Proofpoint, Inc. et al v. Vade Secure, Incorporated et al

Filing 820

ORDER DENYING PLAINTIFFS' MOTION FOR EXEMPLARY DAMAGES. Signed by Judge Maxine M. Chesney on November 18, 2021. (mmclc1, COURT STAFF) (Filed on 11/18/2021)

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1 2 3 4 IN THE UNITED STATES DISTRICT COURT 5 FOR THE NORTHERN DISTRICT OF CALIFORNIA 6 7 PROOFPOINT, INC., et al., Plaintiffs, 8 9 10 United States District Court Northern District of California 11 12 Case No. 19-cv-04238-MMC v. VADE SECURE, INCORPORATED; VADE SECURE SASU; OLIVIER LEMARIÉ, ORDER DENYING PLAINTIFFS' MOTION FOR EXEMPLARY DAMAGES Defendants. 13 14 Before the Court is plaintiffs Proofpoint, Inc. ("Proofpoint") and Cloudmark LLC's 15 ("Cloudmark") "Motion for Exemplary Damages In Re Vade's Willful & Malicious Trade 16 Secret Misappropriation," filed September 10, 2021. Defendants Vade Secure, Inc. and 17 Vade Secure SASU (collectively, "Vade") have filed opposition, to which plaintiffs have 18 replied. The matter came on regularly for hearing on October 29, 2021. Sean S. Pak, 19 Iman Lordgooie, and Jodie W. Cheng of Quinn Emanuel Urquhart & Sullivan, LLP 20 appeared on behalf of plaintiffs. Douglas E. Lumish and Jeffrey G. Homrig of Latham & 21 Watkins LLP appeared on behalf of Vade. Having read and considered the parties' 22 respective written submissions, and having considered the arguments made at the 23 hearing, the Court rules as follow. 24 BACKGROUND 25 In the operative complaint, the First Amended Complaint, plaintiffs allege that 26 Vade, as well as defendant Olivier Lemarié ("Lemarié"), Vade's Chief Technology Officer 27 and formerly Vice President of Gateway Technology at Cloudmark, misappropriated 28 plaintiffs' trade secrets in violation of the Defend Trade Secrets Act ("DTSA"). 1 The case was tried to a jury and, on August 20, 2021, the jury found: (1) plaintiffs' 2 asserted Trade Secrets 1-7 and 9-20 qualified as trade secrets, but asserted Trade 3 Secret 8 did not; (2) Vade misappropriated Trade Secrets 1-7 and 9-16, but not 17-20, 4 (3) Lemarié misappropriated Trade Secrets 1-7 and 9-15, but not 16-20; (4) Vade willfully 5 and maliciously misappropriated Trade Secrets 1-7 and 9-16; (5) Lemarié did not willfully 6 and maliciously misappropriate Trade Secrets 1-7 and 9-15; (6) plaintiffs did not suffer an 7 actual loss as a result of the misappropriation; and (7) Vade, by reason of its 8 misappropriation, was unjustly enriched in the amount of $13,495,659.1 DISCUSSSION 9 10 United States District Court Northern District of California 11 12 By the instant motion, plaintiffs seek, as against Vade, an award of exemplary damages. Under DTSA, "a court may" award (1) "damages for actual loss caused by the 13 misappropriation of the trade secret," (2) "damages for any unjust enrichment caused by 14 the misappropriation of the trade secret that is not addressed in computing damages for 15 actual loss," and (3), "if the trade secret is willfully and maliciously misappropriated, . . . 16 exemplary damages in an amount not more than 2 times the amount of the damages 17 awarded." See 18 U.S.C. § 1836(b)(3). 18 Here, as noted, the jury found Vade willfully and maliciously misappropriated 19 Trade Secrets 1-7 and 9-16. Trade Secrets 1-7 and 9-15 are plaintiffs' spear phishing 20 trade secrets, which secrets, plaintiffs argued to the jury, were used by Vade in the 21 design of two of its products, namely, Vade Secure For Microsoft 365 ("Vade O365) and 22 Vade Secure Email Content Filter ("Content Filter"). Trade Secret 16 is information, 23 contained in plaintiffs' Gateway Daily Licensing Reports, reflecting customer usage of 24 Cloudmark Gateway, a mail transfer agent product ("MTA") sold by plaintiffs, and which 25 information, plaintiffs argued, spurred Vade to develop a competing MTA product sold as 26 27 28 1 The jury also found Vade and Lemarié infringed related copyrights owned by Proofpoint and that Lemarié breached his employment contract with Cloudmark, which findings are not addressed in plaintiffs' motion. 2 1 MTA Builder. Plaintiffs contend they are entitled to an award of exemplary damages 2 based on the jury's findings as to both the spear phishing secrets and the licensing 3 reports. 4 Although there is no clearly articulated test for determining whether, upon a finding 5 of willful and malicious misappropriation, an award of exemplary damages is proper, 6 district courts have considered a number of factors. In particular, courts have considered 7 "the degree of reprehensibility associated with the wrongdoer's actions," see Syntel 8 Sterling Best Shore Mauritius Ltd. v. TriZetto Group, Inc., 2021 WL 1553926, at *8 (S.D. 9 N.Y. April 20, 2021 (internal quotation, alteration, and citation omitted), "the duration of misappropriative conduct," see AgroFresh Inc. v. Essentiv LLC, 2020 WL 7024867, at *23 11 United States District Court Northern District of California 10 (D. Del. November 30, 2020), "the defendant's consciousness of resulting injury and any 12 efforts to cover up malfeasance," see id., "the need to deter similar misconduct in the 13 future," see DiscoverOrg Data, LLC v. Bitnine Global, Inc., 2020 WL 6562333, at *10 14 (N.D. Cal. November 9, 2020), "the amount of compensatory damages awarded," see 15 Citcon USA, LLC v. RiverPay, Inc., 2020 WL 5365980, at *5 (N.D. Cal. September 8, 16 2020), and "the wealth of the particular defendant," see id.2 17 Here, the Court begins with the degree of reprehensibility, a factor of particular 18 importance. See BMW of North America, Inc. v. Gore, 517 U.S. 559, 575 n.23 (1996) 19 (observing "flagrancy of the misconduct is thought to be the primary consideration in 20 determining the amount of punitive damages") (internal quotation and citation omitted). 21 With respect to the spear phishing secrets, plaintiffs argued Lemarié was the 22 23 24 25 26 27 28 2 In Citcon, unlike the other three cases cited above, the district court addressed the question of exemplary damages under the California Uniform Trade Secrets Act ("CUTSA") rather than DTSA. As both DTSA and CUTSA are modeled after the Uniform Trade Secrets Act ("UTSA"), the Court finds it appropriate to consider factors courts have addressed in both DTSA and CUTSA cases. See Brand Energy & Infrastructure Services, Inc., 2017 WL 1105648, at *7 (E.D. Pa. March 24, 20217) (examining legislative history; finding "Congress expressed its specific intent to model the DTSA in large part after the UTSA" and "directly modeled the DTSA's damages provisions after the UTSA's damages provisions"); Cadence Design Systems, Inc. v. Avant! Corp., 29 Cal. 4th 215, 221 (2002) (noting UTSA was "adopted without significant change by California"). 3 1 individual at Vade who used those secrets in the design of Vade products; specifically, 2 plaintiffs argued, Lemarié incorporated secrets he developed while employed by 3 Cloudmark into the source code for Vade's O365.3 Lemarié, however, testified without 4 apparent dispute that, upon learning of plaintiffs' claims, he replaced the assertedly 5 secret code using publicly available code. (See Transcript of Trial Proceedings, July 29, 6 2021, at 740:17-741:4.) Moreover, it is undisputed that Vade thereafter went further and 7 engaged Zenika, a neutral non-party, to wholly redesign the spear phishing module in 8 O365, and, although plaintiffs argued Vade was unsuccessful in eliminating from the 9 redesign all potential influence derived from Cloudmark's trade secrets, there is no 10 United States District Court Northern District of California 11 showing any such failure was intentional. Given the redesign, as well as the absence of a jury finding of willful and malicious 12 misappropriation by Lemarié, plaintiffs, relying primarily on an email written by Lemarié 13 (see PX-2146), contend other Vade officers or employees were involved in the 14 misappropriation of spear phishing trade secrets and that Vade can be held responsible 15 for their conduct as well. The Court, however, is not persuaded that the inferences 16 plaintiffs seek to draw from that email are of sufficient strength to support an award of 17 exemplary damages. Similarly lacking in sufficient strength is the other evidence on 18 which plaintiffs rely for the jury's finding of willful and malicious use of spear phishing 19 trade secrets by Vade, namely, Vade's recruitment of Cloudmark employees who had 20 knowledge of Cloudmark's spear phishing technology (see PX-2288), Vade's Chief 21 Executive Officer Georges Lotigier's ("Lotigier") failure to concede wrongdoing (see 22 Transcript of Trial Proceedings, August 5, 2021, at 1864:5 - 1865:20), Lotigier's decision 23 to place Lemarié on leave rather than to fire him (see id. at 1858:18-1859:7), and Vade's 24 use of strong language in internal documents discussing competition with Cloudmark 25 26 27 28 3 Although plaintiffs' technical expert, James Nielson, Ph.D., offered an opinion that Cloudmark's spear phishing trade secrets were also incorporated in Vade's Content Filter, he conceded he was unable to locate any such code therein (see Transcript of Trial Proceedings, August 3, 2021, at 1344:4-13, 1388:4-19, 1395:1-6), and the instant motion makes no reference to Content Filter. 4 1 2 (see PX-1863.0016). With respect to Trade Secret 16, the Gateway Daily Licensing Reports, the jury's finding as to willful and malicious use appears to have been based on Xavier Delannoy's 4 taking the reports when he left Cloudmark's employ and, subsequently, while employed 5 by Vade as its Vice President of Engineering, forwarding them to Lotigier, who, in turn, 6 forwarded them to Andre Gendre, Vade's Chief Product and Services Officer, via an 7 email in which Lotigier used a winking emoticon. (See PX-2254.0002.) The reports, 8 however, included no trade secrets as to the design of Cloudmark's MTA. Rather, 9 plaintiffs contended, they demonstrated the potential profitability of MTAs, and, although 10 plaintiffs argued Vade thereafter used Trade Secrets 17-20 in designing MTA Builder, the 11 United States District Court Northern District of California 3 jury did not find those secrets were misappropriated. Under such circumstances, the 12 Court finds Vade's misappropriation of the reports, whether considered separately or in 13 combination with the evidence pertaining to the spear phishing trade secrets, is not so 14 egregious as to weigh in favor of an award of exemplary damages. 15 The Court next turns to consciousness of resulting injury and any efforts to cover 16 up malfeasance. As to consciousness of injury, Vade, as noted, endeavored to rectify 17 any misuse of the spear phishing trade secrets, and the claimed misuse of and harm 18 from the forwarding of licensing reports was, essentially, indirect in nature. As to any 19 cover-up, plaintiffs' theory, both in pretrial proceedings and at trial, was based on 20 Lemarié's shredding of various computer files, conduct for which Lemarié provided a 21 benign explanation, which, given its finding that Lemarié did not act willfully or 22 maliciously, the jury apparently accepted. Consequently, this factor adds, at best, only 23 slight support for an award of exemplary damages. 24 The remaining factors add little weight in the balance. As noted, the jury found 25 plaintiffs incurred no actual loss from the misappropriation, and, although exemplary 26 damages can be based on a finding of unjust enrichment, see Syntel, 2021 WL 1553926, 27 at *10, no party or the Court has been able to determine, at least to date, how the jury 28 arrived at the amount it awarded. As to the matters of wealth and deterrence, although 5 1 Vade does not appear to be in difficult financial circumstances, and although, in an 2 apparent effort to put on what might be described as a brave face, as well as to reassure 3 its customers and potential customers it would remain a viable company, it may have 4 expressed satisfaction that the verdict was for an amount considerably less than that 5 sought by plaintiffs (see Cheng Decl., filed September 10, 2021, Ex. 1 at 3), the amount 6 awarded, close to thirteen and a half million dollars, is a substantial sum, a sum that may 7 well affect the manner in which Vade has chosen to allocate resources (see Transcript of 8 Trial Proceedings, August 5, 2021, 1900:8-21) and one the Court finds sufficient to deter 9 future misappropriation. Accordingly, having fully considered the evidence presented at trial and in 11 United States District Court Northern District of California 10 connection with the instant motion, the Court finds imposition of exemplary damages is 12 not warranted. CONCLUSION 13 14 15 16 For the reasons stated above, Plaintiff's motion for an award of exemplary damages is hereby DENIED. IT IS SO ORDERED. 17 18 Dated: November 18, 2021 MAXINE M. CHESNEY United States District Judge 19 20 21 22 23 24 25 26 27 28 6

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