ADVANCED INSTRUCTIONAL SYSTEMS, INC. D/B/A WEBASSIGN v. COMPETENTUM USA LTD.
Filing
32
MEMORANDUM OPINION AND ORDER signed by CHIEF JUDGE WILLIAM L. OSTEEN, JR on 11/25/2015. This Court finds that a Temporary Restraining Order should be issued, returnable within 14 days of the date of this Memorandum Opinion and Order. A bond in the amount of $10,000.00 shall be sufficient. (Coyne, Michelle)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
ADVANCED INSTRUCTIONAL SYSTEMS, )
INC., d/b/a WEBASSIGN,
)
)
Plaintiff,
)
)
v.
)
)
COMPETENTUM USA, LTD.,
)
)
Defendant.
)
1:15CV858
MEMORANDUM OPINION AND ORDER
OSTEEN, JR., District Judge
Advanced Instructional Systems, Inc. (“AIS”) has brought
suit against Competentum USA, Ltd. (“Competentum”), for theft of
trade secrets, copyright infringement, and computer trespass
among others.1 (See First Amended Complaint (“First Am. Compl.”)
(Doc. 10).) AIS does business as, and is the developer and owner
of WebAssign, a proprietary software suite used by universities
and other educational institutions to remotely assign and grade
problems in topics such as math, chemistry, and physics.
Essentially, AIS alleges that Competentum gained access to its
private servers through contracting relationships it and its
Plaintiffs also allege state law claims of conversion and
unfair and deceptive trade practices, however, given that those
are not discussed in their TRO motion, they are not addressed
here.
1
predecessor entered into with AIS, and that it later used that
access to steal and/or reverse engineer proprietary software
code contained on that server.
AIS contends that Competentum
did this in order to develop its own rival version of WebAssign,
which AIS believes that Competentum wants to sell to Cengage
Learning, Inc. (“Cengage”), one of WebAssign’s biggest
customers.2
AIS argues that the grant of a Temporary Restraining
Order (“TRO”) and Preliminary Injunction is necessary to prevent
the deployment of Competentum’s rival software platform, the
loss of Cengage as a client, and irreparable damage to their
business interests.
This court finds that AIS has met the requirements for a
TRO.
AIS has advanced evidence that (1) Competentum or
employees acting on Competentum’s behalf have repeatedly and
systematically accessed AIS’s secured server; (2) Competentum
has admitted to this access; (3) Competentum is working on
releasing a rival software suite similar to WebAssign; and (4)
planning materials found on the internet that involve the
development of this rival platform reference WebAssign’s
AIS alleges that Cengage has made overtures to acquire AIS
on multiple occasions specifically in order to acquire
WebAssign, and has been rebuffed, apparently motivating
Competentum to start down the current path in order to take
advantage of that opportunity.
2
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proprietary software architecture as well as terminology found
only in its proprietary Grading Statements, located on the
secure server.
I.
FACTS
WebAssign in an employee-owned benefit corporation
organized under Virginia law, whose business provides online
instructional systems software that allows teachers to deploy
assignments and tests that are graded automatically.
Am. Compl. (Doc. 10) ¶ 8).
(See First
WebAssign uses proprietary software
of its own design in its grading engine, consisting in relevant
part of two components, known as “Parser” and “Grading
Statements,” respectively, both of which are written in a
programming code known as Perl.
(Id. ¶¶ 13, 15.)
Parser is a
software component that translates a user’s given answer into a
format that can be read by WebAssign’s third-party algebra
systems, and was developed over the course of 18 years. (Id.
¶¶ 17-19.) According to AIS, the code for parser is not
available even on their secured server,3 and is made available
only to a small number of WebAssign employees. (Id. ¶ 18.) A
WebAssign operates under a system whereby they utilize a
public outward facing server that contains the version of
WebAssign utilized by universities, and a private, inner facing
“editing” server, which is secured and allows users to modify or
edit sections of the software code.
3
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Grading Statement is a set of software instructions, again
written in Perl, which completes the assessment of a given
answer by combining the output given by Parser with the correct
answer from an answer key and grading accordingly.
(Id. ¶ 20.)
Grading Statements are copyrightable and original, and according
to WebAssign, have been developed over the course of many years.
(Id. ¶ 21.)
The code for the Grading Statements is not
available publicly (and according to AIS, the code for a Grading
Statement is not readily ascertainable through independent
development.)
(Id. ¶ 23.)
The code for the Grading Statements
is, however, available on the secured server. (Id. ¶ 27.)
In 2006, WebAssign contracted with a predecessor of
Competentum, named Open Teach Software, Inc. (“Open Teach”), and
all work was completed under that contract in January 2009.
WebAssign contracted with Competentum in January 2012 and in
March 2012, and all work was completed under those contracts by
August 2012.
(First Am. Compl. (Doc. 10) ¶¶ 29-35.)
During the
course of this contracting, employees of both Open Teach and
Competentum were given access credentials to WebAssign’s secured
server, access that WebAssign contends was limited by the terms
of their agreements to the specifically defined work and were
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explicitly not to be used after the expiration of the contract
at issue. (Id. ¶ 37.)
Sometime in April of 2014, as part of a routine review of
existing accounts, WebAssign discovered that two user IDs that
had been assigned as part of already completed work had been
used to access the secured server.4
(Id. ¶ 52.)
After closer
examination, WebAssign discovered that the secured server had
been systematically accessed since April 2014 by the accounts
issued to Mr. Alexander Krutik and another former contracted
employee, Michael Kuzmin, which had been inactive since 2009.
(Id. ¶¶ 54-56.)
WebAssign then deactivated accounts connected
with Competentum and Physicon Ltd. (Id. ¶ 57.) After
deactivation, a user attempted to log in to the secure server by
accessing five of the deactivated accounts within the course of
a few minutes. (Id. ¶ 62.)
WebAssign contacted the CEO of Competentum, who admitted
that they had accessed the server, claimed that it was done as
part of a “content review” that had been commissioned by
Cengage, and promised to explain further, which apparently never
The two accounts at issue were assigned to Alexander
Krutik, who had been working for Open Teach, and to Nancy
Murphy, which had been issued in 2010 while Ms. Murphy was
working for a company named Physicon Ltd., which WebAssign
contends is an affiliate of Competentum. Ms. Murphy now works
for Competentum. (First Am. Compl. (Doc. 10) ¶ 52.)
4
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happened.5 (Id. ¶¶ 64-65.) WebAssign has analyzed the access to
the servers and the activity by the ID’s associated with
Competentum and contends that the accounts were attempting to
reverse-engineer (or “black box”) WebAssign’s Parser software by
running commands within the WebAssign system to test the
functionality of Parser.6
(Id. ¶ 59). WebAssign discovered notes
that had been left on the secured server by these accounts which
apparently confirm that testing was occurring. (Id. ¶¶ 60-61.)
WebAssign has also discovered, via online searches, that
Competentum and Cengage are attempting to create a competitor to
WebAssign, and, according to WebAssign, materials that also
confirm the use of WebAssign’s proprietary material.
The
materials make reference to Grading Statements, reference
employees whose accounts were used to access the secured server
as helping to create the content, and refer to efforts to build
a Parser system.
(Id. ¶¶ 70-77.)
Apparently, the CEO of Cengage claimed that Competentum
had been hired to obtain a better understanding of some content
that WebAssign provides to Cengage. Webassign contends that
this content is provided open source to Cengage, and thus access
to the secured server would not have been necessary even
assuming this claim is true.
5
6
By repeatedly entering commands and modifying them
systematically, a user could theoretically examine the output
given by the system to gain an understanding of how Parser
functions, despite the code not being available on the secured
server.
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II.
ANALYSIS
This court has jurisdiction over the parties pursuant to
28 U.S.C. §§ 1331 and 1332.
Federal Rule of Civil Procedure 65(b) governs the
availability of a TRO to preserve the status quo until a hearing
on a motion for preliminary injunction can be held.
Hoechst
Diafoil Co. v. Nan Ya Plastics Corp., 174 F.3d 411, 422 (4th
Cir. 1999).
This court has the power to issue a TRO before
service of the defendant under Fed. R. Civ. P. 4.
See 3M Co. v.
Christian Invs. LLC, No. 1:11CV627, 2011 WL 3678144, at *3 (E.D.
Va. Aug. 19, 2011) (citing Internatio-Rotterdam, Inc. v.
Thomsen, 218 F.2d 514, 516 (4th Cir. 1955)).
The requirements for obtaining temporary and preliminary
injunctive relief are the same.
See Rogers v. Stanback, No.
1:13CV209, 2013 WL 6729864, at *1 (M.D.N.C. Dec. 19, 2013)
(citing U.S. Dep’t of Labor v. Wolf Run Mining Co., 452 F.3d
275, 281 n.1 (4th Cir. 2006)).
In order to obtain a TRO, a
movant must establish: (1) that it is likely to succeed on the
merits of the dispute; (2) that it is “likely to suffer
irreparable harm” in the absence of a TRO; (3) that “the balance
of equities” tips in its favor; and (4) that an injunction is in
the public interest.
Winter v. Nat. Res. Def. Council, Inc.,
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555 U.S. 7, 20 (2008); Real Truth About Obama, Inc. v. Fed.
Election Comm’n, 575 F.3d 342, 346–47 (4th Cir. 2009), vacated
on other grounds, 559 U.S. 1089 (2010).
A.
Likelihood of Success on the Merits
WebAssign discusses three of its claims in its brief in
support of its motion.
Because this court finds, at this
preliminary stage, that the trade secrets claim and the trespass
claim support the issuance of a TRO, this order will analyze
only those claims for likelihood of success on the merits.
Plaintiff bears a heavy burden and must make “‘a clear showing’
that, among other things, it is likely to succeed on the
merits.” JAK Prods, Inc. v. Bayer, 616 F. App’x 94, at *95 (4th
Cir. 2015) (quoting Real Truth About Obama, Inc. v. FEC, 575
F.3d 342, 345 (4th Cir. 2009).
Plaintiff bears a heavy burden and must “make a strong
showing of likelihood of success on the merits.”
Winter v.
Natural Res. Def. Council, Inc., 555 U.S. 7, 21 (2008).
1.
Theft of Trade Secrets
A trade secret is defined in N.C. Gen. Stat. § 66-152(3)
as:
[B]usiness or technical information, including but not
limited to a formula, pattern, program, device,
compilation of information, method, technique, or
process that:
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a.
Derives independent actual or potential
commercial value from not being generally known
or readily ascertainable through independent
development or reverse engineering by persons who
can obtain economic value from its disclosure or
use; and
b.
is the subject of efforts that are reasonable
under the circumstances to maintain its secrecy.
N.C. Gen. Stat. § 66-152(3).
Here, it seems clear that the software code for Grading
Statements and Parser qualify as trade secrets.7 The code for
both has commercial value that derives from being proprietary
and not generally known8, and was on a secured server, with the
code for Parser not being available even on that.
As such, they
qualify as trade secrets.
In order to succeed on a prima facie case for
misappropriation of a trade secret, Plaintiff must present
substantial evidence that “(1) defendant knows or should have
known of the trade secret; and (2) defendant has had a specific
opportunity to acquire the trade secret.”
Barr-Mullin Inc. v.
AIS also contends that the overall coding architecture of
the WebAssign system is a trade secret, but because it is not
relevant to the case (and it is not clear that AIS is actually
alleging it was stolen), it will not be addressed here.
7
8
This value is shown, at least in part, by Cengage’s
apparently repeated efforts to acquire AIS for the specific
purpose of obtaining the code for WebAssign.
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Browning, 108 N.C. App. 590, 596 (1993) (citing N.C. Gen. Stat.
66-155). Here, it seems that Plaintiff has clearly established
these elements.
First, Plaintiff have proffered documented evidence that
Defendant knew of the trade secrets at issue in that they were
contracted to work on the server that contained them (and were
thus exposed to at least the Grading Statements), as well as
evidence that they are not only attempting to create their own,
but that they also have specifically and repeatedly referenced
proprietary terminology from the trade secrets at issue in their
internal materials, as well as attempted to break down and
replicate the WebAssign internal architecture. (See Decl. of
Elena Khvostova (“Khvostova Decl.”) (Doc. 13) ¶¶ 54-64.)
As for the second prong, Plaintiff has offered ample
evidence that Competentum had a specific opportunity to acquire
those trade secrets.
Plaintiff has offered documented evidence
of repeated and systematic access of its secured server via the
use of former contractors that currently work for Competentum or
an affiliate, and on top of that, Competentum has admitted to
the access.
As such, this prong seems clearly met.
Given the
evidence presented, Plaintiffs have shown a likelihood of
success on the merits for their trade secrets claim.
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2.
Computer Trespass
WebAssign’s computer trespass claim is also likely to
succeed on the merits.
Under N.C. Gen. Stat. § 14-458, it is a
violation of the statute to use a computer or computer network
“without authorization,” and with the intent to do any of the
following:
(3)
Alter or erase any computer data, computer
programs, or computer software.
. . . .
(5)
Make or cause to be made an unauthorized copy, in
any form, including, but not limited to, any
printed or electronic form of computer data,
computer programs, or computer software residing
in, communicated by, or produced by a computer or
computer network.
N.C. Gen. Stat. § 14-458.
“[W]ithout authorization” is defined in the statute as
either when the person accessing “has no right or permission of
the owner to use a computer,” or “the person uses a computer in
a manner exceeding the right or permission.”
Id. (emphasis
added).
Here, it seems clear that the employee accounts that were
used by Competentum’s employees to access the secured server
were used beyond the scope of the authorization granted.
Those
user IDs had been granted only for specific work over a specific
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timeframe (see First Am. Compl. (Doc. 10) ¶ 35), and the right
to use them expired when the work was completed in August 2012.
WebAssign has further provided evidence that, while
accessing the server without permission, they altered and/or
erased data within the system, which constitutes the second
prong of Computer Trespass.
Given that they have what seems to
be evidence of unauthorized access, and alteration or deletion
of information during that access,9 Plaintiff has shown a strong
likelihood of success on Computer Trespass.
Defendant has presented evidence of a defense to
Plaintiff’s claims which, if viable, might affect the foregoing
analysis.
However, at this preliminary stage, this court does
not find Defendant’s evidence compelling.
Defendant argues that its access to Plaintiff’s
confidential information was authorized by Cengage, a thirdparty doing business with Plaintiff.
While this allegation may
ultimately turn out to be correct, Defendant’s claim, when
considered in light of Defendant’s use of authorizations which
do not appear to have been issued for the purposes claimed,
their use of older authorizations after some authorizations had
It was an alteration to some code made by a Competentum
account that alerted WebAssign to the improper access in the
first place.
9
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been discontinued, and in light of the material accessed, is not
persuasive at this preliminary juncture.
Relatedly, Defendant has filed with the court a contract
presently existing between Plaintiff and Cengage, and argues
that provisions in the contract further support Cengage, and
therefore Defendant’s authorization to access the trade secret
information.
While Defendant’s interpretation of the contract
may ultimately prove correct, this court does not preliminarily
read the contract so broadly as Defendant contends.
B.
Irreparable Harm
It further seems that, at least based on their claim for
Misappropriation of Trade Secrets, that Plaintiff will suffer
irreparable harm if injunctive relief is not granted.
While
Plaintiff must make a “clear showing” of immediate and
irreparable harm, the loss of permanent relationships with
customers and the loss of proprietary information may constitute
irreparable harm. See Philips Elecs. N. Am. Corp. v. Hope, 631
F. Supp. 2d 705, 711 (M.D.N.C. 2009). In most instances, courts
presume irreparable harm when a trade secret has been
misappropriated, see Merck & Co. v. Lyon, 941 F. Supp. 1443,
1455 (M.D.N.C. 1996), and North Carolina courts have explained
that
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[M]isappropriation of a trade secret is an injury
of “such continuous and frequent recurrence that
no reasonable redress can be had in a court of
law.” The very nature of a trade secret mandates
that misappropriation will have significant and
continuous long-term effects. The party wronged
may forever lose its competitive business
advantage or, at the least, a significant portion
of its market share.
Barr-Mullin, 108 N.C. App. at 597.
concerns are present here.
It seems that all of these
Not only has Competentum apparently
taken proprietary information, at least some of it has been
published publicly.
Further, it appears that Competentum is in
the midst of developing a rival software suite that it plans on
launching in early 2016, and that it is doing so in concert with
an important client of WebAssign’s. (See Khvostova Decl., Ex. F
(Doc. 13-6); Decl. of Alex Bloom (Doc. 12) ¶¶ 8-22, 26-29, 31.)
The damage that could be done to WebAssign’s market share and
future prospects would be extremely difficult to quantify into a
dollar amount, and as such, this court finds that Plaintiff has
shown irreparable harm as to their trade secrets claim.10
Defendant argues that Plaintiff has delayed in seeking
preliminary relief, and therefore a temporary restraining order
It is unclear whether or not Plaintiff contends that they
will suffer irreparable harm as to their other claims, and given
the degree to which the claims intertwine and are related to the
same set of operative fact, it is unnecessary to address each
individually.
10
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is not required.
Defendant contends Plaintiff was aware of
Defendant’s access as early as April, 2014, and certainly by
October, 2014.
Plaintiff responds that while it was aware of
the access, it initially contacted Defendant to determine what
had occurred and resolve the matter.
Plaintiff only recently
discovered that in November, 2014, when Defendant had claimed
any unauthorized access was inadvertent, it was at that same
time presenting information apparently derived from Plaintiff’s
trade secret information.
This court does not find Defendant’s
argument presently compelling.
As an initial matter, it is not clear that Defendant has
shown or that WebAssign knew that a trade secret was taken or
used when the initial unauthorized access was discovered.
This
court, again preliminarily, finds that WebAssign’s discovery of
the nature of the access to its servers and potential use of any
information derived therefrom, only came later.
The Fourth Circuit has addressed the issue of delay in
Candle Factory, Inc. v. Trade Assocs. Group, Ltd., explaining
that:
[A]ny delay attributable to plaintiffs in initiating a
preliminary injunction request, coupled with
prejudicial impact from the delay, should be
considered when the question of irreparable harm to
plaintiffs is balanced against harm to defendants.
[However, 4th Circuit precedent] simply does not
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require us to find, as a matter of law, that the
plaintiff suffered no irreparable injury because it
delayed in initiating its request for a preliminary
injunction.
23 F. App’x 134, at *3 (2001).
C.
Balance of the Equities
Although it is a close question, this court finds that the
balance of the equities also tips in WebAssign’s favor.
As
stated above, it seems clear that WebAssign will undergo
significant hardship if Competentum is not prevented from using
WebAssign’s trade secrets to launch a competing software suite
and likely steal a valuable client.
At the very least, it is far less clear what harm will
befall Competentum by the issuance of a temporary injunction
until a preliminary injunction can be completed.
While
Competentum may be delayed in launching their software, there is
no evidence that time is of the essence in that endeavor, or
that they will lose any current business opportunities by the
issuance of a temporary injunction.
Further, it should be noted that Competentum was approached
by WebAssign and given a chance to explain its actions before
the instant suit was filed.
The fact that they were either
unable or unwilling to do so further tips the balance of
equities in WebAssign’s favor.
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D.
The Public Interest
Finally, the public interest also favors WebAssign. “Put
simply, the public interest favors the protection of trade
secrets.”
Forestry Systems, Inc. v. Coyner, No. 1:11CV295, 2011
WL 1457707, at *2 (M.D.N.C.
Apr. 15, 2011).
The public
interest is also served by “preventing unethical business
behavior.” Philips Elecs., 631 F. Supp. 2d at 724. Finally, that
interest “disfavors allowing a competitor to drive another
competitor out of business by unfairly misappropriating trade
secrets.” Arminius Schleifmittel GmbH v. Design Indus., Inc.,
No. 1:06CV00644, 2007 WL 534573, at *7 (M.D.N.C. Feb. 15, 2007).
Here, an issuance of temporary injunctive relief is clearly in
the interest of the public given the likelihood of success on
the merits as to Plaintiff’s trade secrets claim.
III. CONCLUSION
For the reasons described herein, this court finds that a
Temporary Restraining Order should be issued, returnable within
14 days of the date of this Memorandum Opinion and Order.
Because of the limited scope of this Memorandum Opinion and
Order and the limited time during which this Memorandum Opinion
and Order shall remain effective, this court finds that a bond
in the amount of $10,000.00 shall be sufficient.
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This the 25th day of November, 2015.
_______________________________________
United States District Judge
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