Payward, Inc. v. Runyon

Background

Payward, Inc., which operates a global cryptocurrency exchange, sued Nathan Peter Runyon, a former employee. Payward’s amended complaint asserted three claims: (1) violation of the federal Defend Trade Secrets Act, (2) violation of the federal Computer Fraud and Abuse Act, and (3) breach of an employment agreement under state law.

Payward alleged that, after Runyon’s employment ended, he retained a company-issued laptop, accessed information on it, and copied four documents: board minutes, a confidentiality agreement, an employment agreement, and a lengthy email exchange. Payward also alleged that Runyon disclosed or used the information and disclosed Payward’s physical address in documents filed in his state-court action.

Runyon moved under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal for failure to state a legally sufficient claim. He sought dismissal of all three claims or, alternatively, a stay—an order pausing the federal case—while his state-court action proceeded.

Defend Trade Secrets Act claim

The court held that the amended complaint adequately pleaded several theories of trade-secret misappropriation. At this stage, the court assumed that the four documents contained trade secrets because Runyon had not challenged that point in the motion.

The court found that Payward adequately alleged that its physical address qualified as a trade secret for pleading purposes. Although Payward’s allegations about how disclosure of the address could assist hackers were described as speculative, the court concluded that the allegations were sufficient at this stage.

For the board minutes, the court found sufficient allegations that Runyon improperly acquired them by copying them after his employment ended in violation of the confidentiality agreement. The court also found sufficient allegations that he disclosed them to another Payward employee who had not had access to them during her employment. The court rejected, however, Payward’s theory that Runyon unlawfully “used” the board minutes by discussing their contents with Payward while attempting to settle his state-court claims. That alleged conduct was not commercial use, which the court said is required for liability based on use of a trade secret.

The court reached the same result for the confidentiality agreement and the employment agreement. Payward adequately alleged unlawful acquisition based on Runyon’s post-termination copying of those documents, but not unlawful use based on producing them to Payward in the state-court litigation, because that alleged use was not commercial.

For the email exchange, the court likewise found that Payward adequately alleged unlawful acquisition through post-termination copying. The court found the alleged production of the email exchange in the state-court action insufficient to plead commercial use.

Accordingly, the motion was granted to the extent the first claim relied on Runyon’s alleged use of a trade secret by producing it to Payward. That portion of the first claim was dismissed. The motion was denied as to the physical-address theory and the acquisition and disclosure theories involving the documents.

Computer Fraud and Abuse Act claim

Payward alleged that Runyon accessed Payward’s computer system without authorization after his employment ended and copied the four documents. To bring a private claim under the Computer Fraud and Abuse Act on the theory Payward relied on, Payward had to allege at least $5,000 in qualifying loss.

The court found that three alleged categories of costs could qualify as statutory loss: reviewing the copied documents to assess damage, evaluating logs related to Runyon’s departure, and reviewing weaknesses in software used to secure company computers after involuntary terminations. The court found that two other alleged losses did not qualify because they resulted from Runyon’s retention of the laptop, rather than from his alleged unauthorized access and copying.

The court also rejected Runyon’s argument that Payward had to allege “damage,” in addition to loss, to meet the statutory minimum. The court held that Payward could proceed by alleging qualifying loss of at least $5,000. The motion to dismiss the second claim was therefore denied.

Breach-of-contract claim

Payward’s third claim alleged that Runyon breached his employment agreement by failing to return the laptop, retaining and copying confidential information, and disclosing Payward’s business address. The court had supplemental jurisdiction, meaning authority to hear the related state-law claim alongside the federal claims.

Because a substantial part of the trade-secret claim was not dismissed and the Computer Fraud and Abuse Act claim was allowed to proceed in full, the court denied Runyon’s request to dismiss the contract claim for lack of a remaining federal claim. The motion to dismiss the third claim was denied.

California claim-preclusion argument

Runyon separately argued that all of Payward’s claims should be dismissed under California Code of Civil Procedure § 426.30 because they were related to claims in his earlier-filed state-court action. The court rejected that argument. It held that § 426.30 is procedural and does not apply to claims pending in federal court in these circumstances. The court also noted that no judgment had been entered in Runyon’s state-court case. The motion to dismiss under § 426.30(a) was denied.

Request to stay the federal case

Runyon asked the court to stay the action under the Colorado River doctrine, which permits a federal court to pause a case in exceptional circumstances when a related state-court case is pending. The court found that the state action’s earlier filing and the absence of a showing that the state court could not protect Payward’s rights weighed in favor of a stay. But it found that the federal forum was not inconvenient, federal law governed the two federal claims, and there was little risk of duplicative litigation because the state case concerned Runyon’s termination while the federal case concerned conduct after termination.

The court denied Runyon’s request for a stay.

Disposition

Judge Maxine M. Chesney ordered that Runyon’s motion to dismiss and stay was granted in part and denied in part. The motion was granted only to the extent the first claim was based on Runyon’s alleged use of a trade secret by producing it to Payward; that portion of the first claim was dismissed. In all other respects, the motion was denied. Runyon was ordered to answer the claims remaining in the action by February 9, 2021.