Convey Compliance v. 1099 Pro Inc ( 2006 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CONVEY COMPLIANCE SYSTEMS, 
INCORPORATED,
Plaintiff-Appellee,
v.  No. 04-2335
1099 PRO, INCORPORATED,
Defendant-Appellant.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Gerald Bruce Lee, District Judge.
(CA-03-525)
Argued: November 30, 2005
Decided: March 30, 2006
Before NIEMEYER, MOTZ, and TRAXLER, Circuit Judges.
Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Motz and Judge Traxler joined.
COUNSEL
ARGUED: John Foster Anderson, TROUTMAN SANDERS, L.L.P.,
McLean, Virginia, for Appellant. Donald Wayne Niles, PATTER-
SON, THUENTE, SKAAR & CHRISTENSEN, P.A., Minneapolis,
Minnesota, for Appellee. ON BRIEF: Norman M. Abramson, PAT-
TERSON, THUENTE, SKAAR & CHRISTENSEN, P.A., Minneapo-
lis, Minnesota, for Appellee.
2 CONVEY COMPLIANCE SYSTEMS v. 1099 PRO, INC.
OPINION
NIEMEYER, Circuit Judge:
To end previous litigation between them in Minnesota state court,
Convey Compliance Systems, Inc., and 1099 Pro, Inc., entered into
a settlement agreement that included mutual general releases of all
claims between them, "known or unknown, arising out of any actions
or events occurring in whole or part prior to or concurrent with the
date" of the settlement.
When, after the settlement, 1099 Pro initiated a proceeding against
Convey in the World Intellectual Property Organization to compel
Convey to give up an Internet domain name that it had acquired
before the settlement, Convey commenced this action for breach of
the settlement agreement. 1099 Pro asserted that it was not aware of
the domain name dispute when entering into the settlement agreement
and that therefore its claim against Convey was not within the scope
of claims intended to be released in the settlement agreement. The
jury rejected 1099 Pro’s position and returned a verdict in favor of
Convey, declaring that 1099 Pro breached the agreement. The district
court, relying on the language of the settlement agreement, awarded
Convey its attorneys fees and costs in the amount of $406,750.
On appeal, 1099 Pro challenges (1) the sufficiency of the evidence,
(2) an evidentiary ruling made by the district court at trial, and (3) the
district court’s award of attorneys fees and costs. For the reasons that
follow, we affirm.
I
Convey is a Minnesota corporation engaged in the business of
developing and selling computer software products used to generate
tax forms, particularly those pertaining to compliance with IRS Code
§ 1099. Its customers typically include tax, accounting, and informa-
tion technology professionals, including chief financial officers,
comptrollers, and other members of accounting and information tech-
nology departments. Convey’s products range from relatively inex-
pensive software for desktop computers that typically generate less
CONVEY COMPLIANCE SYSTEMS v. 1099 PRO, INC. 3
than 10,000 tax forms to expensive and complex software for large
operations that require the generation of over a million forms.
1099 Pro is a California corporation that competes with Convey in
the market for the less expensive software.
In late 2000, 1099 Pro hired Convey’s former vice president of
sales and marketing, Edward J. McNamara, as a consultant. When
Convey learned that McNamara was employed by 1099 Pro, Convey
commenced an action against 1099 Pro and McNamara in Minnesota
state court, alleging unfair competition, particularly 1099 Pro’s con-
version of customer and prospect lists; McNamara’s breach of con-
tract; 1099 Pro’s tortious interference with a nondisclosure and
noncompete contract; McNamara’s breach of fiduciary and loyalty
duties; 1099 Pro’s vicarious liability for McNamara’s improper dis-
closures; and violations of the Minnesota Trade Secrets Act.
To end the Minnesota litigation, Convey and 1099 Pro entered into
a settlement agreement on May 17, 2001, in which they included
mutual releases and covenants not to sue. The mutual releases pro-
vided:
In consideration of all the foregoing, Defendants [1099 Pro
and McNamara] on behalf of themselves and any person or
entity claiming any rights through them, do hereby abso-
lutely and unconditionally release and forever discharge
Plaintiffs [Convey], their employees, agents, attorneys,
insurers, successors and assigns from any claims, demands,
rights and causes of action and damages, whether liquidated
or unliquidated, absolute or contingent, known or unknown,
arising out of any actions or events occurring in whole or
part prior to or concurrent with the date hereof, including
specifically, but without limiting the generality of the fore-
going, any and all claims Defendants have asserted or could
have asserted in the Litigation against Plaintiffs, of any
nature whatsoever.
The mutual covenants not to sue provided:
4 CONVEY COMPLIANCE SYSTEMS v. 1099 PRO, INC.
The parties hereby acknowledge and agree that they will not
initiate any legal action against any other party based on any
claim or obligation released pursuant to paragraph 3 or 4 of
this Agreement. Any breach of this provision will entitle the
non-breaching party to damages, including reasonable attor-
neys’ fees. This provision shall not be construed to limit
either parties’ [sic] right to initiate legal action to enforce
the terms of this Agreement.
Approximately three months before executing the settlement agree-
ment, Convey’s Marketing Communications Director, acting in the
routine course of her duties for Convey, registered the domain name
"www.1099professionals.com" and various cognate designations.
Convey’s Marketing Communications Director was not involved in
the Minnesota state court litigation and its settlement, and she did not
inform the Convey executives who were involved in the litigation
about the acquisition of the domain names. Accordingly, at trial, Con-
vey’s corporate executives who were involved in the settlement nego-
tiations testified that they could not have informed 1099 Pro about the
domain name acquisitions during negotiations because they them-
selves were unaware of the acquisitions.
Convey did not activate or begin using the domain name "1099pro-
fessionals.com" until July 2001, approximately two months after exe-
cuting the settlement agreement. When 1099 Pro learned that Convey
had registered the "1099professionals.com" domain name and began
using the name, it initiated an action in the World Intellectual Prop-
erty Organization ("WIPO") against Convey under the Uniform
Domain Name Dispute Resolution Policy, seeking an order transfer-
ring to it the domain name "1099professionals.com." Convey
defaulted in the WIPO proceedings, and a WIPO panel ordered the
transfer of the "1099professionals.com" domain name to 1099 Pro.
Convey commenced this action in the Eastern District of Virginia,
seeking damages for 1099 Pro’s alleged breach of its settlement
agreement and to reverse the WIPO decision. Convey alleged that in
the settlement agreement, 1099 Pro had agreed not to sue Convey for
any claim, known or unknown, that arose out of any actions or events
occurring in whole or in part prior to the settlement release. 1099 Pro
filed a counterclaim for federal trademark infringement, unfair com-
CONVEY COMPLIANCE SYSTEMS v. 1099 PRO, INC. 5
petition, and cyberpiracy arising from Convey’s acquisition and use
of the "1099professionals.com" domain name. Following a four-day
trial, the jury returned a verdict declaring that 1099 Pro breached the
settlement agreement and ruling against 1099 Pro on its counterclaim.
Following the verdict, the district court entered a declaratory judg-
ment and awarded Convey attorneys fees and costs in the amount of
$406,749.65.
This appeal followed.
II
1099 Pro contends that the evidence was insufficient to support the
jury’s verdict declaring that 1099 Pro breached the settlement agree-
ment in instituting the WIPO proceeding. Its contention is grounded
on the principle of Minnesota law that even though a release and cov-
enant not to sue may apply to "unknown" claims, such language is not
a bar to claims that were not within the contemplation of the parties.
1099 Pro argues that the testimony was undisputed in this case that
"at the time the parties settled the Minnesota trade secret case, neither
Convey nor 1099 Pro contemplated any cyberpiracy claims stemming
from Convey’s registration of the domain name, much less any trade-
mark or unfair competition claims that later might arise based on the
future use of the domain name."
Convey contends that the releases expressly apply to "unknown"
claims based on actions taken by either party prior to the execution
of the settlement agreement and that the parties in fact intended to
give such broad releases. Convey asserts that 1099 Pro drafted the set-
tlement agreement and "insisted" upon the breadth of the release pro-
visions. It argues that the jury’s verdict was amply supported by this
evidence.
Under Minnesota law, which the parties agree applies to the inter-
pretation of the settlement agreement, the binding effect of a general
release provision for unknown claims depends on the intent of the par-
ties. If it can be shown that the parties intended to release all unknown
claims, it will be considered binding. As the Minnesota Supreme
Court summarized:
6 CONVEY COMPLIANCE SYSTEMS v. 1099 PRO, INC.
[E]ven though a release expressly covers unknown injuries,
it is not a bar to an action for such unknown injuries if it can
be shown that such unknown injuries were not within the
contemplation of the parties when the settlement was agreed
upon, but that, if the parties did in fact intentionally agree
upon a settlement for unknown injuries, such release will be
binding.
Aronovitch v. Levy, 56 N.W.2d 570, 576 (Minn. 1953); see also Jef-
fries v. Gillitzer, 225 N.W.2d 17, 19 (Minn. 1975) ("If the parties are
found to have intended the release to be final as to unknown as well
as known injuries, then the release will be held binding"); Schmidt v.
Smith, 216 N.W.2d 669, 672 (Minn. 1974) (same); Doud v. Minneap-
olis Street Ry. Co., 107 N.W.2d 521, 524 (Minn. 1961) (same).
To determine the intent of the parties, Minnesota law directs that
the courts consider parol evidence "beyond the language of the
release itself." Jeffries, 225 N.W.2d at 19; Couillard v. Charles T.
Miller Hosp. Inc., 92 N.W.2d 96, 102 (Minn. 1958) (allowing the use
of parol evidence to determine the nature and extent of release); Lar-
son v. Sventek, 1 N.W.2d 608, 610 (Minn. 1942) (same). Thus, the
issue of a party’s intent is generally a matter of fact for the jury. Sch-
midt, 216 N.W.2d at 672; Couillard, 92 N.W.2d at 103; Aronovitch,
56 N.W.2d at 575.
In evaluating evidence of intent, the Minnesota courts have focused
on five factors: (1) the language of the release; (2) the presence of
legal counsel during execution of the release; (3) the existence of
fraud or misrepresentation; (4) wrongful concealment of facts or other
inequitable conduct; and (5) duress. Sorensen v. Coast-to-Coast
Stores, Inc., 353 N.W.2d 666, 669-70 (Minn. 1984).
Considering these factors in this case, we conclude that sufficient
evidence existed to support the jury’s verdict that 1099 Pro breached
its covenant not to sue by initiating a WIPO action, even though the
WIPO claims were not known to 1099 Pro at the time of the settle-
ment agreement. First, the language of the release itself is expansive
and covers the WIPO claims. The release language not only covers
all unknown claims, but all unknown claims accruing after the settle-
ment date so long as they arose out of "any actions or events occur-
CONVEY COMPLIANCE SYSTEMS v. 1099 PRO, INC. 7
ring in whole or part prior to" the settlement agreement. 1099 Pro’s
WIPO claims concededly arose in part out of Convey’s registration
of the domain name "1099professionals.com," even though certain
claims did not become actionable until Convey began using the
domain name after the settlement agreement. But since the adoption
and registration of the domain name were actions or events giving rise
to 1099 Pro’s claims and since those actions occurred prior to the set-
tlement agreement, the fully accrued claims were presumptively cov-
ered by the language of the release and covenant not to sue. See
Sorensen, 353 N.W.2d at 670 ("[T]he law presumes that parties to a
release agreement intend what is expressed in a signed writing").
Second, there was independent evidence that the parties intended
to release unknown claims. The jury heard evidence that the release
language in question was the subject of negotiation. When Convey
proposed during negotiations to narrow the release language so as to
commit resolution of any "unknown" claims to arbitration, 1099 Pro
expressly rejected the proposal, insisting on the broad language of the
release as drafted. Indeed, in a letter dated April 24, 2001, 1099 Pro
explained its position by expressing a "very strong desire not to have
future disputes."
Third, throughout the settlement negotiations, both 1099 Pro and
Convey were represented by counsel. There was no evidence of fraud
or misrepresentation, inequitable conduct, or duress during these
negotiations, as the district court explicitly observed. While 1099 Pro
argued that Convey purposefully withheld the information that it had
acquired the "1099professionals.com" domain name, there was no
evidence to support that contention. Indeed, the evidence showed the
contrary — that Convey’s Marketing Communications Director
acquired the domain name in the ordinary course of business and
never advised the top executives, who were involved in the settlement
negotiations with 1099 Pro, of that fact.
Fourth, there was express evidence of the parties’ intent to resolve
all disputes between them, whether known or unknown. Convey’s
president testified that "[i]n the settlement, we released any and all
claims, known or unknown; to me that pretty much encompasses
everything, known and unknown." Similarly, Convey’s chief financial
officer testified that Convey had offered to submit any unknown
8 CONVEY COMPLIANCE SYSTEMS v. 1099 PRO, INC.
claims to alternative dispute resolution but that 1099 Pro insisted on
a comprehensive release provision.
Thus, although 1099 Pro was able to show that it was not aware
of any disputes relating to the domain name at the time of the settle-
ment agreement, there was sufficient evidence from which the jury
could have concluded that the parties nonetheless intended to fore-
close future litigation arising from any action that occurred prior to
their settlements, whether known or unknown.
III
1099 Pro also contends that the district court abused its discretion
during trial in excluding evidence relating to the decisions made by
the WIPO panel ordering Convey to transfer the "1099profession-
als.com" domain name to 1099 Pro. The district court limited the evi-
dence about the WIPO proceeding to the fact that 1099 Pro
commenced the WIPO proceedings, instructing the jury that although
"the WIPO arbitration proceeding . . . has been mentioned several
times in different context during this trial," evidence of that proceed-
ing "is not admissible for purposes of making a judgment in this case.
You will have to decide based upon the evidence presented to you,
the facts and liability of this case."
Convey responds that the evidence that 1099 Pro sought to admit
was irrelevant and would have been prejudicial if admitted.
It is clear that the substantive rulings made in the WIPO proceed-
ing would not be relevant to whether 1099 Pro breached the settle-
ment agreement. Convey’s complaint for breach of contract depended
simply on 1099 Pro’s institution and prosecution of the WIPO pro-
ceeding, regardless of its success.
With respect to 1099 Pro’s counterclaims, both parties agree that
pursuant to the Uniform Domain Name Dispute Resolution Policy,
Convey was entitled to de novo review of the WIPO decision. See
Eurotech, Inc. v. Cosmos European Travels AG, 213 F. Supp. 2d 612,
617 n.10 (E.D. Va. 2002); Int’l Bancorp, L.L.C. v. Societe des Bains
de Mer et du Cercle des Etrangers a Monaco, 192 F. Supp. 2d 467,
CONVEY COMPLIANCE SYSTEMS v. 1099 PRO, INC. 9
475 n.16 (E.D. Va. 2002). 1099 Pro argues, however, that the exclu-
sion of the evidence about the results of the WIPO proceeding permit-
ted the jury to infer improperly that Convey had prevailed in the
proceeding and was therefore the rightful owner of the "1099profes-
sionals.com" domain name.
We conclude that the district court did not abuse its discretion in
limiting evidence about the WIPO proceeding. First, since the district
court was conducting a de novo review of the issues relating to regis-
tration and use of the domain name, the results of the earlier proceed-
ing were at best irrelevant and at worst prejudicial to the jury’s factual
determinations. Second, 1099 Pro cites no authority concluding that
the refusal to allow the introduction of such evidence was an abuse
of discretion. To the contrary, there is at least some authority pointing
in the opposite direction. See Eurotech, 213 F. Supp. 2d at 617 n.10
("Worth noting here is that the result reached in the WIPO proceeding
is neither admissible, nor entitled to any deference, with respect to the
merits issues presented in this suit"). Third, 1099 Pro’s concern about
a prejudicial adverse inference is belied by the jury’s having heard
evidence that Convey appealed the WIPO decision and was required
to transfer the domain name "1099professionals.com" to 1099 Pro.
What 1099 Pro was not allowed to introduce was evidence from the
WIPO proceeding concerning the qualifications of the WIPO panel or
their legal determinations. The district court was justifiably concerned
about preserving the integrity of the de novo review.
We find no abuse of discretion.
IV
Finally, 1099 Pro challenges the district court’s award of attorneys
fees and costs.
As a general matter, Minnesota law follows the American rule that
"each party bears its own attorneys fee in the absence of a statutory
or contractual exception." Hoang Minh Ly v. Nystrom, 615 N.W.2d
302, 314 (Minn. 2000). In this case there was a contractual exception.
The settlement agreement provided that "[a]ny breach of this [cove-
nant not to sue] will entitle the non-breaching party to damages,
including reasonable attorneys’ fees." Because 1099 Pro was found
10 CONVEY COMPLIANCE SYSTEMS v. 1099 PRO, INC.
liable by the jury for a breach of contract, the award of attorneys fees
became a matter of applying the terms of the settlement agreement.
1099 Pro contends that the terms of the settlement do not cover
fees incurred in defending its counterclaims because those claims
accrued only after the settlement agreement when Convey began
using the "1099professionals.com" domain name. This argument fails,
however, because the settlement agreement covers claims accruing
both before and after the settlement so long as they arise out of any
"actions or events occurring in whole or part prior" to the execution
of the settlement agreement. Because Convey acquired the "1099pro-
fessionals.com" domain name before execution of the settlement
agreement and 1099 Pro’s counterclaims arose in part out of that
acquisition, claims arising from those events, even in part, were
barred by the terms of the agreement. Accordingly, the award of rea-
sonable attorneys fees in defending those claims was consistent with
the terms of the settlement agreement.
1099 Pro contends also that even though the contractual language
might make provision for "attorneys’ fees," it makes no provision for
an award of costs. But this contention ignores the language of the set-
tlement agreement, which gives the non-breaching party "damages,
including reasonable attorneys’ fees." This contractual language is
sufficiently broad to cover as an element of damage the costs of
defending litigation initiated by 1099 Pro in breach of its covenant not
to sue.
Finally, 1099 Pro contends that the amount of the award, $406,750,
was unreasonable. The district court, however, considered Convey’s
application for fees and costs in some detail, measuring them not only
against going rates, but also against the overall costs of similar litiga-
tion. The district court observed that the fee application was carefully
prepared and supported by detailed billing, affidavits, and exhibits.
This was a complex and somewhat protracted case, and in the overall
circumstances, we cannot conclude that the district court abused its
discretion in determining the amount of its award. See Bass v. E.I
DuPont de Nemours & Co., 324 F.3d 761, 766 (4th Cir. 2003).
AFFIRMED