CTI III, LLC v. Devine ( 2022 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 CTI III, LLC, No. 2:21-cv-02184-JAM-DB 12 Plaintiff, ORDER GRANTING DEFENDANT TRI- MERIT’S MOTION TO DISMISS AND 13 v. GRANTING IN PART AND DENYING IN PART DEFENDANT DEVINE’S MOTION 14 BARRY DEVINE, an individual; TO DISMISS TRI-MERIT, LLC, an Illinois 15 limited liability company; and DOES 1 through 50, 16 Defendants. 17 18 CTI III, LLC (“CTI” or “Plaintiff”) brought this action 19 against Barry Devine (“Devine”), its former employee, and Tri- 20 Merit LLC (“Tri-Merit”) (collectively “Defendants”), after Devine 21 left CTI to work for Tri-Merit, allegedly taking CTI’s 22 confidential information and trade secrets to solicit clients 23 with him. See generally First Am. Compl. (“FAC”), ECF No. 10. 24 CTI asserts the following claims against Defendants: 25 (1) Misappropriation of Trade Secrets under the Defend Trade 26 Secrets Act; (2) Misappropriation of Trade Secrets under 27 California’s Uniform Trade Secrets Act; (3) Breach of contract 28 under the Confidentiality Agreement against Devine only; 1 (4) Breach of contract under the Severance Agreement against 2 Devine only; (5) Violation of California Penal Code Section 502; 3 (6) Unfair Competition; (7) Intentional Interference with 4 Prospective Economic Relations; and (8) Negligent Interference 5 with Prospective Economic Relations. Id. Before the Court is 6 Tri-Merit’s motion to dismiss claims five through eight and 7 Devine’s motion to dismiss claims three, and five through eight. 8 Tri-Merit’s Mot. to Dismiss (“Tri-Merit’s Mot.”), ECF No. 13; 9 Devine’s Mot. to Dismiss (“Devine’s Mot.”), ECF No. 14. CTI 10 opposed these motions. Opp’n to Tri-Merit’s Mot., ECF No. 16; 11 Opp’n to Devine’s Mot., ECF No. 15. Defendants replied. Tri- 12 Merit’s Reply, ECF No. 17; Devine’s Reply, ECF No. 18. For the 13 reasons set forth below Tri-Merit’s motion to dismiss is granted, 14 and Devine’s motion is granted in part and denied in part.1 15 16 I. FACTUAL ALLEGATIONS 17 CTI is a Sacramento based tax consultancy firm. FAC. ¶¶ 1, 18 8. Barry Devine worked as CTI’s Business Development Director 19 from 2012 through 2020. Id. ¶ 9. By virtue of his position 20 Devine had access to CTI’s propriety and confidential 21 information. Id. ¶ 28. As such, CTI required Devine to sign a 22 Confidentiality Agreement. Id. ¶ 29. Devine’s employment with 23 CTI ended in November 2020. Id. ¶ 9. He and CTI then entered 24 into a Severance Agreement and General Release, pursuant to which 25 CTI agreed to pay Devine severance benefits and Devine agreed to 26 27 1 These motions were determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was 28 scheduled for April 5, 2022. 1 release certain claims against CTI. Id. ¶ 38. 2 Subsequently, Devine began working for Tri-Merit, CTI’s 3 competitor. Id. ¶ 4. According to CTI, before he left, Devine 4 downloaded and transferred information and data from CTI’s 5 computer systems, including their trade secrets, and shared them 6 with Tri-Merit. Id. ¶ 19. Devine and Tri-Merit then used this 7 information to solicit current and potential clients and referral 8 sources of CTI. Id. This suit ensued. 9 10 II. OPINION 11 A. Legal Standard 12 A Rule 12(b)(6) motion challenges the complaint as not 13 alleging sufficient facts to state a claim for relief. Fed. R. 14 Civ. P. 12(b)(6). “To survive a motion to dismiss [under 15 12(b)(6)], a complaint must contain sufficient factual matter, 16 accepted as true, to state a claim for relief that is plausible 17 on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) 18 (internal quotation marks and citation omitted). While 19 “detailed factual allegations” are unnecessary, the complaint 20 must allege more than “[t]hreadbare recitals of the elements of 21 a cause of action, supported by mere conclusory statements.” 22 Id. In considering a motion to dismiss for failure to state a 23 claim, the court generally accepts as true the allegations in 24 the complaint and construes the pleading in the light most 25 favorable to the plaintiff. Lazy Y Ranch Ltd. v. Behrens, 546 26 F.3d 580, 588 (9th Cir. 2008). “In sum, for a complaint to 27 survive a motion to dismiss, the non-conclusory ‘factual 28 content,’ and reasonable inferences from that content, must be 1 plausibly suggestive of a claim entitling the plaintiff to 2 relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 3 2009). 4 B. Judicial Notice 5 Devine requests the court take judicial notice of three 6 documents: (1) the Confidentiality and Intellectual Property 7 Assignment Agreement entered into between CTI and Devine; 8 (2) the Termination Certificate signed by Devine; and (3) the 9 Severance Agreement and General Release entered into between CTI 10 and Devine. Devine’s Req. for Judicial Notice, ECF No. 14-1. 11 These documents are not proper subjects of judicial notice; 12 therefore, this request is denied. See Fed. R. Evid. 201. The 13 Court, however, considered these documents under the 14 incorporation-by-reference doctrine. See Khoja v. Orexigen 15 Therapeutics, Inc., 899 F.3d 988, 1002 (9th Cir. 2018) 16 (explaining that unlike rule-established judicial notice, 17 incorporation-by-reference is a judicially created doctrine that 18 treats certain documents as though they are part of the 19 complaint itself when the plaintiff refers extensively to the 20 document or it forms the basis of plaintiff’s claim). 21 C. Analysis 22 1. California’s Uniform Trade Secrets Act 23 Under California’s Uniform Trade Secrets Act (“CUTSA”), a 24 party may recover for the “actual loss” or other injury caused 25 by the misappropriation of trade secrets. Cal. Civ. Code 26 § 3426.3 “CUTSA defines misappropriation as (1) the improper 27 acquisition of a trade secret or (2) the non-consensual 28 disclosure or use of a trade secret.” Erhart v. Bofl Holding, 1 Inc., --F.Supp.3d --, 2020 WL 1550207, at *36 (S.D. Cal. March 2 31, 2020). A “trade secret” is information that derives 3 “independent economic value” from its confidentiality and is 4 subject to “efforts that are reasonable under the circumstances 5 to maintain its secrecy.” Cal. Civ. Code. § 3426.1(d). 6 CUTSA “occupies the field” of common law claims based on 7 the misappropriation of a trade secret. K.C. Multimedia, Inc. 8 v. Bank of Am. Tech. & Operations, Inc., 171 Cal.App.4th 939, 9 954 (2009). The Act, however, does not supersede “contractual 10 remedies, whether or not based upon misappropriation of a trade 11 secret, (2) other civil remedies that are not based upon 12 misappropriation of a trade secret, or (3) criminal remedies, 13 whether or not based upon misappropriation of a trade secret.” 14 Cal. Civ. Code § 3426.7(b). The Act’s language “implicitly 15 preempts alternative civil remedies based on trade secret 16 misappropriation.” K.C. Multimedia, 171 Cal.App.4th at 954 17 (citation omitted). 18 A claim cannot simply depend on a “different theory of 19 liability” to survive CUTSA’s preemptive effect. See Id. at 20 957-59 & n.7. Rather, CUTSA supersedes “common law claims that 21 are based on the same nucleus of facts as the misappropriation 22 of trade secrets claim for relief.” Id. at 958 (internal 23 quotation marks and citation omitted). “The preemption inquiry 24 for those causes of action not specifically exempted by 25 § 3426.7(b) focuses on whether other claims are not more than a 26 restatement of the same operative facts supporting trade secret 27 misappropriation. If there is no material distinction between 28 the wrongdoing alleged in a CUTSA claim and that alleged in a 1 different claim, the CUTSA claim preempts the other claim.” 2 SunPower Corp. v. SolarCity Corp., No. 12-cv-00694-LHK, 2012 WL 3 6160472, at *3 (N.D. Cal. Dec. 11, 2012) (internal quotation 4 marks and citation omitted). “At the pleadings stage, the 5 supersession analysis asks whether, stripped of facts supporting 6 trade secret misappropriation, the remaining factual allegations 7 can be reassembled to independently support other causes of 8 action.” Waymo LLC v. Uber Tech., Inc., 256 F.Supp.3d 1059, 9 1062 (N.D. Cal. 2017). 10 Defendants argue CTI’s sixth claim for relief under 11 California Business and Professions Code Section 17200, seventh 12 claim for relief for intentional interference with prospective 13 economic relations, and eighth claim for negligent interference 14 with prospective economic relations are all superseded by CUTSA 15 since they are based on the same nucleus of facts as the 16 misappropriation of trade secrets claim. Tri-Merit’s Mot. at 17 12-15; Devine’s Mot. at 8. 18 CTI’s sixth claim under California Business and Professions 19 Code Section 17200 concerns Devine’s acquisition of data and 20 confidential information and Tri-Merit’s use of that information 21 to gain an unfair competitive advantage against Plaintiff. FAC 22 ¶¶ 46-56. The Court finds this is based on the same nucleus of 23 facts as Plaintiff’s CUTSA claim which alleges that Devine 24 downloaded CTI’s data for the benefit of himself and his future 25 employer, Tri-Merit. Id. ¶¶ 12-22. Similarly, its seventh 26 cause of action for intentional interference with prospective 27 economic relations and eighth cause of action for negligent 28 interference with prospective economic relations rests on the 1 allegations that Defendants used the confidential information to 2 solicit CTI’s clients. Id. ¶¶ 61, 62, 68. Because each of 3 these claims “alleges in essence that Defendants violated 4 [CTI’s] rights by acquiring, disclosing, and/or using, without 5 consent (i.e. misappropriating) [CTI’s] propriety information,” 6 the claims are superseded. SunPower Corp., 2012 WL 6160472, at 7 *13. 8 CTI does not dispute that these claims rest on the same 9 nucleus of facts as the trade secret misappropriation claim. 10 See Opp’n at 8-10. Rather, CTI contends that because this Court 11 in R.R. Donnelley & Sons Co. v. Pappas, No. 21-CV-00753-JAM-AC, 12 2021 WL 3488502 (E.D. Cal. Aug. 9, 2021) found that CUTSA does 13 not preempt claims under California Penal Code Section 502, 14 these claims that are derivative of the Section 502 claim should 15 survive as well. Id. The Court disagrees. 16 In R.R. Donnelley & Sons, this Court noted that district 17 courts were divided on the issue of whether CUTSA preempts 18 Section 502 claims based on the same nucleus of facts. 2021 WL 19 3488502, at *3. For example, in Heieck v. Federal Signal 20 Corporation, the Court found that CUTSA did not supersede 21 Section 502 claims. 2019 WL 6873869, at *4 (C.D. Cal. Nov. 4, 22 2019). In so holding the Heieck Court pointed to the provision 23 of CUTSA that states “[t]his title does not affect [. . .] 24 criminal remedies, whether or not based upon misappropriation of 25 a trade secret.” Id. It reasoned that because Section 502 is a 26 criminal statute with criminal remedies, this enumerated 27 exception applied. Id. Noting the split in authority, this 28 Court decided to “err[] on the side of caution” and found CUTSA 1 did not supersede Section 502 claims. R&R Donnelley & Sons Co., 2 2021 WL 3488502, at *3. 3 That CUTSA specifically exempts Section 502 claims from 4 supersession, even if based on the same nucleus of common facts 5 as a trade secret misappropriation claim, has no bearing on 6 Plaintiff’s other claims. Accordingly, the Court grants 7 Defendants motion to dismiss Plaintiff’s sixth, seventh, and 8 eighth claims for relief, without prejudice.2 See Leadsinger, 9 Inc. v. BMG Music Pub., 512 F.3d 522, 532 (9th Cir. 2008) 10 (explaining leave to amend should be freely given unless there 11 has been undue delay, bad faith, repeated failure to cure 12 deficiencies, it would cause undue prejudice to the opposing 13 party or would be futile). 14 2. California’s Comprehensive Computer Data Access 15 and Fraud Act 16 California’s Comprehensive Computer Data Access and Fraud 17 Act (“CDAFA”), California Penal Code Section 502, generally 18 prohibits “tampering, interference, damage, and unauthorized 19 access to lawfully created computer data and computer systems.” 20 Cal. Penal Code § 502(a). Plaintiff alleges Defendants violated 21 subsection (c)(1), (c)(2), and (c)(7). See FAC ¶ 45. Section 22 502(c)(1) prohibits knowingly accessing and without permission 23 using any data, computer, computer system, or computer network, 24 in order to wrongfully control or obtain money, property, or 25 data. Cal. Penal Code § 502(c)(1). Section 502(c)(2) prohibits 26 27 2 Because the Court dismisses these claims on this ground, it does not address the parties’ arguments on the economic loss 28 rule. Devine’s Mot. at 15-18; Opp’n to Devine’s Mot. at 13-14. 1 knowingly accessing and without permission taking, copying, or 2 making use of any data from a computer, computer system, or 3 computer network. Id. § 502(c)(2). Section 502(c)(7) prohibits 4 knowingly and without permission accessing or causing to be 5 accessed any computer, computer system, or computer network. 6 Id. § 502(c)(7). Section 502(e) enables “the owner or lessee of 7 the computer, computer system, computer network, computer 8 program, or data who suffers damage or loss by reason of a 9 violation of any of the provisions of subdivision (c) [to] bring 10 a civil action against the violator for compensatory damages and 11 injunctive relief or other equitable relief.” Id. § 502(e). 12 As an initial matter, Devine argues CTI’s failure to 13 specifically identify the subsections of which its claims are 14 based violates Rule 8 of the Federal Rules of Civil Procedure. 15 Devine’s Mot. at 12. While CTI did not specifically name the 16 subsections it alleges Defendants breached in its complaint, it 17 did mirror the language of three subsections. FAC ¶ 45. The 18 Court finds this sufficient to give defendants fair notice of 19 the claim and the grounds upon which it rests. See Bell 20 Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). 21 Tri-Merit argues CTI has failed to allege sufficient facts 22 to plausibly state Tri-Merit violated CDAFA. Mot. at 10. The 23 Court agrees. The only facts CTI alleges to support this claim 24 are that Devine installed unauthorized data “while still and in 25 the course and scope of his employment for CTI.” FAC ¶ 47. 26 While CTI claims Tri-Merit “ratified and adopted” such behavior, 27 such conclusory allegations are insufficient to state a claim 28 against Tri-Merit. Iqbal, 556 U.S. at 678. CTI has alleged no 1 facts that demonstrate Tri-Merit participated in the alleged 2 unauthorized taking such that it could be liable. CTI contends 3 that even if Tri-Merit was not aware of Devine’s actions and did 4 not participate, it can be liable so long as it accepted the 5 benefit. Opp’n at 6-7. Not so. See Broidy Capital Mmgt. LLC 6 v. Muzin, 19-cv-0150 (DLF), 2020 WL 1536350, at *17 (D.C.C. Mar. 7 31, 2020), aff’d, 12 F.4th 789 (D.C. Cir. 2021) (finding 8 Plaintiff had failed to state a claim against Defendants where 9 there was no allegation that they facilitated the unauthorized 10 hacking and only received the information.). Because CTI 11 alleges no facts that Tri-Merit actively participated in 12 Devine’s alleged unlawful conduct, such as directing Devine’s 13 acts, this claim is dismissed without prejudice as to Tri-Merit. 14 See Claridge v. RockYou, Inc., 785 F.Supp.2d 855, 863 (N.D. Cal. 15 2011) (noting the cases interpreting the statute impose 16 liability against individuals or entities who are alleged to 17 have actually participated in unauthorized “hacking”’ or the 18 unlawful disclosure of information). See also Leadsinger, Inc., 19 512 F.3d at 532. 20 Devine likewise contends CTI has failed to state a claim 21 against him. According to Devine, because he was permitted to 22 access CTI’s computer systems and data while employed, his 23 access was not unauthorized, and he therefore cannot be liable 24 under CDAFA. Devine’s Mot. at 12-14. He is mistaken. As the 25 Ninth Circuit explained in Christensen, the CDAFA differs from 26 the Computer Fraud and Abuse Act (“CFAA”) and is interpreted 27 differently. See United States v. Christensen, 828 F.3d 763, 28 789 (9th Cir. 2015). Unlike the CFAA, CDAFA “does not require 1 unauthorized access. It merely requires knowing access.” Id. 2 “What makes that access unlawful [under CDAFA] is that the 3 person ‘without permission takes, copies, or makes use of’ data 4 on the computer.” Id. (quoting Cal. Penal Code § 502(c)(2)). 5 Thus, CDAFA prohibits “unauthorized taking or use of 6 information” where the “CFAA criminalizes unauthorized access, 7 not subsequent unauthorized use.” Id. Accordingly, “logging 8 into a database with a valid password and subsequently taking, 9 copying, or using the information in the database improperly” 10 would violate CDAFA. Id. 11 CTI has alleged just that: while Devine was still employed 12 by CTI he accessed their system and improperly copied, then used 13 their data. FAC ¶ 47. While Devine may have been authorized to 14 access the system as an employee, he was not, according to CTI, 15 authorized to copy and use the data to solicit CTI’s clients. 16 Id. This is sufficient to state a claim under CDAFA. See 17 Christensen, 828 F.3d at 789. 18 Devine also argues that to satisfy CDAFA’s provisions that 19 he acted “without permission”, CTI had to allege that he 20 accessed the network in a manner that circumvented technological 21 or code-based barriers in place to restrict or bar a user’s 22 access. Devine’s Mot. at 13. The Court disagrees. As another 23 district court stated: “[c]ircumventing technical barriers may 24 be sufficient to show that a person acted ‘without permission,’ 25 but that does not mean it is necessary for a person to 26 circumvent technical barriers to act ‘without permission.’ 27 Christensen makes this clear.” West v. Ronquillo-Morgan, 526 28 F.Supp.3d 737, 746 (C.D. Cal. 2020). As the West court noted, 1 in Christensen, the Ninth Circuit affirmed convictions under 2 CDAFA of individuals who accessed databases with the authority 3 to do so, without circumventing any technical or code-based 4 barriers. Christensen, 828 F.3d at 790. Accordingly, no such 5 allegation is required to state a claim under CDAFA. The Court 6 therefore denies Devine’s motion as to the CDAFA claim. 7 3. Breach of Confidentiality Agreement 8 California Code of Civil Procedure Section 1856 states: 9 (a) Terms set forth in a writing intended by the parties 10 as a final expression of their agreement with respect 11 to the terms included therein may not be contradicted 12 by evidence of a prior agreement or of a 13 contemporaneous oral agreement. 14 (b) The terms set forth in a writing described in 15 subdivision (a) may be explained or supplemented by 16 evidence of consistent additional terms unless the 17 writing is intended also as a complete and exclusive 18 statement of the terms of the agreement. 19 Thus, Section 1856 “creates two levels of contract integration 20 or finality: (1) the parties intended the writing to be the 21 final expression of their agreement; and (2) the parties 22 intended the writing to be the complete and exclusive statement 23 of the terms of their agreement.” Kanno v. Marwit Capital 24 Partners II, L.P., 18 Cal.App.5th 987, 999 (2017). If a 25 contract “falls within level 1 (the writing is a final 26 expression) then a prior or contemporaneous . . . agreement is 27 admissible if it does not contradict the writing, and evidence 28 of consistent additional terms may be used to explain or 1 supplement the writing.” Id. at 999-1000. If, however, a 2 contract “falls within level 2 (complete and exclusive 3 statement) then evidence of consistent additional terms may not 4 be used to explain or supplement the writing.” Id. at 1000. 5 Devine argues CTI cannot state a claim for breach of the 6 Confidentiality Agreement as it was superseded by the Severance 7 Agreement. Devine’s Mot. at 9. Specifically, Devine points to 8 clause 12 of the Severance Agreement that states “[t]his 9 agreement embodies the entire agreement of all the parties 10 hereto who have executed it and supersedes any and all other 11 agreements, understandings, negotiations, or discussions, either 12 oral or in writing, express or implied, between the parties to 13 this agreement.” Id. at 11 (citing Ex. 3, ¶ 12 (“Severance 14 Agreement”)). As CTI points out “[t]he crucial issue in 15 determining whether there has been an integration is whether the 16 parties intended their writing to serve as the exclusive 17 embodiment of their agreement.” Masterson v. Sine, 68 Cal.2d 18 222, 225 (1968). 19 In California, the presence of an integration clause is not 20 conclusive but rather a factor which may help resolve the issue. 21 Id. To determine whether a writing is integrated, courts 22 consider: “whether the written agreement appears to be complete 23 on its face; whether the agreement contains an integration 24 clause; whether the alleged parol understanding on the subject 25 matter at issue might naturally be made as a separate agreement; 26 and the circumstances at the time of the writing.” Kanno, 18 27 Cal.App.5th at 1001. Because the integration clause is not 28 conclusive on the issue of whether the parties intended the nen ee nnn ene en en nn nen en ne nnn nn NE II 1 Severance Agreement to be the complete and exclusive agreement 2 of the parties, Devine has failed to show at this early stage 3 the Confidentiality Agreement was superseded as a matter of law. 4 Accordingly, Devine’s motion to dismiss this claim is denied. 5 6 Til. ORDER 7 For the reasons set forth above, the Court GRANTS Tri- 8 Merit’s Motion to Dismiss claims five through eight against it 9 | without prejudice. The Court GRANTS Devine’s Motion to Dismiss 10 claims six through eight against him without prejudice. The 11 Court DENIES Devine’s Motion to Dismiss claims three and five. 12 If CTI elects to amend its complaint, it shall file its Second 13 | Amended Complaint within twenty days (20) of this Order. 14 Defendants’ responsive pleadings are due within twenty days (20) 15 thereafter. 16 IT IS SO ORDERED. 17 | Dated: May 25, 2022 18 kA 19 teiren staves odermacr 7008 20 21 22 23 24 25 26 27 28 14