Eidogen-Sertanty, Inc. v. Univ. of N.C.

Eidogen-Sertanty, Inc. v. Univ. of N.C., 2018 NCBC 127.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE

SUPERIOR COURT DIVISION

ORANGE COUNTY 18 CVS 546

EIDOGEN-SERTANTY, INC.,

Plaintiff,

v.

UNIVERSITY OF NORTH

CAROLINA; UNIVERSITY OF ORDER AND OPINION ON

NORTH CAROLINA AT CHAPEL

HILL; and UNIVERSITY OF DEFENDANTS’ MOTION TO DISMISS

NORTH CAROLINA AT CHAPEL

HILL d/b/a UNC ESHELMAN

SCHOOL OF PHARMACY,

Defendants.

1. Sovereign immunity is a doctrine that bars suits against the State and its

agencies absent waiver or consent. The question presented here is whether the State

waived its sovereign immunity for claims of misappropriation of trade secrets. For

the following reasons, the answer is no.

James, McElroy & Diehl, P.A., by John R. Buric and John R. Brickley,

for Plaintiff Eidogen-Sertanty, Inc.

Robinson, Bradshaw & Hinson, P.A., by Cary B. Davis, Erik R.

Zimmerman, and Morgan P. Abbott, for Defendants University of North

Carolina, University of North Carolina at Chapel Hill, and University of

North Carolina at Chapel Hill d/b/a UNC Eshelman School of

Pharmacy.

Conrad, Judge.

I.

BACKGROUND

2. Plaintiff Eidogen-Sertanty, Inc. (“Eidogen”) gathers and categorizes

scientific information into databases designed for chemical, biological, and

pharmaceutical research. (Am. Compl. ¶ 10, ECF No. 17 [“Compl.”].) One such

database, the Kinase Knowledgebase, allows users to access hand-drawn chemical

structures and associated biological annotations from among a collection of

approximately two million data points. (Compl. ¶¶ 11, 12.) Eidogen grants access to

the Kinase Knowledgebase to various organizations, including academic institutions,

for annual license fees. (Compl. ¶¶ 19, 20.)

3. This case arises out of a license agreement between Eidogen and the

University of North Carolina and its Eshelman School of Pharmacy (together, the

“University”). (Compl. ¶ 18.) For $12,500 per year, certain University personnel

were given user-specific, password-protected login credentials that allowed them to

access and download information from the Kinase Knowledgebase for the limited

purpose of using that information to conduct research. (Compl. ¶¶ 20, 24, 25.) The

license agreement had an initial one-year term to be followed by automatic renewals

each year unless the University provided written notice of cancellation at least ninety

days before expiration. (Compl. ¶¶ 18, 21.) According to the amended complaint, the

agreement renewed automatically for a second year and again for a third year,

through December 22, 2018. (Compl. ¶¶ 26, 27.) But on January 24, 2018, the

University informed Eidogen that, due to budget restrictions, it no longer wished to

continue the services. (Compl. ¶¶ 28, 29.) Eidogen now asserts that the license

agreement had already renewed and that the University is therefore obligated to pay

the annual fee. (Compl. ¶¶ 27, 28, 30.) To date, the University has not paid the fee.

(Compl. ¶ 30.)

4. Believing the University’s non-payment to be in violation of the license

agreement, Eidogen began to deactivate the University’s login access. (Compl. ¶¶ 25,

31.) Eidogen claims to have discovered that the University improperly provided its

credentials to outside users, and as a result, that the Kinase Knowledgebase was

accessed beyond the scope of the agreement. (Compl. ¶¶ 32, 33, 35, 36.) Specifically,

Eidogen alleges that the login credentials were used to enter other databases, to

access information after the University indicated it did not want to renew, and to log

in from unauthorized locations, not only in North Carolina but also elsewhere in the

United States and abroad. (Compl. ¶¶ 32, 33.) The University allegedly continues to

have access to information in the Kinase Knowledgebase. (Compl. ¶ 37.)

5. Eidogen filed this lawsuit in April 2018, claiming not only that the

University breached the license agreement but also that it violated the North

Carolina Trade Secrets Protection Act (“TSPA”). (Compl. ¶¶ 44, 54.) Eidogen alleges

that the Kinase Knowledgebase is subject to trade-secret protection and that the

University’s ongoing access to and use of that information amounts to

misappropriation. (Compl. ¶¶ 13–17, 23.)

6. The University has not yet answered the amended complaint but has moved

to dismiss Eidogen’s trade-secret claim, arguing that the claim is barred by sovereign

immunity. (See Defs.’ Mem. in Supp. 1, ECF No. 19 [“Mem. in Supp.”].) Eidogen

responds that the General Assembly waived sovereign immunity through the TSPA.

(See Pl.’s Mem. in Opp’n 1, ECF No. 27 [“Opp’n”]; see also Compl. ¶ 61.) The Court

held a hearing on September 25, 2018, at which all parties were represented. The

motion is ripe for determination.

II.

ANALYSIS

7. Sovereign immunity protects the State and its agencies, including the

University, “from suit absent waiver or consent.” Wood v. N.C. State Univ., 147 N.C.

App. 336, 338, 556 S.E.2d 38, 40 (2001). A valid assertion of sovereign immunity is

not merely a defense to liability; it is an “absolute and unqualified” immunity from

suit altogether. Guthrie v. N.C. State Ports Auth., 307 N.C. 522, 534, 299 S.E.2d 618,

625 (1983) (emphasis omitted). Thus, when a motion to dismiss is based on sovereign

immunity, it must be decided as a threshold jurisdictional issue (though whether it

“is a matter of personal or subject matter jurisdiction” remains unsettled). Teachy v.

Coble Dairies, Inc., 306 N.C. 324, 327–28, 293 S.E.2d 182, 184 (1982).

8. The University’s motion presents a single issue: whether the General

Assembly waived sovereign immunity for claims of trade-secret misappropriation in

the TSPA. That is a question of statutory interpretation and, therefore, a question of

law for the Court to decide. See, e.g., Lunsford v. Mills, 367 N.C. 618, 623, 766 S.E.2d

297, 301 (2014). It is also a question of first impression in North Carolina.

9. Our Supreme Court has stressed that “[w]aiver of sovereign immunity may

not be lightly inferred and State statutes waiving this immunity, being in derogation

of the sovereign right to immunity, must be strictly construed.” Guthrie, 307 N.C. at

537–38, 299 S.E.2d at 627. “The concept of sovereign immunity is so firmly

established that it should not and cannot be waived by indirection or by procedural

rule. Any such change should be by plain, unmistakable mandate of the lawmaking

body.” Orange Co. v. Heath, 282 N.C. 292, 296, 192 S.E.2d 308, 310 (1972).

10. Applying these interpretive principles to the TSPA, the Court finds no plain

and unmistakable waiver of sovereign immunity. The TSPA authorizes a private

right of action for trade-secret misappropriation in just 18 words: “The owner of a

trade secret shall have remedy by civil action for misappropriation of his trade

secret.” N.C. Gen. Stat. § 66-153. This statute does not mention the State. Nor does

it expressly permit the owner of a trade secret to bring a civil action for

misappropriation against the State.

11. Even so, Eidogen infers a waiver of sovereign immunity from other sections

of the TSPA. It points to section 66-155, which states that a prima facie case of

misappropriation exists if there is evidence that “the person against whom relief is

sought” had knowledge of the trade secret and an opportunity to acquire it without

the owner’s consent. Id. § 66-155. The term “person” is defined elsewhere to mean

“an individual, corporation, government, governmental subdivision or agency,

business trust, estate, trust, partnership, association, joint venture, or any other legal

or commercial entity.” Id. § 66-152(2) (emphasis added). Eidogen reads these

statutes to allow trade-secret owners to sue the State because it is a “government”

and, therefore, potentially a “person against whom relief” may be sought. (Opp’n 4–

5.)

12. It would be particularly odd, though, to find a waiver of sovereign immunity

in section 66-155. That statute has nothing to do with authorizing civil actions for

misappropriation (which is section 66-153’s function). Its purpose is only to set out

the standard that a trade-secret owner must satisfy to establish a prima facie case of

misappropriation, along with the types of evidence a defendant may introduce to

rebut the prima facie case. When section 66-155 refers to “the person against whom

relief is sought,” it does so in the context of allocating evidentiary burdens, not for the

purpose of identifying who may be sued for misappropriation, as Eidogen contends.

13. The final sentence of section 66-155, which Eidogen does not address,

confirms as much. It states that section 66-155 “shall not be construed to deprive the

person against whom relief is sought of any other defenses provided under the law.”

N.C. Gen. Stat. § 66-155 (emphasis added). There is no obvious reason why this

facially broad language would exclude defenses that immunize a defendant from suit,

such as sovereign immunity. If so, then section 66-155 could not waive sovereign

immunity because it preserves the defense. Thus, even accepting Eidogen’s position

that the State is a person under the TSPA, section 66-155 does not say or imply that

the State may be sued for misappropriation.

14. Eidogen’s argument also runs afoul of the usual rule that “the term person

does not include the sovereign and statutes employing the word are ordinarily

construed to exclude it.” N.C. Dep’t of Transp. v. Davenport, 334 N.C. 428, 432, 432

S.E.2d 303, 305 (1993) (citation, quotation marks, and alterations omitted) (holding

that the State is immune from the contempt power of the court). Eidogen makes

much of section 66-152(2)’s definition of person to include government, but when the

General Assembly intends for the term government to include the State, it usually

says so expressly. See, e.g., N.C. Gen. Stat. § 132-1(a) (“Agency of North Carolina

government or its subdivisions shall mean and include every public office, public

officer or official (State or local, elected or appointed)[.]”); id. § 53B-2(4)

(“‘Government authority’ means an agency or department of the State or of any of its

political subdivisions, including any officer, employee, or agent thereof.”); see also

Davidson Co. v. City of High Point, 85 N.C. App. 26, 37, 354 S.E.2d 280, 286 (1987)

(“Normally, general statutes do not apply to the State unless the State is specifically

mentioned therein.”).

15. The TSPA never mentions the State, either in its definition of person or

anywhere else. This is in sharp contrast to other statutes our courts have construed

to waive sovereign immunity because they clearly and directly refer to the State. See,

e.g., Tort Claims Act, N.C. Gen. Stat. § 143-291(a) (permitting certain negligence

claims against “the State Board of Education, the Board of Transportation, and all

other departments, institutions and agencies of the State”); N.C. Ins. Guar. Ass’n v.

Bd. of Trs. of Guilford Tech. Cmty. Coll., 364 N.C. 102, 108, 691 S.E.2d 694, 698 (2010)

(finding waiver in Workers’ Compensation Act, which provides that “[n]either the

State nor any municipal corporation within the State . . . shall have the right to reject

the provisions of this Article”); Minneman v. Martin, 114 N.C. App. 616, 619, 442

S.E.2d 564, 566 (1994) (finding “clear statutory waiver” in Whistleblower Act, which

refers to “State department, agency or institution”); State v. Taylor, 322 N.C. 433,

435, 368 S.E.2d 601, 602 (1988) (finding waiver in section 41-10.1, which provides

that “[an] individual . . . may bring an action . . . against the State”).

16. Had the General Assembly intended to treat the State as a person within

the TSPA and also to permit claims for misappropriation against the State, it could

have said so expressly. It did neither. Thus, even if the General Assembly intended

to authorize civil actions for misappropriation against some governments or

governmental bodies (which is not at all clear), that authorization does not extend to

the State.

17. In short, the TSPA does not clearly or unmistakably waive sovereign

immunity for claims of trade-secret misappropriation. The University, as an agency

of the State, is therefore immune from Eidogen’s misappropriation claim, and that

claim must be dismissed.

18. To be sure, this is a harsh result—one that may seem distasteful. It bears

noting, though, that Eidogen is not without a remedy. The University concedes that

Eidogen’s claim for breach of contract is not barred by sovereign immunity because

the State “implicitly consents to be sued for damages” when it enters into a contract.

Smith v. State, 289 N.C. 303, 320, 222 S.E.2d 412, 423–24 (1976). And in other cases,

parties alleging trade-secret misappropriation by the State may have alternative

options for recovery. See Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1002–04 (1984)

(holding that if a plaintiff had a trade-secret property right under state law, the right

is protected by the Fifth Amendment’s Takings Clause). These may be imperfect

substitutes for direct claims against the State for misappropriation, but in the

absence of further action by the General Assembly, they will have to do.

III.

CONCLUSION

19. For these reasons, the Court GRANTS the University’s motion to dismiss

Eidogen’s claim for misappropriation of trade secrets.

SO ORDERED, this the 11th day of December, 2018.

/s/ Adam M. Conrad

Adam M. Conrad

Special Superior Court Judge

for Complex Business Cases