Design Strategy, Inc. v. Davis

• Decision Date: 19 October 2006
• Docket Number: Docket No. 05-4909-CV.
• Parties: DESIGN STRATEGY, INC., Plaintiff-Counter-Defendant-Appellant, v. Marc E. DAVIS, Defendant-Counterclaimant-Appellee, Info Technologies, Inc., Info Technologies Web Solutions, Inc., and John Goullet, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 284

469 F.3d 284

DESIGN STRATEGY, INC., Plaintiff-Counter-Defendant-Appellant, v. Marc E. DAVIS, Defendant-Counterclaimant-Appellee, Info Technologies, Inc., Info Technologies Web Solutions, Inc., and John Goullet, Defendants-Appellees.

Docket No. 05-4909-CV.

United States Court of Appeals, Second Circuit.

Argued: June 19, 2006.

Decided: October 19, 2006.

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Jack S. Dweck, Dweck Law Firm, LLP, New York, NY, for Plaintiff-Counter-Defendant-Appellant.

Leonard Benowich, Roosevelt & Benowich, LLP, White Plains, NY, for Defendant-Counterclaimant-Appellee.

R. Scott Garley (Mark W. Stoutenburg, on the brief), Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C., New York, NY, for Defendants-Appellees.

Before: MINER and CALABRESI, Circuit Judges, and HOLWELL, District Judge.¹

MINER, Circuit Judge:

Plaintiff-counter-defendant-appellant Design Strategies, Inc. ("Design") appeals from a judgment entered in the United States District Court for the Southern District of New York (Marrero, J.). The action arises out of the alleged diversion of a corporate opportunity by defendant-counterclaimant-appellee Marc E. Davis ("Davis") during the course of his employment with Design. According to Design, the corporate opportunity was diverted to defendant-appellee Info Technologies Web Solutions ("IT Web"), with the collusion of defendants-appellees Info Technologies, Inc. ("Infotech") and John Goullet ("Goullet"), Chief Executive Officer of both Infotech and IT Web (collectively, the "IT Defendants"). Davis was employed by IT Web following the alleged diversion.

The District Court, in an order dated April 27, 2005, precluded Design from presenting evidence in support of its claim for lost profits, pursuant to Fed.R.Civ.P. 37(b), on the ground that it had not disclosed the computation of those lost profits, as required by Fed.R.Civ.P. 26(a)(1)(c). In that same Order, the District Court also rejected a demand by Design for a jury trial, the District Court having found that all of Design's remaining claims were "equitable" and therefore that no jury trial right existed. Following a bench trial, the District Court concluded, in an Order dated August 11, 2005, that Davis (a) had not diverted a corporate opportunity; (b) had not engaged in unfair competition; (c) had breached a fiduciary duty of loyalty, requiring the forfeiture of four weeks of salary; (d) was not liable for overpaid commissions; and (e) had not been unjustly enriched; and that (f) the IT defendants had not aided and abetted Davis's breach of fiduciary duty; and (g) a claim for punitive damages was unsupported.

BACKGROUND

I. The Factual Framework

Design is in the business of providing trained personnel to companies needing technical support on specific projects requiring computer technology services. Design hires individuals on a contract basis as needed per project and then assigns those individuals to work at a Design client's site under the client's supervision and on the specific temporary projects and duties determined by the client. This aspect of the computer technology industry is known as "staffing." Design also claims to be involved in the "solutions" aspect of the industry — the provision of "the services of trained personnel employed by [Design] on its premises and using the computers and other technical equipment supplied at [Design's] laboratory on specific projects to design and develop websites for clients in accordance with given specifications."

Marsh Newmark is the President of Design and has been its sole director and shareholder since the company's founding in 1980. Newmark hired Davis in 1987 to work for Design as a Sales Representative and later as Sales Manager. Davis was an at-will employee without a written agreement and was not subject to any restrictive covenant of confidentiality, non-competition, or non-solicitation. From 1998 though February 2000, Davis earned an annual salary of $85,000. Davis's commissions in the last four calendar years of his employment at Design (1997-2000) were $512,333; $434,212; $285,947; and $73,119, respectively.

Sometime during the summer of 1999, Davis was advised by Frank Murphy, a senior employee and one of his business contacts at Microsoft, Inc., that Microsoft was cooperating with an entity known as Brill Media ("Brill") in a venture that would entail the solicitation of companies for participation in a $10-million computer technology project. The project, which came to be known as Contentville.com ("Contentville"), called for the creation of a high-profile website, powered by Microsoft software, to engage in electronic commerce in books and related products in competition with similar businesses operated by Amazon.com and BarnesandNoble.com. The company ultimately chosen to work on Contentville would be required to provide "solutions" work.

Design contends that Davis, while still employed at Design, diverted this corporate opportunity from Design to IT Web and subsequently benefitted from that diversion by accepting an offer of employment with IT Web. Design also contends that IT Web and its sister company, Infotech, along with Goullet, colluded with Davis to divert the Contentville corporate opportunity away from Design and ultimately hired Davis. Moreover, Design argues that Davis was paid a "bounty" in the form of a 50% commission on the Contentville contract once he was hired by IT Web. Davis responded that he notified Design of the Contentville corporate opportunity first and referred IT Web to Microsoft only after Newmark indicated that he was not interested in the project and after Microsoft and Brill made it clear that a "staffing" company like Design would not be qualified to work on the Contentville project.

II. Proceedings in the District Court

Design filed its Complaint on July 11, 2002, pleading claims against Davis for breach of employment agreement, breach of fiduciary duties, unfair competition, and unjust enrichment. Design pleaded claims against the IT Defendants for aiding and abetting a breach of fiduciary duty, wrongful inducement of a breach of fiduciary duty, and interference with employment. Design also pleaded a claim of conspiracy to breach fiduciary duties against both Davis and the IT Defendants. Design sought several forms of relief. First, Design sought injunctive relief against Davis and others to preclude Davis from: (a) using Design documents containing confidential information; (b) soliciting any business from a client of Design that Davis had contact with at Design; and (c) competing with Design. Design also sought the imposition of a constructive trust on all revenues that all defendants derived from the alleged breach of fiduciary duty, as well as restitution and exemplary damages from Davis. Finally, Design sought "damages" "in an amount to be determined at trial."

Following the completion of discovery, the parties cross-moved for summary judgment. The District Court, in a Decision and Order, dated June 22, 2004, found "that the record in this case raises issues of material fact with regard to whether Contentville was a corporate opportunity for Design, whether Davis breached his fiduciary duty to Design, and whether the IT Defendants knew or should have known about Davis's alleged breach." Specifically, the District Court found, in regard to Design's claims of breach of fiduciary duty, unfair competition, unjust enrichment, aiding and abetting a breach of fiduciary duty, and wrongful inducement of a breach of fiduciary duties, that there were genuine issues of material fact as to whether Contentville, absent Davis's alleged breach, could have been awarded to Design (i.e., whether Contentville was a "corporate opportunity") and whether, and to what extent, Davis informed Design and Newmark about Contentville (i.e., whether Davis breached his fiduciary duty). The District Court determined, however, that no claim arising from the alleged breach of employment agreement could be made out because "there was no written agreement covering Davis's employment" nor was there any support for finding an oral agreement between Design and Davis. Finally, the District Court found that no claim for conspiracy to breach a fiduciary duty could be proven because some of the parties to the alleged breach — specifically, the IT Defendants — did not independently owe a duty to Design.

In a subsequent Order, dated February 16, 2005, responding to the motion by Davis and the IT Defendants to strike Design's jury demand, the District Court found:

[T]o the extent that Design seeks monetary damages for the alleged misappropriation of a corporate opportunity and diversion of corporate assets in the form of the legal remedy of lost profits, in other words, corporate revenues Design would have earned out of its business operations but for Defendants' alleged wrongful conduct, it is entitled to a trial by jury. The Court finds that Design is not, however, entitled to a trial by jury on any claims with respect to which it seeks only the equitable remedies of disgorgement of profits, restitution, the imposition of a trust, an accounting, exemplary damages, or permanent injunction.

In an Order dated April 27, 2005, responding to the motion by Davis and the IT Defendants to preclude Design from introducing evidence of its alleged lost profits at trial, the District Court found that "Design [had] not provided sufficient discovery regarding the amount of or basis for calculating damages based on alleged lost profits to enable it to seek those damages at trial." In accordance with its Order of February 16, the District Court therefore held that Design was not entitled to a jury trial, because lost profits were the only "compensatory damages" that it had sought, and the remainder of its remedies were equitable. The court then determined that "the central issue for trial is whether or not Davis provided Design with...