TLS Mgmt. & Mktg. Servs., LLC v. Rodríguez-Toledo

• Decision Date: 21 July 2020
• Docket Number: No. 19-1104,19-1104
• Citation: 966 F.3d 46
• Parties: TLS MANAGEMENT AND MARKETING SERVICES, LLC, Plaintiff, Appellee, v. Ricky RODRÍGUEZ-TOLEDO; ASG Accounting Solutions Group, Inc.; Global Outsourcing Services, LLC, Defendants, Appellants, Lorraine Ramos; Conjugal Partnership Rodgriguez-Ramos; Miguel A. Santo Domingo-Ortiz; Mari Lourdes Cardona-Jimenez, a/k/a Mari Santo-Domingo; Conjugal Partnership Santo-Domingo-Cardona; Sandpiper, LLC; DRRLC & Associates, LLC; Trinity PR, LLC; Global Tax Strategy; Insurance Company A; Insurance Company B; Insurance Company C, Defendants.
• Court: U.S. Court of Appeals — First Circuit

966 F.3d 46

TLS MANAGEMENT AND MARKETING SERVICES, LLC, Plaintiff, Appellee,

v. Ricky RODRÍGUEZ-TOLEDO; ASG Accounting Solutions Group, Inc.; Global Outsourcing Services, LLC, Defendants, Appellants,Lorraine Ramos; Conjugal Partnership Rodgriguez-Ramos; Miguel A. Santo Domingo-Ortiz; Mari Lourdes Cardona-Jimenez, a/k/a Mari Santo-Domingo; Conjugal Partnership Santo-Domingo-Cardona; Sandpiper, LLC; DRRLC & Associates, LLC; Trinity PR, LLC; Global Tax Strategy; Insurance Company A; Insurance Company B; Insurance Company C, Defendants.

No. 19-1104

United States Court of Appeals, First Circuit.

July 21, 2020

Lydia Margarita Ramos Cruz, San Juan, PR, for appellants.

Manuel A. Pietrantoni, with whom Valerie M. Blay-Soler and Marini Pietrantoni Muñiz LLC, were on brief, for appellee.

Before Barron, Lipez, and Dyk,^* Circuit Judges.

DYK, Circuit Judge.

TLS Management and Marketing Services, LLC ("TLS"), sued Ricky Rodríguez-Toledo ("Rodríguez"), ASG Accounting Solutions Group, Inc. ("ASG"), and Global Outsourcing Services, LLC ("GOS") (collectively, "defendants") in the United States District Court for the District of Puerto Rico, alleging trade secret misappropriation (by Rodríguez and ASG) and breach of nondisclosure agreements (by Rodríguez, ASG, and GOS). The district court granted summary judgment to TLS on its breach of contract claims, and after a non-jury trial, found that Rodríguez and ASG were liable for misappropriation of trade secrets.

We reverse because TLS failed to satisfy its burden to prove the existence of trade secrets, and because the nondisclosure agreements are so broad as to be unenforceable. We remand with instructions to enter judgment in favor of the defendants.

I. Background

The facts are in large part undisputed. Plaintiff TLS was a tax planning and consulting firm based in Puerto Rico. It provided clients with advice to enable them to minimize United States and Puerto Rico tax liabilities. TLS's business was divided into a Consulting Division and Puerto Rico Division. TLS alleged that it generated two trade secrets, the Capital Preservation Report and the U.S. Possession Strategy.

The Consulting Division prepared a Capital Preservation Report ("CPR") for clients providing tax recommendations specific to each client based on an analysis of applicable statutes and regulations. The trade secret was alleged to be the portion of the CPR not specific to the individual client.

The Puerto Rico Division provided services utilizing the so-called U.S. Possession Strategy ("the Strategy"), which involved the provision of tax advice and tax avoidance services. In essence, the Strategy was a "tax arbitrage" strategy based on the fact that Puerto Rico tax rates were lower than U.S. federal tax rates. Under the Strategy, a participating client, a business owner in the mainland U.S., became a member of a TLS "division," and purchased shares of TLS, signing a "buy-sell agreement" that limited the client's rights to transfer its membership shares. Through a "services agreement," the client's company on the mainland outsourced some business activities (such as marketing) to TLS. TLS and its affiliate had tax exemption grants under Puerto Rico's Act 20 of 2012 (Export Services Act) and Act 73 of 2008 (Economic Incentives Act). A business that held a grant under these Acts was generally subject to a fixed corporate tax rate of 4%, and dividend distributions to its stockholders were not subject to a personal income tax if they were Puerto Rico residents. See P.R. Laws Ann. tit. 13, §§ 10643, 10832, 10834.

Under the Acts, it appears that TLS paid a 4% Puerto Rico tax rate on the outsourcing fees paid to TLS while the same fees were deductible to the mainland client's company as a business expense and thus not subject to federal or state taxation. If TLS distributed the earnings to the client as a dividend after the client became a Puerto Rico resident, the dividend would be exempt from taxation under the Acts. If the client wished to access the earnings (dividends) before moving to Puerto Rico, the client and TLS entered into a "promissory note" and "security agreement," effectively allowing the client to withdraw the earnings as a tax-free loan. Thus, the effect of the Strategy was that the activities of the client's company in the mainland U.S. would effectively be subject only to a 4% rate on the outsourced services instead of a higher U.S. corporate tax rate on the income from the outsourced services, and that distributions to the client would not be taxed. But a premature termination of the client's "membership" with TLS could result in adverse tax consequences because distributions would not be exempt from tax.

Defendant Rodríguez was the founder of defendant ASG, a company that also offered services in tax planning and accounting. In March 2012, ASG signed a Subcontractor Agreement ("the ASG Agreement") with TLS that included a nondisclosure provision. On September 1, 2012, Rodríguez began working for TLS as its Managing Director and signed a Confidentiality and Non-Disclosure Agreement ("the Rodríguez Agreement"). The ASG and Rodríguez Agreements contained similar nondisclosure provisions governed by Puerto Rico law.¹ Rodríguez and ASG's relationship with TLS appears to have concluded in early 2015.

After his departure from TLS, Rodríguez provided tax services in competition with TLS through ASG and GOS (another company in which Rodríguez purchased a majority interest after he left TLS). Rodríguez was the majority owner of both companies. TLS alleged that Rodríguez and ASG misappropriated trade secrets by utilizing the Strategy trade secret in providing tax services to two former clients of TLS. These clients sought advice on how to exit their "membership" with TLS. The clients emailed documents (which they received from TLS) to Rodríguez who then provided comments. To minimize the tax impact of exiting the membership with TLS, Rodríguez suggested transferring the interest in the TLS division to a new Puerto Rico trust or limited liability company ("LLC") in order to delay tax liability until the clients became Puerto Rico residents. ASG proceeded to create LLCs for the clients.

On August 17, 2015, TLS sued Rodríguez, ASG, and GOS in the United States District Court for the District of Puerto Rico.² TLS alleged that (1) Rodríguez and ASG misappropriated TLS's trade secrets under P.R. Laws Ann. tit. 10, §§ 4131–41, and (2) Rodríguez, ASG, and GOS breached their nondisclosure agreements.

Rodríguez was alleged to have misappropriated the CPR trade secret by downloading copies of particular CPRs without authorization from TLS's Dropbox account before he left TLS. Rodríguez and ASG were alleged also to have violated the nondisclosure agreements by providing services to the two former clients of TLS and other TLS clients using information protected by the nondisclosure agreements. GOS was alleged to have violated those agreements by using TLS's "loan application" form for its business.

TLS and the defendants filed cross-motions for summary judgment. The district court granted summary judgment to TLS on the breach of contract claims. With respect to these claims, the defendants' primary defense was that they were not liable because the nondisclosure agreements were unenforceable. The district court held that this argument was waived and did not address the argument on the merits. It then concluded that ASG and Rodríguez were liable for "disclosure of the U.S. Possession Strategy and retention of TLS's Confidential Information." Later, in its non-jury trial opinion, the district court characterized its order granting summary judgment as finding "liability on the part of Rodríguez and ASG for breaching the confidentiality clauses by using TLS's loan agreement and operating agreement, for using and disclosing the Strategy to clients, and for keeping files after employment with TLS ended."

The district court held a non-jury trial on the trade secret claims. TLS presented only two witnesses, Richard Colombik and David Runge, who were principals of TLS. The defendants presented only Rodríguez as a witness. The district court held that TLS's CPR and the Strategy were trade secrets. It then concluded that Rodríguez and ASG misappropriated the Strategy trade secret when Rodríguez and ASG gave advice to two former TLS clients to help them structure their exit from TLS's membership, and that Rodríguez misappropriated the CPR trade secret by downloading two CPRs from TLS's Dropbox account without authorization.³

The district court awarded damages for TLS's trade secret claims by trebling the service fees paid by the former clients to ASG. It declined to award damages for breaching the nondisclosure agreements, reasoning that an award would be duplicative of the damages under the trade secrets claims. However, the district court issued a permanent injunction order enjoining the defendants "from using or disclosing any of TLS's ‘confidential information’ or its trade secrets in violation of, as defined by, the [ASG and Rodríguez Agreements]."

The defendants appeal, arguing that the district court erred in granting summary judgment to TLS as to the breach of contract claims and in denying the defendants' motion for summary judgment, and in holding that TLS proved its trade secret claims at trial.

We have jurisdiction under 28 U.S.C. § 1291. "We review de novo both the entry of summary judgment ... and the interpretation of the parties' contract[s]." Farthing v. Coco Beach Resort Mgmt., LLC, 864 F.3d 39, 43 (1st Cir. 2017). As for the trade secret claims that were adjudicated by a non-jury trial, we review the district court's legal determination de novo, United States v. 15 Bosworth St., 236 F.3d 50, 53 (1st Cir. 2001), and its factual findings for clear error, Doe v. Harvard Pilgrim Health Care, Inc., 904 F.3d 1, 10 (1st Cir. 2018). We may decide sufficiency of the evidence on our own, even though the district court did not have occasion...