Citcon USA, LLC v. Riverpay, Inc.

• Court: Court of Appeals for the Ninth Circuit
• Decided: January 31, 2022
• Docket: 20-16929
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS JAN 31 2022 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

CITCON USA, LLC, No. 20-16929

Plaintiff-counter- D.C. No. 5:18-cv-02585-NC defendant-Appellant,

v. MEMORANDUM*

RIVERPAY INC., a Canadian Corporation; et al.,

Defendants-counter- claimants-Appellees,

and

HANG MIAO,

Defendant,

WEI JIANG,

Counter-defendant.

Appeal from the United States District Court for the Northern District of California Nathanael M. Cousins, Magistrate Judge, Presiding

Argued and Submitted January 13, 2022 San Francisco, California

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. Before: GOULD, BENNETT, and R. NELSON, Circuit Judges.

Citcon sued two former executives (Yue Hua and Kenny Shi), their new

employer (RiverPay), and a former contractor (Hank Miao) for claims under federal

and California law. It now appeals the district court’s dismissal of its duty of loyalty

and defamation claims, decision not to give a jury instruction on joint and several

liability, and denial of its request for punitive damages, costs, attorney’s fees, and

an injunction. Citcon also appeals the judgment for Shi on his breach of contract

counterclaim. We have jurisdiction under 28 U.S.C. § 1291. See also 28 U.S.C.

§ 636(c)(3).

1. Citcon alleged that (1) Shi and Hua created and lied about the Dropbox

account to use Citcon’s confidential transaction information; (2) they sabotaged

Citcon’s system by arranging it in a way that critically depended on Hua’s login;

(3) they participated in the Terry Liu email attack; and (4) Shi engineered the “Miao

incident” and article to damage Citcon’s reputation and recruit Miao for RiverPay.

Citcon’s Dropbox allegations are “based on the same nucleus of facts as the

misappropriation of trade secrets claim for relief,” and therefore these allegations

cannot support a duty of loyalty claim. See K.C. Multimedia, Inc. v. Bank of Am.

Tech. & Operations, Inc., 171 Cal. App. 4th 939, 958 (2009) (quoting Digit. Envoy,

Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1035 (N.D. Cal. 2005)). And because

Citcon did not identify the Terry Liu allegations as a basis for its duty of loyalty

2 claims in its arguments to the district court, its argument about those pleadings is

waived. See Putnam Fam. P’ship v. City of Yucaipa, 673 F.3d 920, 932 (9th Cir.

2012).

The remaining allegations—that Hua and Shi designed Citcon’s system so that

it would critically depend on Hua’s login and that Shi engineered the Miao

incident—state a claim for breach of Hua’s and Shi’s duties of loyalty. Citcon

essentially alleged that Hua and Shi embedded a “logic bomb”—a piece of code

inserted into software that sets off a malicious function when certain conditions are

met, see Computer Security Resource Center, Logic Bomb, https://csrc.nist.gov/

glossary/term/logic_bomb (last visited Jan. 27, 2022)—in Citcon’s system while still

at the company. The logic bomb went off when Citcon disabled Hua’s login and

Citcon’s system crashed; it required no further action by Hua or Shi. And Citcon’s

allegation that Shi engineered the Miao incident to damage Citcon’s reputation and

steal a potential employee also states a breach of duty of loyalty claim against Shi.

See Stokes v. Dole Nut Co., 41 Cal. App. 4th 285, 295 (1995).

Because we reverse and remand on the claims against Shi and Hua, we also

reverse and remand on the breach of duty of loyalty claim against RiverPay based

on vicarious liability.

2. Citcon also appeals the judgment for Shi on his breach of contract

counterclaim. But the district court’s dismissal of Citcon’s breach of duty of loyalty

3 claims did not prohibit Citcon from seeking discovery on defenses to Shi’s

counterclaim. See Fed. R. Civ. P. 26(b)(1). We accordingly affirm the judgment for

Shi on his breach of contract counterclaim.

3. Citcon next appeals the dismissal of its defamation claim. Citcon’s

defamation claim is based on an internet blog article titled How My Life Was Ruined

By A Silicon Valley Startup And Former PayPal & Uber Execs. The district court

properly held that the statements in the blog post were nonactionable statements of

opinion. See Knievel v. ESPN, 393 F.3d 1068, 1074–75 (9th Cir. 2005). In context,

the article is “a personal story, expressing personal impressions, rather than a

presentation of facts.” Citcon USA, LLC v. RiverPay Inc., No. 18-CV-02585-NC,

2018 WL 6813211, at *9 (N.D. Cal. Dec. 27, 2018). It leaves readers “free to draw

their own conclusions about the hiring dispute rather than take the account in the

article as fact.” Id. The post does not try to hide the fact that it is a collection of the

author’s feelings of anger toward Citcon and its executives and uses crass,

hyperbolic, and emotional language. In short, readers can be expected to take the

article with a grain of salt. See Gardner v. Martino, 563 F.3d 981, 986–89 (9th Cir.

2009).

4. Citcon also appeals the district court’s decision not to include a jury

instruction on Hua’s joint and several liability for the trade secret misappropriation

award against RiverPay. Citcon’s damages evidence was presented under a theory

4 of unjust enrichment. The district court properly declined to give Citcon’s proposed

instruction because an instruction on joint and several liability had no foundation in

the evidence presented at trial. See Yan Fang Du v. Allstate Ins. Co., 697 F.3d 753,

757 (9th Cir. 2012).

5. Citcon argues the district court’s decision not to award punitive and

exemplary damages against RiverPay was an abuse of discretion. Because the

California Uniform Trade Secrets Act (“CUTSA”) displaces “alternative civil

remedies based on trade secret misappropriation,” K.C. Multimedia, 171 Cal. App.

4th at 954, we need only consider what punitive damages might be properly awarded

under CUTSA. CUTSA provides that punitive damages are awarded by the court,

not the jury, and punitive damages are not mandatory even if the jury finds the

misappropriation willful and malicious. See Cal. Civ. Code § 3426.3(c). The district

court did not abuse its discretion, as it identified the relevant factors and ultimately

declined to award punitive damages for reasons including RiverPay’s lack of wealth,

the nature of the conduct, and the sufficiency of the $1.5 million compensatory

damages award.

6. On a similar note, the district court did not abuse its discretion by

declining to award costs or fees. See Thomas v. City of Tacoma, 410 F.3d 644, 647

(9th Cir. 2005). We apply California law, which provides for the recovery of

5 attorney’s fees when authorized by contract or statute. Cal. Civ. Proc. Code

§ 1033.5(a)(10).

Even with the jury’s finding of malice, oppression, or fraud, neither the

Defend Trade Secrets Act nor CUTSA requires the court to award attorney’s fees.

See 18 U.S.C. § 1836(b)(3)(D); Cal. Civ. Code § 3426.4. And a party’s partial

success does not establish an abuse of discretion when the district court considered

factors such as the complexity of the case, the efforts of the parties, and the nature

of relief awarded. K-S-H Plastics, Inc. v. Carolite, Inc., 408 F.2d 54, 60 (9th Cir.

1969). Here, the district court explained that its decision was based on balancing

Citcon’s mixed success on its misappropriation claims (Citcon succeeded on its

claim for misappropriation of source code but not as to four other categories of

alleged trade secrets) with Shi’s success on his breach of contract counterclaim and

the failure of Defendants’ trade libel, defamation, and intentional interference with

prospective economic relations counterclaims.

7. Citcon’s final argument challenges the district court’s denial of its

motion for a permanent injunction. Citcon contends that trade secret

misappropriation always leads to at least a presumption of future irreparable harm

because other cases have recognized that injunctions in trade secrets cases seek to

“protect the secrecy of misappropriated information and to eliminate any unfair head

start the defendant may have gained.” Lamb-Weston, Inc. v. McCain Foods, Ltd.,

6 941 F.2d 970, 974 (9th Cir. 1991). Indeed, an important goal of trade secrets law is

to protect a party’s interest in the exclusive use of secrets it has cultivated. But

Citcon’s argument, which is essentially that injunctive relief automatically flows

from a successful trade secret misappropriation claim, is untenable. See Winter v.

Nat. Res. Def. Council, Inc., 555 U.S. 7, 32 (2008) (“An injunction . . . does not

follow from success on the merits as a matter of course.”).

We are not obligated to grant injunctive relief in trade secrets cases and the

sufficiency of the $1.5 million damages award is supported by Citcon’s evidence at

trial. Citcon bore the burden of establishing the necessity of injunctive relief, see

Klein v. City of San Clemente, 584 F.3d 1196, 1201 (9th Cir. 2009), and gives no

reason the $1.5 million award is inadequate. The district court’s decision to deny its

motion for an injunction was not an abuse of discretion.

The district court’s decisions not to include a jury instruction on joint and

several liability, award punitive damages, or issue a permanent injunction and to

have the parties bear their own costs and fees are AFFIRMED. The judgment on

Shi’s breach of contract counterclaim is AFFIRMED. The dismissal order is

AFFIRMED IN PART regarding Citcon’s defamation claim and REVERSED IN

PART regarding the duty of loyalty claims against Shi, Hua, and RiverPay. The

case is remanded for further proceedings consistent with this memorandum

disposition. The parties shall bear their own costs on appeal.