By Scott Krol, New York

The United States Court of Appeals for the Fourth Circuit recently upheld summary judgment holding that a former employee did not violate the Virginia Computer Crimes Act (“VCCA”) when the former company could not prove that they were unaware of employees’ use of company funds. Further, the employee did not violate the Virginia Uniform Trade Secrets Act (“VUTSA”) when the company could not show any evidence that the employee in fact used any of the otherwise protected trade secrets for his benefit.

The parties to this case are closely linked. Jerry Nims is an entrepreneur who obtained patents on many technologies used in making identification cards more difficult to temper with or counterfeit. Nims started Orasee which owned many of these patents.

In 2003, Nims formed EC4 Technologies Limited (“EC4 UK”), a wholly owned subsidiary of Orasee, to license the technologies.

In 2005, Nims set up Othentec Ltd. (“Othentec UK”) as a subsidiary of EC4 UK.

Nims’s son-in-law, Jeffrey Phelan, was appointed Managing Director of both EC4 UK and Othentec UK, and later was put in charge of better distributing the company’s product in the United States.

On March 17, 2005, Phelan formed EC4 Technologies, Incorporated (“EC4 USA”) and became that company’s CEO. He began to market and distribute Orasee technologies in the U.S. pursuant to a sublicense agreement between the EC4 UK and EC4 USA. In November 2005, another executive formed Othentec Limited (“Othentec USA”) for the same purpose as EC4 USA, this time as wholly owned by Othentec UK.

By early 2006, after a considerable amount of friction developed between the parties, Phelan was discharged from his positions at the UK companies, but continued to do business as EC4 USA. This gave rise to the case at hand, essentially Nims’ companies claimed that Phelan abused his position of power and trust to form EC 4 USA fraudulently and proceeded to use Othentec UK’s money and trade secrets to run the U.S. business successfully. Phelan moved for and won summary judgment against Othentec UK on all issues except whether Phelan breached his fiduciary duty to Othentec UK.

The district court explained that there are three elements of committing a violation of the VCCA: “(1) using a computer or computer network (2) without authority (3) intending to obtain, embezzle, or convert the property of another.” Va. Code Ann, §18.2-152.3.

The Court found that Phelan clearly was authorized to access Othentec UK bank account, Othentec UK was aware of the withdrawals, and Phelan did not directly withdraw the money using a computer. Instead, Phelan merely sent an email to the accountant asking for the withdrawal. Hence, there was no evidence of the unauthorized use of a computer to commit a crime. Othentec UK “produced no evidence outside of self-serving speculations that Phelan committed a violation. of the VCCA.”

The VUTSA makes it illegal for a person to misappropriate trade secrets from another. Othentec UK argued that Phelan, as Managing Director, was intimately familiar with the technology, “unless someone is foolish enough to believe that all that (EC4 USA’s technology) was developed in a clean-room environment without reference to, use of, or attempting to work around” Othentec UK’s proprietary and highly confidential software and manufacturing process, than Othentec UK had no basis for its argument. The Court agreed with the last part, ruling that these “allegations, speculations, and inference are not enough to survive summary judgment.” See Othentec Ltd. v. Phelan, — F.3d —-, Case No. 06-2297, 2008 WL 2009740 (4th Cir. May 12, 2008) (emphasis added).