Transverse, LLC v. Iowa Wireless Services, LLC

          THE HONORABLE LEE YEAKEL UNITED STATES DISTRICT JUDGE.

          REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE

          ANDREW W. AUSTIN UNITED STATES MAGISTRATE JUDGE.

         Before the Court are Plaintiff's Motion for Attorneys' Fees and Costs (Dkt. No. 393); Plaintiff's Motion for Leave to Amend its Complaint to Make Clear It Seeks Attorneys' Fees Under Contracts (Dkt. No. 394); IWS's Application for Attorneys' Fees and Costs (Dkt. No. 395); and all associated Responses and Replies. The undersigned submits this Report and Recommendation to the United States District Court pursuant to 28 U.S.C. § 636(b) and Rule 1(h) of Appendix C of the Local Court Rules.

         I. BACKGROUND

         Iowa Wireless Services, a wireless telephone services provider, hired Transverse, a software development company, to develop customized billing software. Transverse and IWS entered into two agreements: a “Contract for the Supply of: blee(p) Customer Care and Billing System” under which Transverse was to develop software for IWS; and a mutual Non-Disclosure Agreement dated March 3, 2009, under which IWS agreed to maintain the confidentiality of certain proprietary information of Transverse.

         The parties' relationship broke down, and Transverse sued in Texas state court asserting IWS breached both the Supply Contract and the NDA, as well as tort claims for misappropriation of trade secrets, conversion, and violation of the Texas Theft Liability Act. On July 9, 2010, IWS removed to federal court on the basis of diversity and countersued for breach of the Supply Contract. The claims related to the breach of the Supply Contract were tried to a jury and the remaining claims^[1]were tried to the bench.

         The jury found in favor of Transverse, determining that IWS breached the Supply Contract both by wrongfully terminating it and by violating an express prohibition to not give “a competitor access to the Service. ” The jury awarded Transverse lost profit damages, reliance damages, and lost value damages for the “access to the Service” breach. However, the district court set aside the award for the “access to the Service” breach because it determined that it was not supported by legally sufficient evidence. The district court also ruled against Transverse on its tort claims and on its claim for breach of the NDA. The Final Judgment, awarding Transverse in excess of $11 million in damages, was entered by the district court on September 30, 2013. Dkt. No. 305. On October 15, 2013, both parties separately moved for attorneys' fees, arguing that Texas law applied, and that each was entitled to fees pursuant to Texas Civil Practice and Remedies Code § 38 .001 et seq. Dkt. Nos. 306 & 308. Transverse argued that it was entitled to fees because it prevailed on its Supply Contract claims, and IWS argued that it was entitled to fees because it successfully defended the NDA claim, and the tort claims were “subsumed under” the defense of that claim. Upon motion, the district court stayed execution of its judgment, Dkt. No. 321, and once the parties appealed, Dkt. No. 323, dismissed without prejudice the competing motions for attorneys' fees. Dkt. No. 324.

         The parties cross-appealed. In Transverse I, the Fifth Circuit panel affirmed in part, reversed and rendered in part, vacated in part, and remanded. The panel held that: 1) IWS did breach the Supply Contract by wrongfully terminating but not by providing “access to the Service” to a competitor; 2) the district court should not have permitted Transverse to recover lost profits for a twelve-year period for the breach of the Supply Contract claim; 3) Transverse could not recover both lost profits and reliance damages for the same breach; and 4) IWS did breach the non-disclosure agreement. Transverse, L.L.C. v. Iowa Wireless Servs., L.L.C., 617 Fed.Appx. 272 (5th Cir. 2015).

         The court clarified to the district court the issues remaining on remand:

the proper amount and type of damages that Transverse may collect on its breach-by termination claim; the amount of damages, if any, that Transverse may collect for IWS's breach of the [non-disclosure agreement]; and whether IWS is liable under any of the tort theories pressed by Transverse.

617 Fed.Appx. at 282.

         On remand, the district court held a bench trial. Dkt. No. 355. This go around, Transverse elected reliance damages instead of lost profits, and the district court awarded Transverse $1.7 million in reliance damages for IWS's breach of the Supply Contract and determined that Transverse had “no cognizable damages” for IWS's breach of the non-disclosure agreement “as a matter of law.” Dkt. No. 358 at 7. Having determined that IWS's conduct resulted in no lost value to Transverse, the district court also rejected Transverse's misappropriation of trade secrets, conversion, and Texas Theft Liability Act claims. Id. at 7-9. The district court ordered that IWS take nothing on its counterclaim for breach of the Supply Contract and that Transverse take nothing on its claims against IWS for breach of the NDA. The district court also found, regarding attorneys' fees and costs: 1) IWS was not a prevailing party under the Texas Theft Liability Act (thus not entitled to a mandatory award of attorneys' fees and costs); and 2) IWS was not entitled to costs for the supersedeas bond premiums on the first appeal. Dkt. No. 359.

         The parties once again both moved for attorneys' fees. Transverse argued that it was once again entitled to fees pursuant to the Texas Civil Practice and Remedies Code § 38 .001 et seq., this time arguing it was the prevailing party on both the Supply Contract and the NDA. Dkt. No. 360. IWS also moved for attorneys' fees under the mandatory fee provision of the TTLA, arguing that “Transverses's claims for misappropriation of trade secrets, conversion, violation of the TTLA, and breach of contract based on disclosure, were all premised on the same facts and legal arguments, ” and that therefore, it was entitled to its fees for all of these claims. Dkt. No. 365-1 at 6. The parties again cross-appealed and the district court again dismissed the motions for fees without prejudice. Dkt. No. 367 & 375.

         On the second appeal to the Fifth Circuit, Transverse II, the court found as follows:

The district court correctly awarded damages. It also correctly determined that IWS is not entitled to the costs of the premiums for its supersedeas bond. Accordingly, we now AFFIRM in part, VACATE the district court's judgment only as to Transverse's take-nothing judgment on its Texas Theft Liability Act claim because IWS is the prevailing party, and REMAND because IWS is entitled to a mandatory award of costs and attorney's fees on this claim.

Transverse, L.L.C. v. Iowa Wireless Servs., L.L.C., 753 Fed.Appx. 184, 185 (5th Cir. 2018) (per curium). In a lengthy footnote, the Fifth Circuit discussed, and did not determine, whether Iowa law or Texas law was applicable to the fees issue. Id. at 5 n.2.^[2]

         On remand, the district court entered a scheduling order setting briefing deadlines for motions for attorneys' fees and costs. Fully briefed, these motions are now before the undersigned. Additionally. Transverse, fearing it has not properly pled a basis for a fee award for its claims under the Supply Contract under Iowa law, has moved to amend its complaint “to make clear that its attorneys' fee claim includes a claim for attorney's fees under Section 15 of the Mutual NonDisclosure Agreement and under ¶ 19.2.2 of the Contract, in addition to Tex. Civ. Prac. & Rem. Code §§ 38.001 et seq.” Dkt. No. 394 at 2.

         II. STANDARD OF REVIEW

         A. Motion for Fees and Costs

         Traditionally, under the American rule, “each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise.” Baker Botts LLP. v. ASARCO LLC, - U.S.-, 135 S.Ct. 2158, 2160 (2015). Accordingly, “[a] district court may not award attorneys' fees ‘unless a statute or contract provides' the basis for such an award.” Spear Mktg., Inc. v. BancorpSouth Bank, 844 F.3d 464, 470 (5th Cir. 2016) (quoting Baker Botts, 135 S.Ct. at 2164). Federal Rule of Civil Procedure Rule 54(d)(1) states that “costs-other than attorneys' fees-should be allowed to the prevailing party.” Local Rule CV-54 also states that unless a court determines costs at an earlier point, “costs will be assessed in the final judgment in a case, ” and that a “party awarded costs shall prepare and file a proposed bill of costs no later than 14 days after the entry of judgment.” Unless a party objects, the clerk of court shall tax costs without further intervention from the Court. Id.

         B. Motion to Amend

         When requested prior to trial, leave to amend “shall be freely given when justice so requires.” Fed.R.Civ.P. 15(a). Rule 15(a) evinces a bias in favor of amendment and requires that leave be granted “freely.” Chitimacha Tribe of La. v. Harry L. Laws Co., Inc., 690 F.2d 1157, 1162 (5th Cir. 1982). Leave to amend should not be denied unless there is a substantial reason to do so. Jacobsen v. Osbourne, 133 F.3d 315, 318 (5th Cir. 1998). There is a substantial reason to deny leave if the proposed amendment would cause undue delay or prejudice to the non-movant, if it is motivated by bad faith or dilatory motives, if there have been repeated failures to cure deficiencies with prior amendment, or if the amendment is futile. Foman v. Davis, 371 U.S. 178, 182 (1962); see also Martin's Herend Imps., Inc. v. Diamond & Gem Trading, 195 F.3d 765, 770 (5th Cir. 1999); Wimm v. Jack Eckerd Corp., 3 F.3d 137, 139 (5th Cir. 1993). However, the “mere passage of time need not result in refusal of leave to amend; on the contrary, it is only undue delay that forecloses amendment. Amendment can be appropriate as late as trial or even after trial.” 6 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1488.

         II. ANALYSIS

         A. Motion for Leave to Amend Complaint (Dkt. No. 394)

         It its First Amended Complaint Petition, Transverse moved for fees pursuant to Texas Civil Practice & Remedies Code §§ 38.001 et. seq., and § 134.005(b). Dkt. No. 49 at 11. Tranverse now moves for leave to amend its Complaint post-trial, asserting that:

Because of the risk, however small, that this Court or the Fifth Circuit on a third appeal, despite law of the case, could conclude that Iowa law governs the Contract, or that some recent court of appeals cases on §38.001 control and have changed the law since the 2012 trial, then in the interest of justice, Transverse should be given leave beforehand to amend solely to make clear that its attorneys' fee claim includes a claim for attorney's fees under Section 15 of the Mutual Non-Disclosure Agreement (“NDA”) and under Section 19.2 of the Contract, in addition to Tex. Civ. Prac. & Rem.Code §§38.001 et seq.

Dkt. No. 394 at 2.

         Transverse argues it should be afforded leave to amend its Complaint because of a potential change in Texas law. Specifically, since this case was tried, Transverse asserts there has been a split among lower Texas appellate courts regarding whether §38.001 of the Texas Civil Practice & Remedies Code permits recovery of attorney's fees against LLC's like IWS. See Freeman v. Harleton Oil & Gas, Inc., 528 S.W.3d 708, 755 fn. 39 (Tex. App.-Texarkana, July 07, 2017) (noting split). Transverse argues that amending its Complaint to explicitly tie its request for attorneys' fees to the NDA^[3] and the Contract, ^[4] ensures that Transverse can recover fees in the event that the Court finds that Iowa law, which does not allow for a fee award unless expressly provided for in the contract, controls the Supply Contract. Tranverse argues that allowing this amendment is fair because IWS was allowed to amend its Answer and Counterclaim after the amendment deadline and “on the eve of trial” to add claims for attorneys' fees under the Civil Practice & Remedies Code for its breach of contract and TTLA claims.

         IWS argues that Transverse has had nine years to amend its Complaint to add claims for contractual v. statutory attorneys' fees. Additionally, IWS asserts that adding a claim for fees under the Supply Contract is futile, as it does not provide for fees, and that adding a claim for fees under the NDA is also futile, as Transverse was not awarded damages pursuant to the NDA, and thereby does not qualify as a “prevailing party.” IWS further argues that amendment at this late date would prejudice IWS, which would be forced to expend resources to address a legal theory not previously presented. Additionally, IWS asserts this is not a case of inadvertence or excusable neglect, as Transverse has been on notice of its legal theory that Iowa law applies to the substantive issue of the case, since IWS filed its Second Amended Answer and Counterclaim. Dkt. No. 55.

         With regard to Transverse's claim that a “potential” change in Texas law requires this Court to allow it to amend its Complaint, Transverse misreads the law. Transverse cites to various cases in an effort to support its argument. See Moch v. East Baton Rouge Parish School Bd., 548 F.2d 594, 598 (5th Cir.), cert. denied, 434 U.S. 859 (1977) (holding that an intervening change in the law nullified the res judicata effect of a prior decision); Mankes v. Vivid Seats Ltd., 822 F.3d 1302, 1305 (Fed. Cir. 2016)) (holding that when the governing legal standards have changed during an appeal, the appellate court may vacate a determination made under superseded standards and to remand for consideration under the new standards); Dussouy v. Gulf Coast Inv. Corp., 660 F.2d 594, 603-04 (5th Cir.1981) (finding the district court abused its discretion in not allowing a third motion to amend plaintiff's complaint before trial). In the first two cases, the law actually changed, and the courts acted accordingly. In this case, Transverse fears a “potential” change in the law-there has yet to be an actual change, and Transverse fails to cite a Texas Supreme Court case showing any. The third case is also not a case where there was an intervening change in the law, merely a case where a plaintiff was improperly disallowed a late amendment after the factual circumstances of the case changed. Lastly, in Engel v. Teleprompter Corp., 732 F.2d 1238, 1242 (5th Cir. 1984), the Fifth Circuit, relying on Rule 54(c), held that it was appropriate to award attorneys' fees to a prevailing defendant after an appeal despite its failure to seek attorneys' fees in its pleadings. Engel, rather than relating to an intervening change in the law, was a special case where the defendant's circumstances changed. This is not the case here and this case does not support a need to amend the Complaint at this juncture. Transverse's argument that the Court should allow it to amend its complaint because of an intervening change in the law is without merit.

         The types of reasons that might justify denial of permission to amend a pleading include undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility of the amendment. A court may weigh in the movant's favor any prejudice that will arise from denial of leave to amend. E.g., Foman v. Davis, 371 U.S. at 182. In this case, Transverse has chosen to claim attorneys' fees only under the Texas Civil Practice & Remedies Code for the duration of the case, despite the fact that the contractual language upon which it now seeks to rely has been extant the entire time. Transverse has not given a good reason for its prior failure to plead a contractual basis for fees, other than it seemingly believed that Texas law applied. This is not a new issue. IWS has consistently asserted that Iowa law applies, specifically to an award of attorneys' fees, so Transverse has no excuse for failing to move to amend at an earlier juncture. Additionally, this case has been tried appealed, remanded, tried, appealed, and remanded again. The only issue now before the court is the award of costs and fees. Allowing amendment at this juncture would delay the Court's consideration of the issue now before it, and unduly prejudice IWS. Moreover, while perhaps not “futile, ” the amendment is not necessary, as Texas, and not Iowa law is applicable.

         The Court therefore RECOMMENDS that Transverse's Motion for Leave to Amend Complaint (Dkt. No. 394) be DENIED WITHOUT PREJUDICE.

         B. Transverse's Motion for Fees and Costs (Dkt. No. 393)

         Transverse, arguing it is the prevailing party on its breach of the Supply Contract and breach of the NDA claims, requests fees of $2, 733.749.00 and costs in the amount of $140, 368.38. Transverse argues that it is entitled to fees pursuant to Texas Civil Practice & Remedies Code §§ 38.001 et seq, the NDA § 15, and Paragraph 19.2.2 of the Supply Contract. Transverse argues that Texas law applies to its claims for fees. IWS argues that Transverse is not entitled to fees under the Supply Contract, because the contract is governed by Iowa law, which does not provide for fees for contract suits by statute. Under Iowa law, in order to recover fees for breach, a contract must specifically provide for a fee award by its express terms. Van Sloun v. Agans Bros., Inc.,778 N.W.2d 174, 178 (Iowa 2010). Second, IWS argues that transverse is not ...