Sixth Circuit Rejects Dubious Trade Secret Claim

If you are thinking about bringing a trade-secret-misappropriation suit, do not take a ready-fire-aim approach. Before filing the lawsuit, you need to be able to articulate the precise trade secret at issue and how it was misappropriated. A recent case decided by the Sixth Circuit, Dice Corp. v. Bold Tech., 2014 WL 260094 (6th Cir. Jan. 24, 2014) gives an example of a trade-secrets claim that probably never should have been filed. A link to the opinion is below.

This case involved a dispute between two competitors who provide services and software to alarm companies. An alarm company using the plaintiff’s software decided to change to the defendant’s. In this circumstance, there needs to be a transition period, during which the alarm company is still using the plaintiff’s software, while running the defendant’s software in parallel on other servers. This ensures that the new software is properly monitoring the alarm signals before it goes live.

The plaintiff, perhaps angry over the loss of a client, accused the defendant of accessing and using its proprietary information during the transition process. It brought claims under the Michigan Uniform Trade Secrets Act, among others.

The trade-secrets claim was based on supposed misappropriation of (1) a file containing a master list of alarm codes, and (2) “receiver drivers” software that takes incoming signals and converts the data to the plaintiff’s standard. The Sixth Circuit rejected both. As to the list of codes, the court said:

The plaintiff fails to explain how this information, even if uniquely coded, is a trade secret. The [file] is a compilation of labeling codes created by manufacturers, not the plaintiff. The codes were collected by the plaintiff’s customers, not the Plaintiff. The plaintiff has not put forward an explanation of how the value of its unique labeling is derived from it not being readily ascertainable by proper means.

Regarding the software, the Sixth Circuit noted that “neither in the operative complaint nor in the plaintiff’s response to the defendant’s motion for summary judgment can we find a trade secret claim based on receiver drivers or software that performs that function.” Even if the plaintiff had properly pleaded a claim on this basis, the court still would reject it since “other than a generalized explanation of what the receiver drivers do, the plaintiff has failed to explain whether the receiver drivers derive economic value from their secrecy.”

Takeaway: This seems like the latest in a long line of trade-secrets cases that never should have been brought in the first place. Filing a lawsuit and litigating it through appeal is not cheap. Before doing so, make sure you can (1) explain what trade secret(s) were actually misappropriated, and (2) plead and prove the misappropraition (or at least feel comfortable that discovery is likely to lead to the evidence necessary to prove your claim). If you have difficulty doing either, think very carefully whether the suit should be filed. As the (overused) saying goes, sometimes discretion is the better part of valor.

Dice Corp. v. Bold Tech.

Discovery: Keeping Trade Secrets Secret

All litigators need to be familiar with trade-secrets law, since discovery requests often seek  proprietary information. When this happens, you need to protect your clients’ trade secrets in the discovery process. Last week, Florida’s Second District Court of Appeal addressed this issue in Bright House Networks, LLC v. Cassidy, 2014 WL 84237 (Fla. 2d DCA Jan. 10 2014) (opinion linked below). This case offers multiple takeaways for lawyers when your clients are faced with discovery requests calling for production of trade secrets.

In this case, the plaintiffs had a contract with their cable company that entitled them to perpetual free cable. After the defendant, Bright House Networks, purchased the cable company, it terminated the plaintiffs’  free services. The plaintiffs sued Bright House and won — a court ruled that they were entitled to lifetime free cable. In response, Bright House started issuing 1099s to the the plaintiffs for the free cable’s value. (Aside: cable companies are the worst.) The plaintiffs sued again, arguing that the 1099s violated the previous judgment, and that Bright House does not issue 1099s to other customers receiving free services.

In discovery, the plaintiffs sought information about all customers receiving free services. Bright House objected, arguing that this information was confidential and proprietary. The lower court overruled this objection, leading to this appeal.

The appellate court reversed, noting that

The Florida Evidence Code contains a privilege against the disclosure of trade secrets. . . . When a party objects to the disclosure of a trade secret, first a court must determine whether the requested information is, in fact, a trade secret. . . . Usually this determination requires the trial court to perform an in camera review of the information. . . . Second, if the trial court determines that the information is a trade secret, then the court must determine if the party requesting the information has shown a reasonable necessity for the information. . . . If the court orders disclosure, it must make findings to support its determination. . . . [T]he trial court may need to order safeguards to prevent the unnecessary dissemination of the information.

Here, the trial court never made an in camera review. The appellate court ordered the trial court to conduct this review and, if necessary, conduct a hearing to determine whether Bright House’s customer information is a trade secret.

There are several takeaways from this case. Carefully review all discovery requests to determine whether they call for the production of proprietary information. If so, timely object and be prepared to have the court review the material in camera.

If the court orders production, the company should avail itself of an immediate appeal if possible. In Florida, that is done through a petition for writ of certiorari, which allows interlocutory review of orders compelling discovery where compliance could cause irreparable harm.

Also, here Bright House conceded that it had offered free services to other customers but had not issued 1099s. In this opinion, the appellate court noted that “In determining necessity for the information, the trial court should consider the significance of Bright House’s stipulation.” Bright House knew what the information sought would show, and tried to prevent disclosure by conceding the point. This may prove successful. When faced with the possibility of producing trade secrets, you should balance the risk of disclosure with the effect a concession of the relevant point will have on the litigation.

Bright House Networks LLV v. Cassidy

New Year, New Trade-Secrets Issues

Now that New Year’s is behind us, companies face one of the riskiest times of the year for protecting their trade secrets and proprietary information.

As I’ve discussed in the past, employee departures present perhaps the greatest risk of unwanted trade-secret disclosure. And many employees who want to leave wait until after they receive their year-end bonus. With this increased employee movement comes an increased risk of misappropriation.

This is a great time of year to review employee intake and exit procedures. Departing employees need to be made aware of their legal obligations regarding the company’s proprietary or confidential information. This is best done through an exit interview. Whenever possible, a departing employee should sign an acknowledgement of her obligations.

During the exit interview, the company should learn as much as possible about where the employee will be working next. This helps identify situations where proprietary information is at risk. In such situations, an attorney should be consulted. For more details about exit interviews, see this prior post.

Similarly, when hiring new employees, companies need to make sure the new employees will not be violating any restrictive covenants signed with former employers. During the hiring process, potential new hires need to be asked directly whether they have signed any such agreements. And once hired, they should confirm this in writing. If a company wants to hire someone who signed a restrictive covenant with a former employer, the company must consult with an attorney first.

If the new employee will be bound by a restrictive covenant such as a noncompete, make sure it is actually signed. (This may seem obvious, but it’s not uncommon for a noncompete agreement to go unsigned.)

By improving employee intake and exit procedures, companies can significantly reduce the risk of trade-secret misappropriation and expensive litigation.

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