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Signal Financial Holdings LLC v. Looking Glass Financial LLC

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

December 2, 2019

SIGNAL FINANCIAL HOLDINGS LLC, and SIGNAL FUNDING LLC, both Delaware limited liability companies, Plaintiffs,
v.
LOOKING GLASS FINANCIAL LLC, a Delaware limited liability company, et al., Defendants.

          OPINION AND ORDER

          Joan H. Lefkow U.S. District Judge.

         Plaintiffs Signal Financial Holdings LLC and Signal Funding LLC (together, “Signal”) allege that Farva Jafri, a former Signal executive, misappropriated Signal's trade secrets while separating from Signal and used them to compete against Signal. Signal now sues Jafri; several corporate entities Jafri formed: Looking Glass Financial LLC (“Looking Glass”); Pinnacle Structures LLC, Looking Glass Legal LLC, Pinnacle Disability LLC, and Looking Glass Partners LLC (together, the “Related Entities”); a law firm (Sugar Felsenthal Grais & Helsinger LLP (“the Firm”)) and four of its attorneys (Jonathan P. Friedland, Vanessa J. Schoenthaler, Etahn M. Cohen, and Elizabeth B. Vandesteeg), who allegedly assisted Jafri; and Michael Olsen, another former Signal executive. Now before the court are the Firm's, the Related Entities', and Olsen's motions to dismiss.

         For the reasons below, the Firm's (dkt. 247) motion is granted in part and denied in part. The Related Entities' motion (dkt. 253) and Olsen's motion (dkt. 254) are denied.[1]

         BACKGROUND[2]

         I. Jafri's Departure and Competition

         Signal operates a pre-settlement legal funding business, advancing loans to people with potential legal claims in exchange for a portion of any recovery they might secure. (Dkt. 247 ¶¶ 12-13, 32.) In July 2016, Jafri joined Signal as its Vice President of Operations and later became its Chief Operating Officer. (Id. ¶ 33.) But by Summer 2017, while still Signal's COO, Jafri began preparing to hang her own shingle and compete against Signal. (Id. ¶ 90.) Sometime before September 2017, Jafri started taking confidential Signal documents to use in her competing pre-settlement legal funding enterprise, including a document designed for presentations to potential investors. (Id. ¶ 91.) By early September 2017, Jafri stopped showing up to work at Signal and began soliciting investors for her own venture, using altered copies of the investor presentation she had taken from Signal. (Id. ¶¶ 83, 92-93.) Signal alleges that these investors would have been “candidates to invest in Signal” had Jafri not solicited them. (Id. ¶ 100.) Indeed, Jafri found at least one investor by reading an email the investor had sent to an account at Signal inquiring about investment opportunities at Signal. (Id. ¶ 102-03.)

         After Jafri went several weeks without coming into the office, on September 27, her supervisors emailed her to demand that she return. (Id. ¶¶ 86, 112-14.) On September 28, Jafri resigned. (Id. ¶ 40, 87, 119.) The next morning, she returned to the office and spoke with an HR representative who told her to keep her email access while she and Signal negotiated a transition plan to help ease the fallout from her departure. (Id. ¶ 121.) To that end, Signal proposed that Jafri enter into a transition agreement, but Jafri cut off all communications with Signal. (Id. ¶ 41- 42.) On October 7, 2017, unbeknownst to Signal and without its permission, Jafri accessed her Signal email account to forward many confidential Signal documents to her personal email account, including the investor presentation. (Id. ¶¶ 43-44, 50-53.) Signal alleges that these documents contained trade secrets, including particularly “summaries of market data, ” “proprietary information regarding disability receivables, ” and “industry specific financial models.” (Id. ¶¶ 53-66, 71-79.) Once she had the documents in hand, Jafri finally responded to Signal's outreach attempts, declined its proposal to sign a transition agreement, and informed Signal that she would no longer assist Signal in any way. (Id. ¶ 45.)

         Jafri then began forming Looking Glass and the Related Entities between October 12 and October 19, 2017. (Id. ¶¶ 46-48.) By October 20, Looking Glass and the Related Entities had begun funding cases and operating as a going concern. (Id. ¶ 130.)

         At some point, Jafri also solicited Signal executives to join her new venture, including Olsen, Signal's chief marketing officer. She represented to investors that these Signal executives were part of her venture's management team. (Id. ¶¶ 67-68, 94, 99.) In Signal's original and first amended complaints, Signal alleged that it could not determine whether Olsen worked with Jafri or whether Jafri mentioned him without his knowledge or permission. (Dkt. 1 ¶ 51; dkt. 184 ¶ 69.) But Signal's now-operative second amended complaint alleges that Olsen knowingly assisted Jafri. (Dkt. 247 ¶ 69.) Signal now believes that Olsen drafted investor presentation materials for Jafri's new venture before he stopped working for Signal on October 27, 2017. (Id. ¶ 95-97.)

         Shortly after these events, Signal sued Jafri and Looking Glass for misappropriation of trade secrets and breach of fiduciary duty. After some discovery, Signal added the Related Entities and Olsen as defendants to those claims and added a count of breach of contract against Olsen. Signal alleges that the Related Entities are responsible for Jafri's actions because she was “the prime organizer, managing member[], [and] chief administrative officer” of Looking Glass and the Related Entities. (Id. ¶ 139.) The Related Entities, Signal claims, are therefore responsible for Jafri's actions under the doctrine of respondeat superior. (Id.) Signal also alleges that Jafri mentioned three of the four Related Entities in presentations to investors and mentioned the fourth in negotiations with a vendor. (Id. ¶¶ 140-41.) Finally, Signal provides an organization chart showing that the Related Entities are subsidiaries of Looking Glass. (Id. ¶ 142.) Signal concedes that the Related Entities operated, in part, in markets that Signal was “exploring” but was not yet competing in. (Id. ¶ 7.)

         II. The Firm's Involvement

         Signal alleges that its own law firm helped Jafri compete against Signal while still representing and receiving fees from Signal. Signal first engaged the Firm in 2016 to provide legal advice and services “in all general corporate matters.” (Id. ¶ 143.) Signal and the Firm signed an engagement letter that provided in relevant part that “our firm will not be representing any of your owners, members, directors, officers, or employees unless specifically engaged to do so. Accordingly, absent a separate engagement to represent such other persons or entities, our representation of you does not create an attorney-client relationship between the firm and any other persons or entities.” (Dkt. 247, Ex. 1 ¶ 1.) The Firm periodically obtained conflict waivers from Signal for representing Signal employees but never received one for Jafri. (Dkt. 247 ¶¶ 145, 147.) The engagement letter also provided that the Firm “will not be required to disclose to [Signal] . . . any information our firm[] possess[es] with respect to which our firm owes a duty of confidentiality to another current or former client.” (Dkt. 247, Ex. 1 ¶ 11.)

         On September 29, 2017, the day after Jafri separated from Signal, she had an hour-long conversation with the four individual defendant attorneys from the Firm. (Id. ¶ 160.) The Firm (including all four attorneys) then helped Jafri form Looking Glass and the Related Entities, while still representing Signal, and Firm attorney Friedland served as registered agent for some of the entities. (Id. ¶ 170.)

         While still representing Signal, the Firm also provided Jafri with legal advice about several issues. The Firm reviewed and commented on the Related Entities' contract with a software vendor. (Id. ¶ 128.) The Firm also advised Jafri about potential litigation. (Id. ¶ 125.) As Jafri explained to a prospective investor on October 3, while the Firm represented both Signal and Jafri,

I spoke to my attorneys after our meeting. According to them, my former investors would have no legal leg to stand on and in addition, no standing to sue in the scenario we discussed earlier today; thereby any suit filed would be frivolous. My lawyers also mentioned that my previous investors likely would have no incentive to sign any agreement that I would put in front of them and it may ruffle feathers unnecessarily.

(Id. ¶ 125.) This investor had reached out earlier to Signal looking for investment opportunities, and Jafri told him that “[t]his deal would not necessarily be with Signal, rather the deal would be with NewCo.” (Id. ¶ 102.) Considering her suggestion that investing in NewCo instead of Signal was an insubstantial matter of corporate form, it is reasonable to infer that Jafri misrepresented to the investor that Signal was an investor of hers, rather than her employer. The court thus infers that when she mentioned litigation with “former/previous investors, ” she meant Signal. Thus, taking the allegations in the light most favorable to Signal, the Firm offered Jafri advice about potential litigation against Signal while also representing Signal. (Id. ¶ 125.) In turn, this advice assuaged the investor's fears and convinced him to invest. (Id. ¶ 103.)

         Finally, on October 16, while the Firm still represented Signal, Jafri emailed Vanessa Schoenthaler a copy of Olsen's employment agreement with Signal while Olsen was still a Signal executive. (Id. ¶ 169.) Construing the allegations in the light most favorable to Signal, the court infers that through this email, Jafri asked Schoenthaler-while the Firm still represented Signal-to counsel her on how to poach Olsen from Signal without causing him to breach his employment agreement.

         Signal also claims that the Firm lied to Signal by saying it did no work for Jafri. On October 19, 2017, Signal's in-house counsel emailed Firm attorney Friedland, worried about whether the Firm represented Jafri, whom Signal considered adverse. (Id. ¶ 155.) In-house counsel asked, “I need to understand . . . whether there is an attorney-client relationship (even if brief or temporary) with Farva.” (Id.) Friedland replied on October 20 that although there was “no point in time at which we represented Farva in a manner adverse to Signal, ” “[i]f [Signal is] also asking the broader question of whether we represent Farva on other matters, I cannot answer that.” (Id. ¶ 156.) A week later, on October 27, Friedland ended the Firm's representation of Signal, stating,

Farva has asked us to represent her in matters unrelated to Signal (and, at my request, has given the ok to disclose this to you). Because I anticipate that her future endeavors may not be completely unrelated to the space in which Signal operates, I feel it necessary to choose between Signal and Farva. While not an ethical conflict, it is a business conflict which would trouble me if I were either client. In short, and with nothing but the utmost respect for you and Signal, I choose Farva.”

(Id. ¶ 157.)

         Signal alleges that the Firm knew in advance that Jafri planned to resign because while still a Signal employee she once signed a Signal deal document from the Firm's offices. (Id. ¶ 159.) Signal does not, however, allege that the Firm performed any work for Jafri before she resigned from Signal.

         For ease of reference, the chronology of key events (taken in the light most ...


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