A Cautionary Tale from arrivia Inc. v. Rowley
Case Shows Importance of Thinking Twice Before Drafting Release Provisions in Settlement Agreements
Enforceability of releases for unknown claims at the time of settlement is a well-established legal principle, as highlighted in the recent case, arrivia Inc. v. Rowley, No. CV-23-01039-PHX-DLR, 2023 WL 7386384 (D. Ariz. Nov. 8, 2023). Here, the U.S. District Court for the District of Arizona affirmed these principles by determining that the Defendants' initial misappropriation preceding the settlement agreement and their subsequent misappropriation after the settlement agreement fell within the scope of claims released by the Plaintiffs in the settlement agreement. As a result, the court granted the Defendants' motion to dismiss the Plaintiffs' trade secret claims.
John Rowley and Marcia Rowley (Rowleys), former owners of arrivia Inc. (arrivia) sold the company to Panda Holdco LLC (Panda) in 2018, agreeing to a restrictive covenant that encompassed noncompete, nonsolicitation and confidentiality obligations. In 2020, the Rowleys established Open Network Exchange Inc. (ONE). In early 2021, arrivia accused the Rowleys of violating noncompete terms, prompting the Rowleys to initiate a lawsuit in the Delaware Court, seeking a declaratory judgment that ONE's business activities did not violate the restrictive covenant.
On Sept. 1, 2021, a settlement agreement was executed by arrivia, Panda (collectively, Plaintiffs) and the Rowleys, resolving the claims from the Delaware litigation (2021 Settlement). The 2021 Settlement included a release provision1 that absolved the parties of known or unknown claims related to disputes or litigation matters as of the effective date. It also recognized the possibility of discovering unknown claims after the settlement, and the parties agreed to assume the associated risks.
In June 2023, the plaintiffs brought this action in the U.S. District Court for the District of Arizona, asserting inter alia,2 1) violation of the Defend Trade Secrets Act (DTSA) and the Arizona Uniform Trade Secrets Act (AUTSA), and 2) unjust enrichment. The Plaintiffs claim that, following the 2021 Settlement, the Rowleys used arrivia's trade secrets to establish ONE as a competitor. The misappropriation of trade secrets claims involve the alleged improper acquisition, possession and use of confidential information by the Rowleys and ONE (collectively, Defendants). The unjust enrichment claim alleges that the Defendants used arrivia's information to unfairly compete.
The Defendants argue that, due to the 2021 Settlement's release clause covering claims known or unknown as of Sept. 1, 2021, and the alleged initial misappropriation predating the 2021 Settlement, the Plaintiffs' misappropriation of trade secrets claims under the DTSA and AUTSA are barred. The Plaintiffs concede the accrual of claims before the 2021 Settlement but assert that a continuing violation is actionable. However, the court determines that both the DTSA and AUTSA consider the ongoing improper use or disclosure of a trade secret after the initial misappropriation to constitute a "single claim of misappropriation" that accrues at the time of the initial misappropriation. The court concludes that the Defendants' initial misappropriation before the 2021 Settlement and their subsequent misappropriation after the 2021 Settlement should be treated as a single claim. Since these claims, whether known or unknown at the 2021 Settlement's effective date, were released by the Plaintiffs, the court grants the Defendants' motion to dismiss the Plaintiffs' DTSA and AUTSA claims.
The Plaintiffs assert an alternative claim for unjust enrichment, contending that the Defendants used arrivia's confidential information to benefit ONE. The Defendants argue for dismissal, claiming preemption by the AUTSA and release of the claim. The Plaintiffs argue against preemption and claim that release does not apply. The court, however, rules that the unjust enrichment claim is released, emphasizing that the release provision explicitly covers claims known or unknown as of the 2021 Settlement's effective date and concludes that the Plaintiffs were aware of the facts supporting the unjust enrichment claim at the time of the settlement. Consequently, the court grants the Defendants' motion to dismiss the unjust enrichment claim.
A key takeaway from this decision is the significance of the terms included in settlement agreements, particularly the release provision, which can impact the viability of subsequent claims. More specifically, this case highlights the broad scope of release provisions in settlement agreements, covering both known and unknown claims up to the effective date of the settlement agreement. It emphasizes the necessity for parties to carefully consider and negotiate the language of such provisions. Notably, when seeking to explicitly release both known and unknown claims, particularly in situations governed by California law, specific provisions such as a Section 1542 Waiver3 may be required to waive unknown claims in the settlement agreements.
In the context of the misappropriation of trade secrets claim, the court's analysis emphasizes the importance of the timing and accrual of claims. It clarifies that a continuing tort theory is not applicable. The cause of action accrues when the misappropriation is or should have been known, and subsequent misuse or disclosure is ineffective to start the statute of limitations running anew.4 However, if multiple defendants are involved, a plaintiff may have more than one claim for misappropriation, each with its own statute of limitations.5
1 The release provision in the 2021 Settlement provided the following:
Upon the Effective Date [of September 1, 2021], each of the Settling Parties, on behalf of themselves and each of their affiliates … hereby unconditionally and irrevocably releases and forever discharges each of the other Settling Parties and their respective affiliates … from any and all … claims …, whether state or federal, … whether … known or unknown to the parties as of the Effective Date, including but not limited to those in connection with or arising from the dispute over the Rowleys' non-compete obligations under the Restrictive Covenant Agreement … and/ or subject matters outlined in the Litigation; except no party is releasing any claims arising out of the performance or non-performance of the obligations set forth in this Settlement Agreement (including claims to enforce any provisions of this Settlement Agreement) and any claims expressly preserved herein.
Each Settling Party acknowledges and understands that there is a risk that subsequent to the Effective Date of this Settlement Agreement, each Settling Party may discover, incur or suffer released claims that were unknown or unanticipated at the time of the Effective Date of this Settlement Agreement, and which, if known on the Effective Date …, might have materially affected each Settling Party's decision to enter into and execute this Settlement Agreement. Each Settling Party … is assuming the risk of such unknown released claims and agrees that this Agreement applies thereto.
Without in any way limiting any other provisions of this Settlement Agreement, each Settling Party hereby covenants not to sue or to assert, prosecute, or maintain, directly or indirectly, in any form, any claims released by it pursuant to the releases included herein.
2 Additional counts include 1) breach of contract (nonsolicitation) and 2) breach of contract (confidentiality).
3 CA Civ Code § 1542 (2022) ("A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.").
4 Cadence Design Systems, Inc. v. Avant! Corp., 57 P.3d 647, 654 (2002) ("a plaintiff's claim for misappropriation of a trade secret against a defendant arises only once, when the trade secret is initially misappropriated, and each subsequent use or disclosure of the secret augments the initial claim rather than arises as a separate claim.").
5 Cypress Semiconductor Corp. v. Superior Court, 163 Cal.App.4th 575, 583 (6th Dist. 2008) ("In our view, a plaintiff may have more than one claim for misappropriation, each with its own statute of limitations, when more than one defendant is involved.").