MBS Engineering Inc. v. Black Hemp Box LLC

Background

Defendants Black Hemp Box LLC, Jesse Kloberdanz, and Dewey Farms LLC, together called the BHB defendants, moved to dismiss the first amended complaint under Federal Rules of Civil Procedure 12(b)(1), 12(b)(2), and 12(b)(6). Graham McCarthy, who represented himself, filed a separate motion raising overlapping arguments. Rule 12(b)(1) concerns subject-matter jurisdiction, Rule 12(b)(2) concerns personal jurisdiction over a defendant, and Rule 12(b)(6) concerns whether the complaint states a legally sufficient claim.

The first amended complaint's only federal claim was under the Defend Trade Secrets Act. In an earlier ruling, the court had dismissed the plaintiffs' first version of that claim because it did not plausibly identify an actionable trade secret, while allowing amendment. The amended complaint also asserted state-law claims.

Trade-secret claim and related claims

The court held that the amended complaint adequately identified the alleged trade secrets. It described the design and development of the plaintiffs' mobile hemp dryers, including features involving waste heat, bed design, wastewater filtration, and remote access. The court said the complaint gave defendants enough information to understand the subject matter of the alleged trade secrets without requiring the plaintiffs to disclose sensitive details publicly.

The court also found that the plaintiffs plausibly alleged reasonable efforts to maintain secrecy. Those allegations included nondisclosure agreements, confidentiality policies, a secure and password-protected network, and need-to-know access limits. The defendants argued that selling two dryers for resale without prohibiting reverse engineering defeated trade-secret status. The court rejected that argument at the pleading stage, explaining that reverse engineering may be a defense to misappropriation and may raise a factual issue about the reasonableness of secrecy measures, but does not automatically eliminate trade-secret protection.

The plaintiffs also adequately alleged that McCarthy improperly shared protected information with the BHB defendants, including through discussions about confidential dryer information and the alleged disclosure of 8,000 pages to BHB's counsel. As a result, claim one was adequately pleaded, and federal-question jurisdiction existed under 28 U.S.C. § 1331.

The court found supplemental jurisdiction over claims two, three, four, and seven. Supplemental jurisdiction allows a federal court to hear related state-law claims arising from the same core facts. Claims two and seven concerned trade-secret misappropriation under California law and a declaration about ownership of protected trade secrets. Claims three and four concerned McCarthy's alleged breach of a nondisclosure agreement. The court found these claims sufficiently related to the federal trade-secret claim.

Claims five and six

Claim five concerned alleged unpaid loans that James gave Kloberdanz so Dewey Farms could purchase gas turbines. Claim six concerned an equipment purchase agreement under which Black Hemp Box allegedly agreed to pay MBS $550,000 for specified equipment and to purchase additional hemp dryers. The court concluded that these claims arose from different transactions and concerned payment obligations, not the alleged disclosure of confidential information. It therefore declined to exercise supplemental jurisdiction over claims five and six and dismissed them without prejudice.

Other arguments and personal jurisdiction

The court rejected the BHB defendants' request to abstain from deciding the trade-secret dispute based on a separate state proceeding. It found that the defendants had not shown a sufficient basis for abstention at that stage.

The court concluded that a more complete factual record was needed to decide the BHB defendants' challenge to personal jurisdiction. It permitted a brief period of jurisdictional discovery rather than resolving that issue immediately. McCarthy's motion was denied for largely the same reasons. The court also held that the breach-of-nondisclosure-agreement claim against McCarthy was adequately pleaded, rejecting his arguments that the agreement was unconscionable or entered under false pretenses and duress because the amended complaint did not support those conclusions at the pleading stage.

Disposition

The court dismissed claims five and six without prejudice and deferred the personal-jurisdiction decision pending further proceedings. Discovery concerning personal jurisdiction had to be completed by September 13, 2021. The plaintiffs could file a second amended complaint addressing personal jurisdiction and claims five and six by September 27, 2021; no new claims or parties could be added without permission. The court stated that failure to meet the deadline would result in dismissal under Rule 41(b).