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Cocona, Inc. v. Singtex Industrial Co.

United States District Court, D. Colorado

October 9, 2014

COCONA, INC., a Delaware corporation, Plaintiff,
v.
SINGTEX INDUSTRIAL CO., LTD., a Taiwanese company, Defendant.

ORDER ON DEFENDANT'S MOTION TO DISMISS (Docket No. 15)

MICHAEL J. WATANABE, Magistrate Judge.

Cocona Inc. created a process for incorporating carbon particles from coconuts into fabric. The fabric is used for outdoor gear, to enhance odor control, moisture absorption, and UV protection without the use of synthetic chemicals. Singtex Industrial Co. used to manufacture that fabric for Cocona, but has since gone into business selling a competing product (called S.Cafe) made from coffee rather than coconut. In this action, Cocona asserts claims against Singtex for breach of contract, unfair competition, theft of trade secrets, and business torts-and Singtex now asks this Court to dismiss the claims under Rule 12(b)(6) (Docket No. 15).

The parties have consented to have this case resolved in its entirety by a magistrate judge under 28 U.S.C. § 636(c) (Docket Nos. 16, 17). The Court GRANTS the motion in part and DENIES it in part.

Cocona's Legal Claims

Cocona asserts five claims for relief:

• First, that Singtex breached the "Supplier Agreement, " a 2008 contract between the parties;
• Second, that Singtex breached the "Nondisclosure Agreement, " a 2005 contract between the parties;
• Third, that Singtex has misrepresented its product and unfairly competed against Cocona in violation of § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a);
• Fourth, that Singtex misappropriated Cocona's trade secrets in violation of Colorado's Uniform Trade Secrets Act, C.R.S. §§ 7-74-101 et seq.; and
• Fifth, that Singtex interfered with Cocona's customer contracts, a common law tort.

Analysis

Under Rule 12(b)(6), the Court must accept the facts Cocona alleged in the

Complaint as true; further, if there are inferences that must be drawn, the Court must draw them in Cocona's favor. Gee v. Pacheco, 627 F.3d 1178, 1183 (10th Cir. 2010). Only factual allegations are to be accepted as true. Allegations of legal conclusions- for example, that a contract was valid, that conduct was willful or bad faith, or that measures were reasonable-are not included in the Court's analysis. Kansas Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011). Generally speaking, only the Complaint is to be considered. However, "if a plaintiff does not incorporate by reference or attach a document to its complaint, but the document is referred to in the complaint and is central to the plaintiff's claim, a defendant may submit an indisputably authentic copy to the court to be considered on a motion to dismiss." GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997). The parties agree that the contracts attached to Singtex's motion to dismiss are true copies ( see Document No. 18, ¶ 4), and so the Court will consider the terms of those contracts.

Once the set of operative facts is established according to the foregoing rules, the Court must decide whether those facts adequately state grounds for relief. It is not necessary for Cocona to allege a prima facie case including every last element of its legal claims-but it must put forward enough facts for the Court to infer that its claims are at least plausible. Khalik v. United Air Lines, 671 F.3d 1188, 1191-92 (10th Cir. 2012).

I. Statute of Limitations

Singtex first argues that all of the claims in the Complaint are barred by the applicable statutes of limitations. As the Ninth Circuit recently explained:

Dismissal under Rule 12(b)(6) on the basis of an affirmative defense is proper only if the defendant shows some obvious bar to securing relief on the face of the complaint. If, from the allegations of the complaint as well as any judicially noticeable materials, an asserted defense raises disputed issues of fact, dismissal under Rule 12(b)(6) is improper.

ASARCO, LLC v. Union P. R., ___ F.3d ___, 2014 WL 4211113, at *3 (9th Cir. Aug. 27, 2014) (internal citations omitted); accord Radil v. Sanborn Western Camps, Inc., 384 F.3d 1220, 1224-27 (10th Cir. 2004) (deciding that where factual dispute exists as to affirmative defense in workers' comp statute, issue must be put to the trier of fact); Bullington v. United Air Lines, Inc., 186 F.3d 1301, 1311 n. 3 (10th Cir. 1999) ("Rule 12(b)(6) is a proper vehicle for dismissing a complaint that, on its face, indicates the existence of an affirmative defense such as noncompliance with the limitations period"), overruled on other grounds by Nat'l R.R. Passenger Corp. v. Morgan, 536 U.S. 101 (2002).

The parties agree that all of Cocona's claims are subject to a three-year statute of limitations except the tort claim, which is subject to a two-year statute (Document 15, p. 9 nn. 6-7; Document 19, pp. 8-9). Because the Complaint was filed in June 2014, Cocona's suit is thus untimely as to any non-tort claims that accrued before June 2011 and any tort claims that accrued before June 2012. As to each of these claims, a claim accrues only when the plaintiff knows, or should know in the exercise of reasonable diligence, of facts establishing each element of the claim. See, e.g., Miller v. Armstrong, 817 P.2d 111 (Colo. 1991).

Singtex argues that, on the face of the Complaint, Cocona's claims accrued in 2010 at the latest. To support this argument, Singtex points to the following allegation, in Paragraph 27 of the Complaint:

In or around 2010, Singtex began marketing a composite yarn technology it called "S.Cafe." Singtex began targeting customers and potential customers of Cocona's proprietary products.

(Document 1, ¶ 27). From that language, Singtex asserts: "Cocona admits it has known about its claims since 2010" (Document 15, p. 2; see also Document 15, pp. 9-11). Obviously, Cocona's allegation is not an admission of any such thing. It is an allegation about the timing of Singtex's conduct, and it says nothing at all about Cocona's actual knowledge of that conduct. Likewise, Cocona included screenshots from Singtex's website as exhibits to the Complaint, and Singtex points out that those websites (as the screenshots clearly show) are copyrighted in 2010. Again, these exhibits go to the timing of Singtex's conduct, and say nothing at all about Cocona's actual knowledge of that conduct.

Nothing else in the Complaint or its exhibits bears specifically on the timing of Singtex's conduct. Thus, as to constructive knowledge, Singtex asks the Court to conclude that Paragraph 27 and the copyrighted website, together, establish that Cocona would have known of its alleged injuries in 2010 had it been reasonably diligent. But to so hold, the Court would need to infer (for example) that Singtex successfully stole customers in 2010, or that the mere existence in 2010 of Singtex's website should have alerted Cocona that Singtex had stolen its trade secrets and that Singtex's marketing claims were false or misleading. At the 12(b)(6) stage, the Court must draw these inferences in the opposite direction-in Conoca's favor-if there is any reasonable way to do so. And it is, ultimately, reasonable to infer the opposite. One can read the Complaint and reasonably infer that no customers were successfully stolen until some point after 2012. One can read the Complaint and reasonably infer that the website would not have shown up on Cocona's radar until sometime in 2011 despite all due diligence. Accordingly, there is no "obvious bar to securing relief on the face of the complaint, " ASARCO, LLC, 2014 WL 4211113, at *3, and Singtex's affirmative defense cannot prevail on a motion to dismiss.

II. Claim 1: Breach of the Supplier Agreement

Cocona alleges that Singtex breached the 2008 Supplier Agreement:

Upon information and belief, Singtex breached the terms of the Supplier Agreement, including without limitation, by offering its S.Cafe and other natural fabric products in direct competition with Cocona; by using without permission Cocona's intellectual property, technology, and other proprietary materials; and by reverse engineering Cocona materials and processes.

(Docket No. 1, ¶ 49). Singtex does not challenge the factual sufficiency of Cocona's pleadings on this claim. Singtex instead argues that under Colorado law the contract is unenforceable in whole or in part, for two reasons: (1) the non-compete clause in the contract is void as against public policy; and (2) in any event, the contract had been de facto terminated by Cocona before any alleged breach occurred.

A. Non-compete clauses under Colorado law

The 2008 Supplier Agreement contains a clause prohibiting Singtex from competing against Cocona for the duration of their business relationship and for six months thereafter:

[2](e) Non-compete. Company acknowledges that Cocona will be sharing certain confidential information and know-how with Company. Other than with respect to the manufacture and sale of Certified Products in accordance with the express terms herein, Company agrees that during its engagement with Cocona and for a period of six (6) months after provision of written notice of termination of Company's engagement with Cocona, Company will not engage directly or indirectly in the manufacture or sale of fabric products (whether knit or woven) incorporating charcoal or carbon particles (such as those derived from coconut, bamboo or similar sources) or other active particles.

(Docket No. 15-2, p.3).

Colorado has a strong public policy against non-compete clauses. By statute, "[a]ny covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer shall be void." C.R.S. § 8-2-113(2). Such contracts are void ab initio, not merely voidable. Mgmt. Recruiters of Boulder, Inc. v. Miller, 762 P.2d 763, 765 (Colo.App. 1988). The statute has four exceptions, but they are narrowly construed. Nat'l Propane Corp. v. Miller, 18 P.3d 782, 787 (Colo.App. 2000). Moreover, even where a non-compete agreement is not barred by statute, it must still be reasonable in terms of both duration and geographic scope. Nat'l Graphics Co. v. Dilley, 681 P.2d 546, 657 (Colo.App. 1984).

It is not clear that the statute applies in this context, however. On its face, the statute refers only to a person's "right to receive compensation" from "an employer." And while courts routinely apply it more broadly, see, e.g., Keller Corp. v. Kelley, 187 P.3d 1133, 1138-40 (Colo.App. 2008) (franchisor/franchisee); DBA Enters. Inc. v. Findlay, 923 P.2d 298, 301-03 (Colo.App. 1996) (sale of franchise); Colo. Supply Co. v. Stewart, 797 P.2d 1303, 1305 (Colo.App. 1990) (independent contractors); Smith v. Sellers, 747 P.2d 15, 16-17 (Colo.App. 1987) (dental partner/independent contractor), there are only two cases considering the statute in a context analogous to this case- and they came to different conclusions. Compare Nutting v. RAM Southwest, 106 F.Supp.2d 1121, 1124-25 (D. Colo. 2000) (Babcock, J.) (statute applies to manufacturer/distributor contract), with Energex Enterprises, Inc. v. Anthony Doors, Inc., 250 F.Supp.2d 1278, 1281 (D. Colo. 2003) (Kane, J.) (statute does not apply to licensee/licensor relationship).

At this stage, the Court need not determine whether the statute applies- because even if it does, Cocona's pleadings bring this case within the "protection of trade secrets" exception under C.R.S. § 8-2-113(2)(b). See Energex, 250 F.Supp.2d at 1281-82 (applying trade-secret exception in the alternative); cf. Harvey Barnett, Inc. v. Shidler, 338 F.3d 1125, 1133 (10th Cir. 2003) (reversing summary judgment against plaintiff as to non-compete claim where question of fact existed as to related trade-secrets claim). For a covenant to fit that exception, "the purpose of the covenant must be the protection of trade secrets, and the covenant must be reasonably limited in scope to the protection of those trade secrets." Gold Messenger, Inc. v. McGuay, 937 P.2d 907, 910-11 (Colo.App. 1997).

As discussed below, under Claim 4, the Complaint adequately pleads the existence of protectable trade secrets. And as to the reasonableness of the limitation, "a noncompete agreement must not be broader than necessary to protect the promisee's legitimate interests, and it must not impose hardship on the promisor." Reed Mill & Lumber Co. v. Jensen, 165 P.3d 733, 736 (Colo.App. 2006); see also Saturn Sys., Inc. v. Militare, 252 P.3d 516, 526-28 (Colo.App. 2011) (comparing trade-secret cases). Reasonableness turns on the facts of each case. Id. Here, the non-compete clause does not prohibit Singtex from creating or selling fabrics that do not incorporate "active particles." That term will need to be defined over the course of this litigation, but it is not unreasonably broad on its face. Further, given the non-compete clause's prefatory sentence, the clause may allow Singtex to sell fabrics incorporating active particles so long as Singtex does not use Cocona's trade secrets to do so. See, e.g., Gold Messenger, 937 P.2d at 910-11 (reading non-compete narrowly in light of contract preamble). Finally, the clause operates for only six months after the end of the 2008 Supplier Contract, a length of time that is unlikely to be excessive. Accepting the allegations in the Complaint as true and drawing all factual inferences in Cocona's favor, the Court cannot say that this non-compete clause is unreasonable. Cocona has stated a claim for an enforceable non-compete agreement under C.R.S. § 8-2-113(2)(b). Thus, even if the statute applies, Singtex's argument fails.

B. De facto termination

The second argument, about de facto termination, can be resolved very quickly, as there is literally no factual basis for it in the Complaint. Singtex cites no legal authority for establishing de facto termination, and it cites to no factual allegations in the Complaint from which it might be inferred that the unidentified legal requirements are satisfied. Singtex correctly points out that the non-compete clause in the Supplier Agreement prohibits competition for only six months after the termination of the contract. But accepting the facts as alleged in the Complaint to be true, and drawing inferences in Cocona's favor, it is impossible to find that Cocona abandoned or terminated the contract or in any way concluded business with Singtex-and more specifically, it is impossible to find that Cocona abandoned the contract six months before the breaching conduct occurred (allegedly, starting in 2010). Singtex's motion to dismiss Claim 1 is denied.

III. Claim 2: Breach of the Nondisclosure Agreement

Cocona alleges that Singtex also breached the 2005 ...


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