Phoenix Process Equipment Co. v. Capital Equipment & Trading Corporation et al
Filing
57
MEMORANDUM OPINION & ORDER granting in part and denying in part 46 Motion to Dismiss for Failure to State a Claim; granting in part and denying in part 47 Motion to Dismiss for Lack of Jurisdiction; signed by Chief Judge Joseph H. McKinley, Jr. on 1/12/17: The motions to dismiss as to Counts III and IV are DENIED. The motions to dismiss as to Counts II and V are GRANTED. Further, service upon Coralina Engineering, LLC, is QUASHED. Phoenix has leave to effect service within 90 days upon Coralina Engineering, LLC. cc: Counsel(DJT)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:16-CV-00024-JHM
PHOENIX PROCESS EQUIPMENT CO.
PLAINTIFF
V.
CAPITAL EQUIPMENT & TRADING
CORPORATION, et al
DEFENDANTS
MEMORANDUM OPINION & ORDER
This matter is before the Court on motions to dismiss by Defendant Capital Equipment &
Trading Corporation [DN 46] and Defendants Coralina Engineering, LLC and Alexander
Chudnovets [DN 47]. Fully briefed, these matters are ripe for decision.
I.
BACKGROUND
Plaintiff Phoenix Process Equipment Co. (hereinafter “Phoenix”) is a company based in
Louisville, Kentucky, that designs, engineers, manufactures, and services machinery and
equipment used for recycling water that has been used to wash coal. Phoenix has had its
products distributed in Russia, Ukraine, and other eastern European nations since 1997 by an
assortment of different companies that all have used some variation of the trade name CETCO.
As relevant to this case, Phoenix entered into a distribution agreement with Defendant Capital
Equipment & Technology Corporation (hereinafter “Technology Corporation”), a Delaware
corporation, in May 2009 that was to last at least three years. This distribution agreement was
signed on Technology Corporation’s behalf by Defendant Alexander Chudnovets, the company’s
CEO who also owned ninety percent of the company’s stock. Chudnovets signed the agreement
after meeting with employees of Phoenix at its facilities in Kentucky and Indiana.
Technology Corporation was dissolved under the laws of Delaware in October 2011.
However, Phoenix was unaware of this dissolution, as business with a company that referred to
itself as CETCO continued. Instead of Technology Corporation, however, the company was
Defendant Capital Equipment & Trading Corporation (hereinafter “Trading Corporation”), a
Texas corporation with its headquarters in Houston, Texas, as well as Defendant Coralina
Engineering, LLC (hereinafter “Coralina”), a limited liability corporation organized under the
laws of Russia which also branded itself through its website, business cards, and
communications with Phoenix as CETCO-Coralina.1 Further, Chudnovets served as CEO and on
the board of directors of Trading Corporation, and he is the sole member of Coralina. In July
2012, Phoenix and Trading Corporation entered into what Phoenix believed to be a “renewal” of
the 2009 distribution agreement between the two parties, as Phoenix was not aware that Trading
Corporation was a separate entity from Technology Corporation. The 2012 agreement was
signed by Maria Roberson, the president of Trading Corporation. Throughout this time and until
the events at the center of this litigation, business relations remained normal between Phoenix
and the CETCO-branded companies, as Phoenix continued to receive purchase orders through
Vadim Novak, a Coralina employee.
The 2009 and 2012 distribution agreements are nearly identical, and each contain two
pertinent clauses. The “exclusivity clause” reads as follows:
Neither Company [Phoenix] nor Distributor [CETCO] shall
directly or indirectly enter into similar Agreements in the Territory
for the design, development, manufacture, marketing, or sale of
Equipment within the Territory and neither party will design,
1
Further, there is another named defendant that allegedly uses the CETCO branding, Capital Equipment & Trading
Company. However, Trading Corporation has indicated that this is not a separate entity but rather “the former
official corporate name” of Trading Corporation. [DN 46-1, at 2 n. 2]. Phoenix has not contested this. Thus, the
Court will treat all references to Capital Equipment & Trading Company as a reference to Trading Corporation.
2
develop, manufacture, market, or sell Equipment in the Territory
directly or indirectly competitive with the other party.
[DN 50-2, 50-7 at 2]. The “confidentiality clause” reads as follows:
All price information and quotations regarding Equipment,
customer lists, and customer names which now or hereafter are in
Distributor’s possession, and all engineering data and other
technical data furnished by the Company to Distributor, will be
deemed to have been furnished in confidence and for use by
Distributor only in connection with this Agreement. All such data
and information referenced above will remain the property of
Company and, upon the expiration or termination of this
Agreement, Distributor will dispose of all known copies of such
information as directed by the Company.
[DN 50-2, 50-7 at 5–6].
At some point after entering into the 2012 distributor agreement, Phoenix was confronted
with information that products very similar to its own were being sold in the distribution region
assigned to Trading Corporation by Coralina and Defendant Electrogorsk Metal Factory, a
Russian limited liability corporation doing business as Elemet.2 Phoenix then filed this action in
Jefferson Circuit Court, and the Defendants subsequently removed to this Court. Phoenix’s
amended complaint [DN 40] asserts five claims: breach of contract (Count I), unfair competition
or “passing off” (Count II), violation of the Kentucky Uniform Trade Secrets Act (Count III),
civil conspiracy (Count IV), and fraud or fraud in the inducement (Count V). Defendants
Coralina and Chudnovets have filed a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(2), (4),
(6), and the doctrine of forum non conveniens, and Defendant Trading Corporation has filed a
motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6).
2
Elemet has yet to be served and has not made an appearance in this case.
3
II.
DISCUSSION
A. PERSONAL JURISDICTION
Both Chudnovets and Coralina argue that the claims against them should be dismissed
pursuant to Fed. R. Civ. P. 12(b)(2), as this Court lacks personal jurisdiction over them. Phoenix
argues that this Court has personal jurisdiction pursuant to Kentucky’s long-arm statute.3
In
determining whether personal jurisdiction exists over a defendant, a plaintiff “need only make a
prima facie showing of jurisdiction” when the Court is determining the jurisdictional issue on
written submission alone as it is doing here. Compuserve, Inc. v. Patterson, 89 F.3d 1257, 1262
(6th Cir. 1996). “[T]he court must consider the pleadings and affidavits in a light most favorable
to the plaintiff.” Id. Furthermore, the court must “not consider facts proffered by the defendant
that conflict with those offered by the plaintiff.” Neogen Corp. v. Neo Gen Screening, Inc., 282
F.3d 883, 887 (6th Cir. 2002).
1. CHUDNOVETS
A. LONG-ARM STATUTE
Phoenix argues that this court has personal jurisdiction over Chudnovets pursuant to
Kentucky’s long-arm statute, KRS 454.210, as Chudnovets is a nonresident of Kentucky. This
requires two separate showings by Phoenix, as the Court must both determine “(1) whether the
law of the state in which the district court sits authorizes jurisdiction, and (2) whether the
exercise of jurisdiction comports with the Due Process Clause.” Brunner v. Hampson, 441 F.3d
457, 463 (6th Cir. 2006).
3
Phoenix also argues that Chudnovets and Coralina are bound by forum selection clauses found in the 2009 and
2012 distribution agreements. Because the Court has personal jurisdiction pursuant to the long-arm statute, the
Court need not discuss this argument.
4
As to the first requirement, the Kentucky Supreme Court has found that the statute
requires a two-prong showing before a court can exercise personal jurisdiction over a
nonresident. Caesars Riverboat Casino, LLC v. Beach, 336 S.W.3d 51, 57 (Ky. 2011). First, the
Court must find that a nonresident’s conduct or activities fall within one of nine enumerated
subsections in KRS 454.210. And second, the Court must determine if the plaintiff’s claims
arise from the defendant’s actions. This requires a showing of “a reasonable and direct nexus
between the wrongful acts alleged in the complaint and the statutory predicate for long-arm
jurisdiction[.]” Id. at 59.
The Court finds that Chudnovets’ activities in the state constitute “transacting any
business in this Commonwealth,” the first of the nine possibilities for jurisdiction under KRS
454.210. Phoenix alleges that Chudnovets came to Kentucky in April 2009 to attend a trade
show for the coal industry. (Aff. Gary Drake [DN 50-3] ¶ 6.) During that trip, he, along with
Vadim Novak, visited Phoenix’s headquarters in Louisville where they gave a lengthy
Powerpoint presentation about Technology Corporation and other CETCO-branded companies.
(Id.) He also negotiated a renewal of the 2006 distribution agreement that was set to expire in a
few weeks and proposed other possible joint ventures between Phoenix and Technology
Corporation which did not come to fruition. (Id.) This negotiation and sales pitch qualifies as
transacting business in the Commonwealth, as Chudnovets was soliciting current and future
business for a company that, at the time, he was a ninety-percent owner, while being physically
present in the state. See Philmo, Inc. v. Checker Food Holding Co., 2016 WL 1092862, at *2–3
(W.D. Ky. Mar. 21, 2016) (compiling cases interpreting the phrase “transacting any business in
the Commonwealth”).
5
Further, the second requirement has also been met, as Phoenix’s claims against
Chudnovets arise from the business he transacted while in the Kentucky. Phoenix asserts that
Chudnovets, acting as an agent of the CETCO-branded companies and Elemet, as well as on his
own behalf, used the access to Phoenix’s trade secrets that was granted as a result of the
distribution agreement to misappropriate those trade secrets and sell “knock-off” products based
on that confidential information, while making fraudulent statements in the process. (Pl.’s First
Am. Compl. [DN 40] ¶¶ 32–51.) The CETCO-branded companies, Elemet, and Chudnovets
would not have had access to those trade secrets from May 2009 to July 2012, a period in which
Phoenix alleges the conspiracy to misappropriate began, if not for Chudnovet’s activities in
Kentucky negotiating the distribution agreement. Therefore, the claims arose from Chudnovet’s
activities in the state, and the requirements of the long-arm statute are met.
B. DUE PROCESS REQUIREMENTS
After finding that Kentucky authorizes jurisdiction, the Court must determine whether the
exercise of personal jurisdiction conforms with due process. “The relevant inquiry is whether
the facts of the case demonstrate that the nonresident defendant possesses such minimum
contacts with the forum state that the exercise of jurisdiction would comport with ‘traditional
notions of fair play and substantial justice.’” Theunissen v. Matthews, 935 F.2d 1454, 1459 (6th
Cir. 1991) (citations omitted). The Sixth Circuit has identified three criteria for determining
whether specific in personam jurisdiction4 may be exercised.
First, the defendant must purposefully avail himself of the
privilege of acting in the forum state or causing a consequence in
the forum state. Second, the cause of action must arise from the
defendant’s activities there. Finally, the acts of the defendant or
consequences caused by the defendant must have a substantial
4
Phoenix has not argued that Chudnovets or Coralina are subject to general in personam jurisdiction in Kentucky.
6
enough connection with the forum state to make the exercise of
jurisdiction over the defendant reasonable.
Southern Mach. Co. v. Mohasco Indus., Inc., 401 F.2d 374, 381 (6th Cir. 1968).
The Sixth Circuit considers purposeful availment, the first prong under the Southern
Machine test, as “essential” to a finding of personal jurisdiction. Intera Corp. v. Henderson,
428 F.3d 605, 616 (6th Cir. 2005) (citation omitted). This requirement “serves to protect a
defendant from being haled into a jurisdiction by virtue of ‘random,’ ‘fortuitous,’ or ‘attenuated’
contacts.”
Id. (citations omitted).
Finally, “where an out-of-state agent is actively and
personally involved in the conduct giving rise to the claim, the exercise of personal jurisdiction
should depend on traditional notions of fair play and substantial justice; i.e., whether [the agent]
purposely availed [himself] of the forum and the reasonably foreseeable consequences of that
availment.” Balance Dynamics Corp. v. Schmitt Indus., Inc. 204 F.3d 683, 698 (6th Cir. 2000)
(citations omitted).
There are factors that weigh both in favor of finding Chudnovets purposefully availed
himself to the benefit of conducting business in Kentucky and against it. Chudnovets has been
physically present in the state at least three times. See Aff. Gary Drake [DN 50-3] ¶ 6; Def.’s
Reply [DN 19] at 3; and Waugh Email [DN 50-19] at 2. Further, on all three trips he attended a
coal trade show, with each likely involving at least some solicitation of business. He also
personally negotiated the 2009 distributor agreement with Phoenix while present in the state at a
time when he personally owned ninety percent of Technology Corporation, the company on
whose behalf he was negotiating. He further engaged in discussions with Phoenix about an
expanded partnership with the company, which never came to fruition, and he directed at least
one email to a representative at Phoenix in Kentucky. [DN 50-11, at 2]. However, Chudnovets
only visited Kentucky to solicit business on behalf of his companies, and his physical presence in
7
the state was sporadic, with only three visits coming in a six to seven year period and none
coming in the past six years.
Weighing these factors, the Court finds that Chudnovets has purposefully availed himself
to the protections of the state of Kentucky so as to establish personal jurisdiction over him. The
Sixth Circuit’s opinion in Intera Corp. is particularly informative. In that case, a Tennessee
plaintiff was attempting to establish personal jurisdiction over out-of-state defendants who were
corporate agents of a company accused of misappropriating trade secrets, as is the case here.
The court found that the corporate agents were not subject to personal jurisdiction in Tennessee,
but in doing so, it noted that the corporate agents “did not engage in any of the alleged deceptive
actions within Tennessee . . . [and] have [never] transacted business in Tennessee in their
personal or official capacities as corporate officers . . . ” Intera Corp., 428 F.3d at 616.
Chudnovets meets both of those criteria, as his alleged fraudulent statements occurred while in
Kentucky, and he has transacted business in Kentucky in his official capacity as a corporate
officer. Chudnovets contacts with Kentucky are not “random” or “fortuitous,” and while the
attenuation factor is close, they are not so attenuated so as to upset “notions of fair play and
substantial justice.”
Further, the remaining due process requirements have been met as well. The Kentucky
long-arm statute already requires a finding that the claims arise from the defendant’s contacts
with the state, just as the Due Process Clause does, and the Court has already established that
Phoenix’s claims arise from the business Chudnovets transacted while in Kentucky. And finally,
“where, as here, the first two criterion are met, ‘an inference of reasonableness arises’ and ‘only
the unusual case will not meet this third criteria.’” Air Products and Controls, Inc. v. Safetech
Intern., Inc., 503 F.3d 544, 554 (6th Cir. 2007) (quoting Theunissen, 935 F.2d at 1461). Under
8
the third prong, courts consider the following factors: “(1) the burden on the defendant; (2) the
interest of the forum state; (3) the plaintiff’s interest in obtaining relief; and (4) other states’
interest in securing the most efficient resolution of the policy.” Id. at 554–55 (citation omitted).
Here, while Chudnovets is a resident of Russia, the burden on him to defend himself is not so
great so as to be unreasonable, as the evidence indicates he is still the CEO of a Texas
corporation and speaks fluent English. The state of Kentucky has an interest in providing a
forum for its residents to obtain relief from fraudulent actions taken against them, and Phoenix
has an interest in obtaining such relief. And finally, while some of the actions at issue in this
case took place in Russia, allowing a foreign forum to exercise jurisdiction would not lead to a
more efficient outcome, as this Court has personal jurisdiction over Trading Corporation and will
adjudicate that case regardless of any parallel action in a foreign jurisdiction. Therefore, the
Court has personal jurisdiction over Chudnovets, and the motion to dismiss pursuant to Rule
12(b)(2) is DENIED.
2. CORALINA ENGINEERING, LLC
A. LONG-ARM STATUTE
Coralina argues that it has no contacts with Kentucky and therefore cannot be subject to
personal jurisdiction in the state. Much has been made in the parties’ briefs about whether
Coralina is an “alter-ego” of Trading Corporation and whether there should be a “piercing of the
corporate veil” in this case so as to treat the two companies as one and the same. However, the
Court need not make any determination on that issue at this point, as Coralina itself is subject to
personal jurisdiction in this case regardless of its affiliations with Trading Corporation.
Just as with Chudnovets, Coralina has met the requirement of “transacting any business
in this Commonwealth” under KRS 454.210. Chudnovets, the sole member of Coralina, stated
9
in his affidavit that Novak is an employee of Coralina and not Trading Corporation. (Aff.
Alexander Chudnovets [DN 48-1] ¶ 28.) Further, Novak accompanied Chudnovets on his visit
to Kentucky in 2009 to negotiate the distribution agreement between Technology Corporation
and Phoenix and gave a lengthy Powerpoint presentation to Phoenix employees about the state of
the two companies. [DN 50-15]. While Coralina was not a party to the distribution agreement,
by Chudnovets’ own admission, Coralina “facilitate[s] [Trading Corporation’s] purchases and
resales of products manufactured by Phoenix.” (Aff. Alexander Chudnovets [DN 48-1] ¶ 24.)
Further, Novak was in Kentucky in 2012 and brought a purchase order for equipment to Phoenix
while in the state. [DN 50-5, at 2]. And Novak was in regular contact with Phoenix via email
[DN 50-5], with his relationship being significant enough that he was the individual to whom
Phoenix emailed the proposed 2012 distribution agreement between Phoenix and Trading
Corporation, which Novak returned signed by Roberson. [DN 50-6]. Thus, by having an agent
participate in negotiations for the distribution agreement between Technology Corporation and
Phoenix, delivering purchase orders while in the state, and being heavily involved in the process
that led to the 2012 distribution agreement between Trading Corporation and Phoenix, Coralina
transacted business in Kentucky. See Caesars Riverboat Casino, 336 S.W.3d at 58 (outlining
criteria that constitute “transacting business,” including solicitation of business).
Additionally, Phoenix’s claims against Coralina arise from Coralina’s contacts with the
state. As with Chudnovets, Phoenix claims that Coralina misappropriated trade secrets, which
could not have occurred but for the distribution agreements that gave Coralina and the other
defendants access to those trade secrets, and Coralina’s agent played an active role in negotiating
and delivering both the 2009 and 2012 agreements. Further, Phoenix’s fraud claims allege that
Coralina’s agent, Novak, made fraudulent statements while in Kentucky in 2009. Therefore, the
10
claims against Coralina arise from its contacts with Kentucky, and the requirements of the longarm statute have been met.
B. DUE PROCESS REQUIREMENTS
Further, Coralina would suffer no due process violation by being subject to personal
jurisdiction in Kentucky. Coralina has purposefully availed itself to the protections of the state
of Kentucky so that exercising specific in personam personal jurisdiction is appropriate, as they
have at least twice, in 2009 and 2012, sent an agent to Kentucky to negotiate contracts and
deliver purchase orders, which both constitute the solicitation of business. Further, Coralina
agents remained in regular contact with Phoenix in Kentucky via email, and those emails were
directed at maintaining the business relationships between Phoenix, Trading Corporation, and
Coralina. And even if Coralina was only acting on behalf of Trading Corporation, Coralina was
not doing so without a financial interest. Just as with Chudnovets, these contacts were not
“random” or “fortuitous,” and they were even less attenuated than those of Chudnovets. Thus,
the purposeful availment requirement has been met. See Air Products and Controls, 503 F.3d at
551 (noting that a “continuing business relationship” is a strong factor indicating purposeful
availment).
Just as in the analysis under the Kentucky long-arm statute, Coralina’s claims arise from
its contacts with Kentucky; thus, it is reasonable to exercise personal jurisdiction.
While
Coralina is a Russian limited liability corporation, its sole member is already a party to this suit,
diminishing any additional burden that may result from requiring a foreign defendant to defend
itself in Kentucky. Kentucky has an interest in providing a forum for its citizens to obtain relief,
and Phoenix has an interest in obtaining relief in its home state. And as the Court has previously
stated, the claims against Trading Corporation will be adjudicated by this Court, meaning that
11
there would be no efficiency gained from having the claims against other defendants adjudicated
in a different forum. Therefore, the Court has personal jurisdiction over Coralina, and the
motion to dismiss pursuant to rule 12(b)(2) is DENIED.
B. INSUFFICIENT PROCESS
1. CHUDNOVETS
Chudnovets and Coralina also argue that the claims against them should be dismissed for
insufficient process. As to Chudnovets, Phoenix attempted to serve process on him by sending
process via certified mail to 2042 Brentwood Drive, Houston, Texas, the address on file for
Chudnovets as CEO of Trading Corporation with the Texas Secretary of State. Chudnovets
argues that this is not his residence; it is the former home of Roberson which he was last
physically present at six years ago as a social guest. As a result of a mail forwarding directive, it
was delivered to 2727 Kirby Drive, Houston, Texas, a high rise condominium building that
Chudnovets has never been to. The certified mail was delivered and apparently signed for by a
doorman at the building. Chudnovets argues that this service was insufficient, as it failed to
comply with the requirements for service of a foreign resident under the Hague Service
Convention, 20 U.S.T. 361, which preempt the methods of service permitted under the Federal
Rules of Civil Procedure.
The Court rejects this preemption argument. The Hague Service Convention states that it
“shall apply in all cases, in civil or commercial matters, where there is occasion to transmit a
judicial or extrajudicial document for service abroad.” 20 U.S.T. 361. However, the Supreme
Court has stated that, “[i]f the internal law of the forum state defines the applicable method of
serving process as requiring the transmittal of documents abroad, then the Hague Convention
applies.” Volkswagenwerk Aktiengesellschaft v. Schlunk, 486 U.S. 694, 700 (1988). As a result,
12
when the laws of the forum state allow for service within the United States, then service is valid
and need not comply with the Convention, even if the individual being served is a foreign
resident. In this case, Phoenix attempted to serve Chudnovets pursuant to the state laws of
Texas, which is permitted under Fed. R. Civ. P. 4(e)(1), as that is the state in which service was
attempted. Texas allows for service by certified mail at “the defendant’s usual place of business
or usual place of abode or other place where the defendant can probably be found.” Tex. R. Civ.
P. 106(b). Because Chudnovets could “probably be found” at the company address listed with
the Secretary of State, the Texas rules for service of process did not “requir[e] the transmittal of
documents abroad,” and the Hague Service Convention was not implicated at all. See Schlunk,
486 U.S. at 707–08 (finding that service of process did not require transmittal abroad and
therefore the Hague Convention did not apply).
Chudnovets has not argued that Phoenix did not comply with the Texas rules for service
of process, and the Court sees no evidence in the limited record before it that Phoenix failed to
comply. Nor does he argue that the method of service denied him due process. Therefore, the
Court finds that Chudnovets was properly served, and the motion to dismiss pursuant to Rule
12(b)(4) is DENIED.
2. CORALINA
Coralina also argues that Phoenix failed to comply with the Hague Service Convention in
effecting service on it. Phoenix sent process to the Kentucky Secretary of State pursuant to KRS
454.210(3)(a), who then sent process to Coralina’s principal offices in Moscow, Russia, via
certified mail, return receipt requested. [DN 50-14]. However, this Court has previously held
that, when service is made on the Kentucky Secretary of State who then sends process to the
foreign defendant, “that service . . . requires the transmittal of documents abroad, and that [the
13
plaintiff] was therefore required to comply with the Hague Convention.” Norrenbrock Co. v.
Ternium Mexico, S.A. De C.V., 2014 WL 556733, at *2 (W.D. Ky. Feb. 12, 2014). Further,
although there is a split in authority on this issue, this Court has previously determined that
“service of process by direct mail through the Kentucky Secretary of State to [a foreign
Defendant] is not authorized by Article 10(a) of the Hague Convention.”
Uppendahl v.
American Honda Motor Co., 291 F. Supp. 2d 531 (W.D. Ky. 2003). See also Humble v. Gill,
2009 WL 151668, at *2 (W.D. Ky. Jan. 22, 2009) (compiling agreeing cases).
Thus, Phoenix was not permitted to serve Coralina via certified mail under Article 10(a)
of the Hague Convention. Nor did Phoenix comply with any other method of service mentioned
in the Convention. See 20 U.S.T. 361, art. 2–6 (establishing that service may be made through
each state’s “Central Authority” and detailing procedure for doing so). Therefore, service is
quashed, and Phoenix has leave to effect service within 90 days upon Coralina Engineering,
LLC. See, e.g, Stern v. Beer, 200 F.2d 794, 795 (6th Cir. 1952) (if service of process is
ineffective, the court should treat the motion to dismiss as one to quash the service of process
and “the case should be retained” on the docket pending effective service).
C. FORUM NON CONVENIENS
Chudnovets argues that the doctrine of forum non conveniens counsels in favor of
dismissing Phoenix’s claims against him.
“A defendant invoking forum non conveniens
ordinarily bears a heavy burden in opposing the plaintiff’s chosen forum.” Sinochem Intern. Co.
Ltd. v. Malaysia Intern. Shipping Corp., 549 U.S. 422, 430 (2007). The defendant must show
that there is “an adequate, available alternate forum in which the defendant is amendable to
process.” Clark v. Bucyrus Int’l, 634 F. Supp. 2d 814, 817–18 (E.D. Ky. 2009) (citing Piper
14
Aircraft Co. v. Reyno, 454 U.S. 235, 254-55 n. 22 (1981). In addition, the defendant must show
that the private and public interests warrant dismissal in favor of the alternative forum. See id.
As to the first factor, Chudnovets has shown he is amendable to service of process in the
Russian Federation as a resident of Russia, making it an adequate alternative forum. Turning to
the public factors, these include “court congestion, local interest in the matter, interest in having
the trial at home with the law that governs, avoidance of conflict-of-law problems or application
of foreign law, and unfairness in burdening local citizens with jury duty.” Wong v. PartyGaming
Ltd., 589 F.3d 821, 832 (6th Cir. 2009) (citations omitted). Most of these factors are moot due to
the forum selection clause between Phoenix and Trading Corporation, which requires this Court
to adjudicate nearly identical claims against Trading Corporation as those that have been asserted
against Chudnovets in his personal capacity. Thus, there would be no relief to the Court’s
schedule or a potential jury from refraining from hearing the claims against only one defendant.
Alleged foreign misappropriation of a local company’s trade secrets is a matter of local concern
and interest, and the Court anticipates no issues from the potential application of foreign law that
it would not also face in hearing the claims against Trading Corporation. Therefore, the public
factors weigh against dismissal.
As to the private factors, these include “the ease of access to evidence, ability to obtain
witness attendance, and practical problems such as ease, expeditiousness, and expense.” Id. at
833 (citations omitted). While certain witnesses and evidence are located in Russia, the fact that
all of the defendants are so intertwined with one another should actually make the number of
vital witnesses and amount of crucial evidence relatively small for the number of defendants in
the case. Specifically to Chudnovets, he is the CEO of a Texas corporation with its headquarters
in Houston, demonstrating that travel to the United States is not so great a burden that it would
15
justify dismissal of the case. And again, the Court must hear nearly identical claims against
Trading Corporation, so keeping the case consolidated will promote efficiency. Therefore, the
private factors also weigh against dismissal, and the motion to dismiss the claims against
Chudnovets on the grounds of forum non conveniens is DENIED.
D. FAILURE TO STATE A CLAIM
Next, Chudnovets and Trading Corporation5 argue that Counts II – V of Phoenix’s
amended complaint should be dismissed, as the complaint fails to state a claim upon which relief
may be granted. The Court will address each claim as it pertains to all defendants.
1. KENTUCKY UNIFORM TRADE SECRETS ACT
The Court begins with Count III, Phoenix’s claim under the Kentucky Uniform Trade
Secrets Act (hereinafter “KUTSA”). The defendants make two arguments: first, that Phoenix has
failed to plead the trade secret with enough specificity so that it can be determined what was
actually misappropriated; and second, that Phoenix has not adequately plead the statutory
requirements of what constitutes a trade secret.
As to the first argument, a plaintiff must adequately plead what trade secrets were
allegedly misappropriated, as “without the identification of trade secrets misappropriated, no
KUTSA claim is stated.” Amtote Int’l, Inc. v. Kentucky Downs, LLC, 2016 WL 1270262 (W.D.
Ky. Mar. 31, 2016). However, “so long as [the plaintiff] can put forth general categories of its
trade secrets and provide the type of factual allegations . . . that allow for the reasonable
inference that [the defendants] improperly disclosed some of those trade secrets . . . [the
plaintiff] has done all that is required to survive a motion to dismiss.” Luvata Electrofin, Inc. v.
Metal Processing Int’l, L.P., 2012 WL 3961226 (W.D. Ky. Sep. 10, 2012).
5
Coralina makes an identical motion to dismiss [DN 46-1], and if Coralina is ever properly served, the above
analysis would be equally applicable to it.
16
The Court finds that Phoenix has plead what trade secrets were misappropriated with
enough specificity to survive a motion to dismiss. While most of the complaint uses general
terms such as “proprietary and confidential designs, information, and trade secrets,” (Pl.’s First
Am. Compl. [DN 40] ¶ 21), the complaint does specifically state that the defendants “utilize[d]
Phoenix’s confidential and proprietary designs and trade secrets to reverse engineer Phoenix belt
presses . . .” (Id. ¶ 31.) This statement is specific enough to put forth a “general category” of
trade secrets, namely the confidential design of the belt press, so that the defendants are
reasonably on notice as to what they have allegedly misappropriated.
Turning to the defendants’ second argument, a claim made under KUTSA is sufficiently
plead if the plaintiff shows “that the information (1) has independent economic value, (2) is not
readily ascertainable by proper means, and (3) was the subject of reasonable efforts to maintain
its secrecy.” BDT Products, Inc. v. LexMark Int’l, Inc., 274 F. Supp. 2d 880, 890 (E.D. Ky.
2003) (citations omitted). Phoenix has adequately plead the first and third requirements, as the
complaint repeatedly makes references to lost sales suffered as a result of the alleged
misappropriation and the confidentiality clause that was placed into every distribution agreement
with the CETCO companies. (See Pl.’s Am. Compl. [DN 40] ¶¶ 17, 31.) The defendants argue,
however, that Phoenix has not plead any facts demonstrating that the misappropriated trade
secrets were not readily ascertainable by proper means.
Phoenix has plead that the defendants have “utilize[d] Phoenix’s confidential and
proprietary designs and trade secrets to reverse engineer Phoenix belt presses.” The defendants
argue that, because it is sufficient to plead that a trade secret cannot be reversed engineered to
demonstrate that the trade secrets are not readily ascertainable by proper means, see Luvata,
2012 WL 3961226, at *8, Phoenix’s admission that its belt presses were reverse engineered
17
defeats its status as a trade secret. But Phoenix has not argued that its belt press is the trade
secret; instead, it has plead that the confidential design of the belt press, provided to the
defendants pursuant to the confidentiality clause of the distribution agreement, is the trade secret,
and that reverse engineering of the belt press would not be possible without that trade secret.
(See Pl.’s Am. Compl. [DN 40] ¶¶ 21, 23, 31.) Using confidential designs that were provided
pursuant to a confidentiality clause to reverse engineer a machine and sell it would not be
considered “proper means” by which those designs could be ascertained. Thus, sufficient facts
have been plead indicating that the trade secret is not readily ascertainable by proper means, and
the amended complaint “plausibly states that a trade secret exists in this case,” Amtote, 2016 WL
1270262, at *6 (citing Brake Parts, Inc. v. Lewis, 443 F. App’x 27, 29 (6th Cir. 2011)).
Admittedly, this is a fine line between the confidential design of the belt press and the belt press
itself, and discovery may reveal that the design of the belt press was ascertainable without
misappropriation of any trade secret. However, such a dispute is best dealt with at the summary
judgment stage, and not earlier. Therefore, the motions to dismiss Count III are DENIED.
2. UNFAIR COMPETITION AND “PASSING OFF”
Count II of the amended complaint alleges that the defendants conspired to reverse
engineer Phoenix’s machines and equipment by misappropriating Phoenix’s confidential trade
secrets and information, and then pass off such equipment as a true product. The defendants
argue that this claim is preempted by KUTSA. KUTSA “replaces conflicting tort, restitutionary,
and other law of this state providing civil remedies for misappropriation of a trade secret,” with
certain exceptions. KRS 365.892(1). See also Auto Channel, Inc. v. Speedvision Network, LLC,
144 F. Supp. 2d 784, 788–89 (W.D. Ky. 2001) (discussing KUTSA’s preemptive effect).
The
Court finds that this tort claim is based upon the misappropriation of a trade secret, the exact type
18
of claim KUTSA was intended to preempt. Therefore, Count II is preempted, and the motions to
dismiss Count II are GRANTED.
3. FRAUD AND FRAUD IN THE INDUCEMENT
Count V of the amended complaint claims that the defendants made fraudulent statements
that Phoenix detrimentally relied upon. Specifically, though, Phoenix pleads that the defendants
failed to disclose three material facts: that (1) “CETCO and Coralina are ‘alter ego’ companies
which share the same owners, management and employees,” (2) that “Coralina directly markets
and sells Elemet’s products in CETCO’s exclusive territory,” and (3) that “CETCO and Coralina
have assisted Elemet and participated in the conspiracy to reverse engineer and manufacture
‘knock-off’ Phoenix products and then market and sell the same in CETCO’s exclusive sales
territory.” (Pl.’s First Am. Compl. [DN 40] ¶ 50.)
The defendants argue that the amended complaint fails to meet the pleading requirements
for claims of fraud under Fed. R. Civ. P. 9(b).6 To plead a claim of fraud with particularity as is
required under Rule 9(b), a plaintiff must (1) specify the allegedly fraudulent statements, (2)
identify the speaker, (3) plead when and where the statements were made, and (4) explain what
made the statements fraudulent. Republic Bank & Trust Co. v. Bear Stearns Co., 683 F.3d 239,
247 (6th Cir. 2012). However, when the claim is one of fraud by omission, fraud only occurs
when the omission is coupled with a duty to disclose such information. See Giddings Lewis,
Inc. v. Indus. Risk Insurers, 348 S.W.3d 729, 747 (Ky. 2011). Therefore, a plaintiff must specify
that the defendant had a duty to disclose that information.
Phoenix has not plead any facts demonstrating that any defendant had a duty to disclose
any of the specific omitted statements included in Phoenix’s amended complaint. The complaint
6
The defendants also argue that these fraud claims are preempted under KUTSA, but because the claims have been
deficiently plead, the Court will not address this argument.
19
contains no allegations that any of the defendants were required to disclose the omitted
statements, such as through the distribution agreements or an existing fiduciary duty. Therefore,
the claim has not been sufficiently plead under Rule 9(b), and the motions to dismiss Count V
are GRANTED.
4. CIVIL CONSPIRACY
Count IV of the amended complaint alleges that the defendants were in a civil conspiracy
to misappropriate Phoenix’s confidential trade secrets for their own financial benefit.
In
Kentucky, a claim of civil conspiracy is derivative of other causes of action, requiring the
plaintiff to show “an unlawful/corrupt combination or agreement between the alleged
conspirators to do by some concerted action an unlawful act.” Peoples Bank of N. Ky., Inc. v.
Crowe Chizek and Co. LLC. 277 S.W.3d 255, 261 (Ky. Ct. App. 2008) (citations omitted). Here,
because Phoenix’s KUTSA claim has not been dismissed against any defendant, there is a
common claim from which the civil conspiracy claim derives. Therefore, the motions to dismiss
Count IV are DENIED.
III. CONCLUSION
For the reasons set forth above, IT IS HEREBY ORDERED that the motions to dismiss
[DN 46, 47] are GRANTED IN PART and DENIED IN PART. The motions to dismiss as to
Counts III and IV are DENIED. The motions to dismiss as to Counts II and V are GRANTED.
Further, service upon Coralina Engineering, LLC, is QUASHED. Phoenix has leave to effect
service within 90 days upon Coralina Engineering, LLC.
cc:
Counsel of Record
January 12, 2017
20
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?