GWACS Armory, LLC v. KE Arms, LLC

• Decision Date: 23 February 2023
• Docket Number: 20-CV-0341-CVE-SH,21-CV-0107-CVE-SH
• Parties: GWACS ARMORY, LLC, Plaintiff, v. KE ARMS, LLC, RUSSELL PHAGAN, SINISTRAL SHOOTING TECHNOLOGIES, INC., BROWNELLS, INC., and SHAWN NEALON, Defendants, and KE ARMS, LLC, Plaintiff, v. GWACS ARMORY, LLC, GWACS DEFENSE INCORPORATED, JUD GUDGEL, RUSSELL ANDERSON, DOES I through X, and ROE CORPORATIONS I through X, Defendants.
• Court: U.S. District Court — Northern District of Oklahoma

GWACS ARMORY, LLC, Plaintiff, v. KE ARMS, LLC, RUSSELL PHAGAN, SINISTRAL SHOOTING TECHNOLOGIES, INC., BROWNELLS, INC., and SHAWN NEALON, Defendants, and KE ARMS, LLC, Plaintiff, v. GWACS ARMORY, LLC, GWACS DEFENSE INCORPORATED, JUD GUDGEL, RUSSELL ANDERSON, DOES I through X, and ROE CORPORATIONS I through X, Defendants.

Nos. 20-CV-0341-CVE-SH, 21-CV-0107-CVE-SH

United States District Court, N.D. Oklahoma

February 23, 2023

BASE FILE

OPINION AND ORDER

CLAIRE V. EAGAN UNITED STATES DISTRICT JUDGE

Now before the Court are the following motions: Plaintiff's Motion for Order Dismissing Claims against Defendant Shawn Nealon with Prejudice (Dkt. # 113); Defendant KE Arms LLC's Motion for Summary Judgment (Dkt. # 117); Defendant Brownells Inc.'s Motion for Summary Judgment (Dkt. # 118); Defendant Shawn Nealon's Motion for Summary Judgment (Dkt. # 119); Defendants Russell Phagan and Sinistral Shooting Technologies, LLC's Motion for Summary Judgment (Dkt. # 120); Counterclaim Defendant's Motion for Summary Judgment & Brief in Support (Dkt. # 121); and Defendants' Motion for Spoliation Sanctions (Dkt. # 177). Plaintiff GWACS Armory, LLC (GWACS) argues that its communications with defendants KE Arms, LLC (KEA) and Brownells, Inc. (Brownells) were privileged, and GWACS seeks summary judgment on KEA's counterclaims. Dkt. # 121. GWACS also seeks leave to dismiss its claims against Shawn Nealon with prejudice to refiling. Dkt. # 113. Each defendant seeks summary judgment on GWACS' claims against them. Dkt. ## 117, 118, 119, 120. Defendants argue that GWACS did not disclose to defendants any information pursuant to non-disclosure agreements (NDAs) that was proprietary or confidential, and defendants request summary judgment on GWACS' breach of contract claims. Defendants also argue that GWACS does not possess any intellectual property or trade secrets, and they assert that they cannot be held liable for misappropriation of intellectual property or trade secrets.

I.

In the early 2000s, Shawn Nealon formed a company called Cavalry Arms Corporation (Cavalry), and Cavalry's main product was a semi-automatic rifle called the CAV-15. Dkt. # 123, at 2. The CAV-15 rifle was designed by Nealon and other employees of Cavalry, including Russell Phagan, and Phagan subsequently became the vice president of Cavalry. Id. One of the key features of the CAV-15 rifle was the lower receiver, which was made with a polymer instead of steel or aluminum, and this made the CAV-15 somewhat lighter than other similar rifles. Id. Another feature of the lower receiver was that it was monolothic, meaning that the stock, grip, and magazine were a single piece. Id. Much of the information related to the design and manufacturing of the CAV-15 was published on Cavalry's website or otherwise disclosed to customers because customers expressed concern about the use of a polymer in manufacturing components for a rifle. Id. At some point, the information was no longer available on the websites on which the material was published, and certain documents or pictures were privately kept by Phagan. Dkt. # 143-4, at 9-15.

The CAV-15 lower polymer receiver was later renamed the MKI, and Cavalry developed an improved version marketed as the MKII. Dkt. # 123, at 2. Cavalry later produced a prototype for a lower polymer receiver known as the MKIII, but Cavalry never manufactured or produced the MKIII for distribution. Id. Cavalry did not obtain a patent, trademark, or copyright for the MKI, MKII, or MKIII. In 2010, Cavalry stopped manufacturing the MKI, MKII, and MKIII receivers, surrendered its federal firearms license, and began to sell off its assets. Id. at 3. On March 3, 2010, Cavalry and Sinistral Shooting Technologies, Inc. (SST) entered an asset purchase agreement for the sale of the following assets:

(a) One (1) CAV-15 MKII cores and cavities;

(b) One (1) CAV-15 MKI cores and cavities;

(c) One (1) CAV-15 mold base;

(d) One (1) CAV-15 linear vibration welding resin base fixtures;

(e) all of Seller's CAV-15 drilling fixtures; all CAV-15 specific hand tools; all CAV-15 specific nuts, bolts, screws, roll pins; all CAV-15 front and rear pivot; take down pins; all CAV-15 serial number tags;

(f) all licenses for the above described assets to the extent that they are assignable, including those set forth on Schedule 4.1;

(g) all records required to be kept on the above described assets pursuant to parts 447, 478, and 479 of C.F.R. title 27.

Dkt. # 123, at 14-15. SST was owned by Phagan at the time of the transaction, and Phagan states that he is currently the controlling member of SST. Dkt.# 124, at 2. Cavalry agreed that it had “title” to the assets being sold, but Cavalry made no representation that it possessed any protected or exclusive intellectual property rights to the assets. Id. at 16-17. Phagan testified in his deposition that Nealon also gave him “armors, tools, and other ancillary items related to firearms production along with the prints to the mold and a CD of CAD^[1] files,” but the CAD files were not expressly part of the sale. Dkt. # 143-2, at 2. SST and GWACS subsequently entered an asset purchase agreement for the sale of the following assets:

1. Van Don 300 Press HT Series Model 300 HT 14-2865 1996 with Pathfinder 4500 Controller;

2. Con Air SC30 Plastic Dryer with hopper - Serial Number 80105;

3. Branson 90 Series Linear Vibration Welder Model VW2 Serial Number 96R523769;

4. Take Down Pin Sets (1,500+);

5. Serial number tags (1,000+);

6. CAD drawings, design prints to the molds, including any and all intellectual property (“IP”) related thereto;

7. Take Down Pins specifications;

8. Miscellaneous tools and equipment to manufacture, market and sell the Lowers.

Dkt. # 124-4, at 10. Nealon was aware of this transaction and sent GWACS a letter congratulating it on the purchase on the letterhead of a trade name for his new entity, Cavalry Medical LLC (Cavalry Medical). Dkt. # 123, at 64.

In February 2013, Phagan began working for GWACS as a sales representative, and the scope of his work was governed by a non-exclusive independent contractor sales representative agreement (Dkt. # 124-5). Phagan later worked for a competitor of GWACS, KEA, while KEA was marketing a lower receiver known as the KE-15. Dkt. # 124, at 11. The KE-15 was either forged or billet, with the billet version having a flared magazine. Id. On June 15, 2015, KEA entered a mutual NDA with GWACS to allow the parties to “evaluate the feasibility of [a] business relationship,” and they anticipated exchanging trade secrets or proprietary information as part of this process. Dkt. # 124-7, at 2. The agreement defined “proprietary information” as information disclosed by one party to another:

(i) that is marked “Proprietary” or (ii) that relates to the business of the Discloser or the Discloser's affiliates, including without limitation, trade secrets, know-how, data, operations, records, finances, assets, technology, software, research, inventions, future products, customer information, or business development plans.

Id. Any proprietary information exchanged pursuant to the agreement could not be disclosed to third-parties for five years after the effective date of the agreement. Id. Even if one party marked information as proprietary, the agreement states that proprietary information does not include information which:

(a) At the time of disclosure was already in the possession of the Receiving Party;

(b) Is independently made available to the Receiving Party by a third party not bound directly or indirectly by a non-disclosure obligation to the Disclosing Party;

(c) Is in the public domain; or

(d) Is independently developed by the Receiving Party without reference to Proprietary Information received from the Disclosing Party.

Id. at 3. The NDA also recognizes that the parties may offer competing products on the marketplace, and competition was not prohibited as long as the parties complied with their obligations under the agreement. Id. Brownells entered two NDAs with GWACS. The first NDA was executed in May 2013, and the second NDA was executed in January 2016. Dkt. # 122, at 5-8; Dkt. # 122, at 9-12. SST entered NDAs with GWACS, the first of which was executed in October 2011 and the second of which was executed in February 2013. Dkt. # 124, at 6. 9. The NDAs were signed by Phagan on behalf of SST. Dkt. # 124-3, at 3; Dkt. # 124-6, at 3.

Nealon claims that, in 2016, he found a box containing a thumb drive and various firearms “blue prints” at his house, but he did not know the contents of the thumb drive and he lacked the software to open it. Dkt. # 123, at 4. Nealon states that he did not believe that the thumb drive contained any information that could be considered protected intellectual property, because he had publicly shared anything that might have been treated as proprietary information on the internet or directly to firearms enthusiasts or firearms businesses. Id. On February 25, 2016, Calvary Medical sold two boxes of blueprints and a thumb drive containing “assorted CAD/CAM files” to KEA. Id.

KEA claims that it began developing an improved version of the KE-15 aluminum rifle, and the new rifle would include a monolithic polymer lower receiver instead of an aluminum receiver. Dkt. # 124, at 14. Phagan states that KEA used the CAM files for the KE-15 to develop the new lower receiver known as the KP-15, and Phagan states that KEA also consulted outside experts to convert the KE-15 aluminum receiver into the KP-15 polymer receiver. Id. at 14-15; Dkt. # 124-33. GWACS asserts that KEA used the CAV-15 design files to create the new receiver, and GWACS further asserts that KEA's witnesses have falsely claimed to have developed the new receiver from scratch. Dkt. # 143, at 5; Dkt. #...