Anaqua, Inc. v. Ralph Schroeder, Carla Johnson Callis, & Hyperion Global Partners, LLC

ANAQUA, INC., Plaintiff, v. RALPH SCHROEDER, CARLA JOHNSON CALLIS,and HYPERION GLOBAL PARTNERS, LLC, Defendants.

Civil Action No. 12-10710-FDS

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

Dated: May 5, 2014

MEMORANDUM AND ORDER

ON DEFENDANTS' MOTION FOR ATTORNEYS' FEES AND COSTS

SAYLOR, J.

This is a dispute over Rule 11 sanctions. On January 25, 2013, the Court granted the motion of plaintiff Anaqua, Inc. to dismiss its claims voluntarily pursuant to Fed. R. Civ. P. 41(a)(2). However, the Court explicitldiction over the case for the purpose of considering any motion for sanctions or costs under Fed. R. Civ. P. 11 or any other applicable rule or statute. On March 1, defendants Ralph Schroeder, Carla Callis, and Hyperion Global Partners, LLC moved for an award of attorneys' fees and costs pursuant to Fed. R. Civ. P. 11.

On May 15, the motion was referred to Magistrate Judge Jennifer C. Boal. Magistrate Judge Boal issued a report and recommendation on February 21, 2014, recommending against imposing Rule 11 sanctions. Defendants filed a timely objection to the report and recommendation.

For the following reasons, defendants' objections will be overruled, and the motion for sanctions will be denied.

I. Background

The facts are summarized below as set forth in the report and recommendation.

A. The Parties

Anaqua, Inc., develops and licenses intellectual-asset-management software and implementation services to corporations and law firms. Hyperion Global Partners, LLC, publishes "MarketView Reports," which evaluate and rate asset-management software, including those of Anaqua and its competitors. Hyperion also provides consulting services to assist businesses in selecting software providers. Ralph Schroeder is a former Anaqua employee who is now employed as a managing director with Hyperion. He is responsible for drafting Hyperion's MarketView Reports. Carla Callis is a former Anaqua employee who, at the time of the initiation of this lawsuit, was about to begin employment with Hyperion.

Schroder, Callis, and Hyperion all entered into non-competition or non-disclosure agreements with Anaqua. In a 2006 employment contract, Schroeder agreed not to disclose any of Anaqua's confidential information after his employment at the company had terminated. In a 2010 employment contract, Callis agreed to not disclose or use any of Anaqua's proprietary information, and not to accept employment with any of Anaqua's clients or competitors after termination. In a 2011 contract, Anaqua and Hyperion agreed to share confidential information on the condition that the information would be used solely in connection with a potential partnership and would not be disclosed without the other party's consent. The companies also agreed not to contact the other company's employees directly without prior approval.

B. Allegations in the Complaint

Anaqua filed this case on February 28, 2012, in Massachusetts Superior Court. Itamended the complaint on March 1, 2012. The amended complaint alleged claims of breach of contract (Counts 1, 2, and 7); libel, false statements, and defamation (Count 3); tortious interference with contractual relations (Count 6); and unfair business practices in violation of Mass. Gen. Laws ch. 93A (Count 8).

The claims in the amended complaint were based on two sets of factual allegations. First, the amended complaint alleged that Hyperion solicited Callis's employment without Anaqua's permission. The amended complaint further alleged that, as a result of these actions, Hyperion and Callis violated their respective contracts with Anaqua. Those allegations formed the basis for Counts 5, 6, and 7 of the amended complaint.

Second, the amended complaint alleged that Schroeder and Hyperion published confidential and false information about Anaqua in two of its MarketView Reports released in 2011. It further alleged that Schroeder revealed confidential and false information about Anaqua to his clients. Those allegations formed the basis for Counts 1, 2, 3, 4, and 8 of the amended complaint.

C. Procedural Background

On April 20, 2012, defendants removed the case to this Court. On June 22, after some initial discovery, defendants sent a letter to plaintiff contending that the complaint lacked legal and factual merit. The letter requested that plaintiff withdraw the complaint under Rule 11's safe-harbor provisions. Anaqua responded by stating it had a good-faith basis for the claims in the amended complaint.

On September 10, defendants filed a motion for partial summary judgment on the claims related to the MarketView Reports and the alleged disclosure of confidential and falseinformation. In response, plaintiff moved under Fed. R. Civ. P. 56(d) to complete discovery before filing a response.

On January 16, 2013, plaintiff filed a motion to dismiss the amended complaint under Fed. R. Civ. P. 41(a)(2). The Court granted the motion to dismiss on January 25, 2013, but retained jurisdiction over the case for the purpose of considering any motion for sanctions or costs.

On March 1, defendants filed a motion for attorneys' fees and costs. The motion originally requested relief under Mass. Gen. Laws ch. 231, 28 U.S.C. § 1927, Mass R. Civ. P. 11(a), and Fed. R. Civ. P. 11. The same day, defendants filed a motion requesting leave to conduct discovery to support their motion for attorneys' fees. On April 5, the Court allowed the Rule 11 claim to continue, but denied the claims under the three other theories. On April 11, the Court denied defendants' motion for discovery without prejudice as to its renewal.

On May 15, 2013, the motion for attorneys' fees and costs was referred to Magistrate Judge Boal. On February 21, 2014, Magistrate Judge Boal issued a report and recommendation on the motion for attorneys' fees. Defendants timely filed an objection to the report and recommendation.

D. The Report and Recommendation

Defendants' motion for attorneys' fees and costs requested relief under Rule 11. Defendants contended that there was no basis for the claims in the complaint, and that plaintiff failed to conduct a reasonable inquiry into the factual and legal bases of those claims as required by Rule 11. Defendants further contended that plaintiff continued to violate Rule 11 by maintaining the lawsuit and filing pleadings supporting its frivolous claims.

The Magistrate Judge's report and recommendation split plaintiff's claims into two categories: claims based on allegations that Hyperion improperly solicited Callis and claims based on allegations that Hyperion and Schroeder released confidential and defamatory statements. The report and recommendation concluded that Rule 11 sanctions were not appropriate for either set of claims.

Defendants first object to the conclusion that the claims based on allegations that Hyperion improperly solicited Callis did not violate Rule 11. (Def. Obj. to Rep. and Recomm. at 4 n.1). However, defendants have not indicated why the analysis in the report and recommendation is flawed. Accordingly, the Court will adopt the recommendation as to the claims concerning Callis's employment.

Second, defendants object to the conclusions as to the claims based on allegations that Schroeder made confidential or defamatory statements to his clients. (Id.). However, they again have not indicated why the analysis in the report and recommendation as to the allegations concerning release of confidential or defamatory statements by Schroeder to his clients is flawed. Accordingly, the Court will adopt the recommendation as to those claims. The claims concerning Hyperion and the MarketView Reports are addressed below.

II. Standard of Review

A party may object to a magistrate judge's report and recommendation on nondispositive matters. Fed. R. Civ. P. 72(a). "The district judge in the case must consider timely objections and modify or set aside any part of the order that is clearly erroneous or is contrary to law." Id. A magistrate judge's factual findings in determining whether to impose Rule 11 sanctions are reviewed under the Rule 72(a) "clearly erroneous" rubric. Sheppard v. River Valley Fitness One,L.P., 428 F.3d 1, 6 (1st Cir. 2005); see also Phinney v. Wentworth Douglas Hosp., 199 F.3d 1, 4 (1st Cir. 1999).

Under Fed. R. Civ. P. 11, a court may "impose sanctions on a party or lawyer for advocating a frivolous position, pursuing an unfounded claim, or filing a lawsuit for some improper purpose." CQ Int'l Co., Inc. v. Rochem Intern., Inc., USA, 659 F.3d 53, 60 (1st Cir. 2011); see also Fed. R. Civ. P. 11(c)(1). The use of sanctions "serves two main purposes: deterrence and compensation." Navarro-Ayala v. Nunez, 968 F.2d 1421, 1426 (1st Cir. 1992). Rule 11 is a "potent weapon," id., and so "a judge should resort to [sanctions] only when reasonably necessary—and then with due circumspection." United States v. Figueroa-Arenas, 292 F.3d 276, 279 (1st Cir. 2002) (citing Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991)). "[F]or Rule 11 purposes, a party's pleading must be judged on the basis of what was reasonable when the pleading was filed rather than in hindsight." Navarro-Ayala, 968 F.2d at 1425.

The First Circuit has not decided "who bears what burden of proof to establish the factual predicate to the imposition of sanctions." Augustyniak Ins. Grp., Inc. v. Astonish Results, L.P., 2013 WL 998770, at *7 (D.R.I. Mar. 13, 2013). The Second Circuit has held that "district courts [should] resolve all doubts in favor of the signer." Rodick v. City of Schenectady, 1 F.3d 1341, 1350 (2d Cir. 1993) (quoting Associated Indem. Corp. v. Fairchild Indus., Inc., 961 F.2d 32, 34-35 (2d Cir. 1992)); see also Bygott v. Leaseway Transp. Corp., 1987 WL 54392, at *8 (3d Cir. 1987) (unpublished opinion); Augustyniak, 2013 WL 998770, at *7; 2-11 Moore's Federal Practice - Civil § 11.23 ("For example, in determining whether a particular claim is merely a losing argument or is losing and sanctionable, the trial courts are to resolve all doubts in...