Steves & Sons, Inc. v. Jeld-Wen, Inc.

Citations: 252 F. Supp. 3d 537; 2017 WL 2177607; 2017 U.S. Dist. LEXIS 75308Docket: Civil Action No. 3:16cv545

Court: District Court, E.D. Virginia; May 17, 2017; Federal District Court

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The Court, presided over by Senior United States District Judge Robert E. Payne, addresses the motion by JELD-WEN, Inc. to amend its answer and add counterclaims against Steves & Sons, Inc. The Court concludes that the proposed counterclaims are permissive rather than compulsory and grants the motion. However, the claims and counterclaims will be severed as detailed in the ruling.

Steves & Sons, Inc. is a door manufacturer that has sourced interior molded doorskins from JELD-WEN, a vertically integrated manufacturer that also produces its own doors using these doorskins. In 2012, Steves entered into a Long-Term Supply Agreement with JELD-WEN for an eight-year term. Following JELD-WEN's merger with Craftmaster, the company became a dominant player in the doorskin market after Masonite ceased selling doorskins to other manufacturers.

In September 2014, JELD-WEN notified Steves of the termination of their Supply Agreement, claiming that it would expire in December 2019, while Steves contended that it was being ended 21 months prematurely. Steves filed a lawsuit on June 29, 2016, alleging violations of the Clayton Act due to the merger, breach of the Supply Agreement, and other claims, including a request for specific performance and a claim for Trespass to Chattels. Initially, JELD-WEN did not file counterclaims but later sought to amend its answer following unsuccessful settlement discussions, using documents produced by Steves during discovery.

Steves and Sons provided documents to JELD-WEN during a discovery period that was subsequently stayed. JELD-WEN claims that emails from Steves indicate that Steves paid John Pierce, a former JELD-WEN employee, to disclose JELD-WEN's trade secrets and confidential information regarding its doors and doorskins. The allegations suggest that both Steves and Pierce were aware their actions violated Pierce's employment agreement and that they attempted to conceal this wrongdoing. JELD-WEN learned of these documents on January 4, 2017, and demanded on January 5 that Steves cease any use of the stolen trade secrets. Although JELD-WEN was ready to file a motion on February 3, the parties were engaged in settlement mediation and had agreed to a stay.

On January 12, 2017, JELD-WEN issued a Rule 45 subpoena to Pierce for documents related to his work with Steves. Pierce responded on January 23 with limited documents. On January 27, Steves provided additional documents, including an email that indicated John Ambruz, another former JELD-WEN employee, was consulting for Steves. This email contained a confidential proposal sent to the DOJ in 2012, and Ambruz was involved in the DOJ investigation response. JELD-WEN's counsel questioned Steves on how they obtained this document, but Steves' counsel stated that the Steves brothers did not recall receiving it. 

On January 12, 2017, JELD-WEN also subpoenaed Ambruz, receiving further discovery that JELD-WEN claims substantiates its position that Steves intends to enter the doorskin market. This discovery included documents allegedly linking Ambruz's work to Pierce’s actions involving stolen trade secrets. This context supports JELD-WEN’s motion for leave to amend its answer to include counterclaims against Steves. Under Federal Rule of Civil Procedure 13, counterclaims are classified as compulsory or permissive, with the former arising from the same transaction as the opposing party's claims. The motion to amend requires a showing of good cause, which JELD-WEN asserts it has met, as it was unaware of the relevant information until it reviewed the discovery documents from Steves. Had the stay not been in effect, JELD-WEN would have filed its motion sooner.

Steves does not challenge JELD-WEN's ability to meet the good cause standard for amending its claims. The Court must ascertain whether JELD-WEN's counterclaims are permissive or compulsory by evaluating four factors from the Fourth Circuit's precedent: the similarity of fact and law between claims, potential res judicata implications, the overlap of evidence supporting both, and the logical relation between the claims. 

Steves' antitrust claim (Count One) requires evidence demonstrating that the JELD-WEN/Craftmaster merger substantially lessened competition, focusing on market definitions and anticompetitive effects, with potential remedies of divestiture decided by the Court. Counts Two to Five involve breach of contract and warranty claims, necessitating proof of the existence of a contract, breaches, and damages, with Counts Four and Five seeking specific remedies related to the breaches. Count Six alleges trespass to chattels based on damage to Steves' products during inspections by JELD-WEN.

In contrast, JELD-WEN's first three counterclaims relate to trade secrets, requiring proof of ownership, misappropriation, and damages. A comparison of the elements indicates a lack of common issues and evidence between JELD-WEN's counterclaims and Steves' claims, suggesting that JELD-WEN's counterclaims are likely permissive rather than compulsory.

JELD-WEN's Fourth and Fifth Counterclaims assert that Steves tortiously interfered with employment contracts involving former employees Pierce and Ambruz by misappropriating trade secrets, specifically violating confidentiality provisions. The claims necessitate proof of the employment contracts, Steves' awareness of the confidentiality terms, his interference, and resulting damages. There is no overlap in factual or legal issues between these counterclaims and Steves' claims.

In the Sixth Counterclaim, JELD-WEN alleges that the theft of trade secrets constitutes a breach of the implied covenant of good faith and fair dealing within the Supply Agreement, asserting that this theft undermined JELD-WEN's expectation of purchasing doorskins from them. Proof required includes evidence of the theft and its impact, with no common issues found between this counterclaim and Steves’ claims.

The Seventh Counterclaim contends that Steves breached the Supply Agreement by disclosing commercially sensitive information to Ambruz, violating confidentiality provisions. Again, no common legal or factual issues are identified between this counterclaim and Steves’ claims.

JELD-WEN's counterclaims do not satisfy the criteria outlined in the Sue, Sam guidelines regarding compulsory counterclaims, as there are no common factual or legal issues or overlapping evidence. Additionally, JELD-WEN has not demonstrated how the factors relating to res judicata apply and Steves' assurance not to invoke res judicata further undermines JELD-WEN's position. The Court finds no logical connection between JELD-WEN’s counterclaims and Steves’ claims, concluding that JELD-WEN has not met the necessary conditions for compulsory counterclaims. Lastly, JELD-WEN's assertion that evidence for its counterclaims supports its defenses to Steves’ claims does not establish the counterclaims as compulsory.

JELD-WEN argues that the overlap in evidence necessitates classifying its counterclaims as compulsory, particularly regarding trade secrets, which will support its antitrust defenses of unclean hands and barriers to entry. JELD-WEN also claims that evidence for its contract-based counterclaims intersects with its defenses against Steves' claims. In contrast, Steves contends that JELD-WEN's trade secrets counterclaims do not legally defend against the antitrust claim and that there is minimal overlap in evidence between the claims. Steves asserts that JELD-WEN's reliance on the unclean hands doctrine as a defense to its antitrust violation is incorrect, citing that the Fourth Circuit does not recognize unclean hands as a viable defense in antitrust cases. JELD-WEN's argument relies on dicta from California v. American Stores Co., but this is deemed unpersuasive, as the relevant comment does not establish unclean hands as a defense under the Clayton Act. The Fourth Circuit has clearly stated that unclean hands cannot bar antitrust recovery, reinforcing that JELD-WEN's defense lacks legal support in this jurisdiction.

JELD-WEN has not presented any controlling legal precedent from its Circuit to support its claims. While JELD-WEN acknowledges that other circuits have used the equitable defense of laches to dismiss antitrust claims, this does not impact the established law in its Circuit, which only allows the defense of unclean hands in limited circumstances not applicable here. The distinctions between laches and unclean hands are highlighted, with laches potentially affecting remedies like divestiture, as noted in American Stores, but unclean hands require a demonstrated connection to the antitrust violation. JELD-WEN would need to show a "close nexus" between any alleged unethical conduct, such as the misappropriation of trade secrets by Steves through Ambruz and Pierce, and the 2012 merger's effects. JELD-WEN has yet to establish this connection.

Additionally, JELD-WEN claims that evidence of trade secret theft is relevant to its defense against Steves' antitrust accusations, specifically regarding "barriers to entry." JELD-WEN contends that if timely market entry by competitors is likely, its acquisition of Craftmaster should not violate the Clayton Act. Evidence of trade secret misappropriation is expected to arise in this context, particularly a feasibility report indicating that Steves could enter the doorskin market quickly. However, JELD-WEN has not clarified how this feasibility study will be presented in court.

Steves intends to object to the introduction of a report, while JELD-WEN plans to use it for impeachment purposes against the Steves brothers, although the method of doing so is unclear. JELD-WEN has not clarified how its evidence of trade secret misappropriation will support its barrier to entry defense, nor has it provided precedents for using impeachment evidence as overlapping evidence in assessing a compulsory counterclaim. Furthermore, JELD-WEN does not need to prove all elements of its trade secret misappropriation claim to utilize the barrier to entry defense.

Regarding Steves’ breach of contract claim, JELD-WEN asserts that its counterclaims—Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing, and Tortious Interference with Contract—are interconnected with Steves’ allegations. However, these counterclaims are deemed not compulsory, and the defense of unclean hands is unavailable. In JELD-WEN's Seventh Counterclaim, it alleges that Steves breached the Supply Agreement by disclosing confidential information, which JELD-WEN argues demonstrates Steves' non-performance under the contract. Despite both claims being related to the Supply Agreement, the breaches cited by Steves regarding JELD-WEN’s performance do not establish a material breach that would invalidate JELD-WEN's rights. The relationship between the claims is insufficient for a compulsory counterclaim finding.

Additionally, JELD-WEN claims that Steves' misappropriation of trade secrets constitutes a breach of the implied covenant of good faith and fair dealing, linking this claim to its defense against Steves' breach of contract allegation.

Under Delaware law, contracts inherently include an implied covenant of good faith and fair dealing, obligating parties to interpret and act reasonably concerning contractual language. This covenant cannot contradict the express terms of the agreement or create new obligations beyond those specified in the contract. Delaware courts apply this concept in limited circumstances, and the Supreme Court has cautioned that implying contract terms should be rare.

JELD-WEN accuses Steves of breaching this implied covenant by misappropriating trade secrets, arguing that the confidentiality provisions in their Supply Agreement imply a prohibition against stealing trade secrets. However, the court finds this interpretation dubious. At this stage, it focuses on whether JELD-WEN’s counterclaim for breach of the implied covenant is related to Steves' original breach of contract claim, concluding that the two claims are only loosely connected and address significantly different legal issues.

Additionally, JELD-WEN contends that the defense of unclean hands, based on alleged trade secret misappropriation, should apply to Steves' breach of contract claim seeking specific performance. While unclean hands can serve as a defense for equitable remedies, JELD-WEN fails to establish a close connection between the alleged misconduct and the contract breaches at issue. Thus, the court finds no basis to apply the unclean hands doctrine.

JELD-WEN's counterclaims are deemed permissive rather than compulsory, as they do not meet the criteria for a compulsory counterclaim under Fed. R. Civ. P. 13(a). Each counterclaim is allowed under Fed. R. Civ. P. 13(b) since they do not arise from the same transaction or occurrence as the original claim. The court may also permit supplemental pleadings for counterclaims that mature after the initial pleading.

All counterclaims by JELD-WEN satisfy the criteria of Rule 13(e), as they were discovered through documents provided by Steves. Consequently, JELD-WEN's motion to amend its answer to include these counterclaims will be granted. However, the trial for these counterclaims will be severed from Steves’ claims due to the interests of justice and judicial efficiency. According to Federal Rule of Civil Procedure 42, a court may separate trials for convenience, to prevent prejudice, or to streamline proceedings. The court has discretion in deciding whether to sever or consolidate trials, as affirmed in Arnold v. E. Air Lines, Inc.

In this case, the court determined that severing the trial into three parts is warranted based on several factors, including potential prejudice, expediency, and judicial economy. The differences in elements between Steves’ claims and JELD-WEN’s counterclaims suggest a significant risk of jury confusion, as the evidence required for each is materially distinct. Even though some witnesses may testify for both sides, the topics will differ, complicating the trial management and jury instructions. 

Steves contends that trying antitrust claims alongside trade secret claims could unfairly prejudice the antitrust case. This potential for confusion and the complexity of managing such distinct claims supports the decision to sever the trials, ensuring a fairer process for both parties.

The case involves complex antitrust, trade secret, and contract claims, with JELD-WEN asserting approximately 54 trade secrets. The complexity of these issues risks confusion or distortion during a trial, necessitating the separation of the cases into three distinct trials: one for antitrust claims, one for trade secrets, and one for contract/breach of warranty. The different nature of the claims and evidence makes it difficult to manage them in a single trial, suggesting that severance is essential for fairness and clarity. Although this approach may introduce some inefficiencies, it will ultimately facilitate a fair trial structure and better case management. Therefore, the court has granted JELD-WEN's motion to amend its answer and add counterclaims, and separate trials will be scheduled. The court will consult with counsel on discovery and trial management, emphasizing the need for fairness to both parties and the jury. The excerpt also notes the context of a duopoly in the market for doorskins and addresses JELD-WEN's challenge to certain allegations made by Steves regarding market conditions. The court will consider the allegations as presented for the purposes of the motion.

Burlington's decision was established prior to American Stores, yet the Court of Appeals' clear holding remains binding. Any potential changes to this precedent must come from the Supreme Court or the Fourth Circuit. The excerpt references several cases that denied divestiture requests following mergers, emphasizing the hardship and prejudice such actions would cause. Specifically, cases like Ginsburg v. InBev NV/SA and Midwestern Mach. Co. Inc. v. Northwest Airlines, Inc. illustrate that divestiture is not feasible when significant time has passed since the merger's completion, particularly when plaintiffs delay their challenges. In the ongoing litigation, the parties are debating whether the 2012 merger violated the Clayton Act or if the effects of Masonite's market withdrawal in 2014 are relevant to the claims. However, the Court will not resolve this dispute at this stage while considering the Motion to Amend. The Court has yet to hear motions regarding evidence admissibility related to trade secret theft in the antitrust trial, and the breach of warranty claims add further complexity to the legal issues at hand.