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DESIGN STRATEGIES, INC. v. DAVIS

August 11, 2005.

DESIGN STRATEGIES, INC., Plaintiff,
v.
MARC E. DAVIS, INFO TECHNOLOGIES, INC., INFO TECHNOLOGIES WEB SOLUTIONS, INC., and JOHN GOULLET, Defendants.



The opinion of the court was delivered by: VICTOR MARRERO, District Judge

DECISION AND ORDER

Plaintiff Design Strategies, Inc. ("Design") brought this action against its former employee, Marc E. Davis ("Davis"); two corporate entities, Info Technologies, Inc., ("Infotech") and Info Technologies Web Solutions ("IT Web"); and John Goullet ("Goullet"), Chief Executive Officer of both Infotech and IT Web (collectively, the "IT Defendants," and together with Davis, "Defendants"). Design alleges that Davis, while still employed at Design, wrongfully diverted a lucrative business opportunity from Design to IT Web and subsequently benefitted from that diversion by accepting an offer of employment with IT Web. Design further alleges that the IT Defendants colluded with Davis to divert the business opportunity away from Design and ultimately to hire Davis. Defendants deny Design's salient allegations. Davis also filed a counterclaim against Design alleging that Design had wrongfully denied him payment of certain commissions to which he was entitled.

In prior rulings on the parties' respective motions for summary judgment, the Court denied Design's motion and granted in part and denied in part Defendants' motions.*fn1 The Court also dismissed certain of Design's claims in its rulings on Defendants' motions in limine. After determining that Design was not entitled to a jury trial on its surviving causes of action,*fn2 the Court conducted a bench trial on May 9 through 18, 2005. Design's surviving claims that proceeded to trial were: breach of fiduciary duties, aiding and abetting a breach of fiduciary duties, wrongfully inducing a breach of fiduciary duties, unjust enrichment, and unfair competition. Davis's counterclaim was also litigated at trial.

  For the reasons set forth below, the Court concludes that Design has sustained its burden of proof as to its claim against Davis for breach of fiduciary duties, but that Design's remaining claims should be dismissed. The Court further finds that Davis has not sustained his burden of proof as to his counterclaim. I. FACTUAL AND PROCEDURAL BACKGROUND

  Design is in the business of providing trained personnel to companies needing technical support on specific projects requiring computer technology services. That aspect of the industry is known as "staffing." According to Design's Financial Statements, the company:
is a provider of technically skilled individuals, hired on a temporary basis, who provide solutions to complex problems regarding computer applications predominantly to business. . . .
  Typically, the services involve providing computer technology consultants with specific skills and experience to clients on a contract basis for the duration of the particular assignment. The consultants are drawn from an extensive list containing the names of qualified experts which the personnel provider maintains for this purpose. The staff supplied by Design are hired or solicited by Design pursuant to an employment agreement and are then assigned to work at the client's site under the client's supervision and on the particular temporary projects and duties determined by the client. For the four-year period 1997 through 2000, Design's financial statements indicate that over 99.5 percent of the company revenues derived from staffing services.

  Marsh Newmark ("Newmark") is the President of Design and has been its sole director and shareholder since the company's founding in 1980. Newmark hired Davis in 1987 to work for Design as a sales representative. Davis was later promoted to Sales Manager. He was an at-will employee without a written agreement and was not subject to any restrictive covenant of confidentiality, non-competition or non-solicitation, as the Court determined in Design I. Davis's work entailed marketing Design's staffing services. He was compensated with a fixed annual salary plus commissions based on the company's monthly profits from the business he generated, which were paid at a rate of 10 percent on the first $10,000 of such profits and 20 percent on profits in excess of that amount.

  Davis left Design in February 2000 to accept a position with IT Web. At the time of his departure, Davis was earning an annual salary at Design of approximately $85,000, an amount he began making in 1998 following a raise from $45,000. His commissions in his last four calendar years at Design were: 1997-$512,333; 1998-$434,212; 1999-$285,947; 2000-$73,119.

  Sometime during the summer of 1999 Davis became aware from Frank Murphy ("Murphy"), a senior employee and one of his business contacts at Microsoft, Inc., that Microsoft was involved with a partner, Brill Media ("Brill"), in a venture that would be soliciting companies for a contract worth approximately $10 million. The project, which came to be known as Contentville.com ("Contentville"), entailed establishing a high-profile website using Microsoft software to engage in electronic commerce in books and related products and thus compete with similar businesses operated by Amazon.com and Barnes and Noble.

  The services to be provided by the company chosen to work on Contentville involved providing computer technology "project" or "web solutions" work. Unlike staffing, web solutions work in the industry entailed providing the services of trained personnel employed by the company on its premises and using the computers and other technical equipment supplied at the provider's laboratory on specific projects to design and develop websites for clients in accordance with given specifications.

  Microsoft awarded the Contentville contract to IT Web in mid-December 1999. IT Web extended an offer of employment to Davis by letter dated December 14, 1999, which Davis accepted in late January 2000. Davis began working for IT Web in early February 2000.

  During the trial, Defendants moved for a directed verdict pursuant to Fed.R.Civ.P. 52(c). The Court reserved judgment in order to hear Defendants' case in chief. In addition, at the time that Defendants moved for a directed verdict, though Design had concluded the majority of its case in chief, due to difficulties in contacting two witnesses, Design had not yet presented their testimony. Because Design thus had not completed all of its evidence at the time that Defendants moved for judgment as a matter of law, the Court hereby denies Defendants' motion. Accordingly, the Court bases the following discussion on the full record of the trial.

  II. FINDINGS OF FACT

  In light of the legal standards, articulated below, applicable to Design's claims and Davis's counterclaim, liability rests on the resolution of the following factual issues: (1) whether Davis informed Newmark of the Contentville project and made good faith efforts to obtain the business opportunity for Design; (2) whether and to what extent Davis attempted to procure that contract for IT Web; (3) whether the IT Defendants were aware of or participated in any attempts by Davis to obtain the Contentville contract for IT Web; (4) whether Design was sufficiently competitive with IT Web to render any attempts by Davis to assist IT Web disloyal to Design; (5) whether Davis or the IT Defendants played any role in causing Design not to obtain the Contentville contract; and (6) whether Design expressly consented to Davis's referral of the Contentville business to IT Web. Based on its evaluation of the documentary evidence and live testimony presented at trial, the Court makes the following findings of fact regarding these matters.

  A. DAVIS'S EFFORTS TO PROMOTE DESIGN FOR THE CONTENTVILLE CONTRACT

  The Court finds that Davis initially sought to procure the Contentville contract for Design. The trial record supports a finding that Davis promoted Design for what eventually became the Contentville contract from the time he learned about it until sometime in November 1999. The Court bases this finding on Davis's uncontroverted testimony and statements by Murphy in his deposition, portions of which were read into the trial record, that corroborate Davis's claims in this regard.

  Davis testified, for instance, that he had several meetings with Murphy, starting sometime around early September 1999, at which he promoted Design as a partner for Microsoft's contemplated electronic commerce project. (See May 9 Tr. at 227.) Murphy similarly stated that Davis represented to him that Design had the capacity to perform the web solutions work required for such a project and sought to procure the Contentville contract for Design. (See May 16 Tr. at 130, 139.) Although Newmark testified that Davis mentioned the possibility of a project with Microsoft to him only on one occasion and never informed him of the details of such a project, Design did not present any evidence contradicting Davis's and Murphy's testimony that Davis had attempted to solicit the contract on behalf of Design.

  B. DAVIS'S EFFORTS TO PROMOTE IT WEB FOR THE CONTENTVILLE CONTRACT

  The Court finds that in or before early November 1999, Davis ceased attempting to solicit the Contentville contract for Design and, instead, commenced trying to promote IT Web for the contract. Davis made several admissions in this regard. First, he testified that, upon determining that Design was not willing to make the investment necessary to obtain the Contentville contract, he took several steps to inform the IT Defendants about a business opportunity with Microsoft and to encourage Microsoft to consider IT Web for Contentville. Specifically, he acknowledged that he informed Goullet of a possible web solutions project with Microsoft and told him that Murphy was the person to contact at Microsoft in order to pursue that project. (See May 10 Tr. at 50, 53.) Davis also testified that, in informing Goullet about the Microsoft project, he made "it clear to [Goullet] that time was absolutely of the essence. That if anything were to be done it needed to be done very quickly." (Id. at 218.)

  Davis further conceded that he informed IT Web President Michael Largey ("Largey") of a web solutions business opportunity with Microsoft and that he provided Largey with the contact information for another Microsoft employee, John Gomez ("Gomez"), who was in charge of selecting a partner for Contentville. Davis testified that he instructed Largey "that he would have to be able to demonstrate to Mr. Gomez Web Solutions' capabilities to do this work" (id.) in order to convince Gomez to consider IT Web as a potential partner.

  Finally, Davis admitted that he suggested IT Web to Murphy as a web solutions provider for the Contentville project. Davis stated that he "told Frank [Murphy] that since Design was no longer under consideration that [he] felt [he] knew somebody who might be able to help him out." (Id. at 216.)

  The Court further finds that Davis took the additional steps of contacting and/or attempting to contact Gomez directly on numerous occasions in late November and possibly early December 1999 to encourage him to consider IT Web for the Contentville contract. The Court bases this determination on Gomez's testimony that Davis aggressively pursued him in an attempt to secure the Contentville contract for IT Web, and that Gomez was always under the impression that Davis was working for IT Web, rather than for Design.*fn3 (See May 11 Tr. at 68, 70, 71.) Gomez stated that Davis made so many attempts (10 to 15, according to Gomez) to contact him in reference to the Contentville project that he became "annoying." (Id. at 72.)

  The Court credits this portion of Gomez's testimony for the following reasons. First, it was essentially uncontroverted at trial. Davis's counsel's cross-examination of Gomez did not call into question or even address his testimony that Davis made repeated attempts to contact him on behalf of IT Web. (See May 10 Tr. at 145-46.) Davis, while stating that he did not remember having called Gomez on as many occasions as Gomez testified to remembering, never squarely denied having made so many attempts to contact Gomez on behalf of IT Web. In addition, Davis's testimony on this subject was internally inconsistent and appeared somewhat evasive at times.*fn4

  Second, though Gomez's accounts of some details was directly at odds with those of other witnesses and his recollection of those events may have been faulty to that extent, there is no evidence on the record suggesting that Gomez might not have been an impartial witness or otherwise calling into question his credibility. Moreover, based on its observation of Gomez's demeanor during his extensive direct, cross-, and re-direct examination, the Court finds no reason to doubt his truthfulness.

  Third, Murphy made statements at his deposition that to some extent corroborate Gomez's testimony that Davis made repeated attempts to contact him. (See May 16 Tr. at 141.) Murphy also indicated that at least some of Davis's attempts to contact Gomez were made on behalf of IT Web. Murphy stated, for instance, that Davis told him that they "could explore another way to win the [Microsoft] business if it wasn't possible for Design Strategy to win the contract" (id. at 138) and that "[i]f for some reason beyond his control [Davis] was not able to win it for Design [he] had the impression that . . . he could change employers and win the business but it was clearly after — after it was unwinable [by Design]." (Id. at 139.)

  C. THE IT DEFENDANTS' LACK OF AWARENESS OF OR PARTICIPATION IN DAVIS'S ATTEMPTS TO OBTAIN THE CONTENTVILLE CONTRACT FOR IT WEB

  With respect to the facts underlying Design's claims against the IT Defendants, the Court finds as follows. First, there is no evidence that the IT Defendants encouraged Davis to provide them with information concerning the Contentville contract, or that they in any way affirmatively sought his assistance in obtaining it. Instead, the record shows that Davis volunteered information to the IT Defendants about the project on his own initiative and that the only action IT Web took in response was to independently pursue with Microsoft the leads that Davis had offered. To the extent that any affirmative evidence was presented on this issue, it supports the IT Defendants' position that they had no active involvement in Davis's efforts to procure the Contentville contract for IT Web. Goullet explicitly denied having "ask[ed] [Davis] about any projects that he might be able to deliver [to IT Web]." (May 12 Tr. at 105.) He also denied having authorized Davis to "act in any way on behalf of Infotechnologies Web Solutions" or to "solicit business on behalf of IT Web Solutions." (Id. at 110.) Largey testified that he was not aware of Davis's communications with Gomez on behalf of IT Web. (Id. at 223.) There is no basis in the record before the Court to discredit or disbelieve Goullet's or Largey's testimony on these subject.

  In addition, the Court finds that neither Goullet nor Largey, nor any other Infotech or IT Web officer, ever offered Davis a job or payment in exchange for referral of the Contentville business or other information about opportunities with Microsoft. (See id. at 110.) Although it is undisputed that IT Web — sometime after Davis commenced his employment there — approved a very high commission rate for Davis's earnings attributed to Contentville,*fn5 there is no compelling evidence that that commission was intended or functioned as a pre-arranged compensation agreement to reward Davis for his role in assisting IT Web in securing the Contentville contract. On the contrary, IT Web's letter to Davis offering him a position with the company did not reflect any commission rate. (See May 11 Tr. at 263-64.)

  D. COMPETITION BETWEEN DESIGN AND IT WEB

  Another issue disputed at trial and relevant to Design's claims against both Davis and the IT Defendants is whether Design and IT Web were sufficiently competitive in the information technology business to render Davis's advocacy on behalf of IT Web adverse or potentially adverse to Design's business interests. The parties agree that Infotech was a competitor of Design in the staffing business at the relevant time and that it has provided staff augmentation services for the duration of its existence. (See May 11 Tr. at 174.) They disagree, though, as to whether or not Design should be viewed as a competitor of IT Web in relation to web solutions services. For a determination of this matter, an understanding of the computer industry and financial relationship between IT Web and Infotech is necessary. The Court makes the following factual findings in this regard.

  In 1998, Infotech created IT Web as a software solutions services division of Infotech. (See id.) For the years 1998 and 1999, according to Goullet, "[t]he tax return that reported income and expenses and profits and losses . . . on behalf of Infotechnologies Incorporated . . . include[d] the figures from Infotechnologies Web Solutions." (Id. at 194.) In addition, IT Web shared office space with Infotech, the president of IT Web was on the payroll of Infotech (id. at 176), and, "for all intents and purposes from a tax standpoint and from a financial standpoint . . . Infotechnologies and Infotechnologies Web Solutions . . . were all under the same umbrella in 1998 and 1999." (Id. at 195.)

  IT Web, however, did maintain "separate banking and accounting and accounting managers" in 1999. (Id. at 173.) IT Web was incorporated and hence officially became a separate corporate entity from Infotech in February 2000 (see id.), but was subsequently reacquired by Infotech (see id. at 172). Thus, although IT Web existed as a separate corporation for some time, at the time Davis promoted it for the Contentville project, it was still a division of Infotech.

  In addition, the technical personnel services provided by Infotech overlapped to some extent with those provided by IT Web. As Goullet testified, IT Web had "on-site programmers, developers, information architects, application architects, people that are performing off-site project and software development work." (May 11 Tr. at 178.) Goullet also affirmed that "staffing work would be work that you would provide to clients or customers that needed people with particular skills within the IT or computer related areas," including programmers and developers, and in "rare" cases information architects and application architects. (Id. at 179.) Therefore, both entities sought to connect clients in some manner with individuals who possessed some of the same specialized computer skills.

  Although the services provided by Design and IT Web thus overlapped as to their staffing-related components, the Court finds that they differ in that Design had no substantial competence or volume of business in providing web solutions. While Newmark professed an interest in developing Design to encompass web solutions work, pointing, for instance, to a draft 1997 business plan indicating such a goal, the evidence presented at trial does not support a finding that Design was actively engaged in the web solutions business in 1999. Although Newmark referred to several specific examples of work Design had performed or was engaged in that he characterized as web solutions work, the Court finds this evidence unpersuasive. The projects Newmark described appear episodic. Others were performed not by Design, but by another business entity, of which Newmark was part owner, known as Network Integration Services, Inc. ("NISI"), or by an independent entity known as Object X. Also, some entailed not strictly web solutions work performed at a distinct lab dedicated to these services, but a combination of staffing services with attendant software project components. Thus, the Court concludes that, in the latter half of 1999, Design was not engaged in web solutions services in any demonstrable, material way as part of its ongoing business services, and did not actually have in place an operating computer lab facility with the business experience, the personnel and technical support necessary to provide web solutions work.

  E. REASONS FOR DESIGN'S FAILURE TO OBTAIN THE CONTENTVILLE CONTRACT

  Also relevant to certain of Design's claims against Davis and the IT Defendants is whether Davis's efforts on behalf of IT Web played a role in causing Design not to be awarded the Contentville contract. The evidence presented at trial supports a finding that Design would not have obtained the Contentville contract even if Davis had not promoted IT Web.

  First, Murphy testified unequivocally that Design was never in serious contention for the Contentville project because it did not satisfy the vendor requirements Microsoft and Brill had established. Far from viewing Design as a close contender for the project, Murphy testified that, from the beginning, he "knew it would be a stretch [for Design] to win the business and [he] also knew . . . that time would be of the essence and it would be unlikely that a deal could be struck." (May 16 Tr. at 146.) Indeed, he specifically stated that Gomez rejected consideration of Design on this basis. (See id. at 134.)

  Gomez expressly stated that ability to deliver a product promptly within the intense timeframe and pressure the project was under, prior web solutions business experience and an operational computer lab were firm requirements, the absence of which had prompted him to disqualify other vendors, even one with which Microsoft had prior business experience. (See May 11 Tr. at 76, 119, 127.) This evidence is sufficiently persuasive to support a finding that Microsoft rejected Design as a potential web solutions provider for Contentville not because Davis promoted IT Web, but because Microsoft determined that Design did not meet the minimum vendor selection criteria or the readiness timetable Microsoft sought with regard to the Contentville contract. That Newmark felt he could mobilize the necessary resources promptly upon being awarded a contract, or arrange for the project's web solutions services to be delivered through a subcontract ...


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