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Source Production & Equipment Co., Inc. v. Schehr

United States District Court, E.D. Louisiana

September 30, 2019

SOURCE PRODUCTION & EQUIPMENT CO., INC., ASPECT TECHNOLOGY LIMITED, SPECMED, LLC, SPEC MED INTELLECTUAL PROPERTY, LLC AND SPEC INTELLECTUAL PROPERTY, LLC
v.
KEVIN J. SCHEHR, ISOFLEX USA, ISOFLEX RADIOACTIVE LLC, RICHARD H. MCKANNAY, JR., AND JOHN DOES 1-10

         SECTION M (1)

          ORDER & REASONS

          BARRY W. ASHE, UNITED STATES DISTRICT JUDGE.

         Before the Court are several motions filed by defendants Kevin Schehr and Isoflex Radioactive, LLC (“IsoRad”) (together “IsoRad Defendants”) and/or Isoflex USA (“IUSA”) and Richard H. McKannay, Jr. (together “IUSA Defendants, ” and collectively with the IsoRad Defendants, “Defendants”) seeking summary judgment on plaintiffs' trade-secret misappropriation claims for failure to specify the trade secrets at issue, [1] failure to prove misappropriation of any purported trade secrets, [2] and failure to prove damages.[3] Plaintiffs Source Production & Equipment Co., Inc. (“SPEC”), Aspect Technology Limited (“ATL”), Specmed, LLC (“Specmed”), Spec Med Intellectual Property, LLC (“SMIP”), and Spec Intellectual Property, LLC (“SPI”) (collectively, “Plaintiffs”) respond in opposition.[4]Defendants and Plaintiffs filed several replies in further support of, or opposition to, the motions.[5] On August 15, 2019, the Court held oral argument on the motions. Having considered the parties' memoranda, the evidence in the record on summary judgment, counsels' statements at oral argument, and the applicable law, the Court issues this Order & Reasons.

         I. BACKGROUND

         This matter concerns the alleged theft of trade secrets and breaches of fiduciary duty and contract by a business's former employee. The Court summarized the factual background of this case in a prior ruling on Defendants' motion to dismiss certain claims raised in Plaintiffs' first amended complaint:[6]

Source Production & Equipment Co., Inc. (“SPEC”) and its affiliates bring this trade-secret misappropriation and unfair competition action against Kevin J. Schehr, Isoflex USA, Isoflex Radioactive LLC, and Richard McKannay, Jr. SPEC is a supplier of industrial and medical radiography equipment and radioactive isotope materials. Schehr is a former executive officer at SPEC. According to the complaint, Schehr began working for SPEC in 1995 and held various positions at the company until his termination in July of 2016. Plaintiffs allege that over the course of his employment, Schehr signed several confidentiality agreements regarding SPEC's trade secrets. These trade secrets include technologies used to manufacture containers for shipping radioactive material.
According to the complaint, Schehr unsuccessfully attempted to acquire an ownership interest in SPEC in 2012 and 2014. Plaintiffs further allege that Schehr's resentment toward SPEC and its owner, Richard Dicharry, following these attempts prompted Schehr to engage in conduct intended to undermine SPEC and benefit Schehr and others affiliated with Schehr. To this end, Schehr allegedly made several misrepresentations to Dicharry that he knew to be false, caused SPEC to default on the terms of a sale agreement, negotiated business contracts against Dicharry's wishes, filed for and claimed ownership rights to patents developed using SPEC's resources, and provided false financial information in order to inflate his personal bonuses, among several other alleged transgressions.
SPEC terminated Schehr's employment on July 10, 2016. Plaintiffs allege that after his termination, Schehr did not immediately return his company-issued laptop, despite SPEC's demand that he do so. Plaintiffs further allege that once the laptop was returned, a forensic analysis revealed that Schehr emailed a number of SPEC's confidential and proprietary files to his personal email accounts. According to plaintiffs, the analysis also showed that minutes after his termination, Schehr attached two external hard drives to the laptop and subsequently deleted 5, 086 files from the laptop. Plaintiffs allege that Schehr continues to possess other storage media belonging to SPEC, including thumb drives and CDs.
Finally, plaintiffs allege that both before and after his termination, Schehr conspired with Isoflex USA and McKannay, the managing director of Isoflex USA, to establish Isoflex Radioactive. Plaintiffs allege that in creating Isoflex Radioactive, defendants misappropriated plaintiffs' trade secrets and confidential information. This misappropriation, according to plaintiffs, will allow Isoflex Radioactive to compete with plaintiffs in the market for radioactive materials.
In their amended complaint, plaintiffs assert against all defendants claims for violations of the federal Defend Trade Secrets Act (“DTSA”), the Louisiana Uniform Trade Secrets Act (“LUTSA”), and the Louisiana Unfair Trade Practices Act (“LUTPA”), as well as for conversion. Against Schehr individually, plaintiffs assert claims for violation of the Computer Fraud and Abuse Act (“CFAA”), breach of legal duty, breach of contract, and fraud.

Source Prod. & Equip. Co. v. Schehr, 2017 WL 3721543, at *1-2 (E.D. La. Aug. 29, 2017) (footnotes citing record omitted).[7]

         The list of trade secrets that Plaintiffs claim Defendants misappropriated has evolved over the course of this litigation. On February 18, 2019, in their latest recitation of the purported trade secrets at issue, Plaintiffs claim that Defendants misappropriated:

a) The process for mixing and producing the insulation material utilized in Plaintiffs' Aspect Containers;[8]
b) The dimensional tolerances for the components utilized in the Aspect Containers;
f) Plans, drawings, and research regarding the development of a new radiography system, sometimes referred to as the “RDD JTube Radiography System”;
g) Plans, drawings, and research regarding the development of the Se-120 device (based upon intellectual property related to the former “Viking” radiography system sold to SPEC by Gilligan);
h) Methods and processes for producing medical High Does Rate (“HDR”) Afterloader Sources;
i) Methods and processes for producing and encapsulating a Selenium product called “SPE Calloy”;
j) The composition and process and procedure related to the manufacture of a wear-resistant connector for source assemblies;
l) Plans, drawings, and research for the design and development of a mini hotcell;
m) Confidential information regarding SPEC's financial condition; and
n) Confidential information regarding SPEC's business relationship with Qualitek.[9]

         Up to that point in time, Plaintiffs had identified some of the purported trade secrets that appear on the list, but not others. Plaintiffs filed their initial complaint on December 16, 2016, and filed their first amended complaint on April 4, 2017.[10] In their first amended complaint, Plaintiffs allege there are several features of their Aspect Containers that are not disclosed in public filings, and thus are trade secrets that, if known, would allow competitors to quickly and cheaply fabricate, and obtain government approval for, similar containers.[11] In their first amended complaint, Plaintiffs specify that their trade secrets include the items identified above by letters (a), (b), (f), (h), and (i).[12]

         On January 19, 2018, the IUSA Defendants propounded their first set of discovery requests on Plaintiffs, which included interrogatories asking Plaintiffs to specifically identify each trade secret they contend was misappropriated by McKannay or IUSA.[13] In their February 28, 2018 response, Plaintiffs claimed that they could not provide the requested detail without a protective order, and then reiterated the same purported trade secrets identified in the first amended complaint, while adding the newly-identified purported trade secret (g).[14]

         On June 21, 2018, the IsoRad Defendants propounded their first set of discovery requests on Plaintiffs, which included interrogatories asking Plaintiffs to specifically identify each trade secret they contend was misappropriated by Schehr.[15] Plaintiffs responded on August 6, 2018, listing the same purported trade secrets as stated in their February 28, 2018 responses to the IUSA Defendants' interrogatories, but did not provide further detail regarding the alleged misappropriation.[16]

         On February 8, 2019, the parties attended a discovery conference with the magistrate judge at which Defendants expressed their frustration with Plaintiffs' failure to identify with specificity their purported trade secrets. The magistrate judge ordered Plaintiffs to “identify with particularity for the defendants the specific trade secrets plaintiffs claim were misappropriated.”[17]

         Plaintiffs produced the February 18, 2019 identification of trade secrets list (quoted above) in response to that order.[18] This list added for the first time alleged trade secrets (j), (1), (m), and (n).[19] Plaintiffs stated that they believe Schehr was in possession of the purported trade secrets due to his file-downloading activities after his termination.[20] Generally, Plaintiffs think that Schehr has used or will use the purported trade secrets because IsoRad has technical drawings for a radioactive material transport container intended to compete with Plaintiffs' Aspect Container.[21] These drawings were produced to Plaintiffs in discovery on January 9, 2019.[22] Plaintiffs surmise that Schehr has shared the purported trade secrets because, they insist, he is incapable of operating 3D CAD software and “Plaintiffs do not believe that he could have created the drawings acting alone.”[23]

         II. PENDING MOTIONS

         After receiving Plaintiffs' February 18, 2019 list of trade secrets, Defendants filed the pending motions for summary judgment on Plaintiffs' trade-secret misappropriation claims. In the first motion, Defendants argue that Plaintiffs failed to timely identify their trade secrets with specificity.[24] Plaintiffs oppose the motion arguing that they have sufficiently identified the trade secrets at issue.[25] Plaintiffs attach to their opposition a chart constituting an updated list of trade secrets in which they identify by Bates number, for the first time, SPEC documents that purportedly contain the alleged trade secrets.[26]

         In their other motions for summary judgment on Plaintiffs' trade-secret misappropriation claims, Defendants argue that Plaintiffs failed to prove that Defendants misappropriated, used, or shared the purported trade secrets, and failed to prove damages associated with the alleged misappropriation.[27] Plaintiffs oppose the motions arguing that there are disputed issues of material fact that preclude summary judgment on these issues.[28] As evidence of misappropriation, Plaintiffs specified for the first time the documents that Schehr downloaded after his termination that Plaintiffs claim contain their trade secrets.[29]

         III. LAW & ANALYSIS

         A. Summary Judgment Standard

         Summary judgment is proper “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (citing Fed.R.Civ.P. 56(c)). “Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which the party will bear the burden of proof at trial.” Id. A party moving for summary judgment bears the initial burden of demonstrating the basis for summary judgment and identifying those portions of the record, discovery, and any affidavits supporting the conclusion that there is no genuine issue of material fact. Id. at 323. If the moving party meets that burden, then the nonmoving party must use evidence cognizable under Rule 56 to demonstrate the existence of a genuine issue of material fact. Id. at 324.

         A genuine issue of material fact exists if a reasonable jury could return a verdict for the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1996). The substantive law identifies which facts are material. Id. Material facts are not genuinely disputed when a rational trier of fact could not find for the nonmoving party upon a review of the record taken as a whole. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Equal Emp't Opportunity Comm'n v. Simbaki, Ltd., 767 F.3d 475, 481 (5th Cir. 2014). “[U]nsubstantiated assertions, ” “conclusory allegations, ” and merely colorable factual bases are insufficient to defeat a motion for summary judgment. See Anderson, 477 U.S. at 249-50; Hopper v. Frank, 16 F.3d 92, 97 (5th Cir. 1994). In ruling on a summary judgment motion, a court may not resolve credibility issues or weigh evidence. See Delta & Pine Land Co. v. Nationwide Agribusiness Ins. Co., 530 F.3d 395, 398-99 (5th Cir. 2008). Furthermore, a court must assess the evidence, review the facts, and draw any appropriate inferences based on the evidence in the light most favorable to the party opposing summary judgment. See Tolan v. Cotton, 572 U.S. 650, 656 (2014); Daniels v. City of Arlington, 246 F.3d 500, 502 (5th Cir. 2001). Yet, a court only draws reasonable inferences in favor of the nonmovant “when there is an actual controversy, that is, when both parties have submitted evidence of contradictory facts.” Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (citing Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 888 (1990)).

         After the movant demonstrates the absence of a genuine dispute, the nonmovant must articulate specific facts and point to supporting, competent evidence that may be presented in a form admissible at trial. See Lynch Props., Inc. v. Potomac Ins. Co. of Ill., 140 F.3d 622, 625 (5th Cir. 1998); Fed.R.Civ.P. 56(c)(1)(A) & (c)(2). Such facts must create more than “some metaphysical doubt as to the material facts.” Matsushita, 475 U.S. at 586. When the nonmovant will bear the burden of proof at trial on the dispositive issue, the moving party may simply point to insufficient admissible evidence to establish an essential element of the nonmovant's claim in order to satisfy its summary judgment burden. See Celotex, 477 U.S. at 322-25; Fed.R.Civ.P. 56(c)(B). Unless there is a genuine issue for trial that could support a judgment in favor of the nonmovant, summary judgment must be granted. See Little, 37 F.3d at 1075-76.

         B. DTSA and LUTSA

         Plaintiffs assert claims against Defendants under both the federal and Louisiana trade secrets statutes, DTSA and LUTSA, which are substantially similar. To prevail on a DTSA claim, a plaintiff must prove: (1) the existence of a trade secret; (2) a misappropriation of the trade secret by another; and (3) the trade secret's relationship to a product or service used or intended for use in interstate or foreign commerce.[30] 18 U.S.C. § 1836(b)(1). Similarly, to prevail on a LUTSA claim, “‘a complainant must prove (a) the existence of a trade secret, (b) a misappropriation of the trade secret by another, and (c) the actual loss caused by the misappropriation.'” Computer Mgmt. Assistance Co. v. Robert F. DeCastro, Inc., 220 F.3d 396, 403 (5th Cir. 2000) (quoting Reingold v. Swiftships, Inc., 126 F.3d 645, 648 (5th Cir. 1997)).

         1. Identification and Existence of Trade Secrets

         To prevail on a trade-secret misappropriation claim the plaintiff “‘must identify the trade secrets and carry the burden of showing that they exist.'” Mfg. Automation & Software Sys., Inc. v. Hughes, 2018 WL 3197696, at *14 (C.D. Cal. June 25, 2018) (quoting MAI Sys. Corp. v. Peak Comput., Inc., 991 F.2d 511, 522 (9th Cir. 1993)).[31] DTSA defines a “trade secret” as:

all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if -
(A) the owner thereof has taken reasonable measures to keep such information secret; and
(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information[.]

18 U.S.C. § 1839(3). LUTSA's definition of “trade secret” is nearly identical.[32] “A trade secret ‘is one of the most elusive and difficult concepts in the law to define.'” Tewari De-Ox Sys., Inc. v. Mountain States/Rosen, L.L.C., 637 F.3d 604, 613 (5th Cir. 2011) (quoting Lear Siegler, Inc. v. Ark-Ell Springs, Inc., 569 F.2d 286, 288 (5th Cir. 1978)). “Whether something is a trade secret is a question of fact.” CheckPoint Fluidic Sys. Int'l, Ltd. v. Guccione, 888 F.Supp.2d 780, 796 (E.D. La. 2012) (citations omitted).

         a. Plaintiffs' Identification of Trade Secrets

         Although it is not necessary for a plaintiff to disclose in detail in a complaint the allegedly misappropriated trade secrets, the plaintiff must plead sufficient facts to put the defendant on notice of what is alleged to have been misappropriated. Yeiser Research & Dev. LLC v. Teknor Apex Co., 281 F.Supp.3d 1021, 1043-44 (S.D. Cal. 2017) (citations and quotations omitted). “A plaintiff ‘should describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons skilled in the trade.'” Mfg. Automation, 2018 WL 3197696, at *14 (quoting Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161, 1164-65 (9th Cir. 1998)). To that end, “[t]he identification must clearly refer to trade secret material.” Dow Chem. Can. Inc. v. HRD Corp., 909 F.Supp.2d 340, 346 (D. Del. 2012) (citing Imax, 152 F.3d at 1167). Such a “pleading requirement … prevents a plaintiff from taking unfair advantage of the [Uniform Trade Secrets Act] and proceeding on a flimsy basis at the outset of a litigation only to tailor its identification of trade secrets to the discovery it receives.” Yeiser Research, 281 F.Supp.3d at 1044 (quotation omitted).

         Of the ten allegedly misappropriated trade secrets that Plaintiffs currently claim are at issue, five - identified by letters (g), (j), (1), (m), and (n) - were not referenced in the first amended complaint. Plaintiffs first identified alleged trade secret (g) as being at issue in January 2018.[33] Although Plaintiffs waited until more than a year into the litigation to reveal that they claimed the plans, drawings, and research regarding the development of the Se-120 device as a misappropriated trade secret, the parties engaged in discovery for more than a year after that revelation, until March 2019. Thus, Defendants have had plenty of time to develop issues related to the purported Se-120 trade secret through the discovery process.

         In contrast, Plaintiffs identified alleged trade secrets (j), (1), (m), and (n) for the first time on February 18, 2019, one day before Defendants' expert reports were due, and just one month before the close of discovery.[34] This eleventh-hour-trade-secrets identification is highly prejudicial to the Defendants who did not have sufficient time to explore through discovery any issues concerning these alleged trade secrets, nor to have those issues addressed by an expert. Such a late identification of purported trade secrets amounts to trial by ambush and is exactly the type of tailoring of trade-secret identification to discovery that earlier identification is designed to prevent. As a result, Defendants' motion for summary judgment for failure to identify trade secrets with specificity (R. Doc. 140) is GRANTED as to alleged trade secrets (j), (1), (m), and (n), and Plaintiffs' trade-secret claims as to those items are DISMISSED WITH PREJUDICE.

         b. Existence of Trade Secrets - Secrecy

         Information qualifies as a trade secret only if it is secret. 18 U.S.C. § 1839(3); La. R.S. 51:1431(4). Public disclosure obviously destroys secrecy and trade-secret protection. See, e.g., Johns Manville Corp. v. Knauf Insulation, LLC, 2017 WL 4222621, at *6 (D. Colo. Sept. 22, 2017). Thus, it is axiomatic that information that is part of a patent or published patent application, even a foreign one, cannot be protected as a trade secret. MetriColor LLC v. L'Oreal S.A., 2018 WL 5099496, at *5 (C.D. Cal. Aug. 15, 2018) (quoting Bladeroom Grp. Ltd v. Facebook, Inc., 2015 WL 8028294, at *3 (N.D. Cal. Dec. 7, 2015)); Attia v. Google LLC, 2019 WL 1259162, at *5 (N.D. Cal. Mar. 19, 2019) (finding that trade secrets were extinguished as of the date that the patent applications were published), appeal docketed, No. 19-15771 (9th Cir. Apr. 17, 2019); 1 Melvin F. Jager, Trade Secrets Law § 6:6 (2019).

         It is undisputed that alleged trade secrets (i) and (g) are the subjects of published patent applications pending in the United States, and alleged trade secret (f) is the subject of a patent pending in Europe.[35] Plaintiffs acknowledge that the information disclosed in these patent applications is not eligible for trade-secret protection.[36] But, Plaintiffs argue that they are claiming trade-secret protection related to matters that are not disclosed in the patent applications.

         To identify what those allegedly undisclosed trade secrets are, Plaintiffs point to eleven documents that Schehr downloaded after he was terminated from SPEC.[37] Most of these documents include technical information about the RDD J Tube - alleged trade secret (f), Se-120 device - alleged trade secret (g), and SPECalloy - alleged trade secret (i). However, Plaintiffs do not present the Court with any comparison of the publicly-available information, on the one hand, and the documents obtained by Schehr, on the other, to explain or demonstrate how those documents contain information amounting to trade secrets that are not disclosed in the patent applications. As such, Plaintiffs do not clearly refer the Court to tangible trade-secret material, but rather refer the Court to documents they allege, without further identification, to contain trade secrets that may not be disclosed in the patent application. See Imax, 152 F.3d at 1167 (holding that trade-secret claimant failed to identify allegedly secret information about patented projector system undisclosed by patent).

         A plaintiff must do more than identify a technology or document allegedly containing a potential trade secret “and then invite the court to hunt through the details in search of items meeting the statutory definition [of a trade secret].” IDX Sys. Corp. v. Epic Sys. Corp., 285 F.3d 581, 583-84 (7th Cir. 2002). This is especially true in a case such as this one where the trade-secret claim involves sophisticated, highly technical issues that the district court or jury, on its own, is unlikely to have the expertise required to discern exactly what constitutes a trade secret. See Imax, 152 F.3d at 1167. It is the plaintiff's burden to prove that a trade secret exists and identify what information is known to the trade and which is not. IDX Sys., 285 F.3d at 383-84 (“unless the plaintiff engages in a serious effort to pin down the secrets a court cannot do its job”). Plaintiffs have failed to carry that burden as to alleged trade secrets (f), (g), and (i). Therefore, Defendants' motions for summary judgment on Plaintiffs' trade-secret misappropriation claims (R. Docs. 162 & 163) are GRANTED as to alleged trade secrets (f), (g), and (i), and Plaintiffs' trade-secret misappropriation claims as to those items are DISMISSED WITH PREJUDICE.[38]

         c. Existence of Trade Secrets - Dimensional Tolerances

         Plaintiffs identify the dimensional tolerances for the components utilized in the Aspect Containers as alleged trade secret (b) above. As evidence of misappropriation, Plaintiffs contend that Schehr downloaded four proprietary design drawings that show the shape, dimensions, and dimensional tolerances, along with some materials of construction, of the container components.[39] In light of this contention, the Court will broadly read the term “dimensional tolerances, ” as included in Plaintiffs' list of identified trade secrets, to encompass all of the information shown on the drawings. Defendants argue that the container's dimensions, shape, and materials of construction are not trade secrets because they are publicly disclosed or easily ascertainable ...


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