Ice Storms, My Secret Internet and Other Myths

Winter is around the corner.  On the calendar, however, it’s not yet here.  Surely Mother Nature is aware of this.  Still, an ice storm currently engulfs large swaths of our nation and is leaving many of us without power or heat.  If your new business was recently served with a lawsuit seeking an injunction against it to stop allegedly unlawful competition, then you can probably relate to those in the grips of the current storm.

The situation:  A successful closely held corporation sues a new competitor in its industry.  The complaint alleges that the new competitor hired a former employee with knowledge that the former employee and former employer had executed a non-competition agreement.  The complaint against the new competitor seeks an injunction.  If you’re familiar with this column, then you know that this scenario is rather commonplace.  Sometimes, however, the former employer/plaintiff can seek relief that a court deems unreasonable.  One such instance occurs with internet-based companies, or even with internet-reliant companies.

Here’s an example:  You own a company that sells goods over the internet.  You discover that your former employee is working for a new competitor seemingly in violation of his non-competition agreement.  Although there is no evidence that your business is damaged or will suffer damages as a result of the new competitor’s entry into the marketplace, your lawsuit seeks to enjoin the former employee from working for the competitor.  Your lawsuit also includes a claim against the new competitor for tortuous interference with your contract with the former employee.  So far, this legal action presents relatively straightforward issues.  Then you decide to make matters more complicated.

We often see former employers attempt to overreach when seeking damages.  You might, for instance, sue for alleged violation of trade secrets (claiming that the employee gave protected information to the new competitor).  Or you might sue for unfair and deceptive trade practices.  While this aggressive approach could potentially force the new competitor to agree to willingly close its business, it’s more likely than not that you’ve created a situation in which litigation (and associated litigation costs) could escalate.  Particularly with internet-based businesses, the capability to drive business to a particular website is seldom a secret.  While there are certainly professionals who claim that they can use unique search engine optimization (SEO) techniques to increase your exposure, many businesses discover that they can directly pay the search engines themselves to increase their traffic.  And that information is essentially available through the search engines for companies willing to pay for it.

As a result, your new competitor may actually get significant traffic to its website without ever attempting to steal your “trade secrets” in its efforts to do so.  Even if challenged, a “trade secret” that is dependent on information a search engine would otherwise make publicly available is difficult to uphold in court.  To some ˗ if your company is more financially capable of bearing the financial costs and personnel strain of the litigation storm ˗ this fight might seem worthwhile.  Consider, on the other hand, the possibility that if you lose in your efforts to prove unfair and deceptive trade practices you may actually have to pay prevailing party attorney’s fees and costs to the new competitor.  Why?  Because “deceptive and unfair trade practice” statutes usually contain clauses that allow courts to award prevailing party attorney’s fees and costs.  In other words, if the new competitor can hold on long enough to defeat your claim for deceptive and unfair trade practices, your company could end up paying your competitor’s legal bill (even if the court finds grounds to enter the injunction you sought).

Does that scenario denude or devalue your carefully drafted non-competition agreement?  No, it does not.  What the above scenario is intended to provide is a cautionary warning that when dealing with a pest, sometimes a fly swatter gives you a better result than a grenade.  Many times your well-pled motion for injunctive relief will achieve your business goals without having to prove the elements of the additional allegations.  Less cost to you, same effect on your newly-enjoined former-competitor.

Navigating the many laws and difficult language in the area of non-competition agreements can perplex even the most sophisticated business professionals.  This is the point in the blog when you are urged to seek refuge from this complexity with an attorney experienced in these issues and capable of both advising and litigating, if necessary.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Huge Verdict in Trade Secrets Case

It’s a little out of this blog’s Southeastern focus area, but a $22.7MM verdict in a Minnesota trade secrets and non-compete case, as reported by the West Central Tribune at wctrib.comshould be a reminder to all employees and employers that a violation in this area of the law can have disastrous consequences for a defendant. The plaintiff, a dairy and food processing equipment company, successfully argued that two former employees took confidential equipment designs from the company’s computer systems and used them on behalf of a Wisconsin-based competitor, Cheese Systems, Inc. The new employer was also found liable for interference with current or prospective contracts.

Maybe it’s just me, but my mental image of the defendants is this.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Seek Advice In Drafting Trade Secrets And Confidentiality Agreements

In an article recently posted at mondaq.com, Richard Stobbe provides several excellent examples of why employers should consult with their counsel when drafting trade secrets and confidentiality agreements, instead of copying cookie-cutter examples found on the internet.

In his article, Keeping Secrets: Trade Secrets and Confidentiality Agreements, Stobbe notes that many “off-the-shelf” agreements are drafted with terms that do not apply to the employer’s business or the specific transaction, or apply another state’s laws.  Also, many form agreements define key terms, such as “confidential information,” which an employer may not be aware of or understand.  The failure to strictly comply with these defined terms may render the agreement unenforceable.

The issues raised in Stobbe’s article are especially relevant for employers in Tennessee where agreements restricting trade are generally disfavored and strictly construed against the employer.  Rather than rely on form agreements, employers should consult with counsel to insure their non-compete, trade secrets, and confidentiality agreements comply with their state’s laws.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Why Go to the Movies?

Summer has arrived.  The Hollywood blockbusters are here.  New animated features hit the big screens this week.  Superman is flying once more.  Sure, if the movies are your cup of tea, then summer is your annual thirst quencher.  However if you’re looking for drama, you need only scan the internet to find your daily dose of serious corporate espionage and the criminal theft of trade secrets from American corporations.

Just yesterday the San Francisco Chronicle ran a story of a scientist working on solar cell technology who pled guilty to several counts of wire fraud in an indictment claiming he stole trade secrets from his employer “and tried to take them to a competitor in China.”  The prosecutors in the case “estimate the total loss from the theft of trade secrets at nearly $22.7 million.”  The Telegraph – a British newspaper – reported this week that cyber espionage is rampant in the UK with “foreign hackers” secretly working in some companies for up to two years “discreetly stealing intellectual property.”  American newspapers recently published articles that our government systems are under constant attack not only from rogue hackers but also from foreign governments utilizing sophisticated programs and systems in an effort to steal American secrets and military information.  Same thing for recent stories of Chinese manufacturer Sinovel and two if its executives, recently indicted for alleged theft of wind turbine trade secrets.  Alleged financial loss to the owner of the trade secrets: approximately $800 million according to SecurityInfoWatch.com.

The problem is rampant and unlikely to go away.  Nor is this something new.  Corporate espionage likely began soon after the first business incorporated.  Of course, victimized businesses take little comfort knowing that others victims also exist.  So what can your company do to avoid, eliminate or minimize this potential loss?  First line of defense, of course, is education.  Educate the people in charge of monitoring the transmission of technical data on the best means to detect the “discreet stealing.”  Depending on the value of the intellectual property (and the potential loss to your business if a competitor was to receive the trade secret information without a license or without compensation), the potential losses could justify the investment in employees whose role is to oversee the data transferred to and from your company’s system.

As most of you who read this post already know, Florida employment is at will.  While termination for a discriminatory purpose is unlawful, termination for violation of company policies (or termination for violation of State or federal law) is common.  However, as these events (and the dozens of other recently reported events) indicate, the most difficult task for American companies lies in screening employees so as to minimize the possibility of trade secret theft, while at the same time ensuring that all potential employees are given an equal opportunity to apply for a position for which they are potentially qualified.

If your company faces a patient, technically savvy and stealthy employee, like the ones described who steal trade secrets with stealth for two years before they are discovered, a well-written policy is not likely to act as a significant deterrent.  On the other hand, Florida law specifically allows employers to create written policies regarding the protection of its trade secrets and to enforce those policies against its employees as appropriate.  In most circumstances, employee education (and continuing acknowledgement) of the employer’s policies, in concert with a method for your business to monitor activity and to “police” itself, can deter most of the individuals who might consider trade secret theft.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Protecting Your Closely Held Business

A client recently came to me with a problem lawyers often hear: the client’s family-owned business needed to hire new employees to keep up with the growth. In particular, the company needed additional sales force and additional operators in the field. The problem was that in order to train and then oversee these new employees, the client had to disclose to them both its pricing guidelines and its field techniques. This particular business (which was highly regulated and dealt with restricted and often dangerous chemicals) kept its customer base because – like most successful businesses – it provided excellent customer service combined with very competitive pricing.

The owner feared that once his customers became acquainted with the new sales personnel and/or the new field technicians, the new employees could use their knowledge of the company’s pricing guidelines and field techniques in order to start a competing business. Fortunately, under Chapter 542, Florida Statutes, we were able to craft a document that lawfully restricted the new employees’ ability to quickly begin a competing company and that gave the client peace of mind to continue the company’s expansion.

A primer on Chapter 542, Florida Statutes

The short title for Chapter 542 Florida Statutes is “Florida Antitrust Act of 1980.” So basically it’s a statute “to complement the body of federal law prohibiting restraints of trade or commerce in order to foster effective competition.” See 542.16. Fla. Stat. However within the statute is the current language in 542.335 Fla. Stat., entitled Valid restraints of trade or commerce.

Within this section, Florida law allows restrictive covenants, “so long as such contracts are reasonable in time, area, and line of business”. It is important to note, however, that Florida law strictly construes restrictive covenants, all of which are unenforceable unless set forth in writing signed by the person against whom enforcement is sought. It is also essential that the restrictive covenant itself is only valid if the party seeking enforcement can demonstrate a “legitimate business interest” worthy of protection. Examples of legitimate business interests include:

1. Trade secrets;
2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets;
3. Substantial relationships with existing or perspective clients, patients or customers;
4. Good will associated with a trade name, a trademark, a service mark, or “trade dress,” a specific geographic location, or a specific marketing or trade area;
5. Extraordinary or specialized training.

As you might imagine with any strictly interpreted statute, failure to prove the legitimate business interest will render a restrictive covenant unlawful, void and unenforceable. The statute also shifts the burden from the entity seeking to enforce the restrictive covenant to the person opposing enforcement upon prima facie showing that the restraint is reasonably necessary. Defenses to these actions include that the restrictive covenant is “overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interests.”

If the court determines that one of these defenses exists, then the statute directs the court to modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.

Fortunately, Florida law also sets forth some parameters to help both drafters of restrictive covenants and parties seeking to enforce or defend enforcement actions with some guidelines as to the validity of any particular restriction. As one might expect, the more vital the need to protect a “legitimate business interest,” the longer the period Florida law will deem as reasonable. For instance, as long as the restrictive covenant does not deal with the sale of a business or professional practice or an equitable interest in any other type of business or professional practice (including a partnership or limited liability company), then as to a former employee, agent, or independent contractor the court shall presume reasonable in time any restraint that is six months or less in duration and shall presume unreasonable in time any restraint that is more than two years in duration. If a party seeks to enforce a restrictive covenant against the distributor, dealer, franchisee, or licensee of a trademark or service mark (not associated with the businesses listed above) then the court increases its timeframes and will presume reasonable any restraint of one year or less and shall presume unreasonable any restraint more than three years in duration. On the other hand if the restrictive covenant does specifically deal with an action against the seller of all or part of the assets of a business or professional practice, the shares of a corporation, partnership interest, a limited liability company membership or any equity interests of any other type in a business or professional practice, then the court shall presume reasonable a restraint of three years or less and increases its tolerance for reasonability to a period from three years to more than seven years in duration.

The statute also deals with trade secrets and specifically states that a “post term restrictive covenant predicated upon the protection of trade secrets” is presumed reasonable if the restraints are for five years or less and unreasonable if the restraint is for more than ten years. However, all of those presumptions are rebuttable.

Florida law in this area has many nuances. It is quite possible that your valid, written restrictive covenant was drafted to narrowly protect a line of business or a geographical area in which your company no longer has an interest. In such cases, the courts can consider these facts as a defense even in the face of an argument that future damages could arise.

Getting back to the client whose inquiry prompted this post, his closely held corporation sought both legal protection and peace of mind. After a series of successful hires, all signs so far indicate that the client has achieved an effective and enforceable restraint of trade. Because that client services nearly every county in the State of
Florida, the written restrictive covenant bars the new employees from working for a period of two years in the same line of business in all of those counties. To the extent any of the techniques that the client utilizes and/or developed for its field technicians constitutes a trade secret, the document also restricts the use of that trade secret for a period less than five years. Most critical for enforcement, however, is the fact that the business owner never allows a new sales person or field technician to begin work until he or she executes the restrictive covenant. The business owner even goes one step further, having all prospective employees to whom the restrictive covenant applies initial the section of the restrictive covenant indicating that the prospective employee was given the documents in advance of the employment and had the right to seek his or her own legal counsel prior to executing the restriction. If carefully drafted and thoughtfully implemented, a written restrictive covenant can successfully protect the business owners of small, closely held companies just as well as they can protect mid-sized or large corporations.

This is the point in the blog where I tell you to seek legal advice in the drafting or enforcement of your restrictive covenant. The Burr & Forman legal team has qualified attorneys throughout its footprint with significant experience in these issues.

Two Recent High-Stakes Trade Secrets Decisions Demonstrate Broad Protection and Potential for Large Exposure

When a party breaches a confidentiality agreement, claims for misappropriation of trade secrets and breach of the confidentiality agreement are often asserted simultaneously. As two recent federal court decisions based on Texas law demonstrate, trade secrets law can sometimes protect employers where confidentiality agreements cannot. These cases also highlight the potential for very large exposure of violators.

On July 26, 2012, the U.S. Bankruptcy Court for the Western District of Texas entered a final judgment in the amount of $15,873,383 in favor of TXCO Resources, Inc. and against Peregrine Petroleum, L.L.C. for misappropriation of trade secrets. TXCO Res., Inc. v. Peregrine Petroleum, L.L.C. (In re TXCO Res., Inc.), 2012 Bankr. LEXIS 3425 (Bankr. W.D. Tex. July 26, 2012).  Both TXCO and Peregrine are oil and gas companies based in Texas.  Peregrine signed a confidentiality agreement that allowed it to obtain information about certain of TXCO’s properties. TXCO alleged that Peregrine breached the confidentiality agreement and misappropriated TXCO’s trade secrets, among other causes of action.  In a lengthy opinion issued after a 41-day bench trial, the Court found Peregrine was not liable for breach of the confidentiality agreement since TXCO could not prove that its damages were proximately caused by Peregrine’s breach. The Court did find, however, that Peregrine misappropriated TXCO’s trade secrets by using confidential information about TXCO’s land subsurface data, production data and operations data to acquire oil and gas leases formerly held by TXCO, which gave Peregrine a competitive advantage over TXCO and other companies.

In Raytheon Co. v. Indigo Sys. Corp., 2012 U.S. App. LEXIS 15892 (Fed. Cir. Aug. 1, 2012), the U.S. Court of Appeals for the Federal Circuit reversed the decision of the U.S. District Court of the Eastern District of Texas, which granted summary judgment against a misappropriation of trade secrets claim to Indigo and against Raytheon.  Raytheon and Indigo, who are both manufacturers of infrared imaging equipment, entered into a series of confidentiality agreements in 1996 in connection with consulting services to be provided by Indigo to Raytheon.  In 1997, Raytheon became concerned that Indigo was recruiting Raytheon personnel to gain access to Raytheon’s trade secrets, but Indigo assured Raytheon that these accusations were baseless.  Five years later, in 2007, Raytheon disassembled a camera of Indigo’s and discovered evidence of patent infringement and trade secret misappropriation and quickly brought suit.

In granting summary judgment to Indigo, the district court found that the confidentiality agreements were unrelated to the infrared technology at issue and found that Raytheon’s trade secret claim was barred by the three-year statute of limitations under Texas law. The appellate court discussed the “discovery rule,” which allows tolling for claims of trade secret misappropriation until when the plaintiff knew or reasonably should have known of the facts that give rise to the claim. The court also noted that the question of whether Raytheon “should have known” about its claims earlier was for the jury.  The Circuit Court held that the district court erred by resolving this factual question against Raytheon, the non-moving party, at summary judgment.

BURR POINT:  Trade secrets violations can lead to large judgments and the “discovery rule” can be used to preserve the ability to obtain these judgments for older claims.

The Inevitable Disclosure Doctrine — A Glimmer of Hope in the Absence of a Non-Compete Agreement

In the hilarious movie Dumb and Dumber, the imbecilic and unattractive character played by Jim Carrey is told by the beautiful woman he is pursuing that the chances of them winding up together are about one in a million, to which he excitedly replies, “So you’re telling me there’s a chance!” Similarly, if an employer wants to enjoin a former employee from working for a competitor, but the employee is not under any sort of non-compete agreement with the former employer, has taken no company records and property, and has not revealed any confidential information or trade secrets to the new employer, the inevitable disclosure doctrine of trade secrets law provides the employer with at least a “chance” of getting the desired injunction.

The inevitable disclosure doctrine is used by employers to stop former employees from working for competitors, even in the absence of a non-compete agreement, on the basis that it is inevitable that the employee will use or disclose the former employer’s trade secrets in connection with the new employment. The significance of this theory is that the employer is not required to prove an actual misappropriation of a trade secret, but rather that the disclosure of the trade secret is inevitable based on the nature of the information and the circumstances of the employee’s new position.

As with all trade secret issues, the law on inevitable disclosure varies somewhat from state to state. For instance, California courts have rejected the doctrine as creating a “de facto covenant not to compete”, Bayer Corp. v. Roche Molecular Sys., Inc., 72 F. Supp. 2d 1111, 1120 (N.D. Cal. 1999), and held that the doctrine “cannot be used as a substitute for proving actual or threatened misappropriation of trade secrets.”  Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 294 (4th Dist. 2002). The Third Circuit Federal Court of Appeals, however, applied a relatively lenient standard under Pennsylvania law for successfully using the theory, holding that an employer need only show a “substantial likelihood” of disclosure of a trade secret. Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102,110 (3d Cir. 2010). (For an excellent nationwide survey of the doctrine, see Ryan A. Wiesner, A State-by-State Analysis of Inevitable Disclosure: A Need for Uniformity and a Workable Standard, 16 Intellectual Property L. Rev. 211 (2012)).

The Georgia Supreme Court has recognized the inevitable disclosure doctrine, although not referring to it by name, in the case of Essex Group, Inc. v. Southwire Corp., 269 Ga. 553, 501 S.E. 2d 501 (1998). In that opinion, the court upheld the trial court’s injunction prohibiting Southwire’s former employee from working for Southwire’s direct competitor’s logistics department for a period of five years. As the basis for its ruling, the court concluded that the competitor had “sought to obtain, by the simple act of hiring [Southwire's former employee], all the logistics information it had taken Southwire millions of dollars and years of testing and modifications to develop as part of Southwire’s plan to acquire a competitive edge over other cable and wire companies ….” Id. at 557. There was neither mention in the opinion of the employee having a non-compete agreement nor any mention of an actual misappropriation by the employee of the alleged trade secret. Instead, the implication of the decision was that disclosure of Southwire’s logistics system was inevitable because of the identity of Southwire and its competitor’s business.

BURR POINT: Even in the absence of an enforceable non-compete agreement, the inevitable disclosure doctrine provides a means for enjoining a former employee’s competitive activities in certain circumstances. For more information on the inevitable disclosure doctrine or how it might apply to your business, don’t hesitate to contact one of the Burr & Forman team members.

The Court’s Broad Power To Enjoin Trade Secret Violations Can Be Costly

On June 27, 2012, we reported that TNA Entertainment, LLC (“TNA”), a local professional wrestling promotion company, sued its former employee, Brian Wittenstein, and a direct competitor, World Wrestling Entertainment, Inc. (“WWE”), for unlawfully using TNA’s trade secrets to unfairly compete against TNA.  (TNA Entertainment, LLC v. Wittenstein and World Wrestling Entertainment, Inc., Davidson County Chancery Court, Docket No. 12-746-III.)  The alleged trade secrets included information about TNA’s contracts with wrestling talent.  TNA alleged that WWE used TNA’s trade secrets to solicit wrestling talent already under contract with TNA.

In addition to the damages it claims to have suffered, TNA also requested that the Court enter a temporary restraining order (“TRO”) to prohibit WWE and Wittenstein from continuing to use TNA’s trade secrets.  Under Tennessee law, a Court may restrain an offending party from engaging in certain conduct when the injured party shows it will suffer immediate and irreparable harm.  TROs generally last for a short period of time, but may be extended if there is good cause to do so.  The Court may also issue a temporary injunction which can last during the life of the lawsuit.

On May 24, 2012, the Court in TNA Entertainment issued a comprehensive, far reaching TRO which could have had adverse effects on WWE’s business.  The restraining order prohibited WWE and Wittenstein from doing the following:

  1. Breaching or attempting to breach Wittenstein’s Separation Agreement with TNA, including disclosing, transmitting, or otherwise using TNA’s confidential, trade secret, and proprietary information;
  2. Retaining and failing to return TNA’s confidential, trade secret, and proprietary information or property in any form;
  3. Destroying, deleting, erasing, modifying, or otherwise failing to preserve TNA’s confidential, trade secret, and proprietary information;
  4. Soliciting or contracting wrestling talent identified in TNA’s confidential information or taken by Wittenstein; and
  5. Interfering with TNA’s contracts and prospective business relationships which WWE learned through TNA’s confidential, trade secret, and proprietary information.

In addition, the Court specifically required WWE and Wittenstein to not destroy or alter and to provide access information to any computers or similar devices which WWE and Wittenstein used in storing, transmitting, or receiving TNA’s confidential information and trade secrets.  The purpose of this requirement is to allow TNA to inspect WWE and Wittenstein’s computers for use of TNA’s confidential information and trade secrets.

As a condition to entering the Restraining Order, TNA was required to post a $30,000 bond.

The May 24, 2012 TRO was later dissolved as to WWE.  After a hearing, the Court determined that WWE posed no threat of immediate or irreparable harm to TNA and had already returned TNA’s property.  WWE also committed to not solicit TNA’s wrestling talent and to preserve its computers and other devices for inspection at a later date.

While the TRO seems to have had little effect on WWE, because WWE had already taken corrective action with respect to TNA’s confidential information and trade secrets, in other cases such a comprehensive TRO and/or temporary injunction could prove to be costly.  A new employer could suffer loss of business, damages for interfering with a competitor’s contracts, significant costs for litigation, and loss of reputation.  As we said earlier, employers should always be aware of and protect themselves against potential liability when hiring an employee who may possess a former employer’s confidential trade secrets. If you have any questions for your business on trade secrets or liabilities when hiring an employee, don’t hesitate to contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Preparing for a Smack Down: Local Wrestling Company Sues Former Employee and World Wrestling Entertainment for Trade Secrets Violation

A local professional wrestling promotions company, TNA Entertainment, LLC (“TNA”), has sued former employee, Brian Wittenstein, and direct competitor, World Wrestling Entertainment, Inc. (“WWE”), for unlawfully using TNA’s trade secrets against them in unfair competition.  The case, entitled TNA Entertainment, LLC v. Wittenstein and World Wrestling Entertainment, Inc., was filed on May 23, 2012 in the Davidson County Chancery Court, Docket No. 12-746-III and alleges that Wittenstein and WWE violated Tennessee’s Uniform Trade Secrets Act.

According to TNA, Wittenstein was terminated from the company on August 3, 2011.  In connection with his separation, Wittenstein entered into a Separation Agreement and General Release (the “Agreement”), which expressly prohibited him from disclosing TNA’s confidential trade secrets, including information about TNA’s contracts with other wrestling talent.

TNA claims that Wittenstein violated the agreement by downloading TNA’s company policies, contractual agreements with other wrestling talent, and detailed information about its wrestling talent (including compensation). TNA then claims that Wittenstein disclosed the gathered information to his new employer, and direct competitor of TNA, WWE.  TNA asserts that WWE’s possession and use of TNA’s confidential trade secrets provide WWE an unfair competitive advantage regarding wrestling talent.

TNA alleges that WWE has used TNA’s confidential trade secrets to solicit wrestling talent currently, under contract with TNA, and encourage them to join WWE.  Wrestler Ric Flair is a recent example of a client that TNA claims attempted to terminate his exclusive contract with them to sign up with WWE.

To date, the court has entered a temporary restraining order, prohibiting WWE from using TNA’s confidential information.  Though this case is relatively new, it is a prime example of how costly unlawful use of trade secrets can be to former employees and new employers.  Under the Tennessee Uniform Trade Secrets Act, the unlawful user of trade secrets can be liable for the plaintiff’s actual loss caused by the misappropriation of trade secrets and any “unjust enrichment.”  In certain cases, the defendant may also be liable for “exemplary damages” resulting in up to twice the award for the plaintiff’s damages and the plaintiff’s attorney fees.

Ultimately, employers should always be aware of and protect themselves against potential liability when hiring an employee who may possess a former employer’s confidential trade secrets. If you need more information on confidential trade secrets and defenses against former employees, please contact any of the Burr & Forman Non-Compete & Trade Secrets team members for assistance.

Court Ruling Helps Define Factors Used in Trade Secret Classification

What is an allograph? And why doesn’t a company’s sterilization process violate the trade secrets of another company that allegedly invented and protected the sterilization protocol?  And why, you might ask, do these questions appear on our blog?

First, an allograph is a transplant of tissue from one person to a genetically dissimilar person. To successfully complete this transplant, you must sterilize the human tissue. In April 2012, Florida’s Fifth Circuit of Appeal ruled on a case involving allographs: Duane Duchame, Tai T. Huynh, et al. v. Tissuenet Distribution Services, LLC, et al., 37 Fla. L. Weekly D875a.

This case established several factors that Florida courts now use in determining whether to uphold injunctions enforcing trade secrets. These factors are important when recognizing the undeniable link between success with a trade secret claim and the existence of a valid non-compete agreement.

The court ultimately decided in a reversal of the lower court’s temporary injunction in this sterilization case, based on several things.

  • The chemicals used in the case were well-known in the industry and therefore use of them did not constitute qualities of a trade secret.
  • The former employee who created the sterilization protocol did not use a direct replica of the system for a new employer. Rather, he “used his education, knowledge, skill, and experience” to formulate a protocol for his new employer, indicating it was a new creation instead of a stolen trade secret.
  • And most importantly, if the plaintiff wanted to prevent the departed employee from working for a competitor, then the plaintiff should have issued a non-compete agreement to the former employee—which they did not do.

This case stands demonstrates two propositions that all employers seeking to protect trade secrets should remember.  First, if a trade secret exists, it should be kept secret.  Additionally, verify that it does qualify as a trade secret. If you use industry-known materials and use them in a special or untraditional manner (i.e. the sterilization protocol in this case), make sure you can prove in court that your methods are significantly different enough to classify them as trade secrets, and not merely a variation of a widely-accepted process.

Second, if you have a key employee capable of taking their talents to a competitor which could adversely impact your business, then you should always consider executing a valid non-compete agreement to protect your company.  In the Tissuenet case discussed above, it is impossible to say whether or not a valid non-compete agreement would have justified the plaintiff’s claims, but it is likely that the lack of a valid non-compete agreement caused the fatal blow.  Are trade secret claims and non-compete claims different?  Of course! However, as this example has demonstrated, they are often compatible tools working with sensitive information and skilled employees.

For more information, if you have any questions about trade secrets or non-compete agreements, or if you have an unfair competition issue, please contact any of the Burr & Forman’s Non-Compete & Trade Secrets team members and we will be happy to assist you.

 

Other articles you may be interested in:

What is a Trade Secret?

Key Ingredients for an Effective Non-Compete Agreement