Schram v. PMC Ins. Agency

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JEFFREY SCHRAM, Individually; and E-PROBATE, LLC, a California Limited Liability Company, Plaintiffs, v. PMC INSURANCE AGENCY, INC., a Massachusetts Corporation; DAVID M. MALLOY, Individually; and ANDREW SHAW, Individually, Defendants.

No. 20-cv-10307-GAO

United States District Court, D. Massachusetts

September 1, 2022

REPORT AND RECOMMENDATION ON PLAINTIFFS' MOTIONS FOR PRELIMINARY INJUNCTION; MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO STRIKE

DONALD L. CABELL, U.S.M.J.

From 2006 to 2009, plaintiff Jeffrey Schram (“Schram”) developed a web-based, pay-as-you-go software system for the insurance industry to manage payment of premiums (“Plaintiff's Pay-As-You-Go Software”). (D 71-1, ¶ 3) (D. 76, ¶ 6). Under a 2010 Operating Agreement, Schram and defendant PMC Insurance Agency, LLC (“PMC Insurance”), a wholesaler of workers' compensation policies, agreed to form a company, PMC PayGo LLC (“PayGo, LLC”), to facilitate “the implementation of software products to support ‘pay-as-you-go' insurance sales.” (D. 76-1 §§ 1.1, 1.3) (D. 71-1, ¶ 14) (D. 45, ¶ 15) (D. 48, ¶ 15). In a related Asset Purchase Agreement, PayGo, LLC purchased certain source code and proprietary rights of Plaintiff's Pay-As-You-Go Software (“PayGo software” or “PayGo software system”) from TendToBusiness, Inc., Schram's company, with the understanding that Schram would acquire a 49% interest in PayGo, LLC. (D. 762, ¶¶ 1-2) (D. 76, ¶ 9) (D. 76-1, ¶ 6.7.1).

Schram and plaintiff E-Probate, LLC (“E-Probate”) allege that PMC Insurance breached the Operating Agreement and that defendants David M. Malloy (“Malloy”), Andrew Shaw (“Shaw”), and PMC Insurance (“defendants”) breached their fiduciary duties by: diverting PayGo, LLC's revenues to other insurance carriers; selling pay-as-you-go products of other companies to customers of PayGo, LLC; and concealing this diversion of revenue from Schram. (D. 45, ¶¶ 35, 44, 66, 72, 77, 80-83). The defendants' conduct allegedly reduced PayGo, LLC's revenues and deprived Schram of “his distribution from [PayGo, LLC's] revenues.” (D. 45, ¶¶ 42, 46, 59-60, 62, 72, 77).

Pending before this court are two preliminary injunction motions filed by Schram and E-Probate (“plaintiffs”). (D. 71, 85). The defendants oppose the preliminary injunction motions and also move to strike paragraphs 25, 32, and 33, and the last three words of paragraph 26 in Schram's November 12, 2021 affidavit. (D. 79, 90, 91) (D. 71-1, ¶¶ 25-26, 32, 33). For reasons outlined below, this court recommends that both preliminary injunction motions be denied and that the motion to strike be allowed.

I. PROCEDURAL BACKGROUND

A first amended complaint sets out the following claims: (1) breach of fiduciary duty against the defendants (Count One); (2) breach of the Operating Agreement against PMC Insurance (Count Two); and (3) breach of the implied covenant of good faith and fair dealing in the Operating Agreement against PMC Insurance (Count Three). In March 2021, this court recommended a dismissal without prejudice of Counts Four and Five. (D. 44). The court adopted the recommendation. (D. 60).

The first preliminary injunction motion grounds the reasonable likelihood of success regarding Counts Two and Three on sections 6.3 and 6.7.1 of the Operating Agreement. The latter section reads as follows:

Section 6.7 Specific Obligations of Individual Members.

Section 6.7.1 PMC Obligations.

. . Commencing upon the date of the execution of this Agreement and until PMC PayGo, LLC no longer operates the businesses compromising the Subject Assets acquired from TendToBusiness, Inc., PMC [Insurance] shall not directly or indirectly, or as a partner, shareholder, employee, manager or otherwise, own, mange, operate, control, be employed by, participate in, or otherwise be connected with any other insurance PayGo activity without participation of PMC Paygo LLC.

(D. 76-1, § 6.7.1). The plaintiffs submit that PMC Insurance violated section 6.7.1 by disclosing confidential and proprietary information to Nixer Comp, Inc. (“Nixer Comp”), by transferring proprietary information to Nixer Comp, and by working with Nixer Comp to develop a competing pay-as-you-go system without PayGo, LLC's participation.^[1] (D. 71, pp. 6-8, 12-13). Nixer Comp is a managing general underwriter which markets and collects premiums of policies on behalf of an underwriting carrier. (D. 76, ¶ 15).

The plaintiffs contend PMC Insurance violated section 6.3 by acquiring an equity interest in Nixer Comp under “a shareholder addendum” to transfer Nixer Comp stock to PMC Insurance and to William Nagel (“Nagel”), a senior vice president and executive director of PMC Insurance's staffing programs division. (D. 84, p. 2, n.2) (D. 84, p. 4) (D. 84-3, p. 3). The plaintiffs further argue the defendants violated section 9.7 “[b]y transferring software specifications, transferring software specifications, know-how, business practices and software underpinnings” to Nixer Comp. (D. 84, p. 4).

The first preliminary injunction motion requests ordering the defendants: (1) “to cease assisting or aiding any third-party to develop, modify, refine or correct a Pay-As-You-Go system”; (2) “not to access [PayGo, LLC's] Pay-As-You-Go source code or database and not to share or disclose [PayGo, LLC's] source code or database to any other party”; (3) “not to directly or indirectly transfer any [PayGo, LLC] business practices or procedures, [and] its Pay-As-You-Go processes, practices and procedures to any third-party”; and (4) “to disclose to Plaintiffs' counsel the names, telephone numbers and addresses of all persons to whom [the defendants] shared/disclosed [PayGo, LLC's] confidential information, business practices, procedures or specifications, including, but not limited to,” eight third parties, including Nixer Comp. (D. 71, pp. 15-16). The second preliminary injunction motion asks this court to order that: (1) “Shaw and Malloy return to PMC Insurance its equity shares in [PayGo, LLC”]; (2) the defendants comply with the Operating Agreement's terms “to continue funding [PayGo, LLC] and to pay the 0.7% of all premiums” for the insurance policies PMC Insurance “places that use a pay-as-you-go payment system”; (3) the defendants refund PayGo, LLC the money they took to pay their attorneys' fees and not take any additional money to pay such fees; and (4) the defendants “cease interfering with [PayGo, LLC's] relations with its customers, such as AmTrust.” (D. 85, pp. 11-12). With this background in mind, this court turns to the facts.^[2]

II. FIRST PRELIMINARY INJUNCTION MOTION (D. 71)

A. Factual Background

From 2006 to 2009, Schram developed Plaintiff's Pay-As-You-Go Software for the insurance industry. (D. 71-1, ¶ 3). Plaintiff's Pay-As-You-Go software and, by extension, the PayGo software, facilitate accurate estimates of workers' compensation premiums by tracking an insured company's workforce during the term of an insurance policy. As a result, they enable an insured company and its carrier to manage premium payments and minimize potential surprises associated with a premium audit at the end of a policy term. (D. 76, ¶ 6) (D. 45, ¶ 17) (D. 48, ¶ 17) (D. 711, ¶ 10).

In 2010, Schram and PMC Insurance formed PayGo, LLC under the terms of the July 2010 Operating Agreement. (D. 45, ¶ 11) (D. 48, ¶ 11) (D. 76-1, § 1.1). Under the July 2010 Asset Purchase Agreement, TendToBusiness, Inc. (“TendToBusiness”) sold the “exclusive right” and title to the PayGo software created by Schram to PayGo, LLC. (D. 76-2, pp. 2-3) (D. 76, ¶ 9) (D. 45, ¶ 25). PayGo, LLC therefore owns the PayGo software. (D. 76-2, ¶ 2) (D. 76, ¶ 11). Indeed, at a deposition, Schram testified that PayGo, LLC “came to own the software” in 2010 “when we did” the Operating Agreement and the Asset Purchase Agreement. (D. 78-3). In consideration of the transfer, PayGo, LLC agreed to convey a 49% interest in PayGo, LLC to TendToBusiness, which agreed to immediately convey that 49% interest to Schram. (D. 76-2, ¶ 4).

The PayGo software consists of source code for two computer programs: one known as “e-payrite” and accessible on the internet at www.epayrite.com; and the other known as epli.us and accessible on the internet at www.eppli.us. (D. 76-2, ¶ 1). It also includes all other proprietary rights in the source codes and “all interest in the Internet domain[s] known as epayrite.com” and “epi.us.” (76-1, ¶ 1). The PayGo software therefore includes all or, at a minimum, part of Plaintiff's Pay-As-You-Go Software, which Schram created.^[3] (D. 71-1, ¶¶ 3, 13, 15) (D. 76-1, § 3.3).

Pursuant to the Operating Agreement between PMC Insurance and Schram and the related Asset Purchase Agreement, PMC Insurance became a 51% owner and Schram became a 49% owner of PayGo, LLC. (D. 76-1, § 3.1) (D. 71-1, ¶ 14) (D. 76, ¶ 3) (D. 76-1, p. 29) (D. 76-2). As a wholesaler and managing general agent, PMC Insurance sells workers' compensation policies to insurance agents. (D. 45, ¶ 15) (D. 48, ¶ 15) (D. 71-1, ¶ 4). It is also a middleman between insurance agents and workers' compensation “insurance carriers in the placement of” workers' compensation insurance. (D. 71-1, ¶ 4). As such, PMC Insurance “holds the [insurance] contracts with the carriers.” (D. 71-1, ¶ 4). The ability of PMC Insurance to provide the PayGo software to insurance agents gives it a marketing edge and a means to expand its business with workers' compensation insurance carriers. (D. 71-1, ¶¶ 6, 12).

Under paragraph 6.7.1 of the Operating Agreement, PMC Insurance agreed to fund the start-up costs and the operating expenses of PayGo, LLC, including the continued operation of “the epayrite.com and epli.us software” acquired from TendToBusiness, Inc.^[4] (D. 76-1, § 6.7.1). Notably, the same...