Use of Misappropriated Trade Secret Not Required For a Trade Secrets Act Violation
If an employee misappropriates their current or former employer’s proprietary information, and discloses such information to its new employer and/or any other unauthorized person(s), that is enough to establish a violation under the Virginia Uniform Trade Secrets Act (“VUTSA”) so says the Virginia Supreme Court. There is no requirement under the Act that the employee or new employer actually use the misappropriated information to compete with the former employer.
In the case of Geographic Services, Inc. v. Collelo, et al. (2012), the Virginia Supreme Court held that once an employer establishes the existence of a trade secret, all that they are then required to show is that the trade secret was misappropriated as that term is defined under the Trade Secrets Act. The entity from which the trade secret was misappropriated does not have to show that defendants used the trade secret in order to establish a claim under the VUTSA and recover damages. Disclosure of the trade secret is sufficient where it can be shown that the new employer and/or person to whom the trade secret was disclosed knew, or had reason to know, that the trade secret was acquired by improper means. In such cases, where the plaintiff cannot readily prove measurable damages, then the VUTSA provides that the court can impose a reasonable royalty upon the wrongdoers for the unauthorized disclosure of the trade secret.
This decision by Virginia’s highest court provides a cautionary note for Virginia employers: if you know, or should have known, that an employee has obtained proprietary information from its prior employer without its knowledge, you could be on the hook for damages if the employee discloses the information to your company – even if your company never uses the information. The disclosure, in and of itself, will be enough to expose companies to monetary damages. Conversely, companies in which an employee has taken proprietary information can seek legal redress and possibly obtain damages even if the employee and its new company did not use the information.
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Employee and New Company Found Not Liable in Trade Secrets Case
A Fairfax County Circuit Court has found in favor of an employee and his new employer who were sued for misappropriation of trade secrets, among other claims, when the employee went to work for a direct competitor and took a customer list and vendor contact sheet with him. In the case of Tryco Inc. v. U.S. Medical Source, et al., Brian Thomas (“Thomas”) worked for the Plaintiff (“Tryco”), which was in a niche government contracting industry selling dental and medical supplies to the U.S. government under a Decentralized Blanket Purchase Agreement (“DBPA”). Thomas’s sister-in-law decided to get a DBPA and she started a company which sold dental and medical supplies to the government. Thomas left Tryco and went directly to work for his sister-in-law’s new company, U.S. Medical Source (“USMS”).
Upon leaving to work for the new company, Thomas did not tell Tryco that he was going to work for a direct competitor, and when he downloaded a number of personal items from his work computer onto a flash drive, he copied a contact list and vendor list along with his personal files. Tryco sued everyone involved, including Thomas, USMS, Thomas’s sister-in-law and Thomas’s brother who helped out at USMS from time to time.
After a four day bench trial, the Court found in favor of all the Defendants. Specifically, the Court found that neither of the lists taken by Thomas had independent economic value because:
- The customer list was mostly outdated, and the information on the list (names and telephone numbers of government contracting officers) could be readily obtained through legitimate means – such as using the list of contacts provided to the Defendants by the government; and
- The names and contact information for the companies on the vendor list could be readily obtained simply by looking up the companies on the internet. Therefore, the Court found that Plaintiff could not meet its burden under the Virginia Uniform Trade Secrets Act (“VUTSA”).
In addition, the Court found Thomas’s testimony to be credible that he inadvertently took the two files at issue, rather than misappropriating them for some improper means. This finding was bolstered by the fact that Thomas returned the entire flash drive as soon as he was notified of the issue by Tryco’s counsel, and just days after leaving Tryco’s employ; that he did not disclose any of the information to his new employer; and that, as a factual matter, Thomas knew all of the information on the two documents given that he had interfaced with the government contracting officers and the various vendors routinely as part of his work for Tryco.
At this point (if it had not occurred to you sooner), you may be asking why the employer just did not sue Thomas for breach of his non-competition agreement since he went directly from his employment with Tryco to work for a competitor. The answer is that Thomas was never required to sign a non-compete agreement; so he was free to compete and did so accordingly.
Virginia Federal Jury Awards $26 Million in Trade-Secret Case
A Virginia Federal Jury in Alexandria recently awarded a mining tire design development company $26 million against two foreign companies for conspiracy to steal trade secrets and other related claims.
This case involves the alleged theft and misappropriation of tire designs. The plaintiff in this case, Tire Engineering and Distribution, LLC (“TED”), designs, develops and distributes highly specialized tires for underground mining vehicles. All of TED’s underground mining tires were designed and developed by the company’s founder and Chief Executive Officer, Jordan Fishman.
According to TED’s allegations, large tire companies, such as Goodyear and Michelin, abandoned the underground mining tire market and TED became the leader in this specialized area. TED took precautions to safeguard its one-of-a-kind designs and markings for its tires, its customer lists, pricing information, production schedules, and other proprietary and confidential trade secrets. Moreover, Fishman obtained copyrights for the tire designs, a trademark for one of the tire’s distinctive names, and had a patent pending for a special tire design.
TED’s trouble began when it employed a long-time acquaintance of Fishman, Sam Vance, as marketing manager to sell its underground mining tires. Vance was entrusted with access to all of TED’s trade secrets and other confidential business information that only Fishman and one other employee had access to. According to the plaintiff, Vance began working with TED’s China-based joint venture partner and tire manufacturer to cut plaintiff out of the business. The China-based company received manufacturing specifications for plaintiff’s tires and customer and pricing information, and stopped shipping tires for TED.
Moreover, Vance also met with principals of a Dubai-based international tire distributor in Richmond, Va and offered to provide plaintiff’s customer lists, pricing information and the blueprints for molds of the tires. Within a year, the Dubai company was distributing an almost full line of tires using the stolen designs and other proprietary information.
We’ve previously discussed the issue of employee theft of trade secrets on Virginia Business Law Update. As we noted, misappropriation of trade secrets cases are often brought not only against the former employee who took the trade secrets but also against the company who hired the employee and may have benefited from use of the trade secret – as was done in this case. The plaintiffs in this matter also separately pursued a case against Vance in Florida and prevailed. But, unfortunately for TED, this judgment was vacated on jurisdictional grounds since Vance never lived in Florida. Now, Vance is living in China, which makes collection of any monies from him appear unlikely.
Virginia Business Litigation Claims: Part 1 - Misappropriation of Trade Secrets
As noted last week, this blog is running a six-part series on Virginia business litigation claims. This week, the featured Virginia business litigation claim is misappropriation of trade secrets.
In light of the mobility of employees in today’s workforce, businesses face the arduous task of protecting their confidential and proprietary information. In Northern Virginia, through which technology companies of all sizes adorn the Dulles Technology Corridor, the issue of employee theft of trade secrets is one that routinely crosses an attorney's desk. Fortunately for Virginia businesses, the Virginia Uniform Trade Secrets Act provides an avenue of recourse to avenge an employee’s theft of a company’s trade secrets.
What is a “trade secret” under Virginia Law?
Although most people associate the term “trade secret” with technology or intellectual property, a trade secret can be as simple as a company’s customer list, pricing data, or marketing strategy. (The Trade Secrets Act provides that a trade secret can be a “formula, pattern, compilation, program, device, method, technique, or process.”) Under Virginia law, the determination as to whether a company’s information constitutes a trade secret is not based on the type of information at issue. The key is whether the information derives independent economic value (actual or potential) from being unknown and not readily available to someone who can obtain economic value from the use or disclosure of the information. Additionally, the company must take reasonable efforts to maintain the secrecy of the information.
A classic example of a trade secret is the formula for Coca-Cola. The formula has economic value because it is unknown and not available (i.e., if the formula were known, then anyone could make and sell Coca-Cola). And, Coca-Cola takes reasonable steps to keep its prized formula a secret. (According to urban legend, two executives know half of the formula but no one in the company knows the entire formula.)
What does it take to succeed on a trade secrets claim in Virginia?
To succeed on a trade secrets claim in Virginia, a company must not only prove in court that its information is, in fact, a trade secret, the company must also show that its trade secret was misappropriated. Generally, under the Trade Secrets Act, a misappropriation can occur through the acquisition, disclosure or use of a trade secret.
What damages are available for misappropriation of a trade secret?
If misappropriation of a trade secret is proven, the company can get an injunction to prevent its trade secret from being used or disclosed. Additionally, the company can recover damages for the actual loss caused by the misappropriation or for the unjust enrichment caused by the misappropriation. If the company can prove that the misappropriation was willful and malicious, it can also receive punitive damages (up to twice the amount of damages for actual loss and unjust enrichment).
It is important to note that misappropriation of trade secrets cases are often brought not only against the former employee who took the trade secrets but also against the company who hired the employee and may have benefited from use of the trade secret. The addition of a company defendant typically ensures a deep pocket from which a judgment can be collected.
Stay tuned for Part 2 of the Virginia business litigation claims series, which will focus on breach of non-compete agreements.
How Does Intellectual Property Affect Your Business?
In today’s knowledge economy, intellectual property (copyrights, patents, trademarks, trade secrets) can play a tremendous role in the success of a small or medium-sized business. By gaining a better understanding of trademarks, trade secrets, copyrights, and patents, and how they affect your business, you can effectively manage these tools and use them to your advantage.
Trademarks help you protect the name of your business, products and services. Perhaps the most important asset of any business is its name. Your business name and that of your products or services establish your reputation. Therefore, it is important to protect that name and reputation by applying for trademarks and registering them with the United States Patent and Trademark Office.
Trade secrets also play an important role in your business. Trade secrets include secret recipes, formulas, or manners in which you conduct your business. For someone owning a bakery or manufacturing a certain type of food, the recipe you use should be kept secret in order to ensure that no one can replicate your products. A trade secret can also be process that saves money over known processes.
Copyrights and patents generally relate to creations of the mind. Those in the service businesses will probably not require a patent or a copyright to do business, nor should they worry about the copyrights and patents of another. On the other hand, those who create or develop products for manufacture or sale will probably need to consider obtaining copyrights to protect their writings or other expressions of ideas and patents to protect and enforce their rights to manufacture, use or sell an improved product or service.
Let’s look at Richmond-based company, Reynolds Metals Company (recently acquired by ALCOA). The company, now commonly known for its food storage supplies and containers, was founded in 1919 by R.S. Reynolds, as tin foil supplier for cigarette and candy companies. Shortly after its creation, the company turned its sights towards using thin aluminum foil for food storage. By 1926, Reynolds Metals was producing the first high-speed, gravure-printed foil, aluminum bottle labels, heat-sealed foil bags for foods and foil-laminated building insulation paper. Since then, the company has invented countless food storage devices and has become a household name in America. It currently holds hundreds patents and has a plethora of trademarks and trade secrets. These patents, trademarks, and trade secrets protect Reynolds® brand innovations. Without doubt these patents, trademarks, and trade secrets have aided Reynolds in the success in establishing itself and positioning it among America’s successful companies.
What Is Intellectual Property?
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No matter what product your business makes or service it provides, it is likely that your business is frequently using and creating a great deal of intellectual property. So, what is intellectual property? Intellectual property, sometimes referred to by its initials, IP, refers to creations of the human mind that are protected by one or both of state or federal law in a fashion similar to real property (land) or personal property (an automobile). Inventions, literary and artistic works, business secrets, and symbols, names, images, and designs used in commerce are all considered intellectual property. The four forms of intellectual property are patents, copyrights, trademarks and trade secrets.
- Patents provide the right to exclude others from making, using and selling or offering for sale an invention that has been patented.
- Copyrights protect an expression of an idea reduced to a tangible form. For example, a work of art, this blog on intellectual property, a statue or a photograph is protected by copyright.
- A trademark protects a product or service by its name in such a way as to avoid confusion in the marketplace of the source of the product or services.
- A trade secret refers to a secret that one might use in their trade or business but which would provide an unfair advantage to another if taken. An example is the process and formula for making a special soda beverage or a recipe for cookie dough.
These four components all make up what is known as intellectual property. The Constitution defines what may be protected by federal law, namely, patents, copyrights and trademarks. Trademarks may also be registered in a state and both trademarks and trade secrets are regulated by state law. One can only register a copyright or apply for a patent through the federal government and can only enforce their registered copyright or issued patent in federal court. Though it may seem abstract at times, it is important to note that intellectual property is just as valuable as tangible property and is regulated by the federal and governments in this manner.
New TRO Standard for Business Non-Competes
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epresenting a corporate client have gotten the late afternoon call that a former employee is now working for a competitor in violation of the employee’s non-compete, and likely using confidential corporate information. A double-whammy which your client wants stopped immediately!
Well, for years us lawyers practicing in the Eastern District of Virginia would get out our tried and true Complaint asking for a PI, along with the papers requesting a Temporary Restraining Order (TRO) to immediately stop the wayward former employee from wrecking our client’s business one second longer (assuming diversity of citizenship for access to federal court).
We used what had become well-known as the Blackwelder standard, named after the case of Blackwelder Furniture Co. of Statesville v. Selig Manufacturing Co., 550 F.2d 189 (4th Cir. 1977), which was later reaffirmed in Rum Creek Coal Sales, Inc. v. Caperton. The injunction standard adopted by these cases used “the balance-of-hardship test”.
However, a few months ago, the Fourth Circuit changed the tried and true tune of the Blackwelder standard. Citing a Supreme Court case from 2008, the Fourth Circuit ruled in The Real Truth About Obama, Inc. v. FEC (PDF), that it had been misapplying the preliminary injunction standard. Last year, in Winter v. Natural Resources Defense Council, Inc. (PDF), the Supreme Court held that in order to obtain a preliminary injunction, a plaintiff has to establish that:
- he is likely to succeed on the merits
- he is likely to suffer irreparable harm in the absence of preliminary relief
- the balance of equities tips in his favor
- an injunction is in the public interest
For some reason, the prior cases form the Fourth Circuit heavily emphasized prongs two and three. The practical effect of the Real Truth decision (apart from a new catchy sounding injunction standard) is yet to be determined, because despite its proclamations in Real Truth, the Fourth Circuit and the district courts in this Circuit will likely find it difficult to move from a legal standard that had been adopted by jurists and practitioners alike for more than thirty years. However, it may be the case that employers and their counsel will have to really go the extra mile to get a TRO, and actually meet all four prongs of the injunction standard. We will have to wait and see.
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