2004 | Cited 0 times | D. Massachusetts | January 13, 2004


Plaintiff Knapp Schenck & Company Insurance Agency, Inc. ("KnappSchenck") brings this action against Lancer Management Company, Inc. andLancer Insurance Company (collectively "Lancer"), alleging unlawful useof confidential, proprietary, and trade secret information acquiredduring sale negotiations between the parties. With discovery nowcompleted, Lancer seeks summary judgment and, additionally, moves forsanctions and attorney fees pursuant to Rule 11 of the Federal Rules ofCivil Procedure and 28 U.S.C. § 1927. For the reasons set forthbelow, I grant in part and deny in part Lancer's motion for summaryjudgment and deny its motion for sanctions.


Knapp Schenck, a Massachusetts corporation with its principal place ofbusiness in Massachusetts, manages the Splash Fuel Oil Dealers Program("Splash program"), which providesPage 2insurance service packages for oil heat dealers. Lancer Insuranceis a New York-based company which provides commercial and privateautomobile insurance coverage in the passenger transportation industryand in the last year has entered into the oil heat dealer insurancemarket with the launch of its Oilheat Dealers Insurance Network ("ODIN").

In around late March or early April, 2002, representatives of KnappSchenck and Lancer Management began discussions concerning a potentialacquisition of the Splash program by Lancer. On April 5, 2002, JamesTyrrell, the Splash program manager, and Knapp Schenck Treasurer HilbertVan Schenck met with Lancer Vice President Art Catapang to discuss theacquisition. In that meeting, Tyrrell and Van Schenck explained variousaspects of the Splash program to Catapang and provided him withdocumentation about the program,1 including an actuarial reportcompiled by the Aon Corporation.

In the week or so following the April 5, 2002 meeting, Tyrrell andCatapang met several times to discuss the Splash program and during thattime an "acquisition due diligence team"Page 3from Lancer discussed marketing and business strategies with KnappSchenck senior executives and was granted access to Knapp Schenck'sunderwriting files, personnel files, and claims files.

On April 23, 2002, Van Schenck executed a "Letter of Intent" ("LOI")sent to him by John Petrilli, general counsel for Lancer. Under the termsof the LOI, upon execution it constituted an agreement in principle forthe acquisition of the Splash program by Lancer, but it was not a bindingagreement with respect to the acquisition. The LOI was to be effectiveuntil either (1) the parties terminated it in writing or (2) May 15,2002, if no definitive agreement for the acquisition was reached by then.The LOI further stated that "[u]pon such termination, the agreementscontained in this Agreement in Principle become void and of no furtherforce or effect, except for the provisions of this Paragraph 5 andParagraphs 7, 8 and 9 hereof, which shall remain in full force andeffect."

Paragraph 7, under the heading "Publication and Confidentiality,"stated in relevant part:

Each of the parties hereto shall hold confidential this Agreement in Principle, the contents and terms hereof, including any attachments hereto, the fact that discussions concerning the matters herein are taking place and other facts with respect to such discussions, including the status thereof. In addition, each of the parties shall hold confidential all financial or other information supplied by the other in the course of the evaluation, negotiation, or performance of due diligence in respect of this Agreement in Principle or the transactions contemplated herein, provided that such confidentiality obligation shall apply only to non-public information which is designated in writing to be confidential by the disclosing party, and which was not available to the other party on a non-confidential basisPage 4 from a third party.

Paragraph 9,2 under the heading "Miscellaneous," containedprovision (c) titled "No Waiver," which stated: The parties to this Agreement in Principle acknowledge and agree that no failure or delay in exercising any right, power, or privilege hereunder will operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other further exercise thereof or the exercise of any right, power or privilege hereunder.

For reasons which are in dispute,3 negotiations between the partiesdid not give rise to any agreements subsequent to the LOI for thecontemplated acquisition. On May 17, 2002, Knapp Schenck sent a letter toLancer in which it requested that Lancer "return any and all proprietaryand other related information and documents that [Lancer] acquired whileit had access to the books and records of [Knapp Schenck]." In theletter, Knapp Schenck referred to "Proprietary Information," which itdescribed as "documents and related items including but not limited toinformation relating to brokers, accessing systems and producersPage 5relating to the Splash and Septicover Programs."

In response, Lancer's general counsel faxed a letter back to KnappSchenck on the same day stating that it was his understanding that"employee files (other than a contract and a few leases) were not copiedor removed from Knapp Schenck, nor was any policyholder lists." Hefurther asked Knapp Schenck to advise him "what information LancerManagement employees currently hold that is proprietary that was notretained by Knapp Schenck at its offices," and he stated he would checkwith his employees to see if they had such information.

Sometime around August 2002, Lancer Insurance added to its website anicon indicating the availability of services for oil heat dealers. Onaround October 1, 2002, Lancer added a link on its website to ODIN, whichoffers insurance coverage for oil heat dealers.

On October 23, 2002, Knapp Schenck filed a Verified Complaint in theSuffolk Superior Court, alleging that Lancer unlawfully used confidentialand proprietary trade secret information obtained during the parties'negotiations and Lancer's due diligence review of information pertainingto the Splash program. Specifically, Knapp Schenck contended that Lancerillegally used protected information which

included, but was not limited to: underwriting information and guidelines, including renewal and new business guidelines, the referral process, unacceptable exposures and target rate increases; account lists; broker lists; payroll and expense records; account files, including applications, policies, effective dates, premiums, rate structures, rate sheets, pricingPage 6 information, sales claims, loss history, correspondence with brokers and premium and loss ratio information; target market information; and underwriting philosophy.

Knapp Schenck alleged seven separate counts: knowing and willfullytheft and use of protected information in violation of Mass. Gen. Lawsch. 93A §§ 2, 11 (Count I); theft of trade secret information by fraudand deception in violation of Mass. Gen. Laws ch. 93 § 42A (CountII); fraudulent misrepresentation (Count III); common lawmisappropriation of protected information (Count IV); breach of theconfidentiality agreement (Count V); conversion (Count VI); and tortiousinterference with economic advantage (Count VII). Knapp Schenck soughtboth injunctive relief, in the form of preliminary and permanentinjunctions against Lancer, and monetary damages for the harm caused byLancer's conduct.

On October 30, 2002, Lancer removed the action to this Court, and onDecember 13, 2002, following discussions with the parties, I consolidatedthe request for a preliminary injunction with resolution of the case onthe merits — either through summary judgment or through trial— and ordered limited discovery in an expedited fashion.

In moving for summary judgment,4 Lancer argues that Knapp Schenckhas failed to produce any evidence that Lancer has used information itobtained in negotiations with Knapp Schenck.Page 7

Moreover, Lancer contends that, even assuming Lancer used information itreceived from Knapp Schenck, summary judgment is appropriate becauseKnapp Schenck failed to provide evidence that any of the information wasconfidential under the LOI or otherwise and thus has not shown that suchuse would have been improper.5

Lancer additionally asks this Court to impose sanctions on KnappSchenck and award Lancer attorney fees because Knapp Schenck failed toconduct an adequate investigation prior to bringing this action andfailed to withdraw its Complaint after discovery revealed that it had nobasis for its claims.


A. Motion for Summary Judgment

1. Standard of Review

Summary judgment is appropriate when "the pleadings, depositions,answers to interrogatories, and admissions on file,Page 8together with the affidavits, if any, show that there is no genuine issueas to any material fact and that the moving party is entitled to judgmentas a matter of law." Fed.R.Civ.P. 56(c). A fact is "material" if it hasthe "potential to affect the outcome of the suit under applicable law."Santiago-Ramos v. Centennial P.R. Wireless Corp., 217 F.3d 46, 52 (1stCir. 2000), and a "genuine" issue is one that "may reasonably be resolvedin favor of either party." Cadle Co. v. Hayes, 116 F.3d 957, 960 (1stCir. 1997).

In considering a motion for summary judgment, courts must view theissues in a light most favorable to the nonmoving party, indulging allreasonable inferences in that party's favor. Barreto-Rivera v.Medina-Vargas, 168 F.3d 42, 45 (1st Cir. 1999). However, to oppose themotion successfully, the nonmoving party "may not rest upon mereallegation or denials of his pleading, but must set forth specific factsshowing that there is a genuine issue for trial." Anderson v. LibertyLobby, Inc., 477 U.S. 242, 256 (1986); LeBlanc v. Great Am. Ins. Co.,6 F.3d 836, 841-42 (1st Cir. 1993), cert. denied, 511 U.S. 1018 (1994).

2. Improper Use

At the core of each of Knapp Schenck's claims is the allegation that inestablishing ODIN Lancer improperly used the information it obtained fromKnapp Schenck about the Splash program. See Burten v. Milton BradleyCo., 763 F.2d 461, 462-63 (1st Cir. 1985) ("The essence of the wrong [ina misappropriation claim] is generally `the breach of the duty not todisclose or toPage 9use without permission confidential information acquired from another.'")(quoting Jet Spray Cooler, Inc. v. Crampton, 377 Mass, 159, 165 (1979)).At the time it filed its Complaint, Knapp Schenck based its claims on theinference that Lancer used the information it obtained from Knapp Schenckduring the parties' negotiations concerning the Splash program. Thatinference arose out of Knapp Schenck's contentions that (1) Lancerlaunched ODIN only months after negotiations between the parties ended,despite purportedly telling Knapp Schenck that it had no experience inthe field, (2) the statements of protection for policies covered underthe ODIN and Splash programs are almost identical, (3) the customerservices offered by ODIN are substantially similar to those offered bySplash, and (4) the targeted geographic markets for the two programs areidentical. In sum, Knapp Schenck stated in its Complaint: Plaintiff believes that Defendants have, and will continue to use, all of the information that [Defendants] stole from the Plaintiff in their competing insurance program, ODIN, to Plaintiff's great detriment. With no prior expertise or experience in servicing the insurance needs of the niche market for oil heat dealers, the Defendants have within a matter of months after stealing Plaintiff's proprietary information, developed and implemented a program in direct competition with the Plaintiff's Splash® program in the very same states.

Lancer contends that summary judgment is warranted as to all countsbecause the inference that Lancer used any of the information it obtainedfrom Knapp Schenck is not supported by any evidence and therefore restson "sheer speculation." Lancer argues that the evidence clearlydemonstrates that Lancer had thePage 10experience and capability, even prior to its discussions with KnappSchenck, to enter the oil heat provider insurance market and thus theinference that Lancer must have relied on Knapp Schenck information inlaunching ODIN is unfounded. Lancer further argues that because theevidence shows — and because Knapp Schenck does not dispute —that Lancer based its rates for the ODIN program on publicly-availablerates from the Insurance Service Organization ("ISO"), adjusted by losscost multipliers ("LCMs") determined from Lancer's own information,6there is no force for the inference that Lancer used Knapp Schenck'sinformation in starting ODIN.

While Lancer may be correct that Knapp Schenck has failed to provideevidence of a smoking gun which directly demonstrates that Lancer usedKnapp Schenck information,7 its argument falls short of establishingsufficient grounds for summary judgment because Knapp Schenck hasnevertheless provided enough evidence to put the use issue in dispute.

Even assuming that Lancer was both intending to and capable of enteringthe oil heat insurance market without relying on anyPage 11information it received from Knapp Schenck,8 that fact, alongwith the undisputed fact that Lancer ultimately based its rates for theODIN program on the publicly-available ISO rates does not inexorably leadto the conclusion that it never used Knapp Schenck's information. In hisdeposition testimony, Knapp Schenck Treasurer Hilbert Van Schenck statedthat the Aon report and loss data Knapp Schenck gave to Lancer would beuseful even to a company that set its rates according to the ISO rates.Van Schenck based this contention in part on the fact that the ISO ratesdo not provide information relevant for determining coverage forpollution,9 which constitutes an important portion of the coverageprovided by the Splash and ODIN programs. Thus, as an initial matter,Knapp Schenck has put in dispute the issue whether Lancer directly usedKnapp Schenck information at least in determining rates of coverage forpollution.Page 12

Moreover, even if Lancer did not use the Knapp Schenck information toset its pollution coverage rates, a triable issue remains as to the useissue. According to Van Schenck's testimony, information provided by theAon report and by the additional loss data provided to Lancer by KnappSchenck10 would be helpful in assessing the adequacy of the LMCsLancer used to adjust the ISO rates. This contention is further supportedin the Summary Report of Simon Everett, whose expert testimony KnappSchenck intends to present at trial. According to the report, Everettwill testify that [t]he AON report and the additional loss claims data provided by Knapp Schenck to Lancer represents loss (the "Data"), claims and pricing data that is valuable to any entity in the marketplace seeking to write, underwrite, acquire or start up a fuel oil dealer insurance product or program. The type of data contained in the AON report is held by very few persons in the insurance market. Using the same data, several established reinsurance and insurance companies were able to make an informed business decision as to whether or not to write the fuel oil dealers line of business. . . . The data is material to making an informed business decision whether or not to enter into this line of insurance.

An insurance company who received the Data would save significant time in starting up a fuel oil dealers line of insurance which offered similar coverage. The Data represents overall data relating to a specific program that is extremely useful in putting the program together andPage 13 pricing the program. The Data is much more useful in this respect than piecemeal loss cost runs which could be provided by agents in the marketplace. The Data is sufficient to make an informed underwriting decision, including setting the price wherein one could expect a reasonable return on investment. The Data would provide the foundation for entering into the fuel oil dealer program insurance.

In short, Knapp Schenck argues that even if Lancer did not use KnappSchenck information directly to set its rates, the Aon report and lossclaims data were nevertheless valuable to Lancer insofar as they gaveLancer a competitive advantage in quickly entering the market by helpingit assess the adequacy and profitability of the ISO-based rates.

Lancer points to deposition testimony by Lancer officials that theinformation contained in the Aon report and the loss claims data wasessentially useless,11 and it insists that it went ahead withlaunching the ODIN program without the aid of Knapp Schenck information— or for that matter, any historical loss claims data similar tothat provided by Knapp Schenck. Lancer argues that one need not inferthat it used Knapp Schenck information to evaluate the ISO rates, statingthat Lancer may have exercised poor business judgment in relying on ISO loss costs and importing a cost multiplier from Lancer's Nobel propane product to get the ODIN product up and running in an expedited fashion, but that is what Lancer actually did, and that is not a legal violation.

Lancer's arguments do little more than underscore that it isPage 14disputed both whether, as an initial matter, the Aon report andadditional loss claims data supplied by Knapp Schenck were useful toLancer and, perhaps more importantly, whether Lancer in fact used thatinformation to evaluate the ISO-based rates or instead simply "exercisedpoor business judgment" in not using it (or information like it). WhileKnapp Schenck has not mounted any direct evidence that Lancer used theinformation in this way, the circumstantial evidence it has gatheredregarding Lancer's lack of any of its own loss data, the unlikelihoodthat a company would launch a program like ODIN without credible lossclaims data, and the similarities between the Splash and ODIN programs,at a minimum, presents a triable issue as to whether Lancer used the Aonreport and loss claims data in evaluating its rates for entry into theindustry.12 Additionally, as noted above, the issue of whether Lancerused Knapp Schenck information directly to determine rates for pollutioncoverage is also in dispute. Thus, I find that summary judgment in favorof Lancer as to the use issue — at least with respect to the Aonreport and loss claims data — is not warranted. Given thatdemonstrating use — or at least usefulness — is a criticalelement of Knapp Schenck's claims and since Knapp Schenck has put intodispute the use issue only with regard to the Aon report and the lossclaims data, IPage 15consider the remaining issues for summary judgment only with regardto those two sets of information.

3. Misappropriation of Trade Secrets

In addition to showing that the defendant used its information, toestablish a claim of misappropriation of trade secrets underMassachusetts law,13 a plaintiff must show that the information was"in fact and in law [] confidential," Jet Spray Cooler, Inc. v.Crampton, 361 Mass. 835, 840 (1972), and that plaintiff took reasonablesteps to preserve the secrecy of the information, USM Corp. v. MarsonFastener Corp., 379 Mass. 90 (1979).14Page 16

Lancer argues that even assuming there is a genuine issue of materialfact with regard to the use issue, summary judgment in its favor is stillwarranted because Knapp Schenck failed to designate any information asconfidential under the terms of the LOI and Knapp Schenck failed to takereasonable measures to protect the allegedly confidentialinformation.15

a. Confidentiality

Knapp Schenck argues that much of the information it gave to Lancer wasto be treated as confidential pursuant to the LOI. However, under theterms of the LOI, information had to be deemed confidential in writing,and Knapp Schenck has not produced any evidence that it made such adesignation for the Aon report or the loss claims data. Nevertheless,even assuming the Aon report and loss claims data were not protectedunder the terms of the LOI, there is still a genuine issue of materialfact as to whether they were confidential for the purposes of themisappropriation claims. In his deposition testimony, Van Schenck statedthat during the April 5, 2002 meeting he gave to Mr. Catapang a copy ofhistorical loss data andPage 17

the AON pricing report, and asked him and told him that the information was strictly confidential and [Knapp Schenck] didn't expect it to be distributed to anyone except to his reinsurers, if it was required in order to get a reinsurance placement, but outside of that to keep it confidential.

This testimony, while slightly different in the details, iscorroborated by Tyrrell, who stated in his deposition that

Van Schenck had the AON report with him and said, "You understand, Mr. Catapang" — I don't know if he said "Mr. Catapang," but my recollection is he said, "You understand this is confidential and we don't give it to anybody." And Mr. Catapang said, "Of course. Of course we do."

While Catapang disputes that such an exchange ever took place, whetherit did or not is a question for a jury, not an issue appropriatelydetermined on summary judgment.

Even were I to assume that Knapp Schenck has not provided sufficientevidence to create a factual dispute about whether there was an oralagreement, a jury could find that the undisputed facts surrounding theexchange of information support an implied finding of confidentiality. Aconfidential relationship generally arises by operation of law from theaffiliations of the parties and the context in which the disclosures areoffered. Burten v. Milton Bradley Co., 763 F.2d 461, 463 (1st Cir.1985). Thus, "[w]here the facts demonstrate that a disclosure was made inorder to promote a specific relationship, e.g., disclosure to aprospective purchaser to enable him to appraise the value of the secret,the parties willPage 18be bound to receive the information in confidence." Id.; see alsoSentinel Prods. Corp. v. Mobil Chem. Co., No. civ. A. 98-11782-PBS, 2001WL 92272, *12 (D. Mass. Jan. 17, 2001) (a finding of an impliedconfidential relationship could be sustained where plaintiff loaned amachine to defendant for a limited trial period during salediscussions). Here, given that the Aon report and loss claims data wereexposed to Lancer for the explicit purpose of evaluating the Splashprogram in contemplation of acquiring it, I find that a jury couldreasonably find that an implied confidential relationship arose betweenKnapp Schenck and Lancer.

b. Reasonable Precautions

Under Massachusetts law, information cannot be confidential if thepossessor of the information does not take reasonable security precautionsto protect it. USM Corp. v. Marson Fastener Corp., 379 Mass. 90 (1979);See also Burten, 763 F.2d at 463 ("An implied confidential relationshipcan be defeated [] if the disclosing party voluntarily conveys a tradesecret to another without limitation upon its use."). In evaluatingwhether a party has take reasonable precautions to protect confidentialinformation, relevant factors to be considered include (1) the existenceor absence of an express agreement restricting disclosure, (2) the natureand extent of security precautions taken by the possessor to preventacquisition of the information by unauthorized third parties, (3) thecircumstances under which the information was disclosed . . . to (any)employee to thePage 19extent that they give rise to a reasonable inference that furtherdisclosure, without the consent of the possessor, is prohibited, and (4)the degree to which the information has been placed in the public domainor rendered "readily ascertainable" by the third parties through patentapplications or unrestricted product marketing. Id. at 98.

Lancer offers a number of different arguments each designed to showthat the information it received from Knapp Schenck was not confidentialbecause Knapp Schenck did not take appropriate measures to protect theinformation both within and outside Knapp Schenck. Most of thesearguments, however, are contentions about the general practices of KnappSchenck,16 and even setting aside the fact that most are disputed byKnapp Schenck,17 they are not particularly helpful in determiningwhether Knapp Schenck adequately protected the information at issue here— namely, the Aon report and the loss claims data. For example,Lancer's contention that Knapp Schenck did not have any employeenondisclosure agreements for the first seven years the Splash program wasin operation is not relevant if, as Knapp SchenckPage 20contends, only a handful of Knapp Schenck executives had access tothe Aon report and the loss claims data.18 Moreover, even assumingthat Lancer's contentions do apply to the Aon report and the loss claimsdata, a jury, applying the factors listed above, could reasonably findthat Knapp Schenck's actions were adequate given the circumstances.

Lancer specifically contends that Knapp Schenck waived confidentialityas to the Aon report by disclosing it to First American Insurance Company(now Arch Insurance). Lancer points to an affidavit by Vice President,Secretary, and Counsel to Arch Insurance, Joseph Labell, in which Labellstates that "at no time did Arch Insurance either have a writtenagreement or any specific discussion with Knapp Schenck to treat asconfidential, or as trade secret, information it received from KnappSchenck or from any agent working on behalf of Knapp Schenck." Labell,however, in a separate affidavit on behalf of Knapp Schenck states that As a matter of practice, policy and custom in the insurance industry, it was understood by Arch Insurance, at the time known as First American Insurance Company, that the information and data, including the AON report and loss claims data, exchanged with Knapp Schenck during the period of investigation and evaluation for the proposed business relationship was to be used solely for that purpose and that such information would not be disclosed to third parties unless it was necessary to effectuate that purpose.

Thus, Labell's testimony that there was no written agreement ofconfidentiality is immaterial if there was an impliedPage 21understanding of a confidential relationship. The determination ofwhether in fact there was such a relationship and the general issue ofwhether Knapp Schenck's actions constituted reasonable precautions inlight of the exchanges between Knapp Schenck are questions best left fora jury. Thus, I find that there is a genuine dispute as to the issue ofthe reasonableness of the precautions taken by Knapp Schenck inprotecting the Aon report and loss claims data.

4. Breach of LOI Agreement

Under the plain terms of the LOI, information exchanged by KnappSchenck and Lancer was deemed confidential, "provided that suchconfidentiality obligation shall apply only to non-public informationwhich is designated in writing to be confidential by the disclosingparty." The only written evidence Knapp Schenck points to in support ofits contention that it designated information given to Lancer asconfidential is the May 17, 2002 letter in which Knapp Schenck requestedthe return of its proprietary information. In that letter Knapp Schenckdesignated as proprietary "documents and related items including but notlimited to information relating to brokers, accessing systems andproducers relating to the Splash and Septicover Programs." Even assumingthis was a timely designation, which arguably it was not, Knapp Schenckhas not sufficiently shown that the Aon report and the loss claims datafit within this designation. And given that Knapp Schenck has notpresented any evidence that Lancer improperly used or disclosedinformation other than the AonPage 22report and loss claims data, Knapp Schenck has not provided any evidenceof a breach of the agreement with respect to the categories ofinformation designated in the May 17 letter.

5. Limitation on LOI

Having found that there has been no breach of the LOI demonstrated, Imust also address the question whether the LOI, which provides that theconfidentiality obligation applies only to materials designated as suchin writing and is arguably an integrated document, displaces any impliedor oral duty of confidentiality. Even assuming that the LOI is to betreated as a integrated document, I find that the LOI is not inconsistentwith and does not supplant confidentiality obligations predating itseffective date.

The LOI covers information exchanged "in the course of the evaluation,negotiation, or performance of due diligence in respect of this Agreementin Principle or the transactions contemplated herein." The evaluation,negotiation, or performance of due diligence for the sale of Splash didnot actually begin until after the April 5th meeting, during whichSchenck gave the Aon report and (at least some of) the historical lossdata to Lancer. In other words, I view the April 5 meeting as apreliminary meeting for the parties to decide, as an initial matter,whether to enter into negotiations regarding the sale of Splash. Thepurposes of the LOI went into effect sometime after the meeting, whenCatapang indicated that the figures "looked good" and that Lancer wouldlike to do a further evaluation.Page 23Indeed, only after the April 5 meeting did the "due diligence team" fromLancer go to Knapp Schenck to review files and speak with executives, andthus, the April 5 meeting was not part of the due diligence processcontemplated by the LOI. Whether the meeting was part of the "evaluation[or] negotiation in respect of this Agreement in Principle or thetransactions contemplated herein" depends on the point at which thoseevaluations or negotiations began. I find that they did not begin untilsome initial decision to move ahead with the sale was made by Lancer— that, in other words, the "evaluation" and "negotiation"contemplated in the LOI were the evaluation and negotiations connectedwith the due diligence process. The oral agreement and attendant impliedduty of confidentiality are collateral obligations pertaining to thepre-negotiation period.

6. Disposition

Accordingly, Lancer's motion for summary judgment will be granted onthe merits as to Count V, the breach of contract claim; Lancer's motionis denied as to Counts I, II, IV and VI.

B. Sanctions

Lancer moves for sanctions against Knapp Schenck on the grounds thatKnapp Schenck failed to investigate adequately the basis for its claimsbefore bringing suit and additionally failed to inform Lancer in a timelymanner that it was dropping two of its counts. Lancer contends that KnappSchenck's actions warrant sanctions under both Rule 11 of the FederalRules of Civil Procedure and 28 U.S.C. § 1927.Page 24

1. Rule 11

Lancer argues that Knapp Schenck violated subsections (b)(2) and (b)(3)of Rule 11. Those sections provide: (b) Representations to the Court. By presenting to the court (whether by signing, filing, submitting, or later advocating) a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances — . . . (2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; (3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.Fed.R.Civ.P. 11.

As an initial matter, given that I have found summary judgment is notwarranted except as to Counts III, V, and VII, Rule 11 on its face is notapplicable to the surviving counts. Specifically, as to Count V, theclaim of breach of confidentiality, I find that sanctions are notappropriate. It is undisputed that the parties entered into the LOI whichcontained a confidentiality provision. While I have determined that theprovision does not apply to the information about which the use issue isin dispute, I do not find that Knapp Schenck was unreasonable in itscontention that a breach claim was supportedPage 25in law and by the facts of the case.

Additionally, at the time Knapp Schenck filed its Complaint, it couldhave reasonably believed that Counts III and VII were warranted. Itcertainly had a basis in law for the claims and given the circumstancessurrounding the failed negotiations with Lancer regarding the Splashprogram and the subsequent launch of ODIN, I find that Knapp Schenck had acolorable belief that discovery might reveal a basis in fact for theclaims. The mere fact that Knapp Schenck has not opposed Lancer's Motionfor Summary Judgment as to Counts III and VII does not change thisconclusion. Knapp Schenck may have decided not to pursue the claims forvariety of legitimate reasons. Moreover, even were I willing to assumethat Knapp Schenck abandoned the claims because discovery revealed nofactual basis for the claims, Rule 11 concerns what Knapp Schenck knew atthe time it filed the Complaint. See Cruz v. Savage, 896 F.2d 626, 631(1st Cir. 1990) ("Courts should avoid using the wisdom of hindsight andinstead evaluate an attorney's conduct based upon what was reasonable atthe time the attorney acted."). Finally, given the expedited time framefor discovery and the fact that Lancer's motion for summary judgmentfollowed closely on the heels of discovery completion, I do not find thatKnapp Schenck delayed too long after a reasonable time for investigationand discovery in abandoning Counts III and VII.

The purpose of Rule 11 is to "deter dilatory and abusive tactics inlitigation and to streamline the ligation process byPage 26lessening frivolous claims or defenses." There is no evidence herethat the rule applies to the actions of Knapp Schenck.

2. 28 U.S.C. § 1927

Lancer additionally argues that Knapp Schenck failed to give Lancernotice of its intention to abandon its claims in violation of28 U.S.C. § 1927. Section 1927 provides: Any attorney or person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.28 U.S.C. § 1927.

According to Lancer, in a meet-and-confer discussion as well as in afollow-up letter, Lancer encouraged Knapp Schenck to dismiss its claimsbut Knapp Schenck refused. Lancer further states that only after it filedits Motion for Summary Judgment did Knapp Schenck send Lancer a letterstating that it would not pursue Counts III and VII. Thus, Lancercontends that Knapp Schenck unreasonably and vexatiously multipliedproceedings by forcing Lancer to brief claims that it intended toabandon.

Lancer assumes that Knapp Schenck all along intended to abandon theclaims and unnecessarily waited until Lancer had completed its summaryjudgment motion before doing so. That assumption, however, is disputed byKnapp Schenck and in any event is not supported by the chronology of thefilings. According to Knapp Schenck, the Rule 7.1 meet-and-conferdiscussion occurred on May 29, 2003, the day before Lancer filedPage 27its Motion for Summary Judgment. Lancer sent the follow-up letterto Knapp Schenck on June 17, 2003, the same day that Knapp Schenck filedits Motion in Opposition to Summary Judgment, and Knapp Schenck respondedtwo days later with a letter stating that it was not pursuing Counts Vand VII.

Given that Lancer filed for summary judgment the day following the May29 meet-and-confer discussion, it is reasonable to assume, as KnappSchenck suggests, that the work done on the Lancer brief with regard toCounts V and VII was done or substantially done. Moreover, there is noevidence that Knapp Schenck intended before that date not to pursue theclaims. Knapp Schenck may have decided to abandon the claims afterreading Lancer's Motion for Summary Judgment. In that case, the notice itgave to Lancer in the June 19 letter, two days after filing itsopposition motion, was indeed timely. In Pathe Computer Control SystemsCorp. v. Kinmont Industries, Inc., 955 F.2d 94, 99 (1st Cir. 1992), theFirst Circuit held that plaintiff's abandonment was "reasonably prompt"where defendant filed for summary judgment one day after responding tointerrogatories and plaintiff abandoned the claim in its oppositionmotion. Here, while Lancer's Motion for Summary Judgment came two monthsafter the close of discovery, I find that Knapp Schenck was entitled toat least some time to assess the evidence following discovery, as well asto evaluate Lancer's summary judgment motion, and thus the notice it gavewas not unreasonably untimely.Page 28

In Hales v. Prudential Insurance Company of America, No. Civ. 00-2299DWF/RLE, 2002 WL 31242213 (D. Minn. Oct. 3, 2002), cited by Lancer, thecourt held that § 1927 sanctions were appropriate where plaintiffabandoned six claims after defendants moved for summary judgment. In thatcase, however, plaintiff brought six claims against defendants that ithad abandoned in a previous case and plaintiffs indicated to defendantsprior to defendants' motion for summary judgment that they intended todrop the claims. Here, Knapp Schenck made no indication that it intendedto drop the claims before Lancer's Motion for Summary Judgment. Lancer'sreliance on Burger-Moss v. Steinman, 127 F.R.D. 452, 453 (S.D.N.Y.1989), is similarly misplaced. In that case, three years after the casehad been filed, after defendants moved for summary judgment, and on theday plaintiffs' counsel signed the joint pretrial order as the basis forproceeding to trial, plaintiffs conceded their inability to prove theircase. Here, Knapp Schenck gave notice to Lancer two days after filing itsopposition at the tail end of an expedited discovery process. I thereforefind that sanctions under § 1927 are not appropriate in this case.


For the reasons set forth more fully above, Lancer's motion for summaryjudgment is GRANTED IN PART (as to Counts III, V and VII) and DENIED INPART (as to Counts I, II, IV and VI) and Lancer's motion for sanctions isDENIED.

1. What documentation Van Schenck and Tyrrell actually gave toCatapang seems to be in dispute. In his deposition, Catapang stated thathe was given "program information" and "underwriting information" inaddition to the Aon report, which he described as "premium information."Van Schenck stated in his deposition that they gave Catapang "historicalloss data" and the Aon report. In his deposition, Tyrrell stated thatthey gave Catapang "some general information on the program, specificallybrochures, the applications and a general overview of the program" alongwith the Aon report. For purposes of the instant motions I will take asundisputed only that Van Schenck and Tyrrell gave the Aon report toCatapang.

2. Paragraph 8 concerned fees and expenses and is not relevant tothe present dispute.

3. Knapp Schenck asserts in its Complaint that as the May 15, 2002expiration date for the LOI approached, "Lancer Management had so changedits offer to acquire the Splash program that such offer was no longercommercially viable or desirable for the Plaintiff and the term for theletter of intent expired on its own accord." Lancer, on the other hand,contends that the parties failed to reach an agreement because KnappSchenck lost interest in the deal. In filing a counterclaim against KnappSchenck, Lancer alleged that "Knapp Schenck did not abide by itsagreements and representations, and entered into substantive negotiationswith third parties during the pendency of the Agreement" and that "KnappSchenck came to the conclusion that it was not interested in consummatingthe transaction with Lancer" as a result of those negotiations.

4. With its answer, Lancer brought five counterclaims against KnappSchenck. Because neither party has addressed the counterclaims, I dealhere only with Knapp Schenck's claims.

5. Lancer also offers arguments for summary judgment tailored toCounts III and VII. Knapp Schenck, however, apparently does not opposesummary judgment as to those counts. In a letter to Lancer counsel datedJune 19, 2003, counsel for Knapp Schenck stated: You have no doubt received my opposition to your motion for summary judgment at this point. This pleading was filed and served prior to my receipt of your June 17 letter. In that pleading I did not respond in opposition to your request that Count III (Misrepresentation) and Count VII (Tortious Interference with Economic Relations). I have decided not to pursue these particular claims for reasons I do not need to discuss with you.Accordingly, I grant summary judgment as to Counts III and VII.

6. Lancer contends that it took LCMs from its Nobel propane programand applied them to the ISO rates across the board in setting rates forthe ODIN program.

7. To further underscore this point, Lancer notes (1) the lack ofevidence that any Knapp Schenck officials have firsthand knowledge of useby Lancer of Knapp Schenck information, and (2) deposition testimony byLancer officials that they never used the Aon report or any otherinformation obtained from Knapp Schenck.

8. James Tyrrell, the Splash program manager, testified in hisdeposition that Lancer had neither the background nor the experience toenter the oil heat insurance business. Thus, whether Lancer could havestarted ODIN without using information it obtained from Knapp Schenckduring discussions about the Splash program is in dispute. Hilbert VanSchenck testified in deposition that it took Knapp Schenck five years towrite the line of business for the Splash program, that Lancer is theonly competitor to have entered the business in the last three years, andthat he knew of no business that became fully operational in less thanfive years without the aid of data such as that provided by Knapp Schenckto Lancer.

9. Van Schenck stated that the standard coverage captured by the ISOrates contains an absolute exclusion for pollution whereas the Splashprogram offers a buy-back option for coverage of some activities. Inaddition, Van Schenck stated that data from propane dealer coverageprograms would also not be useful in determining coverage for pollutionbecause the propane programs generally exclude such coverage aswell.

10. While it is undisputed that the Aon report was given to Lancerduring the April 5, 2002 meeting, it is not entirely clear when therelevant loss data was exchanged. Van Schenck testified that he gave"historical loss data" to Catapang in the April 5 meeting and in an emailfrom Catapang to Dave Delaney on April 8, 2002, Catapang states thatduring that meeting, Van Schenck provided him with, among other things,"Loss Engineering Info" and "Claims Response Info." However, on April 15,Van Schenck sent Catapang an email to which he purportedly attached a"loss ratio report."

11. Catapang testified in his deposition that the information was"of no value." In his deposition, Van Schenck disputed the testimony readfrom Catapang's deposition that the loss information was not "currentlyvalued."

12. This finding is limited to the Aon report and loss claims data.Knapp Schenck has not provided any evidence that Lancer used any of theother information that it claims was confidential, proprietary, or tradesecret information to evaluate the ODIN rates or otherwise.

13. In its Complaint, Knapp Schenck alleges Lancer's unlawful use of"proprietary, confidential, and trade secret information." As the FirstCircuit has noted in dicta, it is unclear whether and how theMassachusetts courts differentiate among confidential information,proprietary information, and trade secret information. Foster-Miller,Inc. v. Babcock & Wilcox Canada, 210 F.3d 1, 8 (1st Cir. 2000). Forpresent purposes, I will conflate the three terms and use the standardsset forth for misappropriation of trade secrets. If there is a differencebetween that standard and the standard for the misappropriation ofconfidential and proprietary information, it is that the latter appliesto information that does not quite reach the level of trade secretseither because it was not reasonably protected or because it is merelybusiness information. See USM Corp. v. Marson Fastener Corp., 379 Mass. 90,104 (1979). Given that I find that there is a triable issue as to whetherthe Aon report and the loss claims data information constitute tradesecret information, there is no need to test the evidence against thislower threshold standard for the purposes of the present motions.

14. Obviously, a plaintiff must as a threshold matter show that theinformation constitutes a trade secret. Under Massachusetts law, a tradesecret may consist of "any formula, pattern, device or compilation ofinformation which is used in one's business, and which gives himopportunity to obtain an advantage over competitors who do not know oruse it." J.T. Healy & Son, Inc. v. James A. Murphy & Son,Inc., 357 Mass. 728, 736 (1970). Lancer has not contested that theAon report and loss claims data fit within this definition, so I neednot address that issue here.

15. Lancer also contends that the information was not confidentialbecause it was publicly-available. Lancer points to deposition testimonyby Knapp Schenck officials conceding that certain information KnappSchenck claimed was confidential was in fact publicly-available. However,Knapp Schenck has maintained that the Aon report and the loss claims datawere not publicly-available, so at least as to that information there isat a minimum a question of confidentiality.

16. Lancer contends, for example, that Knapp Schenck did not useemployee nondisclosure or nonpiracy agreement during the early years ofthe Splash program, that Knapp Schenck's agreements with its brokers didnot contain confidentiality provisions, and that the insurance carrierswhich issue coverage for the Splash program share ownership rights in theloss history data.

17. For example, Knapp Schenck points to Van Schenck's deposition inwhich he testifies that Knapp Schenck has confidentiality agreements withits brokers and insurance carriers.

18. Van Schenck testified that only he and four others in thecompany.Page 1

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