EATON CORPORATION, AEROQUIP-VICKERS, INC., EATON HYDRAULICS, INC. f/k/a VICKERS, INC., EATON AEROSPACE, LLC AND MICHAEL S. ALLRED
JEFFREY D. FRISBY, KEVIN J. CLARK, JAMES N. WARD, DOUGLAS E. MURPHY, MICHAEL K. FULTON, RODNEY L. CASE, BILLY D. GRAYSON, FRISBY AEROSPACE, LLC, FRISBY AEROSPACE, INC., FOUR SEVENTEEN AEROSPACE, INC., TRIUMPH GROUP, INC. AND THE TRIUMPH GROUP SINGLE BUSINESS ENTERPRISE
DATE OF JUDGMENT: 12/22/2010
HINDS COUNTY CIRCUIT COURT, HON. W. SWAN YERGER, TRIAL JUDGE
ATTORNEYS FOR APPELLANTS: MICHAEL B. WALLACE, JOHN P. SNEED, REBECCA L. HAWKINS, LUTHER T. MUNFORD, FRED L. BANKS, JR. ROBERT GREGG MAYER JOHN G. CORLEW KATHY A. SMITH, JAMES LAWTON ROBERTSON LINDA FAYE COOPER
ATTORNEYS FOR APPELLEES: ALAN W. PERRY J. CHASE BRYAN, HAROLD BARBER BOONE, ERIC W. SITARCHUK, MEREDITH S. AUTEN, J. CLIFTON JOHNSON, II, EDWARD BLACKMON, ROBERT B. MCDUFF, LISA MISHUNE ROSS, PHILLIP SAMUEL SYKES THOMAS E. ROYALS
¶1. The Hinds County Circuit Court imposed a joint and several monetary sanction for "intentional discovery violations" in the amount of $1, 560, 642.83 against Eaton Corporation, its Mississippi attorney, Michael S. Allred, and two Wisconsin attorneys for Eaton, Michael H. Schaalman and Gregory T. Everts. The circuit court also dismissed with prejudice all of Eaton's claims against Frisby Aerospace and related parties, for "improper ex parte and fraudulent contacts" between attorney Ed Peters and then-presiding Hinds County Circuit Judge Bobby DeLaughter. Both Eaton and Allred appeal the monetary sanction (Schaalman filed an appeal but dismissed it voluntarily, and Everts did not appeal). Eaton also appeals the dismissal of its lawsuit against Frisby.
FACTS AND PROCEDURAL HISTORY
¶2. In July 2004, Eaton Corporation (Eaton), represented by Allred, filed suit in the Hinds County Circuit Court against Frisby Aeronautics and numerous individuals (Frisby), alleging that six engineers formerly employed by Eaton and subsequently hired by Frisby in 2001 had stolen proprietary information and trade secrets from Eaton. In September 2004, Frisby filed a countersuit against Eaton, alleging, inter alia, defamation. Frisby, suspecting that Milan Georgeff, a former Frisby employee, had been in contact with Eaton as a potential witness in the case, alleged in the countersuit that Eaton's claims were the result of an "inherently unreliable . . . tale . . . told by a disgruntled former employee, Milan Georgeff."
¶3. The case was assigned to then-Hinds County Circuit Judge DeLaughter. In December 2004, Michael H. Schaalman, Gregory T. Everts, W. Brian Gasscher, and Emily Feinstein of the law firm Quarles & Brady, based in Wisconsin, were admitted pro hac vice as counsel for Eaton.
¶4. Prior to the filing of Eaton's suit against Frisby, Eaton reported the matter to the Federal Bureau of Investigation (FBI) and the U.S. Attorney's Office, and a criminal investigation of Frisby ensued. In January 2004, the FBI raided Frisby's offices and interviewed some of the defendant engineers in their homes. The FBI found some 16, 000 pages of "technical data" that the defendant engineers had brought with them from Eaton. Criminal charges were filed against five of the engineers for violations of the Federal Economic Espionage Act, involving the same alleged theft that is at the core of Eaton's civil action in this cause. In May 2012, the U.S. Attorney's Office, under a newly appointed U.S. attorney, dismissed the indictments.
¶5. During discovery in the instant matter, Frisby propounded extensive interrogatories to which Eaton responded through Allred. On February 25, 2005, Eaton, per its attorney, Allred, served an answer to what has been labeled as "Interrogatory No. 3." Interrogatory No. 3 reads as follows:
In paragraph 113 of your Complaint, you state that "(o)n about November 29, 2002, Plaintiffs first learned that the individual Defendants who were Eaton ex-employees, took with them to Frisby Aerospace all or a major portion of Eaton's engineering CAD designs, drawings and specifications." For this occurrence and for each additional occurrence on which you learned additional information, or confirmed previously learned information, relating to whether the individual Defendants took your engineering CAD designs, drawings and specifications with them to Frisby, please:
(1) state the facts describing how you learned this;
(2) identify the person that contributed in whole or in part to your learning this;
(3) state what you were told;
(4) identify any and all documents that you have, you were provided, or you developed, that relate to what you were told;
(5) state whether you have at any time since November 29, 2002, entered into any employment, consulting or other arrangement with any person identified in response to subpart (2) of this interrogatory; . . .
(6) describe what steps you took to investigate the veracity of what you were told.
¶6. Eaton's response to Interrogatory No. 3 identified an agreement and "communications" Eaton had with Georgeff. The response, in part, was as follows:
Answering further, Plaintiffs state that Plaintiffs have no employment, consulting or other agreement with Mr. Georgeff, except to say that Plaintiffs have agreed in a written memorandum to extend a strictly limited indemnity to Mr. Georgeff to the limited extent that he may incur attorney's fees and other actual costs in the event that defendants prosecute malicious litigation against him because of his status as a whistleblower. Except to identify this agreement for purposes of a privilege log, Plaintiffs do not waive but assert their . . . common litigation and other privileges with respect to the written memorandum of agreement identified herein and any communications among counsel and principals with respect thereto.
¶7. On February 28, 2005, Frisby's counsel, Robert Baron, via a telephone call to Schaalman, Eaton's Wisconsin counsel, challenged Eaton's assertion of privilege. Baron then sent to Schaalman letters dated March 4, March 22, and May 2, 2005, each of which made written demands for the Georgeff indemnity agreement and threatened a motion to compel if the agreement was not produced.
¶8. On November 2, 2005, the Eaton-Georgeff agreement was produced to Frisby in a wrongful-discharge lawsuit filed by Georgeff against Frisby in North Carolina. On January 4, 2006, Frisby filed a motion in the Mississippi case to dismiss and for sanctions against Eaton for unlawfully compensating a fact witness.
¶9. On January 17, 2006, Eaton filed a motion to refer the matter to a special master regarding Frisby's motion to dismiss and for sanctions. Judge DeLaughter appointed Special Master Jack F. Dunbar to resolve the discovery disputes between Eaton and Frisby.
¶10. On March 23, 2006, Dunbar issued a report and recommendation (R&R) rejecting Eaton's argument that the joint-defense privilege applied to protect the Georgeff agreement from disclosure.
¶11. On June 13, 2006, Dunbar issued an R&R regarding Eaton's alleged discovery violations. Dunbar found that:
there existed [a] letter agreement dated January 28, 2003 between Eaton and [Georgeff] and his attorney, [James Marsala], which is described in its first paragraph to be a "consulting agreement." After reciting a number of "factual premises" reflecting certain "misconduct" of Frisby by [Georgeff], which if true would support Eaton's allegations, the [January 28, 2003] agreement, beginning on page 6, sets forth specific undertakings and agreements on the part of Eaton for the benefit of [Georgeff] in return for his cooperation, which go far beyond a "limited indemnity agreement."
Specifically, in summary, Eaton agreed, in return for the cooperation of Georgeff to:
1. Defend Georgeff from any liability, expenses, or damages he might incur in his cooperation with Eaton;
2. Pay for the defense of any litigation, civil or criminal, resulting from his cooperation;
3. Pay the legal fees of James Marsala, counsel for Mr. Georgeff in any such litigation.
4. Pay Mr. Georgeff's travel and related expenses, as a witness for Eaton, incurred in any litigation instituted by Eaton;
5. Provide employment to Georgeff should he lose employment under circumstances outlined in the Third para., page 7 of the attached consulting agreement.
6. Reimburse Georgeff for wages lost as a result of his cooperation in Eaton lititgation at $50.00 an hour, for an 8 hour day and 40 hour week, as "estimated" lost wages. (See pp. 6-8 fo the attached consulting agreement.)
In addition, it is now known that Eaton also agreed to and did reimburse Mr. Georgeff for the attorneys' fees he incurred with his counsel, Mr. Marsala, in the development and drafting of the attached letter agreement of January 28, 2003. This reimbursement is not specified in the agreement itself, but apparently was the subject of a separate verbal agreement between Eaton and Mr. Georgeff, which should have been at least "identified" in Eaton's Answer to the Engineer Defendants' Interrogatory No 3, as an arrangement with Mr. Georgeff.
¶12. Dunbar found that, in response to Frisby's discovery request(s), Eaton did not fairly or adequately identify the existence of the consulting agreement and other documents relating to the "arrangement" with Georgeff. The answer, according to Dunbar, was "inaccurate and misleading." Dunbar said the failure to list the document on a privilege log was not a discovery violation because Frisby was "aware of Eaton's privilege claims asserted in all its answers to all discovery." Dunbar recommended that Frisby's motion to dismiss be denied because its defense of the case had not been prejudiced. Dunbar also recommended that Eaton and outside Wisconsin counsel be sanctioned in an amount equivalent to Frisby's expenses incurred in pursuing its motion to dismiss. D unbar recommended further discovery to determine "who" (and with what "intent") was involved in the discovery violations. On July 24, 2006, Judge DeLaughter adopted Dunbar's R&R and directed the parties to abide by the terms and provisions thereof. Thereafter, Dunbar permitted and oversaw discovery, including depositions.
¶13. On December 5, 2006, Dunbar issued a supplemental R&R (December 2006 R&R), regarding the "Responsibility for Discovery Violations, Intent and Recommended Sanctions, " finding that Eaton's discovery answers were "truly false" in an "intentional effort to mislead." Dunbar recommended an award of monetary sanctions to make Frisby whole, which included reimbursing Frisby for all expenses, attorneys' fees, and special-master fees, reasonably incurred by Frisby in the discovery-violation proceedings.
¶14. In the December 2006 R&R, Dunbar found that, although a "limited indemnity agreement" was not referenced in the privilege log later filed by Eaton on June 10, 2005, Eaton did give notice to Frisby in its response to the "Interrogatory No. 3, " that the "limited indemnity agreement" and "any communications" related thereto were subject to privileges. According to Dunbar, this answer suggested there might be (but did not acknowledge there were) communications relating to the "limited indemnity agreement." The subsequent privilege log served on June 10, 2005, did not identify any Georgeff-related communications. Following receipt of the of the Eaton discovery responses filed in February 2005, and telephone conferences with Eaton counsel, Frisby counsel pressed for the production of what they understood was a document reflecting a "joint defense privilege" with Georgeff and Eaton's "indemnity" of him, as well as "communications" with Georgeff.
¶15. Dunbar found the exchange of letters between Eaton counsel and Frisby counsel instructive on the issues involved in this inquiry. On March 4, 2005, Baron wrote Schaalman, confirming a recent phone conversation with Schaalman:
You are taking the position that communications between you or Eaton's in-house counsel and Milan Georgeff's counsel are subject to the joint defense privilege . . . (as to) the actual written document memorializing this joint defense privilege and plaintiff's indemnity of him. We oppose (the privilege claim) and will seek a court order compelling its production if you do not . . . produce it. We reserve the right to challenge other documents . . . after reviewing your privilege log of all Georgeff-Eaton communications withheld on this ground.
(Emphasis in December 2006 R&R). According to Dunbar, Everts assumed the task of responding to these demands. On March 22, 2005, Baron wrote Everts to confirm their conversation of March 15, 2005, in which he made a further demand for " . . . the joint defense indemnity agreement . . . between Eaton and Milan Georgeff." Dunbar found that these letters of March 4 and March 22, 2005, indicate that Baron was laboring under the impression that there was but one document that set forth both a joint defense agreement and the indemnity agreement. But there were two separate documents; i.e., a joint or common defense agreement between Eaton and Georgeff and his attorney Marsala, and a separate docum ent we now know as the consulting agreement, called a "limited indemnity agreem ent" in Eaton's responses to the defendant's discovery. Eaton never clarified Baron's misunderstanding.
¶16. Allred then became involved, writing Baron on March 30, 2005, and asserting a privilege as to Georgeff communications. Nevertheless he represented that Eaton " . . .will produce a privilege log relating to communications with Mr. Georgeff. This privilege log will be available shortly . . . ." Further, Allred advised, "We have disclosed the fact that Eaton has a joint defense agreement with Mr. Georgeff . . . we will not produce the agreement (on ground of privilege) . . . ." No reference was made to an "indemnity agreement" in this letter.
¶17. On May 2, 2005, Baron wrote Allred and reminded him of his promise to produce the privilege log, as to communications with Georgeff. Allred replied on June 2, 2005, confirming recent agreements with Baron via phone conferences. Allred agreed to produce the documents provided to the government in connection with its criminal investigation (including what is know as the "Georgeff Statement" relating Georgeff's claims of knowledge of the alleged "trade secret" misappropriations), and further, Allred acknowledged a promise:
Second, plaintiffs agreed to provide you with a copy of our communications with Milan Georgeff . . . By June 13, 2005.
(Emphasis in December 2006 R&R). Everts, by letter of June 10, 2005, forwarded a "privilege log" identifying certain Bates-numbered documents. The log did not list or claim as privileged any Georgeff-Allred/Eaton communications. And, as Dunbar found, there were many such communications.
¶18. On September 2, 2005, having received neither the Georgeff communications nor a privilege log designating Georgeff communications as privileged, Baron wrote to Allred, Schaalman, and Everts with the following complaint:
. . . by letter dated March 30, 2005, Mr. Allred promised that a privilege log relating to communications with Mr. Georgeff would be provided shortly. Five months have since passed and no such log has been provided. Nor are any documents relating to communications with Mr. Georgeff reflected on the privilege log provided to us. Such communications must be produced. . . . or that the very least place them on a privilege log if they exist, and are being withheld.
¶19. In response, on October 21, 2005, Everts responded to the Baron complaints:
Contrary to your assertion, Plaintiffs' production to date has been full and complete based on the information and documents in Plaintiffs' possession, custody or control. Plaintiffs have provided defendants with a privilege log, and will update that log if needed.
And at page 8:
13e. Plaintiffs entered into an oral joint defense agreement with Mr. Georgeff. Later this agreement was memorialized in writing (produced as EA 7442-43) . . . we will supplement our response and produce two ...