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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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 FORTINET, INC., Plaintiff, 8 9 10 ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF’S MOTION TO ENFORCE STIPULATION v. SOPHOS, INC., et al., Docket No. 293 Defendants. 12 For the Northern District of California United States District Court 11 Case No. 13-cv-05831-EMC 13 Plaintiff Fortinet, Inc. has filed suit against Defendants Sophos, Inc. and two of its 14 employees, Michael Valentine and Jason Clark, asserting a variety of claims, including patent 15 infringement, trade secret misappropriation, breach of contract, and breach of fiduciary duty. The 16 claim for trade secret misappropriation (the eleventh cause of action) was asserted against Sophos 17 only, and not the individuals. However, the claims for breach of contract (the seventh and eighth 18 causes of action), which were asserted against Mr. Valentine and Mr. Clark only, included 19 allegations that the individuals had misappropriated trade secrets. See FAC ¶¶ 153, 161 (alleging 20 that “[Mr.] Valentine furthermore breached the Valentine Agreement by using Fortinet Trade 21 Secrets for his own benefit and for the benefit of Sophos, without permission from Fortinet” and 22 that Mr. Clark did the same); see also FAC ¶ 71 (defining “Fortinet Trade Secrets”). 23 In March 2014, the parties stipulated to arbitrating all claims – including the breach-of- 24 contract claims – against Mr. Valentine and Mr. Clark. See Docket No. 45 (civil minutes) (stating 25 that “Defendant‟s Motion to Compel Arbitration is granted as to Valentine and Clark pursuant to 26 stipulation of the parties”); see also Docket No. 47 (hearing transcript). In November 2014, the 27 arbitration hearing took place, and in March 2015, the arbitrator – Hon. Jack Komar (retired) of 28 JAMS – issued his award. The arbitrator‟s decision addressed only Fortinet‟s assertion that Mr. 1 Valentine and Mr. Clark had improperly solicited or induced certain Fortinet employees to work 2 for Sophos. The arbitrator did not discuss whether Mr. Valentine and/or Mr. Clark had breached 3 their contracts with Fortinet by misappropriating trade secrets – apparently because Fortinet did 4 not press forward with this theory at the arbitration. In August 2015, Fortinet filed new demands for arbitration against Mr. Valentine and Mr. 5 6 Clark, contending that the individuals had withheld documents supporting Fortinet‟s theory that 7 the individuals had misappropriated trade secrets and thereby, inter alia, breached their contracts 8 with Fortinet. According to Fortinet, the withholding of documents constitutes fraud which 9 warrants a new arbitration and which precludes the individuals from making any res judicata 10 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 12 For the Northern District of California United States District Court 11 issue an order finding that the arbitrator, and not this Court, has the authority to decide whether the 13 new arbitration demands are precluded under the doctrine of res judicata (i.e., because of the 14 earlier arbitration in November 2014). “In the alternative, Fortinet moves for an order that the 15 March 10, 2015 arbitration award be vacated to the extent that the award relates to Fortinet‟s 16 claims against Valentine and Clark for misuse of Fortinet‟s confidential information in breach of 17 their contractual obligations while allowing the portion of the award that relates to Fortinet‟s 18 claims for solicitation of other former Fortinet employees to stand.” Not. of Mot. 19 Having considered the parties‟ briefs and accompanying submissions, as well as the oral 20 argument of counsel, the Court hereby GRANTS in part and DENIES in part Fortinet‟s motion. I. DISCUSSION 21 22 A. Motion to Enforce Stipulation The Court addresses first Fortinet‟s primary request for relief – i.e., that the Court issue an 23 24 order finding that the arbitrator, and not this Court, has the authority to decide whether the new 25 arbitration demands (filed in August 2015) are precluded under the doctrine of res judicata (i.e., 26 because of the earlier arbitration in November 2014).1 27 1 28 As indicated above, the arbitration hearing took place in November 2014, even though the actual written decision was not issued until March 2015. 2 1 Fortinet has characterized its motion as one to enforce the parties‟ stipulation in order to 2 align the situation presented herein with the situation presented to the Ninth Circuit in Chiron 3 Corp. v. Ortho Diagnostic Systems, Inc., 207 F.3d 1126 (9th Cir. 2000). In Chiron, there was a 4 dispute between the parties which was arbitrated. After the arbitration was completed, the plaintiff 5 filed a new lawsuit and moved for an order compelling arbitration. The defendant argued that the 6 second lawsuit was improper because “the earlier arbitration award operated as res judicata to all 7 claims [the plaintiff] sought to raise in a second arbitration proceeding. [The defendant] also 8 sought an order confirming the earlier arbitration award . . . .” Id. at 1129. “Applying federal law, 9 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 12 For the Northern District of California within the scope of the parties‟ agreement to arbitrate.” Id. The court therefore granted the 11 United States District Court 10 earlier arbitration award. See id. The defendant thereafter appealed the district court‟s order 13 granting the motion to compel arbitration (i.e., on the second lawsuit). 14 On appeal, the Ninth Circuit began by noting that (1) the Federal Arbitration Act (“FAA”) 15 applied, (2) there was no dispute that the parties‟ arbitration agreement was valid, and (3) the new 16 dispute was subject to arbitration. See id. at 1130-31 (explaining that “[t]he dispute 17 unquestionably arises out of or relates „to the construction, enforceability or performance‟ of the 18 Agreement and therefore falls within the parties‟ agreement to arbitrate”). 19 The court then turned to the defendant‟s contention that, “unlike a determination on the 20 merits of a claim, the defense of res judicata is not arbitrable” – but “[w]hether [the defendant‟s] 21 res judicata objection to [the plaintiff‟s] claims is itself arbitrable also raises the separate issue of 22 who determines the preclusive effect of an earlier arbitration award, the court or the arbitrator.” 23 Id. at 1132 (emphasis in original). 24 On the first issue, the Ninth Circuit rejected the defendant‟s argument, noting that 25 “[n]owhere is the defense of res judicata treated differently or singled out for exclusion [from 26 arbitration].” Id. On the second issue – the issue which has bearing on the instant case – the 27 Ninth Circuit found “the Second Circuit‟s analysis persuasive: a res judicata objection based on a 28 prior arbitration proceeding is a legal defense that, in turn, is a component of the dispute on the 3 1 merits and must be considered by the arbitrator, not the court.” Id. (emphasis added). A dispute 2 about preclusion “„is as much related to the merits as such affirmative defenses as a time limit in 3 the arbitration agreement or laches, which are assigned to an arbitrator under a broad arbitration 4 clause.‟” Id. (quoting Nat’l Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129, 135-36 5 (2d Cir. 1996)). 6 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, 9 “[b]ecause Ortho‟s res judicata objection to Chiron‟s petition to compel arbitration is intertwined 10 with the merits of the dispute, it too falls within the scope of the agreement to arbitrate”). Fortinet 11 contends that, in the instant case, there was an agreement to arbitrate – not only because of Mr. 12 For the Northern District of California arbitrate, then any contention that the arbitration is barred by the doctrine of res judicata is a 8 United States District Court 7 Valentine‟s employment agreement, which contained a broad arbitration provision, but also 13 because of the parties‟ agreement to arbitrate the claims against Mr. Valentine and Mr. Clark back 14 in March 2014. See Docket No. 45 (civil minutes); Docket No. 47 (hearing transcript). 15 In response, Defendants do not dispute that there was an agreement to arbitrate. 16 Defendants assert, however, that the instant case is not governed by Chiron because Fortinet‟s 17 new arbitration demands must ultimately be construed as collateral attacks on the first arbitration 18 award, and the proper means to challenge an arbitration award are covered by the FAA and/or 19 California Arbitration Act, which give jurisdiction to a court, not an arbitrator, to assess that 20 challenge. 21 The Court finds that both parties‟ positions have some merit but that both parties have (so 22 to speak) painted with too broad a brush. As the Court noted at the hearing, resolution of the 23 parties‟ dispute must take into account the specific parameters of the arbitrator‟s decision in the 24 first arbitration. 25 When Fortinet initiated the first arbitration, it articulated two theories of liability against 26 Mr. Valentine and Mr. Clark: (1) improper solicitation of Fortinet employees and (2) 27 misappropriation of trade secrets. Ultimately, Fortinet abandoned the misappropriation theory 28 (according to Fortinet, only because the individual defendants had improperly withheld 4 1 documents). Thus, the arbitrator in the first arbitration never opined or ruled on Fortinet‟s 2 misappropriation theory and instead issued a decision confined to the improper solicitation theory 3 alone. 4 In its new arbitration demands, Fortinet is presenting the same two theories initially 5 advanced in the first arbitration, i.e., improper solicitation and misappropriation. This fact gives 6 rise to the prospect of res judicata. But here the specific question for the Court is who should 7 decide the res judicata issue – this Court or the arbitrator – and not the merits of the res judicata 8 issue itself. Defendants contend that Fortinet is making a collateral attack on the first arbitration and thus the 11 motion should be framed by the FAA wherein the Court hears a challenge to an arbitration award. 12 For the Northern District of California As to the issue of “who,” with respect to Fortinet‟s misappropriation-based claims, 10 United States District Court 9 However, the arbitrator in the first arbitration never addressed the misappropriation theory at all. 13 Thus, in this respect, Fortinet is not asking for the first arbitration award to be undone; rather, it 14 simply wants the arbitrator to issue a ruling on the misappropriation theory in the first instance, as 15 contemplated by the parties when they stipulated to arbitration of the claims against Mr. Valentine 16 and Mr. Clark. This makes the situation here akin to that in Chiron. 17 Fortinet‟s improper solicitation-based claims, however, present a different situation. As 18 noted above, the arbitrator made an express ruling on the improper solicitation theory tendered by 19 Fortinet. That being the case, with its new arbitration demands on improper solicitation, Fortinet 20 is in effect seeking to undo the first arbitration award; it seeks to change the judgment of the 21 arbitration. Thus, Defendants‟ contention that Fortinet is making a collateral attack has merit, and 22 the proper vehicle for Fortinet‟s challenge to the first arbitration award is to petition this Court for 23 relief pursuant to the FAA and/or CAA. 24 The conclusion here is in keeping with Chiron. Notably, in Chiron, the district court 25 actually confirmed the first arbitration award. That being the case, the first arbitration award could 26 no longer be attacked – i.e., the first arbitration award would stand. Furthermore, there was no 27 indication that the res judicata issue, as raised in the second arbitration, would disturb or impact 28 the first arbitration award in any way; the only question was whether the second arbitration should 5 1 proceed. And there was no indication that Chiron might invoke the fraud exception to res judicata, 2 which would not only allow the second arbitration to proceed but also be an implicit challenge to 3 the first arbitration award. The case at bar is distinguishable from Chiron as, here, the first arbitration award has 4 5 neither been confirmed nor vacated. Thus, the first arbitration award is vulnerable to an attack on, 6 e.g., the basis that it was procured by fraud. And here, of course, Fortinet has expressly stated that 7 it will invoke the fraud exception to res judicata, which would not only allow the second 8 arbitration to proceed but would also be an implicit challenge to the first arbitration award. 9 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, 12 For the Northern District of California authority to decide whether the new arbitration demands – to the extent based on a 11 United States District Court 10 and not the arbitrator, has the authority to decide whether the new arbitration demands – to the 13 extent based on an improper solicitation theory – are precluded under the doctrine of res judicata. 14 Only the latter arbitration demands are a true collateral attack on the first arbitration award such 15 that the Court, and not the arbitrator, must decide whether the first arbitration award is valid or 16 invalid (e.g., because of fraud). 17 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 18 19 Fortinet‟s alternative request for relief. As stated in the notice of motion, “[i]n the alternative, 20 Fortinet moves for an order that the March 10, 2015 arbitration award be vacated to the extent that 21 the award relates to Fortinet’s claims against Valentine and Clark for misuse of Fortinet’s 22 confidential information in breach of their contractual obligations while allowing the portion of 23 the award that relates to Fortinet’s claims for solicitation of other former Fortinet employees to 24 stand.” Not. of Mot. (emphasis added). Because the Court has granted Fortinet its requested 25 primary relief for the misappropriation claims, the alternative request for relief is, in essence, 26 moot. 27 28 II. CONCLUSION For the foregoing reasons, the Court grants in part and denies in part Fortinet‟s motion to 6 1 2 enforce the stipulation. Fortinet‟s alternative motion to vacate is denied as moot. This order disposes of Docket No. 293. 3 4 IT IS SO ORDERED. 5 6 7 8 Dated: November 25, 2015 ______________________________________ EDWARD M. CHEN United States District Judge 9 10 12 For the Northern District of California United States District Court 11 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7

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