In Valkyrie AI LLC v. PriceWaterhouseCoopers LLP, 2024 N.Y. Slip Op. 06141 (1st Dept. Dec. 5, 2024) (here), the Appellate Division, First Department affirmed an order involving claims for unfair competition, tortious interference with contract and tortious interference with prospective business relations. As discussed below, the Court found that plaintiff stated a claim for unfair competition and tortious interference with contract against PwC but failed to do so with regard to its claim against all defendants for tortious interference with prospective business relations.
A Primer on the Law
Unfair Competition
The essence of an unfair competition cause of action based upon the misappropriation of confidential information “is not just that the defendant has ‘reap[ed] where it has not sown,’ but that it has done so in an unethical way and thereby unfairly neutralized a commercial advantage that the plaintiff achieved through ‘honest labor.’”[1] To state a claim, a plaintiff “must show that the defendant[] misappropriated [its] labors, skills, expenditures or goodwill and displayed some element of bad faith in doing so.”[2]
Where a plaintiff alleges unfair competition based on a theory of trade secret misappropriation, the allegations supporting the claim must also describe the “(1) acts or omissions [committed] by [the] defendant[] that proximately caused a misappropriation, and (2) the property or benefit misappropriated.”[3] In other words, the plaintiff must precisely identify the trade secrets it alleges the defendant misappropriated.[4] Therefore, a complaint that does not allege the existence of a trade secret and only alleges “general categories of ‘confidential information’” alleged to be misappropriated will be dismissed.[5]
Further, the trade secret at issue must be “more than a collection of broad concepts” and cannot be readily available to the public.[6] Whether information constitutes a trade secret is generally a question of fact.[7]
Tortious Interference with Contract
To plead a claim for tortious interference with contract, a plaintiff must allege: “the existence of a valid contract between the plaintiff and a third party, [the] defendant’s knowledge of that contract, [the] defendant’s intentional procurement of the third-party’s breach of the contract without justification, actual breach of the contract, and damages resulting therefrom.”[8] Malice and ill will are not affirmative elements of a tortious interference with contract claim and need not have been pleaded to avoid dismissal.[9]
Tortious Interference with Prospective Business Relations
To state a claim for tortious interference with prospective business relations, a plaintiff must allege (1) business relations with a third party, (2) the defendant’s interference with those business relations, (3) the defendant acted for the sole purpose of harming plaintiff or used wrongful means, and (4) injury to the business relationship.[10] For this cause of action, it must be affirmatively alleged that the defendant’s conduct was motivated solely by malice or to inflict injury by unlawful means going beyond mere self-interest or other economic considerations.[11]
Valkyrie AI LLC v. PriceWaterhouseCoopers LLP
[Eds. Note: the background facts come from the operative complaint and the parties’ briefing on appeal.]
Valkyrie AI LLC d/b/a Reclassify AI (“Reclassify”) is a startup company that provides technology consulting services to organizations that are seeking to develop in-house artificial intelligence capabilities and tools and designs and implements semantic technologies for business enterprises. Soon after its launch, Reclassify entered a contract with Morgan Stanley to apply semantic AI across the investment bank’s information and data network.
Reclassify retained Pierluigi Miraglia (“Miraglia”) as an independent contractor to perform work for Morgan Stanley. Miraglia was an employee of Sagence, Inc. (“Sagence”), a consulting firm based in Chicago. Sagence and Reclassify entered a subcontractor agreement regarding Miraglia’s work for Morgan Stanley on August 22, 2022. On October 19, 2022, Sagence agreed to work on an additional project for Morgan Stanley on behalf of Reclassify, with Miraglia remaining as Reclassify’s day-to-day representative at Morgan Stanley.
According to Reclassify, Sagence had no semantic AI offerings, though Miraglia had prior professional experience in semantic AI. As a result, Reclassify trained Miraglia, sharing Reclassify’s AI methods and procedures with him. In that connection, Miraglia and Sagence agreed to be bound by a non-competition agreement, a non-disclosure agreement, and a non-solicitation agreement (collectively, the “restrictive agreements”).
A few months later, PricewaterhouseCoopers LLP (“PwC”) acquired Sagence. It was agreed that that the Morgan Stanley project that Reclassify had created would continue without interruption for Morgan Stanley, with Miraglia remaining as PwC’s representative at Morgan Stanley. As such, Miraglia continued to do the same job he had been doing for months on the same project that Morgan Stanley had hired Reclassify to do.
On November 10, 2022, Sagence informed Reclassify that Sagence was ending its subcontractor agreement with Reclassify.
Reclassify filed its original complaint on June 6, 2023, and an amended complaint about one month later. Reclassify asserted claims for: unfair competition (first cause of action), breach of contract (second cause of action against Sagence and Miraglia), fraudulent inducement (third cause of action against Sagence and Miraglia), tortious interference with contract (fourth cause of action against PwC), tortious interference with prospective business relations (fifth cause of action), breach of fiduciary duty (sixth cause of action against Miraglia), aiding and abetting the breach of fiduciary duty (seventh cause of action against Sagence and PwC), misappropriation of trade secrets (eighth cause of action against Sagence and PwC), inevitable disclosure (ninth cause of action against Sagence and PwC), and permanent injunctive relief (tenth cause of action).
All defendants moved to dismiss the amended complaint. The motion court held a hearing on the motions on January 3, 2024, and issued a decision and order: (a) denying Sagence and Miraglia’s motion with respect to Reclassify’s first and second causes of action for unfair competition and breach of contract, but granting it as to all other causes of action, including the fifth cause of action for tortious interference with prospective business relations; and (b) granting PwC’s motion with respect to Reclassify’s third, fifth, sixth, seventh, eighth, ninth, and tenth causes of action, but denying PwC’s motion with respect to Reclassify’s first and second causes of action for unfair competition and tortious interference with contract.
All parties appealed.[12] The Appellate Division, First Department unanimously affirmed.
The Court held that the motion court “properly found that … Reclassify … sufficiently alleged an unfair competition cause of action based on the misappropriation of its trade secrets against PWC.”[13] The Court found “PWC’s arguments that Reclassify failed to state such a claim because it purportedly did not allege that defendants Sagence, Inc. and Pierluigi Miraglia shared plaintiff’s trade secrets with PWC — or that PWC used any such trade secrets in its business —” to be unavailing.[14] The Court said that Reclassify’s allegations that “Miraglia took off his proverbial Reclassify hat and put on a PWC hat,” and that PWC and Sagence “pocketed Reclassify’s know-how, trade secrets, and methods, then took over Reclassify’s” project with Morgan Stanley “and ran it without interruption with Miraglia in the same spot” sufficient to state a cause of action.[15] The Court also found Reclassify’s allegation “that PWC was ‘no mere bystander,’ and that it openly admitted to acquiring Sagence for the specific purpose of obtaining its ‘AI-based value transformation roadmaps’” sufficient to support the unfair competition claim.[16] “Thus,” concluded the Court, “contrary to PWC’s argument, one need not make a ‘presumption’ that Sagence shared the trade secrets with PWC based on these allegations.”[17]
The Court also held that Reclassify “sufficiently alleged bad faith in support of the unfair competition claim.”[18] Noting that “[b]ad faith can be shown through acts of ‘fraud, deception, or an abuse of a fiduciary or confidential relationship’,[19] the Court found that Reclassify adequately alleged bad faith: “[i]n the days leading up to closing the acquisition, PWC allegedly strategized with Sagence about how to placate Reclassify with respect to the Morgan Stanley business, suggesting a ‘joint business relationship’ with Reclassify or possibly making a cash payment to Reclassify, although these proposed solutions did not come to fruition. PWC’s alleged actions were plainly deceptive.”[20]
The Court rejected “PWC’s argument that the unfair competition claim should have been dismissed because Reclassify failed to properly allege or describe the ‘trade secret’ that PWC allegedly misappropriated.”[21] The Court found that the record supported Reclassify’s allegation that its AI services were novel and secret and therefore, sufficed “to satisfy this element of a misappropriation of trade secrets claim.”[22]
The Court also held that the motion court “properly denied PWC’s motion to dismiss the claim that PWC had tortiously interfered with Reclassify’s restrictive agreements with Sagence and Miraglia.”[23] The Court said that the amended “complaint [sufficiently] allege[d] that the acquisition was driven by PWC’s desire to acquire Reclassify’s semantic AI trade secrets and its lucrative Morgan Stanley contract, and to put itself in the shoes of Reclassify with respect to the LCD Innovation Project” (i.e., the code name for the project with Morgan Stanley).[24] The Court explained that “PWC performed due diligence leading up to the acquisition and thus knew about the restrictive agreements,” which it did not contest.[25]
The Court further held that the motion court properly dismissed the tortious interference with prospective business relations claim because Reclassify failed to identify a prospective business relationship.[26] “The mere fact that Reclassify had a current contractual relationship with Morgan Stanley was not sufficient to establish the prospect of a future contract with Morgan Stanley,” said the Court.[27]
Finally, the Court held that the tortious interference with prospective business relations claim was duplicative of the unfair competition claim.[28] The Court explained that both claims were “premised on the same allegations that, among other things, Sagence misappropriated Reclassify’s semantic AI capabilities, which afforded Reclassify a competitive advantage, and which belonged exclusively to Reclassify as a function of having developed those capabilities for itself.”[29] “As the acts complained of in both causes of action ‘completely overlap,’” said the Court, the motion “court properly dismissed the tortious interference with prospective business relations cause of action as duplicative.”[30]
[1] E.J. Brooks Co. v. Cambridge Sec. Seals, 31 N.Y.3d 441, 460 (2018) (quoting International News Serv. v. Associated Press, 248 U.S. 215, 236, 239-240 (1918)).
[2] Abe’s Rooms, Inc. v. Space Hunters, Inc., 38 A.D.3d 690, 692 (2d Dept. 2007); see also Ahead Realty LLC v. India House, Inc., 92 A.D.3d 424, 425 (1st Dept. 2012) (citation omitted).
[3] Com. Data Servers., Inc. v. Int’l Bus. Machs. Corp., 166 F. Supp. 2d 891, 894 (S.D.N.Y. 2001) (citing Data Broad. Corp. v. Tele-Comm’cns, Inc., No. 92-cv-4840 (JFK), 1992 WL 350624, at *3 n.4 (S.D.N.Y. Nov. 19, 1992)); see also Ferring B.V. v. Allergan, Inc., 4 F. Supp. 3d 612, 629-30 (S.D.N.Y. 2014).
[4] See Schroeder v. Cohen, 169 A.D.3d 412, 412–13 (1st Dept. 2019); see also Subject Matter and Specificity of Trade Secrets, 4F N.Y. Prac., Com. Litig. in New York State Courts § 132:6 (5th ed.).
[5] Elsevier Inc. v. Dr. Evidence, LLC, No. 17-cv-5540 (KBF), 2018 WL 557906, at *6 (S.D.N.Y. Jan. 23, 2018) (emphasis in original) (citing Next Commc’ns, Inc. v. Viber Media, Inc., No. 16 14-CV-8190 (RJS), 2016 WL 1275659, at *4 (S.D.N.Y. Mar. 30, 2016) (internal citations omitted)).
[6] Schroeder v. Pinterest, Inc., 133 A.D.3d 12, 29 (1st Dept. 2015).
[7] Id. at 28.
[8] Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 424 (1996) (citations omitted).
[9] See, e.g., Shared Commc’ns Servs. of ESR, Inc. v. Goldman Sachs & Co., 23 A.D.3d 162, 163 (1st Dept. 2005).
[10] See Thome v. Alexander & Louis Calder Found., 70 A.D.3d 88, 108 (1st Dept. 2009), lv. denied, 15 N.Y.3d 703 (2010).
[11] See Shared Commc’ns, 23 A.D.3d at 163.
[12] Sagence and Miraglia stipulated to the withdrawal of their appeal.
[13] Slip Op. at *1.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Schroeder v. Pinterest, Inc., 133 A.D.3d 12, 30 (1st Dept. 2015).
[20] Slip Op. at *1.
[21] Id.
[22] Slip Op. at *2.
[23] Id.
[24] Id.
[25] Id.
[26] Id. at *3.
[27] Id. (citing Nicosia v. Board of Mgrs. of the Weber House Condominium, 77 A.D.3d 455, 457 (1st Dept. 2010)).
[28] Id.
[29] Id.
[30] Id. (quoting EVEMeta, LLC v. Siemens Convergence Creators Corp., 176 A.D.3d 612, 613 (1st Dept. 2019)).
