceived “a significant disparity in the income generation on the deals we worked on independently” - that is, that Mr. Zuccarello believed he was generating substantially more revenue for Cypress than Mr. Davis was. At that same time, Cypress was allocating less than a 25% share of revenues from Mr. Zuccarello's deals to Mr. Davis. Mr. Zuccarello suggested that they “find an equitable solution to the imbalance in revenue sharing”. Over several years, the parties engaged in periodic discussions about future revenue splits, but failed to reach a firm agreement.

         In 2016, Mr. Davis left Cypress, formed his own competing business, and began soliciting and performing some services for clients that Mr. Davis knew had contractual agreements to deal exclusively with Cypress. Cypress alleges that such solicitations are improper in various respects as discussed herein. Several lawsuits, including the instant one, ensued.

         In its Amended Complaint (# 28), Cypress asserts the following claims against Mr. Davis: (i) a request for a declaratory judgment addressing several topics, including the nature of Mr. Davis' involvement with Cypress, whether Mr. Davis is a party to certain agreements that Cypress has with certain clients, and whether Mr. Davis is entitled to fees earned by Cypress after his departure; (ii) misappropriation of trade secrets in violation of Colorado's Uniform Trade Secrets Act (“CUTSA”), C.R.S. § 7-74-101 et seq., in that since Mr. Davis' departure from Cypress, Mr. Davis has improperly used Cypress' trade secret information to solicit and perform services for Cypress' clients; (iii) a claim of unspecified provenance, captioned as “Civil Theft of Trade Secrets, ” that appears to be duplicative of Cypress' CUTSA claim; (iv) a claim for civil theft under C.R.S. § 18-4-401 et seq., in that Mr. Davis intercepted and cashed a check from a client, payable to Cypress, in the amount of approximately $1, 000; (v) a claim of common-law conversion, presumably under Colorado law, relating to the same events as the civil theft claim; (vi) tortious interference with contractual relations, in that Cypress had contracts with various clients and that Mr. Davis induced those clients not to perform those contracts by engaging in consulting services with the clients despite Cypress' exclusivity agreements and by directing the clients to make payments to him, knowing that the payments should have been directed to Cypress; (vii) breach of contract, apparently under Colorado law, relating to Mr. Davis' breach of a Solicitation and Engagement Agreement he had with Cypress that allegedly limited his ability, post-separation, to provide consulting services to Cypress' clients; and (viii) a claim for unjust enrichment, presumably under Colorado law, that Mr. Davis “receiv[ed] excessive compensation for work in the franchise restaurant industry without paying the associated expenses.”

         Mr. Davis filed counterclaims/third-party claims (# 60) against both Cypress and Mr. Zuccarello, alleging: (i) breach of contract against both defendants, in that the two men had a partnership agreement addressing Mr. Davis' promised compensation and that the defendants breached that agreement by failing to pay Mr. Davis properly; (ii) wrongful disassociation of a partnership against Mr. Zuccarello, in violation of C.R.S. § 7-64-602; (iii) as an alternative to Claim 2 (which is premised upon an alleged partnership agreement), breach of contract against both defendants, in that Mr. Davis and Mr. Zuccarello conducted their mutual business under “a series of oral joint venture[ ]” agreements, particularly relating to compensation, and that the defendants breached those agreements by not paying Mr. Davis properly; (iv) breach of fiduciary duty, presumably under Colorado law, against both defendants arising from their failure to properly compensate Mr. Davis in various respects; (v) as an alternative to Claims 2 and 3, a claim sounding in breach of contract against both defendants, relating to an otherwise unspecified agreement the parties had regarding Mr. Davis' entitlement to various items of compensation; (vi) promissory estoppel, presumably under Colorado law, in that the defendants made promises to Mr. Davis about his compensation with Cypress, then repudiated those promises after Mr. Davis performed work for Cypress in reliance upon them; (vii) a claim for a declaratory judgment on various subjects, including that the parties had a partnership agreement that was improperly terminated and that Mr. Davis is entitled to continue business operations under the “Cypress” name; (viii) “constructive fraud” under both North Carolina and Colorado law, essentially deriving from the same facts underlying the previous claims; (ix) - (xi) various equitable claims, asserted under both Colorado and North Carolina law, seeking dissolution of the parties' partnership, an accounting, and receivership if Cypress' assets; (xii) a claim under both North Carolina and Colorado statutes and regulations requiring the prompt payment of wages; (xiii) and (xiv) claims sounding in unjust enrichment and quantum meruit, under an unspecified jurisdiction's common law, relating to Mr. Davis' compensation; and (xv) tortious interference with prospective economic advantage, in that Mr. Zuccarello and Cypress usurped business opportunities when prospective clients contacted the defendants in search of Mr. Davis' services.[2]

         Both sides move for summary judgment on the other side's claims. Cypress' motion (#141, 142) argues that: (i) Mr. Davis lacks standing to pursue any of his claims against Cypress because Mr. Davis' interactions with Cypress were performed though an entity Mr. Davis owned (Cypress International, Inc., which, for purposes of clarity, the Court will refer to as “CI”), and that entity, rather than Mr. Davis, suffered the alleged injuries; (ii) as to Mr. Davis' claims for breach of partnership agreement (Claim 1), breach of joint venture agreement (Claim 3), breach of contract (Claim 5), and promissory estoppel (Claim 6), that Mr. Davis cannot show that after 2010, he and Mr. Zuccarello and Cypress ever reached a clear and definite agreement as to Mr. Davis' compensation; (iii) as to those same claims, Cypress is entitled to judgment on its affirmative defense that in 2012, Mr. Davis' waived any claim for a share of revenues from business originated by Mr. Zuccarello; (iv) as to those same claims, Cypress is entitled to judgment on its affirmative defense of statute of limitations because Mr. Davis' claims to unpaid compensation involve agreements on case-by-case basis (subject to a three-year limitations period under C.R.S. § 13-80-101(1)), rather than liquidated amount (subject to a six-year limitations period under C.R.S. § 13-80-103.5(1)); and (v) as to the joint venture claim (Claim 3), Mr. Davis cannot show that the parties entered into separate joint venture agreements with each client.

         Mr. Davis' summary judgment motion (# 143) argues that Mr. Davis is entitled to summary judgment: (i) on Cypress' claim for misappropriation of trade secrets because Cypress cannot identify any particular trade secret that was misappropriated and cannot establish that it suffered any loss as a result of any misappropriation; (ii) on Cypress' civil theft claim relating to trade secrets, for essentially the same reasons; (iii) on Cypress' claim for tortious interference with contract because Cypress cannot show that any of the clients whom Mr. Davis' allegedly interfered actually breached their contract with Cypress; (iv) on Cypress' breach of contract claim because Cypress cannot show that it suffered any loss because of Mr. Davis' alleged breach of contract and solicitation of Cypress' clients; and (v) on Cypress' unjust enrichment claim because Cypress cannot establish the value of the benefit that Mr. Davis' allegedly received.

         III. Standard of Review

         Rule 56 of the Federal Rules of Civil Procedure facilitates the entry of a judgment only if no trial is necessary. See White v. York Int'l Corp., 45 F.3d 357, 360 (10th Cir. 1995). Thus, the primary question presented to the Court in considering a Motion for Summary Judgment or a Motion for Partial Summary Judgment is: is a trial required?

         A trial is required if there are material factual disputes to resolve. As a result, entry of summary judgment is authorized only “when there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); Savant Homes, Inc. v. Collins, 809 F.3d 1133, 1137 (10th Cir. 2016). A fact is material if, under the substantive law, it is an essential element of the claim. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute is genuine if the conflicting evidence would enable a rational trier of fact to resolve the dispute for either party. Becker v. Bateman, 709 F.3d 1019, 1022 (10th Cir. 2013).

         The consideration of a summary judgment motion requires the Court to focus on the asserted claims and defenses, their legal elements, and which party has the burden of proof. Substantive law specifies the elements that must be proven for a given claim or defense, sets the standard of proof, and identifies the party with the burden of proof. See Anderson, 477 U.S. at 248; Kaiser-Francis Oil Co. v. Producer's Gas Co., 870 F.2d 563, 565 (10th Cir. 1989). As to the evidence offered during summary judgment, the Court views it the light most favorable to the non-moving party, thereby favoring the right to trial. See Tabor v. Hilti, Inc., 703 F.3d 1206, 1215 (10th Cir. 2013).

         Motions for summary judgment generally arise in one of two contexts - when the movant has the burden of proof and when the non-movant has the burden of proof. Each context is handled differently. When the movant has the burden of proof, the movant must come forward with sufficient, competent evidence to establish each element of its claim or defense. See Fed. R. Civ. P. 56(c)(1)(A). Presumably, in the absence of contrary evidence, this showing would entitle the movant to judgment as a matter of law. However, if the responding party presents contrary evidence to establish a genuine dispute as to any material fact, a trial is required and the motion must be denied. See Leone v. Owsley, 810 F.3d 1149, 1153 (10th Cir. 2015); Schneider v. City of Grand Junction Police Dep't, 717 F.3d 760, 767 (10th Cir. 2013).

         A different circumstance arises when the movant does not have the burden of proof. In this circumstance, the movant contends that the non-movant lacks sufficient evidence to establish a prima facie case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). The moving party must identify why the respondent cannot make a prima facie showing; that is, why the evidence in the record shows that the respondent cannot establish a particular element. See Collins, 809 F.3d at 1137. If the respondent comes forward with sufficient competent evidence to establish a prima facie claim or defense, then a trial is required. Conversely, if the respondent's evidence is inadequate to establish a prima facie claim or defense, then no factual determination of that claim or defense is required and summary judgment may enter. See Shero v. City of Grove, Okla., 510 F.3d 1196, 1200 (10th Cir. 2007).

         IV. Analysis

         Mr. Davis' Motion

         A. Misappropriation of Trade Secret (Claim 2)

         To prove a claim of misappropriation of trade secrets under the Colorado Uniform Trade Secrets Act (C.R.S. § 7-74-101 et seq.), a plaintiff must establish the following elements: 1) that it possessed a valid trade secret, 2) that the trade secret was disclosed or used by the defendant without consent, and 3) that the defendant knew, or should have known, that the trade secret was acquired by improper means. See Gates Rubber Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823, 847 (10th Cir. 1993). Colorado statute defines a trade secret to be “the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.” C.R.S. § 7-74-102(4). Moreover, the holder of an alleged trade secret must have acted reasonably to prevent its disclosure. See Saturn Sys. Inc. v. Militare, 252 P.3d 516, 522 (Colo.App. 2011).

         Mr. Davis alleges that Cypress cannot come forward with evidence sufficient to establish the existence of any trade secret that he misappropriated, and separately that Cypress cannot show that it suffered a loss as a result of any such misappropriation.

         Cypress has adduced the affidavit of Mr. Zuccarello, which explains that Cypress maintains a “clients and contacts database” that includes numerous industry contacts (both prospective buyers and sellers of franchises); information about the contacts' size, profits, and territory; competitor information; lender and banking information, and various other details. Mr. Zuccarello states that he complied the database himself over two decades of work, that the database would be of significant value to competitors who would otherwise be hard-pressed to replicate its contents using publicly-available information. Mr. Zuccarello states that access to the database is controlled by a password that he issues to Cypress personnel whose work requires such access. Cypress has also come forward with evidence that Mr. Davis made use of documents contained in the Cypress database when he was soliciting Cypress clients after leaving Cypress' employ and forming his own business. Thus, the Court finds that Mr. Zuccarello's affidavit suffices to establish at least a triable issue as to whether the Cypress database constitutes a trade secret under Colorado law and whether Mr. Davis misappropriated some or all of it.

         As to Mr. Davis' argument that Cypress cannot show that it suffered a loss due to his alleged misappropriation of trade secrets, Colorado law provides that a party whose trade secret is misappropriated may recover compensatory damages that reflect, among other things, research and development costs that the defendant would have incurred in attempting to replicate the stolen trade secret through the defendant's own efforts. Sonoco Products Co. v. Johnson, 23 P.3d 1287, 1289 (Colo.App. 2001). Cypress cites to the report of its expert, Shawn Fox, who has opined[3] that, among other things, Mr. Davis' misappropriation of Cypress' database saved him approximately $1.41 million compared to the cost of accumulating that database on his own. Thus, the Court is satisfied that Cypress has come forward with sufficient evidence of recoverable loss to support its trade secret misappropriation claim. Accordingly, Mr. Davis' motion is denied with regard to that claim.

         B. Civil Theft of Trade Secret (Claim 3)

         Mr. Davis also moves for summary judgment on Cypress Advisors' claim for civil theft of trade secrets. This claim derives from C.R.S. § 18-4-405, sometimes referred to the “civil theft statute, ” which provides that, where a defendant has obtained the plaintiff's property by theft, the plaintiff may “maintain an action against. . . the taker” and recover statutory damages of $200 or trebled actual damages, plus attorney fees.

         Mr. Davis' motion challenges the sufficiency of this claim based largely upon the same arguments addressed above - that the material he allegedly took does not rise to the level of “trade secrets.”[4] Giving due regard to the parties' right to be heard, the Court nevertheless finds it appropriate to resolve this claim on a ground not raised by Mr. Davis nor briefed by Cypress. (The Court is satisfied that the issue presented is one of law and that the outcome is clear, such that giving the parties an opportunity to brief the issue would not be likely to change the outcome.) CUTSA broadly preempts other laws providing civil remedies for misappropriation of a trade secret. C.R.S. § 7-74-108(1). Because Cypress unambiguously alleges that the materials taken by Mr. Davis constitute trade secrets, CUTSA preempts such a civil theft claim.

         One of the exceptions to that preemption is for statutes that provide for “criminal remedies” for the theft of trade secrets. C.R.S. § 7-74-108(2)(c)(3). Although the civil theft statute is codified within Colorado laws relating to criminal offenses, the remedy it provides is civil in nature, not criminal (i.e. imprisonment or fines). Indeed, Colorado criminal law contains an entirely separate provision that specifically criminalizes the theft of trade secrets, further suggesting that the civil theft statute does not create criminal penalties. C.R.S. § 18-4-408. Moreover, by authorizing treble damages, C.R.S. § 18-4-405 creates remedies that are inconsistent with CUTSA's remedial scheme. Under such circumstances, this Court, like others that have considered the issue, finds that a claim under Colorado's civil theft statute that is premised upon the theft of a trade secret is preempted by CUTSA. See e.g. Powell Products, Inc. v. Marks, 948 F.Supp. 1469, 1474-75 (D.Colo. 1996); Hawg Tools, LLC v. Newso International Energy Servs., Inc., 2015 WL 1064519 (D.Colo. Feb. 23, 2015) (unpublished).

         Courts in Colorado have found that CUTSA did not preempt a civil theft claim where the civil theft claim was premised upon the theft of items that were not trade secrets. See SBM Site Services, LLC v. Garret, 2012 WL 628619 (D.Colo. Deb. 27, 2012) (“[b]ecause Plaintiff's Amended Complaint alleges that, in addition to trade secrets, Able and Garrett stole actual physical items, the Court finds that its [civil theft] claim is not preempted.”); see also Powell, 948 F.Supp.2d at 1475 (“because plaintiff's claim also seeks recovery of the physical items stolen, including blueprints and drawings, which would not be the subject of a misappropriation claim under the UTSA, plaintiff's conversion claim is not entirely preempted”). But, as mentioned above, Cypress' claim is unambiguous that Mr. Davis stole only information, [5] and only information that could be characterized as a trade secret. Accordingly, the Court, sua sponte, dismisses Cypress' claim for civil theft as preempted.

         C. Intentional Interference with Contractual ...

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