Beekeepers Show How Not To Protect Trade Secrets

Trade-secret misappropriation actions, not surprisingly, require discovery into the trade secrets at issue. This can create problems, particularly when the action is being litigated between competitors. In a recent case out of Nebraska, the plaintiff appears to be facing a pretty terrible choice: either disclose its proprietary information to a competitor, risk discovery sanctions, or walk away from its claims. Even worse, some simple proactive thinking could have prevented this problem.

In McDonald Apiary, LLC v. Starrh Bees, Inc., 201 WL 299014 (D. Neb. 1/25/16), the plaintiff and defendant are competitors in the beekeeping and honey production industry, with the plaintiff based in Nebraska and the defendant in California. They entered into an oral agreement under which the plaintiff would place a number of the defendant’s bee hives in Oklahoma and Nebraska.

The plaintiff now accuses the defendant of breaching the contract and has sued for misappropriation of trade secrets and other claims. Of course, the defendant has sought discovery into the alleged trade secrets, including information about the locations where the plaintiff places beehives.

As happens routinely in these cases, the plaintiff is only willing to produce its claimed trade-secret documents on an “attorney’s eyes only” (AEO) basis. The defendant objected, leading to this particular order.

The court rejected the AEO designation, focusing on the plaintiff’s failure to protect this information. Including when the plaintiff shared some location information with the defendant and other competitors:

Plaintiff has failed to explain how it can share certain location information with a competitor and simultaneously claim its location information is held strictly confidential. . . . The parties apparently did not enter into any type of confidentiality agreement as part of their oral contract. And this type of undocumented business arrangement does not appear to be unusual for the Plaintiff: McDonald Apiary has entered into similar contracts with other competitors and has not provided evidence it demands a confidentiality agreement in those contracts.

So the plaintiff has spent time and money developing certain information about the best places to locate bee hives. There’s no reason why this information couldn’t be a trade secret — it certainly appears to give the plaintiff benefits by virtue of being unknown to others. But the plaintiff didn’t adequately protect the information when it shared portions of it with third parties under oral contracts with no confidentiality restrictions.

Here, the lesson is simple: First, never enter into oral contracts. Second, any time you are sharing proprietary information with a third party, the contract must include confidentiality/non-disclosure obligations. While this may seem obvious, this case (and many others I’ve seen) show that companies far too often focus on “business” terms, without regard for protecting proprietary information.

Are We Headed for a Landmark Florida Supreme Court Non-Compete Case?

A few months ago, I wrote about a Florida appellate case holding that referral sources qualify as legitimate business interests under Florida’s restrictive covenant statute (Section 542.335, Fla. Stat.). On New Year’s Eve, a different Florida appellate court disagreed, setting up a possible appeal to Florida’s Supreme Court.

In Hiles v. Americare Home Therapy, Inc.Florida’s 5th District Court of Appeals overturned in part a temporary injunction entered against the former employee of a home healthcare company, who had allegedly violated a non-compete agreement. (The case I discussed in my earlier post also involved the home healthcare industry.) The injunction was based on the company’s claimed need to prevent the former employee from soliciting referral sources.

Under the Florida statue, a restrictive covenant is only enforceable if supported by a legitimate business interest. Here, the appellate court held that referral sources are not legitimate business interests.

The court relied on one of the legitimate business interests listed in the statute: “substantial relationships with specific prospective or existing customers, patients, or clients.” Since referral sources are not specific customers or potential customers, this court found that they are not legitimate business interests.

This is faulty logic, since the statute makes clear that the list of legitimate business interests in non-exclusive: “The term ‘legitimate business interest’ includes, but is not limited to” the enumerated items, including substantial relationships with customers.

In the home healthcare industry, it certainly sounds like referral sources are very important to business success. This is likely the case in a number of industries, where business is primarily generated through referral sources. In those industries, a company should be able to protect its referral sources through restrictive covenants.

Given the appellate-court split, there is at least a chance that the Florida Supreme Court will address this issue. If it does, the case could have far-reaching effects. The Florida Supreme Court could take this opportunity to address the definition of “legitimate business interest” under the statute, and clarify what types of legitimate business interests beyond those listed in the statute justify restrictive covenants. This could dramatically alter the way Florida treats restrictive covenants. Stay tuned.

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