Docmagic Inc. v. Ellie Mae Inc.

• Decision Date: 12 October 2010
• Docket Number: No. C 09–04017 MHP.,C 09–04017 MHP.
• Citation: 745 F.Supp.2d 1119
• Court: U.S. District Court — Northern District of California
• Parties: DOCMAGIC, INC., Plaintiff,v.ELLIE MAE, INC., Defendant.

745 F.Supp.2d 1119

DOCMAGIC, INC., Plaintiff,

v.ELLIE MAE, INC., Defendant.

No. C 09–04017 MHP.

United States District Court, N.D. California.

Oct. 12, 2010.

Jacqueline Bos, James P. Bennett, Stuart Christopher Plunkett, Susan Vastano Vaughan, Morrison & Foerster LLP, San Francisco, CA, for Plaintiff.Ellen McGinty King, White & Case LLP, Palo Alto, CA, Howard Marc Wettan, New York, NY, Taryn Lam, William Sloan Coats, III, Kaye Scholer LLP, Menlo Park, CA, for Defendant.

MEMORANDUM & ORDER

MARILYN HALL PATEL, District Judge.

Plaintiff DocMagic, Inc. (“DocMagic”), a corporation providing online loan document preparation services, brought this action against defendant Ellie Mae, Inc. (“Ellie Mae”), a corporation providing various types of software and services to mortgage professionals. DocMagic's first amended complaint alleges that Ellie Mae unlawfully denied DocMagic access to Ellie Mae's online transaction network, and used DocMagic's proprietary information to create a competing document preparation service. On the basis of these allegations, DocMagic asserts thirteen claims for relief for antitrust violations, trademark infringement, copyright infringement, interference with contractual relationships, breach of contract, trade secret misappropriation and unfair competition. In response, Ellie Mae filed a first amended counterclaim alleging that DocMagic unlawfully accessed Ellie Mae's computer system, and used Ellie Mae's proprietary software to create a new program that permits DocMagic to interact directly with Ellie Mae customers without using Ellie Mae's online transaction network. Ellie Mae asserts nine counterclaims, including copyright infringement, computer fraud, breach of contract, interference with contractual relationships and unfair competition. Before the court are the parties' cross-motions to dismiss. Ellie Mae moves to dismiss DocMagic's complaint in its entirety, and DocMagic moves to dismiss Ellie Mae's first through fifth and seventh through ninth counterclaims. Having considered the parties' arguments and submissions, and for the reasons discussed below, the court enters the following memorandum and order.

BACKGROUNDI. Loan preparation

A brief description of how loans are prepared electronically is necessary to understand the factual background to this case. The process of loan preparation typically begins when a loan originator, such as a mortgage broker or a lender, enters data about the prospective loan into a computer program known as a loan origination system (“LOS”). Docket No. 38 (First Am. Compl. (“Compl.”)) ¶¶ 29–30. The advantage of using an LOS is that once the information has been entered into the LOS, the LOS can provide that data in an electronic format to compatible computer programs, making it unnecessary to engage in the time-consuming and error-prone process of manually re-keying the loan information. Id. ¶ 30. Large lenders, like Bank of America and Wells Fargo, develop their own proprietary LOSs. The rest of the market uses third-party LOSs, which are produced by a number of different companies. Id. ¶¶ 102, 104.

Settlement service providers, or “vendors,” can use the electronically-stored data in the LOS to perform the various tasks necessary to actually prepare a loan. The services provided by these vendors include, for example, document preparation services, appraisals, credit reports, fraud reports, flood information and title and escrow services. Id. ¶¶ 20, 95. However, a vendor will only be able to use the data in the LOS if the LOS and the vendor's own programs are compatible.

In order to connect a loan originator to a vendor and ensure that the loan originator's LOS is compatible with the vendor's programs, corporations have set up online transaction networks. These networks permit loan originators to find and hire vendors providing the services they need. Id. ¶ 20. A network can also automatically convert the data in the loan originator's LOS into a format that the vendor can use. Id. ¶¶ 21–22. A single network can be used by many different LOSs made by different software companies, id. ¶¶ 32–33, and can connect those LOSs to many different vendors. Loan originators usually can join and use a network for free, whereas vendors typically pay a fee to the network operator for every transaction the vendor completes over the network.

If a LOS and/or a vendor are not connected to a network, it is more difficult to achieve compatibility between the LOS and the vendor's programs. To achieve compatibility without using a network, the LOS can be equipped with a software development kit (“SDK”), a program which retrieves data that has been entered into the LOS and converts it into a format usable by the vendor. Id. ¶ 67. The vendor can then provide an adapter program that will transfer the data from the SDK into the vendor's programs, thus creating a bridge from the LOS, to the SDK, to the adapter program, to the vendor's services. Id. ¶ 68.

II. DocMagic, Ellie Mae and their contractual agreements

Ellie Mae is a LOS developer, and the creator of a LOS called Encompass. Docket No. 35 (First Am. Counterclaim (“Counterclaim”)) ¶ 6. According to DocMagic, Ellie Mae's share of the third-party LOS market, defined below, is greater than 50%, and probably greater than 60%. Compl. ¶ 105. Ellie Mae is also the owner and operator of ePASS, an online transaction network of the type described above. Id. ¶ 20. According to DocMagic, Ellie Mae's share of the network market, also defined below, is as much as 60%. Id. ¶ 99. Ellie Mae also developed a SDK for Encompass, called Encompass SDK, capable of making Encompass compatible with vendors who are not on ePASS. Id. ¶ 67.

DocMagic is a vendor providing loan document preparation services (“DPS”). Id. ¶ 15.

In November 2003, Ellie Mae and DocMagic entered into an agreement, known as the “Bridge Agreement,” by which DocMagic became one of the vendors on ePASS. Id. ¶ 38; Docket No. 44 (King Dec.), Exh. H (Electronic Bridge Agreement Between Ellie Mae and Participator (“Bridge Agreement”)). In exchange for access to the network, DocMagic agreed to pay a fee of between one and three dollars, depending on volume, per transaction that it made over ePASS. Bridge Agreement, Exh. A § 2(b). DocMagic also agreed to provide Ellie Mae with proprietary information about DocMagic's document preparation program, so that Ellie Mae could connect DocMagic's program to Ellie Mae's network and ensure compatibility between the LOSs accessing ePASS and DocMagic's program. Id. § 1. The Bridge Agreement acknowledged that each party would have access to the other's proprietary customer information, and provided that neither party would disclose such proprietary information or use it for any purpose outside those contemplated by the agreement. Id. § 10.4. The Bridge Agreement stated that it would automatically renew every year, unless terminated upon notice given 120 days prior to the beginning of the next automatic renewal. Id. § 9.2.

In September 2006, Ellie Mae and DocMagic also entered into a Reseller Agreement. Compl. ¶ 41; King Dec., Exh. G (Reseller Agreement). Under the Reseller Agreement, Ellie Mae became a non-exclusive reseller of certain DocMagic document preparation services, which Ellie Mae was authorized to re-brand with Ellie Mae trademarks. Reseller Agreement § 1. The Reseller Agreement also acknowledged that each party would disclose proprietary information to the other, and required each party not to disclose the other's proprietary information, or use it outside of the purposes of the agreement. Id. § 7.3. Like the Bridge Agreement, the Reseller Agreement automatically renewed every year unless terminated upon notice given 120 days before the next renewal date. Id. § 9.1. The Reseller Agreement also provided that if it was terminated without cause, it would be followed by a sixty-day transition period during which the re-branded services would remain available to Ellie Mae customers, and DocMagic would refrain from marketing its services to Ellie Mae customers. Id. § 9.4(a).

On April 27, 2009, Ellie Mae sent DocMagic notice terminating the Reseller Agreement, effective on August 30, 2009. King Dec., Exh. A. On April 28, 2009, DocMagic likewise sent Ellie Mae notice terminating the Reseller Agreement, effective September 1, 2009. Id., Exh. B. On May 21, 2009, Ellie Mae sent DocMagic notice terminating the Bridge Agreement, effective August 30, 2009. Id., Exh. D.

The parties' characterization of why these contracts were terminated, and of the events that followed, diverge dramatically. Under DocMagic's version of the story, Ellie Mae stole DocMagic's document preparation software and used it to create a competing product. DocMagic then alleges that Ellie Mae attempted to drive DocMagic out of the document preparation business by denying DocMagic access to customers using the Encompass LOS, forcing DocMagic off ePASS and forbidding Encompass users from connecting to DocMagic through the Encompass SDK. Ellie Mae contends, on the other hand, that DocMagic refused to negotiate reasonable fees to be a part of ePASS; rather than pay those reasonable fees, Ellie Mae alleges that DocMagic illegally accessed and copied Ellie Mae's software in order to write an adapter program that would connect DocMagic to Encompass users for free.

III. DocMagic's version of events

DocMagic begins by alleging that Ellie Mae purchased a DPS vendor called Online Documents, and then used DocMagic's proprietary information (to which Ellie Mae had access under the Bridge and Reseller Agreements) in combination with Online Documents' technology to effectively copy DocMagic's software and services. Compl. ¶¶ 48–50, 53–58. Specifically, DocMagic claims that Ellie Mae's new DPS, Ellie Mae Docs, intentionally copied the “structures, workflows, and data ... screens, terminology, and overall look and feel of the DocMagic software,” id. ¶ 50, and in...