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Unlimited Technology, Inc. v. Leighton

United States District Court, E.D. Pennsylvania

July 19, 2017

UNLIMITED TECHNOLOGY, INC.
v.
RICHARD LEIGHTON, a/k/a RICK LEIGHTON, DTS SECURITY, INC. and SECURE VIZUAL, LLC

          MEMORANDUM OPINION

          Savage, J.

         For purposes of applying the first-filed rule, which date governs the analysis-the date the concurrent federal case was filed in the state court or the date it was removed? The Third Circuit has not decided the issue. A few district courts, without analysis, have concluded that the operative date is the date of removal. Other courts have used the date of filing in the state court. We conclude that the date the action was filed in state court is what counts.

         Unlimited Technology, Inc., filed this action to enforce the restrictive covenants in defendant Richard Leighton's employment agreement. Leighton moves to dismiss, stay, or transfer the action to the Northern District of Georgia, where he has a pending action to have the agreement declared unenforceable. Invoking the first-filed rule and 28 U.S.C. § 1404(a), Leighton argues that this action was filed after he had filed the action against Unlimited in the Georgia state court, which was removed to the United States District Court for the Northern District of Georgia. Opposing the motion, Unlimited contends that the action in this district was filed first because it was filed before the Georgia state court action was removed. Unlimited also claims that Leighton filed the Georgia action in bad faith and in anticipation of this action.

         We must determine whether to rely on the state court filing date or the removal date for purposes of applying the rule, and whether exceptions to the rule apply. If the first-filed rule does not apply, we then analyze whether the action should be transferred pursuant to 28 U.S.C. § 1404(a).

         We conclude that because the operative date for applying the first-filed rule is the date the case was filed in the state court and not the date of removal, the Georgia action was the first-filed action. However, we shall not apply the first-filed rule because the Georgia action was anticipatory and in bad faith. Therefore, the motion to transfer shall be denied.

         Background

         This dispute began when Leighton left his employment with Unlimited, taking with him Unlimited's largest customer. After his departure, Unlimited conducted an internal investigation which, it alleges, revealed that he had been planning to leave and start a competing business while still working at Unlimited. Unlimited considered Leighton's leaving and starting a business a breach of the non-compete provision in his employment contract and an unauthorized taking of trade secrets.

         Leighton began his employment with Unlimited, a security services company, in January 2014.[1] As Unlimited's Vice President of Sales and its highest paid employee, he earned approximately $350, 000 annually.[2] His employment agreement contained non-compete, non-disclosure, and non-solicitation provisions.[3]

         When Leighton joined the company, he brought with him Home Depot as a client. When he left, he took Home Depot, which had become Unlimited's largest customer.[4]

         The parties dispute the reasons why Leighton joined Unlimited and what transpired at the time of his departure. According to Leighton, Unlimited reneged on its promise to give him an equity interest in the company.[5] He claims that he was instead demoted in December 2015.[6]

         After his departure on September 29, 2016, Leighton operated his own security services business in Georgia, taking with him the Home Depot account. After he announced he would be leaving the company, Leighton alleges he and Unlimited agreed to continue working together on some Home Depot projects.[7] He claims that Brent Franklin, President of Unlimited, confirmed this agreement via email on October 11, 2016.[8]

         Unlimited disputes the existence of any post-employment agreement. Instead, it claims that Leighton threatened to impede any future business with Home Depot if the company attempted to enforce the restrictive covenants in his employment agreement.[9]Having lost Home Depot as a client, Unlimited agreed to serve Home Depot as Leighton's subcontractor.[10]

         After his departure, Leighton contracted Unlimited to complete a project for Home Depot. He contends that Unlimited failed to adequately perform. At Home Depot's request, Leighton did not offer Unlimited any more Home Depot work.[11] The parties had no further contact until the lawyers became involved.

         On March 31, 2017, Casey Green, counsel for Unlimited, sent Leighton a cease-and-desist letter, demanding that Leighton or his counsel respond by April 17, 2017 “to avoid litigation.”[12] On April 7, 2017, Leighton's counsel in Georgia, Charles Hawkins, called Green to discuss potential settlement. Green claims and Hawkins denies that during the phone call, he assured Hawkins that suit would not be commenced while the parties were engaged in discussions.[13]

         After discussing the case with his client, Hawkins spoke to Green again on Thursday, April 13, 2017. The attorneys dispute what was said during this phone call. They agree Unlimited wanted certain information. Green claims that Hawkins agreed to “voluntarily disclose” information with Unlimited for settlement purposes only.[14] Hawkins counters that they merely discussed “the possibility” of Leighton sharing information.[15]Hawkins insists that Green set a deadline of Monday, April 17, for Leighton to provide the information.[16] Green denies that he gave any deadline.[17]

         Following up on the telephone conversation earlier that day, Green sent Hawkins an email listing the documents Unlimited needed to assess whether there was a breach of contract and a theft of trade secrets. Green reiterated that Unlimited was still interested in reaching “an amicable pre-litigation settlement.”[18] The email did not set a deadline.

         Hawkins ignored Green's email. Instead, without warning, he filed suit in the Georgia state court on April 18, 2017.[19] In his complaint, Leighton seeks a declaration to clarify his rights and obligations, and to avoid violating his employment agreement. Specifically, he asks the court to declare that he did not violate any provision of his employment agreement because the parties had entered into a post-employment agreement that resulted in a novation, or at least, a substantial modification of the original agreement.

         Only after Unlimited filed its motion in this action did Hawkins attempt to justify filing the Georgia action without notice. He explains that the document request was “far more extensive” than what they had discussed on the phone.[20] He states that “[a]ny modestly experienced attorney would know that producing such a large volume of documents on three days' notice would not be humanly possible.”[21] Hawkins claims that he “did not take seriously” that Unlimited was still interested in settling, despite Green's email stating the contrary.[22] Hawkins suggests that Green “should have concluded that my clients were not interested in continuing settlement discussions after that deadline passed without any further communications from me.”[23] Yet, he discussed none of these concerns with Green. If he viewed the situation as he now claims, he should have addressed his concerns with Green. Instead, he gave the impression that Leighton was cooperating and pursuing settlement.

         Unlimited did not learn that Leighton had filed the Georgia action until April 24, 2017, when its registered agent in Georgia was served with a copy of the complaint.[24]Two days later, on April 26, 2017, Unlimited filed this action in the Eastern District of Pennsylvania. Unlimited removed Leighton's state court complaint to the Northern District of Georgia on May 3, 2017.[25]

         Leighton has moved to dismiss, stay, and/or transfer this action. He contends that the first-filed rule favors dismissing or transferring this action to the Northern District of Georgia. Opposing the motion, Unlimited argues that the action here was filed before the Georgia action was removed to the federal court there, giving this action priority under the first-filed rule.

         First-Filed Rule

         The first-filed rule requires, absent extraordinary circumstances, that federal cases sharing substantially similar subject matter be decided by the court where the litigation was first filed. EEOC v. Univ. of Pa., 850 F.2d 969, 971 (3d Cir. 1988), aff'd on other grounds, 493 U.S. 182 (1990); Synthes, Inc. v. Knapp, 978 F.Supp.2d 450, 455 (E.D. Pa. 2013). The rationale for the rule is to promote sound judicial administration and comity among federal courts. EEOC, 850 F.2d at 971. It is also designed to relieve a party who first brings a controversy into a court of competent jurisdiction from vexation of multiple litigations covering the same subject matter. QVC, Inc. v. Patiomats.com, LLC, Civ. No. 12-3168, 2012 WL 3155471, at *3 (E.D. Pa. Aug. 3, 2012).

         The parties agree that the actions are substantially similar. They dispute the date the Georgia action was filed for purposes of applying the first-filed rule. Unlimited argues that the operative date is the date the action was removed, which was after this action was filed. Leighton contends it is the date the action was filed in the Georgia state court. If Unlimited is correct, the Pennsylvania action is the first-filed case. On the other hand, if Leighton is correct, the Georgia case is.

         The Third Circuit has not decided whether the state court filing date or the removal date is used to determine when a case is first filed. District courts within the circuit rely upon the date of removal. E.g., Schulmerich Bells, LLC v. Jeffers Handbell Supply, Inc., Civ. No. 17-0275, 2017 WL 697913, at *2 (E.D. Pa. Feb. 21, 2017); Just Born, Inc. v. Summit Foods Enters., Inc., Civ. No. 13-7313, 2015 WL 996380, at *2 (E.D. Pa. Mar. 6, 2015). District courts outside this circuit have held that the filing date of the state court action, not the date of removal, is the operative date for applying the first-filed rule. E.g., Feinstein v. Brown, 304 F.Supp.2d 279, 282-83 (D.R.I. 2004); Affinity Memory & Micro, Inc. v. K & Q Enters., Inc., 20 F.Supp.2d 948, 954 n.10 (E.D.Va. 1998); Mfrs. Hanover Trust Co. v. Palmer Corp., 798 F.Supp. 161, 166 (S.D.N.Y. 1992).

         How a case is treated after removal warrants relying on the state filing date. Mfrs. Hanover Trust, 798 F.Supp. at 166 (citations omitted). Once a case is removed, the federal court takes it as it is. Williams v. Lampe, 399 F.3d 867, 870 (7th Cir. 2005) (citing First Republic Bank Ft. Worth v. Norglass, Inc., 958 F.2d 117, 119 (5th Cir. 1992)); Palmisano v. Alliance Health Sys., Inc., 190 F.3d 881, 885 (8th Cir. 1999); Igloo Prods. Corp. v. The Mounties, Inc., 735 F.Supp. 214, 217 (S.D. Tex. 1990). The case proceeds “as if it originally had been brought in the federal court.” 14C Wright & Miller, Fed. Prac. & Proc. Juris. § 3738. It does not start anew. The district court gives effect to state court rulings made prior to removal. D.H. Blair & Co. v. Gottdiener, 462 F.3d 95, 108 (2d Cir. 2006) (citations omitted).

         The removal petition relates back to the date the state court action was filed. Repleading is not necessary. The time within which the removing defendant must answer the complaint is calculated from the date the initial pleading in state court was served. See Fed. R. Civ. P. 81(c)(2). Likewise, the statute of limitations is tolled upon filing the state court action even if the action was removed after the limitations period had expired. See Staple v. United States, 740 F.2d 766, 769-70 (9th Cir. 1984); Arakaki v. United States, 62 Fed.Cl. 244, 248 (Fed. Cl. 2004); Morris v. Hoffa, Civ. No. 01-3420, 2002 WL 524037, at *3 (E.D. Pa. Apr. 8, 2002) (citing Patterson v. Am. Bosch Corp., 914 F.2d 384, 386 (3d Cir. 1990)).

         The district courts that rely on the date of removal as the operative date reason that the first-filed rule applies only to concurrent federal actions and there is no concurrent federal case until the state court action is removed. See, e.g., Schulmerich Bells, 2017 WL 697913, at *2; Just Born, Inc., 2015 WL 996380, at *2.[26] They reason that, until a case is removed, the first-filed rule is not triggered because there is only one federal case. In other words, those courts disregard the state court action. They do not consider the relation back of the removal petition and that the federal court takes a removed case as it is from the state court.

         The courts using the removal date advise that “the plaintiff in a state civil action can avoid being the second-filed matter by simply filing a complaint in federal district court, not a state trial court at the outset.” Schulmerich Bells, 2017 WL 697913, at *2 (quoting N. Am. Commc'ns, Inc. v. Homeowners Loan Corp., Civ. No. 2006-147, 2007 WL 184776, at *3 n.1 (W.D. Pa. Jan. 22, 2007)). This suggestion supposes that the plaintiff in the state court action anticipates that the defendant will be filing a federal action in another district. It ignores the plaintiff's choice of forum and assumes that a defendant will always be looking to file its own federal action.

         We disagree with the reasoning of the courts which fix the operative date at the time of removal and disregard the date of the state court filing. The better approach is to relate the removal date back to the state court filing date. Thus, we conclude that the state court filing date is the relevant date for applying the first-filed rule.[27]

         The action now pending in the Northern District of Georgia is the first-filed case. This is so even though the district court in Georgia was not the first federal court to possess jurisdiction. Thus, for purposes of the first-filed rule, the Georgia action is the first-filed action because it was filed in state court before Unlimited filed its lawsuit here.

         That does not mean this action must be transferred to Georgia. The first-filed rule is not applied rigidly. EEOC, 850 F.2d at 976. Exceptions, though rare, do exist.[28]They are: (1) the existence of rare or extraordinary circumstances; (2) the first-filer engaged in inequitable conduct; (3) he acted in bad faith; (4) he engaged in forum shopping; (5) the later-filed action has developed further than the first-filed action; and (6) the first-filing party instituted suit in one forum in anticipation of the opposing party's imminent suit in a less favorable forum. EEOC, 850 F.2d at 972, 976.

         Unlimited argues that we should depart from the first-filed rule because Leighton engaged in inequitable conduct and forum shopping, and the Georgia action is an improper anticipatory one. The circumstances surrounding the attorneys' discussions and the filing of the Georgia action without notice shows that filing the Georgia case was a preemptive move.

         The cease-and-desist letter advised Leighton that Unlimited intended to file suit unless its conduct discontinued or its counsel heard from Leighton's counsel before April 17, 2017. It left the door open to avoid litigation. See One World Botanicals Ltd. v. Gulf Coast Nutritionals, Inc., 987 F.Supp. 317, 329 (D.N.J. 1997). Before the deadline came, Hawkins reached out to Green, giving the impression that Leighton was willing to engage in settlement discussions.

         Leighton anticipated filing the Georgia action as early as when he received the cease-and-desist letter on March 31.[29] Yet, Leighton waited to file suit until after his Georgia counsel appeared to engage in settlement discussions. Had Hawkins not contacted Green before April 17, Unlimited would have concluded that litigation was the only recourse. By contacting Green, Hawkins gave the impression ...


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