Recent Decisions and Case Developments

On August 28, 2015, the Supreme Court of the State of Utah reversed the Utah trial court’s grant of summary judgment to defendant Amanda Mercer, holding that trade secret misappropriation under the Uniform Trade Secrets Act (UTSA) gives rise to a rebuttable presumption of irreparable harm.

In InnoSys Inc. v. Amanda Mercer, plaintiff defense industry technology company sued its former engineer, defendant Amanda Mercer, for violating her non-disclosure agreement and misappropriating the company’s trade secrets, protected material under the UTSA. Mercer had forwarded confidential emails to her private email account and copied a confidential business plan to her own personal external storage device. Further, after InnoSys ended her employment and she was later denied unemployment benefits, she submitted these protected documents into the administrative record of her appeal before the Department of Workforce Services.

The Utah trial court granted Mercer’s summary judgment motion based on InnoSys’ failure to establish any actual or threatened harm. Additionally, the lower court entered rule 11 sanctions against Innosys and awarded Mercer attorney fees. The lower court’s reasoning stemmed in part from the fact that Mercer had apparently destroyed the confidential documents that she misappropriated, thereby defeating the potential for harm to InnoSys.

The state’s Supreme Court reversed the lower court and remanded for further proceedings, reviving InnoSys’ claims against Mercer. Because it was undisputed that Mercer misappropriated these protected documents, the sole issue on appeal concerned the evidence of harm. The Utah high court reasoned that the instant facts demonstrated a prima facie case of misappropriation under the UTSA and thus, gives rise to a rebuttable presumption of irreparable harm. Judge Lee instructed that “trade secrets are a right of property”1 and upon proof of misappropriation, the “trade secret claimant is entitled to a rebuttable presumption of irreparable harm for the purposes of injunctive relief . . . .”2 Judge Lee observed that such a principle is widely accepted under UTSA caselaw and is considered a core standard of trade secret law. Additionally, even though Mercer had apparently destroyed the protected documents at the center of the case, such actions were not sufficient to rebut the presumption of harm to InnoSys. Judge Lee noted that injunctive relief would yield little harm to Mercer if she did indeed destroy the documents, and would provide great protection to InnoSys if she did not, and had intentions to continue misappropriating the confidential information.

1 InnoSys Inc. v. Amanda Mercer, 2015 UT 80U, ¶33.
2 Id. at ¶34.

On June 30, 2015, the Fifth Circuit affirmed the lower court's decision which found Spear Marketing's (SMI) Texas Theft Liability Act and trade secret misappropriation claims precluded by the Copyright Act.

Spear Mktg., Inc. v. Bancorpsouth Bank involved a dispute over cash management software. SMI, producer of the software VaultWorks, alleged that its competitor, Argo, had stolen both technical and business trade secrets related to VaultWorks. On April 1, 2010, SMI had approached Argo to measure Argo's interest in acquiring SMI. In the pursuit of this deal, SMI provided a demonstration of its software and sent Argo screenshots of its software interface. The instant controversy arose when Argo launched its own cash management software at the end of 2011 and SMI's client, BancorpSouth Bank (BCS), had informed SMI that it had no intention of renewing its licensing contract with SMI.

An issue of first impression for the Fifth Circuit, the court confronted the intersection of trade secrets and the preemption purview of federal copyright law. Because processes and methods are excluded from copyright protection per section (102)(b) of the Copyright Act, SMI argued that their trade secrets fell outside the scope of the Act. Thus, the court was presented with whether processes and systems that had been fixed in a tangible medium of expression may be copyrightable subject matter for purposes of preemption, even though such matter may not be copyrightable matter generally.

The court addressed the issue by noting the current circuit split and followed the majority of its sister circuits,* holding that ideas fixed within tangible matter falls within the scope of copyright subject matter for preemption purposes, even if some of the underlying matter is not copyrightable. The court first stated that the Copyright Act protects computer software as a tangible medium. Then the court noted that the ideas that were allegedly stolen were fixed within the provided screenshots and the overall computer software. Therefore, SMI's trade secrets were fixed within the software, falling under the scope of the Copyright Act's preemption provision.

*The Second, Fourth, Sixth, Seventh and Ninth Circuits recognize that the Copyright Act's preemption provision, § 301(a), covers ideas fixed in tangible media. See Forest Park Pictures v. Universal Television Network, Inc., 683 F.3d 424 (2d Cir. 2012); U.S. ex rel. Berge v. Bd. of Trustees of the Univ. of Ala., 104 F.3d 1453 (4th Cir. 1997); Stromback v. New Line Cinema, 384 F.3d 283 (6th Cir. 2004); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); Montz v. Pilgrim Films & Television, Inc., 649 F.3d 975 (9th Cir. 2011) (en banc). The Eleventh Circuit disagrees, finding that ideas are categorically excluded from copyright protection, even if the matter is fixed in a tangible medium. See Dunlap v. G&L Holding Grp., Inc., 381 F.3d 1285 (11th Cir. 2004).

The D.C. Circuit’s decision in CBS indicates that federal courts acknowledge the critical implications of trade secret disclosure and trade secret law’s increasing significance in the protection of business practices. The D.C. Circuit held that it was improper for the Federal Communications Commission (FCC) to require merger applicants to submit proprietary documents for review and make them available for examination by industry participants not a party to the action, on an expedited basis.

Typically when reviewing cable company mergers, the FCC requires disclosure of information including key affiliate contracts and negotiation documents. Within the cable industry, these documents are kept highly confidential. The disclosure of these documents would expose not only the cable company parties involved in the merger, but also the content providers which they do business with. The Plaintiffs in this case, a group of content providers, utilized the Trade Secret Act to resist disclosure of their proprietary information to third party examiners. The Trade Secret Act prohibits disclosing sensitive business information unless “authorized by law.” The Plaintiffs successfully argued that this disclosure of sensitive business information was not authorized by the law because the Commission’s own regulations and internal policies did not authorize the disclosure which the FCC sought. The FCC’s internal policies provide that “a persuasive showing as to the reasons for inspection will be required [for disclosure]” and that the underlying documents must be “necessary” to the review process. The D.C. Circuit held that the affiliate contracts and negotiation documents were merely relevant, but not necessary to the FCC’s merger review. Thus, the required disclosure of proprietary documents involving third party content providers was not authorized by law and prohibited by the Trade Secrets Act.

In CDM Media, the Defendant, former employee Robert Simms, was granted in part and denied in part a motion to dismiss the multiple claims filed in CDM’s complaint. CDM sued its former employee, Simms, for refusing to transfer control of a LinkedIn group allegedly owned by CDM and allegedly wrongfully retaining CDM’s confidential information after Simms left CDM and using it in competition with CDM. The court denied the motion with regard to one claim, but granted the motion regarding the remaining two claims.
CDM asserted Trade Secret protection under the Illinois Trade Secret Act over three separate aspects of CDM’s business. First, CDM asserts Trade Secret protection over a LinkedIn group called “the CIO Speaker Bureau,” a private online community of chief information officers and senior Information Technology executives interested in participating in or speaking at CDM events. Second, CDM asserts Trade Secret protection over the confidential information contained in this LinkedIn group. Lastly, CDM asserts Trade Secret protection over information from CDM’s Event Logistic Management database (“ELM”), which included CDM’s sensitive information including CDM vendor and customer lists, pricing and cost data regarding its products and services and profit or loss information. The court also denied Defendant’s motion to dismiss based on common law misappropriation.
The Northern District of Illinois denied the motion to dismiss, holding that there was a question of fact which a jury must decide regarding the Speaker Bureau membership list. The court denied the Defendant’s motion to dismiss regarding the confidential information contained in the LinkedIn group, holding that “[w]hile a private communication can contain a trade secret, it is not itself a trade secret. It is therefore insufficient for plaintiff to allege that the LinkedIn group’s private communications were trade secrets under the Illinois Act.” The court also denied the motion to dismiss regarding the ELM database, holding that the Plaintiff failed to allege that the defendant actually used the data from the ELM database after he left CDM, and therefore this claim was not viable.
Moving forward, cases that involve business development though social media will continue to mold the landscape of trade secret jurisprudence. Here, the Nothern District of Illinois court is willing to extend trade secret protections to cover social media business development and holds the defendant to a high bar to have the claims dismissed. The court is willing to consider the confidential nature of communications via social media and recognizes that a jury can find that business development through social media may have required a significant investment of time and money. It will be interesting to see in the future how other states interpret its own trade secret statutes as it applies to social media.