The opinion of the court was delivered by: Thomas J. McAVOY, Senior United States District Judge
Plaintiffs Member Services, Inc., Roger D. Banks and R. Aaron Banks (collectively "Member Services" or "Plaintiffs") commenced this action asserting claims of Trade Secret Misappropriation, Copyright Infringement, Breach of Contract/Breach of the Covenant of Good Faith and Fair Dealing, Breach of Fiduciary Relationship, Unjust Enrichment, Tortious Interference with Business Relationships and Prospects, Common Law Unfair Competition, and Fraudulent Misrepresentation. There are several motions presently pending, including motions for summary judgment. The Court will address the motions seriatim.
There is significant disagreement between the parties as to the relevant and material facts in this case. The parties have submitted thousands of pages of argument, exhibits, and transcripts in an effort to seemingly try their cases on the papers. The Court declines that invitation. To the extent possible, the Court will set forth the relevant background of the case so that the discussion can be put in the appropriate context.
Member Services, Inc. is a general insurance agency located in North Carolina and owned by Roger Banks. It markets insurance products and other employee benefits to members of credit unions, including select employer groups (or "SEG"s) who are offered benefits through a particular credit union. Member Services' primary credit union client was Piedmont Aviation Credit Union ("PACU") which sold insurance products to employees of, inter alia, Lowe's Home Improvement Stores ("Lowe's"). Member Services profited from the business relationship with PACU by receiving a share of insurance commissions as a general agent of the insurance carriers.*fn1 Aaron Banks is Roger Banks's son and aided in the development of Member Services's computer program/business method which is at the center of controversy in this matter.
Security Mutual Life Insurance Company of New York is a New York mutual life insurance company located in Binghamton, New York. Archway Technology Services, Inc. ("Archway") is a wholly owned subsidiary of Security Mutual (collectively "Security Mutual").
Schmitt-Sussman Enterprises, Inc. ("Schmitt-Sussman") is a general insurance agency located in Connecticut that does business under the name "PFP." Schmitt-Sussman is a marketer of individual insurance plans (life, disability, and critical illness sold as its "Family Security Plan") to members of credit unions, at credit union sites, at the sites of companies that endorse the credit unions (SEGs), and through an in-house call center. Since 1998, Schmitt-Sussman has distributed its Family Security Plan life insurance product exclusively through Security Mutual.
b. The Parties' Computer Programs/Business Methods pre-2003
In 2003, Member Services and Security Mutual collaborated on a business project related to the Lowe's chain of home improvement stores (discussed below). It is from this collaboration that the claims in this case arise. In order to fully understand some of the claims and defenses asserted herein, it is necessary to understand each party's relevant computer programs & business methods as they existed before the collaboration.
1. Member Services's CU@Work System
Member Services asserts that "Roger Banks, with the assistance of his son Aaron, and some computer programmers, was able to use his experience and knowledge of the credit union benefit market to create a fully automated business method that would stream-line and error-proof the benefit application and premium collection process for selling and administering life insurance." Mem. Serv. MOL p. 1. In this regard, Member Services contends:
Between 1998 and 2002, Member Services created a business system comprised of both automated, computer driven technology and business practices, methods, and rules that together were referred to as CU@Work or the CU@Work System. The system allows for the both the sale and administration of insurance products and premium collection and eliminates many of the inefficiencies associated with the conventional process for the administration of insurance products....
The CU@Work System consisted of a "front-end" program used by Member Services' agents at the point of sale (the employees' work place) to collect information and complete credit union and insurance benefit applications, and a "back-end" program (a computer program initially referred to, in part, as SEGSoft ) that processed, reconciled, audited and issued reports relating to the insurance benefits.
The CU@Work System was able to, in an integrated manner, accomplish many related functions, including: (1) accessing and collecting relevant data from multiple databases (credit union, employer, and carrier) to populate a single authorization form for enrollment and authorization of premium deduction from the employees' paycheck; (2) creating a discrete escrow account for the deposit of premium payments; (3) implementing and administering a timed sweep of the escrow account to retrieve the required premium payment (4) performing automated verification and processing of the applications and deduction forms; and (5) performing reconciliation as well as detailed reporting related to sales and premium payments, including innovative reporting.
Mem. Serv. MOL pp. 1-2 (citing R. Banks Decl., ¶¶ 4-9; A. Banks Decl., ¶¶ 4-8).
Security Mutual argues that Member Services's system was much more rudimentary than represented by Member Services. According to Security Mutual, prior to 2003 Member Services merely had an electronic credit union membership information collection form strictly for use for [the Piedmont Aviation Credit Union] that an agent could use to collect credit union enrollment information from an individual and populate electronic versions of the credit union membership application and the accompanying deduction card/direct deposit form. However, [Member Services] had no ability to do anything with this collected data other than print the form onto paper. [Member Services] thus did not have the ability to store any information locally on a laptop computer for later electronic transmittal over the internet to a home office, which is referred to as the ability to work in a "disconnected mode," or the ability to collect and transmit information over the internet in a "connected mode." All [Member Services ] could do was electronically complete a single set of forms for a single individual and then print those forms so that they could be manually signed and mailed back to [Member Services's] home office and manually entered into [Member Services's] back office tracking program.
2. Security Mutual's ActivEnroller and LifeGuard Programs
The parties also dispute the capabilities and functionality of Security Mutual's programs as they existed prior to the 2003 collaboration. Security Mutual maintains:
By early 2001, Security Mutual's technology staff had begun to develop a computer program they named " ActivEnroller " to electronically collect employees' life insurance and other benefits applications at employer worksites. A special branded version of this program, called " LifeGuard," was created by Security Mutual for Schmitt-Sussman, reflecting Schmitt-Sussman's particular business requirements for its credit union market.... Using these programs on laptop computers, agents could electronically collect insurance application information, including applicant signatures, and then upload the information over the internet for processing by Security Mutual. LifeGuard could also be used to collect and transfer information over the internet in a "connected" mode. In the case of existing policyowners, the programs enabled agents to retrieve stored personal information from Security Mutual databases or those of the credit union or employer.
In 2002, the information collected by LifeGuard was also used to electronically generate credit union account deduction cards that authorized periodic deductions for insurance premium payments from the credit union member's account at the credit union. The credit union used these forms to identify the portion of the member's funds to be placed into a dedicated subaccount for insurance purchased by the member. Premium payments would then be periodically collected from this sub-account. This process of premium collection from dedicated credit union sub-accounts, also referred to as "sweep accounts," had been employed by Schmitt-Sussman, Security Mutual and others in the industry for decades.
To the contrary, Member Services asserts that prior to January 2003, ActivEnroller "was essentially just an electronic life insurance application. That is, a computer rendering of a paper application with fields for entering information useful to apply for a Security Mutual life insurance product. It is also disputed that ActivEnroller was used to take applications for 'other benefits' prior to January 2003." Pl. Response to Sec. Mut. L.R. 7.1(a)(3) Stat. [dkt. # 246], ¶ 8. Member Services asserts that ActivEnroller did not "process" applications. Id. ¶ 9.
Similarly, Member Services asserts that LifeGuard was merely an electronic life insurance application. Id. ¶¶ 11-12. "Neither the pre-2003 ActivEnroller nor Lifeguard programs provided authorizations from credit unions members to establish accounts, payroll deductions and transfer from accounts, or otherwise 'processed' any life insurance applications." Id. ¶ 12; see id. ¶ 17 ("When Lifeguard, in its original form, was rolled out in or about November of 2002, the only functions it accomplished was collection of data for an electronic life insurance application and an associated deduction card was created and printed in (TIFF format) using other software at the Security Mutual offices, and then forwarded for manual processing and implementation.")
In December 2002, Roger Banks contacted Security Mutual about the possibility of a collaboration. Member Services asserts that Banks sought out the collaboration because "Member Services desired to bridge or connect Security Mutual's electronic life insurance application, which was represented to be the ActivEnroller program, to Member Services' existing CU@Work System for the credit union payroll deduction processing and administration of the life insurance enrollments. The bridge was merely a conduit of the data between the existing CU@Work.Asp and Security Mutual's electronic insurance application." Pl. Response to Sec. Mut. L.R. 7.1(a)(3) Stat., ¶ 32.
Member Services contends:
The parties [verbally] agreed, among other things, that (1) Security Mutual would underwrite its Life Insurance product for sale to Lowe's employees by Member Services; (2) Member Services would disclose its CU@Work System to Security Mutual's programmers, under the protection of a non-disclosure agreement, for the sole purpose of building a bridge between CU@Work and Security Mutual's electronic life insurance application called ActivEnroller; (3) the combined program would be utilized by Member Services to sell Security Mutual's life insurance products exclusively to the Lowe's employer group; and (4) Security Mutual would advance Member Services $300,000 against future commissions.
Mem. Serv. Opp. MOL, p. 4 (citing R. Banks Decl. (II) ¶¶ 19-20).
According to Security Mutual, Brooks contacted Security Mutual to discuss Member Services selling life insurance for Security Mutual because Member Services was unprofitable selling American Heritage Life Insurance Company's ("American Heritage") product to Lowe's employees. According to Security Mutual, throughout Member Services's association with American Heritage, Member Services had problems with the drafting of insurance premiums deducted from PACU member accounts resulting in "over $1 million in undrafted premiums sitting in PACU members' insurance accounts." Sec. Mut. MOL, p. 3. Security Mutual contends that:
As Security Mutual viewed the Lowe's market as a tremendous sales opportunity, Security Mutual and Member Services entered into Security Mutual's standard Worksite General Agent's Contract, effective January 21, 2003.
During those meetings in January 2003, [Member Services ] indicated its desire for a fully functioning computer program that could electronically enroll individuals as PACU credit union members and also collect and process insurance applications.... Given the state of [Member Services's] technology development, and in order to promptly realize sales, Security Mutual began work to create a new computer program to be used by Member Services agents for the electronic enrollment of PACU credit union memberships and Security Mutual life insurance applications.
Although a non-disclosure agreement had not been signed, computer programers and technology staff from Member Services and Security Mutual met on several occasions in January 2003. Member Services personnel disclosed certain information about Member Services's "system" to Security Mutual's technology team purportedly "to make them understand the [Member Services] technology and enable them to produce programming that would 'bridge' the [Member Services] programs to a computerized insurance application process then in use by SML." Mem. Ser. Opp. MOL, p. 5. Member Services contends that Security Mutual took the "programming code, logic and business rules associated with CU@Work and rewrote ("re-engineered") them using a.jsp platform as CU@Work.jsp and did so without the prior knowledge or consent of Member Services." Pl. Resp. L.R.7.1(a)(3) Stat. ¶ 33. " CU@Work.jsp was used with ActiveEnroller (ASP) program starting in February 2003, and proved to be an unsuccessful mismatch of a.jsp program with a.asp program." Id.
Security Mutual contends that it developed a new program by using its "previously developed software code from ActivEnroller for the electronic enrollment of life insurance applications. The new program also included code newly developed by Security Mutual to implement the specific PACU membership applications and deduction form, as well as the 'Flash' videos and worksheet to be used by [Member Services] agents in making sales presentations." Sec. Mut. MOL, p. 3. Security Mutual further contends that it named the new program " CU@Work," at Plaintiffs' request, because Member Services was already promoting its services under the name " CU@Work. " Id. According to Security Mutual, "PACU membership applications and Security Mutual life insurance applications were successfully enrolled by [Member Services] agents using Security Mutual's CU@Work program in 2003." Id. p. 5.
e. Letter of Understanding
On February 28, 2003, Security Mutual provided a letter of understanding to Member Services. This indicated that Member Services, Archway, and Security Mutual "will enter into a non-disclosure agreement protecting the intellectual property of each entity. ActiveEnroller will remain the sole intellectual property of Archway Technologies." Sec. Mut. Ex. 23. The letter of understanding further provides:
[Member Services] is the owner of the source code for the Credit Union application and deduction processing functions in the CU@Work product that [Member Services] developed and that Archway Technologies has re-engineered in the joint project with [Member Services]. All aspects of the Insurance product processing and/or Active Enroller content remain the sole property of Archway Technologies. All aspects of the CU@Work product processing and applications and deductions processing functions and content remain the sole property of [Member Services]. All rights reserved. The software code in CU@Work has been developed by Archway Technologies and Archway Technologies maintain the rights to development of derivative works. The communication content, including scripts and credit union enrollment content has been developed by [Member Services], and they maintain sole intellectual property rights for that communication content. Id.
Roger Banks, as President of Member Services, agreed to the terms of the letter by signing it on March 2, 2003. Id.
f. The End of the Collaboration, Use of Proprietary Information & the Lowe's Business
The collaboration between Member Services and Security Mutual began to rapidly deteriorate during 2003. Member Services asserts that it became suspicious because Security Mutual failed to sign a non-disclosure agreement. In February 2003, Roger Banks purportedly learned of Security Mutual's relationship with Schmitt-Sussman, and learned that Security Mutual had an exclusive agreement with Schmitt-Sussman to sell its products nationwide through credit unions. Banks felt this was a violation of the verbal agreement that Member Services had with Security Mutual. At about the same time, a computer programer for Member Services told Banks that the "staff at Security Mutual was not building a bridge between CU@Work and ActivEnroller (both written for the.ASP platform); but rather Security Mutual began re-writing the code of Member Services' CU@Work program and its own ActivEnroller, as one program in a different language -- JSP." Mem. Serv. MOL p. 6.
Member Services further contends that, following its disclosure of its CU@Work program to Security Mutual, Security Mutual upgraded LifeGuard Version 1 to LifeGuard Version 2.0 which effectively changed the program from "just an electronic life application" to a "completely different" program "that exhibited many of the CU@Work signature functions." Id. p. 11. Plaintiffs assert that Security Mutual "used certain code from the original CU@Work disclosure" to accomplish this upgrade, and that Security Mutual was then using Member Services' proprietary information to assist one of its competitors -Schmitt-Sussman. "At the same time, Security Mutual provided Member Services with a bug-ridden and often inoperable version of CU@Work.jsp. Because Security Mutual had rewritten it and would not allow Members Services' technical people to fix it, Member Services lost critical momentum in the industry and lost face with Lowe's for failure to deliver call center operability for the re-written CU@Work program." Id. p. 12.
According to Member Services, in May of 2003 and without the involvement of Member Services, "Security Mutual was negotiating with an insurance company named Trustmark regarding adding an additional Trustmark 'critical illness' ("CI") electronic application for CU@Work." Id. p. 10. From a document produced in the collaboration between Security Mutual and Trustmark, there was also an indication that "Schmitt-Sussman had already been offered the right to use the CU@Work program, impliedly by Security Mutual, but had failed to put the CU@Work program on their system." Id.; see id. p. 9 (in mid-2003, Security Mutual "disclosed CU@Work " to Schmitt-Sussman).*fn2
Member Services also contends that "Security Mutual breached its agreement with Member Services yet again in late 2003, by contacting PACU to try to supplant Member Services and become a direct agent to Lowe's itself." Id. Member Services asserts that Security Mutual colluded with Schmitt-Sussman to "carve up" Member Services' Lowe's business. "[B]y 2004, before terminating its agreement with Member Services, Security Mutual had secretly colluded with [Schmitt-Sussman] promising not to honor its commitments to Member Services, and to otherwise directly solicit the Lowe's business which is the express subject of the agreement in the original Letter of Understanding." Id. p. 13.
Security Mutual tells a decidedly different story leading to the end of the collaboration. According to Security Mutual,
[i]n mid-2003, Member Services approached a software development company in Vermont named Level 9 to create a new " CU@Work " program to replace the program Security Mutual had created. [Member Services] also approached another life insurance company, Trustmark, about taking over the Lowe's case, and in 2004, [Member Services] began to sell life insurance for Trustmark. Insurance applications were then taken using Trustmark's insurance enrollment program, and PACU membership applications were taken using the new Level 9 program. By mid 2004, [Member Services] effectively stopped selling life insurance for Security Mutual. The Worksite General Agent's Contract with [Member Services] was terminated by Security Mutual effective November 1, 2004, and Security Mutual ceased any and all use of the CU@Work program.
Security Mutual asserts that Member Services continued its relationship with Lowe's after ending its collaboration with Security Mutual by contracting "with a sales distribution firm, PMA, to assist its sales efforts." Id. p. 6. While Member Services, in conjunction with PMA, continued to sell Trustmark products to Lowe's employees, in May 2006 Lowe's announced that it was ceasing to sponsor PACU as its official credit union. Id. Lowe's also announced that PACU representatives (meaning Member Services and PMA) would no longer be allowed in Lowe's stores and, in early 2007, PACU's new President and CEO terminated PACU's relationship with Member Services because the President "did not believe in outsourcing member service functions, and because PACU had changed its charter to become 'community-based' rather than 'SEG-based.'" Id. Thus, Security Mutual contends, "the end of [Member Services]'s business with Lowe's and PACU was absolutely unrelated to Security Mutual." Id.
Further, Security Mutual contends that [a]fter termination of the Worksite General Agent's Contract with [Member Services], Security Mutual never again used the CU@Work program Security Mutual created. Furthermore, at no time were the ActivEnroller and LifeGuard programs ever used to collect credit union membership applications, make sales presentations, or implement a credit union worksheet for enrollments. Security Mutual continued to do business as it had prior to its relationship with [Member Services], namely, ActivEnroller was used to collect and process electronic insurance and benefits applications at employer worksites, and Schmitt-Sussman continued to use LifeGuard to collect insurance applications in the credit union market.
a. Motion to Strike Documents [dkt. # 233]
Plaintiffs move to strike certain documents submitted by Security Mutual in support of its motion for summary judgment, arguing that the documents are not proper evidence that may be considered on the motion.*fn3 The Court is well versed in addressing Rule 56 motions and will consider only admissible evidence. That being the case, there is no reason to strike the documents. Accordingly, Plaintiffs' motion is denied.
b. Security Mutual's Summary Judgment Motion [dkt. # 219]
Security Mutual moves for summary judgment seeking to dismiss all of Member Services's claims against it. Member Services has opposed the motion.
1. Trade Secret Misappropriation Claim
Security Mutual moves to dismiss Plaintiffs' Trade Secret Misappropriation claim on four grounds: (1) Member Services failed to identify its trade secret with sufficient specificity; (2) Member Services's alleged "fully electronic" business method was not in use prior to January 1, 2003; (3) Security Mutual does not practice numerous aspects of the alleged combination business method; and (4) Security Mutual was already practicing the remaining allegedly misappropriated features prior to first meeting Member Services.
To state a claim for trade secret misappropriation under New York law,*fn4 the plaintiff must establish "(1) it possessed a trade secret; and (2) [defendants are] using that trade secret in breach of an agreement, confidence, or duty, or as the result of discovery by improper means." Integrated Cash Management Servs. v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990). A "trade secret" is defined by New York law as "any formula, pattern, device or compilation of information which is used in one's business, and which gives [the owner] an opportunity to obtain an advantage over competitors who do not know or use it." N. Atl. Instruments, Inc. v. Haber, 188 F.3d 38, 44 (2d Cir. 1999)(internal quotation marks omitted). "A trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage and is a protectable secret." Integrated Cash Mgmt., 920 F.2d at 174 (quoting Imperial Chem. Indus. Ltd. v. Nat'l Distillers and Chem. Corp., 342 F.2d 737, 742 (2d Cir. 1965)). "A trade secret, however, 'is not simply information as to single or ...