Frischhertz Electric Company, Inc. v. Merchants Bonding Company
Filing
21
ORDER AND REASONS: IT IS ORDERED that the 6 Motion to Dismiss is hereby DENIED insofar as it seeks to dismiss Counts 2, 6, 7, 8 and 9 of Plaintiff's Complaint. IT IS FURTHER ORDERED that the 6 Motion to Dismiss is GRANTED insofar as it seeks to DISMISS Counts 3, 4, and 5 of Plaintiff's Complaint, as set forth in document. Signed by Judge Ivan L.R. Lemelle on 5/7/2018. (jls)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
FRISCHHERTZ ELECTRIC CO.,
CIVIL ACTION
VERSUS
NO. 17-13739
MERCHANTS BONDING CO.,
SECTION “B”(5)
ORDER AND REASONS
Before the Court is Defendant Merchants Bonding Company’s
(“Defendant Merchants”) “Motion to Dismiss for Failure to State a
Claim” (Rec. Doc. 6), Plaintiff Frischhertz Electric Company’s
(“Plaintiff”) Response in Opposition (Rec. Doc. 8), and Defendant
Merchant’s Reply (Rec. Doc. 14). For the reasons discussed below,
IT IS ORDERED that the Motion to Dismiss (Rec. Doc. 6) is
hereby DENIED insofar as it seeks to dismiss Counts 2, 6, 7, 8 and
9 of Plaintiff’s Complaint.
IT IS FURTHER ORDERED that the Motion to Dismiss is GRANTED
insofar as it seeks to DISMISS Counts 3, 4, and 5 of Plaintiff’s
Complaint.
FACTS AND PROCEDURAL HISTORY
This case originates from a September 2016 consult between
Plaintiff and Eustis Insurance, Inc. (“Eustis”). Rec. Docs. 1 and
6. The purpose of the consult was for the possibility of Eustis
submitting a surety-bond application on behalf of Plaintiff. Rec.
Doc. 1 at 2. On account of the consult, Plaintiff alleges that it
1
shared
with
financial
Eustis,
“sensitive
documentation”
that
confidential
included
and
proprietary
“detailed
financial
statements, asset and liability statements, revenue and expense
statements,
cash
flow
statements
and
tax
related
data”
(hereinafter the “Frischhertz Documentation”). Id. Thereafter,
Eustis
submitted
the
Frischhertz
Documentation
to
Defendant
Merchants in a surety application made on Plaintiff’s behalf. Rec.
Docs. 1 and 6-5. According to Plaintiff’s Complaint, “at all times
Frischhertz [Plaintiff] was under the understanding and belief
that the financial documentation provided to Eustis Insurance
would remain confidential and proprietary.” Rec. Doc. 1 at 2.
Plaintiff alleges that between October 9, 2016 and October
12,
2016,
Defendant
Merchants
disseminated
confidential
and
proprietary information contained in the Frischhertz Documentation
as part of a training session conducted by Defendant Merchants in
Des Moines, Iowa (the “Training”). Rec. Doc. 1 at 3. The Training
session allegedly included “approximately 50 trainees with over 25
different
surety
companies,
agencies,
reinsurers
and
outside
lawyers.” Id.
Plaintiff alleges that shortly after receiving notice of
Defendant Merchants’ use of Plaintiff’s information, Plaintiff
sent
Defendant
Merchants
a
demand
letter.
Rec.
Doc.
8-1.
On
November 15, 2017, Defendant Merchants responded saying that it
would investigate the matter. Rec. Doc. 8-2. On November 30, 2017,
2
Plaintiff filed a complaint containing nine (9) causes of action
against Defendant Merchants for the above-mentioned dissemination
of the Frischhertz Documentation. Rec. Doc. 1. Plaintiff alleges:
1) negligence/breach of privacy; 2) violation of Louisiana Unfair
Trade
Practices
and
Consumer
Protection
Law
(“LUPTA”);
3)
negligent misrepresentation; 4) negligent hiring; 5) breach of
duty of reasonable care, diligence, and judgment under Iowa law;
6) misappropriation under the Iowa Uniform Trade Secrets Act; 7)
misappropriation under the Texas Uniform Trade Secrets Act; 8)
violation of the Texas Deceptive Trade practices Act; and 9) breach
of
contract.
Overall,
Plaintiff’s
Complaint
alleges
Defendant
Merchants’ publishing of confidential and proprietary information
has caused damages to its reputation, including being ostracized
in the bonding/surety market, and a potential inability to obtain
surety bonds from other suppliers in the industry. Defendant
Merchants’ instant motion seeks to dismiss eight of the nine causes
of action in the Complaint filed by Plaintiff. Rec. Doc. 6.
LAW AND ANALYSIS
Rule 12(b)(6) of the Federal Rules of Civil Procedure allows
a party to move for dismissal of a complaint for failure to state
a claim upon which relief can be granted. When reviewing a motion
to dismiss, courts must accept all well-pleaded facts as true and
view them in the light most favorable to the non-moving party.
3
Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). However,
“[f]actual allegations must be enough to raise a right to relief
above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007). “To survive a motion to dismiss, a complaint must
contain sufficient factual matter, accepted as true, to state a
claim to relief that is plausible on its face.” Gonzales v. Kay,
577 F.3d 600, 603 (5th Cir. 2009)(quoting Ashcroft v. Iqbal, 129
S.Ct. 1937, 1949 (2009))(internal quotation marks omitted). The
Supreme Court in Iqbal explained that Twombly promulgated a “twopronged
approach”
to
determine
whether
a
complaint
states
a
plausible claim for relief. Iqbal, 129 S.Ct. at 1950. First, courts
must identify those pleadings that, “because they are no more than
conclusions, are not entitled to the assumption of truth.” Id.
Legal conclusions “must be supported by factual allegations.” Id.
“Threadbare
recitals
of
the
elements
of
a
cause
of
action,
supported by mere conclusory statements, do not suffice.” Id. at
1949.
Upon identifying the well-pleaded factual allegations, courts
“assume their veracity and then determine whether they plausibly
give rise to an entitlement of relief.” Id. at 1950. 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.” Id. at 1949. This
is a “context-specific task that requires the reviewing court to
4
draw
on
its
plaintiffs
judicial
must
experience
“nudge[]
their
and
claims
common
sense.”
across
the
Id.
line
The
from
conceivable to plausible.” Twombly, 550 U.S. at 570. This Court
analyzes each of the eight causes of action Defendant Merchants
seeks to dismiss accordingly.
COUNT
2
-
Violation
of
Louisiana
Unfair
Trade
Practices
and
Consumer Protection Law (“LUTPA”)
Plaintiff alleges that Defendant Merchants’ conduct in using
and
disseminating
the
Frischhertz
Documentation
during
the
Training, and concealment of said disclosure constitutes deceptive
and fraudulent business practices under LUTPA. Rec. Doc. 1 at 8.
Defendant Merchants’ contends that as an insurance company subject
to regulation by the Iowa and Louisiana Commissioners of Insurance
it is exempt from liability under LUTPA. Rec. Doc. 6-5 at 4-5.
LUTPA, or Louisiana Statute § 51:1401-1418, declares unlawful
and provides a right of action for “[u]nfair methods of competition
and unfair or deceptive acts or practices in the conduct of any
trade or commerce.” La. Stat. Ann. § 51:1405. However, “the statute
shall
not
apply
to
actions
or
transactions
subject
to
the
jurisdiction of certain state regulatory bodies or commissioners,
including the insurance commissioner.” 1 Alarcon v. Aetna Cas. &
1
La. Stat. § 51:1406 provides that the provisions shall not apply to:
(1) Any federally insured financial institution, its subsidiaries, and
affiliates or any licensee of the Office of Financial Institutions,
its subsidiaries, and affiliates or actions or transactions subject
to the jurisdiction of the Louisiana Public Service Commission or
5
Sur. Co., 538 So. 2d 696, 700 (La. App. 5 Cir. 1989). “A trade
practice is ‘deceptive’ for purposes of LUTPA when it amounts to
fraud, deceit, or misrepresentation.” Mixon v. Iberia Surgical,
L.L.C.,
956
So.
2d
76,
80
(La.App.
3
Cir.
2007).
Defendant
Merchants contends that as an insurer, it is exempt from liability
under
LUTPA
and
is
subject
to
the
insurance
commissioner’s
regulation. Rec. Doc. 6-5 at 5.
In Group Life & Health Insurance Co., the Supreme Court was
presented with the issue of whether or not certain “pharmacy
agreements” were in the “business of insurance” within the meaning
of the McCarran-Ferguson Act. 2 Grp. Life & Health Ins. Co. v. Royal
Drug
Co.,
440
U.S.
205
(1979).
The
Supreme
Court
noted
the
importance of distinguishing between the business of insurance and
the business of insurers. It noted that the statutory exemption
was for “the business of insurance.” Id. at 211. As a result, the
primary element that distinguishes the business of insurance from
other business arrangements is the involvement of any underwriting
or spreading of risk. Ultimately, the Supreme Court held that the
pharmacy agreements did not involve any underwriting or spreading
other public utility regulatory body, the commissioner of financial
institutions,
the
insurance
commissioner,
the
financial
institutions and insurance regulators of other states, or federal
banking regulators who possess authority to regulate unfair or
deceptive trade practices. (Emphasis added).
2
15 U.S.C. §§ 1011-1015.
6
of risk, but were “merely arrangements for the purchase of goods
and services by Blue Shield” and “thus legally indistinguishable
from countless other business arrangements that may be made by
insurance companies.” Grp. Life & Health Ins. Co., 440 U.S. at
214-15. The Fifth Circuit considers three factors determining
whether an act is part of the “business of insurance”: “first,
whether the practice has the effect of transferring or spreading
a policyholder's risk; second, whether the practice is an integral
part
of
the
policy
relationship
between
the
insurer
and
the
insured; and third, whether the practice is limited to entities
within the insurance industry.” Wiley v. Sec. & Exch. Comm'n, 663
F. App'x 353, 359 (5th Cir. 2016).
Here, Plaintiff’s relationship with Defendant Merchants was
not
within
the
business
of
insurance.
While
the
Frischhertz
Documentation was originally provided to Defendant Merchants by
way of Eustis for the purposes of obtaining a surety, Defendant
Merchants did not ultimately obtain said surety for Plaintiff. In
fact. Defendant Merchants repeatedly denies that Plaintiff was
ever its “customer.” Rec. Doc. 6. Rather, the alleged dissemination
was a decision made by Defendant Merchants for the purposes of the
Training; wholly unrelated to any business of insurance services
with Plaintiff. The actions challenged by Plaintiff have nothing
to do with transferring or spreading a policyholder's risk, are
not an integral part of an insurance policy relationship between
7
Defendant Merchants and Plaintiff, and is not limited to entities
within the insurance industry.
Defendant Merchants further argues that Plaintiff’s claims
are preempted under LUTPA and that Plaintiff lacks standing for
its failure to allege facts establishing an “ascertainable loss of
money or property.” However, taking Plaintiff’s allegations of
loss and damages suffered as true the Complaint sufficiently states
a claim under LUTPA at this stage of the litigation. See Rec. Doc.
1 at 5, 9. Finally, the one year period in La. R.S. 51:1409(E) is
a peremptive period; however, it does not begin to run until a
continuing violation ceases. CheckPoint Fluidic Sys. Int'l, Ltd.
v. Guccione, 888 F. Supp. 2d 780, 792 (E.D. La. 2012) citing Tubos
de
Acero
de
Mexico,
S.A.
292
F.3d
at
481–82.
Plaintiff’s
allegations of Defendant Merchants’ use of Plaintiff’s information
in subsequent trainings/violations in other states is sufficient
to survive the instant motion to dismiss.
COUNT 3 - Negligent Misrepresentation 3
In its third cause of action Plaintiff alleges negligent
misrepresentation where Defendant Merchants owed it a duty of care
to
provide
Frischhertz
security
and
Documentation
confidentiality
and
breached
with
that
regards
duty
to
the
when
it
disseminated the Plaintiff’s information during the Training, and
3
Plaintiff’s Response in Opposition (Rec. Doc. 8) cites Fifth Circuit
case law as a result this Court infers that Plaintiff’s claim is pursuant
to Louisiana law.
8
possibly at other alleged subsequent trainings. Rec. Doc. 1 at 910. Plaintiff maintains that Defendant Merchants advertised and
represented to the public that it would provide confidentiality
and security. Id. Further, Plaintiff asserts that it relied upon
these
representation
and
Defendant
Merchants
knew
said
representations were untrue or had reckless disregard for the
veracity of its statements. Id.
To properly allege a claim for negligent misrepresentation in
Louisiana: (1) there must be a legal duty on the part of the
defendant to supply correct information; (2) there must be a breach
of that duty, which can occur by omission as well as by affirmative
misrepresentation; and (3) the breach must have caused damages to
the plaintiff based on the plaintiff's reasonable reliance on the
misrepresentation.
Assocs.,
527
Kadlec
F.3d
412,
Med.
418
Ctr.
(5th
v.
Cir.
Lakeview
2008).
In
Anesthesia
negligent
misrepresentation cases, Louisiana courts have held that even when
there is no initial duty, voluntarily disclosure assumes a duty to
insure the information is correct. Id. at 419 (5th Cir. 2008).
Without specificity, Plaintiff vaguely asserts that Defendant
Merchants made certain public representations, including on its
website,
to
“ascribe
to
a
commitment
to
maintain
the
confidentiality of the personal information which it obtains.”
Rec. Doc. 1 at 3.
Merchants
is
not
However—short of any allegations that Defendant
committed
to
maintaining
9
confidentiality—the
information Plaintiff points to does not rise to the level of
misrepresentations of fact under Louisiana law. Plaintiff fails to
sufficiently state a claim for negligent misrepresentation.
COUNT 4 – Negligent Hiring
Plaintiff’s next cause of action is for negligent hiring.
Because Plaintiff’s Complaint continually fails to specify what
state and statute pursuant to which Plaintiff alleges its claim,
we analyze the allegations under Iowa law as Defendant Merchants
is an Iowa corporation organized under the laws of the State of
Iowa.
The State of Iowa follows the Second Restatement’s recitation
of the requirements to assert a claim for negligent hiring. See
Godar v. Edwards, 588 N.W.2d 701, 708 (Iowa 1999). Consequently,
in order for Plaintiff to recover based on a negligent hiring
claim, the following must be proven:
(1) that the employer knew, or in the exercise of
ordinary care should have known, of its employee's
unfitness at the time of hiring;
(2) that through the negligent hiring of the
employee, the employee's incompetence, unfitness, or
dangerous
characteristics
proximately
caused
the
resulting injuries; and
(3) that there is some employment or agency
relationship between the tortfeasor and the defendant
employer.
Godar
v.
Edwards,
588
N.W.2d
701,
708–09
(Iowa
1999).
See
Restatement (Second) of Agency § 213 (1957). Plaintiff offers no
evidence that Defendant Merchants knew or should have known of its
10
employee’s unfitness or dangerous characteristics at the time of
hiring. Further, the injuries alleged by Plaintiff are not the
type of injuries to an individual or the public contemplated by
recovery for negligent hiring. See generally Restatement (Second)
of
Agency
§
213
(1957);
see
also
27
Am.Jur.2d
Employment
Relationship § 473, at 913 (1996) (“The tort of negligent hiring
is based on the principle that a person conducting an activity
through employees is subject to liability for harm resulting from
conduct in the employment of improper persons involving risk of
harm to others.”). Accordingly, Plaintiff’s claim for negligent
hiring is dismissed.
COUNT 5 – Breach of Duty of Reasonable Care, Diligence, & Judgment
Plaintiff’s fifth cause of action alleges that as an insurance
producer under Iowa law, Defendant Merchants owed Plaintiff a duty
of reasonable care, diligence, and judgment and that it breached
that duty. Rec. Doc. 1 at 11. Under Iowa Code, an “insurance
producer means a person required to be licensed under the laws of
this state to sell, solicit, or negotiate insurance.” Iowa Code §
522B.1
(2014).
However,
as
already
delineated
supra,
the
allegations by Plaintiff against Defendant Merchants were not
within the “business of insurance.” Aside from the preliminary
surety application, it is undisputed that Plaintiff never received
11
insurance services by Defendant Merchants. Consequently, Plaintiff
lacks standing to assert a claim under § 522B.1(7). 4
COUNT 6 – Misappropriation under Iowa Uniform Trade Secrets Act
(“IUTSA”)
Next, Plaintiff’s Complaint alleges the dissemination of the
Frischhertz
Documentation
during
the
Training
was
a
misappropriation of trade secrets under the IUTSA, or Iowa Code §
550.2(3).
Rec.
Doc.
1
at
12.
“The
elements
of
a
claim
of
misappropriation of trade secret under IUTSA and Iowa common law
are
practically
indistinguishable.”
Seneca
Companies,
Inc.
v.
Becker, 134 F. Supp. 3d 1148, 1152 (S.D. Iowa 2015), citing Lemmon
v. Hendrickson, 559 N.W.2d 278, 279 (Iowa 1997). They are: “(1)
existence of a trade secret, (2) acquisition of the secret as a
result of a confidential relationship, and (3) unauthorized use of
the secret.”
Seneca Companies, Inc., 134 F. Supp. 3d at 1152-53.
Additionally, “information may also fall within the definition of
a trade secret, including such matters as maintenance of data on
customer lists and needs, source of supplies, confidential costs,
price data and figures.” US West Commc'ns Inc. v. Office of
Consumer Advocate, 498 N.W.2d 711, 714 (Iowa 1993).
4
Iowa Code Ann. § 522B.11 provides that: “[a]n insurance producer owes
any duties and responsibilities referred to in this subsection only to
the policy owner, a person in privity of contract with the insurance
producer, and the principal in an agency relationship with the insurance
producer.”
12
Plaintiff alleges that the Frischhertz Documentation falls
within the definition of a trade secret, that Defendant Merchants
received such information based on a confidential submission, and
that
the
arguments,
dissemination
including
was
that
Documentation
without
confidentiality
is
unauthorized.
Eustis
any
Defendant
disclosed
contractual
unconvincing
that
Defendant
the
Merchants’
Frischhertz
obligation
Merchants’
of
was
unaware of the confidentiality of the Frischhertz Documentation
upon its receipt of the documents from Eustis. Rec. Doc. 6-5 at
18. Accordingly, Plaintiff’s allegations satisfy the requirements
to establish a prima facie case for misappropriation of trade
secrets under Iowa law.
COUNT 7 – Misappropriation under Texas Uniform Trade Secrets Act
(“TUTSA”)
Similar to its sixth cause of action, Plaintiff also alleges
misappropriation of trade secrets under Texas law. Rec. Doc. 1 at
19. Similar to the analysis above in Count 6, misappropriation of
trade secrets under Texas law is established by a showing that:
“(a) a trade secret existed; (b) the trade secret was acquired
through a breach of a confidential relationship or discovered by
improper
means;
and
(c)
use
of
the
trade
secret
without
authorization from the plaintiff.” Wellogix, Inc. v. Accenture,
L.L.P., 716 F.3d 867, 874 (5th Cir. 2013). However, Defendant
Merchants contends that Plaintiff’s claim should fail because
13
Plaintiff
makes
misappropriation
no
allegations
occurred
in
Texas.
that
any
Rec.
Doc.
injuries
6-5
at
or
19-20.
Nevertheless, Plaintiff’s Complaint alleges that:
Upon information and belief, the Frischhertz Electric’s
sensitive, confidential, and proprietary financial
documentation was used by Merchants Bonding for purposes
other than obtaining the surety . . . and the Frischhertz
Electric documents were used and disseminated for nonsurety purposes after October 9, 2016, and were
ultimately utilized or distributed in Louisiana, Texas,
Iowa and other states.
Rec. Doc. 1 at 4. As a result, and taking Plaintiff’s allegations
to be true at this stage of the litigation, Plaintiff’s Complaint
sufficiently states a claim for misappropriation of trade secrets
under TUTSA at this stage.
COUNT 8 – Violation of Texas Deceptive Trade Practices Act (“DTPA”)
Analogous to its claim under LUTPA, Plaintiff’s Complaint
alleges a violation of DTPA. Specifically, Plaintiff argues that
Defendant Merchants’ “concealment, suppression, or omission of
material facts as alleged herein constitute unfair, deceptive, and
fraudulent business practices within the meaning of the DTPA, Tex.
BUS. & COM. CODE 17.46(a).” Rec. Doc. 1 at 15. The DTPA, Section
17.46(a) provides:
(a) False, misleading, or deceptive acts or practices in
the conduct of any trade or commerce are hereby declared
unlawful and are subject to action by the consumer
protection division under Sections 17.47, 17.58, 17.60,
and 17.61 of this code.
14
Tex. Bus. & Com. Code § 17.46 (2017). The elements of a claim under
the DTPA are that: 1) the defendant engaged in an act or practice
that violated section 17.46(b) of the Texas Business and Commerce
Code; 2) the plaintiff relied on the act or practice to his or her
detriment; and 3) the defendant's act or practice was a producing
cause of actual damages. Allstate Ins. Co. v. Watson, 876 S.W.2d
145, 147 (Tex.1994).
Here, Plaintiff alleges that Defendant Merchants violated
Tex. Bus. & Com. Code Ann. § 17.46 by “representing that goods or
services are of a particular standard, quality, or grade or that
good are of a particular style or model, if they are of another.”
Rec. Doc. 1 at 15. The good and/or service that forms the basis of
Plaintiff’s Complaint is the “quality and/or effectuation of its
processes and procedures concerning the security, confidentiality,
and privacy of customer data.” Id. at 16. Plaintiff’s Complaint
further alleges that Plaintiff was harmed by its reliance upon
Defendant Merchants’ representations and that Defendant Merchants’
subsequent dissemination of the Frischhertz Documentation was the
cause
of
actual
damages.
Rec.
Doc.
1
at
14-17.
Plaintiff sufficiently states a claim under DTPA.
15
Accordingly,
COUNT 9 – Breach of Contract
The last of the allegations by Plaintiff against Defendant
Merchants is for breach of contract. 5 Rec. Doc. 1 at 17. Plaintiff
alleges that it is a third-party beneficiary under an agreement
between Eustis and Defendant Merchants as a stipulation pour
autrui. Id. Further, Plaintiff alleges that it relied upon the
terms of confidentiality as set out in the agreement between Eustis
and Defendant Merchants, and Defendant Merchants violated the
agreement when it disseminated the Frischhertz Documentation at
the Training. Id.
“Under
Louisiana
law,
three
factors
determine
whether
a
stipulation pour autrui is present: (1) The stipulation for a third
party must be manifestly clear; (2) There must be certainty as to
the benefit owed the third party; and (3) The benefit must not be
a mere incident of the contract between the promisor and the
promise.” Smith Marine Towing Corp. v. EPL Oil & Gas, Inc., No. CV
15-5489, 2016 WL 1660211, at *4 (E.D. La. Apr. 27, 2016). By the
terms of the agency agreement, Eustis was appointed as an agent
for the purposes of procuring applications for bonds and policies
and delivering the bonds and policies on behalf of Defendant
Merchants. Rec. Doc. 6-4. While it is arguable that, as a surety
applicant, Plaintiff was a contemplated third-party beneficiary of
5
Plaintiff continually fails to specify which state law upon which it
brings its claims. Therefore, we analyze this claim for breach of
contract pursuant to Louisiana law.
16
the agency agreement between Eustis and Defendant Merchants, there
is no confidentiality provision included in the agreement. Rec.
Doc. 6-4. Therefore, there is no certainty as to the benefit owed
Plaintiff under the terms of the agreement. In fact, the benefit
that
Plaintiff
seeks
is
not
a
provision
within
the
agency
agreement. This further negates Plaintiff’s allegations that it
relied upon the terms of confidentiality in the agreement, as there
are none. Consequently, Plaintiff’s claim for breach of contract
fails
as
there
confidentiality
can
where
be
the
no
contractural
agreement
does
not
breach
contain
of
a
confidentiality provision.
New Orleans, Louisiana, this 7th day of May, 2018.
___________________________________
SENIOR UNITED STATES DISTRICT JUDGE
17
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