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Defending Former Employee On Non-Compete Or For Misappropriation Of Trade Secrets? Read This

Do you really have to rush to Court to obtain an injunction for a misappropriation of trade secrets?  Maybe not.  But for an injunction enforcing a non-compete agreement, maybe yes.  The Plaintiff in American Air Filter Co. v. Price, 2017 NCBC 9 didn't get its non-compete enforced (partly due to its delay in filing suit), but that same delay didn't prevent it from getting an injunction to block its former employee from disclosing its trade secrets to his new employer.

Employers Who Wait Too Long To Seek An Injunction To Enforce A Non-Compete Run A Risk

First, as to non-compete agreements, it's best to move quickly if you want to enjoin a former employee from violating her covenant not to compete.  The Plaintiff in American Air Filter Co. v. Price waited nearly four months to seek a preliminary injunction.  Judge McGuire said its lack of urgency refuted its claim of the irreparable harm essential to the entry of an injunction.

He said that:

It is . . . significant that Plaintiff learned Price was employed with [a competitor] in late August, 2016, but did not file this action until November, 2016, did not seek a TRO to enforce the non-competition covenant, and did not move for a preliminary injunction until December 9, 2016. Plaintiff’s lack of urgency in seeking injunctive relief counsels against the idea that it is likely to suffer irreparable harm.

Op. ¶29 (emphasis added).

The same delay didn't affect Plaintiff's proof of irreparable harm as to the threatened disclosure of its trade secrets.  Judge McGuire said that:   

The acquisition and potential disclosure or use of the information in Plaintiff’s confidential databases, which contain extensive data collected by Plaintiff from its customers and proprietary costing formulas, would cause irreparable harm to the Plaintiff.

Op. ¶51.

Defending A Former Employee Accused Of Misappropriating Trade Secrets

The more interesting points of American Air Filter concern what is necessary to make out the requisites for a trade secrets injunction, and how a former employee can defend against one.

First, Judge McGuire held that it is not necessary to show that misappropriation of a trade secret  has actually occurred in order to obtain an injunction under the TSPA.  Op. ¶40.  There's nothing groundbreaking here.  The COA held in  Horner Int’l Co. v. McKoy, 232 N.C. App. 559, 569-70, 754 S.E.2d 852, 859-60 (2014), that a "threat of misappropriation was sufficient to warrant an injunction under the TPSA.  And the language of the statute itself does not require actual misappropriation for an injunction.  It says that "actual or threatened misappropriation of a trade secret may be preliminarily enjoined."  N.C. Gen. Stat. § 66-154(a).

Rebutting The Trade Secret Plaintiff's Burden Of Proof

There is a difficult issue regarding the burden of proof in making out a trade secrets case.  You might think that would be an easy matter.  After all, North Carolina's version of the Uniform Trade Secrets Act contains a provision titled "burden of proof." That provision is not present in the Uniform Act.  It says that:

Misappropriation of a trade secret is prima facie established by the introduction of substantial evidence that the person against whom relief is sought both:

(1)        Knows or should have known of the trade secret; and

(2)        Has had a specific opportunity to acquire it for disclosure or use or has acquired, disclosed, or used it without the express or implied consent or authority of the owner. 

This prima facie evidence is rebutted by the introduction of substantial evidence that the person against whom relief is sought acquired the information comprising the trade secret by independent development, reverse engineering, or it was obtained from another person with a right to disclose the trade secret. This section shall not be construed to deprive the person against whom relief is sought of any other defenses provided under the law. 

N.C. Gen. Stat. § 66-155.

All of the bases for rebuttal of the prima facie case in North Carolina's statute assume that the Defendant has acquired the trade secrets.  What about a Defendant who had access to the trade secrets but defends on the basis that she never acquired or used trade secrets at all? Are there any other ways to rebut the prima facie case than those specified in the statute?

Judge McGuire framed the problem this way:

If these grounds were exclusive, an absurd result would follow: Every employee in North Carolina who had access to her employer's trade secrets but did not acquire them would have to go to trial to fend off the employer's claim of misappropriation.

Op. ¶42 (quoting RLM Communications, Inc. v. Tuschen, 831 F.3d 190, 200-01 (4th Cir. 2016).

The author of the RLM decision from the Fourth Circuit relied upon by Judge McGuire, navigating in territory without precedent for a guide, said that "[w]e do not think the Supreme Court of North Carolina, which has not had occasion to consider the meaning of the statute, would adopt such an interpretation." 

If your reaction, like mine, was what expertise could a federal Fourth Circuit Judge have to offer regarding how the NC Supreme Court might interpret North Carolina state trade secrets law, we are wrong.  The author of the RLM decision was Judge Albert Diaz.  If you don't remember Judge Diaz, he was a former (the second) Judge on the NC Business Court. He was nominated by President Obama in 2009 to serve on the Fourth Circuit and confirmed not long after his nomination.

So what is the standard applied to a former employee who admits that he had access to trade secrets, but defends on the basis that he did not acquire them?  Judge McGuire, relying on the RLM decision, said that:

Evidence that a former employee had access to, and therefore an 'opportunity to acquire,' an employer’s trade secrets, without more, is not sufficient to establish a prima facie case of misappropriation.  Rather, the employer must establish either that the former employee accessed its trade secrets without authorization or provide other sufficient evidence of misappropriation to raise an inference of actual acquisition or use of its trade secrets. 

Op. ¶45 (emphasis added).

Adopting that somewhat more difficult standard didn't help the Defendant before Judge McGuire.  He was working for a direct competitor of the Plaintiff in pretty much the same job he had held with the Plaintiff.  The Defendant had continued to access the Plaintiff's computer systems after being offered a job by the corporate Defendant.  Also, when the individual Defendant resigned from the Plaintiff, he didn't inform his employer that he was going to work for a competitor.  And he continued to access Plaintiff's trade secret information after he resigned.

Judge McGuire found that these facts established a likelihood of success on the merits, and granted a preliminary injunction prohibiting the individual Defendant from disclosing the Plaintiff's trade secrets.

Copyright © 2017, Brooks, Pierce, McLendon, Humphrey & Leonard LLP

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About this Author

Mack Sperling, Brooks Pierce, Greensboror, Corporate Litigation, Technology
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Mack was born and grew up in New York, and graduated from Union College in Schenectady, New York, with honors in Political Science and Psychology. He received his law degree from the University of North Carolina at Chapel Hill, with honors, in 1983. He was an editor of the North Carolina Law Review and was elected to the Order of the Coif.

After graduation from law school, Mack was law clerk to Judge Frank W. Bullock, Jr. of the United States District Court for the Middle District of North Carolina, from 1983-84. He has also served as...

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