Retail Service Systems, Inc. v. Mattress By Appointment, LLC
Docket: Case No. 2:15-cv-2769
Court: District Court, S.D. Ohio; September 28, 2016; Federal District Court
Defendants’ Motion to Dismiss for Lack of Personal Jurisdiction is partially granted and partially denied. Retail Service Systems, Inc. (RSS), an Ohio corporation based in Dublin, operates a retail mattress and furniture business and holds the intellectual-property rights to a proprietary marketing system purchased from Power Marketing Direct, Inc. (PMD) in June 2013. PMD developed a specialized marketing program for the mattress and furniture industry, licensing dealers to sell products exclusively through PMD, which achieved over 55% of its sales from mattresses. The program incorporates unique sales techniques, including appointment-only selling, low-cost advertising, and a structured management process for dealers.
Defendant Mattress By Appointment, LLC (MBA (FL) II) is a Florida entity, while MBA (SC) is a South Carolina entity, both involved in selling mattresses through independent dealers. C. Edwin Shoffner, a South Carolina citizen, owns and operates these companies. MBA (SC) claims to be non-operational. Darren Conrad, a former PMD dealer, established a competing business, Carolina Bedding and Furniture, Inc., using PMD's methodologies after signing a three-year noncompete clause with PMD. PMD successfully sued Conrad for violating this clause, resulting in a permanent injunction and substantial damages, with the court recognizing PMD's business materials and methodologies as trade secrets. Following the injunction, Conrad transferred his dealers to other parties.
Defendant Shoffner was employed as a sales representative at mattress manufacturer Park Place. Plaintiff alleges Shoffner collaborated with Conrad to receive a portion of sales from Conrad's former dealers, despite knowing of a court injunction against Conrad, thereby facilitating a violation of that order. Defendants counter that Shoffner was compensated according to standard sales commissions. In October 2011, Conrad established Carolina Bedding Direct, LLC in North Carolina, with Shoffner investing in the company. The plaintiff claims this venture utilized marketing techniques developed by PMD, leading to rapid growth in dealer relationships. Conrad later relocated to Florida, transferring all assets from the North Carolina company to a new entity of the same name in Florida and dissolving the North Carolina entity in April 2012. In November 2012, he registered a new Florida entity, Mattress By Appointment, LLC, intended to replace the Carolina Bedding Direct (FL), though no transfer occurred. In March 2013, Shoffner acquired a 45% stake in Carolina Bedding Direct (FL), allegedly aware of the company's reliance on stolen marketing systems from PMD and ongoing litigation against Conrad. In February 2014, the Florida entity was renamed Mattress By Appointment (MBA (FL) II). Conrad filed for personal bankruptcy in July 2014, after which Shoffner obtained Conrad's remaining 55% interest, achieving sole ownership. Shoffner also initiated MBA (SC) with plans to move MBA (FL) II to South Carolina, a transfer that has not yet materialized. In October 2013, RSS, which had acquired PMD's marketing rights, filed a lawsuit against Carolina Bedding Direct (North Carolina) and MBA (FL) I for trade secret misappropriation. Following a failure to respond, a default judgment was entered against the defendants. The case has since moved to the current court. The present defendants, MBA (FL) II, MBA (SC), and Shoffner, seek to intervene and stay proceedings pending resolution of this case. The plaintiff initiated the current action on August 31, 2015, against these entities for misappropriation of trade secrets as successors in interest. Defendants have moved to dismiss the case for lack of personal jurisdiction.
Federal Rule of Civil Procedure 12(b)(2) allows for the dismissal of cases where the court lacks personal jurisdiction over a defendant. District courts can decide such motions based on pleadings, allow discovery, or hold an evidentiary hearing. In this case, the court determined that sufficient information was available to rule on the motion without a hearing. The plaintiff must demonstrate personal jurisdiction, which involves a relatively low burden when the motion is based solely on written submissions; the court must view the evidence favorably toward the plaintiff and only require a prima facie case for jurisdiction.
The Sixth Circuit mandates that courts do not weigh conflicting assertions from the defendant in these motions to prevent evasion of jurisdiction by nonresident defendants. Federal courts, when assessing personal jurisdiction, apply the law of the forum state—in this instance, Ohio's long-arm statute, O.R.C. 2307.382. This statute permits jurisdiction over out-of-state defendants based on specific activities. The court found personal jurisdiction over Defendants Mattress By Appointment, LLC (Florida) and C. Edwin Shoffner but determined it lacked jurisdiction over Mattress By Appointment, LLC (South Carolina). The plaintiff asserted jurisdiction under several provisions of the long-arm statute, which includes transacting business in Ohio, contracting to supply goods or services, and causing tortious injury within the state. Establishing any of these factors would suffice for asserting personal jurisdiction.
Mattress By Appointment, LLC (Florida) and C. Edwin Shoffner contend that there is insufficient evidence showing they transacted business in Ohio. The Ohio Supreme Court defines "transact" as engaging in negotiations or business dealings, which is broader than "contract." To establish jurisdiction, a nonresident must demonstrate a "substantial connection" to Ohio beyond mere solicitation. The plaintiff has made a prima facie case that the defendants transacted business in Ohio by listing Ohio dealers on their website, contracting with them to sell mattresses, and advertising job openings in Ohio. Specifically, the defendants have acknowledged that at least three independent dealers operate in Ohio, countering their claim that these dealers are not affiliated with them.
Additionally, evidence includes the deposition of Nick Lyle, a former employee of Carolina Bedding Direct, who conducted business in Ohio as a dealer and territory manager. The defendants dismiss Lyle’s roles as self-imposed, but the court finds that Lyle effectively represented the company to the public and transacted business on its behalf. Furthermore, a contract between MBA (FL) II and Ohio dealer Michael Wolfe outlines a business relationship for distributing mattresses, which the defendants argue does not constitute "transacting business" due to a liability limitation clause. However, the existence of a contract for selling products clearly indicates business transactions, irrespective of liability concerns.
Plaintiff submitted evidence of two open sales positions by MBA on LinkedIn, indicating the defendants' intent to establish a more permanent presence in Ohio. To meet Ohio's long-arm statute, a sufficient connection must exist between the defendants' business activities in Ohio and the claims in this case. RSS alleges that defendants have knowingly misappropriated its trade secrets from 2011 to the present, benefiting from a proprietary system developed by PMD, which includes specific advertising techniques and management processes for selling mattresses and furniture. RSS argues that the defendants' activities—such as advertising, training, and recruiting Ohio dealers—are closely tied to the misuse of its proprietary materials, establishing a sufficient nexus to the claims.
Defendants counter that having only three Ohio dealers represents an insignificant portion of their nationwide operations, but this number may still be relevant given the context. RSS asserts that since the trade secrets were developed and stolen in Ohio, and since RSS operates there, the defendants' activities in Ohio are adequately related to the case.
Additionally, RSS claims personal jurisdiction over defendant Shoffner through a veil-piercing theory, which requires a less stringent standard than for liability. In Ohio, to pierce the corporate veil, it must be shown that the defendants exerted complete control over the corporation, committed fraud or illegal acts, and caused harm to the plaintiff. RSS argues that Shoffner, as the sole owner of MBA (FL) II, maintains complete control and has engaged with Ohio dealers, thus fulfilling the criteria for personal jurisdiction. Furthermore, RSS alleges that Shoffner was aware of an injunction against a related entity and has continued to misuse RSS’s trade secrets.
RSS has established sufficient facts for personal jurisdiction over Shoffner, as both he and MBA (FL) II have significant connections to Ohio through multiple contracts with Ohio dealers, advertising activities, and job postings. This creates a prima facie case for their business transactions in the state. Conversely, RSS has not met the threshold for personal jurisdiction over MBA (SC) under Ohio’s long-arm statute. MBA (SC) is claimed to be non-operational, and the only evidence presented—a draft employment agreement—does not indicate any actual business operations in Ohio, nor does it involve Ohio in its negotiations. The address provided in the agreement is in Massachusetts, and there is no evidence contradicting the claim that MBA (SC) has not yet begun operations or received a business transfer from MBA (FL) II.
Regarding due process, the court can exercise personal jurisdiction over MBA (FL) II and Shoffner, provided it meets the three-part test from Southern Machine Company v. Mohasco Industries, which includes purposeful availment in the forum state, the cause of action arising from their activities, and a substantial connection to Ohio that justifies jurisdiction. The purposeful availment aspect ensures predictability for out-of-state residents regarding their potential liability in Ohio.
Out-of-state residents are protected from being subject to a jurisdiction based solely on random or incidental contacts, as established by case law including *Burger King* and *Keeton v. Hustler Magazine, Inc.*. A defendant can establish jurisdiction if it has engaged in significant activities or created continuing obligations within the state. The Ohio long-arm statute’s "transacting any business" standard aligns with the constitutional requirement of purposeful availment. MBA (FL) II and Shoffner have transacted business in Ohio, as evidenced by advertising Ohio dealers, employing personnel in Ohio, contracting with local dealers, and posting job openings in the state. These actions indicate that the defendants have purposefully availed themselves of conducting business in Ohio.
In response to the defendants' challenges regarding the credibility of allegations, the court maintains that it does not need to evaluate conflicting assertions in a 12(b)(2) motion; the plaintiff must only make a prima facie case for personal jurisdiction. The plaintiff has sufficiently alleged that the defendants purposefully availed themselves of Ohio's jurisdiction.
Furthermore, for the second requirement under the *Southern Machine* standard, the cause of action must arise from the defendant's activities in the state. This does not necessitate a formal connection but requires a substantial link between the cause of action and the defendant’s in-state activities. In this case, the plaintiff claims that a former business associate of Shoffner stole trade secrets while in Ohio and used that information to create a competing business, establishing a sufficient connection to the defendants' activities in the state.
Plaintiff claims that Shoffner is the sole owner of a competing business that improperly uses plaintiff's trade secrets, particularly a 'playbook' developed by PMD, to operate in Ohio. The plaintiff asserts that the defendants’ business practices are relevant to the ongoing case, Retail Service Systems, Inc. v. Carolina Bedding Direct, LLC, which involves similar allegations of trade secret misappropriation. The plaintiff contends that various iterations of "Carolina Bedding Direct" and "Mattress By Appointment" are effectively the same entity, supported by the company's history displayed on its website. Defendants MBA (FL) II, MBA (SC), and Shoffner have attempted to intervene and stay proceedings in the related case, indicating the interconnection between the two lawsuits.
The analysis further establishes that the second requirement of the Southern Machine test is met. For the reasonableness of exercising jurisdiction over non-resident defendants, the court considers the burden on defendants, the forum state's interests, the plaintiff's interest in relief, and the interests of other states. While MBA (FL) II and Shoffner would face some burden defending in Ohio, the court finds that specific jurisdiction is still appropriate, as the burden is not deemed excessive given that their predecessors have already engaged legal counsel in related litigation. The factors collectively support the conclusion that exercising jurisdiction is reasonable.
Ohio prioritizes protecting RSS's legal rights regarding the alleged misappropriation of its trade secrets, which were developed and stolen within the state. RSS seeks relief for these claims, while the defendants argue that two ongoing state cases in South Carolina and Florida would resolve the matter more efficiently and request the court to combine these cases. However, the first-to-file rule does not apply as the earlier cases are in state court, and RSS is not involved in the Florida case. Additionally, the cases in Ohio were filed before the South Carolina and Florida suits. Ohio's interest in the matter remains significant due to the connections of the parties involved.
Regarding personal jurisdiction, the court finds that exercising jurisdiction over defendants MBA (FL) II and Shoffner complies with constitutional requirements. MBA (FL) II challenges the service of process on its registered agent, claiming improper service. A process server attempted to serve the registered agent but was informed that the agent had changed. However, the server later confirmed that Matthew Whiddon, who had agreed to accept service, was not officially the agent, and the law firm listed remains the registered agent. Despite this confusion, the plaintiff argues that corporations should not evade service by failing to update their registered agent's address. The plaintiff successfully established that service was adequate, as Whiddon accepted service on behalf of MBA (FL) II and defendants did not contest that they received actual notice.
Consequently, the court denies the Motion to Dismiss for lack of personal jurisdiction regarding Mattress By Appointment (Florida) and C. Edwin Shoffner, but grants it concerning Mattress By Appointment (South Carolina). The case also notes a related litigation involving another entity with a similar name, which is distinguished from the current defendant, MBA (FL) II.
