WARNING: Sloppy Drafting May Lead to Bad Results
A Fifth Circuit case handed down recently underscores the importance of detailed and specific drafting when it comes to complaints alleging trade secret violations. In Mareck Brothers Systems, Inc. v. Juan Enriquez and JP Acoustics and Drywall, LLC, the Fifth Circuit Court of Appeals affirmed the denial of injunctive relief against a former employee who had allegedly emailed himself his former employer’s customer list and pricing information.
The defendant employee claimed the customer list was nothing more than names, addresses and phone numbers that could be readily gleaned from publicly available information. Mareck Brothers, on the other hand, argued that the list actually contained a wealth of information, including confidential contact information and “proprietary notes” that the company had on those customers. Mareck’s complaint, however, did not state with specificity the nature of the alleged proprietary notes nor did it attach the customer list to the complaint under seal.
Mareck also alleged that the former employee emailed himself its trade secret pricing and business strategies. Once again, it did not provide the court with the attachments it claimed were sent with the email. Further, the court criticized the fact that the complaint was not accompanied by an affidavit or any other form of verification of these allegations.
The court discounted Mareck’s unsupported conclusions that it had “spent years accumulating” the customer contact information and that it expended “years of goodwill” as insufficient to meet its burden. The court noted that this conclusory information “is insufficient for the court to conclude, based on the paucity of factual specificity, whether the information was acquired or maintained with considerable secrecy such that it might be entitled to trade secret protection.”
Practical tip: Whenever a company files a complaint alleging misappropriation of trade secrets, there is always a concern about disclosing more trade secrets as part of the litigation process. This case is a reminder, however, that a certain level of specificity and supporting documentation is necessary to justify the need for injunctive relief.
Delay Can Be Deadly
More often than not when a trade secret action is initiated, the plaintiff has only discovered the tip of the iceberg. Forensics investigations and documents produced during the course of discovery typically lead to additional evidence of misappropriation. If that evidence is sufficient to expand the scope of the litigation, the plaintiff should move promptly to do so.
This point is illustrated in a recent district court decision in which a global communications company moved for an order compelling a competitor to produce documents relating to a newly alleged trade secret with less than two weeks left in fact discovery. The company claimed it needed more discovery on a new line of products that were not part of the original litigation after it found a document among the competitor’s production of nearly 3 million pages.
The court rejected the company’s attempt to expand discovery at such a late stage in the litigation, noting that the document the company claimed provided its first notice of the new misappropriation was actually similar to a document the competitor had produced early last year. It found that the company had waited too long to seek discovery on the new product line and refused to compel production.
Practical tip: Make sure discovery is managed thoroughly and promptly in trade secret litigation, and act quickly to raise any new claims or discovery issues to avoid waiving your rights.
Don’t Let Third-Party Service Providers Leave Your Trade Secrets Exposed
Companies often turn to outside contractors to provide niche services or supplement their workforces. However, if your company does this, you need to be sure that when you use those contractors to fill a gap, you are not leaving one open with regard to your trade secrets.
In Oregon, University Accounting Services (UAS) filed suit against ScholarChip, its former contractor, alleging misappropriation of trade secrets. UAS claimed that its point person at ScholarChip left the company, took UAS’s trade secrets and formed a product in direct competition with UAS.
In the suit, the court agreed with UAS that its customer lists and webinars copied by the ScholarChip employee constituted trade secrets under the state’s Uniform Trade Secrets Act. But that did not get UAS over the hurdle. ScholarChip claimed that it made industry-accepted efforts to protect UAS’s data and argued that it was not liable for the employee’s conduct. The court then focused on UAS’s efforts to protect its own information. It determined that whether UAS exercised the degree of care necessary to protect its secrets was a question of fact and held that the issue of whether taking the customer lists constituted misappropriation remained in dispute for that reason.
Practical tip: Audit your practices with contractors and their employees to ensure that your trade secret protection efforts extend to them. Having confidentiality and non-disclosure agreements with contractors, requiring them to have similar agreements with their employees, and informing the contractor’s employees of your confidentiality and trade secret policies can help establish the reasonable care element needed to protect to those secrets.
Don’t Rely on a Blue Pencil to Save Your Non-Competition Agreements
Most states have adopted the so-called “blue pencil” rule, which allows courts to modify an overly broad non-competition agreement to the extent necessary to make it reasonable. In reliance on that rule, many companies purposely draft broad-based agreements, assuming that in an enforcement action the court would modify the agreement if necessary. However, the blue pencil rule is not an absolute insurance policy.
In a recent case in Colorado, the district court in Bradsby Group v. Tracy Herman granted Herman’s motion for summary judgment and declared the former employee’s non-competition agreement void and unenforceable. The court held that the agreement at issue was so broad that it would require Herman to remove herself from the entire Denver metropolitan area to earn a living in her industry. It further concluded that the non-solicitation provision was so broad that it rendered the non-compete provision superfluous and held that both provisions were void and in violation of Colorado law. Further, the court simply declined to exercise its ability to blue pencil the agreement to bring it into compliance.
On appeal, the Bradsby Group contended that the severability section of the agreement required the district court to modify the agreement to the extent necessary to make it enforceable. The court of appeals rejected that argument and held that the court had no obligation to exercise that right. It found that the district court did not abuse its discretion in declining to blue pencil the agreement, given Colorado’s general public policy against non-compete provisions, the significant overbreadth of the provisions, and the fact that significant modification would be necessary to make it comport with the law.
Practical tip: A severability provision may not save the day in a non-compete enforcement action. It is essential that you make sure your non-competition agreement is appropriately tailored to the position and that it complies with the laws of the state in which the employee performs services. This is particularly important given the continued trend by states to enact legislation restricting the use and enforceability of non-competition agreements.