AttorneyFirst, LLC v. Ascension Entertainment, Inc.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 04-1744
ATTORNEYFIRST, LLC, a West Virginia limited
liability company,
Plaintiff - Appellant,
versus
ASCENSION ENTERTAINMENT, INCORPORATED, a
Delaware corporation; STEVEN LOPEZ,
individually; JURISFIRST, LLC, a Nevada
limited liability company; ACADEMY MORTGAGE
CORPORATION, a Utah corporation,
Defendants - Appellees.
Appeal from the United States District Court for the Southern
District of West Virginia, at Charleston. Joseph Robert Goodwin,
District Judge. (CA-03-2467-3)
Argued: February 2, 2005 Decided: June 8, 2005
Before WILKINS, Chief Judge, WIDENER, Circuit Judge, and Robert E.
PAYNE, United States District Judge for the Eastern District of
Virginia, sitting by designation.
Reversed and remanded by unpublished per curiam opinion.
ARGUED: Edward Pope Tiffey, Charleston, West Virginia, for
Appellant. Richard Forlani Neely, NEELY & HUNTER, Charleston, West
Virginia, for Appellees. ON BRIEF: R. Terrance Rodgers, Kimberly
Ann Martin, ALLEN, GUTHRIE, MCHUGH & THOMAS, P.L.L.C., Charleston,
West Virginia, for Appellee Academy Mortgage Corporation.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
PER CURIAM:
AttorneyFirst LLC (“AttorneyFirst”) appeals from a judgment
against it on the merits of seven of its nine claims1 after the
district court, under Fed. R. Civ. P. 65(a)(2), consolidated a
hearing on an application for preliminary injunction with a trial
on the merits. Because the district court did not provide clear
and unambiguous notice of its intent to consolidate under Rule
65(a)(2), we reverse the judgment and remand the case for further
proceedings.
I.
AttorneyFirst filed its original Complaint against Ascension
Entertainment, Inc., Steven Lopez, JurisFirst LLC, and Academy
Mortgage Corp. alleging claims for: (1) breach of a Confidentiality
and Non-Disclosure Agreement (the “Confidentiality Agreement”); (2)
breach of a Development Agreement (the “Development Agreement”);
(3) breach of a declaratory judgment of the rights and obligations
of the parties under those agreements; and (4) “willful, malicious,
intentional and independent torts against AttorneyFirst’s property
interests.” The original Complaint sought compensatory and
punitive damages as well as preliminary and permanent injunctive
relief, and the plaintiff requested a trial by jury. The action,
1
The district court ruled in favor of AttorneyFirst on parts
of two claims, but declined to grant most of the relief that
AttorneyFirst had requested in those two counts.
2
which was filed in state court, was timely removed to federal
court.
On December 16, 2003, all defendants except Academy Mortgage
filed motions to dismiss the Complaint under Fed. R. Civ. P.
12(b)(6) or, alternatively, for summary judgment under Fed. R. Civ.
P. 56. On December 22, 2003, Academy Mortgage filed its Answer and
Affirmative Defenses.
On January 16, 2004, the parties filed their Report Of
Parties’ Planning Meeting wherein, as required by Fed. R. Civ. P.
26(f), they proposed a detailed pretrial schedule culminating in a
three-day trial to commence on November 15, 2004. On the same day,
AttorneyFirst filed its motion for preliminary injunction, asking
the court to “enjoin all defendants from improper use of
confidential information,” and to enjoin Ascension and Lopez from
“continued breach of their affirmative contractual obligations to
maintain confidentiality.” AttorneyFirst also requested an
evidentiary hearing on the motion.
Thereafter, on January 27, 2004, AttorneyFirst moved for leave
to file an Amended Complaint with nine counts. In the Amended
Complaint, AttorneyFirst raised claims for: injunctive relief
under the Confidentiality Agreement (Count I); breach of the
Confidentiality Agreement (Count II); breach of the Development
Agreement (Count III); a declaratory judgment of the rights and
obligations of the parties under both agreements (Count IV);
3
conversion (Count V); tortious interference with a business
expectancy (Count VI); fraud (Count VII); agency, unjust enrichment
and constructive trust (Count VIII); and violations of West
Virginia’s Uniform Trade Secrets Act (Count IX). Like the original
Complaint, the Amended Complaint made a demand for trial by jury.
After the defendants had responded to the motion for preliminary
injunction, the district court set the motion for an evidentiary
hearing.
II.
At the beginning of the two day hearing, the district court
observed that the proposed Amended Complaint included a claim, and
sought injunctive relief, under the West Virginia Uniform Trade
Secrets Act. However, the district court went on to explain that
“[t]he motion for preliminary injunction, which we’re here on
today, is based on the contracts [the original Complaint] and not
based on the Uniform Trade Secrets Act [in the Amended Complaint].”
Without objection from the defendants, the district court
granted the motion for leave to file the Amended Complaint.2 Then,
2
Also, at the outset of the hearing, the district court noted
that the defendants had filed a motion to dismiss, which the
district court considered actually to be a motion for summary
judgment. Having made that observation, the district court stated
that: “[t]o the extent you wish to proceed on this motion as filed,
I will treat the motion to dismiss, I think logically, as going to
the likelihood of success on the merits.” That, of course, is one
of the factors to be considered in assessing the propriety of
preliminary injunctive relief. See Direx Israel, Ltd. v.
4
the district court expressed concern that a second hearing for
injunctive relief under the Uniform Trade Secrets Act might be
necessary if the hearing then underway proceeded only on the
contractual basis for injunctive relief that was asserted in the
original Complaint. To that expression of concern, counsel for
Ascension, Lopez, and JurisFirst, responded that “the motion for
preliminary injunction raised the trade secrets issue” and which
had been addressed in the briefs already on file.
Counsel for Ascension, Lopez, and JurisFirst also expressed
hope “to basically wrap that case up” . . . “[s]o, we would hope
that we could address all of these issues today.” JA 250. The
district court asked whether that was agreeable to counsel for
plaintiff who replied: “Yes sir, absolutely. We’re prepared to
address the contractual issues set forth in the first and second
agreements, as well as the trade secrets issue.” JA 251.
Counsel for Academy Mortgage agreed, but noted that Academy
Mortgage was not party to either contract. The district court then
observed:
I understand that. And, that’s why there are discrete
differences between the claims under the first complaint
and the claims under the second complaint. To be
absolutely clear, we are now proceeding under the amended
complaint by agreement.
Breakthrough Med. Corp., 952 F.2d 802 (4th Cir. 1991); Rum Creek
Coal Sales, Inc. v. Caperton, 926 F.2d 353 (4th Cir. 1991);
Blackwelder Furniture Co. v. Seilig Mfg. Co., 550 F.2d 189 (4th
Cir. 1977).
5
* * *
And, the claim for preliminary injunction is based not
only on the contractual provisions [and] . . . by
agreement ore tenus on the West Virginia Trade Secrets
Act.
JA 251 (emphasis added). Counsel all agreed. JA 252. Thereupon,
for most of that day and the better part of the next day the
district court heard testimony directed to the claims for
injunctive relief.
At the conclusion of the evidentiary session, the district
court set a schedule for filing proposed findings of fact and
conclusions of law. JA 696. Counsel for Ascension, Lopez, and
JurisFirst expressed concern about incurring the expense of
preparing an answer to the Amended Complaint, apprehending (for
reasons not of record) that there might be yet another amendment
forthcoming. The district court addressed that issue by
“suspend[ing] the requirement of [defendants] filing an answer
during pendency of my consideration of the motion for preliminary
injunction,” and then said:
And, in that regard, I don’t think there’s anything in
the amended complaint that I need your answer for in
order to deal with the preliminary injunction motion.
* * *
Okay, here’s what we’ll do. We’ll wait until I enter an
order on the preliminary injunction. Thereafter,
whatever happens, within 20 days of that, file an answer.
JA 698 (emphasis added).
6
Subsequently, in March 2004, the parties filed their proposed
findings of fact and conclusions of law. All parties focused their
submissions on whether preliminary injunctive relief was
appropriate under the Blackwelder standard.3 AttorneyFirst’s
filing concluded with a request that the district court convene a
scheduling conference, clearly contemplating further proceedings.
JA 814. Academy Mortgage reflected a similar understanding in
ending its filing with the statement that “a preliminary injunction
is not necessary to protect the status quo or preserve this Court’s
ability to render a meaningful judgment on the merits.” JA at 833.
On May 5, 2004, AttorneyFirst filed Plaintiff’s Motion For
Status And Scheduling Conference. JA 836-39. In it, AttorneyFirst
asked the Court to adjust the previously set discovery and pretrial
deadlines and set a new trial date.
Then, on May 26, 2004, the district court issued Findings of
Fact and Conclusions of Law in which it recited that its judgment
was entered “after a trial on the merits pursuant to Federal Rule
of Civil Procedure 65(a)(2).” Thereafter, the district court: (a)
entered judgment on the merits in favor of the defendants on Counts
3
The papers filed by Ascension, Lopez and JurisFirst made a
passing plea for an award of summary judgment but, in a procedure
unknown in the federal system, acknowledged the weakness of their
position by suggesting that the motion be conditionally granted
subject “to a motion by Plaintiff to reconsider, supported by
specific reference to those things that Plaintiff, in good faith,
believes will be revealed by further discovery and that is revealed
will support a judgment in Plaintiff’s favor. . . .” JA 766-67.
7
II, III, VII, VIII and IX; (b) declined to enter the declaratory
relief requested in Count IV; and (c) held in favor, in small part,
of AttorneyFirst on Counts I and V. JA 845-65. A judgment order
to that effect was entered the same day. JA 866. This appeal
ensued.
III.
Assessment of the notice issue raised by AttorneyFirst begins
with the terms of Fed. R. Civ. P. 65(a)(2), which, in pertinent
part, provides:
(2) Consolidation of Hearing With Trial on Merits.
Before or after the commencement of the hearing of an
application for a preliminary injunction, the court may
order the trial of the action on the merits to be
advanced and consolidated with the hearing of the
application.
* * *
This subdivision (a)(2) shall be so construed and applied
as to save to the parties any rights they may have to
trial by jury.
We have held that “Fed. R. Civ. P. 65(a)(2) wisely permits the
district court in an appropriate case to hear a motion for
preliminary injunction and conduct a hearing on the merits at the
same time.” Gellman v. Maryland, 538 F.2d 603, 604 (4th Cir. 1976)
(quoting Singleton v. Anson County Bd. of Educ., 387 F.2d 349, 351
(4th Cir. 1967)).
We also have accepted the now-settled principle announced in
Pughsley v. 3750 Lake Shore Drive Coop. Bldg., 463 F.2d 1055 (7th
8
Cir. 1972), that, “before consolidation of a trial on the merits
with a hearing on a motion for preliminary injunction is
appropriate, ‘the parties should normally receive clear and
unambiguous notice to that effect either before the hearing
commences or at a time which will still afford the parties a full
opportunity to present their respective cases.’” Gellman v.
Maryland, 538 F.2d at 603; aaiPharma, Inc. v. Thompson, 296 F.3d
227, 234 (4th Cir. 2002).
As the Seventh Circuit explained in Pughsley, the reason for
the rule is that:
A litigant applying for a preliminary injunction should
seldom be required either to forego discovery in order to
seek emergency relief or to forego a prompt application
for an injunction in order to prepare adequately for
trial. Different standards of proof and of preparation
may apply to the emergency hearing as opposed to the full
trial.
Pughsley v. 3750 Lake Shore Drive Coop. Bldg., 463 F.2d at 1057.
We subscribed to that fundamental precept in both Gellman and
aaiPharma. In addition, in aaiPharma, we explained that:
The notice requirement is necessary because ‘the facts
adduced [at a preliminary injunction hearing] often will
not be sufficient to permit an informed determination of
whether a direction for the entry of judgment is
appropriate.’ Berry v. Bean, 796 F.2d 713, 719 (4th Cir.
1986) (quoting 11A Charles Alan Wright, Arthur R. Miller
& Mary Kay Kane, Federal Practice and Procedure § 2950 at
492 (1973)). As a result, ‘a party addressing only
issues of preliminary relief should not ordinarily be
bound by its abbreviated and only partially informed
presentation of the merits.’ Id.
aaiPharma, Inc. v. Thompson, 296 F.3d at 234 (emphasis added).
9
It also is appropriate to keep in mind that a preliminary
injunction is intended to serve the limited purpose of preserving
“the relative positions of the parties until a trial on the merits
can be held.” University of Texas v. Camenisch, 451 U.S. 390, 395
(1981). And, as the Supreme Court explained in Camenisch:
Given this limited purpose, and given the haste that is
often necessary if those positions are to be preserved,
a preliminary injunction is customarily granted on the
basis of procedures that are less formal and evidence
that is less complete than in a trial on the merits. A
party thus is not required to prove his case in full at
a preliminary-injunction hearing, Progress Development
Corp. v. Mitchell, 286 F.2d 222 (C.A.7 1961), and the
findings of fact and conclusions of law made by a court
granting a preliminary injunction are not binding at
trial on the merits, (citations omitted). In light of
these considerations, it is generally inappropriate for
a federal court at the preliminary-injunction stage to
give a final judgment on the merits. (citations
omitted).
Id. (emphasis added). Noting, however, that, on occasion,
expedited decisions on the merits are appropriate, the Supreme
Court recognized that Rule 65(a)(2) provides the means of securing
an expedited decision and then adopted the notice requirement as
announced in Pughsley.
The facts in Pughsley are similar to those presented here. In
Pughsley, the district court had conducted a two day preliminary
injunction hearing and, at the end of the first day, after agreeing
to hear further evidence the next day, the court made the following
statement:
10
Now I am going to insist, counsel, that whatever your
total case is, and I want to give you every reasonable
opportunity to put it in, that you complete it before I
request the defendants to go ahead.
Pughsley v. 3750 Lake Shore Drive Coop. Bldg., 463 F.2d at 1056.
That, according to the Seventh Circuit, was insufficient to satisfy
the notice requirement of Rule 65(a). In Gellman, we cited
Pughsley as an illustration of what does not constitute “clear and
unambiguous notice.” Gellman v. Maryland, 538 F.2d at 604. And,
in Gellman, we adopted the following view as the appropriate means
for accomplishing that result:
A leading text has offered this suggestion on the proper
procedure under Rule 65(a)(2):
Doubt as to the propriety of consolidation will be
minimized if the trial court gives the parties
advance notice of the proposed action or, if
consolidation is ordered at the hearing, the
parties are permitted to request additional time to
assemble their entire presentation on the merits.
11 Wright & Miller, Federal Practice and Procedure,
¶ 2950, p. 488 (1973).
Gellman v. Maryland, 538 F.2d at 605 (emphasis added).
These principles inform our resolution of the notice issue
presented here.
IV.
A.
At the beginning of the preliminary injunction hearing, and
based on its perception of an exchange with, and between, counsel
11
the district court’s opinion recites that, “[f]rom the outset of
[the preliminary injunction] hearing, the parties agreed that they
were prepared to argue the entire case.” JA 846. The exchange
cited by the district court in support of that finding4 came about
because the district court had raised the prospect of two separate
injunction hearings, one on the contractual claims (as presented in
the original Complaint) and one on the Uniform Trade Secrets Act
claim (as presented in the Amended Complaint). Clearly, the
district court desired to avoid that circumstance, and so too did
counsel. Having reviewed that exchange in its entirety, we
conclude that counsel agreed, not on combining a trial on the
merits with the preliminary injunction hearing, but, instead, to
proceed with the claim for injunctive relief based on both the
contractual provisions asserted in the original Complaint and on
the Uniform Trade Secrets Act as presented in the Amended
Complaint.
That conclusion is supported by a review of the hearing
transcript which discloses that the evidence was focused on the
question of preliminary injunctive relief, not on the entirety of
the contractual claims or the Uniform Trade Secret Act claims that
formed the springboard for preliminary injunctive relief. Nor does
the record disclose the sort of proofs usually associated with
claims for fraud, conversion, tortious interference with a business
4
(JA 249-257).
12
expectancy, or unjust enrichment. Further, the record discloses no
proof of monetary damage even though many of AttorneyFirst’s nine
claims call for that kind of relief. One would think that evidence
directed to those points would have been offered if the parties, in
fact, had agreed to trial on the merits. The absence of such
proofs support conclusion that there was no agreement to
consolidate the trial on the merits with the application for
preliminary injunctive relief.
The post-hearing conduct of the parties confirms that they
understood their agreement to have been that the hearing would
encompass both the contractual and the statutory claims for
injunctive relief, and not that the merits of all claims were to be
decided. First, the post-hearing proposed findings of fact and
conclusions of law focused only on the issues of injunctive relief.
Put another way, none of the post-hearing papers even addressed the
other claims made in the Amended Complaint (which was the operative
complaint when the parties filed their proposed Findings of Fact
and Conclusions of Law). For example, Academy Mortgage concluded
its filing by arguing that preliminary injunctive relief was not
necessary either to “protect the status quo or preserve [the
district court’s] ability to render a meaningful judgment on the
merits,” thereby signifying that it contemplated a trial on the
merits after the district court had made its decision on the
injunctive phase of the case. AttorneyFirst concluded its proposed
13
Findings of Fact and Conclusions of Law by requesting that the
court issue an order “convening a scheduling conference as soon as
reasonably possible.” JA 814. The submission made by Ascension,
Lopez, and JurisFirst also focused on the issues of injunctive
relief except for its terse suggestion that “this litigation should
end at this point,” a result that even those defendants realized
could not happen under extant federal procedure.5 And, from the
district court’s opinion, it is clear that the district court did
not grant summary judgment. (“I will therefore dispense with
consideration of the standards for issuing a preliminary injunction
or for granting summary judgment and proceed to the merits of the
plaintiff’s claims.”) JA 847.
For the foregoing reasons, we cannot conclude, on this record,
that the parties agreed to proceed under Rule 65(a)(2) with a
consolidated proceeding.
B.
The district court also held that the notice requirement was
satisfied by a comment that it made after the evidence had been
5
To achieve the result of ending the litigation, those
defendants asked the district court to enter a conditional grant of
summary judgment in its favor subject to a motion by the plaintiff
to reconsider if an appropriate showing could be made as to what
further discovery would reveal and how that information would
support a judgment in behalf of the plaintiff. A procedure of that
sort is unknown in federal practice and, in fact, turns Rule 56 on
its head.
14
presented. It thus is necessary to consider in full the cited
exchange. After the plaintiff had rested, Ascension, Lopez, and
JurisFirst moved “that the Court decide from the bench now that the
standards for issuing a preliminary injunction have not been met
and that such an injunction will not be issued.” JA 616 (emphasis
added). After hearing arguments on that point, the district court
stated:
This fight among all of you has been going on a while.
And I just as soon the preliminary injunction stage, if
I do it right, will be the end of the fight, or at least
I think it will. Since that’s an appealable order too
and we won’t be going into discovery, it doesn’t seem to
me like this is a case that will need to go on much
beyond this.
JA 847 (quoting the hearing transcript at JA 621). In its
memorandum opinion, the district court characterized that statement
as follows: “I made clear at the hearing my intention to resolve
this litigation, if possible, at this stage of the proceedings.”
JA 847.
We cannot conclude that the statement by the district court in
response to what amounts to a motion for judgment as a matter of
law constitutes the kind of clear and unambiguous notice required
by Rule 65(a)(2). Indeed, that comment is not nearly as clear as
the comment in Pughsley which both the Seventh Circuit in Pughsley,
and we, in Gellman, found to constitute inadequate notice under
Rule 65(a)(2).
15
V.
AttorneyFirst also asserts that the district court’s
consolidation decision runs afoul of the last sentence in Rule
65(a)(2) which provides that: “[t]his subdivision (a)(2) shall be
so construed and applied as to save to the parties any rights they
may have to trial by jury.” (emphasis added). We agree.
In its original Complaint and in its Amended Complaint,
AttorneyFirst requested a trial by jury. At no time during the
exchange at the beginning of the preliminary injunction hearing was
there any indication that AttorneyFirst intended to forego its
demand for trial by jury. Yet, to accept the view that
AttorneyFirst agreed to a consolidated bench trial on the merits
with the preliminary injunction under Rule 65(a)(2), one would have
to accept the proposition that AttorneyFirst agreed to waive its
right to trial by jury on the nine claims presented in the Amended
Complaint. A waiver of the right to trial by jury will not be
lightly implied. See Aetna Ins. Co. v. Kennedy, 301 U.S. 389, 393
(1937) (holding that “the right of jury trial is fundamental,
courts must indulge every reasonable presumption against waiver”);
Heyman v. Kline, 456 F.2d 123, 129 (2d Cir. 1972) (holding that
“the right to jury trial is too important, and the usual procedure
for waiver too clearly set out by the Civil Rules for the courts to
find a knowing and voluntary relinquishment of the right in a
doubtful situation”). Indeed, a waiver requires “some express
16
action by the party or his attorney which evidences his decision
not to exercise the right [to trial by jury].” Bowles v. Bennett,
629 F.2d 1092, 1095 (5th Cir. 1980).6
The decision to enter judgment on the merits all of
AttorneyFirst’s nine claims “conclusively resolved the factual
issues at the preliminary injunction stage--issues which otherwise
would have been decided by a jury.” H&W Indus., Inc. v. Formorsa
Plastics Corp., 860 F.2d 172, 178 (5th Cir. 1988). Here, as there,
the act of consolidation operated to deprive AttorneyFirst of its
right to jury trial. That, of course, can be done by agreement to
waive the right to trial by jury, but the record here discloses no
such agreement.
VI.
Of course, there are instances when the lack of notice under
Rule 65(a)(2) does not foreclose a decision on the merits of a
legal issue by the district court. See, e.g., aaiPharma v.
Thompson, 296 F.3d at 235. However, special circumstances must be
present before we can put aside such an error. Id. The special
circumstances in aaiPharma included an acknowledgment by counsel
for the plaintiff at argument on appeal that all the legal
6
Waiver of the right to trial by jury also can occur by
allowing the time for making a jury demand to pass without making
it. However, that did not happen in this case because the original
Complaint and the Amended Complaint both contained demands for jury
trial.
17
arguments had been presented and, most importantly, a statement
that the plaintiff “would welcome” a decision on the merits. Those
statements signified “a waiver of aaiPharma’s objection to the
district court’s procedural error.” Id. Also, in aaiPharma, we
noted that the case turned wholly on the resolution of one specific
legal question; and, therefore, if the case were remanded, “we
would likely find ourselves reviewing the district court’s ruling
on this issue next year in light of the same record and the same
arguments we have before us now.” Id.We find no such special circumstances present here. Unlike
aaiPharma, where only one discrete legal issue remained following
the preliminary injunction hearing, the factual record here is not
developed sufficiently to permit adjudication on the merits. Nor,
were the legal issues fully addressed by the parties. Indeed,
considering the record as a whole, the only issues tried were
whether, on the facts presented, the contracts or the West
Virginia’s Uniform Trade Secret Act warranted preliminary
injunctive relief under this circuit’s test for relief of that
sort. The plaintiff, having never been given notice that the trial
was to be on the merits of its claims, was not required to, and did
not, present fulsome evidence on the merits of any its nine claims.
Absent the clear and unequivocal notice required by Rule 65(a)(2),
it was error to consolidate the injunction proceedings and the
18
merits. Unlike, in aaiPharma, there is no basis in the record to
conclude that the failure of notice in this case can be overlooked.
For the foregoing reasons, the judgment of the district court
is reversed, and the case is remanded for further proceedings on
the merits of all of AttorneyFirst’s claims.
REVERSED AND REMANDED
19