Trade Secret Litigation - An Overview
William M. Corrigan, Jr.1 |
Jeffrey L. Schultz2 |
This article includes a thorough analysis of the Missouri Uniform Trade Secrets Act and Missouri state and federal decisions that analyze the act, along with some practical considerations for protecting trade secrets. It also includes a discussion of discovery strategy in a trade secrets case.
I. Introduction
Trade secret litigation often involves “high stakes” or “bet-the-business” cases. For example, in February 2007, in a case involving the misappropriation of trade secrets, the Eighth Circuit Court of Appeals affirmed a jury verdict totaling more than $2 million in actual and punitive damages.3 Moreover, in 2004 the Eighth Circuit upheld an award of punitive damages in another trade secrets case, which it “remitted to $7 million.”4 As far back as 1997, General Motors and Volkswagon reached a $1.1 billion settlement in a trade secrets case concerning a former senior executive from General Motors who joined Volkswagen.5 Because trade secrets can be of tremendous value to businesses, the protections provided by the Missouri Uniform Trade Secrets Act (“MUTSA”) can be of critical importance to one’s clients.
II. Missouri Uniform Trade Secrets Act
A. Overview
While federal law protects some intellectual property rights, such as patents, copyrights and trademarks, the laws of each individual state generally protect trade secret rights. In 1979, the National Conference of Commissioners on Uniform State Laws adopted the Uniform Trade Secrets Act, which codified the principles of common law trade secret protection. Since then, 43 states have adopted some form of the act.
“The Missouri legislature adopted the MUTSA in 1995.” 6 Thus, the MUTSA is a relatively recent and also significant addition to Missouri businesses’ arsenal for protecting their competitively sensitive information. As a result of the pervasive use of computers in business today, and the ease with which information is transmitted, the protections provided by the MUTSA are becoming increasingly more important to many different businesses, large and small. The MUTSA’s flexible remedial provisions make it an especially effective tool for protecting easily misappropriated electronic information.
The MUTSA provides remedies for misappropriation and threatened misappropriation of a company’s trade secrets by a former employee (or any third party) with or without a non-compete agreement.7 Pursuant to the MUTSA, a plaintiff may be entitled to compensatory damages, punitive damages, and/or injunctive relief if the plaintiff can prove: (1) the information at issue constitutes a trade secret; and (2) actual or threatened misappropriation by the defendant.8
B. What Is A Trade Secret?
The MUTSA defines a trade secret as:
technical or nontechnical data, a formula, pattern, compilation, program, device, method, technique, or process that . . . [d]erives 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.9
The MUTSA further requires that the information be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”10
“The existence of a trade secret is a conclusion of law based on the applicable facts.”11 In addition to the two key limitations set forth in the MUTSA, Missouri courts sometimes rely on six factors from the Restatement (First) of Torts, which pre-date the MUTSA, in determining whether information is a trade secret:
(1) the extent to which the information is known outside [the plaintiff’s] business;
(2) the extent to which it is known by employees and others involved in [the] business;
(3) the extent of [the] measures taken by [the plaintiff] to guard the secrecy of the information;
(4) the value of the information to [the plaintiff] and [its] competitors;
(5) the amount of effort or 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.12
Although these factors “are not part of the Uniform Trade Secrets Act, the act essentially incorporates these factors in its definition of trade secrets.”13
1. What Type of Information Has Been Determined to Warrant Trade Secret Status?
Information need not rise to the level of the Coca-Cola formula or the Kentucky Fried Chicken recipe to qualify as a trade secret. The following information qualified as a trade secret under the MUTSA:
• detailed customer contacts, product specifications, price information and material requirements contained in a book;14
• “dimensions and tolerances” for a product, engineering drawings, “product pricing information, customer-specific product purchases, [and] quantities of products” purchased by specific customers;15
• lead sheets and customer files containing proprietary computer analyses of potential customers’ financial needs;16
• advertising materials and marketing plans presented at a company’s annual planning meeting, changes and additions to services offered to customers, and compensation and pricing issues;17
• a concept that solved a problem for a type of financial product;18
• rail testing technology, marketing strategies, and pricing structures;19 and
• insurers’ specific market share and premium data for residential insurance broken down by specific zip codes.20
Additionally, before the adoption of the MUTSA, Missouri courts found that customer lists21 and a process for manufacturing epoxy resin rods reinforced with fiberglass22 were trade secrets under the Restatement of Torts. A discussion of the leading cases is set forth below.
In Lyn-Flex West, Inc. v. Dieckhaus, the court addressed whether a “price book” containing a detailed compilation of customer contacts, product specifications, “material requirements and price information” constituted a trade secret.23 The plaintiff, a shoe insole manufacturer, presented “evidence that the information [was] not known outside of the business” and the information was not independently known by its employees. “[T]he book represented a compilation of many years of experience in the business of manufacturing insoles,” and testimony indicated that the pricing information in the book would be valuable to competitors. Also, “the specifications and price information could not be easily duplicated or properly acquired by others,” as it would take a year or more to recreate the information contained in the price book.24 Accordingly, the court held that this information constituted a trade secret.25
More recently, the Eighth Circuit, applying Missouri law, concluded that certain customer lead sheets and loan files constituted trade secrets.26 In Conseco Finance Servicing Corp. v. North American Mortgage Co., the defendant solicited and hired “a substantial number of Conseco’s office managers and loan originators,” and encouraged its employees to use Conseco’s loan files and lead sheets.27 The loan files contained Conseco’s customers’ financial statements, “loan applications, appraisals, income calculation worksheets, tax returns,” salary information, and bank statements, all of which allowed Conseco to analyze its customers’ specific financial needs. The defendant asserted that much of the information in the lead sheets could be purchased from sources accessible to the public. Conseco countered that while some of the information was publicly available, “its proprietary computer program provide[d] a unique depth of information that [could not] be obtained from alternative sources and its loan files contained confidential customer information.”28 The court agreed that both the lead sheets and the loan files constituted trade secrets under the MUTSA because the lead sheets were a product of a specialized and unique computer program and the information in the loan files placed Conseco in the unique position of being able to identify its customers’ financial needs.29 The court observed that Conseco derived an economic benefit and a unique market position from this information.30
One court determined that residential insurance premium data and market share data broken down by zip codes, which residential insurers provided to the Missouri Department of Insurance (“MDI”) pursuant to state regulations, deserved trade secret status.31 In American Family Mutual Ins. Co. v. Mo. Dep’t of Ins., various insurance companies filed a petition to enjoin the MDI from disclosing any of this data pursuant to a Sunshine Act and Public Records Law request on the grounds that this information constituted a trade secret, thereby rendering it exempt from disclosure under those acts.32 In concluding that this data constituted a trade secret, the court observed that the information was not known outside of MDI, “that the insurance companies only allowed a limited number of employees…access to [this] information; that the insurance companies utilized extensive measures to guard the [confidentiality] of the information; that the companies spent significant effort and money in developing the information at issue; and that it would be difficult for a competitor to obtain [this] data … on its own.”33 The court found that the data derived independent economic value from not being readily ascertainable by proper means; the plaintiffs’ experts testified that the zip code information can be an important indicator of where an insurer is successful in marketing its policies and allow a competing insurer to determine which other insurers actually compete in particular zip codes and adjust its rates as necessary in that particular zip code.34 Because the insurance companies’ experts testified that the “competitive value” of the information “extended for a minimum of five years,” the court rejected the argument that the three-year-old data was stale and had little economic value.35
In Merrill Lynch Pierce Fenner & Smith v. Zimmerman, the United States District Court for the District of Kansas found that confidential records containing the names, addresses, and financial information of clients for whom the defendant worked while an employee at Merrill Lynch were “compilations” deserving trade secret status under the MUTSA.36 The Zimmerman court observed that Merrill Lynch derived independent economic value from the fact that the documents containing this compilation of information were “not generally known to or properly readily ascertainable by its competitors.”37
In Bancorp Services, L.L.C. v. Hartford Life Ins. Co. (“Bancorp II”), the plaintiff claimed that a concept that solved a problem for a financial product constituted a trade secret.38 The concept consisted of a combination of three separate ideas generally known in the financial services industry. The plaintiff put forth testimony, however, that the combination of these ideas, not the individual ideas, constituted its trade secret and that the combination was not generally known in the industry. Consequently, the court found that there was sufficient evidence from which the jury could find that the financial product concept was a trade secret.39
Finally, in A.B. Chance v. Schmidt, a pre-MUTSA misappropriation of trade secrets case in which the Restatement (First) of Torts was applied, the plaintiff claimed that a process for manufacturing “epoxy resin rods and tubes reinforced with fiberglass” was a trade secret.40 In concluding that the process was a trade secret, the court observed that: (1) the defendant’s employment agreement referred to the processes as “confidential, proprietary and in the nature of trade secrets;” (2) the research “took over 5 years and cost [over] $1 million;” (3) the plaintiff controlled “70 to 100 percent” of the market for the process; (4) the plaintiff restricted access to the process; and (5) the process was “highly complicated [and] not susceptible to duplication.”41 In addition to these factors, the court also expressly noted that the defendant agreed not to work in the field in which the process was used while the temporary restraining order was in effect. The court believed that the defendant’s “acquiescence at trial and on appeal to the file being sealed from the view of outsiders, indicated his tacit agreement that the . . . process is a trade secret.”42 Thus, pursuant to A.B. Chance, under certain circumstances a defendant’s temporary agreement not to work in a field in which the information may be used and acquiescence to the court file being sealed may be interpreted by a court as the defendant’s tacit agreement that the information at issue is actually a trade secret.43
2. Reasonable Steps Required To Maintain Secrecy
Information is not entitled to protection as a trade secret unless it is either secret or the employer took “reasonable” steps “under the circumstances to maintain its secrecy.”44 Matters of public knowledge, of course, are not trade secrets.45 The law does not, however, impose a burden on businesses to take every conceivable step to protect the confidentiality of its trade secret information. Such a burden often would be impractical and costly. Rather, the test is only whether the business took reasonable steps.46
In Conseco, witnesses for both parties testified that all Conseco employees recognized the information contained in the customer lead sheets and files as confidential and, therefore, not to be disclosed. Furthermore, “Conseco’s Employee Handbook specifically state[d] that ‘non-public information about customers, dealers, and others is strictly confidential.’”47 “Conseco require[d] all employees to sign a form” acknowledging “their receipt and understanding of the contents of” the employee handbook.48 Consequently, the court found that Conseco took reasonable steps to ensure the secrecy of its lead sheets and loan files under the MUTSA.49
The absence of a confidentiality agreement or “confidentiality” stamps on the alleged trade secret materials is not dispositive of the issue of reasonable efforts to maintain confidentiality.50 In Lyn-Flex West, Inc. v. Dieckhaus, the plaintiff offered the following evidence that its price book, which it claimed to be a trade secret, was subject to reasonable efforts to maintain its secrecy: plaintiff’s “employees knew the book was confidential;” plaintiff limited access to the book; plaintiff “locked [the book] in an office at night;” plaintiff shredded old copies of the book; the book was only taken from the office during sales calls; and only one employee could print the book.51 The defendants argued that the book was not confidential since it was not stamped as confidential and employees with access to it did not sign a confidentiality agreement.52 The court disagreed. Instead, the court found that the lack of a stamp or a confidentiality agreement was not conclusive, as there were other indications that the book was treated as confidential. The court also observed that the defendants, as former “officers of [the plaintiff,] owed independent fiduciary duties” to the plaintiff, including the duty “to protect trade secrets from disclosure.”53
Although the absence of a written confidentiality agreement between the plaintiff and the defendant is not dispositive of the issue of reasonable efforts, a well-drafted confidentiality or non-disclosure agreement is helpful. In Bancorp Services, L.L.C. v. Hartford Life Ins. Co. (“Bancorp I”), the court observed that the existence of such an agreement “is an important factor to consider in determining whether reasonable steps were taken.”54 In Bancorp I, the plaintiffs claimed that certain information they disclosed to a consultant, who disclosed the information to another entity, was a trade secret.55 Although there existed certain standard procedures to maintain confidentiality of the alleged trade secret information — procedures such as “(1) limiting the number of people [with] access to the information; (2) limiting the scope of distribution; (3) requiring confidentiality agreements; [and] (4) placing confidential or proprietary notices on documents circulated outside of the company” — the consultant never actually entered into any agreement to treat the information as confidential.56 Moreover, plaintiffs presented no evidence to indicate that they actually followed any of the other procedures. Accordingly, the Bancorp I court held that the efforts to protect the alleged trade secrets were not reasonable.57
Courts should not consider a defendant’s improper conduct in disclosing the information when assessing whether a plaintiff took reasonable steps to maintain the secrecy of its trade secret.58 In Bancorp II, the defendants argued that the plaintiff failed to take reasonable steps to protect its trade secret because the “plaintiff ‘tolerated’ disclosures made by [the] defendants” of the plaintiff’s alleged trade secret. The court rejected this argument, expressly noting that “[a] defendant cannot rely on its own improper disclosures to support that argument that the trade secrets at issue are no longer secret.”59
Finally, in Carboline v. Lebeck, the court found that Carboline, the former employer, did not present convincing evidence that it took reasonable measures to maintain the secrecy of its trade secret documents.60 Carboline claimed it “maintained strict security measures with respect to computer access” by requiring all employees to sign an employment agreement with a confidentiality provision. The court, however, noted that Carboline “did not take more specific measures.” For example, some of Carboline’s alleged trade secret information included tests from outside laboratories; yet, Carboline did not enter into confidentiality agreements with these laboratories.61 Other information was sent to “‘qualified’ customers,” but Carboline neither “indicate[d] how it determined who was qualified nor … present evidence that it kept track of which customers received the data.” Moreover, the information did not contain a confidentiality label limiting distribution. Finally, Carboline did not establish that it restricted its salespeople’s use of this information.62 In light of these shortcomings, the court concluded that Carboline did not take reasonable steps to protect its claimed trade secrets.63
C. Practical Considerations to Protect Trade Secrets
Based on the applicable case law, employers can take a number of steps to institute reasonable measures to safeguard trade secrets:
• Requiring employees to sign separate confidentiality agreements;
• Including a separate confidentiality policy within an employee handbook that includes an acknowledgment by the employee that the employee will abide by the terms of the employee handbook, including the confidentiality policy;
• Limiting access to electronic data through the use of passwords or other safeguards;
• Stamping key documents “confidential;”
• Storing trade secret information in locked cabinets;
• Prohibiting the copying of trade secret information; and
• Instituting and enforcing some guidelines or procedures for employees using the trade secret information off the premises of the employer.
As already noted, the standard is whether there were “reasonable measures,” not foolproof safeguards. Thus, it is not necessary for a business to institute all of these measures. Courts are mindful of costs and practical considerations, and look to the facts of the particular case in determining whether reasonable measures were taken.
In addition to the above-mentioned steps to safeguard information, an employer should remind a departing employee during the employee’s “exit” interview of the employee’s promises contained within a confidentiality agreement. The employer should ask the former employee whether he or she possesses copies of any trade secret data. Specifically, an employer should ask whether the employee made any hard copies of the trade secret information, whether the employee took or emailed any electronic data to a new employer or to a home computer, or whether the employee downloaded electronic data onto a disk. Finally, the employer should provide the departing employee with a copy of the executed confidentiality agreement.
D. Actual or Threatened Misappropriation
1. Overview
In addition to a finding that the information at issue constitutes a trade secret, there must be “actual or threatened misappropriation” before a plaintiff is entitled to relief under the MUTSA.64 Section 417.450(1) of the MUTSA sets forth a long list of conduct that constitutes misappropriation. Misappropriation includes:
[1.] Acquisition of a trade secret … by another person who [either] knows or has reason to know that the trade secret was acquired by improper means; or
[2. Disclosure or use of a trade secret … without [the] express or implied consent by another person who:
a. Used improper means to acquire knowledge of the trade secret; or
b. Before a material change of position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake; or
c. At the time of [the] disclosure or use, knew or had reason to know that knowledge of the trade secret was:
i. Derived from or through a person who had utilized improper means to acquire it; or
ii. Acquired under circum-stances giving rise to a duty to maintain its secrecy or limit its use; or
iii. Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.65
The case law cogently states that misappropriation under the MUTSA generally occurs in two ways: (1) when one acquires a trade secret through improper means, or (2) when one discloses a trade secret without consent, knowing or having reason to know that the secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use.66
“‘Improper means’ includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”67 The mere acquisition of a person’s trade secrets through proper and legal means is not a misappropriation that will give rise to a violation of the MUTSA.68
In Lyn-Flex West, the court concluded that the plaintiff proved misappropriation of the plaintiff’s price book by showing that the defendants took and used the price book for a competitor without the plaintiff’s consent.69 The plaintiff also presented testimony that it required its employees to return the book to its premises immediately after making sales calls and, thus, the defendants used improper means to acquire the price book.70 The court observed that even if one of the defendants had authority to keep the book at his home, he was obligated to return it after he left the plaintiff, pursuant to his fiduciary duties as an officer of plaintiff.71 Although there was no evidence to show that “the other defendants participated in removing the book from [the] plaintiff’s premises, they used” it for the benefit of their new employer while knowing or having reason to know that it was confidential and acquired when they “had a fiduciary duty to maintain its secrecy.”72
Similarly, the Conseco court analyzed the issue of actual or threatened misappropriation.73 One of Conseco’s former employees removed at least 14 loan files from Conseco’s offices and brought to the defendant’s offices. Another former employee “made copies of an unspecified number of customer loan files shortly before his resignation.”74 A third former employee copied Conseco’s settlement statements, copied thousands of Conseco’s lead sheets and sent them to defendant, and stated that his goal was to put Conseco out of business. Moreover, the new employer’s management consented to the document duplication by its employees.75 In light of the foregoing, the court held that there was ample evidence supporting Conseco’s MUTSA claim. The court expressly noted that although one of the employees claimed that he copied files in order to help a fellow employee transition into a new position within Conseco, his copying of files contemporaneously with his resignation from Conseco and hiring by defendant created “at least the threat of misappropriation.”76
There is no “misappropriation,” as the term is used in the MUTSA, where the owner of the trade secret discloses or uses his trade secret for his employer in exchange for employment. In Khazai v. Watlow Electric Manufacturing Company, the plaintiff, a former employee of the Watlow Electric Manufacturing Company, alleged that during the course of his employment, Watlow “wrongfully induced him to disclose” ideas for an electric resistance heater that plaintiff developed before he went to work there.77 The plaintiff claimed that the ideas were trade secrets under the MUTSA and that Watlow misappropriated them. The court agreed that the ideas constituted trade secrets, but rejected the argument that Watlow misappropriated the plaintiff’s scientific knowledge. Rather, the plaintiff agreed to use and develop for Watlow the information that he brought to his employment with Watlow. The plaintiff used this information in his employment with Watlow, for which he received agreed upon compensation, until his termination.78 Therefore, the court found that Watlow did not misappropriate the plaintiff’s scientific knowledge.79
One court found that a defendant misappropriated trade secrets when he “aided and abetted” in the misappropriation.80 In Insituform Technologies, Inc. v. Reynolds, Inc., the plaintiff alleged that an officer of the corporation that hired the plaintiff’s former employee was the “in-house architect” of a plan to transfer the plaintiff’s trade secrets by hiring plaintiff’s former employee. The officer knew of the knowledge and expertise possessed by the plaintiff’s former employee, as well as the confidential nature of this information and the former employee’s non-compete. After the plaintiff’s former employee began working for the defendant corporation, the former employee shared confidential information with the corporation. The court held that these allegations, if proved, could lead a reasonable jury to conclude that the officer aided and abetted the alleged acts of misappropriation in violation of the MUTSA.81
2. Inevitable Disclosure Doctrine
Under the inevitable disclosure doctrine, “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that [a] defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.”82 In PepsiCo, Inc. v. Redmond, a case arising under the Illinois Trade Secrets Act, the Seventh Circuit Court of Appeals applied the inevitable disclosure doctrine and held that the plaintiff, PepsiCo, showed a likelihood of success on its misappropriation of trade secrets claim. In reaching its conclusion, the court relied on the demonstrated inevitability that Pepsico’s former employee would rely on PepsiCo’s trade secrets in his new job with a competing beverage manufacturer (Quaker Oats Company) coupled with “the district court’s reluctance to believe that [the former employee] would refrain from disclosing [PepsiCo’s] secrets in his new position.”83
While employed by PepsiCo, the former employee was privy to and/or involved in the creation of PepsiCo’s trade secrets, including its annual strategic plan and an annual operating plan.84 PepsiCo alleged that its former employee could not help but rely on PepsiCo’s trade secrets as he helped to plot Quaker Oats’ new course, and that PepsiCo’s secrets would enable his new employer to achieve a substantial advantage by knowing exactly how PepsiCo will price, distribute, and market its products and being able to respond strategically. The former employee and Quaker Oats, on the other hand, asserted that they did not intend to use whatever confidential information the former employee possessed. 85 The district court found that Quaker Oats’ actions in hiring PepsiCo’s former employee and the former employee’s inaccurate description to PepsiCo of the position its competitor offered to him “demonstrated a lack of candor” and “proof of [his] willingness to misuse [PepsiCo’s] trade secrets.”86 The Seventh Circuit observed that “PepsiCo finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game.”87
Accordingly, the inevitable disclosure doctrine is a theory that can be used to prove “threatened” misappropriation under the trade secret act. However, no Missouri case has applied the inevitable disclosure doctrine to find a violation of the MUTSA.88 Although two Missouri cases expressly addressed the theory of inevitable disclosure, those courts found the doctrine inapplicable to the specific facts of those cases.89 In Carboline, the plaintiff contended that the defendant possessed knowledge that he would inevitably disclose to the plaintiff’s competitor.90 Similarly, in H&R Block Eastern Tax Services, the plaintiffs, relying on PepsiCo, argued that it was inevitable that plaintiffs’ former employees would disclose plaintiffs’ trade secrets to their new employer.91 Neither Carboline nor H&R Block Eastern Tax Services held that the inevitable disclosure doctrine was inapplicable under the MUTSA. Rather, the courts in each case carefully distinguished the facts before them from PepsiCo.92 The fact that these Missouri courts did not reject the inevitable disclosure doctrine as inapplicable to cases arising under the MUTSA leaves the door open as to whether under the appropriate facts this doctrine may be used to prove threatened misappropriation in Missouri.
It is important to note that under the inevitable disclosure doctrine, “the mere fact that a person assumed a similar position at a competitor does not, without more, make it ‘inevitable that he will use or disclose…trade secret information’ so as to ‘demonstrate irreparable injury.’”93 In H&R Block Eastern Tax Services, the court interpreted PepsiCo to mean that “demonstrated inevitability alone is insufficient to justify injunctive relief; rather, demonstrated inevitability in combination with a finding that there is unwillingness to preserve confidentiality is required.”94 In addition to “demonstrated inevitability,” the plaintiff at least must show: (1) the defendant will be making the same decisions for a competitor in the same areas covered by plaintiff’s trade secrets; and (2) the defendant was so involved with plaintiff’s trade secrets that the defendant cannot help but consider them while performing duties for the competitor.95
The real importance of the inevitable disclosure doctrine lies in the relief available when the doctrine is applicable—it can allow a company to prospectively enjoin a former employee from assuming his or her responsibilities with a new employer, operating similarly to a non-competition agreement where none exists.96 However, “[i]n seeking to enjoin a former employee’s… [employment with a competitor], plaintiff must do more than assert that a skilled employee is taking his abilities to a competitor.”97
E. Relief Available Under the MUTSA
Under the MUTSA, injunctive relief and actual and punitive damages are remedies available for misappropriation of trade secrets.98 In addition, the MUTSA provides that a “threatened mis-appropriation [of trade secrets] may be enjoined.”99
1. Injunctive Relief for Actual or Threatened Misappropriation
Injunctive relief under the MUTSA comes in many different forms. A plaintiff alleging actual or threatened misappropriation under the MUTSA may seek an injunction prohibiting the defendant’s use and disclosure of plaintiff’s trade secrets.100 A plaintiff also may seek an injunction prohibiting the defendant from soliciting plaintiff’s customers.101
a. Duration of Injunctive Relief
“A defendant [may] be enjoined only for the time it would take to produce and market the competitive product, absent the misappropriation.”102 The MUTSA expressly provides that an “injunction may be continued” for a reasonable time “to eliminate [any] commercial advantage that [w]ould be derived from the misappropriation.”103 However, an injunction prohibiting conduct for an “open-ended or indefinite period of time … is unreasonable and unenforceable.”104 For example, a trial court’s injunction that prohibits disclosure “to ‘any unauthorized person’ any ‘Confidential Information and/or Trade Secrets’ ‘during his/her employment or at any time thereafter’” was held to be unreasonable and unenforceable.105
In Synergetics, Inc. v. Hurst, the plaintiff sought “an injunction to keep defendants from using or disclosing, for as long as the information remains plaintiff’s trade secret, the dimensions and tolerances of plaintiff’s surgical forceps and scissors products, plaintiff’s pricing information, product information, product prioritization, and customer information.”106 The court observed:
In a case involving the mis-appropriation of trade secrets, Missouri courts employ the so-called “head start” rule . . . . Under that rule, [the prevailing party is] entitled to present evidence of how long it would have taken [defendant] to reproduce [the employer’s trade secrets], absent the mis-appropriation.… The head start rule is based on the premise that, by misappropriating trade secrets, [employees] were able to cut short the time it would otherwise have taken them to reproduce [the employer’s trade secrets]. 107
Applying the MUTSA, the district court granted the requested injunction for a prospective period of two years, which the court found was the amount of time the defendants would need to develop the information on their own through observation and investigation absent the misappropriation.108 The Eighth Circuit affirmed the injunction.109
A court must terminate an injunction “when the trade secret cease[s] to exist.”110 Accordingly, information otherwise protectible as trade secret may not warrant injunctive relief if it is stale at the time of the lawsuit or will quickly become stale. For example, in Carboline Company v. Lebeck, a former employer claimed as a trade secret a power industry marketing plan that its former employee created for fiscal year 1997, which ended before the former employer filed its lawsuit on November 25, 1997.111 The court concluded that the plan was not a trade secret and further observed that the former employee did not help to compose the plan for fiscal year 1998 and that much of the information in the plan was “readily available in trade publications.”112 The “[d]etermination of when trade secret information becomes stale cannot be made by reference to a bright line rule and necessarily requires fact specific consideration.”113
An aggrieved party must act promptly or risk limiting the right to otherwise available remedies. In Merrill Lynch Pierce Fenner & Smith v. Zimmerman, the plaintiff filed a lawsuit against the defendant for violation of the MUTSA and sought a temporary restraining order to prevent the defendant from using the alleged trade secrets.114 Plaintiff employed the defendant for more than six years as a financial consultant before he resigned and took a similar position with one of the plaintiff’s competitors.115 Prior to his resignation, the defendant made copies of certain of plaintiff’s trade secrets.116 After finding the plaintiff would “suffer irreparable injury” without a temporary restraining order (“TRO”), the court analyzed the public interest involved.117 Although the court recognized the “strong public interest” behind protecting trade secrets, the court stated that the fact that the plaintiff actually knew of the defendant’s misappropriation 16 days before filing the lawsuit mitigated the public interest element.118 Therefore, the court, in perhaps a harsh ruling, refused to enter a TRO with respect to customers who switched their accounts to the defendant’s new firm during this 16-day period before the plaintiff filed suit.119
b. Reasonable Royalty and Other Affirmative Acts
The MUTSA affords courts a great deal of discretion in the types of mandatory injunctive relief that courts may order. The MUTSA expressly provides that “[i]n exceptional circumstances, an injunction may condition future use [of a trade secret] upon payment of a reasonable royalty” for, at most, the period of time that use of the trade secret could be prohibited.120 “Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.”121 The MUTSA also generally provides that in “appropriate circumstances” a court may compel “affirmative acts to protect a trade secret.”122 The MUTSA does not explain what constitutes “appropriate cir-cumstances” nor does it specify what “affirmative acts” the drafters had in mind.
2. Damages for Misappropriation
The MUTSA also provides for damages, including “both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing the actual loss.”123 In order to prove damages, counsel should consider a forensic accountant to analyze and value the misappropriated trade secrets.
In addition to the other damages available under the MUTSA, a court may award punitive damages “[i]f the misappropriation is outrageous because of the misappropriator’s evil motive or reckless indifference to the rights of others.”124 In Conseco, the Eighth Circuit upheld the district court’s decision to award punitive damages but held that the amount awarded was unconstitutional.125 The court found that the defendant’s “conduct was ‘widespread and systematic’ and ‘reprehensible.’”126 The defendant’s management knew that employees worked for and were paid by both companies at the same time and, “[r]ather than undertake any investigation [or] corrective … action, it … use[d] the dual employment as a ‘model’ in other offices.”127 The defendant’s actions “involved trickery and deceit, and an utter disregard for Conseco and – even more heinously – the privacy of its customers.”128 Despite the outrageousness of the defendant’s conduct, the court found that the punitive award did “not comport with the requirements of the Due Process Clause” because of the significant variance between the $3.5 million actual damage award and the $18 million punitive award.129 The court remitted the punitive damages award to $7 million.130
F. Interplay Between MUTSA and Federal Intellectual Property Statutes
1. Claims Under the MUTSA Are Not Preempted by the Copyright Act
Claims under the MUTSA based on the copying of copyrighted information are not preempted by the federal Copyright Act.131 In Huckshold v. HSSL, L.L.C., the court observed that “[c]ourts that have been confronted with the question of preemption in the context of trade secret claims filed pursuant to a Uniform Trade Secret Law have consistently held that the law requires proof of ‘extra elements’ that takes the claims out of the preemptive reach of the Copyright Law.”132 The court noted that in order to prevail on his claim under the MUTSA, in addition to proving the copying required for a copyright infringement claim, the plaintiff also must prove that the software at issue was a trade secret that was misappropriated and that one of the defendants was under a duty to keep it secret and limit its use.133
2. Information Revealed to the Public in a Patent Likely is Not Entitled to Protection as a Trade Secret
In a case pre-dating the MUTSA, the Supreme Court of Missouri held that where a product is patented and its formulations are disclosed to a competitor by a former employee, the company developing the product is not entitled to relief in an action for misappropriation of trade secrets because the product’s formulations were necessarily revealed in the patent.134 Since the MUTSA requires trade secret owners to make reasonable efforts to maintain the secrecy of their trade secret, information disclosed by its owner in a patent before the occurrence of any misappropriation likely will not be protectable as a trade secret. Rather, the remedy, if any, is a patent infringement claim. On the other hand, a trade secret disclosed by its owner in a patent after it was misappropriated by another may be entitled to some limited protection as a trade secret, and the misappropriating party may be liable for damages for any head-start it obtained by having access to the trade secret during the period before the patent is issued.135
III. Discovery Strategy Before and After Filing Suit
As technology makes it easier and quicker to store and transmit information, the following scenario is occurring with increasing frequency in highly competitive industries. An employee resigns abruptly to go to work for a competitor. Before the employee resigned, the employee had access to his former employer’s sensitive competitive information, such as customer lists, product pricing, profit margins, design specifications, or formulas. The former employer suspects that the employee took this valuable information and fears that the use of this information by its competitor will have a devastating impact on its ability to compete.
First, counsel for an employer should ascertain whether the former employee signed a non-compete agreement. Second, the employer should determine whether the employee misappropriated trade secrets to use in competition against the former employer.
Before filing suit, an employer should consider interviewing the supervisor or co-workers of the former employee. These interviews can provide important information regarding the types of information to which the employee had access and, potentially, the employee’s motives for leaving. Furthermore, an employer should consider a forensic examination of the employee’s computer. Capable forensic computer experts can quickly make a forensically-sound copy of any computer hard drives in question, and then perform searches using key terms. The cost of such a forensic examination may be recoverable as an element of damages under federal and Missouri computer tampering acts.136 Moreover, conducting a forensic review of a former employee’s computer is often critical in determining whether trade secrets were misappropriated. Specifically, the former employee’s computer should be searched for downloaded information or information emailed to a home or other computer. The strength of these cases can sometimes turn on whether there is a “smoking-gun” email transferring information to a home computer or email account or downloading sensitive data onto a computer disk.
Forensic evidence also can be a very important piece of evidence in persuading a court to enter a temporary restraining order to enjoin a former employee from using data or soliciting the former employer’s customers, even where a covenant not to compete does not exist. Courts often are more willing to enter a TRO if there is forensic evidence – such as an email – indicating that a former employee misappropriated electronic data with the intent of unfairly competing against a former employer.
Counsel for an employer who suspects that a former employee transferred electronic data should also send a “preservation letter” to the former employee, and perhaps the new employer, making demand on them to preserve and not delete any electronic data in their computer systems, both at the office and at home. With the advent of the new Federal Rules of Civil Procedure concerning discovery of electronically-stored information, it may not be critical to send a preservation letter in a case filed in federal court. However, the Missouri Rules of Civil Procedure currently do not have similar provisions for electronically-stored data. A preservation letter is prudent whether suit is filed in federal or state court.
Counsel representing the former employee or new employer should, at the initial client meeting, determine whether the former employee transferred any electronic data to the new employer, to a home computer or downloaded the data in some fashion. If so, counsel should ascertain whether the information is, in fact, a trade secret. Moreover, the information should be immediately returned to the former employer.
IV. Conclusion
The Missouri Uniform Trade Secrets Act can be a very effective, and sometimes critical, means to protect a business from unfair competition. Counsel should be aware of the MUTSA to properly advise clients on what constitutes trade secrets and how to safeguard such valuable competitive information.
Footnotes
1 Mr. Corrigan is a partner at Armstrong Teasdale LLP in St. Louis. He is a past president of The Missouri Bar. Corrigan concentrates his practice in business and personal injury litigation cases and has tried many jury cases in the state and federal courts in Missouri and several other states. He is listed in Best Lawyers in America.
2 Mr. Schultz is an associate at Armstrong Teasdale LLP in St. Louis, where he is a member of the firm’s litigation department. Schultz is engaged in the practice of contract, trade secrets, intellectual property, non-compete, insurance and business litigation. He previously co-authored a chapter on remedies and warranties under UCC Article 2 in the Missouri Bar CLE deskbook on Commercial Law.
*The authors extend their thanks to Steven J. Foristal for the research and drafting assistance he provided for this article while participating in Armstrong Teasdale LLP’s summer associate program.
2 Synergetics, Inc. v. Hurst, 477 F.3d 949 (8th Cir. 2007).
4 Conseco Fin. Serv. Corp. v. North Am. Mortgage Co., 381 F.3d 811, 825 (8th Cir. 2004).
5 Micheline Maynard, $1.1 Billion TRUCE Surprise End to Feud over Trade Secrets, USA Today, January 10, 1997 at 1B.
6 See BP Chemicals Ltd. v. Jiangsu Sopo Corp., 285 F.3d 677, 682 (8th Cir. 2002).
7 Sections 417.450, et seq., RSMo 2006. An action under the MUTSA must “be brought within five years after the misappropriation is discovered” or should have been discovered “by the exercise of reasonable diligence.” Section 417.461, RSMo 2006.
8 Sections 417.455.1 and 417.457, RSMo 2006.
9 Section 417.453(4), RSMo 2006. See also Conseco Fin. Serv. Corp., 381 F.3d at 818-19 (citing Lyn-Flex West, Inc. v. Dieckhaus, 24 S.W.3d 693, 697-98 (Mo. App. E.D. 1999)); Victoria’s Secret Stores, Inc. v. May Dept. Stores Co., 157 S.W.3d 256, 262 (Mo. App. E.D. 2004).
10 Section 417.453(4)(b), RSMo. See also Conseco Fin. Serv. Corp., 381 F.3d at 819.
11 Lyn-Flex West, Inc. v. Dieckhaus, 24 S.W.3d 693, 698 (Mo. App. E.D. 1999).
12 Id. (noting that “courts in states that have adopted the Act, have found that those factors provide guidance in determining whether the information in a given case constitutes trade secrets within the definition of the Act.”). See also Healthcare Servs. of the Ozarks v. Copeland, 198 S.W.3d 604, 611 (Mo. banc 2006); Am. Family Mut. Ins. Co. v. Mo. Dept. of Ins., 169 S.W.3d 905, 909-10 (Mo. App. W.D. 2005); AEE-EMF, Inc. v. Passmore, 906 S.W.2d 714, 721-22 (Mo. App. W.D. 1995).
13 Lyn-Flex West, Inc., 24 S.W.3d at 698.
14 Id. at 698-699.
15 Synergetics, Inc., 477 F.3d at 957.
16 Conseco Fin. Serv. Corp., 381 F.3d at 815, 819.
17 H&R Block Eastern Tax Services, Inc. v. Enchura, 122 F.Supp.2d 1067, 1074 (W.D. Mo. 2000). The Enchura court’s discussion of what materials constituted the plaintiffs’ trade secrets is arguably dicta. Although the court observed that plaintiffs were somewhat broad in their designation of materials as trade secrets and determined that some of the materials were not trade secrets, the court apparently never tried the issue of whether there were trade secrets. Rather, the court focused on the issue of whether there was threatened misappropriation of the alleged trade secrets. Id.
18 Bancorp Services L.L.C. v. Hartford Life Ins. Co. (“Bancorp II”), No. 4:00-CV-70 CEJ, 2002 WL 32727080, at * 2 (E.D. Mo. Nov. 20. 2002).
19 Sperry Rail, Inc. v. Herzog Services, Inc., CIV. A. No. 96-2244-GTV, 1996 WL 507305, at *5 (D. Kan. Aug. 5, 1996).
20 Am. Family Mut. Ins. Co., 169 S.W.3d at 908, 910-911.
21 Kessler-Heasley Artificial Limb Co., Inc. v. Kenney, 90 S.W.3d 181, 188 (citing National Rejectors, Inc. v. Trieman, 409 S.W.2d 1, 18-19 (Mo. banc 1966)).
22 A.B. Chance Co. v. Schmidt, 719 S.W.2d 854, 858 (Mo. App. W.D. 1986) (decided before the enactment of the MUTSA and applying the Restatement (First) of Torts trade secret factors).
23 Lyn-Flex West, 24 S.W.3d at 698-699.
24 Id. at 699.
25 Id.
26 Conseco Fin. Serv. Corp., 381 F.3d at 819.
27 Id. at 815-16.
28 Id. at 819.
29 Id.
30 Id.
31 Am. Family Mut. Ins., 169 S.W.3d at 908-913.
32 Id. at 908.
33 Id. at 910.
34 Id. at 911.
35 Id. at 913.
36 Merrill Lynch Pierce Fenner & Smith, Inc. v. Zimmerman, 42 U.S.P.Q.2d 1149, 1996 WL 707107 (D. Kan. 1996) (applying Missouri law). See also § 417.453(4), RSMo.
37 Id.
38 Bancorp II, 2002 WL 32727080, at *2.
39 A.B. Chance Co., 719 S.W.2d at 858.
40 Id.
41 Id.
42 Id.
43 Id.
44 Section 417.453(4)(b), RSMo 2006.
45 Kessler-Heasley Artificial Limb Co., 90 S.W.3d at 188-89 (citing AEE-EMF, Inc., 906 S.W.2d at 722 (Mo. App. W.D. 1995) and Steamatic of Kansas City, Inc. v. Rhea, 763 S.W.2d 190, 194 (Mo. App. W.D. 1988) and further noting that a “trade secret must be secret.”). See also Western Forms, Inc. v. Pickell, 308 F.3d 930, 934 (8th Cir. 2002) (noting that information that is common knowledge and/or obtainable without recourse to misappropriation is not protectable as a trade secret).
46 Bancorp Servs., L.L.C. v. Hartford Life Ins. Co (“Bancorp I”), No. 4:00-CV-70CEJ, 2002 WL 32727076, at *4 (E.D. Mo. Feb. 25, 2002).
47 Conseco Fin. Serv. Corp., 381 F.3d at 819.
48 Id. at 815.
49 Id. at 819.
50 Lyn-Flex West, Inc., 24 S.W.3d at 699. See also Bancorp II, 2002 WL 32727080, at *2.
51 Lyn-Flex West, Inc., 24 S.W.3d at 698-99.
52 Id. at 699.
53 Id. (citing A.B. Chance Co., 719 S.W.2d at 859).
54 Bancorp I, 2002 WL 32727076, at *4. It should be noted that confidentiality agreements are not “restrictive covenants” under Missouri law and, therefore, there is no “requirement under Missouri law that confidentiality agreements must contain time and geographic limitations to be valid.” Synergetics, Inc., 477 F.3d at 959.
55 Bancorp I, 2002 WL 32727076, at *1.
56 Id. at *4.
57 Id.
58 Bancorp II. 2002 WL 32727080, at * 3.
59 Id. (citing Religious Tech. Ctr. v. Netcom On-Line Commc’n Servs., 923 F.Supp. 1231, 1256 (N.D. Cal. 1995); Underwater Storage, Inc. v. United States Rubber Co., 371 F.2d 950, 955 (D.C. Cir. 1966); Int’l News Serv. v. Associated Press, 248 U.S. 215, 239 (1918)).
60 Carboline Co. v. Lebeck, 990 F.Supp. 762, 767-68 (E.D. Mo. 1997).
61 Id.
62 Id. at 767-68.
63 Id. at 768.
64 Sections 417.455 and 417.457, RSMo 2006.
65 Section 417.453(2), RSMo 2006.
66 BP Chemicals Ltd., 285 F.3d at 683; H&R Block Eastern Tax Services, Inc., 122 F.Supp.2d at 1074.
67 Section 417.453(1), RSMo 2006.
68 See North Kansas City Hosp. v. St. Luke’s Northland Hosp., 984 S.W.2d 113, 121 (Mo. App. W.D. 1998) (holding that the MUTSA did not provide protection for trade secrets where they were properly requested under the Missouri Sunshine Law because the MUTSA protects only those trade secrets that are misappropriated).
69 Lyn-Flex West, Inc., 24 S.W.3d at 699-700.
70 Id. at 699.
71 Id. at 699-700.
72 Id. at 700.
73 Conseco Fin. Serv. Corp., 381 F.3d at 819-20.
74 Id. at 820.
75 Id.
76 Id.
77 Khazai v. Watlow Elec. Mfg. Co., 201 F.Supp.2d 967, 972 (E.D. Mo. 2001).
78 Id.
79 Id.
80 Insituform Technologies, Inc. v. Reynolds, Inc., 398 F.Supp.2d 1058, 1063-1064 (E.D. Mo. 2005) (citing Grothe v. Helterbrand, 946 S.W.2d 301, 304-05 (Mo. App. S.D. 1997)).
81 Id. at 1064.
82 PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995) (applying the Illinois Trade Secrets Act).
83 Id. at 1271.
84 Id. at 1265.
85 Id. at 1265-1267.
86 Id. at 1270-1271.
87 Id. at 1270.
88 The inevitable disclosure doctrine also has not been adopted in a number of other states, including California and Florida. Bayer Corp. v. Roche Molecular Sys., Inc., 72 F.Supp.2d 1111 (N.D. Cal. 1999); Del Monte Fresh Produce Co. v. Dole Food Co., Inc., 148 F.Supp.2d 1326 (S.D. Fla. 2001).
89 See H&R Block Eastern Tax Services, Inc., 122 F.Supp.2d at 1074-1076; Carboline Co., 990 F.Supp. at 767.
90 Carboline Co., 990 F. Supp. at 767.
91 H&R Block Eastern Tax Services, Inc., 122 F.Supp.2d at 1074.
92 See Id. at 1074-1076; Carboline Co., 990 F.Supp. at 767.
93 PepsiCo, 54 F.3d at 1269 (emphasis added). See also Carboline Co., 990 F.Supp. at 767 (noting that to enjoin a former employee’s current work, a plaintiff must do more than assert that a skilled employee is taking his abilities to a competitor, and citing PepsiCo, Inc., 54 F.3d at 1269).
94 H&R Block Eastern Tax Services, Inc., 122 F.Supp.2d at 1075.
95 Id.
96 See PepsiCo, Inc., 54 F.3d at 1272. See Section E, infra, for a more detailed description on the relief available under the MUTSA.
97 Carboline Co., 990 F.Supp. at 767. In Walter E. Zemitzsch, Inc. v. Harrison, 712 S.W.2d 418, 422 (Mo. App. E.D. 1986), after finding that plaintiff’s former officer, who left and began competing against plaintiff, did not have knowledge of trade secrets but had customer contacts with plaintiff’s customers, the court observed “the proper means of protection is a non-competition agreement.” The Zemitzsch court found that the plaintiff was not entitled to injunctive relief for its failure to take precautions, namely, for its failure to obtain a non compete agreement. Id. at 422.
98 Section 417.455(1), RSMo 2006; § 417.457, RSMo 2006.
99 Section 417.455(1), RSMo 2006.
100 See, e.g., Synergetics, Inc., 477 F.3d 949.
101 Merrill Lynch Pierce Fenner & Smith, Inc., 42 U.S.P.Q. 2d 1149. Using the inevitable disclosure doctrine, in the appropriate circumstances a plaintiff may even be able to seek to enjoin the defendant’s employment by a competitor by arguing the employment will lead to the actual misappropriation of the former employer’s trade secrets. PepsiCo., Inc., 54 F.3d at 1272 (applying the Illinois Trade Secrets Act). See also H&R Block Eastern Tax Servs., Inc., 122 F.Supp.2d at 1073-76 (distinguishing PepsiCo without suggesting that the inevitable disclosure doctrine is inapplicable under the MUTSA). See also § D.2, supra.
102 Synergetics, Inc., 477 F.3d at 961.
103 Section 417.455(1) RSMo 2006.
104 Synergetics, Inc. v. Hurst, No. 4:04CV318DDN, 2005 WL 3358298 at *8 (E.D. Mo. 2005) (citing Khazai, 201 F. Supp.2d at 975).
105 Khazai, 201 F. Supp.2d at 975.
106 Synergetics, Inc., 2005 WL 3358298 at *9.
107 Id. at *8 (alterations in original) (quoting Khazai v. Watlow Elec. Mfg. Co., 201 F.Supp.2d 967, 975 (E.D. Mo. 2001)).
108 Id. at *9.
109 Synergetics, Inc., 477 F.3d 949.
110 Section 417.455(1) 2006.
111 990 F. Supp. 762, 767 (E.D. Mo. 1997). See also Victoria’s Secret Stores, Inc. v. May Dept. Stores, 157 S.W.3d 256 (Mo. App. E.D. 2004) (finding that confidential documents of May Department Stores became stale after around six months due to the seasonal nature of the information).
112 Carboline Co., 990 F. Supp. at 767.
113 Synergetics, Inc., 477 F.3d at 958.
114 Merrill Lynch Pierce Fenner & Smith, 42 U.S.P.Q.2d at 1149.
115 Id. at 1149.
116 Id. at 1151.
117 Id. at 1150-51.
118 Id. at 1151.
119 Id.
120 Section 417.455(2), RSMo 2006.
121 Id.
122 Section 417.455(3), RSMo 2006.
123 Section 417.457(1), RSMo 2006.
124 Section 417.457(2), RSMo 2006.
125 Conseco Fin. Serv. Corp., 381 F.3d at 824-25.
126 Id. at 818.
127 Id at 824.
128 Id.
129 Id. at 825.
130 Id.
131 Huckshold v. HSSL, L.L.C., 344 F. Supp.2d 1203 (E.D. Mo. 2004).
132 Id. at 1210.
133 Id. at 1209.
134 Carboline Co. v. Jarboe, 454 S.W.2d 540, 550 (Mo. 1970).
135 See Group One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041, 1049-1052 (Fed. Cir. 2001) (addressing a pre-MUTSA misappropriation of trade secrets claim arising under Missouri law and affirming the district court’s holding that the defendant could be liable “for any ‘head-start’ it obtained by having access to the confidential information in the time period between the date of the confidential disclosure and the date of the…publication” of the information in a Patent Cooperation Treaty application).
136 See § 537.525, RSMo 2006; 18 U.S.C. § 1030.