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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

California Federal Court Allows Non-Signatory to Arbitration Agreement to Compel Arbitration in Trade Secrets Dispute

Posted in Computer Fraud and Abuse Act, Restrictive Covenants, Trade Secrets

A federal district court in the Northern District of California recently found that a non-signatory to an arbitration agreement may enforce that agreement against a signatory and compel arbitration under the doctrine of equitable estoppel.

Semin, a software developer, worked for Torbit, Inc. He signed an employment agreement containing a proprietary information non-disclosure provision, and a commitment not to compete while employed. The agreement mandated arbitration “of any dispute or claim relating to or arising out of the employment relationship.” Before resigning, Semin allegedly used Torbit’s computer network to download the company’s trade secrets onto his personal computer, and he created his own company to use Torbit’s proprietary information in competition with Torbit.

After he resigned, Torbit sued Semin and his company in a California federal court. The complaint alleged that he had violated the Computer Fraud and Abuse Act, and that he was liable for various common law causes of action. However, the only count directed at Semin’s company (also pleaded against Semin) claimed trade secret misappropriation.

Both defendants moved, citing the arbitration clause, to compel arbitration of the whole case. Torbit objected partly because Semin’s company, Datanyze was not a signatory to the employment agreement. Based on the doctrine of equitable estoppel, the court overruled the objection and granted the motion to compel. Torbit, Inc. v. Datanyze, Inc., Case No. 5:12-CV-05889-EJD (N.D. Cal., Feb. 13, 2013).

In the course of his employment, Semin helped to develop technology which, according to Torbit, constituted its “most valuable trade secret and one of its top competitive advantages.” The misconduct alleged against Semin alone included unauthorized computer activity and improper use of Torbit’s proprietary information. Torbit resisted Semin’s motion to compel arbitration of those claims, but the court granted the motion and held that the supposed CFAA violation and common law causes of action “touch matters” relating to and arising out of the parties’ agreement. Accordingly, those claims were deemed arbitrable.

The motion to compel arbitration of the trade secret misappropriation cause of action was more problematic because Torbit had not agreed to arbitrate disputes with Semin’s company, and courts ordinarily hold that arbitration is not required absent such an agreement. But the California federal court distinguished those holdings. Stressing that arbitration is a favored method of dispute resolution, the court cited several federal appellate rulings from outside the Ninth Circuit to the effect that a party is equitably estopped to claim “the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes.” Equitable estoppel was held to apply to the alleged trade secret misappropriation claims because they were “intertwined with,” “arise out of,” and “relate directly to” the contract providing for arbitration.

Although the Ninth Circuit apparently has not ordered arbitration based on equitable estoppel in a case like Torbit, the principle is described in a Ninth Circuit decision cited by the California court, Mundi v. Union Sec. Life Ins. Co., 555 F.3d 1042 (2009). The language in Mundi is dicta because the non-signatory there failed to convince the court that the “intertwined with,” “arise out of,” and “relate directly to” standards were satisfied. Yet, the relevant pleadings in Torbit and in Mundi have some similarities, and so both courts might have reached the same conclusion.

It is difficult to predict, with respect to a specific factual scenario that may arise in the future, how courts in the Ninth Circuit (or elsewhere) will rule on a non-signatory’s motion to enforce an arbitration clause in an employment agreement. In fact, the 5th and 8th Circuits recently reversed district court decisions allowing non-signatories to compel arbitration.

To minimize the likelihood that the court will order the parties to arbitrate a case like Torbit, the complaint should emphasize that the alleged misconduct of the non-signatory fails the “intertwined with,” “arise out of,” and “relate directly to” tests.