Educ. Services v. Blueprint Test Preparation
Filed 1/23/13 Robin Singh
Educ. Services v. Blueprint Test Preparation CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
ROBIN SINGH EDUCATIONAL SERVICES, INC.,
Plaintiff
and Respondent,
v.
BLUEPRINT
TEST PREPARATION, LLC, et al.,
Defendants and Appellants.
B204775
and B211422
(Los
Angeles County Super.
Ct. Nos. BC330098, BC346066, BC347174)
ROBIN SINGH
EDUCATIONAL SERVICES, INC.,
Plaintiff and Appellant,
v.
BLUEPRINT
TEST PREPARATION, LLC et al.,
Defendants and Appellants.
B218775
(Los
Angeles County Super.
Ct. Nos. BC330098, BC346066, BC347174)
APPEALS from a judgment of the
Superior Court for the County of
William F. Highberger, Judge. Affirmed
in part, reversed in part.
Horvitz
& Levy, H. Thomas Watson, Jeremy B. Rosen, Kris Bahr; Cotkin Law Group,
Joan M. Cotkin; Ropers, Majeski, Kohn & Bentley, James C. Potepan,
Susan H. Handelman, Courtney E. Curtis for Defendants and Appellants.
Horvitz
& Levy, H. Thomas Watson, Jeremy B. Rosen, Kris Bahr; Knee, Ross &
Silverman and Howard P. Knee for Defendant and Appellant.
Norminton,
Wiita & Fuster, Thomas M. Norminton, Kathleen Dority Fuster; Tycko &
Zavareei, Hassan A. Zavareei, Andrea R. Gold, Greines, Martin, Stein &
Richland, Robin Meadow, Cynthia E. Tobisman, Lara M. Krieger; Zohar Law Firm
and Daniel Yehuda Zohar, for Plaintiff and Respondent.
____________________________________
As
the importance of standardized tests has increased for admission to
undergraduate and graduate schools, the business of preparing students to take
those tests has flourished. This case
arises out of the creation of a new Law School Admissions Test (LSAT)
preparation business by five employees of one test preparation company who left
to start a competing company. This
professional move generated seven and a half years of litigation, including
three and a half years of vigorously contested pretrial discovery and motions,
a three-month trial, four appeals, and multiple
Defendants
Trent Teti, Matthew Riley, Justin Capuano, and Jodi Triplett (defendants),
along with their colleague Courtney Martin, were LSAT preparation instructors
employed by plaintiff Robin Singh Educational Services, Inc., doing business as
TestMasters (TestMasters). They thought
they could do better on their own. So in
the fall of 2004 they began working on what would become in early 2005 a
competing LSAT preparation course, defendant Blueprint Test Preparation, LLC
(Blueprint). Much of the work they did
in creating their new LSAT preparation course was on their personal
computers. Because defendants did not
want anyone to know that they were working on creating Blueprint in 2004 while
they were still working for TestMasters, however, they were not very
forthcoming in producing documents during discovery evidencing that they were
working on Blueprint in 2004. This
tactic generated lengthy and expensive controversies in discovery, especially
when TestMasters’ forensic electronic discovery experts discovered documents in
defendants’ computers from 2004 that defendants had not produced, and the trial
court found that defendants had misused the discovery process.
Defendants’
discovery abuse resulted in considerable monetary and nonmonetary sanctions,
which gave TestMasters a significant advantage at trial. On TestMasters’ main claims for breach of the
duty of loyalty by an employee and breach of oral employment contract, the jury
found in favor of TestMasters and against Blueprint and Teti, but in favor of
the other defendants. The jury, however,
awarded TestMasters only $183,000 of the $18 million in damages TestMasters had
requested, plus $10,000 in punitive damages against Teti only. On TestMasters’ defamation claims, the jury
awarded TestMasters a total of $45,000 against Triplett, Riley, and Blueprint.
In
these three appeals, defendants appeal the pretrial orders imposing monetary
and nonmonetary sanctions against them for misuse of the discovery
process. TestMasters appeals from the
judgment that awarded TestMasters much less than it had sought to recover. Defendants also appeal from the portion of the
judgment awarding TestMasters damages for defamation against Triplett, Riley,
and Blueprint, while Riley appeals from the punitive damages award against
him. We affirm the trial court’s
pretrial discovery sanctions orders, and, with the exception of the defamation
claims, affirm the judgment.
FACTUAL
BACKGROUND
A.
The Parties
Robin
Singh is a self-described “LSAT enthusiast†and “LSAT junkie.†He took the LSAT as a college senior at Duke
University, and earned a perfect score of 48.
times,
achieved a perfect score 13 times, which he claims is a world record. Singh never gets tired of taking the LSAT,
which keeps him “in touch with the pressure students feel.â€
In the spring of 1989 Singh began
tutoring a group of his college friends for the LSAT. After graduating with a degree1 in history
and Latin, Singh enrolled in USC Law School.
He took a leave of absence, however, during his first year of law
school. Singh never returned because he
went into the LSAT preparation business, first as an instructor at Kaplan Test
Prep from August 1990 to August 1991, and then as the owner of his own LSAT
preparation company, TestMasters, in mid-October 1991.
TestMasters held its first class in
the fall of 1991 at USC. By the end of
the 1990’s, TestMasters was teaching classes throughout California. By 2001 TestMasters had expanded to 18
states, by 2002 to 30 states, and by 2004 to England, Japan, and Canada. Overall, TestMasters’ annual enrollment went
from 15 students in 1991 to 9,000 in 2004, and during that period 80,000
students took TestMasters’ LSAT preparation course. In order to work at TestMasters, an
instructor must score in the 99th percentile on the LSAT. TestMasters instructors do not have written
contracts.
Trent Teti worked as an LSAT
instructor first at Kaplan, and then at TestMasters from approximately 2000 to
January 7, 2005. He earned a B.A. in
philosophy from UC Berkeley, and studied logic and philosophy as a
graduate student at the University of Virginia and UCLA, where he enrolled in
but did not complete a Ph.D. program in philosophy. Teti felt that he was the best instructor at
TestMasters and that Singh was not giving him “proper due or credit.†In his January 7, 2005 resignation email, he
told TestMasters that he was leaving to “attend to matters I have long
neglected.â€
Matthew
Riley took the TestMasters course as a student and then worked as a TestMasters
LSAT instructor from late March or early April 2003 until February 3,
2005. He has taken the LSAT three times,
earning 99th percentile scores of 179, 175, and 176, and has never answered a
question wrong in the logic games section.
When he resigned from TestMasters on February 3, 2005, he stated that he
felt “like it is time to move on.â€
Justin
Capuano graduated from UCLA in 2003 with a degree in mechanical
engineering. He earned a score of 172 on
the LSAT, also in the 99th percentile.
In college he taught SAT preparation classes for three years. He was a TestMasters student, and worked at
TestMasters from the spring of 2003 to the end of 2004 as an LSAT instructor
and in the research and development department.
His last TestMasters class was November 10, 2004, and he sent a
resignation email on December 31, 2004, telling TestMasters that he had “to
start getting serious with myself and find a more permanent career.â€
Jodi Triplett was Teti’s fiancée in
2004. She studied English literature as
an undergraduate at Stanford University and as a graduate student at the
University of Virginia and UC Irvine.
Her LSAT area of expertise is reading comprehension. She worked for TestMasters from 2001 through
2004, resigning with Teti on January 7, 2005. Triplett was not an LSAT instructor at
TestMasters; she taught GRE classes and performed law school admissions consulting
work for students applying to law school.
She also worked in marketing and trained TestMasters instructors, and
would go to classes to observe and evaluate TestMasters instructors. She told TestMasters in her resignation email
that it was time for her “to stop working a part time job and move on with my
life.â€
Courtney Martin was one of Teti’s
close friends. Like Singh, Martin came
to TestMasters from Kaplan as an LSAT instructor. She worked at TestMasters from 2002 until she
resigned on February 17, 2005 and joined Blueprint, where she stayed until
April or May 2006.
Blueprint is an LSAT preparation
company founded by Teti, Riley, Capuano, Triplett, and Martin that competes
with TestMasters. The process of
defendants’ departure from TestMasters to form Blueprint began in September
2004 while they were all still working for TestMasters, and continued into
February 2005 when Blueprint launched its website, March 2005 when defendants
taught their first Blueprint class, and May 2005 when defendants finished
writing the last of Blueprint’s course lessons.
Martin and Capuano are no longer associated with Blueprint.
B.
From TestMasters
. . .
In September 2004 Teti contacted his
close friend of over 20 years, Tom McCarthy, about Teti’s idea of starting an
LSAT preparation company that would compete with TestMasters, where Teti was
employed as an instructor. McCarthy
worked for TestMasters until early 2003 performing web and graphic design
services, and had access to TestMasters’ course materials in digital
format. Despite a written
confidentiality agreement with TestMasters, McCarthy in July 2002 downloaded
TestMasters’ course files without authorization, and then in September 2004
provided Teti with electronic files containing the 2002 version of TestMasters’
course materials both for TestMasters’ entire full length course and its
weekend course, as well as pages from TestMasters’ website. Teti downloaded these files onto his
computer. On September 20, 2004
Teti wrote McCarthy that he had opened some of the files “and it seems to have
worked. These will save us hundreds of
hours, if we, indeed, go ahead with this.
Really, Tom, thank you so much. I
owe you big on this one.â€
Defendants, who referred to
TestMasters as an “evil empire,†began working together in September and
October 2004 on what would become Blueprint while all of them were still
working for TestMasters. For example, on
September 28, 2004 Teti wrote to Martin about the terms of a potential
partnership agreement and how to compete successfully with TestMasters. On October 12, 2004 Teti wrote to Capuano,
Triplett, and Martin “collectively for the first time,†distributing a list of
“vital questions to consider†for their new business. By October 13, 2004 defendants were discussing
the viability of forming a new business together, undercutting TestMasters’
price (by $250), and preparing for litigation with TestMasters. Defendants made plans in October 2004 to meet
with attorneys to discuss these issues, and to get advice on what they “were
and weren’t allowed to do in terms of figuring out whether this potential
business was feasible while still employed by TestMasters.†Teti, Capuano, Triplett, and Martin met
several more times in October 2004 to discuss creating their own LSAT preparation
company, and by October 25 were referring to each other as partners and were
working on structuring their course and creating course material for their new
business that would be “very similar to the TM [TestMasters] course structure.†Capuano promised the others he would “not do
anything ‘Callrisian-esque,’†which was his way of saying that he would not
betray defendants to TestMasters, as the character Lando Calrissian (“the mayor
of Cloud City†played by Billy D. Williams) had done in the Star Wars movie
1980).
Riley first became involved in the
Blueprint project in mid-November 2004.
Riley had been “doing the math.â€
He calculated that each class he was teaching was “netting $100,000 in
revenue,†he was “making $4,000 teaching the class,†and he felt that he was
the one “doing all the work . . . teaching the class†and was
the one the students were coming to see.
Riley, whose LSAT expertise was the logic games section of the test,
began working with Teti to categorize logical reasoning and logic games
questions for use in defendants’ prospective LSAT preparation business. Although he was still teaching at TestMasters
at this time, Riley never spoke to any TestMasters’ students about taking
Blueprint’s courses.
But he was working on ways to fund
Blueprint. Riley approached a retired
businessman he knew through his UCLA fraternity named Jerry Nelson, who was
like a mentor to Riley and whom Riley affectionately referred to as
“Jer-Dog.†Among other activities,
Nelson sponsored current members of the fraternity by providing them with
start-up funding and ran a retreat or “leadership conference for young men†in
Cabo San Lucas, Mexico called “Cabo Alpha.â€
On December 11, 2004 defendants sent Nelson a business plan they had
prepared for Blueprint, and on December 21, 2004 Riley told Nelson, “We would
like to have our investments secured by the end of December in order to form
the LLC and begin advertising in January.â€
During the last week of December 2004 Riley, Capuano, and Teti met with
Nelson in Scottsdale, Arizona about sponsoring them and their business
venture. Nelson wrote a check for
$150,000 dated January 5, 2005 with the notation “Blueprint test prep,†and signed
a partnership agreement dated January 5, 2005 that Riley had drafted based
on a form he found on the Internet that gave Nelson a 10 percent interest
in Blueprint. Because Riley subsequently
became concerned about depositing the check while he was still teaching for
TestMasters, he decided not to cash the check at that time and to ask for
another check from Nelson at a later date.
That later date was the weekend before February 4, 2005, when Riley
had a second meeting with Nelson, this time in Cabo San Lucas. Sitting by the pool, Nelson gave Riley
another check for $150,000 and signed a second partnership agreement for
Blueprint, this one dated February 5, 2005. Blueprint eventually repaid Nelson in full,
and gave him an extra repayment bonus of $45,000. Riley admittedly lied in his deposition about
Nelson’s existence and involvement in Blueprint in order to protect him from
the litigation.
By November 2004 Teti and Triplett were communicating with McCarthy about
creating a website for their new LSAT preparation company. In a November 3, 2004 email, Teti asked
McCarthy, who was supportive of Teti’s efforts to start a competing LSAT
preparation business, for a quote for the cost of designing Blueprint’s website
and helping Teti gain a competitive advantage over TestMasters. Teti told McCarthy at that time that he was
“going to take L.A. from that bastard†Singh, that TestMasters’ best teachers
wanted to join his new company, and that he was spending all of his time
working on the development of the new LSAT course.
and barf it right back onto him. This is
so cool. Payback is awesome, especially
when it is so richly deserved. . . . [¶] I
can start to build a cost estimate and a delivery schedule for you, as well as
help you flesh out how the web can fit into your overall strategy and how it
can give you a competitive advantage in kicking [Singh’s] bony ass.†In a November 14, 2004 email to
McCarthy, Teti confirmed, “we are starting a new company.†Riley also worked with McCarthy and Teti on
the Blueprint website.
Also in November 2004 defendants
formulated a plan to promote their new competing LSAT preparation business by
posting comments on law school and LSAT Internet bulletin boards and chatroom sites. Teti testified that he had done this kind of
activity as part of his job at TestMasters.
The goal of defendants’ “chatroom marketing†plan was to generate
comments and discussion that the quality of an LSAT preparation class depends
on the quality of the teacher, and that “TestMasters is good but only if you
get†Teti, Capuano, or Martin as a teacher, without letting on that defendants
were “shill[s].†Defendants collaborated
on and coordinated their chatroom posts, which Martin and Capuano admitted
included “disparaging remarks about TestMasters and TestMasters
instructors.†These posts helped
defendants promote Blueprint before they resigned from TestMasters. In December 2004 defendants were also working
on marketing their new company with Google and setting up bank accounts for
Blueprint.
In addition to securing funding for
Blueprint, Riley also in November 2004 contacted the Law School Admission
Council (LASC), which writes and administers the LSAT, and learned that for a
“huge fee†LSAC licenses all of its past LSAT questions (other than those in
the experimental sections) in portable document format (PDF) and Microsoft Word
format. Every LSAT preparation company
uses these licensed questions. LSAC also
publishes a book called “Super Prep†that gives students practice LSAT
questions, provides explanations for the questions, and advises students on
what LSAC thinks students should study to prepare for the test. Super Prep also explains to students (and
LSAT preparation course instructors) the types or categories of questions on
the examination, how the examination introduces each type of question, and what
words the examination uses to pose each type of question. Singh testified that the Super Prep book
“does . . . an excellent job of acquainting students with the various
kinds of questions they could expect to encounter when they take the
LSAT.†Unlike the actual LSAT tests,
which LSAC sends only to licensees such as TestMasters, Blueprint, Kaplan, and
Princeton Review, the Super Prep publication is publicly available at
bookstores.
Defendants were also already
concerned about getting into legal trouble for what they were doing and that
TestMasters would sue them. Defendants
met with several attorneys from November 2004 to January 2005 to obtain advice
about how to set up Blueprint, but had to schedule their Blueprint meetings
with the attorneys around their teaching schedules at TestMasters. Defendants met on December 31, 2004 to
discuss legal issues (such as filing an LLC statement, obtaining insurance, and
choosing an attorney), curriculum development, marketing (including chatrooms,
Google, undergraduate pre-law societies, and “fraternity and sorority walksâ€),
questions, opening a bank account, and getting new phone lines).
C. .
. . to Blueprint
Blueprint filed limited liability
papers with the California Secretary of State on January 10, 2005, naming
Triplett as the first president. Because
Riley was still working for TestMasters, defendants filed the papers without
listing Riley as a member “officially.â€
Among the original principals of Blueprint, Teti had primary
responsibility for the logical reasoning part of the LSAT preparation course
because that was his strength, Riley had logic games because he enjoyed them
and was good at them, Triplett had reading comprehension because of her
background in English literature, and Capuano did “all the high-level technical
stuff, putting things together.â€
Capuano’s biggest responsibility at
Blueprint initially was formatting and doing the layout of Blueprint’s practice
questions and course materials. Capuano
also developed a blue handwriting font that Blueprint used to replicate the
kinds of things the students should be writing on paper, and then normal Times
New Roman font type for the kinds of things the students should be thinking
while working on a problem. Capuano
drafted some of the Blueprint course material, but his “task at the time was
largely type setting.â€
On February 8, 2005 Teti on behalf of Blueprint signed a license
agreement with LSAC, which then sent Blueprint via email the text of all of the
questions from the prior LSAT examinations.
The material from LSAC was in a rough format, so Capuano had to convert
the questions he received from LSAC into a readable, Times New Roman
format. Capuano “set up sort of a
conversion scheme to get from the really poorly formatted text†he received
from LSAC “into really nice, easy-to-work-with text boxes . . . .†Capuano “went through the arduous process of
figuring out what the right software was to use and what exactly [defendants]
were going to do with [the] raw text files that [they had] received fromâ€
LSAC. This was a “huge project,†one of
Capuano’s major contributions to creating the Blueprint course material, and he
had to learn how to use a new program called Indesign to do it.
to correct typographical errors contained in the LSAC questions.
(containing 4,500 questions) of the approximately 2,100 pages of Blueprint
course materials consisted of questions that Capuano had formatted from
LSAC.
Triplett had primary responsibility
for creating the reading comprehension portion of the Blueprint course,
developed Blueprint’s reading comprehension technique, and proofread all of the
course materials. To do this, Triplett
read all of the LSAT reading comprehension passages from prior tests that
defendants had obtained from LSAC and “put them into piles according to
similarities that [she] noticed among them.â€
Triplett referred to this process as the “kind of structure-based
reading†with which she was familiar from graduate school. In contrast to other LSAT preparation
companies like Kaplan, TestMasters, and Princeton Review, all of which divide
reading comprehension passages by subject matter (i.e., science, law, art
history), Triplett divided reading comprehension questions into three
categories (thesis, antithesis, and synthesis) depending on the passage’s point
of view, which Triplett believed better helped students find the answer to the
questions on the test.
Capuano, Triplett, Riley, and Martin
did not see the electronic files that McCarthy had sent to Teti in September
2004. Martin testified that no one told
her about an electronic version of TestMasters’ files or a CD from McCarthy
with TestMasters course materials, and that while defendants were creating
Blueprint’s course materials no one was looking at any TestMasters materials. Riley testified that he did not copy any of
TestMasters’ course materials in creating Blueprint’s course materials, and
that it was always his goal in writing logic games explanations “to come up
with a brand new and better way of approaching the entire LSAT.†Capuano testified that he never saw any of
the electronic data McCarthy had provided to Teti until he saw the data as
exhibits in the litigation. Capuano
testified that he and the other defendants were looking for a way to get the
LSAT questions from LSAC in electronic format in late 2004 and early 2005,
which they would not have had to do if they already had electronic copies of
TestMasters’ course materials. Capuano
also testified that defendants researched whether other test preparation
companies used the same kind of symbols defendants used in Blueprint’s course
materials, to make sure they did not “intrude on anything that only TestMasters
was using.†On the other hand, although
defendants “were making a concerted effort to be distinct from everyone else[,]
. . . when there was a concept that was pervasive throughout the
industry,†defendants believed that they “were entitled to express that concept
in the same way as everyone else.â€
Blueprint began teaching its first
course in April 2005, and priced it $251 less than TestMasters’ course. Riley testified that, although defendants did
not specifically target TestMasters students, they did try to sell Blueprint
“to students who would have otherwise taken any other classes†by any other
LSAT preparation company, which he said is the “definition of competition.â€
Since its inception in 2005, Blueprint has taught almost 5,000
students. Blueprint’s gross revenues
were approximately $500,000 in 2005, $1 million in 2006,
$1.75 million in 2007, and over $5.5 million in 2008, with projected
revenue of more than $7 million in 2013.
Defendants took salaries from Blueprint of approximately $32,000 in
2005, $40,000 in 2006, and $100,000 in 2007.
Blueprint’s net profits after salaries were $3,000 in 2005, $4,000 in
2006, and a $40,000 loss in 2007 due to expenses associated with expansion.
D. The Claims
On March 10, 2005 TestMasters sued
Blueprint, Teti, Riley, Capuano, and Triplett (but not Martin). TestMasters’ operative third amended
complaint asserted 22 causes of action for tortious breach of the duty of
loyalty, conversion, recovery of personal property, misappropriation of
property, false advertising in violation of Business and Professions code
section 17500, unfair competition in
violation of Business and Professions Code section 17200, interference with
prospective economic advantage, slander, conspiracy, and breach of oral
employment agreement. TestMasters
alleged that defendants breached their duty of loyalty as employees of
TestMasters by misappropriating TestMasters’ course materials and other
tangible property to set up a competing business, formulating and implementing
a strategy of false and misleading advertising to solicit TestMasters’
students, and forming a competing business based on their wrongful
conduct. TestMasters also alleged that
defendants, posing as students, posted disparaging statements about TestMasters
on Internet bulletin boards.
In August 2005 Blueprint, Teti,
Capuano, Riley, and Triplett filed a cross-complaint against TestMasters. Defendants asserted 11 causes of action for
invasion of privacy, failure to pay overtime wages, waiting-time penalties,
trade libel, defamation, violation of Penal Code sections 632 and 637.2 for
recording telephone conversations, false advertising, unfair competition, and
interference with prospective economic advantage. Defendants alleged that since they formed
Blueprint “TestMasters has done everything in its power to subvert Blueprint’s
business, including disseminating false and intentionally misleading
information about [defendants] and their business,†including false Internet
posts and statements that defendants “are liars.†Defendants alleged that TestMasters agents
infiltrated Blueprint workshops and distributed private and false information
about Teti, including that TestMasters had terminated him for sexual harassment
and for refusing to submit to psychological testing, and that Blueprint
students were experiencing LSAT score decline.
Defendants also alleged that TestMasters engaged in unfair competition
by including unlicensed LSAT and GRE questions in its course materials. TestMasters settled this cross-complaint for
$500,000 prior to trial.
On February 8, 2006 TestMasters
filed a separate lawsuit against the same five defendants (i.e., still not
Martin), asserting 32 causes of action for defamation, trade libel, conspiracy
to commit defamation, and conspiracy to commit trade libel. TestMasters’ operative first amended
complaint in this action alleged that defendants, again posing as students,
“published on an Internet bulletin board false statements of fact disparaging
TestMasters†that “dissuaded students from contracting with TestMasters and
encouraged them to contract with Blueprint . . . .†TestMasters alleged several defamatory
Internet posts by defendants, including that (1) a TestMasters “instructor
was really boring,†(2) “Robin and his 180s thing†was a gimmick and TestMasters’
material was out of date, (3) a TestMasters instructor was “awful, really
boring and [had a] thick accent†and “answered questions wrong in class,â€
(4) a TestMasters instructor was “terrible,†“boring and bad,†and the
class “sucked†and “dwindled to about 10 people†from more than 100, and
(5) a TestMasters instructor “was
boring as hell†and “didn’t know his sh*t very well,†and the “class seemed to
shrink with every lesson.†TestMasters
also alleged that Teti orally published to a group of prospective students that
TestMasters’ course materials, unlike Blueprint’s course materials, had no
explanations. TestMasters alleged that
Capuano orally published to a group of prospective students at USC that he had
not taught a TestMasters class “with less than eighty [students] for a really
long time,†and that Riley orally published to a group of students at UC Irvine
that he had not taught a TestMasters class with “under ninety people in the
last year and a half.â€
On January 18, 2006 TestMasters
filed a third action, this one against Martin only. TestMasters asserted causes of action against
Martin for breach of the duty of loyalty, libel, and interference with
prospective economic advantage.
TestMasters alleged that Martin, during her employment with TestMasters,
breached her duty of loyalty by injuring TestMasters’ reputation and
discouraging “TestMasters’ past, present and prospective students from taking
the very LSAT test-preparation course she was teaching as a TestMasters’
employee.†TestMasters alleged that Martin,
posing as a TestMasters student, published false and disparaging statements on
an Internet bulletin board that TestMasters was a waste of time and money and
used “kinda old†materials, and that after taking TestMasters’ course twice she
was still not ready to take the LSAT.
The trial court initially
consolidated all three actions, but subsequently severed TestMasters’ action
against Martin only. Martin is not a
party to this appeal.
E. The Preliminary
Injunctive Relief
On August 25, 2008 TestMasters filed
an ex parte application for a temporary restraining order and an order to show
cause why the court should not issue a preliminary injunction, seeking to
enjoin Blueprint from disseminating a video entitled “Blueprint: The Movie†and other “online videos that
contain the entire Blueprint course.â€
TestMasters argued that the course materials Blueprint was planning on
posting on line “can be easily copied and saved to illegal file sharing
‘torrent’ websites,â€
name="_ftnref8" title="">[8] making Blueprint’s course materials, which
TestMasters maintained included or were based on its course materials,
“available for free to anyone in the world indefinitely, without any recourse
by TestMasters.†TestMasters submitted
evidence that potential LSAT preparation course customers were discussing on
top-law-schools.com, “an online Internet discussion board frequented by pre-law
students,†how to steal Blueprint’s Internet video using a program called
“stream ripper.â€
On August 28, 2008 the trial court
granted TestMasters’ application for a temporary restraining order and issued
an order to show cause. The trial court
ordered defendants “to immediately cease providing downloads via the Internet
site or by other electronic distribution (e.g. CD or DVD) of any course
material, practice tests, instruction sessions, tutorials, or anything else
which has been provided on the Blueprint website . . . or
any similar instructional, training or practice materials relevant to the LSAT
test and any similar test.†On September
12, 2008 the court entered a preliminary injunction adopting the terms of the
temporary restraining order, and further “requiring defendants to cease
providing any and all LSAT preparation or similar test preparation services on
October 4, 2008.†The trial court found
“defendants’ conduct—in making their entire teaching program susceptible to
illegal downloading—to be a clear ‘scorched earth’ policy intending to harm
[TestMasters] since defendants can no longer foresee how they will avoid a
career-ending outcome to this litigation.â€
Blueprint appealed (Case No.
B210775). On October 2, 2008 this court
ruled that “the preliminary injunction issued by the respondent [trial court]
compels the performance of an affirmative act that changes the position of the
parties and is thus mandatory in nature,†and stayed enforcement of the
preliminary injunction.
Trials
The jury trial on TestMasters’
claims for damages lasted 25 court days over three months. On TestMasters’ breach of duty of loyalty
claim, the jury found in favor of TestMasters and against Teti and Blueprint,
and in favor of Capuano, Riley, and Triplett.
On this claim, the jury awarded $18,000 in damages against Teti and
$165,000 in damages against Blueprint.
On TestMasters’ breach of oral employment contract claim, the jury found
in favor of TestMasters and against Teti, and in favor of Capuano, Riley, and
Triplett. On this claim, the jury
awarded $18,000 in damages against Teti.
Finally, on TestMasters’ defamation claim, the jury found in favor of
TestMasters and against Riley and Triplett, and in favor of Teti, Capuano, and
Blueprint. On this claim, the jury
awarded damages of $10,000 against Riley, $10,000 against Triplett, and $25,000
against Blueprint. The jury also found
that Teti engaged in malice, oppression, or fraud, but that the other
defendants did not.
At the relatively short second phase
of the jury trial on the amount of punitive damages against Teti, Teti was the
only witness. The jury awarded punitive
damages against Teti in the amount of $10,000.
Finally, after the jury trial, the
trial court conducted a three-day court trial on TestMasters’ claim for a
permanent injunction against defendants and on TestMasters’ Business and
Professions Code section 17200 claim.
The trial court denied TestMasters’ request for an injunction, and
ordered judgment in favor of all defendants on TestMasters’ section 17200
claim. The trial court also vacated the
September 12, 2008 preliminary injunction “forthwith,†finding that the
preliminary injunction was “fundamentally inconsistent with the final merits
determination of this case.†On December
9, 2009 this court granted TestMasters’ motion to dismiss the appeal from the
trial court’s (previously stayed) preliminary injunction (Case No. B210775)
as moot.
DISCUSSION
A.
Pretrial Orders
1. Relevant proceedings
a.
first motion for discovery sanctions
After initially raising the issue of discovery abuse in an ex parte
application, TestMasters filed a regular noticed motion for sanctions on
November 2, 2007. TestMasters sought 50
specific monetary, evidence, issue, and terminating sanctions, including orders
striking defendants’ answers, precluding defendants from offering evidence in
support of any of their sixteen affirmative defenses, and imposing monetary
sanctions to be determined by a separate motion for attorneys’ fees. TestMasters also asked the court to give
various adverse jury instructions, including instructions that defendants had
breached their duty of loyalty to TestMasters and had used TestMasters’ course
materials to create Blueprint’s course materials. TestMasters submitted, attached to the
declarations of its attorneys, documents that defendants had not previously
produced but that TestMasters had recently obtained in electronic discovery
showing that defendants had concealed and destroyed documents that tended to
support TestMasters’ claims, which were inconsistent with defendants’
deposition testimony. TestMasters argued
that this electronic discovery showed that defendants were working with each
other and with McCarthy (whom TestMasters referred to as a recently discovered
“sixth conspiratorâ€) on setting up Blueprint while they were still employed by
TestMasters in 2004, not, as defendants had all testified, only after they left
TestMasters in 2005. TestMasters also
argued that defendants had destroyed relevant, if not the most important,
evidence, such as handwritten drafts of defendants’ original course material
and scantron sheets filled in by Blueprint students taking diagnostic tests.
more extensive electronic discovery than the trial court had previously
allowed.
title="">[10]
Defendants opposed the motion, but
did not object to the admissibility of any of the emails or other evidence
submitted by TestMasters, nor did defendants submit any evidence in opposition
to the motion, such as declarations or deposition testimony explaining why
defendants had not previously produced the emails forensically uncovered by
KPMG. Defendants argued only that “the
electronic documents revealed little that is new and nothing that is
significant.†Defendants argued that
McCarthy was an independent website contractor and “had the right to work on
any other website,†and that the emails merely reflected “inquiries about
[McCarthy’s] website designing services.â€
Defendants also argued that the new electronic discovery did not prove
that they had lied under oath because developing a website is not the same as
planning one, and because one of the recently-discovered emails from Teti,
dated November 17, 2004, “[i]f anything . . . merely establishes
that the defendants were preparing to initiate a competing business, an
undeniably legal endeavor in California.â€
Defendants also argued that there was “no evidence that the defendants
intentionally destroyed evidence related to the creation of their course
materials†and that their “failure to produce these documents was not
prejudicial.â€
On
December 12, 2007 the trial court issued its ruling on TestMasters’ first
motion for discovery sanctions and motion for further electronic
discovery. The trial court found that
defendants had “intentionally and seriously misused the discovery process and
did not timely comply in good faith with prior discovery requests for disclosure
of pre-separation communications and writings, electronic and otherwise,†and
had “breached their duties of honest and reasonable cooperation in
discovery.†The trial court made the
following factual findings:
(1) Defendants had disposed of “several relevant computers
and related electronic storage devices which contained key information afterâ€
defendants had become aware “of actual or threatened litigation against themâ€;
(2) one of the defendants (Capuano) had abandoned a computer at an old
apartment when he moved; (3) defendants had engaged in “dissembling outright
prevarication in various statements of sworn testimony,†including statements
about lost documents; (4) defendants had failed “to provide any handwritten or other seminal drafts of
their extensive, allegedly independently created student course material,†and
had shredded “Scantron sheets during the pendency of the litigationâ€; (5)
defendants had not submitted any declarations in opposition to the motions; and
(6) the contents of the electronic documents obtained by KPMG “after great
expense and effort†were of considerable significance in explaining defendants’
course of conduct.
The trial court did not
impose any of the terminating or jury instruction sanctions TestMasters had
requested. Nor did the trial court
impose all of the evidence and issue sanctions requested by TestMasters. Instead, the court crafted a remedy for
defendants’ discovery abuse that was a combination of monetary, cost-shifting,
and evidence sanctions. The trial court
precluded defendants from offering evidence in support of their equitable
defenses of unclean hands, estoppel, laches, and TestMasters’ “bad faith,†and
authorized TestMasters to file separate motions to recover its attorneys’ fees
and electronic discovery costs that TestMasters had incurred as a result of
defendants’ discovery misconduct. The
trial court awarded three categories of costs, one past and two future: (a) “actual sums incurred (whether paid, billed
or merely incurred) to date†for the services of KPMG, the previous court-appointed
computer expert (FIOS), and the discovery referee; (b) “costs for future
services by KPMG†not to exceed $200,000; and (c) “costs of future services of
court reporters and videographers†not to exceed $100,000. The trial court also granted TestMasters’
request for additional electronic discovery, finding that “the combination of
the finding of noncompliance with discovery obligations by defendants and the
utility of the electronic discovery obtained to date justify a much more
extensive and thorough disclosure to [TestMasters] of the contents of the
defendants’ computers and electronic storage devices for relevant
information.†The trial court ruled that
TestMasters could direct KPMG to “do a further search for emails in defendants’
electronic files,†and “to search generally for documents and files of any type
based on search parameters established by†TestMasters, with notice to
defendants.
TestMasters filed two
motions to recover its attorneys’ fees and costs, including electronic
discovery costs, pursuant to the trial court’s December 12, 2007
order. The first cost motion, filed
December 20, 2007, requested $592,260.45 in category (a) costs (pre-December
2007 discovery costs for the services of KPMG, KPMG’s predecessor, and the
discovery referee),
name="_ftnref11" title="">[11] and $116,150.26 in attorneys’ fees incurred in
bringing the first motion for sanctions.
On January 24, 2008 the trial court granted the first cost motion
and awarded TestMasters all of the requested $592,260.45 in electronic
discovery and referee costs and $111,150.20 in attorneys’ fees, for a total of
$703,410.71. In March 2008 TestMasters
filed a second cost motion pursuant to the December 12, 2007 order, and
requested $170,721.95 in category (b) and category (c) costs (“future costsâ€
for post-December KPMG and deposition expenses).
second cost motion and awarded TestMasters $154,952.85.
In
opposition to TestMasters’ first motion for discovery sanctions, defendants had
argued that “TestMasters’ continual accusations of discovery abuse call to mind
the fable of the boy who cried wolf. The
difference here is that, unlike the end of that story, the wolf never
appears.†That would soon change.
b.
second motion for discovery sanctions
On May 13, 2008 TestMasters filed its second motion for discovery
sanctions, entitled a “renewed motion.â€
In its second motion for discovery sanctions, TestMasters sought 48
enumerated monetary, evidence, issue, jury instruction, and terminating
sanctions. In addition to the striking
of defendants’ answers and the entry of their defaults, TestMasters requested
multiple jury instructions establishing liability on its claims and advising
the jury that defendants had concealed and destroyed evidence and given false
answers in discovery, and orders precluding defendants from introducing
evidence on various issues and their remaining affirmative defenses.
TestMasters also filed
on May 13, 2008 a separate motion for monetary sanctions pursuant to Code of
Civil Procedure section 2023.010,
sanctions that TestMasters claimed it had incurred as a result of defendants’
misuse of discovery. This motion sought
to recover several categories of costs and fees associated with specific issues
of discovery misconduct. TestMasters
sought fees and costs incurred in connection with (1) efforts to uncover the
true facts (initially concealed by defendants) that Jerry Nelson had provided
funding for and was an owner of Blueprint, (2) efforts to uncover the true
timing and formation of Blueprint, (3) additional electronic discovery,
(4) defendants’ interference with the depositions of McCarthy and other
third party witnesses, (5) defendants’ Internet defamation campaign, (6) the
filing of the second motion for discovery sanctions, and (7) efforts
relating to the destruction of scantron score sheets.
In support of the
second motion for discovery sanctions, TestMasters submitted additional
electronic discovery obtained by KPMG from defendants’ computers. TestMasters argued that “further e-discovery
has revealed that defendants concealed an entire hard drive full of
incriminating information,†and that KPMG had been able to recover
“incriminating files†for which defendants had “deliberately and systematically
searched their computers†and either hidden or deleted and then never produced
in discovery. KPMG located many of these
electronic files on an external hard drive, referred to as a “Firewire drive,â€
used to store information from other computers, which defendants purchased in
April 2006 while discovery requests from TestMasters were pending. The Firewire drive, which defendants directed
their technical consultant not to produce to the forensic experts in discovery,
contained emails or fragments of emails exchanged among defendants and Martin
in 2004, while defendants were still working for TestMasters, concerning the
formation of Blueprint. These emails
appeared to contradict defendants’ litigation position and deposition testimony
that they did not work on the formation of Blueprint until 2005. These forensically recovered email files also
revealed that Teti had received TestMasters electronic course files from
McCarthy in September 2004. TestMasters
also presented forensic evidence that defendants had run specific searches on
their individual computers to collect some of the emails KPMG found on the
Firewire drive, using key search terms found in those emails, and had run
programs designed to remove or delete certain electronic documents from their
computers. These computerized efforts to
cover their tracks included a “Secure Erase option,†run on July 26, 2007,
which allows the user “to wipe all free space on the hard drive by overwriting
the data once, seven, or thirty-five times with random ones and zeros,†and a
sophisticated program called “BASH†used to find and delete (or confirm the
deletion of) computer files.
name="_ftnref14" title="">[14] TestMasters contended that this evidence
showed that defendants knew about the emails and intentionally concealed them
from production, deleted them, or both.
Some of the
emails recovered by KMG from the Firewire drive that defendants had not
previously produced were potentially damaging to defendants’ case and indeed
could easily be characterized as “incriminating.†It is understandable why defendants may have
been reluctant to produce them. For
example, in a September 18, 2004 email from Teti to McCarthy on the
possibility that McCarthy might be able to provide Teti with TestMasters’
electronic files, Teti wrote: “If you
can do it, I’ll blow you so well snot will shoot out of your cock.†After McCarthy was able to provide Teti with
the TestMasters files, writing “here’s the full-length course, I’ll follow up
with the weekend course shortly,†Teti wrote McCarthy on September 20, 2004
that he had “opened some of them [the files], it seems to have worked,†and
“this will save us hundreds of hours, if we go ahead with this.†Teti told McCarthy on September 24,
2004: “You’re a god. A god who will never be revealed as the
source of these files, but a god nonetheless.â€
In another email recovered by KPMG, Teti wrote to McCarthy on
November 7, 2004: “Don’t save these
emails, for your sake and mine. They
might be misconstrued if they were discovered by those looking for things to
misconstrue.â€
In an email to
Teti written after litigation had commenced, McCarthy wrote: “I thought I should tell you that that
worthless fuck’s Robin’s Boston thugs lawyers are coming to ass-rape depose me
in a couple of weeks. . . .
They’ll have better luck getting sperm from a cow [or] blood from a
stone than they will getting any more info out of me.†Teti responded by advising McCarthy that he
would have Riley contact him “to talk about particulars†before the
deposition. TestMasters argued that this
newly-discovered document showed that defendants had conspired with McCarthy to
give false testimony in the litigation.
In
addition to the emails, KPMG recovered documents showing that as early as
October and November 2004 defendants were well on their way to setting up their
competing business. For example, KPMG
recovered from the Firewire drive an October 24, 2004 document that
outlined a sequence of
events for the establishment of Blueprint.
This timeline outlined defendants’ goals of completing of a “working
draft of the business plan†for Blueprint and “informal procural of faux
franchise employees†by November 1, 2004; finalizing a draft business plan
and general course outline, and setting up meetings with lawyers by November 15,
2004; completing logical reasoning curriculum and off-line website by
December 1, 2004; completing reading comprehension and beginning logic
games, and having legal counsel “look over timeline [and] determine[] its legal
feasibility†by December 15, 2004; and completing logic games, course
schedules, and website by January 1, 2005.
In
support of its second motion for discovery sanctions, TestMasters submitted a
four-volume document entitled “Compendium of Perjury,†which collected numerous
instances in which defendants had given testimony under oath that TestMasters
claimed conflicted with the recently-obtained electronic discovery. For example, TestMasters submitted excerpts
of deposition testimony by Teti (6 instances), Triplett (4 instances), and
Capuano (9 instances) stating that defendants did not work together to set up
Blueprint while they were working for TestMasters, and six electronic
documents showing that they had done exactly that. TestMasters submitted excerpts of deposition
testimony by Teti (9), Triplett (3), and Capuano (11) stating that Capuano
had no involvement with Blueprint until he left TestMasters in December 2004,
and 32 electronic documents showing that he had. Similarly, TestMasters submitted deposition
excerpts of Teti (3), Triplett (2), Capuano (4), and Martin (31) stating that
Martin had no involvement with Blueprint until she left TestMasters in February
2005, and 48 electronic documents showing that she had. TestMasters similarly submitted deposition
excerpts of Teti (32), Triplett (21), Capuano (12), and
Riley (51) stating that Riley had no involvement with Blueprint until he
left TestMasters in February 2005, and 21 electronic documents showing
that he had. TestMasters also submitted
deposition excerpts of Teti (9), Triplett (4), and Capuano (15),
Riley (5), and Martin (1) stating that defendants did not begin creating course
materials for Blueprint until after they left TestMasters in January 2005, and
eight electronic documents showing that they had. Same for the creation of Blueprint’s website
before defendants left TestMasters: Teti
(1) + Triplett (4) + Capuano (1) + Riley (13) vs. contradictory
documents (57). And TestMasters
submitted deposition excerpts of Teti (6), Triplett (4), Capuano (6), and
Riley (16) stating that defendants did not receive any funding from Nelson in
December 2004, and eight electronic documents showing that they had.
Defendants
filed an opposition to the second motion for discovery sanctions and a
four-volume document entitled “Treatise of Truth†in response to TestMasters’
“Compendium of Perjury.†Defendants
argued first that they had and could present “definitive proof†that they did
not use the electronic files containing TestMasters’ course materials,
received from McCarthy.
name="_ftnref17" title="">[17] Defendants also provided an innocent
explanation of how the recently-discovered documents had been found by KPMG on
the 2006 Firewire drive but not defendants’ 2005 personal laptop computers. Teti said that he had purchased a new laptop
computer in January 2005 when Blueprint was formed, transferred his files from
his 2004 computer to the 2005 computer, and then transferred the files from his
2005 computer to the 2006 Firewire drive, and that through this process the emails
he deleted from his 2004 computer migrated to the “unallocated space†of the
2006 Firewire drive, where KPMG found them.
Defendants argued that “if some responsive documents were overlooked or
lost in the shuffle, it was not deliberate.â€
Defendants also argued that the emails recovered by KPMG from the
Firewire drive were either exculpatory or irrelevant. Defendants’ “Treatise of Truth†contained
responses to TestMasters’ “Compendium of Perjury†and argument for each
deposition excerpt cited by TestMasters that TestMasters had either
misrepresented testimony or the witness had corrected his or her
testimony.
This
time, all five individual defendants submitted declarations in opposition to
the motion. Teti stated in his
declaration that, although he “never tried to obstruct†TestMasters’ discovery,
he “underestimated the importance of maintaining extensive records potentially
relevant to a legal proceeding,†and he regretted his “failure to keep a
complete record of documents and emails, both because of the inconvenience it’s
caused all parties involved and because it now threatens the adjudication of
facts at trial . . . .â€
Teti admitted that he had received the TestMasters course materials McCarthy
had sent him in 2004, but reviewed them only to “determine how they were
entered and formatted,†and never read them before he deleted them. Teti also explained that his reference to
having Riley contact McCarthy about deposition “particulars†referred to
“logistical facts about the deposition,†not testimonial facts about the case,
which Riley confirmed. Capuano and
Martin stated that they had never seen or relied on TestMasters’ course
materials in developing Blueprint’s course materials. All five individual defendants stated in
their declarations how difficult and time-consuming responding to TestMasters’
discovery had been.
During
July 16 to 18, 2008 the trial court held a hearing on TestMasters’ second
paper that has been submitted†in connection with the motions “is about as much
as I’ve ever seen in my whole experience as either a lawyer in big-firm
practice for over a generation or as a judge for almost ten years.†At the hearing the parties presented
extensive argument and evidence, made Powerpoint presentations, used
demonstrative evidence, read deposition testimony, and played excerpts of
videotaped deposition testimony, although neither side presented any live
testimony.
title="">[18] The trial court noted at the hearing that
from all of the declarations and other evidence submitted it had “a pretty
complete explanation by the defendants as to why [and] when they felt they were
proceeding in good faith, during the totality of the case, regarding electronic
discovery,†and an understanding of defendants’ explanations for why “KPMG
found some things that hadn’t been produced.â€
On August 6, 2008 the trial
court issued a 40-page ruling on TestMasters’ second motion for discovery
sanctions and TestMasters’ motion for additional monetary sanctions. The trial court ruled that TestMasters had
“obtained substantial additional discovery, primarily electronic discovery of
files which Defendants had heretofore withheld from [TestMasters] when the same
kinds of information were sought pursuant to discovery, which shows how
cavalier and dishonest Defendants were in providing prior sworn discovery
responses, particularly in their deposition testimony. Defendants are now shown to have conspired to
maliciously and intentionally withhold key information, to lie about the true
facts surrounding the formation, funding and start-up of Blueprint, and to have
attempted to encourage at least one key third-party witness (Thomas McCarthy)
to give false, incomplete and/or misleading testimony under oath in this
case.†The trial court found that
defendants “knew full well that they were trying to hide their tracks; they
made their best efforts to do so; for a long time they were successful due to
their willing and repeated dishonesty; and it was only after KPMG scraped
contrary proof off their computers and external hard drives that a truer
(though still incomplete) picture of their actual conduct during the relevant
period emerged.†The trial court
concluded that defendants had “destroyed and disposed of evidence, including
handwritten material, computers, computer files, and scantron sheets at a time
when the lawsuit was pending or when the Defendants had reason to anticipate
that the lawsuit would be filed.â€
One of the primary bases
for the trial court’s finding that defendants’ discovery abuse was intentional
was that defendants “made no attempt whatsoever to explain or justify their
prior erroneous testimony about the timeline for the creation of Blueprint.†The trial court found that defendants “tried
to depict an intentionally false picture of their activities and now have been
shown up as intentional liars.†The
trial court placed particular emphasis on the October 24, 2004 outline of steps
defendants planned to take to create Blueprint.
The trial court found this document, “which Defendants had not
voluntarily produced and whose existence is plainly inconsistent with their
sworn testimony about the timeline of the creation of Blueprint,†showed all of
the steps defendants believed they needed to take in November and December 2004
to set up their new business in 2005.
The trial court also
based its decision on (1) the destruction by Teti of “thousands of pages of
paper . . . including preliminary proofs of the company website and
the course materials†at a time when “he was already under a duty to preserve
the drafts as evidence,†(2) Martin’s shredding of “scantron sheets of
Blueprint students’ tests,†(3) the disposal in late 2004 or early 2005 by Teti,
Triplett and Capuano of the computers they used in 2004 “at a time when the
lawsuit was pending or when the Defendants had reason to believe that they
would be sued by [TestMasters] in connection with the formation of Blueprint,â€
and (4) the absence of electronic evidence from Teti’s 2005 computer that KPMG
was able to retrieve from the Firewire drive.
The trial court noted that defendants had not provided “an
explanation for why the emails appear on the Firewire drive but none of them
appear on Teti’s (or anyone else’s) 2005 computer. The only conclusion that can be drawn is that
the emails were deleted from some 2005 computer after they were transferred to
the Firewire drive. As the Firewire
drive was not purchased until 2006, which is well into the pendency of the
lawsuit and well after [TestMasters had] engaged in focused discovery efforts
to obtain electronic evidence, the destruction of the emails was in violation
of the Defendants’ discovery obligation . . . .†The trial court cited to the “You’re a god,†“Don’t save these
e-mails, for your sake or mine,†“better luck getting a sperm from a cow,†and
“snot†emails recovered by KPMG as evidence of defendants’ willfulness.
The trial court also
found that defendants made materially false statements under oath in their
discovery responses and deposition testimony, primarily because the electronic
documents forensically recovered by KPMG from the Firewire drive directly
contradicted defendants’ testimony. For
example, while defendants repeatedly stated under o
| Description | As the importance of standardized tests has increased for admission to undergraduate and graduate schools, the business of preparing students to take those tests has flourished. This case arises out of the creation of a new Law School Admissions Test (LSAT) preparation business by five employees of one test preparation company who left to start a competing company. This professional move generated seven and a half years of litigation, including three and a half years of vigorously contested pretrial discovery and motions, a three-month trial, four appeals, and multiple writ proceedings. |
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