Trade Secret & Unfair Competition Reporter

Category Archives: Federal Court

SUPREME COURT SACKS NFL IN REJECTING “SINGLE ENTITY” DEFENSE IN SHERMAN ACT SECTION 1 CASE

Posted by Eric Welsh on June 3, 2010 – 11:15 am

Filed under Antitrust Developments, Federal Court, United States Supreme Court

Ending a string of nearly twenty years of victories in front of the Supreme Court by defendants in Sherman Act cases, the Supreme Court last month in American Needle, Inc. v. National Football League, et al., No. 08-661, ruled against the NFL in a case brought under Section 1 of the Sherman Act. In a unanimous decision, the Supreme Court soundly rejected the ”single entity” defense advanced by the NFL, the 32 NFL teams and the entity they created to manage and market their intellectual property, National Football League Properties (”NFLP”) (collectively, the “NFL defendants”), to the Section 1 claim asserted against them, remanding the case to the district court for further proceedings to determine if they had conspired together in restraint of trade.

American Needle involved a narrow issue before the Supreme Court: whether the NFL defendants were capable of conspiring together or whether they acted as a single entity for purposes of Section 1 of the Sherman Act in connection with their conduct in licensing their intellectual property. As demonstrated in the record, the NFL defendants had acted jointly in the licensing of their intellectual property since 1963 when NFLP was created. From 1963 to 2000, the NFL defendants licensed their intellectual property through NFLP, granting licenses on a non-exclusive basis to vendors to manufacture and distribute apparel with team logos and trademarks. American Needle was one of those non-exclusive licensees. In December 2000, the 32 teams of the NFL changed their game plan, and agreed to permit NFLP to enter into an exclusive license for the manufacture of the team apparel, which NFLP subsequently granted to Rebok. American Needle thereafter brought suit against the NFL, the NFL teams and NFLP in the Northern District of Illinois, alleging that the agreements between the NFL, the 32 teams, NFLP and Reebok violated Sections 1 and 2 of the Sherman Act. In their answer to this complaint, the NFL defendants asserted that they could not conspire under Section 1 ”because they are a single economic enterprise, at least with respect to the conduct challenged.”

After permitting limited discovery, the District Court dismissed the Section 1 claim, agreeing with the NFL defendants’ “single entity” defense. The District Court found that the NFL defendants ”in the facet of their operations respecting exploitation of intellectual property rights,” were “so integrated” that “they should be deemed a single entity rather than joint ventures cooperating for a common purpose.” American Needle appealed that decision to the Seventh Circuit Court of Appeals.

The Seventh Circuit looked at the issue of the “single entity” from the perspective of the “economic power” at issue in the relationship. The Seventh Circuit concluded that since “football itself can only be carried out jointly,” then “only one source of economic power controls the promotion of NFL football.” In the area of licensing team’s intellectual property, the marketplace was not deprived of independent sources of economic control, which competition assumes, as a result of the challenged activity. The Seventh Circuit affirmed the District Court. American Needle and the NFL defendants sought review by the Supreme Court.

Justice Stevens, writing for a unanimous court, rejected the “single entity” argument, in overturning the Seventh Circuit’s decision. Noting the long-established precedent of considering “form over substance” when reviewing conduct as a possible violation of Section 1’s prohibition against engaging in a “contract, combination . . ., or conspiracy” in restraint of trade, the Court observed that the issue is whether the parties are “separate economic actors” following their own “separate economic interests.” If that is found to be the case, then the market is deprived of independent centers of decisionmaking by such combination and actual or potential competition is lost. Considering the facts in the American Needle case from this perspective, the Court found each team possessed the attributes of independent economic decisionmaking, advancing their own economic interests which could be at odds with other teams. For example, from the perspective of a vendor making a team hat, the Colts and the Saints are two potentially competing suppliers of valuable trademarks. When the Colts license their intellectual property, according to the Court, they promote their own economic interest, not the interest of the teams as a whole. Accordingly, each team is an independent center of decisionmaking and when those teams jointly license the right to their intellectual property to a single vendor, they deprive the market of other centers of decisionmaking and, accordingly, of actual or potential competition. It is this context that distinguishes the relationship between the parties in American Needle from the relationship of a parent and its wholly owned subsidiary, which has long been found not to be capable of conspiring under Section 1. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). In the latter situation, the economic interests of the parent and subsidiary are one. The same cannot be said for the 32 NFL teams, each of which is an independently owned and managed business.

In reaching this conclusion, the Court rejected the analysis of the Seventh Circuit which found a single entity because “without [the cooperation of the teams], there would be no NFL football.” Finding the justification of cooperation to be irrelevant to whether the cooperation is concerted or independent, the Court noted that cooperation can be found in many different contexts which bear scrutiny under Section 1. As the Court observed:

“Any joint venture involves multiple sources of economic power cooperating to produce a product. And for many such ventures, the participation of others is necessary. But that does not mean that necessity of cooperation transforms concerted action into independent action; a nut and a bolt can only operate together, but an agreement between nut and bolt manufacturers is still subject to § 1 analysis.”

As with the NFL and the NFL teams, the Court also found the decisions of the NFLP itself to constitute “concerted activity” under Section 1. Although noting that this was a “closer call,” due to the fact that NFLP was a separate entity and the profits were distributed to the teams on an equal basis, the Court nevertheless found that for the same reasons the NFL teams’ conduct was subject to review under Section 1, so was NFLP’s conduct. For the Court here, the decision came down to a truism:

“Apart from their agreement to cooperate in exploiting those assets [the intellectual property], including their decisions as the NFLP, there would be nothing to prevent each of the teams from making its own market decisions relating to purchases of apparel and headwear, to the sale of such items, and to the granting of licenses to use its trademarks.”

NFLP simply was “an instrumentality” of the teams and the fact that the NFL teams shared in profits and losses of the NFLP did not save the case from Section 1 scrutiny, since if that were the case, then “any cartel ‘could evade the antitrust law simply by creating a “joint venture” to serve as the exclusive seller of their competing products.’” American Needle, quoting Major League Baseball Properties, Inc. v. Salvino, Inc., 542 F.3d 290, 335 (2nd Cir. 2008).

The Supreme Court’s opinion in American Needle does not mark the end of the NFL defendants’ contract with Rebok. The Court did not find the conduct to be a per se violation of the Sherman Act but rather conduct subject to further review under a “rule of reason” approach. Accordingly, the American Needle case has been sent into overtime and it is up to the NFL defendants to justify their conduct and save their agreement.

As American Needle continues its path in the District Court, attention will be turned to the ramifications of the decision. This decision is not limited to the grid iron but will apply to other venues where companies jointly market their intellectual property through a single licensing entity. Whether it is the NBA, NASCAR, other sports or other venues, closer scrutiny should be expected of those marketing relationships.

PROPOSED REVISIONS TO THE HORIZONTAL MERGER GUIDELINES RELEASED

Posted by Eric Welsh on May 3, 2010 – 6:47 am

Filed under Antitrust Developments, DOJ, FTC, Federal Court, Unfair Competition

Recently, the FTC released for comment the proposed revisions to the 1992 Horizontal Merger Guidelines (the “Proposed Revisions“). Coming just a day before the beginning of the ABA Antitrust Law Spring Meeting, the release of the Proposed Revisions was sure to spark a great deal of discussion at the Spring Meeting as lawyers and economists began to digest the document. Fortunately for those who attended the Spring Meeting, they were not disappointed, as there was much discussion both in and out of the conferences about this topic.

Certainly, the Proposed Revisions offer to make important changes to the Merger Guidelines. For example, product market definition would not necessarily be a determinative consideration. “Market definition is not an end in itself: it is one of the tools the Agencies use to assess whether a merger is likely to lessen competition.” Proposed Revisions, p. 7. The Proposed Revisions though would apply a more expansive description of the definition of the “hypothetical monopolist” test used in determining product markets. In addition, the threshold numbers for the Herfindahl-Hirschman Index (”HHI”) would be increased (see Part 5.3) but would not be considered as necessarily providing a safe harbor. Also, a section would be added addressing “powerful buyers” (see Part 8). Here again, according to the revisions, the presence of so-called “power buyers” would not be determinative: “[T]he Agencies do not presume that the presence of powerful buyers alone forestalls adverse competitive effects flowing from the merger.” Proposed Revisions, p. 27. Finally, the two year guidance for market entry – formerly a central touchstone in merger cases — has been eliminated (see Part 9).

Interestingly, though, the Proposed Revisions are not viewed by some as a dramatic change from the existing Merger Guidelines. Commenting on the Proposed Revisions at the Spring Meeting, Deputy Assistant Attorney General for Civil Enforcement, Molly S. Boast, stated that the revisions were intended to bring the Merger Guidelines in line with current practice at the Agencies when reviewing mergers. Others might disagree. In any event, what is apparent, is that the Proposed Revisions suggest a shift away from “guidelines” to “indicators.” This appears to have been a conscious move to provide the agencies more flexibility in how they consider a merger.

“These Guidelines should be read with the awareness that merger analysis does not consist of uniform application of a single methodology. Rather, it is a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools to the reasonably available and reliable evidence to evaluate competitive concerns in a limited period of time.” Proposed Revisions, pp. 1-2.

In the next several weeks, antitrust practitioners will be chiming in on the Proposed Revisions. While formal comments may result in some changes around the edges, it should be expected that the Proposed Revisions will largely remain intact. Attention will then be focused on what role the Merger Guidelines, as revised, will play in discussions with the Agencies and in court battles over contested mergers.

NEW STATISTICAL ANALYSIS SHOWS TRADE SECRET CLAIMS ON THE RISE

Posted by Eric Welsh on April 26, 2010 – 12:58 pm

Filed under Federal Court, Trade Secrets

A statistical analysis of trade secret cases filed in federal court was recently published in the Gonzaga Law Review. A copy of the analysis is available here.*

This article, titled “A Statistical Analysis of Trade Secret Litigation in Federal Courts,” is noted by the authors as being the first such statistical analysis conducted of trade secret cases in federal court. Several of the authors’ conclusions are of interest here.

First, the number of trade secret claims doubled from 1988 to 1995 and then doubled again from 1995 to 2004. The authors believe that trade secret cases in federal court will double again by 2017.

Second, trade secret theft cost companies as much as 300 billion dollars per year.

Third, in more than 85% of the cases, the trade secrets were misappropriated by employees or business partners, not third party computer hackers.

This article tends to highlight several facts known by attorneys who practice in this area: trade secret misappropriation can have a large financial impact on a company and to reduce the risk of misappropriation, attention should be paid closer to home. It is the employee that leaves his employment with files on a USB device or the business partner that was entrusted with confidential, proprietary information that then uses the information for its own financial gain that poses the most immediate risk. These frequent scenarios have been noted previously in this blog. See Nucor v. Bell, 2:06-cv-02972-DCN (D.S.C. 2008) (Post February 19, 2010)** and Raytheon Corp. v. Indigo Systems Corp., No. 4:07 cv-109 (E.D. Tx 2009) (Post March 17, 2010). While we periodically see the stunning event where someone from abroad has successfully hacked into a computer and wreaked havoc (see “Cyberattack on Google Said to Hit Password System,” John Markoff, New York Times, March 20, 2010), the risk faced daily by companies is for more pedestrian but certainly no less impactful to their business.

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* Published with permission of the authors.

** Parker Poe represented Nucor in this lawsuit.

NON-COMPETE SUIT GIVES RISE TO TRADE SECRET CLAIM BUT NOT A CLAIM FOR UNFAIR TRADE PRACTICES

Posted by Eric Welsh on April 26, 2010 – 8:59 am

Filed under Federal Court, North Carolina law, Trade Secrets, Unfair Competition

In an interesting decision from March 2010, the United States District Court for the Western District of North Carolina held that a complaint adequately pled a claim for trade secret misappropriation but not a claim under North Carolina’s Unfair and Deceptive Trade Practices Act (”UDTPA”). ACS Partners, LLC v. Americon Group, Inc., 2010 WL 883663 (W.D.N.C. March 5, 2010). In that case, ACS Partners sued its former employee, Michael Caputo, for breaching his non-compete agreement through his employment at Americon Group, Inc. Americon was also a named defendant in the case. ACS Partners, which was in the construction and renovation business throughout the country, alleged that Caputo, who was ACS’ regional sales manager for North and South Carolina, breached his non-compete by soliciting ACS customers to cease doing business with ACS and to instead do business with Americon. ACS also alleged that Caputo, with knowledge of ACS’ “pricing methodology,” bid for a project for Americon while he was employed by ACS using his knowledge of ACS’ pricing on that project. ACS alleged that the pricing methodology was a trade secret under North Carolina law.

Caputo filed a motion to dismiss, arguing that the non-compete was unenforceable as a matter of law and that ACS had failed to state a claim under both UDTPA and the North Carolina Trade Secrets Protection Act. In a decision rendered by the Magistrate Judge, and adopted by the District Court Judge, the Court found that the non-compete, although vague as to its geographic reach and potentially invalid, was “not per se unreasonable at the motion to dismiss stage.” The Court made this ruling even though it found that the non-compete, which had no geographic restriction but rather was client based, potentially would prohibit the solicitation of prospective customers throughout the United States in the building renovation business.

“If the Court defines ‘prospective’ as ‘expected, likely or future,’ then it is possible that the non-solicitation provision could be overly broad as applied to Caputo. But, the non-solicitation provision is not so unreasonable as to be declared unenforceable as a matter of law on a FRCP 12(b)(6) Motion to Dismiss.”

Apparently, the Court was willing to permit the parties to engage in discovery to determine the meaning of the solicitation provision so the Court could then determine if the provision was invalid. Although this case is ongoing, it will be interesting to see what evidence is produced to demonstrate a meeting of the minds on this point.

Although the discussion of the non-compete is interesting, the far more important discussion relates to the treatment of the UDTPA and trade secrets claims.

The Court curiously found that the complaint did not state a cause of action under the UDTPA. Citing the principle set forth in Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331 (4th Cir. 1998) that an UDTPA claim cannot “piggyback” on a breach of contract claim, the Court found that the complaint did not allege “substantial aggravating circumstances” that are necessary to support a claim under UDTPA. The Court viewed the dispute as a breach of contract, noting ACS’ UDTPA claim was not “distinct from” the primary breach of the non-compete and confidentiality agreements. The Court’s holding here is somewhat surprising in that ACS’ claims also included a claim in tort for trade secret misappropriation, which the Court upheld. The Court’s decision also seems to run counter to other cases where UDTPA claims were brought, and upheld, in similar situations involving employee breaches of non-compete or confidentiality agreements. See e.g. Philips Electronics North America Corp. v. Hope, 2009 WL 1883921 (M.D.N.C. June 30, 2009); Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp.2d 541 (M.D.N.C. 2002). Moreover, trade secret misappropriation claims frequently become the basis for an UDTPA claim. See Sunbelt Rentals, Inc. v. Head & Engquist Equipment, LLC, 00-CVS-10358, North Carolina Business Court, July 10, 2002.

More interesting, though, is the Court’s statement that ACS’ UDTPA claim was defective because it was “wholly divorced from the context of consumer transactions.” The Court cited PCS Phosphate Co., Inc. v. Norfolk Southern Corp., 559 F.3d 212 (4th Cir. 2009) and Dalton v. Camp, 353 N.C. 647, 548 S.E.2d 704, 710 (2001) for the proposition that UDTPA was “intended to benefit consumers,” and then extrapolated the principle that an UDTPA claim must address “consumer transactions.” A closer look at Dalton shows that such is not the case. In fact, in Dalton, the North Carolina Supreme Court specifically noted that while UDTPA was intended to benefit consumers, “its protections extend to businesses in appropriate circumstances.” As noted previously, “[U]nfair trade practices involving only businesses affect consumers as well.” United Labs, Inc. v. Kuykendall, 322 N.C. 643, 665, 70 S.E.2d 375, 389 (1988). Other UDTPA claims have been brought in North Carolina against businesses. See e.g. Sara Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999); Static Control Components, Inc., 200 F. Supp.2d at 550; Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 620 S.E.2d 222 (N.C. App. 2005).* One would certainly expect that even in ACS, the UDTPA claim would have some impact on consumers. Perhaps this is one of those situations where “you know it when you see it,” and the Complaint just did not show the predicate egregious facts. Whatever the situation, the ACS case gives some pause to the federal court’s willingness to hear an UDTPA claim in the context of an employer-employee dispute even when in the presence of a trade secret misappropriation claim.

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* Parker Poe was counsel to Sunbelt Rentals, Inc. in this lawsuit and Eric Welsh was part of the trial team.

SNOOZE YOU LOSE: VIGILANCE REQUIRED IN PROTECTING TRADE SECRETS

Posted by Eric Welsh on March 17, 2010 – 6:07 am

Filed under Federal Court, Trade Secrets

A decision last year out of the United States District Court for the Eastern District of Texas reminds us all that when it comes to trade secrets, one cannot turn a blind eye to facts leading to “reasonable suspicions” of misappropriation if the value of those trade secrets is to be protected.

In Raytheon Corp. v. Indigo Systems Corp., Case No. 4:07-cv-109, Raytheon filed a complaint on March 2, 2007 against Indigo, alleging claims of trade secret misappropriation surrounding Indigo’s commercialization of infrared imaging cameras. Raytheon, which had earlier developed and commercialized its own infrared imaging cameras, alleged that Indigo, which was formed by former Raytheon employees in 1996, had misappropriated Raytheon’s trade secrets on this technology through, in part, the hiring of over 75 Raytheon employees over the course of several years. According to the decision, Raytheon, concerned that Indigo might be engaged in improper conduct, wrote a formal letter to Indigo, raising its suspicions. In response, Indigo denied any wrongdoing. Based on reassurances from Indigo, Raytheon entered into an agreement with Indigo in July 1997 regarding the hiring of the former Raytheon employees. In that agreement, Indigo agreed to “require all future Indigo employees to refrain from using the intellectual property of former employers.” Following Raytheon’s entering into this agreement with Indigo, Raytheon continued a consulting relationship with Indigo until 2000, and the parties continued to work sporadically on some collaborative projects. Indigo signed confidentiality agreements with Raytheon in connection with these consulting services prior to 2000, all of which, according to the Court, were unrelated to the infrared technology.

In March 2004, Raytheon obtained an Indigo infrared imaging camera and disassembled that camera several months later. Raytheon apparently saw indications in the Indigo camera of the use of Raytheon’s trade secrets. After that discovery, Raytheon reviewed certain files of employees who had left for Indigo and identified a “correlation between the areas of expertise of those employees and the types of technology developed in the interim by Indigo.” Raytheon filed suit against Indigo on March 2, 2007.

Indigo denied any wrongdoing, and moved for judgment from the Court that the misappropriation claim was untimely anyway — barred by the three year statute of limitations. Under Texas law, the time period in which to bring suit for trade secret misappropriation begins once “the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered” and Indigo argued that Raytheon had learned of sufficient facts regarding its claim long before March 2004. In response, Raytheon argued in essence that it’s claim was not barred because Indigo had stolen its trade secrets over the prior 12 years and concealed its conduct or provided assurances such that Raytheon could not discover the misappropriation earlier than March 2004.

The District Court rejected Raytheon’s position, finding a lack of diligence on Raytheon’s part in bringing its trade secret misappropriation claim. The District Court found that the facts were known to Raytheon that provided a reasonable basis for it to suspect that its trade secrets had been misappropriated.

While the Raytheon court’s decision may on first blush appear surprising — especially in light of the allegations that Raytheon was lulled into inaction by Indigo’s reassurances — the Court’s decision finds some explanation and support in two key areas. First, Indigo was a competitor of Raytheon in the infrared imaging camera market for years, a point which was not lost on Raytheon. Raytheon internally tracked Indigo as a competitor in this market for years before 2004 and had in fact lost business to Indigo, which Raytheon was aware of at the time. The Court obviously had difficulty squaring these facts with Raytheon’s claim that during this same period it was reassured by Indigo that it had not stolen Raytheon’s trade secrets and therefore perceived no need to take action. Second, Raytheon could not explain sufficiently to the Court why it did not take action against Indigo after 2000, when Raytheon stopped its consulting services with Indigo and “ceased reposing trust in Indigo,” but before March 2004, when “it developed suspicions it deemed worth investigation.” The Court found this latter point to be the “most damaging” to Raytheon’s argument.

“The termination of the parties’ consulting relationship, Indigo’s competitive successes in the military market — some of which came at Raytheon’s expense, the continued hiring of Raytheon personnel by Indigo and the ability to inspect its employee files were all well known by or readily available to Raytheon long before March of 2004. That combination would have ’cause[d] a reasonably prudent person to make inquiry, which, if pursued, would lead to discovery of the concealed cause of action.’”

Raytheon has indicated its intent to appeal the District Court’s decision and while the final chapter may not yet be written on this one, the decision does highlight the importance of being vigilant in protecting one’s trade secrets. As this decision makes abundantly clear, whether or not a claim is timely filed depends on the totality of the information available. Accordingly, when suspicions of misappropriation occur, thorough investigation is warranted and delay should be avoided. Not only does delay potentially jeopardize the timeliness of the filing, as evidenced by the Raytheon case, but just as important, every day that passes means that someone else is using or disclosing the trade secret, with its value potentially being compromised or lost. While a damage claim may ultimately compensate the wronged party, at least in part, a prolonged delay in bringing action can create impediments for obtaining an order from a court to prevent the continued use or misappropriation of the trade secret. Finally, a lack of diligence in detecting and remedying the misappropriation also can lead to questions regarding the strength of the assertion that the information allegedly stolen is a trade secret in the first place. Indeed, faced with unexplained delay, one can be left to question how information can be a “trade secret” if the aggrieved party did little to determine if the secret had been stolen, or, worse yet, did nothing to correct the wrong once reasonable suspicions occurred. The expression “snooze you lose”, once bantered about in childhood, resonates in this setting as well.

Actions Speak Louder than Words: Bad Faith Conduct Supports Finding of “Inevitable Disclosure” of Trade Secret

Posted by Eric Welsh on February 19, 2010 – 9:10 am

Filed under Federal Court, South Carolina Law, Trade Secrets

Earlier this month, a federal court in Pennsylvania issued an injunction against a former employee of Bimbo Bakeries in a trade secret case that once again demonstrates that the “inevitable disclosure” doctrine is alive and well in certain states. Bimbo Bakeries USA, Inc. v. Botticella, Civil Action No. 10-0194 (E.D. Pa. February 9, 2010).

Although the principles of inevitable disclosure have existed for decades in trade secret cases, the “inevitable disclosure” doctrine itself finds its origin in the Seventh Circuit Court of Appeals opinion Pepsico, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). Under that doctrine, a former employee can be enjoined by a court from taking on employment with a competitor of his former employer if such employment would necessarily require the disclosure or use of his former employer’s trade secrets to carry out the duties of the new position. “A plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Pepsico, Inc. v. Redmond, 54 F.3d 1262, 1269. Since that significant decision, courts from around the country have been asked to consider the “inevitable disclosure” doctrine, and while two state appellate courts have rejected the doctrine (see Whyte v. Schlage Lock Co., 125 Cal. Rpt. 2d 277, 291 (Ct. App. 2002) and LeJeune v. Coin Acceptors, Inc, 849 A.2d 451, 471 (Md. 2004)), the majority of the courts to consider the doctrine have accepted it to some extent. See e.g. National Starch and Chemical Corp. v. Parker Chemical Corp., 219 N.J. Super. 158, 530 A.2d 31 (N.J. 1987) (applying New Jersey law); Cardinal Freight Carriers, Inc. v. J.B. Hunt Transportation Services, Inc., 987 S.W. 2d 642 (Ark. 1999) (applying Arkansas law); Air Prods. & Chem., Inc. v. Johnson, 442 A.2d 1114, 1120 (Pa. Super. Ct. 1982); Victaulic co. v. Tieman, 499 F.3d 227, 234 (3rd Cir. 2007). Although no state court in North Carolina has yet formally adopted the doctrine, a federal court has found the doctrine not to be inconsistent with North Carolina law and that it would be followed by a North Carolina court with respect to specifically defined trade secrets. See Merck & Co. v. Lyon, 941 F.Supp. 1443, 1460-62 (M.D.N.C. 1996) (granting in part injunction under inevitable disclosure doctrine, finding that North Carolina courts would enjoin threatened misappropriation based on their version of inevitable disclosure); see also Analog Devices, Inc. v. Michalski, 157 N.C.App. 4621, 579 S.E.2d 449 (2003) (finding it unnecessary to consider whether to adopt the doctrine of inevitable disclosure since it would not be applied in the broad fashion sought by the plaintiff).

In Bimbo Bakeries, the court applied the “inevitable disclosure” doctrine in entering a consent injunction against a former employee of Bimbo who allegedly possessed Bimbo’s trade secrets, including proprietary and confidential information concerning Bimbo’s strategies, formulas and process parameters for Bimbo’s products. The former Bimbo employee, who was one of five key executives of Bimbo’s western region operations, had accepted a similar position at Hostess Bakery. The former employee had not entered into a non-compete agreement with Bimbo but had signed a confidentiality agreement. Bimbo filed suit against the former employee for trade secret misappropriation and argued to the federal court that without an injunction, the former employee would inevitably use or disclose the trade secrets in his new position with a competitor. The court agreed and entered a consent injunction, preventing the former employee from assuming his new position with Hostess Bakery. The former Bimbo employee has filed a notice of appeal.

Several points are worth noting from the Bimbo Bakeries court’s decision. First, the court applied the “inevitable disclosure” doctrine but found that the threat of disclosure of a trade secret “need not amount to its inevitability.” Noting that Pennsylvania law provides the right to enjoin “threatened” not just “actual” misappropriation of a trade secret, the court found that a more flexible standard should be employed than “inevitability” in determining whether a substantial risk exists of disclosure or use of the trade secret. Applying the doctrine in that case, the court found “at least a substantial threat that Defendant will disclose Bimbo’s trade secrets in the course of his employment at Hostess.”

Second, while the court recited several bases for its finding of this “substantial threat” of disclosure, perhaps the most significant related to the former employee’s conduct and actions following his acceptance of an offer from Hostess. The court appeared to rely heavily on the fact that the former employee allegedly had not disclosed to Bimbo his plans to begin employment with Hostess while employed by Bimbo and receiving its trade secrets and had downloaded Bimbo Bakeries’ confidential information from his work laptop computer on to an external storage device prior to his departure from Bimbo. The court found this strong evidence which undermined his denials of future disclosure or use of the trade secrets. “Defendant’s handling of Bimbo’s trade secrets after accepting the Hostess position undermines his trustworthiness with regard to those trade secrets.” Bimbo Bakeries, Inc. v. Botticella, Civil Action No. 10-0194 at * 29. The court found that the evidence regarding the former employee’s conduct evidenced an intention on that former employee’s part to use Bimbo’s trade secrets at Hostess, and if the case was close, which it appeared not to be, for this court, convincingly tipped in favor of an injunction.

“Defendant’s knowledge of Bimbo’s trade secrets, combined with evidence of an intention to use them at Hostess, creates a realistic expectation that Defendant will draw on and will use his knowledge of Bimbo’s trade secrets in performing his job at Hostess. Based upon the totality of the evidence, we are satisfied that there is a substantial likelihood that Defendant will not be able to perform his duties at Hostess and will not perform those duties without disclosing, whether intentionally or inadvertently, Bimbo’s trade secrets.” Bimbo Bakeries, Inc. v. Botticella, Civil Action No. 10-0194 at * 29.

In trade secret cases, the actions of departing employees can be a key factor in a court’s determination of the risk of future disclosure or use. All the denials of use cannot overcome findings of deceptive conduct by the employee when leaving for a competitor. For example, in the Pepsico case, the Seventh Circuit noted that the ex-employee’s “lack of forthrightness on some occasions, and out and out lies on others, in the period between the time he accepted the position with [his new employer] and when he informed [his then employer] that he had accepted that position leads the court to conclude that [the defendant] could not be trusted to act with the necessary sensitivity and good faith under the circumstances in which the only practical verification that he was not using plaintiff’s secrets would be [the defendant’s] word to that effect”. PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270.

Similarly, the United States District Court of South Carolina, in a “classic inevitable disclosure scenario”, relied on the fact that a departing employee had taken his former employer’s documents, and had acted in bad faith in spoliating evidence of his conduct, in enjoining that former employer from taking on duties in his new position with a competitor. Nucor Corp. v. Bell, 2:06-cv-02972-DCN (2008). As the court noted:

“There are also circumstances demonstrating defendants’ unwillingness or inability to safeguard Nucor’s purported trade secrets. Bell took Nucor documents after he knew he was going to work for SeverCorr and plaintiff has shown a possibility of succeeding to the extent its trade secrets claim relies on those events. Thus, plaintiff has some evidence that Bell already misappropriated its trade secrets. More importantly, the court has already concluded in connection with the motion for sanctions that Bell acted in bad faith by throwing away the SanDisk thumb-drive containing documents with Nucor’s potential trade secrets. . . . The presence of spoliation supports a finding that the circumstances as a whole warrant application of the inevitable disclosure doctrine.”

Based in part on the former employee’s bad faith conduct, the court, in a case of first impression in South Carolina, applied the inevitable disclosure doctrine and found that the former employer’s new employment would inevitably require him to disclose the purported trade secrets.

Time and time again in trade secret cases, the denials of actual or threatened misappropriation are belied by the conduct of the departing employee. The old adage rings true here: actions speak much louder than words.

Parker Poe Adams & Bernstein LLP was counsel to Nucor Corp. in the Bell matter, which marked the first time a court in South Carolina accepted the inevitable disclosure doctrine in a trade secret case after having found that the defendants spoliated evidence.