By Robert Milligan and Grace Chuchla
Ahhh, Hawaii. Crystal clear water, pristine beaches, warm weather – it’s the perfect place to relax and enjoy some sun. Well, that is, it’s the perfect place to relax until you disclose your trade secrets to a third party contractor who then allegedly breaks its business relationship with you and goes on to allegedly use your proprietary technology with two of your former alleged prospective business partners.
Such was the alleged situation that Cougar Mountain Adventures, Ltd. found itself in in February 2007. Cougar Mountain works in the zipline industry, designing and developing adventure courses that use their proprietary braking technology.
In July 2006, Cougar Mountain allegedly began negotiating with Experiential Resources, Inc. (“ERI”), a subcontractor that would assist in some of Cougar Mountain’s zipline course installations and projects. On September 13, 2006, Cougar Mountain and ERI executed a Confidentiality Agreement, after which Cougar Mountain allegedly shared with ERI its confidential and proprietary zipline technology and trained ERI on how to install and operate its zipline courses. Skyline Zipline Global, L.L.C. v. Domeck et al., Case No. 12-00450 JMS-BMK (D. Hawaii) (the court clarified its initial order following a motion by plaintiff).
Enter two alleged prospective business partners interested in Cougar Mountain’s zipline technology. Both allegedly met with a Cougar Mountain representative in late 2006 to discuss the possibilities of forming a zipline partnership and/or developing ziplines for their resorts. In October 2006, after delivering course design proposals to both prospective business partners, Cougar Mountain allegedly brought ERI into both of these deals, again allegedly sharing with ERI their proprietary technology and inside information regarding the negotiations.
Things were apparently going swimmingly and both projects were allegedly moving full steam ahead until February 2007, when one of the business partners allegedly cancelled its Letter of Intent with Cougar Mountain and the other partner allegedly abruptly and inexplicably stopped all communications. Three months later, in May 2007, a Cougar Mountain executive read a newspaper article about one of the partner’s plan to develop a zipline course. With his suspicion allegedly raised, the Cougar Mountain executive emailed ERI and asked if they were involved in the partner’s zipline course. ERI allegedly denied any involvement, and Cougar Mountain did not press the matter.
However, in September 2009, the Cougar Mountain executive allegedly saw photos of one of former alleged partner’s zipline course and allegedly immediately recognized Cougar Mountain’s proprietary braking system and patent-pending trolleys. Around this same time, the executive allegedly also learned from the other former alleged prospective partner’s website that ERI was involved in the construction of its zipline. With this information, Skyline Zipline Global, LLC (a previously uninvolved fourth party that had assumed Cougar Mountain’s intellectual property rights) filed a complaint against ERI and two business partners, on August 28, 2012, asserting patent infringement, breach of contract, trade secret misappropriation, fraudulent concealment, and tortious interference.
On October 31, a motion to dismiss was filed asserting that 1) Cougar Mountain did not take reasonable steps to keep its proprietary information secret and 2) Cougar Mountain’s claim was time-barred because they should have discovered the alleged misappropriation in 2007.
Defendants’ argument was based on the claim that Cougar Mountain’s technology does not constitute a trade secret because they revealed their supposedly proprietary information to the alleged business prospective partners without obligating them to keep the information confidential. However, in its reply, Cougar Mountain disavowed that its misappropriation claim against the prospective business partners was based on the theory that Cougar Mountain disclosed trade secret information directly to them prior to having them sign a confidentiality agreement. Rather, it stated that it provided only general information and the basis of its trade secrets claim against them is that the alleged prospective business partners knew of Cougar Mountain’s confidential relationship with ERI and used ERI as their vendor knowing that ERI was allegedly using Cougar Mountain’s trade secrets. The court accepted this argument, and denied the motion with respect to the trade secret misappropriation claim. The court, however, narrowed the trade secret misappropriation claim to the allegation that the alleged prospective business partners obtained trade secret information through ERI and/or that one of the business partners obtained trade secret information after it signed a confidentiality agreement in connection with its letter of intent.
The court then turned to the statute of limitations argument. The Hawaii Uniform Trade Secrets Act states that all actions for misappropriation “must be brought within three years after [it] is discovered or by the exercise of reasonable diligence should have been discovered” (HRS §482B-7). More than three years had lapsed since Cougar Mountain questioned ERI about its involvement with the alleged prospective business partners, and thus, the court had to decide whether Cougar Mountain executive’s inquiry to ERI and ERI’s subsequent denial of any involvement with defendants’ ziplines constituted “reasonable diligence.” Although the Hawaii Supreme Court had never directly decided this issue, the court looked to other Hawaii and California court decisions and found it “plausible (at least at this pleadings stage) that ERI Defendants’ assurances that they were not involved with [one of the business partners] would end a reasonable investigation.”
Finally, the court ended with some good news for the defendants, and dismissed Skyline’s claim for fraudulent concealment with leave to amend, finding that Skyline’s general assertion that defendants made “false statements” was not enough to prove misrepresentation on part of the two alleged prospective business partners. Indeed, if any fraudulent misrepresentation or omission occurred, the court found that it was carried out by ERI, not the alleged prospective business partners.
So what does this glimpse into trouble in paradise demonstrate? First and foremost, if you do disclose trade secrets to third parties, make sure that you have NDAs with all the parties’ involved and prohibit the sharing of such information outside the authorized individuals expressly provided for in the agreement. And don’t disclose any trade secrets until you have a signed NDA. Think ahead, plan accordingly, and always look to close loopholes and backdoors through which competitors or erstwhile prospective business partners could misappropriate your confidential and trade secret information.
Regardless of the underlying merits of this case, the allegations in this case serve as a cautionary tale to always be vigilant, responsible, and proactive when it comes to protecting trade secrets and confidential information.