Plus One, LLC v. Capital Relocation Services L.L.C.

Background

Plus One and Capital Relocation Services L.L.C. (CapRelo) are third-party providers of employee-relocation services. Plus One developed Point C, a software application that converts employer relocation funds into credits that employees can use for different relocation benefits. CapRelo developed competing software called CompanionFlex.

The dispute followed the companies’ collaboration for Walmart. In March 2021, they entered into a nondisclosure agreement, and Plus One shared information about Point C with CapRelo. Plus One alleged that CapRelo used access to Point C’s confidential information to misappropriate trade secrets and incorporate them into CompanionFlex. Plus One asserted claims for trade-secret misappropriation, breach of contract, interference with a contract, and interference with a business opportunity.

Plus One’s amended complaint alleged that a CapRelo representative had access to Point C’s trade secrets, including technical documents, system architecture, application-programming-interface specifications, algorithms, source code, and internal presentations. During an earlier motion to dismiss, Plus One’s counsel described CapRelo’s access as including source code. The court denied that motion after concluding that the complaint presented factual disputes that could not be resolved at the pleading stage.

Sanctions Motion

During discovery, Plus One identified source code among the trade secrets it alleged CapRelo had misappropriated. CapRelo asked Plus One to explain the factual basis for its claim that CapRelo had access to source code. At a hearing before Magistrate Judge John F. Docherty, Plus One’s counsel said the theory was that CapRelo could reverse-engineer the source code from information it received, including pieces embedded in an application-programming interface, rather than having direct access to the complete source code.

Judge Docherty denied CapRelo’s motion to require a new answer to the discovery question. He stated that Plus One would be bound by its answer and the additional explanation given at the hearing. CapRelo then moved for sanctions under Rule 11(b)(1) and Rule 11(b)(3). Rule 11(b)(1) addresses filings made for an improper purpose, such as causing unnecessary delay or increasing litigation costs. Rule 11(b)(3) requires factual allegations to have evidentiary support, or likely support after a reasonable opportunity for investigation or discovery.

CapRelo argued that Plus One added source-code allegations to avoid dismissal and later retreated to a reverse-engineering theory. CapRelo characterized that change as evidence that the earlier allegations were false, knowingly unsupported, and part of a pattern intended to prolong or expand the litigation. CapRelo asked the court to strike the source-code allegations from the amended complaint and award its fees for preparing the sanctions motion.

Court’s Analysis

The court denied the motion under Rule 11(b)(1). It rejected CapRelo’s assumption that the source-code allegations were included only to avoid dismissal. The court said the parties disputed whether source-code access was legally necessary to prove Plus One’s trade-secret claims, and that CapRelo’s supporting authorities were not binding on the court. Resolving that dispute through a sanctions motion would be improper; the issue was better suited to summary judgment.

The court also concluded that CapRelo had not presented specific evidence that Plus One made the allegations to delay dismissal or otherwise abuse the judicial process. Even if Plus One had shifted from alleging direct source-code access to alleging access sufficient for reverse engineering, that change alone did not establish an improper purpose.

The court found the Rule 11(b)(3) issue closer but still denied sanctions. Rule 11 requires evidentiary support for an allegation, not proof that the party will ultimately win. The court noted the companies’ close work under a confidentiality agreement, CapRelo’s development of similar competing software during that collaboration, and the continuing dispute over what information CapRelo received and whether it informed CompanionFlex. In the court’s view, that factual setting provided a basis for legitimate litigation and made it premature to conclude that Plus One’s source-code allegations were utterly unsupported.

The court also noted that discovery was still ongoing and that Plus One continued to maintain that CapRelo accessed source code through pieces embedded in an application-programming interface. Plus One represented that its expert would testify that CapRelo received enough source-code information to reverse-engineer and misappropriate it. The court did not decide whether that theory would succeed or whether the expert’s testimony would be admissible.

Disposition

The court held that CapRelo had not shown sanctionable conduct under Rule 11. It further held that, even if the allegations had been sanctionable, the requested relief would be inappropriate because striking the allegations could duplicate relief CapRelo might seek through summary judgment. The court therefore denied CapRelo’s Motion for Sanctions. It also denied Plus One’s request for fees incurred in responding to the sanctions motion. The order did not decide the underlying trade-secret claims or whether CapRelo accessed or misappropriated Point C’s source code.