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Brightstar Corp. v. PCS Wireless, LLC

Superior Court of Delaware

August 7, 2019

BRIGHTSTAR CORP., Plaintiff/Counterclaim Defendant,
v.
PCS WIRELESS, LLC, Defendant/Counterclaim Plaintiff.

          Submitted: June 25, 2019

         Upon Defendant/Counterclaim Plaintiff PCS Wireless, LLC's Motion to Dismiss Count II of the Complaint, GRANTED.

         Upon Plaintiff/Counterclaim Defendant Brightstar, Corp.'s Motion to Dismiss Counts I and III of the Counterclaims, GRANTED in part; DENIED in part.

          Thomas E. Hanson, Jr., Esquire (argued), Barnes & Thornburg, LLP, Wilmington, Delaware, Mark L. Durbin, Esquire (pro hac vice) (argued), Barnes & Thornburg, LLP, Chicago, Illinois, Attorneys for Plaintiff/Counterclaim Defendant.

          Jonathan A. Choa, Esquire, Potter Anderson & Corroon, LLP, Wilmington, Delaware, Sean M. Douglass, Esquire (pro hac vice) (argued), Joseph M. Terry, Esquire (pro hac vice) (argued), Williams & Connolly, LLP, Washington, District of Columbia, Attorneys for Defendant/Counterclaim Plaintiff.

          MEMORANDUM OPINION AND ORDER

          PAUL R. WALLACE, JUDGE

         I. INTRODUCTION

         Plaintiff Brightstar Corporation brings this action against Defendant PCS Wireless, LLC for claims arising from a June 1, 2016 Mutual Non-Disclosure Agreement (the "NDA") and a November 7, 2016 Buy/Sell Agreement, as amended (the "Buy/Sell Agreement"), that Brightstar and PCS entered into as part of negotiations for a proposed strategic alliance and potential merger. In its Complaint, Brightstar brings one count each of breach of contract and misappropriation of trade secrets, through which it seeks, inter alia, compensatory and exemplary damages.

         PCS answered the Complaint and brings against Brightstar five counterclaims: Counterclaim I - alleging fraud; Counterclaim II - alleging breach of contract (in the alternative to Counterclaim I); Counterclaim III - alleging breach of the implied covenant of good faith and fair dealing (in the alternative to Counterclaims I and II); Counterclaim IV - alleging misappropriation of trade secrets; and Counterclaim V - alleging a separate breach of contract.

         Now before the Court is PCS's Motion to Dismiss Count II (misappropriation of trade secrets) of Brightstar's Complaint and Brightstar's Motion to Dismiss PCS's Counterclaims I (fraud) and III (breach of the covenant of good faith and fair dealing).

         For the reasons explained below, the Court GRANTS PCS's Motion. As to Brightstar's Motion, it is GRANTED, in part, and DENIED, in part.

         I. FACTUAL AND PROCEDURAL BACKGROUND[1]

         A. Factual Background of the Action.

         Brightstar is a Delaware corporation with its principal place of business in Miami, Florida, and is one of the largest subsidiaries of Japanese-based conglomerate SoftBank Group.[2] Brightstar is in the business of distributing wireless equipment and does so primarily using a "Buy-Back and Trade-In" model ("BBTI").[3]

         PCS is a New Jersey limited liability company headquartered in Florham, New Jersey.[4] Ben Nash is PCS's chief executive officer, co-founder, and controlling shareholder.[5] Brightstar and PCS are leaders and competitors in the industry of distributing new and pre-owned smartphones and other mobile devices.[6]

         In 2016, Brightstar and PCS started to discuss a potential merger of the companies.[7] As their negotiations progressed, the parties entered into the NDA on June 1, 2016, [8] then the Buy/Sell Agreement on November 7, 2016 (reinstated and amended on June 1, 2017).[9] The Buy/Sell Agreement, in particular, memorialized the terms under which PCS would purchase various used mobile devices from Brightstar and Brightstar-approved vendors for resale to third-parties.[10] The terms most relevant to the present case include the pricing, confidentiality, and non-circumvention provisions.

         Specifically, the pricing terms provide that PCS will purchase mobile devices from Brightstar at Brightstar's cost of acquiring those devices plus a predetermined markup.[11] The confidentiality provision requires each party and its affiliates to "maintain in strict confidence" the Confidential Information (as defined in the Buy/Sell Agreement).[12] The non-circumvention provision imposes upon PCS a non-solicitation obligation that during the term of the Buy/Sell Agreement and for a certain period thereafter, PCS shall not solicit the purchase of mobile and iPad devices from the suppliers specified in the Buy/Sell Agreement (including SoftBank, Apple Inc., and their affiliated entities).[13]

         During 2016 and 2017, PCS purchased mobile devices from Brightstar under the Buy/Sell Agreement.[14] Ultimately, the merger contemplated between PCS and Brightstar did not come to fruition.[15] On February 12, 2018, PCS terminated the Buy/Sell Agreement via written notice to Brightstar.[16] After the termination, PCS made three payments to Brightstar in May and June of 2018 totalling about $6 million. This was purportedly to pay for devices PCS purchased pre-termination.[17]

         Brightstar and PCS do not dispute the above facts. However, the parties do contest who is at fault and for what conduct. Brightstar alleges that PCS still owes Brightstar an amount in excess of $10 million for the mobile devices purchased from Brightstar before PCS terminated the Buy/Sell Agreement.[18] Brightstar further alleges that PCS solicited the purchase of mobile devices from restricted vendors in violation of the non-circumvention and confidentiality provisions of the Buy/Sell Agreement.[19]

         PCS denies any further payment obligation to Brightstar. Instead, PCS brings several counterclaims against Brightstar. PCS says Brightstar fraudulently inflated invoices issued to PCS causing PCS to overpay millions of dollars to Brightstar.[20]PCS further claims that Brightstar has improperly used PCS's confidential information-specifically, PCS's product grading system and other commercially valuable information.[21]

         B. Procedural Background of the Action.

         This action is not the first attempt at resolving Brighstar and PCS's payment dispute. Brightstar first filed an action in the District Court of Delaware against PCS and Nash on July 6, 2018.[22] Brightstar voluntarily dismissed the action for failure to establish diversity because Nash-the beneficial owner of PCS-was a resident of Florida and Brightstar has its principal place of business in Florida.[23] Following dismissal in the federal court, Brightstar and PCS attempted two unsuccessful mediations on October 9 and 22, 2018. Then this action ensued.[24]

         Now before the Court are the parties' cross-motions to dismiss.

         II. STANDARD OF REVIEW

         The standard of review on a motion to dismiss is derived from Superior Court Civil Rule 12(b)(6), which provides that a respondent may bring a motion to dismiss if the claimant fails "to state a claim upon which relief can be granted."[25] In considering a motion to dismiss, the Court must:

(1) accept all well pleaded factual allegations as true,
(2) accept even vague allegations as "well pleaded" if they give the opposing party notice of the claim,
(3) draw all reasonable inferences in favor of the non-moving party, and
(4) [not dismiss the claims] unless the [claimant] would not be entitled to recover under any reasonably conceivable set of circumstances.[26]

         However, the Court "is not required to accept every strained interpretation of the allegations proposed by the [claimant]."[27] The Court should "ignore conclusory allegations that lack specific supporting factual allegations."[28] The Court also may not consider extrinsic materials on a motion to dismiss except "where an extrinsic document is integral to a plaintiffs claim and is incorporated into the complaint by reference [.]"[29]

         Dismissal is warranted when a party either fails to plead facts supporting an element of its claim (or counterclaim), or where under no reasonable interpretation of the facts alleged could its complaint (or answer) be read to state a claim (or counterclaim) for which relief might be granted.[30] If the Court engages these well-accepted standards and finds the claimant (or counter-claimant) may recover, the Court must deny the motion to dismiss.[31]

         III. DISCUSSION

         A. PCS's Motion to Dismiss Count II (Misappropriation of Trade Secrets) of Brightstar's Complaint.

         In Count II, Brightstar asserts a claim for misappropriation of a trade secret under the Delaware Uniform Trade Secrets Act.[32] According to Brightstar, the trade secret in question is "confidential information" as defined in the Buy/Sell Agreement, including, without limitation, "information regarding the price Brightstar would pay for products."[33] Brightstar claims that "PCS misappropriated Birghtstar's pricing information and used it to solicit business from Brightstar's suppliers."[34]

         To survive a motion to dismiss a DUTSA claim under Rule 12(b)(6), the complaint 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; and
(iv) The trade secret has been misappropriated within the meaning of that term as defined in the DUTSA.[35]

         PCS moves for dismissal of Count II, contending that Brightstar failed to successfully allege two of the elements required to state a DUTSA claim: (1) the existence of a Brightstar trade secret[36] and (2) alleged misappropriation by PCS.[37]

         To survive dismissal under Delaware's notice pleading standard, [38] "a plaintiff need not plead evidence," but at a minimum, must "allege facts that if true, state a claim upon which relief can be granted."[39] "An allegation, though vague or lacking in detail, is nevertheless 'well-pleaded' if it puts the opposing party on notice of the claim being brought against it."[40]

         1. Brightstar Sufficiently Alleges the Existence of a Trade Secret

         To make out a DUTSA misappropriation of trade secrets claim, the claimant first must show the subject information qualifies as a "trade secret." DUTSA defines "trade secret" as "information" that:

a. derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
b. is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.[41]

         Thus, to be considered a trade secret, information must: (1) not be generally known or readily ascertainable; (2) derive independent economic value from not being generally known or readily ascertainable; and (3) be subject to reasonable efforts to maintain its secrecy.[42]

         PCS argues that Brightstar fails to adequately allege the existence of a trade secret because: (1) the prices Brightstar would pay for products cannot be Brightstar's trade secrets since Brightstar itself derived no independent economic value from its secrecy;[43] (2) Brightstar fails to allege that the prices paid to its suppliers were actually kept secret by its suppliers;[44] and (3) Brightstar's Complaint contains insufficient details of what pricing information it considers to be a trade secret.[45] While Brightstar responds that it has alleged sufficient facts under the notice pleading standard to demonstrate that its pricing information can be considered a trade secret.[46]

         Brightstar's Complaint sufficiently alleges the three elements required to establish the existence of a trade secret under the liberal notice pleading standards governing this motion.[47]

         a. Brightstar Sufficiently Alleges its Pricing Information is Not Generally Known or Ascertainable Through Other Means.

         To be considered a trade secret, information must not be "known to, and not be[] readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use."[48] Brightstar says it "maintains its pricing information as confidential, stored it in a password protected system, and limited its disclosure only to those with a need to know who are subject to confidentiality agreements."[49] Also, Brightstar points out, the pricing information is "not generally known, not available on the Internet, and not otherwise available to the public."[50]

         On this motion to dismiss, the Court must accept Brightstar's allegations as true, [51] and draw reasonable inferences in its favor.[52] Brightstar's allegations demonstrate that the pricing information is securely stored, disclosed on a need-to-know basis and revealed only to those who are subject to certain confidentiality arrangements. These assertions alone illustrate that the pricing information is not generally known or readily ascertainable by the public at large.

         PCS contends that the pricing information is not secret because Brightstar gives it to suppliers in the course of business negotiations and fails here to demonstrate any control over those supplier's ability to publicize it.[53] That's it; that's really the sum of PCS's no-secret argument. And it falls short here.

         According to its Complaint, Brightstar's pricing information is disclosed only to third parties "with a need to know" it and "who are subject to confidentiality agreements."[54] With this insistence of such an agreement as a precursor to disclosure, the Court finds it reasonable to infer that Brightstar's suppliers are subject to confidentiality obligations with respect to the pricing information in question and are otherwise not free to publicize it in a manner that would make it generally known or ascertainable by others.

         b. Brightstar Sufficiently Alleges its Pricing Information has Independent Economic Value.

         Now "[n]ot all confidential information is a trade secret."[55] To be considered a trade secret, information must "[d]erive[] independent economic value" from its secrecy.[56] In the context of sophisticated commercial transactions, a fact-intensive analysis of the economic activities at play may be required to determine both whether protection is warranted[57] and the beneficiary of such protection.[58] The independent economic value requirement highlights DUTSA's purpose-mainly, to protect the "investment" behind "new marketing plans, chemical formulas, client lists, and other materials developed by a business only after the extension of considerable effort."[59] This Court has stressed the importance of protecting secrets that are the product of considerable effort.[60]

         Brightstar claims trade secret protection for "certain confidential information, as that term is defined in the [Buy/Sell] Agreement, including, without limitation, information regarding the price Brightstar would pay for products."[61] The Buy/Sell Agreement defines "Confidential information" as follows:

[A]ny proprietary, financial or other non-public information disclosed or made available by the other Party or its Affiliates in connection with this [Buy/Sell] Agreement, including any financial information, pricing information, marketing plans, business plans and customer lists of such other Party hereto. For clarity, the contact and other information regarding any Supplier or its Affiliates provided by Brightstar to PCS shall be Confidential Information of Brightstar hereunder.[62]

         PCS contends that "pricing information" is vaguely plead and refers solely to "the price Brightstar would pay for products."[63] According to PCS, the price Brightstar pays to its suppliers derives economic value to the suppliers, not Brightstar.[64] But "Brightstar does not allege that the general idea of having pricing information is a trade secret. Rather, [ | [Brightstar contends its] overall pricing information and strategy - established over years in the market as one of the global leaders - is the trade secret."[65]

         This is a motion to dismiss and so the Court must draw all reasonable inferences in favor of Brightstar as the non-moving party.[66] Under that standard the "pricing information" as plead in Brightstar's Complaint represents more than just the price Brightstar paid suppliers for its products; it includes the strategy behind Brightstar's pricing scheme. Seeing as though Brightstar and PCS are both in the business of buying and selling new and used electronic devices, [67] Brightstar's pricing information and the underlying strategy could very well encompass some of "the competitive advantage that [Brightstar] ha[s] in the marketplace."[68] Brightstar alleges that "[i]f a competitor obtained Brightstar's pricing information, it could use that information to undercut Brightstar in negotiating agreements with existing and new suppliers, thereby avoiding the need to invest significant time and resources into gathering pricing data for the industry or establishing a relationship with the suppliers."[69] This concern embodies the type of "investment in the business, the ideas, the effort and time spent by the business in developing it"[70] that DUTSA was designed to protect. So Brightstar sufficiently alleged its pricing information has independent economic value by being kept secret.

         c. Brightstar Sufficiently Alleges it Undertook Reasonable Efforts to Maintain the Secrecy of the Pricing Information.

         To qualify as a trade secret, the holder of protected information must undertake efforts "reasonable under the circumstances to maintain its secrecy."[71] The reasonable efforts requirement "is not a high bar."[72] "Bare legally conclusive assertions are inadequate; confidentiality provisions or policies intended to prevent unauthorized disclosure are sufficient."[73]

         As mentioned before, Brightstar's Complaint alleges that it "maintained its pricing information as confidential, stored it in a password protected system, and limited its disclosure only to those with a need to know who are subject to confidentiality."[74] Accepting these allegations as true, [75] Brightstar's use of secured storage methods and insistence on disclosing the pricing information only to those who agree to be bound by a confidentiality agreement demonstrates that Brightstar undertook sufficiently reasonable measures to keep the information secret.

         2. Brightstar Fails to Plead Facts in Support of Misappropriation by PCS.

         Having found that Brightstar has sufficiently alleged the existence of a trade secret, the Court must now consider whether Birghtstar adequately plead facts demonstrating that PCS engaged in any misappropriation of Brightstar's pricing information.

         To make out a DUTSA trade secret misappropriation claim, the claimant also must plead facts sufficient to demonstrate "misappropriation" by the defendant. Under DUTSA, "misappropriation" is defined, in relevant part, as:

a. Acquisition of a trade secret of another by a person who knows or has reason to know that the secret was acquired by improper means; or
b. Disclosure or use of a trade secret of another without express or implied consent by a person who:
1. Used improper means to acquire knowledge of the trade secret; or
2. At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade was:
A. Derived from or through a person who had utilized improper means to acquire it;
B. Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
C. Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use . . .[76]

         On a motion to dismiss, the Court accepts as true all well-pleaded allegations, [77] and draws all factual inferences in favor of the non-moving party.[78]But, the Court need not accept "conclusory allegations that lack specific supporting factual allegations."[79] A complaint relying exclusively on "threadbare recitals of the elements of a ...


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