First Published Opinion From New Business Court Judge Conrad

Business Court Judges don't have to issue written Opinions in cases granting Preliminary Injunctions.  (G.S. § 7A-45.3 limits the obligation to issue a written Opinion to rulings rendered per NCRCP 12, 56, 59, and 60).  But even so, new Business Court Judge Conrad chose a case granting a Preliminary injunction (Addison Whitney, LLC v. Cashion, 2017 NCBC 23) to be his first published (numbered) Opinion.

The Plaintiff, Addison Whitney, is a branding company.  Among other things, it creates product names, and has done so for a number of famous companies,  It came up with "Outlook" for Microsoft and "Escalade" for Cadillac.  It has a specialty in creating names for new drugs from pharmaceutical companies. 

Addison Whitney sued the Defendants -- all of whom had formerly held top positions at Addison Whitney -- after they left en masse and started a competing company.  Several of the Defendants had signed "Confidential Information and Unauthorized Disclosure Agreements" and "Employee Confidentiality Agreements."  One Defendant had signed an Employee Confidentiality Agreement which contained a non-compete provision.  The other Defendants had not signed any document containing a non-compete.

What Were The Trade Secrets?

Addison Whitney argued that it had three separate categories of trade secret information. 

First, it said that it had "created a database that contains information regarding drug product characteristics for nearly 4,000 drug products on the market.”   This was a mix of publicly accessible information and of information that was "not publicly available and chosen based on the 'professional judgment' of Addison Whitney employees." Op. ¶18.  This database was password-protected.

Second, Addison Whitney maintained 246 case studies of work it had done for particular clients which contained non-public information regarding its work and sometimes the confidential information of clients.  These were also password protected. 

Finally, Addison Whitney kept its client and prospective client information on SalesForce, a "customer relationship management program."  Addison Whitney put non-public information about clients’ buying habits and upcoming product into SalesForce.  Only a limited number of Addison Whitney employees had access to its SalesForce platform.

Addison Whitney said that each of these three categories of trade secret information gave it a "competitive advantage."  Judge Conrad ruled that all of these types of information are entitled to trade secret protection..  As to the client information, he said that North Carolina courts "routinely hold that such information is protectable as a trade secret".  Op. ¶35 (citing Drouillard v. Keister Williams Newspaper Servs., Inc., 108 N.C. App. 169, 174, 423 S.E.2d 324, 327 (1992); Computer Design & Integration, LLC v. Brown, 2017 NCBC LEXIS 8 at *27–28).

Establishing Misappropriation Of A Trade Secret

Since the Defendants, as former employees, had legitimate access to the Plaintiff's trade secrets, the existence of access and opportunity to acquire them was insufficient to establish misappropriation.

Relying on Judge Bledsoe's recent opinion in Am. Air Filter Co. v. Price, 2017 NCBC LEXIS 9, at *23, Judge Conrad held that:

there must be substantial evidence (1) that the wrongdoer accessed the trade secret without consent, or (2) of misappropriation resulting in an inference of actual acquisition or use of the trade secret.

Op. ¶38.

Access without consent can be shown by "showing that an employee continued to access trade secrets after receiving a job offer from a competitor and then later accepted the offer"  Op. ¶39.

The "relevant inquiry," per Judge Conrad, was "when Defendants’ plan to resign and to open their own competing business became sufficiently concrete to render continued access to trade secrets unauthorized."  Op. ¶39.

Since the Defendants told others at the company in December 2016 that they were planning to resign, Judge Conrad ruled that was the point after which their trade secret access became unauthorized.

After that point, they obtained copies of the case studies, a list of clients with open opportunities, and a list of prospective clients.  They also accessed a number of other documents both before and after resigning.  These included accessed "client brand guidelines, market research, linguistic reports, naming strategy briefs, and client strategy presentations.”  Op. ¶25. 

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NC Business Court On Conflicting Rules Of Civil Procedure: Do You Need Leave Of Court To Amend Your Answer To Add A Counterclaim?

If I asked you if you were familiar with Rule 13(f) of the NC Rules of Civil Procedure, I'm betting that you would respond with a glassy stare and a slack jaw.  That Rule deals with a counterclaim that you should have made in your Answer, but which you left out.  It says that "[w]hen a pleader fails to set up a counterclaim through oversight, inadvertence, or excusable neglect, or when justice requires, he may by leave of court set up the counterclaim by amendment."

Leave of Court?  Asking permission?  Well, how does that square up with NCRCP 15, which deals with "amended pleadings?" That Rule says that you can amend your Complaint "as a matter of course" (i.e. without "leave of the Court") at any time before a "responsive pleading is served."  But Rule 13(f) seems to contemplate that the permission of the Court is needed before amending an Answer to raise an overlooked counterclaim. 

Judge Robinson dealt with these apparently conflicting Rules last week in Recurrent Energy Development Holdings, LLC v. Sunenergy1, LLC, 2017 NCBC 18.  Defendant Sunenergy1 had amended its Answer to add a counterclaim.  It did so within thirty days of filing its original, counterclaim-less Answer, but without asking for the permission of the Business Court.

The Plaintiff moved to strike the Answer, contending that NCRCP 13(f) required leave of Court  to add the counterclaim.

Judge Robinson, finding no North Carolina appellate authority on the point, looked to federal court decisions, though he found the federal case law to be "scant."  The majority of federal courts looking at the federal version of the Rule had decided that:

a party may amend its answer to add a counterclaim as a matter of course under Federal Rule 15(a), and that leave of court under Federal Rule 13(f) was only required after the period for amendment under Federal Rule 15(a) had expired.

Op. ¶87.

Judge Robinson observed that "a few other courts" had found otherwise.  Op. ¶88.

There really wasn't any need to decide which line of federal cases to follow because the Federal Rules were amended in 2009 to delete Rule 13(f).  The reason for the deletion was that the Rule was "largely redundant and potentially misleading."  Op. ¶93 (quoting Notes of Advisory Committee on 2009 amendments).  The Notes to Rule 15 state that the deletion of Rule 13(f) "establishes Rule 15 as the sole rule governing amendment of a pleading to add a counterclaim."

Judge Robinson interpreted the deletion of FRCP 13(f) to confirm that FRCP 15(a) "was always intended to apply to amendments to add counterclaims."

So, you do not need to file a Motion asking the Court to permit you to add a counterclaim to your Answer if you add that counterclaim within 30 days of your original Answer.  You can do that as "a matter of course."