HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 1 of 28 [*1] HMS Holdings Corp. v Arendt 2015 NY Slip Op 51034(U) Decided on July 14, 2015 Supreme Court, Albany County Platkin, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports. Decided on July 14, 2015 Supreme Court, Albany County HMS Holdings Corp., Health Management Systems, Inc., and HMS Business Services, Inc., Plaintiffs, against Matthew Arendt, Sean Curtin, and Danielle Lange, Defendants. A754/2014 Weil, Gotshal and Manges LLP Attorneys for Plaintiffs http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015 HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 2 of 28 (Salvatore A. Romanello, David R. Fertig, Jessie B. Mishkin and Aryeh Zuber, of counsel) 767 Fifth Avenue New York, New York 10154 (Christopher J. Cox, of counsel) 201 Redwood Shores Parkway Redwood Shores, California 94065 Bond, Schoeneck & King, PLLC Attorneys for Plaintiffs (Arthur J. Siegel and Stuart F. Klein, of counsel) 111 Washington Avenue, 5th Floor http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015 HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 3 of 28 Albany, New York 12210 Whiteman Osterman & Hanna LLP Attorneys for Defendants (Christopher E. Buckey and Nicholas J. Faso, of counsel) One Commerce Plaza, Suite 900 Albany, New York 12260 Richard M. Platkin, J. Plaintiffs HMS Holdings Corp., Health Management Systems, Inc. and HMS Business Services, Inc. (collectively "HMS") commenced this action against defendants Sean Curtin, Danielle Lange and Matthew Arendt "to enforce [the former employees'] contractual promises to safeguard HMS's confidential, proprietary and trade secret information, to prevent unfair competition and irreparable injury to HMS's business interests, and to protect the goodwill of its business" (Complaint ¶ 1). HMS now moves pursuant to CPLR article 63 for a preliminary injunction. BACKGROUND A.The Parties http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015 HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 4 of 28 HMS is a provider of cost containment solutions for government and commercial healthcare programs. One of its core areas of business is the provision of Third Party Liability services to state Medicaid agencies. Third Party Liability ("TPL") refers to the legal obligation of insurers and other third parties to pay for healthcare services furnished to Medicaid enrollees. Companies that provide TPL services focus on identifying and verifying alternative forms of coverage and recovering funds from third-party payors. According to HMS's complaint, the TPL business is highly competitive. HMS competes with outsourcing and technology firms, claims processors, clearinghouses, consulting firms and smaller regional vendors, as well as clients who perform TPL functions in-house. When this action was commenced, HMS held TPL contracts with, or provided services to, approximately eighty percent of state Medicaid agencies. HMS attributes this leadership position to its unique and proprietary systems, methodologies and technologies. Public Consulting Group, Inc. ("PCG") had been a substantial competitor to HMS in the TPL market. In 2006, however, HMS paid more than $115 million in cash and stock to purchase PCG's TPL business, including all assets, liabilities, employees, contracts and trade secrets. Following this transaction, PCG's chief executive officer ("CEO"), William Mosakowski, accepted a seat on HMS's board of directors. Defendant Sean Curtin was among the PCG employees who went to HMS following the acquisition. Curtin rose through the ranks and "quickly became [HMS's chief operating officer] and more than doubled [its] core product revenue in less than four years". Curtin "was responsible for $375 million in revenue [at HMS] and had more than 2,800 people report" to him. For this work, Curtin was paid a salary of $400,000 per year, along with substantial bonuses and valuable stock options. In April 2012, Curtin and HMS entered into a noncompetition agreement. Among other things, the agreement provided that for a period of at least one year following the termination of Curtin's employment, he would not "directly or indirectly . . . engage or assist others in engaging in any business or enterprise that competes with [HMS's] business". The agreement also imposed certain nonsolicitation and nondisclosure obligations upon Curtin. http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015 HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 5 of 28 Curtin notified HMS in November 2012 that he would be terminating his employment, citing a desire to spend more time with family. His final day of HMS employment was February 28, 2013. A little more than four months later, in July 2013, Curtin initiated contact with several senior PCG managers to raise the prospect of mounting a competitive TPL effort. These [*2]discussions continued through August. By the beginning of September 2013, Curtin committed to assist PCG in developing a comprehensive proposal to reenter the TPL business and compete for HMS's customers. Curtin also assisted PCG in identifying and recruiting "current or past [HMS] employee[s]" with the necessary TPL qualifications and experience. Curtin's reentry plan was presented to Mosakowski in late 2013. The plan was well received, and Mosakowski gave Curtin the "green light" to move ahead with efforts to compete against HMS for TPL business. HMS maintains that in undertaking these efforts, Curtin relied upon confidential information that he learned while an employee of HMS, confidential documents he took from HMS and confidential HMS information procured from his former colleagues. Danielle Lange worked as a staff attorney at HMS from January 2010 until May 2014, focusing primarily on casualty and estate recovery and subrogation work. Matthew Arendt, a specialist in cost-avoidance verification, had worked for PCG from April 2004 until October 2006, when he joined HMS following the acquisition. Over a three-day span in late May 2014, Lange, Arendt and several other HMS employees joined PCG. PCG's newly formed TPL team, led by Curtin, moved quickly to compete for the business of HMS's customers. PCG submitted a successful TPL proposal to the State of Louisiana in July 2014, but the award was protested by HMS on August 8, 2014. During the same time frame, PCG also submitted an unsuccessful proposal to the State of North Carolina. B.This Action On August 19, 2014, HMS commenced this action through the filing of an Order to Show Cause ("OTSC") bringing on the instant motion for preliminary injunctive relief. The OTSC did not seek a temporary restraining order, but it did request, and the Court http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015 HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 6 of 28 granted, expedited, pre-hearing discovery, including the discovery of electronically stored information ("ESI"). On December 31, 2014, HMS moved for the imposition of spoliation sanctions against Curtin and Lange. An evidentiary hearing was held, and the motion ultimately was granted by Decision & Order After Hearing dated May 19, 2015 ("Spoliation Decision"). The Court found "that Curtin and Lange intentionally destroyed, deleted and failed to produce ESI while under a known duty of preservation and that the destroyed, deleted and missing ESI would support HMS's claims against these defendants." The Court further held: Given the willful and deliberate nature of defendants' misconduct, imposition of a mandatory presumption is warranted. The trier of fact should be permitted to draw the strongest possible adverse inference from defendants' bad faith and intentional destruction, deletion and failure to produce relevant evidence Thus, the trier of fact should be instructed as a matter of law that defendants engaged in the intentional and willful destruction of evidence, advised of the extent of each defendant's proven spoliation, and permitted to presume that the evidence spoliated by each defendant was relevant to this action, would have supported HMS's claims against the defendant and been [*3] unfavorable to the defendant.[FN1] The Spoliation Decision goes on to state that "the salutary objective of promoting fundamental fairness by restoring balance to the party deprived of relevant evidence is best served by employing an adverse inference at all relevant stages of the litigation", including HMS's motion for a preliminary injunction. After all, "a preliminary injunction motion requires the Court to determine the movant's ultimate likelihood of success, and a mandatory adverse inference at trial certainly is a factor to be considered in making that assessment." Following oral argument on the preliminary injunction motion, the already voluminous motion record was augmented with additional arguments and evidence directed at defendants' contention that HMS's inadvertent e-filing of certain unredacted motion papers with the Court necessarily terminated the trade secret status of the information included in its filing. http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015 HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 7 of 28 C.The Texas Action Simultaneous with the commencement of this action, HMS commenced a parallel action in the District Court of Dallas County, Texas ("Texas Court") against PCG and former HMS employees James Gambino and Jason Ramos ("Texas Action"). The Texas Court issued an order on February 27, 2015 ("Protocol Order") establishing a protocol for the removal of HMS information from the possession of PCG and the individual defendants in both actions. On July 10, 2015, the Texas Court granted HMS's request for a temporary injunction ("Texas Injunction"). The Texas Court found that HMS had demonstrated a likelihood of success in establishing that: (a) PCG breached contractual obligations owed to HMS by developing a competing TPL business prior to December 31, 2013 and by soliciting its employees; (b) Gambino and Ramos breached their employment agreements with HMS by using and disclosing their former employer's confidential and proprietary information; and (c) PCG, Gambino and Ramos misappropriated HMS's trade secrets, including financial, strategic, customer and technical information. The Texas Court further found that a temporary injunction was necessary to avoid imminent and irreparable harm to HMS, including the loss of client relationships, goodwill, reputational harm and the loss of valuable trade secrets. Accordingly, the Texas Court broadly enjoined PCG and its employees, contractors, consultants and agents from using HMS confidential information and any information derived therefrom. It also restrained PCG from using the services of Curtin and Lange, among others, to solicit or perform any TPL-related work. ANALYSIS To obtain a preliminary injunction, the moving party has the burden of demonstrating: (1) a likelihood of ultimate success on the merits; (2) the prospect of irreparable harm in the absence of the requested injunctive relief; and (3) a balance of the equities tipping in favor of the movant (see CPLR 6301; Nobu Next Door, LLC v Fine Arts Hous., Inc., 4 NY3d 839, 840 [2005]; Confidential Brokerage Servs., Inc. v Confidential Planning Corp., 85 AD3d 1268, 1269 [3d Dept 2011]). http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015 HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 8 of 28 [*4]A.Likelihood of Success 1.Curtin's Covenant Against Competition HMS seeks a preliminary injunction to enforce the covenant against competition established in the Noncompetition, Nonsolicitation, Proprietary and Confidential Information and Development Agreement executed by Curtin on April 24, 2012 ("Noncompetition Agreement"). Specifically, HMS seeks to enforce Curtin's contractual promise that, for one year following the termination of his employment ("Noncompetition Period"), he would not directly or indirectly "engage or assist others in engaging in any business or enterprise that competes with [HMS's] business, including any business or enterprise that develops, designs, produces . . . or provides any product or service that competes with any product or service . . . provided by [HMS]" (§ 2 [a][i]). Curtin further agreed that the Noncompetition Period shall be extended for a period equal to any period of his noncompliance until there has been one full year of post-employment compliance (§ 2 [b] ["Extender Clause"]). Curtin's employment with HMS terminated on February 28, 2013.[FN2] Thus, in order to obtain a preliminary injunction to enforce the Noncompetition Agreement, HMS must demonstrate, as a threshold matter, that the Extender Clause was triggered by Curtin's violation of the covenant during the base Noncompetition Period. For the reasons that follow, the Court finds that HMS has shown a clear likelihood of success in establishing that Curtin was in violation of the Noncompetition Agreement no later than September 3, 2013, when he undertook to assist PCG in re-entering the TPL business to compete against HMS. By July 2013, Curtin had broached the prospect of competing for HMS's TPL customers with two senior PCG managers: John Shaughnessy, a PCG shareholder and a member of its board of directors; and Ben Bobo, the senior executive who led PCG's TPL practice before its sale to HMS. Emails they exchanged during this period explicitly focused on "compet[ing] with HMS", with Curtin outlining his vision of a "possible play that we may have in [TPL] space". Curtin's emails also describe the weaknesses associated http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015 HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 9 of 28 with HMS's approach to TPL, the availability of experienced TPL personnel from HMS, and the potential for using PCG's former provider of mainframe computer services, Data Distributors, Inc. ("DDI"), to quickly launch a competitive TPL effort. Shaughnessy and Bobo brought Curtin's interest in having PCG reenter the TPL marketplace to the attention of Mosakowski, who authorized these discussions to continue, so long as PCG did not provide "or offer any consideration for employment to Sean Curtin" while he remained subject to a noncompetition agreement with HMS. Curtin met with Shaughnessy on September 3, 2013 to continue to explore means by which PCG could compete against HMS. At that meeting, Curtin committed to develop and draft a formal plan for PCG to reenter the TPL business. In a lengthy email sent on September 16, 2013, Curtin updated Shaughnessy on his considerable efforts since the meeting, which included: (a) contacting DDI to get information on start-up costs and inquiring "to see, even [*5]though they were all supposed to go to HMS, if somewhere in [DDI's] archives they stashed away any of the old routines or runs [they] could bring back"; (b) developing and articulating a reentry narrative that PCG could use to compete for HMS's customers; (c) sharing information obtained from former colleagues and subordinates regarding sensitive HMS fiscal, budget and personnel issues that PCG could exploit in its competitive efforts; (d) identifying current or former HMS employees with TPL experience that could be recruited by PCG; and (e) analyzing and describing the next steps for PCG to establish a competitive TPL business. The record shows that Curtin's efforts in this regard continued through Fall 2013, and Curtin ultimately provided Shaughnessy with a completed reentry plan for PCG on November 22, 2013. Entitled "Re-Entry Into the TPL Market, Opportunity Assessment", Curtin's plan addressed, among other things: HMS's competitive challenges; its current financial condition; areas of opportunity for PCG; potential points of reentry for PCG; the system and technology requirements needed to compete against HMS for TPL work; and the proposed staffing of a TPL team (including then-current HMS employees). The reentry plan is printed on PCG letterhead, is labeled "Confidential — Not for Distribution" and identifies Curtin as the author. The plan was presented to Mosakowski, who ultimately gave it the "green light". Curtin acknowledges that his plan for PCG to reenter the TPL business was based upon information he learned while an employee of HMS and information he obtained http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015 HMS Holdings Corp. v Arendt (2015 NY Slip Op 51034(U)) Page 10 of 28 from present or former HMS employees. In apparent recognition of the questionable nature of this conduct, Curtin declined Shaughnessy's request for an electronic copy of the reentry plan, explaining he was already "exposed a bit". In fact, Curtin thought it was "risky" to have electronic copies of his plan in circulation because "there was a lot of information in there that [he] didn't think should be floating around", including confidential information belonging to HMS. Curtin continued to assist PCG in designing and developing a competing TPL product through early 2014, and he formally rejoined PCG as a compensated employee on March 12, 2014. In apparent recognition of Curtin's uncompensated labors on behalf of PCG over the preceding eight months or so, Shaughnessy sent the following email to Curtin on March 19, 2014: "Welcome back!! Real happy to have you with us again (officially) . . . ." (ellipses in original). Under the Noncompetition Agreement, Curtin was barred not only from engaging in a competitive enterprise, either directly or indirectly, but also from "assist[ing] others in engaging in any business or enterprise that competes with [HMS's] business, including any business . . . that . . . develops [or] designs . . . any product or service that competes with any product or service" of HMS (§ 2 [a] [I]). While Curtin's initial discussions with Shaughnessy and Bobo in July and August 2013 ultimately may be found to have been exploratory in nature and represent "mere planning" to assist a potential competitor, HMS is likely to succeed in establishing that, by the beginning of September 2013, Curtin took substantial, affirmative steps to assist PCG in competing against HMS (De Long Corp. v Lucas, 176 F Supp 104, 123 [SDNY 1959], affd 278 F2d 804 [2d Cir 1960]; see World Auto Parts v Labenski, 217 AD2d 940 [4th Dept 1995], lv dismissed 87 NY2d 861 [1995]; see also Ritani, LLC v Aghjayan, 880 F Supp 2d 425, 453-454 [SDNY 2012]; Aviation Assocs. v Temsco Helicopters, 881 P2d 1127, 1132 [Alaska Sup Ct 1994] [competition includes "substantial steps that ultimately result in the provision of . . . services in competition with [the plaintiff]"). Indeed, Curtin's efforts to assist PCG in mounting a competitive effort against HMS for TPL work represent "exactly the kind of head start [an] agreement not to assist a competitor in [development and design] during the [one]-year period was intended to prevent" (De Long, 278 F2d at 809; see Casual Male Retail Group, Inc. v Yarbrough, 527 F Supp 2d 172, 183 [D Mass 2007]; cf. Stork H & E Turbo Blading, Inc. v Berry, 32 Misc http://www.nycourts.gov/reporter/3dseries/2015/2015_51034.htm 7/17/2015