Rekor Systems, Inc. v. Loughlin

Background

Rekor Systems, Inc. sued Suzanne Loughlin, Harry Rhulen, and James Satterfield, alleging that they fraudulently induced Rekor to purchase Firestorm through a Membership Interest Purchase Agreement. Rekor’s second amended complaint also added claims concerning allegedly destroyed company emails: breach of fiduciary duty, conversion, and trespass to chattels. Defendants and CrisisRisk Strategies LLC asserted counterclaims involving employment agreements, warrants, promissory notes, indemnification, and other matters.

The parties had made jury demands at different stages. Rekor’s first two complaints did not demand a jury, but its second amended complaint demanded a jury for all issues eligible for jury trial. Defendants and CrisisRisk also demanded a jury. After some claims and counterclaims were resolved through summary-judgment rulings, Defendants and CrisisRisk moved to withdraw their own jury demand, strike the jury demands of Rekor and Firestorm Solutions LLC and Firestorm Franchising LLC, and divide the trial into court-tried and jury-tried portions.

Jury Waiver for Claims Added Later

The court held that Rekor did not waive its jury right for the email-related claims in its second amended complaint. Those claims were not included in the earlier complaints and were not merely revised versions of the earlier fraud allegations. They raised new factual issues concerning the alleged destruction of company emails. The court therefore held that Rekor could have a jury decide its claims for breach of fiduciary duty, conversion, and trespass to chattels involving those emails.

Contractual Jury Waiver

The Purchase Agreement contained a clause stating that the parties waived jury trial for proceedings arising from the agreement or the transaction. The court found that Rekor knowingly and voluntarily accepted that waiver. The court also interpreted the agreement’s definitions and incorporation clause to extend the waiver to transactions contemplated by the attached employment agreements, promissory notes, and warrants.

The court held that the waiver applied to Rekor’s fraudulent-omission claim; Defendants’ counterclaims concerning Loughlin’s and Satterfield’s warrants and Rhulen’s warrants; the counterclaim for breach of Rhulen’s employment agreement; the counterclaim concerning the promissory notes; and indemnification counterclaims under the Purchase Agreement, identified as the sixteenth through eighteenth counterclaims. The court also held that the waiver did not cover Rekor’s email-related tort claims because those claims arose from alleged conduct occurring after the transaction and were based on legal duties supplied by tort law rather than the employment agreements.

The court further held that the seventh through fifteenth indemnification counterclaims were not covered by the jury waiver. Defendants could not unilaterally withdraw their jury demand as to those claims because a party may withdraw a jury demand only with the parties’ consent. The court also rejected Defendants’ argument that those indemnification claims could be decided only by the court after the merits were resolved, explaining that a jury could decide issues such as whether a person acted in good faith and in the company’s best interests.

Bifurcation and Disposition

The court ordered separate trials under Federal Rule of Civil Procedure 42(b). It directed that the court first try Rekor’s fraudulent-omission claim and the contract-related counterclaims covered by the jury waiver, including the second, third, fifth, and sixteenth through eighteenth counterclaims. A jury would then try Rekor’s email-related claims—the second, fourth, and fifth claims—and most of Defendants’ indemnification counterclaims, identified as the seventh through fifteenth counterclaims. The court found that the two groups involved distinct facts and issues and that separate trials would promote efficiency without unfairness.

The court therefore granted in part and denied in part the motion concerning withdrawal and striking of jury demands and bifurcation of the trial.