The Phoenix Company, Inc. v. Castro-Badillo et al
Filing
56
OPINION AND ORDER: For the reasons set forth in this Opinion and Order, Phoenix's federal law claims against Castro-Badillo are DISMISSED WITH PREJUDICE and the totality of Phoenix's Puerto Rico law claims against both Defendants are DISMISSED WITHOUT PREJUDICE. Judgment shall be entered accordingly. Signed by Judge Raul M. Arias-Marxuach on 11/25/2024. (mrr)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
THE PHOENIX COMPANY, INC.,
Plaintiff
v.
CIVIL NO. 23-1371 (RAM)
JAVIER CASTRO-BADILLO; ROCK
SOLID TECHNOLOGIES, INC.,
Defendants.
OPINION AND ORDER
RAÚL M. ARIAS-MARXUACH, United States District Judge
I.
On
July
FACTUAL AND PROCEDURAL BACKGROUND
17,
2023,
Plaintiff
The
Phoenix
Company,
Inc.
(“Plaintiff” or “Phoenix”) filed a lawsuit against Rock Solid
Technologies,
Inc.
(“Rock
Solid”)
and
Javier
Castro-Badillo
(“Castro-Badillo”) (collectively “Defendants”). (Docket No. 1). On
December 7, 2023, Plaintiff filed an Amended Complaint alleging
Defendants violated the Defend Trade Secrets Act, 18 U.S.C. §
1836., as well as the Computer Fraud and Abuse Act, 18 U.S.C. §
1830 (“the CFAA”), as well as Puerto Rico law. (Docket No. 19 ¶¶
1.1, 7.2, 8.5, 9.3). Phoenix claims Defendants misappropriated a
trade secret and accessed its computers and software, Monet GFS,
without authorization. Id.
On August 9, 2024, the Court issued an Opinion and Order
granting
co-defendant
Rock
Solid’s
Motion
to
Dismiss
Amended
Civil No. 23-1371(RAM)
2
Complaint (the “Motion to Dismiss”) and thereby dismissing all
federal
law
claims
against
Rock
Solid.1
(Docket
No.
44).
Specifically, the Court concluded that Plaintiff failed to: (1)
adequately allege facts showing there was a trade secret; and (2)
adequately allege a computer fraud claim under 18 U.S.C. § 1030.
Id.
The
Court
subsequently
issued
an
order
to
show
cause
instructing Plaintiff “show cause as to (1) why the claims against
Javier Castro-Badillo should not be dismissed in light of the
Court's Opinion and Order at Docket No. 44; and (2) why the Court
should not decline to exercise supplemental jurisdiction over the
Puerto Rico law claims against all Defendants.” (Docket Nos. 53
and 54).2 Phoenix filed a one paragraph response to the order to
show cause merely stating that it “incorporates the reasons stated
in opposition to the motion to dismiss [ECF #37] and in support of
the motion to amend [ECF#52] as reasons why this Court should not
dismiss this action against Defendant Javier Castro Badillo.”
(Docket No. 53).
II. LEGAL STANDARD
Fed. R. Civ. P. 12(b)(6) provides for the dismissal of a
complaint that “fails to state a claim upon which relief can be
1
The Court incorporates by reference that Opinion and Order in its entirety
for the purposes of the present Motion.
2
Plaintiff failed to comply with the order to show cause at Docket No. 53 and
the Court sua sponte granted Plaintiff an extension at Docket No. 54.
Civil No. 23-1371(RAM)
3
granted.” Under Rule 12(b)(6), a plaintiff must plead enough facts
to
state
a
claim
that
is
“plausible”
on
its
face,
and
the
“[f]actual allegations must be enough to raise a right to relief
above the speculative level . . . on the assumption that all the
allegations in the complaint are true (even if doubtful in fact).”
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations
omitted). “[A] plaintiff’s obligation to provide the ‘grounds’ of
his
‘entitle[ment]
to
relief’
requires
more
than
labels
and
conclusions, and a formulaic recitation of the elements of a cause
of action will not do.” Id. Further, a complaint will not stand if
it offers only “naked assertion[s] devoid of further factual
enhancements.”
Ashcroft
v.
Iqbal,
556
U.S.
662,
678
(2009)
(internal quotation marks and citation omitted). To determine
whether a complaint has stated a plausible, non-speculative claim
for relief, courts must treat non-conclusory factual allegations
as true. See Nieto-Vicenty v. Valledor, 984 F. Supp. 2d 17, 20
(D.P.R. 2013) (citations omitted). In certain circumstances, “sua
sponte
dismissals
of
complaints
under
Rule
12(b)(6)
...
are
appropriate,” under the condition that “the parties have been
afforded notice and an opportunity to amend the complaint or
otherwise respond.” Chute v. Walker, 281 F.3d 314, 319 (1st Cir.
2002) (quoting Futura Dev. of P.R., Inc. v. Estado Libre Asociado
de P.R., 144 F.3d 7, 13–14 (1st Cir.1998)).
Civil No. 23-1371(RAM)
4
III. DISCUSSION
A. Plaintiff failed to adequately allege the existence of a
trade secret.
As discussed at length in the Opinion and Order at Docket No.
44, Phoenix has failed to plead sufficient factual allegations to
establish that it was plausibly in possession of a trade secret
capable
of
being
misappropriated
by
Castro-Badillo.
“It
is
hornbook law that ‘the parties and the court cannot accurately
decide the question of whether a trade secret exists without first
understanding what precisely is asserted as a secret.’” Sutra,
Inc. v. Iceland Exp., ehf, 2008 WL 2705580, at *3 (D. Mass. 2008)
(quoting Charles Tait Graves and Brian D. Range, Identification of
Trade Secret Claims in Litigation: Solutions for a Ubiquitous
Dispute, 5 Nw. J. Tech. & Intell. Prop. 68, 69 (2006)); see also
Mallet and Co. Inc. v. Lacayo, 16 F.4th 364, 380-81 (3d Cir. 2021)
(explaining that “each . . . element[] is predicated on an adequate
identification of what the plaintiff contends to be its trade
secret”). The First Circuit has interpreted sufficient specificity
to mean the plaintiff has “separate[d] the purported trade secrets
from the other information . . . that was known to the trade.”
Allstate Ins. Co. v. Fougere, 79 F.4th 172, 197 (1st Cir. 2023)
(quoting TLS Mgmt. & Mktg. Servs., LLC, 966 F.3d 46, 49 (1st Cir.
2020)) (internal quotations and alterations omitted) (emphasis
added).
Civil No. 23-1371(RAM)
5
Phoenix’s factual allegations do not distinguish between
matters of general knowledge in the trade and the particularities
that make its software, Monet GFS, a trade secret. Phoenix alleges
“[o]ne of the most innovative and distinct aspects of Monet GFS is
the data storage design, which stores the information in a very
efficient manner.” (Docket No. 19 ¶ 3.3). Plaintiff claims the
data storage design and the access codes constitute the trade
secret that was misappropriated. Id. This fails to adequately
describe
any
characteristics
of
the
software
that
are
distinguishable from that which is within the general or special
knowledge of persons skilled in the trade. See Allstate, 79 F.4th
at 197; TLS Mgmt., 966 F.3d at 49.
Rather than alleging that its efficient data storage design
is unique to its software and is not common among companies that
provide similar services, Phoenix only asserts that the access
codes for each municipality are different and “the software is
updated and changes.” 3 (Docket No. 37 at 4). However, although the
access codes themselves are secret, they are not a “trade secret.”
Courts in other circuits have held that passwords enabling access
to
confidential
information
are
not
themselves
trade
secrets
unless they are “the product of any special formula or algorithm
that it developed[.]” State Analysis, Inc. v. Am. Fin. Services
3
These factual allegations are made not in the Amended Complaint but instead
in Plaintiff’s Opposition, and “new arguments, however, may not be made in reply
briefs.” United States v. Toth, 33 F.5th 1, 19 (1st Cir. 2022).
Civil No. 23-1371(RAM)
6
Assoc., 621 F. Supp. 2d 309, 321 (E.D. Va. 2009); see also North
Star Media, LLC v. Winogradsky-Sobel, 2011 WL 13220157, at *10
(C.D. Cal. 2011) (“[A] software company’s proprietary algorithm
for its computer programs may be a trade secret, . . . but the key
to the safe where the algorithm is stored is not.”). This because,
while passwords “clearly have economic value given that they are
integral
to
accessing
[plaintiff’s]
database,
they
have
no
independent economic value in the way a formula or a customer list
might have.” State Analysis, 621 F. Supp. at 321. Therefore,
because Plaintiff failed to adequately allege the existence of a
trade
secret,
Phoenix’s
claim
against
Castro-Badillo
for
misappropriation of a trade secret is hereby DISMISSED.
B. Plaintiff failed to adequately allege loss as required by
the CFAA.
To assert a claim under 18 U.S.C. § 1030, a plaintiff must
establish that the defendant:
(1) intentionally accessed a computer, (2)
without authorization or exceeding authorized
access, and that he (3) thereby obtained
information (4) from any protected computer
(if the conduct involved an interstate or
foreign communication), and that (5) there was
loss to one or more persons during any oneyear period at least $5,000 in value.
Philips Med. Sys. P.R., Inc. v. GIS Partners Corp., 203 F. Supp.
3d 221, 230 (D.P.R. 2016) (citing LVRC Holdings LLC v. Brekka, 581
F.3d 1127, 1132 (9th Cir. 2009)). All elements must be adequately
alleged for plaintiff to “maintain a civil action against the
Civil No. 23-1371(RAM)
7
violator.” 18 U.S.C. § 1030(g). A violator of this statute is one
who
“intentionally
accesses
a
protected
computer
without
authorization, and as a result of such conduct, recklessly causes
damage[.]” id. § 1030(a)(5)(B).
In its Amended Complaint, Phoenix clearly identifies CastroBadillo as the violator, alleging that he “intentionally breached
the security of Phoenix computers with the purpose of obtaining
unauthorized access to Monet GFS software, the database design,
and the access codes, to make an unauthorized use and disclosure
of such.” (Docket No. 19 ¶ 4.18). This allegation on its own
satisfies four of the necessary elements to establish a computer
fraud claim. See 18 U.S.C. § 1030(g).
However, as discussed in the Court’s Opinion and Order at
Docket No. 44, Phoenix fails to meet its burden showing a “loss to
1 or more persons during any 1-year period . . . aggregating at
least $5,000 in value.” 18 U.S.C. § 1030(c)(4)(A)(i)(I). “Loss” is
defined as “any reasonable cost to any victim, including the cost
of responding to an offense, conducting a damage assessment, and
restoring
the
data,
condition
prior
incurred,
or
to
other
program,
the
system,
offense,
consequential
or
information
any
damages
and
to
its
revenue
lost,
cost
incurred
because
of
interruption of service.” 18 U.S.C. § 1030(e)(11).
Courts generally require plaintiffs to “plead facts about
its alleged damages under the CFAA.” HotSpot Therapeutics, Inc. v.
Civil No. 23-1371(RAM)
8
Nurix Therapeutics, Inc., 2022 WL 16637988, at *6 (N.D.Cal. 2022)
(granting a motion to dismiss where plaintiff merely stated they
“suffered
actual
damages,
including
but
not
limited
to
lost
profits”) (quoting Metabyte, Inc. v. NVIDIA Corp., 2013 WL 1729808,
at *5 (N.D.Cal. 2013)). Another court in this district found the
loss requirement met when plaintiffs stated they hired a third
party to investigate breaches, and to do so that third party
“conducted a forensic analysis of these breaches, and had been
paid $6,000.”
GIS, 204 F. Supp. 3d at 229.
In the Amended Complaint, Plaintiff alleges it “suffered a
loss due to the time it spent investigating the damages caused by
the breach and its loss in business, both of which exceed $5,000”
and elsewhere “Defendant’s hacking of Plaintiff’s system caused an
interruption
in
service
which
induced
several
of
Plaintiff’s
customers to cancel their contracts and therefore caused Plaintiff
to lose revenue.” (Docket No. 19 ¶¶ 4.33, 6.7). These statements
amount to no more than threadbare recitations of the statutory
definition of loss under 18 U.S.C. § 1030(e)(11) and as such fail
to satisfy the final element of a claim under 18 U.S.C. § 1030.
Plaintiff makes no factual allegations as to what investigative
measures were taken to discover damages caused by the breach, fails
to state what damage, if any, was actually caused by the alleged
hacking, and simply states there was an “interruption of service”
without providing facts as to what part of its services were
Civil No. 23-1371(RAM)
9
interrupted. (Docket No. 19). Accordingly, Phoenix’s CFAA claims
against Castro-Badillo is hereby DISMISSED.
C. The Court declines to exercise supplemental jurisdiction over
pendent Puerto Rico law claims.
A
District
Court
“may
decline
to
exercise
supplemental
jurisdiction over a claim” if the court “has dismissed all claims
over which it has original jurisdiction[.]” 28 U.S.C. § 1367(c)(3).
In
federal-question
cases,
the
dismissal
of
a
“foundational
federal claim” does not automatically “deprive a federal court of
authority
to
exercise
supplemental
jurisdiction
over
pendent
state-law claims. Instead, such a dismissal ‘sets the stage for an
exercise’
of
the
district
court's
broad
discretion.”
Sexual
Minorities Uganda v. Lively, 899 F.3d 24, 35 (1st Cir. 2018)
(quoting Roche v. John Hancock Mut. Life Ins. Co., 81 F.3d 249,
256-57 (1st Cir. 1996)) (internal citations omitted) (emphasis
added). When exercising said broad and “informed discretion[,]”
courts should engage in a “pragmatic and case-specific” analysis.
Roche, 81 F. 3d, 256-57. While “[n]o categorical rule governs the
analysis; a court must weigh concerns of comity, judicial economy,
convenience, and fairness.” Redondo Const. Corp. v. Izquierdo, 662
F.3d 42, 49 (1st Cir. 2011).
Notably, the First Circuit has cautioned that “when all
federal claims have been dismissed, it is an abuse of discretion
for a district court to retain jurisdiction over the remaining
Civil No. 23-1371(RAM)
10
pendent state law claims unless doing so would serve the interests
of fairness, judicial economy, convenience, and comity.” Zell v.
Ricci, 957 F.3d 1, 15 (1st Cir. 2020) (quoting Wilber v. Curtis,
872 F.3d 15, 23 (1st Cir. 2017)) (internal quotations omitted)
(emphasis added). See also Carnegie–Mellon University v. Cohill,
484 U.S. 343, 350 n. 7 (1988) (“in the usual case in which all
federal-law claims are eliminated before trial, the balance of
factors ... will point toward declining to exercise jurisdiction
over the remaining state-law claims.”). Given that Plaintiff’s the
federal claims are being dismissed at the pleading stage, the Court
declines to exercise supplemental jurisdiction pursuant to 28
U.S.C. § 1367(c). All of Phoenix’ supplemental claims under Puerto
Rico law against both co-defendants, are hereby DISMISSED WITHOUT
PREJUDICE.
IV. CONCLUSION
For the foregoing reasons, Phoenix’s federal law claims
against
Castro-Badillo
are
totality
of
Puerto
Phoenix’s
DISMISSED
Rico
WITH
law
PREJUDICE
claims
and
the
against
both
Defendants are DISMISSED WITHOUT PREJUDICE.
Judgment shall be entered accordingly.
IT IS SO ORDERED.
In San Juan, Puerto Rico, this 25th day of November 2024.
s/Raúl M. Arias-Marxuach_________
UNITED STATES DISTRICT JUDGE
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