Mark It Confidential: Allowing Customers To Share Price Quotes Eviscerates Trade Secret Status

Posted on November 6, 2009 by Guest Author for TradeSecretsLaw.com

By Jason Stiehl

Often one of the most confidential aspects of a business is its pricing mechanism and the quotes that it provides its customers. It is for this reason that the general rule governing trade secret law is that a company’s non-published pricing is a trade secret. See generally PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7th Cir. 1995).  What happens, however, when a company does not prohibit its customer from sharing that pricing with others in the industry? 

This precise question was addressed in Southwest Stainless, LP v. Sappington, 582 F.3d 1176 (10th Cir. 2009), and we touched on it in an earlier posting.  However, as the issue comes up fairly frequently, we thought it might warrant deeper discussion.

In Southwest Stainless, the U.S. Court of Appeals for the Tenth Circuit held that although pricing generally may be protectable, a court needs look at the specific pricing at issue in the case to determine whether the company protected that pricing. Ultimately, the Court in Southwest Stainless held that sharing pricing with a customer, without restriction, removes any claim of confidentiality that may have existed.

John Sappington and William Emmer worked for over ten years supplying metals to customers in the Tulsa-area on behalf of Southwest Stainless. Within a month of each other (and shortly after the departure of another Southwest employee), Sappington and Emmer left Southwest to work for a local competitor, Rolled Alloys. After their departure, Southwest identified two Southwest customer (previously serviced by Sappington and Emmer) who transferred business to Rolled Alloys. At trial, it was adduced that the former employees had assisted in preparing pricing quotes to these customers, including re-quoting Rolled Alloys’ prices at a price lower than the Southwest quote known to the former employees. The trial court entered judgment on behalf of Southwest, relying upon the steps undertaken by Southwest to keep its pricing confidential, such as: (1) confidentiality agreements, (2) password protection, (3) expenditure of hundreds of thousands of dollars to keep the information confidential, and, notably (4) the admission of the former employees that they understood price quotes to be confidential. Southwest Stainless, 582 F.3d at 1189.

On appeal, the Tenth Circuit reversed this holding,[1] drawing a distinction between “general measures” used to protect trade secrets and the “particular” pricing at issue in this case. Id. at 1190. It cited record evidence that Southwest had provided customers with “posted pricing,” that customers revealed competitors’ pricing, and that Southwest did not prevent customers from sharing its information. Id. The Tenth Circuit relied upon the United States Supreme Court decision of Rucklehaus v. Monsanto Co., 467 U.S. 986, which held:

If an individual discloses his trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the secret, his property right is extinguished.

Here, because Stainless had “disclosed the quote” and the customer was “under no obligation to keep the information confidential,” the Court held the district court erred in holding such a price quote confidential and reversed the judgment in favor of the Plaintiff. 

This holding implies, however, that a company still may be able to assert trade secret protection for information necessarily shared with customers so long as the company requires its customers to treat the information as confidential as well.


[1] Notably, the opinion affirmed the remaining counts, including a breach of non-competition agreements, which ultimately awarded the same damages sought through the trade secret claim.

 

 

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In 'Ashland Management,' confidentiality knows no bounds.

Posted on March 27, 2009 by Gary Glaser
By Gary Glaser & Brian Murphy
March 23, 2009

We live in a world where global markets are falling all around us; where competition is keener than ever, and where a company's confidential business information, or "trade secrets," may provide it with its only critical edge over competitors. As a result, it is more important than ever to protect such intellectual property. That's why employers frequently require their employees to sign agreements containing restrictive covenants that prohibit them from leaving to go to work for a competitor, from soliciting the employer's customers, and from stealing the company's trade secrets. And that's why restrictive covenant litigation appears to be on the rise.

Unfortunately, however, restrictive covenants - whether styled as covenants not to compete, more limited non-solicitation agreements,1 confidentiality agreements or a combination of the three - are heavily disfavored under New York law. This stems from New York's strong public policy favoring an individual's ability to earn a livelihood. See, e.g., Columbia Ribbon & Mfg. Co. v. A-1-A Corp., 42 NY2d 496, 499, 398 NYS2d 1004, 1006 (1977); Reed, Roberts Assocs. Inc. v. Strauman, 40 NY2d 303, 307, 386 NYS2d 677, 680 (1976). Courts will generally enforce agreements that contain restrictive covenants only where the restrictions are reasonably limited geographically and temporally and the enforcement is necessary to protect a valid business interest. See Columbia Ribbon, 42 NY2d at 499.

The valid business interest, or protectable interest, is most often defined to include confidential customer information; where the employee performed "unique or extraordinary" services; or where necessary to protect against the misappropriation or exploitation of an employer's goodwill, see BDO Seidman v. Hirschberg, 93 NY2d 382 (1999). In the case of covenants restraining competition, New York courts also require a demonstration that the restriction: (i) is no greater than is required for protection of the legitimate interest of the employer; (ii) does not impose undue hardship on the employee; and (iii) is not injurious to the public. Id. at 388-89.

Unfortunately, it is often difficult to decipher the legal bases that underlie many decisions in this area, and there is a host of apparent inconsistency among seemingly similar cases. This is largely because such cases are, by their very nature, exceedingly fact-intensive requiring, a fact-specific, case-by-case, analysis.

A breath of fresh air just blew in from the direction of the Appellate Division, First Department, however, in its decision in Ashland Management Inc. v. Altair Investments NA LLC, 869 NYS2d 465, 2008 N.Y. Slip Op. 10061 (1st Dept. 2008). The clarity of the decision in Ashland Management stands out from the body of somewhat confusing and at times apparently inconsistent cases in this area. In one stroke of their collective pens, the majority strengthened the enforceability of confidentiality agreements binding former employees, and at least implicitly reinforced the viability of confidentiality-based restrictions on the solicitation of the customers of one's former employer even absent an express no-solicitation agreement.

The primary significance of the decision is the court's enforcement of a confidentiality agreement of unlimited duration2 against two former employees. And it did so while expressly holding that it is not necessary for an employee to have provided "unique or extraordinary services" in order to justify enforcing such a perpetual confidentiality agreement. One of the former employees was a portfolio manager, and the other was involved in quantitative research. Ashland Management is in the business of providing investment advice and management to high net worth individuals and entities, and both employees left Ashland Management to form Altair Investments.

Meaning and Scope

Since long before Ashland Management, confidentiality agreements have enjoyed wider latitude than the other types of restrictive covenants. This is largely because they normally do not operate to unreasonably interfere with an individual's ability to earn a livelihood, and because the subject of the agreement, confidential business information, is a readily identifiable protectable interest. See Geritrex Corp. v. DermaRite Indus., LLC, 910 F.Supp. 955, 959 (SDNY 1996). Moreover, an employer's interest in its confidential or proprietary business information is so strong that a former employee is often bound not to disclose it even in the absence of an express agreement because of the common law duty of loyalty and fiduciary duty of good faith and fair dealing. See, e.g., North Atl. Instruments Inc. v. Haber, 188 F.3d 38, 47-48 (2d Cir. 1999).

Indeed, all but four of the 50 states have adopted the Uniform Trade Secrets Act (UTSA), in recognition of the recognized role of trade secrets in commerce, and one of those - New York - might well jump on the UTSA bandwagon this year3: on Feb. 26, 2009, legislation was proposed in the New York State Assembly to adopt the UTSA.4 Nevertheless, merely labeling information "confidential" or a "trade secret" is insufficient to confer legally protectable status upon it. Rather, New York courts will consider the extent to which the information is known outside the business, the measures taken to guard the information, the value of the information to the business, the amount of money or time expended in developing the information, and the ease or difficulty with which the information could be properly acquired or duplicated. See Ivy Mar Co. Inc. v. C.R. Seasons Ltd., 907 F.Supp. 547, 556 (SDNY 1995), and cases cited therein.

The permissible temporal scope of restrictive covenants has been addressed by New York courts at length, although with often dizzying variations. This results, in large part, from the extremely fact-intensive analysis required in each case. New York courts evaluate the reasonableness of temporal (as well as other) restrictions in the context of the nature of the particular industry involved, the strength and nature of the particular business interests asserted to justifying the requested restriction, and the nature of the activity being restricted. Unfortunately, however, it is difficult to discern definitive guidelines for evaluating the permissibility of a particular durational limitation in a restrictive covenant. It is axiomatic, however, that where the agreement effects a restriction on working for a competitor generally forever or prohibits solicitation of clients in perpetuity, the agreement will be unenforceable as a matter of law in New York. That is what makes the decision in Ashland so significant.

'Ashland' Facts and Decision

In Ashland, the First Department had before it a restrictive covenant that was limited to a confidentiality agreement which provided in relevant part that the two individual defendants would "not, at any time during or after the termination of his or her employment . . . reveal, divulge or make known to any person . . . any records, data, trade secrets, know-how, methods of operations, strategies, processes, computer programs, personnel information . . . or any other confidential or propriety information of the Company or any Client . . . used by the Company and made known . . . to the Employee by reason of his or her employment by the Company."

There was no time limitation whatsoever on the obligations of confidentiality which were imposed. Accordingly, by nevertheless finding the confidentiality agreement enforceable, the court chipped away at any blanket prohibition on unlimited durational periods for restrictive covenants - at least those limited to expressly protecting the employer's confidential and trade secret information.

In August 2003, the individual defendants resigned from Ashland to form a competing business, Altair. In an effort to raise their profile, they distributed investment performance data to the plaintiff's clients, contacted plaintiff's clients to inform them of their departure, and after they had officially resigned, began soliciting plaintiff's clients on behalf of Altair by using client contact information and performance data allegedly taken from Ashland.

Plaintiff commenced an action in January 2004 seeking damages and injunctive relief. The Supreme Court, New York County, issued a preliminary injunction enjoining defendants from "(1) using, disseminating or exploiting information derived or copied from any of Plaintiff's records . . . and (2) soliciting any of the individual brokers, custodians or consultants of plaintiff's institutional clients that [defendants] were either introduced to through their employee relationship with plaintiff or learned of from any of the Confidential Information." Plaintiff also sought damages for, inter alia, breach of fiduciary duty and breach of the confidentiality agreements. The Supreme Court denied defendants' motion for summary judgment as to these causes of action, and defendants appealed.

The First Department affirmed the denial of summary judgment. The court began with the settled pronouncements of Reed, Roberts and BDO Seidman, stating that restrictive covenants are subject to specific enforcement to the extent that they are reasonable in time and geography and necessary to protect a valid interest. The court then immediately tackled the lack of a durational limit - the focus of the dissent - holding that the absence of a durational limitation does not render a confidentiality agreement void as a matter of law. While the court noted that restrictive covenants are generally unenforceable if their duration is unreasonable, the court differentiated confidentiality agreements that do not directly impact competition from other restrictive covenants, which may prevent a former employee from pursuing his or her livelihood.

Temporal Restrictions

Ashland is significant in its analysis of the temporal restrictions in several respects. First, by its holding, the court clarified that a temporally unlimited confidentiality agreement is not unenforceable as a matter of law. The majority distinguished itself from the dissent, which appeared to treat the confidentiality agreements at issue as classic non-compete agreements, for which the lack of a temporal restriction would indeed prove problematic. The majority further explained that contrary to what the dissent would have held, whether a former employee provided "unique or extraordinary" services is not a determining factor of enforceability but rather, a component of the analysis as to whether the covenant is temporally reasonable under the circumstances.

The court also held that a court may modify an unlimited durational restriction to one more reasonable under the circumstances, although it did not modify the restriction here. While the majority's holding in this regard is simply an application of well-established New York law, the dissent argued that a court cannot sever an unlimited durational restriction because an unlimited restriction is, in effect, no restriction at all. The majority dismissed this form over substance argument and rested on the power of a court to enforce a covenant "to the extent it deems reasonable." See BDO Seidman, 93 NY2d at 394-395; see also Alside Div. of Associated Materials v. Leclair, 295 AD2d 873, 874, 743 NYS2d 898, 899 (3d Dept. 2002); Unisource Worldwide v. Valenti, 196 F.Supp.2d 269, 277 (EDNY 2002).

Further, the court provided exceedingly useful ammunition to employers seeking to effect a non-solicitation restriction through a confidentiality agreement. Specifically, the dissent noted that plaintiff conceded in its brief that the confidentiality agreement itself also precluded solicitation of certain clients since their very solicitation would, by definition, involve a misappropriation and use of the company's confidential information which the employees had covenanted not to use. This was not discussed by the majority, but they were plainly aware of this point. Accordingly, Ashland Management at least implicitly reaffirms the principle that even absent an express nonsolicitation agreement, a confidentiality agreement may be effective to prohibit solicitation of customers whose identities can be known solely by reference to the employer's confidential information. (We wouldn't suggest arguing for an implied perpetual restriction on solicitation, however.)

Significantly, the court also reaffirmed the principle that it is not necessary to show that an employee physically took documents containing confidential information to be actionable: rather, where the individual is party to a confidentiality agreement, and the confidential information at issue constitutes a "trade secret," "whether defendants' use of that information was a result of casual memory is irrelevant." Ashland, 869 NYS2d at 470.

Steps to Take

So what should an employer do?

• Use confidentiality agreements, as well as other restrictive covenants, but use them smartly: don't overreach; limit them to what is necessary to protect your legitimate business interests.

• Protect your confidential information: keep it secure, both from the third parties and from your own employees who don't have a "need to know."

• Adopt hiring and exit strategies designed to protect your confidential information. And be both vigilant and consistent.

Gary Glaser (gglaser@seyfarth.com) is a partner and Brian Murphy (bmurphy@seyfarth.com) is an associate in the labor and employment department of the New York office of Seyfarth Shaw.

Endnotes:

1. Of customers or employees, the latter which, when conducted en masse, is known as "raiding."

2. The confidentiality covenant in question similarly contained no geographic restriction - a point noted by the dissent. However, the decision of the court focuses solely on the lack of a durational element, which is, accordingly, the primary focus of this article.

3. The other three states are Massachusetts, New Jersey and Texas.

4. The bill is designated A6185, and the stated purpose of it, consistent with the holdings in Ashland Management, is " . . . to provide improved trade secret protection to industry."

"Reprinted with permission from the March 23, 2009 issue of the New York Law Journal. © 2009 Incisive Media US Properties, LLC. Further duplication without permission is prohibited. All rights reserved."

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Arizona District Court Issues Decision Limiting Applicability Of Computer Fraud And Abuse Act Claims

Posted on April 9, 2008 by Robert Milligan

A district court in Arizona recently issued a published decision limiting the use of the Computer Fraud and Abuse Act (“CFAA”) by employers who have been the victim of electronic data theft by their former employees. In Shamrock Foods v. Gast, --- F.Supp.2d ----, 2008 WL 450556 (D.Ariz.), the district court held that a departing employee’s transmittal of confidential information to his personal e-mail account prior to his resignation did not give rise to a cause of action under CFAA.

According to the employer’s complaint, the employee, who had executed a confidentiality agreement with the employer, allegedly e-mailed numerous company confidential and proprietary files to his personal e-mail account shortly after the employee had begun employment negotiations with a competitor. The day after he sent the company material to his personal e-mail account he allegedly told his manager that he was considering leaving the company and shortly thereafter informed the company that he was joining a direct competitor.

In its complaint, the company alleged that the employee was acting as an agent of the competitor when he assessed and e-mailed the confidential information. The company further alleged that he provided the information to the competitor and that the competitor was using the information to the company’s detriment.

The company brought suit in federal court asserting CFAA claims under 18 U.S.C. § 1030(a)(2), (4), and (5)(iii), as well as state law misappropriation claims. The employee and the competitor moved to dismiss the CFAA claims for failure to state a claim.

The district court granted the motion to dismiss concluding that 1) a violation for accessing a protected computer “without authorization” occurs only when the initial access is not permitted; and 2) an “exceeds authorized access” violation occurs only when initial access to a protected computer is permitted but the access of certain information is not permitted.

The court analyzed the CFAA statute in some depth and the specific CFAA claims that the employer brought. The court stated that it is a violation of section 1030(a)(2) when a person “intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains ... information from any protected computer if the conduct involved an interstate or foreign communication.” Next, the court stated that section 1030(a)(4) is violated when a person “knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value....” Finally, the court declared that section (a)(5)(A)(iii) is violated when a person “intentionally accesses a protected computer without authorization, and as a result of such conduct, causes damage. . . .”

In sum, the court reasoned that to state a claim under (a)(2) and (a)(4), the employer must allege conduct showing that the employee accessed a protected computer without authorization or exceeded authorized access and under section (a)(5)(A)(iii), the employer must allege conduct showing that the employee accessed a protected computer without authorization.

The competitor and the employee argued the CFAA claims were not actionable because the employee was authorized to access the computer and information at issue. The employer argued that the employee was no longer authorized to access its confidential information once he acquired the improper purpose to use this information to benefit himself and the competitor.

The district court acknowledged that there were two lines of cases interpreting the meaning of “authorization” under the CFAA. According to the court, some courts have applied principles of agency law to the CFAA and have held that an employee accesses a computer “without authorization” whenever the employee, without knowledge of the employer, acquires an adverse interest or is guilty of a serious breach of loyalty. The court cited the following the cases in support of that proposition: Int'l Airport Ctrs., L.L.C. v. Citrin, 440 F.3d 418, 420-421 (7th Cir.2006); ViChip Corp. v. Lee, 438 F.Supp.2d 1087, 1100 (N.D.Cal.2006); Shurgard Storage Ctrs., Inc. v. Safeguard Self Storage, Inc., 119 F.Supp.2d 1121, 1125 (W.D.Wash.2000).

The court also stated that other courts “have opted for a less expansive view, holding that the phrase ‘without authorization’ generally only reaches conduct by outsiders who do not have permission to access the plaintiff's computer in the first place.” The court cited the following cases in support of this contrasting position: Diamond Power Intern., Inc. v. Davidson, Nos. 1:04-CV-0091-RWS-CCH and 1:04-CV-1708-RWS-CCH, 2007 WL 2904119, at *13 (N.D.Ga. Oct.1, 2007); Brett Senior & Assocs., P.C. v. Fitzgerald, No. 06-1412, 2007 WL 2043377, at *2-4 (E.D.Pa. July 13, 2007); Lockheed Martin Corp. v. Speed, No. 6:05-CV-1580-ORL-31, 2006 WL 2683058, at *5 (M.D.Fla. Aug.1, 2006); Int'l Ass'n of Machinists and Aerospace Workers v. Werner-Masuda, 390 F.Supp.2d 479, 495 (D.Md.2005).

The court found that it was persuaded by the narrower view of “authorization”. First, the court found that the plain language of the statute supports a narrow reading of the CFAA. According to the court, section 1030(e)(6) defines “exceeds authorized access” to mean a violation occurs where the defendant first has initial “authorization” to access the computer. Under that section, once the computer is permissibly accessed, the use of that access is improper because the defendant accesses information to which he is not entitled. According to the court, under Citrin and Shurgard (cases that are often cited to support liability under these facts), however, that distinction is overlooked. According to the court, under their reasoning, an employee who accesses a computer with initial authorization but later acquires (with an improper purpose) files to which he is not entitled-and in so doing, breaches his duty of loyalty-is “without authorization,” despite the Act's contemplation that such a situation constitutes accessing “with authorization” but by “exceed[ing] authorized access.” 18 U.S.C. § 1030(e)(6). The court found that the construction made by the courts in Citrin and Shurgan conflates the meaning of those two distinct phrases and overlooks their application in § 1030(e)(6). The court stated that the plain language of § 1030(a)(2), (4), and (5)(a)(iii) target “the unauthorized procurement or alteration of information, not its misuse or misappropriation.”

Next, the court found that the legislative history supports a narrow view of the CFAA. The court cited Congressional testimony indicating that the general purpose of the CFAA “was to create a cause of action against computer hackers (e.g ., electronic trespassers). According to the court, “[s]imply stated, the CFAA is a criminal statute focused on criminal conduct. The civil component is an afterthought.” The court reasoned that the legislative history confirms that the CFAA was intended to prohibit electronic trespassing, not the subsequent use or misuse of information.

Finally, the court found that principles of statutory construction support adopting a narrower view of the CFAA. The court found that the rule of lenity guides its interpretation of the CFAA because it has both criminal and noncriminal applications. According to the court, the rule requires a court confronted with two rational readings of a criminal statute, one harsher than the other, to choose the harsher only when Congress has spoken in clear and definite language. According to the court, the approach advanced by the employer in the case would sweep broadly within the criminal statute breaches of contract involving a computer. Similarly, according to the court, an interpretation of CFAA based upon agency principles would greatly expand federal jurisdiction and the court expressly declined “the invitation to open the doorway to federal court so expansively when this reach is not apparent from the plain language of the CFAA.”

The court stated that it was adopting the restrictive view of “authorization” and following the line of authority that a violation for accessing ‘without authorization” occurs only where initial access is not permitted. The court found that the employer had failed to state a claim because the employee was initially provided access to the computer he used and was permitted to view the specific files he allegedly emailed to himself. Accordingly, the court found that the employee did not access the information at issue “without authorization” or in a manner that “exceed[ed] authorized access” and thus, the employer failed to state a claim under the CFAA.

While there are several cases from the Ninth Circuit and other jurisdictions that would support a CFAA claim on these facts including Shurgard and ViChip Corp., this case demonstrates that there is a clear split in authority concerning the proper scope of the CFAA. Even in those jurisdictions following the restrictive view, however, employers can avail themselves of state law claims, such as trade secret misappropriation and breach of contract, for misuse of confidential information by former employees.
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Home Builder Alleges Trade Secret Theft Of Strategic Plan By Former Executive

Posted on April 7, 2008 by Robert Milligan

One of the nation’s large home builders recently filed suit against a former executive in federal court in Albuquerque, New Mexico for alleged misuse of the company’s trade secrets related to a highly confidential internal strategic plan.

Pulte Home Corporation filed suit against former executive Lynn Galindo, a former area vice president based out of Las Vegas, Nevada, in the United States District Court of New Mexico (Case 1:08-cv-00210-JB-LFG) alleging claims of trade secret misappropriation, conversion, breach of fiduciary duty, breach of contract, fraud, breach of implied covenant of good faith and fair dealing, and unjust enrichment.

The complaint alleges that shortly before Galindo’s departure from the company, she misappropriated an internal strategic plan related to the Albuquerque housing market and later used it to create a similar plan for a competitor.

According to the complaint, the plan, which cost in excess of $1 million dollars to produce, contained information that would allow a competitor at Pulte’s expense to make informative decisions regarding the “relative health of the market in terms of marco/micro economic and market forces; the size of the mobility of the population within the market; the organization of Pulte’s Target Consumer Groups; the location preferences by consumer group, price sensitivity, product preferences, over-and under-served consumers groups which indicates market opportunity; and the top performing communities in the market organized by Target Consumer Group.” The plan also contained Pulte’s analysis of this data, its strategy for increasing its presence in the market, an “identification of specific challenges of this market and Pulte’s proposed solutions to those challenges.”

According to Pulte’s complaint, “A knowledgeable person would be able to use Pulte’s . . . [strategic plan] to assess the viability of a specific location (or multiple locations), understand the best opportunities for targeting specific consumer groups in the locations under evaluation and be able to fine tune a product offering in terms of community layout, community design, community amenities, lot size and configuration, floor plan selection and specifications of homes.”

According to the suit, Pulte provided Galindo with notice of her termination in the spring of 2007 as part of a reduction in force. Galindo negotiated a lucrative severance package that paid her nearly $300,000 in severance pay, bonuses and other compensation. Pulte claims Galindo conspired to obtain the strategic plan while she was negotiating her severance from the company and that if it would have known she had obtained the highly confidential plan that it would not have entered the severance agreement. Galindo apparently obtained the plan by contacting a subordinate and induced the employee to send her a copy prior to her separation.

During Galindo’s employment and as part of her severance agreement, Galiando signed agreements to keep Pulte’s proprietary information, such as the strategic plan, confidential, according to the complaint. Pulte claims that Galindo agreed to provide a developer in the Albuquerque area with a marketing study and used material from Pulte's confidential strategic plan in the report.

The case has yet to be set for trial and has been assigned to District Judge James O. Browning and Magistrate Judge Lorenzo F. Garcia.

This case highlights the need for employers to review the activities of departing employees shortly before their departure to ensure that company confidential/trade secret information has not been compromised and that the employees understand their continued confidentiality obligations to the company. Employers should consider reviewing these employees’ e-mail activity and access to proprietary databases prior to their departure, as well as remind other employees to report any suspicious activities, to attempt to safeguard company secrets.

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Bubble Bursts On Plaintiff Who Failed To Demonstrate That Trade Secret And Confidential Information Related To His NASCAR-Themed "Pit Crew Chew" Was Protected By Non-Disclosure Agreement

Posted on February 21, 2008 by Robert Milligan

A federal court in the Southern District of California recently burst the bubble on a plaintiff’s suit alleging that the defendant, the alleged creator of a novelty chewing gum product, had stolen the plaintiff’s idea for a NASCAR-themed bubble “chew” by granting the defendant’s motion for summary judgment.

The decision provides a reminder to companies that provide confidential and trade secret information to others under non-disclosure agreements that they need to follow the precise terms of those agreements, including properly designating all information that they seek to protect, otherwise they run the risk of their information being exposed and compromised.

In the colorful case, Hoffman v. Impact Confections, Inc., Case No. 06cv0489 BTM (NLS), 2008 WL 413751 (S.D. Cal.), the plaintiff alleged that together with a partner they established a bubble gum company named Ollie Pop Bubble Gum, Inc. (“Ollie Pop”). Plaintiff claimed that he came up with the concept of marketing novelty gum and candy “which was designed to combine the popularity of NASCAR and its drivers with the lure of the chew tobacco favored by many of NASCAR's fans by providing a gum or candy in an original new packaging intended to appeal to all ages.” First Am. Complaint 11.

Plaintiff alleged that he contemplated two different packaging options, both to be sold under the mark “Pit Crew Chew.” Id. at 12. The first packaging option was a pouch containing gum or candy and the second packaging option was a plastic container shaped like a tire and wheel that would also contain gum or candy. Id. Plaintiff’s idea purportedly was to have the products licensed by NASCAR and bear NASCAR's logos. Plaintiff also wanted to have the products endorsed by at least one NASCAR driver and display the driver's image and/or his car and/or associated number. Id.

According to the plaintiff, he designed both packages and began working with Motorsports Management to establish a relationship between Ollie Pop and NASCAR. Id. at 13. Plaintiff claimed he entered into discussions with Joe Gibbs Racing to have one of its drivers endorse the product and allegedly was able to obtain the promise of an endorsement from Tony Stewart. Id. at 15.

Plaintiff claimed that in 2003, he entered into negotiations with the defendant regarding the marketing and selling of “Pit Crew Chew” products. Id. at 16. The parties entered into a written non-disclosure agreement in May 2003.

As part of his discussions with the defendant, plaintiff contended that he disclosed confidential information and materials to defendant, including, but not limited to, “the idea/concept of marketing and selling a NASCAR and NASCAR driver endorsed bubble gum, the idea/concept of providing gum and/or candy in a package which would appeal to NASCAR fans' noted fondness for ‘chew,’ and the specific drawings of both the pouch and wheel to be marketed and sold.” Id. at 18. Plaintiff also claimed he introduced defendant’s employees to Motorsports employees.

According to plaintiff’s complaint, by July of 2003, defendant had submitted an application for a license to NASCAR seeking to market and sell “Pit Crew Chew” products with the NASCAR logos in place. Id. at 20. Following defendant’s submission of the licensing application to NASCAR, Motorsports allegedly informed defendant and Ollie Pop that NASCAR was indeed interested in licensing the “Pit Crew Chew” products. Id. at 21. Plaintiff alleged that by August 2003, Dale Earnhardt, Jr. was interested in endorsing “Pit Crew Chew” products. Id. at 22.

Then, around the beginning of September 2003, according to plaintiff, defendant abruptly ended its relationship with Ollie Pop and plaintiff. Id. at 24. With the failure to launch “Pit Crew Chew” products, Ollie Pop encountered financial difficulties and as a result plaintiff took a controlling interest in Ollie Pop. Id. Under the deal he allegedly struck with his former partner, plaintiff claimed that Ollie Pop granted him all right, title, and interest in and to and all intellectual property rights related to the “Pit Crew Chew” mark and products, all rights of Ollie Pop under the non-disclosure agreement, and all patent and copyright rights relating to the tire and wheel design and artwork. Id. at 26.

In 2005, plaintiff allegedly obtained copyright registrations for the two-dimensional artwork on Ollie Pop's candy wheel design. Plaintiff also claimed in 2005 he learned that defendant had launched its own product, “Champion Chew.” According to plaintiff, the product consisted of gum enclosed in a tire and wheel and was designed to bear a resemblance to “chew” tobacco. Id. at 27. Plaintiff alleged that “Champion Chew” was licensed by NASCAR and was endorsed by one of NASCAR's drivers. Id. at 28.

Plaintiff filed suit and his first amended complaint asserted claims for: (1) misappropriation of trade secrets under California’s trade secret misappropriation statute (Cal. Civ. Code § 3426.1); (2) intentional interference with economic relationships; (3) negligent interference with economic relationships; (4) breach of contract; (5) breach of implied contract; (6) copyright infringement; (7) quantum merit; (8) unfair business practices in violation of Cal. Bus. & Prof.Code § 17200 and California common law; (9) constructive trust/accounting; and (10) injunctive relief.

In his February 14, 2008 decision on defendant’s motion for summary judgment, district judge Barry Ted Moskowitz ruled, among other things, that the plaintiff failed to show that there was any evidence that the defendant had breached the non-disclosure agreement in question.

Plaintiff alleged that defendant breached the non-disclosure agreement by making use of “confidential” information, as defined by the agreement, and by conducting business with individuals and/or entities introduced to defendant by Ollie Pop. Plaintiff also alleged that defendant breached an implied contract to compensate Ollie Pop for the use of its information, concepts, materials, and ideas when and if defendant used them.

As a threshold issue, the court found that plaintiff’s contract claim failed because lacked standing to bring the claim because he was not a party to the non-disclosure agreement between Ollie Pop and defendant. The court found that when plaintiff acquired the legal entity of Ollie Pop in 2003, the acquisition documents did not transfer any rights under the non-disclosure agreement or any other contract between Ollie Pop and defendant.

Even assuming that plaintiff had standing, the court found that there was no evidence that defendant breached the non-disclosure agreement.

The non-disclosure agreement defined “Confidential Information” as follows:

Definition of “Confidential Information”. As used herein, “Confidential Information” means any and all non-public, confidential and proprietary information, as well as the intellectual property rights embodied therein (including patent, copyright, trademark, trade secrets and other intellectual property rights), disclosed by one party (the “Disclosing Party”) to the other party (the “Receiving Party”), including, without limitation, each party's information concerning contracts, research, experimental work, development, literary works, marketing and creative concepts, financial information, business forecasts and sales and marketing plans. Any Confidential Information disclosed in tangible form shall be clearly marked as “confidential,” “proprietary” or words of similar import. Any Confidential Information disclosed orally shall be identified as confidential at the time of its disclosure and the Disclosing Party shall make reasonable efforts to reduce such Confidential Information to writing and to provide it to the Receiving Party within twenty (20) days of its disclosure. The existence of any business negotiations, discussions, consultations, or agreements in progress between the parties shall also be considered “Confidential Information.” (emphasis added)

Plaintiff alleged that his idea of marketing and selling NASCAR driver endorsed bubble gum in a package, such as a plastic wheel, that would appeal to NASCAR's fans' fondness for chew, was confidential, proprietary information. The court was not persuaded, however, as the president of the defendant declared that at no time did Ollie Pop ever provide defendant with tangible materials of any kind that were marked “Confidential,” or “Proprietary.” Further, the president declared that Ollie Pop never advised defendant that any information which was being conveyed orally was confidential. The court noted that plaintiff did not present any evidence in opposition that it designated its ideas regarding “Pit Crew Chew” as “confidential” under the terms of the non-disclosure agreement.

Similarly, the court also found that there was no evidence that the defendant violated the non-disclosure agreement's prohibition against contacting or conducting business with “any entity or individual introduced by Discloser or its affiliates, directly or indirectly without the expressed written consent of Discloser for a period of three (3) years from the date of this Agreement.”

The defendant introduced evidence that during its involvement with Ollie Pop, Ollie Pop was pursuing a joint venture agreement for “Pit Crew Chew” with Motorsports in its capacity as an agent for the driver Tony Stewart, and Joe Gibbs Racing. The defendant proffered evidence that after the relationship with defendant and Ollie Pop terminated, defendant retained Elite Sports to negotiate non-exclusive, limited sponsorship agreements with Biaggi Brothers Racing LLC and Mike Wallace Racing for “Champion Chew.” Defendant further demonstrated that at no time during defendant's business relationship with Ollie Pop did Ollie Pop have discussions with Mike Wallace, Biaggi Brothers Racing LLC, or Elite Sports regarding “Pit Crew Chew.”

Thus, the court concluded that even if the plaintiff had standing to sue under the non-disclosure agreement, there was no evidence that defendant breached the non-disclosure agreement.

The court further found that plaintiff’s trade secret claim failed because the defendant had presented evidence that the plaintiff did not make reasonable efforts to maintain the secrecy of the purported trade secret and confidential information provided. Plaintiff was required to provide evidence of efforts that were reasonable under the circumstances to make out a prima facie case under California’s Uniform Trade Secrets Act (Cal. Civ. Code § 3426.1(d)). Under the non-disclosure agreement, the parties were required to take certain steps to designate information as confidential. The court found that plaintiff never designated the information at issue as confidential, and thus, was not protected by the agreement. Further, plaintiff failed to present evidence that Ollie Pop took reasonable steps to maintain the secrecy of the information.

On plaintiff’s copyright claim, the court found that “[a]lthough both the ‘Pit Crew Chew’ art work and ‘Champion Chew’ artwork generally depict tires and display NASCAR car numbers and the NASCAR logo (a necessity if NASCAR or its drivers sponsor the product), there is little similarity between the two. The design, font, color scheme, and words are all different.”

Additionally, the court also found that plaintiff’s remaining claims of intentional interference with economic relationships, negligent interference with economic relationships, quantum merit, unfair business practices, constructive trust/accounting, and injunctive relief were based on the defendant’s alleged infringement of copyright and misappropriation of trade secrets and confidential information. Because the court found that those underlying claims failed, these derivative claims failed as well.

The take away……

This decision provides a reminder to companies that if you are going to provide confidential and trade secret information pursuant to a non-disclosure agreement, that you should make sure that you follow the procedures in the non-disclosure agreement concerning the designation of confidential and trade secret information. If you do not follow the procedures articulated in the agreement, you may face an uphill battle suing for a breach of the non-disclosure agreement and/or satisfying the “efforts that are reasonable under the circumstances” prong of the definition of a trade secret under California’s Uniform Trade Secrets Act.
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California Federal District Court Awards $ 6.6 Million In Damages In Trade Secret Suit

Posted on February 5, 2008 by James McNairy

After granting summary judgment for plaintiff in late November 2007, Judge Susan Illston of the U.S. District Court for the Northern District of California recently awarded plaintiff $6.6 million in damages, the majority of which related to future lost profits due to breach of contract and misappropriation of trade secrets. Although the motion for summary judgment was uncontested, the court's ruling and damages award highlights the importance non-disclosure and confidentiality agreements can play in trade secret disputes.

Plaintiff Oculus Innovative Sciences Inc. entered into non-disclosure and purchase agreements with Nofil Corp. related Oculus' MicrocynTM disinfectant, antiseptic and sterilization technology. Under the agreements, Nofil agreed to manufacture certain machines for the production of MicrocynTM and to not disclose confidential information obtained from Oculus.

After ruling that Nofil had breached the agreements, the court held that Nofil had misappropriated Oculus' trade secrets. The court first held that Oculus had established the existence of a trade secret through reference to language in the non-disclosure and purchase agreements ("while the Court does not find this evidence to be overwhelming, it will assume for present purposes that Oculus can establish the presence of some trade secrets that fall within the scope of the [non-disclosure agreement]").

The court then determined that Nofil had misappropriated such trade secrets through its manufacture and sale to a competitor in Mexico of two machines covered by the agreements between the parties . Specifically, the court found persuasive PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368 (2000), which held that "[e]mploying … confidential information in manufacturing, production, research or development, marketing goods that embody the trade secret, or soliciting customers through the use of the trade secret information, all constitute use."

In a January 23, 2008 Order, the Court awarded Oculus $916,206 for lost profits for 2006 through part of 2008. The Court awarded future lost profits of $5,727,829 for a period of 5 ½ years discounted to present value.

The case is Oculus Innovative Sciences, Inc. v. Nofil Corporation, et al., Case No. 06-1686, N.D. Cal. 2006.

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Parsing Non-Competition Clause, Georgia Court of Appeals Uncovers Unreasonable & Overbroad Restriction

Posted on February 5, 2008 by Sara LeClerc

Trujillo v. Great Southern Equipment Sales, LLC, No. A08A0245, 2008 WL 269606 (Ga. Ct. App. Feb. 1, 2008).

Reviewing the “Confidentiality and Restrictive Covenant Agreement” signed by Sarah Alexandra Trujillo while employed by Great Southern Equipment Sales, LLC, the Georgia Court of Appeals reversed the part of the trial court’s judgment that enjoined Ms. Trujillo from competing with Great Southern and soliciting its customers.

Ms. Trujillo had worked as a salesperson for Great Southern, a company primarily engaged in the business of selling transportation equipment, for over two years at the time of her resignation and departure for a competitor. In the early months of Ms. Trujillo’s employment, Great Southern’s president gave her on-the-job training; provided her with lists of Great Southern’s customers; and introduced her to many of the company’s customers and suppliers. After nine months of service, she was asked to sign the “Confidentiality and Restrictive Covenant Agreement.” At issue on appeal were the agreement’s non-solicitation and non-competition clauses.

Under Georgia law, restrictive covenants found in an employment contract must be strictly limited as to time, territorial effect, capacity in which the employee is prohibited from competing, and as to overall reasonableness. Moreover, unless a non-solicitation covenant pertains only to those clients with whom the employee had a business relationship during the term of the agreement, the covenant must contain a territorial restriction. Here, the court looked to the language of the non-solicitation provision in finding that it applied to a broad class of customers:

“The non-solicitation restriction set forth in this Section 2 is specifically limited to Customers of Employer with whom Employee had contact (whether personally, telephonically, or through written or electronic correspondence) during the three (3) year period immediately preceding the Separation Date or about whom Employee had confidential or proprietary information because of his/her position with Employer.”

The latter category of customers was not, as Great Southern argued, merely a reiteration of the separate confidentiality clause found in the agreement. Instead, the court said it was “an effort to impermissibly broaden the class of customers whom Trujillo could not solicit.” Because the non-solicitation clause at issue purported to apply to an expansive class of customers, but failed to include a geographical restriction, the court held that the provision was overbroad and unenforceable. Further, Georgia does not employ the “blue pencil” doctrine of severability, so the non-competition clause of the agreement was also unenforceable.

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Magistrate Judge Denies Motion for Reconsideration in Trade Secrets Case

Posted on January 31, 2008 by Dawn Mertineit

National Elevator Cab & Door Corp. v. H & B, Inc., 2008 WL 207843 (E.D.N.Y.) No. 07 CV 1562

 

United States Magistrate Judge Levy recently denied a motion for reconsideration after he granted the plaintiff National Elevator Cab & Door Corp.’s motion for a preliminary injunction against defendant H & B, Inc. The litigation stems from the failed acquisition talks between National (a supplier of elevator entrances and cabs in the New York metropolitan area) and H & B (also an elevator cab and entrance supplier, working nationally and internationally), and the resulting alleged breaches of non-compete and confidentiality provisions in an agreement between the two parties.

In 2005, H & B, having little presence in the New York metropolitan market, expressed interest in acquiring National. During discussions between the two corporations, National asked H & B to sign an agreement stating that if the acquisition did not occur, H & B would not solicit business with three of National’s customers (Fujitec New York, ThyssenKrupp Elevator, and the New York City Housing Authority) for five years, would not use National’s confidential information or intellectual property to compete with National, would not test or reverse engineer National’s products, and would not solicit National employees for three years. H & B signed the agreement, and National eventually disclosed such information to H & B as its business model, marketing strategies, internal projections for sales and expenses, and information on its pricing, outsourcing, gross margins, and annual sales.

The acquisition discussions failed, and H & B eventually began to do business with Fujitec and solicited National employees. H & B admitted these facts, but argued that the terms of the agreement were unenforceable. National was granted a preliminary injunction against H & B, and H & B moved for reconsideration.

In evaluating the motion, Judge Levy discussed whether National had demonstrated that it would suffer irreparable harm in the absence of an injunction. He noted that not only would it be difficult to calculate monetary damages to redress National’s losses, but also that in the agreement, H & B expressed admitted that money damages would be an insufficient remedy for breach. Judge Levy found that National made a sufficient showing that H & B’s continued solicitation of the three specified National customers would result in irreparable harm in the absence of an injunction. Although H & B argued that it had been unsuccessful in attracting business from two of the three specified customers, Judge Levy declared that National “need not wait until its relationships…are damaged before seeking an injunction.”

Next, Judge Levy reviewed whether National was likely to succeed on the merits of its claims, first analyzing the non-compete and non-solicitation provisions of the agreement. He noted that a non-compete covenant must pass a reasonableness test, and New York courts will only enforce such a provision between businesses where it protects a legitimate business interest, and its terms are reasonable, both temporally and geographically. Judge Levy expressly held that the agreement was reasonable and did not impose undue restraint on competition, because it applied only to three identified customers in one market (the New York metropolitan area). He noted that the customers were not obliged to work with National, but instead could employ other suppliers, and as such, the anti-competitive effects were not so great as to outweigh the harm to National.

Finally, Judge Levy addressed the confidentiality provisions of the agreement. He outlined the factors that New York courts consider in determining whether information constitutes a trade secret: the extent to which the information is known to the public, the extent to which it is known by employees and others in the business, what measures are taken to protect the information, the value of the information to the business and its competitor, the amount of effort or money used by the business to develop the information, and the ease or difficulty with which the information could be acquired by others.

Judge Levy found that the information given to H & B was confidential, and that National had taken adequate steps to guard this information. Despite the fact that National presented no evidence that H & B misused some of its information, Judge Levy found that H & B attempted to procure some of the materials from a mutual client of the two businesses after the acquisition talks failed and it was forced to return what it had been given. Thus, Judge Levy reasoned, the materials contained information that was valuable and not publicly available at the time. Additionally, Judge Levy noted that almost immediately after receiving National’s materials, H & B began offering installation (which it had never done before), changed its design, and was able to successfully attract one of National’s clients. Finding the timing more than merely coincidental, Judge Levy held that H & B violated the terms of the agreement, and further held that the confidentiality provisions were enforceable. Thus, H & B’s motion for reconsideration was denied.

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Coldwell Banker Sues Former Executives Who Form Competing Brokerage, Take Staff, Clients, and Trade Secrets

Posted on January 29, 2008 by Sara LeClerc

Coldwell Banker Residential Brokerage v. D’Ambrosia, No. 08-CV-00166, Complaint (D. Md. Jan. 18, 2008)

On January 18, 2008, Coldwell Banker Residential Brokerage filed a federal lawsuit in Maryland against three former key employees and newly-formed competitor Car-Tay, Inc., an affiliate of GMAC Real Estate. The complaint alleges that the former employees, two of whom had been high-level executives, conspired to form the competing brokerage in violation of their employment agreements, the federal Computer Fraud and Abuse Act, and state law.

Coldwell Banker claims that the former employees began actively, but covertly, planning, staffing, and building the competing venture more than one year before their departure. Key evidence cited in the complaint includes an extensive trail of emails purportedly sent and received by the defendants while still employed by Coldwell Banker. In the emails, the defendants openly discuss solicitation of Coldwell Banker salespersons, tips for persuading Coldwell Banker clients to move their listings to GMAC, how to access Coldwell Banker’s highly-guarded commercial document database, and how to copy data from Coldwell Banker computers. This “scheme,” the complaint says, was a targeted effort “to eviscerate [Coldwell Banker’s] ability to compete with GMAC.”

Indeed, Coldwell Banker points out that the very day following defendant Ann D’Ambrosia’s resignation, the defendants’ GMAC office opened its doors for business. Within one month, two dozen Coldwell Banker salespersons joined the defendants at GMAC. In six weeks time, Coldwell Banker had received requests from approximately ten clients to cancel and void their listing agreements; all of these clients re-listed with GMAC after securing the releases. Each of these results, Coldwell Banker contends, arose directly from the defendants’ pre-resignation solicitation efforts.

In its fourteen-count complaint, Coldwell Banker claims the defendants violated the federal Computer Fraud and Abuse Act by improperly accessing protected computers and removing confidential and proprietary Coldwell Banker information, including client files, listing agreements, contracts, and property records; breached their employment contracts and duty of loyalty owed to Coldwell Banker; tortiously interfered with contractual and prospective economic relations; and misappropriated trade secrets in violation of the Maryland Trade Secrets Act. Coldwell Banker seeks monetary damages in the amount of $2 million – $1 million as compensatory damages and $1 million as punitive damages – as well as injunctive relief enjoining the defendants from soliciting Coldwell Banker’s clients and employees for one year, and from using Coldwell Banker’s confidential and trade secret information.

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Seventh Circuit Rules that Injunction is Insufficiently Specific in not Defining the "Trade Secrets and Confidential Information Covered

Posted on January 17, 2008 by Michael Elkon

In Patriot Homes, Inc. v. Forest River Housing, Inc., No. 06-3012, 2008 WL 90081 (7th Cir. Jan. 10, 2008), the U.S. Court of Appeals for the Seventh Circuit vacated an injunction entered by the U.S. District Court for the Northern District of Indiana, ruling that it was insufficiently specific and therefore was not in compliance with Rule 65(d) of the Federal Rules of Civil Procedure.

The facts of the matter as set forth in Patriot Homes are as follows: Forest River hired four employees of Patriot Homes after merger talks between the two companies fell through. Forest River formed a new company named Sterling with the new employees. Patriot Homes, Forest River, and Sterling are all in the modular homes industry. The four employees copied information from Patriot Homes’s computer system before resigning and utilized that information for Sterling. Sterling did not deny that its employees had done so, but it argued that the information taken from Patriot Homes was not a trade secret because it was filed by Patriot Homes with various state governments and could be procured through Freedom of Information Act requests. Discovery revealed that most, but not all, of the information taken from Patriot Homes and used by the four employees could indeed be procured from state governments.

The District Court entered a preliminary injunction forbidding Sterling from “[u]sing, copying, disclosing, converting, appropriating, retaining, selling, transferring, or otherwise exploiting Patriot's copyrights, confidential information, trade secrets, or computer files.” The preliminary injunction also required Sterling to: “[c]ertify that copied data and materials of Patriot's property, confidential information and trade secrets on computer files and removable media (CDs, DVDs, tapes, etc.) have been deleted or rendered unusable.”

The Court of Appeals found that the injunction was not specific enough to put Sterling on notice as to what acts on its part would constitute contempt of court: “The preliminary injunction entered by the district court uses a collection of verbs to prohibit Sterling from engaging in certain conduct, but ultimately it fails to detail what the conduct is, i.e., the substance of the “trade secret” or “confidential information” to which the verbs refer.” The Court of Appeals based its decision on Sterling’s uncertainty as to what information was truly a trade secret or confidential information and what was not entitled to such protection by virtue of being publicly available. The case stands as a reminder that injunctions compelling parties to simply “follow the law” without more instruction do not comply with Rule 65(d).

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Defense Contractor Wins Nearly $23 Million in Trade Secrets Lawsuit Against Former Employees

Posted on January 7, 2008 by Dawn Mertineit

Innovative Technologies Corp. v. Kenton Trace Technologies LLC et al., case number 03-cv-3674

Innovative Technologies Corp. (ITC) has won nearly $23 million in a trade secret suit against three former employees who competed against ITC while still employed by the Ohio-based defense contractor. The state jury awarded $17 million in punitive damages, in addition to $5.7 million in compensatory damages. The employees also were ordered to return the salary earned in their final year working for ITC, close to $300,000.

According to the lawsuit, filed in May 2003, now-former ITC employees David P. Nicholas, James R. Silcott and Sheila K. Silcott set up Kenton Trace Technologies (KTT) in April 2000 to bid for defense contracts, despite the fact that they were still employed at ITC, had signed confidentially agreements, and were bound by contractual agreements not to compete with ITC.

The suit also alleged that the three enlisted the help of Virginia-based competitor Advanced Management Technology Inc. to lure away ITC customers using trade secrets. Testimony in the trial established that the three former employees won a share of a major services contract in 2001 while still working for ITC. At the time, ITC was under contract with the federal government to provide support services for the Wright-Patterson Air Force Base; the contract had been ITC’s since 1995. ITC did not learn of KTT’s existence until a competitor, Modern Technologies Corp., alerted ITC in May 2001 that KTT was trying to win the contract.

The Montgomery County Common Pleas Court issued a temporary restraining order in 2002 to keep KTT from competing with ITC, and a month later issued a preliminary injunction against the employees. Nevertheless, KTT conspired with Advanced Management to get around the injunction and acquired the Wright-Patterson contract.

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DuPont Scientist Sentenced for Stealing Trade Secrets

Posted on December 7, 2007 by Paul Freehling

A recent ruling from the U.S. District Court for the District of Delaware serves as a reminder that, in addition to civil liability, an ex-employee stealing his or her former employer’s trade secrets can face jail time and a fine. On November 6, 2007, former DuPont employee Gary Min was sentenced to 18 months in prison and two years of supervised probation, fined $30,000, and ordered to pay $14,500 in restitution to his former employer. According to a statement released by the company, Min had been a senior scientist. Shortly before he resigned to take a position with another company, he “misappropriated a significant volume of confidential and proprietary DuPont technical documents.” DuPont filed a civil suit against him in federal court, and that “suit was resolved to our complete satisfaction” according to the company's statement. Then, he was indicted for theft, entered a plea of guilty and was sentenced. United States v. Min, No. 1:06-cr-00121-SLR (D.Del.).

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Former research director of vitamin supplement company accused of stealing precise formula he was hired to develop

Posted on December 3, 2007 by Christina Putman

New lawsuit filed in Utah accuses a former research scientist employed by a nutritional supplement company of stealing trade secrets, customers, and employees when forming a rival vegan supplement company.

Systemic Formulas, Inc. claims that its former research director, Daeyoon Kim, is using Systemic’s trade secrets and proprietary information as the basis for its formula in the rival vegan supplement company. In its complaint against Kim, Systemic alleges that Kim executed Confidentiality and Non-Disclosures Agreement intended to protect Systemic’s proprietary information. Systemic alleges that Kim was specifically hired to develop a line of nutritional supplements without the RNA/DNA factor that is considered to be an animal product and therefore less appealing to certain portions of the supplement-consuming public that want a more natural supplement. Kim asserts that his primary duty was an employee manager and claims that Systemic did not have a research facility. However, Systemic’s website states, “Systemic Formulas uses a technologically advanced research and production facility to manufacture the bottling and capsulation process of its product’s raw materials.”

After Kim resigned from Systemic, he requested a modification to the Confidentiality Agreement to allow Kim to manufacture a line of vegan dietary supplements. Systemic alleges that Kim admitted that the proposed line of vegan dietary supplements would represent a line of products in conflict with his obligations under the Confidentiality Agreement and therefore requested a modification. Kim asserts he reached an agreement with Systemic in June regarding his request to develop the vegan supplements and that the lawsuit surprised him.

This case should be full of classic trade secret issues including an analysis of the scope of the confidentiality agreement and Kim’s exposure to proprietary information as a research director or an employee manager. Another area of inquiry will no doubt be whether the confidentiality agreement was altered by an oral or written agreement. Ultimately, the degree of similarity between Systemic’s supplements and Kim’s vegan supplements will be a major factor in this dispute. Another interesting issue may be whether Kim had a certain amount of knowledge before he was an employee of Systemic or whether he developed his vegan formula idea independently from the scope of his duties at Systemic.

This case can be monitored under Case No. 07-CV-159 in the District Court of Utah, Central Division.

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Ex-Employee's Knowledge of Method that Former Employer Used in Calculating Bulk Product Quotes Leads Illinois Appellate Court to Enforce 24-Month Non-Competition and Non-Solicitation Agreements

Posted on November 26, 2007 by Paul Freehling

An Illinois Appellate Court recently affirmed a preliminary injunction granted to a medical products manufacturer against its former employee, enforcing 24-months’ non-competition and non-solicitation agreements. The non-competition agreement barred the defendant-employee from competing with the plaintiff with respect to all products and territory assigned to the defendant during his final 18 months of employment. The non-solicitation agreement prohibited the defendant from soliciting or assisting in the solicitation of sales or leases of such products competitive with the plaintiff’s products in that same territory.

The court concluded that the defendant possessed confidential information concerning his ex-employer’s method of calculating so-called “open quotes,” offers to sell products in bulk to specific customers, even though the open quotes themselves were not confidential and they resulted in orders less than 50% of the time. Moreover, the competitor for whom the defendant went to work already was selling similar products to the same customers before the defendant changed employers. Furthermore, many of the plaintiff manufacturer’s employees did not have confidentiality agreements, and the defendant was not charged with taking any information with him when he left the plaintiff’s employ, other than what he had in his head. Lifetec, Inc. v. Edwards, No. 4-07-0300 (Ill.App., 4th Dist., Nov. 6, 2007).

The three appellate court justices were somewhat divided in their reasoning. Two ruled that the plaintiff had “legitimate business interests” in protecting its trade secrets, and found that the time and territorial restrictions applicable to the defendant were reasonable. The third justice concurred in the result. He expressed his opinion that enforcement is appropriate if an employer demonstrates that reasonable time and territorial restrictions were violated, but that courts should not impose on a plaintiff the additional burden of proving that it had a protectible or “legitimate” business interest.

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