LS3 Inc. v. Cherokee Nation Strategic Programs

• Court: Court of Appeals for the Tenth Circuit
• Decided: August 17, 2022
• Docket: 21-1385
• Status: Unpublished

Opinion

Appellate Case: 21-1385 Document: 010110725724 Date Filed: 08/17/2022 Page: 1 FILED United States Court of Appeals UNITED STATES COURT OF APPEALS Tenth Circuit

FOR THE TENTH CIRCUIT August 17, 2022 _________________________________ Christopher M. Wolpert Clerk of Court LS3 INC., a Maryland corporation,

Plaintiff - Appellant,

v. No. 21-1385 (D.C. No. 1:20-CV-03555-PAB-NYW) CHEROKEE NATION STRATEGIC (D. Colo.) PROGRAMS, L.L.C., an Oklahoma limited liability company; CHEROKEE FEDERAL SOLUTIONS, L.L.C., an Oklahoma limited liability company; CHEROKEE SERVICES GROUP, LLC, a Cherokee Nation limited liability company; KELLY CARPER; DONALD LOPEZ; GWYNETH ROBE; DANIEL CERMAN; STEVE CLARK; DEBRA DIX; LEVI FLINT; GREGORY FRISINA; SIRISHA GANTI; WAYNE HOPKINS; ERICA HOPPE; ALAN HUGGENBERGER; JAKEB HUGGENBERGER; RONALD JACOBSON; KARL LONG; WILLIAM MCKINNEY; ISAAC MIRELES; KEVIN MUIR; FREDERICK PETERS; CAROL SCHREINER; REX STEFFEN; NICHOLAS STEVENS,

Defendants - Appellees. _________________________________

ORDER AND JUDGMENT* _________________________________

* After examining the briefs and appellate record, this panel has determined unanimously to honor the parties’ request for a decision on the briefs without oral argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore submitted without oral argument. This order and judgment is not binding precedent, Appellate Case: 21-1385 Document: 010110725724 Date Filed: 08/17/2022 Page: 2

Before MATHESON, BACHARACH, and MORITZ, Circuit Judges. _________________________________

LS3, Inc. sued Cherokee Nation Strategic Programs, L.L.C.; Cherokee Federal

Solutions, L.L.C.; and Cherokee Services Group, LLC (collectively the “Cherokee

Defendants”); and 22 former LS3 employees (the “Individual Defendants”) for

breach of contract, intentional interference with contract, civil conspiracy, and

misappropriation of trade secrets. The district court dismissed these claims under

Federal Rule of Civil Procedure 12(b)(6). Exercising jurisdiction under 28 U.S.C.

§ 1291, we reverse in part, affirm in part, and remand for further proceedings.

I. BACKGROUND1

Factual History

LS3 provided services to the U.S. government, primarily through a contract

with the United States Department of Agriculture (“USDA”).2 The Cherokee

Defendants are competitors of LS3. The Individual Defendants are former LS3

employees who now work for the Cherokee Defendants.

except under the doctrines of law of the case, res judicata, and collateral estoppel. It may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1. 1 Except where otherwise noted, these facts come from LS3’s Amended Complaint. We take as true the well-pleaded allegations when considering a motion to dismiss. See Waller v. City & Cnty. of Denver, 932 F.3d 1277, 1282 (10th Cir. 2019). 2 The services related to a “cybersecurity domain that allows agencies to securely access resources across existing systems and emerging platforms.” Identity, Credential, and Access Management (ICAM), Cybersecurity & Infrastructure Security Agency, https://perma.cc/V8P9-69W6. 2 Appellate Case: 21-1385 Document: 010110725724 Date Filed: 08/17/2022 Page: 3

LS3 lost its bid for a USDA contract to Easy Dynamics. One of LS3’s

business partners protested the award. As the protest proceeded, the government

eventually awarded a “bridge contract” to the Cherokee Defendants, a short-term

contract to ensure continuity of services while the government resolved the dispute

over who would secure the longer-term contract.

The Individual Defendants had each signed with LS3 either an “Intellectual

Property, Non-Interference/Non-Solicitation and Non-Disclosure Agreement” (“IP-

NDA”) or an “Employment Agreement” (“EA”). Both included “duty of loyalty”

provisions, which prohibited the Individual Defendants from interfering with LS3’s

existing or prospective business relationships. Under the IP-NDAs, Individual

Defendants agreed not to “participate or otherwise be involved in competition with

LS3 for the award of any contract . . . that Employee knows or should have known

LS3 was competing or preparing to compete for.” Aplt. App. vol. 2 at 134.

Individual Defendants who signed EAs agreed not to “directly or indirectly induce or

attempt to induce any customer . . . of the Company to cease doing business with the

Company.” Id. at 142. The IP-NDAs and EAs also both contained nondisclosure

provisions to protect confidential information. Aplt. App. at 135–36 (nondisclosure

provisions of IP-NDA); id. at 141–42 (nondisclosure provisions of EA).

In August 2020, Linda Evans, a manager for the Cherokee Defendants, sent an

email to LS3’s employees who had been working in support of a previous USDA

contract, including the Individual Defendants (the “Evans email”). It read:

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Dear ICAM Team Member,

You are undoubtedly aware of the protests resulting in a delay in award of the new contract replacing LS3 Technologies as the prime contractor on the ICAM support contract. As a result, Cherokee Nation Strategic Programs (CNSP) has been notified we are being awarded a bridge (interim) contract for four to nine months while the long‐term contract award is completed. CNSP is teamed with two other strategic partners to deliver this work during the bridge period. CNSP and its partners will give employment preference to current team members who apply for employment on the bridge contract.

We understand how difficult this uncertainty is for incumbent personnel on a contract, and our desire is to make this a simple and uneventful transition, both transitioning into the CNSP contract, and transitioning out to the eventual winner of the long‐term contract.

It is our practice, whenever possible, to keep team members’ salaries intact – we want to ensure this is as painless as possible! To that end, please help us help you by doing the following:

1) Please complete the attached information form. . . .

2) Please obtain your most current pay stub digitally, or scan it, or take a photo of it. This should show your rate of pay, hours worked, and the date.

3) Please “reply all” to this email with both the information form and pay stub attached by NOON LOCAL TIME FRIDAY, AUGUST 14. . . .

4) Please tell your co‐workers who may not check their personal email often to check their email and respond as quickly as possible to this request. If they haven’t received this email, please give them my contact information, below, and ask them to reach out to us ASAP. We’re sorry to have to ask for such a rapid response, but we have been given an extremely short timeline by the

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Government for this transition, to ensure all employees are ready to work on the new contract by September 1.

...

One last thing: I understand some of you have expressed concerns about non‐compete agreements you have signed with your current employer. Please note that under Colorado law, it is unlawful to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit. . . .

. . . Please know that CNSP and its partners will not ask you to provide, nor do we want you to provide, any proprietary information from your current employer.

Please note that your salary is not proprietary information and you are free to disclose the compensation you receive as you wish.

After you have reviewed this information, I hope you will feel comfortable discussing your future employment with Team Cherokee and providing the requested information.

Id. at 105–07.

Ms. Evans attached to the email a one-page questionnaire listing 10 questions

regarding job title, ongoing training/certifications, length of employment, hours

worked, work equipment, security clearance, salary, paid time off, and benefits

information. The Individual Defendants responded to the Evans email and answered

the questionnaire. They left LS3 to work for the Cherokee Defendants, either

voluntarily or after LS3 fired them.

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Procedural History

LS3’s amended complaint included claims for (1) breach of contract against

the Individual Defendants; (2) intentional interference with contract against the

Cherokee Defendants; (3) civil conspiracy against all defendants; and

(4) misappropriation of trade secrets against all defendants in violation of Colorado’s

Uniform Trade Secrets Act, Colo. Rev. Stat. § 7-74-101–10, and the federal Defend

Trade Secrets Act, 18 U.S.C. § 1836. The breach of contract claim was based on two

theories—(1) breach of the duty of loyalty and (2) breach of confidentiality. The

defendants filed motions to dismiss. They attached several EAs and IP-NDAs, the

Evans email, and the questionnaire.

The district court, exercising federal question and supplemental jurisdiction,

see 28 U.S.C. §§ 1331, 1367,3 granted the motions. It dismissed

(1) the breach of contract claim, finding the Individual Defendants did not breach either the IP-NDAs or the EAs because the Cherokee Defendants had already won the bridge contract and because none of the information they provided in responding to the Evans email and questionnaire was confidential.

(2) the intentional interference with contract claim because breach of the IP-NDAs or the EAs was a necessary element;

(3) the statutory trade secrets claims because the complaint did not allege misappropriation of any specific trade secrets and the information sought in the questionnaire was not a trade secret; and

(4) the civil conspiracy claim because it was derivative of LS3’s other claims.

3 In its amended complaint, LS3 also asserted the existence of diversity jurisdiction. See 28 U.S.C. § 1332. 6 Appellate Case: 21-1385 Document: 010110725724 Date Filed: 08/17/2022 Page: 7

II. DISCUSSION

“We review de novo a district court’s decision on a Rule 12(b)(6) motion for

dismissal for failure to state a claim.” Waller v. City & Cnty. of Denver, 932 F.3d

1277, 1282 (10th Cir. 2019) (italics, citation, and quotations omitted). We “apply[]

the same standards as the district court” should have applied. Sutton v. Utah State

Sch. for Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999)

“[W]e must accept all the well-pleaded allegations of the complaint as true and

must construe them in the light most favorable to the plaintiff. Waller, 932 F.3d at

1282. “Conclusory allegations are not entitled to the assumption of truth. In fact, we

disregard conclusory statements and look to the remaining factual allegations to see

whether Plaintiff[] ha[s] stated a plausible claim.” Brooks v. Mentor Worldwide LLC,

985 F.3d 1272, 1281 (10th Cir.) (citation and quotations omitted), cert. denied,

142 S. Ct. 477 (2021).

“A claim has facial plausibility when the plaintiff pleads factual content that

allows the court to draw the reasonable inference that the defendant is liable for the

misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “Where a

complaint pleads facts that are merely consistent with a defendant’s liability, it stops

short of the line between possibility and plausibility of entitlement to relief.” Id.

(quotations omitted).

Breach of Duty of Loyalty

LS3, challenging dismissal of its breach of loyalty claim, argues (1) the district

court erred by considering the Evans email, (2) the email was hearsay, and (3) the

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court’s determination that LS3 had already lost the bridge contract when Ms. Evans

sent the email was contrary to the amended complaint. The Cherokee Defendants

argue LS3 forfeited these arguments because LS3 did not raise them in its opposition

to the motions to dismiss and waived them through its “failure to argue for plain error

and its application on appeal . . . [which] surely marks the end of the road for an

argument for reversal not first presented to the district court.” Richison v. Ernest

Grp., Inc., 634 F.3d 1123, 1131 (10th Cir. 2011).

We agree in part. LS3 did not preserve its argument that the district court’s

considering the Evans email was improper, nor did it contend in district court that the

email was hearsay. But LS3 argued in opposition to the motions to dismiss that,

according to its amended complaint, the Evans email preceded the award of the

bridge contract. See Aplt. App. vol. 2 at 182 (“As LS3 stated in the Amended

Complaint, by communicating with and providing information to CNSP about not

only LS3’s business but also about the Employees’ intentions to jump ship, the

Employees enabled and motivated the government to make the switch from LS3 to

[the] Cherokee Defendants.” (quotations omitted)).

The district court, relying on the statement in the Evans email that the

Cherokee Defendants “ha[d] been notified” that they “are being awarded” the bridge

contract, id. at 105, found that the bridge contract had been awarded. Looking at the

specific prohibitions in the IP-NDAs and EAs, the court further concluded that “the

plain language of these duty of loyalty provisions only prevent a current employee

from generally interfering with a current or active business opportunity. But because

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[LS3] had already lost the contracts, [the] [I]ndividual [D]efendants could not have

violated the duty of loyalty provisions.” Id. vol. 3 at 257.

We agree that the duty of loyalty provisions prohibited only interference with

a current or active business opportunity. So if LS3 had already lost the bridge

contract by the time of the Evans email, its claim for breach of loyalty would fail.

But under standards of review applicable to a motion to dismiss, the district

court should not have inferred from the Evans email that LS3 “had already lost the

contracts.” Aplt. App. vol. 3 at 257. When reviewing a document referenced in a

complaint, although a court “may look to the contents of a referenced document itself

rather than solely to what the complaint alleges the contents to be . . . such

documents may properly be considered only for what they contain, not to prove the

truth of their contents.” Emps.’ Ret. Sys. of R.I. v. Williams Cos., 889 F.3d 1153,

1158 (10th Cir. 2018) (quotations omitted). Moreover, the email either did not say

the bridge contract had been awarded or was ambiguous on that point. It said the

contract was “being awarded.” Taking the allegations in the amended complaint as

true and construing them in the light most favorable to LS3, see Waller, 932 F.3d at

1282, we conclude the amended complaint plausibly alleged that LS3 was still

competing for the bridge contract when Ms. Evans emailed the Individual

Defendants.

We therefore reverse the district court’s dismissal of the portion of the breach

of contract claim alleging a breach of the duty of loyalty in the Individual

Defendants’ IP-NDAs and EAs.

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Breach of Confidentiality

LS3’s remaining challenge to dismissal of the breach of contract claim fails.

The district court concluded that none of the information that the Cherokee

Defendants requested from the Individual Defendants in the Evans email or the

questionnaire was confidential, so the court said there was no breach of the

nondisclosure provisions. The email explicitly disclaimed any request for

confidential information. And although LS3 asserts it “does not concede that the

information requested by the questionnaire was not confidential and/or did not seek

or sweep up confidential information,” Aplt. Opening Br. at 22, it has waived that

argument because it has failed to explain why any of the ten questions on the

questionnaire solicited protected information. See Bronson v. Swensen, 500 F.3d

1099, 1104 (10th Cir. 2007) (“[W]e routinely have declined to consider arguments

that are not raised, or are inadequately presented, in an appellant’s opening brief.”).

LS3 argues the district court prematurely dismissed its breach of

confidentiality claim before allowing discovery on what information the Individual

Defendants shared and whether that information was confidential. LS3 points to its

allegations that, “on information and belief,” the information the Individual

Defendants shared “was not limited to” what the questionnaire solicited. Aplt. App.

vol. 2 at 17. LS3’s argument and allegations fall short.

First, LS3 did not advance this argument—that dismissal was premature

without discovery—in its responses to the motions to dismiss in district court and

therefore forfeited it.

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Second, because the amended complaint failed to allege what information the

Individual Employees shared, the conclusory factual allegations “are merely

consistent with,” and not indicative of, the Cherokee and Individual Defendants’

liability, and therefore “stop[] short of the line between possibility and plausibility of

entitlement to relief.” Iqbal, 556 U.S. at 678 (quotations omitted).

Third, LS3 cites no persuasive authority to support its contention that the court

should have allowed discovery before deciding whether to dismiss its claim. And

because LS3 did not adequately plead its breach of confidentiality claim, it was not

entitled to proceed to discovery. See Ghailani v. Sessions, 859 F.3d 1295, 1304

(10th Cir. 2017) (“[T]hreadbare recitals of the elements of a cause of action,

supported by mere conclusory statements . . . no longer suffice to ‘unlock the doors

of discovery’ . . . .” (quoting Iqbal, 556 U.S. at 678)).

Intentional Interference with Contract and Civil Conspiracy

Because the district court dismissed all aspects of LS3’s breach of contract

claim, it also dismissed the intentional interference with contract and civil conspiracy

claims. Both require LS3 to prove breach of the underlying employment contracts.

See Mem’l Gardens, Inc. v. Olympian Sales & Mgmt. Consultants, Inc., 690 P.2d

207, 210 (Colo. 1984) (recognizing liability for intentional interference requires

“inducing or otherwise causing [a] third person not to perform [a] contract” (quoting

Restatement (Second) of Torts § 766 (1977)); More v. Johnson, 568 P.2d 437, 440

(Colo. 1977) (“In a civil conspiracy action, the conspiracy is not actionable per se.”).

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We reverse the dismissal of those claims to the extent they are derivative of LS3’s

claim for breach of the duty of loyalty provisions of the IP-NDAs and EAs.

Misappropriation

LS3’s challenge to the district court’s dismissal of its statutory claims for

misappropriation of trade secrets fails because the amended complaint did not

identify any trade secrets that may have been misappropriated. Under Colorado’s

Uniform Trade Secrets Act, “[t]rade secret’ means the whole or any portion or phase

of any . . . information relating to any business or profession which is secret and of

value.” Colo. Rev. Stat. § 7-74-102. Similarly, under the federal Defend Trade

Secrets Act, information is protectible as a trade secret only if it “derives independent

economic value, actual or potential, from not being generally known to, and not

being readily ascertainable through proper means by, another person who can obtain

economic value from the disclosure or use of the information.” 18 U.S.C.

§ 1839(3)(B).

The amended complaint lacked allegations identifying the information the

Cherokee Defendants acquired from the Individual Defendants that may have been a

protected trade secret. In fact, LS3 acknowledges that it “could not specifically say

exactly what trade secrets were stolen,” but it argues that providing this information

is “the function of the discovery process under a notice pleading standard.” Aplt.

Opening Br. at 27, an argument it failed to make in district court. And LS3 again

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fails to cite convincing authority for its discovery argument.4 Under Iqbal, because

LS3 failed to allege what trade secrets the Cherokee Defendants misappropriated, its

allegations “stop[] short of the line between possibility and plausibility of entitlement

to relief.” Iqbal, 556 U.S. at 678 (quotations omitted). LS3’s failure to state a

plausible claim precluded it from proceeding to discovery. See Ghailani, 859 F.3d at

1304. We therefore affirm the district court’s dismissal of LS3’s claims for

misappropriation of trade secrets.

III. CONCLUSION

We reverse the district court’s dismissal of the portion of LS3’s breach of

contract claim alleging the Individual Defendants breached the duty of loyalty

provisions of the IP-NDAs and EAs. We reverse the dismissal of LS3’s claims for

intentional interference with contract and civil conspiracy to the extent those claims

are derivative of LS3’s claims for breach of the duty of loyalty. In all other respects,

we affirm the judgment of the district court. We remand for further proceedings

consistent with this opinion.

Entered for the Court

Scott M. Matheson, Jr. Circuit Judge

4 In its reply brief, LS3 cites SGS Acquisition Co. Ltd. v. Linsley, 352 F. Supp. 3d 1109, 1122 (D. Colo. 2018), but the district court’s summary judgment order in that case did not address pleading standards to survive a motion to dismiss. 13