PRCM Advisers LLC v. Two Harbors Investment Corp.

Background

PRCM Advisers LLC managed Two Harbors Investment Corp. under a management agreement. PRCM allegedly relied on personnel and resources from Pine River Capital Management, L.P. and its affiliates under a shared-services arrangement. The agreement allowed Two Harbors to decline renewal if its independent directors found PRCM’s compensation unfair, and separately allowed termination for cause based on a material breach or gross negligence.

The agreement stated that intellectual property created or developed by the manager in connection with the agreement would belong exclusively to the manager. It licensed Two Harbors to use that property during the agreement’s term. Personnel working on the management relationship also signed confidentiality, nonsolicitation, and inventions agreements requiring them to return Pine River property when their employment ended, subject to stated exceptions.

Two Harbors first notified PRCM that it would not renew the management agreement. It later terminated the agreement for cause, citing several matters involving employment agreements, compensation, conduct by PRCM partners, and PRCM’s communications asserting rights to personnel and intellectual property. Two Harbors then employed personnel who had managed it and used intellectual property developed during the management relationship. PRCM filed this federal action after voluntarily dismissing an earlier state-court action.

Claims and Motion to Dismiss

PRCM alleged that Two Harbors improperly terminated the management agreement under sections 13(a) and 15, breached the duty of good faith and fair dealing, and misappropriated intellectual property. It also asserted claims for breach of section 27 of the management agreement, violation of the Defend Trade Secrets Act, unfair competition, common-law misappropriation, unjust enrichment, conversion, declaratory relief, and tortious interference with confidentiality agreements.

Two Harbors moved to dismiss under the federal pleading rules. On such a motion, the court generally accepts well-pleaded factual allegations as true but may interpret contracts and other documents incorporated into the complaint.

Rulings on Termination Claims

The court dismissed PRCM’s claim that the nonrenewal under section 13(a) breached the agreement. The agreement’s no-waiver and cumulative-remedies provision allowed Two Harbors to exercise its separate right to terminate for cause after sending the nonrenewal notice. The agreement remained in effect until the effective termination date, so the for-cause termination did not improperly attempt to revive an already terminated agreement.

The court also dismissed PRCM’s challenge to the for-cause termination under section 15. PRCM alleged that Two Harbors used pretexts to internalize management, but the court held that the relevant question was whether the stated events occurred and amounted to material breaches or gross negligence. PRCM did not allege sufficiently that the employment and compensation matters or the conduct by PRCM’s partners failed to meet that standard. The court did find that PRCM adequately alleged that its communications about legal rights and intellectual property did not breach the agreement, but because those communications were not the only grounds for termination, the overall termination claim was dismissed.

The court dismissed the related claim for breach of the implied duty of good faith and fair dealing. It held that the duty limits conduct rather than motives, and that an otherwise valid termination for cause does not violate that duty merely because the termination was motivated in part by unrelated reasons.

Intellectual-Property Claims

The court held that PRCM plausibly alleged ownership of the intellectual property even though PRCM itself had no employees. The agreement contemplated that PRCM could perform its management responsibilities through personnel retained from affiliates under the shared-services arrangement. Whether those personnel acted on PRCM’s behalf when creating the intellectual property was a fact-specific issue that could not be resolved on a motion to dismiss.

The court rejected Two Harbors’ argument that former personnel could continue using PRCM’s intellectual property simply because they became Two Harbors employees. The confidentiality agreements required employees to return PRCM’s tangible property when their employment ended. The exception allowing use of confidential information in connection with services for Two Harbors did not independently give Two Harbors the right to use PRCM’s intellectual property after the management agreement ended.

The court therefore allowed PRCM’s contractual intellectual-property claims to proceed. It also allowed the Defend Trade Secrets Act claim to proceed insofar as PRCM identified the alleged trade secrets with enough specificity. The court held that descriptions of particular programs, databases, models, and tools were sufficient, while unidentified trade secrets and broad descriptions such as generic operations tools, external data management, task-specific code, and information-technology processes were too vague. The court also rejected challenges based on ownership and secrecy at this stage.

The court allowed PRCM’s unfair-competition claim to proceed because PRCM alleged that Two Harbors used access to PRCM’s intellectual property, personnel, and know-how to internalize management without compensation. The unjust-enrichment claim also survived because the parties disputed whether the management agreement covered the intellectual property and PRCM could plead unjust enrichment in the alternative. The conversion claim survived because PRCM based it on alleged unauthorized use of trade secrets after the management agreement ended, which the court viewed as distinct from the contract claim. The court allowed declaratory relief concerning Two Harbors’ post-termination use of the intellectual property, but dismissed the request for a declaration that the termination itself was improper.

The court dismissed PRCM’s common-law misappropriation claim as duplicative of its unfair-competition claim because both claims relied on the same theory and allegations.

Tortious-Interference Claim and Disposition

PRCM alleged that Two Harbors interfered with confidentiality agreements between Pine River Domestic Management LP and certain employees. The court held that PRCM was not a party to those agreements and therefore could not assert the claim as pleaded. Because Two Harbors identified no apparent reason to deny amendment, the court granted PRCM leave to add Pine River Domestic Management LP as a party within 30 days.

The court’s conclusion states that Two Harbors’ motion to dismiss was granted to the extent that PRCM’s claims for tortious interference, common-law misappropriation, breach of sections 13(a) and 15 of the management agreement, and breach of the duty of good faith and fair dealing were dismissed. The motion was denied in all other respects. The opinion does not state that any dismissal was with or without prejudice.