Plasmanet, Inc. v Apax Partners, Inc.

[*1] Plasmanet, Inc. v Apax Partners, Inc. 2004 NY Slip Op 51769(U) Decided on November 22, 2004 Supreme Court, New York County Moskowitz, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 22, 2004
Supreme Court, New York County

PLASMANET, INC., Plaintiff,

against

APAX PARTNERS, INC., f/k/a PATRICOF & CO. VENTURES, INC., TRAFFIX, INC., f/k/a QUINTEL COMMUNICATIONS, INC., JEFFREY L. SCHWARTZ, and ROBERT MACHINIST, Defendants.



600216/2004

Karla Moskowitz, J.

Plaintiff PlasmaNet, Inc. alleges that defendants misappropriated trade secrets pertaining to its internet website located at FreeLotto.com. All defendants now move for pre-answer dismissal of the complaint by way of three motions consolidated here for disposition. For the reasons set forth below, the court grants the motions to dismiss the complaint, but with leave to replead.

In Motion 001, defendants Traffix, Inc. and Jeffrey L. Schwartz (together, Traffix Defendants) move, pursuant to CPLR 3211 (a) (1) and (7), for dismissal of the complaint. In Motion 002, defendant Apax Partners, Inc. moves, pursuant to CPLR 3013 and 3211 (a) (1) and (7), for dismissal.

In Motion 003, defendant Robert Machinist moves, pursuant to CPLR 3211 (a) (7), for dismissal of the complaint on the ground of failure to state a cause of action.

Background

The following facts are from PlasmaNet's complaint. PlasmaNet designs and operates an on-line website at FreeLotto.com. The website enables users to register to win cash prizes free of charge by choosing six numbers from a larger group of numbers on a grid and then registering their names and other personal information with the website.

Defendant Apax is an international private equity investment group that provides long-term equity financing to entrepreneurs to help build and strengthen their companies. Defendant Traffix is a marketing and management company for on-line consumers providing customized consumer data for corporate marketing partners from its database of websites. Traffix owns and operates Grouplotto.com., an on-line free lottery that offers players an opportunity to win cash prizes at no charge by providing personal information and then selecting six numbers from a larger group of numbers represented in a grid format. Defendant Schwartz is the Chief Executive Officer of Traffix. Defendant Machinist acted as Apax's agent during the relevant time period.

In the fall of 1999, PlasmaNet had commenced the commercial operation of FreeLotto.com and sought to raise capital through a $15 million private stock offering. To attract [*2]investors, PlasmaNet prepared a confidential private placement memorandum (PPM) that contained secret and proprietary information such as PlasmaNet's business plan and strategy, a detailed description of how its website operates, current and future financial information and information about suppliers and customers.

In September 1999, PlasmaNet met with Apax representatives to discuss Apax's potential purchase of PlasmaNet stock and Apax executed a non-disclosure agreement (NDA). At a meeting on September 17, 1999, Apax's vice chairman, stating that he had invited Machinist to the meeting as an "advisor" to Apax, introduced Machinist to PlasmaNet. A copy of PlasmaNet's confidential memorandum was available at that September 17th meeting. After the meeting, Machinist discussed the subject matter of the meeting with Schwartz, the CEO of Traffix.

In late 1999 or early 2000, Traffix launched its Grouplotto.com website, that directly competes with PlasmaNet's FreeLotto.com website. Grouplotto.com functions in a manner virtually identical to FreeLotto.com. In September 2001, Schwartz contacted PlasmaNet and proposed that Traffix place some of its advertisements on FreeLotto.com on a revenue share basis. Schwartz told PlasmaNet that Machinist suggested that Traffix should buy PlasmaNet, but Schwartz said that he did not need to buy PlasmaNet and its ideas because he could copy them instead. PlasmaNet, Inc. then filed this action.

The complaint contains two causes of action. The first cause of action is against all defendants for misappropriation of trade secrets. It alleges that: (1) PlasmaNet created and developed the secret and proprietary information it disclosed in the PPM, (2) this information gave PlasmaNet a significant economic and competitive business advantage, (3) those outside of PlasmaNet's business operations did not know this information and (4) PlasmaNet took reasonable steps to protect the confidentiality of its trade secrets.

The second cause of action is against Apax for breach of contract. It alleges that Apax breached its obligations under the NDA by improperly disclosing PlasmaNet's confidential memorandum to the Traffix Defendants.

The Traffix Defendants argue that the PPM does not contain trade secrets subject to misappropriation and that they, the Traffix defendants, have not breached any duty to PlasmaNet.

Apax argues that the court should dismiss the misappropriation claim, because there are no allegations of wrongdoing against it. It may not be held liable for the acts of Machinist because the complaint fails to allege that Machinist was its agent. Apax argues further that there was no breach of contract, because the information that the Traffix Defendants allegedly misappropriated was publicly available on PlasmaNet's website.

Machinist argues that the claim against him, for misappropriation of confidential information and trade secrets, fails as a matter of law because there is no allegation that Machinist used any of PlasmaNet's proprietary information for personal gain or for any commercial purpose.

PlasmaNet argues that the court should deny the motions because, in a decision in a related prior federal action, a Magistrate Judge stated that the complaint validly stated a misappropriation of trade secrets claim. PlasmaNet argues that his determination constitutes law of the case. That action, entitled Plasmanet v Apax, Civ. Action No. 02 CV 9290 (SD NY) (Federal Action), involved the same parties as here, with the addition of two defendants an Apax employee and its vice chairman. According to PlasmaNet, the only substantive difference [*3]between the two actions is that the Federal Action also involved an additional claim of patent infringement. After the parties resolved the patent dispute, the federal court lost federal subject matter jurisdiction and dismissed the action without prejudice so that PlasmaNet could pursue its state law claims here.

In the Federal Action, the Magistrate concluded that, whether the information underlying FreeLotto.com is sufficiently novel so as to constitute a trade secret, was not a matter amenable to decision on a motion to dismiss. He also stated that the PPM contained information other than simply concept ideas underlying the design of the site, and that, before deciding to launch the site, PlasmaNet formulated a detailed business plan, based upon current and future financial information, marketing strategies, profit and revenue information, consumer usage information, names of suppliers, names of customers and pricing information, all of which the PPM contained. He determined that, accepting the allegations as true, PlasmaNet maintained the secrecy of important information contained in the PPM regarding the operation and profitability of FreeLotto, notwithstanding that it had launched the site.

Discussion

As a preliminary matter, the decision of the Magistrate does not constitute law of the case because a district court has not reviewed the decision (Lucente v International Bus. Mach. Corp., 262 F Supp 2d 109 [SD NY 2003] [Magistrate's ruling not law of the case because plaintiff did not have an opportunity to challenge the decision on appeal]; In re Air Crash at Belle Harbor, New York on November 12, 2001 v American Airlines, 2003 WL 124677 [SD NY 2003] [in the absence of review by a district court, a Magistrate Judge's findings are not entitled to deferential review under "law of the case" standards]). Although Lucente v International Bus. Machines Corp., supra, involved a situation where the Magistrate's jurisdiction flowed from 28 USC 636 (b) (1) (A), and, here, the Magistrate's jurisdiction flowed from 28 USC 636 (b) (1) (B), the holding in that decision is particularly persuasive, because the latter Code section expressly pertains to referrals to submit proposed findings of fact and recommendations to a judge and not referrals to hear and determine, as in 28 USC 636 (b) (1) (A).

A trade secret is defined as any formula, pattern, device, or compilation of information that is used in one's business, and that provides an opportunity to obtain an advantage over competitors that do not know or use it (Ashland Mgt. v Janien, 82 NY2d 395, 407, citing Restatement of Torts § 757, comment b). Factors to consider include: (1) the extent to which the information is known publically; (2) the extent to which employees and others involved in the business know the information; (3) the extent of measures the business takes to guard the secrecy of the information; (4) the value of the information to the business and its competitors; (5) the amount of effort or money the business expended in developing the information; and (6) the ease or difficulty with which others could properly acquire or duplicate the information (id.). Although the complaint adequately alleges that certain of the information contained in the PPM constitutes trade secrets such as "financial information, marketing strategies, profit and revenue information, consumer usage information, names of suppliers, names of customers, and pricing information" the complaint fails to allege that defendants misappropriated any of that information in setting up the competing website.

The crux of the misappropriation claim is in paragraph 15 of the complaint, that alleges: Grouplotto.com functions in a virtually identical manner to [*4]Freelotto.com. Both websites allow internet users to register to win substantial cash prizes free of charge in exchange for providing personal information, such as name, address, telephone number, and email address. After the person registers to play, both websites allow the user to select six numbers from a larger group of numbers represented in a grid format in a traditional "lotto" style game. Six numbers are randomly selected from the larger group, and if the user selects the same six numbers that are randomly chosen, the user wins a cash prize. Both websites earn revenue in the same or substantially similar ways, competing for the same advertising dollars.

Even while construing this paragraph in a light most favorable to PlasmaNet, appearance and functionality of the website is the only information that PlasmaNet accuses defendants of misappropriating. Yet, these things were in the public domain prior to defendants' receipt of the PPM. The complaint does not allege that the Traffix Defendants misappropriated the business plan, financial projections, economic model, customer information, and other financial data. Although this type of information can constitute trade secrets (Support Sys. Assoc. v Tavolacci, 135 AD2d 704), the complaint does not allege that defendants misappropriated any of these things. Moreover, the statement in paragraph 20 of the complaint that plaintiff's "trade secrets gave PlasmaNet a significant economic and competitive business advantage" is conclusory. PlasmaNet failed to submit any affidavits in opposition to remedy the defects of the complaint.

Further, the complaint itself contradicts the claim that defendants misappropriated trade secrets. The complaint states that the FreeLotto website was already in commercial operation at the time that Traffix launched its Grouplotto website. Thus, the information about the functionality and appearance of the website was in the public domain, not private as plaintiff contends (Newton Garment Carriers v Consolidated Carriers Corp., 250 AD2d 482; Precision Concepts v Bonsanti, 172 AD2d 737). An essential prerequisite to legal protection against misappropriation of a trade secret is the element of secrecy (Atmospherics, Ltd. v Hansen, 269 AD2d 343).

The complaint adequately alleges that Machinist acted as agent for Apax (see paragraphs 5, 11, and 12). The breach of contract claim fails, however, because the NDA provides, in paragraph 2 (b), that Apax will not be liable for any disclosure or use of the information that PlasmaNet disclosed if such information "is publicly available or later becomes publicly available other than through a breach of this Agreement."

Finally, at oral argument, PlasmaNet requested leave to replead, that the court grants. The failure to request leave to replead in the opposition papers can be excused in the court's discretion (Elliman v Elliman, 259 AD2d 341). Although the court is not convinced of a meritorious claim, at this early stage, and considering the Magistrate's decision, not law of the case, but is of persuasive value, the court is inclined to afford leave to replead (Syllman v Calleo Dev. Corp., 290 AD2d 209). PlasmaNet can replead, if it chooses, upon an appropriate showing of merit (D'Agrosa v Newsday, 158 AD2d 229).

Accordingly, it is [*5]

ORDERED that the motions by defendants Traffix, Inc. and Jeffrey L. Schwartz (001), Apax Partners, Inc. (002), and Robert Machinist (003) for dismissal of the complaint is granted, with leave to move to replead the complaint within 20 days of service of a copy of this order with notice of entry; and it is further

ORDERED that the Clerk is directed to enter judgment accordingly.

Dated: November 22, 2004

ENTER:

/s/ Karla Moskowitz

J.S.C.