Calsoft Labs, Inc. v. Panchumarthi

Background

Calsoft Labs, Inc. purchased PVR Technologies, Inc. from Venkata Panchumarthi in February 2016. Panchumarthi agreed to remain PVR’s chief executive officer until August 31, 2018. Afterward, Calsoft and PVR hired Panchumarthi’s new company, Truinfo Technologies, Inc., as a contractor.

Plaintiffs alleged that Panchumarthi secretly compiled confidential information to compete against them. They alleged that, after access to their email and data servers was terminated, Panchumarthi persuaded GoDaddy to reset the password for a former PVR email account, accessed the account, and deleted its contents. Plaintiffs also alleged that he accessed PVR’s Dropbox account, copied customer and employee information and training materials, and later used the information to recruit employees and solicit customers.

Plaintiffs’ second amended complaint asserted twelve claims: breach of fiduciary duty, conversion, fraud, violation of California’s Unfair Competition Law, intentional interference with contractual relationships, intentional interference with prospective economic relations, trade-secret misappropriation, breach of the purchase agreement, breach of the employment agreement, breach of the contractor agreement, breach of the implied covenant of good faith and fair dealing, and violation of the federal Computer Fraud and Abuse Act.

Legal standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. The court generally had to accept well-pleaded allegations as true, but not conclusory statements or unreasonable inferences. The court also considered the contracts attached to the motion because the complaint relied on them and plaintiffs did not dispute their authenticity.

California trade-secret preemption

The court explained that California’s Uniform Trade Secret Act generally supersedes common-law claims based on the alleged misuse of confidential information, even when the information may not qualify as a statutory trade secret. Contract claims and other civil claims based on conduct independent of trade-secret misappropriation are not necessarily superseded.

Claim-by-claim rulings

Claims dismissed without leave to amend

The court dismissed the breach-of-fiduciary-duty claim because the allegations were based on the same alleged misuse of confidential information as the trade-secret claim and were therefore superseded by California’s trade-secret statute. The court also stated that the complaint did not clearly show that Truinfo owed plaintiffs a fiduciary duty. The claim was dismissed without leave to amend.

The conversion claim was also superseded because it concerned the same intangible information involved in the trade-secret claim. The court dismissed it without leave to amend.

The fraud claim failed because plaintiffs did not adequately allege reliance on the alleged concealment or facts supporting an inference that defendants never intended to honor the agreements. The court dismissed the claim without leave to amend.

The intentional-interference claims were based on defendants’ alleged use of confidential information to recruit employees and solicit customers. Because those claims arose from the same facts as the alleged trade-secret misappropriation, the court dismissed both without leave to amend.

The breach-of-employment-agreement claim failed because a later contractor agreement expressly terminated the employment agreement in its entirety. The court dismissed the claim without leave to amend.

The breach-of-contractor-agreement claim failed because the contractor agreement prohibited disclosure of confidential information, while the complaint alleged unauthorized access and use, not disclosure to a third party. The court dismissed the claim without leave to amend.

Claim dismissed with leave to amend

The court dismissed the trade-secret-misappropriation claim because plaintiffs did not describe their customer lists, employee lists, or training materials with enough detail to distinguish them from generally known information or to define the boundaries of the claimed secrets. Because the allegations concerning the training data and programs were new, the court allowed plaintiffs one final opportunity to amend this claim.

Purchase-agreement claim

The court granted in part the motion to dismiss the purchase-agreement claim. It dismissed without leave to amend the part based on an alleged violation of the noncompetition provision because that provision barred competition only for two years after the February 16, 2016 closing date, while plaintiffs alleged that the competition began around February 11, 2019.

The court otherwise denied the motion as to this claim. Plaintiffs adequately alleged that defendants breached continuing confidentiality obligations by using customer lists and data. The court accepted plaintiffs’ allegations about the agreement’s definition of confidential information and the survival of Panchumarthi’s confidentiality obligations because the contract excerpts submitted by defendants did not contradict them.

Implied-covenant claim

The court granted in part the motion to dismiss the claim for breach of the implied covenant of good faith and fair dealing. It dismissed without leave to amend the portions based on the employment and contractor agreements because the underlying agreement claims failed. The court otherwise denied the motion, allowing the portion based on the purchase agreement to continue.

Computer Fraud and Abuse Act claim

The court denied the motion to dismiss the Computer Fraud and Abuse Act claim. Plaintiffs alleged that Panchumarthi’s authorization to access their email and Dropbox accounts ended on January 11, 2019, that he intentionally accessed those private accounts afterward, obtained information, destroyed information, and caused harm by using the information to recruit employees and customers.

The court rejected defendants’ argument that the access could not be unauthorized merely because valid credentials were used. Relying on Ninth Circuit precedent, the court stated that access permission can be revoked even when someone continues to use legitimate credentials. The court also distinguished a case involving publicly available information because plaintiffs alleged that their email and Dropbox information was private.

Unfair Competition Law claim

The court denied the motion to dismiss the Unfair Competition Law claim. Because plaintiffs adequately alleged a violation of the Computer Fraud and Abuse Act, they also adequately alleged an unlawful business practice under California’s law, which can treat violations of other laws as unlawful practices.

Alter-ego theory

Plaintiffs sought to hold Truinfo liable for Panchumarthi’s alleged actions. The court characterized this as “reverse piercing,” rather than ordinary alter-ego liability. The court stated that California courts generally reject reverse-piercing claims against corporations and that plaintiffs’ allegations concerning the required unity of ownership and prevention of fraud or injustice were conclusory. The court dismissed plaintiffs’ assertion of alter-ego or reverse-piercing liability against Truinfo without leave to amend.

Disposition

The court granted in part and denied in part the defendants’ motion to dismiss. Claims One, Two, Three, Four, Five, Six, Nine, and Ten were dismissed without leave to amend. Claim Seven was dismissed with leave to amend. Claim Eight was dismissed without leave to amend only to the extent it alleged a breach of the obligation not to compete, and the motion was otherwise denied as to that claim. Claim Eleven was dismissed without leave to amend only to the extent it was based on the employment and contractor agreements, and the motion was otherwise denied as to that claim. The court denied the motion to dismiss Claims Four and Twelve, while separately dismissing the alter-ego assertion against Truinfo. Plaintiffs could file a third amended complaint by February 14, 2020, but could not add claims or parties without further permission.