LABMD, Inc. v. Tiversa Holding Corp.

• Court: Court of Appeals for the Third Circuit
• Decided: September 11, 2019
• Docket: 18-3487
• Status: Unpublished

Opinion

NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

No. 18-3487

LABMD, INC.; MICHAEL J. DAUGHERTY, Appellants

v.

TIVERSA HOLDING CORP.; ROBERT J. BOBACK; REED SMITH LLP; JARROD D. SHAW; CLARK HILL PLC; ROBERT J. RIDGE

______________

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civ. Action No. 2-17-cv-01365) District Judge: Honorable Marilyn J. Horan ______________

Submitted Under Third Circuit L.A.R. 34.1(a) June 25, 2019 ______________

Before: SMITH, Chief Judge, CHAGARES, and GREENAWAY, JR., Circuit Judges.

(Opinion Filed: September 11, 2019)

OPINION* ______________ * This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent. GREENAWAY, JR., Circuit Judge.

This appeal asks that we determine, inter alia, whether proceedings that are

voluntarily dismissed with prejudice pursuant to Rule 229 of the Pennsylvania Rules of

Civil Procedure are terminated in favor of the party against whom they were brought

under 42 Pa. Cons. Stat. § 8351(a)(2) of Pennsylvania’s Dragonetti Act.1 The District

Court, adopting the Magistrate Judge’s Report and Recommendation, held that the

circumstances under which the parties terminated their proceedings in this case did not

support a determination that the proceedings were terminated in favor of the non-moving

party. We agree. We will affirm the District Court’s judgment.

The feud between Tiversa Holding Corp. (“Tiversa”), a data security company

formerly headed by Robert Boback, and LabMD, Inc. (“LabMD”), a cancer detection

laboratory2 headed by Michael J. Daugherty, began over a decade ago. On February 25,

2008, Tiversa obtained a 1,718-page file (the “1718 file”) from LabMD.3 The 1718 file

contained sensitive information on over 9,000 patients. After obtaining the 1718 file,

1 The Dragonetti Act codifies the common law tort for wrongful use of civil proceedings at 42 Pa. Cons. Stat. §§ 8351–55. 2 LabMD is no longer in operation, but still exists as a company. 3 The parties dispute the nature by which Tiversa came into possession of the 1718 file. While LabMD asserts that Tiversa “hacked into a LabMD computer” and “stole” the file, Appellants’ Br. 9, Tiversa insists that this assertion is false, see Appellee Tiversa’s Br. 3. 2 Tiversa offered to sell LabMD its remediation services to no avail. In 2009, Tiversa

arranged for the delivery of the 1718 file to the Federal Trade Commission (“FTC”), and

in August 2013, the FTC brought an enforcement action against LabMD.4

In September 2013, Daugherty published a book about the 1718 file, Tiversa, and

the FTC investigation. Tiversa and Boback in response sued LabMD and Daugherty for

defamation in the United States District Court for the Western District of Pennsylvania

(the “Federal Defamation Action”) and in the Allegheny County Court of Common Pleas

(the “State Action”). Both defamation suits form the basis of the instant appeal.

Tiversa and Boback, represented by Reed Smith LLP (“Reed Smith”) and Jarrod

D. Shaw, filed the Federal Defamation Action on September 5, 2013. Their Complaint

was based on the allegedly defamatory statements Daugherty made about Tiversa and

Boback in connection with his book. LabMD and Daugherty filed a Motion to Dismiss,

which was mooted by Tiversa and Boback’s filing of a First Amended Complaint.

LabMD and Daugherty’s subsequent Motion to Dismiss was denied by the District Court,

which found that Tiversa and Boback had pled sufficient facts to demonstrate a plausible

right to recovery. LabMD and Daugherty thereafter filed an Answer and an Amended

4 Specifically, the FTC “allege[d] that LabMD’s data-security program was inadequate and thus constituted an ‘unfair act or practice’ under Section 5(a) of the Federal Trade Commission Act (the “FTC Act” or “Act”), 15 U.S.C. § 45(a).” LabMD, Inc. v. Fed. Trade Comm’n, 894 F.3d 1221, 1224 (11th Cir. 2018). The FTC enforcement action culminated in appeals in the Eleventh and D.C. Circuits. Because the outcomes of these proceedings are not integral to our analysis, we will not discuss their procedural posture at length. 3 Answer.

On November 4, 2014, Tiversa and Boback filed for voluntary dismissal without

prejudice pursuant to Rule 41(a)(2) of the Federal Rules of Civil Procedure. Tiversa and

Boback noted that their reason for filing this motion was to pursue their claims in the

State Defamation Action. The District Court granted the motion on November 4, 2014.

LabMD and Daugherty filed a Motion for Reconsideration, which was denied on

December 1, 2014.

Tiversa and Boback filed the State Defamation Action on September 23, 2014,

again represented by Reed Smith and Shaw. The defamation claims in this proceeding

were also based on statements Daugherty had made in connection with his book. LabMD

and Daugherty filed preliminary objections, which the trial court denied on August 7,

2015. LabMD and Daugherty then moved for sanctions against Tiversa and Boback,

asserting that the defamation claims were not warranted by existing law, and that Tiversa

and Boback were aware of the inadequacy of their defamation claims. The trial court

denied the motion for sanctions.

On March 10, 2016, Tiversa voluntarily terminated the State Defamation Action

with prejudice pursuant to Rule 229 of the Pennsylvania Rules of Civil Procedure. That

same day, Reed Smith and Shaw withdrew their appearance on behalf of Boback, and

Clark Hill PLC (“Clark Hill”), Robert J. Ridge, and Brandon J. Verdream entered their

appearance on behalf of Boback.

4 On October 20, 2017, LabMD and Daugherty (hereinafter “Appellants”) brought

this action against Tiversa and Boback, and their counsel, Clark Hill, Ridge, Reed Smith,

and Shaw. In their Amended Complaint, Appellants assert (1) a claim of abuse of

process against Tiversa, Boback, Clark Hill, Ridge, and Shaw in connection with the

State Defamation Action (Count I); (2) a claim of conspiracy to do the same (Count II);

and (3) a Dragonetti Act claim against Tiversa, Reed Smith, and Shaw in connection with

both the Federal Defamation Action and the State Defamation Action.

On May 17, 2018, Magistrate Judge Maureen P. Kelly recommended that

Appellants’ Amended Complaint be dismissed. On November 6, 2018, Judge Marilyn

Horan adopted Judge Kelly’s Report and Recommendation and entered a final judgment

in favor of Tiversa, Boback, and their counsel. Appellants filed this appeal, seeking

determination on whether the District Court erred in granting the motion to dismiss on

Claim III of their Amended Complaint (the “Dragonetti Act” claim) against Tiversa,

Clark Hill, and Shaw (hereinafter “Appellees”). 5

“We exercise plenary review of a district court’s order granting a motion to

dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, and apply the same

standard as does the District Court.” Edinboro Coll. Park Apartments v. Edinboro Univ.

5 The District Court had jurisdiction over this case pursuant to 28 U.S.C. § 1332(a)(1), and we have jurisdiction pursuant to 28 U.S.C. § 1291. 5 Found., 850 F.3d 567, 572 (3d Cir. 2017) (citation omitted). “Under this standard, the

complaint must contain sufficient factual matter, accepted as true, to state a claim to relief

that is plausible on its face.” Id. (internal quotation marks and citations omitted).

“Because this case comes to us upon a Rule 12(b)(6) motion to dismiss, we accept the

factual allegations contained in the [Amended] Complaint as true, but we disregard rote

recitals of the elements of a cause of action, legal conclusions, and mere conclusory

statements.” James v. City of Wilkes-Barre, 700 F.3d 675, 679 (3d Cir.

2012) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678–79 (2009); Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 555–57 (2007); and Burtch v. Milberg Factors, Inc., 662 F.3d

212, 220–21 (3d Cir. 2011)). To survive a Rule 12(b)(6) motion to dismiss, a party “is

not required to establish the elements of a prima facie case but instead, need only put

forth allegations that raise a reasonable expectation that discovery will reveal evidence of

the necessary element.” Fowler v. UPMC Shadyside, 578 F.3d 203, 213 (3d Cir. 2009)

(internal quotation marks and citation omitted).

Here, Appellants argue that the District Court erred in dismissing their Dragonetti

Act claim. Under the Dragonetti Act,

A person who takes part in the procurement, initiation or continuation of civil proceedings against another is subject to liability to the other for wrongful use of civil proceedings:

(1) he acts in a grossly negligent manner or without probable cause and primarily for a purpose other than that of securing the proper discovery, joinder of parties or adjudication of the claim in which the proceedings are based; and 6 (2) the proceedings have terminated in favor of the person against whom they are brought.

42 Pa. Cons. Stat. § 8351(a). To sufficiently plead a Dragonetti Act claim, Appellants

must allege facts that support a reasonable expectation that discovery will produce

evidence of the required elements. See Fowler, 578 F.3d at 213. The parties’ dispute

concerns the requirement stated in § 8351(a)(2): that the proceedings must have

terminated in favor of the person against whom they are brought. Appellants argue that a

voluntary termination with prejudice qualifies as a termination in favor of the non-

moving party, as required under § 8351(a)(2). Appellees argue that the allegations in the

Amended Complaint do not support a finding that the Federal and State Defamation

Actions6 were terminated in favor of Appellants.

“Generally, when considering the question of ‘favorable termination’ in a

wrongful use of civil proceedings case, whether a withdrawal or abandonment constitutes

a favorable, final termination of the case against who[m] the proceedings are brought

initially depends on the circumstances under which the proceedings are withdrawn.”

6 As the District Court noted, Appellants “take the position that the State Defamation Action is a continuation of the Federal Defamation Action and the two actions constitute one action for purposes of the Dragonetti Act.” JA 209–10. The District Court assumed arguendo that this argument was valid, concluding that whether or not the Appellants are correct has no bearing on the outcome. We agree; therefore, we will make the same assumption. 7 D’Elia v. Folino, 933 A.2d 117, 122 (Pa. Super. Ct. 2007) (citing Bannar v. Miller, 701

A.2d 242, 247 (Pa. Super. Ct. 1997)).

Here, Appellees withdrew pursuant to Rule 229 of the Pennsylvania Rules of Civil

Procedure, which allows a plaintiff to voluntarily withdraw with prejudice. See Pa. R.

Civ. P. 229. While Appellants argue that a withdrawal with prejudice is ipso facto a

termination favorable to the parties against whom the action is brought, this argument is

unconvincing. Pennsylvania courts “have held specifically that, unless the voluntary

withdrawal of the prior case was ‘tantamount to an unbidden abandonment of a claim

brought in bad faith,’ the discontinuance of the underlying action does not constitute a

favorable termination in favor of the Dragonetti Act plaintiff.” Contemporary Motorcar

v. Macdonald Illig Jones & Britton LLP, No. 783 WDA 2012, 2013 WL 11253857 *1, *4

(Pa. Super. Ct. Sept. 19, 2013) (quoting Majorsky v. Douglas, 58 A.3d 1250, 1270 (Pa.

Super. Ct. 2012)).

Appellants harp on the fact that Appellees’ Rule 229 voluntary withdrawal was

with prejudice; suggesting that this alone establishes bad faith and a termination in

Appellants’ favor. However, the circumstances under which Appellees dismissed their

claims does not support a determination that this was a favorable termination for

Appellants. Appellees filed their Rule 229 motion in the early stages of the proceeding

before substantial discovery had taken place. The early motions practice that occurred

had resolved in Appellees’ favor. Furthermore, Boback continues to pursue the same

8 claims that were the subject of the voluntary withdrawal. These circumstances do not

indicate that the voluntary withdrawal was in Appellants’ favor. Without a favorable

termination, Appellants’ Dragonetti Act claim is not a plausible claim for relief.

Therefore, the District Court did not err in granting Appellees’ motion to dismiss.

For the foregoing reasons, we will affirm the District Court. 7

7 In so holding, we will deny as moot Appellants’ motion requesting Certification of State Law to the Supreme Court of Pennsylvania pursuant to Third Circuit L.A.R. Misc. 110.1. 9