Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

NEXT Payment Solutions, Inc. v. CLEAResult Consulting, Inc.

United States District Court, N.D. Illinois, Eastern Division

July 31, 2018

NEXT PAYMENT SOLUTIONS, INC., Plaintiff,
v.
CLEARESULT CONSULTING, INC., Defendant.

          MEMORANDUM OPINION AND ORDER

          Ruben Castillo, Chief Judge

         NEXT Payment Solutions, Inc. ("Plaintiff) filed this action against CLEAResult Consulting, Inc. ("Defendant") alleging violations of the Defend Trade Secrets Act ("DTSA"), 18 U.S.C. § 1831 et seq., and the Lanham Act, 15 U.S.C. § 1125(a). (R. 36, Am. Compl. ¶¶ 194-205, 250-60.) Plaintiff also asserts several state-law claims against Defendant. (Id. ¶¶ 206-49.) Pursuant to Federal Rule of Civil Procedure 12(b)(6), Defendant moves to dismiss the amended complaint in its entirety for failure to state a claim. (R. 45, Second Mot. to Dismiss.) Also pending before the Court are two motions to compel. First, there is Plaintiff's motion to compel Defendant to re-designate thousands of documents from "attorney's eyes only" to "confidential" so that Plaintiffs chief executive officer ("CEO") may assist Plaintiffs counsel in reviewing those documents. (R. 102, Pl.'s Mot. to Compel at 6.) Second, there is Defendant's motion to compel supplemental interrogatory responses. (R. 104, Def, 's Mot. to Compel.) For the reasons stated below, Defendant's motion to dismiss is granted in part and denied in part, Plaintiffs motion to compel is granted, and Defendant's motion to compel is granted in part and denied in part.

         BACKGROUND

         Plaintiff is an Illinois software development corporation with its principal place of business in Illinois. (R. 36, Am. Compl. ¶ 27.) Defendant is a Texas corporation with its principal place of business in Texas. (Id. ¶ 28; R. 30, Answer ¶ 6.) Defendant provides energy efficiency services for organizations exploring ways to reduce energy costs. (R. 36, Am. Compl. ¶¶ 12, 18, 28, 35-36, ) Defendant contracted with Plaintiff to use Plaintiffs existing software and have Plaintiff develop other software tools that would aid Defendant's business. (Id. ¶¶ 2, 4.)

         Plaintiffs "cloud-based"[1] software program, which it refers to as the "Next System," processes digital rebates and customer rewards. (Id. ¶¶ 9-10.) Plaintiff licenses the Next System to companies, and those companies in turn provide Plaintiff with their rules for a specific customer rebate or reward program that they intend to offer their customers. (Id. ¶ 10.) Plaintiff then adapts its software so that the software carries out the company's desired customer rebate or reward program. (Id.) Through Plaintiffs software program, a company's customers can input information related to a rebate or reward that is then automatically processed by the Next System. (Id.) This software enables companies to reduce the number of employees needed to process data and carry out administrative tasks related to a customer rebate or reward program. (Id.)

         The Next System also consists of "back end" software that is used only by the software administrator instead of the end-user customers. (Id. ¶¶ 9, 21, 101.) Plaintiff refers to this "back end" software as the "Next System Back End." (Id. ¶ 101.) The Next System Back End is only accessible with secure login credentials, and it is protected by a "firewall and other state of the art protections." (Id.) Plaintiff alleges that it protected its software and the source code for that software by maintaining it on a "separate secure server that was protected by [firewalls], . .. regularly monitored," and only capable of being accessed by two of Plaintiff s employees. (Id. ¶ 9.) Plaintiff alleges that it has invested significant amounts of money into developing and improving the Next System, and that it has taken other measures to keep secret the source code and logic of the Next System, such as requiring its employees and independent contractors to execute confidentiality agreements. (Id. ¶¶ 13-14.)

         In October 2014, the parties entered into a Master Services Agreement ("MSA") that granted Defendant a license to use Plaintiffs software for "digital rebate portal processing," "point of sale," and "reward fulfillment services." (R. 36-1, MSA at 1.) The MSA required Plaintiff to perform services for Defendant related to processing digital rebates and fulfilling rebate payments. (Id.) The MSA also contemplates that Plaintiff will "provide those duties set forth and defined in a Scope of Work" ("SOW") document, "in the form of Exhibit A" to the MSA, (Id.) Exhibit A to the MSA, however-instead of providing the format for an SOW- appears to be a document that sets forth additional terms and conditions of the MSA. (R. 42, Ex. A to MSA.) The MSA provides that "[t]his Agreement and all SOWs issued hereunder contain the entire Agreement between the parties with respect to the matters covered herein." (R. 36-1, MSA at 7.)

         The MSA required Defendant to pay Plaintiff an annual license fee and other revenue as provided for in Exhibit B to the MSA. (R. 36-1, MSA at 2.) In the event that Defendant terminated the agreement "without cause"[2] or for any other reason than Plaintiffs breach of the MSA, Defendant agreed to pay Plaintiff an early cancellation fee of $300, 000, which the MSA refers to as a "kill fee." (Id. at 2, 6.) The MSA went into effect on April 1, 2014, and provided that its duration or "Term" was from April 1, 2014, until April 1, 2016, "unless the Parties agree in writing to extend the Term[.]" (Id. at 2.) The MSA also provided, however, that "[a]ll obligations incurred under this Agreement shall survive the Term until satisfied" (Id. at 1 (emphasis added).)

         Plaintiff alleges that the parties then executed several SOWs "pursuant to the terms of the MSA." (R. 36, Am. Compl. ¶¶ 18, 34.) Plaintiff claims that in 2014, it began developing a scheduling software tool for Defendant to use with a company named Consumer Energy, a potential customer of Defendant at that time. (Id. ¶ 35.) Plaintiff alleges that in February 2015, Defendant agreed to pay Plaintiff for its use of the scheduling tool, which Plaintiff ultimately branded as the "FAST scheduling wizard." (Id. ¶¶ 47-49.) Defendant then allegedly memorialized the parties' agreement related to the FAST scheduling wizard in an SOW that was "in the form prescribed by [Exhibit] A to the MSA." (Id. ¶¶ 49-50.)

         Plaintiff claims that in August 2016, Defendant approved six more SOWs in "the form prescribed by" Exhibit A to the MSA, and that these SOWs extended Defendant's license for the FAST scheduling wizard to other projects and customers of Defendant. (Id. ¶¶ 54-57, 60-64, 67-70, 73-76, 79-82.) Then, in November and December 2016, Defendant allegedly approved two more SOWs that extended the FAST scheduling wizard license to two more of Defendant's projects. (Id. ¶¶ 85-88, 91-93.) Plaintiff claims that it also provided Defendant with software support services for the projects and customers that were the subject of each SOW, and that it expected Defendant to pay licensing fees for the services and intellectual property rights provided under the SOWs. (Id. ¶¶ 98, 102.)

         In September 2016, Defendant allegedly requested that one of its employees with login credentials to the Next System Back End provide access to Defendant's senior executives, even though those executives were not given login credentials by Plaintiff. (Id. ¶ 151.) Plaintiff claims that Defendant then tasked its employees with identifying key components of Plaintiff s software so that Defendant could incorporate those components into other software that Defendant owned, thereby obviating Defendant's need for Plaintiffs software. (Id. ¶¶ 25, 153-56, 160-64.) Plaintiff alleges that none of Defendant's employees who worked in Texas, Oregon, California, New York, or Georgia were provided login credentials to access the Next System Back End. (Id. ¶¶ 23-24, 164.) Employees of Defendant from these locations, however, allegedly logged into Plaintiffs servers over 34, 000 times between September 2016 and November 2017. (Id. ¶¶ 24, 116, 160, 165-74.) Plaintiff alleges that this was part of Defendant's effort to replace the Next System with its own software by accessing Plaintiffs confidential information without authorization. (Id.)

         Plaintiff avers that in November 2017, Defendant informed Plaintiff that it had achieved a software solution that eliminated the need for Plaintiffs software. (Id. ¶ 125.) Defendant, therefore, allegedly informed Plaintiff that it "had terminated each of the .. . SOWs ... as of October 31, 2017[.]" (Id. ¶¶ 125, 161.) Shortly thereafter, Defendant allegedly refused to pay Plaintiff for work performed pursuant to the SOWs. (Id. ¶¶ 117-32.) Plaintiff claims that Defendant paid Plaintiff licensing fees under the SOWs until Defendant terminated its relationship with Plaintiff in November 2017. (Id. ¶ 178.) Plaintiff also alleges that Defendant induced Plaintiff to develop other software tools that Defendant had no intent to pay for or use, and that Defendant represented that the parties would execute a new MSA to cover the development of these software tools. (Id. ¶¶ 175-77, 179-93.)

         PROCEDURAL HISTORY

         On December 7, 2017, Plaintiff filed its initial complaint in this case, and the case was assigned to U.S. District Judge Samuel Der-Yeghiayan. (R. 1, Compl.) On January 3, 2018, Defendant moved to dismiss the complaint for failure to state a claim. (R. 13, First Mot. to Dismiss.) Shortly thereafter, on January 5, 2018, Plaintiff filed a motion for preliminary injunction and expedited discovery. (R. 18, Mot.) On January 19, 2018, the case was reassigned to this Court following Judge Der-Yeghiayan's retirement. (R. 28, Order.)

         On January 29, 2018, Defendant filed an answer to the complaint, and the next day, the Court dismissed the complaint without prejudice in a minute order. (R. 30, Answer; R. 31, Min. Entry.) On March 1, 2018, Plaintiff filed its amended complaint, which is the operative pleading in this case. (R. 36, Am. Compl.) The amended complaint asserts seven counts against Defendant: violation of the DTSA (Count I); breach of the SOWs that Plaintiff and Defendant allegedly entered into (Count II); breach of the MSA (Count III); unjust enrichment (Count IV); promissory estoppel (Count V); fraud (Count VI); and common law unfair competition as well as unfair competition in violation of the Lanham Act (Count VII).[3] (Id. ¶¶ 194-260.)

         On March 30, 2018, Defendant filed its present motion to dismiss. (R. 45, Second Mot. to Dismiss.) Defendant argues that Plaintiff fails to state a claim for breach of the MSA because the MSA expired months before any alleged breach occurred. (R. 47, Mem. at 5-6.) Defendant contends that the Court should also dismiss Plaintiffs breach of contract claim related to the SOWs because Plaintiff does not allege that Defendant failed to perform any act required by the SOWs. (Id. at 6-7.) In Defendant's view, Plaintiffs DTSA claim is also subject to dismissal because Plaintiff fails to allege any information that qualifies as a trade secret, and because Defendant's alleged reverse engineering of Plaintiff s software does not constitute misappropriation of Plaintiff s trade secrets. (Id. at 7-10.)

         Next, Defendant argues that Plaintiff cannot simultaneously maintain an unjust enrichment claim and a breach of contract claim, because an unjust enrichment claim fails as a matter of law where an express contract governs the parties' relationship. (Id. at 10-11.) Defendant contends, that Plaintiffs promissory estoppel claim likewise fails because promissory estoppel only applies if the parties lack an express agreement. (Id. at 11.) Defendant maintains that Plaintiffs promissory estoppel claim fails for the additional reason that the amended complaint does not allege that Defendant promised to pay for any services after the MSA's expiration. (Id. at 11-12.)

         Defendant argues that Plaintiffs fraud claim should be dismissed because Plaintiff fails to plead fraud with sufficient particularity and does not allege any act or omission attributable to Defendant that is actionable under a theory of fraud. (Id. at 12-13.) Finally, Defendant argues that the Court should dismiss Plaintiffs unfair competition claims because the parties are not competitors and because Plaintiff fails to sufficiently plead that Defendant was passing off Plaintiffs software as its own. (Id. at 14-15.)

         Plaintiff opposes the motion to dismiss and argues that the MSA did not expire because the parties executed SOWs that expressly extended the MSA's term. (R. 69, Resp. at 2.) Plaintiff also maintains that the MSA's extension can be implied from the parties' conduct before and after the date Defendant claims that the MSA expired. (Id. at 4.) As to its breach of contract claim related to the SOWs, Plaintiff contends that it alleges the existence of such agreements and the parties' obligations under such agreements in sufficient detail to survive Defendant's motion to dismiss. (Id. at 4-6.)

         With respect to its DTSA claim, Plaintiff maintains that it pleads enough facts for its software to qualify as a trade secret and that Defendant misappropriated the software by using improper means to obtain it. (Id. at 6-11.) Plaintiff argues that its unjust enrichment and promissory estoppel claims survive dismissal because they can be alleged in the alternative alongside breach of contract claims. (Id. at 11-12.) Plaintiff also contends that the amended complaint sets forth enough factual content to state a claim for promissory estoppel and fraud, and that the amended complaint pleads fraud with sufficient particularity. (Id. at 12-14.) Finally, Plaintiff argues that it alleges a competitive injury and enough facts regarding Defendant's misleading conduct to state a common law unfair competition claim as well as a claim under the Lanham Act. (Id. at 14-15.)

         After Defendant filed its motion to dismiss, Plaintiff filed an amended motion for a temporary restraining order on April 6, 2018. (R. 49, Mot.) On July 13, 2018, Plaintiff filed a motion to compel Defendant to re-designate documents marked for "attorney's eyes only" as "confidential," so that Plaintiffs CEO can assist Plaintiffs counsel in reviewing those documents. (R. 102, Pl.'s Mot. to Compel.) On the same day, Defendant filed a motion to compel responses to interrogatory numbers 10, 15, 16, 18, and 21 that it propounded on Plaintiff. (R. 104, Def.'s Mot. to Compel.) On July 18, 2018, the Court denied Plaintiffs amended motion for a temporary restraining order without prejudice and allowed further briefing on Defendant's motion to compel. (R. 117, Min. Entry.) Defendant's motion to compel is now fully briefed and ripe for resolution. (See R. 122, Reply, )

         LEGAL STANDARD

         A complaint must set forth a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). "A motion to dismiss pursuant to Rule 12(b)(6) challenges the viability of a complaint by arguing that it fails to state a claim upon which relief may be granted." Firestone Fin. Corp. v. Meyer, 796 F.3d 822, 825 (7th Cir. 2015) (citation and internal alteration omitted). "Although detailed factual allegations are unnecessary, the complaint must have 'enough facts to state a claim to relief that is plausible on its face.'" Pierce v. Zoetis, Inc., 818 F.3d 274, 277 (7th Cir. 2016) (quoting Bell Atl Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "Determining whether a complaint states a plausible claim for relief will... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679. "To rise above the speculative level of plausibility, the complaint must make more than threadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Oakland Police & Fire Ret. Sys. v. Mayer Brown, LLP, 861 F.3d 644, 649 (7th Cir. 2017) (citation, internal alteration, and internal quotation marks omitted). In deciding a motion to dismiss, however, the Court accepts the factual allegations in the complaint as true and draws all reasonable inferences in favor of the plaintiff. Tobey v. Chibucos, 890 F.3d 634, 645 (7th Cir. 2018).

         A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes. Fed.R.Civ.P. 10(c). So are documents attached to the complaint, documents that are critical to the complaint and referred to in it, and information that is subject to proper judicial notice. Geinosky v. City of Chicago, 675 F.3d 743, 745 n.1 (7th Cir. 2012).

         ANALYSIS

         I. Choice of Law

         As a preliminary matter, the Court considers which state's substantive law to apply to Plaintiffs state-law claims. The parties do not offer much discussion regarding the substantive law that governs Plaintiffs state-law claims beyond identifying a choice of law provision in the MSA that selects the substantive law of Texas as controlling. (R. 47, Mem. at 5 n.3; R. 69, Resp. at 2 n. 1.) At the same time, however, the parties cite to both Illinois and Texas law in their briefs without raising any choice-of-law argument. (E.g. R. 47, Mem. at 5 n.3, 10-15; R. 69, Resp. at 2 n. 1, 11 -15.) Accordingly, the Court addresses as a threshold issue whether it must apply the substantive law of Illinois or Texas to Plaintiffs state-law claims.

         First, the Court must determine which state's choice of law rules apply. See Berger v. AXA Network LLC, 459 F.3d 804, 809 (7th Cir. 2006) (analyzing first the applicable choice of law rules). When a federal court sits in diversity or exercises supplemental jurisdiction over state-law claims, it generally applies the choice-of-law rules of the state in which it sits. In re Jafari, 569 F.3d 644, 648 (7th Cir. 2009); see also McCoy v. Iberdrola Renewables, Inc., 760 F.3d 674, 684 (7th Cir. 2014) ("Federal courts hearing state law claims under diversity or supplemental jurisdiction apply the forum state's choice of law rules to select the applicable state substantive law."). Here, the Court has both supplemental and diversity jurisdiction over Plaintiffs state-law claims.[4] Accordingly, the Court will apply Illinois' choice of law rules. See In re Jafari, 569 F.3d at 648; McCoy, 760 F.3d at 684.

         The MSA has a choice of law provision that selects the substantive law of Texas to govern the MSA, (R. 36-1, MSA at 8), and the parties do not dispute that Texas law therefore governs the MSA. (R. 47, Mem. at 5 n.3; R. 69, Resp. at 2 n.1.) "Illinois courts generally adhere to a contract's choice of law provisions," and because there is no compelling reason to dishonor the MSA's choice of law provision, the Court will apply Texas law to Plaintiffs breach of contract claim related to the MSA. Sound of Music Co. v. Minn. Mining & Mfg. Co., 477 F.3d 910, 915 (7th Cir. 2007); see also La. Firefighters' Ret. Sys. v. N. Tr. Invs., N.A., 312 F.RD. 501, 508 (N.D. Ill. 2015) (explaining that Illinois enforces choice-of-law provisions unless "(1) the chosen State has no substantial relationship to the parties or the transaction or (2) application of the chosen law would be contrary to a fundamental public policy of a State with a materially greater interest in the issue in dispute." (citation and internal quotation marks omitted)).

         The MSA provides that SOWs issued under the MSA form part of the agreement comprising the MSA, (R. 36-1, MSA at 7), and because Plaintiff alleges that the SOWs were executed pursuant to the MSA, extended the MSA's term, and incorporated all of the MSA's provisions including the Texas choice of law provision, (R. 36, Am. Compl. ¶¶ 34, 207, 211; R. 69, Resp. at 2), the Court will apply Texas law to Plaintiffs claim for ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.