Quad Knopf, Inc. v. South Valley Biology Consulting, LLC et al

Filing 21

ORDER GRANTING 12 Defendants' Motion to Dismiss signed by District Judge Anthony W. Ishii on 4/3/2014. CASE CLOSED. (Jessen, A)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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QUAD KNOPF, INC.,

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Plaintiff,

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CASE NO. 1:13-CV-01262 AWI SKO
ORDER GRANTING DEFENDANTS’
MOTION TO DISMISS

v.
SOUTH VALLEY BIOLOGY
CONSULTING, LLC, a California limited
liability company; JAMES W. JONES, JR.,
an individual; JASON H. KANG, an
individual; NINA E. HOSTMARK, an
individual; MICHAEL V. PHILLIPS, an
individual; and PAUL ROSEBUSH, an
individual,

(Doc. 12)

Defendants.

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Plaintiff Quad Knopf, Inc. (―Plaintiff‖) brings this action against South Valley Biology

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Consulting LLC (―SVBC‖), James W. Jones, Jr. (―Jones‖), Jason H. Kang (―Kang‖), Nina E.

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Hostmark (―Hostmark‖), Michael V. Phillips (―Phillips‖), and Paul Rosebush (―Rosebush‖)

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(collectively ―Defendants‖) for violations of the Computer Fraud and Abuse Act when Hostmark,

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Phillips, and Rosebush allegedly transmitted information from Plaintiff’s computers while

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employed by Plaintiff without Plaintiff’s consent, and that information was then used by

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Defendants to compete with Plaintiff and caused Plaintiff to suffer loss. Plaintiff’s Complaint also

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alleges nine causes of action arising under California law related to Defendants’ use of Plaintiff's

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work product and clients. Defendants moves to dismiss eight causes of action. For the following

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reasons, Defendants’ motion is granted:

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I.

BACKGROUND
Plaintiff, a consulting firm with offices in central California, provides professional services

in the areas of civil engineering, land planning, land surveying, landscape architecture,

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environmental planning, permitting, and biology consulting services. Doc. 1, ¶¶ 2, 9. Plaintiff’s

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biologists conduct biological field studies and provide detailed reports to its clients. Doc. 1, ¶ 11-

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12. Among about eighty-five individuals, Plaintiff employed Defendants Jones, Kang, Hostmark,

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Phillips, and Rosebush. Doc. 1, ¶¶ 11, 14, 15, 6-8. In 2010, Jones and Kang formed SVBC, a

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competing firm providing the same services as Plaintiff in the area of biological studies and

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reporting. Doc. 1, ¶ 14. Jones and Kang recruited Hostmark, Phillips, and Rosebush, staff

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biologists, who left Plaintiff’s employ and joined SVBC. Doc. 1, ¶ 15. Plaintiff soon discovered

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that biological studies and reports were missing or copied from Plaintiff’s computer, and that

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identical portions of Plaintiff’s studies and reports were incorporated into SVBC’s reports. Doc. 1,

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¶¶ 16, 18. Plaintiff later found that SVBC’s website and promotional materials contained

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Plaintiff’s work product. Doc. 1, ¶ 19.
Plaintiff alleges that Hostmark, Phillips, and Rosebush intentionally removed Plaintiff’s

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work product for two years while still employed by Plaintiff without Plaintiff’s knowledge or

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consent and transmitted that product to SVBC, Jones, and Kang by e-mail or in person. Doc. 1, ¶¶

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22-24. Plaintiff also alleges that Defendants intentionally solicited Plaintiff’s clients on behalf of

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SVBC, and, in fact, several of Plaintiff’s clients terminated contracts with Plaintiff to give them to

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SVBC. Doc. 1, ¶¶ 23, 17. Plaintiff has suffered damages in investigating the adequacy of its

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computer security systems, replacing the work product, and lost income. See e.g. Doc. 1, ¶¶ 25,

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31.

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Plaintiff’s Complaint brings ten causes of action and seeks compensatory damages,

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injunctive relief, restitution, punitive damages, costs, and attorney’s fees. Doc. 1. Plaintiff alleges

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that this Court has subject matter jurisdiction over this action because Plaintiff’s first cause of

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action is for violations of the Computer Fraud and Abuse Act (―CFAA‖), codified at 18 U.S.C.

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Section 1030. Doc. 1 ¶ 1. Defendants move to dismiss the Complaint as to the first eight causes of

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action, and, if the first cause of action is dismissed, for lack of subject matter jurisdiction. Doc. 12.

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Plaintiff filed an opposition (Doc. 13), Defendant filed a reply (Doc 14), and the matter was taken

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under submission without oral argument (Doc. 15).

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II.

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THE LEGAL STANDARD
Under Federal Rule of Civil Procedure 12(b)(6), a claim may be dismissed because of the

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plaintiff's ―failure to state a claim upon which relief can be granted.‖ Fed. R. Civ. P. 12(b)(6). A

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dismissal under Rule 12(b)(6) may be based on the lack of a cognizable legal theory or on the

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absence of sufficient facts alleged under a cognizable legal theory. Conservation Force v. Salazar,

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646 F.3d 1240, 1242 (9th Cir. 2011); Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 1121

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(9th Cir. 2008). In reviewing a complaint under Rule 12(b)(6), all allegations of material fact are

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taken as true and construed in the light most favorable to the non-moving party. Faulkner v. ADT

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Sec. Servs., 706 F.3d 1017, 1019 (9th Cir. 2013); Johnson, 534 F.3d at 1121.

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To avoid a Rule 12(b)(6) dismissal, a complaint must contain sufficient factual matter,

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accepted as true, to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S.

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662, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009); see Bell Atl. Corp. v. Twombly, 550 U.S.

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544, 555, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). ―A claim has facial plausibility when

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the plaintiff pleads factual content that allows the court draw the reasonable inference that the

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defendant is liable for the misconduct alleged.‖ Iqbal, 129 S.Ct. at 1949.
―[A] district court should grant leave to amend even if no request to amend the pleading

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was made, unless it determines that the pleading could not possibly be cured by the allegation of

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other facts.‖ Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc), quoting Doe v. United

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States, 58 F.3d 494, 497 (9th Cir. 1995). Leave to amend should be granted ―with extreme

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liberality,‖ so long as factors such as undue delay, bad faith or dilatory motive on the part of the

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movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice

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to the opposing party by virtue of the amendment, or futility of amendment are not present.

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Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051-52 (9th Cir. 2003).

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III.

THE COMPUTER FRAUD AND ABUSE ACT

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The CFAA was enacted to enhance the government’s ability to prosecute computer crimes.

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LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1130 (9th Cir. 2009). The CFAA prohibits various

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computer crimes, which involve accessing computers without authorization or in excess of

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authorization, and then taking specified forbidden actions, such as from obtaining information and
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damaging a computer or computer data. See 18 U.S.C. § 1030(a)(1)-(7).
A private plaintiff may maintain a civil action under Section 1030(g) if the defendant’s

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conduct violated one of the provisions of § 1030(a)(1)-(7), and that the violation involved one of

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the factors listed in § 1030(a)(5)(B). 18 U.S.C. § 1030(g); Brekka, 581 F.3d at 1131. To bring an

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action based on a violation of 18 U.S.C. § 1030(a)(2), a plaintiff must show that the defendant ―(1)

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intentionally accessed a computer, (2) without authorization or exceeding authorized access, and

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that he (3) thereby obtained information (4) from any protected computer (if the conduct involved

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an interstate or foreign communication), and that (5) there was loss to one or more persons during

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any one-year period aggregating at least $5,000 in value.‖ Id. at 1132. Sections 1030(a)(4) and

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1030(a)(5) similarly require intentional access of a protected computer without authorization. 18

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U.S.C. §§ 1030(a)(4), 1030(a)(5). The CFAA defines ―exceeds authorized access‖ as ―to access a

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computer with authorization and to use such access to obtain or alter information in the computer

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that the accesser is not entitled so to obtain or alter.‖ 18 U.S.C. § 1030(e)(6).

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The Ninth Circuit has found that the plain language of the CFAA ―targets the unauthorized

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procurement or alteration of information, not its misuse or misappropriation.‖ United States v.

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Nosal, 676 F.3d 854, 860 (9th Cir. 2012). Hence, the requirement that the access was without

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authorization or exceeded authorized access ―does not extend to violations of use restrictions.‖ Id.

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at 864. The broader interpretation ―would transform the CFAA from an anti-hacking statute into

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an expansive misappropriation statute.‖ Id. at 863. The ―narrower interpretation is also a more

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sensible reading of the text and legislative history of a statute whose general purpose is to punish

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hacking—the circumvention of technological access barriers—not misappropriation of trade

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secrets—a subject Congress has dealt with elsewhere.‖ Id. In Nosal, the government failed to meet

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the element of ―without authorization, or exceeds authorized access‖ under 18 U.S.C. § 1030(a)(4)

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because the defendant’s accomplices had permission to access the company database and obtain

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the information contained within. Id. at 864. The defendant was a former employee who

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convinced some of his former coworkers to use their log-in credentials to download source lists,

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names and contact information from a confidential database on the company’s computer, and then

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transfer that information to him, in support of his establishing a competing business. Id at. 856.
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The employees were authorized to access the database, but the company had a policy that forbade

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disclosing confidential information. Id.

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Similar facts arose in Farmers Ins. Exch. v. Steele Ins. Agency, Inc., in which the

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defendants were former employees of an insurance agency who left and began a competing

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agency. Farmers Ins. Exch. v. Steele Ins. Agency, Inc., 2013 U.S. Dist. LEXIS 104606, *5-6 (E.D.

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Cal. July 23, 2013). One defendant was still employed when he began accessing the insurance

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agency’s information, including the customer list, for the benefit of the competing agency. Id. The

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court found that the employee had permission to access the employer’s confidential proprietary

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information and did not exceed authorized access, ―even though he may have used the information

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for an improper purpose.‖ The motion to dismiss the cause of action for violation of the CFAA as

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to that defendant was dismissed. Id. at 53.

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IV.

DISCUSSION
The facts of Nosal and Farmers Insurance are substantially similar to those alleged in

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Plaintiff’s Complaint. In these cases former employees began a competing business and convinced

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current employees to access the employer’s computer database to transmit confidential

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information to the competing business to the detriment of the employer. Plaintiff’s Complaint

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alleges that Jones and Kang were former employees of Plaintiff who began a competing firm.

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They then recruited Hostmark, Phillips, and Rosebush, all still employed by Plaintiff, to transmit

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confidential data and documents to SVBC and/or Jones and Kang, and then leave Plaintiff’s

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employ for SVBC’s. The Complaint alleges that Hostmark, Phillips, and Rosebush were staff

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biologists who produced the studies and reports that Plaintiff alleges were illegally taken and used

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by Defendants. Doc. 1, ¶¶ 15, 11, 18-19. It says that the removal of Plaintiff’s confidential work

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product and intellectual property from Plaintiff’s computers was done ―prior to their leaving

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Plaintiff’s employ.‖ Doc. 1, ¶ 21. Plaintiff also alleges that the solicitation of clients was done

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―while still employed by Plaintiff.‖ Doc. 1, ¶ 23.

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Plaintiff argues that Defendants’ authorization ended when Defendants began acting as

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agents for the other Defendants, and, according to principles of agency, their agency relationship

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with Plaintiff ended. Doc. 13, p. 5, line 24 – p. 7, line 12. However, the Nosal definition of
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―without authorization‖ as it applies to a violation of the CFAA is the controlling interpretation in

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this case. Plaintiff relies upon other circuit courts which have interpreted the CFAA to cover

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violations of corporate computer use restrictions or violations of a duty of loyalty, including

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International Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006). But this interpretation

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was explicitly rejected in this Circuit for failing to construe ambiguous criminal statutes narrowly.

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Nosal at 862; Brekka, supra, 581, F.3d at 1134. Plaintiff’s argument that agency law should apply

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to determine whether authorization existed is unpersuasive when specific caselaw in this Circuit

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exists limiting the ―without authorization‖ element in a CFAA claim.

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Plaintiff cannot sustain a cause of action for violation of the CFAA because it does not

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properly allege that Defendants acted without authorization or exceeded their authorization.

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Plaintiff’s opposition states that will seek recovery under 18 U.S.C. §§ 1030(a)(2)(c), 1030(a)(4),

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1030(a)(5)(A), all of which require that the access was without authorization. Taking the facts in

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the light most favorable to Plaintiff still indicates that Hostmark, Phillips, and Rosebush did not

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exceed their authorization to access Plaintiff’s computers and databases. The Complaint does not

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allege that Hostmark, Phillips, and Rosebush did not rightfully have access to the computers or

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databases containing the work product that was transmitted and used without consent. Being staff

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biologists who generate that type of work product, and being employed at the time of the alleged

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transmittal, Hostmark, Phillips, and Rosebush clearly had permission to access to the work

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product or other electronically stored information. They were not permitted by Plaintiff to

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disseminate the information. In the same way, the defendants in Nosal and Farmers Insurance

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were current employees when they used their employer-given authorization to access the

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information on the employer’s computers with the intent to transmit the information to the

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competitor.

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Plaintiff appears to be alleging violations of use restrictions or misappropriation of trade

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secrets, but not a cause of action under the CFAA –a statute designed to target hacking crimes.

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Defendants were employed with Plaintiff and did not exceed their access. Defendants then took

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the information that they were entitled as an employee to access, and used it in an inappropriate

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manner contrary to Plaintiff’s interest. As stated in Nosal, the ―without authorization‖ requirement
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does extend to violation of use restrictions. Nosal, supra, 676 F.3d at 864.
Because Plaintiff cannot meet the necessary element of ―without authorization or

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exceeding authorized access,‖ the Complaint does not state a cause of action under the CFAA

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upon which relief can be granted. The facts as alleged indicate that Defendants, as Plaintiff’s staff

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biologists, had permission to access to the information at issue. Plaintiff could not possibly cure

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the deficiency of the CFAA action by the allegation of other facts consistent with those alleged in

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the present complaint. Amendment being futile, leave to amend the CFAA cause of action is

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denied and the claim is dismissed with prejudice.

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V.

JURISDICTION
The CFAA claim is Plaintiff’s only federal claim. Plaintiff specifically disclaims a federal

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Copyright Act claim. Doc. 14, p. 9, lines 17-18. A district court may decline to exercise

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jurisdiction over supplemental state law claims if ―the district court has dismissed all claims over

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which it has original jurisdiction.‖ 28 U.S.C. § 1367(c)(3). When federal claims are dismissed

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before trial pendent state claims also should be dismissed. Religious Technology Center v.

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Wollersheim, 971 F.2d 364, 367-368 (9th Cir. 1992). Considering judicial economy, convenience,

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fairness, and comity, and because the only federal claim in this case is dismissed with prejudice,

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the Court declines to exercise supplemental jurisdiction over Plaintiff’s remaining state law

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claims.

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VI.

ORDER

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Defendants’ Motion to Dismiss is hereby GRANTED.

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The CFAA claim is DISMISSED WITH PREJUDICE.

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All other claims are DISMISSED for lack of jurisdiction.

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IT IS SO ORDERED.

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Dated: April 3, 2014

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SENIOR DISTRICT JUDGE

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