Document Security Systems, Inc. v. Coupons.com Incorporated

Filing 72

DECISION AND ORDER granting 30 Motion to Dismiss the second cause of action in the Amended Complaint. The action may proceed as to the first cause of action for breach of contract.. Signed by Hon. Charles J. Siragusa on 5/9/13. (KAP)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK

DOCUMENT SECURITY SYSTEMS, INC.,
Plaintiff,

11-CV-6528 CJS

-vCOUPONS.COM, INC.,
Defendant.

APPEARANCES
For Plaintiff:

Paul F. Keneally, Esq.
Underberg & Kessler, LLP
300 Bausch & Lomb Place
Rochester, New York 14604
Timothy J. Haller, Esq.
Christopher J. Lee, Esq.
David J. Mahalek, Esq.
Robert A. Conley, Esq.
Joseph A. Culig, Esq.
Niro, Haller & Niro
181 W. Madison, Suite 4600
Chicago, Illinois 60602

For Defendants:

Neil A. Goteiner, Esq.
Farella, Braun and Martel LLP
235 Montgomery Street
San Francisco, California 94014

INTRODUCTION
This is an action asserting claims for breach of contract and misappropriation of trade
secrets. Now before the Court is Defendant’s motion (Docket No. [#30]) to dismiss the latter
claim on the grounds that it is merely duplicative of the former claim, and therefore barred
under the law of New York State. The application is granted.

BACKGROUND
Plaintiff is a New York corporation with its principal place of business in New York,
while Defendant is a Delaware corporation with its principal place of business in California.
Plaintiff provides “anti-counterfeiting, authentication and mass-serialization technologies” to
other businesses. Amended Complaint [#14-3] ¶ 6. Defendant produces store coupons.
Between 2003 and 2008, Plaintiff provided Defendant with “safety paper” for printing
coupons. In connection with this business arrangement, the parties signed two nondisclosure agreements (“NDA”), one in 2003, and one in 2005. Id., Exs. A & B. The
pertinent 2005 NDA indicated that Plaintiff was disclosing such confidential information to
Defendant for the following purpose: “To evaluate a potential business relationship regarding
patented and unpatented technology and trade secrets of [Plaintiff] related to document
printing security features.” Id., Ex. B. The NDA stated that Defendant could only use the
confidential information for that purpose. The 2005 NDA also contained the following
merger clause: “This Agreement constitutes the entire understanding between the parties
hereto as to the Confidential Information and merges all prior discussions between them
relating thereto.” Id. There is no dispute that the 2005 NDA is a valid and binding
agreement.
In 2006, Plaintiff provided Defendant with samples of certain security technology,
including “proprietary, secret ‘Blockout’ technology,’ which, when placed onto an image,
“render[s] a print-out of the image unable to be copied or scanned.” Amended Complaint
[#14-3], ¶ ¶ 9-11. Defendant declined to purchase the Blockout technology. However, in
August 2010, Plaintiff determined that Defendant was utilizing the same Blockout technology
without Plaintiff’s permission. On October 24, 2011, Plaintiff commenced this action.
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The Amended Complaint purports to state two causes of action. The first cause of
action is for breach of contract, referring to the 2005 NDA. The second cause of action is
for misappropriation of trade secrets under New York State law, which the Court has already
determined applies to the parties’ dispute. The breach of contract claim alleges that the
2005 NDA “is a valid and binding contract,” which Defendant breached by “using the
Blockout File for its own commercial purposes.” Amended Complaint ¶ ¶ 24, 28. The claim
for misappropriation of trade secrets also arises from Defendant’s alleged use of “the
Blockout File Technology without [Plaintiff’s] consent,” id. at ¶ 33, and adds that such
unauthorized use was “intentional, willful, malicious and in bad faith.” Id. at ¶ 22..
On September 10, 2012 Defendant filed the subject motion [#30] to dismiss the
misappropriation cause of action, for failure to state a claim. With respect to its application,
Defendant contends that the claim is “duplicative of or precluded by Plaintiff’s first cause of
action” for breach of contract. Notice of Motion [#30]. In that regard, Defendant contends
that Plaintiff could only maintain the misappropriation tort claim if there was either the
violation of a legal duty independent of the NDA or a demand for special damages that could
not be recovered under the NDA, and that Plaintiff has not pleaded either situation. See,
Def. Memo of Law [#30-1] at p. 1 (“There can be no tort claim since Plaintiff has not alleged
an independent legal duty extraneous to the NDA or the existence of special damages
arising from the alleged NDA breach and unrecoverable under the NDA.”).
Plaintiff responds that Defendant is incorrect in asserting that a misappropriation
claim and a breach of contract claim cannot simultaneously arise from the breach of a nondisclosure agreement. Specifically, Plaintiff maintains that Defendant’s contractual duty of
confidence under the NDA can also create the duty of confidence required to establish the
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tort of misappropriation of trade secret. Plaintiff argues that there was a legal duty of
confidentiality owed by Defendant apart from the contract, based upon “the parties’ preexisting relationship,” and alternatively, based upon “ the fact that the disclosure was for the
purpose of facilitating a prospective sale or license” and therefore gives rise to an
independent “duty of confidence.” Pl. Memo of Law [#42] at p. 6. Plaintiff further maintains
that if the misappropriation claim is not dismissed, then it can seek punitive damages in
connection with that claim.
On May 3, 2013, counsel for the parties appeared before the undersigned for oral
argument of the motion.
DISCUSSION
Defendant has moved to dismiss under Rule 12(b)(6), and the applicable standard
for such a motion is clear:
Federal Rule of Civil Procedure 8(a)(2) requires only a short and plain
statement of the claim showing that the pleader is entitled to relief, in order to
give the defendant fair notice of what the claim is and the grounds upon which
it rests. While a complaint attacked by a Rule 12(b)(6) motion to dismiss does
not need detailed factual allegations, a plaintiff's obligation to provide the
grounds of his entitlement to relief requires more than labels and conclusions,
and a formulaic recitation of the elements of a cause of action will not do.
Factual allegations must be enough to raise a right to relief above the
speculative level, on the assumption that all the allegations in the complaint
are true (even if doubtful in fact).
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 1964–65, 167 L.Ed.2d 929
(2007); see also, ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d
Cir.2007 ) (“To survive dismissal, the plaintiff must provide the grounds upon which his claim
rests through factual allegations sufficient ‘to raise a right to relief above the speculative
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level.’ ”) (quoting Bell Atl. Corp. v. Twombly ) (footnote omitted). When applying this
standard, a district court must accept the allegations contained in the complaint as true and
draw all reasonable inferences in favor of the nonmoving party. Burnette v. Carothers, 192
F.3d 52, 56 (2d Cir.1999), cert. den. 531 U.S. 1052, 121 S.Ct. 657 (2000).
The subject motion involves a claim for misappropriation of trade secrets, and the
elements of such a claim are clear:
To succeed on a claim for the misappropriation of trade secrets under New
York law, a party must demonstrate: (1) that it possessed a trade secret, and
(2) that the defendants used that trade secret in breach of an agreement,
confidential relationship or duty, or as a result of discovery by improper
means. A trade secret is any formula, pattern, device or compilation of
information which is used in one's business, and which gives the owner an
opportunity to obtain an advantage over competitors who do not know or use
it.
Faiveley Transport Malmo AB v. Wabtec Corp., 559 F.3d 110, 117 (2d Cir. 2009) (citations
and internal quotation marks omitted).
As indicated above, in this action Plaintiff is attempting to assert claims for both
breach of contract and the tort of misappropriation of trade secrets. Generally, “[u]nder
New York law, when a valid agreement governs the subject matter of a dispute between
parties, claims arising from that dispute are contractual.” Poplar Lane Farm LLC v. Fathers
of Our Lady of Mercy, 449 Fed. Appx. 57, 59, 2011 WL 5966373 at *1 (2d Cir. Nov. 30,
2011). However, in certain cases a plaintiff may be able to maintain claims sounding in both
contract and tort. In that regard, New York State law establishes parameters for the
pleading of tort claims that arise between parties to a contract:
Under New York law, a breach of contract will not give rise to a tort claim
unless a legal duty independent of the contract itself has been violated. Such
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a legal duty must spring from circumstances extraneous to, and not
constituting elements of, the contract, although it may be connected with and
dependent on the contract. Where an independent tort duty is present, a
plaintiff may maintain both tort and contract claims arising out of the same
allegedly wrongful conduct. If, however, the basis of a party's claim is a
breach of solely contractual obligations, such that the plaintiff is merely
seeking to obtain the benefit of the contractual bargain through an action in
tort, the claim is precluded as duplicative.
Bayerische Landesbank, New York Branch v. Aladdin Capital Management LLC, 692 F.3d
42, 58 (2d Cir. 2012) (citations and internal quotation marks omitted).
In this case, Plaintiff contends that in addition to the express contractual obligations
imposed by the NDA, Defendant incurred an implied duty of confidentiality either by virtue
of the parties’ course of dealing, or by virtue of the fact that Plaintiff disclosed the information
in order to allow Defendant to decide whether to purchase the Blockout technology.
As to its “course of dealing” argument, Plaintiff cites Topps Co., Inc. v. Cadbury Stani
S.A.I.C., 380 F.Supp.2d 250, 266 n. 24 (S.D.N.Y. 2005) (“Topps”). Topps involved a series
of licensing agreements over a period of approximately forty years between the Topps
chewing gum company and Stani, a South American candy company. The licensing
agreements recited that Topps was providing Stani with manufacturing and marketing
technology that could not be shared with third parties. The relationship between Topps and
Stani deteriorated after Stani was purchased by a third-party company, Cadbury. Topps
sued Stani for breach of contract, alleging that Stani improperly disclosed Topps’ technology
to Cadbury, and used Topps’ technology after the licensing agreement expired. Topps also
sued Stani for misappropriation of trade secrets, for disclosing Topps’ technology to
Cadbury, “in violation of both the agreement and the parties’ confidential relationship.”

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Topps, 380 F.Supp.2d at 254. Stani moved for partial summary judgment on various
grounds, but did not argue that the misappropriation claim was duplicative of the breach of
contract claim. Nevertheless, in dicta the district court stated that Topps’ misappropriationof-trade-secrets claim was “an independent tort,” since Topps had pleaded that Stani
misappropriated technology in violation of both the contract and “the parties’ confidential
relationship created by their course of dealing over many years.” Id. at 266, n. 24.
However, in New York, “[a] conventional business relationship, without more, is
insufficient to create a fiduciary relationship. Rather, a plaintiff must show special
circumstances that transformed the parties' business relationship to a fiduciary one.” Legend
Autorama, Ltd. v. Audi of America, Inc., 100 A.D.3d 714, 717, 954 N.Y.S.2d 141, 144 (2d
Dept. 2012). Stated differently, “[u]nder New York law, where parties deal at arm's length
in a commercial transaction, no relation of confidence or trust sufficient to find the existence
of a fiduciary relationship will arise absent extraordinary circumstances.” Asian Vegetable
Research and Dev. Ctr. v. Institute of Intern. Educ., 944 F.Supp. 1169, 1179 (S.D.N.Y.
1996) (citation and internal quotation marks omitted). To the extent that Plaintiff relies on
Topps to show that the six-year business relationship between the parties in this case
resulted in a confidential/fiduciary relationship, the Court disagrees, and finds both that the
pertinent language in Topps is dicta, and that the case is factually inapposite. More
importantly, the Amended Complaint before this Court does not plausibly plead facts
suggesting that the parties’ seemingly unremarkable arms-length business relationship
resulted in a fiduciary relationship. Accordingly, the Court determines that the parties’
general course of dealing did not create an independent tort duty.

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As to Plaintiff’s alternative position, that an independent duty of confidence arose
because the disclosure at issue was for the purpose of facilitating a prospective sale or
license, citing Heyman and Speedry, the Court also disagrees. The Court is aware of the
line of cases, including Heyman and Speedry, applying New York law and holding that an
implied confidential/fiduciary relationship may arise where a seller/inventor discloses a trade
secret in confidence to a potential buyer/manufacturer/licensor for the sole purpose of
allowing the potential buyer/manufacturer/licensor to evaluate a product. See, Schreyer v.
Casco Prods. Corp., 190 F.2d 921, 924 (2d Cir. 1951) (Plaintiff disclosed blueprints and
other detailed design information to defendant during negotiation of a licensing agreement);
Klein v. Ekco Products Co., 135 N.Y.S.2d 391, 395-396 (N.Y. Sup.Ct. Kings County 1954)
(Plaintiff disclosed knife prototype to defendant in connection with inquiry as to whether
defendant could manufacture the knife), aff’d, 285 A.D. 908, 139 N.Y.S.2d 258 (2d Dept.
1955); Laurie Visual Etudes, Inc. v. Chesebrough-Pond’s Inc., 105 Misc.2d 413, 418-419,
432 N.Y.S.2d 457, 461 (N.Y. Sup. Ct. NY County 1980) (Inventor disclosed invention to
potential licensor: “Even in the absence of any express agreement to hold the disclosed
information in confidence and not to use it, the law creates in such circumstances a
confidential relationship which restricted Chesebrough from utilizing the disclosure for
anything other than the purpose of the disclosures themselves-here a royalty agreement or
other mutually advantageous relationship.”) (collecting cases), rev’d on other grounds, 83
A.D.2d 505, 441 N.Y.S.2d 88 (1st Dept. 1981); 777388 Ontario Ltd. v. Lencore Acoustics
Corp., 105 F.Supp.2d 56, 64-65 (E.D.N.Y. 2000) (Manufacturer disclosed confidential
technical details to its sales agent: “Plaintiffs have also sufficiently alleged a confidential

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relationship with, or a duty on the part of Lencore since, according to the Complaint, the
technical specifications were disclosed to Lencore for the sole purpose of allowing Lencore
to promote its interests in the United States.”); Stewart v. World Wrestling Federation
Entertainment, Inc., No. 03 CV 2468 RLC, 2005 WL 66890 at *4-5 (S.D.N.Y. Jan. 11, 2005)
(Fashion designer shared design ideas with potential licensor: “Under New York law, a
confidential relationship is synonymous with fiduciary relationship and exists generally where
the parties do not deal on equal terms and one trusts and relies on the other. Courts will
find a duty not to reveal confidential information only when the recipient has accepted the
confidential relationship. Such a relationship may arise either explicitly by contract, or
implicitly by the actions of the parties or other circumstances.

...

Whether such a

confidential relationship exists is ultimately a question to be determined by the trier of fact
and all a plaintiff must do to withstand a motion to dismiss is allege certain facts that would
create this relationship.”) (citing Klein v. Ekco Products Co., 135 N.Y.S.2d 391, 395-96
(N.Y.Sup.Ct.1954), other citations and internal quotation marks omitted).
These cases, though, are factually inapposite to the instant case. Most significantly,
none of the parties in those cases had written confidentiality agreements. Moreover, in Klein
and Stewart, the courts remarked that the parties were in unequal bargaining positions. In
the instant case, the parties dealt at arms’ length and had an express written confidentiality
agreement covering the subject matter of the dispute. Accordingly, the Court finds that
because the parties had an express agreement setting forth Defendant’s duty of
confidentiality, no independent implied-in-law duty arose merely because Plaintiff disclosed
the Blockout Technology to Defendant in connection with a possible sale.

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However, even assuming arguendo that a duty of confidentiality did arise under those
circumstances, Plaintiff still cannot maintain a separate tort action, since the proposed tort
claim is duplicative of the contract claim. On this point, this Court in a separate action set
forth the applicable law:
Where a fiduciary duty may be found, this claim is generally not fatally
duplicative of a breach of contract claim. However, a plaintiff cannot pursue
a separate breach of fiduciary duty claim based on allegations of fiduciary
wrongdoing that are either expressly raised in plaintiff's breach of contract
claim or encompassed within the contractual relationship by the requirement
implicit in all contracts of fair dealings and good faith. That is, a plaintiff may
not maintain both a contract claim and a breach of fiduciary duty claim, without
allegations that, apart from the terms of the contract, the parties created a
relationship of higher trust than would arise from their contracts alone, so as
to permit a cause of action for breach of a fiduciary duty independent of the
contractual duties.
Balta v. Ayco Co., LP, 626 F.Supp.2d 347, 360-361 (W.D.N.Y. 2009) (citing Brooks v. Key
Trust Co. Nat’l Assoc., 26 A.D.3d 628, 630, 809 N.Y.S.2d 270 (3d Dept. 2006), other
citations and internal quotation marks omitted). In this action, the alleged separate duty of
confidentiality that Defendant owed to Plaintiff is indistinguishable from the contractual duty
of confidentiality owed under the NDA.

“Any fiduciary duties allegedly breached by

Defendant arose, expressly or impliedly, under the contract, and the parties had no
relationship of trust apart from their contractual relationship.” Id., 626 F.Supp.2d at 361; see
also, Northern Shipping Funds I, LLC v. Icon Capital Corp., — F.Supp.2d — , 2013 WL
440632 at *8 (S.D.N.Y. Jan. 24, 2013) (“Even if the complaint had alleged that a fiduciary
duty arises from the overall course of dealing between [the parties], a conclusory allegation
that the parties developed a relationship of trust and confidence apart from their contractual

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relationship is insufficient to plead a fiduciary relationship and survive a motion to dismiss.”
(citation and internal quotation marks omitted). Accordingly, the second cause of action
must be dismissed.
CONCLUSION
Defendant’s motion [#30] to dismiss the second cause of action in the Amended
Complaint is granted. The action may proceed as to the first cause of action for breach of
contract.
SO ORDERED.
Dated:

May 9, 2013
Rochester, New York
/s/ Charles J. Siragusa
CHARLES J. SIRAGUSA
United States District Judge

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