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holding that unfair competition claim was not preempted by UTSA where the claim was “based on an alternative theory of liability as well as on new facts”
Summary of this case from Moddha Interactive, Inc. v. Philips Elec. N. Am. Corp.Opinion
No. C 02-04483 SI.
November 20, 2004
ORDER DENYING DEFENDANT'S MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS AND MOTION TO COMPEL
On October 13, 2004, the Court heard argument on defendant Sigaba's motion for partial judgment on the pleadings of PostX's common law unfair competition claim and motion to compel production of documents and testimony regarding PostX's and counterclaim defendant Mayfield's communications with counsel. Having carefully considered the arguments of counsel and the papers submitted, the Court hereby DENIES defendant's motion for partial judgment on the pleadings and DENIES defendant's motion to compel.
BACKGROUND
On September 13, 2002, PostX Corporation ("PostX") filed a complaint for patent infringement against Secure Data In Motion, d/b/a Sigaba ("Sigaba"). On September 29, 2003 and November 25, 2003, the Court granted Sigaba's motions for summary judgment of non-infringement of United States Patent No. 6,477,647 ("the '647 Patent") and U.S. Patent No. 6,014,688 ("the '688 patent"). On February 4, 2004, the Court granted summary judgment for defendants on PostX's claim for misappropriation of trade secrets under the Uniform Trade Secrets Act ("UTSA") because of PostX's failure to adequately disclose the trade secrets at issue in that claim. On June 28, 2004, this Court granted PostX leave to file a Third Amended Complaint ("TAC"), amending a claim for breach of confidentiality agreement by former PostX and current Sigaba employee James Reid ("Reid"), and adding a claim for common law unfair competition. See June 28, 2004 Order at 1-2. Sigaba and Reid filed counterclaims against PostX for antitrust violations and false advertising. On August 22, 2004, PostX and Reid entered into a stipulation dismissing the claims and counterclaims between them. Now, Sigaba moves for dismissal of PostX's common law unfair competition claim.
The common law unfair competition claim arises from a June 11, 2002, email sent by Reid to Sigaba employee Stanley Chin. The email contains a list of actual and potential customers with whom Reid had interacted while employed by PostX. TAC ¶ 36. Chin circulated the email to Sigaba President John Ferraro and Sigaba Vice President Rodger Kobyashi. Id. at ¶ 38. Sigaba did not produce this email to PostX until after entry of this Court's order granting summary judgment on the UTSA claim.
Following discovery of this email, PostX moved for reconsideration of the Court's grant of summary judgment on the trade secrets claim. On March 17, 2004, and again on May 13, 2004, the Court denied PostX's motion because the email was irrelevant, since the basis of the Court's ruling was that has PostX failed properly to disclose the alleged trade secrets on which its claim was premised. The Court subsequently granted Reid's motion for judgment on the pleadings on PostX's trade secrets misappropriation claim, applying the law of the case doctrine. See April 29, 2004 Order at 2. The Court granted PostX leave to amend its complaint to allege common law unfair competition based on Sigaba's alleged wrongful use of confidential information Reid shared with Sigaba, finding that the facts alleged by PostX satisfied the elements of that tort.
Now before the Court are Sigaba's motions for partial judgment on the pleadings on PostX's common law unfair competition claim and to compel production of documents and testimony regarding PostX and Mayfield's communications with counsel.
LEGAL STANDARD
1. Motion for judgment on the pleadingsAfter the close of pleadings, but not too close to the time of trial, any party may move for judgment on the pleadings. Fed.R.Civ.P. 12(c). A motion for judgment on the pleadings is decided in a manner similar to a motion to dismiss under Federal Rule of Civil Procedure 12(b), in that judgment is proper when all allegations in the pleadings (rather than just the complaint), if taken as true, entitle one party to a judgment as a matter of law. Heliotrope General, Inc. v. Ford Motor Co., 189 F.3d 971, 978-79 (9th Cir. 1999).
2. Motion to compel
In general, parties may obtain discovery regarding any matter, not privileged, that is relevant to a claim or defense of any party. Fed.R.Civ.P. 26(b)(1). For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Id. A motion to compel a discovery response is appropriate when a party disobeys a proper request by refusing to produce relevant, non-privileged discovery. See Fed.R.Civ.P. 37(a)(2). The movant must certify that it has in good faith conferred or attempted to confer with the party failing to make discovery in an effort to secure information or material without court action. See id.
DISCUSSION
1. Judgment on the pleadings re PostX's common law unfair competition claimSigaba argues that PostX's unfair competition claim is preempted by the Uniform Trade Secrets Act and that it is "nothing more than its previously-dismissed UTSA trade secret misappropriation claim dressed up in different clothing." Def.'s Mot. at 1:20-22.
The parties recount different versions of what happened previously in the case regarding the UTSA claim. Defendant claims that, by granting summary judgment on the UTSA claim, the Court foreclosed all claims based on misappropriation of proprietary information. Plaintiff states that, at oral argument on June 25, 2004, the Court rejected defendant's preemption argument based on the Ninth Circuit's holding in City Solutions v. Clear Channel Communications, Inc., 365 F.3d 835 (9th Cir. 2004). The Court does not consider its prior rulings to have had either of these effects. The preemption issue is now before the Court for the first time.
Sigaba relies on a recent decision in a case pending in this district,AccuImage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941 (N.D. Cal. 2003), for the proposition that all common law claims based on misappropriation allegations are preempted by the UTSA. InAccuImage, a developer of software for medical imaging brought several claims against a competitor and former employee, including claims for both common law misappropriation of trade secrets and trade secrets misappropriation under the UTSA. The district court considered "whether the UTSA preempts common law misappropriation of trade secrets claims" and held that the UTSA "occupies the field in California," concluding that the plaintiff could not bring a common law misappropriation of trade secrets claim in addition to the UTSA claim. AccuImage, 260 F. Supp. 2d at 953, 954.
Statutory preemption occurs if the legislature enacts a statute intending to cover the entire subject or to occupy the field. See AccuImage, 260 F. Supp. 2d at 953.
Defendant argues that PostX's unfair competition claim is preempted because it is based on the same nucleus of facts as its UTSA claim. Courts in other districts have held that common law claims are superseded by the UTSA where they are factually based on the misappropriation of confidential or proprietary information. See Callaway Golf Company v. Dunlop Slazenger Group Americas, Inc., 318 F. Supp.2d 216, 219-20 (D. Del. 2004) (finding preemption of common law claims for conversion, unjust enrichment, and negligence where they are based on the same factual allegations as a California UTSA claim); Learning Curve Toys, L.P. v. Playwood Toys, Inc., 1999 U.S. Dist. LEXIS 11262, at *2 (N.D. Ill. July 20, 1999) ("if the operative facts are arguably cognizable under the I[llinois]TSA, any common law claim that might have been available on those facts in the past now no longer exists in Illinois");Fox Controls, Inc. v. Honeywell, Inc., 2004 WL 906114, at *2 (D. Ill. Apr. 26, 2004) (finding that claims for unjust enrichment and quantum meruit are preempted "to the extent that [they] rely on misappropriation," and not preempted to the extent that they rely on other factual allegations). These holdings are broader than AccuImage, which dealt only with preemption of a common law trade secrets misappropriation claim by a statutory trade secrets misappropriation claim under the UTSA.
PostX argues that, under the Ninth Circuit's holding in City Solutions v. Clear Channel Communications, Inc., 365 F.3d 835 (9th Cir. 2004), the UTSA does not preempt, supersede, or preclude a common law unfair competition claim based on the misappropriation of property that is not a trade secret. In City Solutions, the plaintiff brought claims both under the UTSA and for common law unfair competition and prevailed at a jury trial on the unfair competition claim but not the UTSA claim. After trial, the district court denied the defendant's motion for judgment as a matter of law on the unfair competition claim. The Ninth Circuit affirmed, rejecting the defendant's argument that, because the jury did not find it liable on the UTSA claim, it could not have found it liable for unfair competition; the court found that the evidence in the record supported the jury's finding that the defendant misappropriated the plaintiff's property, even if that property was not a trade secret. See City Solutions, 365 F.3d at 842. The preemption question itself was not before the Court of Appeals.
This Court is not prepared to extend AccuImage to a common law unfair competition claim on the facts of this case and in light of City Solutions. The procedural posture and facts of this case distinguish it from AccuImage. In AccuImage, the plaintiff simultaneously alleged two trade secrets misappropriation claims, one common law and one statutory, and the court found that the common law claim for trade secrets misappropriation could not survive alongside the UTSA claim. Here, the Court granted summary judgment on plaintiff's UTSA claim in February because of PostX's failure to identify the trade secrets with reasonable particularity, as required by Cal. Code Civ. Proc. § 2019(d). See February 25, 2004 Order at 10 ("[t]he issue in the instant case turns on whether PostX identified customer lists, marketing strategies, and design strategies as trade secrets with sufficient particularity."). The June 11, 2002 email which forms the basis for the unfair competition claim was produced by Sigaba after the grant of summary judgment. The Court has since denied PostX's motions for reconsideration because the June 11, 2002 email did not affect the basis on which summary judgment was granted — PostX's failure to make adequate disclosure — but it granted PostX leave to amend its complaint on the basis of that new evidence, because the facts alleged would support a valid claim of unfair competition.
It is true that a party should not be required to defend repeatedly against previously decided claims. Mir v. Fosburg, 646 F.2d 342, 347 (9th Cir. 1996). But the UTSA claim is out of the case because of pleading infirmities, not a ruling on the merits, and the two claims are not based on precisely the same nucleus of facts. In addition, City Solutions strongly suggests that a plaintiff may still allege trade secrets misappropriation and unfair competition as alternative theories of liability. Therefore, taking City Solutions and AccuImage together, the Court cannot conclude that the tort of common law unfair competition has been superseded by the UTSA in this circuit, and the out-of-circuit authorities relied on by defendant do not answer the question presented here. The claim survives because it is based on an alternative theory of liability as well as on new facts.
The Court finds that its grant of summary judgment on plaintiff's UTSA claim does not preempt or preclude the unfair competition claim. Accordingly, defendant's motion for partial judgment on the pleadings is DENIED.
2. Sigaba's motion to compel
Defendant Sigaba also moves to compel PostX and counterclaim defendant Mayfield to produce documents and provide testimony about their reliance on the advice of counsel in making the decision to file suit. PostX and Mayfield have asserted the attorney-client privilege and work-product protection over documents and communications pertaining to this issue.
A. Attorney-client privilege
Sigaba has asserted anti-trust counterclaims to PostX's infringement claims. To defend against these counterclaims, PostX and Mayfield assertNoerr-Pennington immunity as an affirmative defense. TheNoerr-Pennington doctrine protects from antitrust liability those who petition the government in order to secure or amend their rights. See Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers of America v. Pennington, 381 U.S. 657 (1965). This right includes litigation, see California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972), but does not include sham or baseless litigation. Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993).
In the factual background section of Sigaba's motion to compel, Sigaba asserts that PostX filed two sham patent infringement actions "for anti-competitive purposes to hurt Sigaba in the marketplace by broadly publicizing the litigation as a reason not to do business with Sigaba." Def.'s Mot. to Compelat 3:5-7. PostX objects to these allegations and points out that, to establish the narrow sham litigation exception, Sigaba will first have to show that PostX's lawsuit was "objectively baseless." The Court does not rely on the factual assertions made in Sigaba's "factual background" section for its ruling on this motion.
Sigaba argues that Noerr-Pennington immunity amounts to an assertion of good faith, and that in any event PostX has expressly claimed that its lawsuits "were filed with a proper legal basis and in good faith." Morando Decl., Ex. S, PostX Response to Interrogatory No. 13. See Kottle v. Northwest Kidney Centers, 146 F.3d 1056, 1060-61 (9th Cir. 1998);Handgards, Inc. v. Ethicon, Inc., 743 F.2d 1282, 1294 (9th Cir. 1984). According to Sigaba, PostX's defense of good faith constitutes an implied waiver of the attorney-client privilege.
PostX and Mayfield have offered to stipulate that they will not use privileged information at all in this litigation. PostX and Mayfield state that they "are not relying upon the advice of counsel as part of theirNoerr-Pennington defense," and argue that "[w]aiver simply cannot be established where a party takes affirmative actions not to make protected communications an issue in litigation." Pl.'s Opp'n to Compel at 5:25-27; 10:6-7. Sigaba contends that the proffered stipulation does not resolve the issue, because PostX will still present some evidence of good faith to the jury, such as pre-filing investigation, claim construction, and infringement analysis, while shielding other evidence behind the privilege. Def.'s Reply at 5:16-6:7. Sigaba also argues that PostX's good faith defense is so "inextricably intertwined" with the advice of counsel that it automatically places attorney-client communications at issue.Id. at 12:25. Specifically, defendant cites the deposition testimony of PostX witness Thampy Thomas that "at the end of the day, the board depended upon the advice of counsel," and of Mayfield board member Yogen Dalal that "the experts that we've brought in are extremely qualified to — to make that decision," and that by experts, he was "referring to — to counsel." Morando Decl., Ex. A (Thampy Thomas Depo.) at 359:16-361:10; Ex. T (Yogen Dalal Depo.) at 160:9-161:11. Thampy Thomas also testified that by the time he did his own independent evaluation, he "had already had discussions with [the] lawyers, so it is really difficult for me to now separate my independent analysis with advice given to me by the lawyers." Supp. Morando Decl., Ex. G (Thomas Depo.) at 357:5-9.
In the Ninth Circuit, the issue in implied waiver cases is whether the party asserting the privilege is attempting to use it as both a sword and a shield. In Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162 (9th Cir. 1992), the Court of Appeals held that the attorney-client privilege may be implicitly waived if a party raises a claim that "in fairness requires disclosure of the protected communication." The defendant corporation in that case argued that its tax position was "reasonable" based on the advice given by tax counsel. See Chevron, 974 F.2d at 1162. In United States v. Bilzerian, 926 F.2d 1285 (2d Cir. 1991), cert. denied, 502 U.S. 813, 112 S. Ct. 63 (1991), on which the Chevron court relied, the court found waiver where the defendant sought a ruling that would allow him to testify about his good faith attempts to comply with the securities laws without being cross-examined about his communications with counsel. Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975) is widely cited for the appropriate test for when waiver applies:
(1) assertion of the privilege was the result of some affirmative act, such as filing suit, by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.Hearn, 68 F.R.D. at 581.
At oral argument, Sigaba referred the Court to Pereira v. United Jersey Bank, 1997 WL 773716 (S.D.N.Y. Dec. 11, 1997) as persuasive authority.Pereira arose out of the Chapter 11 bankruptcy of a corporation that had engaged in a check-kiting scheme. The bankruptcy trustee brought an action to recover allegedly preferential transfers made to the defendant bank, and the bank asserted a setoff defense. On cross-motions for summary judgment, one critical issue before the court was when the bank first became aware of the check-kiting scheme, which was material to whether the bank had asserted the right to setoff in good faith. ThePereira court recognized that "Hearn is problematic insofar as there are very few instances in which the Hearn factors, taken at face value, do not apply, and therefore, a large majority of claims of privilege would be subject to waiver." Pereira, 1997 WL 773716 at *3. It also observed that the setoff defense could be asserted without implicating the advice of counsel, but found that counsel had played a "criticalrole" in matters related to the defense and that the defendant's factual assertions could only be fully assessed by examining privileged communications.
This Court finds that, in this case, PostX's assertion of good faith does not impliedly waive the privilege. PostX has expressly stated its intention not to use or introduce the advice of counsel. The Court is not persuaded by Pereira that the deposition testimony about the role of counsel creates an implied waiver in this case. Indeed, it is difficult to conceive of a patent case in which opposing counsel could not extract the kind of deposition testimony given here and then argue implied waiver of all communications regarding the decision to bring suit. As PostX points out, if its assertion of good faith automatically resulted in waiver, patent infringement plaintiffs could never defend against antitrust counterclaims without relinquishing the attorney-client privilege for most or all of their pre-filing communications with counsel. Because PostX is not using the attorney-client privilege as a sword, it has not relinquished its use as a shield.
Consequently, defendant's motion to compel is DENIED.
B. Work product protection
Defendant also seeks documents over which PostX asserts protection under the work product doctrine. Although defendant notes that the attorney-client privilege and work product protection "serve different purposes," it argues that "in most cases fairness dictates the waiver of both." Def.'s Mot. to Compel at 13, n. 3.
Rule 26(b)(3) allows the discovery of work product upon a showing of substantial need and the inability, without undue hardship, to obtain substantially equivalent materials. Fed.R.Civ.P. 26(b)(3). Here, the Court finds that PostX has not waived the protection of the work product doctrine and that Sigaba has not demonstrated the "substantialneed" or "undue hardship." Accordingly, Sigaba's motion to compel is DENIED on this ground as well.
3. PostX's requests for a protective order and attorneys' fees
PostX requests sua sponte entry of a protective order to prevent Sigaba from further pursuing discovery regarding plaintiffs' pre-filing investigation and ongoing advice of its counsel. Pls.' Opp'n at 14:2-5. PostX also asks for attorney's fees for Sigaba's abuse of the discovery process in bringing this motion and refusing to withdraw it despite PostX's representations.
If a motion to compel is denied, Federal Rule of Civil Procedure 37 vests broad discretion in district courts to enter any protective order authorized under Fed.R.Civ.P. 26(c) and award reasonable attorneys' fees to the party opposing the motion. Fed.R.Civ.P. 37(a)(4)(B). Given the legal issues presented and under the circumstances, the Court finds that Sigaba's motion was "substantially justified" and declines to impose sanctions or enter a protective order at this time.
CONCLUSION
For the foregoing reasons and for good cause shown, the Court hereby DENIES defendant's motion for partial judgment on the pleadings and DENIES defendant's motion to compel. [Docket ## 370 and 374.]IT IS SO ORDERED.