Modulus Global Incorporated v. Quintzy FZE LLC ( 2023 )

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Modulus Global Incorporated, No. CV-22-01457-PHX-GMS 10 Plaintiff, ORDER 11 v. 12 Quintzy FZE LLC, et al., 13 Defendants. 14 15 16 Before the Court is Defendants Quintzy FZE LLC, Bloxeo Technology, Inc., Ankit 17 Singhal, and Rajeev Sharma’s Motion to Dismiss Counts IV, VI, VII, VIII, IX, and XI for 18 failure to state a claim (Doc. 32). For the following reasons, the motion is granted in part 19 and denied in part. 20 BACKGROUND 21 In this case, Modulus Global, Inc. (“Plaintiff”) has sued various defendants for 22 conduct related to misappropriating its source code and other documents. Plaintiff is a 23 provider of proprietary enterprise fintech products. It alleges that it began developing a 24 digital currency exchange in 2018, and by Fall 2018, it needed to develop a digital assets 25 exchange and blockchain payment solution. To do so, Plaintiff allegedly executed two 26 agreements with software company Efficacious, and its owner Ankit Singhal. The 27 agreements, among other things, required Singhal to “devote his entire business time, 28 attention, and efforts to the performance of his duties under [the] Agreement” and to “not 1 engage in any other employment.” (Doc. 8 at 2-3.) Singhal also allegedly agreed to 2 develop and write code for the Modulus software and that any software developed “would 3 be the sole and exclusive property of Modulus.” (Doc. 8 at 3.) 4 Plaintiff alleges that after the agreements, Singhal used the underlying source code 5 that he developed for Modulus in developing the Quintzy Spot Exchange Software and/or 6 Quintzy Derivatives Exchange that offers crypto exchange products in direct competition 7 with Modulus at a cheaper cost. Plaintiff claims that Singhal and/or Quintzy offered these 8 products to Modulus’s existing or prospective clients. As a result, Plaintiff brought claims 9 for breach of contract, misappropriation of trade secrets under Arizona and federal law, 10 civil conspiracy to commit trade secret theft, breach of duty of loyalty, breach of fiduciary 11 duty, trespass to chattels, intentional interference with a business expectancy, unfair 12 competition and false designation of origin under the Lanham Act, false advertising under 13 the Lanham Act, and common law unfair competition and trademark infringement. 14 DISCUSSION 15 I. Legal Standard 16 To survive dismissal for failure to state a claim pursuant to Federal Rule of Civil 17 Procedure 12(b)(6), a complaint must contain more than a “formulaic recitation of the 18 elements of a cause of action”; it must contain factual allegations sufficient to “raise a right 19 to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 20 (2007). When analyzing a complaint for failure to state a claim, “[a]ll allegations of 21 material fact are taken as true and construed in the light most favorable to the nonmoving 22 party.” McShannock v. JP Morgan Chase Bank NA, 976 F.3d 881, 886-87 (9th Cir. 2020). 23 However, legal conclusions couched as factual allegations are not given a presumption of 24 truthfulness. Pareta v. F.D.I.C., 139 F.3d 696, 699 (9th Cir. 1998). “A district court may 25 dismiss a complaint only if it fails to state enough facts to state a claim to relief that is 26 plausible on its face.” McShannock, 976 F.3d at 887 (quoting Twombly, 550 U.S. at 570). 27 / / / 28 1 II. Analysis 2 A. Preemption (Counts IV, VI, VII, VIII) 3 Arizona’s Uniform Trade Secrets Act (“AUTSA”) creates an exclusive cause of 4 action—and displaces conflicting causes of action—for claims based on the 5 misappropriation of trade secrets. Orca Commc’ns Unlimited, LLC v. Noder, 337 P.3d 6 545, 546 (Ariz. 2014); A.R.S. § 44-407. The Arizona Supreme Court has explained that 7 A.R.S. § 44-407 “displaces only conflicting tort claims for ‘misappropriation’ of a ‘trade 8 secret,’ terms AUTSA specifically defines, and leaves undisturbed claims ‘that are not 9 based on misappropriation of a trade secret.’” Orca, 337 P.3d at 547. In Orca, the Arizona 10 Supreme Court held that § 44-407 does not broadly displace all common-law claims for 11 misuse of confidential information that does not fall within AUTSA’s definition of a trade 12 secret. Id. Because the Plaintiff’s claim was not limited to trade secrets, but also based on 13 unfair competition from learning “confidential and trade secret information about Orca,” it 14 was not preempted. Id. at 546, 548. The Orca Court specifically acknowledged that the 15 AUTSA does not include the uniformity directive included in the Uniform Trade Secrets 16 Act and adopted by other states. 337 P.3d at 549. As such, it did not feel compelled to 17 follow other courts’ views. Id. 18 Because the AUTSA does not preempt claims that may be outside the scope of the 19 AUTSA’s definitions of “misappropriation” and “trade secret,” the question is whether any 20 of the claims that Defendant seeks to dismiss as preempted may encompass conduct or 21 information beyond “misappropriation of trade secrets.” 22 Breach of Duty of Loyalty, Breach of Fiduciary Duty, and Trespass to Chattels: As 23 pleaded, these claims could cover broader conduct or information than misappropriation of 24 trade secrets. The breach of duty claims are based not only on Singhal’s conduct related 25 to the Modulus source code, but also his conduct in failing to return and safeguard other 26 documentation and related software. To the extent these claims are based on 27 misappropriation of trade secrets, they are, of course, preempted. However, whether 28 information constitutes a trade secret is a question of fact. Gordon Grado M.D., Inc. v. 1 Phoenix Cancer & Blood Disorder Treatment Inst. PLLC, 603 F. Supp. 3d 799, 809 n.4 2 (D. Ariz. 2022). Because, as pleaded, these claims could plausibly encompass information 3 or broader conduct than that created under the trade secret definition, the claims cannot be 4 entirely preempted at the motion to dismiss stage. 5 Civil Conspiracy to Commit Trade Secret Theft: The civil conspiracy to commit 6 trade secret theft claim, however, appears exclusively based on misappropriation of a trade 7 secret. As pleaded, this claim appears directed only at trade secrets and does not encompass 8 any conduct or information beyond the source code. Plaintiff does not explain what, if any, 9 facts relevant to this claim fall outside the scope of the AUTSA’s definitions for 10 “misappropriation of a trade secret.” The claim refers exclusively to actions taken with 11 regard to Modulus’s trade secrets. (Doc. 1 at 33-34.) At oral argument, while Plaintiff 12 highlighted the aspects of the three previously discussed claims that fell outside the scope 13 of the AUTSA, it did not include any information relevant to this claim. Because no aspect 14 of this claim extends beyond “misappropriation of a trade secret,” it is preempted. 15 B. Intentional Interference with a Business Expectancy (Count IX) 16 The motion to dismiss is denied as to the intentional interference with a business 17 expectancy claim because Plaintiff has properly pleaded all elements of the claim. The 18 elements for an intentional interference with a business expectancy claim are: (1) existence 19 of a business expectancy; (2) knowledge of the expectancy on the part of the interferer; 20 (3) intentional interference inducing or causing a breach or termination of the expectancy; 21 (4) resultant damage to the party whose expectancy has been disrupted; and (5) improper 22 motive or means in the interference. Miller v. Servicemaster by Rees, 851 P.2d 143, 146 23 (Ariz. Ct. App. 1992). Defendant contends that Plaintiff has failed to allege the existence 24 of a valid business expectancy, actual loss or termination of the expectancy, or resultant 25 damage. 26 Modulus alleges the existence of a valid business expectancy by identifying a class 27 of clients with which it claims Quintzy and Singhal interfered with business. Modulus also 28 specifically identifies a valid business expectancy in existing client, Bitsmo. (Doc. 1 at 4.) 1 Modulus also generally alleges a business expectancy in its current and prospective clients. 2 This alone is sufficient to satisfy the first element, especially in light of Singhal’s 3 familiarity with Modulus and its clients. See, e.g., Stoyanof v. Crocodiles Not Waterlilies, 4 L.L.C., 2012 WL 1302485, at *10 (D. Ariz. Feb. 16, 2022) (finding that an expectancy “in 5 the animation industry” was sufficient to meet the business expectancy element); True 6 Freight Logistics LLC v. Global Tranz Enters. Inc., 2019 WL 11840292, at *4 (D. Ariz. 7 Jan. 11, 2019) (finding an assertion that defendant interfered with business of existing 8 customers sufficient, “given [Plaintiff’s]] claim that [Defendant] was aware of the entities 9 with whom [Plaintiff] did business”). 10 Plaintiff also properly alleges causation. Modulus must allege intentional 11 interference inducing or causing a breach or termination of the expectancy. Plaintiff 12 plausibly does so, stating “upon information and belief, the underlying source code for the 13 Quintzy Derivatives Exchange was previously developed, programmed and built during 14 Singhal’s engagement under the 2018 Agreement” and “Quintzy has offered for sale and/or 15 sold the Quintzy Spot Exchange Software and/or the Quintzy Derivatives Exchange to 16 various prospective clients and/or actual clients of Modulus.” (Doc. 1 at 13.) This alleges 17 that Singhal and/or Quintzy sold the allegedly misappropriated products to the class of 18 clients in which Modulus had a business expectancy. The causation element is further 19 alleged where Plaintiff states, “Singhal and/or Quintzy intentionally interfered with these 20 prospective deals that Modulus was negotiating relating to spot and derivatives exchanges” 21 and “[t]he result is that the prospective deals for the software were disturbed.” (Doc. 1 22 at 41.) 23 Lastly, the loss of current and potential clients “supports an inference that [Modulus] 24 was damaged.” True Freight, 2019 WL 11840292, at *4. Although Defendant claims that 25 “all Plaintiff does is allege it lost business,” the Complaint specifically states that “the 26 prospective deals for the software were disturbed through the improper action on the part 27 of Singhal and/or Quintzy.” (Doc. 1 at 41.) While these allegations are perhaps not as 28 detailed as they could be, the allegation that Singhal and Quintzy sold the misappropriated 1 products to existing or prospective customers and that improper conduct disturbed 2 prospective deals, at the very least, supports an inference that Modulus was harmed by 3 Singhal and/or Quintzy’s conduct. That is sufficient to survive a 12(b)(6) motion. 4 C. False Advertising (Count XI) 5 The motion to dismiss is granted with leave to amend as to the false advertising 6 claim. Plaintiff has not provided sufficient factual meat to the bones of the False 7 Advertising claim. It is true, as Plaintiff notes, that the General allegations provide some 8 information from which at least some of the elements of an False Advertising claim could 9 be considered to be alleged. But there is not, in this court’s judgment at least at this point, 10 sufficiently clear factual allegations as to some of the elements, to make the claim 11 plausible. False advertising under the Federal Lanham Act requires pleading (1) a false 12 statement of fact by the defendant in a commercial advertisement about its own or another’s 13 product; (2) the statement actually deceived or has the tendency to deceive a substantial 14 segment of its audience; (3) the deception is material, in that it is likely to influence the 15 purchasing decision; (4) the defendant caused its false statement to enter interstate 16 commerce; and (5) the plaintiff has been or is likely to be injured as a result[,] either by 17 direct diversion of sales from itself to defendant or by a lessening of the goodwill associated 18 with its products. Skydive Ariz., Inc. v. Quattrocchi, 673 F.3d 1105, 1110 (9th Cir. 2012). 19 It is not clear whether the heightened pleading standard under Rule 9 applies to false 20 advertising claims. But, even accepting all of the Plaintiff’s alleged facts as true, Plaintiff 21 has not sufficiently alleged what harm has resulted from alleged false statements and/or 22 proximate cause between false statements and such harm. Deficiencies in a complaint 23 cannot be supplied by allegations in the Response on a motion to dismiss. The False 24 Advertising claim (Count XI) therefore is dismissed with leave to amend the claim within 25 thirty days of the date of this Order. 26 IT IS THEREFORE ORDERED that Defendants’ Motion to Dismiss Counts IV, 27 VI, VII, VIII, IX, and XI for failure to state a claim (Doc. 32) is GRANTED in part and 28 DENIED in part. It is granted with respect to Counts IV and XI only. It is denied in all 1 || other respects. 2 IT IS FURTHER ORDERED granting Plaintiff leave to amend Count XI — False || Advertising of the Complaint within thirty days of the date of this Order. 4 Dated this 20th day of September, 2023. ° Wars ) ‘ A Whacrsay Fotos 7 Chief United States District Judge 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -7-