An Award of Injunctive Relief Does Not Preclude Continuing Rights to Monetary Damages
The primary objective in filing a lawsuit involving misappropriation of a trade secret is to stop the use and disclosure of your critical business information. But even if your company succeeds in blocking the use of your trade secrets by obtaining an injunction, you might not immediately be able to assess potential monetary damages. So what next? A recent federal court decision answered that question by ruling the entry of a preliminary injunction does not stop the accrual of monetary damages against the defendants.
In ResMan LLC v. Karya Property Management LLC, the plaintiff licensed its property management software to a property management company that then provided access to a competitor of the software company for the purposes of aiding it in the development of a competing software product. A federal jury reached a verdict against the defendants for breach of contract, tortious interference with contract and economic advantage, and trade secret misappropriation.
In response to the plaintiff’s motion for entry of final judgment and permanent injunction, the defendants argued, among other things, the plaintiff was not entitled to recover monetary damages because the court’s preliminary injunction had severed any causal link to the plaintiff’s further harm. The Texas federal district court rejected this argument. It found the preliminary injunction did not eliminate the head start given to the defendants from the misappropriation because it simply prevented them from commercially using the tainted software internally or externally. The defendants also argued the plaintiff would obtain a double recovery because all of its harm was addressed by the court’s preliminary injunction. The court rejected this argument as well, noting that the jury found the defendants’ wrongful conduct had caused the plaintiff harm in the form of a head start. The Texas jury awarded the plaintiff $152 million in damages, including $120 million in punitive damages.
You Can Prove Misappropriation With Circumstantial Evidence . . . Sometimes
It’s typically difficult to find direct evidence of theft in misappropriation cases because those people who steal trade secrets usually try to hide their tracks. Plaintiffs frequently must prove their cases with circumstantial evidence. A pair of recent cases highlights the types of circumstantial evidence that may support a claim for injunctive relief in a trade secret case.
In Oakwood Labs LLC v. Thanoo, the federal Third Circuit Court of Appeal held that the former employee’s indirect use of the former employer’s trade secrets could be inferred from the timing of the competitive hire, coupled with deception in the employee’s departure, the new employer’s lack of experience in the relevant technology, unusually low financial investment by the new employer, and unusually rapid commercial success by the new employer.
In contrast, a New York federal district court held that merely retaining a former employer’s confidential documents, without any proof of use, was not sufficient to state a claim for misappropriation. In Zurich American Life Insurance Co. v. Nagel, a federal district court in the Southern District of New York held that this remained true even when the employee deliberately kept the documents as leverage for settlement of other claims he maintained he had against his former employer.
Make Sure You Use Reasonable Efforts to Protect the Secrecy of Your Trade Secrets
When prosecuting a trade secret claim, your company must not only demonstrate the value of the information at issue, but also that you exercised “reasonable efforts under the circumstances” to protect the information from disclosure. In effect, many courts will not step in to help you if you failed to help yourself with appropriate security measures that match the business risk.
In DePuy Synthes Products v. Veterinary Orthopedic Implants, Inc., the Federal Circuit Court confronted the issue of whether to seal a court filing that contained confidential information about a manufacturer’s identity. There was no non-disclosure agreement or other contract in effect to establish confidentiality. Instead, the litigant relied on proof that it had kept the information confidential through its own internal security policies and protocols. The Federal Circuit held these procedures were insufficient to prove the secrecy element of the trade secret claim at issue in the case.
Similarly, the plaintiff in ASC Engineered Solutions LLC v. Island Industries Inc., the plaintiff sought summary judgment on the question of whether its efforts to protect its trade secrets were reasonable. It pointed the court to its policies and practice of informing its employees about the importance of preserving the confidentiality of all the company’s information, and requiring employees to mark e-mails and documents with secrecy legends. The federal district court in Tennessee was not persuaded by this evidence. It held that such information could be considered, but was not decisive, because the company’s employees had denied seeing the security policies.
These cases highlight the need for companies to audit and evaluate the steps they take – and instruct their employees to take – to protect their trade secrets. Policies are important, but practices are determinative. If you don’t enforce your trade secret policies, you may find that your company doesn’t have any trade secrets to protect.
Non-Competes are Barred in California and Other Jurisdictions Have Taken Notice
With few exceptions, California has banned non-compete agreements for decades. The District of Columbia recently followed suit. The District’s new ban on non-compete agreements has been in the spotlight for the past year. The D.C. City Council enacted the Ban on Non-Compete Agreements Amendment Act in January 2021. The Act generally prohibits all non-competes in the District, subject to very narrow exceptions, including significant limits on employers’ ability to prohibit simultaneous employment. Its terms are some of the most sweeping in the country.
While the Act became law in March 2021, its restrictions were tied to an “applicability date” that created some uncertainty as to when it would take effect. Initially the effective date was set for April 1, 2022. It was expected the Act would be amended by the council prior to that time to address concerns about how the statute applies to employers’ conflict of interest and ethics policies. However, no movement has been made on that issue by the City Council, so the effective date has been delayed until October 1, 2022. This delay will hopefully provide sufficient time for the council to consider amendments to the Act before it actually goes into effect.
Contact Finkel Law Group to Consult on Your Trade Secret Matters
Finkel Law Group, with offices in San Francisco and Oakland, has more than 25 years of experience assisting technology companies and investors protect their intellectual property rights – including their trade secrets – in an assortment of technologies across numerous industries, including software, hardware, medical instruments, and e-commerce to name just a few. When you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with the trade secret issues confronting your company please contact us at (415) 252-9600, (510) 344-6601, or info@finkellawgroup.com to speak with one of our attorneys about your matter.