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BrandRep, LLC v. Ruskey

Court of Chancery of Delaware

January 7, 2019

BrandRep, LLC, et al.
Chad Ruskey, et al.,

          Date Submitted: December 20, 2018

          Michael J. Barrie, Esquire William M. Alleman, Jr., Esquire Benesch, Friedlander, Coplan & Aronoff LLP.

          Philip A. Rovner, Esquire Jonathan A. Choa, Esquire Potter Anderson & Corroon LLP.

          Barry M. Klayman, Esquire Gregory F. Fischer, Esquire Cozen O'Connor P.C.

          David S. Eagle, Esquire Sean M. Brennecke, Esquire Klehr Harrison Harvey Branzburg LLP.

         Dear Counsel:

         The defendants in this case have moved to dismiss breach of fiduciary duty, aiding and abetting, and trade secret misappropriation claims.[1] One defendant has also moved to dismiss on personal jurisdiction grounds. In anticipation of the preliminary injunction hearing scheduled for tomorrow, I have expedited my consideration of these motions. As explained below, the pending motions are denied. To address the motions promptly, I write for the parties and recite only the necessary facts.

         I. The Court Has Personal Jurisdiction Over Mammano.

         BrandRep[2] alleges defendant Deirdre Mammano aided and abetted breaches of fiduciary duty (Count III) and misappropriated trade secrets (Count IV). Mammano has moved to dismiss both counts. She argues she is not subject to personal jurisdiction in Delaware. I address Mammano's personal jurisdiction arguments first, as I can only substantively review the pleadings against her if I have jurisdiction to do so.[3]

         When a defendant moves to dismiss for lack of personal jurisdiction under Rule 12(b)(2), "the plaintiff bears the burden of showing a basis for the court's exercise of jurisdiction over the defendant."[4] The plaintiff must "make out a prima facie case establishing jurisdiction. A prima facie case requires the 'production of enough evidence to allow the fact-trier to infer the fact at issue and rule in the party's favor.'"[5] "The court engages in a two-step analysis: the court must first determine that service of process is authorized by statute and then must determine that the exercise of jurisdiction over the nonresident defendant comports with traditional due process notions of fair play and substantial justice."[6] Where, as here, "the court makes the determination regarding personal jurisdiction without an evidentiary hearing, it will consider the pleadings, affidavits and evidence of record and will draw all reasonable inferences therefrom in favor of the plaintiff."[7]

         As an initial matter, I reject the argument that Mammano waived the defense that the Court lacks jurisdiction over her. BrandRep argues she did so "by voluntarily submitting to the Court's jurisdiction and obtaining benefits through the Status Quo Order without ever raising a personal jurisdiction defense."[8] But as Mammano points out, the parties agreed to language in that Status Quo Order providing "[t]he Parties reserve all rights, claims and defenses and shall not be deemed to have waived any rights, claims and defenses by executing this Stipulation and [Proposed] Order."[9] Mammano also asserted her defense promptly.[10] BrandRep remains bound by the reservation of rights in the Status Quo Order. I conclude Mammano did not waive her personal jurisdiction defense.

         A. Statutory Jurisdiction

         BrandRep sought to serve Mammano pursuant to Delaware's long-arm statute, 10 Del. C. § 3104.[11] That statute provides that a nonresident who commits certain acts or causes certain injuries in Delaware is subject to jurisdiction in Delaware. In relevant part, it states:

(c) . . . a [Delaware] court may exercise personal jurisdiction over any nonresident . . . who in person or through an agent:
(1) Transacts any business or performs any character of work or service in [Delaware] . . . .

         Mammano formed defendant Business Solutions, a Delaware LLC, in May 2017.[12] "Not surprisingly, Delaware courts have held consistently that forming a Delaware entity constitutes the transaction of business within Delaware that is sufficient to establish specific personal jurisdiction under Section 3104(c)(1)."[13] Because Section 3104(c)(1) confers specific, not general, jurisdiction, formation of a Delaware entity may only serve as the basis for personal jurisdiction where there is a sufficient nexus between that formation and the alleged wrongful conduct.[14]"When determining whether a sufficient nexus exists, the principal factor that Delaware courts have examined is the extent of the factual relationship between the formation of the Delaware entity and the cause of action."[15]

         BrandRep contends Mammano formed Business Solutions in Delaware as part of the wrongful scheme to misappropriate BrandRep's trade secrets.[16] Mammano formed Business Solutions in May 2017, while BrandRep was negotiating its sale and while defendant Chad Ruskey was allegedly talking with developers and third-party defendant Banir Ganatra about bringing BrandRep's customer relationship management ("CRM") software "officially into BrandRep."[17] Ruskey allegedly took BrandRep's trade secrets, gave them to defendant Employer Advertising, then sold his ownership in BrandRep.[18] Mammano then allegedly transferred Employer Advertising's assets, including BrandRep's misappropriated trade secrets, to Business Solutions.[19] I refer to Employer Advertising and Business Solutions collectively as the "Entity Defendants." BrandRep also alleges the defendants attempted to conceal their actions, including by changing trade names and limiting what employees could say about the services Business Solutions offered.[20]

         Giving BrandRep the benefit of all reasonable inferences, as I must, I conclude these allegations provide a sufficient nexus between Mammano's formation of Business Solutions in Delaware and the alleged scheme to take BrandRep's trade secrets and use them to compete with BrandRep.[21] While that scheme allegedly existed before Mammano formed Business Solutions, the company's formation allegedly furthered "the conspiratorial goal" of covertly using BrandRep's trade secrets to compete with BrandRep.[22] Mammano's act of forming a Delaware entity as a contribution toward that scheme allows the Court to exercise jurisdiction over her under Section 3104, so long as jurisdiction is constitutionally permissible.

         B. Constitutional Due Process

         Jurisdiction over Mammano must be not only statutorily compliant, but also constitutional. The constitutional analysis asks "whether subjecting the nonresident defendant to jurisdiction would violate due process."[23] BrandRep asserts the Court has jurisdiction over Mammano under the conspiracy doctrine.

         Conspiracy jurisdiction for BrandRep's aiding and abetting claim is governed by the five-part Istituto Bancario test.[24] That test requires a plaintiff to show:

(1) a conspiracy to defraud existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.[25]

         "[I]t now is well-settled that 'a claim for aiding and abetting a breach of fiduciary duty satisfies the first and second elements of the Istituto Bancario test.'"[26] I focus on the third, fourth, and fifth elements of the Istituto Bancario test.

         The third element is "a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state." It is "well-established that a party that forms a Delaware entity as part of a wrongful scheme has constitutionally sufficient 'minimum contacts' with Delaware for purposes of personal jurisdiction."[27] As explained above, BrandRep has alleged Mammano formed a Delaware entity as one part of the scheme by which the defendants misappropriated BrandRep's software, in a way that allowed Ruskey to benefit from selling his interest in BrandRep. The allegations Mammano formed an entity that contributed to the unlawful misappropriation and competition satisfy the third element.

         "The fourth and fifth elements of the [Istituto Bancario] test evaluate whether 'the defendant knew or had reason to know of the act in the forum state' and whether such act 'was a direct and foreseeable result of the conduct in furtherance of the conspiracy.'"[28] "These elements require allegations 'from which one can infer that a foreign defendant knew or should have known that the conspiracy would have a Delaware nexus.'"[29] BrandRep alleges Mammano formed a Delaware entity to use and profit from the misappropriated trade secrets of BrandRep, another Delaware entity.[30] Creating Business Solutions thus was allegedly "one of the means by which the conspiracy was effectuated."[31] The alleged resulting harm to BrandRep was direct and not only foreseeable, but also intended.[32] BrandRep's allegations satisfy the fourth and fifth elements of the Istituto Bancario test.

         Mammano argues that the alleged misappropriation occurred years before she formed Business Solutions in Delaware. This does not change my conclusion that BrandRep adequately alleged Mammano formed a new Delaware entity that participated in the existing scheme. Mammano also relies on cases that did not involve a party incorporating an entity in Delaware as part of the alleged conspiracy. In Iotex Communications, Inc. v. Defries, the court analyzed acts "wholly outside" Delaware, and distinguished cases where events, such as filings with the Secretary of State, "actually took place in Delaware."[33] Similarly, in In re Bracket Holding Corp. Litigation, none of the "conduct [was] alleged to have occurred in Delaware."[34] These cases do not bear on Mammano's creation of a Delaware entity.[35]

         I conclude the Court's exercise of personal jurisdiction over Mammano comports with due process.[36]

         II. Plaintiffs Stated Claims For Breach Of Fiduciary Duty, Aiding And Abetting, And Trade Secret Misappropriation.

         In considering a motion to dismiss under Rule 12(b)(6), I must "accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as 'well-pleaded' if they provide the defendant notice of the claim, [and] draw all reasonable inferences in favor of the plaintiff."[37] I must "deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."[38]

         A. Count I: Breach of Fiduciary Duty

         Count I is a breach of fiduciary duty claim asserted by BrandRep, LLC against Ruskey.[39] Ruskey moved to dismiss this claim, arguing BrandRep alleged Ruskey was a fiduciary only of BrandRep Inc., as distinguished from BrandRep, LLC.[40]Ruskey argues BrandRep, LLC cannot bring the claim on behalf of BrandRep Inc. because BrandRep Inc. was "not a plaintiff and there is no allegation that BrandRep can bring a claim on its behalf."[41] The dispute boils down to whether BrandRep pled sufficient facts about its corporate history, in which BrandRep Inc. converted to BrandRep, LLC.

         The Amended Complaint alleges that "Ruskey was a director and officer of BrandRep [Inc.] from 2012 until approximately December 18, 2017, "[42] and that "[a]s a director and officer of BrandRep, Ruskey owed BrandRep fiduciary duties of care and loyalty."[43] The Amended Complaint further alleges that on December 18, 2017, Ganatra and Ruskey sold their ownership interests in BrandRep to BrandRep Holdings, LLC, in a transaction governed by a Membership Interest Purchase and Contribution Agreement ("MIPC").[44] The MIPC was attached to the Verified Amended Complaint, and states that "[i]mmediately prior to the closing" BrandRep Inc. "was converted into a Delaware limited liability company" and continued "as the successor to all rights and obligations of" BrandRep Inc.[45] Delaware law provides that all "causes of action belonging to" a corporation that converts to an LLC are "vested in the other entity or business form to which such corporation has converted."[46]

         "Under our liberal notice-pleading rules, all that is required is that the Defendants have notice of the claims against them."[47] In other words, "all evidentiary facts need not be pleaded under our practice of notice pleading."[48] I requested supplemental briefing from Ruskey for authority supporting his argument that BrandRep's claim must be dismissed due to failure to adequately plead its corporate history. His response was not convincing.[49] I conclude the Amended Complaint and attached documents put Ruskey on notice that he allegedly owed fiduciary duties to BrandRep Inc.; that BrandRep Inc. converted to BrandRep, LLC; and that BrandRep, LLC asserted Ruskey had breached fiduciary duties owed to BrandRep Inc. Ruskey's motion to dismiss Count I is denied.

         B. Count III: Aiding and Abetting Breach of Fiduciary Duty

         Count III alleges Mammano and the Entity Defendants aided and abetted Ruskey's breaches of fiduciary duty.[50] BrandRep must plead four elements: "(i) the existence of a fiduciary relationship, (ii) a breach of the fiduciary's duty, (iii) knowing participation in the breach by the non-fiduciary defendants, and (iv) damages proximately caused by the breach."[51] Mammano and the Entity Defendants argue BrandRep failed to plead the first and third elements. I concluded above that BrandRep adequately pled that Ruskey owed fiduciary duties. I now turn to the knowing participation element.

         "Knowing participation in a [director's] fiduciary breach requires that the third party act with the knowledge that the conduct advocated or assisted constitutes such a breach."[52] "[T]he element of 'knowing participation' requires that the secondary actor have provided 'substantial assistance' to the primary violator."[53] "A court's analysis of whether a secondary actor 'knowingly' provided 'substantial assistance' is necessarily fact intensive."[54] Where a defendant secondary actor is an entity, the knowledge of an individual fiduciary or agent may be imputed to that entity.[55] Efforts to conceal competition can support knowing participation.[56] Indeed, "in some circumstances, the [defendant's] actions may be so suspect as to permit, if proven, an inference of knowledge of an intended breach of trust."[57]

         The Entity Defendants allegedly concealed their use of BrandRep's software. BrandRep alleges Business Solutions' "management personnel have told [its] sales representatives that BrandRep is a competitor," and instructed them to notify certain Business Solutions personnel when "they had sold a product to a customer who had also recently been contacted by BrandRep."[58] Business Solutions also allegedly instructed employees to misrepresent to third parties that Business Solutions "was not in the search engine optimization business," and that it was based out of Las Vegas, rather than Orange County, California, where Ruskey and Mammano allegedly reside.[59]

         BrandRep also alleges Ruskey's knowledge that he breached his fiduciary duties by misappropriating BrandRep's software is imputed to the Entity Defendants because Ruskey "owned and/or controlled" the Entity Defendants.[60] Ruskey purportedly misled BrandRep by explaining that "Employer [Advertising] was merely an online job recruiting site, not a BrandRep competitor," and that misrepresentation induced BrandRep to "ma[k]e substantial payments directly to Employer Advertising on Ruskey's behalf."[61] I conclude it is reasonably conceivable that Ruskey owned or controlled the Entity Defendants, such that his knowledge of his alleged breaches of fiduciary duties owed to BrandRep is imputed to both Entity Defendants.[62] Because Ruskey was "the fiduciary and primary wrongdoer" and also allegedly "control[led] [the Entity Defendants] or [] occupie[d] a sufficiently high position that his knowledge is imputed to" those entities, the knowing participation test is "easier to satisfy."[63] Based on Ruskey's imputed knowledge and the Entity Defendants' alleged concealment, it is reasonably conceivable that the Entity Defendants knowingly participated in Ruskey's alleged breaches of fiduciary duty.

         BrandRep also alleges Mammano knowingly participated in Ruskey's breaches of fiduciary duty. Mammano is allegedly Ruskey's "close business associate."[64] It is reasonably conceivable that Mammano knew Ruskey was a BrandRep fiduciary. Mammano, as the CEO of the Entity Defendants, also would have known about their alleged roles in Ruskey's misappropriation of BrandRep's information, and their subsequent competition and concealment of that competition.[65] BrandRep alleges, reasonably in my view because of Mammano's role as CEO, that Mammano caused Business Solutions "to take steps to attempt to conceal Ruskey's misconduct."[66] I conclude it is reasonably conceivable that Mammano knowingly participated in Ruskey's alleged breaches of fiduciary duty.

         Finally, the defendants' alleged actions constitute substantial assistance. Ruskey allegedly monetized his misappropriation through the Entity Defendants, by competing with BrandRep and taking its customers. Mammano, as CEO of those entities, allegedly participated in and benefited from that competition.[67] As discussed in the context of personal jurisdiction, she allegedly formed Business Solutions in an overt act in furtherance of that competition. "At this preliminary stage of the litigation, I cannot rule out the possibility" that the defendants knew of Ruskey's fiduciary position and obligations to BrandRep, and yet helped him breach his duties because it benefited them.[68] Their motion to dismiss Count III is denied.

         C. Count IV: Misappropriation of Trade Secrets

         In Count IV, BrandRep alleges trade secret misappropriation by the defendants.[69] To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must plead four elements:

(i) A trade secret exists. (ii) The plaintiff communicated the trade secret to the defendant. (iii) The communication was made pursuant to an express or implied understanding that the defendant would maintain the secrecy of the information. (iv) The trade secret has been misappropriated within the meaning of ...

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