Hamot v. Telos

• Decision Date: 06 May 2009
• Docket Number: No. 1079, September Term, 2008.,1079, September Term, 2008.
• Citation: 970 A.2d 942,185 Md. App. 352
• Parties: Seth W. HAMOT and Andrew R. Siegel v. TELOS CORPORATION.
• Court: Court of Special Appeals of Maryland

970 A.2d 942

185 Md. App. 352

Seth W. HAMOT and Andrew R. Siegel v. TELOS CORPORATION.

No. 1079, September Term, 2008.

Court of Special Appeals of Maryland.

May 6, 2009.

Trevor J. Welch (Kasowitz, Benson, Torres & Friedman LLP, on the brief), New York City. (Lewis T. Stevens, Warner Stevens, LLP, Fort Worth, TX, Harry Levy, Shumaker Williams, PC, Towson. Leslie D. Hershfield, Schulman, Treem, Kaminkow & Golden PA, Baltimore), all on the brief, for Appellant.

Ava E. Lias-Booker (McGuire Woods LLP, on the brief), Baltimore. (Sean F. Murphy, McGuire Woods, LLP, McLean, VA. Bradley R. Kutrow, McGuire Woods LLP, Charlotte, NC. Thomas M. Beshere, McGuire Woods LLP, Richmond, VA), all on the brief, for Appellee.

Panel: JAMES R. EYLER, WOODWARD, and ZARNOCH, JJ.

ZARNOCH, Judge.

In this interlocutory appeal of a time-conditioned preliminary injunction, we are asked to determine the propriety of a court order prohibiting appellants Seth W. Hamot and Andrew R. Siegel from making certain contacts or communications with the auditors of appellee Telos Corporation (Telos), including threatening future litigation. Because the preliminary injunction has expired by its own terms, and the specific factual premise for its issuance is no longer controlling, we conclude that the question of whether the preliminary injunction should have been issued is moot. In addition, because we find no applicable exception to the mootness doctrine, we will dismiss this appeal as moot without affecting any pending litigation or any final decision on the merits that may be reached.

FACTS AND PROCEEDINGS

Telos is a Maryland corporation headquartered in Ashburn, Virginia that provides networking and security products and services primarily to the U.S. Department of Defense and other federal agencies. Hamot and Siegel are two members of Telos' board of directors nominated by Costa Brava Partnership, II (Costa Brava), which owns 16 percent of Telos' public preferred stock and in which the two directors are principals.

Claiming that Telos failed to make certain mandatory stock redemptions, Costa Brava filed a lawsuit in Maryland against Telos and in Virginia against the firm's former auditing firm.¹ In an apparently related action, Hamot and Siegel, in August 2007, filed suit against Telos in the Circuit Court for Baltimore City seeking access to certain corporate books and records.

In April 2008, Telos filed a counterclaim seeking preliminary and permanent injunctive relief against Hamot and Siegel.² The counterclaim alleged that Costa Brava "is a hedge fund that styles itself as a specialist in using `complex litigation' to generate the investment returns that it believes it should receive," and that Telos "has been dealing with Costa Brava's incessant demands" for investment returns. Telos alleged that Hamot, Siegel, and Costa Brava "targeted" Telos' outside independent auditors to coerce them into reversing their accounting treatment of the redeemable preferred stock they owned and withdrawing earlier audit opinions—actions resulting in the resignation of two auditing firms. The counterclaim further stated:

Telos needs audit opinions from an outside auditor in order to file its 2007 Form 10-K [with the Securities and Exchange Commission]. Now that two accounting firms have resigned in the last ten months as a direct result of communications, threats and lawsuits by Hamot, Siegel and Costa Brava, it will be virtually impossible for Telos to find a public accounting firm willing to act as the outside auditor for Telos unless this Court enjoins Hamot, Siegel and others working in concert with them to cease all communications with the company's outside auditors and any other actions designed to circumvent Telos' practices for communicating with outside auditors. ...

In its prayer for relief, Telos sought the issuance of an unconditioned preliminary and permanent injunction to prevent Hamot and Siegel from making certain contacts or communications with past and future Telos auditors, including those seeking "directly or indirectly to pressure, coerce, manipulate or influence any auditor retained by Telos in the performance of its audit work and review of Telos' financial statements."

On May 1, 2008, the circuit court entered an order preserving the status quo until a hearing on the preliminary injunction request. Three weeks later, Hamot and Siegel moved to dismiss the counterclaim, asserting among other things that their First Amendment right to petition the government for the redress of grievances would be infringed by the counterclaim's attempt to restrict their ability to threaten to sue Telos' auditors.³ After limited discovery and an amendment to the counterclaim, the preliminary injunction case was heard on June 24, 2008. Evidence before the court at the preliminary injunction hearing consisted primarily of documents and Power Point clips of various depositions.⁴

On June 27, 2008, the circuit court granted Telos' request for a preliminary injunction, concluding, among other things, that it would likely succeed on the merits and would suffer irreparable harm if the preliminary injunction were not granted. A key finding of the court was that "Telos finds itself without an auditor and without the ability to produce audited financial statements for 2007" and that this would cause the firm to lose business, government contracts, and key employees. Thus, it ordered Hamot and Siegel to cease auditor contacts and communications "during the pendency of the litigation or until such time as Telos obtains audited financial statements for 2007 and files its 10-K with the SEC."⁵ On July 25, 2008, Hamot and Siegel appealed the entry of the preliminary injunction. On August 15, 2008, their motion to stay enforcement of the preliminary injunction was denied by the circuit court.

The appeal was argued in November, 2008.⁶ During oral argument, counsel for Telos advised that the firm's auditors were in the process of concluding the audit of the Telos' 2007 financial statements and suggested the possibility that the appeal might soon be moot. Post-argument letters to the Court from Telos' counsel advised of the progress of the audit. On December 18, 2008, Telos informed the Court that the audit of the corporation's 2007 financial statements had been completed and its 2007 Form 10-K had been filed with the SEC.

As a result, this Court, on December 30, 2008, ordered the parties to file supplemental memoranda "addressing the issue of whether Appellee Telos Corporation's filing of a 2007 Form 10-K moots the above-captioned appeal, or whether the appeal remains justiciable, and, if so, under what legal theory."

DISCUSSION

A. Effectiveness of Remedy

The test for mootness is "whether, when it is before the court, a case presents a controversy between the parties for which, by way of resolution, the court can fashion an effective remedy," Adkins v. State, 324 Md. 641, 646, 598 A.2d 194 (1991). Generally, when review is sought of an expired preliminary injunction, this test cannot be met. See J.L. Matthews, Inc. v. Maryland-National Capital Park & Planning Commission, 368 Md. 71, 96, 792 A.2d 288 (2002)("Because the injunction expired well prior to this case coming before us, the propriety of the injunction ordinarily would be a moot issue.").

Hamot and Siegel disagree. They contend that a controversy still exists between the parties and this Court can still fashion a remedy for them by ruling on their First Amendment claim. Appellants claim that "[s]uch a decision would preclude a re-issuance of the injunctive relief challenged here. Indeed, such a decision could—and indeed should—result in the outright dismissal of Telos' Counterclaim." These arguments miss the mark.

The only controversy before us is the propriety of a time-conditioned preliminary injunction, not whether appellants' motion to dismiss the counterclaim should have been denied or whether a permanent injunction should or should not issue. There is no effective relief this Court can provide on the narrow issue of whether the request for a preliminary injunction should have been granted.

The U.S. Supreme Court addressed an identical question in University of Texas v. Camenisch, 451 U.S. 390, 101 S.Ct. 1830, 68 L.Ed.2d 175 (1981). There, a U.S. District Court issued a preliminary injunction requiring a university to pay for a deaf student's sign-language interpreter under the Rehabilitation Act of 1973, 29 U.S.C. § 794. By the time the case reached an appellate court, the university had complied with the injunction and paid for the interpreter, and the student had graduated. A Fifth Circuit panel held that neither the preliminary injunction nor the case itself was moot. However, the Supreme Court reversed, noting:

The Court of Appeals correctly held that the case as a whole is not moot, since, as that court noted, it remains to be decided who should ultimately bear the cost of the interpreter. However, the issue before the Court of Appeals was not who should pay for the interpreter, but rather whether the District Court had abused its discretion in issuing a preliminary injunction requiring the University to pay for him. The two issues are significantly different, since whether the preliminary injunction should have issued depended on the balance of factors listed in Canal Authority [of Florida v. Callaway, 489 F.2d 567 (5th Cir., 1974)], while whether the University should ultimately bear the cost of the interpreter depends on a final resolution of the merits of Camenisch's case.

451 U.S. at 393, 101 S.Ct. 1830.

The lower court's decision was incorrect, the Court said, because:

[I]t improperly equates "likelihood of success" with "success," and what is more important, ... it ignores the significant procedural differences between preliminary and permanent injunctions.

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The purpose of a preliminary injunction is merely to preserve the relative positions of the parties until a...