It is not uncommon for a business, whose former employee has joined or formed a competitor firm, to charge that the employee has misappropriated its trade secrets. Proving the charge is another story.
Under the Uniform Trade Secrets Act which has been adopted in Virginia, Maryland and the District of Columbia, a trade secret is defined as:
“information, including but not limited to a formula, pattern, compilation, program, device, method, technique, or process that:
1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
Virginia Code § 59.1-336.
A recent decision from the Fourth Circuit Court of Appeals addressed Virginia’s trade secrets law in the context of a computer model. Decision Insights, Inc. v. Sentia Group, Inc., 2009 U.S. App. LEXIS 2654 (4th Cir. 2009). In that case, the plaintiff had developed and marketed a software program used to prepare negotiating strategies and measure risks associated with various alternatives. Three of the defendants were employees of Decision Insights (“DII”) who had worked on modifications to the software and had access to its source code. While they were still employed by DII, the employees established Sentia Group, Inc. a competitor firm. When efforts to negotiate a license of the software program from DII failed, Sentia hired the same individual who had worked with the defendants at DII to develop its own software. The result was a program that allegedly used the same methods as those used in the software owned by DII.
When DII sued, the district court granted summary judgment in favor of the defendants and dismissed the case on the basis that the plaintiff had failed to meet its burden of proof as to the existence of any trade secrets. On appeal, the Fourth Circuit took a different view and reversed (in part) the decision of the district court granting summary judgment in favor of the defendants and remanded the case for further proceedings.
In its complaint, DII claimed that its computer model, as a total compilation, was a trade secret and that within that model were 12 specific functions that individually also qualified as trade secrets. The appellate court reversed the lower court for, among other things, the failure of the district judge to consider whether the software program as a total compilation qualified as a trade secret. Id. at *19.
The court noted that the most important characteristic of a trade secret is secrecy, Id. at *17, quoting Dionne v. Southeast Foam Converting & Packaging, Inc., 397 S.E.2d 110, 113 (Va. 1990), and that it may retain that characteristic even though it is shared with others, if that disclosure is in confidence, express or implied. Id. at * 17-18, quoting Dionne, 397 S.E.2d at 113. Under long established precedent in Virginia, a “working combination” of information, all of which individually may be in the public domain, can, when combined, be protected as a trade secret. Servo Corp. of Am. v. Con. Elec. Co., 393 F.2d 551, 554 (4th Cir. 1968).
The appellate court in Decision Insights acknowledged that DII could not produce the algorithms used in the creation of the program as it was over 15 years old. Nevertheless, the court held that the source code for the software in conjunction with a flow chart and narrative explaining the software program could be an acceptable method for identifying the trade secret at issue. Id. at *21-23. On remand it directed the district judge to examine the evidence to determine whether Decision Insights adequately identified its software compilation claim such that the claim could proceed to trial. In addition the district court was directed to individually consider the independent trade secret claims separate and apart from the compilation claim. Id. at *22-23.
The take-away: For companies that had developed software programs years ago that they want to protect as trade secrets, the source code may suffice to prove trade secret status, even if the original algorithms have been destroyed. In addition, companies should not forget that the common law also protects proprietary and confidential information from disclosure by a rogue employee to a competitor in those situations where it would be difficult to prove that the information is a trade secret.
Wednesday, July 8, 2009
Monday, July 6, 2009
Unfair Business Practices Government Contracts Webinar Download Available
Williams Mullen's Unfair Business Practices Team hosted its second webinar, entitled Beware the Government Contract: Protecting Your Company's Assets from the Government and Other Contractors.
Topics discussed in the webinar include:
(1) Identifying corporate assets that could be in jeopardy during the award and performance of a government contract;
(2) Practical considerations to protect assets from competitors, contracting partners, and the government; and
(3) Understanding critical contract clauses that can be negotiated to your company’s benefit, whether as a prime contractor or subcontractor.
The complete audio and powerpoint presentation can be downloaded by clicking here.
The Team's next webinar is entitled Intellectual Property: Building Your Castle Moat, How to protect your company's knowledge. It will be held on July 23, 2009. To register, click here.
Topics discussed in the webinar include:
(1) Identifying corporate assets that could be in jeopardy during the award and performance of a government contract;
(2) Practical considerations to protect assets from competitors, contracting partners, and the government; and
(3) Understanding critical contract clauses that can be negotiated to your company’s benefit, whether as a prime contractor or subcontractor.
The complete audio and powerpoint presentation can be downloaded by clicking here.
The Team's next webinar is entitled Intellectual Property: Building Your Castle Moat, How to protect your company's knowledge. It will be held on July 23, 2009. To register, click here.
Thursday, June 18, 2009
D.C. Court Dismisses Case Alleging Interference With Business Expectancy For Failure To Name Names
A recent decision from the United States District Court for the District of Columbia highlights the importance of pleading specific facts in support of unfair business practices claims to survive a Motion to Dismiss. In Command Consulting Group, LLC v. Neuraliq, Inc., 2009 U.S. Dist. Lexis 48082 (D.D.C. June 9, 2009), click here, the defendant counterclaimed for, among other things, interference with prospective business advantage and breach of fiduciary duty arising out of a government contracts consulting agreement.
Apparently, the plaintiff entered into a consulting agreement with the defendant pursuant to which he agreed to assist the defendant in developing business in the federal government defense community. When the plaintiff sued for unpaid fees, the defendant counterclaimed, alleging that the plaintiff used confidential information obtained from the defendant to interfere with the defendant's business. The plaintiff then moved to dismiss two of the claims.
The court first addressed the pleading requirements for the claim of interference with a prospective business advantage under D.C. law. That claim requires: "(1) the existence of a valid business relationship or expectancy, (2) knowledge of the relationship or expectancy on the part of the interferer, (3) intentional interference inducing or causing a breach or termination of the relationship or expectancy, and (4) resultant damages. Valid business expectancies that are "commercially reasonable" include "lost future contracts and lost opportunities to obtain customers. In addition, the plaintiff must make a strong showing of intent to "disrupt a business relationship or expectancy to establish a claim for interference." Intent can be shown if the conduct is egregious, such as libel, slander, physical coercion and fraud.
Here, the court found that the allegations were both unspecific and conclusory, thus failing to meet the standard required to allow the claim to proceed. Perhaps most notable is the requirement under D.C. law that the claimant must plead the particulars of the valid business expectancy, including the names of the third parties with which the claimant had the relationship or expectancy. Simply alleging categories of relationships that may have been affected is inadequate.
The court found similar flaws in the allegations supporting the claim for breach of fiduciary duty. Preliminarily, the court noted that, even though the relationship between the consultant and his client arose out of a written contract, "where circumstances show that the parties extended their relationship beyond the limits of the contractual obligations to a relationship founded upon trust and confidence" a fiduciary duty may exist. Here, the client alleged that the duty arose because "in its capacity as a consultant to the defendant, the plaintiff was privy to sensitive, confidential and proprietary information, including financial information."
Despite alleging that the plaintiff used that information "as part of a scheme to disrupt the operation and ownership of [the defendant], with the objective ... [of placing] financial pressure on [the defendant] that would force [the defendant] to enter business deals favorable" to individuals aligned with the plaintiff "and/or [to] gain control of [the defendant] for the benefit of [the plaintiff] and its co-conspirators" the court found those allegations deficient. It noted the defendant had failed to allege: (1) specific information regarding the confidential information wrongfully used, (2) that the defendant entered into any specific deals as a result of the pressure exerted by the plaintiff, and (3) that the defendant suffered any injury as a result of that pressure. Additionally, the defendant failed to allege that the efforts of the plaintiff to gain control of the defendant resulted in any injury. Accordingly, the court granted the Motion to Dismiss.
This case points out the importance of carefully crafted, factual-laden pleadings. Two recent Supreme Court decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), significantly tightened the pleading requirements in civil cases. Under the new standards, federal complaints must allege sufficient facts, that when accepted as true for purposes of a motion to dismiss, "state a claim to relief that is plausible on its face." Id. at 1949. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In short, mere recitals of the elements of a cause of action, accompanied by conclusory statements, fail the test.
Apparently, the plaintiff entered into a consulting agreement with the defendant pursuant to which he agreed to assist the defendant in developing business in the federal government defense community. When the plaintiff sued for unpaid fees, the defendant counterclaimed, alleging that the plaintiff used confidential information obtained from the defendant to interfere with the defendant's business. The plaintiff then moved to dismiss two of the claims.
The court first addressed the pleading requirements for the claim of interference with a prospective business advantage under D.C. law. That claim requires: "(1) the existence of a valid business relationship or expectancy, (2) knowledge of the relationship or expectancy on the part of the interferer, (3) intentional interference inducing or causing a breach or termination of the relationship or expectancy, and (4) resultant damages. Valid business expectancies that are "commercially reasonable" include "lost future contracts and lost opportunities to obtain customers. In addition, the plaintiff must make a strong showing of intent to "disrupt a business relationship or expectancy to establish a claim for interference." Intent can be shown if the conduct is egregious, such as libel, slander, physical coercion and fraud.
Here, the court found that the allegations were both unspecific and conclusory, thus failing to meet the standard required to allow the claim to proceed. Perhaps most notable is the requirement under D.C. law that the claimant must plead the particulars of the valid business expectancy, including the names of the third parties with which the claimant had the relationship or expectancy. Simply alleging categories of relationships that may have been affected is inadequate.
The court found similar flaws in the allegations supporting the claim for breach of fiduciary duty. Preliminarily, the court noted that, even though the relationship between the consultant and his client arose out of a written contract, "where circumstances show that the parties extended their relationship beyond the limits of the contractual obligations to a relationship founded upon trust and confidence" a fiduciary duty may exist. Here, the client alleged that the duty arose because "in its capacity as a consultant to the defendant, the plaintiff was privy to sensitive, confidential and proprietary information, including financial information."
Despite alleging that the plaintiff used that information "as part of a scheme to disrupt the operation and ownership of [the defendant], with the objective ... [of placing] financial pressure on [the defendant] that would force [the defendant] to enter business deals favorable" to individuals aligned with the plaintiff "and/or [to] gain control of [the defendant] for the benefit of [the plaintiff] and its co-conspirators" the court found those allegations deficient. It noted the defendant had failed to allege: (1) specific information regarding the confidential information wrongfully used, (2) that the defendant entered into any specific deals as a result of the pressure exerted by the plaintiff, and (3) that the defendant suffered any injury as a result of that pressure. Additionally, the defendant failed to allege that the efforts of the plaintiff to gain control of the defendant resulted in any injury. Accordingly, the court granted the Motion to Dismiss.
This case points out the importance of carefully crafted, factual-laden pleadings. Two recent Supreme Court decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), significantly tightened the pleading requirements in civil cases. Under the new standards, federal complaints must allege sufficient facts, that when accepted as true for purposes of a motion to dismiss, "state a claim to relief that is plausible on its face." Id. at 1949. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In short, mere recitals of the elements of a cause of action, accompanied by conclusory statements, fail the test.
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