The “return to normal” in courts across the country has brought with it a flurry of trade secrets decisions that address some interesting and instructive issues, both procedurally and substantively. In the last ten days alone, courts in Illinois, Massachusetts, and Texas have weighed in on issues such as the specificity necessary to assert a viable trade secrets claim, the enforceability of a restrictive covenant against an employee who is laid off temporarily but quickly finds a new role and is rehired by the same organization, and the validity of a $700,000,000 jury verdict that was based on a jury question that combined multiple theories of liability. Let’s take a look:
Next Payment Solutions, Inc. v. CLEAResult Consulting, Inc., No. 1:17-cv-8829 (N.D. Ill. May 31, 2020)
In a recent decision, Judge Steven C. Seeger, a 2019 appointee to the Northern District of Illinois about whom we’ve written in the recent past, granted a defense motion for summary judgment for the second and final time on a trade secret misappropriation claim because, despite multiple opportunities, the plaintiff failed to identify its purportedly misappropriated trade secrets with anything “specific and concrete.”
This dispute arose out of a former customer relationship whereby defendant CLEAResult Consulting, Inc. (“CLEAR”) licensed scheduling and appointment tracking software from plaintiff NEXT Payment Solutions, Inc. (“NEXT”). After a few years of successfully doing business together, CLEAR acquired a different software product and terminated its relationship with NEXT. CLEAR moved on, but NEXT did not.
In response to the termination of its relationship with CLEAR, NEXT filed a lawsuit alleging, among other things, that CLEAR violated the Defend Trade Secrets Act by incorporating elements of NEXT’s software into the product CLEAR acquired to replace NEXT. According to NEXT, CLEAR incorporated NEXT’s trade secrets based on the overlap in functionality of the two scheduling management software products. However, despite repeated attempts, NEXT was unable to specifically identify any actual trade secrets that were misappropriated, and instead alleged its purported trade secrets with generic functionality descriptions, such as “provides for administrative audits” or the even more vague, “applies rules.”
The court applied the standard set forth by the 7th Circuit in IDS Sys. Corp. v. Epic Sys. Corp., 285 F.3d 581 (7th Cir. 2002), which requires a plaintiff to identify its purported trade secrets with specificity, rather than simply identifying a generic kind of technology or functionality. Applying IDS to the facts of the case, Judge Seeger held that NEXT’s trade secret descriptions, “which include public facing functions and other general descriptions that are identifiable to an end-user” failed to specifically and narrowly describe the actual software it claimed was a trade secret. This failure was fatal to NEXT’s claim and warranted summary dismissal.
Judge Seeger’s opinion is instructive to would-be plaintiffs that unless they can specifically identify trade secrets that they allege have been misappropriated, their claims will not survive summary judgment.
Russomano v. Novo Nordisk Inc., No. 20-1173 (1st Cir. June 2, 2020)
Pharmaceutical company Novo Nordisk Inc. hired Thomas Russomano as a Hemophilia Community Specialist in January 2016. Upon his hiring, Russomano entered into a confidentiality and 12-month non-compete agreement. In October 2016, Novo Nordisk eliminated his position and terminated his employment as of November 18, 2016. Three weeks later, Novo Nordisk rehired Russomano for a new role as a regional Hemophilia Therapy Manager. Again, Russomano signed a confidentiality and 12-month non-compete. In June 2018, as part of a corporate realignment, Novo Nordisk eliminated Russomano’s new position and terminated his employment effective August 3, 2018. Russomano applied for other open positions within Novo Nordisk, and was hired as a Senior Hemophilia Community Liaison effective August 6, 2018—three days after the effective date of his termination from his prior position. This time, Russomano was not required to sign a confidentiality or non-compete agreement upon his rehiring. In January 2020, Russomano resigned from Novo Nordisk and accepted employment with a competitor, BioMarin Pharmaceutical, Inc.
In response, Novo Nordisk filed a motion for a temporary restraining order and preliminary injunction seeking to enforce the terms of Russomano’s confidentiality and non-compete agreement. The US District Court for the District of Massachusetts denied the motion, finding that Russomano was no longer bound by the non-compete provision because, by its terms, that provision expired twelve months after the termination of employment, which occurred on August 3, 2018. The three-day break in Russomano’s employment was enough to start the 12-month clock running, and the clock did not reset when he was rehired on August 6, 2018, because he did not enter into a new non-compete upon his rehiring. In so ruling, the court rejected Novo Nordisk’s argument that Russomano was not laid off, but instead transferred positions within the company, and held that a June 20, 2018 letter from Novo Nordisk to Russomano “unambiguously terminated his employment.” On appeal, the First Circuit affirmed the district court’s denial of Novo Nordisk’s motion, rejecting Novo Nordisk’s argument that Russomano was not actually “terminated” in 2020:
This argument is without merit. The district court did not err in concluding that the letter laying Russomano off was unambiguous when it stated that his employment ended “effective August 3, 2018.” The letter offering him a new position was also unambiguous: his new position was “[e]ffective August 6, 2018.” The word “effective” has a clear meaning in this context. See Effective, Black’s Law Dictionary (11th ed. 2019) (defining “effective” as “in operation at a given time”). Russomano’s employment thus “terminat[ed]” as per the terms of the confidentiality and non-compete agreement in August 2018, and he is free to work for BioMarin as of August 2019.
In light of this ruling, companies should be wary of short gaps in employment during corporate reorganizations, even temporary ones such as those occurring during the current pandemic. Companies also should ensure that rehired employees sign new agreements, in order to avoid any questions as to the enforceability of prior restrictive covenants.
Title Source, Inc. v. HouseCanary, Inc., No. 04-19-00044-CV (Tex. App. June 3, 2020)
In 2018, real estate analytics startup HouseCanary made headlines when it obtained a $700 million jury verdict on its claims of fraud and trade-secret misappropriation in Texas state court. HouseCanary alleged that it had developed a proprietary home price index and other models for use in appraising residential real property and that it entered into an NDA with Title Source, Inc. so the parties could discuss doing business together. Pursuant to the NDA, Title Source’s use of HouseCanary’s proprietary information was limited, such that Title Source could not use HouseCanary’s data to compile its own databases or create its own models. When the parties’ relationship deteriorated, Title Source brought suit alleging breach of contract and fraud. HouseCanary counterclaimed alleging fraud, breach of contract, and misappropriation of trade secrets under the Texas Uniform Trade Secrets Act (“TUTSA”) based on TitleSource’s alleged creation of its own databases and models using HouseCanary’s proprietary information. The jury found in favor of HouseCanary, rejecting all of Title Source’s claims and awarding more than $700,000,000 on HouseCanary’s TUTSA and fraud claims.
Last week, the Texas Court of Appeals reversed and remanded the case for a new trial based on errors in the jury charges and questions. As to TUTSA, the trial court issued one charge that instructed the jury as to misappropriation under both the “use” and “acquisition by improper means” theories found in the statute. The court also submitted a single jury question, rather than submitting a separate question under each theory. The Court of Appeals held that the evidence was insufficient to show acquisition by improper means because Title Source acquired the alleged trade secrets legally, pursuant to the parties’ NDA, and that “[a] post-acquisition breach of a confidentiality or non-disclosure agreement—the only breaches HouseCanary presented evidence of here—is irrelevant to the method by which [Title Source] obtained access to the trade secrets in the first instance and thus cannot support an improper means finding as a matter of law.” (quotations omitted). That left HouseCanary only with a claim under the “use” theory. But, while HouseCanary presented evidence in support of its claim under the use theory, the Court of Appeals relied on established Texas precedents to hold that when multiple theories of liability are included within one jury question, and some of those theories are not supported by sufficient evidence, harmful error is established and reversal is required, no matter the evidence in support of the viable theory.
Similarly, with respect to the fraud claim, HouseCanary asserted several theories, including misrepresentations by Title Source in order to obtain HouseCanary’s trade secrets, a fraudulent intention not to pay HouseCanary, and a misrepresentation that caused HouseCanary to forego rights under a licensing agreement. Despite the different theories, the jury was asked to answer “a single broad-form question on all of HouseCanary’s fraud allegations,” which it did in the affirmative. On appeal, TitleSource argued that the fraud claim was preempted by TUTSA in its entirety. The Court of Appeals disagreed and held that only those portions of the fraud claim that related to trade secrets were preempted. The court also held that a reasonable factfinder could have found in HouseCanary’s favor on the non-preempted portions of its claim. Therefore, like the TUTSA claim, the Court of Appeals reversed and remanded HouseCanary’s fraud claim because it was based on a jury question that improperly combined valid and invalid theories of liability and the reviewing court could not determine whether the verdict was based on a valid or invalid theory.
Finally, the Court of Appeals affirmed the trial court’s take-nothing judgment on Title Source’s breach-of-contract claim, holding that did Title Source did not conclusively establish that HouseCanary’s failure to comply with the parties’ contracts, if any, was material. Accordingly, only HouseCanary’s fraud and TUTSA claims were remanded for new trial, where one can expect to see jury instructions and questions presented with more granularity.