PC Yonkers Inc v. Celebrations Party ( 2005 )

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
11-22-2005
PC Yonkers Inc v. Celebrations Party
Precedential or Non-Precedential: Precedential
Docket No. 04-4254
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 04-4254
P.C. YONKERS, INC; PARTY CITY CLIFTON, INC.;
PARTY CITY OF HAMILTON SQUARE, INC.;
PARTY CITY OF LAWRENCEVILLE, INC.;
PARTY CITY NORTH BERGEN, INC.;
P.C. VOORHEES, INC.;
EAST HARRISBURG, P.C., INC.;
LANCASTER P.C., INC.;
MONTGOMERYVILLE P.C., INC.;
PARTY CITY OF COTTMAN AVENUE, INC.;
PARTY CITY OF HARRISBURG, INC.;
PARTY CITY OF LEHIGH VALLEY, INC.;
PARTY CITY OF READING, INC.;
CITY OF SPRINGFIELD, INC.;
PARTY CITY OF NEW YORK, INC.;
SCRANTON PARTY CITY LLC;
STROUDSBURG P.C. INC.;
WILKESBARRE PARTY CITY LLC;
PARTY CITY MANAGEMENT, CO., INC.,
Appellants
v.
CELEBRATIONS THE PARTY AND
SEASONAL SUPERSTORE, LLC;
ANDREW BAILEN; ANDREW HACK
Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 04-cv-04554)
District Judge: Honorable Joseph A. Greenaway, Jr.
Argued June 28, 2005
Before: ROTH, RENDELL, and BARRY, Circuit Judges.
(Filed: November 7, 2005)
Kenneth L. Leiby, Jr.
Einbinder & Dunn, LLP
159 Millburn Avenue
Millburn, NJ 07041
Michael Einbinder [ARGUED]
Einbinder & Dunn
104 West 40th Street
New York, NY 10018
Counsel for Appellants
2
Karol C. Walker [ARGUED]
St. John & Wayne
Two Penn Plaza East
Newark, NJ 07105
Counsel for Appellees
Celebrations the Party and
Seasonal Superstore, LLC;
Andrew Bailen
Peter L. MacIsaac [ARGUED]
Chasan, Leyner & Lamparello
300 Harmon Meadow Boulevard
Secaucus, NJ 07094
Counsel for Appellee
Andrew Hack
OPINION OF THE COURT
RENDELL, Circuit Judge.
Plaintiffs P.C. of Yonkers, Inc., and eighteen related
“Party City” affiliates (the “PC plaintiffs”) appeal the District
Court’s order denying injunctive relief sought pursuant to the
provisions of the federal Computer Fraud and Abuse Act
(“CFAA”), and under New Jersey state law. We will affirm
because we agree with the District Court’s analysis regarding
the lack of evidentiary basis for the injunction, but we will take
this opportunity to clarify the scope of relief available under
CFAA’s provisions.
3
The seventeen Party City retail store plaintiffs are all
franchisees of Party City Corporation (“PCC”). Each operates
a retail store selling discount party goods and related products
(the “PC Stores”). Plaintiff Party City Management Co., Inc.
(“PC Management”), manages the operations of the franchised
locations. Defendant Andrew Hack (“Hack”) worked for
PCC in various positions from March 1991 until his termination
in August 2003. He continued to act as a consultant to
PC Management from September 11, 2003 to November 25,
2003. Defendant Andrew Bailen (“Bailen”), also a longtime
PCC employee, served as the company’s executive vice
president for merchandise and marketing from August 2000
until he left its employ on July 14, 2003.
In 2004, Bailen and Hack formed Celebrations! The Party
and Seasonal Superstore, L.L.C. (“Celebrations”), also a
defendant in this case, and opened two of its own retail party
goods stores in the vicinity of two existing PC Stores, one in
Greenburgh, New York, and a second in Clifton, New Jersey, in
late July and August of 2004, respectively. The PC plaintiffs
averred that the Celebrations stores opened “just in time to
compete with plaintiff PC stores during the biggest selling
season – the weeks leading up to Halloween,” and that “sales
during this time of year are critical to a successful business
year.” (Compl. ¶ 36.)
The PC plaintiffs’ primary claim under CFAA was that
defendant Hack, “without authorization and on behalf of
defendant Celebrations and defendant Bailen,” accessed PCC’s
Tomax computer system from his home 125 times over seven
days during October and November of 2003. Eight of the
4
alleged incursions occurred after Hack ceased working as a
consultant to PC Management.1 Additionally, plaintiffs claim
that unauthorized access purportedly was gained again in
December 2003 and a final time in April 2004, when Hack was
no longer associated with any of the PC plaintiffs.
The access in December 2003 lasted a total of
19.4 minutes. Hack testified that he had a home office during
his years with PCC and had been authorized to use his computer
from home; as proof, he offered e-mails demonstrating that he
did so. He could not recall making this particular access but
stated that he imagined it would have been for PC Management
business as he never accessed the Tomax system for anything
but PC Management related work. The PC plaintiffs contested
Hack’s asserted authorization in their submissions. The April
access was for a total of 5 minutes and 49 seconds, and Hack
testified that it appears to have been an automatic redial of the
last call he had made to the PC Lancaster store in December.
There is a paucity of information as to precisely what could have
been obtained from the system in these incursions, although the
PC plaintiffs’ computer consultant, Joseph Savin, stated that
“reports” could be ordered in a matter of seconds and then
“later, with a few keystrokes,” downloaded and sent to a remote
location. (Savini Certification ¶ 6, Oct. 8, 2004.)
The PC plaintiffs averred that the defendants used the
information obtained from this access to decide where to locate
1
It is undisputed that Hack ceased consulting for PC
Management on November 25, 2003.
5
their stores, where to focus marketing efforts and budgets, and
to obtain valuable information as to sales during the Halloween
season. They urge that by using this valuable information,
defendants purportedly obtained an unfair competitive
advantage. The PC plaintiffs specifically averred that
defendants’ unauthorized access resulted in damage or loss to
the PC plaintiffs of not less than $5,000 within the meaning of
CFAA, 18 U.S.C. § 1030.
The PC plaintiffs sought an injunction prohibiting
Celebrations from operating the Celebrations stores and from
using the PC plaintiffs’ trade secrets and confidential and
proprietary information, and ordering the return of such
information. They also averred that defendants’ conduct
violated New Jersey statutory and common law, entitling the
PC plaintiffs to damages.
After limited discovery, the District Court heard oral
argument on the motion and expressed doubt that 18 U.S.C.
§ 1030, which is primarily a criminal statute, provided for any
civil relief. However, the District Court reasoned that even if
the statute were read to provide a civil remedy, the PC plaintiffs
had failed to frame their claim as a claim under subsection (a)(5)
of § 1030, and thus were not entitled to injunctive relief under
CFAA. Further, the District Court held that, even if a claim
could properly be brought under subsection (a)(4) of § 1030, the
PC plaintiffs had failed to demonstrate a likelihood of success
on the merits of such a claim, because they had not shown what,
“if anything, was actually taken from the Tomax system [by
defendants], nor for that matter, confirm with certainty that the
incursions were inappropriate or outside the scope of a
6
legitimate work purpose.” 2 (Trans. of Op. at 34.)
The Court also ruled that the PC plaintiffs had not
demonstrated that they would succeed under the related New
Jersey statute prohibiting certain computer incursions, or on the
merits of their common law trade secret misappropriation claim.
This latter finding was based on the PC plaintiffs’ failure to
prove that the information in the Tomax system was indeed
entitled to protection as a “trade secret” and also because
monetary damages would compensate for any injury, thus
making injunctive relief inappropriate.
The District Court had jurisdiction over this matter
pursuant to 18 U.S.C. § 1030 and 28 U.S.C. §§ 1331 and 1367.
Our jurisdiction over this appeal from an interlocutory order
arises under 28 U.S.C. § 1292(a)(1).
This Court has held that a district court may permissibly
grant the “extraordinary remedy” of a preliminary injunction
only if “(1) the plaintiff is likely to succeed on the merits; (2)
denial will result in irreparable harm to the plaintiff; (3) granting
the injunction will not result in irreparable harm to the
defendant; and (4) granting the injunction is in the public
interest.” Nutrasweet Co. v. Vit-Mar Enterprises, 176 F.3d 151,
153 (3d Cir. 1999) (quoting Maldonado v. Houstoun, 157 F.3d
179, 184 (3d Cir. 1998)). The burden lies with the plaintiff to
establish every element in its favor, or the grant of a preliminary
2
We do not distinguish among the defendants in terms of the
conduct complained of, as it is not necessary to our ruling.
7
injunction is inappropriate. See id.We review the denial of a preliminary injunction for “an
abuse of discretion, an error of law, or a clear mistake in the
consideration of proof.” Kos Pharms., Inc. v. Andrx Corp., 369
F.3d 700, 708 (3d Cir. 2004) (quotation omitted). “Any
determination that is a prerequisite to the issuance of an
injunction . . . is reviewed according to the standard applicable
to that particular determination.” Id. Therefore, we exercise
plenary review over the district court’s conclusions of law and
its application of law to the facts, but review its findings of fact
for clear error. Duraco Prods., Inc. v. Joy Plastic Enters., Ltd.,
40 F.3d 1431, 1438 (3d Cir. 1994).
DISCUSSION
(1) Denial of Injunctive Relief.
We will not disturb the District Court’s ruling that
if § 1030(g) is interpreted as providing a civil remedy, and
injunctions in aid thereof, the PC plaintiffs failed to prove that
they were likely to succeed on the merits of their claim because
they failed to demonstrate any conduct on the part of defendants
other than the alleged access (which may or may not have been
authorized). As the District Court correctly found, there is
absolutely no evidence as to what, if any, information was
actually viewed, let alone taken. Lacking such a showing, the
elements of the causes of action brought by the PC plaintiffs
cannot succeed.
The federal and state law causes of action asserted
8
by the PC plaintiffs have several elements. It is undisputed that
the conduct complained of falls under subsection (a)(4) of
§ 1030. A claim under CFAA § 1030(a)(4) has four elements:
(1) defendant has accessed a “protected computer;” (2) has done
so without authorization or by exceeding such authorization as
was granted; (3) has done so “knowingly” and with “intent to
defraud”; and (4) as a result has “further[ed] the intended fraud
and obtain[ed] anything of value.” 18 U.S.C.A. § 1030(a)(4);
see also Pacific Aerospace & Elecs., Inc. v. Taylor, 295 F. Supp.
2d 1188, 1195 (E.D. Wash. 2003).
New Jersey state law provides that any person
“damaged in business or property” as a result of “[t]he
purposeful or knowing, and unauthorized altering, damaging,
taking or destruction of any data, data base, computer program,
computer software or computer equipment existing internally or
externally to a computer, computer system or computer
network,” may recover damages. N.J. Stat. Ann. § 2A:38A-3(a).
Lastly, under New Jersey law, to establish a claim for
misappropriation of a trade secret, a plaintiff must show, inter
alia, the existence of a trade secret and that it was “acquired by
the competitor with knowledge of the breach of confidence.”
Rohm & Haas Co. v. Adco Chem. Co., 689 F.2d 424, 429-30 (3d
Cir. 1982). Whether or not the data at issue here was a trade
secret, there has been no showing that anything was “acquired”
by defendants.
It is clear that PC plaintiffs do not know, have not
shown, and cannot show, what information, if any, was taken.
Mr. Nasuti, president of PC Management, stated repeatedly in
his deposition that plaintiffs do not know what, if anything, was
9
actually taken, much less information that could be deemed to
be a trade secret, and this is uncontroverted. In fact, no proof of
conduct other than access has been shown, thus dooming both
of the New Jersey state law claims, which require proof of some
activity vis-a-vis the information other than simply gaining
access to it.3
Under CFAA, too, more is required. The third and
fourth elements we cite above – (3) knowingly and with intent
to defraud, and (4) as a result . . . furthered the intended
fraudulent conduct and obtained anything of value – pose
hurdles that PC plaintiffs have not demonstrated they can
overcome.
The only evidence that might arguably support an
inference as to these elements consists of a one-line e-mail sent
in December 2003 by Hack to Savin, seeking SKU numbers
“confidentially.” Access occurred from Hack’s home computer
later that month. While this raises some level of suspicion,
without more we cannot infer anything of probative value. It is
too slim a reed upon which to rely as proof of the necessary
elements under CFAA.
3
We need not address separately the District Court’s ruling
regarding trade secrets or the availability of monetary relief, as
we affirm all aspects of the District Court’s ruling based on the
general ground that absent proof of something more than mere
access, whether or not the information in the system was secret,
there can be no likelihood of success on any of the state law
claims asserted.
10
The PC plaintiffs urge that we draw inferences of
intent and the obtaining of valuable information from the mere
fact that unauthorized access has been shown, and ask
defendants to rebut these inferences by demonstrating the
innocence of their purpose or actions. However, the elements
of the claims asserted are part of a plaintiff’s burden. That
information was taken does not flow logically from mere access.
Access could be accidental, and, even if access were purposeful
and unauthorized, information could be viewed but not used or
taken. Furthermore, without a showing of some taking, or use,
of information, it is difficult to prove intent to defraud, and
indeed, the PC plaintiffs have not shown that they can do so.
Here, the PC plaintiffs needed something more.
Perhaps they could have produced evidence of identical
merchandise code numbers (known as SKUs) in the
Celebrations stores, or of vendors contacted by Hack or Bailen
in temporal proximity to the unauthorized access. Or, perhaps,
they could have adduced evidence tending to show that neither
Hack nor Bailen could independently have started and stocked
the Celebrations stores. But, absent any such evidence, the
logical inference is not that there was access and use of
information that harmed them, but, to the contrary, that in
opening and stocking their stores, defendants Bailen and Hack
were employing their expertise gained through years of
experience in the retail party goods business, unaided by any
information obtained through access to the PC plaintiffs’
computer system.
Bailen had been the number two executive for
PCC before leaving in 2003, and had had the direct
11
responsibility for all of its buying, marketing, visual
merchandising planning, and allocation of supply chain efforts
for over 500 stores nationwide. The record contains the
numerous e-mails sent by Hack over the relevant time period
pertaining to his plans and the steps he was taking with Bailen
to start Celebrations, none of which contains any reference to
any outside information. Nor do PC plaintiffs point to any
conduct by Hack or Bailen that might imply use of any type of
information gained from the Tomax system.
We have only the unauthorized access in
December 2003 and then again in April 2004, and PC plaintiffs’
failure to complain prior to their bringing an injunction motion
in September 2004, when the Halloween season was imminent.
This does not satisfy the proof necessary for injunctive relief in
aid of the claims at issue.
Accordingly, we agree with the District Court that
the PC plaintiffs’ proffer was not sufficient and that due to the
speculative nature of their proof, they failed to demonstrate that
they could succeed on the merits of any of their claims so as to
warrant injunctive relief.
(2) CFAA
The District Court struggled with the meaning of,
and relationships among, various provisions of CFAA. It is, as
the District Court noted, a criminal statute, criminalizing and
penalizing unauthorized access to computers, and, as noted by
the Court in Pacific Aerospace, the majority of CFAA cases still
involve “classic” hacking activities. 295 F. Supp. 2d at 1196.
12
However, the scope of its reach has been expanded over the last
two decades. “Employers ... are increasingly taking advantage
of the CFAA’s civil remedies to sue former employees and their
new companies who seek a competitive edge through wrongful
use of information from the former employer’s computer
system.” Id; see also Shurgard Storage Centers, Inc. v.
Safeguard Self Storage, Inc., 119 F. Supp. 2d 1121, 1124 & n.3
(W.D. Wash. 2000) (explicitly recognizing that Congress’ 1994
amendment to the CFAA added a private cause of action under
§ 1030(g)).
As currently in force, 18 U.S.C. § 1030 lists seven
different types of conduct punishable by fines or imprisonment.
These are set forth in subsection 1030(c). The prohibited
conduct ranges from trafficking in passwords to knowing and
unauthorized access to government computers. Subsection
1030(d) grants authority to various agencies of the federal
government to investigate offenses. Subsection 1030(e)
contains definitions, while subsection (f) provides that the
powers under the federal law are not exclusive of state powers.
Subsection (g) – containing the purported civil remedy at issue
here – provides:
(g) Any person who suffers
damage or loss by reason of a
violation of this section may
maintain a civil action against the
violator to obtain compensatory
damages and injunctive relief or
other equitable relief. A civil
action for a violation of this section
13
may be brought only if the conduct
involves 1 of the factors set forth in
clause (i), (ii), (iii), (iv), or (v) of
subsection (a)(5)(B). Damages for
a violation involving only conduct
described in subsection (a)(5)(B)(i)
are limited to economic damages.
No action may be brought under
this subsection unless such action is
begun within 2 years of the date of
the act complained of or the date of
the discovery of the damage. No
action may be brought under this
subsection for the negligent design
or manufacture of computer
hardware, computer software, or
firmware.
18 U.S.C. § 1030(g).
The District Court focused on the criminal
provisions and found it difficult to infer a civil application
within the statutory framework and concluded that it could not
do so, although the Court did acknowledge that several other
courts had determined to the contrary. However, we conclude
that not only the relevant case law, but also the plain language
of the statute, militate in favor of the availability of a civil
remedy, and specifically, the type of injunctive relief sought by
the PC plaintiffs.
Numerous courts have recognized that a civil
14
cause of action is apparent from the text of § 1030(g). Although
we acknowledge the criminal thrust of the section in general, as
it is found in Title 18, there is ample authority for permitting
civil actions to proceed based on violations of the section
pursuant to the language of § 1030(g). See, e.g., Theofel v.
Farey-Jones, 359 F.3d 1066, 1078 (9th Cir. 2003) (“The civil
remedy extends to ‘[a]ny person who suffers damage or loss by
reason of a violation of this section.’”) (emphasis in original);
I.M.S. Inquiry Mgmt. Sys., Ltd. v. Berkshire Info. Sys., Inc., 307
F. Supp. 2d 521, 526 (S.D.N.Y. 2004) (stating that § 1030(g)
affords civil action for any violation of CFAA). Accordingly,
we conclude that civil relief is available under § 1030(g).
Defendants make a novel argument, however, in
an attempt to undercut the availability of relief here. They posit
that the third sentence of subsection (g) – which limits recovery
to only economic damages for a violation solely involving
conduct described in subsection (a)(5)(B)(i) – also operates to
exclude injunctive relief for claims involving such conduct.
That reading is unwarranted. We read that sentence to mean,
instead, that if one who is harmed does seek compensatory
damages based on such conduct, which are available by virtue
of the general statement contained in the first sentence, then
those damages will be so limited. That is, compensatory
damages for such conduct will be awarded only for economic
harm. Nothing in the third sentence, however, countermands or
limits the type of injunctive relief specifically authorized in the
first sentence of (g). In fact, two courts have held that the third
sentence does not even limit all compensatory damage claims
but only those based on the specific subsection of § 1030
referred to in the third sentence. See In re Intuit Privacy Litig.,
15
138 F. Supp. 2d 1272, 1281 (C.D. Cal. 2001); In re Doubleclick
Privacy Litig., 154 F. Supp. 2d 497, 519-526 (S.D.N.Y. 2001).4
Accordingly, claims for other types of compensatory damages
– for conduct other than violations of (a)(5)(B)(i) – are clearly
allowed, as are claims for any and all types of injunctive relief.
The only remaining issue pertains to an aspect of
section 1030(g) that was also of concern to the District Court.
That is, does the reference in section 1030(g) to subsection
(a)(5)(B) preclude relief for violations that are brought – as PC
plaintiffs’ is – under subsection (a)(4)? We conclude that it
does not, provided that the claim brought under subsection
(a)(4) – or any other section for that matter – “involves” one of
the five enumerated results in § 1030(a)(5)(B)(i)-(v). For ease
of reference, we repeat both section 1030 (a)(4) and (a)(5) in the
footnote below.5
4
These cases concerned specific language found in a prior
version of § 1030(g) – before the October 26, 2001 amendments
to the statute. See 18 U.S.C. § 1030 (1996) (amended by current
version at 18 U.S.C. § 1030(g)). The third sentence then
referred to violations involving damage as defined in subsection
(e)(8)(A), id., whereas the current version references
(a)(5)(B)(i), see 18 U.S.C. § 1030 (g) (2005).
5
18 U.S.C. § 1030(a): ... (4) knowingly and with intent to
defraud, accesses a protected computer without authorization, or
exceeds authorized access, and by means of such conduct
furthers the intended fraud and obtains anything of value, unless
the object of the fraud and the thing obtained consists only of
16
Here, PC plaintiffs’ claim is clearly based on a
the use of the computer and the value of such use is not more
than $5,000 in any 1-year period;
(5)(A)(i) knowingly causes the transmission of a program,
information, code, or command, and as a result of such conduct,
intentionally causes damage without authorization, to a
protected computer;
(ii) intentionally accesses a protected computer
without authorization, and as a result of such conduct, recklessly
causes damage; or
(iii) intentionally accesses a protected computer
without authorization, and as a result of such conduct, causes
damage; and
(B) by conduct described in clause (i), (ii), or (iii) of
subparagraph (A), caused (or, in the case of an attempted
offense, would, if completed, have caused)--
(i) loss to 1 or more persons during any 1-year
period (and, for purposes of an investigation, prosecution, or
other proceeding brought by the United States only, loss
resulting from a related courts of conduct affecting 1 or more
other protected computers) aggregating at least $5,000 in value;
(ii) the modification or impairment, or potential
modification or impairment, of the medical examination,
diagnosis, treatment, or care of 1 or more individuals;
(iii) physical injury to any person;
(iv) a threat to public health or safety; or
(v) damage affecting a computer system used by or
for a government entity in furtherance of the administration of
justice, national defense, or national security; . . .
17
violation of (a)(4), but they included in their complaint a
specific allegation of loss in excess of $5,000, which satisfies
(a)(5)(B)(i). We do not read section 1030(g)’s language that the
claim must involve one or more of the numbered subsections of
subsection (a)(5)(B) as limiting relief to claims that are entirely
based only on subsection (a)(5), but, rather, as requiring that
claims brought under other sections must meet, in addition, one
of the five numbered (a)(5)(B) “tests.” See I.M.S., 307 F. Supp.
2d at 526. Otherwise, the language would not have referred to
one or more of the numbered subsections, but would have said
that relief is only available for claims under subsection (a)(5).
We must take Congress’ use of language as purposeful. See
Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54 (1992)
(noting that “courts must presume that a legislature says in a
statute what it means and means in a statute what it says”).
Accordingly, we conclude that the claim asserted by PC
plaintiffs fits squarely within the class of claims eligible for
injunctive relief, for it involves one of the factors contained in
subsection (a)(5)(B), namely, the $5,000 loss provision of
(a)(5)(B)(i).
We note that one court seems to have read section
1030(g)’s reference to subsection (a)(5)(B) as limiting relief
under section 1030(g) to only subsection (a)(5) claims, but we
disagree. See McLean v. Mortg. One & Fin. Corp., 2004 U.S.
Dist. LEXIS 7279, *5 (D. Minn. Apr. 9, 2004). The weight of
authority is clearly to the contrary. See Theofel, 359 F.3d at
1078 (“The conduct must involve one of five factors listed in 18
U.S.C. § 1030(a)(5)(B), which include a loss in excess of $
5000.”); Nexans Wires S.A. v. Sark-USA, Inc., 319 F. Supp. 2d
468, 472 (S.D.N.Y 2004) (holding that requirement is met where
18
plaintiff meets the jurisdictional threshold by asserting loss in
excess of $5,000 under (a)(5)(B)(i)); I.M.S., 307 F. Supp. 2d at
526 (holding that subsection (g) affords a civil action for any
CFAA violation, but “requires an allegation of one of the five
enumerated factors in § 1030(a)(5)(B)).
CONCLUSION
We conclude that although the PC plaintiffs’ claim for
injunctive relief under CFAA is cognizable under the statutory
framework and language, and we therefore disagree with the
District Court to the extent it opined to the contrary, we will
AFFIRM the judgment of the District Court that the PC
plaintiffs failed to adduce sufficient proof of a violation under
CFAA and were therefore not entitled to injunctive relief under
that statute or under applicable New Jersey law.
19