A recent decision by the North Carolina Court of Appeals (Armacell LLC v. Jeffrey Bostic, et al., No. COA09-1160 (July 20, 2010)) reminds us that under the North Carolina Trade Secrets Protection Act, N.C. Gen. Stat. § 66-152, direct evidence of misappropriation is neither required nor necessary to establish a claim for misappropriation.
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.