A New Jersey district court judge recently declined to dismiss trade secret claims against the Weather Channel, finding that the plaintiff Events Media Network Inc. (“EMNI”) had alleged sufficient facts to state a claim of trade secret misappropriation under the Georgia Trade Secrets Act. 

The parties first entered into a licensing agreement in the spring of 2008.  EMNI agreed that it would provide the Weather Channel with access to a continually updated database of information, including schedules for events and attractions throughout the United States.  This information was compiled based on publicly available information.  The Weather Channel was given broad rights to use and distribute this information, however, “EMNI retained proprietary rights to the information and imposed confidentiality requirements on its use.”  Following the expiration of the agreement in 2011, some of these confidentiality provisions survived, and EMNI filed suit, alleging that the Weather Channel had misappropriated the information, and used it for purposes beyond those permitted by the contract, such as building maps and creating weather products.

The Weather Channel filed a motion to dismiss the claims, alleging that EMNI was “attempting to expand a simple contract dispute into a tort action for conversion and misappropriation of trade secrets.”  Defendants also argued that the fact that the information at issue was publicly available and could be displayed publicly under the terms of the licensing agreement demonstrated that it was not a trade secret.  The court, however, found otherwise, finding the pleadings sufficiently alleged a violation of the Georgia Trade Secrets Act to survive a motion to dismiss. Here, the plaintiff allegedly earned a “competitive advantage from compiling publicly available information,” and thus, “those public domain elements may be considered to have been integrated into a finished product that is deserving of trade secret protection.” The court found that EMBI had sufficiently alleged that it maintained the confidentiality of a database of information it had licensed to the Weather Channel, and had placed clear limits on the Weather Channel’s dissemination of EMBI’s information. 

Defendants in trade secret litigation should use caution in relying on the defense that information is not a trade secret because it is publicly available.  While this defense may be applicable in many cases, where the information is compiled into a finished product which provides the plaintiff with a competitive advantage, the court may be wary of this defense (at least made on the pleadings).

In addition, the case raises the issue of whether the terms of a written contract can establish the elements of a trade secret. Here, the parties contractually agreed the information supplied by EMNI was proprietary.  EMNI used that provision to argue the Weather Channel had conceded that the information was proprietary, and the court agreed.  As John Marsh points out in his own blog post on the case, “[i]n written agreements negotiated between sophisticated commercial parties, courts will frequently defer to the language of the agreement.”  This is consistent with the recent Convolve case in which the Federal Circuit found that the parties’ negotiated non-disclosure language served to override any governing state law related to trade secret misappropriation. We will continue to keep you posted with any material developments in this case.

Does the Computer Fraud and Abuse Act (“CFAA”) prohibit hacking–improperly gaining entrance into a computer system–or simply prohibit improper use of a computer system? U.S. Courts of Appeal are divided. Now, district and appellate court judges in a single federal case pending in the Northern District of California, U.S. v. Nosal, have produced several divergent opinions regarding congressional intent with respect to the meaning of the CFAA.

The defendant in Nosal allegedly persuaded employees of his former employer to log in to the employer’s computer system and forward confidential information to him. Nosal allegedly planned to use the information to compete with his former employer.

The CFAA provides that an individual who “knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access” is guilty of a crime. Although the CFAA is a criminal statute, most judicial opinions interpreting it are issued in civil (injunction and damages) litigation. Nosal is one of the unique reported CFAA cases in which the defendant was charged with a crime.

The most recent Ninth Circuit opinion in Nosal was written in 2012 by an en banc majority. Those judges concluded that the CFAA is simply an anti-hacking statute that criminalizes circumventing “technological barriers.” It does not apply to Nosal, the majority held, because he was not the person who entered his former employer’s computer system.

After the Ninth Circuit’s en banc decision was issued, affirming the district court’s dismissal of the indictment’s CFAA counts, a superseding indictment was returned. It alleged substantially the same crimes but added more facts with the purpose, apparently, of getting around the en banc ruling. Nosal again moved to dismiss the CFAA counts, stressing that the statutory words “accesses” and “access” relate to unauthorized logging into the company’s computer, not to the use that is made of the computer after logging in. Since he did not log in, he insisted, he could not be guilty of CFAA crimes.

In a ruling issued in mid-March 2013, Nosal’s motion was denied. The district court judge emphasized that the Ninth Circuit en banc majority’s words cannot be taken literally. According to that judge, “[h]acking was only a shorthand term used [by the en banc majority] as common parlance . . . to describe the general purpose of the CFAA,” and the phrase “circumvention of technological access barriers’ was an aside that does not appear to have been intended as having some precise definitional force.” In short, the district court judge concluded,

“[i]f the CFAA were not to apply where an authorized employee gave or even sold his or her password to another unauthorized individual, the CFAA could be rendered toothless. Surely Congress could not have intended such a result.”

Proposed legislation to expand the scope of the CFAA is currently being circulated among the House Judiciary Comittee. Nevertheless, practitioners and parties in the states and territory which encompass the Ninth Circuit — Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington State, and the Territory of Guam — will likely have to wait at least until the next CFAA lawsuit is decided by the Ninth Circuit before they may reliably predict what conduct will be held to violate the CFAA.

The Second Circuit Court of Appeals has reversed a Connecticut federal court’s order dismissing for lack of personal jurisdiction a Connecticut corporation’s complaint for misappropriation of trade secrets by a Canadian employee of the plaintiff’s Canadian subsidiary. The complaint alleged her knowledge that her employer’s emails were stored on its parent corporation’s servers in Waterbury, Connecticut. Therefore, the claim that she purposefully engaged in activities in Connecticut, by downloading confidential emails from her employer’s computer to her personal computer, was adequately pleaded. MacDermid, Inc. v. Deiter, No. 11-5388-cv (2nd Cir., Dec. 26, 2012), rev’g No. 3:11-CV-0855-WWE (D. Conn., Dec. 1, 2011).

Connecticut’s long-arm statute provides, in relevant part, that a non-resident is subject to the state’s jurisdiction for lawsuits alleging misuse of “a computer, as defined, . . . located within the state.” The statutory definition of the word “computer” includes “an electronic . . . device . . . that, pursuant to . . . human instruction . . . can automatically perform computer operations with . . . computer data and can communicate the results to another computer or to a person [or is a] connected or directly related device . . . that enables the computer to store, retrieve or communicate . . . computer data . . . to or from a person, another computer or another device.” According to the Second Circuit, “a computer server meets the Connecticut long-arm statute’s definition of computer.”

In support of her successful motion to dismiss in the district court, the defendant noted that she did not work in the U.S. and that she had no reason to expect that a suit against her would be heard anywhere other than in Canada. The trial court’s Memorandum of Decision observed that she was not alleged to have engaged in a persistent course of misconduct or to have derived any revenue from the supposed misappropriation. That court stressed that the “defendant’s tortious conduct occurred, if at all, when defendant transferred plaintiff’s proprietary information onto her home computer from her work computer, a transaction that occurred exclusively in Canada.”

According to the Court of Appeals, however, “It is not material that [the defendant] was outside of Connecticut when she accessed the Waterbury servers. The statute requires only that the computer . . ., not the user, be located in Connecticut.” While recognizing that many internet users probably do not know the location of servers where emails are stored, this defendant allegedly was aware that the servers were in Connecticut, and at the motion to dismiss stage, well pleaded factual allegations are assumed to be true. In light of the interest of a company with its principal place of business in Connecticut in obtaining redress for alleged wrongs and the public interest of the state in which the company is based, and because “efficiency and social policies against computer-based theft are generally served by adjudication in the state from which computer files have been misappropriated,” the Connecticut federal court could properly exercise jurisdiction.

The decision in this case constitutes a warning to all persons misappropriating confidential emails. No matter where in the world the defendant downloads the emails, he or she may be sued in Connecticut — or in any other state with a similar statute — for trade secrets misappropriation where the emails are stored on servers in the forum state, particularly if the plaintiff does business there and the defendant is alleged to have known the location of the servers. Check out Kenneth Vanko’s blog for a quick analysis of the case.

See also our prior post where a California federal district court examined the issue of personal jurisdiction in an international trade secret misappropriation and breach of contract dispute between an American company and a European distributor based out of Ireland.

By Joshua Salinas and Jessica Mendelson

The secret is out, Tic Tacs and bubblegum have the most valuable and desirable real estate in the entire grocery store.

On September 27, 2012, a district court for the Eastern District of New York granted in part and denied in part a motion to dismiss in a commercial dispute arising out of the home of these consumables–grocery checkout displays. Dorset Industries, Inc. v. Unified Groceries, Inc, 2012 WL 4470423 (E.D.N.Y. Sept. 27, 2012).

The dispute arose when the defendant, inter alia, allegedly misappropriated the plaintiff’s trade secrets and confidential information to allegedly create a competing business program that marketed checkout areas, which also allegedly “cut out” the plaintiff from their alleged exclusive business arrangement.

Plaintiff Dorset Industries develops and implements “checkout programs,” which allegedly allow grocers to maximize their sales opportunities by utilizing the front end of checkout areas. These areas are believed to be the most desirable real estate in the store as the volume of foot traffic is unmatched. To capitalize on this valuable marketing opportunity, Dorset allegedly uses its “knowhow, experience, and intellectual property” to design and manufacture display units for the grocers, and accordingly leases space in those displays to manufacturers of grocery products (e.g. candy, magazines, and health and beauty products).

Defendant Unified Groceries is allegedly one of the largest retailer-owned grocery cooperatives, and allegedly the largest wholesale grocery distributor in the Western United States. Unified allegedly signed agreements with Dorset to implement Dorset’s checkout programs. Under the alleged agreements, Unified would be responsible for finding retail grocers within its member stores to sign up for Dorset’s checkout program; Dorset would be exclusively responsible for providing the displays and leasing the spaces out to manufacturers. Both parties would share in the resulting income stream.

Unified also signed confidentiality and non-disclosure agreements that restricted the use and disclosure of any business information provided by Dorset concerning the business methods and procedures of its checkout programs.

A dispute arose when Unified allegedly attempted to circumvent the parties’ business arrangement by creating its own checkout program and dealing directly with the manufacturers to lease the checkout display space. Consequently, Unified was allegedly able to “cut out” the intermediary (i.e. Dorset) and contract with the manufacturers directly–thereby obtaining 100% of the income stream. Unified also allegedly notified Dorset that it was terminating their program agreements, although the timing and sufficiency of that notification was disputed.

Dorset sued Unified in New York state court, alleging breach of contract, breach of the confidentiality agreement, usurpation of corporate opportunity, and unfair competition. Dorset also sought a declaratory judgment that the agreement’s termination was invalid. Unified subsequently removed the case to the Eastern District of New York and filed a motion to dismiss the entire lawsuit pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

The significance of this case concerns the Court’s analysis of the third cause of action–breach of confidentiality and non-disclosure provisions. Unified contended that (1) Dorset failed to identify any confidential information allegedly used by Unified in creating its competing checkout program, (2) any such information was not confidential, and (3) Dorset failed to adequately allege that Unified misappropriated any confidential information. The Court disagreed.

The Court recognized that under New York law, a combination of characteristics and components in the public domain could be a protectable trade secret when uniquely combined into a unified process or product. The Court found that Dorset had set forth facts plausibly alleging that the information allegedly utilized by Unified constituted confidential information and/or trade secrets when Dorset identified this information as “checkout counter programs and its business model, plan-o-grams and designs, methods and procedures … including creating and designing the specific Program for Unified.”

Additionally, the Court found that Dorset adequately alleged that it took reasonable efforts to guard the secrecy of its trade secret, confidential, and proprietary information because Dorset alleged that it (i) restricted access to certain information within the company, (ii) utilized passwords to protect its computer system, (iii) limited remote access to those with authority, and (iv) limited access to certain documents containing confidential information within the company. The Court also underlined Dorset’s use of confidentiality and non-disclosure agreements, which defined such confidential and proprietary information and which also contained several express restrictive covenants, including specific covenants of non-disclosure of trade secrets and confidential and proprietary information.

The Court emphatically rejected Unified’s argument that Dorset’s complaint required a greater level of specificity at the pleading stage.

This case is also noteworthy considering the fact that Dorset allegedly admitted that it does not even know whether Unified had actually used or disclosed any confidential information, or whether it was merely speculating that it might do so at some unspecific future date. Unified contended that, at most, Dorset had alleged that Unified misappropriated a single form used for entering into agreements with vendors, and that the form did not constitute trade secret or confidential information because it was a one page five line form that contained nothing more than basic contact information.

The Court explained that it could plausibly infer that the confidentiality provisions were violated by Unified when it allegedly created its competing checkout program. Specifically, the court reasoned that (1) the form supported the inference that Unified created a checkout program that utilized the same methods and procedures as the Dorset program, (2) Unified had previously admitted to Dorset its intent to take over Dorset’s program after observing it for several years, and (3) the subsequent decline of customers that signed up for Dorset’s program compared to previous years implied that Unified began enrolling customers into its competing program. Thus, the Court found a reasonable inference from Dorset’s allegations that Unified had created a checkout display program that would replicated the allegedly confidential “methods or procedures” used in operating Dorset’s program.

Accordingly, the court denied Unified’s motion to dismiss as to Dorset’s claim for breach of confidentiality and non-disclosure provisions. The court also granted Unified’s motion to dismiss on the unfair competition and usurpation of opportunities claims, and granted in part and denied in part the claims for declaratory judgment and breach of implied covenant of good faith and fair dealing.

This case reminds us of the importance of non-disclosure and confidentiality agreements when conducting business with third parties. The existence of these agreements is often the deciding factor when analyzing whether the trade secret holder took reasonable efforts to maintain and protect the secrecy of the information. This case also reiterates that allegations for misappropriation of trade secrets and confidential information (at least in this Court) are not subject to a heightened level of specificity at the pleading stage. Indeed, as with other claims, the Court accepted as true the factual allegations set forth in the complaint and drew all reasonable inferences in the plaintiff’s favor. As illustrated in this case, a plaintiff that lacks direct evidence of misappropriation of trade secrets or confidential information should plead all corresponding facts that support a plausible inference that misappropriation occurred.

 

MPI, a Texas company, went to Kentucky and allegedly attempted to hire two Luvata employees, Foster and Meredith. Foster joined MPI soon thereafter. Over the course of the next few months while Meredith remained a Luvata employee, he and Foster allegedly spoke by phone repeatedly. In addition, prior to leaving Luvata for MPI, Meredith allegedly copied his employer’s computer files that described a trade secret manufacturing process, identified its customers, and contained its financial information. Once Meredith became an MPI employee, it allegedly replicated Luvata’s confidential manufacturing process and began competing with Luvata which then sued MPI, Foster and Meredith in a Kentucky federal court.

MPI’s motion to dismiss for lack of personal jurisdiction, on the ground that the Kentucky long-arm statute does not permit the exercise of jurisdiction over MPI and a related defendant company, was granted. The ex-employees’ Rule 12(b)(6) motion to dismiss the misappropriation claim against them was denied. Luvata Electrofin, Inc. v. Metal Processing Int’l, L.P., Case No. 11-CV-00398 (W.D. Ky., Sept. 10, 2012).

Luvata is in the business of electrocoating (“e-coating”) coils used in the heat transfer industry. Luvata maintained that its e-coating process is unique, is a trade secret, and cannot be reverse engineered. Foster was allegedly the company’s production supervisor, and Meredith was “intimately involved in running the” e-coating process. All Luvata employees signed non-disclosure agreements (but there was no non-compete provision).

At an e-coating conference held in Kentucky, MPI endeavored to hire both Foster and Meredith. After both initially declined, Foster left Luvata and went to work for MPI. Over the course of the next few months, he allegedly spoke to Meredith by phone more than 30 times, and at least twice Meredith reviewed Foster’s computer files at Luvata which contained trade secrets. In addition, Meredith allegedly copied onto his own CD and thumb drives files from his and Foster’s computers. On his last day at Luvata before joining MPI, Meredith allegedly used a program that “cleaned ‘unnecessary files’” from his and Foster’s computers. Foster allegedly told Luvata’s general manager that MPI was building an e-coating line, based on information Foster learned at Luvata, and that MPI soon would be competing with Luvata. MPI allegedly proceeded to reproduce Luvata’s secret e-coating process and began soliciting Luvata’s customers, and Luvata sued.

MPI’s motion to dismiss Luvata’s complaint for lack of personal jurisdiction was granted because, according to the court, MPI did not engage in acts in Kentucky that bore a “reasonable and direct nexus” to Luvata’s allegations of misappropriation of trade secrets. The court conceded the possibility “that something fishy was occurring” between MPI and Meredith but added that was only conjecture since Meredith may have been acting unilaterally to increase his value to his new employer. However, the court found sufficient to state a cause of action Luvata’s claim that Foster and Meredith violated their non-disclosure agreement with Luvata by disclosing its trade secrets to MPI. Luvata’s breach of fiduciary duty claim against its two ex-employees was dismissed as preempted by the Kentucky Uniform Trade Secrets Act.

Under the circumstances of this case, and particularly in light of the court’s decision denying the ex-employees’ Rule 12(b)(6) motion, the order dismissing Luvata’s lawsuit against MPI could be described as harsh, especially without giving Luvata an opportunity to take discovery. The suggestion that Meredith might have been acting on his own seems far-fetched but possible. Moreover, it is surprising that Luvata’s allegations held to be conjectural in connection with granting MPI’s motion to dismiss were found “to plausibly give rise to an entitlement to relief” as against the individuals. Of course, Luvata might have had an airtight action against them if they had signed non-competition agreements. Please see our recent post regarding a  Kentucky appellate case containing an overview regarding enforcing non-competes in Kentucky.

Last month we blogged about a district court for the Northern District of California that distinguished the Ninth Circuit’s recent U.S. v. Nosal decision and allowed an employer to bring a counterclaim under the Computer Fraud and Abuse Act (“CFAA”) against a former employee for alleged violations of a verbal computer access restriction. (Weingand v. Harland Financial Solutions, 2012 U.S. Dist. LEXIS 84844 (N.D. Cal. June 19, 2012). Recently, the court reaffirmed its conclusion regarding Nosal concerning the employee’s subsequent motion to dismiss that CFAA counterclaim.

Defendant employer Harland Financial Solutions alleged that it verbally authorized plaintiff and former employee Michael Weingand to return to its offices after the termination of his employment to copy his personal files from his prior work computer. A dispute arose, however, when Weingand allegedly “accessed , without authorization, over 2,700 business files,” some containing confidential, proprietary, and copyrighted information. (See our previous blog post for further details regarding the background of this case).

As discussed in our previous post, the court granted Harland’s motion for leave to amend its answer to assert a counterclaim against Weingand for violations of the CFAA.

Harland subsequently amended its answer to assert the CFAA counterclaim. Weingand then moved to dismiss the claim for “failure to state a plausible claim for relief.” (FRCP 12(b)(6)).

On August 29, 2012, the court denied Weingand’s motion to dismiss. The court noted that it already rejected a bulk of Weingand’s arguments in the prior motion for leave to amend. The court acknowledged, but declined to adopt, Weingand’s argument that verbal authorization could not be the sort of authorization cover by the CFAA:

Notably, the court reiterated its prior conclusion concerning Nosal:

“although Nosal clearly precluded applying the CFAA to violating restrictions on use, it did not preclude applying the CFAA to rules regarding access.”

Additionally, the court noted that many of the issues raised by Weingand concerning the scope and nature of his authorization, what constituted “personal” files, and whether he exceeded Harland’s authorization, were factual questions appropriate for summary judgment — not a motion to dismiss.

The court denied Weingand’s motion to dismiss because Harland alleged specific details about Weingand’s alleged unauthorized access, including when, where, and what Weingand allegedly accessed and copied.

The court’s reassertion that Nosal does not preclude employers’ “access restrictions” is significant because it reaffirms that Nosal may not be as broad of a limitation for employers that seek to use the CFAA against departing employees that steal valuable company data. After Nosal, it was feared that employers would have no recourse under the CFAA against employees that violate clear and explicit computer, network, and information security policies.

The court allowed Harland to proceed with its CFAA claim based on a mere verbal access restriction. This holding remains consistent with the Ninth Circuit’s prior decision in LVRC Holdings LLC v. Brekka: “The plain language of the statute therefore indicate that authorization depends on actions taken by the employer.” Thus under Weingand, an employer’s computer access policies may remain viable post-Nosal to bring CFAA claims in the Ninth Circuit against employees that violate those policies and steal valuable company data.

By Robert Milligan and Jeffrey Oh

In business, as in life, trust and communication are key to healthy and productive relationships. When these crucial elements are lost, as in the case of What 4 LLC v. Roman & Williams, Inc., 2012 WL 1815629 (N.D.Cal.), the fallout is often contentious and requires court intervention.

In a recent decision granting in part and denying in part defendants’ motion to dismiss, Judge Edward M. Chen of the United States District Court for the Northern District of California examined the principal-agent relationship between the parties to determine what responsibilities each had to the other based on the relationship’s underlying agreements and under California law.

On defendants’ motion to dismiss, the court found that plaintiffs had stated a claim for alleged breach of fiduciary duty and concealment predicated on defendants’ alleged misleading statements/conduct as to their intentions to perform under the parties’ alleged agreement. The court further held that plaintiffs were permitted to assert an alleged claim for breach of fiduciary duty and concealment predicated on the disclosure of confidential information not rising to the level of a trade secret, notwithstanding California Uniform Trade Secrets Act ("CUTSA") preemption.

The plaintiffs, What 4 LLC and 1095 Market Street Holding LLC, planned and secured financing for a joint venture to open a “premium youth hostel” at 1095 Market Street, San Francisco, CA, including purchasing the property and conducting market research and analysis. After completing their designs, applying and receiving all requisite entitlements and permits, plaintiffs allegedly approached the defendants, Roman & Williams (“R & W”) as well as its sole shareholders, Robin Standefer and Stephen Alesch, in November 2010 about hiring them for architectural and design services. On November 4, 2010, R & W signed a nondisclosure agreement prohibiting it from disclosing any of the confidential information given to it by plaintiffs, including market research and design. 1095 Market Street Holding eventually hired R & W on January 31, 2011 to work on the youth hostel, entering into a Letter Agreement. The Letter Agreement stipulated that R & W was to complete the project in six different phases ranging from concept to construction, and that other details would be finalized at a later date in a Definitive Agreement meant to supersede the Letter Agreement. In the interest of time, the parties agreed to proceed with the first two stages without signing a Definitive Agreement, which defendants completed in August 2011.

While R & W waited for orders to begin work on the next phase of the project, in October 2011 it allegedly began negotiations with plaintiffs’ competitor, Sydell, to provide services for their own premium youth hostel project. In a subsequent meeting with Sydell on November 1, 2011, Ms. Standefer allegedly disclosed plaintiffs’ confidential information in a bid to win the contract. On November 15, 2011, R & W allegedly met with plaintiffs to discuss the next steps of the 1095 Market Street project, failing to inform them that it had entered into a multi-year exclusive contract with Sydell to provide the same services it had, and was to provide plaintiffs. Allegedly learning about R & W’s agreement with Sydell from a Wall Street Journal article on November 23, 2011, plaintiffs asserted the following causes of action: (1) breach of the nondisclosure agreement, (2) breach of fiduciary duty, (3) concealment, (4) breach of contract, and (5) violation of CUTSA. Defendants then brought a motion to dismiss plaintiffs’ claims except the CUTSA claim.

Lumping the first and fourth causes of action together,  the court began its analysis by examining defendants’ contention that the two breach of contract claims (i.e., the Nondisclosure Agreement and the Letter Agreement) should be dismissed. Due to the fact that the two individual defendants, Ms. Standefer and Mr. Alesch, were not a party to either contract, a point which plaintiffs conceded, the Court granted the motions to dismiss the claims for these two. However, the court noted that “there are still viable claims for breach of contract against R & W. "

Next in its analysis, the court determined whether or not R & W’s actions constituted a breach of fiduciary duty and concealment. For its part, defendants argued that the claims are preempted by the CUTSA and that the claims are not plausible given the insufficient allegations that they owed a duty to plaintiffs. Codified in California Civil Code § 3426, the CUTSA includes a provision which states that the statute “does not affect… (2) other civil remedies that are not based upon misappropriation,” which courts have interpreted to “preempt alternative civil remedies based on trade secret misappropriation.” Plaintiffs stated in their complaint that all of the confidential information disclosed by R & W constituted trade secrets under the CUTSA. Although they argued in court that some of the disclosed information did not constitute trade secrets, Judge Chen agreed with defendants that CUTSA preempts the breach of fiduciary duty and concealment claims based on plaintiffs’ original filing stating otherwise. The court, however, provided plaintiffs with leave to amend the claims to include, as an alternative theory, allegations that plaintiffs’ confidential information did not constitute trade secrets but was otherwise actionable.

In response to R & W’s assertion that they did not owe a duty to What 4 LLC or 1095 Market Street Holding LLC, plaintiffs argued that defendants did “because (1) they were Plaintiff’s architects and (2) they were Plaintiff’s agents.” Citing Palmer v. Brown, where the court found that an architect’s fiduciary duty to one client does not prohibit the architect from working with a client’s potential competitor, the court did not find plaintiffs’ first argument convincing. However, because plaintiffs hired R & W “to act as their agent” to bid and negotiate with suppliers on their behalf, the court found the existence of an agency relationship to be plausible. Citing the Restatement of the Law of Agency (3rd ed., 2006), the court noted that while an agent is not required to disclose its intentions to compete with a principal, it does have a duty not to mislead the principal about its own intentions. R & W allegedly continued to meet with plaintiffs and led them to believe it was committed to proceeding with the next phase of development while previously entering into a multi-year exclusive contract with Sydell that prevented any such work. Therefore, although it found that there is no viable claim for breach of fiduciary duty based on defendants working for a competitor or concealing that fact, the court denied defendants’ motion to dismiss these claims based on the allegations that defendants allegedly misled the plaintiffs.

This decision is noteworthy because the court rejected plaintiffs’ claim that defendants’ alleged breach of the exclusivity provision in their agreement constituted a breach of fiduciary duty and for the court’s willingness to leave the door open to plaintiffs to assert a claim for breach of fiduciary duty and concealment based upon the misuse of information not rising to the level of a trade secret, notwithstanding CUTSA preemption.

Additionally, the case highlights that selecting reliable and trustworthy agents to assist with the implementation of a vision is paramount to the success of any business venture. When a principal-agent relationship fails, the costs to all parties can be enormous. The threat of these costs, including lost productivity and the price of litigating these disputes, should motivate business planners to be exceptionally thorough in vetting potential business partners. While these considerations are essential, it is also important for any business relationship to be anchored by a comprehensive contractual agreement which explicitly details the duties and responsibilities each party has to the other. By clearly outlining the parameters of a business relationship, both the principal and agent can attempt to protect themselves from any unwanted or unexpected results. Consultation with experienced legal counsel is often necessary to position a party for the best outcome, particularly in California where non-compete agreements and claims of theft of trade secrets and confidential information are highly scrutinized.

By Robert Milligan and Jeffrey Oh

In a recent federal case out of California, Judge Morrison C. England, Jr. of the U.S. District Court for the Eastern District of California examined the issue of personal jurisdiction in an international trade secret misappropriation and breach of contract dispute. The case, Vance’s Foods, Inc. v. Special Diets Europe Limited, et al., No. 2:11-cv-02943-MCE-GGH, centers around contracts governing the business relationship between an American company and a European distributor based out of Ireland. Using a three-prong test promulgated by the Ninth Circuit to determine the court’s right to exercise specific jurisdiction over a defendant, Judge England granted in part and denied in part Defendants’ Motion to Dismiss.

The Plaintiff, Vance’s Foods, Inc. (“VF”), is an Alaskan corporation with its principal place of business in Sacramento, CA. VF produces and distributes a non-dairy milk substitute called DariFree™. According to the court’s order, in October 2007, VF entered into two written agreements with the Defendants, Special Diets Europe Limited (“SDE”). The first contract, referred to as the “Distribution Agreement,” made SDE the exclusive distributor for DariFree™ in a specified area of Europe. The second contract, known as the “Product Development Agreement” gave SDE permission to use VF’s product formula, manufacturing process, and list of ingredient suppliers to develop and distribute a liquid stable version of DariFree™ in Europe. VF gave SDE this information with the caveat that they keep it confidential, use it only for the stated purpose of the contract (successful development of the liquid stable version within 8 months), and return the information upon VF’s request or the termination of the agreement. In its initial complaint, VF claims that SDE, along with its owners and directors Eamon and Mariel Cotter, entered into this agreement with the sole intention of misappropriating and using VF’s confidential information. In response, SDE and the Cotters filed a Motion to Dismiss for Lack of Personal Jurisdiction pursuant to Federal Rule of Procedure 12(b)(2). SDE is an Irish corporation with its offices located in Ireland. Individual defendants Eamon Cotter and Mariel Cotter are citizens and residents of Ireland. The Cotters are the sole owners and directors of SDE.

The Defendants did not challenge general jurisdiction over them, so the Court employed the “three prong test to determine whether a court can exercise specific jurisdiction over a defendant” first used by the Ninth Circuit in Brayton Purcell LLP v. Recordon & Recordon, 606 F.3d 1124, 1128 (9th Cir.2010). The first prong of this test requires that the non-resident defendant must purposefully direct his activities or consummate some transaction with the forum or resident thereof; or perform some act by which he purposefully avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws.

This first prong is primarily concerned with establishing a link between a defendant and the forum in which the case is being heard. This link is best established by either showing proof of direct activity related to the complaint within the forum, or by showing that the defendant has deliberately created an ongoing business relationship with forum residents and is therefore subject to “the burden of litigating in that state as well.”

Defendants argued that SDE lacks the requisite “minimum contacts” with California because: 1) SDE does not have any offices, employees or agents, bank accounts, or real property in California; 2) SDE does not conduct any business in California, is not licensed to do business in California, and does not directly advertize or solicit business in California; 3) SDE’s only purpose was to import and distribute Plaintiff’s products in Europe; 4) both the Distribution Agreement and Product Development Agreement were negotiated and entered into in Ireland; and 5) any products that SDE received from Plaintiff were shipped from Plaintiff’s plant in Utah, not from California.

Created with the primary purpose of developing a distributorship relationship with VF, SDE – through its owner and director Mr. Cotter – allegedly solicited VF’s founder in 2003 at his home in Sacramento, California. This initial meeting allegedly led to the development of a relationship between the two companies that culminated four years later in the signing of two business agreements in 2007. These agreements entered SDE into a long-term contractual obligation with an entity principally operating out of Sacramento, as specifically noted in the agreements. The court noted that both agreements provide that any dispute arising between the parties would be governed by California law and the parties would attempt to mediate such a dispute in California. The court found that while the choice-of-law clause is not sufficient by itself to determine that Defendants availed themselves of the benefits and protections of the laws of the forum state, it is a relevant factor. 

The court found that SDE – in addition to Mr. Cotter, the corporate officer who served as the “’guiding spirit’ behind the wrongful act” – both satisfy the standard of purposeful availment within the first prong. In Davis, 885 F.2d at 520-21, the Ninth Circuit allowed that “courts can exercise jurisdiction over an individual acting in an official capacity…where ‘the corporation is the agent or alter ego of the individual defendant.’” According to the Court, Mr. Cotter’s many trips to California and communications with VF executives in which he refers to SDE in the first person made his role as an alter ego of the company hard to deny. In contrast, Ms. Cotter’s lack of consistent communication with VF employees in either the negotiation process or the subsequent business relationship, as well as her never having visited California, led Judge England to rule that VF has failed to establish purposeful availment in her case.

The second prong of the Ninth Circuit’s test holds that the claim must be one which arises out of or relates to the defendant’s forum-related activities.

The standard laid out in this prong of the test requires that the conduct and contacts used to prove purposeful availment in the first prong gave rise to the current dispute. To evaluate this prong judges use the “’but for’ test,” where “’but for’ the contacts between the defendant and the forum state, the cause of action would not have arisen.” Terracom, 49 F.3d at 561.

Applied to SDE, the court found that but for SDE’s solicitation of the contractual relationship with a California-based Plaintiff and entering into two long-term agreements with Plaintiff, Defendants would not have obtained Plaintiff’s confidential information, and thus Plaintiff’s causes of action for breach of contract would not have arisen.

Given Mr. Cotter’s status within the court’s eyes as the “alter ego” of SDE, Judge England extended his rationale for SDE meeting the standard for the second prong to Mr. Cotter. However, since Ms. Cotter’s lack of purposeful availment in the matter precluded the possibility of her being brought into court under specific jurisdiction, the Court did not analyze her under the second prong.

In the first two prongs, the burden rests on the Plaintiff to prove that the Defendant meets all necessary requirements for specific jurisdiction. Once standing under the first two prongs has been established, the burden shifts to the Defendant to argue the third and final prong of the test, the exercise of jurisdiction must comport with fair play and substantial justice, i.e. it must be reasonable.

For a defendant to defeat jurisdictional claims under this test, they must prove that litigating in the current forum would be too difficult as to put them at a significant disadvantage. In deciding this prong, courts use the seven “reasonableness” factors laid out in Bancroft, 223 F.3d at 1088. They are: purposeful interjection; burden on Defendant; sovereignty concerns; the forum state’s interest in adjudicating the matter; the efficiency of resolution in the forum; the importance of Plaintiff receiving a convenient and effective resolution; and the availability of an alternative forum. Given the high level of interaction with residents of the forum, the nature of the contractual language linking SDE and Mr. Cotter to California, including a California choice of law provision, California’s strong interest in protecting its residents, the parties’ inclusion of an arbitration provision providing for arbitration in Illinois for disputes, and the benefits of technology and modern travel which have lowered the costs and burden of litigating in the current forum, the Court found that the majority of the “reasonableness” factors weighed in favor of the Plaintiff. Evaluating SDE and Mr. Cotter simultaneously, the court found that neither had presented compelling evidence why the specific personal jurisdiction in the current forum would be unreasonable.

After evaluating each defendant against the Ninth Circuit’s three prong test, the Court denied the motion to dismiss in the case of both SDE and Mr. Cotter, and granted the motion to dismiss with leave to amend in the case of Ms. Cotter.

Because both of Plaintiff’s claims, including the claim for misappropriation of trade secrets, arise out of the parties’ contractual relationship, the court reasoned that it was not necessary for the court to conduct the “purposeful direction” analysis which is typically analyzed in tort suits. However, the court found that were it to consider the “purposeful direction” prong, it would conclude that Plaintiff has sufficiently demonstrated that SDE purposefully directed its alleged tortious actions at California under the “effects” test. The court reasoned that the Plaintiff has alleged that SDE engaged in intentional tortious acts of trade secret misappropriation, thus satisfying the first prong of the “effects” test. The court further found that the second prong is also satisfied because SDE allegedly “engaged in wrongful conduct targeted at a plaintiff whom [SDE] knows to be a resident of the forum state.” Finally, if SDE misappropriated Plaintiff’s trade secrets, it should have known that Plaintiff would likely suffer harm in California, which is where Plaintiff’s principal place of business is located.

In the end, the court refused to grant the motion to dismiss because the court was convinced that SDE initiated a long-term business arrangement with a company it knew to be principally located in Sacramento, CA. In addition, according to the court, Mr. Cotter’s intertwined existence with SDE as its founder, owner, director and alter ego made him equally suspectible to personal jurisdiction in California federal court. Ms. Cotter’s lack of identifiable involvement in the business relationship between VF and SDE led the Court to rule that Plaintiff “failed to allege sufficient personal conduct directed at California that would justify hailing [her] into this Court.” A subsequent filing in the case reveals that SDE’s and Mr. Cotter’s attorneys are now seeking to withdraw from the case based in part on the Defendants’ continued contention that the court does not have proper jurisdiction over them.  

This decision highlights the importance of including enforceable choice of law, forum selection, and consent to jurisdiction provisions in your company’s business agreements involving international transactions and parties, as well as suing in your home forum first should there later be a dispute to attempt to secure jurisdiction. Critical contract components such as these are essential because the chosen substantive law governing the dispute is typically more favorable in the selected forum for the resident party and there may be increased costs of suit and lack of familiarity and/or level of comfort in the selected forum by the foreign party that may prove dispositive.

On April 25, 2012, a federal judge in North Carolina issued a ruling granting in part and denying in part motions to dismiss involving claims for trade secret misappropriation, breach of contract, and conversion in a dispute between two pharmaceutical companies in the case of River’s Edge Pharmaceuticals v. Gorbec Pharmaceutical Services, Inc. This decision confirms, to an extent, the need to plead actual, rather than speculative harm to prevent dismissal for failure to state a claim.

River’s Edge Pharmaceuticals (“River’s Edge”) is a company which distributes pharmaceutical products and aims to provide “reasonably priced alternatives to costly name brand pharmaceuticals.” The company began marketing and developing certain alleged unapproved pharmaceutical products through an FDA approved process known as Drug Efficacy Study Implementation (“DESI”).

In 2007, River’s Edge began working with another pharmaceutical company, Gorbec, to manufacture DESI drugs and test and formulate generic drugs under the Abbreviated New Drug Application (“ANDA”) process. According to the pleadings, the parties agreed to a contract, and agreed the terms would be memorialized in writing, however this was never actually done. River’s Edge began submitting purchase orders to Gorbec, however, and Gorbec performed according to the agreed upon terms.

River’s Edge alleges that beginning in 2010, Gorbec’s executives began making statements about how they owned the “know-how, intellectual property, and regulatory approvals” which River’s Edge had hired and paid them to develop. According to River’s Edge, these statements were made despite the fact that River’s Edge was the actual owner. In addition, Gorbec threatened to stop work on River’s Edge’s products, and made statements of intent to compete with the company. River’s Edge alleges that all of these actions would harm the company and would worsen its chances of getting FDA approval. Gorbec, by contrast, alleged it had agreed to manufacture these drugs based on River’s Edge’s representations and proceeded to do so for three years. However, Gorbec alleges that during that time, River’s Edge received a warning letter from the FDA asking the company to cease sales. River’s Edge allegedly failed to tell Gorbec about it. Gorbec alleges River’s Edge also failed to pay in full for the work they had performed.

River’s Edge filed a complaint against Gorbec and its President, J. Michael Gorman, in the Middle District of North Carolina, requesting declaratory relief, and alleging breach of contract, breach of fiduciary duty, constructive fraud, promissory estoppel, unjust enrichment, conversion, misappropriation of trade secrets, and punitive damages. Gorbec filed a counterclaim, alleging breach of contract, unjust enrichment, negligent misrepresentation, fraud, and unfair and deceptive trade practices.

Both parties recently filed motions to dismiss. Gorbec moved to dismiss all counts of the amended complaint, except for declaratory relief, while River’s Edge moved to dismiss each and every one of Gorbec’s counterclaims.

With regard to breach of contract claim, the court granted Gorbec’s motion in part to the extent the claimed breach was based on Gorbec’s statements of ownership or intent to compete, but denied the motion to the extent the breach alleged pertained to Gorbec’s cessation of ANDA-related work.

Similarly, with respect to the breach of fiduciary duty claim, the court granted the motion to dismiss to the extent the claim was based on Gorbec’s threatened or potential conduct, but denied the motion to the extent the claim was based on Gorbec’s refusal to provide River’s Edge with complete copies of communications with the FDA and info regarding pending ANDAs and said things suggesting ownership of River’s Edge’s intellectual property. The court also dismissed the claims for constructive fraud and unjust enrichment, holding the plaintiff’s allegations failed to state a claim. The court however found that there were sufficient facts to state a claim for both conversion and misappropriation of trade secrets. On the misappropriation of trade secrets cause of action, however, the court held that while there was sufficient facts to state a claim, the burden would be on River’s Edge to show Grobec had the opportunity to acquire, use and disclose such information without consent.

With respect to Gorbec’s counterclaims, the court dismissed the claim for negligent misrepresentation and denied the motion to dismiss for unfair and deceptive trade practices and unjust enrichment, finding sufficient information to state a claim. Additionally, the court found Gorbec had sufficiently alleged a claim for breach of contract regarding the work Gorbec had done for the ANDA process, but dismissed the claim to the extent it was based on River’s Edge’s failure to enter into a marketing agreement. Similarly, the court denied the motion to dismiss the count of fraud to the extent it was based around River’s Edge’s fraudulent concealment of the warning letter, but dismissed the claim to the extent it was based on the idea that River’s Edge formed its own manufacturing company in order to get around its contract.

The Court’s ruling suggests the need to plead with specificity. Here, claims based on speculative damages, and threatened or potential conduct failed to survive dismissal. This confirms the importance of alleging clear harm in one’s pleadings, and shows that to gain a more favorable result for a client, a pleading needs to be framed in such a way that it avoids speculation.

By Robert Milligan and Jeffrey Oh

As part of the process of acquiring of a business and retaining key employees of the acquired business, multiple agreements surrounding the parameters and contingencies of the transaction are often drafted, including asset purchase agreements and employment agreements. These agreements sometimes overlap in scope and ensuring that all material aspects of the deal align in the documents is crucial in maintaining the effectiveness of any singular business transaction. In an order denying defendant’s motion to dismiss in a non-compete dispute involving a former key executive of the purchaser, the Honorable Judge R. Brooke Jackson of the United States District Court for the District of Colorado illustrated the importance of congruity within these sorts of agreements, particularly forum selection provisions. The bottom line is that special care needs to given in the drafting of these documents so that the non-compete provisions and forum selection provisions remain consistent.  

The case, Robert Stuart v. Marshfield Doorsystems, Inc. Civil Action No. 12-cv-00454-RBJ, 2012 WL 872766 (D. Colo. March 14, 2012), concerns a dispute over agreements signed during defendant’s acquisition of plaintiff’s company and retention of his employment services.  In 2004, Stuart and his business partner David Cox sold Consolidated Fiber, LLC, which deals in the manufacturing and selling of commercial and residential doors, to Marshfield Doorsystems. By the terms of the Asset Purchase Agreement (“APA”), Stuart and Cox received $2 million each and agreed to stay with the company and sign separate employment agreements.  The APA included reference to unsigned employment agreements that were attached as exhibits and incorporated by reference.

The APA included a non-competition clause that barred them from joining a competing business for 24 months after the termination of their employment agreements. Additionally, the APA stipulated it would be governed by Delaware law, where Marshfield is incorporated, and that “any dispute, controversy or claim arising out of or relating to” the APA would be settled through arbitration in Chicago, IL. Any dispute not able to be settled through arbitration would then be settled in an applicable court in Chicago.

In concordance with the APA, Stuart signed an Employment Agreement with Marshfield that had him under contract for a five year “Initial Term.” Per the Employment Agreement’s “Renewal Terms” the contract was extended automatically at the end of the Initial Term for one year every year unless terminated by either party through 45 days advance notification. Stuart’s Employment Agreement contained a non-competition clause largely identical to the one found in the APA, but, in contrast with the APA, provided that any and all disputes “arising out of or related to” the Employment Agreement were to be resolved by a court trial without a jury. Moreover, the Employment Agreement contained a merger clause stating that it “merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature between the parties hereto relating to…employment.” The APA and Employment Agreements were apparently executed on the same day.

After the Initial Term had passed, in addition to three subsequent Renewal Terms, Stuart informed Marshfield on January 9, 2012 that he intended to resign approximately four weeks later.  A few days after this, Stuart informed Marshfield that upon his departure, he would be joining TruStile Doors, LLC in Denver, CO.  Marshfield terminated Stuart’s employment on January 17, 2012 and cited the non-competition clauses of the APA and his Employment Agreement in insisting he quit his job with TruStile Doors, which Marshfield considers a competitor.  Marshfield also informed TruStile Doors of Stuart’s agreements and pressed them to terminate his employment.

On February 22, 2012, Stuart filed a complaint in federal court in Denver, Colorado against Marshfield seeking a declaration that the non-competition agreements are not enforceable, or that they were waived, or that they were not violated, as well as an injunction against Marshfield from interfering with his employment at TruStile Doors.  In response, Marshfield requested arbitration through the American Arbitration Association to settle the arbitrable aspects of the dispute in Chicago, per the APA. Marshfield also filed a complaint against Stuart in the United States District Court for the Northern District of Illinois, Eastern Division, seeking an order from the court for arbitration as well an injunction barring Stuart from working at TruStile Doors. Similarly, Marshfield filed a motion to dismiss Stuart’s complaint filed in the Colorado federal action due to improper venue based on the forum selection clause found in the APA, as well as motion to transfer venue based upon forum non conveniens.

Continue Reading Colorado Federal Court Decision In Non-Compete Dispute Demonstrates Importance Of Drafting Enforceable Forum Selection Provisions In Business Transactions