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Sprout Retail, Inc. v. USConnect LLC

United States District Court, D. New Jersey

April 10, 2017

SPROUT RETAIL, INC., Plaintiff,
v.
USCONNECT LLC, Defendant.

          MEMORANDUM & ORDER FOR PRELIMINARY INJUNCTION

          PETER G. SHERIDAN, U.S.D.J.

         This matter comes before the Court by Defendant USConnect, LLC's (“USConnect”), on behalf of its counsel, motion to dismiss Plaintiff Sprout Retail, Inc.'s (“Sprout”) amended second-filed complaint (see Dkt. No. 8), and Sprout's, on behalf of its counsel, motion for preliminary injunction on order to show cause (see Dkt. No. 9). Oral arguments were heard on March 22, 2017.

         USConnect asserts that this case (“Federal Action”) should be dismissed because-(i) under the first-filed rule, the federal action is a duplicative action of a previously filed suit in the North Carolina State Court (the “NC Action”) that takes precedence over the federal action; (ii) the Court should abstain jurisdiction over the federal action under the Colorado River abstention doctrine because claims in the federal action are compulsory counterclaims in the NC Action as they concern the same subject matter and the same parties; and (iii) this Court lacks personal jurisdiction over USConnect.

         In opposition, Sprout asserts-(i) the first-filed rule does not apply in the federal action because the NC Action was filed in the state court and not in a district court; (ii) this Court should not abstain jurisdiction over the federal action under the Colorado River abstention doctrine because there is no strong federal policy in place; and (iii) USConnect has the sufficient minimum contacts with the State of New Jersey for it to have reasonably anticipated being haled into court in this jurisdiction.

         With regards to Sprout's preliminary injunction motion, Sprout asserts that USConnect has misappropriated and misused its trade secrets such as-(i) pre-coded payment cards, (ii) Sprout's APIs, application program interfaces, and related payment protocols, and (iii) Sprout's software and system. And, Sprout further request this Court to issue a preliminary injunction on all later developed technologies by USConnect under the Ownership of Technical Developments section of the Service Agreement.

         In opposition, USConnect argues that a preliminary injunction should not be issued because-(i) it had a valid license to the aforementioned trade secrets under the Service Agreement, (ii) it's current system is substantially different from the Sprout APIs because it is using its own system and no longer using the Sprout System, and (iii) it has issued new cards that are different from the pre-coded payment cards issued through the Heartland Payment Systems under the Service Agreement.

         BACKGROUND

         USConnect is a technology service provider for the vending and food service industries based in Greensboro, North Carolina. As a technology service provider, USConnect connects numerous different affiliates across the nation by providing them with a cashless payment system. The affiliates include individuals or businesses who operate vending machines, micro markets, unmanned kiosks, cafeteria cash registers, and other remote food service devices. The cashless payment system includes mobile telemetry and loyal card programs that allow the affiliates to offer vending food service and vending services to consumers. (Affidavit of Mr. Jeffrey S. Whitacre, President and CEO of USConnect, Dkt. No. 8-5, (“Aff. of Whitacre”) at ¶ 3).

         Sprout is a New Jersey based corporation that provides essential services for cashless transactions such as back-end software and information technology (IT) functionalities support. In addition, Sprout provides account support features to process payment and loyalty card transactions when a registered card is used at a vending machine of kiosk. (See Declaration of Mr. Jim English, Dkt. No. 9-2 (“Decl. of English”) at ¶ 2).

         On April 1, 2013, Sprout and USConnect entered into a two-year Sprout Service and License Agreement (“Service Agreement”) that required Sprout to license its software and services to USConnect for use in vending machines, food services and kiosks. (See Service Agreement at p. 1; Dkt. No. 8-6; also see Decl. of English at ¶ 6). Under the Service Agreement, Sprout developed the initial account services, payment gateway, and customer support server functions and database protocols necessary to support USConnect's affiliates. (See Aff. of Whitacre at ¶ 6). The Sprout software and services included reporting, payment, loyalty, and a promotional system (collectively the “Sprout System”). For the two-year term, USConnect was permitted to use the Sprout System to increase the number of operators and transactions using pre-coded payment cards. (See Decl. of English at ¶ 7).

         The pre-coded payment cards, issued to USConnect through Heartland Payment Systems, were registered by end consumers as Sprout One cards. The end consumers had to accept terms of a service prior to using their cards. The terms of service indicated in-part,

“The USConnect Card is a prepaid card that can be used at participating merchants subject to the terms of this agreement. […] Treat as cash. […] The Card allows you to load funds onto the Card through loading from a credit card or other funding source. Once your Card is loaded, you can make purchases at locations that accept the Card, as long as the available balance on your Card equals or exceeds the amount of your withdrawals plus applicable fees.”

(see Decl. of English at ¶¶ 9, 25; Terms of Service, Exhibit 3, Dkt. No. 9-2). Sprout permitted these pre-coded payment cards to be rebranded by USConnect, but the coded account information on the card directed the transactions through the Sprout System. (See Decl. of English at ¶ 25). Sprout established a network of operators in twenty (20) regions and over 100, 000 active users. (Id. at ¶ 9). The pre-coded payment cards enabled cardholders or consumers to transact cashless payment for purchases from vending machines connected to the Sprout System. These cards have a unique “OAN number” that can be recognized by a vending machine card reader, which would direct the transaction through the Sprout System. Essentially, these cards are keyed to the Sprout System. Additionally, the cards provide a toll-free number that connects Sprout's customer service department to troubleshoot technical difficulties. (Id. at 26-27).

         Under the Service Agreement, Sprout had access to USConnect's proprietary business information, which included USConnect's know-how, service pricing information, customer proposals, historical costs of service, sales data, customer lists, key person relationships, and anticipated service upgrades and price increases. (See Aff. of Whitacre at ¶ 9). USConnect played no role in the design or technical development of the intellectual property that it licensed from Sprout. And, during the two-year term of the Service Agreement, Sprout allegedly made enhancements to the software and technologies. (See Decl. of English at ¶ 11).

         Pursuant to the “Ownership of Technical Development” section of the Service Agreement, the parties agreed as follows-

“In the absence of a joint development agreement between the parties, Sprout will own, and [USConnect] will assign to Sprout, all rights, title, and interest in and to all technologies created, made, conceived, reduced to practice or authored jointly by Sprout and [USConnect] in connection with the performance of this Agreement. Any future solutions or technologies developed by Sprout are not subject to the terms of this agreement. [USConnect] has the right to request a joint development agreement between the parties should the [USConnect] contemplate development of any technologies and that agreement would dictate the ownership of such technologies.”

(See Service Agreement at p. 7; also see Decl. of English at ¶ 12). And, pursuant to the “Sprout Software” section of the Service Agreement, the parties agreed as follows-

“Sprout retains all right, title and interest in and to the Sprout System and Sprout Software and the associated intellectual property rights. The Sprout System and Sprout Software are not being sold by Sprout to [USConnect].”
[USConnect] acknowledges and agrees that all copyrights, trademarks, service marks, trade secrets and other proprietary rights of any kind, in or to the Sprout System and Sprout Software are owned by, and shall remain the property of Sprout.”

(See Service Agreement at p. 6; also see Decl. of English at ¶ 15). All the pre-existing program concepts of the Sprout One Card, which included stored value, loyalty, designing a charity, and promotions, were carried over and adopted by USConnect as a licensee of Sprout. (See Decl. of English at ¶ 18). In consideration for Sprout's services, USConnect paid a fixed monthly service fee of $25, 000. (See Service Agreement at p. 8).

         USConnect alleges that Sprout has interfered with contractual relationships with its existing clients, such as Beco and USA Technologies, by offering to provide competing services. USConnect alleges that this solicitation to its clients occurred immediately after Sprout interrupted the payment gateway services which had been provided for its client USA Technologies. (Aff. of Whitacre at ¶¶ 15, 16). By using USConnect's trade secrets and confidential information, for example, USConnect's know-how, service pricing information, customer proposals, sales data and customer lists, USConnect alleges that Sprout is developing a competing business program to solicit its customers and affiliates. Thereby, improperly competing with USConnect, which in turn is causing USConnect and its affiliates' economic loss, damage to business reputation and goodwill. (Id. at ¶¶ 19, 20, 22).

         In opposition, Sprout alleges that without Sprout's consent USConnect-(i) has replicated and converted the previously-licensed Sprout System, and (ii) is using its later developed, improved Sprout System; causing Sprout irreparable harm. (See Decl. of English at ¶ 13).

         For example, Sprout alleges that USConnect has misappropriated the following features developed by Sprout-(i) APIs and (ii) communication instructions between the vending machine card readers and the Sprout System. The APIs are proprietary communication protocols that enable USConnect to utilize any hardware and payment system programs that its customers used; thereby processing cashless payments. APIs are only shared with the licensees. (See Decl. of English at ¶¶ 24, 25).

         Whereas, communications between the vending machine card readers and the Sprout System are achieved by using pre-coded payment cards, which have the unique “OAN number.” These pre-coded payment cards are still being used by the cardholders. Sprout further alleges that USConnect has “put in place technology and communicated instructions to its integrations, which circumvents most of the vending machine card readers from directing the transaction to the Sprout System.” Thereby, redirecting transactions away from the Sprout System to a USConnect server. (See Decl. of English at ¶¶ 27, 28). In a nutshell, Sprout alleges that USConnect has replicated the licensed Sprout System, which includes the Sprout Software, and made unauthorized copies of the licensed software, know-how, and later developed technologies for its benefit. (See Decl. of English at ¶ 29).

         The Service Agreement continued in effect through 2016, when USConnect began to transition some services to a new service provider. At this point, Sprout implemented a new payment gateway system for USConnect, replacing the aspect of the payment gateway services previously provided by the Sprout System. (Aff. of Whitacre at ¶ 11). The parties agreed to negotiate a new proposed new agreement, which included provisions related to a new Sprout payment gateway system. To facilitate transition, on March 26, 2016, the parties executed a letter of intent affirming and extending the continued effect of the Service Agreement until a new agreement took effect. The March 26, 2016 letter, signed by James English, President of Sprout, and Jeffrey Whitacre, President & CEO of USConnect, recites, in-part,

This letter is to state our mutual intention to complete a new contractual arrangement between USCONNECT. LLC ("USConnect") and SPROUT RETAIL, INC, ("Sprout") for the provision of Sprout's cashless "Gateway" services, ByteVampire, and to confirm our agreement with respect to the "Gateway”, "Account" and "User" services to be provided by Sprout during a transition from our Service and License Agreement of April 1st 2013, as amended (the "Old Agreement"),

(see Exhibit C; Dkt. No. 6-10). However, the new agreement never came to fruition as there was no meeting of the minds. (See Decl. of English at ¶ 21; Aff. of Whitacre at ¶¶ 12, 14). In late 2016, USConnect allegedly did not pay Sprout's invoices for the services it rendered during the negotiation period of the execution of the new agreement. (See Decl. of English at ¶ 22).

         On January 4, 2017, USConnect sued Sprout in North Carolina for claims arising from the parties' relationship under the Service Agreement. In the complaint of the NC Action, USConnect alleged the following three claims-declaratory judgment of intellectual property rights; breach of the Service Agreement by Sprout; and misappropriation of USConnect's trade secrets by Sprout. Thereafter, USConnect filed a motion for preliminary injunction in the NC Action that has not yet been resolved. (See Dkt. No. 6-5).

         On January 8, 2017, Sprout filed this federal action. In the federal action, Sprout alleges, inter alia-payment of outstanding debts by USConnect; award for compensatory and special damages; and breach of the Service Agreement by USConnect. On February 21, 2017, Sprout filed a motion for preliminary injunction under Fed.R.Civ.P. 65 in the federal action. (See Dkt. No. 9).

         LEGAL STANDARDS

         Fed. R. Civ. P. 12(b)(1)

         Pursuant to the Federal Rules of Civil Procedure, Rule 12(b)(1), a claim can be dismissed for “lack of jurisdiction over the subject matter.” This motion to dismiss may be asserted at any time in a case. In re Kaiser Group Int'l, Inc., 399 F.3d 558, 565 (3d Cir. 2005). In a motion to dismiss based on subject matter jurisdiction, “the standard . . . is much more demanding [than the standard under 12(b)(6)].” “When subject matter jurisdiction is challenged under Rule 12(b)(1), the plaintiff must bear the burden of persuasion.” Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005).

         If the defendant's attack is facial, the court may take all allegations in the complaint as true and Amay dismiss the complaint only if it appears to a certainty that the plaintiff will not be able to assert a colorable claim of subject matter jurisdiction.” Liu v. Gonzales, 2007 U.S. Dist. LEXIS 74611, at *7 (D.N.J. Oct. 5, 2007). The standard of review differs substantially from that under Rule 12(b)(6), however, when the challenge is factual. Then, there is no presumption of truthfulness to a plaintiff's claims ...


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