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Realpage, Inc v. Yardi Systems

August 11, 2011

REALPAGE, INC., COUNTER-CLAIMANT,
v.
YARDI SYSTEMS, INC., COUNTER-DEFENDANT.



The opinion of the court was delivered by: United States District Judge Hon. Otis D. Wright, II

ORDER GRANTING IN PART AND DENYING IN PART COUNTER-DEFENDANT'S MOTION DISMISS PURSUANT TO FED. R. CIV. P. 12(b)(6) [40] [Filed 06/16/11]

I. INTRODUCTION

Pending before the Court is Counter-Defendant Yardi Systems, Inc.'s ("Yardi") Motion to Dismiss Counter-Claimant RealPage, Inc.'s ("RealPage") First Amended Counterclaim ("FACC") pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt. No.40.) RealPage filed an Opposition to the instant Motion, to which Yardi filed a Reply. (Dkt. Nos. 44, 51.) Having carefully considered the papers filed in support of and in opposition to the instant Motion, the Court deems the matter appropriate for decision without oral argument. See Fed. R. Civ. P. 78; L.R. 7-15. For the following reasons, Yardi's Motion to Dismiss is GRANTED in PART and DENIED in PART.

II. FACTUAL BACKGROUND

RealPage and Yardi are competitors in the real property management and accounting business. (FACC ¶¶ 1, 2.) Perhaps Yardi's greatest success has been its popular Voyager software -- a computer program used to integrate property management functions and accounting. (FACC ¶¶ 2, 39.) Voyager can be installed on a computer -- known as the "on-premises" approach -- or clients can remotely access their version of the program stored on Yardi's servers via the Internet -- known as the Application Service Provider ("ASP") approach. (Id.) RealPage, on the other hand, markets a version of cloud computing it calls Software-as-a-Service (the "SaaS"), whereby it offers "vertically-integrated" systems and support designed specifically to address the needs of multifamily real estate owners and property managers throughout the United States. (FACC ¶ 3.) The SaaS allows RealPage clients to aggregate applications from multiple software providers into a single system, which is stored on RealPage's servers and can be remotely accessed by the client via the Internet. (FACC ¶ 4.) Both the ASP approach and SaaS require clients to pay an additional fee for the service. (FACC ¶¶ 2, 4.) RealPage claims the greatest benefit of the SaaS is that it involves only a single version of software code accessed by all clients, thus requiring developers of third-party applications to maintain only one version of their code and causing the cost of ownership to be reduced. (FACC ¶ 5.) Yardi's ASP approach requires a different code stream for each client resulting in higher-end costs. (Id.)

RealPage alleges that rather than innovate and invest in a superior cloud system, Yardi sought to impede and sabotage the growth of the SaaS in an effort to stay competitive with, and not lose business to, RealPage. (FACC ¶ 12.) One way in which Yardi allegedly sought to impede and sabotage RealPage was by and through Joe Hendrix ("Hendrix"), an employee of a significant client of both Yardi and RealPage ("Client X"). (FACC ¶ 30.) While at Client X, Hendrix moved the company's data center to the SaaS. (FACC ¶¶ 29, 30.) Recognizing Client X would no longer have need for his services after its IT department was outsourced to RealPage, Hendrix interviewed for and was hired as the Chief Information Officer at RealPage. (FACC ¶ 30.) Per Client X's request, Hendrix was permitted to wind down his responsibilities with Client X while also working for RealPage, but he was subject to the provisions of a Mutual Confidentiality Agreement. (FACC ¶¶ 30, 31.) This agreement indicated that Hendrix was forbidden to disclose any propriety information regarding RealPage's business model, strategy, or current and prospective clients for two year from the date of the contract. (FACC ¶ 31.)

RealPage further alleges that, at this same time and with Yardi's knowledge, Hendrix was acting as a mole for Yardi. (FACC ¶ 32.) As such, Hendrix provided Yardi with: (a) RealPage data center and disaster recovery architecture; (b) RealPage technology used to monitor and improve the operation of third-party applications; (c) RealPage process methods for change, problem, and release management; (d) detailed and proprietary descriptions of the SaaS; and (e) the confidential details of RealPage's bids for large Yardi clients. (FACC ¶¶ 32, 33.) Furthermore, after participating in sales calls, strategy discussion, and receiving information regarding RealPage hardware and software, Hendrix abruptly announced he had accepted a position with Yardi to expand its Texas operations. (FACC ¶ 32.) Then, within three weeks of Hendrix departure from RealPage, Yardi began offering a vertically-integrated service called Yardi Cloud Services, allegedly modeled on the SaaS. (FACC ¶ 34.)

RealPage also claims Yardi initiated a campaign to force its Voyager clients, through threats and intimidation, into anti-competitive exclusionary contracts, the terms of which allegedly stated that unless clients agreed not to use the SaaS, they would face termination of their licencing agreements. (FACC ¶ 39.) Moreover, because Voyager is a critical back-office application without a suitable alternative program, businesses faced high switching costs if they were to terminate their license agreements with Yardi and change platforms. (Id.) Examples of this misconduct was allegedly manifested in relation to five RealPage clients ("Clients 1-5," respectively).

Client 1, a large property management firm and user of Voyager, entered into a Letter Agreement for Interim Services with RealPage (the "Letter Agreement"). (FACC ¶ 42.) The Letter Agreement indicated, among other things, that Client 1's affiliate would continue to support any Yardi applications until RealPage and Client 1 entered into an additional agreement, called the Cloud Service Agreement, at a later date. (Reply, Exh. 1 at 2, 6.) RealPage alleges that Yardi would not modify its licensing agreement to allow Client 1 to use Voyager on the SaaS; rather it "advised Client 1 that it could not continue with the Letter Agreement for Interim Services or any future contemplated agreements with RealPage." (Id.) Subsequently, Client 1 announced that it could not use the SaaS, and RealPage was deprived of over $100,000 annually. (Id.) Client 2, a top ten property management firm and user of Voyager, moved to RealPage's SaaS for most of its IT needs, including the hosting of Voyager. (FACC ¶ 43.) Although Yardi had initially refused to bid for Client 2's third party hosting and outsourcing of related IT services, Hendrix, who had participated in sales calls to Client 2 and acquired substantial confidential information including detailed bid information, strongly encouraged Yardi to recapture Client 2's business. (FACC ¶¶ 43, 44.) Yardi consequently aggressively bid for Client 2's business.*fn1 (Id.) Additionally, Clients 2-A and 2-B, both customers of Client 2, were affected by Yardi's campaign against RealPage in that Yardi would not allow RealPage to implement Client 2-A's software interface, nor would Yardi allow RealPage to support Client 2-B's upgraded software. (FACC ¶ 46.)

Client 3, another multifamily and commercial real estate owner, agreed to move its data center to the SaaS. (FACC ¶ 47.) During the migration, however, Yardi allegedly demanded that Client 3 not use the SaaS, nor associate itself with RealPage. (Id.) Subsequently, Client 3 decided not to use the SaaS to host its Voyager software and RealPage lost the revenue it would have generated managing that application. (Id.)

RealPage also alleges Yardi repeatedly interfered with RealPage's subsidiary consulting company, EverGreen, and EverGreen's relationships with its existing and prospective consulting clients. (FACC ¶ 48.) One such instance occurred when EverGreen was in the process of negotiating a consulting contract with Client 4. (Id.) Negotiations were supposedly interrupted, however, when Yardi told Client 4 that it would not work with EverGreen, and Client 4 -- not wanting to "be a casualty in" a strained relationship between the two companies -- decided not to enter into the consulting contract. (Id.)

Finally, RealPage alleges Yardi interfered with Client 5's ability to transition from Voyager to RealPage's SaaS property management software, OneSite. (FACC ¶ 49.) Yardi allegedly accomplished this by changing its practice of allowing transitioning clients to maintain read-only access to historical data on Voyager, and supposedly intending to cut off Client 5's access in the future. (Id.)

In response to Yardi's January 24, 2011 Complaint, RealPage filed a Counterclaim on March 28, 2011, followed by the FACC on May 18, 2011. The FACC proceeds on six claims: (1) misappropriation of trade secrets; (2) violation of Section 1 of the Sherman Antitrust Act; (3) violation of the California Cartwright Act; (4) intentional interference with a contract; (5) intentional interference with a prospective economic advantage; and (6) unfair competition in violation of the California Business and Professions Code ...


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