Northern District Sanctions Company for Bringing Baseless Trade Secrets Claim

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In a recent federal court case, Homecare CRM, LLC v. Adam Group, Inc., No. 1:12-cv-19580TCB, 2013 WL 3388389 (N.D. Ga. July 8, 2013), the Northern District of Georgia sanctioned a company for bringing a baseless trade secrets claim.

The Adam Group (also known as “Playmaker”) and Homecare were competitors that both developed customer-relationship management software and licensed such software to companies in the home care or hospice industry.  Both companies have a core software product and an add-on program.   Homecare’s add-on product is called “Harvest” and Playmaker’s is called “TargetWatch.”  Homecare developed Harvest in late 2010 and 2011 and marketed it in early 2011.  In April 2011, PlayMaker announced the availability of TargetWatch and stated it would be available the following month.

Homecare filed suit against PlayMaker alleging, among other things, that PlayMaker misappropriated Homecare’s trade secrets by gaining unauthorized access to Harvest (a trade secret) and using Harvest to create TargetWatch.  More specifically, in its complaint, Homecare asserted that it “came up with the idea to acquire raw . . . claims data” and process that data for its customers to be able to better identify and target certain referral sources.  Homecare further asserted that the underlying coding system and processes for compiling data contained in Harvest constitutes a trade secret. Homecare then contended that PlayMaker’s TargetWatch program  “analyzes, compiles, formats, and displays information drawn from the claims data in manners that are very similar” to Harvest.  Homecare also alleged that PlayMaker improperly accessed Harvest and certain claims data from a third-party that belonged to Homecare and used such access to “design, develop, and/or modify” TargetWatch.

In response, PlayMaker asserted that Homecare’s allegations were untrue and that Homecare violated Rule 11 by including the trade-secrets claim in its complaint.  PlayMaker requested that the court strike Homecare’s claim for misappropriation of trade secrets and require Homecare to pay a monetary sanction.

Although not directly relevant to its decision of the motion, the court listed a panoply of “other disagreements” between the parties before discussing the substance of its Rule 11 analysis. Included in this colorful list was the following: (1) PlayMaker’s counterclaims for libel, slander, false advertising, unfair competition, violation of Georgia’s uniform Deceptive Trade Practices Act, tortious interference with business relations, and a declaratory judgment of non-infringement; (2) PlayMaker’s motion to strike portions of the answers to its counterclaims that contained accusations of “unethical and unsavory” conduct; (3) PlayMaker’s motion for a temporary restraining order and preliminary injunction after learning that Homecare had gained unauthorized access to TargetWatch and used such access to gather confidential information about PlayMaker’s products; (4) PlayMaker’s motion to expand the preliminary injunction; (5) PlayMaker’s motion for contempt; and (6) a summary mention of “numerous discovery disputes that required the Court’s involvement.”

In determining whether to award Rule 11 sanctions, the court considered the allegations in the complaint as well as certain other related evidence.  The court ultimately found that Rule 11 sanctions against Homecare were appropriate because Homecare’s misappropriation of trade secrets claim“(1) ha[d] no reasonable factual basis; (2) [wa]s based on a legal theory that ha[d] no reasonable chance of success and [could not] be advanced as a reasonable argument to change the law; and (3) [wa]s filed in bad faith for an improper purpose.”

More specifically the court found that, several months before it filed suit, Homecare had accessed PlayMaker’s software and put together a matrix that, among other things, compared the features of Harvest and TargetWatch.  The matrix revealed that there were “no intellectual property concerns” when comparing Harvest and TargetWatch. Homecare disputed the reliability of this matrix and asserted that its trade-secrets claim was viable based on the following allegations: (1) the similarity between Harvest and TargetWatch; (2) the release of TargetWatch soon after the release of Harvest; (3) the opportunity for PlayMaker to discover Homecare’s trade secrets through certain of Homecare’s customers.

With respect to the first allegation, the court found that Homecare completely ignored the matrix that compared Harvest and TargetWatch and had concluded that Harvest was far superior to TargetWatch.  For example, the matrix demonstrated that, in April 2012, TargetWatch lacked Harvest updates dating back to October 2010.  Thus, the court stated, “Homecare’s own comparison of the products showed that while Harvest and TargetWatch performed similar functions, they were quite different in their capabilities.  These differences make Homecare’s argument that it could reasonably believe that PlayMaker misappropriated Harvest based on the products’ similarities specious at best.”  The court then stated that Homecare’s contention was “farcical” because of a March 2012 email instructing Homecare’s vice president of product development to “rob whatever we can from any good product ideas they [PlayMaker] have so we can incorporate into our product ASAP.”

With respect to the third allegation, the court pointed out that the matrix Homecare had prepared internally was silent with respect to any insinuation that PlayMaker was accessing Homecare’s alleged trade secrets.  The court further reasoned that the fact that the matrix explicitly concluded that there were “no intellectual property concerns” negated any contention that Playmaker misappropriated Harvest. The court also pointed to internal Homecare emails, none of which expressed any concerns that PlayMaker misappropriated Harvest and one of which indicates that Homecare was partaking in corporate espionage and attempting to steal certain of PlayMaker’s secrets.

Finally, the court rejected Homecare’s contention that it was entitled to “vigorous discovery” to establish its trade-secrets claim because it had established adequate circumstantial evidence.  The court based this rejection on two reasons.  First, Homecare failed to ask the court to compel PlayMaker to produce discovery. Second, Homecare made no attempt to explain how discovery would negate the otherwise “overwhelming evidence in Homecare’s possession that directly refutes its own factual allegations.”

Ultimately, after finding that Homecare’s actions “were at the very least negligent” and “seem[] to have resulted from a desire to injure PlayMaker as a result of Homecare’s concern that PlayMaker posed a competitive business threat,” the court struck Homecare’s claim for misappropriation of trade secrets claim and required Homecare to reimburse PlayMaker for the fees and costs associated with bringing the Rule 11 Motion.

In addition to the evidence that Homecare’s trade secrets claim lacked merit, this case was riddled with other allegations of bad faith on the part of Homecare.  The court’s view of whether Homecare’s trade secrets claim was so egregious as to justify sanctions may have been tainted by these allegations. Thus, there is no certainty as to which circumstances a similar analysis may apply.  Nevertheless, this case still strongly cautions plaintiffs of the risks of pursuing a dubious trade secrets claim.