Case 5:05-cv-01979-SMH-KLH Document 119 Filed 08/06/07 Page 1 of 11 PageID #: 1817
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`UNITED STATES DISTRICT COURT
`WESTERN DISTRICT OF LOUISIANA
`SHREVEPORT DIVISION
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`FREES, INC.
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`VERSUS
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`PHIL MCMILLIAN, ET AL.
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`CIVIL ACTION NO. 05-1979
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`JUDGE S. MAURICE HICKS, JR.
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`MAGISTRATE JUDGE HAYES
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`MEMORANDUM RULING
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`Before the Court is Phil McMillian’s and Tony Pierceall’s (“Defendants”) joint Motion
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`for Partial Summary Judgment (Record Document 82), which seeks to have Frees, Inc.’s
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`(“Frees”) Computer Fraud and Abuse Act claims dismissed, or in the alternative, to have
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`the lost profits allegedly suffered by Frees excluded from the amount of recoverable
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`damages. Frees opposes the motion. For the reasons that follow, Defendants’ motion is
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`DENIED.1
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`I.
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`FACTUAL BACKGROUND
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`Frees provides ventilation and dust control systems to manufacturers in the
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`fiberglass reinforced product industry. See Record Document 1-1, ¶ 6. Frees has spent
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`considerable time, money and effort to research and develop methods which are unique
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`in the industry. See Record Document 1-1, ¶¶ 7-8. In order to protect its trade secrets,
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`The Motion for Partial Summary Judgment also seeks a ruling from the Court that
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`Frees is barred, as a matter of law, from recovering statutory damages under the Copyright
`Act. See Record Document 82-3 at 8-9. This issue is moot because Frees conceded in
`its opposition that it was not seeking an award of statutory damages under the Copyright
`Act, but rather was seeking actual damages. See Record Document 89-1 at 18.
`Accordingly, the Motion for Partial Summary Judgment as to statutory damages under the
`Copyright Act is DENIED AS MOOT.
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`Frees requires employees, potential employees, customers, potential customers, and
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`vendors to sign confidentiality agreements. See id., ¶ 8.
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`Defendants are former employees of Frees. See Record Document 95 at 1.
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`McMillian was employed as a senior manager and vice-president in charge of sales and
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`day-to-day management of the business. Pierceall was responsible for designing
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`ventilation systems. See id. During their employment, Frees provided McMillian and
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`Pierceall with computers which, according to Frees, contained trade secrets, proprietary
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`information and other data (hereinafter collectively referred to as “data”) belonging to
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`Frees. See Record Document 1-1, ¶¶ 16,18.
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`In mid-2002, Southeast expanded its business by providing industrial ventilation and
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`dust control systems. See Record Document 95 at 2. At different times, Southeast hired
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`two former Frees employees, defendants McMillian and Pierceall. See id. McMillian and
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`Pierceall, in turn, are alleged to have loaded Frees proprietary data onto Southeast’s
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`computers, which they apparently used as Southeast’s employees to design, construct,
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`implement, and/or market industrial fiberglass ventilation and dust control systems in
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`competition with Frees. See id. McMillian is also alleged to have deleted data from the
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`Frees computers before he left Frees’ employment, which resulted in Frees expending
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`$2,000 to INS-Triad for a forensic investigation of the computers, $11,000 to
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`CyberControls, LLC, for consultation and forensics work, and $3,500 to MMCC for a
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`forensic investigation of the current home and work computers of McMillian. See Record
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`Document 89-1 at 2. Frees did not suffer an interruption of service as a result of the
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`misconduct. See Record Document 82-2 at 1.
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`Frees filed the above-captioned suit alleging copyright infringement and violations
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`Case 5:05-cv-01979-SMH-KLH Document 119 Filed 08/06/07 Page 3 of 11 PageID #: 1819
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`of the CFAA and is seeking monetary relief, including lost profits, as well as equitable relief.
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`McMillian and Pierceall filed a Motion for Partial Summary Judgment contending that Frees
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`has not alleged “loss” under the CFAA, and in the alternative, that Frees cannot recover
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`lost profits absent an interruption of service.
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`II.
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`LAW AND ANALYSIS
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`A.
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`Summary Judgment Standard.
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`Summary judgment will be granted when “... the pleadings, depositions, answers to
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`interrogatories, and admissions on file, together with the affidavits, if any, show that there
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`is no genuine issue as to any material fact and that the moving party is entitled to a
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`judgment as a matter of law.” Fed. R. Civ. P.56©; see Celotex Corp. v. Catrett, 477 U.S.
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`317, 106 S.Ct. 2548 (1986); Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994).
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`The party moving for summary judgment must demonstrate the absence of a genuine
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`issue of material fact. See Liquid Air Corp., 37 F.3d at 1075. A dispute over a material fact
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`is genuine, if the evidence is such that a reasonable jury could return a verdict for the non-
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`moving party. See Kee v. City of Rowlett Texas, 247 F.3d 206, 210 (5th Cir. 2001). If the
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`moving party fails to meet this initial burden, the motion must be denied, regardless of the
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`nonmovant's response. See Liquid Air Corp., 37 F.3d at 1075.
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`If the movant does, however, meet this burden, the burden shifts and the
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`nonmovant must go beyond the pleadings and designate specific facts showing that there
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`is a genuine issue for trial. See Celotex, 477 U.S. 317, 106 S.Ct. 2548. To that end, the
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`Court must view the facts and the inferences to be drawn therefrom in the light most
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`favorable to the nonmoving party. See Ameristar Jet Charter v. Signal Composites, 271
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`F.3d 624, 626 (5th Cir. 2001). However, the Court will not assume that the nonmoving
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`party could or would prove the necessary facts. See Liquid Air Corp., 37 F.3d at 1075.
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`The nonmoving party’s burden will not be satisfied by “some metaphysical doubt as to the
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`material facts,” by “conclusory allegations,” by “unsubstantiated assertions,” or by only a
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`“scintilla” of evidence. Id. Therefore, summary judgment is appropriate in any case “where
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`critical evidence is so weak or tenuous on an essential fact that it could not support a
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`judgment in favor of the nonmovant.” Armstrong v. City of Dallas, 997 F.2d 62 (5th Cir.
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`1993); see generally Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574,
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`586-87, 106 S.Ct. 1348, 1356 (1986).
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`With these principles in mind, we now turn to a review of the claims at issue in the
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`instant motion.
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`B.
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`Computer Fraud and Abuse Act.
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`The CFAA provides:
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`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.
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`18 U.S.C. § 1030(g) (emphasis added). As the plain language of statute makes clear, only
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`a person who has suffered damage or loss can maintain a cause of action. The CFAA
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`defines “damage” as “any impairment to the integrity or availability of data, a program, a
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`system, or information.” 18 U.S.C. § 1030(e)(8). “Loss” is defined as “any reasonable cost
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`to any victim, including the cost of responding to an offense, conducting a damage
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`assessment, and restoring the data, program, system, or information to its condition prior
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`to the offense, and any revenue lost, cost incurred, or other consequential damages
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`incurred because of interruption of service.” 18 U.S.C. § 1030(e)(11). If the plaintiff has
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`suffered only “loss,” the statute requires the plaintiff to establish a jurisdictional threshold,
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`or “loss” aggregating at least $5,000 in value, to maintain a cause of action. 18 U.S.C. §
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`1030(a)(B)(i).
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`1.
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`“Loss”
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`Frees alleges the following expenditures constitute “loss”:
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`•
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`•
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`•
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`Payment of $2,000 to INS-Triad for a forensic
`investigation of the prior work computer of McMillian;
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`Payment of more than $11,000 to CyberControls, LLC,
`for consultation and forensics work relating to the
`computer problems alleged to have been caused by
`McMillian and Pierceall; and
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`Payment of $3,500 to MMCC for forensic investigation
`of the current home and work computers of McMillian.
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`See Record Document 89-1 at 2.
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`McMillian and Pierceall contend that Frees has not met the jurisdictional threshold
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`because the expenses allegedly incurred by Frees do not constitute “loss” as defined by
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`the CFAA. However, this argument fails. “Loss” is not limited to actual repairs. Nexans
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`Wires S.A. v. Sark-USA, Inc., 319 F. Supp. 2d 468, 475 (S.D.N.Y. 2004); S. Rep. 4702-02
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`(1986). Courts have consistently interpreted “loss,” both before and after the term was
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`defined in the 2001 amendment, to mean a cost of investigating or remedying damage to
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`a computer, or a cost incurred because the computer’s service was interrupted. See
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`Nexans, 319 F. Supp. 2d at 475.
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`During oral argument, defense counsel argued that “expert fees” of this type do not
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`constitute loss. This argument is without merit. In fact, the case repeatedly cited by
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`defendants supports a finding of “loss.” In Resdev, LLC v. Lot Builders Ass’n, Inc., 2005
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`WL 1924743, *4 (M.D. Fla. 2005), the court stated:
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`The CFAA defines “loss” in terms of “any reasonable
`cost.” (Internal citation omitted). “Cost” ordinarily
`means an “amount paid or charged for something; price
`or expenditure.” Black’s Law Dictionary 371 (8th ed.
`2004).
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`The cost of hiring an expert to investigate the computer damage is clearly a “reasonable
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`cost” sufficient to constitute “loss” under the CFAA. 18 U.S.C. § 1030(e)(11); Dudick, ex
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`rel. Susquehanna Precision, Inc. v. Vaccaro, 2007 WL 1847435, *5 (M.D. Pa. 2007)
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`(holding that the time and resources spent and the cost of hiring an expert to research and
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`assess the unauthorized information and assets are costs explicitly identified in the CFAA’s
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`definition of “loss”); Kaufman v. Nest Seekers, LLC, 2006 WL 2807177, *8 (S.D.N.Y. 2006)
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`(the cost involved in investigating hacking and unauthorized access, investigating the
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`damage, and revealing the infringing activity constitutes “loss” as defined by the CFAA);
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`Nexans Wires S.A. v. Sark-USA, Inc., 319 F. Supp. 2d 468, 474 (S.D.N.Y. 2004) (finding
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`that “loss” includes the costs associated with investigating the damage to the computer),
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`aff’d, 166 Fed. Appx. 559 (2nd Cir. 2006); E.F. Cultural Travel BV v. Explorica, Inc., 274
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`F.3d 577, 585 (1st Cir. 2001) (finding that the “loss” suffered by plaintiffs, in having to
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`expend substantial sums to assess whether there was any physical damage to their
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`website, is not lessened simply because no damage occurred).
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`Accordingly, the expenditures allegedly incurred by Frees, which, when aggregated,
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`exceed the $5,000 threshold requirement, are sufficient to constitute “loss” under the
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`CFAA. The Court will now proceed to Defendants’ alternative argument, that Frees cannot
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`recover lost profits absent an interruption of service.
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`2.
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`Recoverable Damages Under the CFAA.
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`Defendants contend that lost revenues are not compensable damages in this case
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`because there has not been an interruption of computer service. See Record Document
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`82-3 at 1. They argue the phrase “any revenue lost, cost incurred, or other consequential
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`damages incurred because of interruption of service” is not only a jurisdictional threshold,
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`but also a limitation on the types of recoverable damages. 18 U.S.C. § 1030(e)(11). Frees
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`rejects this contention, arguing that a plaintiff is entitled to recover ordinary “compensatory
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`damages” once the jurisdictional threshold has been met.
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`The Fifth Circuit has not addressed this issue and the circuits addressing the issue
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`are split. See Nexans Wires S.A. v. Sark-USA, Inc., 166 Fed. Appx. 559 (2nd Cir. 2006);
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`Creative Computing v. Getloaded.com LLC, 386 F.3d 930 (9th Cir. 2004). The Ninth
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`Circuit held that loss of business and business goodwill constitutes recoverable damages
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`under the CFAA, but the Court failed to provide any discussion or give any reason for its
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`holding. See Creative Computing, 386 F.3d at 936. Conversely, the Second Circuit
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`excluded lost profits from the recoverable damages, stating:
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`As the district court correctly recognized, the plain language of
`the statute treats lost revenue as a different concept from
`incurred costs, and permits recovery of the former only where
`connected to an “interruption of service.”
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` Nexans, 166 Fed. Appx. at 562. However, the district court in Nexans simply found that
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`the plaintiff did not allege “loss” sufficient to establish the jurisdictional threshold; the court
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`did not discuss whether lost profits would be recoverable as damages, nor did the court
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`address the issue.
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`Both the plaintiff and defendants cite district court cases in support of their
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`contention. Yet, most of the cases cited by the plaintiff are interpreting the pre-2001
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`version of the CFAA, and nearly all of the cases cited by defendant rely on Nexans in
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`support of their proposition. The Court finds none of those cited cases, including the two
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`Circuit Court decisions, persuasive or controlling. Rather than relying on dicta or pre-2001
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`decisions, the Court will instead look to the basic principles of statutory construction to
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`resolve the conflict.
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`Statutory interpretation begins with the language of the statute itself. There is a
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`presumption that Congress says in a statute what it means and means in a statute what
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`it says. See Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146
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`(1992). In fact, the first rule in statutory construction is to determine whether the language
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`at issue has a plain and unambiguous meaning. See Lamie v. U.S. Trustee, 540 U.S. 526,
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`124 S.Ct. 1023 (2004). If the statutory language is plain and unambiguous, the courts
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`should not consider extrinsic materials and should not derive from such materials an
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`interpretation that is inconsistent with the statute’s plain meaning. See Guilzan v. C.I.R.,
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`985 F.2d 819 (5th Cir. 1993). Most importantly, the court cannot assume Congress
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`intended to say something other than what is plainly stated.
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`Generally, a statutory definition of a term excludes any other meaning, even if it
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`varies from the ordinary meaning of the term. If a word is not specifically defined, it is
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`presumed to have its “ordinary, contemporary, common meaning.” Perrin v. United States,
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`444 U.S. 37, 42, 100 S.Ct. 311 (1979). However, if a term has an accumulated, settled
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`meaning under common law, the courts must infer that Congress intended to incorporate
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`that established meaning. See McDermott Intern., Inc. v. Wilander, 498 U.S. 337, 111
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`S.Ct. 807 (1991).
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`It is also an elementary rule of statutory construction that every word and phrase
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`has a purpose. Thus, in determining the meaning of a statute, the court must be careful
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`not to construe the statute in way that renders one part ineffective or inoperative. See
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`United States v. Nordic Village, Inc., 503 U.S. 30, 112 S.Ct. 1011 (1992).
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`The CFAA provision at issue is 18 U.S.C. § 1030(g), specifically the term
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`“compensatory damages.” This term is not defined by the statute, but because
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`“compensatory damages” is a legal term of art, it is presumed that Congress intended to
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`incorporate its established meaning into the statute. Hence, it is presumed that
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`“compensatory damages” means “damages sufficient in amount to indemnify the injured
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`person for the loss suffered.” See Black’s Law Dictionary (8th ed. 2004). The term
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`includes all damages other than punitive or exemplary damages. 22 Am. Jur. 2d
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`Damages § 24 (emphasis added). Moreover, it is presumed that Congress legislates with
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`the basic knowledge of statutory construction. Had Congress intended a different
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`meaning, they could have easily added a statutory definition of “compensatory damages,”
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`just as they added the definition of “loss” in the 2001 amendment.
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`Congress did specifically express an intent to limit damages for conduct solely
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`violating Section (a)(5)(B)(i). Damages recoverable for such a violation are limited to
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`“economic damages.” 18 U.S.C. § 1030(g). The term “economic damages” was not
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`statutorily defined, but courts have consistently held that this term has its ordinary
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`Section 1030(a)(5)(B)(i) provides that whoever “by conduct described in clause (i),
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`(ii), or (iii) of subparagraph (A), caused (or, in the case of an attempted offense, would, if
`completed, have caused) . . . loss to 1 or more persons during any 1-year period (and, for
`purposes of an investigation, prosecution, or other proceeding brought by the United States
`only, loss resulting from a related course of conduct affecting 1 or more other protected
`computers) aggregating at least $5,000 in value.”
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`meaning, i.e., simply prohibiting damages for pain and suffering, emotional distress, and
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`other like damages. See Creative Computing v. Getloaded.com LLC, 386 F.3d 930 (9th
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`Cir. 2004); P.C. Yonkers, Inc. v. Celebrations the Party & Seasonal Superstore, LLC, 428
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`F.3d 504 (3rd Cir. 2005); In re Doubleclick Privacy Litig., 154 F. Supp. 2d 497 (S.D.N.Y.
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`2001). Similarly, without an express indication to the contrary, “compensatory damages”
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`must be interpreted to have its ordinary, established meaning, thereby allowing “lost
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`profits” as recoverable damages.
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`Further, interpreting the statute to limit the recovery of lost revenue would lead to
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`absurd results. The CFAA defines “damage” in terms of non-economic harm and “loss”
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`in terms of economic harm. § 1030(e)(8), (11). If the Court were to find that these terms
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`were limitations on damages, a plaintiff would be unable to recover any monetary relief
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`where he suffered only “damage,” but no “loss.” When a defendant copies unauthorized
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`data to gain a competitive edge, it makes no sense to limit the plaintiff’s recovery when the
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`lost revenue is a direct result of defendant’s misconduct.
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`The language of the statute is plain and unambiguous and it is unnecessary for the
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`Court to consider extrinsic materials. But even if the statutory language was ambiguous,
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`the Court finds that the numerous references to the “jurisdictional threshold” in the CFAA’s
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`legislative history effectively expresses Congress’ intent. Congress explained that the
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`“required monetary threshold” was established to define conduct punishable as a
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`misdemeanor or as a felony. S. Rep. 104-357 (1996); S. Rep. 4072-02 (1986). As
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`Congress stated, “[i]n instances where the requisite dollar amount cannot be shown,
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`misdemeanor-level penalties will remain available against the offender under the trespass
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`statute... [T]he valuation will... help determine whether the act constituting the offense is
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`punishable as a felony or a misdemeanor.” S. Rep. 4072-02 (1986). The legislative history
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`does not contain any indication of Congress’ intention to limit the scope of recoverable
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`damages in a civil action.
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`Accordingly, the Court finds that the terms “damage” and “loss” are terms of art used
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`to define a jurisdictional threshold; they do not control or limit what damages are available
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`in a civil action if the substantive and threshold standards are not met. Rather, Congress
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`used the terms “compensatory damages” and “economic damages” to define the scope of
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`recovery, and those terms will be given their ordinary meaning in interpreting the CFAA.
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`III.
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`CONCLUSION
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`For the foregoing reasons, the Court finds that Frees has established the CFAA’s
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`jurisdictional threshold and that the CFAA does not limit the recovery of lost profits as an
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`element of compensatory damages solely to instances where there was an interruption of
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`service. Further, Frees has conceded that it is pursuing actual damages, not statutory
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`damages, under the Copyright Act.
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`Accordingly,
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`IT IS ORDERED that McMillian’s and Pierceall’s Motion for Partial Summary
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`Judgment (Record Document 82) be and is hereby DENIED.
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`THUS DONE AND SIGNED in Shreveport, Louisiana, this the 6th day of August,
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`2007.
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