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Mifflinburg Telegraph, Inc. v. Criswell

United States District Court, M.D. Pennsylvania

September 7, 2017

MIFFLINBURG TELEGRAPH, INC., Plaintiff,
v.
HEIDI CRISWELL, DALE E. CRISWELL, WILDCAT PUBLICATIONS, LLC, Defendants.

          MEMORANDUM OPINION

          MATTHEW W. BRANN, UNITED STATES DISTRICT JUDGE.

         The instant motion for default judgment presents the thorny task of determining the value of the surviving goodwill in a small business after employees surreptitiously absconded with proprietary customer information.

         I. BACKGROUND

         Plaintiff, Mifflinburg Telegraph, Inc. filed a complaint on March 31, 2014 against Defendants Heidi Criswell, Dale E. Criswell, and Wildcat Publications, LLC.[1] Mifflinburg Telegraph is a small business located in Mifflinburg, Union County, Pennsylvania, that operated, previously, as both a print shop and a newspaper publisher, and as of 2014, only a print shop. Heidi and Dale Criswell are spouses who had been two of only five employees of Plaintiff Mifflinburg Telegraph until their February 3, 2014 resignation from the business.

         Heidi Criswell had been a long term employee of Mifflinburg Telegraph when its owner, John Stamm, died in 2013. Heidi Criswell's title was ‘primary designer and printer, ' but it is widely acknowledged that in the years preceding Stamm's death, while he was ill, she ran the business in his stead.

         After Stamm's death, she entered into negotiations with the Stamm Estate to purchase the business for $225, 000. Negotiations eventually failed, and in the fall of 2013, unbeknownst to the estate or Mifflinburg Telegraph, Heidi Criswell started a competing business, Wildcat Publications, LLC. Prior to her February 2014 departure from Mifflinburg Telegraph, she began providing customers with re-order forms listing Wildcat Publications contact information where Mifflinburg Telegraph's information had previously appeared. She also misappropriated from Mifflinburg Telegraph its customer list, then subsequently and secretly deleted the customer list from Mifflinburg Telegraph's computers so the business would not be able to use its own customer list. Not only did she delete the customer lists, she also deleted any order history, so that if a customer returned to Mifflinburg Telegraph with a repeat order, Mifflinburg Telegraph could not simply reprint a prior order, but would have to start from scratch and recreate the customer's logo and any other information.

         There are currently three motions pending in this action, one as to each of the three remaining defendants. Mifflinburg Telegraph filed a Motion for Default Judgment as to Wildcat Publications, LLC, [2] a Motion for Partial Summary Judgment against Heidi Criswell, [3] and a Motion for Partial Summary Judgment against Dale E. Criswell.[4] The instant Memorandum Opinion disposes of the Motion for Default Judgment against Defendant Wildcat Publications, LLC, hereinafter “Wildcat.” The pending motions for partial summary judgment will be disposed of by separate Memoranda Opinions and Orders.

         The complaint began as a fifty-four page, two-hundred twenty paragraph, eighteen count complaint against six defendants. Ten counts are alleged against Defendant Wildcat.[5] Jurisdiction is based on two federal causes of action, alleged violations of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, and the Lanham Act 15 U.S.C. § 1125. The Court is exercising supplemental jurisdiction over the pendant state claims.

         What makes resolution of this default judgment motion more complex than the typical default judgment motion is the fact that Wildcat initially retained counsel. Counsel filed an answer to the complaint on behalf of these three Defendants.[6] Thus, the default here is unlike the typical default one sees in federal court where the Defendant simply fails to answer and the default is entered shortly after the date the answer had been due. Here, the default on the part of Wildcat slowly unfolded over time. After a fashion, there was a breakdown of the relationship between counsel and the collective Wildcat Defendants. I eventually granted counsels' motion to withdraw.[7] In so Ordering, I provided these Defendants with two months, until July 28, 2015, to find replacement counsel. When no counsel entered an appearance, I entered a second Order extending the time one additional month. However, I warned in that Order that:

if the Wildcat defendants do not find counsel by August 28, 2015, approximately ninety days after their original counsel withdrew, no further continuances will be granted to find new counsel. The individual Wildcat defendants, Dale E. Criswell, Heidi Criswell, and Darlene Sharp may proceed pro se, that is to say they will represent themselves. If Wildcat Publications, LLC. does not find counsel by August 28, 2015, entry of default will be made against it. See, e.g., Galtieri-Carlson v.Victoria M. Morton Enterprises, Inc., No. 2:08-CV-01777, 2010 WL 3386473, at *1 (E.D. Cal. Aug. 26, 2010).[8]

         Neither Wildcat, nor the Criswells, obtained counsel by August 28, 2015. In fact, nearly two years later, these defendants still have not retained counsel. On September 3, 2015, Mifflinburg Telegraph duly moved for entry of default and the Clerk entered default the same date.[9]

         On November 6, 2015, Mifflinburg Telegraph filed a motion for default judgment[10] against Wildcat, and an evidentiary hearing was held on December 17, 2015. The motion for default judgment is now granted, for the reasons that follow.

         II. ANALYSIS

         Because default judgment is being entered as a sanction here, I look both to the rule governing defaults, Federal Rule of Civil Procedure 55, and also to the case law of the United States Court of Appeals for the Third Circuit. First, I turn to the Rules of Civil Procedure.

         A. Motion for Default Judgment Standard

         Federal Rule of Civil Procedure 55 discusses default and default judgment, the Rule provides in pertinent part:

(a) Entering a Default.
When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default.
(b) Entering a Default Judgment.
(1) By the Clerk. If the plaintiff's claim is for a sum certain or a sum that can be made certain by computation, the clerk-on the plaintiff's request, with an affidavit showing the amount due-must enter judgment for that amount and costs against a defendant who has been defaulted for not appearing and who is neither a minor nor an incompetent person.
(2) By the Court. In all other cases, the party must apply to the court for a default judgment. A default judgment may be entered against a minor or incompetent person only if represented by a general guardian, conservator, or other like fiduciary who has appeared. If the party against whom a default judgment is sought has appeared personally or by a representative, that party or its representative must be served with written notice of the application at least 7 days before the hearing. The court may conduct hearings or make referrals- preserving any federal statutory right to a jury trial-when, to enter or effectuate judgment, it needs to:
(A) conduct an accounting;
(B) determine the amount of damages;
(C) establish the truth of any allegation by evidence; or
(D) investigate any other matter “

         Courts should look with disfavor upon allowance of judgments by default.”[11] That said, however, “grant or denial of motion for entry of default judgment is within discretion of trial court; in exercising that discretion the philosophy of these rules favors trial on the merits in contradistinction to judgments by default and court must look to that policy not only when petition to vacate a default judgment is presented but also when approving or denying entry of default.”[12] The Honorable Arlin M. Adams, writing for the Third Circuit, explained:

It is well settled in this Circuit that the entry of a default judgment is left primarily to the discretion of the district court. As Justice Harlan explained in the parallel context of sanctions for failure to prosecute a claim, a trial court's discretion to dismiss a complaint is a power of “ancient origin” that “has generally been considered an ‘inherent power, ' governed not by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.”[13]

         “Once a default has been entered and entry of judgment pursuant to default is sought, the function of the trial court is not to weigh conflicting evidence, but, rather, a court must make sole determination whether allegations of party in whose favor default has been entered are susceptible of proof.”[14] Default was entered against Wildcat on September 3, 2015.[15] “Defaults are treated as admissions of the facts alleged, but a plaintiff may still be required to prove that he or she is entitled to the damages sought.”[16] “A reasonable calculation should be made by looking at the evidence and the affidavits submitted by the moving party.”[17]

         “Before entering a default judgment, a court must consider a number of factors.”[18] “The Third Circuit . . . has condensed these factors into three main issues: (i) whether the plaintiff will be prejudiced if the default is denied, (ii) whether the defendant has a meritorious defense; and (iii) whether the default was the product of defendant's culpable conduct.”[19]

         First, Mifflinburg Telegraph will be prejudiced if the default is denied. This action has been pending for more than three year. It is a straightforward matter and the time has come for resolution. To delay entry of default any longer is unnecessary and would “detrimentally affect[] their ability to vindicate their rights.”[20]

         Second, Wildcat does not have a meritorious defense. “A meritorious defense is presumptively established when the “allegations of defendant's answer, if established on trial would constitute a complete defense to the action.”[21] Wildcat had counsel at the time it answered the complaint. Its answer was docketed on June 11, 2014.[22] Wildcat's answer consists of general, generic denials of the averments in the complaint. While certainly an appropriate answer, it does not rise to the level of allegations that would constitute a complete defense to the action if this matter were to proceed to trial.

         Third, the default is the product of Wildcat's culpable conduct. “The standard for ‘culpable conduct' in this Circuit is the ‘willfulness' or ‘bad faith' of a non-responding defendant.”[23] Wildcat has now been without counsel for more than two years. “It has been the law for the better part of two centuries ... that a corporation may appear in the federal courts only through licensed counsel.”[24]“The same applies to [limited liability companies], even those with only a single member, because even single-member LLCs have a legal identity separate from their members.”[25] Moreover, “default judgment can be imposed for failure to comply with a court's orders to retain substitute counsel.”[26]

         In addition to evaluating these three factors, “before granting a default judgment, a court must first ascertain whether ‘the unchallenged facts constitute a legitimate cause of action, since a party in default does not admit mere conclusions of law.'” To accomplish this, the Court accepts “the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.”[27] I find that Mifflinburg Telegraph has stated a legitimate cause of action against Wildcat as to seven of the ten counts against it, as follows:

1. Count V: Aiding and Abetting Thru Violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, et. seq.

         The Computer Fraud and Abuse Act (hereinafter “CFAA”) prohibits seven fraudulent activities related to computers. The Third Circuit has observed that employers “are increasingly taking advantage of the CFAA's civil remedies to sue former employees and their new companies who seek a competitive edge through wrongful use of information from the former employer's computer system.”[28]

         Mifflinburg Telegraph has sufficiently plead that Heidi Criswell violated several provisions of the CFAA, specifically 18 U.S.C. § 1030(a) (2)(C). “Whoever-- intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains -- information from any protected computer” and (a)(5) “Whoever-- (A) knowingly causes the transmission of a program, information, code, or command, and as a result of such conduct, intentionally causes damage without authorization, to a protected computer; (B) intentionally accesses a protected computer without authorization, and as a result of such conduct, recklessly causes damage; or (C) intentionally accesses a protected computer without authorization, and as a result of such conduct, causes damage and loss.” “To state a civil claim for violations of the CFAA, AFS must allege: (1) damage or loss “to 1 or more persons during any 1-year period ... aggregating at least $5, 000 in value”; (2) caused by; (3) violation of one of the substantive provisions of §§ 1030(a) or (b).”[29]

         However, “the CFAA does not create a cause of action for aiding and abetting.”[30] Mifflinburg Telegraph has not, therefore, satisfied the factual predicate to state a cause of action against Wildcat Publications for aiding and abetting under the CFAA. Accordingly, this claim fails as a matter of law.

         2. Count VII: Aiding and Abetting Conversion

         Mifflinburg Telegraph has sufficiently plead that Wildcat, through its principal Heidi Criswell, is liable for conversion. The law relating to conversion is well established in the Commonwealth of Pennsylvania. “A conversion is the deprivation of another's right of property in, or use or possession of, a chattel, or other interference therewith, without the owner's consent and without lawful justification.”[31] “Conversion may be committed by [u]nreasonably withholding possession from one who has the right to it.”[32]

         “The civil tort of aiding and abetting has the following elements: For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he (a) does a tortious act in concert with the other or pursuant to a common design with him, or (b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or (c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.”[33]

         ‘Aiding and abetting' a conversion, however, does not appear to be a tort in Pennsylvania; I was unable to find even a single case in Pennsylvania with a cause of action of ‘aiding and abetting' a conversion. Moreover, Mifflinburg Telegraph also did not cite to any cases where ‘aiding and abetting' a conversion is a cause of action. Accordingly, because I am unconvinced that this is a cause of action, and there has been no legal argument advancing the issue, I find that Mifflinburg Telegraph has not satisfied the factual predicate to state a cause of action against Wildcat for aiding and abetting conversion.

         3. Count X: Aiding and Abetting Breach of Fiduciary Duty

         “Under Pennsylvania law, the elements that must be proven in order to maintain a claim for aiding and abetting a breach of fiduciary duty are: (1) a breach of a fiduciary duty owed to another; (2) knowledge of the breach by the aider and abettor; and (3) substantial assistance or encouragement by the aider and abettor in effecting that breach.”[34] “In other words, “[i]n order to be found liable for aiding and abetting a breach of a fiduciary duty, one must demonstrate that the party knew that the other's conduct constituted a breach of a fiduciary duty and gave substantial assistance or encouragement to the other in committing that breach.”[35] “A fiduciary duty may arise from “a confidential relationship between two parties.”[36]

         The Third Circuit has recently held that an employee can “breach[] her fiduciary duty by forwarding confidential e-mails before she quit.”[37] Heidi Criswell owed a fiduciary duty to her former employer, and breached it by taking emails and customer lists from Mifflinburg Telegraph's computers.[38] In Pennsylvania, a business entity can aid and abet breach of fiduciary duty.[39]

         Accordingly, Mifflinburg Telegraph has satisfied the factual predicate to state a cause of action against Wildcat for aiding and abetting breach of fiduciary duty.

         4. Count XI: Tortious Interference with Business Relations

         The elements of a cause of action for intentional interference with a contractual relation, whether existing or prospective, are as follows:

(1) the existence of a contractual, or prospective contractual relation between the complainant and a third party;
(2) purposeful action on the part of the defendant, specifically intended to harm the existing relation, or to prevent a prospective relation from occurring;
(3) the absence of privilege or justification on the part of the defendant; and
(4) the occasioning of actual legal damage as the result of the defendant's conduct.[40]
As to the first element,
A “prospective contractual relationship” is something less than a contractual right, something more than a mere hope. Under Pennsylvania law, [Plaintiffs] must present adequate proof of an objectively reasonable probability that a contract will come into existence. [Plaintiffs] need only demonstrate that it is reasonably probable that it would have obtained a contract, not that it was guaranteed to do so. Stated another way, [Plaintiffs] may recover if, but for [defendant's] wrongful acts, it is reasonably probable that a contract would have been entered. This reasonable probability may result from an unenforceable express agreement, an offer, or the parties' current dealings, but not merely from prior dealings or an existing business relationship between the parties.[41]

         “It is not enough for a plaintiff to show merely that defendant's actions had the incidental consequence of affecting plaintiff's business relationships with third persons.”[42] “A plaintiff must show that the defendant acted for the malevolent purpose of interfering with the plaintiff's existing ... business relationships.”[43]

         “The second element requires proof that the defendant acted for the specific purpose of causing harm to the plaintiff.”[44] “The wrong ordinarily requires conduct intended to interrupt negotiations or prevent the consummation of a contract.”[45] “[T]he second prong is satisfied if defendant acts improperly and with the knowledge that such interference is substantially certain to occur.”[46]

         “The third element requires proof that the defendant's actions were improper under the circumstances presented.”[47] “The presence of a privilege is not an affirmative defense, rather, the absence of such a privilege is an element of the cause of action which must be pleaded and proven by the plaintiff.”[48] “Whether a defendant is privileged or justified in a particular course of conduct is defined by “the rules of the game, ” or the “area of socially acceptable conduct which the law regards as privileged.”[49]

         Pennsylvania has adopted the Restatement Second of Torts proposition that the interference must be improper, i.e., without privilege or justification.[50] To determine impropriety includes consideration of: “(a) the nature of the actor's conduct; (b) the actor's motive; (c) the interests of the others with which the actor's conduct interferes; (d) the interests sought to be advanced by the actor; (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other; (f) the proximity or remoteness of the actor's conduct to the interference; and (g) the relations between the parties.”[51]

In applying these factors, comment b to section 767 is also instructive:
The issue in each case is whether the interference is improper or not under the circumstances; whether, upon a consideration of the relative significance of the factors involved, the conduct should be permitted without liability, despite its effect of harm to another. The decision therefore depends upon a judgment and choice of values in each situation. This Section states the important factors to be weighed against each other and balanced in arriving at a judgment; but it does not exhaust the list of possible factors.[52]

         In making this choice of values in individual cases, the Pennsylvania Supreme Court has advised that when the purpose of the defendant's conduct is, in whole or in part, to protect a legitimate right or interest that conflicts with the interests of the plaintiff, a line must be drawn and the interests evaluated. Although this evaluation of interests is not always susceptible of precise definition, it is clear that the central inquiry is whether the defendant's conduct is sanctioned by the “rules of the game” which society has adopted.

         Mifflinburg Telegraph has satisfied the factual predicate to state a cause of action against Wildcat for tortious interference with contractual relations by providing re-order forms to existing customers with re-order information being redirected from Mifflinburg Telegraph to Wildcat.

         5. Count XII:

         Misappropriation and Misuse of Trade Secrets and Confidential Information in Violation of Pennsylvania Uniform Trade Secrets Act 12 Pa.C.S. § 5301, et. seq. “PUTSA”

         The policy behind trade secret law is “the maintenance of standards of commercial ethics.”[53] “Under PUTSA, a person has misappropriated a trade secret ‘when he acquires knowledge of another's trade secret in circumstances giving rise to a duty to maintain its confidentiality and then discloses or uses that trade secret without the other's consent.'”[54] “PUTSA defines a “trade secret” as: “Information, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process that: (1) derives 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; or (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.””[55]

         Mifflinburg Telegraph has satisfied the factual predicate to state a cause of action against Wildcat Publications for misappropriation of trade secrets under PUTSA for taking Mifflinburg Telegraph's customer list.

         6. Count XIII: Unfair Competition

         Nearly one-hundred years ago, the Pennsylvania Supreme Court defined unfair competition as “anything done by a rival in the same business by imitation or otherwise designed or calculated to mislead the public in the belief that, in buying the product offered by him for sale, they were buying the product of another manufacturer.”[56] The spirit of the law can be expressed as “the deception practiced in ‘passing off' the goods of one for that of another.”[57] “The law of unfair competition also requires that a company, entering a field already occupied by a rival of established reputation, ‘must do nothing which will unnecessarily create or increase confusion between his goods or business and the goods or business of the rival.'”[58]

         Mifflinburg Telegraph has satisfied the factual predicate to state a cause of action against Wildcat for unfair competition.

         7. Count XIV: Procuring Information by Improper Means

         Pennsylvania has adopted Restatement of Torts § 759, Procuring Information by Improper Means, which provides “one who, for the purpose of advancing a rival business interest, procures by improper means information about another's business is liable to the other for the harm caused by his possession, disclosure or use of the information.” “Moreover, the comments to § 759 clearly indicate information that is procured under this section need not rise to the level of a trade secret.”[59] “It only need be confidential business information.”[60]

         Mifflinburg Telegraph has satisfied the factual predicate to state a cause of action against Wildcat for procuring information by improper means.

         8. Count XVI: Civil Conspiracy

         “In Pennsylvania, ‘to state a cause of action for civil conspiracy, the following elements are required: (1) a combination of two or more persons acting with a common purpose to do an unlawful act or to do a lawful act by unlawful means or for an unlawful purpose; (2) an overt act done in pursuance of the common purpose; and (3) actual legal damage.'”[61] To prove a civil conspiracy, it must be shown that two or more persons combined or agreed with intent to do an unlawful act or to do an otherwise lawful act by unlawful means.[62]

         Additionally, the Pennsylvania Supreme Court stated that proof of malice, an intent to injure, is essential in proof of a conspiracy.[63] This unlawful intent must be absent justification. The test was set forth by that court as follows.

Assume that what is done is intentional, and that it is calculated to do harm to others. Then comes the question, Was it done with or without “just cause or excuse”? If it was bona fide done in the use of a man's own property such legal justification would exist not the less because what was done might seem to others to be selfish or unreasonable. But such legal justification would not exist when the act was merely done with the intention of causing temporal harm, without reference to one's own lawful gain, or the lawful enjoyment of one's own rights.[64]

         Mifflinburg Telegraph has satisfied the factual predicate to state a cause of action against Wildcat for civil conspiracy.

         9. Count XVII: Unjust Enrichment

         Pennsylvania law supports two species of unjust enrichment claims: “(1) a quasi-contract theory of liability, in which case the unjust enrichment claim is brought as an alternative to a breach of contract claim; or (2) a theory based on unlawful or improper conduct established by an underlying claim, such as fraud, in which case the unjust enrichment claim is a companion to the underlying claim.”[65]The case at bar appears to be a claim of the latter, hinging upon other claims in the Plaintiff's complaint.

         “Unjust enrichment is essentially an equitable doctrine.”[66] “The elements necessary to prove unjust enrichment are: (1) benefits conferred on defendant by plaintiff; (2) appreciation of such benefits by defendant; and (3) acceptance and retention of such benefits under such circumstances that it would be inequitable for defendant to retain the benefit without payment of value.”[67] “The application of the doctrine depends on the particular factual circumstances of the case at issue.”[68]“In determining if the doctrine applies, our focus is not on the intention of the parties, but rather on whether the defendant has been unjustly enriched.”[69] In other words, “benefits conferred on defendant by plaintiff, appreciation of such benefits by defendant, and acceptance and retention of such benefits under such circumstances that it would be inequitable for defendant to retain the benefit without payment of value.”[70] Employing circular reasoning, the Superior Court of Pennsylvania has stated that “the most important factor to be considered in applying the doctrine is whether the enrichment of the defendant is unjust.”[71]

         More helpfully, Pennsylvania has adopted the Restatement of Restitution for determining whether there is unjust enrichment.[72] The Restatement provides guidance that unjust enrichment can occur through conversion (§40), interference with a trade secret (§42), or through a fiduciary or confidential relation (§43).[73]Further, “an unjust enrichment claim may be pled as a companion… to a claim of unlawful or improper conduct as defined by law-e.g., a tort claim.”[74] When based on an underlying claim, an unjust enrichment claim shall fall where the underlying claims are dismissed.[75]

         Because there is a factual predicate to support a finding of unjust enrichment, Mifflinburg Telegraph has stated a cause of action for unjust enrichment against Wildcat.

         10. Count XVIII: Violation of Section 43(A) of the Lanham Act, 15

         U.S.C. § 1125

         The Lanham Act is the federal law of unfair competition. The Act provides that a civil action exists when:

         any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which--

(A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, or
(B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities,

         shall be liable in a civil action by any person who believes that he or she is or is likely ...


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