If you want to pursue a trade secrets claim in the Business Court, you’ve got to disclose the details of your trade secret.  The Opinion last week in Unimin Corp. v. Gallo, 2014 NCBC 43 illustrates that point in detail. 

It seems at first blush like a case made for a preliminary injunction for the misappropriation of trade secrets, which is what the Plaintiff Unimin sought.  The individual Defendant, Gallo,  had been Unimin’s General Manager of Research and Development.

Gallo had accepted a position with one of Plaintiff’s competitors in the business of mining and processing "high purity quartz" (HPQ).

If you are like me, you have dwelt in ignorance of the importance of HPQ to your existence.  It is "one of today’s key strategic materials for the high-tech industry."  It is used in semi-conductors, tubing for high temperature lamps, telecommunications devices, and in lenses for telescopes.

The quartz refined into HPQ is mined in only a few places around the world, one of them being in Spruce Pine, North Carolina.  Wherever it is mined, its slight impurities must be removed from the quartz in order to render it true high purity.

Plaintiff Unimin says that it is the global leader in HPQ and that its methods of processing the HPQ which it sells are "confidential, proprietary, and a trade secret." Op. ¶13. It said that Gallo had been the inventor or a "key player" in the development of its trade secrets and that he should be enjoined from using them for the benefit of his new employer.

Hadn’t the Plaintiff taken steps to protect itself from Gallo’s disclosure of this important and proprietary information?  Of course it had: Gallo was bound up by three separate agreements.  There were two Confidentiality Agreements and a Non-Compete.

The validity of those restrictive agreements wasn’t the issue in this case.  Instead, it was whether the Plaintiff had sufficiently identified its trade secrets.

Plaintiff broadly described its trade secrets as the various processes that it followed in refining quartz, but failed to provide enough sufficient specifics to satisfy Judge Bledsoe that the Defendants had been put on notice as to what the trade secrets were.

It is hard to distill from this Opinion what you should show  in pursuing a trade secrets claim in the Business Court, but I will take a stab at it.  (Or if you want the full scope of the Court’s analysis, read Paragraphs 35 to 50 of the Opinion).  The answer is not to refer generally to the process you allege is a protected trade secret.  Be prepared to give the details.  Judge Bledsoe said this:

Plaintiff broadly identifies various processes as its alleged trade secrets without offering evidence that those processes are unique to Plaintiff or have been modified by Plaintiff in unique ways.  For example, Plaintiff describes its ‘mining process control plan as using "[REDACTED] modeling and process simulations’ that develop ‘mineral processing strategies’ but does not offer evidence explaining what those simulations and strategies are or why these simulations and strategies are unique to Plaintiff.

Op. ¶41.

Apart from the Plaintiff’s lack of specificity about its trade secrets, two other factors doomed Plaintiff’s request for an injunction.  The first was the argument by Gallo’s new employer that any trade secrets claimed to be known to Gallo would be of little use to it, given that its quartz was extracted from a different mine than the North Carolina mine operated by Plaintiff.  Judge Bledsoe found that the differences in the qualities of the different quartz ores "appear to require sufficiently different processes to mine and develop HPQ to render at least some, if not all, of Plaintiff’s alleged trade secrets non-transferable."  Op. ¶57.

The second factor was a lack of any showing that Unimin was at risk of Gallo disclosing its trade secrets.  To the Court, this was established by the fact that Gallo had been gone from the Plaintiff’s employment for five years before taking a job with his new employer.  During that five year hiatus, he had abided by the terms of his five year non-compete.  Judge Bledsoe ruled that Gallo’s:

long-term adherence to his contractual obligations is persuasive evidence that he is not a threat to violate his contractual or other legal commitments to Plaintiff and disclose Plaintiff’s alleged trade secrets.

Op. ¶59.

A "mere possibility of misappropriation" under the NC Trade Secrets Protection Act is insufficient to obtain an injunction.  Op. ¶63.

Although Judge Bledsoe had previously granted a Temporary Restraining Order to the Plaintiff, he denied its Motion for a Preliminary Injunction.

 

 

 

I’ve written before about trade secrets claims being dismissed by the Business Court and the NC Court of Appeals because the trade secrets were too broadly referenced and not described with “sufficient particularity".  Two of those cases are Akzo Nobel Coatings Inc. v. Rogers, 2011 NCBC 41; and Washburn v. Yadkin Valley Bank and Trust Co. 190 N.C. App. 315, 660 S.E.2d 577 (2008).

And just yesterday came yet another Rule 12 dismissal of an inadequately pleaded trade secrets claim. Judge Jolly of the Business Court shot down the claim because of the insufficiency of the pleading in AECOM Tech Corp. v. Keating, 2012 NCBC 10.

AECOM has the familiar fact pattern of an employee leaving employment with the plaintiff for a position at the defendant, a competitor, with accompanying claims of unfair and deceptive trade practices, tortious interference with contract, and misappropriation of  trade secrets (which was dismissed).

The allegedly stolen "trade secrets" in AECOM were "customer lists, customer contract information, pricing information, and product information,  These descriptions of the trade secrets were deemed to be too "sweeping and conclusory" to put the defendant on notice of what had been stolen and were dismissed.

Most of the claims survived dismissal because the departing employee (Keating) had been an officer of AECOM.  That meant he owed AECOM a fiduciary duty.  Op. ¶16.  The unfair and deceptive practices claim also stuck because the alleged conspiracy between the new employer and Keating to violate his fiduciary duty could constitute constructive fraud, which makes out a UDTPA claim.

Given that getting trade secrets claims dismissed  in the Business Court now (if the trade secrets are not described with sufficient particularity) is as easy as shooting fish in a barrel, I am declaring a boycott on writing about those types of dismissals.

 

An award of damages for breach of a noncompete agreement, like any other damages award, requires evidentiary support.  In a judgment issued yesterday after a bench trial, the Business Court awarded the plaintiffs nominal damages absent such evidence.

In HILB Rogal & Hobbs Co. v. Sellars, the Court faced a common factual scenario:  a former vice president of the plaintiffs resigned and went to work for a direct competitor.  The businesses in question were insurance companies targeting building materials suppliers.  The plaintiff and defendant executed an employment agreement that contained standard restrictions on post-employment competition and on the use of confidential business information.

Two days after interviewing for the competitor’s job, the defendant

copied the entire hard drive of his work computer, which contained, among other things, confidential and proprietary information about [plaintiffs’] Lumber Program accounts and business strategies, including account files and lists, policy expiration dates, policy terms, conditions and rates, internal and external pricing and profit margins, information relating to accounts’ risk characteristics, and carrier information.

He resigned two weeks later and went to work for the competitor, taking the confidential information with him.  (The Court ordered him to return the confidential information in 2008).

Plaintiffs asserted claims for breach of fiduciary duty, breach of contract, and unfair & deceptive trade practices, and defendant counterclaimed for breach of contract for unpaid salary.  Judge Diaz applied New York law to the claims.

During the lawsuit, the defendant took two Rule 30(b)(6) depositions of the plaintiffs concerning their claimed damages.  At those depositions, the witness, another vice president of plaintiffs, disclaimed lost profits, as did counsel for the plaintiffs.  The witness did not know of the origin or calculation of two summary exhibits that plaintiffs attempted to use at the bench trial — those exhibits were prepared by other employees, none of whom testified at trial.  Judge Diaz noted at least eleven unexplained discrepancies between the two exhibits.  Moreover, the Rule 30(b)(6) witness "could not rule out the possibility that the damages exhibits contained amounts for lost revenues for business that Plaintiffs could not underwrite, irrespective of [defendant’s] alleged breach of the Employment Agreement."

The damages witness suddenly became unavailable for trial due to the pre-trial but post-discovery termination of his employment — he declined to appear voluntarily, and he was outside the Court’s subpoena power.  The plaintiffs attempted to notice a de bene esse deposition less than one month before trial.  The Court quashed the notice of deposition based on a month-long delay between plaintiffs’ awareness of the witness’s unavailability and the issuance of the notice, as well as the fact that the Court already had continued the trial once to allow de bene esse depositions to occur.  Thus, plaintiffs had to rely upon his deposition testimony.

Although the plaintiffs proved that the defendant breached his fiduciary duty and breached the employment agreement by copying the contents of his hard drive before resigning, the Court held that there was insufficient evidence of damages.  Under New York law, breach of fiduciary duty damages "are limited to profits lost from the actual diversion of customers," a damages theory that the plaintiffs waived. The Court awarded $1 in damages for the breach of contract claim.

Although the plaintiffs attempted to rely on a liquidated damages formula in the employment agreement, the Court similarly held that they had not provided sufficient evidence of the components of that formula.  Specifically, the Court rejected the argument that the summary exhibits were admissible business records under Rule 803(6) because the Rule 30(b)(6) witness did not lay any foundation for admissibility or for the reliability of the figures contained in the exhibits.  The Court awarded $1 in damages for the breach of contract claim.

The Court rejected the unfair and deceptive trade practices claim, holding that North Carolina’s Chapter 75 was inapplicable under the "most significant relationship test" and that, even if it applied, the lack of actual damages was fatal to a UDTP claim.  Likewise, the Court found no basis to award punitive damages or attorneys’ fees.

As for the counterclaim, the employee asserted that he was entitled to over $94,000 in unpaid salary.  The plaintiffs responded that an interim $50,000 payment constituted an accord and satisfaction.  The Court rejected plaintiffs’ defense on the grounds that they failed to prove that the $50,000 was intended to settle all compensation claims or that the defendant was informed of that intention before he accepted the check.  Instead, the Court offset the $50,000 payment from the employee’s salary claim and awarded him the balance.

Although the claims on both sides arose under New York law, there is no apparent reason why the result would be different under North Carolina law.  In either event, enforcement of a noncompete provision can prove to be an expensive proposition (here, two and a half years of litigation), particularly where the former employee has counterclaims.

Full Order and Judgment

[UPDATE:  In an Order dated July 6, 2010, Judge Diaz denied the company’s motion to reconsider the ruling on the employee’s counterclaim].