HipCricket, Inc. v. mGage, LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
HIPCRICKET, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 11135-CB
)
mGAGE, LLC and GLENN )
STANSBURY, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: April 4, 2016
Date Decided: July 15, 2016
Brian E. Farnan and Michael J. Farnan, FARNAN LLP, Wilmington, Delaware;
Kenneth J. Rubinstein, Joseph M. Vann and Jackson S. Davis, COHEN TAUBER
SPIEVACK & WAGNER P.C., New York, New York; Counsel for Plaintiff
Hipcricket, Inc.
Stephen B. Brauerman, Vanessa R. Tiradentes and Sara E. Bussiere, BAYARD,
P.A., Wilmington, Delaware; Peter F. Schoenthaler and Bryan L. Baysinger, THE
SCHOENTHALER LAW GROUP, Atlanta, Georgia; Counsel for Defendants
mGage, LLC and Glenn Stansbury.
BOUCHARD, C.
This post-trial decision resolves various claims that Hipcricket, Inc., a
mobile marketing company, asserted against a former employee, Glenn Stansbury,
and one of its competitors, mGage LLC, which hired Stansbury shortly after
Hipcricket filed for bankruptcy protection in early 2015.
During his tenure at Hipcricket, Stansbury served as an executive in sales,
and received commissions and bonuses under an agreement that prohibited him
from soliciting Hipcricket’s customers and employees and from using its
confidential information after his employment ended. Almost immediately after
joining mGage, Stansbury began contacting clients of Hipcricket, including some
of his former accounts, to solicit business for mGage. This prompted Hipcricket to
sue Stansbury and mGage in June 2015 for breach of Stansbury’s commission
agreement and other claims.
Because of Hipcricket’s bankruptcy, Stansbury was not paid certain
commissions and other amounts material to him that he earned pre-petition.
Stansbury filed a proof of claim for these amounts in the bankruptcy proceeding.
Critical to this action, in May 2015, fully aware of Stansbury’s claim, and when
Hipcricket knew Stansbury was working for mGage and believed he was violating
the non-solicitation and confidentiality provisions in his commission agreement,
Hipcricket decided not to assume (and thereby rejected) Stansbury’s commission
agreement. As a result, instead of being put on a track to be paid in full,
Stansbury’s claim was relegated to general unsecured status.
Under the Bankruptcy Code, the rejection of an executory contract means
that the contract is deemed to have been breached as of the petition date, and courts
then look to state law to determine the legal effect of that breach. Applying the
governing law of the state of Washington, I conclude that Hipcricket’s material
breach of the commission agreement rendered the non-solicitiation and
confidentiality provisions in it unenforceable. For this reason, judgment is entered
in defendants’ favor for the claims Hipcricket has asserted that are based on the
commission agreement.
Hipcricket also sued defendants for violating the Washington Uniform Trade
Secrets Act. I conclude for the reasons explained below that Hipcricket has proven
this claim and is entitled to a permanent injunction to prevent defendants from
further misappropriating its trade secrets.
I. BACKGROUND
The following are the facts as I find them based on the documentary
evidence and witness testimony. 1 I accord the evidence the weight and credibility I
find it deserves.
1
Joint trial exhibits are cited as “JX ___”. The trial transcript is cited as “Tr. ___”.
Stipulated facts in the Pretrial Order are cited as “PTO.”
2
A. The Parties
Plaintiff Hipcricket, Inc. is a Delaware corporation with its principal place of
business in Bellevue, Washington.2 Hipcricket is a mobile marketing company
that provides end-to-end, data-driven mobile advertising and marketing solutions
(largely through text and multimedia messages) through its proprietary AD LIFE®
platform. 3
Defendant mGage, LLC is a Delaware limited liability company. 4 mGage is
a direct competitor of Hipcricket.5 A substantially larger company than
Hipcricket, mGage is a “Tier 1 aggregator,” which means that it has direct
connections to all five major cellular carries in the U.S. 6
Defendant Glenn Stansbury was employed at Hipcricket from October 2008
until March 13, 2015, eventually becoming its Vice President of Sales. 7 Stansbury
2
PTO ¶ 1.
3
Tr. 378, 401 (Stovall); PTO ¶ 2.
4
PTO ¶ 3.
5
Id. ¶ 3; Tr. 11-13 (Stansbury); Tr. 337-38 (Scholl).
6
Tr. 12-13, 118 (Stansbury); Tr. 335-38 (Scholl).
7
Tr. 7-16, 9-24 (Stansbury); Tr. 380 (Stovall); PTO ¶¶ 4-6.
3
began working with mGage on March 16, 2015.8 He is currently mGage’s head of
sales and oversees mGage’s sales force and account managers across the country. 9
B. Hipcricket Explores Strategic Alternatives
In 2014, Hipcricket retained Canaccord Genuity to explore and evaluate
potential strategic alternatives. 10 An online data room was created. 11 To gain
access to the data room, interested parties were required to sign a non-disclosure
and confidentiality agreement. 12
In April 2014, in connection with evaluating a potential acquisition of
Hipcricket, mGage executed a non-disclosure and confidentiality agreement.13
Between September and December 2014, numerous individuals employed by or
affiliated with mGage accessed the data room, which contained information about
Hipcricket’s customer, vendor, and employee relationships.14 mGage also received
detailed information regarding Hipcricket’s customer relationships through e-
8
PTO ¶ 6.
9
Tr. 59 (Stansbury); PTO ¶ 6.
10
PTO ¶ 11.
11
Id.
12
Id.
13
Id.; JX 3.
14
JX 4; PTO ¶¶ 11-12.
4
mails,15 and met with certain Hipcricket employees, including Stansbury. 16 In late
2014, mGage decided not to pursue a transaction with Hipcricket. 17
C. Stansbury’s Commission Agreement with Hipcricket
As condition of his employment with Hipcricket, Stansbury entered into
annual agreements with the company. Relevant here, the last agreement he signed
before leaving the company was effective for the period from March 1, 2014 to
February 28, 2015 (the “Commission Agreement”).18
The Commission Agreement set forth the rates of, and other the terms and
conditions governing, commission and bonus award payments Stansbury could
receive for generating sales for the company. It provided that commission
payments would be “paid on the month-end pay date following the month in which
the client is billed,”19 and that certain other bonus payments and awards would be
paid after the close of the previous quarter or at the end of Hipcricket’s fiscal year,
which was at the end of February. 20
15
E.g. JX 6; see also Tr. 360-63 (Scholl).
16
Tr. 18-19, 142 (Stansbury).
17
PTO ¶ 13; Tr. 350-51 (Scholl).
18
JX 1 § 3(b).
19
Id. § 5(b).
20
Id. §§ 5(f), 7.
5
The Commission Agreement contained several provisions prohibiting
Stansbury from taking certain actions after his employment with the company
ended. Section 10 prohibited Stansbury from soliciting Hipcricket customers for a
period of two years after his employment ended:
For a period of two (2) years after the date of termination of Sales
Professional’s employment with Employer, Sales Professional shall
not, directly, or indirectly, solicit Employer’s Clients for the purpose
of selling such client services then offered or available through
Employer. 21
Section 9 of the Commission Agreement prohibited Stansbury from soliciting
certain employees for a period of one year after his employment ended:
During the term of Sales Professional’s engagement or employment
and for one year thereafter, The Sales Professional will not cause or
attempt to cause any Sales Professional of the Company to cease
working for the Company to retain an engagement or employment
with another employer that is a competitor of the Company’s. . . . 22
Finally, Section 8(iii) of the Commission Agreement required Stansbury to
maintain the confidence of Hipcricket’s trade secrets during and after his
employment with the company:
21
Id. § 10. The Commission Agreement defines “Employer’s Customers” [sic] as “all
persons, firms, corporations, partnerships, limited liability companies and other legal
entities and all governmental bodies or agencies (including municipalities) for which
Employer is providing services as of the date of termination of Sales Professional’s
employment with Employer,” and defines “Employer’s Prospective Customers” [sic] as
“all persons with whom the Sales Professional had material contact and/or whom they
serviced in their role as a Sales Professional of the Company.” Id.
22
Id. § 9.
6
The Sales Professional agrees that during their engagement or
employment with the Company and after their termination, the Sales
Professional will keep in confidence and trust and will not use or
disclose any Trade Secret or anything relating to any Trade Secret, or
deliver any Trade Secret to any person or entity outside the Company
without the prior written consent of an officer of the Company. 23
The foregoing provisions in Sections 8-10 of the Commission Agreement are
referred to hereafter as the “Post-Employment Restrictions.”
D. Hipcricket Files for Bankruptcy
On January 20, 2015 (the “Petition Date”), Hipcricket commenced a
voluntary case under chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. 24 After filing for bankruptcy,
Hipcricket continued to operate its business as a debtor-in-possession under the
jurisdiction of the bankruptcy court.25
23
Id. § 8(iii). The Commission Agreement defines a “Trade Secret” as “any method,
technique, drawing, process, financial data, financial plan, product plan or list of actual or
potential customers or vendors and suppliers of the Company or any portion or part
thereof, whether or not copyrightable or patentable, that is of value to the Company and
is not generally known to competitors of the Company or to the public, and whose
confidentiality is maintained . . . in each case to the extent that the Company, as the
context requires, derives economic value, actual or potential, from such information not
being generally known to, and not being readily ascertainable by proper means by, other
persons or entities who can obtain economic value from its disclosure or use.” Id.
24
PTO ¶ 14.
25
See, e.g., JX 337.
7
The bankruptcy court approved an auction and sales process. Hipcricket
ultimately selected a bid from, and eventually became a wholly owned subsidiary
of, ESW Capital, LLC when it emerged from bankruptcy on May 15, 2015.26
E. Stansbury Leaves Hipcricket for mGage
On January 22, 2015, Stansbury learned about Hiprcricket’s bankruptcy
filing.27 That same day, he pulled reports from Salesforce, a program which
Hipcricket used to track accounts, opportunities and activities, 28 and sent the
reports to himself through Hightail, a cloud-based program for sending and storing
large files. 29 Stansbury testified that he never looked at, opened, or downloaded
any of the Salesforce reports he sent to his Hightail account, 30 and that the
Salesforce reports he sent there were set to expire automatically a week after he
sent them, meaning that he no longer could access them after that time. 31
Soon after learning about Hipcricket’s bankruptcy filing, Stansbury
contacted Jay Sheth, mGage’s Chief Executive Officer at the time, whom
26
PTO ¶¶ 10, 14; Tr. 379 (Stovall).
27
Tr. 19-20 (Stansbury).
28
Tr. 149-150 (Stansbury); JX 1 § 4(b).
29
Tr. 20-25 (Stansbury); JX 7.
30
Tr. 22-24 (Stansbury).
31
Id.; JX 7. According to Stansbury, the files expired because he was using a trial
version of the Hightail software. Tr. 24.
8
Stansbury had met during mGage’s due diligence of Hipcricket. 32 On March 5,
2015, Stansbury accepted a job offer from mGage with a March 16 start date. 33 On
March 10, Stansbury signed an “Employment Covenants Agreement” with mGage
containing non-solicitation and confidentiality provisions similar to the Post-
Employment Restrictions in the Commission Agreement. 34
On March 6, 2015, Stansbury sent an e-mail to Doug Stovall, who was then
President of Hipcricket, stating that he was resigning from Hipcricket.35 Stansbury
stayed another week and officially stopped working for Hipcricket on March 13.36
Before leaving, Stansbury asked Stovall how Hipcricket wanted him to notify his
clients that he was leaving the company. 37 Stovall never responded to this
request.38
32
Tr. 141-143 (Stansbury).
33
JX 16.
34
Id. at mGage - 010314-22.
35
JX 17.
36
See JX 17; JX 18.
37
Tr. 34-35 (Stansbury); JX 18.
38
Tr. 35 (Stansbury); Tr. 479 (Stovall).
9
F. Hipcricket Explains to Stansbury How Amounts He Had Earned
Would Be Treated in the Bankruptcy Proceeding
After Hipcricket filed for bankruptcy, payments to Hipcricket employees
became governed by the Bankruptcy Code. On March 18, 2015, Tiffany Bradford,
Hipcricket’s Director of Finance, sent Stansbury a letter and an e-mail advising
him how his compensation and other items would be treated in the bankruptcy
proceeding. 39 Bradford explained that, for all employees, Hipcricket was only
permitted to give priority treatment to pay wages earned pre-petition up to a cap of
$12,475, and that any pre-petition wages above this cap would become an
unsecured claim for which Stansbury could file a proof of claim.40
The materials Bradford sent Stansbury on March 18 included a schedule
containing a detailed explanation of the pre-petition and post-petition amounts
concerning Stansbury. The schedule showed that, after Hipcricket paid Stansbury
$12,475 under the wage cap, Stansbury would have a general unsecured claim in
the amount of $30,831, consisting of $9,427 of personal time off (PTO) that was
“accrued pre-petition” and $21,404 in commissions that were “earned pre-
petition.” 41
39
JX 24; JX 25.
40
JX 24; JX 25; see also Tr. 459-460, 463-64 (Bradford).
41
JX 25 at HC000154. For simplicity, I have dropped the cents from the figures in
Stansbury’s proof of claim throughout this opinion.
10
Under the bankruptcy process, Hipcricket was permitted to pay Stansbury
salary and commissions he earned post-petition. Stansbury confirmed he received
these amounts. 42
G. Hipcricket Rejects the Commission Agreement to Clear the Way
For Confirmation of its Reorganization Plan
On March 20, 2015, Hipcricket proposed a plan of reorganization, which it
amended on March 31 (the “Reorganization Plan”). 43 On April 3, 2015, Hipcricket
filed a schedule of assumed contracts and unexpired leases.44 Hipcricket included
the Commission Agreement on the schedule as a contract it intended to assume,
and designated the cure cost for the Commission Agreement as “$0.00.” 45
On April 15, 2015, after learning that Stansbury allegedly had solicited one
of its customers, Hipcricket sent Stansbury a letter demanding that he “cease and
desist” from further customer solicitations.46 On April 28, 2015, Stansbury’s
counsel responded to the cease-and-desist letter, asserting that the Commission
Agreement was unenforceable due to Hipcricket’s rejection of the agreement. 47
42
Tr. 269, 273-274 (Stansbury); JX 145.
43
JX 335; JX 337.
44
JX 339; JX 340.
45
JX 340 at 75; Tr. 483-484 (Stovall).
46
JX 58.
47
JX 83. Counsel apparently was anticipating that the Commission Agreement would be
rejected, because that did not actually occur until May.
11
On April 30, 2015, Stansbury filed a proof of claim with the bankruptcy
court using the calculations he received from Bradford on March 18, which were
attached to the proof of claim. 48 Consistent with those calculations, Stansbury’s
proof of claim listed as “due and outstanding” a $30,831 “unsecured non-
priority” claim. 49
On May 11, 2015, Stansbury objected in the bankruptcy court to
Hipcricket’s “attempt to assume or accept specific clauses in the Commission
Agreement [i.e., the Post-Employment Restrictions], without honoring the
Agreement in full” by paying him the amounts listed in his proof of claim. 50 That
same day, Hipcricket submitted a brief in support of confirmation of the
Reorganization Plan in which it acknowledged that Stansbury and four other
employees had objected to the assumption of their Post-Employment
Restrictions, 51 and stated that “[t]he Debtor has removed the agreements in
question from the Schedule,” thereby mooting their objections. 52
48
JX 86; Tr. 52-54 (Stansbury)
49
JX 86.
50
JX 342, ¶ 6; Tr. 57 (Stansbury).
51
JX 421 p. 2, ¶ 3. The brief referred to assuming the employees’ “Confidentiality and
Non-Solicitation Agreements,” which I understand to mean, in Stansbury’s case, the
Post-Employment Provisions in his Commission Agreement.
52
Id.
12
Hipcricket’s decision not to assume the Commission Agreement and the
agreements of the other four objecting employees cleared the path for the
bankruptcy court to approve the Reorganization Plan. 53 On May 15, 2015, the
bankruptcy court entered an order confirming the Reorganization Plan, which
provided for the rejection of “all other executory contracts and unexpired leases”
other than those assumed. 54
H. Stansbury’s Communications with Hipcricket Clients
When Stansbury left Hipcricket to join mGage, he asked Kimya Coker, an
mGage marketer, to draft a form e-mail to go to his contacts regarding his
employment with mGage. 55 The e-mail, entitled “Good news…,” stated as
follows:
Hi ____ - I hope you’re doing great. I want to let you know that I’m
no longer working at Hipcricket. I haven’t updated my LinkedIn yet
and that’s the last way you should find out.
The good news: I’ve joined mGage, a 15-year leader in the mobile
marketing space and a trusted provider for over 1,000 brands across
the globe. They’re also the foremost expert in short code migration for
companies looking to transition their short codes and messaging with
no downtime, service interruption, or hassle.
I would love the opportunity to work together again soon, and I’m
hoping we can catch up when you have minute so I can explain why I
53
JX 343 ¶ NN; Tr. 57-58 (Stansbury); Tr. 485-86 (Stovall).
54
JX 343 ¶ MM; Tr. 486 (Stovall).
55
Tr. 60-62 (Stansbury).
13
joined mGage. Let me know when you’re free -- does next week
work? 56
Coker sent the “Good news” e-mail to all of Stansbury’s contacts for him. 57
At trial, Hipcricket adduced evidence of contacts between Stansbury and a
number of its customers, which is summarized below. This evidence demonstrates
that Stansbury solicited a number of Hipcricket customers almost immediately
after joining mGage and during the ensuing months.58
1. iHeart
On March 23, 2015, one week after joining mGage, Stansbury, asked
Michelle Savoy, a former iHeart employee, for contact information for the person
in charge of iHeart’s mobile messaging business. 59 iHeart, which is sometimes
referred to as Clear Channel Broadcasting, 60 is an owner and operator of radio
56
JX 34 (emphasis in original); see also JX 39; JX 41.
57
Tr. 61-62 (Stansbury).
58
In a footnote to its post-trial brief, Hipcricket asserts without any meaningful
elaboration that Stansbury also solicited several other Hipcricket customers:
MillerCoors, PKSW, and Reach Media. Pl.’s Post-Trial Op. Br. 26 n.31.
59
Tr. 123, 168-69 (Stansbury); JX 30.
60
Tr. 398-99 (Stovall).
14
stations and was Hipcricket’s largest customer. 61 Savoy suggested contacting
Michael Biondo, a member of the “core digital team.” 62
On April 14, 2015, Stansbury sent Biondo an e-mail to which he attached a
Powerpoint presentation detailing mGage’s mobile marketing capabilities. The e-
mail described Stansbury’s familiarity with Biondo from his time at Hipcricket and
asked Biondo to considering switching iHeart’s business from Hipcricket to
mGage:
I wanted to take this opportunity to introduce myself and my company
mGage. I believe I had met you when I worked at Hipcricket.
Obviously by email you can see I recently left Hipcricket and have
joined mGage and I would welcome the opportunity to meet with you
in NYC next week and talk about how we can help with all your
mobile marketing needs. I know that iHeart is a very large and
extensive client and I have worked with Kristi Miller when we were
both at Hip and have a good understanding of iHeart and your mobile
needs. I assure you that if any mobile company out there could
manage your services and make the switch from your current provider
to a new mobile firm it would be us. Not only can I assure a smooth
transition but I am very confident we can provide you with great
service and a much more cost effective way to manage all of this
versus what you are currently paying.63
Stansbury acknowledged at trial that his e-mail was “an attempt to obtain iHeart’s
mobile messaging business.” 64 After sending the e-mail, Stansbury shared
61
JX 55; Tr. 162-63 (Stansbury).
62
JX 30.
63
JX 55.
64
Tr. 172-73 (Stansbury).
15
information with mGage about iHeart’s relationship with Hipcricket, including
revenue estimates and details of the scope of services under the contract.65
On April 23, 2015, mGage and iHeart executed a non-disclosure
agreement.66 Stansbury asked Biondo for “as much detail as possible” about the
services and features Hipcricket currently provided to iHeart, including the number
of short codes, whether such short codes were provisioned for MMS,67
Hipcricket’s features and campaigns, and any custom functionality. 68 In an effort
to further entice iHeart, Stansbury mentioned the possibility of mGage hiring Kristi
Miller, the former iHeart account manager at Hipcricket.69
mGage made several presentations and proposals to iHeart, which
culminated in a draft master services agreement that was presented on May 18.70
As part of its proposal, mGage offered iHeart significant pricing concessions,
65
Tr. 173-74 (Stansbury); JX 70.
66
JX 75; Tr. 126-27, 175-77 (Stansbury).
67
MMS messages are multimedia, and can include pictures or video, as distinguished
from SMS messages, which are text-only. Tr. 9 (Stansbury). A “short code” is
“basically . . . a phone number for short message systems, for SMS and MMS.” Tr. 174
(Stansbury).
68
JX 75; Tr. 175-76 (Stansbury).
69
JX 75; Tr. 176-77 (Stansbury); see also JX 97; Tr. 309-310 (Miller).
70
JX 114.
16
including unlimited messaging, converting short codes to MMS at no charge, and
waiving certain fees. 71
Throughout the process of soliciting iHeart, Stansbury worked with his
superiors at mGage, including James Citron, mGage’s Chief Revenue Officer.72
Stansbury provided Citron a list of iHeart’s short codes that “were associated to the
Hip[cricket] platform.” 73 As of July 2, Stansbury believed that mGage was “the
front runner” to obtain iHeart’s mobile messaging business.74
After mGage’s initial presentation to iHeart, Biondo called Stovall at
Hipcricket to tell him about mGage’s proposal.75 Using the favorable terms of
mGage’s proposal as leverage, Biondo asked Stovall, “[w]hat are you guys going
to do to keep our business?” 76 Biondo was seeking to obtain better terms from
Hipcricket even though iHeart’s contract with Hipcricket at the time was not due to
expire until November 30, 2016. 77
71
JX 98; JX 106; JX 108; JX 109; Tr. 184-87 (Stansbury).
72
Tr. 169-171 (Stansbury).
73
JX 79.
74
JX 317; Tr. 194 (Stansbury).
75
Tr. 391-94 (Stovall).
76
Id.
77
JX 146 § 7; Tr. 399-400 (Stovall).
17
Biondo sent Stovall a version of mGage’s proposal. 78 After reviewing it,
Stovall became concerned that mGage’s proposed fees and the number of short
codes in the proposal were strikingly similar to those that Hipcricket was providing
iHeart.79 According to Stovall, he had no choice but to make numerous
concessions on pricing and services to retain iHeart’s business because it was
Hipcricket’s largest customer. 80 These negotiations began in June 2015 but did not
result in a signed agreement until after trial, on December 7, 2015.81
2. FordDirect/Team Detroit
While he was at Hipcricket, Stansbury did work for FordDirect, which was
his largest client, and Team Detroit.82 FordDirect is a company formed by Ford
Motor Company to manage technology for its dealer groups.83 Team Detroit is an
advertising agency that handles Ford commercials.84 Before he left Hipcricket,
Stansbury advised FordDirect that he was leaving, which prompted FordDirect to
78
JX 116; JX 117.
79
Tr. 393-96 (Stovall); see also Tr. 189-90 (Stansbury).
80
Tr. 395-96, 400, 524-25 (Stovall).
81
Pl.’s Post-Trial Op. Br. 19.
82
JX 18.
83
Tr. 64-65 (Stansbury).
84
Id.
18
ask where he was going,85 and mGage asked Stansbury to plan to attend a meeting
with Team Detroit that was in the process of being scheduled. 86
mGage and its predecessor entities had past client relationships with
FordDirect and Team Detroit.87 After he joined mGage, Stansbury was tasked
with managing the Ford relationships because he “used to run the Ford relationship
at his former employer and knows these folks well.”88
On March 23, 2015, FordDirect issued a request for proposal (RFP) for
mobile services, seeking bids by April 6. On March 28, Citron asked Stansbury to
“share any & all documents (i.e. flows, etc.) that you think will be helpful” to
prepare a bid in response to the RFP.89 To assist with mGage’s preparation of a
bid, Stansbury circulated internal Hipcricket documents to other mGage
employees.90 One document consisted of an “upsell” that Stansbury “was working
on with Ford Direct” to solicit business for Hipcricket. It was stamped “©2013
Hipcricket – Confidential and Proprietary.” 91 Another document came from
85
Tr. 147 (Stansbury): JX 13 at mGage – 002389.
86
JX 255; Tr. 72 (Stansbury).
87
Tr. 67-68 (Stansbury); 357-59 (Scholl).
88
JX 22; see also Tr. 75 (Stansbury), 357 (Scholl).
89
JX 209.
90
JX 32; JX 33.
91
JX 33; see also Tr. 83, 234-35 (Stansbury); Tr. 432 (Stovall).
19
Hipcricket’s internal “JIRA” system, which tracked information on the FordDirect
account, including contacts and technical information about “message flow
components.”92 Stansbury testified he did not know where he obtained these
documents.93 That testimony is not credible.
Stansbury also helped mGage recruit a former Hipcricket employee (Greg
Hoy) to help mGage solicit FordDirect. Hoy engineered Hipcricket’s pricing and
products for FordDirect, including the “rate cards” Hipcricket used to price
contracts with all of its clients.94
3. Cumulus Media
In early April, 2015, Stansbury began assisting Darren Metzger, director of
enterprise sales at mGage, in his pursuit of business from Cumulus Media, an
owner and operator of radio stations. 95 Although Stansbury did not have a
relationship with Cumulus while he was at Hipcricket, he knew it was a Hipcricket
customer. 96
92
JX 32; Tr. 82-84 (Stansbury); Tr. 428-31 (Stovall).
93
Tr. 82-86 (Stansbury).
94
See, e.g., JX 44; JX 56; JX 60; Tr. 237-38, 204-41 (Stansbury).
95
JX 49; 211-14 (Stansbury). Metzger is the lead salesperson for mGage on the Cumulus
Media account. He now reports to Stansbury. Tr. 556, 560-61 (Metzger).
96
Tr. 114, 217 (Stansbury).
20
With Stansbury’s help, Metzger reached out to various stations owned by
Cumulus Media. 97 Stansbury actively gathered information about the services and
pricing Hipcricket offered to Cumulus Media to assist Metzger in his efforts,98
including information about Cumulus Media station contracts with Hipcricket and
messaging volume that he “pulled together.” 99 Metzger testified that mGage was
able to successfully obtain business with KRBE, a Cumulus Media station located
in Houston, 100 which he hoped would result in future business for mGage with
Cumulus Media.101
4. Long John Silvers
Long John Silvers was a Hipcricket mobile messaging client that Stansbury
serviced during his employment with Hipcricket. 102 On March 17, 2015, in
response to a request from Aimee U’Sellis at Long John Silvers, Stansbury e-
mailed her an executable version of a master services agreement with mGage.103
Stansbury followed up with multiple e-mails to Long John Silvers in an effort to
97
Tr. 214, 217-18, 221 (Stansbury); Tr. 570-72, 582-83 (Metzger).
98
JX 65; JX 66; Tr. 215 (Stansbury); Tr. 584-591 (Metzger).
99
JX 65; Tr. 215-16.
100
Tr. 552-53 (Metzger).
101
Tr. 598-99 (Metzger).
102
JX 18.
103
JX 23; Tr. 194-96 (Stansbury).
21
obtain their business. 104 mGage was aware of these solicitations and pushed
Stansbury to close on a contract with Long John Silvers before the end of the first
quarter of 2015. 105
5. Digitas
Stansbury worked on the Digitas account while at Hipcricket. 106 Digitas
completed the automated lead system on mGage’s website and requested a
proposal from mGage. 107 In an e-mail dated April 14, 2015, Stansbury sought to
be in control of, and assumed responsibility for, this account because he “worked
with Johnathan [Digitas’ contact person] on several projects at Hip.”108 Stansbury
was assigned the lead and responded to Digitas’ request. 109
6. MGM/Mandalay Bay
Stansbury was not responsible for the MGM account while he was
employed at Hipcricket.110 On April 1, 2015, a number of MGM employees
received and responded to Stansbury’s form e-mail announcing his arrival at
104
JX 28; JX 112; JX 122; Tr. 196-97, 199-202 (Stansbury).
105
JX 31; Tr. 197-98 (Stansbury).
106
JX 18; Tr. 202-203 (Stansbury).
107
Tr. 107 (Stansbury).
108
JX 53; see also JX 54; JX 68; Tr. 204-07 (Stansbury).
109
JX 53; Tr. 107-09 (Stansbury).
110
Tr. 100 (Stansbury).
22
mGage. 111 Despite being informed that MGM/Mandalay Bay was “very happy
with the services and partnership provided by Hipcricket, 112 Stansbury continued to
send e-mails later in April and early in May to Lou Ragg, a former MGM
employee, to attempt to set up a meeting. 113
7. Virginia Lottery
Virginia Lottery was one of the largest accounts Stansbury serviced while he
was with Hipcricket.114 mGage put a team together to respond to an RFP that
Virginia Lottery issued in July 2015. 115 Stansbury was part of this team along with
a salesman, account managers, and many other persons. 116
*****
As of trial, Hipcricket had not lost any of the accounts discussed above to
mGage, although Hipcricket claimed that it was forced to renegotiate its contract
with and make significant price concessions to iHeart because of mGage’s
solicitations with Stansbury’s assistance. Hipcricket also claims that it learned at
111
JX 34 JX 37; JX 41; Tr. 208 (Stansbury).
112
JX 34.
113
JX 71; JX 94; Tr. 209-10 (Stansbury).
114
Tr. 164 (Stansbury).
115
Tr. 120 (Stansbury).
116
Tr. 120, 251 (Stansbury).
23
trial that defendants’ actions impacted its relationships with other customers, such
as Viriginia Lottery and Cumulus Media. 117
I. mGage Interviews and/or Hires Former Hipcricket Employees
Hipcricket accuses Stansbury of violating the Commission Agreement by
soliciting several of its current and former employees. The record shows that
Stansbury had contact with several such employees, but that in each case the
Hipcricket employee initiated contact with Stansbury, whose only involvement
was to refer the individuals in question to mGage’s human resources department:
• Lindsey Houser, a former Hipcricket Account Director,
contacted Stansbury in March 2015 to see “if there were any
opportunities at mGage.” Stansbury referred her to human
resources at mGage. Houser left Hipcricket on August 14,
2015. She received an offer from mGage on September 1,
2015, which she accepted.118
• Tracey Dreby was a former Hipcricket Account Director who
worked on several accounts with Stansbury, including
FordDirect, Team Detroit, and Virginia Lottery. While still a
Hipcricket employee, she reached out to Stansbury about
potential employment at mGage. Stansbury “referred her
immediately” to mGage’s human resources department.
mGage made an employment offer to Dreby on May 7, which
she accepted, and her last day with Hipcricket was on or
around May 22, 2015. 119
117
Pl.’s Post-Trial Reply Br. 26.
118
Tr. 320-26 (Houser); Tr. 136-37 (Stansbury).
119
PTO ¶ 7; JX 18; JX 128; Tr. 33-34, 38, 138 (Stansbury); Tr. 436 (Stovall).
24
• Kim Donaldson, a former Hipcricket salesperson, asked
Stansbury about employment at mGage. Stansbury referred
her to mGage’s Vice President of Sales, Scott Lancaster.
Although Donaldson met with Lancaster to discuss a position,
mGage did not hire her.120
II. PROCEDURAL POSTURE
On June 11, 2015, Hipcricket filed its original Verified Complaint together
with a motion for a temporary restraining order (TRO) and preliminary injunction.
In its TRO motion, Hipcricket sought, among other things, (i) to enjoin mGage
from soliciting customers using any evaluation material it had received from
Hipcricket under a non-disclosure agreement in connection with mGage’s due
diligence of a potential acquisition of Hipcricket, and (ii) to enjoin Stansbury from
violating the Commission Agreement by soliciting Hipcricket customers or using
any of its confidential information.121
On June 17, 2015, I granted the TRO motion as to mGage, in part, but
deferred ruling on the relief sought against Stansbury so that the parties could
submit briefs addressing whether the Commission Agreement was enforceable
given Hipcricket’s bankruptcy filing.122
120
JX 101; Tr. 261 (Stansbury).
121
Dkt. 3 at 2.
122
Dkt. 22; Tr. of Temporary Restraining Order H’rg at 76-77 (June 17, 2015). On
November 30, 2015, the TRO against mGage was vacated after mGage returned all
evaluation material to Hipcricket. Dkt. 104.
25
On July 16, 2015, after receiving additional briefing and hearing argument, I
denied Hipcricket’s motion for a preliminary injunction against Stansbury because
Hipcricket failed to demonstrate a reasonable probability of success of proving on
the merits that the Commission Agreement was enforceable. 123 In particular, I
found based on the preliminary record that the Commission Agreement was an
executory contract, and that Hipcricket had materially breached the Commission
Agreement as of the petition date by not assuming its obligations, thereby excusing
Stansbury from having to further perform under the Commission Agreement. 124
On July 31, 2015, the Court entered a stipulated scheduling order setting this
matter for trial beginning on November 2, 2015. On October 19, 2015, Hipcricket
asked to bifurcate the trial to proceed as to liability and injunctive relief in
November, and to address its request for damages at a later date. Hipcricket
explained that the bulk of its damages claim involved its largest customer (iHeart)
with which it was in the midst of renegotiating a contract, and that it expected that
those “negotiations will be completed over the next couple of weeks.” 125 On
123
Tr. of Oral Arg. (“July 16 Tr.”) at 79-80, 86 (July 16, 2015). Given the lapse of time
since the June 17 hearing, I treated the motion as one for a preliminary injunction. Id. at
80.
124
Id. at 85-86.
125
Dkt. 73 at 2.
26
October 22, I denied Hipcricket’s request to bifurcate the trial, but I postponed the
trial by one month to allow Hipcricket to develop its damages theory. 126
On October 20, 2015, after the close of fact discovery, Hipcricket filed a
Verified Amended Complaint (the “Complaint”). It contains the following seven
claims for relief:
(1) Breach of the Commission Agreement against Stansbury.
(2) Aiding and abetting a breach of the Commission Agreement
against mGage.
(3) Civil conspiracy against mGage and Stansbury.
(4) Unfair competition against mGage and Stansbury.
(5) Violation of the Washington Uniform Trade Secrets Act
against mGage and Stansbury.
(6) Tortious interference with business relations against mGage
and Stansbury.
(7) Imposition of a constructive trust against mGage and
Stansbury. 127
On November 22, 2015, defendants filed a motion in limine to preclude
Hipcricket from presenting proof of damages at trial using documents it did not
produce to defendants until November 19.128 I reserved judgment on defendants’
motion in limine, allowing plaintiffs to present their damages theory at trial subject
126
Dkt. 82; Dkt. 85.
127
Compl. ¶¶ 29-64.
128
Dkt. 95.
27
to having it stricken at a later time. 129 On November 30, Hipcricket’s corporate
representative was deposed about Hipcricket’s damages contentions.
Trial was held on December 1-2, 2015. Hipcricket did not have a damages
expert at trial and presented no formal evidence to support a case for monetary
damages. 130 Post-trial argument was heard on April 4, 2016.
III. LEGAL ANALYSIS
A threshold issue governing most of Hipcricket’s claims is whether the Post-
Employment Restrictions are enforceable given how the Commission Agreement
was treated in Hipcricket’s bankruptcy. I address that issue first and then turn to
the remaining claims.
A. The Post-Employment Restrictions Are Not Enforceable Because
Hipcricket Rejected the Commission Agreement in Bankruptcy
Under the Bankruptcy Code, with certain exceptions not relevant here, a
debtor in possession in a chapter 11 case “may assume or reject any executory
contract” subject to the court’s approval. 131 The Third Circuit has defined an
executory contract as “a contract under which the obligation[s] of both the
bankrupt and the other party to the contract are so far unperformed that the failure
129
Pre-Trial Conf. Tr. at 15 (Nov. 30, 2015).
130
Stovall testified at trial about price concessions he claims Hipcricket was forced to
make as a result of mGage’s solicitations with Stansbury’s assistance. Tr. 404-15. But
this testimony was a far cry from a reliable form of damages analysis.
131
11 U.S.C. § 365(a).
28
of either to complete performance would constitute a material breach excusing the
performance of the other.”132
In denying Hipcricket’s motion for a preliminary injunction against
Stansbury early in this case, I held on a preliminary basis that the Commission
Agreement was an executory contract. Hipcricket has not argued otherwise
since.133 To the contrary, the premise of its post-trial position is that the
Commission Agreement was an executory contract that Hipcricket had the ability
to assume or reject in the bankruptcy proceeding. 134 Thus, it is undisputed that the
Commission Agreement was an executory contract.
Hipcricket also admits in its post-trial brief that it rejected the Commission
Agreement in the Bankruptcy proceeding. 135 This conclusion logically follows
from the fact that, although Hipcricket initially included the Commission
132
Cincola v. Scharffenberger, 248 F.3d 110, 123 (3d Cir. 2001) (internal quotations
omitted).
133
By failing to argue in its post-trial brief that the Commission Agreement was not an
executory contract, Hipcricket has waived that argument. See, e.g., Emerald P’rs v.
Berlin, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28, 2003) (“It is settled Delaware law
that a party waives an argument by not including it in its brief.”), aff’d, 840 A.2d 641(Del. 2003).
134
See Pl.’s Post-Trial Op. Br. 44-45 (“the ultimate non-assumption of the Commission
Agreement as part of Hipcricket’s Amended Plan of Reorganization is of no moment”),
45 (accusing Stansbury of violating the Commission Agreement “months before
Hipcricket rejected the Commission Agreement”) & n.51 (“The fact that Stansbury
resigned shortly after the Petition Date further renders the ultimate rejection of the
Commission Agreement months later meaningless”).
135
Id.29
Agreement in a schedule of contracts to be assumed as part of its Reorganization
Plan, it amended the schedule to omit the Commission Agreement in response to
Stansbury’s objection. 136 The final Reorganization Plan approved by the
bankruptcy court on May 14, 2015, specifically rejected all executory contracts
that the company did not assume, including the Commission Agreement. 137
The next question is: What is the legal effect of Hipcricket’s decision to
reject the Commission Agreement in the bankruptcy proceeding?
The Bankruptcy Code provides that “. . . the rejection of an executory
contract . . . of the debtor constitutes a breach of such contract . . . immediately
before the date of the filing of the petition. . . .” 138 The parties agree on this point
of bankruptcy law. 139 Although federal bankruptcy law controls whether an
executory contract has been breached by a debtor’s rejection of the contract,
“rejection does not affect the parties’ substantive rights under the contract.” 140 To
136
JX 343 ¶ NN & n.4 (noting removal of “Objecting Employee Agreements” from the
previous schedule of assumed contracts and unexpired leases).
137
Id. ¶ MM (“Section 8.2 of the Plan provides for the rejection of all other executory
contracts”).
138
11 U.S.C. § 365(g).
139
Pl.’s Post-Trial Op. Br. 42. (“rejection of a contract by the debtor is deemed a breach
as of the petition date”); Defs.’ Post-Trial Ans. Br. 28 (“When a debtor rejects an
executory contract, the rejection constitutes a breach of such contract occurring
immediately before the date the debtor filed its bankruptcy claim.”)
140
Cincola, 248 F.3d at 119 n.8 (3d Cir. 2001) (citing 3 Collier on Bankruptcy ¶¶ 365.09,
365.09[1] (Lawrence P. King ed., 15th ed. 1999); see also In re Beck, 272 B.R. 112, 120-
30
determine the legal the effect of a breach of a rejected contract, one must look to
the applicable state law. The Second Circuit has explained this intersection of
federal bankruptcy and state law as follows: “The Bankruptcy Code treats
rejection as a breach so that the non-debtor party will have a viable claim against
the debtor. However, the Code does not determine parties’ rights regarding the
contract and subsequent breach. To determine these rights, we must turn to state
law.” 141
The Commission Agreement is governed by Washington law. 142 Under
Washington law, a party in material breach of a contract may not demand
performance from the non-breaching party. 143 Washington law further provides
that a “material breach is one serious enough to justify the other party’s
21 (Bankr. E.D. Pa. 2002) (“Rejection does not . . . affect the parties’ substantive rights
under the contract or lease, such as the amount owing or a measure of damages for
breach.”) (citing same section of Collier treatise ); In re Fleming Cos., Inc., No. 03-
10945, 2007 WL 788921, at *3 (D. Del. Mar. 16, 2007) (“[T]he Third Circuit has
explained that rejection of an executory contract does not alter the substantive rights of
the parties.”) (internal quotation omitted).
141
In re Lavigne, 114 F.3d 379, 387 (2d Cir. 1997).
142
JX 1 § 3(g).
143
E.g., DC Farms, LLC v. Conagra Foods Lamb Weston, Inc., 317 P.3d 543, 550
(Wash. App. 2014) (“[I]f it is determined that a breach is material, or goes to the root or
essence of the contract, it follows that substantial performance has not been rendered, and
further performance by the other party is excused.”).
31
abandoning the contract because the contract’s purpose is defeated.”144 In the
employment context, Washington courts have expressed a “strong public policy in
favor of ensuring that earned wages are paid,”145 and found that an employer’s
breach of an employment contract excuses performance of a non-compete by an
employee. 146
In previously denying Hipcricket’s motion for a preliminary injunction, I
found that the amount of Stansbury’s claim against the Company ($31,000) was
material to him and that the company’s failure to pay him this amount would
constitute a material breach of the Commission Agreement. 147 Hipcricket, which
144
Moore v. Blue Frog Mobile, Inc., 221 P.3d 913, 917 n.2 (Wash. App. 2009) (citing
Park Ave. Condo. Owners Ass’n v. Buchan Devs., L.L.C., 71 P.3d 692, 698 (Wash. App.
2003)).
145
Morgan v. Kingen, 169 P.3d 487, 495 (Wash. App. 2007); see also Schilling v. Radio
Hldgs., Inc., 961 P.2d 371, 374-75 (Wash. 1998) (“The Legislature also established a
remedy of exemplary damages if an employer willfully refuses to pay wages. . . . By
providing for costs and attorney fees, the Legislature has provided an effective
mechanism for recovery even where wage amounts wrongfully withheld may be small.
This comprehensive legislative system with respect to wages indicates a strong legislative
intent to assure payment to employees of wages they have earned.”) (internal citations
omitted).
146
See, e.g., Parsons Supply, Inc. v. Smith, 591 P.2d 821, 823 (Wash. App. 1979).
Delaware law follows the same rule. See, e.g., Dickinson Med. Gp., P.A. v. Foote, 1989
WL 40965, at *7 (Del. Super. Mar. 23, 1989) (excusing performance of non-compete
obligations, finding material breach of employment agreement where “[t]he amounts
involved . . . are not de minimis, and the payment of [employee’s] compensation goes to
the essence of this employment agreement.”).
147
July 16 Tr. at 82. This preliminary finding was based on representations Stansbury’s
counsel made that his annual compensation from Hipcricket ranged from about $100,000
to about $200,000. Id. at 32.
32
had the opportunity to explore this issue in discovery and at trial, does not contend
otherwise. I independently find that the amount in question was material to
Stansbury based on the trial record, which indicates that $31,000 constituted over
ten percent of his 2015 compensation.148
Given the materiality to Stansbury of the amount in dispute, I conclude,
based on a straightforward application of Washington law, that Hipcricket’s breach
of the Commission Agreement excused Stansbury from any further obligations he
owed under that agreement, including the Post-Employment Restrictions, as of the
date of the breach. As discussed above, the Bankruptcy Code deems the date of
breach to be immediately before the Petition Date: January 20, 2015.
Hipcricket makes essentially three arguments for why the Post-Employment
Restrictions should remain enforceable notwithstanding its rejection of the
Commission Agreement in the bankruptcy proceeding. None of them has merit in
my opinion.
First, Hipcricket argues that, as of the Petition Date, it did not “owe” any of
the amounts sought in Stansbury’s proof of claim and thus there was no breach of
the Commission Agreement because they were not due to be paid to him until
January 31, February 28, and March 31 of 2015. 149 As an initial matter, as
148
Tr. 266-67 (Stansbury); see also Tr. 31-32.
149
Pl.’s Post-Trial Op. Br. 41.
33
discussed further below, I see no equity in this argument given Hipcricket’s
assertion during the Bankruptcy proceeding that all of the amounts in Stansbury’s
proof of claim were “pre-petition” claims that were either “accrued” or “earned”
before the Petition Date,150 which caused those amounts to be classified as general
unsecured claims rather than to be given administrative priority. Hipcricket also
cites no legal authority to support the distinction it asks the Court to draw between
an amount being “earned” and “owed.” Ultimately, I need not resolve this issue
because, as discussed previously, the conceded legal effect under the Bankruptcy
Code of Hipcricket’s decision to reject the Commission Agreement is that it is
deemed to have been breached as of the Petition Date.
Second, relying on the proposition that executory contracts “remain in full
force and effect up to, and until, the time the debtor assumes or rejects such
contract,” Hipcricket complains that Stansbury violated the Post-Employment
Restrictions by soliciting its customers “before Hipcricket rejected the Commission
Agreement.” 151 The problem with this argument is that Hipcricket took no action
to enforce its rights during this period. Had it done so, it may have been entitled to
relief. But it did not. Hipcricket instead waited until June 11 to file this action,
150
JX 25 at HC000154 (noting that the $9,427 in paid time off was “accrued pre-petition”
and that $21,404 in commissions were “earned pre-petition”). See also JX 24; Tr. 460,
465 (Bradford).
151
Pl.’s Post-Trial Op. Br. 44-45 & n.50 (citing authorities).
34
after it already had elected to reject the Commission Agreement, which, to repeat,
caused a breach of the agreement as of the Petition Date as a matter of bankruptcy
law and rendered it unenforceable under Washington law as of that time, before
any of Stansbury’s alleged breaches.
Third, citing several cases involving debtor franchisees, Hipcricket argues
that “post-termination obligations within executory contracts remain enforceable
even after rejection by a debtor in bankruptcy.” 152 This line of cases, for which
there is a split of authority, 153 is inapposite. All of the franchise cases Hipcricket
relies on dealt with the question of whether a debtor’s obligation not to compete
survived its own rejection of the contract containing that obligation. In each of
those cases, under black-letter bankruptcy principles, the debtors breached the
contracts by rejecting them. It is sensible and equitable that a breaching party
should not be excused from its own non-compete obligations just because it
breached the contract. Here, by contrast, it is the breaching debtor who is seeking
to enforce contract rights that it refused to pay for by assuming the contract. Just
152
Id. at 47-48 (citing Jackson Hewitt Inc. v. Childress, 2008 WL 834386, at *9 (D.N.J.
Mar. 27, 2008); Sir Speedy, Inc. v. Morse, 256 B.R. 657, 659-60 (Bankr. D. Mass. 2000);
In re Steaks to Go, Inc., 226 B.R. 35, 37-38 (Bankr. E.D. Mo. 1998); In re Klein, 218
B.R. 787, 790-91 (Bankr. W.D. Pa. 1998)); see also Pl.’s Post-Trial Reply Br. 13 (citing
In re Don & Lin Trucking Co., Inc., 110 B.R. 562, 568 (Bankr. N.D. Ala. 1990)).
153
See, e.g., In re Rovine Corp., 5 B.R. 402, 404 (Bankr. W.D. Tex. 1980); see also In re
Annabel, 263 B.R. 19, 23-24 (Bankr. N.D.N.Y. 2001) (examining different lines of cases
dealing with debtor rejection of non-compete agreements arriving at opposite results).
35
as it was inequitable in the franchise cases for the debtors to benefit from using
bankruptcy to avoid their obligations, it would be inequitable here to allow
Hipcricket to enforce a contract that it materially breached.
In a broader sense, Hipcricket’s position would lead, in my view, to a result
inconsistent with the policy of the Bankruptcy Code concerning executory
contracts. The purpose of affording a debtor the option to assume or reject
executory contracts is to allow the estate to assume beneficial contracts and to
reject contracts that are less favorable.154 This choice essentially equates to a
decision to perform or to breach.155
The debtor’s decision to perform or breach has significant consequences for
both the debtor and the creditor. If the debtor chooses to breach, the creditor’s
claim typically becomes an unsecured claim against the estate that is treated pro
154
In re Orion Pictures Corp., 4 F.3d 1095, 1098 (2d Cir. 1993) (“The purpose behind
allowing the assumption or rejection of executory contracts is to permit the trustee or
debtor-in-possession to use valuable property of the estate and to ‘renounce title to and
abandon burdensome property.’”) (quoting 2 Collier on Bankruptcy ¶ 365.01[1] (15th ed.
1993); see also Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding
‘Rejection’, 59 U. Colo. L. Rev. 845, 847-49 (1988) (“Assumption permits the estate to
obtain the benefits of continued performance by the nondebtor party to the contract, as
would assumption by an ordinary contract assignee. . . . [R]ejection is not the revocation
or repudiation or cancellation of a contract or lease, nor does it affect contract or lease
liabilities. It is simply a bankruptcy estate’s decision not to assume, because the contract
or lease does not represent a favorable or appropriate investment of the estate’s
resources.”).
155
Jay L. Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev.
227, 231 (1989) (“The trustee has the choice of ‘assuming’ a pre-bankruptcy contract or
‘rejecting’ it. These are merely bankruptcy terms for performance or breach.”)
36
rata with other unsecured creditors, and usually yields little or no value. 156 By
contrast, if a debtor elects to assume the contract, it can only gain the benefits of
that contract by agreeing to give administrative priority to the countervailing
burdens, which usually means paying the creditor in full. 157 As the United States
Supreme Court has stated, “[s]hould the debtor-in-possession elect to assume the
executory contract, . . . it assumes the contract cum onere”—meaning with the
burdens that come with it—“and the expenses and liabilities incurred may be
treated as administrative expenses, which are afforded the highest priority on the
debtor’s estate.”158
Here, Hipcricket rejected the Commission Agreement in May 2015 by
removing it from its list of assumed contracts, and the bankruptcy court confirmed
its Reorganization Plan on that basis. Significantly, Hipcricket knew when it
156
Id. at 252-53 (“The principle that modifies the trustee’s position, making it much more
favorable than that of the pre-petition debtor, is equality of distribution. That principle
requires that all creditors be treated equally, subject to a number of important exceptions.
It apparently is the most universal of all insolvency principles throughout the world.
From the equality principle comes the rule of pro rata distribution to pre-petition
unsecured creditors. The pro rata rule requires that unsecured creditors share
proportionately in distributions, with the result that almost never are they paid in full.
Their claims are calculated in full under state law, . . . but their actual relief, the payment
of the claims, can be thought of as being in little tiny Bankruptcy Dollars, which may be
worth only ten cents in U.S. dollars.”) (citations omitted).
157
Id. at 253 (“In sharp contrast, if the trustee assumes a contract, then it is converted into
an estate obligation, a post-petition obligation, and the Other Party becomes entitled to
full performance or payment as an administration claim. Because administration claims
are paid first in any distribution, they are usually paid in full, 100 cent U.S. dollars.”).
158
N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 531 (1984).
37
rejected the Commission Agreement (1) that Stansbury had resigned from
Hipcricket and joined a competitor (mGage); (2) that the Commission Agreement
contained the Post-Employment Restrictions, which Hipcricket had invoked
against Stansbury in a cease-and-desist letter it sent him on April 15; 159 (3) that
Stansbury had filed a proof of claim on April 30 for amounts Hipcricket deemed to
have been earned or accrued pre-petition, and which were indisputably “owed” by
that date; and (4) that Stansbury objected to Hipcricket assuming the Commission
Agreement as part of the Reorganization Plan without paying his claim in full.
With this information in hand, Hipcricket made a conscious decision to reject the
Commission Agreement, relegating Stansbury’s claim to general unsecured status.
In my opinion, Hipcricket’s plea to “have its cake and eat it too” by demanding the
ability to enforce the Post-Employment Restrictions without accepting the burdens
associated with the Commission Agreement (i.e., giving Stansbury’s claim
administrative priority so it would be paid in full) is not only contrary to the letter
of the law, but would contravene in an inequitable manner the policy behind the
optionality the Bankruptcy Code affords debtors with respect to executory
contracts.
159
JX 58.
38
B. Defendants Are Entitled to Judgment on All Claims Premised on
the Unenforceable Commission Agreement
For the reasons explained above, I have concluded that the Post-
Employment Restrictions in the Commission Agreement are unenforceable.160
Consequently, defendants are entitled to judgment in their favor on each of
Hipcricket’s claims that are premised on establishing a breach of those provisions.
In my opinion, five of the seven claims in the Complaint fall into this category.
Claims 1 and 2 assert, respectively, that Stansbury breached the Post-
Employment Restrictions in the Commission Agreement and that mGage aided and
abetted the breach of those provisions.161 Thus, both of these claims are plainly
premised on establishing a breach of the Post-Employment Restrictions.
Claim 3 asserts that defendants conspired to solicit “Hipcricket customers
and employees in violation of the [Commission] Agreement.” 162 Claim 4 asserts
that defendants unfairly competed with Hipcricket by “continuing to violate the
[Commission] Agreement.”163 Claim 6 (tortious interference with business
160
Because I have found the Post-Employment Restrictions to be unenforceable by virtue
of the bankruptcy proceeding, I do not address defendants’ arguments challenging the
reasonableness of those restrictions under Washington law.
161
Compl. ¶¶ 30-31, 34-35.
162
Id. ¶ 38.
163
Id. at ¶ 45. Hipcricket argues that, separate and apart from any breach of the
Commission Agreement, defendants unfairly competed with Hipcricket by making use of
trade secrets to solicit its customers. See Pl.’s Post-Trial Op. Br. 54-56; Pl.’s Post-Trial
39
relations) asserts that defendants “communicated with various customers of
Hipcricket in violation of the [Commission] Agreement and without the consent or
permission of Hipcricket in an effort to damage Hipcricket’s relationships with
such customers.” 164 Thus, each of these three claims also is premised on
establishing a breach of one or more of the Post-Employment Restrictions.
Because the contractual provisions upon which claims 1-4 and 6 are each
premised are unenforceable for the reasons explained above, judgment will be
entered in defendants’ favor with respect to each of these claims. I next address
Hipcricket’s remaining two claims.
C. Defendants Violated the Washington Uniform Trade Secrets Act
Claim 5 of Hipcricket’s Complaint asserts that defendants violated the
Washington Uniform Trade Secrets Act through Stansbury’s misappropriation of
Hipcricket’s confidential information and use of such information during his
employment with mGage. This claim provides an independent basis for relief that
is not dependent on the Commission Agreement. As the Washington Supreme
Court has explained:
Reply Br. 30. This aspect of Claim 4 is duplicative of Hipcricket’s claim under the
Washington Uniform Trade Secrets Act (Claim 5). As the Washington Supreme Court
explained in Ed Nowogrowski Ins., Inc. v. Rucker, “[o]nce a common law concept, trade
secret protection is now governed by statutes in most states, including Washington.” 971
P.2d 936, 945 (Wash. 1999) (en banc). Accordingly, I address this aspect of Claim 4 in
the context of adjudicating Claim 5.
164
Compl. ¶ 57.
40
As a general rule, an employee who has not signed an agreement not
to compete is free, upon leaving employment, to engage in
competitive employment. In so doing, the former employee may
freely use general knowledge, skills, and experience acquired under
his or her former employer. However, the former employee, even in
the absence of an enforceable covenant not to compete, remains under
a duty not to use or disclose, to the detriment of the former employer,
trade secrets acquired in the course of previous employment. Where
the former employee seeks to use the trade secrets of the former
employer in order to obtain a competitive advantage, then competitive
activity can be enjoined or result in an award of damages.165
Under the Washington Uniform Trade Secrets Act, any “actual or threatened
misappropriation” of a “trade secret” may be enjoined. 166 The term
“misappropriation” is defined in the statute as follows:
(a) Acquisition of a trade secret of another by a person who knows or
has reason to know that the trade secret was acquired by improper
means; or
(b) Disclosure or use of a trade secret of another without express or
implied consent by a person who:
(i) Used improper means to acquire knowledge of the trade
secret; or
(ii) At the time of disclosure or use, knew or had reason to
know that his or her knowledge of the trade secret was (A)
derived from or through a person who had utilized improper
means to acquire it, (B) acquired under circumstances giving
rise to a duty to maintain its secrecy or limit its use, or (C)
derived from or through a person who owed a duty to the
person seeking relief to maintain its secrecy or limit its use; or
165
Nowogrowski, 971 P.2d at 941-42.
166
Wash. Rev. Code § 19.108.020.
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(iii) Before a material change of his or her position, knew or
had reason to know that it was a trade secret and that
knowledge of it had been acquired by accident or mistake.167
The term “trade secret” is defined in the statute as follows:
. . . information, including a formula, pattern, compilation, program,
device, method, technique, or process that: (a) Derives independent
economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other
persons who can obtain economic value from its disclosure or use;
and (b) Is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy. 168
Applying this definition, one court has explained that to succeed on a trade secret
claim under Washington law, “a party must establish (1) that the information
derives independent economic value from not being generally known or readily
ascertainable to others who can obtain economic value from knowledge of its use
and (2) that reasonable efforts have been taken to maintain the secrecy of the
information.”169
I conclude from the evidence at trial that Stansbury, with mGage’s
encouragement and participation, misappropriated trade secrets in violation of the
Washington Uniform Trade Secret Act on at least three occasions.
167
Id. § 19.108.010.
168
Id.
169
Pac. Aerospace & Elecs., Inc. v. Taylor, 295 F. Supp. 2d 1188, 1200 (E.D. Wash.
2003).
42
First, in late March-early April 2015, Stansbury provided members of the
mGage team who were preparing a proposal for Ford with two internal Hipcricket
documents: (1) a document from Hipcricket’s “JIRA” system containing technical
information about past projects Hipcricket did for Ford,170 and (2) an “upsell”
Stansbury was “working on with Ford Direct” while he was at Hipcricket, which
he believed would provide some insight into “where they are headed.” 171 The latter
document bore a copyright stamp in Hipcricket’s name and was labeled
“Confidential and Proprietary.” 172 The documents were provided in response to a
March 28 e-mail from Citron, mGage’s Chief Revenue Officer, who asked
Stansbury to “please share any & all documents (i.e., flows, etc.) that you think
will be helpful” for preparing mGage’s proposal to respond to a Ford RFP, which
Citron characterized as “our biggest new Q2 revenue opportunity in the US.”173 I
find it inexplicable that Stansbury did not know where these documents came
from, and I do not credit his testimony in that regard.
Second, I find that Stansbury passed along to mGage information he
obtained from Hipcricket’s Salesforce database. This is borne out by an April 20,
170
JX 32.
171
JX 33.
172
Id.; Tr. 432 (Stovall).
173
JX 209; Tr. 81-86 (Stansbury).
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2015 e-mail Stansbury sent to Metzger, who was in charge of soliciting business
from Cumulus Media for mGage, with a copy to Citron. In the e-mail, Stansbury
states he is providing “some intel” that was “all pulled together from SF,” an
obvious reference to Salesforce.174 The information appears to reflect Hipcricket’s
annual billings and messaging volumes for “four contract groups” concerning
Cumulus accounts. 175 Using that information, Stansbury and Metzger discussed
how to best price a proposal for mGage to pitch to Cumulus.176
It is not entirely clear how Stansbury accessed the Salesforce database. It is
undisputed that he transferred a significant number of files to his Hightail account
from Hipcricket’s Salesforce program the same day he learned about its
bankruptcy filing, and that he reached out to mGage’s CEO shortly thereafter to
explore employment with mGage. 177 Given this timing and the circumstances, I
am skeptical about Stansbury’s claim that he never looked at, opened or
downloaded any of these materials. When pressed on cross-examination,
moreover, Stansbury admitted he was able to access his Hightail account after
174
JX 65. Stansbury’s testimony that he did not know what “SF” stood for in this context
is simply not credible. See Tr. 216 (“Q. . . . is SF sales force? A. I don’t -- I don’t know.
I -- Q. In your experience, what does SF stand for? A. San Francisco. Q. So you had
spoken with somebody in San Francisco? A. I don’t know. It could be sales force.”).
175
JX 65; see also Tr. 216 (Stansbury); Tr. 589 (Metzger).
176
JX 66; Tr. 218 (Stansbury); Tr. 591 (Metzger).
177
See supra. Part I.E.
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joining mGage. 178 Ultimately, however, how Stansbury obtained access to
information from the Salesforce database to assist mGage is not important because
the documentary evidence clearly shows, in my view, that he did.
Third, in an April 23, 2015 e-mail, Stansbury provided Citron with a list of
“short codes” from the Hipcricket platform that were used by iHeart.179 The e-mail
reflects that the information came from a woman named “Tracey.” Stovall
testified that Hipcricket treats the information on its platform as confidential, and
explained credibly that the e-mail was referring to Tracey Dreby (first name
spelled the same way as in the e-mail), who was a Hipcricket employee at the time
but who joined mGage in May. 180 Stansbury and mGage made use of this
protected information in their solicitation of iHeart.181
178
Tr. 159-60.
179
JX 79.
180
Tr. 433-36 (Stovall). Stansbury claimed that a woman named Tracy Kunzi, an
account manager at mGage, did the research to pull the short codes. Tr. 177-78
(Stansbury). But Kunzi’s first name is not spelled “Tracey” and Stansbury professed not
to know where she obtained the information from. Stovall’s explanation of the source of
the information is more credible.
181
Defendants argue that the short codes are not protected trade secrets because they are
iHeart’s information, not Hipcricket’s, and were “derived from iHeart’s analytics report
which iHeart shared with mGage in order for iHeart to solicit a competing proposal to
[Hipcricket’s] proposal.” Defs.’ Post-Trial Ans. Br. 54. I disagree. The analytics report
that iHeart gave to Stansbury is labeled “© 2014 Hipcricket – Confidential and
Proprietary.” JX 245. The information in it was Hipcricket’s, not iHeart’s, irrespective
of the fact that iHeart passed it along to Stansbury and mGage. Under the Washington
Uniform Trade Secrets Act, Stansbury at the very least had reason to know that that
report was “derived from or through a person who owed a duty to the person seeking
45
Each of the three categories of information was valuable to Hipcricket, was
not generally known or available to persons outside of Hipcricket, and was treated
as confidential information within Hipcricket. Hipcricket took reasonable
measures to protect the confidentiality of this type of information by having
employees regularly sign agreements to protect trade secrets.182 Stansbury himself
signed several such agreements with Hipcricket over the years, and was
undoubtedly well aware (and certainly should have known) when he passed along
to mGage employees the documents and information described above that they had
been obtained improperly without Hipcricket’s consent. As such, Stansbury, with
mGage’s encouragement and participation, violated the Washington Uniform
Trade Secrets Act.
For the reasons explained above, judgment will be entered in Hipcricket’s
favor on Claim 5. The proper remedy for defendants’ violations in my view is to
impose a permanent injunction to bar Stansbury and mGage from making any
further use of Hipcricket’s trade secrets as defined in the Washington Uniform
relief to maintain its secrecy or limit its use.” Wash. Rev. Code.
§ 19.108.010(2)(b)(ii)(C). In any event, even if the short codes are not Hipcricket trade
secrets, the misappropriation of either the Salesforce data or the Ford documents alone
would support the relief granted herein.
182
Tr. 381-82 (Stovall), see also Tr. 304-05 (Miller) (testifying that she signed a similar
agreement when she started working at Hipcricket).
46
Trade Secrets Act.183 In accordance with their rights under the statute, defendants
may apply to the Court for termination of the injunction at such time as the
relevant trade secrets cease to exist. 184 The parties are directed to confer on an
appropriate form of implementing order that addresses all protected Hipcricket
trade secrets without infringing on mGage’s ability to compete in the ordinary
course of business. 185
D. Imposition of a Constructive Trust Is Not Warranted
Count 7 of Hipcricket’s Complaint seeks the imposition of a constructive
trust over “[a]ny profits obtained by defendants as a result of their improper
183
Wash. Rev. Code. § 19.108.020(1) (“Actual or threatened misappropriation may be
enjoined.”); see also Boeing v. Sierracin Corp., 738 P.2d 665, 681 (Wash. 1987) (en
banc) (awarding permanent injunction of further use of trade secrets where “potential
harm to Boeing as trade secrets holder extends beyond a mere calculation of monetary
damages” and “[f]ailure to enjoin present and future copying would be inequitable,
allowing Sierracin to profit from use of its ill-gotten gains.”); Pac. Aerospace, 295 F.
Supp. 2d at 1219 (“A permanent injunction is warranted because of the apparent
difficulty in calculating monetary damages arising from defendants’ use of PAE’s
confidential customer information.”).
184
Wash. Rev. Code. § 19.108.020(1); see also Boeing, 738 P.2d at 682 (finding that
statutory ability to seek termination of injunction mitigated appellant’s argument that
injunction was “perpetual and punitive.”)
185
See, e.g., Pac. Aerospace, 295 F. Supp. 2d at 1220 (“What is problematic, however, is
fashioning a permanent injunction which is detailed enough so defendants know exactly
what is unlawful behavior, but which does not unduly and unfairly prevents [sic]
defendants from conducting business. . . . The court will ask [plaintiff] to propose
language to be included in a permanent injunction which addresses the court’s concerns
and defendants will be given an opportunity to comment upon the proposed language.”).
47
actions.” 186 Hipcricket did not present any evidence at trial concerning ill-gotten
profits mGage earned as a result of the violations of the Washington Uniform
Trade Secrets Act, or otherwise. Accordingly, there is no basis for imposing a
constructive trust. Judgment will entered in defendants’ favor on this claim.
IV. CONCLUSION
For the foregoing reasons, judgment will be entered (1) in defendants’ favor
on Claims 1-4 and 6-7 of the Complaint dismissing those claims with prejudice,
and (2) in Hipcricket’s favor on Claim 5 of the Complaint, entitling it to a
permanent injunction. The parties are directed to confer and submit a form of final
judgment within five business days of the date of this opinion.
186
Pl.’s Post-Trial Op. Br. 63.
48