Troutman Sanders LLP: IP Claims in Corporate Breach of Fiduciary Duty Cases

Troutman Sanders LLP: IP Claims in Corporate Breach of Fiduciary Duty Cases

By Dabney Carr

A recent decision from Judge Trenga in the Eastern District of Virginia illustrates how corporate disputes can give rise to intellectual property claims, including trademark infringement, anti-cybersquatting and Computer Fraud and Abuse Act claims. Ritlabs, S.R.L. v. Ritlabs, Inc., Case No. 1:12CV215 (E.D.Va. Aug. 9, 2012), found here.

Ritlabs, S.R.L. ("SRL") is an Internet software company based in Moldova, which is a former Soviet Republic east of Romania. Ritlabs developed and distributed several software products throughout the world. One of Ritlabs three owners, Serghei Demcenko, served as the director, or CEO, of SRL.

In 2008, Demcenko formed Ritlabs, Inc. ("Inc.") in Virginia, without informing the other two owners of SRL. Demcenko, on behalf of SRL, cancelled SRL's agreement with its U.S. based distributor and gave Inc. an exclusive license to sell SRL's software products in the United States as well as a non-exclusive license to sell SRL's products around the world. Demcenko then had Inc. enter into distributorship agreements with SRL's former U.S. distributor and other companies for distribution of SRL's products. 

SRL sued Inc. and Demcenko asserting the types of claims ordinarily asserted when company executives compete with their employer, including breach of fiduciary duty, conversion and tortious interference with contract. In addition, though, SRL asserted violations of the Anticybersquatting Consumer Protection Act (ACPA), 15 U.S.C. § 1125(d); false designation of origin under the Lanham Act, 15 U.S.C. § 1125(a)(1) and violation of the Consumer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030(a)(4).

Judge Trenga granted summary judgment that Demcenko had breached his fiduciary duties to SRL and that the breach of fiduciary duty entitled SRL to summary judgment on its anticybersquatting and CFAA claims.  When the other owners of SRL found out about Demcenko's actions, they removed him as a director. In response, Demcenko changed the registrant of several of SRL's domain names to Inc., which Judge Trenga held to be a violation of the ACPA. Demcenko also accessed SRL's computers to change access codes and other features of the computer system. Judge Trenga held that this unauthorized computer access violated the CFAA. 

Judge Trenga entered summary judgment in Demcenko's favor, however, on SRL's false designation of origin and common law unfair competition claims because Demcenko's use of SRL's marks in commerce was not confusing or deceptive because the marks were used in connection with products that were, in fact, SRL's products.

Disputes in a closely-held company often involve a scenario similar to that in Ritlabs. Judge Trenga's ruling points up that conduct like Demcenko's will give rise to claims that goes beyond common law fiduciary duty and tort claims. For example, simply by using Ritlabs' computers in his attempt to take over the company, Demcenko exposed himself to liability under the CFAA. Litigators representing either companies or employees must be mindful of the potential impact of intellectual property claims under the ACPA, the CFAA and the Lanham Act in these types of disputes. 

Copyright © 2012, Troutman Sanders LLP

Virginia IP Law
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