Reed Construction Data Inc. v. McGraw-Hill Companies, Inc.

Citations: 745 F. Supp. 2d 343; 2010 U.S. Dist. LEXIS 96791; 2010 WL 3835196Docket: 09 Civ. 8578

Court: District Court, S.D. New York; September 14, 2010; Federal District Court

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Defendant The McGraw-Hill Companies, Inc. (MHC) filed a motion to dismiss specific counts from Reed Construction Data Inc.'s (RCD) Amended Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The dismissed counts include misappropriation of confidential information (Count Three), tortious interference with prospective economic advantage (Count Five), violation of New York General Business Law (GBL) Section 349 (Count Six), violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) (Count Seven), and conspiracy to violate RICO (Count Eight). The court granted the motion for the RICO claims and the GBL claim but denied it for the misappropriation and tortious interference claims.

RCD's original complaint, filed on October 8, 2009, included allegations of fraud, misappropriation of trade secrets, unfair competition, and monopolization, among others. Following an amended complaint on December 10, 2009, MHC attempted to dismiss five counts, with the current motion concerning Counts Three, Five, Six, Seven, and Eight. The parties involved provide competing subscription-based services for construction project information. RCD's service, "Reed Connect," is positioned as more affordable than MHC's "Dodge Network," which commands a significant market share.

RCD claims MHC engaged in deceptive practices by having contractors subscribe to Reed Connect under false pretenses to gather information. Specific instances cited include an individual, Henning Lorenz, subscribing under a false identity linked to a legitimate company, which led to RCD canceling the subscription when the fraud was discovered. Another contractor, Glenn Lewin, was allegedly compensated by MHC for subscribing to Reed Connect.

Lewin obtained multiple subscriptions to Reed Connect from March 2003 to January 2009, using both his name and the alias John Carlson while falsely claiming affiliation with non-existent companies, including Northern Construction Development Company (NCDC), Central Business Services (CBS), and Arrington Partners. Each subscription included a nondisclosure provision barring him from sharing information from Reed Connect, which was also reinforced by a specific representation in Arrington's agreement that it was not subscribing under a fictitious name. Allegations assert that Lewin shared access to Reed Connect with MHC, violating these provisions. In January 2009, he purchased another subscription under the alias Andy Anderson through another fictitious company, Site Amenities. During an audit in mid-2009, Lewin reportedly admitted that MHC was his actual employer and that all mentioned companies were fictitious, acknowledging that MHC funded the subscriptions and used Reed Connect information.

RCD claims MHC misused Reed Connect data in competition, including sharing misleading comparisons with sales agents to favorably position the Dodge Network against Reed Connect, altering the Dodge Network based on this information, and presenting these distortions to Roper Public Affairs, leading to the dissemination of false information. RCD alleges further that MHC misappropriated project information to build its database, resulting in at least 221 customers switching from RCD to MHC. 

The document also outlines the standard for a motion to dismiss under Rule 12(b)(6), stating that all factual allegations are accepted as true, focusing on whether a plaintiff can present evidence to support their claims, not on the likelihood of prevailing. A complaint must include sufficient factual content to be considered plausible.

The court must accept factual allegations in a complaint as true but is not obligated to accept legal conclusions disguised as factual claims. To advance claims from conceivable to plausible, plaintiffs must provide sufficient factual detail. To establish a RICO violation under 18 U.S.C. § 1962(c), a plaintiff must prove four elements: conduct, an enterprise, a pattern, and racketeering activity. Additionally, a civil RICO claimant must demonstrate a violation of § 1962, an injury to their business or property, and that the injury was caused by the defendant’s violation.

RCD claims that MHC violated RICO by forming an association-in-fact enterprise with others to defraud RCD and gain unauthorized access to its confidential information. Specific alleged activities include misrepresentations regarding business affiliations, sending false subscription agreements, and engaging in communications to facilitate fraud, which constituted mail and wire fraud. RCD asserts that it was the direct victim of these fraudulent actions and suffered losses in customers and associated revenues.

However, RCD has not established the distinctness required under § 1962(c), which necessitates that the "person" alleged is separate from the "enterprise." The court notes that allegations cannot simply involve a corporate defendant and its employees conducting the defendant's regular business activities. RCD’s complaint fails to demonstrate that MHC, as the defendant, is distinct from the alleged enterprise, as it describes misconduct by a corporate entity without indicating a separation between MHC and the enterprise.

RCD's Amended Complaint primarily alleges misconduct by MHC, the sole named defendant, with all additional parties identified as agents of MHC. The court's precedent indicates that divisions of a corporation, such as McGraw-Hill Construction, do not qualify as distinct entities for RICO claims. RCD claims that Lorenz and Lewin acted as MHC's agents, thus lacking distinctness from MHC, a position supported by relevant case law. Similarly, the "John Does," described as MHC's agents, and various fictitious companies are also not considered distinct persons due to their agency roles. Roper, added as a defendant, is not alleged to have intended involvement in any racketeering scheme or shared fraudulent intent with others, which is necessary to establish a RICO enterprise. The requirements for a RICO association, including a common fraudulent purpose, are unmet regarding Roper, who is characterized as an unwitting instrument of MHC, having merely validated misleading data without intent to engage in fraud. RCD's assertion that Roper "knew or should have known" of MHC's deceptive practices does not suffice to establish Roper's complicity in a RICO scheme.

Roper cannot be considered a participant in the alleged RICO enterprise because there must be intent to participate to establish such involvement. The distinctness of an enterprise cannot be claimed merely by adding entities that do not function as a cohesive unit with a shared purpose. RCD asserts that its alleged enterprise is distinct from MHC, citing Kushner, which states that distinctness exists when a corporation and its officers are involved together. However, in this case, the defendant is the corporation itself, making it indistinguishable from the alleged enterprise, as supported by relevant case law. The Amended Complaint characterizes MHC as the primary beneficiary of the actions of the co-conspirators, undermining the notion of an independent enterprise. RCD argues that the distinctness rule does not apply here because the agents acted beyond their regular affairs; however, there is no limitation that these affairs must be lawful. The alleged activities, including business competition and data compilation, were part of MHC’s normal operations and thus do not exceed its regular affairs. RCD has not established any relationship between the consultants and the enterprise beyond their consulting roles with MHC, nor provided evidence of any unrelated party acting with intent to further the alleged unlawful aims. Consequently, the Amended Complaint does not fulfill the legal requirements for a valid RICO claim under the distinctness rule, leading to the dismissal of RCD's derivative RICO conspiracy claim as well.

The dismissal of the plaintiffs' substantive RICO claims undermines the viability of their conspiracy cause of action. RCD has sufficiently pled a claim for misappropriation of confidential information, which requires alleging that the defendant used the plaintiff's confidential information to gain a competitive advantage. When both parties are bound by a contract, the plaintiff must show a breach of a duty independent of that contract. This independent duty is a societal obligation rather than one arising from the contract itself. 

MHC argues that RCD's claim is based on violations of subscription agreements with Lewin and Lorenz, which imposed restrictions on their use of Reed Connect data. However, RCD has not claimed that MHC was a party to these agreements or sued MHC for breaching them. Even if MHC were a party, RCD alleges that MHC engaged in actions beyond mere non-compliance, indicating intent to harm RCD. The Second Circuit has established that a breach of contract can also constitute a breach of an independent tort duty if it can be inferred that the defendant acted willfully to harm the plaintiff.

In the Amended Complaint, RCD asserts that MHC accessed Reed Connect without authorization through Lorenz and Lewin, willfully misappropriating RCD's confidential information, including project data and proprietary algorithms. RCD claims MHC used this information to mislead RCD's clients, harming RCD's business and profits. Accepting these allegations as true, MHC's actions of deceitfully accessing RCD's information and utilizing it to compete against RCD arise from circumstances that are separate from the subscription agreements with Lewin and Lorenz, constituting a violation of a legal duty not to misappropriate another's property.

RCD has sufficiently pled its claim for misappropriation of confidential information and tortious interference with economic advantage under New York law. To establish tortious interference, four elements must be proven: 1) the plaintiff had business relations with a third party, 2) the defendant interfered with those relations, 3) the defendant acted with wrongful intent or used improper means, and 4) the defendant's actions caused injury to the relationship. RCD's Amended Complaint names 221 customers, asserting that they had a business relationship and a reasonable expectation of entering into contracts with these customers, with MHC being aware of these relationships and intentionally interfering. MHC argues that RCD’s allegations are overly broad and lack necessary specificity, as they encompass all customers lost since 2006 without indicating that these customers specifically chose MHC based on misrepresentation. MHC also contends that RCD's claims lack evidentiary support per Fed. R. Civ. P. 11(b)(3). However, RCD argues that its allegations are based on misleading comparisons and misappropriated information, which are likely to gain evidentiary support with further investigation. MHC's argument about alternative explanations for customer choices does not undermine the plausibility of RCD's claims, as the identified customers were those who chose MHC due to misconceptions regarding project information. Thus, RCD has pled its tortious interference claim with sufficient particularity, leading to the denial of MHC's motion to dismiss Count Five of the Amended Complaint.

RCD's claim under New York General Business Law (GBL) § 349 fails to meet the necessary elements for a violation. The law requires that: 1) the defendant's actions be directed at consumers, 2) those actions must be materially misleading, and 3) the plaintiff must have suffered injury. Section 349 serves primarily as a consumer protection statute, not a means for resolving disputes between businesses. As established in case law, a competitor must demonstrate that the deceptive act was aimed at the general consuming public. RCD’s sole allegation of public harm—that consumers may have overpaid for the Dodge Network as Reed Connect is superior—does not constitute a legitimate claim under GBL § 349, as it focuses on harm to RCD's business rather than consumer injury. Courts have held that mere business losses, even if consumers pay higher prices, do not equate to public harm necessary to support a GBL § 349 claim. Consequently, RCD's Amended Complaint is insufficient as it emphasizes its own business interests over consumer harm. The court grants the motion to dismiss Counts Six, Seven, and Eight, while denying it for Counts Three and Five. RCD's RICO claims are also dismissed under the Riverwoods distinctness rule, negating the need to evaluate any further arguments related to proximate cause in those claims.