PhoneDog v. Kravitz

11-03474
July 15, 2011
Federal Court
California
United States District Court for the Northern District of California

PhoneDog is a company that delivers news about mobile phones, and provides information about them for consumers to use when comparison shopping. The company had employed Noah Kravitz to write online reviews of phone products using a variety of online mediums; one such medium was Twitter, where Kravtiz’s handle was “@PhoneDog_Noah.” However, after Kravitz left the company, he refused relinquish use of the Twitter account, and instead changed the handle to “@noahkravitz,” and installed a new password. Whether an exiting employee can take his Twitter followers with him, and the potential trade secret implications involved, is a case of first impression.

PhoneDog sued Kravitz in the United States District Court for the Northern District of California on July 15, 2011. The suit claimed misappropriation of trade secrets, interference with economic advantage, and conversion. On November 8, 2011, the court denied Kravitz’s motion to dismiss the trade secrets and conversion claims, noting that PhoneDog had described the elements of trade secrecy in sufficient detail. The case received publicity for potentially determining “ownership” of an employees Twitter account and followers. However, the alleged trade secrets at issue is actually the Twitter account password itself. Although PhoneDog’s conversion claim explicitly asserted ownership of the Twitter account, courts have interpreted the California Uniform Trade Secrets Act to preempt common law claims (such as conversion) if they are based on the same nucleus of facts as a concurrent trade secret misappropriation claim. Thus, the court can decide the case without analyzing the parties’ competing ownership claims. Moreover, even if the court finds in favor of PhoneDog, the specific remedy and calculation of damages could influence whether it would be cost-effective for parties to bring these types of claims moving forward.

The case exemplifies the complex challenges companies face when trying to protect their confidential information in the digital era, and more specifically, the dangers of not instituting explicit internal policies for employees and their social media accounts.

On or around December 19, 2012, the parties settled. Although the actual details of the settlement were confidential, it appears Kravitz has been permitted to retain ownership of the Twitter account.

PhoneDog
Noah Kravitz
Uniform Trade Secrets Act

Case Report

I . FACTS

PhoneDog is an interactive mobile news and reviews web resource. PhoneDog employed Noah Kravitz as a product reviewer and video blogger. Pursuant to his employment, Kravitz submitted written and video content to PhoneDog, which was then transmitted to its users via a variety of mediums, including PhoneDog's website and the Twitter Account. Kravitz used the Twitter account “@PhoneDog_Noah” to disseminate information and promote PhoneDog's services. PhoneDog alleged that all employee Twitter accounts follow the same naming convention (i.e. “@PhoneDog_Name”), and that these accounts, as well as the passwords to such accounts, constitute proprietary, confidential information.

In Octoboer 2010, Kravitz quit PhoneDog after generating approximately 17,000 Twitter followers for @PhoneDog_Noah. At that time, PhoneDog requested that he relinquish use of the Twitter Account. In response, Mr. Kravitz changed the Account handle to ‘@noahkravitz,’ and continues to use the Account. As a result, PhoneDog alleges that it has suffered at least $340,000 in damages.

PhoneDog brought a number of claims against Kravtiz, most relevantly for misappropriation of a trade secret and conversion.

II. CALIFORNIA UNIFORM TRADE SECRETS ACT

The claim for misappropriation of trade secrets is governed by the California Uniform Trade Secrets Act (CUTSA). CUTSA defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value . . . from not being generally known to the public . . . ; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” CUTSA defines misappropriation as “[a]cquisition of a trade secret of another by a person who knows or has reason to know [it] was acquired by improper means” or unauthorized “[d]isclosure or use of a [another’s] trade secret.” CUTSA has a rather unique “negative preemption clause” – most states adopted UTSA’s with positive preemption clauses. However, California courts have nonetheless interpreted CUTSA to preempt all common law torts based on misappropriation of trade secrets.

III. COMPLAINT AND MOTION TO DISMISS

As part of its amended complaint, PhoneDog identified its trade secret as confidential information such as the passwords to PhoneDog's Twitter accounts, including all @PhoneDog__NAME Twitter accounts used by PhoneDog's agents. PhoneDog further alleged that Kravitz misappropriated the secret by making “improper use of [his] knowledge of the [secret] to access the Account to compete unfairly against PhoneDog for PhoneDog's existing customers.”

Kravitz moved to dismiss the misappropriation claim, arguing first that PhoneDog had not stated a trade secret within the meaning of CUTSA. He further argued that the claim should fail because: passwords to twitter accounts have “no independent economic value”; “PhoneDog did not make any reasonable efforts to maintain the secrecy of the password”; and that his alleged conduct did not fall within the definition of misappropriation.

The District Court denied Kravitz’s motion to dismiss. It held that “PhoneDog [had] sufficiently described the subject matter of the trade secret with sufficient particularity,” and averred that Kravitz’s refusal to “relinquish use of the password and [a]ccount” could constitute misappropriation. The court noted that a final determination on the issues “require[] consideration of evidence beyond the scope of the pleading.”

IV. ANALYSIS OF CLAIM

Various commentators have stated that this case will determine who “owns” a Twitter account and/or its followers.[1] Although PhoneDog asserted ownership of the Twitter account as part of its conversion claim, the trade secrets issue does not necessarily hinge upon ownership. Phonedog has not asserted that its Twitter account or followers constitute a trade secret, but rather the log-in information. This case thus differs from a typical customer list misappropriation claim.[2]

A. Trade Secrets and Value
PhoneDog’s claim is more akin to a situation where Kravitz used his knowledge of a secret pin code (obtained based on his employment with PhoneDog) to gain access to a customer list, and PhoneDog asserted a trade secret in the code (and not list). Moreover, the value of the trade secret would not be in the names on the list, but rather that the information enabled the holder to instantaneously convert the customers to their own.

Recent cases (such as TMX Funding, Inc. v. Impero Technologies. Inc.) indicate that log-in information can constitute a trade secret, provided the claimant can prove it derived independent economic value from keeping the information secret. In this regard, a case involving a “hijacked” Twitter account is distinguishable from Eagle v. Morgan, which involving a hijacked LinkedIn account. In the latter case, the court determined that the LinkedIn account merely provided access to a customer list that was otherwise readily available. Even obtaining “links” to potential clients does not guarantee a sale. Thus, while companies use LinkedIn to increase online presence in order to find a potential sales partner or new employer, Twitter is used for the sole purpose of increasing online presence. In this regard, obtaining access to Twitter users that have already agreed to follow your account may in fact be more valuable than obtaining a confidential customer list: even after obtaining the list, the misappropriator must still solicit the customer to leave the plaintiff in favor of its competing venture. What differentiates the present case is that Kravitz used the login information to disassociate the account with PhoneDog, going beyond simply stealing a list of customers, and essentially stealing the sales without the customers even consenting.

B. Reasonable Efforts and Misappropriation
Assuming that log-in information can constitute a trade secret and provides PhoneDog with a competitive economic advantage based on its secrecy, PhoneDog still has the burden of: 1) proving that it took reasonable efforts to maintain secrecy under the circumstances, and 2) that Kravitz misappropriated the secret. Although these are two separate analyses, under the particular circumstances of the case, both hinge on the nature of PhoneDog’s relationship with Kravitz, and the circumstances under which the Twitter account was created.

This analysis is heavily factual, and the record was never fully developed. Certainly the existence of some sort of agreement regarding the account (or lackthereof) between the two parties would be vital. The parties have competing interpretations on that fact, as Kravitz claims “that he – not PhoneDog – initially created the password,” while PhoneDog responds that “even if Mr. Kravitz created the Account, he did so at PhoneDog's request and for its benefit and in the course and scope of his employment with PhoneDog.” The court may also be influenced by the extent to which Kravitz personalized his tweets and Twitter handle, which on one hand contained his name, but also seem to follow PhoneDog’s standardized business format (making them seem more similar to a business e-mail address).

The court could use this opportunity to analyze each party’s property interest in the Twitter account. However, the court could alternatively opt to forgo this analysis and instead rely more heavily on a relational theory to determine the validity of PhoneDog’s trade secret claim. If the court were to determine the ownership rights of an online social media profile, the analysis would be more appropriate as part of PhoneDog’s conversion claim, which directly asserts the account is company property.
However, the court may not even consider the conversion claim if PhoneDog’s trade secret claim is successful. As noted earlier, federal courts have interpreted CUTSA to preempt common law claims – including conversion – if both claims “are based entirely on the same factual allegations that form the basis of its trade secrets claim.”

Although the claims technically differ as to what Kravitz took (login password vs. the account itself), PhoneDog’s conversion claim is “based on the same nucleus of facts as its claim for misappropriation of trade secrets,” and thus is likely to be preempted.

C. Damages

The final prominent issue is damages. Although PhoneDog claims to be using “industry standard” when it calculated that each twitter follower was worth $2.50/month, it failed to cite to any relevant authority. As Kravitz contends, the value should be based on multiple factors, including: “(1) the number of followers; (2) the number of tweets; (3) the content of the tweets; (4) the person publishing the tweets; and (5) the person placing the value of the account.” If the court is forced to determine actual damages, it will be interesting to see if it incorporates a “network effects” theory into its analysis, whereas the value of each Twitter follower increases as the total number of followers increases. If the court chooses a much lower figure for damages, it could establish precedent that would discourage future litigation, since it may not be cost-effective.

V. SETTLEMENT

On or around December 19, 2012, the parties settled. Although the actual details of the settlement were confidential, it appears Kravitz has been permitted to retain ownership of the twitter account. Although none of the issues outlined above were entertained by the court, a good takeaway from this case is that companies should clearly define social media policies in employment contracts.

[1] See Tyson Snow, Who Owns Your Twitter Account – the PhoneDog Case, SOCIAL MEDIA ESQ. (Jan. 8, 2012), www.socialmediaesq.com/2012/01/08/phonedog-who-owns-your-twitter-account/; John Biggs, Lawsuit May Determine Who Owns a Twitter Account, N.Y. TIMES, Dec. 25, 2011, http://www.nytimes.com/2011/12/26/technology/lawsuit-may-determine-who-o....

[2] California Courts refer to a typical trade secret misappropriation of a customer lists as “route cases,” which “derive their name from cases involving businesses whose employees engaged in business by following particular routes to solicit business from a regular group of customers.” Although industry evolved such that customer lists can have value beyond simply the customer’s physical delivery routes, the basic principles still apply.