This was originally posted on the SGR Blog.
Were Claims Barred by Statute of Limitations or Otherwise?
Sure, Inc., an insurance technology (insurtech) company, alleged that one of its former directors, Alex Maffeo, misappropriated Sure’s confidential trade secrets. He then used that information to start a competing business through Boost Insurance Agency USA, Inc. and Boost Insurance Agency, Inc. Sure claimed that Boost used Sure’s confidential information to unfairly compete against Sure and to “steal” Sure’s existing and prospective customers and business partners. Boost moved to dismiss the complaint, arguing that it was time-barred and insufficiently pled.
Sure is a Delaware corporation with a principal place of business in Santa Monica, California. Sure alleged that Wayne Slavin formed Sure in 2014 to sell instant, in-the-moment, direct-to-consumer insurance. According to its original business model, Sure acted as an electronic insurance agent, allowing insurance companies to offer insurance and customers to purchase insurance through a mobile application powered by Sure’s groundbreaking backend software, technology, and electronic system of record. The complaint alleged that Sure developed that backend infrastructure and technology through years of research, design, programming, and testing, and through millions of dollars of investment. In mid-2016, Sure developed proprietary application interfaces (APIs) built on its software and technology to allow non-insurance companies to offer insurance through their websites. Sure alleged that the “innerworkings” of its backend system, its proprietary software, its model of providing instant insurance and related technological innovations, were all confidential trade secrets.
In mid-2016, Sure began fundraising for its Series A financing round. In October 2016, Slavin shared a “pitch deck and other materials” with Maffeo, which “described Sure’s overall business model and strategy” and mentioned that Sure had developed an API platform. At the time, Maffeo was a principal at IA Capital Group, which was considering investing in Sure’s Series A financing round.
Sure closed its first financing round in January 2017, with IA Capital as its lead investor. In connection with its investment, IA Capital obtained a seat on Sure’s board of directors, and designated Maffeo as its board representative. After Maffeo joined the board, Sure alleged that it provided him with confidential information on numerous occasions, including during board meetings. In late January 2017, Maffeo told Slavin that he was working on a project within IA Capital called “Project Boost.” Maffeo provided Slavin with a presentation of Boost’s business model, indicating that Boost was going to assist insurtechs like Sure find underwriting capacity for their products.
Sure further alleged that it continued to expand its business in 2017 and 2018, developing new partnerships with insurance carriers, creating APIs for new consumer markets, integrating its platform into its customers’ systems, and, eventually, packaging and licensing its technology into a software as a service (SaaS) product sold to both its insurance and non-insurance clients. According to Sure, it continually updated its board, including Maffeo, and provided it with confidential information. Although Maffeo disclosed to Sure that he had founded Boost as a service provider for insurtechs like Sure, Sure understood that Maffeo would continue to protect Sure’s confidential information. In 2018, Sure asked Maffeo to step down from the board.
The complaint alleged that, in July 2019, Slavin began to see job postings for Boost indicating that Boost had developed a platform and software to offer insurance products to consumer companies. In August 2019, Slavin visited Boost’s website, and learned that Boost was no longer advertising services for insurtechs. According to Sure, Boost’s revamped website described a business and products that copied Sure’s back-end software system, products, and business model. In particular, Boost’s website marketed an “API-Driven Insurance Platform,” just like Sure. Boost’s website described an “API-driven policy admin system,” which would “packag[e] all the back-end components need to build, launch, and manage a program,” and further alleged that, in mid-2020, Boost “attempted to steal Sure’s current and prospective clients and insurance partners,” citing two examples in which Sure ultimately won the business for which it competed though in one case it required “significant additional time and expense because of Boost’s interference.”
The complaint alleged the following seven claims: (1) misappropriation of confidential information; (2) misappropriation of skills and expenditures; (3) unjust enrichment; (4) unfair competition; (5) tortious interference with prospective economic advantage; (6) tortious interference with business relations; and (7) aiding and abetting a breach of fiduciary duty. And, in its prayer for relief, Sure sought a permanent injunction, compensatory damages in an amount not less than $500,000, punitive damages, and attorney’s fees and costs.
Boost contended that Sure’s misappropriation-based claims (except the fifth and sixth were time-barred.
On a motion to dismiss a cause of action on the ground that it is barred by the statute of limitations, a defendant bears the initial burden of establishing, prima facie, that the time in which to sue has expired. In considering the motion a court must take the allegations in the complaint as true and resolve all inferences in favor of the plaintiff. If the defendant meets that burden, then the burden shifts to the plaintiff to aver evidentiary facts establishing that the case falls within an exception to the statute of limitations.
A claim for misappropriation of trade secrets is subject to a three-year statute of limitations Under New York law. When a trade secret misappropriation claim accrues depends on what the party alleged to have committed the misappropriation did with the information. If a party misappropriates and publicly discloses a trade secret, the claim accrues upon disclosure. If, however, the party keeps the secret confidential yet makes use of it to his own commercial advantage, each successive use constitutes a new actionable tort for purposes of the statute of limitations. The rule reflects the principle that once the information is no longer secret or confidential, there is no property to protect.
Sure alleged that it first learned of Boost’s misappropriation in July and August 2019, through job postings and descriptions on Boost’s website. Boost asserted that Sure knew or should have known about Boost’s use of its purported trade secrets no later than January 2017, when Maffeo gave a presentation to Sure.
But the complaint did not clearly establish the date that Boost first used the trade secrets. Both the January 2017 presentation and Boost’s website used words such as “infrastructure,” “API,” “launch,” and “program.” The Court could not conclude on the record, as a matter of law, that Sure should have known about Boost’s misappropriation based upon Maffeo’s presentation in 2017. In any event, Sure alleged that, in mid-2020, Boost used Sure’s confidential information to purloin one of its insurance partners. Accepting those allegations as true, the Court could not conclude at the early stage of the proceedings that Sure’s misappropriation-based claims were untimely. Accordingly, Boost’s motion to dismiss those claims based on the statute of limitations was denied.
On a motion to dismiss the court must accept the facts as alleged in the complaint as true, accord plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory. Dismissal of the complaint is warranted if the plaintiff fails to assert facts in support of an element of the claim, or if the factual allegations and inferences to be drawn from them do not allow for an enforceable right of recovery.
The first claim sought recovery for misappropriation of confidential information. A trade secret has been defined as any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. To prevail on a claim for misappropriation of trade secrets, a plaintiff must demonstrate that: (1) it possessed a trade secret, and (2) the defendant used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means.
In considering whether information is a trade secret, the court must consider the following factors: (1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the business to guard the secrecy of the information; (4) the value of the information to the business and its competitors; (5) the amount of effort or money expended by the business in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
The Court found that here, affording the complaint a liberal construction, Sure adequately alleged a cause of action for misappropriation of confidential information and/or trade secrets. First, Sure sufficiently alleged that, while Maffeo was on Sure’s board, he was given Sure’s proprietary backend system and software, in addition to its customer lists, partner lists, business model, and business plan. Sure also alleged that its novel backend system, software, customer lists, partner lists, and business strategy and model were developed through considerable effort and expense. Sure further alleged that it took steps to maintain confidentiality, including requiring third-parties to sign non-disclosure agreements, enacting employee policies and procedures, and using robust security and privacy measures on computer systems.
Sure sufficiently alleged that Boost acquired the confidential information by improper means — namely, by Maffeo’s use of information provided to him in his capacity as a Sure board member. Where a breach of fiduciary duty is established, third parties who have knowingly participated in the breach may be held accountable. According to Sure’s allegations, Boost directly copied Sure’s backend software system, products, and business model. Sure alleged that Boost’s executive officers and the members of its board of directors — including Maffeo and Andy Lerner — were aware that Boost (via Maffeo) had wrongfully obtained Sure’s confidential information.
Sure alleged that Boost used its confidential information and/or trade secrets. After reviewing Boost’s website in August 2019, Slavin allegedly discovered that Boost had pivoted its business model to turn Boost into a “carbon copy” of Sure and attempted to steal one of its longstanding business partners using that information. Taking Sure’s factual allegations to be true, Boost was not entitled to dismissal of the first claim.
The fifth claim alleged that Sure had an existing business relationship with Markel; Boost wrongfully used Sure’s confidential information to interfere with Sure’s prospective new contract with Markel; and, as a result of Boost’s interference, Markel decided not to enter into a new contract with Sure. The sixth claim alleged that Sure had business relationships with other third parties, including an online alternative investment platform and software company; Boost wrongfully used Sure’s confidential information in order to interfere with Sure’s business relationships; and Sure was damaged as a result. Boost contended that Sure failed to plead that it lost any business, and failed to plead wrongful means or malice.
A cause of action for tortious interference with prospective contractual relations is actionable when a contract would have been entered into had it not been for the conduct of the defendant and the means employed to induce a termination of the relationship were dishonest, unfair, or in any other way improper. Stated differently, tortious interference with business relations applies to those situations where a third party would have entered into or extended a contractual relationship with the plaintiff but for the intentional and wrongful acts of the defendant. Under either formulation, the plaintiff must allege “wrongful means,” which includes physical violence, fraud or misrepresentation, civil suits and criminal prosecutions, and some degrees of economic pressure, but more than mere persuasion. As a general rule, the defendant’s conduct must amount to a crime or an independent tort. Misappropriation of confidential information or trade secrets is sufficient to allege “wrongful means.”
While sufficiently alleging misappropriation of confidential information, Sure failed to plead allegations from which damages attributable to Boosts’ conduct might be reasonably inferred. Sure admitted that it ultimately won the two contracts with which Boost allegedly interfered. The complaint only made conclusory allegations that Sure had to “expend significant additional time and expense” as a result of the interference. Accordingly, the fifth and sixth causes of action were insufficient to state a cause of action and were dismissed.
The second, third, and fourth claims were labeled misappropriation of skills and expenditures, unjust enrichment, and unfair competition, respectively. Boost contended that these claims were redundant of Sure’s first claim.
Because the misappropriation of skills and expenditures, unjust enrichment, and unfair competition claims were based on the same facts as the first claim for misappropriation of confidential information—and Sure did not explain how these claims differed from its first claim—the second, third, and fourth claims were dismissed as duplicative of the first claim.
Boost contended that the aiding and abetting claim should be dismissed because Sure failed to plead an underlying breach of fiduciary duty. Specifically, Boost argued that: (1) Maffeo disclosed his alleged conflict of interest to Sure; and (2) a breach of fiduciary duty claim against Maffeo was time-barred. The Court found those arguments to be unpersuasive.
The elements of an aiding and abetting a breach of fiduciary duty claim are: (1) breach by a fiduciary of obligations to another; (2) that the defendant knowingly induced or participated in the breach; and (3) that plaintiff suffered damage as a result of the breach. A person knowingly participates in a breach of fiduciary duty only when he or she provides substantial assistance to the primary violator. Substantial assistance occurs when a defendant affirmatively assists, helps conceal, or fails to act when required to do so, thereby enabling the breach to occur.
The parties agreed that the underlying breach of fiduciary duty claim was governed by Delaware law—under which a breach occurs when a fiduciary commits an unfair, fraudulent, or wrongful act, including misappropriation of trade secrets, misuse of confidential information, solicitation of employer’s customers before cessation of employment, conspiracy to bring about mass resignation of an employer’s key employees, or usurpation of the employer’s business opportunity.
A claim for breach of fiduciary duty is subject to a three-year statute of limitations. Generally, a director who has resigned or has been terminated no longer owes fiduciary duties to the company-but there is an important exception. A former director breaches his fiduciary duty if he engages in transactions that had their inception before the termination of the fiduciary relationship or were founded on information acquired during the fiduciary relationship.
Viewing the allegations in the light most favorable to Sure, the complaint adequately alleged that Maffeo, a former director of Sure, breached his fiduciary duty to Sure when he “acquired [confidential] information while he was unquestionably a fiduciary, and subsequently gave it to [Boost], a competitor, to advance his own interests.” Sure alleged that Maffeo acquired the information when he was a fiduciary and that Boost used it in 2019 and 2020. Giving these allegations their most favorable intendment, Sure alleged that Maffeo breached his duty of loyalty to Sure within three years of the filing of the complaint.
Accordingly, Boost was not entitled to dismissal of the seventh claim for failure to state a cause of action.