Total Quality Sys., Inc. v. Universal Synaptics Corp.

679 F.Supp.3d 1196

TOTAL QUALITY SYSTEMS, INC., a Utah Corporation, Plaintiff, v. UNIVERSAL SYNAPTICS CORPORATION, a Utah Corporation, Defendant.

Case No. 1:22-cv-00167-RJS-DAO

United States District Court, D. Utah, Northern Division

Signed June 28, 2023

Eric S. Crusius, Pro Hac Vice, Tessa Beryl Tilton, Pro Hac Vice, Holland & Knight LLP, Tysons, VA, for Plaintiff.

David W. Tufts, Matthew J. Orme, Dentons Durham Jones & Pinegar PC, Salt Lake City, UT, for Defendant.

MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS

ROBERT J. SHELBY, United States Chief District Judge

This action stems from the deterioration of a longstanding business relationship between two Utah-based defense contractors, Plaintiff Total Quality Systems, Inc. (TQS) and Defendant Universal Synaptics Corporation (Universal). Universal terminated the parties' former partnership and now competes with TQS for the sale and delivery of a complex testing solution for military aircraft, prompting TQS to file this action.¹ Now before the court is Universal's Motion to Dismiss, which seeks dismissal of TQS's claims pursuant to Federal Rule of Civil Procedure 12(b)(6).² For the reasons explained below, Universal's Motion is GRANTED IN PART and DENIED IN PART.

BACKGROUND

I. Factual Background³

TQS and Universal worked together for many years to sell a complex fault detection solution to the U.S. military—the Intermittent Fault Detection and Isolation System (IFDIS).⁴ IFDIS combines a standalone system developed by Universal, the Intermittent Fault Detector (IFD), with several components purportedly selected and engineered by TQS.⁵ The resulting solution monitors certain military aircraft systems—known as avionics—under artificial stressors of combat flight to more accurately detect electronic faults that appear during operation but are then undetectable after the aircraft has landed.⁶ TQS claims the testing capability of IFDIS allows more efficient location and correction of elusive defects in avionics without requiring replacement of whole units—thereby saving millions of taxpayer dollars.⁷

But the parties' decades-long partnership took a nosedive amid allegations of breached contracts, late payments, and misconduct by their leadership.⁸ Now TQS alleges Universal misappropriated its proprietary IFDIS knowledge and technology to "cut TQS out and directly offer a Universal IFDIS solution to the U.S. Government," while "lodging a public campaign to discredit and defame TQS's reputation, credibility, and capacity."⁹ Universal counters that it—not TQS—developed IFDIS and that TQS was relegated to supplying "various components of the systems and . . . administrative tasks associated with the [federal] contract[s]."¹⁰ It frames "TQS [as] nothing more than a disgruntled former business partner that is disappointed [ ] Universal has moved on."¹¹

Notwithstanding the parties' current dispute, the early origins of their partnership are generally uncontested. In the mid-1990s, Universal developed and later patented the IFD.¹² Around the same time, TQS received a Small Business Innovation Research (SBIR) contract from the U.S. military to develop a prototype for supporting "fault diagnostic procedures" for military aircraft.¹³ As part of the SBIR contract, TQS decided to use Universal's newly developed IFD along with other components,¹⁴ which culminated in a business relationship between the two companies.¹⁵ This is where the parties' narratives begin to diverge.

Because the court is considering a motion to dismiss, TQS's factual allegations are the focus here. At this stage, the court "accept[s] all well-pleaded factual allegations in [TQS's] complaint as true, and . . . view[s] them in the light most favorable to the nonmoving party."¹⁶

TQS tells the story of an enterprising, veteran-founded company that developed an effective testing solution for military avionics, using a combination of proprietary and commercial off-the-shelf technology.¹⁷ While TQS decided to use Universal's IFD as part of the IFDIS, it "put the entire system together using its own proprietary knowledge, software, and system design."¹⁸ TQS's solution merged the constant fault detection capabilities of Universal's IFD with the extreme vibration and thermal stressors of combat flight to produce more accurate fault detection for military application.¹⁹ Simply put, "[t]he IFDIS did not physically exist before TQS designed, built, and delivered the IFDIS to the U.S. Air Force."²⁰

As a result of TQS's efforts, the IFDIS solution was approved by the U.S. government, leading to follow-on contracts for further development and delivery of the IFDIS.²¹ Over the next decade or so, TQS became known as an SBIR "success story" for its achievements with the IFDIS,²² and continued to work with Universal to develop and commercialize the technology. The parties eventually formalized their relationship under two consecutive agreements—the 2012 Teaming Agreement and 2017 Teaming Agreement—wherein TQS would contract directly with the U.S. government for IFDIS requests and Universal "would sell and provide support for the IFD unit . . . to TQS."²³ TQS avers these teaming agreements contained exclusivity provisions requiring close collaboration and mutual agreement between the parties for all IFDIS-related proposals, whether commercial or government.²⁴ Additionally, the agreements protected both parties' proprietary contributions to the IFDIS, whether Universal's IFD or TQS's own proprietary knowledge and technology.²⁵

But before the 2017 Teaming Agreement was terminated, Universal started flying solo.²⁶ TQS avers, "Universal unilaterally developed agreements with other companies to sell TQS's hijacked IFDIS system to companies such as Lockheed Martin, Barfield, and/or Star Aviation."²⁷ It also started to contract directly with the U.S. government, effectively cutting TQS out of the parties' lucrative contracting IFDIS pipeline.²⁸ At the same time, Universal further breached the parties' 2017 Teaming Agreement by withholding IFDIS- and IFD-related contracts from TQS.²⁹

TQS claims that Universal's offenses went beyond mere contract breach. It alleges that Universal sought to "defame TQS and drive TQS's partners and customers away . . . [with] an all-out and defamatory campaign against TQS, taking bolder steps at each turn."³⁰ In particular, Universal provided false or misleading statements to U.S. government contracting officials about TQS's capabilities and continued to downplay TQS's role with the development and delivery of the IFDIS.³¹ Moreover, Universal sent a letter to TQS's Board of Directors and shareholders containing false statements of fact and questioning the company's leadership.³² Yet, even as Universal sought to disparage TQS and "falsely solidify itself as the inventor and market leader of IFDIS,"³³ it continued using TQS's trade secrets to supplant its former business partner.³⁴

II. Procedural History

Given the contentious breakdown of the parties' relationship and later actions by Universal, TQS "now seeks to hold [Universal] accountable" by filing this action.³⁵ It brings one federal claim for misappropriation of trade secrets under the Defend Trade Secrets Act (DTSA), 18 U.S.C. § 1836(b) (Count IV),³⁶ and five pendant state claims.³⁷ TQS responded with the instant Motion, seeking dismissal of all six claims pursuant to Rule 12(b)(6).³⁸ Universal's Motion has been fully briefed,³⁹ oral argument was heard on June 1, 2023,⁴⁰ and the matter taken under advisement.

LEGAL STANDARDS

"To survive a [Rule 12(b)(6)] motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' "⁴¹ A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."⁴² When determining whether a complaint meets these criteria, the court "accept[s] all well-pleaded factual allegations in the complaint as true, and . . . view[s] them in the light most favorable to the nonmoving party."⁴³ Although a complaint "need not provide 'detailed factual allegations,' it must give just enough factual detail to provide 'fair notice of what the . . . claim is and the grounds upon which it rests.' "⁴⁴ However, the court will not accept as true "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements."⁴⁵ The court is required to "draw on its judicial experience and common sense" to evaluate whether the well-pled facts state a plausible claim for relief.⁴⁶

ANALYSIS

Universal moves to dismiss all of TQS's claims. For the reasons stated below, the court DENIES Universal's Motion to Dismiss TQS's claims for breach of contract, trade secret misappropriation, intentional interference with economic relations, and defamation. However, the court GRANTS Universal's Motion to Dismiss TQS's claim for common law unfair competition on preemption grounds.

I. Breach of Contract (Count II)

Universal first moves to dismiss TQS's breach of contract claim as "defective on its face."⁴⁷ Under Utah law,⁴⁸ "[t]he elements of a prima facie case for breach of contract are (1) a contract, (2) performance by the party seeking recovery, (3) breach of the contract by the other party, and (4) damages."⁴⁹ "[T]o properly state a claim for a breach of contract, a party must allege sufficient facts, which [this court] view[s] as true, to satisfy each element."⁵⁰ TQS has met this burden.

First, TQS sufficiently pleads the existence of the parties' 2017 Teaming Agreement.⁵¹ Second, TQS alleges it performed under the 2017 Teaming Agreement, including paying Universal its designated share of gross billings received for testing and repair services.⁵² Third, TQS avers Universal breached the 2017 Teaming Agreement by (1) violating the parties' non-disparagement clause; (2) refusing to share...