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Albert S. Smyth Co., Inc. v. Motes

United States District Court, D. Maryland

July 31, 2018

Albert S. Smyth Co., Inc., et al.
v.
Mark A. Motes, et al.

          MEMORANDUM

          Catherine C. Blake United States District Judge.

         The plaintiffs, Albert S. Smyth Co., Inc., Smyth Ellicott City, LLC, Smyth Annapolis, LLC, Smyth Management Services, LLC (SMS), Smyth Enterprises LLC, and The DiamondStore.com (TDS), (collectively "Smyth"), have sued Mark A. Motes, John Jackson, III, and Meritage Fine Jewelers for violations of the (1) Defend Trade Secrets Act (all defendants) and the (2) Maryland Uniform Trade Secrets Act (all defendants), as well as for (3) Breach of Contract (Motes), (4) Breach of Covenants (Motes), and (5) Breach of Loyalty (Motes and Jackson). After Smyth filed a third amended complaint, (ECF No. 65), the defendants moved for dismissal, (ECF Nos. 66, 68, 69). For the reasons stated below, the motions filed by Motes and Meritage will be granted, and the motion filed by Jackson will be granted in part and denied in part.

         Background

         This dispute begins with a promotion. In 2007, Mark A. Motes was promoted to Chief Operating Officer of Smyth Timonium, a family jewelry business, after a decade at the company. (Third Am. Compl. at ¶ 11) Motes's promotion was set out in an Employment Agreement that included the following terms: (1) Motes was granted a 25% interest in all operating entities and in each subsequently established retail subsidiary; (2) his partnership was limited by the "rights, duties and obligations ... set forth in" each entities' Operating Agreement; (3) Motes was granted a Valuation Bonus to be paid on the termination of his employment; and (4) Smyth would pay him a $600, 000 salary, increased by $25, 000 yearly. (Id. at ¶¶ 13-15).[1] As Smyth grew so too did Motes's 25% interest: Motes took an ownership interest in Smyth Annapolis, LLC and Smyth Ellicott City, LLC in 2008; Smyth Enterprises, LLC in 2009; TheDiamondSupplier.com, LLC in 2011; and Smyth Management Services, LLC in 2012. (Id. at ¶¶ 16-19). These entities were not all successful, however, and several were closed-Smyth Enterprises, Smyth Management Services, and The DiamondSupplier.com-between 2014 and 2015. (Id. at ¶ 22).

         As the complaint tells it, the parties revisited Motes's Employment Agreement in 2009 to more perfectly capture his position as a full partner in the business. The result was a freezing of Motes's Valuation Bonus at $62, 302 and a new compensation scheme. Motes would now share Smyth's profits and losses on a consolidated basis. (Id. at ¶ 25). Thus, Motes's interest for any year was 25% of all profits less all losses. All of this occurred by oral agreement, however. Smyth alleges that it complied with the new agreements until Motes left the company. (Id. at ¶ 26). Motes, allegedly, did not.

         From 2013 to 2015 Motes took a combined $2, 826, 100 share of Smyth's profits. But a consolidated accounting of Smyth's finances, one that would reflect the parties' alleged oral modification, entitled Motes to only $336, 648 over the same period. (Id. at ¶ 39). To properly account for the losses he should have taken, Motes (again) allegedly orally agreed, in September 2016, to transfer his 25% interest in Smyth Annapolis, LLC and Smyth Ellicott City, LLC to Smyth and to forgive a $158, 879 loan he gave to Smyth. (Id. at ¶ 48). Yet, when presented with a written version of the agreement, Motes refused to sign. (Id. at ¶ 49). Smyth met with Motes again on November 11, 2016, and presented him with an employment severance agreement, which he also refused to sign. (Id.) Motes resigned the next day. (Id.) He allegedly took more than thirteen employees with him, including John Jackson III. (Id. at ¶ 50).

         But not just employees: the complaint also alleges that Motes and Jackson left with "the Companies' confidential records." (Id. at ¶ 56). This information represents "the buying habits of over 69, 000 customers." (Id. at ¶ 55). It was protected by a security system, including a password and an Employee Handbook that warned employees not to remove confidential information from company computers or files, (id. at ¶¶ 52-53).

         Starting in April 2015, Jackson began copying the plaintiffs' business information to a Dropbox account he owned. (Id. at ¶ 57).[2] Although some folders created in the account were shared with other Smyth employees, most of the data was controlled by Jackson and, according to the complaint, possibly Motes. (Id. at ¶¶ 59-62). Based on their own "information and belief," the plaintiffs allege that the copying of their data was part of Motes's and Jackson's plan to start a competing jewelry business. (Id. at ¶ 64).[3]

         Since he left the company, Jackson has repeatedly accessed the files, even after he helped start a competing jewelry business named Meritage Jewelers. (Id. at ¶¶ 74-81). Articles of Organization were filed for Meritage in January 2017, (id. at ¶ 76), and the company opened for business eight months later in August 2017, (id. at ¶ 83). Jackson is one of three owners. His partners are Jennifer McCullough-allegedly Motes's romantic partner-and Michael Lund. (Id. at ¶¶ 83-84). The plaintiffs allege that the defendants have used the business information they copied to support Meritage. (Id. at ¶ 86).

         The plaintiffs filed suit in March 2017. After the court granted the plaintiffs' leave to filed a third amended complaint, (ECF Nos. 64, 65), the defendants moved to dismiss the complaint under Rule 12(b)(6), (ECF Nos. 66, 68, 69).

         Standard of Review

         To survive a motion to dismiss, the factual allegations of a complaint "must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citations omitted). "To satisfy this standard, a plaintiff need not 'forecast' evidence sufficient to prove the elements of the claim. However, the complaint must allege sufficient facts to establish those elements." Walters v. McMahen, 684 F.3d 435, 439 (4th Cir. 2012) (citation omitted). "Thus, while a plaintiff does not need to demonstrate in a complaint that the right to relief is 'probable,' the complaint must advance the plaintiffs claim 'across the line from conceivable to plausible.'" Id. (quoting Twombly, 550 U.S. at 570). And the plaintiff typically must do so by relying solely on facts asserted within the four corners of his complaint. Zak v. Chelsea Therapeutics Intern., Ltd., 780 F.3d 597, 606-07 (4th Cir. 2015).

         Analysis

The defendants' motions will be granted in part and denied in part. Because Smyth sufficiently alleges that Jackson misappropriated business records under the meanings of the Defend Trade Secrets Act and the Maryland Uniform Trade Secrets Act, his motion to dismiss as to those claims will be denied. But because Smyth has failed to sufficiently allege the same for Motes and Meritage, or the existence of an oral modification to the parties' original agreement, and because Jackson and Motes never violated their duty of loyalty during their employment, the defendants' motions as to Smyth's remaining claims will be granted.

         I. Federal Trade Secrets

         Smyth first claims that Motes and Jackson violated the Defend Trade Secrets Act ("DTSA"), 18 U.S.C. § 1836, by using copied business records to solicit customers or to seize an advantage in the jewelry market. The DTSA creates a private right of action allowing an owner of a misappropriated business record to bring a civil action so long as the business record "is related to a product or service used in, or intended for use in, interstate or foreign commerce."[4] 18 U.S.C. § 1836(b)(1).[5]

         Because Jackson allegedly accessed the "Companies' books and records, including customer records, employment records, business plans, pricing information, vendor lists and other confidential information" after he left the company and started a competing jewelry business, his motion to dismiss this claim will be denied. (Third Am. Compl. at ¶ 51). But because the complaint has not sufficiently alleged that Motes or Meritage acted similarly, their motions to dismiss will be granted.

         A. The Business Records are Trade Secrets

         The DTSA defines "trade secret" broadly, including within its umbrella: "all forms and types of financial, business, scientific, technical, economic, or engineering information, including," among other things, "patterns, plans, compilations methods, techniques, processes, [or] procedures ... whether tangible or intangible" so long as "the owner thereof has taken reasonable measures to keep such information secret and the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information." 18 U.S.C. § 1839(3)(A)-(B) (numeration removed).

         The defendants insist that Smyth's business records are not trade secrets because Smyth failed to protect their confidentiality, evidenced in part by the defendants' ability to access and maintain them in Dropbox accounts, and because the records do not derive independent economic value from their confidentiality. The court disagrees.

         To start, Smyth did take steps to protect its records. Its employees were prohibited from disclosing "company information and property," and it stored its business records on encrypted servers protected by firewalls to which only a handful of employees were granted access. (Third Am. Compl. at ¶¶ 52-54). More still, an employee handbook made clear that employees were not to disclose company records to non-employees, and explained how employees might keep confidential information safe. (Id. at ¶ 53). Indeed, the handbook noted that violating the company's confidentiality policies could lead to termination. (Id.)

         That some employees kept this information in Dropbox accounts does not alter this conclusion. Such accounts are private, requiring a Username and Password, and thus shield the documents they contain from everyone but those with the necessary login credentials. An employee's failure to protect the confidentiality of business records, in violation of an express policy, means no more than that an employee failed to protect the confidentiality of business records, and certainly not, without more, that a company did not take reasonable steps to protect its records. Taking the allegations in the complaint as true, Smyth's conduct constitutes reasonable steps to protect the confidentiality of its business records.

         Smyth's business records also are valuable by virtue of their confidentiality. Smyth alleges that these records include decades of "customer records and lists" that contain "the buying habits of over 69, 000 customers" and the company's "pricing information, vendor relationships and business strategies," which, no doubt, would be of value to a competitor. In a competition for sales, information about potential customers and their buying habits, a competitor's pricing, business strategies, and vendors is a windfall, granting the recipient a key to undercut the competition's pricing, outbid their vendor contracts, and attract their customers. There is thus no doubt that Smyth's records were valuable because of their confidentiality. Because Smyth took reasonable steps to protect the confidentiality of business records and their value derives from their confidentiality, they constitute trade secrets within the meaning of 18 U.S.C. §1839.

         B. Smyth's Trade Secrets were Misappropriated

         The defendants also argue that, even assuming the records do constitute trade secrets, the plaintiffs have not sufficiently alleged that the secrets were misappropriated. A trade secret is misappropriated if it was acquired: (1) "by a person who knows or has reason to know that the trade secret was acquired by improper means;" (2) "under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret;" or (3) if it was disclosed "without express or implied consent by a person who used improper means to acquire knowledge of the trade secret," or "at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was derived from or through a person who had used improper means to acquire the trade secret." 18 U.S.C. § 1839(5)(A), (B)(i), (B)(ii)(I)-(II).[6]

         The complaint alleges that Jackson accessed Smyth's trade secrets seven times after his employment was terminated, and five times after he filed documents with the state of Maryland to open a competing jewelry business. (Third Am. Compl. at ¶¶ 74-82). Rather than conclusory statements, ...


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