CHS Inc. v. PetroNet, LLC et al

Filing 176

ORDER Count I of CHS's First Amended Complaint 57 is DISMISSED WITHOUT PREJUDICE; granting in part and denying in part 157 Motion for Summary Judgment: a) the Motion is GRANTED with respect to the Counts IV and V of CHS's First Amended Complaint 57 and those counts are DISMISSED WITH PREJUDICE; and b) the Motion is DENIED with respect to Counts II and III of CHS's First Amended Complaint 57 . (Written Opinion). Signed by Judge Richard H. Kyle on 05/18/11. (kll)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

CHS Inc.,
Plaintiff,
Civ. No. 10-94 (RHK/FLN)
MEMORANDUM OPINION
AND ORDER
v.
PetroNet, LLC, and Chelsea
Consulting, Inc.,
Defendants.

Karen D. McDaniel, Thomas J. Leach, III, Merchant & Gould PC, Minneapolis,
Minnesota, for Plaintiff.
Jeffrey C. Brown, Jeffrey C. Brown PLLC, Minneapolis, Minnesota, and Kenneth L.
Kunkle, Kunkle Law PLC, Saint Paul, Minnesota, for Defendants.

INTRODUCTION
Plaintiff CHS, Inc. (“CHS”) developed a software system customized to the needs
of its fuel business. Defendant Chelsea Consulting, Inc. (“Chelsea”) worked on
developing CHS‟s software. Subsequently, two individuals from Chelsea formed a new
company—Defendant PetroNet, LLC (“PetroNet”)—and began marketing similar
software to competing fuel companies. CHS then commenced this action, alleging that
Chelsea and PetroNet misappropriated its trade secrets, infringed its copyrights, and
misused other confidential and proprietary information. Defendants now move for
summary judgment. For the reasons set forth below, the Court will grant the Motion in
part and deny it in part.

BACKGROUND
I.

CHS and its development of CHS’s Solution
CHS is a downstream oil and gas company that sells bulk fuel to customers such

as gas stations, farmers, construction companies, and other high-volume fuel users.
When customers obtain fuel from CHS, they send trucks to “lift” fuel from designated
terminals. CHS later uses the information about these fuel lifts to generate invoices and
bill customers for the fuel.
In years past, CHS has used a combination of manual systems and software tools
to run various aspects of its business. For example, when fuel lifts took place, truck
drivers manually recorded information at the terminal so CHS could later identify the
customer and determine what price to charge based on the quantity, type, and amount of
fuel lifted. This process was slow and subject to human error. It also failed to provide
up-to-date pricing information to CHS and its customers. Accordingly, in the fall of
2000, CHS began a project to design and implement a software solution that would
automate tasks previously done manually and integrate aspects of its business that had
been managed using differing software tools.
It licensed a software program called JD Edwards (“JDE”). JDE is an Enterprise
Resource Product (“ERP”) solution, which is a type of program that can manage virtually
all of a business‟s “back of house” operations, including finance and accounting, sales,
operations, inventory management, and product pricing, to name just a few. (See, e.g.,
Brown Decl. Ex. 6 (Charles Rebuttal Rep.), ¶ 5.) When a company licenses the JDE
product, it can use the program in its unmodified, “out-of-the-box” form, or it may
2

configure options within the program to make it better fit its specific business needs.
Additionally, a company may build onto the JDE platform by writing custom code into
the program to perform functions unique to its business. (See id.) CHS spent
approximately five years and more than $12 million modifying and customizing JDE to
specifically accommodate its business needs and goals. (See Brown Decl. Ex. 10; accord
Stark Decl. ¶ 1.) The completed program is known as CHS‟s “Solution.”
The Solution consists of two parts: (1) custom code written into JDE to allow CHS
to more efficiently receive and process data specific to its fuel business, and (2) a system
called Control Room, a custom application CHS developed for use by its customers that
sends and receives information such as orders, pricing, inventory availability, and the
like. (See Weisbrod Decl. ¶ 1; Charles Rebuttal Rep. ¶ 8.) Additionally, the Solution
includes an interface between JDE and Control Room. Both parts required CHS to write
custom computer code. (See Weisbrod Decl. ¶ 2.)
CHS registered a copyright for the custom code in its ERP system—titled “CHS,
Inc. Custom ERP Code 2006”—with the United States Copyright Office. (Am. Compl.
¶ 37; Fletcher Decl. Ex. W.) It did the same for its “Petroex Order Creation Process
Flow” flowcharts, which depict how data about bills of lading is received and processed,
a key component of the software system. 1 (Am. Compl. ¶¶ 44-45; Fletcher Decl. Ex. V.)
The end product of CHS‟s efforts was an integrated system that provides up-todate information about pricing, inventory, and supply to both CHS and its customers,
1

CHS also registered a third copyright for its Control Room software. This copyright was
initially the subject of a copyright-infringement claim in this case, but CHS has agreed to drop
that claim. (See Mem. in Opp‟n at 40.)
3

automates the billing process, and allows customers to manage their accounts online
through Control Room. CHS dos not sell its Solution; however, the program is a feature
its customers may use when they contract with CHS, and it is a reason for customers to
choose CHS over other companies. (Brown Decl. Ex. 7, ¶ 9.) Because many companies
sell the same fuel, CHS believes its Solution sets it apart from competitors by offering “a
unique service environment.” (Stark Decl. ¶ 5.) CHS credits its Solution with creating “a
competitive advantage by dramatically lowering CHS‟s costs to manage customer
accounts by automating its billing process and providing up-to-date information,” and it
characterizes the program as “an enormous success.” (Am. Compl. ¶ 18.)
II.

Chelsea’s role in developing CHS’s Solution
CHS hired numerous independent contractors to work on the project to develop its

Solution, including Defendant Chelsea. At the root of this case is the conduct of two
individuals from Chelsea, Caroline Santora and Tareq Mahmood. Santora, the President
of Chelsea, is a project manager who had prior experience in the fuel industry. She was
placed in charge of overseeing the entire project. Mahmood is a computer developer who
wrote much of the code for the software and is currently Chelsea‟s Vice President.
CHS hired Chelsea to work on the project. On behalf of Chelsea, Santora
executed a Consulting Agreement with CHS in May 2003. This Agreement contained a
confidentiality provision, providing:
Consultant agrees that all information supplied to Consultant pursuant to
this Agreement shall be “Confidential” and shall be held strictly
confidential and shall not be revealed to third parties during or for a period
of five (5) years after termination of this Agreement for any reason
whatsoever without [CHS]‟s prior written approval. Consultant shall not
4

use confidential information for any other purpose tha[n] carrying out the
services contract herein. . . .
Consultant has no obligation to preserve the confidentiality of any
information which: (a) was previously known or developed by Consultant
free of any obligation to keep it confidential; or (b) is or becomes publicly
available other than by an unauthorized disclosure; or (c) is disclosed to
third parties by [CHS] without restriction; or (d) is received by Consultant
from a third party who is rightfully in possession of such information and
has proper authority to disclose it.
(Fletcher Decl. Ex. B ¶ 6.) Additionally, the Agreement provided that CHS would be the
sole owner of any property created by Chelsea related to CHS‟s project:
All right, title and interest to any programs, systems, data or materials
created, prepared or delivered by Consultant pursuant to these terms and
conditions (the „Deliverables‟), including, without limitation, any
copyrights, patents, trade secret and other intellectual property rights
therein are and shall be held by [CHS] and shall be considered „works made
for hire‟ as that term is defined in The Copyright Act of 1976. . . .
(Id. ¶ 7.)
There is disagreement as to how CHS‟s Solution was actually developed.
According to CHS, the process was a collaborative one. It created voluminous
development documents that mapped out its business operations for the developers so
they could build custom software to meet its needs, and CHS claims it provided Chelsea
with extensive information, specifications, and functionality requirements for the
Solution in order to facilitate designing and building the program. (E.g., Am. Compl.
¶ 16; Onken Decl. ¶¶ 1-4; Weisbrod Decl. ¶ 5.) CHS asserts that Chelsea representatives
were “exposed to full information about the problems CHS was seeking to resolve and
the solutions it tried that failed (such as an initial pricing solution) and the ones that
ultimately succeeded (such as the final implemented CHS custom pricing program).”
5

(Charles Rebuttal Rep. ¶ 14.) For example, a CHS senior business analyst who worked
on the project explains the development of the program‟s “blend and split” feature (for
fuel lifts involving multiple types of fuel that must be billed as a single “blended” fuel) as
follows: “CHS spent a year trying to get this feature of the system to work properly.
CHS personnel, including myself, explained to Mr. Mahmood the business objective we
were seeking to achieve and why, and he wrote the code for this feature of the program.”
(Onken Decl. ¶ 5.)
On the other hand, Santora describes the development process much differently.
She asserts that she did not collaborate with any CHS employees but rather ran the
project entirely on her own, relying on her prior general knowledge about the fuel
industry. (Santora Dep. at 116 (“I designed the [CHS] system based on my prior
experience, again, of working with other oil and gas companies . . . . Their people were
not involved.”); see also id. at 114, 120.) She further claims she was given little, if any,
information from CHS. Defendants also maintain that Chelsea played no role in
developing the Control Room program, but worked solely on the ERP program. (See
Answer to Am. Compl. ¶ 15.)
Regardless of precisely how its development progressed, the parties agree that the
Solution was completed around early 2005. (Am. Compl. ¶ 17.) The relationship
between CHS and Chelsea ended after the project‟s completion. CHS paid Chelsea just
over $3.3 million for its work on the Solution. (Stark Decl. ¶ 1.)
During the years Chelsea worked on CHS‟s Solution, Santora and Mahmood spent
time on site at CHS‟s facility and had offices at the company‟s headquarters. (Am.
6

Compl. ¶ 16.) Santora acknowledges that she regularly e-mailed documents related to the
CHS project to herself, which she saved in a folder on her hard drive and later transferred
onto her new laptop computer. (Santora Dep. at 203-05, 207-09.) She considered these
documents to be her “work product,” and she retained them after Chelsea‟s business
relationship with CHS ended. (Id. at 207-09 (calling the documents “my property”); id.
210-13.) Additionally, shortly before Mahmood left CHS, another employee observed
him in his office with an external hard drive hooked up to his computer. (Berkowitz
Decl. ¶ 2.) That employee recalls Mahmood saying something to the effect of “I‟m
copying it. I wrote it,” but he did not know whether Mahmood had permission to copy
files, and he only mentioned the incident to one colleague. (Id. ¶¶ 3-4.) Another
consultant similarly remembers seeing Mahmood with a personal hard drive hooked up to
the computer in his office at CHS and hearing Mahmood comment that he was “copying
the system.” (Swiderski Decl. ¶ 3.)
III.

PetroNet and its software
Around the time their work for CHS ended, Santora and Mahmood partnered to

form PetroNet. They are the company‟s only owners. PetroNet developed a JDE-based
ERP software program customized and modified for use by fuel companies. Mahmood
allegedly spent time “working on the side” to develop the PetroNet system while still
working on CHS‟s project. In May 2007, PetroNet registered a copyright for its
software. It markets the system to other companies in the fuel industry, some of whom
directly compete with CHS. PetroNet created no development documents of its own,
which CHS deems atypical for a complex software development project of this nature.
7

(See Brown Decl. Ex. 5 (Charles Rep.) ¶ 20.) Defendants claim, however, that lack of
development documents is not unusual when a program is created by computer
developers themselves rather than by a company, such as CHS, which must communicate
to the developers what it wants. (See id. Ex. 8 (James Rep.) ¶ 28.)
CHS asserts that PetroNet‟s system is substantially similar to CHS‟s Solution in
numerous ways. CHS‟s expert, who reviewed the two programs, opines that PetroNet‟s
code exhibits “almost identical program numbering conventions” to CHS‟s code, and he
identifies similarities in some of the most “mission critical” custom features of the
system. (Charles Rep. ¶ 34.) He explains that, although the programs‟ codes appear
different, the “underlying business requirement and functionality logic, feature sets, and
data structure are nearly identical.” (Id. ¶ 29.) He attributes the differences to the fact
that the systems were based on different versions of the JDE program. (Id. at ¶¶ 29, 33.)
Not surprisingly, Defendants take a very different view. Their expert opines there
is “absolutely no evidence” in either the ERP system or the Control Room software to
indicate that PetroNet copied or used CHS‟s code. (James Rep. ¶ 19; accord id. ¶¶ 1118.) He explains that, unlike CHS‟s Solution, which contains extensive code external to
JDE aimed at working with its Control Room program, PetroNet‟s system does not have
any custom code outside of JDE. (Id. ¶ 9.) Further, Defendants point out that “even
programs with generally similar functional intent show differences in code and
functionality that make it clear that not only is the PetroNet code not a copy of the CHS
code at the detail level, but there are functional elements present in CHS that are not
present in the PetroNet code and vice versa.” (Id. ¶ 35; see also id. ¶¶ 28, 41.)
8

Defendants‟ expert also believes that differences in the coding between the two programs
are not attributable to the fact they are built on different versions of JDE as CHS asserts,
because CHS‟s code could have worked “perfectly” in the newer version of JDE without
any modification, indicating that PetroNet‟s system was independently developed. (Id.
¶¶ 30-31.) He also disagrees with the specific similarities in the code identified by
CHS‟s expert. (E.g., id. ¶ 38.)
In addition to comparisons of the code, CHS points to documents produced by
PetroNet in discovery that are similar (or in some cases identical) to CHS documents.
For instance, PetroNet‟s “[Bill of Lading] Cross Reference Entry” flowchart is virtually
identical—even containing the same typographical errors—to a CHS flowchart, which
was designed specifically for CHS‟s unique processes and business needs. (Id. ¶¶ 27-28;
Fletcher Decl. Ex. G.) PetroNet even supplied this flowchart to one of its consultants,
Tamara Atchley, to use in explaining its system to a customer. (Fletcher Decl. Ex. Q
(Atchley Dep.) at 155-57; id. Ex. P.) CHS also identifies documents PetroNet supplied to
Atchley that reference CHS‟s programs, depict CHS‟s exact computer code in screen
shots, and even bear the identifier “division of CHS Cooperatives” on some pages.
(Fletcher Decl. Exs. O-Q.)
PetroNet produced some 97,000 pages of CHS documents it had in its possession.
Metadata from several of these documents indicate that some the files were modified in
2008 and 2009, after the CHS project had concluded and Chelsea‟s work for CHS had
ended. (Fletcher Decl. Ex. F (Mahmood Dep.) at 125-27, 130.) When asked about this,
Mahmood had no explanation. (Id.) Santora maintains that all the CHS documents
9

retained after Chelsea finished work on CHS‟s Solution were Chelsea‟s work product and
that none contained any confidential information. (Santora Dep. at 114-20, 203-09.) In
CHS‟s view, however, much of the information contained in those documents constitutes
trade-secrets. (Charles Rebuttal Rep. ¶¶ 25, 31.)
CHS commenced this action on January 11, 2010, asserting claims for copyright
infringement related to its ERP system (Count II), copyright infringement related to its
Petroex Order Creation Process Flowcharts (Count III), misuse of proprietary or
confidential information (Count IV), and misappropriation of trade secrets (Count V).2
Defendants now move for summary judgment. The parties dispute whether any of CHS‟s
information was trade secret (and, if so, what information), as well as the extent of
similarities, if any, between the code for CHS‟s Solution and the code for PetroNet‟s
system. For the reasons explained below, the Court will deny Defendants‟ Motion with
respect to the copyright claims and grant it with respect to the remaining claims.
STANDARD OF DECISION
Summary judgment is proper if, drawing all reasonable inferences in favor of the
nonmoving party, there is no genuine issue as to any material fact and the moving party is
entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986). The moving party bears the burden of showing that the

2

As explained above, Count I (claiming infringement of CHS‟s Control-Room software
copyright) has been abandoned. See supra note 1. Defendants deny the allegations in each claim
and have asserted a number of counterclaims. In their initial Motion (Doc. No. 148), Defendants
sought summary judgment on both CHS‟s claims and their own counterclaims. But they
subsequently filed an Amended Motion for Summary Judgment (Doc. No. 157), in which they
seek summary judgment only on the claims in CHS‟s Complaint.
10

material facts in the case are undisputed. Id. at 322; Whisenhunt v. Sw. Bell Tel., 573
F.3d 565, 568 (8th Cir. 2009). The Court must view the evidence, and the inferences that
may be reasonably drawn from it, in the light most favorable to the nonmoving party.
Weitz Co., LLC v. Lloyd‟s of London, 574 F.3d 885, 892 (8th Cir. 2009); Carraher v.
Target Corp., 503 F.3d 714, 716 (8th Cir. 2007). The nonmoving party may not rest on
mere allegations or denials, but must show through the presentation of admissible
evidence that specific facts exist creating a genuine issue for trial. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 256 (1986); Wingate v. Gage Cnty. Sch. Dist., No. 3, 528 F.3d
1074, 1078-79 (8th Cir. 2008).
ANALYSIS
I.

Misappropriation of trade secrets (Count V)
The Minnesota Uniform Trade Secrets Act (“MUTSA”) prohibits the improper

acquisition, use, or disclosure of trade-secret information. Minn. Stat. § 325C.01-08. A
trade secret is information that (1) is not generally known or readily ascertainable; (2) has
value as a result of its secrecy; and (3) is the subject of reasonable efforts under the
circumstances to protect its secrecy. Minn. Stat. § 325C.01, subd. 5; accord Wyeth v.
Natural Biologics, Inc., 395 F.3d 897, 899 (8th Cir. 2005). Additionally, “[i]n a suit for
misappropriation of trade secrets, the plaintiff must specify what information it seeks to
protect.” E.g., Fox Sports Net N., LLC v. Minn. Twins P‟ship, 319 F.3d 329, 335 (8th
Cir. 2003) (citation omitted); Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d
890, 898 (Minn. 1983) (finding “lack of clarity” fatal to plaintiffs‟ claims).

11

Defendants argue that CHS has failed to identify the information it considers to be
trade secret with sufficient specificity. (See Mem. in Supp. at 17-18, 22-23.) CHS
responds that it has specifically identified trade-secret information—including the source
code, feature sets, and business rules underlying its Solution. (See Mem. in Opp‟n at 2228.) The Court disagrees.
Defendants rely upon AMP, Inc. v. Fleischhacker, 823 F.2d 1199 (7th Cir. 1987),3
which determined that the plaintiff had failed to “specify precisely what trade secrets it
believe[d] to be at risk by identifying particular documents or other sources of
information.” Id. at 1203 (citing Litton Sys, Inc. v. Sundstrand Corp., 750 F.2d 952, 954,
956-57 (Fed. Cir. 1984)). In AMP, generalized claims that the defendant misappropriated
“confidential business and technical information” were insufficient, and even the
plaintiff‟s pre-trial submission of “six single-spaced, typewritten pages listing by general
item and category hundreds of pieces of AMP internal information” could not rectify this
failure. Id.
In response, CHS attempts to identify four features of its Solution as trade secrets:
(1) the “Manifest Management” feature, (2) the blend-and-split feature, (3) the methods
of establishing prices and notifying CHS and its customers, and (4) the “Sales Order
Create” process. (See Mem. in Opp‟n at 23-24.) Elsewhere, it claims the following
functions within the program are trade secrets: the “Price Variable Table Maintenance
and Variable Integrity Report,” the “Time-based Contract Adjustment,” the “Contract
3

Although AMP predated, and was technically superseded by, the Illinois Trade Secret Act, the
Seventh Circuit has noted that the case “continues to reflect the proper standard under Illinois‟s
current statutory scheme.” PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995).
12

Agreement Information Extract,” and the “Sales Order Processing.” (Charles Rep.
¶¶ 34.) With respect to each identified feature or function, however, CHS simply claims
that the structure, functionality, and underlying business rules are protected trade secrets.
It claims trade-secret protection at multiple levels—ranging from the overarching
business purposes and processes to the detailed computer code through which key
functions are carried out—yet it never clearly identifies those purposes or processes, nor
does it describe in sufficient detail how the features and functions actually operate.
Tellingly, when the Court inquired about the trade secrets at the hearing on this Motion,
CHS was unable to enumerate them. Instead, it replied there were “in the order of
probably six to eight” trade secrets at issue. It also said there were approximately six key
features which were trade secrets and should be presented to a jury, which is inconsistent
with the number of features identified in CHS‟s brief and laid out above.
In the Court‟s view, CHS‟s varying attempts to identify features and functions as
trade secrets do no more than list “general areas of information which contain
unidentified trade secrets” as AMP warns against. 823 F.3d at 1203 (citations omitted).
CHS does not give the Court an adequate understanding of what it seeks to protect or
how to protect it. See Internet Inc. v. Tensar Polytechs., Inc., Civ. No. 05-317, 2005 WL
2453170, at *6 (D. Minn. Oct. 3, 2005) (Kyle, J.) (quoting Porous Media Corp. v.
Midland Brake Inc., 187 F.R.D. 598, 600 (D. Minn. 1999) (Mason, M.J.)) (“Failure to
identify the trade secrets with sufficient specificity renders the Court powerless to enforce
any trade secret claim.”); Electro-Craft, 332 N.W.2d at 898 (“[G]iven [plaintiff]‟s lack of

13

specificity, it was impossible for the district court to fashion a meaningful injunction
which would not overly restrict legitimate competition.”).
In addition to the features and functions, CHS attempts to identify three categories
of development documents as trade secrets—those memorializing the “as is” operations
and business rules of the company, flowcharts depicting business processes, and
“critical” process documents providing a “road map” to the software and where various
features are located within the code. (See Charles Rep. ¶¶ 21(b), 24-25.) As with the
features and functions discussed above, however, CHS again fails to explain what the
allegedly secret processes reflected in these documents are, instead giving only general
categories and a few specific examples of the documents it claims are trade secrets.
Finally, CHS claims that the way its Solution combines its various features
constitutes a trade secret. (See Mem. in Opp‟n at 18.) In some instances, a combination
of elements or features may constitute a protectable trade secret, so long as the
combination is unique or novel. See Electro-Craft, 332 N.W.2d at 899; see also SL
Montevideo Tech., Inc. v. Eaton Aerospace, LLC (“SL Montevideo I”), No. Civ. 033302, 2005 WL 1923811, at *11 (D. Minn. Aug. 11, 2005) (Kyle, J.) (rejecting
defendants‟ argument that plaintiff had failed to specify the information considered trade
secret where it had identified “the entire design” of the motor at issue as well as certain
individual components). However, “[s]imply to assert a trade secret resides in some
combination of otherwise known data is not sufficient, as the combination itself must be
delineated with some particularity in establishing its trade secret status.” Jostens, Inc. v.
Nat‟l Computer Sys., 318 N.W.2d 691, 699 (Minn. 1982); accord SL Montevideo Tech.,
14

Inc. v. Eaton Aerospace, LLC (“SL Montevideo II”), No. Civ. 03-3302, 2006 WL
1472860, at *3 (D. Minn. May 26, 2006) (Kyle, J) (granting judgment as a matter of law
where plaintiff failed to identify with sufficient particularity how the “guts” of the
allegedly trade-secret motor were compiled). Identifying “performance characteristics” is
not enough where a plaintiff claims the entire design of its product as a trade secret. See
SL Montevideo II, 2006 WL 1472860, at *3. Here, because CHS has made no attempt to
describe with any particularity how its Solution‟s features are combined in a unique or
novel way, the claim cannot survive summary judgment on this basis either.
CHS was not without warning about the Court‟s reservations. In its previous
Order on CHS‟s Motion for Preliminary Injunction, the Court opined that the “so-called
trade secrets are amorphous and ill-defined” and noted that sufficient specificity in
defining the alleged trade secrets appeared to be lacking. (Doc. No. 117, at 13.) Yet
CHS largely relies on the same evidence it previously submitted in support of the
preliminary-injunction Motion. Its newly-proffered expert report attempts to add detail,
yet its expert still only lists broad categories of business documents (see Charles Rep.
¶ 21(b)) and identifies general functions from the Solution‟s code (see id. ¶ 34). The
report concludes that the “logic, routines, sequencing, field names and descriptors,” and
“program numbering conventions” of functions in CHS‟s Solution are virtually identical
to PetroNet‟s system (see id. ¶ 34), but it fails to explain with any particularity how the
functions operate or what makes them protectable trade secrets in the first place. Since
CHS has failed to specifically identify its alleged trade secrets as required under
Minnesota law, its trade-secret claim cannot survive the instant Motion.
15

II.

Copyright infringement (Counts II-III)
Copyright infringement requires proof of (1) ownership of a valid copyright; and

(2) copying of the copyrighted work. E.g., Thimbleberries, Inc. v. C & F Enters., Inc.,
142 F. Supp. 2d 1132, 1137 (D. Minn. 2001) (Doty, J.) (citing Moore v. Columbia
Pictures Indus., Inc., 972 F.2d 939, 941 (8th Cir. 1992)). To show ownership, a plaintiff
must show that the material is original, that it can be copyrighted, and that all statutory
formalities have been satisfied. Thimbleberries, 142 F. Supp. 2d at 1137. Copying may
be shown through direct evidence, but “[b]ecause direct evidence of copying is rarely
available, a plaintiff generally must show that the defendant had access to the copyrighted
material and that the accused work is substantially similar to the copyrighted work.”
Thimbleberries, 142 F. Supp. 2d at 1139 (citing Sid & Marty Krofft Television Prods.,
Inc. v. McDonald‟s Corp., 562 F.2d 1157, 1162 (9th Cir. 1977)). CHS claims
infringement of two separate copyrights—the custom code in its ERP system and its
Petroex flowcharts. The Court will address each in turn.
As an initial matter, however, it is not disputed that Chelsea (acting through
Santora and Mahmood) had access to both the ERP system code and the Petroex
flowcharts. Access is shown if Defendants had a “reasonable possibility” of seeing the
copyrighted information. Id. (citing Moore, 972 F.2d at 942). Given both individuals‟
roles in developing CHS‟s Solution and the extent of their involvement in the project,
they had at least a reasonable possibility of seeing the copyrighted information. Thus,
whether copying occurred will turn on whether there is either substantial similarity
between the works or direct evidence of copying.
16

A. ERP custom code (Count II)
With respect to the infringement claim based on the ERP system code, Defendants
do not challenge the validity of CHS‟s copyright. They argue, however, that CHS has
failed to show substantial similarity,4 because CHS‟s expert, Jeffrey Charles, failed to
apply the abstraction-filtration-comparison (“AFC”) test. (See Mem. in Supp. at 36.)
The AFC test, first outlined by the Second Circuit in Computer Associates, International,
Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992), and later refined by the Tenth Circuit in
Gates Rubber Co. v. Bando Chemical Industries, Ltd., 9 F.3d 823, 841 (10th Cir. 1993),
is a three-part approach to assess whether protectable expression has been copied. Using
AFC, a court “breaks down the alleged infringed program into its constituent structural
parts; filters out all non-protectable material; and then compares this material with the
structure of an allegedly infringing program.” Mayo Clinic v. Elkin (“Elkin II”), No. 09322, 2010 WL 5421322, at *6 (D. Minn. Dec. 27, 2010) (Doty, J.). The Eighth Circuit
has not adopted the test to date, but many other Circuits have. Id. (collecting cases). The
AFC test “provides a helpful structure to use in examining a computer program and
determining which, if any, components of the program warrant protection under the
copyright laws.” I-Sys., Inc. v. Softwares, Inc., No. 02-1951, 2004 WL 742082, at *10
(D. Minn. Mar. 29, 2004) (Tunheim, J.) (emphasis added). Yet, while AFC may be

4

At one point, CHS also argues it has direct evidence of copying—namely, evidence that
PetroNet‟s consultant, Atchley, had copies of entire sections of CHS‟s code in her PetroNet
folder. (See Mem. in Opp‟n at 35.) In the Court‟s view, however, this is not direct evidence that
PetroNet actually copied the code into its own product or used it in any manner. See, e.g., R.C.
Olmstead, Inc. v. CU Interface, LLC, 606 F.3d 262, 274 (6th Cir. 2010) (where the factfinder is
still required to infer that copying occurred, there is not direct evidence of copying).
17

helpful for legal analysis, the Court cannot deem the failure of CHS‟s expert to overtly
follow it fatal to the claim.5
Although CHS did not conduct a detailed AFC analysis, it has identified some
features of its software that are original, thus allowing the factfinder to filter out elements
common in the industry that cannot be protected, just as the AFC approach directs. See,
e.g., R.C. Olmstead, Inc. v. CU Interface, LLC, 606 F.3d 262, 275 (6th Cir. 2010).
Namely, it has listed at least four features of its ERP system that it claims were original
and copied—the “Price Variable Table Maintenance and Variable Integrity Report,” the
“Time-based Contract Adjustment,” the “Contract Agreement Information Extract,” and
the “Sales Order Processing.” (Charles Rep. ¶ 34.) As CHS explained at oral argument,
Charles essentially conducted the “filtering” required by the AFC approach prior to
beginning his analysis by analyzing only the custom features that CHS claims are original
and protectable.
Additionally, there is ample (albeit conflicting) evidence at the comparison step.
CHS‟s expert opines that PetroNet‟s system contains virtually identical features to CHS‟s
Solution, both on high levels of abstraction (e.g., the idea or purpose of the feature) and
on a source code level (e.g., similar numbering conventions). (See Charles Rep. ¶¶ 29,
34.) Defendants‟ expert disputes these conclusions. There are “significant differences of
opinion as to whether [these elements] are protectable and, if so, whether they are
substantially similar.” I-Sys., 2004 WL 742082, at *12 (denying summary judgment on
5

This Court has previously excluded expert testimony that failed to apply the AFC test in a
copyright-infringement case. See Elkin II, 2010 WL 5421322, at *6. Notably, however, neither
side has raised any objection to the other‟s expert at this juncture.
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copyright infringement claim where experts disagreed on the originality and similarity of
two software programs). In short, “one party‟s expert asserts protected, unique
expression and the other, with equal force, asserts the opposite,” which creates a genuine
fact dispute and renders summary judgment inappropriate on this claim. Id.
B. Petroex flowcharts (Count III)
Turning next to the infringement claim involving CHS‟s flowcharts, the element
of copying is much clearer. In fact, Defendants do not argue there was no copying.
PetroNet‟s virtually identical flowcharts, with matching typographical errors, may rise to
the level of direct evidence of copying. (See Fletcher Decl. Ex. G.) At the very least,
they provide ample evidence of substantial similarity. Furthermore, Mahmood submitted
a declaration in connection with the instant Motion certifying that “Chelsea and PetroNet
will destroy all copies of the CHS PetroEx Flowcharts” (Mahmood Decl. (Doc. No. 172)
¶ 3), thereby acknowledging they in fact have copies.
While they do not dispute that copying occurred, Defendants do challenge the
timing of the copying. In particular, they make much of the fact that CHS did not deposit
the requisite information to register the copyright in its flowcharts with the Copyright
Office until August 16, 2010 (see Am. Compl. ¶ 45), and they argue there is no evidence
that PetroNet copied the flowcharts at issue after August 2010. (See Mem. in Supp. at
36.) By fixating on the date of registration, however, Defendants apparently misconstrue
federal copyright law.
Copyright protection is not conditioned on registration. See 17 U.S.C. § 408(a).
Rather, registration is only required before pursuing an infringement action. See id.
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§ 411(a); Olan Mills, Inc. v. Linn Photo Co., 23 F.3d 1345, 1349 (8th Cir. 1994)
(“Infringement itself is not conditioned upon registration of the copyright . . . . Thus, a
copyright holder can register a copyright and file suit after infringement occurs.”)
(emphasis added); Datastorm Techs., Inc. v Excalibur Commc‟ns, Inc., 888 F. Supp. 112,
114 (N.D. Cal. 1995) (“Registration is not a prerequisite to a valid copyright, although it
is a prerequisite to suit.”)). Defendants make no assertion that the flowchart was not
protectable by copyright, and they do not rebut CHS‟s evidence that copying took place
prior to August 2010. At this juncture, CHS‟s infringement claim based on the
flowcharts will therefore survive. 6
III.

Misuse of confidential information (Count IV)
Count IV of CHS‟s Amended Complaint alleges misuse of proprietary and/or

confidential information. Defendants argue that this claim is duplicative of CHS‟s tradesecret claim and must fail. (See Mem. in Supp. at 37-38.) The MUTSA “displace[s]
conflicting tort, restitutionary, and other law in this state providing civil remedies for
misappropriation of a trade secret.” Minn. Stat. § 325C.07(a). The statute also provides,
however, that it does not affect civil remedies that are not based on misappropriation of
trade secrets. Id. Thus, only common-law claims directly based on trade secrets conflict
with the MUTSA and are displaced. See Micro Display Sys., Inc. v. Axtel, Inc., 699 F.
Supp. 202, 204-05 (D. Minn. 1988) (Alsop, J.). Stated differently, “a plaintiff may only
6

Defendants also argue that CHS has failed to show any damages related to infringement of the
flowchart copyright. CHS responds that Defendants have benefitted from the flowcharts in
various ways, and it seeks injunctive relief, actual damages, and/or statutory damages. In the
Court‟s view, however, damages is not a liability issue and need not be considered here at the
summary-judgment stage, but is better left to the trier of fact.
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maintain separate causes of action „to the extent that the causes of action have “more” to
their factual allegations than the mere misuse or misappropriation of trade secrets.‟”
Mayo Clinic v. Elkin (“Elkin I”), Civ. No. 09-322, 2010 WL 760728, at *5 n.13 (D.
Minn. Mar. 4, 2010) (Doty, J.) (quoting Axtel, 699 F. Supp. at 205).
In order to survive, Count IV must therefore be based on underlying factual
allegations distinct from the trade-secret claim. CHS argues that Count IV “covers
confidential information misappropriated by Defendants that may not fall under the
umbrella of a trade secret.” (Mem. in Opp‟n at 41.) The Court‟s review of the record,
however, reveals no information CHS claims as confidential that it does not also claim as
trade secret. Instead, CHS repeatedly refers to confidential and trade secret information
in tandem, and its arguments often conflate the two. (E,g., Mem. in Opp‟n at 4
(“Defendants are liable for trade secret misappropriation if they took, disclosed, or used
CHS‟s confidential or trade secret information.”) (emphasis added).) Because CHS
points to nothing confidential that it does not also claim is a trade secret, it has failed to
allege any facts underlying Count IV that are independent from its misappropriation
claim. Its common-law claim is therefore displaced by the MUTSA and cannot survive.
See Elkin I, 2010 WL 760728, at *5 n.13 (granting summary-judgment where “[t]he
factual allegations underlying plaintiffs‟ common law claim only concern [defendant]‟s
alleged trade secret misappropriation”).

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CONCLUSION
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
ORDERED:
(1) Count I of CHS‟s First Amended Complaint (Doc. No. 57) is DISMISSED
WITHOUT PREJUDICE; and
(2) Defendants‟ Amended Motion for Summary Judgment (Doc. No. 157) is
GRANTED IN PART and DENIED IN PART as follows:
a. the Motion is GRANTED with respect to the Counts IV and V of CHS‟s First
Amended Complaint (Doc. No. 57) and those counts are DISMISSED WITH
PREJUDICE; and
b. the Motion is DENIED with respect to Counts II and III of CHS‟s First
Amended Complaint (Doc. No. 57).

Dated: May 18, 2011

s/Richard H. Kyle
RICHARD H. KYLE
United States District Judge

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