Category Archives: North Carolina law

SPORTS MEMORABILIA CARDS PROCESS NOT LIKELY A TRADE SECRET? SAY IT AIN’T SO JOE.

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Posted by Eric Welsh on January 11, 2010 – 9:00 am
Filed under NC Business Court, North Carolina law, Trade Secrets

In a decision rendered by the North Carolina Business Court in November 2009, Judge Diaz denied a motion for a preliminary injunction filed by plaintiff Napco, Inc. (”Napco”) in connection with a sports memorabilia manufacturing process that it alleged was a trade secret. NAPCO, Inc. v. PBM Graphics, Inc., 09 CCVS 157. While the Court’s order is short on detail, briefs submitted by the parties provide some helpful insight into the Court’s decision. The briefs also help highlight one conclusion to be drawn from the order: irreparable harm may not necessarily exist in a trade secret case.

In that case, it was alleged that Napco developed for PBM Graphics (”PBM”) a manufacturing process for sports memorabilia cards which PBM intended to use in supplying cards to a third-party customer, The Upper Deck Company. The “memorabilia cards” were allegedly different than other sports cards as they would have imbedded in them a swatch of a jersey or a sliver of a broken bat. Napco alleged that it created this process for PBM as a subcontractor, with the assurance that large orders would be placed for these cards as long as a satisfactory product could be produced. Napco further alleged that PBM, having gained access to the process, then misappropriated it for supplying cards to the Upper Deck Company. Napco asserted claims of trade secret misappropriation and unfair competition under North Carolina’s statutes and moved for a preliminary injunction. Interestingly, Napco did not allege that it had formed any contract with PBM or that PBM breached any obligation of confidentiality owed to Napco.

PBM had a different take on the situation, challenging virtually every aspect of the plaintiff’s claims in opposing the motion. Two arguments, however, bear noting. First, PBM argued that Napco’s claim was deficient because Napco “shared its alleged trade secrets without negotiating any obligation on the part of PBM to maintain the secrecy of these purported secrets.” Rather, Napco, according to the Defendant, provided PBM “all its purported trade secrets in the hopes of getting future work from PBM.” Second, PBM argued that Napco understood fully that it was hired to develop the process for both Napco and PBM and if successful, Napco would be awarded substantial work by PBM. “NAPCO’s reward for success was solely monetary” and therefore, plaintiff could not show irreparable harm for an injunction to be granted.

In denying the motion, the Business Court found many failings with the plaintiff’s argument. First, the Court noted was that there was substantial evidence presented that the claimed trade secret, the Napco process for manufacturing the sports memorabilia, did not work. Of course, one requirement of a trade secret in North Carolina is that the alleged secret have actual or potential commercial value. The Court found the evidence wanting in this respect, which obviously posed a hurdle for a preliminary injunction. The Court also found that evidence presented demonstrated that the alleged secret incorporated technology that was widely known and used in the printing industry. Again, this undermined the claim that the alleged secret had actual or potential commercial value from not being generally known or readily ascertainable through independent development.

Of significance here, the Court found that the Plaintiff had failed to show it had taken reasonable efforts to protect its alleged secrets, a fundamental element of any trade secret claim. The Court noted that the parties never negotiated a confidentiality agreement to protect the information or prevent its use by PBM. While Napco relied heavily on logs signed by PBM employees when visiting Napco’s facility as evidence of some agreement not to disclose confidential information, the Court found the language of the log too vague: visitors “may” be exposed to confidential or proprietary information of Napco.

Finally, while finding the Plaintiff had failed to show a likelihood of success on the merits, the Court also found a separate ground to deny the motion for an injunction: the lack of irreparable harm. Noting that the Plaintiff made no claim that PBM took the alleged secret for any other purpose, the Court found that any damage could be addressed through monetary damages, as the Plaintiff had alleged that it had been promised to be awarded a contract to produce the cards for the Upper Deck Company. The Court reasoned “it should be relatively simple for Plaintiff to calculate its damages, which will be measured either by Plaintiff’s lost profits or the extent of Defendant’s unjust enrichment resulting from the alleged violation of the NCTSPA. Accordingly, because Plaintiff has an adequate remedy at law, the Court declines to grant preliminary injunctive relief.” Had the Plaintiff alleged some greater harm — such as the Defendant disclosing the trade secret to others, destroying its value, or using it with other customers — perhaps the Court would have come to a different conclusion on this point.

The Napco decision is interesting in that cases involving motions for preliminary injunctions to protect trade secrets typically do not turn on the irreparable harm component. Here, the Court found that fatal to the motion. But the Napco case also serves as a reminder of the need to take appropriate precautionary steps, through contract or otherwise, to protect the information claimed to be a trade secret. Without such steps, significant hurdles exist to convincing any court that injunctive relief is warranted.

Unfair Competition Claim Satisfies Twombly and Iqbal Standards

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Posted by Eric Welsh on December 9, 2009 – 3:39 pm
Filed under Federal Court, North Carolina law, Unfair Competition

Applying the pleading standards established under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949-52 (2009) to a UDTPA claim, the Magistrate Judge in Davis v. Beazer Homes, U.S.A., Inc., 1:08CV247 (Nov. 17, 2009, MDNC) recommended finding the plaintiff’s claim sufficient to withstand a motion to dismiss. In that case, the plaintiff alleged, among other things, that the defendants engaged in unfair trade practices under North Carolina law through their alleged sales practices involving certain incentive programs. The defendants moved to dismiss on several grounds, including that the plaintiff failed to plead a proper UDTPA claim.

In considering the motion, the court noted that under the standard set by the Supreme Court in Twombly, if the “allegations in a complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency should be exposed at the point of minimum expenditure of time and money by the parties and the court.” Bell Atlantic Corp. v. Twombly, 550 U.S. at 558 (internal quotation marks, punctuation and citations omitted). After citing to Judge Posner in the Asahi Glass Co. v. Pentech Pharms, Inc., 289 F. Supp.2d 986, 995 (N.D.Ill. 2003) case, the court then analyzed the pleading from a “plausibility” standard.

The court noted that the plaintiff maintained that the “deceptive or misleading” act was the alleged incorporation of the cost of her financial incentives into the total purchase price without disclosing that information to her. The court found “this bedrock allegation” an “adequate assertion in this case and ‘plausibility’ was sufficiently shown under all the circumstances of the case.” It is with respect to this latter point that the court refers to the existence of a deferred prosecution agreement (”DPA”), entered into by Beazer Homes and the U.S. Attorney’s Office, and a criminal information. The court, having reviewed the DPA and a related criminal information, found that “it appears that Beazer Homes has admitted some level of misconduct relating to ‘certain’ of its home sales, as least insofar as federal law is concerned.” The court considered this information “a significant factor in assessing ‘plausibility’ of Plaintiff’s UDTPA claim”, even though the DPA was not part of the amended complaint in the matter (or even in existence at the time). While a court is generally limited to the four corners of the complaint when reviewing the sufficiency of the allegations on a motion to dismiss, here the court apparently stepped outside of the complaint to consider this extraneous information, which had been submitted to the court by the plaintiff as part of another filing in that case. The court referred to other allegations of the complaint as well, but from the court’s opinion, the impact of the DPA is clear.

The Defendants have filed objections to the recommendation of the Magistrate Judge.

Customer Files Found Not to be a Trade Secret

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Posted by Eric Welsh on December 9, 2009 – 2:33 pm
Filed under NC Business Court, North Carolina law, Trade Secrets

In August, the North Carolina Business Court, in Edgewater Services, Inc. v. EPIC Logistics, Inc., 2009 NCBC 20 (August 11, 2009), granted summary judgment in part for Defendants on the plaintiffs’ trade secret claim related to its rates and customer files. In that case, plainitff Edgewater Services, Inc. (”ESI”) alleged that the defendants misappropriated its carrier files, rates and customer files and that this information constituted trade secrets under North Carolina law. In discovery, the plaintiff made significant admissions, in effect conceding that only the rates were trade secrets and then admitting that those rates change as variables such as fuel costs change. The plaintiff also conceded that the alleged trade secret information was kept in an unlocked file room “accessible to anyone.” These admissions were probably too great to overcome. The evidence also showed that the customer files were kept by salespersons in their respective offices.

In granting the defendants’ motion for summary judgment on this part of the plaintiffs’ case, the court found that the plaintiffs’ carrier files, rates and customer files were not trade secrets. In support of this conclusion, the court noted that the information could be “learned directly from carriers and customers of ESI.” The court also noted that ESI did not take sufficient steps to safeguard the information.

While the opinion does elsewhere mention the fact that the defendant had entered into an employment agreement and non-compete (and indeed the court denied summary judgment to the defendants with respect to a non-disclosure covenant in that agreement), the court apparently gave this little or no weight in finding that inadequate steps were taken to protect the alleged confidential information. Interestingly, the court, in finding that the customer information was not a trade secret because it could be learned from the customers themselves, did not refer to the portion of the statutory definition that states that a trade secret includes a compilation of information. Of course, an argument could be made that customer files are a compilation of information that are worthy of protection. It is worth noting that the Business Court previously in the Sunbelt case, found that a compilation of information, including customer information, should be afforded trade secret protection. See Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 2003 NCBC 4 (May 2, 2003). Although the court did not mention the Sunbelt case or the compilation point specifically, the court did note that the alleged trade secrets were “compiled in the course of doing business” and there was no evidence that the plaintiffs expended “any significant amount of effort or money in developing the information, outside of the cost of doing business.” While this statement appears to be directed at the value of the alleged trade secret, case law does exist to support the proposition that trade secret status can be afforded to information that is developed in the ordinary course of a company’s business. See e.g. Sunbelt, supra, and Byrd’s Lawn & Landscaping, Inc. v. Smith, 142 N.C. App. 371 (2001).

Post script: This author was on the Sunbelt trial team.

Last Call – 58 Beers Served in Five Hours is not an Unfair or Deceptive Act or Practice

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Posted by Eric Welsh on October 18, 2009 – 9:12 am
Filed under NC Court of Appeals, North Carolina law

While certainly outside the main topic of this Reporter – motor vehicle negligence – a recent opinion of the North Carolina Court of Appeals reminds us all that there are limits to the application of N.C. Gen. Stat. §75-1.1.  In Noble v. Hooters of Greenville (NC) LLC, No. COA08-1144 (N.C.App. Aug. 18, 2009), the plaintiffs, who had been involved in a horrendous motor vehicle accident, sued Hooters, asserting a claim under 75-1.1.  The plaintiffs’ claim was based upon, in part, the argument that Hooters violated state law in serving them and other patrons 58 beers in a five hour span and then permitting them to leave in their car.  The plaintiffs argued that this conduct not only violated state law but also North Carolina public policy of protecting its citizens.  The claim was dismissed below and affirmed by the Court of Appeals, finding that the allegations did not show conduct which amounted to an inequitable assertion of Hooter’s power or position over the plaintiffs.  Nor did the conduct have a tendency to deceive.  In other words, the plaintiffs ordered the beer and they knew what they were getting.  Significantly, while the Court of Appeals noted that plaintiffs had alleged that Hooter’s conduct violated a regulatory scheme and further noted that a violation of regulatory scheme could give rise to liability under Chapter 75-1.1 – specifically citing a violation of North Carolina’s Trade Secrets Protection Act – the Court found that the plaintiffs failed to allege conduct meeting the first element of the claim:  “an unfair or deceptive act or practice, or an unfair method of competition.”  Finally, the Court agreed that North Carolina public policy is to protect its citizens but that alone is not enough to state a claim.  Bottom line here:  while plaintiffs like to avail themselves of Chapter 75-1.1 because of its treble damages and ability to obtain attorney’s fees, there are limits to the reach of this statute.

Court of Appeals Finds Stock Award Not to Be Valid Consideration for Non-Compete

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Posted by Eric Welsh on October 14, 2009 – 12:08 pm
Filed under NC Court of Appeals, North Carolina law

In a recent decision, the North Carolina Court of Appeals found, in affirming the denial of a preliminary injunction and dissolution of a TRO, that the award of restricted stock to a long time employee of the company was not valuable consideration to support a non-compete agreement.  In affirming the lower court, the Court of Appeals in MSC Industrial Direct Co. , Inc. v. Steele, 2009 WL 2501762 (N.C.App. Aug. 18, 2009) summarized the state of law in North Carolina regarding the requirement that a non-compete provision be supported by valuable consideration.  Here, one of the interesting parts of the opinion is that the employee, who had been employed by the company for about twelve years, signed the non-compete agreement and the restricted stock award on the same day.  Even though both agreements were entered into the same day, and even though the Court of Appeals noted that uncertified shares of stock can be valuable consideration, here, the Court of Appeals concluded that “the stock at issue was not.”  The Court of Appeals based its decision on the fact that by the terms of the Award, the earliest that any portion of the stock would have vested would be almost three years after the employee entered into the non-compete.  Until vesting, the employee had no rights to the stock, it conferred no right to continued employment and was not to be considered part of his salary.  Finally, the Court of Appeals noted that the grant and award of the stock actually predated the signing of the non-compete agreement by approximately 30 days.  The Court of Appeals found the consideration illusory.  Moral of the story:  timing matters.

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