A federal court in Washington State issued a ruling last week in Edifecs, Inc. v. Tibco Software, Inc., further limiting grounds for seeking trade secret relief arising out of the acquisition by a licensee of the licensor’s primary competitor. The United States District Court in Seattle dismissed trade secret claims that were based on the failure by the licensee to prevent employees who had worked extensively with the licensor’s confidential information from working on business of the newly acquired competitor because that failure, alone, was not a sufficient threat to the disclosure of admittedly confidential, proprietary technology.

Edifecs, Inc. and Tibco Software, Inc. were parties to a license agreement since 2001 which authorized Tibco to use, copy, manufacture and distribute Edifecs healthcare-related software and to integrate the Edifecs technology into Tibco’s products. Edifecs also provided training, technical support and product enhancements to Tibco. Since the parties exchanged significant proprietary information, the license agreement included confidentiality and non-disclosure restrictions and required that each party would “use a commercially reasonable degree of care” to ensure that the other party’s confidential information would not be disclosed.

An Edifecs employee resigned in 2009 to join Tibco. Edifecs discovered an email mistakenly sent to the departed employee’s Edifecs email address stating that Tibco was acquiring Edifecs’s primary competitor, Foresight, and that the departed Edifecs employee was involved in the acquisition. Edifecs brought a separate action against the departed employee for breach of non-competition and non-disclosure agreements. It also immediately wrote to Tibco expressing concern about potential breaches of Tibco’s confidentiality/non-disclosure obligations if the approximately twelve Tibco engineers who worked with the Edifecs licensed, confidential technology were permitted to work with Foresight products and technology. Edifecs asked that Tibco ensure that those engineers, who had had access to the Edifecs confidential information for years and who had received extensive training about Edifecs’s proprietary technology, be prohibited from working with Foresight’s competing products because of the risk that they “would inevitably and unavoidably use and rely on” Edifecs’s information to develop and improve competing products. Tibco refused and Edifecs sued including for breach of the license agreement and violation of the Uniform Trade Secrets Act, claiming that by its refusal to preclude the engineers from working on Foresight competing products, Tibco “misappropriated or absent taking commercially reasonable steps inevitably and unavoidably will misappropriate” Edifecs’s trade secrets.

The Court granted a motion to dismiss and held that Edifecs failed to state a claim under the UTSA because applicable California law does not recognize the inevitable disclosure doctrine and because Edifecs had failed to sufficiently allege actual or threatened trade secret misappropriation. According to the Court, Tibco’s failure to isolate or segregate the engineers who had extensive knowledge of Edifecs’s proprietary technology so that they did not work on products and technology for the newly acquired Foresight did not sufficiently allege threatened misappropriation of Edifecs’s trade secrets. Despite efforts to cure the defects by amending its complaint, the Court confirmed that Edifecs did not state a trade secrets misappropriation claim under the UTSA, leaving Edifecs with its contract claim and a related claim concerning the payment of royalties under the license agreement.