Icmfg & Assocs., Inc. v. Bare Bd. Grp., Inc. (In re Icmfg & Assocs., Inc.)

Citation: 602 B.R. 780Docket: Case No. 8:16–bk–06552–MGW; Adv. No. 8:17–ap–00299–MGW

Court: United States Bankruptcy Court, M.D. Florida; March 27, 2018; Us Bankruptcy; United States Bankruptcy Court

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Michael G. Williamson, Chief United States Bankruptcy Judge, ruled against The Bare Board Group's claim for $3.1 million in lost profits against former directors Tom Coghlan and Bonnie del Grosso, as well as a competing distributor they helped establish. Bare Board alleged that Coghlan and del Grosso transferred customer relationships to the new entity, causing the loss. However, the Court found insufficient evidence to establish that a reasonable person would conclude they caused the lost profits. Furthermore, Bare Board failed to demonstrate a reliable method for quantifying these lost profits, rendering the claim speculative and conjectural. 

Bare Board, founded in 2002 by Greg Papandrew, operates as a typical printed circuit board (PCB) distributor, selling to contract manufacturers without formal customer contracts. The PCB industry is competitive, with many distributors relying on outside sales representatives who often represent multiple companies without noncompete agreements. Coghlan and del Grosso joined Bare Board as directors, with Coghlan managing operations and del Grosso nominally overseeing sales. In 2009, Mike Doyle sought to establish a new distributor, ICMfg. Associates, and enlisted Coghlan and del Grosso for financial support, with each investing $30,000 in exchange for ownership stakes. While still employed at Bare Board, they aided in setting up the new company’s operations.

Del Grosso served as the Debtor's bookkeeper, managing accounts and communication with customers, while Coghlan assisted with sales. In 2010 and 2011, the Debtor sold over $1.5 million in printed circuit boards, with Static Control—previously a customer of Coghlan's at Bare Board—accounting for nearly half of those sales. After resigning from Bare Board in January 2012, Coghlan and Del Grosso joined the Debtor, which then sold more than $24 million in circuit boards to forty-two former Bare Board customers. Bare Board filed a lawsuit to recover lost profits, alleging that Coghlan and Del Grosso diverted customers to the Debtor while serving as directors. The suit included claims of breach of fiduciary duty, fraud, aiding and abetting, civil conspiracy, and violations of Florida's Deceptive and Unfair Trade Practices Act. The state court issued a default against the defendants due to discovery violations, establishing liability for the claims, and proceeded to a damages trial. Bare Board sought over $3 million in lost profits, resulting in a $3.9 million award from the state court, along with over $1.4 million in disgorgement from Coghlan and Del Grosso and $100,000 in punitive damages against each. However, the Second District Court of Appeal reversed the lost profits award, determining the trial court had incorrectly assumed that liability established causation. The appellate court criticized the reliance on expert testimony that failed to establish a direct link between the defendants' actions and Bare Board's claimed losses. Consequently, the case was remanded, and the Debtor subsequently filed for bankruptcy and removed the case to federal court, where a four-day trial on lost profits took place. Bare Board's expert testified that it was entitled to nearly $3.1 million in lost profits, attributing the loss to Coghlan and Del Grosso's actions in transferring customer relationships. The court must now determine the appropriate amount of lost profits owed to Bare Board, considering the appellate court's ruling on the necessity of establishing a connection between the claimed damages and the defendants' conduct.

Proof of connexity, or causal connection, must be established with a reasonable degree of certainty for lost profits to be recoverable. A prudent person must be convinced that the damages are not speculative. Bare Board is not required to show that the Defendants' actions were the sole cause of its lost profits, but must demonstrate that the Defendants' conduct was a "substantial factor" in causing the losses. Despite presenting Mr. Oscher as its expert on lost profits, Bare Board failed to prove causation. Mr. Oscher's analysis, which remained unchanged after a ruling by the Second DCA, involved reviewing a list of customers that purchased printed circuit boards from 2010 to 2017 and attributing profits from those customers to Bare Board based on historical profit percentages. He estimated nearly $3.1 million in lost profits from forty-two customers.

However, the Court found Mr. Oscher's testimony on causation unpersuasive. He failed to connect the majority of lost profits to any wrongful conduct by the Defendants. His assertion that Defendants transferred customer relationships to the Debtor lacked credible evidence, mainly relying on his own statements. Furthermore, Mr. Oscher's claim that customer migration was primarily due to the relationships with Defendants was deemed incredible. The Court noted that of the forty-two customers, only eleven did business with the Debtor while the Defendants were still employed by Bare Board, and most customers began buying from the Debtor only after the Defendants resigned. Any transfer of relationships after resignation was not wrongful and could not cause Bare Board's lost profits. Therefore, the Court concluded that Bare Board did not satisfy its burden of proving causation linking the lost profits to the Defendants' conduct.

Under Florida law, a former director can use knowledge acquired during employment to compete with a former employer after leaving, as they no longer hold a position of trust or confidence with the company. Employees retain the skills and knowledge gained during their tenure, making it impractical to separate them from their minds. Therefore, without a restrictive covenant, Coghlan and del Grosso were not prohibited from engaging in a competing business after resigning from Bare Board. Bare Board acknowledged that Doyle could have established a competing entity and that Coghlan and del Grosso could have joined him. 

It would only be wrongful for them to compete if they utilized Bare Board's trade secrets, which Bare Board did not sufficiently claim, aside from vague mentions of "confidential information." The primary wrongful act identified was the alleged transfer of customer relationships to the Debtor while Coghlan and del Grosso were still employed by Bare Board, involving at most eleven customers. Analysis indicated lost profits from these customers amounted to $176,877.50 during their employment, and total losses from 2010 to 2017 were just over $1.4 million. Mr. Oscher, the expert, could not connect $1.7 million of the claimed $3.1 million in lost profits to any wrongful actions by the defendants.

Additionally, evidence suggested that Coghlan may have helped the Debtor secure work from two customers after leaving Bare Board, resulting in about $300,000 in lost profits. Even adding this figure to the losses from the eleven customers, the total linked to wrongful conduct is only $1.7 million. Consequently, Mr. Oscher's claims failed to substantiate $1.4 million of the total alleged losses. The admissibility of his opinion under Rule 702 is questioned, as it lacked a foundation of sufficient facts or reliable methodologies, relying largely on the expert's assertions without solid evidence.

Mr. Oscher's analysis of lost profits relies on his assertion that Coghlan and del Grosso transferred their relationships with Bare Board customers to the Debtor. He identified evidence of relationships with only seven out of forty-two customers, specifically noting that Coghlan had connections with five and was involved in e-mail exchanges for quotes with two others. For the remaining thirty-five customers, Oscher's only support for the existence of relationships is his own assertion, with no evidence demonstrating that these customers did business with the Debtor due to any connection with Coghlan or del Grosso. Oscher's assumption of causation lacks supporting investigation, as acknowledged by Bare Board's expert, who did not explore the causal link between the Defendants' actions and the claimed lost profits. The Second DCA highlighted that Oscher did not investigate this connection, casting doubt on his conclusions. Oscher's claim of having investigated causation was contradicted by his testimony, and the Court found his opinion on causation untrustworthy. Furthermore, he failed to credibly link the alleged $3.1 million in lost profits to the Defendants' conduct, ignoring other critical factors such as price, quality, and lead times that could have influenced customer decisions. His conclusions defy common sense and contradict the trial evidence, rendering his opinion unpersuasive.

Prime Technologies is identified as the largest contributor to lost profits for Bare Board, amounting to $639,783 from over $4.7 million in sales. Mark Haefner, the sales representative, indicated he secured this business in August 2012 and testified that neither he nor anyone from Prime Technologies knew Mr. Coghlan prior to this time, undermining any claim that Coghlan influenced their decision to do business with the Debtor. Another customer, S. Y Industries, noted a decline in business with Bare Board primarily due to pricing, opting instead for E-TekNet, which offered significantly lower prices. S. Y Industries later began purchasing from the Debtor when it could match those prices, with the initial introduction to the Debtor stemming from Bare Board’s notification about Coghlan and Mike Doyle’s employment there. Furthermore, Salem Technologies ceased purchases from Bare Board due to quality issues and switched to Active Sales, which provided superior quality and competitive pricing; Chris Tribble, its principal, confirmed that Coghlan did not influence their vendor choice. The trial evidence failed to support the assertion that relationships with sales personnel are the primary motivators for customer loyalty in the PCB industry, as no customer from Mr. Oscher’s list testified that their business with the Debtor was due to relationships with Coghlan or del Grosso. Bare Board contended that it was not required to prove that all customers switched due to these relationships, citing the Eleventh Circuit's decision in Nebula Glass International, Inc. v. Reichhold, Inc., which allows for circumstantial evidence to establish lost profits.

The case distinguishes itself from Nebula, in which Glasslam sued Reichhold for defects in resin that caused significant business losses. Glasslam provided direct evidence of customer loss linked to the defective product, which the Eleventh Circuit upheld as sufficient to award $6.5 million in lost profits. In contrast, Bare Board lacks direct evidence that Coghlan or del Grosso transferred their customer relationships to the Debtor. No customers testified to starting business with the Debtor due to any involvement from Coghlan or del Grosso, nor is there evidence that Bare Board's customers recognized their association with the Debtor. The closest evidence presented were emails indicating Coghlan's involvement in bidding for work, which confirmed his breach of fiduciary duty, already established. However, the testimony regarding whether this breach directly caused Bare Board's loss of business was weak. The witness acknowledged that Coghlan played a key role in sales relationships, but did not provide clear documentation showing that business was transferred from Bare Board to the Debtor. Overall, the evidence does not establish a direct causal link between Coghlan's actions and the loss of business, as seen in Nebula.

Mr. Oscher failed to identify specific actions by Coghlan that led to Bare Board's loss of business, relying instead on inferences regarding lost sales to Static Control, Tyco, and General Microcircuits based on past transactions. His circumstantial evidence does not meet the direct evidence standard established in Nebula, where significant profits were linked to a product's market entry and subsequent decline due to a defect. In contrast, the evidence of Bare Board's declining sales is weak; of the 42 customers cited, 17 showed no drop or even increased sales after the Debtor began competing. For instance, ADI American Distributors' sales with Bare Board grew from $30,000 to over $315,000, while sales to the Debtor remained significantly lower. Similarly, Syncro Corporation only began purchasing from the Debtor after Coghlan's departure from Bare Board and subsequently increased its purchases from Bare Board dramatically. While some sales declines occurred, they were often unrelated to the Debtor's entry into the market; for example, Bare Board's sales to Pacific Insight dropped significantly even as sales to the Debtor were minimal. Notably, in cases like Static Control, pricing issues were cited as a reason for the loss of business, rather than direct competition from the Debtor.

Moehring's suggestion for Helms to contact the Debtor occurred when Helms was unaware of the Debtor's existence. The possibility exists that Coghlan exploited Static Control's pricing issues, either by intentionally inflating Bare Board's prices while planning to bid for the Debtor or by neglecting to assist Bare Board in lowering its prices, knowing the Debtor would also bid. However, without direct or compelling circumstantial evidence linking the Defendants' actions to Bare Board's loss, such claims remain speculative.

Bare Board emphasizes a lucrative consignment program secured by the Debtor, claiming Coghlan rejected participation. However, despite initially expressing willingness to consider a consignment arrangement, Coghlan's later actions—marking up unfavorable contract provisions—do not provide evidence of intentional sabotage, as his comments could be seen as reasonable. Ultimately, Bare Board's argument regarding causation is characterized as mere conjecture.

The Court references the Eleventh Circuit's ruling in Nebula, which allowed for lost profits recovery based on direct evidence of wrongful conduct, but clarifies that this precedent does not apply universally. In this case, the Court determined that any existing direct evidence, paired with circumstantial evidence, failed to convince a prudent impartial person that the damages were not speculative. Bare Board did not establish a reasonable method for measuring lost profits, which is necessary for recovery. Although the "before and after" method is a valid approach, Mr. Oscher's application was inadequate; he sought disgorgement instead, which is inappropriate, and failed to provide a consistent standard for measuring lost profits. Consequently, even if causation were proven, the Court would deny lost profits due to the lack of a reliable yardstick.

Mr. Oscher's "before and after method" is characterized as a form of disgorgement rather than a legitimate calculation of lost profits. The primary case referenced, AngioScore, Inc. v. TriReme Medical, Inc., involved Eitan Konstantino, who knowingly created a competing product, leading to an award of eight years of lost profits due to the severity of his misconduct. However, this case is not applicable here for two main reasons. First, this situation does not involve a corporate opportunity, as Bare Board's claims extend beyond its direct competitors; it cannot assert that all its customers represent corporate opportunities. Second, per the Second DCA, lost profits must reflect fair and just actual damages, not punitive measures for misconduct.

Mr. Oscher's methodology for determining lost profits over a seven-year period lacks a solid foundation. Initially, it seemed based on the average duration of customer relationships, but it was later revealed that the choice was arbitrary, linked to the availability of sales data through 2017. This arbitrary selection raises doubts about its validity, as Mr. Oscher could have extended the period had the trial occurred later. Additionally, the average relationship duration does not justify a seven-year loss period since customers had already been doing business with Bare Board for at least two years prior. Therefore, the loss period appears to be unreasonably inflated and lacks a credible basis.

In conclusion, Bare Board has already received compensatory and punitive damages, but it has not sufficiently demonstrated entitlement to any additional lost profits.

Bare Board presented circumstantial evidence to support its claim for lost profits totaling $3.1 million caused by the Defendants. However, the court found that this evidence was insufficient for a reasonable and impartial person to determine that the lost profits were non-speculative. As a result, Bare Board did not meet its burden of proof and is therefore not entitled to recover any lost profits. The court will issue a separate judgment based on these findings, which will be treated as a non-final order until then. Attorney Susan Sharp is instructed to serve these findings on non-CM/ECF users and file proof of service within three days. The document includes numerous references to trial transcripts and exhibits that support its conclusions.

In Murphy v. Sarasota Ostrich Farm/Ranch, Inc., the court highlights the principle that expert opinions must be substantiated by relevant data, as emphasized in Kumho Tire Co. Ltd. v. Carmichael. The concept of "ipse dixit," meaning assertions made without proof, is discussed, indicating that merely stating an opinion is insufficient for admissibility in court. The necessity for evidence supporting expert testimony is reiterated, referencing multiple cases, including ICMfg. Associates, Inc. v. Bare Board Group, Inc. and Nebula Glass Int'l, Inc. v. Reichhold, Inc. The excerpts from trial transcripts indicate reliance on expert testimony as critical to the arguments presented, with specific citations to various exhibits and trial discussions. The document underscores the importance of evidentiary support for expert claims, asserting that the mere opinion of an expert does not meet legal standards for admissibility.