Tag: Trade Secrets

Preliminary Injunctions and The Illinois Trade Secrets Act

Trade secrets cases provide fertile grounds for preliminary injunctions and temporary restraining orders.  Here are the black-letter basics:

– A preliminary injunction plaintiff must show: (1) irreparable harm, (2) likelihood of success on the merits, (3) the harm the plaintiff would suffer if the injunction is denied is greater than the harm inflicted on the defendants and (4) the injunction is in the public interest;

– To win a trade secrets case, the plaintiff must establish (1) that the information at issue is a trade secret, and (2) that the information was misappropriated and used in the defendant’s business;

– A trade secret is broadly defined as “information” that is (a) sufficiently secret to derive monetary value from not being generally known to others (who can obtain monetary value from its use); and (b) subject of efforts to maintain the information’s secrecy or confidentiality. See Illinois Trade Secrets Act, 760 ILCS 1065/2 (the ITSA);

– Six common-law trade secrets factors include

(1) extent to which the information is known outside of plaintiff’s business,

(2) extent to which the information is known by employees and others involved in plaintiff’s business;

(3) extent of measures taken by plaintiff to guard the information’s secrecy;

(4) value of the information to the plaintiff’s business and 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;

– Misappropriation means acquisition or discovery by improper means or use of the secret;

– There is a presumption of irreparable harm in trade secrets misappropriation cases;

– Irreparable injury means harm that is difficult to quantify;

– The purpose of a preliminary injunction (in the trade secrets context) is not to punish; but to eliminate a litigant’s unfair advantage over another.

 

 

 

  

 

 

 

 

 

 

 

 


Greeting Card Giant Wins $30M-Plus Jury Verdict in Trade Secrets Case (8th Cir.)

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In Hallmark Cards, Inc. v. Monitor Clipper Partners, LLC, 2014 WL 3408853 (8th Cir. 2014), the Eighth Circuit affirmed a $31.3M dollar jury verdict in favor of the greeting card giant against a private equity firm that used Hallmark’s confidential market research.

Hallmark hired a consultant to research consumer behavior as it relates to greeting cards.  Hallmark had the consultant sign non-disclosure agreements that strictly prohibited it from sharing the research findings.  The contracts also contained broad consequential damages disclaimers.

Hallmark sued under trade secrets law when it learned the consultant surreptitiously disclosed Hallmark’s data to the defendant who used the data to try to buy a Hallmark competitor.

 The jury awarded Hallmark a more than $30M judgment against the defendant equity firm including $10M in punitive damages.

Held: Verdict affirmed.

Reasons:

Missouri’s trade secrets statute (Mo.Rev.Stat. s. 417.450, 454) broadly defines a trade secret as (1) information, including (2) non-technical data, that’s (3) sufficiently secret to derive monetary value from not being known to competitors and (4) that’s subject to efforts to maintain the information’s secrecy. 

Misappropriation covers both acquisition of and subsequent use of a trade secret and occurs where a defendant (1) acquires a trade secret that defendant knows or has reason to know was obtained by improper means or (2) discloses or uses the trade secret without the secret’s owner’s express or implied consent. (*5).  

The court held that the PowerPoint slides qualified as trade secrets under the statute in view of the lack of market research available in the greeting cards market.  The scarcity of data on the subject led the appeals court to affirm the jury’s finding that the research data compiled for Hallmark met the elements of a protectable trade secret under Missouri law. 

The court also found there was evidence of the defendant’s misappropriation of the trade secrets. (**3-5). 

Upholding the damage award, the court rejected defendant’s argument that Hallmark obtained improper double recovery.  In Missouri, a party can’t recover twice for the same injury.  

Here, the Court found there were two separate injuries: (1) the consultant’s transmission of the secret data to the defendant; and (2) defendant’s (own) use of the market data. (*4).  Since the injuries were separate, Hallmark could recover separate damage amounts for each injury.

Finally, the Court affirmed the $10M punitive damage award.  Punitive damages under Missouri law are allowed where conduct is outrageous, reprehensible and shows an evil motive or reckless indifference to others’ rights. 

Defendant exhibited reckless indifference by its stealthy campaign of document destruction to cover its tracks once Hallmark learned of the defendant’s plan to buy Hallmark’s rival. 

The court found the defendant’s conduct reckless and sufficiently reprehensible to support the punitive damage award.  The Court also noted that the punitive damage award was “only” one-half of the compensatory award and that this damage ratio met due process standards. (*8).

Afterwords:

Even something as nebulous and innocuous as consumer buying trends research in the greeting card market can qualify for trade secret protection (at least in Missouri). 

Hallmark Cards also shows that a trade secrets plaintiff can recover separately for both (1) disclosure of a trade secret and (2) subsequent use by a third party without violating contract law double-recovery restrictions. 

 

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

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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.