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AlterG, Inc. v. Boost Treadmills LLC

United States District Court, N.D. California

September 5, 2019

ALTERG, INC., Plaintiff,
BOOST TREADMILLS LLC, et al., Defendants.



         Plaintiff AlterG, Inc. (“AlterG”) brings this action against three of its former employees, Sean Whalen, Thomas Allen, and Michael James Bean (the “Individual Defendants”), and the company they founded, Boost Treadmills LLC (“Boost, ” and together with the Individual Defendants, “Defendants”). AlterG alleges that Defendants infringed its patents and misused its trade secret information to create Boost products. AlterG's complaint pleads nine causes of action: (1) patent infringement; (2) breach of contract; (3) trade secret misappropriation; (4) breach of fiduciary duty; (5) interference with contract; (6) interference with prospective economic advantage; (7) false advertisement; (8) trade libel; and (9) unfair competition.

         Upon Defendants' motion, the Court previously dismissed all nine causes of action as insufficiently pleaded, with leave to amend. Docket No. 29 (“Order”). AlterG subsequently filed a First Amended Complaint. Docket No. 33 (“FAC”). Defendant then filed a motion to dismiss the FAC. Docket No. 37 (“Mot.”).

         I. BACKGROUND

         A. Factual Background

         The core allegations in the FAC remain unchanged from AlterG's original complaint. AlterG is a medical device company that is the “leading provider of impact reduction treadmills, ” also known as “Anti-Gravity Treadmills, ” that are used for orthopedic rehabilitation and training. FAC ¶ 14. “One of the keys [sic] drivers of AlterG's success is its patented Differential Air Pressure (‘DAP') technology, ” which “use[s] a pressurized bag to provide a counterforce to the subject's body weight, reducing their effective weight on the treadmill surface.” Id. ¶ 15. From 2012 to 2015, AlterG devoted substantial resources to develop “a lower cost, bare bones AlterG machine” in response to “potential competitors who wanted to develop anti-gravity training and rehab machines using mechanical unweighting and other options, and at a lower price point than AlterG.” Id. ¶ 33. AlterG calls this project the “Low-Cost Platform Project, ” or “LCPP.” Id. AlterG ultimately decided not to “immediately commercialize” or sell any products developed as part of the LCPP. Id. ¶ 34.

         The Individual Defendants are three former employees of AlterG. Whalen was a co-founder of AlterG as well as “the initial and primary inventor . . . principally involved in developing the technology and products of the company.” Id. ¶ 19. In 2012, Whalen relinquished his former positions at AlterG but continued working for the company as a consultant until he stopped working for AlterG altogether on March 31, 2015. Id. ¶¶ 21, 35. During this consultancy period, “Whalen was the principal consultant and engineer” on the LCPP. Id. ¶ 33.

         Allen joined AlterG in 2007 and has “held numerous jobs at AlterG in sales, business development, and in international sales.” Id. ¶ 37. Like Whalen, Allen worked closely with the LCPP team from 2012 through 2015. Id. ¶ 40. Allen was also AlterG's “principal liaison” to Woodway USA (“Woodway”), a longtime supplier of treadmills for AlterG. Id. ¶¶ 41, 43. He resigned from AlterG on April 28, 2015. Id. ¶ 42.

         Bean joined AlterG in 2008 and worked in various sales roles at the company. Id. ¶ 47. He resigned from AlterG in April 2017. Id. ¶ 50. “Since Bean's departure from AlterG in April 2017, AlterG has discovered communications between Bean and Allen about Allen's work on a competing anti-gravity unit while Bean was still an employee of AlterG.” Id.

         Each of the Individual Defendants signed various confidentiality and non-disclosure agreements with AlterG during their employment with the company. Those agreements provided that signatories would “not use or disclose AlterG's proprietary and confidential information in any way contrary to the benefit of AlterG.” Id. ¶¶ 20, 37, 47. AlterG and Woodway also “entered into various confidentiality agreements whereby AlterG would provide to Woodway proprietary and confidential information to assist Woodway to build and supply AlterG with anti-gravity units.” Id. ¶ 44.

         Boost was formed at the end of 2016 and registered in April 2017. Id. ¶ 51. Allen and Bean are founders of Boost, and Whalen worked for the company in product development. Id. ¶¶ 51-52. AlterG believes that “Defendants conspired almost immediately [upon leaving AlterG] to create a competing machine incorporating AlterG intellectual property, ” and that “Boost was developing an unweighting treadmill well prior to the company's registration.” Id. ¶¶ 51, 55. As part of this process, Whalen and Allen started “secretly” working with Woodway and “utilized confidential, proprietary, and trade secret information from the [LCPP], and other AlterG intellectual property, to shortcut the research and development time to come to market with a lower cost unweighting treadmill.” Id. ¶ 46. “At the end of 2017, Boost introduced its first product-the Boost One, ” which “infringes AlterG patents” and “incorporates numerous unpatented technology features developed by AlterG in connection with the [LCPP].” Id. ¶ 54.

         AlterG further alleges that Defendants “falsely claim that the problematic Boost One is a superior product over the AlterG DAP systems ‘at a fraction of the cost.'” Id. ¶ 60. Defendants have also “told customers and prospects false statements to denigrate AlterG and its superior technology, falsely claiming that AlterG was going out of business, is in poor financial health and will not be able to get Woodway treadmills anymore.” Id. ¶ 61. The upshot of Defendants' allegations is that Defendants have been able to “sell over 20 units [of Boost products] to date to customers considering an AlterG unit.” Id. ¶ 62.

         B. Procedural Background

         After Defendants moved to dismiss the original complaint, the Court dismissed AlterG's claims with leave to amend. See Order at 27-28. The FAC presents two principal changes. First, while the original complaint asserted that Defendants infringed five of AlterG's patents, the FAC alleges infringement of just one-U.S. Patent Number 7, 591, 795 (the “'795 patent”). FAC ¶ 64. Second, AlterG alleges that it has had to withdraw its infringement claims with respect to one patent, U.S. Patent Number 10, 004, 656 (“the '656 patent”), because Defendants argued in their first motion to dismiss that the '656 patent was invalid in light of its public disclosure before the patent application was filed. Id. ¶ 27. According to Defendants, Whalen gave a journalist a demo of AlterG's P200/G-Trainer treadmill, the subject of the '656 patent, and the journalist then featured the machine in an online article on August 18, 2006, more than a year before AlterG filed the application for the patent. Id. AlterG now alleges that “Allen and Whalen kept the information about the online article quiet and as an insurance policy so they could use the information later to invalidate the '656 patent . . ., just in case the patent was asserted against them for developing and selling an infringing product through Boost.” Id. AlterG's breach of fiduciary duty claim against Whalen is based in part on these allegations. Id. ¶ 78.


         Rule 8(a)(2) of the Federal Rules of Civil Procedure requires a complaint to include “a short and plain statement of the claim showing that the pleader is entitled to relief.” A complaint that fails to meet this standard may be dismissed pursuant to Rule 12(b)(6). Fed.R.Civ.P. 12(b)(6). To overcome a Rule 12(b)(6) motion to dismiss, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (internal quotation marks omitted). The Supreme Court has noted that, “[w]here a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.” Id. (internal quotation marks omitted).

         On a Rule 12(b)(6) motion, the Court “accept[s] factual allegations in the complaint as true and construe[s] the pleadings in the light most favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). The Court need not, however, “assume the truth of legal conclusions merely because they are cast in the form of factual allegations.” Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (per curiam) (internal quotation marks omitted). Thus, “a Plaintiff's obligation to provide the ‘grounds' of his ‘entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)). The Court also “need not . . . accept as true allegations that contradict matters properly subject to judicial notice or by exhibit.” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).

         Claims sounding in fraud or mistake are subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), pursuant to which a plaintiff alleging fraud “must state with particularity the circumstances constituting fraud.” Fed.R.Civ.P. 9(b). To comply with this heightened pleading standard, the plaintiff must allege the “who, what, when, where, and how” of the alleged fraud. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003).


         Defendants again move to dismiss all of AlterG's claims.

         A. Patent Infringement

         1. Direct Infringement

         AlterG alleges that Defendants directly, indirectly, and willfully infringed the '795 patent, which is titled “System, Method and Apparatus for Applying Air Pressure on a Portion of the Body of an Individual.” FAC, Exh. N ('795 patent). Defendants argue that the infringement claim should be dismissed because AlterG has failed to allege how Boost's accused products infringe on a claim-by-claim, element-by-element basis. See Mot. at 4. As the Court explained in its prior Order, a direct infringement claim “does not satisfy the standards of Twombly and Iqbal where it does not at least contain factual allegations that the accused product practices every element of at least one exemplary claim.” Novitaz, Inc. v. inMarket Media, LLC, No. 16-CV- 06795-EJD, 2017 WL 2311407, at *3 (N.D. Cal. May 26, 2017). Here, AlterG has appended to the FAC a “preliminary infringement claim chart” comparing the accused products to the limitations of claims 1-6, 8-10, 20-22, 27, 30-34, 36-38, 46, 48, and 51 of the '795 patent. FAC ¶ 68; see FAC, Exh. O (claim chart).

         Defendants contend that AlterG has not plausibly alleged that the accused products practice one particular element of Claim 1-a method for “generating a relationship between pressure [inside the treadmill chamber] and actual weight of the individual” treadmill user. '795 patent, 8:43-44. This argument is unpersuasive.

         As an initial matter, Defendants are incorrect to assert that infringement allegations must meet the standard of specificity applied to infringement contentions under this district's Patent Local Rules simply because the complaint references a claim chart that conforms to Patent Local Rule 3-1(c). Rule 3-1(c) requires a plaintiff to provide a chart “identifying specifically where and how each limitation of each asserted claim is found within each Accused Instrumentality[.]” The purpose of Rule 3-1 is “to require a plaintiff to crystalize its theory of the case and patent claims.” Finjan, Inc. v. Check Point Software Techs., Inc., No. 18-CV-02621-WHO, 2019 WL 955000, at *5 (N.D. Cal. Feb. 27, 2019) (citation omitted). It therefore “requires exacting identification of the accused instrumentalities and how those instrumentalities read on the alleged claim limitations.” Grecia v. Apple Inc., No. C-14-0775 EMC, 2014 WL 4685195, at *1 (N.D. Cal. Sept. 19, 2014). Accordingly, courts have held that “[a]t the Patent Local Rule 3-1 Disclosure stage, a plaintiff must put forth information so specific that either reverse engineering or its equivalent is required.” Finjan, 2019 WL 955000, at *5. But at present, Defendants are not challenging AlterG's infringement contentions. They are attacking the sufficiency of AlterG's pleadings under Rule 12(b)(6), which requires a complaint to allege “sufficient factual matter . . . to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 678 (emphasis added); see Novitaz, 2017 WL 2311407, at *2 (explaining that under Rule 12(b)(6), courts “assess[] the sufficiency of claims for direct patent infringement under the standard set forth in Twombly and Iqbal). Infringement contentions generally follow the pleading stage.[1] In any event, the FAC incorporates the infringement contentions already exchanged in this case.

         In the FAC, which incorporates the claims chart, AlterG has plausibly alleged that the accused products “generat[e] a relationship between pressure and actual weight of the individual.” '795 patent, 8:43-44. The claim chart cites a section from the Boost One training manual describing that product's “calibrated” mode:

         (IMAGE OMITTED)

         FAC, Exh. O at 6 (highlights in original). The claim chart also quotes a Boost video touting the Boost One's “incremental off-weighting” capabilities, which “create[] a bespoke workout or rehab session for your personal goals and objectives.” Id. These materials indicate that the Boost One features a “weight control function” that gives the user “the ability fine tune air pressure” inside the treadmill chamber based on the user's “body weight, ” “in 1% increments.” In other words, they plausibly describe a system that “generates] a relationship between pressure” inside the treadmill and the “actual weight of the individual, ” as the '795 patent claims.

         Defendants next protest that AlterG cannot now allege that the accused products adjust air pressure in relation to user weight after alleging in its original complaint that “the Boost One [does] not calibrate to specific user's actual weight and volume dimensions like the AlterG DAP systems.” Docket No. 1 ¶ 44. Defendants believe this earlier allegation is a “judicial admission” that is binding on AlterG. Mot. at 5. Judicial admissions are “formal admissions in the pleadings which have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact.” Am. Title Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir. 1988) (citation omitted). The principle applies only to “factual allegations in a complaint, and not legal conclusions.” Nat'l Abortion Fed'n v. Ctr. for Med. Progress, 134 F.Supp.3d 1199, 1205 (N.D. Cal. 2015).

         AlterG claims that its earlier statement that the Boost One does not calibrate to a user's actual weight merely expressed AlterG's belief that “as tested, Boost One failed to accurately calibrate to a specific user's actual weight.” Opp. at 7. Put differently, AlterG was not alleging that the Boost One does not operate by generating a relationship between pressure and user weight, but rather that it does a poor job of generating the relationship. Because “[a] judicial admission must be deliberate, clear, and unambiguous, ” Lam Research Corp. v. Schunk Semiconductor, 65 F.Supp.3d 863, 870 (N.D. Cal. 2014) (citation omitted), and the Court finds the allegation at issue to be ambiguous, it accepts AlterG's explanation for the apparent inconsistency between its two complaints. See Nat'l Abortion Fed'n, 134 F.Supp.3d at 1206 (“Trial courts have discretion to accept or reject a judicial admission.” (citing Singer v. State Farm Mut. Auto. Ins. Co., 116 F.3d 373, 376 (9th Cir. 1997)). Of course, AlterG has a duty under Rule 11 to make factual contentions with evidentiary support, and if it is later determined that AlterG knowingly mischaracterized the functioning of the Boost One, it can be subject to sanctions.

         Defendants' remaining arguments for dismissal of the infringement claim raise factual disputes about how Boost products actually work. See, e.g., Mot. at 5 (“[T]here is no weight scale of any kind (e.g. a load cell) that measures the actual weight of the individual [in the accused products].”); Docket No. 39 (“Reply”) at 3 n.6 (“Boost uses an assumed or designated weight based only on short size and the rack height adjustment.”). Defendants strongly emphasized these points during the hearing on the motion. However, such disputes are inappropriate for resolution at the pleading stage, where the Court must accept AlterG's well-pleaded factual allegations as true. See Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008).[2]

         2. Indirect and Willful Infringement

         Defendants ask the Court to dismiss AlterG's indirect and willful infringement claims on the sole ground that the predicate direct infringement claim fails. See Mot. at 8. Because AlterG's direct infringement claim is adequately pleaded, its indirect and willful infringement claims also survive.

         In sum, the Court finds that AlterG's direct, indirect, and willful infringement claims were sufficiently alleged. Thus, the motion to dismiss is DENIED as to those claims, and any further refinement of the infringement claims will require claim construction.

         B. Trade Secret Misappropriation

         The FAC alleges that Defendants violated the Defend Trade Secrets Act (“DTSA”) by misappropriating eight of AlterG's trade secrets. See FAC ¶ 90. Defendants argue that two of the eight trade secrets were not identified with sufficient particularity: the second, which is “the concept of retrofitting an existing commercial treadmill with an air based unweighting system, ” and the eighth, which is “AlterG's pricing and market strategy, especially with respect to price-sensitive accounts.” Id.

         To state a claim for trade secret misappropriation under the DTSA, a plaintiff must allege that: “(1) the plaintiff owned a trade secret; (2) the defendant misappropriated the trade secret; and (3) the defendant's actions damaged the plaintiff.” Alta Devices, Inc. v. LG Elecs., Inc., 343 F.Supp.3d 868, 877 (N.D. Cal. 2018) (citation omitted). As set forth in the Order, at the pleading stage, “[a] plaintiff need not spell out the details of the trade secret, ” but must “describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies.” Id. at 881 (citations, internal quotation marks, and alterations omitted).

         1. Second Trade Secret

         Defendants' argument with respect to the second trade secret is not a challenge to the particularity of the pleading at all. Rather, it is a challenge to the validity of the trade secret: Defendants claim that “the concept of retrofitting an existing commercial treadmill with an air based unweighting system . . . falls squarely within the prior art and therefore does not qualify as a trade secret.” Mot. at 10.

         ““[I]t is well established that disclosure of a trade secret in a patent places the information comprising the secret into the public domain. Once the information is in the public domain and the element of secrecy is gone, the trade secret is extinguished.” Ultimax Cement Mfg. Corp. v. CTS Cement Mfg. Corp., 587 F.3d 1339, 1355 (Fed. Cir. 2009) (citation and internal quotation marks omitted). Defendants contend that AlterG made its purported trade secret public on June 18, 2015, when it filed a patent application titled “Pressure Chamber and Lift for Differential Air Pressure System with Medical Data Collection Capabilities.” Docket No. 37-1, Exh. 5.[3] In the background section of the application, AlterG wrote that “Differential Air Pressure (DAP) partial unweighting systems have typically comprised an OEM [‘original equipment manufacturer'] treadmill enclosed in a flexible bag that applies air pressure to the lower portion of the user's body.” Id. ¶ 0007. According to Defendants, this sentence concedes that “DAP treadmill systems typically employ ‘the concept of retrofitting an existing commercial treadmill with an air based unweighting system,' and what AlterG alleges as its trade secret is indisputably in the public domain.” Mot. at 10. AlterG counters that “‘retrofitting an existing commercial treadmill' is an entirely different concept than incorporating an OEM treadmill in an unweighting system. The latter requires the OEM treadmill to be a necessary component of a fully functioning and specified system (like the Woodway OEM treadmill incorporated in Boost One); whereas the former refers to additions and improvements to a user's existing exercise equipment.” Opp. at 9. AlterG thus argues its trade secret was not publicly disclosed through the 2015 patent application.

         The Court finds that as alleged in the FAC, constructing an air-based unweighting system such as Boost One may involve methods and technology similar to prior art which addresses retrofitting such a system. It is not readily apparent what material differences there are between retrofitting and use of an OEM treadmill. Accordingly, AlterG's misappropriation of trade secrets claim as it pertains to the second trade secret demands a greater degree of specificity than was presented in the FAC.

         2. Eighth Trade Secret

         Defendants also argue that AlterG's eighth trade secret, described as “AlterG's pricing and market strategy, especially with respect to price-sensitive accounts, ” is not alleged with sufficient particularity. Mot. at 11.

         The Court dismissed AlterG's trade secret allegations from the original complaint regarding “its marketing and product strategy, cost strategies, [and] customer needs” for lacking sufficient specificity. Order at 9-10 (quoting Docket No. 1 ¶ 102). In doing so, the Court relied on Vendavo, Inc. v. Price f(x) AG, No. 17-CV-06930-RS, 2018 WL 1456697 (N.D. Cal. Mar. 23, 2018). In Vendavo, the court dismissed claims regarding trade secrets characterized as “pricing information, vendor lists and related information, [and] marketing plans” because the claims were only “set out . . . in broad, categorical terms.” Id. at *3-4. The Court's prior concern about AlterG's original allegations arose from their vagueness as to technical matters, which are more complex to begin with and therefore warrant greater specificity. See Order at 10 (noting that the purported trade secrets “are not tethered to a specific technology; it cannot be discerned which aspects of AlterG's ‘anti-gravity rehabilitation and training units' the information pertains to”). Pricing and marketing strategy, by contrast, are less technical, and their description does not demand the same level of specificity that applies to technical matters. Alta Devices, 343 F.Supp.3d at 877. Pricing and marketing strategies tied to specific products are typical trade secrets. The Court finds that the claim for misappropriation of the eighth trade secret is adequately pleaded.

         Accordingly, the motion to dismiss is GRANTED as to AlterG's second trade secret claim and DENIED as to AlterG's eighth trade secret misappropriation claim.

         C. Breach of Contract

         AlterG's alleges that Defendants breached several of their contracts with AlterG. The Court dismissed the breach of contract claims from the original complaint because AlterG merely alluded to the underlying contracts without attaching them or identifying their essential terms. See Order at 11-19. AlterG has now attached the contracts to the FAC: five agreements between Whalen and AlterG (FAC, ...

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