Magnesium Machine, LLC v. Terves, LLC ( 2021 )

NOT RECOMMENDED FOR PUBLICATION
File Name: 21a0564n.06
Nos. 20-3779/3998
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
MAGNESIUM MACHINE, LLC; MAGNESIUM ) Dec 06, 2021
) DEBORAH S. HUNT, Clerk
HOLDINGS, LLC; PARAMOUNT DESIGN, LLC,
)
)
Plaintiffs-Appellants,
) ON APPEAL FROM THE
) UNITED STATES DISTRICT
v.
) COURT FOR THE NORTHERN
) DISTRICT OF OHIO
TERVES, LLC; MCDONALD HOPKINS, LLC,
)
)
Defendants-Appellees.
)
Before: DONALD, LARSEN, and THAPAR, Circuit Judges.
LARSEN, Circuit Judge. This case raises the question whether a three-word “trade secret”
buried in a response to a lawfully issued subpoena was misappropriated when an attorney received
it and passed it along to his client. Because there is no evidence that the lawyer or his client
improperly obtained, disclosed, or used the alleged trade secret, there was no misappropriation.
And the district court did not abuse its discretion by awarding attorney’s fees for the bad faith
invention and protraction of this lawsuit upon a lawsuit. Therefore, we AFFIRM the judgment of
the district court.
I.
The underlying dispute began when appellee Terves, LLC sued Ecometal, Inc. for patent
infringement. Terves alleged that Ecometal had infringed its patents by importing infringing
magnesium material, used in the fracking industry, from China. See Terves, LLC v. Yueyang
Aerospace New Materials Co., No. 19-cv-1611 (N.D. Ohio, July 15, 2019). Ecometal supplies
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magnesium to appellant Magnesium Machine, LLC, and the two are represented by the same
counsel. The patent lawsuit is still ongoing, but a discovery dispute has spiraled into this separate
action.
On October 7, 2019, Terves, acting through its counsel, McDonald Hopkins, informed
Ecometal’s lawyers that a subpoena would be served on a third party, Bradley Machine & Design,
LLC. Bradley’s agent, who is not a lawyer, responded to the subpoena; he said that Bradley had
ended its relationship with Magnesium Machine and turned over a settlement agreement (the
Agreement) between the two companies as proof. Bradley did not assert any confidentiality
concerns related to the Agreement.
On October 15, the same day that Bradley responded to the subpoena, McDonald Hopkins
passed the Agreement along to Terves’s President, Andrew Sherman, for use in the litigation.
Sherman shared the Agreement with another Terves employee, Steven Barela, who was helping
with the case.
On October 25, Magnesium Machine learned that Bradley had produced the Agreement to
Terves. As a party to the settlement, Magnesium Machine knew that the Agreement contained a
confidentiality provision. It also knew that an exception allowed production of the Agreement in
response to a subpoena upon twenty days’ notice so that either party could seek a protective order.
And it knew that Bradley had failed to give that notice. Yet Magnesium Machine did nothing.
On November 1, Magnesium Machine received its own, separate subpoena from Terves.
Counsel sprang into action. In a letter arguing that the new subpoena was improper because of the
confidentiality clause and the twenty-day requirement, Magnesium Machine requested that Terves
hand over all information related to the Agreement. Terves responded two days later, saying that
it was unwilling to turn over the Agreement, which it received pursuant to a valid subpoena, but
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offering to designate the Agreement as “Attorney’s Eyes Only” under the Northern District of
Ohio’s Local Patent Rule 2.2. Terves also offered to quarantine the Agreement for twenty days,
giving Magnesium Machine a chance to seek a protective order. Magnesium Machine agreed and
Terves complied.
The dispute should have ended there. But it didn’t. On November 8, during a meet-and-
confer regarding the subpoena, Magnesium Machine asked whether the Agreement had been
shown to anyone else. Counsel for Terves agreed to verify that the Agreement had not been
“shared with anyone (or if it was, that all copies ha[d] been clawed back and destroyed).” On
November 11, Magnesium Machine responded and asked Terves for the names of anyone who had
been shown the Agreement. On November 20, Terves replied, explaining that the company
President, Sherman, had received the agreement and had passed it on to one other Terves employee.
Counsel for Terves confirmed that all copies had been deleted except for his own which was still
marked “Attorney’s Eyes Only.” Magnesium Machine didn’t respond.
Weeks later, on December 4, Magnesium Machine sued Terves under federal and state
trade secrets laws and sought an ex parte seizure of all devices containing the Agreement.
Magnesium Machine claimed that the Agreement held a trade secret, which it described as
“products and methods for degrading . . . downhole tools used in the oil and gas industry” with “a
salt-based treatment.” Magnesium Machine didn’t say what part of the trade secret was in the
Agreement; it gave the court a copy of the Agreement with two and a half lines redacted as “MM
Trade Secret Products and Methods.” Obfuscating the timeline, Magnesium Machine described
its back and forth with Terves’s counsel as “urgent attempts to try to minimize the damage” from
Bradley’s “breach-laden disclosure of the trade secrets.” It said that Terves’s counsel had
“deceived” Magnesium Machine “about the status of the [Agreement] and its purported
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quarantine.” How? Magnesium Machine claimed that “nearly three weeks” after the November
6 call, it learned that the Agreement had not been “held securely by an officer of the court” and,
worse, was in the possession of two Terves employees. “[I]f these two deceptions were not bad
enough,” one of the employees was also highly skilled in magnesium technology. Magnesium
Machine called these “blatant lies to cover up the misappropriation.” And it pleaded that its first
movers’ advantage was “now highly at risk,” prompting it to “frantically contemplate altering its
prior business plans for the trade secrets.”
Moved by the desperate plea, the district court granted the ex parte seizure. Officers
immediately retrieved Sherman’s laptop, storage devices, and cellphone. And Sherman was served
with the complaint. That seems to be the first time someone at Terves became aware that the
Agreement contained a supposed trade secret.
The next day, the court held an evidentiary hearing and vacated the seizure order. After
listening to testimony from Sherman and Loren Swor, a co-owner of Magnesium Machine, the
court was skeptical that the Agreement contained any trade secret, much less one that had been
misappropriated.
First, Swor admitted that the alleged trade secret wasn’t the full redacted portion of the
Agreement, but just “three words.” And the third word was “Patent,” which the court noted was
both false (there was, in fact, no patent, just a patent application) and misleading (patents can’t be
trade secrets since patents require disclosure). The court thought it implausible that Terves would
have recognized a trade secret from three words—“___ ___ patent”—buried in the Agreement.
Second, the court was baffled by Magnesium Machine’s argument that there had been
misappropriation, when the evidence showed that the subpoena was issued properly. The response
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to the subpoena was not marked, no precautions had been taken, and all Terves did was receive
the unmarked Agreement.
After the vacatur, the district court granted Terves’s motion to dismiss the misappropriation
claim. Terves then moved for attorney’s fees against Magnesium Machine under the provisions
of the relevant state and federal trade secret acts, and against counsel, Dunlap Codding, under 28
U.S.C. § 1927 for unreasonably and vexatiously multiplying the proceedings. The district court
granted this motion as well: it found that Magnesium Machine had brought its misappropriation
claim in “bad faith” and that counsel’s refusal to back down in the face of undisputed evidence
unreasonably and vexatiously multiplied the proceedings.
Magnesium Machine appeals both orders. It seeks reversal of the district court’s order
dismissing its complaint, dissolving the seizure order, and denying further injunctive relief. It also
asks for a reversal of the award of attorney’s fees and sanctions. Those appeals were consolidated,
and we take them in order.
II.
We review a district court’s dismissal of a complaint de novo. Tennessee v. U.S. Dep’t of
State, 931 F.3d 499, 506 (6th Cir. 2019). Magnesium Machine may proceed only if its claims
“contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its
face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotation marks omitted). Claims have “facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Id.Magnesium Machine alleges that Terves and McDonald Hopkins misappropriated a trade
secret in violation of the Defend Trade Secrets Act of 2016, 18 U.S.C. § 1836, the Ohio Uniform
Trade Secrets Act, Ohio Rev. Code §§ 1333.61–1333.69, and the Oklahoma Uniform Trade
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Secrets Act, Okla. Stat. tit. 78, §§ 85–94 (1986). Misappropriation is an essential element of all
three statutes and is defined the same way. “Misappropriation” means:
(A) acquisition of a trade secret of another by a person who knows or has reason to
know that the trade secret was acquired by improper means; or
(B) disclosure or use of a trade secret of another without express or implied consent
by a person who–
(i) used improper means to acquire knowledge of the trade secret; or
(ii) at the time of disclosure or use, knew or had reason to know that his
knowledge of the trade secret was–
(I) derived from or through a person who had utilized improper
means to acquire it; or
(II) acquired under circumstances giving rise to a duty to maintain
its secrecy or limit its use; or
(III) derived from or through a person who owed a duty to the person
seeking relief to maintain its secrecy or limit its use; or
(iii) before a material change of his position, knew or had reason to know
that–
(I) the trade secret was a trade secret; and
(II) knowledge of the trade secret had been acquired by accident or
mistake.
18 U.S.C. § 1839(5); see also Ohio Rev. Code § 1333.61; Okla. Stat. tit. 78, § 86. “Improper
means” includes “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to
maintain secrecy, or espionage through electronic or other means; and does not include . . . any
other lawful means of acquisition.” 18 U.S.C. § 1839(6).
We may put to one side the question whether the Agreement’s three-word phrase ending
in “Patent” constitutes a trade secret; even if it did, neither Terves nor its counsel misappropriated
it. First, Terves didn’t “acquire” the putative trade secret by “improper means.” Magnesium
Machine doesn’t even allege theft, bribery, misrepresentation, breach or inducement of a breach
of a duty to maintain secrecy, or espionage. And how could it? The subpoena issued to Bradley
was totally unrelated to the “trade secret” that was eventually turned over; Terves asked for
information related to the importation of magnesium from China after it learned that Ecometal had
listed Bradley’s address as the delivery address. Bradley responded with the Agreement to show
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that its relationship with Magnesium Machine had been dissolved, and only incidentally included
the three-word “trade secret.” This is far from an inducement to breach a duty to secrecy, much
less espionage, theft, or bribery. And if Magnesium Machine has a claim against anyone, it would
be Bradley. Terves’s subpoena request is the definition of a “lawful means of acquisition.” See
18 U.S.C. § 1839(6)(B).
Second, Terves didn’t disclose or use the trade secret. Magnesium Machine alleges only
that Terves received the trade secret from Bradley, not that Terves turned around and
communicated that secret to third parties or began using it in its own business.
Magnesium Machine has another theory—that Terves’s counsel, McDonald Hopkins,
made the disclosure when it forwarded the Agreement to Terves on October 15. But, of course,
McDonald Hopkins was acting merely as Terves’s agent; and we question whether there could be
actionable disclosure by Terves to itself. See Rogers Corp. v. Arlon, Inc., 855 F. Supp. 560, 572
(D. Conn. 1994). But even if we treat Terves and its counsel as separate entities, McDonald
Hopkins’s disclosure was not “misappropriation.” The law firm used no “improper means” when
it acquired the Agreement by lawful subpoena.1 See 18 U.S.C. § 1839(5)(B)(i). And, although
disclosure may sometimes trigger liability without “improper” acquisition, that is only when the
discloser has knowledge of the trade secret. See id. § 1839(5)(B)(ii) & (iii). Magnesium Machine
hasn’t shown that McDonald Hopkins knew anything about the trade secret; indeed, it is unclear
how an attorney should have recognized that a three-word phrase ending in the word “Patent”
1
Magnesium Machine argues for the first time on appeal that McDonald Hopkins deployed
“improper means” through repeated “misrepresentations” in the back and forth beginning on
November 4. That argument is forfeited. But even if it weren’t, and even if we agreed that there
were misrepresentations, there still must be acquisition, disclosure, or use by “improper means.”
18 U.S.C. § 1839(5). Whatever misrepresentations Magnesium Machine has in mind, they
occurred after the trade secret was already acquired, and are unrelated to any disclosure or use.
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could have been a trade secret. If Magnesium Machine actually had a patent, then by definition,
its existence would have been public.
Magnesium Machine suggests that McDonald Hopkins misappropriated the trade secret by
failing to label the Agreement, upon receipt, as “Attorney’s Eyes Only” under the Northern District
of Ohio’s Local Patent Rule 2.2. This argument doesn’t get off the ground. Rule 2.2 allows
“disclosures deemed confidential by a party [to] be produced to the adverse party for the eyes of
outside counsel of record only, marked ‘Attorney’s Eyes Only.’” This establishes a procedure for
producing parties to protect their confidential documents. It doesn’t create a duty for receiving
parties. But even if Local Patent Rule 2.2 did create such a duty, it wouldn’t help Magnesium
Machine. There is still no evidence that Terves’s counsel realized, or should have realized, there
was a trade secret. Magnesium Machine claims that counsel was “personally aware that . . . the
Settlement Agreement [was] confidential,” but confidentiality alone does not a trade secret make.
Because there was no “misappropriation” under any of the trade secret statutes, we do not
address the question whether the litigation privilege would be a separate bar to Magnesium
Machine’s claims.
III.
We now turn to the award of attorney’s fees. We review a district court’s award of
attorney’s fees for abuse of discretion. Imwalle v. Reliance Med. Prods., Inc., 515 F.3d 531, 551
(6th Cir. 2008). We review the factual findings underlying that decision for clear error. Degussa
Admixtures, Inc. v. Burnett, 277 F. App’x 530, 534 (6th Cir. 2008); Bergman v. United States,
844 F.2d 353, 357 (6th Cir. 1988).
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A.
All three trade secret statutes permit a court to award reasonable attorney’s fees if it finds
that a misappropriation claim was brought in “bad faith.” 18 U.S.C. § 1836(b)(3)(D); Ohio Rev.
Code § 1333.64(A); Okla. Stat. tit. 78, § 89(1). The definition of “bad faith” has been interpreted
by courts somewhat differently among these statutes. But the district court found that Magnesium
Machine’s actions met the definition under any standard. We agree.
We haven’t addressed the meaning of “bad faith” under any of the trade secret acts here.
But other courts have applied a test with objective and subjective prongs. See RJB Wholesale, Inc.
v. Castleberry, 788 F. App’x 565, 566 (9th Cir. 2019) (concluding that bad faith exists under
Washington law “when a party intentionally brings a frivolous claim, counterclaim, or defense
with improper motive” and using the same standard for federal trade secrets law) (quotation marks
omitted); Green Bay Packaging, Inc. v. Preferred Packaging, Inc., 932 P.2d 1091, 1098 (Okla.
1996) (deciding that, under Oklahoma law, bad faith exists “when the claim was made for
oppressive, abusive or wasteful reasons”) (quotation marks omitted); Am. Chem. Soc’y v.
Leadscope, Inc., 2010-Ohio-2725, ¶ 84 (Ct. App.) (explaining that, under Ohio law, “bad faith”
can include a claim that is “objectively specious,” being “without substance and devoid of merit”);
see also Akira Techs., Inc. v. Conceptant, Inc., 773 F. App’x 122, 125 (4th Cir. 2019) (stating that,
under Virginia and federal trade secrets laws, bad faith requires a claim to have “no chance of
success under existing law,” but not addressing whether there is an additional subjective prong).
This is consistent with our definition of “bad faith” in the similar context of sanctions imposed
under a court’s inherent authority: “bad faith” requires “(1) that the claims advanced were
meritless, (2) that counsel knew or should have known this, and (3) that the motive for filing suit
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was for an improper purpose such as harassment.” United States v. Llanez-Garcia, 735 F.3d 483,
492 (6th Cir. 2013).
The district court did not abuse its discretion by finding that, here, all possible standards
were met. Magnesium Machine’s claim was baseless, the company knew it was baseless, and it
acted with improper motive.
First, the claim was baseless; we agree with the district court that “[m]ishandling of
confidential third-party discovery does not equate to misappropriation of a trade secret.” The
Agreement here was “obtained by legal means,” “not restricted by the rules,” and was not shared
beyond the attorney and his client.
Second, Magnesium Machine knew this when it filed the action. The district court found
that Magnesium Machine was “well aware” that the alleged trade secret had been received
“through legitimate discovery means” and had “not been distributed further.” Magnesium
Machine notified Terves of its belief that the Agreement contained secret information, and Terves
“voluntarily took measures to protect” it. And Magnesium Machine later admitted that the
Agreement didn’t actually contain the elaborate trade secrets presented in its complaint, but just a
three-word phrase ending in “Patent.” The district court called Magnesium Machine’s complaint
“an intentional exaggeration/misrepresentation of the alleged disclosure at issue.” There is no
reason that, upon seeing the three-word phrase, Terves or its counsel would have known it
possessed any trade secret. So the misappropriation claim was “at best intentionally misleading,
and at worst, intentionally deceptive.”
Finally, the district court did not err by finding that Magnesium Machine acted with
“improper motive,” based on the “extraordinary means” by which it prosecuted the case.
Magnesium Machine wasn’t forthcoming in its claim for ex parte emergency relief. It exaggerated
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the content of the “trade secret,” intentionally muddled the timeline, and claimed that Terves lied.
It’s not unreasonable to conclude that Magnesium Machine acted with improper motive when it
failed to object for nearly two weeks after it had learned that the Agreement had been handed over,
and then reacted only when it was served with its own subpoena. Litigation shenanigans like these
are the core of “bad faith.” See BDT Prods., Inc. v. Lexmark Int’l, Inc., 602 F.3d 742, 754 (6th
Cir. 2010).
Magnesium Machine argues that the district court’s bad faith finding merely replicates its
decision on the merits. But the district court explicitly based its findings on both the
“circumstances” leading up to the claim and the “extraordinary means” by which the claim was
brought, neither of which has to do with the merits. We give substantial deference to a district
court’s award of attorney’s fees because of its “superior understanding of the litigation.” Hensley
v. Eckerhart, 461 U.S. 424, 437 (1983). Here, the judge presided over the related patent case and
the ex parte seizure hearing; and the attorneys for Magnesium Machine are also the attorneys for
Ecometal. The district judge was in the best position to determine whether Magnesium Machine’s
actions were an improper use of the courts. We see no reason to reverse the district court’s finding
of bad faith.
B.
A court may impose personal liability on an attorney who “multiplies the proceedings in
any case unreasonably and vexatiously.” 28 U.S.C. § 1927. Sanctions are warranted when an
attorney engages in conduct that “falls short of the obligations owed by a member of the bar to the
court and which, as a result, causes additional expense to the opposing party.” Holmes v. City of
Massillon, 78 F.3d 1041, 1049 (6th Cir. 1996) (quotation marks omitted).
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The district court found that Magnesium Machine’s attorneys, the law firm Dunlap
Codding, vexatiously multiplied the proceedings by asking for “truly exceptional relief” in an
intentionally misleading manner and by continuing the litigation after the evidentiary hearing
“should have ended the case.” It’s not an abuse of discretion to impose sanctions when an attorney
refuses to voluntarily dismiss a meritless claim, unreasonably protracting the proceedings. See
Bailey v. Papa John’s USA, Inc., 236 F. App’x 200, 205 (6th Cir. 2007).
Dunlap Codding, argues that the “court’s order does not allow for any possibility that
[Magnesium Machine] may have continued to have a good-faith belief in the merits of its claims.”
Dunlap Codding then rehashes many of the same meritless arguments that it made in support of
the misappropriation claim. But the district court did not abuse its discretion by finding that
Dunlap Codding never had a good-faith belief in the merits of its claim when the claim was
objectively specious and brought in an intentionally misleading way.
Finally, Dunlap Codding argues that § 1927 doesn’t authorize the imposition of sanctions
on a law firm, rather than against individual attorneys. But that argument wasn’t raised in the
district court and is forfeited. See Taft Broad. Co. v. United States, 929 F.2d 240, 243–44 (6th Cir.
1991). Thus, the district court did not abuse its discretion by finding that Dunlap Codding also
owed attorney’s fees.
***
We AFFIRM the district court’s dismissal of Magnesium Machine’s misappropriation
claim and its award of attorney’s fees to Terves under the trade secrets acts and § 1927.
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