Two Senior Executives Liable for Millions in Misappropriation and Breach of Fiduciary Duty Case

Posted on July 11, 2008 by Erika Birg

Associated Press (Anna Jo Bratton) is reporting that a state district court judge in Lancaster County, Nebraska tagged two Nebraska Municipal Power Pool executives with millions of dollars in damages arising out of their scheme to use American Public Energy Agency's "company information, financial data and copyrighted material."  View Article. It appears that Nebraska Municipal Power Pool ("NMPP") previously provided services to American Public Energy Agency.  Then the two NMPP executives decided to create their own agency to compete with American Public Energy Agency.  AP also reports that the two executives attempted to steal away American Public Energy Agency's customers in an effort to eliminate or severely harm the company. 

I have not been able to locate a copy of the opinion, but I am hoping that it will be up on a website or a search service soon.   If I find it publicly available, I'll try to post a link to the judge's decision.

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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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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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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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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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