TMX Funding, Inc. v. Impero Technologies, Inc. et al

Filing 157

ORDER BY JUDGE JEREMY FOGEL GRANTING IN PART AND DENYING IN PART 55 MOTION TO DISMISS. (jflc1, COURT STAFF) (Filed on 6/17/2010)

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**E-Filed 6/17/10**

IN THE UNITED STATES DISTRICT COURT 10 FOR THE NORTHERN DISTRICT OF CALIFORNIA 11 SAN JOSE DIVISION 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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TMX FUNDING, INC., a Delaware corporation, Plaintiff, v. IMPERO TECHNOLOGIES, INC., a California corporation; CLARENCE NICHOLAS STEIGELMAN, an individual; RONALD J LESNIAK, an individual; MITCHELL A HEINLEIN, an individual; JOSEPH ZHANG, a.k.a. XIANGCHOU ZHANG, an individual; MICHELLE DOVER, an individual; and DAVID LESNIAK, an individual, Defendants.

Case Number C 10-00202 JF (PVT) ORDER1 GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS [re doc. no. 55]

Defendants Impero Technologies, Inc. ("Impero"), Clarence Steigelman ("Steigelman"), Ronald Lesniak ("R. Lesniak"), Mitchell Heinlein ("Heinlein"), Joseph Zhang ("Zhang"), Michelle Dover ("Dover"), and David Lesniak ("D. Lesniak") (collectively, "Defendants") move

This disposition is not designated for publication in the official reports.

C a s e Number C 10-00202 JF (PVT) O R D E R GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS (J FE X 1 )

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pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the complaint of Plaintiff TMX Funding, Inc. ("TMX"). The Court has considered the moving and responding papers and the oral arguments of counsel presented at the hearing on May 28, 2010. For the reasons discussed below, the motion will be granted in part and denied in part, with leave to amend. I. BACKGROUND TMX filed the instant action against Defendants on January 14, 2010, asserting the following claims for relief: (1) misappropriation of trade secrets in violation of California's Uniform Trade Secrets Act ("UTSA"), Cal. Civ. Code § 3426, et seq.; (2) breach of the duty of loyalty, (3) breach of contract, (4) conversion of personal property, (5) unfair competition in violation of California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200, et seq., (6) interference with prospective economic advantage; and (7) the violation of Cal. Penal Code § 502(e). As remedies for the alleged violations, TMX seeks a constructive trust and an accounting. A. Factual history TMX is the purchaser of certain assets and collateral of Teledex, a designer and manufacturer of hotel guest room telecommunication solutions. (Complaint ¶¶ 21, 27.) TMX acquired the assets and collateral of Teledex after the expiration of several forbearance agreements with respect to a loan on which Teledex was the borrower. (Complaint ¶¶ 26-27.) The individual Defendants, who were employees of Teledex, were terminated during TMX's purchase of Teledex's assets. (Complaint ¶¶ 37-42, 53.) TMX alleges that the individual Defendants formed Defendant Impero following their termination from Teledex, which operates in the same general field as Teledex. (Complaint ¶ 56.) Shortly after its acquisition of Teledex, TMX suspected that some of Teledex's property ­ including laptops and trade secret information ­ had been stolen. (Complaint ¶¶ 56-63.) B. Procedural history On January 20, 2010, TMX moved for a temporary restraining order ("TRO") and an order to show cause why Defendants should not be enjoined from unlawfully taking, retaining and utilizing property and confidential, proprietary, and trade secret information allegedly 2
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belonging to TMX. On January 29, 2010, the Court denied the request for a TRO. On February 12, 2010, the Court held a hearing on TMX's motion for a preliminary injunction. In an order dated March 18, 2010, the Court found that TMX had satisfied its evidentiary burden under California law for obtaining a preliminary injunction. On March 31, 2010, the Court issued a preliminary injunction; Defendants subsequently appealed the order granting a preliminary injunction and moved to stay or modify the preliminary injunction. On May 21, 2010, the Court modified the preliminary injunction; Defendants thereafter dismissed their appeal. II. LEGAL STANDARD A complaint may be dismissed for failure to state a claim upon which relief may be granted if a plaintiff fails to proffer "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). TMX relies on Morton v. Rank Am, Inc., 812 F. Supp. 1062, 1065 (C.D. Cal. 1983), for the proposition that a motion to dismiss will be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." However, the "`no set of facts' language has been questioned, criticized, and explained away long enough" and "is best forgotten as an incomplete, negative gloss on an accepted pleading standard". Twombly, 550 U.S. at 562-63. Allegations of material fact must be taken as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1997). Nonetheless, the Court need not accept as true allegations that are conclusory, unwarranted deductions of fact, or unreasonable inferences. See Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). See also Twombly, 550 U.S. at 561 ("a wholly conclusory statement of [a] claim" will not survive a motion to dismiss). While the record in the instant case is well developed because of the evidence submitted in connection with TMX's motion for a preliminary injunction, the Court's review on a motion to dismiss is limited to the face of the complaint and matters judicially noticeable. MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986); N. Star Int'l v. Ariz. Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). Under the "incorporation by reference" doctrine, the Court also may consider documents which are referenced extensively in the complaint and which are accepted by all parties as 3
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authentic. In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999). Leave to amend should be granted unless it is clear that the complaint's deficiencies cannot be cured by amendment. Lucas v. Dep't of Corr., 66 F. 3d 245, 248 (9th Cir. 1995). In assessing whether to grant an opportunity to amend, the Court considers "the presence or absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party[,] and futility of the proposed amendment." Lee v. SmithKline Beecham, Inc., 245 F.3d 1048, 1052 (9th Cir. 2001) (quoting Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 538 (9th Cir. 1989)). When amendment would be futile, dismissal may be ordered with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996). Finally, although their claims arise under state law, TMX's allegations are subject to the Federal Rules of Civil Procedure. Defendants contend that allegations of "intentional torts like misappropriation of trade secrets, breach of fiduciary duty, unfair competition and the like", (Def.'s Mot. at 3-19:21), are subject to the heightened pleading requirements of Fed. R. Civ. P. 9(b). See Fed. R. Civ. P. 9(b) (requiring that "a party must state with particularity the circumstances constituting fraud or mistake"); Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir. 2003) (if "the claim is said to be `grounded in fraud' or to `sound in fraud,' [then] the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b)."); and Kaplan v. Rose, 49 F.3d 1363, 1370 (9th Cir.1994) (claims based in fraud "must state precisely the time, place, and nature of the misleading statements, misrepresentations, and specific acts of fraud."). However, TMX's claims do not sound in fraud or mistake. As discussed below, while a claim for the misappropriation of trade secrets must be pled with "sufficient particularity", the claim is not subject to Fed . R. Civ. P. 9(b). III. DISCUSSION Defendants argue that TMX has failed to allege enough facts to state a claim for relief that is plausible on its face. In addition, Defendants contend that the USTA preempts all of TMX's claims, except its claims for the misappropriation of trade secrets and breach of contract. // 4
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A.

Misappropriation of trade secrets (Claim 1) Defendants contend that TMX has failed (1) to identify the alleged trade secrets with

particularity and (2) to plead that they have misappropriated the trade secrets. 1. Identification of trade secrets with sufficient particularity

Under the USTA, a "trade secret" is information including a "program, device, method, technique, or process, that: (1) [d]erives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Cal. Civ. Code § 3426.1(d). A complaint for the misappropriation of trade secrets "should describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies." Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 253 (Cal. App. 2d Dist. 1968). However, "[o]ne who seeks to protect his trade secrets from wrongful use or disclosure does not have to spell out the details of the trade secret to avoid [dismissal]. To so require would mean that the complainant would have to destroy the very thing for which he sought protection by making public the secret itself." Id. at 252. TMX alleges nine broad categories of trade secret information: a. b. Its software, source codes, data, formulas, and other technical information developed as proprietary and confidential products and services; Its business methods and marketing plans, such as prospective customer and sales methods for attracting and retaining customers; Its product information, including, but not limited to, cost, pricing, margin data and other financial information; Customer lists; Contact names and information at the various accounts; Names and contact information of the person(s) with purchasing authority and person(s) with influence over purchasing decisions at the various accounts; Customer profiles, including but not limited to, a record of all of its previous transactions, feedback, and service history with the various accounts; 5
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h.

Special buying and service needs, buying and service patterns, agreements with customers, and buying preferences of customers, including special terms, discounts, and accessories; Login and password information to access the computer networks, servers, computer systems, and telephone systems.

j.

(Complaint ¶ 43.) This description is sufficient to permit Defendants at least to ascertain the 5 boundaries within which the secrets lie. 6 a. 7 Defendants contend that TMX insufficiently alleges how the information described above 8 is separate from the trade's general knowledge of the subject matter. While Twombly arguably 9 heightened the overall pleading standard under Fed. R. Civ. P. 12(b)(6), the facts alleged in the 10 complaint still are construed in the light most favorable to the nonmoving party. See Von Saher 11 v. Norton Simon Museum of Art at Pasadena, 592 F.3d 954, 960 (9th Cir. 2010). It is self evident 12 that some of the types of information alleged are not generally known to others in the trade. 13 Entities outside of Teledex certainly would not have general knowledge of Teledex's login and 14 password information for access to Teledex's computer networks and servers, nor would they 15 have access to Teledex's software, source codes, data, formulas, business methods, marketing 16 plans, or margin data. At least with respect to Teledex's login and password information, the 17 information's only economic value derives from the fact that it is not generally known to others. 18 b. 19 TMX sufficiently alleges its reasonable efforts to maintain the secrecy of the information 20 that it has identified. The complaint refers to at least two agreements with respect to proprietary 21 information: a Propriety Information and Employee Inventions Agreement, (Complaint Ex. F), 22 and a Confidential Information Policy and Agreement, (Complaint Ex. G). Construing the facts 23 in the light most favorable to TMX, Teledex would have required its employees to sign these 24 agreements. Teledex also maintained computer login procedures and password protection for at 25 least some of the information that TMX has identified. (Complaint ¶¶ 49-50.) 26 2. 27 Defendants also contend that TMX insufficiently alleges that Defendants actually 28 6
C a s e Number C 10-00202 JF (PVT) O R D E R GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS (J FE X 1 )

Separate from the trade's general knowledge of the subject matter

Subject to efforts to maintain its secrecy

Misappropriation of trade secrets

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misappropriated any trade secrets. TMX alleges that several computers, servers, and hard files were stolen from its offices in San Jose, California, (Complaint ¶¶ 60-61), but it does not allege explicitly that Defendants were responsible for the theft. However, TMX does allege, on information and belief, that "Defendants used confidential and proprietary information to obtain unauthorized access to Teledex servers and computer networks and copied, misappropriated, removed, overwrote, removed [sic], and erased confidential, proprietary and trade secret information as recently as January 1, 2010." (Complaint ¶ 62.) It alleges specifically that Defendants misappropriated information, identifies the method used to misappropriate the information, and indicates the a date on which the information was misappropriated. B. UTSA preemption Defendants contend that the UTSA preempts TMX's claims for breach of the duty of loyalty, conversion, unfair competition, interference with a prospective economic advantage, constructive trust and accounting, and unauthorized access to computerized data in contravention of California Penal Code § 502. The UTSA "preempts common law claims that are `based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.'" K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal. App. 4th 939, 958 (Cal. App. 6th Dist. 2009) (quoting Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1035 (N.D. Cal. 2005)). However, as discussed above, Defendants also dispute that TMX sufficiently identifies any trade secret information. Regardless of whether the information is a trade secret, Defendants may be liable for a breach of the duty of loyalty if they utilized Teledex's proprietary information, for conversion if they wrongfully deprived TMX of possession of that information, for unfair competition if they misappropriated TMX's proprietary information, for interfering with TMX's prospective economic advantage, and for accessing computerized information without authorization. This Court agrees with the approach taken by other courts within this district: To the extent the claim is based on these trade secrets, it cannot go forward. However, [the plaintiff] may continue to pursue the [tort claim] so long as the confidential information at the foundation of the claim is not a trade secret, as that term is defined in [the UTSA]. If, in subsequent pleadings or briefs, or at trial, it is established that the disclosures on which [the plaintiff] bases this claim were trade secrets, the claim will be 7
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dismissed with prejudice." First Advantage Background Services Corp. v. Private Eyes, Inc., 569 F. Supp. 2d 929, 942 (N.D. Cal. 2008). C. Breach of the duty of loyalty (Claim 2) Defendants point out that they have never been employed by TMX and thus do not owe a duty of loyalty to TMX. TMX alleges that Defendants breached fiduciary duties owed to Teledex and that, as Teledex's successor in interest, it has acquired the right to enforce those claims against Defendants. The individual Defendants contend that they were terminated as of December 10, 2009 and that all of the wrongful conduct alleged by TMX occurred after that date. TMX alleges that at least some Teledex property was stolen before or immediately after December 10, 2009. (Complaint ¶ 61.) While there is a dispute with respect to whether the individual Defendants removed Teledex property and when that property was removed, the complaint lacks allegations of factual details of Defendants' wrongful actions while still employed at Teledex. The Court concludes that requiring TMX to provide more specific allegations with respect to which Defendants did what and when will clarify TMX's claim and make it significantly more manageable. D. Breach of contract (Claim 3) Under California law, a prima facie claim for breach of contract consists of four elements: (1) the existence of a contract, (2) the plaintiff's performance or excuse for non-performance, (3) defendant's breach, and (4) damages to the plaintiff from defendant's breach. Walsh v. West Valley Mission Community College Dist., 66 Cal. App. 4th 1532, 1545 (Cal. App. 6th Dist. 1998). TMX identifies two Teledex form agreements intended to protect proprietary and confidential information: a Proprietary Information and Employee Inventions Agreement, (Complaint Ex. F), and a Confidential Information Policy and Agreement, (Complaint Ex. G). TMX alleges, on information and belief, that Defendants signed these agreements. Defendants contend that TMX insufficiently alleges the existence of a contract, arguing that it does not provide factual support for its allegation that Defendants signed the agreements. For purposes of the instant motion, TMX sufficiently alleges the existence of a contract. TMX 8
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specifically alleges that the individual Defendants are former Teledex employees and identifies two form agreements used by Teledex to protect its confidential and proprietary information from disclosure by its employees. Viewed in the light most favorable to TMX, these factual allegations are sufficient to support a reasonable inference that Defendants signed the agreements while they were employed by Teledex. E. Conversion (Claim 4) "`Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion are the plaintiff's ownership or right to possession of the property at the time of the conversion; the defendant's conversion by a wrongful act or disposition of property rights; and damages.'" Plummer v. Day/Eisenberg, LLP, 184 Cal. App. 4th 38, 45 (Cal. App. 4th Dist. 2010) (citing Farmers Ins. Exchange v. Zerin, 53 Cal. App. 4th 445, 451 (Cal. App. 3d Dist. 1997)). Defendants argue that TMX also must allege that it demanded the return of the items that were lost, relying on Wade v. Markwell & Co., 118 Cal. App. 2d 410, 418 (Cal. App. 1953). However, to the extent that such a demand once was an element of the prima facie case for conversion, modern California courts do not appear to require it. More troubling is Defendants' contention that TMX does not allege that Defendants actually coverted any tangible property. TMX does allege that computers, hard files, hardware, servers, and computer and internet access cards were stolen from its offices in San Jose, California, (Complaint ¶ 61), but it does not allege that Defendants or any particular individual Defendants are responsible. The complaint lacks sufficient factual support to make an inference to that effect reasonable. However, TMX also alleges that Defendants misappropriated intangible property by accessing Teledex's servers and computer networks on January 1, 2010. (Complaint ¶ 62.) "It would be a curious jurisprudence that turned on the existence of a paper document rather than an electronic one. Torching a company's file room would then be conversion while hacking into its mainframe and deleting its data would not. That is not the law, at least not in California." Kremen v. Cohen, 337 F.3d 1024, 1034 (9th Cir. 2003). F. Interference with a prospective economic advantage (Claim 6) The elements of interference with a prospective economic advantage "are usually stated as 9
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follows: `(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.'" Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1153 (2003) (citation omitted). Defendants contend that TMX insufficiently alleges (1) the existence of an economic relationship between TMX and a third party and (2) intentional acts of Defendants that have actually disrupted that relationship. TMX alleges in a conclusory fashion that some economic relationship with a third party has been disrupted by Defendants' intentional acts. (Complaint ¶¶ 108-110.) Such conclusory allegations need not be accepted as true. Sprewell, 266 F.3d at 988. The complaint does not provide any factual support for this allegation. G. Cal. Penal Code § 502 (Claim 8) Cal. Pen. Code § 502(c) proscribes a wide range of conduct involving the knowingly unauthorized access of computer data, including knowingly accessing and without permission taking, copying, or making use of any data from a computer, computer system, or computer network, or taking or copying any supporting documentation, whether existing or residing internal or external to a computer, computer system, or computer network; knowingly and without permission using or causing to be used computer services; and knowingly accessing and without permission adding, altering, damaging, deleting, or destroying any data, computer software, or computer programs which reside or exist internal or external to a computer, computer system, or computer network. Cal. Pen. Code § 502(c)(2)-(4). TMX alleges "that Defendants used confidential and proprietary information to obtain unauthorized access to Teledex servers and computer networks and copied, misappropriated, removed, overwrote, removed [sic], and erased confidential, proprietary and trade secret information as recently as January 1, 2010." (Complaint ¶ 62.) If this allegation is true, Defendants conduct may have violated Cal. Pen. Code § 502. Because the information need not be a trade secret for purposes of Cal. Pen. Code § 502, the UTSA does not preempt this claim to the extent that the misappropriated information was not a trade secret. 10
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H.

Unfair competition (Claim 5) The UCL prohibits "any unlawful, unfair or fraudulent business act or practice and unfair,

deceptive, untrue or misleading advertising." Cal. Civ. Code § 17200. Accordingly, "[a]n act can be alleged to violate any or all of the three prongs of the UCL ­ unlawful, unfair, or fraudulent." Berryman v. Merit Prop. Mgmt., Inc., 152 Cal. App. 4th 1544, 1554 (2007). For an action based upon an allegedly unlawful business practice, the UCL "borrows violations of other laws and treats them as unlawful practices that the unfair competition law makes independently actionable." Cel-Tech Commc'ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 180 (1999). As discussed above, TMX states a claim under Cal. Pen. Code § 502, and this is a sufficient predicate for unlawful competition under the UCL. Defendants argue that the UCL claim must be dismissed because TMX seeks compensatory, punitive, and exemplary damages. Defendants are correct that California courts "have stated that under the UCL, `[p]revailing plaintiffs are generally limited to injunctive relief and restitution.'" Korea Supply Co., 29 Cal. 4th at 1144 (quoting Cel-Tech, 20 Cal.4th at 179) (marks in the original). However, TMX also seeks injunctive relief. (Complaint at 28:3-6, 29:11-15, and 30:1-12.) I. Constructive trust and accounting (Claim 7) A constructive trust "is not an independent cause of action but merely a type of remedy for some categories of underlying wrong." Glue-Fold, Inc. v. Slautterback Corp., 82 Cal. App. 4th 1018, 1023 n.3 (Cal. App. 1st Dist. 2000). An accounting "is treated as a cause of action available to a wronged fiduciary [citation], which is subject to the statute of limitations governing the nature of the underlying wrong." Id. Thus, "these equitable forms of remedies are dependent upon a substantive basis for liability". Id. As discussed above, the Court will decline to dismiss TMX's claim for misappropriation of trade secrets. Accordingly, TMX's prayer for these remedies remains viable. IV. DISPOSITION Defendants motion will be granted with respect to TMX's claims for breach of the duty of loyalty and interference with prospective economic advantage. The motion otherwise will be denied. Any amended complaint shall be filed within thirty (30) days of the date of this order. 11
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C a s e Number C 10-00202 JF (PVT) O R D E R GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS (J FE X 1 )

IT IS SO ORDERED

JEREMY FOGEL United States District Judge