Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Idaho: Franchisee’s CFAA, trade secret claims against franchisor fail, (Apr 9, 2014)

By Peter Reap, J.D., LL.M.

The Computer Fraud and Abuse Act (CFAA) claim brought by an electrical contracting business franchisee and its owners against its franchisor, Mr. Electric Corp., and other related entities was barred by the applicable two-year statute of limitations, the federal district court in Boise, Idaho, has decided (Mitchell Enterprises, Inc. v. Mr. Electric Corp., April 7, 2014, Bush, R.). The evidence also failed to support the franchisee’s claim for violation of the Idaho Trade Secrets Act (ITSA). The franchisee’s remaining claims for conversion and tortious interference failed for similar reasons. Thus, the franchisor was entitled to summary judgment in its entirety.

Background. Mitchell Electric is a family-owned and family-operated electrical contractor that specializes in renovations and troubleshooting in the Treasure Valley area of Idaho. In the early-to-mid-1990's, Mitchell Electric developed a copyrighted software system to manage all aspects of its business records, including customer lists, contact information, employee personnel files, time sheets, inventory, project bids, invoices, sales documents, and financial statements. According to Mitchell Electric, the original and upgraded versions of the software (“the Mitchell Dispatch Software”), along with the proprietary business information it contained, “served as the lifeblood of Mitchell Electric’s business success.”

On October 26, 2007, Mitchell Electric and Mr. Electric entered into a franchise agreement under which Mitchell Electric became Mr. Electric’s franchisee in Ada County and Canyon County, Idaho. Mitchell Electric claims that the franchise agreement (1) permitted Mitchell Electric to continue to own and develop the Mitchell Dispatch Software and the Data as a separate business opportunity, and (2) permitted Mitchell Electric to utilize the Mitchell Dispatch Software for its business operations rather than Mr. Electric’s ZWARE software (a database system designed for Mr. Electric franchisees). Nevertheless, Mitchell Electric and Mr. Electric executed a ZWARE License and Maintenance Agreement, whereby Mitchell Electric agreed to license the ZWARE software from Mr. Electric and to cooperate in installing and supporting the ZWARE software on Mitchell Electric’s computer network.

At some point in August 2009, the franchisee not only lost all access to the business’s computer network, but also found that the franchisee’s home computers had seemingly crashed. The franchisee hired a computer forensics company to investigate and concluded that the franchisor had utilized the ZWARE software to gain unauthorized access to the franchisee’s computers. The franchisee filed a complaint on November 4, 2011, asserting the following claims against the franchisor: (1) violation of the CFAA; (2) violation of the ITSA; (3) conversion; and (4) tortious interference with prospective economic advantage. The franchisor moved for summary judgment on all of the claims.

CFAA claim. The CFAA contains a two-year statute of limitations period, the court noted. It begins on “the date of the act complained of or the date of the discovery of the damage.” 18 U.S.C. § 1030(g).

The franchisee argued that its CFAA claim did not actually accrue until November 5, 2009, when it received the first computer forensics report detailing the damage to its computer network. In other words, the franchisee took the position that a later-alleged date reflecting the discovery of the “details of damage” should control the date the statute of limitations begins to run on their CFAA claim. The franchisee’s argument that the statute of limitations only began to run upon a forensic confirmation of their behalf of damage, rather than on the date that such apparent damage became known to them, was without merit, the court determined.

To be clear, the CFAA requires a plaintiff to file suit within two years of discovering any impairment to the integrity or availability of data, a program, a system, or information. Through the complaint, the franchisee admitted that the genesis of the CFAA claim began around August 23, 2009 when it first became aware of problems with the computer network, including unauthorized file copying, loss of computer access, and system crashes. There is no requirement in the CFAA that the damage be confirmed by some sort of independent forensic examination, the court noted. To add such a requirement would create a wandering line in the application of the statute of limitations. Thus, the claim was time-barred, the court held.

ITSA claim. To prevail on a claim for misappropriation of trade secrets under the ITSA, a plaintiff must show that (1) it owned a trade secret; (2) the defendant acquired, disclosed, or used that trade secret through improper means; and (3) the defendant’s actions damaged the plaintiff.

Here, the evidence did not establish a prima facie case of the franchisor’s “acquisition” of the franchisee’s trade secrets, as those terms are used in the ITSA, according to the court. In other words, none of the evidence pointed toward the franchisor actually coming into possession of the franchisee’s claimed trade secrets through improper means or otherwise.

The circumstances offered to suggest that the franchisor acquired (and, in turn, misappropriated) the franchisee’s trade secrets painted an incomplete picture. It was apparently true that the ZWARE software has the capacity to perform in a certain way that could contribute to complications within a computer network system, so long as specific preconditions are satisfied. Yet, on the ultimate question of whether the franchisor the ZWARE software bore any responsibility for the franchisee’s alleged damages, the computer expert hired by the franchisee deferred, even though he had multiple opportunities to say so, the court observed. In fact, the franchisee’s expert went on to agree with the expert hired by the franchisor, that the complaint’s reference to an alleged forensics investigation/report finding that the ZWARE software gained unauthorized access (or exceeded any authorized access) to the franchisee’s computers, was not an opinion that he shared.

Without stating here that the franchisee had no claim at all for its alleged damage, there was a lack of evidence to support a claim under the ITSA, the court ruled.

Conversion claim. Generally, conversion is any distinct act of dominion wrongfully exerted over another’s personal property in denial or inconsistent with his or her rights, depriving him or her of possession, permanently or for an indefinite time.

The franchisee contended that the franchisor took possession and converted the franchisee’s software and the data contained therein. To support that contention, the franchisee offered the exact same evidence (indeed, presented verbatim) that it did to oppose the franchisor’s efforts to dismiss the ITSA claim. For the same reasons that the franchisee could not show that the franchisor acquired and/or misappropriated its trade secrets, it likewise could not show that the franchisor converted its software or data for its own use.

Tortious interference claim. A claim for tortious interference with a prospective economic advantage requires proof of: (1) the existence of a valid economic expectancy, (2) Defendants’ knowledge of the expectancy, (3) intentional interference inducing termination of the expectancy, (4) the interference was wrongful by some measure beyond the fact of the interference itself, and (5) Plaintiffs’ resulting damage whose expectancy has been disrupted.

For the same reasons that the franchisee could not show that the franchisor either acquired and/or misappropriated their trade secrets or converted its software or data for its own use, it likewise could not show that the franchisor actually interfered with the franchisee’s software or data so as to induce the termination of any alleged economic expectancy, even assuming such an expectancy’s existence, the court explained.

The case is No. CV 11-0537-REB.

Attorneys: Matthew G. Gunn (Brassey, Crawford & Howell, PLLC) for Mitchell Enterprises, Inc. Kelly Alfred Cameron (Perkins Coie LLP) for Mr. Electric Corp. and Dwyer Group.

Companies: Mitchell Enterprises, Inc.; Mr. Electric Corp.; Dwyer Group

Cases: FranchisingDistribution IdahoNews