Order Granting Partial Motion to Dismiss and Motion to Strike, Taiwan Semiconductor Mfg. Co., LTD., v. Tela Innovations, Inc., Case No. 14-cv-00362-BLF (Judge Beth Labson Freeman)
In an appearance earlier this week in San Francisco, while commenting upon the recent Supreme Court Hobby Lobby decision and other developments in the law, the actor Alec Baldwin told a crowd at a sold-out Nourse Theater that he felt corporations in the United States have all the rights of individuals, but not all of their associated responsibilities.
Ironically, whether or not you agree with the politics of the star of the 1993 legal thriller Malice, an opinion that issued from Judge Beth Labson Freeman just days before Alec's appearance lends some credibility to his ultimate conclusion. Judge Freeman in Taiwan Semiconductor Mfg. Co., LTD., v. Tela Innovations, Inc., ruled that corporations, unlike individuals, cannot be held liable for "willful and malicious conduct" for purposes of punitive damages liability in California. Rather, only individual officers or directors are capable of such conduct. Thus, a complaint must name an individual, and not merely a corporate entity, when seeking punitive damages liability. It is a ruling that Alec's popular GE and NBC executive character Jack Donaghy from the television show 30 Rock might applaud – so long as he himself was not being sued, that is.
As reflected by the complaint reviewed by Judge Freeman, the plaintiff Taiwan Semiconductor Manufacturing Co., LTD. ("TSMC") provides semiconductor fabrication services for customers who design their own circuit layouts. To utilize TSMC's services, a customer's circuit design must comply with certain "Design Rules" created by TSMC. TSMC holds out these Design Rules as "an important and competitively sensitive aspect of TSMC's technology," and as such, they are treated as "highly confidential, proprietary information," i.e. trade secrets.
Defendant Tela Innovations, Inc. ("Tela") allegedly approached TSMC with a circuit design utilizing a "gridded array approach" for which it had a pending patent application. In May 2006, the parties signed a nondisclosure agreement whereby TSMC would disclose some of its Design Rules to be used solely for the parties' mutual benefit. The two companies tested the viability of Tela's designs from 2006 through 2009, after which they entered into a collaboration agreement to co-develop circuit layouts incorporating both Tela's and TSMC's technology. However, TSMC alleges that despite the NDA and collaboration agreement, Tela used TSMC's confidential Design Rules to amend the claims of several continuation patent applications, and to add a limitation to the independent claims of one of the applications in order to overcome rejection. In the end, TSMC alleges that its confidential information is "reflected in the claims" of at least four Tela patents.
TSMC brought four causes of action against Tela: breach of the NDA, breach of the collaboration agreement, fraud-deceit, and trade secret misappropriation. Tela then moved to dismiss the fraud-deceit claim, and moved to strike TSMC's allegation of "willful and malicious" conduct from the trade secret misappropriation claim. The Court as an initial matter agreed that the fraud-deceit claim should be dismissed, with leave for TSMC to amend, because TSMC failed to allege specific facts showing that its confidential information was used in the continuation patent at the heart of that claim, and because TSMC generally alleged the nature of the misrepresentations, but failed to identify the portions of its confidential information Tela received and then incorporated into the continuation patent applications.
However, turning to the allegations that the trade secret misappropriation was "willful and malicious," Judge Freeman agreed with Tela that under California law, corporate entities are incapable of willful and malicious conduct for purposes of punitive damages liability. Specifically, the Court noted that under the California Uniform Trade Secrets Act ("CUTSA"), if willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice the damages otherwise received. See Cal. Civ. Code § 3426.3(c). Further, under California law, a corporate entity is incapable of engaging in willful and malicious conduct for purposes of punitive damages liability, and instead such conduct must be predicated on the part of an officer, director, or managing agent of the corporation. See Cal. Civ. Code § 3294(b),. Thus, Judge Freeman found that under California punitive damages law, a company simply cannot commit willful and malicious conduct – only an individual can.
In its complaint, TSMC alleged only that Tela engaged in willful and malicious conduct, but failed to mention any individual at all at Tela who was responsible for such behavior. The court found TSMC's failure to include the names or titles of any individual actor to be a "fatal defect" in the pleading. However, Judge Freeman also was mindful of controlling Ninth Circuit authority that holds that Rule 12(f) does not authorize district courts to strike claims for damages on the ground that such claims are precluded as a matter of law. Thus, Judge Freeman only struck the "willful and malicious" allegations from the Complaint, but again provided TSMC leave to amend them.
In one of his many memorable lines from 30 Rock, Alec Baldwin's character Jack Donaghy once said "I've been a GE man for 25 years, and a GE woman for one week of corporate espionage at Revlon." So long as no one ever learned he wasn't a woman, Jack's actions would leave his GE employer, who under California law could not be deemed malicious by itself, smiling as much as the television audience that laughed for seven seasons at his audacious actions.
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