IP Law Daily, TRADE SECRETS—N.D. Ohio: Security system company dispute stayed under Colorado River abstention, (Apr 18, 2023)

By Kevin M. Finson, J.D.

Earlier-filed state court case would resolve contract issues relevant to trade secret dispute.

Two consolidated federal trade secrets cases between competing security system contractors were stayed under the Colorado River abstention doctrine because an earlier-filed case filed in Missouri state court involving the same parties would require adjudication of the same material facts, the federal district court in Akron, Ohio, has held. In particular, the state case would decide the same issues of validity of contract and performance that would need to be decided in the trade secrets case (American Security & Audio Video Systems, Inc. v. Prep TMT, LLC, April 14, 2023, Knapp, A.).

American Security & Audio Video Systems, Inc. (ASAV) was a security system contractor. ASAV hired PREP TMT, LLC (Prep) as a subcontractor for certain projects. As part of the subcontractor agreement, Prep agreed to keep confidential ASAV’s operations, customer, marketing, installation, monitoring, and service policies, and also agreed that it would not solicit ASAV’s customers for a period of three years, and would return ASAV equipment upon request. ASAV eventually suspected that Prep had begun doing work for ASAV clients outside the subcontractor agreement and terminated the agreement.

Prep filed suit in Missouri state court for breach of contract and related claims, and three weeks later ASAV filed suit for misappropriation of trade secrets under the Defend Trade Secrets Act (DTSA) before the U.S. District Court for the Northern District of Ohio, and then filed a subsequent breach of contract action in Ohio state court, which Prep removed to federal court based on diversity of citizenship. The two Ohio cases were consolidated, and Prep moved to dismiss for lack of personal jurisdiction, for abstention under the Colorado River doctrine, or to transfer venue to the U.S. District Court for the Eastern District of Missouri.

Personal jurisdiction. Prep and its codefendants argued that ASAV had not alleged that they lost business or suffered harm in Ohio as required by the Ohio long-arm statute. The court found that ASAV, as an Ohio company, had alleged an ongoing business relationship with a particular client, Bloom Medicinals, in both Ohio and Missouri, and that Prep, hired as a subcontractor for the projects in Missouri, had allegedly misappropriated trade secrets which caused harm throughout ASAV’s business, including in Ohio. Due process was satisfied because the alleged harm consisted of misappropriation of trade secrets belonging to an Ohio company. The court denied the motion to dismiss on personal jurisdiction grounds.

Abstention. Prep argued that the Missouri case was a parallel proceeding and that the court should therefore abstain from exercising its jurisdiction under the Colorado River doctrine. The court held that the cases were parallel because they centered around the same factual nexus, although the Missouri cases did not include statutory trade secrets claims, and the Ohio court could not determine the trade secrets allegations without first adjudicating the validity of the subcontractor agreements and whether either party had properly performed or had breached those agreements. Reviewing the Colorado River factors, the court held that this case would inevitably lead to piecemeal litigation and a risk of conflicting results if the present matter was not stayed. The court also noted the Missouri case was filed first, and that the remaining factors were not sufficient to overcome the risk of piecemeal litigation.

Because abstention was warranted the court stayed proceedings and did not consider the motion to transfer venue.

The case is Nos. 5:22-CV-00558-AMK and 5:22-CV-01399-AMK.

Attorneys: Christopher B. Congeni (Matasar Jacobs LLC) for American Security & Audio Video Systems, Inc. and Frank Baxter. Clare C. Moran (Seeley, Savidge, Ebert & Gourash) for Prep TMT, LLC, Thomas Reed and Matthew Prost.

Companies: American Security & Audio Video Systems, Inc.; Prep TMT, LLC

Cases: TradeSecrets OhioNews