Opinion
Civil Case No. 19-cv-02104-CMA-GPG
04-17-2020
SATCOM SOLUTION AND RESOURCES LLC, Plaintiff, v. FRED POPE, SATCOM RESOURCES LLC, and 6SOLE INC. Defendants.
REPORT AND RECOMMENDATION DENYING IN PART AND GRANTING IN PART DEFENDANTS' MOTION TO DISMISS PLAINTIFF'S COMPLAINT
This matter comes before the Court on Fred Pope, Satcom Resources LLC (Satcom Resources), and 6Sole Inc.'s (6Sole) (collectively, Defendants) Motion to Dismiss the Complaint (D. 13), Plaintiff's response (D. 22), and Defendants' reply (D. 24). The motion has been referred to this Magistrate Judge for recommendation (D. 20). The Court has reviewed the pending motion, response, reply, and all attachments. The Court has also considered the entire case file, the applicable law, and is sufficiently advised in the premises. Oral argument is not necessary. This Magistrate Judge respectfully recommends that the motion be DENIED IN PART AND GRANTED IN PART for the reasons specifically set forth below. I. FACTS
"(D. 13)" is an example of the stylistic convention used to identify the docket number assigned to a specific paper by the Court's case management and electronic case filing system (CM/ECF). This convention is used throughout this Report and Recommendation.
Be advised that all parties shall have fourteen (14) days after service hereof to serve and file any written objections in order to obtain reconsideration by the District Judge to whom this case is assigned. FED. R. CIV. P. 72(b). The party filing objections must specifically identify those findings or recommendations to which the objections are being made. The District Court need not consider frivolous, conclusive or general objections. A party's failure to file such written objections to proposed findings and recommendations contained in this report may bar the party from a de novo determination by the District Judge of the proposed findings and recommendations. United States v. Raddatz, 447 U.S. 667, 676-83 (1980); 28 U.S.C. § 636(b)(1). Additionally, the failure to file written objections to the proposed findings and recommendations within fourteen (14) days after being served with a copy may bar the aggrieved party from appealing the factual findings and legal conclusions of the Magistrate Judge that are accepted or adopted by the District Court. Thomas v. Arn, 474 U.S. 140, 155 (1985); Moore v. United States, 950 F.2d 656, 659 (10th Cir. 1991).
The Court briefly summarizes the pertinent facts drawn from the Plaintiff's Complaint here and will elaborate as necessary in the analysis. (See D. 1). While the parties disagree as to many facts, the basic framework of this case is largely undisputed. For purposes of reviewing the Defendants' motion to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), this Court accepts "all well-pleaded factual allegations in the . . . complaint . . . as true and viewed in the light most favorable to the nonmoving party." Brown v. Montoya, 662 F.3d 1152, 1162 (10th Cir. 2011) (quoting Moore v. Guthrie, 438 F.3d 1036, 1039 (10th Cir. 2006)); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Plaintiff Satcom Solution and Resources, LLC, is a Delaware limited liability company that operates an online marketplace for commercial satellite communications equipment and services in Colorado. (D. 1, pp. 1-2). Along with building and managing entire networks and assisting customers, Plaintiff also operates satcomresources.com, which contains resources for budgeting and designing satellite network solutions as well as a team of sales engineers who assist the customers from installation to commissioning of these networks. (Id., pp. 4-5). Plaintiff has over 20,000 systems deployed worldwide. (Id., p. 5).
Because Plaintiff has deployed so many systems, it has developed and maintained data regarding clients and vendors as well as specialized inventory and predictive ordering software. To protect and preserve its confidential information and trade secrets, Plaintiff uses or requires non-disclosure and confidentiality agreements, the return or restriction of access to all company property upon the termination of employment, as well as password protection and physical safeguards. (Id., pp. 13, 23). Moreover, Plaintiff does not share its customer and vendor information with the public. Plaintiff's website, however, does share product information, datasheets, product configurators, and engineering tools with the public. (Id., p. 4).
In January 2018, Pope contacted the President and CEO of Primrose Alloys, Inc. (Primrose), on behalf of Satcom Resources, LLC (Satcom Resources), a Delaware limited liability company, to discuss Primrose providing financing via asset and real estate purchases and forming a new entity, i.e., the Plaintiff. (Id., pp. 5-6). It is undisputed that Satcom Resources and Plaintiff entered into an Asset Purchase Agreement (APA). (D. 29, p. 5). Pursuant to the APA, Plaintiff agreed, among other things, to pay the purchase price of $1,121,551.36 in exchange for Satcom Resources' assets. (D. 1, p. 6). The APA was signed, and Pope executed a Continuing Guaranty agreement in March 2018. (Id., p. 37). On May 4, 2018, Pope created 6Sole LLC, a Colorado limited liability company and converted it to 6Sole Inc. (6Sole) in June 2019. (Id., p. 8; see also D. 26, p. 5).
While CEO of Plaintiff, Pope created an inventory management program called Magnetico. (D. 1, p. 8). During this time, Pope used Plaintiff's equipment and proprietary code to create a competing database called Magneteco and registered the copyright on the source code under 6Sole. (Id.). Furthermore, Pope saved the competing database called Magneteco to Plaintiff's servers. (Id., p. 9). Near the beginning of 2019, Plaintiff discovered that Satcom Resources over-valued its existing inventory by approximately $90,407.02 from what was disclosed in the APA and that $152,471.23 worth of products were either missing or never existed. (Id., p. 9). Plaintiff further determined that Satcom Resources also withheld $87,862.90 in third-party payments sent to Pope rather than to Plaintiff. (Id.).
On May 22, 2019, Pope was terminated. (Id., pp. 9-10). After being notified of his termination, Pope logged into the Plaintiff's computer system, accessed Plaintiff's database, and downloaded Plaintiff's master customer and marketing distribution lists. (Id., p. 10). Thereafter, Plaintiff learned that Pope was operating a website (www.magneteco.com), which listed its intellectual property as owned by 6Sole LLC dba Magneteco. (Id., p. 10).
Plaintiff filed this action on July 22, 2019, against three named Defendants and twenty unknown Defendants. Between July 23 and July 25, 2019, Plaintiff served the three named Defendants. (D. 1). A Scheduling Conference was held on October 29, 2019. (D. 29, D. 30). On February 18, 2020, this Court granted the Defendants' Motion to Stay Initial Disclosures and Discovery Pending Resolution of Defendants' Motion to Dismiss. (D. 33). On April 14, 2020, Plaintiff voluntarily dismissed without prejudice Defendants Does 1-20. (D. 36, p. 1). II. LEGAL STANDARD
Under Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a complaint for "failure to state a claim upon which relief can be granted." FED. R. CIV. P. 12(b)(6). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). To state a claim that is plausible on its face, a complaint must "sufficiently allege[] facts supporting all the elements necessary to establish an entitlement to relief under the legal theory proposed." Forest Guardians v. Forsgren, 478 F.3d 1149, 1160 (10th Cir. 2007).
A claim is not plausible on its face "if [the allegations] are so general that they encompass a wide swath of conduct, much of it innocent," and the plaintiff has failed to "nudge[ the] claims across the line from conceivable to plausible." Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (quoting Twombly, 550 U.S. at 570). And a plaintiff may not rely on mere labels, conclusions, or formulaic recitation of the elements of a cause of action. Twombly, 550 U.S. at 555. During this stage of the litigation, the complaint does not need detailed factual allegations, but it must provide more in order to raise "a right to relief above the speculative level." Twombly, 550 U.S. at 555. "Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679. "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct," the complaint has merely alleged but has failed to show "that the pleader is entitled to relief." Id. (citing FED. R. CIV. P. 8(a)(2)). III. ANALYSIS
The Court has jurisdiction under 28 U.S.C. §§ 1331 and 1367. Plaintiff raises ten claims: (1) violation of 18 U.S.C. § 1836, et seq., by all Defendants for misappropriation of trade secrets; (2) violation of 18 U.S.C. § 2701, et seq., by Pope for obtaining, altering and preventing authorized access to wire or electronic communications; (3) violation of 18 U.S.C. § 1030, et seq., by Pope for computer fraud; (4) violation of Colorado Revised Statutes § 7-74-101, et. seq., by all Defendants for misappropriation of trade secrets; (5) violation of Colorado Revised Statutes §§ 18-4-408 and 18-4-405 by all Defendants for theft of trade secrets; (6) fraud by Pope and Satcom Resources; (7) breach of fiduciary duty by Pope; (8) conversion by all Defendants; (9) breach of the APA by Pope and Satcom Resources; and (10) money due on guaranty by Pope. (D. 1).
A. Trade Secret Misappropriation — Violation of the Defend Trade Secrets Act, 18 U.S.C. § 1836, et seq. (DTSA), and the Colorado Uniform Trade Secrets Act, Colorado Revised Statutes § 7-74-101, et. seq. (CUTSA)
Plaintiff alleges that all the Defendants violated the DTSA and the CUTSA, through Pope's actions, when Pope misappropriated Plaintiff's confidential information, proprietary database, computer source code, email lists, and client and vendor information. (D. 1, pp. 14-16; 22-25). Defendants argue that this cause of action should be dismissed for failure to state a claim because Plaintiff has not pleaded any facts demonstrating how Satcom Resources or 6Sole have allegedly "misappropriated" Plaintiff's trade secrets or client and vendor lists. (D. 13, pp. 2-3). Defendants further argue that Plaintiff's claims against Pope are conclusory and fail to properly allege what information constitutes a trade secret in its first cause of action. (Id., p. 3). Because the pleading requirements under the DTSA and CUTSA are substantially similar, this Court will address these claims concomitantly. See zvelo, Inc. v. Akamai Techs., Inc., No. 19-CV-00097-PAB-SKC, 2019 WL 4751809, at *2 (D. Colo. Sept. 30, 2019).
Under the DTSA, a plaintiff must establish: (1) "the existence of a trade secret that relates to a product or service used in, or intended for use in, interstate or foreign commerce;" (2) "the acquisition of the trade secret, or the use or disclosure of the trade secret without consent;" and (3) "the person acquiring, using, or disclosing the trade secret knew or had reason to know that the trade secret was acquired by improper means." Arctic Energy Servs., LLC v. Neal, No. 18-cv-00108-PAB, 2018 WL 1010939, at *2 (D. Colo. Feb. 22, 2018). The term "trade secret" is defined broadly as:
[A]ll forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices,
formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—
18 U.S.C. § 1839(3).(A) the owner thereof has taken reasonable measures to keep such information secret; and
(B) the information 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.
Similarly, under the CUTSA, a plaintiff must establish that: (1) "he or she possessed a valid trade secret;" (2) "the trade secret was disclosed or used without consent;" and (3) "the defendant knew, or should have known, that the trade secret was acquired by improper means." Gates Rubber Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823, 847 (10th Cir. 1993). Under Colorado law, the term "trade secret" is defined as "the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value." Colo. Rev. Stat. § 7-74-102(4). In order to constitute a trade secret, the owner must "have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes." (Id.). Determining what is a trade secret is a question of fact for the trial court. Doubleclick Inc. v. Paikin, 402 F. Supp. 2d 1251, 1257 (D. Colo. 2005). To make this determination, courts will examine the following factors:
(1) the extent to which the information is known outside the business, (2) the extent to which it is known to those inside the business, i.e., by the employees[,] (3) the precautions taken by the holder of the trade secret to guard the secrecy of the information, (4) the savings effected and the value to the holder in having the information as against competitors, (5) the amount of effort or money expended
in obtaining and developing the information, and (6) the amount of time and expense it would take for others to acquire and duplicate the information.Arctic Energy Servs, LLC, 2018 WL 1010939, at *2 (quoting Doubleclick Inc., 402 F. Supp. 2d at 1257). Indeed, a trade secret can even exist as "a combination of characteristics and components each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage and is a protectable secret." Harvey Barnett, Inc. v. Shidler, 338 F.3d 1125, 1129 (10th Cir. 2003) (quoting Rivendell Forest Prod., Ltd. v. Georgia-Pac. Corp., 28 F.3d 1042, 1045 (10th Cir. 1994)).
Defendants contend that Plaintiff fails to state a claim against Satcom Resources and 6Sole because the actions alleged in the Complaint only pertain to Pope. (D. 13, p. 2). Defendants also contend that Plaintiff's allegations against Pope are conclusory and fail to allege that Magneteco is a trade secret and that Plaintiff failed to claim that Pope misappropriated Magnetico. (Id., pp. 3-4). However, "cases rejecting trade secret claims for lack of specificity are predominantly at later stages in the litigation process" and a court will only dismiss a trade secret claim "for lack of specificity on the pleadings in the most extreme cases." SBM Site Servs., LLC v. Garrett, No. 10-CV-00385-WJM-BNB, 2012 WL 628619, at *10 (D. Colo. Feb. 27, 2012).
First, in the Complaint and its Response, Plaintiff alleges that Pope created the "Magnetico" software while employed by Plaintiff, and then used its equipment and proprietary code to develop a competing software product that was named "Magneteco," and listed 6Sole as the registered owner of the copyrights. (D. 1, p. 8; D. 22, p. 3). Second, Plaintiff alleges in the Complaint that Pope, after being terminated, downloaded its master customer list and a marketing distribution list called "Solar Outage," which contained contact information for 3,429 potential customers. (D. 1, p. 10). Finally, Plaintiff alleged that Pope's e-commerce website, (www.megneteco.com) which advertised marketing techniques that could be used to assist consumers with end purchasing decisions, had components that were "substantially similar to the types of datadriven analytics Magnetico provides." (Id., p. 11).
Taking the allegations as true, this Court finds that Plaintiff has pleaded the existence of trade secrets under the DTSA and the CUTSA. Plaintiff alleged that it protected and kept confidential its customer and vendor lists, had Pope develop the Magnetico software while he was employed by Plaintiff, that Pope stored a copy of the software's code on its server under the name Magneteco, that Pope copyrighted the Magneteco software under 6Sole, and finally Pope downloaded Plaintiff's customer and vendor lists after being notified of his termination. See Wright Med. Tech., Inc. v. Paragon 28, Inc., No. 18-CV-00691-PAB-STV, 2019 WL 4751807, at *3 (D. Colo. Sept. 30, 2019); SBM Site Servs., LLC, 2012 WL 628619, at *10 (finding that plaintiff's allegations contained sufficient detail because it "set forth specific documents and subjects of information that were allegedly misappropriated."). Plaintiff also very clearly protected this information, did not share it with the public, and restricted access to such information after termination of employment. See zvelo, Inc., 2019 WL 4751809, at *3 ("This limited access inside and outside the business demonstrates precautions taken by plaintiff to guard the secrecy of the information."). Moreover, Plaintiff's alleged that Pope hid the copy of Magneteco's code on its server but "filed them in separate folders to obscure its existence from Plaintiff's other employees." (D. 1, p. 9). Finally, Plaintiff alleges that Pope used administration credentials to access Plaintiff's database and download its customer and marketing distribution lists after he was notified of his termination. (Id., p. 10). Thus, Plaintiff's allegations clearly show that acquisition and use of its trade secrets were without consent and that Pope acquired such information and had reason to know that the trade secret was acquired by improper means.
Regarding notice, these allegations contain sufficient detail to satisfy the notice pleading requirement of Federal Rule of Civil Procedure 8 and give 6Sole and Pope fair notice of the basis of Plaintiff's claims. See SBM Site Servs., LLC, 2012 WL 628619, at *10. However, Defendants' argument that Plaintiff has not adequately alleged facts that would show that Satcom Resources "misappropriated" Plaintiff's trade secrets through Pope is well-taken. The Complaint fails to allege how Satcom Resources had any involvement in Pope or 6Sole's actions, acquired or used trade secrets without Plaintiff's consent, or knew or had reason to know that trade secrets were acquired by improper means. See Ciena Commc'ns, Inc. v. Nachazel, No. 09-CV-02845-MSK-MJW, 2010 WL 3489915, at *4 (D. Colo. Aug. 31, 2010) (finding that an employer who is unaware of an employees' misappropriation of another's trade secret cannot be imputed to also have misappropriated trade secrets based on the theory that the employee is an agent of the corporation). Without any specific factual averments showing Satcom Resources' misappropriation of Plaintiff's secrets, this Court cannot find that Plaintiff's allegations satisfy Rule 8's pleading requirements. Thus, regarding Satcom Resources, Plaintiff has failed to adequately plead a claim under the DTSA and CUTSA. In sum, this Court recommends granting Defendants' motion to dismiss Plaintiff's First and Fourth Cause of Action against Defendant Satcom Resources but recommends denying the motion as to Plaintiff's claims against Defendants Pope and Sole6.
B. Violation of the Stored Communications Act 18 U.S.C. § 2701, et seq. (SCA)
Plaintiff alleges that Defendant Pope violated the SCA through Pope's actions because Pope "intentionally accessed without authorization facilities through which electronic communication services are provided" and "such conduct [was] designed to increase their own profits without regard for the confidential nature of the information and potential damage to Plaintiff." (D. 1, pp. 17-19). Defendants argue that this cause of action should be dismissed for failure to state a claim because (1) the SCA does not apply to the information at issue in this case because the data are not electronic communications under the SCA; (2) personal computers are not considered electronic communication service providers under the SCA; (3) Plaintiff cannot show that Pope's actions violated the SCA; and (4) Plaintiff has not alleged that Pope's actions caused damage or caused harm under the SCA. (D. 13, pp. 4-5)
The SCA prohibits anyone from "intentionally access[ing] without authorization," or "intentionally exceed[ing] an authorization to access," any "facility through which an electronic communication service is provided," and "thereby obtain[ing], alter[ing], or prevent[ing] authorized access to a wire or electronic communication while it is in electronic storage in such system." 18 U.S.C. § 2701(a). The SCA creates a private right of action for "any provider of electronic communication service, subscriber, or other person aggrieved by any violation" to "recover from the person or entity, other than the United States, which engaged in that violation such relief as may be appropriate." 18 U.S.C. § 2707(a). This Court is not the first to note that the statute is confusingly worded. See, e.g., Cloudpath Networks, Inc. v. SecureW2 B.V., 157 F. Supp. 3d 961, 986 (D. Colo. 2016) ("For example, how does one 'intentionally access[ ]' something 'without authorization' and 'thereby obtain[ ]. . . authorized access'?").
The SCA incorporates the definitions of terms from the Electronic Communications Privacy Act, 18 U.S.C. § 2510, et seq. 18 U.S.C. § 2711(1). Under the SCA, "electronic communication services" (ECS) is defined as "any service which provides to users thereof the ability to send or receive wire or electronic communications." 18 U.S.C. § 2510(15). The statute defines "electronic storage" as "(A) any temporary, intermediate storage of a wire or electronic communication incidental to the electronic transmission thereof"; and "(B) any storage of such communication by an electronic communication service for purposes of backup protection of such communication." 18 U.S.C. § 2510(17). Courts in other jurisdictions have considered the question of what constitutes a "facility" under the SCA and concluded that the statute applies to companies that provide an electronic communication service, not a company that merely uses an electronic communication service.
The key issues that this Court must analyze pertain to whether Plaintiff alleged facts supporting that it was a "facility through which an electronic communication service is provided" and whether Pope accessed information without authorization or by exceeding authorized access. Unfortunately, the SCA does not define the term "facility" and the Tenth Circuit has yet to define "without authorization" or "exceeds authorization to access" under the SCA. See Bovino v. MacMillan, 28 F. Supp. 3d 1170, 1176 (D. Colo. 2014); Cent. Bank & Tr. v. Smith, 215 F. Supp. 3d 1226, 1235 (D. Wyo. 2016). Regardless, courts in this Circuit and other jurisdictions have examined the meaning of these clauses, which this Court finds persuasive:
Courts have interpreted the statute to apply to providers of a communication service such as telephone companies, Internet or e-mail service providers, and bulletin board services. For example, in Steve Jackson Games, Inc. v. United States Secret Service, we found that the SCA applied to cover the seizure of a computer used to operate an electronic bulletin board system. 36 F.3d 457, 462-63 (5th Cir. 1994). Other circuits have applied the SCA to Internet service providers. See, e.g., Councilman, 418 F.3d at 81-82; Theofel v. Farey-Jones, 359 F.3d 1066, 1075 (9th Cir. 2004).
[. . .]
The Eleventh Circuit's decision in United States v. Steiger provides useful guidance. 318 F.3d 1039, 1049 (11th Cir. 2003). In Steiger, when a hacker accessed an individual's computer and obtained information saved to his hard drive, the court held such conduct was beyond the reach of the SCA. Id. The court found that "the SCA clearly applies . . . to information stored with a phone company, Internet Service Provider (ISP), or electronic bulletin board system," but does not, however, "appear to apply to the source's hacking into Steiger's computer to download images and identifying information stored on his hard-drive." Id. It noted that "the SCA may apply to the extent the source accessed and retrieved any information stored with Steiger's Internet service provider." Id. (emphasis added).
A number of district courts that have considered this question have also concluded that "the relevant 'facilities' that the SCA is designed to protect are not computers that enable the use of an electronic communication service, but instead are facilities that are operated by electronic communication service providers and used to store and maintain electronic storage." Freedom Banc Mortg. Servs., Inc. v. O'Harra, No. 2:11-cv-01073, 2012 WL 3862209, at *9 (S.D. Ohio Sept. 5, 2012) (emphasis added). Recently, the Northern District of California held that a class of iPhone plaintiffs had no claim under the SCA because their iPhones did not "constitute 'facilit[ies] through which an electronic communication service is provided.'" In re iPhone Application Litig., 844 F.Supp.2d 1040, 1057-58 (N.D. Cal. 2012).Cent. Bank & Tr. v. Smith, 215 F. Supp. 3d 1226, 1234-35 (D. Wyo. 2016) (quoting Garcia v. City of Laredo, Tex., 702 F.3d 788, 792-93 (5th Cir. 2012)); see also K.F. Jacobsen & Co. v. Gaylor, 947 F. Supp. 2d 1120, 1124 (D. Or. 2013) ("Succinctly stated, '[t]he [Stored Communications Act] gives network account holders statutory privacy rights against access to stored information held by ISPs.'" (citation omitted)).
[ . . .]
This reading of the statute is consistent with legislative history, as "Sen. Rep. No. 99-541 (1986)'s entire discussion of [the SCA] deals only with facilities operated by electronic communications services such as 'electronic bulletin boards' and 'computer mail facilit[ies],' and the risk that communications temporarily stored in these facilities could be accessed by hackers. It makes no mention of individual users' computers . . . ." In re DoubleClick Inc. Privacy Litig., 154 F.Supp.2d 497, 512 (S.D.N.Y. 2001) (quoting S. Rep. No. 99-541, at 36, reprinted in 1986 U.S.C.C.A.N. 3555, 3590).
Plaintiff argues that the SCA should be extended to "unauthorized access of Plaintiff's business computer network." (D. 22, p. 5). But this argument is unavailing because Plaintiff is not a facility through which an electronic communication service is provided, rather the Plaintiff uses an electronic communication service in order to conduct its business and makes the network available to its employees. See Smith, 215 F. Supp. 3d at 1235 (finding that the bank's business computer network did not constitute a "facility" under the SCA because it was "not an internet service provider or analogous to one."); Noel v. Hall, No. CIV. 99-649-AC, 2012 WL 3241858, at *9 (D. Or. Apr. 27, 2012), report and recommendation adopted, No. 3:99-CV-649-AC, 2012 WL 3241814 (D. Or. Aug. 7, 2012), aff'd, 525 F. App'x 633 (9th Cir. 2013) ("[A] provider of an 'electronic communications service' would be Noel's telephone carrier, whereas he himself would qualify as a user of that service. The fact that Noel made his service available to third parties for their use is of no relevance to this analysis."). Plaintiff relies upon non-binding decisions that personal computers can constitute facilities. However, these cases are factually distinct. In Expert Janitorial, LLC v. Williams, No. 3:09-CV-283, 2010 WL 908740, at *5 (E.D. Tenn. Mar. 12, 2010), the court found that the plaintiff's allegations that the email accounts, user-names, and passwords were stored on plaintiff's computers and that defendants knowingly accessed this stored information without authorization (i.e., the defendants had the necessary information to have unauthorized access to stored electronic communications), was sufficient to state a claim under § 2701 of the SCA. But the court did not conclusively find that the personal and business computers of a law firm qualified as a facility under the SCA. Id. ("Further, it appears to the Court that plaintiff's computers on which the data was stored may constitute "facilities" under the SCA.") (emphasis added). Thus, Plaintiff is not a "facility" under the SCA.
But even if Plaintiff was a qualifying facility under the SCA, there remains the question of whether Pope was authorized to access a wire or electronic communication while it was in electronic storage in such a system. See Bovino v. MacMillan, 28 F. Supp. 3d 1170, 1176 (D. Colo. 2014) ("Although the Tenth Circuit has not addressed the boundaries of authorized access under the SCA, other jurisdictions interpret the SCA with reference to the common law doctrine of trespass."). Here, Plaintiff did not allege that Pope violated the SCA by obtaining, preventing, or altering access to electronic communications while in storage at a facility through which such service is provided, but rather that Pope downloaded documents from its server after receiving notice of termination.
The SCA prohibits conduct whereby a person, without authorization, "obtains, alters, or prevents authorized access." 18 U.S.C. § 2701(a). The SCA does not prohibit obtaining or altering emails without authorization, but obtaining or altering access without authorization. See Sherman & Co. v. Salton Maxim Housewares, Inc., 94 F.Supp.2d 817, 820 (E.D. Mich. 2000). Thus, the SCA prohibits unauthorized access, not "the disclosure or use of information gained without authorization." Id. (emphasis in original); accord Wesley College v. Pitts, 974 F.Supp. 375, 389 (D. Del. 1997) ("a person who does not provide an electronic communication service . . . can disclose or use with impunity the contents of an electronic communication"); Penrose Computer Marketgroup, Inc. v. Camin, 682 F.Supp.2d 202, 211 (N.D.N.Y. 2010) ("[S]ection 2701 outlaws illegal entry, not larceny" (internal quotation marks omitted)). The SCA is therefore violated when "the trespasser gains access to information to which he is not entitled to see, not [when] the trespasser uses the information in an unauthorized way." Int'l Ass'n of Machinists & Aerospace Workers v. Werner-Masuda, 390 F.Supp.2d 479, 497 (D. Md. 2005) (internal quotation marks omitted). As a matter of law, Mrs. MacMillan did not exceed the scope of her authorized access by forwarding or printing emails from Mr. MacMillan's AOL account.Bovino, 28 F. Supp. 3d at 1177-78. Furthermore, Plaintiff neither stated that Pope was not entitled to see the documents he allegedly downloaded nor that those documents were protected under the SCA. Thus, Plaintiff has failed to state a claim that the alleged access by Pope was unauthorized access to a wire or electronic communication while it was in electronic storage. And because Plaintiff has failed to state that they are a facility or that Pope accessed a wire or electronic communication while it was in storage, this Court does not need to proceed further in its analysis. This Court recommends granting the Defendants' motion to dismiss Plaintiff's Second Cause of Action.
C. Violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, et seq. (CFAA)
Plaintiff alleges that Defendant Pope violated 18 U.S.C. §§ 1030(a)(2), 1030(a)(4), 1030(a)(5), 1030(a)(6)(A), 1030(b), and 1030(g) through Pope's actions, because: (1) Plaintiff's servers are used to host its database; (2) the servers are used in interstate commerce and communications, which makes them "protected computers"; (3) Pope accessed these protected computers without authorization and obtained information from them without authorization; and (4) intentionally caused damage. (D. 1, pp. 19-21). Defendants argue that this cause of action should be dismissed for failure to state a claim because: (1) Plaintiff has not pleaded any facts demonstrating how Pope's access was unauthorized or beyond the scope of authorized access because he had administrator credentials; (2) that Pope had only been informed that he was "being terminated" when he allegedly downloaded the data and, therefore, Plaintiff failed to allege that he exceeded the scope of his authorization or that his access was unauthorized; and (3) Plaintiff only alleges that Pope accessed and obtained information from Plaintiff's computers and cannot allege any damage under the CFAA. (D. 13, pp. 5-7).
The CFAA creates a private right of action for:
Any person who suffers damage or loss by reason of a violation of this section may maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief. A civil action for a violation of this section may be brought only if the conduct involves 1 of the factors set forth in subclauses (I) , (II), (III), (IV), or (V) of subsection (c)(4)(A)(i).18 U.S.C.A. § 1030(g). Plaintiff alleges that Pope's conduct satisfies 18 U.S.C. § 1030(c)(4)(A)(i)(I) because he "intended fraud and obtained things of value in excess of $5,000, during a one-year period, in violation of 18 U.S.C. § 1030(a)(4)." (D. 1, p. 20). Therefore, Plaintiff is limited to seeking only economic damages. 18 U.S.C. § 1030(g).
Section 1030(a)(2) prohibits anyone from:
(2) intentionally access[ing] a computer without authorization or exceeds authorized access, and thereby obtains—
(A) information contained in a financial record of a financial institution, or of a card issuer as defined in section 1602(n) of title 15, or contained in a file of a consumer reporting agency on a consumer, as such terms are defined in the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.);
18 U.S.C. § 1030(a)(2). A protected computer is defined, in part, as a computer, "which is used in or affecting interstate or foreign commerce or communication, including a computer located outside the United States that is used in a manner that affects interstate or foreign commerce or communication of the United States" 18 U.S.C. § 1030(e)(2)(B). Furthermore, § 1030(a)(4) prohibits anyone from:(B) information from any department or agency of the United States; or
(C) information from any protected computer
[K]nowingly and with intent to defraud, access[ing] a protected computer without authorization, or exceed[ing] authorized access, and by means of such conduct further[ing] the intended fraud and obtain[ing] anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period;18 U.S.C. § 1030(a)(4). Under § 1030(a)(5), a person is prohibited from:
(A) knowingly causes the transmission of a program, information, code, or command, and as a result of such conduct, intentionally causes damage without authorization, to a protected computer;18 U.S.C. § 1030(a)(5). A person is further prohibited from "knowingly and with intent to defraud traffic[king] (as defined in section 1029) in any password or similar information through which a computer may be accessed without authorization," which affects interstate or foreign commerce. 18 U.S.C. § 1030(a)(6)(A). Finally, a person is subject to punishment for "conspir[ing] to commit or attempts to commit an offense under subsection (a)." 18 U.S.C. § 1030(b).
(B) intentionally accesses a protected computer without authorization, and as a result of such conduct, recklessly causes damage; or
(C) intentionally accesses a protected computer without authorization, and as a result of such conduct, causes damage and loss.
The CFAA defines "exceeds authorized access" as "to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter." 18 U.S.C. § 1030(e)(6). "Damage" is defined as "any impairment to the integrity or availability of data, a program, a system, or information." 18 U.S.C. § 1030(e)(8). "Loss" is defined as "any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service." 18 U.S.C. § 1030(e)(11).
Defendants' arguments pertain to the issue that Plaintiff's allegations fail to support its claim that (1) Pope's actions were either unauthorized or beyond the scope for which he was authorized, and (2) Plaintiff failed to allege any damage beyond Pope's accessing and obtaining information. (D. 13, p. 6). Most notably, Defendants argue that Plaintiff's actions do not establish that Pope exceeded the scope of his access because he (1) had administrator credentials and (2) Plaintiff does not state whether "Pope's employment had actually been terminated at the time he allegedly accessed the computer system and downloaded the lists" and that there is "no allegation that Pope had been instructed not to use Plaintiff's computer systems at the time he allegedly downloaded the customer lists." (Id., pp. 6-7).
This Court finds Plaintiff plausibly alleges violations of §§ 1030(a)(2), 1030(a)(4), and 1030(a)(5) against Pope. And while the Tenth Circuit has not reviewed the question of what constitutes "exceeding authorized access," this district court has held that the phrase "extends to an employee/agent who use[s] his or her access for purposes contrary to the employer/principal's interests." Cloudpath Networks, Inc., 157 F. Supp. 3d at 973; see also Triad Consultants, Inc. v. Wiggins, 249 F. App'x 38, 40-42 (10th Cir. 2007) (holding that in order to state a claim under the CFAA the information must be of value, which the court defined as "relative to one's needs and objectives."). In Cloudpath Networks, Inc., the court noted the distinction between "without authorization" and "exceeds authorized access":
As it turns out, however, construing "authorized" as "permitted to access at least some data on the computer" is the only construction that avoids making "exceeds authorized access" entirely redundant to "without authorization." See F.T.C. v. Accusearch Inc., 570 F.3d 1187, 1198 (10th Cir. 2009) ("Under a long-standing canon of statutory interpretation, one should avoid construing a statute so as to render statutory language superfluous." (internal quotation marks omitted)). Again, the point in dispute here is whether the specific wording of an employer's policies can affect CFAA liability. If it can, then a policy worded as this Court proposed—"Employees are authorized to use company computers solely to the extent they do so for company purposes"—would mean that any employee exceeding that authorization would be without authorization. "Exceeds authorized access" would then be superfluous. By contrast, a distinction remains if "without authorization" means "not permitted to access any data on the computer," and "exceeds authorized access" means "permitted to access at least some data on the computer, but accessing data outside the scope of that permission."Cloudpath Networks, Inc., 157 F. Supp. 3d at 981-82 ("In ordinary life, none of us could get away with saying, 'The IT department gave me a login and I stopped listening after that—I figured I could do whatever I wanted with the computer.'"); see also Cent. Bank & Tr., 215 F. Supp. 3d at 1232 ("This Court agrees with the narrow interpretation of the statute and sees no reason to depart from the interpretation of sister district courts."); MSC Safety Sols., LLC v. Trivent Safety Consulting, LLC, No. 19-CV-00938-MEH, 2019 WL 5189004, at *5 (D. Colo. Oct. 15, 2019) (adopting Cloudpath Networks, Inc.'s CFAA analysis).
Thus, this Court finds Plaintiff's allegations, taken as true, that (1) Pope, without authorization from Plaintiff, accessed Plaintiff's database, and downloaded Plaintiff's master customer and marketing distribution lists; (2) during his employment with Plaintiff, Pope used Plaintiff's equipment and proprietary code to create a competing database called Magneteco, and registered the copyright on the source code under 6Sole; (3) Pope saved the competing database called Magneteco to Plaintiff's servers, and (4) Defendants Pope and 6Sole were either an unauthorized party (i.e., 6Sole) or exceeded authorized access (i.e., Pope) to Plaintiff's computers state claims for relief under §§ 1030(a)(2), 1030(a)(4), 1030(a)(5), and 1030(g). (D. 1, pp. 8-10).
This Court, however, finds the remaining allegations, even taken as true, do not otherwise state claims for relief. First, Plaintiff failed to allege any conspiracy between the Defendants or that Pope trafficked in any passwords or similar information. The CFAA is a federal criminal statute, therefore in order for Plaintiff to establish a conspiracy to violate the CFAA, it must allege that: (1) "the defendant agreed with at least one other person to violate the law"; (2) "one of the conspirators engaged in at least one overt act furthering the conspiracy's objective"; (3) "the defendant knew the essential objective of the conspiracy"; (4) "the defendant knowingly and voluntarily participated"; and (5) "there was interdependence among the members of the conspiracy." DTC Energy Grp., Inc. v. Hirschfeld, 420 F. Supp. 3d 1163, 1185 (D. Colo. 2019) (citing Tenth Circuit Criminal Pattern Jury Instructions § 2.19 (updated 2018) (general conspiracy instruction) and United States v. Schaffer, 586 F.3d 414, 422 (6th Cir. 2009)). Plaintiff has not made any factual allegations supporting the claim that Pope or any other Defendants knew of a plan to violate the law, agreed to violate the law, or that any of the individual Defendants participated in such a plan. And Plaintiff has not made any factual allegations supporting the claim that Pope or any individual Defendants trafficked in passwords or similar information.
Thus, this Court recommends granting Defendants' motion to dismiss Plaintiff's Third Cause of Action against Pope under 18 U.S.C. §§ 1030(a)(6)(A) and 1030(b). However, this Court recommends denying the motion as to Plaintiff's Third Cause of Action against Pope pursuant to 18 U.S.C. §§ 1030(a)(2), 1030(a)(4), 1030(a)(5), and 1030(g).
D. Violation of Colorado Revised Statutes §§ 18-4-408 and 18-4-405 — Theft of Trade Secrets
Plaintiff alleges that all the Defendants violated Colorado Revised Statutes §§ 18-4-408 and 18-4-405 through Pope's actions because Defendants "stole or disclosed to unauthorized persons the trade secrets and confidential information of Plaintiff or, without authority, made or caused to be made a copy or copies of articles representing the trade secrets of Plaintiff." (D. 1, p. 26). First, Plaintiff claims that its civil theft claim arises under Colorado Revised Statutes § 18-4-408, which pertains to the theft of trade secrets. The only penalty provision, however, contained in that statute is criminal. Thus, Plaintiff lacks standing to pursue this claim. C.R.S. § 18-4-408(3)(a); see also Cypress Advisors, Inc. v. Davis, No. 17-CV-01219-MSK-KLM, 2019 WL 7290948, at *4 n.3 (D. Colo. Aug. 28, 2019).
Second, Plaintiff alleges that the Defendants are liable under Colorado Revised Statutes § 18-4-405 for theft of trade secrets. (D. 1, p. 26). Defendants argue that the CUTSA preempts Plaintiff's claim under § 18-4-405. (D. 13, p. 8). Plaintiff, citing Abbott Labs. v. Finkel, No. 17-CV-00894-CMA, 2017 WL 5517399, at *3 (D. Colo. Nov. 17, 2017), argues that, under Federal Rule of Civil Procedure 8(e)(2), it can plead alternative claims even if they are inconsistent and that this Court should not dismiss a claim as preempted until determining whether Plaintiff's client data, marketing material, and source code constitute trade secrets. (D. 22, p. 9). Plaintiff alleged in its Fifth Cause of Action that Defendants "stole or disclosed to unauthorized persons the trade secrets and confidential information of Plaintiff." (D. 1, p. 26). A complaint that merely contains "a claim under Colorado's civil theft statute that is premised upon the theft of a trade secret is preempted by CUTSA." Cypress Advisors, Inc. v. Davis, No. 16-CV-01935-MSK-MEH, 2019 WL 1242331, at *5 (D. Colo. Mar. 18, 2019). Plaintiff counters that the District Court of Colorado, citing Abbott Labs, determined at an earlier stage in the litigation (e.g., pre-discovery) that a claim under Colorado's civil theft statute was not preempted by the CUTSA. Defendants' reliance on Cypress Advisors is misplaced as "[c]ourts in Colorado have found that CUTSA did not preempt a civil theft claim where the civil theft claim was premised upon the theft of items that were not trade secrets." Cypress Advisors, Inc., 2019 WL 1242331, at *5; see also Abbott Labs., 2017 WL 5517399, at *3 (Plaintiff alleged that Defendant stole proprietary "confidential information and/or trade secrets."); SBM Site Servs., LLC v. Garrett, No. 10-CV-00385-WJM-BNB, 2012 WL 628619, at *11 (D. Colo. Feb. 27, 2012).
Here, Plaintiff alleged that trade secrets and confidential information were stolen or disclosed by Pope and 6Sole. Thus, at this stage of the litigation, this Court will not preempt Plaintiff's civil theft claim because it was premised on more than the theft of trade secrets. While the claim may not be preempted by the CUTSA, this Court finds that Plaintiff does not otherwise state claims for relief against all Defendants. In fact, the allegations supporting Plaintiff's Fifth Cause of Action, except in a conclusory fashion, does not mention Defendant Satcom Resources. Therefore, this Court recommends granting Defendants' motion to dismiss Plaintiff's Fifth Cause of Action against Defendant Satcom Resources.
E. Fraud — Intentional Misrepresentation
Plaintiff alleges that between January and March 2018, Defendants Pope and Satcom Resources misrepresented to Plaintiff: (1) certain claims regarding financial control, returns on investments, and potential earnings in order to induce Plaintiff to enter into an asset purchase agreement; (2) "that specific assets held as inventory . . . would pass to Plaintiff as a part of the asset sale on the closing date"; (3) that according to "information provided by Satcom Resources, the existing inventory at the time of closing was worth $382,628.18"; (4) that "Pope and Satcom Resources further misrepresented to Plaintiff that Satcom Resources was transferring orders and existing accounts in the amount of $2,697,599.95 to Plaintiff as of the date of the sale"; and (5) that "Pope and Satcom Resources also warranted that as of the closing date, Satcom Resources would fulfill $415,801.77 worth of pending obligations." (D. 1, pp. 26-28). Defendants argue that: (1) Plaintiff has failed to meet Federal Rule of Civil Procedure 9(b)'s specificity requirements and (2) the alleged misrepresentation are inconsistent with the terms of the APA, which contains an integration clause and a disclaimer regarding reliance on any representations or warranties not contained in the APA, and therefore bar Plaintiff's fraud claims. (D. 13, pp. 8-9).
"Rule 9(b) clearly applies to intentional misrepresentation and fraud." Lynch v. Olympus Am., Inc., No. 18-CV-00512-NYW, 2019 WL 2372841, at *4 (D. Colo. June 5, 2019). The complaint must contain "the time, place and contents of the false representation, the identity of the party making the false statements and the consequences thereof." Denver Health & Hosp. Auth. v. Beverage Distributors Co., LLC, 843 F. Supp. 2d 1171, 1177 (D. Colo. 2012), aff'd, 546 F. App'x 742 (10th Cir. 2013) (quoting Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997)). To state a plausible claim for misrepresentation, a plaintiff must allege: (1) "a misrepresentation"; (2) "of material facts"; (3) "that [is] false"; (4) "made with knowledge of the falsity or with indifference to its truth or falsity"; (5) "and the party claiming fraud relied on the representation"; (6) "had a right to rely on it"; (7) "acted in accordance with the reliance"; and (8) "suffered damages." Beckley v. Skarupa, No. 15-CV-0766-WYD-MEH, 2016 WL 374485, at *5 (D. Colo. Feb. 1, 2016). "When plaintiff is dealing with more than one defendant, he or she is under a Rule 9(b) obligation to specify which defendant told which lie and under what circumstances." Brooks v. Bank of Boulder, 891 F. Supp. 1469, 1477 (D. Colo. 1995).
Plaintiff's Complaint suffers from a lack of specificity regarding the time, date, place, and circumstances surrounding any of its claims. First, Plaintiff alleges that these statements were made sometime between January and March 2018 but failed to allege specifically when and where. (D. 1, p. 26). In its Response, Plaintiff claims that "in January 2018, Pope had discussions with Craig Yarde . . . President and CEO of Primrose Alloys, Inc., regarding the acquisition of Pope's business." (D. 22, p. 10). However, Plaintiff's response still does not allege that any statements made during the meeting were false, made with knowledge of the falsity or with indifference to its truth or falsity, or that Plaintiff had a right to rely on such statements. Plaintiff argues that their allegation that Pope and Satcom Resources statements were false and that they knew they were false in order to induce Plaintiff to pay over $1.1 million satisfies their pleading requirement. (D. 22, p. 12). Plaintiff further argues that such an allegation suffices to state a fraud claim, relying on United Int'l Holdings, Inc. v. Wharf (Holdings) Ltd., 946 F. Supp. 861, 870 (D. Colo. 1996). However, in Wharf, the plaintiffs included an "affidavit—together with the memoranda, board of directors meeting minutes, and the deposition testimony indicating" that the defendant knew that statements were false. Here, Plaintiff has provided no such documentation to support its fraud claim.
Furthermore, statements made by either Pope or Satcom Resources about future profitability for the Plaintiff cannot be the basis of its fraud claims. "Under Colorado law, statements that [the plaintiffs] were going to be 'high[ly] profitable' and projections regarding future profitability, however, are 'mere puffery" which 'cannot be the basis of any misrepresentation claim.'" Steak n Shake Enterprises, Inc. v. Globex Co., LLC, 110 F. Supp. 3d 1057, 1083 (D. Colo. 2015), aff'd, 659 F. App'x 506 (10th Cir. 2016) (quoting Alpine Bank v. Hubbell, 555 F.3d 1097, 1106, 1108 (10th Cir. 2009)).
Third, the APA contained the following integration clause: "This Agreement and the agreements, exhibits, schedules and certificates referred to herein or delivered pursuant hereto constitute the entire agreement between the Parties with respect to the Transactions and supersedes all prior agreements and understandings." (D. 1-1, p. 15). Moreover, the APA contained an independent analysis clause:
Buyer acknowledges that it has conducted an independent investigation of the Assets, the Business and, in making its determination to proceed with the Transactions, Buyer has relied solely on the results of such investigation and the representations and warranties of Seller set forth herein. The representations and warranties by Seller in Section 4 constitute the sole and exclusive representations and warranties of Seller to Buyer in connection with the Transactions, and Buyer acknowledges and agrees that Seller is not making any representation or warranty whatsoever, express or implied, beyond those expressly given in this Agreement.(D. 1-1, p. 11). Plaintiff argues that this provision mirrors a provision in Keller v. A.O. Smith Harvestore Prod., Inc., 819 P.2d 69 (Colo. 1991), and therefore does not expressly bar it from asserting a fraud claim against Satcom Resources. (D. 22, p. 11). However, the court in Keller found that "[t]he general language of the integration provisions of the purchase agreements here at issue does not specifically preclude negligent misrepresentation claims." Keller, 819 P.2d at 73. Here, Plaintiff is asserting a claim for fraud and intentional misrepresentation, not a negligent misrepresentation claim. Like Steak n Shake, the APA specifically and clearly provides that the APA constituted the sole and exclusive representations and warranties of the seller, and that Plaintiff was entering into the agreement as a result of its own investigation and not as a result of any representation by any Defendants. Steak n Shake Enterprises, Inc., 110 F. Supp. 3d at 1083; see also Pensford Fin. Grp., LLC v. 303 Software, Inc., No. 1:18-CV-03286-RM-SKC, 2019 WL 2076579, at *2 (D. Colo. May 10, 2019) ("The Court notes that Steak n Shake Enterprises, Inc.[,] . . . is factually distinct from the present case. There, among other things, the integration clause specifically referenced an independent investigation of financial data by the franchisee which the evidence showed to be both sophisticated and extensive.").
Moreover, Plaintiff alleges that Satcom Resources misrepresented the number and value of assets that it would possess after the sale. However, the APA, again, very clearly delineated which assets would pass to the Plaintiff. (D. 1-1, pp. 2-4). Finally, Plaintiff alleges that Satcom Resources withheld $87,862.90 in third-party payments mistakenly sent to Pope as opposed to Plaintiff. (D. 1, p. 28). However, this claim does not constitute fraudulent misrepresentation. See Beckley, 2016 WL 374485, at *5. Consequently, this Court recommends granting Defendants' motion to dismiss Plaintiff's Sixth Cause of Action.
F. Breach of Fiduciary Duty
Plaintiff alleges that Defendant Pope breached his fiduciary duties to Plaintiff by: "(1) using company assets to create Magneteco, a competing ecommerce mechanism; (2) using Plaintiff's confidential and proprietary information to enrich himself; (3) appropriating Plaintiff's proprietary computer code; and (4) unlawfully downloading Plaintiff's client information and e-distribution lists." (D. 1, p. 30). Defendants argue that Plaintiff must prove that Pope was acting as a fiduciary of Plaintiff when he committed the alleged breaches and that once he was terminated any actions taken afterward cannot constitute a breach of fiduciary duties because Pope no longer owed any to Plaintiff. (D. 13, pp. 11-12). However, Defendants' argument is unavailing.
Resignation or termination does not automatically free a director or employee from his or her fiduciary obligations. A former director breaches his or her fiduciary duty if he or she engages in transactions that had their inception before the termination of the fiduciary relationship or that were based on information obtained during that relationship. Comedy Cottage, Inc. v. Berk, 145 Ill.App.3d 355, 99 Ill.Dec. 271, 276, 495 N.E.2d 1006, 1011 (Ill. App. 1986). Once the fiduciary relationship is terminated, employees may compete with their employers as long as prior fiduciary confidences are not used to the corporation's detriment. 3 Fletcher Cyc. Corp. § 860.T.A. Pelsue Co. v. Grand Enterprises, Inc., 782 F. Supp. 1476, 1485-86 (D. Colo. 1991). Defendants do not cite any case or proposition that termination absolved Pope of owing any fiduciary duties to Plaintiff, nor did Defendants address Plaintiff's allegation that Pope created Magneteco, a competing software product, while still employed by Plaintiff.
Under Colorado law, a claim for a breach of fiduciary duty has the following four elements: "(1) that the defendant was acting as a fiduciary of the plaintiff; (2) that the defendant breached a fiduciary duty to the plaintiff; (3) that the plaintiff incurred damages; and (4) that the defendant's breach of fiduciary duty was a cause of the plaintiff's damages." Sewell v. Great N. Ins. Co., 535 F.3d 1166, 1172 (10th Cir. 2008) (citing Graphic Directions, Inc. v. Bush, 862 P.2d 1020, 1022 (Colo.App.1993)). Defendants only argue that Plaintiff "has not alleged any facts supporting its allegation it has suffered any loss" as a result of an alleged breach. (D. 13, p. 12). However, this Court's function when assessing a Rule 12(b)(6) motion "is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted." Dubbs v. Head Start, Inc., 336 F.3d 1194, 1201 (10th Cir. 2003); see also Myers v. Hummel, No. 11-CV-00400-REB-KLM, 2011 WL 2581399, at *2 (D. Colo. May 17, 2011), report and recommendation adopted, No. 11-CV-00400-KMT-KLM, 2011 WL 2564765 (D. Colo. June 29, 2011) ("Whether Plaintiff can actually prove the existence and breach of that duty is a separate question to be addressed at trial or during the resolution of a motion for summary judgment filed after the parties have had an opportunity to undertake discovery."). Therefore, this Court recommends denying Defendants' motion to dismiss Plaintiff's Seventh Cause of Action against Pope.
G. Conversion
Plaintiff alleges that all Defendants wrongfully withheld $87,862.90 and that Defendants have held, possessed, retained, owned, and/or exercised dominion and control over sums of money that were due to Plaintiff under the terms of the APA. (D. 1, p. 31). Defendants argue that this claim is barred by the economic loss rule and that Plaintiff did not address this claim in its Response. (D. 13, pp. 12-13, D. 24, p. 14). First, this Court finds that Plaintiff did respond to their argument, even if in a conclusory manner. (See D. 22, p. 11). Regardless, for a complaint to survive a motion to dismiss, "the complaint must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims." Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007). Second, the economic loss rule does not necessarily bar a claim for conversion. The Colorado Supreme Court has noted that its "previous cases have applied the economic loss rule to bar only certain common law negligence claims." Bermel v. BlueRadios, Inc., 440 P.3d 1150, 1153 (Colo. 2019). The Colorado Supreme Court held that the economic loss rule would not bar a claim for civil theft, because it "would undermine a key purpose of the statute, which is to remedy even purely economic losses" and that the "separation of powers principles dictate that the judge-made economic loss rule cannot bar a statutory cause of action." Id. at 1153, 1159.
Under the economic loss rule, "a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law." Fid. Nat'l Title Ins. Co. v. Pitkin Cty. Title, Inc., 761 F. App'x 802, 806 (10th Cir. 2019) (quoting A.C. Excavating v. Yacht Club II Homeowners Ass'n, Inc., 114 P.3d 862, 865 (Colo. 2005) (en banc)). "To survive a motion to dismiss based on the economic loss rule, [a plaintiff] merely has to allege sufficient facts, taken in the light most favorable to him, that would amount to the violation of a tort duty that is independent of the contract." Spring Creek Expl. & Prod. Co., LLC v. Hess Bakken Inv., II, LLC, 887 F.3d 1003, 1020 (10th Cir. 2018) (quoting Van Rees v. Unleaded Software, Inc., 373 P.3d 603, 608 (Colo. 2016). "In order for a 'duty to be 'independent' of a contract, and thus actionable in tort notwithstanding the economic-loss rule,' the duty must (1) 'arise from a source other than the relevant contract,' and (2) 'the duty must not be a duty also imposed by the contract.'" Swan Glob. Investments, LLC v. Young, No. 18-CV-03124-CMA-NRN, 2020 WL 897654, at *5 (D. Colo. Feb. 25, 2020) (quoting Haynes Trane Serv. Agency, Inc. v. Am. Standard, Inc., 573 F.3d 947, 962 (10th Cir. 2009)).
Here, Plaintiff's conversion claim against Satcom Resources is not barred by the economic loss rule. "The economic loss rule applies where the plaintiff has an enforceable contractual remedy against the person or entity sought to be charged with liability." Rhino Fund, LLLP v. Hutchins, 215 P.3d 1186, 1194 (Colo. App. 2008) (holding that Defendant's conversion and theft claims were based on acts independent of a contractual breach and that the economic loss rule did not apply to bar Plaintiff's claims). Significantly, there are no provisions within the contract or guaranty concerning Plaintiff's claim, i.e., conversion or a requirement for Satcom Resources to deliver payment. (D. 1-1, pp. 2-45; D. 1-2). Because the contract is silent, this Court recommends denying Defendant's motion to dismiss against Satcom Resources. See Young, 2020 WL 897654, at *6. This Court finds that the legal duty underlying Plaintiff's tort claim arises from a source other than the relevant contract and that duty is not duplicated by the contract. It is clear from the Complaint that Plaintiff can "nudge[ ] [its] claims across the line from conceivable to plausible." Twombly, 550 U.S. at 570. Therefore, this Court recommends denying Defendants' motion to dismiss Plaintiff's Eighth Cause of Action against Satcom Resources.
However, the guaranty does note that:
(d) If Guarantor receives any payment, satisfaction or security for any indebtedness of Company to Guarantor, then Guarantor shall immediately deliver the payment, satisfaction or security to Buyer. Guarantor will hold any payment, satisfaction or security Guarantor receives in trust for Buyer until the payment, satisfaction or security is delivered to Buyer.(D. 1-1, p. 40). Because Pope's duty to deliver payment is memorialized in the agreement, there is no common law tort duty independent of the contract, and Plaintiff's claim against Pope is barred by the economic loss rule. Moreover, this Court agrees with Defendants that Plaintiff's conversion claim does not make any allegations that 6Sole took or currently possesses the $87,862.90 that is allegedly due to them. Therefore, this Court recommends granting Defendants' motion to dismiss Plaintiff's Eight Cause of Action against Pope and 6Sole.
H. Breach of Asset Purchase Agreement and Money Due on Guaranty
Plaintiff alleges in its Ninth Cause of Action that Defendants Pope and Satcom Resources breached the APA by (1) overvaluing its existing inventory by approximately $90,407.02; (2) misrepresenting the extent of its actual inventory by listing over $152,471.23 worth of products that were either missing or non-existent and (3) wrongfully withholding $87,862.90 in payments improperly sent to Pope as opposed to Plaintiff. (D. 1, p. 32).
First, Plaintiff fails to allege how Pope has breached the APA. The APA explicitly states that Pope is "not a party to this Agreement," and acts as a guarantor. (D 1-1, p. 3, 37). Pope only had the "necessary power, authority and legal right to execute, deliver and perform its obligations under the Guaranty." (Id., p. 9). Thus, this Court recommends granting Defendants' motion to dismiss Plaintiff's Ninth Cause of Action against Pope.
Second, Plaintiff fails to identify any term or clause in the APA that Satcom Resources may have breached. See Chimal v. Frank D. Sledge, Esq., No. CIV.A. 06CV02394WYDM, 2007 WL 1247078, at *2 (D. Colo. Apr. 30, 2007) ("Plaintiff does not cite to any specific contract provision or any specific act or undertaking that Defendants have failed to perform."); M & T Bank Corp. v. LaSalle Bank Nat. Ass'n, 852 F. Supp. 2d 324, 334 (W.D.N.Y. 2012) ("A claim or counterclaim based on breach of contract must identify the specific contractual provision(s) allegedly breached."). The inventory valuation summary found in Schedule 1(a)(i) was dated for March 20, 2018. (D. 1-1, pp. 47-56). According to Plaintiff, the parties entered into the APA on March 26, 2018. Plaintiff alleges that it became aware of the inflated values some time in "late-2018 and early-2019." (D. 1, p. 9). However, Plaintiff has failed to allege which existing inventory values were overvalued or inflated or that there were any warranties as to the valuation of the inventory. And as stated previously, Plaintiff acknowledged that it had conducted an independent investigation of the assets and the business and relied solely on the results of such investigation and the representations and warranties of Satcom Resources set forth within the APA. (D. 1-1, p. 11). Moreover, Plaintiff fails to explain how "Pope and Satcom Resources alleged [withholding of] $87,862.90 in payments improperly sent to Pope as opposed to Plaintiff" relates to a breach of the APA. Plaintiff fails to show what clause of the APA was violated by not sending over the payments. Thus, this Court recommends granting Defendants' motion to dismiss Plaintiff's Ninth Cause of Action against Satcom Resources.
Plaintiff alleges in its Tenth Cause of Action that Defendants Pope owes $330,741.15 to Plaintiff because "Pope in his individual capacity, and for valuable consideration, executed a Guaranty to guarantee to Plaintiff full payment and prompt and faithful performance of all present and future indebtedness and obligations under the APA." (D. 1, p. 33). However, because Plaintiff has failed to state a claim that Satcom Resources breached the APA, it follows that the majority of the Tenth Cause of Action fails as well. However, this Court previously noted that Pope had a contractual duty under the guaranty to deliver payments made to Satcom Resources or him to Plaintiff. (D. 1-1, p. 40). Thus, Plaintiff's claim regarding the nonpayment of $87,862.90 survives the Defendants' motion to dismiss. This Court, therefore, recommends denying Defendants' motion to dismiss Plaintiff's Tenth Cause of Action against Pope regarding the nonpayment of $87,862.90. IV. CONCLUSION
For the foregoing reasons, this Magistrate Judge respectfully RECOMMENDS that the motion to dismiss the complaint (D. 13) be GRANTED IN PART and DENIED IN PART. Specifically, this Court RECOMMENDS THAT:
1. Plaintiff's First and Fourth Causes of Action should be permitted to proceed against Defendants Pope and Sole6. Plaintiff's First and Fourth Causes of Action against Defendant Satcom Resources should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6);
2. Plaintiff's Second Cause of Action against Defendant Pope should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6);
3. Plaintiff's Third Cause of Action against Defendants Pope and 6Sole should be permitted to proceed pursuant to 18 U.S.C. §§ 1030(a)(2), 1030(a)(4), 1030(a)(5), and 1030(g). Plaintiff's Third Cause of Action should be dismissed against Defendant Satcom Resources under 18 U.S.C. §§ 1030(a)(2), 1030(a)(4), 1030(a)(5), 1030(a)(6)(A), 1030(b), and 1030(g) pursuant to Federal Rule of Civil Procedure 12(b)(6).
4. Plaintiff's Fifth Cause of Action under Colorado Revised Statutes § 18-4-408 should be dismissed against all Defendants for lack of standing. Plaintiff's Fifth Cause of Action under Colorado Revised Statutes § 18-4-405 should be permitted to proceed
against Defendants Pope and 6Sole but dismissed against Defendant Satcom Resources pursuant to Federal Rule of Civil Procedure 12(b)(6);
5. Plaintiff's Sixth Cause of Action against Defendants Pope and Satcom Resources be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6);
6. Plaintiff's Seventh Cause of Action should be permitted to proceed against Defendant Pope;
7. Plaintiff's Eighth Cause of Action should be permitted to proceed against Satcom Resources but dismissed against Defendant Pope pursuant to the economic loss rule;
8. Plaintiff's Ninth Cause of Action against Defendants Pope and Satcom Resources should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6);
9. Plaintiff's Tenth Cause of Action against Defendant Pope should be permitted to proceed regarding the nonpayment of $87,862.90 but dismissed against Defendant Pope on the remaining claims pursuant to Federal Rule of Civil Procedure 12(b)(6).
Dated at Grand Junction, Colorado this April 17, 2020.
/s/_________
Gordon P. Gallagher
United States Magistrate Judge