IP Law Daily Guitar pedal maker's trade secrets suit against former employees will move forward
Tuesday, April 16, 2019

Guitar pedal maker's trade secrets suit against former employees will move forward

By Thomas K. Lauletta, J.D.

A guitar pedal producer's trade secret misappropriation suit under the Defend Trade Secrets Act could go forward, but allegations under the Computer Fraud and Abuse Act were dismissed.

CatalinBread LLC sued its former employees, defendants Howard Gee, Scott Miller, Bois Lutskovsky, and Michael Erickson ("former employees"), for conspiring to misappropriate CatalinBread's intellectual property, tangible property, and protected trade secrets. The suit alleged that the former employees' actions violated two federal statutes, the Computer Fraud and Abuse Act (CFAA), and the Defend Trade Secrets Act (DTSA), and also stated six claims based on state statutes or common law. The federal district court in Portland, Oregon, dismissed the claims made under the CFAA, but refused to do so with regard to the plaintiff's DTSA and the other claims (Catalinbread LLC v. Gee, April 12, 2019, Hernandez, M.).

Following the death of CatalinBread's founder, Nicholas Harris, in 2016, his mother, Mary Burkett, assumed control of the company. As part of its business operations, CatalinBread maintains highly detailed proprietary and confidential information relating to how its guitar pedals are made, the cost of all components used to build the pedals, circuitry and physical structure details of its products, and project and data file that are used to design, test, cut all component parts and finish the pedals. CatalinBread took various steps to secure and protect these trade secrets, including adopting confidentiality policies and procedures in its employee handbook, and maintaining a secure computer network that was limited to use by employees who had required passwords.

According to the plaintiff, production fell sharply after Burkett assumed control of the company, and the former employees conspired to force her to sell the company to them. In September, 2017, the plaintiff's complaint alleged that the former employees were continuing to work for CatalinBread while secretly planning to start a competing company, had used CatalinBread's laptops to further their plans, had removed components for building its products, and were using plaintiff's proprietary engineering to develop a line of competing products. In October 2017, the plaintiff alleged that the former employees falsely marked supplies out of stock and downloaded protected build of material, cost of goods schematics, product structures, files and other data, and made copies of these materials. Further, the former employees deleted information from CatalinBread computers and laptops and took CatalinBread's property. Following these activities, three of the four employees quit, while the fourth was fired a few days later.

According to the plaintiff, it saw increased traffic on its on-line network and detected attempts to login to its computers and company network. The plaintiff characterized this increased network traffic as attributable to attempts by the former employees to access company-protected systems after their actual and legal authority to do so had been revoked.

Computer Fraud and Abuse Act. The court held that CatalinBread failed to state a valid claim under the CFAA (18 U.S.C. §1030). Although the plaintiff's allegations could fall within CFAA provisions forbidding access of company computers or protected company systems without authorization or exceeding authorized access, the court concluded that these allegations failed to state facts supporting CFAA violations. Under the rule followed in the Ninth Circuit, for purposes of CFAA, when an employee has received company authorization to use a company computer subject to certain limitations, the employee retains such authorization even if the employees violates such restrictions (LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009)). Thus, even if the former employees accessed and altered the CatalinBread computers while they were still employed, such conduct would not be a violation of CFAA.

Although the plaintiff also alleged that the former employees accessed company protected systems after their authority to do so had been revoked, the court saw as too speculative the plaintiff's belief that the attempted access to the company network after their firing could be attributed to the former employees' actions.

As an additional reason to conclude that a valid CFAA was not made, the court noted that the plaintiff had failed to allege damages of at least $5,000, as required by §1030(a)(4).

Defend Trade Secrets Act. The court concluded that the plaintiff's pleadings adequately stated a DTSA claim. In so holding, the court noted that the complaint alleged at least five specific actions by one or more of the former employees that constituted misappropriation of its protected trade secrets. In this way, the plaintiff's allegations were distinguished from the holding in Space Data Corp. v. X, where only a "high-level overview" of the defendants' acquisition and use of trade secrets was held not to support a DTSA claim. Although the court noted that the plaintiff will have to produce evidence to support its allegations as to each defendant, at this stage of the proceeding, the plaintiff's allegations were adequate.

The court also rejected the defendants' argument that the plaintiff did not allege that the defendants' actions caused an injury to the plaintiff. The court concluded that the plaintiff's allegation that it was forced to spend significant time and money to restore business operations, and that it sustained substantial losses to revenue, sales, and production, met this DTSA requirement.

Accordingly, the court denied the defendants' motion to dismiss the DTSA claim. As the court had only dismissed the plaintiff's CFAA claim, the plaintiff's state law and common law claims apparently still remained, although the court did not further discuss them. The plaintiff was granted a 14 day leave to amendment its complaint to comply with directions noted the court's opinion.

This case is No. 3:18-cv-01795-HZ.

Attorneys: Aaron J. Cronan (Cronan Law LLC) for Catalinbread LLC. Christopher G. Lundberg (Haglund Kelley LLP) for Howard Gee.

Companies: Catalinbread LLC

MainStory: TopStory TechnologyInternet TradeSecrets OregonNews

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