by James Kachmar
IP Law Blog
California case law over the last few years is replete with instances where a new and/or small business has one of their employees take responsibility for various IT activities such as setting up the company website and/or email domains. Disputes arise when that employee leaves for other employment and refuses to give the former employer access to the business domain and/or emails. This is what happened in the recent case, Pneuma International, Inc. v. Cho, which made its way to the California First Appellate District. The Court was required to analyze an old, but largely forgotten, theory of tort liability, trespass to chattels, in connection with a defendant’s “control” over his former employer’s website domain.
Pneuma supplies paper goods to various distributors and is known for selling a 10-ounce “ripple soup cup” that is used in Kaiser hospitals. Pneuma employed Yong Kwon Cho and he set up the company’s website domain (www.egpak.com) using his personal yahoo email address and became the registered owner of that domain. During his employment, the website domain was used as a repository for the company’s business records, including its financial books, contact information for vendors and customers, and purchase orders.
Mr. Cho left Pneuma’s employ approximately one year after creating the website and went to work for a competitor, Central United Packaging, Inc. (“CUP”). A dispute later arose between Pneuma and CUP, which apparently began after one of Pneuma’s primary customers switched to CUP. Pneuma demanded that Mr. Cho transfer ownership of the company domain over to Pneuma but the transfer apparently would require Pneuma to shut down its computer system for a period of time with the risk of potential loss of information or data. While Mr. Cho was willing to have Pneuma substituted in his place as the registered owner of the domain, he did not want to allow Pneuma to have complete access to his personal email account associated with the domain. As the negotiations between Pneuma and CUP and Pneuma and Cho broke down, Pneuma filed a lawsuit in October 2014 alleging 15 causes of action, including one for recovery of personal property related to the company domain, which the Court later construed as a claim for trespass to chattel. When the trial began approximately 18 months later, Mr. Cho remained the registered owner of the egpak.com domain. After a bench trial, the Court found in favor of Pneuma against Mr. Cho on the claim of trespass to chattel and ordered Mr. Cho to transfer the contents of the domain to Pneuma (with the exception of his personal emails). Pneuma lost on other related claims from which it appealed, claiming the trial court had committed error.
In considering Pneuma’s appeal, the First Appellate District Court began by examining the tort of trespass to chattel, which had long been described as the “little brother of conversion.” In essence, a trespass to chattels occurs when there have been “interferences with possession of personal property ‘not sufficiently important to be classed as conversion, and so to compel the defendant to pay the full value of the thing with which he has interfered.’” That is, the plaintiff must show a defendant’s interference with the possession of personal property has resulted in injury to plaintiff and the plaintiff “may recover only the actual damages suffered by reason of the impairment of the property or the loss of its use.” Legal commentators have long recognized that “`trespass remains as an occasional remedy for minor interferences, resulting in some damage, but not sufficiently serious or sufficiently important to amount to the greater tort’ of conversion.”
The appellate court began by reviewing the trial court’s findings as to the trespass of chattels cause of action and concluded that it properly found that: (1) Pneuma owned or had a right to possess the egpak.com domain and its contents; (2) Cho had intentionally interfered with its use or possession of that property by declining to transfer ownership of the domain and its contents to Pneuma; (3) Pneuma did not consent to this interference; (4) Pneuma was harmed by being denied access; and (5) Mr. Cho’s conduct was a substantial factor in causing Pneuma’s harm. The trial court analogized Mr. Cho’s conduct to someone taking and holding a key to a storage locker, thereby depriving the owner of the property inside the locker from accessing it. Although Pneuma owned the business records that had been loaded onto the egpak.com domain, it was unable to prevent Mr. Cho or anyone else from accessing and viewing its business records since Mr. Cho was the “registered owner” of the domain. Nevertheless, because Pneuma was still able to access the records in its possession, and Mr. Cho had generally cooperated in keeping the site active, the court found that Mr. Cho’s interference was not substantial and did not amount to conversion. Because Pneuma could not totally control and protect its business records, the trial court concluded that equitable relief was merited since it would be hard to show or determine what monetary damages should be awarded.
Pneuma argued that the trial court erred in not finding in its favor on its conversion cause of action, which related to Mr. Cho’s exercise of control over the egpak.com domain. The First Appellate District Court rejected this claim on two grounds. First, it has long been recognized that conversion does not apply to “’the unauthorized taking of intangible interests that are not merged with or reflected in something tangible.’” The appellate court affirmed the trial court’s finding that because Pneuma had alleged that its “intangible property,” such as the domain and its computer records had been converted, it could not prevail on a conversion theory. Furthermore, the trial court had properly found that any interference with the website domain was not substantial, which the appellate court found was also fatal to a conversion cause of action. Again, because trespass to chattel occurs where there has only been a “minor interference” that does not amount to conversion, the appellate court found that Pneuma’s conversion claim was properly rejected.
Pneuma also appealed the trial court’s ruling against it on its unfair business practices claim under section 17200 of the California Business and Professions Code. The trial court concluded that because Mr. Cho’s only wrongful conduct was in not transferring ownership of the egpak.com domain to Pneuma, it did not rise to a fraudulent or unfair business practice within the meaning of section 17200. The appellate court agreed with this conclusion. First, the Court noted that there had been no legal authority in California that trespass to chattels could give rise to an unfair business practice under section 17200. Furthermore, Pneuma could not point to any specific California law that the legislature may have “borrowed” for purposes of establishing an unlawful act in violation of section 17200. Rather, the doctrine of trespass to chattels is an old common law concept. Finally, the appellate court affirmed the finding that there had been no showing of an unfair or fraudulent conduct in connection with Mr. Cho’s control over the egpak.com domain that would also violate section 17200. In essence, Pneuma had not established that there had been any unlawful business practice.
To further buttress this finding, the appellate court found that because section 17200 only provides for equitable relief (instead of monetary damages), Pneuma would not have been entitled to anything in addition to what it was already awarded in connection with its trespass to chattel cause of action, i.e., return of the domain to its control. Thus, the First Appellate District Court affirmed the finding in Pneuma’s favor as to its trespass to chattels cause of action and rejected Pneuma’s appeal as to the other related claims.
The Pneuma case is a good reminder to businesses that they should take the time to review and/or audit their current IT structures, including identifying the registered owners of its domains and who controls access so that it can work with current employees to ensure that control and/or ownership of its web-based assets are transferred back to the company. Waiting until after an employee has been terminated to try to negotiate the return of such assets can be complicated and pose risk that the company’s web presence could be interfered with and customers shut out and/or redirected.
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