Opinion
NO. 226-2011-CV-332
10-05-2012
GT Crystal Systems, LLC, and GT Solar Hong Kong, Ltd. v. Chandra Khattak, Kedar Gupta, and Advanced RenewableEnergy Company, LLC
ORDER
The Plaintiffs, GT Crystal Systems, LLC and GT Solar Hong Kong, Ltd., allege that the Defendants, Chandra Khattak, Kedar Gupta, and Advanced RenewableEnergy Company, LLC, are liable under several causes of action, including, inter alia, misappropriation of trade secrets. Defendants have filed a Partial Motion for Summary Judgment, asserting that judgment for the Defendants is appropriate because the Plaintiffs are estopped from raising their misappropriation of trade secrets claim due to disposition in a prior case against a party that the Plaintiffs are in privity with. For the reasons stated in this Order, Defendants are not entitled to Summary Judgment and their motion must be DENIED.
I
In deciding whether to grant summary judgment, the reviewing court considers the pleadings, affidavits, and other evidence, as well as all inferences properly drawn from them, in the light most favorable to the non-moving party. See Purdie v. Attorney General, 143 N.H. 661, 663 (1999). "[S]ummary judgment may be granted only where no genuine issue of material fact is present, and the moving party is entitled to judgment as a matter of law." Id.; see also RSA 491:8-a, III (2010). "An issue of fact is 'material' for purposes of summary judgment if it affects the outcome of the litigation under the applicable substantive law." Vandemark v. McDonald's Corp., 153 N.H. 753, 756 (2006) (citation omitted). To defeat summary judgment, the non-moving party "must set forth specific facts showing that there is a genuine issue [of material fact] for trial." Panciocco v. Lawyers Title Ins. Corp., 147 N.H. 610, 613 (2002).
By way of brief background, the Plaintiff Khattak was an employee of Crystal Systems, Inc. ("CSI"), a Delaware corporation in the business of growing sapphire crystals that are used in electronic and optical equipment and devices, including light emitting diodes ("LEDs"). CSI invented the specific process that it used to manufacture sapphire crystals.
Defendant Gupta was a founder of GT Solar, Inc. ("GT Solar"), a Delaware corporation with a principal place of business in Merrimack, New Hampshire, that also engaged in the business of designing and manufacturing sapphire crystal growth systems. In March of 2006, Khattak left CSI for employment with GT Solar. At some point, Gupta became involved with Advanced RenewableEnergy Company ("ARC") and when GT Solar terminated Khattak's employment in May 2010, he became employed at ARC.
In July of 2010, GT Solar acquired CSI and, subsequently, the company became GT Crystal Systems. GT Solar now functions as the sole member of GT Crystal Systems. GT Crystal Systems is the successor in interest to CSI's property interests, including its trade secrets. Thus, the trade secrets at issue in the litigation belong to GT Crystal. GT Crystal granted an exclusive license to GT Hong Kong to manufacture and sell sapphire crystal growth systems outside of the United States.
In October 2010, Khattak filed a law suit against GT Solar in Hillsborough County South Superior Court alleging breaches of certain agreements. GT Solar filed several counterclaims, alleging, inter alia, that "Khattak . . . misappropriated GT Solar trade secrets . . . ." Plaintiffs' Obj. to Defendants' Partial Motion for Summary Judgment, Ex. B, 14. In January 2011, Khattak filed a Motion to Dismiss certain of GT Solar's counterclaims, including the claim for misappropriation of trade secrets on the ground that GT Solar "failed to identify with sufficient specificity the GT Solar trade secrets allegedly misappropriated by Khattak and the circumstances in which those trade secrets had been misappropriated." Plaintiffs' Obj. to Defendants' Motion for Partial Summary Judgment, 6.
The Court (Nicolosi, J.) granted Khattak's motion as to the claim for misappropriation of trade secrets. However, the Court acknowledged and ordered the following:
[D]ismissal for failure to state a cause of action is a judgment on the merits and has a preclusive effect and, accordingly, a plaintiff should generally be given the opportunity to amend the writ to clarify the claims or to correct deficiencies prior to dismissal. ERG, Inc. v. Barnes, 137 N.H. 186, 189 (1993). For this reason, the Court will order dismissal subject to the [sic] GT Solar's right to file a motion to amend with an amended writ within thirty (30) days of the date of this order clarifying their claim. In the event that no amended writ is filed, dismissal will become final.Khattak v. GT Solar, Inc., Hillsborough County Superior Court, South, No. 2010-EQ-00331 (April 7, 2011) (Order, Nicolosi, J.). GT Solar never filed an amended counterclaim and, its claim for misappropriation of trade secrets was dismissed.
However, on May 6, 2011, within the 30 days required by Judge Nicolosi's order, GT Crystal Systems and GT Hong Kong, the actual owners of the trade secrets, instituted the current action against Khattak, Gupta, and ARC. On May 9, 2011, GT Solar submitted a Motion for a Protective Order and, for the Court's convenience, a copy of the complaint filed on May 6 in the present litigation. In the cover letter of that filing, GT Solar stated:
Because [the matter of GT Crystal Systems, LLC and GT Solar Hong Kong, Ltd. v. Chandra Khattak, et al] involves parties and issues related to the parties and issues in this litigation, the Court or the plaintiff in this matter may want to consider consolidation of the two cases. (In any event, the defendant in this matter, GT Solar Incorporated, reserves the right to seek to do so, at an appropriate time.)Plaintiffs' Obj. to the Defendants' Motion for Partial Summary Judgment, Ex. E.
The cases were never consolidated, and the instant case was transferred to the Business and Commercial Dispute Docket in Merrimack County by agreement. In July 2011, Defendants Khattak and Gupta filed a Motion to Dismiss and, regarding the Plaintiffs' claims for misappropriation of trade secrets, the Defendants asserted that the doctrine of collateral estoppel precluded the Plaintiffs from raising that claim again. After a hearing, this Court denied the Defendants' Motion to Dismiss the Plaintiffs' trade secret claim on the basis that collateral estoppel requires the same parties or parties in privity with the parties of the prior action. Based on the limited discovery, it was unclear whether GT Crystal and GT Hong Kong were in privity with GT Solar and, so, the Court left that question open.
In the instant motion, all of the Defendants, including ARC, move for partial summary judgment asserting that, after some discovery, it is clear that GT Crystal and GT Hong Kong are and were in privity with GT Solar and are precluded from bringing their misappropriation of trade secrets claim. Defendants assert that the Plaintiffs' admissions that GT Crystal is a Delaware limited liability company and that GT Crystal's sole member is GT Solar subjects the Plaintiffs to 6 Del. C. §18-402. That statute provides in relevant part that: "Unless otherwise provided in a limited liability company agreement, each member and manager has the authority to bind the limited liability company." Because the Plaintiffs have also admitted that their limited liability company agreement does not provide otherwise, the Defendants argue that this statute alone demonstrates that GT Solar and GT Crystal Systems are in privity.
The Plaintiffs object. The Plaintiffs assert several arguments in support of their position: (1) that the Plaintiffs, through filing a new action in Hillsborough County Superior Court within 30 days of Judge Nicolosi's Order on the Motion to Dismiss, either actually or constructively complied with the Court's requirement to submit "an amended writ;" (2) the Defendants erroneously approached the Motion to Dismiss under a theory of collateral estoppel, when it should have been asserted under a theory of res judicata, and, in any event, the Defendants have failed to meet all of the requirements of collateral estoppel; and (3) the Defendants reliance on 6 Del. Ch. §18-402 is misplaced because, although the statute provides that a member of an LLC has the authority to bind the LLC, GT Solar would still have to exercise that power in order to be in privity with GT Crystal, and it never did so.
II
In the briefing on the original Motion to Dismiss both parties briefed the issue of whether collateral estoppel precluded the Plaintiffs' claims. However, as the Plaintiffs point out in their recent papers, res judicata, not collateral estoppel, applies to dismissals for failure to state a claim, where opportunity to amend has been granted before dismissal or where such opportunity has been denied and no appeal taken from the de- nial. ERG, Inc. v. Barnes, 137 N.H. 186, 189 (1993). Therefore, the Court considers the facts before it and whether the claims are precluded under a theory of res judicata.
"Res Judicata precludes the litigation in a later case of matters actually decided, and matters that could have been litigated, in an earlier action between the same parties for the same action." Sleeper v. Hoban Family Partnership, 157 N.H. 530, 533 (2008), citing Meier v. Town of Littleton, 154 N.H. 340, 342 (2006). In order for the doctrine to apply, "three elements must be met: (1) the parties must be the same or in privity with one another; (2) the same cause of action must be before the court in both instances; and (3) a final judgment on the merits must have been rendered in the first action." Id. These three elements are similar to those applied in the context of collateral estoppel and in the Court's first Order. See ERG, Inc., 137 N.H. at 188 (stating the three elements required to demonstrate that collateral estoppel applies). Even under a theory of res judicata, the same cause of action is before the court in both instances (misappropriation of trade secrets) and a final judgment on the merits in the first action has been rendered (motion to dismiss for failure to state a claim with leave to amend and a failure to amend).
Whether the doctrine of collateral estoppel or res judicata is considered, the most significant issue is privity. In general, "res judicata does not apply to nonparties to the original judgment," but "this rule is subject to exceptions." Sleeper, 157 N.H. at 533 (citations omitted). "Nonparty preclusion may be justified based on a variety of preexisting substantive legal relationships between the person to be bound and a party to the judgment." Id. (citations and quotations omitted). One such pre-existing substantive legal relationship resulting in preclusion is that of a closely-held corporation and its sole-owner. Restatement (Second) of Judgments, §59 provides, in relevant part:
(3) If the corporation is closely held, in that one or a few persons hold substantially the entire ownership in it, the judgment in an action by or against the corporation or the holder of ownership in it is conclusive upon the other of them as to issues determined therein as follows:The reasoning behind this exception is that "[w]hen [a] corporation is closely held . . . interests of the corporation's management and stockholders and the corporation itself generally fully coincide." Id., cmnt. e. In fact, "there is no good reason why a closely held corporation and its owners should be ordinarily regarded as legally distinct"—instead, "it may be presumed that their interests coincide and that one opportunity to litigate issues that concern them in common should sufficiently protect both." Id.
...
(b) The judgment in an action by or against the holder of ownership in the corporation is conclusive upon the corporation except when relitigation of the issue is justified in order to protect the interest of another owner or a creditor of the corporation.
Analogously, a judgment against the sole-member of an LLC is conclusive upon the LLC. See generally S&B Const., LLC v. Old Fort, LLC, 826 N.E.2d 32, 38 (Ind. App. 2005) (applying Restatement (Second) of Judgments, §59 to a matter involving an LLC and its members). Applying the Restatement (Second) of Judgments, §59 to an LLC even though the rule is explicitly applicable to corporations is sound and reasonable. A corporation and an LLC share many common characteristics: "[a]s in a corporation, investors (shareholders in a corporation, members in an LLC) have limited liability," see 6 Del. C. § 18-303; "own undivided interests in the company's property;" see id. at § 18-701; "are bound by the terms of their Agreement (like the corporate Articles); and share in the overall profits and losses ratably according to their investment or as otherwise provided by the organizing Agreement," see id. at §18-503. Frasier v. Major League Soccer, LLC, 97 F.Supp.2d 130, 134-35 (D. Mass. 2000). Therefore, Restatement (Second) of Judgments, §59 should apply to LLCs as it does to corporations and, it follows then, that a judgment against GT Solar, the sole member of GT Crystal, would have pre-clusive effect against GT Crystal. There is nothing in the facts to suggest that "relitiga-tion of the issue is justified in order to protect the interest of another [member] or a creditor of [GT Crystal]."
The Plaintiffs seek to turn attention from this "pre-existing substantive legal relationship" and focus, instead, on another kind of relationship used to satisfy the privity requirement, albeit more broadly, in the preclusion context—the "functional relationship." Sleeper, 157 N.H. at 534. The Court mentioned this relationship in its previous Order and discussed how the "functional relationship" requires that "at a minimum, the interests of the nonparty were in fact represented and protected in the prior litigation." Daigle v. City of Portsmouth, 129 N.H. 561, 571 (1987) (citations and quotations omitted). However, where a pre-existing substantive legal relationship is present, the Court need not consider whether a functional relationship is also present—either type of relationship "satisfies the privity requirement" for the purposes of res judicata. Sleeper, 157 N.H. at 534.
III
However, the circumstances before the Court are procedurally unique. Although GT Solar failed to file an amended counterclaim as Judge Nicolosi's Order on the original Motion to Dismiss required, GT Crystal and GT Hong Kong did file the instant suit within the thirty days provided for the amendment. They acted reasonably in doing so, because the action they brought was brought on behalf of the actual owners of the trade secrets, which would facilitate discovery. Further, GT Solar filed a cover letter suggesting that the Court may wish to consolidate the two related cases. The Court never acted, and by agreement, the case was transferred to the Business and Commercial Dispute Docket, in another county. If GT Solar or GT Crystal had filed a formal Motion to Consolidate, rather than a letter request, more than likely, the Court would not be faced with the instant Motion for Summary Judgment, and counsel for the Defendants conceded this fact at the hearing held on August 31, 2012. Moreover, Judge Nicolosi's Order was arguably ambiguous to the extent it required GT Solar to amend its "writ" because GT Solar never filed a writ, but only a counterclaim.
Finally, and most importantly, the Defendants have not shown any resulting prejudice from the fact that the claim against them was brought in a separate action, naming the actual owners of the trade secrets, within the time frame required by the judge who had dismissed the initial claim, rather than in the same action. As in Roberts v. General Motors Corporation, 140 N.H. 723, 727 (1996), "the successive suits were not brought for purposes of hindrance or delay or otherwise to gain a strategic advantage for the plaintiff." As the Court stated in that case:
Nor was [the defendant] prejudiced by the lapse of time or otherwise. [Plainitff's] initial action was timely in the first instance and has been under litigation ever since. [Defendant] has been on notice of the allegations against it, and of its need to secure and preserve evidence to present its defense.Id. at 727-728.
Under these unusual circumstances, the Court will not elevate form over substance. See Karch v. Baybank FSB, 147 N.H. 525, 528 (2002). Since the days of Chief Justice Doe in the late 19th century, New Hampshire procedure has focused on "what justice require[s]," not on "strict precision in form." In re Proposed Rules of Civil Procedure, 139 N.H. 512, 515-516 (1995). For this reason, New Hampshire courts "make every effort to reach a judgment on the merits, to achieve the ends of justice unobstructed by imaginary barriers of form." Roberts, 140 N.H. at 729, quoting In re Proposed Rules of Civil Procedure, 139 N.H. at 516; Walker v. Walker, 63 N.H. 321, 328 (1885). GT Crystal constructively complied with the Court's Order of April 2011 to amend the counterclaims or face dismissal when it filed the instant suit. See Karch v. Baybank, FSB, 147 N.H. at 528.
There is, therefore, no preclusive judgment which may be asserted by the Defendants, and it follows that their Motion for Summary Judgment must be DENIED.
SO ORDERED.
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Richard B. McNamara
Presiding Justice