Barnes & Noble Inc lost its bid to dismiss Spring Design Inc's lawsuit accusing the largest U.S. bookseller of illegally copying a screen design for the popular Nook electronic book reader.

Spring Design will be allowed to pursue claims accusing Barnes & Noble of misappropriating trade secrets, breach of contract and unfair competition, according to a ruling in the federal court in San Jose, California.

The ruling by U.S. District Judge James Ware on Monday evening is a setback for Barnes & Noble, which launched Nook in October 2009 to compete with Amazon.com Inc's market-leading Kindle. Spring Design sued the next month.

In its complaint, Spring Design said it had shared the dual-display design of its forthcoming Alex eReader with Barnes & Noble when the companies held talks in 2009 over a possible partnership.

The company said Barnes & Noble later incorporated features of Alex into Nook, breaching a nondisclosure agreement. One Nook screen is used for reading and one for browsing.

Nook's price starts at $149, and Forrester Research expects sales to reach about 2 million by the end of this year, for a roughly 20 percent market share.

Spring Design began to ship Alex in April and sells it for $299, its website shows.

In his ruling, Ware said there was a significant factual dispute over whether the information Spring Design shared had substantially influenced the design of Nook or had been disclosed already in patent applications filed as early as 2006.

The judge also said it was premature to reject charges that Barnes & Noble had violated California law by stealing trade secrets and misleading consumers by advertising that the Nook was the first eReader with such features as a color touch screen.

Mary Ellen Keating, a Barnes & Noble spokeswoman, said the company does not discuss pending litigation.

Founded in 2006, Spring Design is based in Silicon Valley, and has offices in China and Taiwan. A spokeswoman had no immediate comment.

Ware scheduled a February 7 pretrial conference.

Barnes & Noble launched the Nook to help stanch declining sales and earnings.

Amazon does not disclose sales figures for the Kindle, launched two years earlier, but Forrester estimated the company controls more than 60 percent of the e-books market.

On Monday, Amazon reported strong holiday season sales for the Kindle, while several Barnes & Noble stores reported having sold out of Nook over the weekend.

Barnes & Noble shares were down 33 cents, or 2.3 percent, at $14.24 in midday trading on the New York Stock Exchange.

The case is Spring Design Inc v. Barnesandnoble.com LLC, U.S. District Court, Northern District of California, No. 09-05185.

(Additional reporting by Phil Wahba; editing by Dave Zimmerman and Maureen Bavdek.)

China Lawsuit