Switch Ltd. v. Fairfax et al

Filing 33

ORDERED that 8 Defendants' Motion to Dismiss is GRANTED in part and DENIED in part. The Court dismisses Plaintiff's fourth, fifth, and eighth causes of action with prejudice. FURTHER ORDERED that 7 Plaintiff's Motion for Preliminary Injunction is DENIED without prejudice. Signed by Chief Judge Gloria M. Navarro on 8/30/2018. (Copies have been distributed pursuant to the NEF - MMM)

UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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SWITCH LTD.,

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Plaintiff,
vs.

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STEPHEN FAIRFAX, et al.,

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Defendants.

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Case No.: 2:17-cv-02651-GMN-VCF
ORDER

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Pending before the Court is the Motion to Dismiss, (ECF No. 8), filed by Defendants

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Stephen Fairfax (“Fairfax”) and MTechnology (collectively “Defendants”). Plaintiff Switch

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Ltd. (“Plaintiff”) filed a Response, (ECF No. 16), and Defendants filed a Reply, (ECF No. 18).

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Also pending before the Court is Plaintiff’s Motion for Preliminary Injunction. (ECF No. 7).

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Defendants filed a Response, (ECF No. 12), and Plaintiff filed a Reply, (ECF No. 19). For the

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reasons discussed herein, Defendants’ Motion to Dismiss is GRANTED in part and DENIED

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in part. Additionally, Plaintiff’s Motion for Preliminary Injunction is DENIED without

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prejudice.

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I.

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BACKGROUND
This action arises from Plaintiff’s allegations that Defendants misappropriated its trade

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secrets to the benefit of a competitor. (Compl., Ex. 1 to Pet. of Removal, ECF No. 1-1).

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Plaintiff is a limited liability company in Nevada that designs, builds, and operates data centers.

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(Id. ¶ 6). According to Plaintiff, its unique designs have allowed it to become known as “one of

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the best in the industry at building and operating data center technology ecosystems.” (Id. ¶ 15).

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Specifically, Plaintiff asserts that its novel approach allows its data centers to operate “more

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efficiently than their competitors” and “solve one of the biggest threats to data center

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efficiency: containing, channeling, and cooling server heat.” (Id. ¶ 20). Plaintiff attributes this

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competitive advantage in the industry to its numerous patents, patent-pending technology, and

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trade secrets. (See id. ¶¶ 5–27).

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On or about May 2011, Plaintiff alleges that Fairfax, who served as the President of

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MTechnology, was given an in-depth tour of Plaintiff’s facilities and “special access to all of

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[Plaintiff’s] designs.” (Id. ¶¶ 12, 28–29). The purpose of this “rare access” was to allow

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Fairfax to conduct an audit of Plaintiff’s technologies and provide an “independent and trusted

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assessment” to a mutual customer. (Id. ¶ 30). As part of the audit, Plaintiff claims that Fairfax

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had access to extremely sensitive trade secret information, and therefore Plaintiff required

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Fairfax to sign a Non-Disclosure Agreement (the “2011 NDA”). (Id. ¶¶ 31, 32). Under the

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2011 NDA, Fairfax and MTechnology allegedly agreed to “not disclose or use any of

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[Plaintiff’s] Confidential Information . . . including trade secret information.” (Id. ¶ 33).

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In August 2015, Plaintiff again permitted Fairfax to conduct a review of Plaintiff’s

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technology at the request of the same mutual customer. (Id. ¶ 41). The purpose of this renewed

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request was to have Fairfax evaluate “new evolutions in [Plaintiff’s] trade secret protected and

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patent-pending technologies.” (Id.). Plaintiff again required Fairfax to execute a second Non-

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Disclosure Agreement (the “2015 NDA”), which allegedly prohibited Fairfax from disclosing

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trade secrets. (Id.).

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Around or before 2015, Plaintiff claims that Fairfax began speaking with Aligned Data

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Centers (“Aligned”), which is a provider of data center services in Phoenix, AZ and a

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competitor with Plaintiff. (See id. ¶¶ 47–53). After entering discussions, Plaintiff asserts that

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Fairfax agreed to design Aligned’s data centers. (Id. ¶ 55). In November 2015, Aligned

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allegedly opened a new data center in Texas based on Fairfax’s design. (Id. ¶ 45). According to

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Plaintiff, “it is apparent that [Fairfax] improperly used [Plaintiff’s] Confidential Information to

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influence the design and makeup of the Aligned Data Centers.” (Id. ¶ 57). In particular,

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Plaintiff notes similarities between the physical infrastructure and layout, cooling designs,

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electrical configuration, interplay of various component parts, and overall operations of the data

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center. (Id.). Plaintiff alleges that Aligned has opened, and will continue to open, additional

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data centers based on this design. (See id. ¶¶ 47–49).

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On September 12, 2017, Plaintiff initiated this action in state court. (Compl., Ex. 1 to

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Pet. of Removal). Defendants subsequently removed the action to this Court on October 12,

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2017. (Pet. of Removal, ECF No. 1). In the Complaint, Plaintiff alleges causes of action for:

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(1) Breach of Contract; (2) Breach of Implied Covenant of Good Faith and Fair Dealing; (3)

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Tortious Breach of Implied Covenant of Good Faith and Fair Dealing; (4) Unjust Enrichment;

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(5) Conversion; (6) Misappropriation of Trade Secrets under 18 U.S.C. § 1836; (7)

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Misappropriation of Trade Secrets under N.R.S. 600A; and (8) Misappropriation of Licensable

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Commercial Properties. (See Compl., Ex. 1 to Pet. of Removal). Defendants filed their Motion

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to Dismiss on November 2, 2017. (ECF No. 8).

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II.

LEGAL STANDARD

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A) Motion to Dismiss

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Rule 12(b)(6) of the Federal Rules of Civil Procedure mandates that a court dismiss a

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cause of action that fails to state a claim upon which relief can be granted. See North Star Int’l

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v. Ariz. Corp. Comm’n, 720 F.2d 578, 581 (9th Cir. 1983). When considering a motion to

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dismiss under Rule 12(b)(6) for failure to state a claim, dismissal is appropriate only when the

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complaint does not give the defendant fair notice of a legally cognizable claim and the grounds

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on which it rests. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In considering

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whether the complaint is sufficient to state a claim, the Court will take all material allegations

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as true and construe them in the light most favorable to the plaintiff. See NL Indus., Inc. v.

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Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).

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The Court, however, is not required to accept as true allegations that are merely
conclusory, unwarranted deductions of fact, or unreasonable inferences. See Sprewell v. Golden

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State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). A formulaic recitation of a cause of action

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with conclusory allegations is not sufficient; a plaintiff must plead facts showing that a

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violation is plausible, not just possible. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing

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Twombly, 550 U.S. at 555) (emphasis added). In order to survive a motion to dismiss, a

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complaint must allege “sufficient factual matter, accepted as true, to state a claim to relief that

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is plausible on its face.” Id. “A claim has facial plausibility when the plaintiff pleads factual

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content that allows the court to draw the reasonable inference that the defendant is liable for the

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misconduct alleged.” Id.

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“Generally, a district court may not consider any material beyond the pleadings in ruling

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on a Rule 12(b)(6) motion . . . . However, material which is properly submitted as part of the

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complaint may be considered on a motion to dismiss.” Hal Roach Studios, Inc. v. Richard

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Feiner & Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990) (citations omitted). Similarly,

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“documents whose contents are alleged in a complaint and whose authenticity no party

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questions, but which are not physically attached to the pleading, may be considered in ruling on

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a Rule 12(b)(6) motion to dismiss” without converting the motion to dismiss into a motion for

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summary judgment. Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994). Under Federal Rule

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of Evidence 201, a court may take judicial notice of “matters of public record.” Mack v. S. Bay

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Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986). Otherwise, if the district court considers

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materials outside of the pleadings, the motion to dismiss is converted into a motion for

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summary judgment. See Fed. R. Civ. P. 12(d); Arpin v. Santa Clara Valley Transp. Agency, 261

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F.3d 912, 925 (9th Cir. 2001).

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If the court grants a motion to dismiss, it must then decide whether to grant leave to

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amend. Pursuant to Rule 15(a), the court should “freely” give leave to amend “when justice so

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requires,” and in the absence of a reason such as “undue delay, bad faith or dilatory motive on

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the part of the movant, repeated failure to cure deficiencies by amendments previously allowed,

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undue prejudice to the opposing party by virtue of allowance of the amendment, futility of the

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amendment, etc.” Foman v. Davis, 371 U.S. 178, 182 (1962). Generally, leave to amend is

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only denied when it is clear that the deficiencies of the complaint cannot be cured by

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amendment. See DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992).

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B) Preliminary Injunction

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Preliminary injunctions are governed by Rule 65 of the Federal Rules of Civil

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Procedure, which provides that a “court may issue a preliminary injunction only on notice to

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the adverse party.” Fed. R. Civ. P. 65(a)(1). In general, injunctive relief is an extraordinary

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remedy that is awarded only upon a clear showing that the moving party is entitled to that

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relief. Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 22 (2008). A plaintiff seeking a

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preliminary injunction “must establish that he is likely to succeed on the merits, that he is likely

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to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips

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in his favor, and that an injunction is in the public interest.” Id. at 20. In certain circumstances,

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“‘serious questions going to the merits’ and a balance of hardships that tips sharply towards the

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plaintiff can support issuance of a preliminary injunction, so long as the plaintiff also shows

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that there is a likelihood of irreparable injury and that the injunction is in the public interest.”

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Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1134 (9th Cir. 2011). “[C]ourts must

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balance the competing claims of injury and must consider the effect on each party of the

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granting or withholding of the requested relief.” Amoco Production Co. v. Village of Gambell,

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AK, 480 U.S. 531, 542 (1987).

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III.

DISCUSSION

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1. Motion to Dismiss

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In the instant Motion to Dismiss, Defendants advance three separate arguments: (1)

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Plaintiff’s misappropriation claims are premised on the same allegations as a separate patent

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action and therefore fail to state a claim; (2) Plaintiff’s tort claims are subsumed by the

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misappropriation claims; and (3) Plaintiff’s contract claims do not apply to Fairfax in his

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individual capacity. (See Mot. to Dismiss, ECF No. 8). The Court addresses these arguments in

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turn.

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A. Misappropriation Claims
Defendants argue that the Court should dismiss Plaintiff’s misappropriation claims

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because a related patent case filed in the Eastern District of Texas encompasses the same

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alleged conduct by Defendants. (Mot. to Dismiss 6:21–24). According to Defendants, Plaintiff

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cannot show that this conduct “simultaneously constitutes contributory patent infringement and

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misappropriation of trade secrets,” as such an assertion is a “legal impossibility.” (Id.). In

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response, Plaintiff asserts that “Defendants assume incorrectly that [Plaintiff’s]

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misappropriation of trade secrets claims are exclusively based on information set forth in

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published patent claims . . ..” (Pl.’s Resp 7:18–21, ECF No. 16). Additionally, Plaintiff notes

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that many of the alleged improper disclosures occurred before the associated patents were

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published. (See id. 8:2–11).

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Defendants are correct that information disclosed in the public domain cannot give rise

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to a claim based on trade secrets. See Stutz Motor Car of Am., Inc. v. Reebok Int'l, Ltd., 909 F.

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Supp. 1353, 1359 (C.D. Cal. 1995) (“It is well established that disclosure of a trade secret in a

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patent places the information comprising the secret into the public domain.”). Here, however,

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Plaintiff has sufficiently alleged that Defendants have misappropriated information outside the

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patent disclosures. While Defendants assert a factual dispute as to the overlap between

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Plaintiff’s misappropriation and patent claims, such an argument is improperly raised at this

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stage in the litigation. The Court therefore rejects Defendants’ argument as premature. See

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Kaplan, 792 F.2d at 898.

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To the extent Defendants argue that Plaintiff must allege its misappropriation claims
with greater particularity, the Court disagrees. In order to state a claim for misappropriation

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under NRS 600A, a plaintiff must allege: (1) a valuable trade secret; (2) misappropriation of the

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trade secret through use, disclosure, or nondisclosure of use of the trade secret; and (3) that the

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misappropriation was made in breach of an express or implied contract or by a party with a

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duty not to disclose. Frantz v. Johnson, 999 P.2d 351, 358 (Nev. 2000). A claim for

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misappropriation under the Defend Trade Secrets Act (“DTSA”) has substantially similar

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elements. See 18 U.S.C. § 1836; see also Physician's Surrogacy, Inc. v. German, 2018 WL

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638229, at *4 (S.D. Cal. Jan. 31, 2018).

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Here, the Complaint alleges that Defendants obtained numerous trade secrets during
Fairfax’s multiple tours of Plaintiff’s facility. These alleged trade secrets go to specific aspects

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of Plaintiff’s data centers, including electrical and mechanical lines, operational routines,

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electrical designs, cooling and power redundancy designs, and infrastructure layouts. (See, e.g.,

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Compl. ¶¶ 11, 19, 23, 42). Furthermore, the Complaint alleges that Fairfax misappropriated

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these trade secrets by incorporating them into Aligned’s data center design. (See id. ¶¶ 56–65).

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This misappropriation allegedly occurred in violation of two nondisclosure agreements. (See id.

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¶¶ 32, 41). The Court therefore finds that Plaintiff has sufficiently pled its misappropriation

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claims.

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B. Tort Claims
Defendants argue that the Court should dismiss each of Plaintiff’s tort claims because

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the claims are superseded by Plaintiff’s Nevada misappropriation claim. (See Mot. to Dismiss

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10:13–12:18). N.R.S. 600A provides that “this chapter displaces conflicting tort, restitutionary,

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and other law of this state providing civil remedies for misappropriation of a trade secret.” In

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its Response, Plaintiff concedes that the fourth, fifth, and eighth causes of action are subsumed

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by its claim under NRS 600A. (Pl.’s Resp 2:14–17). Accordingly, the Court dismisses

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Plaintiff’s fourth, fifth, and eighth causes of action with prejudice.

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C. Contractual Claims

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Defendants argue that the Court should dismiss Plaintiff’s contractual claims against

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Fairfax because he is not a party to either of the two at-issue nondisclosure agreements. (See

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Mot. to Dismiss 12:19–13:4). According to Defendants, Fairfax only signed the agreements in

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his official capacity as president of Mtechnology. (Id. 14:1–7). In turn, Plaintiff argues that

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“[i]t was always expressly stated and understood by [Plaintiff] and Fairfax that Fairfax and

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[Mtechnology] would both be bound by the NDA since both were visiting the data center.”

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(Pl.’s Resp 11:22–24). Additionally, Plaintiff asserts that nowhere on the agreements does

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Fairfax indicate that he “was expressly excluding himself from being bound by the terms of the

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agreement.” (Id. 11:8–11).
As a general rule, there must be privity of contract between a plaintiff and defendant in

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order to render the defendant liable under an agreement. Bernard v. Rockhill Dev. Co., 734 P.2d

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1238, 1240 (Nev. 1987); White Pine Cty. Bank v. Sadler, 6 P. 941, 943 (Nev. 1885). In cases

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involving a corporate officer as a signatory to an agreement, courts look to the intent of the

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parties to determine whether the officer is liable in a personal capacity. See Trident Const.

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Corp. v. W. Elec., Inc., 776 P.2d 1239, 1242 (Nev. 1989); see also Trump v. Eighth Judicial

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Dist. Court of State of Nev. In & For Cty. of Clark, 857 P.2d 740, 747 (Nev. 1993) (analyzing

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individual liability based on the manner in which the contract was signed and personal

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relationship between the parties). Absent an unambiguous expression to be bound or not be

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bound by an agreement, courts may use extrinsic evidence to determine the parties’ intent. See

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Moldan v. First National Bank of Miami, 174 So.2d 780, 781 (Fla.Ct.App.1965), cited with

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approval by Trump, 857 P.2d at 747; see also Butler v. Lovoll, 620 P.2d 1251, 1253 (Nev.

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1980).

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In this case, both nondisclosure agreements state on the top of their respective title pages
that the contract is “entered into and effective . . . between [Plaintiff] and the person or entity

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identified below (‘recipient’).” (NDAs at 28, 36, Ex. 1 to Pet. of Removal). With respect to the

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2015 NDA, the final page of the agreement explicitly lists Mtechnology as the “recipient.” (Id.

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at 37). Accordingly, although Fairfax’s name and title are included below the recipient line, it

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is clear based on the terms of the contract that only Plaintiff and Mtechnology are bound to the

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agreement. With respect to the 2011 NDA, however, the “recipient” line is left blank. (Id. at

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29). Underneath the blank recipient line lies Fairfax’s signature, printed name, and title. (Id.).

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Absent a clearly stated recipient of the agreement, the Court finds it ambiguous whether Fairfax

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signed the agreement in his personal capacity or representative capacity. As resolving this

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question requires weighing evidence not yet in the record, the Court cannot determine whether

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Fairfax is personally liable at this stage in the litigation. Plaintiff’s contractual claims against

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Fairfax in his individual capacity may therefore move forward as to the 2011 NDA.

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2. Preliminary Injunction

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In its Motion for Preliminary Injunction, Plaintiff seeks an order requiring Defendants

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to: (1) cease designing any data centers; (2) cease displaying promotional materials for their

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designs of Aligned’s data centers; (3) deliver all documents, contracts, and emails exchanged

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between Defendants and Aligned. (Mot. Prelim. Inj. 1:26–2:6, ECF No. 7). According to

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Plaintiff, such relief is warranted because Plaintiff is likely to succeed on the merits, will suffer

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irreparable harm, and the public interest and relative hardships weigh in favor of an injunction.

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(See id. 9:18–13:26). In support of this conclusion, Plaintiff broadly asserts that Aligned’s

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facilities and technology appear identical, and that such similarities are “not the result of

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coincidence but rather demonstrate clearly that [Defendants] misappropriated confidential and

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trade secret information.” (See id. 10:1–12).

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“[T]he burdens at the preliminary injunction stage track the burdens at trial.” Gonzales v.

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O Centro Espirita Beneficente Uniao do Vegetal, 546 U.S. 418, 429 (2006). Thus, the burden

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is on Plaintiff to demonstrate that it is likely to prevail on its claims that Defendants

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misappropriated trade secrets in violation of their contractual and statutory obligations. Upon

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review of the briefs and accompanying exhibits, the Court finds that Plaintiff’s allegations are

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insufficient to meet this burden. Notably, although the exhibits provided in Plaintiff’s Motion

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show facial similarities in Aligned’s data center design, Plaintiff has failed to provide any

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specific evidence regarding which trade secrets Defendants allegedly misappropriated. See

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Frantz, 999 P.2d at 358. Rather, Plaintiff merely reasserts many of the broad allegations

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contained within the Complaint without providing additional detail or evidentiary support.

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While the Court finds these allegations sufficient to state a claim, such allegations do not

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demonstrate that Plaintiff is entitled to the extraordinary remedy of an injunction. Winter, 555

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U.S. at 22. The Court therefore denies Plaintiff’s Motion for Preliminary Injunction without

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prejudice.

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IV.

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CONCLUSION
IT IS HEREBY ORDERED that Defendants’ Motion to Dismiss, (ECF No. 8), is

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GRANTED in part and DENIED in part. The Court dismisses Plaintiff’s fourth, fifth, and

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eighth causes of action with prejudice.

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IT IS FURTHER ORDERED that Plaintiff’s Motion for Preliminary Injunction, (ECF
No. 7), is DENIED without prejudice.

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DATED this _____ day of August, 2018.

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___________________________________
Gloria M. Navarro, Chief Judge
United States District Judge

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