Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca4-06-02297/USCOURTS-ca4-06-02297-0/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 

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PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

OTHENTEC LIMITED; OTHENTEC LTD; 

EC4 TECHNOLOGIES LIMITED,

Plaintiffs-Appellants,

v.  No. 06-2297

JEFFREY PHELAN; MARK W. MARTENS;

EC4 TECHNOLOGIES, INCORPORATED,

Defendants-Appellees. 

Appeal from the United States District Court

for the Eastern District of Virginia, at Alexandria.

Claude M. Hilton, Senior District Judge.

(1:06-cv-00186-CMH)

Argued: January 31, 2008

Decided: May 12, 2008

Before NIEMEYER and SHEDD, Circuit Judges, and

Patrick Michael DUFFY, United States District Judge for the

District of South Carolina, sitting by designation.

Affirmed by published opinion. Judge Duffy wrote the opinion, in

which Judge Niemeyer and Judge Shedd joined. 

COUNSEL

ARGUED: Jerry William Boykin, WOMBLE, CARLYLE, SANDRIDGE & RICE, Tysons Corner, Virginia, for Appellants. John F.

Mardula, ROBERTS, MARDULA & WERTHEIM, L.L.C., Reston,

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Virginia, for Appellees. ON BRIEF: Virginia W. Hoptman, Erin L.

Roberts, WOMBLE, CARLYLE, SANDRIDGE & RICE, Tysons

Corner, Virginia, for Appellants. Shauna M. Wertheim, ROBERTS,

MARDULA & WERTHEIM, L.L.C., Reston, Virginia, for Appellees.

OPINION

DUFFY, District Judge: 

Appellants Othentec Limited, Othentec Ltd., and EC4 Technologies Limited appeal the district court’s grant of summary judgment

for Appellees Jeffrey Phelan, Mark Martens, and EC4 Technologies,

Incorporated. Appellants challenge the district court’s grant of summary judgment on the grounds that they had established issues of

material fact on their claims under the Virginia Computer Crimes Act

and the Virginia Uniform Trade Secrets Act. We find no error in the

ruling of the district court, and uphold its entry of summary judgment.

I.

Jerry Nims ("Nims") is an entrepreneur who began researching and

working with lenticular optical imaging technology in the 1970s. (J.A.

at 723.) Over the course of many years, Nims obtained a number of

patents and formed a number of corporations to market this technology. (J.A. at 595.) This technology was of particular use in making

identification cards that were difficult to tamper with or counterfeit.

One key component of Nims’ technological innovations is "the cylinder," which cuts three-dimensional images into plastic. (J.A. at 722-

23.) 

One of the corporations Nims started was Orasee ("Orasee"), which

owned patents on many technologies Nims had developed. In 2003,

EC4 Technologies Limited ("EC4 UK") was formed as a whollyowned subsidiary of Orasee to market Nims’ technologies. (J.A. at

691.) On May 7, 2004, Orasee entered into an agreement with EC4

UK which gave EC4 UK the exclusive right to license the technological innovations owned by Orasee. (J.A. at 52.) 

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In April 2005, Othentec Ltd. ("Othentec UK") was set up as a subsidiary of EC4 UK (90% of Othentec UK was owned by EC4 UK)

to market Orasee’s technologies, specifically in the area of authentication. (J.A. at 25.) Defendant Jeffrey Phelan ("Phelan"), who is Nims’

son-in-law, was picked to run these subsidiary corporations. Phelan

was appointed to be Managing Director of both EC4 UK and

Othentec UK. (J.A. at 683.) 

Othentec UK leadership determined that the company needed to

take steps to further distribution of its products in the United States

market. Phelan was put in charge of this project. On March 17, 2005,

EC4 Technologies, Incorporated ("EC4 USA") was formed by Phelan, and incorporated under Delaware law. Id. Phelan became the

CEO of this corporation. (Appellants’ Br. at 8.) A sublicense agreement was struck between EC4 USA and EC4 UK in April 2005 that

provided that EC4 USA could market and distribute Orasee technology in the U.S.1

Phelan sought, and obtained, money from investor Lantson Eldred

("Eldred") to further the American distribution efforts. (J.A. at 575.)

Eldred was also in contact with Ronald Doeve ("Doeve"), who was

counsel and director for Othentec, and a confidant of Nims, regarding

his investment (J.A. at 575; 683.) During that summer, Eldred was

issued shares of stock in EC4 USA. (J.A. at 684-85.) 

In August 2005, Phelan hired Mark W. Martens ("Martens") as the

Director of Operations for Othentec UK. (J.A. at 670.) 

In November 2005, Othentec Limited ("Othentec USA") was

formed as a Virginia corporation, also for the purpose of distributing

Orasee technology in the U.S. (J.A. at 684.) Othentec USA was

wholly owned by Othentec UK. (J.A. at 24.) 

From September 2005 to January 2006, five separate withdrawals,

1Appellants claim that the deal was actually struck during the summer

of 2005, but was fraudulently backdated to April 12, 2005, to predate the

licensing agreement between EC4 UK and Othentec UK. (J.A. at 683-

84.) 

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totaling nearly $385,000,2

 were made from an Othentec UK bank

account to fund the American venture. All but the final withdrawal

were made electronically. (J.A. at 835; 857-58.) All withdrawals were

requested by Phelan, and all funds were actually withdrawn and wired

to Phelan by Bhisham Dindyal ("Dindyal"), who held the position of

secretary with both Othentec UK and EC4 UK, and who was a signatory on the account. (J.A. at 860-67.) For at least some of the withdrawals, Doeve also gave his approval through email. Id.

During this time period, Phelan had been at least somewhat successful in marketing the identification card authenticating technology

in the United States, as deals were struck with DynCorp and CrossMatch to aid in the manufacturing of identification cards and driver’s

licenses in foreign nations (J.A. at 780.) These companies entered into

contracts with EC4 USA. 

By early 2006, a considerable amount of friction had developed

between Phelan and the rest of the leadership of Othentec UK, including Nims and Doeve. An Othentec UK shareholder meeting was called for January 26, 2006, at which time Phelan was discharged from

his positions as Managing Director of Othentec UK and Othentec

USA. (J.A. at 600-01.) Phelan and Martens have continued to do business in the United States as EC4 USA. (J.A. at 604.) 

For their part, Appellants claim that Phelan was picked to head up

the effort to market and distribute Orasee’s technology in the United

States. To this end, Appellants claim that Phelan was clearly and

explicitly authorized and instructed to form Othentec USA as

Othentec UK’s American branch. (Appellants’ Br. at 8.) Appellants

assert that Phelan was never authorized to found EC4 USA, and that

he did so on his own initiative, without permission, consent, or

2The withdrawals were as follows: 

September 8: $29,980

October 6: $160,000

November 15: $40,000

November 30: $75,000

January 3: $80,000

(J.A. at 835; 857-58.) 

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knowledge from any other parties involved in Othentec UK. Id.

Appellants claim that when they did learn of EC4 USA’s existence in

summer 2005, they had no knowledge that it was (a) actively marketing Orasee technology in the United States, and (b) that it was diverting funds from Othentec UK for this purpose. Id.

According to Appellants, Doeve had to do all the work himself to

incorporate Othentec USA in Virginia, since Phelan had failed to do

this as instructed. Id. at 9. When Appellants were told by the investor

Eldred in July 2005 that he had been putting money into EC4 USA,

they claim that they confronted Phelan about this, but that Phelan lied

and told them that was only Eldred’s "wish list" and that no money

had actually been received. Id.

Regarding the financial withdrawals from Othentec UK’s bank

account, Appellants claim that they signed off on all withdrawals

because they believed it was going to Othentec USA. Appellants specifically claim that "Doeve was unaware that any funds were being

transferred to or used by EC4 USA, a U.S. corporation not affiliated

with Othentec UK or EC4 UK. EC4 US[A] was not identified in these

requests, which appeared to be for transfers to an Othentec account."

Id. at 11. 

Appellants claim that it was not until December 2005, when an

Othentec UK accountant was trying to reconcile certain finances

before the end of the year and obtained a bank record of an account

registered to EC4 USA, that they realized that Phelan had been using

Othentec UK money to finance EC4 USA. Id.

Appellants allege that in December 2005, they learned that Phelan

had, unbeknownst to anyone else at Othentec UK, directly contacted

Orasee investors and made statements critical of Nims in order to

undermine Nims. Id. at 12. After Phelan requested another withdrawal

in the amount of $190,000,3 Appellants denied this request, and

3There is no objective evidence of a $190,000 request anywhere in the

record. In Nims’ deposition, he stated, "I believe there are documents

that you ought to have in your record, because I seem to recall seeing

them, of Jeffrey’s e-mail and his break-out list of where the 190,000 was

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informed Phelan that $45,000 was all they could give him. (J.A. at

728.) After this incident, Appellants allege that Phelan refused to

attend a meeting in Atlanta to discuss the financial statuses of the various corporate entities involved. (Appellants’ Br. at 12.) 

Essentially, then, Appellants’ claims are that Phelan, assisted by

Martens, abused his position of power and trust with Orasee, EC4

UK, and Othentec UK to fraudulently form EC4 USA as a corporation that only he had control over, and to then proceed to use both

Othentec UK’s money and its trade secrets to start a successful business in which EC4 UK, Othentec UK, and Othentec USA had neither

control nor a financial stake. 

According to Appellees, however, Phelan was expressly authorized

to form EC4 USA, and Nims, Doeve, and others at Othentec UK were

fully informed of and involved in this process. (Appellees’ Br. at 6.)

In the fall of 2005, Appellees claim that they discovered that many

of Orasee’s useful patents had been abandoned by Nims’ "failure to

prosecute and perfect application and failure to pay the required maintenance fees." Id. at 7. Phelan claims that upon discovering this, he

worried that this may have a material impact on the long-term viability of the various corporations involved, as well as possibly rendering

material statements made to investors false. Id. at 8. When Phelan

tried to question Nims about this, he claims that Nims became

enraged, and out of retribution, called the January shareholders meeting (without providing notice to Phelan, even though Phelan was a

shareholder) and had Phelan removed from his positions with EC4

UK and Othentec UK. Id.

At this point, Phelan asserts that Eldred still wanted to fund EC4

USA to protect his existing investment. Id. at 9. However, Appellees

going generally." (J.A. at 728.) Nims may have in fact been referring to

an e-mail sent by Phelan to Dindyal on December 8, 2005, requesting

$128,861.00, and giving a breakdown of where that money would be

going. (J.A. at 865.) On December 14, Doeve responded via a memorandum to Phelan informing him that he would be receiving $45,000. (J.A.

at 867.) 

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claim that since most of Othentec’s useful patents had expired, and

that the Orasee technology was mostly based on obsolete photographic and printing technology and techniques instead of more modern computerized technology, there was no market for Orasee’s

technology. In accordance with Eldred’s wishes, EC4 USA then had

to "start from scratch" and develop new technology on its own to

compete in the market for tamper-proof identification cards. Id. at 9-

10. Defendants claim that they have developed this new technology

on their own, and this is what EC4 USA uses today. 

Appellants initially brought this action on February 17, 2006, filing

claims against Appellees for: (1) violating the Computer Fraud and

Abuse Act ("CFAA"), 18 U.S.C. § 1030(a)(4); (2) violating the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.

§ 1961, et seq.; (3) violating the Virginia Computer Crimes Act

("VCCA"), Va. Code § 18.2-152.3; (4) violating the Virginia Uniform

Trade Secrets Act ("VUTSA"), Va. Code § 59.1-336; and (5) breach

of fiduciary duty. (J.A. at 23.) In response, Appellees asserted four

state-law counterclaims, none of which is germane to the issues

before this court. 

On July 21, 2006, the Defendants moved for summary judgment.

(J.A. at 322.) The court deferred consideration of this motion until

after discovery had been completed. (J.A. at 507.) Defendants then

renewed this motion for summary judgment on September 28, 2006.

(J.A. at 522.) On September 29, the Plaintiffs filed a motion for summary judgment of their own. (J.A. at 634.) 

On October 20, the district court judge, The Honorable Claude M.

Hilton, held a hearing at which he granted the motion for summary

judgment, stating that "there simply isn’t any evidence" to support the

VCCA claim and that "there is no evidence in this case to go forward"

on the VUTSA claim, and thus dismissed them both. (J.A. at 1181-

82.) He also ruled that there was insufficient evidence to support the

two federal causes of action, and therefore granted summary judgment on the CFAA and RICO claims as well. (J.A. at 1181-82.) This

left only the breach of fiduciary duty claim and the four counterclaims

to be adjudicated. 

At this point, the case was transferred to Senior District Judge The

Honorable Leonard D. Wexler, who was sitting by designation from

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the Eastern District of New York. After determining that the breach

of fiduciary duty claim and all four counterclaims were exclusively

governed by state law, Judge Wexler determined that the federal

courts no longer had subject matter jurisdiction over these claims and

declined to exercise supplemental jurisdiction. (J.A. at 1196.) 

On December 5, 2006, Plaintiffs filed a Notice of Appeal regarding

the district court’s decision to grant Defendants’ Motion for Summary

Judgment. (J.A. at 1197.) Plaintiffs amended this Notice on December

7. (J.A. at 1199.) Plaintiffs are not pursuing an appeal of the district

court’s grant of summary judgment on the RICO and CFAA claims,

and are only claiming that summary judgment was wrongfully

granted on the VCCA and VUTSA causes of action. 

II.

"We review a district court’s grant of a motion for summary judgment de novo." Castillo v. Emergency Med. Assocs., P.A., 372 F.3d

643, 646 (4th Cir. 2004). "Rule 56(c) of the Federal Rules of Civil

Procedure requires that the district court enter judgment against a

party who, ‘after adequate time for discovery . . . fails to make a

showing sufficient to establish the existence of an element essential

to that party’s case, and on which that party will bear the burden of

proof at trial.’ " Stone v. Liberty Mut. Ins. Co., 105 F.3d 188, 190 (4th

Cir. 1997) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322

(1986)). "To prevail on a motion for summary judgment, a party must

demonstrate that: (1) there is no genuine issue as to any material fact;

and (2) it is entitled to judgment as a matter of law." Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986)). 

The nonmoving party "cannot create a genuine issue of material

fact through mere speculation or the building of one inference upon

another." Beale v. Hardy, 769 F.2d 213, 214 (4th Cir. 1985). Rather,

a nonmoving party must produce some evidence (more than a "scintilla") "upon which a jury could properly proceed to find a verdict for

the party producing it, upon whom the onus of proof is imposed."

Anderson, 477 U.S. at 251 (quoting Improvement Co. v. Munson, 14

Wall. 442, 448 (1872)). 

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III.

The three elements of committing a violation of the VCCA are,

according to the statute, (1) using a computer or computer network (2)

without authority (3) intending to obtain, embezzle, or convert the

property of another. Va. Code Ann. § 18.2-152.3. 

Simply put, Appellants have produced no evidence outside of selfserving speculation that Appellees committed a violation of the

VCCA. The district court ruled that "there simply isn’t any evidence

here to go forward with the unauthorized use of computers to commit

a crime." (J.A. at 1181.) We agree. 

The evidence shows that Phelan was clearly authorized to access

the Othentec UK bank account. Furthermore, Phelan’s use of a computer was merely incidental to the withdrawal of the money. Phelan

did not directly withdraw the money from the account himself with

the use of a computer. Phelan would send an email, and on one occasion a physical letter, to Dindyal requesting that the money be withdrawn, and then Dindyal would withdraw the money and send it to

Phelan. (J.A. at 860-67.) Doeve himself actually signed off on many

of these withdrawals as well. Id.

Appellants have also failed to produce any evidence that they disapproved of what Phelan was doing during the time period in question. EC4 USA was incorporated under Delaware law on March 17,

2005. (J.A. at 683.) During the summer of 2005, Phelan was in contact with Eldred regarding investing in EC4 USA, and Eldred contacted Doeve and others at Othentec UK and explicitly told them he

had been investing money in EC4 USA. Id. The withdrawals in question began in September 2005. 

By their own admission, Appellants were aware by November

2005 at the latest that they knew that Phelan had not set up Othentec

USA as they claim he had been instructed to do. (J.A. at 684.) Despite

this, Phelan continued to make withdrawals from the account, including a request made on November 28 for $75,000 that was explicitly

approved by Doeve. (J.A. at 862-63.) The objective evidence in this

case, then, shows that Appellants were aware of EC4 USA’s existence, aware that Othentec USA had not been founded, and were

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aware that Phelan was withdrawing money from the Othentec UK

account. 

While Appellants persist in their claim that they were not aware

that Phelan was using the money to run EC4 USA instead of Othentec

USA, Appellants "cannot create a genuine issue of material fact

through mere speculation or the building of one inference upon

another." Beale, 769 F.2d at 214. In the present case, that is precisely

what Appellants attempt to do, as they have produced no factual evidence that Phelan used a computer to withdraw funds he was not

authorized to withdraw for an illegal or unauthorized purpose.

Accordingly, the district court’s ruling that "there simply isn’t any

evidence here to go forward with the unauthorized use of computers

to commit a crime" is correct, and we uphold the district court’s entry

of summary judgment on Appellants’ VCCA claim.

IV.

The Virginia Uniform Trade Secrets Act ("VUTSA") makes it illegal for a person to misappropriate trade secrets from another. Va.

Code Ann. § 59.1-336. The statute defines "trade secret" as:

information, including but not limited to, a formula, pattern,

compilation, program, device, method, technique, or process

that: (1) Derives independent economic value, actual or

potential, from not being generally known to, and not being

readily ascertainable by proper means by, other persons who

can obtain economic value from its disclosure or use, and

(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 

Id. The statute defines "misappropriation" as:

Disclosure or use of a trade secret of another without

express or implied consent by a person who (a) Used

improper means to acquire knowledge of the trade secret; or

(b) At the time of disclosure or use, knew or had reason to

know that his knowledge of the trade secret was (1) Derived

from or through a person who had utilized improper means

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to acquire it; (2) Acquired under circumstances giving rise

to a duty to maintain its secrecy or limit its use; (3) Derived

from or through a person who owed a duty to the person

seeking relief to maintain its secrecy or limit its use; or (4)

Acquired by accident or mistake.

Id.

Appellants assert that their developments in lenticular imaging

technology were developed by Nims on a proprietary basis and had

economic value from being a method of making tamper-proof identification cards that was not widely known. (Appellants’ Br. at 20-21.)

Appellants also allege that, as Managing Director of both Othentec

UK and EC4 UK, Phelan was intimately familiar with Orasee’s lenticular imaging technology, and that upon starting EC4 USA, he used

this technology even though he was under a fiduciary duty to

Othentec UK to limit the use of such technology. 

The district court granted summary judgment for Appellees on

Appellants’ VUTSA claim, ruling that "I find that there is no evidence in this case to go forward that any trade secret was taken and

used." (J.A. at 1182.) 

Appellants have failed to produce any objective evidence that

Appellees misappropriated any of Appellants’ trade secrets and used

them for EC4 USA. During deposition testimony, Doeve conceded

that they had no evidence of this, only inference:

Q: [S]o you don’t know whether any Othentec U.K.’s proprietary and highly confidential software is being used today

by EC4 U.S.?

A: Do I know dispositively? No. Do I have my suspicions? Yes. But, no, in answer to your question, I do not

know dispositively what specific lines of code are being

used.

Q: And do you know what manufacturing process is being

used by EC4 U.S.?

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A: All of my responses—the answer is no. Let me explain.

All of my responses are based upon the fact that all of the

work that had been imparted from EC4, from Orasee—EC4

U.K., Orasee, and Othentec U.K. under license is how EC4,

Inc., and it’s the only way EC4, Inc., could be where it is

today. 

So unless someone is foolish enough to believe that all

that was developed in a clean-room environment without

reference to, use of, or attempting to work around, I have no

other basis for what I’m stating.

(S.J.A. at 445-46.) 

Appellants have not shown any evidence that Appellees were, in

fact, using the cylinder, or any manufacturing processes associated

with the cylinder, in making identification cards. In trying to survive

a motion for summary judgment, the nonmoving party "cannot create

a genuine issue of material fact through mere speculation or the building of one inference upon another." Beale, 769 F.2d at 214. As with

their claim against Appellees under the VCCA, Appellants’ claim

under the VUTSA relies exclusively on allegations and inferences

instead of any sort of actual objective evidence. While Phelan and

Martens did work for Othentec and thus did have access to trade

secrets, Appellants were unable to produce any evidence, even after

discovery, that EC4 USA was using such trade secrets. Appellants’

allegations, speculation, and inference are not enough to survive summary judgment. Accordingly, we uphold the district court’s ruling

that "there is no evidence in this case to go forward that any trade

secret was taken and used." (J.A. at 1182.)

V.

Based on the reasoning above, we affirm the district court’s entry

of summary judgment for Appellees.

AFFIRMED

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