April 19, 2019

Tenth Circuit: Refusal to Pay Arbitration Fees Justified District Court’s Removal of Stay

The Tenth Circuit Court of Appeals issued its opinion in Pre-Paid Legal Services, Inc. v. Cahill on Tuesday, May 26, 2015.

Todd Cahill was a former sales associate for Pre-Paid Legal Services, Inc., who agreed not to solicit or recruit other Pre-Paid sales associates during his employment or for two years after termination. Cahill left Pre-Paid to join another marketing company, and Pre-Paid contended he misused trade secret information and solicited other Pre-Paid employees for work at his new company. Pre-Paid brought suit in Oklahoma state court, and Cahill removed the action to the U.S. District Court for the Eastern District of Oklahoma, claiming diversity jurisdiction. Cahill then moved to stay the proceedings pending arbitration, which motion was granted. Pre-Paid initiated arbitration proceedings before the American Arbitration Association (AAA). Pre-Paid paid its share of arbitration fees but Cahill did not. Cahill received repeated warnings from the Director of ADR Services at the AAA that arbitration would be suspended and terminated if he failed to pay, but neither paid his fees nor requested other relief. Eventually, the Director terminated arbitration. Pre-Paid petitioned the district court to remove the stay, and the district court granted the motion.

Cahill appealed the lifting of the stay, arguing the Tenth Circuit had jurisdiction under 9 U.S.C. § 16(a)(1)(A). Pre-Paid moved to dismiss the appeal for lack of jurisdiction, and, if the Tenth Circuit found it had jurisdiction, urged the court to affirm the lifting of the stay.

The Tenth Circuit first analyzed its jurisdiction. Although it generally does not have jurisdiction to review non-final orders, the Federal Arbitration Act provides an exception for orders that refuse to stay proceedings pending arbitration. The Circuit found that the order lifting the stay was essentially an order “refusing a stay,” since the district court declined to continue enforcing the stay after arbitration proceedings were terminated. The Tenth Circuit declined to draw a distinction between a district court refusing to apply a stay and a court refusing to continue a stay once arbitration failed. The Circuit likewise found that Cahill’s request to continue the stay was initiated under § 3 of the FAA.

Turning to the merits of the appeal, the Tenth Circuit found the district court properly lifted the stay. The Circuit found that arbitration had “been had in accordance with the terms of the agreement” because the arbitration clause in Cahill’s employment agreement required the parties to pay their share of fees in accordance with AAA rules. Since Cahill failed to pay his fees and the Director terminated the arbitration proceedings, the Tenth Circuit found arbitration had “been had” pursuant to § 3. Similarly, the Tenth Circuit found support for the district court’s actions under § 3’s language regarding default. There was no dispute regarding Cahill’s failure to pay the arbitration fees. Cahill never asserted an inability to pay, nor did he ask for a modified payment schedule or request for Pre-Paid to pay his arbitration fees. Instead, he allowed arbitration to terminate by refusing to pay the fees. The Tenth Circuit found this failure to pay constituted “default” under § 3. Cahill contended the arbitrators were the correct party to determine default, but the Circuit disagreed, finding the district court’s decision to remove the stay appropriate in light of Cahill’s refusal to pay fees. Even assuming the default decision was left to the arbitrators, the Tenth Circuit found that the arbitrators determined Cahill was in default by refusing to pay the fees.

The Tenth Circuit found it had jurisdiction to hear the appeal and affirmed the district court’s lifting of the stay.

Tenth Circuit: In Issue of First Impression, Reasonable Foreseeability Applies to Calculation of “Actual Loss” Under U.S.S.G. § 2B1.1(b)

The Tenth Circuit Court of Appeals published its opinion in United States v. Crowe on Monday, November 18, 2013.

Between June 2004 and December 2006, Vicki Crowe purchased nineteen properties in  Colorado. The residential loan applications that Crowe signed and submitted all contained false job titles, inflated and fabricated employment income, inflated rental income, and/or inflated assets of Crowe or her then-husband, Jamaica Crowe.

As part of the transactions for these property purchases, Crowe persuaded the property sellers to falsely inflate the sale prices so that Crowe could receive the inflated portions of the sale prices as “up front” money at, or shortly after, the closing of the purchase transactions. Sometimes this “up front” money was falsely characterized as a payment to a remodeling company that was supposed to perform specified remodeling work on the subject property. The total “up front” money that Crowe received at or after the closings was $943,332.70.

Crowe was convicted of eight counts of mail fraud and eight counts of wire fraud for her participation in a mortgage fraud scheme. The district court sentenced Crowe to a term of imprisonment of sixty months and ordered her to make restitution in the amount of $2,408,142.37. The sentencing court imposed an 18-level increase pursuant to U.S.S.G. § 2B1.1(b)(1)(J) because “the loss exceeded more than $2,500,000, but [was] less than $7,000,000.”

Crowe appealed, arguing that the district court erred in calculating the amount of loss associated with her crimes for purposes of U.S.S.G. § 2B1.1(b), and in denying her motion for new trial, which alleged ineffective assistance on the part of her trial counsel.

Crowe’s challenge to the district court’s calculation of loss raised an issue of first impression for the Tenth Circuit: whether the concept of reasonable foreseeability applies to a district court’s calculation of the “credits against loss” under § 2B1.1(b). The court held that that the concept of reasonable foreseeability applies only to a district court’s calculation of “actual loss” under § 2B1.1(b), and not to its calculation of the “credits against loss.”

The court stated that if it were to state the method for determining “loss” for purposes of § 2B1.1(b)(1) as a mathematical equation, it would be as follows: loss equals actual loss (or intended loss) minus credits against loss. Consequently, it was irrelevant whether Crowe, at the time she negotiated the various mortgages at issue, reasonably anticipated a decline in the real estate market that might result in the original lender or successor lenders being unable to recoup their losses from the sale of pledged collateral should she default. Instead, the only foreseeability issue in this case was the amount of the potential pecuniary harm that might result from Crowe’s offenses, i.e., the reasonable foreseeability of the “actual loss” (rather than the “loss”) that occurred in the case. The reasonably foreseeable pecuniary harm resulting from Crowe’s fraud included the full amount of unpaid principal on the fraudulently obtained loans. Consequently, the court rejected Crowe’s assertion that her sentence was procedurally unreasonable.

Crowe next argued ineffective assistance of her trial counsel. Applying the standards in Strickland v. Washington, 466 U.S. 668 (1984), the court concluded that the record established that Crowe’s trial counsel vigorously represented Crowe in challenging the government’s evidence on the wire fraud counts, particularly the key question of whether Crowe acted with specific intent to defraud or to obtain money or property by means of false pretenses, representations or promises.

AFFIRMED.

Tenth Circuit: District Court’s Entry of Default Judgment as Sanctions for Plaintiff’s Discovery Abuses Affirmed

The Tenth Circuit published its opinion in Klein-Becker v. Englert on Wednesday, March 27, 2013.

Klein-Becker owned the trademark StriVectin. The StriVectin line of skin care products could only be sold through authorized sellers that Klein-Becker approved and trained. Mr. Englert was never an authorized seller of StriVectin. Nonetheless, Mr. Englert sold StriVectin online without authorization.

Klein-Becker sued Patrick Englert for trademark infringement, copyright infringement, false advertising, and unfair competition under the Lanham Act; false advertising under the Utah Truth in Advertising Act; unfair competition under the Utah Unfair Practices Act; fraud; civil conspiracy; and intentional interference with existing and prospective business relations. Mr. Englert was sanctioned several times for failing to comply with court orders and discovery schedules. The third and final sanction resulted in the entry of default judgment for Klein-Becker on all remaining claims. A bench trial determined damages.

The district court entered judgment in favor of Klein-Becker for Lanham Act damages, fraud damages, stolen property, and copyright damages. The district court later issued a permanent injunction.

Mr. Englert appeals the district court’s (1) entry of default judgment against him on all existing claims as sanctions for his discovery abuses, (2) award of damages to Klein-Becker, (3) determination that Klein-Becker is entitled to a permanent injunction, (4) denial of his demand for a jury trial, and (5) denial of his request to call an unlisted witness.

(1) Entry of Default Judgment on All Claims as Sanctions for Englert’s Discovery Abuses

FRCP 37(b)(2)(A)(vi) allows a district court to issue sanctions, including default judgment against the disobedient party” when a party disobeys a discovery order. To determine if a sanction such as dismissal or default judgment is appropriate, courts should consider “(1) the degree of actual prejudice to the defendant; (2) the amount of interference with the judicial process; . . . (3) the culpability of the litigant.” Ehrenhaus v. Reynolds, 965 F.2d 916, 920 (10th Cir. 1992). Due to Mr. Englert’s continued noncompliance with discovery orders, the district court did not abuse its discretion when it entered default judgment on Klein-Becker’s claims for Englert’s discovery abuses.

Although the Tenth Circuit had not addressed the issue, other circuits have held that a district court may establish personal liability through entry of default judgment. The Tenth Circuit agreed that personal liability may be established through entry of default judgment.

(2) Damages Award

Under the Lanham Act, plaintiffs must show either actual damages or willful action on the part of the defendant as a prerequisite to recover disgorgement of profits. Because the parties agreed that Englert’s sales of StriVectin undermined the reputation and goodwill of the brand and hurt Klein-Becker’s relationships with authorized resellers, as well as their competitiveness in the cosmetics industry, the district court found that Klein-Becker established actual damages. Further, the district court found that Mr. Englert’s use of Klein-Becker’s registered mark was sufficient to support the inference that Mr. Englert acted willfully and in bad faith, entitling Klein-Becker to disgorgement of profits. Finally, equitable considerations favored judgment in favor of Klein-Becker. The district court did not err in its damages award calculation.

(3) Permanent Injunction

The Tenth Circuit agreed with the district court’s analysis of the factors for issuing an injunction: (1) actual success on the merits; (2) irreparable harm unless the injunction is issued; (3) the threatened injury outweighs the harm that the injunction may cause the opposing party; and (4) the injunction, if issued, will not adversely affect the public interest. Absent a permanent injunction barring Mr. Englert from using Klein-Becker’s trademarks or selling its products, Klein-Becker’s interests could continue to be harmed. The Tenth Circuit held that Klein-Becker’s injury outweighed any interest Mr. Englert had in continuing to violate Klein-Becker’s trademarks and found that a permanent injunction was appropriate and necessary to prevent future violations of the law.

(4) Denial of Englert’s Demand for a Jury Trial

Because he never formally objected to the magistrate judge’s ruling on his jury demand, Mr. Englert waived this argument on appeal. See United States v. One Parcel of Real Prop., 73 F.3d 1057, 1060 (10th Cir. 1996).

(5) Denial of Englert’s Request to Call an Unlisted Witness

Because Mr. Englert had not listed the witness on any of the witness lists he had submitted to the court, the Tenth Circuit concluded the district court did not abuse its discretion in denying Mr. Englert’s request to call the witness.

AFFIRMED.