Richard Raysman and Peter Brown ()
As both consumer and business-facing, telecommunications companies collect vast amounts of the data produced during the “digitization” age. Often, these companies use only a small proportion of this data, because it is costly and laborious to move and evaluate the data internally.
Enter third-party analytics and database management companies, which have become more important in the telecommunications industry facing decreasing revenue per user virtually worldwide. Telecommunications companies’ need for determining market share and customer movement among competitors only stands to increase in this tumultuous market. For instance, in a 2015 Harvard Business Review survey of executives from more than 15 industries, 64 percent of telecom executives expected to see “moderate or massive” digital disruption in 2016-17. Only the media sector executives foresee greater disruption in their industry.
While the telecom industry is hardly in peril, as evidenced by Moody’s Investor Service changing its outlook on the industry writ large in March 2017 from negative to stable, the database analytics providers serve an increasingly essential role by supplying information to telecom giants operating under the shadow of market contraction and fierce price competition.
These providers enter a nascent market without dominant legacy providers controlling vast swaths of market share and holding an iron grip over all forms of usable technology. This arguably creates a greater incentive for prospective providers to eschew contractual obligations and misappropriate confidential information as a means of immediately satisfying snowballing demand. In this environment, the possibility for circumvention of contractual obligations is heightened further when such purported obligations are memorialized merely in an oral agreement, rendering it invariably subject to a statute of frauds defense in any subsequent litigation.
Such litigation arose in 2016 between a provider, an alleged licensee and its allegedly unauthorized sublicensee, over an alleged breach of an oral contract (precipitating the purported “theft” of the business relationship with the sublicensee from the provider by the licensee) and trade secret misappropriation by the licensee. See Flowshare v. TNS, US, No. 4:16-cv-00300-JAR, 201 WL 3174321 (E.D. Mo. July 26, 2017). This column focuses on this case, which involves the same type of database analytics directed at the telecommunications industry described above and that raises question of how contentious litigation will be in this burgeoning and ever more lucrative industry.
Facts and Procedural History
All allegations are taken from plaintiff Flowshare d/b/a ShareTracker’s (ShareTracker) Amended Complaint (the complaint). See Dkt. 16.
ShareTracker claims to be the leading research company providing analytics to the communications industry. ShareTracker provides “database products and solutions” that utilize information allegedly confidential and therefore subject to trade secret protection.
Generally, ShareTracker offers a fee-based limited and non-exclusive license to the database products directly or indirectly via authorized independent distributors. Defendant TNS US was a ShareTracker distributor. To formalize their business relationship, ShareTracker alleged that the parties orally agreed to a license agreement (the license) wherein TNS could sell or grant to three authorized customers or sublicensees a limited, non-exclusive, non-transferable sublicense to use ShareTracker’s products for a unique and individually negotiated fee.
In 2015, ShareTracker acquired GeoResults, a competing telecommunications company offering marketing database products. ShareTracker claimed that a primary reason for the acquisition was ownership of GeoResults’ proprietary and confidential information, as well as assumption of its’ business relationship with a “long-standing” customer (the customer, which goes unnamed in the opinion) that is one of the largest telecom companies in the American market. Soon after, the customer ended its relationship with GeoResults (now ShareTracker), which spanned more than a decade.
ShareTracker alleged that TNS encouraged the customer to cut out ShareTracker and deal directly or indirectly with TNS for access and use of ShareTracker’s products. According to ShareTracker, TNS converted and misappropriated its confidential information, and then used information received pursuant to the license to distribute the database products to the customer, who then essentially became an unauthorized sublicensee of ShareTracker. TNS then purportedly obtained payment directly from the customer.
ShareTracker sued TNS, asserting six causes of action, including inter alia: (1) breach of the license; and (2) misappropriation of confidential information under both the state Uniform Trade Secrets Act and the Federal Defend Trade Secrets Act (DTSA, 18 U.S.C. §1836, et seq.). As the breach of contract claim constitutes the majority of the opinion, this column limits its evaluation to this claim. TNS moved to dismiss under Fed. R. Civ. P. 12(b)(6), which requires “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted).
Legal Analysis and Conclusions
Unsurprisingly, since the license was not memorialized in a writing, TNS invoked the statute of frauds (the statute), claiming that it was unclear from the “face of the Complaint” that the license could have been performed within one year, and that no writing existed to exclude it from the purview of the statute. ShareTracker countered that: (1) its typical agreement (i.e., the license) lasted one year, with “quarterly or bi-annual deliverables or updates”; (2) related writings existed which proved the existence of the license and supplied the “essential terms”; and (3) the “performance exception” to the statute applied given that it fully performed its obligation under the license.
The court agreed with TNS and rejected each of ShareTracker’s defenses. First, it held that the complaint on its face offered “no allegations regarding the duration of the oral contract [being completed within one year]” consonant with the requirement that “ allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged,” much less sufficient to remove the oral contract from the statute. Ashcroft, 556 U.S. at 678.
Second, the court held that ShareTracker’s evidence of writings memorializing the terms of the license was insufficient to satisfy the statute. ShareTracker’s evidence was a number of letter agreements and “various writings exchanged by the parties.” However, ShareTracker did not “go through or name the essential terms” supposedly recited in its evidence. Instead, ShareTracker asked the court to evaluate a non-disclosure agreement (NDA) and an email attached not to the complaint, but to its opposition to the motion to dismiss.
The extrinsic nature of these documents required the court to employ the legal standard that “matters outside the pleading may not be considered in deciding a Rule 12 motion to dismiss,” unless the documents were “necessarily embraced” by the complaint. See Gorog v. Best Buy Co., 760 F.3d 787, 791 (8th Cir. 2014) (citation omitted).
The court did not view the NDA and email as “necessarily embraced” by the complaint. ShareTracker failed to reference either document in the complaint, nor “plead what essential terms are contained in the purported written agreements therein.” Accordingly, even when applying the lenient standard that a plaintiff need not submit the “actual contract or append its terms verbatim,” the evidence ShareTracker presented failed to plead its “legal effect” insofar as neither document supported the existence of the license, as well as neglected to specify where the essential terms of the license were to be found.
Finally, the court held that the complete performance “equitable exception” did not apply to the license as described by ShareTracker. Rather, the complaint contradicted its claim of full performance, as ShareTracker pled that it “provided and continues to provide, under terms and conditions … updated or refreshed databases and data fields to TNS” to support the licensed product. This language “indicates that present and future obligations remain,” and therefore, the complaint necessarily implied incomplete performance of its obligations under the supposed license. Such partial performance did not remove the supposed license from the statute.
For those reasons, the court dismissed the breach of contract claim without prejudice. However, ShareTracker did survive the motion to dismiss on all its other claims, including the trade secrets. Very briefly, the court analyzed the state-level claim first, and held that ShareTracker “stated a viable claim” by pleading that the confidential information possessed economic value as a result of a significant expenditure of time in developing proprietary database technology. Since the arguments of both sides concerning the DTSA claim were “similar if not identical”, ShareTracker also stated a claim under the DTSA. Since these and other claims survived its motion to dismiss, TNS was instructed to file an answer within 15 days of the order.