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Brocade Communications Systems, Inc., A Delaware Corporation, and v. A10 Networks

March 23, 2011

BROCADE COMMUNICATIONS SYSTEMS, INC., A DELAWARE CORPORATION, AND
FOUNDRY NETWORKS, LLC, A DELAWARE LIMITED LIABILITY COMPANY,
PLAINTIFFS,
v.
A10 NETWORKS, INC., A CALIFORNIA
CORPORATION, LEE CHEN, AN INDIVIDUAL,
RAJKUMAR JALAN, AN INDIVIDUAL, RON SZETO, AN INDIVIDUAL, LIANG HAN, AN INDIVIDUAL, STEVEN HWANG, AN INDIVIDUAL, AND DAVID CHEUNG, AN INDIVIDUAL,
DEFENDANTS.



The opinion of the court was delivered by: Lucy H. Koh United States District Judge

United States District Court For the Northern District of California

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

Defendants A10 Networks, Inc., Lee Chen, Rajkumar Jalan, Ron Szeto, and Steven Hwang (together, A10) move to dismiss various claims pursuant to Federal Rule of Civil Procedure 22 12(b)(6). For the reasons set forth below, this Motion is GRANTED in part and DENIED in part.

I. Introduction and Background 24

On August 4, 2010, plaintiffs Brocade Communications Systems, Inc., and Foundry Networks, LLC (Foundry) (together, Brocade) filed a complaint asserting patent infringement, 26 trade secret misappropriation, breach of contract, interference with prospective economic 27 advantage, interference with contract, and unfair competition against Defendants A10 Networks 28 and individuals Lee Chen, Rajkumar Jalan, Ron Szeto, and David Cheung. See Dkt. No. 1 (Compl.). On October 11, 2010, all the defendants other than Mr. Cheung filed a Motion to 2 Dismiss most of Brocade's claims pursuant to Federal Rule of Civil Procedure 12(b)(6). On 3 Lian Han and Steven Hwang. See Dkt. No. 37. The FAC asserts additional patent infringement 5 claims, as well as adding copyright infringement, breach of fiduciary duty, and breach of duty of 6 loyalty claims. 7

October 29, 2010, Brocade filed a First Amended Complaint (FAC), naming additional defendants 4

a. Allegations Regarding Brocade's Products and Business

The FAC alleges that Foundry was acquired by Brocade in December, 2008. FAC ¶ 3.

Prior to this, Brocade alleges that Foundry established itself as the industry leader in application 10 delivery systems. These systems help to optimize Internet performance. FAC ¶¶ 14,15. Foundry 11 sold application delivery systems as part of its ServerIron and ADX product lines. FAC ¶ 14.

Brocade alleges that Foundry obtained ten U.S. patents on its application delivery system 13 technology. FAC ¶ 16. Foundry developed software for use in its products. FAC ¶ 17. Brocade 14 alleges that Foundry invested millions in development of its Server Iron and ADX products.

FAC 15

Brocade alleges three categories of alleged trade secrets: technical, marketing, and 17 employee-related information. Brocade identifies its confidential technical information as "the 18 design and technology best suited for the products, software code . . . performance capabilities, 19 constraints and challenges for the product, as well as potential product development plans. FAC 20

¶ 19. Brocade identifies its confidential marketing information as information regarding its 21 products, including customer needs and terms of agreements with customers. FAC ¶ 20. Finally, 22

Brocade identifies its confidential employee-related information as "the skill levels, experience, 23 specialties, performance attributes, compensation levels, and attitudes" of employees. FAC ¶ 21. 24

Brocade alleges that it took precautions to protect this information. Employees were required to 25 sign employment contracts by which they agreed not to disclose proprietary information, including 26 company development plans and marketing information. FAC ¶ 48. 27 28

b. Allegations Regarding A10's Products and Business

Brocade alleges that defendant Chen was a co-founder of Foundry, and served as its Vice President of Software Engineering until he left the company in 2004. FAC ¶ 24. Brocade alleges 4 that Chen supervised the development of the ServerIron products and Foundry's application 5 delivery systems. Id. Chen supervised the named inventors of the patents in suit and had access to 6 the technical, customer, and employee trade secrets alleged above. Id. Brocade alleges that while 7 still serving as a Foundry executive, Chen secretly began working on a new venture which would 8 ultimately become A10. FAC ¶ 26, 30. Brocade asserts that Chen used Foundry resources to 9 develop the new business. Brocade further asserts that Chen represented Foundry in negotiations 10 regarding the potential acquisition of Authenet, Inc. while simultaneously pursuing this opportunity 13 market as Foundry and to compete directly with Foundry" and that A10's products, such as the 14 A10 AX Series network devices, would "copy and compete directly with Foundry ServerIron 15 products" that Chen had helped develop while working at Foundry. FAC ¶ 31. Brocade goes on to 16 allege that Chen recruited a large number of employees from Foundry, and tried to avoid arousing 17 suspicions by requiring employees to resign from Foundry and wait a period of time before joining 18

Brocade alleges that both were heavily involved with development of ServerIron products, and that 20 each is a named inventor of one or more of the patents in suit. FAC ¶ 36. Brocade alleges that 21

Regarding defendant Han, Brocade states he is a software engineer who worked for Foundry from 2003-2005. FAC ¶ 38. Brocade alleges that Han began working for A10 while still 24 employed by Foundry, and passed technical information regarding the ServerIron and ADX 25 products to specific A10 personnel. Id. 26

Brocade alleges that Chen developed A10 to "operate in precisely the same specialized

A10. FAC ¶ 32. Some of these alleged recruits include defendants Jalan and Szeto. FAC ¶ 34. 19 Jalan and Szeto used Foundry's source code to develop the competing AX products. FAC ¶ 37. 22 Regarding defendant Hwang, Brocade asserts he is a hardware engineer and former Foundry employee. FAC ¶ 39. Brocade alleges that he began working for A10 while still 28 employed by Foundry, used Foundry resources in conducting business for A10, and passed 2 Foundry's technical information to specific A10 personnel. Id. 3

4 knowledge of its alleged trade secrets, and that A10 was funded in part by investments from 5 employees still working for Brocade. FAC ¶¶ 54-55. Finally, Brocade alleges that through its use 6 of Brocade's technical information and source code, A10 was able to launch its competing AX 7

Brocade alleges that A10 recruited many former Foundry employees with access to and

Series more quickly and cheaply than it could have done otherwise. FAC ¶¶ 57-60. Brocade 8 alleges that A10 also recruited marketing employees with access to the alleged marketing trade 9 secrets, and that these individuals used Brocade trade secret information in marketing A10's 10 products to Brocade's customers. FAC ¶ 61. Brocade alleges that these activities disrupted Dismiss, and A10*fn1 filed a Motion to Dismiss the FAC on November 12, 2010. See Dkt. No. 45. 14

28, 2011. See Dkt. No. 70. Pursuant to Civil Local Rule 7-1(b), the Court finds this matter 16 suitable for decision without oral argument. Therefore, the April 28, 2011 hearing on this Motion 17 is VACATED. However, the Case Management Conference set to follow the hearing will proceed 18 as scheduled. In advance of the Case Management Conference, the Court will set a schedule based 19 on the parties' Joint Case Management Statement, filed on February 11, 2011. 20

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if 22 it fails to state a claim upon which relief can be granted. To survive a motion to dismiss, the 23 plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. 24 Corp. v. Twombly, 550 U.S. 544, 570 (2007). This "facial plausibility" standard requires the 25 plaintiff to allege facts that add up to "more than a sheer possibility that a defendant has acted 26 unlawfully." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). In deciding whether the plaintiff has 27 stated a claim, the Court must assume the plaintiff's allegations are true and draw all reasonable 28 ongoing and potential client relationships. FAC ¶ 62.

After the FAC was filed, moving defendants withdrew their then-pending Motion to

The hearing on this Motion was originally set for February 17, 2011, but was continued to April 15

II. Standard 21

inferences in the plaintiff's favor. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). 2

However, the court is not required to accept as true "allegations that are merely conclusory, 3 unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 4 F.3d 1049, 1055 (9th Cir. 2008). Leave to amend must be granted unless it is clear that the 5 complaint's deficiencies cannot be cured by amendment. Lucas v. Dep't. of Corr., 66 F.3d 245, 6

III. Application 8

10 alleging misappropriation of trade secrets. First, A10 argues that the FAC pleads facts so

248 (9th Cir. 1995). 7

a. Twelfth Claim for Trade Secret Misappropriation

A10 advances several arguments in support of its Motion to Dismiss Brocade's claims inconsistent with those stated in the original Complaint that the court should strike them as "sham." 12

See Mot. at 5-6. Second, in a related argument, A10 urges that the trade secret claims are time-13 barred based on the allegations of the original Complaint, and that the Court should disregard any 14 contrary allegations in the FAC and dismiss the trade secret claims as untimely. See Mot. at 6-10. 15

Third and finally, A10 argues that Brocade has alleged insufficient facts to state a claim for trade 16 secret misappropriation and that the claims should be dismissed on this ground. See Mot. at 14-16. 17

21 three years. Cal. Civ. Code § 3426.6. The period begins to run "after the misappropriation is 22 discovered or by the exercise of reasonable diligence should have been discovered." Id. In support 23 of its first argument, A10 urges the Court to find that Brocade should have discovered its trade 24 secret claims more than three years before filing its first complaint, and therefore that the claims 25 are time-barred. In support of this argument, A10 states that the original Complaint "painted a 26 picture in which Foundry's co-founder, Mr. Chen, started a competing company while still working 27 for Foundry in 2004, left Foundry later that year and wrongfully started recruiting for Foundry 28

The Court addresses these arguments in turn.

b. Motion to Strike Amended Pleadings and Dismiss Trade Secret Claim as Time-Barred

The statute of limitations for a trade secret misappropriation claim under California law is

Foundry [sic] engineers to join his new company . . . the OC does not even hint that Foundry was unaware of any of this while it was happening. The FAC attempts to paint a very different picture, 2 in which Foundry was actually completely in the dark until just quite recently." Mot. at 6. 3

Essentially, A10 asks the Court to assume that Brocade's silence about when it learned of the trade 4 secret misappropriation in the original Complaint should be taken as an admission that it knew 5 about its potential cause of action as of 2004, when Mr. Chen left Foundry, and that the statute of 6 limitations should begin running at that time. However, after a careful comparison of the 7

Brocade's present contention that it did not learn about the alleged trade secret theft until late 2009 9 or early 2010. A10 complains that "Plaintiffs' FAC omits what they supposedly did know and 10 when they learned it. . . ." Mot. at 9. However, the FAC adequately alleges reasons why the trade 11 secret misappropriation claim (and overed earlier: the defendants'

the other claims) were not disc

12 alleged concealment of their activities. A claim cannot be dismissed on statute of limitations 13 grounds unless it is clear from the face of the complaint that the statute has run and that no tolling 14 is possible. Conerly v. Westinghouse Electric Corp., 623 F.2d 117, 119 (9th Cir. 1980). 15

16 to the Ninth Circuit's holding in Conerly. Moreover, none of the authority cited by A10 supports 17 such actions. First, as Brocade points out in its Opposition, the Ninth Circuit has held that even 18 inconsistent pleadings may not be stricken unless the Court finds that they were made in bad faith. 19

Rules of Civil Procedure to prevent a party from filing successive pleadings that make inconsistent 21 or even contradictory allegations. Unless there is a showing that the party acted in bad faith-a 22 showing that can only be made after the party is given an opportunity to respond under the 23 procedures of Rule 11-inconsistent allegations are simply not a basis for striking the pleading."). 24

Even assuming that A10 intended to argue that the allegations in the FAC were made in bad faith, 25 it has not sufficiently supported this argument. 26

Complaint and the FAC, the Court can find no facts in the Complaint that are inconsistent with 8 Striking portions of the FAC and assuming facts not alleged in either complaint is contrary

PAE Gov't Servs. v. MPRI, Inc., 514 F.3d 856, 860 (9th Cir. 2007) ("there is nothing in the Federal 20

A10's cited authority is also distinguishable. For example, in Stearns v. Select Comfort Retail Corp., _ F. Supp. 2d _, No. 08-2746 JF (PVT), 2010 WQL 2898284 at *13 (N.D. Cal. July 28 15, 1996), the court struck a new allegation that directly contradicted previous allegations, but refused to strike new allegations that were not contradicted by previous pleadings. Although A10 2 cites some authority finding that new contentions need not be directly contradictory in order to be 3 stricken as sham pleadings, as A10 concedes, these cases hold that the new allegations must be at 4 least inconsistent with the previous pleadings if the court wishes to ignore them. See, e.g., Lockton 5

FAC's allegations are consistent with those of the Complaint, and that there is no reason to suspect 7 that the amendments were made in bad faith (pursuant to PAE). Therefore, there is no basis to 8 strike new allegations in the FAC.*fn2

9

10 discovered or by the exercise of reasonable diligence should have been discovered." Cal. Civ. v. O'Rourke, 184 Cal. App. 4th 1051, 1061 (2010). As stated above, the Court finds that the 6

The statute of limitations on trade secret claims begins to run "after the misappropriation is

Code § 3426.6. In the FAC, Brocade alleges that it did not discover the possibility of the alleged misappropriations until late 2009 or 2010. FAC ¶ 23. A10 argues that, regardless of these 13 allegations, Brocade should have discovered its claim sooner, and the claim should be barred on 14 this ground. See Mot. at 9-10. It appears that the factual record must be developed before the 15

Court can determine whether Brocade's claims are time-barred. For the most part, A10's cited 16 authority finds that trade secret claims are time-barred at the summary judgment phase, not at the 17 pleadings phase. Intermedics, Inc. v. ...


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