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Bcoww Holdings, LLC v. Daniel Collins, Jadac LLC.

United States District Court, W.D. Texas, San Antonio Division

September 5, 2017

BCOWW HOLDINGS, LLC, BCOWW OUTFITTERS, LLC, Plaintiffs
v.
DANIEL COLLINS, JADAC LLC, Defendants

          REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE

          ELIZABETH S. ("BETSY") CHESTNEY JUDGE.

         To the Honorable United States District Judge Fred Biery:

         This Report and Recommendation concerns the request for a preliminary injunction filed by Plaintiffs BCOWW, LLC and BCOWW Outfitters, LLC (collectively, “Plaintiffs” or “BCOWW”) against Defendants Daniel Collins and JADAC, LLC (“JADAC”) (collectively, “Defendants”). All pretrial matters in this case have been referred to the undersigned for disposition pursuant to Western District of Texas Local Rule CV-72 and Appendix C [#9].[1] The undersigned has authority to enter this recommendation pursuant to 28 U.S.C. § 636(b)(1)(B) (authorizing a U.S. Magistrate Judge to conduct an evidentiary hearing and submit proposed findings of fact and recommendations to a district judge on a motion for injunctive relief); see also Local Rule CV-72 (“The magistrate judges of this court are authorized to perform all the duties allowed to magistrate judges under the Federal Magistrates Act as amended in 28 United States Code § 636). This Court has subject matter jurisdiction over this matter under 28 U.S.C. § 1331 because Plaintiffs raise a federal question by asserting a violation of 15 U.S.C. § 1125(a).[2]Accordingly the Court has supplemental jurisdiction over Plaintiffs' state-law claims pursuant to 28 U.S.C. § 1367.

         The undersigned held a hearing on Plaintiffs' request for preliminary injunction on August 28, 2017 and August 29, 2017. After considering Plaintiffs' brief [#2-3], Plaintiffs' supplemental brief in support of their request for a preliminary injunction [#43-2], Plaintiffs' post-hearing brief [#51], the response and supplemental response in opposition to the request filed by Defendants [#35, #42], the testimony and other evidence presented during and in advance of the hearing, the arguments of counsel, and the case file, the undersigned recommends that the District Court DENY Plaintiffs' request for preliminary injunction.

         I. PROCEDURAL BACKGROUND

         This is an unfair competition case brought by Plaintiffs against a former member Defendant Daniel Collins, as well as Defendant JADAC, a company Collins formed after resigning from BCOWW. Plaintiffs filed suit against Defendants on May 1, 2017, asserting claims for breach of contract, trademark infringement, trade secret misappropriation, breach of fiduciary duty, tortious interference with prospective business relationships, tortious interference with existing contracts, common law unfair competition, and civil conspiracy [#1]. At the same time they filed their Complaint, Plaintiffs filed a motion requesting a temporary restraining order, expedited discovery, and preliminary injunction [#2]. Construing the motion for temporary restraining order as a motion for preservation of evidence, the District Court granted the request [#8] and referred all pre-trial matters to the U.S. Magistrate Judge [#9]. The case was then stayed for mediation pursuant to a mandatory mediation provision in the Restated Company Agreement [#19, #21]. The stay was lifted on July 12, 2017 when the mediation ended in impasse, and the case was re-referred [#26]. U.S. Magistrate Judge John Primomo then set a hearing on Plaintiffs' request for preliminary injunction, and the parties subsequently conducted expedited discovery [#29, #32]. On August 22, 2017, the case was reassigned to the undersigned, who held a two-day hearing beginning on August 28, 2017.

         II. LEGAL STANDARD

         The purpose of a preliminary injunction is to preserve the status quo by preventing irreparable harm until the respective rights of the parties can be ascertained during a trial on the merits. Mississippi Power & Light Co. v. United Gas Pipe Line Co., 760 F.2d 618, 627 (5th Cir. 1985); Nichols v. Alcatel USA, Inc., 532 F.3d 364, 372 (5th Cir. 2008). A party seeking a preliminary injunction must establish the following factors: (1) a substantial likelihood of success on the merits; (2) a substantial threat of irreparable harm if the injunction is not granted; (3) that the threatened injury outweighs any harm that may result from the injunction to the non-movant; and (4) that the injunction will not disserve the public interest. Mississippi Power, 760 F.2d at 621; Nichols, 532 F.3d at 371.

         “A preliminary injunction is an ‘extraordinary remedy' and should only be granted if the plaintiffs have clearly carried the burden of persuasion on all four requirements.” Mississippi Power, 760 F.2d at 621; Nichols, 532 F.3d at 372 (internal quotations and citation omitted). Accordingly, a preliminary injunction must be denied where the movant has failed sufficiently to establish any one of these four criteria. Black Fire Fighters Ass'n v. City of Dall., 905 F.2d 63, 65 (5th Cir. 1990) (emphasis in original). Only if a movant demonstrates a likelihood of success on the merits must the Court analyze the threat of irreparable harm or weigh the relative hardships. See State of Tex. v. Seatrain Int'l, S. A., 518 F.2d 175, 180 (5th Cir. 1975). “The decision to grant a preliminary injunction is to be treated as the exception rather than the rule.” Mississippi Power, 760 F.2d at 621.

         To show a substantial likelihood of success, a movant must present a prima facie case, but need not prove that he is entitled to summary judgment. Daniels Health Sciences, L.L.C. v. Vascular Health Sciences, L.L.C., 710 F.3d 579, 582 (5th Cir. 2013). Courts look to the standards of substantive law when determining whether this element has been met. Miss Power, 760 F.2d at 622.

         Once a movant establishes a substantial likelihood success on its claim, the Court evaluates whether a substantial threat of irreparable harm exists if the injunction is not granted. To meet this factor, a plaintiff must show “a significant threat of injury from the impending action, that the injury is imminent, and that money damages would not fully repair the harm.” Humana, Inc. v. Avram A. Jacobson, M.D., P.A., 804 F.2d 1390, 1394 (5th Cir. 1986). But “[t]he purpose of an injunction is to prevent future violations.” United States v. W. T. Grant Co., 345 U.S. 629, 633 (1953) (emphasis added). Where a movant requests injunctive relief on the basis of a defendant's past violations, “the ultimate test . . . is whether [the] defendant's past conduct indicates that there is a reasonable likelihood of further violations in the future.” Sec. & Exch. Comm'n v. Blatt, 583 F.2d 1325, 1334 (5th Cir. 1978); see also Armstrong v. Turner Indus., Inc., 141 F.3d 554, 563 (5th Cir. 1998) (“[t]o pursue an injunction . . . the [plaintiffs] must allege a likelihood of future violations of their rights by [the defendant], not simply future effects from past violations.”). This is because “[i]njunctive relief is not to punish for past violations, but to prevent future violations.” Wirtz v. Lone Star Steel Co., 405 F.2d 668, 670 (5th Cir. 1968).

         A trial court generally holds an evidentiary hearing on a request for preliminary injunction to resolve factual disputes apparent from the parties' conflicting evidence. See Kaepa, Inc. v. Achilles Corp., 76 F.3d 624, 628 (5th Cir. 1996); see also Heil Trailer Int'l. Co. v. Kula, 542 Fed. App'x 329, 334 (5th Cir. 2013). At this hearing, “the procedures in the district court are less formal, and the trial court may rely on otherwise inadmissible evidence, including hearsay evidence.” Sierra Club, Lone Star Chapter v. F.D.I.C., 992 F.2d 545, 551 (5th Cir. 1993). As with all other evidentiary hearings, a trial court weighs the evidence and may make credibility findings. See United States v. Edwards, 333 F.2d 575, 578 (5th Cir. 1964). “Although the district court may employ informal procedures and rely on generally inadmissible evidence [at the preliminary injunction stage], the record must nevertheless support the district court's decision.” Sierra Club, 992 F.2d at 551 (citing Fed.R.Civ.P. 52).

         III. FINDINGS OF FACT

         During the hearing, Plaintiffs called the following witnesses: Lizabeth “Libby” Williams, Daniel Collins (through his video-taped deposition), John Williams, and Osborn Barrett. Plaintiffs also offered Collins's deposition transcript (Exhibit 1), Deposition Exhibits 1- 50[3], and Exhibits 2-37, 51-53, which the undersigned admitted.[4] Defendants recalled Daniel Collins (live) and John Williams, and offered Exhibits 1-23, which the undersigned admitted. The undersigned makes the following factual findings, based upon this evidence.

         A. Formation of BCOWW

         1. BCOWW is a company formed by members John Williams, his wife Libby Williams, Osborn Barrett, and John Williams's childhood friend, Defendant Collins, on or about January 1, 2007. (See Restated Company Agreement, Collins Dep. Ex. 4). Collins and Barrett were both BCOWW Vice Presidents. (See Collins Dep. Ex. 3; Collins testimony).

         2. The original purpose of BCOWW was to source goods in China that would be brought to the United States and resold at a profit. (See Ver. Compl. [#1] ¶ 8; see also Libby William and John Williams testimony.)

         3. Pursuant to BCOWW's Restated Company Agreement, all members were required to “bring all investment or business opportunities to the Company” that they became aware of and “which are within the scope of the purposes of the company.” (Restated Company Agreement ¶ 11.8). Members also acknowledged in the Agreement that “from time to time, they may receive information from or regarding the Company in the nature of trade secrets or that otherwise is confidential, the release of which may be damaging to the Company.” (Id. ¶ 12.12). Accordingly, each member agreed to “hold in strict confidence any information received regarding the Company that is identified as being confidential” and not to disclose it to any non-member except to “advisers or representatives of the member . . . but only if the recipients have agreed to be bound by the provisions of [the Agreement].” (Id.) The Restated Company Agreement was executed by all of BCOWW's founding members. (Id.)

         4. In forming BCOWW, John Williams, Libby Williams, and Barrett each invested capital in the Company, and received Class A stock for their investment. (See Schedule A to Restated Company Agreement; see also John and Libby Williams testimony) Collins, on the other hand, received Class B stock for his investment of time and prior experience in developing and sourcing products overseas. (See Schedule A to Restated Company Agreement; see also John and Libby Williams testimony).

         B. The Employment Agreements

         5. Shortly after the company's formation, BCOWW requested that an attorney prepare employment agreements for the members/employees to sign. (See Libby Williams testimony). The attorney, Larry Berkman, did, in fact, draft an agreement, which imposes nondisclosure, non-solicitation, and non-compete obligations on BCOWW employees. (Id.; see also Collins Dep. Ex. 5). John Williams, Libby Williams, and Osborn Barrett all testified that they signed their agreements, although none was able to produce an executed copy of the agreement he or she executed.

         6. Collins admits that he received the draft agreement from the attorney. Collins, however, vehemently denies that he ever executed an agreement. In fact, he was able to produce the original letter from the attorney's firm enclosing the agreement and requesting that he sign it and return it in the enclosed envelope. (See Def. Ex. 21). The original, unexecuted employment agreement was transmitted by Berkman's secretary on bonded paper to Collins on or about April 13, 2007. In the cover letter, which is also printed on bonded paper and signed in blue ink, Berkman's secretary requested that Collins sign the agreement, forward the original to John Williams “so that it will be fully executed, ” and transmit a copy to Berkman in the self-addressed enclosed envelope. (See id.). Berkman, like BCOWW, does not have an executed copy of Collins's employment agreements in his records-presumably because Collins never returned the envelope as requested. Collins testified that he did not sign the agreement because he thought it would prevent him from being able to make a living. Collins's claim that he never signed the employment agreement is corroborated by Defendants' Exhibit 21 as well as by the fact Plaintiffs have been able to produce an executed version.

         7. Despite this evidence, BCOWW claims Collins executed the employment agreement. (See Ver. Compl. ¶ 10; Ex. B to Verif. Compl.; Libby and John Williams testimony). BCOWW has accused Collins of stealing a folder allegedly containing the signature pages of employment agreements executed by each BCOWW member when Collins lived with the Williamses. (See Ver. Compl. ¶¶ 27-30; see also Libby Williams testimony). BCOWW makes this accusation without any proof except that Collins had access to the office where company documents were stored while he lived with John and Libby Williams.[5]

         8. During the hearing, Libby Williams testified that she recalled seeing the executed signature page[6] to Collins's employment agreement in the pocket of BCOWW's binder at some point approximately two to three years ago. Notably, this would have been years after Collins resided with the Williamses, and therefore this testimony is inconsistent with BCOWW's accusation that Collins stole the documents when he lived with the Williamses. Similarly, John Williams testified that he, too, recalled seeing a copy of Collins's signature page in the BCOWW binder, and he is “positive” that the notebook contained Collins's signature page along with signature pages for the other BCOWW members. But John Williams cannot recall when, in the past decade, he last remembers seeing these signature pages. Moreover, neither John nor Libby Williams can recall how BCOWW allegedly obtained Collins's signature page. The Williamses each testified that they never saw Collins execute or deliver a signed copy of the employment agreement. John Williams's speculative testimony that Collins likely handed him the executed signature page is unconvincing.

         9. BCOWW's final member, Osborn Barrett, claimed during his testimony that “everyone” signed the employment agreement, but like the Williamses, Barrett admitted that he did not see Collins execute the agreement. Nor did Barrett claim he ever saw a copy of Collins's executed agreement or even the signature page. Indeed, Barrett testified that he was not even sure the unexecuted copy of the employment agreement he produced in this case (Exhibit 5 to Collins's deposition) was the “final final [agreement], ” i.e., that it could have been an earlier draft. Barrett also admitted he does not have “the best memory.”

         10. John Williams admitted that nobody ever told Collins he could only continue working with BCOWW if he signed the employment agreement.

         11. BCOWW has submitted evidence indicating that at one point Collins may have been under the impression he had executed an employment agreement with the company. Specifically, shortly before his resignation, Collins contacted BCOWW's attorney, Larry Berkman, to inquire about “what [Berkman] had relating to possible employment agreements.” (See Collins testimony). BCOWW also offered emails sent by Collins in which he discusses a need to “void” his employment agreement with BCOWW. (See, e.g., Collins Dep. Exs. 8-9). This evidence arguably conflicts with Collins's testimony that at no point did he believe he had ever executed a non-compete agreement with BCOWW, although Collins contends these communications just demonstrate his efforts to confirm that no executed agreement existed, and that he took these steps after he became aware BCOWW was taking a contrary position. Whether or not Collins ever believed that he may have executed an agreement, the evidence presented during the hearing makes it very unlikely that a fact finder would conclude that Collins in fact executed an agreement.

         C. BCOWW's Texas and fleur-de-lis waffle makers

         12. Shortly after BCOWW's formation, Collins and John Williams traveled to China looking for manufacturers that could make products for resale in the United States. (See John Williams testimony). Although BCOWW explored manufacturing various types of products, it eventually settled on producing a home waffle maker that could make waffles in the shape of Texas. (Id.) During their trip to China, Collins and Williams visited the Canton fair-a trade fair with a focus on export trade[7]- and encountered a booth hosted by a Chinese manufacturer specializing in producing home appliance products. (Id.) That manufacturer was later bought out by a company known as Elec-tech. (Id.)

         13. John and Libby Williams testified that BCOWW thereafter engaged Elec-tech to manufacture the Texas waffle maker, graphic artist Bruce Carr to design the box, and engineer Scott Crossman to design the plates. According to Libby Williams, BCOWW also sought the assistance of Chinese consultant HaiJie Qi to help facilitate sourcing from China. All of these individuals were engaged as contractors; none were employees of BCOWW. (See Libby Williams testimony). It is undisputed that Collins had relationships with Crossman and Qi that predated his or their relationship with BCOWW. (See id.; see also Collins testimony). Moreover, Elec-tech is a publicly available company. (See http://www.elec- tech.com.hk/company/index.php).

         14. It is also undisputed that BCOWW did not enter into exclusivity or non-disclosure agreements with Carr, Crossman, Qi, or Elec-tech. (See Libby and John Williams testimony). In fact, there was no evidence presented at the hearing that Carr, Crossman, Qi, or Elec-tech were placed under any restrictions regarding how they were to treat information received from or provided to BCOWW or information about BCOWW. There is no evidence in the record that any of these contractors were made aware of, let alone that they agreed to be bound by, the Restated Company Agreement and its confidentiality provision, notwithstanding Paragraph 12.12's requirements.

         15. In 2011, BCOWW began producing and selling a second waffle maker-one that made waffles in the shape of a fleur-de-lis. (See Libby and John Williams testimony).

         D. BCOWW's maple-leaf waffle maker

         16. Sometime between 2010 and 2012, BCOWW discussed expanding its product line to include a waffle maker that makes waffles in the shape of a maple-leaf. The parties dispute who conceived of this idea. Libby and John Williams both testified that Barrett conceived of the idea based upon his Canadian roots, while Collins testified that the idea was his. Regardless, it is undisputed that BCOWW invested money exploring the concept up until approximately 2015, paying Crossman to engineer the maple-leaf plates and Carr to create the design work for the box. (See, e.g., Pl. Exs. 3-9). BCOWW also contracted with a “maple leaf sales guy.” (Pl. Ex. 7).

         17. As with the Texas and fleur-de-lis waffle makers, BCOWW did not enter into exclusivity agreements with Carr, Crossman, Qi, or Elech-tech with respect to the maple-leaf waffle maker. (See Libby and John Williams testimony). Nor did BCOWW ever require these vendors to sign non-disclosure agreements. (Id.) When questioned by the undersigned, John Williams admitted that company information was routinely provided to these vendors via unsecured email, and that the documents were not marked “confidential.” (See John Williams testimony). Moreover, despite the procedures outlined in Paragraph 12.12 of the Restated Company Agreement, BCOWW never placed any restrictions upon the vendors' storage or use of the information; nor did BCOWW even have an expectation that the vendors keep the information confidential. (See John Williams testimony).[8] As John Williams conceded, Crossman would have been free to openly use BCOWW's designs in his customer portfolio. (Id.) Finally, the evidence reveals that BCOWW did not even retain copies of information any information relating to the maple-leaf waffle maker. Instead, BCOWW left all of this information in the hands of its vendors. (See Collins Dep. Ex. 27) (John Williams email to Qi requesting “[a]ny information, design, or engineering plans” that Qi has regarding the Texas, fleur-de-lis, and maple-leaf waffle makers).

         18. When it initially pursued the maple-leaf concept, BCOWW secured interest in the product from retailer Canadian tire and explored whether other large retailers such as TJX and Costco Canada would also be interested. (See Pl. Exs. 8-9; Collins Dep. Ex. 33).

         19. Over the years, Collins requested on several different occasions that BCOWW bring the maple-leaf product to market. (See Collins testimony; see also Def. Ex. 4). However, from 2012 through 2016, the other BCOWW's members informed Collins that this could not occur at least until the company paid down its line of credit. (See Libby and John Williams testimony & Collins testimony). Collins testified that John Williams informed him that the other BCOWW members would also first need to also be paid back their initial investment, which―according to Collins-would have taken many years. (See Collins testimony).

         E. Collins begins pursuing the maple-leaf waffle maker on his own, while still an officer and member of BCOWW.

         20. Disagreeing with the “financial management decisions” of the other members as well as their “lack of desire to grow the business, ” Collins informed Qi on August 12, 2016 that he had decided to “do[] the Canadian Maple Leaf waffle maker on [his] own-outside BCOWW, ” and inquired whether Qi would join him in his new venture. (See Collins Dep. Ex. 23). When Qi asked Collins why he would not simply purchase BCOWW to pursue this opportunity, Collins responded that he “do[es] not think the cost of buying the business would provide a successful foundation for continuing the business.” (Id.) However, Collins also noted that “maybe in the future once the business really starts to flounder there could be an opportunity where my partners are more willing to look at a realistic price.” (Id.) Although Collins recognized that there was a risk in pursuing this endeavor without BCOWW, Collins explained to Qi that because he was forming a new company with a different name, it would be hard for his partners to discover he was starting a competitive company. (Id.) Finally, Collins informed Qi that the legal “down side is minimal.” (Id.) According to Collins, even if BCOWW decides to pursue legal action “there is no way to patent or trademark any of the work that has been done so far.” (Id.)

         21. Thereafter, Collins, while still a BCOWW member and officer, took active steps to begin forming a new company, JADAC, to compete with BCOWW in producing and selling maple-leaf waffle makers. The evidence reveals that Collins sought to use BCOWW's design, artwork, and packaging to produce a similar, if not identical, maple-leaf waffle maker, as the one Collins was involved in designing during his time with BCOWW. Specifically, Collins contacted Carr to obtain a quote regarding the cost to “modify the unit box artwork, instruction sheet, and shipping cartoon with new company verbiage and network.” (See Collins Dep. Exs. 34-36). In one email to Carr, Collins revealed that the “basic unit design will remain the same except we will reduce the supplier from 800 to 700 watts.” (Collins Dep. Ex. 34). In another series of emails to Carr, Collins explained, “my new company name will be JADAC LLC. I will be setting that up later this week.” (See Collins Dep. Ex. 35). “I need to settle some open issues with BCOWW and set up my LLC. Then we are off to the races.” (See Collins Dep. Exs. 36). On the advice of Carr, Collins aimed to have the product ready in time for Canada's Sesquicentennial, which was July 1, 2017. (See Collins Dep. Exs. 8, 33; see also Collins testimony).

         22. Collins also continued to solicit Qi's participation in his new venture, directing Qi to contact BCOWW's manufacturer, Elec-tech, to see if it could manufacture the maple-leaf waffle maker using BCOWW's current design but modifying the wattage and powder coating. (See Collins. Dep. Exs. 24, 29; see also Pl. Ex. 12). To aid in his discussions with Elec-tech, Qi sent the manufacturing company a file containing a maple-leaf design that Collins had worked on for BCOWW (presumably with Crossman) several years prior. (See Collins Dep Ex. 24).

         23. Collins concedes that he never received BCOWW's permission to use the maple-leaf design. (See Collins Dep. at 163:6-22).

         24. On August 30, 2016, Collins emailed Qi the following “high level plan” in pursuing the maple-leaf waffle maker:

#1. Get free of BCOWW - by mid -September #2. Approach Canadian Tire to see what sort of interest ...

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