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Wired Fox Technologies Inc. v. Estep

United States District Court, D. South Carolina, Greenville Division

March 27, 2017

Wired Fox Technologies, Inc., Plaintiff,
v.
Christopher Estep, individually, and as Owner of Steel Lions, Inc.; and Steel Lions, Inc., (Of Whom Christopher Estep is also Defendant-Counterclaimant) Defendants. Christopher L. Estep, Defendant-Counterclaimant,
v.
Jeffrey Yelton, Dwayne Mosley, and Jon Weatherill, and Asset Enterprises, Inc., Additional Counterclaim Defendants.

          OPINION AND ORDER

          Bruce Howe Hendricks United States District Judge.

         This matter is before the Court on Defendant-Counterclaimant Christopher Estep (“Estep”) and Defendant Steel Lions, Inc.'s (“Steel Lions”) (collectively “Defendants”) motion for summary judgment on Plaintiff-Counterclaim Defendant Wired Fox Technologies, Inc.'s (“Wired Fox” or “Plaintiff”) claims, and Estep's motion for partial summary judgment on his counterclaims for declaratory judgment under the Copyright Act and for violation of the South Carolina Payment of Wages Act (“SCPWA”) (ECF No.127).[1]

         BACKGROUND AND PROCEDURAL HISTORY

         The factual background of this case is set forth thoroughly in the Court's prior orders. (See ECF Nos. 70 & 125.) The Court assumes knowledge of that background and incorporates it by specific reference herein. This case arises out of a falling out between various parties to a business venture in Greenville, South Carolina known as Wired Fox Technologies. Counter Defendant Jeffrey Yelton (“Yelton”) formed Wired Fox in September 2013 after purchasing the assets of a company called Goddard Technologies (“Goddard”). Goddard was a software company that had a presence in the security and identification software industry for clients such as schools and airports. Estep worked for Goddard as a computer programmer from January 2001 to December 2003, then left to form his own company called Intellisoft, Inc. (“Intellisoft”), which specializes in the same sector of the software industry.

         Yelton and Estep began discussing the potential for Estep and/or Intellisoft to perform computer programming work for Wired Fox in October 2013. (Estep Decl., ECF No. 127-3 ¶ 4-5.) Estep confided in Yelton that he was having difficulties with his business partner, David Peeples (“Peeples”), at Intellisoft; indeed, Estep had already begun to have a falling out with Peeples by that fall. (Id. ¶¶ 6-9.) On December 9, 2013, after meeting in person, Yelton sent via email to Estep an “Independent Contractor Agreement” setting forth the proposed terms of a business relationship between Wired Fox and Estep. (Id. ¶ 11.) Yelton's email states:

Attached is a rough agreement that we can operate under. I'm just trying to be very clear about what each of us expects. Please feel free to add anything you want to add. I put the start date at 1-1-2014 but we can start as soon as you are ready.

Give me a call if you want to discuss.

(ECF No. 127-3 at 20 (emphasis in original).) The document was never signed by either party, and Estep contends it was never finalized. Additionally, the document contains certain phrases that seem to indicate it is not a final product and that the particulars of the business relationship will continue to evolve, namely: (1) under one subparagraph of the “payment for services” provision it states, “Let's discuss this”; (2) under the “term/termination” provision it states, “We will start with a 6 month term to see if the relationship is beneficial to both parties”; and (3) under the “expenses covered” provision of the “services to be provided” attachment it states, “How do you think we should handle these?” (See ECF No. 71-1 at 2, 5.) Estep states, however, that he and Yelton reached an agreement in principal about most of the material terms of his business relationship with Wired Fox, namely: (1) Estep would perform the service and maintenance work for Wired Fox customers and would receive 50% of the gross revenue from such work or contracts; (2) Estep would create new software[2] for Wired Fox customers which would be owned on a 50/50 basis between himself individually and Wired Fox; and (3) Estep would become an equal 50% owner of Wired Fox at some point prior to the end of 2014. (Id.) There is no signed writing that memorializes this limited set of terms.

         Yelton describes the December 2013 meeting with Estep to discuss the terms of their emerging business arrangement as follows:

During the meeting, I made clear that any source code created based upon Goddard Code would belong exclusively to [Wired Fox]. Any new source code created that was not based on Goddard Code would be owned jointly between [Wired Fox] and Estep. The new software, which we eventually called the “Blue Fox Code, ” would be marketed as such on [Wired Fox's] website and in all future marketing materials to [Wired Fox's] customers. These terms were outlined in an Independent Contract Agreement (“Agreement”) which was to start on January 1, 2014 and run through December 31, 2014. Under the Agreement, Estep would be a contracted 1099 employee of [Wired Fox]. His agreement to provide services would be for a minimum of six months under the Agreement with both parties being required to perform all requirements no later than December 31, 2014. This Agreement was not signed but we acted in accordance and reliance on the terms beginning January 1, 2014, with Estep being employed as an independent contractor on or about that date.

(Yelton Decl., ECF No. 135-1 ¶ 5 (emphasis added).) Curiously, in the very next sentence of his declaration, when describing the plans for the new Blue Fox Code, Yelton states: “According to the Agreement, the Blue Fox Code was to be owned and used exclusively by [Wired Fox] in order to provide customizable products and services to third parties, including security and identification software, program development enhancement, scanners, identification card supplies, and various other uses.” (Id. ¶ 6 (emphasis added).) During the course of this litigation, Plaintiff has represented that the entirety of the terms in the Independent Contractor Agreement were in place and enforceable from January 2014 onward. Paragraph 5 of the Independent Contractor Agreement states:

RELATIONSHIP OF PARTIES. It is understood by the parties that Chris Estep is an independent contractor with respect to Wired Fox Technologies, and not an employee of Wired Fox Technologies. Wired Fox Technologies will not provide fringe benefits, including health insurance benefits, paid vacation, or any other employee benefit, for the benefit of Chris Estep.

(ECF No. 71-1 at 2-3.) Paragraph 6 of that document states:

WORK PRODUCT OWNERSHIP. Any copyrightable works, ideas, discoveries, inventions, patents, products, or other information (collectively, the “Work Product”) developed in whole or in part by Christ Estep in connection with the development of extensions to Val-Id. v3.x and v4.x shall be the exclusive property of Wired Fox Technologies. Upon request, Chris Estep shall sign all documents necessary to confirm or perfect the exclusive ownership of Wired Fox Technologies to the Work Product.
Any development done on products other than Val-Id. v3.x and v4.x will be owned jointly and equally (50/50%) by Chris Estep and Wired Fox Technologies.[3]

(Id. at 3.)

         Estep began performing programming work for Wired Fox in January 2014 as contemplated, with no signed contract in place. Estep's relationship with Peeples declined rapidly over the next few months, and Peeples and Intellisoft began to threaten legal action against Estep, making a variety of allegations about Estep's conduct with respect to source code he developed while at Intellisoft and Intellisoft client accounts. (ECF No. 127-3 ¶¶ 12-14.) After negotiating a stand-still agreement[4] with Intellisoft in order to ensure completion of a software project for the Pentagon, Estep turned back to negotiations with Yelton. (Id. ¶¶ 15-20.)

         Estep states that he and Yelton finalized their agreement and understanding of the Wired Fox venture in late June 2014, including the following terms: (1) Estep and Yelton would each be 50% shareholders of Wired Fox; (2) Estep would be provided a draw from Wired Fox in the amount of at least $8, 000 per month, plus employment benefits including medical, dental, and life insurance coverage, and retirement benefits through a 401(k); (3) the ownership of any software created by Estep, including the Blue Fox Code he had already been developing for 6-8 weeks, would be split between Estep and Wired Fox on a 50/50 basis; (4) Yelton would provide all of the working capital to cover the start-up expenses of the company, including computer hardware, equipment and software, marketing, travel, and related business expenses; and (5) Yelton would reimburse Estep for all legal expenses associated with the on-going dispute with Intellisoft and Peeples, which was anticipated to possibly include the purchase of Peeples' ownership interest in Intellisoft by Wired Fox. (Id. ¶ 20.)

         On July 21, 2014, Estep and Peeples participated in a mediation regarding the proposed split-up of Intellisoft, during which Estep pursued various options to purchase Peeple's half of Intellisoft, on the promise of Yelton funding such a purchase if it came about. (Id. ¶¶ 21-23.) Also on July 21, 2014, Yelton entered into an Administrative Shared Services Agreement with two of his business associates, Dwayne Mosley (“Mosley”) and Jon Weatherill (“Weatherill”), through their company Asset Enterprises, Inc. (“AEI”), whom Yelton had contacted regarding a possible acquisition of Wired Fox due an inability to sustain mounting operating costs. (ECF No. 135-1 ¶ 13.) Yelton next met with Mosley and Weatherill on July 29, 2014, in order to detail a rough plan for a possible joint venture between AEI and Wired Fox. (Id. ¶ 13 & pg. 26.) Yelton contends that he informed Estep of the specifics of this meeting during several telephone conversations. (Id. ¶ 13.)

         On July 31, 2014, Yelton sent Estep an email with subject line, “Our Way Forward, ” detailing his thoughts “about how to make this Intellisoft/Wired Fox Technologies deal work.” (ECF No. 127-3 at 26.) Yelton indicates that he anticipates a cash outlay of between $150, 000 and $350, 000 over a minimum of 12 months before the venture becomes profitable. He further states, that at a minimum “we need to fund your [Estep's] salary benefits, ” and indicated that such compensation would include, for “all Wired Fox employees, medical, dental and life coverage and the ability to participate in a 401K plan.” (Id.) Yelton told Estep that he was taking a job with a company called Ingram Micro in order to ensure that there would be enough capital to sustain the Wired Fox venture, and that Mosley and Weatherill would be stepping into his role at Wired Fox. Yelton wrote that “[Mosley] will run the company day-to-day while I support him on a weekly basis.” (Id.) Yelton further stated, “I will leave 100% of my money in the company and will add additional if needed, ” that “[t]he [Wired Fox] entity will remain the same, ” that “I [Yelton] will need to be an investor in the company so that I don't have a conflict of interest with Ingram [Micro] so [Mosley], [Weatherill] and Chris Garrison will have to be the main partners with you, ” and that “The structure of the deal will remain the same with [Mosley], [Weatherill] and Chris [Garrison] added as shareholders.” (Id. (emphasis added).) Estep contends that the phrase, “the deal, ” as used in Yelton's July 31, 2014 email refers to Estep's and Yelton's oral agreement from late June 2014, not the proposed Independent Contract Agreement from January 1, 2014. (See ECF No. 127-1 at 10.) Estep further asserts that Yelton viewed him as a 50% “partner” in Wired Fox at this point, and that Yelton was merely bringing Mosley and Weatherill in to take Yelton's place in the venture. (Id.) Yelton contends that his agreement with Estep was that Estep would become a “joint (50%) owner” of Wired Fox “if all terms of the [Independent Contractor Agreement] were satisfied by December 31, 2014.” (ECF No. 135-1 at 4; see ECF No. 71-1 ¶ 11 (“It is the intent of both parties to be joint owners in Wired Fox Technologies on or before December 31, 2014.”).)

         Estep continued to perform his programming duties as before, while Mosley and Weatherill assumed the day-to-day operations of Wired Fox and Yelton went to work for Ingram Micro. (ECF No. 135-1 ¶ 15.) During this period, Mosley and Weatherill were providing the funds necessary to keep Wired Fox operational and were making efforts to reach a final joint venture agreement between the parties. (Id.)

         On August 7, 2014, Intellisoft filed a lawsuit against Estep in this Court, which matter was detailed to the undersigned. Estep informed Yelton and Mosley about the Intellisoft lawsuit and received money from Yelton to pay for at least a portion of his legal fees in defending that suit. Estep contends that Yelton and Mosley promised they would pay all of his legal expenses in connection with defending the lawsuit and in pursuing counterclaims against Intellisoft and Peeples. (ECF No. 127-3 ¶¶ 25-26.) Yelton contends that he loaned money to Estep to pay his attorney's initial retainer, and that any other monies provided to Estep were for the purpose of general living expenses. (ECF No. 135-1 ¶ 17.)

         Estep asserts that in late-August or early-September 2014, Mosley unilaterally informed him that Mosley and Weatherill had decided they were not willing to be equal, 50% shareholders with him in Wired Fox, and that they insisted on together owning at least a 51% controlling interest of the outstanding shares of the company. (ECF No. 127-3 ¶ 28.) Estep further contends that he immediately contacted Yelton about the new partners' effort to change the deal he and Yelton had previously agreed to, but Yelton convinced him that it would be in his interest to give up some ownership interest in Wired Fox to Mosley and Weatherill in exchange for receiving additional cash up front. (Id. ¶ 29.) Estep also claims that Yelton told him it was fair to give up some ownership interest in Wired Fox because Estep was the only shareholder who would also be receiving a salary from Wired Fox as a W-2 employee, and Mosley and Weatherill were taking more financial risk by investing in the company. (Id.)

         On September 5, 2014 Intellisoft, Peeples, and Estep participated in a mediation of the Intellisoft lawsuit, which Estep settled for $200, 000 in exchange for transferring his half of Intellisoft to Peeples, with no non-compete agreement included. (Id. ¶ 30.) Estep contends that he forwent an opportunity to settle the case for the greater sum of $325, 000, but including a six-month non-compete, specifically based on his discussions with Yelton about their commitment to the Wired Fox venture, in effect making a $125, 000 investment in Wired Fox, to ensure that he would be able to continue his work with Wired Fox unhindered by any restrictions on his ability to compete with Intellisoft. (ECF No. 127-3 ¶¶ 30-31.) All parties to the Intellisoft lawsuit signed a settlement memorandum at the conclusion of the mediation session on September 5, 2014, which contained mutual releases specifically including a release of Wired Fox from any potential liability to Intellisoft or Peeples. (Id. ¶ 32.)

         Prior to the Intellisoft mediation, and without any notice to Wired Fox, Yelton, Mosley, or Weatherill, Estep applied for and was granted a copyright of the Blue Fox Code on September 3, 2014. (Id. ¶ 20.) On September 10, 2014, Estep met with Yelton, Mosley, and Weatherill to proceed with further negotiations regarding the terms of a proposed joint venture. (Id. ¶ 21.) Describing that meeting, Yelton states:

Estep disclosed that he had applied for the copyright of the Blue Fox Code in his own name. This fact came as a surprise to all parties because up to this point all parties were acting under the assumption that [Wired Fox] owned the Blue Fox Code or that Estep and Plaintiff owned the code 50/50. I later heard Estep acknowledge for the first time in his deposition that he [Estep] had copyrighted the Blue Fox Code in his name as leverage in both the Intellisoft mediation and the Joint Venture negotiations.
Despite Estep's copyrighting the Blue Fox Code in violation of the terms of the Agreement, Mosley, Weatherill, and I, still proceeded in good faith with negotiations regarding the terms of a proposed Joint Venture with him. The various structures for the Joint Venture proposed at the September 10, 2014 meeting took into account Estep's actual ownership of the Blue Fox Code and his anticipated assignment of the Blue Fox Code to the new company as a term of a final agreement culminating in the Joint Venture's new company. The parties agreed that the new company would be structured as a 70/30 ownership split with Mosley and Weatherill receiving seventy percent (70%) of the ownership and Estep receiving thirty percent (30%) of the ownership. In consideration for Estep receiving eight thousand dollars ($8, 000.00) per month salary, a final eight thousand dollars ($8, 000.00) cash toward his legal expenses, and eighty thousand dollars ($80, 000) cash, his 50% ownership in the proposed Joint Venture would be reduced to 30%. He would also be required to assign the Blue Fox Code to the new company in lieu of any capital contribution by him. The other owners would receive no salary from the new company, would provide all funding for its daily operations and would be responsible for additional capital as needed for expansion and development in the growth of the new company as its investment in the Joint Venture. As additional investment in the Joint Venture, they would also be required to pay Estep's cash payments per the terms of the proposed Joint Venture. All terms went into effect upon execution of the final agreement. [Wired Fox's counsel] was made aware of these terms for purposes of drafting the corporate documents and necessary agreements for review by [Estep's counsel].

(Id. ¶¶ 21-22.) The substance of the September 10, 2014 meeting is illustrated, at least in part, in a white-board photograph attached as Exhibit F to the amended complaint. (ECF No. 71-6 at 4.) The white-board diagram reflects that the parties specifically contemplated the creation of several documents to memorialize the terms of the revised deal: (1) a Buy/Sell agreement, including “Pain to Leave”; (2) non-compete and nondisclosure agreements; (3) a copyright agreement; and (4) an operating agreement and/or employee manual. (Id.)

         The proposed joint venture never came to fruition. Estep asserts that his persistent attempts to review and consummate the closing documents were repeatedly put off by Mosley and Wired Fox's counsel, until he was finally informed by Yelton on December 1, 2014, that Mosley and Weatherill had decided not to move forward with the Wired Fox venture after all. (Id. ¶¶ 36-48.) Yelton then indicated that he was unable to proceed with the venture because of his position at Ingram Micro and proposed that Estep purchase his interest in Wired Fox for $40, 000 payable over a two-year period, which proposal Estep ultimately rejected. (Id. ¶ 48.) Yelton, on the other hand, asserts that the joint venture was never consummated because of Estep's unpredictable and troubling behavior. In his declaration, Yelton describes the demise of the negotiations as follows:

Given that the parties had learned of Estep's filing of the copyright for the Blue Fox Code while in ongoing negotiations with Intellisoft without disclosing the same, it was agreed that the Settlement Agreement between Intellisoft and Estep should be adopted as a Final Order in full resolution of the Intellisoft matter prior to moving forward with the proposed Joint Venture. While the parties awaited the Final Order regarding the Settlement agreement in the Intellisoft case, Estep and [Wired Fox] continued to operate pursuant to the terms of the Agreement, the only exception being that Estep now had full ownership of the Blue Fox Code pursuant to his copyright application. The final Order in the Intellisoft case was issued on October 27, 2014. Between then and mid-November, Estep became frustrated that final documents were not ready for execution. Despite being assured that all the parties were waiting on was final documents from [Wired Fox's counsel] and that such documents take time, especially given that the underlying matter had only just been resolved a couple of weeks prior, Estep sent an email to Mosley and Yelton (but specifically addressed to [Yelton]), prior to a trade show he was set to attend on behalf of [Wired Fox] in Orlando, Florida. (Exhibit “H-1”). In the email, Estep stated in reference to his attendance at the event, “[i]f you keep going the way you are going the trip to Orlando will not be a chance to show off our new software, it will be a networking opportunity where the core of your business will find other employment.” Id. I interpreted this correspondence to be a threat by Estep whereby he, along with other unnamed Wired Fox employees, would use the trip to Orlando - funded by Wired Fox - as an opportunity to seek alternative employment opportunities, taking with them the newly created Blue Fox Code. This threatening behavior, in such close proximity to the timing of the revelation of his sole ownership in the Blue Fox Code, along with other instances of Estep's unprofessional and unpredictable actions ultimately led to the disintegration of the Joint Venture.

(Id. ¶ 23.)

         After returning all Wired Fox equipment in his possession to Yelton through their respective attorneys, Estep created Steel Lions through Legal Zoom in mid-December 2014. (Id. 49-50.) Shortly after the new business entity was officially incorporated with the State of South Carolina in January 2015, Wired Fox filed the instant lawsuit against Estep and Cunningham, whom Estep had recruited to join him at Steel Lions. (Id. ¶ 56.) Estep and Cunningham soon decided that continuing with Steel Lions was not feasible because Yelton and Wired Fox had filed UCC-1 financing statements claiming a security interest in the software, making it impossible to sell. (Id.)

         Wired Fox initially alleged that Estep was an “employee”[5] of Wired Fox who created new source code for the company, namely, the Blue Fox Code. Wired Fox further alleged that Estep improperly copyrighted the Blue Fox software in his own name, and then left Wired Fox, with Cunningham, to form a competitor, Steel Lions. According to these initial allegations, Estep and Steel Lions were improperly using Wired Fox's exclusive intellectual property, including the Blue Fox Code, to harm Wired Fox's business relationships.

         In its September 21, 2015 order, the Court granted Wired Fox leave to amend its complaint, but ruled that any claims based on Wired Fox's purported ownership of the copyright to the Blue Fox Code were precluded by the United States Copyright Act, 17 U.S.C. § 301(a), because Wired Fox had not complied with the necessary prerequisite of registering the copyright. (See ECF No. 70 at 12-13); see also 17 U.S.C. § 411(a) (“no civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title”); Miller v. CP Chemicals, Inc., 808 F.Supp. 1238, 1242 (D.S.C. 1992) (dismissing copyright infringement claim because lack of registration is fatal to such a claim and mandates dismissal).

         Wired Fox filed its amended complaint (ECF No. 71) on September 30, 2015, proceeding with the causes of action that the Court ruled were not preempted by the Copyright Act: (1) conspiracy; (2) intentional interference with business relationships; (3) tortious interference with contractual relationships (against Shane Cunningham only, see Id. ¶¶ 61-66); (4) breach of fiduciary duty; (5) breach of contract; and (6) unjust enrichment. The amended complaint no longer refers to Estep's relationship with Wired Fox as “employment, ” or as pursuant to an “employment contract.” Rather, Wired Fox alleges that Estep was an “independent contractor, ” in accordance with the title and terms of the proposed Independent Contractor Agreement. (See Ex. A, Am. Compl., ECF No. 71-1 at 2.)

         Estep filed an answer to the amended complaint on October 19, 2015, and included his amended counterclaims against Wired Fox and additional Counterclaim Defendants Yelton, Mosley, Weatherill, and AEI. (ECF No. 81.) Estep's counterclaims include causes of action for: (1) declaratory judgment-copyright; (2) breach of contract; (3) breach of contract accompanied by a fraudulent act; (4) breach of fiduciary duty; (5) promissory estoppel; (6) violation of the SCPWA; (7) judicial dissolution of corporation (against Wired Fox and Yelton only); (8) slander per se (against Wired Fox, Yelton, Mosley, and Weatherill only); (9) slander of title (against Yelton, Mosley, and Weatherill only); (10) product disparagement (against Wired Fox, Yelton, Mosley, and Weatherill only); and (11) breach of contract as intended third-party beneficiary (against AEI only).

         Counterclaim Defendant AEI filed counterclaims against Estep on November 9, 2015 (ECF No. 104), which were either withdrawn or subsequently dismissed by the Court for failure to state a claim upon which relief could be granted in its August 4, 2016 order (ECF No. 125 at 11-14).

         Defendants filed the instant motion(s) for summary judgment on August 8, 2016 (ECF No. 127) and additional attachments in support by way of separate docket entries (ECF Nos. 128 & 129). Plaintiff and all Counterclaim Defendants responded on September 26, 2016. (ECF No. 135.) Defendants replied on October 6, 2016. ...


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