Petition for Writ of Certiorari — Riley v. Eckard Brandes, Inc.
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reme Court, US.
FILED
031182FEB 19 2004
es as ao 8 et |
Supreme Court of the United States
RANDELLA. RILEY and LEE T. KUNIMITSU,
Petitioners,
ECKARD BRANDES, INC.,
Respondent.
On Petition for a Writ of Certiorari to the
United States Court of Appeals for the Ninth Circuit
PETITION FOR A WRIT OF CERTIORARI
ome am
a
Junsuke Otsuka
~ Counsel of Record
Law Offices of
Gary Y. Shigemura
745 Fort Street
Fort Street Tower
Suite 700 -
Honolulu, HI 96813-3814
(808) 531-9711
Attorney for Petitioners
a ee
CURRY & TAYLOR ® WASH D.C..@ (202) 223-3160 @ USSCINFO.COM
i
QUESTIONS PRESENTED FOR REVIEW
1. Did the Ninth Circuit err or abuse its discretion
when it rejected Petitioners’ request for certification of
state law questions and upheld the District Court’s
prediction that the Hawaii Supreme Court would
recognize a cause of action for breach of duty of loyalty,
predicting its scope, statute of limitations, and
enunciating availabie remedies?
2. Did the Ninth Circuit deprive Petitioners’
substantive due process rights when it affirmed the
award of disgorgement of Petitioners’ profits for a
breach of an implied contract where there was no
evidence of consequential damages sustained by
Respondent?
3. By disregarding pertinent, if not controlling,
Hawaii Supreme Court cases, did the Ninth Circuit fail
to review the case de novo in the light of the rule of
independent review enunciated in Salve Regina?
ii
PARTIES TO THE PROCEEDING
The following entities are parties to the proceeding in
the court below:
Randell A. Riley and Lee T. Kunimitsu were involved
in the Ninth Circuit Appeal Case No. 00-15474 and are
petitioners in this case. They filed bankruptcy but the
stay is lifted for Case No. 00-15474. They were also
involved in Case No. 01-1730 but the stay was not lifted
for Case No. 01-1730. Both cases were consolidated at
the time of the Ninth Circuit Opinion.
Garnishee Kamaania Pumping, Inc., A Hawaii
Corporation, was involved in the, Ninth Circuit Appeal,
Case No. 01-1730, but is not a party to this petition.
Defendant Kamaaina Pumping, A Hawaii General
Partnership, did not appeal to the Ninth Circuit.
Eckard Brandes, Inc. was involved in the Ninth Circuit
Appeal Cases No. 00-15474 and No. 01-1730 and is the
respondent in this case.
ms
TABLE OF CONTENTS
QUESTIONS PRESENTED FOR REVIEW «...sssssseessssessensensesees j
PARTIES TO THE PROCEEDING........sssccessseerseseecesesecesensees i il
TABLE OF CONTENTS........ccccssscossssscosscocccssccescsensssescsessooses ili
TABLE OF AUTHORITIES ......cccsssssscssssscscecseecesssescessesssoscnsees Vv
OPINIONS BELOW .......0.2.esccscsscssssccssscccsccecsscecssnessssccessecsosenes 1
JURISDICTION seseeeeseeessessnunsnnnnnnnnnnnnnnnnnnnnnnnngnnnnnensnsssesesessee 1
CONSTITUTIONAL PROVISIONS. ......cssscsssssssesercesseesscscesoesees 2
STATUTORY PROVISIONS .....sscsssssssssssssseeeeeesscseccssecesssesesees 2
STATEMENT OF THE CASE .......csccsscssssseecrecesrcersssscnsesnssnsees 3
REASONS FOR GRANTING THE PETITION ........0ceeseesseeeees 6
PTD vanexvescrsnnesnencsrnpsecvesesasesconsoncoonenscnssenses icnameaannuens 7
PROT SIRIIT on asssnvecncconesscnsscnenoresvscensecenescnsssssenoessonontasesooones 29
APPENDIX A
NINTH CIRCUIT OPINION ......ccsccssssosscseeesrsesesccesncssnenees la
APPENDIX B
FINDING OF FACTS AND CONCLUSIONS OF LAW....... 12a
APPENDIX C
SUMMARY JUDGMENT ORDER ........ccssssesesesssceeeeeseeenses 28a
iv
APPENDIX D
BE ae NIN. “Sesisicsinssdstasibsisncsccnsibenctaibincideiediaahsanasibtaealananindsmantsinn 77a
APPENDIX E
PAL, BEAT TD wvenicctsvscssnsesncinepevsinvooeinmes S8la
APPENDIX F
ORDER DENYING EN BANC REHEARING. .........00006- 102a
APPENDIX G
AMENDED ORDER (RE: EN BANC) ..............ccccceeeeees 104a
APPENDIX H
Pe FU iettscccteiiecntnnineaseiehncsstianisiarenaiaiiie 106a
APPENDIX I
FUTIGMENT 16 A CCIVEL, CAI cicsecscevensesercstssercccesenssnevs llla
APPENDIX J
ERT TORT FI I weisceevtciintctertoiecintneiees 113a
Vv
TABLE OF AUTHORITIES
CASES
ALDRICH V. ALDRICH, 375 U.S. 75, 84S. CT. 184,
TE FT Bah A seen ivecsiescssiianescaleatsonivetssicsiaiienstianaiann 13
ALLSTATE INS. Co. Vv. MENDARDS, INC., 285 F.8D
SEIU 5, FD scisssccctnteipiitinnitiesinieiciiiaaieielitindaties 10
ALLSTATE INS. Co. V. SERIO, 261 F.3D 143 (2ND
CRIES Fisncsvssssnesssctliveesiteainesoteeaaasectiaaaiaiaiaibanbaisnaay 10
AMBERBOY V. SOCIETE DE BANQUE PRIVEE, 831
S.W 2p TOG, TOS NA CEBE.. TIE) snisesisccsssissicesissenesavians 13
ARIZONANS FOR OFFICIAL ENGLISH V. ARIZONA,
520 U.S. 43, 62, 76-79, 117 S.CT. 1055, 137 L.ED.
Be FF CED stcisinnsiessntentighitihiantinanivtipiticnaiiadaaiuil 9,18, 21
ASUMUS V. PAC BELL, 159 F.3D 422 (9TH CIR.
SUED cciciisiinaaiameen svitbitinieieapasibieldaiadceaaammiaeiila 13
BENEFICIAL HAWAII, INC. V. KIDA, 96 HAW. 289,
30 P.3D 895 (2001) «....sessrscsssseesseesesseesersnensssenees 15, 17, 27
BEST PLACE, INC. V. PENN AMERICA INS. CoO., 82
HAw. 120, 124, 920 P.2pD 334, 357 AT FN. 5 (1996) ......14
BMW oF NORTH AMERICA, INC. V. GORE, 517
U.S. 559, 116 S.CT. 1589, 184 L.ED.2D 809 (1996) .....24
BURNS V. INTERNATIONAL INSURANCE CoO., 929
PF 2D 1422, T4Z9 (OTH GIR, FOGG) wcessasenserisesscacsnssvavecessents 9
vi
CITY OF HOUSTON V. HILL, 482 U.S. 451, 107
S.CT. 2502, 96 L.ED.2D 398(1987) .......ss-ssccssrcssscees 9,19
CLAY V. SUN INS. OFFICE, LTD., 363 U.S. 207,
212, 80S. CT. 1222, 4 L. ED. 2D 1170 (1960)............... 18
COLORADO RIVER WATER CONSERVATION DIST.
v. UNITED STATES, 424 U.S. 800, 814, 96S. CT.
1236; 47 L. ED. 2D 483 (1976) ............0000 Peete ee 12
DIMIDOWICH V. BELL & HOWELL, 803 F.2D 1473,
SOT CAE TOG ivivtkidcin imeem 9
DRESNER V. TALLAHASSEE, 375 U.S. 136, 84S.
OP. 236, 11 Li. ED. BD BOG (OGG) ovsciverscosevnsinsscnsneriansens 13
ECKARD BRANDES V. RILEY, 338 F.3D 1082 (9TH
IE: BID ecssrinesnscostsasisanininassinabieancieiotennimiinmameaaaaae 1,9
ELKINS V. MORENO, 435 U.S. 647, 98S. CT. 1338,
55 L. ED. 2D 614 (1978) .......c-cecscereorsnecsssnssesrnvsesenenee 13,18
ERIE R. Co. Vv. TOMPKINS, 304 U.S. 64, 58S. CT.
BIT, BE Ls. Ek LEB CG oseescsiivvensecsscinsccvtccscumeninnon 16
FIORE V. WHITE, 528 U.S. 23, 120 S. CT. 469, 145
is, Uy, Be eS CD ienccescnicaevereeveecennsmnnns soiled 13, 18
FISHER V. BAR HARBOR BANKING & TRUST CO.,
SBT FB 4, B00 CUR, TO) vsaiccesssenssoreovccnsemesscocncinions 22
FRANCIS V. LEE ENTERPRISE, 89 HAW. 234, 971
Fe FE CED ccsninssvenrstatstisninttiintebinnmionniote 14, 17, 21, 27
GASPERINI V. CENTER FOR HUMANITIES, 518
U.S. 415, 1168S. CT. 2211, 185 L. ED. 2D 659
RIED scsisinsnsncsdnaicenisntenuteniaitssosaioniniansechaneaeninseumnaaaamaanlas 16
. vii
HANNA V. PLUMER, 380 U.S. 460, 468, 85 S. CT.
| a ae 8
HATELEY V. SEC, 8 F.3D 653, 655 (9TH CIR. 1993}.....27
HIGA V. MIRIKITANI, 55 HAW. 167, 517 P.2D 1
Fo | nT Ce a eee
HULIN V. FIBREBOARD CORP., 178 F.3D 316, 333
yk TE EN 23
JEROME B. GRUBART, INC. V. GREAT LAKES
DREDGE & DOCK Co., 513 U.S. 527, 546 N.6, 115
S.CT. 1043, 130 L. ED. 2D 1024(1995)............sccccsssseees 2?,
KAISER STEEL CORP. V. W.S. RANCH Co., 391
U.S. 598, 88S. CT. 1753, 20 L. ED. 2D 835 (1968)....... 12
KOHN V. WEST HAWAII TODAY, INC., 65 HAW.
Fy i: SRT EET Ee eT 20
KREMEN V. COHEN, 325 F.3D 1035 (9TH CIR.
LEHMAN BROTHERS V. SCHEIN, 416 U.S. 386, 391,
94 S.CT. 1741, 40 L.ED.2D 219 (1974).............0 9,16, 18
MACARTHY V. OLIN CoRP., 119 F.3D 148, 158-59
oe Ri ED erties itiioeiaiesienatiinsninis 11
MALABED V. NORTH SLOPE BOROUGH, 335 F.8D
er i IE tiitcentidetenitacmeticteitiemimmcniamians 18
MEREDITH V. WINTER HAVEN, 320 U.S. 228, 64
Fe, 1, Oe kk BOs WCE tincicceseconetictssinenntbieninieianes 18
viii
MONTANA V. CROW TRIBE OF INDIANS, 523 U.S.
696, 118 S. CT. 1650, 140 L. ED. 2D 898 (1998)..7, 23, 27
NAT’L EDUC. ASS’N V. LEE COUNTY BD. OF PUB.
INSTRUCTION, 467 F.2D. 447, 449 (5™ CIR. 1972)..... 21
NIEVES V. UNIV. OF P.R., 7 F.3D 270, 278 & FN.15
POPS Fi Se axccesiclheustsaaiiebetedimaonbiaaasdadeadaamanneeadians 21
PARNAR V. AMERICANA HOTELS, INC., 65 HAW.
STO, GES FF Ge Cio renniccninsivsnerncnsevesncannsiiinnta 14,17
PITTMAN V. COLE, 267 F.3D 1269 (11TH CiR. 2001).... 10
RAILROAD COMM'N OF TEX. V. PULLMAN Co., 312
U.S. 496, 85 L. ED. 971, 61S. CT. 648 (1941)............. 18
SALVE REGINA COLLEGE V. RUSSELL, 499 U.S.
225, 111 S.CT. 1217, 113 L.E.2pD 190 (1991).8, 16, 19, 29
SANTANA V. ZIGLOG, 95 F.3D 780, 783 (9TH CIR.
SEC v. DREXEL BUMHAM LAMBERT, INC., ET
AL., 956 F.SUPP. 503, 507, (S.D.N.Y. 19977) .......scccses 26
SEC v. HUFFMAN, 996 F.2D 800, 802 (5TH CIR.
SMALL V. BANDENHOP, 67 HAW. 626, 636, 701
Fe GO CD inssintcinsaiinicissnaisintntinseationiiateaiaipiiinn 25
STATE FARM MuUT. AUTOMOBILE INS. Co. V.
CAMPBELL, 538 U.S. 408, 123 S. CT. 15138, 155 L.
Be Fe ee ianicciiesesrancciced) edmememadeaeaonn 7,24
ix
TSA INTERNATIONAL LIMITED V. SHIMIZU
CORPORATION, 92 HAW 243, 264, 990 P.2D 713,
FE 0 eT iintcanssticiseaacnninnalabiddiaianalasdaeabeeamiatilianaiie 11
WEST V. AMERICAN TEL. & TEL. Co., 311 U.S.
223, 61S. CT. 179; 85 L. ED. 139 (1940)..............ccsccesee 28
| WHITE V. RANSMEIER & SPELLMAN, 950 F.SUPP.
| ee es Pe iccaaininccaeeiadbaneamadstninaiiaial 14
OTHER AUTHORITIES
| Te, 8. otorrrsntauiaedsesn 1
Br i Be i csiseipesrcnneiiabatdintiesiasaiediieeiguinata 4
Clark, Ascertaining the Laws of Several States:
Positivism and Judicial Federalism After
Erie, 145 U.Penn.L.Rev. 1459, 1549 (1997).............. 10
Employee Duty of Loyalty, a State by State
Survey 2d Ed., Bureau of National Affairs, Inc.
IE Pa cinesfinisnssnseenseiiinenssiaiieidiidiniaidssabbaiilieabanialasiiaiaieaaliies 20
Farnworth, Your Loss My Gain? The Dilemma
of the Disgorgement Principal in Breach of
Contract, 94 Yale L.J. 1339, 1841 (1985).......... eee 24
| Reso Rev. Stat, § 607-14
Haw.Rev.Stat., § 636-14
Haw.Rev.Stat., § 636-16
FO TI, F Gt Rvieiicsasccersstsitarsiineieinenninnninicaciniamaaien
BD RO TINE GE sisitisiciciptsseteaieattincecnisiaiaiveiitetingtel
Faw. Rev Stat... FIOSD- 104. .cscvasecsesssoveensvsverenvevensess 2, 5, 12
FER FEO IL... SE Pv steecnessnntcieemarmasnmsnmnninninnnns 2
FE TO TS E,., CT seestsrtcinesninetniscnineenasavinnntiivenisiein z
NT rls TO rtcscntncnnenieietnendancnitaenanenineinicine 3
Hawaii Rules Appellate Procedure Rule 13(a)............ 2
UF, COMME, BITE, Y censcensssnssnrsnssnceseniinnenoseeninmconsentionionen 2
: &¥
PETITION FOR A WRIT OF CERTIORARI
Petitioners RANDELL A. RILEY (“RILEY”)
and LEE T. KUNIMITSU (“KUNIMITSU”)
respectfully petition this court for a writ of certiorari to
review the decision of the United States Court of
Appeals for the Ninth Circuit.
OPINIONS BELOW
The district court’s findings of fact and
conclusions of law (Gillmore, J.) in this case may be found
at Appendix B., infra, at p.p.12a-27a. The findings of
fact and conclusions of law regarding the certification of
state law questions, duty of loyalty, statute of
limitations, disgorgement remedy, attorney fees and
prejudgment interests may be found at Appendices C-E,
infra, at pp.28a-10la. The court of appeals’ opinion
(Schroeder, CJ., Appendix A pp. 1la-12a) affirming the
district court judgment is published at 338 F.3d 1082.
The court of appeals’ order denying rehearing and
suggestion of a rehearing en banc (Appendix F, infra, at
p-p. 102a-108a), as amended (Appendix G, infra,
p.p.104a-105a) are not otherwise published.
JURISDICTION
The Court of Appeals entered its opinion on
August 11, 2003, and subsequently denied a rehearing
and suggestion for a rehearing en banc on October 22,
2003, as amended on October 31, 2003. The application to
extend time to file a petition for a writ of certiorari was
granted until February 19, 2004. Case No. 03A560.
Petitioners invoke this Court’s jurisdiction under 28
U.S.C. § 1254(1).
2
CONSTITUTIONAL PROVISIONS
U.S. Const. Amend. V provides, in relevant part:
"No person shall ... be deprived of life,
liberty, or property, without due process of
law; nor shall private property be taken for
public use, without just compensation."
STATUTORY PROVISIONS
1. Rule 13(a) of the Hawaii Rules Appellate
Procedure, states:
RULE 13. Certification of question of
Hawaii law by federal courts.
(a) When certified. When a federal
district or appellate court certifies to the
Hawaii Supreme Court that there is
involved in any proceeding before it a
question concerning the law of Hawaii
which is determinative of the cause, and
that there is no clear controlling precedent
in the Hawaii judicial decisions, the Hawaii
Supreme Court may answer the certified
question by written opinion.
The statutory language of the following important
statutes involved in this case is set: forth in Appendix J,
infra, p.p. 118a-128a:
Haw.Rev.Stat., §103D-704 (Exclusivity of
remedies).
Haw.Rev.Stat., §103D-705 (Solicitations or
awards in violation of law).
Haw.Rev.Stat., §103D-709 (Administrative
proceedings for review).
3
Haw.Rev.Stat., §602-5 (Jurisdiction and
powers).
Haw.Rev.Stat., § 607-14 (Attorneys' fees
in actions in the nature of assumpsit, etc.)
Haw.Rev.Stat., § 636-16 (Awarding
interest).
Haw.Rev.Stat., § 657-1 (Six years).
Haw.Rev.Stat., § 657-7 (Damage to persons
or property).
STATEMENT OF THE CASE
The underlying facts are very simple. Two at-will
employees, RILEY and KUN IMITSU, formed a Hawaii
general partnership and _ bid against their employer,
Respondent ECKARD BRAN DES, INC. (“EBI”), while
they were employed. Their partnership was awarded a
contract with the County of Hawaii. There was no
evidence of actual or concrete loss by EBI, however,
there was evidence of actual profits by RILEY and
KUNIMITSU after their termination from employment.
The District Court entered a judgment against RILEY
and KUNIMITSU on the breach of loyalty claim and
disgorged past wages and profits after their termination
from employment.
EBI is in the business of repairing and
maintaining sewer pipes and other structures that
convey sewage, debris, and rainwater. EBI employed
RILEY as a superintendent and KUNIMITSU as a
laborer. (p.2a). Both were at-will employees. (p.58a at
fn.5). There was no finding of fact that there was any
confidential or trust relationship between the parties.
(p.p.13a-18a). Nor was there a finding of fact that
solicitation of business was within the scope of their
employment. Jd. While still employed by EBI, RILEY
4
and KUNIMITSU formed their own _ partnership,
Kamaaina Pumping, and competed against EBI for a
County of Hawaii project. (p.p.14a-15a). Kamaaina
Pumping submitted the lowest bid and the county
awarded it the contract. (p.15a). EBI then learned that
RILEY and KUNIMITSU were the sole partners of
Kamaaina Pumping and terminated their employment on
June 17, 1996. (p.20a at fn.4).
This litigation began when RILEY and
KUNIMITSU filed an overtime wage action in state
court against EBI, claiming violation of the Fair Labor
Standards Act ("FLSA"), 29 U.S.C. §§ 201-219. (p.17a).
EBI removed the case to federal court and filed a
counter-claim for breach of the duty of loyalty. (p.17a).'
The only evidence that the District Court relied on
granting a summary judgment was that during the
course of employment, RILEY and KUNIMITSU bid
against their employer EBI and Kamaaina Pumping
entered into a contract with the County of Hawaii.
(p.p.50a-55a). There was no evidence of a fiduciary
relationship. Jd. The District Court granted a summary
judgment for EBI on the employees' FLSA claims and
the duty of loyalty claim. (p.18a). In the trial for
damages, EBI in open court stated that it would not seek
consequential damages but disgorgement of profits.
(p.107a). The District Court concluded that the
appropriate remedy for the employees' breach of the
duty of loyalty was disgorgement of profits made by
| Of the four counts in EBI’s Counterclaim, Count I (Breach of
Contract), Count III (Misappropriation of Trade Secrets), and
Count IV (Interference with Business Expectancy) were
stipulated to be dismissed in favor of RILEY and KUNIMITSU
against EBI. (p.106a). The judgment against RILEY and
KUNIMITSU in favor of EBI was entered on Count II (Breach of
Fiduciary Duty of Loyalty) alone.
5
RILEY and KUNIMITSU while competing with EBI.
(p.p.2la-22a) There was no evidence or findings of facts
of actual or concrete losses by EBI. (p.p.13a-18a). The
period of disloyalty ended June 17, 1996, (p.20a at fn.4),
but the District Court did not disgorge RILEY and
KUNIMITSU’s 1996 income from Kamaaina Pumping.
(p.p.23a-25a). Inexplicably, the District Court disgorged
RILEY and KUNIMITSU’s 1997 income from
Kamaaina Pumping less $62,400 each for the value of the
labor. (p.25a). The District Court also denied Plaintiff's
overtime claim or set-off due to the defense of breach of
loyalty. (p.20a). The District Court denied requests to
certify questions of state law.? (p.77a & p.79a). It
entered judgment granting relief in favor of EBI.2 The
2 By a motion, the following questions were requested to be
certified at the District Court on October 18, 1999.
1. Is an employee’s duty of loyalty recognized in at-will
employment situations in the State of Hawaii for employees who
are not officers, directors, shareholders, management officials or
supervisors of the employer?
2. Assuming that the employee’s duty of loyalty exists,
under what cause of action, contract, tort or equity, is a breach of
employee duty raised?
3. Assuming that the employee’s duty of loyalty exists,
what statute of limitations appl[ies] to breach of employee’s duty of
loyalty?
4. Assuming that the employee’s duty of loyalty exists,
what [are] the criteria to distinguish the type of employee conduct
deemed to be a breach of the duty of loyalty?
Petitioners requested another question to be certified at
the District Court on October 28, 1999.
1. Does the exclusivity of remedies [provision] under
Hawaii Revised Statutes §103D-704 preclude a person aggrieved
in connection with the solicitation or award of a contract by a State
of Hawaii governmental body from bringing a private cause of
action for damages against the successful bidder or those who act
in concert with the successful bidder?
3 The District Court’s Amended Judgment states that the award
“represent[s] damages” to EBI indicating it was attempting to
6
special master then issued a special master’s report
(Appendix E, infra, at p.p. 81la-101a) in violation of an
automatic stay and after the stay terminated, the
District Court awarded attorneys' fees and prejudgment
interest for the disgorged profits to EBI. (p.107a). The
employees appealed.
On August 11, 2003, the Ninth Circuit affirmed
the District Court’s ruling. (Appendix A, infra, at
p.p.la-lla). The Ninth Circuit panel ruled the Hawaii
Supreme Court would recognize a cause of action for
breach of duty of loyalty in an employment contract
context, such duty applies to low-level employees, the
six-year statute of limitations applies, and available
remedies were disgorgement, prejudgment interests on
disgorged amount, and attorney fees and costs. Jd. The
petition for rehearing and suggestion of rehearing en
bance was denied, by the Ninth Circuit. (Appendix “F”’,
infra, at p.p.102a-103a; Appendix “G”, infra, at 104a-
105a).
REASONS FOR GRANTING THE PETITION
This Court should grant this petition because:
e The Court of Appeals, by rejecting certification of
state law questions and predicting the recognition of
a new cause of action, enunciating its nature, statute
of limitations, and remedies, has far departed from
the spirit of comity and federalism as to call for an
exercise of this Court's supervisory powers; and;
e The Courts of Appeals has no uniform formula or
test as to when to certify state law questions and
label disgorgement (RILEY and KUNIMITSU’s profits) as EBI’s
consequential damages. (Appendix H, infra, at p.108a)
ncn
7
this court should fashion and settle a standard in-a
manner consistent with the federalism scheme, the
abstention doctrine, and the “rule of independent
review’; and;
e The Court of Appeals’ opinion that disgorgement
remedy was available when there was no evidence of
actual or concrete loss directly conflicts with
Montana v. Crow Tribe of Indians, 523 U.S. 696, 118
S. Ct. 1650, 140 L. Ed. 2d 898 (1998)(inequity of
disgorgement in lieu of consequential damages);
State Farm Mut. Automobile Ins. Co. v. Campbell,
538 U.S. 408, 123 S. Ct. 1518, 155 L. Ed. 2d 585
(2003)(punitive damages must correlate to special
damages) as to call for an exercise of this Court's
supervisory powers; and;
e The Court of Appeals, by disregarding pertinent, if
not controlling Hawaii cases, has far departed from
“the rule of independent review” enunciated in Salve _
Regina as to call for an exercise of this Court's
supervisory powers.
ARGUMENT
A.
THE NINTH CIRCUIT PANEL SHOULD HAVE
CERTIFIED STATE LAW QUESTIONS TO THE
HAWAII SUPREME COURT
Petitioners request for the certification of the
following questions to the Hawaii Supreme Court.
i. Whether an independent cause of action
for employee’s breach of duty of loyalty is recognized in
at-will employment situations in the State of Hawaii for
cng lcaa cuca caval ialcsicgbs llia Soast ta encadndacodilis dete lcs itd tlagd it ails sense toianbameaacicaioniin
|
8
employees who are not officers, directors, shareholders,
or management officials of the employer?
2. Assuming that such cause of action is
recognized;
i) What is the nature of the cause of action,
contract, tort, or equity?
ii) What statute of limitations applies?
lil) What are the available remedies,
consequential damages, disgorgement, prejudgment
interests, and/or attorney fees and costs?
iv) What are the criteria to-distinguish the
type of employee conduct deemed to be a breach of the
duty of loyalty?
3. Whether disgorgement of profits is
barred by the doctrine of exhaustion of legal remedies
in Hawaii when one elects to waive consequential
damages?
4, Whether disgorgement of profits violates
substantive due process rights under the Hawaii
Constitution when there was absence of consequential
damages?
A federal court sitting in diversity applies the
substantive law of the forum state, absent a federal
statutory or constitutional directive to the contrary
pursuant to the rie doctrine. Salve Regina College v.
Russell, 499 U.S. 225, 111 S.Ct. 1217, 113 L.E.2d 190
(1991). Two major purposes of the Frie doctrine are
“discouragement of forum-shopping and the avoidance
of inequitable administration of justice.” Hanna v.
Plumer, 380 U.S. 460, 468, 85 S. Ct. 1136, 14 L. Ed. 2d 8
(1965). The courts of appeal must review de novo
district courts’ determination of state law. Salve
Regina, supra. (“rule of independent review”). In
absence of a state supreme court precedent, federal
courts exercising diversity jurisdiction may look to
9
“other state-court decisions, well-reasoned decisions
from other jurisdictions, any other available authority”
to determine how state courts would resolve the issue.
Santana v. Ziglog, 95 F.3d 780, 783 (9th Cir. 1996).
However, decisions by the state court of appeals
providing guidance and instruction are not to be
disregarded in the absence of convincing indications
that the state supreme court would hold otherwise.
Burns v. International Insurance Co., 929 F.2d 1422,
1424 (9th Cir. 1996); Dimidowich v. Bell & Howell, 803
F.2d 1473, 1482 (9th Cir. 1996). Federal appellate
courts have an obligation to consider whether novel
state-law questions should be certified. Arizonans for
Official English v. Arizona, 520 U.S. 48, 62, 76-79, 117
S.Ct. 1055, 187 L.Ed. 2d 170 (1997); Lehman Brothers v.
Schein, 416 U.S. 386, 391, 94 S.Ct. 1741, 40 L.Ed.2d 219
(1974). Certification today covers territory once
dominated by a deferral device called “Pullman
abstention.” Arizonans, at 75-76; see also, City of
Houston v. Hill, 482 U.S. 451, 107 S.Ct. 2502, 96
L.Ed.2d 398 (1987).
In Eckard Brandes v. Riley, 338 F.3d 1082 (9th
Cir. 2003), the Ninth Circuit panel upheld the District
Court’s prediction that the Hawaii Supreme Court
would recognize a cause of action for breach of duty of
loyalty, predicting its scope, statute of limitations, and
available remedies. The panel’s decision to reject
certification of state law questions was inconsistent
with another panel’s decision in Kremen v. Cohen, 325
F.3d 1035 (9th Cir. 2003). There appears to be no
uniformity within the Ninth Circuit as to when to
certify state law questions. The inquiry when to certify
state law questions involves exceptional importance as
it relates to the spirit of comity and federalism.
Resolution of this issue has nationwide application as it
10
may affect every diversity case. Some Circuits have
recently elaborated as to when certification is proper
with different formula. E.g., Allstate Ins. Co. v.
Mendards, Inc., 285 F.3d 630 (7th Cir. 2002); Pittman v.
Cole, 267 F.3d 1269 (11th Cir. 2001); Allstate Ins. Co. v.
Serio, 261 F.3d 148 (2nd Cir. 2001). Certification
patterns vary widely among federal courts and are
largely ad hoc. Clark, Ascertaining the Laws of Several
States: Positivism and Judicial Federalism After Erie,
145 U.Penn.L.Rev. 1459, 1549 (1997). This writ asks
this court to review and clarify the certification process
in light of the federalism scheme, the abstention
doctrine, and the “rule of independent review.”
Petitioners submit that in reviewing the
rejection of certification, appellate courts should make
the following inquiry: 1) Whether the state law
questions are significant, involving public concerns and
state public policy ramifications rendering them
appropriate to give the state courts first opportunity to
address the issue?; 2) Whether the questions are
outcome determinative of the case?; 3) Whether the
questions are novel and unpredictable?; 4) Whether the
federal court disregarded any authorities and issues?;
5) Whether the federal court decision may have actual
forum-shopping _effect?; 6) Whether federal
constitutional issues can be avoided by certification?; 7)
Whether judicial economy can be served in light of the
state and federal courts’ caseload?; and 8) Who is the
party responsible for bringing state law questions to
federal courts?
11
1. The Ninth Circuit should have invoked the
certification process because the state law
questions presented significant issues including
public policy analysis all of which were outcome
determinative of the case.
Unlike the United States Supreme Court which
has the prerogative to be final arbiter of disputes
arising under federal law brought before any courts,
state supreme courts do not always have the
opportunity to rectify erroneous‘ state law
interpretations by federal courts. Inability of state
supreme courts to supervise federal courts concerning
disputes arising under state law, can lead to erroneous
decision being developed by federal courts undermining
the stability of state law and prerogative of state
supreme courts. The Pullman abstention doctrine, and
more recently, the certification process have developed
to provide state courts an opportunity to enunciate
definitive interpretations on matters of state law in
federal court cases.
Recognition of a cause of action under Hawaii
law and its nature’ and remedies® are normally issues,
* As a practical matter, prediction of state law can be a difficult
task and certification has the benefit of sparing federal court the
difficult chore of having to determine state law. See, e.g. MaCarthy
v. Olin Corp., 119 F.3d 148, 158-59 & n.3 (2™4 Cir. 1997) (Cakaresi,
J. dissenting)(describing the Second Circuit’s difficulties in
predicting state law).
° The Petitioners argued that because the remedy of disgorgement
was only available for breach of tortious duty, EBI’s claim was
barred by the two-year tort statute of limitations. Hawaii Revised
Statutes, §657-7; TSA International Limited v. Shimizu
Corporation, 92 Haw 243, 264, 990 P.2d 713, 734 (1999)(when the
claims did not inyolve ‘monetary damages” based upon the non-
performance of a contractual or quasi-contractual obligation, the
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12
only reserved for the Hawaii Supreme Court, the
definitive expositor of Hawaii law. Naturally,
recognition of a cause of action entails the extensive
analysis of state public policy considerations and
ultimately prioritizing often competing public policies.’
When an issue involves novel and vital concerns such as
the recognition of a cause of action, deference should be
made to state courts. See, Kaiser Steel Corp. v. W. S.
Ranch Co., 391 U.S. 593, 88 S. Ct. 1753, 20 L. Ed. 2d 835
(1968)(When a state law issue is one of vital concern
and a truly novel one, sound judicial administration
claims does not arise under contract and sounds in tort). The Ninth
Circuit in its opinion rejected this view opining that the nature of
breach of duty of loyalty was in assumpsit and the six-year statute
of limitations pursuant to Hawaii Revised Statutes, §657-1 applied.
Furthermore, the Ninth Circuit affirmed imposing prejudgment
interests pursuant to Haw.Rev.Stat., § 636-16 on the disgorged
profits even when these profits were obtained in span of
approximately one and a half year after the termination of
employments. The attorney fees were awarded based on fee
award for assumpsit actions. Haw.Rev.Stat., § 636-14. The
recommendation to award prejudgment interests and attorney fees
wase made by the special master during the automatic stay in
bankruptcy (p.107a). This made Petitioners ineligible for Chapter
13 relief.
* The Petitioners argued that because disgorgement in effect took
away Petitioners’ profits to be rewarded to EBI, the claims were
barred by the exclusively provision of Hawaii Procurement Code,
Hawaii Revised Statutes, §103D-704. The Ninth Circuit in its
opinion rejected this view opining that the issues in this case were
not within the ambit of the Hawaii Procurement Code labeling the
case as an employment contract case rather than a bid protest
case.
‘ Traditionally, state public policies have been the grounds for
abstention. See, Colorado River Water Conservation Dist. v.
United States, 424 U.S. 800, 814, 96 S. Ct. 1236; 47 L. Ed. 2d 483
(1976)(“Abstention- is also appropriate where there have been
presented difficult questions of state law bearing on policy
problems of substantial public import whose importance
transcends the result in the case then at bar.”) |
13
requires that the parties in a pending case be given the
benefit of the same rule of law which will apply to all
parties.) Federal courts should not pass advance
judgment on the state court’s priority in its policy.
Kremen, at 1038. The state supreme courts have the
experience and instinct for the history of and
idiosyncratic problems within the state. State appellate
courts often have to wait until appropriate cases come
before them. By certification, federal courts® give the
state supreme courts a first opportunity? to express
their policies affording them the right to define their
own substantive law. Here, the Ninth Circuit’s decision
deprived the Hawaii Supreme Court of its first
opportunity to express its policies regarding the duty of
loyalty. Implied terms of employment contracts have
been certified by a different Ninth Circuit panel in the
past, Asumus v. Pac Bell, 159 F.3d 422 (9th Cir. 1998),
and the panel’s rejection of certification conflicted with
other cases.
Federal courts should avoid creating potentially
erroneous federal precedents on significant state law
and policy issues. In particular, the Ninth Circuit panel
did not address the assignment of error that the
Petitioners were only “at-will employees.” | Under
Hawaii law, as matter of public policy, employment at-
will contracts are treated differently from ordinary
* Even this court itself has certified questions of state law. E.9.,
Dresner v. Tallahassee, 375 U.S. 136, 84 S. Ct. 235, 11 L. Ed. 2d
208 (1963,: Aldrich v. Aldrich, 375 U.S. 75, 84 S. Ct. 184, 11 L. Ed.
2d 141(1963); Elkins v. Moreno, 435 U.S. 647, 98 S. Ct. 1338, 55 L.
Ed. 2d 614 (1978); Fiore v. White, 528 U.S. 23, 120 S. Ct. 469, 145 L.
Ed. 2d 353 (1999).
° A state court has indicated that by certification state courts enjoy
the opportunity to rule on significant state law issues where it
might not otherwise have the chance. Amberboy v. Societe de
Banque Privee, 831 S.W.2d 793, 798 fn.10 (Tex. 1992).
14
contracts in that there are no implied covenants of good
faith and fair dealings. Best Place, Inc. v. Penn
America Ins. Co., 82 Haw. 120, 124, 920 P.2d 334, 357 at
fn. 5 (1996) (citing Parnar v. Americana Hotels, Inc., 65
Haw. 370, 652 P.2d 625 (1982)). The Hawaii Supreme
Court may have believed this issue to be important.
See, Francis v. Lee Enterprise, 89 Haw. 234, 971 P.2d
707 (1999) (overruling “tortious breach of contract”
theory in employment at-will contracts). It may have
believed the duty of loyalty depends upon actual
relationship. Petitioners were blue collar laborers
cleaning drywell and sewers and soliciting customers
was not within the scope of their employments. There
was no evidence of a fiduciary relationship. The Hawaii
Supreme Court also may have believed that employers
should not hold at-will employees to a duty comparable
to a duty of an attorney in an attorney-client
relationship as set forth in Higa v. Mirikitani, 55 Haw.
167, 517 P.2d 1 (1973), when employers can freely
terminate employees for no reason. It may also have
justly believed that an employee's duty of loyalty
should correspond to the level of his or her duty as an
agent!’, and compensation and these are factual issues
not appropriate for summary judgment.
Furthermore, the Hawaii Supreme Court may
have believed that the disgorgement issue raised
important public policy concerns. Due process concerns
for disgorgement of profits given no evidence of actual
For example, under New Hampshire law, a breach only occurs
when undertaken by a supervisor, manager, director, officer or
other person “holding a position of trust and confidence” with the
employer and no cause of action for breach of the duty of loyalty
can lie against a law firm’s secretary who is not a supervisor,
manager, director, or officer of the employee. White v. Ransmeier
& Spellman, 950 F.Supp. 39, 43 (D.N.H. 1996).
15
concrete loss sustained by EBI, may raise the eyebrow
of Hawaii Supreme Court justices from a state
constitutional viewpoint. The Ninth Circuit panel did
not even address Petitioners assignment of error that
the remedy to disgorge profits was not available when
there was an opportunity for consequential damages.
Hawaii has long adhered to the doctrine of exhaustion
of legal remedies. This case is not a federal securities
fraud action where disgorgement remedies are
available by statutory law. This lawsuit is a state
common law dispute. While the appeal was pending,
the Hawaii Supreme Court’ enunciated the
prerequisites for a complainant to satisfy when seeking
an equitable remedy. Beneficial Hawaii, Inc. v. Kida,
96 Haw. 289, 30 P.3d 895 (2001). The Hawaii Supreme
Court has stated that one must claim-that 1) the claim is
of an equitable nature and 2) admit of a remedy in a
court of equity only. Jd. at 312, at 918. Thus, it would
appear unless EBI had admitted that it had no
remedies other than disgorgement, it would not have
been able to avail itself of disgorgement remedy. The
ordinary interpretation of Kida would be that equitable
remedies are not available for assumpsit actions. Here,
EBI did not admit having exhausted the legal remedy
and elected in open court to abandon consequential
damages and to seek instead disgorgement of profits.
(p.107a). The Hawaii Supreme Court may have
considered that the basic equitable principle mandates
that courts of equity should not act in vain so as to
substitute disgorgement in lieu of consequential
damages providing a windfall to a party. In any event,
the Hawaii Supreme Court should have had the
opportunity to address these issues.
ee
LEER LOL LES 5S TR Ta ee
16
2. Certification should have been made to avoid
the practical effect of fostering forum shopping.
Certification produces a precedent which is a
definitive explication of state law that is reliable and
controlling. Certification process promotes long-term
efficiency by providing uniform and consistent results.
Lehman Bros. v. Schein, 416 U.S. at 391(“ilt does, of
course, in the long run save time, energy, and resources
and helps build a cooperative judicial federalism.”) It
also deters forum-shopping. In practicality, when
federal courts’ interpretation involves issues such as
recognition of causes of action, this may effectively
ereate federal common law defeating the purposes of
Erie. Federal courts should not generate federal
common law. Gasperini v. Center for Humanities, 518
U.S. 415, 427, 116 S. Ct. 2211, 135 L. Ed. 2d 659 (1996);
Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82
L. Ed. 1188 (1938). This court has expressed concerns
about practical effect of creating a dual system. See,
Salve Regina, at 234 (“{Bly denying a litigant access to
meaningful review of state-law claims, appellate courts
that defer to the district court’s state-law
determinations create a-dual system of enforcement of
state created rights, in which the substantive rule
applied to a dispute may depend on the choice of
forum.”) The practical effect of the panel’s ruling is that
if the remedy sought is for disgorgement arising out of
breaches of contracts, Hawaii plaintiffs will run to the
federal court rather than state courts because it must
follow the Ninth Circuit. It will be unlikely that Hawaii
plaintiffs will elect to go to state courts by choice, when
they are bound by pertinent, if not controlling, Hawaii
precedents cited below which were disregarded by the
Panel. In particular, divergent developments of
affirming the award of disgorgement for breach of an
17
implied contract, will be controversial because
disgorgement does not normally arise out of a legal
cause of action because it is an equitable remedy.
* Parnar v. Americana Hotels, Inc., 65 Haw. 370,
652 P.2d 625 (1982). In the opening brief, this case was
submitted for the proposition that an implied duty of
good faith and fair dealing was not recognized in an
employment at-will contract and such contracts were
treated differently from other contracts.
e Francis v. Lee Enterprise, 89 Haw. 234, 971 P.2d
707 (1999). In the opening brief, this case was
submitted for the proposition that under Hawaii law
there was no hybrid cause of action in tort and contract
in an employment at-will contract context. It was also
submitted for the proposition that when disgorgement
was sought the cause of action must sound in tort.
. Beneficial Hawaii, Inc. v. Kida, 96 Haw. 289, 30
P.3d 895 (2001) (enunciating modern application of the
doctrine of exhaustion of legal remedies). In the motion
for summary reversal before the Ninth Circuit, this
case was submitted to support the proposition that
disgorgement was unavailable when consequential
damages were not sought.
3. Certification is proper to avoid the federal
constitutional issue.
The decision also did not address Petitioners’
federal constitutional objection that disgorgement was
awarded regardless of any lack of evidence of actual or
concrete loss by EBI. It is Petitioners’ position that
their substantive due process rights were violated
when the District Court took their profits despite
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18
EBI’s inability to show it suffered any actual or
concrete damages. See, infra, Argument, Section B.
When the resolution of a federal constitutional issue
may be rendered irrelevant by the determination of a
predicate state-law question, federal courts should
ordinarily abstain from passing on the federal issue.
Railroad Comm'n of Tex. v. Pullman Co., 312 U.S. 496,
85 L. Ed. 971, 61 S. Ct. 643 (1941). Because certification
has the same purposes as those of the Pullman
abstention doctrine, certification is proper. See,
Malabed v. North Slope Borough, 335 F.3d 864 (9th Cir.
2003). In fact, this court has certified questions of state
law when there was an opportunity to avoid federal
issues. Elkins v. Mcreno, 435 U.S. 647, 98 8. Ct. 1338,
55 L. Ed. 2d 614 (1978); Fiore v. White, 528 U.S. 28, 120
S. Ct. 469, 145 L. Ed. 2d 353 (1999). And this court has
also recommended invoking the certification process.
Clay v. Sun Ins. Office, Ltd., 363 U.S. 207, 212, 808. Ct.
1222, 4 L. Ed. 2d 1170 (1960)(“The Florida Legislature,
with rare foresight, has dealt with the problem of
authoritatively determining unresolved state law
involved in federal litigation by a statute which permits
a federal court to certify such a doubtful question of
state law to the Supreme Court of Florida for its
decision.”)."!
| Certification supplants Pullman abstention as the preferred
device to obtain definitive explanation of state law from state
courts. See, Arizonans for Official English, 520 U.S. at 7
(“Certification today covers territory once dominated by a deferral
devise called ‘Pullman abstention’... ) But, even when there is no
federal question, the certification may be proper. Lehman v.
Schein, supra. Thus, the certification is not restricted unlike the
limitation to abstention enunciated in Meredith v. Winter Haven,
320 U.S. 228, 64 S. Ct. 7, 88 L. Ed. 9 (1943).
19
4. In determining whether state law questions
are predictable or unpredictable the appellate
court must review de novo the contrary
authorities disregarded by the District Court.
Where there is any doubt as to state law, federal
courts should certify questions to state supreme courts
to avoid making unnecessary Erie “guesses.”
However, if there is no doubt, then they should not be
certified. Hill, supra. Although certification should be
reviewed by an abuse of discretion standard as a whole,
the subissue whether state law is unpredictable should
be reviewed de novo so as to not effectively defeat the
independent review requirement set forth in Salve
Regina. Disregarded Hawaii cases and issues here
display importance in addressing all authorities and
issues to determine whether the state law questions are
predictable.
De novo review of the predictability issue
comports with the purpose of Erie. Comparatively,
state lower courts have a keen instinct as to predicting
how state supreme courts would rule based on their
actual experience of cases being affirmed, reversed, or
remanded. In contrast, because federal district courts
cannot be affirmed, reversed or remanded by state
Supreme courts, they have the freedom to challenge
existing state case law rather than being simply
predictable. This gives the unsupervised federal
district courts a broader freedom to usurp novel and
attractive issues. Furthermore, the district courts
often must quickly resolve complicated legal questions
without the benefit of reflection or extensive
information. See, Salve Regina, at 232 (citation
omitted). Also, the district courts may actually just
abstain from addressing significant contrary issues out
—
20
of comity and federalism, by ignoring the issues. This
may be a practical method for achieving comity, but
unjust for parties whose voices were never answered
on significant state law issues and raises serious due
process concerns. De novo review is necessary to assure
that there are no Erie guesses, no authorities
disregarded, and no issues avoided. This is consistent
with the supervisory power given to federal appellate
courts.
Federal appellate courts should review de novo
not only pertinent cases and issues that support the
decision, but also contrary authorities and arguments.
Here, the Ninth Circuit panel allowed a great amount
of deference to the District Court’s interpretation of
state law. The panel disregarded pertinent, if not
controlling, Hawaii Supreme Court cases set forth
above and gave more weight to the Restatement.
Under de novo review, these Hawaii cases or “data”
cannot be just disregarded as if they did not exist as did
the District Court. Disregarding pertinent or contrary
cases is analogous to excluding or limiting evidence
before findings of fact. If these Hawaii cases had been
considered, the conclusion would have been that the
issues were unpredictable, if not in favor of Petitioners’
contentions. The Hawaii Supreme Court does not
blindly follow the restatement. E.g., Kohn v. West
Hawaii Today, Inc., 65 Haw. 584, 656 P.2d 79 (1982)
(rejecting comment g to Section 580B of Restatement
(Second) of Torts). State-by state survey shows that
employees’ duty of loyalty, its scope, statute of
limitations, remedies are a developing area of law which
cannot be simply restated. Employee Duty of Loyalty,
a State by State Survey 2d Ed., Bureau of National
Affairs, Inc. (1999). Uniess the issues raised by these
cases are properly addressed and disposed, the so-
21
called “independent review” requirement articulated in
Salve Regina is not satisfied.
5. Certification should be invoked for judicial
economy and be made against the party bringing
the state law claims to federal courts.
Disregard of the Hawaii cases shows that the
certification to the Hawaii Supreme Court would have
been more economic because the decision creates new
unresolved issues. See, Arizonans, supra, at 176
(“Through certification of novel or unsettled questions
of state law for authoritative answers by a State's
highest court, a federal court may save "time, energy,
and resources and help build a cooperative judicial
federalism.”); Nat'l Educ. Ass’n v. Lee County Bd. of
Pub. Instruction, 467 F.2d. 447, 449 (5% Cir.
1972)(Certification “minimiz[es] or eliminate[es] the
confusion, uncertainty and judicial friction inherent in a
system of federalism that frequently forces Federal
Judges to assume-often with extreme reluctance - a
decisional rule that properly belongs to their brethren
on the State bench.”) By certification, arguments can
be submitted before state supreme court justices who
drafted the pertinent precedents. The state supreme
court justices will be familiar with delicate issues
involved in past cases. Federal Courts of Appeals are
also burdened with appeals, if the issue can be certified
at the District Court level, it would be economic. Unlike
California, Hawaii does accept certification at the
District Court level. See, Francis, supra. Petitioners
promptly” requested certification at the District Court
A court has indicated that the timing of the certification request
is one factor. Nieves v. Univ. of P.R., 7 F.3d 270, 278 & fn.15 (1*
Cir. 1993) (rejecting request for certification first raised on
appeal).
22
level before the order granting summary judgment on
liability. (p.75a).
Furthermore, in this case Petitioners did not
bring the state law questions before the federal court.”
In this case, EBI removed the case from the Hawaii
court to the District Court bringing these state law
questions to the federal court. In other words, it was
EBI’s choice of forum. RILEY and KUNIMITSU are
not responsible for bringing state law issues to the
federal court. In all fairness, federal courts should
resolve the certification issue against the parties who
are responsible for bringing state law questions to the
federal courts. Such rule will have the effect of
diminishing forum-shopping.
The certification process also _ provides
equilibrium to prevent the potential abuses in diversity
jurisdiction. Diversity jurisdiction appears to have
initially developed to prevent the parochialism of state
courts against out-of-state residents. Jerome B.
Grubart, Inc. v. Great Lakes Dredge & Dock Co., 513
U.S. 527, 546 n.6, 115 S.Ct. 1048, 180 L. Ed. 2d 1024
(1995). However, the establishment of diversity
jurisdiction has also created a potential risk of federal
court abuses. The federal court’s unintentional bias
may come from the justices just having practiced in
states other than the forum state. Since the Court of
Appeals rulings cannot be appealed to the state
supreme courts, unless there is certification process
there is no practical mechanism to prevent federal
'’ A court has indicated it will be less receptive to certification
request from a party who chose to invoke federal jurisdiction.
Fisher v. Bar Harbor Banking & Trust Co,, 857 F.2d 4, 8 (1* Cir.
1988). In this case EBI removed this case to federal court and
then filed a counterclaim. ,
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courts’ bias, abuse, or mistake. Certification achieves
the proper check and balance and fosters comity
between the judiciaries.
The answers to the certified question by the
Hawaii Supreme Court will create a “law of the case”
which binds the parties as well as others. Hulin v.
Fibreboard Corp., 178 F.8d 316, 333 (5 Cir.
1999)(“Ordinarily, a state court's answer to a certified
question is final and binding upon the parties between
whom the issue arose. (citations omitted) Such an
answer, therefore, generally becomes "the law of the
case” (citations omitted). [F]Jurther, because we
consider the state court's answer to be binding in the
proceedings between the parties to the certified case,
that answer becomes the law of this circuit and binding
upon parties who were not parties to the certified
case.(citations omitted)”).
B.
THE AWARD OF DISGORGEMENT FOR A
BREACH OF IMPLIED CONTRACT WITHOUT
EVIDENCE OF CONCRETE LOSS VIOLATES
SUBSTANTIVE DUE PROCESS
Should this court be inclined to reject the
certification request, Petitioners request that the panel
address the federal constitutional question as to
whether the award of disgorgement for a breach of an
implied contract was a substantive due process
violation when there was no evidence of concrete or
actual loss. See, Montana v. Crow Tribe of Indians, 523
US. 696, 118 S. Ct. 1650, 140 L. Ed. 2d 898
(1998)Gnequity of disgorgement in lieu of consequential
damages); State Farm Mut. Automobile Ins. Co. v.
24
Campbell, 538 U.S. 408, 123 S. Ct. 1518, 155 L. Ed. 2d
585 (2003) (punitive damages must correlate to
consequential damages). Although the issue was raised
in the Opening Brief in the Ninth Circuit by citing
BMW of North America, Inc. v. Gore, 517 U.S. 559, 116
S.Ct. 1589, 134 L.Ed.2d 809 (1996), the Ninth Circuit
did not address this issue in its decision. Petitioners
submit that the Ninth Circuit’s ruling upholding the
disgorgement award conflicts with Montana and
Campbell because no evidence of concrete loss existed
in this case and disgorgement is inequitable and
punitive in nature. The Ninth Circuit overlooked the
material fact that there was no evidence of “concrete
loss” sustained by EBI. The question involves
exceptional importance as it relates to substantive due
process rights.
The award of disgorgement rather than
consequential damages for a breach of contract violates
due process because such award results in a windfall to
the alleged victim. See, Campbell, supra.
(compensatory damages are intended to redress a
plaintiffs loss, while punitive damages are aimed at
different purposes of deterrence and retribution). The
major distinction between consequential damages and
disgorgement is that the former concerns victim’s loss
where in the latter concerns wrongdoer’s profits.
Farnworth, Your Loss My Gain? The Dilemma of the
Disgorgement Principal in Breach of Contract, 94 Yale
L.J. 1339, 1841 (1985). Like punitive damages,
disgorgement often results in a windfall to another and
cannot be simply equated with restitution or unjust
enrichment. Reviewing the decision as it relates to
“unjust enrichment,” the panel followed the District
Court in assuming that EBI’s loss of the potential
contract with the County of Hawaii resulted in EBI’s
H
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25
losses. The loss of the contract with the County of
Hawaii by itself is not competent evidence of any actual
losses in terms of monetary damages. In this case, at
trial, EBI never produced any evidence that it had
sustained consequential damages (“actual loss” or
“concrete loss”). There are no findings of facts
regarding any actual or concrete losses, and as a matter
of law, EBI sustained no actual loss. For all we know,
EBI may have entered into a more lucrative contract as
a result of not having to service the County of Hawaii.
EBI simply did not prove its actual losses at trial.
When there was no evidence of actual losses, the award
of disgorgement by District Court was an arbitrary
deprivation of property. RILEY and KUNIMITSU's
disgorged 1997 income was income earned after the
termination of their employment with EBI in 1996. The
bid award was for the term ending on March 31, 1997,
but the District Court disgorged all income of 1997.
There was no rationality in awarding disgorgement.
Under Hawaii law, the equitable theory of
unjust enrichment assumes that there was a wrongful
enrichment “at the expense of another.” Small v.
Bandenhop, 67 Haw. 626, 636, 701 P.2d 647, 654 (1985).
Here, there was no evidence of EBI’s actual losses.
Petitioners’ profits derived from the fact that they had
provided actual labor services to the County of Hawaii
by cleaning drywells and sewers. In addition, their past
wages are from work performed on behalf of EBI. In
other words, Petitioners did not wrongfully take money
from EBI at the expense of EBI, and retained that
money. This case is not a case where disgorgement may
be appropriate due to kickbacks employees received.
EBD’s proper cause of action may have been a tortious
interference with a prospective contract, but that claim
was dismissed.
26
Furthermore, the recognition of disgorgement as
remedy for breach of an implied contract will result in
inequitable results. In an ordinary breach of contract
case, a cause of action arises when there is a breach and
such breach proximately results in damages. If
disgorgement is available under a breach of contract
theory, the cause of action would be extended to those
without damages. It would also _ encourage
opportunistic victims to wait until the wrongdoer’s
profits accumulate and ask for disgorgement just before
the end of the contractual statute of limitations. There
would be no incentive to mitigate damages resulting in
inequitable results where an opportunistic victim seeks
windfalls from a breach of contract. Some victims may
also enter into more lucrative deals and obtain new
profits in addition to disgorgement. In this case,
prejudgment interest pursuant to Haw.Rev.Stat., §636-
16 was irrationally caleulated from the time when
Petitioners were not even receiving any profits.
Addressing the punitive nature of disgorgement
in SEC v. Drexel Bumham Lambert, Inc., et al., 956
F.Supp. 503, 507 (S.D.N.Y. 1997), the court specifically
noted that, "[t]he disgorgement remedy is not intended
to compensate investors, rather, it is intended to
deprive the violator of unjust enrichment, thereby
furthering the objectives of the securities laws." Jd.
The court went on to distinguish between the remedy
of disgorgement and restitution by stating: "While some
cases have equated the two remedies, [citations
omitted], they are distinct in that restitution aims to
make the damaged persons whole, while disgorgement
aims to deprive the wrongdoer of ill-gotten gains.
Id.(citing SEC v. Huffman, 996 F.2d 800, 802 (5th Cir.
1993)). This position was later affirmed in Huffman
where the United States Court of Appeals of the Fifth
~
27
Circuit affirmed:
: disgorgement is not precisely
restitution. Disgorgement wrests _ ill-
gotten gains from the hands of a
wrongdoer. [citations omitted] It is an
equitable remedy meant to prevent the
wrongdoer from enriching himself by his
wrongs. Disgorgement does not aim to
compensate the victims for the wrongful
acts, as restitution does." [citation
omitted] Id.
Ordinarily, unjust enrichment is equated with
actual losses. See, Hateley v. SEC, 8 F.3d 653, 655 (9th
Cir. 1993)(disgorgement order was unreasonable and
excessive when it amounted to more than ten times the
amount of their unjust enrichment).
In rejecting the Ninth Circuit’s award of
disgorgement when damages were available, in a.
federal law context, this Court has expressly adopted a
view that disgorgement should not be awarded when
consequential damages may have been available.
Montana, 523 U.S. at 718 (where an Indian Tribe
sought disgorgement rather than compensatory
damages and deliberately proved no damages,
disgorgement was exorbitant, and _ therefore,
inequitable remedy).
Under Hawaii law, courts cannot award punitive
damages for mere breaches of employment contracts.
Francis, 89 Haw. at 240. Ordinarily, when
consequential damages are not sought, equitable
remedies are not available due to the doctrine of
exhaustion of legal remedies. Kida, 96 Haw. at 23.
cjmaepaee ee eo
ET SS Te
28
Normally, consequential damages are considered to be
the remedy for breach of contract. Thus, the award of
disgorgement rather than consequential damages is an
inequitable remedy because it is punitive in nature and
especially when it is disproportionate to the actual
damages of a breach of contract.
C.
THE PANEL DISREGARDED PERTINENT, IF
NOT CONTROLLING HAWAII CASES AND DID |
NOT REVIEW THIS CASE DE NOVO |
The highest court of the state is the final arbiter
of what is state law. When it has spoken, its
pronouncement are to be accepted by federal courts as
defining state law unless it has later given clear and |
persuasive indication that its pronouncement will be
modified, limited or restricted. West v. American Tel. &
Tel. Co., 311 U.S. 223, 61 S. Ct. 179; 85 L. Ed. 139
(1940). In rendering its opinion Panel did not even cite
the pertinent Hawaii cases, Parner, Francis, Beneficial
Hawaii, Inc. to distinguish or address them and just
ignored these cases as if they did not exist. (p.p. la-
lla). If the Ninth Circuit had been unwilling to certify
questions of state law regardless of these cases, it had
the duty to address them in its opinion. These cases are
data to formulate conclusions of law. Ignoring data is
analogous to excluding evidence for admission. “[S]tate
law is to be determined in the same manner as a federal
court resolves an evolving issue of federal law: ‘with the
aide of such light as [is] afforded by the materials for
decision at hand, and in accordance with the applicable
principles for determining state law.” Salve Regina, at
227 (citing Merdith, supra.) The opinion is also unclear
as to whether the Panel used an independent review
29
standard and did not defer the conclusion of law to
district court opinion. (p.p. la-lla). Failure to address
these cases is evidence that the Panel failed to conduct
an independent review. At the very least it should raise
a presumption that the panel faltered to conduct a de
novo review. When de novo review is compelled, no
form of appellate deference is acceptable. Salve Regina
College at 238. The Panel cannot ignore these cases and
must address them when Petitioners raised these cases.
Alternatively, Petitioners ask that writ be granted to
see if remand is appropriate.
CONCLUSION
There was no evidence of any actual or concrete
losses sustained by EBI, nevertheless, the District
Court disgorged Petitioners’ profits to impose sanctions
which amounts to a level of criminal fines. In doing so,
the District Court recognized a new independent cause
of action with hybrid remedies of equitable and legal
remedies as if it was fashioning a cause of action
particularly for this case. The District Court and Ninth
Circuit all disregarded controiling, if not pertinent,
Hawaii law. Currently, except for a writ to this court
and certification, there is no mechanism to supervise
the federal courts and to prevent a misinterpretation of
state law questions as it cannot be reversed by the
state courts. Substantive due process means a
fundamentally fair process and Petitioners deserve the
same fair process they could have obtained in state
courts.
Petitioners petition for the issuance of the writ
of certiorari to determine whether certification to the
Hawaii Supreme Court is appropriate. In addition, the
issue of a disgorgement remedy should also be certified
aii ii
30
in addition to original certification requests made prior
to the judgment made at the District Court. This case
is significant because it concerns federalism and its
ruling may affect every diversity case in every
jurisdiction. Should the certification request be
rejected, Petitioners request this Court to address the
federal constitutional issue. The award of
disgorgement for a breach of an implied contract when
there was no evidence of actual or concrete losses is
irrational, arbitrary, and an __ unconstitutional
deprivation of one’s property in violation of due process
rights. Alternatively, the Petitioners ask that writ be
granted so that this court can remand the case to the
Ninth Circuit to add”ess the disregarded Hawaii cases
mentioned above.
Wherefore, this petition for a writ of certiorari
should be granted. |
Respectfully submitted,
Junsuke Otsuka
Counsel of Record
Law Offices of
Gary Y. Shigemura
745 Fort Street
Fort Street Tower
Suite 700
Honolulu, HI 96813-3814
4 (808) 531-9711
Attorney for Petitioners
la
Appendix A
Eckard Brandes, Inc. v. Riley et al., 338 F.3d
1082 (9" Cir. 2003)(Ninth Circuit Case Nos. 00-
15474 & 01-1730, August 11, 2003)
Opinion by C.J. Mary Schroeder
Nos. 00-15474 & 01-1730
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ECKARD BRANDES, INC.,
Counter-claimant-Appellee,
V.
RANDELL A. RILEY; LEE T. KUNIMITSU,
Counter-defendants-Appellants, and KAMAAINA
PUMPING, a Hawaii general partnership,
Counter-defendant.
and
All related claims.
Argued and Submitted,
November 5, 2002 -- Honolulu, Hawaii
August 11, 2003, Filed
COUNSEL: Junsuke Otsuka, Law Offices of Gary Y.
Shigemura, Honolulu, Hawaii, for the counter-
2a
defendants-appellants. |
Ernest H. Nomura, Kobayashi, Sugita & Goda,
Honolulu, Hawaii, for the counter-claimant-appellee.
JUDGES: Before: Mary M. Schroeder, Chief Judge,
Arthur L. Alarcon, and Raymond C. Fisher, Circuit
Judges. Opinion by Chief Judge Schroeder.
OPINION BY: Mary M. Schroeder
OPINION:
SCHROEDER, Chief Judge:
This run of the mill Fair Labor Standards Act case
quickly became the unusual case of a claimed breach of
‘the duty of loyalty owed by employees to their
employer under state law, when the employees set up a
competing business. The district court recognized that
employees owe a duty of loyalty under Hawaii law to
refrain from competing with their employer, and the
court ordered the employees, Randell A. Riley and Lee
T. Kunimitsu, to disgorge their profits to the employer,
Eckard Brandes, Ine. ("EBI"). We affirm because the
employer's claim represents a classic violation of the
duty of loyalty as recognized by Section 393 of the
Restatement (Second) of Agency.
I. Facts and Procedural History
Appellee EBI is in the business of repairing and
maintaining sewer pipes and other structures that
convey sewage, debris, and rainwater. EBI employed
Riley as a superintendent and Kunimitsu as a laborer.
While still employed by EBI, Riley and Kunimitsu
3a
formed their own partnership, Kamaaina Pumping, and
competed against EBI for a County of Hawaii project.
Kamaaina Pumping submitted the lowest bid and the
county awarded it the contract. EBI then learned that
Riley and Kunimitsu were the sole partners of
Kamaaina Pumping and terminated their employment.
This litigation began when Riley and Kunimitsu filed
an overtime wage action in state court against EBI,
claiming violation of the Fair Labor Standards Act
("FLSA"), 29 U.S.C. §§ 201-219. EBI removed to federal
court and filed a counter-claim for breach of the duty of
loyalty. The district court granted summary judgment
for EBI on the employees' FLSA claims and the duty of
loyalty claim. It concluded that the appropriate remedy
for the employees' breach of the duty of loyalty was
disgorgement of profits Riley and Kunimitsu made
while competing with EBI. It entered judgment
granting that relief and then awarded attorneys' fees
and prejudgment interest to EBI. The employees
appeal.
II. Breach of the Duty of Loyalty
The primary issue on appeal is whether EBI may
bring a claim under Hawaii law against its employees
for directly competing against it. In deciding state law
claims, we apply Hawaii law as we believe the Hawaii
Supreme Court would apply it. See Gravquick A/S v.
Trimble Navigation Int'l, Ltd., 323 F.3d 1219, 1222 (9th
Cir. 2003). We conclude that Hawaii law would
recognize EBI's claim against Riley and Kunimitsu for
their breach of the duty of loyalty.
LALLA ATE EET
4a
It is clear under Hawaii law that employees owe their
employer a duty of loyalty. See Stout v. Laws, 37 Haw.
382, 392 (1946). Although the Hawaii Supreme Court
has not explicitly stated that the employer may bring a
claim for a breach of this duty, Hawaii courts have
recognized the authoritative nature of the Restatement
(Second) of Agency. See, e.g., Hawai'i Hous. Auth. v.
Uyehara, 77 Haw. 144, 883 P.2d 65, 72 (Haw. 1994). We
thus believe that the Hawaii Supreme Court would
follow the Restatement in finding that such a cause of
action exists.
The Restatement recognizes that "an agent is subject
to a duty not to compete with the principal concerning
the subject matter of his agency." Restatement
(Second) of Agency § 3938. This duty extends to
employees. See Restatement (Second) of Agency § 429
emt. a. Although an employee "is entitled to make
arrangements to compete" with his employer prior to
terminating the employment relationship, the employee
is not "entitled to solicit’ customers for such rival
business before the ed of his employment."
Restatement (Second) of Agency § 393 cmt. e. The
Restatement also provides that the employer may
maintain an action for a violation of the duty of
loyalty. See Restatement (Second) of Agency § 399.
This is the classic case the Restatement envisions.
The material facts are not disputed. While still
employees of EBI, Riley and Kunimtisu formed their
own partnership, Kamaaina Pumping. , Merely
preparing to compete does not itself breach the duty of
loyalty. Restatement (Second) of Agency § 393 cmt. e.
When the partnership submitted a bid for a County of
Hawaii drywell and culvert cleaning project, however,
5a
Riley and Kunimtisu engaged in conduct equivalent to
the solicitation of customers. Jd. EBI was the only
other bidder, and it ultimately lost the contract to
Kamaaina Pumping. Moreover, Riley and Kunimitsu
executed the contract with the County of Hawaii while
still employees at EBI and without EBI's knowledge. It
is therefore clear from the record that Riley and
Kunimitsu breached their duty of loyalty by directly
competing with EBI.
Riley and Kunimitsu argue that EBI nevertheless has
no claim against them because they were only low-level
employees. Nothing in the Restatement indicates,
however, that ordinary employees have no duty of
loyalty. Further, other courts have recognized the
liability of employees who are not officers or directors.
See, e.g., Eaton Corp. v. Giere, 971 F.2d 136, 141 (8th
Cir. 1992) (concluding that a product engineer breached
his duty of loyalty by soliciting his employer's
customers for himself). Thus, Riley and Kunimitsu are
liable.
The employees also contend that any claim EBI had is
barred by Hawaii's two-year statute of limitations for
torts. The district court, however, correctly applied
Hawaii's six-year contractual statute of limitations to
EBI's duty of loyalty claim. The six-year statute of
limitations applies to "actions for the recovery of any
debt founded upon any contract, obligation, or liability."
Haw. Rev. Stat. § 657-1. The Hawaii Supreme Court
has held that the words "obligation" and _ "liability"
encompass actions that are hybrids of tort and contract
and that primarily involve an injury to intangible
property interests. See Higa v. Mirikitani, 55 Haw. 167,
517 P.2d 1, 5, 55 Haw. 677 (Haw. 1973). A claim for a
6a
breach of an employee's duty of loyalty is such a hybrid.
Under the Restatement, the employer has a cause of
action either in tort or for breach of contract when the
employee violates the duty. See Restatement (Second)
of Agency § 403 emt. b. Thus, section 657-1(1)'s six-year
limitation period applies to EBI's claim for the breach
of the duty of loyalty. See Higa, 517 P.2d at 4-5
(applying the six-year limitations provision to a claim
for legal malpractice that "generally arises out of a
contractual relationship between the parties’).
III. Remedy of Disgorgement
The employees also challenge the district court's
order requiring them to disgorge their profits from the
County of Hawaii contract. We hold that the district
court properly ordered disgorgement.
The Restatement supports the district court's award
of disgorgement as a remedy for breach of the duty of
loyalty. It provides, "If an agent receives anything as a
result of his violation of a duty of loyalty to the
principal, he is subject to a liability to deliver it, its
value, or its proceeds, to the principal." Restatement
(Second) of Agency § 403. This rule applies where the
agent makes a profit from competing with the principal.
See Restatement (Second) of Agency § 403 cmt. a.
Although there are few reported cases addressing the
appropriate remedy, those we have found have also
required employees to turn over profits received as a
result of breaching their duty of loyalty. See Chernow v.
Reyes, 239 N.J. Super. 201, 570 A.2d 1282, 1285 (N.J.
Super. Ct. App. Div. 1990); W. Elec. Co. v. Brenner, 41
N.Y.2d 291, 360 N.E.2d 1091, 1094, 392 N.Y.S.2d 409
(N.Y. 1977).
Ta
The employees contend that the district court erred in
awarding disgorgement, arguing that EBI's exclusive
remedy is the procedure in the Hawaii Public
Procurement Code, Hawaii Revised Statutes chapter
103D, governing procurement. This argument is
unpersuasive. Although section 103D-704 of the
Procurement Code provides that the Code is the
"exclusive means" available for persons aggrieved in
connection with the award of public contracts, Hawaii
courts do not read the Procurement Code so literally or
so broadly. See CARL Corp. v. Haw. Dep't of Educ., 85
Haw. 431, 946 P.2d 1, 29 (Haw. 1997). EBI's claim for
breach of the duty of loyalty is not the type of grievance
with which the Procurement Code is concerned. The
Procurement Code addresses how Hawaii agencies are
to administer public bidding to ensure that the
procurement system functions fairly and with adequate
accountability and fiscal responsibility. See id. EBI's
claim does not concern that process, nor will the
outcome of the case have any effect on the award of this
contract. The Procurement Code is not relevant to
EBI's claim.
The employees similarly contend that the district
court lacked primary jurisdiction over this dispute.
Under the doctrine of primary jurisdiction, the court
may suspend review of a claim if its resolution involves
issues that have been placed within the jurisdiction of
an administrative body. See United States v. W. Pac.
R.R. Co., 352 U.S. 59, 62, 1 L. Ed. 2d 126, 77 S. Ct. 161,
135 Ct. Cl. 997 (1956). This dispute is not within the
jurisdiction of any state administrative agency because,
as we have seen, it does not involve the administration
of the contracting process. There is no primary
jurisdiction in any state agency.
8a
IV. Certification to the Hawaii Supreme Court
The employees contend the district court erred in
refusing to certify the duty of loyalty issue to the
Hawaii Supreme Court. The decision to certify a
question to a state supreme court rests in the "sound
discretion" of the district court. Lowie v. United States,
776 F.2d 819, 824 (9th Cir. 1985) (internal quotations
omitted). In the absence of controlling Hawaii Supreme
Court precedent, the district court properly looked to
decisions from other jurisdictions, other relevant
Hawaii cases, and the Restatement to determine how a
Hawaii court would resolve these issues. See Santana v.
Zilog, Inc., 95 F.3d 780, 783 (9th Cir. 1996). There was
no abuse of discretion.
V. Award of Attorneys' Fees and Prejudgment Interest
We affirm the district court's award of attorneys’ fees
to EBI. Under Hawaii law, attorneys' fees are available
in "all actions in the nature of assumpsit." Haw. Rev.
Stat. § 607-14. In Hawaii, "assumpsit" is an action that
allows for the recovery of damages arising from quasi-
contractual obligations. See Schulz v. Honsador, Inc., 67
Haw. 433, 690 P.2d 279, 281 (Haw. 1984). EBI's claim
for breach of Riley and Kunimitsu's duty of loyalty is
such an action because it arises from and is a breach of
their contractual employment relationship with EBI.
See Kona Enters., Inc. v. Estate of Bishop, 229 F.3d
877, 886 (9th Cir. 2000) (under Hawaii law, a breach of
fiduciary duty claim is in the nature of assumpsit when
based on the non-performance of _ contractual
obligations); Blair v. Ing, 96 Haw. 327, 31 P.3d 184, 189-
90 (Haw. 2001) (concluding that an action is in the
nature of assumpsit where the claim arises out of the
SS SE ae
ER
9a
contractual relationship); Schulz, 690 P.2d at 282. Here,
the implied employment contract creates the duty that
gives rise to the cause of action. The duty breached is
not a duty that would exist independent of the terms of
any contract. Moreover, as we have previously
discussed, the Restatement provides that an employer
has a cause of action either in tort or for breach of
contract for a breach of the duty of loyalty by his
employee. This case is therefore unlike TSA
International Limited v. Shimizu Corporation, 92
Haw. 243, 990 P.2d 713 (Haw. 1999). There the court
held the action was not in the nature of assumpsit
because the fraud and breach of fiduciary duty claims
merely related to a contract and did not involve any
breach of contract. See id. at 734.
The employees argue that this is not an assumpsit
action because the remedy awarded, disgorgement, is
not a proper remedy for a breach of contract. Hawaii
law recognizes, however, that its law of assumpsit
evolved in part to prevent defendants’ unjust
enrichment. See Hong v. Kong, 5 Haw. App. 174, 688
P.2d 833, 841 (Haw. Ct. App. 1984). It is widely
recognized that disgorgement is a remedy intended to
prevent a wrongdoer from unjust enrichment. See, e.g.,
SEC v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993); 1
Dan B. Dobbs, Law of Remedies § 4.5(5) (2d ed. 1993)
(stating that disgorgement is limited to the amount of
the unjust enrichment). We therefore hold that the
district court did not err in awarding EBI attorneys'
fees.
We also affirm the district court's award of
prejudgment interest to EBI. Hawaii law authorizes
the court to award interest commencing with the date
TE es Ee
10a
the injury first occurred in tort cases, and the date the
breach occurred for contract cases. See Haw. Rev. Stat.
§ 636-16. It is also within the court's discretion to award
prejudgment interest where the issuance of the
judgment is materially delayed. See Kalawaia v. AIG
Haw. Ins. Co., 90 Haw. 167, 977 P.2d 175, 180 (Haw.
1999). The district court found that EBI was injured
from January 1996, when the employees first breached
their duty of loyalty, through June 1996. Judgment was
not entered in this case for four years. Under Hawaii
law, the district court has broad discretion in awarding
prejudgment interest, and an award must be- upheld
unless it "clearly exceeded the bounds of reason."
Schmidt v. Bd. of Dirs. of the Ass'n of Apartment
Owners of the Marco Polo Apartments, 73 Haw. 526,
836 P.2d 479, 483-84 (Haw. 1992). This award was not
unreasonable.
VI. Appeal Number 01-17307
Appeal number 01-17307 is from the grant of a
temporary restraining order that has now expired. The
appeal is dismissed as moot. The district court properly
denied Kamaaina Pumping, Incorporated's ("KPI")
motion to enjoin EBI from future abuse of process. The
motion arose from the employees' belated efforts to
avoid their individual liability.
CONCLUSION
We hold that the district court properly recognized
EBI's claim under Hawaii law for its employees' breach
of their duty of loyalty by operating a competing
business. The court also properly ordered the
employees to disgorge their profits in appeal number
lla
00-15474. The district court's order is AFFIRMED. In
appeal number 01-17307, the appeal from the grant of
EBI's TRO is DISMISSED AS MOOT. The district
court's denial of KPI's motion to enjoin EBI is
AFFIRMED.
12a
Appendix B
Findings of Fact and Conclusions of Law and
Order dated February 9, 2000 by J. Gillmore;
Riley et al. v. Eckard Brandes, Inc., (Civil No. 98-
0779, USDC, D.Haw.)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
RANDELL A. RILEY and LEE T. KUNIMITSU
Plaintiffs,
V.
ECKARD BRANDES, INC.,
Defendant.
and
All related claims.
Civil No. 98-0779 HG
FINDINGS OF FACT AND CONCLUSIONS OF
LAW AND ORDER
The First Amended Complaint of Randell A.
Riley and Lee T. Kunimitsu’, filed on August 13, 1998,
1 Randell A. Riley and Lee T. Kunimitsu are the Plaintiffs and
13a
and the Counterclaim of Eckard Brandes, Inc.?, filed on
September 30, 1998, came for trial before the Court on
November 18, 1999. Randall Harakal and Junsuke
Otsuka appeared on behalf of Riley and Kunimitsu.
Ernest Nomura and Elena Onaga appeared on behalf of
EBI. The Court, having considered the arguments of
the parties, authority and evidence presented, issues
the following findings of fact, conclusions of law, and
order. Any finding of fact that should more properly be
deemed a conclusion of law and any conclusion of law
that should more properly be deemed a finding of fact
shall be so construed.
FINDINGS OF FACT
1. This action arises out of an employment
dispute between Randell A. Riley and Lee T.
Kunimitsu, and their employer, Eckard Brandes, Inc.
2. During the period of January to June 1996 (the
"relevant time period"), Riley and Kunimitsu were
residents of the state of Hawaii.
8. During the relevant time period, EBI was a
duly organized Hawaii corporation doing business in
the state of Hawaii.
4. During the relevant time period, Riley and
Kunimitsu were employees of EBI. (Defendant and
Counterclaim Defendants in this action. Throughout this Order,
they will be referred to as "Riley and Kunimitsu."
2 Eckard B. indes, Inc. is both the Defendant and Counterclaimant
in this action. In this Order, Eckard Brandes, Inc. will be referred
to as "EBI."
14a
Counterclaimant Eckard Brandes, Inc.'s Separate and
Concise Statement of Facts, Re: Motion for Summary
Judgment on Count II of the Counterclaim, {1.)
5. EBI is in the business of repairing, televising,
and maintaining sewer pipes, culverts, drywells, and
other structures that convey sewage, debris, or
rainwater.
6. In 1996, Riley and Kunimitsu performed
services for EBI on two public contract jobs - Pilot
Project for Rehabilitation of Sewer Lines in Enchanted
Lakes, Project No. C40966 ("Enchanted Lakes") and
Kaneohe Wastewater Treatment Plant Sewer Line,
Project No. C40966 ("WTTP"). (Declaration of Randell
A. Riley, July 29, 1999, 6; Declaration of Lee T.
Kunimitsu, July 29, 1999, 74 .)
7. From mid-January 1996 to June 12, 1996, EBI
paid Riley $17,663.26 in net salary, excluding medical
coverage and pension payments. (EBI's Exh. 157.)
8. From mid-January 1996 to June 19, 1996, EBI
paid Kunimitsu $14,012.27 in net salary, excluding
medical coverage and pension payments. (EBI's Exh.
158.)
9. On November 1, 1995, while still employed by
EBI, Riley and Kunimitsu. formed their own
partnership, called Kamaaina Pumping, by executing a
General Partnership Agreement. (Exh. C to Defendant
and Counterclaimant Eckard Brandes, Inc.'s Separate
and Concise Statement of Facts, Re: Motion for
Summary Judgment on Count II of the Counterclaim;
Declaration of Ernest H. Nomura,
15a
June 14, 1999, 44.)
10. On January 12, 1996, the County of Hawaii
published its Invitation for Bid No. 1606, Proposal and
Specifications for A Price Agreement for Furnishing
Drywell and Culvert Cleaning and Maintenance for the
Department of Public Works (Bid No. 1606). (EBI's
Exhibit 113.) ;
11. EBI submitted a bid to the County of Hawaii
for the project. (Defendant and Counterclaimant
Eckard Brandes, Inc.'s Concise Statement of Facts, Re:
Motion for Summary Judgment on Count II of the
Counterclaim, 45.)
12. On February 24, 1996, Riley and Kunimitsu,
doing business as Kamaaina Pumping, submitted the
only other bid for the project. (Proposal Price
Agreement for Furnishing Drywell and Culvert
Cleaning and Maintenance for the Department of Public
Works, County of Hawaii, EBI's Exh. 114; Defendant
and Counterclaimant Eckard Brandes, Inc.'s Concise
Statement of Facts, Re: Motion for Summary Judgment
on Count II of the Counterclaim, 45.)
13. Kamaaina Pumping was the lowest of the two
bidders on Bid No. 1606. (EBI's Exh. 112.)
14. On March 27, 1996, Riley, as general partner
of Kamaaina Pumping, executed the contract for Bid
No. 1606 with the County of Hawaii. (EBI's Exh. 115.)
15. In 1996, Kamaaina Pumping received gross
revenues from the County of Hawaii of $168,195 for
services performed pursuant to the contract for Bid No.
16a
1606. (EBI's Exh. 146.)
16. In 1997, Kamaaina Pumping received gross
revenues from the County of Hawaii of $737,595 for
services performed pursuant to the contract for Bid No.
1606. (Id.)
17. In 1996 and 1997, Riley and Kunimitsu
received income from Kamaaina Pumping. The money
Kamaaina Pumping paid to them during those years
came from the funds Kamaaina Pumping earned from
the County of Hawaii pursuant to the contract for Bid
No. 1606.’
18. In 1996, Kunimitsu received ordinary income
of $22,013 from Kamaaina Pumping. (EBI's Exh. 118.)
19. In 1996, Riley received ordinary income of
$22,912 from Kamaaina Pumping. (Id.)
8 EBI has provided evidence of the amount the County of Hawaii
paid to Kamaaina Pumping pursuant to the contract for Bid No.
1606. (EBI's Exh. 146.) EBI has also provided the income tax
partnership return for Kamaaina Pumping for the years 1996 and
1997 (EBI's Exhs. 117, 118.) The income generated by Kamaaina
Pumping in 1996 and 1997 (EBI's Exhs. 117, 118) does not match
exactly the amount the County of Hawaii paid to Kamaaina
Pumping in 1996 and 1997. (EBI's Exh. 146). Neither party has
explained the minor discrepancy, however, or set forth evidence
demonstrating that the money Kamaaina Pumping paid to Riley
and Kunimitsu during 1996 and 1997 came from anything other
than the amount Kamaaina Pumping earned from the County of
Hawaii pursuant to the contract for Bid No. 1606. Given the
evidence set forth by the parties, the Court finds that the amounts
Kamaaina Pumping paid to Riley and Kunimitsu came from funds
Kamaaina earned from the County of Hawaii.
17a
20. In 1997, Kunimitsu received ordinary income |
of $217,690 from Kamaaina Pumping. (EBI's Exh. 117.)
|
|
21. In 1997, Riley received ordinary income of
$226,577 from Kamaaina Pumping. (EBI's Exhs. 117,
121.) |
22. On August 13, 1998, Riley and Kunimitsu
filed an Amended Complaint in the Circuit Court of the
First Circuit, State of Hawaii, alleging violations of the
Fair Labor Standards Act, 29 U.S.C. § 207 ("FLSA"),
and Hawaii Revised Statutes §§ 387-3 and 387-12(c).
23. On September 23, 1998, EBI removed the
case to this Court alleging federal question jurisdiction.
24. On September 30, 1999, EBI filed its Answer
to Riley and Kunimitsu's Amended Complaint, as well |
as a Counterclaim. In the Counterclaim, EBI alleged a
number of causes of action, including that Riley and
Kunimitsu breached their fiduciary duty of loyalty by
competing with EBI to win Bid No. 1606 while still
working for EBI. .
25. On Ju» 14, 1999, EBI filed a Motion for
Summary Judgme: | on the Amended Complaint.
26. On June 14, 1999, EBI filed a Motion for
Summary Judgment on Count II of the Counterclaim -
Breach of the Fiduciary Duty of Loyalty.
27. In the Court's October 22, 1999 Order, the
Court granted in part and denied in part EBI's Motion
for Summary Judgment on the Amended Complaint.
The Court determined that the only wage compensation
18a
issue remaining for trial was whether EBI owed to
Riley and Kunimitsu overtime compensation for the
Enchanted Lakes and WWTP projects. (Order
Granting Defendant and Counterclaimant Eckard
Brandes, Inc.'s Motion for Summary Judgment, dated
October 22, 1999, at 54.)
28. In the October 22, 1999 Order, the Court also
granted EBI's Motion for Summary Judgment on
Count II of the Counterclaim. The Court determined
that Riley and Kunimitsu had not met their burden to
establish a genuine issue of material fact with respect
to the duty of loyalty issue and that Riley and
Kunimitsu had breached their duty of loyalty to EBI.
The Court further determined that the only remaining
question with respect to the duty of loyalty issue was
how to ascertain the damages EBI suffered due to
Plaintiff's breach. (Id. at 54-55.)
29. On November 16, 1999, the parties entered
into a Stipulation to Dismiss Remaining Overtime
Claims Asserted by Plaintiff Lee T. Kunimitsu against
Defendant Eckard Brandes, Inc.
30. At a hearing held on November 18, 1999,
counsel for EBI and counsel for Riley and Kunimitsu
stipulated that the value of Riley's overtime
compensation claim for the Enchanted Lakes Project
and WWTP projects is $3,735.76.
CONCLUSIONS OF LAW
1. Jurisdiction. The Court's original jurisdiction
over Riley and Kunimitsu's Amended Complaint is
pursuant to 28 U.S.C. § 1331.
19a
2. In its Order dated October 22, 1999, the Court
granted EBI's Motion for Summary Judgment on the
Amended Complaint as to the only federal law issue
raised in the case - Riley and Kunimitsu's overtime
compensation claim under the Fair Labor Standards
Act. After the Court filed its Order, only state law
claims remained.
3. The Court retains supplemental jurisdiction
over the remaining state law claims pursuant to 28
U.S.C. § 1867(¢)(3). A court should consider the factors
of judicial economy, convenience, fairness, and comity
when deciding whether to retain supplemental
jurisdiction. See Imagineering, Inc. v. Kiewit Pacific
Co., 976 F.2d 1303 (9th Cir. 1992). Here, at the time the
Court dismissed Riley and Kunimitsu's federal claims,
the parties had completed discovery, and the trial date
was less than three weeks away. As a result, the
judicial economy, convenience and fairness factors
militate in favor of exercising supplemental jurisdiction
over the remaining state law claims.
4. Riley and Kunimitsu Overtime Compensation
Claims Under Hawaii Revised Statutes Chapter 104.
Hawaii Revised Statutes Chapter 104 governs Riley's
claim for overtime compensation relating to the
Enchanted Lakes and WWTP projects. Pursuant to
Hawaii Revised Statutes § 104-28(a), Riley is entitled to
only the unpaid overtime compensation for the
Enchanted Lakes and WWTP projects. As stipulated to
by the parties on the record, the amount of overtime
that EBI owes to Riley for the two projects at issue is
$3,735.76.
20a
5. Riley and Kunimitsu, however, breached their
fiduciary duty of loyalty to EBI as a matter of law.
(Order at 51-52.) Riley and Kunimitsu are not entitled
to any compensation during the period of disloyalty.
See, e.g., Maritime Fish Products, Inc. v. World-Wide
Fish Products, Inc., 474 N.Y.S. 2d 281, 286, 287 (N.Y.
App. Div. Ct. 1984); Wilshire Oil Co. of Texas v. Riffe,
406 F.2d 1061, 1062 (10th Cir. 1969); Cameco, Ince. v.
Gedicke, 724 A.2d 783, 790 (N.J. 1999); Jet Courier
Service, Inc. v. Mulei, 771 P.2d 486, 499-500 (Colo.
1989); Restatement (Second) of Agency § 469 (1958).
6. Riley's work on both the Enchanted Lakes and
WWTP projects was performed during the period in
which he was disloyal to EBI. This period was from
mid-January 1997 to June 17, 1996.4 Riley is therefore
not entitled to any overtime compensation for his work
on the Enchanted Lakes or WWTP projects. See, e.g.,
Maritime Fish Products, Inc., 474 N.Y.S. 2d at 286, 287;
Wilshire Oil Co. of Texas, 406 F.2d at 1062; Cameco, 724
A.2d at 790; Jet Courier Service, Inc., 771 P.2d at 499-
500; Restatement (Second) of Agency § 469 (1958).
7. EBI is entitled to the return of any
compensation paid to Riley and Kunimitsu during the
period of disloyalty. See, e.g., Maritime Fish Products,
Inc., 474 N.Y.S. 2d at 287; Wilshire Oil Company of
4 The parties both agree that the period of disloyalty was from
mid-January to June 17, 1996. (Riley and Kunimitsu's First
Amended Proposed Findings of Fact and Conclusions of Law at 7;
Defendant and Counterclaimant Eckard Brandes, Inc.'s Amended
Proposed Findings of Fact and Conclusions of Law at 3.) On
January 12, 1996, the County of Hawaii published its Invitation for
Bid No. 1606. (EBI's Exh. 113.) On June 17, 1996, EBI terminated
the employment of both Riley and Kunimitsu.
2la
Texas, 406 F.2d at 1062; Jet Courier Service, Inc., 771
P.2d at 499-500; Cameco, Inc. 724 A.2d at 790; ABC
Trans National Transport, Inc. v. Aeronautics
Forwarders, Inc., 90 Ill. App. 3d 817 (1980); American
Timber & Trading Co. v. Niedermeyer, 276 Or. 1135
(1976); Restatement (Second) of Agency § 469.
8. EBI is therefore entitled to repayment of the
compensation it paid to Riley during the period of his
disloyalty. See, e.g., Maritime Fish Products, Inc., 474
N.Y.S. 2d at 287; Wilshire Oil Company of Texas, 406
F.2d at 1062; Jet Courier Service, Inc., 771 P.2d at 499-
500; Cameco, Inc. 724 A.2d at 790; ABC Trans National
Transport, Inc., 90 Il]. App. 3d 817; American Timber &
Trading Co., 276 Or. 1135; Restatement (Second) of
Agency § 469. Riley must therefore repay to EBI
$17,663.26 - the amount EBI paid to him from mid-
January 1996 through June 17, 1996.
9. Similarly, EBI is entitled to repayment of the
compensation it paid to Kunimitsu during the period of
disloyalty. See, e.g., Maritime Fish Products, Inc., 474
N.Y.S.2d at 287; Wilshire Oil Company of Texas, 406
F.2d at 1062; Jet Courier Service, Inc., 771 P.2d at 499-
500; Cameco, Inc. 724 A.2d at 790; ABC Trans National
Transport, Inc., 90 Ill. App. 3d 817; American Timber &
Trading Co., 276 Or. 1135; Restatement (Second) of
Agency § 469. Kunimitsu must thererore repay to EBI
$14,012.27 - the amount EBI paid to him from mid-
January 1996 through June 17, 1996.
10. Damages for Riley and Kunimitsu's Breach of
Fiduciary Duty of Loyalty. When an employee
breaches his fiduciary duty of loyalty owed to an
employer, the employer has a choice of remedies, one of
22a
which is the equitable remedy of restitution. See,
Western Electric Co. v. Brenner, 41 N.Y.2d 291, 295
(N.Y. 1977); Demoulas v. Demoulas Super Markets,
Inc., 677 N.E.2d 159, 195 (Mass. 1997); Restatement
(Second) Agency § 399 (1958). See also Tory A.
Weigand, Employee Duty of Loyalty and the Doctrine
of Forfeiture, 42 Boston B.J. 6, 20, September/October
1998 (summarizing remedial options employer may.
choose in a breach of fiduciary duty of loyalty action);
E. Allan Farnsworth, Your Loss or My Gain? The
Dilemma of the Disgorgement Principle in Breach of
Contract, 94 Yale L.J. 1339, 1354 (1985) (explaining that
employer may choose equitable remedy of
disgorgement even basis of action is contractual).
11. EBI prayed for equitable relief in its
Counterclaim. (Counterclaim, September 30, 1999, at 5.)
Specifically, EBI's Counterclaim prayed:
That a constructive trust [be] imposed against
Counterclaim Defendants in the amount to which they
were unjustly enriched; and
That [EBI be] awarded such other and further relief as
the Court deems just and equitable.
(Id.)
12. On November 8, 1999, at a hearing before
Magistrate Judge Yamashita, EBI made clear that it
sought the equitable remedy of restitution. Specifically,
EBI requested the disgorgement of all gains received
by Riley and Kunimitsu. (Riley and Kunimitsu's Trial
Brief on Disgorgement at 2.)
23a
13. Disgorgement is an appropriate means by
which to achieve restitution when an employee
breaches his fiduciary duty of loyalty owed to his
employer. See, e.g., Demoulas, 677 N.E.2d at 195;
Chernow v. Reyes, 570 A.2d 1282, 1285 (N.J. 1990).
14. The purpose of the equitable remedy of
disgorgement to prevent the unjust enrichment of the
wrongdoer. See, e.g., Fidelity Management & Research
Co. v. Ostrander, 662 N.E.2d 699, 705 (Mass. 1996)
(stating that the overall object of disgorgement is to
render the ultimate recovery a sound reflection of the
wrongdoer's unjust enrichment due to the beach of the
fiduciary duty).
15. The Court determines that the most
equitable reflection of the amount by which Riley and
Kunimitsu were unjustly enriched is not the entire
amount received by Kamaaina Pumping for the
contract for Bid No. 1606 - $905,790. This amount would
provide a windfall to EBI and would ignore the costs
and expenses of performing the work for the project
such as the value of the labor provided to Kamaaina
pumping, the purchase of equipment other normal costs
of doing business. See Burg v. Miniature Precision
Components, Inc., 330 N.W.2d 192, 199 (Wis. 1983)
(adopting trial court's finding that an award of gross
receipts is improper because it is unfair to the agent
and provides a windfall to the principal).
16. The Court determines that the most accurate
and equitable reflection of the amount by which Riley
and Kunimitsu were unjustly enriched is the funds
Kamaaina paid to Riley and Kunimitsu minus the value
of their labor provided to Kamaaina during 1996 and
24a
1997. See Hill v. Names & Addresses, Inc., 571 N.E.2d
1085, 1096 (Ill. App. 1991) (recognizing that the amount
of money disgorged should accurately reflect the
seriousness of the wrongdoing). Riley must therefore
disgorge to EBI $164,177. Kunimitsu must disgorge to
EBI $155,290. These figures are the most reasonable
amounts to be awarded as a mere award of the funds
paid to them would fail to take into account the fact that
Kamaaina Pumping incurred the normal business
expense of paying workers (Riley and Kunimitsu) for
the labor necessary to perform work on the contract for
Bid No. 1606. The specific amounts are calculated as
follows:
a. Riley - 1996. In 1996, Kamaaina Pumping paid
to Riley $22,912. For the six months Riley worked for
Kamaaina Pumping in 1996, the Court determines that
the value of his labor was $31,200.5 Because the value of
Riley's labor during the latter six months of 1996
exceeds the amount he was paid during that period,
neither Kamaaina Pumping nor Riley need to disgorge
any money to EBI for this period.
b. Kunimitsu - 1996. In 1996, Kamaaina Pumping
paid to Kunimitsu $22,018. For the six months
Kunimitsu worked for Kamaaina Pumping in 1996, the
Court determines that the value of his labor was also
$31,200. Because the value of Riley's labor during the
5 The Court derives the value of labor figure as follows. During
1995, Riley earned a salary of $1,200 per week. (EBI's Exh. 127.)
Such a figure is the most accurate reflection of the value of Riley's
labor that has been presented to the Court. $1,200 per week
multiplied by 26 weeks equals $31,200.
6 The Court determines that the value of Kunimitsu's labor is
equivalent to that of Riley because Riley and Kunimitsu acted as
25a
latter six months of 1996 exceeds the amount he was
paid during that period, neither Kamaaina Pumping nor
Kunimitsu need to disgorge any money to EBI for this
period.
ce. Riley - 1997. In 1997, Kamaaina Pumping paid
to Riley $226,577. For 1997, the value of Riley's labor
was $62,400.’ Subtracting the value of labor - $62,400 -
from Riley's income of $226,577, the Court derives
$164,177. Riley must disgorge this amount to EBI.
d. Kunimitsu - 1997. In 1997, Kamaaina Pumping
paid to Kunimitsu $217,690. For 1997, the value of
Kunimitsu's labor was $62,400. Subtracting the value of
labor - $62,400 - from Kunimitsu's income of $217,690,
the Court derives $155,290. Kunimitsu must disgorge
this amount to EBI.
17. Riley, accordingly, must disgorge to EBI
$164,177. The total amount Riley must pay to EBI is
$181,840.26.
18. Kunimitsu, accordingly, must disgorge to
EBI $155,290. The total amount Kunimitsu must pay to
EBI is $169,302.27.
equal partners in their venture. This fact is reflected by the 1996
and 1997 partnership tax returns for Kamaaina Pumping, which
demonstrate that Riley and Kunimitsu were paid nearly equivalent
funds. (EBI's Exhs. 117, 118.)
7 This figure is derived by multiplying $1200 by 52 weeks.
26a
ORDER
Based on the authority and evidence reviewed,
and the Findings of Fact and the Conclusions of Law
stated herein, it is hereby ORDERED, ADJUDGED
AND DECREED:
1. EBI is entitled to repayment of the
compensation it paid to Riley during the period of his
disloyalty. The amount Riley must repay to EBI is
$17,663.26.
29. EBI is entitled to repayment of the
compensation it paid to Kunimitsu during the period of
disloyalty. The amount Kunimitsu must repay to EBI is
$14,012.27.
2 EBI is entitled to the equitable remedy of
restitution for Riley and Kunimitsu's breach of the
fiduciary duty of loyalty owed to EBI.
4. The salary paid by Kamaaina Pumping to
Riley and Kunimits" in 1996 and 1997 minus the value
of their labor during the latter one-half of 1996 and
during 1997, is the most equitable reflection of the
amount by which Riley and Kunimitsu were unjustly
enriched.
5. Riley must disgorge to EBI a total of $164,177.
6. Kunimitsu must disgorge to EBI a total of
$155,290.
7. Riley must pay a total of $181,840.26 to EBI.
27a
8. Kunimitsu must pay a total of $169,302.27 to
EBI.
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, 2-9-00.
s/ Helen Gillmore
HELEN GILLMOR
United States District Judge
Riley v. Eckard Brandes, Inc., Findings of Fact and
Conclusions of Law and Order; Civil No. 98-00779 HG.
28a
Appendix C
ORDER GRANTING DEFENDANT AND
COUNTERCLAIMANT ECKARD BRANDES,
INC.'S MOTION FOR SUMMARY JUDGMENT ON
THE AMENDED COMPLAINT; ORDER
GRANTING IN PART AND DENYING IN PART
PLAINTIFFS/COUNTERCLAIM DEFENDANTS
RANDELL A. RILEY, LEE T.KUNIMITSU AND
KAMAAINA PUMPING'S MOTION FOR PARTIAL
SUMMARY JUDGMENT AS TO
COUNTERCLAIMS FOR COUNT 1 - BREACH OF
CONTRACT, COUNT II - BREACH OF DUTY OF
EMPLOYEE LOYALTY AND COUNT III - MIS-
APPROPRIATION OF TRADE SECRETS; ORDER
GRANTING DEFENDANT'S MOTION FOR
SUMMARY JUDGMENT ON COUNTII OF THE
COUNTERCLAIM; ORDER DENYING
_ PLAINTIFFS/-COUNTERCLAIM DEFENDANTS
RANDELL A. RILEY, LEE T. KUNIMITSU AND
KAMAAINA PUMPING'S MOTION FOR
CERTIFICATION OF QUESTION OF STATE LAW
TO THE HAWAII SUPREME COURT AND STAY
PENDING STATE COURT'S DECISION dated
November 18, 1999 All by J. Gillmore; Riley et al.
v. Eckard Brandes, Inc., (Civil No. 98-0779, USDC,
D.Haw.)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
RANDELL A. RILEY and LEE T. KUNIMITSU
Plaintiffs,
29a
Vv.
ECKARD BRANDES, INC.,
Defendant.
and
All related claims.
Civil No. 98-0779 HG
ORDER GRANTING DEFENDANT AND
COUNTERCLAIMANT ECKARD BRANDES,
INC.'S MOTION FOR SUMMARY JUDGMENT ON
THE AMENDED COMPLAINT
and
ORDER GRANTING IN PART AND DENYING IN
PART PLAINTIFFS/COUNTERCLAIM
DEFENDANTS RANDELL A. RILEY, LEE T.
KUNIMITSU AND KAMAAINA PUMPING'S
MOTION FOR PARTIAL SUMMARY JUDGMENT
AS TO COUNTERCLAIMS FOR COUNT 1 -
BREACH OF CONTRACT, COUNT II - BREACH
OF DUTY OF EMPLOYEE LOYALTY AND
COUNT III - MISAPPROPRIATION OF TRADE
SECRETS
and
ORDER GRANTING DEFENDANT'S MOTION
FOR SUMMARY JUDGMENT ON COUNT II OF
-
i
a ee
30a
THE COUNTERCLAIM
and
ORDER DENYING PLAINTIFFS/-
COUNTERCLAIM DEFENDANTS RANDELL A.
RILEY, LEE T. KUNIMITSU AND KAMAAINA
PUMPING'S MOTION FOR CERTIFICATION OF
QUESTION OF STATE LAW TO THE HAWAII
SUPREME COURT AND STAY PENDING STATE
COURT'S DECISION
Plaintiffs Randell A. Riley and Lee T. Kunimitsu
("Plaintiffs"), former employees of Defendant Eckard
Brandes, Inc. ("Defendant") bring this action in an
Amended Complaint to recover unpaid overtime
compensation, liquidated damages, attorneys’ fees, and
costs under the Fair Labor Standards Act of 1938, 29
U.S.C. § 216(b), and the Hawaii Wage and Hour Act,
Section 387-12(c) of the Hawaii Revised Statutes.
Defendant moves for summary judgment on the
Amended Complaint, has filed a Counterclaim raising
five state law claims, and moves for summary judgment
on Count II of the Counterclaim. Plaintiffs have moved
for summary judgment as to Counts I, II, and III of the
Counterclaim.
PROCEDURAL HISTORY
On August 13, 1998, Plaintiffs filed an Amended
Complaint against Defendant in the Circuit Court of
the First Circuit, State of Hawaii, alleging violations of
the Fair Labor Standards Act of 1938, 29 U.S.C. §
216(b), and the Hawaii Wage and Hour Act, Section
387-12(c) of the Hawaii Revised Statutes. On
3la
September 23, 1998, Defendant removed the case to
this Court on grounds of federal question jurisdiction.
Defendant filed an Answer to the Amended
Complaint, and a Counterclaim on September 30, 1998.
In the Counterclaim, Defendant raises the following
five claims, pursuant to Hawaii State law: (1) Breach of
contract, (2) Breach of fiduciary duty of loyalty, (8)
Misappropriation of trade secrets, (4) Interference with
business expectancy, and (5) Punitive damages and
attorneys' fees.
Defendant filed a Motion for Summary
Judgment on Count II of the Counterclaim - Breach of
fiduciary duty of loyalty - on June 14, 1999. Plaintiffs
filed a Memorandum in Opposition to Defendant's
Motion for Summary Judgment on July 29, 1999 and an
Errata to their memorandum on July 30, 1999. On
August 6, 1999, Defendant filed a Reply to Plaintiffs'
Memorandum in Opposition.
Defendant also filed a Motion for Summary
Judgment on the Amended Complaint on June 14, 1999.
Plaintiffs filed a Memorandum in opposition to
Defendant's Motion on July 29, 1999, and Defendant
filed a Reply to Plaintiffs' Memorandum in Opposition
on August 6, 1999.
On June 14, 1999, Plaintiffs filed a Motion for
Partial Summary Judgment as to Defendant's
Counterclaims for: Count I - Breach of Contract, Count
II - Breach of duty of employee loyalty, and Count III -
Misappropriation of trade secrets. Defendant filed a
Memorandum in opposition to Plaintiffs' Motion on July
29, 1999. Plaintiffs filed a Reply to Defendant's
32a
Memorandum in Opposition on August 6, 1999.
The three motions came for hearing before the
Court on August 18, 1999.
Plaintiffs filed a Notice of
Plaintiffs/Counterclaim Defendants Randell A. Riley
Lee T. Kunimitsu and Kamaaina Pumping's Motion for
Certification of Question of State Law to the Hawaii
Supreme Court and Stay Pending State ‘ourt's
Decision, on October 18, 1999.
After careful consideration of the evidence, the
parties' arguments, and the governing law, the Court
rules as follows: The Court GRANTS IN PART and
DENIES IN PART Defendant's Motion for Summary
Judgment on the Amended Complaint; the Court
GRANTS IN PART and DENIES IN PART Plaintiffs’
Motion for Partial Summary Judgment as_ to
Counterclaims for Count I, Count II, and Count III and
DISMISSES all counterclaims as to Kamaaina
Pumping; and the Court GRANTS Defendant's Motion
for Summary Judgment on Count II of the
Counterclaim. ;
STATEMENT OF FACTS
Plaintiffs Randell A. Riley and Lee T. Kunimitsu
("Plaintiffs") are former employees of Defendant
Eckard Brandes, Inc. ("Defendant"). Defendant is
involved in the business of plumbing. As part of that
business, Defendant performs the maintenance and
cleaning of drywells and culverts in the state of Hawaii.
Defendant terminated both Kunimitsu and Riley on
June 17, 1996.
33a
Defendant allegedly terminated Plaintiffs due to-
the fact that Plaintiffs competed ayainst Defendant,
while still working for Defendant. Specifically, while
employed by Defendant, Riley and Kunimitsu formed a
general partnership called Kamiaaina Plumbing, Inc.
("Kamaaina"). After forming Kamaaina, Plaintiffs,
through Kamaaina, submitted a price proposal to
furnish drywell and culvert cleaning and maintenance
services for the Department of Public Works, County of
Hawaii, Bid No. 1606 ("Bid No. 1606"). Defendant was
the only other company to bid ‘on Bid No. 1606.
Kamaaina Pumping was the lowest of the two bidders,
and accordingly, was awarded the contract. In March,
1996, Kamaaina entered into a contract with the County
of Hawaii to furnish drywell and culvert cleaning and
maintenance for Bid No. 1606.
Defendant alleges that Plaintiffs could not have
secured the contract for Bid No. 1606 without having
misappropriated certain information from Defendant,
such as Defendant's technological k.:o*v-how reg ‘ding
the cleaning of drywells and Defendant's cos: and
pricing information for sucn cleaning projects.
Defendant terminated Plaintiffs after Defendant
learned of Plaintiffs' actions surrounding the formation
of Kamaaina Plaintiffs' bid on Bid. No. 1606.
Defendant's Counterclaim arises out of this allegedly
inappropriate competition against Defendant for Bid
No. 1606.
After Plaintiffs were terminated by Defendant,
they filed the instant action, alleging that Defendant
had failed to pay them for overtime hours they had put
in while working on various projects for Defendant
throughout the state of Hawaii. In particular, Plaintiffs
x
d
34a
allege that Defendant failed to pay Plaintiffs for public
contract projects on which Plaintiffs had worked during
the years 1995 and 1996. Defendant contends, in its -
various motions, that Defendant has properly paid
Plaintiffs for all overtime hours Plaintiffs worked while
employed by Defendant.
STANDARD OF REVIEW
Summary judgment is appropriate when there is
no genuine issue as to any material fact and the moving
party is entitled to judgment as a matter of law. Fed. R.
Civ. P. 56(c). The moving party has the initial burden of
"identifying for the court the portions of the materials
on file [in the case] that it believes demonstrate the
absence of any genuine issue of material fact." T.W.
Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809
F.2d 626, 630 (9th Cir. 1987) (citing Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986)). If the moving party
meets its burden, then the opposing party may not
defeat a motion for summary judgment in the absence
of any significant probative evidence tending to support
its legal theory. Commodity Futures Trading Comm'n
v. Savage, 611 F.2d 270, 282 (9th Cir. 1979). The
opposing party cannot stand on its pleadings, nor can it
simply assert that it will be able to discredit the
movant's evidence at trial. See T.W. Elec. Serv., 809
F.2d at 630; Fed. R. Civ. P. 56(e). In a motion for
summary judgment, the court must view the facts in
the light most favorable to the non-moving party. State,
Farm Fire & Casualty Co. v. Martin, 872 F.2d 319, 320
(9th Cir. 1989).
35a
ANALYSIS
Defendant's Motion for Summary Judgment on the
Amended Complaint
Defendant urges the Court to grant summary
judgment with respect to both Plaintiffs' federal and
state claims for overtime compensation. The Court
addresses each claim in turn.
a Plaintiffs' Claims under the Fair Labor
Standards Act
Defendant contends that Plaintiffs' claims for
‘overtime compensation under the Fair Labor
Standards Act ("FLSA") are barred by the statute of
limitations. The Court agrees.
Section 255(a) of the FLSA, 29 U.S.C. §§ 216,
251-262, provides a limitations period of two years to
file an unpaid overtime compensation claim under the
FLSA, unless a willful violation can be established and
proven. Section 255(a) provides, in relevant part, as
follows:
Any action commenced on or after May 14, 1947, to
enforce any cause of action for... unpaid overtime. .
under the Fair Labor Standards Act. . . may be
commenced within two years after the cause of action
accrued, and every such action shall be forever barred
unless commenced within two years after the cause of
action accrued, except that a cause of action arising out
of a willful violation may be commenced within three
years after the cause of action accrued. . .
36a
29 U.S.C. § 255(a). A party commits "willful" conduct by
acting "willfully" or in "reckless disregard" that its
conduct was prohibited by the FLSA. See McLaughlin
v. Richland Shoe Co., 486 U.S. 128, 183-135 (1988) (to
obtain the benefit of the 3-year exception, the claimant
must prove that the employer's conduct was willful);
Trans World Airlines, Inc. v. Thurston, 469 U.S. 111,
128 (1985) (willful violation is not committed unless
claimant can prove that employer knew or showed
reckless disregard that its conduct was prohibited by
the FLSA); Service, Employees Int'l Union v. County
of San Diego, 60 F.3d 1346, 1855 (9th Cir. 1994) (same);
Mireles v. Frio Foods, 899 F.2d 1407, 1416 (5th Cir.
1990) (negligent violation of the statute does not
constitute willfulness and accordingly will not extend
statute).
The party that seeks to extend the statute of
limitations must prove the willful conduct because, as
the McLaughlin court noted, Congress made a
"significant distinction" between an "ordinary violation"
and a "willful violation" in enacting the 3-year
limitations period. The McLaughlin court stated,
The fact that Congress did not simply extend the
limitations period to three years, but instead adopted a
two-tiered statute of limitations, makes it obvious that
Congress intended to draw a significant distinction
between ordinary violations and willful violations.
McLaughin, 486 U.S. at 132. Due to this significant
distinction, an employer's negligent conduct or
incorrect assumption that a pay plan complies with the
FLSA does not constitute a willful violation. Id. at 135;
Trans World Airlines, 469 U.S. at 128. Similarly, a mere
37a
assertion that an employer knew that the FLSA was
applicable to its departments is not sufficient to
establish a knowing or reckless violation. See Armitage
v. City of Emporia, 782 F. Supp. 537, 545 (D. Kan. 1992),
rev'd on other grounds, 982 F.2d 430 (10th Cir. 1992)(3-
year period did not apply because plaintiffs failed to
produce evidence showing that defendant knew that its
flex time plan or standby plan violated the FLSA).
Here, the parties do not dispute that Plaintiffs
filed their Complaint in this action beyond the 2-year
limitations period, but before the 3-year period had run.
(Defendant's Motion for Summary Judgment on the
Amended Complaint. at 7; Plaintiffs' Memorandum in
Opposition to Eckard Brandes, Inc's Motion for
Summary Judgment on the Amended Complaint as to
Unpaid Overtime Wages and Hours (Mem. In Opp. to
Def.'s Summ. Judg.) at 6.) Plaintiffs contend that the 3-
year statute of limitations should apply because
Defendant willfully violated the FLSA. Specifically,
Plaintiffs argue that Defendant failed to provide to
Plaintiffs or post at Plaintiffs' job sites, calculations of
the prevailing wage rates for the jobs on which
Plaintiffs were working. The Court finds that
Plaintiffs have failed to meet their burden of proving
willfulness. See, e.g., Service Employees Int'l Union, 60
F.3d at 1355 (conclusory allegation does not constitute
evidence of a willful violation of FLSA); EEOC v.
O'Grady, 857 F.2d 383, 388 (7th Cir. 1988) (plaintiffs
must make a sufficient showing of a reckless or
| Hawaii Revised Statutes § 104-2(d)(2), requires that in all public
works contracts the employer shall post at the job site the
prevailing wage rate and shall provide to each laborer employed a
copy of the rate of wages. The FLSA requires no such posting.
38a
knowing violation).
Plaintiffs have not produced sufficient evidence
to demonstrate Defendant knew or showed a reckless
disregard that its conduct was prohibited by the FLSA.
The fact that Defendant may not have properly posted
prevailing wage rate information may, as Plaintiffs
allege, have handicapped Plaintiffs in their efforts to
determine whether they had been paid the correct
amount of overtime wages. The failure also may have
violated Hawaii law2 Such a failure, however, in no
way demonstrates, as a matter of law, that Defendant
willingly violated the FLSA. See id.; see also Armitage,
782 F. Supp. at 545 (plaintiff failed to establish willful
violation because plaintiff failed to establish that
defendant knew that it was violating the FLSA).
Without more, such a failure to post is consistent with a
careless oversight. Plaintiffs have cited no legal
authority to support their argument that a failure to
post prevailing wage information constitutes a willful
violation of the FLSA.
Because Plaintiffs have failed to present
evidence or legal authority demonstrating that
Defendant acted in a willful or reckless manner, the 3-
year FLSA statute of limitations does not apply. The
Court therefore GRANTS Defendant's Motion for
Summary Judgment on the Amended Complaint as to
Plaintiffs' overtime compensation claims under the
FLSA.
2 To be clear, the Court is not deciding this issue at this time.
39a
Il. Plaintiffs' Claims under Hawaii State Law
A. Overtime Compensation of Randell Riley
Plaintiffs' Amended Complaint alleges that
Defendant owes Plaintiffs overtime compensation back
pay pursuant to Hawaii Revised Statutes § 387-12(c) for
work performed by Plaintiffs during the time period
from January, 1990 through July 1996. Defendant has
argued that Riley is not entitled to recover under § 387-
12(c) because he was a salaried employee during the
relevant period, and earned approximately $5,000 per
month. See H.R.S. § 387-1 (exempting from the
definition of employee one who earns more than $1,250
per week). Plaintiffs have conceded this issue in their
Memorandum in Opposition. (Memo. In Opp. to Def.'s
Summ. Judg. at 2.) Plaintiffs similarly conceded this
issue in the summary judgment hearing held on August
18, 1999. The Court therefore determines that Riley
may not recover under H.R.S. § 387-12(c).
In Plaintiffs’ Memorandum in Opposition,
Plaintiffs argue that even if Riley may not recover
under H.R.S. § 387-12(c), he may still recover pursuant
to H.R.S. Chapter 104 ("Chapter 104"). This Chapter
governs employee wages on public works projects, and
does not contain the § 387-1 salaried employee
exemption. Although Plaintiffs did not allege a violation
of Chapter 104 in Plaintiffs' Amended Complaint, the
Court will consider the argument due to the fact that
the Federal Rules of Civil Procedure establish a liberal
system of notice pleading. See American Timber &
Trading v. First Nat'l Bank, 690 F.2d 781, 786 (9th Cir.
1982)("A party need not plead specific legal theories in
the complaint, so long as the other side receives notice
40a
as to what is at issue in the case.").
Plaintiffs argue that Riley was not reimbursed
for public works projects he worked on during the
years 1993 through 1996 (Mem. in Opp. to Def.'s Mtn.
for Summ. Judg. at 2.) Riley, in his declaration, does not
specify what public works projects Riley allegedly
worked on without being properly compensated. In his
declaration, Riley states only that, "I was working on a
State of Hawaii, City and County of Honolulu job and I
was doing laborers work and I believe I should have
been paid the prevailing wage rate . . ." (Declaration of
Randell A. Riley, July 29, 1999, 96.) Such a general
statement, which is inconclusive and lacks particularity,
fails to alert the Court to what projects Riley is putting
at issue.
The Court notes, however, that Riley states that
he performed the same type of work that-Kunimitsu
performed during 1996. (Id.) Kunimitsu, according to
his declaration, performed public contract work on two
jobs during 1996 - the Kailua Enchanted Lakes Pilot
Project ("Enchanted Lakes") and the Kaneohe
Wastewater Treatment Plant Project ("WWTP").
(Declaration of Lee T. Kunimitsu, July 29, 1999, q 4.)
Adding the statements from these two declarations
together, it appears that Riley is putting at issue two
contracts - Enchanted Lakes and WWTP. The Court,
accordingly, will consider evidence with respect to
these two projects. The Court will not consider
evidence with respect to any other projects, which
Riley attempts to put at issue by way of vague, general
statements. See Fed. R. Civ. P. 56(e)~Gif moving party
satisfies initial burden, the opposing party may not rely
on denials in the pleadings, but must produce specific
4la
evidence, through affidavits or admissible discovery
material, to show that a dispute exists); see also Lulan
v. National Wildlife Fed'n, 497 U.S. 871 (1990) (a non-
movant "is not to replace conclusory allegations of the
complaint or answer with conclusory allegations of an
affidavit."); T.W. Elec. Serv., 809 F.2d at 630 (party
opposing summary judgment cannot stand on its
pleadings, nor can it simply assert that it will be able to
discredit the movant's evidence at trial).
With regard to the two projects put at issue,-
Defendant has not set forth evidence to show that Riley
was properly compensated for back overtime nay and,
accordingly, has failed to carry its burden to
demonstrate the absence of a genuine issue of material
fact on this issue. The Court therefore DENIES
Defendant's Motion for Summary Judgment on the
Amended Complaint as to Riley's claims for overtime
compensation for the Enchanted Lakes and WWTP
projects. The Court GRANTS Defendant's Motion with
respect to all other projects.
B. Overtime Compensation of Lee T. Kunimitsu
Plaintiffs limit their overtime compensation
claim for Kunimitsu to a Chapter 104 claim for two
public works projects on which Kunimitsu worked.
(Mem. in Opp. to Def.'s Summ. Judg. at 3.) Specifically,
Plaintiffs contend that Kunimitsu was not properly
compensated for his overtime for the Enchanted Lakes
and WWTP projects. (Id.; Declaration of Lee T.
Kunimitsu, July 29, 1999, 94.) Defendant has not carried
its burden to demonstrate the absence of a genuine
issue of material fact with respect to Kunimitsu's back
pay for these two projects.
42a
Defendant has established that the Department
of Labor and Industrial Relations ("DLIR") conducted
an audit and investigation regarding Defendant's
compliance with Chapter 104 with respect to each of
these projects. Specifically, the DLIR investigated
Defendant's compliance with Chapter 104 for the years
1993 to 1996. (Exh. B to Defendant's Reply
Memorandum in Support of Defendant's Motion for
Summary Judgment on the Amended Complaint (Def.'s
Reply in Supp. of Mtn. for Summ. Judg.)) _The
investigation included four projects: Enchanted Lakes;
the Honouliuli Tributary Area Sewer Line
Rehabilitation in Wahiawa Whitmore; WWTP; and the
Wailuku Paia Sewer Line Rehabilitation. (Id.)
Upon completion of its investigation the DLIR
determined that Defendant had not fully complied with
Chapter 104 requirements but that Defendant's
oversight was unintentional. (Id.) Based on the DLIR's
investigation and determination, Defendant and the
DLIR entered into a settlement agreement. Under the
terms of the settlement agreement, Defendant agreed
to pay a total amount of $19,607.73 in order to
compensate employees for ali unpaid overtime on the
four investigated projects. (Exh. E to Defendant's
Separate and Concise Statement of Facts Re: Motion
for Summary Judgment on the Amended Complaint
(Def.'s Stmt. Facts Re: Summ. Judg.) at 3.) Pursuant to
the settlement. agreement, Defendant paid to
Kunimitsu back wages for overtime for each of the four
audited projects. (Defendant's Separate and Conciso
Statement of Facts re: Motion for Summary Judgment
on the Amended Complaint (Def.'s Stmt. Facts Re:
Summ. Judg.) 19; Plaintiffs' Separate and Concise
Statement of Facts Accepting the Facts in Defendant's
43a
Concise Statement in Support of its Metion for
Summary Judgment on the Amended Complaint, at 2.)
In particular, on June, 4, 1997, Defendant sent a check
for $1,080.34 to Kunimitsu for all back overtime wages
owed. (Exh. D to Def.'s Reply in Supp. of Mtn. Summ.
Judg.)
Although Defendant has shown the existence of
the settlement agreement between DLIR and
Defendant, Defendant has not demonstrated that
Kunimitsu accepted the terms of the agreement.
Kunimitsu has stated that he was not a party to the
agreement and that he never accepted the terms of the
agreement. (Declaration of Lee T. Kunimitsu, July 29,
1999, 45.) Defendant has not shown otherwise.
In addition, Defendant has failed to present
evidence to demonstrate that the settlement agreement
properly compensated Kunimitsu for all back overtime
compensation for the Enchanted Lakes and WWTP
projects. Plaintiffs allege that Defendant still owed
Kunimitsu back overtime compensation pay even after
Kunimitsu. received payment pursuant to the
settlement agreement. (Plaintiffs' Mem. in Opp. to
Def.'s Mtn. for Summ. Judg. at 3-4; Declaration of Lee
T. Kunimitsu, July 29, 1999, 95-7.) Defendant's only
response to Plaintiffs' allegation is a general statement
that Kunimitsu was fully reimbursed pursuant to the
settlement agreement. (Def.'s Reply Mem. in Supp. of
Mtn. for Summ. Judg. at 7.) Such a broad statement,
without more, is insufficient to establish that Kunimitsu
was fully reimbursed for back overtime pay for the
Enchanted Lakes and WWTP projects. Defendant has
failed to meet its burden to establish the absence of a
genuine issue of material fact with respect to the two
Re So eS ee ere LN ON AM ee Rta te TS a ne ENTE aD
44a
projects Kunimitsu has put at issue. The Court,
accordingly, DENIES Defendant's Motion for
Summary Judgment on the Amended Complaint as to
Kunimitsu's claims for overtime compensation under
Hawaii state law.
Plaintiffs' Motion for Partial Summary Judgment
as to Counterclaims for Count I - Breach of
Contract, Count II - Breach of Duty of Loyalty, and
Count III — Misappropriation of Trade Secrets
Plaintiffs have filed a Motion for Partial
Summary Judgment as to Count I, Count II, and Count
III of Defendant's Counterclaim. The Court will
address Plaintiffs' arguments with respect to each
Count in turn.
I. Defendant Kamaaina Pumping
Defendant's Counterclaim names __ three
counterclaim defendants - Randell A. Riley, Lee T.
Kunimitsu, and Kamaaina Pumping, a Hawaii general
partnership. Plaintiffs have requested that the Court
dismiss the Counterclaim as to Kamaaina Pumping
because Kamaaina Pumping was never employed by
Defendant and therefore cannot be liable for any of the
causes of action set forth in the Counterclaim.
Defendant does not respond to Plaintiffs' argument
regarding Kamaaina Pumping.
Defendant's Counterclaim states five causes of
action, as follows: Breach of Contract, Breach of
Fiduciary Duty of Loyalty, Misappropriation of Trade
Secrets, Interference with Business Expectancy, and
Punitive Damages and Attorneys' Fees. Each of these
45a
causes of action arises out of the individual plaintiffs’ -
Riley and Kunimitsu's - employment with Defendant.
Specifically, Defendant is basing its action on the
alleged fact that Riley and Kunimitsu used confidential
information learned while employed by Defendant in
order to successfully bid against Defendant on Bid No.
1606. Defendant has not alleged activity with respect to
Kamaaina Pumping sufficient to state a claim for any-of
the five causes of action asserted in Defendant's
counterclaim. See Parrino v. FHP, Inc., 146 F.3d 699,
706 (9th Cir. 1998) (bare, generalized claims with no
factual support are insufficient to state a claim pursuant
to Federal Rule of Civil Procedure 12(b)(6)).
In particular, Defendant does not allege that
Kamaaina Pumping, a Hawaii general partnership, was
ever affiliated with or interacted with Defendant.
Without such interaction, Kamaaina Pumping could not
have beached an employment contract with Defendant
or owed a duty of loyalty. Defendant has not shown
otherwise. Defendant, likewise, has not demonstrated
how Kamaaina Pumping could have misappropriated
Defendant's trade secrets or interfered with business
expectancy without having had any interaction with
Defendant. Due to Defendant's failure to set forth any
facts regarding Kamaaina Pumping, Defendant has
failed to state a claim with respect to that
counterdefendant. See id. The Court, accordingly,
DISMISSES all counterclaims as to Kamaaina
Pumping.
Il. Breach of Contract
Plaintiffs set forth a number of arguments in
support of their summary judgment motion as to
SRR aL SB eer os CSN came ME ION TNE SEN ay Mmm ee Re Oe ON Umm TS
NE STE SRN ELINA LG TR OO MO Ne en ee
- 46a
Defendant's Breach of Contract claim. The Court has
sorted out these arguments as follows. First, Plaintiffs
take issue with the contractual formalities surrounding
the Confidentiality Agreement at issue. Specifically,
Plaintiffs argue that Defendant failed to execute each
agreement and that each agreement lacks |
consideration. Second, Plaintiffs contend that the
Confidentiality Agreement was limited in scope to one
specific "pipelining" process and that it therefore did
not cover any of the work performed by Plaintiffs.
Third, Plaintiffs argue that Defendant never properly
explained to them the terms and conditions of the
Confidentiality Agreement. Fourth, Plaintiffs contend
that any information that they did use was public
knowledge. Each argument is addressed in turn.
Plaintiffs first argue that neither Confidentiality
Agreement is valid because Defendant failed to sign the
agreements. Plaintiffs' argument is flawed. A written
contract need not be signed by both parties to be valid.
See, e.g., 17A Am. Jur. 2d Contracts § 185 at 196 (1991).
Instead, the contract is valid if one party signs it and
the other acquiesces to its terms. Id; see also 1 Corbin
on Contracts § 31 at 114 (1963)("the making of a valid
contract requires no writing whatever; and even if
there is a writing, there need be no signatures .. . .”)
The record shows that both Riley and Kunimitsu
signed the Confidentiality Agreement form. (Lee T.
Kunimitsu Decl., June 14, 1999, 92; Randell A. Riley
Decl., June 14, 1999, 92.) It also appears from the
record that neither Riley nor Kunimitsu ever received
Confidentiality Agreements that had been signed by
Defendant. (Id.) This fact, however, does not preclude
Defendant from enforcing the Confidentiality
47a
Agreements, so long as Defendant acquiesced to the
agreements. Here, it appears that Defendant
acquiesced to the terms of the Confidentiality
Agreement because Defendant desired to protect its
confidential company information from disclosure by
employees. (Exh. B to Defendant's Separate and
Concise Statement of Facts in opposition to Plaintiffs’
Motion for Partial Summary Judgment (Def's Cone.
Stmt. in Opp.).) Piaintiffs have neither disputed the fact
that Defendant has acquiesced to the Confidentiality
Agreement nor presented any facts to demonstrate
otherwise. The Confidentiality Agreement is therefore
valid and enforceable despite the fact that D-fendant
may not have signed it.
Plaintiffs cursorily argue that Riley and
Kunimitsu provided no consideration to Defendant
because they were already employed by Defendant
when each signed a Confidentiality Agreement.
Plaintiffs' legal premise is incorrect. In an at-will
employment situation, « worker who continues to work
for the company gives not only his assent but also
consideration to any modification of the original
employment contract. See, e.g., Carter-v. Kaskaskia
Community Action Agency, 322 N.E.2d 574, 576 (Ill.
1974); Gishen v. Dura Corp., 285 N.E.2d 117 (Mass.
1972); Hathaway v. General Mills, Inc., 711 S.W.2d 227,
229 (Tex. 1986); L.G. Balfour Co. v. Brown, 110 S.W.2d
104, 107 (Tex. 1937). Here, the parties do not dispute
that both Riley and Kunimitsu were at-will employees.
The parties also do not dispute that Riley and
Kunimitsu continued to work for Defendant after they
had signed a Confidentiality Agreement, which served
as a modification of their at-will employment contract.
Plaintiffs continuing employment after executing the
48a
Confidentiality Agreement constituted — sufficient
consideration to support the Confidentiality Agreement
contract. Id.
Plaintiffs next argue that the Confidentiality
Agreement was limited in scope to only one specific
"pipelining" process and that it therefore did not cover
any of the work done by Plaintiffs. Specifically,
Plaintiffs contend that Bob Barnes, who served as a
project manager for Defendant during the time period
Plaintiffs signed the Confidentiality Agreement,
informed Plaintiffs that the Confidentiality Agreement
applied only to a newly patented process for pipelining
called "inliner." (Lee T. Kunimitsu Decl., June 14, 1999,
{2; Randell A. Riley Decl., June 14, 1999, 42.) Plaintiffs'
interpretation comports neither with the broad
language of the agreement nor Defendant's
interpretation of the agreement.
The Confidentiality Agreement itself uses broad,
sweeping language. For example, the agreement states,
in part, "[Plaintiff] has represented that [Plaintiff] will
protect the confidential material and information which
may be disclosed between EBD and [Plaintiff]." (Exh. 1
to Plaintiffs' Motion for Partial Summary Judgment at
1.) Confidential information is defined as including
business records and plans, financial statements,
customer lists and records, trade secrets, technical
information, products, inventions, product design
information, costs, computer programs, and copyrights
and other intellectual property. (Id.) Nowhere does the
Confidentiality Agreement suggest that the agreement
is limited to one specific technological process.
49a
Defendant's understanding of the scope of the
Confidentiality Agreement comports with the broad
language of the agreement. In particular, Defendant
believed that the Confidentiality Agreement applied to
Defendant's entire business, and not simply to one
particular project or technology. (Exh. B to Def.'s Conc.
Stmt. in Opp. at 199.) Defendant alleges that Plaintiffs
violated the clear terms of the Confidentiality
Agreement by inappropriately using cost, pricing,
technical and other confidential information in order to
successfully bid on a drywell cleaning project in the
County of Hawaii. (Counterclaim 5-8; Def.'s Conc.
Stmt. in Opp. at 4-5.) There remains a material issue of
fact as to whether the Confidentiality Agreement was
limited in scope to one particular technological process.
Plaintiffs’ interpretation appears to overlook the broad
language of the agreement itself and stands in contrast
to Defendant's interpretation. Plaintiffs, accordingly,
have not carried their burden to demonstrate that
there is no genuine issue of material fact regarding the
scope of the Confidentiality Agreement.
Plaintiffs also challenge the validity of the
Confidentiality Agreement on the grounds that
Defendant never properly explained to Plaintiffs the
terms and conditions of the agreement. This argument
has no merit. It is a general rule of contract law that a
party who signs a contract is bound by it and cannot
complain that he has not read it or did not understand
its contents. See Leong v. Kaiser Foundation Hospitals,
71 Haw. 240, 245 (Haw. 1990); see also Liberty Bank v.
Shimokawa, 2 Haw. App. 280, 283-284 (Haw. App. 1981)
(a failure to read or understand the contents of a
contract does not relieve the signing party of the
obligation imposed by it). Here, there is no doubt that
ii
50a
both Riley and Kunimitsu signed a Confidentiality
Agreement. Having signed the agreement, they cannot
now complain that Defendant failed to explain to them
the terms and conditions of the agreement. See id.
Plaintiffs last argue that they did not violate the
Confidentiality Agreement because any information
they used in connection with their bid for Bid No. 1606
was public information. The Court addresses this
argument in Section III of this Order. As explained in
that section, information regarding the use of a Vactor
truck and accompanying technology is _ public
information that can be readily obtained from such
sources as trade magazines and sales representatives.
There is no material issue of fact at issue with respect
to the use of information surrounding Vactor truck
methodology and technology. With respect to the issue
of the Plaintiffs' use of confidential cost and pricing
information, however, the Court has determined that a
genuine issue of material fact remains. Plaintiffs have
not set forth sufficient evidence to demonstrate that
they used solely public information in calculating their
bid on Bid No. 1601. The Court, accordingly, GRANTS
Plaintiffs' Motion for Partial Summary Judgment as to
Count 1, with respect to use of information surrounding
the use of Vactor truck methodology and technology.
The Court DENIES Plaintiffs' Motion for Partial
Summary Judgment as to the other contract violation
allegations of Count 1.
III. Duty of Loyalty
Plaintiffs argue that the Court should not
address the issue of a breach of the duty of loyalty
because the State of Hawaii has never explicitly
—aees
| 5la
| recognized a cause of action for breach of the duty of
| loyalty in an employer-employee scenario. Plaintiffs
suggest that the Court certify this issue to the Hawaii
Supreme Court. Plaintiffs also contend that any duty of
loyalty claim is barred by the statute of limitations. The
Court disagrees with Plaintiffs and therefore will not
grant Plaintiffs' summary judgment motion on this
issue.
A. Cause of Action for Duty of Loyalty
Pursuant to Rule 13(a) of the Hawaii Rules of
Appellate Procedure, a question may be certified if: (1)
there is a question concerning the law of Hawaii; (2)
which is determinative of the cause; and (3) there is no
clear and controlling precedent in Hawaii judicial
decisions. See Richardson v. City and County of
Honolulu, 802 F. Supp. 326, 344 (D. Haw. 1992). The
"[uJse of the certification procedure in any given case
‘rests in the sound discretion of the federal court."
Louie v. United States, 776 F.2d 819, 824 (9th Cir. 1985)
(quoting Lehman Bros. v. Schein, 416 U.S. 386, 391
(1974)). The certification process should not be used to
abdicate the duty of the federal courts to decide issues
by routinely certifying questions to the state supreme
court. See, e.g., Richardson, 802 F’. Supp. at 344. In the
instant case, the Court finds that certification is not
warranted.
The Hawaii Supreme Court did address the issue
of whether there exists a cause_of action for a breach of
the duty of loyalty in the employer-employee context.
In the case of Stout v. Laws, 37 Haw. 382 (Haw. 1946),
the Court indicated that it would recognize such a cause
of action. In Stout, the Hawaii Supreme Court
52a
considered whether three employees of a company - the
"superintendent of construction" and two "workmen" -
had misappropriated and inappropriately registered
their employer's tradename while still employed by
their employer. See Stout, 37 Haw. at 383. The
employees at issue had used their former employer's
company name - "Laws Roofing Company" - in a new
business the employees had started after leaving their
former jobs. Id. at 386-388. In analyzing this situation,
the Stout court stated,
An employee unquestionable owes a duty of loyalty to
his employer. Likewise an agent in respect to the
subject matter of his agency must exercise the utmost
good faith in the furtherance and advancement of the
interests of his principal. Agents, as to matters within
the scope of their duty, cannot assume positions
antagonistic to their employer's interest.
id.at_292. The Stout court ultimately concluded that
the employees had committed constructive fraud and
issued-declaratory and injunctive relief to the former
employer. Id. at 393.
The language used by the Stout court regarding
an employee's duty of loyalty reflects precisely the
Restatement Second of Agency's (the "Restatement")
definition of the duty of loyalty. According to the
Restatement, "[uJnless otherwise agreed, an agent is
subject to a duty to his principal to act solely for the
benefit of the principal in all matters connected with his
agency." Restatement 2d Agency § 387. Although the
Hawaii courts have not precisely addressed this section
of the Restatement, Hawaii courts have consistently
looked to the Restatement in articulating Hawaii law
— ae a ee ~~
53a
on agency. See, e.g., Pancakes of Hawaii, Inc. v. Pomare
Properties Corp., 85 Haw. 300 (Haw. Ct. App. 1997)
(relying on Restatement 2d Agency § 320, in connection
with agent-principal dispute); Southwest Slopes, Inc. v.
Lum, 81 Haw. 501 (Haw. Ct. App. 1996) (relying on
Restatement 2d Agency § 321). The Stout court's
articulation of a duty of loyalty, which closely resembles
the Restatement's definition, coupled with the fact that
Hawaii courts have consistently looked to the
Restatement in the past for legal guidance, strongly
suggests that Hawaii courts would find that there
exists a cause of action for an employee's breach of a
duty of loyalty owed to his employer.
Despite Plaintiffs' protestations to the contrary,
numerous jurisdictions recognize a cause of action for
an employee's breach of the duty-of loyalty. See, e.g.,
Weiss/Watson v. Lange, 1990 WL 33601 at *2 (S.D.
N.Y. Mar. 21, 1990) (employee breaches duty of loyalty
owed to employer by competing with employer during
period of employment); Knott's Wholesale Foods, Inc.
v. Azbell, 1996 WL 697943 at *3 (Tenn. App. Dec. 6,
1996)("duty of loyalty includes, of course, a duty not to
compete with the employer during the employment
relationship"); Eaton Co p. v. Giere, 971 F.2d 136, 141
(8th Cir. 1992) (duty of loyalty prohibits employee "from
otherwise competing with his employer, while he is still
employed"); Rehabilitation Specialists, Inc. v. Koering,
404 N.W.2d 301, 304 (Minn. 1987) (same); Stokes v. Dole
Nut _Co., 41 Cal. App. 4th 285, 295 (Cal. Ct. App.
1995)("[d]Juring the term of employment, an employer is
entitled to its employees' undivided loyalty"); American
Bldgs. Co. v. Pascoe Bldg. Sys., Inc., 392 S.E.2d 860, 864
(Ga. 1990) (when employer discloses its trade secret to
ar. employee in the course of employment, the employee
-
=
ea ee lee tt oe bet ee ee oe a, ee er
i |
54a
is bound by fiduciary duty not to use or reveal it for his
own personal benefit); TIE Sys., Inc. v. Telcom
Midwest, Inc., 560 N.E.2d 1080 (Ill. App. Ct. 1990)
(same); Gonzales v. Zamora, 791 S.W.2d 258 (Tex. Ct.
App. 1990) (same); Radio TV Reports, Inc. v. Ingersoll,
742 F. Supp. 19, 19-22 (D. D.C. 1990) (employee
breached duty of loyalty when he bid against his
employer); Higgins v. Medical College of Hampton
Roads, 849 F. Supp. 1113, 1119 (E.D. Va. 1994)
(employees breached the duty of loyalty by merely
participating in negotiations with employer's
competitors); see generally Employees’ Duty of Loyalty
and the Corporate Constituency Debate, 25 Conn. L.
Rev. 681, 692 (1993) (summarizing cases that have
recognized a duty of loyalty in the employment
context). The volume of cases that have found a cause of
action for breach of the duty of loyalty in the
employment context also suggests that Hawaii courts
would similarly find such a cause of action. Plaintiffs
have failed to cite a single case wherein a court has
been confronted with the issue and then failed to
recognize a cause of action for the breach of a duty of
loyalty in this context. The Court has located no such —
cases.
Further support for the fact that Hawaii courts
would recognize a cause of action for the duty of loyalty
comes from the fact that the State of Hawaii
- Department of Labor and Industrial Relations (the
"DLIR") has recognized that an employee owes a duty
of loyalty to his employer. See State of Hawaii
Department of Labor and Industrial Relations Decision
No. 9602693, September 30, 1996, Exh. K to ,
Defendant's Sep. and Cone. Stmt. of Facts Re: Motion
for Summ. Judg. On Count II of Counterclaim (Def.'s
55a
Cone. Stmt. Re: Count II). In that administrative
decision, the DLIR considered whether Kunimitsu was
entitled to unemployment compensation after
Defendant had terminated his employment. The DLIR
concluded that Kunimitsu was not entitled to benefits
because he had committed "misconduct" while employed
by Defendant. In so concluding, the DLIR stated that,
"[w]hen an employer hires a worker, loyalty is implicit
in the contract of hire." Id. at 3. This recognition of the
concept of duty of loyalty by a Hawaii administrative
agency suggests to the Court that Hawaii courts would
similarly find that an employee owes to his employer an
inherent duty of loyalty.
Based on the language used by the Hawaii
Supreme Court in Stout, the large volume of other
jurisdictions that have recognized a cause of action for
an employee's breach of a duty of loyalty, and the
DLIR's recognition of the duty of loyalty in this
context, the Court finds that Hawaii courts would adopt
such a cause of action. The Court therefore need not
certify this issue to the Hawaii Supreme Court.
B. Statute of Limitations
Plaintiffs next contend that even if a cause of
action exists, Defendants are barred by the applicable
statute of limitations. Specifically, Plaintiffs contend
that Hawaii Revised Statutes § 657-7, which sets a two-
year statute of limitations period, applies to this action
because Defendant is bringing a tort cause of action for
the breach of the duty of loyalty. Defendant, on the
other hand, argues that H.R.S. § 6571, which sets a six-
year statute of limitations, applies in this case because
Defendant's breach of the duty of loyalty claim is
ee ne ee ere ee ee
56a
brought in contract, not tort.2 The Court finds that
H.R.S. § 657-1 applies in this case.
The Hawaii Supreme Court has stated that
H.R.S. § 657-7 "has been interpreted to apply to ‘claims
for damages resulting from physical injury to persons
or physical injury to tangible interests in property." Au
v. Au, 63 Haw. 210, 216 (Haw. 1981) (emphasis in
original) (citations omitted). In the Au case, the court
was faced with the issue of which limitations period -
H.R.S. § 657-1 or H.R.S. § 657-7 - should apply for a
fraudulent representation claim that involved damages
to a home. In assessing the issue, the Au court stated
that "[t]he proper standard to determine the relevant
limitations period is the nature of the claim or right, not
the form of the pleading." Au, 63 Haw. at 214 (citations
omitted). The Au court went on to find that the nature
of a fraudulent representation claim -involved no
physical injury to any tangible interest in property. See
Au, 63 Haw. at 216. Accordingly, the Au court rejected
the application of § 657-7, and opted instead for § 657-
1(4). The court stated,
Although the end result of the fraudulent
representation was physical injury to appellant's
tangible interest in property, wherein H.R.S. § 657-7
would seemingly apply, we believe that the instant case
falls within the purview of H.R.S. § 657-1(4). The nature
of this claim is not the physical injury to property,
* The cause of action for breach of the duty of loyalty must be
brought in either contract or tort. This is so because there is no
cause of action for tortious breach of contract in the employment
context in Hawaii. See Francis v. Lee Enterprises, Inc., 89 Haw.
234 (Haw. 1999).
57a
rather it is the making of the fraudulent
representations concerning the condition of the home
which induced appellant to purchase it. Since
fraudulent representations are not governed by a
specific limitations period, the general limitations
period set forth in H.R.S. §657-1(4) applies.
Au, 63 Haw. at 216-217 (footnote omitted).4
In the instant case, Defendant has alleged no
physical injury to either person or property. Instead,
Defendant's alleged injury consists of the loss of a
contract - a nonphysical, intangible interest. Because
Defendant has alleged no physical injury of any sort,
the Court finds that it would be inappropriate to apply
H.R.S. § 657-7 to Defendant's breach of the duty of
loyalty claim. See Au, 63 Haw. at 216-217.
The Court also finds additional support for
application of H.R.S. § 657-1 in this case. Specifically,
the Court finds that Defendant's duty of loyalty claim is
contractual in nature because the claim arises out of the
employment contract between Plaintiffs and
Defendant. It is well-settled that the employment
relationship is a contractual matter. Where there is no
express contract, the common law implies the
contractual terms into the relationship. See, e.g.,
Kinoshita _v. Canadian Pacific Airlines, 68 Haw. 594
(Haw. 1986) (employment of indefinite duration viewed
* The Hawaii Supreme Court has not since strayed from its
position that § 657-7 applies only to physical injury to persons or to
tangible interests in property. In fact, in Pele Defense Fund v.
Paty, 73 Haw. 578, 597 n.14 (Haw. 1992), the Hawaii Supreme
Court reiterated this interpretation of § 675-7.
58a
as employment contract that is terminable at the will of
either party); McKinney v. National Dairy Council, 491
F. Supp. 1108, 1110-1111 (D. Mass. 1980) (same).
Because the employment situation is contractual, courts
that have-considered the duty of loyalty in the
employment context have consistently found that a
contract statute of limitations applies. See, e.g.,
Western Electric Co. v. Brenner, 360 N.E.2d 1091, 1094
(N.Y. 1977) (contract statute of limitations applied
because "employer-employee relationship is one of
contract, express or implied"); United States v. Moore,
765 F. Supp. 1251, 1254 (E.D. Va. 1991) (violation of 18
U.S.C. § 209, which sets forth duty of loyalty for certain
employees of the United States government, is
contractual in nature and accordingly contract statute
of limitations applies); United States v. Boeing Co., 845
F.2d 476, 482 (4th Cir. 1988), rev'd on other grounds,
494 U.S. 152 (1990) (acceptance of remuneration by
government employee from source other than the
United States constitutes a breach of the duty of
loyalty, and is contractual in nature; six-year contract
statute of limitations therefore applies). Plaintiffs have
cited to no cases in which the court applied a tort
statute of limitations for a duty of loyalty claim.
Here, Defendant alleges that Plaintiffs
misappropriated confidential information they obtained
while employed by Defendant, and then used that
information to formulate a bid on Bid No. 1606. This
allegation arises directly out of the at-will employment
contract between Plaintiffs and Defendant.’ Were it not
for the existence of the employment contract, no cause
° Neither party disputes that an at-will employment contract
existed between Plaintiffs and Defendant.
59a
of action would lie. Because the cause of action derives
from the employment contract, the contract statute of
limitations - H.R.S. § 657-1, applies.
Based on the Hawaii Supreme Court's holding in
Au, 63 Haw. at 216, and based on the fact that this
cause of action arises from an employment contract, the
Court concludes that H.R.S. § 657-1 applies. Because
H.R.S. § 657-1 is a six-year statute of limitations,
Defendant has timely filed the duty of loyalty claim.
Accordingly, the Court DENIES Plaintiffs' Motion for
Partial Summary Judgment as to Count II - Breach of
Duty of Employee Loyalty.
IV. Misappropriation of Trade Secrets
Plaintiffs argue that they have not
misappropriated any trade secrets because all
information they used in formulating their bid and
performing the drywell cleaning project on the Big
Island of Hawaii was public knowledge. The Court
believes there remains a genuine issue of material fact
with respect to Defendant's pricing and cost
information.
Hawaii's Uniform Trade Secrets Act, Hawaii
Revised Statutes § 482B, prohibits the acquisition and
use of a trade secret. A trade secret is defined by the
Act as,
[I]nformation, including a formula, pattern, compilation,
program device, method, technique, or process that:
(1) Derives independent economic value, actual or
potential, from not being generally know to, and not
60a
being readily ascertainable by proper means by, other
persons who can obtain economic value from its
disclosure or use; and
(2) Is the subject of efforts that are reasonable
under the circumstances to maintain its secrecy.
H.R.S. § 482B. A trade secret does not include any
information that is obtained through "proper means."
See Uniform Trade Secrets Act, Commissioner's
Comment to § 1 (1985); H.R.S. §482B. "Proper means"
inelude, among other things, the fact that defendant
learned of the trade secret through independent
discovery, public literature, public displays or
_advertising, or from the information's obviousness. See
Uniform Trade Secrets Act, Commissioner's Comment
to § 1. In order to gain trade secret protection, a party
must take reasonable precautionary measures to ensure
the secrecy of the product or technology at issue.
H.R.S. § 482B-2. The efforts required to maintain
secrecy are those "reasonable under the circumstances."
Uniform Trade Secrets Act, Commissioner's Comment
to §1.
A. Use of Vactor Truck Technology
Plaintiffs contend that Defendant's use of a
Vactor truck to clean drywells is not a protected trade
secret because information surrounding use of Vactor
trucks is public information that Plaintiffs acquired
through "proper means." The Court agrees with
Plaintiffs.
Both Riley and Kunimitsu stated in their
declarations that the use of Vactor trucks and the
6la
technology of such trucks is information that is freely
available to the public. (Lee T. Kunimitsu Decl., June
14, 1999, 1 7; Randell A. Riley Decl., June 14, 1999, Q 8.)
According to Plaintiffs' declarations a Vactor pumping
truck is a truck that uses high pressure water hoses to
wash down the sides of a drywell or culvert and then
suck up the debris through a vacuum. (Id.) Riley stated
that he had used similar technology when cleaning
sewer lines before he was employed by Defendant and
that he had observed other individuals in Hawaii use
similar technology to clean drywells and culverts.
(Randell A. Riley Decl., June 14, 1999, 98.) Riley also
indicated that he had read articles in trade magazines
that described the use of such vacuum pumping
equipment in the cleaning of drywells and culverts. In
support of Plaintiffs’ Motion for Partial Summary
Judgment, Plaintiffs submitted copies of numerous
trade magazine advertisements and articles
surrounding the use of such technology. (Plaintiffs'
Suppl. Exh. in Supp. of Plaintiffs/Counterclaim
Defendants' Motion for Partial Summ. Judg.) In
addition, Riley stated that Defendant had performed a
demonstration on how the Vactor truck worked in
cleaning drywells and culverts to employees of the
State of Hawaii. (Randell A. Riley Decl., June 14, 1999,
{10.) Riley also stated that Marty Coe, a man who sells
Vactor trucks, explained to Riley that the use of the
Vactor truck technology is the same on the mainland as
in Hawaii. (Id. at 98.) Finally, after Kamaaina Pumping
purchased a Vactor truck, Plaintiffs received a video
tape and instruction manual, which explained the
proper use of the truck. (Id.) Kunimitsu's declaration
regarding the use and technology of Vactor trucks
mirrored that of Riley.(Lee T. Kunimitsu Decl., June
14, 1999, 97.)
62a
Defendant has not presented any evidence to
contradict Plaintiffs' declarations regarding the use of
Vactor truck technology. Nor has Defendant presented
any evidence to demonstrate that the use of a Vactor
truck to clean drywells is information that is not freely
available to the public. The evidence submitted by
Plaintiffs, on the other hand, demonstrates that Vactor
trucks and the technology used by Vactor trucks is
ascertainable by "proper means." This is so because
information regarding the Vactor truck technology can
be readily found in published trade magazines and
through companies that sell Vactor trucks. In addition,
Defendant has not countered Plaintiffs' contention that
Defendant publically demonstrated how to use a Vactor
truck to clean drywells and culverts. Such a public
demonstration suggests that the technology is not a
trade secret because Defendant did not take
precautionary measures to keep the Vactor truck
technology a secret in the first place. See Uniform
Trade Secrets Act, Commissioner's Comment to § 1.
Because Vactor truck technology is freely available to
the public, and because Defendant did not take proper
measures to keep its Vactor truck method a secret, the
Court GRANTS Plaintiffs' Motion for Partial Summary
Judgment on Count III, as to the misappropriation of
information surrounding the use of Vactor truck
methodology and technology.
B. Use of Cost and Pricing Information
Plaintiffs argue that all cost and pricing
information used by Defendant was publically available
information. The Court finds that there is a genuine
issue of material fact as to this issue.
63a
Although neither the Hawaii Uniform Trade
Secrets Act nor-Hawaii caselaw addresses the issue of
whether cost and pricing information is a trade secret, a
number of other courts have given such information
trade secret protection. See, e.g., Support Systems
Associates, Inc. v. Tavolacci, 522 N:Y.S.2d 604, 606
(N.Y. App. Div. 1987)("The [cost and pricing]
information compiled by the plaintiff in generating the .
. . proposals was highly confidential and entitled to
trade secret protection."); SI Handling Systems, Ine. v.
Heisley, 753 F.2d 1244, 1260 (8d Cir. 1985)(""(C]osting'
and ‘pricing’ information is a whole range of data
relating to materials, labor, overhead, and profit margin
. ... We believe such information qualifies for trade
secret protection."); Ecolaire Inc. v. Crissman, 542 F.
Supp. 196, 206 (E.D. Penn. 1982). The Court believes
that the reasoning of these cases comports with the
broad reach of the Uniform Trade Secrets Act. See
Uniform Trade Secrets Act, Commissioner's Comment
to § 1 (definition of "trade secret" in Uniform Act
substantially broader than definition provided by the
Restatement of Torts (First)). The Court therefore
holds that cost and pricing information may be entitled
to protection under the Hawaii Uniform Trade Secrets
Act when a company takes reasonable precautionary
measures to keep the information secret.
In this case, Defendant contends that Plaintiffs
misappropriated both cost and pricing information.
With regard to cost information, Defendant alleges that
Plaintiffs had insider knowledge of cost factors such as
the necessary equipment and number of employees
required to perform drywell cleaning, and then used
that. information to determine cost factors for Bid No.
1606. Plaintiffs contend, on the other hand, that all cost
64a
information they used came from information they
received from the County of Hawaii regarding previous
bids made by other companies. (Lee T. Kunimitsu Decl.,
June 14, 1999, 49; Randell A. Riley Decl., June 14, 1999,
411.) Plaintiffs' blanket statement that they used only
information from prior bids does not settle this issue.
It appears to the Court that calculation of cost
and pricing factors is a rather complex task that would
require utilization of experience and prior industry
knowledge. Merely looking to past bids that are now
public would not likely give a bidder enough
information to calculate cost factors for a current bid.
This is so because "cost" information is a broad term
that refers to "a whole range of data relating to
materials, labor, overhead, and profit margin, among
other things." SI Handling Systems, Inc., 753 F.2d at
1260. Here, Plaintiffs do not dispute Defendant's
assertion that Plaintiffs worked for Defendant for a
number of years and had learned information about the
necessary factors that went into a drywell cleaning
project. (Declaration of Jeffrey Iwasaki-Higbee, Exh. D
to Defendant's Separate and Concise Statement of
Facts in opposition to Plaintiffs' Motion for Partial
Summary Judgment, 98.) The fact that Plaintiffs had
gained drywell cleaning experience while working for
Defendant and learned information regarding the costs
associated with the cleaning, suggests to the Court that
Plaintiffs may have used cost information obtained
during their employment with Defendant when
calculating their bid for Bid No. 1606. Plaintiffs' broad
contention that they used past bid information
published by the State of Hawaii is not conclusive.
65a
With regard to the issue of pricing information,
Defendant alleges that Higbee told Riley that
Defendant was going to bid on Bid No. 1606 and
"rollback" its prices by 10%, and that Plaintiffs then
used that information in formulating their bid on Bid
No. 1606. Plaintiffs contend that Higbee fabricated the
claim that he told Riley about a price rollback. In
support of this contention, Plaintiffs state that
- Kamaaina Pumping actually bid less than Defendant on
numerous tasks that were part of Bid No. 1606.
Plaintiffs cite to Exhibit 2 to Plaintiffs' Motion for
Partial Summary Judgment to support their contention.
Exhibit 2, though, does not support Plaintiffs'
argument.
An examination of that exhibit reveals that
Kamaaina Pumping substantially underbid Defendant
on all 8 sites that were a part of Bid No. 1606. Exhibit 2
also reveals that Plaintiffs underbid Defendants with
respect to substantially all of the numerous component
tasks that made up the total bid for each site. Such
underbidding su
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