Case Report: 2FA Technology, LLC v. Oracle Corporation

On December 29, 2010, 2FA Technology, LLC (2FA), a Texas–based developer in the software security industry, unleashed an eleven-count complaint on its former licensee, security software supplier Passlogix, Inc., alleging conspiracy and corporate theft. The business relationship between the two parties had soured years ago. A related action filed in December of 2008 by Passlogix (now part of Oracle Corporation) against 2FA, charging breach of obligations and tortuous conduct is pending on the same judge’s docket in the Southern District of New York. , is. Passlogix, Inc. v. 2FA Technology, LLC, et al., Docket No. 08-cv-10986 (S.D.N.Y. Dec. 18, 2008) (Hon. Barbara S. Jones, J). In the 2008 suit, 2FA counterclaimed for breach of contract, breach of the covenant of good faith and fair dealing, unfair competition, misappropriation, and interference with business relations. Theft of trade secrets constitutes the pith of 2FA’s recent complaint, grounded in New York common law, and its counterclaims in the first suit are replete with the same allegations.

Relevant Facts
In 2006, Passlogix and 2FA entered into an agreement under which 2FA granted Passlogix a limited license of certain proprietary software, contingent on a non-compete mandate. 2FA, relying on this license agreement and the accompanying confidentiality provisions, provided Passlogix with “its most important and protected asset”— a source code, which supposedly embodied trade secrets.

The licensing agreement went south and was eventually terminated but not before Passlogix, according to 2FA, compromised the confidentiality of its source code. Passlogix allegedly failed to exercise the same degree of care to avoid the unauthorized disclosure that it would employ with respect to its own confidential proprietary information. In July 2006, a Passlogix engineer allegedly emailed the source code to a number of internal Passlogix personnel. This incident spiraled into mass internal emailing and the collection of “nearly 100,000 pages and hundreds of thousands of lines of source code.” 2FA further charges Passlogix with development of a credential management system and certain software enhancements that allegedly “included trade secrets taken from 2FA without 2FA’s permission…while having complete, unobstructed access to 2FA’s source code.” Theft of 2FA’s trade secrets purportedly escalated with a “code walkthrough” in September of 2007, during which Passlogix engineers and developers “siphoned as much intellectual property, know-how, knowledge of intricate workings of 2FA’s source code, and other proprietary information as they could.”

2FA Technology's Complaint
2FA’s resulting complaint involves allegations grounded in contract, as well as misappropriation, unfair competition, conversion, trespass to chattels, unjust enrichment, civil conspiracy, and aiding and abetting, among other things. 2FA also named as a defendant Oracle Corporation, the colossal, California–based enterprise software company in most of its causes of action.. Additionally, Oracle is the subject of a Criminal Possession of Stolen Property in the First Degree charge under New York Penal Law. Before November 1, 2010, when Oracle acquired Passlogix as a wholly owned subsidiary, the two companies were partners. After January 1, 2011, Oracle Corp. merged Passlogix, formerly with Oracle Systems Corp., and on the docket dated March 4, 2011 is a motion to substitute Oracle Systems Corp. for Passlogix. 2FA alleges that Oracle sold and continues to sell “rebranded Passlogix software” with the knowledge that it “contain[s] 2FA’s misappropriated trade secrets.” In that same vein, when Oracle acquired the majority interest in Passlogix, it “knew or should have known, that a portion of the property it was acquiring was stolen from 2FA.”

Interestingly, Oracle joins the suit fresh off a $1.3 billion jury verdict in its favor in a software piracy and corporate theft of trade secrets suit it brought against SAP, a German business management software company, for the actions of its subsidiary, TomorrowNow. Presently, 2FA seeks injunctive relief, restitution and disgorgement, damages of more than $10,000,000,000 and punitive damages.

This case is stagnant at the moment. On January 31, 2011, the defendants filed a motion to stay the proceedings pending the outcome of a partial summary judgment motion filed by Passlogix in the 2008 case. The summary judgment motion seeks dismissal in the entirety of each of 2FA’s counterclaims, which could spell doom for the pending similar claims in this action. 2FA filed a memorandum in opposition to the motion to stay on March 17, 2011 but the motion to stay was granted on April 6, 2011.