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Joseph Oat Holdings, Inc. v. RCM Digesters

October 14, 2009

JOSEPH OAT HOLDINGS, INC., BIOTHANE CORPORATION, ROBERT SAX, MICHAEL HOLTZ, GRAIG ROSENBERGER, MARTIN KAPLAN, RONALD KAPLAN, JOHN MURPHY, AND RCM BIOTHANE, LLC, PLAINTIFFS,
v.
RCM DIGESTERS, INC. AND MARK MOSER, DEFENDANTS/ COUNTERCLAIMANTS/THIRD-PARTY PLAINTIFFS.



The opinion of the court was delivered by: Hillman, District Judge

OPINION

Plaintiffs Joseph Oat Holdings, Inc. ("JOHI"), Biothane Corporation ("Biothane"), Robert Sax, Michael Holtz, Graig Rosenberger, Martin Kaplan, Ronald Kaplan, John Murphy, and RCM Biothane filed a Verified Complaint consisting of eight claims against Defendants RCM Digesters, Inc. ("RCM Digesters") and Mark Moser. Defendants filed an answer, a verified counterclaim consisting of 29 counts, and a third-party complaint*fn1 consisting of two counts. On March 31, 2009, this Court denied plaintiffs' motion for summary judgment on ten counts in defendants' counterclaim and both counts of the third-party complaint. Now before the Court are plaintiffs' and defendants' motions for partial summary judgment on defendants' counterclaims regarding plaintiffs' copying of defendants' computer files. For the reasons expressed below, plaintiffs' motion will be denied, and defendants' motion will be granted in part and denied in part.

BACKGROUND & DISCUSSION

Moser was the founding stockholder of RCM Digesters, a business that promoted, designed, built, and sold anaerobic digester systems.*fn2 Contemporaneously, Biothane existed as a multinational corporation specializing in the biological treatment of industrial wastewater. As a result of a series of agreements between the parties, Biothane's principals and Moser (who was RCM Digesters' principal) created RCM Biothane pursuant to a Certificate of Formation dated February 17, 2005. JOHI was to own 80% of RCM Biothane, and Moser was to own 20%.

A year and a half later, due to what plaintiffs call a "stormy relationship," the parties agreed to terminate the operation of RCM Biothane. On August 7, 2006, the parties entered into a separation agreement (the "Separation Agreement"), which was signed by the six individual plaintiffs and Moser. At that point RCM Biothane ceased to exist, and the two entities reverted back to their original independent status as Biothane Corp. and RCM Digesters.*fn3

The main issue in this case,*fn4 which constitutes more than 40 counts of alleged violative conduct by the parties, is the validity of the Separation Agreement and its effect on the parties' prior agreements and duties going forward. In the Court's March 31, 2009 Opinion, summary judgment as to the validity of the Separation Agreement was denied, and all claims concerning that agreement, including defendants' claims of breach of fiduciary duty, unjust enrichment, libel, and intentional infliction of emotional distress, are proceeding to a trial by jury.

The current issue before the Court is plaintiffs' copying and alleged destruction of defendants' computer files after August 7, 2006, the date of the Separation Agreement and the date both sides agree marked the end of their joint venture. When RCM Biothane was formed in April 2005, defendants' computers in Oakland, California were connected to plaintiff JOHI's computer system through a virtual private network (VPN). All of defendants' files continued to reside on the Oakland "cube" server, but JOHI had access to those files through the VPN. After the parties agreed to dissolve RCM Biothane, and even after plaintiffs filed their complaint against defendants on September 20, 2006 and obtained a TRO which enforced the dissolution, the parties' computers were still connected via the VPN, despite the fact that the computer system in Oakland reverted back to RCM Digesters. As reflected in the Separation Agreement*fn5 and the TRO hearing*fn6, held on September 29, 2006, this presumably was a result of the time necessary to wind down the affairs of RCM Biothane including the restoration of separate computer systems.

In October 2006 through November 3, 2006 - after the parties' joint venture had ceased, after plaintiffs had sued in this Court to enforce that dissolution, and after this Court had granted their request for certain injunctive relief but while the computer systems were still connected for technical reasons - plaintiffs admit that they copied approximately 152,000 documents contained on defendants' cube server in Oakland.*fn7 They did so without any notice to this Court or their adversaries - an act both brazen and surreptitious at the same time.

Importantly, the documents copied included defendants' proprietary business information created after the dissolution of RCM Biothane, including contracts, grants, and designs. Defendants did not find out about plaintiffs' copying of their files, however, until a year later on October 18, 2007 during the deposition of Stephen Murphy, despite defendants' requests for documents ten months earlier. Following that revelation, defendants were granted leave to amend their counterclaims against plaintiffs to include claims pursuant to California Penal Code § 502, Computer Data Access and Fraud Act (Count 19), N.J.S.A. 2A:38A-1, Computer Related Offenses Act (Count 20), California Business & Professional Code § 17200, California Unfair Competition (Count 21), and for common law conversion (Count 22). Defendants also sought discovery violation sanctions against plaintiffs.

On June 27, 2008, Magistrate Judge Joel Schneider issued an Opinion and Order on defendants' motion for sanctions. Judge Schneider considered plaintiffs' explanation and justification for the file copying: (1) Moser was unresponsive to plaintiffs' proposed plan to sever the connection, and they copied the files in order to prevent a security risk if Moser were to disconnect the computers in an unsafe way; (2) Moser knew the computers were still connected, so he assumed the risk of his files being copied; (3) defense counsel sent plaintiffs a "litigation hold" letter on October 11, 2006, which imposed on them a duty to preserve all documents within their possession, custody or control; (4) plaintiffs owned the joint computer system, and therefore had the right to access anything on the network. (Op. at 9.) Judge Schneider then considered defendants' opposition to plaintiffs' proffered reasons: (1) plaintiffs' preservation excuse is an after-the-fact concoction to justify their illegal actions; (2) they deny plaintiffs' contention that they did not use the documents for litigation advantage; and (3) they deny plaintiffs' contention that they had a right to access defendants' cube server in Oakland. (Op. at 9-10.)

In the context of determining whether plaintiffs committed a discovery violation, and determining whether plaintiffs' complaint should be dismissed for fraud on the court, Judge Schneider found that plaintiffs' conduct, while secretive, did not warrant the imposition of the ultimate penalty of the dismissal of their complaint because there was no evidence that plaintiffs' conduct was to obtain a litigation advantage. Instead, Judge Schneider found that plaintiffs' conduct was done for a business advantage. Judge Schneider also found, however, plaintiffs' conduct to be "troubling," and ordered plaintiffs to reimburse defendants for reasonable out-of-pocket costs defendants incurred, although not attorneys' fees. (Op. at 19.) Judge Schneider further commented that his ruling on the discovery issues did not prejudge defendants' legal claims.*fn8

Based on essentially the same arguments and evidence advanced with regard to defendants' motion for discovery sanctions, both plaintiffs and defendants have moved for summary judgment in their favor on defendants' claims arising out of plaintiffs' copying of defendants' computer files. In defendants' motion, they state that they seek judgment in their favor on liability, and with regard to damages, they are only currently seeking equitable relief - namely, the return of all data and the enjoining of plaintiffs' use of that data - because the calculation of money damages is for the jury to decide.*fn9 (Docket No. 181 at 30.)

The Court first turns to whether plaintiffs are liable substantively for defendants' four claims related to the file copying, each of which will be addressed in turn.*fn10 In this analysis, the Court will distinguish the copying of those documents that were created after August 7, 2006 from those that were created before. This distinction is necessary because the documents plaintiffs copied from defendants' computer server that were created after the August 7, 2006 business divorce are undisputably the sole property of defendants, while the right - or joint right -to the documents created prior to the dissolution of RCM Biothane is not as clear. The Court will then consider, in the context of damages, defendants' request for injunctive relief.

1. Count 19 - California Penal Code § 502, Computer Data Access and Fraud Act

Defendants claim that plaintiffs violated California Penal Code § 502(c), Computer Data Access and Fraud Act, when they secretly accessed and copied defendants' computer files.*fn11 Section 502(c) provides, in relevant part,

[A]ny person who commits any of the following acts is guilty of a public offense:

(1) Knowingly accesses and without permission alters, damages, deletes, destroys, or otherwise uses any data, computer, computer system, or computer network in order to either (A) devise or execute any scheme or artifice to defraud, deceive, or extort, or (B) wrongfully control or obtain money, property, or data.

(2) Knowingly accesses and without permission takes, copies, or makes use of any data from a computer, computer system, or computer network, or takes or copies any supporting documentation, whether existing or residing internal or external to a computer, computer system, or computer network. . . .

(4) Knowingly accesses and without permission adds, alters, damages, deletes, or destroys any data, computer software, or computer programs which reside or exist internal or external to a computer, computer system, or computer network. . . .

(6) Knowingly and without permission provides or assists in providing a means of accessing a computer, computer system, or computer network in violation of this section.

(7) Knowingly and without permission accesses or causes to be accessed any computer, computer system, or computer network.

West's Ann. Cal. Penal Code ยง 502(c). Thus, the primary issue with regard to most subsections of this statute is whether any disputed issue of material fact exists with regard to defendants' claim that plaintiffs "knowingly and without permission" ...


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