This case was on the court's calendar on December 14, 2011 for argument on plaintiff's motion for a preliminary injunction and sanctions, and for plaintiff's motion for reconsideration of the magistrate judge's order of October 3, 2011 denying sanctions for discovery non-compliance. Paul Andre and Yuridia Caire, King and Spalding LLP, appeared for defendants; Scott Pink, Daniel Croxall and Rajiv Dharnidharka, DLA Piper LLP, appeared for plaintiff. As explained below, the court grants plaintiff's motion for a preliminary injunction and denies the motion for sanctions and for reconsideration.
A. Claims and Pending Motion
Plaintiff Berster Technologies, LLC, which operates under the business name of Chip Connect, filed its motion for injunctive relief while defendants' motion to dismiss the first amended complaint was pending. After the court resolved the motion to dismiss, it set the instant motion for hearing. Before the hearing, plaintiff filed a second amended complaint (SAC), which raises eleven claims: (1) breach of express contract against Christmas and Calibur11; (2) breach of partnership agreement and implied in fact contract against Christmas and Calibur11; (3) fraud against Christmas, BGRMods and Calibur11; (4) breach of fiduciary duty against Christmas; (5) breach of contract against BGRMods and Christmas; (6) copyright infringement against all defendants; (7) misappropriation of trade secrets against Christmas, BGRMods and Calibur11; (8) rescission of assignment of patent against Christmas and Calibur11; (9) conversion against all defendants; (10) declaratory relief against all defendants; and (11) accounting against Christmas and Calibur 11. ECF No. 101.
Plaintiff argues it is likely to prevail on the merits of five claims in the complaint: that Christmas breached his fiduciary duty to plaintiff (claim 4); that BGRMods and Christmas breached the BGR agreement (claim 5); that defendants are infringing plaintiff's copyrights in Intensafire, MLG [Major League Gaming] Game Vault, and Epic Games' Gears of War 3 Game Vault (claim 6); that defendants are misappropriating plaintiff's trade secrets (claim 7); and that defendants have converted plaintiff's property (claim 9). Plaintiff asks the court to order the following: that defendants refrain from using, copying, reproducing and distributing the flexboard and computer code for all versions of Intensafire, the circuit board design and computer code for MLG Game Vault, the circuit board design and computer code for Gears of War 3 Game Vault and any and all design features of the Game Vault Products provided by plaintiff; that defendants refrain from representing that they are the creators of Chip Connect technology; that they refrain from any other activity constituting infringements of the copyrights for the Intensafire, MLG Game Vault and Gears of War Game Vault, including software covered by copyright registrations TX 7-364-435, TXu 1-739-688, TX 7-376-632; and finally that defendants return all of plaintiff's confidential information. ECF No. 64.
B. Additional Exhibits Provided At Hearing
At the hearing on the motion, plaintiff's counsel offered additional exhibits in support of its claims that defendants have attempted to reverse engineer the Intensafire code and that Christmas never intended to honor his commitments to make plaintiff's employee Steven Frazier and thus plaintiff part of Calibur11. The court allowed the parties to provide supplemental briefing on the significance of this material. Plaintiff provided three additional declarations with its supplemental briefing; defendant objects that these are outside the scope of the court's request, are impermissible amendments to earlier declarations and contain multiple layers of hearsay. ECF No. 116. Plaintiff responds that it submitted declarations in support of the factual assertions in its supplemental brief, the declarations explain the late production of the information, and the brief is responsive to the court's concerns expressed at the hearing. According to plaintiff's counsel, he did not provide the documents earlier because they had been designated Highly Confidential--Attorneys' Eyes Only and he could not discuss their significance with his client until the time for filing defendants' request to maintain confidentiality had passed. ECF No. 114-1 ¶¶ 2-6; see generally ECF No. 99 (protective order).
Defendants argue they have not waived the confidentiality of the documents, which should be maintained. They then argue that some of emails concerning Calibur11, Bates-stamped C011541-1-2 and C011608, support their claims and that the remaining Calibur11 documents, C011658-1, C011752-1 and C011798, are not relevant. They also contend that the documents related to Intensafire do not support plaintiff's claim that defendants were seeking to clone Intensafire in China. ECF No. 115.*fn1
The court declines to consider the materials plaintiff provided at hearing or any of the declarations submitted with its supplemental briefing. As defendants noted at hearing, there is a motion to maintain confidentiality in addition to a new motion for sanctions pending in front of the magistrate judge, who is by now familiar with the parties' many discovery disputes. See ECF Nos. 37, 102-103 (pending motions); ECF Nos. 37, 78 (discovery orders). The court leaves the resolution of these motions in his capable hands, without presuming any particular result.
II. Motion For A Preliminary Injunction
As provided by Federal Rule of Civil Procedure 65 a court may issue a preliminary injunction to preserve the relative position of the parties pending a trial on the merits. University of Texas v. Camenisch, 451 U.S. 390, 395 (1981). The party seeking injunctive relief must show that "he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20 (2008); Munaf v. Green, 553 U.S. 674, 689-90 (2008).
Before the Winter decision, the Ninth Circuit employed a "sliding scale" or "serious question" test, which allowed a court to balance the elements of the test "so that a stronger showing of one element may offset a weaker showing of another." See Clear Channel Outdoor, Inc. v. City of Los Angeles, 340 F.3d 810, 813 (9th Cir. 2003). Recently, the circuit court found that its sliding scale test survived Winter: a court may issue a preliminary injunction when a plaintiff raises serious questions going to the merits and demonstrates that the balance of hardships tips sharply in its favor, so long as the court also considers the remaining two prongs of the Winter test. Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1135 (9th Cir. 2011).
Plaintiff has submitted evidence showing that, through its employee Steven Frazier and several independent contractors, it designed a gaming mod flexboard to use with "first person shooter games," which allows the game player to modify virtual weapon use; that the product became the Intensafire product on the market today; that computer code is imbedded in the chip used in the board; and that the code is protected from access and download by means of a key, which is controlled by plaintiff. Declaration of Steven Frazier, ECF No. 57, ¶¶ 3-5 & Exs. A & B. Plaintiff has provided Certificates of Registration of its copyrights in Intensafire's base form (TX-7-376-632) and its "active reload" form (TX-7-414-327). Id. ¶ 10 & Ex. F; Supplemental Declaration of Steven Frazier, ECF No. 86 & Ex. 19.
Defendant Coy Christmas is President and CEO of BGRMods, LLC, Calibur11 LLC, and Einsteinmodz, LLC, all privately held companies. Declaration of Coy Christmas, ECF No. 75-1 ¶ 1. EinsteinModz distributes Intensafires. ECF No. 57 ¶ 11; ECF No. 75-1 ¶¶ 1, 5. EinsteinModz purchased Intensafires from BGRMods. ECF No. 75-1 ¶ 5 & Ex. A.*fn2
Although Christmas avers that each of his companies is separate and distinct from the other, plaintiff has produced evidence in the form of a declaration from its managing partner Bernadette Wyatt, suggesting that Christmas used the companies "interchangeably" in his and their dealings with plaintiff. Declaration of Bernadette Wyatt, ECF No. 60 ¶ 9; Supplemental Declaration of Bernadette Wyatt, ECF No. 83 ¶ 2. Wyatt avers, for example, that Christmas "paid invoices for any work done for any of these three companies using the same personal American Express card." ECF No. 83 ¶ 2. Once Christmas asked Frazier to modify some Intensafires and send them directly to EinsteinModz customers in California. ECF No. 57 ¶ 11. Wyatt billed BGRMods for this work, at Christmas's direction. ECF No. 83 ¶ 3. In addition, in a June 26, 2011 email, Christmas explained entries on a balance sheet, showing that Einsteinmodz paid bills for Calibur11. ECF No. 86, Ex. 9.*fn3
In July 2009, plaintiff and BGRMods entered into an Exclusive Reseller Agreement, giving BGRMods the exclusive rights to promote and distribute plaintiff's flexboards containing the object code version of the Intensafire software. ECF No. 57 ¶ 8 & Exs. D-1 & D-3; ECF No. 60 ¶ 4; ECF No. 75-1 ¶ 6. The agreement prohibited BGRMods from using any of plaintiff's intellectual property or attempting to reverse engineer the hardware or software, and required BGRMods to cease distributing the products and return all master material and confidential information relating to Intensafire upon termination of the agreement. ECF No. 57, Exs. D-3 & D-9.
Although the BGRMods agreement provided for a minimum order of 549,000 Intensafire units between September 2009 and August 2010, Christmas and BGRMods did not meet this threshold and fell behind in payments in 2011. Id. ¶¶ 11, 12. On June 9, 2011, plaintiff terminated the BGRMods agreement for non-payment and demanded that BGRMods stop selling Intensafire products and return all confidential information, among other things. Id. ¶ 12; ECF No. 60 ¶ 6 & Ex. Y. Christmas and BGRMods did not respond to the letter, but have continued to sell Intensafires through EinsteinModz and additional websites. ECF No. 57 ¶ 12; ECF No. 60 ¶ 6. According to Christmas, after the termination of the Reseller Agreement, he hired developers to write new code for Intensafires and no longer sells products containing plaintiff's source code, software or components. ECF No. 75-1 ¶¶ 6-7.
In June 2011, Frazier visited Chinese manufacturer, Suntech Corp., Ltd., to set up manufacturing for Game Vault. During this visit, the manufacturing manager showed Frazier an Intensafire board and said Christmas had asked Suntech to reverse engineer the flexboard to build a competing project. ECF No. 57 ¶ 12.*fn4
In late July 2011, plaintiff arranged for Debra Harrer to purchase an Intensafire from Einsteinmodz and delivered it, unopened, to Wyatt, plaintiff's managing partner. Declaration of Debra Harrer, ECF No. 59 ¶¶ 2b & 4; ECF No. 60 ¶¶ 1, 6. Frazier then delivered the Intensafire to Chris Tarnovsky, who specializes in the analysis of integrated circuits. ECF No. 57 ¶ 10; Declaration of Chris Tarnovsky, ECF No. 62 ¶¶ 2, 4. Tarnovsky determined that the source code contained in the Intensafire from EinsteinModz was an exact match to plaintiff's Intensafire source code. Id. ¶ 5. The computer code embedded in the chips incorporated in the Intensafire provided by plaintiff is object code only, protected from disclosure by an access control encryption key, which plaintiff does not disclose. ECF No. 57 ¶ 11.
Alex Golubev owns a gaming distribution business and was a distributor of Intensafires, which he purchased from BGRMods. Declaration of Alex Golubev., ECF No. 63 ¶¶ 2-3. In June 2011, he entered into an exclusive reseller agreement with plaintiff to distribute plaintiff's improved flexboard product for the Intensafire. Id. ¶ 4. Golubev believes his efforts to sell plaintiff's flexboard have been hindered by confusion in the marketplace over the ownership of the rights to plaintiff's flexboard technology. ECF No. 63 ¶ 4.*fn5
In June 2010, Frazier, Christmas and Christmas's friend and business associate Sid Garrand began to discuss an interactive casing product that would integrate with Microsoft's popular Xbox 360 gaming console, providing light and sounds. ECF No. 57 ¶¶ 13, 14. The three agreed to form a business called Calibur11 to produce and market their new product, which would be called Game Vault. Id. ¶ 14. Because plaintiff owns Frazier's technology, Greg McCarry, one of plaintiff's limited liability members, took over discussions with Christmas about the structure of the business. Id. ¶ 15; Declaration of Greg McCarry, ECF No. 58 ¶¶ 1, 3. McCarry and Christmas agreed on a partnership arrangement and the formation of Calibur11 as a new limited liability corporation. ECF No. 58 ¶ 3. Over the course of the next several months, Christmas was not forthcoming about the ...