Stemcell Technologies Canada Inc. v. StemExpress, LLC

Background

StemExpress asserted amended counterclaims against the plaintiffs, alleging misappropriation of trade secrets, breach of a confidentiality agreement, breach of the implied covenant of good faith and fair dealing, and violation of California’s Unfair Competition Law. The plaintiffs moved to dismiss those counterclaims. StemExpress also asserted claims against Eaves, identified in the opinion as the founder and CEO of Stemcell Tech.

Trade-secret claims

The court held that StemExpress adequately pleaded a claim under the California Uniform Trade Secrets Act (CUTSA). To survive a motion to dismiss, StemExpress had to allege that it owned trade secrets, that the plaintiffs misappropriated them, and that the alleged conduct damaged StemExpress. The court found sufficient detail in StemExpress’s descriptions of its internal donor-screening processes, donor-pool management methods, product batch records, procurement and manufacturing methods, and quality-control testing methods.

The court also found that StemExpress plausibly alleged how the plaintiffs misappropriated the information: after obtaining access to it, the plaintiffs allegedly used it to create a knockoff of StemExpress’s business and replicate its procurement and manufacturing operations. StemExpress also plausibly alleged financial harm. The court therefore allowed the trade-secret claim to proceed at the pleading stage.

Contract claims

The breach-of-contract claim based on the confidentiality agreement survived. The plaintiffs argued that CUTSA displaced the contract claim, but the court explained that CUTSA does not displace contractual remedies.

The claim for breach of the implied covenant of good faith and fair dealing also survived. This covenant is an implied promise in a contract that protects the parties’ reasonable expectations. StemExpress alleged that it entered the confidentiality agreement to share information without losing control over it, while the plaintiffs allegedly entered the agreement to obtain information for the purpose of copying StemExpress’s manufacturing business. The court held that these allegations plausibly showed conduct that frustrated the contract’s purpose and that the claim was not duplicative of the express breach-of-contract claim.

Unfair Competition Law claim

The court dismissed the California Unfair Competition Law claim. Under the court’s analysis, CUTSA displaces civil remedies based on trade-secret misappropriation unless the claim rests on materially distinct wrongdoing. StemExpress’s allegations either described trade-secret misappropriation or breach of contract. The court concluded that the contract-related allegations did not adequately allege that legal remedies were insufficient, a requirement for seeking equitable relief under the Unfair Competition Law in federal court. To the extent the claim was based on trade-secret conduct, it was displaced by CUTSA.

Personal jurisdiction over Eaves

The court dismissed all claims against Eaves for lack of adequately alleged personal jurisdiction. StemExpress did not argue that the court had general jurisdiction over Eaves; it relied on specific jurisdiction based on contacts with California.

The court rejected StemExpress’s attempt to rely on the corporations’ contacts with California because corporate contacts generally cannot be attributed to an officer unless the officer is the corporation’s alter ego. The court found no allegations showing that the corporations were merely Eaves’s instruments or that corporate formalities had been ignored.

The court also held that contracts Eaves signed in his official capacity as CEO did not count as his personal contacts with California. Finally, although an officer’s own wrongful actions can sometimes support jurisdiction, the court found StemExpress’s allegations that Eaves “planned, schemed and conspired” with the corporate entities too conclusory. StemExpress had not plausibly alleged that Eaves was personally involved in the decision-making underlying its claims.

Disposition

Judge Vince Chhabria granted in part and denied in part the plaintiffs’ motion to dismiss the amended counterclaims. The trade-secret, confidentiality-agreement, and implied-covenant claims survived the motion. The California Unfair Competition Law claim and all claims against Eaves were dismissed. The opinion states that the dismissed claims were dismissed without leave to amend, but that StemExpress could request leave to amend later if discovery revealed a basis for the Unfair Competition Law claim or personal jurisdiction over Eaves. The plaintiffs were ordered to answer the counterclaims within 14 days of the order.