Cotiviti, Inc. v. Deagle

• Decision Date: 19 November 2020
• Docket Number: 20 Civ. 2730 (ER)
• Citation: 501 F.Supp.3d 243
• Parties: COTIVITI, INC., Plaintiff, v. Cory DEAGLE, Rebecca Husband, Brian Rubio, Tom Magnotta, and Scott Rathke, Defendants.
• Court: U.S. District Court — Southern District of New York

501 F.Supp.3d 243

COTIVITI, INC., Plaintiff,

v.Cory DEAGLE, Rebecca Husband, Brian Rubio, Tom Magnotta, and Scott Rathke, Defendants.

20 Civ. 2730 (ER)

United States District Court, S.D. New York.

Signed November 19, 2020

Daniella Adler, A Michael Weber, Miguel Angel Lopez, Littler Mendelson, P.C., New York, NY, for Plaintiff.

Shawn J. Rabin, Ravi Bhalla, Susman Godfrey LLP, New York, NY, for Defendants.

OPINION & ORDER

Ramos, D.J.:

Cotiviti, Inc. ("Cotiviti") brings this action against its former employees Cory Deagle, Rebecca Husband, Brian Rubio, Tom Magnotta, and Scott Rathke (collectively, "Defendants"), all of whom now work for one of its competitors, for breach of their employment agreements and related claims. Pending before this Court is Defendants’ motion to dismiss and to award costs under Federal Rules of Civil Procedure 12(b)(6) and 41(d), respectively. For the reasons discussed below, Defendants’ motion to dismiss is GRANTED in part and DENIED in part, and Defendants’ motion for costs is GRANTED.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY¹

Cotiviti, a Delaware corporation with its principal place of business in Georgia, provides payment accuracy and spend-management solutions to public and commercial health plans in the United States, Canada, and India. Doc. 21, ¶¶ 2, 6. Cotiviti previously employed Cory Deagle of Utah, Rebecca Husband of Kentucky, Brian Rubio and Tom Magnotta of Pennsylvania (collectively, the "RSU Defendants"),² and Scott Rathke of Florida. Id. , ¶¶ 2, 10–14. Each of the Defendants held senior leadership positions with Cotiviti, directly communicated with clients, developed and were privy to sensitive business strategies, and had access to Cotiviti's trade secrets. Id. , ¶¶ 2, 38. Cotiviti's trade secrets are not known to its competitors but would be of significant value to them if acquired. Id. , ¶ 35.

Defendants each entered into agreements with Cotiviti containing similar non-compete, non-solicitation, and non-disclosure clauses. On June 24, 2016, Rathke executed a Non-Disclosure, Non-Solicitation, and Non-Compete Agreement (the "Rathke Agreement"). Id. , ¶ 39. In 2017 and 2018, the RSU Defendants each executed the Restricted Stock Unit Award Agreement ("RSU Agreement") as part of Cotiviti's 2016 Equity Incentive Plan ("Incentive Plan"). Id. , ¶ 44. In consideration of the RSU Defendants’ participation in the Incentive Plan and receipt of restricted stock units ("RSU Award"), Defendants agreed to Exhibit A of the RSU Agreement, which contains restrictive covenants ("RSU Restrictive Covenants"). Id. , ¶ 47. The value of the RSU Awards at the time the stocks were given was over $5,000 for Rubio, $33,000 for Husband, $59,000 for Deagle, and $80,000 for Magnotta. Doc. 21, ¶¶ 55, 57, 59, 61.

The Rathke Agreement and the RSU Restrictive Covenants have substantially similar provisions barring (1) disclosure or misappropriation of trade secrets under state trade secrets laws, (2) solicitation of clients and employees, and (3) the provision of "substantially similar professional services" to Cotiviti competitors. The trade secrets provision of the Rathke Agreement states:

Trade Secrets. You acknowledge the protections provided to Cotiviti's Trade Secrets under applicable law, including the protections afforded by the Connecticut Uniform Trade Secrets Act, Conn. Gen. Stat. § 35-50 et seq. (the "Act"). You agree not to disclose or misappropriate any Cotiviti Trade Secrets for so long as such materials or information constitutes trade secrets under the Act. For purposes hereof the term "Trade Secret" is defined in the Act.

Doc. 21 ex. A, § 2. The Rathke Agreement's non-solicitation clauses state:

Non-Solicitation of Customers. During the term of your employment with Cotiviti and for a period of two (2) years following the termination of such employment for whatever reason, you shall not (except on behalf of Cotiviti) solicit, either directly or indirectly, any Person: (i) who is a client or who was a client or an actively sought prospective client of Cotiviti, (ii) who is located within the Territory (as defined in the attached Exhibit A); (iii) with whom you had Meaningful Business Contact at any time during the two (2) year period ending on the date on which your employment by Cotiviti ends (or shorter period, if applicable), (iv) for the purpose of selling or otherwise providing to such client or prospective client, any services or products that are substantially similar to or competitive with any of the services or products provided by Cotiviti as of the date of your solicitation or the termination of your employment, whichever is earlier ("Competitive Services")....

Non-Solicitation of Employees. You agree that during the term of your employment by Cotiviti and for a period of two (2) years thereafter, you will not directly or indirectly (i) solicit any person who is at the time of the solicitation, or was, at any time during the two (2) year period ending on the date on which your employment by Cotiviti ends (or shorter period, if applicable), (ii) an employee, agent, or independent contractor of Cotiviti, (iii) with whom you had business contact in the course of your employment by Cotiviti, (iv) for the purpose of offering employment to such person within the Territory with an individual or entity which is engaged in providing or selling Competitive Services, (v) for the purpose of providing any services which are substantially similar to the services performed by such person for Cotiviti.

Id. , § 3, 4. Finally, the non-compete clause provides:

Non-Compete. You agree that during the term of your employment by Cotiviti and for a period of two (2) years thereafter, regardless of the reason for such separation, you will not directly or indirectly provide substantially similar professional services within the Territory to that part of any Person engaged in selling or providing Competitive Services.

Id. , § 5.

The RSU Restrictive Covenants contain similar clauses:

[1.]f. Participant acknowledges the protections provided to the Company's Trade Secrets under applicable law. Participant agrees not to disclose or misappropriate any Company Trade Secrets for so long as such materials or information constitute trade secrets. For purposes hereof the term "Trade Secret" is defined in the applicable State Trade Secrets Act....

2. Non-Solicitation of Customers. During the term of Participant's Service with the Company and for a period of two (2) years following the termination or expiration of Participant's Service with the Company or its Subsidiaries for any reason, Participant shall not (except on behalf of the Company) solicit, either directly or indirectly, any Person: (i) who is a client or who was a client or an actively sought prospective client of the Company, (ii) who is located within the Territory (as defined in Attachment 1); (iii) with whom the Participant had Meaningful Business Contact at any time during the two (2) year period ending on the date on which the Participant's Service with the Company or its Subsidiaries ends (or shorter period, if applicable), (iv) for the purpose of selling or otherwise providing to such client or prospective client, any services or products that are substantially similar to or competitive with any of the services or products provided by the Company as of the date of Participant's solicitation or the termination or expiration of Participant's Service with the Company or its Subsidiaries, whichever is earlier ("Competitive Services")....

3. Non-Solicitation of Employees. Participant agree [sic ] that during the term of Participant's Service with the Company and its Subsidiaries and for a period of two (2) years thereafter, Participant will not directly or indirectly (i) solicit any person who is at the time of the solicitation, or was, at any time during the two (2) year period ending on the date on which Participant's Service with the Company and its Subsidiaries ends (or shorter period, if applicable), (ii) an employee, agent, or independent contractor of the Company, (iii) with whom Participant had business contact in the course of Participant's Service with the Company and its Subsidiaries, (iv) for the purpose of offering employment to such person within the Territory with an individual or entity which is engaged in providing or selling Competitive Services, (v) for the purpose of providing any services which are substantially similar to the services performed by such person for the Company.

4. Non-Compete. Participant agrees that during the term of Participant's Service with the Company or its Subsidiaries and for a period of two (2) years thereafter, regardless of the reason for such separation, Participant will not directly or indirectly provide substantially similar professional services within the Territory to that part of any Person engaged in selling or providing Competitive Services.

Doc. 21 ex. B, §§ 1.f., 2, 3, 4.

The Rathke Agreement and RSU Restrictive Covenants also contain choice of law provisions selecting Connecticut law to construe and enforce the contracts, and forum selection clauses submitting to the exclusive jurisdiction of the federal and state courts in New York. Doc. 21 ex. A, § 7; Doc. 21 ex. B, § 6.

In June 2018, Cotiviti Holdings merged with a company called Verscend to form Cotiviti, Inc. (the "Verscend Merger"). Doc. 26, 8. The terms of the Verscend Merger are outlined in the "Agreement and Plan of Merger" filed with the SEC ("Merger Agreement") and include provisions relating to the Incentive Plan and the RSU Awards. Id. , 8–9. Specifically, Section 3.05(b) of the Merger Agreement provides:

Effective as of immediately prior to the Effective Time, each Company RSU Award that remains outstanding and each Company Restricted Stock Award that remains outstanding and unvested shall (i) vest in full, and (ii) by virtue of the Merger and without any action on the part of the holders thereof, be cancelled and terminated as of immediately

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