Fortinet, Inc. v. Sophos, Inc. et al

Filing 334

ORDER by Judge Edward M. Chen granting in part and denying in part 293 Plaintiff's Motion to Enforce Stipulation (emclc2, COURT STAFF) (Filed on 11/25/2015)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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FORTINET, INC.,
Plaintiff,

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ORDER GRANTING IN PART AND
DENYING IN PART PLAINTIFF’S
MOTION TO ENFORCE STIPULATION

v.
SOPHOS, INC., et al.,

Docket No. 293

Defendants.

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For the Northern District of California

United States District Court

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Case No. 13-cv-05831-EMC

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Plaintiff Fortinet, Inc. has filed suit against Defendants Sophos, Inc. and two of its

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employees, Michael Valentine and Jason Clark, asserting a variety of claims, including patent

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infringement, trade secret misappropriation, breach of contract, and breach of fiduciary duty. The

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claim for trade secret misappropriation (the eleventh cause of action) was asserted against Sophos

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only, and not the individuals. However, the claims for breach of contract (the seventh and eighth

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causes of action), which were asserted against Mr. Valentine and Mr. Clark only, included

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allegations that the individuals had misappropriated trade secrets. See FAC ¶¶ 153, 161 (alleging

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that “[Mr.] Valentine furthermore breached the Valentine Agreement by using Fortinet Trade

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Secrets for his own benefit and for the benefit of Sophos, without permission from Fortinet” and

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that Mr. Clark did the same); see also FAC ¶ 71 (defining “Fortinet Trade Secrets”).

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In March 2014, the parties stipulated to arbitrating all claims – including the breach-of-

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contract claims – against Mr. Valentine and Mr. Clark. See Docket No. 45 (civil minutes) (stating

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that “Defendant‟s Motion to Compel Arbitration is granted as to Valentine and Clark pursuant to

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stipulation of the parties”); see also Docket No. 47 (hearing transcript). In November 2014, the

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arbitration hearing took place, and in March 2015, the arbitrator – Hon. Jack Komar (retired) of

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JAMS – issued his award. The arbitrator‟s decision addressed only Fortinet‟s assertion that Mr.

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Valentine and Mr. Clark had improperly solicited or induced certain Fortinet employees to work

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for Sophos. The arbitrator did not discuss whether Mr. Valentine and/or Mr. Clark had breached

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their contracts with Fortinet by misappropriating trade secrets – apparently because Fortinet did

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not press forward with this theory at the arbitration.
In August 2015, Fortinet filed new demands for arbitration against Mr. Valentine and Mr.

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Clark, contending that the individuals had withheld documents supporting Fortinet‟s theory that

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the individuals had misappropriated trade secrets and thereby, inter alia, breached their contracts

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with Fortinet. According to Fortinet, the withholding of documents constitutes fraud which

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warrants a new arbitration and which precludes the individuals from making any res judicata

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argument. See Freeman Decl., Exs. 22-23 (new arbitration demands).
Currently pending before the Court is a motion by Fortinet, in which it asks the Court to

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For the Northern District of California

United States District Court

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issue an order finding that the arbitrator, and not this Court, has the authority to decide whether the

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new arbitration demands are precluded under the doctrine of res judicata (i.e., because of the

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earlier arbitration in November 2014). “In the alternative, Fortinet moves for an order that the

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March 10, 2015 arbitration award be vacated to the extent that the award relates to Fortinet‟s

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claims against Valentine and Clark for misuse of Fortinet‟s confidential information in breach of

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their contractual obligations while allowing the portion of the award that relates to Fortinet‟s

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claims for solicitation of other former Fortinet employees to stand.” Not. of Mot.

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Having considered the parties‟ briefs and accompanying submissions, as well as the oral

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argument of counsel, the Court hereby GRANTS in part and DENIES in part Fortinet‟s motion.
I. DISCUSSION

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A.

Motion to Enforce Stipulation
The Court addresses first Fortinet‟s primary request for relief – i.e., that the Court issue an

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order finding that the arbitrator, and not this Court, has the authority to decide whether the new

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arbitration demands (filed in August 2015) are precluded under the doctrine of res judicata (i.e.,

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because of the earlier arbitration in November 2014).1

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As indicated above, the arbitration hearing took place in November 2014, even though the actual
written decision was not issued until March 2015.
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Fortinet has characterized its motion as one to enforce the parties‟ stipulation in order to

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align the situation presented herein with the situation presented to the Ninth Circuit in Chiron

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Corp. v. Ortho Diagnostic Systems, Inc., 207 F.3d 1126 (9th Cir. 2000). In Chiron, there was a

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dispute between the parties which was arbitrated. After the arbitration was completed, the plaintiff

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filed a new lawsuit and moved for an order compelling arbitration. The defendant argued that the

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second lawsuit was improper because “the earlier arbitration award operated as res judicata to all

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claims [the plaintiff] sought to raise in a second arbitration proceeding. [The defendant] also

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sought an order confirming the earlier arbitration award . . . .” Id. at 1129. “Applying federal law,

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the district court concluded that [the defendant‟s] res judicata defense was itself an arbitrable issue

plaintiff‟s motion to compel arbitration. It also granted the defendants‟ motion to confirm the

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For the Northern District of California

within the scope of the parties‟ agreement to arbitrate.” Id. The court therefore granted the

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United States District Court

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earlier arbitration award. See id. The defendant thereafter appealed the district court‟s order

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granting the motion to compel arbitration (i.e., on the second lawsuit).

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On appeal, the Ninth Circuit began by noting that (1) the Federal Arbitration Act (“FAA”)

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applied, (2) there was no dispute that the parties‟ arbitration agreement was valid, and (3) the new

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dispute was subject to arbitration. See id. at 1130-31 (explaining that “[t]he dispute

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unquestionably arises out of or relates „to the construction, enforceability or performance‟ of the

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Agreement and therefore falls within the parties‟ agreement to arbitrate”).

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The court then turned to the defendant‟s contention that, “unlike a determination on the

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merits of a claim, the defense of res judicata is not arbitrable” – but “[w]hether [the defendant‟s]

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res judicata objection to [the plaintiff‟s] claims is itself arbitrable also raises the separate issue of

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who determines the preclusive effect of an earlier arbitration award, the court or the arbitrator.”

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Id. at 1132 (emphasis in original).

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On the first issue, the Ninth Circuit rejected the defendant‟s argument, noting that

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“[n]owhere is the defense of res judicata treated differently or singled out for exclusion [from

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arbitration].” Id. On the second issue – the issue which has bearing on the instant case – the

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Ninth Circuit found “the Second Circuit‟s analysis persuasive: a res judicata objection based on a

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prior arbitration proceeding is a legal defense that, in turn, is a component of the dispute on the
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merits and must be considered by the arbitrator, not the court.” Id. (emphasis added). A dispute

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about preclusion “„is as much related to the merits as such affirmative defenses as a time limit in

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the arbitration agreement or laches, which are assigned to an arbitrator under a broad arbitration

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clause.‟” Id. (quoting Nat’l Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129, 135-36

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(2d Cir. 1996)).

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Relying on Chiron, Fortinet argues, in the case at bar, that, if there is an agreement to

merits-related issue for the arbitrator to decide, and not this Court. See id. at 1134 (stating that,

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“[b]ecause Ortho‟s res judicata objection to Chiron‟s petition to compel arbitration is intertwined

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with the merits of the dispute, it too falls within the scope of the agreement to arbitrate”). Fortinet

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contends that, in the instant case, there was an agreement to arbitrate – not only because of Mr.

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arbitrate, then any contention that the arbitration is barred by the doctrine of res judicata is a

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United States District Court

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Valentine‟s employment agreement, which contained a broad arbitration provision, but also

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because of the parties‟ agreement to arbitrate the claims against Mr. Valentine and Mr. Clark back

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in March 2014. See Docket No. 45 (civil minutes); Docket No. 47 (hearing transcript).

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In response, Defendants do not dispute that there was an agreement to arbitrate.

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Defendants assert, however, that the instant case is not governed by Chiron because Fortinet‟s

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new arbitration demands must ultimately be construed as collateral attacks on the first arbitration

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award, and the proper means to challenge an arbitration award are covered by the FAA and/or

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California Arbitration Act, which give jurisdiction to a court, not an arbitrator, to assess that

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challenge.

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The Court finds that both parties‟ positions have some merit but that both parties have (so

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to speak) painted with too broad a brush. As the Court noted at the hearing, resolution of the

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parties‟ dispute must take into account the specific parameters of the arbitrator‟s decision in the

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first arbitration.

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When Fortinet initiated the first arbitration, it articulated two theories of liability against

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Mr. Valentine and Mr. Clark: (1) improper solicitation of Fortinet employees and (2)

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misappropriation of trade secrets. Ultimately, Fortinet abandoned the misappropriation theory

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(according to Fortinet, only because the individual defendants had improperly withheld
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documents). Thus, the arbitrator in the first arbitration never opined or ruled on Fortinet‟s

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misappropriation theory and instead issued a decision confined to the improper solicitation theory

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alone.

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In its new arbitration demands, Fortinet is presenting the same two theories initially

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advanced in the first arbitration, i.e., improper solicitation and misappropriation. This fact gives

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rise to the prospect of res judicata. But here the specific question for the Court is who should

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decide the res judicata issue – this Court or the arbitrator – and not the merits of the res judicata

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issue itself.

Defendants contend that Fortinet is making a collateral attack on the first arbitration and thus the

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motion should be framed by the FAA wherein the Court hears a challenge to an arbitration award.

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As to the issue of “who,” with respect to Fortinet‟s misappropriation-based claims,

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However, the arbitrator in the first arbitration never addressed the misappropriation theory at all.

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Thus, in this respect, Fortinet is not asking for the first arbitration award to be undone; rather, it

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simply wants the arbitrator to issue a ruling on the misappropriation theory in the first instance, as

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contemplated by the parties when they stipulated to arbitration of the claims against Mr. Valentine

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and Mr. Clark. This makes the situation here akin to that in Chiron.

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Fortinet‟s improper solicitation-based claims, however, present a different situation. As

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noted above, the arbitrator made an express ruling on the improper solicitation theory tendered by

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Fortinet. That being the case, with its new arbitration demands on improper solicitation, Fortinet

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is in effect seeking to undo the first arbitration award; it seeks to change the judgment of the

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arbitration. Thus, Defendants‟ contention that Fortinet is making a collateral attack has merit, and

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the proper vehicle for Fortinet‟s challenge to the first arbitration award is to petition this Court for

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relief pursuant to the FAA and/or CAA.

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The conclusion here is in keeping with Chiron. Notably, in Chiron, the district court

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actually confirmed the first arbitration award. That being the case, the first arbitration award could

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no longer be attacked – i.e., the first arbitration award would stand. Furthermore, there was no

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indication that the res judicata issue, as raised in the second arbitration, would disturb or impact

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the first arbitration award in any way; the only question was whether the second arbitration should
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proceed. And there was no indication that Chiron might invoke the fraud exception to res judicata,

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which would not only allow the second arbitration to proceed but also be an implicit challenge to

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the first arbitration award.
The case at bar is distinguishable from Chiron as, here, the first arbitration award has

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neither been confirmed nor vacated. Thus, the first arbitration award is vulnerable to an attack on,

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e.g., the basis that it was procured by fraud. And here, of course, Fortinet has expressly stated that

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it will invoke the fraud exception to res judicata, which would not only allow the second

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arbitration to proceed but would also be an implicit challenge to the first arbitration award.

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Accordingly, the Court rules as follows: The arbitrator, and not this Court, has the

misappropriation theory – are precluded under the doctrine of res judicata. This Court, however,

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authority to decide whether the new arbitration demands – to the extent based on a

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and not the arbitrator, has the authority to decide whether the new arbitration demands – to the

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extent based on an improper solicitation theory – are precluded under the doctrine of res judicata.

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Only the latter arbitration demands are a true collateral attack on the first arbitration award such

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that the Court, and not the arbitrator, must decide whether the first arbitration award is valid or

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invalid (e.g., because of fraud).

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B.

Alternative Motion to Vacate (In Part) Arbitration Award
Because the Court has denied in part Fortinet‟s primary request for relief, it now turns to

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Fortinet‟s alternative request for relief. As stated in the notice of motion, “[i]n the alternative,

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Fortinet moves for an order that the March 10, 2015 arbitration award be vacated to the extent that

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the award relates to Fortinet’s claims against Valentine and Clark for misuse of Fortinet’s

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confidential information in breach of their contractual obligations while allowing the portion of

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the award that relates to Fortinet’s claims for solicitation of other former Fortinet employees to

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stand.” Not. of Mot. (emphasis added). Because the Court has granted Fortinet its requested

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primary relief for the misappropriation claims, the alternative request for relief is, in essence,

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moot.

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II.

CONCLUSION

For the foregoing reasons, the Court grants in part and denies in part Fortinet‟s motion to
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enforce the stipulation. Fortinet‟s alternative motion to vacate is denied as moot.
This order disposes of Docket No. 293.

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IT IS SO ORDERED.

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Dated: November 25, 2015
______________________________________
EDWARD M. CHEN
United States District Judge

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For the Northern District of California

United States District Court

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