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

California Federal Court Finds Specific Jurisdiction Over South Dakota Company For Alleged Involvement in Misappropriation of Trade Secrets

Posted in Trade Secrets

A South Dakota company recently found itself subject to personal jurisdiction in California by a California federal court despite its arguments that it lacked sufficient “minimum contacts” to establish such jurisdiction. The district court held that the company’s alleged knowledge of and involvement with a new employee’s alleged misappropriation of trade secrets in California purposefully availed the company to jurisdiction in California. (Integrated Practice Solutions, Inc. v. Wilson, 3:13-cv-00088-BTM-WMC, (S.D. Cal., July 31, 2013)).

Plaintiff Integrated Practice Solutions, Inc. is a Washington corporation with its principal place of business in San Diego County, California. IPS designs, sells, and services practice management computer software for chiropractors and other healthcare professionals, including features to aid with billing, scheduling patient visits, managing patient records, and tracking inventory.

IPS alleged that it maintains a list of current and prospective customers that it alleges would be extremely valuable to competitors. A dispute arose when a former IPS sales representative and Vice President of Sales joined competitor Future Health Acquisition, Inc. (“Future Health”) and allegedly misappropriated about 6,000 “leads” from IPS’s customer list.

IPS brought action against the former employee and Future Health for, inter alia, misappropriation of trade secrets. Future Health subsequently filed a motion to dismiss for, inter alia, lack of personal jurisdiction. Additionally, IPS filed a motion to dismiss for jurisdictional discovery.

Future Health contended in its motion to dismiss that it was a South Dakota based company and IPS did not establish sufficient minimum contacts between Future Health and California. Future Health argued that IPS provided no allegations that Future Health had any California residents as employees, any sales to California customers, or any California offices. Moreover, Future Health argued that it did not meet the former employee in California or negotiate his employment contract in California and hiring a California resident alone is insufficient to establish minimum contacts.

The district court rejected Future Health’s arguments and found the court had specific jurisdiction over Future Health based on its involvement with the alleged actions of the former employee misappropriating IPS’s customer list. The district court reasoned that misappropriation of trade secrets is an intentional tort and:

“if [the former employee] did misappropriate the customer list and Future Health did somehow take advantage of that, then Future Health would have purposefully availed itself of doing activities in or directed towards California. It would have committed an intentional act, namely using IPS’s customer list, an act expressly aimed at California, since that is where IPS is based, knowing that IPS would likely suffer competitive harm as a result.”

The district court further reasoned that IPS offered correspondence from Future Health that implies that Future Health was aware that the sales representative allegedly misappropriated IPS’s customer list. Thus, the court denied Future Health’s motion to dismiss and granted IPS’s motion for jurisdictional discovery, but limited such discovery to the specific issue of Future Health’s knowledge of and possible ratification of the former employee’s alleged misappropriation.

This case illustrates that out of state companies who do not conduct business in California but hire California residents may be subject to personal jurisdiction in the state should a dispute later arise regarding their knowledge of and involvement with a new employee’s misappropriation of trade secrets. This case is similar to the Vance’s Foods, Inc. v. Special Diets Europe Ltd. case we blogged on last year where a California federal court found personal jurisdiction over a corporate officer who was a citizen of Ireland and his Ireland based corporation based on his alleged international trade secret misappropriation activities. This case also reminds of us the importance of employers expressly explaining to new employees and obtaining their written acknowledgement during the hiring and on-boarding process not to bring over, utilize, or otherwise disclose their former employer’s trade secrets. For additional best practices regarding hiring competitors’ employees, check out our Nov. 28, 2012 webinar.