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Virtual Cloud Services, Inc. v. CH2M Hill

February 21, 2006


The opinion of the court was delivered by: Kane, J.


This is a business tort action in which Plaintiff Virtual Cloud is suing its former development officer Jeffrey Ingram and former joint venturer CH2M Hill claiming Ingram defected to CH2M Hill after an "alliance" agreement between the companies faltered. Virtual Cloud claims Ingram misappropriated certain computer network monitoring software he had developed while at Virtual Cloud, which Virtual Cloud believed it was jointly promoting with CH2M Hill. After Ingram switched allegiances and transferred his software and know-how to CH2M Hill, Virtual Cloud claims CH2M Hill abandoned the joint venture, reaping the benefits of the technology and robbing Virtual Cloud of any beneficial interest it had in it and was entitled to retain under the parties' partnership arrangement.

In its Complaint, Virtual Cloud originally asserted thirteen claims for relief against CH2M Hill and Ingram ranging from violations of the federal Computer Fraud and Abuse Act to misappropriation of trade secrets and similar business torts to breach of contract, breach of fiduciary duty, and unjust enrichment.*fn1 The claims are based on Virtual Cloud's assertion that CH2M Hill strung it along in sham partnership negotiations until it could hire Ingram and pirate Virtual Cloud's software for itself. CH2M Hill denies any wrongdoing and claims Virtual Cloud gave the software to it in exchange for financial support during the relevant time period.

On Virtual Cloud's motion accompanying the Complaint, I entered a temporary restraining order limiting Defendants' use of the allegedly stolen network monitoring technology and set the matter for an expedited hearing on a request for a preliminary injunction. After a three-day evidentiary hearing, I declined to continue the injunction, finding the legal issues too fact intensive to warrant prohibiting CH2M Hill from using information Virtual Cloud only averred was proprietary and misappropriated.

Discovery continued, and a spate of Motions for Judgment and Summary Judgment were filed seeking to tailor Plaintiff's claims. Among them, the Motions sought judgment on eight of Plaintiff's twelve remaining claims on grounds that six of them are preempted by the Colorado Uniform Trade Secrets Act and three others -- the CCPA claim and the claims for intentional interference and breach of contract against Ingram -- fail under Rule 56(c) standards to state viable causes of action. Virtual Cloud's claims for violations of the Federal Computer Fraud and Abuse Act and Colorado Trade Secrets Act, together with its common law claims for breach of contract against CH2M Hill and breach of fiduciary duty against Ingram are not the subject of any dispositive motion at this time. Virtual Cloud has since confessed judgment on the CCPA claim.

Considering carefully the parties' multiple briefs, attachments thereto and relevant statutory and other legal authority, I issue the following rulings:

1. Defendants' Motion for Judgment as a Matter of Law on Claims Preempted by the Uniform Trade Secrets Act (Doc. # 75, filed 8/18/03)

In this Motion, CH2M Hill and Ingram contend the express preemption provisions of the Uniform Trade Secrets Act (UTSA) bar six of Virtual Cloud's state-law tort and restitutionary claims because all are based on the same allegations of misappropriation, use, or disclosure of alleged trade secrets that give rise to Virtual Cloud's second claim for relief under Colorado's version of the UTSA.*fn2 Specifically, Defendants challenge Claim IV of Plaintiff's Amended Complaint (unfair competition); Claim V (civil conspiracy); Claim VI (conversion); Claim VII (civil theft); Claim XI (unjust enrichment/restitution); and Claim XII (the breach of fiduciary duty against CH2M Hill). I evaluate this assertion under a Rule 12(c) standard because the claims' evidentiary sufficiency under a Rule 56(c) standard is not at issue in the Motion.

Virtual Cloud denies its common law claims are preempted, both because they form alternate theories of relief in the event Defendants succeed in their assertion that the information at issue does not meet the definition of a trade secret and because they state claims independently of whether a trade secret exists or not. Both sides rely on Judge Babcock's analysis of the issue in Powell Prods., Inc. v. Marks, 948 F. Supp. 1469, 1475 (D. Colo. 1996). I grant the Motion in part and deny it in part.

In Powell, now Chief Judge Babcock rejected the concept of field preemption under Colorado's UTSA. Citing commentator Roger M. Milgrim, Judge Babcock disagreed with "courts that had applied blanket preemption to all claims that arise from a set of circumstances that happen to involve information that the plaintiff claims is in the nature of a trade secret," opting instead for a tailored approach where only claims "'restat[ing] the same operative facts [as] would plainly and exclusively spell out only trade secret misappropriation'" are preempted. Powell, 948 F. Supp. at 1474 (quoting Milgrim on Trade Secrets § 1.01[4] at 1-68.14 (1996)(emphasis added)).

'The preemption provisions can be somewhat worrisome if they are applied mechanistically or overly conceptually. Our common law is richly flexible in redressing wrongs for improper conduct which in full or in part involves the use of information derived from the plaintiff.' [Citation omitted.] It is neither necessary nor prudent to preclude all common law claims that are connected with the misappropriation of what a plaintiff claims are trade secrets.

Id. (quoting Milgrim, supra). Accordingly, the salient question in addressing the question of trade secrets act preemption is whether a challenged common law claim depends solely on a finding of trade secret status to be actionable. Where it does not, the claim is not preempted.

Thus, in Powell, Judge Babcock parsed the various common law claims of a manufacturer asserted against a former employee and that employee's new company to conclude, for example, that while the UTSA preempted the manufacturer's conversion claim, it did so only to the extent the claim was based on the conversion or theft of the manufacturer's idea or "trade secrets." 948 F. Supp. at 1475. That portion of the conversion claim seeking recovery for stolen physical items such as blueprints and drawings would not be preempted because it would not be the subject of a misappropriation claim under the UTSA. Id. By contrast, and because the claim could only be stated for the misappropriation or exploitation of ideas protectible as "trade secrets," plaintiff's unfair competition claim would be actionable only under the UTSA and not as a separate common law cause of action. Id. at 1476.

Powell is instructive and cannot be read, as Defendants suggest here, to require a form of field preemption for all of Virtual Cloud's ...

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