Aldmyr Sys., Inc. v. Friedman

• Citation: 215 F.Supp.3d 440
• Decision Date: 18 March 2016
• Docket Number: Civil No. PJM 15–864
• Parties: ALDMYR SYSTEMS, INC., et al., Plaintiffs v. Stephen A. FRIEDMAN, et al., Defendants.
• Court: U.S. District Court — District of Maryland

215 F.Supp.3d 440

ALDMYR SYSTEMS, INC., et al., Plaintiffs

v.Stephen A. FRIEDMAN, et al., Defendants.

Civil No. PJM 15–864

United States District Court, D. Maryland.

Signed March 18, 2016

Filed March 21, 2016

James Phillip Chandler, Chandler Law Firm PLLC, Washington, DC, for Plaintiffs.

Shirlie Norris Lake, Daniel R. Hodges, Eccleston and Wolf PC, Hanover, MD, for Defendants.

MEMORANDUM OPINION

PETER J. MESSITTE, UNITED STATES DISTRICT JUDGE

This case, ostensibly seeking damages for copyright infringement under federal law and misappropriation of trade secrets under state law, is in reality an effort to wage a state-based domestic relations battle in federal court. The decision to dismiss the case, given that the case should never have been pursued outside the domestic litigation in state court, is easily made.

The more challenging question is the extent to which the filing of this suit in federal court should trigger sanctions under Federal Rule of Civil Procedure II against the corporate Plaintiffs, Plaintiffs' de facto controlling shareholder and CEO, and Plaintiffs' counsel.

I.

The background facts are these:

A.

Donald Bailey, Sr. ("Mr. Bailey") and Geraldine Bailey ("Mrs. Bailey") married in October 1999. Compl. ¶ 16, ECF No. 1. By 2014, the Baileys were involved in a divorce proceeding in the Circuit Court for Anne Arundel County, Maryland. According to the docket sheet in the state case, Geraldine M. Bailey v. Donald M. Bailey Sr., Circuit Court for Anne Arundel County, Case No. 02–C–14–886729, Mrs. Bailey sued Mr. Bailey for divorce on April 7, 2014. See State Ct. Docket, ECF No. 30–1.¹ The Complaint in the present federal case states that Mr. Bailey left the marital home "by agreement and not wishing to displace his family."² Compl. ¶ 21. Mrs. Bailey retained as her counsel in the divorce proceeding Stephen A. Friedman, Esquire, of the Greenbelt, Maryland law firm Joseph, Greenwald & Laake, P.A. ("JGL"). Mr. Friedman and his firm are both Defendants in the present proceeding.

In the state court proceeding, on September 16, 2014, Mrs. Bailey, through Mr. Friedman, served Mr. Bailey with a First Request for Production of Documents and a First Set of Interrogatories. See State Ct. Docket, ECF No. 30–1; Pl.'s Opp'n Def.'s Mot. Protective Order & Quash Subpoena ("Pl.'s Opp'n Mot. Protect. Order"), Ex. A, B, C, ECF No. 17–6. Since Mrs. Bailey's prayer for relief in the proceeding sought, among other things, a share of marital assets, her discovery request sought basic financial information pertaining to Mr. Bailey's business affairs, including his ownership and controlling interest in the corporate Plaintiffs in the present suit, Aldmyr Systems, Inc. ("Aldmyr") and Zegato Solutions, Inc. ("Zegato, Inc."). See Pl.'s Opp'n Mot. Protect. Order, Ex. A, B, C, ECF No. 17–6.

Discovery in the state divorce case and proceedings in the present federal suit establishes that Mr. Bailey indeed had an intimate relationship with Aldmyr and legato, Inc. He incorporated Aldmyr in 1989. Compl. ¶ 17. Although Aldmyr purportedly authored a computer program entitled "Per Diemmazing Travel Management System," according to the Complaint in the present action, it appears that Mr. Bailey actually authored the program because he registered a copyright for it in his own name in 1995. Compl., Ex. 2, ECF No. 1–2. Aldmyr also purportedly authored an improved and renamed version of Per Diemmazing Travel Management System, Compl. ¶ 19, but again, on September 30, 1999, Mr. Bailey claimed and registered a copyright for this version in his own name, this time for a computer program titled either "legato" or "Zegato Travel Management System." Compl., Ex. 3 at 1, ECF No. 1–3.

According to pleadings Mr. Bailey filed in the divorce proceeding and attached to Plaintiffs' surreply in the present federal case³ (discussed further below), Mr. Bailey owned a 90% interest in Aldmyr, one of the Plaintiffs in this action. See Def.'s Opp'n Pl.'s Mot. Adjudicate Def. Contempt of Court at 4, ECF No. 11–31. In 2000, legato, Inc., the second Plaintiff in this action, was incorporated. Compl. ¶ 20. Again, in the state divorce proceeding, Mr. Bailey represented in pleadings that he had a 50% ownership interest in legato, Inc.⁴ See Def.'s Opp'n Pl.'s Mot. Adjudicate Def. Contempt of Court at 4. Later on, Mr. Bailey stated in the same filing in the divorce proceeding, that, after Zegato Travel Solutions, LLC ("Zegato LLC") was incorporated, he held a 100% ownership interest in this entity.⁵ Id. But then, in sworn testimony in the state divorce proceeding, under questioning from his own attorney, Mr. Bailey stated that he was the CEO and held a 100% ownership interest in all three of the corporate entities. See State Ct. Hr'g Tr. 140:16–25, 142:23–144:25, Dec. 18, 2014, ECF No. 13–1.⁶

According to two documents attached to Plaintiffs' surreply in the present case, on July 5, 2005, Mr. Bailey assigned the right to reproduce and make derivative works of the copyrighted "Zegato Automated Travel System" to Aldmyr, see Pls.' Mot. Summ. J., Ex. Aldmyr Copyright Assignment, ECF No. 11–24, and the right to distribute and license the copyrighted "Zegato Automated Travel System" to Zegato, Inc. See Pls.' Mot. Summ. J., Ex. Zegato, Inc. Copyright Assignment, ECF No. 11–25.⁷

Although the Complaint in the present case contains few facts as to the precise nature of the Zegato software program, the Complaint describes it as "an elite travel system for the federal government," Compl. ¶ 20, that is "used in Fed Traveler," id. ¶ 12, presumably a different software system used by the federal government. According to a putative 2006 Software License Agreement that Plaintiffs attached to their Response in Opposition to the Motion to Dismiss, Zegato, Inc. licensed the Zegato Travel System source code to Electronic Data Systems which, in turn, had a contract with the General Services Administration of the federal government to deliver software for its eTravel program. Pls.' Resp. Opp'n Mot. Dismiss, Ex. 1, ECF No. 8–1. Finally, the Complaint in the present case alleges that Plaintiffs' software programs "processed the travel information of the U.S. Marshal Service and other secret federal agencies on a classified basis ...."⁸ Compl. ¶ 33. According to Mr. Bailey's testimony in the divorce proceedings, the companies' contract with the federal government, which accounted for about 85 to 90% of their revenue, officially ended on December 15, 2014. See State Ct. Hr'g Tr. 114:5–115:23, Dec. 18, 2014, ECF No. 13–1.

Unquestionably, Mrs. Bailey and her counsel, Mr. Friedman, were entitled to fully explore Mr. Bailey's relationship with Aldmyr and legato, Inc. in the state divorce proceedings. The state court record is clear, however, that Mr. Bailey, through his counsel in the divorce proceedings, Greg Nugent, Esquire, stonewalled any production. On October 27, 2015, for example, Mr. Bailey through Mr. Nugent filed Objections and Responses to Mrs. Bailey's first discovery requests, in which he refused to answer many of Mrs. Bailey's interrogatories or produce documents on the grounds that disclosure could threaten trade secrets and national security. See Pl.'s Opp'n Mot. Protect. Order, Ex. E, Def.'s Answers to Pl.'s Interrogs. Nos. 4–5, 7–9, ECF No. 17–6; Ex. D, Def.'s Resp. Pl.'s Request Produc. Docs. Nos. 1–8, 13–15, 17, 20, 28, 43–44, 46–47, 58, 60, 64, ECF No. 17–6. This refusal included a refusal to produce documents pertaining to business entities in which Mr. Bailey held an interest, namely, Aldmyr, Zegato, Inc., and legato LLC, or to supply basic financial information with respect to any business entity in which Mr. Bailey held an interest. See Pl.'s Opp'n Mot. Protect. Order, Ex. D, Def.'s Resp. Pl.'s Request Produc. Docs. Nos. 1–8, 13–15, 17, 20, 28, 43–44, 46–47, 58, 60, ECF No. 17–6. The refusal, it may be noted, even extended to requests for documents pertaining to real property in which Mr. Bailey held an interest, as well as other requests. See id.

At the same time, Mr. Bailey, who as noted, had departed the marital home either voluntarily or forcibly,⁹ Compl. ¶ 21, stated that he could not produce many of the documents Mrs. Bailey requested because they were located in the marital home where Mrs. Bailey was then residing. See Pl.'s Opp'n Def.'s Mot. Protective Order, Ex. D, Def.'s Resp. Pl.'s Request Produc. Docs. Nos. 2–8, 10, 13–14, 16, 18, 25, 28, 43–44, 46–47, 51–52, 54, 56, 58, 63–64, ECF No. 17–6.

Thereafter, the plot began to thicken.

According to the Complaint in the present case, on October 30, 2014, three days after Mr. Bailey and Mr. Nugent had refused to produce the documents, Mr. Friedman and JGL ("the JGL Defendants") came into possession of some 813 pages of Aldmyr's business records and "related documents containing protected copyright information and a number of protected trade secrets," Compl. ¶ 12, including "valuations of Aldmyr/Zegato technology, valuations of Aldmyr/Zegato companies, a list of Aldmyr/Zegato customers, [and] the selling price or pricing of Aldmyr/Zegato technology...." Id. ¶ 21. Although the Complaint in the present federal case as opposed to First Federal Case, discussed infra, fails to allege exactly how Mr. Friedman and JGL acquired the documents, it is clear from Plaintiffs' filings that they contend that Mrs. Bailey found the documents in Mr. Bailey's office within the marital home, then turned them over to her lawyers, the JGL Defendants. See id. ¶¶ 21–22.

According to the Complaint, the JGL Defendants then "translat[ed] ... the Plaintiffs' copyrighted computer program and other intellectual property ... to machine readable code, machine language, then cop[ied] by uploading the program to [the JGL Defendants'] computer and to [the JGL Defendants'] computer server."¹⁰ Id. ¶ 13. In other words, Plaintiffs allege that Mr. Friedman scanned the paper documents Mrs. Bailey had collected to a JGL computer connected to their server. Mr. Friedman then...