EDITOR’S NOTE — Aurora Information Security and Risk, the computer forensics firm that Township Attorney John Inglesino retained without Council approval, and which billed the Township nearly 1 million dollars for imaging the hard drive of a former Parsippany Police Captain was found liable in a federal court on October 8, 2015 for fraudulent inducement and found almost all of his testimony not to be credible.  The decision was rendered by United States District Judge, Valerie Caproni. The following text is Judge Caproni’s entire and fascinating decision regarding Parsippany’s alleged computer expert.

FINDINGS OF FACT & CONCLUSIONS  OF LAW

There are many reasons that this business breakup should not have ended in a trial in federal court.

Plaintiff Douglas Ferguson and Defendant Matthew Ferrante were friendly colleagues at Barclays Bank, with expertise in different realms of information security. Both men left Barclays to work at Aurora Information Security & Risk, LLC (“Aurora”), a new company registered by Ferrante’s wife, the sole member, and did so without each consulting an attorney to ensure his interests were protected. When the men’s relationship began to sour and the parties began to speak to each other through their by-then retained attorneys, poor communication expedited the deterioration of the relationship. Aurora and Ferguson negotiated a settlement, but when a technical error prevented Aurora from accessing some of the data that Ferguson had promised to return, the tentative peace collapsed and expensive and unnecessary litigation ensued. Although all parties would have been served by a simple telephone call to straighten out the misunderstanding, Ferguson and Ferrante each blamed the other and neither was willing to be the bigger person; accordingly, the lawyers took over, engaging in contentious discovery and substantial motion practice. Despite numerous judicial efforts to persuade the parties to resolve their dispute, several claims remained for trial: Ferguson’s claim against Ferrante for fraudulently inducing him to leave Barclays and join Aurora (where he was fraudulently induced to stay); Aurora’s claim against Ferguson for breach of the duty of loyalty (based on Ferguson’s alleged solicitation of Aurora’s clients between the time the relationship soured and the time that he formally left Aurora); and Aurora’s claim against Ferguson for failing to return data in a useable form. On August 27, 28, and 31, 2015, the Court held a three-day bench trial on these claims. For the following reasons, the Court holds that (1) Ferrante fraudulently induced Ferguson and is liable to Ferguson for $371,594.34; (2) Ferguson did not breach a duty of loyalty to Aurora or to Ferrante; and (3) Ferguson breached the Settlement Agreement, resulting in damages totaling $94.75.

FINDINGS OF FACT

The Parties

In 1996, Plaintiff Douglas Ferguson joined Internet Securities Systems (“ISS”), a startup information security company based in Atlanta, Georgia.  Ferguson worked at ISS until December 2007. While there, he developed relationships with a number of information security professionals, including Carrie Dooley, who later worked at McAfee International and Intel Corporation; Kirk Greene, who later worked for Accuvant, an information security company; and Elizabeth Martin, who thereafter worked for RedLegg, another information security company. Ferguson remained in contact with all three after their departures from ISS.

Ferguson’s information security expertise is in “red teaming” and penetration testing, methods by which he would explore the vulnerabilities of a client’s information technology systems and assets to analyze their protective capabilities. This is a “proactive” approach to information security and is intended to be used prior to a security incident (typically an intrusion).

In May or June 2007, Barclays Bank hired ISS to perform penetration testing of Barclays’ London headquarters, which Ferguson performed. Richard Horne, a Barclays information security executive, oversaw the project; he introduced Ferguson to some of Barclays’ other senior information security executives and, at the end of the project, caused Barclays to offer Ferguson a position. Ferguson began to work at Barclays (in London) in December 2007.

Matthew Ferrante is also an information security professional. For approximately seven and a half years, Ferrante worked for the United States Secret Service. Ferrante claimed that for part of that time he was the Secret Service’s “top electronic crimes expert,” and that his service included time on President Clinton’s Presidential Protective Detail.

After leaving the Secret Service, Ferrante worked for Kroll, a large information security company. Within six months, Barclays recruited Ferrante to build out the bank’s cyber forensics and e-discovery capabilities.

Ferrante’s primary expertise is in responding to breaches or “incidents.” At Barclays, Ferrante focused on cyber forensics, breach assessment, and global incident response. Although Ferrante had some experience with penetration testing, it was not his “forte.”

Inexplicably, Ferrante testified that he did not know when he worked for the Secret Service.

Establishing Aurora Information Security & Risk

In May 2009, Ferrante’s wife, Diana Quintero, founded Aurora as a limited liability company under the laws of New York. The company was registered under Quintero’s name so that it would not be traceable to Ferrante on an internet search.

In March 2010, Ferrante and Bob Lewis, another Barclays employee, discussed Aurora with Ferguson. Ferrante told Ferguson that combining Ferrante and Lewis’s expertise in forensics and post-incident work with Ferguson’s expertise in “the proactive side of security” would “be a great mix.”

Ferrante, Lewis, and Ferguson approached Barclays regarding Aurora, which they envisioned as an independent entity that could deliver services to Barclays cheaper than the same services were being provided in-house. They sought funding from Barclays for Aurora as a standalone company that would provide services to Barclays. Barclays declined the offer and did not provide funding for the new venture.

Not long thereafter, Lewis withdrew from the venture, which he viewed as too risky and not likely enough to have a sustainable presence in the United Kingdom.

The parties’ descriptions of the ensuing conversations between Ferguson and Ferrante vary sharply. Ferguson testified that Ferrante recruited him to join Aurora (ultimately as an equity owner). Ferrante testified that he did not attempt to recruit Ferguson to work for Aurora and that his position had been that if Ferguson wanted to join, it would be strictly as a “1099 contractor.”

The Court credits Ferguson’s testimony. Ferguson ‘s mannerisms, demeanor, and pace of speech were more consistent with a witness trying to relay accurately what transpired years ago. Moreover, Ferrante asserted a firm conviction about some events and timelines while denying a memory of, for example, the timeframe during which he worked for the Secret Service or his children’s birthdays. Insofar as Ferrante was not attempting to mislead the tribunal, his memory about the events that he does claim to remember appears to have been reinforced by discussions of the events in the context of this lawsuit, rendering his memories less a true product of the events, and more a convenient product of ex post deliberations.

On Saturday, May 8, 2010, Ferrante met Ferguson in a cafe in London to discuss the new business. The two talked for two or two and a half hours about the “overall business model” for Aurora, including the allocation of responsibilities between the two. They agreed that there was a “gap” in the information security world between entities offering the “back-end work” of cyber forensics, Ferrante’s specialty, and the penetration-testing, firewalls and red-teaming that was Ferguson’s expertise.

Although Ferrante testified to the contrary, Ferguson testified credibly that the two agreed, at the May 8, 2010 meeting, that they would be equity partners in Aurora. Ferguson testified that Ferrante made clear that he would “always … be the ultimate decision-maker” and therefore would need to own more than 50 percent of the equity. Nevertheless, Ferrante acknowledged that, like it was for him, joining the new company would be a big risk for Ferguson.

Ferguson’s testimony was corroborated in part by an email that Ferrante sent to Ferguson the same day. He described the two of them as “the founding partners. We’re . . . the two guys taking the risk here…. So we’re the high-level risk takers versus – well, since we don’t have money, we can’t just hire employees, but our workforce, which would be the 1099 contractors.”

Although Ferguson had not yet committed to join Ferrante, Ferrante created an email address for Ferguson at Aurora. Ferrante also created and sent Ferguson mock­ ups of a number of business cards for prospective Aurora employees, including Ferguson (who was described as “Co-Founder/Managing Director”) and Lewis (who was described as “Co­ Founder/Managing Director of Global Operations”).

In the first week of June 2010, Ferrante arranged for the parties to meet in a restaurant near their offices. The Court does not credit Ferrante’s denials that this meeting took place. Ferrante told Ferguson that it was time “to make something happen.” For the first time, the two discussed the equity split; Ferrante agreed that Ferguson would be entitled to forty percent of the revenue in the new business, but “left open that [Ferguson’s] 40 [percent] could increase,” albeit never to equal or exceed Ferrante’s share.  Ferrante further represented that he had “a legal team working on a partnership agreement.” Although Lewis had made a capital contribution, Ferrante asserted that he believed Lewis would not “be coming on board,” so that the duo did not need to account for an equity share for him. The Court views as not credible Ferrante’s testimony that the pair agreed that Ferguson would come to Aurora as a contractor.

In addition to the equity split, Ferguson and Ferrante agreed to each draw a salary once Aurora “had the money to pay them.” They agreed that Ferguson -who would remain and work in London – would be paid a base salary of £100,000, whereas Ferrante would be paid $150,000. Ferrante deliberately left Ferguson with the impression that Ferrante was in the process of drawing up paperwork to reflect Ferguson’s 40 percent position in Aurora.

Ferguson believed that Aurora would need to be formally incorporated in the U.K. in order to do business with British companies, including Barclays. According to Ferguson’s credible testimony, Ferrante indicated that he agreed and hoped “to have a UK registration in very short order.” Ferguson left the incorporation of a U.K. entity to Ferrante, who had indicated that he would handle legal matters for Aurora.

Based on Ferrante’s representations – including specifically the discussion of a 60-40 equity split – Ferguson agreed to resign from Barclays and work full-time for Aurora. Ferguson resigned the following week, and Ferrante a week or two thereafter. Ferguson remained on “garden leave,” drawing a salary from Barclays without having to perform any work, until mid-September 2010.

Although it was sharply disputed at trial, the Court credits Ferguson’s testimony that he would not have resigned from Barclays but for the Aurora opportunity, and specifically but for the representation that Ferrante was drawing up paperwork to reflect Ferguson’s “40 percent equity ownership” of Aurora.

Ferrante did not testify that he intended, at any time, to follow through on his agreement to provide Ferguson with equity in Aurora. The Court finds that Ferrante told Ferguson whatever Ferrante thought he wanted to hear in order to persuade him to join Aurora and that Ferrante never intended to follow through on what he claimed he was already doing with regard to bringing Ferguson in as an equity partner.

Ferguson used one company’s interest in him to try to prod a quicker formalization of his role at Aurora from Ferrante. Ferguson never received a formal offer from that company. The Court credits Ferrante’s testimony that Ferguson told him that Ferguson was entertaining other offers, but the Court rejects Ferrante’s testimony that Ferguson was in fact entertaining offers from that company and “two or three” other firms.

The Court does not credit Ferrante’s testimony that Ferguson told him that Ferguson intended to leave Barclays regardless of what happen with Aurora. Although it is plausible that Ferguson expressed a willingness to consider outside opportunities before Ferguson discussed the possibility of his joining Aurora, the Court does not credit that Ferguson, without any offers in hand, told Ferrante that he intended to leave Barclays irrespective of any opportunities at Aurora.

In July 2010, Ferguson signed a Confidentiality, Non-Disclosure and Non-Solicitation Agreement (NDA) – which purported to be a contract between Ferguson and Aurora – Ferguson agreed not to disclose any of Aurora’s confidential information; not to utilize Aurora’s confidential information independently for his own commercial gain; and not to solicit any Aurora clients or attempt to cause Aurora employees to terminate their employment at Aurora within two years of his termination from Aurora.

Delay in Forming a Business Plan

Immediately after he left Barclay’s, Ferguson began doing some work for Aurora. His early efforts were largely spent formalizing a business plan for the fledgling company.

In many respects, Ferguson and Ferrante were unlikely partners. Ferrante disdained interacting with lawyers and formalizing business plans. Ferguson was far more concerned with the need for vital but perhaps tedious documents formalizing the business arrangement between the two men.

Ferguson peppered Ferrante with proposed business models and business plans, both in the early stages of their time at Aurora and throughout his tenure at the company. His detailed cost estimates and questions regarding the structure of the business were not always met with detailed responses from Ferrante, but Ferrante wrote that Ferguson had his “support, dedication and loyalty for the business.” Those words had a profound effect on Ferguson, about which he testified in an almost emotional and extremely credible manner.

On July 12, 2010, Ferrante wrote to Ferguson that: “It is almost ready to launch. We just need the wording to put into the final ink.” Ferguson reasonably understood that this email referred to the partnership agreement between the two.

Aurora in Business

Once Aurora was operational, much of Ferguson’s time was spent trying to drum up business.

In October or November 2010, Ferguson worked with Ed Kerbs (a Barclays employee who helped to “facilitate the paperwork and pricing negotiations … for the head of penetration testing,”) and other contacts at Barclays to begin the process of qualifying Aurora to serve as a vendor to Barclays. Ferguson handled Aurora’s relationship with Barclays, which was predominantly interested in Aurora for its penetration testing and red teaming capabilities.

Ferguson also worked to update Aurora’s business models, cost forecasts, reporting templates for Aurora’s contracts, operational models, and other documents that he believed contributed to Aurora’s business infrastructure.  Initially, the demand for Ferguson’s services was not strong. Ferguson traveled with Ferrante to conferences and pitch meetings in New York City, Las Vegas, San Francisco, and elsewhere. Although Ferguson worked on pitches for several potential Aurora clients, many of the pitches were to potential clients that Ferrante had identified.

Ultimately, Ferguson brought three clients to Aurora -McAfee, Accuvant, and RedLegg -through his former ISS colleagues Dooley, Greene, and Martin.

Dooley, who handled security-related assessments and emergency incident response for McAfee, caused McAfee to engage Aurora because McAfee needed an expert on pre-attack assessments and penetration testing and Ferguson was an expert in those areas.

When Dooley needed a consultant to assist with a post-incident investigation, Ferguson referred him to Ferrante. Ultimately, McAfee did not engage Aurora for any forensics or post-incident work because Ferrante’s rates were too high.

Like Dooley, Greene approached Ferguson and engaged Aurora for Accuvant’s penetration testing needs.

Ferguson introduced Ferrante to Martin via Skype. When RedLegg needed forensic expertise, Martin engaged Aurora. That engagement d id not go well; based on Martin’s experience with Aurora, she testified that she would never hire it again. Moreover, when Martin communicated her dissatisfaction to Ferrante, she testified that he was unprofessional and nonresponsive.

Throughout Ferguson’s tenure at Aurora – including through the summer of 2011 Ferguson sent Ferrante requests to formalize their partnership. Ferguson believed that whatever the split of the parties’ equity ultimately would be, he would receive at least the 40 percent to which Ferrante had agreed in May 2010.

Things Fall Apart

Ferrante never intended to formalize an equity arrangement with Ferguson.

Ferrante treated Ferguson’s requests to formalize their arrangement as a nuisance, but when Ferrante did respond, he continued to represent to Ferguson that formal documentation was being drafted and would be forthcoming. During this time, Ferguson, who was spending his and his wife’s own money trying to develop business for Aurora, became increasingly desperate to formalize the agreement.

In August 2011, Ferrante contacted Ferguson to report that he wanted to sign a lease for office space in New Jersey. Ferrante believed that client demand from some of Ferrante’s clients justified the expense of the lease. Ferguson, on the other hand, was skeptical and asked for more information about the expenditures. There was no explanation why Ferrante would be contacting an independent contractor to seek a capital contribution necessary to rent the space.

Ferrante responded to Ferguson ‘s skepticism about the need for space by asking Ferguson to prove that he was committed to the business, including the forensic investigations side into which Ferrante had much greater insight.

Ferrante’s response – which revealed his belief that Ferguson should be “committed” to the business and make additional capital contributions – was entirely consistent with Ferguson’s understand ing that he was an owner of the company and entirely inconsistent with Ferrante’s professed understanding that Ferguson was an independent contractor.

Once Ferguson began to generate business through his three former ISS colleagues, Ferguson became more attractive to Ferrante as a prospective partner.

On September 5, 2011, Ferguson emailed Ferrante, expressing frustration that they had not yet formalized his role at Aurora and proposing an arrangement whereby Ferguson would own and run “Aurora Star,” which he envisioned as a penetration testing company that would be a complement to “Aurora CFI,” Ferrante’s existing company. The Court credits Ferguson’s testimony that, in his understanding of his proposal, both companies would be subordinate to Aurora Information Security & Risk, the parent company, which would be owned 60-40 by Ferrante and Ferguson.

As part of their discussions regarding Ferguson’s role at Aurora, in September 2011 Ferrante advised Ferguson to obtain outside counsel, rather than relying on Goetz Fitzpatrick LLP, the law firm that represented Aurora. Ferguson retained Oury Clark Solicitors to advise him.

On September 27, 2011, Ferguson, Ferrante, and their respective attorneys participated in a telephone conference. Howard Rubin, Aurora’s attorney, opened the call by offering Ferguson “zero percent equity shares of Aurora.” Rubin proposed that Ferguson “create his own company in the United Kingdom” and that he “could pay for a license to use the Aurora branding on that business.”

The Court recognizes that Ferrante’s account of the September 27, 2011 call differs radically from the Court’s finding. In this case – and in all others in which the Court’s findings are inconsistent with Ferrante’s testimony – the Court finds Ferrante’s testimony not to be credible.

Ferguson and his representatives were “stunned” by the offer, which was inconsistent with Ferguson’s understanding of what he already possessed. They asked for a few weeks to plan Ferguson’s next steps.

On October 4, 2011, one week after the teleconference, Ferguson registered a new company, Pharos Security, in the U.K. Within two weeks after registering Pharos, Ferguson informed Ferrante that he had done so.

Ferguson continued to work for Aurora after the call, but the parties began to negotiate his departure from Aurora. During these negotiations, Ferguson’s counsel suggested that Aurora and Ferguson could choose to interpret Ferguson’s relationship with Aurora in different ways, some not accounting for Ferguson as an equity owner of Aurora. Oury Clark’s ex post willingness – in the context of negotiations to unwind the relationship -to allow their client to be called a contractor or employee is not inconsistent with Ferguson’s genuine and reasonable belief, during his time at Aurora, that Ferrante was in the process of formalizing his 40 percent ownership of the company.

Ferguson informed his former colleagues (Kerbs and Michael Broomfield from Barclays, Dooley from McAfee, Greene from Accuvant, and Martin from RedLegg) that he was leaving Aurora and beginning his own company, Pharos. Accuvant and McAfee stopped engaging Aurora once Ferguson left, but there is no evidence that he solicited them to do so.

When Ferguson informed Kerbs that he was leaving Aurora and beginning Pharos, Kerbs changed the paperwork that would permit Aurora to be a Barclays vendor, substituting Pharos for all references to Aurora. Neither Pharos nor Aurora ever concluded an agreement with Barclays. There is no evidence that Ferguson actively solicited Barclays to terminate its nascent relationship with Aurora while Ferguson was still at Aurora.

RedLegg never engaged Pharos, and there is no evidence that Ferguson actively solicited RedLegg before he and Aurora had parted company.

When Dooley learned that Ferguson was leaving Aurora, McAfee stopped using Aurora’s services because Dooley’s relationship was with Ferguson, and because Aurora’s forensic investigation rates were too high. Ferguson never solicited McAfee to terminate its relationship with Aurora and switch to Pharos.

There is no credible evidence that Ferguson actively solicited business from Accuvant on behalf of Pharos. The Court concludes, based on the evidence that the clients that Ferguson brought to Aurora were using Aurora for penetration testing and that Pharos offered stronger penetration testing than Aurora did after Ferguson’s departure, that Accuvant began using Pharos to remain with Ferguson because of Ferguson’s penetration testing expertise, and because Greene, like Dooley, had a pre-existing relationship with Ferguson.

At Aurora, Ferguson worked with Pablo Sisca, a London-based information security expert who was one of the independent contractors Aurora employed.  Sisca was never an Aurora employee.

Although Ferguson emailed Sisca to tell him that he would like to work together again later, there is no credible evidence that Ferguson encouraged Sisca to leave Aurora or to join Pharos. Ferguson’s preference for working with Sisca rather than working “alone,” is consistent with his preference for working with Sisca as part of Aurora’s penetration-testing team. (“If I could increase the opportunity of working with this guy, that’s in mine and Aurora’s best interests. . . . It’s my responsibility to build out a team for the Red Team, the pen test security assessment side of the business.”).

There is no credible evidence that Ferguson actively solicited business from any of Aurora’s clients. Moreover, it is unlikely that any company that engaged Aurora for Ferguson’s penetration testing expertise would use Aurora for that purpose after Ferguson left, as Ferguson was Aurora’s penetration testing expert. The only Aurora client brought in by Ferguson that engaged Aurora for forensic work, RedLegg, was unhappy with Aurora’s performance and would not hire Aurora again for that reason.

Settlement Agreement

On January 2, 2012, Aurora and Ferguson executed a Settlement Agreement that provided the terms of Ferguson’s departure from Aurora.

The Settlement Agreement provided that “Aurora and Doug [Ferguson] are sometimes referred to herein as the ‘parties.”

The Settlement Agreement characterized Ferguson’s role as “an independent contractor” at all times. It also incorporated the NOA by reference, and characterized certain money that Ferguson had provided to Aurora as a “loan,” which he agreed to forgive in exchange for Aurora’s waiving the NDA’s non-compete agreement with respect to Barclays.

The Settlement Agreement required that within three days Ferguson would “return to Aurora all physical and electronic data belonging to Aurora, … including, without limitation, all copyrighted material of Aurora; provided, however, that [he] shall deliver all emails sent by or received through his Aurora email account … to his counsel, Oury Clark Solicitors.” Ferguson’s emails were to be held in escrow by Oury Clark. “Upon payment in full of all sums due under [the Settlement] Agreement from Aurora to [Ferguson],” Aurora was required to notify Oury Clark, which was required to “release and deliver” Ferguson’s emails to Aurora.

The Settlement Agreement also provided that “promptly upon signing,” Aurora was required to pay Ferguson $4,165.14, “which represented all expenses incurred by [Ferguson] personally on behalf of Aurora,”  $2,290.89 and £8,859.37, “which represented all profits owing to [Ferguson] where payment has already been received by Aurora from” business that Ferguson generated, $7,100 and £18,675, “which represented all contractor payments owing to [Ferguson]” from business that Ferguson generated, and £12,789.95, “representing all sums owing to [Ferguson’s wife], acknowledging that such sums were paid on behalf of Aurora.” Aurora was also charged with collecting outstanding accounts receivable from the business that Ferguson had generated and remitting to Ferguson his share of the profits.

Aurora further “acknowledge[d] the expenses incurred by [Ferguson] in relation to” a Ferrante-generated Aurora client, and agreed to reimburse Ferguson and pay him the fees that he earned “promptly upon Aurora’s signing.”

Critically, the Settlement Agreement provided for the parties’ mutual release.

Specifically it provided:

Upon [Oury Clark]’s written confirmation of receipt of payment referenced in paragraph 7 herein, the parties agree to release each other from all actions, causes of action, suits, debts, dues, sums of money, accounts, bills, covenants, contracts, controversies, agreements, promises, damages, judgments, claims, counterclaims and demands whatsoever (collectively, “Claims”), except for claims arising out of the breach of this Agreement or those arising as a direct result of gross negligence, fraudulent conduct or willful misconduct of a party hereto (including its principals, employees and agents). . . . Should any allegation of gross negligence, fraudulent conduct or willful misconduct be made against a party to this Agreement and such allegation is not proven before a court of competent jurisdiction, or is deemed to be false, vexatious or frivolous, the defending party shall be indemnified by the alleging party in full for all liabilities, costs, expenses, damages and losses (including but not limited to reasonable attorneys fees and costs, any direct, indirect or consequential losses, loss of profit, loss of reputation and all interest, penalties and reasonable legal and other professional costs and expenses) suffered or incurred by that defending party arising out of or in connection with the allegation.

Ferrante signed the Settlement Agreement twice – once for Aurora, and once in his individual capacity “with respect to Paragraph 17 only.” Paragraph 17 provided that: None of the officers, directors, shareholders, principals, general partners, limited partners, members, managers or employees of Aurora shall be personally responsible for any of the obligations set forth herein. In the event that Aurora files for bankruptcy, insolvency, reorganization, or fraudulently conveys a majority of its assets, or undergoes a similar event to the aforementioned prior to the full payment of all monies owing to [Ferguson], or if any payment made hereunder is reclaimed by creditors or other claimants . . . Matthew Ferrante of Aurora shall assume personal liability and shall be joint[ly] and severally liable with Aurora.

Post-Settlement Disputes

Aurora paid Ferguson all of the money due under the Settlement Agreement save just over $20,000 that was to be paid after the receipt of the escrowed emails.

The Settlement Agreement did not put an end to the parties’ discord, however Ferguson sent Ferrante a disc that he claims contained the non-email data that he was obliged to return pursuant to Section Six of the Settlement Agreement. The password that Ferguson sent Ferrante did not, however, unlock the disc, apparently because a quirk of trans-Atlantic text messaging that routinely transforms a caret (‘^’) into a double underscore (_). As a result, Ferrante could not open the disc that Ferguson provided.

Ferrante was concerned that Ferguson had access to sensitive client data, including the security framework for one of Aurora’s client’s systems. Ferrante also believed that Ferguson had deleted a number of emails containing Aurora information. Although Ferrante testified that Aurora had an “urgent” need to open the disc that Ferguson sent, when he was unable to open the files with the password that Ferguson provided, Ferrante did not call Ferguson to ascertain the correct password, in large part because they “were not on speaking terms.”

Instead, Aurora’s counsel emailed Ferguson’s counsel, and Ferguson’s counsel responded with an email suggesting that Ferrante’s inability to open a WinZip file was the basis for his inability to access to the data on the disc. Ferrante, a cybersecurity professional who was very familiar with WinZip, was offended by Ferguson’s counsel’s response. Ferguson’s counsel proposed a conference call, and Ferrante counter­ offered a “third-party escrow” idea for the password. Conversations broke down and Ferrante was unable to open the disc until the discovery process in this litigation.

In 2013, Ferguson retained new counsel; through counsel, Ferguson proposed that if Aurora would pay the $22,000 still owing, it would obtain all the data contemplated by the Settlement Agreement, and the parties could sign another mutual release. Ferrante rejected that proposal, in part because he understood that he would be sacrificing some of the NDA’s protections by accepting it.

Additional Findings

Douglas Ferguson testified credibly except where explicitly noted. His demeanor, mannerisms, cadence, and tone were consistent with a witness endeavoring to tell the truth.

Matthew Ferrante testified credibly where his testimony is cited but was largely not credible. The rigidity of his adherence to an implausible narrative (particularly regarding whether he made it clear that Ferguson would be a “1099 contractor,” not a partner) without the appearance of natural reflection, particularly when confronted with documentary evidence that on its face contradicted his story, bespoke a witness who had predetermined what testimony he thought would be favorable and was resolved to provide it, without regard to whether it was true.

Ferguson received a salary from Barclays through September 8, 2010. Had Ferguson remained employed through the beginning of 2012, he would have received additional payments of £11,250 and £ 10,000 under Barclays’ long term cash plan and their incentive shares bonuses for the 2008 and 2009 years. Ferguson’s salary for the remainder of 2010 would have been £30,302.52.

If Ferguson had been given the same salary, allowances, and bonuses that he received in 2010 – as the Court finds that he would have – then his total compensation for each of the 2011 and 2012 years would have been £125,050.

In 2012, Pharos’ s net profit was £20,128.

Pursuant to the Settlement Agreement, Ferguson received £27,534.37 and $9,390.89 in compensation from Aurora.

At all relevant times the conversion rate was approximately £0.667 per $1.00.

CONCLUSIONS OF LAW

After trial, both parties moved for involuntary dismissal of their adversary’s claims pursuant to Federal Rule of Civil Procedure 41(b), which permits dismissal for failure to prosecute or non-compliance with a court order. Both motions are denied; each party prosecuted its claims and complied with the Court’s orders. The Court’s duties after a non­ jury trial are set forth in Federal Rule of Civil Procedure 52, which provides that “[i]n an action tried on the facts without a jury … the court must find the facts specially and state its conclusions of law separately,” and which applies the same standard to any motion for judgment as to some of the claims findings must be supported by findings of fact and conclusions of law as required by Rule 52(a).”).

Ferguson ‘s Claim for Fraudulent Inducement

The Court has already found that the Settlement Agreement’s release provision does not apply to Ferguson’s claim for fraudulent inducement, which is asserted against Ferrante but not against Aurora. Instead of finding the provision ambiguous, the Court found that the release unambiguously did not apply to claims against Ferrante.

To prevail on a claim of fraudulent inducement, a party must establish “‘(i) a material misrepresentation of a presently existing or past fact; (ii) an intent to deceive; (iii) reasonable reliance on the misrepresentation by [the complaining party]; and (iv) resulting damages.”

Each element must be proven by clear and convincing evidence, which ‘”demands a high order of proof and forbids the awarding of relief whenever the evidence is loose,
equivocal or contradictory’ because ‘fraud will not be assumed on doubtful evidence or circumstances of mere suspicion.”

Defendants rely heavily on Ferguson’s deposition testimony that, when he executed the Settlement Agreement, he did not believe that he had any claims against Ferrante. The fact that Ferguson, a non-lawyer, may not have believed that he had any viable legal claims against Ferrante personally, rather than against the company, does not speak to whether he actually had any such claims. And Ferrante specifically signed only as to the paragraph constituting an indemnification for officers; he apparently worked hard to ensure that he would not be a party to the Settlement Agreement who could be sued for its breach. Just as he could not be held to account for failing to fulfill the promises set forth in the agreement, however, so too can he not benefit from the general release provision that it contained.

Beginning in May 2010 and continuing through August 2011, Ferrante materially misrepresented the Aurora equity that he was providing Ferguson. He did so: by indicating that Ferguson would receive at least 40 percent of the business; by providing Ferguson with business cards and other documents suggesting that Ferguson was a partner and founder of the company; by soliciting capital contributions to the company from Ferguson; and by suggesting that he was in the process of formalizing a partnership agreement consistent with Ferguson’s understanding of the parties’ arrangement. He specifically misrepresented his presently ongoing efforts to draft a partnership agreement consistent with the parties’ understanding.

In making his representations to Ferguson, Ferrante intended to misrepresent Ferguson’s share of the company in order to persuade Ferguson to continue to work on behalf of Aurora so that Ferrante could gauge how productive of a business partner Ferguson would really be. This is apparent from the fact that Ferrante wanted to “bring Ferguson on to do pen testing … as a consultant,” but he told Ferguson that Ferguson would be given 40 percent equity. Ferrante therefore had an intent to deceive – he wanted Ferguson to operate under the mistaken belief that he would be receiving 40 percent equity – but Ferrante did not -and did not intend to – give him the equity that he promised. Instead of suggesting that he might provide some equity, the Court has found that Ferrante explicitly told Ferguson that Ferguson would receive a 40 percent equity share of Aurora. Moreover, Ferrante was incredible when testifying regarding his representations to Ferguson; the Court interpreted his demeanor and mannerisms as suggestive of a guilty conscience for having induced Ferguson to join Aurora and to remain with Aurora for a substantial period of time through false representations. Together this constitutes more than clear and convincing evidence that Ferrante deliberately misrepresented Ferguson ‘s role at the company to Ferguson in order to cause Ferguson to join him at Aurora and to stay with him for a substantial period of time. Ferrante had a “present intent to deceive” at the time that he told Ferguson that Ferguson was an equity partner in Aurora, while intentionally treating Ferguson as an independent contractor (except when he needed capital infusions).

Ferguson clearly relied on Ferrante’s representations regarding his role at Aurora. (“When we agreed on that 60/40 [split of Aurora equity], that was what I needed to hear.”). Ferguson’s reliance was objectively reasonable. Ferrante had promised a specific equity split in the new company, had referred to Ferguson as a “high level risk taker” distinct from the 1099 contractors they would need to use, and had requested capital contributions to the company. The fact that Ferrante did not memorialize his promise in writing is not, in itself, enough to render Ferguson’s reliance unreasonable. Ferguson credibly testified that he believed that the legal paperwork was still being finalized but that the parties had agreed that he would receive a 40 percent interest. Any specific knowledge to the contrary was “peculiarly within defendant[s’] knowledge,” and therefore Ferguson was not required to conduct further investigation to ascertain the actual ownership structure of Aurora.

As a result of his justifiable reliance on Ferrante’s promise, Ferguson resigned from Barclays and delayed the creation of his own company. He therefore suffered damages as a result of his reliance on Ferrante’s fraudulent inducement.

Defendants argue that Ferguson may only to recover for “losses actual sustained instead of expected profits.” Nevertheless, “[i]f the proof is there, a defrauded plaintiff may base a claim for actual pecuniary loss upon an economic opportunity that defendant fraudulently induced him to forego.”

Ferguson chose to relinquish the certainty of his salary at Barclays in order to pursue his opportunity at Aurora. The Court finds that Ferguson’s compensation at Barclays during the ensuing years would, beyond all doubt, have at least matched his compensation for his work during 2009 (which did not include the large bonus that he received for unusually strong performance in 2008). “As courts have held, loss of professional opportunity and reputation, and loss of benefits flowing from one’s previous employment all are cognizable losses in employment-related fraudulent inducement cases.”

Ferguson’s testimony was credible, and Ferrante’s testimony regarding the promises that he made to Ferguson was wholly incredible. Moreover, the documentary evidence corroborates Ferguson’s testimony that Ferrante promised him equity, and Ferrante’s failure to act (coupled with his testimony) suggests that he had no intention of providing Ferguson with the equity that Ferrante had promised him. Accordingly, the Court finds that Ferguson has established all of the elements of his fraudulent inducement claim by clear and convincing evidence.

The total compensation from Barclays that Ferguson would have earned – including salary and bonuses from September 9, 2010, through the end of 2012, and the bonuses from 2009 that would have been payable in 2011 and 2012 – was £301,652.52. Aurora was jointly and severally liable with Ferrante for fraudulently inducing Ferguson to join Aurora, however. Ferguson’s damages incurred as a result of the fraudulent inducement must, therefore, be reduced by the amount that he has already obtained from Ferrante’s joint tortfeasor for the same injury. Ferguson’s damages must therefore be reduced by the £27,534.37 and $9,390.89 that he received from Aurora. Moreover, Ferguson would not have earned profits from Pharos in 2012 had he been working at Barclays through that period; as a result, the £20,128 that he received from Pharos in 2012 must be subtracted from what is otherwise due to him from Ferrante.

Accordingly, Ferguson is entitled to $371,594.34 in damages based on Ferrante’s fraudulently inducing him to join Aurora.

Defendants argue that Ferguson’s claim for fraudulent inducement is duplicative of his dismissed breach of contract claim. See Defs. Supp. Conclusions of Law. Ferguson’s only breach of contract claim in this action was asserted against Aurora for failure to pay $22,000 under the Settlement Agreement. Ferguson’s claim that Ferrante fraudulently induced him to join Aurora is not duplicative of that breach of contract claim.

Aurora’s Claim for Breach of Contract

To allege a breach of contract under New York law, a plaintiff must allege “the existence of a contract, the plaintiff s performance pursuant to the contract, the defendant’s breach of its contractual obligations, and damages resulting from the breach.”

Aurora has proven, and Ferguson does not contest, that the Settlement Agreement is a binding contract.

Aurora has proven, and Ferguson does not now contest, that Aurora performed pursuant to the Settlement Agreement.

Aurora has proven, and Ferguson does not now contest, that Ferguson breached the Settlement Agreement by failing to provide the password to the disc containing Aurora data in usable form. Ferguson also breached by failing to provide a second disc, containing his emails, to Aurora in a timely fashion.

The £301,652.52 that Barclays would have paid Ferguson, less the £27,534.37 that Aurora paid him and the £20,128 that he earned from Pharos, yields £253,990.15. That sum, converted at the only conversion rate discussed at trial, yields a total of $380,985.23. Subtracting the total that Aurora paid Ferguson in dollars – $9,390,89 – yields $371,594.34 that is due to Ferguson from Ferrante.

Although “damages resulting from the breach” is an element of a breach of contract claim at New York law, this element may be satisfied by establishing that nominal damages resulted from the breach.

Aurora has established all of the elements of its breach of contract claim against Ferguson and is therefore entitled to judgment as to that claim.

The appropriate measure for a breach of contract, absent certain exceptions, is “expectation damages.” These damages are “measured by the Joss in the value to [the performing party] of the other party’s performance caused by its failure or deficiency, plus any other loss … caused by the breach, less any cost or other loss that [the performing party] has avoided by not having to perform.”

“Under certain circumstances, however, a plaintiff may be entitled to elect between damages representing the benefit of the bargain made – expectation damages -and damages representing an undoing of the bargain altogether – restitution damages.” As Judge Lynch wrote in Waxman, “[t]here is a sound basis” for the preference of expectation damages – specifically, those damages represent ‘”what the parties expected their contract to yield,”‘ and thus are “not only the most accurate means of measuring loss following a breach of contract but also the most typical measure of recovery granted.”

There is no reason, in this case, to award restitution damages and thus permit Aurora to undo the carefully – negotiated Settlement Agreement. Defendants are dissatisfied with parts of the agreement – for example, its lack of a release as to claims against Ferrante -that were part of a bargained-for exchange that was not undone because a technical snafu prevented Ferrante’s telephone from receiving the password that Ferguson transmitted to him. Accordingly, Aurora is entitled to recover only the damages that would put it in the position that it would have been in but for the breach.

“[T]he injured party has a duty to mitigate” damages for a breach of contract. Defendants argue that the measure of whether efforts to mitigate damages were reasonable does not rely on “what the breaching party suggests in the midst of the crisis or what hindsight suggests to a fact-finder would have been the most efficient thing to do.”

The most reasonable response to the initial breach – Ferguson ‘s transmittal of a slightly incorrect version of the password to Ferrante – would have been to verify with Ferguson that the password received was the password to the files. Although Ferrante was understandably perturbed that Ferguson and his counsel insinuated that Ferrante’s difficulty was in not knowing the difference between a WinZip file and a 7-Zip file, he allowed his annoyance to cloud his judgment. Moreover, because Ferrante was “not on speaking terms” with Ferguson, he refused to call him. Had Ferrante called Ferguson or taken any other steps to verify the password that Ferguson sent, his damages from the initial breach would have been negligible.

Ignoring the fact that Ferguson had, in good faith, attempted to provide the correct password to Aurora – a fact that is known with 100 percent certainty only in hindsight – the most reasonable course at the time would have been for Aurora to communicate directly withFerguson regarding the problem. Reducing discussions about a technical issue to written communications between lawyers may often (and did in this case) create a roadblock to an otherwise easily travelled course. Pettiness – specifically, falling back on the defense that the two ex-partners were not on speaking terms – is not reasonable. Aurora argues that it was not required to follow its adversary’s advice in the face of an apparent breach. While as an abstract matter that is true, that truism does not mean that Aurora was not required to engage in reasonable efforts to mitigate its damages. Aurora would likely have spent some time – the Court generously estimates one half an hour – futilely attempting to open the disc prior to contacting Ferguson; Ferguson must reimburse Aurora for this time, which the Court values at $93.75.

Aurora’s discussion of “unclean hands” is irrelevant, and an analysis of Ferguson’s post-breach conduct does not help Aurora. After he inadvertently breached the contract, Ferguson offered to work with Ferrante to discuss the problems opening the disc and clarified certain potentially difficult components of the password (the fact that it included a space, for example). Ferguson’s efforts to mitigate were reasonable, and Aurora’s refusal to engage with Ferguson was not; Aurora’s damages for Ferguson’s breach by failing to deliver the first disc were, therefore, $93.75.

Even if Aurora had adequately discharged any duty to mitigate, it has not proven more than minimal harm. Aurora’s sole need for the data on the initial disc was to return the data to its owners; instead, Ferrante had to inform lawyers at two client firms that “there was certain data that had been provided to [Aurora] that [Aurora was] not in a position to return.” Defendants did not attempt to quantify the value that the expedient return of the data had to them. Accordingly, in light of the facts that Defendants should have mitigated their damages but did not, the Court finds that Aurora is entitled to damages of $93.75 – reflecting the approximate cost of a reasonable effort to mitigate, which were the only actual damages incurred by Aurora as a result of the breach.

This is consistent with the “well-settled principle of contract law … that a party injured by a breach is entitled to recover damages that are the ‘natural and probable consequences of the breach.”

The “natural and probable consequences” of Ferguson’s transmittal of a password with a missing character was some administrative costs associated with ascertaining the correct password. Any costs beyond those were not reasonable or foreseeable.

Aurora presented evidence of the costs it incurred to protect its network against Ferguson’s possible hacking, but those costs were not the reasonable consequences of Ferguson’s having conveyed the incorrect password to the disc. The thousands of hours of labor allegedly expended and the upgraded infrastructure that Aurora allegedly obtained were a result of Ferrante’s fear that Ferguson would retaliate for his ill-treatment and hack Aurora. Even if the Court were to accept that Aurora’s evidence adequately proved that Aurora spent $736,000 to protect against such a hack, 11 those expenses were not related to Ferguson’s breach of contract and would not be recoverable even if Aurora had mitigated its damages (which it did not).

With respect to the failure to deliver the second disc, containing Ferguson’s emails from his time at Aurora, Aurora has again failed to prove any actual damages resulting from the breach, for substantially the same reasons that the $736,000 is not recoverable as a result of the failure to return the first disc. Even if some recovery were appropriate – and, in light of the failure to prove any damages, none is – it would be limited to $22,000, because Aurora could always have obtained the release the second disc from escrow by paying that amount.

Aurora is entitled to judgment of $93.75 in damages based on Ferguson’s breach for failure to provide the proper password to the disc that he provided to Aurora and nominal damages of $1.00 for failure to provide the second disc containing his Aurora emails. Defendants’

Claim for Breach of the Duty of Loyalty

The elements of a claim for breach of a fiduciary obligation are: (i) the existence of a fiduciary duty; (ii) a knowing breach of that duty; and (iii) damages resulting therefrom.” The duty of loyalty is understood as such a “fiduciary duty.”

Independent contractors can, but do not always, have a fiduciary duty to the entity that pays them.

Consistent with the NOA, Ferguson assumed certain duties to Aurora. These included the duty not to disclose confidential information, and not to solicit Aurora’s clients, or its employees.

No evidence was introduced from which the Court could find that Ferguson knowingly disclosed Aurora’s confidential information.

No evidence was introduced from which the Court could find that Ferguson knowingly solicited Aurora’s clients prior to his signing the Settlement Agreement on January 2, 2012.

No credible evidence was introduced from which the Court could find that Ferguson knowingly solicited Sisca to terminate his relationship with Aurora, or that Sisca was ever an Aurora employee.There was no evidence introduced from which the Court could find that Ferguson otherwise solicited Aurora’s employees.

Because there is no credible evidence that Ferguson breached any of the duties that he had to Aurora, Ferguson is entitled to judgment on Aurora’s claim for breach of the duty of loyalty.

CONCLUSION

The Clerk of the Court is respectfully directed to terminate the case and enter judgment for Plaintiff on his fraudulent inducement claim and for Aurora on its breach of contract counterclaim. If either party seeks attorneys’ fees pursuant to Section 12 of the Settlement Agreement, the parties are directed to meet in person to determine (1) whether either party is entitled to such fees and, (2) regardless of the parties’ ability to agree as to (1), if so, the amount of fees that are appropriate in light of the Court’s findings. Any such agreement may be made without prejudice for either party to dispute – in this Court or on appeal – the findings underlying the calculations. If the parties are able to agree, they must file a stipulation to that effect no later than October 30, 2015. If the parties are unable to agree, then no later than November 13, 2015, any party seeking fees must file a letter-brief no longer than 5 pages in support of its application for fees, attaching any necessary invoices or billing records for the Court’s review. Responses shall be filed November 20, 2015. There shall be no replies.

SO ORDERED.

Date: October 8, 2015
New York, NY

VALERIE CAPRONI
UNITED STATES DISTRICT JUDGE

PARSIPPANY — The Township of Parsippany-Troy Hills will host a public information session with JCP&L that will address storm restoration. Discussion about the responsibilities of homeowners and JCP&L during an impending storm will be undertaken as will upcoming efforts taken by JCP&L after the storm.

This event will take place on Thursday, December 3 at 7:00 p.m. in the Council Chambers at Parsippany Municipal Building, 1001 Parsippany Boulevard.