UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-2300
DECISION INSIGHTS, INCORPORATED,
Plaintiff - Appellant,
v.
SENTIA GROUP, INCORPORATED; THOMAS H. SCOTT; MARK
ABDOLLAHIAN; JACEK KUGLER; BRIAN EFIRD,
Defendants - Appellees.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Claude M. Hilton, Senior
District Judge. (1:06-cv-00766-CMH-JFA)
Argued: January 28, 2011 Decided: March 15, 2011
Before TRAXLER, Chief Judge, and MOTZ and KEENAN, Circuit
Judges.
Vacated and remanded by unpublished per curiam opinion
Nicholas Hantzes, HANTZES & REITER, McLean, Virginia, for
Appellant. Edward F. O’Connor, THE ECLIPSE GROUP, LLP, Irvine,
California, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
Decision Insights, Inc. (DII) filed a complaint in June
2006 against Sentia Group, Inc. (Sentia) and the four
individuals that founded Sentia (collectively, the defendants). 1
DII alleged in its complaint that Sentia’s development of a
competing software application was based on materials obtained
from the defendants’ misappropriation of DII’s trade secrets.
DII also alleged that several of the individual defendants
breached contractual and fiduciary obligations owed to DII by
disclosing DII’s confidential and proprietary information,
including the “source code” for DII’s software, 2 reports
containing marketing and research material, information
contained in the user manual for the DII software at issue, and
certain information pertaining to DII’s clients.
In June 2007, the district court granted the defendants’
motion for summary judgment on all DII’s claims. In an
unpublished opinion issued in February 2009, this Court affirmed
the judgment of the district court in part and reversed in part.
1
The individual defendants named in DII’s complaint are
Mark Abdollahian, Brian Efird, Jacek Kugler, and Thomas H.
Scott.
2
“Source code” is a document written in computer language,
which contains a set of instructions designed to be used in a
computer to bring about a certain result. See Trandes Corp. v.
Guy F. Atkinson Co., 996 F.2d 655, 662-63 (4th Cir. 1993).
2
Decision Insights, Inc. v. Sentia Group, Inc., 311 F. App’x 586
(4th Cir. 2009) (per curiam). We remanded the case with
instructions to the district court to consider, among other
issues, whether DII’s software application, as a total
compilation, could qualify as a trade secret under Virginia law.
Id. at 593-94. On remand, the district court again granted the
defendants’ motion for summary judgment, holding that DII failed
to develop facts during discovery that would establish that
DII’s software, as a compilation, is not generally known or
ascertainable, and that all DII’s claims must be dismissed in
light of that holding. Upon review of the district court’s
judgment on remand, we vacate the district court’s judgment, and
we remand the case for further proceedings consistent with this
opinion.
I.
Because our prior opinion set forth the facts of this case
at great length, see id. at 587-91, we summarize the relevant
facts only briefly here. We review the factual record in the
light most favorable to DII, the non-moving party in the
district court. Hope v. Pelzer, 536 U.S. 730, 734 n.1 (2002).
The record reflects that DII created software in the 1980s
called the “Dynamic Expected Utility Model” (EU Model), which is
an analytical tool used to prepare negotiating strategies. The
3
EU Model assesses risk, compares the impact of different
operating positions, and details the relative effects of
selecting various alternatives. Essentially, the EU Model
applies concepts from several academic disciplines, including
mathematics, economics, political science, and psychology, to
predict for DII’s clients the outcome of a given political or
business situation. DII owns the assets, copyright, and all
proprietary rights to the EU Model, which DII considers to be
its primary asset.
Sentia was formed in November 2002 by the four individual
defendants in this case, Mark Abdollahian, Brian Efird, Jacek
Kugler, and Thomas H. Scott. Three of these defendants,
Abdollahian, Efird, and Kugler, were formerly affiliated with
DII, and each worked with the EU Model while employed by DII. 3
Abdollahian and Efird entered into nondisclosure agreements with
DII that restricted their ability to disclose information
acquired during their employment with DII. Kugler signed a
similar nondisclosure agreement, but DII failed to execute the
agreement. Additionally, Efird’s contract contained a covenant
3
Abdollahian provided executive consulting services to DII.
Efird is a former DII employee. Kugler is a former director of
DII and “major owner” of stock in DII. Scott was not formerly
affiliated with DII.
4
placing restrictions on his potential future employment with any
business competitor of DII.
Sentia initially sought to obtain a software license from
DII for use of the EU Model. However, negotiations between the
parties did not result in an agreement. Sentia later hired
Carol Alsharabati, a former consultant for DII who worked
extensively on the source code for DII’s EU Model, to develop
software for a Sentia product that would compete directly with
DII’s software. Alsharabati completed this task in about six
weeks, which, according to DII, could only have been
accomplished by using DII’s source code to create the Sentia
software.
DII filed a complaint in the district court against the
defendants, alleging that Abdollahian, Efird, Kugler, and
Alsharabati disclosed DII’s trade secrets to Sentia in violation
of the Virginia Trade Secret Misappropriations Act, Virginia
Code §§ 59.1-336 through -343 (the Act). 4 According to DII, the
software developed by Alsharabati for Sentia is almost identical
to DII’s EU Model, both in terms of method and in the results
obtained when the respective programs are executed. DII
asserted that Sentia’s software could not achieve results equal
to DII’s software unless all the parameters, variables, and
4
DII did not name Alsharabati as a defendant.
5
sequencing associated with the programs are equal. Although the
EU Model uses certain mathematical formulas that are in the
public domain, DII asserted that the combination and
implementation of these formulas in DII’s source code for the
software constitutes a trade secret.
DII also alleged that Efird, Kugler, and Abdollahian
breached their respective contractual and fiduciary obligations
by disclosing confidential and proprietary information owned by
DII. Additionally, DII contended that Scott conspired with
Sentia to induce DII’s former employees to breach their
respective nondisclosure agreements with DII, and assisted the
defendants in misappropriating DII’s trade secrets. 5 The parties
agree that Virginia law governs DII’s claims.
After discovery, the defendants filed a motion for summary
judgment seeking dismissal of all DII’s claims. The district
court granted the defendants’ motion. With regard to DII’s
trade secret claims, the district court held that DII failed to
meet its burden to establish that the EU Model software
qualified as a trade secret under the Act. The district court
5
DII asserted the following causes of action in its amended
complaint: breach of contract (Count I), conspiracy to commit
breach of contract (Count II), conspiracy to injure another in
trade, business or profession (Count III), misappropriation of
trade secrets (Count IV), breach of fiduciary duty (Count V),
and conversion (Count VI).
6
did not address DII’s claims relating to the other materials
that DII asserted were its trade secrets, including reports
containing marketing and research material, information
contained in the user manual for the DII software at issue, and
certain information pertaining to DII’s clients.
With regard to DII’s breach of contract claims, the
district court held that DII failed to identify “any
confidential or proprietary information obtained by [the
defendants] while employed at DII that [was] thereafter
misappropriated” that would violate the nondisclosure provisions
in Abdollahian’s and Efird’s agreements. The district court
also held that DII could not establish an enforceable contract
between DII and Kugler because DII did not execute Kugler’s
agreement.
DII timely noted an appeal and, as stated above, we
affirmed in part, reversed in part, and remanded the case to the
district court. 311 F. App’x at 587. In our unpublished
opinion, we noted that DII’s trade secret claims were founded,
in part, “upon its software as a total compilation.” Id. at
593. We held that the district court “did not address whether
or not the software program, as a total compilation, could
qualify as a trade secret.” Id. Accordingly, we remanded the
case with instructions that the district court analyze DII’s
software compilation claim in light of our decision in Trandes
7
Corp. v. Guy F. Atkinson Co., 996 F.2d 655 (4th Cir. 1993)
(applying Maryland law). See 311 F. App’x at 593-94. As stated
in our prior opinion in this case, we held in Trandes that a
“plaintiff’s alleged software compilation trade secret is to be
analyzed separate and apart from other software trade secret
claims, and that production of source code is an acceptable
method of identifying an alleged compilation trade secret.” 311
F. App’x at 594 (citing Trandes, 966 F.2d at 661-63.).
We instructed the district court to determine first whether
DII “adequately identified its software compilation claim.” Id.
at 594. If DII made such a showing, we stated, the district
court “should then consider the sufficiency of DII's showing as
to the existence of a trade secret and [thus] a triable issue of
fact.” Id. We provided further that “the district court should
specifically address the relevant criteria for establishing the
existence of a trade secret under Va. Code. § 59.1-336, namely,
whether or not the compilation has independent economic value,
is generally known or readily ascertainable by proper means, and
is subject to reasonable efforts to [maintain] secrecy.” Id.
Additionally, we remanded DII’s claims concerning other
confidential information that DII alleged was misappropriated by
the defendants, including the operating manual for the DII
software, DII’s reports containing marketing and research
material, and DII’s client contact information. Id. at 595. We
8
observed that the district court failed to discuss these
categories of alleged proprietary materials, and that
“[d]epending on the circumstances, any of this information could
be characterized as trade secrets” under the Act. Id. We also
remanded DII’s breach of contract claims to the district court,
with instructions that the court “address DII's contractual
claims in light of [the court’s] findings with respect to the
existence of a trade secret.” 6 Id. at 596.
On remand, the district court first held that DII met its
burden under Trandes to demonstrate that DII’s source code was
unique. However, the district court concluded that DII failed
to satisfy its burden to show that DII’s software, as a
compilation, was not generally known or readily ascertainable by
proper means. In reaching this conclusion, the district court
found that DII “failed to distinguish which aspects of its
software, as a compilation, are publicly available or readily
ascertainable and which are not.” The district court did not
address the other relevant criteria under the Act, including
whether the compilation had independent economic value, and
6
We affirmed the district court’s grant of summary judgment
on the issue whether DII met its evidentiary burden to show that
any of the twelve individual portions of the program within
DII’s source code could constitute a trade secret. Id. at 595.
That issue is not before us in this appeal.
9
whether the compilation was subject to reasonable efforts by DII
to maintain the secrecy of the information.
The district court held that DII’s other claims, including
its claims concerning DII’s marketing, research, and client
information material, as well as DII’s breach of contract
claims, all failed because DII did not satisfy its evidentiary
burden for the software compilation trade secret claims.
Accordingly, the district court awarded summary judgment to the
defendants on all DII’s claims. DII timely appealed from the
district court’s judgment.
II.
A.
The primary issue in the present appeal is whether DII
adduced enough evidence during discovery to allow a jury to
reach the ultimate conclusion that the DII software, as a
compilation, is not generally known or ascertainable by proper
means, within the meaning of Section 59.1-336 of the Code of
Virginia. As discussed below, we conclude that the district
court erred in holding that DII failed to satisfy its burden of
producing sufficient evidence on this issue.
We review the district court’s decision granting summary
judgment de novo. See S.C. Green Party v. S.C. State Election
Comm’n, 612 F.3d 752, 755 (4th Cir. 2010). Under Rule 56(a) of
10
the Federal Rules of Civil Procedure, summary judgment should be
granted if “the movant shows that there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a); see Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 247 (1986) (construing former Rule
56(c) of the Federal Rules of Civil Procedure). A genuine
dispute exists only if “the evidence is such that a reasonable
jury could return a verdict for the nonmoving party.” Anderson,
477 U.S. at 258. In conducting our analysis, we view the
evidence in the light most favorable to the non-moving party.
See Hope, 536 U.S. at 734 n.1.
“[T]he determination whether a trade secret exists
ordinarily presents a question of fact to be determined by the
fact finder from the greater weight of the evidence.”
MicroStrategy, Inc. v. Li, 601 S.E.2d 580, 589 (Va. 2004). The
Act defines a “trade secret” as “information, including but not
limited to a formula, pattern, compilation, program, device,
method, technique, or process, that:
1. Derives independent economic value, actual or
potential, from not being generally known to, and not
being readily ascertainable by proper means by, other
persons who can obtain economic value from its
disclosure or use, and
2. Is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy.”
11
Va. Code § 59.1-336. As described in our prior opinion in this
case, the determination whether information qualifies as a trade
secret under the Act depends on “whether or not the
[information] has independent economic value, is generally known
or readily ascertainable by proper means, and is subject to
reasonable efforts to [maintain] secrecy.” 311 F. App’x at 594
(citing Va. Code. § 59.1-336).
We have recognized that a trade secret may be composed of
publicly-available information if the method by which that
information is compiled is not generally known. For instance,
in Servo Corp. of America v. General Electric Co., 393 F.2d 551,
554 (4th Cir. 1968), we held that a trade secret “might consist
of several discrete elements, any one of which could have been
discovered by study of material available to the public.”
Additionally, we have held specifically that computer source
code as a compilation can qualify as a trade secret. See
Trandes, 996 F.2d at 664. Moreover, the definition of a “trade
secret” provided in the Act explicitly includes a “compilation”
among the types of information that qualify for protection under
the statute. Va. Code. § 59.1-336.
Although it is clear that a software compilation such as
DII’s EU Model can qualify for protection as a trade secret, the
question presented here is whether the record supports DII’s
contention that the DII software is not generally known or
12
readily ascertainable by proper means. As described below, DII
relies on deposition testimony and reports from two witnesses
that DII presented in support of the argument that the EU Model
software, as a compilation, is not generally known or readily
ascertainable.
The defendants, however, urge that we reject the testimony
offered by these two witnesses as “ultimate conclusions” of
individuals affiliated with DII. The defendants maintain,
without citing any authority, that the testimony of these two
witnesses “is clearly not evidence and cannot be used to satisfy
[DII’s] burden.” We disagree with the defendants’ argument.
DII presented the report of expert witness Dr. Bruce Bueno
de Mesquita, the Silver Professor of Politics at New York
University and an authority on expected utility theory, the
theory upon which the EU Model is based. Dr. Bueno de Mesquita
was a founder of DII, and he co-authored the original source
code for DII’s EU Model in the 1980s.
In his report, Dr. Bueno de Mesquita characterized some of
the elements of the DII software as “proprietary . . .[,]
elements that have not been published in my research or anyone
else’s.” Dr. Bueno de Mesquita’s report expressly rebutted the
testimony of the defendants’ expert witness, Dr. Peter
Alexander, who asserted that Sentia’s “alleged uses of
proprietary DII methodologies are well known concepts from the
13
open literature.” Additionally, Dr. Bueno de Mesquita stated in
his report that “[t]he method for calculating the value of the
discount term that triggers the stopping rule and – crucially –
leads to the predicted outcome is proprietary; that is,
unpublished. . . . [N]o formula for the actual calculation is
stated in . . . [any] publication that addresses the forecasting
model on which DII’s software is based.”
DII also presented the report and deposition testimony of
Gary Slack, a current DII employee and co-author of DII’s
software program. Mr. Slack stated in his report and during his
deposition testimony that many aspects of the source code, and
hence the compilation of the source code as a whole, were not
public knowledge or readily ascertainable by proper means. In
his report, Mr. Slack identified and described 13 proprietary
processes in the source code, and stated that “[t]he collection
of these processes as a whole and the sequence of these
processes also serve as a proprietary aspect of [DII’s EU Model
software].” Mr. Slack’s expert report also included a “flow
chart,” which set forth the sequencing of DII’s source code,
including its organization and structure. Mr. Slack testified
that portions of this process, as well as the entire sequencing
of the process, were not known to the public.
During his deposition testimony, Mr. Slack also identified
numerous variables that are part of DII’s software code for the
14
EU Model, noting that the set of these variables had “never been
disclosed to anyone else.” Mr. Slack further testified that
while a few of these individual variables were in the public
domain, numerous other of these variables were not in the public
literature or known outside of DII. Additionally, Mr. Slack
testified that “[n]one of the code has ever been shared with
anybody that has not signed a confidential[ity] agreement.”
In light of the foregoing evidence offered by Dr. Bueno de
Mesquita and Mr. Slack concerning the nonpublic and proprietary
nature of DII’s software code, we conclude that the district
court erred in holding that DII failed to satisfy its
evidentiary burden to show that DII’s software compilation was
not generally known or readily ascertainable by proper means.
Therefore, we conclude that DII adduced sufficient evidence
during discovery to render this issue appropriate for decision
at a trial.
In view of its analysis, the district court did not address
the other criteria specified by the Act, including whether DII’s
software code has independent economic value and whether DII
engaged in reasonable efforts to maintain the secrecy of the
software code. See Va. Code. § 59.1-336. On remand, the
district court should consider these criteria, as well as the
adequacy of DII’s evidence that the defendants misappropriated
15
DII’s software code, in determining if DII’s claims under the
Act should proceed to a trial.
B.
In addition to the EU Model software, DII also claimed as
trade secrets other materials that DII alleged were
misappropriated by the defendants, including the operating
manual for the DII software, DII’s reports containing marketing
and research material, and DII’s client information. In our
prior opinion, we directed the district court to examine these
other categories of purported trade secrets under the criteria
set forth under the Act. 311 F. App’x at 595.
On remand, the district court dismissed these claims
summarily, holding that “[t]he failure of [DII’s] software
compilation claim requires that these proprietary claims fail.”
We disagree that the resolution of these other categories of
purported trade secrets rises or falls on the issue whether the
DII’s software compilation qualifies as a trade secret.
Regardless, the basis of the district court’s holding on this
issue is no longer valid in light of our conclusion above, and a
remand to the district court for further consideration of these
separate issues is required. In considering DII’s trade secret
claims on remand for these other categories of materials, the
district court should apply the criteria specified under the
Act’s definition of a trade secret, including whether the
16
materials at issue have independent economic value, whether the
materials are generally known or readily ascertainable by proper
means, and whether DII engaged in reasonable efforts to maintain
the secrecy of the information.
C.
The district court also dismissed DII’s breach of contract
claims, including the claim for breach of nondisclosure
agreements asserted against Abdollahian and Efird, the claim for
breach of a noncompetition agreement asserted against Efird, and
the claim for breach of a nondisclosure agreement asserted
against Kugler for the contract that he signed but which DII
failed to execute. The sole basis for the district court’s
dismissal of these claims was the court’s earlier holding that
DII failed to meet its evidentiary burden with respect to its
trade secret claims pertaining to the software compilation.
Because we disagree with the district court’s holding on that
issue, we also vacate the district court’s judgment relating to
DII’s contract-based claims and remand those claims to the
district court for further consideration. Consistent with the
directive of our prior opinion, we also instruct the district
court to consider whether an implied agreement existed between
DII and Kugler pertaining to DII’s confidential and proprietary
information, despite the lack of a fully executed written
agreement between the parties. See id. at 596-97.
17
We note that separate consideration of DII’s various breach
of contract claims will be necessary regardless of the outcome
on remand of DII’s trade secret claims concerning its software
compilation. Those breach of contract claims do not require a
finding that the materials at issue qualify as a trade secret,
because the respective nondisclosure clauses apply to “any
confidential or proprietary information . . . owned or used by”
DII. 7 This contractual language is broader than the definition
of a “trade secret” under the Act and, thus, the nondisclosure
language may apply to the software code and other proprietary
materials at issue even if those materials are not covered by
the Act. Therefore, we direct the district court to consider
7
The contract clauses at issue provide in full:
The [Party] acknowledges that he will, as a result of
his association with [DII], have access to and be in a
position to receive information of a confidential or
proprietary nature including trade secrets. The
[Party] agrees that he will not, during the
association with [DII] or thereafter, disclose to
anyone whomsoever or use in any manner whatsoever any
confidential or proprietary information, whether
patentable or unpatentable, concerning any inventions,
discoveries, improvements, processes, methods, trade
secrets, research or secret data (including but not
limited to models, formulas, computer programs and
software developments), or other confidential matters
possessed, owned, or used by [DII] that may be
obtained or learned by the Representative in the
course of, or as a result of his association with
[DII], except as such disclosure or use may be
required in the normal course of doing business with
[DII] and pursuant to [DII’s] prior written consent.
18
the language of the respective nondisclosure clauses when the
court analyzes DII’s breach of contract claims.
III.
For these reasons, we conclude that the district court
erred by granting the defendants’ motion for summary judgment on
all DII’s claims. We remand the case to the district court for
further proceedings consistent with this opinion.
VACATED AND REMANDED
19