Cotiviti, Inc. v. Deagle

Background

Cotiviti, Inc. sued former employees Cory Deagle, Rebecca Husband, Brian Rubio, Tom Magnotta, and Scott Rathke. Cotiviti alleged that the former employees later worked for HMS Holdings Corp., a direct competitor, and violated agreements containing restrictions on employee solicitation, client solicitation, competition, and disclosure or misuse of trade secrets.

Four defendants received restricted stock units under agreements containing restrictive covenants. Rathke signed a separate agreement with similar restrictions. The agreements selected Connecticut law and New York courts. Cotiviti had previously brought related claims in New York state court, voluntarily dismissed that action, and then filed this federal case. The federal complaint added claims and added Rathke as a defendant.

Choice of Law and Contract Provisions

The court declined to enforce the Connecticut choice-of-law provisions because the pleadings did not show sufficient contacts between Connecticut and the parties, contracts, or alleged conduct. Applying New York’s conflict-of-law rules, the court concluded that Georgia had the most significant relationship to the dispute and applied Georgia law.

The court took judicial notice of the merger agreement between Cotiviti Holdings and Verscend, but only for the agreement’s contents, not for the truth of disputed matters. The court found the agreement ambiguous as to whether the merger terminated the restricted-stock-unit agreements and their restrictive covenants. Because that ambiguity had to be resolved in Cotiviti’s favor at the motion-to-dismiss stage, the court treated the restrictive covenants as effective and enforceable for purposes of the motion.

Rule 12(b)(6) Rulings

A Rule 12(b)(6) motion tests whether a complaint alleges enough facts to state a legally plausible claim. The court found that Cotiviti plausibly alleged that at least one defendant, Magnotta, solicited other former Cotiviti employees to join HMS. Cotiviti also plausibly alleged violations of the non-compete clauses because it alleged that each defendant worked for HMS in a capacity similar to the defendant’s former role at Cotiviti.

The court found the client-solicitation allegations inadequate because Cotiviti did not identify a specific client, the person who allegedly solicited that client, or when the solicitation occurred. The court also found the trade-secret allegations conclusory. Cotiviti did not allege that the defendants copied or retained documents or other media containing trade secrets and later disclosed them to HMS. The court therefore held that the breach-of-contract claim survived only as to alleged employee solicitation and non-compete violations.

Because the implied covenant of good faith and fair dealing could not provide an independent basis for liability apart from the contract, that claim survived only to the extent it was based on the employee-solicitation and non-compete provisions.

The Connecticut Uniform Trade Secrets Act claim was dismissed because Georgia law governed the dispute. The court also held that the claim would fail as pleaded even under Georgia law because Cotiviti did not adequately allege actual or threatened trade-secret misappropriation. The federal Defend Trade Secrets Act claim was dismissed for the same lack of adequate allegations.

The unfair-competition claim was dismissed because Georgia law focuses on passing off one business’s goods or services as another’s, and Cotiviti did not allege that Defendants or HMS did so. The tortious-interference claim was dismissed because Cotiviti did not identify a specific lost client or employee relationship and did not adequately plead malice or financial injury. The duty-of-loyalty claim was dismissed because Cotiviti did not identify specific violations and primarily alleged conduct occurring after the defendants left Cotiviti. The unjust-enrichment claim was dismissed because the enforceable contracts governed the alleged conduct.

Costs for the Earlier State Action

Federal Rule of Civil Procedure 41(d) allows a court to award costs when a plaintiff voluntarily dismisses an earlier action and later brings an action based on the same claim against the same defendant. The court found that both cases depended on the same core allegations concerning solicitation, similar services for a competitor, and trade-secret misuse. It therefore granted Defendants’ motion for costs, including potentially attorneys’ fees for work that could not be reused in the federal case.

The court did not determine the amount immediately. It ordered Defendants to serve an affidavit identifying reasonable costs and ordered the parties to submit a joint letter proposing an agreement about the amount.

Disposition

Judge Edgardo Ramos denied the motion to dismiss as to Counts I and II insofar as they alleged employee solicitation and violations of the non-compete clauses. He granted the motion as to the other alleged violations of the contracts and as to all remaining counts. The dismissed claims were dismissed without prejudice, and Cotiviti was given leave to file a Second Amended Complaint by December 21, 2020. The court also granted Defendants’ motion for costs under Rule 41(d).