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Edelman Financial Engines, LLC v. Harpsoe

United States District Court, D. Kansas

June 7, 2019

EDELMAN FINANCIAL ENGINES, LLC, Plaintiff,
v.
ERIK HARPSOE and BRIAN K. FOWLES, Defendants.

          MEMORANDUM AND ORDER

          DANIEL D. CRABTREE UNITED STATES DISTRICT JUDGE

         This matter comes before the court on defendants Erik Harpsoe and Brian K. Fowles's “Combined Motions to Dismiss for Lack of Subject Matter Jurisdiction, to Dissolve Temporary Restraining Order, and to Award Defendants Damages Under the Bond.” Doc. 47. The court, defendants contend, lacks subject matter jurisdiction over plaintiff's lawsuit because plaintiff Edelman Financial Engines, LLC, has conceded it is “highly likely” diversity jurisdiction does not exist and, further, plaintiff's Amended Complaint raises no federal question. The court agrees for the reasons explained below. Because the court concludes it lacks subject matter jurisdiction, it dismisses plaintiff's Amended Complaint without prejudice. The court also vacates the Temporary Restraining Order. And, last, the court directs the parties to submit additional briefing on whether defendants may recover damages on the bond.

         I. Facts

         Plaintiff is a limited liability company who provides financial services. Doc. 1 at 1-2 (Compl. ¶¶ 1-2). Defendants are two former employees who reside in Cleveland, Ohio. Id. at 2 (Compl. ¶¶ 3-4). On January 17, 2019, defendants resigned from plaintiff's Cleveland office. Id. at 1 (Compl. ¶ 1). And, plaintiff alleges, defendants began soliciting plaintiff's customers in violation of their contracts with plaintiff and trade secret law. Id. (Compl. ¶ 1). In response, plaintiff filed a lawsuit in this court alleging two state law causes of action: (1) breach of contract and (2) breach of common law duty of loyalty. Doc. 1 at 8-9 (Compl. ¶¶ 28-38). And, plaintiff invoked the court's diversity jurisdiction under 28 U.S.C. § 1332. Id. at 2 (Compl. ¶ 5). One day later, plaintiff filed an Amended Complaint. Doc. 3 (Am. Compl.). The Amended Complaint added a third state law claim-misappropriation of trade secrets under the Kansas Uniform Trade Secrets Act (“KUTSA”), Kan. Stat. Ann. §§ 60-3320-3330-and, again, invoked § 1332 as the court's basis for subject matter jurisdiction. Id. at 3 (Am. Compl. ¶ 5), 16-18 (Am. Compl. ¶¶ 61-71). The Amended Complaint also requested injunctive relief. Id. at 18-20 (Am. Compl. ¶¶ A.1-B).

         On January 19, 2019-two days after plaintiff filed its lawsuit-plaintiff filed a Motion for Temporary Restraining Order (“TRO”). Doc. 4. The court conducted a hearing with the parties on January 24, 2019, and, based on its diversity jurisdiction, the court granted plaintiff's motion. Doc. 14. It appeared that all parties agreed that complete diversity existed as the two defendants here had sued plaintiff in the United States District Court for the Northern District of Ohio. Id. at 4 (citing Fowles v. Fin. Engines, Inc., No. 1:19-cv-00139-JG (N.D. Ohio Jan. 17, 2019)). In the Ohio suit the two defendants in this case likewise invoked diversity jurisdiction and alleged that complete diversity existed between them and the plaintiff in this case. Complaint at 2, Fowles v. Fin. Engines, Inc., No. 1:19-cv-00139-JG (N.D. Ohio Jan. 17, 2019).[1]The TRO restrained each defendant from violating the terms of his agreement with plaintiff; causing or attempting to cause any of plaintiff's customers from ending or reducing their relationship with plaintiff; using or disclosing any of plaintiff's trade secrets or confidential information; and avoiding discovery by destroying or concealing plaintiff's trade secrets or confidential information. See Id. at 7. The court also directed plaintiff to provide $100, 000 in security for the TRO. Id.

         On March 1, 2019, the court held a conference call with the parties. The court questioned whether complete diversity jurisdiction existed based on plaintiff's status as a limited liability company. Specifically, a limited liability company “takes the citizenship of all its members.” Siloam Springs Hotel, L.L.C. v. Century Sur. Co., 781 F.3d 1233, 1234 (10th Cir. 2015). The governing standard thus requires complete diversity of citizenship-i.e., plaintiff must allege that no LLC member on plaintiff's side of the case caption is a citizen of the same state as either individual named on the defendants' side of the caption. See Middleton v. Stephenson, 749 F.3d 1197, 1200 (10th Cir. 2014). In response, plaintiff submitted a Supplemental Filing in Support of Subject Matter Jurisdiction. Doc. 44. In its filing, plaintiff conceded

that there lies in the chain of ownership an investment partnership with a substantial amount of limited-partner investors who are based all over the country, and [plaintiff] believes it highly likely that this group of limited-partner investors includes an Ohio citizen who would, in essence, infuse [plaintiff] with Ohio citizenship, thereby negating diversity jurisdiction.

Id. at 2-3. Defendants then filed their “Combined Motions to Dismiss for Lack of Subject Matter Jurisdiction, to Dissolve Temporary Restraining Order, and to Award Defendants Damages Under the Bond.” Doc. 47. And the parties completed briefing on that motion. Doc. 52, 54. Plaintiff contends that although diversity may be lacking, its Amended Complaint implicitly states a claim under the federal Defend Trade Secrets Act (“DTSA”), 18 U.S.C. §§ 1836, et seq. Alternatively, plaintiff asserts that 28 U.S.C. § 1653 permits the court to amend plaintiff's defective jurisdictional statement by adding a federal DTSA claim after defendants have challenged this court's subject matter jurisdiction.

         Having reviewed the parties' papers and arguments, the court concludes that it lacks subject matter jurisdiction and thus it dismisses plaintiff's Amended Complaint without prejudice. The court also dissolves the TRO. And the court permits the parties to file additional briefs addressing whether defendants are entitled to damages under the bond. Last, without subject matter jurisdiction, the court directs the Clerk to terminate defendants' Motion to Transfer Case (Doc. 6) and plaintiff's Motion for Order to Show Cause (Doc. 34).

         II. Legal Standard

         Federal Rule of Civil Procedure 12(b)(1) “allows a court to dismiss a complaint for lack of subject matter jurisdiction.” Pueblo of Jemez v. United States, 790 F.3d. 1143, 1151 (10th Cir. 2015) (citing Becker v. Ute Indian Tribe of the Unitah & Ouray Reservation, 770 F.3d 944, 946 (10th Cir. 2014)). “‘Federal courts are courts of limited jurisdiction,' possessing ‘only that power authorized by Constitution and statute.'” Id. (quoting Gunn v. Minton, 568 U.S. 251, 256 (2013)) (further citation omitted). As such, “[f]ederal subject matter jurisdiction is elemental . . . and its presence must be established in every cause under review in the federal courts.” Id. (quoting Firstenberg v. City of Santa Fe, 696 F.3d 1018, 1022 (10th Cir. 2012)).

         When challenged, the party invoking federal jurisdiction must shoulder the burden to establish facts necessary to support jurisdiction by the preponderance of the evidence. Celli v. Shoell, 40 F.3d 324, 327 (10th Cir. 1994); see also 1mage Software, Inc. v. Reynolds & Reynolds Co., 459 F.3d 1044, 1048 (10th Cir. 2006) (“Federal courts ‘have an independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party,' and thus a court may sua sponte raise the question of whether there is subject matter jurisdiction ‘at any stage in the litigation.'” (quoting Arbaugh v. Y & H Corp., 546 U.S. 500, 506, 514 (2006))). When this burden goes unsatisfied, the court must refrain from exercising its subject matter jurisdiction. Pueblo of Jemez, 790 F.3d at 1151 (“A court lacking jurisdiction cannot render judgment but must dismiss the cause at any stage of the proceedings in which it becomes apparent that jurisdiction is lacking.” (quoting Full Life Hospice, LLC v. Sebelius, 709 F.3d 1012, 1016 (10th Cir. 2013))).

         III. Discussion

         A. Plaintiff's Amended Complaint raises no federal question on its face nor does its state law claims implicate a substantial question of federal law.

         On January 17, 2019, plaintiff filed its Complaint asserting two state law claims-breach of contract and breach of common law duty of loyalty-against defendants. Doc. 1 at 8-9 (Compl. ¶¶ 28-38). The next day, plaintiff filed an Amended Complaint as a matter of course under Federal Rule of Civil Procedure 15(a). Doc. 3 (Am. Compl.). The Amended Complaint included a new state law claim for misappropriation of trade secrets under KUTSA, and it also requested injunctive relief. Id. at 16-19 (Am. Compl. ¶¶ 61-D). So, when the court conducted a hearing on plaintiff's Motion for Temporary Restraining Order on January 24, 2019, the Amended Complaint served as the operative pleading. Under the Amended Complaint, plaintiff invoked the court's subject matter jurisdiction under 28 U.S.C. § 1332-i.e., the diversity jurisdiction statute. Doc. 3 at 3.

         Now, in response to the court's Order to Show Cause, plaintiff has conceded that it is “highly likely” that diversity jurisdiction did not exist when it filed its Amended Complaint. Doc. 52 at 4-5. The court accepts this statement as a concession that plaintiff could not carry its jurisdictional burden under 28 U.S.C. § 1332. Instead, plaintiff contends the Amended Complaint raises a federal question and thus the court may exercise federal question jurisdiction under 28 U.S.C. § 1331. Specifically, plaintiff asserts that the facts alleged in its Amended Complaint support a claim under the DTSA. But, under the well-pleaded complaint rule, the court concludes that plaintiff's Amended Complaint does not present a federal question.

         Federal courts exercise “original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. “To determine whether [a] claim arises under federal law, [courts] examine the ‘well[-]pleaded' allegations of the complaint and ignore potential defenses . . . .” Devon Energy Prod. Co., L.P. v. Mosaic Potash Carlsbad, Inc., 693 F.3d 1195, 1202 (10th Cir. 2012) (quoting Beneficial Nat'l Bank v. Anderson, 539 U.S. 1, 6 (2003)) (further citation omitted). So, § 1331 applies “only when the plaintiff's statement of his own cause of action shows that it is based on federal law.” Id. (citations and internal quotations omitted); see also The Fair v. Kohler Die & Specialty Co., 228 U.S. 22, 25 (1913) (“Of course, the party who brings a suit is master to decide what law he will rely upon, and therefore does determine whether he will bring a ‘suit arising under' the patent or other law of the United States by his declaration or bill.”). Specifically, “[t]he complaint must identify the statutory or constitutional provision under which the claim arises, and allege sufficient facts to show that the case is one arising under federal law.” Sac & Fox Nation of Okla. v. Cuomo, 193 F.3d 1162, 1165-66 (10th Cir. 1999) (quoting Martinez v. U.S. Olympic Comm., 802 F.2d 1275, 1280 (10th Cir. 1986)). In short, the well-pleaded complaint rule “makes the plaintiff the master of the claim.” Devon Energy Prod. Co., 693 F.3d at 1203 (quoting Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987)).

         Plaintiff contends its Amended Complaint implicitly sets forth the basis for a Defend Trade Secrets Act claim. But, the face of plaintiff's Amended Complaint reveals no reference to a federal statutory provision.[2] Instead, plaintiff's Amended Complaint recites three state law causes of action: (1) breach of contract; (2) breach of common law duty of loyalty; and (3) misappropriation of trade secrets under KUTSA. And the court may not construe the complaint in plaintiff's favor-i.e., inferring that it asserts unpleaded federal claims-when subject matter jurisdiction is challenged. See Sac & Fox Nation of Okla., 193 F.3d at 1168 (“When the question to be considered is one involving the jurisdiction of a federal court, jurisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it.” (quoting Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998))). Plaintiff's implicit federal claim theory is unpersuasive.

         In rare circumstances, plaintiff's state law claims may confer jurisdiction under § 1331 where those claims raise a substantial question of federal law. Gilmore v. Weatherford, 694 F.3d 1160, 1170-71 (10th Cir. 2012) (characterizing this “substantial question” conception as “exceedingly narrow”). The Supreme Court outlined the parameters of the substantial question doctrine in Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005). Under Grable, a state law claim arises under § 1331 when its resolution “demands not only a contested ...


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