IP Law Daily, TRADE SECRETS—W.D. Wash.: OEG’s trade secret misappropriation lawsuit against former employees remanded to state court, (Feb 4, 2025)

By Saurabh Kashyap, B.A., LL.B., LL.M.

Federal jurisdiction was not found proper, as trade secrets and unfair competition claims were not preempted by copyright law.

A federal district court in Washington granted OEG Inc.'s motion to remand its lawsuit against former employees and competing business MSM Solutions (also known as K4 Electrical) back to state court. The court rejected the defendants' argument that OEG's claims were preempted by federal copyright law, holding that the claims arose under Washington state law, including the Uniform Trade Secrets Act, breach of fiduciary duty, conversion, and criminal profiteering (OEG Inc. v. Korum, No. 3:24-cv-05694-TMC (W.D. Wash. Jan. 31, 2025)).

Background. The plaintiff, OEG Inc., is an electrical contracting company based in the Portland-Vancouver area, specializing in designing, manufacturing, and installing electrical control systems and low-voltage electrical panels.

The primary defendants, George Korum, Richard Morse, Nick Korum, and Brandon Grimes, are former employees of OEG who previously worked in its Integrated Systems Group (ISG) division, which focuses on manufacturing and installing electrical control panels. While employed at OEG, Mick Korum founded the co-defendant company MSM Solutions to create a competing business. As per OEG's complaint, George Korum recruited Morse, Nick Korum, and Grimes to join him, and together, they planned their departure from OEG while preparing MSM Solutions for operations.

OEG filed this lawsuit alleging that its former employees improperly accessed, copied, and removed sensitive corporate data from the company’s internal systems before their departure. The alleged misappropriated materials included client lists, project bid information, financial records, pricing models, technical drawings, blueprints, and proprietary installation methods. OEG asserted that these documents were critical to its business operations, allowing it to remain competitive in securing high-value contracts. The lawsuit claimed that by taking and utilizing this information, the defendants not only violated Washington’s Uniform Trade Secrets Act but also breached their fiduciary duties and engaged in conversion and criminal profiteering.

The defendants removed the case to federal court, arguing that OEG’s claims, particularly those concerning the misappropriation of proprietary technical drawings and other business documents, fell within the subject matter of the Copyright Act. They contended that because these materials were capable of copyright protection, OEG’s claims were essentially copyright infringement claims, which should be exclusively heard in federal court. The defendants invoked the doctrine of complete preemption, asserting that OEG’s allegations were preempted by federal copyright law, rendering removal to federal court proper. OEG filed the instant motion requesting remand of the case back to state court. Defendants filed a motion to seal OEG’s interrogatory responses and a supporting declaration, citing a state court protective order.

Complete preemption under the Copyright Act. The defendants argued that OEG’s claims were completely preempted by the Copyright Act, thereby creating federal jurisdiction. The court applied the Ninth Circuit's two-prong test for preemption, evaluating (1) whether the subject matter of the claims fell within the scope of the Copyright Act and (2) whether the state law claims asserted rights equivalent to those protected by copyright law.

Citing Mattel, Inc. v. Bryant, 441 F. Supp. 2d 1081, 1092 (C.D. Cal. 2005), aff’d, 446 F.3d 1011 (9th Cir. 2006), the court noted that complete preemption occurs only when state law claims are equivalent to rights granted under the Copyright Act and lack an "extra element" that alters their nature. The court acknowledged that some of the allegedly misappropriated materials, such as marketing and design documents, could be copyrightable. However, it concluded that OEG’s claims were primarily based on trade secret misappropriation, breach of fiduciary duty, and theft—elements that extend beyond the scope of the Copyright Act.

Referencing Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987), the court reiterated that a federal defense, including preemption, does not itself create federal jurisdiction unless the claim is inherently federal. The court rejected the defendants' reliance on GlobeRanger Corp. v. Software AG, 691 F.3d 702, 710 (5th Cir. 2012), and Spear Mktg., Inc. v. BancorpSouth Bank, 844 F.3d 464, 472 (5th Cir. 2016), noting that those cases involved different procedural contexts and did not support complete preemption in this case.

Burden of proving federal jurisdiction. The court emphasized that the burden of proving federal jurisdiction rests on the removing party. Citing Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992), the court stated that removal statutes are strictly construed against federal jurisdiction, and any doubt must be resolved in favor of remand. Further, citing Moore-Thomas v. Alaska Airlines, Inc., 553 F.3d 1241, 1244 (9th Cir. 2009), the court reaffirmed that the removing party must establish that federal question jurisdiction exists based on the plaintiff's well-pleaded complaint rather than a defense or counterclaim.

Replevin and conversion claims. The defendants contended that OEG’s replevin and conversion claims, which sought the return of documents and digital files, were preempted because they were equivalent to copyright claims. The court disagreed. Citing Firoozye v. Earthlink Network, 153 F. Supp. 2d 1115, 1125 (N.D. Cal. 2001), the court held that conversion and replevin claims are not preempted when they involve tangible items, such as physical copies of business records or storage devices. Because OEG sought to recover company laptops, SD cards, and physical documents allegedly misappropriated by the defendants, the court found that the claims had a substantive basis independent of copyright law.

Criminal profiteering and unjust enrichment. The defendants further argued that OEG’s claims for criminal profiteering and unjust enrichment were preempted because they sought damages for unauthorized use of business materials, which they claimed was equivalent to copyright infringement. Referencing State v. Smith, 115 Wn. 2d 434, 440 (1990), the court held that Washington’s criminal profiteering statute (RCW 9A.82.010) requires proof of unlawful acquisition and financial gain derived from criminal conduct. This, the court reasoned, introduced an element distinct from copyright infringement. Similarly, citing Northwest Home Designing Inc. v. Soundbuilt Homes Inc., 776 F. Supp. 2d 1210, 1216 (W.D. Wash. 2011), the court found that unjust enrichment claims based on theft of proprietary business information contain an “extra element” that removes them from the scope of copyright preemption.

Conclusion. Thus, the court concluded that the defendants failed to meet their burden of establishing federal jurisdiction, as OEG’s claims were not completely preempted by the Copyright Act. The motion to remand was therefore granted, returning the case to Washington state court. The court also granted the defendants’ motion to seal certain filings related to confidential business information.

The Case is No. 3:24-cv-05694-TMC.

Judge: Cartwright, T.

Attorneys: Neil N. Olsen (Olsen Barton LLC) for OEG Inc. Edward A. Piper (Angeli & Calfo LLC) for George Korum a/k/a Mick Korum.

Companies: OEG Inc.

Cases: TradeSecrets WashingtonNews