Don’t sell a business and then keep running it

Electrology Laboratory, Inc. v. Kunze, 169 F.Supp.3d 1119
(D. Colo. 2016)
Larry Paul Kunze a/k/a Lorenzo Kunzel sold his family
business, plaintiff ELI (d/b/a Rocky Mountain Laser College/RMLC), “but
couldn’t give it up. So, as the evidence revealed, even while negotiating the
sale of ELI to the purchasers … , Mr. Kunze was trying to figure out how to
continue the same business he was selling.” 
The purchasers sued and, understandably, prevailed on most of their
claims (though the court admirably resists the temptation to condemn all his conduct together, even the parts that would be unobjectionable on their own); Kunze did, however, show that he was entitled to relief on his
counterclaim and third-party claim for breach of the Promissory Note given in
partial payment for the purchase of ELI.
ELI operated RMLC to provide aesthetic laser use education
and training; provided aesthetic laser services to clients; and earned income
from the sale of laser equipment.  The
laser education course provided 40 hours of training with a curriculum approved
and regulated by the Colorado Department of Higher Education.  To market classes and sell laser equipment,
ELI maintained a customer list identifying students who took the RMLC laser
education course. ELI the files under lock and key and protected the lists on
the computer system with a password.  ELI
awarded its students “Certified Laser Specialist” or “CLS” certificates,
showing they were trained at RMLC. The website at laserlaser.com was the
primary source of ELI’s ads, though it also used a number of other domain names.  Because of his many years in the industry,
Kunze was well known in the aesthetic laser education industry. But:
While Mr. Kunze was a “gifted”
teacher, he was not as educated or experienced as he touted. While ELI’s
business and Certified Laser Specialist were recognized by some in the
industry, they were also not as Mr. Kunze represented. Instead, Mr. Kunze
intentionally made numerous misrepresentations … , including misrepresentations
concerning the extent of his education, experience, and certifications; the
number of CLS certifications that ELI had awarded to RMLC students; and that
Certified Laser Specialist was a registered trademark when it was not.
After the sale, Kunze kept teaching students, employees of a
former ELI student, who thought that they were getting an education from RMLC.
The former ELI student believed that “what was important was receiving a
certificate from ROCKY MOUNTAIN LASER COLLEGE and being taught by Mr. Kunze.” She
also thought that the Certified Laser Specialist certification was important
because Kunze said it was. 
Kunze taught a shorter class for his own business, American
Laser College, but still used ELI’s RMLC marks and curriculum as if they were
his own. He handed out RMLC business cards, and used RMLC interchangeably with
American Laser College so that the students thought the entities were the same.
He awarded the students CERTIFIED LASER SPECIALIST certificates, and issued the
certificates under RMLC’s name. Kunze backdated the certificates as if they
were issued in 2010 and put a stamp on those certificates implying the
certificate or course was sanctioned by the Texas Department of Education when
it was not.
Kunze also made disparaging remarks about ELI and its new
owners.  He continued to compete with
ELI, using its curriculum, marks, pictures, and/or information to do so.  He used RMLC interchangeably with the name of
his entity, American Laser College, as if they were affiliated. “He directed
customers to contact him for laser education, but used ELI’s refund and other
policies along with pictures of ELI’s facilities and students to do so.” The
laserlaser.com website had no working link to ELI’s website, even though ELI
was relying on the website to drive student traffic to its business.  Some of the students Kunze taught were
surprised or confused when they received Certified Laser Technician
certificates from an entity they had never heard of, Rock Creek.  However, the students were seeking laser
certification and didn’t really care whether whether they’d be deemed Certified
Laser Technicians or Certified Laser Specialists (the latters was what had been
respresented to them).
After saving the information for his own account, Kunze also
deleted about 60 gigabytes of data from ELI’s server, which included a list of
ELI’s customers—its students and clients. There were other problems, but you
get the idea.
For some of Kunze’s misrepresentations (e.g., his background
and qualifications, the need for a CLS certificate), the court found no
connection between them, even assuming the purchasers relied on them, and
plaintiffs’ damages.  Also, ELI’s
purchasers were skeptical of Kunze’s financial claims and conducted their own
due diligence.  Kunze knowingly falsely
represented to the purchasers that Certified Laser Specialist and CLS were
registered trademarks, and these were material claims on which the purchasers
relied.  ELI itself suffered damage from
this—its diminished ability to protect its interest in the marks in this very
suit and Kunze’s post-sale attempt to register the marks on his own behalf—but
the purchasers didn’t establish damage in their own rights.  Kunze also knowingly concealed his failure to
file ELI’s tax returns or pay ELI’s taxes, but that wasn’t material or harmful
to the purchasers since ELI owed that amount anyway (and paying the resulting penalties
only harmed ELI).  The court found that
there were some breaches of contract, but not everything that plaintiffs
alleged.
Defendants argued that the economic loss rule barred all of
plaintiffs’ claims, including statutory claims, except for those based on
breach of contract. However, a breach of a duty arising independently of any
contract duties between the parties may support a tort action.  And “if the legislature intended to provide a
remedy in addition to a contractual one, the statutory remedy would trump the
economic loss rule.”
For trade secrets: neither ELI’s written materials nor the
curriculum as a whole were trade secrets. Protection efforts were minimal, and
the effort a competitor would require to recreate the materials wasn’t that
great. Also, there wasn’t evidence of any “unified process, design and
operation of which, in unique combination,” gave ELI a competitive advantage. “[W]hat
ELI seeks to protect and to preclude Mr. Kunze from using are his skills and
experience as a teacher—his interactive or engaging teaching style acquired
over years of teaching the course. This is what was of great value to ELI.” But
his general skill and experience isn’t a trade secret.
The student/customer list could be, and was, a trade secret,
given ELI’s efforts to keep control over it. 
ELI was entitled to injunctive relief and damages, including exemplary
damages, for Kunze’s misappropriation of the list and use of the list to sell
equipment to students.  This wasn’t
precluded by the economic loss rule because state trade secret law created a
duty on Kunze independent of his contractual duties.
So too with the Lanham Act claims, which didn’t arise from
any contractual duty. Even if the Lanham Act claims had been within the scope
of the contract, Congress intended to provide statutory rights and remedies
independent of breach of contract. 
Here, Kunze’s use of the RMLC marks constituted false
designation of origin, though his use of Certified Laser Specialist and CLS did
not.  The RMLC marks had secondary
meaning and Kunze’s use caused confusion. 
But Certified Laser Specialist and CLS weren’t protectable marks, on
this record.
False advertising: The Tenth Circuit hasn’t yet decided
whether materiality is required separately from falsity/misleadingness, but
even without materiality, ELI couldn’t win most of its claims.  ELI’s damages didn’t arise from Kunze’s
misrepresentations about his “pedigree.” 
Kunze intentionally and willfully
made numerous false and/or
misleading statements concerning the nature, characteristics, or qualities of
his goods and services. Such statements included his credentials to support his
skills/abilities to perform laser education services (some false, others
misleading); his affiliation with ROCKY MOUNTAIN LASER COLLEGE and ability to
issue CERTIFIED LASER SPECIALIST certificates (false); that ROCKY MOUNTAIN
LASER COLLEGE and American Laser College are affiliated or the same (false);
and that CERTIFIED LASER SPECIALIST is a registered trademark (false).
The RMLC affiliation-related claims were material, but not
the others. “[W]hile the evidence supports that receiving some certification
was important to the consumers, for many consumers it mattered not whether it
was a CLS or a CLT.”  Since the RMLC
affiliation-related claims were literally false and intentional, no evidence of
confusion was required; ELI was damaged thereby because students signed up for
Kunze’s courses thinking they were RMLC courses but didn’t get RMLC
certificates, so RMLC suffered in both sales and reputation.
The court exercised its equitable discretion to treble the
damages it found ELI to have suffered (lost class revenues) because overall
damages were hard to ascertain and Kunze’s actions were willful.  Because this was an “exceptional” case, the
court also awarded attorneys’ fees.  Kunze “intentionally used ELI’s marks for his
own benefit … and he continued to use the marks even after the Amendment was
terminated and ELI requested Mr. Kunze to stop doing so. Mr. Kunze offered no
credible explanation as to why he was entitled to do so.”  The court also awarded prejudgment interest.
Colorado Consumer Protection Act: The CCPA requires a
significant impact on the public, for which relevant considerations include:
“(1) the number of consumers directly affected by the challenged practice, (2)
the relative sophistication and bargaining power of the consumers affected by
the challenged practice, and (3) evidence that the challenged practice has
previously impacted other consumers or has the significant potential to do so
in the future.” Making defamatory statements about ELI was purely a private
wrong.  However, the false website advertising
directed to the market generally had a public impact, given the length of time
and the number of websites on which Kunze posted his false and misleading
advertisement.  Students were likely to
be unsophisticated consumers with bargaining weaknesses, and some enrolled
believing they’d get a RMLC certificate. 
However, there was insufficient evidence that Kunze’s false claims about
his affiliations with other organizations, his credentials, and the like
affected any consumers.  Given the
court’s finding of bad faith in the actionable misrepresentations, it also
trebled ELI’s damages under state law.
Kunze also lost on defamation/libel per se based on
statements to ELI’s landlord, one plaintiff’s banker, ELI’s laser supplier, and
ELI’s students.  The plaintiffs were
private figures, and the statements were defamatory per se (about ELI’s financial solvency), so defamation was presumed; the court awarded
a total of $50,000.

The court also granted injunctive relief.  ELI would suffer irreparable harm because
competing sales of laser equipment would erode its customer base, and damages
would be difficult to determine because ELI wouldn’t be able to monitor Kunze’s
sales.  “ELI presented insufficient
evidence of continuing sales to support an award of damages subsequent to the
termination of the parties’ relationship, but it is this very difficulty in
discovering Mr. Kunze’s use (and resulting damages) that supports the issuance
of injunctive relief.”

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