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Exl Laboratories, LLC v. Kris Egolf et al.

March 11, 2011

EXL LABORATORIES, LLC
v.
KRIS EGOLF ET AL.



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

MEMORANDUM

Presently before the Court is Defendants' Motion to Dismiss. (ECF No. 19.) For the following reasons, Defendants' Motion will be granted in part and denied in part.

I. BACKGROUND

On December 7, 2010, after a hearing, we issued a Memorandum and Order which temporarily restrained Defendants from misappropriating Plaintiff's trade secrets and other confidential information. EXL Labs., LLC v. Egolf, No. 10-6282, 2010 WL 5000835 (E.D. Pa. Dec. 7, 2010). Two days later, Defendants filed the instant Motion to Dismiss the Complaint.

Plaintiff EXL Laboratories is engaged in the business of manufacturing dairy hygiene and food sanitation products and technologies. Plaintiff primarily markets its goods and services through exclusive dealers and distributors. Plaintiff manufactures and markets to dairy producers a product called SOLO acid detergent, which is also licensed and sold under the DELTA trademark. Plaintiff provides its dealers with unique third-party incentives through Land O'Lakes, Inc. ("LOL Program"). Plaintiff also provides incentives and rebates through its own Dealer Programs.

Plaintiff restricts its dealers access to pricing information, which includes the price Plaintiff charges its dealers for Plaintiff's products and services ("Pricing Data"). Plaintiff affixes a "confidential" stamp on its Pricing data and prohibits its dealers from disclosing the Pricing Data to third parties. Plaintiff also internally restricts access to its Pricing Data to individuals who have a designated "need to know," and by storing this information on a secure computer server that is password protected.

Lancaster Dairy Farm Automation, Inc. ("LDFA") is the exclusive dealer for Plaintiff's products in Pennsylvania. At all relevant times, Defendants Dry and Egolf were employees of LDFA and directors of LDFA. Defendant Egolf and LDFA entered into an Employment Agreement containing non-disclosure and other restrictive covenants.*fn1 (Employment Agreement, Mot. Prelim. Inj. Ex. 10, ECF No. 3.) Defendant Dry did not enter any such agreement with LDFA.

As directors of LDFA, Defendants were privy to certain confidential information with respect to Plaintiff's business. Specifically, Roger Beers, who is Plaintiff's vice president and general manager, as well as an outside director of LDFA, has on several occasions disclosed Plaintiff's confidential information to members of the LDFA board of directors, which included Defendants. However, before disclosing such confidential information, Beers informed all members of the board that the confidential information that he was divulging to them must be treated as confidential and should not be disclosed to third parties. Beers has disclosed to the LDFA board of directors such confidential information as the precise nature of the Dealer Programs, the LOL Program, and Plaintiff's business development plans. He did not discuss Pricing Data during any LDFA board meeting.

On October 28, 2010, Beers received an email from Carter S. Elliot, III, one of Plaintiff's employees, which informed Beers that Defendants had had communications with Bou-Matic, LLC, a competitor of Plaintiff, about Plaintiff's Dealer Programs and undisclosed information related to SOLO/DELTA. Specifically, the email advised that Defendants had paid a company to assist them with the preparation of a business plan for a business to compete with Plaintiff and LDFA; that Defendants discussed with Bou-Matic the precise nature of Plaintiff's Dealer Programs; that Defendants discussed Bou-Matic's development of a product designed to compete with SOLO/DELTA, prior to Defendants' nascent company consummating a partnership with Bou-Matic; and that Defendants discussed other details of Plaintiff's LOL Program and business development plans. One of LDFA's employees, Becky Guhl, was present at meetings conducted by Defendants concerning Defendants' intentions to create a company in direct competition with LDFA. Guhl has confirmed that the information contained in the October 28, 2010, email is a true and complete summary of the information communicated to her at such meetings.

On October 29, 2010, Beers and Dennis Milhoan, president of LDFA, commenced an internal investigation of the activities of Defendants. Beers found an August 19, 2010, email from Defendant Dry to Lance Reynolds, the Bou-Matic account manager, which establishes that Dry transmitted confidential Pricing Data directly to Bou-Matic without Plaintiff's authorization.

On November 2, 2010, LDFA convened a meeting of the board of directors. During the meeting, Defendants each admitted that they had presented their business plan to Bou-Matic area manager, Duane Kleve, on July 6, 2010. Defendants admitted the authenticity of the August 19, 2010, email. Dry further admitted to transmitting Plaintiff's Pricing Data to Reynolds, the BouMatic account manager. Dry also produced copies of notes that he took at the meeting with Kleve. The notes show that Defendants disclosed Pricing Data with respect to "chlorinated cleaners and acid cleaners." At the meeting, Beers received a copy of Defendants' business plan, which Defendants had presented to prospective business partners. The business plan is premised upon a manufacturer-dealer business model that is "strikingly similar" to the relationship between Plaintiff and LDFA. Specifically, the business plan contains programs which imitate Plaintiff's LOL Program and Dealer Programs. At the conclusion of the November 2, 2010, board meeting, Milhoan terminated the employment of Dry and Egolf, effective immediately.

On November 12, 2010, Plaintiff filed both a Complaint and a Motion for Injunctive Relief. (ECF Nos. 1, 3.) The Complaint includes claims for Breach of Contract (Count One), Violation of Pennsylvania Uniform Trade Secret Act, 12 Pa. Cons. Stat. Ann. §§ 5302 et seq. (Count Two), Conversion of Trade Secrets and Confidential Information (Count Three), Unfair Competition (Count Four), and Civil Conspiracy (Count Five). On December 7, 2010, we issued a Temporary Restraining Order enjoining Defendants from misappropriating Plaintiff's trade secrets and other confidential information. On December 9, 2010, Defendants' filed the instant Motion to Dismiss. On December 30, 2010, we issued a Consent Order, which continued indefinitely the Temporary Restraining Order as a Preliminary Injunction, pending a decision on the merits. Plaintiff has filed a Response in Opposition to the Motion to Dismiss (ECF No. 24) and Defendants have filed a Reply thereto (ECF. No. 31). The matter is now ripe for disposition.

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 8, a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Federal Rule of Civil Procedure 12(b)(6) provides that a complaint may be dismissed for "failure to state a claim upon which relief can be granted." "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).A complaint that merely alleges entitlement to relief, without alleging facts that show entitlement, must be dismissed. See Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009).This "'does not impose a probability requirement at the pleading stage,' but instead 'simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of' the necessary elements." Phillips v. Cnty. of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (quoting Twombly, 550 U.S. at 556).

III. DISCUSSION

A. Breach of Contract Claim Against Defendant Egolf

Plaintiff is not a party to any express contract with Defendant Egolf. Nevertheless, Plaintiff argues that it was an intended, third-party beneficiary of Egolf's Employment Agreement with LDFA. Plaintiff argues that Egolf breached this contract by disclosing Plaintiff's trade secrets and other confidential information.

The Employment Agreement, by its terms, is governed in accordance with Maryland law. Generally, "a third party beneficiary contract arises when two parties enter into an agreement with the intent to confer a direct benefit on a third party, allowing the third party to sue on the contract despite the lack of privity." Flaherty v. Weinberg, 492 A.2d 618, 622 (Md. 1985). "To establish the existence of the requisite duty under this theory, the non-party plaintiff must show that a party actually intended to benefit him, and that the promisee's intent to confer upon him this benefit was a direct purpose of the transaction or relationship." Salmon v. Cable & Wireless USA, Inc., No. 01-394, 2003 WL 1730413, at *3 (D. Md. Mar. 18, 2003) (internal citations omitted); see also Merrick v. Mercantile-Safe Deposit & Trust Co., 855 F.2d 1095, 1100 (4th Cir. 1988); Marlboro Shirt Co. v. Am. Dist. Tel. Co., 77 A.2d 776, 777 (Md. 1951) ("[I]n order for a third party beneficiary to recover for a breach of contract it must clearly appear that the parties intended to recognize him as the primary party in interest and as privy to the promise. An incidental beneficiary acquires by virtue of the promise no right against the promisor or promisee."). The determination of whether a third party to the contract may recover under this theory is based on "the intention of the contract, revealed by its terms, in light of the surrounding circumstances." In re Merry-Go-Round Enters., Inc., 218 B.R. 361, 366 (Bankr. D. Md. 1998) (quoting Hamilton & Spiegel, Inc. v. Bd. of Educ. of Montgomery Cnty., 195 A.2d 710, 710 (Md. 1963)).

Although the name of an "intended third-party beneficiary normally appears in the language of a contract, '[t]here are cases where the name of the beneficiary is not stated, but where he can recover under the contract.'" Wong v. Aragona, 815 F. Supp. 889, 892 (D. Md. 1993) (quoting Marlboro, 77 A.2d at 778); see Salmon, 2003 WL 1730413, at *3 n.2 (finding it "not essential to the creation of a right in the third-party beneficiary that he be identified when a contract is made"); Geo. Byers Sons, Inc. v. E. Europe Imp. Exp., Inc., 488 F. Supp. 574, 584 (D. Md. 1980) ("While it is not essential to the creation of a right in the third-party beneficiary that he be identified when a contract is made, in order for him to recover on that contract 'it must clearly appear that the parties intended to recognize him as the primary party in interest and as privy to the promise.'") (citations omitted). Moreover, "[i]f a class of persons ...


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