ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS; GRANTING MOTION TO BIFURCATE AND STAY DISCOVERY CHARLES R. BREYER, District Judge.
This case is before the Court on three defendants' motions to dismiss (two of which are identical) and a motion to bifurcate and stay discovery. Plaintiff craigslist, Inc. (“Craigslist”) has brought seventeen claims against three companies and one individual—3taps, Inc. (“3Taps”); Padmapper, Inc. (“Padmapper”); Discover Home Network, Inc. d/b/a Lovely (“Lovely”); and Brian R. Niessen, an individual affiliated with 3Taps—essentially alleging that all defendants have improperly harvested and reproduced the contents of Craigslist's website. 3Taps, Padmapper, and Lovely move to dismiss various claims.
The Court GRANTS the motions to dismiss IN PART—dismissing a subset of the copyright claims as well as the claims against Padmapper premised on civil conspiracy. The Court also GRANTS the motion to bifurcate and stay discovery on the antitrust counterclaims and overlapping affirmative defenses.
I. BACKGROUND Craigslist operates a well known and widely used website that allows users to submit and browse classified advertisements. FAC (dkt.35) ¶¶ 1, 25, 28–34. According to the First Amended Complaint (“FAC”), “[m]ore than 60 million Americans visit craigslist each month, and they collectively post several hundred million classified ads each year.” Id. ¶ 25. Craigslist's service is organized by geographic area, and within each given area by types of products and services. Id. ¶ 29. Craigslist provides ancillary features, such as anonymous email forwarding, to support its classified ad service. E.g., id. ¶ 34.
The TOU also grant Craigslist a broad license to use and republish content submitted by its users. TOU at 3. For a period in the summer of 2012, Craigslist presented users with a statement during the ad submission process “confirming” that Craigslist acquires an exclusive license to all ads submitted by users. FAC ¶ 38. Aside from that statement, the TOU do not specify whether Craigslist's license is exclusive. See TOU at 3.
Craigslist has submitted a number of copyright registration applications. FAC ¶¶ 51–53. The parties dispute the scope of those registrations.
Defendants 3Taps, Padmapper, and Lovely aggregate and republish ads from Craigslist. Id. ¶¶ 63, 65, 99, 104, 112. Craigslist alleges that 3Taps copies (or “scrapes”) all content posted to Craigslist in real time, directly from the Craigslist website. Id. ¶¶ 3, 78–80. 3Taps markets a “Craigslist API” FN2 to allow third parties to access large amounts of content from Craigslist, id. ¶¶ 3, 5, 64, and also operates the websitecraiggers.com, which “essentially replicated the entire craigslist website,” id. ¶ 65, including “all of craigslist's posts,” id. ¶ 68.
Padmapper provides real estate listings, largely consisting of real estate ads originally posted to Craigslist. Id. ¶ 99. Craigslist alleges that Padmapper initially copied content directly from Craigslist. Id. ¶ 101. After receiving a cease and desist letter, Padmapper did not use Craigslist content for several weeks, but then announced that it was “Bringing Craigslist Back,” and began obtaining Craigslist content from other parties, including 3Taps. Id. ¶¶ 101–04.
Lovely also provides real estate listings through a website and mobile application, including Craigslist content that it receives from 3Taps. Id. ¶ 112.
Craigslist has sent letters to 3Taps, Padmapper, and Lovely demanding that they “cease and desist all ... craigslist-related activities” and informing them that they were “no longer authorized to access ... craigslist's website or services for any reason.” FAC ¶¶ 132–34; Kao Decl. Ex. A (dkt 60–2) at 3 (cease and desist letter to 3Taps, referenced in the FAC). Craigslist filed this action against 3Taps and Padmapper on July 20, 2012, see generally Compl. (dkt.1), and later filed the FAC, which added Lovely and Niessen as defendants, and brought additional claims. See generally FAC.
The FAC alleges claims for (1) trespass; (2) breach of contract; (3) misappropriation; (4) copyright infringement; (5) contributory copyright infringement; (6) federal trademark infringement; (7) federal false designation of origin; (8) federal dilution of a famous mark; (9) federal cyberpiracy prevention; (10) California trademark infringement; (11) common law trademark infringement; (12) California unfair competition; (13) violations of the Computer Fraud and Abuse Act (CFAA); (14) violations of the California Comprehensive Computer Data Access and Fraud Act; (15) aiding and abetting trespass; (16) aiding and abetting misappropriation; and (17) an accounting. See generally id.FN3 3Taps and Lovely have filed identical motions to dismiss the fourth and fifth claims, regarding copyright infringement, and the thirteenth and fourteenth claims, regarding the CFAA and its state-law counterpart. 3Taps Mot. (dkt.48); Lovely Mot. (dkt.50). Padmapper joins the other defendants' motions regarding the copyright claims, and separately moves to dismiss the trespass, trademark, and breach of contract claims, as well as civil conspiracy theories of liability that Craigslist incorporates into several claims. Padmapper Joinder (dkt.52); Padmapper Mot. (dkt.46).
Padmapper and 3Taps have also filed antitrust counterclaims. Padmapper Am. Counterclaim (dkt.44); 3Taps Am. Counterclaim (dkt.47). Craigslist moves to bifurcate the counterclaims and to stay discovery on them. Mot. to Bifurcate (dkt.61).
II. LEGAL STANDARD A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in a complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199–1200 (9th Cir.2003). “Detailed factual allegations” are not required, but the Rule does call for sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (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.” Id. In determining facial plausibility, whether a complaint states a plausible claim is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. Allegations of material fact are taken as true and construed in the light most favorable to the non-moving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th Cir.1996).
A complaint should not be dismissed without leave to amend unless it is clear that the claims could not be saved by amendment. Swartz v. KPMG LLP, 476 F.3d 756, 760 (9th Cir.2007).
. . .
E. Craigslist's Trespass Claim Adequately Alleges Injury
Padmapper moves to dismiss Craigslist's trespass claim on the grounds that it does not adequately allege injury. Under California common law, the tort of trespass to chattel encompasses unauthorized access to a computer system where “(1) defendant intentionally and without authorization interfered with plaintiff's possessory interest in the computer system; and (2) defendant's unauthorized use proximately resulted in damage to plaintiff.” eBay, Inc. v. Bidder's Edge, Inc., 100 F.Supp.2d 1058, 1069–70 (N.D.Cal.2000); see also Intel Corp. v. Hamidi, 30 Cal.4th 1342, 1354–55, 1 Cal.Rptr.3d 32, 71 P.3d 296 (2003) (citing eBay as “the leading case”); Thrifty–Tel, Inc. v. Bezenek, 46 Cal.App.4th 1559, 1566 & n. 6, 54 Cal.Rptr.2d 468 (1996) (among the first cases to apply this tort in an electronic context). For such a claim to lie, the defendant's access to the system must cause “actual damage,” such as impairment as to the “condition, quality, or value” of the system or deprivation of its use “for a substantial time.” Hamidi, 30 Cal.4th at 1357, 1 Cal.Rptr.3d 32, 71 P.3d 296 (citations omitted). “[T]he tort does not encompass ... an electronic communication that neither damages the recipient computer system nor impairs its functioning.” Id. at 1347, 1 Cal.Rptr.3d 32, 71 P.3d 296.
Craigslist alleges that “Defendants' unauthorized interference, intermeddling, and access with [sic] craigslist, its website, computer systems, and its servers, among other harms, reduces craigslist's capacity to service its users because it occupies and uses craigslist's resources.” FAC ¶ 121. Given the scope of Defendants' alleged use of Craigslist's website, it is plausible that such access could divert sufficient computing and communications resources to impair the website's and servers' functionality. See FAC ¶ 3 (alleging that one defendant “boasts that it mass copies tens of millions of postings from craigslist in ‘real time’ ”).
On the other hand, it is also possible that Defendant's actions caused no such impairment. See Hamidi, 30 Cal.4th at 1360, 1 Cal.Rptr.3d 32, 71 P.3d 296 (finding that after the defendant sent thousands of unsolicited email messages through Intel's email system, “[t]he system worked as designed, delivering the messages without any physical or functional harm or disruption”). Whether Defendants caused actual damage or impairment to Craigslist's computer systems is a question of fact more appropriate for summary judgment or trial than for a motion to dismiss. See Coupons, Inc. v. Stottlemire, No. CV 07–03457 HRL, 2008 WL 3245006, at *6 (N.D.Cal. July 2, 2008) (“Although [a lack of significant injury] may be an appropriate argument once more facts have been established, it would be premature to dismiss the trespass to chattels claim at this time.”); cf. Hamidi, 30 Cal.4th at 1364, 1 Cal.Rptr.3d 32, 71 P.3d 296 (considering the extent of injuries in the context of summary judgment rather than a motion to dismiss).
Padmapper points to district court orders dismissing electronic trespass claims where plaintiffs failed to allege more than de minimis injury as a result of unauthorized access to a mobile devices. Hernandez v. Path, Inc., No. 12–CV–01515 YGR, 2012 WL 5194120, at *7–8 (N.D.Cal. Oct.19, 2012) (noting that the plaintiff alleged “depletion of ‘two to three seconds of battery capacity’ ”); In re iPhone Application Litig., 844 F.Supp.2d 1040, 1069 (N.D.Cal.2012) (holding that the plaintiffs' allegations did “not plausibly establish a significant reduction in service constituting an interference with the intended functioning of the system”). Here, while Craigslist will need to support its claim of actual injury with evidence at summary judgment or trial, Craigslist's allegation of injury is sufficient for the purpose of Padmapper's Motion to Dismiss. See Coupons, Inc., 2008 WL 3245006, at *6. The Court therefore DENIES Padmapper's motion to dismiss Craigslist's trespass claim.
Pearl Investments, LLC v. Standard I/O, Inc.
257 F.Supp.2d 326 (D.Me.,2003)
ORDER AFFIRMING RECOMMENDED DECISION OF THE MAGISTRATE JUDGE HORNBY, District Judge.
The United States Magistrate Judge filed with the court on March 21, 2003, with copies to counsel, his Recommended Decision on Cross-Motions for Summary Judgment (Docket Item 59 (sealed version) and Docket Item 62 (expanded public version)). The plaintiff and third-party defendant filed an objection to the Recommended Decision on April 4, 2003. I have reviewed and considered the Recommended Decision (sealed version), together with the entire record; I have made a de novo determination of all matters adjudicated by the Recommended Decision; and I concur with the recommendations of the United States Magistrate Judge for the reasons set forth in his Recommended Decision, and determine that no further proceeding is necessary.
. . .
Remaining for trial are the following: Count I of the Complaint (misappropriation of trade secrets) against Chunn only, with the caveat that Pearl is precluded from premising any such claim on contents found on the HDD; Count III of the Complaint (violation of the DMCA) against Chunn only; Count V of the Complaint (breach of contract) against both Standard and Chunn; Count VI of the Complaint (breach of warranty/services) against both Standard and Chunn, to the extent asserting breach of express warranty only; and Count II of the Counterclaim, with respect only to the amount of damages to be awarded Chunn.
SO ORDERED. COHEN, United States Magistrate Judge.
RECOMMENDED DECISION ON CROSS–MOTIONS FOR SUMMARY JUDGMENT Plaintiff Pearl Investments, LLC (“Pearl”) and defendants Standard I/O, Inc. (“Standard”) and Jesse Chunn (together, “Defendants”) cross-move for summary judgment as to Counts I and V of Pearl's eight-count complaint, and the Defendants move for summary judgment as to the remaining counts, in this action arising from Standard's provision of custom computer programming to Pearl. Motion for Partial Summary Judgment of Liability on Counts I and V of the Complaint and for Summary Judgment on Counterclaims. In addition, Chunn, Pearl and third-party defendant Dennis Daudelin cross-move for summary judgment as to Count II of Chunn's four-count counterclaim/third-party complaint, and Pearl and Daudelin move for summary judgment as to the remaining two counts applicable to them (Counts I and IV). Chunn concedes Pearl's and Daudelin's entitlement to summary judgment as to Count IV of the Counterclaim. For the reasons that follow, I recommend that both motions be granted in part and denied in part.
I. Summary Judgment Standards
Summary judgment is appropriate only if the record shows “that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). “In this regard, ‘material’ means that a contested fact has the potential to change the outcome of the suit under the governing law if the dispute over it is resolved favorably to the nonmovant. By like token, ‘genuine’ means that ‘the evidence about the fact is such that a reasonable jury could resolve the point in favor of the nonmoving party.’ ” Navarro v. Pfizer Corp., 261 F.3d 90, 93–94 (1st Cir.2001) (quoting McCarthy v. Northwest Airlines, Inc., 56 F.3d 313, 315 (1st Cir.1995)).
. . .
II. Factual Context
The parties' statements of material facts, credited to the extent either admitted or supported by record citations in accordance with Local Rule 56, reveal the following relevant to this recommended decision:
Pearl is a Maine limited liability company with its principal place of business in Portland, Maine. Plaintiff's Statement of Undisputed Material Facts in Support of Their [sic] Motion for Partial Summary Judgment of Liability on Counts I and V of the Complaint (“Plaintiff's SMF”) (Docket No. 20) (sealed) ¶ 1; Defendants' Opposing Statement of Material Facts in Opposition to Plaintiff's Motion for Summary Judgment and in Support of the Cross–Motion for Summary Judgment (“Defendants' Opposing SMF”) (Docket No. 31) ¶ 1. Pearl develops and operates automated stock-trading computer systems (collectively and individually, “Pearl's ATS”). Id. ¶ 2. Standard is a Maine corporation with its principal place of business in Portland, Maine. Id. ¶ 3. Standard provides custom software programming for third parties. Id. ¶ 4. Chunn, a Maine resident, is the sole owner of Standard. Id. ¶¶ 5–6.
In April 2000, Pearl hired Standard to perform software-programming services in relation to Pearl's ATS. Chunn was initially offered an equity interest in Pearl to carry out the programming, but declined the offer. Instead, he proposed that Standard would do the programming work at a reduced hourly rate on a time-and-materials basis. Pearl agreed.
Standard provided software-development services from April 2000 through June 2001, with some miscellaneous transition work by Michael Farnsworth completed by mid-July. Chunn personally worked on computer programming for Pearl from April 2000 through June 22, 2001.
The automated trading system that Chunn and Standard developed for Pearl consisted of software that carried out trading of corporate securities without human intervention over alternative trading systems known as electronic communications networks, or ECNs. ECNs are private trading systems maintained separately from public markets such as NASDAQ, although they trade the same securities. They enable buy and sell orders for stocks to be displayed and matched by market professionals and “day-traders.”
On any given ECN, the various offers for a particular security are displayed as a “book” for that security, with the highest offer to buy (or “bid”) and the lowest offer to sell (or “ask”) shown at the “top” of the “book.” The difference between the highest bid price and the lowest ask price is the “spread” for that security at a given time. ECN arbitrage opportunities are only possible between books on different ECNs.
An automated trading system necessarily includes a component that determines when and how the system will enter the market. A system could be programmed to enter the market immediately either by buying a security (i.e., accepting an ask) or by accepting a bid and “selling short,” i.e., selling a security that is not yet owned in the expectation that the price will go down and the shares to cover the trade could be purchased later for less. Alternatively, rather than accepting an offer to buy or sell, the trading system could place a bid or an ask on the book and wait to see whether that bid or ask was accepted. The trading system also must include a component that determines when and how to exit the market, either by selling a security that is owned or buying a security to “cover” a short sale.
Pearl's ATS are modular software systems, meaning that they comprise numerous software components, each of which performs independent functions, but all of which operate as a single system. Among those various components is a single component, referred to as the “signal generator,” that contains the system's trading logic. This modular approach allowed Pearl to execute its business model of conceiving, developing and implementing several systems based on different signal generators, such systems being developed as resources allowed.
Among many possible signal generators, Pearl had the resources to develop only two initial systems. Other signal-generator concepts were discussed and analyzed to varying degrees and reserved for future development.
The software for the first system that Standard and Chunn helped develop, “Engine 1,” was an “arbitrage” system in that it was designed to purchase a security on one ECN and sell it on a different ECN to profit from the differences in the price of that security in the two different ECNs. For example, if one thousand shares of Oracle were selling at 90 on the Island ECN, and someone were simultaneously bidding to buy the same number of shares on the Instanet ECN for 90, there would be an opportunity to buy the shares on Island and sell them on Instanet for a profit of $250, minus commissions. he software developed by Standard automatically both identified such arbitrage opportunities and executed the respective trades.
During the fall of 2000, Standard succeeded in producing the first version of the software to carry out the automated arbitrage transactions. The software was installed on several servers owned by Pearl and located at a computer facility maintained by On–Site Trading, Inc. (“On–Site”) in New York. Id. On the first day of automated trading, the system generated approximately [REDACTED] in revenue. During the last four months of 2000, it generated about [REDACTED] in revenue. Pearl considered acquiring Standard, and a letter of intent was signed on September 15, 2000.
In the meantime, employees of Standard operated the trading system and provided office space for one full-time Pearl employee, Doug Robertson. Standard kept a current backup copy of the software it had developed for Pearl in “SourceSafe” files. While Standard was running the trading system for Pearl, programmer Farnsworth had an established practice of printing and storing daily trading records—a practice that was solely for Pearl's benefit. Pearl conceded that for Standard to print out the trading records, it needed passwords to Pearl's clearing account (as distinguished from passwords to Pearl's computers), which passwords were given to Standard.
By February 2001 the financial conditions for the acquisition had not been met, and the parties' letter of intent expired of its own terms. At a Pearl company meeting on February 16, 2001 several courses of action to reduce Pearl's operating costs were discussed, including moving some or all of Pearl's development work in-house. At the same meeting Daudelin asked: “Should we consider a stock grant for a tighter NDA and non-compete? How much?” By March 2001 the parties had decided not to merge their operations, and Pearl had decided to establish its own separate office and hire its own employees to write software programs and monitor the stock-trading system. In April 2001, Pearl rented its own office space for the first time and moved its equipment out of the Standard offices into the new space. By April, Pearl had also advised Standard that it was winding down its use of Standard's services.
Although the Pearl arbitrage system was the primary trading “engine” developed by Standard and used by Pearl, it was not the only trading system considered. Standard presented another, non-arbitrage automated trading system to Pearl as a concept. Chunn and Standard employee Famsworth referred to that system as the “Scalper.” The Scalper was specified to trade a single stock at a time on the Island ECN. Chunn testified at his deposition that he could not recall details of the Scalper system. However, on March 16, 2001 Farnsworth e-mailed to Pearl representatives Daudelin and Robertson a Scalper Design Definition Document and flow chart outlining details of the Scalper system.
The Scalper Design Definition Document describes the Scalper system as follows:
[REDACTED] As its trading parameters initially were set up, the Scalper would
[REDACTED] Pearl specifically informed Standard and Chunn that “any deviation from the document that also creates a working signal is good.”
Pearl ran simulation testing on the initial parameters of the Scalper and concluded that they would not generate a signal that would result in the desired trading opportunities. However, the Scalper system concept [REDACTED] was potentially promising. The development of new parameters was postponed for budget reasons. No software to carry out trading using the Scalper was ever developed by Pearl employees.
Because Pearl's business relies on identifying market inefficiencies and/or predictive indicators, it is extremely important to Pearl that few or no other automated trading systems are implemented that might eliminate, reduce or affect a particular inefficiency or market inefficiencies in general.
Daudelin, Pearl's chief executive officer, made it clear to Standard employees (including Chunn) on several occasions that the existence of Pearl's ATS and all aspects of it, including various signal generators and related components, constituted proprietary and confidential information owned by Pearl. Pearl has not made any patent applications relating to its trading methodologies or systems. In its copyright applications related to computer programs for its trading methodologies, Pearl has carefully excised any trade secrets about exactly how the trading methodologies work.
On April 10, 2000, prior to the disclosure of any details about Pearl's methods to Chunn, Chunn signed a non-disclosure and confidentiality agreement (“NDA”). The NDA provides, in part:
I agree to make full and prompt disclosure to the Company [Pearl] of all business opportunities relating to manual and automated stock market trading and any other businesses in which the Company may be engaged during the course of my contract with the Company, (collectively, “Business Opportunities”), as well as of all computer software systems, methods, designs, processes, algorithms and trade secrets whether patentable, copyrightable or not, made, conceived or reduced to practice by me or under my direction or jointly with others during the term of my contract with the Company (all of which are collectively termed “Discoveries”). I hereby assign and transfer to the Company without further compensation the entire worldwide right, title and interest in and to all Discoveries and any patents, patent applications, copyrights, copyright registrations, or trade secrets covering such Discoveries....
The NDA also provides:
I understand that the Company's confidential information includes matters not generally known outside the Company, such as computer software systems, object and source code, methods, designs, processes, algorithms and trade secrets relating to manual and automated stock market trading including business operations, methodologies and the techniques of the Company. I further understand that while I am under contract by the Company, I may obtain or hear of confidential information of the Company and of other parties, which has been provided to the Company in confidence. I agree not to disclose, use or copy any confidential information of the Company (whether or not produced by me) or of other parties, which has been provided to the Company in confidence, except as the Company may authorize or direct.
Section III of the NDA provides that ownership of copyrights and other intellectual property rights “in the designs, drawings, and related documents and works of authorship created for the Company or within the scope of my contacts with the Company belong to the Company exclusively throughout the world.” The NDA also provides that the obligations thereunder “shall survive any termination of contracts with the Company.”
The following employees of Standard also signed one or more nondisclosure agreements: Mike Farnsworth, Janet Chunn, Sue Davidson, Marc Grover and Michael Moore. Janet Chunn, the controller of Standard, signed an NDA purportedly on behalf of Standard on April 24, 2000. Pearl also required that On–Site, then its broker, execute a confidentiality agreement.
Prior to being hired by Pearl, Standard and Chunn had never worked with or developed any automated stock-trading systems. Chunn opened a trading account with On–Site and deposited money to fund the account on March 29, 2001. Before On–Site would agree to open Chunn's account, it insisted that Pearl give its consent. Daudelin gave that consent on Pearl's behalf. Chunn purchased a server with his own money and had it delivered to On–Site. He directed On–Site that it should maintain his server separate and apart from the equipment being stored for Pearl. . On–Site agreed to that request.
Chunn wrote his software on the server he had installed at On–Site using a remote utility program that enabled him to connect over the Internet from his office and computer at Standard. Chunn insisted on keeping his personal trading system separate from work being performed by others at Standard. Working on his own time, Chunn created software for his own experimental automated trading system.
Chunn described his trading system as follows:
Well, the way it was going to work some day was it would look at the number of shares that—the number of shares that—excuse me, it has been awhile. I've got to remember. The number of executions—the number of shares executed on the buy side of the book for a specific symbol versus the number of shares executed on the sell side of the book for that same symbol, and whether or not those executions were happening on the buy side or on the sell side.
So that if most executions happened on the buy side, my theory was, and this never came to fruition because I didn't have enough time, but the theory was that since more people were coming over to the buy side—it has been a long time. If more people were executing at the price the buyers were offering to pay, then the price was going to go down. If more executions were happening at the price that the sellers were offering to sell for, then the price would go up. I may have that backwards. Again, it has been a long time. I never did get it to work. That's how it works, although I might have it in reverse. And, of course, there was a lot more to it, but that was the basic premises.
Chunn's ATS was programmed to trade only on the Island ECN. [REDACTED] Chunn carried out the first manual trades using his system on April 12, 2001. He did not begin to trade automatically until on or about May 18, 2001. In all, Chunn traded stock manually and automatically using his system on twenty-eight separate days between April 12 and October 23, 2001. In that time, he traded only three stocks: [REDACTED]. All automated trades were conducted over the same ECN; there was no arbitrage. Chunn lost a total of $9,274.79 as a result of these transactions. Chunn and his wife—not Standard—reported the losses from use of the trading system on their personal tax returns.
Pearl never authorized Standard or Chunn to develop an automated trading system or to use any of Pearl's trading concepts or software. Pearl never implicitly nor explicitly consented to Standard's or Chunn's use of any Pearl trade secrets. For the only trades that Chunn carried out, he did not need, and went out of his way not to use, the specific software components that Pearl ultimately identified as trade secrets: [REDACTED], the execution system, the broker system, the feed parser system and the control panel and node manager.
In early November 2001, On–Site's assets were sold to A.B. Watley (“ABW”), a New York-based brokerage house. At about that time, Douglas Robertson, Pearl's chief technology officer, telephoned Tim Reynolds, a network engineer for ABW, and asked him to install a Linux operating system on Pearl's Pionex server. Reynolds told Robertson that he had installed the Linux operating system, but Robertson connected to the server and found no evidence of the installation. In a subsequent telephone conversation, Reynolds asked Robertson which Pionex server he was to install the Linux system on. Because Pearl had only one Pionex server, this led Pearl to discover that Reynolds had installed Linux on a server other than Pearl's. The server was plugged into Pearl's KVM (keyboard, video, mouse) box and router. The purpose of the router at the ABW facility was to control access to Pearl's computer network.
On–Site provided hardware racks and IP ports for each user to connect to its system. Pearl had not authorized the connection of any additional servers to the Pearl network. Pearl's ATS operates and executes trades in the millisecond range and, therefore, is extremely dependent upon operating on maximum speed and efficiency, as has been demonstrated by internal experimentation.
After consulting with legal counsel, and with the sole intent of preserving the suspect server for legal proceedings, Daudelin drove to ABW's premises on November 15, 2001, took pictures of the server (which was unplugged and shut down before he arrived) and the networking hardware to which it was connected, removed the server and returned to his home in Harvard, Massachusetts. As it turned out, the Linux software was installed on Chunn's server, overwriting his hard drive and obliterating his programming code. Pearl had not authorized Standard or Chunn to use any element of Pearl's network or server, to view any Pearl data or to develop or operate an automated trading system. After discovering that the server was owned by Chunn, Pearl's legal counsel tried over the ensuing several weeks to reach agreement with Chunn's legal counsel on the best manner to preserve any evidence contained on the hard disk drive (“HDD”) within the server.
Counsel for Chunn provided proof of Chunn's ownership and demanded the return of his server beginning on December 14, 2001. In early January 2002, Daudelin delivered the server to Pearl's counsel. Prior to doing so, Daudelin removed the HDD from the server and delivered it to Pearl's counsel at the same time he delivered the server. Counsel for Pearl placed the HDD in a secure location and informed counsel for Standard and Chunn that it could pick up the server (without the HDD) while the parties attempted to agree on the best manner to preserve any evidence contained on the HDD. In early January 2002, Pearl purchased a replacement hard disk drive and delivered it to counsel for Standard and Chunn. On January 9, 2002 counsel for Pearl delivered the server (without the HDD) to counsel for Standard and Chunn.
On February 4, 2002 counsel for Pearl sent the HDD that was removed from Chunn's server to Pearl's expert for imaging, with explicit instructions that no information on the drive was to be accessed or viewed in any way. Pearl's expert made a duplicate copy of the HDD, and the original HDD was returned to counsel for Pearl, who retained the drive in a secure location until a protective order was agreed to by the parties. Only after Pearl's expert executed a protective order on September 24, 2002 was the expert instructed to perform any forensic analysis of the drive.
The original HDD was returned to the Defendants' counsel on October 24, 2002 in response to a discovery request by the Defendants. At no point did any employee of Pearl turn on, boot up or in any way access the server or the HDD or view the contents of the HDD.
In late November 2001, shortly after Chunn's server was seized by Daudelin, Chunn was informed by ABW employee Matt Ventura that the company no longer wanted his business and was terminating his account. Chunn had done nothing to ABW to cause it to terminate his account, which was profitable for ABW. Defendants' He paid commissions on the trades that he conducted, which produced revenues for ABW. There is no evidence that Pearl or Daudelin used fraud or intimidation to cause ABW to sever its relationship with Chunn.
In just over a year, from the end of September 2000 through the end of October 2001, the total value of securities sold by Pearl through On–Site was approximately [REDACTED]. The total value of securities purchased was approximately the same. One could assume conservatively that the average price per share of a NASDAQ security traded by Pearl during this period was less than $50. One also could assume conservatively that Pearl paid a commission of at least $1 for each one hundred shares traded.
Pearl's experts have determined that the installation of the Linux operating system on the HDD destroyed all the files on it. As a result, there is no confidential information about Chunn's trading system on the server. No “files copied from Pearl's ATS” were found on Chunn's hard drive, as Pearl's experts admit. Pearl's technical expert, Pat Tormey, retrieved GUIDs from the remnants of the HDD identifying discrete components of Pearl's software. These GUIDs were installed on the HDD prior to the installation of the Linux operating system and the overwriting of the HDD.