Scherer Design Grp., LLC v. Ahead Eng'g LLC

• Decision Date: 25 February 2019
• Docket Number: No. 18-2835,18-2835
• Parties: SCHERER DESIGN GROUP, LLC v. AHEAD ENGINEERING LLC; FAR FIELD TELECOM LLC; KYLE MCGINLEY; DANIEL HERNANDEZ; RYAN WALDRON; CHAD SCHWARTZ Appellants
• Court: U.S. Court of Appeals — Third Circuit

SCHERER DESIGN GROUP, LLC v. AHEAD ENGINEERING LLC; FAR FIELD TELECOM LLC;KYLE MCGINLEY; DANIEL HERNANDEZ;RYAN WALDRON; CHAD SCHWARTZ Appellants

No. 18-2835

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued January 7, 2019

February 25, 2019

NOT PRECEDENTIAL

Appeal from the United States District Court for the District of New Jersey

(D.C. No. 3-18-cv-03540)

District Judge: Hon. Anne E. Thompson

Before: AMBRO, SHWARTZ, and FUENTES, Circuit Judges.

OPINION^*

Ronald D. Coleman, Esq. [ARGUED]

Brian Block, Esq.

Mandelbaum Salsburg

3 Becker Farm Road

Suite 105

Roseland, NJ 07068

Counsel for Appellee

David Kistler, Esq. [ARGUED]

Blank Rome

300 Carnegie Center

Suite 220

Princeton, NJ 08540

Michael A. Iannucci, Esq.

Blank Rome

130 North 18th Street

One Logan Square

Philadelphia, PA 19103

Counsel for Appellants

SHWARTZ, Circuit Judge.

Scherer Design Group, LLC ("SDG"), obtained a preliminary injunction that stopped its former employees, Defendants Daniel Hernandez, Ryan Waldron, Chad Schwartz, and Kyle McGinley, from contacting SDG's clients and destroying information taken from SDG. Defendants assert that SDG surreptitiously monitored Hernandez's Facebook activity after he left SDG, and claim this constitutes unclean hands barring SDG from obtaining equitable relief. Because the Court acted within its discretion in declining to apply the unclean hands doctrine, we will affirm.

I¹

SDG is an engineering firm that provides services to wireless carriers and other vendors in the telecommunications business. Schwartz alleges that he was promised a partnership in SDG. During discussions about a potential ownership stake, Schwartz informed SDG that if he did not reach an agreement with SDG, he would start a competing engineering firm. SDG asked Schwartz to enter a noncompete agreement, but he declined, and, in November 2017, Schwartz resigned and started two competing engineering firms, Defendants Ahead Engineering and Far Field Telecom.

Schwartz thereafter recruited Hernandez, McGinley, and Waldron to join his firms. While Hernandez, McGinley, and Waldron were still employed by SDG, they (1) discussed their new venture using, at least in part, Facebook, and (2) transmitted SDG's documents and information to Schwartz's firms.

During the 2017 Christmas vacation period, Schwartz accepted a project from one of SDG's largest clients, ExteNet, which SDG had allegedly declined because SDG would be closed through the New Year. Schwartz asked Waldron, who was on vacation from SDG at the time, to assist him with the project. ExteNet eventually left SDG and became Schwartz's client.

Hernandez, McGinley, and Waldron resigned from SDG in January 2018. Hernandez testified that while he worked at SDG, he accessed his Facebook account fromhis SDG laptop, and "would log off sometimes and leave it open sometimes," but that on the day he resigned from SDG—at the direction of his co-Defendants—he "closed out of Facebook" by clearing the history on the internet browsers on his SDG laptop, App. 227, 334 ("I cleared the passwords which logs you out.").

After the mass resignation and loss of ExteNet as a client, SDG's network administrator was instructed to examine Defendants' SDG computers.² The administrator (1) reviewed Hernandez's browser history using software that allowed him to access deleted activity, (2) asserts that he accessed Hernandez's Facebook account without a password because Hernandez had not cleared it from the computer,³ and (3) installed software that allowed him to monitor Hernandez's Facebook activity without detection. From February through mid-March 2018, the administrator accessed Hernandez's Facebook account "very often" from Hernandez's SDG laptop, App. 210, and saw messages that revealed Defendants' plans and the actions that they took to secure SDG's client information and other intellectual property.

SDG sent Defendants cease and desist letters, and thereafter filed a complaint in the New Jersey Superior Court alleging, among other things, breach of the duty of loyalty, tortious interference with prospective business relationships, and misappropriation of trade secrets. With the complaint, SDG sought a temporaryrestraining order ("TRO") and a preliminary injunction. Defendants removed the case to the United States District Court for the District of New Jersey.

After granting SDG's request for a TRO, the District Court allowed the parties to conduct expedited discovery and then it held argument on SDG's injunction request. Defendants produced, among other things, testimony from Hernandez, who insisted that he logged out of his Facebook account before he returned his computer to SDG, and a report from a computer forensics expert, who opined that (1) "it is highly unlikely" that Hernandez's Facebook account "remained logged on the SDG laptop after January 17, 2018" and (2) SDG accessed the Facebook account using Hernandez's password. App. 245. In response, SDG produced a supplemental declaration from its network administrator stating that he did not have Hernandez's password and that Hernandez "likely . . . misremembered logging out of his Facebook account" or may have "thought" he logged out but did not do so because of Facebook's "persistent" picture login "feature," which requires additional steps to completely log out. App. 342-46.

The District Court acknowledged that the parties "hotly dispute" how SDG gained access to Hernandez's Facebook account but, without resolving this factual dispute, determined that the unclean hands doctrine did not bar injunctive relief because (1) it "may be reasonable" for an employer such as SDG to access password-protected content on a company laptop; (2) SDG's conduct "is arguably not related to the litigation" because "[w]hile it goes to Plaintiff's full knowledge of the underlying facts," Defendants' alleged breaches of loyalty, tortious interference, and/or trade secret violations predate SDG's alleged hacking of Hernandez's account and SDG's actions didnot "affect" the Defendants' alleged violations; and (3) "[o]n balance," the Court was not persuaded that "unclean hands" should bar SDG's right to pursue injunctive relief. App. 9. The Court then considered the preliminary injunction factors, determining that SDG "demonstrated a strong likelihood of success on the merits of its breach of the duty of loyalty claim" and that SDG would be irreparably harmed without an injunction barring Defendants from soliciting SDG's clients and from destroying information taken from SDG. App. 18-22. Defendants appeal the Court's decision not to apply the unclean hands doctrine.

II⁴

The unclean hands doctrine is "derived from the unwillingness of a court, originally and still nominally one of conscience, to give its peculiar relief to a suitor who in the very controversy has so conducted himself as to shock the moral sensibilities of the judge." Gaudiosi v. Mellon, 269 F.2d 873, 882 (3d Cir. 1959) (quotation marks and citation omitted). The doctrine "applies when a party seeking relief has committed an unconscionable act immediately related to the equity the party seeks in respect to the litigation." Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d 160, 174 (3d Cir. 2001)(citing Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 245 (1933)). Thus, a party seeking to invoke the doctrine must show: (1) the party seeking equitable relief committed an unconscionable act; and (2) the act is related to the claim upon which equitable relief is sought.⁵

The unclean hands doctrine "is not an automatic or absolute bar to relief; [rather,] it is only one of the factors the court must consider when deciding whether to exercise its discretion and grant an injunction." 11A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2946 (3d ed. 1998) (citing Johnson v. Yellow Cab Transit Co., 321 U.S. 383, 387 (1944) (explaining that the unclean hands doctrine "is not a rigid formula which 'trammels the free and just exercise of discretion'"); Shondel v. McDermott, 775 F.2d 859, 868 (7th Cir. 1985) ("Today, 'unclean hands' really just means that in equity as in law the plaintiff's fault, like the defendant's, may be relevant to the question of what if any remedy the plaintiff is entitled to."); and Houston Oilers, Inc. v. Neely, 361 F.2d 36 (10th Cir. 1966)). Thus, a court retains the discretion to grant equitable relief even where the elements of the unclean hands doctrine are met. See Johnson, 321 U.S. at 387 (explaining that while "a federal court should not, in an ordinary case, lend its judicial power to a plaintiff who seeks to invoke that power for the purpose of consummating a transaction in clear violation of law" courts need not "always permit a defendant wrongdoer to retain the profits of his wrongdoing merely because the plaintiff himself is possibly guilty of transgressing the law in the transactions involved");In re New Valley Corp., 181 F.3d 517, 525 (3d Cir. 1999) (even where there is a "relationship between the inequitable conduct and the claims brought . . . the court has discretion to limit the reach of the doctrine").

Even if SDG's monitoring of Hernandez's Facebook constituted the kind of act that would be viewed as unconscionable,⁶ the District Court did not err in concluding theconduct was not related to the claim upon which equitable relief was sought. For the unclean hands doctrine to apply, "there must be a relationship between the inequitable conduct and the claims brought before the court." New Valley Corp., 181 F.3d at 525 (citations omitted). In describing the "relationship" element, we have said that the unclean hands doctrine will bar recovery when such conduct "has immediate and necessary relation" to the equity sought. Id. (quoting Keystone, 290 U.S. at 245). Thus, the doctrine "only applies when there is a direct nexus between the bad conduct and the activities sought to be enjoined." Id.; see also Ne. Women's Ctr., Inc. v. McMonagle, 868 F.2d 1342, 1354, 1356 (3d Cir. ...