In that case, Bimbo Bakeries USA, Inc. obtained an injunction against Chris Botticella, Bimbo’s former Vice President of Operations in California, to prevent him from working with Bimbo’s competitor, Interstates Brand Corporation (now Hostess Brands Inc.).  Bimbo contended that Botticella had downloaded confidential, trade secret information of Bimbo prior to his departure, which he continued to receive as an employee of Bimbo after he had received his offer from Hostess.  Bimbo also argued that an injunction was warranted given the sufficient likelihood that Botticella would disclose Bimbo’s trade secrets in his new position.  The district court agreed with Bimbo and granted the injunction.  On appeal, the Third Circuit affirmed. 

The Third Circuit opinion raises several interesting points.  First, in affirming the district court’s injunction, the Third Circuit made it clear that it was not basing its decision on the theory of “inevitable disclosure.”  Rather, the Third Circuit based its decision on the Pennsylvania trade secret statute’s proscription of threatened misappropriation. 

Second, the Third Circuit clarified that the standard for showing such threatened misappropriation.  Rejecting the argument that a showing was required of  ”virtual impossibility” of avoiding disclosure of the trade secrets, the Third Circuit concluded that a lesser standard, of showing a sufficient likelihood of disclosure, is all that is required. 

In clarifying the standard for proving threatened misappropriation (and in the process distinguishing prior contrary language of the Third Circuit in Victaulic Co. v.Tieman, 499 F.3d 227, 234 (3d Cir. 2007) as dicta), the Third Circuit found more than enough evidence in the record, to support Bimbo’s likelihood of success on the merits, including evidence of Botticella’s continued receipt of Bimbo confidential information after he had received his Hostess offer, his “copying Bimbo’s trade secret information from his work laptop onto external storage devices” and the substantial similarity of his positions at Hostess and Bimbo.  Interestingly, the Third Circuit also found that the district court was entitled to make an adverse inference against Botticella for failing to testify at the preliminary injunction hearing. 

As any good chef knows, a great dish is made up of not one but many great ingredients.  For the district court, and the Third Circuit, Bimbo introduced many pieces of probative evidence that made a compelling case that absent an injunction, Botticella was likely to misappropriate Bimbo’s trade secrets.  Bimbo’s case was not reliant only on claims of “inevitable disclosure.”

Armacell LLC manufactured foam insulation products and employed Jeffrey Bostic in its Research and Development Group as a Senior Research Scientist.  Armacell had developed and marketed a foam insulation that was based on ethylene propylene diene methylene (EPDM), which was superior to other pipe insulation in terms of its fire test ratings.  Armacell competed with K-Flex, which did not have an EPDM product prior to this dispute.  

In its complaint, Armacell alleged, among other things, that Bostic and K-Flex had misappropriated Armacell’s trade secrets for the EPDM insulation product.  Armacell alleged that Bostic resigned from Armacell to accept a position as a chemist at K-Flex and in the process, undertook ”a surreptitious campaign of disloyal actions,” copying  onto external hard drives thousands of competitively sensitive and confidential information of Armacell.    Armacell asserted that K-Flex, which did not have an EPDM product, had been struggling to compete with Armacell in the sale of two inch thick pipe insulation.  After Bostic was hired, however, K-Flex quickly had ready for testing a one-inch thick EPDM product, a product for which K-Flex had no commercial need but which could be reproduced to develop a two-inch EPDM sample.  Armacell alleged that this evidence was strong circumstantial evidence of misappropriation.

The North Carolina Business Court agreed with Armacell and issued a preliminary injunction against Bostic, K-Flex and its affiliated company.  On appeal, the Defendants challenged the injunction order, asserting that the Business Court erred in finding that Armacell had proven a likelihood of success on the merits of its trade secrets claim.  The Defendants contended that Armacell brought only “speculative claims” and “while the evidence demonstrated that Bostic took a significant amount of data from [Plaintiff's] computer system, [Plaintiff] did not show that [Defendants] had a specific opportunity to acquire [Armacell's EPDM formulation].”  The Defendants argued that the evidence was simply not sufficient. 

The Court of Appeals rejected the Defendants’ argument.  In affirming the granting of the injunction, the Court correctly observed that North Carolina’s Trade Secrets Protection Act only requires that the plaintiff make out a prima facie showing of misappropriation and the burden then shifts to the defendant to show that it obtained the subject information lawfully. 

Under the Act, a prima facie case is established by “the introduction of substantial evidence that the person against whom relief is sought both:

(1) Knows or should have known of the trade secret; and

(2) Has had a specific opportunity to acquire it for disclosure or use or ahs acquired, disclosed, or used it without the express or implied consent or authority of the owner.”  N.C. Gen. Stat. § 66-155. 

Once the prima facie showing is made, it is up to the defendant to rebut that evidence through the introduction of “substantial evidence that the person against whom relief is sought acquired the information comprising the trade secret by independent development, reverse engineering, or it was obtained from another person with a right to disclose the trade secret.” Id.

Although the defendants challenged the very nature of the burden shifting in the statute, the Court, consistent with precedent, reiterated the view that the statute in fact contemplates a shifting of the burden of proof.  Combs & Associates, Inc. v. Kennedy, 147 N.C. App. 362, 369, 555 S.E.2d 634, 639 (2001); Byrd’s Lawn & Landscaping v. Smith, 142 NC. App at 376, 542 S.E.2d at 693.  The reason for the burden shifting is simple:  the North Carolina statute reflects the practical reality that “[f]ew defendants leave the proverbial ’smoking gun’” when misappropriating a trade secret.  Lawsuits Between Business Competitors: Chapter 75-1.1 and Beyond, Eric D. Welsh, Mecklenburg County Bar Association Business Litigation Forum, February 17, 2006, p. 7.  Moreover, due to the frequent absence of direct evidence, a claim for misappropriation will often depend upon circumstantial evidence.  Medical Staffing Network, Inc. v. Ridgway, 194 N.C. App. 649, 658, 670 S.E.2d 321, 329 (2009); Byrd’s, 142 N.C.App. at 377, 542 S.E.2d at 693; Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp. 2d 541, 545 (M.D.N.C. 2002).    

In reviewing the record before it, the Court of Appeals found ample circumstantial evidence to support Armacell’s prima facie case of trade secret misappropriation.  The evidence showed that Bostic, as a Senior Research Scientist, had knowledge of Armacell’s EPDM technology and K-Flex, which had not developed an EPDM product prior to Bostic being hired by it, had, within a year after hiring Bostic, produced an EPDM sample.  Relying on Sunbelt Rentals, Inc. v. Head & Engquist Equip., L.L.C., 174 N.C.App. 49, 620 S.E.2d 222 (2005), the Court of Appeals found that this “before and after” evidence was ”sufficient circumstantial evidence to show Defendants’ opportunity to acquire the trade secrets as well as Defendants’ subsequent use thereof.”  

In Sunbelt, a case involving the theft of trade secrets and unfair competition resulting from a corporate raid, the North Carolina Business Court found as persuasive evidence of misappropriation the fact that the Defendants were able to quickly compete against Sunbelt even though they had not invested time to develop independently the requisite resources to do so.  As the Business Court stated:

In this instance it may be more important to look at what was not done and the business results.  There is no evidence of a unified pricing structure for Hi-Lift.  Many salespeople testified that they did not have prices when they began calling on customers.  There were no restrictions placed on the sales people concerning use of BPS information.  The sales people began calling on the same customers within days of leaving BPS and in some cases went after business that was based on special pricing arrangements.  Credit decisions had to be based upon knowledge obtained at BPS, as there is no evidence of the independent development of credit information for the customers called upon at the outset.  Indeed, there is little evidence of the independent development of information by Hi-Lift that one would expect in a normal greenfield operation. As previously noted, there was an advantage to Hi-Lift to get the new Hi-Lift branches open in the BPS markets before Sunbelt could close its transaction. The rapidity with which the old BPS customers were identified, called upon and converted to Hi-Lift, despite the lack of business information and guidance from Hi-Lift management, provides strong circumstantial evidence that at least some of BPS confidential information was used to solicit customers.  Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 2003 NCBC 4, 2003 WL 21017456 (N.C. Super. May 2, 2003). 

As in Sunbelt, the Defendants in Armacell obtained  a head start advantage as a result of Bostic’s alleged misappropriation and that advantage, from the Court’s perspective, was sufficient proof of misappropriation.   

The Defendants in Armacell attempted to rebut this prima facie showing, arguing that Armacell’s proof showed only that Bostic stole some of Armacell’s information but not the information related to the EPDM product.  Defendants’ curious argument, however, failed because they were unable to come forward with ample evidence to explain how it was that they had developed the EPDM product so quickly if not through Bostic’s efforts.  Here, it would appear that Armacell caught Bostic with his hand in the “trade secret cookie jar” — perhaps 7000 times — which was more than enough for the Court to conclude, at this stage, that Bostic not only had access to the information but, in light of the absence of a product before and then sudden introduction of a product after his hiring, had misappropriated that information. 

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*  Parker Poe represented Sunbelt Rentals, Inc. in the Head & Engquist Equipment litigation and Eric Welsh was a member of the trial team.

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.

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.

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.

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.

In the Milliken & Co. v. Morin case, Milliken had employed Morin as a research analyst. As part of his employment, Morin signed an employment agreement with Milliken, which contained an inventions assignment provision, a non-compete provision and a confidentiality provision. In his position with Milliken, Morin allegedly developed an idea to create a high modulus multifilament polypropylene fiber. Milliken apparently did not pursue the idea of developing this fiber. Morin subsequently resigned from Milliken, created his own company, and filed a patent for a high modulus multifilament polypropylene fiber. Upon learning of Morin’s conduct, Milliken brought suit against him, alleging claims for, among other things, breach of contract with respect to the confidentiality provision and violation of South Carolina’s Trade Secrets Act. At the close of Milliken’s case at trial, Morin moved for a directed verdict, arguing that the confidentiality agreement was unenforceable. The trial court denied the motion and Morin appealed the decision.

The central issue in Morin’s appeal, which is of interest here, was whether the confidentiality provision satisfied “the same strict scrutiny” applied to non-compete agreements under South Carolina law. The appellate court, citing Carolina Chem. Equip. Co. v. Muchkenfuss, 471 S.E.2d 721, 723 (Ct. App. 1996) for the proposition that “a covenant not to divulge trade secrets had the effect of a covenant not to compete, and thus, was subject to the same strict scrutiny,” analyzed Morin’s confidentiality provision under standards applicable to non-compete agreements, and determined that the provision “did not substantially restrict Morin’s competitive employment activities” and was enforceable. In arriving at this conclusion, the court noted that the provision did not “prohibit Morin from disclosing or using any and all information he learned working at Milliken, or using the general knowledge and skills he learned while working there.” The court also found the provision reasonable as to time period and territory.

The Milliken case raises several important questions. First, should the Milliken decision be read to stand for the proposition that all confidentiality agreements must meet the standards set for non-compete agreements to be enforceable? While not expressly addressing the issue, the court suggests that may be the case. In its analysis, the Milliken court quickly jumped to the Muckenfuss decision, stating “In Muckenfuss, the court determined a covenant not to divulge trade secrets had the effect of a covenant not to compete, and thus, was subject to the same strict scrutiny.” However, the Milliken court did not initially address whether the confidentiality provision had this effect as to Morin. The court did not consider the competitive effect of the confidentiality provision as an initial matter and simply proceeded to an analysis under the non-compete standards. There certainly is a healthy question as to whether Muckenfuss should be read for the proposition that all confidentiality agreements, regardless of reach or effect, must be analyzed under the standards set for non-compete agreements.

Second, if Muckenfuss and now Milliken are to be read broadly to reach all confidentiality agreements, then one is left to ask about what that means for the enforceability of confidentiality provisions that prohibit an employee from disclosing confidential information of his former employer in a non-competitive setting. For example, if a former employee disclosed confidential information on the internet out of spite or revenge, such disclosure would not be in a competitive environment. Yet, the enforceability of the confidentiality provision, and redress for the wrong, might still turn on whether it met the “strict scrutiny” afforded to non-compete agreements. If the provision lacked any territorial limitation, would it nevertheless be found enforceable and a tool for redress against such conduct? Applying a broad reading to Muckenfuss and Milliken could lead to the conclusion that even in such a situation the confidentiality agreement may be found invalid.

With the adage “better safe than sorry,” the uncertainties surrounding confidentiality agreements in South Carolina suggest the need to draft confidentiality agreements in a manner that is compliant with the standards set for non-compete agreements. Among other things, confidentiality agreements should be kept narrow to avoid a charge that it would prevent the employee from “using the general skills and knowledge he gained” at the former employer. Carolina Chemical Equipment Co., Inc. v. Muckenfuss, 471 S.E.2d 721, 724. In this case, the “horse” may actually be a zebra, even though it lacks the stripes, and should be handled accordingly.

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.

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.