Honolulu Data Entry Project, Ltd. v. D. Bello Assocs.

HONOLULU DATA ENTRY PROJECT, LTD.dba HDEP INTERNATIONAL Plaintiff, v. D. BELLO ASSOCIATES, DOUGLAS W. BELLO,and JEFFREY A. BATES Defendants.

Civ. No. 12-000467 BMK

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAII

DATED: July 2, 2014

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This case involves claims and counter-claims made by Honolulu Data Entry Project ("HDEP") and D. Bello Associates ("DBA"), two one-time business partners, arising from the demise of their twenty-plus year cooperative business venture to pursue contracts for and provide title data plant, and later search and exam services to the title industry. Despite the fact HDEP and DBA collectively conducted millions of dollars in annual business, the two entities' business relationship was largely defined by an oral handshake agreement dating from the early 1990's - a conflict in the waiting.

The twelve separate claims and counterclaims generally fall into threecategories: retrospective, current, and prospective claims. First, HDEP's principle claims are retrospective, alleging that from 2005 until HDEP's termination of the parties' oral agreement in August of 2012, DBA effectively failed to perform its obligations. In connection with this alleged retrospective breach of contract, HDEP claims it incurred over $2 million in damages based on the cost of performing services that otherwise should have been performed by DBA.

Second, both parties assert current claims. DBA asserts that pursuant to the parties' written commission agreement, notwithstanding the August 2012 termination of the oral agreement between HDEP and DBA, HDEP owes DBA commissions on all then-existing customer contracts for the duration of those contracts. For its part, HDEP contends that its August 2012 termination of the parties' oral agreement ended HDEP's obligation to pay further commissions. HDEP also alleges that DBA is liable for defamation and various forms of contractual interference involving the solicitation of existing third-party customers.

Third, DBA asserts prospective claims to a share of HDEP's future income from all previously joint, third-party customers for ten years. DBA claims that HDEP lacks the authority to act unilaterally to not renew existing joint third-party contracts, and that DBA remains entitled to continued commissions based upon its prior work under the parties' cooperative arrangement.

The Court held a bench trial on March 11, 2014, through March 25, 2014. After careful consideration of the evidence, the Court concludes HDEP has failed to prove its retrospective claims involving DBA's breach of its contractual duties. Likewise, DBA has failed to prove that it is entitled to a prospective share of future income from clients with which it no longer has any relationship, and for which DBA provides no ongoing services. As to the claims the Court has classified as current claims, the Court finds that HDEP is required to pay commissions to DBA as specified in the parties' 2012 written Commission Agreement. As to HDEP's current claims, the Court finds that only HDEP's claim for breach of non-competition provisions holds water, and that HDEP has failed to prove either causation or damages for its remaining claims.

This Court has original jurisdiction pursuant to 28 U.S.C. § 1332(a)(1), and venue is proper pursuant to 28 U.S.C. § 1391(a) and (c). Having heard and weighed all the evidence and testimony presented at trial, having observed the demeanor of the witnesses and evaluated their credibility and candor, having heard plaintiff's and defense counsel's arguments and considered the memoranda submitted, and pursuant to Federal Rules of Civil Procedure 52(a)(1), the Court makes the following findings of fact and conclusions of law. Where appropriate, findings of fact shall operate as conclusions of law, and conclusions of law shalloperate as findings of fact.

FACTS

I. Parameters of the Parties' Early Collaboration

HDEP is a Hawaii based company engaged in offshore data entry, including the operation of Datascope, a Manila outsourcing facility that performs data entry and data processing services to the title industry. DBA is a California company, which prior to its relationship with HDEP, performed consulting work within the title industry. Until 2003, DBA had one employee, Douglas W. Bello ("Bello") the owner of DBA. Jeffrey Bates ("Bates"), hired in 2003, is currently the Chief Operating Officer of DBA.

Virendra Nath ("Nath"), the President of HDEP, first met Bello in 1991 while Bello was doing consulting work for another company that was utilizing HDEP's outsourcing services. Sometime that same year, HDEP and DBA entered into an informal, oral agreement to work together to pursue contracts with title companies to provide data entry services for title documents. Under this agreement, DBA handled primary sales and marketing, provided project setup and management, billed customers, and provided instruction and training to HDEP employees during occasional trips to HDEP's Manila facility. HDEP, in turn, provided the resources necessary to execute and deliver title services to customersincluding equipment, real estate, software, and a workforce. The distinct roles of DBA and HDEP were not, however, set in stone. HDEP also engaged in marketing and performed some of the employee training at its Manila facility. While each company maintained its name and independent control, they also jointly marketed their services, along with a third company, under the name "Title Team."

In the early years of this relationship, the projects undertaken for clients were typically one-time data entry projects with defined end dates. These projects entailed building databases or "back plants" for title companies by keying in historical data. For back plant work, DBA was generally charged with initial project setup during which DBA would work with clients to establish the parameters of the work required and thereafter create instruction sets and manuals for HDEP employees' data entry work. After work commenced, DBA was also charged with some level of responsibility for quality control and ensuring that the production fulfilled the client's needs. Because of the one-time nature of back plant work, DBA's "project management" duties were most significant during project setup, and limited during actual production through project completion. At the time that HDEP and DBA initially joined forces, there were no other companies providing comparable out-sourcing services for the title industry.

During this initial period of collaboration, there was no standardizedthird-party customer contract. Some clients had contracts solely with DBA and others had contracts solely with HDEP. In either case, the two companies shared duties as described above, and each received a portion of customer revenues.

II. The Evolution of HDEP and DBA's Business

Beginning sometime in 1997, the nature of HDEP/DBA's work began to evolve from discrete, data entry back plant work, to the ongoing or "day-forward" provision of various title services. This work entailed the daily entry of title data to update existing title plants, and accessing clients' existing electronic title databases to perform title "searches" and create title reports regarding property insurability. As compared to back plant work, day-forward work required a significantly increased level of ongoing customer interaction and daily oversight or project management.

As the nature, as well as the volume of the work evolved, so too did the responsibilities of HDEP and DBA. Although HDEP pressured DBA to hire additional staff, DBA did not do so. Accordingly, by default or acquiescence, HDEP took over much of the daily project management work as well as customer billing that had previously been handled by DBA. To accomplish these tasks, HDEP hired additional staff. DBA continued to take primary, though not exclusive, responsibility for sales and marketing and participated in initial projectsetup, and some level of ongoing client communication.

It was also around this time of shifting to daily work, in 1998, that HDEP and DBA adopted the practice of entering into joint third-party contracts with clients, under which both DBA and HDEP were expressly identified as the "Contractor." (Exh. 643, e.g. Contracts 49-80.) Unlike back plant work with a defined project scope and end date, day forward work was typically contracted for specified terms subject to automatic renewal for successive terms unless the customer or Contractor acted to prevent automatic renewal as provided in the contract.

While these joint customer contracts formally obligated both companies to the customer and the customer to both companies, they did not delineate the respective duties of HDEP and DBA or specify how either company, individually, would be compensated. The division of revenues between HDEP and DBA was controlled solely by agreements between the companies themselves.

III. Revenue Sharing Under the Collaborative Agreement

Under HDEP and DBA's initial oral agreement, HDEP would define its per document price for a particular project and DBA would tack on an additional per document charge. Per document payment varied from client to client based on the complexity of the work involved. In 2001, rather than continuing to calculate a perdocument payment for each project, Nath and Bello agreed that DBA's commissions for day-forward jobs would come from a standard 12-15% markup over HDEP's price. (Exhs. 21, 31.)

Compensation to DBA was further formalized in July of 2005, when the parties signed a written commission agreement to "confirm the following business relationship" between DBA and HDEP:

1. Existing Commissions. HDEP is currently paying DBA the commissions specified on Exhibit A for the existing contracts specified on Exhibit A and will continue to pay such commissions for the duration of such contracts, including all renewals.

2. New Contracts.

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