Murj, Inc. v. Rhythm Management Group, Inc.

Background

Murj alleged one breach-of-contract claim against Rhythm under agreements concerning Murj’s data-management software platform for implanted cardiac-device transmissions. The agreements included confidentiality, reverse-engineering, and intellectual-property provisions. Murj alleged that, while the agreements were in effect, Rhythm created a competing cardiac-monitoring software platform and used Murj’s platform and related information to sell that competing platform.

Murj sought damages including lost profits, unjust enrichment, annual lost revenue, royalties, specific performance, and injunctive relief. The court had previously granted Rhythm’s first motion to dismiss and allowed Murj to amend its complaint. This opinion addressed Rhythm’s motion to dismiss the second amended complaint.

Judicial Notice

Rhythm asked the court to take judicial notice—a process allowing a court to accept certain facts without formal proof—of archived versions of Murj’s website and Twitter posts and images. Rhythm argued that these materials showed Murj had publicly disclosed the platform before the agreements were signed. The court declined to take judicial notice of those materials for purposes of deciding the motion because Rhythm was asking the court to draw disputed conclusions about what the materials disclosed and what features of the platform they showed.

The court did grant Rhythm’s request to take judicial notice of a technical definition of reverse engineering because that definition was not reasonably disputable.

Contract Theories

The court applied California law, under which a breach-of-contract claim requires allegations showing a contract, the plaintiff’s performance or an excuse for nonperformance, the defendant’s breach, and resulting damages. The existence of the agreements and Murj’s performance were undisputed for purposes of the motion.

The court held that Murj adequately pleaded a breach of the confidentiality clause. Murj alleged that Rhythm used the Murj platform to create its competing platform, incorporated portions of the Murj platform into it, failed to keep the platform confidential, disclosed portions without permission, and failed to take reasonable steps to prevent disclosure. The court also rejected Rhythm’s argument that the platform could not be confidential because some images and demonstrations had been publicly available.

The court held that Murj adequately pleaded a breach of the reverse-engineering clause. Murj alleged that Rhythm examined the Murj platform while having access to it as a licensee and used that knowledge to create a competing platform. Murj also identified alleged similarities involving the user interface, layout, design, “2 Click Clear” service, alerts, transmission-review and processing functions, synergy-page features, and revenue-collection features. The court found these allegations sufficient to make the theory plausible.

The court rejected Murj’s theory under Section 3.4(d). That provision prohibited Rhythm from distributing, selling, sublicensing, renting, leasing, or using the contract’s “Products” for certain service-provider purposes. The court held that the agreement unambiguously defined “Products” to mean the Murj platform and services, not products created by another party such as the Rhythm platform. Murj therefore failed to plead a breach based on Section 3.4(d).

The court held that Murj adequately pleaded a breach of Section 3.5, which provided that Murj and its licensors retained all rights, title, and interest, including intellectual-property rights, in the Products. Because the court had found that the Murj platform qualified as confidential information, it found that Murj had identified an intellectual-property interest that Rhythm allegedly violated.

Damages and Equitable Relief

The court held that Murj did not adequately plead damages based on unjust enrichment. The parties did not dispute the validity of their contract, and the court concluded that Murj had not shown why royalty-based disgorgement would be appropriate when Murj had an adequate legal remedy under the contract claim.

The court held that Murj adequately pleaded direct lost-profit damages. The agreement barred indirect, incidental, special, or consequential damages, including lost profits, but the court read that provision as barring lost profits when they were consequential or special damages, not direct lost profits that flowed from the alleged breach. Murj’s alleged lost profits from customers who allegedly would have purchased the Murj platform were sufficiently pleaded at this stage.

The court held that damages for the cost of developing confidential information and loss of business market value were not recoverable under the agreement. It characterized those losses as collateral or indirect losses rather than damages flowing directly from the contract’s promised performance. The court therefore found that Murj had not adequately pleaded damages for those categories and struck damages for loss of market value, development costs, and unjust enrichment.

The court also declined to dismiss Murj’s requests for specific performance and injunctive relief. Because Murj adequately pleaded a breach-of-contract claim, the court found that a proven breach could provide a basis for those forms of relief.

Disposition

The court granted in part and denied in part Rhythm’s motion to dismiss. Specifically, the motion was granted to the extent Murj’s breach-of-contract claim was based on Section 3.4(d), and it was denied in all other respects. The court struck damages for loss in market value, development costs, and unjust enrichment. Judge Edward J. Davila also denied Rhythm’s request for judicial notice of the archived webpages and Twitter posts and images, while granting judicial notice of the technical definition of reverse engineering.