BrandRep, LLC v. Chad Ruskey

• Court: Court of Chancery of Delaware
• Decided: January 7, 2019
• Docket: C.A. No. 2018-0541-MTZ
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER VICE CHANCELLOR 500 N. KING STREET, SUITE 11400 WILMINGTON, DELAWARE 19801-3734

Date Submitted: December 20, 2018 Date Decided: January 7, 2019

Michael J. Barrie, Esquire Barry M. Klayman, Esquire William M. Alleman, Jr., Esquire Gregory F. Fischer, Esquire Benesch, Friedlander, Coplan & Aronoff LLP Cozen O’Connor P.C. 222 Delaware Avenue, Suite 801 1201 North Market Street, Suite 1001 Wilmington, DE 19801 Wilmington, DE 19801

Philip A. Rovner, Esquire David S. Eagle, Esquire Jonathan A. Choa, Esquire Sean M. Brennecke, Esquire Potter Anderson & Corroon LLP Klehr Harrison Harvey Branzburg LLP 1313 North Market Street, Hercules Plaza 919 Market Street, Suite 1000 Wilmington, DE 19801 Wilmington, DE 19801

RE: BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ

Dear Counsel:

The defendants in this case have moved to dismiss breach of fiduciary duty,

aiding and abetting, and trade secret misappropriation claims.1 One defendant has

also moved to dismiss on personal jurisdiction grounds. In anticipation of the

1 I granted motions to dismiss as to Counts II (breach of fiduciary duty by BrandRep Holdings, LLC) and Count V (breach of contractual restrictive covenants by BrandRep Holdings) on a December 14, 2018 teleconference. Docket Item (“D.I”) 220. I dismissed Count V without prejudice and provided BrandRep Holdings leave to amend, which it did on December 20. D.I. 208. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 2

preliminary injunction hearing scheduled for tomorrow, I have expedited my

consideration of these motions. As explained below, the pending motions are

denied. To address the motions promptly, I write for the parties and recite only the

necessary facts.

I. The Court Has Personal Jurisdiction Over Mammano.

BrandRep2 alleges defendant Deirdre Mammano aided and abetted breaches

of fiduciary duty (Count III) and misappropriated trade secrets (Count IV).

Mammano has moved to dismiss both counts. She argues she is not subject to

personal jurisdiction in Delaware. I address Mammano’s personal jurisdiction

arguments first, as I can only substantively review the pleadings against her if I have

jurisdiction to do so.3

When a defendant moves to dismiss for lack of personal jurisdiction under

Rule 12(b)(2), “the plaintiff bears the burden of showing a basis for the court’s

exercise of jurisdiction over the defendant.”4 The plaintiff must “make out a prima

facie case establishing jurisdiction. A prima facie case requires the ‘production of

enough evidence to allow the fact-trier to infer the fact at issue and rule in the party’s

2 I use the term BrandRep to mean BrandRep, LLC and BrandRep Inc. I refer to BrandRep Holdings, LLC as BrandRep Holdings. 3 See Branson v. Exide Elecs. Corp., 625 A.2d 267, 269 (Del. 1993) (“A court without personal jurisdiction has no power to dismiss a complaint for failure to state a claim.”). 4 Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch. 2007). BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 3

favor.’”5 “The court engages in a two-step analysis: the court must first determine

that service of process is authorized by statute and then must determine that the

exercise of jurisdiction over the nonresident defendant comports with traditional due

process notions of fair play and substantial justice.”6 Where, as here, “the court

makes the determination regarding personal jurisdiction without an evidentiary

hearing, it will consider the pleadings, affidavits and evidence of record and will

draw all reasonable inferences therefrom in favor of the plaintiff.”7

As an initial matter, I reject the argument that Mammano waived the defense

that the Court lacks jurisdiction over her. BrandRep argues she did so “by

voluntarily submitting to the Court’s jurisdiction and obtaining benefits through the

Status Quo Order without ever raising a personal jurisdiction defense.”8 But as

Mammano points out, the parties agreed to language in that Status Quo Order

providing “[t]he Parties reserve all rights, claims and defenses and shall not be

deemed to have waived any rights, claims and defenses by executing this Stipulation

5 Baier v. Upper New York Inv. Co. LLC, 2018 WL 1791996, at *5 (Del. Ch. Apr. 16, 2018) (quoting Prima facie case, BLACK’S LAW DICTIONARY (10th ed. 2014)). 6 Ryan, 935 A.2d at 265. 7 EBP Lifestyle Brands Hldgs., Inc. v. Boulbain, 2017 WL 3328363, at *3 (Del. Ch. Aug. 4, 2017). 8 D.I. 116 at 1. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 4

and [Proposed] Order.”9 Mammano also asserted her defense promptly.10 BrandRep

remains bound by the reservation of rights in the Status Quo Order. I conclude

Mammano did not waive her personal jurisdiction defense.

A. Statutory Jurisdiction

BrandRep sought to serve Mammano pursuant to Delaware’s long-arm

statute, 10 Del. C. § 3104.11 That statute provides that a nonresident who commits

certain acts or causes certain injuries in Delaware is subject to jurisdiction in

Delaware. In relevant part, it states:

(c) . . . a [Delaware] court may exercise personal jurisdiction over any nonresident . . . who in person or through an agent:

(1) Transacts any business or performs any character of work or service in [Delaware] . . . .

Mammano formed defendant Business Solutions, a Delaware LLC, in May 2017.12

“Not surprisingly, Delaware courts have held consistently that forming a Delaware

9 D.I. 11 ¶ 11. 10 BrandRep conceded at argument that Mammano moved to dismiss within the time provided by the Court’s rules. This fact also distinguishes the only Delaware authority BrandRep cites, Hornberger Management Co. v. Haws & Tingle General Contrs., Inc., 768 A.2d 983 (Del. Super. 2000). In Hornberger, the defendant stipulated to extending the time to file case dispositive motions, and then failed to move on personal jurisdiction grounds before the agreed-upon deadline. 768 A.2d at 989. 11 D.I. 5. BrandRep received the summons, but has not filed an affidavit of service. It is unclear whether BrandRep served the summons, or Mammano’s counsel accepted service. 12 D.I. 85, Affidavit of Deirdre Mammano in Support of Her Motion to Dismiss ¶ 4. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 5

entity constitutes the transaction of business within Delaware that is sufficient to

establish specific personal jurisdiction under Section 3104(c)(1).”13 Because

Section 3104(c)(1) confers specific, not general, jurisdiction, formation of a

Delaware entity may only serve as the basis for personal jurisdiction where there is

a sufficient nexus between that formation and the alleged wrongful conduct.14

“When determining whether a sufficient nexus exists, the principal factor that

Delaware courts have examined is the extent of the factual relationship between the

formation of the Delaware entity and the cause of action.”15

BrandRep contends Mammano formed Business Solutions in Delaware as part

of the wrongful scheme to misappropriate BrandRep’s trade secrets.16 Mammano

formed Business Solutions in May 2017, while BrandRep was negotiating its sale

and while defendant Chad Ruskey was allegedly talking with developers and third-

party defendant Banir Ganatra about bringing BrandRep’s customer relationship

management (“CRM”) software “officially into BrandRep.”17 Ruskey allegedly

13 Terramar Retail Centers, LLC v. Marion #2-Seaport Tr. U/A/D/ June 21, 2002, 2017 WL 3575712, at *5 (Del. Ch. Aug. 18, 2017). 14 Id. at *5-6. 15 Id. at *6. 16 D.I. 116 at 12. 17 Id. Ex. 3; id. Ex. 7, ¶ 20; see also id. Ex. 6 (executed Confidentiality and IP Assignment Agreement). BrandRep’s Confidential Information Memorandum is dated February 2017. Id. Ex. 2. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 6

took BrandRep’s trade secrets, gave them to defendant Employer Advertising, then

sold his ownership in BrandRep.18 Mammano then allegedly transferred Employer

Advertising’s assets, including BrandRep’s misappropriated trade secrets, to

Business Solutions.19 I refer to Employer Advertising and Business Solutions

collectively as the “Entity Defendants.” BrandRep also alleges the defendants

attempted to conceal their actions, including by changing trade names and limiting

what employees could say about the services Business Solutions offered.20

Giving BrandRep the benefit of all reasonable inferences, as I must, I conclude

these allegations provide a sufficient nexus between Mammano’s formation of

Business Solutions in Delaware and the alleged scheme to take BrandRep’s trade

secrets and use them to compete with BrandRep.21 While that scheme allegedly

existed before Mammano formed Business Solutions, the company’s formation

allegedly furthered “the conspiratorial goal” of covertly using BrandRep’s trade

secrets to compete with BrandRep.22 Mammano’s act of forming a Delaware entity

18 D.I. 19 ¶ 56; D.I. 85, Mammano Affidavit ¶¶ 3, 9. 19 D.I. 116 at 5, Ex. 8. 20 D.I. 116 at 15; id. Ex. 4 ¶¶ 8, 17. 21 See Terramar Retail Centers, 2017 WL 3575712, at *6 (“Whether a sufficient nexus exists necessarily depends on the nature of the claim. If the claim turns on a wrongful conduct or scheme, then the formation of the Delaware entity must relate to the wrongful conduct or scheme before it can support the exercise of specific personal jurisdiction.”). 22 Microsoft Corp. v. Amphus, Inc., 2013 WL 5899003, at *12 (Del. Ch. Oct. 31, 2013). BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 7

as a contribution toward that scheme allows the Court to exercise jurisdiction over

her under Section 3104, so long as jurisdiction is constitutionally permissible.

B. Constitutional Due Process

Jurisdiction over Mammano must be not only statutorily compliant, but also

constitutional. The constitutional analysis asks “whether subjecting the nonresident

defendant to jurisdiction would violate due process.”23 BrandRep asserts the Court

has jurisdiction over Mammano under the conspiracy doctrine.

Conspiracy jurisdiction for BrandRep’s aiding and abetting claim is governed

by the five-part Istituto Bancario test.24 That test requires a plaintiff to show:

(1) a conspiracy to defraud existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.25

23 Matthew v. Fläkt Woods Grp. SA, 56 A.3d 1023, 1027 (Del. 2012). 24 Benihana of Tokyo, Inc. v. Benihana, Inc., 2005 WL 583828, at *7 (Del.Ch. Feb. 4, 2005), aff’d, 906 A.2d 114 (Del. 2006); see Malpiede v. Townson, 780 A.2d 1075, 1098 n. 82 (Del. 2001) (referencing underlying claim for breach of fiduciary duty and stating “[a]lthough there is a distinction between civil conspiracy and aiding and abetting, we do not find that distinction meaningful here”); Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1038 (Del. Ch. 2006) (explaining “that in cases involving the internal affairs of corporations, aiding and abetting claims represent a context-specific application of civil conspiracy law”). 25 Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210, 225 (Del. 1982). BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 8

“[I]t now is well-settled that ‘a claim for aiding and abetting a breach of fiduciary

duty satisfies the first and second elements of the Istituto Bancario test.’”26 I focus

on the third, fourth, and fifth elements of the Istituto Bancario test.

The third element is “a substantial act or substantial effect in furtherance of

the conspiracy occurred in the forum state.” It is “well-established that a party that

forms a Delaware entity as part of a wrongful scheme has constitutionally sufficient

‘minimum contacts’ with Delaware for purposes of personal jurisdiction.”27 As

explained above, BrandRep has alleged Mammano formed a Delaware entity as one

part of the scheme by which the defendants misappropriated BrandRep’s software,

in a way that allowed Ruskey to benefit from selling his interest in BrandRep. The

allegations Mammano formed an entity that contributed to the unlawful

misappropriation and competition satisfy the third element.

“The fourth and fifth elements of the [Istituto Bancario] test evaluate whether

‘the defendant knew or had reason to know of the act in the forum state’ and whether

such act ‘was a direct and foreseeable result of the conduct in furtherance of the

26 Hospitalists of Delaware, LLC v. Lutz, 2012 WL 3679219, at *5 (Del. Ch. Aug. 28, 2012) (quoting Hamilton P’rs, L.P. v. Englard, 11 A.3d 1180, 1198 (Del. Ch. 2010)); see also Hamilton P’rs, 11 A.3d at 1197 (“Although Istituto Bancario literally speaks in terms of a ‘conspiracy to defraud,’ the principle is not limited to that particular tort.”). 27 Microsoft Corp., 2013 WL 5899003, at *9. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 9

conspiracy.’”28 “These elements require allegations ‘from which one can infer that

a foreign defendant knew or should have known that the conspiracy would have a

Delaware nexus.’”29 BrandRep alleges Mammano formed a Delaware entity to use

and profit from the misappropriated trade secrets of BrandRep, another Delaware

entity.30 Creating Business Solutions thus was allegedly “one of the means by which

the conspiracy was effectuated.”31 The alleged resulting harm to BrandRep was

direct and not only foreseeable, but also intended.32 BrandRep’s allegations satisfy

the fourth and fifth elements of the Istituto Bancario test.

Mammano argues that the alleged misappropriation occurred years before she

formed Business Solutions in Delaware. This does not change my conclusion that

28 Konstantino v. AngioScore, Inc., 2015 WL 5770582, at *10 (Del. Ch. Oct. 2, 2015) (quoting Istituto Bancario, 449 A.2d at 225). 29 Konstantino, 2015 WL 5770582, at *10 (quoting Fläkt Woods, 56 A.3d at 1024). 30 D.I. 116 at 13-14. 31 Fläkt Woods, 56 A.3d at 1029. 32 By satisfying the fourth and fifth elements, BrandRep has also met the requirements of any overlapping “minimum contacts” analysis that would be needed to analyze Count IV. See Virtus Capital, 2015 WL 580553, at *12 (“The fourth and fifth Istituto Bancario elements—whether the defendant ‘knew or had reason to know of’ the forum-directed activity and the degree to which the forum-directed activity was ‘a direct and foreseeable result of the conduct in furtherance of the conspiracy’—speak to due process and whether there are sufficient minimum contacts between the defendant and the forum such that the defendant could reasonably anticipate being sued there.”); Microsoft Corp., 2013 WL 5899003, at *9 (“It is equally well-established that a party that forms a Delaware entity as part of a wrongful scheme has constitutionally sufficient ‘minimum contacts’ with Delaware for purposes of personal jurisdiction.”). BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 10

BrandRep adequately alleged Mammano formed a new Delaware entity that

participated in the existing scheme. Mammano also relies on cases that did not

involve a party incorporating an entity in Delaware as part of the alleged conspiracy.

In Iotex Communications, Inc. v. Defries, the court analyzed acts “wholly outside”

Delaware, and distinguished cases where events, such as filings with the Secretary

of State, “actually took place in Delaware.”33 Similarly, in In re Bracket Holding

Corp. Litigation, none of the “conduct [was] alleged to have occurred in

Delaware.”34 These cases do not bear on Mammano’s creation of a Delaware

entity.35

I conclude the Court’s exercise of personal jurisdiction over Mammano

comports with due process.36

33 1998 WL 914265, at *7-8 (Del. Ch. Dec. 21, 1998). 34 2017 WL 3283169, at *1 (Del. Super. Ct. July 31, 2017). 35 Mammano also cites and attempts to distinguish Terramar Retail Centers, LLC v. Marion #2-Seaport Tr. U/A/D/ June 21, 2002, 2017 WL 3575712 (Del. Ch. Aug. 18, 2017). See D.I. 142 at 10 n.2. Terramar supports BrandRep here because the entity Mammano formed relates “to the wrongful conduct or scheme.” Terramar Retail Centers, LLC, 2017 WL 3575712, at *8. 36 Much of Mammano’s reply brief focuses on establishing her rights, or the rights of her entities, to the software, including its development history and work Mammano and Ruskey did at their former business. D.I. 142 at 1-6. These arguments would require me to resolve factual disputes as to whether misappropriation actually occurred. That is improper at the motion to dismiss stage. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 11

II. Plaintiffs Stated Claims For Breach Of Fiduciary Duty, Aiding And Abetting, And Trade Secret Misappropriation.

In considering a motion to dismiss under Rule 12(b)(6), I must “accept all

well-pleaded factual allegations in the Complaint as true, accept even vague

allegations in the Complaint as ‘well-pleaded’ if they provide the defendant notice

of the claim, [and] draw all reasonable inferences in favor of the plaintiff.”37 I must

“deny the motion unless the plaintiff could not recover under any reasonably

conceivable set of circumstances susceptible of proof.”38

A. Count I: Breach of Fiduciary Duty

Count I is a breach of fiduciary duty claim asserted by BrandRep, LLC against

Ruskey.39 Ruskey moved to dismiss this claim, arguing BrandRep alleged Ruskey

was a fiduciary only of BrandRep Inc., as distinguished from BrandRep, LLC.40

Ruskey argues BrandRep, LLC cannot bring the claim on behalf of BrandRep Inc.

because BrandRep Inc. was “not a plaintiff and there is no allegation that BrandRep

37 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011). 38 Id. 39 D.I. 19 ¶¶ 73-78. 40 D.I. 79 at 10-11. “A claim for breach of fiduciary duty requires proof of two elements: (1) that a fiduciary duty existed and (2) that the defendant breached that duty.” Beard Research, Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010). Ruskey argues BrandRep, LLC failed to satisfy only the first element. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 12

can bring a claim on its behalf.”41 The dispute boils down to whether BrandRep pled

sufficient facts about its corporate history, in which BrandRep Inc. converted to

BrandRep, LLC.

The Amended Complaint alleges that “Ruskey was a director and officer of

BrandRep [Inc.] from 2012 until approximately December 18, 2017,”42 and that

“[a]s a director and officer of BrandRep, Ruskey owed BrandRep fiduciary duties of

care and loyalty.”43 The Amended Complaint further alleges that on December 18,

2017, Ganatra and Ruskey sold their ownership interests in BrandRep to BrandRep

Holdings, LLC, in a transaction governed by a Membership Interest Purchase and

Contribution Agreement (“MIPC”).44 The MIPC was attached to the Verified

Amended Complaint, and states that “[i]mmediately prior to the closing” BrandRep

Inc. “was converted into a Delaware limited liability company” and continued “as

the successor to all rights and obligations of” BrandRep Inc.45 Delaware law

provides that all “causes of action belonging to” a corporation that converts to an

41 D.I. 79 at 11 n.4. 42 D.I. 19 ¶ 6. 43 Id. ¶ 74. 44 Id. ¶¶ 7, 33, 35-40. 45 D.I. 19 Ex. 2, Recital B. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 13

LLC are “vested in the other entity or business form to which such corporation has

converted.”46

“Under our liberal notice-pleading rules, all that is required is that the

Defendants have notice of the claims against them.”47 In other words, “all

evidentiary facts need not be pleaded under our practice of notice pleading.”48 I

requested supplemental briefing from Ruskey for authority supporting his argument

that BrandRep’s claim must be dismissed due to failure to adequately plead its

corporate history. His response was not convincing.49 I conclude the Amended

Complaint and attached documents put Ruskey on notice that he allegedly owed

fiduciary duties to BrandRep Inc.; that BrandRep Inc. converted to BrandRep, LLC;

and that BrandRep, LLC asserted Ruskey had breached fiduciary duties owed to

BrandRep Inc. Ruskey’s motion to dismiss Count I is denied.

46 8 Del. C. § 266(h); see also 6 Del. C. § 18-214(e) (“The conversion of any other entity into a domestic limited liability company shall not be deemed to affect . . . the personal liability of any person incurred prior to such conversion.”). 47 Simplexity, LLC v. Zeinfeld, 2013 WL 5702374, at *7 n.74 (Del. Ch. Oct. 17, 2013); see also Ct. Ch. R. 8 (requiring “a short and plain statement of the claim showing that the pleader is entitled to relief”). 48 Citron v. Lindner, 1985 WL 44689, at *2 (Del. Ch. Nov. 14, 1985). 49 D.I. 196. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 14

B. Count III: Aiding and Abetting Breach of Fiduciary Duty

Count III alleges Mammano and the Entity Defendants aided and abetted

Ruskey’s breaches of fiduciary duty.50 BrandRep must plead four elements: “(i) the

existence of a fiduciary relationship, (ii) a breach of the fiduciary’s duty, (iii)

knowing participation in the breach by the non-fiduciary defendants, and (iv)

damages proximately caused by the breach.”51 Mammano and the Entity Defendants

argue BrandRep failed to plead the first and third elements. I concluded above that

BrandRep adequately pled that Ruskey owed fiduciary duties. I now turn to the

knowing participation element.

50 D.I. 19 ¶¶ 86-95. Both BrandRep, LLC and BrandRep Holdings asserted Count III. I previously granted the motion to dismiss BrandRep Holdings’ breach of fiduciary duty claim: BrandRep Holdings’ aiding and abetting claim is therefore also dismissed. This decision relates only to BrandRep, LLC’s aiding and abetting claim. Count III is pled against Employer Ad Network, BeRanked, and Ad.IQ, but it is clear that BrandRep’s allegations against those trade names bear on the two Entity Defendants. The Complaint alleges that Employer Advertising did business as Employer Ad Network and BeRanked, and that Business Solutions did business as BeRanked and Ad.IQ. D.I. 19 ¶¶ 8-9. Other than in defining the entities, BrandRep uses the “doing business as” (“d/b/a”) names, rather than the entities’ legal names, throughout the Complaint. BrandRep alleges the use of “multiple unincorporated, unregistered trade names,” made “it extremely difficult to determine the conduct of any particular ‘business’ and identify the people involved.” Id. ¶ 61. By defining the entities and using the d/b/a names, BrandRep linked its allegations to the Entity Defendants. 51 In re Rural Metro Corp., 88 A.3d 54, 80 (Del. Ch. 2014) (citing Malpiede, 780 A.2d at 1096). BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 15

“Knowing participation in a [director’s] fiduciary breach requires that the

third party act with the knowledge that the conduct advocated or assisted constitutes

such a breach.”52 “[T]he element of ‘knowing participation’ requires that the

secondary actor have provided ‘substantial assistance’ to the primary violator.”53 “A

court’s analysis of whether a secondary actor ‘knowingly’ provided ‘substantial

assistance’ is necessarily fact intensive.”54 Where a defendant secondary actor is an

entity, the knowledge of an individual fiduciary or agent may be imputed to that

entity.55 Efforts to conceal competition can support knowing participation.56 Indeed,

52 Malpiede, 780 A.2d at 1097. 53 In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *41 (Del. Ch. Aug. 27, 2015). 54 Id. at *42. 55 See Carr v. New Enter. Assocs., Inc., 2018 WL 1472336, at *16 (Del. Ch. Mar. 26, 2018) (“A director’s knowledge and participation in a breach may be imputed to a non- fiduciary entity for which that director also serves in a fiduciary capacity.”); Cumming v. Edens, 2018 WL 992877, at *26 (Del. Ch. Feb. 20, 2018) (describing scheme facilitated through various “subsidiaries named as aiders and abettors” and concluding that “[u]nder basic principles of agency, all of their knowledge is imputed to the [] entities they served as agents”); Triton Const. Co. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *16 (Del. Ch. May 18, 2009) (“Eastern also is liable for aiding and abetting because the knowledge and conduct of Elliott, its controlling officer, are imputed to it.”); see also Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 638 (Del. Ch. 2013) (finding the knowing participation element was adequately pled because knowledge of fiduciaries who were alleged to have breached their duties could be imputed to other entities where the fiduciaries also served as officers, agents, or principals). 56 Triton Const. Co., 2009 WL 1387115, at *16. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 16

“in some circumstances, the [defendant’s] actions may be so suspect as to permit, if

proven, an inference of knowledge of an intended breach of trust.”57

The Entity Defendants allegedly concealed their use of BrandRep’s software.

BrandRep alleges Business Solutions’ “management personnel have told [its] sales

representatives that BrandRep is a competitor,” and instructed them to notify certain

Business Solutions personnel when “they had sold a product to a customer who had

also recently been contacted by BrandRep.”58 Business Solutions also allegedly

instructed employees to misrepresent to third parties that Business Solutions “was

not in the search engine optimization business,” and that it was based out of Las

Vegas, rather than Orange County, California, where Ruskey and Mammano

allegedly reside.59

BrandRep also alleges Ruskey’s knowledge that he breached his fiduciary

duties by misappropriating BrandRep’s software is imputed to the Entity Defendants

because Ruskey “owned and/or controlled” the Entity Defendants.60 Ruskey

57 Id. 58 D.I. 19 ¶¶ 50, 67. 59 Id. ¶¶ 62-63. 60 D.I. 19 ¶ 43. Though Mammano submitted an affidavit stating Ruskey no longer owns Employer Advertising, and never owned Business Solutions, I cannot consider her affidavit in deciding the motion to dismiss under Rule 12(b)(6). See Mizel v. Connelly, 1999 WL 550369, at *5 (Del. Ch. July 22, 1999) (refusing to consider affidavit submitted by defendant concerning control of company because a motion to dismiss “is directed to the face of the complaint”); see also Orman v. Cullman, 794 A.2d 5, 15 (Del. Ch. 2002) (“As BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 17

purportedly misled BrandRep by explaining that “Employer [Advertising] was

merely an online job recruiting site, not a BrandRep competitor,” and that

misrepresentation induced BrandRep to “ma[k]e substantial payments directly to

Employer Advertising on Ruskey’s behalf.”61 I conclude it is reasonably

conceivable that Ruskey owned or controlled the Entity Defendants, such that his

knowledge of his alleged breaches of fiduciary duties owed to BrandRep is imputed

to both Entity Defendants.62 Because Ruskey was “the fiduciary and primary

wrongdoer” and also allegedly “control[led] [the Entity Defendants] or [] occupie[d]

a sufficiently high position that his knowledge is imputed to” those entities, the

knowing participation test is “easier to satisfy.”63 Based on Ruskey’s imputed

knowledge and the Entity Defendants’ alleged concealment, it is reasonably

a general rule, when deciding a Rule 12(b)(6) motion, the Court is limited to considering only the facts alleged in the complaint and normally may not consider documents extrinsic to it.”). Based only on the allegations in the Amended Complaint, it is reasonably conceivable that Ruskey owned or controlled the Entity Defendants. That is because Ruskey allegedly used those entities to misappropriate trade secrets and compete with BrandRep, and it is reasonable to infer that he used entities through which he would have profited. Whether Ruskey actually owned or controlled the Entity Defendants will be determined on a factual record as the case progresses. 61 D.I. 19 ¶ 43. 62 See supra n. 55. 63 In re PLX Tech. Inc. S’holders Litig., 2018 WL 5018535, at *49 (Del. Ch. Oct. 16, 2018). BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 18

conceivable that the Entity Defendants knowingly participated in Ruskey’s alleged

breaches of fiduciary duty.

BrandRep also alleges Mammano knowingly participated in Ruskey’s

breaches of fiduciary duty. Mammano is allegedly Ruskey’s “close business

associate.”64 It is reasonably conceivable that Mammano knew Ruskey was a

BrandRep fiduciary. Mammano, as the CEO of the Entity Defendants, also would

have known about their alleged roles in Ruskey’s misappropriation of BrandRep’s

information, and their subsequent competition and concealment of that

competition.65 BrandRep alleges, reasonably in my view because of Mammano’s

role as CEO, that Mammano caused Business Solutions “to take steps to attempt to

conceal Ruskey’s misconduct.”66 I conclude it is reasonably conceivable that

Mammano knowingly participated in Ruskey’s alleged breaches of fiduciary duty.

Finally, the defendants’ alleged actions constitute substantial assistance.

Ruskey allegedly monetized his misappropriation through the Entity Defendants, by

competing with BrandRep and taking its customers. Mammano, as CEO of those

entities, allegedly participated in and benefited from that competition.67 As

64 D.I. 19 ¶ 46. 65 Id. Mammano’s knowledge as CEO is also imputed to both Employer Advertising and Business Solutions. 66 D.I. 19 ¶ 91. 67 D.I. 19 ¶¶ 46, 68. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 19

discussed in the context of personal jurisdiction, she allegedly formed Business

Solutions in an overt act in furtherance of that competition. “At this preliminary

stage of the litigation, I cannot rule out the possibility” that the defendants knew of

Ruskey’s fiduciary position and obligations to BrandRep, and yet helped him breach

his duties because it benefited them.68 Their motion to dismiss Count III is denied.

C. Count IV: Misappropriation of Trade Secrets

In Count IV, BrandRep alleges trade secret misappropriation by the

defendants.69 To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must

plead four elements:

(i) A trade secret exists. (ii) The plaintiff communicated the trade secret to the defendant. (iii) The communication was made pursuant to an express or implied understanding that the defendant would maintain the secrecy of the information. (iv) The trade secret has been misappropriated within the meaning of that term as defined in . . . [the Delaware Uniform Trade Secrets Act].70

68 Stewart v. Wilm. Tr. SP Servs., Inc., 112 A.3d 271, 321 (Del. Ch. 2015), aff’d, 126 A.3d 1115 (Del. 2015). 69 D.I. 19 ¶¶ 96-101. 70 Alarm.com Hldgs., Inc. v. ABS Capital P’rs Inc., 2018 WL 3006118, at *6-7 (Del. Ch. June 15, 2018). The defendants argued for the first time in their reply brief that BrandRep did “not plead any specific trade secrets.” D.I. 130 at 5. This argument fails for several reasons. First, as required by Delaware law, BrandRep provided a statement of trade secrets. D.I. 18; see SmithKline Beecham Pharm. Co. v. Merck & Co., 766 A.2d 442, 447 (Del. 2000). The defendants challenged the sufficiency of BrandRep’s statement of trade secrets and argued BrandRep had not identified its trade secrets with reasonable particularity. D.I. 30 at 5-14. Vice Chancellor Glasscock denied that motion, ruling BrandRep satisfactorily identified its trade secrets. D.I. 83 at 23-25. The parties have conducted discovery and briefed BrandRep’s request for a preliminary injunction based on BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 20

The defendants’ motion to dismiss Count IV focuses on the fourth element. The

Delaware Uniform Trade Secrets Act defines misappropriation 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:

1. Used improper means to acquire knowledge of the trade secret; or

2. At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade 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

3. Before a material change of the person’s 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.71

those same disclosures. Second, the defendants waived this argument by not raising it until their reply brief. City of Miami Gen. Emps.’ & Sanitation Empls.’ Ret. Tr. v. C & J Energy Servs., Inc., 2018 WL 508583, at *6 (Del. Ch. Jan. 23, 2018). 71 6 Del. C. § 2001(2). BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 21

Because “[m]isappropriation and misuse can rarely be proved by convincing

direct evidence,”72 a plaintiff can prove its case using circumstantial evidence.73

Indeed, “in most cases ‘plaintiffs must construct a web of perhaps ambiguous

circumstantial evidence from which the trier of fact may draw inferences which

convince him that it is more probable than not that what plaintiffs allege happened

did in fact take place.’”74 This acceptance of circumstantially supported inferences

is compounded on a motion to dismiss, where plaintiffs “need only plead sufficient

facts to make it reasonably conceivable that circumstances exist from which the

necessary inferences can be drawn.”75

BrandRep alleges that Ruskey and the third-party developers he worked with

were the only individuals who “could access the source code.”76 Ruskey allegedly

owned or controlled the Entity Defendants while he had access to BrandRep’s source

code. The software used by the Entity Defendants is alleged to “appear[] and

function[] nearly identically to” BrandRep’s software, including “several

72 Alarm.com Hldgs., 2018 WL 3006118, at *7 (quoting Greenberg v. Croydon Plastics Co., Inc., 378 F. Supp. 806, 814 (E.D. Pa. 1974)). 73 Id. 74 Id. (quoting Merck & Co. v. SmithKline Beecham Pharm. Co., 1999 WL 669354, at *20 (Del. Ch. Aug. 5, 1999)). 75 Id.; see also Cabot Corp. v. Fansteel Inc., 1990 WL 181960, at *3 (Del. Ch. Nov. 21, 1990) (“Here the specifics of the secrets and the alleged misappropriation are identified. This is enough.”). 76 D.I. 19 ¶¶ 31, 54, 56. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 22

distinguishing features that are identical to features of BrandRep’s” software.77 And

the Entity Defendants’ software “targeted the same potential customers as”

BrandRep’s, which allegedly indicates it operates in the same way as BrandRep’s.78

Because Ruskey is the only alleged link between BrandRep and the Entity

Defendants, and one of a very few persons with access to BrandRep’s source code,

it is reasonably conceivable that he was the reason the companies had nearly

identical source code.79

BrandRep adequately alleges misappropriation by Mammano and the Entity

Defendants under 6 Del. C. § 2001(2)(b)(2), under the theory that the defendants had

reason to know they were acquiring BrandRep’s trade secrets by improper means

because they knew Ruskey had a duty to maintain their secrecy. In other words,

BrandRep alleges those defendants had something they knew they should not. The

Entity Defendants, through Ruskey’s allegedly imputed knowledge, would have

known they should not have had BrandRep’s source code.80 And as discussed above,

Business Solutions allegedly went to great lengths to conceal how it competed with

77 Id. ¶ 53. 78 Id. ¶ 56. 79 This link also distinguishes this case from Accenture Glob. Servs. GMBH v. Guidewire Software Inc., 581 F. Supp. 2d 654 (D. Del. 2008). There, the only allegation was that the defendant “somehow” acquired the trade secret. Id. at 663. Here, BrandRep specifically alleges that Ruskey improperly took its source code and shared it with the other defendants. 80 See supra n. 55. BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 23

BrandRep. It is reasonably conceivable that Mammano, as its CEO, would know

about that concealment, and that as Ruskey’s close business associate, she would

understand why the concealment was occurring.

Defendants also move to dismiss on the basis that BrandRep has failed to

plead it maintained the secrecy of its software. Efforts to maintain secrecy must be

“reasonable under the circumstances.”81 BrandRep alleges that its trade secrets “are

not known to [its] competitors,” that it “stored the source code for the CRM Software

in a secured depository,” that “only Ruskey and certain third-party software

developers under Ruskey’s control could access the source code, and that “all people

with access to the CRM Software or CRM Data are subject to appropriate restrictive

agreements.”82 These are sufficient allegations of reasonable efforts to maintain

secrecy, distinguishable from the bare and conclusory assertions of maintaining

secrecy in the cases the defendants rely upon.83

81 6 Del. C. § 2001(4)(b). 82 D.I. 19 ¶¶ 29-31. 83 See MHS Capital LLC v. Goggin, 2018 WL 2149718, at *14 (Del. Ch. May 10, 2018) (“The sole allegation in the Complaint on this score is that ‘ECM made efforts to maintain the secrecy of the [i]nformation, and these efforts were reasonable under the circumstances.’ . . . No facts are pled about ECM’s efforts to maintain secrecy.”). BrandRep, LLC, et al. v. Chad Ruskey, et al., C.A. No. 2018-0541-MTZ January 7, 2019 Page 24

III. Conclusion

For these reasons, the motions to dismiss Counts I, III, and IV are denied.

IT IS SO ORDERED.

Sincerely,

/s/ Morgan T. Zurn

Vice Chancellor

MTZ/ms