Cases from Common Law (Restatement)

confidentiality agreements, trade secrets
7th Circuit Case Serves as a Reminder of Trade Secrets Best Practices

The 7th Circuit ruled in favor of Defendants Block and Company, Inc. on October 22, 2014 on the issue of breach of confidentiality agreement. The Court cited a previous 7th Circuit case which stated that in the 7th Circuit, courts "will enforce [confidentiality] agreements only when the information sought to be protect is actually confidential and reasonable efforts were made to keep it confidential." See Tax Track Sys. Corp. v. New Investor World, Inc., 478 F.3d 783, 787 (7th Cir.2007).

Since the Plaintiff nClosures Inc. did not make additional efforts to have individuals who access the designs at issue sign confidentiality agreements, keep the designs under lock and key, or store the designs on a limited-access computer, the Court found that nClosures did not engage in "reasonable steps" to protect the confidentiality of its designs. Therefore, the Court concluded that confidentiality agreement between nClosures and Block and Company is unenforceable as a matter of law.

United States District Court for the Eastern District of New York
Ex-Charles Schwab employee Alledgedly Recruits Former Clients to Join New Competing Financial Group

Securities brokerage firm Charles Schwab & Co. Inc. has filed suit against former financial consultant Douglas Castro, employed in the brokerage’s Garden City, New York office from until December 2011, when he allegedly abruptly left Schwab and immediately began work at ADC Wealth management, Castro’s newly formed wealth management firm. Schwab’s complaint alleges that Castro was responsible form managing a portfolio worth neatly $275 million, and possessed voluminous information about his former clients and access to extensive amounts of client account information, assets and tax information, as well as investment objectives and other client financial records. The Schwab brokerage complaint includes allegations of Castro’s breach of contract, misappropriation of trade secrets, breach of duty of loyalty, and unfair competition. According to Schwab, Castor utilized Schwab trade secret customer information without authorization, and therein misappropriated said information by soliciting Schwab clients for his newly formed competing firm ADC Wealth Management (ADC).

Not surprisingly, Castro executed confidentiality, non-solicitation and assignment agreements that barred him from using Schwab customer information to divert Schwab business to a new company or solicit Schwab clients to transition their accounts outside the brokerage. In the terms of his agreement with Schwab, Castro agreed not to solicit Schwab customers upon the termination of his employment, to protect the confidentiality of customer information, and not to use or disclose Schwab's confidential information for any purpose aside from performing his duties and responsibilities on behalf of Schwab” (Complaint, 5). According to Schwab, Castro violated the terms of this agreement after he quit and subsequently contacted Schwab clients with accounts he managed, in attempts to have these individuals transfer their accounts to Castro’s new firm. The case against Castro presents a familiar factual import where a former employee is alleged to have violated previous contractual and statutory obligations not to utilize investor-client information for financial or personal gain. Here, Schwab asserts that Castro could not have possibly learned of the identities of the individual he solicited for ADC’s business services without the information Castro obtained through Schwab.

However, somewhat unique to the case at bar is that both the identities of the Schwab customers themselves, in addition to their respective financial portfolio and wealth management information are seemingly claimed as Schwab trade secrets in this matter. While simply customer names themselves are likely not considered trade secret information, generally customer lists developed by a business through substantial effort and kept in confidence may be treated as a trade secret and protected at the owner's instance against disclosure to a competitor, provided the information it contains is not otherwise readily ascertainable. See North Atlantic Instruments v. Haber, 188 F.3d 38 (2d Cir. 1999). Determination of whether the Schwab customer information is trade secret will include a consideration of the cost, energy, and time taken by Schwab to cultivate their customer information, a question of fact rather than law. Importantly, the complaint goes to great lengths to outline the steps taken by Schwab to maintain the secrecy of their client information, an essential element for client-lists to be considered trade secrets under common law and count III of the complaint at bar. No answer has been filed by Fisher and Phillips LLP, the New Jersey firm representing Douglas Castro.

8th Circuit
Distinguishing Between Misappropriation and Breach of Contract

Loftness Specialized Farm Equipment, Inc. (“Loftness”) brought a declaratory judgment action againt three defendants (Terry Twiestmeyer; Steven Hood; and Twiestmeyer & Associates, Inc.) (collectively, "Twiestmeyer"), arguing that it had satisfied an agreement with Twistmeyer regarding grain bagging equipment design secrets. Defendants allege that they shared this confidential information with Loftness in 2007, that these conversations eventually led to Loftness’s decision to enter this market, and that this information was shared with Loftness under the protection of a twenty-year Non-Disclosure Agreement (“NDA”) which the parties signed before their meeting. Thereafter, the parties agreed to an additional agreement in which defendant would be paid a percentage of the revenue generated from the sale of this equipment for two years.

Twiestmeyer received payments for more than two years, but the parties were unable to negotiate a new deal to govern the remaining time covered by the NDA, after which Loftness brought this action. Twiestmeyer subsequently countersued for unjust enrichment and breach of the two contracts.

The district court dismissed the unjust enrichment claim and granted Loftness’s summary judgment motion on the breach of contract.

In the section of the opinion most relevant to trade secret practitioners, the Court of Appeals determined that the district judge had erred in applying the test for the tort of misappropriation and that, instead, the claim was based on a breach of contract. Because the district court had failed to analyze the NDA, the court remanded the case so that the district court could examine the NDA.

Supreme Court of Texas
Texas Supreme Court to Review Jurisdictional Dismissal of Misappropriation Suit Against Russian NG Producer

In December, the Texas Supreme Court granted review of a lower Texas court's dismissal, on jurisdictional grounds, of Texas-based plaintiff Moncrief's misappropriation suit against Russian natural gas giant Gazprom. Moncrief's petition for review (available below) was filed in 2011. A record of the court's grant of review is available Here.

Supreme Court of the State of New York
ARS Accused Ex-Employee of Breaking "Code of Ethics" and Stealing Trade Secrets for New Employer UBS

On Thursday, October 18, 2012, investment firm A.R. Schmeidler & Co. Inc (“ARS”) brought suit against its former Senior Vice President Michael Kahn, as well as Kahn’s new employer UBS Financial Services, Inc. (“UBS”) (collectively “Defendants”). ARS alleged Defendants stole and unfairly utilized confidential and proprietary information related to ARS’ clientele. In addition to its common law claim for Misappropriation of Trade Secrets, ARS also brought causes of action for: Breach of Contract; Unfair Competition; Breach of Duty of Loyalty; Tortious Interference; and Conversion.

In its complaint, ARS alleged that after Kahn abruptly resigned from UBS, he “systematically contacted ARS’s clients” to discuss “their specific account and performance,” as well as “ different investment opportunities available at UBS.” His conduct – if true – could be in violation of a “Code of Ethics agreement” that Kahn had agreed to as part of his employment with ARS. The agreement requires Kahn to “maintain ARS’s confidential client information and not divulge such information to third parties” after termination. ARS asserts its client list is also a trade secret, as evidenced by the amount of resources ARS expended to compile the non-publicized list of “high net worth individuals in need of investment management and services.”

In addition to damages, ARS seeks both preliminary and permanent injunctive relief against Defendants. The proposed injunctions would enjoin Defendants them from using “ARS’s trade secrets or confidential client information, including client lists, client account values, performance, investments and holdings or by soliciting any of ARS’s clients that were procured by ARS . . . .”

United States District Court N.D. Georgia (Atlanta Division)
Software Experience as a Trade Secret Claim Survived a Motion to Dismiss

The Northern District court of Georgia (Atlanta Division) denied a motion to dismiss a trade secret claim based on an end user license agreement (EULA). Plaintiff AirWatch provided sufficient evidence (for the purpose of defeating a motion to dismiss) that defendants, employees of Mobile Iron, had electronically signed a contract for a free trial that incorporated the EULA by reference. The EULA said, “the Software is provided to User for evaluation purposes,” that it was a “license to use the software solely for the purposes of testing and evaluating the software,” and that the user “shall not engage in competitive analysis.”

The court refused to dismiss all of plaintiff’s five claims. In addition to the breach of contract claim concerning the EULA, plaintiff brought claims under the Computer Fraud and Abuse Act (CFAA), under the Georgia Trade Secrets Act, under the California Unfair Competition Law, and a tort claim for fraudulent misrepresentation.

Superior Court of the State of California
Former Stage Designer Sues Mötley Crüe Over Idea For "Tommy Lee Loop Coaster"

On September 20, 2012, Howard Scott King brought suit against popular rock band Mötley Crüe (itself, its touring company and bassist Tommy Lee as an individual, collectively “MC”), for misappropriation of trade secrets in the Superior Court of California. The suit relates to MC’s allegedly unlawful use of King’s proposal for a “Tommy Lee Loop Coaster” (“Coaster”).

According to his complaint, King developed the idea for the Coaster as part of his now defunct business “Stages ‘N’ Motion.” King described it as “a track on which [Tommy Lee] would play his drums on a platform on wheels which follow the track until Lee was in an upside down position playing the drums and he would continue playing the drums as the platform followed the track in a complete loop.” On or about November 21, 1991, King alleged that he discussed a proposal for the Coaster with Top Rock Development Corp. (MC’s agents). King claims that both the proposal, as well as a signed confidentiality agreement (which has since been lost or misplaced), expressly stated that the ideas were confidential, and that King was to be compensated should MC implement the Coaster. In June 2011, MC begin using the Coaster, or a substantially similar device, as a centerpiece for concerts, as well as in commercials and other promotions.

(link to video of device in question)

King brings trade secret misappropriation actions under both the California Uniform Trade Secret Act (CUTSA), as well as common law. The key difference between the claims is that the CUTSA claim seeks relief in the form of actual damages ($400,000), or in the alternative, a “reasonable royalty”; conversely, the common law claim does not seek a reasonable royalty damages award. Both claims seek injunctive relief, as well as punitive damages in light of MC’s alleged “willful and malicious” conduct.

United States Court of Appeals for the Fifth Circuit
Fifth Circuit Affirms Preliminary Injunction for Misappropriation of Dietary Supplement Research Compilation

On an interlocutory appeal from the Southern District of Texas, the Fifth Circuit affirmed that court's grant of preliminary injunction against the former sales partner of a dietary supplements manufacturer.

Plaintiff Daniels Health Sciences ("DHS") had "compiled a distilled version of the science and research behind [its seaweed-based supplement] Provasca into a PowerPoint presentation titled 'The Path to Provasca.'" It shared this information with its marketing partner, Vascular Health Sciences ("VHS"). Despite the fact that DHS and VHS were led by brothers, this marketing relationship soured, and VHS allegedly relied on DHS's compiled research to develop and market a competing product.

The Fifth Circuit held that the grant of preliminary injunction was proper on DHS's breach of confidentiality agreement and trade secret misappropriation claims. The court rejected the defendant's argument that no evidence of confidential information, or of the existence of a trade secret, had been presented. The court called these distinct arguments "largely repetitive," but analyzed them under the parties' contractual definition, and Texas trade secret law (which adopts the Restatement) respectively.

295th Judicial District Court of Harris County, Texas
Baker Hughes Accuses Departing Scientist of Leaving Confidential Information

On August 6, 2012, Plaintiffs Baker Hughes Incorporated and Baker Petrolite Corporation (collectively “Baker”) filed an application seeking a temporary restraining order, and a temporary and permanent injunction against its former employee, Defendant Jun Tian (“Tian”). Plaintiffs allege Defendant misappropriated “confidential information and trade secrets, resigned from [Plaintiffs’ company], and went to work for a direct competitor, Multi-Chem Group LLC (‘Multi-Chem’).” Defendant has refused to return said information, and Plaintiffs seek to enjoin Tian from every using or disclosing it.

Plaintiffs offered specific details regarding the events leading up to the lawsuit. Tian was a Senior Development Engineer on Plaintiffs’ “Flow Assurance” work group, as part of which he played “a critical research and development role,” had access to confidential information and was “a listed inventor on several patents and patent applications.” Tian entered into an explicit “Employment Agreement” with Plaintiff that barred him from disclosing Plaintiffs’ confidential information. After resigning, Tian allegedly acted “suspiciously” and was “tight-lipped” at his exit interview. This, combined with reports from fellow employees that Tian had downloaded work files to an external harddrive prior to his departure, lead Plaintiffs to perform a forensics investigation of Tian’s harddrive. At the close of the investigation, Plaintiffs concluded that Defendant had transferred proprietary information to an external harddrive without authorization.

In addition to the trade secrets misappropriation claim, Plaintiffs also allege causes of action for breach of contract, threatened misappropriation/inevitable disclosure, breach of fiduciary duty, unjust enrichment and conversion.

One of the first issues that will likely arise is the fact that Plaintiffs did not specify exactly what confidential information Tian allegedly took. Plaintiffs are understandably hesitant to commit this information to public record, and will likely seek a protective order and/or in camera review by the Judge. Interestingly, even if Plaintiffs fail to prove that Tian took confidential information, the court could still bar Defendant from working at Multi-Chem through the inevitable disclosure claim.

U.S. District Court for the Southern District of New York
In a fight over ownership of the Pepsi cola formula, heirs of formula creator seek to disclose documents regarding creation of formula

The heirs of Richard Ritchie, who created the Pepsi® cola formula in 1931, filed a declaratory judgment in the District Court for the Southern District of New York on May 3, 2012, requesting the court to declare that the documents relating to the creation of the soda formula are the Ritchie heirs’ personal property, which the heirs may publicly share. PepsiCo, Inc. (“Pepsi”) counters that the documents are the company’s trade secrets but the heirs argue in response that Pepsi has no claim for trade secrets misappropriation. Ritchie allegedly developed the Pepsi formula while working for a separate candy company and was not a Pepsi employee until 1939. He left Pepsi in 1951 and signed an agreement which only prohibited him from disclosing the formula to a competing beverage company but it did not cover his heirs’ use of the formula and did not require him to return the formula documents. Alternatively, even if the formula was Pepsi’s trade secret, the heirs argue that they have a First Amendment journalistic right to disclose the “historically significant, newsworthy” documents.

While the parties are currently in mediation, and by request of the court Silleck requested leave until September 28, 2012 to file an amended complaint.