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Leatt Corp. v. Innovative Safety Technology

April 15, 2010

LEATT CORPORATION, A NEVADA CORPORATION; AND EXCEED HOLDINGS (PTY) LTD., A SOUTH AFRICAN COMPANY, PLAINTIFFS,
v.
INNOVATIVE SAFETY TECHNOLOGY, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY; KEVIN HEATH ENTERPRISES, INC., A CALIFORNIA CORPORATION; KEVIN HEATH, AN INDIVIDUAL; AND E.V. TECHNOLOGY, A CHINESE BUSINESS ENTITY, DEFENDANTS.



The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court

ORDER GRANTING IN PART AND DENYING IN PART MOTION FOR PRELIMINARY INJUNCTION [Doc. No. 35]

This is a case about alleged trade secret misappropriation. Currently before the Court is Plaintiffs' motion for a preliminary injunction, which seeks to enjoin Defendants (1) from using or disclosing Plaintiffs' trade secrets, (2) from manufacturing or selling the DefNder product in the United States, (3) requiring Defendants to return all of Plaintiffs' trade secrets in Defendants' possession or control, and (4) from competing unfairly with Plaintiffs in any manner. Having considered the parties' arguments, and for the reasons set forth below, the Court DENIES the motion with respect to Defendants Kevin Heath, Kevin Heath Enterprises, Inc., and E.V. Technology, but GRANTS IN PART the motion with respect to Defendant Innovative Safety Technology, LLC.

BACKGROUND

I. Factual Background

Plaintiffs Leatt Corporation ("Leatt") and Exceed Holdings (Pty) Ltd. ("Xceed") allege to have spent many years of independent research and development to create neck safety braces for use in motorsports. The effort was spearheaded by the founder of both corporations, Dr. Christopher Leatt, whose personal acquaintance was fatally injured in a motorcycle event in 2000-2001 when he fell and broke his neck. Following the accident, Dr. Leatt allegedly spent over 18 months studying neck injuries and how they were caused in order to develop neck brace protection from these injuries. In or around 2003, Dr. Leatt began working with a designer to create a prototype of his neck brace.

At the same time as Dr. Leatt was working on developing a neck brace for motorcycles, he was also working on a neck brace for cars. This brace, subsequently known as Moto-R, was first sold in or around July/August 2004. At that time, one of the major devices available for neck protection in motorsports and the only device that was approved by the world's top motorsport authority, the Federation Internationale de l'Automobile ("FIA"), was the "HANS" device. According to Plaintiffs, the Moto-R was superior to the HANS device, which apparently made insufficient provision for side impact and did not optimally apply its restraining force in a horizontal direction.

Xceed, formerly known as Leatt Brace Holdings (Pty) Limited ("Leatt Brace"), was established in 2005 and was responsible for the development of safety devices for motorsports, including neck braces or restraint devices. Xceed's main purpose now is ownership of the intellectual property related to the neck braces and restraint devices. Leatt was established in or around May 2005 and was responsible for the commercialization of the safety devices developed by Xceed. Leatt now also assists in the development and manufacture of new safety devices.

During the latter half of 2005 and 2006, after the Moto-R was launched, most of Plaintiffs' efforts were diverted to finalizing the development, manufacturing, and launch of the Moto-GPX, a brace for use with motorcycles. The Moto-GPX brace was launched at the end of 2006, and was enormously successful, largely due to the need for such a product and the absence of any competing protective equipment for the protection of motorcyclists' necks.

At about the same time in 2006, Leatt began commercializing the original Moto-R. However, while the U.S. safety body approved the Moto-R, it had not yet been approved by the European safety body, the FIA. Accordingly, Leatt focused on improving the Moto-R to a level where it would be approved by the FIA. To that end, a new version of Moto-R was allegedly prototyped in or around the late summer and/or early fall of 2006 ("Prototype 1"). According to Plaintiffs, substantial sums were expended on research and development during 2007 and up to the beginning of 2008. Leatt designed and built a second prototype around the summer of 2007 ("Prototype 2").

Two employees of Leatt, Grant Nelson and Karl Ebel, tested Prototype 2 around August and November 2007 at the Delphi test center in Ohio, after which they traveled to the Dakar Rally in Spain. Both employees worked for Xceed and then Leatt from at least 2005, and both had entered into employment and confidentiality agreements with Leatt on or around May 7, 2007, providing that they would maintain strictly confidential any and all information acquired during their employment by Leatt, including the "know-how as well as any and all result which has been or will be achieved or used with the Project," "the description of the Project," and "any other information which is not publicly available."*fn1 (See Leatt Decl., Exs. A, B, C, D [Doc. No. 35-3].)

Shortly after their return from the Dakar Rally, both Nelson and Ebel resigned from Leatt. Nelson resigned on January 11, 2008, effective January 25, 2008, and Ebel resigned in early February 2008. Plaintiffs allege that in less than a month after leaving Leatt, Nelson had already designed a prototype of a neck brace with a raised stabilizer bar similar to Prototype 2 ("the DefNder") and had drafted a document for his patent attorney describing his "invention." In March 2008, either Nelson or Ebel reserved a spot at the PRI tradeshow in Florida to launch the DefNder product. Nelson began testing the DefNder by May 2008, branding was complete by June 2008, and pre-orders were being taken by August 2008. In or around June 2008, Nelson, Ebel, and an investor (Doug Williams) formed Defendant Innovative Safety Technology, LLC ("IST"), which listed all three as managers or members. IST is presently in the business of selling safety braces, namely the DefNder. Williams is now the majority shareholder of the IST.

In summer or fall of 2008, IST entered into a distribution agreement with Defendant Kevin Heath, who arranged for the DefNder to be manufactured in China and to be imported and sold in the United States. Heath accomplished this through two of his companies: E.V. Technology ("EVT"), a Chinese business entity, and Kevin Heath Enterprises, Inc. ("KHE"), a California corporation. Defendant EVT was to manufacture the DefNder product, while Defendant KHE was to manufacture, import, market, and sell the product. By November 2008, when KHE began to manufacture the DefNder, Heath alleges he had already expended approximately $105,950 on testing, marketing, and obtaining tooling, labor, and other services.

Defendant KHE currently has a contract to sell the DefNder, and is the owner of the domain name. The website located at provides information and advertising for the DefNder product, and also allows online purchases of the DefNder. Defendant Heath also maintains the registration for the domain name, and personally owns and operates the website at that domain name. The website located at originally advertised and provided information about the DefNder product, but now only provides a link to the website located at the domain name .

II. The South African Action

Plaintiffs first filed suit in South Africa against Nelson and Ebel for misappropriating Plaintiffs' trade secrets and for copyright infringement.*fn2 On November 21, 2008, Plaintiffs received Anton Piller relief (order of preservation) from the court against Nelson and Ebel, which allowed for seizure of information from Nelson's and Ebel's computers. On December 5, 2008, Plaintiffs received an interdict (similar to a preliminary injunction) against Nelson and Ebel that prohibited them from disclosing, copying, selling, or distributing any of the following features of the Plaintiffs' Prototype 2: (1) "the bowed or convex shape of the bridge sections or 'collar-bone cut-offs' in the load-bearing struts between the wearer's shoulders and the lower end of the belt channels," (2) "the elongated side platforms of the bridge sections on either side of the wearer's neck elevated off the wearer's chest," (3) "the lateral tethers that extend generally vertically from the neck brace to the wearer's helmet," and (4) "belt channels defined by walls extending along the sides of the channels, to the proximity of the lower ends of the belt channels." (See Zaitlen Decl., Ex. 3.) In late November 2008, Plaintiffs also filed an action against Williams, among others. On June 11, 2009, Plaintiffs received a similar interdict against Williams. (See id., Ex. 4.) Both of the interdicts also expressly enjoined any sale or distribution of the DefNder product.

Plaintiffs allege that on or about January 6, 2009, the day before Nelson and Ebel were ordered to shut down the operation of the website, defendants' counsel contacted Leatt and requested a delay in the enforcement of the order, to which Leatt agreed. On the next day, Nelson and Ebel allegedly transferred the ownership and operation of the domain name and the website to Defendant Heath's third company, Speedworld Indoor Racing. Plaintiffs allege the website is still operating in direct contradiction to the interdicts issued against Nelson, Ebel, and Williams.

Subsequently, the South African action was referred to arbitration. Nelson testified during the arbitration, but Ebel and Williams did not. On December 4, 2009, after holding evidentiary hearings over a period of several months and after considering 2,580 pages of transcript, the Arbitrator issued a 202-page decision. (See Zaitlen Decl., Ex. 1 [hereinafter, "Arbitration Award"].) The Arbitrator determined that the overall shapes of Prototype 1 and 2 did not form part of the state of the art as of January 25, 2008. (Id. ¶ 98.) According to the Arbitrator:

The device of a raised stabiliser bar in particular, located between the upper and lower belt channels, under which the driver's belt or harness is positioned or located by means of the upper and lower belt channels or "wings", also did not form part of the state of the art as at [sic] the 25th January 2008. I also conclude that such a stabiliser bar, shaped so that its lower portion, resting on the wearer's chest, incorporates a lower belt channel, designed with the intention of holding the safety belt or harness in place at the position of the lower belt channels, did not form part of the state of the art. (Id.) The Arbitrator then determined that even though the test results of Prototype 2 were unsuccessful and that no further work was specifically carried out on Prototype 2, it "was a step in the process of developing a new generation neck brace," and as such could not be considered of no economic value. (Id. ¶ 112.) Thus, the Arbitrator concluded that even though elements of Prototype 2 were present on the Moto-R device and in other devices available in the marketplace, "there were significant design differences as between Prototype 2 and the prior art," and therefore "the overall design of Prototype 2 constituted confidential information." (Id. ¶ 113.)

The Arbitrator then identified the following information to have been confidential: (1) test results indicating the developments that were effective and those developments that were ineffective; (2) the fact that Prototype 2 incorporated a series of specific features, even though certain of those features were individually known in the public domain; (3) "the overall shape of the brace;" (4) "the harness channels, their size and the strategic placement thereof;" (5) "the reason for adopting extra large wings;" and (6) the shape and configuration of the stabilizer bars. (Id. ¶¶ 120, 127-28, 130-32.) The Arbitrator also determined that a number of items identified by Plaintiffs could not be considered confidential, including: (1) "design principles applicable in the manufacture of Plaintiffs' neck braces;" (2) "the manner in which such braces are tested and where the accredited test sites are to be found;" and (3) "the use and the placement of tethers generally including lateral and horizontal tethers." (Id. ¶¶ 118, 124, 137.) Finally, the Arbitrator also found that the developments that led to the "open-back" concept and to Prototypes 1 and 2 were notintended to be a "later version" of the closed front Moto-R as released to the public. (Id. ¶ 125.) Indeed, the Arbitrator indicated that it was "highly unlikely" that Prototypes 1 and 2 would have ever been released to the public in the form that they were in at that time. (Id.)

In the end, although there were some differences, the Arbitrator found that the DefNder conceptually resembled Prototype 2, particularly in relation to the stabilizer bar. (Id. ¶¶ 257, 350.) The Arbitrator found that Nelson used his knowledge of the design of Prototype 2 in designing the DefNder, and that such knowledge constituted confidential information proprietary to Plaintiffs. (Id. ¶¶ 348-53.) According to the Arbitrator, the following confidential information was misused by Nelson: (1) the harness channels and their strategic placement, (2) the elevated frontal support bars (the stabilizer bars), and (3) the overall shape of the brace. (Id. ¶ 355.) The Arbitrator also found that Ebel and Williams were liable for aiding and abetting Nelson. (Id. ¶ 362.) Finally, having concluded that the misappropriation provided Nelson with a "springboard" of ...


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