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University Accounting Service, LLC v. Schulton

United States District Court, D. Oregon

June 10, 2019


          Allyson B. Baker, Sameer P. Sheikh, Erin Z. Cass, and Michael J. Marusak, Venable LLP, Ciaran P. A. Connelly, BALL JANIK LLP, of Attorneys for Plaintiff.

          Scott R. Ast, Scharnhorst Ast Kennard Griffin PC, Stephen P. Yoshida and Michael J. Farrell, MB Law Group LLP, of Attorneys for Defendant Ethan Schulton.

          Stephen Nakamura, Merle Brown & Nakamura PC, John C. Rothermich, K&L Gates LLP, of Attorneys for Defendant ScholarChip Card, LLC.


          Michael H. Simon, United States District Judge.

         Defendant ScholarChip Card, LLC (“ScholarChip”) moves for summary judgment against all claims asserted against ScholarChip by Plaintiff University Accounting Service, LLC (“UAS”). For the reasons that follow, the Court denies ScholarChip's motion.


         A party is entitled to summary judgment if the “movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). The moving party has the burden of establishing the absence of a genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The court must view the evidence in the light most favorable to the non-movant and draw all reasonable inferences in the non-movant's favor. Clicks Billiards Inc. v. Sixshooters Inc., 251 F.3d 1252, 1257 (9th Cir. 2001). Although “[c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge . . . ruling on a motion for summary judgment, ” the “mere existence of a scintilla of evidence in support of the plaintiff's position [is] insufficient . . . .” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 255 (1986). “Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citation and quotation marks omitted).


         Plaintiff UAS is a student loan servicing company and a wholly owned subsidiary of Transworld Systems, Inc. (“TSI”), a debt collection and receivables management company. The customers of UAS are lenders who provide student loans. UAS assists its customers by documenting when student loan payments are made, ensuring that loan balances are accurately tracked, and maintaining loan documents.

         Defendant ScholarChip is a technology company that provides software development and data security services. Dr. Maged Atiya (“Dr. Atiya”) founded ScholarChip in 2000 and currently is its Chief Technology Officer (“CTO”). Defendant Ethan Schulton (“Schulton”) worked for ScholarChip from 2003 through the end of 2017, when he resigned. At the time of his resignation, Schulton was one of the leading software developers at ScholarChip.

         On May 31, 2006, UAS entered into three contracts with ScholarChip. They are referred to as: (1) the Master Terms and Conditions (“MTC”); (2) the Software Development Agreement (“SDA”); and (3) the Hosting Support Services Agreement (“HSSA”) (collectively, the “Agreements”). Through the Agreements, UAS hired ScholarChip to create for UAS a unique, proprietary software platform (“eUAS Software”) and to host data provided to or accessed by ScholarChip for the benefit of UAS and its customers (“Client Data”). Client Data is described in the MTC as “including but not limited to all reports provided by ScholarChip” to UAS concerning services such as hosting, maintenance, and support services. The MTC also includes confidentiality provisions requiring, among other things, that ScholarChip “shall take appropriate action, by instruction to or agreement with its employees, ” to maintain the confidentiality of confidential information including all information defined under the MTC as “Confidential Information.”

         Under the MTC, UAS's Confidential Information includes “customer lists, customer and supplier identities and characteristics, agreements, marketing knowledge and information, sales figures, pricing information, marketing plans and business plans.” MTC § 8.2. ScholarChip must use the Confidential Information and the Client Data solely for the purpose of performing its obligations under the Agreements. MTC § 8.3. To the extent ScholarChip discloses Confidential Information to “persons in its organization who have a need to know for purposes of performing the [Agreements] or for a purpose consistent with the terms of the [Agreements], ” such disclosure must be “then only pursuant to an agreement that such persons will maintain the Confidential Information or Client Data in confidence and will not use or disclose to others except in accordance with this paragraph.” MTC § 8.3.[1]

         Schulton was one of the principal software developers at ScholarChip and was the chief architect of the eUAS Software. His responsibilities included developing, coding, and maintaining the eUAS Software, responding to questions and requests from UAS and its customers, and ensuring the security and safekeeping of UAS's Client Data and Confidential Information. Schulton was UAS's primary contact at ScholarChip for all technical needs and questions or requests relating to the eUAS Software. In addition, Schulton was responsible for providing “webinars, ” or personalized tutorial sessions, to UAS's customers to educate them about the features of the eUAS Software, provide technical support to UAS's customers, and answer customer-specific questions. UAS entrusted ScholarChip and its employees, including Schulton, with access to UAS's Client Data and Confidential Information, including customer lists, customer preferences, and other customer-specific intelligence that Schulton was exposed to while providing eUAS webinars and other tasks.

         According to ScholarChip, in March 2015, TSI (UAS's parent company) told ScholarChip that TSI wanted ScholarChip to split the eUAS student loan servicing business into its own unit that would then contract directly with TSI. In September 2015, TSI informed ScholarChip that it no longer wanted to pursue the proposal discussed in March. Instead, TSI told ScholarChip, TSI and UAS wanted to separate from ScholarChip and to have ScholarChip move, or migrate, the loan servicing platform into TSI's own date center.

         In December 2015, as an interim pricing agreement was about to expire, UAS requested a price extension through the end of 2016. Dr. Atiya told UAS that ScholarChip would only consider a price extension through the end of 2016 in the context of a transition agreement. The parties, however, did not reach an agreement on new rates, and, according to ScholarChip, the interim pricing agreement expired on December 31, 2015. ScholarChip adds that in January 2016, TSI suggested to ScholarChip that it send UAS a notice of ScholarChip's intent to cease providing any further loan servicing services to UAS. On February 3, 2016, ScholarChip sent a notice to UAS, stating that ScholarChip would cease servicing UAS's loan portfolio on June 30, 2016. According to UAS, in February 2016 ScholarChip told UAS that it would have to pay higher fees if it wanted to continue using the eUAS Software; otherwise, UAS's access would be terminated. ScholarChip later agreed to postpone the termination date.

         On March 29, 2016, Schulton sent an email to ScholarChip's founder and CTO Dr. Atiya stating, among other things: “To ensure UAS/TSI has no fuel for a lawsuit, should we provide them with the source code now?” During the following month, April 2016, Schulton sent an email to his legal counsel, and copied others within ScholarChip. Schulton discussed his plan to form a new legal entity, “Online Financial Management Technologies, LLC.” In July 2016, ScholarChip and UAS entered into a new pricing agreement through March 2017.

         In late 2016, Tuition Management Systems (“TMS”), a competitor of UAS, approached ScholarChip about using ScholarChip's loan servicing platform to host TMS's clients' student workout plans for a single university. According to ScholarChip, it created a test environment using simulated data to determine whether the eUAS platform could service TMS's proposed student workout plan and considered demonstrating this test environment to TMS. Also according to ScholarChip, after internal testing ScholarChip abandoned the idea of using portions of the eUAS platform for workout plans for any entity, including TMS. Thereafter, this potential product was never marketed or sold, and ScholarChip asserts that it did not entertain any use of the eUAS platform for any services other than those being provided to UAS. In November 2016, ScholarChip proposed to UAS that they enter into a new agreement under which ScholarChip would compete directly with UAS using the eUAS Software. UAS did not agree, and the parties did not adopt ScholarChip's proposal.

         In February 2017, UAS and ScholarChip met, and UAS explained that it had identified an alternative platform and intended to move, or migrate, its Client Data away from ScholarChip. ScholarChip then demanded from UAS an increase in fees for allowing UAS to migrate its Client Data. In March 2017, Schulton declined a request from UAS to perform certain software development work relating to eUAS. Schulton told UAS that the requested modifications were no longer available to UAS. By letter ...

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