ATS Prods., Inc. v. Champion Fiberglass, Inc.

Decision Date19 November 2013
Docket NumberNo. C 13-02403 SI,C 13-02403 SI
PartiesATS PRODUCTS, INC., Plaintiff, v. CHAMPION FIBERGLASS, INC., Defendant.
CourtU.S. District Court — Northern District of California
ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANT'S
MOTION TO DISMISS

Currently before the Court is defendant's motion to dismiss the complaint for failure to state a claim upon which relief can be granted. Pursuant to Civil Local Rule 7-1(b), the Court determines that this matter is appropriate for resolution without oral argument and VACATES the hearing scheduled for November 22, 2013. For the reasons set forth below, the Court GRANTS IN PART AND DENIES IN PART the motion to dismiss.

BACKGROUND

The following allegations are taken from the complaint. Plaintiff ATS Products, Inc. ("ATS") is a California corporation. Compl. ¶ 1. ATS owns trade secrets relating to: (1) "formulas for making fire-safe plastics by combining phenol-resorcinol resins with catalysts and/or fillers," and (2) "information regarding the best methods and practices for using resins, hardeners and fillers to manufacture plastic products." Id. ¶ 5. Defendant Champion Fiberglass, Inc. ("Champion") is a Texascorporation. Id. ¶ 2. During the 2000s, Champion worked with ATS's predecessor in interest, Shea Technology, to develop an electrical conduit built using ATS's resins. Id. ¶ 9. Throughout that process, Champion worked with employee, Frank Ghiorso.

In 2007, Ghiorso allegedly formed Thermalguard Technology, LLC and began building resins using ATS's misappropriated trade secrets. Id. ¶ 9. In 2009 and 2010, Champion purchased resins from Thermalguard Technology, LLC. Id. In 2010, Champion's president and Ghiorso formed a new company, Thermalguard, LLC, together. Id. On October 28, 2010, ATS brought suit against Ghiorso and his companies, Thermalguard Technology, LLC, and Thermalguard, LLC, alleging violations of ATS's trade secret rights. Id. ¶ 8. Throughout that litigation, Champion paid for the defense of all of the defendants. Id. The case proceeded to trial and ATS prevailed. Id. ¶ 10.

ATS alleges that Champion used the resins it purchased from the Thermalguard companies to produce its Flame Shield product, which it then sold to Bay Area Rapid Transit ("BART"), in California. Id. ¶¶ 13-15.

On May 28, 2013, ATS filed suit alleging three causes of action: (1) violation of California's Uniform Trade Secrets Act ("CUTSA"); (2) conspiracy to violate CUTSA; and (3) unfair competition. On September 19, 2013, Champion filed this motion to dismiss all causes of action in ATS's complaint.

LEGAL STANDARD

To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This "facial plausibility" standard requires the plaintiff to allege facts that add up to "more than a sheer possibility that a Defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While courts do not require "heightened fact pleading of specifics," a plaintiff must allege facts sufficient to "raise a right to relief above the speculative level." Twombly, 550 U.S. at 544, 555. "A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). "Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Id. (quoting Twombly, 550 U.S.at 557). "While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations." Id.

In reviewing a Rule 12(b)(6) motion, a district court must accept as true all facts alleged in the complaint, and draw all reasonable inferences in favor of the plaintiff. See al-Kidd v. Ashcroft, 580 F.3d 949, 956 (9th Cir. 2009). However, a district court is not required to accept as true "allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). As a general rule, the Court may not consider any materials beyond the pleadings when ruling on a Rule 12(b)(6) motion. Lee v. City of L.A., 250 F.3d 668, 689 (9th Cir. 2001). However, pursuant to Federal Rule of Evidence 201, the Court may take judicial notice of "matters of public record," such as prior court proceedings, without thereby transforming the motion into a motion for summary judgment. Id. at 688-89. If the Court dismisses a complaint, it must decide whether to grant leave to amend. The Ninth Circuit has "repeatedly held that a district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (citations and internal quotation marks omitted).

DISCUSSION

The Court must address two preliminary matters before proceeding to the substantive analysis of Champion's motion. First, Champion asks the Court to take judicial notice of excerpts of the trial court transcript from the prior litigation discussed above. ATS asks the Court to take judicial notice of the document entitled Findings of Fact, Conclusions of Law, and Permanent Injunction, also from the prior litigation. Neither party opposes the other's request. Accordingly, the Court finds that it is appropriate to take judicial notice of these documents. See Fed. R. Evid. 201.

Second, the parties' briefing in this matter raised some choice of law concerns. Specifically, ATS contends that California law, Texas law, or federal law may be the appropriate law to apply to this case, and that at this early stage of the litigation, it is impossible to determine which law to apply. Opposition to Motion to Dismiss at 13-14. A court sitting in diversity jurisdiction applies the law of the forum state to determine choice of law issues. Patton v. Cox, 276 F.3d 493, 495 (9th Cir. 2002).However, because this case is in the pleading stage and the record has not yet been developed, the Court lacks sufficient information to perform a choice of law analysis at this juncture. Thus, the Court may only grant Champion's motion if ATS has failed to state a viable claim under any of the potentially available laws. See Chiquita Fresh v. Greene Transp., No. C-11-06683 DMR, 2012 WL 1669395, at *4 (N.D. Cal. May 11, 2012).

1. ATS's Claim for Violation of CUTSA.

ATS's first cause of action alleges that Champion violated CUTSA through "misappropriation and/or other wrongful use of ATS's Trade Secrets." Compl. ¶ 20. This cause of action is premised on allegations that Champion acquired resins made using ATS's trade secrets from third parties, and used those resins in the Flame Shield product it sold to BART. Id. For this violation, ATS seeks money damages and injunctive relief. Id. ¶¶ 21-26.

A cause of action under CUTSA requires that: (1) the plaintiff possessed a trade secret; (2) the defendant misappropriated that trade secret through acquisition, disclosure, or use; and (3) the plaintiff suffered actual or threatened injury. Silvaco Data Sys. v. Intel Corp., 184 Cal. App. 4th 210, 220 (Cal. Ct. App. 2010). CUTSA defines a "trade secret" as

information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and
(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Cal. Civ. Code § 3426.1(d). A defendant may misappropriate a trade secret through improper acquisition, disclosure, or use of the trade secret. Id. § 3426.1(b).

ATS alleges that Champion misappropriated its trade secrets through both acquisition and use. Compl. ¶ 20. For the following reasons, the Court finds that ATS has sufficiently alleged misappropriation through acquisition, but not through use.

Misappropriation of another's trade secret "can occur through improper acquisition of a trade secret, not only through use." San Jose Const., Inc. v. S.B.C.C., Inc., 155 Cal. App. 4th 1528, 1544 (Cal. Ct. App. 2007) (emphasis in original). The term acquisition "implies more than passive reception; itimplies pointed conduct intended to secure dominion over the thing . . . ." Silvaco, 184 Cal. App. 4th at 223. ATS alleges in its complaint that its resins are susceptible to being reverse engineered to disclose ATS's trade secrets. Compl. ¶ 15. It further alleges that Champion acquired those resins, knowing, or having reason to know, that the resins had been created utilizing trade secrets improperly acquired from ATS. Id. ¶ 20. These allegations are sufficient to establish a viable claim of misappropriation through wrongful acquisition of trade secrets.

Champion argues that, at most, it acquired the resins and not the trade secrets themselves, and ATS has therefore failed to state a viable claim of misappropriation. Motion to Dismiss at 6-7. However, ATS's complaint sufficiently alleges that the resins are susceptible to reverse engineering which would, in turn, yield the trade secrets to anyone who possessed the resins. Compl. ¶ 15. Champion, therefore, acquired ATS's trade secrets when it acquired the resins from third parties. Thus, ATS has stated a viable claim for misappropriation by wrongful acquisition.

Champion next argues that, even if the resins are capable of being reverse engineered, ATS is judicially estopped from making this argument by virtue of statements made during the prior litigation. Reply at 1-2. Specifically, during opening statements in the prior litigation, ATS's predecessor in interest took the position that consumers who buy the resins do not get the information that ATS has claimed is a trade secret; instead, they only get the...

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