Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-04615/USCOURTS-cand-5_05-cv-04615-9/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1331 Fed. Question

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 This disposition is not designated for publication and may not be cited.

Case No. C 05-04615JF 

ORDER GRANTING THE MOTION TO DISMISS

(JFEX1)

**E-Filed 06/26/06**

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

AIRDEFENSE, INC.,

 Plaintiff,

 v.

AIRTIGHT NETWORKS, INC.,

 Defendant.

Case Number C 05-04615JF

ORDER1 GRANTING THE MOTION

TO DISMISS 

[re: docket no. 43]

Defendant AirTight Networks, Inc. (“AirTight”) moves to dismiss claims two through

seven alleged by Plaintiff AirDefense, Inc. (“AirDefense”) for failure to state a claim upon which

relief may be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6). AirDefense opposes

the motion. The Court heard oral argument on July 14, 2006. For the reasons set forth below,

the Court will grant the motion with leave to amend.

I. BACKGROUND

AirDefense filed its original complaint on November 9, 2005 and the operative First

Amended Complaint (“FAC”) (corrected version) on June 1, 2006. The FAC alleges seven

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Case No. C 05-04615 JF

ORDER GRANTING THE MOTION TO DISMISS

(JFEX1)

claims for relief: (1) Misappropriation of Trade Secrets, Cal. Civ. Code §§ 3426, et seq.; (2)

Unfair Competition, Common Law; (3) Unfair Competition, Cal. Bus. & Prof. Code §§ 17200-

09; (4) Intentional Interference with Contractual Relations; (5) Intentional Interference with

Prospective Economic Advantage; (6) Conversion; and (7) Unjust Enrichment. 

AirDefense alleges the following. In 2001, AirDefense began developing, marketing and

selling advanced solutions for controlling airspace, security, policy, and operational support for

wireless fidelity (“Wi-Fi”) networks. AirDefense solutions are configured to work with

numerous vendors, network protocols, and devices. AirDefense alleges that its products have

gained widespread success and won numerous awards.

Current AirDefense customers may access the source code for AirDefense products

pursuant to a contract that prevents them from sharing the products with or providing the

products to third parties. The source code and products are not otherwise available to the open

market. Select AirDefense employees may also access the source code if it is necessary to their

job functions. Resellers of AirDefense products are prohibited contractually from disclosing or

selling AirDefense’s confidential information, including the software, source code, and products,

to anyone other than those who need the information and who agree to maintain confidentiality

regarding the product. AirDefense’s protocols and tools are confidential and made available to

employees only as needed. The protocols and tools are unavailable to any other entity, including

current customers. 

AirDefense alleges that it has spent a substantial amount of time, effort, and money

creating, developing, and maintaining its customer lists and prospective customer lists. These

lists are confidential and are considered by AirDefense to be among its most valuable trade

secrets. Access to the customer lists is limited to a select group of AirDefense employees and is

never shared with anyone outside of AirDefense. 

Scott Strelitz (“Strelitz”), a former salesperson for AirDefense, left AirDefense on or

about June 30, 2005. AirDefense alleges that Strelitz provided confidential customer lists and

prospective customer lists to Steve Skordilis (“Skordilis”), an AirTight salesperson, on or about

September 6, 2005. This exchange is alleged to have taken place at a reseller event where

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Case No. C 05-04615 JF

ORDER GRANTING THE MOTION TO DISMISS

(JFEX1)

Skordilis extracted the confidential information from a Universal Serial Bus (“USB”) key

provided by Strelitz. Skordilis subsequently provided this information to Brad Taylor (“Taylor”),

Vice President of Sales for AirTight. 

AirDefense alleges that AirTight has been “actively” soliciting the entities listed on

AirDefense’s customer lists. AirDefense believes that AirTight has been contacting

AirDefense’s customers and offering to replace AirDefense’s products with those of AirTight. 

Furthermore, AirTight is representing to customers that it is replacing AirDefense as the supplier

of “Wireless Intrusion Protection Systems” to other customers, a representation that AirDefense

alleges is false. AirDefense further alleges that Strelitz also provided AirTight employees with

specific customer information related to AirDefense’s products, such as product functionality and

performance, and its dealings with current and prospective customers as they relate to such

products. 

On October 5, 2004, Strelitz signed an offer letter with AirDefense. The letter stated that

the offer was “contingent upon [him] signing the Company’s Confidentiality Agreement.” On

October 6, 2004, Strelitz signed the “Confidentiality Agreement,” which provides that he is

prohibited from giving any trade secrets or confidential information to others. The agreement

also stated that upon termination he was not to take with him any of AirDefense’s documents,

data, programs or customer lists. AirDefense alleges that both Skordilis and AirTight were

aware of Strelitz’s confidentiality agreement, and that AirTight “induced” Skordilis to share the

information with Strelitz and other AirTight employees. 

II. LEGAL STANDARD

For purposes of a motion to dismiss, the plaintiff’s allegations are taken as true, and the

Court must construe the complaint in the light most favorable to the plaintiff. Jenkins v.

McKeithen, 395 U.S. 411, 421 (1969). Leave to amend must be granted unless it is clear that the

complaint’s deficiencies cannot be cured by amendment. Lucas v. Department of Corrections,

66 F.3d 245, 248 (9th Cir. 1995). When amendment would be futile, however, dismissal may be

ordered with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996). 

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ORDER GRANTING THE MOTION TO DISMISS

(JFEX1)

II. DISCUSSION

Although AirTight moves to dismiss claims two through seven, AirTight does not seek to

dismiss claim one, for misappropriation of trade secrets under California Civil Code § 3426. 

AirTight argues that claims two through seven allege either (1) the misuse of non-public, secret

information, which is preempted by the California Trade Secrets Act (“CUTSA”), or (2) the

misuse of non-secret business information, as to which the claims are precluded by the

Supremacy Clause and the Business and Professions Code § 16600. AirTight alternatively

argues that claims five, six, and seven fail to allege the requisite elements of the torts upon which

the claims are based. 

A. Preemption by California’s Uniform Trade Secrets Act

“California has adopted without significant change the Uniform Trade Secrets Act.” 

DVD Copy Control Ass’n, Inc. v. Bunner, 31 Cal. 4th 864, 874 (2003). The primary purpose of

California’s trade secret law “is to promote and reward innovation and technological

development and maintain commercial ethics.” Id. at 878. The enactment of the CUTSA

provided “‘unitary definitions of trade secret and trade secret misappropriation, and a single

statute of limitations for the various property, quasi-contractual, and violation of fiduciary

relationship theories of noncontractual liability utilized at common law.’” American Credit

Indemnity Co. v. Sacks, 213 Cal. App. 3d 622, 630 (1989) (quoting Commissioners’ Prefatory

Note to Uniform Trade Secrets Act, 14 West (U.L.A.) 537, 538). Federal courts have interpreted

the CUTSA as superseding common law claims of misappropriation. See Cacique, Inc. v. Robert

Reiser & Co., Inc., 169 F.3d 619, 624 (9th Cir. 1999); Digital Envoy, Inc. v. Google, Inc., 370 F.

Supp. 2d 1025, 1034-35 (N.D. Cal. 2005) (holding that unfair competition and unjust enrichment

were preempted by the CUTSA because these claims were based on the “identical facts alleged in

its claim for misappropriation of trade secrets”); AccuImage Diagnostics Corp. v. Terarecon,

Inc., 260 F. Supp. 2d 941, 953 (N.D. Cal. 2003); Callaway Golf Co. v. Dunlop Slazenger Group

Americas, Inc., 318 F. Supp. 2d 216, 219 (D. Del. 2004) (holding that the CUTSA “preempts

common law claims that ‘are based on misappropriation of a trade secret’”); B. Braun Medical,

Inc. v. Rogers, 163 Fed. Appx. 500, 508 (9th Cir. 2006) (stating that the language of CUTSA

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“has been interpreted to mean that the CUTSA was intended to occupy the field [of trade secret

misappropriation] in California”). The California Court of Appeals also has suggested that

common law claims for trade secret misappropriation are preempted by the CUTSA. See Balboa

Ins. Co. v. Trans Global Equities, 218 Cal. App. 3d 1327, 1345 n.22 (1990) (holding that

because the complaint had been filed before the CUTSA was enacted, common law applied). 

At the same time, the CUTSA “does not supersede any statute relating to

misappropriation of a trade secret, or any statute otherwise regulating trade secrets” unless it is

expressly provided for in the statute, California Civil Code § 3426.7(a), and it “does not affect 

. . . other civil remedies that are not based upon misappropriation of a trade secret . . . .” Cal.

Civ. Code § 3426.7(b). Accordingly, courts have inferred that claims arising out of facts similar

to, but distinct from, those underlying a claim for misappropriation of trade secret are not

preempted. See Digital, 370 F. Supp. 2d at 1034-35 (distinguishing the situation at issue in

Digital from prior cases, such as PostX, PostX Corp. v. Secure Data, 2004 WL 2663518, because

those prior cases dealt with claims not “premised on precisely the same nucleus of facts”).

AirTight argues that to the extent that claims two through seven allege misuse of nonpublic, secret information, they are preempted by the CUTSA because they are duplicative of the

claim for trade secret misappropriation. AirDefense acknowledges the CUTSA preempts some

common law claims, but argues that the CUTSA does not preempt all common law or statutory

causes of action that relate to the trade secret. AirDefense argues that its alternative claims are

not preempted because they arise out of factual allegations distinct from those that give rise to the

claim for trade secret misappropriation. 

AirDefense requests that the Court defer a decision as to whether the claims are

preempted by the CUTSA until it makes a preliminary determination as to whether AirDefense’s

confidential information constitutes a trade secret. AirDefense relies on Callaway Golf, which

states that: “[E]ven if [the] claims for patent title, conversion, and unjust enrichment are

preempted by [the CUTSA], it may plead in the alternative, or assert alternative recoveries, in the

event that certain information does not qualify as a ‘trade secret’ under [the CUTSA].” Callaway

Golf Co. v. Dunlop Slazenger Group Americas, Inc., 295 F. Supp. 2d 430, 437 (D. Del. 2003).

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However, in a later decision, the same court, while acknowledging its previous holding in

Callaway Golf, held that the alternative claims either were based on trade misappropriation and

preempted by the CUTSA or were based on public information that cannot be protected. See

Callaway Golf Co. v. Dunlop Slazenger Group Ams., Inc., 318 F. Supp. 2d 216, 219-21 (D. Del.

2004). During oral argument, counsel for AirDefense pointed out that the court in City Solutions

allowed alternative claims to proceed; however, the court in City Solutions did not address the

issue of preemption. See City Solutions, Inc. v. Clear Channel Commc’ns, 365 F.3d 835 (9th Cir.

2004).

AirDefense also argues that neither the California Supreme Court nor the California

Court of Appeal has addressed which claims are preempted by the CUTSA. However, as

previously discussed, multiple federal courts have determined that claims based on the same

factual allegations as the claim for misappropriation of trade secrets are preempted. Supra pp. 4-

5. Accordingly, it is appropriate for this Court to determine whether claims two through seven

are preempted based on whether they arise from the same allegations as those that give rise to the

claim for misappropriation of trade secrets.

1. Common Law Unfair Competition

The claim for common law unfair competition in California has four elements: (1) a

substantial investment of “time, skill or money in developing its property;” (2) appropriation and

use of the property by another company at little or no cost; (3) the appropriation and use of the

“property was without the authorization or consent . . . ;” and (4) injury by the appropriation and

use. City Solutions, 365 F.3d at 842. AirDefense argues that this claim is based not only on the

information that was misappropriated but also on what AirTight did with the information. 

However, if the information was not misappropriated, AirTight has the right to use it. Thus, the

claim for common law unfair competition is based on the underlying allegation of trade secret

misappropriation and is preempted by the CUTSA. 

2. Unfair Competition, California Business and Professions Code §§ 17200-09

AirDefense bases its claim for unfair competition under California Business and

Professions Code §§ 17200-09 on its allegation that AirTight violated the CUTSA. Section

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17200 allows claims to be brought for “unlawful, unfair or fraudulent” business practices. 

AirDefense argues that AirTight has committed business acts and practices that are “unlawful”

and “unfair,” and that these acts are based on facts other than those giving rise to the

misappropriation of trade secrets, such as “the improper solicitation of AirDefense’s current and

prospective customers and false representations made thereto.” Opposition p. 15. 

Under § 17200, an “unlawful” business practice arises from the violation of another

statute. See Matoff v. Brinker Rest. Corp., 2006 WL 1851442 (C.D. Cal. 2006). Because the

only statute that AirDefense identifies as being violated is the CUTSA, its unfair competition

claim based on “unlawful” business practices is preempted. 

A claim under § 17200 also may be based on an “unfair” business practices. See CelTech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 180 (1999) (holding that

a business practice “may be deemed unfair even if not specifically proscribed by some other

law”). “The word ‘unfair’ in [§ 17200] means conduct that threatens an incipient violation of an

antitrust law, or violates the policy or spirit of one of those laws because its effects are

comparable to or the same as a violation of the law, or otherwise significantly threatens or harms

competition.” Id. at 187. AirDefense alleges that AirTight’s business practices are unfair

because they “impair fair and honest competition and otherwise significantly harm competition in

the market for AirDefense’s products and services.” FAC ¶ 64. However, if the customer lists

are trade secrets, a claim based on their use is preempted by the CUTSA; if the lists are public

information, it is unclear how AirTight’s actions constitute an “unfair” business practice. In

other sections of the FAC, AirDefense alleges that AirTight made false representations, but it is

unclear if AirDefense is relying on these false representations for the unfair competition claim,

and if it is relying on them, it is unclear how the false representations meet the threshold of an

“unfair” business practice. 

Accordingly, the Court concludes that the unfair competition claim as based on an

“unlawful” business practice, is preempted by the CUTSA, and the unfair competition claim

based on an “unfair” business practice is either preempted or insufficient as a matter of law. 

3. Intentional Interference with Contractual Relations

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 The Court held that the claim for common law misappropriation of trade secrets was

preempted by the CUTSA.

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(JFEX1)

AirDefense states that AirTight’s “intentional acts . . . were designed to induce breach or

disruption of this contractual relationship.” FAC ¶ 70. The CUTSA expressly preempts this

claim: “‘Improper means’ includes . . . breach or inducement of a breach of a duty to maintain

secrecy, or espionage through electronic or other means.” Cal. Civ. Code § 3426.1(a). 

AirDefense argues that the claim for intentional interference with contractual relations is not

preempted because the court in AccuImage allowed the plaintiff’s claim for interference with

contractual relations to be dismissed with leave to amend. See AccuImage Diagnostics Corp. v.

Terarecon, Inc., 260 F. Supp. 2d 941, 956 (N.D. Cal. 2003). However, the court in AccuImage

simply did not address preemption as to the claims for interference with contractual relations and

interference with prospective economic advantage; preemption was only raised as a defense to

the claim for common law misappropriation of trade secret.2 Id. at 953-58. AirDefense also

argues that the holding in Powell supports its claim for intentional interference with contractual

relations. See Powell Prods., Inc. v. Marks, 948 F. Supp. 1469 (D. Colo. 1996). Powell,

however, is distinguishable. Courts, other than those applying Colorado law, have generally

interpreted UTSA broadly. See id. at 1474-75. Powell held that the Colorado UTSA “only

preempts common law claims that ‘conflict’ with its provisions.” Id. at 1474. The California

legislature chose not to incorporate the section of the UTSA that included the word “conflicting.” 

See Cal. Civ. Code § 3426.7; See Unif.Trade Secrets Act § 7. While the Colorado UTSA

displaces only “conflicting” law, the CUTSA displaces all claims arising from the

misappropriation of trade secrets except those “expressly provided” for in superseding statutes

and those dealing with criminal and contractual remedies. See Cal. Civ. Code § 3426.7(a)-(b);

see also Colo. Rev. Stat. § 7-74-110(1). Accordingly, the claim for intentional interference with

contractual relations is preempted. 

4. Intentional Interference with Prospective Economic Advantage

The elements for the claim of intentional interference with prospective economic

advantage are: “1) an existing economic relationship or one ‘containing the probability of future

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 However, as discussed below, the Court concludes that AirDefense has failed to allege

adequately the elements of this claim.

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(JFEX1)

economic benefit’; 2) knowledge by the defendant of the relationship; 3) acts by defendant

designed to disrupt the relationship; 4) actual disruption of the relationship; 5) damages

proximately caused by the acts of the defendant.” AccuImage Diagnostics Corp., 260 F. Supp.

2d at 956 (quoting Della Penna v. Toyota Motor Sales, U.S.A., 11 Cal. 4th 376, 380 n.1 (1995)). 

AirDefense alleges that AirTight had knowledge of its economic relationship with its customers

because AirTight “had access to and used AirDefense’s Customer Lists and other customer

specific information that it wrongfully obtained.” FAC ¶ 77. AirDefense also alleges that

AirTight “made false representations to AirDefense’s existing and potential customers

concerning AirDefense products and capabilities and . . . the capabilities of AirTight’s current

and/or future products.” FAC ¶ 80. Because these allegations are additional to the facts alleged

with respect to the claim of misappropriation of trade secrets, this claim is not preempted by the

CUTSA.3

5. Conversion

AirDefense alleges that AirTight “wrongfully converted valuable property belonging to

AirDefense, including AirDefense proprietary and confidential information.” FAC ¶ 83. 

Because this claim is based on the same facts as those underlying the claim for misappropriation

of trade secrets, it is preempted by the CUTSA.

6. Unjust Enrichment

AirDefense alleges that AirTight “received a benefit and unjustly retained and continues

to retain that benefit at the expense of and without compensating AirDefense.” FAC ¶ 86. 

Because this claim also arises from the same facts as the claim for misappropriation of trade

secrets, it also is preempted. 

B. Non-secret information

AirTight also argues that if and to the extent that AirDefense alleges the misuse of nonsecret business information, the claims based on these allegations must be dismissed pursuant to

the Supremacy Clause and Business and Professions Code § 16600. 

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(JFEX1)

1. Supremacy Clause

Pursuant to the Supremacy Clause, U.S. Const. Art. VI, cl. 2, federal law preempts state

law when there is an “express preemption by statute.” Air Conditioning & Refrigeration Inst. v.

Energy Res. Conservation & Dev. Comm’n, 410 F.3d 492, 495 (9th Cir. 2005). Relying on

Sammons, Sammons & Sons v. Ladd-Fab, Inc., 138 Cal. App. 3d 306, 312-13 (1982), AirTight

argues that AirDefense’s claims based on the use of non-secret information are barred by the

Supremacy Clause. However, Sammons stands only for the propositions that if something can be

patented or copyrighted, there is protection for it under federal law and thus it cannot be

protected by state law. Id. Sammons does not address customer lists, which cannot be patented

or copyrighted. Id. AirTight does not identify any federal law that would preempt state

protection of customer lists and cites no case authority for its assertion that the Supremacy

Clause preempts state laws that protect customer lists. Accordingly, the Supremacy Clause does

not preempt state protection of customer lists. 

2. California’s Business & Professions Code § 16600

AirTight argues that the claims based on non-secret information are barred by

California’s Business & Professions Code § 16600, which prohibits impermissible trade

restraints. Section 16600 states: “Except as provided in this chapter, every contract by which

anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that

extent void.” Contracts that protect an employer’s confidential information are valid,

enforceable, and not prohibited by § 16600. Gordon v. Landau, 49 Cal. 2d 690, 694 (1958) (en

banc); Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425, 1430 (2003). “California courts have

consistently declared this provision an expression of public policy to ensure that every citizen

shall retain the right to pursue any lawful employment and enterprise of their choice.” Metro

Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 859 (1994). “‘[T]he

employer will be able to restrain by contract only that conduct of the former employee that would

have been subject to judicial restraint under the law of unfair competition, absent the contract.’” 

Id. at 861 (quoting Hays, Unfair Competition-Another Decade, 51 Cal. L. Rev. 51, 69 (1962)).

AirDefense argues that there is protection for customer lists even if they are not trade

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secrets. The California Court of Appeal has stated that “information about [] customers could be

protected because it was confidential, proprietary, and/or a trade secret.” Thompson, 113 Cal.

App. 4th at 1429. However, once a customer list is designated as public information and not a

trade secret, it is available for use by anyone. Sacks, 213 Cal. App. 3d at 633 (holding that “in

the absence of a protectable trade secret, the right to compete fairly outweighs the employer’s

right to protect [its customer lists]”). 

C. Failure to Allege Requisite Elements

AirTight argues alternatively that claims five, six and seven fail to allege the requisite

elements of the torts upon which the claims are based. Because claims six and seven are

preempted by the CUTSA, the Court need not reach the merits of this argument as to those

claims. The Court agrees with AirTight that claim five, for intentional interference with

prospective economic advantage, is insufficient as presently pled. 

1. Intentional Interference With Prospective Economic Advantage

As stated above, the elements of a claim of intentional interference with prospective

economic advantage are: “1) an existing economic relationship or one ‘containing the probability

of future economic benefit’; 2) knowledge by the defendant of the relationship; 3) acts by

defendant designed to disrupt the relationship; 4) actual disruption of the relationship; and 5)

damages proximately caused by the acts of the defendant.” AccuImage Diagnostics Corp., 260

F. Supp. 2d at 956 (quoting Della Penna, 11 Cal. 4th at 380 n.1). The plaintiff “must plead and

prove as part of its case-in-chief that the defendant not only knowingly interfered with the

plaintiff's expectancy, but engaged in conduct that was wrongful by some legal measure other

than the fact of interference itself.” Della Penna, 11 Cal. 4th at 377. 

AirDefense does not identify any “existing economic relationships” in its FAC. The only

companies identified as current or former customers of AirDefense are McDonald’s and

Volkswagen, and the only reference to these companies is in a declaration attached to the FAC. 

See FAC Ex. A pp. 2-3. AirDefense has not specified in its allegations with whom it had

economic relationships, what disruption took place, and the amount of damages that resulted.

These deficiencies may well be cured by amendment.

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IV. ORDER

Good cause therefore appearing, IT IS HEREBY ORDERED that the motion to dismiss

claims two, three, four, six and seven, as preempted under the CUTSA, is GRANTED WITH

LEAVE TO AMEND. The motion to dismiss claim five for failure to state a legally cognizable

claim also is GRANTED WITH LEAVE TO AMEND. Any amended complaint shall be filed

and served within twenty (20) days after service of this order. 

DATED: July 26, 2006

 

JEREMY FOGEL

United States District Judge

Case 5:05-cv-04615-JF Document 60 Filed 07/26/06 Page 12 of 13
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Case No. C 05-04615 JF

ORDER GRANTING THE MOTION TO DISMISS

(JFEX1)

This Order has been served upon the following persons:

Charles Tait Graves tgraves@wsgr.com 

David James Miclean miclean@fr.com, arceo@fr.com 

Huong Thien Nguyen htnguyen@wsgr.com, cjohnston@wsgr.com

Katherine D. Prescott prescott@fr.com, horsley@fr.com 

Nagendra Setty nsetty@fr.com, cwalker@fr.com, rmorgan@fr.com 

Case 5:05-cv-04615-JF Document 60 Filed 07/26/06 Page 13 of 13