Safe Acquisition, Llc v. Gf Protection Inc. ( 2019 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
SAFE ACQUISITION, LLC, a
Washington corporation; LUCIDY, LLC, No. 77507-3-I
a Washington corporation; and SCOTT
FONTAINE, an individual, DIVISION ONE
Appellants, UNPUBLISHED OPINION
V.
GF PROTECTION INC., dlbla
GUARDIAN FALL PROTECTION, a
Washington corporation,
Respondent. FILED: March 25, 2019
APPELWIcK, C.J. — SAFE sued GFP, alleging that GFP breached the
parties’ contracts in failing to market and sell SAFE’s products. In the ongoing
litigation, SAFE moved to strike a contractual provision between GFP and its
former president, Marquardt, barring Marquardt from assisting SAFE in its lawsuit.
The trial court denied the motion. After the discovery period ended, SAFE moved
for an order to compel GFP to produce documents relating to the sale of its
company and “to produce” GFP’s alleged owner for a deposition. The trial court
denied the motion. We affirm the order denying SAFE’s motion to strike, and
decline to grant discretionary review of the order denying SAFE’s motion to compel
GFP to produce documents.
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
SAFE ACQUISITION, LLC, a
Washington corporation; LUCIDY, LLC, No. 77507-3-I
a Washington corporation; and SCOTT
FONTAINE, an individual, DIVISION ONE
Appellants, UNPUBLISHED OPINION
V.
CF PROTECTION INC., dibla
GUARDIAN FALL PROTECTION, a
Washington corporation,
Respondent. FILED: ______________
APPELWICK, C.J. — SAFE sued GFP, alleging that GFP breached the
parties’ contracts in failing to market and sell SAFE’s products. In the ongoing
litigation, SAFE moved to strike a contractual provision between GFP and its
former president, Marquardt, barring Marquardt from assisting SAFE in its lawsuit.
The trial court denied the motion. After the discovery period ended, SAFE moved
for an order to compel GFP to produce documents relating to the sale of its
company and “to produce” GFP’s alleged owner for a deposition. The trial court
denied the motion. We affirm the order denying SAFE’s motion to strike, and
decline to grant discretionary review of the order denying SAFE’s motion to compel
GFP to produce documents.
No. 77507-3-1/2
FACTS
SAFE Acquisition LLC and Lucidy LLC (hereafter collectively called SAFE)
are companies Scott Fontaine created to patent certain construction products he
invented. In August 2013, SAFE signed contracts with GE Protection Inc. (GFP)
for GFP to manufacture, market, and sell the products in exchange for royalty
payments to SAFE.
SAFE sued GFP in June 2016, alleging that GFP breached the license
agreements by failing to make reasonable efforts to market and sell the products.
GFP discovered that its former president, Edward Marquardt, was actively sending
e-mails to SAFE, leading GEP to subpoena Marquardt for a deposition. Due to
scheduling conflicts, Marquardt chose the deposition date of August 7, 2017, the
last day of discovery.
Near the end of the deposition on August 7, SAFE asked Marquardt to
confirm that he had ‘signed some sort of agreement” with GFP. Marquardt
acknowledged that he was bound by an agreement with GFP, restricting him from
discussing confidential information that he was “exposed to during [his] tenure
there as an employee.” During the deposition, GEP’s counsel stated,
I’ll allow you to ask. about terms of the settlement agreement with
. .
Mr. Marquardt which impact this litigation, but if you want to talk
about, you know, the terms of, other terms of settlement of dispute
between Guardian and Mr. Marquardt, that’s off limits by the court’s
order.
After Marquardt stated that he was restricted from “talking about anything
confidential,” SAFE affirmed that GFP was going to provide the pertinent clauses
and moved to a different subject.
2
No. 77507-3-1/3
Within three days following the deposition, GFP provided SAFE with the
relevant provision from the settlement agreement with Marquardt. GFP did not
provide the entire agreement, because it felt that the remainder was outside the
scope of discovery.
The provision states,
“Other Litigation. Marquardt agrees that he shall not assist, directly
or indirectly, SAFE, Lucidy, or Scott Fontaine in separate litigation or
other proceeding adverse to GFP and/or its officers and directors.
For purposes of this agreement, assist includes, but is not limited to,
providing advice, information, and serving as a witness. Marquardt
may respond to a properly served and noticed subpoena by making
statements in a deposition pursuant to such subpoena or producing
documents in direct response to such subpoena. Marquardt shall
provide no assistance to this litigation voluntarily, or without notice to
GFP consistent with the rules governing subpoenas. This paragraph
does not diminish or lessen Marquardt’s ongoing obligations to not
disclose Confidential Information to competitors such as SAFE, as
further set forth in a paragraph 11(D), above.”
(Boldface omitted.)
On August 11, 2017, GFP executed an equity purchase agreement with
buyer Gemini Acquisition Corporation (Gemini). Under the agreement, Gemini
acquired the patent license agreements between SAFE and GFP. On August 25,
2017, SAFE asked GFP to produce documents and information about the sale of
the license agreements. GFP agreed to provide a redacted version of the equity
purchase agreement to confirm the transfer of the contracts and to show what
rights and liabilities GFP retained regarding this litigation.
Unsatisfied with the redacted documents, on September 7, 2017, SAFE
moved the trial court to compel GFP to produce (1) a complete, unredacted copy
of the equity purchase agreement, (2) copies of all communications and other
3
No. 77507-3-1/4
documents relating to this acquisition and the licensed products and/or SAFE, and
(3) Darrin Erdahl1 for a two hour deposition regarding the details of the acquisition
as it relates to SAFE and the licensed products. The trial court denied the motion,
stating, “The documents and communications [SAFE] seek[s] are beyond the
scope of their discovery requests, not relevant to the claims and issues in this case,
and [SAFE has] failed to establish good cause to conduct additional discovery after
the discovery cutoff.”
On September 8, 2017, SAFE moved to strike GFP’s contract provision
prohibiting Marquardt from “assisting” SAFE in the lawsuit. In denying the motion,
the trial court stated, “To the extent that someone might interpret the contractual
prohibition as prohibiting Ed Marquardt from answering a subpoena to testify at
trial, the court finds that it does not do so.”
SAFE sought discretionary review of the order denying the motion to strike
GFP’s contract provision prohibiting Marquardt from assisting SAFE in this lawsuit.
Review was granted. It also seeks review of the order denying its motion to compel
GFP to produce the complete equity purchase agreement, related documents, and
the Erdahl deposition.2
1 SAFE alleges that Erdahl is the owner of GFP and replaced Marquardt as
president, after Marquardt was fired. In its answer, GFP did not confirm that Erdahl
was the owner or the president, but admitted that Marquardt was fired. In his
declaration, Erdahl refers to himself as the “chairman of CF Transition Inc.,
formerly known as [GFPJ.”
2 Commissioner Neel granted review of the order denying the motion to
strike, but referred to the court to decide if it will grant discretionary review of the
order denying SAFE’s motion to compel production.
4
No. 77507-3-1/5
DISCUSSION
SAFE makes two arguments. First, it argues that the trial court erred in
denying its motion to strike the “non-cooperation clause” in Marquardt’s settlement
agreement with GFP. Second, it argues that the trial court erred in denying its
motion to compel GFP to produce relevant documents about the sale of GFP.
I. Motion to Strike Noncooperation Clause
SAFE argues first that the trial court erred in upholding a noncooperation
clause in Marquardt’s settlement agreement with GFP. It contends that the
“restriction barring Mr. Marquardt from ‘assisting’ or ‘serving as a witness’ for
[SAFE] contravenes public policy because it interferes with the free and fair
administration of justice, and allows one party to restrict access of the other party
to a key witness.”
A. Standard of Review and Standing
The parties disagree over the proper standard of review. SAFE argues that,
because it is “purely a question of law,” this court should review de novo whether
the noncooperation clause violates public policy. GFP argues that, because “the
motion to strike sought discovery,” this court should determine whether the trial
court abused its discretion “[un declining to invalidate a contract in which [SAFE
was] not a party.”
Appellate courts determine legal issues de novo. Island County v. State,
135 Wn.2d 141, 160, 955 P.2d 377 (1998). And, this court reviews the trial court’s
conclusions of law pertaining to contract interpretation de novo. Viking Bank v.
Firgrove Commons 3, LLC, 183 Wn. App. 706, 712, 334 P.3d 116 (2014).
5
No. 77507-3-1/6
An appellate court reviews a trial court’s discovery order for an abuse of
discretion. T.S. v. Boy Scouts of Am., 157 Wn.2d 416,423, 138 P.3d 1053 (2006).
We will find an abuse of discretion only on a clear showing that the court’s exercise
of discretion was manifestly unreasonable, or exercised on untenable grounds, or
for untenable reasons. ki.
At the outset, GFP asserts, as it did below, that SAFE does not have
standing to challenge Marquardt’s settlement agreement with GFP.
The doctrine of standing prohibits a litigant from asserting another’s legal
right. Miller v. U.S. Bank of Wash., N.A., 72 Wn. App. 416, 424, 865 P.2d 536(1994). A contract can be enforced only against those party to it. Gall v. McDonald
Indus., 84Wn. App. 194, 201, 926 P.2d 934 (1996). Dismissal of a contract action
is proper when the litigant is not a party to the contract and thus lacks standing.
West v. Thurston County, 144 Wn. App. 573, 576, 183 P.3d 346 (2008).
SAFE contends that it has standing under the Uniform Declaratory
Judgment Act (UDJA), chapter 7.24 RCW. The UDJA permits a party to bring an
action to determine the validity of a contract, among other instruments, as long as
that party’s rights, status, or other legal relations are affected by the instrument in
question. RCW 7.24.020. In order to have standing to seek declaratory judgment
under the Act, a person must present a justiciable controversy: (1) an actual,
present and existing dispute, or the mature seeds of one, as distinguished from a
possible, dormant, hypothetical, speculative, or moot disagreement, (2) between
parties having genuine and opposing interests, (3) which involves interests that
must be direct and substantial, rather than potential, theoretical, abstract or
6
No. 77507-3-1/7
academic, and (4) a judicial determination of which will be final and conclusive.
Branson v. Port of Seattle, 152 Wn.2d 862, 877, 101 P.3d 67 (2004).
SAFE is not a party to the contract. Marquardt, who is the subject of the
challenged provision in the contract, is not a party to this lawsuit. SAFE did not
seek a declaratory judgment below. Instead, it moved ‘to strike” the provision of
GFP’s settlement agreement with Marquardt that “prohibits” Marquardt from
assisting SAFE in the litigation. In its motion, SAFE asked the trial court to hold
that, because it violated public policy, the provision “should be declared invalid” so
that it could not be used to prevent Marquardt from participating in SAFE’s litigation
with GFP.
The trial court interpreted the agreement provision as allowing Marquardt to
testify. As a result, the trial court did not need to, and did not address, the
questions of whether the language had to be stricken and whether SAFE had
standing to challenge it. The issue before this court is the correctness of the trial
court’s interpretation of the contractual language. The proper standard of review
is de novo.
B. Public Policy V
SAFE alleges that the contractual clause violates public policy and the fair
administration of justice. It asserts that the provision “allows one party to restrict
access of the other party to a key witness.” SAFE further claims that the trial court
“sanctioned witness tampering” in approving the clause. (Boldface omitted.)
As a matter of law, contract terms are unenforceable on grounds of public
policy when the interest in its enforcement is clearly outweighed by a public policy
7
No. 77507-3-1/8
against the enforcement of such terms. LK Orerating, LLC v. Collection Grp., LLC,
181 Wn.2d 48, 85, 331 P.3d 1147 (2014). In general, a contract which is not
prohibited by statute, condemned by judicial decision, or contrary to the public
morals contravenes no principle of public policy. State Farm Gen. Ins. Co. v.
Emerson, 102 Wn.2d 477, 481, 687 P.2d 1139 (1984).
In denying SAFE’s motion to strike, the trial court stated, “To the extent that
someone might interpret the contractual prohibition as prohibiting Ed Marquardt
from answering a subpoena to testify at trial, the court finds that it does not do so.”
SAFE argues that, in interpreting the clause in this matter, the trial court engaged
in inappropriate “blue-lining” of the contract.
The original provision states,
Marquardt agrees that he shall not assist, directly or indirectly, SAFE,
Lucidy, or Scott Fontaine in separate litigation or other proceeding
adverse to GFP and/or its officers and directors. For purposes of this
agreement, assist includes, but is not limited to, providing advice,
information, and serving as a witness. Marquardt may respond to a
properly served and noticed subpoena by making statements in a
deposition pursuant to such subpoena or producing documents in
direct response to such subpoena. Marquardt shall provide no
assistance to this litigation voluntarily.
Because the clause states that Marquardt is free to respond to a subpoena, the
trial court did not improperly alter the provision in its interpretation.
Citing Wright v. Grp. Health Hosp., 103 Wn.2d 192, 691 P.2d 564 (1984),
SAFE asserts that, “If a party cannot bar its current employees from cooperating
in litigation against it, it cannot bar its former employees either.”
In Wright, the issue before the court was whether a defendant hospital
corporation may prohibit its current employees from conducting ex parte interviews
8
No. 77507-3-1/9
with plaintiffs’ attorneys. k~. at 193. The court held that current employees
authorized to speak for a corporation would be considered “parties” with whom
opposing counsel could not speak ex parte. k1. at 196, 200-01. But, it held that
opposing counsel could interview employees of the corporation ex parte so long
as such employees were not authorized to speak for the corporation or in a
management status. ki. at 202-03. And, it held that “[s]ince former employees
cannot possibly speak for the corporation,” opposing counsel could also interview
them ex parte. ~ k~. at 201. The court emphasized, “This opinion shall not be
construed in any manner, however, so as to require an employee of a corporation
to meet ex parte with adverse counsel. We hold only that a corporate party, or its
counsel, may not prohibit its nonspeaking/managing agent employees from
meeting with adverse counsel.” jçj~ at 203 (emphasis in original).
Because an employee or former employee is not required to agree to speak
with adverse counsel, the employee is free to decline to do so voluntarily.
Logically, the employee is also free to agree with the employer/former employer
that they will decline to engage in that communication voluntarily. There is no
evidence in the record that Marquardt did not voluntarily enter into the settlement
agreement in which he agreed not to communicate voluntarily with SAFE. GFP
did not unilaterally block SAFE’s access to Marquardt. This does not violate the
policy articulated in Wriqht.
Here, the clause at issue explicitly states that “Marquardt may respond to a
properly served and noticed subpoena by making statements in a deposition
pursuant to such subpoena or producing documents in direct response to such
9
No. 77507-3-1/10
subpoena.” GFP did not block SAFE’s access to Marquardt, as it claims. He is
free to testify pursuant to a subpoena, at which time counsel for GFP would be
present to object to any disclosure of confidential information or information
protected by the attorney-client privilege.
Because the provision at issue does not bar Marquardt’s participation in the
underlying proceeding, it does not offend public policy, or contravene the holding
of Wright. There was no legal error, and the trial court did not err in denying the
motion. We affirm the order denying SAFE’s motion to strike.
II. Motion to Compel Production
SAFE argues second that the trial court erred in denying its motion to
compel relevant documents about the sale of GFP and SAFE’s licenses. It asserts
that this court should grant review of this issue and reverse the trial court’s
decision. This court accepts discretionary review only in the following
circumstances:
(1) The superior court has committed an obvious error which
would render further proceedings useless;
(2) The superior court has committed probable error and the
decision of the superior court substantially alters the status quo or
substantially limits the freedom of a party to act;
(3) The superior court has so far departed from the accepted
and usual course of judicial proceedings, or so far sanctioned such
a departure by an inferior court or administrative agency, as to call
for review by the appellate court; or
(4) The superior court has certified, or that all the parties to
the litigation have stipulated, that the order involves a controlling
question of law as to which there is substantial ground for a
difference of opinion and that immediate review of the order may
materially advance the ultimate termination of the litigation.
10
No. 77507-3-I/il
RAP 2.3(b).
A discovery order of the trial court is reviewable only for an abuse of
discretion, which exists only when no reasonable person would have decided the
way the judge did. Howell v. Spokane & Inland Empire Blood Bank, 117 Wn.2d
619, 629, 818 P.2d 1056 (1991).
SAFE makes three arguments for why the trial court abused its discretion
in denying its motion. First, it argues that the trial court erred in concluding that
the sale is “beyond the scope of [its] discovery requests,” because the “discovery
deadline is not a valid reason for the trial court to have permitted [GFP] to refuse
basic discovery.” But, in stating that the request was beyond the scope of SAFE’s
discovery requests, the trial court did not rely on the discovery deadline. It found
that GFP’s sale agreement was beyond the scope of information SAFE sought in
its production requests. The sale occurred well after filing the lawsuit and became
known to SAFE after the close of the discovery period. SAFE could not have
knowingly included discovery requests about the sale within the deadline.
The trial court did not commit obvious or probable error necessitating
discretionary review by denying the motion on the basis that the material was
beyond the scope of the discovery requests made.
SAFE argues next that the trial court erred in concluding that the information
sought was “not relevant to the claims and issues in this case.” SAFE argues that
it sought documents related to the sale of the licenses “that are at the center of this
litigation and expressly mention either Plaintiffs or their licensed products.”
11
No. 77507-3-1/12
In its motion, SAFE moved to compel GFP to produce (1) a ‘complete,
unredacted copy of the Equity Purchase Agreement;” (2) “copies of all
communications and other documents relating to this acquisition and the Licensed
Products and/or Plaintiffs in this case;” and (3) “Darrin Erdahl for a two-hour
deposition . . . regarding the details of this acquisition as it relates to the Plaintiffs
and the Licensed Products.” It did not ask the trial court for an in camera review
of the documents.
But, SAFE alleged in its complaint that GFP—not Gemini—breached the
contracts and owes damages. SAFE has not established that further information
about the equity purchase agreement is relevant to determine whether breach of
contract occurred nor any damages caused by the alleged breach.
The trial court did not commit obvious or probable error necessitating
discretionary review by denying the motion on the basis of relevance.
SAFE argues third that the trial court erred in concluding that SAFE “‘failed
to establish good cause to conduct additional discovery.” It contends, “There was
(and is) no trial date set; there would have been no (and is no) prejudice to GFP;
Plaintiffs had been diligent and could not possibly have foreseen the need for
additional discovery earlier; and the information sought is plainly relevant.”
The GFP sale was not made known to SAFE until August 23, too late to
have been a specific focus of discovery. And, the trial court ruled the agreement
was outside the scope of the discovery actually sought. So, permission from the
court was required for additional discovery. See Buhr v. Steward Title of Spokane,
LLC, 176 Wn. App. 28 34, 308 P.3d 712 (2013) (“[T]he rule contemplates a court
12
No. 77507-3-1/13
order establishing a plan and schedule for discovery. A schedule for discovery
may be altered or amended ‘whenever justice so requires’” (quoting CR 26(F))).
However, a September trial date was in place when the motion for additional
discovery was made. The trial date was stayed pending this appeal.
SAFE asserted that it needed to know the parties at issue and “whether
GFP . . . will be able to satisfy any judgment against it, including a judgment
terminating the licenses.” It also raised the valuation of the licenses as an example
of a document that was relevant, implying that it had a right to see the sale
agreement on that premise. It is clear from the redacted equity purchase
agreement that GFP retained all liability and assets with respect to this litigation.
And, as for SAFE’s concern about valuation, the Erdahl declaration states that
SAFE’s contracts were not separately valued as part of the transaction between
GFP and Gemini, and had no independent impact on the purchase price. If the
information in the declaration were in doubt, SAFE could have requested in camera
review by the trial court. It did not. No other information in the record suggests
the declaration is not true. In addition, SAFE does not show how this information
would inform whether GFP breached its contract or the amount of any damages
related to that breach. The court need not address whether production would
prejudice GFP.
The trial court did not commit obvious or probable error necessitating
discretionary review by denying the motion on the basis of lack of a showing of
good cause.
13
No. 77507-3-1/14
We decline to grant discretionary review on the trial court’s order denying
SAFE’s motion to compel GFP to produce documents.
Ill. Attorney Fees
GFP requests that this court award it attorney fees “under CR 37(b) and the
fee provision in the contracts at issue.” GFP does not cite to the record for the fee
provision in the contracts. Because this provision does not appear to be in the
record before this court, we cannot review it.
A trial court has broad discretion under CR 37 to impose sanctions for
noncompliance with a discovery order. Rhinehart v. KIRO, Inc., 44 Wn. App. 707,
710, 723 P.2d 22 (1986). But, this court has denied a party’s fee request for
defending an appeal, where the appeal is “without merit but not one that this court
deem[s] frivolous or interposed to harass or for purposes of delay.” ki. at 711 In
line with the reasoning in Rhinehart, we decline to grant fees to GFP, as this appeal
is not frivolous or designed to harass or to delay.
We affirm the order denying SAFE’s motion to strike and decline to grant
discretionary review of the order denying SAFE’s motion to compel.
WE CONCUR: V
I
14