R. R. Donnelley & Sons Co. v. Pappas

• Court: District Court, E.D. California
• Decided: August 9, 2021
• Docket: 2:21-cv-00753
• Status: Unknown

Opinion

1 2 3 4 5 UNITED STATES DISTRICT COURT 6 EASTERN DISTRICT OF CALIFORNIA 7 8 R.R. DONNELLEY & SONS No. 2:21-cv-00753-JAM-AC COMPANY, a Delaware 9 corporation, 10 Plaintiff, ORDER DENYING DEFENDANT’S MOTION TO DISMISS 11 v. 12 JOHN PAPPAS III, an individual, and DOES 1-10, 13 Defendant. 14

15 This lawsuit is the result of a long-time working 16 relationship that was ultimately spoiled by the alleged 17 misappropriation of trade secrets. John Pappas III (“Pappas”) 18 worked for R.R. Donnelley & Sons Company (“RRD”), an integrated 19 communications company that provides business communications, 20 commercial printing, and related services for more than 600,000 21 customers worldwide. Compl. ¶¶ 5, 12, 8, ECF No. 1. RRD alleges 22 that, prior to Pappas’ resignation, he reached out to clients to 23 encourage them to move their work from RRD to his new employer 24 and downloaded and deleted numerous confidential and proprietary 25 RRD documents and trade secrets. 26 As a result, RRD filed suit against Pappas for: (1) breach 27 of the duty of loyalty; (2) and (3) trade secret misappropriation 28 1 under California and Federal law; (4) breach of contract; and 2 (5) computer crimes in violation of the California Penal Code. 3 See generally, Compl. Pappas now moves to dismiss RRD’s first 4 and fifth causes of action for breach of the duty of loyalty and 5 computer crimes, arguing both are preempted by the California 6 Uniform Trade Secrets Act (“CUTSA”). See Mot. to Dismiss 7 (“Mot.”), ECF No. 16. RRD opposes the motion. See Opp’n, ECF 8 No. 19. Pappas filed a reply. See Reply, ECF No. 22. 9 For the reasons set forth below, the Court DENIES Pappas’ 10 motion to dismiss.1 11 12 I. BACKGROUND 13 Pappas was in his eleventh year working for Consolidated 14 Graphics, Inc. when it was acquired by RRD in January of 2014. 15 Compl. ¶¶ 7, 8, 30. Upon acquisition, Pappas became an employee 16 of RRD. Compl. ¶ 8. Pappas worked for RRD as a salesperson 17 until he resigned on January 13, 2021. Compl. ¶¶ 8, 13. Id. 18 RRD requires every employee to sign a confidentiality agreement 19 as part of their onboarding process. Compl. ¶ 21. Pappas signed 20 this confidentiality agreement. Id. In it, Pappas agreed not to 21 disclose “any proprietary or confidential information, knowledge 22 of any invention, or any other data relating to [RRD’s] business, 23 products[,] or operations,” either during, or subsequent to, his 24 employment with RRD. Id. Pappas also agreed that, one week 25 after termination of employment with RRD, he would return all 26

27 1 This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was 28 scheduled for July 6, 2021. 1 hard and digital copies of documents and data relating to RRD’s 2 operations that were still in his possession. Id. 3 RRD’s electronic information and systems use policy also 4 informs employees that they may not “[c]opy, transmit, or use any 5 copyrighted material, trade secret, confidential, or proprietary 6 information belonging to RRD or its clients [], unless doing so 7 as part of an authorized business purpose.” Compl. ¶ 24. 8 Employees are similarly told not to store RRD email or 9 proprietary content or conduct any RRD business using a personal 10 email or over any other service not under an approved contract 11 with RRD. Id. RRD’s policy on confidential information, 12 customer information, and taking of customer property prohibits 13 employees from using information that is confidential or 14 proprietary to RRD, a customer, or vendor for a non-work-related 15 reason or for personal gain. Compl. ¶ 25. 16 Pappas was required to, and agreed to, abide by the above 17 provisions, among others, as a condition of his employment with 18 RRD. Compl. ¶ 29. However, RRD alleges that, on December 11, 19 2020, Pappas accessed RRD’s Google Drive account and “selectively 20 downloaded 784 documents to his personal computer.” Compl. ¶ 32. 21 These files contained confidential and proprietary information 22 and trade secrets. Id. That same day, Pappas also deleted 916 23 filed from RRD’s Google Drive account. Compl. ¶ 33. In 24 addition, RRD alleges that Pappas worked to divert customers and 25 business opportunities away from RRD months prior to his 26 resignation by contacting customers in an effort to convince them 27 to bring their business over to his soon-to-be employer, Dome 28 Printing. Compl. ¶¶ 35–42. 1 RRD contends that Pappas’ actions breached his duty of 2 loyalty and his confidentiality agreement and constituted trade 3 secret misappropriation under the CUTSA, Cal. Civ. Code § 3426 et 4 seq., and the Defend Trade Secrets Act, 18 U.S.C. § 1836 et seq. 5 Compl. ¶ 43. RRD further alleges that Pappas’ unauthorized 6 downloading and deletion of RRD’s data constitutes a crime under 7 California Penal Code § 502(c). Id. 8 9 II. OPINION 10 A. Legal Standard 11 To defeat a Rule 12(b)(6) motion to dismiss, a plaintiff 12 must “plead enough facts to state a claim to relief that is 13 plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 14 U.S. 544, 570 (2007). This plausibility standard requires 15 “factual content that allows the court to draw a reasonable 16 inference that the defendant is liable for the misconduct 17 alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). At this 18 stage, the court “must accept as true all of the allegations 19 contained in a complaint.” Id. But it need not accept as true 20 unreasonable inferences, unwarranted deductions of fact, or 21 conclusory legal allegations cast in the form of factual 22 allegations. See W. Mining Council v. Watt, 643 F.2d 618, 624 23 (9th Cir. 1981). Moreover, dismissal under Rule 12(b)(6) may be 24 based on the absence of a cognizable legal theory. Balistreri 25 v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). 26 B. CUTSA Preemption 27 The CUTSA prohibits and provides remedies for the 28 misappropriation of trade secrets. Henry Schein, Inc. v. Cook, 1 2017 WL 783617, at *2 (N.D. Cal. 2017) (citing Cal. Civ. Code 2 §§ 3426-3426.11). It preempts a common law claim when it is 3 “based on the same nucleus of facts” as a misappropriation of 4 trade secrets claim. Digital Envoy, Inc. v. Google, Inc., 370 5 F.Supp.2d 1025, 1033-35 (N.D. Cal. 2005); K.C. Multimedia, Inc. 6 v. Bank of Am. Tech. & Operations, Inc., 171 Cal.App.4th 939, 7 955 (2009). Three types of cases are not preempted by the 8 CUTSA: (1) breach of contract; (2) criminal remedies; and 9 (3) any claim not based on the misappropriation of trade 10 secrets. Cook, 2017 WL 783617, at *2 (citing Cal. Civ. Code 11 §§ 3426.7(a)-(b)). 12 The preemption inquiry is a factual one, focusing on 13 “whether other claims are no more than a restatement of the same 14 operative facts supporting trade secret misappropriation.” Id. 15 (internal quotation marks and citations omitted). Put another 16 way: The CUTSA preempts a common law claim when, after the facts 17 relating to trade secrets are removed, there are insufficient 18 facts for the claim to survive. Id. (citing Axis Imex, Inc. v. 19 Sunset Bay Rattan, Inc., 2009 WL 55178, at *5 (N.D. Cal. 2009). 20 A determination of trade secret preemption under the CUTSA is 21 appropriate at this stage of litigation. C&H Travel & Tours, 22 Inc. v. Chow, 2018 WL 6427369, at *1 (C.D. Cal. 2018). 23 1. Claim I: Duty of Loyalty 24 Pappas argues that the Court should dismiss the common law 25 claim of a breach of the duty of loyalty against him because it 26 arises out of the same facts as the CUTSA claim. Mot. at 6-8. 27 RRD disputes this, arguing that “claims alleging that an 28 employee transferred his loyalties to a competitor before 1 resigning are not preempted by [the] CUTSA because such a 2 transfer [] is independently wrongful” and separate from the 3 allegation that confidential information was taken. Opp’n at 4. 4 For there to be a breach of the duty of loyalty, there must 5 be: (1) the existence or a relationship that gives rise to the 6 duty; (2) a breach of that duty; and (3) damages. Hong Que, 7 Inc. v. Luu, 150 Cal.App.4th 400, 410 (2007). RRD claims that 8 Pappas, as an employee, owed RRD a duty of loyalty and breached 9 that duty by “divert[ing] business away from RRD”—and over to 10 Dome Printing—while still an RRD employee. Compl. ¶¶ 46, 50. 11 RRD also alleges that Pappas “diverted future [business] 12 opportunities away from RRD and failed to disclose those 13 opportunities to RRD.” Id. As a result, RRD contends it is 14 entitled to damages. Compl. ¶¶ 52, 53. 15 These allegations do not merely restate the same facts as 16 the CUTSA claim. For instance, Pappas “did not necessarily rely 17 on [RRD’s] trade secrets when [he] solicited customers to move 18 their business to [Dome Printing].” Cook, 2017 WL 783617, at *3 19 (a dental supply company’s claim for breach of the duty of 20 loyalty against a former salesperson was not preempted by the 21 CUTSA where the salesperson did not necessarily rely on the 22 company’s trade secrets to solicit customers). These 23 allegations are separate and apart from those dealing with trade 24 secrets and confidential information. Standing alone, they are 25 sufficient to state a claim for breach of the duty of loyalty 26 that is not preempted by the CUTSA. 27 Accordingly, the Court declines to dismiss RRD’s first 28 cause of action for breach of the duty of loyalty against 1 Pappas. 2 2. Claim V: Computer Crimes 3 Pappas argues that the Court should dismiss the claim of 4 computer crimes pursuant to California Penal Code § 502(c) 5 because it also arises from the same nucleus of facts as the 6 CUTSA claim and is, therefore, preempted. Mot. at 8–11. RRD 7 argues that preemption does not apply to a statutory claim 8 brought under § 502(c). Opp’n at 6–8. The California district 9 courts are divided on the issue and a binding authority has not 10 offered clarification. As such, the Court errs on the side of 11 caution and does not find that the claim is preempted. 12 Section 502(c) imposes liability on any person who 13 “knowingly access and without permission takes, copies, or makes 14 use of any data from a computer, computer system, or computer 15 network . . . .” Cal. Penal Code § 502(c)(2). RRD alleges that 16 Pappas violated § 502(c) by “accessing, downloading[,] and then 17 deleting information from RRD’s secured systems and accounts, 18 including its Google Drive account.” Compl. ¶ 83. RRD contends 19 that, in doing so, “Pappas was acting solely for his personal 20 benefit and/or the benefit of his new employer, a competitor of 21 RRD.” Compl. ¶ 87. RRD goes on to allege that this claim “is 22 not predicated on the misappropriation or theft or any 23 confidential, proprietary[,] and/or trade secret information 24 belonging to RRD.” Compl. ¶ 88. 25 In order to prove the CUTSA claim, RRD “will need to show 26 that Pappas accessed the trade secret information through its 27 computer system before leaving Plaintiff for a competitor.” 28 Chow, 2018 WL 6427369, at *2. To prove its § 502(c) claim, RRD 1 will need to show that Pappas “accessed [RRD’s] computer systems 2 in an unauthorized manner.” Id. Moreover, RRD cannot plausibly 3 allege the “use” element of § 502(c) without relying on facts 4 from its CUTSA claim. See, e.g., Compl. ¶ 62 (“Pappas has and 5 will continue to misappropriate, disclose, and use for his 6 benefit and the benefit of his new employer, and to RRD’[s] 7 detriment, RRD’[s] trade secret information unless he is 8 enjoined from doing so.”) (emphasis added). 9 However, it is not clear that the CUTSA claim can preempt a 10 statutory claim arising under the California penal code. The 11 courts in Chow and Cook both dismissed the plaintiffs’ § 502(c) 12 claims as preempted by the CUTSA because they were based on the 13 same nucleus of facts. See Chow, 2018 WL 6427369, at *2; Cook, 14 2017 WL 783617, at *5. By contrast, several other courts have 15 found that the CUTSA may preempt common law and unfair 16 competition claims but cannot preempt a § 502(c) claim. See JEB 17 Group, Inc. v. San Jose III, 2020 WL 2790012, at *4 (C.D. Cal. 18 2020); Heieck v. Fed. Signal Corp., 2019 WL 6873869, at *4–5 19 (C.D. Cal. 2019); Synopsys, Inc. v. Ubiquiti Networks, Inc., 313 20 F.Supp.3d 1056, 1074–74 (N.D. Cal. 2018); Regents of the Univ. 21 of Cal. v. Aisen, 2016 WL 4097072, at *8 (S.D. Cal. 2016) (“[I]t 22 is illogical to think that the California legislature enacted a 23 computer crime provision and deliberately included a civil 24 remedy that would in turn be preempted by other legislation 25 authorizing civil protection for trade secrets.”). 26 In Heieck, the court pointed to the provision of the CUTSA 27 that states, in pertinent part: “This title does not 28 affect . . . criminal remedies, whether or not based upon eee mE IEICE III III EI IE EEE I IID ESO EE

1 | misappropriation of a trade secret.” 2019 WL 6873869, at □□□□ 2 It reasoned that, because § 502(c) is a criminal statute that 3 contains criminal remedies, the third exception to preemption 4 enumerated in the CUTSA applied. Id. In Synopsys, the court 5 declined to find preemption of a § 502(c) claim by the CUTSA 6 | because no California case law “explicitly address[es] whether 7 [the] CUTSA would preempt a statutory claim” as opposed to a 8 common law claim. 313 F.Supp.3d at 1074. Thus, “[a]lbsent 9 additional authority or persuasive argument, [the Court] will 10 not find the [§ 502(c)] claim preempted even if based in part on 11 the misappropriation and subsequent use of [RRD’s] information.” 12 | Id. at 1075. 13 Accordingly, the Court declines to dismiss RRD’s fifth 14 cause of action for computer crimes against Pappas. 15 16 Til. ORDER 17 For the reasons set forth above, the Court DENIES Pappas’ 18 | Motion to Dismiss. 19 IT IS SO ORDERED. 20 Dated: August 9, 2021 21 Me 22 Brink rmucr sunt 23 24 25 26 27 28