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KMH Systems, Inc. v. Capital Equipment and Handling, Inc.

United States District Court, N.D. Indiana, South Bend Division

August 19, 2019

KMH SYSTEMS, INC., Plaintiff,
v.
CAPITAL EQUIPMENT AND HANDLING, INC., et al., Defendants.

          OPINION AND ORDER

          JON E. DEGUILIO JUDGE

         KMH Systems, Inc. provides products and services related to materials handling equipment. After one of its employees left to join a competitor, KMH Systems sued both of them. It alleges that they are soliciting its customers in violation of a non-disclosure agreement the former employee, Bradley Horvath, signed during his employment. KMH Systems asserted claims against Mr. Horvath and his new employer, Capital Equipment and Handling, Inc., for breach of contract, fraud, and tortious interference.

         Since filing this case in state court, though, KMH Systems has done little to advance it. Its only filing has been a response to a motion to disqualify counsel-a filing that was untimely and filed in the wrong case. In the meantime, Capital Equipment filed a motion to dismiss, as well as a motion for sanctions. KMH Systems did not respond to either motion, nor has it ever served Mr. Horvath. As explained below, the Court dismisses the claims against Mr. Horvath for lack of service; dismisses the claims against Capital Equipment on their merits; and imposes sanctions against KMH Systems for filing in bad faith and abusing the judicial process.

         Bradley Horvath worked for KMH Systems for several years. In June 2011, he signed a Non-Disclosure Agreement. In that agreement, Mr. Horvath agreed not to “divulge, reveal, report, publish, transfer or disclose, ” either during or after his employment, any proprietary information he obtained through his employment. In 2017, Mr. Horvath left KMH Systems and began working for Capital Equipment, one of its competitors. Shortly thereafter, KMH Systems, by its present counsel, sent him a “cease and desist” letter. The letter asserted that the NonDisclosure Agreement “prohibits [Mr. Horvath] from contacting any customer of KMH Systems, Inc. at this time, ” and that Mr. Horvath had breached that agreement by soliciting KMH Systems' customers. [DE 23-1 p.8]. An attorney representing Mr. Horvath and Capital Equipment responded to that letter by pointing out that the agreement “in no way prohibits Mr. Horvath from contacting customers of KMH, or soliciting or serving those customers; it simply prohibits him from disclosing certain confidential information.” [DE 23-2 p. 6].

         KMH Systems never responded. Instead, about a year later, it filed this suit against both Mr. Horvath and Capital Equipment. The complaint alleges that Capital Equipment has been servicing “customers and clients of KMH based upon contacts made by Horvath at Capital Equipment's direction.” [DE 6 ¶ 18]. It alleges that despite a “written request to cease contacting KMH customers and clients, ” Mr. Horvath and Capital Equipment continue to do so, in violation of the Non-Disclosure Agreement. Id. ¶¶ 19-20. The complaint, which was filed in state court, asserts four counts against both defendants: breach of contract, fraudulent inducement, breach of the implied covenant of good faith and fair dealing, and tortious interference with contract.

         Capital Equipment removed the case to federal court. After its motion to disqualify KMH Systems' counsel was denied, Capital Equipment moved to dismiss the claims against it for failure to state a claim. It also noted that Mr. Horvath had never been served, even though the time provided under the federal rules had long since expired. KMH Systems never responded to that motion. Capital Equipment filed another motion in which it reiterated those arguments and noted KMH Systems' failure to respond to the motion to dismiss; again, KMH Systems did not respond. Finally, Capital Equipment moved for sanctions against KMH Systems for litigating in bad faith. KMH Systems did not respond, and those motions are each ripe. The Court thus addresses the claims against Mr. Horvath and Capital Equipment and then considers the motion for sanctions.

         A. Mr. Horvath

         At the outset, the Court dismisses the claims against Mr. Horvath for lack of service. KMH Systems filed this case in state court in June 2018, and the case was removed in November 2018. Rule 4(m) allows 90 days to complete service, and that period begins running on the date of removal in a case initially filed in state court. UWM Student Assoc. v. Lovell, 888 F.3d 854, 858 (7th Cir. 2018). This case was removed nine months ago, meaning the deadline to complete service expired six months ago, yet KMH Systems has not served Mr. Horvath. Under Rule 4(m), if a defendant is not timely served, then upon a motion or after providing notice to the plaintiff, a court may dismiss the action without prejudice. Though Mr. Horvath has not appeared or moved to dismiss, Capital has twice noted the lack of service and requested dismissal of the claims against Mr. Horvath. [DE 21 p. 3 n.3; DE 22]. Those motions gave KMH Systems ample notice that its claims against Mr. Horvath were subject to dismissal. Since KMH Systems failed to respond to those motions, and has not served Mr. Horvath or otherwise explained its failure to do so, dismissal is appropriate. Accordingly, the Court dismisses the action without prejudice as to Mr. Horvath.

         B. Capital Equipment

         Next, Capital Equipment moved to dismiss the claims against it on their merits. Capital Equipment argues that Counts 1 and 3, which assert breach of contract theories, fail because the contract was only between KMH Systems and Mr. Horvath, and thus cannot support a claim against Capital Equipment. As to the fraudulent inducement claim in Count 2, Capital Equipment argues that the complaint fails to allege fraud with particularity, as required by Rule 9(b), and that in any event, the complaint fails to allege that Capital Equipment had anything to do with KMH Systems' entry into an agreement with Mr. Horvath in 2011. Finally, as to the tortious interference claim in Count 4, Capital Equipment argues that the complaint not only lacks sufficient detail to state a claim and provide notice of what conduct is complained of, but that KMH Systems pled itself out of court by alleging a legitimate justification for its conduct: competition to acquire clients.

         KMH Systems failed to file any response to the motion, and thus forfeited its claims. The Seventh Circuit has held that “a district court may hold a claim forfeited if a plaintiff fails to respond to the substance of the defendant's motion to dismiss.” Boogaard v. Nat'l Hockey League, 891 F.3d 289, 295 (7th Cir. 2018); see also Alarm Detection Sys., Inc. v. Village of Schaumburg, 930 F.3d 812 (7th Cir. 2019) (holding that the plaintiff waived a claim by failing to address it in response to a motion to dismiss). That is the case here. KMH Systems is represented by counsel, and if it intended to pursue these claims and believed it had a meritorious response to the motion to dismiss, surely it would have filed a response. As it stands, KMH Systems has presented no argument in support of its claims, and it is not the Court's role to construct an argument for it. Riley v. City of Kokomo, 90 F.3d 182, 190 (7th Cir. 2018) (“‘It is not the obligation of the court to research and construct the legal arguments open to parties, especially when they are represented by counsel.'” (quoting Beard v. Whitley Cty. TEMC, 840 F.2d 405, 408-09 (7th Cir. 1988))). Dismissal is therefore appropriate.

         Ordinarily, a dismissal at this stage would be without prejudice, to allow the plaintiff a chance to amend, but that is not warranted here. First, as just discussed, KMH Systems' failure to respond to the motion to dismiss-or to meaningfully participate in this case at all-suggests that it does not intend to pursue these claims. Second, it does not appear that the defects raised in Capital Equipment's motion to dismiss could be cured by an amended complaint. The breach of contract claims fail because, as repeatedly acknowledged in the complaint and as confirmed by the agreement, the contract was between KMH Systems and Mr. Horvath, not Capital Equipment. As to the fraudulent inducement claim, there is no reason to believe that Capital Equipment, which did not begin employing Mr. Horvath until 2017, played any role in inducing KMH Systems' entry into the contract in 2011. And KMH Systems plead itself out of court on the tortious interference claim, as the competitive justification it alleged for Capital Equipment's conduct forecloses its claim. Accordingly, the Court dismisses the claims against Capital Equipment with prejudice.[1]

         C. Sanctions

         Finally, Capital Equipment filed a motion for sanctions against KMH Systems. It argues that KMH Systems' claims lack any basis in the law; that they are founded upon facts that are either misrepresentations or simply inapplicable; and at bottom that the claims were presented for the improper purpose of chilling competition. Capital Equipment cites three sources of authority for imposing sanctions: Rule 11; section 1927; and a court's inherent authority. Rule 11 does not apply, though. KMH Systems filed its complaint in state court, at which point the Federal Rules of Civil Procedure did not apply. As the Seventh Circuit has made clear, “‘Rule 11 only provides sanctions for papers signed and filed in the federal court.'” Bisciglia v. Kenosha Unified Sch. Dist., No. 1, 45 F.3d 223, 227 (7th Cir. 1995) (quoting Schoenberger v. Oselka, 909 F.2d 1086, 1087 (7th Cir. 1990)). Because KMH Systems has not defended or advocated for the claims asserted in its complaint since the case's removal to federal court, it cannot be sanctioned under Rule 11. For similar reasons, it is also at least arguable whether sanctions can be imposed under § 1927, which applies when an attorney “multiplies the proceedings in any case unreasonably and vexatiously.” 28 U.S.C. § 1927; see Boyer v. BNSF Ry. Co., 832 F.3d 699, 700-01 (7th Cir. 2016). The Seventh Circuit has held, however, that courts have the inherent ...


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