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TFOR LLC v. Virtustream, Inc.

United States District Court, E.D. Virginia, Norfolk Division

June 22, 2017

TFOR LLC, Plaintiff,
v.
VIRTUSTREAM, INC., Defendant.

          MEMORANDUM OPINION AND ORDER

          ROBERT G. DOUMAR UNITED STAGES DISTRICT JUDGE

         This matter comes before the Court on Virtustream, Inc.'s ("Defendant") Motion to Dismiss Plaintiffs First Amended Complaint ("Motion to Dismiss"). ECF No. 13. For the reasons stated herein, Defendant's Motion to Dismiss the Amended Complaint is GRANTED IN PART and DENIED IN PART.

         I. PROCEDURAL BACKGROUND

         On October 7, 2016, TFOR LLC ("Plaintiff') filed the complaint against Defendant. ECF No. 1. On January 18, 2017, Plaintiff filed the First Amended Complaint ("FAC"), which is at issue here. ECF No. 12. The FAC asserts the following seven claims: (1) declaratory judgment; (2) misappropriation of invention; (3) misappropriation of trade secret; (4) conversion; (5) misappropriation of trade secret in violation of 18 U.S.C. § 1836; (5) breach of contract and/or breach of constructive trust; and (6) fraud in the inducement. Id. On February 1, 2017, Defendant filed the instant Motion to Dismiss and supporting memorandum ("Def. Mem.") seeking dismissal of all seven claims in the FAC. ECF Nos. 16, 17. On February 15, 2017, Plaintiff filed a Brief in Response to Defendant's Motion to Dismiss ("PI. Resp."). ECF No. 18. On February 21, 2017, Defendant filed a Reply Memorandum ("Def. Reply"). ECF No. 20.

         On that same day, Plaintiff filed a Motion for Leave to File a Supplemental Brief ("PI. Suppl. Br. I") on the grounds that, after filing its response brief on February 15, 2017, Plaintiff reportedly discovered that a key factual representation made by Defendant in the briefing was inaccurate. ECF No. 21. On February 24, 2017, the Court granted Plaintiffs motion for leave to file. On March 1, 2017, Defendant filed a brief in opposition to Plaintiffs Supplemental Brief. ECF No. 23. With leave of the Court, Plaintiff then filed a response to Defendant's opposition brief on March 6, 2017. ECF Nos. 24, 25. Defendant filed a rebuttal on March 7, 2017. ECF No. 26. On March 13, 2017, Plaintiff filed a second motion for leave to file an additional responsive brief, which was denied by the Court on April 3, 2017. ECF Nos. 27, 29.

         On May 23, 2017, in anticipation of the hearing on Defendant's Motion to Dismiss, the Court ordered the parties each to submit a one-page status report on the patent application, Serial No. 15/008, 608, which is discussed in the parties' briefing. On May 30, 2017, in accordance with this Order, the parties submitted their respective status reports. ECF No. 32 (Plaintiffs) and ECF No. 33 (Defendant's). On June 1, 2017, the parties appeared before the Court and presented oral argument on Defendant's Motion to Dismiss. See ECF No. 34. During this hearing, the Court instructed Plaintiff to submit additional legal support, if any, for the FAC's Seventh Claim (Fraud in the Inducement). On June 5, 2017, pursuant to this instruction and with Defendant's consent, Plaintiff filed a supplemental brief to address the assignability of fraud claims under Virginia law ("PI. Suppl. Br. II").[1] ECF No. 35. On June 9, 2017, Defendant filed a response in opposition to Plaintiffs supplemental brief ("Def. Supp. Resp. II"). ECF No. 38. Defendant's Motion to Dismiss is now ripe for decision by this Court.

         II. FACTUAL BACKGROUND

         On a motion to dismiss for failure to state a claim, the Court accepts the plaintiffs properly pleaded factual allegations as true. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). A summary of the facts alleged in Plaintiffs First Amended Complaint follows.

         Trans Encryption

         In 2004, David von Vistauxx ("DvV") began developing an idea for encryption software, which was designed to take "digitized intelligible information and divid[e] that information into randomized strings of data none of which contain any information." FAC ¶ 9. Unlike prior art, the invention "can reassemble [the data] without having to make intermediate reassembles." Id. DvV recorded his ideas for this invention and logged his testing results of same in a single notebook ("Notebook"), which has entries spanning from April 17, 2004, to June 1, 2015. Id. ¶ 14. DvV called the invention "Trans Encryption" ("TE"). Id. ¶ 8.

         The PIIAA

          In May, 2015, Defendant recruited DvV to work as a Senior SOC Analyst[2] in the Defendant's facility in Fairfax, Virginia. FAC ¶¶ 8, 16; see May 6, 2015 Engagement Letter, Id. at Ex. 2. On May 6, 2015, Defendant sent an engagement letter to DvV, which had as an attachment the company's Proprietary Information and Invention Assignment Agreement ("PIIAA") and which instructed DvV to accept Defendant's offer of employment by executing said agreement. May 6, 2015 Engagement Letter, Id. at Ex. 2. In May 2015, both DvV and Defendant signed the PIIAA, which took effect on DvV's first day of employment, June 1, 2015. Id. at 8. The executed PIIAA is attached as Exhibit 2 to the FAC.[3] The PIIAA contains a clause entitled "Prior Inventions, " which provides, in part:

I have disclosed on Exhibit A a complete list of all Inventions that (a) I have, or I have caused to be, alone or jointly with others, conceived, developed, or reduced to practice prior to the commencement of my employment by Company: (b) in which I have an ownership interest or which I have a license to use: (c) and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). . . If, in the course of my employment with Company, I incorporate a Prior Invention into a Company process, machine or other work, I hereby grant Company a non-exclusive, perpetual, fully-paid and royalty-free, irrevocable and worldwide license .,. to reproduce, make derivative works of, distribute, publicly perform, and publicly display in any form or medium . . ., make, have made, use, sell, import, offer for sale, and exercise any and all present or future rights in such Prior Invention.

PIIA, FAC at Ex. 2, § 2.2. The PIIAA also contains the following assignment clause:

Subject to the subsection entitled Government or Third Party and except for Inventions that I have set forth in Exhibit A, I hereby assign and agree to assign in the future (when any such Inventions or Intellectual Property Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to Company all my right, title, and interest in and to any and all Inventions (and all Intellectual Property Rights with respect thereto) made, conceived, reduced to practice, or learned by me, either alone or with others, during the period of my employment by Company.

Id. §2.3.

         Plaintiff alleges that, prior to signing the PIIAA, DvV "insisted that the PIIAA be amended to exclude from its scope [TE] and other works of the inventor." FAC ¶ 17. When DvV executed the PIIAA, he attached as "Exhibit A" a handwritten list of eight "Prior Inventions, " including "(2) all work/design in TransEncryption." PIIAA, Id. at Ex. 2, at 9. DvV also handwrote the following clause beneath his signature on the signature page of the PIIAA: "Addendum 'Exhibit A' attached including areas of work excluded from this PIIAA." Id. at 8.

         The ROME Proposal

         DvV began his employment with Defendant on June 1, 2015. FAC ¶ 14. On June 6, 2015, "on his own time and equipment, " and understanding that it was "his work, " DvV conducted an additional test of TE on a network configuration that was transatlantic in scope. Id. ¶ 24. From June 16 through 18, 2015, DvV attended a data residency conference in Berlin.[4] Id. ¶¶ 18, 26. During his return trip, DvV realized that TE could be used to solve an important problem relating to international data residency, which could make TE marketable. Id. ¶ 25. On June 19, 2015, DvV outlined a "business proposal" for "engaging Defendant in this project" and pitched the proposal, including his "proposed terms for engaging Defendant, " to his supervisor at Defendant, Brian Fennimore. Id. ¶ 26. DvV then told Mr. Fennimore that "a non-disclosure agreement would be needed to say more." Id. That same day, Mr. Fennimore told DvV via email that one of Defendant's co-founders was "very interested" in the proposal. Id. ¶ 27.

         At Mr. Fennimore's request, DvV then drafted a "one-page summary of the business proposal, " which DvV called "ROME." Id. ¶ 28. DvV submitted this one-page document and additional revisions thereof to Mr. Fennimore between June 22 and early July of 2015. Id. "In July [DvV] also drafted a longer document setting out the business case, laying out the proposal in detail and including a non-disclosure agreement." Id. The first two pages of this document are attached to the FAC as Exhibit 4. Plaintiff alleges that "[t]his proposal was written by DvV on his own time, on his own equipment, in his own personal office." Id. On October 13, 2015, "Defendant asked DvV to again submit the ROME business proposal." FAC ¶ 33. Then, in early December 2015, Mr. Fennimore "notified DvV that Defendant would be interested in pursuing the ROME business proposal and a patent for [TE]." Id. ¶ 34.

         On December 2, 2015, DvV was contacted via email by Defendant's patent attorney who said he was "instructed to draft a patent application based on your invention disclosure EMC-15-1154" and to file the application before the end of the year. Id. ¶ 35; Id. at Ex. 5. DvV responded by email with his availability and indicated to the patent attorney that DvV "conceived" of the ROME concept "during and shortly after" his attendance at the data residency conference in Berlin. Id. at Ex. 5. In that same email, DvV also indicated that he had "reduced [the ROME concept] to practice on my own time, utilizing my own servers, and other than discussions with [Mr. Fennimore] regarding required disclosure, no company time or equipment has been authorized or used for this development." Id.

         Daniel McLoughlin, the Associate General Counsel for EMC, Defendant's corporate owner, was copied on the above email exchange between DvV and Defendant's patent attorney. FAC ¶ 36. In response to the exchange, Mr. McLoughlin requested an "oral discussion" with DvV. Id. ¶ 37. This discussion took place on December 4, 2015, during which McLoughlin told DvV that "what DvV had done prior to employment belonged to DvV but what DvV had done after employment belonged to Defendant." Id. During that same discussion, "DvV asserted that under his agreement with Defendant what he did on [TE] on his own time and equipment belonged to him in the same way that [TE] had been specifically excluded from the PIIAA." Id. Plaintiff alleges that, on information and belief, "McLoughlin was not aware at that time that the Defendant's standard PIIAA had been modified for DvV to exclude Trans Encryption." Id.

         The '608 Patent Application

         From December 3 through December 31, 2015, DvV worked with Defendant's patent attorney to complete the patent application "in accordance with the [TE] technology disclosed in the Notebook." ]d ¶ 39. On December 31, 2015, the patent attorney emailed DvV (1) the draft patent application; (2) a declaration form in need of DvV's signature, (3) an assignment form in need of DvV's signature; and (4) an Application Data Sheet ("ADS") naming Defendant as the applicant pursuant to DvV's assignment. Id. ¶ 40. DvV then signed the declaration form but did not sign the assignment form. Id. DvV refused to execute the assignment because TE was "specifically excluded from his work with Defendant by the PIIAA" and "because the financial terms of his ROME business proposal had not yet been negotiated." Id.

         Between December of 2015 and early 2016, DvV engaged in numerous communications with Defendant regarding TE. Id. ¶ 42. "DvV anticipated that negotiations in response to his ROME business proposal would resolve how the parties would be compensated, and this was the basis on which DvV helped with the patent preparation during December 2015." Id. DvV explicitly stated to Defendant that he would not assign his TE invention "without compensation and an executed written contract following through on his ROME business proposal." Id.

         On January 28, 2016, Defendant filed the patent application, Serial No. 15/008, 608, ("'608 Patent Application") with the United States Patent and Trademark Office ("USPTO") without DvV's knowledge or permission. Id. ¶ 44. This application included DvV's signed declaration but not an assignment form, which DvV refused to sign. Id. Plaintiff alleges that "[t]he '608 Application was completely derived from the pre-employment Notebook of the Inventor DvV, and did not include DvV's post Berlin work or work done as an employee of Defendant." W.¶41.

         DvV's Termination from Defendant

         On or about March 10, 2016, DvV was relieved from his duties with Defendant, ]d ¶ 45. Three weeks later, he was terminated. Id. After his termination, Defendant transferred a small sum into DvV's account as a "bonus" for developing TE. Id. ¶ 46. DvV returned the sum to Defendant in full. Id. On April 5, 2016, DvV filed a provisional application for a patent, No. 63/318, 714, which consisted of the USPTO form and the Notebook ('"714 Provisional Application"). Id., ¶ 49.

         On September 6, 2016, DvV assigned all of his right, title and interest in the '714 Provisional Application, the '608 Patent Application, TE, and the Notebook to TFOR LLC, the named Plaintiff in this case. Id. ¶ 50; see Executed Assignment, Id. at Ex. 1.

         III. LEGAL STANDARD

         Defendant moves to dismiss Plaintiffs FAC in its entirety under Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure (hereinafter, "Rule 12(b)(1)" and "Rule 12(b)(6), " respectively). ECF No. 16 at 1.

         A. Motion to Dismiss for Lack of Subject Matter Jurisdiction

         A defendant may challenge subject matter jurisdiction under Rule 12(b)(1) in one of two ways: (1) by contending that the complaint is insufficient on its face to establish such jurisdiction or (2) by challenging the factual predicate of subject matter jurisdiction set forth in the complaint. Kerns v. United States. 585 F.3d 187, 192 (4th Cir. 2009) (citing Adams v. Bain. 697 F.2d 1213, 1219 (4th Cir. 1982)). In the first case, the facts alleged in the complaint are taken as true, and the motion must be denied if the complaint alleges sufficient facts to invoke subject matter jurisdiction. Id. In the second case, the plaintiff is afforded less procedural protection: the district court need not presume the truthfulness of the complaint and is instead "entitled to decide disputed issues of fact with respect to subject matter jurisdiction." Id. The court may consider evidence outside the pleadings to make this determination. Richmond. Fredericksburg & Potomac R. Co. v. United States. 945 F.2d 765, 768 (4th Cir. 1991). Additionally, in the second case, the plaintiff bears the burden of proving subject matter jurisdiction. Adams. 697 F.2datl219.

         B. Motion to Dismiss for Failure to State a Claim

         A defendant may also move to dismiss a complaint under Rule 12(b)(6) on the grounds that it fails to state a claim on which relief can be granted. Such a motion should be granted if it appears that the plaintiff is not "entitled to relief under any legal theory which might plausibly be suggested by the facts alleged." Harrison v. United States Postal Serv., 840 F.2d 1149, 1152 (4th Cir. 1988) (citation omitted). To survive a motion to dismiss, the facts alleged in the complaint "must be enough to raise a right to relief above a speculative level" and must be sufficient "to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 547. In resolving a Rule 12(b)(6) motion, the court must assume the truth of all facts alleged in the complaint and construe the factual allegations in favor of the non-moving party. Robinson v. Am. Honda Motor Co., 551 F.3d 218, 222 (4th Cir. 2009). But the court is not bound by the complaint's legal conclusions. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Furthermore, the court may not consider any matters outside the pleadings, but it may consider written instruments that are attached as exhibits to a pleading, Occupy Columbia v. Haley, 738 F.3d 107, 116 (4th Cir. 2013), as these exhibits are "part of the pleading for all purposes, " Fed.R.Civ.P. 10(c). Where the complaint's bare allegations conflict with such an exhibit, the exhibit controls. Favetteville Inv'rs v. Commercial Builders. Inc., 936 F.2d 1462, 1465 (4th Cir. 1991).

         IV. DISCUSSION

         Defendant's Motion to Dismiss seeks dismissal of each of the seven claims alleged in Plaintiffs First Amended Complaint. They are discussed in turn.

         A. First Claim: Declaratory Judgment

         Plaintiffs First Claim seeks a declaratory judgment that (1) DvV was the rightful applicant and owner of the invention when the '608 Patent Application was filed; and (2) that all ownership, rights, and interests in TE, the ROME business proposal, and the '608 Patent Application are exclusively owned by Plaintiff. FAC ¶¶ 97-100. In its Motion, Defendant moves to dismiss the First Claim on two grounds: (1) that the claim is moot, and (2) that it fails to state a claim on which relief can be granted.

         1. ...


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