Implicit Conversions, Inc. v. Stine

Background

Implicit Conversions, Inc. sued Jacob Stine and Juanita Traver Stine. The complaint asserted claims under the federal Computer Fraud and Abuse Act, California Penal Code section 502, the federal Defend Trade Secrets Act, the California Uniform Trade Secrets Act, breach of contract, breach of the duty of loyalty, and declaratory relief.

Stine had helped found Implicit and served as its chief technology officer. Traver Stine served as its human resources and payroll administrator. Implicit terminated Stine on June 14, 2024, and told him that his access to company computer systems would be disabled. The court described the record as showing that, after the termination, Stine and Traver Stine accessed Implicit’s systems, restored Stine’s access, disabled or altered Lavallee’s access, downloaded company information, exported documents, and deleted or tampered with files. Stine retained proprietary information and maintained that he was Implicit’s rightful chief executive officer.

Implicit also sought the return of company hardware and digital files, including a data center located at the defendants’ residence. The court noted that Stine described one computer, called “Reynard,” as an individual personal computer that hosted a server used by Implicit.

Preliminary-injunction standard

A preliminary injunction is an interim court order issued before final judgment. The court applied the four factors requiring a showing that the plaintiff is likely to succeed on the merits, likely to suffer irreparable harm without relief, that the balance of hardships favors relief, and that the injunction serves the public interest. The court also discussed an alternative standard involving serious questions on the merits and a sharply favorable balance of hardships.

Likelihood of success

The court found that Implicit was likely to prevail on its computer-access claims. Under the Computer Fraud and Abuse Act, access is unauthorized when permission has not been given or has been withdrawn. The court concluded that Stine almost certainly accessed Implicit’s systems without authorization after his termination. It also found that his asserted board membership did not give him unlimited permission to search through company files, delete information, or tamper with company systems.

The court likewise found that Implicit was likely to prevail on its California computer-access claims. That law does not require unauthorized access in the same way; it can apply when a person knowingly accesses a computer and, without permission, takes, copies, or uses data. The court found that Stine knowingly accessed Implicit’s systems after his termination, used access restored through Traver Stine’s credentials, interfered with Lavallee’s access, and downloaded data.

For the trade-secret claims, the court found that Implicit adequately identified protected information, including source code, software tools, business-development plans, customer-negotiation information, customer contracts, budgets, and forecasts. The court found that Implicit used appropriate measures to protect that information and that Stine wrongfully acquired and retained information after his termination. It also found that Traver Stine had reason to know that information stored at the data center was confidential and that Stine’s downloading of information after termination was improper. The court concluded that Implicit was likely to prevail on the federal and California trade-secret claims.

The court applied Delaware law to the contract claim because the parties agreed that Delaware law governed the confidentiality agreement. The court found it more likely than not that Stine signed the agreement, despite his lack of recollection. The agreement prohibited unauthorized copies of confidential information and required him to return company property and information at the end of his employment relationship. Because Stine remained in possession of the data center and other requested items, the court found a high likelihood of success on the contract claim. The court also stated that Implicit had shown it was likely to prevail on the breach-of-loyalty claim against Traver Stine; the defendants had not addressed that claim in their opposition.

Irreparable harm

The court found that Implicit faced irreparable harm if the defendants could continue accessing its systems or acquiring, using, or disclosing its confidential information and trade secrets. The court was particularly concerned that the defendants believed the information was theirs to use and that they continued to retain it. It also noted that Implicit had taken some data centers offline to limit potential damage.

Balance of hardships and public interest

The court found that preventing access to Implicit’s systems and preventing the defendants from acquiring, using, or disclosing the specified information would protect Implicit without imposing an undue burden on the defendants. The court also found that protecting trade secrets serves the public interest.

The court reached a different conclusion about the requested mandatory injunction requiring the defendants to return all company information and property. It found that the heightened standard for such an order was not met. Although Implicit was likely to prevail, the defendants might ultimately prevail in the litigation, and requiring immediate surrender of property could then be burdensome. The court was also concerned that the requested “Reynard” computer appeared to be at least partly merged with the defendants’ personal computer system. The court left open the possibility of revisiting the issue if Implicit learned that the defendants were preparing to violate the injunction.

Disposition

Judge William H. Orrick granted Implicit’s motion for a preliminary injunction. The order enjoins Jacob Stine and Juanita Traver Stine from accessing Implicit’s computer systems and, subject to stated exceptions for information that is publicly available or not kept confidential and disclosures to certain people with a need to know, from acquiring, using, or disclosing specified Implicit source code, software tools, business plans, customer information, contracts, budgets, forecasts, and financial records. The court did not issue the requested mandatory injunction requiring the return of Implicit’s information and property.