Active Release Techniques, LLC v. Xtomic, LLC

COLORADO COURT OF APPEALS 2017COA14
Court of Appeals No. 15CA1753
El Paso County District Court No. 13CV30988
Honorable Thomas K. Kane, Judge
Active Release Techniques, LLC, a Colorado limited liability company; ART
Corporate Solutions, Inc., a Colorado corporation; and ART Business Solutions,
LLC, a Colorado limited liability company,
Plaintiffs-Appellants,
v.
Xtomic, LLC, a Colorado limited liability company; Select Seminar Services,
LLC, a Colorado limited liability company; and Jay Ferguson,
Defendants-Appellees.
JUDGMENT AND ORDER AFFIRMED IN PART, VACATED
IN PART, AND CASE REMANDED WITH DIRECTIONS
Division IV
Opinion by JUDGE ASHBY
Freyre and Davidson*, JJ., concur
Announced February 9, 2017
Shook, Hardy & Bacon, L.L.P., Richard G. Sander, Daniel E. Rohner, Denver,
Colorado, for Plaintiffs-Appellants
Howard & Jensen LLC, Erin M. Jensen, Colorado Springs, Colorado, for
Defendants-Appellees
*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.
VI, § 5(3), and § 24-51-1105, C.R.S. 2016.
¶1 Plaintiffs, Active Release Techniques, LLC; ART Corporate
Solutions, Inc.; and ART Business Solutions, LLC (collectively, ART),
appeal from the trial court’s entry of judgment and an award of
damages in favor of defendants, Xtomic, LLC; Select Seminar
Services, LLC; and Jay Ferguson (collectively, Xtomic). We reverse
in part and remand the case to the trial court to amend the
damages award.
I. Background
¶2 ART describes itself as a provider of “training, seminars and
business support software for chiropractor and other health care
professionals who specialize in soft tissue treatment techniques
called Active Release Techniques.” Tulio Pena was an employee of
ART for several years and worked closely with ART’s founder and
owner, Dr. Michael Leahy. Mr. Pena introduced Jay Ferguson, a co-
owner of Xtomic, to Dr. Leahy. Dr. Leahy hired Xtomic to manage
ART’s information technology (IT) services and provide IT support.
Xtomic also developed software programs and wrote software code
for ART.
¶3 Approximately ten years later, Mr. Ferguson, Mr. Pena, and
others formed Select Seminar Services, LLC (S3). S3 was created to
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market seminar training for a different soft tissue technique than
that offered by ART, using software programs that Xtomic had
developed, including a program that ART also used. When ART
learned about S3, it petitioned the court for a temporary restraining
order and a preliminary injunction. It also initiated the current
litigation, asserting claims for, inter alia, misappropriation of trade
secrets. Xtomic responded by asserting numerous counterclaims
including, as relevant here, a claim for abuse of process. A jury
ultimately decided all claims in Xtomic’s favor and awarded
$1,530,000 in damages. ART appeals.
II. Directed Verdict
¶4 ART contends that the trial court erred by denying its motion
for a directed verdict on Xtomic’s counterclaim for abuse of process.
We agree.
¶5 We review a trial court’s decision on a motion for directed
verdict de novo. Top Rail Ranch Estates, LLC v. Walker, 2014 COA
9, ¶ 17. A directed verdict should only be granted in the clearest of
cases. Huntoon v. TCI Cablevision of Colo., Inc., 969 P.2d 681, 686
(Colo. 1998). In deciding whether to grant the motion, the court
should view the evidence and all reasonable inferences arising
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therefrom in the light most favorable to the nonmoving party.
Huntoon, 969 P.2d at 686; Bonidy v. Vail Valley Ctr. for Aesthetic
Dentistry, P.C., 186 P.3d 80, 82-83 (Colo. App. 2008). “If the
evidence viewed in this light cannot support a verdict in favor of the
nonmoving party, the court may grant a motion for directed verdict
and the issue should not be submitted to the jury.” Bonidy, 186
P.3d at 82 (quoting Bryant v. Cmty. Choice Credit Union, 160 P.3d
266, 271 (Colo. App. 2007)).
¶6 A valid abuse of process claim must allege
(1) an ulterior purpose for the use of a judicial
proceeding; (2) willful action in the use of that
process which is not proper in the regular
course of the proceedings, i.e., use of a legal
proceeding in an improper manner; and (3)
resulting damage.
Mackall v. JPMorgan Chase Bank, N.A., 2014 COA 120, ¶ 39
(quoting Lauren Corp. v. Century Geophysical Corp., 953 P.2d 200,
202 (Colo. App. 1998)). “The essential element of an abuse of
process claim is the use of a legal proceeding in an improper
manner; therefore, an improper use of the process must be
established.” Sterenbuch v. Goss, 266 P.3d 428, 439 (Colo. App.
2011). “[T]here is no liability for abuse of process if the defendant’s
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ulterior purpose was simply incidental to the proceeding’s proper
purpose.” Mintz v. Accident & Injury Med. Specialists, PC, 284 P.3d
62, 66 (Colo. App. 2010), as modified on denial of reh’g (Feb. 24,
2011), aff’d, 2012 CO 50.
¶7 Here, ART moved for a directed verdict on Xtomic’s abuse of
process counterclaim at the close of the evidence as to the
counterclaims. At trial, in support of its counterclaims, Xtomic
argued that ART knew from the outset that it had no legitimate
claims against Xtomic and the overly aggressive manner in which it
pursued its claims against Xtomic was evidence of ART’s ulterior
motive to use the lawsuit as a means to harass Xtomic and run it
out of business. In denying the directed verdict motion, the court
relied primarily on the following: (1) ART’s pre-trial settlement with
Mr. Pena for $3000. Xtomic asserted that Mr. Pena was more
culpable than Mr. Ferguson because Mr. Pena was an employee and
close advisor to Dr. Leahy and had violated his fiduciary
relationship to ART. The nominal settlement was therefore,
according to Xtomic, proof of ART’s improper motive in filing the
suit and aggressively pursuing it against Xtomic; (2) ART’s
reputation for filing lawsuits to control the behavior of former
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associates and business partners; and (3) the nature and number of
preservation letters that ART sent to numerous individuals,
including spouses of Xtomic’s co-owners, clients, and others who
were not directly involved in the litigation.1 In our view, none of
these actions, alone or in combination, demonstrates an abuse of a
legal proceeding or court process.
¶8 Various remedies were developed at common law to balance
the right of access to the courts against the competing interest of
being free from unwarranted legal actions. The tort of abuse of
process was developed to provide a remedy for the filing of what
could be otherwise meritorious legal actions that are then
manipulated to achieve an improper advantage unrelated to the
substance of the actions filed. See Timothy P. Getzoff, Comment,
Dazed and Confused in Colorado: The Relationship Among Malicious
Prosecution, Abuse of Process, and the Noerr-Pennington Doctrine, 67
U. Colo. L. Rev. 675 (1996).
¶9 An abuse of process claim does not require proof of malice.
Hewitt v. Rice, 154 P.3d 408, 414 (Colo. 2007). The tort is
1The letters were not admitted at trial but were described as letters
sent by ART’s attorney requiring the recipients to preserve various
documents in their possession relating to ART, Xtomic, and S3.
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specifically designed to address misuse of and access to courts, not
malicious intent. See Mintz, 284 P.3d at 66; see also Cornelison v.
TIG Ins., 376 P.3d 1255, 1268 (Alaska 2016) (“The required motive
in an abuse of process claim is to put pressure on the person who
is wrongfully sued to perform or to refrain from performing an
action unrelated to the process.”). And the tort is not actionable
unless an ulterior purpose is combined with an improper use of a
legal proceeding or process that is unrelated to, or outside the scope
of, the action filed. Aztec Sound Corp. v. W. States Leasing Co., 32
Colo. App. 248, 252-53, 510 P.2d 897, 899-900 (1973).
¶ 10 What constitutes a “legal” or “judicial proceeding” for abuse of
process purposes has not previously been articulated in Colorado
case law. However other jurisdictions have stated, consistent with
the purpose behind the remedy, that it must involve an actual court
process, not just an action taken in connection with a lawsuit. See,
e.g., Weinstein v. Leonard, 134 A.3d 547, 556 (Vt. 2015) (Abuse of
process “requires proof of improper use of specific court processes,
rather than a use of the legal system for improper purposes.”).
Abuse of process therefore focuses not on the alleged wrongdoer’s
motivations or intentions, but on whether or not he used the legal
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system for its intended purpose. See Colo. Cmty. Bank v. Hoffman,
2013 COA 146, ¶ 37 (“If the action is confined to its regular and
legitimate function in relation to the cause of action stated in the
complaint there is no abuse, even if the plaintiff had an ulterior
motive in bringing the action or if he knowingly brought suit upon
an unfounded claim.” (quoting Sterenbuch, 266 P.3d at 439)); Mintz,
284 P.3d at 66; see also Weinstein, 134 A.3d at 555.
¶ 11 Here, first, ART’s settlement with Mr. Pena is not evidence of
abuse of process. A settlement is a process designed to allow
parties to resolve their conflicts without going through a full trial.
Whatever ART’s motives in reaching the settlement with Mr. Pena
may have been, the process itself was used as intended. See Colo.
Cmty. Bank, ¶ 38 (“[A]lthough an ulterior motive may be inferred
from the wrongful use of process, the wrongful use may not be
inferred from the motive.”); Sterenbuch, 266 P.3d at 439.
¶ 12 Second, ART’s reputation for filing, or even its abuse of
process in, other lawsuits should have no bearing on its alleged
abuse of process here. We must look at the use of the process in
this instance objectively. See Moore v. W. Forge Corp., 192 P.3d
427, 438 (Colo. App. 2007) (“Although the litigant’s motive may be
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important in determining whether there was an ulterior purpose,
the plaintiff must still establish that, viewed objectively, an
improper use of judicial process occurred.”).
¶ 13 And third, the letters ART sent out were not a legal proceeding
or a court process. See Weinstein, 134 A.3d at 556. From the
evidence in the record, it appears that ART sent letters to numerous
individuals after becoming concerned that e-mails that may have
had some bearing on ART’s claims to the software were being
destroyed. The letters were used to inform the recipients that ART
was investigating potential litigation and there could be adverse
consequences if relevant evidence was not preserved. The letters
were not, however, issued in conjunction with or as the result of a
hearing or pleading before the court. They were sent prior to any
court filing and independent of any court action or involvement,
and there was no evidence that the court was asked to play any role
in their issuance or enforcement. Therefore, we cannot conclude
that they were a legal proceeding as contemplated by the abuse of
process tort. See Walker v. Van Laningham, 148 P.3d 391, 394
(Colo. App. 2006). Even if we assume, without deciding, that their
intended purpose was to harass, intimidate, or otherwise harm
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Xtomic, because sending them was an action taken outside of the
scope of any legal proceeding, the abuse of process tort is
inapplicable. See Sterenbuch, 266 P.3d at 439.
¶ 14 Accordingly, we conclude that the trial court should have
granted ART’s motion for a directed verdict on the abuse of process
counterclaim as a matter of law.
¶ 15 Based on our conclusion that the motion for directed verdict
should have been granted, we vacate the abuse of process verdict in
favor of Xtomic. We also vacate any damages awarded in
connection with that verdict. Because the damages award included
other claims, we remand the case to the trial court to modify the
damages award accordingly. ART’s remaining contentions on
appeal relate to the damages award for the abuse of process verdict;
thus, our resolution of this issue renders them moot, and we need
not address them. See People in Interest of Ofengand, 183 P.3d
688, 691 (Colo. App. 2008); Sopko v. Clear Channel Satellite Servs.,
Inc., 151 P.3d 663, 668 (Colo. App. 2006).
III. Appellate Attorney Fees
¶ 16 Xtomic asserts it is entitled to appellate attorney fees. We
disagree.
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¶ 17 “When a party is awarded attorney fees for a prior stage of the
proceedings, it may recover reasonable attorney fees and costs for
successfully defending the appeal.” Kennedy v. King Soopers Inc.,
148 P.3d 385, 390 (Colo. App. 2006). Because we have decided the
appeal in ART’s favor, Xtomic is not entitled to its appellate fees,
and we decline to award them.
IV. Conclusion
¶ 18 We vacate the jury’s verdict in favor of Xtomic on the abuse of
process claim. Accordingly, we also vacate the damages award
predicated on that verdict. And we remand the case to the trial
court to amend the damages award accordingly.
JUDGE FREYRE and JUDGE DAVIDSON concur.
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