Capricorn Management Systems, Inc. v. Government Employees Insurance Co.

Filing 24

ORDER denying 15 Motion to Dismiss for Failure to State a Claim: See attached Memorandum & Order. Ordered by Judge Denis R. Hurley on 4/6/2016. (Gapinski, Michele)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NW YORK
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CAPRICORN MANAGEMENT SYSTEMS,
INC.,
Plaintiff,
-against-

MEMORANDUM & ORDER
15-CV-2926 (DRH)(SIL)

GOVERNMENT EMPLOYEES
INSURANCE CO.,
Defendant.
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APPEARANCES:
For Plaintiff:
Collen IP
The Holyoke-Manhattan Building
80 South Highland Avenue
Ossining, New York 10562
By:
Jess M. Collen, Esq.
Thomas P. Gulick, Esq.
Kristen A. Mogavero, Esq.
For Defendant:
Vinson & Elkins LLP
666 Fifth Avenue, 26th Floor
New York, New York 10103
and
2200 Pennsylvania Avenue NW
Suite 500 West
Washington, D.C. 20037
By:
Clifford Thau, Esq.
Marisa Antos-Fallon, Esq.
Charles D. Ossola, Esq.
Matthew J. Ricciardi, Esq.
HURLEY, Senior District Judge:
Plaintiff Capricorn Management Services Inc. (“Plaintiff” or “Capricorn”) commenced
this diversity action against defendant Government Employees Insurance Co. (“Defendant” or

“GEICO”) asserting claims for breach of a licensing agreement (Count I), breach of a nondisclosure agreement (Count II) and misappropriation of trade secret under Maryland Law (Count
III). Presently before the Court is defendant’s motion to dismiss Counts II and III. For the
reasons set forth below, the motion is denied.
BACKGROUND
The following allegations are taken from the Complaint and presumed true for purposes
of this motion.
Capricorn is a software company that designs and provides application software and
related services for insurance companies and medical billing services. (Compl. ¶ 12.) Capricorn
has provided software and services in New York to GEICO for 35 years, including “software for
the transmission, handling, and management of automobile insurance medical bills” called
Supercede. (Id. ¶¶14, 16.) Plaintiff also developed “module programs that are add-ons to its
Supercede system (a claims management system) including for example, Arbitration Entry,
which generates entries for arbitrations, and Affidavit Print, which prepares affidavits for
printing.” (Id. ¶19.) “The module programs within the Supercede system are proprietary to
Capricorn” and “[s]ome of these modules and the customization and compilation are maintained
as a trade secret.” (Id. ¶¶ 20-21.)
The Lease Agreement
Capricorn and GEICO have entered into Lease and Royalty Agreements for the
Supercede software and modules, the latest of which was executed on September 1, 2013 and is
set to expire on August 31, 2016, with an option to renew for an additional year (the “Lease
Agreement”). (Id. ¶¶ 22-27.) The Lease Agreement “show[s] the Parties’ intent that the
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Supercede software and modules are to be used by GEICO exclusively in New York. (Id. ¶ 29.)
Although Capricorn has offered to negotiate a licensing agreement with GEICO to permit the use
of Capricorn’s software outside of New York, GEICO has declined to pursue such negotiations.
(Id. ¶¶ 32-33.)
In 2009 Capricorn began to develop a Supercede module called “Encovel Detection” to
detect fraud relating to Nerve Conduction Velocity tests (“NCVs”), which are tests in which
peripheral nerves in the arms and legs are stimulated with an electrical impulse to cause the nerve
to depolarize. (Id. ¶¶ 34-35.) During “the process of developing the software for the Encovel
Detection module, Capricorn devised certain know-how and proprietary methods for processing
large amounts of data to detect fraud.” (Id. ¶ 36.) “Capricorn also has a sophisticated program
which helps verify and investigate certain medical providers.” (Id. ¶ 38.) GEICO’s use of the
Encovel Detection program led to a lawsuit against various medical service providers in which
GEICO alleged it was erroneously billed over twenty-three million dollars. (Id. ¶ 39.) “Based on
the success of its Encovel Detection software, Capricorn also created complementary/ancillary
programs called “Encovel Report” and “Encovel Alert.”
Outside of New York, GEICO uses a program called ATLAS “for the maintenance and
handling of insurance claims” but ATLAS “lacked the sophisticated NCV fraud detection system
available in Supercede through the Encovel detection system.” (Id. ¶¶ 42-44.) It is alleged that
“GEICO used and is using a copy of Capricorn’s Encovel Detection program or derivative work
based on Capricorn’s Encovel Detection program in GEICO’s ATLAS system in the forty-nine
(49) other states outside New York, as well as in the District of Columbia, in violation of the
terms of the Lease [] Agreement.” (Id. ¶¶ 47-49.)
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The Non-Disclosure Agreement
Capricorn and GEICO entered into a Non-Disclosure Agreement in August 2005 (the
“NDA”) when Capricorn was asked to provide a master copy of the Supercede program at
GEICO’s Washington. D.C. facility. (Id. ¶¶ 50-51.) Since the signing of the NDA “Capricorn
has diligently developed highly customized modules and methods for maximizing efficiency in
the management and adjustment of claims and information for GEICO (hereinafter referred to as
‘Capricorn’s Trade Secrets’).” (Id. ¶53.) Capricorn’s Trade Secrets enable (1) “the
customization and automation of the claims management process,” (2) “enhanced fraud detection
as part of the claims management process,” (3) “monitoring of the efficiency of GEICO
employees,” and (4) “the detection of abusive and/or fraudulent prescription of certain narcotic
drugs.” (Id. ¶¶ 55-58.) “Capricorn’s Trade Secrets and related information pertaining to their
creation, functionality, organization, compilation, and management are held in confidence by
Capricorn as a company trade secret” and it does not disclose its trade secrets to anyone other
than GEICO, to which disclosures were made under the terms of the NDA. (Id. ¶¶ 59-60.) It is
alleged GEICO copied and incorporated Capricorn’s trade secrets directly into the ATLAS
system, as well as disclosed Capricorn’s confidential information to competitors of Capricorn.
(Id. ¶¶ 62-85.)
Based on the foregoing, Capricorn asserts claims two claims for breach of contract, one
for breach of the Licensing Agreement and one for breach of the NDA, as well as a claim for
misappropriation of a trade secret under Maryland law.

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DISCUSSION
I.

Motion to Dismiss Standard
In deciding a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a court

should “draw all reasonable inferences in Plaintiff[‘s] favor, assume all well-pleaded factual
allegations to be true, and determine whether they plausibly give rise to an entitlement to relief.”
Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks omitted).
The plausibility standard is guided by two principles. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)); accord Harris v. Mills, 572 F.3d 66,
71–72 (2d Cir. 2009).
First, the principle that a court must accept all allegations as true is inapplicable to legal
conclusions. Thus, “threadbare recitals of the elements of a cause of action supported by mere
conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678. Although “legal conclusions can
provide the framework of a complaint, they must be supported by factual allegations.” Id. at 679.
A plaintiff must provide facts sufficient to allow each named defendant to have a fair
understanding of what the plaintiff is complaining about and to know whether there is a legal
basis for recovery. See Twombly, 550 U.S. at 555.
Second, only complaints that state a “plausible claim for relief” can survive a motion to
dismiss. Iqbal, 556 U.S. at 679. “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. The plausibility standard is not akin to a ‘probability requirement,’ but asks
for more than a sheer possibility that defendant acted unlawfully. Where a complaint pleads facts
that are ‘merely consistent with’ a defendant's liability, it ‘stops short of the line’ between
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possibility and plausibility of 'entitlement to relief.' ” Id. at 678 (quoting Twombly, 550 U.S. at
556-57) (internal citations omitted); see In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir.
2007). Determining whether a complaint plausibly states a claim for relief is “a context specific
task that requires the reviewing court to draw on its judicial experience and common sense.”
Iqbal, 556 U.S. at 679; accord Harris, 572 F.3d at 72.1
II.

The Complaint Adequately Specifies Capricorn’s Trade Secrets
Defendant asserts that both Counts I and II must be dismissed because of an alleged lack

of specificity in defining Capricorn’s trade secrets.
As recently stated in Next Commc’ns Inc. v. Viber Media, Inc., 2016 WL 1275659
(S.D.N.Y. March 30, 2016):
a plaintiff must, “at minimum, generally identify the trade secrets
at issue.” Alexander Interactive, Inc. v. Leisure Pro Ltd., No.
14-cv-2796 (PKC), 2014 WL 4651942, at *5 (S.D.N.Y. Sept. 16,
2014). However, “specificity as to the precise trade secrets
misappropriated is not required in order ... to defeat ... Motions to
Dismiss.” Medtech Prods. Inc. v. Ranir, LLC, 596 F. Supp. 2d 778,
789 (S.D.N.Y. 2008); see also SD Prot., Inc. v. Del Rio, 498 F.
Supp. 2d 576, 586 (E.D.N.Y. 2007) (“Naturally, [plaintiff] has no
obligation to reveal those secrets in the Complaint simply to prove
that they exist.”). In other words, “a plaintiff only need give the
opposing party fair notice of what the plaintiff's claim is and the
grounds on which it rests.” Alexander Interactive, Inc., 2014 WL
4651942, at *4. . . . “[A] trade secret can exist in a combination of
characteristics and components, each of which, by itself, is in the
public domain, but the unified process, design and operation of
which, in unique combination, affords a competitive advantage and
is a protectable secret.” Integrated Cash Mgmt. Serv., Inc. v. Dig.
Transactions, Inc., 920 F.2d 171, 174 (2d Cir. 1990) (citation
omitted); see also Restatement (First) of Torts § 757, cmt. b (Am.
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Consistent with its obligations on a motion to dismiss, the Court has not considered the
allegations in the “Factual Background” section of GEICO’s Memorandum (see Def.’s Mem. at
2-4) as those allegations are not contained in the Complaint.
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Law Inst. 1939) (“A trade secret may consist of any formula,
pattern, device or compilation of information which is used in one's
business, and which gives him an opportunity to obtain an
advantage over competitors who do not know or use it.”). In sum,
“New York and Second Circuit law establish that compilation trade
secrets are protectable but ... the law requires the trade secret
claimant to describe the secret with sufficient specificity that its
protectability can be assessed and to show that its compilation is
unique.” Sit-Up Ltd. v. IAC/ InterActiveCorp., No. 05-cv-9292
(DLC), 2008 WL 463884, at *10 (S.D.N.Y. Feb. 20, 2008)
(emphasis added).
2016 WL 1275659, at *3.
Capricorn’s allegations meet the standard for pleading a trade secret. The complaint
alleges that its program Supercede and its highly customized modules and methods enable (1)
“the customization and automation of the claims management process,” (2) “enhanced fraud
detection as part of the claims management process,” (3) “monitoring of the efficiency of
GEICO employees,” and (4) “the detection of abusive and/or fraudulent prescription of certain
narcotic drugs.” (Id. ¶¶ 55-58.) Capricorn’s description is sufficient “to discern the general
contours of the alleged trade secrets without compromising their secrecy and for Defendant to be
put on notice of the claim.” Next Commc’ns, 2016 WL 1275659 at *3. Cf. E.J. Brooks Co. v.
Cambridge Sec. Seals, 2015 WL 9704079, at *9 (S.D.N.Y. Dec. 23, 2015) (finding description
of trade secret as “manufacturing processes used to create” security seals sufficiently specific);
Sorias v. National Cellular USA, Inc.,2015 WL 5093344, at *13 (E.D.N.Y. Aug. 27, 2015)
(description of trade secret as “data and designs of a specific phone charger with horizontally
folding A/C prongs” sufficient to state a claim for trade secrets); Medtech Products Inc. v. Ranir,
LLC, 596 F. Supp. 2d 778, 789 (S.D.N.Y. 2008)(descriptions of trade secrets that included the
“manufacturing cost details, drawings, test data, and other information about the design and
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manufacturing process for its dental protectors” sufficient to state a claim for misappropriation of
trade secrets). To the extent the exact contours of Capricorn’s trade secrets are unclear, GEICO
can explore those contours through discovery.
To the extent Defendant seeks dismissal of Counts I and II for lack of specificity in
defining Capricorn’s trade secrets, the motion is denied.
III.

Misappropriation of a Trade Secret under Maryland Law
The Maryland Uniform Trade Secrets Act (“MUTSA”) provides statutory remedies for

misappropriation of a trade secret. LeJeune v. Coin Acceptors, Inc., 381 Md. 288, 301, 849 A.2d
451 (Md. 2004). MUTSA defines “trade secret” as “information, including formula, pattern,
compilation, program, device, method, technique, or process, that (1) [d]erives 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 (2) [i]s the subject of efforts that are reasonable under the circumstances to
maintain its secrecy.” Md. Code Ann. Com. Law § 11-201(e).
In support of its motion to dismiss, GEICO asserts that the complaint fails to sufficiently
plead a trade secret in that the software in question does not have independent economic value
and were not the “subject of efforts reasonable under the circumstances to maintain [their]
secrecy.” The Court will address each of these contentions in turn.
A.

The Complaint Adequately Alleges Independent Economic Value

GEICO argues that as Capricorn has plead that the software is highly customized for
GEICO, “[a]s a matter of common sense, software “highly customized “ for one company is of
little utility and therefore of little value to another company.” Def.’s Mem. at 11. In addition it
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asserts that to the extent the software implements more generally applicable insurance industry
functionality it would fail to meet to the “independent economic value” requirement “because
“its value would then not be derived ‘from not generally known to, and not being readily
ascertainable by proper means, by other persons’ but rather from the very fact that it implements
well-know and common requirements applicable to others in the insurance industry.” Def.’s
Mem. at 11. The Court is underwhelmed by these arguments, neither of which are supported by
citation to relevant case law.
The assertion that the software has little value to another company because it is highly
specialized for GEICO refers only to its value to another insurance company. The mere fact that
the program was designed for a particular customer does not eliminate the possibility of the
program being protectable as a trade secret. See Dorset Ind. v. Unified Grocers, Inc., 893 F.
Supp. 2d 395, 411 (E.D.N.Y. 2012). Additionally, in examining economic value, the universe of
comparables is not limited to other insurance companies. It is appropriate to consider the value of
the software to competitors of Capricorn. See LaJeune, 381 Md. at 309-10 (finding company’s
cost and profit information and detailed specifications of its currency acceptance machines had
economic value to its competitor and thus met economic value portion of definition for a trade
secret); Padco Advisors, Inc. v. Omdahl, 179 F. Supp. 2d 600 (D. Md. 2002) (information on
database was not ascertainable by competitor and that information had economic value because it
could help competitor develop new products). Here, as Capricorn aptly notes, it has competitors
who also offer insurance claims management systems and if they obtain Capricorn’s proprietary
information and know-how they can “avoid the costs associated with allocating resources and
capital in research and development.” Pl.’s Mem. in Opp. at 15. Indeed, it is alleged that GEICO
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has shared Capricorn’s trade secrets with third parties to make products competitive to those of
Capricorn.
Finally, contrary to GEICO’s assertions, to the extent the software “implements wellknown and common requirements” of the insurance industry it does have economic value. That
the requirements it implements are well-known is not, as GEICO suggests, the relevant
benchmark. It is the software’s “proprietary methods for processing large amounts of data”
required to be processed by those well-known and common requirements that provides
economic value.2
B.

The Complaint Adequately Alleges Reasonable Effort to Maintain Secrecy

With respect to efforts to maintain secrecy, GEICO asserts that the mere-existence of a
non-disclosure agreement does not establish the requisite secrecy and faults the complaint for not
covering the wide array of factors that Maryland courts look to in determining whether the
information sought to be protected were the subject of efforts to maintain their secrecy. Def.’s
Mem. at 12-13. While Maryland courts do indeed look to a variety of factors to determine
whether the information claimed as a trade secret has been the subject of efforts to maintain their
secrecy, see, e.g., Home Paramount Pest Control Co., Inc. v. FMC Corp., 107 F. Supp. 2d 684
(D. Md. 2000); Bond v. Polycycle, Inc., 127 Md. App. 365, 372-73, 732 A.2d 970 (Md. App.
1999), Plaintiff’s burden is not to establish reasonable efforts to maintain secrecy but to allege
facts that make that claim plausible. At least one court has held that under Maryland law “[t]he
existence of [a] Confidentiality Agreement easily satisfies the second part of the trade secret
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Indeed, it seems disingenuous for GEICO to argue that the software has no economic
value given that it has been paying a licensing fee for Capricorn’s programs since 2008, see
Comp. ¶ 22.
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definition for the purposes of a Rule 12(b)(6) motion.” RaceRedi Motorsports, LLC v. Dart
Machinery, Ltd., 640 F. Supp. 2d 660, 668 (D. Md. 2009); accord Dealertrack, Inc. v. Huber,
460 F. Supp. 2d 1177, 1184 (C.D. Cal. 2006) (requiring other corporations to sign confidentiality
agreements is a reasonable step to ensure secrecy sufficient to withstand motion to dismiss). Cf.
LeJeune, 381 Md. at 310 (finding on motion for a preliminary injunction that reasonable measure
to maintain secrecy of pricing and cost information was demonstrated, inter alia, by company’s
negotiation of non-disclosure agreements with its customers to prevent them from discussing
prices with other customers).
CONCLUSION
Defendant’s motion to dismiss is denied.
Dated: Central Islip, New York
April 6, 2016

/s/ Denis R. Hurley
Denis R. Hurley
United States District Judge

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