FRANCOIS TRAHAN, Plaintiff, -against- NANCY LAZAR, ANDREW LAPERRIERE, ROBERTO PERLI, MICHAEL KANTROWITZ, GEORGE ZACHAR, CORNERSTONE MACRO HOLDINGS LLC, and CORNERSTONE MACRO RESEARCH LP, f/k/a Cornerstone Macro LP, Defendants.
Case 1:19-cv-01131-GHW
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF
4/30/2020
GREGORY H. WOODS, District Judge
Document 134; Filed 04/30/20; Page 1 of 50
MEMORANDUM OPINION AND ORDER
GREGORY H. WOODS, District Judge:
Plaintiff Francois Trahan (“Trahan” or “Plaintiff“) is an extraordinarily successful portfolio strategist. In 2016, he joined forces with three partners—Nancy Lazar,
Defendants have moved to dismiss all but the breach of contract claim. Plaintiff‘s claim for misappropriation of trade secrets under the Defend Trade Secrets Act survives in part, but fails with respect to the intellectual property developed while at Cornerstone Macro because the intellectual property at issue was properly within the possession of Cornerstone Macro. Plaintiff adequately states a claim for breach of fiduciary duties against Lazar, Laperriere, and Perli as a result of fiduciary duties arising out of their partnership relationship, but fails to state a fiduciary duty claim against Michael Kantrowitz, a Cornerstone Macro employee and Trahan‘s successor. For these reasons and those that follow, Defendants’ motion to dismiss is GRANTED in part and DENIED in part.
I. BACKGROUND
A. Facts1
Plaintiff is a renowned financial portfolio strategist and quantitative analyst with “unparalleled” credentials. AC ¶ 18. Institutional Investor named him the number one portfolio strategist at least ten times and he is the only portfolio strategist to have been inducted into the “All-America Research Team Hall of Fame.” Id. ¶ 22. “Trahan has developed a unique and recognizable approach to both portfolio market strategy and quantitative analysis,” analyzing the stages of the business cycle and how that translates to the stock market. Id. ¶ 21. Over the course of 12 years, Trahan, “has developed models that rank stocks and provide recommendations on which to buy, and when, while incorporating the business cycle.” Id. This unconventional approach has been “extraordinarily successful“—these models are “worth many millions of dollars” because of their “ability to translate complex macroeconomic concepts into distillable and unique charts and graphs that are quickly digestible.” Id. ¶¶ 21, 23.
In February 2007, Defendant Nancy Lazar (“Lazar“) asked Trahan to join her at International Strategy & Investment Group (“ISI“), where she was a partner. Id. ¶ 19. Trahan joined ISI, heading the firm‘s investment committee as the company‘s Executive Director and Chief Investment Strategist. Id. While at ISI, Trahan hired Defendant Michael Kantrowitz (“Kantrowitz“) as the most junior member of his team and taught him “his trade secrets and proprietary methods, which Kantrowitz understood to be highly confidential.” Id. ¶ 42. Trahan left ISI after about three years to join another firm—to be renamed Wolfe Trahan & Co. (“Wolfe“)—where he continued to utilize and develop his intellectual property. Id. ¶ 20. Shortly thereafter, Kantrowitz left
1. Formation Of Cornerstone Macro
In January 2013, Trahan met with Lazar, Defendant Andrew Laperriere (“Laperriere“), and Defendant Roberto Perli (“Perli“) (the “Limited Partner Defendants” and, collectively with Kantrowitz, the “Individual Defendants“) to discuss the formation of a new firm. Id. ¶ 24. Trahan, Lazar, Laperriere, and Perli (the “Partners“) agreed to form a partnership and created Defendant Cornerstone Macro Research LP (“Cornerstone Macro LP” or the “Partnership“) by executing two governing agreements, the LLC Agreement and the Limited Partnership Agreement (the “LPA” and, collectively with the LLC Agreement, the “Agreements“). Id. ¶ 26. The LLC Agreement, entered into between Trahan and the Limited Partner Defendants, created Defendant Cornerstone Macro Holdings, LLC (“Cornerstone Macro Holdings” and, together with the Partnership, “Cornerstone Macro“). LLC Agreement, Dkt. No. 88-2. The LPA, entered into between the Partners and Cornerstone Macro Holdings, created the Partnership. LPA, Dkt. No. 88-1. The Partnership had one General Partner, Defendant Cornerstone Macro Holdings, and four Limited Partners—Trahan, Lazar, Perli, and Laperriere. AC ¶ 26. Trahan and Lazar each owned 33.33 percent of the Partnership, while Perli and Laperriere each owned 16.67 percent of the Partnership. Id. The Partners eventually amended the LPA to create a Managing Partner position, appointing Trahan as Cornerstone Macro‘s first Managing Partner. Id. ¶ 31. And as Managing Partner, Trahan spent approximately half of his time managing Cornerstone Macro‘s day-to-day operations and the responsibilities of its CFO, which he assumed after Cornerstone Macro‘s previous CFO passed away. Id. ¶ 39.
The Partnership was organized into three distinct divisions which were run separately by at least one of the Partners. Id. ¶¶ 27-28. Trahan ran the Market Strategies Advisory Business (“MSAB“), Lazar ran the Economic Advisory Business, while Perli and Laperriere jointly ran the Policy Advisory Business. Id. ¶ 27. Under this organizational structure, “[e]ach Partner had complete control over his or her own division, including hiring and firing employees, setting compensation, and determining the extent of their own expenditures.” Id. ¶ 28. Further, Partnership profits were distributed to each Partner in relation to the net cash flow associated with their respective divisions. Id. ¶ 29. Cornerstone Macro employees would, independent of the Partners, calculate the percentage of revenue attributable to each division, which would determine the respective Partner‘s compensation. Id. ¶ 30. Should a Partner disagree with the attribution, he or she could question the results. Id.
In drafting the LPA, the Partners sought to ensure that any Partner could take his or her business with them should they leave the Partnership. Id. ¶ 32. Thus, the LPA provided that “the Leaving Partner was entitled to have assigned him or her upon his or her departure any intellectual property belonging to the Partnership and used solely by his or her division.” Id. Section 3.7(f)(i) of the LPA specifically provides that:
The Partnership shall grant to a Leaver all rights in, title to, and ownership of all Intellectual Property owned by the Partnership which is utilized solely by the Business managed by such Leaver and the Partnership shall take all reasonable steps necessary to assign to such Leaver
all rights in, title to, and ownership of any such Intellectual Property within a reasonable period of time following the Leaver‘s withdrawal from the Partnership.
LPA § 3.7(f)(i). “Intellectual Property” is defined as:
patents, patent applications, inventions and discoveries (whether or not patentable), registered and unregistered copyrights in both published works and unpublished works, copyrightable works, copyright registrations, moral rights, computer software and systems, source code, object, executable or binary code, objects, screens, user interfaces, report formats, files, data, manuals, design notes, user documentation, know-how, trade secrets, confidential or proprietary information, client lists, databases, database rights, business and marketing plans and analyses, utility models, technical information, operating procedures, process technology, formulas, rights in internet web sites and internet domain names and other commercial intellectual property rights whether registered or capable of registration and all applications for registration or protection of any of the foregoing.
Id. at 11. The intellectual property at issue here broadly falls into two categories: the IP Trahan created and owned prior to the founding of Cornerstone Macro (the “Pre-Cornerstone IP“) and the IP that was created at Cornerstone Macro (the “Cornerstone IP“). “Almost all” of the intellectual property at issue is Pre-Cornerstone IP. AC ¶ 186. Trahan never transferred or assigned the Pre-Cornerstone IP to Cornerstone Macro, but he did allow it to be used by MSAB while he was at Cornerstone Macro. Id. ¶ 37. The Cornerstone IP is intellectual property that Trahan or his employees developed for use by MSAB and that was allegedly required to be assigned to Trahan upon his departure. Id.
2. The Conspiracy
a. Pushing Trahan Out
Kantrowitz followed Trahan from Wolfe to Cornerstone Macro. Id. ¶ 42. In February 2018, Trahan discovered that Kantrowitz had been publishing, in Kantrowitz‘s name, reports generated using Trahan‘s trade secrets. Id. ¶ 47. Specifically, some of these reports incorporated the MSAB‘s proprietary Macro Accommodation Barometer model, which Trahan had directed Kantrowitz not to use or disseminate without his prior approval. Id. ¶ 48. Trahan confronted Kantrowitz about the misconduct, but subsequently allowed Kantrowitz to publish his thoughts under certain conditions—Kantrowitz could not use any materials published in the MSAB reports, could only publish original material, could only publish once every two weeks, and he had to provide drafts to Trahan for review prior to their distribution. Id. ¶ 49. But Kantrowitz continued to send out reports in contravention of Trahan‘s conditions. Id. ¶¶ 49-50.
On March 6, 2018, Trahan met with Lazar and her husband George Zachar to discuss the fact that Trahan no longer wanted to remain in the Partnership with her. Id. ¶ 56. Trahan‘s desire to split with Lazar stemmed from disagreements over Cornerstone Macro‘s operations, including sales team compensation, id. ¶ 51, and the attribution process. Id. ¶¶ 52-55. Trahan proposed, in accordance with the LPA, that he, as the exiting partner, receive $27.5 million in exchange for control over the Partnership. Id. ¶ 56. Lazar rejected Trahan‘s buyout proposal, and instead, along with the other defendants, allegedly “launched a secret plan” to “deceive Trahan into granting them rights to his business, employees, and intellectual property ... for a fraction of their value, and, if that failed, to take them by outright theft.” Id. ¶ 57.
On May 2, 2018, Kantrowitz “drastically changed demands” and “assured Trahan that he would be placated if he were simply made co-head of the MSAB.” Id. ¶ 63. Perli and the interim CEO subsequently pressured Trahan to promote Kantrowitz. Id. ¶ 64. Specifically, on May 3, 2018, “Perli warned Trahan that Trahan had to make Kantrowitz the Co-Head of the [MSAB] because [Lazar] and [Laperriere] needed Kantrowitz to be promoted.” Id. On May 8, 2018, Trahan agreed to promote Kantrowitz to Co-Head of the MSAB, prompting the Limited Partner Defendants and Kantrowitz to begin “freezing Trahan out from some firm operations and client relationships and development,” which included using “an email distribution list that omitted Trahan, cutting him out of important discussions relating to Trahan‘s business.” Id. ¶¶ 64-65.
In his new position, Kantrowitz “continued his erratic and improper behavior,” id. ¶ 66, causing Trahan to consider firing him. Id. ¶ 68. This allegedly induced the Limited Partner Defendants to “accelerate[] their plan to steal Trahan‘s business before Trahan had any chance to actually fire Kantrowitz.” Id. Indeed, Cornerstone Macro‘s Chief Compliance Officer (“CCO“) “told Trahan that Trahan could not fire Kantrowitz without the permission of the Limited Partner Defendants because Kantrowitz was an officer of the firm.” Id.
On June 18, 2018, Defendants removed Trahan from the partnership, serving him with the withdrawal notice needed to remove him pursuant to the LPA and LLC agreements. Id. ¶ 69. Cornerstone Macro‘s interim CEO and CCO subsequently met with Trahan and explained “that this was a ‘no cause’ removal, meaning that [Cornerstone Macro] had no good cause to remove Trahan from the [P]artnership, and Trahan was being removed pursuant to the provision that allowed the Partners to vote him out of the Partnership.” Id. In response, Trahan offered two exit options, stating, “[I could] leave with my IP and my team and start my own firm or join another sell-side operation, so essentially compete, or on the other hand I can leave my team and my IP at [Cornerstone Macro], for the firm to continue the business, which I would consider under the right circumstances.” Id. ¶ 70. The latter required re-opening Trahan‘s March 6, 2018 proposed buyout. Id. Trahan explained that he owned the intellectual property and trade secrets he brought from Wolfe to Cornerstone Macro, which allegedly were “substantially all of his trade secret models.” Id. ¶ 70. He also stated that he had a right to take any intellectual property owned by the Partnership and used solely by the MSAB—which allegedly was “substantially all of the relevant IP“—and that he was permitted to take his entire business, along with any MSAB employees, with him pursuant to the LPA. Id. ¶¶ 70-71.
Rather than a buyout, the Limited Partner Defendants offered Trahan “$7 million as part of the withdrawal, so long as he did not compete over an 18 month period and then $5.5 million so long as he did not compete over a 9 month period. Defendants
b. The Conspiracy To Steal Trahan‘s Business
Prior to giving Trahan his withdrawal notice, Defendants had allegedly “carefully placed events in motion well before that date to ensure that they would retain Trahan‘s clients and business.” Id. ¶ 73. For example, in March and April 2018, Stephen Gregory, an MSAB employee, worked closely with Trahan on a MSAB business cycle model; rather than work to finish the project, however, Gregory actively stalled to prevent its completion in order to “ensure that Trahan would not be able to access the data after his departure,” and to “segregate this project from the Trahan IP—all the while planning to finish the project and use it to attract clients after Trahan‘s departure.” Id. ¶ 74. The Limited Partner Defendants also allegedly sought to “ensure that Trahan would leave with significantly less money than that to which he was contractually entitled.” Id. ¶ 75. Additionally, the Limited Partner Defendants allegedly attempted to preemptively convince key MSAB employees to stay at Cornerstone Macro following Trahan‘s departure “through bribes, intimidation, and threats.” Id. ¶¶ 78-80.
While the Limited Partner Defendants did not change Kantrowitz‘s title to head of the MSAB, he “was told he would head the business and acted as the head in everything but name.” Id. ¶ 81. On December 6, 2018, at a Cornerstone Macro holiday party, Kantrowitz “gave a speech as the head of the [MSAB]” where he stated “that he had ‘battled’ with Trahan during the year and emerged ‘victorious’ which” allegedly meant that Defendants “had successfully stolen Trahan‘s business.” Id.
3. Misappropriation Of Trahan‘s Intellectual Property
On August 3, 2018, after being informed of his removal, Trahan demanded that Cornerstone Macro return his intellectual property. Id. ¶ 87. Cornerstone Macro responded through its counsel and acknowledged that Trahan had a contractual right to the return of certain intellectual property, including intellectual property owned by the Partnership and utilized solely by the business managed by the departing Partner. Id. However, Cornerstone Macro‘s counsel also asserted that some other materials sought by Trahan were “outside the definition of Intellectual Property and/or were not capable of ownership by Cornerstone LP,” and failed to address any intellectual property that Trahan had created prior to Cornerstone Macro. Id. While “certain Cornerstone Macro representatives have instructed the firm‘s employees to not use Trahan‘s preexisting models and files,” this preexisting content allegedly “has continued to be openly and flagrantly copied and used by the [MSAB] since his departure.” Id. ¶ 88.
Because Defendants “lacked the ability to generate any new and original material required to continue the [MSAB] on their own,” Kantrowitz and others allegedly “took numerous steps to copy as much of the Trahan IP as possible.” Id. ¶ 89. On October 10, 2018, Defendants notified Trahan through their counsel that they had turned over all of his intellectual property to him; however, certain essential code files which are required to use the intellectual property were not turned over. Id. ¶ 90. Trahan expressly demanded in two separate letters that Cornerstone Macro formally assign, pursuant to the LPA, all rights to the intellectual property to him. Id. ¶¶ 90-93.
Defendants used this copied intellectual property to provide clients information and reports. Id. ¶¶ 104-05. Further, Defendants have been “recycling” Trahan‘s prior reports “which constitute intellectual property under the LPA (though not trade secrets)” “in an attempt to create the perception of issuing a ‘new’ report” to clients. Id. ¶¶ 106-30. This copying “has occurred in virtually every report Cornerstone Macro has published since Trahan‘s departure.” Id. ¶ 106. And in addition to the use of old reports, Defendants have allegedly continued to use Trahan‘s intellectual property and trade secrets by using Trahan‘s models (the “Models“) to “provide accurate and fast answers to their clients’ financial questions” and to use Trahan‘s “tool[s] that allow[] for quick creation of standardized charts to demonstrate complex concepts.” Id. ¶¶ 132-34. Finally, Defendants allegedly informed certain MSAB employees that “the Trahan IP would remain open and available for now but at some point they would have to lock it down and prevent people from using it,” and “that they should use and copy whatever Trahan IP they needed in the future for purposes of preparing reports before they had to remove it from their servers.” Id. ¶ 136.
B. Procedural History
Trahan filed the complaint that initiated this case on February 6, 2019. Dkt No. 1. On February 25, 2019, Plaintiff filed a motion for a preliminary injunction, Dkt. No. 27, which the Court denied on April 29, 2019. Dkt. No. 55. On June 7, 2019, Defendants filed a motion to dismiss the Complaint. Dkt. No. 72. In response, Plaintiff filed the Amended Complaint (“AC“) on June 28, 2019. Dkt. No. 80. In the Amended Complaint, Plaintiff asserts sixteen claims. Defendants filed this motion to dismiss the Amended Complaint on July 19, 2019. Dkt. Nos. 87-89. Plaintiff subsequently filed his opposition on August 9, 2019, Dkt Nos. 93-94, and Defendants filed their reply on August 27, 2019, Dkt. No. 100.
Defendants argue that Plaintiff fails to state a claim with respect to the following claims: (1) unfair competition; (2) violation of the Defend Trade Secrets Act (“DTSA“); (3) common law misappropriation of trade secrets; (4) breach of fiduciary duty; (5) aiding and abetting breach of fiduciary duty; (6) faithless servant; (8) breach of the implied covenant of good faith and fair dealing; (9) tortious interference with contract; (10) fraud; (11) negligent misrepresentation; (12) unjust enrichment; (13) conversion; (14) declaratory judgment regarding indemnification for fees; (15) declaratory judgment regarding capita account balance payments; and (16) violation of
A. Rule 12(b)(6)
A complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.”
“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 level.‘” ATSI Commc‘ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Twombly, 550 U.S. at 555). Although
In determining the adequacy of a claim under
B. Rule 9(b)
Under
III. DISCUSSION
A. DTSA (Claim 2)
Plaintiff has successfully stated a DTSA claim with respect to the intellectual property Plaintiff brought with him to Cornerstone Macro but fails to state a claim with respect to the IP developed at Cornerstone. The DTSA provides that “[a]n owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”
1. Status As Trade Secrets
Plaintiff has adequately pleaded that the IP at issue qualifies as trade secrets within the meaning of DTSA. “The DTSA defines ‘trade secret’ to include ‘all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes,’ so long as: (1) ‘the owner thereof has taken reasonable measures to keep such information secret‘; and (2) ‘the information derives independent economic value . .. from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.‘” Iacovacci v. Brevet Holdings, LLC, No. 18cv8048, 2020 WL 528059, at *8 (S.D.N.Y. Feb. 3, 2020) (quoting
Here, Plaintiff alleges that Trahan‘s IP was very valuable and developed through great effort. AC ¶ 23 (“[H]is intellectual property was the product of extensive research, sweat equity, and ingenuity, and worth many millions of dollars.“). Competitors allegedly tried and failed to create successful competing models. Id. ¶ 180. Plaintiff also alleges that he took reasonable measures to keep the Models secret. With respect to his time prior to Cornerstone, Plaintiff alleged that he “repeatedly took steps to protect his intellectual property. Among other things, for example, Trahan has filed lawsuits against various infringers of his intellectual property and has been successful in stopping those infringers.”2 Id. ¶ 23. While at Cornerstone, Plaintiff took a number of protective measures, including: (1) requiring restrictive covenants in employment contracts; (2) using computer password protection and firewalls; (3) limiting access to information; (4) establishing restricting unauthorized use of data; (5) tracking improper re-distribution of the outputs of the trade secrets
models; and (6) implementing a strictly enforced policy not to disclose the Models to “clients or anyone else.” Id. ¶¶ 176–77. The Models were used only by MSAB employees, who were subject to nondisclosure and confidentiality obligations. Id. ¶ 174. Because Plaintiff has adequately pleaded the value of the information, importance of its secrecy, and the reasonable measures taken to keep it secret, he has adequately pleaded that the Models qualify as trade secrets.
Plaintiff has also met his burden to “describ[e] the alleged trade secret with adequate specificity to inform the defendants what it is alleged to have misappropriated.” Sit-Up Ltd. v. IAC/InterActiveCorp., No. 05 Civ. 9292 (DLC), 2008 WL 463884, at *11 (S.D.N.Y. Feb. 20, 2008). Plaintiff does not merely generally describe the trade secrets at issue. Next Commc‘ns, Inc. v. Viber Media, Inc., No. 14-cv-8190 (RJS), 2016 WL 1275659, at *3 (S.D.N.Y. Mar. 30, 2016) (“[A] plaintiff must, ‘at minimum, generally identify the trade secrets at issue.“) (quoting Alexander Interactive, Inc. v. Leisure Pro Ltd., No. 14-cv-2796 (PKC), 2014 WL 4651942, at *5 (S.D.N.Y. Sept. 16, 2014)). Instead, he provides a name and description of each of the 38 models he alleges as trade secrets. AC ¶¶ 169, 171.
2. Misappropriation
Plaintiff has adequately pleaded that Defendants “misappropriated” the Pre-Cornerstone IP, but has not adequately pleaded misappropriation with respect to the Cornerstone IP.
a. Pre-Cornerstone IP
Plaintiff‘s DTSA claim with respect to the Pre-Cornerstone IP survives Defendants’ motion to dismiss because Defendants’ only argument is that Plaintiff fails to allege “that any supposed misappropriation under DTSA was obtained by ‘improper means.’ “Misappropriation” under the DTSA is a defined term which encompasses two separate categories of conduct. Under
(i) used improper means to acquire knowledge of the trade secret;
(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was--
(I) derived from or through a person who had used improper means to acquire the trade secret;
(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(iii) before a material change of the position of the person, knew or had reason to know that--
(I) the trade secret was a trade secret; and
(II) knowledge of the trade secret had been acquired by accident or mistake.
Improper means “includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means” and does not include “lawful means of acquisition.”
However, as described above, acquisition by improper means under
Plaintiff has not adequately pleaded that Defendants have “misappropriated” any trade secrets embodied in the Cornerstone IP. Misappropriation requires acquisition, disclosure, or use of “a trade secret of another.”
3. Ownership
Plaintiff adequately alleges ownership of the Pre-Cornerstone IP because the Amended Complaint alleges that “[i]t was understood and agreed that Trahan would retain ownership of trade secrets and other intellectual property he and his team developed at Wolfe Trahan & Co.” AC ¶ 20. In response, Defendants argue that Plaintiff‘s previous employment contract did not grant him ownership of intellectual property. In support, Defendants attach to their motion to dismiss an employment contract between Trahan and Wolfe Research, LLC. Defs.’ Mot. Dismiss, Ex. G, Dkt. No. 88-7. This evidence is not properly before the Court on a motion to dismiss. Defendants assert that the Court can consider this agreement because it is integral to the Amended Complaint. Defs.’ Mem. Law Supp. Mot. Dismiss (“MOL“), Dkt. No. 89, at 18 n.13. But the Amended Complaint does not specifically refer to this agreement, instead alleging more broadly that it “was understood and agreed that Trahan would retain ownership . . . .” AC ¶ 20. The Court cannot conclude that Plaintiff relied on the agreement attached by Defendants in crafting the Amended Complaint. Defendants’ argument is therefore unable to overcome Plaintiff‘s well-pleaded allegation that he owned the Pre-Cornerstone IP.
Because Plaintiff has adequately alleged that the Pre-Cornerstone IP qualified as trade secrets, that Defendants misappropriated these trade secrets, and that he owned the Pre-Cornerstone IP, Defendants’ motion to dismiss Plaintiff‘s DTSA claim (Claim 2) is DENIED as to the Pre-Cornerstone IP. Because Plaintiff has not adequately alleged that the Cornerstone IP was misappropriated, Defendants’ motion to dismiss is GRANTED as to the Cornerstone IP.
B. Breach Of Fiduciary Duties (Claim 4)
Plaintiff alleges that the Individual Defendants breached fiduciary duties owed to Trahan personally, rather than fiduciary duties owed to the company. Plaintiff argues these duties arise as a result of Trahan‘s limited partner relationship with the Limited Partner Defendants, a relationship of trust and confidence with all Individual Defendants, and a “special employee” relationship with Kantrowitz. Each argument is addressed in turn below.
1. Fiduciary Duties Between Partners
The Limited Partner Defendants owed Trahan fiduciary duties based
Here, Plaintiff alleges that “[e]ach Partner had complete control over his or her own division” of Cornerstone Macro, thus playing an active role in management. AC ¶ 28. Defendants argue that under the LPA, “[n]o Limited Partner, in his or her capacity as such, shall participate in the conduct of, or have any control over, the Partnership business.” LPA § 6.2.3 But this argument ignores both the Partners’ control over the conduct of their own divisions and the role the Limited Partner Defendants exercised by way of their membership in Cornerstone Macro Holdings, the
General Partner of Cornerstone Macro. AC ¶ 26; see, e.g., LLC Agreement § 6.1 (“The business and affairs of the Company shall be managed under the supervision of a board of managers (the Board) comprised, as of the date hereof, of [Lazar, Trahan, Laperriere, and Perli].“). Based on the allegations of the Amended Complaint and the provisions of the LLC Agreement, the Limited Partner Defendants took an active role in the management of the partnership, and therefore owed fiduciary duties to Trahan.
The LPA did not replace these fiduciary duties with contractual duties. Delaware law “permits [limited partnership agreements] to disclaim fiduciary duties, and replace them with contractual duties.” Brinckerhoff v. Enbridge Energy Co., Inc., 159 A.3d 242, 253 (Del. 2017). Delaware‘s Revised Uniform Limited Partnership Act (“DRULPA“) provides, in part, “[t]o the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership or to another partner . . . the partner‘s or other person‘s duties may be expanded or restricted or eliminated by provisions in the partnership agreement.”
Section 7.2 of the LPA, upon which Defendants rely, does not eliminate the Limited Partner Defendants’ fiduciary duties. It provides:
The Partnership and each Partner agree that the provisions of this Agreement to the extent they restrict, limit or eliminate the duties (including, without limitation, fiduciary duties) or liability of a Covered Person that may otherwise exist at law or in equity, shall replace such other duties and liabilities of such Covered Person to the maximum extent permitted by applicable law.
LPA § 7.2. This section merely provides that other provisions of the agreement may modify existing duties, including fiduciary duties. It does not by itself modify these duties. The only provision of the LPA that actually modifies existing duties is Section 7.9, which applies only to duties owed by the General Partner, not the Limited Partner Defendants. Therefore, the LPA does not affect the existence of any fiduciary duties owed by the Limited Partner Defendants.5
2. Fiduciary Duties Arising Out Of Trust And Confidence
Plaintiff has plausibly alleged that the Limited Partner Defendants owe Trahan fiduciary duties on the basis of a relationship of trust and confidence. “Under New York law, a fiduciary duty arises if ‘confidence is reposed on one side and there is resulting superiority and influence on the other.‘” In re Refco Inc. Sec. Litig., 826 F. Supp. 2d 478, 503 (S.D.N.Y. 2011) (citing United States v. Chestman, 947 F.2d 551, 568 (2d Cir. 1991)). The Second Circuit has “emphasized that ‘[a] fiduciary relationship involves discretionary authority and dependency’ and that ‘at the heart of the fiduciary relationship lies reliance, and de facto control and dominance. . . .‘” United States v. Brennan, 183 F.3d 139, 150 (2d Cir. 1999) (emphasis in original) (quoting Chestman, 948 F.2d at 568, 569).
The Amended Complaint alleges that a fiduciary relationship existed between Plaintiff and the Limited Partner Defendants, as well as Kantrowitz, because “their relationship was one of trust and confidence, in which Trahan reposed trust and confidence in them and expected that they would act towards him as his fiduciary.” AC ¶ 219. Plaintiff alleges that the Limited Partner Defendants were “in a position of superior knowledge and access to information than Trahan with respect to Cornerstone Macro‘s finances, including with respect to the relative contributions of each of the Limited Partners’ business divisions.” AC ¶ 223. Though Plaintiff undertook the duties of CFO and served as Managing Partner, id. ¶¶ 31, 39, the Court cannot conclude as a matter of law that a relationship of trust and confidence did not exist given Plaintiff‘s allegations regarding the superior knowledge of the Limited Partner Defendants with respect to the businesses that they operated. However, Plaintiff does not make similar allegations regarding Kantrowitz. Therefore, Plaintiff adequately alleges that the Limited Partner Defendants, but not Kantrowitz, owed him fiduciary duties arising out of a relationship of trust and confidence.
3. Employment-based Duties Owed By Kantrowitz
Plaintiff asserts that Kantrowitz owed Plaintiff fiduciary duties as Plaintiff‘s “special employee,” but the special
4. Breach Of Fiduciary Duties
Defendants’ motion to dismiss for failure to allege breach of the fiduciary duties owed by the Limited Partner Defendants fails. Defendants argue only that all of the alleged violations are either duplicative or occurred after Trahan left Cornerstone, such that any fiduciary duties were no longer owed to Trahan. Plaintiff alleges the Limited Partner Defendants breached their fiduciary duties by, inter alia, (1) concealing and executing their scheme to elevate Kantrowitz, remove Trahan, block Trahan from hiring his own employees, and establish a competing business; (2) sabotaging Trahan‘s projects and business prospects; (3) misappropriating Trahan‘s trade secrets and IP; (4) using Trahan‘s resources and proprietary or confidential information to highjack Trahan‘s business relationships and engage in transactions for the benefit of Defendants’ competing business, including copying Trahan‘s client lists and other business records, as well as charging expenses to Trahan even where they were incurred while acting in their own interests; (5) obtaining the benefits of Defendants’ scheme, including continuing business relationships with clients and significant fees; (6) attempting to ruin Trahan‘s reputation, both internally and externally; and (7) inaccurately disclosing or calculating the Limited Partner Defendants’ and Trahan‘s contributions to the Partnership (which impacts distributions). AC ¶ 225.
Trahan was given notice that he was being removed from the Partnership on June 18, 2018. Id. ¶ 69. The parties negotiated the terms of Trahan‘s separation through the end of September 2018. Id. ¶ 89. Cornerstone Macro employees allegedly began copying Trahan‘s IP “at least as early as October 8, 2018,” which post-dated Trahan‘s departure. Id. ¶¶ 90, 107. However, the Amended Complaint alleges that Defendants’ scheme was hatched around March 2018. Id. ¶ 57. It is rife with allegations that the Limited Partner Defendants’ scheme was underway before Trahan‘s departure, including Defendants’ inducing Trahan to promote Kantrowitz,6
These alleged breaches of fiduciary duties are not duplicative of Plaintiff‘s breach of contract claim.8 “It is a well-settled principle that where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim. In that specific context, any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.” Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010) (dismissing as duplicative a fiduciary duty claim that arose from a dispute regarding the exercise of a right that was “solely a creature of contract“). Plaintiff alleges a sweeping plot in which Defendants schemed to oust Trahan, cut him out of partnership activities, and steal his clients. See, e.g., ¶¶ 64–65. The broad alleged breaches of fiduciary duties do not relate solely to obligations arising from the provisions of the Agreements, even when looking only at conduct prior to Trahan‘s departure. Therefore, because Defendants do not dispute on the merits that the conduct alleged constitutes a breach of fiduciary duties, because certain alleged breaches occurred before Trahan left the partnership, and because the fiduciary duty claims are not duplicative, Plaintiff‘s fiduciary duty claims survive with respect to the Limited Partner Defendants. Defendants’ motion to dismiss Claim 4 is DENIED with respect to the Limited Partner Defendants and GRANTED with respect to Kantrowitz.
C. Aiding And Abetting Breach Of Fiduciary Duty (Claim 5)
To the extent certain Defendants did not have or breach fiduciary duties to Trahan—at least Kantrowitz, Cornerstone Macro Holdings and Cornerstone Macro LP—Plaintiff has adequately stated a claim for aiding and abetting breach of fiduciary duties. The parties cite no law in their briefing regarding this claim, but Delaware and New York law governing aiding and abetting a breach of fiduciary duty are “not materially different.” BBS Norwalk One, Inc. v. Raccolta, Inc., 60 F. Supp. 2d 123, 130 (S.D.N.Y. 1999). “Under Delaware law, a claim of aiding and abetting a breach of fiduciary duty (sometimes referred to as a claim of civil conspiracy) requires: (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary‘s duty, and (3) a knowing participation in that breach by the non-fiduciary.” Id. at 129–30 (citing In re Santa Fe Pacific Corp. Shareholder Litig., 669 A.2d 59, 72 (Del. 1995)), aff‘d, 205 F.3d 1321 (2d Cir. 2000). “Under New York law, third party liability for participation in a breach of fiduciary duty is established by
Plaintiff has adequately pleaded that the Limited Partner Defendants owed and breached fiduciary duties to Plaintiff. See supra Section III.B. Therefore, the only remaining element is Defendants’ knowing participation in the breach. Each Defendant allegedly “knowingly and substantially assisted the other Defendants’ breaches of their fiduciary duties.” AC ¶ 231. Moreover, each Defendant allegedly had knowledge of the fiduciary duties owed to Trahan “through their positions, duties, responsibilities, and experience at Cornerstone Macro, and in the case of the Contract-Party Defendants, through their access to the LPA and LLC Agreement.” Id. ¶ 230. Therefore, Plaintiff has adequately pleaded a claim for aiding and abetting a breach of fiduciary duty, and Defendants’ motion to dismiss Claim 5 is DENIED.
D. Fraud (Claim 10)
Defendants’ motion to dismiss Plaintiff‘s fraud claim is granted in part because, in some instances, Plaintiff fails to allege actionable misstatements or reasonable reliance. However, some misstatements and omissions survive the motion to dismiss.
1. Legal Standard
“To state a claim for fraud under New York law, a plaintiff must allege (1) a material misrepresentation or omission of fact; (2) which the defendant knew to be false; (3) which the defendant made with the intent to defraud; (4) upon which the plaintiff reasonably relied; and (5) which caused injury to the plaintiff.” Fin. Guar. Ins., 783 F.3d at 402.
“[S]tatements will not form the basis of a fraud claim when they are mere ‘puffery’ or are opinions as to future events.” Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994). “[S]peculation and expressions of hope for the future are not actionable representations of fact under common law theories of fraud.” Passiglia v. Northwell Health, Inc., 252 F. Supp. 3d 129, 138 (E.D.N.Y. 2017) (quoting Karakus v. Wells Fargo Bank, N.A., 941 F. Supp. 2d 318, 344 (E.D.N.Y. 2013)), adhered to on denial of reconsideration, No. 09-cv–4739 (ENV) (SMG), 2013 WL 3187055 (E.D.N.Y. June 20, 2013). “The failure to fulfill a promise to perform future acts is not ground for a fraud action unless there existed an intent not to perform at the time the promise was made.” Cohen, 25 F.3d at 1172.
With respect to reasonable reliance, “[a] plaintiff cannot close his eyes to an obvious fraud, and cannot demonstrate reasonable reliance without making inquiry and investigation if he has the ability, through ordinary intelligence, to ferret out the reliability or truth . . . .” Crigger v. Fahnestock & Co., 443 F.3d 230, 234 (2d Cir. 2006). “In assessing the reasonableness of a plaintiff‘s alleged reliance, we consider the entire context of the transaction, including factors such as its complexity and magnitude, the sophistication of the parties, and the content of any agreements between them. Id. at 235 (emphasis added) (quoting Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 195 (2d Cir. 2003)).
“Proximate cause, known in the context of fraud claims as ‘loss causation,’ requires proof of a causal nexus between Defendants’ breach and/or tortious conduct and the damages incurred. To establish loss causation, Plaintiff must furnish facts that the ‘subject of the fraudulent statement or omission was the cause
2. Analysis
Plaintiff alleges four affirmative misrepresentations of material fact: (1) Perli‘s statement to Trahan that “Trahan had to make Kantrowitz the Co-Head of [MSAB] because Defendants Nancy Lazar and Andrew Laperriere needed Kantrowitz to be promoted“; (2) “Kantrowitz‘s contemporaneous assurances to Trahan that he would be satisfied if he were simply promoted to co-head of [MSAB]“; (3) the CCO‘s statement that Kantrowitz could not be fired; and (4) Defendants’ statements through counsel on October 16, 2018, that they would not use Trahan‘s IP. AC ¶ 280. Plaintiff also alleges that Defendants fraudulently omitted material facts, including by failing to disclose “Defendants’ scheme to defraud Trahan and steal his business and intellectual property. . . .” AC ¶ 278. None of these misrepresentations or omissions give rise to a fraud claim. Each is addressed in turn below.
a. Perli‘s Statement
Perli allegedly pressured Trahan to promote Kantrowitz. He allegedly “warned Trahan that Trahan had to make Kantrowitz the Co-Head of [MSAB] because Defendants Nancy Lazar and Andrew Laperriere needed Kantrowitz to be promoted.” Id. ¶ 64. Plaintiff argues that this statement was an actionable misrepresentation because Perli‘s statement was not a “vague statement of hope[] but contained [a] clear promise[] to continue the Partnership and not to steal his IP or trade secrets.” Opp. at 20 n.13. But nothing in Perli‘s statement can be plausibly read as a promise. It was a warning coupled with no assurances; there is no concrete statement of future intent. Therefore, Perli‘s statement to Trahan is not an actionable misstatement.
b. Kantrowitz‘s Statement
After Kantrowitz had been demanding certain compensation and arguing that Trahan should step down and Kantrowitz should lead MSAB, Kantrowitz allegedly “assured Trahan that [Kantrowitz] would be placated if he were simply made co-head of [MSAB]” rather than receiving guaranteed compensation in writing. AC ¶ 63. Plaintiff has plausibly alleged that Kantrowitz‘s statement was a promise not to continue seeking to be made the sole head of MSAB and to have Trahan step down if Kantrowitz was promoted to co-head instead. The allegations that there was a “conspiracy to oust Trahan,” e.g., AC ¶ 64, are sufficient to show that Kantrowitz knew he would not be placated merely by being made co-head and would not stop until Trahan was ousted and Kantrowitz was head of MSAB. Kantrowitz‘s statement was therefore an actionable misrepresentation, as pleaded, because Plaintiff alleges a promise that Kantrowitz had no intent of performing. See Cohen, 25 F.3d at 1172.
Defendants assert that Trahan did not “have any justification in relying on Kantrowitz‘s statement, both because, as an at-will employee, Kantrowitz was entitled to give notice at any time, and because, as a general matter, expressions of emotion states cannot be the basis of reasonable reliance in a fraud claim.” MOL at 14. But Plaintiff has plausibly alleged that Kantrowitz‘s statement was not a mere
Moreover, Plaintiff has adequately pleaded that this alleged misrepresentation was the proximate cause of his injury. Defendants’ scheme allegedly involved “induc[ing] Trahan to elevate Kantrowitz to co-head of [MSAB] . . . in order to better position Defendants to steal Trahan‘s business and intellectual property after summarily removing him from the partnership.” AC ¶ 2. The alleged injury as a result of the statement is “Kantrowitz‘s promotion, Trahan‘s eventual unjust ousting, and the theft of his intellectual property, trade secrets, and business.” AC ¶ 282. It is possible that Kantrowitz‘s subsequent promotion was not the proximate cause of any injury if Defendants would have succeeded in perpetrating their alleged scheme anyway, but that is a factual determination that the Court cannot make on this motion to dismiss. See Bank Midwest, N.A. v. Hypo Real Estate Capital Corp., No. 10 CIV. 232 (WHP), 2010 WL 4449366, at *4 (S.D.N.Y. Oct. 13, 2010) (“[I]ssues of proximate cause are often ‘fact-laden, requiring a fully developed factual record, and not [a] bare-bones motion to dismiss.‘“) (quoting In re Sept. 11 Prop. Damage & Bus. Loss Litig., 468 F. Supp. 2d 508, 525 (S.D.N.Y. 2006)).
Therefore, Kantrowitz‘s statement regarding his promotion may form the basis of a fraud claim because Plaintiff has adequately alleged that it was an actionable misrepresentation, upon which Plaintiff reasonably relied, proximately causing Plaintiff harm.
c. CCO‘s Statement
The CCO allegedly told Trahan that Trahan “could not fire Kantrowitz without the permission of the Limited Partner Defendants because Kantrowitz was an officer of the firm” and that this representation was not true pursuant to the LPA and LLC Agreement. AC ¶ 68. But this statement was not made by Defendants. In response, Plaintiff argues that this statement was made to Plaintiff “at Defendants’ instruction.” Opp. at 18. “Under either or both the law of conspiracy and agency, an actor may be held liable for the actions, including the misstatements, of another.” Carroll v. LeBoeuf, Lamb, Greene & MacRae, LLP, 623 F. Supp. 2d 504, 510 (S.D.N.Y. 2009). However, the Amended Complaint is devoid of any allegation that the CCO was acting at Defendants’ instruction, within the scope of any agency relationship, or as part of a conspiracy. AC ¶ 68. The Amended Complaint is also silent as to whether the CCO knew this statement was false. Therefore, as pleaded, this statement does not form the basis of a fraud claim against Defendants.
d. Defendants’ Letter
The final alleged affirmative misstatement was an October 16, 2018 letter in which Defendants, through counsel, told Trahan “that they would not use Trahan‘s intellectual property (despite knowing at the time they made this representation that they planned to continue to use his intellectual property after his departure), upon which Trahan reasonably relied to his detriment in delaying to bring legal action against Defendants.” AC ¶ 280(d). Thus, the only alleged harm as a result of
But Plaintiff did not “reasonably rel[y]” on the letter in so delaying this action. Fin. Guar. Ins., 783 F.3d at 402. The October 16, 2018 letter was sent by Defendants in response to a letter in which Trahan explained that his IP included both Pre-Cornerstone IP and Cornerstone IP, and demanded that Cornerstone Macro cease using and assign to Trahan all Trahan IP. Id. ¶ 158. While Defendants allegedly agreed in the letter not to use Trahan‘s IP, id. ¶ 159, Defendants “committed to assigning only a single copyright registration to Mr. Trahan, and claimed that there were no ‘further actions Cornerstone must take under [Section 3.7 of the LPA].‘” Id. ¶ 254(c). As alleged, this letter not only failed to resolve all outstanding disputes between the parties, but also highlighted that Defendants’ proposed resolution was inconsistent with Trahan‘s desired outcome. Knowing there was a live dispute as to the disposition of the IP, Trahan was not reasonable in delaying suit in reliance on Defendants’ letter, particularly in light of Trahan‘s sophistication. See Crigger, 443 F.3d at 234-35. Therefore, the October 16, 2018 letter does not form the basis of a fraud claim because Plaintiff has failed to plead reasonable reliance.
e. Failure To Disclose The Scheme To Oust Trahan
“[A] concealment of facts supports a cause of action only if the non-disclosing party has a duty to disclose. Such a duty ordinarily arises where the parties are in a fiduciary or other relationship signifying a heightened level of trust.” Remington Rand Corp. v. Amsterdam-Rotterdam Bank, N.V., 68 F.3d 1478, 1483 (2d Cir. 1995) (citations and internal quotation marks omitted). Absent a fiduciary relationship, “a duty to disclose may arise if: (1) one party makes a partial or ambiguous statement that requires additional disclosure to avoid misleading the other party; or (2) one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge,” but only “when it becomes apparent to the non-disclosing party that another party is operating under a mistaken perception of material fact.” Id. (citations and internal quotation marks omitted).
Here, Plaintiff has plausibly alleged that the Limited Partner Defendants owed Trahan fiduciary duties. But Plaintiff either did not allege or did not plausibly allege that the non-Limited Partner Defendants owed him fiduciary duties. Moreover, Plaintiff only conclusorily alleges superior knowledge and partial representations that could trigger a duty to disclose for the non-Limited Partner Defendants. AC ¶ 278. This is insufficient under Rule 9(b). Miller v. HSBC Bank U.S.A., N.A., No. 13 CIV. 7500, 2015 WL 585589, at *7 (S.D.N.Y. Feb. 11, 2015) (“When attempting to establish a duty to disclose based on partial representations or superior knowledge, the pleader must allege facts giving rise to a duty to disclose with the specificity required by Rule 9(b).“) (citations and internal quotation marks omitted). Therefore, while Plaintiff has adequately alleged that the Limited Partner Defendants had a duty to disclose, he has not adequately alleged that the non-Limited Partner Defendants had a duty to disclose.
With respect to the Limited Partner Defendants, Plaintiff has alleged fraudulent concealment with the necessary particularity. Here, Plaintiff has pleaded that “[e]ach Defendant intentionally and misleadingly failed to disclose . . . Defendants’ scheme to defraud Trahan and steal his business and intellectual property, as well as each aspect, element, and step of that
Defendants are lumped together, in other places the conduct of the three Limited Partner Defendants is specifically identified. See, e.g., AC ¶¶ 2, 65, 69, 72.
The Amended Complaint also alleges context—that the omissions occurred while the conspiracy to oust Trahan was underway, beginning around March 2018,10 see AC ¶ 57, despite a duty disclose that arose “as a result of their superior knowledge about the information they were providing Trahan” and, for the “Fiduciary Duty Defendants,” “as a result of their fiduciary duties to Trahan.” Id. ¶ 278. Plaintiff allegedly relied on these omissions in promoting Kantrowitz, which eventually led to Trahan‘s “unjust ousting, and the theft of his intellectual property, trade secrets, and business.” Id. ¶ 282.
Thus, Plaintiff has adequately pleaded with particularity a fraudulent omission claim against the Limited Partner Defendants. However, Kantrowitz‘s statement regarding his promotion is the only affirmative statement that plausibly gives rise to a fraud claim. Therefore, Defendants’ motion to dismiss Claim 10 is GRANTED in part and DENIED in part.
E. Negligent Misrepresentation (Claim 11)
Plaintiff‘s negligent misrepresentation claim rises and falls with the fraud claim. “Negligent misrepresentation ‘involves most of the same elements as fraud, with a negligence standard substituted for the scienter requirement.‘” Carroll, 623 F. Supp. 2d at 510 (quoting Mia Shoes, Inc. v. Republic Factors, Corp., No. 96 Civ. 7974 (TPG), 1997 WL 525401, at *3 (S.D.N.Y. Aug. 21, 1997)). Here, the outcome of Defendants’ motion to dismiss Plaintiff‘s various fraud claims did not turn on scienter. Therefore, Defendants’ motion to dismiss Claim 11 is GRANTED in part and DENIED in part.11
Plaintiff‘s tort claims for unfair competition, misappropriation, and conversion are not duplicative of Plaintiff‘s contract claim, with the exception of Plaintiff‘s conversion claim with respect to Cornerstone IP. These are three separate causes of action, but they are addressed together here because Defendants’ only arguments with respect to these claims is that they are duplicative of Plaintiff‘s breach of contract claim.
“When a valid agreement governs the subject matter of a dispute between parties, claims arising from that dispute are contractual; attempts to repackage them as sounding in fraud, conversion, and other torts, are generally precluded, unless based on a duty independent of the contract.” Bancorp Servs., LLC v. Am. Gen. Life Ins. Co., No. 14-cv-9687 (VEC), 2016 WL 4916969, at *9 (S.D.N.Y. Feb. 11, 2016) (quoting Poplar Lane Farm LLC v. Fathers of Our Lady of Mercy, 449 F. App‘x 57, 59 (2d Cir. 2011)). “[P]laintiff must allege a breach of ‘a duty independent of the duties under the contract.‘” Reed Const. Data Inc. v. McGraw-Hill Companies, Inc., 745 F. Supp. 2d 343, 348, 353 (S.D.N.Y. 2010) (quoting Carvel Corp. v. Noonan, 350 F.3d 6, 16 (2d Cir. 2003)).
With respect to Pre-Cornerstone IP, none of these claims can be dismissed as duplicative because the IP-related breach of contract allegations relate only to the IP covered by Section 3.7(f) of the LPA, which refers to IP developed while Trahan worked at Cornerstone.12 Id. ¶¶ 254(b), (c); LPA § 3.7(f). Because the Amended Complaint alleges tortious conduct related to IP not covered by the breach of contract claim, Claims 1, 3, and 13 are not duplicative with respect to the Pre-Cornerstone IP.13 Because Claims 1, 3, and 13 also relate to IP covered by the contract, each is addressed in turn below.
1. Unfair Competition
Plaintiff‘s unfair competition claim is not duplicative. “The essence of an unfair competition claim under New York law is that the defendant misappropriated the fruit of plaintiff‘s labors and expenditures by obtaining access to plaintiff‘s business idea either through fraud or deception, or an abuse of a fiduciary or confidential relationship.” Bytemark, Inc. v. Xerox Corp., 342 F. Supp. 3d 496, 505 (S.D.N.Y. 2018) (quoting Telecom Int‘l Am., Ltd. v. AT & T Corp., 280 F.3d 175, 197 (2d Cir. 2001)). Plaintiff‘s unfair competition claim alleges that “Defendants secretly schemed to misappropriate the Trahan IP and use it to publish newsletters, models, and strategies, answer client questions, develop and publish reports, hold
2. Misappropriation
For reasons similar to the unfair competition claim, Plaintiff‘s misappropriation claim as to the Cornerstone IP is not duplicative. “To state a claim for misappropriation of confidential information, a plaintiff must allege that the defendant used the plaintiff‘s confidential information for the purpose of securing a competitive advantage.” Reed Const. Data Inc., 745 F. Supp. 2d at 352. “A claim of misappropriation ‘must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract.‘” Id. at 353 (quoting Productivity Software Int‘l, Inc. v. Healthcare Techs., Inc., No. 93 Civ 6949 (RPP), 1995 WL 437526, at *8 (S.D.N.Y. Jul. 25, 1995)). Plaintiff‘s misappropriation claim alleges that Defendants “have obtained, misappropriated, utilized, and disclosed Trahan‘s trade secrets for their own benefit, for the purpose of competing against Trahan unfairly, and for the purpose of soliciting Trahan‘s actual and prospective customers.” AC ¶ 210. These allegations plead a breach of a duty beyond the failure to assign to Trahan and discontinue use of the intellectual property under Section 3.7(f), since the alleged wrongdoing extends to Defendants’ violation of a duty to not use the confidential information for the purpose of securing a competitive advantage against Trahan. Cf Bancorp, 2016 WL 4916969, at *9. Therefore, the misappropriation claim with respect to the Cornerstone IP is not duplicative of the breach of contract claim.
3. Conversion
However, the conversion claim is duplicative. “To prevail on a claim of conversion, a Plaintiff must demonstrate that: 1) the property subject to conversion is a specific identifiable thing; 2) plaintiff had ownership, possession, or control over the property before its conversion; and 3) defendant exercised an unauthorized dominion over the thing in question, to the alteration of its condition or to the exclusion of the plaintiff‘s rights.” Strategic Growth Int‘l, Inc. v. RemoteMDx, Inc., No. 06 Civ. 3915, 2008 WL 4179235, at *3 (S.D.N.Y. Sept. 10, 2008) (quoting Ad Rendon Commc‘ns., Inc. v. Lumina Ams. Inc., No. 04-CV-8832 (KMK), 2007 WL 2962591, at *5 (S.D.N.Y. Oct. 9, 2007)). Here, Trahan‘s conversion claim is premised on Defendants’ refusal to return and continued
For these reasons, Defendants’ motion to dismiss Claims 1, 3, and 13 as duplicative is DENIED; however the motion to dismiss Claim 13 is GRANTED as to Cornerstone IP.
G. Faithless Servant (Claim 6)
Plaintiff‘s faithless servant claim against each of the Individual Defendants fails because Plaintiff fails to adequately allege an agency relationship. Under the faithless servant doctrine, which is grounded in agency law, “[o]ne who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary.” Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184, 200 (2d Cir. 2003). The “principal is entitled to recover from his unfaithful agent any commission paid by the principal.” Id. While the defendant in Phansalkar was denominated a partner, the application of the faithless servant doctrine turned on whether the partner was the plaintiff‘s agent. “In order to establish a principal/agent relationship, a party must demonstrate the following elements: (1) the manifestation by the principal that the agent shall act for him; (2) the agent‘s acceptance of the undertaking; and (3) an understanding between the parties that the principal is to be in control of the undertaking.” Nuevo Mundo Holdings v. Pricewaterhouse Coopers LLP, No. 03 CIV. 0613 GBD, 2004 WL 112948, at *4 (S.D.N.Y. Jan. 22, 2004). “The importance of control by the principal is paramount. There is no agency relationship where the alleged principal has no right of control over the alleged agent.” Id. at *5 (quoting Morgan Guar. Trust Co. of N.Y. v. Republic of Palau, 657 F. Supp. 1475, 1481 n.2 (S.D.N.Y. 1987)).
Trahan was not in control of the Limited Partner Defendants; each controlled their own subdivision. AC ¶ 28. Moreover, the LPA limits Limited Partners’ control over the Partnership: “No Limited Partner, in his or her capacity as such, shall participate in the conduct of, or have any control over, the Partnership business. . . . no Limited Partner, in his or her capacity as such, shall have any authority or right to act for or bind the Partnership.” LPA § 6.2. The lack of control exercised by Trahan over the Limited Partner Defendants defeats any alleged agency relationship.
As for Kantrowitz, Plaintiff again rests his claim on Kantrowitz‘s alleged “special employee” status because Kantrowitz was paid by Cornerstone Macro LLC. AC ¶ 238. But this argument is unavailing for the same reasons that the special employee doctrine does not create a fiduciary relationship. See supra Section III.B.3. Plaintiff does not point to authority suggesting that a special employee relationship can give rise to a faithless servant claim. Because no agency relationship existed between the Individual Defendants and Plaintiff, Defendants’ motion to dismiss the faithless servant claim (Claim 6) is GRANTED.
H. Implied Covenant of Good Faith and Fair Dealing (Claim 8)
Plaintiff‘s claim for breach of the implied covenant of good faith and fair dealing must be dismissed. “Under New York law, a covenant of good faith and fair dealing is implied in all contracts.” Fishoff v. Coty Inc., 634 F.3d 647, 653 (2d Cir. 2011) (citing Cross & Cross Props., Ltd. v. Everett Allied Co., 886 F.2d 497, 502 (2d Cir. 1989)). “A breach of the duty of good faith and fair dealing is considered a breach of contract.” Id. (citing Nat‘l Mkt. Share, Inc. v. Sterling Nat‘l Bank, 392 F.3d 520, 525 (2d Cir. 2004)). Accordingly, “raising both claims in a single complaint is redundant, and courts confronted with such complaints under New York law regularly dismiss any freestanding claim for breach of the covenant of fair dealing.” Jordan v. Verizon Corp., No. 08 Civ. 6414 (GEL), 2008 WL 5209989, at *7 (S.D.N.Y. Dec. 10, 2008). However, an implied covenant claim “can survive a motion to dismiss ‘if it is based on allegations different from those underlying the accompanying breach of contract claim.‘” JPMorgan Chase Bank, N.A. v. IDW Grp., LLC, No. 08 Civ. 9116 (PGG), 2009 WL 321222, at *5 (S.D.N.Y. Feb. 9, 2009) (quoting Grand Heritage Mgmt., LLC v. Murphy, No. 06 Civ. 5977 (NRB), 2007 WL 3355380, at *6 (S.D.N.Y. Nov. 5, 2007)). Therefore, “to simultaneously plead breach of contract and implied covenant claims under New York law, a plaintiff must allege an implied duty that is consistent with the express contractual terms, but base its implied covenant theory on allegations that are distinct from the factual predicate for its contract claims.” Id.
All but one of Defendants’ alleged breaches of the implied covenant are duplicative of the breach of contract claim because they are based on the same underlying allegations—the theft of his intellectual property and unfairly and inaccurately calculating attributions for purposes of compensation.14 Compare AC ¶ 261 (implied duties allegedly breached) with id. ¶ 254 (contractual duties allegedly breached).
The one implied covenant allegation not reflected in the breach of contract claim is Defendants’ alleged conspiracy to remove Trahan from the partnership. But “[t]he implied covenant ‘can only impose an obligation consistent with other mutually agreed upon terms in the contract.‘” Broder v. Cablevision Sys. Corp., 418 F.3d 187, 198-99 (2d Cir. 2005) (quoting Geren v. Quantum Chem. Corp., 832 F. Supp. 728, 732 (S.D.N.Y.1993)). “It does not ‘add to the contract a substantive provision not included by the parties.‘” Id.; see also Oscar de la Renta, Ltd. v. Mulberry Thai Silks, Inc., No. 08 CIV. 4341 (RJS), 2009 WL 1054830, at *5-6 (S.D.N.Y. Apr. 17, 2009) (“Significantly, although this implied covenant bars actions not ‘expressly forbidden’ by the contract but undertaken in bad faith, it does not ‘operate to create new contractual rights; it simply ensures that parties to a contract perform the substantive, bargained-for terms of their agreement and that parties are not unfairly denied express, explicitly bargained-for benefits.‘“) (quoting Don King Prods., Inc. v. Douglas, 742 F. Supp. 741, 767 (S.D.N.Y.1990)). Here, the allegedly implied duty “not to conspire with Trahan‘s employees to remove Trahan as a Partner,” AC ¶ 261, is inconsistent with the Agreements, which gave the Limited Partner Defendants the power to remove Trahan without cause. See LPA § 3.7(d); LLC Agreement § 6.5(w). Therefore, Defendants’ motion to dismiss Plaintiff‘s good faith and fair dealing claim (Claim 8) is GRANTED.
Plaintiff‘s claim against Kantrowitz for tortious interference with contract survives Defendants’ motion to dismiss. “Under New York law, the elements of tortious interference with contract are (1) ‘the existence of a valid contract between the plaintiff and a third party;’ (2) the ‘defendant‘s knowledge of the contract;’ (3) the ‘defendant‘s intentional procurement of the third-party‘s breach of the contract without justification;’ (4) ‘actual breach of the contract;’ and (5) ‘damages resulting therefrom.‘” Kirch v. Liberty Media Corp., 449 F.3d 388, 401 (2d Cir. 2006) (quoting Lama Holding Co. v. Smith Barney Inc., 668 N.E.2d 1370, 1375 (N.Y. 1996). “[P]laintiff must allege that ‘there would not have been a breach but for the activities of defendants.‘” Sharma v. Skaarup Ship Mgmt. Corp., 916 F.2d 820, 828 (2d Cir. 1990) (quoting Special Event Entertainment v. Rockefeller Center, Inc., 458 F. Supp. 72, 78 (S.D.N.Y. 1978)). “Once a plaintiff alleges facts . . . establishing that the breaching party was predisposed toward breaching its agreement, the claim for tortious interference must be dismissed for failure to plead ‘but for’ causation.” Granite Partners, L.P. v. Bear, Stearns & Co. Inc., 17 F. Supp. 2d 275, 293-94 (S.D.N.Y. 1998) (citing Special Event Entertainment, 458 F. Supp. at 78). Defendants dispute only the existence of a “third party” relationship and causation. MOL at 30-32.
The parties dispute whether Kantrowitz was acting outside the scope of his authority, such that he could tortiously interfere with his employer‘s contract. “[A] plaintiff bringing a tortious interference claim must show that the defendants were not parties to the contract.” Finley v. Giacobbe, 79 F.3d 1285, 1295 (2d Cir. 1996) (emphasis in original). “In order to show that a defendant-employee is a ‘third party,’ a plaintiff must show that the defendant-employee has exceeded the bounds of his or her authority.” Id. “A supervisor is considered to have acted outside the scope of his employment if there is evidence that the supervisor‘s manner of interference involved independent tortious acts such as fraud or misrepresentations, or that he acted purely from malice or self-interest.” Cohen v. Davis, 926 F. Supp. 399, 404 (S.D.N.Y. 1996). Kantrowitz was an employee of MSAB. AC ¶ 271. The Amended Complaint adequately alleges that Kantrowitz acted outside the scope of his authority by “participating in the orchestration, planning, perpetration, and execution of the scheme to defraud and steal from Trahan,” all self-interested acts. Id.
The Amended Complaint also adequately alleges but for causation because Kantrowitz‘s involvement in the scheme, and eventual promotion to co-head of MSAB served to “better position Defendants to steal Trahan‘s business and intellectual property after summarily removing him from the partnership.” AC ¶ 2. Therefore, the Amended Complaint plausibly alleges that but for Kantrowitz‘s participation, the Limited Partner Defendants would not have executed their scheme. Defendants argue that but for causation is defeated because Kantrowitz was allegedly recruited into this scheme by the Limited Partner Defendants. Id. (the “Limited Partner Defendants saw an opportunity to turn Kantrowitz against Trahan—and they did.“). This does not render the Limited Partner Defendants “predisposed” to breach within the meaning of Granite Partners, in which the breaching party would have breached regardless of the defendant‘s conduct. Granite Partners, 17 F. Supp. 2d at 293. Here, it is not alleged that the Limited Partner Defendants would or could have breached even if Kantrowitz was not involved. Rather, the Amended Complaint alleges he was an integral part of their plan. AC ¶ 273 (“[Kantrowitz‘s]
Because the Amended Complaint adequately alleges a third party relationship and but for causation, Defendants’ motion to dismiss the tortious interference with contract claim against Kantrowitz (Claim 9) is DENIED.
J. Unjust Enrichment (Claim 12)
Defendants’ motion to dismiss the unjust enrichment claim on the basis that it is duplicative of the breach of contract claim is denied because it is pleaded in the alternative. Unjust enrichment is “a New York common law quasi-contract cause of action requiring the plaintiff to establish: ‘(1) that the defendant benefitted; (2) at the plaintiff‘s expense; and (3) that equity and good conscience require restitution.‘” Myun-Uk Choi v. Tower Research Capital LLC, 890 F.3d 60, 69 (2d Cir. 2018) (quoting Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000)). “‘[T]he existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter.’ . . . ‘[I]t is impermissible . . . to seek damages in an action sounding in quasi contract where the suing party has fully performed on a valid written agreement, the existence of which is undisputed, and the scope of which clearly covers the dispute between the parties.‘” Ball v. Cook, No. 11 Civ. 5926 (RJS), 2012 WL 4841735, at *10 (S.D.N.Y. Oct. 9, 2012) (internal citation omitted) (quoting Clark-Fitzpatrick, Inc. v. Long Island R. Co., 516 N.E.2d 190, 193 (N.Y. 1987)). “A plaintiff can plead unjust enrichment as an alternative claim to breach of contract, but only if there is ‘a bona fide dispute concerning existence of a contract or whether the contract covers the dispute in issue.‘” MF Glob. Holdings Ltd. v. PricewaterhouseCoopers LLP, 43 F. Supp. 3d 309, 317 (S.D.N.Y. 2014) (quoting Fantozzi v. Axsys Techs., Inc., No. 07 Civ. 02667 (LMM), 2008 WL 4866054, at *7 (S.D.N.Y. Nov. 6, 2008)).
Plaintiff‘s unjust enrichment claim is pleaded only “[t]o the extent the express terms of the LPA and LLC Agreement do not cover the subject matter of the [unjust enrichment] claim, and/or to the extent some Defendants are not parties to the LPA and LLC Agreement . . . .” AC ¶ 296. Plaintiff therefore brings this claim in the alternative, pleading unjust enrichment only to the extent that the Agreements do not govern the subject matter of this claim. Here, there is a dispute regarding whether the Agreements govern this dispute because Plaintiff argues that the Agreements do not cover the Pre-Cornerstone IP, which Defendants dispute. Therefore, Plaintiff‘s unjust enrichment claim, as pleaded, is not duplicative, and Defendants’ motion to dismiss Claim 12 is DENIED.15
Defendants’ motion to dismiss Plaintiff‘s claim seeking a declaratory judgment regarding indemnification for fees incurred in connection with Trahan‘s withdrawal from the partnership is denied because the Amended Complaint adequately alleges Trahan was entitled to be indemnified for those fees. Plaintiff seeks a declaratory judgment declaring “that the Partnership is responsible for Trahan‘s expenses relating to this dispute, except those incurred by him ‘as plaintiff’ in this action, in an amount no less than $77,474.19.” AC ¶ 319.
The LPA provides, in relevant part, that Trahan will be indemnified:
from and against any and all liabilities, obligations, losses, damages, . . . costs, expenses and disbursements (including legal and accounting fees and expenses, costs of investigation and sums paid in settlement) of any kind or nature whatsoever . . . which may be imposed on, incurred by or asserted at any time against such Covered Person in any way related to or arising out of this Agreement, the Partnership or the management or administration of the Company or in connection with the business or affairs of the Partnership or the activities of such Covered Person on behalf of the Partnership . . . .
LPA § 7.4. There is a carveout that provides Trahan “is not entitled to indemnification for claims and expenses that are incurred by such Covered Person as plaintiff in any action, suit or proceeding brought by such Covered Person against the Partnership or any Partner.” Id.
Similarly, the LLC Agreement provides, in relevant part, that Trahan will be indemnified:
from and against any and all liabilities, obligations, losses, damages, costs, expenses and disbursements (including legal and accounting fees and expenses, costs of investigation and sums paid in settlement) of any kind or nature whatsoever . . . which may be imposed on, incurred by or asserted at any time against such Covered Person in any way related to or arising out of this Agreement, the Company or the management or administration of the Company or in connection with the business or affairs of the Company or the activities of such Covered Person on behalf of the Company . . . .
LLC Agreement § 7.4. Again, a carveout provides that Trahan is not entitled to indemnification for claims and expenses that are “incurred by such Covered Person as plaintiff in any action, suit or proceeding brought by such Covered person against the Company or any Member.” Id.
The Amended Complaint seeks “expenses relating to this dispute, except those incurred by him ‘as’ plaintiff in this action,” but it is silent as to what expenses relate to this dispute but were not incurred as plaintiff. AC ¶ 319. Plaintiff‘s Opposition clarifies that “Trahan is entitled to his legal fees incurred during [the withdrawal] negotiation.” Opp. at 23. The text of the LPA and LLC Agreement covers “any and all liabilities” incurred by covered persons “in any way related to arising out of” the business, and Plaintiff has made it clear that he does not seek reimbursement of fees subject to the carveout. Therefore, the fees allegedly incurred by Plaintiff are plausibly alleged to fall within the scope of the indemnification provisions and Defendants’ motion to dismiss Claim 14 is DENIED.
Defendants’ motion to dismiss Plaintiff‘s claim seeking a declaratory judgment regarding the calculation of his “Capital Account balance payment” is denied because the Capital Account balance payment is not subject to Plaintiff‘s breach of contract claim. Under Section 3.7(b) of the LPA and Section 3.7(a) of the LLC Agreement, the Capital Account balance payment is a payment to which Plaintiff was allegedly entitled after withdrawing from the partnership. AC ¶ 322. Plaintiff alleges that “Trahan has demanded that, at the time Cornerstone Macro calculates and makes the Capital Account balance payment, it include the gross Fair Value of Trahan‘s Market Strategies Advisory Business.” AC ¶ 326. Cornerstone Macro, allegedly acting at the direction of the Limited Partner Defendants, refused to do so. Id.
Defendants move to dismiss this claim only on the basis that it is duplicative of Plaintiff‘s contract claim. However, the breach of contract claim does not allege failure to pay, or properly calculate, the Capital Account balance. AC ¶ 254. While Plaintiff does allege a breach of the same contractual provision, the breach alleged is failure to make a different payment, the Accrued Net Cash Flow Distribution. Id.; LPA § 3.7(b)(i). Plaintiff‘s justification for not bringing this claim as part of the breach of contract claim is that, at the time the Amended Complaint was filed, the Partnership had yet to issue its financial statements for 2018, Opp. at 24, which is the trigger for a 30-day clock to make the Capital Account balance payment. AC ¶ 328. As pleaded, the declaratory judgment claim is not duplicative because the Plaintiff does not allege a breach of contract for failure to pay Capital Account balance payment,16 so Defendants’ motion to dismiss Claim 15 is DENIED.
M. New York Labor Law (Claim 16)
Plaintiff‘s claim for unauthorized deductions from wages and failure to pay wages under
Plaintiff has adequately alleged that the unpaid partnership distributions were “wages.” Wages are “the earnings of an employee for labor or services rendered,
N. Motion to Dismiss Under Rule 8(a)
Finally, Defendants also move to dismiss the entirety of the 123-page, 338-paragraph Amended Complaint on the grounds that it fails to comply with the
IV. CONCLUSION
For the reasons explained above, Defendants’ motion to dismiss:
Claim 1 is DENIED;
Claim 2 is GRANTED as to Cornerstone IP and DENIED as to Pre-Cornerstone IP;
Claim 3 is DENIED;
Claim 4 is GRANTED as to Kantrowitz and DENIED as to the Limited Partner Defendants;
Claim 5 is DENIED;
Claim 6 is GRANTED;
Claim 8 is GRANTED;
Claim 9 is DENIED;
Claim 10 is GRANTED, except DENIED as to omissions by the Limited Partner Defendants and Kantrowitz‘s statement regarding his promotion;
Claim 11 is GRANTED, except DENIED as to omissions by the Limited Partner Defendants and Kantrowitz‘s statement regarding his promotion;
Claim 13 is GRANTED as to the Cornerstone IP and DENIED as to the Pre-Cornerstone IP;
Claim 14 is DENIED;
Claim 15 is DENIED; and
Claim 16 is DENIED.
Defendants’ motion to dismiss the entirety of the Amended Complaint under
The Clerk of Court is directed to terminate the motion pending at Dkt. No. 87.
SO ORDERED.
Dated: April 29, 2020
GREGORY H. WOODS
United States District Judge