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CHARLES SCHWAB & CO., INC. v. CARTER

September 27, 2005.

CHARLES SCHWAB & CO., INC., Plaintiff,
v.
BRIAN D. CARTER, ACORN ADVISORY MANAGEMENT, L.L.C., ACORN ADVISORY CAPITAL, L.P., DELPHI FINANCIAL GROUP, INC., DELPHI CAPITAL MANAGEMENT, INC., and ROBERT ROSENKRANZ, Defendants.



The opinion of the court was delivered by: AMY ST. EVE, District Judge

MEMORANDUM OPINION AND ORDER

In its initial complaint, Plaintiff Charles Schwab & Co., Inc. ("Schwab") brought suit against Defendants Brian D. Carter ("Carter"), Acorn Advisory Management, L.L.C., and Acorn Advisory Capital, L.P. (collectively, the "Original Defendants") for incidents surrounding Carter's resignation from Schwab and subsequent employment with one of the Acorn entities.*fn1 Schwab maintained that Carter and Acorn were liable for misappropriation of Schwab's trade secrets (Count I), conversion (Count II), and violation of the Computer Fraud and Abuse Act (codified at 18 U.S.C. § 1030) (the "CFAA") (Count VI). Schwab further alleged that Carter was liable for breach of contract (Count IV) and breach of fiduciary duty (Count III) and that Acorn was liable for aiding and abetting Carter's breach of fiduciary duty (Count V). Schwab subsequently added other parties to this suit. Specifically, Schwab (after receiving leave of court) filed a Third Amended Complaint (the "Complaint") suing the Original Defendants and adding to the suit Acorn Partners, L.P., Delphi Financial Group, Inc., Delphi Capital Management, Inc., and Robert Rosenkranz ("Rosenkranz") (collectively, the "New Defendants"). Schwab added the New Defendants to Counts I, II, V, and VI. In addition, Schwab added a claim of unjust enrichment (Count VII) against all Defendants.

Two motions currently are before the Court. The New Defendants filed a motion to dismiss Counts II, III, V, VI (in part), and VII (the "Motion to Dismiss") and a motion for summary judgment on Count I (the "Summary Judgment Motion"). The Original Defendants have joined in the New Defendants' Summary Judgment Motion*fn2 and have further requested to join in the New Defendants' Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(c) (despite having previously filed their own motion under Rule 12(b)(6)).*fn3 For the reasons below, the Court denies both Motions. ANALYSIS

  I. The Motion to Dismiss

  A. Legal Standard

  Defendants' motion to dismiss is based on Federal Rule of Civil Procedure 12(b)(6). A Rule 12(b)(6) motion tests the sufficiency of a complaint. It is not designed to resolve the case on the merits. Johnson v. Rivera, 272 F.3d 519, 520-21 (7th Cir. 2001). When determining whether to grant a 12(b)(6) motion to dismiss, a court must accept all factual allegations in the complaint as true. Jang v. A.M. Miller & Assocs., 122 F.3d 480, 483 (7th Cir. 1997). A court must also draw all reasonable inferences in the plaintiff's favor. Id. A court should dismiss a complaint under Rule 12(b)(6) only if "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spaulding, 467 U.S. 69, 73, 104 S. Ct. 2229, 2232 (1984).

  B. Facts

  For purposes of deciding Defendants' Motion to Dismiss, the Court accepts the following allegations as true.

  1. The Parties

  Schwab is a California corporation with its principal place of business in San Francisco, California. (R. 69-1; Pl.'s Third Am. Compl. at ¶ 17.) Defendant Brian Carter was formerly employed by Schwab and currently resides in Tinley Park, Illinois. (Id. at ¶¶ 1, 18.) Defendant Acorn Advisory Management, L.L.C., is a limited liability company formed in Delaware with its principal place of business in New York, New York. (Id. at ¶ 19.) Defendant Acorn Advisory Capital, L.P., is a limited partnership formed in Delaware with its principal place of business in New York, New York. (Id. at ¶ 20.) Defendant Acorn Partners, L.P., is a limited partnership formed in Delaware with its principal place of business in New York, New York. (Id. at ¶ 21.) Defendant Delphi Financial Group, Inc. is a Delaware corporation with its principal place of business in New York, New York. (Id. at ¶ 23.) Defendant Delphi Capital Management, Inc. is a Delaware corporation with its principal place of business in New York, New York. (Id. at ¶ 22.) Defendant Robert Rosenkranz is a New York resident and has an ownership interest in each of the company defendants. (Id. at ¶¶ 24, 25.)*fn4

  2. The Events Surrounding Carter's Departure

  Prior to November 1, 2004, Schwab, a full service investment and securities firm, maintained a business division named the Schwab Soundview Capital Markets' Investment Analytics Division ("IA"). (Id. at ¶¶ 1-2, 17.)*fn5 Through IA, Schwab generated and maintained substantial amounts of confidential information, including proprietary investment research strategies and analytical tools. (Id. at ¶ 30.) IA provided analytical research — derived from twelve analytical models (the "Models") — to approximately 100 institutional clients (including Defendants) nationwide. (Id. at ¶ 2.) Schwab kept the Models confidential and did not disclose the Models to IA customers or other individuals outside of Schwab. (Id. ¶¶ 2, 30.) To protect the confidentiality of the Models, Schwab instituted certain policies and precautions. (Id. at ¶ 32.) For instance, Schwab maintained security at all of its offices, restricted access to confidential information on a need-to-know basis, and used computer pass codes. (Id.) Schwab also required its employees, including Carter, to execute a confidentiality agreement which prohibited the employees from disclosing Schwab's "Confidential Information." (Id. at ¶¶ 33-37.)

  Carter worked in the IA division as the Director of Information Technology. (Id. at ¶ 3.) Carter's position allowed him to access the IA division's entire computer information network, including the Models and customer information. (Id. at ¶ 39.) Carter did not develop the IA Models and did not provide any of the ongoing analytical research used to maintain the Models. (Id. at ¶ 3.)

  In September 2004, Schwab announced that it intended to close IA, effective November 1, 2004. (Id. at ¶ 4.) Schwab's IA division, however, continued to provide research to its institutional clients through the end of January 2005. (Id.) In connection with IA's closing, Schwab offered its IA employees severance packages or employment within other areas of Schwab. (Id.)

  On October 1, 2004, Acorn made a written offer to Schwab to acquire IA, proposing to acquire all assets necessary to operate the Models (including all of IA's intellectual property associated with the Models) and to hire six IA employees including Carter and several of IA's analysts. (Id. at ¶ 5.) Schwab rejected Acorn's offer. (Id. at ¶ 6.) According to Schwab, Acorn's proposed consideration was inadequate, and Acorn's offer did not protect Schwab's brand and continuing business, in particular Schwab Equity Ratings, the investment research offered to Schwab's retail client base. (Id.) Even though the model used by Schwab to generate the Schwab Equity Ratings "was built from scratch" in 2002, it shares a "brand" with Schwab's IA Models. (Id.) As Schwab sees it, if Schwab sold IA's intellectual property without appropriate controls and if a Schwab competitor then acquired the Models, the brand, reputation and value of the Schwab Equity Ratings would be diluted and harmed. (Id.) Schwab thus decided to retain IA's confidential property, including the Models. (Id.)

  On Friday, October 15, 2004, after Schwab had rejected Acorn's offer, Rosenkranz, on behalf of Acorn, made offers to employ Carter and several of IA's analysts. (Id. at ¶ 7.) By October 18, 2004, all IA analysts had rejected Acorn's employment offers. (Id.) Carter, however, accepted Rosenkranz's offer. (Id. at ¶ 8-13.)

  On Monday, October 18, 2004, in preparation for joining Acorn and at Acorn's direction, Carter e-mailed confidential information to Acorn relating to certain of the "outside data sources" used in IA's Models. (Id. at ¶ 8.) In addition, Carter's e-mail attached documents that would facilitate Acorn's access to an information database licensed by Schwab and used in connection with the Models. (Id. at ¶ 44.) Schwab's records also indicate that Carter accessed and copied huge volumes of Schwab's computer information (approximately 15,000 computer files in a single day) during the previous weekend. (Id. at ¶ 8.) At that time, Carter had access to the entire ...


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