Othentec Ltd. v. Phelan

• Citation: 526 F.3d 135
• Decision Date: 12 May 2008
• Docket Number: No. 06-2297.,06-2297.
• Parties: OTHENTEC LIMITED; Othentec Ltd; EC4 Technologies Limited, Plaintiffs-Appellants, v. Jeffrey PHELAN; Mark W. Martens; EC4 Technologies, Incorporated, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

526 F.3d 135

OTHENTEC LIMITED; Othentec Ltd; EC4 Technologies Limited, Plaintiffs-Appellants, v. Jeffrey PHELAN; Mark W. Martens; EC4 Technologies, Incorporated, Defendants-Appellees.

No. 06-2297.

United States Court of Appeals, Fourth Circuit.

Argued: January 31, 2008.

Decided: May 12, 2008.

ARGUED: Jerry William Boykin, Womble, Carlyle, Sandridge & Rice, Tysons Corner, Virginia, for Appellants. John F. Mardula, Roberts, Mardula & Wertheim, L.L.C., Reston, Virginia, for Appellees. ON BRIEF: Virginia W. Hoptman, Erin L. Roberts, Womble, Carlyle, Sandridge & Rice, Tysons Corner, Virginia, for Appellants. Shauna M. Wertheim, Roberts, Mardula & Wertheim, L.L.C., Reston, Virginia, for Appellees.

Before NIEMEYER and SHEDD, Circuit Judges, and PATRICK MICHAEL DUFFY, United States District Judge for the District of South Carolina, sitting by designation.

Affirmed by published opinion. Judge DUFFY wrote the opinion, in which Judge NIEMEYER and Judge SHEDD joined.

OPINION

DUFFY, District Judge:

Appellants Othentec Limited, Othentec Ltd., and EC4 Technologies Limited appeal the district court's grant of summary judgment for Appellees Jeffrey Phelan, Mark Martens, and EC4 Technologies, Incorporated. Appellants challenge the district court's grant of summary judgment on the grounds that they had established issues of material fact on their claims under the Virginia Computer Crimes Act and the Virginia Uniform Trade Secrets Act. We find no error in the ruling of the district court, and uphold its entry of summary judgment.

I.

Jerry Nims ("Nims") is an entrepreneur who began researching and working with lenticular optical imaging technology in the 1970s. (J.A. at 723.) Over the course of many years, Nims obtained a number of patents and formed a number of corporations to market this technology. (J.A. at 595.) This technology was of particular use in making identification cards that were difficult to tamper with or counterfeit. One key component of Nims' technological innovations is "the cylinder," which cuts three-dimensional images into plastic. (J.A. at 722-23.)

One of the corporations Nims started was Orasee ("Orasee"), which owned patents on many technologies Nims had developed. In 2003, EC4 Technologies Limited ("EC4 UK") was formed as a wholly-owned subsidiary of Orasee to market Nims' technologies. (J.A. at 691.) On May 7, 2004, Orasee entered into an agreement with EC4 UK which gave EC4 UK the exclusive right to license the technological innovations owned by Orasee. (J.A. at 52.)

In April 2005, Othentec Ltd. ("Othentec UK") was set up as a subsidiary of EC4 UK (90% of Othentec UK was owned by EC4 UK) to market Orasee's technologies, specifically in the area of authentication. (J.A. at 25.) Defendant Jeffrey Phelan ("Phelan"), who is Nims' son-in-law, was picked to run these subsidiary corporations. Phelan was appointed to be Managing Director of both EC4 UK and Othentec UK. (J.A. at 683.)

Othentec UK leadership determined that the company needed to take steps to further distribution of its products in the United States market. Phelan was put in charge of this project. On March 17, 2005, EC4 Technologies, Incorporated ("EC4 USA") was formed by Phelan, and incorporated under Delaware law. Id. Phelan became the CEO of this corporation. (Appellants' Br. at 8.) A sublicense agreement was struck between EC4 USA and EC4 UK in April 2005 that provided that EC4 USA could market and distribute Orasee technology in the U.S.¹

Phelan sought, and obtained, money from investor Lantson Eldred ("Eldred") to further the American distribution efforts. (J.A. at 575.) Eldred was also in contact with Ronald Doeve ("Doeve"), who was counsel and director for Othentec, and a confidant of Nims, regarding his investment (J.A. at 575; 683.) During that summer, Eldred was issued shares of stock in EC4 USA. (J.A. at 684-85.)

In August 2005, Phelan hired Mark W. Martens ("Martens") as the Director of Operations for Othentec UK. (J.A. at 670.)

In November 2005, Othentec Limited ("Othentec USA") was formed as a Virginia corporation, also for the purpose of distributing Orasee technology in the U.S. (J.A. at 684.) Othentec USA was wholly owned by Othentec UK. (J.A. at 24.)

From September 2005 to January 2006, five separate withdrawals, totaling nearly $385,000,² were made from an Othentec UK bank account to fund the American venture. All but the final withdrawal were made electronically. (J.A. at 835; 857-58.) All withdrawals were requested by Phelan, and all funds were actually withdrawn and wired to Phelan by Bhisham Dindyal ("Dindyal"), who held the position of secretary with both Othentec UK and EC4 UK, and who was a signatory on the account. (J.A. at 860-67.) For at least some of the withdrawals, Doeve also gave his approval through email. Id.

During this time period, Phelan had been at least somewhat successful in marketing the identification card authenticating technology in the United States, as deals were struck with DynCorp and Cross-Match to aid in the manufacturing of identification cards and driver's licenses in foreign nations (J.A. at 780.) These companies entered into contracts with EC4 USA.

By early 2006, a considerable amount of friction had developed between Phelan and the rest of the leadership of Othentec UK, including Nims and Doeve. An Othentec UK shareholder meeting was called for January 26, 2006, at which time Phelan was discharged from his positions as Managing Director of Othentec UK and Othentec USA. (J.A. at 600-01.) Phelan and Martens have continued to do business in the United States as EC4 USA. (J.A. at 604.)

For their part, Appellants claim that Phelan was picked to head up the effort to market and distribute Orasee's technology in the United States. To this end, Appellants claim that Phelan was clearly and explicitly authorized and instructed to form Othentec USA as Othentec UK's American branch. (Appellants' Br. at 8.) Appellants assert that Phelan was never authorized to found EC4 USA, and that he did so on his own initiative, without permission, consent, or knowledge from any other parties involved in Othentec UK. Id. Appellants claim that when they did learn of EC4 USA's existence in summer 2005, they had no knowledge that it was (a) actively marketing Orasee technology in the United States, and (b) that it was diverting funds from Othentec UK for this purpose. Id.

According to Appellants, Doeve had to do all the work himself to incorporate Othentec USA in Virginia, since Phelan had failed to do this as instructed. Id. at 9. When Appellants were told by the investor Eldred in July 2005 that he had been putting money into EC4 USA, they claim that they confronted Phelan about this, but that Phelan lied and told them that was only Eldred's "wish list" and that no money had actually been received. Id.

Regarding the financial withdrawals from Othentec UK's bank account, Appellants claim that they signed off on all withdrawals because they believed it was going to Othentec USA. Appellants specifically claim that "Doeve was unaware that any funds were being transferred to or used by EC4 USA, a U.S. corporation not affiliated with Othentec UK or EC4 UK. EC4 US[A] was not identified in these requests, which appeared to be for transfers to an Othentec account." Id. at 11.

Appellants claim that it was not until December 2005, when an Othentec UK accountant was trying to reconcile certain finances before the end of the year and obtained a bank record of an account registered to EC4 USA, that they realized that Phelan had been using Othentec UK money to finance EC4 USA. Id.

Appellants allege that in December 2005, they learned that Phelan had, unbeknownst to anyone else at Othentec UK, directly contacted Orasee investors and made statements critical of Nims in order to undermine Nims. Id. at 12. After Phelan requested another withdrawal in the amount of $190,000,³ Appellants denied this request, and informed Phelan that $45,000 was all they could give him. (J.A. at 728.) After this incident, Appellants allege that Phelan refused to attend a meeting in Atlanta to discuss the financial statuses of the various corporate entities involved. (Appellants' Br. at 12.)

Essentially, then, Appellants' claims are that Phelan, assisted by Martens, abused his position of power and trust with Orasee, EC4 UK, and Othentec UK to fraudulently form EC4 USA as a corporation that only he had control over, and to then proceed to use both Othentec UK's money and its trade secrets to start a successful business in which EC4 UK, Othentec UK, and Othentec USA had neither control nor a financial stake.

According to Appellees, however, Phelan was expressly authorized to form EC4 USA, and Nims, Doeve, and others at Othentec UK were fully informed of and involved in this process. (Appellees' Br. at 6.)

In the fall of 2005, Appellees claim that they discovered that many of Orasee's useful patents had been abandoned by Nims' "failure to prosecute and perfect application and failure to pay the required maintenance fees." Id. at 7. Phelan claims that upon discovering this, he worried that this may have a material impact on the long-term viability of the various corporations involved, as well as possibly rendering material statements made to investors false. Id. at 8. When Phelan tried to question Nims about this, he claims that Nims became enraged, and out of retribution, called the January shareholders meeting (without providing notice to Phelan, even though Phelan was a shareholder) and had Phelan removed from his positions with EC4 UK and Othentec UK. Id.

At this point, Phelan asserts that Eldred still wanted to fund EC4 USA to protect his existing investment. Id. at 9. However, Appellees claim that since most of Othentec's useful patents had expired, and that the Orasee technology was mostly based on obsolete photographic and printing technology and techniques instead of more modern computerized technology, there was no...