Source: https://www.domingorivera.org/othentec-ltd.-v.-phelan-526-f.3d-135-4th-cir.-2008/
Timestamp: 2019-04-18 18:28:00+00:00

Document:
Jeffrey PHELAN; Mark W. Martens; EC4 Technologies, Incorporated, Defendants-Appellees.
ARGUED: Jerry William Boykin, Womble, Carlyle, Sandridge & Rice, Tysons Corner, Virginia, for Appellants. John F. Mardula, Roberts, Mardula & Wertheim, L.L.C., Reston, 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.
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.
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.
From September 2005 to January 2006, five separate withdrawals, 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 All withdrawals were requested by Phelan, and all funds were actually withdrawn and wired to Phelan by Bhisham Dindyal (“Dindyal”), who held the position of secretary with both Othentec UK and EC4 UK, and who was a signatory on the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 Cross-Match 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.
Appellants assert that Phelan was never authorized to found EC4 USA, and that he did so on his own initiative, without permission, consent, or 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.
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.
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 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 tamperproof 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 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.
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.
de novo.” Castillo v. Emergency Med. Assocs., P.A., 372 F.3d 643, 646 (4th Cir.2004). “Rule 56© 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, 106 S.Ct. 2548, 91 L.Ed.2d 265 (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, 106 S.Ct. 2505, 91 L.Ed.2d 202 (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, 106 S.Ct. 2505 (quoting Improvement Co. v. Munson, 81 U.S. 442, 14 Wall. 442, 448, 20 L.Ed. 867 (1871)).
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 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.
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.
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 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.
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 tamperproof 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.
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.?
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.
V. Based on the reasoning above, we affirm the district court’s entry of summary judgment for Appellees.

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