Delphx Corp. v. Fondren

600 F.Supp.3d 540

DELPHX CORPORATION

v.Larry E. FONDREN

CIVIL ACTION NO. 22-877

United States District Court, E.D. Pennsylvania.

Filed April 27, 2022

Cezanne S. Harrer, David F. Russey, Dentons Cohen & Grigsby P.C., Pittsburgh, PA, for DelphX Corporation.

Jennifer A. McKay, West Chester, PA, for Larry E. Fondren.

ORDER - MEMORANDUM

KEARNEY, District Judge

AND NOW , this 27^th day of April 2022, upon considering Defendant's Motion to Dismiss (ECF Doc. No. 15), Plaintiff's Response (ECF Doc. No. 16), and for reasons below, it is ORDERED Defendant's Motion to Dismiss (ECF Doc. No. 15) is DENIED requiring he file an Answer by May 11, 2022.

Analysis

DelphX Corporation allegedly developed two proprietary securities products known as collateralized put options and collateralized reference notes.¹ Larry E. Fondren signed an employment agreement in 2017 to serve as DelphX's Chief Executive Officer.² Mr. Fondren agreed to "[s]erve DelphX ‘faithfully’; to ‘devote his entire working time, attention, energy and skill to his employment and the benefit and business of [DelphX]’; and to ‘promote its interests.’ "³ DelphX alleges Mr. Fondren agreed he would not use DelphX's proprietary information "for his own benefit during the course of his employment"; from using trade secrets and other patentable inventions forever; and from using "Confidential Information" during his employment and for five years thereafter.⁴ Mr. Fondren also agreed not to compete or interfere with DelphX and its contracts for one year following his termination.⁵ Mr. Fondren agreed products he developed while working for DelphX "belonged to DelphX."⁶ DelphX replaced Mr. Fondren as chief executive officer in April 2019, but he remained on its board of directors.⁷

Mr. Fondren sued DelphX and its Canadian parent, DelphX Capital Management ("DelphX Management"), in the Chester County Court of Common Pleas in March 2021.⁸ Mr. Fondren claimed DelphX breached the employment agreement by underpaying him, terminating him without cause, and failing to pay severance.⁹ He claims he developed products unrelated to DelphX's intellectual property following the post-termination confidentiality period, yet DelphX is claiming it owns Mr. Fondren's products to harm his business prospects and reputation.¹⁰ Mr. Fondren sued DelphX for breach of contract and declaratory judgment, and sued both DelphX and its parent DelphX Management for intentional interference with contractual relations and defamation.¹¹

DelphX did not timely answer Mr. Fondren's claims. The state court entered default judgment against DelphX.¹² The state court denied DelphX's motion to set aside the default.¹³ DelphX appealed, the Pennsylvania Superior Court heard argument on March 16, 2022, and the Superior Court is presently preparing its decision.¹⁴

Mr. Fondren's state-court claims against DelphX Management proceeded in Chester County. DelphX Management counterclaimed against Mr. Fondren for breaches of fiduciary duty, tortious interference with contractual relations, civil conspiracy, breach of the implied covenant of good faith and fair dealing under Pennsylvania law, and breach of fiduciary duty under Canadian law.¹⁵ The parties began discovery in the Fondren-DelphX Management case, but the state court stayed the action pending the Superior Court's decision on DelphX's appeal from the entry of default.

DelphX (not DelphX Management) now seeks remedies in this Court invoking our diversity subject matter jurisdiction. DelphX sues Mr. Fondren for breaching his employment contract and fiduciary duties by using DelphX's proprietary information for his own benefit; diluting the value of DelphX's information by creating a new company using DelphX's products; marketing DelphX's products through this new company; attempting to sell DelphX's products to companies with whom DelphX negotiated; hiring a DelphX consultant to work for him; marketing DelphX-developed securities as his own; and engaging in other bad-faith conduct.¹⁶

A. We deny Mr. Fondren's first-filed and preclusion arguments.

Mr. Fondren moves to dismiss arguing the first-filed rule bars DelphX's claims because the state action occurred first and issue preclusion and claim preclusion bar DelphX's claims.¹⁷ We deny his motion based on these arguments. The first-filed rule does not apply and Mr. Fondren fails to carry his burden to show issue preclusion or claim preclusion apply.

1. The first-filed rule does not apply.

Mr. Fondren argues the first-filed rule bars DelphX's claims here. We disagree because the first-filed rule applies only to concurrent federal actions.

The first-filed rule requires "[i]n all cases of federal concurrent jurisdiction, the court which first has possession of the subject must decide it."¹⁸ The first-filed rule "encourages sound judicial administration and promotes comity among federal courts of equal rank."¹⁹ Judges must analyze the first-filed rule, an abstention doctrine, mindful of their "virtually unflagging obligation" to exercise their jurisdiction.²⁰

We decline to apply the first-filed rule because it does not apply to concurrent state and federal cases and abstaining would violate our obligation to exercise jurisdiction. Federal judges routinely reject attempts to apply the first-filed rule where a state action precedes a federal action.²¹ In Spellman v. Express Dynamics, LLC , Judge Walls thoroughly explained why the first-filed rule does not apply based on a first-filed state action: It would violate the Supreme Court's directive "federal courts have a strict duty to exercise the jurisdiction that is conferred upon them by Congress."²²

We agree. The first-filed rule promotes comity among the federal courts, not federal and state courts.²³ Comity between federal and state courts does not permit federal judges to ignore their congressionally mandated obligation to exercise jurisdiction. Our Court of Appeals has never applied the doctrine to concurrent federal and state proceedings. The Court of Appeals for the Eleventh Circuit did so in 1982,²⁴ but we are persuaded by the repeated criticism of its decision over the past forty years.²⁵ We will not follow the court of appeals's analysis from forty years ago mindful of our Court of Appeals's recent reminder district court judges have a "virtually unflagging obligation" to exercise their jurisdiction when able.²⁶ The first-filed rule does not bar DelphX's claims.

2. Mr. Fondren does not show a basis for issue or claim preclusion.

Mr. Fondren next argues issue preclusion and claim preclusion bar DelphX's claims before us. We disagree because Mr. Fondren admits he does not carry his burden to show issue preclusion or claim preclusion apply.

"Issue preclusion, formerly titled collateral estoppel, proscribes relitigation when the identical issue already has been fully litigated."²⁷ Issue preclusion requires four elements:

(1) The identical issue was decided in a prior adjudication;

(2) There was a final judgment on the merits;

(3) The party against whom the bar is asserted was a party or in privity with a party to the prior adjudication; and

(4) The party against whom the bar is asserted had a full and fair opportunity to litigate the issue in question.²⁸

"Claim preclusion, often called res judicata, is broader [than issue preclusion] in effect and prohibits reexamination not only of matters actually decided in the prior case, but also those that the parties might have, but did not, assert in that action."²⁹ Claim preclusion requires "a final judgment on the merits."³⁰ In addition to a final judgment on the merits, the party asserting claim preclusion must prove four elements:

(1) Identity of issues;

(2) Identity of causes of action;

(3) Identity of persons and parties to the action; and

(4) Identity of the quality or capacity of the parties suing or sued.³¹

Mr. Fondren admits he does not prove either defense, which alone prevents us from granting his motion because Mr. Fondren has the burden to prove them. Claim preclusion and issue preclusion are affirmative defenses which Mr. Fondren must prove.³² The defenses fail "if the movant fails to establish any of the elements of the defense[s]."³³ Mr. Fondren fails to establish the principal element of the defenses—a final judgment on the merits—because he thrice admits no final judgment has been rendered against DelphX in the state action.³⁴ Mr. Fondren argues claim preclusion or issue preclusion will apply only once a final judgment is rendered in the state action. But a final judgment is required for claim preclusion or issue preclusion to apply today. We cannot make Mr. Fondren's arguments for him. We must deny his motion without prejudice to him reraising issue preclusion or claim preclusion at a later stage. We express no view at this stage regarding whether a final judgment has indeed been rendered in the state court.

Mr. Fondren concedes issue preclusion and claim preclusion do not apply, but argues we should stay this litigation "pending final judgment" in the state court.³⁵ We decline for two reasons. First, staying this action would prejudice DelphX. It would force DelphX to wait helplessly while the final element of Mr. Fondren's affirmative defense ripens. Second, staying this action would essentially make the first-filed rule apply based on first-filed state actions. We would only stay this action based on comity concerns or efficient judicial administration. But those factors apply only to concurrent federal actions, not concurrent state and federal actions.³⁶ This action will proceed.

B. DelphX adequately pleads breach of contract, breach of fiduciary duty, and tortious interference with prospective contractual relations.

Mr. Fondren also seeks to dismiss arguing DelphX fails to state its claims as a matter of law.³⁷ We disagree.

1. DelphX pleads Mr. Fondren breached a contract.

DelphX pleads Mr. Fondren breached a contract. "[T]hree elements are necessary to plead a cause of action for breach of contract: (1) the existence...