Cognate Bioservices, Inc. et al v. Smith et al
Filing
227
MEMORANDUM. Signed by Chief Judge Catherine C. Blake on 3/10/2016. (nd2s, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
COGNATE BIOSERVICES, INC.
v.
ALAN K. SMITH
:
:
:
:
:
:
:
Civil No. CCB-13-1797
MEMORANDUM
Cognate Bioservices, Inc. (“Cognate”), along with Healthbank, Inc., Oncocidex, Inc.,
Theradigm, Inc., and Vesta Therapeutics, Inc. (individually, “Healthbank,” “Oncocidex,”
“Theradigm,” and “Vesta”; collectively, “the non-Cognate plaintiffs”), have sued Alan K. Smith
and Alan Smith Consulting, Inc. (individually, “Smith” and “Smith Consulting”; collectively,
“the Smith defendants”), and MacroCure, Ltd. (“MacroCure”), alleging (1) violations of the
Computer Fraud and Abuse Act, 18 U.S.C. § 1030 (“CFAA”); (2) misappropriation of products;
and (3) misappropriation of trade secrets in violation of the Maryland Uniform Trade Secrets
Act, Md. Code Ann., Com. Law §§ 11-1201 to 11-1209 (“MUTSA”). Now pending before the
court are the defendants’ motions to dismiss or, in the alternative, for summary judgment on res
judicata grounds; MacroCure’s motions to dismiss for lack of personal jurisdiction and for
failure to state a claim; and two motions related to discovery. No oral argument is necessary. See
Local Rule 105.6 (D. Md. 2014). For the reasons that follow, the defendants’ motions to dismiss
or, in the alternative, for summary judgment on res judicata grounds will be granted. The other
pending motions to dismiss, and the discovery motions, will be denied as moot.1
BACKGROUND
Cognate is a contract service manufacturer and developer of human cell therapy products
1
The court also will grant the parties’ unopposed motions to seal, (ECF Nos. 166, 172, 183, 194, 198, 212).
1
and services in the biomedical industry, and the non-Cognate plaintiffs are customers of
Cognate. (Am. Compl. ¶¶ 11, 15, 16, ECF No. 148.) According to the amended complaint, the
plaintiffs have invested substantial time and money in developing trade products and trade
secrets, including some Cognate developed on behalf of the plaintiffs. (Id. ¶¶ 12-14, 17-20.)
Cognate’s computer systems store confidential data and information owned by Cognate and its
customers, including the plaintiffs’ trade products and trade secrets. (Id. ¶ 29.)
Smith was President and Chief Executive Officer of Cognate from December 2003 until
May 2010. (Id. ¶ 21.) In May 2010, he resigned from his position at Cognate and began serving
as “the head of U.S. operations” for MacroCure, an Israeli biotechnology company. (Id. ¶¶ 8, 21,
25.) In August 2010, Smith formed a wholly-owned company, Smith Consulting, to provide
consulting services to the biotechnology industry, including but not limited to MacroCure. (Id. ¶
26.) The plaintiffs allege that, upon his resignation, Smith failed to return his computer
passwords and the laptop Cognate had provided him in connection with his employment (“the
Cognate laptop”), as required by the Cognate employment handbook. (Id. ¶¶ 30, 31, 33.) Instead,
the plaintiffs allege that, following his resignation, Smith accessed or attempted to access the
Cognate network at least six times, copied many proprietary files from the Cognate servers and
its virtual private network (“VPN”) to the Cognate laptop, transferred the plaintiffs’ proprietary
information from the Cognate laptop to an external drive owned or controlled by MacroCure (the
“MacroCure external drive”), and then accessed and used this information from a laptop
MacroCure provided him (“the MacroCure laptop”). (Id. ¶¶ 37, 41, 45, 46.) The Cognate laptop
was returned to Cognate on October 18, 2012, but the plaintiffs have not received access to the
MacroCure external drive or laptop, which they allege is part of an effort by the defendants to
shield these devices from discovery by the plaintiffs. (Id. ¶¶ 36, 42.) The plaintiffs allege that
2
Smith’s intent was to make use of this proprietary information for the benefit of the defendants,
and that MacroCure hired Smith with the intent that he would unlawfully access and use the
plaintiffs’ proprietary information. (Id. ¶¶ 41, 44, 49, 52, 53.)
In 2012, Smith sued Cognate,2 Toucan Capital Fund II LP, Linda Powers (“Powers”), and
Robert Hemphill (“Hemphill”) in Circuit Court for Baltimore County. (Circuit Court Docket
Sheet.) Smith alleged that Cognate violated Maryland wage laws by failing to pay him salary and
accrued unused vacation that he was owed, and that he should be indemnified for money that
was garnished from his bank account to pay a California tax liability. (Circuit Court Verdict
Sheet, ECF No. 63-6.) In June 2013, Cognate filed its Second Amended Counterclaims against
Smith, alleging that Smith was liable to Cognate for constructive fraud, trover and conversion,
breach of contract, misappropriation of trade secrets, and misappropriation of products. (Second
Amended Counterclaims, ECF No. 63-3.) A jury trial in the Circuit Court occurred in February
and March of 2014. (Circuit Court Docket Sheet.) On March 6, 2014, the jury found in favor of
Smith on all his claims, awarding him several hundreds of thousands of dollars in damages, and
found against Cognate on all its counterclaims. (Circuit Court Verdict Sheet.)
In June 2013, while the state court case was pending, the plaintiffs in this case filed their
complaint, which they amended on March 17, 2015. (Original Compl., ECF No. 1; Am. Compl.)
On April 16, 2015, the Smith defendants filed a motion to dismiss or, in the alternative, for
summary judgment on res judicata grounds, to which MacroCure has signed on, arguing that the
state court action precludes the plaintiffs from bringing this suit in federal court. (Smith Res
Judicata Mot., ECF No. 164; MacroCure Res Judicata Mot. 173.) The plaintiffs responded, (Res
Judicata Resp. Opp’n, ECF No. 180), and the defendants replied, (Smith Reply, ECF No. 189;
2
In the state court litigation, Smith sued Cognate Bioservices, Inc. and Cognate Therapeutics, Inc. (Circuit Court
Docket Sheet, ECF No. 63-2.) The parties in that case agreed that they were the same entity and that Cognate
Therapeutics, Inc. no longer existed. (Smith Res Judicata Mot. Ex. 1-A, Pretrial Tr. 133-34.)
3
MacroCure Reply, ECF No. 191). On April 27, 2015, MacroCure filed a motion to dismiss for
lack of personal jurisdiction, (Personal Jurisdiction Mot., ECF No. 170), and a motion to dismiss
for failure to state a claim under the CFAA, (CFAA Mot., ECF No. 174), to which the Smith
defendants signed on in a motion styled as a “response,” (Smith Resp., ECF No. 179). The
plaintiffs have opposed both motions. (Personal Jurisdiction Resp. Opp’n, ECF No. 184; CFAA
Resp. Opp’n, ECF No. 185). Also pending is MacroCure’s July 10, 2015, motion to stay
discovery, (Mot. Stay Disc., ECF No. 200), on which Judge Sullivan has issued a report and
recommendation, (R. & R., ECF No. 214), and the Smith defendants’ motion to set aside Judge
Sullivan’s opinion on Smith’s alleged spoliation of evidence, (Mot. Set Aside, ECF No. 210).3
For the reasons that follow, the defendants’ motions to dismiss or, in the alternative, for
summary judgment on res judicata grounds will be granted. The other motions to dismiss and the
discovery motions, therefore, will be denied as moot.
ANALYSIS
I.
Standard of Review
The defendants have moved to dismiss for failure to state a claim under Fed. R. Civ. P.
12(b)(6) or, in the alternative, for summary judgment under Fed. R. Civ. P. 56. A court considers
only the pleadings when deciding a Rule 12(b)(6) motion. Where the parties present matters
outside of the pleadings and the court considers those matters, as here, the motion is treated as
one for summary judgment. See Fed. R. Civ. P. 12(d); Gadsby by Gadsby v. Grasmick, 109 F.3d
940, 949 (4th Cir. 1997); Paukstis v. Kenwood Golf & Country Club, Inc., 241 F. Supp. 2d 551,
556 (D. Md. 2003). “There are two requirements for a proper Rule 12(d) conversion.” Greater
Baltimore Ctr. for Pregnancy Concerns, Inc. v. Mayor and City Council of Baltimore, 721 F.3d
264, 281 (4th Cir. 2013). First, all parties must “be given some indication by the court that it is
3
This case was transferred to me on January 14, 2016, following the retirement of Judge William D. Quarles, Jr.
4
treating the 12(b)(6) motion as a motion for summary judgment,” which can be satisfied when a
party is “aware that material outside the pleadings is before the court.” Gay v. Wall, 761 F.2d
175, 177 (4th Cir. 1985); see also Laughlin v. Metro. Washington Airports Auth., 149 F.3d 253,
261 (4th Cir. 1998) (commenting that a court has no obligation “to notify parties of the
obvious”). “[T]he second requirement for proper conversion of a Rule 12(b)(6) motion is that the
parties first ‘be afforded a reasonable opportunity for discovery.’” Greater Baltimore, 721 F.3d
at 281.
The plaintiffs had adequate notice that the defendants’ motions might be treated as ones
for summary judgment. The motions’ alternative captions are in themselves sufficient indicia.
See Laughlin, 149 F.3d at 260-61. Moreover, the plaintiffs referred to the motions in their
opposition brief as ones for summary judgment, and both parties cited to previously-filed
documentary exhibits to support their arguments. Therefore, the court will treat the defendants’
res judicata motions as ones for summary judgment.
Federal Rule of Civil Procedure 56(a) provides that summary judgment should be granted
“if the movant shows that there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The Supreme Court has clarified
that this does not mean that any factual dispute will defeat the motion. “By its very terms, this
standard provides that the mere existence of some alleged factual dispute between the parties will
not defeat an otherwise properly supported motion for summary judgment; the requirement is
that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
247-48 (1986) (emphasis in original). Whether a fact is material depends upon the substantive
law. See id. “A party opposing a properly supported motion for summary judgment ‘may not rest
upon the mere allegations or denials of [his] pleadings,’ but rather must ‘set forth specific facts
5
showing that there is a genuine issue for trial.’” Bouchat v. Baltimore Ravens Football Club,
Inc., 346 F.3d 514, 522 (4th Cir. 2003) (alteration in original) (quoting Fed. R. Civ. P. 56(e)).
The court must “view the facts and draw reasonable inferences ‘in the light most favorable to the
party opposing the [summary judgment] motion,’” Scott v. Harris, 550 U.S. 372, 378 (2007)
(alteration in original) (quoting United States v. Diebold, 369 U.S. 654, 655 (1962)), but the
court also must abide by the “affirmative obligation of the trial judge to prevent factually
unsupported claims and defenses from proceeding to trial.” Drewitt v. Pratt, 999 F.2d 774,
778-79 (4th Cir. 1993) (internal quotation marks omitted).
II.
Res Judicata
The preclusive effect of a judgment rendered in state court is determined by the law of
the state in which the judgment was rendered. Laurel Sand & Gravel, Inc. v. Wilson, 519 F.3d
156, 162 (4th Cir. 2008). The parties agree that, in this case, Maryland law applies to determine
the preclusive effect of the prior suit. (See Smith Res Judicata Mot. Mem. Law 5, ECF No. 1641; Res Judicata Resp. Opp’n 22 n.81.) Under Maryland law, the elements of res judicata, or
claim preclusion, are: (1) the parties in the present litigation are the same or in privity with the
parties in the earlier dispute; (2) the claim presented in the current action is identical to the one
determined in the prior adjudication; and (3) there has been a final judgment on the merits.
Laurel Sand, 519 F.3d at 162.
a. Parties4
Under Maryland law, for res judicata to apply, the parties in the present litigation must be
4
The plaintiffs, in arguing against the application of res judicata, maintain that Judge Quarles already decided that
the issues and parties in this case are not the same as in the state action. (See, e.g., Res Judicata Resp. Opp’n 1.)
Judge Quarles’s opinion, however, was in response to the defendants’ prior argument that the then-ongoing state
court litigation justified abstention, which is evaluated under a different standard than is res judicata. (Quarles Mem.
Op., ECF No. 21.) Further, Judge Quarles “assum[ed], without deciding, that the state court action is parallel
litigation,” finding that the factors from Colo. River Water Conservation Dist. v. United States, 424 U.S. 800 (1967),
ultimately did not support abstention. (Id. at 12.)
6
the same or in privity with the parties in the earlier dispute. Laurel Sand, 519 F.3d at 162. It is
undisputed that Cognate and Smith were parties to the previous case. But several parties in this
case—Healthbank, Oncocidex, Theradigm, and Vesta on the plaintiffs’ side, and Smith
Consulting and MacroCure on the defendants’ side—were not and, therefore, the privity analysis
is at issue. In Maryland, “where persons, although not formal parties of record, have a direct
interest in the suit, and in the advancement of their interest take open and substantial control of
its prosecution, or they are so far represented by another that their interests receive actual and
efficient protection, any judgment recovered therein is conclusive upon them to the same extent
as if they had been formal parties.” Ugast v. La Fontaine, 55 A.2d 705, 708 (Md. 1947); see also
Cochran v. Griffith Energy Servs., Inc., 43 A.3d 999, 1002-03 (Md. 2012). The court finds that,
even viewing the facts in the light most favorable to the plaintiffs, there is no genuine dispute
that the non-Cognate plaintiffs, Smith Consulting, and MacroCure are in privity with the parties
from the state court action.
i. Non-Cognate Plaintiffs
Oncocidex and Theradigm merged with Cognate, effective December 30, 2013. (Merger
Certificates 1, ECF Nos. 63-7, 63-8.) Given that the amended complaint in this case was filed in
March 2015, when Oncocidex and Theradigm no longer existed as individual entities, the issue
of whether these two parties are in privity with Cognate may be moot. (Id. at 1, 2 (“The name of
the surviving corporation is Cognate,” and “[u]pon the effective date of the Merger, . . .
Oncocidex, Inc. shall cease to exist.”).) Even assuming that is not the case, the mergers are
sufficient to establish privity: both occurred before the state court trial, jury verdict, and entry of
judgment; and the merger documents state that Cognate shall succeed to all tax attributes, assets,
and liabilities of Oncocidex, (id. at 2). See Buckley v. Airshield Corp., 977 F. Supp. 375, 379 (D.
7
Md. 1997) (“Airshield USA is in privity with [the party to the original lawsuit] because the two
entities have merged.”).5
Healthbank and Vesta also are in privity with Cognate given their overlapping ownership
and management. Powers, who was a party to the state court lawsuit, is the sole director of Vesta
and Healthbank. (Powers Decl. ¶ 1, ECF No. 77-7.) Powers and Hemphill, who also was a party
to the prior litigation, owned approximately seventy percent of Toucan Capital Fund II LP,
which was a party to the state court lawsuit.6 (2012 Powers Dep. 28:20-30:1.) Since 2003,
Powers and Hemphill have been the only directors of Cognate, which has been owned entirely by
Toucan funds. (Id. at 51:15-52:15.) The Toucan investment fund is the main shareholder of the
non-Cognate plaintiffs. (Powers Decl. ¶ 3.) Toucan Partners LLC, whose only partners are
Powers and Hemphill, owns Healthbank. (2012 Powers Dep. 31:8-32:1.) Further, although the
amended complaint lists new addresses for Vesta and Oncocidex, when the original complaint
was filed in June 2013, all the plaintiffs were listed as sharing an office suite in Maryland.
(Original Compl.) Finally, John Harman and Michael Fried were lawyers for all the defendants
in the state court action, (see Circuit Court Docket Sheet), and are lawyers, along with others, for
all the plaintiffs in this case, (see Notice of Appearance, ECF No. 14). The Second Circuit,
although applying New York law, has said that having the same attorneys in two actions brought
at about the same time is of “singular significance” in the privity analysis. Ruiz v. Comm’r of the
Dep’t of Transp., 858 F.2d 898, 903 (2d Cir. 1988). Even if, as the plaintiffs maintain, the non-
5
The plaintiffs argue that the non-Cognate plaintiffs did not receive “actual and efficient protection,” Ugast, 55
A.2d at 708, in the state court action because these entities had separate trade secrets claims that Cognate did not
present to the jury, (Res Judicata Resp. Opp’n 37-39); the Oncocidex and Theradigm mergers cannot control the
privity analysis because they occurred after the close of discovery in the state case, (id. at 40); and Buckley is
inapposite because that case dealt with parties suing over the exact same patent that was at issue in a prior litigation,
(id. at 41). The court agrees with the defendants that these arguments go more toward whether the claims in both
cases are identical, rather than whether the parties are in privity.
6
Toucan Fund II was liquidated in 2010 and a new fund, Toucan Fund III, was created. (2012 Powers Dep. 46:4-13,
ECF No. 63-9.)
8
Cognate plaintiffs have separate bank accounts, tax filings, and scientific and medical
collaborations, the above factors are enough to establish that Vesta and Healthbank are in privity
with Cognate.
The court, therefore, concludes that the non-Cognate plaintiffs are in privity with the
defendants from the state court litigation.
ii. Smith Consulting
In deLeon v. Slear, the Maryland Court of Appeals quoted the Restatement (Second) of
Judgments § 51 (1982) for the proposition that “[i]f two persons have a relationship such that one
of them is vicariously responsible for the conduct of the other, and an action is brought by the
injured person against one of them,” then “[a] judgment against the injured person that bars him
from reasserting his claim against the defendant in the first action extinguishes any claim he has
against the other person responsible for the conduct unless: (a) The claim asserted in the second
action is based upon grounds that could not have been asserted against the defendant in the first
action; or (b) The judgment in the first action was based on the defense that was personal to the
defendant in the first action.” 616 A.2d 380, 387 (Md. 1992). According to the Restatement, a
vicariously liable relationship includes that of a “principal and agent for matters within the scope
of the agency relationship.”7 Restatement (Second) of Judgments § 51 cmt. a (1982).
The amended complaint alleges that Smith acted as the agent of Smith Consulting, his
wholly-owned company. (Am. Compl. ¶¶ 26, 76, 84, 92, 100, 108.) According to the
Restatement and Maryland law, these allegations are sufficient to establish that Smith Consulting
7
In addition, under Maryland law, an employer may be liable for acts “which his [employee] does with the actual or
apparent authority of the [employer], or which the [employee] does within the scope of his employment, or which
the [employer] ratifies with the knowledge of all the material facts.” See, e.g., Oaks v. Connors, 660 A.2d 423, 426
(Md. 1995). Therefore, Smith’s conduct, which the amended complaint alleges was on behalf of, inter alia, his
wholly-owned consulting company, would have been with the actual or apparent authority of that company, within
the scope of his employment, and ratified by his employer.
9
is vicariously liable for Smith’s conduct. In the state court case, Cognate brought several
counterclaims against Smith and lost. Therefore, the judgment against Cognate, the “injured
person” in the Restatement definition, “extinguishes” any claim the plaintiffs have against Smith
Consulting unless the claim asserted in the second action is based upon grounds that could not
have been asserted against the defendant in the first action, or the judgment in the first action was
based on a personal defense. The plaintiffs argue that the first caveat applies because Smith
Consulting has at least another agent, Cherise Smith, who may have acted unlawfully on behalf
of Smith Consulting.8 (Res Judicata Resp. Opp’n 32-33.) In deLeon, the Maryland Court of
Appeals favorably cited a case where a federal district judge held that a federal suit against the
plaintiff’s supervisor and corporate employer was precluded by the plaintiff’s suit in state court
on the same charges against a different co-worker because the employer’s potential liability was
exclusively vicarious. 616 A.2d at 386-87 (citing Michelson v. Exxon Research & Eng’g, 629 F.
Supp. 418 (W.D. Pa. 1986)). This reasoning applies here as well: the plaintiffs are alleging that
Cherise Smith may have assisted in the misappropriation of trade secrets, which, the court will
explain, is the same claim that Cognate made or could have made in the state court action; and
Smith Consulting’s potential liability is exclusively vicarious. Therefore, there is no genuine
dispute of fact that Smith Consulting is in privity with Smith.
iii. MacroCure
The Maryland Court of Appeals has relaxed the strict requirements of privity and
mutuality for purposes of res judicata and collateral estoppel “in situations where the plaintiff
had a full and fair opportunity to litigate the same claim in the prior proceeding. In these
instances, a defendant not in privity with a defendant to the first suit may invoke the defense of
8
The plaintiffs also allege that, in the state court action, Smith asserted personal defenses that would not apply to
other agents of Smith Consulting. (Res Judicata Resp. Opp’n 32.) They do not, however, indicate what those
defenses were or explain how they were personal to Smith.
10
res judicata . . . .” deLeon, 616 A.2d at 389 n.5. As explained below, the court finds that the
plaintiffs had a full and fair opportunity to litigate the claims raised here in the state court action.
Therefore, MacroCure meets Maryland’s privity requirements for res judicata as well. Further,
even if the plaintiffs’ claims against MacroCure are not barred by res judicata, they are issue
precluded, or barred by collateral estoppel, because whether MacroCure is independently liable
for the use of trade secrets or products misappropriated by Smith would require relitigating
whether Smith misappropriated trade secrets or products in the first place.9
In Maryland, four elements must be satisfied for the doctrine of collateral estoppel to
apply: (1) the issue decided in the prior adjudication is identical to the one presented in this
action; (2) there was a final judgment on the merits; (3) the party against whom the plea is
asserted was a party or is in privity with a party to the prior adjudication; and (4) the party
against whom the plea is asserted was given a fair opportunity to be heard on the issue. See
Colandrea v. Wilde Lake Cmty. Ass’n, Inc., 761 A.2d 899, 909 (Md. 2000). The court already
has concluded that the parties are in privity, and there is no dispute that the state court action was
a final judgment on the merits. (See Res Judicata Resp. Opp’n 21.) Further, as will be explained
in more detail below, the issues decided in the prior adjudication are identical to the ones
presented here: because the state court jury found that Smith did not misappropriate trade secrets
or products, and because MacroCure only received this allegedly proprietary information through
9
Even if the plaintiffs were not barred from bringing claims against MacroCure by res judicata or collateral
estoppel, this court agrees with the defendants that the plaintiffs have failed to state a claim against MacroCure
under the CFAA. (See CFAA Mot.) Each of the CFAA provisions the plaintiffs cite in their opposition to
MacroCure’s motion to dismiss would apply only if MacroCure “accesse[d]” information on a protected computer,
18 U.S.C. §§ 1030(a)(2)(C), 1030(a)(4), 1030(a)(5)(B), 1030(a)(5)(C). (See CFAA Resp. Opp’n 10.) The plaintiffs,
however, have not alleged that MacroCure “accessed” its computers or network except through Smith. (See, e.g.,
Am. Compl. ¶ 8 (“On information and belief, Smith acted as MacroCure’s agent and within the scope of his
employment when he accessed Plaintiffs’ computer systems without authorization for the purpose of obtaining
Plaintiffs’ proprietary information.”).) The claims against Smith and Smith Consulting are barred by res judicata.
Therefore, for the plaintiffs to survive the CFAA motion to dismiss, they would have to allege that MacroCure
independently accessed its computers, which they have not.
11
Smith, deciding whether MacroCure misappropriated the plaintiffs’ trade secrets or products
would require relitigating the issues already decided by the state court jury. (Circuit Court
Verdict Sheet.) Cognate also was given a fair opportunity to be heard on the issue. During the
state court action, Cognate alleged that Smith “unlawfully used Cognate’s confidential
information to obtain employment in May of 2010 with MacroCure as Head of U.S. Operations.”
(Second Amended Counterclaims ¶ 16, ECF No. 63-3.) Cognate also raised MacroCure’s
allegedly unlawful actions several times before the Circuit Court judge, and is appealing those
motions that the judge denied. (Civil Appeal Information Report 3, ECF No. 189-1 (including as
“[i]ssues on appeal,” the Circuit Court’s rulings on the “admissibility of testimony about [the]
MacroCure laptop”).) Therefore, even if the plaintiffs are not barred from bringing their claims
against MacroCure on grounds of res judicata, they are precluded by collateral estoppel.
b. Claims
Maryland uses the transaction test to determine the identity of claims, looking to
“whether the same evidentiary facts would sustain both suits.” Kutzik v. Young, 730 F.2d 149,
152 (4th Cir. 1984) (citing MPC, Inc. v. Kenny, 367 A.2d 486, 489 (Md. 1977)); see also
Colandrea, 761 A.2d at 908. In determining whether the causes of action stem from the same
transaction or series of connected transactions, courts consider such pragmatic factors as
“whether the facts are related in time, space, origin, or motivation, whether they form a
convenient trial unit, and whether their treatment as a unit conforms to the parties’ expectations
or business understanding or usage.” See Restatement (Second) of Judgments § 24(2) (1982).
Two suits that rely upon the same facts will share an identity of claims even if the legal theories
on which recovery is based or the remedies sought are different. Kutzik, 730 F.2d at 152. And
even if additional facts are pleaded in a later suit, that suit will be precluded if those facts and
12
issues could have been presented in the earlier suit. White v. Harris, 23 F. Supp. 2d 611, 616 (D.
Md. 1998); see also Gertz v. Anne Arundel Cty., 661 A.2d 1157, 1161 (Md. 1995). Further, “[a]n
error in the first court’s judgment does not dispel the res judicata effect of the judgment.”
Weathersby v. Kentucky Fried Chicken Nat’l Mgmt. Co., 804 F. Supp. 756, 761 (D. Md. 1992)
(emphasis in original). There is no genuine dispute of fact that all the claims raised by the
plaintiffs in this litigation were raised or could have been raised in the state action.
The plaintiffs’ first argument for why the claims in the two cases are not “identical” is
that Smith’s fraudulent concealment during discovery in the state court action prevented
litigation of the claims that form the basis of the federal suit. (Res Judicata Resp. Opp’n 22.) In
particular, the plaintiffs allege that Smith: lied during his deposition about his use of the Cognate
and MacroCure laptops, and the falsity of his statements was not discovered until after the close
of discovery in the state court trial; returned the Cognate laptop fewer than two weeks before
discovery closed in the state court action; and sent the MacroCure laptop to a MacroCure
employee in Philadelphia, and then outside the United States, to prevent its discovery in the state
court action. (Id. at 23-25.) “[I]t has long been black letter law in Maryland that the type of fraud
which is required to authorize the reopening of an enrolled judgment is extrinsic fraud and not
fraud which is intrinsic to the trial itself.” Hresko v. Hresko, 574 A.2d 24, 26 (Md. Ct. Spec.
App. 1990); see also Forkwar v. Progressive N. Ins. Co., 910 F. Supp. 2d 815, 821-22 (D. Md.
2012). “In determining whether or not extrinsic fraud exists, the question is not whether the fraud
operated to cause the trier of fact to reach an unjust conclusion, but whether the fraud prevented
the actual dispute from being submitted to the fact finder at all.” Hresko, 574 A.2d at 26-27.
Here, the defendants in state court raised these discovery issues several times before the Circuit
Court judge, who denied their various motions to extend discovery, sanction Smith, and find
13
spoliation. (Circuit Court Docket Sheet.) The August 2013 motion for sanctions, for example,
which was filed after Smith’s interrogatory responses alerted the state-court defendants to his
“fraud,” alleges that Smith lied about accessing the Cognate laptop, copying documents from the
laptop to external storage devices, and accessing those documents on the MacroCure laptop.
(Cognate Mot. Sanctions ¶¶ 4-9, 12, ECF No. 81-8.) The motion requests that Smith make
available to Cognate and the other state-court defendants the MacroCure laptop and external
drives. (Id. ¶ 33.) Further, Cognate argued spoliation by MacroCure in a pretrial hearing on
February 18, 2014, which the Circuit Court judge rejected. (Pretrial Tr. 85-115, 133.) And in
closing arguments, Cognate’s counsel mentions Smith’s changing story. (Smith Res Judicata
Mot. Ex. 1-Q, Closing Arg. Tr. 121.) Finally, Cognate is appealing the state court verdict and
lists as potential issues on appeal, inter alia, the Circuit Court’s rulings denying its motions to
amend the scheduling order, extend the discovery order, impose discovery sanctions, and admit
testimony about the MacroCure laptop.10 (Civil Appeal Information Report 3.) Although Smith’s
and MacroCure’s conduct during discovery may be far from exemplary, appealing the state court
verdict is the proper avenue for addressing these issues, rather than trying to relitigate them in
federal court.
The plaintiffs also argue that this court does not have to reach the fraud issue because
new facts have arisen that could not have been alleged in the previous lawsuit. (Res Judicata
Resp. Opp’n 27-28.) In particular, the plaintiffs in their response mention that Smith has left
MacroCure and is now working at LifeNet, where he may be continuing to use their proprietary
information. But LifeNet is not mentioned once in the amended complaint and, therefore, this
10
The plaintiffs argue that there is “no support for [Smith’s] contention” that he was helping Cognate employees
when he accessed Cognate’s materials after his resignation, and that “the scope and extent of this access is wholly
inconsistent with the materials accessed.” (Res Judicata Resp. Opp’n 14.) Smith, however, offered this explanation
to the state court jury which, presumably, accepted it, (see, e.g., Res Judicata Mot. Ex. 1-D, State Trial Tr. 60-73;
Closing Arg. Tr. 118-121), and it is not the job of this court to revisit or second-guess the jury’s decision.
14
argument is not properly before the court. See McKenzie v. Comcast Cable Commc’ns, Inc., 393
F. Supp. 2d 362, 373 (D. Md. 2005) (refusing to consider a claim raised for the first time in an
opposition to a motion for summary judgment). Further, the plaintiffs have not set forth
sufficient facts to establish a genuine dispute regarding Smith’s conduct at LifeNet, as they are
required to do to overcome a motion for summary judgment. See Bouchat, 346 F.3d at 522. The
plaintiffs next argue that the CFAA claim addresses new facts because, to bring a CFAA
counterclaim in the state court action, the jury would have had to focus on Smith’s access to the
Cognate laptop, and Cognate’s misappropriation claims in the prior litigation did not require
factfinding on Smith’s unpermitted access. (Res Judicata Resp. Opp’n 28.) It is true that the jury
instructions in the state court case defined misappropriation as the improper “acquisition,”
“disclosure,” or “use” of a trade secret. (Smith Res Judicata Mot. Ex. 1-Q, Jury Instr. Tr. 40-44.)
This distinction, however, is largely semantic: Cognate argued “acquisition,” “disclosure,” and
“use” in state court by explaining how Smith accessed Cognate’s (and its clients’) proprietary
information through Cognate’s laptop, computer servers, and VPN.11 Further, it appears that
Cognate wanted the term “access” to be included in the jury instructions on the trade secrets
claim, (id. at 56), and has appealed that issue, (Civil Appeal Information Report 3).
The plaintiffs next argue that their claims are not barred by res judicata because
counterclaims in Maryland are permissive, and counterclaims available in an earlier action but
not actually litigated there are not forfeited and may be brought in a later suit as long as they
would not “nullify” the earlier judgment. See Rowland v. Harrison, 577 A.2d 51, 55-57 (Md.
11
For example, in the state court action, Cognate filed an affidavit that explained how the forensic analysis
conducted on the Cognate laptop showed that the laptop was “extensively . . . accessed without authorization,”
confidential information “on Cognate’s corporate servers was accessed via Cognate’s [VPN],” and “Cognate[’s] and
its Client[s’] Confidential Information was accessed on external storage devices.” (Ganjei Aff. ¶ 11, ECF No. 81-7.)
Further, Cognate elsewhere explained that it was able to determine “Smith’s access of the documents and files
stored on the hard drive of the Cognate Laptop.” (Cognate’s Sixth Suppl. Answers to Smith’s First Set of Interrogs.
7, ECF No. 63-4.) And Cognate’s counsel, in closing arguments, tried to explain why Smith was “accessing”
Cognate’s and its clients’ information. (Closing Arg. Tr. 122.)
15
1990). Specifically, the plaintiffs argue that, because this action raises new claims that would not
nullify the judgment in the state court action—for violations of the CFAA and the
misappropriation of trade secrets and products not litigated in state court—the plaintiffs are not
precluded from raising them here. Regarding the CFAA claim, as explained above, Cognate did
raise the same allegations in its state court counterclaims. There is no indication that the statecourt defendants in this case would not have been permitted to bring the CFAA claim in state
court,12 and, moreover, the question is not whether a party could have brought the federal claim
in state court, but whether it could have brought the allegations supporting its federal claim as
state claims. Cf. Henry v. Farmer City State Bank, 808 F.2d 1228, 1236 (7th Cir. 1986) (“Even
assuming, however, that the federal courts have exclusive jurisdiction over RICO claims, the
Henrys were still required to raise their allegations of fraud and forgery, which form the sole
basis for their RICO claims, as a defense to the mortgage foreclosures.”). The facts underlying
the state court counterclaims are the same as those supporting the allegations in this case. The
plaintiffs, therefore, actually litigated these claims in the state court action, and allowing them to
raise the same arguments here would “nullify” that court’s verdict.
Finally, the plaintiffs argue that they could not and did not litigate in state court the trade
secrets belonging to the non-Cognate plaintiffs. (Res Judicata Resp. Opp’n 29-31.) In fact, they
both could have raised—and did raise—these issues. The non-Cognate plaintiffs’ trade secrets
are stored on Cognate’s computer network.13 In the state court case, Cognate covered its bases by
12
This court has found no Fourth Circuit case law on the issue, but courts in other circuits have concluded that the
CFAA creates concurrent jurisdiction. See H & R Block Tax Servs., Inc. v. Rivera-Alicea, 570 F. Supp. 2d 255, 268
n.5 (D.P.R. 2008) (listing cases to have held that the CFAA does not create exclusive jurisdiction in the federal
courts).
13
According to the amended complaint, Smith accessed the proprietary information belonging to the non-Cognate
plaintiffs through Cognate’s laptop, server computers, and VPN. (E.g., Am. Compl. ¶¶ 69, 128, 129.) And in a
declaration in this case, the plaintiffs submitted that, “[a]t all relevant times, Cognate’s computer servers have stored
an extensive controlled document database containing confidential and proprietary information” belonging to
Cognate and its clients, including Vesta, Healthbank, Oncocidex, and Theradigm, “all of which have entrusted their
16
asserting that everything on the Cognate laptop was a trade secret, even if it focused on a limited
number of documents for purposes of trial. (See Pretrial Tr. 25-26 (“[W]e believe everything on
[the Cognate laptop] is a trade secret . . . but we want to focus on these 133 . . . for purposes of
trial.”); Closing Arg. Tr. 113 (“[T]here were eleven thousand files . . . on that laptop. It
essentially had all of Cognate’s business processes on there.”).) In that case, Cognate also said
that the Cognate laptop in Smith’s possession contained its customer’s or client’s confidential
and proprietary information, (Ganjei Aff. ¶ 11 (emphasis added)); listed Theradigm and
Oncocidex documents as examples of those that Smith accessed after his resignation from
Cognate, (id. Ex. A 5-6, 7); and listed an Oncocidex document allegedly worth at least $1.1
million in its supplemental answers to Smith’s interrogatories to explain the damages it sought,
(Cognate’s Sixth Suppl. Answers 8, 10). Further, the plaintiffs have not listed new dates on
which Smith unlawfully accessed or attempted to access the Cognate laptop: in both the state and
federal cases, only dates in 2010, 2011, and 2012 are listed. (Cognate’s Sixth Suppl. Answers 7;
Am. Compl. ¶ 37.) Finally, Cognate received a forensic copy of the Cognate laptop in October
2012, which, while only a week before discovery closed in the state court case, presumably was
enough time to have included information on additional trade secrets and products in its June
2013 counterclaims. (Ganjei Decl. ¶¶ 5, 6; see also Ganjei Aff. ¶¶ 10, 11.)
In conclusion, even viewing the facts in the light most favorable to the plaintiffs, it is
clear that, in the state court action, Cognate did raise, or could have raised, claims identical to the
ones presented here.14
confidential materials to Cognate.” (Ganjei Decl. ¶ 2, ECF No. 76-7.)
14
The court will not allow the plaintiffs to conduct further discovery pursuant to Fed. R. Civ. P. 56(d). (See Res
Judicata Resp. Opp’n 41-45.) For the reasons stated above, additional discovery about whether MacroCure, the
American Red Cross, Smith, Smith Consulting, or LifeNet used the plaintiffs’ documents that they received from
Smith would not change the disposition of this case, given that the state court jury already determined that Smith did
not misappropriate trade secrets or products.
17
c. Final Judgment
A final judgment retains its res judicata consequences pending a decision on appeal. See
Warwick Corp. v. Md. Dep’t of Transp., 573 F. Supp. 1011, 1014 (D. Md. 1983); Campbell v.
Lake Hallowell Homeowners Ass’n, 852 A.2d 1029, 1041 (Md. Ct. Spec. App. 2004). In the
prior case, the jury entered a verdict in favor of Smith and against the defendants on their
counterclaims on March 6, 2014, and the court issued an order entering that judgment on March
25, 2014. (Circuit Court Docket Sheet.) Further, the plaintiffs do not appear to contest that the
judgment in the prior case constitutes a final judgment for purposes of res judicata. (See Res
Judicata Resp. Opp’n 21.)
CONCLUSION
In conclusion, this court finds that the parties in this case are the same or in privity with
those in the state court action, the claims presented in this case are identical to those determined
by the state court jury, and there has been a final judgment on the merits. Therefore, the plaintiffs
are precluded from bringing this suit in federal court. Because its decision to grant the
defendants’ motions for summary judgment on res judicata grounds will dispose of the case, the
court will not address the defendants’ other motions to dismiss, or their discovery motions,
which will be denied as moot. The parties’ motions to seal, which are unopposed, will be
granted. A separate order follows.
March 10, 2016
Date
/S/
Catherine C. Blake
United States District Judge
18
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?