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Food Services of America, Inc. v. Carrington

United States District Court, Ninth Circuit

August 23, 2013

Food Services of America, Inc., a Delaware Corporation Plaintiff,
v.
Paul Carrington; et. al. Defendants.

ORDER

G. MURRAY SNOW, District Judge.

Pending before the Court is Plaintiff's Motion for Partial Summary Judgment, (Doc. 105), and Motion for Sanctions, (Doc. 111), and Defendants' Motion for Summary Judgment, (Doc. 109), and Motion to Strike, (Doc. 134). For the reasons discussed below, Plaintiff's Motion for Partial Summary Judgment is granted in part and denied in part, its Motion for Sanctions is granted in part and denied in part, Defendants' Motion for Summary Judgment is denied, and their Motion to Strike is granted.

BACKGROUND

This case involves an employer's claims of misappropriation of trade secrets against former employees. Plaintiff Food Services of America ("FSA") is a national distributor that wholesales food products to operators such as restaurants and schools. (Doc. 106-2, Ex. B (Manuszak Decl.) ¶ 14.) Defendant Paul Carrington began his employment with FSA as a Supplier Information Specialist ("SIS") in September 2008. (Doc. 106, PSOF ¶ 2.) Defendant Elba Rubio had previously joined FSA in May 2008 and was also an SIS at the time of her termination. ( Id. ¶ 3.)

As employees of FSA, Defendants received new hire orientation and materials. ( Id. ¶¶ 4-5.) Among those materials were an FSA Handbook and Arbitration Agreement that Defendants acknowledged and signed. ( Id. ¶¶ 5-6, 10-12.) The Parties dispute whether Defendants were also provided with and signed a Confidentiality Agreement. ( Id. ¶¶ 7-8; Doc. 115, DSOF ¶¶ 7-8.) All three documents included provisions regarding the confidentiality of FSA information and the duty of all FSA employees to keep such information secret. (Doc. 106, PSOF ¶¶ 6, 9, 12.)

Defendants were granted access to FSA information so they could use it as SISs in their dealings with suppliers, customers, and internal personnel. ( Id. ¶ 13.) That information included the following: (1) manufacturer and UPC codes; (2) vendor, customer, and FSA employee contacts and information; (3) product brands, descriptions, and formulae; (4) product cost, pricing, and rebates; (5) product purchase and sales volume; and (6) FSA business strategies. ( Id. ) FSA information is accessible only through its closed and secure system. (Doc. 106-2, Ex. B (Manuszak Decl.) ¶ 23.) Access is restricted to those who have passes and electronic passwords which are granted to employees who need to use the information to perform their job functions. ( Id. )

On March 4, 2011, FSA terminated Rubio's employment for gross misconduct. (Doc. 106, PSOF ¶ 14.) Consistent with its policy regarding terminated employees, upon termination, Rubio's access to FSA's system was cancelled. ( Id. ¶ 15.) As of the close of the business on March 4, Defendants knew that Rubio was no longer authorized to access FSA's system or its information. ( Id. ¶ 16.) That evening, Defendants agreed to have Carrington forward specific FSA information to his and Rubio's personal e-mail accounts from FSA's system. ( Id. ¶ 17.)

On March 5, 2011, Carrington went to FSA's offices when he was not scheduled to work, and obtained access to FSA's system. ( Id. ¶¶ 18-19.) That weekend, Carrington sent approximately 300 e-mail strings to his and Rubio's personal e-mail accounts after Defendants mutually selected which strings to send. ( Id. ¶ 19.) The e-mails included new item requests and customer product information forms in response to operator/customer inquiries, new product information sheets from suppliers, distribution plans and freight matrices, and letters to specific customers containing product offers. (Docs. 119-1-6, Ex. O.) On March 7, FSA also terminated Carrington's employment for gross misconduct. ( Id. ¶ 23.)

FSA sent letters to Defendants on March 8, 2011, demanding the immediate return of electronic or hard copy documents containing FSA information. (Doc. 110, DSOF ¶ 10.) Carrington responded on March 14, stating that he no longer possessed FSA information and had deleted any documents he may have had. ( Id. ¶ 11.) Rubio did not respond to FSA's letter. ( Id. ¶ 13.) Upon receipt of the letters, Defendants knew that they both possessed information that FSA sought. (Doc. 106, PSOF ¶¶ 27-28.)

Months later, FSA investigated Carrington's FSA account and discovered the e-mails he had sent with FSA information to personal accounts in March 2011. (Doc. 110, DSOF ¶ 19; Doc. 133, PSOF ¶¶ 19-20.) On January 24, 2012 an NLRB trial based on Carrington's discharge began. FSA's counsel alleged that it first discovered that Carrington still possessed FSA information and had provided false statements in his response to FSA's March 8 letter on that first trial day. (Doc. 110, DSOF ¶ 26.) FSA asserts that Carrington provided a disc during the morning recess of the trial which contained the information and alerted FSA to the deception. (Doc. 133, PSOF ¶ 26.)

FSA brought this action against Defendants the next day on January 25, 2012. (Doc. 1.) The Complaint alleged the following claims: (1) violation of the Computer Fraud and Abuse Act ("CFAA"); (2) violation of the Arizona Uniform Trade Secrets Act ("AUTSA"); (3) violation of the Arizona Anti-Racketeering Statute; (4) breach of fiduciary duty; (5) conversion; and (6) unjust enrichment. On August 7, 2012, Defendants filed a Motion for Judgment on the Pleadings. (Doc. 32.) The Court granted the Motion as to the CFAA claim but denied it as to the remaining claims. (Doc. 57.) Defendants filed another Motion for Judgment on the Pleadings as to counts three through six on December 2, 2012. (Doc. 72.) The Court granted the Motion and found that FSA's common law tort claims were preempted by the AUTSA because they were based on the misappropriation of confidential information and not saved by the anti-abrogation clause of the Arizona Constitution. (Doc. 95.) The Court denied Defendants' Motion for Reconsideration. (Doc. 135.)

The Parties now move for summary judgment on FSA's remaining AUTSA claim. (Docs. 105, 109.) FSA further moves for sanctions against Defendants for spoliation of evidence, (Doc. 111), and Defendants move to strike expert declarations filed in support of FSA's Motion, (Doc. 134).

DISCUSSION

I. LEGAL STANDARD

Summary judgment is appropriate if the evidence, viewed in the light most favorable to the nonmoving party, shows "that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). Substantive law determines which facts are material and "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." In addition, the dispute must be genuine, that is, the evidence must be "such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248. "[A] party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

Because "[c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge, ... [t]he evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor" at the summary judgment stage. Id. at 255 (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970)); Harris v. Itzhaki, 183 F.3d 1043, 1051 (9th Cir. 1999) ("Issues of credibility, including questions of intent, should be left to the jury.") (internal citations omitted).

Further, the party opposing summary judgment "may not rest upon the mere allegations or denials of [the party's] pleadings, but... must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e); see also LRCiv. 1.10(l)(1) ("Any party opposing a motion for summary judgment must... set[] forth the specific facts, which the opposing party asserts, including those facts which establish a genuine issue of material fact precluding summary judgment in favor of the moving party."). If the nonmoving party's opposition fails to specifically cite to materials either in the court's record or not in the record, the court is not required to either search the entire record for evidence establishing a genuine issue of material fact or obtain the missing materials. See Carmen v. S.F. Unified Sch. Dist., 237 F.3d 1026, 1028-29 (9th Cir. 2001); Forsberg v. P. N.W. Bell Tel. Co., 840 F.2d 1409, 1417-18 (9th Cir. 1988).

When parties file cross-motions for summary judgment, "the court must rule on each party's motion on an individual and separate basis, determining, for each side, whether a judgment may be entered in accordance with the Rule 56 standard." Fair Housing Council of Riverside County v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir. 2001). In fulfilling its duty to review each cross-motion separately, the court must review the evidence submitted in support of each cross-motion. Id.

II. MISAPPROPRIATION OF TRADE SECRETS

A. Existence of Trade Secrets

Arizona has adopted the Uniform Trade Secrets Act, "which codifies the basic principles of common-law trade-secret protection, to govern the resolution of trade-secret issues." Enter. Leasing Co. of Phoenix v. Ehmke, 197 Ariz. 144, 148, 3 P.3d 1064, 1068 (Ct. App. 1999). Arizona recognizes the Restatement of Torts in the absence of controlling authority for guidance as to misappropriation claims. Id. Under the AUTSA, a plaintiff may recover damages for misappropriation of a trade secret. A.R.S. § 44-401-07. The AUTSA defines "trade secret" as follows:

(4) "Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique or process, that both:
(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use.
(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Id. § 44-401. "The threshold determination whether to protect information as a trade secret therefore depends upon the nature of the information and the circumstances surrounding its secrecy and the maintenance thereof." Ehmke, 197 Ariz. at 148 (internal citation omitted). The owner of the information has the burden "to establish that the matter is secret... [and] that it exercised reasonable care to safeguard the secret." Id. at 150.

1. Independent Economic Value

To be entitled to trade secret protection, FSA's information must derive economic value from the fact that it is not generally known to or readily ascertainable by other persons in the industry. See id. at 149 ("Because the hallmark of a trade secret obviously is its secrecy, not only must the subject-matter of the trade secret be secret, it must be of such a nature that it would not occur to persons in the trade or business."). Matters that are public knowledge, such as those available in trade journals or known to principal trade persons, are not safeguarded as trade secrets. Id. In particular, "when a process or idea is so common or widely known that it lacks all novelty, uniqueness and originality, it necessarily lacks the element of privacy required to make it legally cognizable as a trade secret." Id.

Using an FSA-issued computer, Carrington transmitted FSA information to his and Rubio's personal e-mail accounts in March 2011.[1] (Doc. 106, PSOF ¶¶ 18-19.) The e-mails included internal FSA communications and external FSA communications with operators (FSA's customers) and suppliers (manufacturers from which FSA purchases products). Those communications included the following elements of information: manufacturer and UPC codes, brand names and product specifications, product formulae and pricing strategies, rebates, customer contact information, volumes, and pricing, and vendor contact information and data. (Doc. 106, PSOF ¶¶ 13, 30-31.) Defendants contend that some of that information is readily ascertainable; for example, the manufacturer and UPC codes, brand names and product specifications, vendor and customer contact information are generally known to others in the food service industry. FSA argues that even if some of those elements are readily ascertainable, its information is still entitled to protection as compilations of data.

"Although matters of general knowledge cannot be appropriated as secret, a trade secret may consist of a combination of elements even though each individual component may be a matter of common knowledge." Ehmke, 197 Ariz. at 150 (citing Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475 (1974)). A trade secret may include a compilation in which the individual elements "are in the public domain but there has been accomplished an effective, successful and valuable integration of those public elements such that the owner derives a competitive advantage from it." Ehmke, 197 Ariz. at 149 (internal citation omitted). Thus, the analysis depends on whether the compilation as a whole qualifies as a trade secret. Id.

Defendants have submitted under seal the e-mails they transmitted in March 2011. (Docs. 119-1-6, Ex. O.) A number of these e-mails contained new item requests in relation to inquiries from FSA's customers. The e-mails attached customer product information ("CPI") forms. (Docs. 119-1-3, Ex. O ("Exs. A11, A21").) The CPI forms included the name of the customer and contact person(s), the manufacturer, detailed description and quantity/volume of the product, the customer price or distributor cost, and the time period for which this information was active. ( See id. ) Other e-mails attached "new product information sheets" presumably from FSA's suppliers with similar contact information, product detail and pricing per quantity. (Docs. 119-3, Ex. O ("Ex. A23").) One of the e-mails is a memo describing FSA's national distribution plan for selected products sent to its distribution centers. ( Id. ("Ex. A21").) Attached to the memo are spreadsheets containing "freight matrices, " for specific products that list distribution centers and their addresses as well as product price and quantity. ( Id. ) The e-mails further included letters to individual FSA customers containing product offers with details as to quantity, price, purchasing period, and shipping. (Docs. 119-4, Ex. O ("Ex. A27").) Also within the e-mails were informal price/quantity quotes for customers with accompanying product images and specifications. ( Id. ("Ex. A28").)

FSA sets forth a number of facts about the competitive aspects of its industry, none of which have been contested by Defendants. For example, FSA is a distributor that wholesales various foods and supplies to food service operators, ranging from schools to small restaurant chains. (Doc. 106-2, Ex. B (Manuszak Decl.) ¶ 14.) Competition among distributors for the business of operators is generally on product price. Because the cost of food and supplies represents a large percentage of their total cost, operators may switch distributors based on slight variations in price. ( Id. ¶ 20) (declaring that operators will change distributors "solely because the difference in the negotiated price of ground beef from different distributors is one cent per pound"). Hence, in order to offer lower prices to operators, it is critical that FSA pays lower prices to product suppliers. ( Id. ) (declaring that "[a] one cent advantage in cost per pound can result in millions of dollars in sales"). Put simply, FSA relies for its competitive advantage on "the products [it] buy[s], who [it] buy[s] them from, who [it] sell[s] them to, what [it] pay[s] for them, and what [it] sell[s] them for." ( Id. ¶ 25.)

FSA's representatives negotiate prices on all products with operators and suppliers. ( Id. ¶ 17.) There is no preset price list or publicly available catalogue. ( Id. ) FSA maintains proprietary information on "each customer and their individual needs, " product pricing for operators, and "acquisition[] costs" negotiated with suppliers. ( Id. ) In his affidavit submitted in support of FSA's Motion for Summary Judgment, Steve Manuszak, the Senior VP of FSA, states that if this information were disclosed to other distributors, they could use it to make more favorable contracts with operators or suppliers and push FSA out of business. ( Id. ¶ 21.) It would reveal FSA's "manner, method and process of doing business." ( Id. ¶ 25.) Further, such disclosure would be contrary to confidentiality agreements that FSA signs with its partners and would cause those partners to lose trust in FSA. ( Id. ¶ 22.) Defendants do not contest these facts. The information that Carrington transmitted to himself and Rubio thus contained FSA's confidential compilations of data. Those compilations provide a competitive advantage to FSA in that they allow FSA to uniquely serve its customers and are not known by other distributors in the industry. See Ehmke, 197 Ariz. at 148 ("[A] trade secret may consist of a compilation of information that is continuously used or has the potential to be used in one's business and that gives one an opportunity to obtain an advantage over competitors who do not know of or use it."). Even if the information obtained by Defendants contained elements of common knowledge, such as product specifications, it is the combination of those elements, such as what products each customer requested at what price or what FSA bought from suppliers at what cost that provides economic value to FSA.

Further, FSA created and maintained the information through "substantial efforts... such that it would be difficult for a competitor to acquire or duplicate the same information." Calisi v. Unified Fin. Servs., LLC, 232 Ariz. 103, 302 P.3d 628, 632 (Ct. App. 2013); Prudential Ins. Co. of Am. v. Pochiro, 153 Ariz. at 371, 736 P.2d at 1183 (Ct. App. 1987) (stating that a list of customers, "if their trade and patronage have been secured by years of business effort and advertising and the expenditure of time and money, ... is in the nature of a trade secret"). Manuszak declares that the compilations "took millions of dollars and years to develop" over the last 25 years and is the product of the "work [of] thousands of employees." (Doc. 106-2, Ex. B (Manuszak Decl.) ¶ 13.) He further states that the mix of customer, supplier, and product information "has been refined over decades to create our successful business offering in a highly competitive industry." ( Id. ¶ 25.) Thus, the information obtained by Defendants has independent economic value.

Defendants argue that FSA's delay in bringing this suit shows that the information has minimal value to FSA. Defendants acquired the information in March 2011, but FSA did not bring suit until January 2012. That delay, however, does not establish that the information lacks economic value. The undisputed facts show that during that period, FSA approached Defendants to retrieve any information they had acquired and kept after their termination. On March 8, 2011, FSA sent letters to Defendants demanding the immediate return of any hard copy documents containing FSA information and destruction of electronic records with such information. (Doc. 110, DSOF ¶ 10.) Carrington responded on March 14, stating that he did not have confidential FSA information and had deleted any information pertaining to his employment with FSA. ( Id. ¶ 11.) Rubio did not respond to FSA's letter. ( Id. ¶ 13.) Some months later[2], FSA investigated Carrington's FSA account and discovered that he had sent information to personal e-mail accounts in February and March 2011. ( Id. ¶ 19; Doc. 133, PSOF ¶¶ 19-20.) FSA first discovered that Carrington still possessed FSA information when the NLRB trial commenced on January 24, 2012. (Doc. 110, DSOF ¶ 26.) FSA filed this suit the next day on January 25. (Doc. 1.)

FSA did not excessively delay prosecution of its case against Defendants. To the extent it could have investigated Defendants' conduct earlier, any such delay relates to the amount of damages, if any, to which FSA is entitled and not to whether FSA's information has independent economic value.

2. Reasonable Efforts to Maintain Secrecy

"[T]he most important factor in gaining trade-secret protection is demonstrating that the owner has taken such precautions as are reasonable under the circumstances to preserve the secrecy of the information." Ehmke, 197 Ariz. at 150. But the secrecy need not be absolute. Miller v. Hehlen, 209 Ariz. 462, 471, 104 P.3d 193, 202 (Ct. App. 2005) (internal citation omitted). The owner of the secret information need only show that it made reasonable efforts to maintain its secrecy to ensure that it would be difficult for others to discover it without using improper means. Ehmke, 197 Ariz. at 150 (citing K-2 Ski Co. v. Head Ski Co., 506 F.2d 471, 474 (9th Cir. 1974)). Reasonable efforts do not require extreme and unduly expensive procedures to protect trade secrets against industrial espionage. Id.

Further, "the owner of a trade secret does not relinquish its secret by disclosure to employees on a necessary basis or by limited publication for a restricted purpose." Miller, 209 Ariz. at 471 (customer list was not trade secret when employer gave it to former employee and did not condition its use); see Calisi v. Unified Fin. Servs., LLC, 232 Ariz. 103, 302 P.3d 628, 632-33 (Ct. App. 2013) (collecting cases); Restatement (First) of Torts § 757 (1939) ("It is not requisite that only the proprietor of the business know [the trade secret]. He may, without losing his protection, communicate it to employees involved in its use."). Nevertheless, a substantial element of secrecy must exist, so that, except by the use of improper means, there would be difficulty in acquiring the information. Restatement § 757.

FSA took several measures to protect the secrecy of its information. FSA made Defendants and other employees aware that they were to keep FSA information confidential. It is undisputed that Defendants received instructions during the new hire process that "all information they had access to as employees of FSA was to be treated as confidential." (Doc. 106, PSOF ¶ 4; Doc. 115, DSOF ¶ 4.) Employees also received an FSA Handbook that had a confidentiality provision. That provision stated the following:

While many of our competitors are free with disclosing their proprietary information, we have a very strict policy in that regard. No one outside the Company needs to know anything about our Company unless the Chairman or President has identified a specific benefit to the Company.... Unauthorized disclosure of information about our company, no matter how harmless it may seem, can be grounds for discipline up to and including termination.

(Doc. 106, PSOF ¶ 6.) Further, as part of their new-hire paperwork, Defendants and other employees signed an Arbitration Agreement. (Doc. 106, PSOF ¶¶ 10-11; Doc. 115, DSOF ¶¶ 10-11.) By signing the Agreement, employees attested to the following:

I know that I may have access to FSA confidential or proprietary information and that the unauthorized use or disclosure of that information may violate applicable law and my duties to FSA. I agree that it is impossible to measure solely in money damages which FSA may suffer if I violated the law or my duties with regard to FSA's confidential or proprietary information. Therefore, I understand and agree that any action by FSA to protect its rights as to its confidential or proprietary information is excluded from this ...

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