Opinion
Civil Action No. 19-cv-02952-RM-MEH
01-06-2021
APS BIOGROUP, INC., AND LA BELLE ASSOCIATES, INC., Plaintiffs/Counterclaim Defendants, v. STERLING TECHNOLOGY, INC., Defendant/Counterclaim Plaintiff, and STERLING TECHNOLOGY, INC., Third-Party Plaintiff, v. PANTHERYX, INC., Third-Party Defendant.
RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
Michael E. Hegarty, United States Magistrate Judge.
Before the Court is the Motion to Dismiss Amended Counterclaim and Third-Party Complaint ("Counter Complaint"). ECF 129. The Motion was referred to this Court for recommendation. It is fully briefed, and the Court finds that oral argument will not materially assist in its adjudication. Based upon the record herein and for the reasons that follow, the Court respectfully recommends that the Motion be granted in part and denied in part.
BACKGROUND
I. Procedural History
APS BioGroup, Inc. and La Belle Associates, Inc. brought suit alleging that Sterling Technology, Inc. "has been falsely advertising certain of its blended bulk colostrum products as 'pure,' '100%,' or '99.5%' bovine colostrum, despite the fact that such products consist of up to as much as 80% WPC [whey protein concentrate] powder." ECF 1 at 1-2. They raise claims under the Lanham Act, 15 U.S.C. § 1125(a)(1)(b) and the Colorado Deceptive Trade Practices Act as well as a claim of common law unfair competition.
Not only does Sterling Technology, Inc. ("Sterling") dispute the basis of the Complaint, but it contends that it is the one that has been harmed. Sterling responds with counterclaims against APS BioGroup and La Belle ("Counter Defendants"). Sterling raises the counterclaims of tortious interference with contractual relations, tortious interference with prospective contractual relations, and abuse of process. Sterling names PanTheryx, Inc. ("PanTheryx") as an additional, third-party defendant and asserts a breach of contract claim. Lastly, Sterling brings claims of unjust enrichment, conspiracy, and breach of contract conspiracy against all three. Together, Counter Defendants and PanTheryx ("Movants") seek dismissal of Sterling's Counter Complaint (ECF 118).
Sterling complains that Movants did not confer with it pursuant to D.C. Colo. LCivR 7.1 before filing their Motion. Movants reply that the local rule's conferral obligation does not apply to their Rule 12(b)(6) Motion. However, the Practice Standards of United States District Judge Raymond P. Moore do require conferral before filing a motion to dismiss. See Section IV(N)(2)(a). Despite the Movants' non-compliance, the Court proceeds to consider its merits given that Judge Moore referred the Motion to me and especially because it is fully briefed.
II. Alleged Facts
For purposes of this ruling, the Court accepts as true the factual allegations—but not any legal conclusions, bare assertions, or conclusory allegations—that Sterling raises in its Counter Complaint. See generally Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (accepting as true a plaintiff's factual allegations for purposes of Fed. R. Civ. P. 12(b)(6) analysis).
Sterling describes itself as a pioneering supplier of bovine colostrum. The product's health benefit comes from antibodies known as immunoglobulins. The immunoglobulin ("IgG") content of colostrum can vary, but Sterling says that it is able to achieve consistent IgG profiles. Its customers are sophisticated manufacturers who have specific needs and who incorporate bovine colostrum into final products for human and animal consumption. Sterling certifies each batch's IgG, protein, fat, lactose, ash, and moisture content, as well as the absence of contaminants. Sterling generally does not disclose the product's ingredients, although it does provide an ingredient declaration to a few customers for certain products.
Sterling has experienced much growth. The bovine colostrum marketplace still remains small, with just a few producers competing for the same set of customers.
The events underlying this lawsuit began in 2015 when PanTheryx expressed interest in buying Sterling. Sterling alleges that PanTheryx used the cover of the due diligence and evaluation period to obtain its trade secrets. PanTheryx signed a Non-Disclosure Agreement ("NDA"), and under its protection, Sterling disclosed a range of sensitive information. However, Sterling kept its most important trade secrets confidential. That included "its batch records, which detail every step, from beginning to end, that Sterling takes to produce its bulk bovine colostrum powder products." ECF 118 at ¶ 27. Sterling declined the purchase offer.
In 2017, PanTheryx bought Counter Defendants. Both of them were Sterling's direct competitors. Together, the three began an alleged scheme to discredit Sterling's business.
PanTheryx made a second attempt to buy Sterling. Sterling disclosed additional confidential information under the protection of the NDA to facilitate the renewed negotiations. Those negotiations ended with an alleged low-ball offer that Sterling rejected.
Sterling alleges that PanTheryx used the information it obtained from the two rounds of negotiations for its competitive advantage. It sought to obtain Sterling's "raw colostrum routes." It leased the same warehouse that Sterling uses in New York and offered employment to at least one of Sterling's area managers. In June and August 2019, Counter Defendants gave a PowerPoint presentation to groups of potential customers saying that Sterling "cuts" all of its bovine colostrum powder with as much as 80% high IgG whey protein concentrate ("WPC") and specifically mentioned Sterling's "Colostrum Powder 2060" and "Colostrum Instant 2060" products. Id. at ¶ 38. Sterling alleges that Counter Defendants created the false impression that it secretly adds high IgG WPC to all of its products to deceive its customers. Counter Defendants know or should have known that the kind of test used to determine the ingredients in Sterling's products would give an unreliable WPC reading.
Sterling alleges that Counter Defendants brought this lawsuit as an additional means to harm its business and to obtain its trade secrets. Sterling anticipates that its unique processing technology will be a subject of discovery. Id. at ¶¶ 36, 44.
LEGAL STANDARDS
I. Fed. R. Civ. P. 12(b)(6)
The purpose of a motion to dismiss under Fed. R. Civ. P. 12(b)(6) is to test the sufficiency of the plaintiff's complaint. Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 2008). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Plausibility, in the context of a motion to dismiss, means that the plaintiff pleaded facts that allow "the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. Twombly requires a two-prong analysis. First, a court must identify "the allegations in the complaint that are not entitled to the assumption of truth," that is, those allegations which are legal conclusions, bare assertions, or merely conclusory. Iqbal, 556 U.S. at 679-80. Second, a court must consider the factual allegations "to determine if they plausibly suggest an entitlement to relief." Id. at 681. If the allegations state a plausible claim for relief, such claim survives the motion to dismiss. Id. at 680.
Plausibility refers "to the scope of the allegations in a complaint: if they are so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs 'have not nudged their claims across the line from conceivable to plausible.'" S.E.C. v. Shields, 744 F.3d 633, 640 (10th Cir. 2014) (quoting Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012)). "The nature and specificity of the allegations required to state a plausible claim will vary based on context." Safe Streets All. v. Hickenlooper, 859 F.3d 865, 878 (10th Cir. 2017) (quoting Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1215 (10th Cir. 2011)). Thus, while the Rule 12(b)(6) standard does not require that a plaintiff establish a prima facie case in a complaint, the elements of each alleged cause of action may help to determine whether the plaintiff has set forth a plausible claim. Khalik, 671 F.3d at 1191.
However, "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678. The complaint must provide "more than labels and conclusions" or merely "a formulaic recitation of the elements of a cause of action," so that "courts 'are not bound to accept as true a legal conclusion couched as a factual allegation.'" Twombly, 550 U.S. at 555 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)). "Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679. "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct," the complaint has made an allegation, "but it has not shown that the pleader is entitled to relief." Id. (quotation marks and citation omitted).
ANALYSIS
I. Tortious Interference
To state a claim of tortious interference with prospective business relations, Sterling first must show an ongoing or prospective business relationship (whether in the form of a contractual, quasi-contractual, or other customary relationship), Nobody in Particular Presents, Inc. v. Clear Channel Commc'ns, 311 F. Supp. 2d 1048, 1117 (D. Colo. 2004), and a reasonable likelihood or probability of obtaining that business but for the interference, Hertz v. Luzenac Grp., 576 F.3d 1103, 1119 (10th Cir. 2009). Sterling must show that Counter Defendants acted improperly in a way that induced or caused a third party not to enter or continue the business relationship. Nobody, 311 F. Supp. 2d at 1118-19 (setting forth the factors for determining whether conduct was improper). Sterling must identify the prospective relationship it lost, Storlie v. Prudential Ins. of Am., No. 19-cv-02543-CMA-NRN, 2020 WL 209859, at *2 (D. Colo. Jan. 14, 2020), but it need not establish that Counter Defendants knew of the specific customer or business relationship, Pers. Dep't, Inc. v. Prof'l Staff Leasing Corp., 297 F. App'x 773, 777 (10th Cir. 2008). Sterling must show that Counter Defendants acted intentionally to cause that interference. Nobody, 311 F. Supp. 2d at 1118. Lastly, Sterling must have suffered pecuniary harm as a result. Hertz, 576 F.3d at 1119.
In the background section to its Counter Complaint, Sterling discusses two PowerPoint presentations that Counter Defendants made in 2019 (ECF 118 at ¶ 38), but for the tortious interference with prospective business relations claim, it refers only to the June 2019 presentation (id. at ¶ 56). Plaintiff alleges that Counter Defendants made a misleading claim about the content of its products at that presentation and did so intentionally to harm its business. Therefore, Sterling pleads a wrongful act.
The next issue is whether Sterling identifies an ongoing or prospective business relationship that it lost as a result. Sterling pleads that its "potential customers" were at the presentation. Id. at ¶ 56. Sterling alleges a reasonable probability that they would have purchased its products but for the presentation; instead, Counter Defendants diverted those potential sales. Id. at ¶¶ 57-58. Sterling gives no further details such as the identity of the customers (potential or existing) that it lost. In its Response, Sterling refers to the Counter Complaint's background section where it describes the bovine colostrum marketplace as consisting of just a few producers and buyers (id. at ¶¶ 18-19), and where it asserts that both existing and potential customers attended the presentation (id. at ¶ 39). Therefore, Sterling concludes that the attendees must have been prospective customers. However, without more detail, Sterling pleads only the potential of otherwise unknown customers. That is insufficient to state a plausible claim.
Sterling also raises a claim of tortious interference with an existing contractual relationship. The elements of that version of the tort require Sterling to show that (1) Movants were aware of the existence of a contract, and (2) intentionally induced one of the parties to breach it or made it impossible for the party to perform (3) through improper conduct. Hertz, 576 F.3d at 1118. In other words, this theory of tortious interference requires the showing of an actual contract and its breach. However, Sterling identifies no specific contract whose breach or non-performance Counter Defendants induced. Sterling pleads only potential interference with its existing customers. Without more information, Sterling does not plead a plausible claim.
Therefore, both tortious interference claims should be dismissed.
II. Breach of Contract
The elements of this cause of action consist of (1) the existence of a contract, (2) Sterling's performance, (3) PanTheryx's failure to perform, and (4) resulting damages. Greenway Nutrients, Inc., v. Blackburn, 33 F. Supp. 3d 1224, 1255 (D. Colo. 2014). Sterling pleads that "PanTheryx and its affiliates have improperly conspired to use Sterling's confidential information, stolen under cover of the NDA." ECF 118 at ¶ 73. PanTheryx construes that language as accusing it only of conspiring to breach the NDA contract. It argues that the claim therefore fails because there is no allegation that it actually breached the contract. However, PanTheryx omits from its argument Sterling's additional allegation that its "actions constitute a breach of the Non-Disclosure Agreement entered into on August 25, 2015." Id. at ¶ 73. Sterling thereby pleads both the existence of a contract and PanTheryx's direct breach of it.
Consequently, the breach of contract claim should not be dismissed.
IIII. Unjust Enrichment
To state this cause of action, Sterling must establish that Movants received a benefit, at Sterling's expense, under circumstances that would make it unjust for Movants to retain that benefit without restitution. Dudding v. Norton Frickey & Assocs., 11 P.3d 441, 444 (Colo. 2000). The test for "whether injustice results often will turn on whether a party engaged in some type of wrongdoing." Id. Wrongdoing consists of improper, deceitful, or misleading conduct by the benefitting party. DCB Constr. Co. v. Cent. City Dev. Co., 965 P.2d 115, 122 (Colo. 1998). "The principle underlying a claim of unjust enrichment is to deprive a wrongdoer of benefits that in equity and good conscience he ought not to keep." Greenway, 33 F. Supp. 3d at 1260-61.
In support of the claim, Sterling alleges the misappropriation of its confidential information, inventions, and trade secrets. In the background section to the Counter Complaint, Sterling also accuses PanTheryx of taking advantage of the purchase negotiations to obtain its confidential information. Movants argue that the allegation is inconsistent with Sterling's statement that it "refused to disclose its most closely-guarded trade secrets." ECF 118 at ¶ 1. Sterling withheld information about its batch records, the identities of its suppliers and customers, and its specific pricing information. Id. at ¶ 27. While it withheld that particular information, Sterling still gave PanTheryx access to a range of other confidential information. Id. at ¶ 25. Therefore, Sterling alleges sufficient facts to show a benefit conveyed, and the Motion should be denied as to Counter Defendants (who may have obtained that information from PanTheryx).
PanTheryx argues that the unjust enrichment claim, as raised against it, also fails as a matter of law. Sterling alleges that the NDA bars PanTheryx from using its "confidential and proprietary information . . . for any purpose except to evaluate and engage in discussions concerning a potential business arrangement between the parties." Id. at ¶ 22. The NDA therefore governs PanTheryx's alleged act of misappropriation. Because an express contract covers the subject matter, Sterling may not proceed on a theory of unjust enrichment. Greenway, 33 F. Supp. 3d at 1260 (explaining that "[e]quitable remedies normally are available only when the remedy at law is inadequate"). Moreover, Sterling's limited pleading describes no wrongful conduct that falls outside the scope of the NDA that could be actionable under the unjust enrichment theory. Id. at 1261 (permitting an unjust enrichment claim for conduct outside the express contract, matters arising subsequent to the express contract, or in the absence of an enforceable contract right). Therefore, the unjust enrichment claim as raised against PanTheryx should be dismissed.
IV. Abuse of Process
To state an abuse of process claim, Sterling must demonstrate that (1) Counter Defendants had an ulterior purpose for bringing their lawsuit, (2) Counter Defendants willfully used the legal proceeding in an improper manner, and (3) Sterling suffered damage. Hertz, 576 F.3d at 1117. Sterling alleges that Counter Defendants are acting with the ulterior purpose of harming its reputation, gaining a competitive advantage, and obtaining its highly proprietary and innovative processing techniques through the discovery process.
Pleading that Counter Defendants are acting with an ulterior purpose or motive, alone, is insufficient. Sterling also must plead that Counter Defendants are using this lawsuit to accomplish some coercive goal or secure some advantage that is collateral to the litigation process. Id. Should Counter Defendants prevail on their claims that Sterling mislabeled the content of its products, Sterling's reputation naturally would suffer as would its ability to compete with Counter Defendants. The harm would be the lawsuit's expected consequence. Viewed from Counter Defendants' perspective, the benefit to them would be the regular and legitimate result of their claims for relief. Id. at 1117-18 (distinguishing between the proper and improper use of litigation).
Sterling disputes the reliability of the test upon which Counter Defendants base their false advertising claims. The implication of Sterling's argument is that the lawsuit lacks support. However, filing a baseless or unfounded lawsuit does not demonstrate the improper use of legal process, so long as the claims are colorable on their face and seek relief consistent with the allegations. Pinon Sun Condo. Ass'n, Inc. v. Atain Specialty Ins. Co., No. 17-cv-01595-CMA-MJW, 2019 WL 140710, at *4-5 (D. Colo. Jan. 9, 2019); Partminer Worldwide, Inc. v. Siliconexpert Techns., Inc., No. 09-cv-00586-MSK-MJW, 2010 WL 502718, at *3 (D. Colo. Feb. 10, 2010).
The same standard applies to Sterling's concern about the course of discovery. As with the act of bringing the lawsuit itself, the justifiable use of discovery in the proceeding's regular course does not constitute the abuse of process, even if the litigant has an ulterior purpose. Mintz v. Accident & Injury Med. Specialists, PC, 284 P.3d 62, 66 (Colo. App. 2010). The subject of Sterling's processing techniques bears some relationship, at least facially, to Counter Defendants' claims for purposes of the abuse of process analysis. Moreover, it is a prospective concern. Sterling does not address whether the rules of discovery provide inadequate protection for the highly proprietary aspects of its processing techniques.
The Motion should be granted and this claim dismissed.
V. Conspiracy
Sterling alleges that Movants conspired to harm it in several different ways. For its Third Claim for Relief, Sterling alleges a conspiracy to commit defamation, tortious interference, and disparagement, and for its Sixth Claim for Relief, it alleges a conspiracy to breach the NDA contract and misappropriate its trade secrets. The elements of civil conspiracy require (1) two or more persons, (2) an object to be accomplished, (3) a meeting of the minds on the object or course of action, (4) an unlawful overt act, and (5) damages as the proximate result. Powell Prods., Inc. v. Marks, 948 F. Supp. 1469, 1480 (D. Colo. 1996).
In the background section to its Counter Complaint, Sterling alleges that "APS BioGroup and LaBelle are affiliated companies" that a PanTheryx affiliate bought in 2017, after the unsuccessful attempt to buy Sterling. ECF 118 at ¶¶ 20, 29. "PanTheryx and its newly acquired affiliates initiated a scheme to smear and discredit Sterling." Id. at ¶ 30. "Not satisfied with a few meetings with customers in their quest to harm" it, Sterling alleges that "APS BioGroup and LaBelle, at PanTheryx's behest, [then] filed this lawsuit." Id. at ¶ 4. Movants contend that Sterling fails to plead the involvement of two or more independent actors if PanTheryx owned and controlled Counter Defendants.
Movants argue that Sterling's allegations about PanTheryx's ownership of Counter Defendants is inconsistent with its conspiracy theory. However, the simple fact of ownership does not necessarily imply that Counter Defendants are non-distinct entities unable to act independently of each other. They could be affiliated, but still separate, entities. Movants rely on MSC Safety Sols., LLC v. Trivent Safety Consulting, LLC, No. 19-cv-00938-MEH, 2020 WL 4271703, at *11 (D. Colo. July 24, 2020) to support their argument, but that case addressed the different context of an employer/employee relationship. While Sterling's allegations leave ambiguous whether the Movants are distinct and separate entities, Sterling also alleges that Counter Defendants acted at PanTheryx's "behest." Sterling thereby alleges that Counter Defendants acted pursuant to PanTheryx's direction or control. It is in this respect that Sterling does not allege independent action. More than just concerted action is needed to hold parties liable as co-conspirators. The conspirators must have acted independently in furtherance of the unlawful goal. Tara Woods Ltd. P'ship v. Fannie Mae, 731 F. Supp. 2d 1103, 1122 (D. Colo. 2010) (explaining the nature of conspiracy liability).
Relatedly, Sterling does not allege that all three Movants had "a meeting of the minds." Element (3) of conspiracy liability requires Sterling to show that each Movant agreed to take action in furtherance of the conspiracy, knowing of its improper purpose. Powell, 948 F. Supp. at 1480. However, Sterling pleads only that Counter Defendants had a meeting of the minds and does not include PanTheryx in that allegation.
The existence of a conspiracy is not actionable by itself; it is a derivative cause of action. Tara, 731 F. Supp. 2d at 1122. Therefore, element (4) requires an underlying unlawful act. Sterling bases its first conspiracy claim on defamation, tortious interference, and disparagement. Of them, Sterling raises as separate causes of action only the tortious interference claims. Because the Court finds that Sterling does not plead a plausible tortious interference claim, there is no unlawful overt act to support the conspiracy claim.
Sterling bases its second conspiracy claim on the breach of the NDA and the misappropriation of its trade secrets. First, Sterling does not explain how Counter Defendants conspired to cause the NDA's breach. Sterling's own allegations show that Counter Defendants did not start acting against it until 2019, several years after PanTheryx allegedly had breached the NDA. Second, Sterling brings no separate cause of action for trade secret misappropriation. Thus, Sterling also pleads no underlying unlawful act to support this conspiracy claim.
Therefore, both conspiracy claims should be dismissed.
CONCLUSION
Sterling seeks redress for the wrongful actions that it alleges Counter Defendants and PanTheryx took against it. For purposes of Rule 12(b)(6) review, Sterling must go beyond the basic outlines of those theories of relief and plead facts sufficient to show how each is plausible according to its specific legal definition. Most of its claims for relief lack a sufficient factual basis, and the Motion should be granted as to them. However, because there is the potential that Sterling can correct the pleading deficiencies and plausibly plead its theories of relief, dismissal should be with leave to amend.
Accordingly, the Court respectfully RECOMMENDS that the Motion to Dismiss [filed September 16, 2020; ECF 129] be granted in part. The Court recommends dismissal of both tortious interference claims (First and Second Claims for Relief); both conspiracy claims (Third and Sixth Claims for Relief); and the abuse of process claim (Fourth Claim for Relief). The Court recommends dismissal of the unjust enrichment claim (Seventh Claim for Relief) only as raised against PanTheryx. The Court recommends that the dismissals be without prejudice to amend. The Court respectfully RECOMMENDS that the Motion be denied in part, with respect to the unjust enrichment claim as raised against Counter Defendants and the breach of contract claim (Fifth Claim for Relief).
Be advised that all parties shall have fourteen (14) days after service hereof to serve and file any written objections in order to obtain reconsideration by the District Judge to whom this case is assigned. Fed. R. Civ. P. 72. The party filing objections must specifically identify those findings or recommendations to which the objections are being made. The District Court need not consider frivolous, conclusive or general objections. A party's failure to file such written objections to proposed findings and recommendations contained in this report may bar the party from a de novo determination by the District Judge of the proposed findings and recommendations. United States v. Raddatz, 447 U.S. 667, 676-83 (1980); 28 U.S.C. § 636(b)(1). Additionally, the failure to file written objections to the proposed findings and recommendations within fourteen (14) days after being served with a copy may bar the aggrieved party from appealing the factual findings of the Magistrate Judge that are accepted or adopted by the District Court. Thomas v. Arn, 474 U.S. 140, 155 (1985); In re Garcia, 347 F. App'x 381, 382-83 (10th Cir. 2009). --------
Entered and dated this 6th day of January, 2021, in Denver, Colorado.
BY THE COURT:
/s/
Michael E. Hegarty
United States Magistrate Judge