The Best Label Company v. Custom Label & Decal, LLC

Background

Best Label Company, Inc. was acquired by Resource Label Group, LLC through an asset purchase. Resource Label Group formed plaintiff Best Label Company, LLC to complete the transaction. The agreement provided that Best Label Company, Inc.’s employees would be terminated when the assets transferred, with the expectation that the new company would soon offer them employment.

The plaintiff alleged that defendants—including Custom Label & Decal, LLC and former employees Daniel Crammer, Travis Gilkey, Scott McKean, and Gareth Cole—diverted business, solicited employees, misappropriated trade secrets, accessed computer data without permission, and infringed trademarks. The defendants moved for partial summary judgment on seven of the plaintiff’s eleven causes of action.

Summary-judgment standard

The court applied the Rule 56 standard. Summary judgment is appropriate when there is no genuine dispute about a fact that matters to the outcome and the moving party is entitled to judgment under the law. The court must view the evidence and reasonable inferences in favor of the party opposing the motion, while credibility determinations and weighing evidence are generally functions for a jury.

Trade-secret claim

The plaintiff identified four categories of alleged trade secrets: customer and prospective-customer information; marketing and strategic-planning documents; customer-specific label-making processes; and employee salary and compensation information. The defendants did not seek summary judgment on the customer-information category, and the plaintiff stated that its claim did not depend on the marketing and strategic-planning category. The court nevertheless granted summary judgment on the marketing and strategic-planning, label-making-process, and salary-and-compensation categories.

The court found that the plaintiff had not described the alleged label-making processes and compensation information with enough detail to distinguish them from general knowledge in the label-making industry. Password protection alone did not establish trade-secret status. The plaintiff also did not provide evidence that the information had independent economic value because it was not generally known.

Duty of loyalty, interference, and unfair competition

The defendants argued that the claims for breach of the duty of loyalty, unlawful interference with prospective economic advantage, and statutory unfair competition were superseded by California’s Uniform Trade Secret Act. The court rejected that argument because the plaintiff based those claims on alleged statements and conduct to divert business and solicit employees while the defendants were allegedly still working for the plaintiff. The court described those allegations as independent of the trade-secret allegations, even though they might ultimately be unsuccessful at trial.

The court denied summary judgment on all three claims. For the duty-of-loyalty claim, the parties disputed whether Gilkey, Cole, and McKean became employees of Best Label Company, LLC after the asset purchase. Evidence that they continued going to the office and received payments created a factual dispute. The court also noted that Crammer undisputedly owed Best Label Company, Inc. a duty of loyalty before his resignation. The court found factual disputes about whether the individual defendants diverted business opportunities or improperly solicited employees while still working for the plaintiff.

California Penal Code section 502 claim

The court granted summary judgment on the claim under California Penal Code section 502, which addresses knowingly accessing a computer system without permission and taking, copying, or using data. The court found that the plaintiff could not establish the required use of data without relying on the same conduct underlying its trade-secret claim. The claim was therefore superseded by the California Uniform Trade Secret Act.

Trademark claims

The court granted summary judgment on the federal and common-law trademark-infringement claims. The claims concerned the “Beer Labels Done Right” logo and graphic, which McKean created and used during his employment with Best Label Company, Inc. The court found that Best Label Company, LLC and Resource Label Group had not used the marks since McKean left in 2018.

The court treated abandonment as an affirmative defense. It concluded that the plaintiff had not offered evidence that it intended to resume using the marks and noted that nothing prevented the plaintiff from using them. The court therefore granted summary judgment on the tenth and eleventh causes of action.

Other rulings and disposition

The court’s final rulings were:

- First cause of action, trade secrets: summary judgment granted for the marketing and strategic-planning, customer-specific label-making-process, and salary-and-compensation categories; summary judgment was not granted on the customer and prospective-customer-information category because it was not at issue. - Second cause of action, breach of duty of loyalty: summary judgment denied. - Fifth cause of action, unlawful interference with prospective economic advantage: summary judgment denied. - Sixth cause of action, statutory unfair competition: summary judgment denied. - Ninth cause of action, California Penal Code section 502: summary judgment granted. - Tenth and eleventh causes of action, trademark infringement: summary judgment granted.

The court also granted the parties’ motions to file materials under seal and denied the plaintiff’s motion to supplement the record. The order was signed by Judge Susan Illston on April 20, 2022.