N. Harris Computer Corp. v. DSI Invs., LLC

608 F.Supp.3d 511

N. HARRIS COMPUTER CORPORATION, et al., Plaintiffs

v.DSI INVESTMENTS, LLC, et al., Defendants

CIVIL ACTION NO. 1:19-CV-00142-GNS-HBB

United States District Court, W.D. Kentucky, Bowling Green Division.

Signed June 17, 2022

Chad E. Wallace, Chelsea N. Hayes, Baker Donelson Bearman Caldwell & Berkowitz, PC, Johnson City, TN, Nicole D. Berkowitz, Baker Donelson Bearman Caldwell & Berkowitz, PC, Memphis, TN, for Plaintiffs.

E. Kenly Ames, English, Lucas, Priest & Owsley LLP, Bowling Green, KY, for Defendants.

MEMORANDUM OPINION AND ORDER

Greg N. Stivers, Chief Judge

This matter is before the Court on Plaintiffs’ Motion for Partial Summary Judgment (DN 100); Defendant's Motion for Partial Summary Judgment (DN 101); the parties’ Joint Motions for Leave to Seal (DN 103, 120); Defendants’ Motion for Leave to File Sur-Reply (DN 126); Plaintiffs’ Cross-Motion for Leave to File Sur-Reply (DN 128); and Defendants’ Motion to Strike (DN 129). The motions are ripe for adjudication.

I. STATEMENT OF FACTS AND CLAIMS

N. Harris Computer Corporation ("Harris Corp.") and its subsidiaries, Colossus, Inc. ("Colossus") and InterAct911 Corporation ("InterAct") (collectively "Plaintiffs") develop and market software programs. (Third Am. Compl. ¶¶ 11-13, DN 61). One of Plaintiffs’ software products—JailTracker—provides jail management services to detention facilities. (Third Am. Compl. ¶ 12). JailTracker was originally developed in 2002 by Defendant David C. Ogles ("Ogles") who registered the copyright with Defendant Digitech Services, Inc. ("Digitech"). (Third Am. Compl. ¶¶ 14-15). In February 2012, Ogles, Digitech, and Digitech Public Safety Solutions ("DPSS") (collectively "Defendants") sold JailTracker to InterAct for $4.5 million pursuant to the terms of an Asset Purchase Agreement ("APA"). (Third Am. Compl. ¶ 16). As part of the APA, Ogles executed a Confidentiality, Assignment of Inventions, Non-Competition and Non-Solicitation Agreement (the "2012 Agreement"). (Third Am. Compl. ¶ 17). The 2012 Agreement includes an Assignment of Inventions provision ("Assignment") that was to remain in force for the duration of Ogles’ employment with Plaintiffs and for one year after that employment ended. (Pls.’ Mot. Partial Summ. J. Ex. F, § 4, DN 100-7 [hereinafter 2012 Agreement]).

When InterAct acquired JailTracker, Ogles became an employee of an affiliated company, Colossus, as the Vice President of Operations working primarily with JailTracker.¹ (Third Am. Compl. ¶ 20). In late 2018 and early 2019, Ogles’ relationship with his supervisor Andrew Wright ("Wright") began to deteriorate. (Ogles Decl. ¶ 4, DN 18-1). Ogles was fired on March 26, 2019. (Ogles Decl. ¶ 18). Shortly after his separation from Plaintiffs, in May and June 2019, Ogles used software developers at Veepal IT Services Pvt. Ltd. ("Veepal") in India to develop a new jail management software system called E-Jail. (Ogles Decl. ¶¶ 22-25). By mid-June 2019, Ogles had created a functional diagram for E-Jail and sent it to Veepal, which started writing code for the program on or about June 24, 2019. (Ogles Decl. ¶¶ 24, 26). Plaintiffs brought this action in October 2019. (Compl. DN 1). The Court granted Plaintiffs a preliminary junction prohibiting Defendants from soliciting and selling E-Jail to any of Plaintiffs’ customers until March 2020 per the 2012 Agreement. (Order 13, DN 25). Plaintiffs’ Motion to Toll Enforcement of the preliminary injunction (DN 42) was later denied. (Order 4, DN 98). Plaintiffs and Ogles have filed dueling motions for partial summary judgment. (DN 100, 101).

II. JURISDICTION

This Court has jurisdiction over "any civil action brought in a State court of which the district courts of the United States have original jurisdiction" that is "removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending." 28 U.S.C. § 1441(a). This Court has "original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between ... the citizens of different States ...." 28 U.S.C. § 1332(a)(1).

III. DISCUSSION

A. Motions for Partial Summary Judgment

1. Ownership of E-Jail

Plaintiffs and Defendants both move for summary judgment regarding whether InterAct owns E-Jail by virtue of the Assignment. (Pls.’ Mem. Supp. Mot. Partial Summ. J. 10, DN 100-1; Def.’s Mem. Supp. Mot. Partial Summ. J. 21, DN 101-1). Plaintiffs argue that the Assignment is fully enforceable and that InterAct owns E-Jail under the terms of the Assignment because E-Jail is related to Ogles’ work at InterAct and was developed within a year after Ogles’ employment with InterAct ended. (Pls.’ Mem. Supp. Mot. Partial Summ. J. 10). Defendants contend that the Assignment is overbroad and unconscionable which renders it unenforceable. (Def.’s Mem. Supp. Mot. Partial Summ. J. 21). This Court previously held that the 2012 Agreement between Ogles and InterAct is likely generally enforceable, although the Assignment was not at issue in that decision. (Order Granting Prelim. Inj. 4-8, DN 25). The question currently before the Court is the enforceability of the holdover provision in the Assignment.

The Assignment of Inventions provides that Ogles assigned to InterAct all of his interests in any "inventions", defined as:

[A]ny and all inventions, developments, discoveries, improvements, work of authorship, concepts or ideas, or expressions thereof, whether or not subject to patents, copyright, trademark, trade secret protection or other intellectual property right protection (in the United States or elsewhere), (i) that are developed by me during my employment with InterAct Public Safety Systems and (ii) that are developed within one (1) year following termination of such employment which relate to any actual or anticipated business, work, research or investigation for InterAct Public Safety systems, or which are suggested by or result from tasks assigned to or performed by me for InterAct Public Safety Systems. This Agreement does not apply to inventions that are or have been developed entirely by me on my own time without use of our facilities, supplies, equipment or Confidential Information, and which do not relate to any actual or anticipated business, work, research or investigations for InterAct Public Safety Systems ....

(2012 Agreement ¶ 4.2). As applicable here, the Assignment applies to (1) tangible embodiments of Ogles’ ideas, (2) created by him within one year after his employment ended (3) that are related to InterAct's business. (2012 Agreement ¶ 4.2). The E-Jail program, developed by Ogles soon after leaving his employment with Plaintiffs and which is a jail management system ("JMS") just like JailTracker, falls squarely within the definition of "inventions" under the Assignment. Defendants concede that E-Jail was developed within one year of Ogles’ termination of employment at InterAct. (Def.’s Mem. Supp. Mot. Partial Summ. J. 29).

Assignments of inventions are utilized to "prevent an employee from appropriating to his own use or to the use of a subsequent employer inventions relating to and stemming from work done for a previous employer." Dorr-Oliver, Inc. v. United States , 432 F.2d 447, 452 (Ct. Cl. 1970). Such assignments recognize "the fact of business life that employees sometimes carry with them to new employers inventions or ideas so related to work done for a former employer that in equity and good conscience the fruits of that work should belong to the former employer." Id. When a contractual provision, like the Assignment at issue here, requires an employee to assign inventions created after the employment ends, they are known as "holdover provisions." See Ingersoll-Rand Co. v. Ciavatta , 110 N.J. 609, 542 A.2d 879, 887-88 (1988). The parties agree that North Carolina law governs the interpretation, validity, and enforcement of the Assignment. (Order Granting Prelim. Inj. 4; 2012 Agreement ¶ 8). Both parties also recognize that there are no reported North Carolina decisions addressing the validity of an assignment of inventions in a similar context, or in any other context for that matter.

Holdover provisions are a type of restrictive covenant, which are carefully scrutinized under North Carolina law. ChemiMetals Processing v. McEneny , 124 N.C.App. 194, 476 S.E.2d 374, 376 (1996) ; Asheboro Paper & Packaging, Inc. v. Dickinson , 599 F. Supp. 2d 664, 671 (M.D.N.C. 2009).² Non-compete provisions, another form of restrictive covenant, are enforceable in North Carolina if reasonable. Beverage Sys. of the Carolinas, LLC v. Associated Beverage Repair, LLC , 368 N.C. 693, 784 S.E.2d 457, 461 (2016). To determine whether a restrictive covenant is reasonable in the context of the sale of a business courts consider three factors: (1) whether the covenant is reasonably necessary to protect the legitimate interest of the purchaser; (2) whether the covenant is reasonable with respect to time and territory; and (3) whether the covenant interferes with the interest of the public. Id. ; see also Beverage Sys. of the Carolinas, LLC v. Associated Beverage Repair, LLC , 368 N.C. 693, 784 S.E.2d 457, 461 (2016) (citation omitted).

In Ingersoll-Rand v. Ciavatta , 110 N.J. 609, 542 A.2d 879 (1988), the New Jersey Supreme Court faced a similar dearth of case law dealing with the validity of a holdover assignment by adapting its non-compete analysis, an approach suggested by Ogles. (Def.’s Mem. Supp. Mot. Summ. J. 8). "In view of the competing interests involved in holdover agreements, courts have not held them void per se. Rather, the courts apply a test of reasonableness." Ingersoll-Rand , 542 A.2d at 887. When reasonable, hold-over assignments serve the legitimate purpose of "prevent[ing] an employee from appropriating to his own use or to the use of a subsequent employer inventions relating to and stemming from work...