Trade Secret | Noncompete – Issues and Cases in the News – December 2011

Like a similar post last month, this post provides a summary of noncompete and trade secret issues and cases that have arisen in the past month or so, but that I have not already addressed in recent posts. In addition to my summary, you will find links for more in-depth reading on each issue. (There’s a lot here again, enjoy.)

Eighth Ciruit (Indiana and Missouri):  The 8th Circuit, applying Indiana and Missouri trade secret law, issued a recent decision (AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corporation) addressing a common question: When can publicly-available information be a trade secret? The court focused on the effort to compile the information:

Compilations are specifically contemplated in the UTSA definition of a trade secret, and the fact that some or even most of the information was publicly available is not dispositive of the first factor in the UTSA definition. Compilations of non-secret and secret information can be valuable so long as the combination affords a competitive advantage and is not readily ascertainable. . . . Compilations are valuable, not because of the quantum of secret information, but because the expenditure of time, effort, and expense involved in its compilation gives a business a competitive advantage. . . . This value is not dependent on how much of the information is otherwise unavailable because “the effort of compiling useful information is, of itself, entitled to protection even if the information is otherwise generally known.”

Ninth Circuit (California): On December 15, the 9th Circuit took oral argument  in its en banc (full court) review of the controversial United States v. Nosal decision holding that the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030 applies to “an employee . . . when he or she obtains information from the [employer’s] computer and uses it for a purpose that violates the employer’s restrictions on the use of the information.”

California (as interpreted by an Idaho court): The Idaho Supreme Court issued a decision on November 30, 2011 (T.J.T., Inc. v. Mori) that, under California law, a seller of a business who, upon the sale, becomes an employee of the acquiring company can be bound by a noncompete agreement that he entered into as part of the sale of a business.

Colorado: In an October 12, 2011, the District of Colorado issued a decision (L-3 Communications Corporation v. Jaxon Engineering & Maintenance, Inc.) discussing the level of specificity necessary to satisfy the requirement that trade secrets be identified “with reasonable particularity.” The decision also addresses the use of filing trade secrets under seal as “[i]n order to preserve the secrecy required for such material.”

Delaware: The District of Delaware issued a recent decision (actually, a report and recommendation subject to review by the district court judge) analyzing the standards (under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937 (2009)) required to plead a trade secrets claim under the Delaware Uniform Trade Secrets Act, 6 Del. C. §§ 2001-2009.

Georgia:  Coca-Cola put its secret formula “on display.” Don’t get too excited, the formula held up as one of the most famous trade secrets in the world (whether the legendary security measures are true or not) is not really on view. See here.

Massachusetts: Faithless employee? The Massachusetts Appeals Court, in Specialized Technology Resources, Inc. v. JPS Elastomerics Corp, barred a former employee and his new employer not only from using the stolen trade secrets until such time as they are no longer trade secrets (if that should ever happen), but – for five years – from producing a similar product by any means.

Michigan: No noncompete? No problem. If your employee steals trade secrets, you may still have a remedy. The Michigan Court of Appeals, in Actuator Specialties, Inc. v. Chinavare, is the latest to grant a “head start” injunction against a faithless former employee who stole trade secrets. In Actuator Specialties, the court barred the employee from working for a competitor for three years, seemingly recognizing that that small companies may not take all the steps one would expect of more sophisticated companies (such as requiring employees to agree to relevant restrictive covenants). Another interesting aspect of the case is that the defendant employee took steps that would be barred by the requested injunction in the period between the time that the injunction was sought and when it was issued. This is an issue that comes up often, and the Michigan Court of Appeals was clearly displeased with the employee’s conduct during that window.

Montana: The Montana Supreme Court, in Wrigg v. Junkermier, held that there is no legitimate business interest (a necessary element to enforcement of noncompetes in most states) in enforcing a noncompete against a former employee who was terminated by the company without cause.

Oklahoma: Despite what these recent cases suggest, noncompete decisions from appellate courts are few and far between. In Oklahoma, where true employee noncompetes are not enforceable, they are even fewer and farther between. But, in a recent Oklahoma Supreme Court decision, Howard v. Nitro-Lift Technologies, the court considered whether it should modify a broad noncompete to, essentially, convert it into a permissible nonsoliciation agreement (which has its own limitations in Oklahoma – which must be considered when writing such agreements). The court declined to do so, “because judicial modification cannot be accomplished without rewriting the agreement to cure multiple defects, leaving only a shell of the original agreement, and would require the addition of at least one material term . . . .”

Virginia: Virginia’s genera cap on punitive damages ($350,000) applies to the entire trade secret case – not to each trade secret. E.I. DuPont De Numours & Co. v. Kolon Indus., Inc., 2011 WL 5872895 (Nov. 22, 2011).

International: Theft by foreign nationals continues. See Scientist gets 7-plus years for trade secret theft. But as I recently observed to reporter Jan Wolfe (reported in Don’t Blame China for Trade Secrets Left (on, international trade secret theft is a much smaller problem than domestic misappropriation.

Related Items of Interest: A few obscure issues are worth a look. In particular, (1) whether a signature is required for a noncompete to be enforceable (remember the analogous case out of New York a few years ago (IBM v. Johnson), where the employee escaped the agreement because he signed in the wrong place); and (2) what happens when there is a dispute about a “missing” noncompete (I represented an employee in one of these relatively-rare cases this past year, and the validity of the purported noncompete was never resolved). Ken Vanko wrote a nice summary of the key considerations for both of these issues: Are Signatures Required on a Non-Compete Agreement? (U.S. Risk Mgmt. v. Day); and Stealing a Non-Compete Agreement May Not Do You Any Good and It Could Land You In Jail.