Opinion ID: 169778
Heading Depth: 3
Heading Rank: 2

Heading: History of Business Dealings

Text: W hen Cartel was formed in 1993, the national sale of BPOs was a fledgling industry. Coats, along with two other national BPO providers, explained that the development of a database of brokers and agents sufficient to provide a national service was a time-consuming and expensive process. Prior to the advent of extensive internet listings, a national agent list was generated through review of telephone books and industry listings. Even with the available resources on the internet in 2001 to 2003, finding the name of an agent or broker was only part of the process. Further steps in the process required calls to the individual realty professionals to determine their willingness to perform the service at a certain price, eventual use of the individual realtor, and finally, a review and rating of the timing and quality of the realtor’s work. If the agent was timely and accurate, the agent was designated as “use.” If the agent’s work was not satisfactory, the designation was “prevent use.” (R. Vol. 9 at 2984-85.) As described by one national provider, once developed, the agent list “is the lifeblood of [the] business.” (R. Vol. 7 at 2308.) -7- Cartel began doing business with the Bank’s valuation department shortly after Cartel’s inception. As the purchaser of loan pools, the Bank eventually ordered thousands of BPO s from Cartel and other national providers, supplying the national vendors with its own forms for completion of the BPOs. The form included a space identifying the realtor completing the B PO, the realtor’s telephone number to be used in the event the Bank needed to clarify any information on the form, and the realtor’s professional license number. Several witnesses testified the understanding between Cartel and the Bank was that the names of Cartel’s brokers and agents were Cartel’s proprietary information. 4 Upon the return of the BPOs to the Bank, the Bank’s team of review ers w ould analyze the BPO s and other information to determine a value on the loan pool or portfolio. Commencing in 1995, the Bank’s Order Tracking system contained the names of its national BPO vendors and its retail BPO providers used primarily for Bank-owned REO properties. 5 By 1997, the Bank ordered approximately 94% of its residential BPOs from national providers. These orders w ould be identified in the Order Tracking system under the vendor’s name. At that point, Cartel 4 Throughout trial, however, the Bank witnesses contended the Bank unconditionally purchased not only the BPO valuation, but the broker information as w ell. 5 A “retail” BPO provider is an agent or broker contacted directly by the Bank to perform a BPO as an initial service and to be the listing agent in the event of a foreclosure sale. -8- received the lion’s share of the Bank’s B PO business, approximately 35% of all national BPO orders. 6 For example, in the fourth quarter of 1998, the Bank ordered 16,285 BPO s. Only 417 were ordered from retail providers, while 15,868 were ordered from national providers. Cartel received 7,042 of the Bank’s BPO orders in that quarter. (R. Vol. 10 at 3573, 3589.) In late 1998, Ocwen Technology was preparing to debut its REALTrans system. The product was the foundation for Ocwen’s overall corporate objective to increase profits through the use of e-commerce. Prior to REALTrans, the Bank communicated with its vendors by e-mail, telephone and fax. The plan was to integrate the Bank’s Order Tracking system and O cwen Technology’s REALTrans program, eventually allowing the Bank to create an order in Order Tracking, assign a vendor and, with the press of a button, engage the REALTrans capabilities. At the other end, the vendor would log on to REALTrans to receive an assignment identifying the product, price and deadlines. Accordingly, in late 1998 and early 1999, the Bank and Ocwen Technology gathered the national providers to explain the process and encourage their participation. Because REALTrans was a desktop system (it later became a web application), the Bank asked the national providers to have their agents sign up on the new product; they would train the agents and the agents could send their BPOs directly to the Bank. 6 Due to the volume, Cartel’s pricing was on the low end of the range through the year 2000. It charged the Bank $75 per BPO , while most national vendors’ charge per BPO was between $75 and $100. -9- Several of the national providers, including Cartel, expressed concern that once their agent information was in the system, the Bank and other lenders w ould have direct access to their realtor lists and put them out of business. At a December 1998 meeting, W illiam Erbey assured one of the national BPO providers that the Bank was not in the business of providing BPO s or competing with the national providers. A t a January 1999 meeting, Krueger and his assistant, Dave Babbitt, told Cartel and the other attending national BPO providers that the Bank would not take the agent databases because they were not getting into the BPO business. Cartel was the only national provider willing to join Ocwen’s system. Due to its concerns regarding its database, Cartel negotiated a confidentiality agreement with Ocwen Technology to be included in the contract for the use of REALTrans. During these negotiations, Coats and Babbitt worked out a system whereby Cartel’s agents would work through a Cartel portal to REALTrans rather than sign up directly on the Ocwen Technology system. Krueger also promised Coats that if he signed on to REALTrans, he would eventually receive 100% of the Bank’s national BPO provider business. The contract was executed in M arch 1999. As soon as the agreement was signed, Cartel began working with Ocwen Tecnology to integrate their systems. Because of problems in the REALTrans connections between Cartel and the Bank, Cartel spent approximately $260,000 on retooling the REALTrans program between 1999 and 2001. -10- In the meantime, the Bank’s business strategy was undergoing a drastic change. At least part of the impetus for the change was the overall corporate plan to capitalize on the efficiencies inherent in the use of the internet and the technology provided by Ocwen Technology. In addition, the loan acquisition business was producing diminishing returns. During the negotiations with Cartel to sign on to REALTrans, Krueger, then manager of the Bank’s property valuation department, joined with Babbitt to present a plan to John and W illiam Erbey. Krueger and Babbitt proposed the Bank develop an “in-house BPO shop,” eventually eliminating the national providers. (R. Vol. at 3043.) The Erbeys apparently liked the idea because during the first quarter of 1999, the Bank decided to transition out of the loan acquisition business and become a loan services provider. Eventually, in August 1999, the Bank replaced the valuation department with a new division, Ocwen Realty Advisors, and placed Krueger at its head. Prior to the creation of Ocwen Advisors, in June 1999, Krueger spoke with Ann Gilbert who had been working as one of the Bank’s commercial real estate analysts (a loan pool reviewer) since 1998. Krueger discussed the possibility of Gilbert moving to a different position because her current job would be eliminated in the coming business transition. Gilbert became the “manager of vendor management” for Ocwen Advisors. H er job involved vendor recruitment, approving vendors for Ocw en Advisors’ use, and vendor file maintenance. In -11- other words, Gilbert was charged with the development and growth of a national retail vendor network to perform BPOs directly for the Bank — essentially creating the same resource used by the national vendors — to bypass the costs of the middleman. She began by reviewing the vendor list in the Bank’s Order Tracking system. M ost of those were real estate brokers who performed detailed property analysis for the REO department. She contacted many of these agents but most indicated they were not interested in performing any services, such as an initial BPO , which did not result in receiving a subsequent real estate listing. Prior to her new position at Ocwen Advisors, Gilbert testified there had been “some efforts” in the company to take agent names off BPOs in the Bank’s possession and contact those agents directly, which practice continued through the time she was with Ocwen Advisors. She testified in the early fall of 1999, another national vendor, M arket Intelligence, was given a large order. After the orders were received, Ocw en Advisors “started targeting M arket Intelligence’s brokers.” (R. Vol. 7 at 2380-81.) In early November 1999, Gilbert hired a fulltime assistant, Kelie M atthew s, whose sole responsibility was to recruit vendors to perform BPO s. By early 2000, M atthews reported she had exhausted all her major avenues of recruitment, including the internet, without much success. 7 7 In January 2000, Gilbert began receiving her paychecks from Ocwen Technology. Ocwen Technology was also intended to start paying the vendors at that time, but the lack of synchronization between the Bank’s and Ocwen Technology’s billing systems prevented payment from reaching the vendors. -12- Gilbert worked with Coats as a national vendor and she understood Cartel eventually would be Ocwen Advisors’ lead national vendor. In February 2000, Gilbert approached Krueger to suggest the Bank purchase Cartel’s agent database. Krueger agreed she should pursue the idea but instructed her not to tell Coats that Ocwen Advisors was building its own retail agent database. Gilbert contacted Coats who expressed interest in the proposition. Although there were several subsequent meetings between Coats and Krueger, Krueger concluded the purchase would be too expensive. In M arch 2000, Kreuger called all the managers into his office to inform them he w as going to initiate a contest for the staff. He planned to instruct the staff to pull the BPO s provided by national vendors, including Cartel. The staff were to copy the names and telephone numbers of the agents, create spreadsheets and forward the spreadsheets to Gilbert or M atthews. Gilbert testified she lodged an objection to Krueger because she knew most of the targeted BPOs belonged to Cartel. She told Krueger she disapproved of copying the agents’ names w hile Ocwen Advisors w ere currently in negotiations w ith Cartel for the purchase of its database. Despite Gilbert’s objection, Krueger issued an e-mail to everyone “on the floor.” (R. Vol. 7 at 2371.) The e-mail promised a gift certificate for a free lunch at a local restaurant for the employee with the largest list. After the spreadsheets were sent to Gilbert and M atthews, M atthews eliminated duplicate names and -13- divided the remainder among the members of Gilbert’s staff. The staff then telephoned the agents to inquire whether the agent was interested in providing direct BPO services for Ocwen Advisors. After receiving and approving the resulting applications, the agents were sent a vendor identification and information regarding fees. A copy of this information was sent to Ocwen Technology. The vendors were also informed that the preferred mode of comm unication would be REALTrans and they should expect a representative from Ocwen Technology to contact them. Gilbert testified the staff continued to pull names off Cartel’s BPO s until her employment with Ocwen Advisors was terminated in November 2000. Gilbert created reports of the number of retail vendors added each month to the Order Tracking system to keep Kreuger apprised of her progress. The reports indicated Ocwen Advisors added fifty-four vendors in January 2000 and approximately one hundred per month through June 2000. Nonetheless, Ocwen Advisors’ database provided in pre-trial discovery reflected only zero to fourteen vendors were added each of those months. Gilbert testified the data could be skewed either because of the Bank’s common practice to “back fill” the names of the new vendors to fill in numbers formerly assigned to vendors with which they no longer did business or because the information had been improperly pulled -14- from the database. 8 (R. Vol. 7 at 2359.) In 2000, two circumstances began to affect Cartel’s ability to return BPO orders in a timely fashion. The first involved the use of the REALTrans system. Unfortunately, the synchronization between Cartel’s system and REALTrans did not develop smoothly. Orders “were getting lost in cyberspace.” (R. Vol. 7 at 2363.) In addition, Cartel was not permitted to turn down any order issued through REALTrans. Second, Ocwen Advisors w as in the process of building its own retail vendor network. Because it was easier to find agents in highly populated areas, Ocwen filled those orders with its own agents on REALTrans while it sent Cartel fewer, more difficult orders. Gilbert discussed these issues with Coats during weekly telephone meetings. During the summer of 2000, Coats learned Ocwen Advisors may have taken agents’ names from Cartel’s BPOs. He received a call from several of his agents stating an Ocwen Advisors’ representative had telephoned and asked if they would work directly for Ocwen. They asked if Coats had given Ocwen their names. Indeed, Coats got a call personally from an O cwen A dvisors’ representative w ho asked if C oats wanted to be on Ocwen Advisors’ database. H e replied he w as already listed as a national provider. Coats then contacted Gilbert to inform her he believed Ocwen was building a retail vendor network and was 8 These statements were vigorously denied by the O cwen entities’ witnesses at trial. -15- targeting his brokers. Gilbert relayed this information to Krueger who instructed her: “Don’t tell them what we’re doing.” (R . Vol. 7 at 2380.) Gilbert, Babbitt and Krueger all denied they were taking names off the broker database when asked directly by Coats. In August 2000, an Ocwen Technology employee sent Coats a copy of the “contest” e-mail issued by Krueger in M arch 2000. Coats telephoned Gilbert to protest and directed her attention to the confidentiality agreement with Ocwen Technology. At that time, Gilbert informed Coats that Ocwen Advisors was building its own database. 9 Coats also met with Rita Holland, an Ocwen Technology supervisor, to protest the direct use of Cartel’s agents. In addition, he spoke with Krueger and Babbitt. In September 2000, Krueger contacted Coats to see if he would be interested in selling Cartel. Negotiations continued into December 2000, at which time Ocwen Advisors decided not to purchase the business. At that point, Coats sent a letter to each Erbey brother and Krueger stating he believed the Ocwen entities had stolen Cartel’s agent names in breach 9 W illiam Erbey explained the difference between the Bank’s and Ocwen Technology’s BPO business. He identified two kinds of BPOs. One type is a “review” BPO where appraisers on staff evaluate the quality of the BPO . The Bank has been in the business of selling review BPO s to W all Street firms since mid-2000. As of 2004, the Bank would pay an agent or broker approximately $45 to $50 to do the B PO and sell the reviewed BPO for approximately $150. In contrast, the other type of BPO is “unreviewed.” The unreviewed BPO is the equivalent of the Cartel product and sells for approximately $70. At trial, Erbey was asked if “any [Ocwen Technology] entity [had] been in the business of doing BPOs.” Erbey responded “yes.” (R. Vol. 9 at 3203.) -16- of the confidentiality agreement. By the end of the second quarter of 2001, Ocwen Advisors completely ceased ordering BPOs from Cartel. 10 Cartel filed suit against the Ocwen entities on August 21, 2001. After extensive pre-trial discovery and numerous pre-trial motions, the case went to trial. At trial, Cartel introduced a comparison of Ocwen Advisors’ database, provided in discovery, with its own. Ocwen’s database contained approximately 7,000 names of brokers entered after M arch 2000, the date of the contest. Of those 7,000, approximately 3,900 names were marked “prevent use.” (R . Vol. 8 at 2695.) Of the remaining 3,100 names designated “use,” approximately 1,320 were identical to the Cartel database. (Id.) Cartel also introduced the testimony of Christina Teahan as Cartel’s BPO expert and James TenBrook as its damages expert. Before and during trial, the O cw en entities objected to the expert testimony. As to Teahan, Ocwen claimed the jury was not allowed to hear her testimony since the magistrate had ruled she was unqualified to offer such opinions. Ocwen objected to TenBrook’s testimony alleging it was unreliable and based solely on speculation. The district court overruled these objections. As noted earlier, the jury returned a verdict for Cartel against the Bank and Ocw en Technology. Following vigorous post-trial motions, the district court 10 In 1999, the Bank ordered an average of 3,766 BPO s from Cartel per quarter. In the first quarter of 2000, the Bank ordered 3,365 BPO s. During the remainder of 2000, the Bank ordered an average of 1,732 BPO s from Cartel per quarter. In 2001, the Bank ordered 786 BPO s from Cartel in the first quarter and six in the second quarter. -17- ultimately determined it had incorrectly allowed TenBrook’s testimony and reduced Cartel’s recovery based on the Bank’s misappropriation of trade secrets to $1 in actual and $1 in punitive damages. Cartel’s timely appeal and the Ocwen entities’ timely cross-appeal followed.