Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_15-cv-03449/USCOURTS-cand-3_15-cv-03449-6/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Account Receivable

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United States District Court

For the Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

ARTEC GROUP, INC.,

Plaintiff,

v.

ANDREY KLIMOV, et al.,

Defendants.

Case No. 15-cv-03449-EMC 

ORDER GRANTING IN PART AND 

DENYING IN PART DEFENDANT’S 

MOTION TO DISMISS

Docket No. 125

Plaintiff Artec Group, Inc. alleges trade secret misappropriation, breach of contract, and 

related causes of action against three former employees and three corporations. Defendant Axon 

Business Systems, LLC moves to dismiss Artec‟s seven causes of action against Axon for failure 

to state claim. Docket No. 125.

1

The Court heard argument on September 30, 2016. Defendant 

Axon‟s motion is GRANTED in part and DENIED in part.

I. BACKGROUND

Artec Group, Inc. is a California corporation specializing in the design and manufacture of 

3D scanners and facial recognition devices. Docket No. 80, First Amended Complaint ¶ 1. Artec 

alleges that a group of former Artec officers, directors, and employees breached their employment 

contracts by conspiring to misappropriate trade secrets and compete directly with Artec through 

 

1

Plaintiff makes a half-hearted argument that all of the arguments asserted by Axon in this motion 

“could have been brought months ago in its first motion to dismiss.” Docket No. 141 at 1. Under 

Federal Rule of Civil Procedure 12(g)(2), a party that makes a motion to dismiss under Rule 12 

“must not make another motion under this rule raising a defense or objection that was available to 

the party but omitted from its earlier motion.” Axon notes that its first motion was a “special 

limited appearance” for the purposes of challenging jurisdiction. Docket No. 125 at 2. In any 

case, judicial economy favors resolution of Axon‟s motion because Axon would be able to renew 

the same arguments presented here in a Rule 12(c) motion for judgment on the pleadings after 

filing an answer. See, e.g., Amaretto Ranch Breedables, LLC v. Ozimals, Inc., No. C 10-05696 

CRB, 2011 WL 2690437, at *2 (N.D. Cal. July 8, 2011). 

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two newly formed companies, A-Star LLC and ID-Wise SIA. Id. ¶¶ 3, 85-94. Artec alleges that 

Axon Business Systems, LLC, a third corporate defendant, breached an Artec distribution 

agreement by purchasing and receiving Artec-branded products from defendant A-Star. Id. ¶¶ 20, 

139-43. 

Axon is a United Arab Emirates limited liability company with its principal place of 

business in Dubai. Id. ¶ 19. On August 8, 2012, Artec and Axon entered into a “Non-Exclusive 

Distribution Agreement.” Id. ¶¶ 20, 76. Under the NDA, Axon had “the right to sell [Artec‟s] 

facial recognition devices and 3D scanners, including in connection with [Artec‟s] trademarked 

„Broadway 3D‟ lines, to purchasers in the UAE.” Id. ¶ 76. The term of the agreement was one 

year, but certain provisions of the agreement survived its termination. Id. ¶ 77. For example, 

Axon has a continuing obligation to maintain the secrecy of Artec‟s confidential information and 

refrain from selling “products similar to or competitive with” Artec‟s products in the UAE without 

Artec‟s permission. Id. ¶¶ 20, 77-83. Artec alleges that Axon breached the NDA by, e.g., entering 

into an agreement with A-Star in January 2015 pursuant to which A-Star sold 112 Artec Broadway 

3D devices to Axon for distribution in the UAE2; by distributing competing products in the UAE;

by failing to notify Artec of competing or allegedly infringing products; by failing to maintain 

confidential information; and by failing to immediately cease using Artec marks following 

termination of the NDA. Id. ¶¶ 125-26, 182-83.

II. ANALYSIS

A motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 

12(b)(6) tests the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 

2001). While a complaint need not contain detailed factual allegations, it “must contain sufficient 

factual matter, accepted as true, to „state a claim to relief that is plausible on its face.‟” Iqbal, 556 

U.S. at 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “The plausibility 

 

2

“The agreement was for a grand total of $819,273, which in aggregate was a far lower price than 

Artec Group‟s usual price for authentic [Artec] devices.” FAC ¶ 126. Artec alleges, on 

information and belief, that “these products and/or the parts needed to manufacture there were 

deliberately stolen by [A-Star] and the [individual defendants], or some of them, from Artec 

Group warehouses and then shipped to [Axon].” FAC ¶ 128.

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standard is not akin to a „probability requirement,‟ but it asks for more than a sheer possibility that 

a defendant has acted unlawfully.” Id. (internal citation omitted). “Determining whether a 

complaint states a plausible claim for relief . . . [is] a context-specific task that requires the 

reviewing court to draw on its judicial experience and common sense.” Id. at 679. “When there 

are well-pleaded factual allegations, a court should assume their veracity and then determine 

whether they plausibly give rise to an entitlement to relief.” Id. at 679. However, “the tenet that a 

court must accept as true all of the allegations contained in a complaint is inapplicable to legal 

conclusions. Threadbare recitals of the elements of a cause of action, supported by mere 

conclusory statements, do not suffice.” Id. (citing Twombly, 550 U.S. at 555). 

Plaintiff asserts seven causes of action against Axon: breach of distributor agreement,

(Count 4); unjust enrichment (Count 5); breach of implied covenant of good faith and fair dealing 

(Count 7); conversion (Count 9); civil conspiracy (Count 13); constructive trust (Count 14); and 

unfair competition (Count 16). The Court dismisses plaintiff‟s claims for unjust enrichment 

(Count 5), civil conspiracy (Count 13), constructive trust (Count 14), and unfair competition 

(Count 16) as preempted by CUTSA. Axon‟s motion is otherwise denied (Counts 4, 7, and 9). 

A. Contract Claims

Plaintiff alleges that Axon breached four provisions of the NDA: Sections 2.9, 2.11, 2.12, 

and 7.5. Axon argues that Section 2.9 is unenforceable under California law and that Plaintiff has 

failed to allege any breach of Sections 2.11, 2.12, and 7.5. Axon also moves to dismiss Plaintiff‟s 

claim for breach of the implied covenant of good faith and fair dealing as superfluous. The Court 

declines to dismiss Plaintiff‟s contract claims.

1. Sections 2.9 

Section 2.9 of the NDA states:

Except for equipment or products that Distributor was already 

selling or distributing in the Territory prior to the date of this 

Agreement, Distributor shall not develop, manufacture, or distribute 

equipment or products similar to or competitive with the Products in 

the Territory without ARTEC‟s prior written consent. Distributor 

shall keep ARTEC informed of Distributor‟s current or future sales 

of equipment or products similar to or competitive with the Products 

in the Territory. In the event that Distributor begins sales of 

equipment or products similar or competitive with the Products, 

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Distributor shall inform ARTEC of that fact not later than one 

month after the commencement of such sales.

Docket No. 90-1. Plaintiff alleges that Axon breached this section by distributing equipment or 

products similar to or competitive with Artec‟s products in the UAE without Artec‟s prior written 

consent and without keeping Artec informed. See FAC ¶ 182. Axon argues that the whole 

provision is an unenforceable non-compete agreement. 

In California, “every contract by which anyone is restrained from engaging in a lawful 

profession, trade, or business of any kind is to that extent void.” Cal. Bus. & Prof. Code § 16600.3

Section 16600 “protects „the important legal right of persons to engage in businesses and 

occupations of their choosing.‟” Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 946, 189 

P.3d 285, 291 (2008) (quoting Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1520 (1997)). 

Restraints on the ability to compete after an agreement terminates – even for only a particular 

geographical region – are void under section 16600. See, e.g., Edwards, 44 Cal. at 948 (finding 

non-compete clause invalid because it restricted employee from providing professional services in 

Los Angeles and to former clients for period of time after termination); Beatty Safway Scaffold, 

Inc. v. Skrable, 180 Cal. App. 2d 650, 656 (Ct. App. 1960) (affirming invalidity of provision 

“wherein defendant agreed not to sell or lease in that territory any equipment during the three-year 

period after the termination of the agreement”). What is less clear is whether Section 2.9 is an 

unenforceable provision while the contract between the parties is “in term” (i.e., while the contract 

is still in force and not yet terminated).

This Court declines to find that Section 2.9 is unenforceable for the time before

termination of the NDA between the parties. See Angelica Textile Servs., Inc. v. Park, 220 Cal. 

App. 4th 495, 509 (2013), as modified (Oct. 29, 2013), as modified on denial of reh’g (Nov. 7, 

2013) (“statute does not affect limitations on an employee‟s conduct or duties while employed”). 

Axon claims that Angelica Textile has no application here because it was decided based on the 

employee‟s duty of loyalty to the employer while employed. However, in the majority of cases 

 

3

The statute contains a few exceptions, none of which are applicable in this case.

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cited by Axon, the void provisions restrained a party after termination of the agreement.4For 

example, in Beatty Safway Scaffold, the court addressed a provision that prohibited the distributor 

from competing “during the continuance of this agreement and for three (3) years thereafter,” but 

found only the “portion of the agreement pertaining to the three-year period” invalid. 180 Cal. 

App. 2d at 652. 

Because it is not clear from the allegations in the complaint whether or not the contract was 

in term (i.e., still in effect) at the time of the alleged breach, Axon‟s motion to dismiss is denied.

Moreover, even if the contract were not in term at the time of the alleged breach, Axon‟s 

motion should still be denied, at least at this point in the proceedings. Artec fairly points out that 

whether a provision operates as “a restraint of substantial character” for purposes of § 16600,

Golden v. California Emergency Physicians Med. Grp., 782 F.3d 1083, 1093 (9th Cir. 2015), is a 

fact-intensive inquiry. Given that all allegations are taken is true and all reasonable inferences 

must be drawn in Artec‟s favor, the merits should be decided a later juncture in this litigation, and 

not at the 12(b)(6) phase.

The Court, however, is not persuaded by Plaintiff‟s contention that the provision at issue in 

this case is enforceable under the “trade secrets” exception to section 16600. See, e.g., Latona v. 

Aetna United States Healthcare, Inc., 82 F. Supp. 2d 1089, 1096 (C.D. Cal. 1999) (citing case 

“finding that section 16600 permits non-compete provisions in employment contracts when 

„necessary to protect the employer‟s trade secrets‟” but concluding that agreement at issue “cannot 

qualify for the trade secret exception to section 16600” because, inter alia, parties had “signed a 

legal confidentiality agreement” and thus “paragraph 4 of the Agreement added nothing”). As an 

initial matter, the California Supreme Court‟s Edwards decision called into doubt the continued 

viability of the trade secrets: “We do not here address the applicability of the so-called trade secret 

exception to section 16600.” 44 Cal. 4th at 946. In any event, the Court need not address the 

continued viability of the exception because the provision at issue in the instant case would apply 

 

4

In Gatan, Inc. v. Nion Co., No. 15-CV-1862-PJH, 2016 U.S. Dist. LEXIS 42764 (N.D. Cal. Mar. 

30, 2016), the district court voided a non-compete clause in a reseller agreement that applied both 

“„during the term and for one (1) year following the conclusion of the Term.” – without 

addressing the two timeframes separately. Id. at *2 (emphasis added).

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to all products “similar to or competitive with” Artec products, regardless of whether the products 

involve protected or confidential information, and the agreement contains separate provisions to 

address confidential information. The cases cited by Plaintiff do not support the application of a 

trade secrets exception under these circumstances. See, e.g., Gatan, 2016 U.S. Dist. LEXIS 

42764, at *7-8 (provision “cannot be considered „necessary‟ to protect Gatan‟s trade secrets” 

where agreement “already contains a separate provision, entitled “Use of Confidential 

Information,” which provides protection for Gatan‟s trade secrets”); Applied Materials, Inc. v. 

Advanced Micro-Fabrication Equip. (Shanghai) Co., 630 F. Supp. 2d 1084, 1091 (N.D. Cal. 

2009) (exception does not apply because provision “touches post-employment inventions, 

regardless of when they were conceived or whether they were based on Applied‟s confidential 

information”); Dowell, 179 Cal. App. 4th at 577 (exception does not apply because “clauses in the 

agreements are not narrowly tailored or carefully limited to the protection of trade secrets”).

2. Section 7.5

Section 7.5 states:

Upon termination of this Agreement, Distributor shall immediately 

cease all use of the ARTEC Marks.

Docket No. 90-1. Plaintiff alleges that Axon breach this section continuing to use Artec‟s marks 

after the agreement terminated. Axon argues that these allegations do not identify a specific mark, 

or how Axon‟s use the mark. The Court disagrees. Plaintiff alleges that Axon contracted “for the 

unauthorized sale of 112 ARTEC‟s Broadway 3D devices, or infringing counterfeits or 

reproductions thereof” and continued “to transact for 3D scanners, facial recognition devices 

and/or intercom devices with A-STAR.” FAC ¶ 182. Plaintiff has identified the mark in question

(Broadway 3D) and the transactions at issue.

3. Section 2.12

Section 2.12 states: 

Distributor shall maintain in confidence and not disclose to any third 

party any Confidential Information. Distributor shall make no use 

of Confidential Information except to further the business interests 

of the parties as contemplated by this Agreement. Distributor shall 

not use the Confidential Information to the detriment of ARTEC 

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under any circumstances. All Confidential Information is the sole 

and exclusive property of ARTEC. Distributor will return to 

ARTEC all Confidential Information upon termination of this 

Agreement. Distributor‟s obligations with respect to the disclosure 

and use of Confidential Information shall survive the termination or 

expiration of this Agreement. Distributor agrees that ARTEC‟s 

training materials, service manuals, and all technical documents 

relating to the equipment shall be considered Confidential 

Information and that such materials will be safeguarded and returned 

to ARTEC in accordance with this provision, unless notified 

otherwise in writing by ARTEC.

Id. Plaintiff alleges that Axon violated this section by continuing “to transact for 3D scanners, 

facial recognition devices and/or intercom devices with A-STAR.” FAC ¶ 182.

Axon claims that these allegations do not adequately identify the “Confidential 

Information” at issue in the alleged violations of Sections 2.11 and 2.12. See Pellerin v. 

Honeywell Int’l, Inc., 877 F. Supp. 2d 983, 990 (S.D. Cal. 2012) (dismissing breach of contract 

claim where counterclaimant failed to plead “what the „trade secrets and/or confidential 

information‟ are or whether the confidential information falls within the terms of the 

agreements”). In this case, Artec argues that Confidential Information is broadly defined in the 

NDA. FAC ¶ 72 n. 13. The definition of “Confidential Information” includes “intellectual 

property, trade secrets, and other proprietary information relating to ARTEC‟s business strategies,

plans, financial data, projections, customer information, markets, and Products.” Docket No. 90-1 

§ 1.1. The Court is not persuaded that a broad definition of confidential information is enough to 

plausibly allege that the transactions at issue involved disclosure of Artec‟s confidential 

information. Therefore, Plaintiff‟s claim for breach of Section 2.12 is dismissed with leave to 

amend. Artec must identify with specificity what confidential information is at issue.

4. Sections 2.11

Section 2.11 states: 

Distributor shall timely report market information to ARTEC on 

competitive activities, market conditions and developments, and 

local legislation affecting sales of the Products in the Territory. 

Distributor shall notify ARTEC promptly of any and all 

infringements, limitations, simulations, illegal uses, or misuses of 

the ARTEC Marks, patents, and other intellectual property rights, 

Distributor shall forward to ARTEC any inquiries regarding the 

Products received from Customers located outside the Territory.

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Docket No. 90-1. Plaintiff alleges that Axon violated this section by failing to promptly notify 

Artec of infringements and misuses of Artec‟s intellectual property. FAC ¶ 182. 

Axon again argues that Plaintiff failed to adequately identify the “Confidential 

Information” at issue. To the extent Plaintiff‟s claim for breach of Section 2.11 is based on 

Axon‟s alleged use of Artec‟s Broadway 3D mark, the Court finds the allegations in the complaint 

sufficient. To the extent Plaintiff‟s claim is based on the disclosure of unidentified “Confidential 

Information” in the scanner products, the claim is dismissed with leave to amend. 

5. Implied Covenant of Good Faith and Fair Dealing

To establish a breach of an implied covenant of good faith and fair dealing, a plaintiff must 

establish the existence of a contractual obligation, along with conduct that frustrates the other 

party‟s right to benefit from the contract. See Racine & Laramie v. Dep’t of Parks & Rec., 11 

Cal.App.4th 1026, 1031 (1992). Plaintiff alleges that Artec breached the implied covenant by 

secretly engaging in the purchase of devices that A-Star “unlawfully stole or replicated,” thereby 

frustrating Artec‟s ability to benefit from the NDA – which prohibits Axon from distributing 

products that “similar to or competitive with” Artec‟s products and requires Axon to keep Artec 

informed of such sales. FAC ¶¶ 11, 55, 127-19. These allegations are sufficient to plead a cause 

of action. See Gonzalez v. JP Morgan Chase Bank, N.A., No. C-14-2558 EMC, 2014 U.S. Dist. 

LEXIS 152674, at *19-20 (N.D. Cal. Oct. 28, 2014) (stating that “[t]he covenant of good faith and 

fair dealing is implied by law into every contract, functioning „as a supplement to the express 

contractual covenants, to prevent a contracting party from engaging in conduct which (while not 

technically transgressing the express covenants) frustrates the other party‟s rights to the benefits of 

the contract‟”); Basic Research, LLC v. Rath, No. C-09-00942 RMW, 2009 WL 3064771, at *2-3 

(N.D. Cal. Sept. 24, 2009) (finding allegations that “because the explicit terms of the agreements 

require Rath to cease the sale and marketing of Relacor products, Rath is frustrating the plaintiffs‟ 

right to realize the benefits of the settlement agreement by maintaining and acquiring foreign 

trademarks and registrations using „rel‟ and „cor‟” sufficient at pleading stage). Plaintiff is 

permitted to plead claims in the alternative. Fed. R. Civ. Proc. 8(d)(2). This Court notes that the 

contours of the NDA appear to be in dispute, and declines to dismiss Plaintiff‟s implied covenant 

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claim is duplicative at this stage of the litigation. 

B. Non-Contract Claims

Plaintiff‟s non-contract claims are dismissed as preempted by the California Uniform 

Trade Secrets Act. The CUTSA supersedes other civil remedies based on trade secret 

misappropriation. See Cal. Civ. Code § 3426.7(b)(2) (“This title does not affect ... other civil 

remedies that are not based upon misappropriation of a trade secret.”). “CUTSA‟s 

„comprehensive structure and breadth‟ suggests a legislative intent to occupy the field,” and the

CUTSA preempts common law claims that are “„based on the same nucleus of facts as the 

misappropriation of trade secrets claim for relief.‟” K.C. Multimedia, Inc. v. Bank of Am. Tech. & 

Operations, Inc., 171 Cal.App.4th 939, 954-58 (2009); see NetApp, Inc. v. Nimble Storage, Inc., 

41 F. Supp. 3d 816, 839 (N.D. Cal. 2014) (noting that federal courts have follow the same rule). 

“CUTSA provides the exclusive civil remedy for conduct falling within its terms.” Silvaco Data 

Sys. v. Intel Corp., 184 Cal.App.4th 210, 236 (2010, overruled on other grounds by Kwikset Corp. 

v. Superior Court, 51 Cal.4th 310, 120 (2011).

In this case, Plaintiff‟s remaining claims are based on the same nucleus of facts as its 

misappropriation of trade secrets claim:

 ¶ 189: alleging unjust enrichment through “unauthorized use of ARTEC‟s Trade Secrets 

and Confidential Information;” 

 ¶ 213: alleging conversion through defendants‟ taking of “ARTEC‟s Confidential 

Information to their use”;

 ¶ 253: alleging civil conspiracy to misappropriate “Trade Secrets and Confidential 

Information of ARTEC and affiliated companies; and using such Trade Secrets and 

Confidential Information to tortiously interfere with the contractual relationships existing 

between ARTEC and various distributors and end customers;”

 ¶ 265: alleging constructive trust through “the actions taken to compete against Artec and 

to profit from the unauthorized sale of Artec Devices and devices based on Trade Secrets 

and Confidential Information;” and

 ¶ 283: alleging unfair competition through “tortious interference with the Employment 

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Agreements and NCIAs of ARTEC employees; the misappropriation of ARTEC‟s Trade 

Secrets and Confidential Information, vendor and distributor information, and customer 

information; and the unauthorized manufacture and sale of devices or products identical or 

substantially similar to ARTEC Devices.”

Because the Court finds Plaintiff‟s claims for unjust enrichment, conversion, civil conspiracy, 

constructive trust, and unfair competition preempted, the Court does not reach Axon‟s remaining 

arguments in favor of dismissal.

Plaintiff argues that its claims based on “the misappropriation of otherwise confidential or 

proprietary, but not trade secret, information” should not be preempted. Leatt Corp. v. Innovative 

Safety Tech., LLC, No. 09-CV-1301-IEG (POR), 2010 WL 2803947, at *6 n.5 (S.D. Cal. July 15, 

2010) (“A careful reading of the Silvaco decision reveals that it does not undermine the conclusion 

that the UTSA only preempts additional claims that depend on the misappropriation of a trade 

secret.”). The Court is not persuaded by the reasoning in Leatt. In Silvaco, the California Court of 

Appeal 

emphatically reject[ed] the . . . suggestion that the uniform act was 

not intended to preempt “common law conversion claims based on 

the taking of information that, though not a trade secret, was 

nonetheless of value to the claimant.” On the contrary, a prime 

purpose of the law was to sweep away the adopting states‟ 

bewildering web of rules and rationales and replace it with a 

uniform set of principles for determining when one is – and is not –

liable for acquiring, disclosing, or using “information . . . of value.” 

Central to the effort was the act‟s definition of a trade secret. 

Information that does not fit this definition, and is not otherwise 

made property by some provision of positive law, belongs to no one, 

and cannot be converted or stolen. By permitting the conversion 

claim to proceed on a contrary rationale, the Cenveo court impliedly 

created a new category of intellectual property far beyond the 

contemplation of the act, subsuming its definition of “trade secret” 

and effectively obliterating the uniform system it seeks to generate.

184 Cal. App. 4th at 239 n.22 (emphasis in original). “The majority of district courts that have 

considered Silvaco have held that CUTSA supersedes claims based on the misappropriation of 

information that does not satisfy the definition of trade secret under CUTSA.” SunPower, 2012 

WL 6160472, at *6 (collecting cases); see also Total Recall Techs. v. Luckey, No. C 15-02281 

WHA, 2016 WL 199796, at *8 (N.D. Cal. Jan. 16, 2016) (“to the extent Total Recall‟s claims rely 

on the alleged misappropriation of Confidential Information, any such claims are superseded by 

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CUTSA”). This Court, therefore, is persuaded that Plaintiff‟s claims based on its non-trade secret 

proprietary information are superseded. 

The Court also rejects Plaintiff‟s argument that preemption should not apply because 

Plaintiff does not assert a trade secrets misappropriation claim against Axon. “[S]uch a rule would 

defeat preemption by allowing plaintiffs to intentionally omit CUTSA claims in favor of other 

claims.” NetApp, 41 F. Supp. 3d at 840.

III. CONCLUSION

For the reasons stated herein, Axon‟s motion to dismiss Counts 4 and 7 is DENIED, 

except to the extent such claims depend on the alleged disclosure of unidentified “Confidential 

Information.” Axon‟s motion to dismiss Counts 5, 7, 8, 13, 14, and 16 is GRANTED. Plaintiff 

is granted thirty days leave to amend. 

This order disposes of Docket No. 125.

IT IS SO ORDERED.

Dated: December 8, 2016

______________________________________

EDWARD M. CHEN

United States District Judge

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