In its latest opinion dealing with trade secret issues, the Virginia Supreme Court ruled that the Virginia Uniform Trade Secrets Act, Va. Code §§ 59.1-336 through 343 ("VUTSA") protects trade secrets even if they are used by an entity that is not demonstrably "in competition with" the plaintiff. Collelo v. Geographic Services, Inc., No. 101411, 101421. The Court also apparently concluded that a plaintiff must demonstrate different damages flowing from a violation of the VUTSA, on the one hand, and claims for breaches of contract and tortious interference of contract, on the other hand. Further, the trial court’s original ruling and the Collelo dissent suggest that hostility to trade secret protection for employers in Virginia is not waning.
Anthony Collelo worked for Geographic Services, Inc. ("GSI") for two years on GSI’s "geonames" work, in which GSI sold information to its clients that populated maps. As part of his training and work, Collelo had access to and utilized tools and methods developed by GSI with respect to its geonames work. Collelo had an employment agreement with GSI that included non-disloclosure and non-solicitation provisions with GSI, preventing him from disclosing GSI’s confidential information or performing "conflicting services" for a customer or contractor of GSI’s for a period of one year after his employment with GSI ended.
Collelo resigned from GSI in 2008 and began working for a new employer, a customer of GSI’s for whom GSI had done geonames work. Collelo’s work for his new employer appeared to be substantially identical to the work he had done for GSI on geonames, including development of tools for the new employer that were substantially similar to those used at GSI. Notably, after Collelo joined his new employer, the new employer demanded from GSI a reduction in rates and hours for certain geonames work by GSI.
GSI filed suit against Collelo and the new employer alleging, among other things, that Collelo had breached his employment agreement with GSI and violated the VUTSA, and that the new employer had violated the VUTSA and had tortiously interfered with GSI’s employment contract with Collelo. Among the relief sought was damages, reasonable royalty, and an injunction. GSI lost at trial, however, when the trial judge granted the defendants’ motion to strike after GSI’s case in chief and dismissed the case with prejudice.
The trial court had ruled that GSI established the existence of proprietary information under VUSTA. However, it concluded that even if Mr. Collelo had taken something from GSI, because the new employer was not doing the same work as GSI, GSI could establish no loss of business or damages. The court reasoned that the purpose of protections for proprietary information was to keep competitors from using them to take business away from the owner of that proprietary information. In the trial court’s view, there must be loss of business by plaintiff, or a gain in income by the defendant, in order for there to be compensable damage.
On appeal, the Virginia Supreme Court analyzed the VUTSA and concluded that it does not require that "one who is accused of misappropriating a trade secret use [it] to compete with the holder of the trade secret." Instead, the law requires only proof of a trade secret, its misappropriation or use of the trade secret by someone knowing or having reason to know it was acquired by improper means, and damages. The Court then declined to rule as a matter of law on the sufficiency of the VUSTA damages demonstrated by GSI.
The Court then upheld the trial court’s dismissal of the breach of contract and tortious interference claims because GSI’s two damages experts stated on cross-examination that they were offering opinions as to the VUSTA claims only. This testimony led the Court to conclude there was no evidence supporting damages for the breach of contract or tortious interference claims. Apparently GSI’s counsel did not argue that the experts’ testimony regarding unjust enrichment, devaluation of the trade secrets, and devaluation of GSI supported the damages claim for the contract and tort claims.
The dissent took GSI’s damages evidence to task and argued that the majority’s failure to rule on the merits of GSI’s damages was in error. While not precedential, the dissent’s analysis of the damages is the most detailed such analysis in a recent Virginia Supreme Court trade secret case and thus deserves attention. The dissent demanded evidence of lost profits to support actual damages, rejecting as being legally baseless GSI’s claim for diminished value and cost to develop the trade secret. The dissent found GSI’s expert calculation of unjust enrichment to be insufficient because it did not provide a one-for-one analysis of the use of GSI’s trade secret and profits obtained thereby by the new employer. Because the royalty analysis was dependent on the unjust enrichment analysis, the dissent rejected that claim out of hand.
– The Virginia Supreme Court likely got it right in interpreting the VUSTA to apply even in instances when a misappropriated trade secret is used by an entity that is not technically in competition with the trade secret’s owner.
– The Court probably got it wrong, however, in apparently requiring different damages to flow from a VUSTA violation and claims for breach of contract and tortious interference. While the damages may, in fact, be separate among the claims, they need not be. For example, GSI proffered evidence of a diminution in value of its trade secrets, and of its company, as a result of the new employer’s alleged use of those trade secrets. Nothing in the Court’s analysis explains why these kinds of damages could flow from all of GSI’s claims against the new employer — except for the testimony of GSI’s experts limiting the scope of their damages analysis to a single claim. The lesson here is for employers (and their trial counsel) to prep your experts better. Leave it to the lawyers to argue which damages proofs support which claims.
– Finally, the dissent’s opinion is cautionary and indicates that Virginia courts may have a high bar for proof of damages flowing from actionable misuse or disclosure of a trade secret. Make sure your experts provide rigorous opinions supporting the damages claim, and be armed with legal support for the kinds of damages to which a plaintiff is entitled in trade secrets cases.