Motion,Ex Parte: MICROCHECK SYSTEMS INC (TEXAS CORPORATION) vs. ZIGROSSI & MURPHY L L C (TEXAS CORPORATION) (IND A

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                                CONFIRMED FILE DATE: 11/25/2009

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CAUSE }

 

MBER 2004-59790

MICROCHECK SYSTEMS. INC. AND
MICROCHECK SOLUTIONS. INC.

IN THE DISTRICT COURT OF

VS.

HARRIS COUNTY, TEXAS
ZIGROSSI & MURPHY. 1. .. Individually

and déb‘a EDUCATED SOLUTIONS: FIL ED
CHRIS ZIGROSST: SCOTT MURPHY: MIKE § ‘gran Jackson
SMITH Individually and d/b‘a CMS Ss

TECHNOLOGY avk'a CMS I NOV 25 2009
MICHOICE TECHNOLOGY SYS
JIM HAYDEN: ALEX CAMPBELL: AND
JASON JABLECKI

 

   

LPL LL SL TL TL LL.

 

 

 
  
 

    

Time: _

Wares County. tae

 
  

ky

MICROCHECKS* MOTION TO RECONSIDER STATE CAUS

 

tS OF ACTION
PO THE HONORABLE JUDGE OF SAID COURT:

COMES NOW. MicroCheek Systems. Inc. and MicroCheck Solutions. Inc.
("MicroCheck”) and files this Motion to Reconsider State Causes of Action and would
show the Court the following.

1. On January 18. 2008. Judge John Coselli. the former judge of this Court
entered an order on Mike Smith’s Motion to Dismiss for lack of subject matter
jurisdiction that stated the following:

Itis Ordered that: (1) The Motion is denied as to any cause of action in Plaintiffs

Vhird Amended Petition and Application for Injuncti ef that requires as a

basis for liability the proof of conduct that is qualitatively different than the

unauthorized copying. reproduction. or adaptation of a plainuit?” s original (work
that is a tangible medium of expression, including compilations and derivative
works. independently created and with some creativity) computer software.
computer programming codes or compu uree code to a substantially similar

form. or the distribution. performance or display of the same.
(2) The motion is other wise granted.

     
  

 

2. hen. on November 10. 2009 the Honorable Judge Kyle Carter signed an

order striking all causes of action in Plaintiffs’ Fourth Amended Petition for Fraud.conversion. breach of fiduciary duty. misappropriation of proprietary information.
tortuous interference with business relations. unfair competition. conspiracy. alter ego.

accounting. and constructive trust. Copies of the respective orders are attached hereto as

   

exhibits 1] and 2. Smith claimed that the theft and misappropriation of its proprietary
source code are preempted by the Federal Copyright Act (hereinafter the “Act™) and
should be dismissed: from there. Smith went on to argue that all of MicroCheck’s claims
are preempted and should be dismissed. Smith is wrong on both counts and therefore. the

Order dated November 10. 2009 should be amended to allow for breach of confidence

  

and fiduciary duty, misappropriation of proprietary information (excluding the computer

 

souree code): tortuous interference with business relations and unfair competition.
3. The Act does not preempt claims for breach of confidence or fiduciary

duty. including claims for thelt of trade secrets. See e.g. TLRep. No. 94-1476. 94th

 

Cong.. 2d Sess. 132 (1976) reprinted in 5 ULS.Code Cong. & Admin. News at 5659. 5746-

 

5747 (1976). The primary basis for MicroCheck’s claims against Smith is that as an
officer of that company he owed fiduciary duties which he breached when he participated
in and facilitated in a scheme to steal MicroCheck’s souree code which he now uses with
his new company MiChvice Technology Systems. Inc. Furthermore. there are a host of
claims against Smith which do not involve the source code and therefore, by the
standards articulated in Smith’s own motion, are not preempted.

4. Despite the exclusive jurisdiction provided to the federal courts for

copyright claims under the Act. Congress specilically advised that state law claims such

 

as those asserted by MicroCheck here would survive:

The evolving common law rights of ‘privacy.’ publicity.’ and trade
would remain unaffected so long as the causes of action

 

seerets,

 

tocontain elements such as an invasion of personal rights or a breach
of trust or confidentiality... .

See id.
3S, This carve-out has been recognized by federal courts of the Fifth Circuit.
In BPI Sys. Inc. vy. Leith. 532 F.Supp. 208 (W.D. Tex. 1981). the district court held
plaintiffs trade seeret claims based on development of a computer program were not
preempted by the Act and enjoined defendants from further exploitation of plaintiffs trade
secrets. In doing so. the court stated:
Concerning the allegation that Defendant wrongfully appropriated
trade secrets. the Court is of the opinion that Plaintiffs remedy
therefore is not preempted by the Copyright Act since the material
allegedly improperly used was not copyrighted. The information
(Exhibit 6) qualifies as a trade seeret as that term is defined by the
Restatement of Torts Section 757 and [/vde Corp. v. [hiffines, 158

Tex, 566. 3314S. W.2d 763 (1958). /d. at 211.

6. Again. in Southern Miss. Planning and Dev. Dist. Inc. vy. Robertson. 660

 

“Supp. 1057 (S.D. Miss. 1986), the court found that state common law trade secret

claims based on the development of computer sofiware were not preempted by the Act.

 

Jn that case. defendant. a computer and software development company. contracted with
two employees of the plaintiff for the development of applications software involving
fund accounting. tax assessment and other related functions. together with the necessary
training and documentation materials. A dispute arose as to the ownership and licensing
of these materials. Plaintiff. the employer of the individuals who contracted with
defendant. sued for a declaration of ownership of the materials: defendant counterclaimed
that plaintiffs employees who were contracted to work with defendant on the program
stole defendant's trade secrets in the process and were exploiting those trade secrets

through attempting to sell the subject software as the property of the plaintiff. Indetermining the issue of preemption by the Act. the court noted that copyright preemption
did not extend to claims asserting violation of legal or equitable rights that are not
equivalent to any of the exclusive rights in the Act and held

An analysis of the interest secured by copyright and trade secret
law demonstrates that the claims are not “equivalent” as intended
by the Congress. Copyright protection extends not to an idea itsell
but rather to the particular expression used by its author. — In
contrast. the protection provided by the common law of trade
secret misappropriation extends to the very ideas of the author.
subject. of course. to the requirement that the idea has some
originality and is as of vet undisclosed or disclosed only on the
basis of confidentiality

  

 

 

 

Jd. at 1061 (citations omitted), The court then quoted the House Committee report set
out above and held that the computer and software development company’s claim for
Misappropriation of trade secrets was not preempted. Id.

7. This approach is also the law of other jurisdictions. See Balboa Ins. Co. v.
Trans Global Equities, 218 Cal.App.3d 1327. 267 Cal.Rptr. 787 (Cal-App. 3 Dist. 1990)
(collecting cases).! Balhou cites that the majority view in this contest is that state law:

causes of action for trade secrets. breach of fiduciary duty and breach of confidence are

 

5

 

hot preempted by the act. See id at 1350-52. This majority view is based on the
preemption limitation set out in the Act with respect to claims that seek to protect rights
not equivalent to any of the exclusive rights provided by the Act. See Robertson, 660
F.Supp. LO6L. This limitation has sometimes been expressed as the extra element test.
ie. when a state Jaw claim requires proof of an extra element that is qualitatively

different than a copyright infringement action. the state law claim is not preempted. See

Balbou supra at 1339-40, ‘This exception to the Act's preemptive effect is recognized by

 

Smith. (Motion to Dismiss. p. 4). The majority of courts have routinely held that tradesecret claims and breach of fiduciary duty claims require the extra clement of proof of a
relationship of trust or confidence which is the foundation of the wrongful conduct at
issue and therelore. are not preempted. See Balbou supra at 1339-40 (collecting cases).
8. Fhe preemption carve-out for trade secret and breach of fiduciary duty
claims is well recognized in patent law which is persuasive in the copyright context. See,

. 470. 94: S.Ct. 1879, 40 L.Ed.2d 315

 

va. Kewanee Oil Co. v. Bicron Corp.. 416 Uy

z

 

(1974). In Kewanee Off the Court considered the preemptive effect of the Federal Patent
Acton state law trade secret and breach of fiduciary duty claims. In holding the claims
were not preempted. the Court stated:

Nothing in the patent law requires that States refrain from action to
prevent industrial espionage. In addition to the increased costs for
protection from burglary. wire-tapping. bribery. and the other
means used to misappropriate trade secrets. there is the inevitable
cost to the basic deceney of society when one firm steals from
another. .\ most fundamental human right. that of privacy. is
threatened when industrial espionage is condoned or is made
profitable: the state interest in’ denying profit to such illegal
ventures is unchallengeable.

Kewanee Oil Co. supra at 488 (emphasis added).
9, Phe foundation of the Kewanee Oil Co.. and subsequent cases. limitation

on patent preemption is the preservation of state laws that do not clash with the objectives

  

of the federal law. See Kewanee Oil Co.. supra at 480. Because protection of trade

secrets and fiducia

 

- relationships do not clash with the protections provided by patent

 

law. those claims are not preempted. See Kewanee Oil Co., supra at 492-93,
10. This well established patent law mirrors the “extra clement” test under
copyright jurisprudence which preserves state laws that do not protect rights equivalent to

those provided in the Act. Because the trade secret and breach of fiduciary duty claimsasserted by MicroCheck seck to protect rights not provided in the Act. e.g. the right to
privacy and protection of fiduciary and other confidential relationships, the Act does not

preempt) MicroCheck’s claims for misappropriation of trade seerets/proprieta

 

information and breach of fiduciary duty. See Southern Miss. Planning and Dev. Dist..
Inc. v. Robertson. 660 F.Supp. 1057. 1061 (S.D. Miss. 1986).

I. Likewise. MicroCheck’s claims for conversion and theft of the source
code would not be preempted because they are also intended to protect MicroCheck’s

privacy and are based on the breach of confidence and trust placed in Smith which gave

 

him access to the source code in the first place. Finally. MicroCheck’s claims that Smith
interfered with contractual relations and prospective business relationships are not

preempted to the extent they relate to the souree code because those claims seek to

protect MicroCheck’s

 

ights in its contracts and potential business relationships with third
parties which are in no way exclusively provided by the Act and require extra.
qualitatively different clements relating to proving an existing contract with the third
party with which Smith interfered or an independently tortious act such as the breach of

fiduciary duty and theft claims discussed above. For these reasons, it is clear Smith's:

 

motion lo dismiss MicroCheck’s source code related claims must fail.

 

   

12, Butler vy. Cominental Airlines, Inc. is easily distinguished. In that case. the
plaintilf was an employee who developed macro computer programs which he shared
with his defendant employer. Defendant employer later purchased a different computer
system which plaintiff claimed incorporated his macros. Plaintiff sued for defendant's

use of his computer macros without compensation. There was no breach of fiduciary

 

 

 

   

The same analysis would apply to MicroCheck’s other claims based upon the confidential
relationship with defendants fraud and constructive fraud and unfair competition.

6duty. no breach of confidence and no misappropriation of trade secret. In fact. plaintit!
admitted he did not share the macros with defendant in confidence. Bauder v. Continental
clirliney, Inc. 31 S.W.3d 642. 646 (Les. App. Houston [1 Dist.| 2000, no pet.) As

srent than MieroCheck’s

 

such. plaintiff's claims in that case were fundamentally dif
claims here there was never an intent to protect rights of privacy or rights in a
confidential or fiduciary relationship and there was never any need for plaintiff to prove
any additional clement other than unauthorized copying. In many ways. Butler is the
polar opposite of this case which seeks an employer's rights to trade secrets shared with.
then stolen by. employees to start their own business. Butler does not apply and does not
support dismissal.

13. Finally. there should be no doubt in the court's mind that there are a host
of claims against Smith which have nothing to do with the source code. ‘The court is well
aware at this stage that Smith. while still president of MicroCheck Systems. Inc..
attempted to divert $95.000,00 in contirmed sales away [rom MicroCheck: facilitated in
the theft of $110,009.00 cash along with numerous tangible items from MicroCheck: and
has knowingly and intentionally interfered with MicroCheck’s covenant not to compete
with Scott Murphy. MicroCheck also claims Smith is guilty of defamation per se for
libelous remarks to third parties regarding MicroCheck. The Act does not cover theft of
money. violations of covenants not fo compete or business disparagement and therefore.
these claims are not preempted.

WHEREFORE. PREMISES CONSIDERED. MicroCheck Systems. Inc. and
MieroCheck Solutiens. Inc. pray that, upon final hearing. Plaintiffs’ be granted the relief

in which they are seeking.Respectfully submitted.

  

2 Keb Cry
Scarlett C, May 4, fermerrers,
‘Fexas Bar No. 24028171

20202 Iwy. 59 North. Suite 170

Humble, Texas 77338

Vel. (281) 540-3330

Fax. (281) 840-5129

Attorney for Plaintiffs

MicroCheck Systems. Inc.

And MicroCheek Solutions. Inc.and

Third-Party Defendant John

 

CERTI OF SERVICE

 

This will certify that a@ true and correct copy of the foregoing document has been
forwarded to all counsel of record by facsimile pursuant to the Texas Rules of Civil
Procedure on the 2. £74ay of November. 2009,

Scarlett C. May Ly perreraton :