Allyis, Inc. v. Schroder

ALLYIS, INC., a Washington corporation, Appellant, v. JEREMY AND NICOLE SCHRODER, Defendants,SIMPLICITY CONSULTING INC., a Washington corporation, Respondent,MATTHEW F. DAVIS, attorney for Allyis, Inc., Appellant.

No. 74511-5-I

COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION ONE

February 27, 2017

UNPUBLISHED OPINION

APPELWICK, J. — Allyis sued its former employee and his new employer, Simplicity, for breach of a noncompete agreement. The court dismissed Allyis's case with prejudice. It awarded attorney fees and costs under RCW 4.84.185 for a frivolous case and CR 11 sanctions for Allyis's failure to perform a reasonable inquiry before filing the complaint. Allyis and its counsel appeal. We affirm.

FACTS

Allyis Inc. is a Washington company that was originally formed as Essential Web Design & Consulting Inc. Its business began as internet design and consulting, and it expanded to providing contract workers to technology companies.

Jeremy Schroder was hired by Allyis in 2002, when it was still doing business as Essential Web Design. He was provided an employee handbook, which contained a noncompete agreement and a confidentiality agreement.

Schroder ended his employment with Allyis on May 7, 2014. Prior to leaving Allyis, Schroder expressed an interest in working for Simplicity Consulting Inc. Simplicity is a marketing talent agency that provides consultants to other companies. Simplicity offered Schroder a position as an account manager on April 21, 2014. Schroder accepted.

After Schroder began working with Simplicity, Allyis became concerned that Schroder was soliciting Allyis employees to join him at Simplicity. Through its attorney, Allyis asked Schroder to stop inducing Allyis employees to leave Allyis.

On September 22, 2014, Allyis filed a complaint against Schroder, his wife, and Simplicity. It alleged that Schroder had breached the terms of his noncompete and confidentiality agreements. And, it alleged that Simplicity tortiously interfered with these agreements, violated the Consumer Protection Act (CPA),¹communicated false and injurious information about Allyis to other persons, and violated the Uniform Trade Secrets Act (UTSA).²

On March 10, 2015, Allyis filed an amended complaint. This complaint withdrew the four claims previously asserted against Simplicity, replacing them with an unjust enrichment claim.

Simplicity served discovery requests on Allyis on March 16, 2015. By July 9, 2015, Allyis had not produced any discovery, despite Simplicity's multiple requests, so Simplicity filed a motion to compel discovery. On July 17, 2015, the trial court granted the motion. Simplicity scheduled depositions of two Allyis executives to take place on July 23, 2015. But, counsel for Allyis, Matthew Davis, failed to appear with the witnesses. And, Allyis still failed to respond to discovery requests. On August 14, 2015, the court entered a second order, holding Allyis and Davis in contempt of the July 17 order.

Simplicity moved for summary judgment on August 7, 2015. The motion was set for a hearing on September 4, 2015. But, on September 3, 2015, Allyis moved to voluntarily dismiss the case. Simplicity in turn moved for a dismissal with prejudice.

The trial court granted Simplicity's motion to dismiss with prejudice. It found that Allyis and its counsel had willfully disregarded two of the court's orders and engaged in discovery abuse. And, it found that any lesser sanction was unlikely to deter Allyis from engaging in further discovery abuse or contempt of court.

Simplicity moved for fees and costs for opposing a frivolous action. It argued that fees were warranted under RCW 4.84.185, because Allyis recognized its original four claims lacked merit by dropping them and it knew or should have known that its unjust enrichment claim was frivolous. Alternatively, Allyis argued that the court should award CR 11 sanctions.

The trial court granted Simplicity's motion for fees and costs. It found that Allyis's claims were frivolous and that Davis violated CR 11 by pursuing the claims against Simplicity. After Allyis moved for reconsideration, the trial court amended the order and entered additional findings. Allyis and its attorney Davis appeal.

DISCUSSION

Allyis challenges both the CR 11 sanctions and the award of fees and costs under RCW 4.84.185. It challenges a number of the trial court's findings of fact as lacking substantial evidence. We address the challenged findings in the context of the CR 11 sanctions and the RCW 4.84.185 attorney fees.

I. CR 11 Sanctions

We review a trial court's decision to impose or deny CR 11 sanctions for an abuse of discretion. Bldg. Indus. Ass'n. v. McCarthy, 152 Wn. App. 720, 745, 218 P.3d 196 (2009). The court abuses its discretion where its conclusion was the result of an exercise of discretion that was manifestly unreasonable or based on untenable grounds or reasons. Skimming v. Boxer, 119 Wn. App. 748, 754, 82 P.3d 707 (2004).

CR 11 relates to the signing of pleadings, motions, and legal memoranda. It states,

The signature of a party or of an attorney constitutes a certificate by that party or attorney that the party or attorney has read the pleading, motion, or legal memorandum, and that to the best of the party's or attorney's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances: (1) it is well grounded in fact; (2) it is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law or the establishment of new law; (3) it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; and (4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.

CR 11(a). Where a party or an attorney violates this rule, the court may impose appropriate sanctions upon the party or person who signed the pleading, motion, or legal memorandum, or both. Id.

CR 11 envisions two violations of the rule: filings that are not well grounded in fact and warranted by law, and filings that are made for an improper purpose. Bryant v. Joseph Tree, Inc., 119 Wn.2d 210, 217, 829 P.2d 1099 (1992). Before imposing CR 11 sanctions for a baseless filing, the court must find that the attorney failed to conduct a reasonable inquiry into the factual and legal basis of the claim. Id. at 220. Courts use an objective standard in determining whether the attorney engaged in an appropriate inquiry. Stiles v. Kearney, 168 Wn. App. 250, 261-62, 277 P.3d 9 (2012). The court must make findings that specify the actionable conduct to impose CR 11 sanctions for a baseless complaint. Id. at 262. Namely, the court must make a finding that either (1) the claim was not grounded in fact or law and the attorney failed to perform a reasonable inquiry into the law or facts, or(2) the filing was made for an improper purpose. Biggs v. Vail, 124 Wn.2d 193, 201, 876 P.2d 448 (1994).

In this case, the trial court found that Allyis and Davis violated CR 11 and therefore imposed CR 11 sanctions jointly and severally against Allyis and Davis. It did so after finding that neither the unjust enrichment claim nor the original four claims were well grounded in fact or warranted by existing law or a good faith argument to modify the law. Consequently, it found that Allyis and Davis failed to perform a reasonable inquiry prior to filing the original complaint and the amended complaint. The court noted that Davis's conduct throughout the lawsuit was not consistent with a claim filed in good faith. And, it inferred that Allyis and Davis filed the original and amended complaints for an improper purpose: to bring and keep Simplicity's presumably deep pockets into the litigation.

Allyis contends that the trial court erred by sanctioning both it and its attorney, failing to enter the required findings, and entering findings that were not supported by the record. As discussed below, we conclude that the trial court did not abuse its discretion in imposing CR 11 sanctions.

A. Joint and Several Liability

Allyis argues that the trial court erred in entering CR 11 sanctions jointly and severally against it and its attorney. It suggests that CR 11 sanctions can be imposed against only the attorney, not the client. But, CR 11(a) specifically states, "If a pleading, motion, or legal memorandum is signed in violation of this rule, the court, upon motion or upon its own initiative, may impose upon the person who signed it, a represented party, or both, an appropriate sanction." The rule givesbroad discretion for the trial court to determine who should be sanctioned. In re Cooke, 93 Wn. App. 526, 529, 969 P.2d 127 (1999). Sanctions directly on a party are permissible where the party is responsible for the frivolous filing. Id. at 529-30. Here, counsel for Allyis signed the original complaint and the amended complaint. Allyis's chief financial officer, Rakesh Garg, signed the verification attached to the original complaint, verifying that its contents were accurate. Thus, both Allyis itself and its counsel were responsible for the filing, and could be sanctioned under CR 11.

B. Necessary Findings

Allyis contends that the trial court failed to enter the required findings to support CR 11 sanctions. And, it argues that the findings that were entered do not support the judgment. We disagree. The trial court made not one, but both Biggs findings: that the claims were not grounded in fact or law and Allyis and Davis failed to perform a reasonable inquiry before filing the original and amended complaints, and that the claims were filed for the improper purpose of bringing Simplicity's deep pockets into the litigation. Further, as discussed below, we conclude that the court's findings on all of Allyis's claims support the CR 11 sanctions.

1. Unjust Enrichment

In its amended complaint, Allyis argued that...