248 F. Supp.2d 64 (2003) | Cited 0 times | D. Rhode Island | March 3, 2003


Magnum Defense, Inc. ("Magnum" or "Plaintiff") is a California defenseresearch firm and contractor that developed a process for the productionof a high technology plastic film.1 This so-called Magnalon Film wasdesigned primarily for use in the guidance system of missiles andtorpedoes,but it also has other commercial applications. Over time,through a series of acqusitions and transactions, the trade secretsassociated with Magnalon Film passed through various companies andindividuals. Magnum has sued these companies for the allegedmisappropriation of those trade secrets. This matter is before the Courton a Motion for Judgment on the Pleadings pursuant to Fed.R.Civ.P. 12(c)brought by Defendant Harbour Group., Ltd. For the reasons detailedbelow, the Defendants' motion is denied in part and granted in part.

Standard of Review

Federal Rule of Civil Procedure 12(c) allows a party, "[a]fter thepleadings are closed but within such time as not to delay the trial, [to]move for judgment on the pleadings." Rivera-Gomez v. de Castro,843 F.2d 631, 635 (1st Cir. 1988) (citing Bloor v. Carro, Spanbock,Londin, Rodman & Fass, 754 F.2d 57, 61 (2nd Cir. 1985)). In reviewinga Rule 12(c) motion, a court must accept all of the non-movant'swell-pleaded factual averments as true and draw all reasonable inferencesin his or her favor. Id.; see Int'l Paper Co. v. Town of Jay, 928 F.2d 480,482 (1st Cir. 1991). The court may not grant a Rule 12(c) motion unlessit appears beyond a doubt that the non-movant can prove no set of factsin support of his or her claim or defense which would entitle thenon-movant to prevail. Rivera-Gomez, 843 F.2d at 635; see Int'l PaperCo., 928 F.2d at 482-83.

The standard for granting a motion to dismiss and a motion for judgmenton the pleadings is the same. See Whiting v. Maiolini, 921 F.2d 5, 6 (1stCir. 1990) (district court was within its discretion in convertingmovant's Rule 12(c) motion for judgment on the pleadings to 12(b) motionfor failure to state a claim); Nedder v. Rivier College, 944 F. Supp. 111,120 (D.N.H. 1996) (standard for evaluating a Rule 12(c) motion forjudgment on the pleadings is the same as the standard for evaluating aRule 12(b)(6) motion). The trial court may dismiss a complaint underRule 12(b)(6) or Rule 12(c) only if no relief can be granted based on any setof facts that could be proved consistent with plaintiff's allegations.See Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229,81 L.Ed.2d 59 (1984); Figueroa v. Rivera, 147 F.3d 77, 80 (1st Cir. 1998).In considering either motion, the court must treat all well-pleadedfactual allegations contained in the complaint as true and draw allreasonable inferences therefrom in favor of the plaintiff. Coyne v. Cityof Somerville, 972 F.2d 440, 442-43 (1st Cir. 1992); Rumford Pharmacy,Inc. v. City of East Providence, 970 F.2d 996, 997 (1st Cir. 1992).


Taking all well pleaded facts as true, as this Court must, thecircumstances that gave rise to this action are as follows. In 1996,Magnum entered into a prime contract with the United States Air Forcewhereby Magnum was to perform additional research and development on itsproduct, Magnalon Film, and to build and deliver a pilot line of machinesto synthesize and extrude Magnalon Film. Magnum entered into a writtensubcontract (the Basic Ordering Agreement or "BOA") with a Rhode Islandmanufacturer, Marshall & Williams Company ("M&W"), whereby M&W wouldmanufacture, assemble and deliver a machine that would "advanc[e] thestate-of-the-art in orienting polymer films" (the "Machine"). Magnumalleges that it disclosed confidential and proprietary information (inoral, written, and computerized form) to M&W in order for M&W to buildthe Machine. To protect this confidential information, Magnum enteredinto a written confidentiality agreement(the "Confidentiality Agreement") with M&W.

Problems arose in the construction of the Machine, and in 1999, Magnumsued M&W in California Superior Court for, inter alia, breach of contract(based, in part, on M&W's failure to return Magnum's confidentialinformation upon demand) and fraud (the "California Action"). M&W removedthe California Action to the United States District Court for the CentralDistrict of California and counterclaimed for the unpaid balance due onthe subcontract. At oral argument before this Court on January 24, 2003,counsel for Magnum represented that both the BOA and the ConfidentialityAgreement were attached to the complaint in the California Action. InSeptember 2000, the California District Court found M&W liable for fraudand breach of contract, and entered judgment for Magnum in the amount of$5,230,000, including punitive damages and costs.

At the time the California Action was proceeding, M&W was petitionedinto receivership in Rhode Island, and in February 2000, a Receiverappointed by the Rhode Island Superior Court sold M&W's assets toDefendant Harbour Group Ltd. ("Harbour").2 M&W's counterclaim (ofapproximately $600,000) in the California Action was also sold toHarbour, but in March 2000, Harbour agreed to dismiss the counterclaim.Magnum alleges that many of its confidential Trade Secrets (includingdrawings, technical specifications, designs, models, componentdescriptions and logistics, blueprints, computer files, software, andpass codes) (collectively the "Trade Secrets") were included in the assetssold and transferred to Harbour (although they were not listed as part ofthe assets sold). See Magnum Defense, Inc.'s Memorandum of Law in Supportof Opposition to Harbour Group Defendants' Motion for Judgment on thePleadings, p. 6. Magnum further asserts that it had not authorized (and,indeed, did not know of) the sale or transfer of its Trade Secrets toHarbour and that it received no compensation therefor. Moreover, Magnumalleges that in 1999 and 2000, it made several written and oral demandsto the Receiver for the return of its Trade Secrets, but received noresponse.

Shortly after it purchased the M&W assets, Harbour transferred thoseassets (including Magnum's Trade Secrets) to its wholly-ownedsubsidiary, Defendant Tubular Textiles, LLC ("Tubular").3 Tubular, inturn, transferred the M&W assets (including Magnum's Trade Secrets) toits wholly-owned subsidiary, Defendant Marshall & Williams Products,Inc. ("Products").4 Products next transferred a portion of the M&Wassets (including Magnum's Trade Secrets) to Defendant ParkinsonMachinery & Manufacturing Corp. ("Parkinson").5 Parkinson thenreorganized the M&W assets (including Magnum's Trade Secrets) into a newdivision named Marshall & Williams Plastics ("Plastics").

Magnum claims that Products, Parkinson, and Plastics employ former M&Wemployees who are knowledgeable about the Confidentiality Agreement andthe Trade Secrets. Magnum accuses Parkinson d/b/a Plastics of using theTrade Secrets to produce machinery and equipment similar to thatcontemplated in the BOA.

On June 21, 2001, Magnum sent a letter to Harbour, Tubular, Products,and Parkinson demanding the return of its Trade Secrets. In response,Harbour and Products filed a motion for contempt against Magnum in theRhode Island Superior Court overseeing the M&W receivership, claimingthat the demand letter violated that court's order that the M&W assetswere sold "free and clear" of all liens and encumbrances.6

On November 30, 2001, Magnum filed this action in United StatesDistrict Court for the Central District of California, alleging thatHarbour, Tubular, Products, and Plastics misappropriated Magnum's TradeSecrets or otherwise violated California law. Harbour, Tubular, andProducts (collectively the "Harbour Defendants") moved to dismiss thecase for lack of personal jurisdiction on the ground that the partieswere not completely diverse. After allowing limited discovery solely onthe jurisdictional issue, the California court concluded that it did nothave personal jurisdiction over the named Defendants, and therefore,transferred the case to this Court pursuant to 28 U.S.C. § 1631.

The Complaint sets forth six counts: (1) Misappropriation of TradeSecrets in violation of the Uniform Trade Secrets Act ("UTSA") by theHarbour Defendants; (2) Misappropriation of Trade Secrets in violation ofCalifornia common law by the Harbour Defendants; (3) Misappropriation ofTrade Secrets in violation of UTSA by Parkinson; (4) Misappropriation ofTrade Secrets in violation of California common law by Parkinson; (5)unfair business practices in violation of the California Unfair BusinessPractices Act by all Defendants; and (6) unfair competition in violationof California common law by all Defendants.

The Harbour Defendants now move for judgment on the pleadings on allclaims against them (Counts 1, 2, 5, and 6) pursuant to Fed.R.Civ.P. 12(c),and for attorneys' fees. They contend that the Harbour Defendants couldnot have misappropriated Magnum's Trade Secrets because they did not knowor have reason to know of the existence of the Trade Secrets. They alsoargue that Rhode Island law controls this dispute and that the RhodeIsland Uniform Trade Secrets Act ("RIUTSA") preempts a common law claimfor misappropriation. Based on these assertions, the Harbour Defendantsclaim that they are entitled to attorneys' fees under the fee-shiftingprovisions of RIUTSA.7 Finally, the Harbour Defendants argue thatRhode Island does not recognize a cause of action in these circumstanceseither for unfair business practices or unfair competition.


A. Choice of Law

In their written submissions, both parties have relied exclusively onRhode Island law to support their substantive legalclaims. However, atoral argument, counsel for Magnum suggested that California law mightgovern some of the claims in the case.

A federal court sitting in diversity must apply the law of the forumstate, Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188(1938), including that state's conflict of law rules. See Klaxon Co. v.Stentor Elec. Mfg. Co. Inc., 313 U.S. 487, 496, 61 S.Ct. 1020,85 L.Ed. 1477 (1941); Crellin Technologies, Inc. v. Equipmentlease Corp., 18 F.3d 1,4 (1st Cir. 1994) ("[i]n determining what state law pertains, the courtmust employ the choice-of-law framework of the forum state, here, RhodeIsland"). Under Rhode Island law, the choice of law applicable to asubstantive issue depends upon whether the particular claim is properlycharacterized as a contract claim or a tort claim. See id. at 11-12(determining that a claim brought pursuant to Mass. Gen. Laws ch. 93Ashould be considered a tort claim for choice of law purposes if therequested remedy is highly analogous to that of a tort claim); ScullySignal Co. v. Joyal, 881 F. Supp. 727, 742 (D.R.I. 1995) ("[t]he factsunderlying the claim and the conduct complained of are the relevantfactors in determining if the claim is most analogous to a tort orcontract claim").

Plaintiff has alleged, in every relevant count of the Complaint, thatthe Harbour Defendants engaged in "wrongful," "willful," "deliberate,"and "malicious" conduct by misappropriating, holding, using, selling,disclosing, and disposing of Magnum's Trade Secrets. See Complaint,¶¶ 45-48, 50-53, 65, 68-70. These claims sound in tort. Therefore,the Court will apply the Rhode Island conflict of law principlesapplicable to tort claims.

Rhode Island has adopted an interest-weighing analysis to choosebetween the conflicting tort law of two or more states. See Scully,881 F. Supp. at 744 (citing Woodward v. Stewart, 104 R.I. 290, 243 A.2d 917,cert. dismissed sub nom., Vizcarra-Delgadillo v. U.S., 393 U.S. 957,89 S.Ct. 387, 21 L.Ed.2d 371 (1968); Brown v. Church of the Holy Name ofJesus, 252 A.2d 176 (R.I. 1969)). "In a misappropriation of trade secretscase such as the present one, the defendants' wrongful conduct is said totake place where the defendants misused the plaintiff's confidentialinformation for their own benefit." Scully, 881 F. Supp. at 744.Similarly, "[i]n the context of unfair competition claims, the place ofthe defendants' conduct is the overriding factor to be considered." Id.

Here, the evidence indicates that the alleged wrongful conduct occurredin Rhode Island. The underlying tort is the purchase and sale, in RhodeIsland, of receivership assets containing the Trade Secrets.Furthermore, Magnum claims that Parkinson d/b/a Plastics, a Rhode Islandentity, has misused and continues to misuse the Trade Secrets toconstruct machinery similar to what was contracted for in the BOA.Parkinson would never have obtained the Trade Secrets but for the saleand transfer of the M&W assets (including the Trade Secrets) fromProducts to Parkinson in Rhode Island.8 The balance of interestsfavors Rhode Island, and the Court will therefore apply Rhode Island lawto the dispute.

Misappropriation Of Trade Secrets Under The RIUTSA

Under the RIUTSA a person can misappropriate a trade secret in twoways. First, a person misappropriates a trade secret by acquiring a tradesecret with the knowledge — actual or constructive — that thesecret was obtained by improper means. See R.I. Gen. Laws §6-41-1(2).

Second, a person misappropriates a trade secret if he discloses oruses the secret when he (1) used improper means to acquire knowledge ofthe secret; (2) knew or had reason to know that the secret had beenacquired by improper means; or (3) knew or had reason to know that it wasa trade secret and that knowledge of it had been acquired by mistake oraccident. See R.I. Gen. Laws § 6-41-1(2) (emphasis supplied).

Accepting the facts as pled, and drawing all reasonable inferences infavor of Magnum, Harbour clearly knew or had reason to know that it hadreceived Magnum's Trade Secrets by the sale and transfer of the M&Wassets. One of the assets that Harbour purchased was M&W's $600,000counterclaim against Magnum in the California Action, whose dismissalHarbour explicitly approved. Even a cursory due diligence review of thisasset would have revealed that Magnum's Trade Secrets were at the heartof the California Action.

Furthermore, the BOA and Confidentiality Agreement were attached to thecomplaint in the California Action. Anyone who read the ConfidentialityAgreement would immediately have been on notice that Harbour wasacquiring the Trade Secrets.

Moreover, the Complaint states that Harbour's subsidiary, Products,employed former M&W employees who had worked on the Magnalon Film projectand were aware of the Confidentiality Agreement.9 This knowledgereasonably can be imputed to the Company.

The Court therefore finds that the allegations undergirding Count 1 ofthe Complaint and the reasonable inferences to be drawn therefrom aresufficient to withstand a motion for judgment on the pleadings. The Courtalso finds that the Motion for Attorneys' Fees is without merit, as theHarbour Defendants are not the "prevailing party" under the RIUTSA withrespect to Count 1.

Common Law Misappropriation of Trade Secrets

The Harbour Defendants next contend that the RIUTSA precludes a commonlaw misappropriation claim.10Specifically, R.I. Gen. Laws §6-41-7 provides that the RIUTSA "displaces conflicting tort,restitutionary, and other law of this state providing civil remedies formisappropriation of a trade secret."

There is little guidance on the issue of whether the RIUTSA precludes aRhode Island common law cause of action for misappropriation of tradesecrets. This is perhaps because there is no common law claim under RhodeIsland law for misappropriation of trade secrets. Clearly, this is only astatutory cause of action in Rhode Island. Therefore, judgment on thepleadings is appropriate as to Count 2 of the Complaint.11

Unfair Or Deceptive Business Practices

There is no Rhode Island analog to California's sweeping UnfairBusiness Practices Act. See Cal. Bus. & Prof. Code § 17200. TheRhode Island Deceptive Trade Practices Act does provide a statutory causeof action for deceptive trade practices, but it limits standing to "anyperson who purchases or leases goods or services primarily for personal,family, or household purposes." Eri Max Entertainment, Inc. v.Streisand, 690 A.2d 1351, 1354 (R.I. 1997) (citing R.I. Gen. Laws §6-13.1-5.2(a)); see Scully, 881 F. Supp. at 745 (§ 6-13.1 does notprovide a right of action for business persons or entities). Magnum, adefense contracting business making claims against other businesses,obviously does not have standing under the statute. Therefore, judgmenton the pleadings is appropriate as to Count 5.

Common Law Unfair Competition

For similar reasons, Count 6 of the Complaint is ripe for judgment onthe pleadings. Rhode Island common law requires that a putative plaintiffbringing a claim for unfair competition allege

conduct on the part of the [defendant] that reasonably tended to confuse and mislead the general public into purchasing [its] product when the actual intent of the purchaser was to buy the product of the complainant.

Eri Max, 690 A.2d at 1353-54 (citing George v. George F. Berkander,Inc., 169 A.2d 370, 371 (R.I. 1961)). Magnum clearly has madeinsufficient allegations to support this cause of action.


For the foregoing reasons, the court hereby ORDERS as follows:

Judgment on the pleadings as to Count 1 is DENIED;

Judgment on the pleadings as to Count 2 is GRANTED;

Judgment on the pleadings as to Count 5 is GRANTED; and

Judgment on the pleadings as to Count 6 is GRANTED.

1. Magnum is a California corporation with its principal place ofbusiness in California.

2. Harbour is a Delaware corporation and its principal place ofbusiness is in Missouri.

3. Tubular is a North Carolina corporation and its principal place ofbusiness is in North Carolina.

Defendants allege that it was, in fact, an entity named "Harbour GroupIndustries, Inc." that purchased the M&W assets and then assigned itsrights to those assets to Marshall & Williams Products, Inc. SeeMemorandum in Support of Motions for Judgment on the Pleadings and forAttorney's Fees ("Defendants' Memorandum"), p. 3 n. 3. It is notnecessary for the Court to make a determination on this issue in orderfor it to decide the instant motion.

4. Products is a Delaware corporation and its principal place ofbusiness is in South Carolina.

5. Parkinson is a Rhode Island corporation and its principal place ofbusiness is in Rhode Island.

6. The motion for contempt was heard by Judge Silverstein on September20, 2001. No decision on that motion has yet been rendered.

7. R.I. Gen. Laws § 6-41-4 provides in relevant part that

"[i]f . . . a claim of misappropriation is made in bad faith . . . the court may award reasonable attorney's fees to the prevailing party."

8. Counsel for Magnum argued orally that California law might applybecause various M&W employees had traveled to Magnum's offices inCalifornia, and because Magnum had disclosed some or all of its TradeSecrets during those visits. This misconstrues the conflict of lawrubric. It is, as noted above, the locus delicti that governs the choiceof law. The disclosure of confidential information, of itself, is not atort.

9. The Harbour Defendants purport to rely on the deposition testimonyof William Willhite, a Senior Vice President and the CFO of Harbour. SeeDefendants' Memorandum, p. 13. This type of evidence, however, is moreappropriately presented in a motion for summary judgment. Even so, thatportion of Mr. Willhite's testimony cited by the Harbour Defendants tendsto support Magnum's contentions:

Mr. Willhite knew very little if anything about the California Action against M&W. . . . At some point during the due diligence (or at closing), he did learn that one of the "assets" of M&W was a "receivable" related to Magnum, i.e., the counterclaim M&W had filed in the California Action.

See id. (citations omitted). At the very least, this testimony wouldappear to suggest that Harbour may have had reason to know that it wasacquiring the Trade Secrets. Furthermore, the discovery taken to date inthis case is by no means complete: the California District Court onlypermitted discovery to the extent that it was relevant to the issue ofpersonal jurisdiction. There may well be other witnesses who possessinformation respecting Harbour's knowledge of the Trade Secrets at thetime of the receivership asset purchase.

10. Count 2 seeks relief for misappropriation of Trade Secrets underCalifornia common law, but choice of law analysis, as set forth above,requires the application of Rhode Island law. The same principle appliesto Counts 5 and 6, discussed infra.

11. Were it before the Court, a motion for judgment on the pleadingswould appear to be equally appropriate as to Count 4 of the Complaint forcommon law misappropriation of Trade Secrets against Parkinson.

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