The United States District Court for the Eastern District of Virginia recently denied a motion to dismiss a counterclaim for violation of Virginia’s Uniform Trade Secrets Act (“VUTSA”), holding that the counterclaim sufficiently alleged trade secret misappropriation based on improper acquisition of a trade secret, even in the absence of allegations of use or disclosure.
Plaintiff Jacqueline Marsteller was a Senior Vice President and Account Executive employed by defendant Electronic Consulting Services, Inc. (“ECS”). On November 3, 2011 ECS informed Marsteller that she was being terminated and that her last day of employment would be December 31, 2011 in order that she would be eligible to receive a $95,000 bonus. The bonus was indeed paid to Marsteller on December 30, 2011. Marsteller began work for a competitor to ECS in December 2011.
Almost a year and a half after Marsteller left ECS, she sued her former employer on grounds not identified in the court’s opinion. ECS filed a six-count counterclaim alleging, among other things, that after Marsteller was notified she was being terminated, she misappropriated various trade secrets by transferring information to an external storage device as well as e-mailing information to her personal e-mail account in violation of VUTSA.
Motion to dismiss:
Marsteller moved to dismiss the counterclaims, including the VUTSA claim on the grounds that ECS failed to allege that: (1) the alleged trade secrets derived independent economic value; and (2) Marsteller used the trade secret information.
In ruling on the motion, the court explained that a claim for violation of VUTSA must allege that: (1) the information in question constitutes a trade secret, and (2) the defendant misappropriated it.
The court further explained that to constitute a “trade secret” under VUTSA, information must: (1) derive independent economic value; (2) not be known or readily ascertainable by proper means; and (3) be subject to reasonable efforts to maintain its secrecy. The court concluded that ECS validly pleaded the information allegedly taken by Marsteller was trade secret because it alleged that: (1) the information derives independent economic value because ECS spent time, effort and money developing the information and the information would allow a competitor to know ECS’s business development and bidding plans, target its contracts and access its unique format for summarizing contract opportunities; (2) the information is not readily ascertainable by proper means as it reflects ECS’s internal strategies and plans not publicly available; and (3) ECS took reasonable steps to protect the information by storing it on an internal password protected server.
With respect to “misappropriation,” the court stated that VUTSA recognizes two kinds: (1) improper acquisition of a trade secret; and (2) disclosure or use of a trade secret. Improper acquisition means “acquisition of a trade secret by a person who knows or has reason to know that the trade secret was acquired by improper means.” “Improper means” is defined under VUTSA as including “theft, bribery, misrepresentation, use of a computer or computer network without authority, breach of a duty or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.” The court also cited case law for the proposition that “[u]nder the VUTSA, improper acquisition of a trade secret, even in the absence of allegations of use or disclosure, is sufficient to state a claim.” Systems 4, Inc. v. Landis & Gyr, Inc., 8 Fed. Appx. 196, 2000 (4th Cir. 2001) (improper means alone can give rise to misappropriation claim) (unpublished).
In analyzing the counterclaim, the court concluded that ECS’s allegation that Marsteller transferred and retained ECS’s internal documents outside of the scope permitted by her employment, including transferring proprietary documents to an external storage device, sufficiently stated a claim for “misappropriation” through improper acquisition.
Alternative basis for ruling:
Interestingly, the court also noted (in what is arguably dicta) that ECS’s VUTSA claim contained “plausible allegations” that Marsteller also used certain misappropriated ECS information. The court apparently reached this opinion based on ECS’s allegations that: (1) the ECS information in question was developed in order to obtain ISO certification; (2) ISO certification requires development and implementation of “business processes” required by ISO standards: (3) Marsteller began working for her new employer as the Vice President of Business Process Engineering in December 2011; and (4) Marsteller’s new employer obtained ISO certification in July 2012.
The court stated that these allegations raised a “reasonable inference” that Marsteller used ECS’s information and that it was “plausible, not just possible, that Marsteller used or disclosed” ECS information to benefit her new employer.
As a somewhat related side note, Virginia does not recognize the doctrine of inevitable disclosure. Gov’t Tech. Servs. v. IntelliSys Tech. Corp., 1999 WL 1499548 (Va. Cir. Ct. Oct. 20, 1999).
Having survived the motion to dismiss, it is unclear where ECS goes from here. Given that ECS waited more than a year and a half after Marsteller’s departure (and her new employer’s ISO certification) to raise its allegations, ECS will likely have an uphill battle obtaining any injunctive relief. The court will presumably also be unlikely to award damages if there is no evidence Marsteller used any of ECS’s information.
What can employers do to avoid ending up in this situation? There are a number of safeguards and procedures that companies should consider as part of “best practices” in preventing trade secret misappropriation: (1) emphasizing to workers the importance of protecting the company’s confidential, proprietary and trade secret information; (2) using non-disclosure and trade secret protection agreements to protect sensitive information; (3) continued education to remind workers regarding their obligations to protect company information; (4) employing reasonable protective measures to safeguard trade secrets; and (5) using exit interviews and certifications requiring departing workers to confirm they do not have any company trade secrets or confidential or proprietary information.
When misappropriation is suspected, it is essential not to delay to do a thorough factual and legal investigation before filing any misappropriation claim. Such investigation should identify any evidence showing: (1) what specific trade secrets are at issue; (2) what reasonable measures were taken to maintain their secrecy; (3) how the departed employee was able to acquire the trade secrets; (4) any threat of misappropriation or damages arising from the misappropriation. If it is suspected the trade secrets were transferred electronically, it is important that a forensic examination of relevant computers and/or other electronic devices be performed by experienced experts. Be mindful that using in-house IT personnel may create evidence spoliation issues.
Finally, if evidence of misappropriation is found, delaying legal action is likely to reduce the chances of obtaining injunctive relief to stop impermissible use of the misappropriated trade secrets, and thereby reduce your chances of preventing harm to your company.