Vhxareal v. Saenz
| Decision Date | 18 May 2021 |
| Docket Number | 5-20-CV-00571-OLG-RBF |
| Court | U.S. District Court — Western District of Texas |
| Parties | JONATHAN VHXAREAL, INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF ZROBLACK, LLC; Plaintiff, v. JOHN SAENZ, MIGUEL VILLARREAL, JR., GUNN, LEE & CAVE, P.C., Defendants. |
REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
This Report and Recommendation concerns (1) the Motion to Dismiss filed by Defendant John Saenz, Dkt. No. 41, and (2) the Motion to Dismiss filed by Defendants Miguel Villarreal, Jr. and Gunn, Lee & Cave, PC (collectively, the "Law Firm Defendants"), Dkt. No. 40. This case was referred for resolution of all pretrial matters, including requests for injunctive relief, pursuant to Rules CV-72 and 1 of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. See Dkt. Nos. 22 & 36. The Court has original federal question jurisdiction over Plaintiffs' claims for violation of the Defend Trade Secrets Act ("DTSA"),18 U.S.C. § 1836, Computer Fraud and Abuse Act ("CFAA"), 18 U.S.C. § 1030(g), and Anti-cybersquatting Consumer Protection Act ("ACPA"), 15 U.S.C. § 1125(d). See 28 U.S.C. § 1331. Plaintiffs seek to invoke the Court's supplemental jurisdiction over state law claims asserted against Defendant Saenz and the Defendants Law Firm Defendants. See 28 U.S.C. § 1367.
For the reasons discussed below, it is recommended that Saenz's Motion to Dismiss, Dkt. No. 41, be GRANTED IN PART. Plaintiffs' claims against Saenz for violations of the DTSA and TUTSA, breach of fiduciary—to the extent such claim is premised on conduct allegedly committed while Saenz served as ZroBlack's CEO—conversion, fraud, breach of contract, tortious interference, violations of the Texas Theft Liability Act, CFAA, ACPA—to the extent Plaintiffs' CFAA and ACPA are premised on Saenz's refusal to return ZroBlack's laptop—and request for declaratory relief should be DISMISSED. But Plaintiffs' claims for breach of fiduciary duty and for violations of the CFAA and ACPA—in so far as these claims are premised on Saenz's alleged conduct after the parties executed the Release—should remain at issue, at least at this juncture.
It is further recommended that Plaintiffs' state law legal-malpractice and breach-of-fiduciary-duty claims asserted against the Law Firm Defendants should be SEVERED AND DISMISSED WITHOUT PREJUDICE for lack of subject matter jurisdiction or because the Court should decline to exercise supplemental jurisdiction over them pursuant to 28 U.S.C. § 1367(c). Accordingly, the Law Firm Defendants' Motion to Dismiss, Dkt. No. 40, should be DISMISSED AS MOOT.
This case concerns an employment dispute between former business partners Plaintiff Jonathan Villarreal1 and Defendant John Saenz, and Saenz's alleged retention of company property and proprietary information after he assigned his interest in the company to Villarreal.
According to the live Complaint, Villarreal is a computer programmer who developed and patented valuable and profitable technology, which allows the user to remotely access, copy,erase, and recover data on password-protected and encrypted cell phones and tablets. See Amend. Compl. ¶¶ 15-16.2 In October 2018, Villarreal—with the help of an associate—began negotiating with a foreign international data security company3 for the licensing of this technology. Id. ¶¶ 18-19. Unfortunately, the associate wasn't able to perform his obligations, and Villarreal parted ways with him before the technology could be sold. See id. A few months later, Villarreal discussed the technology with his cousin's husband, Defendant Saenz. See id. ¶ 20. Saenz, in turn, represented that he had the business experience and government contacts to market the technology to the government. See id. To that end, Saenz claimed that he could use his contacts in the military and technology business sectors to bolster sales, and he proposed forming a company as a vehicle to market the technology. See id. Relying on Saenz's representations and trust in Saenz as a family member, Villarreal agreed to form the security engineering firm ZroBlack LLC with Saenz. See id.
On January 14, 2019, Villarreal and Saenz together formed ZroBlack, with each owning 50% of the company. See id. ¶ 22-23 (incorporating by reference Ex. 3 ¶ 4.7). The purpose of ZroBlack was to provide applications and services regarding cell phone data capture and erasure for both commercial and governmental use. See id. Villareal was charged with performing all the in-house coding, hardware engineering, and servicing of the technology. See id. Saenz was tasked with client engagement and promoting the company. See id. In furtherance of ZroBlack's formation, Saenz purchased (and set up) the domain name www.zroblack.com from GoDaddy.com and provided Villarreal with access to it. See id. On March 31, 2019, Villarrealassigned his intellectual property interest in the software he developed to ZroBlack. See id. ¶¶ 24, 26.
On April 15, 2019, ZroBlack and the foreign customer entered into a Professional Services Agreement ("PSA"). See id. ¶ 30. Attorney M. Villarreal of Gunn, Lee, & Cave advised ZroBlack on the contract negotiations with the foreign customer. See id. ¶ 35. Pursuant to the PSA, ZroBlack agreed to "pass down its knowledge of mobile devices, consult with [the foreign customer] on its software development and coding, hardware development, and organize and document the process of supporting ability to identify, diagnose, clear, and validate certain devices." Id. In exchange, the foreign customer agreed to pay ZroBlack $1.5 million up front and a 14% earn-out on new customer revenue and existing growth. See id. ¶ 31. At Saenz's instruction, the $1.5 million was initially transferred into a Wells Fargo business account.4 Id. ¶ 32 (incorporating Villarreal Aff. ¶ 175). Saenz then withdrew $740,000 and transferred the money to his personal account. Id. Villarreal, on the other hand, transferred $740,000 to a newly formed distribution account "according to the terms of the LLC agreement." Id. 33-34. According to Plaintiffs, the distributions to both Villarreal and Saenz constituted their salary through the end of 2019 and, hence, the $740,000 Saenz withdrew wasn't yet earned. See id. ¶¶ 35-36, 86.
On May 2, 2019, in connection with his duties as ZroBlack's CEO, Saenz purchased a 15-inch Apple MacBook with ZroBlack's funds. See id. ¶ 27. According to Plaintiffs, the laptop contains "proprietary information and trade secrets belonging to ZroBlack," including the code related to ZroBlack's phone-security project. Id. ¶ 96; Villarreal Aff. ¶¶ 50, 58.
Shortly after Villarreal and Saenz commenced their consulting work under the PSA, they began to disagree regarding Saenz's performance as ZroBlack's CEO. See Amend. Compl. ¶¶ 46- 53 (citing Ex. 11). According to Plaintiffs, Saenz missed key customer meetings while providing little to no services for ZroBlack. See id. Ultimately, on June 26, 2019, Villarreal accused Saenz of "sit[ting] back and expect[ing] a paycheck," and Villareal threatened to dissolve the company. See id. Saenz, in response, reached out to M. Villarreal to help resolve the dispute. See id. ¶ 54. Plaintiffs contend that "an obvious," nonwaivable conflict of interest existed for M. Villarreal. Id. But M. Villareal, according to Plaintiffs, nonetheless undertook to represent both Saenz and Villarreal in negotiations to resolve their disagreements. See id.
Ultimately, Saenz and Villarreal decided to part ways. In furtherance of this decision, M. Villarreal prepared a document entitled, "Release" that Saenz and Villarreal, on behalf of themselves and ZroBlack, executed on August 9, 2019. See id. ¶ 72 & Ex. 15 (Release). Pursuant to the Release, the parties agreed that Saenz would "assign[] [] his entire interest to ZroBlack LLC to Villarreal." Release. Contemporaneous with the Release, the parties executed a document entitled "Unanimous Written Consent In Lieu of Meeting of The Members of ZroBlack LLC," which "memorialize[d]" the assignment of Saenz's "entire interest." Ex. 16 to Amend. Compl. (Unanimous Consent). Villarreal and Saenz agreed to split future earn-out payments from the foreign customer, and they then fully released each other "from all claims and demands, known or unknown." Release ¶¶ 2, 7. The Release doesn't mention the following: (1) the $740,00; (2) any company property, such as the laptop; or (3) ZroBlack's proprietary and trade secret information, domain name, webpage, or server. See Release; Amend. Compl. ¶¶ 73-75. By failing to include these matters, Plaintiffs claim the Law Firm Defendants "create[d] avague and ambiguous document that made it unclear ZroBlack still owned these things and that Saenz was required to return them." Amend. Compl. ¶ 76.
On August 15, 2019, and again on September 19 and 20, 2019, Villarreal requested that Saenz release ZroBlack's domain name and return the laptop, which allegedly contains ZroBlack's proprietary trade secrets. See id. ¶¶ 90, 99, 100 & Exs. 18-19, 22. Saenz allegedly refused to do so. See id. ¶¶ 91, 94-95. On August 15, 2019, Villarreal received an email from GoDaddy informing him that Saenz had, the day before, revoked Villarreal's access to the domain name. See Ex. 41 to Amend. Compl. Then, on or about September 12, 2019, Villarreal learned Saenz had allegedly deleted thousands of emails and documents on ZroBlack's email server and had also taken down its webpage. See Amend. Compl. ¶¶ 94, 97, 170, 178; Ex. 20. According to Plaintiffs, Saenz has "blackmailed ZroBlack over the domain name, webpage, and email server, offering to sell it back to ZroBlack for $7,000." Id. ¶¶ 92, 95. Without access to the ZroBlack domain, Plaintiffs contend they are unable to update ZroBlack's credentials with Dun & Bradstreet, Apple, or government websites and agencies,...
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