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Presence of EULA Fails to Convert Reverse Engineering Into an “Improper Means” Within Definition of California Trade Secret Law

In EULA, Improper Means, Reverse Engineering on February 21, 2012 at 3:13 pm
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In an unreported case from the Central District of California, Senior District Judge Ronald S.W. Lew held that plaintiff may not maintain a trade secrets claim for reverse engineering of software code, where plaintiff alleged that a trial version of the software was properly downloaded pursuant to an end user license agreement (“EULA”).  Aqua Connect, Inc. v. Code Rebel, LLC, et al., No. CV 11 5764 RSWL (MANx), 2012 WL 469737 (C.D. Cal.  Feb. 13, 2012).

Background

Plaintiff Aqua Connect, Inc. sued Defendants Code Rebel, LLC and others.  Defendants brought a motion to dismiss plaintiff’s claim for misappropriate of trade secrets.  Id.  Plaintiff alleged that defendants downloaded a trial version of Plaintiff’s Aqua Connect Terminal Server software (“ACTS”) and subsequently reverse engineered ACTS in violation of the End User License Agreement (“EULA”), which defendants had to agree to in order to use the trial version of ACTS.  Id. Plaintiff alleged that defendants misappropriated the trade secrets within ACTS and used that information to create and distribute a competing software product.  Id.


Discussion

The court described the elements of a UTSA claim: “[t]o state a cause of action for misappropriation of a trade secret under California law, a plaintiff must plead that (1) the plaintiff owned a trade secret, (2)  the defendant acquired, disclosed, or used the plaintiff’s trade secret through improper means, and (3) the defendant’s actions damaged the plaintiff.” Id. (citing Cal. Civ. Code § 3426.1; Cytodyn, Inc. v. Amerimmune Pharm., Inc., 160 Cal.App.4th 288, 297, 72 Cal.Rptr.3d 600 (2008)).  The court noted that “improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means,” but “[r]everse engineering or independent derivation alone shall not be considered improper means.”  Id. (citing Civ. Code. § 3426.1(a); Sargent Fletcher, Inc. v. Able Corp., 110 Cal.App.4th 1658, 1666, 3 Cal.Rptr.3d 279 (2003)).

This Court found that the plaintiff did not allege a legally cognizable trade misappropriation claim because the “only improper means pled in the FAC is reverse engineering, which according to California law, ‘shall not be considered improper means’ by itself.”  Id.

The court rejected plaintiff’s argument that the “EULA form contract and its alleged breach by Movants can legally convert the alleged reverse engineering into an ‘improper means’ of acquiring Plaintiff’s trade secret.” Id.  The Court noted Justice Moreno’s concurrence to the California Supreme Court decision DVD Copy Control Ass’n, Inc. v. Bunner, 31 Cal.4th 864, 901 n.5, 4 Cal.Rptr.3d 69, 75 P.3d 1 (2003) (Moreno, J., concurring), in which Justice Moreno wrote:

[N]owhere has it been recognized that a party wishing to protect proprietary information may employ a consumer form contract to, in effect, change the statutory definition of ‘improper means’ under trade secret law to include reverse engineering, so that an alleged trade secret holder may bring an action.

Id.

The Central District noted the statutory language of the California Uniform Trade Secret Act, Civil Code section 3426.1(a), which states that “[r]everse engineering alone shall not be considered improper means.”  “[F]rom the plain language of the statute, reverse engineering must be combined with some other improper action in order for it to form the basis of a cognizable misappropriation claim.” Id.

“[R]everse engineering is not an improper means of acquiring trade secret information when defendants acquire the item, from which the information is derived, through fair and honest means.”  Id. The Court found that the complaint was insufficiently pled “because it does not allege that the ACTS trial software was obtained through unfair or dishonest means.” Id.

“Though a breach of the EULA may support a cognizable breach of contract claim, the Court finds that the mere presence of the EULA does not convert reverse engineering into an “improper means” within the definition of California trade secret law.”  Id.

Plaintiff also argued an action for misappropriation of a trade secret exists when a person discloses or uses a trade secret acquired (1) under circumstances giving rise to a duty to maintain secrecy or (2) derived from a person who owed a duty to maintain the secrecy of the trade secret. Id. (citing Civ. Code § 3426.1).  Plaintiff argued that the EULA created a “duty to maintain secrecy,” which was allegedly breached when defendants reverse engineered ACTS.  Id.

The court found this argument without merit.  Id.

California Court have found that this “duty to maintain secrecy” generally exists in the context of a fiduciary duty or an employment agreement to maintain the confidentiality of company trade secrets. See Ali v. Fasteners for Retail, Inc., 544 F. Supp. 2d 1064, 1070 (allowing a trade secret claim to proceed in the context of a fiduciary relationship); Ralph Andrews Prod., Inc. v. Paramount, Pictures Corp., 222 Cal.App.3d 676, 682-83, 271 Cal.Rptr. 797 (analyzing liability context of a competitor who hires a former employee of another company who is likely to disclose trade secrets).

Id.

The court found that the “duty to maintain secrecy” does not arise from a form license agreement.  Id.  Since the complaint FAC has only pled that defendants acquired Plaintiff’s trade secret through “reverse engineering.” As such, the Court found that Plaintiff had not pled sufficient facts to support a cognizable trade secret misappropriation claim.

Judge and Attorneys

Senior District Judge Ronald S.W. Lew.

Michael Karl Hagemann, Century City, CA, for Plaintiff.

Andres F. Quintana, John M. Houkom, Quintana Law Group APC, Calabasas, CA, for Defendants.

By CHARLES JUNG

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