Tag: ITSA

Marital Privilege Argument Premature in Insurance Broker’s Trade Secrets Case Against Former Agent – IL ND

The district court in Cornerstone Assurance Group v. Harrison discusses the Federal court plausibility standard for pleadings and considers whether Illinois’s marital privilege statute defeats an insurance broker’s trade secrets suit against a former employee.

The defendant signed an employment contract that contained a confidentiality provision covering plaintiff’s financial information, marketing plans, client leads, prospects, and lists along with fee schedules, and computer software.  Plaintiff paid defendant $1,000 not to disclose plaintiff’s confidential information.

The plaintiff alleged the defendant disclosed the information – including a protected client list and private medical data – to her husband, who worked for a competing broker.  The plaintiff alleged the competitor used that information to recruit plaintiff’s employees.  The defendant moved to dismiss the plaintiff’s claims under Rule 12(b)(6).

Trade Secrets Claim

Denying the motion, the court first looked to the pleading requirements of a claim under the Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1, et seq.To prevail on a claim for misappropriation of a trade secret under the [ITSA], the plaintiff must demonstrate (1) the information at issue was a trade secret, (2) that the information was misappropriated, and (3) that it was used in the defendant’s business.

ITSA defines a trade secret as information, data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that is (1) sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (20 is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality. 765 ILCS 1065/2(d)

The law does not confer trade secret status for information “generally known or understood within an industry even if not to the public at large.”  A plaintiff also foregoes trade secret protection where it fails to take affirmative measures to keep others from using the proprietary information.  In addition to these statutory guideposts, Illinois case law considers several additional factors that inform the trade secrets analysis.  These include: (1) the extent to which the information is known outside of the plaintiff s business; (2) the extent to which the information is known by employees and others involved in the plaintiff s business; (3) the extent of measures taken by the plaintiff to guard the secrecy of the information; (4) the value of the information to the plaintiff s business and to its competitors; (5) the amount of time, effort and money expended by the plaintiff in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.  No one factor predominates but the more factors present increases plaintiff’s chances of establishing a trade secret.

The Court held the plaintiff alleged sufficient facts to show that some of the information allegedly misappropriated was a trade secret.  Under Illinois law, a list of actual or potential customers as well as insurance claims data can qualify as a trade secret under certain facts.  The plaintiff’s Complaint allegations that it spent several years developing the confidential data at issue and that it wasn’t accessible to others satisfied the pleading requirements for a valid trade secrets case.

Marital Communications Privilege

The Court held it was too soon to address Defendant’s argument that the marital privilege statute negated Plaintiff’s claims.  The marital privilege attaches to husband and wife communications.  But a spouse’s communication to a third party waives the privilege and a litigant is free to use that communication against its adversary.  The marital privilege also doesn’t extend to subsequent uses of protected communication.  See 735 ILCS 5/8-801 (husband and wife may not testify to communication or admission made by either of them to each other.)

While the court opted to table the privilege issue until after discovery, the Court noted the plaintiff alleged the defendant disclosed trade secrets not only to her husband but to a third party – the husband’s employer. Since the Complaint established it was possible the defendant shared information with someone other than her husband, the marital privilege didn’t bar plaintiff’s claims at the case’s pleading stage.

Afterwords

This case represents a court flexibly applying Rule 12’s plausibility standard in the trade secrets context.  Solidifying the proposition that a plaintiff doesn’t have to plead evidence or try its case at the pleading stage, the Court makes clear that disclosure of a trade secret to even a single competitor can satisfy the misappropriation prong of a trade secrets claim.  Harrison also shows the marital communications privilege won’t apply to information that escapes a husband-wife union.  A complaint’s plausible allegation that protected information went beyond the confines of the marital union nullifies the marital privilege.

Illinois Lawyer’s Practice Management Software Qualifies for Trade Secret Protection

Geraci v. Amidon, 2013 IL App (2d) 120023-U, exhaustively analyzes Illinois trade secrets law in the context of a pitched battle between two competing law firms and their respective practice management software programs. 

The plaintiff, a bankruptcy attorney whose ubiquitous television presence is likely familiar to most Chicagoland viewers, sued a former employee and competing bankruptcy firm under the Illinois Trade Secrets Act, 765 ILCS 1065/1 (ITSA) claiming the former employee pilfered the plaintiff’s secret  practice management software and used it while working for the competing firm. 

Defendants argued that the software was an independent creation of the former employee’s and wasn’t a trade secret.  The trial court granted summary judgment for defendants.

Result: Trial court reversed.

Reasoning:

The Second District held that plaintiff raised a genuine issue of fact on his trade secrets claim sufficient to defeat summary judgment.

An Illinois trade secrets plaintiff must show (1) the existence of a trade secret, and (2) use of that secret by the defendant in the defendant’s business. 

To establish that information is a trade secret, a plaintiff must demonstrate that the information is sufficiently secret to provide economic value to the trade secret’s holder, is not within the realm of general knowledge and skills of a given industry, and that the information can’t be readily duplicated without major time, effort and monetary expense.   ¶ 76; 765 ILCS 1065/2(d). 

A claimed trade secret doesn’t have to rise the level of a protected patent and computer software can qualify as a trade secret under Illinois law. ¶ 77.

The Court held that plaintiff produced sufficient evidence that the software was a trade secret and that defendants used that program in their competing business.

On the “sufficiently secret” trade secrets prong, the Court pointed to plaintiff’s evidence that the software was the first of its kind in the industry and there were no comparable programs when plaintiff developed it in the late 1980s. 

The Court also found that plaintiff’s software had economic value based on plaintiff’s affidavit testimony that the program was the “single most important aspect” of running his law firm and that he developed the software over two decades and at an expense of several million dollars.  Geraci ¶¶ 80, 83.

The Second District also found that plaintiff offered enough evidence that he tried to keep the software secret; citing as examples plaintiff requiring employees to sign confidentiality agreements, preventing employees from taking the software code off-site, password-protecting firm computers and sequestering the firm server in a locked room.  ¶¶ 5-51, 79.  Taken together, these efforts adequately demonstrated plaintiff’s efforts to maintain the software’s secrecy to survive defendants’ summary judgment motion. 

Plaintiff also offered enough evidence that defendants misappropriated the software. program under trade secrets law.  

Misappropriation means disclosure or use of another’s trade secret without express or implied consent.  ¶ 85, 765 ILCS 1065/2(b)(2)(B)(ii).  Plaintiff’s expert witness testified that there were too many similarities between the competing software programs to be a mere coincidence.   The defendant also admitted that he regularly took copies of plaintiff’s program home with him while employed by plaintiff.  This was at least circumstantial evidence of misappropriation to raise a contested fact question for a later trial.  ¶ 96.

Take-aways:  Tedious (at times) technical analysis aside, Geraci provides a thorough synopsis of the key elements and factors which govern the prosecution and defense of a trade secrets case.  The case illustrates the quantum of evidence needed to establish the existence of a trade secret and that it was impermissibly used by a defendant. 

The case also shows how expensive it is to state a colorable trade secrets case and that, at least in the context of warring software programs, how crucial it is to have a computer expert’s testimony to support a trade secrets claim.  Without detailed expert testimony on the similarities between the two competing software programs, it’s clear that plaintiff would have lost his trade secrets claim.

Seventh Circuit Strikes Down Employer’s Claim for Permanent Injunctive Relief in Non-Compete Case

Earlier this month, in Tradesman International, Inc. v. Black, et al., 2013 WL 3949020 (7th Cir. 2013), the Seventh Circuit affirmed summary judgment against a plaintiff construction staffing firm that sued four former employees for violating restrictive covenants they signed while employed by plaintiff. 

The Plaintiff sought to enforce 18-month long and (effectively) nation-wide restrictive covenants (“non-competes”) that prevented defendants from (a) ever disclosing plaintiff’s proprietary information and (b) from soliciting construction staffing business within 100 miles of a Tradesman field office and within 25 miles of any Tradesman customer location.  2013 WL 3949020 at *2. 

The District Court granted summary judgment for the defendants on all claims because plaintiff failed to prove compensable damages and therefore could not show irreparable harm: a required permanent injunction element.

Disposition: The Seventh Circuit affirms District Court on summary judgment ruling; reverses on denial of defendants’ attorneys’ fees under Illinois Trade Secrets Act claim. 

Grounds: (1) Plaintiff employer failed to show irreparable harm; and (2) Plaintiff’s restrictive covenants (the “non-competes”) were unreasonable – both in terms of content and geographic scope.

Reasoning:  Plaintiff showed no harm, much less irreparable harm.  Irreparable harm means damages that are ongoing and difficult to quantify.  The Court held that since plaintiff failed to seek preliminary injunctive relief (as opposed to permanent injunctive relief), this undermined its irreparable harm claim (in other words, why didn’t the plaintiff move for preliminary injunctive relief if its damages were so dire?). 

The Court noted that a permanent injunction would be too “costly” as it would require defendants to reverse several years worth of efforts in building up their competing staffing firm.  Tradesman, at *7-8.

The Seventh Circuit also found the non-competes signed by the defendants unreasonable under Ohio law.  A contractual choice-of-law clause provided that Ohio law would govern (The plaintiff was an Ohio corporation.)

Ohio considers a restrictive covenant’s time and space limitations, whether trade secrets or confidential information are/is involved, whether the employer seeks to stifle ordinary competition, and the detrimental impact on the employee’s livelihood.  Id. at *9.

Applying the factors, the Tradesman Court found that the proprietary information which plaintiff sought to protect was unreasonable.  The Court noted that the information plaintiff was suing on – worker’s compensation and manager compensation rates, marketing materials and Dun & Bradstreet reports – was either publicly available, generally known or was information that the plaintiff didn’t try to keep secret.  *8-9. 

A plaintiff generally has to show that it tried to keep information confidential (under “lock and key”) for that information to qualify as a trade secret.

The Court also found the non-competes’ geographic restrictions unreasonable.  They were so expansive, they were basically nation-wide restraints.  To comply with the non-competes as  written, the defendants really couldn’t work anywhere in the U.S.  *9-10.

Lessons:

1/ publicly available or generally known information will not qualify for proprietary or trade secret information protection;

2/ restrictive covenants that don’t involve true trade secrets or proprietary information and that have nation-wide reach (“you can’t work anywhere in the U.S.”, e.g.) will not be enforced; and

3/ the party that loses a trade secrets case may have to pay the winning party’s fees even if the party had good faith belief in its claim when it filed the lawsuit – but later learns that its claim lacks merit (and still presses forward with the case).