Opinion
No. X10 UWYCV095014518S
April 29, 2011
MEMORANDUM OF DECISION
FACTS
The present matter arises out of a proposed management-led buyout of the plaintiff, MacDermid, Inc. (MacDermid). On October 1, 2010, MacDermid filed a third amended complaint in the present matter, alleging the following facts. On October 13, 2005, defendant David North entered into a consulting agreement with MacDermid. Among other provisions, the agreement contained a clause requiring North to refrain from using or disclosing to any third party MacDermid's confidential and proprietary information. Subsequently, North was given access to certain trade secrets of MacDermid, including strategic and "competitively sensitive" financial information. (Compl., ¶ 24.) North remained a consultant for MacDermid until 2006.
The third amended complaint is the operative complaint and will hereinafter be referred to as "the complaint."
In 2006, MacDermid was a publicly traded company. During that time, defendant Cookson Group, PLC (Cookson), requested information about MacDermid related to a possible transaction. On October 27, 2006, Cookson entered into a letter agreement with MacDermid, whereby MacDermid agreed to provide Cookson with "certain trade secret financial and strategic information." (Compl., ¶ 27.) Pursuant to the letter agreement, Cookson agreed "[n]ot to directly or indirectly contact or communicate with any executive or employee of [MacDermid] concerning a Possible Transaction, or to seek any information in connection therewith from such person without the express written consent of Merrill Lynch," MacDermid's investment banker. Cookson also assumed responsibility for any breach of the letter agreement by it or its representatives, pursuant to the terms of the letter agreement.
Additional defendants to the present action are Cookson Electronics and Enthone, both divisions of Cookson. North, Cookson, Cookson Electronics and Enthone will collectively be referred to as "the defendants." Cookson, Cookson Electronics and Enthone will collectively be referred to as "the Cookson defendants."
Prior to October 2006, North was employed by or engaged as a consultant by Cookson. Moreover, prior to Cookson signing the letter agreement of October 27th, North disclosed certain of MacDermid's confidential and proprietary trade secret information to Cookson. The trade secret information disclosed by North to Cookson "was never provided by, or intended to be provided by, MacDermid under the Letter Agreement." (Compl., ¶ 28.)
The first count of the complaint alleges that the Cookson defendants breached the terms of the letter agreement with MacDermid through their maintenance of trade secret information provided by North. The second count alleges that North breached the terms of his consulting agreement with MacDermid through his disclosure of trade secrets to the Cookson defendants. The third count alleges intentional interference with contractual relations on the part of the Cookson defendants. The fourth and fifth counts allege misappropriation of trade secrets in violation of the Connecticut Uniform Trade Secrets Act (CUTSA), General Statutes § 35-50 et seq., against North and the Cookson defendants, respectively. The sixth and. seventh counts allege claims against North and the Cookson defendants, respectively, under General Statutes § 52-570b for violations of § 53a-251(e). Finally, count eight alleges that the Cookson defendants violated the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a et seq. All eight counts of the complaint are premised on identical claims of injury, including allegations that the defendants' use of MacDermid's trade secrets compromised its sale and caused it to be saddled with additional debt.
Specifically, MacDermid alleges: "a. The process of the sale of the publicly-traded company was compromised by virtue of defendants' illegal access to and/or use of MacDermid's trade secret, confidential and proprietary information concerning, inter alia, the financial performance of its separate business units. This information included, but is not limited to, strategic and financial performance information about MacDermid's separate offshore business unit. This information is contained in MacDermid documents provided to David North while he worked as a consultant to MacDermid, for the purpose of performing work for MacDermid; which documents North provided to one or more of the Cookson defendants. This caused financial losses to MacDermid in an amount to be determined at trial.
"b. By virtue of defendants' illegal access to and/or use of MacDermid's trade secret, confidential and proprietary information concerning, inter alia, the financial performance of its separate business units, MacDermid lost the competitive value of such information, in an amount to be determined at trial, in one or more of the following ways:
"Cookson improperly had access to and/or used the trade secret, confidential, and proprietary information that it obtained from North in its bid for the purchase of MacDermid. Cookson's bid price was higher than that of other bidder(s) and Cookson's bid price ultimately caused the price for MacDermid to increase. The increased price in turn caused MacDermid to be saddled with additional debt, which has caused continuing financial losses to MacDermid in an amount to be determined at trial. Further, Cookson's access to MacDermid's confidential information will allow Cookson to unfairly compete with MacDermid by obtaining a look into its competitor's business that Cookson had no right in seeing. Lastly, the leak of this confidential information to Cookson imperils and devalues the assets of MacDermid." (Compl., ¶ 34.)
On November 19, 2010, both North and the Cookson defendants filed motions to strike the complaint. MacDermid objected to the motions to strike on January 3, 2011, and the defendants responded thereto on January 18, 2011. Oral argument was heard by the court on January 24, 2011.
DISCUSSION
"A motion to strike attacks the legal sufficiency of the allegations in a pleading." Keane v. Fischetti, 300 Conn. 395, 402 (2011). "It is fundamental that in determining the sufficiency of a complaint challenged by a defendant's motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted." (Internal quotation marks omitted.) Violano v. Fernandez, 280 Conn. 310, 318, 907 A.2d 1188 (2006). When ruling on a motion to strike, the court must "construe the complaint in the manner most favorable to sustaining its legal sufficiency." (Internal quotation marks omitted.) American Progressive Life Health Ins. Co. of New York v. Better Benefits, LLC, 292 Conn. 111, 120, 971 A.2d 17 (2009). "In ruling on a motion to strike, the court is limited to the facts alleged in the complaint." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 580, 693 A.2d 293 (1997).
I Preliminary Matters
As a preliminary matter, MacDermid argues that the court should decline to consider references to public filings with the Securities and Exchange Commission presented in the defendants' motions. The defendants contend that the court may take judicial notice of such facts, relying on a series of Superior Court cases and non-binding federal authority.
"It is well established that a motion to strike must be considered within the confines of the pleadings and not external documents . . . [The Court is] limited . . . to a consideration of the facts alleged in the complaint." (Internal quotation marks omitted.) Zirinsky v. Zirinsky, 87 Conn.App. 257, 268 n. 9, 865 A.2d 488, cert. denied, 273 Conn. 916, 871 A.2d 372 (2005); see also Rowe v. Godou, 209 Conn. 273, 278, 550 A.2d 1073 (1988). Accordingly, the court will not consider the submissions of the defendants extraneous to the facts alleged in MacDermid's complaint.
II Legal Sufficiency of Damages
The defendants first move to strike counts one through eight of the complaint on the ground that the damage alleged — that MacDermid has been saddled by an increased amount of debt in its restructuring as a result of the disclosure of its trade secrets — is not cognizable under law. The defendants rely, primarily, on the federal cases In re Ivan F. Boesky Securities Litigation, 825 F.Sup. 623 (S.D.N.Y 1993), and In re Ivan F. Boesky Securities Litigation, 36 F.3d 255 (2d. Cir. 1994), for the proposition that MacDermid cannot claim an injury flowing from an increase in its share price.
"Decisions of the Second Circuit Court of Appeals, although not binding on us, are particularly persuasive." Turner v. Frowein, 253 Conn. 312, 341, 752 A.2d 955 (2000).
The Boesky litigation involved allegations of insider trading arising out of a proposed recapitalization of FMC, Corp. (FMC). FMC alleged that material, nonpublic information regarding its recapitalization plan was disclosed by an officer of its investment banker, Goldman Sachs Co. (Goldman), and made its way through a network of finance industry connections into the hands of Ivan Boesky, a professional arbitrageur. Boesky then utilized the information to purchase large quantities of FMC stock, causing the price of the stock to rise sharply. The increase in FMC's share price resulted in FMC raising the per share cash payout that it was obligated to pay its public shareholders pursuant to the recapitalization plan. FMC alleged that as a result of the disclosure of its nonpublic information, it was forced to pay out approximately $235 million more than it would have had the insider information never been disclosed.
Goldman moved for summary judgment on FMC's claims on the ground that FMC was not damaged by the alleged disclosure of its insider information. In granting Goldman's motion, the district court noted that FMC "failed to adduce any admissible evidence of specific facts that FMC sustained any increase in costs to it incurred to effectuate the restructure, or that any legitimate and legally cognizable value held by FMC in the financial information, which benefitted all its shareholders (at no cost to the company), was diminished in any way by the premature disclosure." In re Ivan F. Boesky Securities Litigation, supra, 825 F.Sup. 633.
FMC's action was originally brought in the United States District Court for the Northern District of Illinois, where FMC raised federal securities, RICO, and state law claims. FMC Corp. v. Boesky, 673 F.Sup. 242 (N.D.Ill. 1987). That court dismissed FMC's federal securities and RICO claims for failure to state a sufficient injury under Article III. The United States Court of Appeals for the Seventh Circuit remanded, finding sufficient injury to satisfy Article III standing requirements. FMC Corp. v. Boesky, 852 F.2d 981 (7th Cir. 1988). On remand from the Court of Appeals, the district court again dismissed FMC's federal securities and RICO claims, but declined to dismiss the state law claims. FMC Corp. v. Boesky, 727 F.Sup. 1182 (N.D.Ill. 1989). The matter was subsequently transferred to the United States District Court for the Southern District of New York, where it became part of a consolidated action against Boesky and other individuals. That court dismissed FMC's remaining claims. In re Ivan F. Boesky Securities Litigation, supra, 825 F.Sup. 623. Thereafter, the United States Court of Appeals for the Second Circuit reviewed both the New York district court's summary judgment decision, as well as the Illinois district court's dismissal of the securities claims on remand. In re Ivan F. Boesky Securities Litigation, supra, 36 F.3d 255.
In affirming the district court's decision, the Court of Appeals for the Second Circuit stated: "Judge Pollack determined, and we agree, that FMC presented no evidence that the stock was not worth the $97 per share price ultimately paid, or that the $85 per share originally contemplated was adequate to compensate the public shareholders . . . FMC cannot claim that Boesky stole a premium the company was entitled to, since FMC had no legitimate interest in realizing a gain at its public shareholders' expense. Therefore, even if Boesky's trades cause the stock price to rise prematurely, because the transaction was approved by both the shareholders and the board of directors, FMC cannot claim injury unless it shows, at a minimum, that the price increase also was artificial . . ."(Citations omitted; emphasis added.) In re Ivan F. Boesky Securities Litigation, supra, 36 F.3d 262.
The Boesky cases do not stand for the proposition that a corporation is absolutely precluded from bringing an action claiming damages as a result of its own stock price inflation. Rather, the Boesky decisions note FMC's failure to adduce evidence of artificiality with regard to its stock price increase in granting judgment in favor of Goldman.
Furthermore, evidence existed that both FMC and its shareholders would benefit from incurring additional debt. FMC Corp. v. Boesky, supra, 727 F.Sup. 1191. Here, MacDermid has alleged injury due to its increased debt burden. In addition, the district court in Boesky noted the absence of a claim for injury by management. In re Ivan F. Boesky Securities Litigation, supra, 825 F.Sup. 634 n. 7. Here, the resultant shareholders of MacDermid are primarily management insiders. MacDermid's suggestion that the present matter is similar to Litton Industries, Inc. v. Lehman Brothers Kuhn Loeb, Inc., 967 F.2d 742 (2d. Cir. 1992), however, is misplaced. The trade secret information misappropriated under the facts of Litton belonged to the acquirer of an external target company. Here, pursuant to the contemplated management buyout, MacDermid stood in the position of both purchaser and target. Thus, MacDermid's management was obligated to see that all shareholders received a fair price for the transaction and could not benefit at the expense of the soon to be divested public shareholders via its knowledge of the trade secret information. In re Ivan F. Boesky Securities Litigation, supra, 825 F.Sup. 633.
MacDermid has pleaded that its sale was compromised through the Cookson defendants' use of certain trade secrets disclosed by North. Construing the allegations of the complaint broadly, and in a light most favorable to sustaining its legal sufficiency, MacDermid has alleged viable damage claims and should be afforded the opportunity to develop an evidentiary basis to support such claims. Nonetheless, where, as here, the factual context of the complaint's allegations render the harm alleged economically implausible — though not impossible — "plaintiffs must come forward with more persuasive evidence to support their claim than would otherwise be necessary." In re Ivan F. Boesky Securities Litigation, supra, 825 F.Sup. 634.
The defendants further contend that MacDermid's complaint fails to identify a legally compensable damage claim because it is based on speculative damages. In particular, the defendants argue that MacDermid's claim is premised on "a probability of future damage" as opposed to any actual damage. MacDermid objects on the ground that the defendants are attempting to narrowly construe the allegations of the complaint and draw inferences in their favor.
As noted, an increase in share price of a target company, although generally non compensable, may result in a redressable harm under certain circumstances. MacDermid has pleaded that the defendant's illicit use of its trade secrets compromised the sale of the company. Moreover, MacDermid has pleaded a devaluation of its assets as a result of the improper disclosures. Although MacDermid's complaint contains prospective damage claims related to potential use of its trade secret information by the defendants, a statutory basis exists for enjoining "[a]ctual or threatened misappropriation." General Statutes § 35-52(a). In addition, a statutory basis exists under § 52-570b for enjoining certain acts by persons believed to be aggrieved by violations of § 53a-251. Thus, the complaint contains sufficient allegations of ascertainable and present harm, along with cognizable claims for injunctive relief under the plain language of § 35-52(a) and § 52-570b(a)(1). Accordingly, the motions to strike the first through eighth counts of the complaint for failing to allege sufficient injury are denied.
Even if the court were persuaded by the defendants' arguments related to MacDermid's claim for damages due to its increased debt burden, MacDermid still maintains viable claims for injunctive relief. "Insofar as [a] motion to strike is directed [to] the entire complaint, it must . . . fail if any of the plaintiff's claims are legally sufficient." (Internal quotation marks omitted.) Whelan v. Whelan, 41 Conn.Sup. 519, 520, 588 A.2d 251 (1991) [ 3 Conn. L. Rptr. 135]. Thus, striking the complaint in its entirety would remain improper.
III Competitive Use
The defendants move to strike the first, second, fourth and fifth counts of the complaint on the ground that MacDermid fails to plead a competitive use of its trade secrets. The defendants argue that Connecticut law does not prohibit noncompetitive use of trade secrets.
In the subsection title of his memorandum in support of his motion to strike, North requests that the court strike counts one through four of the complaint for failing to allege competitive use. However, the defendants proceed to argue in the body of their respective memoranda that the court should strike counts one, two, four and five of the complaint. As the defendants' arguments primarily concern competitive use of trade secrets under CUTSA, the court will construe both motions to strike as moving to strike counts one, two, four and five of the complaint.
MacDermid counters that its complaint specifically alleges misappropriation of its trade secrets by the defendants, MacDermid's direct competitors, and, thus, alleges a competitive misuse of its trade secrets. Furthermore, MacDermid argues that allegations of competitive use are not necessary to plead a cognizable claim under CUTSA. Specifically, MacDermid argues that its allegations of improper disclosure and improper acquisition satisfy the plain language of CUTSA.
General Statutes § 35-52(a) provides in relevant part: "Actual or threatened misappropriation may be enjoined upon application to any court of competent jurisdiction." General Statutes § 35-53(a) likewise provides in relevant part: "(a) In addition to or in lieu of injunctive relief, a complainant may recover damages for the actual loss caused by misappropriation. A complainant also may recover for the unjust enrichment caused by misappropriation that is not taken into account in computing damages for actual loss."
Misappropriation is defined in General Statutes § 35-51(b), which provides: "`Misappropriation' means: (1) 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 (2) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used unproper means to acquire knowledge of the trade secret; or (B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was (i) derived from or through a person who had utilized improper means to acquire it; (ii) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use, including but not limited to disclosures made under section 1-210, sections 31-40j to 31-40p, inclusive, or subsection (c) of section 12-62; or (iii) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of his 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."
Drawing all reasonable inferences in favor of MacDermid, the complaint alleges viable misappropriation claims of improper acquisition under the first prong of § 35-51(b) and improper disclosure or use under the second prong of the statute. Specifically, MacDermid alleges: "Unbeknownst to MacDermid and without its consent, North knowingly and intentionally disclosed MacDermid trade secret, confidential, and proprietary information to Cookson, Cookson Electronics, and/or Enthone, which took place, upon information and belief, before Cookson signed the Letter Agreement." (Compl., ¶ 28.) MacDermid further alleges in count one that the Cookson defendants "breached the Letter Agreement by obtaining information, including trade secret confidential information about MacDermid, from North. Defendants did so without authorization." (Compl., ¶ 30.) The allegations of the first count are incorporated by reference in all subsequent counts.
The present matter is distinguishable from Lydall v. Ruschmeyer, CT Page 10723 282 Conn. 209, 919 A.2d 421 (2007), which involved a post-trial appeal after the development of an evidentiary record. Although Lydall allows for noncompetitive use of trade secrets by an employee contemplating a buyout of the corporate owner of those trade secrets; Lydall v. Ruschmeyer supra, 282 Conn. 234-35; here the Cookson defendants are, allegedly, MacDermid's direct competitors. MacDermid alleges that the defendants' disclosure, acquisition and use of its trade secrets, although resulting in an increase in share price, have caused competitive harm. While, generally, an increase in share price inures to the benefit of public shareholders; In re Ivan F. Boesky Securities Litigation, supra, 825 F.Sup. 633; MacDermid has pleaded a legally cognizable claim alleging an injurious inflation of its share price. An increase in share price, as discussed above, does not preclude an action predicated on a competitive harm suffered by virtue of such increase. Although Lydall notes that the purchase of a company, be it friendly or hostile, is a noncompetitive action; Lydall v. Ruschmeyer, supra, 282 Conn. 234-35; the thrust of the present complaint, when read in a light most favorable to sustaining its legal sufficiency, does not relate to the Cookson defendants' proposed purchase of MacDermid, but rather to the defendants' alleged use of MacDermid's trade secrets to compromise its sale. Accordingly, the defendants' motions to strike the first, second, fourth and fifth counts of the complaint for failing to allege competitive use are denied.
IV Breach of Contract
Finally, the Cookson defendants move to strike count one of the complaint on the ground that it fails to allege a prima facie case of breach of contract. Specifically, the Cookson defendants argue that MacDermid's claim is premised on a breach that occurred before the Cookson Group entered into the letter agreement with MacDermid. Thus, the alleged breach occurred before there was a legally enforceable agreement between the parties.
MacDermid objects on the ground that "it is not only the defendants' initial acquisition of MacDermid's trade secrets that constitutes a breach of the Letter Agreement, but also the maintenance and use of the trade secrets by the defendants." Specifically, MacDermid argues that the defendants have breached the plain language of the agreement through their continued maintenance and use of information disclosed by North and that MacDermid reasonably believes North disclosed information to the Cookson defendants after the date of the Letter Agreement.
"The elements of a breach of contract action are the formation of an agreement, performance by one party, breach of the agreement by the other party and damages." (Internal quotation marks omitted.) Keller v. Beckenstein, 117 Conn.App. 550, 558, 979 A.2d 1055, cert. denied, 294 Conn. 913, 983 A.2d 274 (2009).
The complaint alleges: "On or about October 27, 2006, Cookson signed the Letter Agreement with MacDermid, pursuant to which MacDermid disclosed certain trade secret financial and strategic information to Cookson, for the purpose of Cookson's evaluating whether to enter into a transaction with MacDermid, as set forth in the Letter Agreement." (Compl., ¶ 27.) The complaint further alleges: "Unbeknownst to MacDermid and without its consent, North knowingly and intentionally disclosed MacDermid trade secret, confidential, and proprietary information to Cookson, Cookson Electronics, and/or Enthone, which took place, upon information and belief, before Cookson signed the Letter Agreement." (Emphasis added.) (Compl., ¶ 28.)
The complaint alleges that North disclosed MacDermid's proprietary information and trade secrets to the Cookson defendants prior to the execution of the letter agreement between MacDermid and the Cookson defendants. Moreover, the express language of the letter agreement provides that the Cookson defendants must not contact "any executive or employee" of MacDermid or "seek any information" from such person. According to the terms of his consulting agreement with MacDermid, North was an independent consultant and, thus, was not an employee or executive covered by the plain language of the letter agreement. Moreover, the agreement was not in effect between MacDermid and Cookson at the time that MacDermid alleges North disclosed its proprietary information to the Cookson defendants. Liberally construing count one in MacDermid's favor, the breach of contract allegations fail to state a claim upon which relief can be granted.
"A complaint includes all exhibits attached thereto." (Citations omitted; internal quotation marks omitted.) Tracy v. New Milford Public Schools, 101 Conn.App. 560, 566 922 A.2d 280, cert. denied, 284 Conn. 910, 931 A.2d 935 (2007). Exhibit A, attached to MacDermid's second revised complaint and incorporated herein by reference, is a copy of the "Consultant Agreement" between MacDermid and North. Paragraph nine of that document states: "Consultant's relationship with MacDermid will be that of an independent contractor. Nothing in this Agreement is to be construed as designating Consultant an agent or employee of MacDermid."
Accordingly, the defendants' motions to strike the first count of the complaint, alleging breach of contract against Cookson Group, PLC, are granted