Case: 4:10-cv-01045-CEJ Doc. #: 167 Filed: 06/26/12 Page: 1 of 9 PageID #: 3655
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`UNITED STATES DISTRICT COURT
`EASTERN DISTRICT OF MISSOURI
`EASTERN DIVISION
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`))
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`))
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`TWO PALMS SOFTWARE, INC., et al.,
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` Plaintiffs,
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` vs.
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`)
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`WORLDWIDE FREIGHT MANAGEMENT
`LLC., et al., )
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`)
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` Defendants.
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`Case No.4:10-CV-1045(CEJ)
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`MEMORANDUM AND ORDER
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`This matter is before the Court on defendants’ motion for partial summary
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`judgment, pursuant to Fed. R. Civ. P. 56(c). Plaintiffs oppose the motion and the
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`issues are fully briefed.
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`I. Background
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`Plaintiff Stuart Tomlinson is a computer software developer. In 2001, Tomlinson
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`entered into an agreement with defendant David Barton to develop “Management
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`Software,” a internet-based computer software system designed for Barton’s freight
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`and storage management business. Tomlinson and Barton also agreed to form plaintiff
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`Two Palms Software, Inc., a company that develops Management Software for end
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`users. In 2004, defendant Interstate Logistics, LLC., entered into an oral agreement
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`with plaintiffs to use Management Software in exchange for paying subscription and
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`enhancement fees. Pursuant to the agreement, Interstate would pay Two Palms an
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`up-front customization fee of $2,000.00 and then a monthly subscription fee of
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`$300.00.
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`In February 2007, Interstate failed to pay its subscription and enhancement
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`fees. Shortly thereafter, Tomlinson allegedly discovered that Interstate had continued
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`Case: 4:10-cv-01045-CEJ Doc. #: 167 Filed: 06/26/12 Page: 2 of 9 PageID #: 3656
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`to use a modified version of Management Software without authorization and without
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`making payments to plaintiffs. Plaintiffs allege that Interstate was able to modify
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`Management Software by saving a copy of the program on a server that could not be
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`accessed by plaintiffs.
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`On August 6, 2010, plaintiffs filed a ten-count amended complaint against
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`Interstate, and other parties who allegedly used a modified and unauthorized version
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`of Management Software. The claims pending before the Court are breach of fiduciary
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`duty (Count II), breach of contract (Count VII), copyright infringement (Count VIII),
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`violation of the Missouri Uniform Trade Secrets Act, Mo. Rev. Stat. § 537.525 (Count
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`IX), and violation of the Missouri Computer Tampering Act, Mo. Rev. Stat. § 417.450,
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`et seq. (Count X).1
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`Interstate and its founder defendant James Wheelehon move for partial
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`summary judgment on Counts VII and IX, pursuant to Fed. R. Civ. P. 56(c). They
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`assert that plaintiffs’ breach of contract claim is preempted by the Copyright Act and
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`that Management Software is not a trade secret under Missouri law.
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`II. Legal Standard
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`Rule 56(c) of the Federal Rules of Civil Procedure provides that summary
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`judgment shall be entered “if the pleadings, depositions, answers to interrogatories,
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`and admissions on file, together with the affidavits, if any, show that there is no
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`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.” In ruling on a motion for summary judgment the court
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`is required to view the facts in the light most favorable to the non-moving party and
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`1 Plaintiffs’ claims of conversion (Count III), conspiracy (Count IV), tortious
`interference (Count V), and unjust enrichment (Count VI), were dismissed by the Court in an
`Order entered into on February 18, 2011. (Doc. #83).
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`2
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`must give that party the benefit of all reasonable inferences to be drawn from the
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`underlying facts. AgriStor Leasing v. Farrow, 826 F.2d 732, 734 (8th Cir. 1987). The
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`moving party bears the burden of showing both the absence of a genuine issue of
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`material fact and its entitlement to judgment as a matter of law. Anderson v. Liberty
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`Lobby, Inc., 477 U.S. 242 (1986); Matsushita Electric Industrial Co. v. Zenith Radio
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`Corp., 475 U.S. 574, 586-87 (1986); Fed. R. Civ. P. 56(c). Once the moving party has
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`met its burden, the non-moving party may not rest on the allegations of his pleadings
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`but must set forth specific facts, by affidavit or other evidence, showing that a genuine
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`issue of material fact exists. Fed. R. Civ. P. 56(e). Rule 56(c) “mandates the entry of
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`summary judgment, after adequate time for discovery and upon motion, against a
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`party who fails to make a showing sufficient to establish the existence of an element
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`essential to that party’s case, and on which that party will bear the burden of proof at
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`trial.” Celotex Corporation v. Catrett, 477 U.S. 317, 322 (1986).
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`III. Discussion
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`Defendants first argue that plaintiffs’ breach of contract claim is preempted by
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`the Copyright Act. “The Copyright Act provides the exclusive source of protection for
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`all legal and equitable rights that are equivalent to any of the exclusive rights within
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`the general scope of copyright. National Car Rental System, Inc. v. Computer
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`Associates Intern., Inc., 991 F.2d 426, 428 (8th Cir. 1993). The preemption provision
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`is found in section 301(a) of the Copyright Act, which states in part:
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`[A]ll legal or equitable rights that are equivalent to any of the exclusive
`rights within the general scope of copyright as specified by section 106
`in works of authorship that are fixed in a tangible medium of expression
`and come within the subject matter of copyright...are governed
`exclusively by this title. Thereafter, no person is entitled to any such
`right or equivalent right in any such work under the common law or
`statutes of any State.
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`17 U.S.C. § 301(a).
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`“[A] state cause of action is preempted if: (1) the work at issue is within the
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`subject matter of copyright as defined in §§ 102 and 103 of the Copyright Act, and (2)
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`the state law created right is equivalent to any of the exclusive rights within the
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`general scope of copyright as specified in § 106.” National, 991 F.2d at 428.
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`The parties appear to agree that Management Software is within the subject
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`matter of copyright---satisfying the first part of the analysis. The issue becomes
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`whether the rights at issue in plaintiffs’ breach of contract claim are “equivalent” to the
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`exclusive rights outlined in the Copyright Act. In determining whether the rights at
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`issue are equivalent, a court must consider whether “there is an ‘extra element’ that
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`changes the nature of the state law action so that it is qualitatively different from a
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`copyright infringement claim.” Huckshold v. HSSL, L.L.C., 344 F.Supp.2d 1203, 1206
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`(E.D. Mo. 2004). “The existence of an extra element precludes preemption only where
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`the element changes the nature, rather than the scope, of the action.” Stromback v.
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`New Line Cinema, 384 F.3d 283, 301 (6th Cir. 2004).
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`To establish a breach of contract claim, plaintiffs must establish “(1) the
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`existence of an enforceable contract between the parties, (2) mutual obligations under
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`the terms of the contract, (3) one party’s failure to perform the obligations imposed
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`by the contract, and (4) the other party’s thereby incurring damage.” Huckshold, 344
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`F.Supp. 2d at 1207(citing McClain v. Papka, 108 S.W.3d 48,53 (Mo. Ct. App. 2003).
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`Breach of contract claims are typically not preempted by the Copyright Act. Id.
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`(“courts generally read preemption clauses to leave private contracts unaffected.”)
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`Contracts generally affect the contracting parties, and therefore, courts have held that
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`they do not create ‘exclusive rights’ within the scope of the Copyright Act. Huckshold,
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`344 F. Supp 2d at 1207(“A copyright is considered a right against the world.
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`Contracts, by contrast, generally affect only their parties; strangers may do as they
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`please, so contracts do not create ‘exclusive rights’.”); see also Lipscher v. LRP
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`Publications, Inc., 266 F.3d at 1318 (“[C]laims involving two-party contracts are not
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`preempted because contracts do not create exclusive rights, but rather affect only their
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`parties.”). Furthermore, to succeed on a breach of contract claim, a plaintiff must
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`prove an extra element that is qualitatively different from a copyright infringement
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`claim--the existence of a valid contract. Lipscher, 266 F.3d at6 1318-1319 (finding no
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`preemption in breach of contract claim; plaintiff had to show an extra element-“ the
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`existence of a valid contract between the parties.”)
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` A breach of contract claim, however, may be preempted by the Copyright Act
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`when the plaintiff merely alleges that the defendant breached the contract by infringing
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`on the copyright. See National Car, 991 F.2d. at 431. Indeed, plaintiffs allege that
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`Interstate breached their contract by modifying and using an unauthorized version of
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`Management Software. However, the substance of plaintiffs’ breach of contract claim
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`concerns Interstate’s failure to pay subscription and enhancement fees. Plaintiffs
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`allege that Interstate entered into an agreement with plaintiffs and breached that
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`agreement when it continued to use Management Software without paying plaintiffs
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`the subscription and enhancement fees. The substance of the breach of contract
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`allegations here is qualitatively different from those of a copyright infringement claim
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`and, therefore, Count VII is not preempted by the Copyright Act.
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`Defendants also argue that Interstate was not obligated to pay its subscription
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`and enhancement fees because it terminated the contract with plaintiffs in February
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`2007. Defendants’ argument does not affect the Court’s ruling. Plaintiffs’ breach of
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`contract claim requires proof an element outside the scope of the Copyright Act,
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`despite whether or not Interstate terminated their contract with plaintiffs.
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`Defendants next argue that plaintiffs cannot establish a claim under the Missouri
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`Uniform Trade Secrets Act (MUTSA), because Management Software’s source code is
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`not a trade secret. To establish a violation of MUTSA ,plaintiffs must demonstrate (1)
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`the existence of a protectable trade secret, (2) misappropriation of those trade secrets
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`by Defendants, and (3) damages. Secure Energy, Inc. v. Coal Synthetics, LLC, 708
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`F.Supp.2d 923, 926 (E.D.Mo. 2010). The statute defines a “trade secret” as:
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`[I]nformation, including but not limited to, technical or nontechnical data,
`a formula, pattern, compilation, program, device, method, technique, or
`process, that:
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`(a) Derives independent economic value, actual or potential,
`from not being generally known to, and not being readily
`ascertainable by proper means by other persons who can
`obtain economic value from its disclosure or use; and
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`(b) Is the subject of efforts that are reasonable under the
`circumstances to maintain its secrecy.
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`Mo. Rev. Stat. § 417.453.
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`Missouri courts have used the following factors to determine whether information
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`constitutes a trade secret under the MUTSA: “(1) the extent to which the information
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`is known outside of [the] business; (2) the extent to which it is known by employees
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`and others involved in [the] business; (3) the extent of measures taken by [the
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`business] to guard the secrecy of the information; (4) the value of the information to
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`[the business] and to [its] competitors; (5) the amount of effort or money expended
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`by [the business] in developing the information; (6) the ease or difficulty with which
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`the information could be properly acquired or duplicated by others.” Cerner Corp. v.
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`Visicu, Inc., 667 F.Supp.2d 1062, 1076–1077 (W.D.Mo.2009) (citing Am. Family Mut.
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`Ins. Co. v. Mo. Dep't of Ins., 169 S.W.3d 905, 909–10 (Mo.Ct.App.2005)).
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`Defendants contend that Management Software’s source code is not a trade
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`secret because plaintiffs have failed to take reasonable efforts to maintain its secrecy.
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`In support, defendants point to Tomlinson’s disclosure of the source code to the
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`Copyright Office and to employees who had not signed a confidentiality agreement.
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`It is well established that a source code is a trade secret. JustMed, Inc. v. Byce,
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`600 F.3d 1118, 1129 (9th Cir. 2010). However, public disclosure of a source code is
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`fatal to its existence as a trade secret. See Reliant Care Management, Co., Inc. v.
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`Health Systems, Inc, 2011 WL 4342619, at * 9 (E.D.Mo. Sept. 2011). “If an individual
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`discloses his trade secret to others who are under no obligation to protect the
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`confidentiality of the information, or otherwise publicly discloses the secret, his
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`property right is extinguished.” Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984).
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`During his deposition, Tomlinson testified that he filed the first 50 pages of more
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`than 80,000 lines of source code with the Copyright Office. (Doc. #116-2, p. 210).
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`That action in itself is not necessarily inconsistent with maintaining the secrecy of the
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`source code. JustMed, 600 F.3d at 1129 (holding that a source code may remain a
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`trade secret, even if a portion of it was disclosed to the Copyright Office. Id. (citing
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`Compuware Corp. v. Serena Software Int’l, Inc., 77 F. Supp.2d 816, 821 (E.D.Mich.
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`1999)). Furthermore, federal regulations provide that the Copyright Office will grant
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`requests for reproductions of materials deposited in connection with a copyright
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`registration only when at least one of the following conditions has been met: (1)
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`written authorization from the copyright claimant or owner; (2) a written request by
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`an attorney for a plaintiff or defendant in connection with actual or prospective
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`litigation; or (3) an order by a court having jurisdiction of a case in which the
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`requested material is to be used as evidence. 37 C.F.R. § 201.2(d)(2). Because
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`Tomlinson only disclosed a portion of the source code and the Copyright Office limits
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`access to deposited materials, a reasonable jury could find that plaintiffs took
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`reasonable efforts to maintain the secrecy of the source code. See Reliant, 2011 WL
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`4342619, at *9 (concluding that depositing materials to the Copyright Office did not
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`preclude plaintiffs from asserting the work constituted a trade secret.).
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` Tomlinson testified that he provided two employees access to Management
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`Software’s source code without requiring them to sign a confidentiality agreement.
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`(Doc. # 116-3, p. 210-211, 247). Under Missouri law, the absence of a written
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`confidentiality agreement will not necessarily defeat a trade secret claim. Lyn-Flex
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`West, Inc. v. Dieckhaus, 23 S.W.3d 693, 699(Mo. App. E.D. 1999). The presence of
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`a confidentiality agreement, however, is an important factor to consider in determining
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`whether reasonable steps were taken to maintain a work’s secrecy. See Auto Channel,
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`Inc. v. Speedvision Network, LLC, 144 F.Supp.2d 784, 795 (W.D.Ky.2001). The test
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`is not whether a party took every conceivable step to protect its trade secret
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`information. Rather, all that is required is that a party take reasonable steps.
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`Surgidev Corporation v. Eye Technology, Inc., 828 F.2d 452, 455 (8th Cir.1987).
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`Generally, the issue of whether a party took reasonable steps to maintain secrecy of
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`information is an issue of fact. Id.
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`Here, there is evidence that there were only four employees of Two Palms who
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`had access to the source code, that the computers used by two employees (Chrissy
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`Greenwalt and Stuart Tomlinson) were password-protected and not freely accessible
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`to others, and that the source code was not disclosed to customers. (Doc.# 116-7, p.
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`56-58; Doc.# 166-3, p. 210). Given these circumstances, the Court cannot conclude,
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`as a matter of law, that plaintiffs failed to take reasonable steps to protect their trade
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`secret.
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`Accordingly,
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`IT IS HEREBY ORDERED that defendants’ motion for partial summary
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`judgment [#115] is denied .
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` CAROL E. JACKSON
` UNITED STATES DISTRICT JUDGE
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`Dated this 26th day of June, 2012.
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