NEW STATISTICAL ANALYSIS SHOWS TRADE SECRET CLAIMS ON THE RISE

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Posted by Eric Welsh on Monday, April 26th

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

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Posted by Eric Welsh on Monday, April 26th

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.

JUST BECAUSE YOU ARE A “WHISTLE BLOWER” DOESN’T MEAN THERE WAS UNFAIR OR DECEPTIVE TRADE PRACTICES

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Posted by Eric Welsh on Wednesday, March 17th

Under Chapter 75-1.1 of North Carolina’s Unfair and Deceptive Trade Practices Act (the “Act”), a plaintiff must prove an “unfair or deceptive act or practice” as an element of the claim, hardly a surprise. Certainly, then, a “whistle blower’s” claim that a company engaged in illegal and fraudulent activity in its business must give rise to a claim under the Act. Not necessarily, or so says the North Carolina Court of Appeals in a decision filed yesterday.

In Combs v. City Electric Supply Co., No. COA09-108 (March 16, 2010), the North Carolina Court of Appeals found that a whistle blower’s unfair trade practices claim failed even though it was based on allegations that the defendant had engaged in illegal and fraudulent conduct. In that case, Combs, a former employee of City Electric Supply Company, was terminated from his position after he had objected to certain business practices of City Electric, which Combs alleged were illegal or fraudulent. Combs filed his complaint alleging wrongful discharge, tortious interference with his contractual rights and unfair and deceptive trade practices under Chapter 75-1.1. Combs alleged “that his employment was terminated in retaliation for reporting ‘that Defendant [w]as stealing from its customers’ accounts’.” Following a trial, the trial court directed a verdict in favor of the defendants on all counts. Combs appealed the decision.

On appeal, the Court found sufficient evidence of City Electric’s obtaining money by false pretenses from its customers and therefore found sufficient grounds for the wrongful discharge and tortious interference claims to go to a jury. The Court reversed and remanded those claims for a new trial.

The Court, however, was not so inclined when it came to the Chapter 75-1.1 claim. As to that claim, the Court affirmed the directed verdict for the defendants. Noting that a plaintiff must prove not only an “unfair or deceptive act or practice” under Chapter 75-1.1, but also that that act or practice was “in or affecting commerce” and “proximately caused injury to the plaintiff,” citing Dalton v. Camp, 353 N.C. 647, 656, 548 S.E.2d 704, 711 (2001), the Court found that Combs’ complaint “involved a simple employment dispute” and did not involve acts “in or affecting commerce.” Relying on precedent which establishes that the Act does not apply to general employer-employee relationships, the Court concluded that Combs’ claim did not affect commerce and did not fall within Chapter 75-1.1, regardless of the “whistle blowing” allegations.

Combs attempted to distinguish his claim from those found in ordinary employer-employee relationships, citing to Sarah Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999) and Walker v. Sloan, 137 N.C. App. 387, 529 S.E.2d 236 (N.C. App. 2000), cases involving employer-employee relationships with Chapter 75-1.1 claims. The Court found Combs’ argument unconvincing, distinguishing both Sarah Lee and Walker from Combs’ situation.

“In both Sarah Lee Corp. and Walker, the Court focused upon conduct that constituted activity ‘affecting commerce’ that occurred between the employer and employee and held that N.C. Gen. Stat. 75-1.1 was applicable to those cases. . . . In the instant case, there was no evidence presented before the trial court of any conduct that would constitute activity ‘affecting commerce’ between plaintiff and City Electric. Plaintiff only asserts that he was fired in retaliation for ‘blowing the whistle’ on City Electric’s practice of not sending out negative balance statements at the end of each month.”

Based on this reasoning, the appellate court found Combs’ Chapter 75-1.1 claim to lack merit.

The City Electric case is interesting in several respects. First, an observation can be made that just because an act or practice is deceptive or unfair does not by itself mean that a claim under Chapter 75-1.1 can be brought. A proper nexus must be found with “commerce” for a claim to exist. Here, although the underlying alleged act of fraud gave rise to an alleged “whistle blowing,” because the crux of the claim involved a “simple employment dispute,” a Chapter 75-1.1 claim was not found.

A second, converse observation can be made: just because the underlying facts involve an employer-employee relationship does not necessarily mean that a Chapter 75-1.1 claim cannot be brought. Indeed, the Court noted both the Sara Lee and Walker cases as examples where a Chapter 75-1.1 claim existed even in the context of an employer-employee dispute. Another example, although not cited by the Court in City Electric, is Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 620 S.E.2d 222 (N.C. App. 2005).

In that case, Sunbelt alleged that the defendants had engaged in unfair and deceptive trade practices under Section 75-1.1 when they raided Sunbelt’s business for its employees and confidential, trade secret information. Following a trial, Sunbelt obtained a judgment in its favor on the unfair and deceptive trade practices act, even though the claims involved to some extent the employment relationships between Sunbelt and certain of its former employees. The Business Court found the claim valid due to the fact that the case involved claims of trade secret misappropriation and tortious interference with Sunbelt’s business relations and therefore a proper nexus was found between the deceptive acts and practices and commerce. Sunbelt’s judgment was affirmed on appeal.

So what do we take away from this discussion? Perhaps, that while a “whistle blower” may not have facts sufficient to make out a claim under the Act, the fact that a claim is in the context of an employer-employee relationship is not necessarily fatal to bringing an unfair and deceptive trade practices claim under Chapter 75-1.1. As in any legal matter, the facts matter.

Parker Poe represented Sunbelt Rentals in Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, and Eric Welsh was part of the trial team.

SNOOZE YOU LOSE: VIGILANCE REQUIRED IN PROTECTING TRADE SECRETS

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Posted by Eric Welsh on Wednesday, March 17th

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

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Posted by Eric Welsh on Friday, February 19th

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.

IN SOUTH CAROLINA, A HORSE CAN BE A ZEBRA: SOUTH CAROLINA SCRUTINIZES CONFIDENTIALITY AGREEMENT UNDER NON-COMPETE STANDARD

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Posted by Eric Welsh on Wednesday, February 3rd

In perhaps another example of a case where a court has looked at substance over form in determining the validity of a claim (see prior blog entry: JUST BECAUSE THE HORSE HAS STRIPES ON IT DOESN’T MAKE IT A ZEBRA — Business Court Finds “Securities Transaction” Beyond the Reach of Chapter 75), the Court of Appeals in South Carolina last year affirmed the trial court’s finding that a confidentiality agreement was enforceable after scrutinizing it under standards applicable to non-compete agreements. Milliken & Co. v. Morin, 685 S.E.2d 828 (Ct. App. 2009). This case, interesting in several respects, highlights a significant distinction between North Carolina and South Carolina law with respect to confidentiality agreements: South Carolina, unlike its neighbor to the north, can subject confidentiality agreements to heightened scrutiny typically given to non-compete agreements to determine if the agreement is enforceable. If the agreement tends to restrict competitive employment, then it will treated as a non-compete agreement and reviewed as such under applicable law. Again, labels do not control; substance does.

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.

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