TLS Mgmt. & Mktg. Servs. LLC v. Rodríguez-Toledo

TLS MANAGEMENT AND MARKETING SERVICES LLC, Plaintiff, v. RICKY RODRÍGUEZ-TOLEDO, et al., Defendants.

Civil No. 15-2121 (BJM)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

June 29, 2021

ORDER

TLS Management and Marketing Services LLC ("TLS") brought this action under the court's federal question and supplemental jurisdiction against Ricky Rodríguez-Toledo ("Rodríguez"), ASG Accounting Solutions Group, Inc. ("ASG"), and Global Outsourcing Services LLC ("GOS") (collectively "defendants"), among others. Dkt. 74. TLS alleged, inter alia, violations of the Electronic Communications Privacy Act, 18 U.S.C. §§ 2510-2522 ("the Wiretap Act"); violations of the Puerto Rico Commercial and Industrial Trade Secret Protection Act, P.R. Laws Ann. tit. 10, §§ 4131-4141 (the "Trade Secret Act"); and breach of contract, under Articles 1044, 1054, 1077 and 1206 of the Puerto Rico Civil Code, P.R. Laws Ann. tit. 31, §§ 2994, 3018, 3052, 3371. Id. After summary judgment practice and a five-day non-jury trial, TLS prevailed on claims for misappropriation of trade secrets and breach of a nondisclosure agreement. The First Circuit reversed, concluding that TLS failed to satisfy its burden to prove the existence of trade secrets and finding the nondisclosure agreement unenforceable. Dkt. 586 at 3. Judgment has been entered for defendants. Dkt. 588. Before the court is defendants' motion for attorney's fees, Dkt. 597, which TLS opposed, Dkt. 600. Defendants replied, Dkt. 604, and TLS submitted a surreply, Dkt. 611. The case is before me on consent of the parties. Dkt. 93. For the reasons that follow, defendants' motion for attorney's fees is DENIED.

BACKGROUND

TLS is a Puerto Rico tax planning and consulting firm that advises clients regarding how to minimize United States and Puerto Rico tax liabilities. Dkt. 586 at 3. Rodríguez is the founder of ASG, a company that also offers tax planning services. Id. at 5. In March 2012, ASG entered a subcontractor agreement with TLS, and six months later, Rodríguez began working for TLS. Id. Both ASG and Rodríguez signed contracts with TLS containing similar nondisclosure provisions. Id.

As a TLS employee, Rodríguez had access to a TLS Dropbox account, where TLS stored various documents it deemed confidential. Dkt. 535 at 8-9. In September 2014, Rodríguez copied the complete contents of the TLS Dropbox account onto an external hard drive without authorization. Id. at 13. The copied information included templates for TLS forms, client loan applications and buy-sell agreements, lists of current and potential TLS clients, TLS contractors, valuation reports, a new insurance strategy, and two Capital Preservation Reports ("CPRs").¹ Id.

In January 2015, Rodríguez left his employment with TLS and began providing tax services—through ASG and GOS—in competition with TLS.² Id. He did not remove TLS's confidential information from his ASG laptop, disable its TLS Dropbox access, delete the files he copied in September 2014, or return the external hard drive containing those files. Id. Rodríguez used two of the TLS documents he copied: he modified a loan application for a GOS client, and he used the TLS operating agreement to structure GOS. Id. He also provided services to two of TLS's former clients. Id. at 14-15. Those clients sent Rodríguez all their documentation related to TLS's U.S. Possession Strategy ("the Strategy")—which TLS would claim as trade secret—and Rodríguez provided advice and analysis regarding that information. Id. at 15.

TLS brought suit in August 2015, claiming, inter alia, that defendants (1) violated the Wiretap Act by intercepting electronic communications from the TLS Dropbox account without authorization, (2) misappropriated TLS's trade secrets, and (3) breached their nondisclosure agreements with TLS. TLS's Wiretap Act and state law claims survived a motion to dismiss, Dkt. 173 at 17-18, and discovery ensued. During discovery, Rodríguez admitted that he had lost or destroyed certain electronic devices, and I granted in part TLS's motion for spoliation sanctions,thus permitting an adverse inference regarding the information stored on Rodríguez's ASG laptop. See Dkt. 212. As litigation progressed, I granted preliminary injunctive relief based on TLS's trade secret claims, Dkt. 215, and I granted TLS's motion for summary judgment as to portions of its breach of contract claim, Dkt. 383 at 21.

In April 2017, defendants emailed TLS an offer of judgment indicating that they would settle the case for $5,000, but TLS did not accept this offer. See Dkt. 591-1.

TLS's claims for violations of the Wiretap Act, breach of contract, and misappropriation of trade secrets survived to a five-day non-jury trial. As to the Wiretap Act claim, I gave little weight to the adverse inference permitted by spoliation sanctions and found that TLS did not otherwise show that defendants had intercepted any information from TLS's Dropbox account after Rodríguez left TLS. Dkt. 535 at 16-20. Accordingly, TLS's Wiretap Act claim failed. Id. Regarding TLS's breach of contract claims, I found that defendants breached the confidentiality clauses in the contracts they entered with TLS by using TLS's loan agreement and operating agreement and that ASG and Rodríguez breached their contracts by using and disclosing the Strategy to clients and by keeping files after their employment with TLS ended. Id. at 33 (summarizing findings on summary judgment). Regarding misappropriation of trade secrets, TLS claimed as trade secrets both (1) the Strategy, which allowed TLS clients to lower their tax payments by outsourcing some business activities to TLS, and (2) a portion of TLS's CPRs, which provided client-specific tax recommendations based on an analysis of applicable statutes and regulations. Id. at 21; Dkt. 586 at 4-5. I found that both the Strategy and CPR contained trade secrets and determined that Rodríguez and ASG misappropriated those trade secrets by downloading two CPRs without authorization and providing certain advice to two former TLS clients. Dkt. 535 at 22-32. I ordered money damages and permanently enjoined defendants from using or retaining TLS's confidential information or trade secrets, including the CPR and Strategy. Id. at 40.

On January 9, 2019, defendants filed a notice of appeal to the First Circuit. Dkt. 567.

On May 29, 2019, TLS sent an ethics complaint to the Association of Certified Public Accountants of Puerto Rico ("the Association") regarding Rodríguez, who is a Certified Public Accountant ("CPA"). See Dkt. 597-2. That complaint explained that the district court had found that Rodríguez had misappropriated TLS's trade secrets and violated a nondisclosure agreement and then argued that Rodríguez's conduct violated the Certified Public Accountants' Code of Ethics. Ultimately, it sought "all applicable sanctions." Id. at 17.

On July 21, 2020, the First Circuit handed down its decision, reversing the district decision as to TLS's breach of contract and trade secret claims. Dkt. 586. The First Circuit held unenforceable the nondisclosure agreement defendants had allegedly breached. Although the Puerto Rico Supreme Court had not directly addressed the question, the relevant nondisclosure provisions were unenforceable under Puerto Rico law because they implicated the same policy concerns as do noncompete clauses—some of which, per Arthur Young & Co. v. Vega III, 136 D.P.R. 157, 1994 P.R.-Eng. 909, 262, 136 D.P.R. 137 (P.R. 1994), are unenforceable. Dkt. 586 at 30-31. As to the trade secret claims, the First Circuit held that TLS failed to show that its CPR contained trade secrets, as it had failed to separate the purported trade secrets from other generally known information. Dkt. 586 at 16-17. Similarly, TLS had an obligation to show that the Strategy was not publicly known and not readily ascertainable from public sources. Id. at 20. But on this front, it fell short and thus had not shown that the Strategy contained trade secrets. Id.

Given that all of TLS's claims failed after appeal, judgment was entered for defendants. Dkt. 588. Defendants now seek attorney's fees.

DISCUSSION

Defendants argue that they are entitled to attorney's fees because (1) public policy concerns regarding labor and employment disputes favor awarding attorney's fees here; (2) Rodríguez's nondisclosure agreement with TLS provides for attorney's fees; (3) Rule 35.1 of the Puerto Rico Rules of Civil Procedure would grant them attorney's fees; and (4) TLS's claims were both frivolous and brought in bad faith.³ I will address each argument in turn.

Under the "American Rule," "the prevailing litigant is ordinarily not entitled to collect a reasonable attorney's fee from the loser." Alyeska Pipeline Serv. Co. v. Wilderness Socy., 421 U.S. 240, 247 (1975). However, a court may award attorney's fees pursuant to statutory authority, Buckhannon Bd. and Care Home, Inc. v. W. Virginia Dept. of Health and Human Resources, 532 U.S. 598, 602 (2001); contractual obligation, Summit Valley Industries Inc. v. Loc. 112, United Broth. of Carpenters and Joiners of Am., 456 U.S. 717, 721 (1982); or where the losing party has "acted in bad faith, vexatiously, wantonly, or for oppressive reasons," Alyeska Pipeline, 421 U.S. at 258-59 (citations and internal quotation marks omitted).

Defendants first contend that they are entitled to attorney's fees based on Puerto Rico public policy regarding labor disputes. According to defendants, because Rodríguez was once employed by TLS, policy concerns now compel TLS to pay his attorney's fees. In support of this argument, defendants cite two statutes, P.R. Laws Ann. tit. 29, § 146 et seq. and P.R. Laws Ann. tit. 32, § 3114.⁴

At the outset, I note that defendants' citation to P.R. Laws Ann. tit. 29, § 146 is inapposite, as TLS' claims against defendants for Wiretap Act violations, misappropriation of trade secrets, and breach of contract had nothing to do with employment discrimination. See P.R....