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sit-up Limited v. IAC/InterActive Corp.

February 20, 2008

SIT-UP LIMITED, PLAINTIFF,
v.
IAC/INTERACTIVE CORP. AND HSN INTERNATIONAL, DEFENDANTS.



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION & ORDER

This case arises out of the failed efforts of defendants IAC/InterActive Corp. ("IAC") and HSN International ("HSN") to acquire plaintiff sit-up Limited ("sit-up") in order to enter the lucrative British television home shopping market. Defendants undertook due diligence and investigated sit-up's business, and subsequently made purchase bids that sit-up rejected. Rebuffed, defendants then acquired another British television home shopping network, entered the market, failed, and closed up shop. In the instant action, sit-up alleges that IAC and HSN used trade secrets revealed during their due diligence in launching their home shopping network, and brings claims for breach of the companies' non-disclosure agreement as well as an array of alleged tortious activity. Defendants move for summary judgment on all claims, and sit-up moves for partial summary judgment on its claim for breach of contract. For the following reasons, both motions are granted in part. BACKGROUND

The facts that follow are undisputed unless otherwise noted. sit-up is a British television retailing business founded in 1999. IAC is the parent company of HSN, which founded home shopping television in 1981 and has since been one of the most recognized companies in the industry. Today, HSN is the second largest television retailer in the world. sit-up launched an interactive screen commerce channel called bid-up.tv ("bid-up") in November 2000. At the time of its launch, bid-up conducted primarily rising-price auctions --that is, auctions in which each successive bid raises the price of the item for sale. By October 2000, however, sit-up had begun experimenting with falling-price auctions, in which the price drops until the available stock is exhausted and each purchaser pays the last and lowest price. In June 2003, sit-up launched price-drop.tv ("price-drop"), an interactive screen commerce channel dedicated primarily to falling-price auctions. price-drop was extremely successful, generating more than $200 million in sales in its first year of operation.

I. Talks Begin Between sit-up and Defendants

The United Kingdom is one of the top markets worldwide for home shopping television, and has historically been dominated by HSN's primary competitor, QVC. Before 2003, HSN had made efforts to gain a foothold in the British television retailing market, but those efforts had been unsuccessful. In June 2003, a sit-up shareholder approached HSN and suggested that it might be interested in sit-up's business. On July 1, John Watson, chief executive officer of HSN International and chief operating officer of HSN, wrote an email to the leadership of IAC informing them that he had met with sit-up executives "to go through their channel concepts and to get a sense of their progress." He stated that he "was impressed with the business models (auction tv/dutch auction tv) and their progress (they claim to be 100M pounds this year and marginally profitable)." He expressed a "belie[f] that we should dive deeper into another rev[ie]w of this company." Barry Diller, chairman and chief executive of IAC, replied to Watson's email and stated, "I've always been intrigued with this . . . [L]et's aggressively see if it makes sense for us to pursue."

Acquisition discussions began in July, and on August 22, the parties signed a nondisclosure agreement ("NDA"). Under the NDA, sit-up agreed to furnish HSN with "Evaluation Material," defined as:

All . . . information . . . whether furnished before or after the date of [the NDA] and regardless of the manner in which it is furnished, together with all analyses, compilations, studies or other documents or records prepared by [IAC] and its Representatives to the extent such analyses, compilations, studies, documents or records contain, otherwise reflect, or are generated from such information.

The NDA made clear, however, that "Evaluation Material" did not include information which:

(i) is or becomes generally available to the public other than as a result of the breach of this Agreement by the Receiving Party or its Representatives, (ii) is or has been independently acquired or developed by the Receiving Party and its Representatives without violating any of the receiving party's obligations under this Agreement, (iii) was within the Receiving Party or its Representatives' possession prior to it being furnished to the Receiving Party or its Representatives by or on behalf of the Disclosing Party pursuant to the terms hereof, or (iv) is received from a source other than the Disclosing Party or any of its Representatives; provided that, in the case of (iii) and (iv) above, the source of such information was not known by the Receiving Party to be bound by a confidentiality obligation to the Disclosing Party or any other party with respect to such information. (Emphasis supplied). Under the terms of the NDA, all "Evaluation Material" was to be used by HSN and IAC "solely for the purpose of evaluating a possible [t]ransaction" with sit-up, and was to be destroyed or returned to the providing party within five days of the providing party's request. The NDA was effective for one year, commencing September 1. By letter agreement executed July 8, 2004, the parties agreed to extend the NDA until September 1, 2005. The NDA did not include a provision prohibiting IAC either from competing with sit-up in the British marketplace or from developing a channel that would conduct falling-price auctions.

II. Defendants' Due Diligence and Acquisition Offers

Between September 2003 and July 2004, sit-up and HSN representatives met both in London and in the United States to discuss possible collaboration and/or acquisition. HSN's due diligence team included, among others, John Watson; Terry Curtis, senior vice president of HSN International; Andrea Kirschner, HSN's senior manager of international finance; Moshe Koyfman, a member of IAC's mergers and acquisitions group; and Michael Pekowsky, HSN's vice president and senior international counsel. The team informed sit-up that IAC was interested in entering the British marketplace regardless of whether the parties ultimately agreed on an acquisition deal.

The scope and breadth of HSN's due diligence of sit-up are the subject of vigorous dispute between the parties. It is undisputed, however, that sit-up provided HSN with an array of documents concerning, among other things, sit-up's historical financial data, projected income, consumer research, and buying processes, as well as access to sit-up's facilities. It is also undisputed that, during the course of HSN's due diligence, its team solicited additional information from sit-up through particularized requests concerning the latter company's finances and business models. For example, in November 2003, Kirschner wrote to sit-up principals Ashley Faull, John Egan, and Chris Manson, asking them to "fill out the yellow highlighted cells" in an attached spreadsheet plotting sit-up's financial data. The same day, Koyfman emailed sit-up and requested a distribution summary prepared by sit-up's lawyers as well as an electronic capitalization table previously provided in hard copy by sit-up. In response, Faull sent Koyfman a six-page memorandum summarizing sit-up's carriage agreements.

During the course of HSN's due diligence in late 2003, members of the team expressed enthusiasm internally about both sit-up and the prospect of reentering the British marketplace after the company's earlier, failed efforts to do so. Tom McInerney, chief executive officer of IAC retailing and chief financial officer of IAC, told Diller that sit-up's story was "a pretty impressive one." Watson, writing to IAC leadership, observed that reentering the British marketplace --- either by converting a pre-existing IAC-owned channel to a shopping format or by acquiring sit-up --- "would be a once in a lifetime chance to put HSN right next to QVC and with HSN relaunched (this time) intelligently, I believe it would have a very strong probability of success."

Due diligence continued into 2004, and HSN's enthusiasm for sit-up grew with time. In March 2004, McInerney recognized that "every indication is that our initial instinct that this is working and would have real near term earnings momentum appears in-tact [sic] . . . ." IAC made an offer to purchase sit-up in March for sixty million British pounds upfront and maximum consideration of 150 million British pounds, assuming sit-up met all of its stated financial targets for 2004 and 2005. sit-up refused the offer and did not make a counter-proposal. In May 2004, following additional due diligence, Diller wrote an email to McInerney asking, "IS SIT/UP A COPYRIGHTED IDEA . . . CAN IT BE IN THE GREAT HISTORICAL PRACTICES OF ALL TELEVISION . . . BORROWED?" (All caps in original.) In June 2004, IAC submitted a non-binding proposal to acquire sit-up, offering upfront consideration of 100 million British pounds, in addition to contingent consideration based upon 2005 revenue milestones. sit-up rejected the offer as too low.

Around the same time that sit-up rejected IAC's second offer, it began entertaining an offer from HSN's main competitor, QVC. Admittedly disheartened by the rebuff from sit-up, IAC began to make alternative plans. On July 1, Diller wrote an email to McInerney in which he "assume[d] we would then proceed with our own plans to compete with Sit-Up in the US . . . ." But on July 5, HSN's John Watson, who reported directly to McInerney, sent an email to McInerney confirming plans to visit sit-up's headquarters and undertake further due diligence. The circumstances giving rise to these renewed relations between HSN and sit-up are disputed, but there is no dispute that for several days, members of the HSN team undertook additional "active diligence on sit-up." The team reviewed sit-up documents, including a twenty-eight-page PowerPoint presentation labeled "Strictly Confidential," which included sit-up's summary financial projections through 2008 for total revenue, annual growth, gross profit, EBITDA (earnings before interest, taxes, depreciation, and amortization), profit, operating cashflow, and net assets, and was granted access to sit-up's headquarters and facilities.

On July 23, IAC informed sit-up that it would not submit a revised offer to purchase the company. Indeed, IAC never made a subsequent offer for sit-up.

III. AuctionWorld and iBuy

Following its decision not to make a revised offer for sit- up, IAC approached AuctionWorld, another British television auction channel, regarding a potential acquisition.

AuctionWorld had aired both rising-price and random-price auction channels, but never a falling-price auction channel. Such a channel was in the works, however, when IAC approached AuctionWorld in July 2004. Indeed, by November 2004, AuctionWorld had developed the technological elements necessary to run a falling-price auction channel, as well as financial forecasts and assumptions for that channel, to be called "drop-it."

At the time of IAC's overtures, AuctionWorld was beset with serious financial troubles. IAC therefore believed "that there was potential for a reduced price entry into the UK market with a small, manageable investment that would save time and provide for an excellent upside in the potential to grow the business." Following submission of a non-binding letter of intent to purchase AuctionWorld, IAC undertook due diligence of the company. During that process, IAC became concerned about AuctionWorld's financial state and problems with British regulatory authorities, and eventually ended acquisition discussions. The chief operating officer of AuctionWorld resigned in November 2004, and on or about November 18, AuctionWorld ceased trading and broadcasting. Thereafter, several members of AuctionWorld's management team pleaded guilty to criminal charges stemming from fraud committed at AuctionWorld.

Those members of the AuctionWorld management team who were left behind in the wake of these resignations and criminal charges began work on a business proposal for a new interactive television channel. The proposal attracted the attention of numerous potential investors, including IAC. In December 2004 and January 2005, IAC hired eight former AuctionWorld employees as consultants to assist IAC in developing AuctionWorld's business proposal, with an eye towards IAC's eventual acquisition of AuctionWorld's assets. On the IAC side, several of the employees working on the AuctionWorld project had been involved in sit-up due diligence and acquisition talks. These included, among others, John Watson, Terry Curtis, Andrea Kirschner, and Michael Pekowsky.

On January 25, 2005, IAC paid eighty thousand British pounds to acquire certain of AuctionWorld's assets. Over the next three months, IAC prepared for the launch of its new channel, based at least in part on its acquisitions from AuctionWorld, which was to be called "iBuy." Although the AuctionWorld team had originally planned to launch a multi-format channel, IAC decided to run iBuy exclusively as a falling-price channel. iBuy launched in April 2005 for a three-month test period on two of the four digital platforms in the United Kingdom, giving it access to 9.3 million households.*fn1

Following the three-month test period, IAC and HSN executives --- most prominently Tom McInerney -- reviewed iBuy's performance and, in July 2005, approved its continued operation. iBuy lost money every month it was in business. In addition, after the merger of two British television platforms in March 2006, iBuy's distribution agreement with one of the merging platforms was terminated,*fn2 relegating iBuy to only one British platform and limiting its access to British households. iBuy closed its operations and ceased broadcasting in March 2007.

IV. Procedural History

sit-up filed the complaint in the instant lawsuit on November 2, 2005, approximately six months after iBuy's launch. The complaint brought causes of action for misappropriation of trade secrets, breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition, and misappropriation of an idea, and sought, inter alia, preliminary and permanent injunctions.*fn3 The gravamen of sit-up's complaint is that IAC and HSN gained access to sit-up's trade secrets during their due diligence, and then used those secrets, in violation of the NDA, to launch iBuy. IAC and HSN deny using any of sit-up's trade secrets, and contend that they developed iBuy independently, through a combination of publicly available information concerning falling-price auctions and the assets and knowledge they acquired through their purchase of AuctionWorld.

Following massive document discovery, a conference was held on August 29, 2006 to address certain discovery disputes. Defendants claimed that plaintiff had failed to produce numerous critical documents despite representing to defendants that production was complete or substantially complete. Plaintiff was ordered to produce any additional requested documents and to submit two affidavits of compliance. Following that conference, the parties continued to meet and confer to address discovery disputes, keeping the Court apprised both of the parties' progress in discovery and their need for additional time to complete summary judgment motions.

A conference was held on December 15, 2006 to address what appeared to be a sprawling discovery process beset by numerous conflicts. The meet and confer process had broken down and, by the date of the conference, defendants had yet to receive the two affirmations of compliance required by the Court at the August 29 conference. Defendants complained of plaintiff's discovery abuse, including the belated disclosure of some fifty-one witnesses and the failure to search a variety of email and other electronic databases for requested information. The parties were required to meet and confer again to discuss the various disputes, and a subsequent conference was scheduled for December 21.

By letter dated December 21, counsel for the defendants informed the Court that the parties had reached agreement with respect to most of the discovery disputes and proposed a schedule going forward. The letter also identified a single, unresolved issue to be addressed at that day's conference, to wit, the alleged lack of specificity of plaintiff's trade secret allegations. According to defendants, their Interrogatory 16, propounded July 19, 2006, asked plaintiff to identify by Bates number all information or documents constituting, reflecting, embodying, or containing material that plaintiff alleged comprised its trade secrets. Plaintiff replied that its trade secrets were strewn across at least 13,000 pages produced in discovery. Addressing this issue at the December 21 conference, the Court stated:

The plaintiffs are going to have to open to a jury. They're going to have to sum up. They're going to have to potentially resist a summary judgment motion.

They have to be able to identify with specificity what information they consider to have been a trade secret and to identify the route through which it was provided to the defendants and then to otherwise show the misappropriation. If the plaintiff can't do that now, it can't proceed on that theory, because the defendants have a right during discovery to test whatever the plaintiff's theory is, and we're not going to . . . reopen discovery after summary judgment briefing or in the middle of a trial.

The Court remonstrated plaintiff that it would be required to "narrowly define with specificity your trade secrets." Indeed, at the conference, the Court repeatedly reminded plaintiff of its burden at trial or in defending against a motion for summary judgment on a trade secret misappropriation claim, and its obligation to disclose its alleged trade secrets in detail to defendants so that defendants could prepare for the depositions of those witnesses who would be testifying about trade secrets. Plaintiff was ordered to produce by January 31, 2007, a detailed specific list of each trade secret and an identification of the document in which it was contained and the methodology through which it was communicated to the defendants, either given to them, e-mailed to them, shown to them by X witness or . . . --- I don't pretend to make an exclusive list here ---or contained in a room to which they had access without a witness saying that they actually looked at it.

A subsequent conference was scheduled for February 14.

On January 31, plaintiff provided defendants with a lengthy response to their request for specific details concerning plaintiff's alleged trade secrets. By letter dated February 13, defendants argued that plaintiff's submission failed to comply with the Court's December 21 directive concerning presentation of the alleged trade secrets because the submission "brings us no closer than before to knowing what specific 'trade secrets' Plaintiff believes it has or what about them Plaintiff believes is 'secret.'"*fn4 Indeed, the January 31 submission did not contain any real description of the alleged trade secrets. Rather, it outlined general categories into which the alleged trade secrets fell, and attached schedules of documents corresponding to those categories, identified by their Bates numbers and the means by which the documents were allegedly communicated to defendants.

At the February 14 conference, the Court ruled that plaintiff would be bound by its January 31 submission, subject to any amendment made shortly after the conference. The Court stated that plaintiff's "case will rise or fall, to the extent that [it] rests on a trade secret theory, on [its] ability to identify those trade secrets and respond to the other information described in this amended response." The Court further elaborated:

If the plaintiff is bound to this answer, I expect [defendants will] be arguing to me at summary judgment that they have not been able to identify, with sufficient specificity, something that could be given trade secret protection and, therefore . . . they're not going to be able to respond to that in opposing your summary judgment motion by giving you that specificity for the first time. They were given this chance. They're going to be bound by this response. Finally, the Court again reminded plaintiff of its eventual burden at trial or in opposing summary judgment:

Plaintiff is asserting trade secret violations. Plaintiff is the only one who can know what it believes its trade secrets are. No one else can do this work for you. If you can't do this work --- we've been down this road before --- you can't open to a jury, much less sum up to a jury, nor can you defend a summary judgment motion. And it is unfair to your clients and to the defendants to conduct discovery without knowing what the assertions are.

Plaintiff was given an additional week, until February 21, to provide defendants with "narrative identifier[s] of your trade secrets, with sufficient specificity so that we would know what they are," and was again warned that "[a]nything that you identify in the next week and is still of a level of generality that it cannot qualify as a trade secret will obviously fail as a matter of law." On February 21, plaintiff ...


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