Trade Secrets Claim Results from Copyright Infringement Investigation

nexTUNE, a Washington corporation, provides digital music services to businesses and individuals.  Over a period of more than six years, nexTUNE developed music delivery technologies that it considered trade secrets.  EMI Music is a major music company.  EMI sent nexTUNE a cease and desist letter, which accused nexTUNE of copyright infringement.  EMI then requested information about nexTUNE’s music services in connection with its investigation of nexTUNE’s claim that a statutory license covered nexTUNE’s use of EMI’s copyrighted sound recordings.  nexTUNE agreed to provide the information requested, on the condition that it be kept confidential.  nexTUNE’s president met with EMI’s outside counsel, Buck McKinney and Christopher Harrison, in Austin, Texas, and provided the requested information.  In a phone conversation before the meeting, McKinney agreed to keep the information confidential.  At the meeting, nexTUNE’s president recognized Harrison as someone who was working for a nexTUNE direct competitor and had previously worked for other nexTUNE’s direct competitors.

nexTUNE sued EMI, McKinney and Harrison in the Western District of Washington, alleging non-infringement of EMI’s copyrights (a federal law claim) and misappropriation of trade secrets (a state law claim).  Harrison moved to dismiss the trade secret misappropriation claim against him for lack of personal jurisdiction (FRCP 12(b)(2)) and failure to state a claim upon which relief can be granted (FRCP 12(b)(6)).  McKinney moved to dismiss the trade secret claim against him for lack of subject matter jurisdiction (FRCP 12(b)(1)) and lack of personal jurisdiction.  EMI moved to dismiss the trade secret claim against it for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted.  The district court granted Harrison’s motion to dismiss for lack of personal jurisdiction, but denied McKinney’s motion.  The district court granted McKinney’s and EMI’s motions to dismiss for lack of subject matter jurisdiction without prejudice and with leave to amend the complaint.  EMI’s motion to dismiss for failure to state a claim was granted and the claim dismissed without prejudice.

Lack of personal jurisdiction over Harrison

The evidence showed that Harrison’s only contact with nexTUNE was the meeting in Austin, Texas.  Specific jurisdiction over a non-resident defendant requires a showing 1) that the defendant purposefully directed his activities at the forum; 2) that the plaintiff’s claims arise out of the forum-related activities; and 3) that exercising jurisdiction over the defendant is reasonable.  The purposeful direction element is based on an “effects test” focusing on the forum in which the defendant’s actions were felt, regardless of whether those actions occurred in the forum.  The effects test “requires that the nonresident defendant (1) commit an intentional act, (2) that was expressly aimed at the forum state, and (3) that caused harm that the nonresident defendant knew would likely be suffered in the forum state.”  (Harrison order pdf page 6). 

The district court ruled that Harrison did not expressly aim his activities at Washington, the forum state, since his only involvement was the meeting in Austin, Texas.  Given its ruling on specific jurisdiction, the district court ruled that Harrison’s failure to state a claim motion was moot.

Lack of subject matter jurisdiction over McKinney and EMI

The district court addressed the lack of subject matter issue first, as the power of the court to hear a case is the preliminary issue.  In addition to having jurisdiction over the person, courts must have the power to hear the specific kind of claim that is before the court.  Subject matter jurisdiction for federal courts is limited.  Federal courts do not have the power to hear every kind of case.

A complaint must be dismissed under Rule 12(b)(1) if, considering the factual allegations in the light most favorable to the plaintiff, the action: (1) does not arise under the Constitution, laws, or treaties of the United States, or does not fall within one of the other enumerated categories of Article III, Section 2, of the Constitution; (2) is not a case or controversy within the meaning of the Constitution; or (3) is not one described by any jurisdictional statute.

(McKinney/EMI order pdf page 5).

The plaintiff has the burden of establishing federal court subject matter jurisdiction.  McKinney and EMI argued that the complaint did not provide a basis for jurisdiction over the state law claim, as it did not allege either diversity jurisdiction (federal jurisdiction over parties from different states and over $75,000 in controversy) or supplemental jurisdiction (jurisdiction based on valid jurisdiction over another claim in the case) over the state law claim.  The district court agreed and granted McKinney’s and EMI’s motion to dismiss, with leave to amend the complaint.

Failure to state a claim against EMI

The complaint must allege facts sufficient to state a plausible ground for relief.  The district court granted EMI’s motion to dismiss the trade secret misappropriation claim for failure to state a claim upon which relief can be granted.  The district court ruled that the complaint speculates that McKinney may have shared information with EMI for an improper purpose, but that such speculation without the support of factual allegations is insufficient to support a claim of trade secret misappropriation, and is therefore insufficient to survive a Rule 12(b)(6) motion to dismiss.  The district court dismissed this claim without prejudice.

Lack of personal jurisdiction over McKinney

The legal requirements are set out in the discussion regarding Harrison, above.  The district court ruled that the intentional act requirement of the effects test was satisfied by McKinney’s acquisition of nexTUNE’s documents.  McKinney engaged in intentional acts by acquiring the documents and providing them to Harrison.  McKinney’s acts were expressly aimed at Washington because he knew that nexTUNE was a Washington corporation and engaged in direct communication with nexTUNE.  McKinney was also aware that misappropriation of nexTUNE’s trade secrets would result in harm to a Washington entity, satisfying the foreseeable harm in the forum requirement.  nexTUNE’s trade secrets claim against McKinney arises out of forum-related activities, because nexTUNE would not have a trade secrets claim without McKinney’s forum-related activities. 

Finally, the district court ruled that the exercise of jurisdiction over McKinney is reasonable. 

The Ninth Circuit considers seven factors in determining whether the exercise of jurisdiction is reasonable.

(1) the extent of the defendants’ purposeful interjection into the forum state’s affairs; (2) the burden on the defendant of defending in the forum; (3) the extent of conflict with the sovereignty of the defendants’ state; (4) the forum state’s interest in adjudicating the dispute; (5) the most efficient judicial resolution of the controversy; (6) the importance of the forum to the plaintiff’s interest in convenient and effective relief; and (7) the existence of an alternative forum.

(McKinney/EMI order pdf page 13.)

The district court ruled that factors 1, 4 and 6 favor the exercise of jurisdiction, while factors 2 and 7 go against the exercise of jurisdiction.  Factors 3 and 5 are neutral.  When the factors are considered together, the exercise of jurisdiction is not so unreasonable as to violate due process.  The district court denied McKinney’s motion to dismiss for lack of personal jurisdiction.

This case is nexTUNE, Inc. v. McKinney, No. C12-1974 TSZ, U.S. District Court, Western District of Washington.  The court filed separate orders on its rulings, designated in this post as nexTUNE, Inc. v. McKinney Harrison order and nexTUNE, Inc. v. McKinney McKinney/EMI order.

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