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TLS Management I Marketing Service, LLC v. Mardis Financial Services, Inc.

United States District Court, S.D. Mississippi.

August 3, 2018

TLS Management & Marketing Services, LLC, Plaintiff,
Mardis Financial Services, Inc., et al., Defendants.

         Findings of Fact & Conclusions of Law

          Before Carlton W. Reeves, District Judge.

          Carlton W. Reeves United States District Judge.

         TLS Management & Marketing Services, LLC filed this suit nearly four years ago, alleging that Defendants hatched a scheme to steal its trade secrets and launch a competing tax reduction business.[1] In January 2018, after finding that Defendants had destroyed evidence, the Court entered a default judgment against them under Federal Rule of Civil Procedure 37(e)(2).[2] The Court then held a two-day bench trial on damages.

         In the Fifth Circuit, “after a default judgment, the plaintiff's well-pleaded factual allegations are taken as true, except regarding damages . . . [and] personal jurisdiction.”[3] A defendant “may not challenge the sufficiency of the evidence” in the wake of a default judgment.[4] But while a default judgment “conclusively establish[es] a defendant's liability, ”[5] such liability exists “only so far as it is supported by well-pleaded al-legations.”[6] In other words, if a particular claim would not survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), there is no liability under that claim.[7] Therefore, despite the default judgment, the Court must determine if TLS's well-pleaded liability-related factual allegations, taken as true, establish liability.

         The analysis begins with jurisdiction. The Court will then consider liability on a claim-by-claim basis, and assess damages under each claim. The analysis concludes with the questions of injunctive relief and attorney's fees.

         I Jurisdiction

         Subject Matter Jurisdiction. The Court has diversity jurisdiction under 28 U.S.C. § 1332, as the parties are diverse and the amount in controversy exceeds $75, 000.[8] TLS is a Puerto Rico business. J. Todd Mardis is a Mississippi resident. Capital Preservation Services and Mardis Financial Services list their principal places of business in Flowood, Mississippi.

         Personal Jurisdiction & Venue. The Court has personal jurisdiction over Defendants, given their places of residence and principal offices. For these same reasons, the Southern District of Mississippi is an appropriate venue for this action.

         II Liability

         A Facts[9]

         TLS's Business. TLS provides businesses with customized strategies to reduce their taxes through a group of highly skilled tax attorneys and accounting professionals. TLS has designed custom made plans for more than 5, 000 clients' businesses and individual needs, and through these efforts has developed substantial goodwill and a respected reputation in the industry.

         TLS's Confidential & Proprietary Information. The identity, contact information, and knowledge of particular needs of TLS customers (“Customer Information”) are essential to TLS's business, and are considered by TLS to be confidential, proprietary information. Although certain information might be publicly available—such as a company's name or corporate mailing address—only a limited number of TLS employees and affiliates know who among the general public are TLS customers or prospects, and therefore have a specific need for tax consulting services. TLS also considers information about its marketing strategies, pricing, and other business-related information (“Business Information”) to be confidential and proprietary.

         TLS devotes significant time, effort, and capital to the development of its Customer Information and Business Information. TLS pays for subscription information services to enable it to stay up to date on the latest issues relevant to its tax planning advice. TLS employs at least one individual whose sole responsibility is to conduct and distill this research. TLS also employs two full-time employees devoted to marketing tasks, and invests heavily in branding and marketing efforts.

         TLS has developed a lengthy document that thoroughly assesses a client's financial information and provides recommendations of potential avenues to achieve tax savings (the “Tax Report”). TLS developed and customized the Tax Report through the full-time efforts of several individuals that began before the inception of TLS's business in 2005 and continues to this day. The Tax Report contains methods that are unique to TLS and are not generally available in the industry. TLS's extensive experience with regard to tax reduction is reflected in the Tax Report, TLS analytical methods, TLS forms, and TLS proposals to potential clients. TLS also devotes significant time, effort, and capital to following all developments in tax law and policy that might affect its strategies or its clients' needs, and uses that knowledge to constantly update the Tax Report.

         TLS's Efforts to Keep Information Confidential. TLS maintains its Customer Information and Business Information in confidence, both to preserve TLS's competitive advantage and to meet customer expectations that TLS will maintain sensitive information (such as the amount of money TLS was able to save a client in tax payments) in confidence. TLS vigilantly preserves its Customer Information and Business Information so that it does not become available to competitors who could use the data to divert customers without the investment of time, labor, and capital that TLS made to compile the information. TLS does not provide its Customer Information or Business Information to competitors. It requires individuals or entities who require access to TLS's Customer Information or Business Information to sign non-disclosure, confidentiality, and non-competition agreements before providing them with such access. Access to TLS's database containing all Customer Information is password-protected, and access permissions and methods are frequently reviewed and strictly enforced. The business derives substantial economic value from preserving its Customer Information and Business Information as confidential, keeps this information out of the hands of its competitors, and considers it a trade secret.

         Mardis & Capital Preservation Services. Todd Mardis, through his company Capital Preservation Services, learned about TLS's tax planning and consulting business after entering into a contract with TLS—the CPS Agreement—on June 9, 2010.[10] Mardis signed the contract on Capital Preservation Services' behalf. The CPS Agreement imposed duties of confidentiality and non-competition on the parties.[11]

         TLS provided Capital Preservation Services and Mardis with TLS's Customer Information and Business Information pursuant to the protections of the CPS Agreement. TLS would not have provided Capital Preservation Services or Mardis with its Customer Information and Business Information without the agreement to protect the information and to refrain from competing with TLS.

         As a result of its relationship with TLS, Capital Preservation Services has received commissions on sales from TLS and as a result of insurance policies sold to TLS clients. The sales of insurance policies are a direct result of a TLS client's implementation of the recommendations contained in the Tax Report. Therefore, without the TLS proprietary Customer Information, Business Information and Tax Report, TLS clients would have no reason to buy insurance policies from Capital Preservation Services.

         The CPS Agreement was terminated on November 14, 2014.[12]

         Mardis & Mardis Financial Services. On February 28, 2011, TLS expanded its business relationship with Todd Mardis and his affiliated companies by entering into a subcontractor agreement with Mardis Financial Services.[13] The MFS Agreement was signed by Mardis and was jointly prepared by the parties, each of which was a sophisticated business.

         The MFS Agreement allowed Mardis Financial Services to become responsible for gathering Customer Information from prospective TLS clients, applying proprietary TLS Business Information to analyze clients' tax situations, and developing and pricing TLS sales proposals. In addition, Mardis Financial Services became responsible for production of the Tax Report. Mardis Financial Services was given not only the Tax Report, but all TLS methods and procedures for customizing the Tax Report to specific client situations. As part of the agreement to assume these duties, Mardis Financial Services accepted duties of confidentiality and non-competition.[14]

         In 2013, the parties amended the MFS Agreement to further expand their business relationship; the amendments did not alter the existing duties of confidentiality and non-competi-tion.[15] TLS provided Mardis with additional, significant access to its confidential Customer and Business Information. Mardis received information about TLS's financial and business operations, including TLS's business profitability and external relationships.

         The MFS Agreement was terminated on September 26, 2014.[16]Mardis Financial Services failed to return to TLS all Confidential Information in its possession after the termination of the MFS Agreement.

         Defendants' Wrongdoing. In 2014, Defendants began secretly and deliberately building their own tax planning business using TLS resources, relationships, and intellectual property. That business directly competed with TLS and diverted customers from TLS. Defendants began diverting sales opportunities away from TLS and sold tax planning services on their own behalf to competitors during the spring and summer of 2014.

         Defendants now compete with TLS in the market for tax reduction consulting services. Defendants are engaging in the business of providing tax consulting services similar to those provided by TLS and performing services for a competitor of TLS. Defendants are in possession of TLS's Confidential Information, and continue to use it for their own benefit to divert business away from TLS.

         Defendants are intentionally confusing customers about the nature and source of their services, causing customers to believe that Defendants' services are provided through or on behalf of TLS. Defendants obtained permission from customers to use their names to endorse TLS services, then used the customers' names and comments to promote Defendants' services. Clients whom Defendants began soliciting while Mardis was still associated with TLS were not notified that work on their projects was no longer being performed by TLS.

         Defendants have distributed advertisements and posted pages on its website which include false and misleading representations of fact.

         B Analysis

         1 Mississippi Uniform Trade Secrets Act

         The Mississippi Uniform Trade Secrets Act allows plaintiffs to “recover damages for misappropriation” of a trade secret, [17]and to obtain an injunction to prevent “[a]ctual or threatened misappropriation.”[18] A trade secret is “information, including a formula, pattern, compilation, program, device, method, technique or process, that: [d]erives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and [is] the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”[19] One form of misappropriation is the “[d]isclosure or use of a trade secret of another without express or implied consent by a person who, ” to “acquire knowledge of the trade secret, ” used “improper means, ” such as “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain se-crecy.”[20]

         Here, TLS provided Defendants with confidential and proprietary information about its business and customers. TLS derived independent economic value from the secrecy of this information. TLS engaged in reasonable efforts to maintain its secrecy, like forcing Defendants to sign non-disclosure agreements that required the return of all business and customer information at the conclusion of their business relationship. Such information constituted trade secrets.[21] Defendants willfully and maliciously misappropriated TLS's trade secrets by using and disclosing them without consent and in breach of existing duties of non-disclosure. The Court finds that Defendants are liable under the Trade Secrets Act. TLS is entitled to an injunction and damages for misappropriation.

         2 Tortious Interference with Business Relations

         Tortious interference with business relations occurs when: “(1) the acts [of interference] were intentional and willful; (2) the acts were calculated to cause damage to the plaintiffs in their lawful business; (3) the acts were done with the unlawful purpose of causing damage and loss without right or justifiable cause on the part of the defendant (which constitutes malice); and (4) actual loss and damage resulted.”[22]

         Under this standard, Defendants are liable in tort for interference with business relations. Defendants intentionally interfered with TLS's business, stole trade secrets in order to effect that interference, and diverted customers from Defendants, causing actual loss. This interference was willful and malicious.

         3 Unfair Competition

         In Mississippi, a person is liable in tort for unfair competition if they “set[] about to maliciously and wantonly injure a competitor” and cause such an injury.[23] While the Trade Secrets Act “displaces conflicting tort [ ] law of this state providing civil remedies for misappropriation of a trade secret, ”[24] an unfair competition claim is “not . . . displaced” if it can “stand alone . . . without [a plaintiff] proving that [any relevant information] was a trade secret.”[25]

         In this case, TLS's unfair competition claim is not displaced. Even if TLS had not proven any theft of trade secrets, Defendants' appropriation of TLS's customer lists and misrepresentations to prospective customers were parts of a scheme to divert business from TLS. Such a scheme was a successful attempt to maliciously and wantonly injure a competitor. Defendants are liable in tort for unfair competition.

         4 Federal Trademark Law

         Federal trademark law prohibits the use of a “false or misleading description of fact [that] . . . is likely to cause confusion . . . as to the origin, sponsorship, or approval of [one's] services.”[26] Defendants' advertisements and webpages include false and misleading representations of fact since they misrepresented the nature of their business to their customers. Defendants are liable for violating the federal ban on false advertising.

         5 Breach of Contract

         CPS Agreement. Under the CPS Agreement, Capital Preservation Services was barred from disclosing “information regarding [TLS's] business” (including “information regarding business methods and procedures, clients or prospective clients, agent lists, marketing channels and relationships, marketing methods, costs, prices, earnings, products, formulae, compositions, methods, systems, procedures, prospective and executed contracts and other business arrangements”) unless such disclosure was for “the purpose of carrying out [the CPS Agreement] and all other written agreements between the parties.”[27] Upon termination of the CPS Agreement, Capital Preservation Services had a duty to “promptly retur[n]” all confidential information to TLS.[28] The CPS Agreement also barred Capital Preservation Services from, without prior written permission from TLS, “[b]ecom[ing] involved in the business of offering services substantially similar to any component” of TLS's business.[29] These duties of confidentiality and non-competition extended “during the term [of the CPS Agreement] and for a period of two years after [its] termination.”[30]

         The Court finds that Capital Preservation Services breached the CPS Agreement. By constructing a business founded on TLS's trade secrets, disclosing those trade secrets to clients, and diverting customers from TLS, Capital Preservation Services willfully breached the duties of confidentiality and noncompetition it had under the CPS Agreement.

         Mardis Financial Services. Under the MFS Agreement, Mardis Financial Services promised to keep confidential TLS's business information (including “information regarding clients or prospective clients, marketing channels and relationships, marketing methods, costs, prices, earnings, reports, products, formulae, compositions, methods, systems, procedures, reports, prospective and executed contracts and other business arrangement, and sources of supply”).[31]Mardis Financial Services also agreed to “return to TLS any Intellectual Property of TLS still in [its] possession” upon the termination of the agreement.[32] Finally, Mardis Financial Services promised to not “engage in the business of providing any tax consulting services that are packaged, sold, delivered or implemented in a manner similar to the services provided by TLS” during the term of the MFS Agreement and for one year after the contract's termination.[33]

         Mardis Financial Services breached the MFS Agreement. By constructing a business founded on TLS's trade secrets, disclosing those trade secrets to clients, and diverting customers from TLS, Mardis Financial Services willfully breached the duties of confidentiality and non-competition it had under the MFS Agreement.

         III Damages

         A Preliminary Considerations

         Defendants are liable to TLS under all the claims described above. While TLS is entitled to damages on each of these claims, it is not entitled to recover on each claim if that would constitute a “double recovery.”[34] Plaintiffs “cannot recover the same damages twice, even though the recovery is based on two different theories.”[35] Thus, TLS can only recover under separate claims to the extent each addresses different damages.

         TLS submitted an expert report by Brett Bersin (“the Bersin Report”) to calculate damages under its Trade Secrets Act and breach of contract claims.[36] His testimony was consistent with his report. Bersin is well-qualified. He has a B.B.A. degree in accounting from the University of Houston, is a Texas-licensed certified public accountant, is certified in financial fo-rensics by the American Institute of Certified Public Accountants, and is a certified licensing professional.[37] At the time of his involvement in this case, Bersin was managing director of an international financial advisory consulting firm, Duff & Phelps.[38] Bersin is regularly retained to serve as an expert witness in cases involving forensic accounting and economic damages.[39]

         The Bersin Report was based on a “review of the facts, documentary evidence produced in this lawsuit, deposition transcripts, data and information [on Defendants' businesses], interviews of TLS's personnel, as well as [Bersin's] business training and experiences.”[40] It analyzed hundreds of Defendants' internal documents, [41] using profit and loss statements, customer detail reports, and vendor detail reports to calculate revenues and expenses.[42]

         Defendants do not challenge Bersin's qualifications or exper-tise.[43] They also made the strategic choice to not submit any expert testimony rebutting Bersin's conclusions or presenting an alternative theory of damages.

         B Analysis

         1 Trade Secrets Act

         The Trade Secrets Act allows plaintiffs to recover “both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.”[44]

         Expert Report on Damages. The Bersin Report quantified Defendants' damages under the Trade Secrets Act as “profits from [their] alleged unauthorized use of [trade secrets] for the period of September 2014 through October 2017 (date of trial).”[45] Bersin began this unjust enrichment calculation by using Defendants' total revenues as a baseline.[46] He subtracted from this revenue all “incremental expenses directly related to the production of [their] revenue from [misappro-priation].”[47] Following Fifth Circuit guidance on calculating unjust enrichment, [48] Bersin excluded from his calculations what he identified as variable and semi-variable expenses, and included what he identified as fixed costs.[49] Bersin's methodology was simple: Total Revenue - Incremental Expenses = Profit = Unjust Enrichment.[50]

         When calculating the unjust enrichment of Capital Preservation Services, Bersin examined the company's financial statements and Todd Mardis's deposition testimony.[51] Bersin identified four categories of incremental expenses: commissions, which were “contractual amounts paid to advisors for their client-related work”; marketing expenses, which were “amounts expended to advertise . . . business services and generate client work”; marketing and related fees, which were “agreed upon amounts paid to medical associations in connection with . . . marketing efforts to its members”; and professional fees, which were “amounts paid to [lawyers] for tax work performed for . . . clients.”[52] Subtracting these expenses from Capital Preservation Services' total revenues for the relevant time period, Bersin calculated the profits unjustly earned by the firm as $2, 482, 221.57.[53]

         Bersin took a similar approach to calculating the unjust enrichment of Mardis Financial Services. Bersin identified two categories of incremental expenses: commissions and marketing expenses.[54] Subtracting these expenses from Mardis Financial Services' total revenues for the relevant time period, Bersin calculated the profits unjustly earned by the firm as $1, 025, 496.91.[55]

         Objections to Expert Report. Defendants made four objections to Bersin's methodology. None are persuasive.

         First, Defendants say Bersin was wrong to assume that all of their revenue during the relevant time period stemmed from the use of trade secrets.[56] Defendants argue that as much as 25% of the profits identified by Bersin were unrelated to stolen trade secrets, pointing to Todd Mardis's testimony that some of his business stemmed from an “audit defense plan” not offered by TLS.[57] If these audit defense services were un- related to tax planning, Defendants' argument might be persuasive. But Defendants' audit defense “services” were simply biannual meetings with tax planning clients to “review their documentation” and “make adjustments if there [were] changes to the tax code.”[58] Thus, these services were a part of the tax planning business built on stolen trade secrets.

         Defendants' second objection is that Bersin used Defendants' profit and loss statements, rather than their allegedly more accurate tax returns, to calculate the relevant revenue streams. This argument is meritless. As Bersin testified, it makes no difference if he “looked at the tax returns versus the profit and loss statements, ” as the latter statements “form the basis for the tax returns.”[59] Defendants allude to “substantial adjustments” made on the tax returns that render prior filings inaccurate.[60] Bersin, however, testified that the tax returns reflect no such adjustments, and were instead “more or less the same” as the profit and loss statements.[61] To dispute this claim, Defendants have submitted their raw tax returns as evidence, hoping the Court will both conduct its own analysis and weigh it against Bersin's methodology. The Court must decline this invitation to perform forensic financial accounting. The expert is far more capable. The profit and loss state- ments are far more detailed assessments of Defendants' business operations, and there is no reason to believe the tax returns better capture those operations.[62]

         Defendants' third argument is that Bersin used a flawed methodology for deducting business expenses. The only evidence to support this claim is the testimony of Todd Mardis, who performed a different set of deductions when filing Defendants' tax returns.[63] But Mardis admits that he has “no expertise” when it comes to forensic accounting.[64] ...

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