Masimo Corp. v. Sotera Wireless, Inc. (In re Sotera Wireless, Inc.)
Docket: Case No.: 17-cv-0885-BTM-BLM
Court: District Court, S.D. California; September 11, 2018; Federal District Court
Masimo Corporation appeals the July 18, 2017 decision of the U.S. Bankruptcy Court for the Southern District of California regarding its claims against Sotera Wireless, Inc. under the California Uniform Trade Secret Act (CUTSA). Masimo accuses Sotera of misappropriating trade secrets taken by former employees James Welch and David Hunt. After Sotera filed for Chapter 11 bankruptcy on September 30, 2016, Masimo submitted a proof of claim for $15,500,000 in damages. The Bankruptcy Court ruled on April 14, 2017, and later issued a 117-page memorandum, partially overruling Sotera's objection. It awarded Masimo $558,000, including $240,000 for pricing trade secrets, $300,000 for customer trade secrets, and $18,000 for investigation costs. Additionally, the court granted Masimo injunctive relief to remove and destroy its technical trade secrets from Sotera's systems.
In its appeal, Masimo contends that the Bankruptcy Court erred in its application of CUTSA, made clearly erroneous factual findings regarding the status of certain information as trade secrets, and neglected to address its request for royalties related to the alleged misappropriation of numerous documents. The appellate review involves de novo examination of legal conclusions and clear error scrutiny of factual findings. The determination of whether information qualifies as a trade secret is a factual issue. In addressing one of Masimo's points on appeal, the court will review whether the Bankruptcy Court incorrectly included the condition that trade secrets must not be "readily ascertainable."
Masimo contests the Bankruptcy Court's determination that "readily ascertainable information cannot be a trade secret," referencing the case Syngenta Crop Protection Inc. v. Helliker, which articulates that information easily accessible to competitors lacks independent value from being undisclosed. Syngenta also cites American Paper, Packaging Products, Inc. v. Kirgan, affirming that information must derive independent economic value from its secrecy to qualify as a trade secret under the California Uniform Trade Secrets Act (CUTSA), which specifically states that a trade secret is information that (1) has independent economic value from not being generally known and (2) is subject to reasonable efforts to maintain its secrecy. The inquiry about independent economic value hinges on whether the information is known or readily ascertainable by competitors.
Masimo contends that the Bankruptcy Court erred based on the precedent set in Abba Rubber Co. v. Seaquist, which states that information can be a trade secret even if readily ascertainable, provided it has not yet been discovered by others in the industry. This perspective diverges from the conclusions in American Paper, creating a conflict among California Court of Appeal decisions. While Abba is persuasive, it is not binding, as there is no horizontal stare decisis in California appellate courts, allowing lower courts to choose among conflicting decisions.
Ultimately, the Court concurs with the Bankruptcy Court's reliance on Syngenta and American Paper in defining trade secrets under CUTSA. Even if the Bankruptcy Court's assertion regarding readily ascertainable information as non-protectable was legally erroneous, such an error was deemed immaterial to its overall analysis, thus not warranting reversal. The defense that information is readily ascertainable remains valid in misappropriation claims.
The Bankruptcy Court's finding that information was "readily ascertainable" precluded a finding of a California Uniform Trade Secrets Act (CUTSA) violation, regardless of the stage of the analysis. Masimo claimed that the court misallocated the burden of proof regarding whether information was a trade secret, specifically citing one instance where the court stated Masimo failed to prove the information was not readily ascertainable. However, this was irrelevant to the court's conclusion of no misappropriation, as Sotera independently derived the idea to target a specific customer without using Masimo's information. The court found no legal error in the Bankruptcy Court's analysis of "readily ascertainable," and any potential error did not warrant reversal.
In addressing Masimo's second appeal issue regarding the definition of "use" under CUTSA, Masimo argued that the court erred by not including "passive consideration of data" as "use" and by allowing independent derivation to negate a finding of "use." The court reviewed this de novo and clarified that the Bankruptcy Court did not state that "passive consideration of data" cannot constitute "use." The lack of an explicit definition was acceptable since CUTSA does not define "use," which can vary contextually. Masimo's reliance on the Syngenta case was found unpersuasive; the court distinguished that case's context-specific ruling regarding the Department of Pesticide Regulation from a broader application of "passive consideration" as "use." Therefore, the Bankruptcy Court did not err in its interpretation.
The Bankruptcy Court correctly determined that the finding of "independent derivation" negated the claim of improper "use" in the context of misappropriation of trade secrets. To establish a prima facie case, a plaintiff must show ownership of a trade secret, improper acquisition or use by the defendant, and resultant damage. Under California law (CUTSA), "reverse engineering or independent derivation" is not deemed improper means, directly countering claims of improper use. Consequently, if a defendant’s use of information stemmed from independent derivation, it undermines the basis for misappropriation claims, relieving the defendant of the burden to prove this.
Masimo contested the Bankruptcy Court's ruling which stated that there was no improper use of its trade secrets if Sotera independently derived the same information. The court's interpretation aligns with the standard that independent derivation eliminates a critical element of misappropriation. Masimo’s assertion that independent derivation only pertains to the method of acquiring trade secrets lacks support in statutory language or case law.
The Bankruptcy Court also ruled on the factual findings regarding whether specific information constituted trade secrets or was used by Sotera. For the first item, "custom alarm analytics," the court found it was not a trade secret as it involved retrospective analysis of hospital data, a method already published in an industry journal. The court supported its conclusion with expert testimony, indicating that the process was replicable. The court noted that Sotera developed its own algorithm for this analysis, with credible testimony affirming that the technical aspects of "custom alarm analytics" were not secretive. Masimo's emphasis on "custom alarm analytics" as a sales technique rather than a technical trade secret did not alter the court's findings.
The Bankruptcy Court required Masimo to prove that its "custom alarm analytics," which involves applying an analytical method to a single hospital's data, constituted a trade secret. The Court rejected this claim not because sales techniques cannot be trade secrets per se, but because Masimo failed to meet its burden of proof. Testimony from Masimo's expert, Muhsin, was deemed deficient; he inconsistently argued that analyzing data from a single hospital was a trade secret, while doing so from multiple hospitals was not, and he did not clarify this on redirect examination. The Court found his reasoning nonsensical and stated that simply claiming something is a trade secret is insufficient for proof. The Bankruptcy Court also concluded that Sotera did not misappropriate the concept since it was readily ascertainable, as evidenced by testimonies indicating that hospitals believe they have unique conditions requiring customized analytics. Masimo's argument against the inclusion of "readily ascertainable" in defining trade secrets was dismissed, as it did not affect the analysis of "customized alarm analytics." The Court upheld the Bankruptcy Court's findings as plausible and not erroneous.
Regarding the second alleged trade secret, "four breaths per minute," the Bankruptcy Court expressed skepticism about its status as a trade secret but ultimately found no misappropriation, as Sotera independently decided to use that threshold in its alarm management strategy.
The Bankruptcy Court determined that Sotera independently derived the lower limit of "four breaths per minute" based on compelling evidence, including the analysis of 694 hours of patient data from actual hospitals conducted by Tom Watlington. His findings were supported by Jim Moon, whose credible testimony indicated that no confidential information from Masimo was disclosed during discussions about setting respiratory limits. The court found that Masimo's claims, primarily through Harold Walbrink's testimony, were insufficient, viewing them as mere speculation rather than definitive proof of misappropriation. An internal email from Don Bernstein to Welch was deemed not compelling evidence of misappropriation but rather a clinician's input on settings. Although Masimo pointed out a later email from Welch discussing breath rates, the court concluded this did not undermine Sotera's independent analysis, which had already begun prior to the email's date. The Bankruptcy Court's conclusion that Sotera did not misappropriate the "four breaths per minute" limit was deemed plausible based on the entire record.
Regarding the second alleged trade secret, the transition from a 2.4 GHz to a 5 GHz wireless frequency for patient data transmission, the court assumed it could be a trade secret but found no evidence of misappropriation, asserting that Sotera independently derived this idea as well.
Sotera had initiated efforts to develop a 5 GHz wireless frequency for its ViSi device before Welch's arrival from Masimo in 2011. The Bankruptcy Court found significant evidence, including testimony from Gary Manning, indicating that Sotera sought expert opinions on wireless monitoring systems as early as 2008, with Wi-Fi recognized as essential by 2009. Despite the absence of suitable technology at that time, by 2011, Sotera had located a manufacturer for a wireless chip that could potentially meet its requirements. An email from July 2011, prior to Welch's employment, highlighted the urgency to achieve dual-band capabilities.
In contrast, the Bankruptcy Court deemed Masimo's evidence—suggesting that Sotera only pursued 5 GHz solutions after Welch joined—unconvincing, particularly a roadmap and Welch's email advocating for prioritization of the 5 GHz development, which the court found insufficient to establish misappropriation of trade secrets. The court concluded that Sotera independently decided to pursue this technology, a finding supported by the overall evidence.
Regarding the alleged trade secret of "installation forms," the Bankruptcy Court recognized these as trade secrets but determined that Sotera did not appropriate them. Although Masimo's Hunt had sent these forms to Sotera, employee Vasquez testified that he only reviewed them briefly and did not utilize them in developing Sotera's own forms. The court found Vasquez’s testimony credible and backed by documentation, leading to the conclusion that there was no misappropriation.
In 2011, Vasquez was hired by Sotera to enhance processes for implementing the ViSi system in hospitals, utilizing pre-existing documentation, including the Remote Assessment Questionnaire (RAQ), which Vasquez was responsible for updating. A comparison of RAQ versions before and after Hunt's email regarding Masimo's "installation forms" showed only minor changes. The Bankruptcy Court found these differences immaterial and determined that Vasquez's changes were based solely on his experience, not influenced by Masimo's forms, which he briefly reviewed without substantial engagement. Testimony from Masimo's expert, Walbrink, was deemed unreliable as it compared forms used at different stages of installation, leading to the conclusion that the analysis was irrelevant. The Bankruptcy Court ruled that Sotera did not "use" Masimo's forms, clarifying that mere passive consideration does not equate to use under the California Uniform Trade Secrets Act (CUTSA). The court emphasized that the brief review by Vasquez did not constitute misappropriation, aligning with precedents that define "use" in a specific context. Masimo's claim for royalties regarding alleged misappropriation of its documents was not addressed by the Bankruptcy Court, prompting Masimo to request a remand for consideration of this issue.
Masimo's argument misinterprets the Bankruptcy Court's order, which indicates that if damages or unjust enrichment from misappropriation cannot be proven, the court may only award a reasonable royalty for the time the use could have been prohibited, as per Cal. Civ. Code. 3426.3(b). A royalty award is contingent upon a finding of misappropriation. The Bankruptcy Court established that Welch copied over 4,500 Masimo files, while Hunt copied about 2,500. It determined that both Welch and Hunt misappropriated Masimo trade secrets when they transferred and opened certain files on their Sotera computers. However, the misappropriation ruling applied only to the few files that were actually opened by them (5 by Welch and 6 by Hunt), not to all the files copied. Consequently, the Bankruptcy Court awarded $540,000 in damages for the misappropriation of Masimo's pricing and customer trade secrets, but did not consider a royalty award for the unaccessed files, which it found to be appropriate.
Regarding equitable mootness, Sotera argued for dismissal of Masimo's appeal based on the complexity of the transactions involved following the confirmation of Sotera's reorganization plan on May 12, 2017. The doctrine of equitable mootness suggests that if a case's circumstances are too complex to reverse, courts may refrain from addressing the appeal's merits. Factors to assess equitable mootness include whether a stay was sought, the extent of plan consummation, the potential impact on third parties, and whether the court can provide equitable relief without disrupting the plan. Masimo did seek a stay, but it was denied. Substantial consummation of the reorganization plan had occurred by May 22, 2017. While Sotera did not address third-party effects, the Bankruptcy Court's prior award to Masimo of $558,000 could be adjusted upon remand, as funds were allocated for Masimo's relief in the reorganization plan without significant disruption.
The Court is able to provide effective and equitable relief without undermining the existing plan, rejecting the notion of equitable mootness and refusing to dismiss Masimo's appeal. The Court affirms the Bankruptcy Court's order, directing the clerk to enter judgment accordingly. The Bankruptcy Court determined that Sotera was liable for Hunt's misappropriation under the respondeat superior doctrine. Several federal district courts have referenced the Abba case, establishing that information may qualify as a trade secret even if it is readily ascertainable, provided it has not yet been obtained by others in the industry. Although this supports Abba's application, it does not definitively indicate legal error in the Bankruptcy Court's consideration of conflicting opinions. California's adoption of the Uniform Trade Secrets Act (UTSA) codifies common law trade secret protections. Masimo highlights one instance where the Bankruptcy Court used "reasonably ascertainable" instead of "readily ascertainable." However, a subsequent correct usage indicates that this inconsistency is not a significant error.
