NTSI Corporation v. Nelson, No. 54229-0-I (WA 1/17/2006), No. 54229-0-I
| Decision Date | 17 January 2006 |
| Docket Number | No. 54229-0-I |
| Court | United States State Supreme Court of Washington |
| Parties | NTSI CORPORATION, Appellant, v. LORRAINE W. NELSON and COURT SERVICES INSTITUTE, INC., Respondents, and BRENDA L. SARGENT and BRUCE SARGENT, husband and wife, and their marital community; and BRIAN K. HEIDEN and LORI B. HEIDEN, husband and wife; and their marital community, Defendants. |
Appeal from Superior Court of King County. Docket No: 02-2-25704-6. Judgment or order under review. Date filed: 04/15/2004. Judge signing: Hon. Mary I Yu.
Counsel for Appellant(s), Thomas William Hayton, Cutler Nylander & Hayton PS, 505 Madison St Ste 220, Seattle, WA 98104-1111.
Robert G. Jr Nylander, Cutler Nylander & Hayton PS, 505 Madison St Ste 220, Seattle, WA 98104-1111.
Counsel for Respondent(s), Charles Kenneth Wiggins, Wiggins & Masters PLLC, 241 Madison Ave N, Bainbridge Island, WA 98110-1811.
NTSI Corporation prevailed on five of its seven claims against Lorraine Nelson: conversion, conspiracy, breach of duty of loyalty, breach of fiduciary duty, and misappropriation of trade secrets. Although the trial court ruled NTSI was entitled to attorney fees only for the fiduciary duty claim, the company eventually asked the court to award nearly the entire fee amount, arguing that the claims were too interrelated to segregate the fees. The trial court denied NTSI's motion and awarded no attorney fees.
Because all of the successful claims arose from the same core of facts, and virtually all of the facts related to the fiduciary duty claim, we agree with NTSI that it was not realistically possible for it to segregate its fees. But the Uniform Trade Secrets Act (UTSA) preempts NTSI's right to fees for its fiduciary duty claim to the extent it is based on misappropriation of trade secrets. Thus, the court cannot award fees for work establishing breach of fiduciary duty to the extent the claim is based on Nelson's misappropriation of trade secrets. This creates a conundrum for the court, perhaps not envisioned by the Legislature when it adopted the UTSA, in which the court cannot award fees where the court and the party seeking fees agree that they cannot be segregated. We therefore affirm the trial court on the ground that, in these circumstances, the UTSA preempts its authority to award attorney fees.
NTSI provides informational and behavior modification classes to clients the criminal courts refer for treatment. Lorraine Nelson was an NTSI employee and corporate officer who formed her own company, Court Services Institute, Inc. (CSI). NTSI sued Nelson alleging that she began forming CSI while she was still an employee and corporate officer at NTSI, wrongfully accessed and used NTSI's trade secrets, conspired with former NTSI employees Brian Heiden and Brenda Sargent to steal trade secrets from NTSI,1 and damaged NTSI by deliberately sabotaging its computer system and business records. NTSI alleged seven theories of recovery against Nelson: (1) conversion, (2) civil conspiracy, (3) breach of the duty of loyalty, (4) breach of fiduciary duty, (5) interference with a business expectancy, (6) misappropriation of trade secrets,2 and (7) unfair competition.
Jury instruction 14 addressed breach of fiduciary duty:
NTSI claims that Lorraine Nelson breached her `fiduciary duty' to NTSI. An employee's `fiduciary duties' include a duty of loyalty, confidence, and non-competition during the term of the employee's employment. While employed by the employer, an employee: (1) must act solely for the benefit of the employer in all matters connected with the employee's employment; (2) has a duty not to disclose or use the employer's trade secrets; and (3) may not operate a competing business.
A fiduciary relationship embraces those technical and informal relationships that exist wherever one person trusts or relies upon another. It is a relationship formed on the trust or confidence placed by one person in the integrity and faithfulness of another. A corporate officer is an agent for his/her corporate principal. Corporate officers and directors occupy a fiduciary relationship to a private corporation and shareholders thereof similar to that of a trustee, and owe undivided loyalty and a standard of behavior above that of the everyday work world.
An employee breaches the employee's fiduciary duties to the employer if, while employed by the employer, the employee solicits the employer's customers, diverts business away from the employer, lures away co-workers to a competing enterprise, fails to disclose matters adverse to the employer that impair the employee's duty of loyalty, takes undisclosed payments from a third party who is doing business with the employer, or divulges the employer's confidential information to others.
After the termination of the relationship, the employee retains a fiduciary duty to the employer not to use or disclose to third persons, on his/her account or on account of others, in competition with the employer or to his/her injury, trade secrets, or other similar confidential matters given to him only for the employer's use or acquired by the agent in violation of such duty.
. . . .
You must determine whether Ms. Nelson breached her fiduciary duty to NTSI and if such breach proximately caused damages to NTSI.
On February 17, 2004, the jury found for NTSI on the conversion, conspiracy, loyalty, fiduciary duty, and trade secret claims. It found that Heiden's misappropriation of trade secrets was willful and malicious, but that Nelson's was not. NTSI moved for a permanent injunction and argued it was entitled to attorney fees for the trade secrets, fiduciary duty, and conspiracy claims. On April 16, the trial court granted the injunction and ruled that NTSI was On May 9, the trial court entered judgment against Nelson and CSI for $146,803, of which $73,612 was Nelson's independent liability, and $73,191 was Nelson and CSI's joint and several liability. The jury awarded NTSI $23,700 against Nelson for her breach of fiduciary duty.
On August 24, 2004, NTSI moved for a fee award of $146,061, almost the entire amount it had incurred. It segregated only those fees associated with the two unsuccessful claims, tortious interference and unfair competition, arguing that it could not reasonably segregate the fees associated with the fiduciary duty claim from the other successful claims because they involved much of the same proof and were too interrelated. On October 26, 2004, the trial court denied NTSI's motion for attorney fees in its entirety, stating that NTSI had `without just and adequate cause, failed and refused to segregate its attorney fees between its claim for breach of fiduciary duties and its other claims, as ordered by this court .. . .' NTSI appeals.
NTSI argues that the trial court abused its discretion by not awarding fees. A court may award attorney fees only when based upon a contract, statute, or recognized ground in equity.3 A successful breach of fiduciary duty claim is a recognized ground in equity for recovering attorney fees.4 We review a trial court's ruling on attorney fees for abuse of discretion.5 A trial court has broad discretion to determine the reasonableness of a fee award.6 In reviewing an award, we are mindful of the trial court's `superior understanding of the litigation and the desirability of avoiding frequent appellate review of what essentially are factual matters.'7
I. Adequate Record
As an initial matter, Nelson argues that because NTSI did not provide the verbatim report of proceedings on appeal, we do not have an adequate record to review the trial court's ruling on fees. In her statement of additional authority, Nelson contends that Dash Point Village Associates v. Exxon Corp.8 establishes that an appellant must provide a verbatim report of proceedings if we are to review a trial court's order requiring segregation of fees. In Dash Point, Exxon asked us to look beyond the written findings of fact to hold that the trial court failed to require adequate fee segregation.9 It provided a list of Dash Point's witnesses who, it argued, were irrelevant to Dash Point's fee-authorized claim, but the record on appeal did not contain the substance of most of those witnesses' trial or deposition testimony. We held that `{e}ven though the entire record is not required, `those portions of the verbatim report of proceedings necessary to present the issues raised on review' must be provided to the court.' Because the record did not provide enough information to review those witnesses' testimony, we held that we could not determine whether the trial court had abused its discretion.10
Here, NTSI does not ask us to look beyond the written findings of fact or jury instructions, both of which are included in the record and neither of which Nelson disputes. Nor do we need the verbatim report of proceedings because the primary issue on review is whether NTSI's claims are so interrelated that the trial court abused its discretion by refusing to award fees when NTSI did not segregate its fees in the way the trial court ordered. We can determine the answer to this question from the jury's special verdict form and the instructions the trial court gave. The record on appeal is sufficient to review the issues presented.
II. Fee Segregation
NTSI argues that the trial court abused its discretion by requiring it to segregate attorney fees. It contends that its claims were so interrelated that it could not reasonably segregate the fees incurred on the fiduciary duty claim from those associated with the other claims. Nelson argues that requiring segregation was within the trial court's realm of reasonable choices, and NTSI's failure to do so...
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