Sylabs, Inc. v. Rose

Background

Sylabs, Inc. asserted 21 causes of action against 12 named defendants, including Gregory Kurtzer, Julia Kurtzer, Robert Adolph, Matthew Hayden, Erin Fong, CTRL IQ, Inc. doing business as CIQ, Open Drives, Inc., David Buss, Marlin Prager, Joel Whitley, IAG Fund II, LP, and IAG Capital Holdings II, LLC. Sylabs alleged that defendants took its intellectual property and other valuable non-public information, helped establish CIQ as a competing company, and obtained patents using technologies based on that information.

The court had previously dismissed Sylabs’s claims with leave to amend. Sylabs then filed a first amended complaint. Two groups of defendants filed motions to dismiss that complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim.

Release

The court denied a request for judicial notice concerning a purported release that defendants said excused Gregory Kurtzer from liability. The court held that the non-public release was not a fact that could be accurately determined without reasonable dispute. The court also held that Sylabs had not incorporated the release into its complaint, so the court would not consider it when evaluating the motions to dismiss.

Trade-secret claims

The court held that Sylabs adequately identified five alleged trade secrets: SingularityPRO, SIF technology, Singularity Enterprise, Fuzzball, and Armored Containers. It also held that Sylabs adequately alleged misappropriation by CIQ, Gregory Kurtzer, and Matthew Hayden. The court concluded, however, that the allegations supported harm only for the SIF technology, Fuzzball, and Armored Containers trade secrets.

The court therefore allowed Sylabs’s claims under the Defend Trade Secrets Act and the California Uniform Trade Secrets Act to proceed against CIQ, Gregory Kurtzer, and Matthew Hayden, but only to the extent they concerned those three trade secrets. It dismissed those claims as to the remaining defendants and as to the other alleged trade secrets, without leave to amend.

Computer-access claim

The court dismissed Sylabs’s claim under the Computer Fraud and Abuse Act because the first amended complaint did not identify which provisions of that statute defendants allegedly violated. The court gave Sylabs leave to amend this claim.

Racketeering claims

The court dismissed Sylabs’s claims under Sections 1962(c) and 1962(d) of the Racketeer Influenced and Corrupt Organizations Act without leave to amend. Sylabs relied on alleged trade-secret theft as the required racketeering acts, but the court held that the alleged thefts were part of one episode with one purpose rather than at least two separate acts forming a pattern. Because the Section 1962(c) claim failed, the Section 1962(d) claim also failed.

Contract and intentional-misrepresentation claims

The court dismissed the breach-of-contract claims against Open Drives, Inc., David Buss, and Marlin Prager with leave to amend. As to Open Drives, the court found no non-conclusory allegations that it disclosed or used Sylabs’s trade secrets or confidential information. As to Buss and Prager, the court noted that they did not sign the agreement between Sylabs and Open Drives and were not identified as parties to it.

The court also dismissed Sylabs’s intentional-misrepresentation claims with leave to amend. It held that the claims sought recovery for purely economic harm and were based on alleged failures to keep the same promises contained in the contracts. The court concluded that the economic-loss doctrine barred those claims as pleaded.

Other state-law claims

The court held that the California Uniform Trade Secrets Act preempted Sylabs’s remaining state-law claims, including claims based on alleged misappropriation of non-trade-secret information. Sylabs had not shown that the information was made property under a different legal rule or that the alleged wrongdoing was materially different from the conduct underlying its trade-secret claim. The court dismissed the remaining state-law claims without leave to amend.

Leave to amend and other rulings

The court granted limited leave to amend. It allowed amendment of the Computer Fraud and Abuse Act, breach-of-contract, and intentional-misrepresentation claims. It denied leave to amend the Defend Trade Secrets Act and California Uniform Trade Secrets Act claims, the racketeering claims, and the remaining state-law claims. Sylabs could not add new claims or parties without separately obtaining permission from the court.

The court did not strike any portion of the first amended complaint at that time. It also admonished Sylabs about exceeding a page limit, filing a very lengthy complaint, and continuing to rely on an outdated pleading standard. The court warned that it would consider appropriate consequences, including sanctions, if Sylabs continued to misstate the law.

Disposition

The court granted in part and denied in part the motions to dismiss and dismissed the first amended complaint with limited leave to amend. The trade-secret claims survived only against CIQ, Gregory Kurtzer, and Matthew Hayden and only concerning SIF technology, Fuzzball, and Armored Containers. The court dismissed the Computer Fraud and Abuse Act, breach-of-contract, and intentional-misrepresentation claims with leave to amend, and dismissed all other claims without leave to amend. Sylabs’s amended pleading was due by May 29, 2024.