Staffing Firm’s Trade Secrets and Tortious Interference Claims Against Ex-Employees Rejected After Bench Trial (Part II of II)

Top Secret

The plaintiff staffing firm lost big in Instant Technology, LLC v. DeFazio, 2014 WL 1759184 (N.D. IL 2014).  The Northern District Court found for the defendants on the plaintiff’s non-compete counts (see prior post) as well as on its trade secrets, tortious interference and breach of fiduciary duty claims. 

Trade Secrets Analysis

The ex-employee defendants signed broad non-disclosure agreements that prevented them from divulging plaintiff’s business information to third parties.  In finding that the plaintiff failed to establish either valid trade secrets or that the defendants used the alleged secrets, the Court applied the key Illinois trade secrets rules:

–  a trade secrets plaintiff must establish (1) that it possessed trade secrets and (2) that the defendant misappropriated them;

– a trade secret is information not generally known to others.  The plaintiff must concretely identify the secret: it isn’t enough for the plaintiff to point to “broad areas of technology” and claim that something there “must be” secret;

– misappropriation means improper acquisition, unauthorized disclosure or unauthorized use.  See 765 ILCS 1065/2(b);

 – misappropriation by “improper acquisition” means theft, bribery, breach of or inducement of a breach of a confidential relationship or espionage through electronic means;

  – misappropriation by “unauthorized disclosure” or “unauthorized use” means the defendant used the alleged trade secrets or disclosed them to others for purposes other than serving the interests of the trade secrets owner;

where information is generally known to others who could benefit from using it, the information is not a trade secret

 (*18-19).

The staffing company failed to establish a protectable trade secret.  None of the client or candidate information the plaintiff was suing on was secret.  The Court found that client names, hiring needs as well as candidate identities and qualifications were publicly available (through phone or internet searches) and information that was freely given out by plaintiff’s clients.  This is because many of the plaintiff’s clients use multiple rival staffing firms simultaneously.

The Court also held that the plaintiff failed to show misappropriation by the defendants.  The trial testimony (18 witnesses testified at the bench trial) established that the defendants were authorized to store and transport plaintiff’s documents via thumb drives and that each defendant physically returned all of plaintiff’s documents and data.

Tortious Interference Analysis

The plaintiff also lost on its tortious interference with contract and prospective economic advantage claims.  Plaintiff alleged that certain defendants tortiously interfered with plaintiff’s client and candidate relationships.

In Illinois, to show tortious interference with contract, the plaintiff must establish: (1) the existence of valid and enforceable contract between plaintiff and third party; (2) defendant’s awareness of that contract; (3) defendant’s intentional and unjustified inducement of a breach of that contract; (4) breach of the contract by the third party; and (5) damages.  Tortious interference with prospective economic advantage has identical elements except the plaintiff must specify customers who actually contemplated entering into a business relationship with the plaintiff.

Since the non-compete lacked consideration and was unreasonable, the contract was unenforceable and so plaintiff’s  tortious interference with contract claim failed.   The plaintiff’s tortious interference with prospective economic advantage count also fell short since the plaintiff couldn’t identify a specific client that didn’t materialize due to defendants’ conduct.  The Court held that proof of a past customer relationship was insufficient to prove a reasonable expectation of a future business relationship.  (¶22).

Breach of Fiduciary Duty Claim

The Court also sided with the defendants on the plaintiff’s breach of fiduciary duty claim.  An Illinois employee can form a rival corporation and outfit it for business while employed by his former employer.  And where there is no valid post-employment restrictive covenant, an employee is free to compete with his ex-employer. 

Further, only a corporate “officer” can be liable for soliciting employees for a new, competing venture.  Job title is not enough to establish corporate officer status.  Instead, the court looks to whether the defendant performs “significant managerial and supervisory responsibilities for operation of the office”.  Here, one of the individual defendants – despite being Executive Vice President of plaintiff – had no managerial authority.  As a result, this defendant wasn’t a true corporate officer and couldn’t be liable for breach of fiduciary duty in soliciting the other defendants to join her in the new staffing firm.  (¶¶ 19-20).

Take-away: The case again illustrates the high evidence burden for a plaintiff to show the existence of a trade secret and its misappropriation.  It also underscores how difficult it is for a plaintiff to prove tortious interference without specifically pinpointing lost contracts or hoped-for business relationships.  The case also construes Illinois law to subject only a corporate officer – with management authority – to breach of fiduciary duty claims where that officer solicits employees of a corporation to join the officer in a competing venture.

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.