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Top 10 2015 California Trade Secrets and Unfair Competition Developments

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  1. Introduction

There were several noteworthy developments in 2015 in the area of trade secrets and unfair competition.  This article focuses on developments affecting California employers.  Due to the unsettled nature of some of the law, this update includes a discussion of some significant federal district court decisions in 2015, so that California employers can understand and plan for the trends at the trial court level.  Further trial and appellate court decisions will no doubt clarify some of the legal principles discussed in this article.  Following are the “top 10” key developments and lessons from 2015:

  1. Including a somewhat “standard” “do not darken our doors again” / no re-hire provision in a settlement or severance agreement with a former employee may constitute an unlawful restraint of trade.
  2. Courts continue to struggle over the scope of the federal Computer Fraud and Abuse Act, including what constitutes “unauthorized access” and the “damage” or “loss” requirement.
  3. Trade secrets plaintiffs must thoroughly investigate claims before suit, as courts are awarding substantial attorney’s fees to prevailing defendants in trade secrets cases that turn out to be meritless.
  4. The so-called “inevitable misappropriation of trade secrets doctrine,” e., the former employee cannot help but use or disclose the employer’s trade secrets in his/her new position, is not viable under California law.
  5. To improve the chances of enforceability of a contractual forum selection clause, drafters should use the broader language, “any dispute arising from or related to” the employment contract, rather than simply “arising from” the contract.
  6. A well-drafted forum selection clause may allow an employer to attempt to enforce a covenant not to compete against former employees in a non-California forum that enforces such non-competes under the forum state’s law.
  7. Employers should continue to be wary of even informal agreements among their competitors not to hire each other’s employees, or not to “poach,” “cold call” or recruit them, as courts have ruled that they constitute unlawful restraints of trade.
  8. Protecting the alleged secrecy of the trade secret is an essential element of the misappropriation claim. For example, the trade secret proponent’s failure to place the recipient on notice of the secrecy requirement, failure to insist on NDAs, voluntarily disclosing, publishing on the Internet, sharing with others, etc. can defeat the claim.
  9. Practitioners should pay attention to the drafting of and compliance with protective orders, including “model” court-provided protective orders.
  10. Courts continue to recognize the preemptive effect of the California Uniform Trade Secrets Act, to the extent related claims (g., unfair competition, conversion, trespass to chattels, interference with contract, etc.) rely on “the same nucleus of operative facts.”

 

 

 

No Re-Hire Provision in Standard Settlement Agreement May Constitute Restraint of

Trade in Violation of California Business and Professions Code section 16600

 

Golden v. California Emergency Physicians Med. Group, Case No. 12-16514, 782 F.3d 1083 (9th Cir. April 8, 2015):

Dr. Golden, a physician, agreed to settle his discrimination claim against his former employer, California Emergency Physicians Medical Group (the “Employer”).  In their written settlement agreement, Dr. Golden “waived any and all rights to employment with [the Employer] or at any facility that [Employer] may own or with which it may contract in the future” (the “no re-hire provision”).  The federal district court (Hon. Jeffrey S. White) enforced the agreement, rejecting Dr. Golden’s challenge that this no re-hire provision” violated California Business and Professions Code section 16600 (“Section 16600”), which broadly voids “any” agreement by which anyone is restrained from “engaging in a lawful profession, trade, or business of any kind.”  On appeal, Dr. Golden argued that the no re-hire provision voided the entire agreement, which permitted him to pursue his (settled) discrimination claim.  A divided Ninth Circuit panel determined that Dr. Golden might succeed on this argument, and remanded the case to the district court for further findings, including whether the no re-hire provision actually created a restraint of a “substantial character” on Dr. Golden’s pursuit of his profession.  The Ninth Circuit held that the district court abused its discretion in holding that the no-employment provision did not violate Section 16600.  The panel majority held that a void contract under Section 16600 was broadly interpreted and was not limited only to covenants not to compete[1]:

The courts of California have not clearly indicated the boundaries of section 16600’s stark prohibition but have nevertheless intimated that they extend to a considerable breadth.  At the very least, we have no reason to believe that the State has drawn section 16600 simply to prohibit “covenants not to compete” and not also other contractual restraints on professional practice.  We refrain, however, from addressing the ultimate merits of this question on the relatively undeveloped record that accompanies this appeal, leaving the district court at liberty to order additional briefing or to conduct further fact-finding as it deems prudent.  On remand, the district court should determine in the first instance whether the no-employment provision constitutes a restraint of a substantial character to Dr. Golden’s medical practice.[2] 

The Ninth Circuit panel also found that the dispute over the enforceability of the no re-hire provision was ripe because Dr. Golden sought to have the settlement agreement voided after his former attorney attempted to enforce the agreement to collect attorney’s fees.  Thus, the panel determined, the fact that the Employer had not sought to enforce the no re-hire provision was of no moment: “[W]hen a litigant resists his adversary’s attempt to enforce a contract against him, the dispute has already completely materialized.”[3] 

The Ninth Circuit panel adopted a broad view of Section 16600, reasoning that it applies to any contractual provision that “restrain[s anyone] from engaging in a lawful profession, trade, or business of any kind . . . extend[ing] to any ‘restraint of a substantial character,’ no matter its form or scope.”[4]  The Ninth Circuit majority relied on the broad statutory language and case law to support its broad interpretation, including the Supreme Court of California’s most recent decision on Section 16600, Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008), and the First District Court of Appeal’s decision in City of Oakland v. Hassey, 163 Cal. App. 4th 1447 (2008).  The panel majority noted that both Edwards and City of Oakland focused on the broad text of the statute (Section 16600), and not specifically whether the clause prevented competition with the former employer.  The panel majority concluded that a clause creating a restraint of a “substantial character” that could limit a former employee’s opportunity to engage in a chosen line of work would fall under Section 16600’s “considerable breadth.”[5] 

Judge Alex Kozinski authored a strong dissent, disagreeing with the panel majority’s prediction of how the Supreme Court of California would have decided the case, and arguing that the settlement agreement was enforceable as it did not restrain Dr. Golden’s current ability to pursue his profession: 

The provision barring Dr. Golden from current employment by CEP cannot possibly violate California Business and Professions Code § 16600 because the continuation of their employment relationship is the very subject in controversy in this lawsuit, and one possible outcome would be that he would lose his job and get nothing in exchange.  If this violates section 16600, few employment disputes could ever be settled.

The only way section 16600 might be implicated is if, at some future time, Dr. Golden were working for an entity that is acquired by CEP, in which case the agreement would give the employer a right to fire him without a further showing of cause.  We have no way of knowing whether this part of the settlement agreement will ever come into play, as its enforcement depends on numerous circumstances that are not capable of determination at this time: where Dr. Golden will choose to live and work; where he will find employment; and what facilities, if any, CEP will acquire in the future. If the stars align and all this came to pass, we would then have to determine whether Dr. Golden’s ability to practice his profession at that indefinite future time would be adversely affected, a highly contingent inquiry depending on numerous factors that are susceptible to little more than a guess today.  The majority remands for further fact-finding, but fact-finding normally involves reconstructing past events, not prognosticating about the future.  The court will need a Ouija board to “find” any of the facts the majority believes are relevant to whether the agreement will violate section 16600.

What we know for sure is that the settlement agreement does not limit Dr. Golden’s ability to practice his profession at this time—except to the extent that he can’t work for CEP.  No case cited by the majority, and none I’m aware of, has construed section 16600 as preserving an unfettered right to employment in all future circumstances, no matter how remote or contingent.

If and when the scenario Dr. Golden fears comes to pass, he can raise section 16600 as a defense to his dismissal.  . . .  But I can see no justification for allowing this remote contingency to serve as an excuse for Dr. Golden to finagle his way out of his contract and deprive his lawyer of the fee he has earned. Because I seriously doubt that the California Supreme Court would reach such a result, I would affirm the judgment of the district court.[6]

Courts Continue to Struggle with the Scope of the Federal Computer Fraud and Abuse Act

NetApp, Inc. v. Nimble Storage, Inc., Case No.: 5:13-CV-05058-LHK (HRL), 2015 U.S. Dist. LEXIS 11406 (N.D. Cal. Jan. 29, 2015):

The plaintiff NetApp, Inc. (“NetApp”), sued defendants Nimble Storage, Inc. (“Nimble”) and an individual, Michael Reynolds, for numerous claims, including trespass to chattels, trade secrets misappropriation, statutory unfair competition (Cal. Bus. & Prof. Code § 17200), violation of the federal Computer Fraud and Abuse Act (the “CFAA”), and related claims.  The defendants moved to dismiss all of NetApp’s claims, except for a state law breach of contract claim and claims under 18 U.S.C. §§ 1030(a)(2)(C) and (a)(4).  The defendants also moved to strike certain factual allegations and a cause of action in NetApp’s Second Amended Complaint.  

NetApp and Nimble are competing companies in the data storage industry.  Defendant Reynolds is an Australian citizen and resident who works at Nimble Storage Australia Pty Limited (“Nimble AUS”), an entity related to defendant Nimble.  This lawsuit stems from NetApp’s belief that “Nimble targeted NetApp talent and valuable confidential and non-confidential information to compete unfairly in the marketplace.”  NetApp alleges that “Nimble has achieved rapid growth and customer adoption” by “rely[ing] heavily on foundational information as to the internal working of NetApp’s products and its proprietary business processes.”  According to NetApp, Reynolds previously worked at Thomas Duryea Consulting (“TDC”), an “IT infrastructure consultancy business” in Australia, who NetApp contracted with for certain services, provided Reynolds with access to NetApp’s computer systems, and offered Reynolds training courses available to NetApp employees, all subject to NetApp’s restrictions on unauthorized access to and use of its systems.  Reynolds left TDC in April 2013, and took a job with Nimble AUS, where – NetApp alleges – Reynolds accessed NetApp databases repeatedly from June through August 2013 and used confidential and proprietary information to solicit business for Nimble.

On May 12, 2014, the District Court granted in part and denied in part the various defendants’ motions to dismiss.  The court denied Reynolds’ motion to dismiss for lack of personal jurisdiction, and Reynolds’ motion to dismiss NetApp’s claim for breach of contract and claims under Sections 1030(a)(2)(C) and (a)(4) of the CFAA.  However, the court granted Reynolds’ motion to dismiss with leave to amend NetApp’s CFAA claim with respect to Section 1030(a)(5) due to NetApp’s failure to plead the statutorily-required element of “damage,” NetApp’s claim of trespass to chattels, and claim of unfair competition.  With respect to NetApp’s claims against Nimble, the court granted with leave to amend Nimble’s motion to dismiss all of NetApp’s CFAA claims (on the grounds that NetApp failed to plead that Nimble was vicariously liable for Reynolds’ actions), claim for trespass to chattels, and claim of unfair competition.  The court also declined to exercise supplemental jurisdiction over, and thus dismissed with prejudice, NetApp’s state law claims against Nimble for trade secret misappropriation, intentional interference with contract and contractual relations, and unfair competition.  Finally, the court declined to exercise supplemental jurisdiction over NetApp’s claims for trade secret misappropriation, breach of contract, intentional interference with contract and contractual relations, and unfair competition against former NetApp employees Daniel Weber, Sandhya Klute, Timothy Binning, Neil Glick, and Christoper Alduino.  The court dismissed claims against these former employees with prejudice.  The court ordered NetApp to file an amended complaint within 21 days to cure the deficiencies identified in its First Amended Complaint.  

On June 2, 2014, NetApp filed its Second Amended Complaint (the “SAC”), winnowing its original claims down to four: (1) violations of 18 U.S.C. §§ 1030(a)(2)(C), (a)(4), and (a)(5) asserted against Nimble and Reynolds; (2) trespass to chattels against Nimble and Reynolds; (3) breach of contract against Reynolds; and (4) unfair competition in violation of California Business and Professions Code §§ 17200, et seq. against Nimble and Reynolds.  On June 19, 2014, the defendants filed the instant motion to dismiss.  Also on June 19, 2014, the defendants moved to strike portions of the SAC that, according to Nimble, pertained exclusively to the state law claims that the court previously dismissed for lack of supplemental jurisdiction.

The defendants asserted several grounds to dismiss certain claims in NetApp’s SAC: (1) All of NetApp’s CFAA and trespass to chattels claims against Nimble under the theory that NetApp does not allege sufficient facts showing that Nimble is vicariously liable for Reynolds’ actions; (2) NetApp’s claim under Section 1030(a)(5) of the CFAA on the grounds that NetApp does not allege a cognizable claim of “damage” within the meaning of the statute; and (3) NetApp’s claims of trespass to chattels and unfair competition on the grounds that these claims are superseded by the California Uniform Trade Secrets Act (“CUTSA”), and, as to NetApp’s claim of trespass to chattels, on the grounds that NetApp fails to sufficiently plead the  requisite damage.  

The court first rejected NetApp’s attempt to change its story by pleading that defendant Reynolds was a “direct employee” of Nimble, making Nimble vicariously liable:

Here, when this Court granted NetApp leave to amend its First Amended Complaint with respect to NetApp’s claims of vicarious liability, NetApp did not have license to amend its pleading in a way that contradicted assertions NetApp made in its earlier complaint.  However, by amending its complaint to plead that Reynolds was Nimble’s direct employee instead of an employee of Nimble AUS, this is precisely what NetApp did.  Therefore, the Court finds that NetApp fails to state a claim for Nimble’s vicarious liability on the basis that Reynolds is a direct employee of Nimble.[7]  

The court then addressed Nimble’s motion to dismiss certain of NetApp’s claims under the CFAA, 18 U.S.C. § 1030.  The court explained that the “CFAA prohibits a number of different computer crimes, the majority of which involve accessing computers without authorization or in excess of authorization, and then taking specified forbidden actions, ranging from obtaining information to damaging a computer or computer data.”[8]  Unlike the CFAA’s other provisions, Section 1030(a)(5) requires that the accused cause “damage” to data, a system, information, or a program:

(A)  knowingly causes the transmission of a program, information, code, or command, and as a result of such conduct, intentionally causes damage without authorization, to a protected computer;

(B)  intentionally accesses a protected computer without authorization, and as a result of such conduct, recklessly causes damage; or

(C)  intentionally accesses a protected computer without authorization, and as a result of such conduct, causes damage and loss.[9]

Section 1030(e)(8) defines “damage” as “any impairment to the integrity or availability of data, a program, a system, or information.”[10]  NetApp alleged that Reynolds caused “damage” to NetApp’s computers, and thereby violated Section1030(a)(5), in three ways: (1) Reynolds “cop[ied] certain information from NetApp’s protected computers and transferr[ed] it to a non-secure area or device”; (2) Reynolds “diminish[ed] the value of NetApp’s data by compromising its exclusivity, for which it derives value because it is not available to competitors”; and (3) Reynolds “alter[ed] or modif[ied] NetApp’s performance data contained on its protected computers.”  The defendants argued that none of these allegations plead a cognizable claim of “damage” within the meaning of the CFAA because NetApp has not alleged that Reynolds’ alleged actions “impair[ed] the integrity or availability of any part of NetApp’s systems—he did not crash NetApp’s systems, delete data, or prevent any other user’s access.”  NetApp countered that merely “rendering a computer system less secure should be considered ‘damage’ under § 1030(a)(5)[], even when no data, program, or system is damaged or destroyed.”

The court first noted that “the Ninth Circuit has not addressed whether the copying of information, without more, states a cognizable claim of ‘damage’ under the CFAA.”  “In addition, district courts are divided on this issue.  The majority of district courts to have considered the question agree that the mere copying of information does not plead a recognizable claim of ‘damage’ under § 1030(a)(5).”[11]  “Moreover, these courts have decided the mere copying of information does not constitute ‘damage’ where, as NetApp alleges here, a former employee is accused of taking information from his former employer to give to a competitor.”[12]  

Judge Koh ultimately sided with what the court characterized as “[t]he majority of district courts” on the “damage” requirement under Section 1030(a)(5):

The Court finds that the mere copying of information does not constitute a claim of “damage” within the meaning of the CFAA.  As previously discussed, the statutory definition of “damage” in the CFAA is “any impairment to the integrity of data, a program, a system, or information.”  18 U.S.C. § 1030(e)(8).  NetApp contends that the copying of information impairs that information’s “integrity.”  The legislative history of the CFAA does not define the term “integrity.”  However, district courts that have considered the meaning of “integrity” in the CFAA have noted that the word typically means “an unimpaired or unmarred condition” or “soundness.”[13]  Therefore, the copying of information could damage that information’s integrity if, for instance, the information’s wholeness or soundness was affected.  However, simply copying information, as NetApp alleges here, without otherwise affecting the wholeness or soundness of the information, would not impair the information’s “integrity” as that term is commonly defined.  . . .  Finally, the Court notes that while the Ninth Circuit has not addressed the definition of “damage” within the CFAA, the Ninth Circuit has cautioned against interpreting the CFAA in a way that would “transform the CFAA from an anti-hacking statute into an expansive misappropriation statute.”[14]  

Next Judge Koh dismissed NetApp’s claim for trespass to chattels based on CUTSA preemption; and also found it deficient for failure to plead a property right in the alleged stolen information:

However, even assuming that NetApp’s claim of trespass to chattels was not preempted by CUTSA, the Court concludes that NetApp’s claim should be dismissed because NetApp fails to allege the existence of a source of positive law that grants NetApp a property right in the information Reynolds allegedly took.  As Defendants correctly point out in their motion to dismiss, in order for the taking of information to constitute wrongdoing, the information must be “property” as defined by some source of positive law.[15]

In light of NetApp’s “vague” pleading, the court granted in part Nimble’s motion to dismiss NetApp’s statutory unfair competition action on CUTSA preemption grounds, with leave to amend its complaint:  

As a preliminary matter, the Court notes that although NetApp does not use the words “confidential,” “proprietary,” or “trade secret” in its unfair competition cause of action, at least some of the bases for NetApp’s cause of action appear to implicate the misappropriation of such material.  For instance, NetApp alleges that NetApp employees “transport[ed] necessary infrastructure” to Nimble so that “Nimble could expand its sales market quicker and not have to invest substantial resources in developing its sales and distribution channels.”  NetApp also alleges that Nimble “encourag[ed]” NetApp employees to “delete NetApp information before their departure in an attempt to further frustrate NetApp’s ability to compete.”  Furthermore, NetApp alleges that Nimble “hir[ed] teams formerly employed by NetApp in Australia in order to compete unfairly in the marketplace.”  Under California law, the solicitation of an employee to leave and associate with a competitor can implicate trade secret law if the solicitation involves the use of trade secrets.[16]  Finally, NetApp states that Nimble committed unfair business practices by encouraging NetApp employees to “access a compilation of . . . NetApp training and other materials” which are otherwise “publicly available” but in which “NetApp has invested substantial time and money preparing.”  As previously discussed, under California law compilations of otherwise publicly-available information or data may receive trade secret protection if there is, inter alia, evidence that the compiling party procured the compilation by expending substantial resources.[17]  To the extent that any of the bases for NetApp’s unfair competition cause of action implicate the misappropriation of trade secrets, or confidential or proprietary information, NetApp’s cause of action would be subject to CUTSA preemption.[18]  

The court also ruled that at least one of the bases for NetApp’s unfair competition cause of action may also implicate the Copyright Act, and therefore be subject to preemption under that law.[19]  The count granted Nimble’s motion to dismiss to the extent that the CUTSA or the Copyright Act preempted NetApp’s claims: 

However, due to NetApp’s vague pleading, the Court cannot conclusively determine that NetApp’s unfair competition cause of action is in fact so preempted.  Indeed, construing the pleadings in the light most favorable to the plaintiff—as the Court must in ruling on a Rule 12(b)(6) motion, see Manzarek, 519 F.3d at 1031—it is plausible to read NetApp’s unfair competition cause of action to assert a claim that is based on the use of non-confidential, non-trade secret, and non-proprietary information.  Similarly, it is possible to read NetApp’s cause of action in such a way that does not implicate copyright infringement.  Therefore, the Court DENIES the Defendants’ motion to dismiss to the extent that NetApp’s unfair competition cause of action does not implicate the misappropriation of trade secrets or confidential or proprietary information, or does not raise a claim for copyright infringement.[20]

The court then declined to exercise supplemental jurisdiction over NetApp’s state law claim of unfair competition against Nimble “because such claims were exclusively the province of state law and bore little factual relation to the CFAA allegations,”[21] and “the factors of economy, convenience, fairness, and comity further supported a declination of supplemental jurisdiction.”[22]  The court decided, however, to exercise supplemental jurisdiction over NetApp’s unfair competition cause of action against Nimble to the extent that NetApp’s allegations form part of the same case or controversy as NetApp’s CFAA claims against Reynolds and to the extent that these allegations are not preempted by the CUTSA or the Copyright Act.[23]  

Finally, the court found that “one of the bases for NetApp’s unfair competition claim against Reynolds is certainly preempted by the Copyright Act, and there is a possibility that the rest of the other bases are also preempted by either the Copyright Act or by [the] CUTSA.”[24]  “However, again, due to NetApp’s vague pleading, the Court cannot conclusively determine whether the entirety of NetApp’s unfair competition cause of action against Reynolds is in fact preempted.”[25]  

Nimble also moved to strike NetApp’s fourth cause of action, and other specific allegations in its SAC, which detailed specific alleged conduct of Nimble “targeting” NetApp’s employees, or in the alternative Nimble AUS, that NetApp alleged constituted unfair competition.  The court agreed with Nimble that these unfair competition allegations were “immaterial because it refers only to state law claims that this Court previously dismissed for lack of supplemental jurisdiction.”[26]

Based on NetApp and other recent cases, damages claims under the CFAA are likely limited to those seeking compensation for the cost of investigating or repairing damage or security breaches to the victim’s computer system – and not loss caused by the theft of trade secrets.  Although a couple of cases (such as NetApp) apply this damages analysis only to a claim under Section 1030(a)(5) of the CFAA, which specifically prohibits damage to the computer system, the weight of authority holds that all sections of CFAA are limited by the definitions of “damage” and “loss” that are set forth in the statute itself, at Section 1030(e)(8) and (11).  Indeed, these definitions read fairly allow only for damage to the system, the cost of responding/restoring, and revenue lost because of interruption of service.  The NetApp case discussed differences between the statute’s subsections only for the purpose of alleging fraud or misconduct with particularity.

A few other points are worth noting.  First, NetApp holds that the term “defraud” as used in the CFAA refers to general wrongdoing and not common law fraud.[27]  Second, the requisite “unauthorized access” under the CFAA cannot be committed by current employees – regardless of their intention to leave the company – only by those who have left the company.[28]  On the other hand, for liability under the CFAA, the former (or non-) employees need not circumvent technological barriers.  It is sufficient that they are no longer supposed to be accessing the company’s data.[29]  See also Custom Packaging v. Phillips, 2015 U.S. Dist. LEXIS 164523 (C.D. Cal. Dec. 7, 2015) (former employee trade secrets misappropriation case, where district court dismissed CFAA claims because plaintiff failed to allege any impairment to its computer system); NovelPoster v. Javitch, 2014 U.S. Dist. LEXIS 155445 (N.D. Cal. 2014) (allowing claim for damages based on temporary unavailability of data in plaintiff’s computer system because of defendant’s conduct); SunPower Corp. v. SunEdison, Inc., Case No. 15-cv-02462-WHO, 2015 U.S. Dist. LEXIS 121587, __ F. Supp. 3d ____ (N.D. Cal. Sept. 11, 2015) (current employees do not violate CFAA if they breach their employer’s computer use policies while accessing files that they were authorized to use, “[b]ecause the CFAA is an anti-hacking statute, not a misappropriation statute”).

The Ninth Circuit Court of Appeals heard oral argument in December 2015 in a case involving the scope of the CFAA, and specifically what constitutes “unauthorized access” to a computer, Facebook Inc. v. Power Ventures, Inc.  Facebook is seeking to preserve a $3 million damages award and injunction against Power Ventures Inc., the developer of now-defunct social media aggregation site Power.com.  Facebook asked a three-judge panel to affirm a district court ruling that found that Power had violated the CFAA by continuing to access Facebook accounts after receiving a cease-and-desist notice.

Attorney Defending Trade Secret Misappropriation Lawsuit Can Receive Allegedly

Stolen Trade Secrets from Client – And Court Warns Over Zealous Practitioners

 

Finton Construction, Inc. v. Bidna & Keys, APLC, Case No. G050093, 2015 WL 3947116, 2015 Cal. App. LEXIS 574, 238 Cal. App. 4th 200 (June 29, 2015):

 

The plaintiff, a construction company (“FCI”), sued its former business partner, Reeves, for soliciting FCI’s clients and employees, and for copying various documents that FCI alleged constituted its trade secrets.  FCI also filed a second, subsequent lawsuit against Reeves’ counsel, the law firm Bidna & Keys, based on its receipt of the allegedly misappropriated documents in the regular course of its representation of Reeves.  FCI argued that because its confidential documents are stolen property, Reeves’ counsel was liable for conversion and receipt of stolen property, and sought to enjoin Reeves’ counsel from “deleting, accessing, or in any way using the data.”[30]

 

The Fourth District Court of Appeal affirmed the trial court’s order granting the law firm’s anti-SLAPP[31] motion, reasoning that California’s absolute litigation privilege protected the law firm’s receipt of the allegedly stolen data, and “[n]o attorney can litigate a trade secret case without examining the disputed materials to determine if they constitute trade secrets or even contain any relevant data at all.”[32]  The appellate court was sharply critical of the plaintiff’s litigation tactics and strategy:

 

We find FCI’s conduct with respect to this entire case demonstrative of a particularly nasty type of scorched earth tactics.  A purportedly stolen hard drive, which was placed in the hands of defendants solely for litigation purposes, has resulted in an attempt to disqualify counsel and two efforts to depose counsel in the underlying case, a police report, complaints to the State Bar of California, and this entirely derivative and unmeritorious second lawsuit.  FCI’s overreach does not suggest zealousness or righteousness, but a calculated effort to undermine the parties in the underlying case by turning their attorneys into fellow defendants.

 

While we strongly suspect that FCI is the prime mover behind the prosecution of this lawsuit, we remind FCI’s counsel – and indeed, all attorneys – that while they owe their clients a duty to zealously represent them, that zealousness does not trump the duty they owe the courts and the judicial process to prosecute only lawsuits with merit.  The type of uncivil behavior and specious tactics demonstrated by filing this case represents conduct that brings disrepute to the entire legal profession and amounts to toying with the courts.

 

Less than 48 hours prior to oral argument, the parties notified us they had reached a settlement.  The court, however, declines the parties’ request to dismiss the appeal.  This is a particularly egregious SLAPP, filed against defendants for the sole “crime” of representing their clients in the underlying action.  The lack of civility demonstrated in this case is a matter of public interest.  Moreover, while we cannot be certain, it appears that FCI deliberately decided to keep this action pending until the last possible moment in order to avoid the opinion we write today.  We therefore decide in defendants’ favor and publish this case as an example to the legal community of the kind of behavior the bench and the bar together must continually strive to eradicate.[33]

 

Reeves’ original complaint alleged that Reeves and Finton began building custom homes as a general contractor in the 1980s and were eventually joined by Tontini.  The company’s stock was owned 40 percent each by Reeves and Finton, and 20 percent by Tontini.  From 2000 onward, Reeves ran the company’s Orange County branch office.  The company, FCI, was quite successful, with 2010 revenues exceeding $44 million.  After some financial disputes, the complaint alleged, Finton and Tontini unlawfully conspired to reduce Reeves’s ownership and ultimately terminate his involvement.  Reeves sought an accounting and millions of dollars in damages.

Finton and FCI filed a cross-complaint against Reeves and several FCI employees who left to join Reeves at his new company, MA3 Corporation (“MA3”).  Reeves continued building homes in Orange County.  Among other alleged acts of past wrongdoing, the cross-complaint alleged Reeves essentially stole FCI’s clients and wrongfully solicited its employees.  It also alleged that before they left FCI, Reeves and the other cross-defendants, including Nicole Lacuesta, copied various “confidential” documents from FCI’s Orange County office and copied them to computers at MA3.  These documents allegedly included “client lists, project plans, specifications, bid books, and contact information for valued vendors, suppliers and subcontractors.”  The cross-complaint also alleged that the cross-defendants allegedly stole various computers and cell phones.  FCI’s cross-complaint alleged unfair competition, conversion, and misappropriation of trade secrets.  

In April 2012, not long after Finton and FCI filed their cross-complaint, FCI’s counsel sent Bidna a letter stating that on the day the cross-defendants had resigned from FCI, one of them, Jim White, had used a company credit card to purchase a hard drive, which was used to copy files from FCI’s computers.  FCI’s counsel claimed that FCI owned the hard drive and demanded its return.  Bidna responded that he would return the hard drive after his information technology consultant made a copy of the files on it.  FCI’s counsel offered an “inspection” by the consultant overseen by his own expert, but demanded the drive be returned without copying the files, stating that if the drive were copied, “we will take the position that you have taken materials belonging to FCI and/or spoilated evidence.”  Bidna responded that it was unclear the hard drive had any files belonging to FCI on it, and refused to return it without copying the files.

In July 2012, FCI filed an application for a writ of possession, demanding Reeves turn over the drive White had purchased, a USB flash drive, and all the hard copies of client files in their possession.  Reeves apparently opposed, although his opposition was not in the record on appeal.  The application was eventually resolved in August by way of a stipulated order that directed the drive White had purchased, along with a USB flash drive, be turned over to FCI’s computer expert, who made copies of the drives and gave them to Reeves’s attorneys.  The parties’ stipulated order also stated that the drives may be used for the purposes of the pending litigation.

FCI took Lacuesta’s deposition in April 2013.  She testified that on the day that she left FCI, she copied files that were on the computer that she used at the office.  She did not have permission to do so.  She stated she had personal files that she wanted copies of, and did not have time to sort through them.  She did not make any effort to search or sort through the files.  She told Reeves sometime later that she had copied the documents, which were, at some point, transferred to MA3 computers.  She eventually turned everything over to the attorneys, Bidna & Keys.

Immediately thereafter, FCI’s counsel wrote to Bidna demanding the return of the hard drive that Lacuesta had testified about at her deposition.  Bidna & Keys’ counsel, Jon Longerbone, replied and stated they were willing to give the drive to FCI’s counsel on the same terms stipulated to in the August 2012 order.  FCI’s counsel did not accept the offer, or provide a reason as to why he would not do so.  FCI filed the second lawsuit against Bidna & Keys shortly thereafter, in May 2013.  FCI also filed a report for theft with the Costa Mesa Police Department and complaints with the State Bar of California against Bidna and Longerbone.  FCI also filed a motion to disqualify defendants in the underlying case, which they eventually lost.  At two different points, the court in the underlying case has denied FCI’s motions to depose Bidna.

In June 2013, Reeves filed an application in the underlying case regarding the use of the same drive that was the subject of this case.  On October 3, the court entered an order directing defendants to deliver the drive to FCI’s computer expert.  The expert was to make two exact copies of the drive and deliver one to Bidna & Keys and one to FCI’s counsel, with the expert maintaining the original.  The duplicate drive was to be used only for the purposes of the underlying litigation.  “In sum, this order was essentially similar to the August 2012 stipulated order.”[34]  

The Fourth District had no difficulty concluding that FCI sued Bidna & Keys for engaging in protected activity to satisfy the first prong of the anti-SLAPP analysis:

It is unquestionable and undisputed that the acts alleged in the complaint all arise out of defendants’ representation of their clients in the underlying case.  The only reason the hard drive was ever turned over to defendants is because they were counsel in that matter.  The only purported reason defendants are being sued is because they refused to unconditionally return the hard drive, which constitutes potential evidence in the underlying matter.  In reality, it seems they are being sued for representing their clients.

FCI’s only real argument on this point is that where the activity at issue is illegal as a matter of law, the defendant is precluded from availing itself of the anti-SLAPP statute, citing Flatley v. Mauro, supra, 39 Cal.4th at page 320.  Flatley, however, is a very narrow exception.  It applies only “where either the defendant concedes the illegality of its conduct or the illegality is conclusively shown by the evidence . . . .”  (Id. at p. 316.)  In Flatley, the conclusive evidence was an extortionate letter from the defendant.  (Id. at pp. 307-309.)  Subsequently it has been recognized that “the Supreme Court’s use of the phrase ‘illegal’ [in Flatley] was intended to mean criminal, and not merely violative of a statute.”  (Mendoza v. ADP Screening & Selection Services, Inc. (2010) 182 Cal.App.4th 1644, 1654 (Mendoza); see also Cabral v. Martins, supra, 177 Cal.App.4th at p. 482 [evading child support obligations insufficient to take case outside of scope of anti-SLAPP statute].)  The Mendoza court noted: “[A] reading of Flatley to push any statutory violation outside the reach of the anti-SLAPP statute would greatly weaken the constitutional interests which the statute is designed to protect.”  (Mendoza, supra, 182 Cal.App.4th at p. 1654.)  FCI, as we will discuss post, has come nowhere close to conclusively establishing criminal conduct on the part of defendants.  Therefore, this narrow exception does not apply.[35] 

The Court of Appeal then determined that FCI had not shown a reasonable probability of prevailing on the merits of its claims against Bidna & Keys, relying primarily on the California absolute litigation privilege, Evidence Code section 47, subdivision (b):

 

Such reasoning compels the same result here.  Without the litigation privilege, attorneys would simply be unable to do their jobs properly.  No attorney can litigate a trade secret case without examining the disputed materials to determine if they constitute trade secrets or even contain any relevant data at all.  Indeed, FCI, by entering into a stipulation in the underlying case allowing defendants to review other materials for the purposes of litigation only, can hardly deny this obvious point.  The same concern likely led the trial court in the underlying case to the same conclusion, resulting in the October 2013 order permitting defendants to maintain a copy.  The litigation privilege, therefore, applies to defendants’ actions in terms of both receiving and retaining the drive until it was turned over pursuant to the court’s order in the underlying case. 

 

In addition to Bidna & Keys’ litigation privilege defense, the Court of Appeal determined that FCI had failed to show legally sufficient claims supported by admissible evidence:

 

Thus, both of these claims turn on the question of whether the drive was indeed stolen, or put another way, whether FCI had the right to ownership or possession.  The only evidence FCI submitted in support of its anti-SLAPP motion (besides an uncitable case) was an excerpt from Lacuesta’s deposition.  An anti-SLAPP motion is an evidentiary motion.  Once the court reaches the second prong of the analysis, it must rely on admissible evidence, not merely allegations in the complaint or conclusory statements by counsel.  FCI’s evidence falls far short of what is needed to establish a prima facie case of either conversion or receipt of stolen property.

 

In her deposition, Lacuesta does not admit to stealing, or wrongfully taking or copying anything.  She testified that she did not ask Finton or Tontini (or Reeves, for that matter) for permission to make the copy because she did not “think I needed to.”  FCI offered no evidence to refute this statement.

 

Additionally, merely alleging ownership of the drive or the information contained on it is insufficient to establish conversion.  The record reflects that Reeves is still a 40 percent partner in FCI, and therefore, it is far from clear that he did not have a right equal to that of Finton or Tontini in terms of access to and copying of any FCI records.  FCI’s scant evidence in support of its opposition to the anti-SLAPP motion fails to establish any of these facts.  Further, even if FCI was the undisputed owner, there was no evidence whatsoever offered to prove that defendants “knowingly” received stolen property at any time.  At best, the status of the property continues to be disputed.[36] 

 

It Is Difficult to Prevent a Competitor From “Poaching” Your Employees, the

“Inevitable Disclosure Doctrine” Does Not Exist Under California Law, and

Plaintiffs Must Thoroughly Investigate Any Trade Secret Case Before Filing Suit

 

Cypress Semiconductor Corp. v. Maxim Integrated Products, Inc., 236 Cal. App. 4th 243 (2015):

 

The plaintiff, Cypress Semiconductor Corporation (“Cypress”), sued the defendant, Maxim Integrated Products, Inc. (“Maxim”), alleging that Maxim had misappropriated a trade secret, or was in the process of doing so, by seeking to hire away specialists in touchscreen technology, a field in which Cypress and Maxim compete.  Maxim responded that it was entitled to solicit prospective employment candidates in Cypress’s workforce and that there was no evidence it had acquired, or was seeking to acquire, any trade secret.  After failing to obtain temporary injunctive relief, and failing to obtain an order placing under seal certain evidence derived by Maxim from public sources, Cypress dismissed the action.  The trial court awarded Maxim its attorney’s fees pursuant to Civil Code section 3426.4 (§ 3426.4), which authorizes such an award to the prevailing party where a claim for misappropriation of trade secrets is found to have been made in bad faith.  On appeal, Cypress contended that this was error because the trial court could not properly find that Maxim was the prevailing party, or that Cypress brought the action in bad faith.  The Sixth District Court of Appeal “concluded that (1) the trial court’s findings are free of procedural error; (2) the finding of bad faith is amply supported by evidence that defendants did no more, and Cypress accused them of no more, than attempting to recruit the employees of a competitor, which Maxim was entitled to do under the laws of this state; and (3) Maxim prevailed when, as the trial court impliedly found on substantial evidence, Cypress dismissed the suit to avoid an adverse determination on the merits.”[37]  

 

Cypress initiated this action on June 8, 2011, by filing a complaint against Maxim and its president, Tunç Doluca.  Two days later Cypress filed an ex parte application for a temporary restraining order prohibiting Maxim and its recruiter from soliciting Cypress touchscreen employees and requiring them to “immediately return all Cypress trade secret and confidential and proprietary information that became known to Defendants, including specifically any list or roster of Cypress employees working on touchscreen technology.”  In opposition to the application for a temporary restraining order, Maxim manager Bart DeCanne declared that when his business unit had job openings, his practice was to forward a job description to several outside recruiters.  Maxim also filed a declaration by one of its attorneys, Lael Andara, who described how he had identified a number of Cypress touchscreen specialists by using only publicly available sources.  He focused his efforts on LinkedIn.com, a professional networking website. He examined Cypress’s own page on LinkedIn, which included a section referring to the change of one employee’s position from “Touchscreen Marketing Director” to “Senior Member of Technical Staff.”  A link to that person’s own LinkedIn page revealed that it too referred to his previous “Touchscreen” position.  That page referred to other Cypress employees, including one identified as a “System Engineering Director.”  By these and other searches on LinkedIn, Cypress’s attorney was able to identify some 20 Cypress employees having touchscreen or seemingly related experience.

 

Meanwhile, on July 11, 2011, Maxim demurred generally to Cypress’s complaint, asserting that (1) the identities of Cypress’s touchscreen employees were not a trade secret because the information was publicly available; (2) the complaint failed to allege any conduct by either defendant constituting misappropriation; (3) no actionable conduct of any kind was attributed to defendant Doluca; and (4) the California Uniform Trade Secret Act (Civ. Code §§ 3426-3426.11) preempted Cypress’s second cause of action, alleging unlawful business practices.  On October 19, 2011, the last day to file opposition to Maxim’s demurrer, Cypress filed an amended complaint, which “differed little from its predecessor.”[38]  On November 23, 2011, Maxim demurred generally to Cypress’s amended complaint.  In support of its demurrer, Attorney Andara filed an updated declaration listing 93 Cypress employees with apparent touchscreen experience whom he had identified from Web sites and patent office records.  On December 1, Cypress filed a request to dismiss the complaint in its entirety without prejudice.  On February 2, 2012, Maxim filed a cost bill claiming $1,049.95.  One week later, Maxim filed a motion for attorney’s fees under Section 3426.4 based upon Cypress’s “bad faith filing and maintenance of the above-referenced action.”  The trial court granted Maxim’s motion, and on June 1, 2012, the trial court entered judgment for Maxim in the amount of $180,817.50 plus costs.  

 

On appeal, the Sixth District rejected Cypress’s “prevailing party” argument, as it was “satisfied that any reasonable finder of fact would be likely to find that Maxim was the prevailing party ‘on a practical level’”[39]:

 

Cypress filed a complaint that was, as we discuss below, meritless on its face, based upon theories of liability that were not merely specious, but nonsensical.  The apparent purpose of the lawsuit was to cow Maxim, and perhaps other competitors, into refraining from conduct in which – as we discuss below – they had every right to engage.  Cypress proceeded to lose at every subsidiary stage, as well it should have.  It ultimately abandoned the action rather than face a determination on the merits that would certainly have been adverse.  Contrary to its arguments, it gained no legitimate benefit from the action, practical or otherwise.  At most it succeeded in notifying the labor marketplace that it would resort to spurious litigation to prevent “poaching” of its employees.  Since this objective is contrary to California law and policy, its achievement cannot be considered the kind of success that will sustain prevailing party status, or prevent an opponent from acquiring that status, under section 3426.4.[40] 

 

But the Court of Appeal did not stop there in its harsh criticism of Cypress; among other things, it opined:

  • “In contending otherwise, Cypress constructs a kind of carnival fun house in which the facts of the case are distorted into grotesque and nearly unrecognizable shapes.”
  • “First it asserts that it only dismissed the action because, ‘after the trial court erroneously denied its motion to seal,’ it ‘would have had to place its trade secrets in the public record’ in order to continue litigating the matter. No part of this depiction survives scrutiny.  First, we perceive no error in the trial court’s denial of the motion to seal.  That motion rested on the premise that merely by filing a pleading characterizing certain information as a trade secret, a party can compel the courts to withhold that information from the public record until such time as it finally adjudged not to be a trade secret.  This premise would have considerable color where the information is at least arguably secret.  Here there was no arguably secret information before the court.  Nearly all of the information Cypress sought to place under seal had been compiled by its opponent from public sources where – so far as this record shows – it has remained available to this day for anyone with the appropriate subscription to find and peruse.  This was not a colorable trade secret, and Cypress’s calling it so did not obligate the court to place it under seal or take any other action to prevent its further disclosure.” 
  • “Other circumstances make it highly implausible that Cypress’s dismissal of the action was motivated by a desire to prevent the disclosure of information. First, there was no reason to assume or expect that the dismissal would have that effect.  Had the information at issue in Cypress’s motion to seal been filed by Cypress, it would have been returned to Cypress when the motion to seal was denied.  But the vast bulk of the information at issue had been filed by Maxim.  Once the motion to seal was denied, there was no legal basis for the materials in question to remain under seal.  Cypress might have been entitled to a temporary continuation of their sealed status while it sought appellate relief from that order, but it sought no such relief.  In the absence of such a proceeding there was no basis for Cypress to assume that the materials would remain sealed.  Certainly the mere dismissal of the action could not be expected to accomplish that result.”
  • “The one exception to the foregoing observations is the one item filed by Cypress that it sought to keep under seal: the unredacted declaration of Employee 294XX. That document presumably was – certainly it should have been – returned to Cypress upon denial of its motion to seal.  Whether it was or not, Cypress proceeded to include the unredacted document in its appendix on appeal, making no effort to keep it or anything else out of the publicly accessible appellate record.  We are thus implicitly asked to believe that an interest so overriding as to compel dismissal of a meritorious lawsuit suddenly became too insignificant to warrant a motion in this court.  We decline the request.  It is impossible to construe Cypress’s dismissal of the action as an attempt to protect information from disclosure – even if information warranting such protection appeared in the record, which it does not.
  • “Finally, we note that the motivation to which Cypress now ascribes its dismissal of the action appears never to have been mentioned in the trial court. There Cypress claimed that it dismissed the matter ‘because Defendants apparently had ceased their efforts to obtain Cypress trade secrets, thus Cypress achieved its primary litigation objective.’  In its opposition to the fee motion Cypress explained this supposed victory as follows: ‘[A]fter Cypress filed suit, Defendants expressly agreed to not solicit Cypress employees for thirty days and thereafter voluntarily refrained from soliciting Cypress’s touchscreen employees (at least as far as Cypress is aware).  This reality operated as a de facto injunction against further threats to Cypress’s trade secrets.  At a practical level, Cypress was the prevailing party because it achieved the primary remedy it sought from this Court – an injunction barring any further improper solicitations by Defendants.’  [¶]  Unsurprisingly, the trial court was unpersuaded by this interpretation of events; nor does Cypress press this perspective on appeal, contending instead that ‘there was no prevailing party’ because Maxim failed to achieve its litigation objective.  But Maxim’s litigation objective, like that of every defendant, was to avoid the imposition of liability.”
  • “The only plausible explanation for Cypress’s dismissal of the action is that it feared a determination on the merits. Had Maxim’s demurrer been heard, it would almost certainly have been sustained and there is no reason to believe Cypress was in any position to amend its way past the pleading stage.  As will be discussed more thoroughly below, Cypress appeared to possess no facts suggesting that Maxim had done anything unlawful, or was threatening to do so.  The trial court could quite properly infer that the suit was dismissed to avoid what was bound to be an adverse adjudication on the merits.  The lawsuit thus achieved no legitimate objective.  Maxim, in contrast, walked away with all of the rights it had when it was served with the complaint – and all the money, save the attorney fees Cypress had forced it to expend.  The trial court did not err in concluding that Maxim was the prevailing party.”
  • “Amidst such dross the only colorably actionable conduct attributed to Maxim is its attempt, through Mushel, to recruit Cypress employees. In the absence of additional, liability-producing circumstances, that conduct was entirely lawful.”
  • “Cypress failed to competently allege that there had been any misappropriation of trade secrets, whether ‘as a concomitant of [Maxim’s] solicitation’ of Cypress employees or otherwise.”
  • “Nor does anything outside the pleadings suggest any basis for a belief, or even a reasonable suspicion, that Maxim or Mushel had come into possession of some sort of secret in-house list of Cypress’s touchscreen employees. Cypress never even directly asserted the existence of such a list, let alone the circumstances making it a trade secret.  At most it implied that there was an ‘employee roster’ which Cypress viewed as ‘proprietary’ and did not ‘publish or share.’  This roster was never tied, by allegation or otherwise, to any conduct by Maxim or Mushel.  Nor did Cypress coherently allege, or attempt to show, that the disclosure of a coworker’s identity by a Cypress employee would constitute the divulging of legally protected information.  The complaint referred at great length but with equally great ambiguity to Cypress’s efforts to prevent the disclosure of confidential information, including unspecified information concerning its employees.  It nowhere stated facts sufficient to establish than [sic] an employee would violate any duty by, for example, telling a headhunter the mere identity of a coworker or the kind of work the latter performed.”
  • “As Maxim vividly demonstrated, it was not at all difficult to identify dozens of Cypress touchscreen specialists without relying on any internal Cypress information. Maxim’s attorneys eventually found nearly 100 such names by searching a single website and patent records.  Cypress never pointed to anything creating even the appearance that Mushel was using protected Cypress information.” 
  • “In other words, according to this theory Maxim was seeking to hire Cypress employees so that it could appropriate whatever trade secrets they might know. We may assume that at least some aspects of ‘Cypress’s touchscreen technology’ were genuine trade secrets.  It is absolutely clear, however, that no such misappropriation had occurred when the complaint was filed.  Maxim had extended an offer to one Cypress employee, who initially accepted but was ultimately prevailed upon to remain with Cypress.  So far as anything in the record suggests, Maxim never extended an offer to any other ‘touchscreen employee.’  Therefore it never had the occasion or opportunity to engage in the posited brain-picking.  As reflected in the last sentence quoted above, the claim was purely one of threatened misappropriation.”
  • “Nothing in the complaint, and nothing submitted by Cypress since filing the complaint, lends any color to the naked assertion that Maxim was pursuing Cypress employees with the object of extracting trade secrets from them. In the trial court Maxim suggested that Cypress’s claims in this regard implicitly rested on the doctrine of inevitable disclosure, under which some jurisdictions will permit a plaintiff to substantiate a trade secret claim against a departing employee ‘by demonstrating that [the] defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.’[41]  This doctrine, as Maxim pointed out, has been flatly rejected in this state as incompatible with the strong public policy in favor of employee mobility.  The inevitable disclosure doctrine would contravene this policy by ‘permit[ting] an employer to enjoin the former employee without proof of the employee’s actual or threatened use of trade secrets based upon an inference (based in turn upon circumstantial evidence) that the employee inevitably will use his or her knowledge of those trade secrets in the new employment.  The result is not merely an injunction against the use of trade secrets, but an injunction restricting employment.[42]  Cypress expressly disclaimed any reliance on the doctrine of inevitable disclosure, but in the absence of that doctrine we can detect no basis for its allegation of threatened misappropriation.  . . .  Given the complete absence of any coherent factual allegations suggesting a threatened misappropriation, Cypress’s second theory of relief was an inevitable disclosure claim, or it was no claim at all – and in either case, it did not state grounds for relief under California law.”
  • “We have generally directed our comments to Cypress’s original complaint because that pleading reflects the state of Cypress’s knowledge and understanding when it initiated the suit. These comments apply just as well, however, to the amended complaint, which did nothing to supply the missing factual allegations.  Nor did any of the materials filed in support of Cypress’s position on subsequent motions add any flesh to the evasive and conclusory assertions of liability in its pleadings.  We therefore cannot say that the trial court’s finding of objective speciousness lacked substantial evidentiary support.”
  • “If anything, the evidence of improper purpose was stronger than the evidence of objective speciousness. First, the parties’ pre-suit correspondence supports a reasonable inference that the actuating motive of Cypress’s president Rodgers was to scare Maxim away from attempting to hire any of Cypress’s touchscreen employees under any circumstances, lawfully or otherwise.  In the letter commencing this exchange, Rodgers wrote to Maxim’s president Doluca, ‘The purpose of this letter is to inform you that Maxim is seeking to obtain Cypress’s proprietary information illegally by targeting Cypress employees skilled in our touchscreen technology.  If Maxim persists in these actions, Cypress will sue Maxim and enjoin it from creating or distributing any products using any touchscreen expertise obtained from Cypress through former employees.’  . . .  The final two paragraphs of the letter again threatened litigation, and resulting expense, if Maxim did not desist from its attempts to hire Cypress employees: ‘You might know of me well enough to know that I do not make idle threats.  Read it again: The next time a Cypress employee working on touchscreen technology is illegally solicited or offered employment by Maxim, Cypress will sue your company, pursuing all legal remedies available to prevent Maxim from stealing our IP through unlawful hiring practices.  [¶] . . . .  The next person you try to hire illegally from Cypress will not be cheap for your company, as Cypress will spare no effort or legal expense to protect its people and its technology.’  This letter supports an inference that the purpose of the lawsuit was to impose a financial penalty upon, and thereby deter, Maxim’s attempts to hire Cypress technical employees.  Indeed, it might be inferred that the purpose of the lawsuit was to inhibit not only Maxim but other competitors as well from attempting to engage in the same, entirely lawful conduct.  Such an inference gains weight from a press release apparently issued by Cypress on the day it dismissed the action.  In it, Cypress ‘announced that it ha[d] dropped its trade secret lawsuit against Maxim Integrated Products.  The lawsuit charged Maxim with trying to gain access to Cypress’s touchscreen intellectual property by unfairly targeting key Cypress employees.  Cypress dropped the lawsuit ‘without prejudice,’ so it can be filed again in the future if necessary.  [¶]  ‘We are well aware that our people are our greatest asset,’ said T.J. Rodgers, President and CEO of Cypress.  ‘We will not tolerate unfair attempts to lure our employees away in order to gain access to our trade secrets.  In this case, Maxim has been unsuccessful, both in hiring our people and in making inroads in the touchscreen market, allowing us to drop the suit.  However, we will file again if we perceive more unfair efforts to hire away our employees.’”
  • “It bears emphasis that despite the repeated references to ‘unfair’ – not illegal – hiring practices, Cypress at no time pointed to any information whatever tending to show that Maxim was doing anything more than seek the most qualified candidates for openings in its own enterprise. It is of course true that any technicians hired from Cypress might possess trade secrets they could not lawfully share with their new employer.  But as Rodgers himself wrote to Doluca, hiring such employees posed an inherent risk to Maxim as well.  If Maxim succeeded in engaging Cypress employees laden with such secrets, he wrote, it would run the risk that they might ‘contaminate your touchscreen products with an IP liability.’  When he specifically linked this risk to Maxim’s potential hiring of Employee 60XX, Doluca acknowledged the risk but deemed it manageable, writing that Employee 60XX would ‘not be working on touch technology at all,’ and adding, ‘I will make sure he does not contaminate our touch technology.’  In continuing to insist that the mere attempt to hire that employee and others warranted judicial relief, Cypress is revealed as relying entirely on the generic risk that employees knowledgeable in a given specialty may give a new employer the benefit not only of their expertise but also of trade secrets acquired in a previous employment.  As previously noted, this is a de facto invocation of the ‘inevitable disclosure’ doctrine, which courts in this state have rejected.”   

California Courts Will Enforce Forum Selection Clauses Even Where the

Forum State’s Law Permits Post-Employment Covenants Not to Compete

 

Rowen v. Soundview Communs., Inc., Case No. 14-cv-05530-WHO, __ F. Supp. 2d ___, 2015 U.S. Dist. LEXIS 24986 (N.D. Cal. March 2, 2015)

The plaintiffs, Robert Jay Rowen and Lotus Management, LLC (“Lotus”), entered into contracts to provide content and other services for defendant Soundview Communications, Inc. (“Soundview”), which sells dietary supplements and publishes information on alternative medicine in its newsletter titled Second Opinion.  The contracts included a covenant not to compete that may well be binding in Georgia but unenforceable in California, and a forum selection clause mandating that all suits be brought in Georgia.  Notwithstanding the forum selection clause, the plaintiffs filed this declaratory relief lawsuit in California, and Soundview moved to transfer or, in the alternative, to dismiss for improper venue.  The District Court granted the defendant’s motion to transfer venue “[s]ince the forum selection clause is valid and [the] public interest factors do not make transfer inappropriate.”

With respect to the venue for any action, the contract stated:

Rowen acknowledges and agrees that the services to be rendered by or through Lotus, as contemplated by said simultaneously executed Agreement between Lotus and Soundview, are to be rendered in Fulton County, State of Georgia, where SECOND OPINION will be compiled and published.  This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia.  It is further agreed that any and all claims or actions brought by any party to this Agreement against any other party to this Agreement shall be brought in a court of competent jurisdiction located in Fulton County, in the State of Georgia.  Rowen expressly acknowledges, consents, agrees, and submits to the jurisdiction and venue of the courts of Fulton County, Georgia for the resolution of any disputes between parties.

The parties changed the venue and the workplace in the forum selection clauses from Fulton County to Gwinnett County, Georgia, when they extended the terms of the contracts on May 10, 2013.  The contract also included a covenant not to compete:

Lotus agrees, in behalf of any editor furnished by Lotus, during the initial term or any renewal term of this Agreement, and for a period of two (2) years following the termination, withdrawal or resignation of any writer or editor furnished by Lotus or the cessation of such writer or editor to furnish editorial material pursuant to the provisions of this Agreement, that such writer or any agent or employee of Lotus shall be prohibited and restrained from writing for, contributing to or investing in another health newsletter, particularly an alternative health newsletter, or internet web site (or similar electronic medium) that is printing, circulating or distributing material oriented towards health or alternative health issues similar to or in competition with SECOND OPINION in the States of Georgia, Florida, California, New York and Texas, without the written consent of Soundview.  By the execution hereof, Lotus, in behalf of any writer or editor furnished by Lotus, acknowledges that while SECOND OPINION circulates in states other than those named in this paragraph, a concentration of the circulation of SECOND OPINION exists in the states named in this subparagraph.   Lotus, in behalf of any editor or writer furnished, further agrees the time period and geographical limitation imposed herein and in subparagraphs (c) and (e) are reasonable, acceptable and necessary in order to protect the interests of Soundview and its publication known as SECOND OPINION.

The contract further provided: “Lotus, in behalf of itself and any writer or editor furnished by Lotus, acknowledges that the violations of any of the non-compete provisions herein would cause irreparable injury, damage and harm to Soundview, for which it is agreed there is no adequate remedy at law, in which event Soundview shall have the right, in addition to any other remedies available at law or in equity, to enjoin Lotus and/or any writer furnished through Lotus in a court of equity from violating the non-compete provisions hereof.”  Rowen’s Contract expressly incorporated the Lotus Contract and through it, plaintiff Rowen agreed to be bound by all representations and agreements made by Lotus, including “to be bound by the non-compete provisions” of the Lotus Contract.  Soundview contended that it terminated both contracts on August, 30, 2014 and paid a 90 day severance pay to Lotus.  Rowen and Lotus contend that Soundview materially breached the parties’ contracts and they also gave notice to Soundview on November 5, 2014, that they were terminating the contracts, effective January 3, 2015.

Rowen and Lotus filed this action in state court in Sonoma County, California, on November 12, 2014.  On December 18, 2014, Soundview removed the action to the U.S. District Court for the Northern District of California.  In their declaratory relief complaint, Rowen and Lotus seek a declaration that the non-compete provisions in their contracts are unenforceable because they are void under California Business & Professions Code section 16600.  Rowen sought to continue his work in writing, producing, editing and/or publishing information, advice, and recommendations through newsletters, blogs, and internet sites and “to be free of threats or lawsuits by Soundview seeking injunctive relief or damages for exercising his rights to conduct his chosen occupation and profession granted under Business & Professions Code Section 16600.”

Soundview moved to have this case transferred to the Northern District of Georgia, or in the alternative dismissed, based on the forum selection clause in the parties’ contracts.  28 U.S.C. § 1404(a) provides: “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.”  “[A] proper application of § 1404(a) requires that a forum-selection clause be given controlling weight in all but the most exceptional cases.”[43]  The plaintiff bears the burden of showing these exceptional circumstances that make transfer inappropriate.[44]  The plaintiff must show either that the forum selection clause is not valid or that the public interest factors recognized under Section 1404(a) make transfer inappropriate.[45]

The plaintiffs argued that the forum selection clause is not valid because the covenant not to compete contravenes three California public policies: protecting consumers from deceitful business practices under Business and Professions Code section 17200, preventing limits on trade and business activity under Business and Professions Code section 16600, and upholding the right to free speech and expression under California’s Constitution.  Plaintiffs also contended that, assuming the forum selection clause is valid, three public interest factors weigh against transfer: California’s localized interest in having lawsuits decided at home, California citizens’ interests in having lawsuits decided by a California court best versed in California law, and practical considerations such as expediency and lower expenses.  The court rejected the plaintiffs’ argument “[b]ecause none of the public policies identified are tethered to venue, plaintiffs’ arguments are unconvincing.”[46] 

The district court first noted that “[a] forum selection clause is presumptively valid; the party seeking to avoid a forum selection clause bears a ‘heavy burden’ to establish a ground upon which [the court] will conclude the clause is unenforceable.”[47]  However, “a forum selection clause is unenforceable ‘if enforcement would contravene a strong public policy of the forum in which suit is brought.’”[48]  The court then explained that “the choice-of-law analysis is irrelevant to determining if the enforcement of a forum selection clause contravenes a strong public policy”:  

Instead, absent a total foreclosure of remedy in the transferee forum, courts tether their policy analysis to the forum selection clause itself, finding the forum selection clause unreasonable only when it contravenes a policy specifically related to venue.[49]  [¶]  Courts throughout the Ninth Circuit have consistently followed this analysis, rejecting policy arguments unrelated to venue whenever there was no foreclosure of remedy in the transferee forum.[50]  Drilling down, courts in this District have applied this analysis when addressing the main public policy asserted here, California’s prohibition on non-compete agreements.  In Marcotte, a post Atlantic Marine case decided in 2014, a judge in this District addressed the validity of a forum selection clause in the context of an action challenging a covenant not to compete and found it enforceable.[51]  Plaintiff argued, as Rowen and Lotus do here, that the enforcement of the forum selection clause violated California’s public policy against covenants not to compete under Business and Professions Code section 16600.[52]  Plaintiff noted, as Rowen and Lotus do here, that the transferee forum, unlike California, allowed covenants not to compete.  The court found this argument irrelevant.  “[T]his case does not involve foreclosure of a remedy . . . .”   Instead, “choice of law issues are the same for a district court in Maryland or California: both courts, sitting in diversity, consider which law (California or Maryland) to apply to the claims.”  This makes the forum selection clause separate from the choice-of-law analysis and therefore “a party challenging enforcement of a forum selection clause may not base its challenge on choice of law analysis.”[53]  

The court noted that two other district judges “similarly found a forum selection clause valid in a case challenging a covenant not to compete.”[54]   “Similarly, judges in the Southern District of California have also refused to consider California’s policy against non-compete agreements in determining whether a forum selection clause was valid.”[55]  And the court noted that “[o]utside of the non-compete context, judges in other districts also limit policy considerations to venue when there is no foreclosure of remedy in the transferee forum.”[56]  The court concluded that the plaintiffs failed to articulate any argument “specifically related to venue” as contrasted with California public policy prohibiting non-competes:

Here, there is no reason why the Georgia court will not or cannot entertain Rowen’s and Lotus’s choice of law arguments.  Rowen may challenge the non-compete agreement in Georgia and argue (under the applicable choice-of-law analysis) that California law should apply in light of Rowen’s status as a California resident and California’s strong public policy against non-compete provisions.  Lotus may make similar arguments.  Even if Georgia law is determined to apply, Rowen and Lotus will still be free to argue that enforcement of the non-compete would be “unreasonable” under Georgia law.[57]  There is simply no foreclosure of remedy in Georgia.

Here, Rowen and Lotus did not make any arguments specifically related to venue or mount a public policy challenge to the validity of the forum selection clause itself.  Nor have they shown that transfer to Georgia would foreclose all of their remedies.  As such, Rowen and Lotus have not met their heavy burden of showing that the forum selection clause is not valid.

Once a court finds that the forum selection clause is valid, the clause “should be given controlling weight in all but the most exceptional cases.”[58]  The plaintiff bears the burden of demonstrating that relevant factors weigh against transfer and “a district court may consider arguments about public-interest factors only.”[59]  These factors include “the administrative difficulties flowing from court congestion; the local interest in having localized controversies decided at home; [and] the interest in having the trial of a diversity case in a forum that is at home with the law.”[60]  “[T]he plaintiff’s choice of forum merits no weight” and the “transfer of venue will not carry with it the original venue’s choice-of-law rules—a factor that in some circumstances may affect public-interest considerations.”[61]  The court rejected the plaintiffs’ argument: “Here, two of the public interests plaintiff identifies—‘practical considerations’ such as expediency and lower expenses of litigating in California and California citizens’ desire to have a California court familiar with California law decide the dispute—are irrelevant.”[62]  “With respect to the familiarity of the Georgia court with California law, as the Supreme Court recognized, ‘federal judges routinely apply the law of a State other than the State in which they sit.’”[63]  

With respect to the final public interest – the local interest in having the lawsuit decided at home – the court ruled that it “is insufficient to prevent transfer in this case for three reasons”:

First, this limited interest does not outweigh all the private interest factors presumed to be in favor of the transferee forum and the controlling weight already given to the forum selection clause.  Second, the plaintiff’s choice of forum generally merits no weight in this context.  Third, there are interests other than Rowen’s at play, including those of Soundview, a Georgia corporation that negotiated the contracts with Georgia venue and choice of law provisions, and Lotus, the Nevada limited liability company.  The effects of this litigation, while undoubtedly affecting Rowen as a resident of California, also have effects in Georgia and Nevada.  Simply put, Rowen’s interest in having this dispute settled in California does not make this an “exceptional case” that defeats application of a valid forum selection clause.[64]

Forum Selection Clauses Are Generally Enforceable, and Trial Court Reversibly Erred

in Judicially Noticing Truth of Disputed Facts in Prior Trade Secret Litigation

 

Richtek USA, Inc. v. uPI Semiconductor Corp., 242 Cal. App. 4th 651 (Nov. 24, 2015):

The Sixth District Court of Appeal reversed the trial court’s order granting the defendant’s demurrer to a trade secret plaintiff’s complaint without leave to amend on statute of limitations grounds.  According to the Court of Appeal, “[h]ere, we confront the boundaries of the use of judicially noticed records in ruling on a demurrer.  Utilizing judicially noticed documents in ruling on a demurrer is only proper when the documents are not used to determine disputed factual issues, such as the timing of acquisition of knowledge of the misappropriation of customer information or power supply technology.”[65] 

Appellants Richtek Technology Corporation (“Richtek Technology”), a Taiwan corporation and Richtek USA, Inc. (“Richtek USA”), its California subsidiary (collectively, “Richtek”), sued three of its former employees who resided in Taiwan, James Chang, H.P. Huang and J.C. Chen, and uPI Semiconductor Corporation (“uPI”), a California company that they formed, for trade secret misappropriation.  Richtek Technology designs, markets and sells power management integrated circuit products.  Richtek USA is a subsidiary of Richtek Technology, and has offices in Campbell, California.  uPI is a Taiwanese corporation that also designs, markets, and sells power management integrated circuit products.  Huang, Chang and Chen are Taiwanese citizens who live in Taiwan.  They all are former Richtek Technology employees, who left and went to work for uPI in Taiwan.

The trial court sustained the defendants’ demurrer to Richtek’s complaint on the ground that their claims were barred by the Taiwanese statute of limitations for trade secret misappropriation actions.  The trial court also granted Chen’s motion to dismiss based on a forum selection clause in his employment agreement mandating a Taiwanese forum.

Richtek appealed the trial court’s orders, arguing that the trial court erred in sustaining the defendants’ demurrer because it resolved disputed issues of fact based on information from judicially noticed documents.  In addition, Richtek argued that the trial court erred in granting Chen’s motion to dismiss based on the forum selection clause in his employment agreement with Richtek Technology.

While Richtek Technology employed Chang, Huang and Chen, they were subject to an employment agreement providing: “[The employee] shall bear special confidentiality responsibility for any plans, documents or drawings classified by [Richtek Technology] as confidential . . . and s/he may not disclose such. . . . [¶] . . . [¶]  After leaving the position, [the employee] may not use any research or marketing secret of [Richtek Technology] s/he possessed or became known of.”  With regard to forum selection for resolution of disputes, the employment agreement provides: “Should [the employee] violate the above provisions, s/he is subject to the punishment of removal from the position.  Should [the employee’s] violation involve any . . . disclosure of secrets or any other infringement, which results in losses to [Richtek Technology], [the employee] shall bear any legal liabilities and indemnify [Richtek Technology] for any losses and claims, and relinquish the counterplea right, and agrees that Xinzhu local court shall be the court with governing jurisdiction for first trial.” 

According to Richtek’s complaint (facts assumed true for purposes of ruling on a demurrer), Chang left Richtek Technology in December 2005.  While he was still working for Richtek Technology, he founded uPI to directly compete with Richtek.  He and other former Richtek Technology employees agreed to take Richtek Technology and Richtek USA’s trade secrets.  In order to directly compete with appellants, uPI targeted appellants’ customers in the United States.  Huang, Chang and Chen had regular and systematic contact via e-mail, telephone and in-person meetings with individuals at AMD, Dell, nVidia, Apple and Hewlett Packard (“HP”), some of which occurred in Santa Clara County in California.

Huang, Chang and Chen improperly acquired Richtek’s technical and business trade secrets, including United States customer contacts and customer information.  uPI used that trade secret information to persuade those companies to become uPI’s customers for power controller products designed and manufactured using Richtek’s trade secrets.  Richtek lost customers and sales to uPI, who offered nearly identical products at a lower price.

Richtek Technology filed two prior cases in Taiwan in 2007 related to misappropriation of its trade secrets by the defendant-former employees and their new competing company, uPI.  On July 13, 2007, Richtek Technology filed a criminal complaint in Taiwan seeking prosecution of 11 individuals, including respondents Huang and Chang, who were alleged to be former employees of Richtek Technology and were subsequently employed by uPI.  The complaint alleged a claim for misappropriation of trade secrets belonging to Richtek Technology.   The criminal complaint alleged that at the end of 2005, Huang and Chang left Richtek Technology with confidential information belonging to Richtek Technology and that they illegally used the information for the benefit of uPI.  On September 11, 2007, Richtek Technology filed a civil complaint for patent infringement in Taiwan against uPI and the same 11 individual defendants, including Huang and Chang.  The civil complaint alleged that respondents misappropriated Richtek Technology’s trade secrets in connection with uPI’s products and business in violation of their Richtek Technology employment agreements.

On December 2, 2009, Richtek Technology filed two complaints in the United States alleging patent infringement and trade secret misappropriation: one in the United States International Trade Commission that was terminated on September 9, 2010, and the other in the U.S. District Court for the Northern District of California, alleging patent infringement and trade secret misappropriation against uPI.  On August 19, 2010, Richtek Technology filed a second amended complaint adding Huang, Chang, and Chen as defendants.  On January 3, 2011, the U.S. District Court dismissed the trade secret claim for lack of subject matter jurisdiction and dismissed all claims against Huang, Chang, and Chen for lack of personal jurisdiction.  The U.S. District Court action on the patent and copyright claims remains pending, but is presently stayed.

On January 28, 2011, Richtek Technology and Richtek USA filed the present case, alleging trade secret misappropriation against Huang, Chang, Chen, and uPI.  On October 5, 2011, uPI, Huang, and Chang filed a demurrer to the complaint on the ground that the claims are time-barred under Taiwan’s statute of limitations for trade secret misappropriation.  Concurrent with the demurrer, Huang, Chang, and Chen filed a motion to dismiss based on the forum selection clause in their employment agreements mandating a forum in Taiwan for Richtek Technology’s trade secret claims.  On May 23, 2012, the trial court sustained uPI, Huang, and Chang’s demurrer with leave to amend.  The court granted the defendants’ request to take judicial notice of the Taiwan Trade Secrets Act and Richtek Technology’s criminal and civil complaints that were filed in Taiwan in 2007.  The court determined Richtek Technology’s claims were barred by Taiwan’s two-year statute of limitations for trade secret misappropriation claims, because the Taiwan criminal and civil complaints demonstrate that Richtek Technology had knowledge of the defendants’ alleged misappropriation in 2007.  With regard to Richtek USA’s identical trade secret claims, the court determined under a choice of law analysis that Taiwan’s statute of limitations also applied to bar the misappropriation claims.  The trial court denied Huang, Chang, and Chen’s motion to dismiss based on the forum selection clause in their employment agreements as moot.

On June 4, 2012, Richtek filed an amended complaint adding allegations of recent discoveries of the full scope of the continuing misappropriation of trade secrets.  On July 6, 2012, the defendants again demurred to the amended complaint on the ground that the claims were barred by the Taiwan statute of limitations.  In support of their demurrer, the defendants requested that the trial court take judicial notice of the Taiwan judicial decision in MediaTek v. Mstar, Chong-Fu-Ming-Zi, No.1 Intellectual Property Court of 2012 (“MediaTek”), and its English translation.  On February 8, 2013, the trial court granted the defendants’ request for judicial notice of the MediaTek case as the law of a foreign jurisdiction.  The court sustained the defendants’ demurrer without leave to amend, finding that Richtek’s allegations of recent discoveries of further misappropriation “do not appear to be instances of new misappropriations, but rather, ongoing uses of the trade secrets originally misappropriated from Richtek by its former employees.”  The court went on to state: “None of the new allegations . . . change the fact that Richtek knew of the act of misappropriation and the identity of the liable parties in September 2007 . . . .”  With regard to Richtek USA’s identical trade secret claims, the trial court stated that it saw “no basis to reconsider its conflict of laws analysis from the prior order.”

The court deemed Chang and Huang’s motion to dismiss moot.  The court granted Chen’s motion to dismiss, finding that the forum selection clause in the employment agreement mandated a Taiwanese forum.  The trial court dismissed the defendants from the action, and this appeal followed.

Regarding the timing of Richtek’s discovery of the misappropriation, the amended complaint specifically alleged:

At the time Richtek USA and Richtek Technology first suspected that some trade secrets may have been misappropriated, they had not yet obtained knowledge of the acts which constituted the misappropriation, the role of the person involved in misappropriating the trade secrets; the identity of which specific trade secrets had been misappropriated; the scope of the misappropriation, the identification of all of the products manufactured and sold using the misappropriated trade secrets, some of which had not yet been designed, manufactured or sold, and the extent to which Richtek USA, Richtek Technology and the trade secrets were damaged by the misappropriation, use and sale of these products.  . . .  Richtek USA and Richtek Technology obtained decapped microphotographs of uPI’s uP6201 product sometime in early 2009.  Richtek reviewed and analyzed the microphotographs and learned of the similarities between Richtek’s products and uPI products.  . . .  Richtek USA and Richtek Technology did not become aware of [the defendants’] misappropriation of their files generated to test and verify circuit schematics and layout design files until approximately April 2009.  Accordingly, Richtek USA and Richtek Technology did not suspect that [defendants] had misappropriated their customer information, customer contacts, customer needs, customer requirements, customer purchasing strategies, customer feedback, and solutions provided to customer relating to product samples, evaluation boards, and demonstration boards until approximately October 2009.

The amended complaint contained additional specific allegations regarding other subsequent discoveries of the defendants’ misappropriation.  These included information about Richtek’s “parameters for circuit schematics and layout files,” and their “product engineering specifications and definitions for fabricating power management IC products,” which Richtek did not learn were misappropriated until April 2010, and uPI’s use of Richtek’s trade secret schematics, circuit layouts and design files in its new generation products, which Richtek learned of in November 2011. 

The trial court determined that Taiwan’s two-year statute of limitations for trade secret misappropriation barred Richtek’s claims.  In so holding, the court took judicial notice of the criminal and civil complaints filed in Taiwan in 2007 as records of a United States case.  In reversing the trial court’s order sustaining the defendants’ demurrer without leave to amend, the Court of Appeal stated: “While it was proper for the trial court to judicially notice the Taiwanese complaints as appended to the United States District Court case, it was not proper to use the allegations in those complaints to resolve factual disputes for purposes of the demurrer in this case[66]:

Here, the trial court did not take notice of the existence of the complaints; rather, it used the complaints to resolve the disputed issue of when appellants’ had knowledge of respondents’ misappropriation of trade secrets for purposes of the statute of limitations.  The allegations in the amended complaint, which we must accept as true for purposes of evaluating a demurrer, state that appellants learned of specific misappropriations in 2009, 2010 and 2011.  This is contrary to the allegations in the Taiwanese complaints. In sustaining respondents’ demurrer, the trial court used the allegations in the Taiwan complaints to conclude that appellants had knowledge of respondents’ misappropriation in 2007, and as such, appellants’ claims in this case were time-barred.  This was improper.

The Court of Appeal observed that “a mandatory forum selection clause” “will usually be given effect unless it is unfair or unreasonable,” “a court will normally reject any claims that the chosen forum is unfair or inconvenient,” and “[a] court will usually honor a mandatory forum selection clause without extensive analysis of factors relating to convenience.”[67]  The Court of Appeal observed that the translated phrase “is to be” in the forum selection clause “is unequivocal, and evinces the parties’ intent that the forum selection clause be mandatory.”[68]   Accordingly, the Court of Appeal affirmed the trial court’s ruling that the forum selection clause in the employment agreement between Chen and Richtek Technology is mandatory, and the trial court correctly granted Chen’s motion to dismiss on that separate ground.

Subsequent “Do Not Cold Call” Antitrust Putative Class Action Barred

by Statute of Limitations – But Declining to Enforce Contractual

Forum Selection Provision Based on Language of Clause

 

Ryan v. Microsoft Corp., Case No. 14-CV-04634-LHK, 2015 U.S. Dist. LEXIS 47753 (N.D. Cal. April 10, 2015):

U.S. District Court Lucy Koh, who presided over a similar prior putative class action involving several other technology companies in the Silicon Valley who allegedly conspired not to “poach” each other’s engineers (the “In Re High-Tech Employees Litigation”),[69] ruled that the applicable four-year statute of limitations barred plaintiffs’ antitrust (Sherman Act and Cartwright Act) and unfair competition (Cal. Bus. & Prof. Code § 17200) claims  The plaintiff filed a putative class action against defendant Microsoft Corporation  for alleged violations of state and federal antitrust laws.  Plaintiff Ryan, a resident of California, worked for Microsoft as a Senior Product Manager from April 2007 to September 2012 in Redmond, Washington.  Plaintiff Rau, a resident of Washington, worked for Microsoft as a Lead Systems Engineer Senior from June 2006 to June 2010.  Microsoft is a Washington corporation with its principal place of business in Redmond, Washington. 

As in the prior In Re High-Tech Employees Litigation, the plaintiffs alleged that Microsoft conspired with “several other technology companies” in both a “Do Not Cold Call” agreement and a “Restricted Hiring” agreement.  As observed by Judge Koh in her opinion, “[t]here appears to be significant factual overlap between Plaintiffs’ allegations and the related action In re High-Tech Employees Litigation.”[70]  From 2009 to 2010, the Antitrust Division of the U.S. Department of Justice (“DOJ”) investigated the employment and recruitment practices of various Silicon Valley technology companies, including Adobe Systems, Inc.; Apple, Inc.; Google, Inc.; Intel Corp.; and Intuit, Inc.[71]  In September 2010, the DOJ filed civil complaints against these same technology companies, in addition to Pixar and Lucasfilm.  The DOJ filed its complaint against Adobe, Apple, Google, Intel, Intuit, and Pixar on September 24, 2010.  On December 21, 2010, the DOJ filed another complaint against Lucasfilm and Pixar.  The defendants, including Pixar and Lucasfilm, stipulated to proposed final judgments in which they agreed that the DOJ’s complaints had stated claims under federal antitrust law and agreed to be “enjoined from attempting to enter into, maintaining or enforcing any agreement with any other person or in any way refrain from . . . soliciting, cold calling, recruiting, or otherwise competing for employees of the other person.”[72]  

The High-Tech plaintiffs filed five separate state court actions between May and July 2011.  Following removal, transfer to Judge Koh, and consolidation, the High-Tech plaintiffs filed a consolidated amended complaint on September 13, 2011.[73]  In their complaint, the High-Tech plaintiffs alleged antitrust claims against their employers, claiming that the defendants had conspired “to fix and suppress employee compensation and to restrict employee mobility.”[74]  More specifically, the High-Tech plaintiffs alleged a conspiracy comprised of “an interconnected web of express bilateral agreements.”[75]  One agreement, the “Do Not Cold Call” agreement, involved one company placing the names of the other company’s employees on a “Do Not Cold Call” list and instructing its recruiters not to cold call the employees of the other company.[76]  In addition to the “Do Not Cold Call” agreements, the High-Tech plaintiffs also alleged that Pixar and Lucasfilm entered into express, written agreements to (1) not cold call each other’s employees, (2) to notify the other company whenever making an offer to an employee of the other company, and (3) not to engage in “bidding wars.”[77]  

The plaintiffs’ complaint in this follow-on case contained four claims for relief under: (1) Section 1 of the Sherman Act, 15 U.S.C. § 1; (2) California’s Cartwright Act, Cal. Bus. & Prof. Code § 16720; (3) California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code §§ 17200 et seq.; and (4) California Business & Professions Code §§ 16600 et seq.  Plaintiffs sought damages, pre- and post-judgment interest, attorney’s fees and expenses, and injunctive relief.

In the prior In Re High-Tech Employees Litigation, Judge Koh granted the High-Tech plaintiffs’ supplemental motion for class certification on October 24, 2013.  On November 13, 2013, the High-Tech defendants filed a Rule 23(f) petition with the Ninth Circuit, requesting permission to appeal Judge Koh’s October 24, 2013 class certification order.  The Ninth Circuit denied the defendants’ petition on January 14, 2014.  In the interim, three of the High-Tech defendants, Intuit, Lucasfilm, and Pixar, reached an early settlement with the plaintiffs.  On September 21, 2013, the High-Tech plaintiffs filed a motion for preliminary approval of a proposed class action settlement as to defendants Intuit, Lucasfilm, and Pixar.  On October 30, 2013, Judge Koh preliminarily approved the proposed settlement with Intuit, Lucasfilm, and Pixar.  Judge Koh granted final approval as to that settlement on May 16, 2014, and entered a final judgment as to Lucasfilm, Pixar, and Intuit on June 9, 2014.[78]  

The remaining High-Tech defendants, Adobe, Apple, Google, and Intel, filed individual motions for summary judgment, and joint motions for summary judgment and to strike certain expert testimony on January 9, 2014.  Judge Koh denied the High-Tech defendants’ individual motions for summary judgment on March 28, 2014.  On April 4, 2014, Judge Koh granted in part and denied in part the High-Tech defendants’ motion to strike, and denied the defendants’ joint motion for summary judgment.  

On May 22, 2014, the High-Tech plaintiffs filed a motion for preliminary approval of class action settlement as to the remaining defendants.  On August 8, 2014, Judge Koh denied the High-Tech plaintiffs’ motion for preliminary approval, concluding that the proposed settlement did not fall “within the range of reasonableness.”  On September 4, 2014, the High-Tech defendants filed a petition for a writ of mandamus with the Ninth Circuit.  On January 13, 2015, the High-Tech defendants filed correspondence with the Ninth Circuit referring to a new proposed settlement agreement.  On January 30, 2015, the defendants filed an unopposed motion to dismiss the petition, which the Ninth Circuit granted on February 2, 2015.

On January 15, 2015, the High-Tech plaintiffs filed a motion for preliminary approval of class action settlement as to the remaining defendants.  In this second proposed class action settlement, the parties had reached a settlement amount exceeding the previously rejected settlement by approximately $90.5 million.[79]  Following a fairness hearing on March 2, 2015, Judge Koh granted preliminary approval to the January 2015 settlement agreement on March 3, 2015, and final approval on July 9, 2015.

Plaintiffs in this case filed their complaint on October 16, 2014.  Judge Koh related this action to In re High-Tech Employees Litigation on November 19, 2014.  Microsoft filed motions to transfer venue and to dismiss on December 15, 2014.  In its motion to transfer venue, Microsoft contended that the Court should transfer this action to the Western District of Washington because (1) the plaintiffs’ employment agreements “select the Western District of Washington forum” and (2) the convenience of the parties and witnesses, and the interest of justice favor transfer.

Microsoft contended that the plaintiffs’ employment agreements contain valid forum selection clauses that require them to litigate the action in the Western District of Washington.  In support of its motion to transfer venue based on a forum selection clause, Microsoft relied on two provisions of the plaintiffs’ employment agreements: the noncompetition clause and the forum selection clause:

While employed at MICROSOFT and for a period of one year thereafter, I will not (a) engage in any competitive activities or accept employment by or agree to provide services to any person or entity that engages in competitive activities (“competitive activities” meaning the development, production or provision of any product, service, technology, product feature or project that is or is intended to be competitive with one or more products, services, technologies, product features or projects, including actual or demonstrably anticipated research or development, on which I worked or about which I learned confidential or proprietary information or trade secrets while employed at MICROSOFT or a MICROSOFT subsidiary) . . . .

I agree that this Agreement shall be governed for all purposes by the laws of the State of Washington as such laws apply to contracts performed within Washington by its residents and that exclusive venue and exclusive personal jurisdiction for any action arising out of this Agreement shall lie in state or federal court located in King County, Washington.[80]

Judge Koh first noted that “[a]s a general matter, forum selection clauses covering disputes ‘arising out of’ a contract are narrower than those covering disputes ‘arising out of or relating to’ a contract.”[81]  Where a forum selection clause covers only disputes “arising out of” a contract, the Ninth Circuit has held that the forum selection clause should be “narrowly construed.”[82]  Judge Koh concluded that “[t]hese ‘arising out of’ and ‘arising under’ forum selection clauses apply only to ‘disputes and controversies relating to the interpretation of the contract and matters of performance.’”[83]  “In contrast, a forum selection clause which covers disputes ‘arising out of or relating to’ a contract applies much more broadly, as ‘the inclusion of the phrase ‘relating to’ should lead to a ‘broad[er]’ interpretation.”[84]  

Judge Koh declined to enforce the forum selection clause: “In the instant case, the Court concludes that Plaintiffs’ claims do not ‘arise out of’ Plaintiffs’ employment contracts because whether Defendant violated federal and state antitrust laws does not require interpretation of Plaintiffs’ employment agreements.”[85]  “More specifically,” according to Judge Koh:

Plaintiffs aver that Microsoft engaged in anticompetitive behavior by conspiring with other technology companies to suppress employee compensation and restrict mobility.  It may be the case that Plaintiffs were less likely to have been “poached” as a result of the noncompetition clauses, but that argument alone does not establish that adjudication of Plaintiffs’ claims will require interpretation of their employment agreements.  Microsoft assumes that resolving Plaintiffs’ claims will require a finding that but-for Microsoft’s alleged anticompetitive behavior, Plaintiffs would have taken positions at competing companies in breach of Plaintiffs’ employment agreements.  This straw-man argument is both incorrect and not determinative to the scope of the forum selection clause.  [¶]  Here, Plaintiffs allege that Microsoft participated in a conspiracy which resulted in artificially depressed compensation for all employees at “high technology” companies, and restricted employee mobility because Microsoft and its co-conspirators agreed not to solicit each other’s employees and restricted their hiring practices for certain types of employees.  Whether Microsoft did in fact engage in a conspiracy that had the effect of depressing employee wages and restricting mobility does not require determining whether Plaintiffs’ employment agreements were breached, or the scope of the rights and responsibilities of the parties under Plaintiffs’ employment agreements.  Nor are Plaintiffs’ claims related to the conditions under which Plaintiffs agreed to work for Microsoft.  Rather, Plaintiffs’ claims are based on Microsoft’s alleged illegal conduct that is wholly independent of Plaintiffs’ agreements not to seek employment with a competitor for a period of one year.[86]

Despite denying Microsoft’s motion to transfer venue, Judge Koh granted Microsoft’s motion to dismiss the plaintiffs’ claims under Rule 12(b)(6) of the Federal Rules of Civil Procedure.  Microsoft moved to dismiss the plaintiffs’ complaint on five grounds: (1) the plaintiffs’ claims are time barred; (2) they failed to adequately allege facts supporting their antitrust claims; (3) they failed to plead facts to support the application of California law; (4) they have no right to restitution as a remedy under California’s Unfair Competition Law (“UCL”); and (5) they lacked standing to assert a claim under California Business & Professions Code section 16600.  Judge Koh granted Microsoft’s motion with leave to amend based on its four-year statutes of limitations defense; therefore, the Court did not reach the remainder of Microsoft’s arguments:[87]

Here, Plaintiffs’ claim began to accrue in 2007, when Plaintiff Ryan worked for Microsoft as a Senior Product Manager, and Plaintiff Rau worked for Microsoft as a Lead Systems Engineer Senior.  Plaintiffs further allege that Microsoft entered into the anti-solicitation agreement and restricted hiring agreement “around May 2007.”  Consequently, the four year statute of limitations ran on Plaintiffs’ claim in 2011.  As Plaintiffs filed their complaint on October 16, 2014, Plaintiffs’ claim is time barred unless Plaintiffs have sufficiently alleged that their claim falls within two narrow statute of limitations exceptions or that a tolling doctrine applies.  The Court first addresses the applicability of: (1) an exception for unascertainable damages; and (2) an exception for “continuing violations” by Defendant.  The Court then addresses whether Defendant’s alleged fraudulent concealment should toll the statute of limitations.[88]

Judge Koh rejected the plaintiffs’ arguments that their claims were subject to the two narrow exceptions to the statute of limitations rule, and that Microsoft allegedly “fraudulently concealed” the existence of their claims.

In their First Amended Complaint, the plaintiffs added a new section titled “Statute of Limitations,” which advanced two arguments as to why their claims were timely filed: (1) Microsoft’s conspiracy was a continuing violation of antitrust laws until at least 2013; and (2) Microsoft fraudulently concealed the conspiracy from the plaintiffs until 2013.  Judge Koh then granted Microsoft’s Rule 12(b)(6) motion to dismiss the plaintiffs’ First Amended Complaint with prejudice, concluding that they still had not plead any post-2007 anti-solicitation agreements, and could not avail themselves of any exception to the governing four-year statute of limitations.[89]

Trade Secret Proponent Did Not Take Adequate Steps to Protect Alleged Trade Secrets

McIntyre v. BP Exploration & Prod., Inc., Case No. 3:13-cv-149 RRB, 2015 WL 999092, __ F.3d _____ (D. Alaska Mar. 5, 2015):

In April 2010, an explosion occurred at one of defendant BP’s wells, which resulted in uncontrolled leaking of oil into the surrounding coastal waters.  BP solicited public suggestions to address the well problem.  The plaintiff, Mr. McIntyre, submitted drawings of potential methods to cap the well.   By late July 2010, BP had capped the well.  BP then filed a U.S. Patent Application on the method that it used to cap the well.  After McIntyre did not receive any compensation or credit for his submission, he sued BP for trade secret misappropriation.  The federal district court ruled that even when a formal confidentiality agreement is unreasonable under the circumstances, the trade secret proponent cannot unilaterally create a confidential relationship without the knowledge or consent of the party to whom the proponent voluntarily discloses the alleged trade secret.  The court found that McIntyre failed to put BP on notice of the secrecy of his ideas in his communications with BP. 

This decision should be helpful to defendants in trade secret litigation.  Protecting the alleged secrecy of the trade secret is an essential element of the misappropriation claim.  For example, the trade secret proponent’s failure to place the recipient on notice of the secrecy requirement, failure to insist on NDAs, voluntarily disclosing, publishing on the Internet, sharing with others, etc. can defeat the claim.

 

 

Northern District of California’s “Model Order” for Trade Secrets and Patent Cases

Was Not an Enforceable Court Order for Purposes of Contempt of Court Sanctions

 

Koninklijke Philips N.V. v. Elec-Tech Int’l Co., Case No. 14-cv-02737, 2015 U.S. Dist. LEXIS 145756 (N.D. Cal. Oct. 26, 2015):

This case involves the global market for Light Emitting Diode (“LED”) technology.  The plaintiffs sued 11 defendants, including a Chinese-based competitor, seven subsidiaries, two corporate directors and a former employee for, among other claims, trade secret misappropriation and a violation of the federal Computer Fraud and Abuse Act (the “CFAA”).  U.S. District Judge Beth Labson Freeman previously dismissed the plaintiffs’ complaint with prejudice based on their failure to adequately plead a violation of the CFAA, declining to exercise supplemental jurisdiction over the plaintiffs’ pendent state law claims.[90]  After the plaintiffs re-filed their complaint in state court, the defendants alleged that the plaintiffs violated the Northern District of California’s Stipulated Protective Order for Litigation Involving Patents, Highly Sensitive Confidential Information and/or Trade Secrets (“Model Order”) by using information disclosed through discovery in the prior federal case to draft a state complaint (the “State Complaint”) and impermissibly sharing the information with federal law enforcement personnel or otherwise encouraging the Department of Justice (“DOJ”) to subpoena the defendants’ records.

The defendants argued that the Model Order limits use of documents subject to its terms to “this litigation,” and prohibits distribution beyond “outside counsel, outside experts, and certain court personnel.”  The defendants contended that in filing the State Complaint, the plaintiffs violated both requirements.  In addition, the defendants suggested that plaintiffs and their counsel, the Reed Smith law firm, shared protected information with and colluded with the DOJ to set deadlines that evaded their document destruction obligations under the Model Order.  

Judge Freeman denied the defendants’ motion for contempt sanctions and attorney’s fees, ruling that the Northern District’s Model Order was not an enforceable court order in the first place:

While parties commonly enter into an agreement to protect their confidential information and courts often take on the special role of supervising compliance by approving the agreement as a court order, that did not happen here.  Instead, as discussed at length below, the parties orally agreed to abide by a model order without even determining the application of certain optional terms.  This interim agreement was meant to serve as a stop-gap measure until the parties could agree on a final version.  But the parties never came to an agreement, much less one that the Court elevated to an order.[91]

Judge Freeman also rejected the defendants’ motion for discovery sanctions, either under Rule 37(b) of the Federal Rules of Civil Procedure or under the Court’s “inherent power.”  The Court ruled that a valid court order was a prerequisite to an award of discovery sanctions, and repeated its conclusion that the Model Order was not a valid court order.  The Court ruled that the plaintiffs’ violations, if any, were “technical” and not evidence of bad faith: 

In contrast, the Court finds that Plaintiffs’ violations in this case, if any, were technical and not evidence of bad faith.  Unlike the parties in Haeger,[92] Plaintiffs did not respond to Defendants’ notification regarding the alleged violation by misrepresenting their actions to the Court or Defendants.  Instead, notwithstanding their claim that no violation occurred, Plaintiffs refiled the State Complaint in redacted form.  Similarly, in response to the instant motion, Plaintiffs did not minimize Defendants’ allegations but instead worked to identify for this Court the permissible source for each challenged State Complaint allegation.[93]

The California Uniform Trade Secrets Act Preempts Common Law

Claims Based on the “Same Nucleus of Operative Facts”

 

Lifeline Food Co. v. Gilman Cheese Corp., Case No. 5:15-cv-00034-PSG, 2015 U.S. Dist. LEXIS 64155 (N.D. Cal. May 15, 2015):

After working together for nearly 25 years, the plaintiff, Lifeline Food Co., Inc. (“Lifeline”), and the defendant, Gilman Cheese Corporation, formerly known as Drangle Foods, Inc. (“GCC”), dispute whether GCC misappropriated Lifeline’s proprietary recipes, formulations and processes for making fat-free cheese.  GCC moved to dismiss Lifeline’s claims of false promise fraud, unfair competition and conversion.  U.S. Magistrate Judge Paul S. Grewal granted GCC’s motion to dismiss with leave to amend, finding that, “[a]s written, each of GCC’s claims arise from the same nucleus of operative facts: GCC’s alleged use of trade secrets”; thus, the California Uniform Trade Secrets Act (“CUTSA”) “therefore preempts Lifeline’s unfair competition and conversion claims, and the doctrine of election of remedies bars Lifeline’s false promise claim.”[94]  

The CUTSA supersedes “common law claims that are based on the same nucleus of facts as the misappropriation of trade secret claims for relief,” but “[a]t the same time, the statute ‘does not affect contractual remedies, whether or not based upon misappropriation of a trade secret, other civil remedies that are not based upon misappropriation of a trade secret, or criminal remedies, whether or not based upon misappropriation of a trade secret.”[95]  The test for whether a claim overlaps with the CUTSA involves a factual inquiry, one that examines the conduct alleged in the claim.  Depending on the pleaded facts, the CUTSA can operate to supersede claims for unfair competition and conversion.  Some courts have further held that the CUTSA may supersede “claims based on the misappropriation of information that does not satisfy the definition of trade secret under CUTSA,” when “the basis of the alleged property right is in essence that the information is not . . . generally known to the public,” because then “the claim is sufficiently close to a trade secret claim that it should be superseded.”[96] 

In dismissing the plaintiff’s “false promise” claim, Magistrate Judge Grewal observed: “To a similar end, the doctrine of election of remedies, stemming from the equitable principles of estoppel, prevents alternative and inconsistent remedies based on the same nucleus of operative facts.  The doctrine precludes a plaintiff from pursuing concurrent causes of action based on breach of contract and fraud where each action arises out of the same obligations and the same operative facts.”[97]

The parties enjoyed a long business relationship without incident until 2014, when Lifeline learned that GCC was making fat-free cheese for one of Lifeline’s competitors, Red Apple, LLC.  GCC’s manager acknowledged that it was using the same formulas to create fat-free cheese for Red Apple and for Lifeline, but claimed that GCC had the right to do so because GCC owned the formulas now that the parties’ 1993 contract had expired.  GCC would not give Lifeline the formulas it used to manufacture Lifeline’s fat-free and low fat cheese line.  Lifeline further learned around May 2014 that GCC was advertising its own line of fat-free and reduced-fat cheese on its website.  Based on GCC’s contention that it owns the disputed formulas, as well as the fact that GCC was selling the same varieties of cheeses that it manufactured for Lifeline, Lifeline concluded that GCC was using Lifeline’s formulas to manufacture its own cheese.  Lifeline then sued GCC for misappropriation of trade secrets, breach of contract, promissory fraud, unfair competition, conversion and injunctive and declaratory relief.

GCC moved to dismiss Lifeline’s claims for unfair competition, conversion and promissory fraud.  Magistrate Judge Grewal first observed that “dismissal of an unfair competition claim is proper when the claim is based solely upon allegations that the defendant has misused the plaintiff’s secret or confidential information.[98]  “For instance, in MedioStream, Inc. v. Microsoft Corp., the court dismissed a Section 17200 unfair competition claim under CUTSA because the court saw ‘no difference’ between the plaintiff’s allegation in support of its unfair competition claim that defendants used ‘[p]laintiff’s [t]rade [s]ecrets and other confidential and property information . . . with deliberate intent to injure [p]laintiff’s business and improve their own business and/or financial status’ and the allegations that ‘form the basis of [plaintiff’s] trade secrets claim.”[99]   Magistrate Judge Grewal followed other federal district court decisions in concluding that the CUTSA preempted Lifeline’s unfair competition claim:

Like the unfair competition claims at issue in MedioSteam and NetApp, CUTSA preempts Lifeline’s unfair competition claim because the claim is based solely upon GCC’s alleged misuse of Lifeline’s trade secrets.  In its complaint, Lifeline supports its unfair competition claim by incorporating the entirety of the allegations made in support of its misappropriation of trade secrets claim.  Lifeline further alleges that GCC’s “misappropriation of trade secrets . . . constitutes unlawful, unfair and fraudulent business practice.”  Lifeline’s unfair competition claim thus “rests squarely on its factual allegations of trade secret misappropriation” because Lifeline alleges as a “factual basis for its [unfair competition claim] . . . the same conduct that gives rise to [its] trade secrets claim.”[100]

Magistrate Judge Grewal next concluded that the CUTSA preempted Lifeline’s conversion claim, which “arise[s] from the same nucleus of operative facts” as its trade secret claim: “Lifeline supports its conversion claim by incorporating the same facts that form the basis of its trade secret claim and alleging that GCC ‘intentionally and substantially interfered with [p]laintiff’s [t]rade [s]ecrets by using said [t]rade [s]ecrets’ without Lifeline’s permission.  Lifeline’s conversion claim therefore is not factually distinct from its trade secret claim because both claims are based on GCC’s alleged use of the same recipes, formulas and manufacturing processes.”[101]  

Magistrate Judge Grewal similarly rejected Lifeline’s argument that its conversion claim was based upon a property right “outside of trade secrets law” because its series of contracts with GCC provide Lifeline with a contractual right to the disputed formulas, recipes and processes.  Lifeline argued that by alleging that the contracts establish that “the recipes and manufacturing processes belonged to Lifeline,” Lifeline had asserted “some other basis in . . . law [separate from trade secret law] on which to predicate the requisite property right” necessary to state a claim for conversion, such as goodwill property.”[102]  “However,” Magistrate Judge Grewal reasoned, “Lifeline’s contention that its conversion claim is grounded in both contract and trade secret law does not negate the fact that both claims are based on GCC’s allegedly improper use of the same recipes, processes and formulas.”[103]

Magistrate Judge Grewal distinguished the leading anti-CUTSA preemption case, Angelico Textile Services, Inc. v. Park,[104] where the California Court of Appeal observed that the CUTSA “by its terms does not displace a contract claim, even if it is based on the misappropriation of a trade secret,” and that the CUTSA did not preempt a claim for conversion of documents that were not trade secrets.[105]  “[U]nlike Angelico, Lifeline does not allege facts claiming that GCC converted property other than the alleged trade secrets.”[106]

Finally, Magistrate Judge Grewal found that the doctrine of election of remedies barred Lifeline’s false promise claim because it arose out of the same obligations and operative facts as Lifeline’s breach of contract claim: “Lifeline’s promissory fraud claim is premised upon GCC’s allegedly false promise to comply with its contractual obligation to provide Lifeline with ownership of the disputed recipes, formulas and processes.”[107]

“Defend Trade Secrets Act of 2015” Introduced in Congress (H.R. 3326; S. 1890)

These new bills [https://www.congress.gov/bill/114th-congress/house-bill/3326/text] aim to address some of the criticism leveled at a prior version of a federal trade secrets law, the “Defend Trade Secrets Act” (the “DTSA”) introduced in the 2014 session of Congress.[108]  The House (H.R. 3326) and Senate (S. 1890) versions of the DTSA are identical.  The DTSA amends chapter 90 of 18 U.S.C. (“Economic Espionage Act” or “EEA”), which relates to the protection of trade secrets but currently includes only criminal provisions.  The DTSA amends Section 1836, renamed as “Civil Proceedings,” to add forms of civil relief by replacing subsection (b) with new provisions under the heading “Private Civil Actions.”  First, upon ex parte application, it provides for a seizure of property necessary to prevent the propagation or dissemination of the trade secret at issue.  Second, it provides for an injunction or damages at the conclusion of the action.  It then amends Section 1839 (definitions) to add definitions for “misappropriation” and “improper means.”  It requires a biannual report by the Attorney General on the “theft” of trade secrets outside the U.S., opining on the “sense of Congress” that trade secret theft in and outside the U.S. harms trade secret owners and their employees. 

A trade secret owner can bring a civil action under the DTSA “if the person is aggrieved by a misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.”  The DTSA expressly does not preempt any law.  Thus, the DTSA will exist alongside existing state law, even for cases that may also be brought under the DTSA.  Section 2(b)(2)(A) of the DTSA permits a court to issue an ex parte order providing for the seizure of property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action” when the court finds that it “clearly appears from specific facts” that:

A temporary restraining order issued pursuant to Rule 65(b) of the Federal Rules of Civil Procedure would be inadequate;

An immediate and irreparable injury will occur absent seizure;

The harm to the applicant outweighs the harm of the one against whom seizure would be ordered (opponent) and significantly outweighs the harm to any third parties;

The applicant is likely to show that (i) the information is a trade secret, (ii) the opponent misappropriated the trade secret by improper means or conspired to use improper means to do so, and (iii) the opponent possesses the trade secret;

The application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, the location of the matter to be seized;

The opponent or persons acting in concert therewith would destroy, hide, or otherwise make the matter inaccessible to the court if on notice; and

The applicant has not publicized the requested seizure.

The court “may” issue a seizure order if the applicant satisfies the above requirements.  The DTSA sets forth specific requirements for the seizure order itself, which include providing the narrowest seizure necessary, restricting (although not necessarily entirely) access by the applicant, setting a date for a hearing no later than seven days after the order issues, and requiring the party seeking seizure to provide security for the payment of damages resulting from wrongful or excessive seizure or attempted seizure.  The court also must protect the opponent from publicity about the order, secure the seized material from physical and electronic access, and order that service of the seizure order and the seizure be made by a federal, state, or local law-enforcement officer.  At the seizure hearing, the party obtaining the order has the burden to prove that facts “necessary to support the order” are still in effect.  If the party cannot do so, the seizure order will be dissolved or modified appropriately.  The opponent may move the court at any time to dissolve or modify the order after giving notice to the obtaining party.  A party who suffers damage by reason of a wrongful or excessive seizure has a cause of action against the obtaining party and is entitled to the same relief as provided under Section 34(d)(11) of the Trademark Act of 1946 (the Lanham Act), which provides that the party is entitled to “relief as may be appropriate, including damages for lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney’s fee.”

The DTSA provides a five-year statute of limitations from the date the misappropriation is discovered or should have been discovered through reasonable diligence.  The DTSA provides for an injunction and damages.  A court may grant an injunction to prevent any actual or threatened misappropriation, provided that it does not prevent a person from accepting an offer of employment on terms that avoid actual or threatened misappropriation.  In “exceptional circumstances that render an injunction inequitable,” a court may condition future use of the trade secrets upon the payment of a reasonable royalty.  For past harm, the court may award damages for actual loss and any unjust enrichment not addressed in damages for actual loss.  In lieu of such damages, a court may award damages measured by a reasonable royalty for the unauthorized use.

The DTSA also provides a court with specific authority to punish either side for egregious behavior, beyond a court’s existing authority to do so.  For example, like the CUTSA,[109] if the trade secret is “willfully and maliciously misappropriated,” a court may award exemplary damages up to triple the amount of actual damages awarded and may award reasonable attorneys’ fees.  If a claim of misappropriation is “made in bad faith,” or a motion to terminate an injunction is made or opposed in bad faith, a court may also award reasonable attorneys’ fees to the prevailing party.

The DTSA adds definitions for “misappropriation” and “improper means” to the existing definition of “trade secret” in 18 U.S.C. section 1839(3) (part of the federal Economic Espionage Act).[110]  Similar to the existing definition in the CUTSA, the DTSA defines “misappropriation” as acquisition of a trade secret by a person who has reason to know it was acquired by improper means, or the disclosure or use of a trade secret without consent under various circumstances involving improper acquisition or violation of a duty to maintain secrecy:

(A)  acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(B)  disclosure or use of a trade secret of another without express or implied consent by a person who—

(i)  used improper means to acquire knowledge of the trade secret;

(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—

  • derived from or through a person who had used improper means to acquire the trade secret;
  • acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
  • derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or

(iii) before a material change of the position of the person, knew or had reason to know that—

(I)        the trade secret was a trade secret; and

(II)      knowledge of the trade secret had been acquired by     accident or mistake.

 

The DTSA defines “improper means” to include theft, bribery, misrepresentation, breach, or inducement of a breach to maintain secrecy, or espionage.”  It expressly “does not include reverse engineering or independent derivation.”

A vote on either of the two identical versions of the DTSA is not expected until mid-2016.

 

*  By Tyler M. Paetkau, Hartnett, Smith & Paetkau, Redwood City, California (tpaetkau@hslawoffice.com).  Tyler represents employers in all aspects of employment and labor law, including counseling and litigation regarding trade secrets and unfair competition.  Tyler would like to thank his Paralegal, Yveline Coulond, for her invaluable assistance in the preparation of this article.

[1]  782 F.3d at 1084-86, 1093-94.

[2]  Id. at 1093-94 (italics added).

[3]  Id. at 1088-89. 

[4]  Id. at 1090-92.

[5]  Id. at 1093-94

[6]  Id. at 1093-94.

[7]  See Banaga v. Taylor Bean Mortgage Co., No. 11-4007 JSC, 2011 U.S. Dist. LEXIS 122804, 2011 WL 5056985, at *4 (N.D. Cal. Oct. 24, 2011) (finding that plaintiff failed to state a claim when plaintiff’s amended complaint contradicted plaintiff’s earlier pleadings).  Moreover, the court found that the documents NetApp cites in its sur-reply do not support NetApp’s claim that Reynolds is in fact an employee of Nimble.  The court also rejected NetApp’s attempts to plead that Nimble AU was the “alter ego” of Nimble, finding NetApp’s allegations typical of a parent-subsidiary relationship, as well as NetApp’s insufficient allegations of a “civil conspiracy” between Nimble AUS and Nimble to support vicarious liability for Reynolds’ alleged actions. 

[8]  LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1131 (9th Cir. 2009) (citing 18 U.S.C. § 1030(a)(1)-(7)).

[9]  18 U.S.C. § 1030(a)(5).

[10] 18 U.S.C. § 1030(e)(8).

[11]  See, e.g., Capitol Audio Access, Inc. v. Umemoto, 980 F. Supp. 2d 1154, 1157-58 (E.D. Cal. 2013) (rejecting claim that “access to a publication and the disclosure of its information satisfies the CFAA’s definition of damage”); Garelli Wong & Associates, Inc. v. Nichols, 551 F. Supp. 2d 704, 710 (N.D. Ill. 2008) (where information has been misappropriated through the use of a computer, “we do not believe that such conduct alone can show ‘impairment to the integrity or availability of data, a program, a system, or information’”) (quoting 18 U.S.C. § 1030(e)(8)); Landmark Credit Union v. Doberstein, 746 F. Supp. 2d 990, 993 (E.D. Wis. 2010) (allegation that “defendant accessed and disclosed information from Landmark’s computer” does not plead a cognizable claim of “damage”); U.S. Gypsum Co. v. Lafarge N. Am. Inc., 670 F. Supp. 2d 737, 743-44 (N.D. Ill. 2009) (“Plaintiff does not contend that Spear destroyed USG data.  Rather, it alleges he disclosed USG data improperly.  This does not constitute damage under the CFAA.”); Motorola, Inc. v. Lemko Corp., 609 F. Supp. 2d 760, 769 (N.D. Ill. 2009) (where only harm alleged is disclosure to competitor of confidential information, “[t]he CFAA’s definition of damage does not cover such harm”); New S. Equip. Mats, LLC v. Keener, 989 F. Supp. 2d 522, 530 (S.D. Miss. 2013) (“[T]he mere copying of electronic information from a computer system is not enough to satisfy the CFAA’s damage requirement”) (internal quotation marks omitted); Del Monte Fresh Produce, N.A., Inc. v. Chiquita Brands Int’l Inc., 616 F. Supp. 2d 805, 811 (N.D. Ill. 2009) (copying electronic files from a computer database – even when the former employee e-mails those files to competitor – is not enough to satisfy the damage requirement of CFAA); Lockheed Martin Corp. v. Speed, No. 6:05-CV-1580-ORL-31, 2006 U.S. Dist. LEXIS 53108, 2006 WL 2683058, at *8 (M.D. Fla. Aug. 1, 2006) (“copying of information from a computer onto a CD or PDA is a relatively common function that . . . does not” constitute a claim of damage under CFAA); Worldspan, L.P. v. Orbitz, LLC, No. 05 C 5386, 2006 U.S. Dist. LEXIS 26153, 2006 WL 1069128, at *5 (N.D. Ill. Apr. 19, 2006) (given CFAA’s definition of “damage” and “integrity,” “we reject Worldspan’s argument that the mere ‘taking of information’ constitutes ‘damage’ under the CFAA”); see also NovelPoster v. Javitch Canfield Grp., No. 13-CV-05186-WHO, 2014 U.S. Dist. LEXIS 155445, 2014 WL 5594969, at *6 (N.D. Cal. Nov. 3, 2014) (recognizing “the mere copying of data is not enough” to state claim of damage under CFAA).

[12]  See, e.g., Del Monte Fresh Produce, 616 F. Supp. 2d at 811 (no cognizable claim of “damage” under CFAA where  former employee e-mails former employer’s files to competitor); Keener, 989 F. Supp. 2d at 530 (no cognizable claim of “damage” under CFAA where  former employee copied employer’s information to external hard drive and shared it with competitor); Speed, 2006 U.S. Dist. LEXIS 53108, 2006 WL 2683058, at *8 (no cognizable claim of “damage” under CFAA where former employees copied employer’s information to CDs and personal digital assistants to give to competitor).

[13]  See Worldspan, 2006 U.S. Dist. LEXIS 26153, 2006 WL 1069128, at *5; see also Resdev, 2005 U.S. Dist. LEXIS 19099, 2005 WL 1924743, at *5 (“integrity . . . ordinarily means ‘wholeness’ or ‘soundness’”).

[14]  United States v. Nosal, 676 F.3d 854, 857 (9th Cir. 2012) (en banc).

[15]  SunPower, 2012 U.S. Dist. LEXIS 176284, 2012 WL 6160472, at *5 (“In order for the taking of information to constitute wrongdoing, the information must be property.  Information is not property unless some positive law makes it so.”) (internal quotation marks omitted); Silvaco, 184 Cal. App. 4th at 239 n.22 (if allegedly taken information is not “made property by some provision of positive law,” then it “belongs to no one, and cannot be converted or stolen”).

[16]  Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324, 1337 (9th Cir. 1980); see also ReadyLink, 126 Cal. App. 4th at 1019 (noting that although “mere solicitation” of employee to “leave and associate with a competing firm is not illegal,” it likely violated CUTSA where soliciting party used “misappropriated trade secret information to solicit ReadyLink’s employees”).

[17]  See ReadyLink, 126 Cal. App. 4th at 1020 (publicly available information regarding plaintiff’s lists of hospitals and nurses may receive trade secret protection because there was “substantial evidence establishing that ReadyLink’s lists of hospitals and nurses . . . were procured by substantial time, effort, and expense”).

[18]  K.C. Multimedia, Inc., 171 Cal. App. 4th at 954-58.

[19]  2015 U.S. Dist.LEXIS 11406 at *67-*69.  NetApp alleged that Nimble engaged in unfair competition by, inter alia, “encouraging its employees who work in its Australian sales office, including Reynolds,” to access NetApp’s “compilation of non-confidential copyright protected NetApp training and other materials.”  To the extent that NetApp alleges that Nimble violated unfair competition law by infringing NetApp’s copyright, such a claim would be subject to preemption under the Copyright Act.  See Kodadek v. MTV Networks, Inc., 152 F.3d 1209, 1212 (9th Cir. 1998) (claim of unfair competition under California law preempted by Copyright Act if (1) rights at issue are equivalent to those protected by Copyright Act, and (2) work involved falls within subject matter of Copyright Act).

[20]  Id. at *69

[21]  Id. at 26-27.

[22]  Id. at 27.

[23]  See 28 U.S.C. § 1367(a) (federal court may exercise supplemental jurisdiction over state-law claims that are “so related to claims in the action within [the court’s] original jurisdiction that they form part of the same case or controversy”).  

[24]  2015 U.S. Dist. LEXIS 11406 at *79-*80.

[25]  Id. at *79-*80

[26]  Id. at *83-*84

[27]  Id. at 51 (citing eBay v. Digital, 608 F. Supp. 1156, 1164 (N.D. Cal. 2009); and Multiven v. Cisco, 725 F. Supp. 2d 887, 892 (N.D. Cal. 2010)).

[28]  In SunPower Corp. v. SunEdison Inc., 2015 U.S. Dist. LEXIS 121587 (N.D. Cal. Sept. 11, 2015) and Eriki v. Freedman, 2014 U.S. Dist. LEXIS 9169 (N.D. Cal. Jan. 23, 2014), for example, the Northern District dismissed CFAA claims in employee trade secret misappropriation cases where the access occurred during employment. 

[29]  See LVRC v. Brekka, 581 F.3d 1127 (9th Cir. 2009).  Note that this is not the case under California Penal Code section 502.  See Facebook v. Power Ventures, 2010 U.S. Dist. LEXIS 93517 (N.D. Cal. July 20, 2010) (claims under Cal. Penal Code § 502 are limited to those in which there was circumvention of technical or code-based barriers).

[30]  238 Cal. App. 4th at 207-08.

[31]  238 Cal. App. 4th at 213-14.

[32]  Id. at 214.

[33]  Id. at 205.

[34]  Id. at 207.

[35]  Id. at 211.

[36]  Id. at 214.

[37]  236 Cal. App. 4th at 247.

[38]  Id. at 253.

[39]  Id. at 254 (citing Heather Farms, 21 Cal. App. 4th at p. 1574.)

[40]  Id. at 255.

[41]  Id. at 264 (citing Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1458 (2002) and PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir.1995)).

[42]  Id. at 265 (citing Whyte, 101 Cal. App. 4th at 1461-62). 

[43]  2015 U.S. Dist. LEXIS 24986 at *7 (citing Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. Of Tex., 134 S. Ct. 568, 579, 187 L. Ed. 2d 487 (2013) (internal quotation omitted)).

[44]  Id. at 581.

[45]  Id. at 579, 582; see also Bayol v. Zipcar, Inc., No. 14-cv-02483-TEH, 2014 U.S. Dist. LEXIS 135953, 2014 WL 4793935, at *1 (N.D. Cal. Sept. 25, 2014).

[46]  2015 U.S. Dist. LEXIS 24986 at *9.

[47]  Citing Doe 1 v. AOL LLC, 552 F.3d 1077, 1083 (9th Cir. 2009) (quoting M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 17, 92 S. Ct. 1907, 32 L. Ed. 2d 513 (1972)).

[48]  Id. (quoting Bremen, 407 U.S. at 15).

[49]  See, e.g., Jones v. GNC Franchising, Inc., 211 F.3d 495, 497-98 (9th Cir. 2000) (finding forum selection clause invalid because California policy at issue under California Business and Professions Code section 20040.5 specifically provided that California franchisees were entitled to a California venue for franchise agreement suits); Monastiero v. appMobi, Inc., No. C 13-05711 SI, 2014 U.S. Dist. LEXIS 67202, 2014 WL 1991564, at *6 (N.D. Cal. May 15, 2014) (rejecting plaintiff’s arguments based on California’s policy for “full and prompt payment of an employee’s earned wages,” a non-venue policy, because plaintiff did not show a total foreclosure of claims in transferee forum irrespective of private interest factors).

[50]  See E. Bay Women’s Health, Inc. v. gloStream, Inc., No. C 14-00712 WHA, 2014 U.S. Dist. LEXIS 55846, 2014 WL 1618382, at *3 (N.D. Cal. April 21, 2014) (rejecting consideration of California’s public policy against deceptive business practices under the Unfair Competition Act because “the transferee court may decide to apply the substantive law sought by plaintiffs” and plaintiffs “failed to identify a fundamental policy underlying California’s Unfair Competition Act that relates to venue”) (emphasis in original); Voicemail Club, Inc. v. Enhanced Servs. Billing, Inc., No. C 12-02189 SI, 2012 U.S. Dist. LEXIS 146178, 2012 WL 4837697, at *3-4 (N.D. Cal. Oct. 10, 2012) (rejecting plaintiff’s arguments based on California policies under California Civil Code sections 1542, 1668, and 1717 because “the Court only examines public policy as it relates to venue”); Hegwer v. Am. Hearing & Assocs., No. C 11-04942 SBA, 2012 U.S. Dist. LEXIS 24313, 2012 WL 629145, at *3 (N.D. Cal. Feb. 27, 2012) (rejecting plaintiff’s argument because plaintiff failed to identify a specific California policy and concluding that any such policy must be related to the forum selection clause itself given that no foreclosure of remedy would exist in the transferee forum); Gamayo v. Match.com, No. C 11-00762 SBA, 2011 U.S. Dist. LEXIS 95914, 2011 WL 3739542, at *6 (N.D. Cal. Aug. 24, 2011) (rejecting plaintiff’s policy argument concerning the California Legal Remedies Act because plaintiff failed to show a total foreclosure of remedy in Texas); Besag v. Custom Decorators, Inc., No. C 08-05463 JSW, 2009 U.S. Dist. LEXIS 13582, 2009 WL 330934, at *3-4 (N.D. Cal. Feb. 10, 2009) (refusing to consider a strong public policy of “providing damages to employees who have been deprived of their meal and/or rest periods” under California Labor Code section 226.7(b) because “Besag presents no evidence that the public policy underlying her claim expressly related to venue”).

[51]  2014 U.S. Dist. LEXIS 128054, 2014 WL 4477349, at *6, *9.

[52]  2014 U.S. Dist. LEXIS 128054, [WL] at *8.

[53]  Id. (citing Besag, 2009 U.S. Dist. LEXIS 13582, 2009 WL 330934, at *3-4).

[54]  Hartstein v. Rembrandt IP Solutions, LLC, No. 12-2270 SC, 2012 U.S. Dist. LEXIS 105984, 2012 WL 3075084, at *6 (N.D. Cal. July 30, 2012). The plaintiff argued that enforcing the forum selection clause would contravene California’s public policy against covenants not to compete under section 16600 and that the transferee forum, unlike California, upholds such covenants.  2012 U.S. Dist. LEXIS 105984, [WL] at *1, *5.  The court found that the “problem with Plaintiff’s argument is that it does not challenge the reasonableness of the forum selection clause itself, only the reasonableness of its effect.”  Id.  The argument, if accepted, forces the court to “make a determination of the potential outcome of the litigation on the merits in the transferee forum and whether that outcome would conflict” with California policies.  Id.  It asks for an overly complex analysis of “detailed speculation.”  The court then limited its analysis only to whether the forum selection clause itself was contrary to California law or policy and found that the forum selection clause was valid.  2012 U.S. Dist. LEXIS 105984, [WL] at *6.  In Universal Operations Risk Management, LLC v. Global Rescue LLC, No. C 11-5969 SBA, 2012 U.S. Dist. LEXIS 94740, 2012 WL 2792444, at *4 (N.D. Cal. July 9, 2012), a third judge in the Northern District found a forum selection clause valid in a case challenging a covenant not to compete.  The plaintiffs argued that enforcing the forum selection clause would violate California’s policy against covenants not to compete under Section 16600 and that the transferee forum, unlike California, upholds such covenants.  2012 U.S. Dist. LEXIS 94740, [WL] at *4, *6.  The court enforced the forum selection clause, concluding that plaintiffs only “speculate as to how a Massachusetts court may rule on the choice of law clause” and “do not directly challenge the forum selection clause itself.”  Id.

[55]  See Meyer v. Howmedica Osteonics Corp., No. 14CV2496 AJB (NLS), 2015 U.S. Dist. LEXIS 20110, 2015 WL 728631, at *11-12 (S.D. Cal. Feb. 19, 2015) (transferring the case to New Jersey despite a non-compete provision and rejecting plaintiff’s policy arguments based on Business and Professions sections 16600 and 17200 because “the Court does not find that the forum selection clause in the Employment Agreement itself [as opposed to its effect due to choice of law] contravenes California public policy”); see also Swenson v. T-Mobile United States, Inc., 415 F. Supp. 2d 1101, 1103 (S.D. Cal. 2006).  As the court in Swenson explained, the plaintiff mounted “no direct challenge to the forum selection clause itself, but only to its effect.”  415 F. Supp. 2d at 1103-04, 1105.  Even after a court in Washington heard the case, applied Washington laws, and ruled against the California plaintiff, the court stated:

 

While the Court notes that a Washington court’s application of Washington law to the matter at hand may arguably lead to a result conflicting with the provisions of § 16600, Swenson was free to, and in fact, did argue for the application of California law.  The fact that the Washington court ruling resulted in a decision unfavorable to Swenson does not mandate a finding that the clause requiring the case be litigated in Washington is invalid.  Notwithstanding Swenson’s contention that forum states apply their own law in “virtually every case,” the Washington court could have applied California law if it found application appropriate.  The Washington court dutifully considered whether to apply Washington or California law to the agreement in question and its determination was based on an application of each state’s choice of law standards. 

 

Id. at 1104.  The court then noted that if “Swenson’s argument were correct, forum selection clauses would be largely meaningless as it would depend on who filed first and whether that forum’s law was more favorable to them.”  Id. at 1105.

[56]  See Mazzola v. Roomster Corp., No. CV 10-5954 AHM (JCGx), 2010 U.S. Dist. LEXIS 127879, 2010 WL 4916610, at *3 (C.D. Cal. Nov. 30, 2010) (refusing to consider a California policy favoring class actions under Consumer Legal Remedies Act because “Plaintiff is free to pursue remedies in federal court in New York” and “is free to argue for application of California law”); Billing v. CSA-Credit Solutions of Am., Inc., No. 10-cv-0108 BEN (NLS), 2010 U.S. Dist. LEXIS 63314, 2010 WL 2542275, at *4 (S.D. Cal. June 22, 2010) (rejecting policy arguments unrelated to venue because there “is no reason to believe that Texas courts will not or cannot entertain Plaintiff’s choice of law arguments or that they cannot apply California law”).

[57]  See, e.g., Fab'rik Boutique, Inc. v. Shops Around Lenox, Inc., 329 Ga. App. 21, 25, 763 S.E.2d 492, 495 (2014).

[58]  Atlantic Marine Const. Co., Inc., 134 S. Ct. at 582.

[59]  Id. at 581-82.

[60]  Id. at 581, n. 6 (internal quotation omitted).

[61]  Id. at 581, 582.

[62]  As the Supreme Court noted in Atlantic Marine, “convenience” and expense are private interests that “weigh entirely in favor of the preselected forum.”  Id. at 582-83; see also Monastiero, 2014 U.S. Dist. LEXIS 67202, 2014 WL 1991564, at *5 (finding that “practical problems” that are “related to making trial of a case easy, expeditious and inexpensive” have been “deemed private interest factors that may not be considered”).

[63]  Atlantic Marine Const. Co., Inc., 134 S. Ct. at 584.  “As in Atlantic Marine, plaintiffs here do not identify any ‘exceptionally arcane features’ of California’s Unfair Competition Law or Business and Professions Code “that are likely to defy comprehension by a federal judge sitting in” Georgia.  Id.

[64]  See Atlantic Marine Const. Co., Inc., 134 S. Ct. at 582-83.

[65]  242 Cal. App. 4th at 654.

[66]  Id. at 660 (citing Cal. Evid. Code §§ 452, 453; “In ruling on a demurrer, a court may consider facts of which it has taken judicial notice.  (Code Civ. Proc. § 430.30, subd. (a).)  This includes the existence of a document.  When judicial notice is taken of a document, however, the truthfulness and proper interpretation of the document are disputable.  [Citation.]”  (StorMedia, Inc. v. Superior Court, (1999) 20 Cal.4th 449, 457, fn. 9)).

[67]  Id. at 661 (citing and quoting Berg v. MTC Electronics Technologies Co., 61 Cal. App. 4th 349, 358-59 (1998)).

[68]  Id. at 662 (citing Lu v. Dryclean--U.S.A. of California, Inc., 11 Cal. App. 4th 1490, 1492 (1992) (“[a]ny and all litigation that may arise as a result of this Agreement shall be litigated in Dade County, Florida”); CQL Original Products, Inc. v. National Hockey League Players’ Ass’n., 39 Cal. App. 4th 1347, 1352 (1995) (“any claims . . . shall . . . be prosecuted in the appropriate court of Ontario [Canada]”); Cal-State Business Products & Services, Inc. v. Ricoh, 12 Cal. App. 4th 1666, 1672, fn. 4 (1993) (“[A]ny appropriate state or federal district court located in the Borough of Manhattan, New York City, New York shall have exclusive jurisdiction over any case of controversy arising under or in connection with this Agreement”)).

[69]  See Tyler M. Paetkau and Olga Savage, “Silicon Valley Giants Victims of their Own Success:  DOJ Claims Otherwise Lawful ‘No Cold Calling’ Agreements Among Tech Heavyweights Violate the Sherman Antitrust Act,” Bender’s California Labor & Employment Law Bulletin, Vol. 2011, No. 1 at p.1 (Jan. 2011).

[70]  See Northern District of California Case No. No. 11-CV-02509-LHK.

[71]  See In re High-Tech Emple. Antitrust Litig., 856 F. Supp. 2d 1103, 1109 (N.D. Cal. 2012).

[72]  856 F. Supp. 2d at 1109-10 (quoting Adobe Proposed Final Judgment at 5).  The D.C. District Court entered the stipulated proposed final judgments in March and June 2011.  Id.

[73]  Id. at 1113.

[74]  Id. at 1108.

[75]  Id. at 1110.

[76]  Id. at 1092 (citing Chamberlain v. Augustine, 172 Cal. 285, 156 P. 479 (1916)).

[77]  Id. at 1111.

[78]  At the request of Intuit, the Court entered an amended final judgment on June 20, 2014.  No. 11-2509, ECF No. 947.

[79]  Id. at 1.

[80]  Ryan v. Microsoft, 2015 U.S. Dist. LEXIS 47753, at *16 (emphasis added).

[81]  Ryan v. Microsoft, 2015 U.S. Dist. LEXIS 47753, at *16 (citing Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir. 1983)).

[82]  Id. (citing Cape Flattery Ltd. v. Titan Maritime, LLC, 647 F.3d 914, 922 (9th Cir. 2011)).

[83]  Id. at *16-*17 (citing Mediterranean Enters., 708 F.2d at 1464).

[84]  Id. at * 17 (citing Perry v. AT&T Mobility LLC, No. C 11-01488 SI, 2011 U.S. Dist. LEXIS 102334, 2011 WL 4080625, at *4 (N.D. Cal. Sept. 12, 2011) (quoting Cape Flattery, 647 F.3d at 922-23).

[85]  Id. at *17.

[86]  Id. at *19-*20 (citations omitted; citing Hopkins & Carley, ALC v. Thomson Elite, No. 10-CV-05806-LHK, 2011 U.S. Dist. LEXIS 38396 2011 WL 1327359, at *6 (N.D. Cal. Apr. 6, 2011) (plaintiff’s claims “arose under” contract where the claims required “interpretation of the obligations [defendant] owed [plaintiff] under the contract, the services [defendant] agreed to perform under the contract, and the product and services [plaintiff] contracted to receive”).  Judge Koh went on to analyze whether certain “private” and “public” factors supported Microsoft’s motion to transfer the case to the Western District of Washington, observing “that the significant overlap between Plaintiffs’ claims in the instant action and the related action High-Tech weigh against transfer.”  See, e.g., FTC v. Watson Pharms., Inc., 611 F. Supp. 2d 1081, 1089 (C.D. Cal. 2009) (familiarity with underlying facts weighed against transfer).  Judge Koh “therefore conclude[d] that Defendant Microsoft has failed to carry its burden of showing that transfer of venue to the Western District of Washington is warranted in the instant action.  Viewing the totality of the circumstances, the Court concludes that while this action could have been brought in the Western District of Washington, the interest of justice and the convenience of the parties do not call for transfer of the instant action to Washington.  Accordingly, Microsoft's motion to transfer venue is denied.”  2015 U.S. Dist. LEXIS 47753, at *20-*30.

[87]  Id. at *33.

[88]  Id. at *37-*38 (citations omitted).

[89]  Ryan v. Microsoft Corp., Case No, 14-CV-04634-LHK, 2015 U.S. Dist. LEXIS 158944 (N.D. Cal. Nov. 23, 2015).

[90]  Koninklijke Philips N.V. v. Elec-Tech Int’l Co., Case No. 14-cv-02737-BLF, 2015 U.S. Dist. LEXIS 35285 (N.D. Cal. March 20, 2015).

[91]  2015 U.S. Dist. LEXIS 145756, at *6-*7.  Judge Freeman concluded: “Thus, while the parties may have entered into an agreement and Defendants might choose to pursue a breach of contract claim, Defendants have failed to show that a court order exists.  As a result, Defendants’ motion fails on the first prong of the contempt inquiry: there is no court order for the Plaintiffs to violate.”  Id. at *8-*9.

[92]  Haeger v. Goodyear Tire & Rubber Co., 793 F.3d 1122 (9th Cir. 2015).

[93]  Id. at *15-*16.

[94]  2015 U.S. Dist. LEXIS 64155 at *2.

[95]  Id. at *3.

[96]  See, e.g., MedioStream Inc. v. Microsoft Corp., 869 F.Supp.2d 1095, 1116 (N.D. Cal. 2012) (dismissing unfair competition claim and conversion claim); SunPower Corp. v. SolarCity Corp., Case No. 5:12-cv-00694-LHK, 2012 U.S. Dist. LEXIS 176284, 2012 WL 6160472, at *7 (N.D. Cal. Dec. 11, 2012) (dismissing conversion claim); Axis Imex, Inc. v. Sunset Bay Rattan, Inc., No. 5:08-cv-3931-RS, 2009 U.S. Dist. LEXIS 2667, 2009 WL 55178, at *5 (N.D. Cal. Jan. 7, 2009) (dismissing unfair competition claim); see also SunPower, 2012 U.S. Dist. LEXIS 176284, 2012 WL 6160472 at **5-6 (citing Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210, 239 n.22 (2010)); Robert Half Int’l, Inc. v. Ainsworth, Case No. 14-cv-2481-WQH, 68 F. Supp. 3d 1178, 2014 U.S. Dist. LEXIS 175054, 2014 WL 7272405, at *8 (S.D. Cal. Dec. 17, 2014). 

[97]  See, e.g., Waffer Intl. Corp. v. Khorsandi, 69 Cal. App. 4th 1261, 1274 (1999); Baker v. Superior Court, 150 Cal. App. 3d 140, 145-46 (1983); Glendale Fed. Sav. & Loan Ass’n v. Marina View Heights Dev. Co., 66 Cal. App. 3d 101, 136-37 (1977); Gen Ins. Co. v. Mammoth Vista Owner Ass’n, 174 Cal. App. 3d 810, 828 (1985).

[98]  Cal. Bus. & Prof. Code § 17200 prohibits unlawful, unfair or fraudulent business practices.  A practice may violate Section 17200 even if it is not proscribed by other law.  See Arce v. Kaiser Found. Health Plan, Inc., 181 Cal. App. 4th 471, 486 (2010); MedioStream, 869 F. Supp. 2d at 1116.

[99]  See id.; NetApp, 41 F. Supp. 3d at 840.

[100]  See K.C. Multimedia, 171 Cal. App. 4th at 962.  The Court also rejected Lifeline’s argument regarding its breach of contract allegations as a separate basis for its unfair competition claim: “Lifeline contends that its breach of contract allegations stand regardless of whether its formulas and recipes are trade secrets.  But while Lifeline is correct that systemic breaches of contract may constitute unfair business practice under Section 17200, Lifeline’s complaint alleges that GCC’s ‘misappropriation of trade secrets’—not its systematic breach of the parties’ contracts—is what ‘constitutes an unlawful, unfair and fraudulent business practice.’  Lifeline does not claim ‘materially distinct’ facts: GCC’s alleged failure to provide Lifeline with the disputed recipes and formulas and use of those recipes and formulas to make cheese for others supports both claims.” 

[101]  Id. at *12 (citing MedioStream, 869 F. Supp. 2d at 1116 (allegations that defendants were liable for conversion because they took “certain documents and data and computer data discs that contain or reference [p]laintiff’s Trade Secrets” were “no more than a restatement” of the facts supporting plaintiff’s trade secret claim); SunPower, 2012 U.S. Dist. LEXIS 176284,, 2012 WL 6160472, at *7 (allegations that defendants were liable for conversion because they “interfered with [plaintiff’s] ownership and possessory rights” in plaintiff’s non-trade secret proprietary information were the same as allegations made in support of trade secret claim) (citing Silvaco, 184 Cal. App. 4th at 239).  California courts have held that intangible property rights can form the basis of a conversion claim.  See Kremen, 337 F.3d at 1034; see also Silvaco, 184 Cal. App. 4th at 238-39; Inglewood Redevelopment Agency v. Aklilu, 153 Cal. App. 4th 1095, 1107 (2007).  “Lifeline also contends that GCC has improperly retained ‘trim,’ portions of larger cheese blocks left over after the trimming process.  Lifeline asserts this ‘trim’ belongs to Lifeline and that GCC’s retention of the trim ‘constitutes a separate conversion of a physical object unaffected by CUTSA.’  The court does not consider Lifeline’s allegations with respect to the ‘trim’ because Lifeline does not allege these facts in the amended complaint that is the subject of this motion.”

[102]  [see above and text of opinion]

[103]  Id. at *13.

[104]  220 Cal. App. 4th 496 (2013).

[105]  Citing 220 Cal. App. 4th 495, 506, 508 (2013).

[106]  2015 U.S. Dist. LEXIS 64155 at *14.

[107]  See Engalla v. Permanente Medical Group, Inc., 15 Cal. 4th 951, 973-74 (1997) (“An action for promissory fraud may lie where a defendant fraudulently induces a plaintiff to enter into a contract” because “[a] promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud”).

[108]  Last year, a group of 31 law professors urged Congress to reject the proposed 2014 House Bill in a letter, which identified five primary reasons why Congress should reject the bill: (1) effective state law already exists, (2) the law will weaken uniformity of state law while simultaneously creating potentially damaging parallel law, (3) the law is imbalanced and could be used for anti-competitive purposes, (4) the law increases the risk of accidental disclosure of trade secrets, and (5) the law may have a negative impact on access to information, business, and employee mobility.

[109]  See Cal. Civ. Code § 3426.4; T. Paetkau & J. Skonberg, “Shield and Sword: Recovery of Attorneys’ Fees in Trade Secret Misappropriation Litigation,” Bender’s California Labor & Employment Bulletin (Vol. 2008, No. 9 Sept. 2008) at p. 252.

[110]  The existing definition of “trade secret” under the Economic Espionage Act includes “all forms and types of” various categories of information, regardless of how stored, if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.” 

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