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Cognetx, Inc. v. Haughton

August 26, 2010


The opinion of the court was delivered by: Rufe, J.


On May 17, 2010, Defendants Robert Houghton*fn1 and BusinessOne Technologies, Inc. ("Defendants") removed the instant matter from the Court of Common Pleas of Bucks County to this Court, alleging that Plaintiff CognetX, Inc. ("Plaintiff" or "CognetX") had "artfully plead" a copyright action as state law claims in order to avoid federal jurisdiction. Before the Court is Plaintiff's Expedited Motion to Remand,*fn2 asserting that because Plaintiff does not have a registered copyright, it could not have brought the action in federal court, and thus removal was improper. Plaintiff's Motion is now ripe for disposition.


Plaintiff CognetX is a business that provides "healthcare research, analysis, and consulting" and "information regarding reimbursements and formularies" to clients such as pharmaceutical manufacturers.*fn3 From August 15, 2000 until his termination on April 13, 2010, Defendant Houghton ("Houghton") served as President, Secretary, and Treasurer of CognetX.*fn4

CognetX asserts that under the employment agreement entered into by CognetX and Houghton, Houghton could not compete, solicit employees, or disclose CognetX information.*fn5

In the early 2000's, CognetX developed a project named "MCHMaestro," which was designed to "expand[] [CognetX's] database to allow its customers to access the information that CognetX provided via a software interactive interface."*fn6 CognetX expected MCHMaestro to be a "major revenue driver" in 2005.*fn7 MCHMaestro was later renamed "Symphony," allegedly at Houghton's request.*fn8 During 2005, however, CognetX's business began to deteriorate significantly. Frederick Howe, the majority shareholder of CognetX, began to suspect that the source of CognetX's business troubles was BusinessOne Technologies, Inc. ("BOT"), a company to which CognetX had outsourced IT functions. At that time, BOT was developing a product named "Maestro" that had "striking similar appearance and functionality" to Symphony.*fn9 CognetX's ensuing investigation into the actions of BOT led to the conclusion that both BOT and Houghton were engaged in malfeasance.*fn10

CognetX alleges in its Complaint that it learned that Houghton had acquired BOT and became its majority stakeholder in 2003 or 2004.*fn11 Sometime between 2004 and 2010, CognetX avers that Houghton served in several BOT leadership positions, including Secretary, Treasurer, Director, and Chairman.*fn12 CognetX asserts that it discovered numerous breaches of fiduciary duty and misappropriation of its assets during its investigation of Defendant Houghton and BOT: First, Houghton allegedly misrepresented to CognetX employees that he was the sole owner and director of Cognetx.*fn13 Second, CognetX contends that because "the businesses of CognetX and BOT overlap,"*fn14 Houghton had a duty to disclose that he acquired an ownership interest in BOT when CognetX and BOT began their business relationship.*fn15 Houghton allegedly diverted assets to BOT soon after he acquired the company, and commingled the staffs of both entities to the detriment of CognetX.*fn16 In the "Misappropriation of Customers, Trade Secrets and Products" section of its Complaint, CognetX refers to malfeasance regarding the development of Maestro, BOT's product that resembles Symphony.*fn17 CognetX also accuses BOT of stealing and using its computers and servers, and further asserts that a former CognetX employee, now a BOT employee, is the only employee who was authorized with the administrative rights to access CognetX servers, email system and websites.*fn18 Finally, CognetX alleges that in mid-March of 2010, Houghton met with CognetX employees to discuss a "reorganization" of BOT, which involved the transfer of CognetX employees onto BOT's payroll, among other changes.*fn19

On April 13, 2010, Frederick Howe intervened to elect a new Board of Directors for CognetX.*fn20 A new Chief Executive Officer was also elected, and Houghton was thereafter placed on leave and thereafter terminated.*fn21

Defendants answer that Houghton was abruptly and unfairly ambushed on April 13th, when CognetX removed him from his position.*fn22 They further allege that, as Houghton was preparing to assert his rights and request a Temporary Restraining Order ("TRO") against CognetX as a result of that termination, CognetX initiated the instant action.*fn23 On April 19, 2010, CognetX filed the underlying Complaint, a Petition for a TRO, and a Petition for Preliminary Injunction in the Bucks County Court of Common Pleas. One day later, in the same court, Houghton filed a complaint against CognetX and its officers, directors, and majority shareholder. Defendants also pursued an emergency TRO directing CognetX to cease its alleged surveillance of Houghton, "his elderly mother, and their neighbors."*fn24 The Bucks County Court of Common Pleas held a preliminary conference on April 22, 2010, wherein the parties agreed to meet and confer regarding an expedited discovery schedule; the court then scheduled an injunction hearing for June 2, 2010.*fn25

The following day, the court conducted a telephone conference with the parties and sua sponte scheduled an evidentiary hearing on CognetX's Petition for a TRO on April 27th and 28th.*fn26 In advance of the hearing, Defendants made discovery requests, to which Plaintiff responded.*fn27

The April 27th hearing was terminated when Defendants' counsel requested additional time to retain independent counsel for BOT.*fn28 Thereafter, on May 3rd, the parties entered into a stipulated order removing Houghton from his position at BOT and appointing an independent accountant as a temporary receiver over BOT.*fn29 The parties then engaged in pre-hearing discovery: Houghton served interrogatories and document requests on CognetX, and CognetX served deposition notices on Houghton and BOT President James Barone and Chief Financial Officer Richard Kane.*fn30

On May 17, 2010, Defendants filed a Joint Notice of Removal; at that point, it appears that efforts to conduct discovery halted.

CognetX's Complaint contains twelve (12) counts connected to Defendants' alleged theft of its assets, customers, and employees: breach of fiduciary duty, concerted tortious conduct, usurpation of corporate opportunities, fraud/misrepresentation, breach of contract, breach of covenant of good faith and fair dealing, misappropriation of trade secrets, conversion, unfair competition, unjust enrichment, accounting, and appointment of receiver.*fn31 Defendants argue in their Notice of Removal that four counts pled as state claims (conversion, misappropriation of trade secret, unjust enrichment, and unfair competition) are preempted by the Copyright Act,*fn32 alleging that "[t]he crux of CognetX's Complaint is the claim that Houghton and BOT ...

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