Cotiviti Holdings, Inc. v. McDonald

Background

Cotiviti, Inc., Cotiviti Holdings, Inc., and Cotiviti USA, LLC sued former employees Kevin McDonald, Ronald Jones, Jr., and Jeffrey Martin. The amended complaint asserted breach of contract, misappropriation of trade secrets, and unfair competition. The opinion treated the complaint’s factual allegations as true for purposes of the motion to dismiss and expressly stated that doing so was not a finding that the allegations were true.

The defendants had held management or executive positions at Cotiviti and allegedly had access to sensitive business information and trade secrets. Each had signed agreements containing restrictive covenants. The agreements allegedly restricted competition, solicitation, or disclosure of information for two years after employment ended. McDonald, Jones, and Martin later accepted positions at Discovery Health Partners, which Cotiviti alleged was a direct competitor. Cotiviti alleged that their new responsibilities were substantially similar to their former responsibilities.

Choice of Law

The court applied Connecticut law to the breach-of-contract claim because the parties briefed that claim under Connecticut law. It applied Delaware law to the misappropriation-of-trade-secrets and unfair-competition claims. The court concluded that the restrictive covenant’s choice-of-law provision governed contract breaches, while the broader choice-of-law provision in the restricted stock unit agreements governed tort claims outside the restrictive covenant’s scope.

Breach of Contract

Under Connecticut law, a breach-of-contract claim requires an agreement, performance by one party, breach by the other party, and damages. The court held that Cotiviti adequately alleged such a claim against all three defendants. The complaint alleged that Discovery Health Partners was a direct competitor and that the defendants’ new roles involved substantially similar services and responsibilities. The court also took judicial notice of publicly available information on Discovery Health Partners’ website describing Jones’s and Martin’s responsibilities, using that information to determine what the website stated rather than to establish the truth of the statements.

Misappropriation of Trade Secrets

Under Delaware law, a trade-secret misappropriation claim requires allegations that a defendant acquired, disclosed, or used another’s trade secret through improper means or without consent in circumstances creating a duty to maintain its secrecy or limit its use. Cotiviti alleged that all three defendants had access to its trade secrets and had substantially similar responsibilities in their new positions. The court held that those allegations sufficiently stated a trade-secret claim against each defendant.

Unfair Competition

Under Delaware law, unfair competition requires a reasonable expectation of a valid business relationship, wrongful interference that defeats that expectation, and resulting harm. The defendants argued that Cotiviti’s unfair-competition claim duplicated its other claims. The court agreed that the claim did not provide relief or additional damages beyond the breach-of-contract and trade-secret claims. It therefore held that Cotiviti failed to state an unfair-competition claim.

Disposition

Judge Vernon S. Broderick granted in part and denied in part the defendants’ motion to dismiss. The court granted the motion as to the unfair-competition claim and denied it as to the breach-of-contract and misappropriation-of-trade-secrets claims. The defendants were directed to file an answer to the amended complaint within twenty-one days of the opinion and order.