ILLINOIS TOOL WORKS, INC. v. SEATTLE SAFETY, LLC (W.D.Wash. 11-8-2010)

system operated in the same manner as the Hyper-G (as DSD asserts it finally did in 2007) for DSD to reasonably suspect that Seattle Safety had misappropriated its trade secrets. As the Beard court states, neither conclusive proof nor a smoking gun is necessary. Id. Rather, the statute begins to run as soon as the plaintiff reasonably suspects that a specific wrongful act has occurred. At that point, the plaintiff is on notice that legal action must be taken. Id.

That point in time occurred in 2004 for DSD. Dr. Steffan has admitted that the fact that he had given trade secrets to Seattle Safety (in the form of modeling information), combined with the fact that Seattle Safety was building a sled which operated in a similar manner to the Hyper-G, was sufficient to cause him to reasonably assume that Seattle Safety was using proprietary information. (Wilkinson Decl. Ex. 10 at 105.) DSD knew at the termination of its contractual relationship with Seattle Safety in 2003 that Seattle Safety had acquired some of DSD's trade secrets as a result of their collaboration. Indeed, the contract between the parties provided for the handling of such confidential information both during the contract period and following termination. (Wittman Decl. Ex. 6.) Moreover, as indicated above, beginning in March 2004 and continuing throughout the year, numerous people, including employees, suppliers, and customers, were alerting DSD to the strong similarities between its product and the ServoSled. Moreover, Dr. Steffan was responding to customers during this timeframe by telling them that Seattle Safety was "using a lot of [DSD's] proprietary information." (Wilkinson Decl. Ex. 10 at 104.) On these facts, reasonable minds could not differ that DSD either reasonably suspected that Seattle Safety was misappropriating trade secrets or it should have so suspected. Thus, by the time that DSD and ITW had filed suit on December 21, 2007, the statute of limitations (which had begun running prior to that date in 2004) had already expired.

Further, Dr. Steffan has expressly admitted that DSD "provided a lot of confidential information on our system" to Seattle Safety. (Wilkinson Decl. Ex. 10 at 102-103.)

The court finds Seatrax, Inc. v. Sonbeck Int'l, Inc., 200 F.3d 358 (5th Cir. 2000), instructive. In Seatrax, a manufacturer of offshore marine cranes brought an action against an aftermarket parts supplier for misappropriation of trade secrets. Several employees had left the manufacturer's former licensee and gone to work for the defendant. Id. at 365. While at the former licensee, the employees had access to trade secrets such as drawings. Id. After the former employees joined the defendant company, the plaintiff heard a "lot of innuendos and rumors" about the defendant's role in distributing plaintiff's crane parts. Id. Further, at least three customers raised questions with the plaintiff about the defendant's status as a distributor of the plaintiff's parts. Id. at 366. The court found that the combination of former employees of plaintiff's licensee starting a new company that sold a product line similar to that marketed by plaintiff's licensee, along with all of the "innuendos and rumors," created "a red flag for possible misappropriation of trade secrets," and triggered commencement of the statutory period. Id. at 367. Because the plaintiff failed to file suit within the statutory timeframe, the court granted summary judgment. Id. ("[S]ummary judgment evidence indicates that [plaintiff] failed to exercise reasonable diligence to discover its cause of action").

Similarly, here, it is undisputed that Seattle Safety through its contractual relationship with DSD had access to DSD's trade secrets. It is also undisputed that as early as 2004, Seattle Safety began distributing the ServoSled, which DSD believed was highly similar to its own Hyper-G. There is also no dispute that employees, suppliers, and customers had all alerted DSD to the similarity of Seattle Safety's sled to the Hyper-G beginning as early as March 2004, and continuing during that year. Like Seatrax, these facts constituted a "red flag for possible misappropriation of trade secrets." Id. at 366-67; see also McLeod, 969 P.2d at 1071 (undisputed facts that plaintiff knew trade secrets were disclosed to defendant, and that defendant had begun tests using the trade secret, commenced the running of the statute of limitations on that day). On the basis of the foregoing undisputed facts, reasonable minds could not differ that by the time DSD and ITW filed suit on December 21, 2007, the three-year statute of limitations was already exhausted. Thus, the court is compelled to grant summary judgment to Seattle Safety on grounds that the Plaintiffs' UTSA claim is barred by the statute of limitations.

Plaintiffs rely primarily on Veritas Operating Corp. v. Microsoft Corp., No. C06-0703-JCC, 2008 WL 474248 (W.D. Wash. Feb. 4, 2008), in which the court denied summary judgment on the statute of limitations in response to plaintiff's argument that it could not have discovered the misappropriation of its computer code until it received the latest version of Microsoft's operating system. However, in doing so, the court emphasized plaintiff's diligent efforts, involving "much discussion, negotiations, and numerous letters," to discover whether a claim existed. Id. at *11. Further, the court noted Microsoft's delay in providing the plaintiff the code, id., as well as Microsoft's pattern of "deception and obfuscation of the true facts" over several years. Id. at *10. There are no similar allegations against Seattle Safety here. Nor has DSD recited facts constituting diligent efforts on its part to discover whether a claim against Seattle Safety existed. For similar reasons, Mass. Eye and Ear Infirmary v. QLT Phototherpeutics, Inc., 412 F.3d 215 (1st Cir. 2005), is also distinguishable. There, defendant gave plaintiff "repeated assurances" that its trade secrets were not being disclosed, id. at 241, and the court found it "reasonable . . . to assume that [the defendant's] purpose in making assurances to [the plaintiff] could have been to delay a suit that would include trade secret claims." Id. at 242. Again, similar allegations of false reassurances are absent here.
Plaintiffs also rely on Accenture Global Servs. GmbH v. Guidewire Software, Inc., 691 F. Supp. 2d 577 (D. Del. 2010). Like Veritas, Accenture involves the misappropriation of trade secrets concerning computer software. The court finds allegations of misappropriation of intangible items such as computer software to be factually distinct from the type of misappropriation alleged here involving crash test sleds. While the court recognizes that part of Plaintiffs' claim involves control software, Plaintiffs have also alleged misappropriation involving physical components such as brake pads. ( See Steffan Decl. ¶ 9, Ex. B.) Such tangible items were not at issue in either Veritas or Accenture. Further, once Plaintiffs were aware in 2004 that Seattle Safety was allegedly attempting to misappropriate information concerning Plaintiffs' brake pads, it would have been unreasonable for Plaintiffs to assume that Seattle Safety could be trusted to protect any other secrets, including intangible items such as control software. See, e.g., Forcier v. Microsoft Corp., 123 F. Supp. 2d 520, 525 (N.D. Cal. 2000); Intermedics, Inc. v. Ventritex, Inc., 822 F. Supp. 634, 654 n. 19 (N.D. Cal. 1993)).

Seattle Safety also seeks summary judgment based on the running of the limitations period with regard to some of the Plaintiffs' other tort claims, including breach of confidential relationship (fifth cause of action), and breach of fiduciary duty (sixth cause of action), Plaintiff's claim for unjust enrichment (eighth cause of action), and Plaintiffs' claim for breach of the covenant of good faith and fair dealing (third cause of action). These claims also carry a three-year statute of limitations. RCW 4.16.080(2) (tort claims); RCW 4.16.080(3) (unjust enrichment); Eckert v. Skagit Corp, 583 P.2d 1239, 1240 (Wash. Ct. App. 1978) (unjust enrichment); Steinberg v. Seattle First Nat'l Bank, 832 P.2d 124, 125 n. 4 (1992) (good faith and fair dealing). To the extent that these claims are based on Seattle Safety's misuse of DSD's trade secrets, the court grants summary judgment with regard to these claims as well.

The court notes that Plaintiffs have asserted that factual allegations unrelated to the misappropriation of trade secrets undergird these claims as well. (Resp. at 9-10.) Defining the specific contours of what, if anything, may remain of these claims in light of this order is not an issue that the court addresses today.

C. Conversion and Unfair Competition

Seattle Safety has moved for summary judgment with regard to Plaintiffs' claims for conversion and unfair competition. Seattle Safety asserts that Plaintiffs' have failed to make an evidentiary showing sufficient to avoid summary judgment with regard these two claims. (Mot. at 15-16.)

In December 2008, the court dismissed most of Plaintiffs' conversion claim as preempted by Washington's UTSA. (Order (Dkt. # 34) at 4-6.) However, the claim survived "only to the extent that Seattle Safety converted physical property or other types of property," including "physical items connected to Seattle Safety's alleged improper `possession and control of proprietary information provided by DSD.'" (Order (Dkt. # 41) at 3 n. 1 (quoting Compl. (Dkt. # 1) ¶ 48).) On June 10, 2009, Plaintiffs filed an amended complaint in which they once again alleged a cause of action for conversion, asserting that Seattle Safety "improperly took possession and control of the proprietary information provided by DSD, including without limitation documentation, material and other physical components of Hyper-G technology." (Am. Compl. (Dkt. # 93) ¶ 67.)

In their opposition to Seattle Safety's motion for summary judgment, Plaintiffs asserts that Seattle Safety wrongfully obtained and converted samples of Hyper-G brake pad material and drawings of the Hyper-G brake design. (Resp. at 14-15.) Seattle Safety disputes Plaintiffs' recitation and interpretation of the facts surrounding these items. (Reply at 8.) Nevertheless, Plaintiffs have successfully raised a material issue of fact sufficient to present to the jury with regard to this claim. Accordingly, the court denies Seattle Safety's motion for summary judgment with regard to Plaintiffs' claim for conversion.

Seattle Safety also moved for summary judgment of Plaintiffs' claim for unfair competition. (Mot. at 16.) On December 17, 2008, the court dismissed Plaintiffs' claim for unfair competition. (Order (Dkt. # 34) at 11-14.) In its ruling, the court found that Plaintiffs' unfair business competition claim was preempted by Washington's UTSA "to the extent it [wa]s not factually independent from [Plaintiffs'] misappropriation claim," but was "not preempted . . . as it relate[d] to Seattle Safety's alleged improper commercialization under the contract." ( Id. at 13.) Nevertheless, the court went on to rule:

On June 10, 2009, Plaintiffs re-plead this claim in their amended complaint. The court recognizes that to preserve their appeal rights with regard to their claim for unfair competition, Plaintiffs were required to re-plead this cause of action in their amended complaint, despite the court's earlier dismissal. See Marx v. Loral Corp., 87 F.3d 1049, 1055-56 (9th Cir. 1996) ("Ninth Circuit authority clearly states that all causes of action alleged in an original complaint which are not alleged in an amended complaint are waived.") (internal quotations omitted).

Despite the court's conclusion as to preemption under the UTSA, it does not follow that Plaintiffs' unfair competition claim survives review under Rule 12(c). . . . [T]he economic loss rule functions to preclude Plaintiffs from recovering in tort economic losses to which their entitlement flows only from contract. . . . [Plaintiffs'] unfair competition claim straddles the boundary between tort and contract. The court's review of the complaint and Plaintiffs' response indicates that Plaintiffs' unfair competition claim is predicated on a contractual provision assigning an exclusive right of commercialization of the Hyper-G technology to DSD. . . . Plaintiffs' losses are economic in nature; they have not alleged personal injury or property damage. . . . As discussed above, Plaintiffs may recover for this alleged breach but must do so as part of their contract claim. The court concludes that Plaintiffs' unfair competition claim is barred by the economic loss rule. The court DISMISSES Plaintiffs' seventh cause of action for unfair competition.

(Order (Dkt. # 34) at 13-14.)

As noted above, since the court's ruling on December 17, 2010 ruling, the Washington Supreme Court has issued two new decisions which address the prior development of case law concerning the economic loss rule, and denominate a new rule known as the "independent duty doctrine." See Eastwood, 2010 WL 4361986 Affiliated FM Ins. Co., 2010 WL 4350338. Under this doctrine, "[a]n injury is remediable in tort if it traces back to the breach of a tort duty rising independently of the terms of the contract." Eastwood, 2010 WL 4361986 at *12. The court has already directed the parties to provide supplemental memorandum concerning the impact of these new decisions, and thus will defer ruling on whether Plaintiffs' claim for unfair competition remains barred under Washington's new independent duty doctrine.

However, irrespective of whether Plaintiffs' unfair competition claim is barred by Washington's independent duty doctrine, Plaintiffs' have failed to raise a genuine issue of fact with regard to this claim for trial. As the court has previously noted, Washington law limits common law claims for unfair business competition to claims for "passing off." Childers v. Sagem Morpho, Inc., No. C06-0060RSM, 2006 WL 3734151 at *5 (W.D. Wash. Dec. 15, 2006) (citing Ivan's Tire Serv. Store, Inc. v. Goodyear Tire Rubber Co., 517 P.2d 229, 237 (Wash. Ct. App. 1973)). "Passing off" refers to "the appropriation of a competitor's name or symbols or the substitution of goods so as to deceive the public." Boggs v. Whitaker, Lipp Helea, Inc., 784 P.2d 1273, 1275 (Wash. Ct. App. 1990). Plaintiffs' evidence to support their allegation of "passing off" consists of testimony and documents indicating that Seattle Safety contacted a customer that had considered buying a Hyper-G, and offered to sell the customer a ServoSled instead. (Resp. at 15 (citing Stahl Decl. Ex. Z (Wittman Dep.) at 48-49, 51-52 Ex. AA.) In do so, Plaintiffs assert that Seattle Safety told the customer that the "fundamental operation" of the ServoSled and the Hyper-G was "the same." (Stahl Decl. Ex. AA.) While this conduct may be actionable under some other cause of action, it does not constitute "passing off." Indeed, the evidence cited by Plaintiffs demonstrates that Seattle Safety made a clear distinction between its "newer system" which "does not use the components supplied by DSD," and "the system using DSD components" when comparing the two. ( Id.) None of this evidence, even viewed in the light most favorable to Plaintiffs, indicates that Seattle Safety was attempting to "pass off" a ServoSled as a Hyper-G.

Plaintiffs also assert that they have evidence of "reverse passing off" by Seattle Safety. (Resp. at 15.) Even assuming such conduct is cognizable in Washington to undergird a common law claim for unfair competition, and that the claim is not preempted by federal law, Plaintiffs have once again failed to raise a genuine issue of fact. The only evidence of "reverse passing off" they cite is Seattle Safety's identification, during sales presentations, of two customers from the period of DSD's and Seattle Safety's collaboration as prior "ServoSled" customers. (Resp. at 15 (citing Stahl Decl. Ex. A (Coughren Dep.) 16, 29-30 Ex. BB).)

The court was unable to find any Washington case involving allegations of "reverse passing off" in the context of a common law claim for unfair competition, and the parties did not cite any.

"[W]hile `passing off' claims avoid 17 U.S.C. § 301 preemption, reverse passing off claims tend not to survive." Cyber Websmith, Inc. v. Am. Dental Assoc., No. 09-CV-6198, 2010 WL 3075726 at *3 (N.D. Ill. Aug. 4, 2010). "Courts nationwide recognize that the Copyright Act preempts claims of `reverse passing off' brought under state laws governing unfair and deceptive trade practices." Rutledge v. High Point Regional Health Sys., 558 F. Supp. 2d 611, 621 n. 4 (M.D.N.C. 2008) (citing myriad cases). However, none of the parties have raised this issue, and the court therefore declines to decide it.

Although there is no Washington law defining the necessary elements of this claim, the Ninth Circuit has described "reverse passing off" as situations in which the defendant allegedly removes the name on another party's product and sells that product under the name of the defendant, removes the name of the manufacturer and sells the product in an unbranded state, or sells or offers for sale another's product that has been modified slightly and labeled with a different name. Cleary v. News Corp., 30 F.3d 1255, 1261 (9th Cir. 1994). All of these instances involve the defendant acquiring the plaintiff's product and selling that product as the defendant's own, whether in its original state or in a slightly modified one. Here, the evidence, when viewed in a light most favorable to Plaintiffs, involves at best the misidentification of the Plaintiffs' customers. Plaintiffs have provided no evidence that Seattle Safety ever attempted to rebrand a Hyper-G sled and sell it as its own, in either its original state or in a somewhat altered form. See, e.g., Atlas Equip. Co., LLC v. Weir Supply Group, Inc., No. C07-1358Z, 2009 WL 4670154 at *6 (W.D. Wash. Sept. 15, 2009) (granting summary judgment of reverse passing off claim under Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), where there was no evidence that defendant had ever purchased or acquired product from trademark holder).

Further, some courts have also identified the likelihood of consumer confusion as an element of "reverse passing off." See, e.g., id. Plaintiffs have identified no evidence of consumer confusion as a result of Seattle Safety's marketing materials in which Seattle Safety allegedly misidentified two out of 23 companies as former ServoSled customers. The scintilla of evidence put forward by Plaintiffs with regard to a potential "reverse passing off" claim is simply insufficient to create a genuine issue of material fact. See id. at *7. Thus, the court grants Seattle Safety's motion for summary judgment on this alternate ground with regard to Plaintiff's claim for unfair competition whether in the form of "passing off" or "reverse passing off."

D. Washington's Consumer Protection Act

Seattle Safety contends that the Washington State Supreme Court recently determined that nonresidents of Washington, such as Plaintiffs here, do not have standing to bring a Washington CPA claim. In Schnall v. AT T Wireless Services, Inc., 225 P.3d 929 (Wash. 2010), the Court states:

Even the general extraterritorial flavor of RCW 19.86.920 cannot change the clear standing limitations in the statute: a claimant must allege injury in trade or commerce that `directly or indirectly affect[s] the people of the State of Washington.'"

Id. at 939 (quoting RCW 19.86.010(2)). The Court continues that "[i]n the context of this case, the CPA applies only to claims brought by persons residing in Washington." Id.

Plaintiffs counter that the narrow question presented in Schnall was "whether Washington will become a locus of nationwide class action litigation," id. at 932, and therefore, neither Schnall's "context" nor its holding are applicable here. Plaintiffs note that Seattle Safety's principal place of business is in Washington, and thus to the extent that Seattle Safety engaged in anti-competitive practices, which includes allegations of bribery, interference with the competitive bidding process, and misrepresentations, many of those acts would have originated in Washington. ( See Resp. at 16.) While the court agrees that reading Schnall to eliminate standing under the CPA for every nonresident would be an overly broad interpretation, Plaintiffs interpretation limiting Schnall solely to the class action context is too narrow.

Further, the Plaintiffs' emphasis on the location of Seattle Safety's principal place of business is also misplaced. The Schnall court's analysis was unaltered by the fact that the defendant corporation (AT T Wireless Services, Inc.) was based in Washington and engaged in disputed transactions within the state. See Avritt v. Reliastar Life Ins. Co., 615 F.3d 1023, 1032-33 (8th Cir. 2010) (citing Schnall, 225 P.3d 944-45 (Sanders, J. dissenting) (observing that the defendant was a Washington corporation and that `[s]ignificant portions of each transaction occurred in Washington.")). Rather, of critical importance to the Schnall court was the connection — or lack thereof — between the CPA claim at issue and the people of the state of Washington. "To state a [CPA] claim a person must show that the unfair or deceptive act affected the people of the state of Washington." Schnall, 225 P.3d at 938. The court explained that CPA actions, whether they are pursued by the Washington Attorney General or a private citizen, may be brought only on behalf of persons residing within the state. Id. at 938-39.

Therefore, despite the location of Seattle Safety's principal place of business within the state of Washington, there is an insufficient connection between the Plaintiffs' CPA claim and the people of the state of Washington for Plaintiffs to be said to be acting "on behalf of persons residing within the state." See id. Although Plaintiffs baldly assert that Seattle Safety's "unfair acts hurts [sic] not just Plaintiffs, but customers, other sled manufacturers, and others in the industry" (Resp. at 17), Plaintiffs cite no evidence in the record that any of these individuals or entities are located in Washington. To the contrary, the record reveals that Plaintiff DSD is the only company that has ever contracted with Seattle Safety to collaborate on the marketing or production of an acceleration sled. (Wittman Decl. ¶ 24.) Indeed, Seattle Safety asserts that Plaintiffs are its only serious competitors ( see Mot. at 18 (citing Wilkinson Decl. Ex. 10 (Steffan Dep.) at 204-05)), and Plaintiffs have not disputed this assertion. The Schnall court recognized "the Washington CPA as a tool for protecting the interests of Washington citizens and residents." K.S. v. Ambassador Programs, Inc., No. CV-08-243-RMP, 2010 WL 1629247 at *2 (E.D. Wash. Apr. 21, 2010) (dismissing Virginian's claim against Washington company which solicited plaintiff and others to apply for and participate in trip to Australia). Under the facts of this case, "Plaintiffs are certainly outside of th[e] sphere of interest as determined in Schnall." Id. Accordingly, the court grants Seattle Safety's motion for summary judgment with respect to the Plaintiffs' CPA claim.

Because the court resolves this issue on the basis of the standing requirement set forth in Schnall, the court does not reach the issue of whether Plaintiffs' CPA claim satisfies the "public interest" element of the claim, or is essentially a private dispute. ( See Mot. at 18.)

IV. CONCLUSION

For the foregoing reasons, the court GRANTS in part and DENIES in part Seattle Safety's motion for partial summary judgment regarding non-patent issues (Dkt. ## 192 (redacted) 193 (sealed)).

Dated this 8th day of November, 2010.