A REVIEW AND UPDATE: TRADE SECRETS RESTRICTIVE POST-EMPLOYMENT … · 2013-10-17 · A REVIEW AND...

A REVIEW AND UPDATE:TRADE SECRETS

RESTRICTIVE POST-EMPLOYMENT COVENANTSAND

INEVITABLE DISCLOSURE

By

GALE R. PETERSONCox & Smith

San Antonio, Texas

ADVANCED OIL, GAS AND ENERGY RESOURCES LAW 2002State Bar of TexasOctober 3-4, 2002

Dallas, Texas

CHAPTER 5

GALE R. PETERSONCox & Smith Incorporated

112 East Pecan, Suite 1800San Antonio, Texas 78205

Direct Line: 210/554-5327 Main No.: 210/554-5500E-Mail: [email protected] Fax No.: 210/226-8395

Gale R. (Pete) Peterson is senior partner in the intellectual property law department of theSan Antonio firm of Cox & Smith Incorporated and has been with the firm since 1978. Prior to1978, Mr. Peterson served as an examiner with the United States Patent and Trademark Office andas technical advisor to Chief Judge Howard Markey of what is now the U.S. Court of Appeals forthe Federal Circuit. Mr. Peterson holds a degree from the University of Nebraska in electricalengineering and received his Masters of Law Degree (with highest honors) from GeorgeWashington University. He is currently head of Division VI: Litigation, ABA Intellectual PropertyLaw Section, is past chairman of the Intellectual Property Law Section of the State Bar of Texas, andpast president of the Society of International Business Fellows. He is a frequent writer and speakeron intellectual property law topics and serves as special master for several courts including theS.D.N.Y., W.D. Wis., D. Conn., and E.D. Tx. He is the editor or author of a number ofpublications including three books: Understanding Biotechnology Law: Protection, Licensing, and IntellectualProperty Policies (Marcel Dekker, 1993), the Texas Chapter of State Trademark and Unfair CompetitionLaw (Clark Boardman), and Trade Secret Protection in an Information Age (Glasser LegalWorks, 1997).He serves as an instructor for the Patent Resources Group, Patent Bar Review course, and theFederal Circuit Current Awareness courses on §102, §103, and inequitable conduct topics.

A Review and Update: Trade Secrets RestrictivePost-Employment Covenants and Inevitable Disclosure Chapter 5

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Table of Contents

I. BACKGROUND................................................................................................................................... 1A. Defining a Trade Secret: Common Law and Statutory Sources of Trade Secret Definitions ....... 1

1. RESTATEMENT (FIRST) OF TORTS ......................................................................................... 12. Uniform Trade Secrets Act.................................................................................................... 13. RESTATEMENT (THIRD) OF UNFAIR COMPETITION ............................................................... 24. State Criminal Statutes .......................................................................................................... 35. Computer Fraud and Abuse Act (“CFAA”) .......................................................................... 36. The Economic Espionage Act of 1996 (“EEA”) ................................................................... 47. The Trade Secrets Act ........................................................................................................... 6

B. The Trade Secret Analysis ............................................................................................................ 61. The Fundamental Criteria...................................................................................................... 62. Trade Secret Protection May Exist In Combination Of Well-Known Elements ................... 73. The “Secrecy” Requirement .................................................................................................. 8

a. Relative Secrecy ............................................................................................................ 8b. Duty to Protect Confidentiality...................................................................................... 8c. Difficulty of Acquiring Through Proper Means.......................................................... 10d. Disclosure Outside an Obligation of Confidentiality .................................................. 10

4. Patent Law Type “Novelty” Is Not Required...................................................................... 12C. Potential Trade Secret Subject Matter......................................................................................... 13

1. Trade Secret Information..................................................................................................... 132. Non-Trade Secret Information............................................................................................. 153. Customer Lists..................................................................................................................... 16

a. Information Is Readily Ascertainable .......................................................................... 16b. Information Is Not Readily Ascertainable ................................................................... 16c. Work Effort In Developing.......................................................................................... 17d. Acquiring Customer Lists by “Improper Means”........................................................ 18e. Other Factors ............................................................................................................... 18F. RESTATEMENT (THIRD) OF UNFAIR COMPETITION ..................................................... 19g. Scope of Protection − Notifying of New Affiliation versus Solicitation..................... 20h. The “Memory Rule” .................................................................................................... 20

II. MISAPPROPRIATION ANALYSIS ................................................................................................. 22A. The RESTATEMENT (FIRST) Analysis.......................................................................................... 22

1. General Principles of Liability ............................................................................................ 222. “Improper Means” Under the RESTATEMENT (FIRST) OF TORTS § 757.............................. 223. Disclosure or Use ................................................................................................................ 23

B. The UTSA Analysis .................................................................................................................... 241. Acquisition By Improper Means ......................................................................................... 242. Disclosure Or Use................................................................................................................ 25

C. The RESTATEMENT (THIRD) OF UNFAIR COMPETITION Analysis............................................... 251. Acquisition By “Improper Means”...................................................................................... 252. Use or Disclosure ................................................................................................................ 263. Duty of Confidentiality ....................................................................................................... 26

D. Breach of “Anti-Assignment” Provisions ................................................................................... 27E. Insurance Policy Coverage.......................................................................................................... 27F. Reverse Engineering ................................................................................................................... 27

1. Lawful Acquisition of a Trade Secret.................................................................................. 272. Reverse Engineering—Acquiring Product Properly v. Improperly .................................... 28


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III. IDENTIFYING TRADE SECRETS DURING LITIGATION........................................................... 29A. Identification of Trade Secrets by the Plaintiff ........................................................................... 29B. Trade Secret Privilege ................................................................................................................. 30C. Documents Filed Unsealed in Court Record Does Not Necessarily Destroy Trade Secret ........ 30D. Confidentiality Orders................................................................................................................. 31E. Protection for Trade Secrets in Federal Courts: The Good Cause Standard ............................... 33F. Protection for Trade Secrets in Criminal Cases − EEA............................................................... 36G. Spoliation .................................................................................................................................... 36H. Identification of “Employees” as Expert Witnesses.................................................................... 37

IV. PREEMPTION.................................................................................................................................... 37A. Preemption by the Copyright Act................................................................................................ 37B. Preemption by the Patent Laws ................................................................................................... 40C. Preemption of Other State Laws by UTSA ................................................................................. 41D. Copyright Registration Affecting Trade Secret Protection ......................................................... 41

V. STATUTES OF LIMITATION .......................................................................................................... 42A. Introduction ................................................................................................................................. 42

1. When an Action Accrues..................................................................................................... 422. Fraudulent Concealment...................................................................................................... 443. The UTSA ........................................................................................................................... 44

B. The Discovery Rule..................................................................................................................... 441. Introduction ......................................................................................................................... 442. The Discovery Rule in Texas after Seatrax......................................................................... 453. The Discovery Rule Elsewhere ........................................................................................... 47

C. In States That Have Adopted The Uniform Trade Secrets Act (UTSA) ..................................... 471. UTSA Statute of Limitations............................................................................................... 472. California & Tenth Circuit Adopt Intermedics Rationale – When Statute Begins to Run on

One Trade Secret Claim It May Begin to Run on All Trade Secrets Claims ...................... 48

VI. RELIEF ............................................................................................................................................... 49A. Actual and Punitive Damages ..................................................................................................... 49B. Damages Under The UTSA ........................................................................................................ 51C. Damages Under the RESTATEMENT (THIRD) OF UNFAIR COMPETITION .................................... 53D. Prejudgment Interest ................................................................................................................... 54E. Reasonable Royalty..................................................................................................................... 54F. Attorney’s Fees ........................................................................................................................... 56

1. General Rule in Texas ......................................................................................................... 562. Under the UTSA.................................................................................................................. 56

G. Injunctive Relief .......................................................................................................................... 561. General Requirements ......................................................................................................... 562. Irreparable Harm ................................................................................................................. 573. Duration Of Injunction ........................................................................................................ 594. Scope of the Injunction........................................................................................................ 615. Losing The Right to an Injunction....................................................................................... 626. Under the RESTATEMENT (THIRD) OF UNFAIR COMPETITION ............................................ 627. Failure to Comply With Discovery Directed at Whether Defendant Has Complied With

Preliminary Injunction May Be Punishable by Contempt................................................... 63H. Officers and Directors Personal Liability for Trade Secret Misappropriation ............................ 63

VII. RECENT CASES INVOLVING TRADE SECRET ISSUES ............................................................ 64A. Economic Espionage Act of 1996 (“EEA”) ................................................................................ 64

1. Legal Impossibility is Not a Defense Under the EEA......................................................... 64


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B. Reasonable Efforts to Maintain Trade Secret.............................................................................. 651. Fifth Circuit: Louisiana Law: Allowing Customers to Photograph, Inspect and Examine

Units Without an Obligation of Confidentiality Do Not Constitute Reasonable Efforts toMaintain a Trade Secret....................................................................................................... 65

2. Illinois Law: Failing to Take Steps to Enforce Confidentiality Provisions in SoftwareLicense Agreement May Result in Loss of Trade Secret Rights as a Matter of Law.......... 66

3. Arkansas Law: (a) Subjective Belief Held By Employee That Information is Confidentialand Has Value is “Irrelevant” in Determining Whether Trade Secret Owner TookReasonable Steps to Preserve a Trade Secret (b) Post-Employment ConfidentialityAgreement is Not an Absolute Requirement in All Instances ............................................. 67

4. Indiana Law: Reliance on Industry Custom Is Not Sufficient to Meet Obligation of TakingReasonable Precautions to Protect Trade Secret: Internal Measures Do Not NecessarilyProtect Against Suppliers and Vendors .............................................................................. 68

5. Iowa Law: “Not Doing Much” Internally to Protect Trade Secrets May Nevertheless beSufficient if Company is Small and Trade Secrets Are Not Disclosed to Competitors ...... 69

6. Vermont Law: Failure to Take Reasonable Precautions Results in Loss of Trade Secret inOptical Interference Film Technology: One May Not Rely on an Employer-EmployeeRelationship Alone to Satisfy Trade Secret Owner’s Obligation........................................ 70

C. Term Limitations......................................................................................................................... 711. Fed. Cir: California Law: Term Limitations in Non-Disclosure Agreements Limit Non-

Disclosure Obligations ........................................................................................................ 712. Texas Law: Termination of Exclusive License to Manufacture Certain Fish Hooks Does

Not Require Cessation of Manufacturing in Absence of a Trade Secret or Patent ............. 72D. Publication of Patent Application ............................................................................................... 72

1. Federal Circuit: North Carolina Law: Unauthorized Publication of Another’s Trade Secretin a Published Patent Application Does Not Destroy Trade Secret Protection ................... 72

E. Novelty – Misappropriation of Idea Cases Distinguished From Trade Secret Cases.................. 751. New Jersey Law: (a) Misappropriation of Idea Cases Distinguished From

Misappropriation of Trade Secret Cases (b) Under New Jersey Law, Novelty (Perhaps inEach Component Part) is Required in Misappropriation of Idea Cases Where There is NoPost-Disclosure Contract (c) “Novel to Disclosee” Not Applicable Where Idea is SoLacking in Novelty that Knowledge Can Be Imputed to Disclosee (d) Novelty is Decidedby the Court as a Matter of Law (e) The Definition of a Trade Secret Does Not Include aMarketing Concept or New Product Idea ............................................................................ 75

F. Potential Trade Secret Subject Matter......................................................................................... 771. Arkansas Law: Rule That A Trade Secret May Reside in Compilation of Information Does

Not Save Trade Secret: Method for Executing Bulk Credit Transactions Held ReadilyAscertainable and Not a Trade Secret ................................................................................. 77

2. Arkansas Law: Information in Employee Handbook Containing Marketing and BusinessPlans, and Customer Information, Held Readily Ascertainable and Not a Trade Secret .... 78

3. Illinois Law: Various Customer Information Held Readily Ascertainable and Not a TradeSecret ................................................................................................................................... 78

4. Iowa Law: Selection of Trade Shows and Magazines for Advertising Can Constitute aTrade Secret......................................................................................................................... 79

5. Colorado Law: (a) A Bid on a Single Project May Constitute a Trade Secret (b) Smilingor Other Non-Verbal Conduct When Confronted With Misappropriation is Admissible... 79

6. Florida Law: Subpoena on Attorney to Produce Customer Lists Provided by ClientQuashed per Fifth Amendment............................................................................................ 80

7. Colorado Law: (a) Non-Solicitation Clause Limited to Direct Solicitation (b) EmployeeRanking System Not a Trade Secret.................................................................................... 81

8. Vermont Law: Customer List of Bus Tour Groups Not Protectable Because No Effort toMaintain List as a Trade Secret ........................................................................................... 81


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9. Utah Law: Customer-Specific Chemical Price Lists Deemed Trade Secrets ..................... 8210. Customer Lists..................................................................................................................... 83

a. Nebraska Law: (a) In a Case of First Impression, Customer Lists Qualify as TradeSecrets (b) Damages Are Based on Lost Net Profits, Not Gross Profits (c) Error toAward Both Lost Future Profits and a Permanent Injunction ..................................... 83

11. Memory Rule....................................................................................................................... 83a. Memory Rule: Connecticut Law: Employee is Ordinarily Privileged to Use Names of

Customers Retained in Memory and Customers Could Be Readily Ascertained Fromthe Internet................................................................................................................... 83

G. Misappropriation Analysis .......................................................................................................... 841. Missouri Law: (a) Action Under Missouri Uniform Trade Secrets Act Against Chinese

Government Corporation Not Barred by Sovereign Immunities Act Where Activity in U.S.Is Commercial (b) Misappropriation Under the UTSA May Occur In Any of Three Forms(i) Improper Acquisition, (ii) Disclosure, or (iii) Use ......................................................... 84

2. Maryland Law: A Cause of Action for Misappropriation May Arise From ImproperAcquisition Alone Without Use or Disclosure, But Acquiring Trade Secret Inadvertently isnot “Improper Means”......................................................................................................... 85

3. Use May Be Inferred ........................................................................................................... 86a. Federal Circuit Illinois Law: Use of a Trade Secret May be Inferred Based on Access

and Similarity and/or Inevitable Disclosure ................................................................ 864. The “Owner” of the Trade Secret is the One Entitled to Sue .............................................. 87

a. Texas Law: (a) The “Owner” of a Trade Secret Includes One Entitled to AssertSecrecy (b) Under Rule 507, Tx. R. Civ. P., Once a Trade Secret is Established theBurden Shifts to Requesting Party to Establish that the Information is Necessary for aFair Adjudication (c) If Trade Secret is Established, Trial Court Abuses Its Discretionby Ordering Production Without In Camera Inspection ............................................. 87

5. Texas Law: A Subpoena Does Not Authorize Obtaining and Disclosing DocumentsContaining Trade Secret Information in Violation of Texas Penal Code 31.05: NeitherClient nor Attorney Are Fully Shielded by “Litigation Privilege”...................................... 88

H. Identifying Trade Secrets During Litigation ............................................................................... 891. Seventh Circuit: Wisconsin Law: (a) 43 Page Description of Software is Insufficient to

Identify Plaintiff’s Trade Secrets (b) Vendor-Vendee Confidentiality Agreements Are NotUnenforceable For Failure to Include Temporal and Geographic Restrictions(c) Wisconsin’s UTSA Does Not Preempt a Cause of Action for Tortiously Inducing aCustomer to Breach a Confidentiality Agreement............................................................... 89

2. Delaware Law: Trade Secrets Must Be Identified With Sufficient Particularity to Enable aDefendant to Prepare a Defense – Simply Attaching 120 Pages of MiscellaneousInformation to the Complaint is Not Sufficient................................................................... 91

3. Delaware Law: Identification of a Broad Process as a Trade Secret May be LaterNarrowed During Trial ........................................................................................................ 91

4. Seventh Circuit: Wisconsin Law: (a) Trade Secret May Be Asserted in a Combination ofProcedures Disclosed in 500 Pages of Manuals (b) Misappropriation May Be InferredFrom Defendants’ Ability to Produce Product Within a Short Time Span (c) InjunctionThat Encompasses Information in 500 Pages of Manuals and Public Domain as Well asTrade Secret Information Nevertheless Complies with Rule 65(d) (d) Proof that theDefendants Did Not Use an Asserted Trade Secret Furnishes Grounds for JMOL............. 92

4. (e) Injunctions Are Not Punitive: Damages Equaling Plaintiff’s Development Costs and anInjunction Against Future Disclosure But Not Use, Rather Than Permanent Injunction, isAppropriate.......................................................................................................................... 92

I. Spoliation .................................................................................................................................... 941. Wisconsin Law: Pointing a Finger at One’s Children to Explain Repeatedly Downloading

6 GB of Music on Hard Drive That Was to be Produced for Inspection is Not Credible ... 94


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2. Illinois Law: Repeatedly Defragmenting Hard Drive to Remove Evidence is StrongCircumstantial Evidence of Misappropriation and May Justify Willful and MaliciousMisappropriation ................................................................................................................. 94

J. Identifying ISP User.................................................................................................................... 951. New Jersey Law: Procedures and Test for Disclosing Identity of Anonymous User of ISP

Message Board: Plaintiff Must Product a Prima Facie Case, i.e., More Than What WouldBe Required To Survive a Motion to Dismiss..................................................................... 95

2. New Jersey Law: Allegations of Trade Secret Misappropriation by a Current or FormerEmployee in Violation of an Employment Agreement Justified Disclosing Identity ofAnonymous User of ISP Message Board ............................................................................ 96

K. Preemption .................................................................................................................................. 971. Oklahoma Law: Action for Fraud and Deceit Not Preempted by Oklahoma UTSA ......... 97

L. Statutes of Limitations ................................................................................................................ 971. Indiana UTSA Statute of Limitations is Not Tolled Where French Defendant Was Subject

to Jurisdiction Under Long-Arm Statute and Service of Process Through Certified Mail.. 972. New York Law: Trade Secret Actions That Are Time-Barred May Be Filed In Original

Counterclaim But Not Amended Counterclaims................................................................. 98M. Relief ........................................................................................................................................... 99

1. Seventh Circuit: Illinois Law: Case Involving Claims for Trade Secret Misappropriationand Patent Infringement Should Not Be Bifurcated If Based on Same Underlying FactsDue to Parallel Appeals ....................................................................................................... 99

2. Damages .............................................................................................................................. 99a. Colorado Law: (a) An Award of Attorney’s Fees Requires a Finding of Willful and

Malicious Missappropriation (b) An Award of a Reasonable Royalty is AppropriateWhere the Defendant Proves It Made No Profit.......................................................... 99

b. Montana Law: (a) Montana’s UTSA Did Not Incorporate Montana’s GeneralPunitive Damages Statute – The Court May Find “Willful and MaliciousMisappropriation” and Award Exemplary Damages and Attorney Fees Despite a JuryVerdict of No Actual Fraud and/or Actual Malice (b) Ninth Circuit: “Willful andMalicious Misappropriation” Need Not Be Proved by Clear and Convincing Evidence100

c. Arkansas Law: A Trade Secret Owner May Recover Either Its Lost Net Profits orThat Portion of the Misappropriator’s Net Profits Resulting From Unjust Enrichment101

d. Colorado Law: Damages for Trade Secret Misappropriation May Be Based on theDefendants’ Cost of Capital Savings......................................................................... 102

e. Florida Law: Damages: (a) Pre-Judgment Interest Is Only Available for LiquidatedDamages (b) Exemplary Damages Are Limited to Cases of Aggravated Misconduct102

f. Wisconsin Law: Damages for Trade Secret Misappropriation Includes Lost ProfitsResulting From Defendant’s Manufacture and Distribution of Defective ProductIncorporating Trade Secret ........................................................................................ 103

g. Texas Law: (a) Lost Profit Damages Are Net Lost Profits Reached by Deducting AllExpenses From Gross Receipts (b) Opinions on Lost Profits Must Be Based onObjective Evidence (c) Plaintiff Must Demonstrate One Complete Calculation of LostNet Profits.................................................................................................................. 104

h. North Carolina Law: Legal Malice (Wrongful Intent) in Bringing a Trade SecretMisappropriation Suit May Constitute Tortious Interference with Contract Regardlessof Whether the Suit is Objectively Reasonable ......................................................... 105

i. North Carolina Law: Trial Court is Justified in Entering a Broad Injunction (OrderingThat Defendant’s Business be Permanently Closed) Where Defendants Attempted toEvade Prior Injunction by Adding Trace Amounts of Inert Elements....................... 106

j. North Carolina Law: (a) Mere Enticement and Hiring of an At-Will Employee is NotTortious Inteference (b) Outside the Context of a Fiduciary Relationship, There is NoIndependent Tort for Breach of Loyalty by an At-Will Employee............................ 106


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k. Rhode Island Law: Exemplary Damage Provisions of Uniform Trade Secrets ActPrevail Over Common Law Standard........................................................................ 107

3. Vicarious Liability............................................................................................................. 107a. Minnesota Law: Absent Evidence That Misappropriation by New Employee is

Forseeable, New Employer is Not Vicariously Liable for Misappropriation............ 107N. Insurance ................................................................................................................................... 109

a. Maryland Law: No “Advertising Injury” Insurance Coverage for MisappropriationWhen Misappropriation Resulted From Developing Product ................................... 109

b. Illinois Law: Allegations of Trade Secret Misappropriation Do Not Constitute“Advertising Injury” For Purposes of Insurance Coverage ....................................... 110

c. Wisconsin Law: Cause of Action for Trade Secret Misappropriation Does Not FallWithin “Advertising Injury” Coverage...................................................................... 110

VIII. OBLIGATIONS ARISING FROM EMPLOYMENT.............................................................. 110A. Implied Obligations................................................................................................................... 110

1. General Rule...................................................................................................................... 1102. An Essentially Unlimited Implied Obligation of Confidentiality May be Limited by an

Express Agreement of the Parties...................................................................................... 111B. Express Obligations................................................................................................................... 112C. Departing Employees ................................................................................................................ 112

1. Trade Secrets and Corporate Opportunities....................................................................... 1132. Discovery Actions ............................................................................................................. 1133. Advising Customers/Clients of New Affiliation ............................................................... 113

IX. COVENANTS NOT TO COMPETE ............................................................................................... 114A. Texas ......................................................................................................................................... 114

1. Brief Background .............................................................................................................. 1142. The “Old” 1989 Statute ..................................................................................................... 1153. The 1993 Revisions ........................................................................................................... 1154. Statutory Requirements for Enforceability: A Question of Law for the Court ................. 116

a. Ancillary To An Otherwise Enforceable Agreement................................................. 116b. Reasonable As To Time, Geography and Scope ....................................................... 120c. Reformation ............................................................................................................... 122d. Effect Of Unenforceability On Severance Payments ................................................ 122

5. Procedures and Remedies in Actions to Enforce Covenants not to Compete ................... 123a. Under the Texas Statute............................................................................................. 123b. Under the Common Law ........................................................................................... 124

B. Contract Provisions Having The Same Effect As Covenants Not to Compete ......................... 125C. Covenant Not to Compete Contrasted with Covenant Not to Disclose Trade Secrets.............. 125D. Recent Cases Involving Non-Competition Covenants .............................................................. 127

1. Texas Cases ....................................................................................................................... 127a. Texas Law: A Covenant That Is Not Limited to the Employee’s Employment

Capacity at the Former Employer is Unreasonable ................................................... 127b. Texas Law: Covenant in Franchise for Real Estate Inspection Services Enforced as

Modified to Cover Area Actually Covered by Franchise .......................................... 127c. Texas Law: (a) Non-Competition and Non-Disclosure Covenants Are Subject to

Separate Analyses (b) Stock Option Agreements “In This Case” Do Not Give Rise toInterest in Restraining Competition (c) Confidentiality Agreements Are Evaluated AsOf The Time Made .................................................................................................... 128

d. Texas Law: Interests (1) That Defendants Not Use Confidential Information toPlaintiff’s Detriment, (2) In Preserving Plaintiff’s Anatomic Pathology Business, and(3) That A Transfer of the Cytology Operations Would Be Protected by a


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Contemporaneous Non-Compete Provision, Were Sufficient to Justify Enforceabilityof the Covenant.......................................................................................................... 129

e. Texas Law: (a) In “At-Will” Employment, A Promise to Share ConfidentialInformation Is A Sufficient Non-Illusory Promise to Support A Non-CompetitionCovenant (b) Interest in Preserving Client Database Developed Through Spending $3Million is Sufficient to Support Non-Competition Covenant.................................... 129

f. Texas Law: A “Satisfaction” Contract of Employment is Not “At Will” Employment130g. Texas Law: (a) No Promise to Give Employee Confidential Information At The Time

of the Agreement (b) Promise of Promotion Was Illusory (c) Obligation on EmployeeGive Notice Prior to Termination Is Not Sufficient Consideration for Non-Competition Covenant (d) Non-Disclosure Obligations Enforceable Independent ofNon-Competition Covenant....................................................................................... 130

2. Cases Outside Texas.......................................................................................................... 131a. Arizona Law: Geographical Covenant Limited By Sales Volume Enforced ........... 131b. Arkansas Law: Failure to Impose Post-Termination Non-Competition/Non-Disclosure

Restraints Is Evidence of a Failure to Properly Protect Trade Secrets ...................... 132c. Colorado Law: Restrictive Covenant May Not Be Used to Preclude Use of Something

That is Not a Trade Secret – Here a Method of Teaching Infants To Swim ............. 133d. Georgia Law: Non-Solicitation Covenant Extending for 12 Months and Personal

Customers Was Not Overly Broad ............................................................................ 134e. Illinois Law: A Non-Competition Covenant Given in Connection With a Gift May Be

Enforceable – But Here It Was Not ........................................................................... 134f. Indiana Law: Good Will Is A Legitimate Interest That May Be Protected By Non-

Competition Covenants ............................................................................................. 135g. Indiana Law: Trade Secrets, Confidential Information, and Good Will Are Legitimate

Interests That May Be Protected By Non-Competition Covenants ........................... 136h. Indiana Law: A Non-Competition Covenant May Be Enforced to Protect Promisee’s

Good Will Including Customer Contacts .................................................................. 136i. Iowa Law: Extensive Personal Contacts May Justify Enforcing Covenant Not to

Compete..................................................................................................................... 137j. Fourth Circuit: Maryland/Delaware Law: Injunction Enforcing Covenant Not To

Compete Issued on Two Days Notice Upheld........................................................... 138k. MassachusettsLaw Court Applying Connecticut Law: Six Month Non-

Competition/Non-Solicitation Agreement Enforceable............................................. 139l. New York Court Applying Massachusetts Law: Restrictive Covenant May Be

Enforced to Protect Good Will Even in the Absence of Trade Secrets or ConfidentialInformation .............................................................................................................. 139

m. New York Court Applying Massachusetts Law: Restrictive Covenant May BeEnforced to Protect Good Will .................................................................................. 140

n. Massachusetts Law: Non-Disclosure and Non-Competition Covenant Poorly DraftedNot Enforced.............................................................................................................. 140

o. Michigan Law: Michigan Antitrust Reform Act (MARA), As Amended to PermitNon-Competition Covenants, Is Not Limited To Employer-Employee Relationships,i.e., The Act Applies To Independent Contractors As Well ...................................... 141

p. Mississippi Law: Covenant Enforced Prohibiting Insurance Salesman From SolicitingFormer Customers ..................................................................................................... 141

q. Missouri Law;: Two Year Restrictive Covenants Covering Supervised RegionEnforced..................................................................................................................... 142

r. New York Law: Court Finds Testimony by Wife That She Set Up Business in DirectCompetition With Husband’s Employer Solely Because of “Empty Nest Syndrome”Not Credible .............................................................................................................. 142


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s. New York Law: A Company in Bankruptcy That Lets Its Employees Go Because ofan Inability to Pay Them Might Not Be Able to Enforce Covenants Not To Compete,But May Be Able to Enforce Nondisclosure Agreements ......................................... 143

t. Ohio Law: Continued Employment is Sufficient Consideration to Support Non-Competition Covenant ............................................................................................... 144

u. Ohio Law: Clear and Convincing Proof is Necessary to Support Either a Preliminaryor Permanent Injunction For Violation of Ohio’s Uniform Trade Secrets Act orBreach of Employment Agreements.......................................................................... 145

v. Ohio Law: Non-Competition Agreement Entered Into by Executive in Exchange forStock Options is Enforceable..................................................................................... 146

w. Ohio Law: Injunction Prohibiting Breach of Non-Competition Agreement RequiresOnly a Showing of Threatened Harm and May Be Shown Through Inevitability ofDisclosure .................................................................................................................. 147

x. Non-Competition Covenant versus Non-Disclosure Agreement............................... 147

X. THE INEVITABLE DISCLOSURE DOCTRINE............................................................................ 149A. Background ............................................................................................................................... 149B. 7th Circuit − PepsiCo v. Redmond ............................................................................................ 152C. Factors That Might Be Considered ........................................................................................... 153D. Cases Expressly or Implicitly Applying The Inevitable Disclosure Doctrine........................... 158E. Cases Declining to Apply The Inevitable Disclosure Doctrine Rationale ................................ 161F. Recent Cases ............................................................................................................................. 163


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A REVIEW AND UPDATE: TRADESECRETS RESTRICTIVE POST-EMPLOYMENT COVENANTSAND INEVITABLE DISCLOSURE

I. BACKGROUNDA. Defining a Trade Secret: Common Law

and Statutory Sources of Trade SecretDefinitions

1. RESTATEMENT (FIRST) OF TORTS

The most widely quoted definition of a“trade secret,” at least for the 40 years prior to theadvent of the Uniform Trade Secrets Act(“UTSA”), was that of the RESTATEMENT (FIRST)

OF TORTS:1

A trade secret may consist of anyformula, pattern, device orcompilation of information whichis used in one’s business andwhich gives him an opportunity toobtain an advantage overcompetitors who do not know oruse it. It may be a formula for achemical compound, a process ofmanufacturing, testing orpreserving materials, a pattern fora machine or other device, or a listof customers * * *. Generally, itrelates to the production of goods,as for example, a machine orformula for the production of anarticle. It may, however relate tothe sale of goods or to otheroperations within the businesssuch as a code for determiningdiscounts, rebates or otherconcessions in a price list orcatalog, or a list of specializedcustomers or a method of

1 Although perhaps technically incorrect, theRESTATEMENT OF TORTS (1939) will be referenced inthe text as “RESTATEMENT (FIRST)” or“RESTATEMENT (FIRST) OF TORTS” to clearlydifferentiate the RESTATEMENT (THIRD) OF UNFAIRCOMPETITION.

bookkeeping or other office

management.2

That definition was adopted by a number of statesand has been applied in numerous state and federalcases.

2. Uniform Trade Secrets ActThe vast majority (41) of states and the

District of Columbia have now adopted a version

of the UTSA3 that defines a trade secret as:

[I]nformation, including aformula, pattern, compilation,program, device, method,technique, or process, that:(1) derives independent economicvalue, actual or potential from notbeing generally known to and notbeing readily ascertainable byproper means by other personswho can obtain economic valuefrom its disclosure or use, and (2)is the subject of efforts that arereasonable under thecircumstances to maintain its

secrecy.4

2 RESTATEMENT (FIRST) OF TORTS § 757 cmt. b (1939).3 The original UTSA was adopted in 1979 by the

National Conference of Commissioners on UniformState Laws, and was amended in 1985.

4 Uniform Trade Secrets Act § 1(4). See, e.g., HydraulicExch. and Repair, Inc. v. KM Specialty Pumps, Inc., 690N.E.2d 782, 46 U.S.P.Q.2d 1291 (Ind. Ct. App.1998)(“We have held that a protectable trade secret hasthe following four characteristics: (1) information, (2)which derives independent economic value, (3) is notgenerally known, or readily ascertainable by propermeans by other persons who can obtain economicvalue from its disclosure or use, and (4) the subject ofefforts reasonable under the circumstances to maintainits secrecy.”).

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3. RESTATEMENT (THIRD) OF UNFAIR

COMPETITION

The RESTATEMENT (THIRD) OF UNFAIR

COMPETITION defines a trade secret as follows:

A trade secret is any informationthat can be used in the operationof a business or other enterprisethat is sufficiently valuable andsecret to afford an actual orpotential economic advantage

over others.5

That definition was intended to be consistent with

the definition in the UTSA.6 The comments to theRESTATEMENT (THIRD) OF UNFAIR COMPETITION

note:

A trade secret may consist of aformula, pattern, compilation ofdata, computer program, device,method, technique, process, orother form or embodiment ofeconomically valuableinformation. A trade secret mayrelate to technical matters such asthe composition or design of aproduct, a method of manufacture,or the know-how necessary toperform a particular operation orservice. A trade secret may alsorelate to other aspects of businessoperations such as pricing andmarketing techniques or theidentity or requirements of

customers.7

Several courts have now considered (and

quoted) several of the trade secret provisions8 of

5 RESTATEMENT (THIRD) OF UNFAIR COMPETITION(1995).

6 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 39 cmt. b (1995).

7 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 39 cmt. d (1995).

8 The RESTATEMENT (THIRD) OF UNFAIR COMPETITIONalso addresses trademark and deceptive advertisingissues. Several other courts have cited or quoted withapproval those provisions. Global Prot. Corp. v.

the RESTATEMENT (THIRD) OF UNFAIR

COMPETITION with approval.9

Halbersberg, 503 S.E.2d 483 (S.C. 1998)(adoptingtrademark provisions of RESTATEMENT (THIRD) OFUNFAIR COMPETITION); Indus. Indem. Co. v. AppleComputer, Inc., 71 Cal. App. 4th 452; 1999 Cal. App.LEXIS 333; 83 Cal. Rptr. 2d 866 (Cal. App. 1999),modified 1999 Cal. App. LEXIS 483 (Cal. App.1999)(review granted)(unpublished non-precedential)(deceptive advertising provisions of theRESTATEMENT (THIRD) OF UNFAIR COMPETITION);Commercial Sav. Bank v. Hawkeye Fed. Sav. Bank, 592N.W.2d 321 (Iowa 1999)(adopting trademarkprovisions of RESTATEMENT (THIRD) OF UNFAIRCOMPETITION); Robert’s Hawaii Sch. Bus, Inc. v.Laupahoehoe Transp. Co., 1999 Haw. LEXIS 261(Hawaii 1999)(general reference to provisions onunfair competition, in RESTATEMENT (THIRD) OFUNFAIR COMPETITION § 1 cmt. g); Tri-County FuneralServ. v. Eddie Howard Funeral Home, Inc., 957 S.W.2d 694(Ark. 1997)(adopting trademark provisions ofRESTATEMENT (THIRD) OF UNFAIR COMPETITION);Wyndham Co. v. Wyndham Hotel Co., 670 N.Y.S.2d 995,1997 N.Y. Misc. LEXIS 684 (Sup. Ct. N.Y.1997)(adopting trademark provisions ofRESTATEMENT (THIRD) OF UNFAIR COMPETITION).

9 United Support Ass’n. v. Mellon, 1999 Wash.App. LEXIS634 (Wa.App. 1999)(unpublished)(adoptingRESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 38); Ed Nowogroski Ins., Inc. v. Rucker, 971 P.2d 936,50 U.S.P.Q.2d 1268 (Wa. 1999); Essex Group, Inc. v.Southwire Co., 501 S.E.2d 501 (Ga. 1998)(“The fact thatsome or all of the components of the trade secret arewell-known does not preclude protection for a secretcombination, compilation, or integration of theindividual elements,” quoting with approvalRESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 39(f)); Wiener v. Lazard Freres & Co., 672 N.Y.S.2d 8,1998 N.Y. App. Div. LEXIS 4043 (N.Y. App. Div.1998)(adopting definition of a trade secret inRESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 39); Revere Transducers, Inc. v. Deere & Co., 1999 IowaSup. LEXIS 124 (Iowa 1999)(quoting with approvalRESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 41 cmt. d); Alevizos v. John D. & Catherine T.MacArthur Found., 1999 Fla. App. LEXIS 1762 (Fla.App. 1999)(not final)(“Because it was not briefed bythe parties, we do not reach the issue of whether weshould adopt the RESTATEMENT (THIRD) OF UNFAIRCOMPETITION in this area.”).

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4. State Criminal StatutesA number of states have enacted criminal

statutes covering trade secrets.10 The Texasstatute, for example, defines a trade secret as:

“Trade secret” means the whole orany part of any scientific ortechnical information, design,process, procedure, formula orimprovement that has value andthat the owner has taken measuresto prevent from becomingavailable to persons other thanthose selected by the owner tohave access for limited

purposes.11

and defines “theft” of a trade secret as follows:

A person commits an offense if,without the owner’s effectiveconsent, he knowingly makes acopy of an article representing a

trade secret.12

Such statutes, in general, have beeninterpreted in consonance with the RESTATEMENT

(FIRST) OF TORTS and the UTSA, and specificallyhave been held to cover the “theft” of computer

software.13

Some states also provide for related civilliability. For example, the Texas legislature hasprovided for civil liability through the Texas Theft

Liability Act14 for unlawfully appropriating orobtaining property in violation of several sectionsof the Texas Penal Code, including the statuteaddressing theft of trade secrets. Liability extendsto the person who commits the theft, as well as to

10 See generally Jager, TRADE SECRETS LAW § 4.01[4].11 TX. PEN. CODE § 31.05.12 TEX. PEN. CODE § 31.05(b)(2).13 See, e.g., Weightman v. State, 975 S.W.2d 621 (Tex. Crim.

App. 1998)(reasonable security precautions required atthe time of the alleged misappropriation − notnecessarily before); Schalk v. State, 823 S.W.2d 633, 21U.S.P.Q.2d 1838 (Tx.Crim.App. 1991).

14 TEX. CIV. PRAC. & REM. CODE §§ 134.001-005.

the parent or other person who has the duty ofcontrol and reasonable discipline of a child thatcommits the theft. A person may recover actualdamages plus $1,000 (or a total amount of $5,000if the theft is committed by a child), and “shall beawarded court costs and reasonable and necessaryattorney’s fees.”

5. Computer Fraud and Abuse Act(“CFAA”)The Federal Computer Fraud and Abuse

Act,15 a criminal statute originally passed in

1984,16 and amended substantially since then,17

has provided for a private cause of action since

amendments in 1994.18 Although originally thestatute was limited to “federal interestcomputer[s],” the Act was amended in 1996 to

more broadly cover “protected computer[s]”19

which means a computer, inter alia, “which is

15 18 U.S.C. § 1030.16 Pub. L. 98-473, title II, Sec. 2102(a), Oct. 12, 1984, 98

Stat. 219017 Amended Pub. L. 99-474, Sec. 2, Oct. 16, 1986, 100

Stat. 1213; Pub. L. 100-690, title VII, Sec. 7065, Nov.18, 1988, 102 Stat. 4404; Pub. L. 101-73, title IX, Sec.962(a)(5), Aug. 9, 1989, 103 Stat. 502; Pub. L. 101-647,title XII, Sec. 1205(e), title XXV, Sec. 2597(j), titleXXXV, Sec. 3533, Nov. 29, 1990, 104 Stat. 4831,4910, 4925; Pub. L. 103-322, title XXIX, Sec.290001(b)-(f), Sept. 13, 1994, 108 Stat. 2097-2099;Pub. L. 104-294, title II, Sec. 201, title VI, Sec.604(b)(36), Oct. 11, 1996, 110 Stat. 3491, 3508.

18 H.R. Conf. Rep. No. 103-711, § 290001 (1994).19 The Senate Report accompanying the 1996

amendments, S. Rep. No. 104-357 (1996), for examplenoted:

The proposed subsection 1030(a)(2)(C) isintended to protect against the interstate orforeign theft of information by computer* * *. This subsection would ensure thatthe theft of intangible information by theunauthorized use of a computer isprohibited in the same way theft of physicalitems are protected. In stances where theinformation stolen is also copyrighted, thetheft may implicate certain rights under thecopyright laws. The crux of the offenseunder subsection 1030(a)(2)(C), however, isthe abuse of a computer to obtain theinformation.

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used in interstate or foreign commerce or

communication.”20

6. The Economic Espionage Act of 1996(“EEA”)The Economic Espionage Act of 1996

(EEA),21 signed into law by President Clinton on

October 11, 1996, created, for the first time,22 a

20 18 U.S.C. § 1030(e)(2)(B). See Shurgard Storage Ctrs., Inc.v. Safeguard Self Storage, Inc., 119 F. Supp. 2d 1121(W.D. Wash. 2000)(concluding that the Act, asamended, was intended to cover using a “protectedcomputer” “without authorization” to misappropriateintellectual property). See also United States v. Galindo,871 F.2d 99 (9th Cir. 1989)(employee convicted ofstealing mail for a jewelry was culpable despite thatshe had authorization to pick up the mail because sheattempted to conceal her receipt by forging another’ssignature).

21 Pub. L. No. 104-294, 110 Stat. 3488, codified at 18U.S.C. §§ 1831-1839 (1997). The Act creates a newChapter 90 entitled “Protection of Trade Secrets” inTitle 18, United States Code, immediately followingChapter 89 covering interstate transportation ofunauthorized dentures.

22 Prior to the EEA, there was no federal statute thatdirectly permitted criminal prosecution for theft ormisappropriation of trade secrets, with the exceptionof a single narrow statute, 18 U.S.C. § 1905, thatresulted from the 1948 codification of the federalcriminal code. As discussed further below, that statuteis limited to the unauthorized disclosure ofinformation by federal employees. The statuteprovides only for misdemeanor penalties and has beenrarely used. United States v. Wallington, 889 F.2d 573(5th Cir. 1989)(the court upheld the defendant’sconviction for running background checks on peoplefor a friend). Indirectly, federal prosecutors have usedthe Interstate Transportation of Stolen Property Act,18 U.S.C. §§ 2314, 2315, originally enacted in 1934,with some success in deterring intellectual propertymisappropriation. In 1991, however, in United States v.Brown, 925 F.2d 1301, 17 U.S.P.Q.2d 1929 (10th Cir.1991). The Tenth Circuit held that computer sourcecode was not the type of property contemplated bythe Act. Specifically, the court held that “[p]urelyintellectual property” cannot “constitute goods, wares,[or] merchandise which have been stolen, convertedor taken within the meaning of sections 2314 or2315.” The Federal Wire Fraud Statute, 18 U.S.C.§ 1343, prohibits the use of “wire, radio, or televisioncommunication in interstate or foreign commerce” to“defraud, or for obtaining money or property bymeans of false or fraudulent pretenses,

broad federal criminal remedy to deter trade secretmisappropriation, thus supplementing the CFAA.

The EEA includes an expansive definitionof a “trade secret:”

§ 1839 Definitions

As used in this chapter —

* * * *

(3) the term “trade secret” meansall forms and types of financial,business, scientific, technical,economic, or engineeringinformation, including patterns,plans, compilations, programdevices, formulas, designs,prototypes, methods, techniques,processes, procedures, programs,or codes, whether tangible orintangible, and whether or howstored, compiled, or memorializedphysically, electronically,graphically, photographically, orin writing if —

(A) the owner thereof has takenreasonable measures to keep suchinformation secret; and

(B) the information derivesindependent economic value,actual or potential, from not beinggenerally known to, and not beingreadily ascertainable throughproper means by, the public; and

(4) the term “owner,” with respectto a trade secret, means the personor entity in whom or in whichrightful legal or equitable title to,

representations, or promises.” Similarly, the federalmail fraud, 18 U.S.C. § 1341, statute prohibits the useof “any matter or thing” placed in the Postal Service,or received therefrom, “to defraud” or to obtain“money or property by means of false or fraudulentpretenses, representations, or promises.” Although“property” here has been construed to includecomputer software, United States v. Seidlitz, 589 F.2d152 (4th Cir. 1978), not all trade secretmisappropriation involves use of the mails orinterstate communication facilities.

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or license in, the trade secret isreposed.

The broad definition of “trade secret” in the EEAindicates that it was intended to be construed atleast as broadly as the definitions in its civil

counterparts.23 The EEA’s definition also tracksthe corresponding civil requirement that the ownerof the trade secret has taken reasonable measures

to keep such information secret.24 If the owner ofthe trade secret is subsequently found to haveinadequately protected the “secret,” protection will

be denied.25 On the civil side, however, the keyfactor is whether the owner has taken reasonable

precautions to protect the subject trade secret,26

and the EEA expressly incorporates that standard

by requiring “reasonable measures.”27

The EEA provides for two separateoffenses for the theft of trade secrets, the crime of“economic espionage” under § 1831, and thecrime of “theft of trade secrets” under § 1832. Forboth offenses, the government must prove beyonda reasonable doubt that (1) the defendant stole, orwithout authorization by the trade secret owner,obtained, destroyed or conveyed information; (2)the defendant knew that information wasproprietary; and (3) the misappropriatedinformation was in fact a trade secret as defined in

23 In United States v. Hsu, 155 F.3d 189, 196 (3d Cir.1998), the court stated that the “EEA protects a widervariety of technological and intangible informationthan current civil laws.” That comment, however, wasin the context of simply comparing the wording of theEEA against that of the UTSA. There is no indicationthat the court actually compared the scope of subjectmatter deemed covered by the UTSA in case law tothe language of the EEA.

24 18 U.S.C. § 1839(3)(A).25 Soap Co. v. Ecolab, Inc., 646 So. 2d 1366 (Ala. 1994)(jury

issue whether alleged trade secret owner exercisedreasonable precautions when competitor retrievedinformation and documents from trash containerlocated on owner’s property).

26 Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d174, 17 U.S.P.Q.2d 1780 (7th Cir. 1991)(test iswhether the steps taken to protect the trade secret arereasonable in the circumstances of actual use).

27 Id.

the Act. The offense of “economic espionage”under § 1831 requires that the government alsoprove that the defendant knew the offense wouldbenefit or was intended to benefit a foreigngovernment, foreign instrumentality, or foreign

agent, as also defined in the Act.28

If there is insufficient proof that thedefendant acted with an intent to benefit a foreignentity to establish a violation of § 1831,prosecution may still be possible under § 1832 ifthe government can prove beyond a reasonabledoubt the three elements discussed above, andfurther that: (4) the defendant intended to convertthe trade secret to the economic benefit of anyoneother than the owner; (5) the defendant knew orintended that the owner of the trade secret wouldbe injured; and (6) the trade secret was related toor was included in a product that was produced or

placed in interstate or foreign commerce.29

Attempts and conspiracies to engage ineconomic espionage and steal trade secrets are also

prosecutable offenses.30 Further, the knowingreceipt, purchase or possession of a stolen trade

secret is made an offense.31 Those elementscommon to both crimes are acts ofmisappropriation as defined in the statute,knowledge that the subject matter being

28 Sec. V “Prosecution of the Theft of Trade Secrets,”Federal Prosecution of Violations of IntellectualProperty Rights (Copyrights, Trademarks and TradeSecrets), Computer Crime & Intellectual PropertySection, Criminal Division, U.S. Department of Justice(May 1997). The manual is available through theDoJ’s web site at http://www.usdoj.gov.

29 Id.30 The first appellate decision involving the EEA was the

Third Circuit’s 1998 opinion in United States v. Hsu,155 F.3d 189, 202 (3d Cir. 1998) holding that a chargeof “attempt:” under the EEA requires proof of thesame elements used in other modern attempt statutessuch as the Model Penal Code (MPC)§ 5.01(1)(c)(1985). The second appellate decisioninvolving the EEA was the First Circuit’s 2000opinion in United States v. Martin, 228 F.3d 1 (1st Cir.2000)

31 Id.


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misappropriated was proprietary, and the existenceof a true trade secret.

7. The Trade Secrets ActThe Trade Secrets Act, 18 U.S.C. § 1905,

was originally enacted in 1864 out ofCongressional concern over disclosure of businessinformation by “feckless or corrupt revenue

agents.”32 The current version of § 1905 is

somewhat limited33 stemming from Congress’consolidation of three statutes in 1948 andCongress’ “recogni[zing] that increasedgovernmental access to financial records andcommercial operations of individuals and entities* * * had to be accompanied by some restraint onthe freedom of governmental employees to

disseminate such data to third parties.”34

The D.C. Circuit has interpreted the Act asproviding that “private commercial and financialinformation should not be revealed by agenciesthat gather it, absent a conscious choice in favor ofdisclosure by someone with power to impart the

force of law to that decision.”35 The SupremeCourt has interpreted “authorized by law” in thestatute to mean that the exercise by an agency ofquasi-legislative power “must be rooted in a grantof such power by the Congress and subject to

limitations which that body imposes.”36

Specifically, the Court held that “[w]hat isimportant” is whether a reviewing court couldreasonably conclude that the statutory grant of

32 Chrysler v. Brown, 441 U.S. 281, 296 (1979).33 See Nat’l Parks and Conservation Ass’n v. Kleppe, 547 F.2d

673, 687 n.50 (D.C. Cir. 1976)(characterizing thestatute as “merely a general prohibition againstunauthorized disclosures of confidential financialinformation”).

34 CNA Fin. Corp. v. Donovan, 830 F.2d 1132, 1149 n.122(D.C. Cir. 1987). See also Qwest Communications Int’l, Inc.v. Federal Communications Comm’n, 229 F.3d 1172 (D.C.Cir. 2000)(holding that § 220(f) of the CommutationsAct of 1934, 47 U.S.C. § 220(f) did not bar release ofcertain data and was consistent with the Trade SecretsAct).

35 CNA, 830 F.2d at 1141.36 Chrysler, 441 U.S. at 302.

authority contemplated the regulations providing

for release of information.”37

B. The Trade Secret Analysis1. The Fundamental Criteria

The criteria adopted by the RESTATEMENT

(FIRST) OF TORTS for determining whether a tradesecret exists are:

(1) the extent to which theinformation is known outside ofthe business;

(2) the extent to which it is knownby employees and othersinvolved in the business;

(3) the extent of measures taken toguard the secrecy of theinformation;

(4) the value of the information tothe business and to competitors;

(5) the amount of effort or moneyexpended in developing theinformation;

(6) the ease or difficulty with whichthe information could beproperly acquired or duplicated

by others.38

The courts have relied heavily on those criteria indetermining whether or not a trade secret exists,even in jurisdictions that have adopted the

Uniform Trade Secrets Act.39 The Food and

37 Id.38 RESTATEMENT (FIRST) OF TORTS § 757 cmt. b (1939).39 See, e.g., Optic Graphics v. Agee, 591 A.2d 578, 585 (Md.

App. 1991)(“Although all of the Restatement’s factorsno longer are required to find a trade secret, thosefactors still provide helpful guidance to determinewhether the information in a given case constitutes‘trade secrets’ within the definition of the statute.”);Basic Am., Inc. v. Shatila, 992 P.2d 175 (Idaho1999)(same); Procter & Gamble Co. v. Stoneham, 747N.E.2d 268, 272 (Ohio App. 2000); Warner-Lambert Co.v. Execuquest Corp., 427 Mass. 46, 691 N.E.2d 545, 547n.5 (1998); Jet Spray Cooler, Inc. v. Crampton, 361 Mass.835, 282 N.E.2d 921 (1972); Phillip Morris, Inc. v. Reilly,113 F. Supp. 2d 129 (D. Mass. 2000); HarvardApparatus, Inc. v. Cowen, 130 F. Supp. 2d 161 (D. Mass.

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Drug Administration (“FDA”) has also adoptedthose criteria in determining whether an ingredientin a cosmetic is a “trade secret” and therefore may

be omitted from an ingredient listing or a label.40

Similar criteria are used in determining whether atrade secret exists for purposes of the related

criminal statutes.41 Those same six criteria havealso been used by some courts to gauge whether atrade secret exists under the Uniform Trade

Secrets Act.42

2. Trade Secret Protection May Exist InCombination Of Well-Known ElementsTrade secret protection may extend to a

compilation of information or a combination of

well-known elements.43 Accordingly, the courts

2001); Hurst v. Hughes Tool Co., 634 F.2d 895 (5th Cir.1981) cert. denied, 454 U.S. 329 (1981); Pate v. Nat’l FundRaising Consultants, Inc., 20 F.3d 341 (8th Cir.1994)(relying on the 6 factors of the Restatement heldthat information concerning cost saving measuresdisclosed in a franchise relationship constituted a tradesecret).; Colson Co. v. Wittel, 569 N.E.2d 1082 (Ill. App.4th Dist. 1991).

40 21 C.F.R. § 20.61, 701.3(a), 720.8 (1987). See also ZotosInt’l, Inc. v. Young, 830 F.2d 350 (D.C. Cir.1987)(holding that the FDA acted arbitrarily andcapriciously in denying trade secret status to aningredient simply because it could be identified byreverse engineering; the FDA failed to apply the otherfactors).

41 See, e.g., Schalk v. State, 823 S.W.2d 633, 21 U.S.P.Q.2d1838 (Tx. Crim. App. 1991).

42 See Roton Barrier, Inc. v. Baer, 79 F.3d 1112, 37U.S.P.Q.2d 1816 (Fed. Cir. 1996); Stampede ToolWarehouse, Inc. v. May, 651 N.E.2d 209, 215-16, 35U.S.P.Q.2d 1134, 1138 (Ill. App. [1st Dist.]1995)(appeal denied).

43 See e.g., Am. Airlines, Inc. v. KLM Royal Dutch Airlines,Inc., 114 F.3d 108 (8th Cir. 1997)(trade secret assertedin “yield management” model that allowed airline tobalance passenger capacity with demand consisting offive specific elements, individually known in theindustry. Summary judgment granted to defendantwhen discovery showed that KLM had acquired onlyfour of the five elements, despite later change intestimony by American’s expert witness that four ofthe five also constituted a trade secret); ThermodyneFood Serv. Prods. v. McDonald’s Corp., 940 F. Supp. 1300,40 U.S.P.Q.2d 1801 (N.D. Ill. 1996)(applying Illinoislaw)(interrelationship of component parts constituted

have extended trade secret protection to computersoftware where the overall combination was“unique” even though the individual elements or

modules were known.44

trade secret.); FMC Corp. v. Spurlin, 596 F. Supp. 609,612-613 (W.D. Pa. 1984)(a design manual, consistingof a compilation of well-known process elements, heldto constitute a trade secret); Amoco Prod. Co. v. Laird,622 N.E.2d 912 (Ind. 1993)(“It is a well-settledprinciple ‘that a trade secret can exist in a combinationof characteristics and components, each of which, byitself, is in the public domain, but the unified processand operation of which, in unique combination,affords a competitive advantage and is a protectablesecret.’”); Nilssen v. Motorola, 963 F. Supp. 664, 673(N.D. Ill. 1997); Cont’l Data Sys., Inc. v. Exxon Corp.,638 F. Supp. 432 (E.D. Pa. 1986)(a software programfor personal injury lawyers using well-known formsand data constituted a sufficiently “novel compilation”to qualify as a trade secret); Metallurgical Indus., Inc. v.Fourtek, Inc., 790 F.2d 1195 (5th Cir. 1986)(the processused well known devices, but that does not preventprotection for the overall process.); Water Servs., Inc. v.Tesco Chems., Inc., 410 F.2d 163 (5th Cir. 1969)(methodof manufacture of automated water purificationsystem which applied known techniques and assemblyof available components to create a successful systemwas protectable).

44 Softel, Inc. v. Dragon Med. and Scientific Communications,Inc., 118 F.3d 955 (2d Cir. 1997), cert. denied, 523 U.S.1020 (1998)(district court’s conclusion that individualsoftware elements/modules were not protectable“does not address Softel’s claim that the combination ofthe elements is a trade secret.”); Vermont Microsystems,Inc. v. Autodesk, Inc., 88 F.3d 142, 39 U.S.P.Q.2d 1421(2d Cir. 1996 ( a “display list driver” described ashaving a unique “architecture which comprises its dataformat and organization, its collection of associateddisplay list data processing algorithms, and its softwarecode implementation,” held to constitute a“combination” trade secret under California law);Rivendell Forest Prods., Ltd. v. Georgia-Pac. Corp., 28 F.3d1042 (10th Cir. 1994)(“a trade secret can exist in acombination of characteristics and components, eachof which, by itself, is in the public domain, but theunified process, design, and operation of which, inunique combination affords a competitive advantageand is a protectable secret.”); Anacomp, Inc. v. Shell KnobServs., Inc., 29 F.3d 621 (2d Cir. 1994)(trade secretexists in the combination of components); IntegratedCash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 920F.2d 171 (2d Cir. 1990)(four utilities making up theICM system were “generic” programs, yet the “way inwhich [ICM’s] various components fit together as







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If the value of the trade secret lies in thecombination or integration, of course, that must be

proved by the owner of the trade secret.45


COMPETITION likewise takes the position thattrade secret protection may extend to the overallcombination even though the individual elementsare well-known: “The fact that some of thecomponents of the trade secret are well-knowndoes not preclude protection for a secretcombination, compilation, or integration of the

individual elements.”46 Comments to theRESTATEMENT (THIRD) OF UNFAIR COMPETITION

further explain: “Self-evident variations ormodifications of known processes, procedures, ormethods also lack the secrecy necessary forprotection as a trade secret. However, it is thesecrecy of the claimed trade secret as a whole thatis determinative. The fact that some or all of thecomponents of the trade secret are well-knowndoes not necessarily preclude protection for asecret combination, compilation or integration of

the individual elements.”47 The comments alsoimportantly point out that: “The theoretical abilityof others to ascertain information by propermeans does not necessarily preclude protection asa trade secret. Trade secret protection remainsavailable unless the information is readily

ascertainable by proper means.”48 [Emphasisadded.]

building blocks in order to form the unique whole” isa protectable trade secret).

45 Comprehensive Techs. Int’l, Inc. v. Software Artisans, Inc., 3F.3d 730, 28 U.S.P.Q.2d 1031 (4th Cir. 1993), vacated,No. 92-1837, 1993 U.S. App. LEXIS 28601 (4th Cir.1993)(dismissed per stipulation of the parties).

46 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 39 cmt. f (1995).

47 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 39 cmt. f (1995). See also Water Servs., Inc. v. TescoChems., Inc., 410 F.2d 163 (5th Cir. 1969); ImperialChem. Indus., Ltd. v. Nat’l Distillers and Chem. Corp., 342F.2d 737 (2d Cir. 1965).


3. The “Secrecy” RequirementThe subject matter of a trade secret must

be secret. Trade secret protection is not, however,lost if the secret is discovered through “impropermeans.” That rule is consistent with thecompanion rule that “absolute” secrecy is notrequired, but reasonable precautions to protect thesecret must be taken.

a. Relative SecrecyThe RESTATEMENT (FIRST) OF TORTS

adopted the “relative” rather than “absolute”

standard of secrecy. 49 The “relative” standard ofsecrecy is also the standard adopted by the UTSA(“not * * * generally known”) and theRESTATEMENT (THIRD) OF UNFAIR COMPETITION.

b. Duty to Protect ConfidentialityThe trade secret owner is under a duty to

take reasonable steps to preserve the secrecy of the

trade secret.50 If the owner of the trade secret is

49 RESTATEMENT (FIRST) OF TORTS, § 757 cmt. b (1939)provides:

Secrecy. The subject matter of a trade secretmust be secret. Matters of publicknowledge or of general knowledge in anindustry cannot be appropriated by one ashis secret. Matters which are completelydisclosed by the goods which one marketscannot be his secret. Substantially, a tradesecret is known only in the particularbusiness in which it is used. It is notrequisite that only the proprietor of thebusiness know it. He may, without losinghis protection, communicate it toemployees involved in its use. He maylikewise communicate it to others pledgedto secrecy. Others may also know of itindependently, as, for example, when they havediscovered the process or formula by independentinvention and are keeping it secret.Nevertheless, a substantial element ofsecrecy must exist, so that, except by theuse of improper means, there would bedifficulty in acquiring the information.[Emphasis added.]

50 E.I. du Pont de Nemours & Co., Inc. v. Christopher, 431F.2d 1012 (5th Cir. 1970), cert. denied, 400 U.S. 1024(1971).










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subsequently found to have inadequately protected

the “secret,” protection will be denied.51

Among the factors that the courts haveconsidered in assessing the reasonableness ofprotective measures are:

1. The existence or absence of anexpress agreement restrictingdisclosure;

2. The nature and extent ofsecurity precautions taken by thepossessor to prevent acquisition ofthe information by unauthorizedthird parties;

3. The circumstances underwhich the information wasdisclosed to employees to theextent that such circumstancesgive rise to a reasonable inferencethat further disclosure, without theconsent of the possessor, isprohibited, and

4. The degree to which theinformation has been placed in thepublic domain or rendered“readily ascertainable” by thethird parties through patentapplications or unrestricted

product marketing.52

“[A] court should consider the relationship and theconduct of the parties,” and it is appropriate tobalance the plaintiff’s conduct in maintaining

51 See, e.g., ConAgra Poultry Co. v. Tyson Foods, Inc., 30S.W.3d 725 (Ark. 2000)(Tyson failed to protect tradesecrets by failing to include non-disclosure provisionsin its customer contracts, and by failing to imposewritten post-termination non-disclosure and non-competition restrictions on its executives); Soap Co. v.Ecolab, Inc., 646 So.2d 1366 (Ala. 1994)(jury issuewhether alleged trade secret owner exercisedreasonable precautions when competitor retrievedinformation and documents from trash containerlocated on owner’s property).

52 See USM Corp. v. Marson Fastener Corp., 379 Mass. 90,393 N.E.2d 895, 900 (1979); Trent Partners & Assoc.,Inc. v. Digital Equip. Corp., 120 F. Supp. 2d 84, 110 (D.Mass. 1999); Baystate Tech., Inc. v. Bentley Sys., Inc., 946F. Supp. 1079, 1092 (D. Mass. 1996).

security measures against the defendant’s conduct

in acquiring the information.53 In short, the

courts apply a balancing test.54

One of the principal precautions taken toprotect trade secrets are employee non-disclosure

or confidentiality agreements.55 Some courtshave indicated that if a trade secretmisappropriation occurs through a breach ofconfidence, less than adequate protection measures

may be excused.56 But, the requirement to takereasonable steps to preserve the secrecy of thetrade secret varies with the circumstances of eachcase, and simply having each employee signconfidentiality agreements may not be adequate

53 USM Corp. v. Marson Fastener Corp., 379 Mass. 90, 393N.E.2d 895, 900 (1979)

54 Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d174, 17 U.S.P.Q.2d 1780 (7th Cir. 1991)(test iswhether the steps taken to protect the trade secret arereasonable in the circumstances of actual use). See alsoSimplified Telesys, Inc. v. Live Oak Telecom, L.L.C., 2000WL 1862122 (Tex. App.-Austin 2000)(non-published,non-precedential)(evidence of substantial time andmoney invested in developing computer program, thatall employees signed confidentiality agreements, andthat individual employees were only allowed to learnseparate parts of the program was sufficient towithstand summary judgment that no trade secretexisted).

55 See Southwest Whey, Inc. v. Nutrition 101, Inc., 117 F.Supp. 2d 770 (C.D. Ill. 2000)(failure to imposeconfidentiality restrictions, even on customers andtruckers, may lead to a finding that no reasonableefforts were undertaken to protect alleged tradesecrets.). But see, Surgidev Corp. v. Eye Tech. Inc., 828F.2d 452, 4 U.S.P.Q.2d 1090 (8th Cir. 1987)(requiringemployees to sign non-disclosure agreements,restricting visitor access to sales and administrativeareas, keeping customer information in locked files,and distributing customer information on a “need-to-know” basis was sufficient to meet the “reasonableprecaution” test).

56 Noddings Inv. Group, Inc. v. Kelley, 1994 U.S. Dist.LEXIS 3246 (N.D. Ill. 1994)(lack of confidentialityagreement not fatal to trade secret misappropriationaction where information disclosed to individuals on aneed to know basis).



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alone to preserve trade secret protection if the

other precautions taken are not sufficient.57

c. Difficulty of Acquiring Through ProperMeans“Relative secrecy” is sometimes measured

by the difficulty in acquiring the trade secret by

proper means.58 For example, it has been heldthat distribution of object code did not operate todisclose the underlying source code because of the

difficulty in reverse engineering.59

d. Disclosure Outside an Obligation ofConfidentialityCertainly the surest way to lose a trade

secret, however, is to generally disclose it outsideof an express or implied obligation ofconfidentiality.

If you do not want another to tellyour secrets, you must not tellthem yourself.

Seneca: Phaedra60

57 Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d890 (Minn. 1983)(although each employee had signeda confidentiality agreement, and matter had beenfound to constitute a trade secret and to have beenmisappropriated, other precautions plaintiff took werefound to be inadequate under the circumstances. Inresponse, the Minnesota legislature specificallyamended its version of the UTSA to provide that“[t]he existence of a trade secret is not negated merelybecause an employee or other person has acquired thetrade secret without express or specific notice that it isa trade secret if, under all the circumstances, theemployee or other person knows or has reason toknow that the owner intends or expects the secrecy ofthe type of information comprising the trade secret tobe maintained.”)

58 Celeritas Techs., Ltd. v. Rockwell Int’l Corp., 150 F.3d1354, 47 U.S.P.Q.2d 1516 (Fed. Cir. 1998);

59 See Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655,27 U.S.P.Q.2d 1014 (4th Cir. 1993), cert. denied, 510U.S. 965 (1993)(distribution of object code does notpreclude trade secret protection because of difficultyin reverse-engineering).

60 See Southwest Whey, Inc. v. Nutrition 101, Inc., 117 F.Supp. 2d 770 (C.D. Ill. 2000).

(1) Obligation of Confidentiality Must BeUnderstood By Both PartiesWhether there is, in fact, an obligation of

confidentiality must be clearly understood by both

parties.61

(2) Obligation of Confidentiality May BeImpliedWhether or not an obligation of

confidentiality will be implied sometimes turns onwhether the recipient of the information directly or

indirectly solicited or encouraged the disclosure.62

61 Snead v. Redlen Aggregates, Ltd., 998 F.2d 1325 (5th Cir.1993), cert. dism’d, 114 S. Ct. 1587 (1994)(non-disclosure agreement was obtained based onrepresentations that patent had been filed when it hadnot – held that information was not a trade secret andnon-disclosure agreement had no effect because basedon fraud); Harbor Software, Inc. v. Applied Sys., 887 F.Supp. 86 (S.D.N.Y. 1995)(applying Illinois law, motionfor summary judgment denied because whether therewas an implied obligation of confidentiality was aquestion of fact); Cont’l Data Sys., Inc. v. Exxon Corp.,638 F. Supp. 432 (E.D. Pa. 1986)(orally cautioningprospective customers that a computer programmanual was confidential was sufficient under thecircumstances).

62 Injection Research Specialists, Inc. v. Polaris Indus., L.P.,1998 U.S. App. LEXIS 18745 (Fed. Cir. 1998)(non-precedential)(actual damages of $24 million andpunitive damages of $10 million against Polaris, andactual damages of $15 million and punitive damages of$8 million against Fuji (punitive damages vacated bydistrict court) under Colorado Uniform Trade SecretsAct). According to the Federal Circuit, the relevantinquiry was whether Polaris “knew or had reason toknow” that it was acquiring information fromInjection Research under circumstances giving rise toa duty to maintain its secrecy or limit its use. Basedon the evidence before the court, including evidencethat Polaris had hired an independent contractor forInjection Research who had access to InjectionResearch’s trade secret information, there was ampleevidence to support the jury’s finding ofmisappropriation. See also Phillips v. Frey, 20 F.3d 623,30 U.S.P.Q.2d 1755 (5th Cir. 1994)(disclosure of amanufacturing process had been made without anyexpress obligation of confidentiality, but disclosurehad been made during the course of discussions inwhich the defendants had offered to buy the plaintiff’sbusiness. The Fifth Circuit held that in such asituation, a jury could find that the defendants knewor should have known that the information was atrade secret, and that the disclosure was being made in

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Thus, although an obligation of confidentialitymay be implied in appropriate instances, thatobligation must be one that both partiesunderstand exists based either on the actualdealings between the parties, standard practices inthe industry, the parties relationship, or otherfactors indicating that both parties knew or shouldhave known that the information or materials wereconfidential.

(3) Simple Mechanical ProductsRelatively simple mechanical products

may be difficult to protect as a trade secret becauseof the ease with which they can be reverseengineered from the publicly sold product.However, the manufacturing process maynevertheless constitute a trade secret deserving ofprotection, especially in instances where thatmanufacturing process has been learned through

“improper means.”63

confidence); Bateman v. Mnemonics, Inc., 79 F.3d 1532,38 U.S.P.Q.2d 1225 (11th Cir. 1996)(“We are wary ofany trade secret claim predicated on the existence ofan ‘implied’ confidential relationship * * * .”); Smith v.Snap-On Tools Corp., 833 F.2d 578 (5th Cir. 1988)(notrade secret protection when the evidence indicatedthat Smith had made a voluntary disclosure outside ofan express or implied obligation of confidentiality).

63 See, e.g., EFCO Corp. v. Symons Corp., 219 F.3d 734, 741(8th Cir. 2000)(“none of [EFCO’s] trade secrets wouldbe ascertainable to the naked eye by looking at itsproducts [concrete forming molds] because itsmanufacturing process cloaked the secrets” Symonshired EFCO ex-employee and avoided non-competition covenant by having third party pay him).See also Reingold v. Swiftships, Inc., 126 F.3d 645, 44U.S.P.Q.2d 1481 (5th Cir. 1997).(boat hull moldprotected as a trade secret under terms of lease);Phillips v. Frey, 20 F.3d 623, 30 U.S.P.Q.2d 1755 (5thCir. 1994)(deer stands at issue here were unique singlepole deer stands that were collapsible and consisted offour main parts: the upper seat section and threeladder pole sections that enabled the seat to beelevated approximately fourteen feet above theground. The design for the stands had taken Mr.Philips three years to develop. Although the deerstands could be reverse engineered, the actual processfor producing those deer stands could not. Here theprocess had been obtain improperly by thedefendants)

(4) Disclosure in an Issued Patent“Trade secret” information that is

published in a patent is disclosed and no longer

entitled to trade secret protection.64 On the otherhand, that which is not disclosed in the patent can

be retained as a trade secret.65 However, theprevailing rule in Texas and other jurisdictions isthat issuance of a patent does not destroy the rightof a trade secret owner to recover formisappropriation of a trade secret that occurred

before the patent issued.66 Additionally, issuance

64 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 39 cmt. f (1995)(“[I]nformation that is disclosed in apatent or contained in published materials reasonablyaccessible to competitors does not qualify forprotection under this Section.”); Forcier v. MicrosoftCorp., 123 F. Supp. 2d 520 (N.D. Cal.2000)(confirming that Microsoft could not be liablefor misappropriation of trade secrets that had beendisclosed in issued patents prior to its acquisition of acompany that had allegedly misappropriated thosetrade secrets); Atlas Bradford Co. v. Tuboscope Co., 378S.W.2d 147 (Tex. Civ. App.–Waco 1964, no writ);Keystone Plastics, Inc. v. C & P Plastics, Inc., 340 F. Supp.55 (S.D. Fla. 1972), aff'd, 506 F.2d 960 (5th Cir. 1975);Scharmer v. Carrollton Mfg. Co., 525 F.2d 95 (6th Cir.1975); Felmlee v. Lockett, 351 A.2d 273 (Pa. 1976). Thatis also consistent with the corresponding rule underpatent law that information disclosed, but not claimed,in a patent is deemed dedicated to the public subjectto possible recapture if the patentee acts quicklyenough. In re Gibbs, 437 F.2d 486, 168 U.S.P.Q. 578(C.C.P.A. 1971).

65 Thermotics, Inc. v. Bat-Jac Tool Co., Inc., 541 S.W.2d 255,261 (Tex. Civ. App.–Houston [1st Dist.] 1976, nowrit); Lamb-Weston, Inc. v. McCain Foods, Ltd., 941 F.2d970 (9th Cir. 1991). See also Modern Controls, Inc. v.Andreadakis, 578 F.2d 1264, 1269 n.10 (8th Cir. 1978);Henry Hope X-Ray Prods., Inc. v. Marron Carrel, Inc., 674F.2d 1336, 1342 (9th Cir. 1982). See also Christianson v.Colt Indus. Operating Corp., 822 F.2d 1544 (Fed. Cir.1987), vacated and ordered transferred 108 S. Ct. 2166(1988), decided, 870 F.2d 1292, 10 U.S.P.Q. 2d 1352(7th Cir. 1989)(the requirements of 35 U.S.C. § 112 donot require a description of how to mass-produce theinventions).

66 Hyde Corp. v. Huffines, 314 S.W.2d 763 (Tex. 1958), cert.denied, 358 U.S. 898 (1958); Atlas Bradford Co. v.Tuboscope Co., supra; Bryan v. Kershaw, 366 F.2d 497 (5thCir. 1966), cert. denied, 386 U.S. 959 (1967); ForscanCorp. v. Dresser Indus., Inc., 789 S.W.2d 389 (Tex. App.–Houston [14th Dist.] 1990, writ denied). See alsoGoldberg v. Medtronic, Inc., 686 F.2d 1219 (7th Cir.













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of a patent does not foreclose a trade secretmisappropriation action for information not

disclosed in the patent.67

Courts relying on the “equitable” theoryof trade secret law generally rely to some degreeon Justice Holmes’ now famous comment in E.I.

du Pont de Nemours Powder Co. v. Masland,68

that the “word property as applied to trade-marksand trade secrets is an unanalyzed expression ofcertain secondary consequences of the primaryfact that the law makes some rudimentaryrequirements of good faith. * * * The propertymay be denied by the confidence cannot be.” TheUTSA, though, is generally premised on a“property” theory, but with equitable factors, suchas acquisition through “improper means.”

Courts in those now few states, like Texas,that have not adopted the UTSA arguably follow

the “equitable” theory.69 For example, in Smith v.

Snap-On Tools Corp.,70 the Fifth Circuit notedthat “[t]he essence of the tort of trade secretmisappropriation is the inequitable use of the

1982); Franke v. Wiltschek, 209 F.2d 493 (2d Cir. 1953);Classic Instruments, Inc. v. VDO-Argo Instruments, Inc., 700P.2d 677 (Or. 1985); A.O. Smith Corp. v. Petroleum IronWorks Co., 74 F.2d 934 (6th Cir. 1935); Shellmar Prods.Co. v. Allen-Qually Co., 87 F.2d 104 (7th Cir. 1936).Compare Conmar Prods. Corp. v. Universal Slide FastenerCo., 172 F.2d 150 (2d Cir. 1949), with Timely Prods.Corp. v. Arron, 523 F.2d 288 (2d Cir. 1975).

67 Injection Research Specialists, Inc. v. Polaris Indus., L.P.,1998 U.S. App. LEXIS 18745 (Fed. Cir. 1998)(non-precedential)(“That these claimed trade secrets mayhave been disclosed by the publication of the ‘701patent was an affirmative defense raised by Polaris andFuji. * * * Accordingly, after Injection Researchpresented a prima facie case establishing to the jury’ssatisfaction the element of appropriately safeguardingits claimed trade secrets, the burden shifted to Polarisand Fuji to persuade the jury of their affirmativedefense. * * * [T]he question of whether the patent orother form of publication discloses the same subjectmatter as the claimed trade secret is not assumed, butis a question of fact to be answered by the jury.”).

68 244 U.S. 100, 102 (1917).69 See, e.g., RESTATEMENT (FIRST) OF TORTS § 757cmt.

(a).70 833 F.2d 578 (5th Cir. 1987).

secret.” Under an equitable theory, a cause ofaction for misappropriation and recovery ofsubsequent damages may be had even thoughsome action, for example the publication of apatent application, has occurred that has resultedin a loss of trade secret protection, provided the act

of misappropriation occurred first. 71 However,where the public disclosure of a trade secret is dueto the trade secret owner’s own actions, i.e.,publication of a patent application, under either the“equitable” or “property” theories, there isauthority that protection (and liability) should

cease at that point.72

(5) Limited Disclosure Does Not PrecludeTrade Secret ProtectionLimited disclosures, even without express

or implied obligations of confidentiality, havebeen held not to destroy trade secret protection, ifthe owner otherwise takes adequate securityprecautions, the disclosure is limited, and theinformation does not, as a result, become generally

known.73

4. Patent Law Type “Novelty” Is NotRequiredComment b to § 757 of the RESTATEMENT

(FIRST) OF TORTS makes clear that “novelty” inthe patent law sense is not a requirement for trade

secret protection. 74 Novelty in a patent law sense

71 See e.g.., Group One, Ltd. v. Hallmark Cards, Inc., 254F.3d 1041, 59 USPQ2d 1121 (Fed. Cir. 2001) (holding,despite the lack of any definitive authority, thatMissouri followed the “property” theory prior toadoption of the UTSA, and therefore any possiblemisappropriation ended when a Patent CooperationTreaty (PCT) patent application was published.).

72 See PETERSON, TRADE SECRET PROTECTION IN ANINFORMATION AGE § 13.3 (1996)(and cases citedtherein).

73 Metallurgical Indus., Inc. v. Fourtek, Inc., 790 F.2d 1195,229 U.S.P.Q. 945 (5th Cir. 1986).

74 This portion of the comment seems to have beengenerally accepted by the courts, see, e.g., Dionne v.Southeast Foam Converting & Packaging, Inc., 397 S.E.2d110, 17 U.S.P.Q.2d 1565 (Va. 1990)(“[i]ndeed, a tradesecret ‘may be a device or process which is clearlyanticipated in the prior art or one which is merely amechanical improvement that a good mechanic canmake.’”), with some caveats—for example, it is


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is not required because trade secret protection doesnot protect against independent creation, as does

patent protection.75 Thus, the fact that the U.S.Patent & Trademark Office may have refused togrant a patent on the process that is asserted as atrade secret is not determinative of whether a trade

secret exists.76 Some minimal amount of novelty,

however, is generally required.77


COMPETITION likewise takes the view that“novelty,” in a patent law sense, is not required,but notes that the secrecy requirement effectivelycreates a minimal level of advance necessary tosecure trade secret protection: “However, somenovelty will be required if merely because thatwhich does not possess novelty is usually known;

probably not the general rule that “merely a mechanicalimprovement that a good mechanic can make” willqualify as a trade secret. See, e.g., Alderman v. TandyCorp., 720 F.2d 1234, 1235-36 (11th Cir. 1983).

75 Softel, Inc. v. Dragon Med. and Scientific Communications,Inc., 118 F.3d 955, 43 U.S.P.Q.2d 1385 (2d Cir.1997)(cautioning district court on remand that“novelty” in the patent law sense is not required fortrade secret protection, and that district court shouldnot confuse the use of the term “novelty” in ideasubmission cases with the use of the same term intrade secret cases because “‘novelty’ is used in this lineof cases in a very different, and much weaker, sensethan it is used in patent law.”); Hudson Hotels Corp. v.Choice Hotels Int’l, 995 F.2d 1173 (2d Cir.1993)(“novelty” is necessary in a trade secret case, butnot the same type of “novelty” as in the patent lawsense); Buffets, Inc. v. Klinke, 73 F.3d 965, 968 (9th Cir.1996)(a finding of novelty in recipes is not requiredwhere recipes were more detailed than competitors).But see Blank v. Pollack, 916 F. Supp. 165, 174(N.D.N.Y. 1996)(a trade secret owner “mustdemonstrate novelty and originality to be protectableas a property right”).

76 See, e.g., Basic Am., Inc. v. Shatila, 992 P.2d 175 (Idaho1999).

77 Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 476(1974); K & G Oil Tool & Serv. Co., Inc. v. G & GFishing Tool Serv., 314 S.W.2d 782 (Tex. 1958), cert.denied, 358 U.S. 898 (1958); Cataphote Corp. v. Hudson,444 F.2d 1313 (5th Cir. 1971)(a trade secret must have“at least that modicum of originality which willseparate it from every-day knowledge”). See alsoAlderman v. Tandy Corp., 720 F.2d 1234 (11th Cir.1983)(applying Texas law).

secrecy, in the context of trade secrets, thus

implies at least minimum novelty.”78 Clearly,matters of public or general knowledge in anindustry cannot be appropriated by one company

as a trade secret.79

C. Potential Trade Secret Subject Matter1. Trade Secret Information

Computer hardware and software, withinlimits, have long been held to qualify for trade

secret protection.80 Additionally, the courts haveconcluded that a wide variety of types of computersoftware are available for trade secret protection,including data processing programs in the health

care field,81 accounting software,82 diagnostic

78 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 39 cmt. f (1995), quoting Kewanee Oil Co. v. BicronCorp., 416 U.S. 470, 476 (1974).

79 See e.g., Vigoro Indus., Inc. v. Crisp, 82 F.3d 785 (8th Cir.1996)(information concerning the needs of farmersfor fertilizer not a trade secret); Sungard Data Sys., Inc.v. Devlin, 37 U.S.P.Q.2d 1190, 1995 U.S. Dist. LEXIS10595 (E.D. Pa. 1995)(injunction denied whereinformation regarding disaster recovery plan wasgenerally known); Cockerham v. Kerr-McGee Chem. Corp.,23 F.3d 101 (5th Cir. 1994)(applying Mississippi law,found that the location of a fill dirt site not a tradesecret because it was readily ascertainable); Hoffman-LaRoche, Inc. v. Yoder, 950 F. Supp. 1348 (S.D. Ohio1997)(clinical trial information held not to constitute atrade secret where security precautions wereinadequate, namely failure to obtain signedconfidential agreement from investigator, documentsmost not marked “confidential,” information waswidely disseminated, lack of document control, and nopolicy on retrieving “confidential” documents afterdissemination); Midgard Corp. v. Todd, 1997 U.S. App.LEXIS 3873 (10th Cir. 1997)(non-precedential)(general business information relating tocustomers, suppliers, pricing and practices); RSR Corp.v. Browner, 924 F. Supp. 504 (S.D.N.Y. 1996), aff’d,1997 U.S. App. LEXIS 5523 (2d Cir. 1997)(monthlyproduction rates that constitute “effluent data” underthe Clean Water Act, 33 U.S.C. §§ 1251 et seq. held notto constitute confidential information for purposes ofFreedom of Information Act “confidential businessinformation exception,” 5 U.S.C. § 554(b)(4)).

80 Elec. Data Sys. Corp. v. Heinemann, 268 Ga. 755, 493S.E.2d 132 (Ga. 1997)(“It is well-accepted thatcomputer software may constitute trade secrets.”).

81 See, e.g., Elec. Data Sys. Corp. v. Kinder, 497 F.2d 222(5th Cir. 1974).

















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software,83 and inventory control programs.84

Indeed, there is currently little question thatvirtually all types of software potentially qualifiesfor trade secret protection.

The definitions in both Restatements andthe UTSA are broad enough to include a variety oftechnical and non-technical materials andinformation. Cases within the past few yearsinclude, a method of introducing additives to

potatoes,85 information learned by an attorney in

representing a client,86 process for making and

freezing precooked sausage,87 informationconcerning business methods and procedures,business accounts and names of insurance policy

holders,88 warehouse logistics system includingarchitectural layout, customized equipment andcomputer software designed over a three-yearperiod with a development cost exceeding $2

million,89 business information consisting of amarketing program that contained product-lineinformation and development and sales

82 See, e.g., Aries Info. Sys., Inc. v. Pac. Mgmt. Sys. Corp., 366N.W.2d 366 (Minn. Ct .App. 1985); McCormack &Dodge Corp. v. ABC Mgmt. Sys., Inc., 222 U.S.P.Q. 432(Wash. Sup. Ct. 1983).

83 See, e.g., GCA Corp. v. Chance, 217 U.S.P.Q. 718 (N.D.Calif. 1982).

84 Univ. Computer Co. v. Lykes-Youngstown Corp., 504 F.2d518 (5th Cir. 1974).

85 Basic Am., Inc. v. Shatila, 992 P.2d 175 (Idaho 1999).86 Hyman Cos., Inc. v. Brozost, 119 F. Supp. 2d 499 (E.D.

Pa. 2000)(an injunction may issue precluding anattorney from representing a new client in areas inwhich the attorney had trade secret informationregarding store profitability and lease negotiations).

87 C&F Packing Co., Inc. v. IBP, Inc., 224 F.3d 1296 (Fed.Cir. 2000).

88 Union Life Ins. Co. v. Tillman, 143 F. Supp. 2d 638(N.D. Miss. 2000) .

89 Essex Group, Inc. v. Southwire Co., 501 S.E.2d 501 (Ga.1998)(“The fact that some or all of the components ofthe trade secret are well-known does not precludeprotection for a secret combination, compilation, orintegration of the individual elements,” quoting withapproval RESTATEMENT (THIRD) OF UNFAIRCOMPETITION § 39(f)).

strategies,90 information concerning a hotel’soccupancy levels, average daily rates, discountingpolicies, rate levels, long term contracts, marketing

plans, and operating expenses,91 customer andpricing information that included profits percustomer, sales per customer, special suppliers,

overhead and specific pricing information,92

information concerning high-performance

upgrades for certain automobiles,93 telemarketing

technology,94 fudge making recipe,95 a mailinglist strategy, program evaluations and registrant

lists for continuing education seminars,96

applications engineering and customer

information,97 information in a franchise manualconcerning the operation of an advertising circular

franchise,98 insurance customer informationprotected against misappropriation by former

agents,99 information obtained from a non-clientby an associate in a law firm under confidentialityagreements in connection with the investigation ofalleged failure to pay overriding royalties incertain oil and gas properties and later used to

90 Heller Invs., Inc. v. Kroy, Inc., 1998 WL 422182 (Minn.App. 1998)(unpublished).

91 Camp Creek Hospitality Inns, Inc. v. Sheraton FranchiseCorp., 139 F.3d 1396 (11th Cir. 1998)..

92 Hydraulic Exch. and Repair, Inc. v. KM Specialty Pumps,Inc., 690 N.E.2d 782, 46 U.S.P.Q.2d 1291 (Ind. Ct.App. 1998) .

93 T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965S.W.2d 18 (Tx. App.–Houston [1st Dist.] 1998, nowrit).

94 APAC Teleservices, Inc. v. McRae, 985 F. Supp. 852(N.D. Iowa 1997).

95 Christopher M’s Hand Poured Fudge, Inc. v. Hennon, 699A.2d 1272 (Pa. Super. Ct. 1997).

96 Med. Educ. Servs., Inc. v. Health Educ. Network, L.L.C.,1998 Wis. App. LEXIS 456 (Wis. Ct. App.1998)(unpublished).

97 Eng’g Res., Inc. v. CRS Stream, Inc., 1997 U.S. Dist.LEXIS 6101 (N.D. Ill. 1997).

98 Gold Messenger, Inc. v. McGuay, 937 P.2d 907 (Colo. Ct.App. 1997).

99 IDS Life Ins. Co. v. Sunamerica, Inc., 958 F. Supp. 1258(N.D. Ill. 1997).

















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prepare and file a class action suit on behalf of

royalty owners,100 detailed manufacturing

drawings,101 and knowledge that a particularfeature or compound has certain characteristicsthat make it useful or an “essential ingredient”even though the feature or compound is otherwise

known and the overall combination is known.102

2. Non-Trade Secret InformationMost cases in which the information was

found not to constitute a trade secret turn on thelack, or inadequacy, of the precautions taken bythe “trade secret” owner, rather than the “type” ofinformation involved. Such cases include, forexample, by providing in an employmentagreement that an employee agreed not to divulgeany trade secret “during or for a period of one yearafter termination of my employment,” theemployer manifested an intent that after theexpiration of that period a former employee was

under no restrictions,103 real estate informationheld not to be a trade secret under GeorgiaUniform Trade Secrets Act when it consisted ofknowledge that any sophisticated real estate

investor would know or have access to,104 aproposal for putting a lye-based hair relaxer in asqueezable tube and using the tube to apply theproduct, when non-lye-based hair relaxers hadbeen marketed in squeezable tubes and at least oneother company had sold hair relaxer in plastic

100 Southwestern Energy Co. v. Eickenhorst, 955 F. Supp.1078, 42 U.S.P.Q.2d 1824 (W.D. Ark. 1997).

101 DB Riley, Inc. v. AB Eng’g Corp., 977 F. Supp. 84 (D.Mass. 1997)(but efforts were insufficient to protecttrade secret).

102 Mangren Research and Dev. Corp. v. Nat’l Chem. Co., Inc.,87 F.3d 937 (7th Cir. 1996)(single “essential”ingredient provided basis for trade secret). See alsoSovereign Chem. Co. v. Condren, 47 U.S.P.Q.2d 1120(Ohio Ct. App. 1998).

103 ECT Int’l, Inc. v. Zwerlein, 597 N.W.2d 479 (Wis. Ct.App. 1999)(“By limiting the period in which anemployee agreed not to divulge trade secrets [theemployer] manifested its intent that after one yearthere was no need to maintain the secrecy of anysensitive and confidential information [the employee]learned while employed.”).

104 Capital Asset Research Corp. v. Finnegan, 160 F.3d 683(11th Cir. 1998).

squeezable tubes,105 a casino’s record of their“community contribution,” an amount equal totwo percent of “Net Wins” from certain gamblingoperations, was not a protectable trade secretbecause the tribes failed to establish that thecasino’s profitability was not easily accessible to

the public,106 a beef fajita marinating process,107

insurance policyholder information,108 clinicaltrial information held not to constitute a tradesecret where security precautions were inadequate,namely failure to obtain signed confidentialagreement from investigator, documents most notmarked “confidential,” information was widelydisseminated, lack of document control, and nopolicy on retrieving “confidential” documents

after dissemination,109 general businessinformation relating to customers, suppliers,

pricing and practices,110and monthly productionrates that constitute “effluent data” under theClean Water Act, 33 U.S.C. §§ 1251 et seq. heldnot to constitute confidential information forpurposes of Freedom of Information Act“confidential business information exception,” 5

U.S.C. § 554(b)(4).111

105 Pope v. Alberto-Culver Co., 694 N.E.2d 615 (Ill. App.1998).

106 Confederated Tribes v. Johnson, 958 P.2d 260 (Wash.1998)(the casino’s profitability could be ascertained byvisiting the casino, reading newspaper articles, or byspeaking with employees, tribal members, or localservice agencies which received the requiredcommunity contributions).

107 H.E. Butt Grocery Co. v. Moody’s Quality Meats, Inc., 951S.W.2d 33 (Tex. App.−Corpus Christi 1997, nowrit)(“Moody’s process was commonly knownbecause it was published and widely distributed in theindustry before HEB began making pre-marinatedfajitas.”).

108 Mutual Life Ins. Co. of New York v. Veselik, 1998 WL30672 (N.D. Ill. 1998).

109 Hoffman-La Roche, Inc. v. Yoder, 950 F. Supp. 1348(S.D. Ohio 1997).

110 Midgard Corp. v. Todd, 1997 U.S. App. LEXIS 3873(10th Cir. 1997)(non-precedential).

111 RSR Corp. v. Browner, 924 F. Supp. 504 (S.D.N.Y.1996), aff’d, 1997 U.S. App. LEXIS 5523 (2d Cir.1997).





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3. Customer Listsa. Information Is Readily Ascertainable

Trade secret protection will not generally

attach to customer lists and lists of suppliers112

where the information is readily ascertainable

from public sources.113

112 See e.g.., John Paul Mitchell Sys. v. Randalls Food Mkts.,Inc., 17 S.W.3d 721 (Tex. App.–Austin 2000,denied)(list of suppliers may constitute a trade secretthat is privileged from disclosure except on a showingthat such a list is necessary for a fair adjudication).

113 See e.g., Harvest Life Ins. Co. v. Getche, 701 N.E.2d 871(Ind. App. 1998)(“[O]ur examination of case lawshows that where the information in question is apolicyholder list of an insurance company, thatinformation, which can include names of customers,policy coverage, premium amounts, and expirationdates, is not a trade secret. * * * The rationale whichhas been followed in these cases is that theinformation could be obtained from the policyholderhimself, from the policy, or from other materialsprovided to the policyholder by the insurancecompany.”); Early, Ludwick & Sweeney, L.L.C. v. Steele,1998 WL 526156 (Conn. Super. 1998)(law firm clientlist of plaintiffs in pediatric lead poisoning cases heldnot to be a trade secret under the ConnecticutUniform Trade Secrets Act. Twelve of the sixteenclients that the departing lawyer had contacted hadfiled suit, and their names, addresses etc., were amatter of public record. Of the remaining four, twoelected to stay with the original law firm, the firmvoluntarily turned the file of a third over to thedeparting lawyer, and the departing lawyer took thefourth file openly and with the knowledge of the lawfirm); Am. Red Cross v. Palm Beach Blood Bank, Inc., 143F.3d 1407, 47 U.S.P.Q.2d 1139 (11th Cir. 1998)(blooddonor lists were not protectable where at leastportions of the list were posted on computer bulletinboards and many donor groups publicly revealed theirsponsorship); H&R Recruiters, Inc. v. Kirkpatrick, 663N.Y.S.2d 865 (N.Y. App. Div. 1997)(“Under thecircumstances of the instant case, the restrictivecovenant [not to compete] in the employmentagreement is not enforceable because the plaintiff’sclient lists do not qualify for trade secret protection.”);Vigoro Indus., Inc. v. Crisp, 82 F.3d 785 (8th Cir.1996)(customer list for Arkansas farm store held notto constitute a trade secret because identity ofcustomers in small geographical area could be easilydiscovered); Animal Health Clinic, P.C. v. AndreaAutorino, D.V.M., 1998 Conn. Super. LEXIS 801(1998)(unpublished)(list of veterinarian’s clientsobtained from “call-back” slips held not to constitutea trade secret); Roessel Cine Photo Tech, Inc. v. Kapsalis, 43

b. Information Is Not Readily AscertainableIf the customer list contains information

not generally known in the trade and not generallyin use by good faith competitors, and if theproprietor has taken reasonable steps to preserve

the secrecy of that information,114 then such lists

are protectable.115 Lists containing specialized

information have also been protected.116

U.S.P.Q.2d 1134 (N.Y. Sup. Ct. 1997)(customer listsof borescope [very long lenses which attach to a filmcamera and permit extreme close-ups] held not toconstitute a trade secret because customers werereadily ascertainable); Sternberg v. Satco Casting Serv., Inc.,42 U.S.P.Q.2d 1889 (E.D. Pa. 1997)(customer lists,labor costs and names of suppliers held not toconstitute trade secrets because information known toall employees, readily ascertainable from publicsources, and employer made no effort to protectinformation); Uncle B’s Bakery, Inc. v. O’Rourke, 920 F.Supp. 1405 (N.D. Iowa 1996)(identity of “brokers”where there was a failure “to demonstrate that thisinformation is not readily ascertainable upon inquiry inthe industry”); John Deere Ins. Co. v. Ricker, 1997 OhioApp. LEXIS 3718 (1997)(customer files of aninsurance agent held not to qualify as a trade secretbecause information concerning customers was readilyascertainable from public sources). But see Fred SiegelCo., L.P.A. v. Arter & Hadden, 1997 Ohio App. LEXIS3397 (1997)(in action for “business interference” by alaw firm against former associate who used the firm’sclient list to generate mailing list at new firm, held thata law firm may bring a tort action for businessinterference against a former employee, but adeparting attorney has a privilege to inform thoseclients for whom he/she worked that he/she wasleaving the firm. That privilege does not, however,extend to all clients of the firm. The court furtherheld that the law firm’s client list qualified as a tradesecret under the Ohio trade secret statute).

114 See e.g., North Atlantic Instruments, Inc. v. Haber, 188F.3d 38 (2d Cir. 1999).

115 Fred’s Stores of Mississippi, Inc. v. M & H Drugs, Inc., 725So. 2d 902, 911 (Miss. 1998)(pharmacy’s mastercustomer list held to constitute a trade secret); MerrillLynch, Pierce, Fenner & Smith, Inc. v. Davis, 1998 U.S.Dist. LEXIS 20675 (N.D. Tex. 1998)(“This court hasroutinely held that Merrill Lynch's customer listsqualify as trade secrets.”); Clifford McFarland Read &Lundy, Inc. v. Brier, 1998 WL 269223 (R.I. Super.1998)(“[T]his Court finds that customer informationconcerning credit history, sales volume, prospectivefuture business, service relationships, special needs ofcustomers, supplier lists, cost information, pricing










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policies, and profitability are trade secrets as defined[by the Rhode Island Uniform Trade Secrets Act].”);Gazelah v. Rome Gen. Practice, P.C., 502 S.E.2d 251 (Ga.App. 1998)(waiting room patient lists in weight lossclinic protected); Evan’s World Travel, Inc. v. Adams, 978S.W.2d 225 (Tex. App.–Texarkana 1998, nowrit)(travel agency customer lists held to constituteconfidential information sufficient to support acovenant not to compete despite minimal evidence ofthe same); D.L. Ricci Corp v. Forsman, 1998 WL 202595(Minn. Ct. App. 1998)(preliminary injunction grantedto enforce non-competition agreement and to protecttrade secret rights in certain customer information);Merrill Lynch Pierce Fenner & Smith v. Zimmerman, 42U.S.P.Q.2d 1149 (D. Kan. 1996)(injunction granted toprotect information in documents taken by financialconsultant who later solicited former employer’scustomers); DeGiorgio v. Megabyte Int’l, Inc., 266 Ga.539, 468 S.E.2d 367 (Ga. 1996)(customer and vendorlists protected as trade secrets); HBD, Inc. v. Ryan, 642N.Y.S.2d 913, 1996 N.Y. App. Div. LEXIS 5101(N.Y. App. Div. 1996)(customer list of customersemployee developed a “rapport” with); SethscottCollection, Inc. v. Durable, 669 S.2d 1076 (Fla. Dist. Ct.App. 1996)(customer list containing names of severalthousand fraternities and sororities was not aprotectable trade secret because readily ascertainable,but a list containing purchasing histories for variousfraternities and sororities was protected because thatinformation was not readily available to the public);Aloi Elec. Serv. v. ASAP Fire Equip., 1996 Conn. Super.LEXIS 1564 (Conn. Super. Ct. 1996)(“sensitivecustomer service data that has been accumulated overa number of years * * * essential to the effectiveserving of accounts * * * [and that] has been privatelymaintained by the plaintiff’s president for theplaintiff’s exclusive use and benefit.”). See also Bohler-Uddeholm America, Inc. v. Ellwood Group, Inc., 247 F.3d79, 107 (3d Cir. 2001)(“Pennsylvania law is * * * clearthat this kind of information [client lists and profiles,pricing information, and shipping-to information] canbe a trade secret.”).

116 Several states in adopting versions of the UTSA haveincluded language in the definition of a trade secretseemingly in an effort to specifically include customerlists or information. Illinois added “technical ornontechnical data,” “drawings,” and “financial data, orlist of actual or potential customers or suppliers.”Connecticut and Oregon added “drawings,” “costdata,” and “customer list.” Colorado omitted some ofthe laundry list from the “official” definition in theUTSA, but then added “the whole or any portion orphase of any scientific or technical information,design, procedure, improvement, confidential businessor financial information, listing of names, addresses,or telephone numbers, or other information relating

c. Work Effort In DevelopingIn determining whether information has

“independent economic value” under the UTSA orwould provide a competitive advantage under theRESTATEMENT (FIRST) OF TORTS, one of the keyfactors used by the courts appears to be the effortand expense that was expended on developing theinformation. For example, in Morlife, Inc. v.

Perry,117 involving a customer list for a businessinvolved in inspecting, maintaining, and repairingroofs primarily for commercial propertiesprotected as a trade secret which had beendeveloped through telemarketing, sales visits,mailings, advertising, membership in tradeassociations, referrals and research, and in whichonly 1 in 10 contacts resulted in a customer, thecourt held:

[W]here the employer hasexpended time and effortidentifying customers withparticular needs or characteristics,courts will prohibit formeremployees from using thisinformation to capture a share ofthe market. Such lists are to bedistinguished from mere identitiesand locations of customers whereanyone could easily identify theentities as potential customers.* * * As a general principle, themore difficult information is toobtain, and the more time andresources expended by anemployer in gathering it, the morelikely a court will find suchinformation constitutes a tradesecret. [Citations omitted.]

Or, as the court also explained:

As a general principle, the moredifficult information is to obtain,and the more time and resourcesexpended by an employer ingathering it, the more likely a

to any business or profession which is secret and ofvalue.”

117 56 Cal. App. 4th 1514, 45 U.S.P.Q.2d 1741 (Cal. Ct.App. 1997).










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court will find such informationconstitutes a trade secret.[Citations omitted.]

As a result, the courts tend to protect customerlists that have taken a good deal of time and

money to develop as trade secrets,118 sometimes,

118 Ed Nowogroski Ins., Inc. v. Rucker, 971 P.2d 936, 50U.S.P.Q.2d 1268 (Wa. 1999)(insurance summaries,customer lists and other documents containingcustomer names, expiration dates, coverageinformation and related information held to constitutea trade secret); Sautter v. Comp Solutions Network, Inc.,1998 WL 802481 (Tex. App.–Houston [14th Dist.]1998, no pet.)(unpublished non-precedential)(Wholesale insurance company’s list ofcustomers and agents developed over a “long time”and maintained on password protected computersprotected as a trade secret. Temporary injunctionprohibiting former employee from using customerlists of former employer upheld despite lack of non-competition agreement); Hydraulic Exch. and Repair, Inc.v. KM Specialty Pumps Inc., 690 N.E.2d 782, 46U.S.P.Q.2d 1291 (Ind. Ct. App. 1998) (customer andpricing information that included profits percustomer, sales per customer, special suppliers,overhead and specific pricing information. Althoughcustomer names in this limited market did notconstitute a trade secret, those names coupled withother pricing information constituted a trade secret.Court relied on effort undertaken to daily updatecustomer and pricing information); Stampede ToolWarehouse, Inc. v. May, 651 N.E.2d 209, 35 U.S.P.Q.2d1134 (Ill. App. [1st Dist.] 1995)(appealdenied)(customer list developed by spending $50,000per month to “prospect” potential customers was aprotectable trade secret); MAI Sys. v. Peak Computer,Inc., 991 F.2d 511, 26 U.S.P.Q.2d 1458 (9th Cir.1993)(a computer manufacturer’s customer list hadpotential economic value, and therefore wasprotectable under the California UTSA, because itallowed competitors like Peak to direct their salesefforts at specific potential customers); Liberty MutualIns. Co. v. Arthur J. Gallagher & Co., 1994 U.S. Dist.LEXIS 18412 (N.D. Cal. 1994)(former insuranceagent enjoined from contacting policyholders withindefined limits of non-solicitation agreement); CourtesyTemp. Serv. Inc. v. Camacho, 272 Cal. Rptr. 352, 222 Cal.App. 3d 1278 (Cal. App. [2d Dist.] 1990)(UTSA isbroader than the Restatement in that it permits theprotection of information that has a commercial valuefrom a negative viewpoint, for example, a list of entitiesthat have not used the former employer’s services. Alist of such “customers” that was compiled through“lengthy and expensive efforts, including advertising,

but not always, on the rationale that such time andmoney indicates that the list is not “readilyaccessible.”

d. Acquiring Customer Lists by “ImproperMeans”One rationale underlying trade secret

protection is to promote at least some degree ofcommercial morality. Thus some courts havetended to protect customer lists more readily whenit appears that such lists have been obtained

“improperly.”119 Improper acquisition includesan agent improperly using information acquired in

violation of a duty.120 “Improper means” cansometimes be inferred based on circumstantial

evidence.121

e. Other FactorsOther factors can also be used in deciding

whether a particular customer list is protectable.

promotional campaigns, canvassing, and cliententertainment” was a protectable trade secret).

119 Scranton Gillette Communications, Inc. v. Dannhausen, 1997WL 701344 (N.D. Ill. 1997)(evidence that mailing listsshould have been in former employee’s offices afterthey left, and were not; evidence of dummy nameappearing on defendant’s list; evidence of misspellingsof two names all is evidence from which a trier of factmight infer that the trade secrets were taken withoutauthorization and then used); Merrill Lynch Pierce Fenner& Smith v. Zimmerman, 42 U.S.P.Q.2d 1149 (D. Kan.1996)(injunction granted to protect information indocuments taken by financial consultant who latersolicited former employer’s customers); Herrmann &Andreas Ins. Agency, Inc. v. Appling, 800 S.W.2d 312(Tex. App.–Corpus Christi 1990)(evidence of samemisspellings in client solicitation materials as in“confidential” client list attached to settlementagreement sufficient to raise a fact issue precludingsummary judgment); Am. Precision Vibrator Co. v. Nat’lAir Vibrator Co., 764 S.W.2d 274 (Tex. App.–Houston[1st Dist.] 1988)(one set of 2,000-4,000 customer cards“disappeared” at approximately the same time as twolong-time employees quit to form a competingcompany. Held that “where such a list has beenunfairly acquired, it will be afforded protection as atrade secret.”).

120 Perl Brand Foods Corp. v. Deli Direct From Perl, Inc., 14U.S.P.Q.2d 1569 (N.D. Ill. 1989).

121 Pioneer Hi-Bred Int’l v. Holden Found. Seeds, Inc., 35 F.3d1226, 31 U.S.P.Q.2d 1385 (8th Cir. 1994).





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Illinois, in particular, prior to its adoption of theUTSA, had developed a substantial body of law on

protecting customer relations.122 AlthoughIllinois now expressly protects such informationunder its version of the UTSA by specificallyproviding that a trade secret includes a “list ofactual or potential customers or suppliers” in thedefinition of protectable subject matter, the sevenevidentiary factors previously articulated by theIllinois courts remain useful (but are no longercontrolling in Illinois) in determining whethersuch information should be protectable: (1) thenumber of years its takes the employer to maintainthe clientele, since that number indicates anintention to remain affiliated indefinitely; (2) theamount of money invested in developing theclientele because that is an objective indication ofthe employer’s intention to retain the customerrelationship in a “near-permanent” status; (3) thedifficulty involved in the process of developingthe clientele; (4) whether the business is “highlycompetitive” because in such businesses personalcustomer contact by an employee is important inmaintaining customer relationship; (5) whether theemployee has a “storehouse of intimate knowledgeof customer requirements” because suchknowledge strongly indicates that a protectableinterest in “near-permanent” clientele exists; (6)the length of time the company has been inbusiness, or the number of contacts a company haswith a client over a relevant time period and howmuch time passes between each contact;and (7) the “continuity of the relationship” withthe customer, meaning how frequently customersneed or use the services of the business. Evidenceon these seven factors should be persuasive in

other courts as well.123 After 1988, however, thedate of enactment of the Illinois Trade Secrets Act

122 McBrand, Inc. v. Van Veelen, 486 N.E.2d 1306, 1311(Ill. App. Ct. 1985).

123 Curtis 1000, Inc. v. Suess, 24 F.3d 941 (7th Cir. 1994)(J.Posner)(however, “near permanent” customerinformation was not a protectable interest, if thatinformation had not been otherwise maintained as atrade secret, for employers that are sellers of ordinarygoods. The interest of protecting “near permanent”customer relations, according to Judge Posner, ispresent in the case of service providers such asaccounting and consulting firms because it is difficultfor customers to asses the quality of the service).

(ITSA), those seven factors no longer control in

Illinois.124

f. RESTATEMENT (THIRD) OF UNFAIR

COMPETITION


COMPETITION takes the position that “[t]he generalrules governing trade secrets are applicable to theprotection of information concerning the identity

and requirements of customers.”125 TheRestatement, in fact, takes the position that“[c]ustomer identities and related information canbe a company’s most valuable asset and mayrepresent a considerable investment of

resources.”126

At this point it should be explained thatthe RESTATEMENT (THIRD) OF UNFAIR

COMPETITION specifically comments on customerlists in the context of § 42 dealing with “Breach ofConfidence by Employees.” That sectionprovides: “An employee or former employee whodiscloses or uses a trade secret owned by theemployer or former employer in breach of a dutyof confidence is subject to liability for

124 Stampede Tool Warehouse, Inc. v. May, 651 N.E.2d 209,35 U.S.P.Q.2d 1134 (Ill. App. [1st Dist.] 1995)(appealdenied)(6 common law factors are used to decidewhether information is a trade secret, namely “(1) theextent to which the information is known outside theemployer’s business, (2) the extent to which it isknown by employees and others involved in thebusiness, (3) the extent of measures taken by theemployer to guard the secrecy of the information, (4)the value of the information to the employer and hisor her competitors, (5) the amount of effort or moneyexpended in developing the information, and (6) theease or difficulty with which the information could beproperly acquired or duplicated by others.”).

125 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 42 cmt. f (1995). The Reporters’ Note to comment fnotes that a number of cases have recognizedcustomer lists as “potential subject matter of tradesecret law.” Although that is correct, the cases alsoindicate that courts have many times struggled withthe issue.

126 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 42 cmt f (1995).





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appropriation of the trade secret under the rule

stated in § 40.”127

g. Scope of Protection − Notifying of NewAffiliation versus SolicitationIn deciding whether a particular customer

list has been misappropriated, the courts in generaldistinguish between using a customer list to notifycustomers of an ex-employee’s new affiliation(generally permitted) and using a customer list to

“solicit” customers (generally not permitted).128

A departing attorney may, for example, has aprivilege to inform those clients for whom he/sheworked that he/she was leaving the firm. But thatprivilege does not extend to all clients of the

firm.129 The California courts have also adopteda somewhat crude definition of “solicit” in the

context of customer lists.130

127 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 42 (1995).

128 MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 26U.S.P.Q.2d 1458 (9th Cir. 1993) Ninth Circuit heldthat a computer manufacturer’s customer list hadpotential economic value, and therefore wasprotectable under the California UTSA, because itallowed competitors like Peak to direct their salesefforts at specific potential customers. MAI’s servicemanager did not physically take the database, butrather announced his new affiliation with Peak toMAI’s customers, and then personally visited severalof them in an attempt to solicit their business. TheNinth Circuit held that merely announcing a newaffiliation, even to existing MAI clients, was notmisappropriation. However, according to the court,going the extra step and personally calling oncustomers and soliciting their business constitutedmisappropriation. See also ABBA Rubber Co. v. Seaquist,235 Cal. App. 3d 1, 286 Cal. Rptr. 518 (Cal. App.[4thDist.] 1991).

129 Fred Siegel Co., L.P.A. v. Arter & Hadden, 1997 OhioApp. LEXIS 3397 (1997.

130 Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 66 Cal.Rptr. 2d 731, 737-38, 45 U.S.P.Q.2d 1741 (Cal. Ct.App. 1997) (“‘Solicit’ * * * means: ‘To appeal to (forsomething); to apply to for obtaining something; toask earnestly; to ask for the purpose of receiving.’ * * *By contrast, ‘[m]erely informing customers of one’sformer employer of a change in employment, withoutmore, is not solicitation.’”).

h. The “Memory Rule”The Restatement (Second) of

Agency § 396, however, also deals with an formeremployee’s use of confidential information aftertermination of employment, and provides, in part:

Unless otherwise agreed, after thetermination of the agency, theagent:

* * * * *

(b) * * * The agent is entitled touse general informationconcerning the method of businessof the principal and the names ofthe customers retained in hismemory, if not acquired inviolation of his duty as agent;[Emphasis added.]

Comment b explains that although an agent cannotuse copies of written memoranda concerningcustomers, an agent is normally privileged to use,in competition with the principal, customer namesretained in his memory. At least one court hascharacterized that rule as necessary to precludeforcing departing employees to perform prefrontal

lobotomies on themselves.131 In more seriousterms, the rule is an example of the courts’attempts at striking a proper balance between tradesecret law and the principles of vigorous business

competition.132

In actuality, though, the “memory rule”makes little practical sense, and even less legalsense, except in the narrow class of casesexemplified by the Iowa Supreme Court’s opinion

131 Fleming Sales Co. v. Bailey, 611 F. Supp. 507, 514-15(N.D. Ill. 1985).

132 Georgia in Amerigas Propane, L.P. v. T-Bo Propane, Inc.,972 F. Supp. 685 (S.D. Ga. 1997) has drawn a similarline, but has done so by limiting its trade secret act totangible information. In 1993, the Georgia SupremeCourt held that the Georgia Trade Secrets Act did notextend to information in intangible form. In 1996, theGeorgia legislature amended the Act’s definition of atrade secret by, inter alia, adding the phrase “withoutregard to form.” The court held in Amerigas Propane, L.P.that despite the 1996 amendment, the GTSAcontinues to apply only to tangible forms of customerinformation.









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in Lemmon v. Hendrickson,133 in which a formeremployee subsequently contacted only a few (onlythose he could recall) of several hundred formercustomers. If the subject matter truly is a tradesecret, deciding whether there has beenmisappropriation should not be based on

anatomical distinctions.134 It should make nodifference whether the ex-employee uses his or herhead or hands to effect the appropriation. TheRESTATEMENT (THIRD) OF UNFAIR COMPETITION

attempts to reconcile the “memory rule” withtraditional trade secret analysis: “[t]he fact that anemployee has appropriated a written list or made aspecial attempt to memorize customer informationprior to terminating the employment may justifyan inference that the information is valuable and

not readily accessible by proper means.”135

Hopefully, the Restatement (Third) ofAgency will correct its view. In the meantime,some courts have ignored it and others haveexpressly rejected it. In Ed Nowogroski

Insurance, Inc. v. Rucker,136 in a case of firstimpression in Washington, for example, the court

expressly rejected the “memory rule”137 because

133 559 N.W.2d 278 (Iowa 1997)(whether customer list isa trade secret or not “need not be decided,” becausethe credible testimony of the ex-employee indicated herecalled only 7 customers out of a list of 300-400names, and those were the only customers hecontacted).

134 See, e.g., Schulenburg v. Signatrol, Inc., 212 N.E.2d 865(Ill. 1965)(“it should, moreover, make no differencewhether the information contained in the blueprints ** * has been pilfered by tracing the blueprintsthemselves * * * or has been memorized by someonewith a photographic memory, or has been committedto memory by constant exposure to the prints while inthe employ of plaintiffs.”) See also Custom Mfg., Inc. v.Raymer, 1995 U.S. Dist. LEXIS 9059 (N.D. Ill.1995)(“it is irrelevant as a matter of law whetherKuborn took copies of the drawings or memorizedthem in detail, because he may not take with himparticularized confidential drawings developed byCMI and disclosed to him while working there.”)


136 971 P.2d 936, 50 U.S.P.Q.2d 1268 (Wa. 1999).137 Citing, Peterson, Recent Developments in Trade Secret Law

in an Information Age, Patents, Copyrights, Trademarks

“it does not comport with prior Washington law ormeet the goal of promoting standards ofcommercial ethics and fair dealing by protectingtrade secrets.” In Stampede Tool Warehouse, Inc.

v. May,138 the court noted that “[i]n factdefendants admitted that they redeveloped theircustomer lists by remembering the names andlocations of at least some of their Stampedecustomers. Using memorization to rebuild a tradesecret does not transform that trade secret fromconfidential information into non-confidentialinformation. The memorization is one method ofmisappropriation.” In Dannenbaum, Inc. v.

Brummerhop,139 the Houston Court of Appealsobserved that Texas courts had not applied the“memory rule.” Instead, the Texas courts hadproperly focused on the difficulty in obtainingcustomer lists, and on the method used to obtain

the information.140 In North Atlantic

Instruments, Inc. v. Haber,141 the court

acknowledged that prior New York law142 hadaccepted the “memory rule” as a factor that should

& Literary Property *444 (PLI Handbook Series No.G4-4042, Feb. 1998), available in Westlaw 507/Pat 351.

138 651 N.E.2d 209, 35 U.S.P.Q.2d 1134 (Ill. App. [1stDist.] 1995)(appeal denied).

139 840 S.W.2d 624 (Tex. App.–Houston [14th Dist.]1992, writ denied).

140 The court approved an instruction that read:

You are instructed that confidentialinformation means any process,information or compilation of information,formula, pattern, or device which is used inone’s business and which gives anopportunity to obtain an advantage overcompetitors who do not know of or use it.In order to be confidential there must be asubstantial element of secrecy; however,secrecy need not be absolute. Matters ofpublic knowledge or of general knowledgein an industry cannot be appropriated asconfidential. The personal efficiency,inventiveness, skills and experience whichan employee develops through his workbelong to him and not his employer.

141 188 F.3d 38 (2d Cir. 1999).142 See Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 391, 278

N.E.2d 636, 639, 328 N.Y.S.2d 423, 427 (1972).







22

be considered, but also noted that was not “a broadrule dictating that anything an employee

remembers casually is not a trade secret.”143 Thecourt also noted that “if a defendant’s solicitationfollowed ‘a physical taking or studied copying, thecourt may in a proper case enjoin solicitation, notnecessarily as a violation of a trade secret, but asan egregious breach of trust and confidence while

in plaintiffs’ service.’ ”144

II. MISAPPROPRIATION ANALYSISA. The RESTATEMENT (FIRST) Analysis1. General Principles of Liability

Section 757, RESTATEMENT (FIRST) OF

TORTS, establishes the general rule that:

One who discloses or usesanother’s trade secret, withoutprivilege to do so, is liable to theother if

(a) he discovered the secret byimproper means, or

(b) his disclosure or useconstitutes a breach of confidencereposed in him by the other indisclosing the secret to him, or

(c) he learned the secret from athird person with notice of thefacts that it was a secret and thatthe third person discovered it byimproper means or that the thirdperson’s disclosure of it wasotherwise a breach of his duty tothe other, or

(d) he learned the secret withnotice of the facts that it was asecret and that its disclosure wasmade to him by mistake.

One of the Texas Courts of Appeals hasemphasized and expressly held that § 757 of theRESTATEMENT (FIRST) OF TORTS does not providea basis for a cause of action for misappropriation

143 188 F.3d at 46.144 Id. at 46-47.

of confidential information that is not secret.145

Other jurisdictions, however, such asMassachusetts, have adopted § 759 of theRESTATEMENT (FIRST) OF TORTS which “appliesto information about one’s business whether or notit constitutes a trade secret,” but is “applicableonly when the information is procured by

improper means.”146

2. “Improper Means” Under theRESTATEMENT (FIRST) OF TORTS § 757Trade secret law has historically protected

against disclosure or use by “improper means.”But that does not preclude discovery or use by“proper means.” The Supreme Court in Kewanee

Oil Co. v. Bicron Corp.,147 for example,expressly noted that “[t]he protection accorded thetrade secret holder is against the disclosure orunauthorized use of the trade secret by those towhom the secret has been confided under theexpress or implied restriction of non-disclosure ornon-use. * * * A trade secret law, however, doesnot offer protection against discovery by fair andhonest means, such as by independent invention,accidental disclosure, or by so-called reverseengineering, that is by starting with the knownproduct and working backward to divine theprocess which aided in its development ormanufacture.” [Footnotes omitted.]

What is and is not “improper,” of course,varies with the circumstances of the case anddepends, to some degree, on the precautions takenby the owner of the trade secret. Further,“improper means” can include otherwise lawful

145 Stewart & Stevenson Servs., Inc. v. Serv-Tech, Inc., 879S.W.2d 89 (Tx. App.–Houston [14th Dist.] 1994, writdenied).

146 RESTATEMENT (FIRST) OF TORTS § 759 cmt. b(1939). See USM Corp. v. Marson Fastener Corp., 379Mass. 90, 393 N.E.2d 895, 903 (1979). See also JetSpray Cooler, Inc. v. Crampton, 361 Mass. 835, 282N.E.2d 921, 924 (1972)(“the duty to use confidentialinformation is not limited to technical trade secrets.”).But see Warner-Lambert Co. v. Execuquest Corp., 427Mass. 46, 691 N.E.2d 545, 547 n. 5 (1998)(citing to thesix factors used in assessing whether a trade secretexists in considering whether information wasconfidential.).

147 416 U.S. 470, 475-76 (1974) .










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conduct.148 Improper acquisition has also beenfound where potential buyers of a business learneda manufacturing process under misrepresentationsabout their ability to finance purchase of the

business.149

3. Disclosure or UseThe basis for liability under § 757 is the

disclosure or use of the trade secret.Unfortunately, comment (c) to § 757, which wasintended to explain disclosure and use, offers littleguidance in deciding whether particular actionsconstitute such disclosure or use as to triggerliability:

One who has a trade secret may beharmed merely by the disclosureof his secret to others as well asby the use of his secret incompetition with him. A meredisclosure enhances thepossibilities of adverse use. Thepersons to whom the disclosure ismade may or may not be liableunder Clause (c) for thesubsequent use (see also § 758).Since a trade secret is vendibleand since its sale value depends inpart upon its secrecy, a meredisclosure may reduce thevendibility or sale value of thesecret. The rule stated in thisSection protects the interest in atrade secret against bothdisclosure and adverse use.

Comment c, RESTATEMENT (FIRST) OF TORTS §757 (1939). In some cases, that burden has been

held to require direct proof of actual use.150 In

148 E.I. du Pont de Nemours & Co., Inc. v. Christopher, 431F.2d 1012 (5th Cir. 1970), cert. denied, 400 U.S. 1024(1971)(flying an airplane over and taking pictures of apartially completed plant held to be “improper”acquisition even though airplane was in legalairspace).flying an airplane over a plant, that isimproper under the circumstances).

149 Phillips v. Frey, 20 F.3d 623, 30 U.S.P.Q.2d 1755 (5thCir. 1994). .

150 See e.g., Controls Int’l, Inc. v. Kinetrol., Ltd., 1998 U.S.Dist. LEXIS 4794 ( N.D. Tex. 1998)(preliminary

other cases, however,151 the courts havepermitted the trade secret owner to rely on an

inference of use.152

In all events, however, specific evidencethat an alleged trade secret was not used negates a

claim of trade secret misappropriation.153

injunction granted restraining use of plaintiff’strademark, but denied on related trade secretmisappropriation claim because there was no evidencethat defendants were using the trade secretinformation); Zellweger Analytics, Inc. v. Milgram, 1997WL 667778 (N.D. Ill. 1997)(no evidence of actualuse); Omnitech Int’l, Inc. v. Clorox Co., 11 F.3d 1316 (5thCir. 1994), cert. denied, 115 S. Ct. 71 (1994)(“to sustain atrade secret action under the ‘use’ prong of thestatutory definition of ‘misappropriation,’ a plaintiffmust necessarily demonstrate that the defendantreceived some sort of unfair trade advantage.” Here,Omnitech had failed to show that Clorox had actually“used” any trade secrets that were disclosed byOmnitech during an aborted corporate acquisition);Sip-Top, Inc. v. Ekco Group, Inc., 86 F.3d 827 (8th Cir.1996)(follows Omnitech, and held that theconfidentiality agreement did not prohibit the partiesfrom negotiating, or entering into agreements, withother companies, and thus, no inference could arisethat Ekco used or divulged confidential information);Southwestern Energy Co. v. Eickenhorst, 955 F. Supp. 1078,42 U.S.P.Q.2d 1824 (W.D. Ark. 1997)(in action toprotect information obtained from a non-client by anassociate in a law firm under confidentialityagreements in connection with the investigation ofalleged failure to pay overriding royalties in certain oiland gas properties and later used to prepare and file aclass action suit on behalf of royalty owners, held“use” requires use for competitive purposes, and usein preparing class action lawsuit does not qualify —but information nevertheless protected againstinevitable “disclosure”). See also Am. Relocation NetworkInt’l, Inc. v. Wal-Mart Stores, Inc., 1997 U.S. App. LEXIS19189 (6th Cir. 1997)(unpublished).; Zellweger Analytics,Inc. v. Milgram, 1997 WL 667778 (N.D. Ill. 1997)(noevidence of actual use)Camp Creek Hospitality Inns, Inc.v. Sheraton Franchise Corp., 139 F.3d 1396 (11th Cir.1998).

151 See e.g., Solutec Corp. v. Agnew, 88 Wash. App. 1067,1997 Wash. App. LEXIS 2130 (Wash. Ct. App. 1997).

152 See e.g., Roton Barrier, Inc. v. Stanley Works, 79 F.3d1112, 37 U.S.P.Q.2d 1816 (Fed. Cir. 1996)(applyingIllinois law on trade secret issues).

153 See e.g., ADCO Indus. v. Metro Label Corp., 2000 WL1196337 (Tex. App.–Dallas 2000)(unpublished, non-













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Additionally, the alleged misappropriation mustoccur during the time of the confidential

relationship. 154

B. The UTSA AnalysisThe UTSA is expressly premised on

deterring “breach of faith and reprehensible means

of learning another’s secret.”155 Accordingly, theUTSA bases misappropriation on the use of“improper means.” Nevertheless, that analysisonly begins after it has been decided that aprotectable trade secret exists. Also, the courtshave recognized that one hold a trade secret hasstanding to pursue misappropriation, i.e., an actionfor misappropriation is not limited to the first or

ultimate “owner” of the trade secret.156

1. Acquisition By Improper MeansThe UTSA defines misappropriation under

two broad categories: (1) acquisition; and

(2) disclosure and use.157 With respect toacquisition, the UTSA defines misappropriation as“(i) acquisition of a trade secret of another by aperson who knows or has reason to know that the

precedential)(evidence that employee recreated mailinglist from public domain sources negates trade secretmisappropriation claim).

154 Expansion Plus Inc. v. Brown-Forman Corp., 132 F.3d1083 (5th Cir. 1998)..

155 Commissioners’ prefatory note, UTSA.156 See, DTM Research, L.L.C. v. AT&T Corp., 245 F.3d

327 (4th Cir. 2001)(misappropriation does not requireproof that the plaintiff is a “fee simple” owner of atrade secret. According to the court, “one whopossesses non-disclosed knowledge may demandremedies as provided by the [Maryland Uniform TradeSecrets] Act against those who ‘misappropriate’ theknowledge.”). But see RMS Software Dev., Inc. v. LCS,Inc., 1998 Tex. App. LEXIS 1053 (Tex.App.−Houston [1st Dist.], 1998, nowrit)(unpublished)(in an unpublished opinion applyingColorado law, affirmed summary judgment dismissinga trade secret misappropriation suit holding that anonexclusive licensee was not the “owner” of thetrade secret and therefore did not have standing tobring the suit.).

157 See e.g., Computer Mgmt. Assistance Co. v. Robert F.deCastro, Inc., 220 F.3d 396 (5th Cir. 2000)(withoutproof of improper acquisition or use there can be nomisappropriation of trade secrets).

trade secret was acquired by improper means.”158

Thus, acquisition through improper means is a

pleading requirement.159

“Improper means” is defined in the UTSAas including “theft, bribery, misrepresentation,breach or inducement of a breach of a duty tomaintain secrecy, or espionage through electronic

or other means.”160 That list is not intended to beexhaustive. “Improper means” also includesinstances in which the information was originallyacquired properly, e.g., under a confidentialityagreement, but then later used in violation of the

agreement.161 As should be readily apparent,liability also extends to third parties who “knew orhad reason to know” that the information wasderived or acquired improperly. A pure heart,

empty head defense is not available.162

158 UTSA § 1.159 Am. Antenna Corp. v. Amperex Elec. Corp., 190 Ill. App.

3d 535, 546 N.E.2d 41 (Ill. App. Ct. 1989)(complaintdismissed where there was no allegation of acquisitionthrough “improper means”); DeGiorgio v. Megabyte Int’l,Inc., 266 Ga. 539, 468 S.E.2d 367 (Ga. 1996). Tosupport a claim for misappropriation of trade secretsunder Georgia’s Trade Secret Act, O.C.G.A. §§ 10-1-761, 763, the plaintiff must show that (1) it had a tradesecret and (2) the defendant misappropriated the tradesecret.

160 UTSA § 1(1).161 See e.g., Camp Creek Hospitality Inns, Inc. v. Sheraton

Franchise Corp., 139 F.3d 1396 (11th Cir. 1998).. Seealso Roton Barrier, Inc. v. Stanley Works, 79 F.3d 1112(Fed. Cir. 1996)(applying Illinois Trade Secrets Act,765 ILCS § 1065)(information obtained underconfidentiality agreements during acquisitionnegotiations and then later misused); Bell HelicopterTextron, Inc. v. Tridair Helicopters, Inc., 982 F. Supp. 318(D. Del. 1997)(complaint alleging that Bell wasprovided access to and learned of Tridair’s tradesecrets in confidence, and thereafter breached its dutyto limit its use of those trade secrets was sufficient toallege misappropriate of trade secrets under theDelaware Uniform Trade Secrets Act).

162 See e.g., EFCO Corp. v. Symons Corp., 219 F.3d 734, 741(8th Cir. 2000)(hiring a former employee andcircumventing severance agreement by having a thirdparty pay the employee is “improper means.”).













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2. Disclosure Or UseThe UTSA expressly provides liability for

“disclosure or use of a trade secret” without theconsent of the trade secret owner who (1) used“improper means” to acquire the trade secret:

(ii) disclosure or use of a tradesecret of another withoutexpress or implied consent by aperson who

(A) used improper means to acquireknowledge of the trade secret;or

or (2) had reason to know that his knowledge was

derived improperly:163

(B) at the time of disclosure or use,knew or had reason to knowthat his knowledge of the tradesecret was

(I) derived from or through a personwho had utilized impropermeans to acquire it;

(II) acquired under circumstancesgiving rise to a duty tomaintain its secrecy or limit itsuse; or

(III) derived from or through aperson who owed a duty to theperson seeking relief tomaintain its secrecy or limit itsuse; or

or (3) became aware that knowledge had beenacquired through accident or mistake before amaterial change of position:

(C) before a material change ofhis position, knew or hadreason to know that it was atrade secret and that

163 But see On-Line Techs. v. Perkin Elmer Corp., 141 F.Supp. 2d 246 (D. Conn. 2001)(oral assurances frompatent counsel that prospective purchasers of businessunit were advised of trade secret claim may beinsufficient to place actual purchaser on notice oftrade secret claim, but part performance may save oralassurances that a non-signing entity is bound by anon-disclosure agreement from the statute of frauds).

knowledge of it had beenacquired by accident ormistake.

As noted above, some courts, includingTexas courts, have held that under theRESTATEMENT (FIRST) OF TORTS disclosure or use

was necessary to incur liability.164 Although it is,of course, arguable that those decisions wereincorrect, the UTSA expressly now providesliability for improper acquisition of a trade secretregardless of whether it is thereafter used or

disclosed:165

C. The RESTATEMENT (THIRD) OF UNFAIR

COMPETITION Analysis1. Acquisition By “Improper Means”

The Restatement (Third) similarlyimposes liability for acquisition of a trade secretby “improper means:”

One is subject to liability formisappropriation of another’strade secret if:

(a) the actor acquires informationthat it knows or should knowis the other’s trade secret by

means that are improper166

under the rule stated in § 43 ;or

164 Atlantic Richfield Co. v. Misty Prods., Inc., 820 S.W.2d414 (Tex. App.–Houston [14th Dist.] 1991, writdenied), citing Hyde Corp. v. Huffines, 314 S.W.2d 763(1958), cert. denied, 358 U.S. 898 (1958).

165 The RESTATEMENT (THIRD) OF UNFAIRCOMPETITION § 39 cmt. d (1995), is in accord.

166 Improper acquisition is defined in § 43 of theRESTATEMENT (THIRD) OF UNFAIR COMPETITION as:

“Improper” means of acquiring another’strade secret under the rules stated in § 40include theft, fraud, unlawful interceptionof communications, inducing or knowinglyparticipating in a breach of confidence, andother means either wrongful in themselvesor wrongful under the circumstances of thecase. Independent discovery and analysisof publicly available products orinformation are not improper means ofacquisition.








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2. Use or DisclosureSecondly, the Restatement (Third)

imposes liability for use or disclosure without thetrade secret owner’s consent:

One is subject to liability formisappropriation of another’strade secret if:

* * * *

(b) the actor uses or discloses theother’s trade secret withoutthe other’s consent, and, at thetime of the use or disclosure,167

subject to the following knowledge requirements,namely that the actor knew that the informationwas a trade secret and (1) was acquired undercircumstances creating a duty of confidentiality:

(1) the actor knows or shouldknow that the information is atrade secret that the actoracquired under circumstancescreating a duty of confidenceowed by the actor to the otherunder the rules stated in

§§ 41-42; or168

or (2) was acquired by improper means:

(2) the actor knows or shouldknow that the information is atrade secret that the actoracquired by means that areimproper under the rule

started in § 43; or169

or (3) was acquired through a person who acquiredit through improper means or in violation of a dutyof confidence:

(3) the actor knows or shouldknow that the information is atrade secret that the actoracquired from or through a

167 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 40 (1995).

168 Id.169 Id.

person who acquired it bymeans that are improper underthe rule stated in § 43 orwhose disclosure of the tradesecret to the actor constituteda breach of a duty ofconfidence owed by thatperson to the other under therules stated in §§ 41 and 42;

or170

or (4) was acquired through accident or mistake,unless that was caused by a failure to properlymaintain the trade secret:

(4) the actor knows or shouldknow that the information is atrade secret that the actoracquired through an accidentor mistake unless theacquisition was the result ofthe other’s failure to takereasonable precautions tomaintain the secrecy of the

information.171

Note the somewhat subtle difference from theUTSA. Under the RESTATEMENT (THIRD) OF

UNFAIR COMPETITION, the “knows or shouldknow” requirement extends not only to theimproper acquisition or derivation, but also to thefact that the information is a trade secret. Thus, acause of action for improper acquisition by a thirdparty, apparently, must include allegations that thethird party had knowledge that the informationwas a trade secret.

3. Duty of ConfidentialityThe RESTATEMENT (THIRD) OF UNFAIR

COMPETITION provides that a person owes a dutyof confidentiality to the owner of a trade secret(1) when there has been an express promise ofconfidentiality prior to disclosure, or (2) becauseof surrounding circumstances, the recipient knewor had reason to know that the disclosure was

being made in confidence. 172 The confidentialityobligations of employees are treated separately.

170 Id.171 Id.


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173 Thus, the RESTATEMENT (THIRD) OF UNFAIR

COMPETITION closely parallels, but does notliterally follow, the substantive rules of the UTSA.

D. Breach of “Anti-Assignment” ProvisionsNon-disclosure and confidentiality

agreements frequently contain non-assignmentprovisions. Are those provisions breached if thepromisee is acquired by merger? The generalweight of authority (albeit in cases not involvingconfidential/trade secret information) and at least

one of the Texas Courts of Appeal says no.174

E. Insurance Policy CoveragePolicies typically define “advertising

injury,” inter alia, as “[m]isappropriation ofadvertising ideas or style of doing business,” or“[i]nfringement of copyright, title or slogan.” Ingeneral, the courts have held that insurance policy

172 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 41 (1995), provides:

A duty of confidence owed to the tradesecret owner for purposes of the rulesstated in § 40 is created by:

(a) an express promise of confidentialitymade to the trade secret owner by therecipient prior to the disclosure of thetrade secret; or(b) a disclosure of the trade secret undercircumstances in which the relationshipbetween the parties or other factssurrounding the disclosure justify theconclusions that, at the time of thedisclosure, the recipient knew or hadreason to know that the disclosure wasintended to be in confidence and thatthe trade secret owner was reasonable ininferring that the recipient consented toan obligation of confidentiality.

173 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 42 (1995), provides:

An employee or former employee whodiscloses or uses a trade secret owned bythe employer or former employer in breachof a duty of confidence is subject to liabilityfor appropriation of the trade secret underthe rule stated in § 40.

174 See TXO Prod. Co. v. M.D. Mark, Inc., 999 S.W.2d 137(Tex. App.–Houston [14th Dist.] 1999, pet. denied).

coverage for “advertising injury” does not apply to

claims for trade secret misappropriation.175

F. Reverse Engineering1. Lawful Acquisition of a Trade Secret

Reverse engineering is, of course, a lawfulmeans for acquiring a trade secret. Accordingly, atrade secret may be lost by selling or displaying aproduct, outside of an obligation ofconfidentiality, where the “secret” of the productcan be discovered upon inspection or by reverse

engineering.176 The public’s right to reverseengineer is an important element in the delicatebalance between federal patent law and state trade

secret law.177

However, the mere possibility of reverseengineering is not a defense to a trade secret

175 See e.g.., Zurich Ins. Co. v. Amcor Sunclipse N. Am., 241F.3d 605 (7th Cir. 2001)(Easterbrook, C.J.).

176 Apollo Techs. Corp. v. Centrosphere Indus. Corp., 805 F.Supp. 1157 (D.N.J. 1992); Flotec, Inc. v. S. Research, Inc.,16 F. Supp. 2d 992 (S.D. Ind. 1998)(“[T]rade secretlaw does not protect information that is publiclyavailable, including information that can be discernedwith reasonable effort by inspecting a productavailable for purchase on the market.”)

177 Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S.141, 109 S. Ct. 971 (1989).











28

misappropriation cause of action.178 Also,allegations of reverse engineering by formeremployees are many times suspect. Among otherthings, former employees may be aware of processsteps or “failed experiments” that allow them toproduce a competitive product in a fraction of thetime that would otherwise be required by normal

reverse engineering.179

2. Reverse Engineering—Acquiring ProductProperly v. ImproperlyIt is not a misappropriation to discover a

trade secret “properly” by reverse engineering

where the product was acquired properly.180 TheRESTATEMENT (THIRD) OF UNFAIR COMPETITION

§ 43 (1995) expressly provides, in part:“Independent discovery and analysis of publiclyavailable products or publications are not impropermeans of acquisition.”

It is not “proper” reverse engineering,however, when the device (or software) that issubsequently reverse engineered is obtained

178 See e.g., ILG Indus., Inc. v. Scott, 273 N.E.2d 393 (Ill.1971); Essex Group, Inc. v. Southwire Co., 501 S.E.2d 501(Ga. 1998)(quoting and adopting the RESTATEMENT(THIRD) OF UNFAIR COMPETITION § 39, “Thetheoretical ability of others to ascertain theinformation through proper means does notnecessarily preclude protection as a trade secret.Trade secret protection remains available unless theinformation is readily ascertainable by such means.Thus, if acquisition of the information through anexamination of a competitor’s product would bedifficult, costly, or time-consuming, the trade secretowner retains protection against an improperacquisition, disclosure, or use * * * However, anyperson who actually acquires the information throughan examination of a publicly available product hasobtained the information by proper means and is thusnot subject to liability. * * * Similarly, the theoreticalpossibility of reconstructing the secret from publishedmaterials unlike to come to the attention of theappropriator will not preclude relief against thewrongful conduct * * *.”).

179 See e.g., Solutec Corp. v. Agnew, 88 Wash. App. 1067,1997 Wash. App. LEXIS 2130 (Wash. Ct. App. 1997) .

180 Cataphote Corp. v. Hudson, 422 F.2d 1290, 1293 (5thCir. 1970); Water Servs., Inc. v. Tesco Chems., Inc., 410F.2d 163, 172 (5th Cir. 1969).

“improperly.”181 Misleading an employee of acustomer to gain access to a competitor’soperating system software in order to developfirmware compatible with that operating systemsoftware, for example, has been held to constitute

“improper means:”182 Also, enticing one tobreach an obligation of confidentiality in order togain access to and disassemble product is improper

acquisition.183

Courts are frequently more apt to findmisappropriation in those cases in which thedefendants have misappropriated drawings orsimilar materials, and then have later argued thatthe drawings or materials cannot constitute tradesecrets because the machines or devices depictedin the drawing were capable of being reverseengineered. There is also a valid technical reasonfor that distinction. Drawings, particularlyproduction drawings, frequently give tolerancesthat are generally regarded as the epitome of atrade secret because such tolerances cannot be

181 See, e.g,. E.I. du Pont de Nemours & Co. v. Christopher,431 F.2d 1012 (5th Cir. 1970), cert. denied, 400 U.S.1024 (1971). There is an element of commercialmorality involved in deciding whether access to the“secret” was “proper” even though the reverseengineering was otherwise legal. If the access wasillegal, e.g., through trespass, theft or similar wrongfulconduct, then the resulting reverse engineering islikewise illegal. See also Otis Elevator Co. v. Intelligent Sys.,Inc., 17 U.S.P.Q.2d 1773 (Conn. Super. Ct.1990)(obtaining access to competitor’s elevator repairterminals by picking lock on storage box atconstruction site at night and then reading outsoftware held to be improper acquisition); Reingold v.Swiftships, Inc., 126 F.3d 645, 44 U.S.P.Q.2d 1481 (5thCir. 1997).(“improper means” was construction of anunauthorized boat hull in violation a lease.).

182 Alcatel USA Inc. v. DGI Techs., Inc., 166 F.3d 772, 49U.S.P.Q.2d 1641 (5th Cir. 1999). See also DSCCommunications Corp. v. Pulse Communications, Inc., 170F.3d 1354 (Fed. Cir. 1999)(triable issue of factPulsecom’s use of a “snooper board” at BellSouth andNYNEX installations was an “improper means” todetermine how DSC’s operating system detectedwhether a particular card was a DSC card or not).

183 Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161 (9thCir. 1998).















29

obtained from the finished product even with the

most accurate of measurements.184

But, tolerances are most important when adefendant is trying to compete in a market wherethe defendant’s products will need to actually fittogether with the plaintiff’s product. In order todetermine tolerances accurately frommeasurements of a finished product, it would benecessary to measure a statistically significantsample of finished products and then determinethe range for a particular dimension. That wouldrequire a substantial investment of time andexpense, and thus such tolerances would not be“readily ascertainable.” On the other hand, if theproduct does not need to physically fit with theplaintiff’s (or another’s) product and if thetolerances are not all that critical or are withinnormal tolerances for machining, then the sale ofthe product may result in a loss of any trade secret

claim in such tolerances.185

184 Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161 (9thCir. 1998)(trade secret protection claimed in numericaldimensions and tolerances, but summary judgment ontrade secret claim properly granted where the plaintifffailed to properly identify those trade secrets duringdiscovery); Smith v. BIC Corp., 869 F.2d 194 (3d Cir.1989)(district court erred in denying protective orderbecause of affidavit evidence that tolerances on designdrawings could not be derived by reverse engineering);Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d174, 17 U.S.P.Q.2d 1780 (7th Cir. 1991)(there is adifference between detailed technical drawings withtolerance information used to manufacture parts andless detailed drawings used to assemble a product); SIHandling Sys., Inc. v. Heinsley, 753 F.2d 1244 (3d Cir.1985); Am. Precision Vibrator Co. v. Nat’l Air VibratorCo., 764 S.W.2d 274 (Tex. App.–Houston [1st Dist.]1988); Boeing Co. v. Sierracin Corp., 738 P.2d 665 (Wa.1987)(trial court actually excluded evidence of reverseengineering and decision upheld on appeal); Baker’sAid v. Hussmann Foodservice Co., 830 F.2d 13 (2d Cir.1987).

185 Flotec, Inc. v. S. Research, Inc., 16 F. Supp. 2d 992 (S.D.Ind. 1998)(tolerances readily discernible from publiclysold product).

III. IDENTIFYING TRADE SECRETSDURING LITIGATION

A. Identification of Trade Secrets by thePlaintiffIn general, a defendant is entitled to know

what he/she is alleged to have

misappropriated.186 One of the principaldefenses available in trade secret litigation issimply that the asserted subject matter is not, in

fact, a trade secret.187 Thus, many courts haveheld that the plaintiff has an obligation to describethe asserted trade secret with sufficientparticularity that the defendant knows where the

boundaries of the trade secret lie.188 California,for example, by statute requires such a

disclosure.189 That rationale has been followed in

other jurisdictions.190 Nevertheless, the necessity

186 See, e.g., Litton Sys, Inc. v. Sunstrand Corp., 750 F.2d 952(Fed. Cir. 1984); Young Dental Mfg. Co. v. Q3 SpecialProds., Inc., 1995 U.S. Dist. LEXIS 10076 (E.D. Mo.1995)(“The complaint fails to identify with anyparticularity the nature of the trade secrets andconfidential information allegedly taken and used bythe defendants” and in the depositions YoungDental’s president “could not identify a single tradesecret or piece of confidential information that he wasaware of that defendant Carron had taken or used.”).See also Stewart & Stevenson Servs., Inc. v. Serv-Tech, Inc.,879 S.W.2d 89 (Tex. App.–Houston [14th. Dist.] 1994,writ filed)(plaintiff gave a detailed list of 64 items ofinformation allegedly constituting misappropriatedtrade secrets.). But see Static Controls Components, Inc. v.Darkprint Imaging, Inc., 135 F. Supp.2d 722 (M.D.N.C.2001)(pleading trade secrets generally is sufficient tosatisfy Rule 8, Fed. R. Civ. P.).

187 See, e.g., FMC Corp. v. Cyprus Foote Mineral Co., 899 F.Supp. 1477 (W.D.N.C. 1995)(plaintiff must establishthe existence of its alleged trade secrets).

188 Diodes, Inc. v. Franzen, 67 Cal. Rptr. 19, 23 (Cal. Ct.App. 1968)(“[T]he complainant [must] describe thesubject matter of the trade secret with sufficientparticularity to separate it from matters of generalknowledge in the trade or of special knowledge ofthose persons who are skilled in the trade, and topermit the defendant to ascertain at least theboundaries within which the secret lies.”).

189 See MAI Sys. Corp. v. Peak Computer, Inc., 99 F.2d 511(9th Cir. 1993).

190 ECT Int’l, Inc. v. Zwerlein, 597 N.W.2d 479 (Wis. Ct.App. 1999)(adopting Diodes standard, “[w]e hold that aparty asserting a protectable trade secret must describe



















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of safeguarding confidential business informationhas been specifically recognized by the courts,

including the Texas courts,191 in the context ofpermitting injunctions to issue that did notspecifically list or identify the trade secretsinvolved.

B. Trade Secret PrivilegeMany states have specific statutes or rules

governing the disclosure of trade secrets inlitigation. Rule 507, TEX. R. EVID., for example,provides a general privilege for trade secretinformation. When such a privilege is asserted,

under In re Continental General Tire, Inc.,192 a“trial court is to apply a balancing test that

employs shifting burdens.”193 Specifically, the“party resisting discovery must first establish thatthe information is a trade secret. The burden thenshifts to the requesting party to show that theinformation is ‘necessary for a fair adjudication of

its claims.’ ”194 In doing so, the “requestingparty must show something more than that theinformation is relevant: ‘Rule 507 clearly

it with sufficient particularity to identify the specifictrade secret at risk * * *”); Lynchval Sys. Inc. v. ChicagoConsulting Actuaries Inc., 49 U.S.P.Q.2d 1606 (N.D. Ill.1998)(“In order to prove the contents of theprograms, the best evidence rule requires [the plaintiff]to provide the original computer programs orcomponent parts and documents detailing theinterrelationship between the component parts which[the plaintiff] alleges exists.”); Water & Energy Sys. Tech.Inc. v. Keil, 974 P.2d 821, 1999 UT 16, 50 U.S.P.Q.2d1157 (Utah 1999)(preliminary injunction reversedwhere the plaintiff had not submitted actual watertreatment formulas to the trial court for comparisonwith the defendant’s formulas.).

191 Rugen v. Interactive Business Systems, Inc., 864 S.W.2d 548(Tex. App.-Dallas 1993, no writ)(“When confidentialinformation and trade secrets are sought to beprotected, courts should word the injunction order toavoid disclosure of the information. An injunctionreferring to sealed exhibits is in compliance with Rule683 provided the activity sought to be enjoined isdescribed in reasonable detail.”) .

192 979 S.W.2d 609, 611-13 (Tex. 1998).193 John Paul Mitchell Sys. v. Randalls Food Mkts., Inc., 17

S.W.3d 721, 737 (Tex. App.–Austin 2000, denied).194 Id.

contemplates a heightened burden for obtaining

trade secret information.’ ”195

C. Documents Filed Unsealed in CourtRecord Does Not Necessarily DestroyTrade SecretBecause unsealed court records are public,

does that mean that trade secret protection is lost ifthe trade secret is revealed, perhaps inadvertently,in a publicly filed document? Sometimes, but not

necessarily.196 Depending on whether the forumhas adopted a version of the UTSA, theRESTATEMENT (FIRST) OF TORTS, or theRESTATEMENT (THIRD) OF UNFAIR COMPETITION,the question is whether the trade secret, as a resultof that filing, is now generally known or readily

ascertainable,197 or no longer “relatively”

secret,198 or now not “sufficiently secret199 toqualify as a trade secret. Also, the courts andspecifically the Fifth Circuit have recognized thatlimited disclosures, even without express orimplied obligations of confidentiality, may notdestroy trade secret protection, if the ownerotherwise takes adequate security precautions, thedisclosure is limited, and the information does not,

as a result, become generally known.200

At one extreme of the analysis isinformation that has been widely disseminated, forexample by being placed on-line either through a

195 Id., quoting Cont’l Gen., 979 S.W.2d at 613-14.196 See Taco Cabaña Int’l, Inc. v. Two Pesos, Inc., 932 F.2d

1113 (5th Cir. 1991), aff’d on different grounds, 505 U.S.763 (1992)(filing architectural drawings with municipalclerk’s office was a “limited disclosure” and courtinstructed the jury that “[f]iling of architectural planswith a city does not make them public informationwithin the context of secrecy, that relates to the law oftrade secrets.”).

197 Uniform Trade Secrets Act § 1(4).198 RESTATEMENT (FIRST) OF TORTS § 757 cmt. b

(1939). The RESTATEMENT (FIRST) OF TORTSadopted the “relative” rather than “absolute” standardof secrecy:

199 The RESTATEMENT (THIRD) OF UNFAIRCOMPETITION (1995).

200 Metallurgical Indus., Inc. v. Fourtek, Inc., 790 F.2d 1195(5th Cir. 1986).

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BBS or the Internet. It has been held that makingmaterials available on-line renders such works“generally known” and effectively injects such

materials into the public domain.201 Courtrecords are generally not “on-line,” although manycourt dockets are now available for searching on-line and the underlying briefs, affidavits, exhibitsand so forth are readily available through theclerk’s office for review and copying.

Even before such modern day on-lineavailability, though, several courts concluded thatfiling unsealed documents that disclose a tradesecret in court records results in a loss of trade

secret protection.202 Other courts, however, havetaken a more conservative view, reasoning thatsuch a filing is one fact, but only one fact, that the

court must consider.203

201 See, e.g., Religious Tech. Ctrs. v. Lerma, 897 F. Supp. 260(E.D. Va. 1995); Religious Tech. Ctrs. v. F.A.C.T.Net,Inc., 901 F. Supp. 1519 (D. Colo. 1995); Religious Tech.Ctrs. v. Lerma, 908 F. Supp. 1362 (E.D. Va. 1995).

202 See, e.g., Jackson v. Hammer, 653 N.E.2d 809, 816 (Ill.App. 1995)(attaching customer list to unsealedaffidavit destroyed trade secret); M.R.S. Datascope Inc.v. Exch. Data Corp., Inc., 745 S.W.2d 542 (Tex. App.-Houston [1st Dist.] 1988, no writ)(filing customer listwith court destroyed trade secret); Cottingham v. Engler,178 S.W.2d 148 (Tex. Civ. App.-Dallas 1944, no writ);Gerber Radio Supply Co. v. Philips Semiconductors, Inc.,1995 U.S. App. LEXIS 20711 (1st Cir. 1995)(non-precedential)(“Indeed, partly because of Gerber’sfailure to seek an appropriate protective order, the[customer] list has been publicly available for most ofthat [five month] period—having been submitted (inunsealed format) as part of the record in this case.”).

203 See, e.g., Hoechst Diafoil Co. v. Nan Ya Plastics Corp., 174F.3d 411 (4th Cir. 1999)(concluding that inadvertentlyleaving a 28-page unsealed document, that disclosed atrade secret manufacturing process for polyester films,in court records from an earlier related case, did notresult in a loss of trade secret protection.); Gates RubberCo. v. Bando Chem. Indus., Ltd., 9 F.3d 823, 28U.S.P.Q.2d 1503 (10th Cir. 1993); Religious Tech. Ctrs. v.Netcom On-Line Communications, Inc., 923 F. Supp. 1231,1255 (N.D. Cal. 1995); Plastic & Metal Fabricators v.Roy, 303 A.2d 725, 731 (Conn. 1972)(attachingdescription of trade secret to an unsealed affidavit didnot per se destroy the trade secret).

D. Confidentiality OrdersIt would, of course, be a hollow victory in

trade secret litigation if one were required todisclose the asserted trade secrets during litigation

to protect those secrets.204 On the other hand, asnoted above, a defendant is entitled to know what

he/she is alleged to have misappropriated.205 Inorder to balance the interests of the litigants,confidentiality orders are used so frequently topermit mutual disclosure of confidentialinformation that they are considered de rigueure in

trade secret litigation.206 There is, however, also

a public component to civil litigation,207 and

204 M.R.S. Datascope Inc. v. Exch. Data Corp., Inc., 745S.W.2d 542 (Tex. App.–Houston [1st Dist.] 1988, nowrit)(filing customer list with court destroyed tradesecret); Cottingham v. Engler, 178 S.W.2d 148 (Tex. Civ.App.–Dallas 1944, no writ). See also Safeguard Bus. Sys.,Inc. v. Schaffer, 822 S.W.2d 640 (Tex. App.–Dallas 1991,no writ)(entire list of customers not required tosupport broad injunctive relief).

205 On a related note, the Federal Circuit has held that,under Rule 26, FED. R. CIV. P., a disclosure ofinformation and documents to a testifying expert isdiscoverable by the opposing party, whether or notthe expert relies on such documents and informationin preparing her report. In re Pioneer Hi-Bred Int’l, Inc.,238 F.3d 1379, 1375 (Fed. Cir. 2001).

206 It should be noted that § 5 the UTSA specificallyprovides:

In an action under this [Act], a court shallpreserve the secrecy of an alleged tradesecret by reasonable means, which mayinclude granting protective orders inconnection with discovery proceedings,holding in-camera hearings, sealing therecords of the action, and ordering anyperson involved in the litigation not todisclose an alleged trade secret withoutprior court approval.

207 See, e.g., In re Adobe Sys. Inc. Sec. Litig., 141 F.R.D. 155(N. D. Cal. 1992)(discussing right of access tomaterials produced during discovery). The commonlaw right of access to judicial documents has been saidto predate the Constitution. Leucadia, Inc. v. AppliedExtrusion Tech., Inc., 998 F.2d 157 (3d Cir. 1993). Seealso, Nixon v. Warner Communications, Inc., 435 U.S. 589(1978)(“It is clear that the courts of this countryrecognize a general right to inspect and copy publicrecords and documents, including judicial records anddocuments. In contrast to the English practice, * * *American decisions generally do not condition











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confidentiality or sealing orders have sometimesbeen used improperly to exclude public

review.208 In Union Oil Co. of California v.

Leavell,209 for example, Judge Easterbrook notedthat almost every document filed in the districtcourt and on appeal bore the legend “FILEDUNDER SEAL.” Although the parties hadobtained a sealing order in the district court, theparties apparently had not obtained such an orderfrom the Seventh Circuit. Accordingly, the courtissued a show cause order why the documentsshould not be placed in the public record. Inresponse, Unocal asked the court to not only sealthe briefs and record, but to hold oral argument ina courtroom closed to the public and to use onlypseudonyms in any opinion. The court declined todo so, ordered that all appellate records beunsealed, and ordered the district court to do thesame. Pointing out that litigation concerning tradesecrets, national security, and even hydrogenbomb plans were conducted in open courts, thecourt comments that “[p]eople who want secrecyshould opt for arbitration. When they call on thecourts, they must accept the openness that goeswith subsidized dispute resolution by public (and

publicly accountable) officials.”210

Nevertheless, as recognized by the First

Circuit in Anderson v. Cryovac, Inc.,211 and the

enforcement of this right on a proprietary interest inthe document or upon a need for it as evidence in alawsuit. The interest necessary to support the issuanceof a writ compelling access has been found, forexample, in the citizen’s desire to keep watchful eyeon the workings of public agencies * * * and in anewspaper publisher’s intention to publishinformation concerning the operation ofgovernment.” [Footnotes omitted.]).

208 See, however, In re Samsung Telecomms. of Am., Inc., 1999WL 1081387 (Tex. App. – Dallas 1999)(unpublished,nonprecedential)(trial court did not abuse itsdiscretion in issuing orders sealing the courtroom andhaving spectators sign non-disclosure agreements).

209 220 F.3d 562 (7th Cir. 2000)(Easterbrook, CircuitJudge).

210 220 F.3d at 568.211 805 F.2d 1 (1st Cir. 1986) . But see Public Citizen v.

Liggett Group, Inc., 858 F.2d 775 (1st Cir. 1988), Pansy v.Borough of Stroudsburg, 23 F.3d 772 (3d Cir. 1994);Glenmede Trust Co. v. Thompson, 56 F.3d 476 (3d Cir.

Supreme Court in Seattle Times Co. v.

Rhinehart,212 protective orders restricting the useand dissemination of trade secret or confidentialinformation are necessary especially in light of

modern liberal discovery rules.213

Inadmissibility at trial is not a validground for objection if the information sought isreasonably calculated to lead to the discovery of

admissible evidence.214 In its oft-cited opinion

on discovery, Hickman v. Taylor,215 the UnitedStates Supreme Court emphasized that fulldisclosure was at the heart of the then relativelynew federal discovery rules, and that the intent ofbroad disclosure was to enable the parties “toobtain the fullest possible knowledge of the issues

and facts before trial.”216 The Court directed thatthose “discovery provisions are to be applied as

1995); Leucadia, Inc. v. Applied Extrusion Techs., Inc., 998F.2d 157 (3d Cir. 1993).

212 467 U.S. 20 (1984).213 See Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548

(Tex. App.–Dallas 1993, no writ. See also Gerber RadioSupply Co. v. Philips Semiconductors, Inc., 1995 U.S. App.LEXIS 20711 (1st Cir. 1995)(non-precedential)(“Indeed, partly because of Gerber’sfailure to seek an appropriate protective order, the[customer] list has been publicly available for most ofthat [five month] period—having been submitted (inunsealed format) as part of the record in this case.”).But see Citizen First Nat’l Bank of Princeton v. CincinnatiIns. Co., 178 F.3d 943, 51 U.S.P.Q.2d 1218 (7th Cir.1999)(district court judge has responsibility forensuring compliance with the “good cause” standardof Fed. R. Civ. P. 26(c), and “umbrella” protectiveorder in that case was invalid as an improperdelegation to the parties to determine what would bekept from the public record).

214 See, e.g., Gordon v. Blackmon, 675 S.W.2d 790 (Tex.App.–Corpus Christi 1984, no writ)(discovery is notlimited to information admissible at trial, but rather, toincrease likelihood that all relevant evidence will bediscovered and brought before the trier of fact).Mallinckrodt Chem. Works v. Goldman Sachs & Co., 58F.R.D. 348, 353 (S.D.N.Y. 1973) (the scope ofdiscovery is to be liberally construed so as to provideboth parties with information essential to properlyprepare for litigation on all facts).

215 329 U.S. 495 (1947).216 Id. at 501.














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broadly and liberally as possible.”217 In fact,Professor Wright has commented that “discoveryshould be relevant where there is any possibilitythat the information sought may be relevant to the

subject matter of the litigation.”218

There is no general privilege from

disclosure of relevant business records,219

regardless of whether such records contain or

reveal trade secrets.220 It is thus inevitable thatsuch a sweeping scope of permissible discoverywill frequently invade privacy interests, includingreasonable expectations of privacy in trade secretand other confidential business information. Someintrusion is justified by the offsetting policy ofpermitting full and complete preparation for trial.But privacy interests and the interests of a full andfair trial must be carefully weighed to obtain aproper balance between those competing interests.The ability for litigants to obtain orders protectingconfidential information is essential to maintain

that balance.221

Even though protective orders may becommon and serve a very real purpose, parties willnot necessarily always agree to entry of such anorder, particularly where counsel wants to shareinformation with other litigants. Also, courts havedenied entry of even agreed protective orderswhere the parties did not establish sufficient cause

217 Id. at 506.218 C. Wright, LAW OF FEDERAL COURTS º81 at 359 n.47

(2d ed. 1970) (emphasis added); Detweiler Bros., Inc., v.John Graham Co., 412 F. Supp. 416 (E.D. Wash. 1976).It has been held, however, that standards for non-party discovery require a stronger showing ofrelevance than for simple party discovery. Laxalt v.McClatchy, 116 F.R.D. 455 (D. Nev. 1986).

219 Penthouse Intern, Ltd. v. Playboy Enters., 663 F.2d 371,391 (2d Cir. 1981); Penwalt Corp. v. Plough, Inc., 85F.R.D. 257, 259 (D. Del. 1979).

220 Centurion Indus., Inc. v. Warren Steurer and Assocs., 665F.2d 323, 325 (10th Cir. 1981); United States v. Int’l Bus.Machs., 67 F.R.D. 40 (S.D.N.Y. 1975).

221 It is also necessary for courts to enforce such orders,which sometimes courts are unwilling to do whenviolation has been innocent. See Foresight Res. Corp. v.Pfortmiller, 1989 U.S. Dist. LEXIS 16004 (D. Kan.1989)(refusing to issue sanctions).

for such an order.222 Counsel should thus beprepared to justify entry of even an agreedprotective order. In federal court, counsel mustcomply with the “good cause” standard of Rule26(a).

E. Protection for Trade Secrets in FederalCourts: The Good Cause StandardRule 26(c), Federal Rules of Civil

Procedure,223 provides generally for protective

orders upon a showing of good cause.224 Suchprotective orders can, of course, limit disclosure ordiscovery, provide for the filing of sealeddocuments, and the protection of confidential ortrade secret information. Contrary to somecharacterizations and beliefs, however, entry of aprotective order is neither automatic nor a mereformality. The parties must show “good cause”under Rule 26(c) to justify entry of a protective

order.225 Further, such protective orders must be

definite in describing what is covered.226

222 See Broan Mfg. Co. v. Westinghouse Elec. Corp., 101F.R.D. 773, 774 (E.D. Wis. 1984) (because neitherparty showed cause for entry of protective order,court denied the order); Krekel Publ’ns, Inc. v. WaukeshaFreeman, Inc., 98 F.R.D. 745, 746 (E.D. Wis. 1983).

223 Prior to the reorganization and revamping of therules in 1970, the Federal Rules contained no expressprovision for protecting trade secrets or otherconfidential business information. Prior Rule 30(b)protected only “secret processes, developments andresearch.” The courts, however, protected suchinformation by analogizing trade secrets andconfidential business information to the informationexplicitly protected by Rule 30(b) or other subjectmatter traditionally protected by the courts. Covey OilCo. v. Cont’l Oil Co., 340 F.2d 993 (10th Cir.) cert. denied,380 U.S. 964 (1965); Essex Wire Corp. v. Eastern Elec.Sales Co., 48 F.R.D. 308 (E.D. Pa. 1969). Rule26(c)(7), according to the Advisory CommissionNotes, reflected existing law, namely that courtswould limit the disclosure of trade secrets andconfidential business information revealed indiscovery. Advisory Commission reprinted in 48F.R.D. 485, 497–508 (1970).

224 But see In re Orion Pictures Corp., 21 F.3d 24 (2d Cir.1994) (there is no requirement to show “good cause”in bankruptcy matters.).

225 See Cipollone v. Liggett Group, Inc., 785 F.2d 1108 (3rdCir. 1986), cert. denied, 479 U.S. 1043 (1987); In re











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But the courts have not been entirelyconsistent in their articulation of what constitutes“good cause.” According to one court “[i]t mustbe shown that disclosure will work a clearlydefined and serious injury, [citations omitted], andthat the party resisting disclosure ‘will indeed be

harmed by disclosure.’ ”227 Another court hasarticulated the standard as whether disclosurewould cause “significant harm” to the movant’s

competitive and financial position.228 At aminimum, however, the burden is on theproponent of the protective order to demonstratethat (1) the material in question is within the scopeof materials subject to Rule 26(c), and (2)disclosure would cause an identifiable, significant

harm.229

A showing of good cause is generally notmade simply because opposing counsel will likelyshare the fruits of discovery with other

litigants.230 Also, conclusory statements are not

Halkin, 598 F.2d 176, 188 (D.C. Cir. 1979) (party orperson from whom discovery is sought must establish“good cause” for any restriction on the use ofdiscovery documents); Zenith Radio Corp. v. MatsushitaElec. Ind. Co., 529 F. Supp. 866, 890 (E.D. Pa.1981)(party seeking a protective order bears theburden of showing good cause for the order to issue);Avirgan v. Hull, 118 F.R.D. 252, 254 (D.C. Cir. 1987)(party seeking a protective order clearly bears the bur-den of proving its necessity).

226 See Fonar Corp. v. Deccaid Servs., Inc., 983 F.2d 427 (2dCir. 1993)(in reversing the district court’s grant of atemporary restraining order, contempt citation forviolation of that TRO, and a preliminary injunctionfor being too broad, the Second Circuit, in asomewhat thinly veiled threat of mandamus, urged thedistrict court to “give further consideration to theterms of that order in the light of defendants’allegations of prior publications and in the interests ofcertainty.”

227 Zenith Radio Corp., 529 F. Supp. at 891.228 See e.g., Deford v. Schmid Prods., Co., 120 F.R.D. 648,

653. (D. Md. 1987).229 Cipollone v. Liggett Group, Inc., 785 F.2d 1108, 1121

(3rd Cir. 1986), cert. denied, 479 U.S. 1043 (1987).230 See e.g., Garcia v. Peeples, 734 S.W.2d 343 (Tex. 1987);

Patterson v. Ford Motor Co., 85 F.R.D. 152, 153-154(W.D. Tex. 1980); Parsons v. Gen. Motors Corp., 85F.R.D. 724, 726 (N.D. Ga. 1980)(court denied GM’s

sufficient to satisfy the standard.231 At least onecourt has held that where it is alleged thatdisclosure would create a competitivedisadvantage, the specific instances must be setforth in more than briefs or counsel’s hearsay

allegations in an affidavit.232 In some instances,

of course, the harm is readily apparent.233

Nevertheless, counsel should be prepared to allegeand offer proof of specific facts in support of theneed for a protective order, even if the protective

order is presented as an agreed order.234

In cases involving computer hardware andsoftware, the “good cause” standard should be

relatively easy to meet.235 Indeed, in actionsasserting trade secret misappropriation orcopyright infringement or both, disclosure ofsource code and related confidential information

motion for a protective order where there was nodemonstration that the requested information wasconfidential or that disclosure would create acompetitive disadvantage. The allegation that theplaintiff would share the information with otherattorneys in pending or planned lawsuits against GMwas insufficient to constitute a showing of goodcause).

231 See e.g., Gen. Dynamics Corp. v. Selb Mfg. Co., 481 F.2d1204, 1212 (8th Cir. 1973), cert. denied, 414 U.S. 1162,94 S. Ct. 926 (8th Cir. 1974)(movant must makespecific and particular demonstrations of facts, notstereotyped or conclusory statements); BCI Comm. Sys.,Inc. v. Bell Atlanticom Sys., Inc., 112 F.R.D. 154, 160(N.D. Ala. 1986) (protective order denied where factsalleged were no more than “ordinary garden variety orboilerplate ‘good cause’ facts”).

232 Reliance Ins. Co. v. Barron's, 428 F. Supp. 200 (S.D.N.Y.1977).

233 See Zenith Radio Corp., 529 F. Supp. at 891(“frequentlythe injury that would flow from disclosure is patent,either from consideration of the documents alone oragainst the court's understanding of the backgroundfacts”).

234 See Smith v. BIC Corp., 121 F.R.D. 235, 241 (E.D. Pa.1988) (protective order denied where movant made noshowing that the material at issue provided it withsome type of competitive advantage).

235 But see Rare Coin-It, Inc. v. I.J.E., Inc., 625 So .2d 1277(Fla. 1993)(a statutory privilege against disclosing tradesecrets can preclude discovery of source code absent ashowing that disclosure is “reasonably necessary”).













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by both parties is more likely than not

essential.236 The court must balance the risks ofdisclosure to a competitor against elements theparties must prove in asserting their claims and

defenses. 237 That is particularly true when thedisclosed materials and information will be made

available to in-house counsel.238

236 See, e.g., Upjohn Co. v. Hygieia Biological Labs., 151F.R.D. 355 (E.D. Cal. 1993)(owner of animal vaccinewas entitled to discover trade information held byCalifornia Department of Food and Agriculture andU.S. Department of Agriculture because withoutdisclosure it could not be determined whether owner’svaccine and competitor’s vaccines were the same ordifferent); Mohawk Mfg. & Supply Co. v. Lakes Tool Die& Eng’g, Inc., 1993 U.S. Dist. LEXIS 3196 (N.D. Ill.1993)(dealing with discovery). See also Brown BagSoftware v. Symantec Corp., 960 F.2d 1465, 22 U.S.P.Q.2d1429 (9th Cir. 1992), cert. denied, 113 S. Ct. 198 (1992);U.S. Steel Corp. v. United States, 730 F.2d 1465 (Fed. Cir.1984)(cautioning against arbitrary distinctions basedon type, in-house/outside, of counsel involved, andencouraging evaluation based on counsel’s relationshipto the party demanding access).

237 See Brown Bag Software, 960 F.2d at 1470. See alsoAmgen, Inc. v. Elanex Pharms., Inc., 160 F.R.D. 134(W.D. Wash. 1994)(denying motion to enterprotective order excluding in-house counsel fromaccess to certain materials); Liberty Folder v. CurtissAnthony Corp., 90 F.R.D. 80 (S.D. Ohio 1981)(in a suitbetween competitors in the paper folding machineindustry, the court approved entry of a blanketprotective order limiting access to confidentialinformation to counsel and his associates andemployees, limiting the number of copies of theinformation that could be circulated among counseland limiting use of the information only for purposesof the present litigation); Vesta Corset Co. v. CarmenFounds. Inc., 50 U.S.P.Q.2d 1219 (S.D.N.Y.1999)(protective order limiting disclosures to counselfor the parties and experts retained for litigation −excluding the presidents of both parties − approvedwhere data included information relating to pricing,profits, costs, overhead, manufacturing specifications,customer lists, price structure, and dealings with acommon customer).

238 See U.S. Steel Corp. v. United States, 730 F.2d 1465(Fed. Cir. 1984)(court adopted a “competitivedecision-making” test, rather than simply status as in-house counsel, to decide whether disclosure should bedenied). See also Matsushita Elec. Indus. Co., Ltd. v.United States, 929 F.2d 1577 (Fed. Cir.

Umbrella protective orders allow theproducing party to designate materials it considersconfidential. Such orders also allow a party tochallenge a confidentiality designation and obtain

a ruling from the court.239 If challenged, theparty making the designation has the burden ofshowing that the material is entitled to the

confidentiality designation.240

But, the Seventh Circuit, in an opinion byChief Judge Posner, has expressly disapproved ofsuch orders. Indeed, the Seventh Circuit indicatedthat there is a presumption of public access tomaterials produced during litigation, includingdiscovery materials, and indicated that the districtcourt’s obligation to determine whether “goodcause” exists under FED. R. CIV. P. 26(c) to sealcertain materials requires the district court toactually review those materials, or, in cases withthousands of documents, (1) to satisfy “himselfthat the parties know what a trade secret is and areacting in good faith in deciding which parts of therecord are trade secrets and (2) makes explicit thateither party and any interested member of thepublic can challenge the secreting of particular

documents.”241

1991)(competitive decision-making involvesparticipation in pricing, product design, marketing orother decisions “made in light of similar orcorresponding information about a competitor.”). Seealso In re Indep. Serv. Orgs. Antitrust Litig., 1995 U.S.Dist. LEXIS 4698 (D. Kan. 1995); Fluke Corp. v. FineInstruments Corp., 32 U.S.P.Q.2d 1789 (W.D. Wash.1994).

239 See Chambers Dev. Co. v. Browning-Ferris Indus., 104F.R.D. 133, 136 (W.D. Pa. 1985)(party objecting toconfidentiality must apply to the court for ruling).

240 Zenith Radio Corp., 529 F. Supp. at 893, 915.241 Citizen First Nat’l Bank of Princeton v. Cincinnati Ins. Co.,

178 F.3d 943, 51 U.S.P.Q.2d 1218 (7th Cir. 1999).(after strongly berating the trial court for failure toperform its “gate keeper” function, the SeventhCircuit said that it had no objection “to an order thatallows the parties to keep their trade secrets (or otherproperly demarcated category of legitimatelyconfidential information) out of the public record,provided the judge (a) satisfies himself that the partiesknow what a trade secret is and are acting in goodfaith in deciding which parts of the record are tradesecrets and (2) makes explicit that either party and any








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F. Protection for Trade Secrets in CriminalCases − EEASection 1835 of the Economic Espionage

Act (EEA), 18 U.S.C. § 1835, provides generallythat the court “shall” issue orders necessary topreserve the confidentiality of trade secrets:

In any prosecution or otherproceeding under this chapter, thecourt shall enter such orders andtake such other action as may benecessary and appropriate topreserve the confidentiality oftrade secrets, consistent with therequirements of the Federal Rulesof Criminal and Civil Procedure,the Federal Rules of Evidence,and all other applicable laws. Aninterlocutory appeal by the UnitedStates shall lie from a decision ororder of a district courtauthorizing or directing thedisclosure of any trade secret.

In United States v. Hsu,242 the Third Circuit heldthat there is no requirement that the governmentshow “good cause” or otherwise bear a burden ofproving the need for a protective order under§ 1835)

G. SpoliationCourts have held that there is an

obligation, in certain instances, to preserve sourcecode and other materials for litigation, and thatdestroying or disposing of the same can be

sanctioned.243 Because such destruction can

interested member of the public can challenge thesecreting of particular documents.”).

242 155 F.3d 189, 198 n. 12 (3d Cir. 1998).243 Lauren Corp. v. Century Geophysical Corp., 953 P.2d 200

(Colo. Ct. App. 1998)(affirmed trial court’s sanction ofa presumption that the defendant had used softwareon machines other than those described in licensingagreements and award of the plaintiff’s attorney’s feesand costs when defendant during discovery disposedof certain computers); Rodriguez v. Schutt, 896 P.2d 881(Colo. App. 1994), rev’d on other grounds, 914 P.2d 921(Colo. 1996)(it is within the trial court’s discretion toimpose sanctions for spoliation of evidence in theform of an adverse inference where there is a showingthat the destruction was intentional); Computer Assocs.

occur, intentionally or unintentionally, a partybelieving that evidence will be secreted ordestroyed may seek an ex parte order seeking topreserve goods or evidence. Under Rule 65(b),FED. R CIV. P., a district court may issue an exparte temporary restraining order, but aplaintiff/movant must show that the circumstancesare appropriate for ex parte relief, and anyresulting order must describe the proscribed

conduct with some degree of precision.244

Normally, such circumstances exist wherethe adverse party is unknown or is unable to befound. Another limited circumstance is whennotice to the defendant would result in destructionof evidence. The plaintiff/movant, though,generally must do more than simply allege that thedefendant may destroy evidence; there must be ahistory of such destruction or similar evidence thata validly issued court order will be violated or

ignored.245 Also, where there is no valid reason

Int’l, Inc. v. Am. Fundware, Inc., 133 F.R.D. 166 (D.Colo. 1990) (defendant has an obligation to preservecomputer code after the complaint had been serveddespite corporate practice of retaining only the currentversion of its program); Cabinetware, Inc. v. Sullivan, 22U.S.P.Q.2d 1687 (E.D. Cal. 1991)(defendant willfullydestroyed code after being served with a requisitionfor production). See also Pioneer Hi-Bred Int’l v. HoldenFound. Seeds, Inc., 31 F.3d 1226, 31 U.S.P.Q.2d 1385(8th Cir. 1994)(discarding original seed cornprogenitor allowed court to shift the burden of proofto defendant to show that seed corn was not derivedfrom protected Pioneer seed). But see Data Gen. Corp.v. Grumman Sys. Support Corp., 803 F. Supp. 487 (D.Mass. 1992), aff’d 36 F.3d 1147 (1st Cir. 1994)(locatingand piecing together original code was unreasonableand unnecessary for Grumman’s defense despite thatData General admitted at trial that it had depositedthe wrong program with the U.S. Copyright Office inconnection with its applications for registration).

244 See Fonar Corp. v. Deccaid Servs., Inc., 983 F.2d 427 (2dCir. 1993)(injunction describing “MaintenanceSoftware” as “all software other than ‘OperationalSoftware,’ ” and “Operational Software” as that“described in listed menus in the ‘User’s Manual’ ”wasnot specific and was “unintelligible.”).

245 See In re Vuitton et Fils, S.A., 606 F.2d 1 (2d Cir.1979).











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for proceeding ex parte, issuing such a temporary

restraining order is an abuse of discretion.246

H. Identification of “Employees” as ExpertWitnessesOn a somewhat related note, the Middle

District of Alabama, in KW Plastics v. United

States Can Co., (KW I),247 in an action involvingalleged misuse of trade secrets, joined the

Southern District of New York248 and the District

of Minnesota249 in reading Rule 26(a)(2)(B),FED. R. CIV. P., as requiring an identification of,and an expert report from, all witnesses, includingemployees, who are expected to give experttestimony under Rule 702, FED. R. EVID.According to the Advisory Committee Notes of1993, the term “expert” in Rule 26(a)(2)(B) refers“to those persons who will testify under Rule 702of the Federal Rules of Evidence with respect toscientific, technical, and other specializedmatters.” In this case, U.S. Can proposed using itscontroller and vice-president to offer expertopinion testimony regarding damages. The courtconcluded that Rule 26(a)(2)(B) governed such

testimony.250

246 See Am. Can Co. v. Mansukhani, 742 F.2d 314 (7th Cir.1984)(district court in a trade secret case issued anorder authorizing the plaintiff and U.S. Marshals toenter the defendant’s premises and seize samples ofallegedly infringing inks and documents relating to theproduction and sale of those inks. On appeal, theSeventh Circuit reversed holding that there was noevidence that defendants would have altered the inksor secreted pertinent documents).

247 199 F.R.D. 687 (M.D. Ala. 2000).248 Day v. Consol. Rail Corp., 1996 WL 257654 (S.D.N.Y.

1996).249 Minnesota Mining & Mfg. Co. v. Signtech USA, Ltd., 177

F.R.D. 459, 461 (D. Minn. 1998).250 In a later opinion, the district court granted KW’s

motion in limine to exclude the comptroller’stestimony under Daubert v. Merrell Dow Pharm., Inc., 509U.S. 579 (1993) and Kumho Tire Co., Ltd. v. Carmichael,526 U.S. 137 (1999) as being speculative, withoutsufficient factual basis, and methodologically flawed.KW Plastics v. United States Can Co., (KW II), 131 F.Supp. 2d 1289 (M.D. Ala. 2001). Compare EFCO Corp.v. Symons Corp., 219 F.3d 734 (8th Cir. 2000)(expert

It should be noted, however, that in thecase from the Southern District of New York, Day

v. Consolidated Rail Corp.,251 the courtacknowledged that Rule 26(b)(4)(A) may be readto infer that some category of experts may beexempt from the report requirement, i.e., expertswho are testifying as fact witnesses and alsoexpress some expert opinions.

The Fifth Circuit has held that “[u]nderFederal Rule of Evidence 701, a lay opinion mustbe based on personal perception, must ‘be one thata normal person would form from thoseperceptions,’ and must be helpful to the jury * * *.We have allowed lay witnesses to express

opinions that required specialized knowledge.”252

The Federal Circuit, applying regional FifthCircuit law, has permitted witnesses who had notbeen designated as expert witnesses under Rule26(a)(2) to offer opinions regarding “enablement”

under 35 U.S.C. § 112.253

IV. PREEMPTIONA. Preemption by the Copyright Act

Copyright protection has been argued topreempt trade secret protection by virtue of§ 301(a) of the 1976 Copyright Act. Whetherfederal copyright law preempts a state law claim isa question of law that is reviewed de novo on

appeal.254

The statute sets up a two-prong inquiry todetermine preemption: first, the work must be“within the scope of the ‘subject-matter ofcopyright’ as specified in 17 U.S.C. §§ 102, 103,”and second, “the rights granted under state law”

testimony on damages found reliable and properlyadmitted).

251 1996 WL 257654 (S.D.N.Y. 1996).252 United States v. Riddle, 103 F.3d 423, 428 (5th Cir.

1997), quoting Lubbock Feed Lots, Inc. v. Iowa BeefProcessors, 630 F.2d 250, 263 (5th Cir. 1980).

253 Union Pac. Res. Co. v. Chesapeake Energy Corp., 236 F.3d684 (Fed. Cir. 2001).

254 United States ex rel Berge v. Bd. of Trs. of the Univ. ofAlabama, 104 F.3d 1453, 41 U.S.P.Q.2d 1481 (4th Cir.1997); Rosciszewski v. Arete Assocs., Inc., 1 F.3d 225, 229(4th Cir. 1993).















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must be “equivalent to any exclusive rights withinthe scope of federal copyright as set out in 17

U.S.C. § 106.”255 In deciding the issue, the courtmust first decide whether the work of authorshipfalls within the subject matter of copyright. Thecourt must next decide whether the state lawcreates legal or equitable rights equivalent to anyof the exclusive rights within the general scope of§ 106. If the right created by state law, standingalone would infringe one of the § 106 rights, thenthe action is preempted. On the other hand, if statelaw requires additional elements, there is no

preemption.256

As to the first prong, the Second Circuithas held that “[c]opyrightable material oftencontains uncopyrightable elements within it, butSection 301 preemption bars state lawmisappropriation claims with respect touncopyrightable as well as copyrightable

elements.”257 The subject matter of a trade secretmisappropriation claim does not, of course,necessarily overlap that of a copyright

255 United States ex rel Berge v. Bd. of Trs. of the Univ. ofAlabama, 104 F.3d 1453 41 U.S.P.Q.2d 1481 (4th Cir.1997); Daboub v. Gibbons, 42 F.3d 285 (5th Cir. 1995);Rosciszewski v. Arete Assocs., Inc., 1 F.3d 225, 229 (4thCir. 1993).

256 See Harper & Row Publishers, Inc. v. Nation Enter., 723F.2d 195, 220 U.S.P.Q. 321 (2d Cir. 1983), rev’d on othergrounds, 471 U.S. 539 (1985); United States ex rel Berge v.Bd. of Trs. of the Univ. of Alabama, 104 F.3d 1453 41U.S.P.Q.2d 1481 (4th Cir. 1997); Rosciszewski v. AreteAssocs., Inc., 1 F.3d 225, 229-30 (4th Cir. 1993); TrandesCorp. v. Guy F. Atkinson Co., 996 F.3d 655, 659-60 (4thCir. 1993), cert. denied, 510 U.S. 965 (1993).

257 Nat’l Basketball Assoc. v. Motorola, Inc., 105 F.3d 841,41 U.S.P.Q.2d 1585 (2d Cir. 1997)(held that basketballgames were not copyrightable subject-matter, butrecorded broadcasts were copyrightable subject-matter.Nevertheless, once the performance “is reduced totangible form, there is no distinction between theperformance and the recording of the performancefor the purpose of preemption under § 301(a),”quoting Baltimore Orioles, Inc. v. Major League BaseballPlayer’s Ass’n., 805 F.2d 663, 675 (7th Cir. 1986)(thecourt held “that where the challenged copying ormisappropriation relates in part to the copyrightedbroadcasts of the games, the subject matterrequirement is met as to both the broadcasts and thegames”).

infringement claim; subject matter may qualify forcopyright protection and not qualify for trade

secret protection.258

The second prong of the preemption test issatisfied unless there is an “extra element” thatchanges the nature of the state law action so that itis “qualitatively different from a copyright

infringement claim.”259 In addition, a state lawmay escape preemption if it involves “qualitativelydifferent” conduct. However, courts have heldthat it is not sufficient that the state law claimsimply require intent or elements similar to

intent.260

Most courts applying the “extra-element

test”261 have now concluded that there is no

258 Koontz v. Jaffarian, 617 F. Supp. 1108 (E.D. Va. 1985),aff’d 787 F.2d 906 (4th Cir. 1986)(although materialsmay be protected under the copyright laws, “it doesnot follow that what was developed was a tradesecret.” The court found that the method used by thesoftware to compile the data was not a secret: “Whilenot everyone, or even a substantial number of people,could do what he did, his method is a matter of publicknowledge, not a secret”).

259 United States ex rel Berge v. Bd. of Trs. of the Univ. ofAlabama, 104 F.3d 1453 41 U.S.P.Q.2d 1481 (4th Cir.1997); Rosciszewski v. Arete Assocs., Inc., 1 F.3d 225, 229-30 (4th Cir. 1993); Trandes Corp. v. Guy F. Atkinson Co.,996 F.3d 655, 659-60 (4th Cir. 1993), cert. denied, 510U.S. 965 (1993). See also Walker v. Time Life Films, 784F.2d 44, 228 U.S.P.Q. 505 (2d Cir. 1986); DurhamIndus. v. Tomy Corp., 630 F.2d 905, 268 U.S.P.Q. 10 (2dCir. 1980).

260 See e.g., Markogianis v. Burger King Corp., 42 U.S.P.Q.2d1862 (S.D.N.Y. 1997)(state law claims for breach ofimplied-in-fact contract and breach of confidencedismissed for failure to state a claim because claims asalleged were preempted); Computer Assocs. Int’l, Inc. v.Altai, Inc., 982 F.2d 693, 717 (2d Cir. 1992)(“An actionwill not be save from preemption by elements such asawareness or intent, which alter ‘the action’s scope butnot its nature’ * * * Following this ‘extra element’ test,we have held that unfair competition andmisappropriation claims grounded solely in thecopying of a plaintiff’s protected expression arepreempted by section 301.”); Mayer v. Josiah Wedgewood& Sons, Ltd., 601 F. Supp. 1523, 225 U.S.P.Q. 776(S.D.N.Y. 1985).

261 Computer Assocs. Int’l, Inc. v. Altai, Inc. (Altai II), 982F.2d 693 (2d Cir. 1992)(Altai II).; Nat’l Car Rental Sys.,




























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blanket preemption of a trade secret claim assertedwith a copyright claim, even though both may bedirected toward the same acts, because the two arequalitatively different if the trade secret claim isbased on acts involving a breach of confidence and

involve more than copying.262

Inc. v. Computer Assocs. Int’l, Inc., 991 F.2d 426, 26U.S.P.Q.2d 1370 (8th Cir. 1993); Computermax, Inc. v.UCR, Inc., 804 F. Supp. 337, 26 U.S.P.Q.2d 1001(M.D. Ga. 1992); WEF Basel A.G. v. Reg’l Fin. Assocs.,Inc., 23 U.S.P.Q.2d 1712 (E.D. Pa. 1992); Trandes Corp.v. Guy F. Atkinson Co., 996 F.2d 655, 27 U.S.P.Q.2d1014 (4th Cir. 1993), cert. denied, 510 U.S. 965 (1993);Data Gen. Corp. v. Grumman Sys. Support Corp., 803 F.Supp. 487 (D. Mass. 1992), aff’d 36 F.3d 1147 (1st Cir.1994) Avtec v. Peiffer, 21 F.3d 568, 30 U.S.P.Q.2d 1365(4th Cir. 1994); Gates Rubber Co. v. Bando Chem. Indus.,Ltd., 9 F.3d 823, 28 U.S.P.Q.2d 1503 (10th Cir. 1993);Enhanced Computer Solutions, Inc. v. Rose, 927 F. Supp.738 (S.D.N.Y. 1996)(case asserting tortiousinterference with business relations, breach ofemployment agreement, and misappropriation of tradesecrets, removed to federal court based on assertionsthat claims of trade secret misappropriation weredependent upon federal copyright law, remanded tostate court finding that cause of action for trade secretmisappropriation was not preempted by § 301(a) ofthe Copyright Act—no federal question jurisdiction).But see EZ-Tixz, Inc. v. Hit-Tix, Inc., 919 F. Supp. 728(S.D.N.Y. 1996)(claims for trade secretmisappropriation and unfair competition based onfailure to pay alleged licensing fees for computersoftware did not satisfy “extra element test” and werepreempted by § 301(a) of the Copyright Act); Kregos v.Associated Press, 3 F.3d 656 (2d Cir. 1993)(the SecondCircuit adopted the same rationale to find that certainunfair competition claims brought under New Yorkstate law were preempted); Rosciszewski v. Arete Assocs.,Inc., 1 F.3d 225, 229 (4th Cir. 1993), 1 F.3d 225, 27U.S.P.Q.2d 1678 (4th Cir. 1993)(the Fourth Circuitnot only concluded that § 301(a) preempted theVirginia Computer Crimes Act, but so completelypreempted it that the preemption alone gave thefederal courts removal jurisdiction).

262 DSC Communications Corp. v. Pulse Communications, Inc.,170 F.3d 1354 (Fed. Cir. 1999)(DSC’s claim for tradesecret misappropriation under Virginia Trade SecretsAct is not preempted by § 301(a) of the Copyright Actbecause that cause of action requires an “extraelement.”); Rodrigue v. Rodrigue, 55 F. Supp. 2d 534, 50U.S.P.Q.2d 1278 (E.D. La. 1999)(Louisianacommunity property laws preempted by § 301(a) ofthe Copyright Act); United States Golf Ass’n v. ArroyoSoftware Corp., 69 Cal. App. 4th 607, 49 U.S.P.Q.2d

Also, the Pennsylvania courts haverecognized two distinct types of misappropriationof trade secrets: those based upon the use of aplaintiff’s work and those based upon thedisclosure of material that a defendant has a dutyto keep confidential. Claims of the former typeare preempted while claims of the latter type are

not.263

State law claims for “conversion,” whichare frequently asserted with trade secretmisappropriation claims, have been rather

consistently deemed preempted. 264 If, however,

1979 (1999)(in a poorly reasoned opinion, theCalifornia Court of Appeals held that cause of actionfor misappropriation of the USGA’s handicappingformulas (which were distributed in software form)was not preempted by § 301(a) of the Copyright Actbecause the USGA sought to prohibit Arroyo fromusing those formulas, but not copying those formulas);Expediters Int’l of Washington, Inc. v. Direct Line CargoMgmt. Servs., Inc., 995 F. Supp. 468 (D.N.J. 1998)(nopreemption of state law misappropriation or breach ofcontract claims where state law requires extraelement); Micro Data Base Sys., Inc. v. Nellcor Puritan-Bennett, Inc., 20 F. Supp. 2d 1258 (N.D. Ind.1998)(claim for trade secret misappropriation underIndiana Trade Secrets Act involving certain data basesoftware was not preempted by § 301(a) of theCopyright Act because that cause of action requiredan extra element, i.e., breach of trust, not required bythe Copyright Act).

263 Long v. Quality Computers & Applications, Inc., 860 F.Supp. 191, 31 U.S.P.Q.2d 1944 (M.D. Pa. 1994); GemelPrecision Tool Co., Inc. v. Pharma Tool Corp., 35U.S.P.Q.2d 1019, 1995 U.S. Dist. LEXIS 2093 (E.D.Pa. 1995). See Bieg v. Hovnanian Enter., Inc., 53U.S.P.Q.2d 1274, 1278 (E.D. Pa. 1999)(“Only claimspredicated on the violation of a distinct duty of trustor confidentiality may avoid preemption.”).

264 See United States ex rel Berge v. Bd. of Trs. of the Univ. ofAlabama, 104 F.3d 1453 41 U.S.P.Q.2d 1481 (4th Cir.1997)(claim for conversion of “intellectual property”in research materials held to have been preempted);Dielsi v. Falk, 916 F. Supp. 985, 992 (C.D. Cal.1996)(claim for conversion of a television script waspreempted because there was no extra element to theessential claim that the ideas were misappropriated);Daboub v. Gibbons, 42 F.3d 285 (5th Cir. 1995)(wherethe core of the state law theory of recovery goes towrongful copying the cause of action is preempted.);Garrido v. Burger King Corp., 558 So. 2d 79, 82 (Fla. Dist.Ct. App. 1990)(where the gravamen of a conversion

























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the plaintiff can prove an extra element, forexample that the defendant was unlawfullyretaining a physical object embodying the work,

then there should be no preemption.265 State law“hot-news” misappropriation claims based on

International News Serv. v. Associated Press,266

with a narrow exception,267 have been held to be

preempted.268

claim is the unauthorized taking or use of ideas, theelements of the claim are not qualitatively differentfrom copyright infringement); Patrick v. Francis, 887 F.Supp. 481, 482, 484 (W.D.N.Y. 1995)(conversionclaim preempted where the action sought to recoverfor unauthorized copying of the work and ideas in aresearch paper).

265 See Oddo v. Reis, 743 F.2d 630, 635 (9th Cir.1984)(claim for conversion of tangible property heldnot preempted); G.S. Rasmussen & Assocs. v. KalittaFlying Serv., 958 F.2d 896 (9th Cir. 1992), cert. denied,508 U.S. 959 (1993)(conversion claim dealing withSupplemental Type Certificate that had been usedimproperly to obtain an airworthiness certificate fromthe FAA held not preempted).

266 248 U.S. 215 (1918).267 See Nat’l Basketball Assoc. v. Motorola, Inc., 105 F.3d

841, 41 U.S.P.Q.2d 1585 (2d Cir. 1997)(held that onlysurviving or non-preempted “hot-news” INS-likeclaims are “limited to cases where: (i) a plaintiffgenerates or gathers information at a cost; (ii) theinformation is time-sensitive; (iii) a defendant’s use ofthe information constitutes free-riding on theplaintiff’s efforts; (iv) the defendant is in directcompetition with a product or service offered by theplaintiffs; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would soreduce the incentive to produce the product or servicethat its existence or quality would be substantiallythreatened.” The “extra elements” are (i) the time-sensitive value of factual information, (ii) the free-riding by a defendant, and (iii) the threat to the veryexistence of the product or service provided by theplaintiff.).

268 See Alcatel USA Inc. v. DGI Techs., Inc., 166 F.3d 772,49 U.S.P.Q.2d 1641 (5th Cir. 1999). See also Daboub v.Gibbons, 42 F.3d 285 (5th Cir. 1995)(concluding, in anaction centering around ZZ Top’s live performancesand studio records, that various state law claims werepreempted because the “core of each of the state lawtheories of recovery * * *, without detailing thespecific elements comprising each claim, is the same:the wrongful copying distribution, and performance of

B. Preemption by the Patent LawsIn general, the law of trade secrets has

been construed to complement, not conflict with,

the law of patents.269 Indeed, in Kewanee Oil v.

Bicron Corp.,270 the Supreme Court held thatOhio state trade secret law was not preempted bythe federal patent laws. The Court cautioned,however, that to the extent possible, trade secretlaw and patent law should be administered in sucha manner that the former will not deter an inventorfrom seeking the benefit of the latter, because thepublic is most benefited by early disclosure of the

invention in consideration of the patent grant.271

Nevertheless, there have been cases inwhich a court has found a trade secret

misappropriation claim272 and various forms of

the lyrics of Thunderbird.”); United Support Ass’n, Inc. v.Mellon, 1999 Wash. App. LEXIS 634 (Wash. App.1999)(unpublished). But see Balboa Ins. Co. v. TransGlobal Equities, 215 Cal. App. 3d 1327, 15 U.S.P.Q.2d1081 (Cal. Ct. App. 1990)(no preemption of statetrade secret claims, or claims based on breach ofconfidence or breach of a fiduciary duty because allinvolve an element of a confidential relationshipbetween the parties -- an element not required forcopyright infringement).

269 See, e.g., Kewanee Oil v. Bicron Corp., 416 U.S. 470(1974). Compare, Bonito Boats Inc. v. Thunder Craft Boats,Inc., 489 U.S. 141 (1989)(reaffirming Kewanee, but alsoconcluding that the Florida “anti-splash” statuteconflicted with the federal patent statute and wastherefore unconstitutional under the SupremacyClause). See also Pioneer Hi-Bred Int’l v. Holden Found.Seeds, Inc., 31 F.3d 1226, 31 U.S.P.Q.2d 1385, 1994U.S. App. LEXIS 16965 (8th Cir. 1994)(in a caseinvolving misappropriation of seed corn, held thatPlant Variety Protection Act, 7 U.S.C. §§ 2321-2582,does not preempt state trade secret law).

270 416 U.S. 470 (1974) .271 See, e.g., In re Sarkar, 575 F.2d 870, 872 (C.C.P.A.

1978).272 Acuson Corp. v. Aloka Co., Ltd., 209 Cal. App. 3d 425,

10 U.S.P.Q.2d 1814 (6th Dist. 1989). Acuson was citedwith approval by the Eleventh Circuit in Roboserve Ltd.v. Tom’s Foods, Inc., 940 F.2d 1441 20 U.S.P.Q.2d 1321(11th Cir. 1991).




















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“unfair competition” to have been preempted by

federal patent law.273

C. Preemption of Other State Laws by UTSAThe model UTSA, § 7, has the following

preemption provision:

(a) This Act displaces conflictingtort, restitutionary, and other lawof this State pertaining to civilliability for misappropriation of atrade secret.

(b) This Act does not affect:(1) contractual or other civilliability or relief that is not basedupon misappropriation of a tradesecret; or (2) criminal liability formisappropriation of a trade secret.

The comments to the model Act make clear thatthe Act was not intended to cover covenants not todisclose trade secrets, covenants not to compete,an employee’s duty of loyalty, or duties

273 See Abbott Labs. v. Brennan, 952 F.2d 1346, 21U.S.P.Q.2d 1192 (Fed. Cir. 1991)(common law abuseof process action can not be invoked to remedy allegedinequitable conduct before the PTO); Concept DesignElecs. and Mfg., Inc. v. Duplitronics, 34 U.S.P.Q.2d 1789,1995 U.S. App. LEXIS 848 (Fed. Cir. 1995)(non-precedential)(in a non-precedential opinion, adeclaratory judgment plaintiff/alleged infringer wasable to recover under a state unfair competition lawbased on assertions of inequitable conduct and badfaith assertions of patent rights.); Dow Chem. Co. v.Exxon Corp., 139 F.3d 1470, 46 U.S.P.Q.2d 1120 (Fed.Cir. 1998), order denying petition for rehearing and decliningsuggestion for rehearing en banc, 139 F.3d 1470, 46U.S.P.Q.2d 1859 (Fed. Cir. 1998)(state law claim forunfair competition that is based essentially oninequitable conduct before the PTO is not preemptedby federal law); Hunter Douglas, Inc. v. Harmonic Design,Inc., 153 F.3d 1318, 47 U.S.P.Q.2d 1769 (Fed. Cir.1998)(state unfair competition claims can escapepreemption if the plaintiff alleges that thepatentholder was guilty of fraudulent conduct beforethe PTO or bad faith in the publication of the patent);Zenith Elecs. Corp. v. Exec, Inc., 182 F.3d 1340 (Fed. Cir.1999)(court extended rationale to include claimsbrought under § 43(a) of the Lanham Act, 15 U.S.C.§ 1125(a)).

voluntarily assumed under express or implied-in-

fact contracts.274

Nevertheless, the Northern District ofIllinois, now in at least two cases, has held thatclaims for tortious interference with anemployment agreement which contains non-disclosure provisions based on hiring an employeeas part of an alleged scheme to misappropriatetrade secrets are preempted by the Illinois Trade

Secrets Act (ITSA). 275

At least two courts have also held thatunjust enrichment claims are preempted by theUTSA, as adopted in those jurisdictions, where theunjust enrichment claim was founded on the samealleged ill-gotten gains as those resulting from an

alleged misappropriation of trade secrets.276

On the other hand, it has been held thatimposing vicarious liability under a theory ofrespondeat superior is not preempted by the

UTSA.277

D. Copyright Registration Affecting TradeSecret ProtectionRegistration, particularly as an

unpublished work, should not preclude laterassertion of trade secret rights. Under the 1976Act, copyright registration is permissive. Butregistration, subject to certain exceptions, remainsa statutory prerequisite to a suit for

infringement.278 Further, important remedies ofstatutory damages and attorney’s fees may be lost,again subject to certain exceptions, if registrationis not sought within three (3) months of first

publication.279 One of the requirements for

274 Model UTSA§ 7, cmt.275 Thomas & Betts Corp. v. Panduit Corp., 108 F. Supp. 2d

968 (N.D. Ill. 2000); Leggett & Platt, Inc. v. HickorySprings Mfg. Co., 132 F. Supp. 2d 643 (N.D. Ill. 2001).

276 On-Line Technologies v. Perkin Elmer Corp., 141 F. Supp.2d 246 (D. Conn. 2001); Frantz v. Johnson, 999 P.2d351 (Nev. 2000).

277 Newport News Industrial v. Dynamic Testing, Inc., 130 F.Supp. 2d 745 (E.D. Va. 2001).

278 17 U.S.C. § 411(a).279 17 U.S.C. § 412.











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obtaining a copyright registration is the deposit of

one or two copies of the work.280 Section 705(b)of the Act requires that all such deposits “shall be

open to public inspection.”281 Thus, there is anargument (but only an argument) that registrationmay preclude assertion of trade secret rights, quiteapart from any “admission” of general publication.

Two cases, both decided in 1999, directlyaddress the issue and reach opposite results. Thefirst is the Middle District of Florida’s opinion inTedder Boat Systems, Inc. v. Hillsborough County,

Florida.282 involving certain boat ramps. Theopinion says that in 1992, the plaintiff“copyrighted” one of its systems, presumablymeaning that the plaintiff registered a claim ofcopyright in drawings for such a system, andconcludes that “because the design wascopyrighted, Plaintiff lost all claims to a

misappropriation of a trade secret.”283 Therationale and holding of that case are suspect.

The second case is the Eastern District ofMichigan’s opinion in Compuware Corp. v.

Serena Software International, Inc.284

Compuware developed and licensed computersoftware known as File−AID. Compuwarecharged Serena with trade secret misappropriation,and Serena moved for summary judgmentcontending that the trade secret claim must failbecause Compuware had registered copyrights inits software and had not used those provisions of

280 17 U.S.C. § 408(b).281 17 U.S.C. § 706(b), however, provides that “[c]opies

of deposited articles retained under the control of theCopyright Office shall be authorized or furnished onlyunder the conditions specified by the CopyrightOffice regulations.” The Copyright Office regulationspreclude the public from making copies unless thosecopies are authorized by the copyright owner, arecertified for use in litigation, or a court order soprovides. 37 C.F.R. § 201.2(d)(4). The CopyrightOffice regulations also permit, for some works, thefiling of identifying material, i.e., less than completecopies. See 37 C.F.R. § 202.20.

282 54 F. Supp. 2d 1300 (M.D. Fla. 1999).283 Id. at 1305.284 77 F. Supp. 2d 816 (E.D. Mich. 1999).

the rules of the Copyright Office that permitteddepositing redacted versions. The district courtdisagreed. The court noted that even thoughdeposit copies were open for public inspection, theCopyright Office regulations imposed strictlimitations on copying, and even on making notesfrom, deposit copies of works. According to thecourt, “Serena’s argument would render publicavailability, alone and apart from publicconsumption, a dispositive fact in a trade secretmisappropriation claim,” and that “is not the

present standard under Michigan law.”285 Thecourt, for good reason, declined to follow Tedder

Boat.286

V. STATUTES OF LIMITATIONA. Introduction1. When an Action Accrues

In addition to the various state statutesdealing with tortious conduct, a trade secret actionmay also, or in the alternative, be pleaded as anaction for breach of an oral or written contract,breach of an implied-in-fact or implied-in-law

contract.287 State statutes of limitationsapplicable to such causes of action vary widely,but are generally from one to four years. Thematter is further complicated, though, by varyingrules on when the cause of action accrues. Somestates apply the rule that a breach of contract

action accrues at the time of the breach.288 Otherstates apply the rule of continuing breach in which

285 Id. at 824.286 Id. at 825 n.24.287 The Texas Supreme Court, in considering actions

sounding in contract but pleaded to state a claimunder the Deceptive Trade Practices Act, stated: “Indeciding whether the facts in [a] case [can] sustain acause of action [in tort], this Court consider[s] both [1]the source of the Defendant’s duty to act (whether itarose solely out of the contract or from somecommon law duty) and [2] the nature of the remedysought by Plaintiff.” Crawford v. Ace Sign, Inc., 917S.W.2d 12 (Tex. 1997)(per curiam). See also Murr,Contract Trumps Tort Law, Not the Other Way Around, 61TX. BAR. J. 334 (April 1998); Powers, Border Wars, 72TEX. L. REV. 1209 (1994).

288 See, e.g., M&T Chems., Inc. v. Int’l Bus. Machs. Corp., 188U.S.P.Q. 568 (S.D.N.Y. 1975); Lemelson v. CarolinaEnters., Inc., 216 U.S.P.Q. 249 (S.D.N.Y. 1982).






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the applicable statue of limitations bars damagesfor events occurring outside the applicable statute,

but does not bar the action itself.289

Similarly, in tort actions, there is a varietyof state statutes and governing court decisions fordetermining when a cause of action arises, andfurther whether each act of misappropriationconstitutes a continuing tort. One line of cases,exemplified by the Ninth Circuit’s decision inMonolith Portland Midwest Co. v. Kaiser

Aluminum & Chemical Corp.290 commenting thatthe “fabric of the relationship once rent is not tornanew with each added use or disclosure, althoughthe damage suffered may thereby be aggravated,”and its progeny, holds that a cause of action fortrade secret misappropriation accrues on the datethe trade secret was first used or disclosed and theapplicable statute of limitation continues to runregardless of whether the plaintiff had notice ofthe misappropriation. The Ninth Circuitsubsequently held in Whittaker Corp. v.

Execuair,291 however, that if there has beenwrongful acquisition of a trade secret, but notnecessarily any disclosure or use, that a cause ofaction accrues when there has been an“appreciable and actual harm, however uncertainin amount.” The court also held that the same ruleapplied when the cause of action was directedagainst a third party. The foregoing cases,however, were decided before California adoptedits version of the UTSA and therefore are nolonger the rule in California. Nevertheless,Monolith has been followed in several non-UTSA

jurisdictions.292

The second but minority line of authority

in some states293 prior to the advent of the UTSAtook the view that trade secret misappropriation isa continuing tort. For example in Underwater

289 See, e.g., Anaconda Co. v. Metric Tool & Dye Co., 205U.S.P.Q. 723 (E.D. Pa. 1980).

290 407 F.2d 288, 293 (9th Cir. 1969).291 736 F.2d 1341 (9th Cir. 1984).292 See, e.g., USM Corp. v. Tremco, Inc., 11 U.S.P.Q.2d 1567

(N.D. Ohio 1988); M&T Chems., Inc. v. Int’l Bus. Machs.Corp., 403 F. Supp. 1145 (S.D.N.Y. 1975); Lockridge v.Tweco Prods., Inc., 497 P.2d 131 (Kan. 1972).

Storage, Inc. v. United States Rubber Co.294 theD.C. Circuit held “We are of the opinion that,although it is an extremely close question, themisappropriation and continuing use of a tradesecret does constitute a continuing tort and that aninjured party can recover for use during thestatutory period preceding the filing of the suit,assuming, of course, that there had been useduring that period.”

Some states, though, added furtherqualifications. For example in Lemelson v.

Carolina Enterprises, Inc.,295 the SouthernDistrict of New York held that it makes adifference whether the defendant kept the use ofthe “secret” confidential: “[I]f the defendant keepsng Bulk Credit Transactions Held ReadilyAscertainable and Not a Trade Secret �PAGEREF _Toc19691080 \h ��77�2. Arkansas Law: Information in EmployeeHandbook Containing Marketing and Business

Plans,tt v. Morton International, Inc.,296 theDistrict of Massachusetts adopted a similar ruleholding that the use of a trade secret in preparing apatent application that was maintained in secretunder 35 U.S.C. § 122 was a continuing tort, butthat the issuance of a patent destroyed any tradesecret protection for “secrets” incorporated in thepatent and that act triggered the running of thestatute. Many (but not all) of the states thatseemed to have adopted the continuing tort theoryhave now adopted the UTSA or a similar civiltrade secret misappropriation statute. It iscurrently doubtful whether the continuing tort

293 DeGette v. Mine Co. Rest., Inc., 751 F.2d 1143 (10th Cir.1985)(construing Colorado law); Eli Lilly Co. v. EPA,615 F. Supp. 811 (S.D. Ind. 1985); Moore Int’l Corp. v.Lumber Sys., Inc., 217 U.S.P.Q. 1278 (D. Or. 1982);Dotolo v. Schouten, 426 So.2d 1013 (Fla.App. 1983).Compare Pilkington Bros. v. Guardian Indus. Corp., 230U.S.P.Q. 300 (E.D. Mich. 1986)(suggesting thatMichigan will follow the continuing tort theory) withShatterproof Glass Corp. v. Guardian Glass Co., 322 F.Supp. 854 (E.D. Mich. 1970), aff’d, 462 F.2d 1115 (6thCir. 1972), cert. denied, 409 U.S. 1039 (1972)(holdingthat trade secret misappropriation was not a continuingtort).

294 371 F.2d 950 (D.C. Cir. 1966), cert. denied, 386 U.S.111 (1967). See also Fitzgerald v. Seamans, 553 F.2d 220(D.C. Cir. 1977).

295 216 U.S.P.Q. 249 (S.D.N.Y. 1982).296 769 F. Supp. 404 (D. Mass. 1990).




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whether the continuing tort theory is actually aliveand well in any jurisdiction.

2. Fraudulent ConcealmentIn addition, some states prior to the advent

of the UTSA adopted the equitable doctrine of

fraudulent concealment.297 Under that doctrine, afraud that goes undiscovered despite the plaintiff’sdiligence in attempting to discover it, or a fraudthat is undiscovered due to affirmative acts by thedefendant, tolls the running of the statute of

limitations.298 A decision whether to equitablytoll a statute of limitations is generally left to the

sound discretion of the district court.299 Forexample, in Telex Corp. v. International Business

Machine Corp.,300 the district court held thatOklahoma’s then two-year statute was tolled byTelex’s fraudulent concealment of itsmisappropriation up to the time of trial. The courtexpressly commented on the fact that the extent ofthe misappropriation would not have been

discovered absent IBM’s extensive efforts.301

3. The UTSARecognizing the split of authority

discussed above, § 6 of the model version of theUTSA adopts a three-year statute of limitations fornon-contractual causes of action asserting tradesecret misappropriation:

297 See Bailey v. Glover, 88 U.S. 342 (1875)(doctrinedeveloped in bankruptcy context).

298 See Goldstandt v. Bear, Stearns & Co., 522 F.2d 1265(7th Cir. 1975); Coastal Distrib. Co., Inc. v. NGK SparkPlug Co., Ltd., 779 F.2d 1033 (5th Cir. 1986); Cole v.Kelley, 438 F. Supp. 129 (C.D. Cal. 1977)(collectingcases).

299 Banner Indus. v. Central States Pension Fund, 875 F.2d1285 (7th Cir. 1989); Ohio v. Peterson, Lowry, Rall, Barber& Ross, 651 F.2d 687 (10th Cir. 1981).

300 510 F.2d 894 (10th Cir. 1975), cert. dism’d, 423 U.S.802 (1975).

301 But see Kregos v. Associated Press, 3 F.3d 656 (2d Cir.1993)(Second Circuit affirmed the district court’sdenial of equitable tolling. The asserted reasoning inthat case was that opposing counsel had denied certainforms were copyrightable and that he had no legalclaim against Associated Press).

An action for misappropriationmust be brought within threeyears after the misappropriation isdiscovered or by the exercise ofreasonable diligence should havebeen discovered. For the purposesof this section, a continuingmisappropriation constitutes asingle claim.

The Commissioners’ comment to § 6 explains that:

This Act rejects a continuing-wrong approach to the statute oflimitations but delays thecommencement of the limitationperiod until an aggrieved persondiscovers or should havediscovered the existence of

misappropriation.302

The uniformity envisioned by the UTSA,however, is to some extent illusory. Each of thestates adopting the UTSA is free to amend themodel version, including the statute of limitations.Thus, counsel should be alert to possible longerand shorter limitations periods even in those statesthat have adopted a version of the UTSA.

B. The Discovery Rule1. Introduction

Section 6 of the UTSA also adopts the“discovery rule,” namely that the statute oflimitations begins to run when “themisappropriation is discovered or by the exerciseof reasonable diligence should have beendiscovered.” In Sokol Crystal Products, Inc. v.

DSC Communications Corp.,303 the SeventhCircuit explained that discovery of amisappropriation occurs when there is

knowledge304 of the use of the trade secret.305

302 Commissioners’ comment to § 6. See Intermedics, Inc.v. Ventritex, Inc., 822 F. Supp. 634, 27 U.S.P.Q.2d 1641(N.D. Cal. 1993).

303 15 F.3d 1427 (7th Cir. 1994).304 But see Chasteen v. UNISIA JECS Corp., 216 F.3d

1212, 55 U.S.P.Q.2d 1341 (10th Cir. 2000),distinguishing Sokol.

















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2. The Discovery Rule in Texas after SeatraxThe Texas Supreme Court has viewed

torts as generally arising from the common lawaction for “trespass.” A tort not expressly coveredby a limitation period, nor expressly held to begoverned by a different provision would,according to the Court, be presumptively a

“trespass” for limitations purposes.306 Section16.003 of the TEXAS CIVIL PRACTICES AND

REMEDIES CODE provides a general two-yearstatute of limitations for trespass:

(a) A person must bring suit fortrespass for injury to the estate orto the property of another,conversion of personal property,taking or detaining the personalproperty of another, personalinjury, forcible entry and detainer,and forcible detainer not later thantwo years after the day the causeof action accrues.

305 All states that have adopted the UTSA have adoptedthe discovery rule exception. Ala. Code § 8-27-5(1993); Alaska Stat. § 45.50.925 (1994); Ariz. Rev. Stat.Ann. § 44-406 (1994); Ark. Stat. Ann § 4-75-603(1991); Cal. Civ. Code § 3426.6 (1995 Supp.); Colo.Rev. Stat. § 7-74-107 (1990); Conn. Gen. Stat. § 35-56(1987); Del. Code Ann. tit. 6, § 20065 (1993); D.C.Code Ann. § 48-506 (1990); Fla. Sta. § 688.007 (1990);6, 2006 (1993); Ga. Code Ann. § 10-1-766 (1994);Hawaii Rev. Stat. § 482B-7 (1992 Supp.); Idaho Code§ 48-805 (1994 Supp.); Ill. Rev. Stat. ch. 765, § 1065/7(1993); Ind. Code § 24-2-3-7 (1994 Supp.); Md. Com.Law Code Ann. § 11-1206 (1990); Maine Rev. Stat.Ann. tit. 10, 1547 (1994 Supp.); Md. Com. Law CodeAnn. § 11-1206 (1990); Minn. Stat. § 325C.06 (1981);Miss. Code Ann. § 75-26-13 (1972); Mont. Code Ann.§ 30-14-407 (1993); Neb. Rev. Stat. § 87-506 (1992Supp.); Nev. Rev. Stat. § 600A.080 (1991); N.H. Rev.Stat. Ann. § 350-B:6 (1994 Supp.); N.M. Stat. Ann. §57-3A-7 (1994 Supp.); N.C. Gen. Stat. § 66-157(1992); N.D. Cent. Code § 47-25.1-06 (1993 Supp.);Okla. Stat. tit. 78, § 91 (1987); OR. Rev. Stat. §646.471 (1993); R.I. Gen. Laws § 6-41-6 (1992); S.C.Code Ann. § 39-8-6 (1993 Supp.); S.D. Codified LawsAnn. § 37-29-6 (1994); Utah Code Ann. § 13-24-7(1992); Va. Code § 59.1-340 (1992); Wa. Rev. Code §19.108.060 (1989); W. Va. Code § 47-22-6 (1992); Wis.Stat. § 893.51(2) (1994 Supp.).

306 Williams v. Khalaf, 814 S.W.2d 854 (Tex. 1990).

(b) A person must bring suit notlater than two years after the daythe cause of action accrues in anaction for injury resulting indeath. The cause of actionaccrues on the death of the injuredperson.

Prior to 1997, when § 16.010 was added to theTEX. CIV. PRAC. REM. CODE, that statute had beenheld applicable to trade secret misappropriation

causes of action.307

Historically, Texas viewed the statute oflimitations as beginning when some legal injuryoccurs even if that injury is not discovered untillater and even if any damages resulting from that

injury have not yet all occurred.308 A trade secretmisappropriation action, in Texas, was sometimessaid to accrue when the trade secret was

improperly acquired or used,309 although manycases seemed to use the date that the trade secretowner lost control of the trade secret. In general,the Texas courts applied the rule that a “party’signorance of material facts or lack of knowledgewill not prevent the statute of limitations from

running.”310 The Texas courts, however, alsorecognized a narrow class of actions in which the“discovery rule” may be applied. But, the

307 Coastal Distrib. Co., Inc. v. NGK Spark Plug Co., Ltd.,779 F.2d 1033 (5th Cir. 1986); First Nat’l Bank v.Levine, 721 S.W.2d 287 (Tex. 1986)(agreeing with theconclusion in Coastal and also holding that a cause ofaction for tortious interference with contract was atort governed by the two-year statute). But see Williamsv. Khalaf, 814 S.W.2d 854 (Tex. 1990)(holding that acause of action for “fraud” is in the nature of anaction for debt, and is governed by the four-yearstatute). See, however, R. Ready Prods., Inc. v. Cantrell, 85F. Supp. 2d 672 (S.D. Tex. 2000)(suggesting thatclaims for unfair competition throughmisappropriation of trade secrets are governed bytwo-year statute).

308 See Murphy v. Campbell, 964 S.W.2d 265, 270 (Tex.1997).

309 Computer Assocs. Int’l, Inc. v. Altai, Inc., 918 S.W.2d453, 455 (Tex. 1996)

310 Snyder v. Eanes Indep. Sch. Dist., 860 S.W.2d 692, 699(Tex. App.−Austin 1993, writ denied).












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discovery rule nevertheless was applied

sparingly.311 In general, application of thediscovery rule was limited to those types ofactions in which the nature of the injury was

“inherently undiscoverable.”312

In 1996, in Computer Associates

International, Inc. v. Altai, Inc.,313 the TexasSupreme Court held that the discovery rule did notapply to trade secret misappropriation causes ofaction “[b]ecause misappropriation of trade secretsis not a cause of action that is inherentlyundiscoverable, permitting application of thediscovery rule exception in these cases would dono more than permit the litigation of stale claims.”In 1997, and in response to the Altai holding, theTexas legislature added § 16.010 to the TEX. CIV.PRAC. REM. CODE. Section 16.010 provides:

§ 16.010. Misappropriation ofTrade Secrets

A person must bring suit formisappropriation of trade secretsno later than three years after themisappropriation is discovered orby the exercise of reasonablediligence should have beendiscovered.

A misappropriation of tradesecrets that continues over time isa single cause of action and thelimitations period described bySubsection (a) begins runningwithout regard to whether themisappropriation is a single orcontinuing act.

Thus, the statute, in terms similar to the UTSA, (1)adopts the discovery rule, but imposes an

311 See, e.g., Hurlbut v. Gulf Atl.Life Ins. Co., 749 S.W.2d762 (Tex. 1987)(discussing “discovery rule” in contextof fraudulent concealment); Mooney v. Harlin, 622S.W.2d 83 (Tex. 1981)(discussing “discovery rule” infraud action).

312 See, e.g., Shivers v. Texaco Exploration and Prod., Inc.,1998 Tex. App. LEXIS 1622 (Tex. App.−Texarkana1998).

313 918 S.W.2d 453, 457 (Tex. 1996).

obligation to exercise reasonable diligence todiscover the misappropriation, and (2) rejects the“continuing tort” theory (which had never been an

issue in Texas, anyway).314

The question then became whether thestatute begins and continues to run even thoughthe trade secret owner had no knowledge of thetrade secret misappropriation, i.e., did thediscovery rule apply? Secondly, there was aquestion whether Texas recognized fraudulentconcealment as an equitable tolling of the statute?The answer to both, after the adoption of § 16.010,was considered to be a qualified yes, but withlimitations.

In Seatrax, Inc. v. Sonbeck International,

Inc.,315 however, the Fifth Circuit affirmed thegrant of a motion for summary judgment that atrade secret action was time barred finding that,despite Texas’ (albeit not part of the UTSA)statutory adoption of the discovery rule, employershave an obligation to ferret out possible tradesecret misappropriations by former employees(indeed, former employees of another company),quoting with approval the Texas Supreme Court’sobservation in Computer Associates International,

Inc. v. Altai, Inc.,316 that because “[w]e live in aworld of high employee mobility and easytransportability of information, * * * it is notunexpected that a former employee will go towork for a competitor and that the competitor

might thereby acquire trade secrets,”317 especially

314 The effective date of the amendment was May 1,1997, and by its terms applied to all actionscommenced on or after that date. Act of Apr. 17,1997, 75th Leg., R.S. ch. 26, § 3(a), 1997 Tex. Gen.Laws 68. See, however, Baker Hughes, Inc. v. Keco R & D,Inc., 12 S.W.3d 1, 43 Tex. Sup. J. 9 (Tex. 1999)(despitethe terms of the statute, retroactive application to acause of action that was time-barred under the priortwo-year statute would violate the prohibition againstretroactive laws in art. I, § 16 of the TexasConstitution.).

315 200 F.3d 358 (5th Cir. 2000). See also Tavana v. GTESouthwest Inc., 1999 Tex. App. LEXIS 5365 (Tex. App.Dallas 1999)(nonprecedential)(same result).

316 918 S.W.2d 453, 455 (Tex. 1996).317 200 F.3d at 365, quoting Altai, 918 S.W.2d at 457.











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in circumstances where “[s]uspicions should

abound.”318 With respect to fraudulentconcealment, the court held that “[t]he partyasserting the fraudulent concealment defense tothe statute of limitations bears the burden ofshowing that the defendant was under a duty tomake a disclosure but fraudulently concealed theexistence of a cause of action from the one to

whom it belongs.”319 Thus, Seatrax should be ofconcern to anyone wishing to protect valuabletrade secret technology in the state of Texas.

3. The Discovery Rule ElsewhereThe Washington statute of limitations,

having adopted a version of the UTSA, is similarto the Texas amended statute and provides that“[a]n action for misappropriation must be broughtwithin three years after the misappropriation isdiscovered or by the exercise of reasonablediligence should have been discovered * * * [and]a continuing misappropriation constitutes a single

claim.” In McLeod v. Northwest Alloys, Inc.,320

the Washington Court of Appeals held that a causeof action “accrues when the claimant knows orshould know the relevant facts, ‘whether or not theplaintiff also knows that these facts are enough toestablish a legal cause of action.’” According tothe court, “[g]enerally, the date of an unauthorizeddisclosure will serve as the event that triggers thestatute of limitations where the date of disclosurecan be readily determined and it is shown that theclaimant was aware of the disclosure.” But“[w]hen the date of an unauthorized disclosure isnot immediately discovered by the claimant, theperiod of limitations will not commence until theclaimant knew or should have known of thedisclosure. When the disclosure is authorized orthe date of disclosure is unknown, facts related tothe use of the trade secret and the claimant’sknowledge of this use will be determinative.”

318 Id. at 366, quoting Altai, 918 S.W.2d at 457.319 Id. citing Timberlake v. A.H. Robins Co., Inc., 727 F.2d

1363, 1366 (5th Cir. 1984).320 90 Wash. App. 30, 1998 Wash. App. LEXIS 73

(Wash. Ct. App. 1998).

C. In States That Have Adopted The UniformTrade Secrets Act (UTSA)

1. UTSA Statute of LimitationsRecognizing the split of authority

discussed above, § 6 of the model version of theUTSA adopts a three-year statute of limitations fornon-contractual causes of action asserting tradesecret misappropriation, which begins to run “afterthe misappropriation is discovered or by theexercise of reasonable diligence should have beendiscovered.” The Commissioners’ comment to § 6explains that “[t]his Act rejects a continuing-wrong approach to the statute of limitations butdelays the commencement of the limitation perioduntil an aggrieved person discovers or should have

discovered the existence of misappropriation.”321

Some courts have held that discovery of amisappropriation occurs when there is some noticeor knowledge that the secret is being used by

another.322 The Tenth Circuit, however, has heldthat limitations begin to run when the trade secretowner has knowledge of the defendant’sdisclosure of the plaintiff’s trade secrets eventhough any use thereof occurs later, and regardlessof whether the owner understands that such

disclosure constitutes misappropriation.323 Thecourt held that equitable tolling based onconcealing the use of a trade secret cannot be

invoked if a prior disclosure is not concealed,324

however, the court also held that withholdingdocuments might potentially require equitable

tolling (in other cases).325

321 Commissioners’ comment to § 6. See Intermedics, Inc.v. Ventritex, Inc., 822 F. Supp. 634, 27 U.S.P.Q.2d 1641(N.D. Cal. 1993).

322 See Sokol Crystal Prods., Inc. v. DSC CommunicationsCorp., 15 F.3d 1427 (7th Cir. 1994)(discovery of amisappropriation occurs when there is knowledge ofthe use of the trade secret).

323 Chasteen v. UNISIA JECS Corp., 216 F.3d 1212 (10thCir. 2000).

324 216 F.3d at 1220-21.325 Id.








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2. California & Tenth Circuit AdoptIntermedics Rationale – When StatuteBegins to Run on One Trade Secret ClaimIt May Begin to Run on All Trade SecretsClaimsIn California, an initial act of

misappropriation by A starts the statute oflimitations to run for A and also for B whoobtained the trade secrets from A and then used

them for B’s own purposes.326 What aboutindividual trade secrets? Suppose Amisappropriates trade secrets X1, X2, Y1 and Y2,where X1 and X2 are related, and Y1 and Y2 arerelated. If the statute begins to run on X1, doesthe statute also begin to run on X2, Y1 and Y2?

That is, if a party has notice that anotherparty has misappropriated one or more tradesecrets, does that notice also impose an obligationto use reasonable diligence to discover other tradesecrets that party may have misappropriated?

Intermedics, Inc. v. Ventritex, Inc.,327 a casecharacterizing that issue as one of first impressionfor the California courts, the Northern District ofCalifornia said yes. Specifically, the court framedthe issue as:

[U]nder California law, when acause of action accrues against agiven defendant formisappropriation of some allegedtrade secrets or confidentialinformation, does the statute oflimitations also begin to run fromthat time on possible claimsagainst the same defendant formisappropriation of other allegedtrade secrets or confidentialinformation, without regard towhether there is evidence that thedefendant has disclosed or usedany of those other alleged

secrets?328

326 Ashton-Tate Corp. v. Ross, 728 F. Supp. 597, 603 (N.D.Calif. 1989).

327 822 F. Supp. 634, 27 U.S.P.Q.2d 1641 (N.D. Cal.1993).

328 822 F. Supp. at 634, 27 U.S.P.Q.2d at 1641.

The court answered that althoughthe result may be different in othercases, here:

we hold that when the statute oflimitations began to run on claimsfor misappropriation of some ofthe alleged trade secrets itsimultaneously began running asto claims for allegedmisappropriations of the other,related secrets, even if no acts ofmisappropriation of the othersecrets had yet occurred.

[Emphasis added.] 329

In the above example, therefore, under thatrationale, the statute begins to run on X1 andrelated trade secret X2, but does not necessarilybegin to run on unrelated trade secrets Y1 and Y2.

The California Court of Appeals has nowadopted that rationale. In Glue-Fold, Inc. v.

Slautterback Corp.,330 the court concluded that“[w]e agree with the federal court [in Intermedics]that California law assumes that once a plaintiffknows or should know that a particular defendantcannot be trusted with one secret, it isunreasonable for that plaintiff simply to assumethat defendant can be trusted to protect othersecrets,” and that “it is the first discovered (ordiscoverable) misappropriation of a trade secretwhich commences the limitations period.” Thecourt also rejected the plaintiff’s argument that thestatute should be tolled during a time in which theplaintiff believed the defendant “would desist”from further misappropriation, confirming that “itis the first discovered (ordiscoverable) misappropriation of a trade secretwhich commences the limitation period.”

The Tenth Circuit also adopted theIntermedics rationale in Chasteen v. UNISIA JECS

Corp.,331 concluding that limitations begins to

329 Id.330 82 Cal. App. 4th 1018, 98 Cal. Rptr. 2d 661 (Cal. Ct.

App. 2000). See also Forcier v. Microsoft Corp., 123 F.Supp. 2d 520 (N.D. Cal. 2000).

331 216 F.3d 1212 (10th Cir. 2000).








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run as to all defendants when the trade secretowner has knowledge of one defendant’sdisclosure of his trade secrets.

On a related question, the Ninth Circuit,on June 11, 2001, certified the following questionto the California Supreme Court:

Under the California UniformTrade Secrets Act (“UTSA”), Cal.Civ. Code § 3426, when does aclaim for trade secret infringementarise: only once, when the initialmisappropriation occurs, or witheach subsequent misuse of the

trade secret? 332

Although the language of the statute itself,providing that misappropriation is a continuingtort, would appear to answer the question, perhapsnot. In any event, the California Supreme Court

accepted certification in the Fall of 2001,333 buthas not decided the question as of this writing.

VI. RELIEFA. Actual and Punitive Damages

In addition to an injunction, money

damages may be awarded.334 Such damages may

include actual damages and lost profits.335 Some

332 Cadence Design Sys. v. Avant! Corp., 253 F.3d 1147 (9thCir. 2001).

333 Cadence Design Sys. v. Avant! Corp., 2001 Cal. LEXIS7137 (Calif. October 31, 2001).

334 See, e.g., Basic Am., Inc. v. Shatila, 992 P.2d 175 (Idaho1999); Children’s Broad. Corp. v. Walt Disney Co., 245F.3d 1008 (8th Cir. 2001).

335 See e.g., Softel, Inc. v. Dragon Med. and ScientificCommunications, Inc., 118 F.3d 955, 43 U.S.P.Q.2d 1385(2d Cir. 1997)(Softel’s trade secret damages based onDragon’s profits); Pioneer Hi-Bred Int’l v. Holden Found.,Inc., 31 F.3d 1226, 31 U.S.P.Q.2d 1385 (8th Cir.1994)(courts have used a wide variety of methods tomeasure damages in trade secret cases, including lostprofits, unjust enrichment and reasonable royalty.Here affirmed reliance on Pioneer’s expert testimonythat “but for” Holden’s misappropriation, Pioneerwould have obtained the same percentage of Holden’ssales as its market share in all other sales (36%average), and subsequent calculation of lost profits of$140 million. Trial court reduced that amount to $46

courts have considered profits made by asubsequent employer as a result of the breach of anon-disclosure/non-competition covenant as anelement of damages on the rationale that thoseprofits might otherwise have accrued to the former

employer.336 Although courts have emphasizedthe flexibility required in formulating appropriate

relief in trade secret cases,337 and that recovery oflost profits does not require that the loss bysusceptible to exact calculation, nevertheless, mostcourts require that the amount of the loss be shownby competent evidence with reasonable certainty.What constitutes reasonably certain evidence oflost profits is a question of fact, but most courts

million reflecting its determination that Pioneer wouldnot have obtained the full 36% market share). See alsoRoboserve Ltd. v. Tom’s Foods, Inc., 940 F.2d 1441, 20U.S.P.Q.2d 1321 (11th Cir. 1991); Micro Lithography,Inc. v. Inko Indus., Inc., 20 U.S.P.Q.2d 1347 (Cal. Ct.App. [6th Dist.] 1991)(unpublished); A.F.A. Tours, Inc.v. Whitchurch, 937 F.2d 82 (2d Cir. 1991).; Timely Prods.Corp. v. Arron, 523 F.2d 288 (2d Cir. 1975); Hyde Corp.v. Huffines, 314 S.W.2d 763, 768 (Tex. 1958).

336 Arabesque Studios, Inc. v. Academy of Fine Arts Int’l, Inc.,529 S.W.2d 564 (Tex. Civ. App.–Dallas 1975, nowrit)..

337 Sweetzel, Inc. v. Hawk Hill Cookies, 1996 U.S. Dist.LEXIS 8562 (E.D. Pa. 1996)(proper measure ofdamages is the cost that the misappropriator wouldhave incurred in developing the informationindependently); Univ. Computing Co. v. Lykes-YoungstownCorp., 504 F.2d 518 (5th Cir. 1974)(“[E]very caserequires a flexible and imaginative approach to theproblem of damages. * * * [C]ases reveal that mostcourts adjust the measure of damages to accord withthe commercial setting of the injury, the likely futureconsequences of the misappropriation, and the natureand extent of the use the defendant put the tradesecret to after misappropriation.”); But see WebbCommunications Group v. Gateway 2000, Inc., 1994 U.S.Dist. LEXIS 5691 (N.D. Ill. 1994). (Webb claimedthat Gateway 2000 had misappropriated one ofWebb’s “trade secrets,” to wit, a “stepped insert”advertising format. During discovery, Webb soughtdocuments relating to Gateway 2000’s sales andfinancial information claiming that such documentswere necessary to prove damages. Webb was assertingunjust enrichment as a basis for damages. The districtcourt, in denying Webb’s discovery request, held thatGateway 2000’s sales figures had little or nothing todo with what Webb would have charged if Gatewayhad placed the advertising through Webb, as opposedto a third firm).














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require, at a minimum, that opinions or estimatesof lost profits be based on objective facts, figures,or data from which the amount of lost profits maybe ascertained. The Texas courts require thatrecovery of lost profits must be predicated in at

least one complete calculation. 338

The “lost profits” analysis the courts haveused in trade secret cases has been substantiallyderived from, or similar to, damage calculations inpatent infringement cases, particularly the Panduit

test.339 The Federal Circuit has expanded thePanduit test to include all compensation that thepatent owner would have received “but for” theinfringement, subject to the limits of objective

foreseeability.340 It is presently unclear whetherthe scope of recovery in trade secret cases willlikewise be expanded will have to await futurecourt review.

Damages may alternatively be based on a

reasonable royalty,341 discussed below.

338 Szczepanik v. First S. Trust Co., 883 S.W.2d 648, 649(Tex. 1994). See also Plumbing Consultant v. Watkins,1997 Tex. App. LEXIS 5917 (Tex. App.−CorpusChristi, 1997, no writ)(unpublished)(instructed verdictfor defendants in trade secret misappropriation caseinvolving technique for using a video camera to locateleaks in residential drain and sewer systems affirmed).

339 Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d1152 (6th Cir. 1978)339(the elements of proof are: (1)demand for the product, (2) an absence of non-infringing substitutes, (3) the ability to exploit thedemand, and (4) evidence of the amount of profit theplaintiff would have received).

340 See Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1546, 35U.S.P.Q.2d 1065, 1071 (Fed. Cir.)(en banc), cert. denied,116 S. Ct. 184 (1995): See also King Instrument Co. v.Perego, 65 F.3d 941, 36 U.S.P.Q.2d 1129 (Fed. Cir.1995), cert. denied, 116 S. Ct. 1675 (1996)(extending theright to recover “lost profits” even though the patentowner did not manufacture a device that incorporatedthe patented technology).

341 Taco Cabaña Int’l, Inc. v. Two Pesos, Inc., 932 F.2d 1113,19 U.S.P.Q.2d 1253 (5th Cir. 1991), aff’d on differentgrounds, 112 S. Ct. 1555 (1992).; Softel, Inc. v. DragonMed. and Scientific Communications, Inc., 118 F.3d 955, 43U.S.P.Q.2d 1385 (2d Cir. 1997)(reasonable royaltycalculated on “total value” of the trade secret to thetrade owner appropriate only where the defendant

Punitive damages may also be awardedwhere a tort is pled in addition to or

contemporaneously with breach of contract,342

and, in UTSA jurisdictions, where the conduct is

found to be malicious.343 Breach of aconfidential relationship may also justify an awardto compensate for necessary remedial expenses,such as for promotional expenses to counter

destroyed the value of the trade secret); MetallurgicalIndus., Inc. v. Fourtek, Inc., 790 F.2d 1195, 229 U.S.P.Q.945 (5th Cir. 1986).; Sikes v. McGraw-Edison Co., 665F.2d 731 (5th Cir. 1982); Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974)(“thetotal value of the secret to the plaintiff, includingplaintiff’s development costs and the importance ofthe secret to the plaintiff’s business” are factors thatshould be considered in determining a reasonableroyalty).

342 Softel, Inc. v. Dragon Med. & Scientific Communications,Inc., 891 F. Supp. 935 (S.D.N.Y. 1995), punitive damagesreduced, 1995 WL 606307 at *2 (S.D.N.Y. Oct. 16,1995), aff’d, 118 F.3d 955, 43 U.S.P.Q.2d 1385 (2d Cir.1997) (punitive damages for willful trade secretmisappropriation); Klein v. Grynberg, 44 F.3d 1497 (10thCir. 1995)(“Colorado law is quite clear that if thebreach of contract would also constitute anindependent tort, punitive damages are recoverable.”).

343 The UTSA provides that “[i]f willful and maliciousmisappropriation exists, the court may awardexemplary damages in an amount not exceeding twiceany award made under subsection (a).” See RotonBarrier, Inc. v. Stanley Works, 79 F.3d 1112 (Fed. Cir.1996)(applying Illinois Trade Secrets Act, ITSA, heldthat “there must be knowing disclosure of a tradesecret” for a finding of misappropriation and “[f]or anaward of exemplary damages, that misappropriationmust in addition be willful and malicious”); AccordSolutec Corp., Inc. v. Agnew, 88 Wash. App. 1067, 1997Wash. App. LEXIS 2130 (Wash. Ct. App. 1997)(follows Roton Barrier); Med. Educ. Servs., Inc. v. HealthEduc. Network, L.L.C., 1998 Wisc. App. LEXIS 456(Wis. Ct. App. 1998)(unpublished(“To support anaward for punitive damages, the plaintiff must showthat the defendant acted with wanton, willful orreckless disregard of the plaintiff’s rights * * *, or thatthe harm was inflicted with vindictiveness or maliceunder circumstances of aggravation, insult, orcruelty.”); Crutcher-Rolfs-Cummings, Inc. v. Ballard, 540S.W.2d 380, 388 (Tex. Civ. App.–Corpus Christi 1976,writ ref’d n.r.e.), cert. denied, 433 U.S. 910 (1977).;Jackson v. Fontaine’s Clinics, Inc., 499 S.W.2d 87 (Tex.1973).
























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balance the losses caused by the breach, as well as

attorney fees and costs.344

It is presently uncertain what effect, ifany, the Supreme Court’s recent decision inCooper Indus., Inc. v. Leatherman Tool Group,

Inc.345 will have on exemplary or punitivedamages in trade secret cases. In Cooper, theSupreme Court held that appellate courts mustreview the constitutionality of punitive damageawards under a de novo standard of review, i.e., anindependent examination or review. The threefactors guiding punitive damage awards, according

to Cooper,346 are those cited in BMW of N. Am.,

Inc. v. Gore,347 namely:

(1) the degree or reprehensibilityof the defendant’s misconduct,

(2) the disparity between the harm(or potential harm) suffered by theplaintiff and the punitive damagesaward [the ratio test], and

(3) the difference between thepunitive damages awarded by thejury and the civil penalitiesauthorized or imposed incomparable cases.

One of the presently few cases on theissue is the Federal Circuit’s opinion in Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp.

(Rhone-Poulenc I)348 holding that “[i]ndependentexamination or review means a searching review,one that hunts for error and gives virtually noweight to the decisional process under review.Each aspect of the appellate review puts eachaspect of the decision under review in sharpfocus.” Additionally, the Federal Circuitconstrued the Supreme Court’s admonition in

344 See e.g., Zoecon Indus. v. Am. Stockman Tag Co., 713F.2d 1174 (5th Cir. 1983).

345 121 S.Ct. 1678 (2001).346 121 S.Ct. at 1687-88.347 517 U.S. 559, 574-75 (1996).348 Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 272

F.3d 1335 (Fed. Cir. 2001).

Cooper that the Seventh Amendment would notpermit a court, in reviewing a punitive damagesaward, “to disregard * * * jury findings” on

factual issues,349 to mean “that if a punitivedamages determination rests on purely factualissues, we [the court] are to assume that thosefactual issues have been resolved adversely to thedefendant, absent contrary indication.”

The Federal Circuit further viewedCooper as suggesting that the first BMW factorcould be influenced by the demeanor andcredibility of witnesses, matters on which anappellate court must defer substantially to the jury.According to the court, in Rhone-Poulenc I, itappeared that much of the “reprehensibility” inthis case turned on an evaluation of DeKalb’switnesses. Even on appeal, the Federal Circuitnoted that the “cold record” revealed “severalrather implausible explanations and assertions byDeKalb witnesses.” Accordingly, based almostentirely on perceived witness credibility, theFederal Circuit found “that DeKalb’s conduct wassufficiently reprehensible to support the award ofpunitive damages.”

B. Damages Under The UTSAAs amended in 1985, § 3 of the UTSA

specifically provides for actual and punitivedamages:

(a) Except to the extent that a materialand prejudicial change of positionprior to acquiring knowledge orreason to know of misappropriationrenders a monetary recoveryinequitable, a complainant is entitledto recover damages formisappropriation. Damages caninclude both the actual lost caused bymisappropriation and the unjustenrichment caused bymisappropriation that is not takeninto account in computing actualloss. In lieu of damages measure byany other methods, the damagescaused by misappropriation may bemeasured by imposition of liabilityfor a reasonable royalty for a

349 121 S.Ct. at 1687.








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misappropriator’s unauthorizeddisclosure or use of a trade secret.

(b) If willful and maliciousmisappropriation exists, the courtmay award exemplary damages in anamount not exceeding twice anyaward made under subsection (a).

The UTSA follows the Conmar350 rule thatmonetary relief, like injunctive relief, is onlyappropriate for the period of time in which thesubject matter qualifies as a trade secret (namely,during the time that it is secret) plus any additionaltime necessary to preclude the misappropriatorfrom benefiting from a “head start.” Althoughboth damages and an injunction may be sought,the comments note that ordinarily an injunctionwould preclude damages for the same period of

time.351 Additionally, the 1985 amendment to§ 3(a) adopts the Conmar innocentmisappropriation rationale that if a person chargedwith misappropriation shows a material andprejudicial change in position in reliance onknowledge of a trade secret: (1) acquired in goodfaith, and (2) without reason to know of itsmisappropriation, both injunctive and monetary

relief may be denied.352

350 Conmar Prods. Corp. v. Universal Slide Fastener Co., 172F.2d 150 (2d Cir. 1949). Compare Shellmar Prods. Co. v.Allen-Qualley Co., 87 F.2d 104 (7th Cir. 1937), cert.denied, 301 U.S. 695 (1937)(relief can be awarded eventhough the secret is no longer secret).

351 Comment, UTSA § 3, as amended in 1985. The 1985amendment added the “inequitable” proviso in thefirst clause of § 3(a), clarified that damages for bothactual loss and unjust enrichment (to the extent thereis no overlap) may be sought, and added the lastsentence in § 3(a) dealing with a reasonable royalty.

352 But see Injection Research Specialists, Inc. v. Polaris Indus.,L.P., 1998 U.S. App. LEXIS 18745 (Fed. Cir.1998)(non-precedential)(“Nor do we agree withPolaris and Fuji that the district court erred byallowing trade secret damages for the period followingthe issuance of the ‘701 patent. * * * InjectionResearch produced evidence that it made substantialefforts to safeguard its secrets both before and afterthe issuance of its patent. * * * Accordingly,there was evidence in the record from which areasonable juror could have concluded that Injection

Although the UTSA permits exemplary orpunitive damages if the misappropriation is

“willful and malicious,”353 the UTSA does notsay whether the standard of proof for exemplarydamages must be (1) by a preponderance of theevidence, or (2) by clear and convincing evidence.Courts that have considered the issue have

split,354 and the Supreme Court has held, Pacific

Mutual Life Ins. Co. v. Haslip,355 that a standardof proof less than “clear and convincing” does notviolate the Due Process Clause. Also, somecourts, -- the Illinois courts, in particular -- haveemphasized that the UTSA requires both(1) willful and (2) malicious conduct, and havedistinguished between “motivation by malice” and

Research established the statutory element [under theColorado Uniform Trade Secrets Act] of safeguardingits claimed trade secrets for the entire period forwhich damages were awarded.”).

353 See Injection Research Specialists, 1998 U.S. App. LEXIS18745 (Fed. Cir. 1998)(non-precedential)(actualdamages of $24 million and punitive damages of $10million against Polaris, and actual damages of $15million and punitive damages of $8 million against Fuji(punitive damages vacated by district court) underColorado Uniform Trade Secrets Act); Heller Invs., Inc.v. Kroy, Inc., 1998 WL 422182 (Minn. App.1998)(unpublished)(award of exemplary damagesaffirmed under Minnesota’s Uniform Trade SecretsAct − evidence showed that high-level executivesdeliberately engaged in a scheme to obtain confidentialbusiness information, and scheme was carried outthrough a breach of a confidentiality agreement − suchconduct was willful and malicious justifying award ofpunitive damages and attorney’s fees); Micro Data BaseSys. Inc. v. Dharma Sys., Inc., 148 F.3d 649, 46U.S.P.Q.2d 1922 (7th Cir. 1998)(“When an award ofpunitive damages requires that the defendant havecommitted an aggravated form of the wrongful actsought to be punished, a defendant who commits thebarebones tort is not liable for such damages.”); RotonBarrier, Inc. v. Stanley Works, 79 F.3d 1112 (Fed. Cir.1996):

354 Trandes Corp. v. Guy F. Atkinson Co., 996 F.3d 655, 666(4th Cir. 1993), cert. denied, 510 U.S. 965(1993)(Maryland law-clear and convincing); Centrol, Inc.v. Morrow, 489 N.W.2d 890, 896 (S. Dak. 1992)(clearand convincing); Zawels v. Edutronics, Inc., 520 N.W.2d520, 523-24 (Minn. Ct. App. 1994)(preponderance).

355 499 U.S. 1, 23 n. 11 (1991).









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“motivation by competition,” awarding exemplary

damages for the former, but not the latter.356

Damages for both unjust enrichment andactual loss may be recovered, but there can be nodouble recovery. Exemplary damages up to twicethe amount of any actual damages may be awardedby the court. The UTSA thus specifically followsthe patent statute, 35 U.S.C. § 284, giving thejudge the discretion to award punitive damageseven if trial is to a jury.

C. Damages Under the RESTATEMENT

(THIRD) OF UNFAIR COMPETITION

Section 45 of the RESTATEMENT (THIRD)OF UNFAIR COMPETITION provides for damagesbased on (1) “the pecuniary loss to the othercaused by the appropriation,” or (2) for themisappropriator’s “own pecuniary gain resultingfrom the appropriation, whichever is greater* * *.” The Restatement also, however, providesthat the court should consider “(a) the degree ofcertainty with which the plaintiff has establishedthe fact and extent of the pecuniary loss or thedefendant’s pecuniary gain resulting from theappropriation; (b) the nature and extent of theappropriation; (c) the relative adequacy to theplaintiff of other remedies; (d) the intent andknowledge of the defendant, and the nature andextent of any good faith reliance on the tradesecret by the defendant; (e) any unreasonabledelay by the plaintiff in bringing suit or assertingits rights; and(f) any related misconduct on thepart of the plaintiff.”

The comments note that courts haverecognized at least four methods of measuring

monetary relief in trade secret cases.357 The firstattempts to measure the plaintiff’s direct loss as aresult of the misappropriation. That may includelost profits, loss of royalties or other income, orthe value of the trade secret if the misappropriationhas destroyed it. The second is based ondefendant’s profits attributable to the

356 See e.g., Roton Barrier, Inc. v. Stanley Works, 79 F.3d1112 (Fed. Cir. 1996):

357 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 45 cmt. B (1995).

misappropriation.358 The third, borrowed frompatent infringement cases, attempts to measure thesavings to the defendant resulting from themisappropriation. The fourth, also borrowed frompatent infringement actions, is a reasonable royaltycalculated using the legal fiction of a willingbuyer-willing seller. The section does notadvocate one measure over another, but instead

leaves that to the parties and the court.359

Like the UTSA, both damages andequitable relief in the form of an injunction orrestitution for unjust enrichment may be sought.Indeed, the comments note that often it is difficultin trade secret cases to determine damages, and theequitable remedy of restitution may be mostappropriate. The comments likewise indicate thatthe Restatement would not follow those cases thatrequire a plaintiff to elect between the legalremedy of damages and the equitable remedy of

restitution.360

Also like the UTSA, the RESTATEMENT

(THIRD) OF UNFAIR COMPETITION adopts the

Conmar361 rule that monetary remedies are onlyavailable for the period of time that theinformation would have remained a trade secret(measured by the amount of time it would havetaken to discover the trade secret by proper means)plus any additional time to compensate for the

defendant’s “head start.”362 The commentsfurther note, however, that such a limitationapplies only where the action is based on tortious

358 See Data Gen. Corp. v. Grumman Sys. Support Corp., 803F. Supp. 487 (D. Mass. 1992), aff’d 36 F.3d 1147 (1stCir. 1994), for a discussion of damages in a mixedcopyright infringement and trade secretmisappropriation suit involving diagnostic software.Here, the jury awarded the identical amount,$ 27,417,000, for both the copyright infringement andtrade secret counts.

359 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 45 cmt. d (1995).

360 Id. cmt. c (1995).361 Conmar Prods. Corp. v. Universal Slide Fastener Co., 172

F.2d 150 (2d Cir. 1949).362 RESTATEMENT (THIRD) OF UNFAIR COMPETITION

§ 45 cmt. h (1995).









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conduct. If the action is based on breach ofcontract, the remedy will most likely be measured

by the terms of the agreement.363

Section 45, unlike the UTSA, does notrefer to punitive damages per se. The commentsthough note that punitive damages are generallyavailable for misappropriation under the commonlaw. The list of factors in § 45(2) include factorsrelating to willfulness (as well as factors relatingto innocent misappropriation) and the intent,apparently, is to let the court fashion anappropriate remedy.

D. Prejudgment InterestInsofar as trade secret claims are

concerned, state law determines whether a plaintiffis entitled to prejudgment interest. The EighthCircuit, in Pioneer Hi-Bred International v.

Holden Foundation Seeds, Inc.,364 remarked thatone of the major goals of prejudgment interest wasto promote settlement, but that where a caseinvolves damages that are “virtually impossible toascertain prior to trial,” pre-trial settlement

becomes a less compelling goal.365 The courtheld, despite an otherwise applicable Iowa statuteproviding for pre-judgment interest in virtually allcases, that “when faced with particular situationsin which an award of prejudgment interest serveslittle purpose or would otherwise proveinequitable, the Iowa courts have on severaloccasions created exceptions to this general

rule.”366

That view was reiterated by the court in

EFCO Corp. v. Symons Corp.,367 finding thatalthough the time from filing to trial was not asgreat as in Pioneer (3 years), EFCO’s $13 millioncompensatory damage award was substantial andthe damage amount was hotly contested. Thecourt found that those factors together gave the

363 Id.364 35 F.3d 1226 (8th Cir. 1994).365 Id. at 1246.366 Id.367 219 F.3d 734, 741 (8th Cir. 2000).

district court discretion to deny prejudgmentinterest.

A rule in Illinois, however, is that a partymay only recover prejudgment interest by expressagreement or by statutory authorization, or if it is“warranted by equitable considerations.” Ingeneral, however, that appears to mean instanceswhere there is a fiduciary or confidential

relationship. 368 The Federal Circuit reversed thedistrict court’s award of pre-judgment interestbecause there was a direct relationship betweenC&F and IBP, the alleged misappropriator, andthus no fiduciary or confidential relationship.

E. Reasonable RoyaltyAs amended in 1985, § 3 of the UTSA

specifically provides for a “reasonable royalty”

which can result in large judgments.369 Unlikethe patent statute that sets a “reasonable royalty”as a floor to recoverable damages (“Upon findingfor the claimant the court shall award * * * in noevent less than a reasonable royalty,” 35 U.S.C.§ 284), a reasonable royalty in trade secretmisappropriation cases is generally treated as analternative to lost profits or other actual

damages.370 Indeed, comment (f) to § 45 of the

368 See C&F Packing Co., Inc. v. IBP, Inc., 224 F.3d 1296,1305 (Fed. Cir. 2000).

369 See Celeritas Techs., Ltd. v. Rockwell Int’l Corp., 150 F.3d1354, 47 U.S.P.Q.2d 1516 (Fed. Cir. 1998) ($57million verdict on breach of contract − non-disclosureagreement − affirmed. Damages based onhypothetical lump-sum paid-up license). The mostfrequently cited case listing the factors used indetermining a “reasonable royalty” in patentinfringement cases is Georgia-Pacific Corp. v. United StatesPlywood Corp., 318 F. Supp. 1116, 166 U.S.P.Q. 235(S.D.N.Y. 1970). See also Vermont Microsystems, Inc. v.Autodesk, Inc., (Vermont I), 88 F.3d 142, 151, 39U.S.P.Q.2d 1421, 1428 (2d Cir. 1996) (defining areasonable royalty as: “A reasonable royalty awardattempts to measure a hypothetically agreed value ofwhat the defendant wrongfully obtained from theplaintiff. By means of a “suppositious meeting”between the parties, the court calculates what theparties would have agreed to as a fair licensing price atthe time that the misappropriation occurred.”).

370 See Camp Creek Hospitality Inns, Inc. v. Sheraton FranchiseCorp., 139 F.3d 1396 (11th Cir. 1998).; Olson v.Nieman’s, Ltd., 1998 Iowa Sup. LEXIS 130 (Iowa










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RESTATEMENT (THIRD) OF UNFAIR COMPETITION

discusses a reasonable royalty in the context ofwhen an award of a defendant’s entire profitwould be unjust, i.e., when a trade secret accountsfor only a portion of such profits. Nevertheless,under the language of both the model UTSA andthe patent statute, plaintiffs entitled to either lostprofits or reasonable royalty damages are

generally able to choose between the two.371

Indeed, the Federal Circuit has approved a juryinstruction that divided a damage award into a“reasonable royalty” and “damages adequate to

compensate for the infringement.”372 California,however, has not adopted the model form of theUTSA verbatim. Under the California version,“[i]f neither damages nor unjust enrichmentcaused by misappropriation are provable, the courtmay order payment of a reasonable royalty * * *.”

1998).; Elec. Data Sys. Corp. v. Heinemann, 268 Ga. 755,493 S.E.2d 132 (Ga. 1997); Metallurgical Indus., Inc. v.Fourtek, Inc., 790 F.2d 1195, 229 U.S.P.Q. 945 (5th Cir.1986)(“In calculating what a fair licensing price wouldhave been had the parties agreed, the trier of factshould consider such factors as the resulting andforeseeable changes in the parties competitive posture;the prices past purchasers or licensees may have paid;the total value of the secret to the plaintiff, includingthe plaintiff’s development cost and the importance ofthe secret to the plaintiff’s business; the nature andextent of the use the defendant intended for thesecret, and finally whatever other unique factors in theparticular case might have been affected [by] theparties’ agreement, such as the ready availability ofalternative process.”); Taco Cabaña Int’l, Inc. v. TwoPesos, Inc., 932 F.2d 1113, 19 U.S.P.Q.2d 1253 (5th Cir.1991), aff’d on different grounds, 112 S. Ct. 1555 (1992).;Metallurgical Indus., Inc. v. Fourtek, Inc., 790 F.2d 1195,229 U.S.P.Q. 945 (5th Cir. 1986); Sikes v. McGraw-Edison Co., 665 F.2d 731 (5th Cir. 1982); Forest Labs.,Inc. v. Pillsbury Co., 452 F.2d 621 (7th Cir. 1971); VitroCorp. v. Hall Chem. Co., 292 F.2d 678 (6th Cir. 1961).

371 Some states, however, have chosen to modify thatprovision. Indiana, for example, provides that areasonable royalty may be awarded (1) when it wouldbe unreasonable to enjoin future use, but then theroyalty can only last for a period that otherwise couldhave been enjoined, or (2) when neither damages orunjust enrichment are provable, but again for only aperiod of time that otherwise could have beenenjoined. IND. CODE §§ 24-2-3-3(b), -4(b).

372 Maxwell v. J. Baker, Inc., 86 F.3d 1098, 39 U.S.P.Q.2d1001 (Fed. Cir. 1996).

CAL. CIV. CODE § 3426.3(b) (1997). Thus, underthe language of the California statute, a reasonable

royalty is only a last resort.373

There is authority for awarding the totalvalue of the secret to the plaintiff, including alldevelopment costs, through a reasonable

royalty,374 but the Second Circuit has held that areasonable royalty based on the “total value” ofthe trade secret to the trade secret owner is onlyappropriate where the misappropriator’s use of thetrade secret destroyed the entire value of the trade

secret:375

In patent infringement actions, the FederalCircuit has disapproved the use of a “Panduitkicker,” i.e., an increase in the royalty rate tocompensate the patent owner for various costs or

damages incurred in enforcing its patent rights.376

The Second Circuit in Vermont Microsystems, Inc.

v. Autodesk, Inc., (Vermont II),377 similarly heldthat it was improper for the district court to doublea “reasonable royalty” award to account for the“cost of infringement.”

373 See Cacique Inc. v. Robert Reiser & Co., 169 F.3d 619, 49U.S.P.Q.2d 1997, 2000 (9th Cir. 1999)(“California lawdiffers on this point from both the UTSA and Federalpatent law, neither of which require actual damagesand unjust enrichment to be unprovable before areasonable royalty may be imposed.” − in that casefinding “no reason to believe that unjust enrichmentcould not be proved.”).

374 Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d518 (5th Cir. 1974)(“the total value of the secret to theplaintiff, including plaintiff’s development costs andthe importance of the secret to the plaintiff’sbusiness” are factors that should be considered indetermining a reasonable royalty.).

375 Softel, Inc. v. Dragon Med. and Scientific Communications,Inc., 118 F.3d 955, 43 U.S.P.Q.2d 1385 (2d Cir.1997)(reasonable royalty calculated on “total value” ofthe trade secret to the trade owner appropriate onlywhere the defendant destroyed the value of the tradesecret). See also Univ. Computing Co. v. Lykes-YoungstownCorp., 504 F.2d 518 (5th Cir. 1974)(same).

376 Mahurkar v. C.R. Bard, Inc., 79 F.3d 1572, 38U.S.P.Q.2d 1288 (Fed. Cir. 1996).

377 138 F.3d 449, 45 U.S.P.Q.2d 2014 (2d Cir. 1998).



















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F. Attorney’s Fees1. General Rule in Texas

In Texas, attorney’s fees for breach of aconfidentiality agreement may be awarded underthe general Texas attorney’s fees statute, TEX.

CIV. PRAC. & REM. CODE ANN. § 38.001.378

Unlike the attorney’s fees provision in theDeceptive Trade Practices Act (TEX. BUS. & COM.CODE ANN. § 17.50(d)), there is no requirement inTEX. CIV. PRAC. & REM. CODE ch. 38 to showthat such fees are “necessary.” The only

requirement is that they be “reasonable.”379

“Reasonableness” is a question of fact for the jury.Although generally the amount of an award ofattorney’s fees should bear some reasonablerelationship to the amount in controversy, theamount of damages recovered is only one factor to

be considered.380 Other factors include the totalamounts of money involved in the case, the natureof the case, the time spent, and the skill andexperience required. The statute does not,however, permit an award directly to the attorney,and where both parties are entitled to awards ofdamages and attorney’s fees, the award ofattorney’s fees is included in the overall amount

for purposes of offsetting respective awards.381

2. Under the UTSAIn those states that have adopted the

UTSA: “[i]f (i) a claim of misappropriation ismade in bad faith, (ii) a motion to terminate aninjunction is made or resisted in bad faith, or (iii)willful and malicious misappropriation exists, thecourt may award reasonable attorney’s fees to the

prevailing party.”382 The Commissioners’

378 Under TEX. CIV. PRAC. & REM CODE § 38.001, aperson may recover reasonable attorney’s fees if theclaim is for, inter alia, “an oral or written contract.”

379 Murrco Agency, Inc. v. Ryan, 800 S.W.2d 600 (Tex.App.–Dallas 1990, no writ history).

380 Id.381 Id.382 UTSA § 4. See also Best Indus. v. CIS Bio Int’l, Inc., 134

F.3d 362 (4th Cir. 1998)(where plaintiff voluntarilydismisses claim without prejudice under the VirginiaTrade Secrets Act at the close of discovery, thedefendant is not a “prevailing party” and is notentitled to attorney’s fees or costs); Trident Perfusion

comment explains that an award of attorney fees isintended as a deterrent to “specious claims ofmisappropriation, to specious efforts by amisappropriator to terminate injunctive relief, and

to willful and malicious misappropriation.”383

In cases with multiple causes of action,some courts have held that there is no requirement

to apportion the attorney’s fees.384 Also, at leasttwo courts have held that attorney’s fees may berecovered even though such recovery is not

specifically pleaded.385

G. Injunctive Relief1. General Requirements

Injunctive relief, of course, is a principalremedy in departing employee and trade secret

cases.386 A trade secret owner may obtain both a

Assocs., Inc. v. Lesnoff, 992 F. Supp. 829 (W.D. Va.1998)(“ when a party to a Virginia Trade Secrets Actcase does not prevail and is found to have acted in badfaith, the prevailing party may recover counsel feesnot only incurred at the trial level but also thoseincurred in a successful defense of all or part of thetrial court’s final judgment on appeal.”).

383 Commissioners’ comment, UTSA § 4. See Boeing Co.v. Sierracin Corp., 738 P.2d 665 (Wash. 1987); Aries Info.Sys., Inc. v Pac. Mgmt. Sys. Corp., 366 N.W.2d 366(Minn. Ct. App. 1985). See also Lucas v. Avery DennisonCorp., 141 F.3d 1159 (4th Cir. 1998)(adopting thecomment’s meaning of “bad faith” as a “specious”claim, trial court’s award of attorney’s fees for aspecious action brought under the South CarolinaUniform Trade Secrets Act affirmed as not being anabuse of discretion); Roton Barrier, Inc. v. Stanley Works,79 F.3d 1112 (Fed. Cir. 1996)(no award of attorney’sfees appropriate if conduct is not willful andmalicious).

384 See Data Gen. Corp. v. Grumman Sys. Support, 825 F.Supp. 340, 361 (D. Mass. 1993), aff’d 36 F.3d 1147 (1stCir. 1994)(in a suit involving claims for both copyrightinfringement and trade secret misappropriation,successful plaintiff is entitled to full recovery ofattorney’s fees under the copyright statute and there isno requirement to apportion).

385 See Engel v. Teleprompter Corp., 732 F.2d 1238 (5th Cir.1984); Capital Asset Research Corp. v. Finnegan, 216 F.3d1268 (11th Cir. 2000).

386 See Weed Eater, Inc. v. Dowling, 562 S.W.2d 898 (Tex.Civ. App.–Houston [1st Dist.] 1978, writ ref’d n.r.e.).The right to exclude, indeed, is fundamental to the

















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preliminary and a permanent injunction.387 Suchrelief can go both to prohibiting use of the trade

secret388 as well as maintaining documents, code,and materials for evidentiary purposes.

In general, the movant for a preliminaryinjunction has the burden of showing (1) asubstantial likelihood of success of prevailing onthe merits; (2) irreparable injuries; (3) that thethreatened injury to the plaintiff outweighs the

potential damage to the defendant;389 and (4) aninjunction would not disserve the public

interests.390 Where there are multiple causes of

concept of a property right. Ruckelshous v. MonsantoCo., 104 S. Ct. 2862 (1984). Although injunctive reliefis available, prospective plaintiffs should alsounderstand that injunctions under both federal andstate law require bonds which can be substantial. SeeNintendo of America, Inc. v. Lewis Galoob Toys, 16 F.3d1032 (9th Cir. 1994)(Nintendo obtained a preliminaryinjunction and bond was raised to $15 million.Ultimately, the Ninth Circuit affirmed a finding thatGaloob’s use was “fair use,” Lewis Galoob Toys, Inc. v.Nintendo of Am., Inc., 964 F.2d 965 (9th Cir. 1992), andsubsequently affirmed the district court’s award toGaloob of the $15 million bond plus costs.).

387 See Molex, Inc. v. Nolen, 759 F.2d 474 (5th Cir. 1985);Zoecon Indus. v. Am. Stockman Tag Co., 713 F.2d1174(5th Cir. 1983); Hyde Corp. v. Huffines, 314 S.W.2d 763,768 (Tex. 1958); Elcor Chem. Corp. v. Agri-Sul, Inc., 494S.W.2d 204 (Tex. Civ. App.–Dallas 1973, writ ref’dn.r.e.).

388 See e.g., D.L. Ricci Corp v. Forsman, 1998 WL 202595(Minn. Ct. App. 1998)(preliminary injunction grantedto enforce non-competition agreement and to protecttrade secret rights in certain customer information).

389 The Fourth Circuit has emphasized that districtcourts are obliged to balance the hardships even if theplaintiff has shown a likelihood of success on themerits. Direx Israel Ltd. v. Breakthrough Med. Corp., 952F.2d 802 (4th Cir. 1991).

390 See e.g., Honeywell, Inc. v. Brewer-Garrett Co., 145 F.3d1331 (6th Cir. 1998)(preliminary injunction properlydenied where there was insufficient evidence ofimproper use or disclosure of certain bid information);Controls Int’l, Inc. v. Kinetrol., Ltd., 1998 U.S. Dist.LEXIS 4794 ( N.D. Tex. 1998)(preliminary injunctiongranted restraining use of plaintiff’s trademark, butdenied on related trade secret misappropriation claimbecause there was no evidence that defendants wereusing the trade secret information); Welsh v. RockmasterEquip. Mfg., Inc., 1998 U.S. Dist. LEXIS 6201 (E.D.

action, courts will balance those factors vis-à-vis

each cause of action.391

In Texas state courts, the issue is normallyphrased as whether there is a probable right torelief or probability that the plaintiff willultimately prevail at trial on the merits, andwhether the plaintiff risks irreparable harm or

injury if a temporary injunction is not issued.392

Irreparable injury is not, of course, a requirementfor an injunction following trial on the merits. Aninjunction prohibiting further use or disclosure ofthe trade secret is inherent to the recognition of

trade secrets as property rights.393 In fact,injunctive relief has been held to be especiallyappropriate where an employee seeks to disclose

or use confidential information.394

2. Irreparable HarmIrreparable harm is usually based on the

irreparable damages flowing from an improper use

Tex. 1998)(preliminary injunction issued preventingdefendant patent owners from producing patenteddevice where plaintiff asserted rightful ownership ofinvention.); Allied Mktg. Group, Inc. v. CDL Mktg., Inc.,878 F.2d 806, 809 (5th Cir. 1989); Union Carbide Corp.v. UGI Corp., 731 F.2d 1186, 1191 (5th Cir. 1984);Interox Am. v. PPG Indus., Inc., 736 F.2d 194 (5th Cir.1984); Canal Auth. of the State of Florida v. Callaway, 489F.2d 567, 573 (5th Cir. 1974).

391 See e.g., Learn2.com, Inc. v. Bell, 2000 U.S. Dist. LEXIS14283 (N.D. Tex. 2000).

392 Tom James Co. v. Mendrop, 819 S.W.2d 251 (Tex. App.–Fort Worth 1991, no writ); Keystone Life Ins. Co. v.Marketing Mgmt., Inc., 687 S.W.2d 89 (Tex. Civ. App.–Dallas, 1985, no writ)(“The use of confidentialinformation to gain access to customers of acompetitor has been recognized as a ground forinjunction relief because of the difficulty establishingthe amount of damages”); Middagh v. Tiller-Smith Co.,Inc., 518 S.W.2d 589 (Tex. Civ. App.–El Paso 1975, nowrit); Scotsman-Norwood Co. v. Hinsley, 515 S.W.2d 347(Tex. Civ. App.–Houston 1974, no writ); Matlock v.Data Processing Secs., Inc., 618 S.W.2d 327 (Tex. 1981);Son Oil Co. v. Whitaker, 424 S.W.2d 216, 218 (Tex.1968).

393 See Ruckelshous v. Monsanto Co., 104 S. Ct. 2862(1984).

394 Picker Int’l, Inc. v. Blanton, 756 F. Supp. 971, 17U.S.P.Q.2d 1036 (N.D. Tex. 1990).



























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or disclosure of trade secrets, and may be shownby the misappropriation of a single trade

secret.395 It may also be based on the employee’s

subsequent employment.396

“Irreparable” generally has been held tomean an injury that cannot be compensated by

money damages,397 or that cannot be measured

by any certain pecuniary standard.398 If damagesare sufficient to compensate the plaintiff for anywrong, and if damages are reasonablyascertainable, then courts have held that an

injunction should not issue.399 The movant for aninjunction bears the burden of showing the lack of

adequate legal remedies.400

Once a trade secret is shown, there is anargument that irreparable damage should bepresumed because once the secret is disclosed it is

irretrievably lost.401 The trade secret owner’s

395 F.M.C. Corp. v. Varco Int’l, Inc., 677 F.2d 500 (5th Cir.1982).

396 Williams v. Compressor Eng’g Corp., 704 S.W.2d 469(Tex. Civ. App.–Houston [14th Dist.] 1986, writ ref’dn.r.e.) (irreparable injury in some cases may bepresumed as a matter of law).

397 See Foxboro Co. v. Arabian Am. Oil Co., 805 F.2d 34(1st Cir. 1986); Auburn New Co. v. Providence Journal Co.,659 F.2d 273 (1st Cir. 1981); Northeastern FloridaChapter of Ass’n of Gen. Contractors v. City of Jacksonville,Florida, 896 F.2d 1283 (11th Cir. 1990); Molex, Inc. v.Nolan, 759 F.2d 474 (5th Cir. 1985); Merrill Lynch,Pierce, Fenner & Smith, Inc. v. Bishop, 839 F. Supp. 68(D. Me. 1993); Williams v. Compressor Eng’g Corp., 704S.W.2d 469 (Tex. Civ. App.– Houston [14th Dist.]1986, writ ref’d n.r.e.).

398 See e.g., Parkem Indus. Servs., Inc. v. Garton, 619 S.W.2d428 (Tex. Civ. App.–Amarillo 1981, no writ).

399 See e.g., Minexa Arizona, Inc. v. Staubauch, 667 S.W.2d563 (Tex. App.–Dallas 1984, no writ).

400 Id. at 567.401 In the Ninth Circuit, for example, a showing of

reasonable success on the merit in a copyrightinfringement suit is sufficient to raise a presumptionof irreparable harm. Triad Sys. Corp. v. SoutheasternExpress Co., 64 F.3d 1330, 1334 (9th Cir. 1995)(holdingthat the presumption of irreparable harm supportedthe district court’s preliminary injunction order);Johnson Controls, Inc. v. Phoenix Control Sys., Inc., 886 F.2d

loss of control over the secret, and consequentlythe means for protecting it, have led some courts

to presume irreparable injury.402 Some courtshave required a showing of imminent disclosure ormisuse of the trade secret in order to find

irreparable harm.403 The Fifth Circuit404 andFederal Circuit, however, apparently will notpresume irreparable harm, and the Federal Circuithas denied a preliminary injunction where “[t]herewas no showing [that plaintiff] would suffer injuryirreparable and noncompensable by moneydamages” if the defendants used the allegedlymisappropriated trade secrets during the

litigation.405

However, a violation of a state tradesecrets statute may dispense with any requirementfor a separate showing of irreparable harm. In

1173 (9th Cir. 1989)(same), citing Apple Computer, Inc.v. Formula Int’l, Inc., 725 F.2d 521 (9th Cir. 1984); AppleComputer, Inc. v. Franklin Computer Corp., 714 F.2d 1240,1254 (3rd Cir.1983)(holding that the district courterred when it failed to consider the presumption ofirreparable harm).

402 See Picker Int’l, Inc. v. Blanton, 756 F. Supp. 971, 17U.S.P.Q.2d 1036 (N.D. Tex. 1990); Nutmeg Techs., Inc.v. Mahshie, 12 U.S.P.Q.2d 1469 (N.D.N.Y. 1989).

403 See, e.g., Rapco Foam, Inc. v. Scientific Applications, 479 F.Supp. 1027 (S.D.N.Y. 1979).

404 DFW Metro Line Servs. v. Southwestern Bell Tel. Co., 901F.2d 1267, 1269 (5th Cir. 1990)(per curiam)(“Therecan be no irreparable injury where money damageswould adequately compensate a plaintiff.”); FMC Corp.v. Taiwan Tainan Giant Indus. Co., 730 F.2d 61 (2d Cir.1984). See also Concrete Mach. Co. v. Classic LawnOrnaments, Inc., 843 F.2d 600, 612 n.12 (1st Cir.1988)(noting that the Fifth Circuit was the only circuitthat did not apply a presumption of irreparable harmonce the plaintiff had shown a likelihood of successon the merits).

405 Formax, Inc. v. Hostert, 5 U.S.P.Q.2d 1939 (Fed. Cir.1988); Litton Sys., Inc. v. Sunstrand Corp., 750 F.2d 952(Fed. Cir. 1984); Reebok Int’l, Ltd. v. J. Baker, Inc., 32F.3d 1552, 1994 U.S. App. LEXIS 21580 (Fed. Cir.1994). See also Sampson v. Murray, 415 U.S. 61(1974)(“[t]he possibility that adequate compensatoryor other corrective relief will be available at a laterdate, in the ordinary course of litigation, weighsheavily against a claim of irreparable harm.”).





























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EEOC v. Cosmair,406 the Fifth Circuit held that aviolation of the Mississippi Uniform Trade Secrets

Act itself constituted irreparable injury.407

Although some courts in California have

also refused to presume irreparable harm,408 thegeneral rule in the Ninth Circuit seems to be that ashowing of reasonable success on the merits (atleast in a copyright infringement suit) is sufficient

to raise a presumption of irreparable harm.409

Defendants in temporary/preliminaryinjunction hearings in trade secretmisappropriation cases frequently argue that anydamages suffered by the trade secret owner arecompensable by money damages and therefore not“irreparable.” However, the intervening loss ofbusiness and good will, and the loss of acompetitive advantage are not easily measured,and may constitute evidence of “irreparable”

harm,410 and there may be evidence that the

406 821 F.2d 1085, 1090-91 (5th Cir. 1987).407 See also Union Life Ins. Co. v. Tillman, 143 F. Supp. 2d

638 (N.D. Miss. 2000) .408 Integral Sys., Inc. v. Peoplesoft, Inc., 1991 U.S. Dist.

LEXIS 20878 (N.D. Cal. 1991); Imi-Tech Corp. v.Gagliani, 691 F. Supp. 214 (S.D. Cal. 1986).

409 Triad Sys. Corp. v. Southeastern Express Co., 64 F.3d1330, 1334 (9th Cir. 1995)(holding that thepresumption of irreparable harm supported thedistrict court’s preliminary injunction order); JohnsonControls, Inc. v. Phoenix Control Sys., Inc., 886 F.2d 1173(9th Cir. 1989)(same), citing Apple Computer, Inc. v.Formula Int’l, Inc., 725 F.2d 521 (9th Cir. 1984); AppleComputer, Inc. v. Franklin Computer Corp., 714 F.2d 1240,1254 (3d Cir. 1983)(holding that the district courterred when it failed to consider the presumption ofirreparable harm).

410 SeeT-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc.,965 S.W.2d 18 (Tx. App.–Houston 1st Dist.], 1998, nowrit). (“Injunctive relief is proper to prevent a party,which has appropriated another’s trade secrets, fromgaining an unfair market advantage. The onlyeffective relief available to [Hennessey] is to restrain[defendants’] use of its trade secrets and confidentialinformation pending trial. At the time of theinjunction hearing, [Hennessey] had over 20 Vipers inits shop. Hennessey stated that if the Venomupgrades could be obtained anywhere, there would beno reason for people to send their Vipers to

defendant would, in any event, not be able to

respond to a damage judgment.411

3. Duration Of InjunctionOnce there has been a public disclosure,

there is no longer a trade secret to protect, and the“owner” cannot thereafter obtain an injunction

against its use.412

However, Texas has historically followedthe theory that a permanent injunction may issue,even though the “secret” later becomes public, ifthe defendant learned the trade secret improperly

or while under an obligation of confidentiality.413

[Hennessey]. He testified that if the confidentialinformation were distributed, [Hennessey] would loseits [market] advantage. He estimated that [his] grosssales for 1997 would drop from approximately $4million to about $2 million. He also said the loss ofgood will was immeasurable. The potential damagesto [Hennessey’s] business cannot be easily calculated;therefore, a legal remedy is inadequate”).

411 See e.g., GTC Chem. Servs., Inc. v. Burdge, 1998 Tex.App. LEXIS 3562 (Tex. App.−Corpus Christi 1998,no writ).(“We have previously held that for purposesof injunctive relief, no adequate remedy at law exists ifdamages are incapable of calculation or if defendant isincapable of responding in damages which may resultpending outcome of the litigation.”). See also CadenceDesign Sys., Inc. v. Avant! Corp., 125 F.3d 824 (9th Cir.1997)(district court’s failure to enter a preliminaryinjunction reversed and remanded where district courtallowed defendant to rebut presumption of irreparableharm by showing harm compensable by moneydamages).

412 See, e.g., Wissman v. Boucher, 240 S.W.2d 278 (Tex.1951). See also Campbell Soup Co. v. ConAgra, Inc., 977F.2d 86, 24 U.S.P.Q.2d 1537 (3d Cir. 1992)(noirreparable harm, and therefore no basis for apreliminary injunction, if the alleged trade secret hadalready been published in an issued patent, eventhough the breach of confidence occurred before theissuance of the patent and the patent was obtained bythe defendant.).

413 Hyde Corp. v. Huffines, 314 S.W.2d 763, 768 (Tex.1958); K & G Oil Tool & Serv. Co. v. G & G FishingTool Serv., 314 S.W.2d 782 (Tex. 1958); Atlas BradfordCo. v. Tuboscope Co., 378 S.W.2d 147 (Tex. Civ. App.–Waco 1964, no writ); Elcor Chem. Corp. v. Agri-Sul, Inc.,494 S.W.2d 204 (Tex. Civ. App.–Dallas 1973, writref’d n.r.e.). Compare Conmar Prods. Corp. v. UniversalSlide Fastener Co., 172 F.2d 150 (2d Cir. 1949)(right to





















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The more modern and prevalent rule, however, isthat publication of a trade secret terminates anyright to an injunction or damages (postpublication), and that the length of an injunction

should be limited to the “head-start” time.414

Several courts, for example, have held that theduration of the injunction should not go beyond

that required for reverse engineering,415

especially in those states that have adopted the

Uniform Trade Secrets Act.416

relief ends when secret is no longer secret) withShellmar Prods. Co. v. Allen-Qualley Co., 87 F.2d 104 (7thCir. 1937), cert. denied, 301 U.S. 695 (1937)(relief can beawarded even though the secret is no longer secret).

414 Bryan v. Kreshaw, 366 F.2d 497, 503 (5th Cir. 1966),cert. denied 386 U.S. 959 (1967). See also Surgidev Corp. v.ETI, Inc., 828 F.2d 452, (8th Cir. 1987); Kilbarr Corp. vBus. Sys., Inc. B.V., 679 F. Supp. 422 (D.N.J. 1988).

415 See, e.g., Data Gen. Corp. v. Digital Computer Controls,Inc., 297 A.2d 433 (Del. Ch. 1971), aff’d, 297 A.2d 437(Del. 1972); K-2 Ski Co. v. Head Ski Co., 506 F.2d 471(9th Cir. 1974).

416 See e.g., Stampede Tool Warehouse, Inc. v. May, 651 N.E.2d209, 35 U.S.P.Q.2d 1134 (Ill. App. [1st Dist.]1995)(appeal denied)(court modified a permanentinjunction that had been entered by the trial court toexpire 4 years after the date of the original temporaryrestraining order — thus expiring approximately 3months after the date of the court’s decision —finding that was the amount of time that it would havetaken to reconstruct the lists). See also Schulenburg v.Signatrol, Inc., 212 N.E.2d 865, 147 U.S.P.Q. 167 (Ill.1965)(holding that an injunction should be limited induration to the period of time reasonably required toreproduce the trade secret); Lamb-Weston, Inc. v.McCain Foods, Ltd., 941 F.2d 970 (9th Cir.1991)(approved a preliminary injunction, intended tocorrespond to the defendant’s head-start time, thatextended approximately 7 months after plaintiff’spatent issue); Integrated Cash Mgmt. Servs., Inc. v. DigitalTransactions, Inc., 920 F.2d 171 (2d Cir. 1990)(affirmedan injunction prohibiting the defendants frombecoming involved in the development of anyprograms similar to the plaintiff’s programs for six-months and an injunction perpetually enjoining thedefendants from distributing any version of the four“generic” programs that made up ICM’s system).

As amended in 1985, § 2 of the UTSAprovides:

(a) Actual or threatenedmisappropriation may beenjoined. Upon application to thecourt, an injunction shall beterminated when the trade secrethas ceased to exist, but theinjunction may be continued foran additional reasonable period oftime in order to eliminatecommercial advantage thatotherwise would be derived fromthe misappropriation.

(b) In exceptional circumstances, aninjunction may condition futureuse upon payment of a reasonableroyalty for no longer than theperiod of time for which use couldhave been prohibited.Exceptional circumstancesinclude, but are not limited to, amaterial and prejudicial change ofposition prior to acquiringknowledge or reason to know ofmisappropriation that renders aprohibitive injunction inequitable.

(c) In appropriate circumstances,affirmative acts to protect a tradesecret may be compelled by courtorder.

The Commissioners’ comment states that theUTSA specifically declines to follow the rule insome states, including Texas, that an injunctionmay be punitive in nature and extend

perpetually.417

417 But see Clifford McFarland Read & Lundy, Inc. v. Brier,1998 WL 269223 (R.I. Super. 1998)(“[T]his Courtfinds that customer information concerning credithistory, sales volume, prospective future business,service relationships, special needs of customers,supplier lists, cost information, pricing policies, andprofitability are trade secrets as defined [by the RhodeIsland Uniform Trade Secrets Act].” The court issueda permanent injunction prohibiting the defendantsfrom using that information).







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Instead, the UTSA takes the position thatan injunction should terminate once a trade secretbecomes generally known or is discovered through“proper means,” plus any additional timenecessary to cure a defendant’s unlawfuladvantage gained through early improperacquisition or use (head start or lead timeinjunction). According to the Comment, if themisappropriator, at the time of hearing, has nottaken advantage of the lead time or if the secrethas lost its status as a trade secret at the time of

hearing, then no injunction should issue.418

Section 2(b) of the UTSA is directed tothe situation where an injunction against future useis considered inappropriate, as was the rule under

the common law.419

4. Scope of the InjunctionThe injunction must, of course, be phrased

broadly enough to accomplish the underlyingpurpose of protecting the trade secrets at issue, andyet not cast too broad a net for two reasons. First,Rule 65, FED. R. CIV. P. (and most, if not all,corresponding state court rules) requires somespecificity in injunctions for the practical reasonthat the enjoined party should know, with littlelingering doubt, what he or she is prohibited from

doing under penalty of contempt.420

418 Commissioners’ comment, UTSA § 2, as amended in1985. See Uncle B’s Bakery, Inc. v. O’Rourke, 920 F.Supp. 1405 (N.D. Iowa 1996)(“the public interest [is]embodied and articulated in the legislature’s passage ofthe Trade Secrets Act.”).

419 See e.g., Republic Aviation Corp. v. Schenk, 152 U.S.P.Q.830 (N.Y. Sup. Ct. 1967)(injunction would haveprohibited supply of an aircraft weapons system andlack of that system would have endangered militarypersonnel in Vietnam).

420 See e.g., Roton Barrier, Inc. v. Stanley Works, 79 F.3d1112 (Fed. Cir. 1996)(injunctive order must distinguishbetween lawful and unlawful activity, and must“describe in reasonable detail the acts sought to berestrained.”); W. Water Mgmt., Inc. v. Brown, 40 F.3d105, 33 U.S.P.Q.2d 2014 (5th Cir. 1994)(injunctionbroad, but definite); Hydraulic Exch. and Repair, Inc. v.KM Specialty Pumps Inc., 690 N.E.2d 782, 46U.S.P.Q.2d 1291 (Ind. App. 1998)(although customernames in this limited market did not constitute a tradesecret, those names coupled with other pricing

Secondly, excluding those cases in whichthere has been reprehensible conduct, theinjunction should not utterly destroy the

defendant’s ability to fairly compete.421

Nevertheless, the injunction should be broadenough to protect the rights of the trade secret

owner.422 In some cases, that may require an

information that included profits per customer, salesper customer, special suppliers, overhead and specificpricing information, constituted a trade secret.Preliminary injunction prohibiting subsequentemployer from using former employee of plaintiff toprepare bids sustained because there was a threat thatemployee would inherently use trade secret customerinformation of former employer. However, injunctionbroadly prohibiting KM from offering certain productlines to “any customer or client of KM” was overlybroad). See also Fonar Corp. v. Deccaid Servs., Inc., 983F.2d 427 (2d Cir. 1993)(reversing injunction thatrestrained defendant from “copying, duplicating,distributing, offering for sale, or using plaintiff’scopyrighted ‘Maintenance Software,’ ‘Schematics’ orother trade secrets of the Beta 3000 and Beta 3000Mas being unintelligible”); Additive Controls &Measurement Sys,, Inc. v. Flowdata, Inc., 986 F.2d 476,480, 25 U.S.P.Q.2d 1798, 1801 (Fed. Cir. 1993)(Rule65 requires specificity in order to relieve parties fromthe burden of adjudicating unwarranted contemptproceedings); KSM Fastening Sys., Inc. v. H.A. Jones Co.,776 F.2d 1522, 1526, 227 U.S.P.Q. 676, 679 (Fed. Cir.1985)(“If the potent weapon of judicial contemptpower is to be brought to bear against a party forviolation of an order, ‘one basic principle written intoRule 65 is that those whom an injunction is issuedshould receive fair and precisely drawn notice of whatthe injunction actually prohibits.’”).

421 See T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc.,965 S.W.2d 18 (Tx. App.–Houston [1st Dist.], 1998,no writ) (injunction that went beyond prohibiting theuse of trade secret and confidential information wasoverbroad and modified on appeal); DeGiorgio v.Megabyte Int’l, Inc., 266 Ga. 539, 468 S.E.2d 367 (Ga.1996)(“all solicitation and sale to customers that [thedefendants] knew or had reason to know were[plaintiff’s] customers during employment” was toobroad); Acuson Corp. v. Aloka Co., Ltd., 209 Cal. App.3d 425, 10 U.S.P.Q.2d 1814 (6th Dist. 1989)(aninjunction that prohibited the use of anything learnedas a result of reverse engineering is too broad).

422 See, e.g., Chemetall GmbH v. ZR Energy, Inc., 138 F.Supp. 2d 1079, 1082 (N.D. Ill. 2001)(“The injunctiverelief issued in a trade secret case must be tailored tothe facts of the case and must be sufficient to protectthe interests of the trade secret holder.”).




















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injunction that effectively precludes the

production of a competitive product.423

Also, at least one court has justifiedissuance of a broad final injunction on thedifficulty of policing the defendants’ activities

while a temporary injunction was in place.424

Another court addressed that problem byappointing an independent “verifier” to assure

continued compliance with the injunction.425

5. Losing The Right to an InjunctionThe right to an injunction may be lost due

to “unclean hands” or affirmative defenses such as“copyright misuse” that are based on the “uncleanhands” maxim. Under Texas law, a plaintiff with

unclean hands is not entitled to equitable relief.426

423 Christopher M’s Hand Poured Fudge, Inc. v. Hennon, 699A.2d 1272 (Pa. Super. Ct. 1997)(“production”injunction permanently prohibiting former employeefrom making fudge upheld on appeal because formeremployee’s lack of fudge making experience combinedwith his knowledge of trade secret recipe andmanufacturing process established “an inextricableconnection” between the trade secrets and hismanufacture of fudge); Post Office v. Portec. Inc., 913F.2d 802, 15 U.S.P.Q.2d 1865 (10th Cir. 1990)(findingthat the trade secrets were “so necessarily intertwinedwith the manufacture and sale of [the subject devices]that an injunction which falls short of barring themanufacture and sale of any such chutes would fail toadequately apprise defendant as to the prohibitedconduct and would create a potential window ofopportunity for defendant to engage in conduct whichwould prevent plaintiff from being [adequatelyprotected],” broad injunction affirmed); Gen. Elec. v.Sung, 843 F. Supp. 776 (D. Mass. 1994)(“productioninjunctions,” i.e., an injunction that enjoined“production” of something, are preferred in thosesituations where a “use injunction,” i.e., an injunctionenjoining the “use” of a trade secret, would beineffective in eliminating the competitive advantagegained by the misappropriation. The rationale for a“production injunction” is that the trade secrets are“inextricably connected” to the defendant’smanufacture of the product).

424 Solutec Corporation, Inc. v. Agnew, 88 Wash. App. 1067,1997 Wash. App. LEXIS 2130 (Wash. Ct. App. 1997) .

425 Essex Group, Inc. v. Southwire Co., 501 S.E.2d 501 (Ga.1998).

426 See Reg’l Props., Inc. v. Fin. & Real Estate Consulting Co.,752 F.2d 178, 183 (5th Cir. 1985); DeSantis v.

Also under Texas law, however, the defendantmust show some injury resulting from the actions

allegedly constituting “unclean hands.”427 If ajury verdict finding “unclean hands” is deemedadvisory, however, then the trial court hasdiscretion whether to disregard the jury findings of

unclean hands.428

The right to an injunction may also be lostin situations where granting an injunction wouldresult in double recovery, i.e., where damageshave been awarded to compensate the plaintiff for

future use of the trade secret.429 The right to aninjunction can also be lost throughmisrepresentations (or, at least, perceived

misrepresentations).430

6. Under the RESTATEMENT (THIRD) OF

UNFAIR COMPETITION


COMPETITION, in § 44, provides that “injunctiverelief may be awarded to prevent a continuing orthreatened appropriation of another’s trade secret* * *,” and that the “duration of injunctive relief intrade secret actions should be limited to the timenecessary to protect the plaintiff from any harmattributable to the appropriation and to deprive thedefendant of any commercial advantageattributable to the appropriation.” Section 44further lists eight factors that courts shouldconsider in granting an injunction, namely “(a) thenature of the interest to be protected; (b) the natureand extent of the appropriation; (c) the relativeadequacy to the plaintiff of an injunction and of

Wackenhut Corp., 793 S.W.2d 670, 682 n.6 (Tex. 1990),cert. denied, 498 U.S. 1048 (1991).

427 Alcatel USA Inc. v. DGI Techs., Inc., 166 F.3d 772, 49U.S.P.Q.2d 1641 (5th Cir. 1999).

428 See Thomas v. McNair, 882 S.W.2d 870, 880 (Tex.App.–Corpus Christi 1994, no writ)

429 Next Level Communications L.P. v. DSC CommunicationsCorp., 179 F.3d 244 (5th Cir. 1999). See also DSCCommunications Corp. v. Next Level Communications, 107F.3d 322, 328 (5th Cir. 1997).

430 qad, Inc. v. ALN Assocs., Inc., 974 F.2d 834, 24U.S.P.Q.2d 1145 (7th Cir. 1992)(injunction dissolvedwhen trial court learned that qad had characterized itssoftware as “wholly original” when, in fact, it wasderived from other software.).

















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other remedies; (d) the relative harm likely toresult to the legitimate interests of the defendant ifan injunction is granted and to the legitimateinterests of the plaintiff if an injunction is denied;(e) the interests of third persons and of the public;(f) any unreasonable delay by the plaintiff inbringing suit or asserting its rights; (g) any relatedmisconduct on the part of the plaintiff; and (h) thepracticality of framing and enforcing theinjunction.” The comments indicate that thissection was derived from the RESTATEMENT

(SECOND) OF TORTS § 936 generally dealing withfactors to be considered when issuing injunctionsin tort actions.

The comments also note that theRESTATEMENT (THIRD) follows the lead of theUTSA in limiting the duration of an injunction tothe time the trade secret remains a secret plus anyadditional time necessary to negate a defendant’s

head start or lead time.431 According to thecomments, the “appropriateness” of an injunctionshould be gauged on “the interests of both theparties and the public, including the interest of theplaintiff in preserving the commercial advantageinherent in the trade secret, the interest of thedefendant in avoiding interference with legitimatebusiness transactions, and the interest of the publicin fostering innovation and promoting vigorous

competition.”432

Comments to the RESTATEMENT (THIRD)OF UNFAIR COMPETITION indicate that the intent,like the UTSA, was not to follow theRESTATEMENT (FIRST) OF TORTS’ position ongood faith purchasers for value. Indeed, thecomments suggest that a reasonable royalty suchas provided in § 2(b) of the UTSA may beappropriate in that instance.

431 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 44 cmts. c and f (1995).

432 RESTATEMENT (THIRD) OF UNFAIR COMPETITION§ 44 cmt. c (1995).

7. Failure to Comply With DiscoveryDirected at Whether Defendant HasComplied With Preliminary InjunctionMay Be Punishable by ContemptThat was the holding by the Georgia Court

of Appeals in Gazelah v. Rome General

Practice.433 Rome, a weight loss clinic, sued Dr.Shawn Gazelah and two of Rome’s formermanagement staff for allegedly scheming to divertpatients and assets from Rome to Gazelah. Duringa hearing on Rome’s request for a preliminaryinjunction, a former receptionist for Romeadmitted that she had participated in providingRome’s waiting list patient’s names to Gazelah.The trial court entered a preliminary injunctionprohibiting Gazelah from using those customerlists and scheduling calendars. Throughinterrogatories, Rome asked Gazelah for each ofher patient’s names from the date the clinicopened. Gazelah gave incomplete answers despitea court order to do so, and the trial court heldGazelah in contempt. Gazelah’s “excuse” was thatsuch information constituted a trade secret andthey could not be required to reveal thatinformation. On appeal, the court affirmed thefinding of contempt: “But to determine theircompliance with the court’s order restraining themfrom using the Practice’s customer list, and todetermine their violation, if any, of the GeorgiaTrade Secrets Act, as well as damages resultingtherefrom, this information is essential to thelitigation. We cannot endorse the appellants’disingenuous attempt to conceal informationproperly subject to discovery by the law they areaccused of violating to insulate themselves fromdisclosing this information.”

H. Officers and Directors Personal Liabilityfor Trade Secret MisappropriationCan officers and directors who invest in a

business be held liable for trade secretmisappropriation? In a California case, PMC Inc.

v. Kadisha,434 the California Court of Appealsheld yes. According to the court:

In the present case, plaintiffspresented sufficient evidence to

433 502 S.E.2d 251 (Ga. Ct. App. 1998).434 78 Cal. App. 4th 1368 (Cal. Ct. App. 2000).



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raise a triable issue whether, whendefendants invested in PWP,became majority shareholders,officers and directors of PWP,effectively took control of thecorporation, hired personnel torun it, and continued itsoperations, they knew or, withrespect to trade secretmisappropriation, had reason toknow, that their codefendants hadengaged in tortious conductharmful to WFI. In a nutshell,there was evidence from which atrier of fact could reasonably inferdefendants, in anticipation ofenormous corporate and personalprofit, knowingly invested at abargain price in a corporationwhose sole business assetsconsisted of stolen confidentialinformation and processes, andsubsequently controlled the entitywhich was engaging in unlawfulconduct.

VII. RECENT CASES INVOLVING TRADESECRET ISSUES

A. Economic Espionage Act of 1996(“EEA”)

1. Legal Impossibility is Not a DefenseUnder the EEA

United States v. Yang, 281 F.3d 534 (6th Cir. 2002)

Yang, his company Four Pillars EnterpriseCompany, Ltd., and Yang’s daughter Hwei ChenYang (Sally), were charged, inter alia, withconspiracy to commit theft of a trade secret inviolation of the EEA. Avery Dennison, Inc. wasone of Four Pillars chief competitors in themanufacture of adhesives. Dr. Victor Lee workedfor Avery doing adhesive research. Lee met Yangand Sally in 1989 in Taiwan while making apresentation. Yang asked Lee to serve as a“consultant” and paid him $25,000. They agreedto keep the arrangement “secret.” Over the courseof the next eight years, Lee provided Yang et al.with confidential information concerning Avery’sadhesives. After learning of Lee’s activities, theFBI confronted him. Lee agreed to cooperate withthe government in a sting operation. In 1997,

Yang told Lee that he and Sally would be in theUnited States. They met at a hotel room in Ohio.The meeting was videotaped. During the courseof the meeting, Lee gave Yang and Sallydocuments stamped “confidential” whichsupposedly contained Avery’s confidentialinformation, though apparently the documents didnot. Following the meeting, Yang and Sally werearrested with the documents in their possession.

On appeal from a conviction, Yang arguedthe defense of legal impossibility, i.e., that whatthey allegedly stole was not, in fact, a trade secret.The Third Circuit’s 1998 opinion in United States

v. Hsu.435 addressed the same argument, andrejected the defense of legal impossibility. Yangargued that the Third Circuit was wrong. TheSixth Circuit disagreed, and adopted the reasoningof the Third Circuit. According to the court,Yang’s conspiracy to steal the trade secrets inviolation of § 1832(a)(5) was completed when,with the intent to steal the trade secrets, theyagreed to meet with Lee in the hotel room and theytook an overt act towards the completion of thecrime * * *. The fact that the information theyconspired to obtain was not what they believed itto be does not matter because the objective of theYangs’ agreement was to steal trade secrets, andthey took an overt step toward achieving that

objective.”436

435 155 F.3d 189, 196 (3d Cir. 1998).436 281 F.3d at 544.




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B. Reasonable Efforts to Maintain TradeSecret

1. Fifth Circuit: Louisiana Law: AllowingCustomers to Photograph, Inspect andExamine Units Without an Obligation ofConfidentiality Do Not ConstituteReasonable Efforts to Maintain a TradeSecret

Tubos de Acero de Mexico S.A. v. American Int’lInvestment Corp., _292 F.3d 471, 63 USPQ2d1340 (5th Cir. 2002)

Louisiana adopted a version of the UTSA

in 1982.437

Tubos de Acero de Mexico S.A.(TAMSA) was a Mexican corporation thatmanufactured and sold steel pipe to the offshorepetrochemical industry. TAMSA used ultrasonictesting (UT) equipment for quality control.American was a Louisiana corporation thatmarketed UT units designed and manufactured byTechnical Industries, Inc. of Houston. In 1995,American sold TAMSA a UT unit under apurchase agreement. That agreement had noprovisions regarding confidentiality or theproprietary nature of the units, did not have anyrestrictions that prevented TAMSA from makingdesign changes, and did not require TAMSA topurchase spare parts from American. Americanprovided TAMSA with an operation manual,electrical wiring diagrams, and mechanicaldrawings, none of which were, apparently, markedconfidential.

In mid-1997, TAMSA needed another UTunit. American, this time, leased a UT unit toTAMSA. The lease provided that TAMSA mustkeep the terms of the lease confidential, but had noprovisions regarding the confidentiality orproprietary nature of the units. That lease was thesubject of the trade secret allegation.

The 1997 leased unit was actuallymanufactured before the 1995 unit, and was“extremely similar” thereto. The CEO ofAmerican testified that he did not know whether

437 LA REV. STAT. § 51:1431 et seq.

Technical required obligations of confidentialityfrom other customers, and Technical employeestestified that Technical allowed its customers tophotograph, inspect and examine the UT unit.Photographs of the UT unit and its componentswere also available on Technical’s website.American’s CEO also testified that American’scompetitors were allowed to view photographs ofTechnical’s UT units at trade shows.

The 1997 rental was contingent onTAMSA purchasing a new unit from American.Although TAMSA acknowledged that, there wasevidence that TAMSA was not going to purchasethe unit from American. TAMSA did, in fact,purchase a new unit from another party in 1998.TAMSA also spent $425,000 renovating its UTunits, although the lease required that TAMSApurchase spare parts from American. There wasalso evidence that TAMSA copied electroniccircuitry in the 1997 unit.

TAMSA returned the leased unit in 1999.During an inspection, a TAMSA representativeacknowledged damage to the unit, as well as, thepresence of reproduced and replacement parts.American faxed two invoices to TAMSA for suchdamage and “downtime” totaling approximately$200,000. TAMSA had secured the leasepayments through a $650,000 letter of credit(LOC) with a bank in New Orleans. Shortly afterfaxing the invoices, American presented the bankwith an “invoice” for the entire amount of$650,000, which the bank paid.

TAMSA filed breach of contract, fraudand conversion claims against American.American counterclaimed seeking damages forbreach of contract, violations of the LouisianaUnfair Trade Practices and Consumer ProtectionAct, and violation of Louisiana’s UTSA. Thediscussion here will focus solely on American’sclaim under the LUTSA. The district court deniedTAMSA’s motion for summary judgment on, interalia, American’s claim under the LUTSA, butrecommended interlocutory appeal under 28U.S.C. § 1292(b).

TAMSA urged on appeal that it wasentitled to summary judgment on the trade secretclaim because (1) American did not own thealleged trade secrets, (2) American failed to takereasonable measures to protect the alleged trade



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secrets, and (3) there was insufficient evidence toraise a genuine issue of material fact that TAMSAhad misappropriated any trade secrets. The FifthCircuit concluded that even assuming thatAmerican had standing to assert misappropriation(which was doubtful given that the units weredesigned and manufactured by Technical), thesummary judgment evidence demonstrated a lackof any genuine issue of material fact as to whetherAmerican used reasonable measures to maintainthe secrecy of the alleged trade secrets. The courtconcluded that American had not.

The court viewed the 1997 leaseagreement as the only evidence that American wasrelying. The lease agreement apparently limitedthe access that TAMSA employees could have tothe UT, but, according to the court, was “silent asto what information American considered to be atrade secret and contains no restrictions onTAMSA’s use of the information or its disclosure

to other parties.”438 The court further noted thatAmerican had sold the 1995 unit to TAMSA withno restrictions, and allowed competitors to viewphotographs of the UT units. Technical alsoallowed customers to photograph, inspect andexamine the 1997 leased unit without taking anyefforts to maintain secrecy. Accordingly, the courtconcluded that TAMSA was entitled to summaryjudgment on the trade secret claim.

2. Illinois Law: Failing to Take Steps toEnforce Confidentiality Provisions inSoftware License Agreement May Resultin Loss of Trade Secret Rights as a Matterof Law

Compuware Corp. v. Health Care Service Corp.,203 F. Supp.2d 952 (N.D. Ill. 2002)

Illinois initially adopted the UTSA in

1988.439

Compuware licensed certain mainframesoftware to Health Care Services Corporation ofIllinois (HCSC) in 1984. That license was

438 292 F.3d at 485, 63 USPQ2d at 1349.439 765 ILL. COMP. STAT. ANN. [ILCS] §§ 1065/1-9.

amended by several “product schedules”identifying certain software between 1984 and2000. In 1997, Compuware began investigatingwhether Unitech Systems, Inc. might be apotential customer, and discovered that Unitechwas running Compuware software that it hadobtained from HCSC. Indeed, it turned out thatHCSC had been selling Compuware’s software toUnitech since 1984. Compuware did not file suitfor breach of contract, copyright infringement andtrade secret misappropriation, however, untilFebruary 2001.

The 1984 license provided that “noaction” under the agreement could be broughtmore than one year after the cause of actionaccrued. The court found that Compuware wasaware in 1997 that Unitech was using its software,and delayed too long in bringing suit. Compuwareasserted that it believed that Unitech was aconsultant to HSCS, but the court noted that thelicense did not provide for use by consultants.Thus, the court reasoned that Compuware hadnotice in 1997 of a breach of the agreement, andshould have brought suit within the one year timedeadline set by the agreement.

With respect to the trade secret claim, theIllinois UTSA has a five year statute oflimitations. However, the court concluded thatCompuware had failed to preserve theconfidentiality of the licensed software. AlthoughCompuware required employees and customers tosign non-disclosure agreements, the district courtfound that such agreements were not enforced.According to the court, “all that matters is thatCompuware knew that HSCS had violated itsconfidentiality agreement by permitting Unitech touse the software, and took no steps to stop this.As a matter of law doing nothing to enforce aconfidentiality agreement is not a reasonable effortin the circumstances to maintain a trade secret.”



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3. Arkansas Law: (a) Subjective Belief HeldBy Employee That Information isConfidential and Has Value is “Irrelevant”in Determining Whether Trade SecretOwner Took Reasonable Steps to Preservea Trade Secret(b) Post-Employment ConfidentialityAgreement is Not an AbsoluteRequirement in All Instances

Tyson Foods, Inc. v. ConAgra, Inc., 349 Ark. 469,2002 Ark. LEXIS 391 (Ark. 2002) (Tyson II)

Note: This case is related to ConAgraPoultry Co. v. Tyson Foods, Inc., 30S.W.3d 725 (Ark. 2000)(Tyson I).

Arkansas adopted the UTSA in 1988.440

Arkansas also, however, has adopted the six factor

“test” of the First Restatement,441 that is, thecourts will consider (1) the extent to which theinformation is known outside the business; (2) theextent to which the information is known byemployees and others involved in the business;(3) the extent of measures taken by the companyto guard the secrecy of the information; (4) thevalue of the information to the company and to itscompetitors; (5) the amount of effort or moneyexpended by the trade secret owner in developingthe information; and (6) the ease or difficulty withwhich the information could be properly acquired

or duplicated others.442

David Purtle joined Tyson in 1984 and atthe time of his resignation in 1999 held theposition of Senior Vice-President in charge ofRetail Poultry. In 1997, he had directed anotherVP at Tyson, Dr. Brister, to develop two nutrientprofiles for use in formulating Tyson’s poultryfeed. Dr. Brister did so, and the two profiles wereincorporated into a single document termed the“nutrient profile.” When Purtle left Tyson in1999, he joined a competitor, ConAgra and gave

440 ARK. CODE ANN. § 4-75-602 et seq. (Michie 1996).441 RESTATEMENT (FIRST) OF TORTS § 757 cmt. b

(1939).442 Saforo & Assoc. Inc. v. Porocel Corp., 337 Ark. 553, 991

S.W.2d 117 (Ark. 1999).

ConAgra Tyson’s nutrient profile. Tyson thencommenced trade secret litigation againstConAgra alleging that it had “raided” four toplevel executives, including Purtle. Tyson prayedfor an injunction prohibiting the “inevitable”disclosure of trade secret information, but the caseagainst Purtle was severed because he had alreadydisclosed the nutrient profile to ConAgra. Thecase involving the other three went to trial. Thetrial court found that certain pricing and marketinginformation constituted trade secret informationand enjoined the three former Tyson executivesfrom disclosing those trade secrets for one year.On appeal, in Tyson I, the Arkansas SupremeCourt reversed finding that Tyson had not takenreasonable measures to protect its trade secrets,specifically pointing to the absence of any post-employment confidentiality agreement. Here,though, in Tyson II, the Arkansas Supreme Courtstrenuously denied it had imposed a requirementfor such post-employment confidentialityagreements in Tyson I.

Meanwhile, Purtle’s case was tried andresulted in a finding of trade secretmisappropriation. The jury returned a verdictagainst ConAgra of over $20 million. Shortlythereafter, however, Tyson I came down, and thetrial court granted ConAgra JNOV concluding thatTyson I “appears to require a written contractprohibiting postemployment disclosure ofinformation and upon no other grounds.” Onappeal, the Arkansas Supreme Court affirmed, buton different grounds.

With respect to Tyson I, the court stressedthat it had not reached its conclusion solely due toa lack of a post-employment agreement (althoughit seems clear that was the clear import of theTyson I opinion). Rather, according to the court,“[t]hat was simply one measure to which wereferred that could be taken by the company toassure trade-secret protection

postemployment.”443

As noted in Tyson I, Tyson had adopted a“Corporate Code” in the mid-to-late 1990s as aresult of a special prosecutor’s investigation intothe affairs of Michael Espy and Tyson. The Code,

443 349 Ark. at 477.

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inter alia, provided that Tyson’s employees wererequired to safeguard Tyson’s confidentialbusiness and technical information. Additionally,Purtle admitted that he considered the nutrientprofile to be confidential and that he had instructedothers that it was. There was also testimony thatonly five people at Tyson had a hard copy of theprofile. ConAgra, on the other hand, pointed totestimony that hundreds of Tyson’s managers inthe field were given copies of the profile withoutany admonition of confidentiality.

Over a strenuous dissent, the ArkansasSupreme Court concluded that Tyson had nottaken reasonable steps to protect its nutrientprofile. The Corporate Code, according to thecourt, “hardly qualifies as an agreement betweenTyson and Purtle not to disclose the nutrientprofile,” and pointed to testimony by a formerpresident of Tyson and current member of itsboard that the standard in the industry was todepend on the honesty and integrity of employeesas evidence that there were no other measurestaken to protect the nutrient profile. The court alsonoted that items such as the nutrient profile werenot listed in the Corporate Code, and Tyson hadnot conducted an exit interview with Purtle.

Tyson, of course, concentrated on Purtle’sadmission that he knew the profile wasconfidential. According to the court, however,“[a]bsent clear corporate action to protect thenutrient profile as a trade secret, a subjective beliefof an individual employee that the information isconfidential or even had value seems largely

irrelevant in our analysis.”444

The criticisms are, of course, abundant.As in Tyson I, the court nowhere addresses thecommon law duty obliging former employees topreserve a former employer’s confidential and/ortrade secret information. Although writtenagreements might be preferable, Tyson’s choice,apparently, to rely on an employee’s common lawduties, which are roughly equivalent to whatcourts consider to be reasonable in the case ofwritten restrictions, was not prima facieunreasonable. That the Corporate Code did notspecifically list the nutrient profile is not

444 349 Ark. at 483.

surprising; such “codes” are general statements.Here, though, the Code specifically advisedemployees of their obligation to protect Tyson’sinformation, and Purtle admitted that the profilewas subject to that obligation. Secondly, manyemployees leave companies without exitinterviews – that does not mean that suchemployees are released from their common lawobligations. In short, although Tyson could,perhaps, have taken additional steps to protect thenutrient profile, and the record as a whole mayjustify the result, the court’s stated reasons forfinding that Tyson had not adequately protectedthe nutrient profile are simply insufficient tojustify the result.

4. Indiana Law: Reliance on IndustryCustom Is Not Sufficient to MeetObligation of Taking ReasonablePrecautions to Protect Trade Secret:Internal Measures Do Not NecessarilyProtect Against Suppliers and Vendors

Zemco Mfg., Inc. v. Navistar Int’l TransportationCorp., 759 N.E.2d 239 (Ind. App. 2001)

Indiana adopted its version of the UTSA

in 1982.445 The Indiana courts have held that aprotectable trade secret has four generalcharacteristics: (1) information; (2) derivingindependent economic value; (3) not generallyknown, or readily ascertainable by proper meansby others who can obtain economic value from itsdisclosure or use; and (4) the subject of efforts,reasonable under the circumstances to maintain its

secrecy.446

Zemco manufactured machined parts forthe truck and automotive industry. Navistar wasone of its customers. The principal part thatZemco manufactured for Navistar was a “springshackle” which attached suspension springs totruck frames. Zemco had developed amanufacturing process for such shackles thatallowed it to produce the parts to precise

445 IND. CODE § 24-2-3-1 et seq.446 Burk v. Heritage Food Serv. Equip., Inc., 737 N.E.2d 803,

813 (Ind. App. 2000).




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specifications at a low cost. Zemco had developedspecial drilling machines that it used in producingthose parts.

Zemco was owned by two equalshareholders, Pecoraro and Zemen. In 1995,Pecoraro sold his interest to Zemen under anagreement that allowed Pecoraro to immediatelybegin a competing business using the sametechnology under a license that was nottransferable without Zemco’s consent. Pecorarostarted PMI, using drilling machines thatapparently were the same as those at Zemco, andbecame Navistar’s primary supplier of springshackles. PMI, however, began to have financialdifficulties, and Navistar approached TrayerProducts, which produced other products forNavistar, with a request for a quote. In 1998,Navistar told PMI that it was going to transition itsshackle business to Trayer. Pecoraro then toldNavistar that he wanted to sell PMI. At Navistar’surging, Trayer purchased PMI’s drilling machines.

Zemco then filed suit alleging, inter alia,trade secret misappropriation. The trial courtgranted summary judgment to all defendants. Onappeal, the Indiana Court of Appeals affirmed.

On the trade secret issue, the courtconcluded that there were no Indiana cases thatdirectly discussed “reasonable efforts to maintainsecrecy.” Accordingly, the court looked to otherjurisdictions and focused specifically on theSouthern District of Indiana’s opinion in Flotec,

Inc. v. Southern Research, Inc.447 In evaluatingZemco’s efforts to maintain its proprietaryinformation, the court noted that Zemco’smachines were located on the third floor of itsbuilding, and there were signs prohibiting accessby unauthorized individuals. Employeehandbooks advised that no equipment or printswere to leave the building, and signs posted by thetime clocks advised employees that no informationregarding the machines should leave the facility.There was also evidence that it was customary inthe industry that customers and vendors whoreceived confidential information would maintainits confidentiality.

447 16 F. Supp.2d 992 (S.D. Ind. 2000).

On the other hand, the court noted thatZemco had no confidentiality agreements with itsemployees or customers that toured the building.Navistar employees, for example, were not askedto sign confidentiality agreements. Trayeremployees also toured the building and were notasked to sign confidentiality agreements.According to the court, the “secret” to makingshackles efficiently was evident from viewing themachines themselves. In response to Zemco’scontention that the “custom in the industry” was tomaintain information confidentiality, the courtresponded that “Flotec demonstrates that isinsufficient.”

The court concluded that “[a]lthoughZemco took some measures within its owncompany and with its own employees to protectthe information contained in its shackle machines,it did very little, if anything at all, to protect theinformation from outside sources. Under thesecircumstances, the trial court could have found asa matter of law that Zemco had not takenreasonable steps to maintain the secrecy of itsproprietary information, and therefore theinformation did not constitute a trade secret

* * *.”448

Although the court’s ultimate conclusionmay have been correct, the court is likely givingfar too much weight to Flotec. In Flotec, therewere few if any measures taken to preserveconfidentiality. Nevertheless, the case illustratesthe increasing importance courts are placing onwritten confidentiality agreements.

5. Iowa Law: “Not Doing Much” Internallyto Protect Trade Secrets May Neverthelessbe Sufficient if Company is Small andTrade Secrets Are Not Disclosed toCompetitors

Business Designs, Inc. v. MidNational Graphics,L.L.C., 2000 Iowa App. LEXIS 524 (Ia. 2002)

Iowa adopted its version of the UTSA in

1990.449 Iowa has also taken a broad view of the

448 759 N.E.2d at 250.449 IOWA CODE ANN. §§ 550.1-550.8 (West 1994).



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types of information that may constitute a tradesecret: “There is virtually no category ofinformation that cannot, as long as the informationis protected from disclosure to the public,

constitute a trade secret.”450 The Iowa courtsrequire “some showing” that the trade secretowner took reasonable efforts to protect the trade

secret.451 In determining whether informationhas independent economic value, the Iowa courtslook to whether the information protects the

owner’s competitive edge or advantage.452

BDI was in the business of using digitalthermal resin transfer imaging, and specifically inproducing signs and decals for advertising carwashes. The owner of BDI spent five monthsexperimenting with various materials in order toproduce a product that held up in outdoorconditions. Shaver and Raymond were hired asthe only employees. They, plus the owner,comprised the company. Shaver and Raymond,however, left and joined MidNational, acompeting company founded by another formerBDI employee. Within one week, MidNationalwas able to ship full sign packages to formercustomers of BDI, and began taking BDI’sbusiness with slightly lower prices. According tothe testimony, BDI and MidNational had fewcompetitors that could produce similar highquality products. BDI sued alleging conversionand trade secret misappropriation. On BDI’smotion, the trial court issued an injunctionprohibiting MidNational and the individualdefendants from doing any business with sixformer BDI customers. On appeal, over a dissent,the Iowa Court of Appeals affirmed.

The court concluded that the process ofdesigning, producing and marketing the car washsigns fell within the scope of permissible tradesecret subject matter, and that it was clear that

450 U.S. West Communications, Inc. v. Office of ConsumerAdvocate, 498 N.W.2d 711, 714 (Iowa 1993). See also,Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751,776 (Iowa 1999).

451 205 Corp. v. Brandow, 517 N.W.2d 548, 550 (Iowa1994).

452 Olson v. Nieman’s Ltd., 579 N.W.2d 299, 314 (Iowa1998).

BDI’s information gave BDI a competitiveadvantage. As for the efforts undertaken to protectthe information, the court acknowledged that “BDIdid not do much internally to underscore to Shaverand Raymond that they should not reveal its tradesecrets to competitors.” However, the court notedthat BDI was a small company, and the ownertestified that in order to maintain a congenialoffice atmosphere, he did not require written non-compete agreements. Additionally, the courtnoted that BDI had not disclosed the informationto competitors. Accordingly, the court affirmedgranting of the injunction, modified to permitMidNational to do business with the subject sixcompanies if MidNational developed a newprocess.

6. Vermont Law: Failure to TakeReasonable Precautions Results in Loss ofTrade Secret in Optical Interference FilmTechnology: One May Not Rely on anEmployer-Employee Relationship Aloneto Satisfy Trade Secret Owner’sObligation

Omega Optical, Inc. v. Chroma Technology Corp.,800 A.2d 1064 (Vt. 2002)

Although this case arose prior toVermont’s adoption of a version of the UTSA in

1996,453 the court concluded that the VUTSAand the RESTATEMENT (THIRD) OF UNFAIR

COMPETITION nevertheless provided guidance.

Omega developed and produced certainthin-film optical interference filters used influorescence microscopy. A number of Omegaemployees left the company and started Chromamaking the same type of filters. Omega broughtsuit for, inter alia, trade secret misappropriation.Following a bench trial, the trial court found forthe defendants on all issues, including that Omegahad not taken proper steps to protect theconfidentiality of its technology. On appeal, theVermont Supreme Court affirmed.

The court pointed to testimony that(1) Omega had no policy of confidentiality,

453 9 VER. STAT. ANN. §§ 4601-4609.





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(2) just before the defendants left to form Chroma,Omega recognized a need to create guidelines fordistinguishing between confidential and non-confidential information, (3) there was littleawareness among employees as to what Omegaconsidered to be proprietary, (4) Omega’s recordwas sloppy, and in some cases nonexistent,(5) technical information was not kept in anorganized or controlled manner, and (6) whatsecurity measures Omega had in place, such assigning out keys, were not enforced or evenmonitored.

Omega argued that its employees owed ita duty of confidentiality simply because of theirstatus as employees and regardless of whether theemployer had done anything either to protect theinformation or to communicate to the employeesthe confidential and proprietary nature of theinformation. The court responded that such“argument is simply at odds with the case law,which required something more than the mereemployer-employee relationship to establish aduty of confidentiality.”

C. Term Limitations1. Fed. Cir: California Law: Term

Limitations in Non-DisclosureAgreements Limit Non-DisclosureObligations

Marketel Int’l, Inc. v. Priceline.com, Inc., 2002WL 732141 (Fed. Cir. 2002)(non-precedential)

Because this is a non-precedential opinion,the facts are not fully set out. It appears, though,that Marketel was asserting that Priceline.com hadmisappropriated certain trade secret information.It also appears that a four-year non-disclosureagreement had been signed in 1987 that expired in1991. The alleged misappropriation took place in1996. The relationship was evidently governed byCalifornia law. According to the Federal Circuit,“[b]ecause California has not had occasion todiscuss the relationship between non-disclosureagreements and implied duties of confidentiality,we look to the Ninth Circuit for guidance,” citing

the holding in Union Pac. R.R. Co. v. Mower,454

454 219 F.3d 1069, 1076 (9th Cir. 2000).

that “a written non-disclosure agreement supplantsany implied duty of confidentiality that may haveexisted between the parties.” Although UnionPacific so held, the Ninth Circuit was applyingOregon law rather than California law.

In Union Pacific, the Ninth Circuitacknowledged that “Oregon law imposed on everyemployee a legal duty to protect an employer’strade secrets and other confidential information, anobligation that continues beyond the term of

employment.”455 The court further, however,found that “Oregon also generally permits partiesto alter by negotiations duties that would

otherwise be governed by state law.”456 TheNinth Circuit concluded that “under Oregon law,parties have the power to alter the implied duty ofconfidentiality. The existence of an expressagreement is relevant both in determining whethera particular employee is bound by a duty ofconfidentiality and in defining the scope of that

duty.”457 The court found that a ResignationAgreement by a former employee clearlyaddressed the issue of confidential informationthat the employee was privy to, and with equalclarity expired on December 31, 1995. Accordingto the Ninth Circuit, the “unambiguous meaning ofthe Resignation Agreement was that, after thatdate, [the former employee’s] obligation toconduct his affairs in accordance with thatagreement terminated and he would no longer be

subject to its nondisclosure requirements.”458

Thus, in Marketel, the same rationale mayhave been applicable, but the Federal Circuitclearly applied the wrong law.

455 219 F.3d at 1073.456 Id.457 Id. at 1074.458 Id.



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2. Texas Law: Termination of ExclusiveLicense to Manufacture Certain FishHooks Does Not Require Cessation ofManufacturing in Absence of a TradeSecret or Patent

Hollomon v. O. Mustad & Sons (USA), Inc., 196 F.Supp.2d 450 (E.D. Tex. 2002)

Michael Hollomon designed and producedfish hooks out of his store in Hemphill, Texas.Mustad learned of one of his designs in 1992 andthe parties subsequently entered into an agreementunder which Mustad would pay Hollomon aroyalty of five percent of Mustad’s sales for theexclusive right to produce and market Hollomon’shook. At Mustad’s urging, Hollomon also filed apatent application on that hook design. Theagreement contained no confidentiality provisions,and no term: either party could terminate on givingsix months notice.

Hollomon later submitted severaladditional hook designs to Mustad, and Mustadagreed to pay the five percent royalty on those aswell. Although the opinion is unclear, apparentlyHollomon sought patent protection on at leastsome of those additional hook designs as well.

In 1994, the parties amended theiragreement to add a five year term, and providedthat new designs would be submitted to a patentattorney for review to determine patentability.The 1994 agreement likewise did not contain anyconfidentiality provisions.

In 1997, Hollomon terminated the ’93 and’94 agreements, and in his termination letter setout the dates on which he believed each licenseperiod would end. Mustad continued to payroyalties on each hook until the date stated in thatletter. At that time, none of Hollomon’s patentapplications had issued as a patent. Also, othermanufacturers had made and sold hooks similar totwo of Hollomon’s hooks, and Hollomonconceded that other manufacturers could easilycopy the hooks in “about twenty minutes.”Mustad, following termination, also continued tomanufacture and sell the hooks that werepreviously covered by the license agreement.

Hollomon subsequently filed suit alleging,inter alia, breach of contact and trade secretmisappropriation. The court granted Mustadsummary judgment on all of Hollomon’s claimsexcept for a trademark infringement claim. On thebreach of contract claim, the district courtreasoned that upon termination or completion ofthe ’93 and ’94 agreements, it lost the exclusiveright to manufacture and sell Hollomon’s hooks,but that nothing in the agreements precludedMustad from continuing to manufacture and sellthe hooks (and pay Hollomon nothing) unless anduntil Hollomon actually secured patent protection.With respect to the trade secret claim, the courtfound that no confidential relationship existedbetween the parties, i.e., there was no summaryjudgment evidence that Mustad was required tokeep the hook designs confidential, and Hollomontestified that he was under no obligation to keepthe designs confidential.

D. Publication of Patent Application1. Federal Circuit: North Carolina Law:

Unauthorized Publication of Another’sTrade Secret in a Published PatentApplication Does Not Destroy TradeSecret Protection

Rhone-Poulenc Agro, S.A. v. DeKalb GeneticsCorp., 272 F.3d 1335 (Fed. Cir. 2001)

Rhone-Poulenc involved a number ofissues, one of which was Rhone-Poulenc’s (nowAventis CropScience, SA) (“RPA”) assertion thatit was fraudulently induced to enter into alicensing agreement with DeKalb relating tocertain genetically engineered corn that wastolerate to herbicides. That technology resulted inDeKalb’s ROUNDUP READY® corn thatpermitted a farmer to douse a field with herbicideto kill weeds while allowing the resistant corn tosurvive. RPA also charged DeKalb withmisappropriation of trade secrets.

Inside a plant, the herbicide glyphosatebinds to a specific enzyme in a plant chloroplastcalled EPSPS which cannot then perform itsnormal critical function in the biosynthesis ofaromatic acids, and the plant dies. Calgene, Inc.(not a party to this litigation) owned two patentscovering a gene, C-aroA or CT-7, which, whenexpressed in transgenic plants, encodes the





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bacterial EPSPS enzyme thus satisfying thearomatic amino acid needs of the plant in thepresence of glyphosate. In 1985, DeKalb andCalgene entered into an agreement for the jointdevelopment of crops containing the CT-7 gene.That agreement gave DeKalb an exclusive licensein the field of use of corn. In 1991, RPA, DeKalband Calgene entered into an agreement underwhich RPA assumed Calgene’s rights andobligations under the 1985 agreement.

DeKalb and RPA were also involved in abroader collaboration to produce glyphosate-resistant corn. RPA performed the initial geneticwork by creating “genetic constructs” and DeKalb“transformed” corn cells by introducing such“constructs” into corn cells, growing full cornplants from such cells in a greenhouse, andperforming field tests on corn plants grown fromseeds from the greenhouse plants.

In 1992, a representative of RPA told hiscounterpart at DeKalb that RPA would provideDeKalb with new genetic material containing amutated EPSPS gene from maize/corn rather thanthe CT-7 gene. RPA then combined an“optimized transit peptide” (OTP) with a mutatedmaize EPSPS gene (“DMMG”). The new“construct” was designed “RD-125.” RPAtransferred the RD-125 construct to DeKalb in1993. In late 1993 and early ’94, DeKalb wassuccessful in growing herbicide resistant cornplants in its greenhouse, and notified RPA of thoseresults. DeKalb also noted that it would beginfield tests during the summer of 1994, which werenecessary to determine whether the resistant genewould be passed on to the next generate of plant.Those field tests were conducted in Hawaii andwere successful. However, DeKalb did not informRPA that those tests were successful, but simplyinformed RPA that those tests were“encouraging,” and asked whether DeKalb coulduse the gene in soybeans. When asked in adeposition why he did not inform RPA that thosetests were successful, DeKalb’s representative saidit would have required him to write a longer letter.DeKalb’s representative, Dr. Flick, did not appearat trial, and testified only through his videodeposition. The district court noted that Dr.Flick’s manner during the deposition “mostreasonably could have been interpreted asindicative of deception.”

Following the field tests, DeKalb began“backcrossing” the successful corn plantscontaining RD-125 with commercial cornvarieties. Such backcrossing, which can takeseveral years, was necessary to ensure that a traitsuch as glyphosate tolerance was incorporated intoa plant genome.

In 1994, Calgene and RPA filed a patentinfringement action against Monsanto Co., nowPharmacia Corp. (also a party to thislitigation), alleging infringement of Calgene’spatents covering the CT-7 gene. Two agreementswere negotiated in settlement of that litigation. Ina first agreement, Monsanto paid several milliondollars for a co-license, shared with DeKalb, forCalgene’s patents in all fields. In a secondagreement, (“the 1994 Agreement”) DeKalbagreed to share its exclusive license underCalgene’s patents for a share of the settlementproceeds and receipt, from RPA, of a “world-wide,paid-up right to use” various technologies in thefield of corn, including the RD-125 construct.That agreement also gave DeKalb the right togrant sublicenses. At the time that agreement wasprepared, DeKalb’s lawyer was aware of thesuccessful Hawaii field trials. That lawyer’s notesregarding the preparation of that agreement werealso destroyed contrary to DeKalb’s documentretention policies.

Ultimately, DeKalb developed itsROUNDUP READY® corn, referred to as the“GA21 corn line,” and, in 1996, licensed theGA21 corn line to Monsanto. ROUNDUP® is aglyphosate herbicide manufactured by Monsanto.Sales of such corn began in 1998.

RPA subsequently sued DeKalb assertingthat by not providing RPA with the results of the1994 Hawaii field tests, DeKalb fraudulentlyinduced RPA to enter into the 1994 Agreementgiving DeKalb paid-up rights to the RD-125technology. RPA also asserted that the RD-125technology was a trade secret that DeKalb hadmisappropriated, and sued DeKalb forinfringement of claim 11 of its patent covering theOTP that was part of the RD-125 technology. OnDeKalb’s motion, the district court bifurcated thetrial into two different jury trials. The firstcovered the fraud and licensing issues. Thesecond covered the trade secret and patent issues.


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In the first trial, the jury found thatDeKalb had fraudulently induced RPA to enterinto the 1994 Agreement by not disclosing theHawaii field trials, and awarded DeKalb, interalia, $15 million for unjust enrichment, and $50million in punitive damages. The district courtfurther ordered rescission of the agreement. In thesecond trial, the jury found that RD-125 was atrade secret from April 1996 until February 1997,and that DeKalb had misappropriated it, that claim11 of Calgene’s patent was not obvious, and thatthe asserted patent had not been procured throughinequitable conduct. The jury declined to grantpunitive damages against DeKalb on themisappropriation claim, and the parties enteredinto a stipulated agreement regarding damages.On appeal, the Federal Circuit affirmed.

On the misappropriation claim, the juryfound that RD-125 ceased to be a trade secretwhen published in RPA’s patent application underthe Patent Cooperation Treaty (PCT) in February1997. The jury failed to find, however, thatDeKalb’s PCT application published in May 1995,constituted a similar disclosure of the RD-125trade secret.

DeKalb urged that the district court haderred in (1) excluding evidence related to theteachings of DeKalb’s PCT application, and(2) failing to find a judicial admission that thetrade secret was disclosed. According to theFederal Circuit, though, “a broader rule of law

renders these issues moot.”459

The court acknowledged that “[t]ypically,the publication of a patent terminates all trade

secret rights.”460 However, here DeKalb did nothave RPA’s permission to include RD-125 in itsMay 1995 PCT application. According to thecourt, the consequence is that “whateverdisclosure DeKalb made of the RD-125technology in its PCT application constituted a

wrongful use.”461 The Federal Circuit, reachingback a number of years to a Seventh Circuit

459 272 F.3d at 1359.460 Id. See also Group One, Ltd. v. Hallmark Cards, Inc., 254

F.3d 1041, 59 USPQ2d 1121 (Fed. Cir. 2001) .461 Id.

decision, concluded broadly that “[c]ourts havecarved out an exception to the general rule thatpublication terminates all trade secret rights incases where the wrong-doer is the one who has

published the trade secret,”462 citing Syntex

Ophthalmics, Inc. v. Tsuetaki,463 which in turncites Shellmar Prods. Co. v. Allen-Qualley

Co.,464 for the proposition that “a wrongdoer whohas made an unlawful disclosure of another’s tradesecrets cannot assert that publication to escape the

protection of trade secret law.”465 Relying ontwo district court cases from the Eastern District ofNorth Carolina and the Eastern District ofWisconsin, respectively, a 1953 Seventh Circuitdecision and a 1963 Ninth Circuit decision, noneof which directly support the propositions for

which they were cited,466 the Federal Circuitconcluded that “if there is a wrongful use ordisclosure prior to the issuance of the patent, thewrongdoer will not be absolved from liability for

his wrong committed during that prior period.”467

There are a number of problems with theFederal Circuit’s conclusion. First, the parties, thedistrict court and the Federal Circuit all agreed that

462 Id.463 701 F.2d 677, 683 (7th Cir. 1983).464 87 F.2d 104 (7th Cir. 1937), cert. denied, 301 U.S. 695

(1937).465 272 F.3d at 1359.466 For example, in Glaxo, Inc. v. Novopharm, Ltd., 931 F.

Supp. 1280, 1300-02 (E.D.N.C. 1996), aff’d, 110 F.3d1562 (Fed. Cir. 1997), Novopharm was relying oncertain information disclosed in trial transcripts andexhibits. Glaxo argued that Novopharm should notbe able to do so because it had precipitated thedisclosure by infringing Glaxo’s patents. In response,the district court noted that “[w]hile it is true thatparties responsible for the dissemination of another’strade secret may not benefit from the disclosure,responsibility for dissemination of Glaxo’s‘confidential’ information must fall on Glaxo. [TheNorth Carolina statute] adopting the language of theUniform Trade Secrets Act * * * places upon tradesecret owners an affirmative duty to take reasonablemeasures to maintain the information’s secrecy as adefinitional element of the property right.”

467 272 F.3d at 1359.











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the misappropriation issue was governed by NorthCarolina law. North Carolina adopted its version

of the UTSA in 1981.468 The UTSA follows therule of Conmar Prods. Corp. v. Universal Slide

Fastener Co.469 (rather than Shellmar) thatmonetary relief, like injunctive relief, is onlyappropriate for the period of time in which thesubject matter qualifies as a trade secret (namely,during the time that it is secret) plus any additionaltime necessary to preclude the misappropriatorfrom benefiting from a “head start.” Secondly,citation to pre-1988 Seventh Circuit decisionsapplying Illinois law is inapposite because Illinoisdid not adopt its version of the UTSA until 1988.

The Federal Circuit’s conclusion is thus atbest questionable, and is likely flat wrong. Furthertrade secret protection was likely destroyed bypublication of DeKalb’s PCT application in 1995,but RPC could, of course, obtain damages as aresult.

E. Novelty – Misappropriation of Idea CasesDistinguished From Trade Secret Cases

1. New Jersey Law: (a) Misappropriation ofIdea Cases Distinguished FromMisappropriation of Trade Secret Cases(b) Under New Jersey Law, Novelty(Perhaps in Each Component Part) isRequired in Misappropriation of IdeaCases Where There is No Post-DisclosureContract(c) “Novel to Disclosee” Not ApplicableWhere Idea is So Lacking in Novelty thatKnowledge Can Be Imputed to Disclosee(d) Novelty is Decided by the Court as aMatter of Law(e) The Definition of a Trade Secret DoesNot Include a Marketing Concept or NewProduct Idea

Johnson v. Benjamin Moore & Co., 347 N.J.Super. 71, 788 A.2d 906 (N.J. Super. Ct. App.Div. 2001)

468 N.C. GEN STAT. §§ 66-152 et seq.469 172 F.2d 150 (2d Cir. 1949).

New Jersey has not adopted the UTSA,and follows the RESTATEMENT (FIRST) OF TORTS

§ 757 (1939) in trade secret actions.

In 1995, Johnson met with BenjaminMoore’s (BM’s) merchandising and graphicdesign manager, Bishop, to discuss painting amountain scene. Approximately a month later,Johnson called Bishop to tell him that he had anew idea, and the parties later met. Johnsonsigned what appears to have been a typicalsubmission agreement (i.e., not a non-disclosure orconfidentiality agreement) saying generally thatBM would pay Johnson reasonable compensationif BM chose to use the idea. The idea was called“Mural in a Can,” and basically provided a paint-by-numbers design. Ultimately, BM did notaccept Johnson’s idea.

Meanwhile, another BM employee, EllenSinger, was working on creating a Crayola Paintsproject that included selected paints for creatingimages for children. Singer testified that she hadnot heard of Johnson or the Mural in a Can ideauntil her deposition. There was, apparently, noevidence linking anyone involved in the CrayolaPaints project to Johnson’s idea. Nevertheless,Johnson filed suit, and the trial court granted thedefendants summary judgment. On appeal, theAppellate Division affirmed.

There were a number of points raised onappeal. One point, raised in several contexts, wasthat novelty was not a requirement for provingmisappropriation of an idea. The court disagreed.

As noted above, New Jersey has notadopted the UTSA, and generally follows the

RESTATEMENT (FIRST) OF TORTS.470

Accordingly, New Jersey courts have held thatNew Jersey trade secret law does not require

patent law-type novelty.471 However, here in

470 See e.g., Chernow v. Reyes, 239 N.J. Super. 201, 570 A.2d1282 (N.J. Super. Ct. App. Div. 1990), certif. denied, 122N.J. 184, 584 A.2d 245 (1990).

471 Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 636-37, 542A.2d 879 (1988), quoting Restatement (First) of Torts§ 757 cmt. b (1939). See also, Rycoline Prods., Inc. v.Walsh, 334 N.J. Super. 62, 75-76, 756 A.2d 1047 (N.J.Super. Ct. App. Div. 2000), certif. denied, 165 N.J. 678,

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Johnson, the court held, apparently as a matter offirst appellate impression in New Jersey, that“[m]isappropriation of ideas is a separate area of

law from both patent law and trade secret law,”472

and adopted the law division’s (trial

court’s) holding in Flemming v. Ronson Corp.,473

that “our courts have embraced the principle that ashowing of novelty or originality is essential in aclaim for wrongful use or appropriation of anidea.” Under Flemming, “[a] plaintiff is requiredto establish as a prerequisite for relief that (1) theidea was novel; (2) it was made in confidence; and

(3) it was adopted and made use of.”474

Similarities between the submission and theultimate product may justify a factual inference of

copying.475

The court noted that the New York courts,as explained in Apfel v. Prudential-Bache Sec.

Inc.,476 also require novelty (“at least novelty asto the buyer) in idea submission cases where therehas been pre-disclosure contract, but no post-disclosure contract. The rationale is that wherethere is a post-disclosure agreement, there is noquestion that the idea had at least some value tothe recipient. Thus novelty is not required.However, where there is no post-disclosureagreement, novelty at least to the buyer is requiredto establish the value of the consideration, i.e., thedisclosure, necessary for a contract based claim.

The novelty required, though, is less thanthat required for a patent under 35 U.S.C. § 102.The court in Johnson, quoting with approval theSecond Circuit’s decision in Softel, Inc. v. Dragon

762 A.2d 659 (2000)(“only a very minimal noveltyrequirement is imposed for a trade secret.”).

472 347 N.J. Super. at 97, 788 A.2d at 923.473 107 N.J. Super. 311, 315, 258 A.2d 153 (Law Div.

1969), aff’d o.b., 114 N.J. Super. 221, 275 A.2d 759(App. Div. 1971).

474 Flemming, 107 N.J. Super. at 317.475 Id..476 81 N.Y.2d 470, 616 N.E.2d 1095, 600 N.Y.S.2d 433

(N.Y. 1993).

Med. and Scientific Communications, Inc.,477

explained that “[t]his quotation (especially thecomment ‘at least as to the buyer’) illustrates thatthe term ‘novelty’ is used in this line of cases in avery different, and much weaker, sense than it isused in patent law.”

Johnson urged, however, that the samephrase “as least as to the buyer” had applicationhere because BM did not have a previous programsuch as Crayola Paints, and that he did not have toestablish novelty for other than BM. The courtdisagreed, again adopting New York law.

In Nadel v. Play by Play Toys & Novelties,

Inc.,478 the Second Circuit observed that: “Insome cases an idea may be so unoriginal orlacking in novelty that its obviousness bespeakswidespread and public knowledge of the idea, andsuch knowledge is therefore imputed to thebuyer.” According to the court, “[i]n such cases, acourt may conclude, as a matter of law, that theidea lacks both the originality necessary to supporta misappropriation claim and the novelty to the

buyer necessary to support a contract claim.”479

The court in Johnson expressly adopted thatstandard: “[W]e adopt that standard. Plainitiff’sideas may be viewed as so unoriginal that, as amatter of law, they were not novel as to the

defendant.”480

Johnson also asserted that his idea hadnovelty in the overall combination, relying ontrade secret cases. The court rejected thatargument noting that “there is no discussion inthese cases that the submission of an idea may benovel in a submission-of-idea case when itincludes a combination of elements that are not

477 118 F.3d 955, 969 (2d Cir. 1997), cert. denied, 523 U.S.1020 (1998).

478 208 F.3d 368, 378-79 (2d Cir. 2000).479 See, Khreativity Unlimited v. Mattel, Inc., 101 F. Supp.2d

177, 185 (S.D.N.Y.), aff’d, 242 F.3d 366 (2d Cir. 2000),cert. denied, 121 S. Ct. 57 (2001).

480 347 N.J. Super. at 92, 788 A.2d at 919.












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novel, and we have found no reported case in any

jurisdiction with such a discussion.”481

The court also rejected Johnson’sargument that novelty should be treated as aquestion of fact. Rather, acknowledging that therewas no New Jersey case directly on point other

than Duffy v. Charles Schwab & Co.,482 wherethe court forecast that “the New Jersey SupremeCourt would determine that although some of thefactors relevant to a determination of novelty maybe factual, the ultimate determination of whetheran idea is novel is a question of law for the court.”The court in Johnson said: “We agree withDuffy’s analysis * * *.”

Lastly, the court concluded that Johnsoncould not rely on trade secret misappropriation,because, in the court’s view, “the definition oftrade secret [in the Restatement (First) of Torts§ 757 cmt. b (1939)] does not include a marketingconcept or a new product idea.”

F. Potential Trade Secret Subject Matter1. Arkansas Law: Rule That A Trade Secret

May Reside in Compilation ofInformation Does Not Save Trade Secret:Method for Executing Bulk CreditTransactions Held Readily Ascertainableand Not a Trade Secret

Wal-Mart Stores, Inc. v. P.O. Market, Inc., 347Ark. 651, 66 S.W.2d 620 (Ark. 2002)

Arkansas adopted a version of the UTSA

in 1988.483

Prior to November 1993, Sam’s Club didnot have a system that allowed purchasers of largequantities of good to finance those purchases:Sam’s Club operated on a “cash and carry” basis.In 1992, Joe O’Banion, one of the principals ofP.O. Market, became acquainted with the managerof the Sam’s Club store in Little Rock, MikeHampson. O’Banion later contacted Hampson

481 Id.482 123 F. Supp.2d 802, 808 (D.N.J. 2000).483 ARK. CODE ANN. § 4-75-602 et seq. (Michie 1996).

with an idea for executing bulk credit transactions,and Hampson put O’Banion in contact with aSam’s Club executive, Sharon Austin. During theFall of ’92 and early part of ’93, there were anumber of meetings between Austin (and othersfrom Sam’s Club) and O’Banion. During thosemeetings, O’Banion advised that the system hewas proposing was confidential. Eventually,O’Banion prepared an agreement between theparties, and on several occasions Austin told himthat the agreement was about to be signed.However, it never was, and Austin eventuallystopped returning O’Banion’s calls. O’Baniongave up hope of obtaining an agreement, andreturned to his factoring business.

In November 1993, however, O’Banionbecame aware of an article in the Wall StreetJournal and a later article in the Dallas MorningNews announcing a program at Sam’s Club thatallowed bulk purchasers to buy goods on credit.O’Banion tried to get in touch with Austin, butlearned that she had left Sam’s Club and now hada consulting business. Eventually he was able tocontact her by phone, and unknown to her, tapedthe phone calls. During the calls, Austin admittedthat the idea of the bulk credit purchasing systemwas O’Banion’s idea, that he had “made it easy forthem” to implement the program, that O’Banionhad educated Wal-Mart, that Wal-Mart had“stepped on” O’Banion, and that although shecould not be sure whether his idea had beenreviewed by senior executives, she had “run it by”the then CEO of Sam’s Club.

In the subsequent action by P.O. Market,the jury awarded lost profits damages of $6.7million and damages for Wal-Mart’s unjustenrichment of $25 million. The trial court alsoawarded $5 million in attorneys’ fees. On appeal,however, the Arkansas Supreme Court reversed.

Although acknowledging that a tradesecret may exist in a collection of componentseven though each of the components individuallywas generally known, the court neverthelessconcluded (without citing any record support), that“[i]t is apparent to this court that any personreasonably well versed in the economics ofwholesaling and credit purchasing could have puttogether the O’Banion concept. Indeed, theO’Banion concept was essentially wholesaling inthe sense that it contemplated buying goods in





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bulk at a favorable price and selling them at amarkup to pre-ordained customers. Even thoughwe look to the combination of the components andnot to the individual qualities, the O’Banionconcept was hardly unique. * * * In short, therewas nothing about this business plan that was notgenerally known in the industry or readily

ascertainable.”484

All of that may be true, but the court citedno evidence or testimony from the record thatwould support that conclusion. It appears from theopinion, that the court simply made up its ownmind on the issue, despite contrary testimony byO’Banion and others involved in developing andpresenting the system to Sam’s. The courtdiscredited that testimony as being from interestedindividuals (which is true), but never cited to anycontrary evidence from the record.

2. Arkansas Law: Information in EmployeeHandbook Containing Marketing andBusiness Plans, and CustomerInformation, Held Readily Ascertainableand Not a Trade Secret

City Slickers, Inc. v. Douglas, 73 Ark. App. 64, 40S.W.2d 805 (Ark. App. 2001)

Douglas began work on February 1, 2000,with City Slickers, which provided on-site oil-changes for rental-car companies and the like, as ageneral manager to develop the Arkansas region.Douglas signed a non-disclosure agreement, a“confirmation” of the same, and later a combinedconfidentiality and non-disclosure agreement.Douglas quit six weeks later on March 1, 2000saying that he was going to start his own fleet oil-changing business. City Slickers sued requestinginjunctive relief. The trial court refused findingthat City Slickers had not shown a likelihood ofprevailing on the merits. On appeal, the ArkansasCourt of Appeals affirmed.

City Slickers had conceded at trial thatcustomer and marketing information was readilyascertainable, and suspected that Douglas was notusing its pricing information because Douglas

484 347 Ark. at 672.

disagreed with it. Accordingly, the courtconcluded that the trial court was correct infinding that none of the documents that Douglashad access to contained trade secret information.As for the confidentiality and non-disclosureagreement, the trial court construed the obligationto preserve confidential and proprietaryinformation for five years as an “overly broadcovenant not to compete masquerading as aconfidentiality and nondisclosure agreement.”Over a dissent, the Court of Appeals agreed,pointing to testimony by the president of CitySlickers that the agreement would have preventedDouglas from working in the oil-changingbusiness for five years. In actuality, theagreements simply prevented Douglas from usingconfidential or proprietary information. Thecourt’s earlier ruling that the information givenDouglas did not contain such confidential orproprietary information essentially rendered thenon-disclosure covenants somewhat meaningless,i.e., even if enforced those covenants would nothave prevented Douglas from working in the oil-changing business.

3. Illinois Law: Various CustomerInformation Held Readily Ascertainableand Not a Trade Secret

Delta Medical Sys., Inc. v. Mid-America MedicalSys., Inc., 2002 Ill. App. LEXIS 460 (Ill. App.2002)

Illinois adopted the UTSA in 1988, and indoing so modified the Model Act by, inter alia,adding “or list of actual or potential customers, or

suppliers” to the definition of a trade secret.485

Illinois nevertheless continues to use the sixcommon law factors of the Restatement

(First)486 in evaluating whether a trade secret

exists.487

Delta sold and serviced various types ofmedical diagnostic equipment used in hospitals

485 765 Ill. Comp. Stat. Ann. [ILCS] § 1065/2(d).486 RESTATEMENT (FIRST) OF TORTS § 757 cmt. b

(1939).487 ILG Indus., Inc. v. Scott, 273 N.E.2d 393 (Ill. 1971).

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and clinics. An individual defendant, Ottum, hadworked for a company that Delta had acquired.After the acquisition, Ottum began working forDelta. At the time of the acquisition, Delta was adealer of mammography equipment manufacturedby Lorad. In February 2001, though, Deltaterminated its dealership agreement with Lorad,and became a dealer for Siemens. Delta wasaware at the time that another company wouldlikely assume the Lorad dealership. Shortlythereafter, Ottum began discussions with Loradabout a dealership, and incorporated Mid-America. When Lorad awarded the dealership toMid-America, Ottum resigned from Delta.Several Delta customers with Lorad equipmentterminated their relationship with Delta and begandoing business with Mid-America. Delta suedalleging trade secret misappropriation and seekingan injunction. The trial court found that certaincustomer and servicing information constitutedtrade secret information, and granted the requestedinjunction. On appeal, the Illinois Court ofAppeals reversed.

With respect to the list of Delta’scustomers, the court noted that Delta had notmaintained a “list” per se, but had simply prepareda list for the purposes of the litigation. The namesof the hospitals and medical clinics on that “list”could be easily located in the yellow pages.Additionally, Lorad furnished Mid-America with alist of its customers along with addresses, phonenumbers, medical specialization, equipment modelnumbers and so forth. Lorad also provided Mid-America with information concerning equipmentage which could then be used to price service. Inshort, the court concluded that the informationobtained as a result of working for Delta waseither readily ascertainable or general knowledgelearned as a result of that employment.

4. Iowa Law: Selection of Trade Shows andMagazines for Advertising Can Constitutea Trade Secret

Rocklin Mfg. Co. v. Tucker, 2001 Iowa App.LEXIS 774 (Iowa App. 2001)

Rocklin Mfg. (RMC) developed andmarketed two products, the Rocklinizer andMoldMender. The case concerned theMoldMender which was a “micro-welder” used to

repair plastic injection molds. Two employees,Tucker and Willer, began creating a new micro-welder while employed by RMC, and later formedMicroweld Technology, Inc. RMC sued andmoved for an injunction. The trial court issued aninjunction that enjoined the defendants from usingtrade publications and trade shows that RMC used,and ordered that the injunction would remain ineffect for ten years. On appeal, the injunction wasaffirmed.

The court concluded that the identity oftrade publications and trade shows that RMCcould use to its best advantage constituted a tradesecret, and that the ten year duration wasreasonable given testimony that it would takeRMC ten years to recoup its costs of development.

5. Colorado Law: (a) A Bid on a SingleProject May Constitute a Trade Secret(b) Smiling or Other Non-Verbal ConductWhen Confronted With Misappropriationis Admissible

Ovatoin Plumbing, Inc. v. Fulton, 33 P.3d 1221(Colo. App. 2001)

Colorado adopted a version of the UTSA

in 1986.488 Nevertheless, the Colorado courtscontinue to apply the six common law factors of

the First Restatement489 in determining whether a

protectible trade secret exists.490

Ovation was a plumbing subcontractor fora multi-family home developer. Fulton was anindependent contractor for Ovation. There wasevidence that Fulton had obtained Ovation’s bidon a particular project. Ovation terminated Fulton,and Fulton subsequently submitted a bid for aplumbing contract on an unrelated, but similar,multi-family home construction project. Fulton’sbid was accepted. Ovation filed suit alleging trade

488 COLO. REV. STAT. ANN. § 7-74-101 et seq. (West1996).

489 RESTATEMENT (FIRST) OF TORTS § 757 cmt. b(1939).

490 Porter Industries, Inc. v. Higgins, 680 P.2d 1339, 1341(Colo. App. 1984).




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secret misappropriation alleging that Fulton hadused Ovation’s earlier bid. Judgment was enteredagainst Fulton. On appeal, the Colorado Court ofAppeals affirmed.

Fulton argued on appeal that (1) bidpricing information, or (2) a bid that was not usedcontinuously in Ovation’s business, could notconstitute a trade secret. The court disagreed. Thecourt noted that the CUTSA definition of a tradesecret clearly encompassed “confidential businessor financial information,” and did not have anycontinuous use requirement. The court found thatbecause of the similarities in multi-family projects,the bid would be valuable in formulating a bid onother such projects.

Fulton also argued that there was noevidence that he obtained, or could have obtained,Ovation’s earlier bid. However, there wasevidence that the bid was on file in a job-sitetrailer, and that Fulton had a “friendly socialrelationship” with an employee for the project.Also, the court observed that when Fulton and thatemployee were accused of misappropriating thebid information, they did not deny it, but onlysmiled. The court noted that nonverbal conduct inresponse to an accusatory statement may showadoption of that statement and was admissible.

The court further noted that the absence ofany direct evidence that Fulton had copiedOvation’s bid documents or had used informationin those documents was due, at least in part, to thefact that Fulton had destroyed all documentsrelating to his bid.

6. Florida Law: Subpoena on Attorney toProduce Customer Lists Provided byClient Quashed per Fifth Amendment

Heddon v. Florida, 786 So.2d 1262 (Fla. App.2001)

Florida adopted a version of the UTSA in

1988, which was amended in 1991 and 1997.491

491 FLA. STAT. ANN. §§ 688,001 et seq.

In Fisher v. United States,492 theSupreme Court held that if a document in thehands of a client cannot be obtained throughsubpoena and the client transfers the document tohis attorney for the purpose of obtaining legaladvice, the document cannot be obtained bysubpoena from the attorney because of theattorney-client privilege. The Court also notedthat the very act of producing a subpoenaeddocument can have a testimonial impact apartfrom the content of the document, i.e., complyingwith the subpoena concedes the existence of thedocument and the fact that the accused possessesor controls it.

Heddon left his job at West WorldTelecommunications Systems, Inc., and WestWorld complained to the state attorney thatHeddon was misappropriating West World’s tradesecrets. The State subpoened a number ofdocuments from Heddon’s company, which heprovided. The State also, though, subpoenaed “alldocuments including vendor/customer list(s)* * *” from Heddon’s former attorney. Thatattorney acknowledged that Heddon had consultedhim for legal advice and that he had a fileconcerning that representation. He assertedattorney-client privilege in the contents of that file.The trial court denied the attorney’s motion toquash, but on appeal, the Florida Court of Appealsgranted a writ of certiorari to quash. UnderFisher, the court reasoned, Heddon’s possession ofa West World customer list would tend toincriminate him under the Florida Trade SecretsAct.

492 425 U.S. 391, 402-405 (1976).




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7. Colorado Law: (a) Non-SolicitationClause Limited to Direct Solicitation(b) Employee Ranking System Not aTrade Secret

Atmel Corp. v. Vitesse Semiconductor Corp. 30P.3d 789 (Colo. App. 2001)

Colorado adopted a version of the UTSA

in 1986.493

Atmel and Vitese were bothsemiconductor companies, but not competitors,located in Colorado Springs. Atmel employedover 2,200 persons, constituting over two-thirds ofthe semiconductor labor force in the area. Vitesebuilt a manufacturing facility and began to hireemployees, many of whom had previously workedfor Atmel. Thus Atmel and Vitese both competedfor a limited number of qualified employees.Atmel’s employment agreements contained a non-solicitation clause, i.e., that Atmel employeeswould not “solicit” other Atmel employees foremployment elsewhere. Atmel filed suit allegingthat Vitese and several named individualdefendants were “raiding” its work force. Thetrial court entered an injunction that enjoined theindividual defendants from participating at all inVitese’s hiring practices, even vis-à-vis thoseemployees that initiated contact with Vitese. Onappeal, the Colorado Court of Appeals reversed.

The court construed the non-solicitationlanguage in light of industry custom, the fact thatAtmel had drafted the language, and the “necessityfor a sensible result,” and concluded that the non-solicitation provision could not be read broadly topreclude these individuals from being involvedwith Vitese’s hiring practice vis-à-vis Atmel’semployees. The court further concluded that if theprovision was interpreted that broadly, it would beunenforceable under Colorado and California law.Atmel urged that the provision was necessary toprotect its employee ranking system, i.e., Atmelmanagers would rank its employees on a scale of1-4. The court disagreed, concluding that “[n]ocourt has held, to our knowledge, that an

493 COLO. REV. STAT. ANN. § 7-74-101 et seq. (West1996).

employee’s subjective opinions about his or herco-workers are trade secrets belonging to theemployer.”

8. Vermont Law: Customer List of Bus TourGroups Not Protectable Because No Effortto Maintain List as a Trade Secret

Dicks v. Jensen, 172 Vt. 43, 768 A.2d 1279 (Vt.2001)

Vermont adopted a version of the UTSA

in 1996.494 This appears to have been the firstcase brought to the Vermont Supreme Court underthat statute. Accordingly, in reaching itsconclusion, the court relied heavily on decisions inother UTSA jurisdictions.

Dicks owned the Lodge at Mount Snow inDover, Vermont. During non-winter months,Dicks relied heavily on business from bus tours ofsenior citizen groups who were run by organizersthat returned to the Lodge year after year. The bustour industry, though, was highly competitive, andDicks hired Cary and Brenda Jensen in 1991 tomanage the Lodge, as well as to run a bus tourbusiness. Soliciting tour groups involved massmailings followed by direct telephone solicitation,which resulted in but 20-60 bookings from aninitial mailing of 10,000-15,000 advertisements.Also, there was approximately a six month leadtime required between the advertisements andactual bookings.

In 1997, the Jensens left the Lodge toopen their own competing lodge, the Autumn Inn,in Bennington. The Jensens contacted Lodgecustomers, informing them of their move, and alsosolicited their business. Nine of eleven tours thatthe Jensens booked in their first season were withformer Lodge customers. Dicks sued alleging,inter alia, trade secret misappropriation. The trialcourt, on summary judgment, held that theLodge’s customer list did not qualify for tradesecret protection because it was readilyascertainable. On appeal, the Vermont SupremeCourt affirmed, albeit for a different reason.

494 9 VER. STAT. ANN. §§ 4601-4609.



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On the issue of whether the customer listcould qualify as a trade secret, Brenda Jensen hadadmitted that at the time they opened their inn,they did not have the money for marketing. Bydirectly soliciting the Lodge’s customers, theJensen’s thus saved the costs of marketing as wellas the six month lead time. The Jensen’s thoughargued that all of the customer’s names wereavailable in public documents.

The court noted that other jurisdictionshad held that customer lists, particularly customerlists that resulted from parsing profitablecustomers from larger lists, qualified for tradesecret protection. Accordingly, the court held thatit could not say as a matter of law whether theLodge’s customer list constituted a trade secretsolely on the basis of whether the customer nameswere readily ascertainable.

However, the court observed that therewas no evidence in the record that Dicks took anymeasures to maintain the confidentiality of thecustomer list. Apparently, the list was posted, atleast for a time, on a large reservation board, andthe names were available to all employees. Therewas also no evidence of any understanding that thelist was confidential. The court concluded:“Because plaintiff has adduced no evidence that hetook reasonable efforts to maintain the secrecy ofthe customer information, we hold, as a matter oflaw, that this customer list is not a trade

secret.”495

9. Utah Law: Customer-Specific ChemicalPrice Lists Deemed Trade Secrets

Water & Energy Systems Tech., Inc. v. Keil, 48P.2d 888 (Utah 2002)

Utah adopted a version of the UTSA in

1989.496

Keil had worked for Water & Energy(WEST) as a sales representative for certainchemicals since 1986. During his employment, he

495 172 Vt. at 51, 768 A.2d at 1285.496 UTAH CODE ANN. §§ 13-24-1 et seq.

spent the majority of his time with four customers,Alliant Techsystems, Cargill Flour Milling,Magnesium Corporation of America, and UtahState University. Keil also had access to theformulae that WEST used to create its chemicals,as well as to WEST’s customer-specific pricing.In 1997, Brody Chemical (BCC) recruited Keil.Keil and BCC then began discussions concerningthe chemical inventory that BCC would carry anda price scheme that would be “competitive” withWEST’s pricing. Following those meetings, Keilprepared six substantially identical letters toclients he had serviced for WEST, including hisfour principal customers. Keil explained in thoseletters that he was now working for BCC andcould offer “substantially the same” chemicals butat “substantially lower” prices. Keil thenterminated his relationship with WEST anddelivered the letters the next day. Within twoweeks, three of the four principal customers beganpurchasing their chemicals from BCC, and therewas testimony that price was an important factorin that decision.

WEST sued alleging trade secretmisappropriation, namely WEST’s confidentialprices, and for other causes of action, for exampleinterference with WEST’s business relationships.The jury rendered a verdict for WEST, andawarded $188,675 in lost profits damages. Onappeal, the Utah Supreme Court affirmed.Although BCC urged that the evidence wasinsufficient to establish a trade secret claim, theUtah Supreme Court disagreed finding that “evena cursory review of the record reveals that ampleevidence was presented at trial for the jury to findthat WEST’s price lists were confidential andexpected their employees to keep them as such* * *.”


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10. Customer Listsa. Nebraska Law: (a) In a Case of First

Impression, Customer Lists Qualify asTrade Secrets(b) Damages Are Based on Lost NetProfits, Not Gross Profits(c) Error to Award Both Lost FutureProfits and a Permanent Injunction

Home Price Foods, Inc. v. Johnson, 262 Neb. 701,634 N.W.2d 774 (Neb. 2001)

Nebraska adopted a version of the UTSA

in 1988.497

Home Pride and Consumer’s Choice, a co-defendant, were competing home food servicecompanies, i.e., they deliver food products andappliances to their customers. The partiesstipulated that the defendants paid $800 for HomePride’s customer list and knew that it was stolenwhen they purchased it. A search warrantexecuted on Consumer’s Choice premisesuncovered the list. Nevertheless, the defendantsargued that the list was not a trade secret becausethe names on the list could be ascertained frompublicly available sources. The NebraskaSupreme Court disagreed holding (1) thatcustomer lists could be protected under theNUTSA, and (2) the list at issue containedinformation that was not available from publicsources (the court asked: “if the information wasreadily available, why did the appellants pay $800for a stolen list?”). The court also found that thelist had been properly protected. The courtfurthermore found evidence that Consumer’sChoice had used the list.

With respect to damages, however, thecourt observed that Home Pride had only providedevidence of its lost gross profits, and concluded, asa matter of first impression, that damages for tradesecret misappropriation in Nebraska require proofof lost net profits. Accordingly, the courtremanded. The trial court had also awarded bothlost future profits (i.e., a reasonable royalty) andan injunction, which the court concluded was errorbecause it resulted in double recovery.

497 NEB. REV. STAT. §§ 87-501 et seq.

11. Memory Rulea. Memory Rule: Connecticut Law:

Employee is Ordinarily Privileged to UseNames of Customers Retained in Memoryand Customers Could Be ReadilyAscertained From the Internet

Heritage Benefit Consultants, Inc. v. Cole, 2001Conn. Super. LEXIS 543 (Conn. Super. 2001)

Connecticut adopted a version of the

UTSA in 1983, which was amended in 1997.498

Heritage provided 401k, pension and otherplan services to small and medium sizedbusinesses, as well as investment advice. Coleworked for Heritage for seventeen years, and hadaccess to client files, client lists, serviceagreements and other client information. Anotherco-defendant, Crocicchia, was employed as a salesrepresentative at Heritage for ten years, and alsohad access to client information. Cole’semployment contained non-solicitation and non-competition covenants. Cole and Crocicchiabecame dissatisfied with the way Heritage wasmanaged, and after attempts at purchasing thebusiness failed, both resigned, and started a newbusiness that targeted and solicited Heritagecustomers. The court found, however, that Coleand Crocicchia did not remove any client lists,documents or other Heritage property.

The court further found that services onthe Internet, such as ERISA.com, made availableto the public a list of all employers who had filed aForm 5500, and that list included all of Heritage’sclients. In addition, the court found that at leastfour other Internet services could provide thenames of pension administrators, brokers andactuaries that provide services for particular plans.Using those services could also provideinformation regarding Heritage’s clients.

The court also found that Heritage had nowritten confidentiality policies. File cabinetscontaining client files were not locked, and all

498 CONN. GEN. STAT. §§ 35-50 et seq. See also, Robert S.Weiss & Assoc., Inc. v. Wiederlight, 208 Conn. 525, 546A.2d 216 (1988).

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employees had access to those files. Client listswere not marked confidential, and client files wereroutinely taken out of the office for work at homeor for client meetings.

The court concluded that Heritage’s clientinformation (and other information as well) didnot constitute a trade secret because suchinformation was readily ascertainable. Withregard to the memory rule, the court noted that theRestatement of Agency (Second) § 396 providedthat an employee was ordinarily privileged to usethe names of customers retained in memory.Additionally, the court concluded that the namesand other information concerning Heritage’sclients were readily ascertainable through theInternet: “The wealth of information that theInternet now provides to businesses precludes afinding that the information sought to be protectedin this case should be considered a trade secret.”The court also concluded that Heritage had nottaken reasonable measures to protect itsinformation.

The court declined to enforce Cole’s non-competition covenant because Heritage hadmaterially breached the same by not paying Colefor certain stock.

G. Misappropriation Analysis1. Missouri Law: (a) Action Under Missouri

Uniform Trade Secrets Act AgainstChinese Government Corporation NotBarred by Sovereign Immunities ActWhere Activity in U.S. Is Commercial(b) Misappropriation Under the UTSAMay Occur In Any of Three Forms(i) Improper Acquisition, (ii) Disclosure,or (iii) Use

BP Chemicals Ltd. v. Jiangsu Sopo Corp., 285F.3d 677 (8th Cir. 2002)

Missouri adopted a version of the UTSA

in 1995.499

In 1986, BP acquired Monsanto Corp.’sproprietary technology in a methanol

499 MO. REV. STAT. §§ 417.450 et seq.

carbonylation process for making acetic acid.Acetic acid is used for making paints, plastics,resins and various pharmaceutical andagrochemical products. BP licensed thattechnology worldwide to enable companies tobuild acetic acid production plants. In buildingthose plants, BP and its licensees relied on variousvendors – outside engineering firms – to producecertain equipment and components. Many ofthose vendors are located in the United States.Those vendors operated under contractual dutiesof confidentiality.

In the mid-1990s, BP learned that one ofits vendors, Nooter Corp. in St. Louis, had beenasked to manufacture equipment for an acetic acidplant under construction in China. BP started aninvestigation and learned that other U.S. vendorshad received product specifications and directionsto prepare materials for that acetic acid plant.Those product specifications closely resembledBP’s specifications, and, in some cases, replicatedtypographical errors from the original BPdocuments.

BP traced the disclosures to Sopo, aChinese corporation owned by the PeoplesRepublic of China (PRC), and another governmentowned business, Shanghai PetrochemicalEngineering Co., SPECO. BP believed thatSPECO was operating as Sopo’s purchasing agent.BP alleged that SPECO had disclosed BP’s tradesecrets to U.S. vendors to permit them to assessthe cost and feasibility of manufacturing variousplant components.

BP sued Sopo, SPECO and Nooter. BPand Nooter quickly settled, and SPECO defaulted.Sopo moved to dismiss on the ground that Sopowas immune from suit under the Foreign

Sovereign Immunities Act of 1976 (FSIA).500

The district court granted Sopo’s motion todismiss. On appeal, the Eighth Circuit reversed.

Under the FSIA, a “foreign sovereign” isimmune from the jurisdiction of U.S. courts. Sopowas considered a “foreign sovereign” because itwas owned by the government of the PRC.

500 Pub.L.No. 94-593, 90 Stat. 2891, codified at 28 U.S.C.§§ 1602-1611.




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However, the FSIA contains several exceptions tothat jurisdictional immunity. One exception is anycase “in which the action is based upon acommercial activity carried on in the United States

by the foreign state * * *.”501 A claim is “basedupon” events in the United States “if those events

establish a legal element of the claim.”502

The Eighth Circuit observed that theMissouri Uniform Trade Secrets Act(MUTSA) provided for three forms ofmisappropriation: (1) improper acquisition,

(2) disclosure, and (3) use.503 The court reasonedthat BP had decided to pursue its action againstSopo based on Sopo’s alleged wrongfuldisclosure (rather than acquisition) of BP’s tradesecrets to U.S. engineering firms. Thus, BP’s“disclosure” MUTSA claim, according to thecourt, was “based upon” Sopo’s commercialactivity in the United States, and therefore fell

within the FSIA exception.504

The district court had rejected the“disclosure” rationale, concluding that was a mere“semantic ploy.” The district court viewed BP’strue claim as being one for wrongful acquisition.The Eighth Circuit, though, observed thatdenigrating a cause of action as a “semantic ploy”was only applicable to legally untenable claims.The court viewed BP’s trade secret cause of actionas properly grounded in the MUTSA.

The Eighth Circuit further found thatSopo’s activities constituted “commercialactivity,” and that its efforts to obtain “the fruits ofAmerican engineering know-how constitute

‘substantial contact’ with the United States.”505

501 28 U.S.C. § 1605.502 Santos v. Compagnie Natinale Air France., 934 F.2d 890,

893 (7th Cir. 1991), cited with approval, Saudi Arabia v.Nelson, 507 U.S. 349 (1993).

503 285 F.3d at 683.504 Id. at 684.505 285 F.3d at 686.

2. Maryland Law: A Cause of Action forMisappropriation May Arise FromImproper Acquisition Alone Without Useor Disclosure, But Acquiring Trade SecretInadvertently is not “Improper Means”

Systems 4, Inc. v. Landis & Gyr, Inc., 8 Fed.Appx.196, 2001 WL 434586 (4th Cir. 2001)

Maryland adopted a version of the UTSA

in 1989.506

In 1993, the National Gallery of Art inWashington, D.C. solicited proposals for a newautomated building heating, ventilation and airconditioning system. Systems 4 and Landis, bothin the business of engineering and installing suchsystems, submitted bids. At a pre-bid meeting, theNational Gallery announced that the bids would beclosed, i.e., bidders would not be able to reviewone another’s bids, because of the level of detailrequired in the bids. System 4’s proposal wasselected as a finalist, but Landis’ bid was not.Later, however, the National Gallery announcedthat it was withdrawing the solicitation, and wouldreissue the solicitation after revisions. TheNational Gallery also told the bidders that theycould pick up their earlier proposals. A NationalGallery employee mistakenly gave System 4’sproposal to a Landis employee who testified thathe did not realize the mistake until later when heopened the box. The Landis employee testifiedthat he “thumbed through” the proposal todetermine how it was presented, but did notreview it for content. Later, at a second meeting atthe National Gallery, the Landis employee wasasked whether he had received the System 4proposal. He acknowledged that he had, andreturned the proposal the next day. The NationalGallery, after an investigation, thereafter excludedLandis from the second round of biddingreasoning that Landis may have obtained acompetitive advantage.

Systems 4 then brought the present actionalleging trade secret misappropriation and unjustenrichment. The district court subsequentlygranted summary judgment for Landis concluding

506 MD. CODE ANN. §§ 11-1201 et seq.




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that there was no evidence that Landis hadmisappropriated System 4’s trade secrets. Onappeal, the Fourth Circuit affirmed.

The court noted that under the MarylandUTSA (MUTSA), “a plaintiff can state a claim formisappropriation simply by demonstrating that thedefendant acquired a trade secret by impropermeans, even if the plaintiff cannot show use of that

trade secret.”507 The court further noted,however, that the MUTSA defined “impropermeans” as including “theft, bribery,misrepresentation, breach or inducement of breachof a duty to maintain secrecy, or espionage

through electronic or other means.”508 Althoughrecognizing that the list was not exhaustive, thecourt nevertheless concluded that “one can derivesome common characteristics of improper means.All of the examples listed in the MUTSAconstitute intentional conduct involving some sort

of stealth, deception or trickery.”509 Here,according to the court, “[w]hile [the Landisemployee] probably should not have looked at theproposal once he realized it was not hiscompany’s, merely looking at informationacquired inadvertently does not constitute

improper means.”510 That was particularly truehere, according to the court, in view of the factthat System 4’s proposal did not bear anyconfidentiality markings.

507 2001 WL 434586 at **3. See also Nora Beverages, Inc. v.Perrier Group of Am., Inc., 164 F.3d 736, 750 (2d Cir.1998)(“Thus a violation of [the Connecticut UniformTrade Secrets Act] occurs if the defendant eitherwrongfully acquired plaintiff’s trade secret or used ordisclosed the trade secret.”).

508 Md.Code Ann., Comm. Law § 11-1201(b).509 2001 WL 434586 at **3.510 Id. at **4.

3. Use May Be Inferreda. Federal Circuit Illinois Law: Use of a

Trade Secret May be Inferred Based onAccess and Similarity and/or InevitableDisclosure

Leggett & Platt, Inc. v. Hickory Springs Mfg., Co.,285 F.3d 1353 (Fed. Cir. 2002)

L&P owned a patent on a “nestable” boxspring, i.e., a box spring that would “nest” withoutother box springs in order to reduce size duringshipping. L&P charged Hickory with patentinfringement and trade secret misappropriation.The district court, after construing the patentclaims, granted Hickory summary judgment ofnon-infringement and also concluded that Hickoryhad not misappropriated L&P’s trade secrets. Onappeal, the Federal Circuit reversed.

The facts vis-à-vis the trade secretmisappropriation claim are not clear from theopinion. Apparently, Hickory had hired one ofL&P’s employees (also one of the co-inventors ofthe patent-in-suit), and had produced a box springsimilar to L&P’s. Hickory’s box spring wasdifferent, however, and the Federal Circuitaffirmed the district court’s summary judgmentthat there was no literal infringement. The districtcourt had found that there were genuine issues ofmaterial vis-à-vis whether L&P possessed anyprotectable trade secrets, but granted summaryjudgment to Hickory on the finding that L&P hadnot shown that Hickory had actually used any ofL&P’s trade secrets.

In reversing the district court’s grant ofsummary judgment on the trade secret issue (aswell as the issue of infringement under thedoctrine of equivalents), the Federal Circuitgenerally misstated Illinois law, and its rationale isinternally inconsistent. For example, the FederalCircuit says that under Illinois law, “[t]o satisfythe use requirement, L&P must show that Hickorycould not have created its product without the use

of L&P’s trade secrets,”511 citing MangrenResearch and Dev. Corp. v. Nat’l Chem. Co.,

511 285 F.3d at 1361.




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Inc.512 Actually, that was not the holding inMangren, but rather was simply the court’sobservation. The Federal Circuit secondly, basedon the fact that Hickory had hired one of L&P’semployees and had produced a similar box spring,said that “[t]hese showings – access and similarity– may support a trade secret misappropriation

claim,”513 citing Sokol Crystal Prods., Inc. v.

DSC Communications Corp.514 What the courtactually wrote in Sokol is that the jury must haveinferred misappropriation from the defendant’saccess to the plaintiff’s confidential informationand the similarity between the defendant’s andplaintiff’s devices. The Federal Circuit furtherobserved that “[o]n the issue of access, directevidence is rarely available, thus requiring a

reliance on circumstantial evidence,”515 citing

PepsiCo, Inc. v. Redmond,516 which, of course,deals with the issue of inevitable disclosure.

In any event, the Federal Circuitconcluded that there were genuine issues ofmaterial fact in dispute regarding the trade secretmisappropriation claim, and, accordingly,reversed.

4. The “Owner” of the Trade Secret is theOne Entitled to Sue

a. Texas Law: (a) The “Owner” of a TradeSecret Includes One Entitled to AssertSecrecy(b) Under Rule 507, Tx. R. Civ. P., Once aTrade Secret is Established the BurdenShifts to Requesting Party to Establish thatthe Information is Necessary for a FairAdjudication(c) If Trade Secret is Established, TrialCourt Abuses Its Discretion by OrderingProduction Without In Camera Inspection

512 87 F.3d 937, 944 (7th Cir. 1996).513 285 F3d at 1361.514 15 F.3d 1427, 1429 (7th Cir. 1994).515 285 F.3d at 1361.516 54 F.3d 1262, 1269 (7th Cir. 1995).

In re Cayman Island Firm of Deloitte & Touche,2001 Tex. App. 6214 (Tex. App. – San Antonio2001)(non-precedential)

Texas has not adopted the UTSA, andcurrently follows the RESTATEMENT (FIRST) OF

TORTS § 757 (1939) in trade secret actions.

In a class action lawsuit involving over1,000 Latin American investors brought against anumber of defendants, including the CaymanIsland Firm of Deloitte & Touche (DT-Cayman),for alleged accounting malpractice, discoveryrevealed that corporate representatives of DT-Cayman had reviewed a Professional PracticeManual prior to their depositions. The plaintiffsmoved for production of the manual. DT-Caymanresponded that the manual was highly confidential,and offered to produce the manual for in camerainspection. The trial court, however, ordered themanual to be produced without in camerainspection. That, the Court of Appeals held, waserror.

One of the issues on appeal involved the“ownership” of the asserted trade secret in themanual. The uppermost entity in the DTorganization was Deloitte Touche Tohmatsu (DT-Tohmatsu) which was, apparently, the “owner” ofthe manual. The plaintiffs contended that DT-Cayman did not have standing to assert the

privilege of Rule 507, Tex. R. Civ. P.517 Thecourt disagreed, adopting the reasoning of DTM

Research, L.L.C. v. AT&T Corp.,518 that “[t]he‘proprietary aspect’ of a trade secret flows, notfrom the knowledge itself, but from its secrecy. Itis the secret aspect of the knowledge that provides

value to the person having the knowledge.”519

“As a consequence,” according to the Fourth

517 Rule 507 provides:

A person has a privilege, which may beclaimed by the person or the person’s agentor employee, to refuse to disclose and toprevent other persons from disclosing atrade secret owned by the person, if theallowance of the privilege will not tend toconceal fraud or otherwise work injustice.

518 245 F.3d 327 (4th Cir. 2001).519 Id.






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Circuit, “one ‘owns’ a trade secret when oneknows of it, as long as it remains a secret.” Thecourt concluded that DT-Cayman “owned” themanual for purposes of asserting a privilege underRule 507.

On the merits, the court noted that under

In re Continental General Tire, Inc.,520 trial courtmust apply a balancing test that employs shiftingburdens. Specifically, the party resistingdiscovery must first establish that the informationis a trade secret. The burden then shifts to therequesting party to show that the information is‘necessary for a fair adjudication of its claims.Here, the court concluded that DT-Cayman had,through affidavit, established that the manualcontained trade secrets and that the burden hadthus shifted to the plaintiffs. Thus, the courtconcluded that the trial court had abused itsdiscretion in ordering that the manual be producedwithout conducting an in camera inspection.

5. Texas Law: A Subpoena Does NotAuthorize Obtaining and DisclosingDocuments Containing Trade SecretInformation in Violation of Texas PenalCode 31.05: Neither Client nor AttorneyAre Fully Shielded by “LitigationPrivilege”

IBP, Inc. v. Klumpe, 2001 Tex. App. 7729 (Tex.App. – Amarillo 2001, no pet.)

Klumpe and his stepson, Escamilla, wereemployed by IBP in Amarillo. Klumpe was asuperintendent and Escamilla was a laborer in theslaughter department. Escamilla was injured by ameat cutting machine, and consulted an attorney,Blackburn, who was also Klumpe’s personalattorney. Blackburn referred him to another firm,Fadduol & Glasheen (F&G), who commenced suitagainst IBP alleging inadequate staffing andnegligent production procedures. Duringdiscovery, F&G noticed the deposition of Klumpeand directed him to produce various documents.One of those documents was a collection ofguidelines for the production process termed“Crewing Guides.”

520 979 S.W.2d 609, 611-13 (Tex. 1998).

That deposition notice was served oncounsel for IBP and on Blackburn as attorney forKlumpe. Klumpe then delivered variousdocuments to Blackburn, including the CrewingGuides. IBP filed objections and a motion for aprotective order asserting that the Guidescontained IBP’s trade secret information. IBP’sattorney then made arrangements with Blackburnto review the documents that Kumpe had givenhim on Monday, June 30th.

On Sunday, June 29th, however,Blackburn, responding to F&G’s request for“informal discovery” faxed copies of thedocuments that Klumpe had given him, includingthe Guides, to F&G. When IBP’s attorneydiscovered that Blackburn had done so, he reachedan agreement with F&G to hold the documents inconfidence until a hearing could be held. The trialcourt subsequently ordered that the Guides werenot to be disclosed to any third parties except asnecessary for prosecuting the Escamilla suit.

The Escamilla suit was settled during trial.While that suit was pending, however, IBP suedKlumpe, Blackburn and F&G seeking aninjunction, damages, and attorney’s fees. Theessence of the suit was that the Guides constitutedIBP’s trade secrets, and that Klumpe hadcontractual, common law, and statutoryobligations not to take or disclose the same. Thesuit alleged, inter alia, trade secretmisappropriation, tortious interference, conversionand civil conspiracy.

The trial court granted summary judgmentfor Klumpe and Blackburn without specifying itsreasons for doing so. On appeal, the Court ofAppeals affirmed summary judgment as to bothKlumpe and Blackburn insofar as IBP’s causes ofaction were based upon Klumpe’s disclosure ofthe Guides to Blackburn and Blackburn’s faxingof the Guides to F&G. The summary judgmentwas also affirmed as to IBP’s cause of action fortrade secret misappropriation. The summaryjudgment was reversed in all other respects.

The court acknowledged that “[a]s ageneral rule, neither a party in a lawsuit nor anattorney representing a party in a lawsuit has aright of recovery under any cause of action againstanother attorney arising from conduct the secondattorney engaged in as part of discharging duties



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in representing a party in that lawsuit.” However,the court also held that “[a] lawyer is protectedfrom liability claims only as to actions which are‘within the bounds of the law.’ ”

With respect to Klumpe, the courtconcluded that the disclosure to Blackburn and thelater disclosure to F&G was privileged, but therewas a material issue of fact whether Klumpe’soriginal taking of the Guides was an unprivileged“stealing.” The court noted that “[a] subpoenaduces tecum does not authorize a witness toillegally seize and remove property of another [inviolation of Texas Penal Code § 31.05(b)(1)]simply because the property is listed in thesubpoena. * * * Although an absolute privilegefrom civil liability is accorded as to claims basedon communication by participants in the discoveryprocess, a privilege is not accorded as to claimsbased on acquiring information or documentsillegally.”

As for Blackburn, IBP argued that hisactions were outside the bounds of the law because(1) he directly violated Penal Code § 31.05 byfaxing the Guides to F&G, and (2) he conspiredwith Klumpe and F&G to have Klumpe take theGuides in violation of § 31.05. IBP referredevidence such as (1) Blackburn referred Escamillato F&G, (2) Blackburn would receive a referral feeif the suit against IBP was successful, (3) membersof F&G knew of the Guides and had previouslybeen unsuccessful in obtaining those in otherlawsuits, (4) members of F&G met with Blackburnon various occasions prior to the time that theGuides were faxed, (5) one of those meetingsinvolved Escamilla, (6) F&G had requested“informal discovery” of all documents receivedfrom Klumpe, and (7) Blackburn had faxed the 18page Guides the day before he was to meet withIBP’s attorney.

The court concluded that Blackburn’sfaxing of the Guides was absolutely privileged.However, IBP’s claim, according to the court, thatBlackburn had conspired with others regarding thesame was not based on that communication, but onKlumpe’s having obtained the Guides illegally.Accordingly, claims against Blackburn based onKlumpe’s activities survived.

With respect to IBP’s trade secretmisappropriation claim, the court found that IBP

had not provided summary judgment that theGuides were either commercially used or thesubject of a non-privileged disclosure. The courtreasoned that the disclosures were privileged asdiscussed above. Unfortunately, the court did notaddress (or the parties did not argue) thatKlumpe’s, and subsequently Blackburn’s,possession of the Guides was obtained through“improper means” and would itself justify a claimfor trade secret misappropriation.

H. Identifying Trade Secrets DuringLitigation

1. Seventh Circuit: Wisconsin Law: (a) 43Page Description of Software isInsufficient to Identify Plaintiff’s TradeSecrets(b) Vendor-Vendee ConfidentialityAgreements Are Not Unenforceable ForFailure to Include Temporal andGeographic Restrictions(c) Wisconsin’s UTSA Does Not Preempta Cause of Action for Tortiously Inducinga Customer to Breach a ConfidentialityAgreement

IDX Systems, Corp. v. Epic Systems Corp., 285F.3d 581 (7th Cir. 2002)(Easterbrook, C.J.)

Wisconsin adopted a version of the UTSA

in 1986.521

IDX and Epic both produced software foruse in managing the financial side of a medicalpractice, i.e., billing, insurance reimbursement,and the like. IDX sold or licensed its software totwo medical groups in the 1980s. Those twogroups later merged into the University ofWisconsin Medical Foundation consisting of over1,000 physicians. In December 2000, theUniversity switched to Epic’s software. IDXcharged that two former Epic employees instigatedthat change, and used their position with theUniversity to transfer IDX trade secrets to Epic.

The district court had granted summaryjudgment to Epic on IDX’s trade secretmisappropriation claim because IDX had failed to

521 WIS. STAT. ANN. §§ 134.90 et seq.




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specifically identify its trade secrets. The SeventhCircuit, in an opinion by Circuit JudgeEasterbrook, affirmed. IDX urged that “a 43 pagedescription of the methods and processesunderlying and the inter-relationships amongvarious features making up IDX’s softwarepackage” was specific enough to withstandsummary judgment. The Seventh Circuit

answered “No, it isn’t.”522 The court noted thatthe document did not separate the trade secretsfrom other information, and that IDX’s tender ofthe complete documentation for the software didnot solve the problem: “a plaintiff must do morethan just identify a kind of technology and theninvite the court to hunt through the details insearch of items meeting the statutory

definition.”523

The Wisconsin version of the UTSAspecifically provides that the statute “does notaffect * * *[a]ny contractual remedy, whether ornot based upon misappropriation of a trade

secret.”524 IDX and the Foundation (through itspredecessors, namely the two medical groups),entered into an agreement under which theFoundation agreed that it would not allow thesoftware to be “examined * * * for the purpose ofcreating another system” and also agreed not to“use or disclose or divulge to others any data orinformation relating to” the system or thetechnology. The district court held that thosepromises were unenforceable because they wereunlimited in temporal and geographic scope,relying on employer-employee non-competitioncovenant cases. On appeal, the Seventh Circuitreversed.

The Seventh Circuit clearly distinguishedconfidentiality or non-disclosure agreements fromemployer-employee non-competition agreements.The court observed that “[r]ules limiting the extentof no-compete clauses are based on the fact thatthey tie up human capital and, if widely adopted,may have the practical effect of preventinghorizontal competition in economically significant

522 285 F.3d at 583.523 Id. at 584.524 Id. at 584.

markets.”525 “But neither rationale,” according tothe court, “applies to contracts that restrict the useof particular information between businesses thathave vertical (supplier-to-customer) rather thanhorizontal (competitor-to-

competitor) relations.”526 “They [supplier-to-customer confidentiality agreements] may compelrivals such as Epic to do more work to developsoftware independently, but this promotes ratherthan restricts competition. * * * Rivals such asEpic, non-parties to the vertical arrangements,remain entitled to discover and use the informationindependently and to compete vigorously.Nothing in the antitrust laws gives one producer aright to sponge off another’s intellectual property,even when the producer of that knowledge has a

market share much larger than IDX’s.”527

The court further noted that geographicalrestrictions made no sense: “If the Foundationwere forbidden to disclose the details to Epic inWisconsin, but allowed to do so in Indiana, thatwould be the same thing as permitting disclosureeverywhere (and thus nixing all contractual limits)– for Epic could sell worldwide any software

derived from what it learned in Indiana.”528

Temporary restrictions, according to the court,might make sense if, for example, obligations ofconfidentiality ended when information becamegenerally known, but the court noted that it wastoo early in the litigation to make thatdetermination.

Lastly, the court addressed IDX’s chargethat the Foundation had tortiously induced theFoundation to breach its obligations ofconfidentiality owed to IDX. The district courtdismissed that cause of action on the pleadingsfinding that Wisconsin’s UTSA preempted thatcause of action. The Seventh Circuit reversed fortwo reasons. First, the Wisconsin statute carvedout civil remedies “not based uponmisappropriation of a trade secret” from the areaof preemption. The tort of inducing breach of a

525 285 F.3d at 585.526 Id.527 Id.528 Id. at 586.


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non-disclosure agreement, the court noted, isbased on interference with the contract, notmisappropriation of a trade secret. Secondly, thestatutory preemption only dealt with conflictingtort law. The court noted that enforcement of anon-disclosure agreement did not “conflict” with

trade secret law.529

2. Delaware Law: Trade Secrets Must BeIdentified With Sufficient Particularity toEnable a Defendant to Prepare a Defense –Simply Attaching 120 Pages ofMiscellaneous Information to theComplaint is Not Sufficient

Savor, Inc. v. FMR Corp., 2002 Del. Super.LEXIS 137 (Del. Super. 2001)

Delaware adopted a version of the UTSA

in 1982, that was amended in 1997.530

In 1999, Savor provided information to asenior executive of FMR about a rebate programwhereby consumers of certain products andservices would receive rebates for investment indesignated state qualified tuition plans. Noconfidentiality agreement was signed, although theexecutive agreed to “respect the secrecy of theinformation.” After several more discussions,FMR declined to participate in the program.Later, however, Upromise, Inc. was formed, andnews reports described a rebate program that hadbeen initiated by Upromise and managed in partby FMR. Savor contended that Upromise’s rebateprogram was identical to the one he had proposed,and noted that a former employee of FMR assistedUpromise in developing the program.

Savor’s initial complaint referred broadlyto the rebate program as the trade secret, but Savorconceded that the rebate program per se was not atrade secret because such programs were common.Savor then filed a second amended complaint thatdescribed the alleged trade secret in generalconclusory terms. Savor agreed to rectify theproblem if the court entered a protective order

529 Id. at 586.530 6 DEL. CODE ANN. §§ 2001 et seq.

which the court did. In a third amendedcomplaint, Savor again referred broadly to“information which included marketing strategiesand methods, techniques and processes forextracting payments * * *.” Savor also attachedan Exhibit A that, according to the court, consistedof 120 pages of “miscellaneous information,appended in no discernable order, whichinclude[d] various letters * * *, charts, salespitches, newspaper articles, pictures of proposedcredit cards, a patent application, and copies ofwebsites maintained by organizations unaffiliatedwith the parties * * *.”

In granting the defendants’ motion todismiss, the court noted that “Savor attempted toenhance its presentation by fastening to itscomplaint a compilation of documents * * * thecontent or context of which is nowhere explainedin the pleading. By doing so, Savor has sent theCourt and the Defendants on an unguided safarithrough a marsh of seemingly benign informationin search of a trade secret.” The court furthernoted that “[t]o require a plaintiff allegingmisappropriation of trade secrets to identify thetrade secret at issue with some specificity is notonerous, impractical or inconsistent with noticepleading. * * * No amount of discovery from thedefendant will assist the plaintiff in betterunderstanding or describing its own trade secret.The trade secret, if it exists, is well-known to theplaintiff at the outset of the litigation.”

3. Delaware Law: Identification of a BroadProcess as a Trade Secret May be LaterNarrowed During Trial

SmithKline Beecham Pharma. Co. v. Merck & Co.,Inc., 766 A.2d 442 (Del. 2000)

In 1970, a Japanese scientist Dr.Takahashi isolated a strain of chicken pox virus,successfully developed a vaccine, and publishedhis results. SmithKline obtained an option fromHandai Biken, the commercial arm of theuniversity that employed Dr. Takahashi, toevaluate the strain for two years. That option wassubsequently extended several times. SmithKlineand Biken, though, were unable to reach anagreement, and Biken ultimately granted Merck alicense to use “Biken Know-How” and a non-exclusive license to use the strain in the U.S. and



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Canada. Later, Biken and SmithKline entered intoan agreement giving SmithKline non-exclusiverights in the strain and know-how in Europe.SmithKline, however, had difficulty in applying anew process that it had developed to producingvaccine, and sought Biken’s assistance.Researchers from Biken thereafter gaveSmithKline step-by-step instructions. SmithKlinethereafter filed information regarding that processwith the FDA in preparation for clinical trials inthe U.S. which violated the geographicalrestrictions in its license with Biken. Merckbrought suit for trade secret misappropriationseeking to enjoin SmithKline from marketing itsvaccine in the U.S.

During discovery, SmithKline requestedan identification of the trade secrets that Merckwas asserting. In response, Merck provided a 37-page description of the Biken production processand the information that Biken had previouslyfurnished SmithKline. SmithKline argued thatMerck was therefore bound to asserting that theentire production process was a trade secret thatSmithKline was accused of misappropriating. Thecourt disagreed, holding that Merck could, as itdid, later narrow the broad trade secret allegation“to fit the particular aspects of the productionprocess Merck claimed were misappropriated bySmithKline.” Doing so, according to the court,did not prejudice SmithKline.

4. Seventh Circuit: Wisconsin Law:(a) Trade Secret May Be Asserted in aCombination of Procedures Disclosed in500 Pages of Manuals(b) Misappropriation May Be InferredFrom Defendants’ Ability to ProduceProduct Within a Short Time Span(c) Injunction That EncompassesInformation in 500 Pages of Manuals andPublic Domain as Well as Trade SecretInformation Nevertheless Complies withRule 65(d)(d) Proof that the Defendants Did Not Usean Asserted Trade Secret FurnishesGrounds for JMOL(e) Injunctions Are Not Punitive: DamagesEqualing Plaintiff’s Development Costsand an Injunction Against FutureDisclosure But Not Use, Rather ThanPermanent Injunction, is Appropriate

Minnesota Mining & Manufacturing Co. v. Pribyl,259 F.3d 587 (7th Cir. 2001)

3M manufactured, among other things,“carrier tape,” i.e., tape used to transport sensitiveelectronic components. Such tape was made froma thin layer of plastic called “resin sheeting.”Pockets were formed in the “resin sheeting” to fitthe components to be transferred. 3Mmanufactured the resin sheeting, but did not sell itin the open market, other than to its foreignsubsidiaries.

Three employees, Pribyl, Skrtic andHarvey, had positions “integral” to 3M’s resinsheet manufacturing. In 1996, 3M announced thatit was moving its plant from Menominee,Wisconsin to Hutchinson, Minnesota. For avariety of reasons, those three employees decidednot to move. Instead, they formed Accu-Tech,while still employed by 3M, which manufacturedand sold resin sheeting to various companies.Three years later, 3M discovered the existence ofAccu-Tech and terminated the three employees.3M also filed suit alleging, inter alia, trade secretmisappropriation.

The jury concluded (1) that the threeformer employees had breached a duty of loyaltyowed 3M, (2) 3M owned four trade secrets, and(3) Accu-Tech and its founders hadmisappropriated two of those four trade secrets.The district court granted a permanent injunctionprecluding Accu-Tech and its founders fromdisclosing (but not from using) those trade secrets,and awarded 3M damages.

On appeal, Accu-Tech et al. argued thatalthough 3M maintained elaborate securitymeasures, the various operating procedures andmanuals that 3M said constituted its trade secretsencompassed a broad category of items, many ofwhich were in the public domain. Accu-Tech etal. pressed 3M to specify what specificinformation in the more than 500 pages ofinformation should be considered a trade secret.The court concluded that 3M need not do so,noting that a “trade secret can exist in acombination of characteristics and components,each of which, by itself, is in the public domain,but the unified process, design and operation ofwhich, in unique combination, affords a



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competitive advantage and is a protectable

secret.”531

Secondly, the Seventh Circuit agreed withthe district court “that there was a powerfulinference that defendants used 3M’s operatingprocedures and manuals in establishing Accu-

Tech’s operations.”532 The court observed that ithad taken 3M six years to make its carrier tapeoperations efficient, and yet Accu-Tech was ableto do so almost immediately. There was alsoevidence that Accu-Tech had discloses processesdisclosed in 3M’s manuals to its customers.

Accu-Tech additionally argued that thedistrict court’s injunction order did not meet thespecificity requires of Fed.R.Civ.P. 65(d) in that itencompassed some 500+ pages of information andincluded admittedly public domain information.The Seventh Circuit was not persuaded. As notedabove, the court found that 3M could validly asserttrade secret protection in a combination ofprocedures and the like contained within those 500pages, and that the injunction sufficientlyinformed the defendants of what they were toavoid even though the injunction encompassed

public domain information.533

3M additionally asserted trade secretsrights in a customized resin formulation. Theprocess for manufacturing resin sheeting beganwith a “resin pellet.” Such pellets were availablecommercially in a number of differentformulations. 3M experimented with a number ofdifferent pellets, and also developed its ownformulation. Although one of the defendants hadaccess to that formulation, the evidence wasundisputed that Accu-Tech used commerciallyavailable resin pellets. The district court hadgranted Accu-Tech JMOL on this issue, and theSeventh Circuit agreed: “the evidence at trialspecifically established that Accu-Tech was not

using 3M’s polystyrene resin.”534 The courtreasoned that the injunction sufficient protected

531 259 F.3d at 595-96.532 Id. at 596.533 Id. at 597-98.534 Id. at 605.

3M against Accu-Tech’s threatened use of 3M’scustomized resin formulation.

With respect to the district court’sinjunction prohibiting Accu-Tech from disclosing,but not from using, 3M’s trade secrets, 3M arguedthat was equivalent to forcing 3M to sell its tradesecrets to those who stole them. The SeventhCircuit disagreed. The jury had granted damagesbased in part on what it would have cost thedefendants to independently develop the tradesecrets at issue. The district court reasoned,relying on the Fifth Circuit’s decision in NextLevel Communications L.P. v. DSC

Communications Corp.535 (awarding a permanentinjunction where the damages already includedlost future profits would result in doublerecovery), that once the defendants had paid thedamages based on 3M’s development costs, thedefendants should be free to use the secrets thatthey had misappropriated. 3M argued that thedamages here were not for future lost profits as inNext Level, and, in any event, Next Level waswrongly decided.

Although affirming, the Seventh Circuit

adopted a different rationale.536 The court notedthat “[t]he purpose of a permanent injunction is toprotect trade secret owners from the ongoingdamages caused by the future use of trade secrets,

rather than to compensate for those damages.”537

The court reasoned that “[a]n injunction is not apunitive tool, but rather a vehicle for preventinginjury. * * * According to Wisconsin law, thougha court may grant injunctive relief against a personwho misappropriated a trade secret, the courtshould continue the injunction only for a period oftime reasonable to eliminate commercialadvantage which the person who misappropriateda trade secret would otherwise derive from the

violation.”538 Here, the district court had made a

535 179 F.3d 244 (5th Cir. 1999).536 The Seventh Circuit noted that to the extent that

Next Level could be read as suggesting that thepayment of any damages for misappropriation givesthe misappropriator ownership of the trade secret, theSeventh Circuit would disagree. 259 F.3d at 608 n. 7.

537 259 F.3d at 607.538 259 F.3d at 609.



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factual determination that Accu-Tech would havebeen able to develop 3M’s trade secrets in a periodof less than two years. The district court furtherdetermined that once payment to 3M had beenmade to offset any commercial advantage gainedfrom the misappropriation, any future injunctiverelief would have been punitive. The SeventhCircuit accordingly held that the district court hadnot abused its discretion in not granting 3M apermanent injunction against further use of thetrade secrets. In a footnote, the Seventh Circuitalso noted that the district court’s injunctionagainst future disclosure, in fact, deprived Accu-Tech of the right of ownership, a right it otherwisewould have had if it had developed the tradesecrets independently. According to the SeventhCircuit, “the district court’s decision has provided3M with a blanket of protection that it would not

have received otherwise.”539

I. Spoliation1. Wisconsin Law: Pointing a Finger at

One’s Children to Explain RepeatedlyDownloading 6 GB of Music on HardDrive That Was to be Produced forInspection is Not Credible

Minnesota Mining & Manufacturing Co. v. Pribyl,259 F.3d 587 (7th Cir. 2001)

The Seventh Circuit affirmed the districtcourt’s grant of JMOL for the defendants on oneof the trade secret misappropriation issues wherethe evidence clearly showed that the defendantshad not used 3M’s resin formulation, i.e., one of3M’s asserted trade secrets. 3M urged that thejury’s verdict should not have been overturned oninsufficiency of evidence grounds because thedistrict court had determined that the defendantshad engaged in spoliation of evidence.Specifically, the evening before one of thedefendants was to turn over his computer pursuantto a discovery request, six gigabytes of music wasrepeatedly downloaded to his hard drive over ashort time span. The defendant pointed to hischildren who used the computer. The districtcourt did not buy that explanation, and instructed

539 Id. at 610 n. 8.

the jury that they could draw a negative inferencefrom that act of destruction.

On appeal, the Seventh Circuit agreed thatthe district court was correct in giving thatinstruction, but also noted that “the fact that harddrive space was destroyed * * * does not relieve3M of having to prove the elements of its

claims.”540 The court also noted that “the districtcourt was in a unique position to examine theimpact that any spoliation may have had on 3M’sclaims,” and that the district court “while aware ofthe spoliation, was still comfortable in determiningthat there was insufficient evidence to support

3M’s claim.”541

2. Illinois Law: Repeatedly DefragmentingHard Drive to Remove Evidence is StrongCircumstantial Evidence ofMisappropriation and May Justify Willfuland Malicious Misappropriation

RKI, Inc. v. Grimes, 177 F. Supp.2d 859 (N.D. Ill.2001) and RKI, Inc. v. Grimes, 200 F. Supp.2d 916(N.D. Ill. 2002)

The first opinion addresses RKI’s causesof action for trade secret misappropriation andbreach of a non-competition covenant. Thesecond opinion addresses post-trial motions.

RKI d/b/a Roll-Kraft, based in Mentor,Ohio, produced tube and pipe mill rolls. Grimeswas employed in 1999 as a salesman to serviceaccounts in Illinois, Indiana, Iowa, Missouri andWisconsin. Grimes had no prior experience in thefield, and was given an initial 90 day trainingcourse, during which he received informationregarding Roll-Kraft’s customers, their buyinghistories, and other confidential information.Grimes signed a two-year employment agreementcontaining non-disclosure and non-solicitationprovisions.

Initially, Roll-Kraft used ACT! as itscustomer contact management system, but in 2001

540 259 F.3d at 606 n. 5.541 Id.





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developed its own proprietary system known asBAM. Grimes had access to both ACT! andBAM, as well as another system known as NPIthat contained information regarding pricing,margins, shipping and strategic plans. All threesystems were password protected, and individualssuch as Grimes had access only to those portionsof the system that related to their jobs.

Roll-Kraft required its salesmen to add allcustomer contact information to ACT! and BAMweekly. Grimes was apparently not doing so, andafter a warning, Roll-Kraft reduced his salary by$2,500. Grimes then initiated discussions with acompetitor, Chicago Roll. In e-mailcorrespondence to a friend of his at Chicago Roll,Grimes bragged about taking an order from anactive Roll-Kraft account and that he was lookingforward to “stealing” Roll-Kraft’s customers.When Roll-Kraft learned that Grimes was talkingto Chicago Roll, Roll-Kraft contacted Grimes.Grimes twice denied that he was talking toChicago Roll, but that same evening accessed theRoll-Kraft computer system from his home todownload the ACT!, BAM and NPI databases.Later, when joining Chicago Roll, Grimes signedan indemnity agreement indemnifying ChicagoRoll in the event of an action by Roll-Kraft.

During discovery, Grimes and ChicagoRoll refused to appear or produce documents atscheduled depositions leading the court to orderGrimes and Chicago Roll to produce theircomputers for inspection. On the same day,Grimes defragmented his computer allegedly onthe advice of PCPitstop, an Internet based trouble-shooting company. However, a partner withPCPitstop testified that Grimes’ computer was notfragmented, and they had not advised him todefragment it. Two days later, Grimesdefragmented his computer again, also allegedlyon the advice of PCPitstop, but PCPitstop deniedhaving given that advice. Four days later, Grimesdefragmented his drive a third time, and despitesaying once again that he had done so on theadvice of PCPitstop, records indicated that he hadnot visited their website.

The district court also found that ChicagoRoll had deleted data from its salesmen’scomputers after suit had been filed, despite that ithad no policy for deleting data on a set schedule,no deletions had been made before that, and there

was plenty of room on their computer hard drives.One laptop computer had been defragmented twodays prior to a scheduled inspection by Roll-Kraft’s computer forensics expert.

The district court concluded that theinformation contained in Roll-Kraft’s ACT!, BAMand NPI databases was trade secret customerinformation under the Illinois UTSA, and thatRoll-Kraft had taken reasonable measures toprotect the same. The court further concluded thatfrom the foregoing, there was strongcircumstantial evidence that Grimes had used“improper means” to acquire those databases:“Defendants never placed any witness on the standto explain: 1) why Grimes accessed Roll-Kraft’scomputers on October 16, 2001 after businesshours from his home computer, or 2) why 60megabytes of information was deleted fromGrimes’ home computer between November 15and December 8, 2001, or 3) why he defragmentedhis home computer four times in ten days inNovember 2001, when no mechanical or

engineering reason required it.”542

J. Identifying ISP User1. New Jersey Law: Procedures and Test for

Disclosing Identity of Anonymous User ofISP Message Board: Plaintiff MustProduct a Prima Facie Case, i.e., MoreThan What Would Be Required ToSurvive a Motion to Dismiss

Dendrite Int’l, Inc. v. John Does No. 3, 342 N.J.Super. 134, 775 A.2d 756 (N.J. Super. Ct. App.Div. 2001)

The court noted that the “trial court mustconsider and decide [applications for orderscompelling an ISP to disclose the identity of ananonymous user] by striking a balance betweenthe well-established First Amendment right tospeak anonymously, and the right of the plaintiffto protect its proprietary interests and reputationthrough the assertion of recognizable claims basedon the actionable conduct of the anonymous,fictitiously-named defendants.”

542 177 F. Supp.2d at 875.



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According to the court:

• “the trial court should first requirethe plaintiff to undertake efforts tonotify the anonymous posters thatthey are the subject of a subpoenaor application for an order ofdiscovery, and withhold action toafford the fictitiously-nameddefendants a reasonableopportunity to file and serveopposition to the application.These notification efforts shouldinclude posting a message ofnotification of the identitydiscovery request to theanonymous user on the ISP’spertinent message board.”

• “The court shall also require theplaintiff to identify and set forththe exact statements purportedlymade by each anonymous posterthat plaintiff alleges constitutesactionable speech.”

• “The complaint and allinformation provided to the courtshould be carefully reviewed todetermine whether plaintiff has setforth a prima facie cause of actionagainst the fictitiously-namedanonymous defendants.” [That is,more is required than that simplyto survive a motion to dismiss –“the plaintiff must producesufficient evidence supportingeach element of its cause ofaction, on a prima facie basis,prior to a court ordering thedisclosure of the identity of theunnamed defendant.”]

• “Finally, assuming the courtconcludes that the plaintiff haspresented a prima facie cause ofaction, the court must balance thedefendant’s First Amendmentright of anonymous free speechagainst the strength of the primafacie case presented and thenecessity for the disclosure of the

anonymous defendant’s identity toallow the plaintiff to properly

proceed.”543

In Dendrite, the plaintiff based its claimson a variety of causes of action, including breachof contract, breach of fiduciary duty, trade secretmisappropriation, and defamation, among others.The court, however, evaluated the case based onthe claim of defamation, and found that in someinstances the plaintiff’s allegations, on balance,supported disclosure, and in others thoseallegations did not. Overall, though, the courtconcluded that Dendrite had failed to demonstratethat it had suffered damages attributable to themessages posted on the ISP message board.

2. New Jersey Law: Allegations of TradeSecret Misappropriation by a Current orFormer Employee in Violation of anEmployment Agreement JustifiedDisclosing Identity of Anonymous User ofISP Message Board

Immunomedics, Inc. v. Jean Doe, 342 N.J. Super.160, 775 A.2d 773 (N.J. Super. Ct. App. Div.2001)

Immunomedics filed a complaint againstJean Doe, a/k/a “moonshine_fr,” alleging thatMoonshine had posted a message on the Yahoo!Finance Message Board containing confidentialand proprietary information. Immunomedicsalleged that Moonshine’s communicationindicated that she was a female employee ofImmunomedics residing in France. Moonshine’smessage indicated that she was a “worried

543 See also In re Subpoena Duces Tecum to America Online,2000 WL 1210372 (Va. Cir. Ct. 2000)(a court shouldonly order disclosure of the identity of a subscriber“(1) when the court is satisfied by the pleadings orevidence supplied to that court (2) that the partyrequesting the subpoena has a legitimate, good faithbasis to contend that it may be the victim of conductactionable in the jurisdiction where suit was filed and(3) the subpoenaed identity information is centrallyneeded to advance that claim.”); Columbia Ins. Co. v.Seescandy.Com, 185 F.R.D. 573 (N.D. Cal.1999)(adopting four prong approach in a trademarkcase similar to that adopted by the New Jersey court).



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employee” and stated that Immunomedics was“out of stock for diagnostic products in Europe”and that there would be no more sales if thesituation did not change. A second message statedthat Immunomedics was going to fire theEuropean manager. Immunomedics conceded thatthe information was true, but asserted that thestatements violated Immunomedics’confidentiality agreement and “several provisions”of the Employee Handbook.

Immunomedics served a complaint onYahoo! seeking discovery of Moonshine’s trueidentity. Yahoo! contacted Moonshine, and shefiled a motion to quash. The trial court denied thatmotion, and the Appellate Division affirmed. Thecourt reasoned: “With evidence demonstratingMoonshine is an employee of Immunomedics, thatemployees execute confidentiality agreements, andthe content of Moonshine’s posted messagesproviding evidence of the breach thereof, thedisclosure of Moonshine’s identity, which can bereasonably calculated to be achieved byinformation obtained from the subpoena, was fully

warranted.”544

K. Preemption1. Oklahoma Law: Action for Fraud and

Deceit Not Preempted by OklahomaUTSA

Craig Neon, Inc. v. McKenzie, 2001 WL 1338434(10th Cir. 2001)

Oklahoma adopted a version of the UTSA

in 1986.545

Craig Neon prepared sketches and a modelfor new signs at McKenzie’s automobile repairbusiness locations. The sketches and model werepresented during a meeting between the parties.Although the evidence was conflicting, the districtcourt found that Craig Neon had insisted that thesketches and model remain confidential, andMcKenzie had agreed. Thereafter, McKenzie hadtaken the sketches to another company for

544 342 N.J. Super. at 167, 775 A.2d at 778.545 OKLA. STAT. tit. 78, §§ 85-94.

construction of new signs. Craig Neon suedalleging fraud and deceit, i.e., failure to keep thesketches confidential, and for misappropriation.The jury found for Craig Neon on the fraud anddeceit claim. McKenzie argued that the OklahomaUTSA preempted the cause of action for fraud anddeceit.

The Okalahoma UTSA provides that it“displaces conflicting tort, restitutionary, and otherlaw of this state providing civil remedies formisappropriation of a trade secret, [but] does notaffect * * * other civil remedies that are not based

upon misappropriation of a trade secret.”546 Inrejecting McKenzie’s argument, the courtconcluded that the elements of the UTSA weredifferent from those of a claim of fraud and deceit,and the claim for fraud and deceit could standalone without proving that the sign plans were atrade secret. Accordingly, the court concludedthat there was no preemption.

L. Statutes of Limitations1. Indiana UTSA Statute of Limitations is

Not Tolled Where French Defendant WasSubject to Jurisdiction Under Long-ArmStatute and Service of Process ThroughCertified Mail

Research Systems Corp. v. IPSOS Publicité, 276F.3d 914 (7th Cir. 2002)

Indiana adopted its version of the UTSA

in 1982,547 including the three year statute oflimitations of § 7 of the model UTSA.

RSC was an advertising company thatproduced a product known as “ARS Persuasion”for testing the effectiveness of televisioncommercials. In 1989, IPSOS Publicité, a Frenchadvertising research company, approached RSCregarding a possible joint venture, specifically toattract the business of Procter & Gamble. Thepresidents of IPSOS and a related parent companysigned confidentiality agreements with RSC. Overthe course of the next year or so, RSC disclosed

546 OKLA. STAT. tit. 78 § 92(A) & (B)(2).547 IND. CODE § 24-2-3-1 et seq.




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various information to IPSOS, but the parties werenot able to reach an agreement. In 1991, IPSOS incollaboration with a German company revised itsexisting Pre*Vision product to make it compatiblewith the system used by P&G. RSC filed suit in1996 alleging, inter alia, trade secretmisappropriation.

The district court dismissed themisappropriation claim as being time-barred. Thejury found for IPSOS on the remaining claims. Onappeal, the Seventh Circuit affirmed that themisappropriation claim was time barred.

The Indiana UTSA provides for a three-year limitations period. RSC conceded that itlearned of the alleged misappropriation in 1991and did not file suit until 1996. Indiana’s tollingstatute, however, provides that “[t]he time duringwhich the defendant is a nonresident of the state[and does not] maintain in Indiana an agent forservice of process or other person who, under thelaws of Indiana, may be served with process as

agent for the defendant.”548 IPSOS, of course,had never been a resident of Indiana and had nevermaintained an agent for service of process there.The Indiana Court of Appeals, however, had heldthat the tolling provision did not apply where theparty claiming the benefit of the period oflimitations was subject to the jurisdiction of acourt in the state. The district court held that theUTSA limitations period was not tolled becauseRSC could have served IPSOS by certified mailunder the Indiana long-arm statute when it learnedof the misappropriation.

The Seventh Circuit agreed. The rationaleunderlying the tolling statute, according to theIndiana Court of Appeals, was that the statute wasto protect the right of a plaintiff to bring an actionand to prevent a defendant from defeating a claimby absenting himself from the jurisdiction. Whena defendant was amenable to service, however,according to the court, the tolling provision servedno purpose. Although the present case involved anonresident defendant that the court had yet tosubject to its jurisdiction, the Seventh Circuitconcluded that the underlying rationale was thesame. Because IPSOS could be served by certified

548 IND.CODE § 34-11-4-1.

mail under the Indiana long-arm statute, the courtconcluded that the tolling provision did not apply.

Query: even though IPSOS could havebeen served, what happens if IPSOS’s activitieswithin the Indiana forum did not otherwise meetthe requirements of Indiana’s long-arm statute?That a nonresident defendant may be served doesnot necessarily mean that the court hasjurisdiction.

2. New York Law: Trade Secret ActionsThat Are Time-Barred May Be Filed InOriginal Counterclaim But Not AmendedCounterclaims

American Stock Exchange, LLC, v. Mopex, Inc.,2002 WL 1300251 (S.D.N.Y. 2002)

Under N.Y. C.P.L.R. § 203(d),counterclaims that would otherwise be time-barredat the time the complaint is filed may be assertedas claims for equitable relief if they arose from thesame transactions or occurrences asserted in thecomplaint. The New York courts, however, haveheld § 203(d) does not apply to counterclaims

asserted in an amended answer.549

Here, Amex filed a declaratory judgmentaction seeking a declaration that Mopex’s patentsfor certain business methods were invalid and notinfringed. Mopex, in turn, filed a state court suitin Illinois alleging that Amex had misappropriatedits trade secrets. That action was removed tofederal court and transferred to the S.D.N.Y. Thedistrict court dismissed all trade secret claimsagainst Amex as being time barred. Mopex thenfiled a motion for leave to amend in the New Yorkaction to add the trade secret claims. The courtdenied that motion finding that because§ 203(d) applied only to original answers,Mopex’s trade secret claim remained time-barred.

549 Coleman & Zasada Appraisals, Inc. v. Coleman, 667N.Y.S.2d 828 (3rd Dept. 1998).


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M. Relief1. Seventh Circuit: Illinois Law: Case

Involving Claims for Trade SecretMisappropriation and Patent InfringementShould Not Be Bifurcated If Based onSame Underlying Facts Due to ParallelAppeals

Nilssen v. Motorola, Inc., 255 F.3d 410 (7th Cir.2001)(Easterbrook, J.)

Nilssen, fired by Motorola in 1972, was alitigious inventor who had been threatened on atleast two occasions by the Federal Circuit withsanctions for making frivolous claims. Thepresent suit arose from discussions betweenNilssen and Motorola in the late 1980s concerninghis ideas for a new electronic ballast (used forfluorescent lamps). Nilssen contended thatMotorola had either stolen his ideas, or hadproceeded in making ballasts without using hisideas in violation of an alleged agreement. In anyevent, the district court decided that the caseshould be bifurcated between the trade secret andrelated state law claims, and Nilssen’s patentinfringement claims. The district court orderedNilssen to file a new complaint with the patentinfringement claims, and retained the originalcomplaint with the trade secret and related statelaw claims which the court ultimately dismissed.Appeal was originally taken to the Federal Circuitbecause original jurisdiction was founded on 28U.S.C. § 1338. However, a divided panel of theFederal Circuit transferred the appeal to the

Seventh Circuit.550 The Seventh Circuitexpressly refused to consider any of the issuespresented, and remanded to the case forconsolidation with the still-pending patent case.

The court did so for two principle reasons.One reason concerned Nilssen’s basis fordamages, i.e., that the trade secret cause of actionand the patent infringement cause of action werefor use of essentially the same technology. Inshort, it was not possible to separate the damages.That, indeed, had lead the district court to rejectNilssen’s damage expert’s report which also leadto the dismissal. Another reason was that

550 Nilssen v. Motorola, Inc., 203 F.3d 782 (Fed. Cir. 2000).

separating the cases would necessarily lead to twoappeals, one to the Federal Circuit and another tothe Seventh Circuit on essentially the sametechnology: “[s]quandering judicial resources byrequiring six appellate judges (at least two panelsof two circuits) to master this material should be

avoided.”551 The court noted that the jointappendix in the appeal exceeded 4000 pages.

2. Damagesa. Colorado Law: (a) An Award of

Attorney’s Fees Requires a Finding ofWillful and Malicious Missappropriation(b) An Award of a Reasonable Royalty isAppropriate Where the Defendant ProvesIt Made No Profit

Weibler v. Universal Technologies, Inc., 2002 WL119267, 61 USPQ2d 1599 (10th Cir. 2002)

UTI held a contract with the United StatesNavy to supply heat exchangers used in a plasticwaste disposal unit. The initial contract requiredUTI to purchase the heat exchangers from Tranter,a company based in Georgia. The cost wasapproximately $3,400 per unit, which UTI thoughtwas too high. UTI convinced the Navy to amendthe contract to provide that UTI could purchase theheat exchangers from any manufacturer providedthe product met Navy parameters. UTI locatedWeibler, and gave him a copy of the Navy’sspecifications along with a drawing that UTI hadcreated of a “reverse-engineered” Tranter heatexchanger. As they began working together,Weibler told UTI that that Weiblers’ ideas were toremain secret, and UTI agreed. Later whenWeibler was unable to produce shop drawings, aUTI employee did so. UTI ultimately produced itsown heat exchangers from those shop drawingswhen Weibler was unable to develop an interiorcomponent for the exchangers that met Navyparameters.

The district court, in a bench trial, foundthat UTI had misappropriated Weibler’s tradesecrets. The district court awarded Weibler areasonable royalty of approximately $111,000calculated on 15% of the cost of a Tranter unit

551 255 F.3d at 414.




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($3,400) multiplied by the number of exchangersdelivered to the Navy. The district court declinedto award Weibler attorneys fees. On appeal, theTenth Circuit affirmed.

The Colorado UTSA provides that if“willful and malicious misappropriation exists, thecourt may award reasonable attorney fees to the

prevailing party.”552 The standard of review is anabuse of discretion. The Tenth Circuit held thatthe district court did not abuse its discretion infinding that the misappropriation was neitherwillful nor malicious.

With respect to damages, the ColoradoUTSA provides for damages that “include both theactual loss caused by misappropriation and theunjust enrichment caused by misappropriation thatis not taken into account in computing actual

loss,” or in lieu thereof, a “reasonable royalty.”553

The district court had determined that based onUTI’s costs for manufacturing the heatexchangers, UTI had received no profits. Thus, adisgorgement of profits was not an appropriatemeasure of damages. The Tenth Circuit concludedthat the district court’s reasonable royalty wastherefore proper.

b. Montana Law: (a) Montana’s UTSA DidNot Incorporate Montana’s GeneralPunitive Damages Statute – The CourtMay Find “Willful and MaliciousMisappropriation” and Award ExemplaryDamages and Attorney Fees Despite aJury Verdict of No Actual Fraud and/orActual Malice(b) Ninth Circuit: “Willful and MaliciousMisappropriation” Need Not Be Provedby Clear and Convincing Evidence

Yeti by Molly, Ltd. v. Deckers Outdoor Corp., 259F.3d 1101 (9th Cir. 2001)

552 COLO.REV.STAT. § 7-74-105.553 COLO.REV.STAT. § 7-74-104.

Montana adopted a version of the UTSA

in 1985.554

In 1989, Molly Strong invented animproved winter boot having improved traction,warmth and dryness. She named it the “Yeti.”Strong received a patent on the shoe in 1992. In1993, Strong incorporated Yeti by Molly, Ltd. andsought a partner to help mass produce herproducts. She met an “old shoe dog” JamesGranville. Granville signed a nondisclosureagreement, and Strong disclosed several tradesecrets in the shoe design, including trade secretsembodied in a second patent application, as wellas details about her company’s attempts to expandproduction and sales. Unbeknownst to Strong,Granville told Peter Link, Vice-President ofDeckers – maker of the popular Teva line ofsandals – about Strong and the Yeti. Link hiredGranville as a consultant, and then approachedStrong about a possible business relationship.Link too signed a nondisclosure agreement withStrong/Yeti. The parties, however, were not ableto come to terms, and in 1994, Strong/Yeti beganto suspect that Deckers had incorporated theirtrade secrets into its products. Strong/Yeti filedsuit for, inter alia, trade secret misappropriation.The jury found in favor of Strong/Yeti on the tradesecret claim, and awarded Yeti approximately $1.3million and Strong $425,000.

The jury verdict form asked whether thejury found “by clear and convincing evidence”that Deckers acted “with actual fraud and/or actualmalice,” pursuant to Montana’s general punitive

damages statute.555 The jury answered “No.”Accordingly, the district court declined to awardpunitive damages or attorneys fees. The districtcourt felt bound by that verdict, and refused toconsider exemplary damages or an award ofattorneys fees under Montana’s UTSA, providingthat “[i]f willful and malicious misappropriationexists, the court may award exemplary

damages,”556 and “[i]f * * * willful and maliciousmisappropriation exists, the court may award

554 MONT. CODE ANN. § 30-14-401 et seq.555 MON.CODE ANN. § 27-1-221.556 MON.CODE ANN. § 30-14-404.




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reasonable costs and attorney fees to the prevailing

party.”557

On appeal, the Ninth Circuit reversed,concluding that “the Montana legislature did notincorporate the definition of punitive damages into

the trade secrets act.”558 In doing so, the NinthCircuit made two rulings that likely go beyondMontana law per se, and apply to the UTSA ingeneral.

First, the court observed that under theMontana general statute, punitive damages mustbe proved “by clear and convincing evidence,” and“[n]othing in the MUTSA suggests that exemplarydamages and attorneys’ fees need to be provided

by clear and convincing evidence.”559 Althoughthe Ninth Circuit did not acknowledge the same,

actually the courts are split on the issue.560 TheNinth Circuit, though, cited a Minnesota Court ofAppeals decision on the preemption issue

(discussed below), Zawels v. Edutronics, Inc.,561

and Minnesota in that case adopted thepreponderance of the evidence standard. It is thuslikely that the Ninth Circuit will be disposed toapplying the same standard to the UTSA ingeneral.

The Ninth Circuit secondly noted that theMontana legislature had, in other contexts,specifically referenced the general punitivedamages statute, but in enacting the MUTSA hadnot done so. Lastly, the Ninth Circuit noted that inZawels, the Minnesota Court of Appeals haddecided that the preemption provisions of theUTSA, namely that the UTSA prevailed overconflicting law providing civil remedies for tradesecret misappropriation, meant that by adopting

557 MON.CODE ANN. § 30-14-405.558 259 F.3d at 1111.559 Id.560 Trandes Corp. v. Guy F. Atkinson Co., 996 F.3d 655, 666

(4th Cir. 1993), cert. denied, 510 U.S. 965(1993)(Maryland law-clear and convincing); Centrol, Inc.v. Morrow, 489 N.W.2d 890, 896 (S. Dak. 1992)(clearand convincing); Zawels v. Edutronics, Inc., 520 N.W.2d520, 523-24 (Minn. Ct. App. 1994)(preponderance).

561 520 N.W.2d 520, 523-24 (Minn. Ct. App. 1994).

the UTSA a state legislature must have intendedthat the exemplary damage provisions prevailedover general punitive damage provisions.

c. Arkansas Law: A Trade Secret OwnerMay Recover Either Its Lost Net Profits orThat Portion of the Misappropriator’s NetProfits Resulting From Unjust Enrichment

Brown v. Rullam Enterprises, Inc., 73 Ark. App.296, 44 S.W.2d 740 (Ark. App. 2001)

Arkansas adopted the UTSA in 1988.562

In Saforo & Assoc. Inc. v. Porocel

Corp.,563 the Arkansas Supreme Court held thatdamages under the Arkansas UTSA should becalculated by determining either the plaintiff’s lostprofits or the defendant’s gain, but not acombination of the two. The court did not,however, specifically address whether profits orgain should be calculated on a gross or net basis,and did not discuss what deductions werepermissible.

In Brown, Rullam, d/b/a Lam Containers(“Lam”) and the defendants Brown et al.,employees of Unique Design Wholesale(“Unique”), competed in the telemarketingbusiness for baskets, silk flowers and other itemsused in the florist industry. Lam charged that itsformer employees, now working for Unique, hadtaken its index cards containing customerinformation. The trial court found that Uniquehad, indeed, misappropriated Lam’s trade secrets,and Unique apparently conceded the same. Thetrial court calculated damages, though, by takingUnique’s gross sales, then deducting freight costs,and multiplying by a ten percent profit multiplier.The court then doubled the result and rounded itoff to $50,000. On appeal, the Arkansas Court ofAppeals held that was error, and remanded.

The court held that “the proper method ofcalculation [of damages] is on the basis of netprofit, whether lost by the injured party or gained

562 ARK. CODE ANN. § 4-75-602 et seq. (Michie 1996).563 337 Ark. 553, 567, 991 S.W.2d 117, 124 (Ark. 1999).



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by the wrongdoer * * *. Due to Unique’sappropriation of Lam’s trade secrets, Lam isentitled to recover either its resulting lost netprofits or that portion of Unique’s net profits bywhich it has been unjustly enriched, which affordsthe greater relief.” The court further held thatthere was no authority for doubling that figurebecause punitive damages were not permitted by

the Arkansas UTSA.564 The court further heldthat there was no authority for “rounding off.”

d. Colorado Law: Damages for Trade SecretMisappropriation May Be Based on theDefendants’ Cost of Capital Savings

Sonoco Products Co. v. Johnson, 23 P.3d 1287(Colo. App. 2001)

Sonoco and The Newark Group weredirect competitors in manufacturing paper spiraltubes and cores for carrying paper towels, tape,newsprint and so forth. James Johnson hadworked for Sonoco for thirty years, but thenresigned and joined Newark. The trial court foundthat Johnson had misappropriated a number ofitems from Sonoco, including manufacturingtechnology, floppy disks, manuals, manufacturingprocesses, customer lists and pricing information.The trial court awarded Sonoco approximately$4.6 million in actual damages, $22,165.50 indamages against Johnson, and punitive damages of$2.3 million. Sonoco asserted on appeal that therewas no support for the $4.6 million award. TheColorado Court of Appeals disagreed.

Sonoco had presented expert testimonyNeward saved between $19.7 and $25 million in“cost of capital” by obtaining Sonoco’s tradesecrets through Johnson. During closingarguments, Sonoco’s counsel alternativelysuggested that if the trial court granted aninjunction against future use (which the courtsubsequently granted), the actual damages wouldbe $4.6 million. The court found that wassufficient to support the award.

564 Arkansas specifically deleted the exemplary damageprovision of § 3(b) of the Model UTSA. ARK. CODEANN. § 4-75-606.

e. Florida Law: Damages: (a) Pre-JudgmentInterest Is Only Available for LiquidatedDamages(b) Exemplary Damages Are Limited toCases of Aggravated Misconduct

Perdue Farms Inc. v. Hook, 777 So.2d 1047 (Fla.App. 2001)

Florida adopted a version of the UTSA in

1988, which was amended in 1991 and 1997.565

Dennis Hook, developed a proprietaryprocess for preparing, storing and reheatingrotisserie style chicken. Under that process,chicken pieces were seasoned, cooked in avacuum-sealed bag, and then refrigerated, but notfrozen. The chicken parts could be refrigerated forup to nine weeks. The chicken pieces could thenbe “rethermalized” by microwaving and browningin an oven or deep fryer. The principal advantagewas that fast-food restaurants could prepare andserve rotisserie-style chicken in less than tenminutes.

Pizza Hut agreed to test market theprocess, and brought in Perdue. Kentucky FriedChicken also agreed to test market the process.All signed confidentiality agreements with Hook.Hook then disclosed his process to Perdue,although Perdue claimed that the only proprietaryportion was Hook’s seasonings. In any event,sometime later, the test marketing was cancelled.Hook thereafter attempted unsuccessfully tomarket the product through other companies in theU.S., although he did enter into an agreement thatlicensed the in Europe, Russia, the Middle Eastand South Africa.

Perdue, meanwhile, began developing its“TenderReady” chicken, which Hook believed hadresulted from a misappropriation of his process.Hook sued, and the jury awarded $25 million inactual damages for trade secret misappropriationand $2 million in damages for unjust enrichment.The trial court further awarded Hook $6.7 millionin exemplary damages and assessed $14.8 millionin prejudgment interest.

565 FLA. STAT. ANN. §§ 688,001 et seq.




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The Florida Court of Appeals affirmed the$25 million damage award even though theevidence was somewhat slim. The court, however,reversed the award of exemplary damages findingnoting that “[e]xemplary damages are given solelyas a punishment where torts are committed withfraud, actual malice or deliberate violence oroppression, or when the defendant acts willfully,or with such gross negligence as to indicate awanton disregard of the rights of others.” Thecourt concluded that Perdue’s conduct here simplydid not reach that level.

The court further reversed the award ofprejudgment interest noting the general rule that“[o]nce damages are liquidated, prejudgmentinterest is considered an element of those damagesas a matter of law * * *,” and that prejudgmentinterest involved equitable considerations. Basedon the evidence, the court concluded that thedamages could not have been liquidated on thedate that Perdue began developing itsTenderReady product, or on any other date certain.The court held that damages were not liquidateduntil the jury’s verdict, and that Hook was onlyentitled to prejudgment interest from that timeuntil the date of judgment, a period of about onemonth.

f. Wisconsin Law: Damages for TradeSecret Misappropriation Includes LostProfits Resulting From Defendant’sManufacture and Distribution of DefectiveProduct Incorporating Trade Secret

World Wide Prosthetic Supply, Inc. v. Mikulsky,251 Wis.2d 45, 640 N.W.2d 764 (Wis. 2002)

Wisconsin adopted a version of the UTSA

in 1986.566 Under the Wisconsin version of theUTSA, “[d]amages may include both the actualloss caused by the violation and unjust enrichment

* * *.”567

World Wide designed and distributedendoskeletal prosthetic components. Robert and

566 Wis. Stat. Ann. §§ 134.90 et seq.567 § 134.90(4).

Karen Mikulsky, d/b/a Voyager, Inc., producedcomponents for World Wide. When WorldWide’s customers began complaining that some ofthe components produced by Voyager werecracked and broken, the parties’ relationshipdeteriorated, and World Wide eventually arrangedfor another company to manufacture itscomponents. Voyager, however, continued tomanufacture and distribute the components,without making changes to their appearance ordesign. World Wide sued alleging trade secretmisappropriation, and claimed that it was entitledto recover its lost profits due to the fact that theVoyager components were defective and that thesedefective components, which looked like WorldWide’s components, caused buyers to loseconfidence in World Wide’s products.

The trial court, over objection, admittedsome testimony on World Wide’s damage theory,but later reconsidered and granted Voyager a newtrial. World Wide petitioned the court of appealsfor leave to appeal, which the court granted. Thecourt of appeals held that under § 134.90(4) WorldWide could recover damages that were the naturaland proximate result of Voyager’s wrongfulconduct, including losses suffered becauseVoyager distributed a defective productincorporating World Wide’s trade secret. Onappeal, the Wisconsin Supreme Court affirmed.

The court relied heavily on the SeventhCircuit’s 1998 decision in Micro Data Base Sys.

Inc. v. Dharma Sys., Inc.,568 in which Dharma putinto evidence that Micro Data had souredDharma’s relationship with another entity, whootherwise would have purchased at least 1000copies of Dharma’s software. The court held thatDharma could recover its resulting lost profits.Although Micro Data was based on NewHampshire law, the court noted that bothWisconsin and New Hampshire had adopted aversion of the UTSA.

The court concluded that World Wide’slost profits would be the reasonably foreseeabledamages flowing from Voyager’s marketing of itsown defective product. The court found that resultwas supported by the Restatement (Third) of

568 148 F.3d 649, 46 U.S.P.Q.2d 1922 (7th Cir. 1998).

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Unfair Competition commenting that: “A plaintiffmay also recover any other proven pecuniary lossattributable to the appropriation * * *. Theplaintiff is also entitled to recover lossesassociated with sales of its own goods at reducedprices resulting from the wrongful competition of

the defendant.”569 The court additionallyreasoned that trade secret misappropriation is oftencharacterized as sounding in tort, and ordinarilytort damages are limited only by the concept of“proximate cause” and public policy concerns.

Accordingly, the court held “that ‘actualloss’ as used in § 134.90(4) may include lostprofits resulting from Voyager’s manufacture anddistribution of a defective product incorporating

World Wide’s trade secret.”570

g. Texas Law: (a) Lost Profit Damages AreNet Lost Profits Reached by Deducting AllExpenses From Gross Receipts(b) Opinions on Lost Profits Must BeBased on Objective Evidence(c) Plaintiff Must Demonstrate OneComplete Calculation of Lost Net Profits

Adkins Adjustment Services, Inc. v. Neal, 2001Tex. App. 6939 (Tex. App. – Dallas 2001)(non-precedential)

Texas has not adopted the UTSA.

Few facts are given in this non-precedential opinion, but it appears that AAS suedNeal for breach of non-solicitation and non-competition covenant, tortious interference withcontracts and business relations, and trade secretmisappropriation. The trial court granted Neal adirected verdict on all claims, and the Court ofAppeals affirmed.

On the issue of damages, the courtreminded the bar that the proper measure of lost

569 RESTATEMENT (THIRD) OF UNFAIR COMPETITION,§ 45 cmt. e (1995).

570 251 Wis.2d at 61, 640 N.W.2d at 770.

profit damages is net profits,571 and that “[n]etprofit is that which remains in the conduct of abusiness after deducting from its total receipts allof the expenses incurred in carrying on the

business.”572 According to the court, “[a]t aminimum, opinions or estimates of lost net profitsmust be based on objective facts, figures, or datafrom which the amount of lost net profits can be

ascertained.”573 Also, according to the court, a“plaintiff must demonstrate one completecalculation of lost net profits,” and “a party mustshow either the actual existence of future contractsfrom which lost net profits can be calculated withreasonable certainty or a history of

profitability.”574

Here, AAS’s expert witness estimated lostgross profits, meaning total receipts minusvariable costs, and there was no evidence of ahistory of profitability. Accordingly, the courtconcluded that without the requisite element ofdamages, AAS had failed to prove breach of thenon-solicitation or non-competition covenants, aswell as the tortious interference claims. Withrespect to the trade secret misappropriation claim,the court concluded that AAS had presented noevidence that its information was secret or that itmade an effort to keep the informationconfidential. The court noted that information wasnot locked up or marked confidential, when Nealleft, AAS did not ask him to return anyinformation, and much of the information wasotherwise available.

571 Edmunds v. Sanders, 2 S.W.3d 697, 705 (Tex. App. – ElPaso 1999, pet. denied); Travel Masters, Inc. v. Star Tours,Inc., 830 S.W.2d 614, 620 (Tex. App. Dallas), rev’d onother grounds, 827 S.W.2d 830 (Tex. 1991).

572 Travel Masters, 830 S.W.2d at 620.573 Edmunds, 2 S.W.3d at 705.574 Id.







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h. North Carolina Law: Legal Malice(Wrongful Intent) in Bringing a TradeSecret Misappropriation Suit MayConstitute Tortious Interference withContract Regardless of Whether the Suit isObjectively Reasonable

Reichhold Chemicals, Inc. v. Goel, 555 S.E.2d 281(N.C. App. 2001)

North Carolina adopted a version of the

UTSA in 1981.575 However, North Carolinacontinues to use the six common law factors of the

Restatement (First) of Torts. 576

Goel, a recognized expert, began workingfor Swift Adhesives, a division of ReichholdChemicals, in 1990, as VP of R&D because of hisextensive experience in moisture cured adhesives.Goel and Swift negotiated a non-competitioncovenant that would permit Goel to compete inreactive adhesives after leaving Swift. In 1994,Reichhold eliminated Goel’s position, and movedhim to an automotive adhesives unit. That was ademotion, and an effort to force Goel out of thecompany. From that time, Goel was not involvedwith R&D for Reichhold. Goel initiateddiscussions with Imperial Adhesives, and at somepoint Imperial hired Goel as a consultant.Imperial’s legal counsel advised Goel that thediscussions with Imperial would not violate Goel’snon-competition covenant with Swift. Goel andImperial specifically agreed that there would be notransfer of confidential or trade secret information.

A secretary at Imperial contactedReichhold in 1996 and indicated that she believedthat Goel was involved in improper conduct.Reichhold made a report to the FBI whoinvestigated and indicated that the allegations oftrade secret misappropriation were notsubstantiated. Nevertheless, Reichhold had Goelescorted from the premises, told Goel that hisreputation would be ruined, that Goel would never

575 N.C. GEN. STAT. §§ 66-152 et seq.576 RESTATEMENT (FIRST) OF TORTS § 757 cmt. b

(1939). See State ex rel Utilities Comm’n v. MCI, 132 N.C.App. 625, 634, 514 S.E.2d 276, 282 (1999).

get another job in the adhesives industry, and thatImperial would never get into the reactiveurethane adhesives business. Reichhold then fileda complaint against Imperial alleging that Goelhad misappropriated Reichhold’s trade secrets.Imperial abandoned its consulting agreement withGoel, feeling intimidated by Reichhold, a muchlarger company. Reichhold also attempted tocoerce Imperial into cooperating in its suit bythreatening to sue Goel, which it did anyway.

The trial court found that found that at thetime of his termination, Goel was entitled tocertain payments for vacation time and otherbenefits, and ordered that those payments bedoubled because of Reichhold’s failure to showthat they were withheld in good faith. The trialcourt further found that Imperial’s adhesive wasnot the same as Reichhold’s, and that both couldbe easily derived from information provided byraw material suppliers. The trial court furtherfound that all of the information Goel provided toImperial was either widely known, or known toGoel prior to joining Reichhold. The trial courtconcluded that Reichhold and tortiously interferedwith the consulting agreement between Goel andImperial by maliciously filing a lawsuit for tradesecret misappropriation against Imperial, andawarded Goel compensatory and punitivedamages.

On appeal, the court affirmed. The courtobserved that “malice” in this context meant legalmalice, namely intentionally doing some harmfulact without legal justification. The courtconcluded that “a showing of legal malice willdefeat plaintiff’s defense of justification in filingsuit against Imperial, and that insofar as legalmalice related to intent, the ‘objective

reasonableness’ of the suit is irrelevant.”577 Thecourt further concluded that the trial court’sconclusion that Reichhold’s information was nottrade secret because it was commonly known wassupported by competent evidence.

577 555 S.E.2d at 288.

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i. North Carolina Law: Trial Court isJustified in Entering a Broad Injunction(Ordering That Defendant’s Business bePermanently Closed) Where DefendantsAttempted to Evade Prior Injunction byAdding Trace Amounts of Inert Elements

Barker Industries, Inc. v. Gould, 553 S.E.2d 227(N.C. App. 2001)

Barker manufactured high grade,inorganic and organo-metallic chemicalcompounds resulting from twenty-five years ofresearch. In 1993, Barker hired Gould to performclerical work. Gould had no previous experienceof the area of manufacturing chemicals. In 1997,however, Gould complied Barker’s customer,supplier and pricing information in an “AddressBook,” and also made copies of Barker’s productformulations. After Gould’s termination, he beganmanufacturing chemical compounds in directcompetition with Barker using information he hadobtained from Barker, and supplies from Barker’ssuppliers. Gould also attempted to sell thosechemicals to Barker’s customers. The trial courtenjoined Gould and his company from alloperations, ordering that the business bepermanently closed. The trial court also awardedBarker compensatory and punitive damages. Onappeal, the Court of Appeals affirmed.

With respect to the scope of theinjunction, the court found that the defendantswere “solely responsible for their plight byactively ignoring the terms of the preliminaryinjunction against them.” In the preliminaryinjunction, the trial court set out a list of specificchemicals that Gould could not manufacture, aswell as the specific suppliers and customerscovered by the injunction. Gould, however, addedtrace amounts of chemicals to his compounds thatdid not affect the compound’s performance, andthen sold those chemicals to affiliates of theprohibited customers. Noting that broadinjunctive relief is available where there has beena showing of bad faith or underhanded dealings,the court concluded that the injunction was withinthe trial court’s proper exercise of discretion.

j. North Carolina Law: (a) Mere Enticementand Hiring of an At-Will Employee is NotTortious Inteference

(b) Outside the Context of a FiduciaryRelationship, There is No IndependentTort for Breach of Loyalty by an At-WillEmployee

Combs & Assoc., Inc. v. Kennedy, 147 N.C. App.362, 555 S.E.2d 634 (2001)

Combs provided sales representationservices for manufacturers of water andwastewater equipment. Defendant AmericanSigma (Sigma) was a subsidiary of a manufacturerof such equipment. Sigma appointed Combs itsexclusive sales representative for North and SouthCarolina, and Virginia. The agreements wereterminable on thirty days notice.

Kennedy started working for Combs in1994, and, in 1996, approached co-defendantMiller about forming a new sales representativecompany. Miller was a former employee ofCombs. Kennedy and Miller subsequentlyexchanged e-mails about forming a new company,Carolina Environmental Technologies, LLC(CET), and began identifying potential customers,which included Sigma. They incorporated CET inNovember 1998, and Kennedy resigned fromCombs in December.

Meanwhile, Sigma’s Regional SalesManager had had meetings with Combs beginningin early 1998 in an attempt to increase sales.Sigma, however, became convinced that Combswould not be able to increase sales, and beganlooking for a replacement. After meeting withCombs, Sigma moved its business to CET. Combssued alleging, inter alia, trade secretmisappropriation and tortious interference. Thetrial court granted the defendants summaryjudgment, and the Court of Appeals affirmed.

With respect to trade secretmisappropriation, the court concluded that theinformation Combs alleged constituted trade secretinformation was either readily ascertainable or hadnot been properly protected. With respect to thetortious interference claim, Combs alleged thatSigma and Miller had tortiously interfered withKennedy’s employment. The court noted,however, that “our Supreme Court has held thatthe mere enticement and hiring of an at-willemployee by a competing company, absent an






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improper motive, does not give rise to a tortiousinterference with a contract claim.” Combs alsoargued that Kennedy had interfered with itscontract with Sigma by breaching his “fiduciaryduty of loyalty.” The court disagreed, noting that“[o]ur Supreme Court has recently addressed theissue of an at-will employee’s duty of loyalty tohis employer in the context of starting a competingcompany. * * * the Court held that, outside thepurview of a fiduciary relationship, our State doesnot recognize an independent tort for breach ofduty of loyalty by an at-will employee.”

k. Rhode Island Law: Exemplary DamageProvisions of Uniform Trade Secrets ActPrevail Over Common Law Standard

McFarland v. Brier, 769 A.2d 605 (R.I. 2001)

Rhode Island enacted a version of the

UTSA in 1986, and a revised version in 1992.578

Ready & Lundy (R&L) was an industrialsupply business that McFarland owned. In theearly 1980s, McFarland hired Bibeau as a salesrepresentative. In 1990, McFarland and Bibeauentered into an agreement under which McFarlandfinanced Bibeau’s purchase of R&L and Bibeauwould repay the loan from company profits. Thatagreement was modified in 1995 to includereciprocal non-competition provisions as well asother provisions. During the time that Bibeau waspresident of R&L, Brier and his accounting firmwere retained to R&L to assist in financing thebuyout. Thus, both Bibeau and Brier had fullaccess to all of the information of R&L. Bibeauand Brier, however, formed another company,Consigned Systems, Inc. (CSI) to engage in head-to-head competition with R&L. In doing so,Bibeau and Brier used R&L’s customer and otherinformation. Indeed, in a meeting with a potentialcustomer, Bibeau advised that if the customer wasever questioned, he was “not present” at themeeting (due to his non-competition covenant),but that he possessed all of R&L’s computerprograms as well as all customer informationneeded to compete with R&L.

578 R.I. GEN. LAWS §§ 6-41-1 et seq.

Bibeau filed an action to be relieved of thenon-competition agreement, and R&Lcounterclaimed. Bibeau was permanentlyenjoined from using any of the information stolenfrom R&L, and was enjoined for three years fromcompeting with R&L vis-à-vis any customers whowere R&L’s customers at the time Ribeau left.McFarland and R&L subsequently filed thepresent lawsuit against Brier and CSI alleging,inter alia, tortious interference and trade secretmisappropriation. The trial court found that CSIhad misappropriated trade secrets from R&L, thatBrier had tortiously interfered with the contractualrelation between McFarland and Bibeau, i.e., thenon-competition covenant, that Brier and CSI hadinterfered with the prospective business advantageof R&L, and that Brier had disclosed confidentialbusiness information belonging to his formerclient in violation of his fiduciary duty.

The trial court, however, denied punitivedamages relying on the common law standardrather than the standard set by the Rhode IslandUniform Trade Secrets Act. On appeal, the courtreversed noting that the RIUTSA specificallyprovided for exemplary damages for willful andmalicious misappropriation, and that standard didnot require misconduct amounting to criminalconduct. According to the court, “[u]pon carefulreview of [R.I. GEN. LAWS] § 6-41-3, it is clearthat the Legislature intended to relax this stringentcommon law standard to deal with the intentionaland egregious misconduct found in this case. * * *We are satisfied that if ever egregious misconductdeserving of punitive damages has occurred, this issuch a case.”

3. Vicarious Liabilitya. Minnesota Law: Absent Evidence That

Misappropriation by New Employee isForseeable, New Employer is NotVicariously Liable for Misappropriation

Hagen v. American Agency, Inc., 633 N.W.2d 497(Minn. 2001)

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Minnesota adopted a version of the UTSA

in 1981.579 The Minnesota statute added thefollowing definition of a trade secret:

The existence of a trade secret isnot negated merely because anemployee or other person hasacquired the trade secret withoutexpress or specific notice that it isa trade secret if, under all thecircumstances, the employee orother person knows or has reasonto know that the owner intends toexpects the secrecy of the type ofinformation comprising the tradesecret to be maintained.

Burmeister purchased the assets ofHagen’s insurance agency in 1991. Hagen went towork for Burmeister, first as an independentcontractor and later as an employee under anemployment agreement that contained a non-disclosure covenant vis-à-vis Burmeister’spolicyholders. The identification of thosepolicyholders, per the agreement, was “deemed tobe [a] ‘trade secret[ ]’ within the meaning of theMinnesota Uniform Trade Secrets Act.” Theemployment agreement also contained a non-competition covenant.

In 1994, Hagen met with a branchmanager of American Agency to exploreemployment, and told American about the non-disclosure and non-competition covenants. Hagenthen resigned from Burmeister. Apparently therewas a discussion between Hagen and the owner ofBurmeister to the effect that if Hagen’s family andfriends wanted to keep their business with Hagen,that was acceptable, but if Hagen took 90% of theaccounts, that would be a problem. Hagen went towork for American about one week later, anddiscussed his parting with American’s branchmanager. American’s branch manager testifiedthat he was under the impression that Hagen had agood exit interview and that he was free to solicitsome of the accounts.

Hagen then sent out solicitation letters tomore than 200 of Burmeister’s accounts.

579 MINN. STAT. §§ 325C.01-.08.

American was aware that he had done so, and hadreviewed a draft of his letter. Burneister’sattorney sent Hagen a letter charging him withviolating the non-competition covenant. Hagenthen filed a declaratory judgment action againstBurmeister. Meanwhile, American’s branchmanager, Hagen and the owner of Burmeisters metand agreed to send a joint customer letter sayingthat they had the right to select the insurance agentof their choice. Burmeister viewed the letter as“damage control,” while Hagen and Americanviewed it as resolving the conflict. Burmeisterthen counterclaimed for breach of contract, unjustenrichment and trade secret misappropriation.Burmeister named American in a tortiousinterference count, but later tried the case based onvicarious liability.

The trial court held that Hagen was liablefor breach of contract and trade secretmisappropriation. The court, however, held thatAmerican could not be liable for violating theMUTSA under a theory of vicarious liability. Onappeal, the Minnesota Court of Appeals reversedholding that American could indeed be vicariouslyliable under the MUTSA, but that an essentialelement was whether Hagen was acting within thecourse and scope of his employment when hemailed the solicitation letter. On remand, the trialcourt held that Hagen was not acting within thecourse and scope of his employment. On appeal,the Minnesota Court of Appeals disagreed andreversed. On further appeal, however, theMinnesota Supreme Court reversed concludingthat although there could be vicarious liability,none was shown here.

Under Minnesota law, vicarious liabilitywill not be imposed unless there is someconnection between the tort and the business “suchthat the employer in essence assumed the risk

when it chose to engage in the business.”580

Specifically, “an employer is vicariously liable foran employee’s intentional tortious acts when:(1) the tort is related to the employee’s duties; and(2) the tort occurs within the work-related limits of

time and place.”581 Additionally, under

580 Hagen, 633 N.W.2d at 504, citing Fahrendorff v. NorthHomes, Inc., 597 N.W.2d 905, 910 (Minn. 1983).

581 Id.



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Minnesota law, “it is a question of fact whether theemployee’s acts were foreseeable, related to, andconnected with acts otherwise within the scope ofemployment,” and foreseeability is an importantconsideration. In determining foreseeability, thecourts do not require that the employer actuallyforesee the tortious act, but require that “anemployee’s conduct is not so unusual or startlingthat it would seem unfair to include the lossresulting from it among other costs of theemployer’s business.” The court noted that “[t]hisstandard of foreseeability is commonly proven, ora question of fact is raised, when a partyestablishes that the type of tortious conduct

involved is a well-known industry hazard.”582

Here, the court noted that the trial courthad concluded that American did not know orhave reason to know that Hagen had not madeappropriate arrangements with Burmeister beforehe sent out the letters. Thus, according to thecourt, Burmeister was required to introduce someevidence at trial that Hagen’s tortious act wasforeseeable, for example, evidence showing thatthe risk of employees misappropriating tradesecrets was a well-known hazard in the insuranceindustry. Because such evidence was lacking, thecourt concluded that Burmeister could not succeedon its vicarious liability theory.

N. Insurancea. Maryland Law: No “Advertising Injury”

Insurance Coverage for MisappropriationWhen Misappropriation Resulted FromDeveloping Product

Perdue Farms Inc. v. Natinal Union FireInsurance Co. of Pittsburgh, P.A., 197 F. Supp.2d370 (D. Md. 2002)

Sometime prior to 1991, an inventor,Dennis Hook, developed a proprietary process forpreparing, storing and reheating rotisserie stylechicken. Under that process, chicken pieces wereseasoned, cooked in a vacuum-sealed bag, andthen refrigerated, but not frozen. The chickenparts could be refrigerated for up to nine weeks.The chicken pieces could then be “rethermalized”

582 Id.

by microwaving and browning in an oven or deepfryer. The principal advantage was that fast-foodrestaurants could prepare and serve rotisserie-stylechicken in less than ten minutes.

Pizza Hut agreed to test market theprocess, and brought in Perdue. Kentucky FriedChicken also agreed to test market the process.All signed confidentiality agreements with Hook.Hook then disclosed his process to Perdue.Sometime later, however, the test marketing wascancelled.

In 1996, Hook say advertisements and adisplay at a Paris trade show for Perdue’s“TenderReady” chicken which Hook believed hadresulted from a misappropriation of his process.He sued, and ultimately received a damage awardof almost $50 million. While the case was onappeal, Hook and Perdue entered into a “high-low” settlement agreement which resulted in Hookrecovering $30 million. Perdue now soughtcoverage for those damages.

Perdue urged that advertising injurycoverage existed because the misappropriationclaim arose from the advertisements for the“TenderReady” product in Paris. The court,however, concluded, after reviewing the recordfrom the trial, that the jury found that Perduemisappropriated the Hook process by developingand marketing the “TenderReady” product, notthrough the advertisements in Paris. Further, thepolicy-in-issue defined “Advertising Liability” as“piracy or unfair competition or ideamisappropriation under an implied contract.”Here, liability arose from the express contracts thatthe parties had signed with Hook. Perduecountered that its liability arose under the FloridaUTSA, rather than under contract. The courtdisagreed, finding that Perdue’s liability arosefrom Perdue’s failure to perform the expressconfidentiality agreements it had with Hook, andthat avoided coverage.




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b. Illinois Law: Allegations of Trade SecretMisappropriation Do Not Constitute“Advertising Injury” For Purposes ofInsurance Coverage

Lexmark Int’l, Inc. v. Transportation InsuranceCo., 327 Ill. App.3d 128, 761 N.E.2d 1214 (Ill.App. 2001)andMcDonald’s Corp. v. American Motorists Ins. Co.,321 Ill. App.3d 972, 748 N.E.2d 771 (Ill. App.2001)

In both cases, Lexmark and McDonald’s,respectively, sought insurance coverage under atheory of advertising injury in instances in whichLexmark and McDonald’s had been sued for tradesecret misappropriation. In McDonald’s,McDonald’s urged that the real cause of actionwas not for trade secret misappropriation, but for“cloud on title.” In Lexmark, Lexmark argued thatcertain allegations regarding “copying” broughtthe action within the policy definition of“advertising injury.” In both cases, the IllinoisCourt of Appeals disagreed. In both cases, thecourt viewed the underlying trade secret cause ofaction as having little, if anything, to do withadvertising or promotion, or other activitiescovered by the insurance contracts.

c. Wisconsin Law: Cause of Action forTrade Secret Misappropriation Does NotFall Within “Advertising Injury”Coverage

Fireman’s Fund Insurance Co. of Wisconsin v.Bradley Corp., 2002 Wisc. App. LEXIS 675 (Wis.App. 2002)

Bradley and Lawler Mfg. Co., a co-defendant, were competitors in the developmentand sale of thermostatic mixing systems, i.e.,systems that mixed hot and cold water to producetempered water that was used in emergencyshower and eyewash systems. In an underlyinglawsuit for, inter alia, trade secretmisappropriation brought by Lawler, Lawleralleged that a former Lawler employee stoleLawler’s designs for its thermostatic mixingtechnology, and that Bradley then hired thatemployee and used the stolen technology to create

its own emergency showers and eyewash systems.Bradley notified its carrier, Fireman’s Fund, andFireman’s Fund sought a declaratory judgmentthat it had no obligation to defend or indemnifyBradley. The trial court ordered Fireman’s Fundto pay Bradley approximately $2.8 million fordefense and indemnification costs. On appeal, theWisconsin Court of Appeals reversed.

The policy defined “advertising injury” as,among other things, “misappropriation ofadvertising ideas or style of doing business; ord.infringement of trademark, copyright, title orslogan.” The court noted that in order for there tobe coverage, (1) the injury must fall within one ofthe categories covered under the insurance policy;and (2) there must be a causal connection betweenthe advertising and the injury. The courtconcluded that although the trade secretmisappropriation count might be “liberally”construed to fall within the definition of“advertising injury,” there nevertheless was nocoverage because there was no connectionbetween the advertising and the injury, i.e.,Bradley’s “injury” – its liability to Lawler – wascaused by theft of Lawler’s trade secrets, not anysubsequent advertising.

VIII. OBLIGATIONS ARISING FROMEMPLOYMENT

A. Implied Obligations1. General Rule

One of the implied duties of an employeeis to refrain from using confidential or proprietaryinformation acquired during the employmentrelationship in a manner adverse to the employer,regardless of any written employment

agreement.583 That duty, however, does not barthe use of general knowledge, skill andexperience, but that duty prevents a formeremployee from using confidential information or

583 See T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc.,965 S.W.2d 18 (Tx. App.–Houston [1st Dist.], 1998,no writ). ; Am. Derringer Corp. v. Bond, 924 S.W.2d 773(Tex. App.–Waco 1996, no writ); Miller Paper Co. v.Roberts Co., 901 S.W.2d 593 (Tex. App.–Amarillo 1995,no writ).






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trade secrets acquired during the course of

employment.584

That obligation survives termination of

employment.585 Indeed, it has been held thatsuch an obligation extends beyond employees toindividuals or companies acting in an agency

capacity.586 Also, at least one court has held thatthe obligations arising from employment mayfurnish sufficient basis for an injunction eventhough a written non-disclosure agreement was

found to fail for lack of consideration.587

However, those implied obligations, in theabsence of an express agreement, do not covergeneral information learned as the result ofemployment and do not expressly include anobligation not to solicit former customers or

clients.588

2. An Essentially Unlimited ImpliedObligation of Confidentiality May beLimited by an Express Agreement of thePartiesThat was the Ninth Circuit’s holding

(interpreting Oregon law) in Union Pac. R.R. Co.

v. Mower,589 and is certain to influence courts in

584 Am. Derringer Corp. v. Bond, 924 S.W.2d 773 (Tex.App.–Waco 1996); Miller Paper Co. v. Roberts Co., 901S.W.2d 593 (Tex. App.–Amarillo 1995, no writ).

585 Am. Derringer Corp. v. Bond, 924 S.W.2d 773 (Tex.App.–Waco 1996); Miller Paper Co. v. Roberts Co., 901S.W.2d 593 (Tex. App.–Amarillo 1995, no writ);AutoWax Co., Inc. v. Byrd, 599 S.W.2d 110 (Tex. Civ.App.–Dallas 1980, no writ).

586 RESTATEMENT (SECOND) OF AGENCY § 396. See alsoMicromanipulator Co. Inc. v. Bough, 779 F.2d 255, 257 n.5(5th Cir. 1985).

587 Beck Computing Servs., Inc. v. Anderson, 524 A.2d 990(Pa. Super. Ct. 1987).

588 Vigoro Indus., Inc. v. Crisp, 82 F.3d 785 (8th Cir. 1996);Hart v. McCormick, 746 S.W.2d 330 (Tex. App.–Beaumont 1988, no writ); Keystone Life Ins. Co. v.Marketing Management Inc., 687 S.W.2d 89 (Tex. App.–Dallas 1985, no writ)(customer list protected despiteabsence of confidentiality provisions in contract, andfurther absent any expression of confidentiality).

589 219 F.3d 1069 (9th Cir. 2000).

a variety of situations. Basically, the court heldthat if the parties impose a limit on an obligationof confidentiality, that limit prevails. Althoughthis case involved a departing employee, byanalogy, temporal limitations in non-disclosureagreements may be interpreted to inject the subjectmatter of the NDA into the public domain uponexpiration of such limitations.

Mower was employed by UP from 1979 to1992 first as a low-level claims adjuster and lateras Director of Occupational and EnvironmentalIssues. In that later position, he had responsibilityfor investigating and resolving thousands ofoccupational illness claims filed against UP, andworked closely with UP’s law department in doingso. In 1992, Mower was asked to resign. Mowerand UP entered into a “Resignation Agreement”under which Mower served as a consultant to UPfor three years. The agreement containedprovisions requiring Mower to maintain UP’sconfidential information in confidence and not toconsult with any person asserting claims againstUP. The agreement terminated on December 31,1995.

In May 1997, an individual filed acomplaint against UP in Idaho alleging that he hadsustained personal injuries while employed by UP.Mower was added to a witness list in that litigationin 1998. Mower, in an affidavit, said that hewould testify about a study he had conducted forUP in 1989 relating generally to the same type ofinjury alleged to have been suffered here. UPobjected, and also brought a second action inOregon seeking an injunction prohibiting Mowerfrom testifying in the Idaho case or any other case.The district court granted the injunction. Onappeal, the Ninth Circuit reversed.

The court acknowledged that “Oregon lawimposed on every employee a legal duty to protectan employer’s trade secrets and other confidentialinformation, an obligation that continues beyond

the term of employment.”590 The court also,however, found that “Oregon also generallypermits parties to alter by negotiations duties that

would otherwise be governed by state law.”591

590 219 F.3d at 1073.591 Id.















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The court concluded that “under Oregon law,parties have the power to alter the implied duty ofconfidentiality. The existence of an expressagreement is relevant both in determining whethera particular employee is bound by a duty ofconfidentiality and in defining the scope of that

duty.”592 The court found that the ResignationAgreement clearly addressed the issue ofconfidential information that Mower was privy to,and with equal clarity expired on December 31,1995. According to the court, the “unambiguousmeaning of the Resignation Agreement was that,after that date, Mower’s obligation to conduct hisaffairs in accordance with that agreementterminated and he would no longer be subject to

its nondisclosure requirements.”593 The courtalso rejected UP’s other arguments that Mowershould nevertheless be enjoined from testifyingbased on attorney-client privilege, work-productprivilege, or “self-critical analysis” privilege,finding the later privilege “particularly

questionable.”594

B. Express ObligationsAlthough the law will imply certain

obligations as a result of the employer-employeerelationship, an express agreement is preferred.Express contractual commitments not to discloseor use confidential information are regularly

enforced by the courts.595 Indeed, courts haveeffectively enforced such agreements although theagreements could not be found at the time of

trial.596

592 Id. at 1074.593 Id.594 Id. at 1076 n.7.595 See e.g., Elcor Chem. Corp. v. Agri-Sul, Inc., 494 S.W.2d

204 (Tex. Civ. App.–Dallas 1973, writ ref’d n.r.e.); K& G Oil Tool & Serv. Co., Inc. v. G & G Fishing ToolServ., 314 S.W.2d 782 (Tex. 1958), cert. denied, 358 U.S.898 (1958).

596 See Mangren Research and Dev. Corp. v. Nat’l Chem. Co.,Inc., 87 F.3d 937 (7th Cir. 1996)(all employees wererequired to sign confidentiality agreements, and non-employees were not permitted in the company’slaboratory. The agreements for ex-employees here,however, could not be found at the time of trial.Nevertheless, the court granted relief as if those

C. Departing EmployeesDeparting employees either lured or

leaving voluntarily to join a competitor, or to starttheir own business, have frequently spawned tradesecret misappropriation litigation. The courts havelong recognized the balancing necessary betweenpromoting competition and in protecting businessfrom unfair competition. The California SupremeCourt in Continental Car-Na-Var Corp. v.

Moseley,597 noted:

Equity will to the fullest extentprotect the property rights ofemployers in their trade secretsand otherwise, but public policyand natural justice require thatequity should also be solicitousfor the right inherent in all people,not fettered by negative covenantsupon their part to the contrary, tofollow any of the commonoccupations of life. Everyindividual possesses as a form ofproperty, the right to pursue anycalling, business or profession hemay choose. A former employeehas the right to engage in acompetitive business for himselfand to enter into competition withhis former employer, even for thebusiness of those who hadformerly been the customers of his

agreements had been introduced into evidence); UncleB’s Bakery, Inc. v. O’Rourke, 920 F. Supp. 1405 (N.D.Iowa 1996). Uncle B’s brought suit against a formermanager for violation of a covenant not to competeand trade secret misappropriation after he had gone towork for a competitor, Brooklyn Bagel Boys.Apparently, Uncle B’s had invested a number of yearsof research and several million dollars in developing aprocess to preserve the shelf life of bagels withoutfreezing. The agreement containing the non-disclosure and non-competition provisions wasmissing from O’Rourke’s personnel file, andO’Rourke claimed that he had never signed one. Ingranting a preliminary injunction, the court found thatUncle B’s had shown a reasonable likelihood ofsuccess in proving that O’Rourke had agreed to theterms of the agreement, even though the agreementwas missing from the files.

597 24 Cal. 2d 104, 148 P.2d 9 (Cal. 1944).








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former employer, provided suchcompetition is fairly and legallyconducted.

1. Trade Secrets and Corporate OpportunitiesEmployees who depart and form new

businesses using proprietary information of theirformer employer are potentially liable under

several possible causes of action.598 Among thepossible causes of action are (1) trade secretmisappropriation; (2) breach of express or impliedcontract; (3) “generic” unfair competition; (4)false advertising/false designation oforigin/trademark infringement; (5) interferencewith existing or prospective contracts/businessrelations; (6) diversion of corporate opportunity;(7) conversion; (8) unjust enrichment; (9) civil

598 See e.g., T-N-T Motorsports, Inc. v. Hennessey Motorsports,Inc., 965 S.W.2d 18 (Tx. App.–Houston [1st Dist.]1998, no writ). ; Gen. Clutch Corp. v. Lowry, 10 F. Supp.2d 124 (D. Conn. 1998); Injection Research Specialists, Inc.v. Polaris Indus., L.P., 1998 U.S. App. LEXIS 18745(Fed. Cir. 1998)(non-precedential)(actual damages of$24 million and punitive damages of $10 millionagainst Polaris, and actual damages of $15 million andpunitive damages of $8 million against Fuji (punitivedamages vacated by district court) under ColoradoUniform Trade Secrets Act); DSC Communications Corp.v. Next Level Communications, 107 F.3d 322 (5th Cir.1997); Weston v. Buckley, 677 N.E.2d 1089 (Ind. Ct.App. 1997); Elec. Data Sys. Corp. v. Heinemann, 268 Ga.755, 493 S.E.2d 132 (Ga. 1997); Solutec Corp., Inc. v.Agnew, 88 Wash. App. 1067, 1997 Wash. App. LEXIS2130 (Wash. Ct. App. 1997) ; Christopher M’s HandPoured Fudge, Inc. v. Hennon, 699 A.2d 1272 (Pa. Super.Ct. 1997); Vanguard Trans. Sys., Inc. v. Edwards Transfer& Storage Co., 109 Ohio App. 3d 786, 673 N.E.2d 182(1996); Spring Works, Inc. v. Sarff, 1996 Ohio App.LEXIS 2560 (1996). But see Metaullics Sys. Co. L.P. v.Molten Metal Equip. Innovations, Inc., 110 Ohio App.3d367, 674 N.E.2d 418 (1996); Carboline Co. v. Lebeck,990 F. Supp. 762, 45 U.S.P.Q.2d 1922 (E.D. Mo.1997)(preliminary injunction refused where formeremployer and former employee entered into a“termination agreement” that did not expresslyinclude non-competition provisions of an employmentagreement, and also included a merger clause statingthat the “termination agreement” constituted the“entire” agreement between the parties and“superseded” all prior agreements andunderstandings).

conspiracy; and (10) RICO.599 However, theFifth Circuit held in United Teachers Assoc. Inc.

Co. v. MacKeen & Bailey, Inc.,600 that, underTexas law, the usurpation of corporate opportunitydoctrine is inapplicable to any fiduciary who is notalso an officer, director, or major shareholder of acorporate entity.

2. Discovery ActionsIt is sometimes difficult to know, of

course, whether a former employer’s trade secretinformation is being used by former employees attheir new employment. Most states permit a little-used “discovery action” which is intended topermit limited discovery usually in preparation fora main action. In Ohio, for example, OHIO REV.CODE § 2317.48 provides that a party “claimingto have a cause of action” against another party,but who is unable to file a complaint against thatparty “without the discovery of a fact” from thatparty, may institute an action for discovery inorder to learn the needed fact. The complaint inthe action for discovery is to include “the necessityand the grounds for the action, with anyinterrogatories relating to the subject matter of thediscovery that are necessary to procure the

discovery sought.”601

3. Advising Customers/Clients of NewAffiliationThe general rule is that, in the absence of

an express contractual provision and provided

599 See, e.g., DSC Communications Corp. v. Next LevelCommunications, 107 F.3d 322 (5th Cir. 1997).

600 99 F.3d 645 (5th Cir. 1996).601 See Bridgestone/Firestone v. Hankook Tire Mfg. Co., Inc.,

687 N.E.2d 502 (Ohio Ct. App. 1996) In Poulos v.Parker Sweeper Co., 44 Ohio St. 3d 124 (1989), the OhioSupreme Court explained that: “§ 2317.48 occupies asmall niche between an unacceptable ‘fishingexpedition’ and a short and plain statement of acomplaint or defense filed pursuant to the CivilRules.” Here, the court held that it was not enough toallege “reason to believe.” According to the court, thediscovery action must allege “underlying facts andcircumstances constituting” the “reason to believe.”);Nat’l City Bank, N.E. v. Amedia, 1997 Ohio App.LEXIS 745 (1997)(same result).










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there is no “business interference,”602 uponassuming a new and competitive employment, anex-employee may advise former clients of his orher new affiliation, but may not properly solicit hisformer employer’s customers, and may not use theformer employer’s trade secret customer list to do

so.603 Further, even though a customer list perse may not be protectable as a trade secret, at least

602 The Ohio courts have held that a law firm may bringa tort action for “business interference” against aformer employee. In Sonkin & Melena Co., L.P.A. v.Zaransky, 83 Ohio App. 3d, 169, 179, 614 N.E.2d 807,814, the court explained that “[t]he tort of ‘businessinterference’ occurs when a person, without privilege,induces or otherwise purposefully causes a third partynot to enter into, or continue, a business relationship,or perform a contract with another.”

603 See Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Garcia,127 F. Supp. 2d 1305 (C.D. Cal. 2000)(in action byMerrill Lynch against former employees in which theformer employees, now working for Smith Barney,sent Merrill Lynch customers letters including formsto be used in transferring their accounts, the courtgranted a preliminary injunction finding that suchletter crossed the line into solicitation); Fred Siegel Co.,L.P.A. v. Arter & Hadden, 1997 Ohio App. LEXIS3397 (1997) (in action for “business interference” bya law firm against former associate who used thefirm’s client list to generate mailing list at new firm,firm may bring a tort action for business interferenceagainst former employee, but a departing attorney hasa privilege to inform those clients for whom he/sheworked that he/she was leaving the firm. Thatprivilege does not, however, extend to all clients of thefirm. Law firm’s client list qualified as a trade secretunder the Ohio trade secret statute); Morlife, Inc. v.Perry, 56 Cal. App. 4th 1514, 45 U.S.P.Q.2d 1741 (Cal.Ct. App. 1997)(using trade secret customerinformation to solicit customers constitutes “use” or“misappropriation” under the California UTSA.);Animal Health Clinic, P.C. v. Autorino, D.V.M., 1998Conn. Super. LEXIS 801 (1998)(unpublished)(“Wherea list of customers of customers is, because of somepeculiarity of the business, a trade secret an employeewho has obtained such a list in confidence will berestrained from using that list against his employer’sinterest; but where the identity of the customers arereadily ascertainable through ordinary channels ordirections, the list will not be accorded the protectionof a trade secret.”); Holiday Food Co. v. Munroe, 426A.2d 814 (Conn. 1981)(“after the termination of anemployee’s agency, in the absence of a restrictiveagreement, the agent can properly compete with hisprincipal as to matters for which he was employed”).

one court has held that the fiduciaryresponsibilities of an employee would ordinarilypreclude such an employee from contactingexisting customers, while the employee wasemployed, in an effort to entice them to a new

business.604

IX. COVENANTS NOT TO COMPETEA. Texas1. Brief Background

For 27 years, between 1960 and 1987,Texas law on covenants not to compete wassuccinctly stated in the four part test ofWeatherford Oil Tool Co. v. Campbell, namely:(1) the covenant must be necessary for theprotection of the promisee; (2) the covenant mustnot be oppressive to the promisor; (3) the covenantmust not be injurious to the public; and (4) the

covenant must be supported by consideration.605

In January 1987, the Texas Supreme Court

held in Hill v. Mobile Auto Trim, Inc.,606 the firstof a series of controversial cases, that theenforceability of covenants not to compete wouldturn largely on what particular training oradditional knowledge the employee received fromthe employment. The court refused to reform thecovenant at issue viewing it as a naked restraint oftrade. In doing so, the court adopted the reasoningof a 1982 Utah Supreme Court opinion refusing toenforce a hearing-aid distributor’s non-competition agreement against a former salesmanstating “[c]ovenants not to compete which areprimarily designed to limit competition or restrainthe right to engage in a common calling are not

enforceable.”607

604 Vigoro Indus., Inc. v. Crisp, 82 F.3d 785 (8th Cir. 1996).605 Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d 950

(Tex. 1960).606 Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168(Tex.

1987); Bergman v. Norris of Houston, 734 S.W.2d 673(Tex. 1987); DeSantis v. Wackenhut Corp., 757 S.W.2d29 (Tex. 1988), opinion on rehearing, 793 S.W.2d 667(Tex. 1990); Martin v. Credit Prot. Ass’n, 757 S.W.2d 24(Tex. 1988), opinion on rehearing, 793 S.W.2d 667 (Tex.1990).

607 Robbins v. Finley, 645 P.2d 623, 627 (Utah 1982).








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Thus, beginning in 1987, Texasexperienced several divisive decisions by itsSupreme Court, a first legislative attempt in 1989to return Texas law on covenants not to competeto the law as it existed immediately prior to

Hill,608 and a second legislative effort in 1993609

again in an effort to return Texas law to conformwith the common law as it existed prior to 1987.In 1994, however, the Texas Supreme Court

decided Light v. Centel Cellular Co. of Texas610

which presently is the prevailing law and isdiscussed further below.

2. The “Old” 1989 StatuteThe initial, now revised, 1989 statute set

criteria for the enforceability of covenants not tocompete, as well as procedures and remedies inactions to enforce such covenants. First, thestatute required that an enforceable covenant be“ancillary to an otherwise enforceable agreement.”However, “if the covenant not to compete isexecuted on a date other than the date on whichthe underlying agreement is executed, suchcovenant must be supported by independent

valuable consideration.”611 Secondly, the statuteprovided that an enforceable covenant must“contains reasonable limitations as to time,geographical area, and scope of activity to berestrained that do not impose a greater restraintthan is necessary to protect the goodwill or otherbusiness interest of the promisee.”

The statute received mixed interpretations

in the Texas courts of appeal.612 It was held, for

608 ROBERT W. HAMILTON, THE TEXAS BUSINESS LAWFOUNDATION AND PROPOSED BUSINESSLEGISLATION IN TEXAS, 10 CORP. COUNSEL REV.(Tex.) 1 (1991).

609 The statute was also amended in 1999 to add specificprovisions for physicians. Act of May 26, 1999, 76thLeg., ch. 1574, § 1, eff. Sept. 1, 1999.

610 883 S.W.2d 642 (Tex. 1994), withdrawing earlier opinion,37 Tex. Sup. Ct. J. 17 (Oct. 6, 1993) .

611 TEX. BUS. & COM. CODE § 15.50 (1989).612 At least one court, shortly after the effective date of

the statute, did not appear to realize that the statutehad been passed. Spicer v. Tacito & Assocs., Inc., 783S.W.2d 220 (Tex. App.–Dallas 1989, no writ).

example, that the legislature intended to codify the

common law as articulated in Weatherford.613

One court held that the legislative intent was to

overturn Hill and its progeny.614 Yet anothercourt, however, held that a covenant must firstpass muster under the “common law principles”and secondly must meet the requirements of the

statute.615

3. The 1993 RevisionsLegislative action in 1993 was intended to

resolve questions left open in the 1989 statute andsubsequent decisions by the Texas Supreme Courtand the several courts of appeal. In 1993, TexasHouse Bill No. 7 amended § 15.50 to read:

Notwithstanding Section 15.05 ofthis code, a covenant not tocompete is enforceable if it isancillary to or part of anotherwise enforceableagreement at the time theagreement is made to the extentthat it:

(1) is ancillary to an otherwiseenforceable agreement but, ifthe covenant not to compete isexecuted on a date other thanthe date on which theunderlying agreement isexecuted, such covenant mustbe supported by independentvaluable consideration; and

(2) contains reasonablelimitations as to time,geographical area, and scope of

613 Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381(Tex. 1991); Wabash Life Ins. Co. v. Garner, 732 F.Supp. 692 (N.D. Tex. 1989). See also Oliver v. Rogers,976 S.W.2d 792, 800 (Tex. App. – Houston [1st Dist.]1998)(“We and the parties agree that the purpose ofthe statute was to return the law to the way it wasbefore Hill, that is, to testing the enforceability ofcovenants not to compete by the ‘reasonableness’ testlaid down in Weatherford * * *.”).

614 Webb v. Hartman Newspapers, Inc., 793 S.W.2d 302(Tex. App.–Houston [14th Dist.] 1990, no writ).

615 Daytona Group of Texas, Inc. v. Smith, 800 S.W.2d 285(Tex. App.–Corpus Christi 1990, writ denied).











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activity to be restrained that arereasonable and do not impose agreater restraint than isnecessary to protect thegoodwill or other businessinterest of the promisee.

4. Statutory Requirements for Enforceability:A Question of Law for the Court

a. Ancillary To An Otherwise EnforceableAgreementThe 1993 statutory amendments have been

construed by the Texas Supreme Court asrequiring a court to initially decide two questionsbefore the reasonableness of the restraint is evenconsidered, namely “(1) is there an otherwiseenforceable agreement, to which (2) the covenantnot to compete is ancillary to or a part of at the

time the agreement is made.”616 The Court alsoheld that the enforceability of a covenant not to

compete is a question of law for the court.617

Non-solicitation covenants have been construed

under the same criteria.618

(1) “At Will” EmploymentIt has been the law in Texas for some that

a restrictive covenant that is not ancillary to anotherwise enforceable agreement or transaction isa “naked” or “bold” restraint that is invalid per

se.619 In Light, the Texas Supreme Court

616 Light, 883 S.W.2d at 644.617 Id.. See also CRC-Evans Pipeline Int’l, Inc. v. Myers, 927

S.W.2d 259, 262 (Tex. App. – Houston [1st Dist.]1996, no writ).

618 See Miller Paper Co. v. Roberts Co., 901 S.W.2d 593(Tex. App.–Amarillo 1995, no writ).(non-competitionclause — characterized by the plaintiff as a “diversionof trade or nonpiracy clause” — prohibiting thesolicitation of certain customers was unenforceablebecause it was part of “at-will” employment).

619 See Toch v. Eric Schuster Corp., 490 S.W.2d 618, 621(Tex. Civ. App.–Dallas 1972, writ ref’d n.r.e.); CoiffureCont’l, Inc. v. Allert, 518 S.W.2d 942 (Tex. Civ. App.–Dallas 1975, writ ref’d n.r.e.)(fact that employee wasfired does not affect enforcement of the covenant). Ifthe non-competition agreement has the removal of acompetitor as its sole object, then the agreement isconsidered void as against public policy. See, e.g.,Potomac Fire Ins. Co. v. State, 18 S.W.2d 929 (Tex. Civ.

observed that parties to an “at-will” employmentagreement may agree on a variety of matters,except for the duration of employment.Employment “at-will” allows either the employeror employee to terminate the employment

relationship at any time for any reason620 andtherefore means that there are no limitations on the

employer’s right to terminate.621 In order to alterthe “at will” relationship, the employmentagreement must “in a meaningful and special way”limit the employer’s right to terminate the

employment.622 In non-“at-will” agreements, theemployer must unequivocally indicate a definiteintent to be bound not to terminate the employee

except under clearly specified conditions.623

Thus, the Court in Light reasoned thatconsideration for a non-competition promise basedon employment in an “at-will” context would beillusory because there was no obligation tocontinue employment. In order to find “anotherwise enforceable agreement” in the context of“at will” employment, the Court reasoned thatthere must be one or more non-illusory mutualpromises that are not dependent upon continuedemployment or otherwise conditioned uponsomething that is exclusively within the control of

the promisor.624 When there are only illusory

promises, then there is no contract.625

App.–Dallas 1929, writ ref’d). See also RESTATEMENT(SECOND) OF CONTRACTS § 187.

620 Fed. Express Corp. v. Dutschmann, 846 S.W.2d 282, 283(Tex. 1993).

621 Benoit v. Polysar Gulf Coast, Inc., 728 S.W.2d 403, 406(Tex. App.–Beaumont 1987, writ ref’d n.r.e.).

622 Lee-Wright, Inc. v. Hall, 840 S.W.2d 572, 577 (Tex.App.–Houston [1st Dist.] 1992, no writ).

623 See e.g., Montgomery County Hosp. Dist. v. Brown, 965S.W.2d 501, 502-503 (Tex. 1998).

624 883 S.W.2d at 645 n.6.625 883 S.W.2d at 644. See also Burgess v. Permian Court

Reporters, Inc., 864 S.W.2d 725 (Tex. App.–El Paso1993, writ dism’d w.o.j.)(on a motion for rehearing,Permian argued that the 1993 amendments to thestatute removed “at will” distinction, but the courtadhered to its original opinion concluding that the

















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Some of the Texas Courts of Appeal have,accordingly, distinguished Light in situationswhere there was an additional covenant providingthat the employee would receive certain tradesecret information and would not disclose such

information, or other non-illusory promises. 626

agreement, being an “at-will” agreement, was not an“otherwise enforceable agreement.” According to thecourt, the “recent legislative amendments to therelevant statutes do not change our conclusion”).

626 See e.g., Evan’s World Travel, Inc. v. Adams, 978 S.W.2d225 (Tex. App.–Texarkana 1998, no writ)(agreementprovided for a three year term of employment, butalso provided that the employee could be terminatedprior to that term “for any reason, including, but notlimited to, the commission by the Employee of any actconstituting a dishonest * * * [other ‘for cause’ acts].”The agreement also included a 90-day probationaryperiod during which the employee could be dismissed“without cause.” The trial court held that theagreement established “at will” employment. Onappeal, the Texarkana court reversed finding that theagreement provided for employment for a term ofyears and limited the employer’s ability to terminate toonly “for cause” reasons); Zep Mfg. Co. v. Harthcock,824 S.W.2d 654 (Tex. App.–Dallas 1992, nowrit)(“satisfaction” agreement was not an “at will”agreement); Goodyear Tire and Rubber Co. v. Portilla, 836S.W.2d 664 (Tex. App.–Corpus Christi 1992, writgranted)(oral statements by a employee’s supervisorthat her job was secure as long as her job performanceremained satisfactory operated as an oral modificationfrom an “at-will” relationship to a “satisfaction”contract of employment). See also, Ireland, D.C. v.Franklin, D.C., 950 S.W.2d 155 (Tex. App.−SanAntonio 1997, no writ)(“ The clause’s consideration isnot tied to the illusory term of employment. Instead,Franklin’s consideration was its promise to share thelisted trade secrets with Dr. Ireland and Dr. Ireland’sconsideration was her promise not to disclose or usethe trade secrets during or after her employment.”);Donahue v. Bowles, Troy, Donahue, Johnson, Inc., 949S.W.2d 746 (Tex. App. − Dallas 1997, writdenied)(acknowledging in dicta that an exchange ofpromises regarding trade secret or confidentialinformation in an “at will” employment contractwould be non-illusory, but finding that covenant wasnonenforceable); Totino v. Alexander & Assocs., Inc.,1998 WL 552818 (Tex. App.–Houston [1st Dist.] –1998, no pet.)(unpublished, non-precedential)(promises by employees (a) not to recruitA&A employees or disclose A&A confidentialinformation after termination, (b) to return all A&Aproperty and confidential and business information

(2) Is the covenant not to compete ancillary toor part of that agreement?In deciding whether a covenant is

“ancillary,” the Court in Light adopted JusticeStevens’ dissent in Business Electronics Corp. v.

Sharp Electronics Corp.,627 that a restraint isancillary to a contract if “it is designed to enforcea contractual obligation of one of the parties.” TheCourt then adopted the following “test” fordeciding whether a covenant is “ancillary” to an

otherwise enforceable agreement:628 “(1) the

upon termination, (c) to conduct exit interviews, ifasked, (d) to inform A&A of new employment aftertermination, (e) not to disparage A&A, and (f) tosubmit to certain restrictions and remedies uponbreach or litigation after termination, held toconstitute all non-illusory promises in “at will”employment agreements. A&A, in return, awardedthe employees stock options, the parties mutuallyagreed to provide each other two weeks notice oftermination, and there were certain other provisionsregarding various payments, all of which the courtdeemed as non-illusory promises. Covenant uphelddespite “at will” employment agreement); HoustonSolvents and Chems. Co., Inc. v. Montealegre, 1999 WL219366 (Tex. App. – Houston [14th Dist.]1999)(unpublished, non-precedential)(court foundthe following non-illusory promises “(1) the employeewas obligated to give Southwest 14 days written noticeto terminate his employment with or without cause;(2) Southwest was obligated to give the employee 45days written notice to terminate the employmentwithout cause; (3) upon termination of employment,the employee was obligated to return to Southwest allfiles, records, and the like pertaining to Southwest’sbusiness; and (4) the employee was obligated not todivulge any trade secrets of Southwest.” Nevertheless,the court held that the only non-illusory promise thatSouthwest gave was the 45 notice of terminationprovision and that was not related to the non-competition provision.). But see Ad Com, Inc. v. Helms,1998 WL 884509 (Tex. App. – Dallas1998)(unpublished, non-precedential)(under tradesecret non-disclosure provision, Helms made a non-illusory promise not to disclose confidentialinformation of employer, but there was no non-illusory promise on the part of Ad Com that wouldconstitute consideration for that promise not todisclose).

627 485 U.S. 717, 739-41 & n.3 (1988)(Stevens, J.,dissenting) .

628 It has also been held that the agreement must be onethe parties intend to perform, and not one merelyused as a sham for insurance or other reasons. Larock











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consideration given by the employer in theotherwise enforceable agreement must give rise tothe employer’s interest in restraining the employeefrom competing; and (2) the covenant must bedesigned to enforce the employee’s considerationor return promise in the otherwise enforceable

agreement.” 629

(a) Confidential InformationOne employer’s “interest” worthy of

protecting is the protection of good will andconfidential or proprietary information. In Light,the Court acknowledged that customer informationcould constitute a legitimate, protectable interest.630 Subsequent cases have found suchconfidential information to exist in some

instances,631 but there must be an affirmativeduty on the party of the employer to disclose such

trade secrets.632 Also, it has been held that past

v. Enabnit, 812 S.W.2d 670 (Tex. App.–El Paso 1991,no writ).

629 Light, 883 S.W.2d at 646-47.630 883 S.W.2d at 647 n.14:631 See e.g., Evan’s World Travel, Inc. v. Adams, 978 S.W.2d

225 (Tex. App.–Texarkana 1998, no writ); Ireland, D.C.v. Franklin, D.C., 950 S.W.2d 155 (Tex. App. − SanAntonio 1997, no writ); Totino v. Alexander & Assocs.,Inc., 1998 WL 552818 (Tex. App.–Houston [1st Dist.]1998, no pet.)(unpublished, non-precedential); Donahuev. Bowles, Troy, Donahue, Johnson, Inc., 949 S.W.2d 746(Tex. App. − Dallas 1997, no writ); Property TaxAssocs., Inc. v. Staffeldt, 800 S.W.2d 349 (Tex. App.–ElPaso 1990, no writ); Webb v. Hartman Newspapers, Inc.,793 S.W.2d 302 (Tex. App.–Houston [14th Dist.]1990, no writ). But see Ad Com, Inc. v. Helms, 1998 WL884509 (Tex. App. – Dallas 1998)(unpublished non-precedential) (under trade secret non-disclosureprovision, Helms made a non-illusory promise not todisclose confidential information of employer, butthere was no non-illusory promise on the part of AdCom that would constitute consideration for thatpromise not to disclose).

632 Curtis v. Ziff Energy Group, Ltd., 12 S.W.3d 114 (Tex.App.−Houston [14th Dist.] 1999, no pet.)(a promiseas part of a non-disclosure agreement to share tradesecrets and confidential information with an employeesuffices for an “otherwise enforceable agreement.”).But see Bandit Messenger of Austin, Inc. v. Contreras, 2000WL 1587664 (Tx. App. – Austin 2000)(unpublished,non-precedential)( agreement was “somewhat vague,”and spoke in terms of employee having access to

disclosures of trade secrets will not support asubsequent promise not to disclose that

information.633

(b) Specialized Training or KnowledgeOpinions prior to the 1993 statutory

amendments and the Court’s opinion in Light dealwith specialized knowledge and training as part ofthe inquiry whether the promisee receivedconsideration other than simply employment in

exchange for the covenant not to compete.634

More recent cases tend to analyze whether thespecialized training is sufficient to meet the firstprong of the Light two-prong test, namely whether“(1) the consideration given by the employer inthe otherwise enforceable agreement must giverise to the employer’s interest in restraining theemployee from competing” and secondly whetherthe covenant is designed to protect the employer’sinterest in having given that training, i.e., the

confidential information, but did not affirmativelyobligate employer to disclose confidential informationto employee.).

633 Security Telecom Corp. v. Law Enforcement Techs., Inc.,2000 Tex. App. LEXIS 1818 (Tex. App.–Dallas2000)(unpublished)(at the time the agreement wasexecuted, the asserted trade secrets were in existenceand “[p]ast disclosure of trade secrets to an employeewill not support a subsequent promise not to disclosethe information,” citing CRC-Evans Pipeline Int’l, Inc. v.Myers, 927 S.W.2d 259, 265 (Tex. App. – Houston [1stDist.] 1996, no writ)).

634 See e.g., DeSantis v. Wackenhut Corp., 793 S.W.2d 670,677 (Tex. 1990), cert. denied, 498 U.S. 1048 (1991)(priorto its opinion on rehearing, the Court discussedwhether the employee received specialized training orknowledge or other “valuable consideration.”); PickerInt’l, Inc. v. Blanton, 756 F. Supp. 971, 17 U.S.P.Q.2d1036 (N.D. Tex. 1990)(interpreted DeSantis prior torehearing as requiring specialized training to serve asconsideration for the covenant, but found that a ten-week training course and on-the-job training inservicing magnetic resonance imaging systemssufficed); Recon Exploration, Inc. v. Hodges, 798 S.W.2d848 (Tex. App.–Dallas 1990, no writ)(several monthsof intensive training in using a process known asmicrowave spectrometry was insufficient to provideadequate consideration to support covenant); DaytonaGroup of Texas, Inc. v. Smith, 800 S.W.2d 287 (Tex.App.–Corpus Christi 1990, no writ)(viewing readilyavailable video tapes on advertising was deemedinsufficient consideration).


















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second prong of the Light test, namely “(2) thecovenant must be designed to enforce theemployee’s consideration or return promise in the

otherwise enforceable agreement.”635

(3) Stock OptionsA covenant not to compete that is

“ancillary” to a stock option agreement might be

enforceable.636

(4) ConsiderationThe statute as originally enacted in 1989

also provided that if the covenant was executedother than on the date that the underlyingagreement is executed, then “independentvaluable” consideration was required. Thatlanguage was removed in the 1993 revisions.Prior to Hill, employment alone was consideredadequate consideration to support a non-

competition covenant.637 Presumably, that

635 See, e.g., Evan’s World Travel, Inc. v. Adams, 978 S.W.2d225 (Tex. App.–Texarkana 1998, no writ)(at the timethat Adams, the employee, joined Evan’s WorldTravel and signed the subject employment agreement,she had ten years of experience as a travel agent, anddid not receive any “specialized training” other than ingeneral procedures. The court noted that “[g]eneralskills and knowledge developed through the course ofemployment are not the type of interest which justifiesprotection under a restrictive covenant”). 978 S.W.2dat 231.

636 See Totino v. Alexander & Assocs., Inc., 1998 WL552818 (Tex. App.–Houston [1st Dist.] – 1998, nopet.)(unpublished, non-precedential) (non-competitioncovenant held “ancillary” to a stock option awardexpressly predicated on execution of the non-competition covenant); Field v. Alexander & Alexanderof Indiana, Inc., 503 N.E.2d 627 (Ind. App. 1987)(stockoption program designed to encourage continuedemployment and individual performance and madedependent upon execution of non-competitioncovenant was consideration for and ancillary to non-competition covenant). But see Donahue v. Bowles, Troy,Donahue, Johnson, Inc., 949 S.W.2d 746 (Tex. App. –Dallas 1997, no writ)(stock option not consideredbecause no evidence of agreement introduced andissue not preserved); John R. Ray & Sons, Inc. v.Stroman, 923 S.W.2d 80 (Tx. App.–Houston [14thDist.] 1996, writ denied)(stock ownership award notseverable from non-competition covenant).

637 See e.g., Garcia v. Laredo Collections, Inc., 601 S.W.2d 97(Tex. Civ. App.–San Antonio 1980, no writ); John L.

remains the law in employment-for-express term

agreements.638 The law also, however, was thatnon-competition covenants executed duringemployment, but conditioned on continued

employment, were enforceable.639 After Light,something more than simply employment may berequired to support a covenant not to compete,especially if employment is “at will.” It is

questionable whether that remains the law.640

Bramlet & Co. v. Hunt, 371 S.W.2d 787 (Tex. Civ.App.–Dallas 1963, writ ref’d n.r.e.).

638 Payment of a partial salary during the prohibitedperiod, however, substantially increases the probabilitythat a court will find consideration adequate tosupport the covenant. See Hekimian Labs., Inc. v.Domain Sys., Inc., 664 F. Supp. 493 (S.D. Fla. 1987). Indrafting such an agreement, however, it should beclear that the obligation to make payments terminateson the death of the promisor. TPS Freight Distribs., Inc.v. Texas Commerce Bank-Dallas, 788 S.W.2d 456 (Tex.App.–Fort Worth 1990, writ denied)(covenant not tocompete as part of the sale of a business and whichdid not require any continuing services was not apersonal services contract and survival was not animplied condition. Promisor’s heirs were entitled toreceive continued payments under the agreement.).But see Koonsman v. Comstock, 1994 WL 60783 (Tex.App.–Dallas 1994)(non-precedential, TEX. R. CIV.APP. 90)(non-assignment clause may prevent estatefrom continuing to receive payments for non-competeafter death of promisor).

639 See Garcia, 601 S.W.2d at 99, citing McAnally v. Person,57 S.W.2d 945, 948-49 (Tex. Civ. App.–Galveston1933, writ ref’d); Bettinger v. N. Ft. Worth Ice Co., 278S.W. 466, 469 (Tex. Civ. App.–Fort Worth 1925, nowrit). It was also the law that salary increases in partattributable to a non-competition covenant couldprovide sufficient evidence of consideration. Garcia,supra.

640 Compare Daytona Group of Texas, Inc. v. Smith, 800S.W.2d 287 (Tex. App.–Corpus Christi 1990, nowrit)(covenant that was part of an agreement signedafter employment, but conditioned upon furtheremployment, was impliedly not sufficientconsideration to support the covenant) with PropertyTax Assocs., Inc. v. Staffeldt, 800 S.W.2d 349 (Tex.App.–El Paso 1990, no writ)(employment agreementcontaining a covenant not to compete was signed twomonths after employment upheld because thecovenant was signed on the same day as the“ancillary” agreement, and no “independent”consideration need be shown). But see .Posey v. Monier
















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b. Reasonable As To Time, Geography andScopeThe second requirement of the statute

(which was left undisturbed by the 1993amendments) essentially restates the Weatherford“reasonable” tests, i.e., the covenant must be

reasonable as to time,641 geography and scope.“Reasonableness” is determined in the context of

Res., Inc., 768 S.W.2d 915 (Tex. App.–San Antonio1989, writ denied)(the court appears to have upheld anon-competition agreement that had been executed 6months after employment. A nondisclosureagreement, however, had been executed at the start ofemployment, and it is unclear whether the injunctionwas intended to enforce the nondisclosure agreement,the non-competition agreement, or both).

641 In general, two to five years has historically been heldto be reasonable time in non-competition agreementcases, although that is obviously dependent on thefacts of each case. Property Tax Assocs., Inc. v. Staffeldt,800 S.W.2d 349 (Tex. App.–El Paso 1990, no writ);AMF Tuboscope v. McBryde, 618 S.W.2d 105,108 (Tex.Civ. App.–Corpus Christi 1981, writ ref’d n.r.e.);French v. Cmty. Broad. of Coastal Bend, Inc., 766 S.W.2d330 (Tex. App.–Corpus Christi 1989, writ dism'dwoj)(3 years held to be a reasonable time). A surveyof reported cases over a period of twenty yearsreported that two years was the average permissiblelimitation. White, Common Callings and the Enforcement ofPost-Employment Covenants in Texas, 19 ST. MARY’S L.J. 589 (1988). Whether a time restraint isunreasonable, however, will depend entirely upon theparticular products, services and markets involved. Ina computer case, for example, the Southern District ofNew York enforced a one-year world-wide covenantagainst a senior level programming consultant dueprimarily to the programmer’s unique knowledge ofthe software and the fact that the former employer’sbusiness was indeed world-wide. The courtrecognized that the consultant would inevitably revealor use knowledge in working for a principalcompetitor marketing highly competitive products.Bus. Intelligence Servs., Inc. v. Hudson, 580 F. Supp. 1068(S.D.N.Y. 1984). See also Bertotti v. C.E. Sheppard Co.,Inc., 752 S.W.2d 648 (Tex. App.–Houston [1st Dist.]1988, no writ)(2-year covenant without geographicalrestriction upheld). Contra Matlock v. Data ProcessingServs., Inc., 618 S.W.2d 327 (Tex. 1981)(2-yearnationwide restriction held unenforceable due to thefact that the employer could not serve the whole ofthe United States). See also Oliver v. Rogers, 976 S.W.2d792, 800 (Tex. App. – Houston [1st Dist.] 1998)(“thelack of a fixed time limitation cannot, in and of itself,render a covenant unreasonable”).

whether the restraint imposes a greater restraintthan necessary to protect the goodwill or otherlegitimate business interest of the promisee.Whether a covenant is “reasonable” is a question

of law, not fact.642

The Texas Supreme Court has held thatthe lack of any one of the required geographic,time or scope of employment restrictions rendernon-competition covenants unenforceable per

se.643 Thus, the first issue becomes whether thecovenant contains express or implied geographic,

time and scope limitations.644 If the covenantdoes not, some courts have concluded that it is

unenforceable per se,645 despite authority in other

642 See Juliette Fowler Homes v. Welch Assocs., Inc., 793S.W.2d 660, 662 (Tex. 1990); Wabash Life Ins. Co. v.Garner, 732 F. Supp. 692 (N.D. Tex. 1989); Henshaw v.Kroenecke, 656 S.W.2d 416, 418 (Tex. 1983); Prof’lBeauty Prods., Inc. v. Derrington, 513 S.W.2d 236, 238(Tex. Civ. App.–El Paso 1974, writ ref’d n.r.e.); CustomDraperies Co. v. Hardwick, 531 S.W.2d 160 (Tex. Civ.App.–Houston [1st Dist.] 1975, no writ).

643 See Juliette Fowler Homes, Inc. v. Welch Assocs., Inc., 793S.W.2d 660 (Tex. 1990). See also John R. Ray & Sons,Inc. v. Stroman, 923 S.W.2d 80 (Tx. App.–Houston[14th Dist.] 1996, writ denied (court sustained findingsby the trial court that portions of an employmentagreement that created an industry-wide restriction onStroman’s ability to work in the insurance business inand around Harris County, and that containedrestrictions unlimited in time and extended tocustomers Stroman had no contact with wereunenforceable.).

644 See, e.g., Car Wash Sys. of Texas, Inc. v. Brigance, 856S.W.2d 853 (Tex. App.–Fort Worth 1993, nowrit)(although covenant somewhat indefinite as totime, nevertheless enforceable — one of the cases inwhich the appellate court reversed the trial court’s denialof a temporary injunction to enforce the terms of thecovenant, and directed the trial court to enter theinjunction after remand).

645 Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654 (Tex. App.–Dallas 1992, no writ)(covenant having no geographicalboundaries unenforceable as a matter of law.Although the court recognized that what constitutes areasonable area is typically the territory in which theemployee worked, the court was unwilling to “read”that limitation into the otherwise unlimited non-competition covenant. Accordingly, the court heldthat the covenant was unenforceable); Butts Retail, Inc.v. Diversifoods, Inc., 840 S.W.2d 770 (Tex. App.–

























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jurisdictions that unlimited covenants may beupheld where, for example, the market isconcentrated in a few companies that truly

compete world-wide.646 In any event, a covenantthat does not contain an express geographicallimitation may be upheld if the covenant implicitlyimposes such a limitation by, for examplerestricting the promisee to those customers while

whom he/she dealt.647

In general, the breadth of enforceability ofterritorial restrictions in covenants not to competedepends upon the nature and extent of theemployer’s business and the degree of the

Beaumont 1992, writ denied)(franchise agreementproviding that (1) if the franchisor terminated thefranchise agreement, the franchisee would not operatea business selling fruit and nuts (the franchisebusiness) in a specific shopping mall for 2 years, heldenforceable, but the second provision (2) that duringthe first 5 years of the franchise, the franchisee wouldnot operate another business selling fruit and nutswithin the “metropolitan area of the Parkdale Mallstore in Beaumont, Texas,” held unenforceable); Gen.Devices, Inc. v. Bacon, 836 S.W.2d 179 (Tex. App.–Dallas1991)(covenant unlimited in time or geography heldunenforceable).

646 See, e.g., Hekimian Labs,, Inc. v. Domain Sys., Inc., 664 F.Supp. 493 (S.D. Fla. 1987); Bus. Intelligence Servs., Inc. v.Hudson, 580 F. Supp. 1068 (S.D.N.Y. 1984) (both theformer employer and new employer marketed highlycompetitive software worldwide. A 12-month, world-wide covenant not to compete was upheld).

647 See e.g., Totino v. Alexander & Assocs., Inc., 1998 WL552818 (Tex. App.–Houston [1st Dist.] – 1998, nopet.)(unpublished, non-precedential)(Houston courtheld that “the trial court did not abuse its discretion inimplicitly finding the noncompetition covenantscontained a reasonable geographic restriction aswritten by virtue of their limiting the restriction to‘A&A Clients,’ as defined in the employmentagreements.”); Investors Diversified Servs., Inc. v. McElroy,645 S.W.2d 338 (Tex. App.–Corpus Christi 1982, nowrit)(covenant without express geographicallimitations upheld as being limited to clients contactedby former employee); Am. Express Fin. Advisors, Inc. v.Scott, 955 F. Supp. 688 (N.D. Tex. 1996)(territoryundefined, but covenant upheld as being limited tocustomers former employer actual dealt with); Stocksv., Banner Am. Corp., 599 S.W.2d 665 (Tex. Civ. App. –Texarkana 1980, no writ)(use of a customer list as analternative to setting a specific geographical limit wasreasonable).

employee’s involvement.648 The covenant mustbear some relationship to the activities of theemployee, but if the covenant is overbroad, a court

may reform it.649 A reasonable area is generallyconstrued as the territory in which the employee

worked.650 A covenant that is broader than thearea in which the employee actually worked is

generally unenforceable as written.651 The samegeneral rule applies to determining thereasonableness of scope of activities

covenants.652

648 Allan J. Richardson & Assoc., Inc. v. Andrews, 718S.W.2d 833, 835 (Tex. App. – Houston [14th Dist.]1986, no writ).

649 Allan J. Richardson, 718 S.W.2d at 835.650 See Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787,

2001 Tex. App. LEXIS 4144 (Tex. App.–Houston [1stDist.] 2001)(geographical restraints covering theterritory in which an employee worked are generallyreasonable, and court has a statutory obligation toreform overly broad covenants); Leon’s Fine Foods, Inc.v. McClearin, 2000 Tex. App. LEXIS 1681 (Tex. App.–Dallas 2000)(covenant extended beyond actual salesterritory was unreasonable); Curtis v. Ziff Energy Group,Ltd., 12 S.W.3d 114, 119 (Tex. App.–Houston [14thDist.] 1999, no pet.); Evan’s World Travel, Inc. v. Adams,978 S.W.2d 225, 232-33 (Tex. App.–Texarkana 1998,no writ). See also Diversified Human Res. Group, Inc. v.Levinson-Polakoff, 752 S.W.2d 8 (Tex. App.–Dallas1988, no writ)(a reasonable geographical restriction is“generally considered the territory in which theemployee worked while in the employment of hisemployer”); Posey v. Monier Res., Inc., 768 S.W.2d 915(Tex. App.–San Antonio 1989, writ denied);USAChem. Inc. v. Goldstein, 512 F.2d 163, 168 (2d Cir.1975)(applying pre-Light Texas law).

651 Evan’s World Travel, 978 S.W.2d at 233. See alsoMcNeilus Cos., Inc. v. Sams, 1997 Tex. App. LEXIS5427 (Tex. App. − Dallas 1997, no writ)(covenantcovering Texas, Louisiana, Arkansas, and Oklahoma,prohibiting employment by any competitor for 3 yearsheld overly broad and unenforceable); NCH Corp. v.Share Corp., 757 F.2d 1540 (5th Cir. 1985)(applyingTexas law).

652 See Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787,2001 Tex. App. LEXIS 4144 (Tex. App.–Houston [1stDist.] 2001)(covenant defined a competitive businessas “a business that provides or offers the same orsimilar type or [sic. of] services, goods and materials asprovided or offered by Employer during the term of





















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c. ReformationUntil Hill, Texas followed the rule of

reformation that permitted a court to reform or“blue pencil” a covenant if the court found that the

covenant was unreasonable as written.653 Courtswould do so using their equitable powersrecognizing that the reasonableness of a non-competition covenant may change over the period

of employment.654 Hill strongly suggested thatcourts would no longer use reformation to cureoverly broad covenants. In a legislative response,the statute, as originally enacted in 1989, madereformation mandatory subject to

qualifications,655 e.g. if the promisee requestedreformation in the trial court and if the covenantmet the other criteria of being ancillary to an

otherwise enforceable agreement.656

Employee’s employment,” reformed to “installingmirrors and glass products in new residentialconstruction.”); Hargrave v. Giuffre, ___ S.W.2d ___,1999 Tex. App. LEXIS 9618 (Tex. App. − Beaumont1999)(insurance agent’s covenant not to use customerinformation for 5 years held unreasonable because itwas not limited to customers that agent had workedwith).

653 Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d 950(Tex. 1960); NCH Corp. v. Share Corp., 757 F.2d 1540(5th Cir. 1985).

654 See, e.g., Spinks v. Riebold, 310 S.W.2d 668, 669 (Tex.Civ. App.–El Paso 1958, writ ref’d).

655 Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787,2001 Tex. App. LEXIS 4144 (Tex. App.–Houston [1stDist.] 2001)(court has a statutory obligation to reformoverly broad covenants).

656 B.J. Software Sys., Inc. v. Osina, 827 S.W.2d 543 (Tex.App.–Houston [1st Dist.] 1992, no writ)(trial courtwas required to reform the agreement if requested to doso by the promisee); Gomez v. Zamora, 814 S.W.2d 114(Tex. App.–Corpus Christi 1991, no writ)(covenantprecluding Gomez from competing, after terminationof employment, in an “existing marketing area” andany “future marketing area of the employer begunduring employment,” too indefinite to stand,reformation must be requested first in the trial court,and failure to do so constitutes a waiver); DaytonaGroup of Texas, Inc. v. Smith, 800 S.W.2d 285, 290 (Tex.App.–Corpus Christi 1990, no writ)(reformation mustbe requested in trial court); Recon Exploration, Inc. v.Hodges, 798 S.W.2d 848 (Tex. App.–Dallas 1990, nowrit).

As a result of the 1993 amendment,reformation is now mandatory “If the covenant isfound to be ancillary to or part of an otherwise

enforceable agreement.”657 What happens if thetrial court refuses to reform a covenant found to beoverly broad? The Houston court has held that thetrial court may refuse to reform an overly broad

covenant if doing so would have been “futile.”658

Other courts in other jurisdictions have alsorefused to reform or “blue pencil” overly broad

covenants, but for questionable reasons.659 TheTexas Court of Appeals -Dallas has also held thatthere is no appellate jurisdiction to consider a trialcourt’s refusal to reform an overly broad covenantin the context of an interlocutory appeal from thetrial court’s refusal to grant a temporary

injunction.660

d. Effect Of Unenforceability On SeverancePaymentsIf the covenant is not severable from the

remainder of the employment agreement, the FifthCircuit has held that a corresponding obligation to

657 See, e.g., Evan’s World Travel, Inc. v. Adams, 978 S.W.2d225 (Tex. App.–Texarkana 1998, no writ)(covenant ina case involving a travel agent that extended to “thecounties of Gregg and Harrison, State of Texas, orany State in which the Employer is conducting or hasconducted its business during the Term ofEmployment” reformed to Harrison county alone,namely the county where the travel agent worked).

658 John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80 (Tx.App.–Houston [14th Dist.] 1996, writ denied) .

659 See, e.g., Trailor Leasing Co. v. Assocs. Commercial Corp.,1996 U.S. Dist. LEXIS 9654 (N.D. Ill. 1996)(thedistrict court judge refused to enforce an over-broadnon-competition covenant and further refused to“blue pencil” to covenant to make it enforceablesaying that he was refusing to do so “to encourageemployers to write restrictive covenants morenarrowly.” Here the covenant would have restrictedthe ex-employee from contacting both existingcustomers — regardless of whether he had actuallyhad any contact with them, as well as prospectivecustomers).

660 McNeilus Cos., Inc. v. Sams, 1997 Tex. App. LEXIS5427 (Tex. App.−Dallas 1997, no writ).













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make severance payments is unenforceable as

well.661

5. Procedures and Remedies in Actions toEnforce Covenants not to Compete

a. Under the Texas StatuteSection 15.51, both before and after the

1993 amendments, in three subsections, coversfour topics: (1) relief and remedies available to apromisee; (2) burden of proof; (3) reformation;

and (4) relief available to a promissory.662

Section 15.51(a) provides that the court mayaward the promisee damages, injunctive relief, orboth for a breach of the covenant by a promisee.Damages, however, may not be awarded “for abreach of the covenant before its reformation andthe relief granted to the promise shall be limited to

injunctive relief,”663 continues the common law

661 Sheline v. Dun & Bradstreet Corp., 948 F.2d 174 (5thCir. 1991). The covenant did not contain ageographical limitation, and the district court held thatrendered the covenant unenforceable per se. Onappeal, both parties and the Fifth Circuit agreed thatwas a correct holding. The Fifth Circuit also,however, held that the covenant was not severablefrom the remainder of the agreement. Thus, theagreement as a whole, including D&B’s obligation tomake severance payments, was unenforceable. This isat least arguable inconsistent, though, with the TexasSupreme Courts opinion in Frankiewicz v. NationalComp Associates., 633 S.W.2d 505 (Tex. 1982). There acovenant was held unenforceable also because therewas no territorial limitation. That covenant was partof an agreement providing that an insurance agentwould continue to receive renewal commissions solong as he did not violate the non-competitioncovenant. The agent went to work for a competinginsurance company. Although the covenant wasdeclared unenforceable, the court enforced theremainder of the agreement.

662 See Ex parte Chambers, 898 S.W.2d 257 (Tex.1995)(contempt); Security Telecom Corp. v. Meziere, 1996Tex. App. LEXIS 806 (Tx. App.–Dallas 1996, nowrit)(unpublished)(refusal to grant temporaryinjunction affirmed — no showing of irreparable harmwhen money damages would be adequate).

663 TEX. BUS. AND COM. CODE § 15.51(c). See Butler v.Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 2001 Tex.App. LEXIS 4144 (Tex. App. – Houston [1st Dist.]2001)(if a covenant is reformed, the promisee is notentitled to damages).

rule that in an action for damages, the covenant

stands or falls as written.664

With respect to the burden of proof forestablishing that the covenant meets theenforceability standards of § 15.50, the statutedraws a distinction between covenants ancillary toan agreement to provide personal services and onethat is not. In the case of the former, the promiseehas the burden of establishing enforceability. Inthe case of all other agreements, the promissoryhas the burden of establishing that the covenant

does not meet those standards.665

(1) Costs and Attorney’s FeesIt is unfortunately the case that threats of

suit on non-competition covenants can be used tokeep ex-employees in line, even though thecovenant may not be enforceable. That was aconcern voiced during pendency of thislegislation. As a result, the second sentence in§ 15.51(c) of the statute includes a somewhatunique, one-way costs and attorney’s feesprovision. If the primary purpose of theunderlying agreement is to render personal

services (i.e., an employment contract),666 and ifthe promissor proves that the promisee knew at thetime of the execution of the contract that the

664 Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d 950(Tex. 1960); Peat, Marwick, Mitchell & Co. v. Sharp, 585S.W.2d 905 (Tex. Civ. App.–Amarillo 1979, writ ref’dn.r.e.). See also United Mobile Networks, L.P. v. Deaton,939 S.W.2d 146 (Tex. 1997)(trial court had reformed anon-competition covenant’s geographical boundaries,but nevertheless entered judgment for $100,000 for analleged breach of the covenant — reversed. The courtof appeals upheld the reformation, but held thatreformation precluded the award of damages per§ 15.51(c). That was affirmed on appeal.) See alsoDeaton v. United Mobile Networks, L.P., 926 S.W.2d 756(Tx. App.–Texarkana 1996, writ granted), aff’d-in-part,rev’d-in-part, 939 S.W.2d 146 (Tex. 1997); Peat MarwickMain & Co. v. Haass, 818 S.W.2d 381 (Tex. 1991). SeeEx parte Chambers, 898 S.W.2d 257 (Tex. 1994) forenforcing injunctions through contempt proceedings.

665 TEX. BUS. AND COM. CODE § 15.51(b).666 See Leon’s Fine Foods, Inc. v. McClearin, 2000 Tex. App.

LEXIS 1681 (Tex. App.–Dallas 2000)(unpublished)(atermination agreement is not an agreement to renderpersonal services for purposes of an attorney feeaward to a promisor).














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covenant was not reasonable, then the promissorymay recover costs and attorney’s fees if thepromisee attempts to enforce the covenant to agreater extent than necessary to protect goodwillor other business interests. Reasonableness per seis a subjective standard and proving that thepromisee knew that a covenant was unreasonable

is a heavy burden to carry.667 The promissor alsohas a “second bite at the apple”; the promissor canunilaterally narrow the covenant before attemptingto enforce it.

One court has held that a promisee isentitled to an award of attorneys’ fees if the trialcourt issues an injunction enforcing the covenant,even after reformation, and even though no

damages have been awarded.668 Attorneys’ feesmay also be awarded the promisee under the Texas

Declaratory Judgments Act.669

667 See Schneider v. Acoustic Eng’g Co. of Florida, 1993 WL415481 (Tex. App.–Houston [1st Dist.]1993)(unpublished, non-precedential)(formeremployee was not entitled to a jury question onattorney’s fees under § 15.51 because he neverobtained, either through summary judgment or at trial,a finding that the former employer sought to enforcethe non-competition agreement to a greater extentthan was necessary to protect the goodwill or otherbusiness interests of former employer, or that theformer employer knew at the time of the execution ofthe non-competition agreement that the covenant wasunreasonable.). But see Evan’s World Travel, Inc. v.Adams, 978 S.W.2d 225 (Tex. App.–Texarkana 1998,no writ)(restrictive covenant that extended for threeyears and to “the counties of Gregg and Harrison,State of Texas, or any State in which the Employer isconducting or has conducted its business during theTerm of Employment,” read by the trial court andthe Texarkana court to mean the entire state ratherthan as modifying Gregg and Harrison counties, andwas “clearly” unreasonable. The court approved anaward of attorney’s fees to promisor for trial, but notfor appeal due to a lack of evidence that wouldsupport an award of attorney’s fees on appeal.).

668 Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787,2001 Tex. App. LEXIS 4144 (Tex. App. – Houston[1st Dist.] 2001).

669 Curtis v. Ziff Energy Group, Ltd., 12 S.W.3d 114 (Tex.App. − Houston [14th Dist.] 1999, no pet.).

(2) Statute Must Be Specifically PleadedAt least one court has held that if the

procedures and remedies of the statute are desired,

the statute must be specifically pleaded.670 Thecase, however, arose from a partial denial of atemporary injunction, and its broader applicationis therefore questionable. At least one court,however, has also held that a showing ofirreparable harm is not required for an injunction if

the statute is specifically pleaded.671

(3) Appellate Review Of A Trial Court’sGrant Or Denial Of A TemporaryInjunction Should Not Be Used To ObtainA Ruling On The MeritsThe Dallas court has expressly noted that

appeals from temporary injunctions are notintended to provide a means to obtain an advance

ruling on the merits from the appellate court.672

b. Under the Common LawThe cases that follow discuss various

remedies approved and disapproved by the Texascourts. Counsel should be cautious, however, inrelying on these cases in view of Hill and itsprogeny, and the statute. In short, these cases mayor may not reflect the current view of the TexasSupreme Court.

670 Hilb, Rogal & Hamilton Co. of Texas v. Wurzman, 861S.W.2d 30 (Tex. App.–Dallas 1993, no writ).

671 Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787,2001 Tex. App. LEXIS 4144 (Tex. App. – Houston[1st Dist.] 2001)(holding that “if an applicant relies ona statute that defines the requirements for injunctionrelief, then the express statutory language supersedescommon law requirements,” citing Hilb, Rogal &Hamilton Co. of Texas v. Wurzman, 861 S.W.2d 30, 33(Tex. App. – Dallas 1993, no writ).).

672 See Hilb, Rogal & Hamilton Co. of Texas v. Wurzman,861 S.W.2d 30 (Tex. App.–Dallas 1993, no writ); Hissv. Great N. Am. Cos., Inc., 871 S.W.2d 218 (Tex. App.–Dallas 1993, no writ), sub. history, 1196 Tex. App.LEXIS 4259 (Tex. App.–Dallas 1996)(unpublished);Eager v. Samson’s Carpet Care, Inc., 1996 Tex. App.LEXIS 281 (Tex. App.–Dallas 1996, nowrit)(unpublished). Accord LA Sweats, Inc. v. Smith,1996 Tex. App. LEXIS 138 (Tex. App.–Dallas 1996,no writ)(unpublished).











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(1) Breach Of Non-competition CovenantMay Not Excuse Payments UnderAgreement Of SaleThe Texas Supreme Court has held that

breach of a non-competition agreement inconnection the sale of a business does notnecessarily excuse payments under the agreement

of sale.673 The Texas Supreme Court has alsoheld that the unenforceability of a non-competitioncovenant does not justify withholding insurance

renewal premiums.674

(2) Liquidated DamagesThe Texas Supreme Court has, however,

approved liquidated damages provisions for

violation of a covenant not to compete.675

(3) ArbitrationArbitration clauses and contracts are

increasingly being used in an effort to reduce thetime and expense of litigation. The Texarkanacourt’s decision in a mandamus action, stronglysuggests that non-competition agreements are

subject to arbitration.676 Nevertheless, there arelimitations on the validity of arbitrationagreements, and one of those is that a party to the

contract cannot be designated as the arbitrator.677

673 Hanks v. GAB Bus. Servs., Inc., 644 S.W.2d 707 (Tex.1982).

674 Frankiewicz v. Nat’l Comp Assocs., 633 S.W.2d 505(Tex. 1982).

675 Henshaw v. Kroenecke, 656 S.W.2d 416 (Tex. 1983). .But see, Peat Marwick Main & Company v. Haass, 818S.W.2d 381 (Tex. 1991)(finding similar provisionsunenforceable).

676 Holk v. Baird, 920 S.W.2d 803 (Tex. App.–Texarkana1996, no writ).

677 Manes v. Dallas Baptist College, 638 S.W.2d 143 (Tex.App.–Dallas 1982, writ ref’d n.r.e.)(College Board ofTrustees could not serve as arbitrator in employmentdispute between college and an employee). See alsoBDO Seidman v. Miller, 1996 Tex. App. LEXIS 1278(Tex. App.–Austin 1997, no writ)(unpublished)(thecourt, citing New York case law, noted that although“parties may designate arbitrators of their choice andmay, with the knowledge of the parties, designatearbitrators who have some interest in the dispute ormaintain a relationship with a party,” nevertheless,“[t]o allow a party to act as its own judge necessarily

B. Contract Provisions Having The SameEffect As Covenants Not to CompetePersonal services business such as

accounting firms rely heavily on the value of theirclient bases. When such firms are sold or aremerged, much of the evaluation centers on thatclient base. It is thus typical to include provisionsin sale or merger agreements that are intended to

protect that client base.678 However, if suchprovisions have the practical effect of restrainingcompetition, the Texas Supreme Court has heldthat such provisions will be judged by the same

standards as non-competition agreements.679

C. Covenant Not to Compete Contrasted withCovenant Not to Disclose Trade SecretsAlthough covenants not to disclose trade

secrets have historically been deemed consistentwith public policy, while covenants not to compete

have not,680 a 1984 Illinois decision, Disher v.

Faulgoni,681 initially created some doubt.

Disher and its progeny, unfortunately, usedeceptively simple logic to reach a patently wrongresult. The first issue, of course, is whether theinformation sought to be protected qualifies as a

taints the process and is repugnant to a proper senseof justice.” According to the court, “[a]n agreement inwhich a party is designated as an arbitrator is illusoryand becomes ‘not a contract to arbitrate, but anengagement to capitulate.’” The court concluded thathere there was no valid arbitration agreement as aresult of the designation of arbitrators).

678 The Texas Code of Professional ResponsibilityDR2-108, however, expressly prohibits the use of suchagreements among attorneys. Whiteside v. Griffis &Griffis, P.C., 902 S.W.2d 739 (Tex. App. Austin 1995,no writ).

679 Peat Marwick Main & Company v. Haass, 818 S.W.2d381 (Tex. 1991). But see, Henshaw v. Kroenecke, 656S.W.2d 416 (Tex. 1983)..

680 Hi-Line Elec. Company v. Dowco Elec. Prods., 765 F.2d1359, 1363 n. 5 (5th Cir. 1985); NCH Corporation v.Share Corp., 757 F.2d 1540 (5th Cir. 1985).

681 464 N.E.2d 639 (Ill. App. 1984)(confidentialityagreements are invalid, in the same vein as non-competition agreements, if they are overly broad inscope or duration.). See also AMP Inc. v. Fleischhacker,823 F.2d 1199, 3 U.S.P.Q.2d 1421 (7th Cir. 1987)(theSeventh Circuit adopted the Disher rationale.).



















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trade secret. If it does, then a non-disclosureagreement can and should continue indefinitely; atleast until the trade secret is discoverable throughproper means, i.e., until it looses its status as atrade secret. That is the normal and naturalconsequence of a trade secret, and there is nothingoppressive or unreasonable about it. Similarly,trade secrets have no geographical boundaries.Disclosure such that the trade secret becomeswidely known or readily accessible (or otherwise“non-secret” under the relative secrecy rulesdiscussed above) anywhere would cause the tradesecret owner damage and loss of the trade secret.Unlimited geographic restraints would not only bereasonable, but seemingly required.

Although the Illinois legislature hasrecognized the folly of Disher and AMP, and has

now legislatively superceded it,682 thedeceptively simple logic of Disher, like a virus,has escaped and spread. Death of the original hostdoes not seem to have stemmed the spread of theinfection. Some courts are now analyzing non-disclosure agreements in terms of their

competitive effects.683

682 The Illinois Trade Secrets Act, adopted in 1988,specifically provides that “a contractual or other dutyto maintain secrecy or limit use of a trade secret shallnot be deemed to be void or unenforceable solely forlack of durational or geographical limitation on theduty.” Ill. Rev. Stat. ch. 765, § 1065/8(b)(1). See also,Pepisco, Inc. v. Redmond, 54 F.3d 1262 n. 7, 35U.S.P.Q.2d 1010 n. 7 (7th Cir. 1995).

683 See e.g., Carolina Chem. Equip. Co. v. Muckenfuss, 471S.E.2d 721, 39 U.S.P.Q.2d 1642 (S.C. Ct. App.1996)(agreement provision that defines trade secrets“so broadly that virtually all of the information [anemployee] acquired during his employment would fallwithin its definition” is unenforceable.); Nalco Chem. v.Hydro Technologies, Inc., 984 F.2d 801, 25 U.S.P.Q. 1719,1993 U.S. App. LEXIS 1195 (7th Cir. 1993)(theSeventh Circuit, applying Wisconsin law, discussed theoverlap of covenants not to compete and non-disclosure agreements, and held both to beunenforceable as lacking time and geographicallimitations.); Machen, Inc. v. Aircraft Design, Inc., 828P.2d 73, 1992 Wash. App. LEXIS 178 (Wash. Ct.App. 1992)(“Although cases cited by the partiesinvolve non-competition agreements rather thanconfidentiality agreements, we see no reason todistinguish between the two when the issue is the

Other courts, however, are clearlydistinguishing between the two, and have upheldnon-disclosure agreements even thoughcorresponding covenants not to compete have been

held unenforceable.684 For example, in Lee v.

sufficiency of consideration to support them.”); Tech.for Energy Corp. v. Integrated Sys., Inc., 895 F.2d 1414 (6thCir. 1990)(discussion of “competitive effect” of a non-disclosure agreement.); Unitel Corp. v. Decker, 731S.W.2d 636 (Tex. App.–Houston [14th Dist.] 1987, nowrit)(Houston court interpreted an employmentagreement containing a provision that had both non-disclosure and non-competition language under thetime, geography, and scope of activity standardsapplicable to covenants not to compete.).

684 See e.g., Sautter v. Comp Solutions Network, Inc., 1998 WL802481 (Tex. App. – Houston [14th Dist.] 1998, nowrit)(unpublished, non-precedential)(temporaryinjunction prohibiting former employee from usingcustomer lists of former employer upheld despite lackof non-competition agreement); Miller Paper Co. v.Roberts Co., 901 S.W.2d 593 (Tex. App.–Amarillo 1995,no writ)Rugen v. Interactive Bus. Systems, Inc., 864 S.W.2d548 (Tex. App.–Dallas 1993, no writ)(non-competition provision held unenforceable, but non-disclosure agreement enforced.); Zep Manufacturing Co.v. Harthcock, 824 S.W.2d 654 (Tex. App.–Dallas 1992,no writ)(held non-competition provisions wereunenforceable, but corresponding non-disclosureprovisions were severable and that theunenforceability of invalidity of the non-competitionprovision did not impair the validity or enforceabilityof the non-disclosure provisions. The Dallas courtexpressly held that non-disclosure covenants are notsubject to the time, geographic and scope-of-activitylimitations applicable to non-competition agreements,and to the extent that Unitel suggests otherwise, theDallas court would not follow it. The opinion isparticularly pertinent because the agreement did nothave any limitations regarding time, geography orscope-of-activity.); The Murrco Agency, Inc. v. Ryan, 800S.W.2d 600 (Tex. App.–Dallas 1990, no writhistory)(non-disclosure provisions held enforceable);Eaton Corp. v. Giere, 971 F.2d 136, 23 U.S.P.Q.2d 1705(8th Cir. 1992)(court upheld a permanent injunctionagainst a former employee who had signed aconfidentiality agreement restricting disclosure oftrade secret information gained during the course ofemployment.). But see, Hargrave v. Giuffre, ___ S.W.2d___, 1999 Tex. App. LEXIS 9618 (Tex. App. −Beaumont 1999) (“[i]n any event, we note thatwhether an agreement not to solicit accounts of aformer employer is called a non-compete agreementor an anti-piracy agreement, such an agreement must


















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Environmental Pest & Termite Control, Inc.,685

the Georgia Supreme Court reiterated:

When a duty has been imposedupon an employee pursuant tocontract not to discloseconfidential business informationupon termination of employment,public policy is swung in favor ofprotecting these commercialintangibles and of preventingunfair method of exploiting themin breach of duty * * *.Covenants not to disclose andutilize confidential businessinformation are related to generalcovenants not to compete becauseof the similar employer interest inmaintaining competitiveadvantage. Unlike generalnoncompetition provisions,however, specific non-disclosureclauses bear no relation toterritorial limitations and theirreasonableness turns on factors oftime and the nature of the businessinterest sought to be protected. Indetermining whether restraints ondisclosure are reasonable, twofactors are of importance:(1) whether the employer isattempting to protect confidentialinformation relating to thebusiness, such as trade secrets,methods of operation, names ofcustomers, personnel data, and soon − even though the informationdoes not rise to the stature of atrade secret; and (2) whether therestraint is reasonably related tothe protection of the information.

[Citations omitted.]686

still be judged to be reasonable in order to beenforceable.”).

685 516 S.E.2d 76 (1999).686 Id. at 77, quoting Durham v. Stand-By Labor, 230 Ga.

558, 563-64 (Ga. 1973).

D. Recent Cases Involving Non-CompetitionCovenants

1. Texas Casesa. Texas Law: A Covenant That Is Not

Limited to the Employee’s EmploymentCapacity at the Former Employer isUnreasonable

APRM, Inc. v. Hartnett, 2002 Tex. App. LEXIS4779 (Tex. App. – Houston [1st Dist.] 2002)(non-precedential)

Hartnett worked for APRM, a companythat sells, installs and services refractory andcorrosion materials, in Houston as a salesman andproject manager. His employment agreementcontained a non-competition covenant thatextended for three years and to “any businesswithin any geographic location the employeeperformed duties for or on behalf of employer thatis in competition with the business of theEmployer.” Hartnett moved to California toestablish an APRM office there, but that officewas not successful. Hartnett terminated hisemployment, and joined a competitor, PhilipCorrosion Services, Inc. APRM sued to enforcethe non-competition covenant. The trial courtrefused finding the covenant was unreasonable,and the Court of Appeals affirmed finding that“the covenant’s restraint is not limited to thecapacity in which Harnett worked for APRM.Thus, the restraint is overbroad and unreasonable.”Query: what about reformation?

b. Texas Law: Covenant in Franchise forReal Estate Inspection Services Enforcedas Modified to Cover Area ActuallyCovered by Franchise

AmeriSpec, Inc. v. Metro Inspection Service, Inc.,2001 WL 770999 (N.D. Tex. 2001)(Fitzwater, J.)

The court emphasized that the issue herearose on a motion for a preliminary injunction.Thus, the court’s holding should be consideredaccordingly.

Wayne and Deborah Holt had a ten-yearfranchise agreement with AmeriSpeci for aresidential home inspection service operated underthe AmeriSpec® mark. The agreement contained





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a post-termination non-competition covenant thatextended for one year, to building inspectionservices, and encompassed the Holt’s designatedterritory of portions of Dallas and Tarrantcounties, within ten miles thereof, and within tenmiles of the location of any other AmeriSpecoffice. The Holts elected not to renew theagreement, and began providing home inspectionservices through their new company, MetroInspection Services. AmeriSpec sued to enforcethe non-competition covenant.

The court rejected the Holt’s argumentthat the non-competition covenant was notnecessary to protect any legitimate businessinterest (i.e., AmeriSpec retained the good will inits name and marks, and there were no tradesecrets involved), although on somewhat crypticgrounds. The court concluded that AmeriSpec haddeveloped good will in its name and marks, andthat it was entitled to protect that good will bypreventing a former franchisee from competingagainst it. What? Assuming that the Holts hadrelinquished all use of the AmeriSpec name andmarks (and there was some doubt about that), what“good will” is the court referring to? Possibly thecourt is referring to customer relationships, butthat is nowhere mentioned in the opinion. Thecourt also noted that AmeriSpec was not obligatedto that trade secrets were involved. That is true,but AmeriSpec nevertheless has the obligation ofshowing that the non-competition covenantprotected some legitimate business interest otherthan simply restricting competition. Again,possibly AmeriSpec could have relied on thetraining given the Holts, but that also is notmentioned in the opinion.

The court concluded that the one year timeperiod was reasonable, and that the scope ofactivities was reasonable. The court alsoconcluded that the ten-mile buffer zone wasreasonable, but that the geographical exclusionthat extended outside their actual franchisedterritory was not. Accordingly, the court reformedthe covenant to extend to the Holt’s designatedterritory and within ten miles thereof.

c. Texas Law: (a) Non-Competition andNon-Disclosure Covenants Are Subject toSeparate Analyses(b) Stock Option Agreements “In ThisCase” Do Not Give Rise to Interest in

Restraining Competition(c) Confidentiality Agreements AreEvaluated As Of The Time Made

Olander v. Compass Bank, 172 F. Supp.2d 846(S.D. Tex. 2001)(Atlas, J.)

Olander worked in mortgage lending forCompass Bank from 1988 until 2001, and was avalued employee. At the time he left, he wasExecutive Vice President in the real estate lendingdepartment. Every year since 1990, Olander andCompass entered into stock option agreements.Beginning in 1994, those agreements containednon-competition and non-solicitation covenantsthat extended for two years. The geographicalarea was essentially any territory in whichCompass had been conducting business. Theagreements also contained non-disclosurecovenants. Although the parties differed on theextent of confidential information that Olander hadaccess to, Olander did not deny that he had accessto at least some confidential information.

Olander voluntarily resigned fromCompass in 2001, and joined Whitney NationalBank to head up its fledgling real estate lendinggroup. Olander also brought a declaratoryjudgment action in state court that was removed.Compass sought to enforce the non-competitionand non-disclosure covenants.

The court observed that “[u]nder Texaslaw, employees’ non-disclosure provisions aremore readily enforced than non-competecovenants because the non-disclosure provisionsare not restraints on trade, they do not prevent theemployee from making use of the generalexperience he acquired during employment.” Thecourt further observed that although Olander mayhave had access to confidential information duringhis tenure with Compass, the confidentialityprovisions in the stock option agreements did notobligate Compass to provide any confidentialinformation in exchange for Olander’s non-competition covenant. The court held that “[e]venif the confidentiality provisions are currentlyenforceable, the non-compete provision must beevaluated as of the time it was made; prior orfuture performance by Compass does not suffice.”[Emphasis by the court]

The court lastly observed that “Compasshas not articulated any coherent theory explaining



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how Compass’ promise to Olander, i.e., to grantthe right to buy stock at a set price during hisemployment, gives rise to an interest in restrainingOlander from competing after he has leftCompass’s employ.” The court was careful tonote that it was not ruling that a stock optionagreement could never give rise to an interest inrestraining competition, but found no interest here.

d. Texas Law: Interests (1) That DefendantsNot Use Confidential Information toPlaintiff’s Detriment, (2) In PreservingPlaintiff’s Anatomic Pathology Business,and (3) That A Transfer of the CytologyOperations Would Be Protected by aContemporaneous Non-CompeteProvision, Were Sufficient to JustifyEnforceability of the Covenant

ProPath Services, L.L.P. v. Quest DiagnosticsClinical Labs., Inc., 2002 WL 535056 (N.D. Tex.2002)(Sanders, J.)

The issue arose on a motion for summaryjudgment. ProPath, d/b/a Medical LaboratoryService Southwest (MLSS) was a partnership ofphysicians specializing in pathology. Quest(previously SBCL) owned and operated clinicallaboratories, and provided laboratory services. In1992, the parties’ predecessors entered into anagreement under which Quest agreed to provideMLSS with technical and support services. In2000, Quest notified ProPath that it wasterminating the agreement. ProPath respondedthat it would require transfer of cytologyoperations, and Quest allegedly refused to comply.The parties met and reached an accommodation,but in 2001, Quest again notified ProPath that itwas terminating the agreement. ProPath againresponded that it would require a transfer of thecytology operations.

The majority of the court’s opinion isdevoted to resolving various questions concerningthe parties’ agreement. With respect to the non-competition covenant, Quest’s predecessor SBCLhad agreed that for a period of six monthsfollowing termination neither it nor any of itsaffiliates would solicit any of ProPath’s businessin 48 Texas counties. The court concluded that thecovenant was enforceable finding that ProPath hada legitimate business interest (1) Quest not using

ProPath’s confidential information, (2) inpreserving ProPath’s anatomic pathology business[Query: Isn’t this simply a naked restraint?], and(3) that transfer of the cytology operations wouldbe protected by a contemporaneous non-competition covenant. Despite that there does not(at least from the opinion) appear to be anyobligation on ProPath to disclose confidentialinformation to Quest, the court neverthelessaccepted ProPath’s argument and found theagreement enforceable. The court found that thesix month term and the 48 county geographicalrestraints were reasonable.

e. Texas Law: (a) In “At-Will”Employment, A Promise to ShareConfidential Information Is A SufficientNon-Illusory Promise to Support A Non-Competition Covenant(b) Interest in Preserving Client DatabaseDeveloped Through Spending $3 Millionis Sufficient to Support Non-CompetitionCovenant

Rimkus Consulting Group v. Budinger, 2001 WL619067 (Tex. App. – Houston [14th Dist.]2001)(unpublished, non-precedential)

Rimkus was an engineering consultingfirm that analyzed accidents and failures ofvarious kinds for insurance companies. Budlingerwas a licensed engineer and architect, and joinedRimkus in 1992. He signed a non-competitioncovenant that extended for eighteen months and to“any geographical area where [Rimkus] has donebusiness during the term hereof.” The scope ofactivities was “any business service similar to thatwhich are carried on by the Company.” Budlingerleft Rimkus in 1997 and joined a competitorProNet. Rimkus filed suit to enforce the non-competition covenant. The trial court held that thecovenant was written was unenforceable, butreformed the covernant to one year and restrictedthe geographical area to Harris County. Onappeal, the court affirmed.

The court found that although Budlinger’semployment was “at will,” “[t]he originalemployment agreement contained a clausewhereby Rimkus promised to share secret andproprietary information with Budlinger, andBudlinger promised not to disclose such


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information * * *.” In actuality, the agreementsimply said that “in consideration of theCompany’s agreement to engage Employee toperform personal services and the resulting accessby Employee to customer names and files, trainingand techniques given by the Company, tradesecrets and other proprietary and confidentialinformation * * *.” It is questionable whether thatis an affirmative obligation that goes beyondemployment.

The court also found that Rimkus haddeveloped various specialized techniques foranalyzing failures, and had spent more than $3million in developing an extensive customerdatabase, which was a sufficient legitimatebusiness interest to protect using a non-competition covenant.

f. Texas Law: A “Satisfaction” Contract ofEmployment is Not “At Will”Employment

Friedman, Clark & Shapiro, Inc. v. Greenberg,Grant & Richards, Inc., 2001 WL 1136169 (Tex.App. – Houston [14th Dist.] 2001)

This is splitting hairs. GGR was acommercial debt collection firm. Individualdefendants King, Hausman and Bregenzer wereGGR employees. Because GGR’s employees hadbeen leaving and taking business with them, in1996, GGR had its existing employees signemployment agreements containing non-competition and non-solicitation covenants. Thenon-competition covenant extended for one yearwithin Harris County. Two of the agreements(one of the three was a letter agreement containingonly a non-competition covenant) at issueprovided that the “employment of Employee shallcontinue only so long as services rendered byEmployee are satisfactory to Employer” and“Employer shall be the sole judge as to whethersuch services of Employee are satisfactory.”

In 1998, King et al., while still employedby GGR, started their own debt collection firm,FCS. GGR sued, and as the result of summaryjudgments and a trial, the non-competitioncovenant was essentially enforced. On appeal, thecourt affirmed finding that the covenant wasenforceable.

With respect to the enforceability of thenon-competition covenant, the court deemed thetwo employment agreements as “satisfaction”agreements, rather than employment “at will,”which thus avoided any necessity for finding

another enforceable agreement.687 The court alsofound consideration to support the non-competition covenant in King et al.’s agreementnot to disclose or use confidential information,such as customer names etc. Query: Was there anagreement requiring GGR to disclose suchinformation?

g. Texas Law: (a) No Promise to GiveEmployee Confidential Information AtThe Time of the Agreement(b) Promise of Promotion Was Illusory(c) Obligation on Employee Give NoticePrior to Termination Is Not SufficientConsideration for Non-CompetitionCovenant(d) Non-Disclosure ObligationsEnforceable Independent of Non-Competition Covenant

Anderson Chemical Co., Inc. v. Green, 66 S.W.2d434 (Tex. App. – Amarillo 2001)

The case arise from the trial court’s refusalto grant Anderson a temporary injunctionenforcing a former employee’s non-competitionand non-disclosure covenants. The court foundthat the trial court had not abused its discretion.

Green worked for Anderson Chemical forapproximately eleven years from 1990 to 2001 asa salesman for water treatment systems. Greenhad an employment agreement that contained anon-competition covenant that extended for oneyear and covered a defined “Territory” in WestTexas that he had served for Anderson. In 2001,Green went to work for Alpha Labs, a co-defendant and one of Anderson’s competitors. Inhis new position, Green solicited customers that hehad serviced while employed by Anderson within

687 In Light, the Texas Supreme Court held that apromise of continued employment was illusory if itwas within the sole control of the employer. Light,883 S.W.2d at 644 n. 5.





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the same geographic area proscribed by his non-competition covenant. Anderson sued, and thisappeal was from the trial court’s denial of atemporary injunction to enforce the terms ofGreen’s non-competition covenant. The courtaffirmed.

The court concluded that Green had givena number of non-illusory promises in hisemployment agreement, i.e., that upon terminationhe would return Anderson’s property, (2) that forone year he would not solicit Anderson’semployees, (3) that following termination hewould keep various items of informationconfidential, and (4) to give ten days notice priorto terminating employment. The court did not,however, find any non-illusory promises flowingfrom Anderson: “A promise not to disclose anemployee’s [sic. employer’s] proprietaryinformation which is later accepted by theemployer’s performance in providing thatinformation to the employee is a unilateralcontract that cannot support a covenant not tocompete because it is not otherwise enforceable atthe time it was made. * * * The instant agreementcontains no promise on the part of * * *[Anderson] to furnish Green with confidentialinformation. Thus, even if * * * [Anderson] gavesuch information to Green, at the time it wasmade, there was no enforceable agreement.”[Emphasis added.]

Anderson also promised that if it failed topromote Green to manager of its West Texasterritory when another employee, Bill Dawson,ceased to work for Anderson, then the non-competition covenant would not bind Green. Thecourt concluded that was an enforceableagreement because Anderson could terminateGreen at any time prior to Dawson’s retirement.

The court further held that Green’s returnpromise to give ten days notice was not sufficientto support the non-competition covenant.Accordingly, the court concluded that the trialcourt could have concluded that the non-competition covenant was not enforceable becauseit was not ancillary to an otherwise enforceableagreement.

Green’s employment agreement alsoincluded a non-disclosure covenant. The courtacknowledged that a “non-disclosure covenant

may be enforceable even if a non-competeprovision is not enforceable and such a provisionis not required to contain reasonable restrictions asto time, geography, and scope of activity.” Thecourt noted, though, that Green had returned all ofAnderson’s materials upon his termination, andthat the record revealed that Green had not usedany of Anderson’s proprietary information.Accordingly, the court concluded that there was noerror in refusing to grant a temporary injunction.

2. Cases Outside Texasa. Arizona Law: Geographical Covenant

Limited By Sales Volume Enforced

Bed Mart, Inc. v. Kelley, 45 P.3d 1219 (Ariz. App.2002)

In Arizona, a covenant not to compete is“valid and enforceable by injunction when therestraint does not exceed that reasonably necessaryto protect the employer’s business, is notunreasonably restrictive of the rights of theemployee, does not contravene public policy, and

is reasonable as to time and space.”688

Kelley began working for Bed Mart as asalesman in January 2000, and signed anemployment agreement containing confidentialityand non-competition covenants. The non-competitive covenant extended to “any businessfor which the sale of mattresses accounts for morethan fifty percent (50%) of sales revenue” and“within ten (10) miles of any location where [BedMart] conducts business.” The covenant had aterm of six months. The trial court found that thegeographical restriction was unreasonable. Onappeal, the Arizona Court of Appeals reversed.

The court observed that a “restrictivecovenant is reasonable and enforceable when itprotects some legitimate interest of the employerbeyond the mere interest in protecting itself from

competition * * *.”689 The court found that Bed

688 Phoenix Orthopaedic Surgeons, Ltd. v. Peairs, 164 Ariz. 54,57, 790 P.2d 752, 755 (Ariz. App. 1989), disapproved onother grounds, Valley Med. Specialists v. Farber, 194 Ariz.363, 982 P.2d 1277 (Ariz. 1999).

689 45 P.2d at 1221.

http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=AZ_caselaw&volume=45&edition=P.3d&page=1219&id=70510_01

http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=az_caselaw&volume=164&edition=Ariz.&page=54&id=70510_01






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Mart had several legitimate interests for its non-competitive covenant, chiefly the need to protectits pricing information. Each salesman was givena “Product Bible” that included wholesale pricesand promotional deals from suppliers because eachsalesman could determine the price at which aproduct would be sold to a customer.

The court found that the six month termwas reasonable because (1) that was how long ittook to train a new employee, and (2) the ProductBible was revised approximately every sixmonths. The court further found that thegeographical term was reasonable given the 50%of sales limitation, i.e., the limitation precludedKelley from working at the 5-6 beddingsuperstores in the Phoenix area, but not in othernumerous department and furniture stores.

b. Arkansas Law: Failure to Impose Post-Termination Non-Competition/Non-Disclosure Restraints Is Evidence of aFailure to Properly Protect Trade Secrets

ConAgra Poultry Co. v. Tyson Foods, Inc., 30S.W.3d 725 (Ark. 2000)(Tyson I)

Tyson and ConAgra are, of course,competitors and major producers of poultryproducts. Tyson filed suit alleging that ConAgrahad “raided” Tyson by hiring away three of its topmanagement executives. According to Tyson,those executives had access to confidentialinformation concerning pricing, pricing programs,cost of goods sold, profit margins, and marketingstrategies. Tyson’s complaint alleged that thoseindividuals would inevitably disclose suchconfidential and/or trade secret information intheir new positions with ConAgra. The trial courtagreed and entered an injunction prohibitingConAgra from misappropriating Tyson’s tradesecrets for one year, prohibiting two of the formeremployees from engaging in the sale or marketingof poultry for one year, and prohibiting the thirdformer employee from continuing his involvementin sales and marketing with various subsidiaries,e.g., Burger King, KFC, etc. On appeal, theArkansas Supreme Court reversed finding that theinformation that Tyson alleged to be confidentialand/or a trade secret had not been properlyprotected.

ConAgra argued that the pricinginformation had been disclosed in customercontracts that did not contain confidentialityrestrictions. Tyson argued, in response, that it wasunlikely that Tyson’s customers would disclosesuch information because that would benefitcompetitors. Nevertheless, the Arkansas SupremeCourt noted that “the fact remains that Tysonneglected to include any restriction in its customercontracts which prevented disclosure to thirdparties. Regardless of whether proof waspresented that such disclosure by Tyson customershad transpired, Tyson manifestly failed to takesteps to guard the secrecy of this information.”Moreover, according to the court, “without a curbor some restriction on its customers, theinformation was readily ascertainable by thirdparties from some, if not all, of Tyson’scustomers. This lapse is important to this court. IfTyson did not consider it necessary to preclude thedissemination of pricing information by itscustomers, why should this court * * * enforce the

secrecy of that same information?”690

The court further held that the trial courthad clearly erred in relying on Tyson’s CorporateCode of Conduct and Compliance Policy infinding that Tyson had met its responsibility ofsafeguarding its trade secrets. The Code,according to the court, only applied to employees,and noted that “Tyson had not entered into acovenant not to compete with the three executivesto be effective for a certain period of time after thethree men left Tyson * * *. Nor did Tyson have aseparate confidentiality agreement with theseexecutives which extended the period of time forconfidentiality * * * for a period of one year afterthe three men left the company’s

employment.”691 Those factors were clearlyimportant to the court’s conclusion that Tyson hadnot properly protected its trade secrets.

The criticisms are abundant, but two standout. As discussed above, one of the considerationsin determining whether a trade secret owner hastaken reasonable precautions to protect a tradesecret is the relationship between the owner and

690 30 S.W.2d at 729.691 Id..




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those to whom the trade secret has been disclosed.Tyson, it seems, made a reasonable argument thatalthough its customers may not be under acontractual obligation of non-disclosure, theirrelationship with Tyson rendered any disclosureunlikely. Viewed from a perspective of what was“reasonable,” Tyson’s failure to includeconfidentiality restrictions would appear to havebeen reasonable. Secondly, the court nowhereaddresses the common law duty obliging formeremployees to preserve a former employer’sconfidential and/or trade secret information.Although post-termination express writtenrestrictions might be preferable, Tyson’s choice,apparently, to rely on an employee’s common lawduties, which are roughly equivalent to whatcourts consider to be reasonable in the case ofwritten restrictions, is not prima facieunreasonable. In short, Tysons may not haveprotected its confidential or trade secretinformation through the types of writtenobligations the Arkansas Supreme Court wasaccustomed to seeing, but that does not mean thatTysons failed to meet the “reasonableness”standard generally applicable.

c. Colorado Law: Restrictive Covenant MayNot Be Used to Preclude Use ofSomething That is Not a Trade Secret –Here a Method of Teaching Infants ToSwim

Harvey Barnett, Inc. v. Shidler, 2001 U.S. Dist.LEXIS 5722 (D. Colo. 2001)

The Colorado statute governing non-competition agreements generally renders all suchprovisions void, but then creates four narrowlydefined exceptions:

Any covenant not to competewhich restricts the right of anyperson to receive compensationfor performance of skilled orunskilled labor for any employershall be void, but this subsection

(2) shall not apply to:

(a) Any contract for the purchaseor sale of a business or the assetsof a business;

(b) Any contract for the protectionof trade secrets;

(c) Any contractual provisionproviding for recovery of theexpense of educating and trainingan employee who has served anemployer for a period of less thantwo years;

(d) Executive and managementpersonnel and officers andemployees who constituteprofessional staff to executive andmanagement personnel.

Colo. Rev. Stat. § 8-2-113.

The plaintiffs over a number of yearsdeveloped techniques for teaching infants andtoddlers to survive in the water. Basically, theywere taught to swim, flip over and float, swim etc.Instructors were trained, who in turned trainedother instructors, and so forth, leading tonationwide programs. The defendants trained asinstructors in the 1980s. While associated with theplaintiffs, the defendants had signed a “LicenseAgreement” that contained confidentiality andnon-competition provisions. The defendantsultimately started their own company teachinginfants and children to swim, including using theswim-float-swim method, but, according to thecourt, used methods that were substantiallydifferent that the plaintiffs’ methods.

The plaintiffs conceded that theirinstructing methods were used in public withoutany obligations of confidentiality, and were nottrade secrets, prior to 1996. They alleged,however, that the program “came together” in1996 and constituted a trade secret thereafter. Thedistrict court disagreed, finding that the plaintiffshad not sufficiently distinguished the currentprogram from the prior non-trade secret program.As a result, the covenant did not fall within one ofthe statutory exceptions. The court also found thatthe language of the covenant was overly broad andunenforceable even if it fell within a statutoryexception.


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d. Georgia Law: Non-Solicitation CovenantExtending for 12 Months and PersonalCustomers Was Not Overly BroadIn Georgia, the reasonableness of a

covenant not to compete is determined by thereasonableness of its duration, territorial coverage,

and scope of prohibited activity.692

Covington v. D.L. Pimper Group, Inc., 546 S.E.2d37 (Ga. Ct. App. 2001)

There, apparently, are several differenttypes of firms that sell stocks and securities, i.e.,large national brokerage houses that trade in theirown names on the floor of stock exchanges,regional brokers who trade in their corporatenames, and independent brokers who contract withlicensed securities salesmen to are employees oflocal “stock stores.” D.L. Pimper was a local“stock store.” IJL Wachovia was a regionalbroker. Although the court acknowledged thatthere were differences between the two, the courtconcluded that the relevant fact was that they weredirect competitors.

Covington had worked for Pimper and hadentered into an agreement containing non-disclosure, non-solicitation, and non-competitionprovisions. Covington resigned in August, 2000,and promptly began soliciting Pimper clients usinghis Pimper client list. Indeed, prior to leavingPimper, Covington had removed clientinformation regarding various accounts and hadgiven that information to Wachovia. Pimper suedand the trial court entered an interlocutoryinjunction against Covington and Wachovia.

The non-competition provision extendedfor one year and to Floyd County, Georgia.Covington did not contend that the covenant wastoo broad as to territory or time. RatherCovington argued that as a registered agent withRoyal Alliance, he technically was soliciting salesfor Royal Alliance rather than Pimper during hisemployment. The court rejected that argumentoutright, finding that the evidence was clear thathe solicited sales on behalf of Pimper. The courtalso found that the terms of the non-solicitation

692 Reardigan v. Shaw Indus., 518 S.E.2d 144 (Ga. Ct. App.1999).

covenant, extending for twelve months followingtermination of employment, and prohibitingCovington from “solicit[ing], contact[ing],call[ing] upon, communicat[ing] with” “any clientor prospective client” of Pimper, was not overly

broad.693

e. Illinois Law: A Non-CompetitionCovenant Given in Connection With aGift May Be Enforceable – But Here ItWas Not

Liautaud v. Liautaud, 221 F.3d 981 (7th Cir.2000)

This involved a feud between cousinshaving the same surname. Jim owned a chain ofsuccessful gourmet sandwich shops in Illinoisunder Jimmy John’s, Inc. In 1988, Jim’s cousin,Michael, asked Jim about opening a submarinesandwich shop in Madison, Wisconsin, under thename “Big Mike’s Super Subs.” Jim agreed toprovide Michael with his “secrets of success” andsent Michael a letter outlining their relationship.That letter provided that Michael could not open ashop outside Madison using Jimmy John’sproducts or services without involving JimmyJohn’s. Michael returned the letter with ahandwritten notation on the bottom: “Jimmy, If Iagree on all items stated above, you must agreethat you (Jimmy Johns Inc.) won’t enter theMadison WI market.” Jim then helped Michaelopen a shop in Madison, but, in 1991, Michaelopened a shop in LaCrosse, outside Madison, inviolation of the agreement. Jim brought suitattempting to enforce the agreement.

The Seventh Circuit viewed thetransaction, not as a franchise, but as a gift.According to the court, under Illinois law, “[a]‘naked’ promise by one merchant not to competeagainst another merchant is against public policybecause it injures the public and the promissory,while at the same time it serves no protectable

693 But see, First Miami Sec., Inc. v. Bell, 758 So. 2d 1229(Fla. Ct. App. 2000)(injunction denied on similarfacts).







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interest of the promisee.”694 Thus, the courtreasoned that “[i]n order for a noncompetitionagreement to be valid * * * it must be ancillary toa valid transaction, such that the covenant not tocompete is subordinate to the main purpose of the

transaction.”695 A “gift,” the court stated, “is avoluntary gratuitous transfer of property fromdonor to donee where the donor manifests anintent to make such a gift and absolutely and

irrevocably delivers the property to the donee.”696

The court reasoned that the “donor may wish toprotect both his generosity and his businessinterests from exploitation; therefore, he maydesire to impose a covenant not to compete on his

donee.”697 Here, the court held that the covenantnot to compete was ancillary to the gifttransaction, and “because the gift relationship[was] a valid relationship or transaction and thenoncompetition agreement [was] subordinate tothat relationship, the noncompetition agreementmeets the first requirement that it be ancillary to a

valid relationship or transaction.”698

The court, however, found that thecovenant was unreasonable in preventing Michaelfrom expanding outside of Madison, in preventingsuch expansion regardless of whether Michaelused Jim’s trade secrets, and because there was nolimitation on time. Accordingly, the courtconcluded that the covenant, as written,contravened public policy and was unenforceable.

694 221. F.3d at 986, quoting Abel v. Fox, 274 Ill. App. 3d811, 654 N.E.2d 591, 596 (4th Dist. 1995).

695 Id.696 Id.697 Id.698 Id.

f. Indiana Law: Good Will Is A LegitimateInterest That May Be Protected By Non-Competition Covenants

Unger v. FFW Corp., 771 N.E.2d 1240 (Ind. App.2002)

FFW was a holding company that ownedFirstFed Financial of Wabash, Inc. that offerednon-retail deposit and brokerage services. Ungerwas eventually promoted to president of FirstFedunder an employment agreement that contained anon-competition covenant. The covenantextended geographically to Wabash and adjacentcounties. The term was one year followingtermination of employment. In December, 2000,the CEO of FFW informed Unger that his contractwould not be renewed in April, 2001, and that heshould not return to work. Unger, though, waspaid his salary and benefits until his contractexpired. During the spring of 2001, Unger sentbetween 1000 and 1500 letters to “everybody andanybody that he could think of” explaining that hiscontract had not been renewed. One of thoseletters went to the father-in-law of FFW’s CEO.The evidence indicated that Unger had usedFirstFed’s customer list to obtain that address (andpossibly others). Unger also ran an advertisementin the local newspaper indicating that he providedfull brokerage services. FFW filed suit to enforcethe non-competition covenant, and the trial courtissued the requested injunction. On appeal, theIndiana Court of Appeals affirmed.

Unger argued that FFW did not have aprotectible interest in the bank’s customer list.According to the court, “[w]e need not determinewhether the bank’s customer list was a protectibleinterest because FFW Corp. established aprotectible interest in its good will.” There wastestimony that the banking industry was based ontrust and reputation, and that the confidentiality ofclient lists were part of that.




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g. Indiana Law: Trade Secrets, ConfidentialInformation, and Good Will AreLegitimate Interests That May BeProtected By Non-Competition Covenants

Titus v. Rheitone, Inc., 758 N.E.2d 85 (Ind. App.2001)

Under Indiana law, noncompetitioncovenants are construed as being in restraint of

trade, and are not favored.699 Accordingly, suchcovenants are construed against the employer andare enforced only if reasonable. The courts firstdetermine whether the employer has asserted alegitimate interest that may be protected by a non-competition covenant, and then determine whetherthe scope of the agreement is reasonable in termsof time, geography and prohibited activites. Theemployer bears the burden of proof, and mustdemonstrate that “the former employee has gaineda unique competitive advantage or ability to harmthe employer before such employer is entitled to

the protection of a noncompetition covenant.”700

Covenants have been upheld to protect trade secretand confidential information, and to protect acompany’s good will: “Elements of this good willinclude ‘secret or confidential information,’ suchas the names and addresses and requirements ofcustomers and the advantage acquired throughrepresentative contact with the trade in the area of

their application.”701

Rheitone was a pre-press business, i.e.,preparing materials for printing presses bytransforming text and graphics into finished pages,and making printing plates of those pages. Titusworked for Rheitone for nine years, most recentlyas Vice President of Operations, at salaries rangingfrom $26,000 to $84,000. In 1995, she signed anemployment agreement that containedconfidentiality and non-compete provisions. Thenon-competition covenant had a term of threeyears, extended to the entire state of Indiana, and

699 Burk v. Heritage Food Serv. Equip., Inc., 737 N.E.2d 803,813 (Ind. App. 2000).

700 Burk, 737 N.E.2d at 811.701 Duneland Emergency Physician’s Medical Group v. Brunk,

723 N.E.2d 963 (Ind. Appl. 2000).

generally covered the pre-press business. Tituswas terminated in September 2000, and she begansearching for work. She received, but declined,offers from Eli Lilly and Conseco. In October2000, she explored work with Midwest Graphics,which was also in the pre-press business.Correspondence indicated that she was intendingto contact former Rheitone customers, and sheactually did so after being hired. Rheitone filedsuit and moved for an injunction. The trial courtissued an injunction enforcing the non-competitioncovenant and, on appeal, the Indiana Court ofAppeals affirmed.

According to the court, the pre-pressbusiness was “extremely” competitive, and thatTitus had traveled throughout Indiana. Titusfurthermore had access to customer purchase andpreference information, discount levels, andpricing on a pass-word protected computer.Additionally, Titus apparently controlled the entiresales force, and had more knowledge ofRheitone’s customers than anyone else in thecompany. The court found that the customerinformation constituted a trade secret, and thatRheitone had shown a legitimate protectibleinterest in such information. The court also foundthat the three year term of the non-competitioncovenant was reasonable in light of the nature ofthe pre-press industry and Rheitone’s legitimateinterest in protecting its customer information.The court further held that the statewidegeographical restriction was reasonable under thecircumstances, and that “Titus knowingly executedthe employment agreement” and “was handsomelycompensated as an employee.”

h. Indiana Law: A Non-CompetitionCovenant May Be Enforced to ProtectPromisee’s Good Will Including CustomerContactsIn Indiana, covenants not to compete are

generally disfavored, but will be enforced if(1) the restraint is reasonably necessary to protectthe employer’s business; (2) the restraint is notunreasonably restrictive of the employee; and(3) the covenant is not antagonistic to the general

public.702 In applying that test, the Indiana courts

702 Slisz v. Munzenreider Corp., 411 N.E.2d 700, 704 (Ind.Ct. App. 1980).






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have held that an employer must demonstratesome special facts giving the former employee aunique competitive advantage or ability to harmthe employer before such a covenant will be

enforced.703 Such special facts include suchthings as trade secrets that the employee knows, anemployee’s unique services, confidentialinformation such as customer lists that theemployee knows, or the existence of a confidential

relationship.704 On the other hand, an employeris not entitled to protection against an employee’sknowledge, skill, or general information gainedthrough experience or instruction while

employed.705

McGlothen v. Heritage Environmental, Servs.,L.L.C., 705 N.E.2d 1069 (Ind. Ct. App. 1999)

Heritage was a waste management firm.McGlothen worked for Heritage for six years from1992 to 1998. McGlothen’s employmentagreement had confidentiality, non-solicitation andnon-competition provisions. The non-solicitationprovision extended for twelve months followingtermination and extended to any of Heritage’scustomers. The non-competition provision alsoextended for twelve months and to the principalState in which he was employed and beyond thatto any city or county or state where he had“rendered services” for Heritage. McGlothen leftand joined a competitive firm, but then shortly leftthat firm and joined another competitive firmwhere he began soliciting Heritage’s customers.Heritage obtained a temporary restraining order,and at a preliminary injunction hearing,McGlothen turned over materials that he had takenwith him from Heritage, including a spreadsheetprogram that included Heritage’s direct costs,customer lists, target customer lists, completedproposals, completed project lists, and feeschedules. The trial court enjoined McGlothenfrom soliciting work from Heritage customers,working in the industry in the territory where hehad previously worked for Heritage, divulgingconfidential information, and soliciting Heritage

703 Id.704 Id.705 Century Personnel, Inc. v. Brummett, 499 N.E.2d 1160,

1163 (Ind. Ct. App. 1986).

employees to work for other firms, for a period ofone year following the termination of hisemployment with Heritage. On appeal, theIndiana Court of Appeals affirmed.

Although McGlothen argued that theinformation that he had appropriated was notconfidential, the court noted that the weight of theevidence was to the contrary. The court also notedthat, apart from the confidential information, anemployer is entitled to contract to protect the goodwill of the business, and such good will includesthe names, addresses, and requirements of itscustomers, and the advantage gained throughcontacts between customers and itsrepresentatives. McGlothen argued that Heritagedid not have a protectable interest in its good willunless it could show that there was an exclusiverelationship between its employees and itscustomers. The court rejected that argumentnoting whether the relationship was exclusive ornot goes to the degree of good will developed, notto whether the employer is entitled to

protection.706

i. Iowa Law: Extensive Personal ContactsMay Justify Enforcing Covenant Not toCompete

White Pigeon Agency, Inc. v. Madden, 2001 IowaApp. LEXIS 479 (Iowa App. 2001)

Madden worked for White Pigeon, aninsurance agency, for approximately seventeenyears. She had executed an employmentagreement that contained a non-competitioncovenant, but the precise terms are unclear fromthe opinion. In 1999, her employment agreementwas not renewed, and she began working for aninsurance company that she had previously formedwith her husband. White Pigeon subsequentlyfiled suit alleging that she was violating the termsof her non-competition covenant, and wassoliciting clients from its policyholder list. Thetrial court, inter alia, refused to enforce the threeyear term of her non-competition covenant (butentered a one-year injunction). On appeal, the

706 McGlothen, 705 N.E.2d at 1073.




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Iowa Court of Appeals held that the trial courtshould have enforced the three year covenant.

The court reasoned that “[i]n situationswhere an employee has extensive personalcontacts with an employer’s customers, personalloyalties develop which leads the customer tofollow the employee upon termination ofemployment. * * * Therefore, the covenant isnecessary to protect White Pigeon.” The courtalso noted that nothing in the covenant preventedMadden from selling insurance. It only preventedher from selling insurance to White Pigeon clientsin a five county region.

j. Fourth Circuit: Maryland/Delaware Law:Injunction Enforcing Covenant Not ToCompete Issued on Two Days NoticeUpheld

CIENA Corp. v. Jarrard, 203 F.3d 312 (4th Cir.2000)

CIENA was a Delaware corporationheadquartered in Maryland. CIENA designed,manufactured, and marketed hardware andsoftware for increasing the capacity of fiber-opticnetworks. In 1997, CIENA hired Jarrard as itsWestern Regional Director of Sales. She wasbased in Kansas City, Missouri, and supervisedCIENA’s sales force in the western part of theUnited States. She received a salary of $300,000per year plus bonuses. During her last year, shewas paid $500,000.

On taking her position, Jarrard signed anemployment agreement that contained non-solicitation and non-competition provisions. Thenon-competition covenant extended to “any partywho, at any time during the term of myemployment, was a competitor or a client of[CIENA] * * *.” The covenant (at least thatportion reproduced in the opinion) did not haveany geographical limitation, but terminated oneyear following termination of employment.

Jarrard resigned her position to take ahigh-level sales position with a start-up company,Sycamore Networks, Inc. based in Massachusetts.Apparently she received in excess of $5 million incompensation and stock options. Sycamore’sbusiness was improving the optical network

infrastructure available to the telecommunicationsindustry.

CIENA promptly filed suit alleging breachof her employment agreement and trade secretmisappropriation. CIENA notified her on a Fridaythat suit had been filed in the District of Marylandand delivered the suit papers to her on Saturday.Those papers included a motion for a TRO thatwas set on the following Monday. That Monday,the district court announced that it would handlethe TRO as a preliminary injunction. Afterhearing the arguments of counsel, the district courtgranted a preliminary injunction enforcing theterms of Jarrard’s employment agreement. Onappeal, the Fourth Circuit affirmed.

Jarrard argued (1) the court lackedpersonal jurisdiction, (2) the short notice of theinjunction hearing denied her due process, and(3) the non-competition covenant wasunenforceable. With respect to jurisdiction, thecourt concluded that “[t]his case arises out ofJarrard’s alleged breach of her noncompetitionagreement entered into with her Maryland-basedemployer; her knowledge of company trade secretsthat she allegedly acquired during her numerousvisits to the company’s headquarters in Maryland;and her abrupt departure from the company towork for a competitor, an action implicating thetraining and experience she acquired in Marylandwhen she regularly traveled to the company’sheadquarters over a period of two years. Under allof these circumstances, we conclude that Jarrard’srepeated trips to Maryland and the injury that shethreatens in Maryland provided sufficient contactswith Maryland to enable a federal court inMaryland constitutionally to assert personal

jurisdiction over her.”707

With respect to the short notice, the courtwas obviously troubled. However, the court notedthat the district court was faced with allegationsthat Jarrard had just commenced work for acompetitor in violation of her employmentagreement, and that once she disclosed CIENA’strade secrets irreparable damage would result. Thecourt further noted that the district court hadexpressly mentioned that Jarrard may want to file

707 203 F.3d at 318.



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a motion for reconsideration, which Jarrard did notdo. Nevertheless, the court remanded the case tothe district court with instructions that Jarrardshould be allowed expedited discovery and theoption to file a motion to dissolve the injunctionwithin thirty days.

With respect to the covenant, the courtnoted that under Delaware law, covenants not tocompete with reasonable time and geographicalrestrictions are enforceable. The court held thatthe district court had not erred “as a preliminarymatter” from enforcing the covenant “at least until

Jarrard advances facts to show otherwise.”708

k. MassachusettsLaw Court ApplyingConnecticut Law: Six Month Non-Competition/Non-Solicitation AgreementEnforceableUnder Connecticut law, five factors are

considered when evaluating the reasonableness ofrestrictive covenants, namely: (1) the length oftime of the restriction; (2) the geographicalarea(s) to which the agreement applies; (3) thefairness of the employer’s protection; (4) theextent of the impact of the restraint on theemployee’s opportunity to pursue his livelihood;and (5) the extent of interference with the interests

of the public.709

TKO, Inc. v. Gentle, 1997 Mass. Super. LEXIS399 (Mass. Super. Ct. 1997)

TKO was a manufacturer’s representativefor medical equipment. Gentle and Reilly, thedefendants, worked for TKO as salesrepresentatives. Both had signed agreements,governed by Connecticut law, with TKO havingnon-competition and non-solicitation provisions.Reilly left and opened a competing company.Gentle followed later joining Reilly’s business.TKO filed the present action to enforce the non-competition and non-solicitation covenants. Therestrictions in the agreements that Gentle andReilly signed were different. Gentle, however, didnot respond to TKO’s motion for summary

708 Id. at 324.709 Weiss and Assocs., Inc. v. Wiederlight, 546 A.2d 216

(Conn. 1988).

judgment. Thus, only Reilly’s covenant wasactually at issue which had a six-month term andcovered his sales territory. The court found thatthe restriction was “narrowly tailored to TKO’sparticular business situation,” was reasonable, andwas enforceable.

l. New York Court Applying MassachusettsLaw: Restrictive Covenant May BeEnforced to Protect Good Will Even in theAbsence of Trade Secrets or ConfidentialInformationUnder Massachusetts law, “a former

employer may enforce the restrictive covenantsexecuted by an employee when the employerdemonstrates that the agreement is necessary toprotect the employer’s legitimate business interestsand that the covenants are reasonably limited in

time and space.”710 In general, Massachusettsrecognizes three business interests that may beprotected by restrictive or non-competitioncovenants, namely: (1) trade secrets;

(2) confidential data; and (3) goodwill.711 Goodwill is the “company’s positive reputation in thecommunity, particularly in the eyes of its

customers and potential customers.”712

Garber Bros., Inc. v. Evlek, 122 F. Supp.2d 375(E.D.N.Y. 2000)

Garber, a wholesale service company,brought suit against one of its former employees,Evlek, to enforce “Employee Confidentiality andNoncompetition Agreement.” The agreementcontained a “confidentiality covenant” thatgenerally provided that Evlek would maintain theconfidentiality of Garber’s proprietaryinformation, including the “identity of allcustomers, vendors, suppliers and prospects and* * * pricing methods and other confidential tradesecrets and techniques” and would return anymaterials containing such information at theconclusion of his employment.

710 Modis, Inc. v. Revolution Group, Ltd., 1999 WL14441918 (Mass. Super. Ct. 1999).

711 See New England Canteen Serv., Inc. v. Ashley, 363N.E.2d 526, 528 (Mass. 1977).

712 Borden & Remington Corp. v. Banisch, 10 Mass. L. Rptr.696, 1999 WL 1266161 (Mass. Super .Ct. 1999).




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The agreement also contained a“noncompetition covenant” prohibiting Evlekfrom working in a business that competes withGarber for two years after termination of hisemployment “in any area where any Garbercustomers are located and/or in which Garber nowor at any time during the term of this agreementconducts business and in any event in anygeographical location within 500 miles ofStoughton, Mass.”

The agreement thirdly contained a“nonsolicitation covenant” that provided thatEvlek, for a period of two years after terminationof his employment, “will not directly or indirectly* * * call upon, solicit, divert or take away orattempt to solicit, divert or take away, any of thecustomers, business or suppliers of Garber,” and“will not solicit or discuss with any employee* * * of Garber the potential employment or otherengagement of such Garber employee * * * by anybusiness, firm, company, partnership, association,corporation or any other entity other than for thebenefit of Garber * * *.”

The evidence showed that Garber’s salesrepresentatives were the primary contact betweenGarber and its customers, which were gas stationsand convenience stores selling variousconvenience store products. The court found thatthe process of developing customers was a timeconsuming and costly process − for every tenprospects contacts, only approximately onecustomer was obtained, at a cost of severalthousands of dollars.

The court concluded that Garber hadshown sufficient good will to enforce theagreements. The court rejected one of Evlek’sclaims that the customers were his because he haddeveloped those customers through his contacts inthe Turkish community noting that was his jobwith Garber. The court, however, found that thetwo-year covenant was unreasonable in time, andreformed the covenant to one year. The court alsofound that the scope of the covenant was to broad,and reformed the covenant to preclude Evlek fromsoliciting only those customers with which he haddeveloped a relationship will working for Garber.

m. New York Court Applying MassachusettsLaw: Restrictive Covenant May BeEnforced to Protect Good Will

Markovits v. Venture Info Capital, Inc., 129 F.Supp.2d 647 (S.D.N.Y. 2001)

The court similarly found that the non-competition provision before the court wasgoverned by Massachusetts law. Markovits wasone of the founders and principal shareholders ofVenture Info Capital (VIC). His employmentagreement contained various provisions relating totermination, both for cause and not for cause. VIChad the option to purchase 2/3 of the stockMarkovits held, but the price depended on whethertermination was for cause. The agreement alsoincluded non-disclosure provisions and a non-competition covenant that extended to the 48contiguous states and Canada, and extended for 3years. The court determined that Markovits wasterminated without cause and granted Markovitzpartial summary judgment of over $900,000 forthe value of his stock. The court also, however,found that the non-competition covenant wasenforceable because it protected VIC’s good willin its customer base and proprietary information.Even following various preliminary injunctionsissued by the court, Markovits, apparently, hadpersisted in contacting VIC’s customers and inusing VIC’s proprietary information. The court,though, reformed the covenant to exclude Canada,and shortened the term to two years.

n. Massachusetts Law: Non-Disclosure andNon-Competition Covenant PoorlyDrafted Not Enforced

FLEXcon Co., Inc. v. McSherry, 123 F. Supp.2d42 (D. Mass. 2000)

An employment agreement containingnon-disclosure and non-competition covenants,characterized by the court as ambiguous andpoorly drafted, was not enforced. McSherry beganwork with FLEXcon as a quality analyst in 1986.FLEXcon manufactured, inter alia, pressure-sensitive adhesive coated film products for use asidentification stickers and decals, and asmanufacturing labels for high-temperature printedcircuit boards. Three days after joining FLEXcon,






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McSherry signed an employment agreement thatprovided that, for a period of two years followingtermination, he would not accept employment witha competitor “in the territories” in which he hadworked. McSherry was ultimately promoted toManager of FLEXcon’s Nebraska operations, butleft in November, 2000, to join Avery-Dennison,one of FLEXcon’s principal competitors, asDirector of Operations of the Graphics MediaDivision (Ohio). FLEXcon brought suitattempting to enforce the employment agreementalleging that “territories” should be construed tocover the entire United States. The court refusedto issue a preliminary injunction finding thatFLEXcon had not shown a likelihood of successon the merits or irreparable harm. The court notedthat McSherry’s original offer of employment andsubsequent promotions made no mention of, andwere not conditioned on, the restrictive covenant,and his employment agreement was signed at atime when he had accepted an entry level positionthat was unlike his later manager’s position. Thecourt further found that McSherry had not beeninvolved with “the inner sanctum of running thecorporation” and apparently had receivedinformation regarding strategic planning,marketing, customers “on a distribution basisonly.” The court further found that McSherry’sjob responsibilities with Avery would not requirehim to use or disclose any of FLEXcon’s allegedlyconfidential information that “he might retain inhis head.”

o. Michigan Law: Michigan AntitrustReform Act (MARA), As Amended toPermit Non-Competition Covenants, IsNot Limited To Employer-EmployeeRelationships, i.e., The Act Applies ToIndependent Contractors As Well

Bristol Window & Door, Inc. v. Hoogenstyn, 2002Mich. App. LEXIS 465 (Mich. App. 2002)

Bristol offered various home improvementproducts to residential home owners. Theindividual defendants worked for Bristol asindependent contractors until they all ceasedworking for Bristol and started a competingbusiness. Each of their contracts had a three yearnon-competition covenant. When Bristol sued, thedefendants counterclaimed arguing that the non-competition covenants were unreasonable

restraints of trade under the Michigan AntitrustReform Act (MARA), MICH. COMP. LAWS ANN.(MCL) §§ 445.771 et seq. The trial court agreedand dismissed Bristol’s claims. On appeal, theMichigan Court of Appeals reversed andremanded.

Prior to 1905, the Michigan SupremeCourt applied the rule of reason to determine theenforceability of non-competition covenants. In1905, the Michigan legislature adopted a generalrule rendering non-competition covenants “illegaland void.” In 1985, the MARA repealed thatstatutory provision, but contained no sectionsspecifically addressing non-competitioncovenants. In 1986, the Michigan Court ofAppeals held that non-competition agreementswere therefore construed under a rule of

reason.713 In 1987, the legislature amended theMARA to include § 4a, MCL 455.774a(1) thatprovides that “An employer may obtain from anemployee an agreement or covenant whichprotects an employer’s reasonable competitivebusiness interests * * * if the agreement orcovenant is reasonable as to its duration,geographical area, and the type of employment orline of business. * * *.” Thus, the amendmentitself applied strictly to agreements betweenemployers and employees, but the prevailingcommon law at the time was that non-competitioncovenants in general would be reviewed under arule of reason.

The Michigan Court of Appeals viewedthe foregoing as a clear legislative intent to returnthe analysis of non-competition covenants inMichigan to a rule of reason, and that there was nointent to generally prohibit all non-competitioncovenants other than those between employers andemployees.

p. Mississippi Law: Covenant EnforcedProhibiting Insurance Salesman FromSoliciting Former CustomersIn Mississippi, whether a non-competition

covenant is enforceable or not “is largelypredicated upon the reasonableness and specificityof its terms, primarily the duration of the

713 Compton v. Joselph Lepak, DDS, PC, 154 Mich. App.360, 397 N.W.2d 311 (1986).

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restriction and its geographic scope.”714 Thecourts must also consider the effect of thecovenant on “the rights of the employer, the rightsof the employee, and the rights of the public,” and

then balance those concerns.715

Union Life Ins. Co. v. Tillman, 143 F. Supp. 2d638 (N.D. Miss. 2000).

An employment agreement with aninsurance salesman provided that for a one-yearperiod, the salesman could not sell insurance to, orsolicit policyholders of, the former employerwithin the geographical region formerly served bythe salesman. The district court found thatcovenant reasonable and granted a preliminaryinjunction enforcing the same, as well as acovenant of the same agreement requiring theformer employer to protect the former employer’strade secrets.

q. Missouri Law;: Two Year RestrictiveCovenants Covering Supervised RegionEnforcedCovenants not to compete are enforceable

in Missouri if they “serve a proper interest of theemployer in protecting the good will of abusiness” and are “reasonably limited in time and

space.”716

H&R Block Eastern Tax Servs., Inc. v. Enchura,122 F. Supp.2d 1067 (W.D. Mo. 2000)

The defendants, Enchura and Fortner,were Regional Directors for H&R Block. Theirduties generally included establishing financialand other goals for company-owned offices intheir regions. They did not have responsibilitiesfor franchised operations or for marketing. Bothhad signed employment agreements that includednon-competition covenants providing that theywould not, for a period of two years aftertermination of employment, engage in any

714 Empiregas, Inc. v. Bain, 599 So.2d 971, 975 (Miss.1992).

715 Texas Road Boring Co. v. Parker, 194 So.2d 885, 888(Miss. 1967)..

716 Osage Glass, Inc. v. Donovan, 693 S.W.2d 71, 75 (Mo.1985)(en banc).

business involving the preparation or electronicfiling of income tax returns within their assignedregions. Both became disenchanted with theiremployment, and joined H&R Block’s principalcompetitor, Jackson Hewitt, Inc. Jackson-Hewitt,unlike H&R Block, uses franchises exclusively.Fortner in his new position had nationwideresponsibility, and therefore his area ofresponsibility included his formerly assignedregion with H&R Block. Enchura’s area ofresponsibility did not, however, include isformerly assigned region. At a hearing on H&RBlock’s application for a preliminary injunction,both Fortner and Enchura indicated that they didnot object to entry of an injunction, but assertedthat an injunction was not necessary because theywere not violating their covenants. The court,nevertheless, entered an injunction enforcing theterms of the covenants finding that Fortner was, infact, violating the covenant. The court concludedthat the covenant, as written, was not limited tocompany-owned outlets, and covered franchiseoperations as well, even though Fortner had noresponsibility for the same with H&R Block.

r. New York Law: Court Finds Testimonyby Wife That She Set Up Business inDirect Competition With Husband’sEmployer Solely Because of “Empty NestSyndrome” Not Credible

Unisource Worldwide, Inc. v. Valenti, 196 F.Supp.2d 269 (E.D.N.Y. 2002)

Unisource sold paper and protectivepackaging products. In 1996, Unisource bought acompany called Spero Wallach. DefendantAnthony Valenti was a shareholder and employeeof Spero Wallach, and was employed byUnisource as an Executive Vice-President andsalesman. Valenti had an employment agreementwith Unisource that included a non-competitivecovenant prohibiting him from acceptingemployment for two years with a competitorwithin 100 miles of New York City or “within anyother marketing area currently serviced by theCompany, or within any other marking areaswhich come under Employee’s supervision orresponsibility * * *.”

In March 2001, Valenti attended anawards banquet where a Unisource VP announced





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that it was his intention to “get rid of” all of theold owners of purchased companies. Valentiurged that announcement initiated the start of ascheme to force him out of the company. Valentisubsequently sued Unisource and that actionremained pending.

Meanwhile, Valenti’s wife, Kathleen, metwith the couple’s accountant and developed abusiness plan to set up a business identical toValenti’s business at Unisource. She also metwith their attorney, who advised her that Valenti’semployment agreement should not be a problem solong as Valenti was not involved in the business.Mrs. Valenti then withdrew $500,000 from theirjoint brokerage account, allegedly without tellingValenti, and started Matrix Group Ltd. Theiraccountant thereafter arranged for Matrix to hireseveral key Unisource employees. Mrs. Valentiand the accountant testified that they undertookthese actions without any advice or leads fromValenti.

The district court characterized Mrs.Valenti’s testimony as incredible: “Like most ofthe testimony by the defendants and theirwitnesses, these claims are utterly incredible. Thedefendants would have this court believe thatKathleen Valenti started Matrix, a company indirect competition with her husband’s employer’scompany, to alleviate the “empty nest syndrome”she was suffering from; that she started Matrixwithout any involvement of her husband; that shenever discussed the formation of her companywith him; that she did not mention to him that shetook $500,000 out of a joint account to startMatrix; and that it is mere coincidence that all thekey personnel hired for Matrix were former

Unisource employees.”717

The court found that the temporalrestrictions in the non-competition covenant werereasonable, but that the geographic restrictionswere not given that the accounts that it servicedwere throughout the United States. Nevertheless,the court concluded that regardless of how thatrestriction should be amended, it would precludeValenti from starting a competing business in LakeSuccess or Syossett. The court also concluded that

717 196 F. Supp.2d at 275.

Unisource’s customer information constituted atrade secret, and that enforcement of the non-competition covenant was necessary to protectsuch information.

s. New York Law: A Company inBankruptcy That Lets Its Employees GoBecause of an Inability to Pay ThemMight Not Be Able to Enforce CovenantsNot To Compete, But May Be Able toEnforce Nondisclosure Agreements

Handel v. Nisselson, 1998 U.S. Dist. LEXIS19916 (S.D.N.Y. 1998)

UFG was an insurance brokerage firmhandling both commercial and personal lines ofinsurance. Handel was employed by UFG,ultimately becoming manager of the personal linesdepartment. Handel had signed a non-solicitation/non-competition and confidentialityagreement that, among other things, prohibitedHandel, following termination of employment,from (1) “having any dealings with presentaccounts” at UFG, and (2) disclosing confidentialinformation and trade secrets.

In 1995, UFG’s president notified thecompany’s entire staff that UFG was unable to paythem and thus their employment was ended.Handel obtained a position at another company.Handel took with him a customer list belonging toUFG, and solicited former UFG customers. TheTrustee in Bankruptcy sold UFG’s book ofbusiness to another brokerage firm under termsrequiring that firm to pay the Trustee 50% of itscommissions for the first three years. Thebrokerage firm, however, later reported that it hadbeen unable to retain many accounts. The Trusteesubsequently brought the present action seeking toenforce the covenant not to compete.

The bankruptcy judge found the covenantreasonable and enforceable. Handel appealed, andthe district court reversed. The district court foundthat termination because of an inability to pay itsemployees was a termination “without cause”under New York law. The court further concludedthat, in a bankruptcy context, “that in enforcing anon-competition covenant, a court must first findthat the employer was willing to continueproviding employment to the employee.” The


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court further concluded, quoting the opinion in acompanion case, “the cases which hold that acovenant not to compete is unenforceable againstan employee who is terminated without cause arepremised on the unfairness of permitting anemployer who has destroyed the mutuality ofobligation on which the covenant rests to benefitfrom the covenant * * *. Regardless of the scopeof the restrictive covenant, an employer cannothobble his employee by terminating him withoutcause and then enforcing a restriction thatdiminishes his ability to find comparative

employment.”718

The district court, on the other hand, notedthat the Trustee may have an action against Handelfor violating the confidentiality provisions of hisagreement by using UFG’s customer lists. Thecourt remanded the case to the Bankruptcy Courtfor further proceedings.

t. Ohio Law: Continued Employment isSufficient Consideration to Support Non-Competition CovenantThe Ohio Supreme Court has held that “a

covenant restraining an employee from competingwith his former employer upon termination ofemployment is reasonable if it is no greater than isrequired for the protection of the employer, doesnot impose undue hardship on the employee, and

is not injurious to the public.”719 The factors thata court should consider include “[w]hether thecovenant imposes temporaral and spatiallimitations, whether the employee had contactwith customers, whether the employee possessconfidential information or trade secrets, whetherthe covenant bars only unfair competition, whetherthe covenant stifles the employee’s inherent skilland experience, whether the benefit to theemployer is disproportionate to the employee’sdetriment, whether the covenant destroys theemployee’s sole means of support, whether theemployee’s talent was developed during theemployment, and whether the forbiddenemployment is merely incidental to the main

718 Handel, 1998 U.S. Dist. LEXIS 19916, * 9, quotingNisselson v. DeWitt Stern Group, Inc., 225 B.R. 51, 56(S.D.N.Y. 1998).

719 Raimonde v. Van Vlerah, 325 N.E.2d 544 (Ohio 1975).

employment.”720 Covenants of one-year duration

have generally been found to be reasonable.721

Unreasonable restraints may be modified by the

courts under the courts’ inherent power.722

The Ohio courts, however, are split onwhether continued employment alone constitutesadequate consideration to support a restrictive

covenant signed in the midst of employment.723

The Ohio Supreme Court has not resolved theissue. Some Ohio intermediate appellate courtshave held that continued employment does notfurnish adequate consideration to support arestrictive covenant reasoning that such covenantsare frequently the result of unequal bargainingpower, and cannot provide adequate considerationunless supported by new consideration such as anincrease in salary, a promotion, or any additional

inducements.724 Other courts have held that, inthe case of at-will employment, continuedemployment alone is sufficient consideration tosupport a restrictive covenant reasoning thatcontinued employment goes beyond what theemployer and employee are already obligated to

do.725

Avery Dennison Corp. v. Kitsonas, 118 F. Supp.2d848 (S.D. Ohio 2000)

Kitsonas was first hired by DennisonManufacturing Co. in 1984 and signed anagreement providing, inter alia, that “for a periodof six (6) months following termination ofemployment, employee will not acceptemployment * * * by or for any person * * *engaged in the sale * * * of products incompetition with any product of the Employer orin any sales * * * territory in which the Employeeworked during the one (1) year period prior to

720 Id. at 547.721 See, Rogers v. Runfola & Assoc., 565 N.E.2d 540, 544

(Ohio 1991).722 Raimonde, 325 N.E.2d at 548.723 See, Willis Refrigeration, Air Conditioning & Heating, Inc.

v. Maynard, 2000 WL 36102 (Ohio Ct. App. 2000).724 Id.725 Id.

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termination.” Avery Corp. merged with Dennisonin 1989. In 1996, Kitsonas signed a secondagreement providing, inter alia, that (1) “[f]or aperiod of two (2) years following termination ofemployment * * *, Employee will not * * * enterthe employment of * * * any person * * * engagedin * * * the manufacture or sale of any productsubstantially similar to or competitive with anyproduct on which * * * Employee worked * * *during the last two years of * * * employment* * *, and (2) “Employee will not * * * for aperiod of one (1) year * * * following * * *termination * * * call upon * * * or attempt tosolicit * * * any customers * * * upon whomEmployee called * * * as a result of employmentwith the Company.

In 2000, Kitsonas told Avery that he wasleaving, and he joined a competitor as NationalSales Manager. At that time, Kitsonas wasWestern Regional Sales Manager for theWorldwide Ticketing Services Division of Averyhaving a sales territory extending from Columbus,Ohio to California. While he was leaving,Kitsonas refused to return a computer belonging toAvery stating that he would not return thecomputer until he had finished downloading files.That computer had not been returned as of the dateof the hearing on Avery’s application for apreliminary injunction. The evidence showed thatafter he left, he began trying to divert formerAvery customers to his new employer.

The district court granted a preliminaryinjunction enforcing the restrictive covenant, butshortened the time period from two years to oneyear. The court resolved the Ohio courts’ conflict,finding that, in this case, the second agreementwas enforceable. The 1996 agreement providedthat the contract was “in consideration of his orher employment, promotion, salary or benefitincrease, bonus or transfer by the Company * * *and the compensation to be paid by the Company* * *.” Under Kitsonas’ signature there was anotation: “NOTE: Agreed to in consideration for1/96 compensation which was not implementeduntil this Agreement was signed.” Testimony attrial indicated that employees who refused to signthe agreement were not given pay increases. Thecourt found that Kitsonas’ continued employmentwas adequate consideration to support thecovenant.

There was testimony that, while employedby Avery, Kitsonas had extensive customercontact, and held confidential information aboutcustomer lists, pricing information, salesstrategies, and “business philosophy.” The courtconcluded that the restrictive covenant wasreasonable under the circumstances, and thatAvery had shown a reasonable likelihood ofprevailing on its action for breach of the restrictivecovenant. The court also found that Avery’scustomers, pricing information, and salesstrategies constituted trade secrets under the OhioUniform Trade Secrets Act, and concluded thatAvery had shown a reasonable likelihood ofprevailing on its trade secret misappropriationw: Information in Employee HandbookContaining Marketing and Businesstain irreparable injury if the injunction was notgranted, and that such injunction would not causesubstantial harm to others: “Any harm to Mr.Kitsonas would be as a direct result of his ownactions. He was aware of the restrictivecovenants, yet he chose to accept employmentwith [a competitor].” With respect to the publicinterest, the court found that “valid contracts arethe lynchpin of all commercial activity in society,and therefore, they must be honored. Further, thepublic interest is served by discouraging practicesaimed at surreptitiously acquiring trade secrets, byprohibiting misappropriation of trade secrets, andby condemning the theft of client through unfaircompetition.” [Emphasis added.]

u. Ohio Law: Clear and Convincing Proof isNecessary to Support Either a Preliminaryor Permanent Injunction For Violation ofOhio’s Uniform Trade Secrets Act orBreach of Employment Agreements

Procter & Gamble Co. v. Stoneham, 747 N.E.2d268 (Ohio App. 2000)

Paul Stoneham worked for P&G for 13years, most recently in the hair care divisionhaving responsibility for international marketing.As a member of P&G’s several teams of managersformulating its global goals and strategies,Stoneham was required to know and use a varietyof information, such as market research results,financial data related to the costs and profits of theproducts, and the technological developmentsunderway for existing and new products. The




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court concluded that no one was moreknowledgeable about the foreign marketing ofP&G’s hair care products, and the productsthemselves, than Stoneham.

When Stoneham reached a certainmanagement level, he was given an opportunity toobtain P&G stock options in exchange forexecuting a three-year covenant not to compete.Signing was voluntary, but if he had not signed hewould not have received the stock options.Stoneham also had signed a confidentialityagreement the day he was hired.

In 1998, Stoneham took a job withAlberto-Culver, whose hair care productscompeted with P&G’s hair care products, at leastto some extent. Stoneham’s new position wasPresident of Alberto-Culver International. Inresponse, P&G filed suit alleging breach of thecovenant not to compete and the confidentialityagreement. Following a consolidated hearing onP&G’s application for a preliminary injunctionand on the merits for P&G’s application for apermanent injunction, the trial court denied P&G’srequests for both. On appeal, the Ohio Court ofAppeals found that the trial court had clearlyerred.

The first issue on appeal concerned the“clear and convincing” burden of proof that thetrial court had imposed on P&G in decidingP&G’s claim for misappropriation of trade secrets.

Under Ohio law, a party seeking either apreliminary or permanent injunction mustordinarily prove the required elements by clear

and convincing proof.726 The Supreme Court ofOhio, however, held in Ackerman v. Tri-City

Geriatric & Health Care,727 that when aninjunction is authorized by statute, normal equityconsiderations do not apply, and a party is entitledto an injunction by showing that the party has metthe requirements of the statute for issuance of an

726 Vanguard Transp. Sys., Inc. v. Edwards Transfer & StorageCo., 673 N.E.2d 182, 184 (Ohio App.1996)(preliminary injunction); Dayton Metro. Hous.Auth. v. Dayton Human Relations Council, 611 N.E.2d384, 388 (Ohio Ct. App. 1992)(permanent injunction).

727 55 Ohio St. 2d 51, 378 N.E.2d 145, 148 (1978).

injunction, without proving the ordinary equitablerequirements. However, the Ohio Court ofAppeals has held that the Auckerman rule islimited to those statutes that contain specificcriteria that the court must use in determining

whether an injunction should issue.728 When astatute simply provides that a party is entitled toinjunctive relief, there is no “statutory injunction”such as at issue in Auckerman and the partyrequesting relief must use the general equitableprincipals governing injunctive relief. Accordingto the court, Ohio’s Uniform Trade Secrets Actprovides for injunctive relief, but does not containstatutory guidelines. Thus, the court held that thatP&G would be required to prove by clear andconvincing evidence that it was entitled to aninjunction on either its trade secretmisappropriation or breach of contract claims.

v. Ohio Law: Non-Competition AgreementEntered Into by Executive in Exchange forStock Options is Enforceable


The facts are discussed above. The courtfound that the trial court had clearly erred infinding that Stoneham’s covenant not to competewas not enforceable. According to the court, therecord clearly demonstrated that Stoneham wasprivy to “massive amounts” of confidential andtrade secret information, and that P&G hadundertaken reasonable efforts to protect the same.The court also concluded that the terms of thecovenant were reasonable.

728 State ex rel. Jones v. Hamilton Cty. Bd. of Commrs., 705N.E.2d 1247, 1250 (Ohio App. 1997).




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w. Ohio Law: Injunction Prohibiting Breachof Non-Competition Agreement RequiresOnly a Showing of Threatened Harm andMay Be Shown Through Inevitability ofDisclosure


The facts are discussed above. The trialcourt had held that P&G had not shown anyevidence of actual or threatened harm, and that the“inevitable-disclosure” rule did not apply. TheOhio Court of Appeals held that was clear error.

The court held that, as a matter of law, athreat of harm is sufficient basis on which to grantinjunctive relief. Furthermore, according to thecourt, “[i]n actions to enforce covenants not tocompete, Ohio courts have held that an actualthreat of harm exists when an employee possessesknowledge of an employer'’ trade secrets andbegins working in a position that causes him or herto compete directly with the former employer orthe product line that the employee formerlysupported. Although the courts do not refer to thisevidentiary proposition as ‘inevitable use’ or‘inevitable disclosure,’ the concepts are the

same.”729

The court reasoned that Stonham hadintimate knowledge of P&G’s confidentialinformation and trade secrets, and that his positionwith Alberto-Culver resulted in a directcompetition between the products that he hadformerly supported and the new products forwhich he now had responsibility. “Under thesecircumstances, Stoneham’s use of P&G’sinformation and secrets was a very real threat.”The court also pointed to evidence thatStoneham’s use or disclosure of P&G’sinformation was not only a threat, but was

“substantial probability.”730

729 747 N.E.2d at 278-79.730 Id. at 279.

x. Non-Competition Covenant versus Non-Disclosure Agreement

(1) Maine Law: Non-Disclosure CovenantMay Be Breached Even Though SubjectMatter Being Protected Is Not A TradeSecret?

Bernier v. Merrill Air Engineers, 770 A.2d 97(Me. 2001)

Maine adopted its version of the UTSA in

1987.731 However, Maine continues to apply aslightly modified form of the common law factors

of the Restatement (First) of Torts, 732 that is, thecourts will consider (1) the value of theinformation to the plaintiff and to its competitors;(2) the amount of effort or money the plaintiffexpended in developing the information; (3) theextent of measures the plaintiff took to guard thesecrecy of the information; (4) the ease ordifficulty with which others could properlyacquire or duplicate the information; and (5) thedegree to which third parties have placed theinformation in the public domain or rendered theinformation “readily ascertainable” through patent

applications or unrestricted product marketing.733

Bernier worked as a engineer for Merrillfrom 1988 to 1997. In 1993, Merrill’s presidentsigned a memorandum promising engineers athree-percent commission on projects. Bernierqualified for, but was not paid, three commissionsallegedly due to Merrill’s cash flow constraints.Bernier sued, and the trial court found Merrillliable for those past commissions. The trial courtalso trebled those commissions and awardedBernier attorney fees as provided in 6 M.R.S.A.§ 626.

Bernier’s employment agreementcontained non-competition and non-disclosurecovenants. When Bernier left Merrill he accepteda job with Henry Molded Products. Henry had

731 ME. REV. STAT. ANN. [M.R.S.A.] tit. 10, §§ 1541-48.732 RESTATEMENT (FIRST) OF TORTS § 757 cmt. b

(1939).733 Spottiswoode v. Levine, 730 A.2d 166, 174 n. 6 (Me.

1999).



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made a commitment to buy a product dryer fromMerrill before Bernier left, and canceled that orderafter Bernier joined Henry. Bernier subsequentlybuilt a dryer for Henry that varied from the Merrilldesign, although the parties disagreed on thedegree of variation. The trial court found thatBernier had breached his non-disclosure covenantbecause it was more likely than not that Henrywould have ordered the dryer from Merrill ifBernier had not gone to work for Henry.Accordingly, the trial court awarded Merrilldamages based on Merrill’s lost net profit fromthat dryer.

Merrill also, however, brought an actionfor trade secret misappropriation, and the trialcourt, after weighing the foregoing factors,concluded that the information that Bernier used todesign the dryer for Henry was not a trade secret.

On appeal, the Maine Supreme Courtaffirmed both holdings. On the trade secretmisappropriation issue, the court concluded thatthe trial court’s ultimate conclusion was notclearly erroneous. On the non-disclosure issue,the court found that Bernier had violated the non-disclosure agreement by using “particularized,highly specialized proprietary protected originalwork” from Merrill in building Henry’s dryer.The non-disclosure covenant, though, referredgenerally to “any confidential or secretdevelopment or other original work of [Merrill].”

The two holdings, accordingly, aredifficult to reconcile. Apparently the court viewedthe non-disclosure covenant as broadly covering“original designs” even though such designs werenot trade secrets and could, according to findingsby the trial court on the trade secret issue, beeasily reverse engineered (although Merrill madethe point that doing so may involve acquiring onethrough “improper means” because Merrillrequired its customers to sign confidentialityagreements).

(2) North Dakota Law: Non-SolicitationProvisions in Insurance Agent’sEmployment Agreement Cannot SurviveGeneral Statutory Prohibition AgainstRestraint of Trade, But Non-DisclosureProvisions Do

Warner & Co., v. Solberg, 634 N.W.2d 65 (N.D.2001)

North Dakota adopted a version of the

UTSA in 1983.734

Solberg worked as personal linesunderwriter, marketing manager and insuranceagent for Warner for approximately sixteen years.She had signed a “producer agreement” in 1992that contained non-disclosure and non-solicitationcovenants. In 1997, she resigned and joined acompeting insurance company. When she left, shetook files containing information about Warner’sclients as well as personnel files. Those files wereretrieved some weeks after she began work at thecompeting agency. Within a few months, Warnerbegan to loose business to Solberg, and suedalleging breach of the non-solicitation and non-disclosure covenants. The district court grantedSolberg summary judgment finding that thecovenants were in violation of N.D. CENT. CODE

[N.D.C.C.] § 9-08-06.

N.D.C.C. § 9-08-06 generally providesthat “[e]very contract by which anyone isrestrained from exercising a lawful profession,trade or business of any kind is to that extent void,except * * *.” The exceptions are (1) when onesells the goodwill of a business, and (2) during thedissolution of a partnership.

The North Dakota statute is similar toCAL. BUS. AND PROF. CODE § 16600 providingthat “every contract by which anyone is restrainedfrom exercising a lawful profession, trade orbusiness of any kind is to that extent void,” andthe court acknowledge that both had a commonheritage. The court also acknowledged that it hadrelied on California court decisions in construingthe North Dakota statute. The Eighth Circuit, as a

734 N.D. CENT. CODE [N.D.C.C.] §§ 47-25.1-01 et seq.

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result, had decided in 1997, in Kovarik v.

American Family Ins. Group,735 by reference toCalifornia cases, that non-solicitation covenantswere enforceable under North Dakota law.

The court was urged to follow thoseCalifornia decisions and Kovarik. The NorthDakota Supreme Court declined to do so, findingthat the language of the statute was clear, andcould not be extended to non-solicitationcovenants. Furthermore, the court noted that theNorth Dakota legislature had turned downproposed legislation that would have done justthat.

However, the court noted that in Kovarikthe Eighth Circuit had held that customerinformation of the type involved here couldqualify for trade secret protection. Here, the courtnoted, the customer data included not only namesand addresses, but amounts and types of insurancepurchased, the dates of premiums, the character ofinsured property, and personal information of theinsured such as age, driver’s license number andso forth. Accordingly, the court remanded thecase to the trial court to determine whether thefiles and information that Solberg had retainedconstituted trade secret misappropriation.

X. THE INEVITABLE DISCLOSUREDOCTRINEIf the circumstances indicate that a former

employee will be required to use trade secret orconfidential information of a former employer inhis/her position with a new employer, aninjunction may be obtained in some jurisdictionsprecluding the employee from working in thatposition. Although such circumstances form partof the rationale and justification for granting aninjunction and therefore do not define a “doctrine”per se, nevertheless, that analysis is currentlyreferred to as the “inevitable disclosure doctrine,”meaning that because of the job requirements forthe new employer, the former employer will“inevitably” be required to use or disclose tradesecrets of the former employer.

735 108 F.3d 962, 965 (8th Cir. 1997).

A. BackgroundTexas and other states have long

recognized the underlying rationale for the“doctrine,” although not dubbed by that name. In

Electronic Data Systems Corp. v. Powell,736 forexample, the Dallas Court of Appeals in 1975stated the rationale:

Even in the best of good faith, aformer technical or “creative”employee such as Powell workingfor a competitor such as SRI canhardly prevent his knowledge ofhis former employer’s confidentialmethods from showing up in hiswork * * *. If Powell is permittedto work for SRI in the same areaas that in which he was trained byEDS, injunctive relief limited torestraint of imparting such specialknowledge as prepaymentutilization review, is likely toprove insufficient. The mererendition of service in the samearea would almost necessarilyimpart some knowledge to somedegree in his subsequentemployment. Powell cannot beloyal both to his promise to hisformer employer, EDS, and to hisnew obligation to his presentemployer, SRI. In thesecircumstances, the most effectiveprotective device is to restrainPowell from working in thecomputer field in which he wasassociated while employed by

EDS.737

736 524 S.W.2d 393, 398 (Tex. Civ. App.–Dallas 1975,writ ref’d n.r.e.).

737 See also Weed Eater, Inc. v. Dowling, 562 S.W.2d 898(Tex. Civ. App.–Houston [1st Dist.] 1978, writ ref’dn.r.e (same rationale); Williams v. Compressor Eng’g Corp.,704 S.W.2d 469, 471-72 (Tex. App.–Houston [14thDist.] 1986, writ ref’d n.r.e.) . The Houston courtnoted:

Texas courts clearly recognize the right ofan employer to insist that the non-disclosure provisions of his contract with






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The Fifth Circuit also long ago adopted the

rationale.738 Under that rationale, the newemployer may also be enjoined from using

misappropriated trade secrets.739 The trade secretowner may also obtain an injunction against thosewho are in active concert or participation with theformer employee, including a corporation createdand made capable of competing by the former

employee.740

Although the underlying rationale haslong been recognized at least by some courts, theSeventh Circuit’s 1995 decision in PepsiCo, Inc.

v. Redmond741 is typically cited as giving thedoctrine increased recent prominence, and isgenerally regarded as having given the doctrinethe moniker of “inevitable disclosure.” Certainlycases and articles discussing the doctrine havebeen legion since PepsiCo. One article asserts that21 states (not including California) currentlypermit a showing of liability for trade-secretmisappropriation under the inevitable disclosure

theory.742 And courts have increasingly beenexpressly adopting the doctrine by name. Forexample, the Arkansas Supreme Court recentlyadopted the doctrine expressly by name inCardinal Freight Carriers v. J.B. Hunt

Transportation Service,743 and shortly thereafter

an employee be specifically enforced. * * *Proof that trade secrets will be used by theemployee in competition against his formeremployer afford support for an injunctionspecifically enforcing the non-competitioncovenant. This is usually the only way useof the secret by the former employee canbe prevented.

738 FMC Corp. v. Varco Int’l, Inc., 677 F.2d 500 (5th Cir.1982).; Union Carbide Corp. v. UGI Corp., 731 F.2d 1186(5th Cir. 1984).

739 Bryan v. Kershaw, 366 F.2d 497, 503 (5th Cir. 1966),cert. denied 386 U.S. 959 (1967).

740 Powell Elec. Mfg. Co., Inc. v. Williams, 515 S.W.2d 156,158 (Houston [14th Dist.] 1974, no writ).

741 54 F.3d 1262 (7th Cir. 1995).742 See Stephen L. Sheinfeld & Jennifer M. Chow,

Protecting Employer Secrets and the ‘Doctrine of InevitableDisclosure, 600 PLI/LIT 367 (1999).

743 987 S.W.2d 642, 646 (Ark 1999).

reiterated that it had done so in Bendinger v.

Marshalltown Trowell Co.744

Other jurisdictions, however, have not. InCalifornia, for example, as of the date this paperwas prepared, the doctrine has been expresslyrejected by several courts, including, by

implication, the California Supreme Court.745 In

Maxxim Medical, Inc. v. Michelson,746 theSouthern District of Texas, applying Californialaw, concluded that “although only a CaliforniaSuperior Court has had the opportunity todetermine whether to follow Redmond, this Courtbelieves that the California Supreme Court wouldfollow the overwhelming majority of other

jurisdictions to do so.”747 The Maxxim court,however, relied on the finding of a CaliforniaSuperior Court to support its conclusion that thedoctrine of inevitable disclosure would be adoptedas the law of California. The Northern District ofCalifornia, though, noted in Bayer Corp. v. Roche

Molecular Systems, Inc.,748 (discussed

744 994 S.W.2d 468 (Ark. 1999).745 Section 16600 of the California Business and

Professions Code provides that “every contract bywhich anyone is restrained from engaging in a lawfulprofession, trade, or business of any kind is to thatextent void.” The California courts have typicallyconstrued § 16600 broadly and have observed that“[s]ection 16600 has specifically been held toinvalidate employment contracts which prohibit anemployee from working for a competitor whenemployment has terminated, unless necessary toprotect the employer's trade secrets.” Metro TrafficControl, Inc. v. Shadow Traffic Network, 27 Cal. Rptr. 2d573, 577, 22 Cal. App. 4th 853, 859 (Cal. Ct. App.1994). Indeed, § 16600 has been characterized as a“fundamental public policy” of California. Int’l Bus.Machs.. Corp. v. Bajorek, 191 F.3d 1033, 1038 (9th Cir.1999). California courts have also expressed the viewthat “the interests of the employee in his own mobilityand betterment are deemed paramount to thecompetitive business interests of the employers” if theemployee has not been otherwise engaged in anyillegal conduct. Metro Traffic Control, 27 Cal. Rptr. 2d at577, 22 Cal. App. 4th at 860 (citations omitted).

746 51 F. Supp.2d 773 (S.D.Tex. 1999), rev’d withoutopinion, 182 F.3d 915 (5th Cir. 1999).

747 Maxxim Med., Inc., 51 F. Supp. 2d at 786.748 72 F. Supp. 2d 1111 (N.D.Cal. 1999).
















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below) that California Superior Court decisionsare not citable authority. In a similar vein, in

Electro Optical Industries, Inc. v. White,749 theCalifornia Court of Appeals wrote that:“Although no California court has yet adopted it,the inevitable disclosure rule is rooted in commonsense and calls for a fact specific inquiry. Weadopt the rule here.” The California SupremeCourt, however, ordered that the opinion not bepublished in the official reports, thus effectivelywithdrawing it.

In Danjaq LLC v. Sony Corp.,750 a caseinvolving an alleged misappropriation of tradesecrets relating to a “James Bond” movie, theCentral District of California wrote:

[L]acking proof of actualdisclosure and actual use, thePlaintiffs fill-in the gaps in therecord with the “inevitabledisclosure doctrine” articulated inPepsiCo v. Redmond. But thePlaintiffs’ reliance on theinevitable disclosure doctrine ismisplaced. PepsiCo is not the lawof the State of California or theNinth Circuit. [Citations

omitted.]751

Danjaq was followed in Computer Sciences Corp.

v. Computer Associates Int'l, Inc.,752 in which thesame court reiterated that the inevitable disclosuredoctrine “is not the law of the State of Californiaor the Ninth Circuit.”

749 76 Cal. App. 4th 653, 90 Cal. Rptr. 2d 680 (Cal. Ct.App. 1999), opinion withdrawn, 2000 Cal. LEXIS 3536(Cal. 2000). The California Supreme Court orderedthat “The Reporter of Decisions is directed not topublish in the Official Appellate Reports the opinionin the above-entitled appeal, filed November 30, 1999,which appears at 76 Cal. App. 4th 653. (Cal. Const.,art. VI, section 14; rule 976, Cal. Rules of Court.).

750 50 U.S.P.Q.2d 1638 (C.D. Cal. 1999).751 Id. at 1640.752 1999 WL 675446, *16 (C.D. Cal. 1999).

In Bayer Corp. v. Roche Molecular

Systems, Inc.,753 mentioned briefly above, theNorthern District of California similarly concludedthat “California trade-secrets law does notrecognize the theory of inevitable disclosure,”reasoning:

In determining the law ofCalifornia, the Court agrees withDanjaq and Computer Sciences.California public policy favorsemployee mobility and freedom.California Business andProfessions Code Section 16600provides that “every contract bywhich anyone is restrained fromengaging in a lawful profession,trade, or business of any kind is tothat extent void.” Reading thislanguage broadly, Californiacourts generally do not enforcecovenants not to compete. * * *.Nor do they generally enforcecovenants that seek to avoid thepolicy by penalizing formeremployees who compete withtheir former employers. * * * Inthe words of the CaliforniaSupreme Court:

Equity will to the fullestextent protect the property rightsof employers in their trade secretsand otherwise, but public policyand natural justice require thatequity should also be solicitousfor the right inherent in all people,not fettered by negative covenantsupon their part to the contrary, tofollow any of the commonoccupations of life. Everyindividual possesses as a form ofproperty, the right to pursue anycalling, business or profession hemay choose.

A former employee has theright to engage in a competitivebusiness for himself and to enter

753 72 F. Supp. 2d 1111 (N.D.Cal. 1999) .




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into competition with his formeremployer, even for the business ofthose who had formerly been thecustomers of his former employer,provided such competition isfairly and legally conducted.

Continental Car-Na-Var Corp. v.Moseley, 24 Cal. 2d 104, 110, 148P.2d 9 (1944). To the extent thatthe theory of inevitable disclosurecreates a de facto covenant not tocompete without a nontrivialshowing of actual or threateneduse or disclosure, it is inconsistentwith California policy and caselaw. * * *.

In sum, the Court holds thatCalifornia trade-secrets law doesnot recognize the theory ofinevitable disclosure; indeed, sucha rule would run counter to thestrong public policy in Californiafavoring employee mobility.[Citations omitted.]

But that does not necessarily mean that theunderlying rationale of the doctrine will not beapplied. The district court in Bayer explained:

A trade-secrets plaintiff mustshow an actual use or an actualthreat. Once a nontrivial violationis shown, however, a court mayconsider all of the factorsconsidered by the jurisdictionsallowing the theory in determiningthe possible extent of theirreparable injury. In other words,once the employee violates thetrade-secrets law in a nontrivialway, the employee forfeits thebenefit of the protective policy inCalifornia. For example, that ahigh-level employee takes avirtually identical job at thenumber one competitor in afiercely competitive industrywould be a factor militating infavor of a broader injunction oncesufficient evidence of a nontrivial

violation is shown. [Emphasisadded.]

Thus, although the California courts appear tohave rejected inevitable disclosure as a doctrine,nevertheless, if one shows a “nontrivial violation,”which presumably means a strong showing ofactual misappropriation, at least the NorthernDistrict of California would apparently permitreliance on the inevitable disclosure factors indeciding whether injunctive relieve wasappropriate.

B. 7th Circuit − PepsiCo v. RedmondAs noted above, the case currently

regarded as the seminal case for the “inevitabledisclosure doctrine” is the Seventh Circuit’s

decision in PepsiCo, Inc. v. Redmond.754 QuakerOats Co., a co-defendant, and PepsiCo were fiercecompetitors in the beverage industry. Redmondworked for 10 years in PepsiCo’s North American(PCNA) division in various capacities, ultimatelybecoming general manager for a business unitcovering all of California and having annualrevenues of more than $500 million. In 1994,after several months of negotiation, Redmond wasoffered, and accepted, a position as Vice-President-Field Operations for Gatorade withQuaker. PepsiCo brought suit shortly afterRedmond announced that he was leaving.PepsiCo asserted that Redmond was privy to tradesecret and confidential information while atPepsiCo that he would inevitably use in hisposition with Quaker. Specifically, PepsiCoasserted that he had knowledge of various strategicmarketing, pricing and competition plans, as wellas innovations in its selling and delivery systems.Quaker responded that Redmond was in a positionto simply implement pre-existing plans, thatQuaker’s distribution system was in place andcould not be modified to duplicate PepsiCo’s, andthat he had signed an agreement expresslyprecluding him from disclosing or using PepsiCo’sconfidential information.

The trial court, after an evidentiaryhearing, issued a preliminary injunctionprohibiting Redmond from assuming any dutiesthat related to beverage pricing, marketing and

754 54 F.3d 1262 (7th Cir. 1995).

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distribution. On appeal, the Seventh Circuitaffirmed. According to the court, “PepsiCopresented substantial evidence at the preliminaryinjunction hearing that Redmond possessedextensive and intimate knowledge about PCNA’sstrategic goals for 1995 sports drinks and new agedrinks,” and “unless Redmond possessed anuncanny ability to compartmentalize information,he would necessarily be making decisions aboutGatorade and Snapple by relying on hisknowledge of PCNA’ s trade secrets.” As forQuaker’s argument that even if Redmond hadknowledge of PepsiCo’s distribution strategies,Quaker was not in a position to change its systemto duplicate PepsiCo’s, the court noted thatargument missed the point: “PepsiCo finds itselfin the position of a coach, one of whose playershas left, playbook in hand, to join the opposingteam before the big game.” The point was thatQuaker through Redmond’s knowledge couldanticipate PepsiCo’s marketing strategy. Lastly,as to Redmond’s and Quaker’s denials that anyconfidential information would be used, thedistrict court simply did not believe the denialsand, according to the Seventh Circuit, “had reasonto do so” noting “Redmond’s lack offorthrightness on some occasions and out and outlies on others.”

C. Factors That Might Be ConsideredThere currently are several different

proposed listings of the PepsiCo “factors” that acourt might consider. In Maxxim Medical, Inc. v.

Michelson,755 in granting a preliminaryinjunction that prevented a former employee fromworking for a direct competitor of Maxxim for oneyear in any of the product lines that he had beenassociated with at Maxxim during the last twoyears, Judge Harmon of the Southern District ofTexas adopted eight factors, namely:

(1) Is the new employer acompetitor?

(2) What is the scope of thedefendant’s new job?

755 51 F. Supp.2d 773 (S.D.Tex. 1999), rev’d withoutopinion, 182 F.3d 915 (5th Cir. 1999).

(3) Has the employee been lessthan candid about his newposition?

(4) Has actual trade secretmisappropriation alreadyoccurred?

(6) Did the employee sign a non-disclosure and/or non-competition agreement?

(7) Does the new employer have apolicy against use of others’trade secrets?

(8) Is it possible to “sanitize” the

employee’s new position?756

The district court had determined that Californialaw applied and that California would adopt theinevitable disclosure doctrine. As discussedabove, on that score, the district court was simplywrong and the Fifth Circuit reversed Maxximwithout opinion on appeal. The factors the courtlists, however, remain instructive.

Other writers have shortened the list tofour factors, namely:

(1) whether the formeremployer has protectabletrade secrets;

(2) whether the formeremployer disclosed thosetrade secrets to the formeremployee in confidence;

(3) whether the formeremployee is going towork for a competitor;and

(4) whether the formeremployee will be in acomparable position whenworking for thecompetitor, such that the

756 The court adopted those factors from D. PeterHarvey, “Inevitable Trade Secret Misappropriationafter PepsiCo, Inc. v. Redmond,” 537 PLI/PAT 199,226 (1998).




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employee may inevitablyuse or disclose the formeremployer’s trade secretswhen performing his

duties.757

Yet another writer has suggested that there is a“strong” version of PepsiCo that uses those fourfactors, but also a “weak” version that adds a fifthfactor, namely a showing of bad faith or someother indication that the former employee is likely

to disclose the former employer’s trade secrets.758

Another writer has suggested a three-partPepsiCo “test” for evaluating inevitablemisappropriation, namely:

1. Knowledge:

The departing employee knowsthe former employer’s tradesecrets.

2. Job Similarity:

The departing employee’s new jobduties at the competitor, and thetechnology or products s/he plansto work on at the new job, are sosimilar to those in the former jobthat it would be extremelydifficult for him/her to avoidrelying on or using the formeremployer’s trade secrets.

3. Untrustworthiness /Undependability:

The departing employee and thenew employer cannot be dependedupon to avoid using the former

employer’s trade secrets.759

757 N. Setty & T. McKeon, “Making Use of the InevitableDisclosure Doctrine,” paper presented at The 14th AnnualSpring CLE Program, ABA Section of IntellectualProperty Law, Washington, D.C. (April 12-13, 1999).

758 Bradford P. Leyrla, “Thirteen Rules for InevitableDisclosure Trials,” Vol. 15, No. 6 Computer Lawyer 10(June 1998).

759 Thomas H. Zellerbach, “Safeguarding Your TradeSecrets: Strategies for Dealing With Employee Mobility,”

Suffice it to say that the analysis is presently a“work in progress.”

In listings of factors and attempts to parsePepsiCo into a “test” satisfy the need of those thatrequire a convenient checklist of elements (and tothat extent maybe useful), but those listings andsuch a “test” lose sight of what PepsiCo and theprior cases mentioned above are all about, namelyfashioning effective relief that balances theimportant interests of both the formeremployer/trade secret owner and the formeremployee. To that extent, those listings and such a“test” draw attention from the underlying rationale− and therefore are potentially dangerous. Rather,the underlying rationale of PepsiCo, and the casesdiscussed above that preceded it, rest on threecriteria, namely:

(1) Has the plaintiff proved thefactors necessary for aninjunction?

(2) Is the potential disclosure“inevitable” or “probable”?

(3) Does the scope and substanceof the proposed injunctionmatch the injunction proof?

Most, if not all, of the cases potentially involvingthe “inevitable disclosure doctrine,” will bebrought in the context of a plaintiff pursuing apreliminary injunction, as was the case inPepsiCo. Although phrased differently by somestate courts, in general the movant for apreliminary injunction has the burden of provingfour prerequisites, namely (1) a substantiallikelihood of success of prevailing on the merits;(2) irreparable injury; (3) that the threatened injuryto the plaintiff outweighs the potential damage to

the defendant;760 and (4) that an injunction would

overhead slides presented at the ABA Section ofIntellectual Property Law Summer Conference, SanFrancisco, CA (June 23, 1999).

760 The Fourth Circuit has emphasized that districtcourts are obliged to balance the hardships even if theplaintiff has shown a likelihood of success on themerits. Direx Israel Ltd. v. Breakthrough Med. Corp., 952F.2d 802 (4th Cir. 1991).




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not disserve the public interest.761 The firstquestion must always be whether the plaintiff isentitled to an injunction. Under the UTSA either“actual” or “threatened” misappropriation may beenjoined. “Misappropriation,” in turn, is definedas being either acquisition of a trade secret byimproper means, or, “disclosure or use of a tradesecret” without the consent of the trade secretowner. Both bases for liability require, of course,that the plaintiff prove the existence of one ormore trade secrets.

In order to satisfy the first prerequisite foran injunction, namely proving a substantiallikelihood of success on the merits, a plaintiffmust therefore prove that the plaintiff (1) ownsinformation qualifying as a trade secret, and(2) there is either (a) an actual misappropriation,or (b) a threatened misappropriation. If, under thefacts of the case, the former employee has beencaught absconding with the corporate jewels, i.e.,computer software, customer lists, marketing plansetc., that likely would qualify as actualmisappropriation and the plaintiff should beentitled to an injunction restraining furthermisappropriation, assuming that the other threeprerequisites of an injunction are extant. Oncesuch a former employee has control over suchmaterials, of course, there is the danger of“disclosure” or “use,” i.e., “threatened”misappropriation, possibly resulting in a loss oftrade secret rights. Thus, the plaintiff should beentitled to an injunction that further restrains any“threatened” disclosure or use of such materials,and further that requires the affirmative act ofreturning those materials to the rightful owner orperhaps to an escrow agent for safekeepingpending trial. All of that is not particularlyproblematic.

Similarly, if the former employee hasengaged in some “bad faith” or an overt actindicating an intention to misappropriate tradesecret information of her former employer, thatwould signal an actual “threat” ofmisappropriation which may justify injunctive

761 See, e.g., Allied Mktg. Group, Inc. v. CDL Mktg., Inc., 878F.2d 806, 809 (5th Cir. 1989); Union Carbide Corp. v.UGI Corp., 731 F.2d 1186, 1191 (5th Cir. 1984); InteroxAm. v. PPG Indus., Inc., 736 F.2d 194 (5th Cir. 1984).

relief, assuming that the other prerequisites of aninjunction are present.

The second question is whether potentialdisclosure is “inevitable.” The actual problemarises when the proof indicates only that (a) theplaintiff owns information qualifying as a tradesecret, (b) that the former employee knows orotherwise had access to, and (c) the only“threatened” misappropriation arises simply fromthe fact that the former employee is going to workfor a competitor in a position where she mightdisclose or use trade secret information. Thus, thebalancing is between that “threat,” real orimagined, and the interests of the former employeein pursuing her career and livelihood lawfullyusing general knowledge and skills gained fromher previous employment. That is frequently notan easy balance.

Under the Restatement (Second) ofAgency § 387, a current employee has a generalduty of loyalty to the employer, and theRestatement (Second) of Agency § 395, again inthe case of a current employee, explains that thereis a general obligation of confidentiality forinformation given to the employee. Comment b to§ 42 of the RESTATEMENT (THIRD) OF UNFAIR

COMPETITION adopts the same position. All ofthat changes, however, once an employee departs.As comment e to the Restatement (Second) ofAgency § 393 notes, an employee can properly“compete” with her former employer aftertermination of employment (assuming that thereare no enforceable restrictive covenants precludingthe same) and may indeed make “arrangements” tocompete while she is still employed. In short, inthe absence of a restrictive covenant, there isnothing inherently wrong, evil or illegal when aformer employee that knows or otherwise hadaccess to an employer’s trade secret goes to workfor a competitor in a similar position.

Additionally, as important as effectiveprotection for trade secrets is to our moderninformation technology society, an individual’sfundamental freedom of association and theequally fundamental right to choose gainfulemployment in pursuit of a career using acquiredknowledge and skills is no less important.Certainly, a court would not be justified inrestricting that freedom based solely on a






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suspicion that the former employee might discloseor use trade secret information.

After all, the burden is on the plaintiff toprove the prerequisites for injunctive relief. Thereis no recognized presumption or other theory thatwould shift the burden of proof or persuasion tothe former employee. The burden thus remainswith the plaintiff to prove, as part of the burden ofinter alia proving a likelihood of success on themerits, that in fact there is a “threatened”misappropriation substantial enough to concludethat an injunction restraining personal freedoms isnecessary to prevent actual misappropriation.

That is not, of course, to say that a formeremployee’s conduct before and after terminationof employment is irrelevant. Certainly if theformer employee has engaged in a course ofconduct that raises questions regarding theindividual’s personal honesty and integrity, thatconduct should be considered in deciding thesubstantiality of the “threatened”misappropriation, i.e.,. whether such conductincreases or decreases the “threat.” Indeed, anumber of courts have recognized that anunderlying rationale of trade secret law is toimpose an acceptable level of commercial morality

to the marketplace.762 Conduct indicating thatthe subject individual may possess only marginallevels of commercial morality, or perhaps evenbelow par levels, naturally increases the likelihood− or probability − that misappropriation will occurif that individual is allowed to take a position witha competitor that has duties and responsibilitiessimilar to those borne while employed by the tradesecret owner.

The conduct of the new employer mayalso be evaluated. For example, unusual signingbonuses and indemnification agreements have leadcourts to conclude that the new employer knew orshould have known that it was acquiring tradesecrets through the hiring of a competitor’s former

employee.763 The converse is not, however, true.

762 E.I. du Pont de Nemours & Co., Inc. v. Christopher, 431F.2d 1012 (5th Cir. 1970), cert. denied, 400 U.S. 1024(1971).

763 See, e.g., Sperry Rail, Inc. v. Herzog Servs., Inc., 1996 U.S.Dist. LEXIS 13134 (D. Kan. 1996)(unusual signing

Although some cases such as PepsiCo involvealleged conduct that may call into question anindividual’s integrity, the underlying rationale forthe “inevitable disclosure doctrine” does notdepend on a court judging the pureness of one’ssoul − even if that were possible for mere mortals.Rather, the doctrine stems from the rationaleexplained by the Dallas court in Electronic Data

Systems Corp. v. Powell764 that “[e]ven in thebest of good faith, a former technical or “creative”employee such as Powell working for a competitorsuch as SRI can hardly prevent his knowledge ofhis former employer’s confidential methods fromshowing up in his work * * *. [Emphasis added.]Or, as the Seventh Circuit in PepsiCo concluded,that because of Redmond’s particular knowledgeof PepsiCo’s strategic plans, Redmond would“inevitably disclose” trade secret information as aresult of his employment in that particularposition.

In short, even assuming that the formeremployee observed the highest standards ofpersonal honesty and integrity, and subscribed tothe highest principles of commercial morality, thequery becomes whether the position with the newemployer would “inevitably” require that theemployee compromise those standards andprinciples to some degree resulting in a whole orpartial misappropriation of the former employer’strade secrets.

That analysis becomes clearer when thefocus turns to the available remedies. If aplaintiff/trade secret owner successfully proves asubstantial “threatened” misappropriation (alongwith the other prerequisites of an injunction), oneavailable remedy is an injunction restraining theformer employee from using or disclosing thetrade secret information of a former employer.Violation of such an injunction is, of course,serious and may result ultimately in variousmonetary and other sanctions − possibly, albeitimprobably, in a loss of freedom. Courts andattorneys understand that. Private individuals

bonus); DSC Communications Corp. v. Next LevelCommunications, 107 F.3d 322 (5th Cir. 1997)(indemnityagreement).

764 524 S.W.2d 393, 398 (Tex. Civ. App.–Dallas 1975,writ ref’d n.r.e.).







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likely understand that, or can be so counseled orinstructed. Thus, an injunction short ofprohibiting specific employment carries significantweight and penalties. Why is that not

sufficient?765

Once again, the Texas Court ofAppeals−Dallas in Powell explained that “Themere rendition of service in the same area wouldalmost necessarily impart some knowledge tosome degree in his subsequent employment.Powell cannot be loyal both to his promise to hisformer employer, EDS, and to his new obligationto his present employer, SRI.” The point onceagain is that an injunction prohibiting the formeremployee from using or disclosing the tradesecrets of her former employer is inadequate, notbecause the former employee may choose todisregard it or may choose to try and circumventit, but rather because even assuming that theformer employee has the personal integrity,courage and moral standards of Moses, and hasevery intention of complying with such aninjunction completely and fully in form and spirit,nevertheless, the former employee’s jobresponsibilities at the new employer simply makeit “inevitable” that misappropriation will result.

Some courts have been unwilling to grantinjunctions for threatened misappropriation unlessthere is a “high degree of probability of inevitableand immediate * * * use of * * * trade

secrets.”766 Other courts have been willing toaccept an ex-employee’s express denial that anyconfidential information would be used or

disclosed.767

765 See Ackerman v. Kimball Int’l, Inc., 652 N.E.2d 507,1995 Ind. LEXIS 101 (Ind. 1995)(“Were the trialcourt not permitted, on facts such as these, to enjoinAckerman for a limited period from being employedby any of Kimball’s competitors, Kimball might,under the Trade Secrets Act, have a right without aremedy.”).

766 Teradyne, Inc. v. Clear Communications Corp., 707 F.Supp. 353 (N.D. Ill. 1989).

767 See, e.g., Cincinnati Tool Steel Co. v. Breed, 482 N.E.2d170 (Ill. App. [2d Dist.] 1985).

The Eighth Circuit, for example, has heldthat if the evidence is that the employee is notrequired to use or disclose confidentialinformation, then he/she will not be enjoined fromworking for a competitor absent an enforceablenon-competition agreement. In Baxter

International, Inc. v. Morris,768 a researchscientist for Baxter, Morris, left and went to workfor a competitor, bioMerieux Vitek, Inc. Baxtersought to enforce Morris’ 1-year non-competitionagreement. The trial court, however, found thatCalifornia law applied and that the agreement wasunenforceable under California law. The districtcourt also found that Morris was able to work inhis new job without using or disclosing Baxter’strade secrets, and that bioMerieux would notencourage Morris to do so. It was also unclear,apparently, whether bioMerieux would developproducts similar to Baxter’s. On appeal, theEighth Circuit affirmed the denial of a preliminaryinjunction prohibiting Morris from working at hisemployer. The court concluded that the trialcourt’s findings were not clearly erroneous, andsupported the denial of the requested

injunction.769

The First Circuit has similarly so held in

Campbell Soup Co. v. Giles.770 Giles is, in manyrespects, similar to PepsiCo, discussed above, butthe First Circuit reached the opposite resultprimarily due to the differences between theresponsibilities of the individuals involved. Gileshad worked in a series of sales positions atCampbell Soup for 13 years, most recently as an“Area Director,” a position in which he developedand implemented various marketing plans. In1994, he left and joined Pet, Inc. in a similarcapacity. Campbell sued alleging that Giles hadpossession of trade secret information relating tomarketing information for the 1995 fiscal year(running from August 1994 to July 1995) and to a“secret project” involving a new product line.Campbell asserted that Giles, in undertaking tomarket Pet’s competitive Progresso line of soups,

768 976 F.2d 1189 (8th Cir. 1992).769 The trial court did, however, enter an injunction

prohibiting Morris from using or disclosing any ofBaxter’s trade secrets.

770 47 F.3d 467, 33 U.S.P.Q.2d 1916 (1st Cir. 1995).









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would be unable, even in good faith, to avoidusing such information. Giles responded that mostof the marketing information had already beendisclosed, and was available from public sources.Further, Giles argued, even if he had suchconfidential information, his position at Pet was toimplement marketing strategy that had long sincebeen finalized. In short, he was not in a positionto adjust Pet’s marketing strategy. As for the“secret project,” Giles flatly denied anyknowledge of it.

The district court refused to enter apreliminary injunction, and on appeal the FirstCircuit affirmed. The court noted that Campbelldid not seriously contest that most of themarketing information had been disclosed tocustomers at the start of the fiscal year. Further,Campbell did not dispute that most customersplaced their orders 4 months in advance. Thus,there was little that Giles could do even if hepossessed confidential information. As for the“secret project,” the trial court held that Giles wasunlikely to disclose the project to Pet, even if heknew about it, and secondly that Campbell had notshown that it would be irreparable harmed even ifhe did so. On appeal, the First Circuit agreed.

The last question is does the scope andsubstance of the proposed injunction match theinjunction proof. Although the foregoingdiscussion has focused on the first requirement ofan injunction, namely proving a substantiallikelihood of success on the merits, one seeking apreliminary injunction must bear the burden ofproof on the other prerequisites as well. Thus, atthe end of the day, before the court may set aboutfashioning an appropriate injunction, the court alsohas before it proof of (1) irreparable injury; (2)that the threatened injury to the plaintiff outweighsthe potential damage to the defendant; and (3) thatan injunction would not disserve the publicinterest.

An injunction is an equitable remedycommitted to the sound discretion of the court.That discretion though is bounded by theforegoing prerequisites. Certainly a court isentitled to weigh and balance the evidence onthose factors, and that same weighing andbalancing necessarily influences the substance andscope of any resulting injunction in addition to thecourt’s application of the principles of equity.

Thus, in fashioning the substance andscope of an injunction, the court should be mindfulof the actual proof adduced on the extent of any“threatened” misappropriation, as well as theextent of the “irreparable injury” shown.Although the plaintiff/trade secret owner may (andlikely will) seek an injunction carving outproscribed activity with the precision of a chainsaw in unskilled hands, the obligation of the court,in light of the respective interests of the parties, isto use more refined surgical excision in craftingthe forbidden activity. In spite of everything else,the former employee likely has personal andfamily obligations that depend on receiving apaycheck, and also likely has career dreams/plansthat extend beyond the current controversy. Utterfairness and equity are required by the very act ofenjoining otherwise lawful activity, if not by theinjunction prerequisites of balancing the potentialdamage to the plaintiff and the defendant anddetermine whether the injunction would disservethe public interest.

Among the possible innovativeapproaches is one approved by the GeorgiaSupreme Court that involved the appointment ofan independent “verifier” to assure continued

compliance with the injunction.771 Althoughclearly that would not be appropriate in every case(or, indeed, perhaps in many cases), yet such anapproach may offer an alternative to an injunctionthat would effectively deprive an individual of anopportunity to pursue a chosen career path.Similarly, however, the court is entitled toconsider instances of an employee’s conduct thatwould indicate less than good faith. In suchinstances, broader proscriptions may clearly be notonly justified but required.

D. Cases Expressly or Implicitly ApplyingThe Inevitable Disclosure Doctrine In Procter & Gamble Co. v.

Stoneham,772 Paul Stoneham worked for P&G for13 years, most recently in the hair care divisionhaving responsibility for international marketing.As a member of P&G’s several teams of managers

771 Essex Group, Inc. v. Southwire Co., 501 S.E.2d 501 (Ga.1998).

772 747 N.E.2d 268 (Ohio App. 2000).




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formulating its global goals and strategies,Stoneham was required to know and use a varietyof information, such as market research results,financial data related to the costs and profits of theproducts, and the technological developmentsunderway for existing and new products. Thecourt concluded that no one was moreknowledgeable about the foreign marketing ofP&G’s hair care products, and the productsthemselves, than Stoneham.

When Stoneham reached a certainmanagement level, he was given an opportunity toobtain P&G stock options in exchange forexecuting a three-year covenant not to compete.Signing was voluntary, but if he had not signed hewould not have received the stock options.Stoneham also had signed a confidentialityagreement the day he was hired.

In 1998, Stoneham took a job withAlberto-Culver, whose hair care productscompeted with P&G’s hair care products, at leastto some extent. Stoneham’s new position wasPresident of Alberto-Culver International. Inresponse, P&G filed suit alleging breach of thecovenant not to compete and the confidentialityagreement. Following a consolidated hearing onP&G’s application for a preliminary injunctionand on the merits for P&G’s application for apermanent injunction, the trial court denied P&G’srequests for both. On appeal, the Ohio Court ofAppeals found that the trial court had clearlyerred.

The trial court had held that P&G had notshown any evidence of actual or threatened harm,and that the “inevitable-disclosure” rule did notapply. The Ohio Court of Appeals held that wasclear error.

The court held that, as a matter of law, athreat of harm is sufficient basis on which to grantinjunctive relief. Furthermore, according to thecourt, “[i]n actions to enforce covenants not tocompete, Ohio courts have held that an actualthreat of harm exists when an employee possessesknowledge of an employer'’ trade secrets andbegins working in a position that causes him or herto compete directly with the former employer orthe product line that the employee formerlysupported. Although the courts do not refer to thisevidentiary proposition as ‘inevitable use’ or

‘inevitable disclosure,’ the concepts are the

same.”773

The court reasoned that Stonham hadintimate knowledge of P&G’s confidentialinformation and trade secrets, and that his positionwith Alberto-Culver resulted in a directcompetition between the products that he hadformerly supported and the new products forwhich he now had responsibility. “Under thesecircumstances, Stoneham’s use of P&G’sinformation and secrets was a very real threat.”The court also pointed to evidence thatStoneham’s use or disclosure of P&G’sinformation was not only a threat, but was

“substantial probability.”774

In Essex Group, Inc. v. Southwire Co.,775

the court noted that “McMichaels brought to Essexnot only the general information acquired in hisjob, i.e., that a certain logistical factor such as thepositioning of storage containers would need to beresolved before certain other factors were decided:McMichaels also brought specific information,such as how, where and when those storagecontainers had to be positioned so as toaccommodate most efficiently the very sameproduct Essex was producing in competition withSouthwire. It was the disclosure of this specificinformation that Southwire sought to enjoin* * *.”).

In Hydraulic Exchange and Repair, Inc. v.

KM Specialty Pumps Inc.,776 although customernames in the limited market at issue here did notconstitute a trade secret, according to the court,those names coupled with other pricinginformation that included profits per customer,sales per customer, special suppliers, overhead andspecific pricing information, constituted a tradesecret. The court issued a preliminary injunctionprohibiting subsequent employer from usingformer employee of plaintiff to prepare bids

773 747 N.E.2d at 278-79.774 Id. at 279.775 501 S.E.2d 501 (Ga. 1998).776 690 N.E.2d 782, 46 U.S.P.Q.2d 1291 (Ind. Ct. App.

1998).




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sustained because there was a threat that employeewould inherently use trade secret customer

information of former employer.777

In Southwestern Energy Co. v.

Eickenhorst,778 in an action to protectinformation obtained from a non-client by anassociate in a law firm under confidentialityagreements in connection with the investigation ofalleged failure to pay overriding royalties incertain oil and gas properties and later used toprepare and file a class action suit on behalf ofroyalty owners, the court held, despite denials byattorney, that reasonable trier of fact couldconclude that disclosure will inevitably occur.

In La Calhene, Inc. v. Spolyar,779 at ahearing on La Calhene’s motion for a preliminaryinjunction to preclude subsequent employment at acompetitor, the evidence showed that La Calhenehad no formal program for marking documents as“confidential” nor did La Calhene have restrictionsor policies on leaving sensitive documents ondesktops or other reasonable standard trade secretprecautions. Nevertheless, La Calhene argued thatit restricted particularly sensitive information toonly three people in upper management, of whichthe departing employee, Spolyar, was one. Theevidence further showed that after Spolyar had leftLa Calhene, he had contacted all but one of LaCalhene’s customers that he had previouslyprovided bids to, and had provided a modified bidto one on behalf of Walker Stainless. Althoughthe court found that certain of La Calhene’sasserted trade secrets were not protectable, it heldthat other information was protectable despite thegeneral lack of security precautions. One factorfor that decision may have been that institutingsuch a security program had been one of Spolyar’sjob requirements. The court further, in grantingthe preliminary injunction, held that “it is all butinevitable that he [Spolyar] will utilize that

777 See also Novell, Inc. v. Timpanogos Research Group, Inc., 46U.S.P.Q.2d 1197 (Utah 1998); DSC CommunicationsCorp. v. Next Level Communications, 107 F.3d 322 (5thCir. 1997).

778 955 F. Supp. 1078, 42 U.S.P.Q.2d 1824 (W.D. Ark.1997).

779 938 F. Supp. 523 (W.D. Wis. 1996).

knowledge during his work with Walker Stainlessor any other competitor so long as he is selling acompeting product.”

Uncle B’s Bakery, Inc. v. O’Rourke,780

probably represents the broadest currentapplication of the inevitable disclosure doctrine.Uncle B’s sued Kevin O’Rourke, its formermanager, for trade secret misappropriation after hewent to work for Brooklyn Bagel Boys. The courtfound that Uncle B’s had invested a number ofyears of research and several million dollars intoits “fresh, never-frozen” packing and processingtechnology. O’Rourke, however, testified thatbecause of the differences between the recipes andprocesses used at the respective companies it wasnot necessary for him to reveal any of Uncle B’strade secrets. Nevertheless, the district courtconcluded that there was a “significant danger ofan inadvertent disclosure.” The court noted that“Although an employee is entitled to use the fundof general knowledge he or she has accumulated inthe course of employment, that entitlement doesnot extend to use of trade secrets.” Due to theuncertainty of “[w]here the one kind of knowledgeends and the other begins,” the court said that itcould infer there was a “realistic threat ofinadvertent disclosure of trade secrets, andconsequently a threat of irreparable harm” toUncle B’s. The irreparable harm, according to thecourt, came from Uncle B’s “reason to fear” thatO’Rourke “will be motivated to appropriate its

technology and processes.”781

In Sperry Rail, Inc. v. Herzog Services,

Inc.,782 Sperry Rail had been in the business ofproviding rail testing services for railways andsubways to detect flaws and defects in rail lines

780 920 F. Supp. 1405 (N.D.Ia. 1996).781 See also Lumex, Inc. v. Highsmith, 919 F. Supp. 624

(E.D.N.Y. 1996)(where there is “evidence that therewill inevitably be immediate disclosure of tradesecrets” at new employment, six-month preliminaryinjunction is justified); Neveux v. Webcraft Techs, 921 F.Supp. 1568 (E.D. Mich. 1996)(declaratory relief forformer employee denied where evidence indicatedemployee would inevitably use or disclose tradesecrets).

782 1996 U.S. Dist. LEXIS 13134 (D. Kan. 1996).









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since 1928. Sperry Rail used two types of detectorsystems, one that used magnetic inductiontechnology and another that used ultrasonictechnology. Fitzgerald, one of Sperry Rail’s longtime R&D engineers, announced his “retirement”effective on January 9, 1996. On a Sunday,however, he put his retirement letter in SperryRail’s mailbox and then removed several boxescontaining books and documents from the R&Ddepartment. He then met with a representative ofHerzog and negotiated an “IndependentContractor’s Agreement” that provided for a salaryof $75,000 and a signing bonus of $54,000.Herzog had never paid a signing bonus before, butwas likewise involved in the rail testing business.Herzog, however, only used the ultrasonictechnology. Herzog also provided Fitzgerald withan indemnification agreement in which Herzogagreed to indemnify, defend and hold Fitzgeraldharmless from any claims that Sperry Rail mightmake for breach of Fitzgerald’s employment.Herzog assigned Fitzgerald the task of reviewingHerzog’s rail testing technology and to prepare areport and recommendation.

The district court granted a preliminaryinjunction concluding that Sperry Rail had showna likelihood of success in prevailing on its cause ofaction under the Missouri Uniform Trade SecretsAct. The court concluded that the unusual signingbonus and indemnification agreement indicatedthat Herzog knew or should have known that itwas acquiring Sperry Rail’s trade secrets throughFitzgerald: “Defendant’s actions in hiringFitzgerald were calculated to misappropriateplaintiff’s trade secrets concerning its technology,marketing strategies and pricing structure.” Theinjunction prohibited Herzog from, among otherthings, employing Fitzgerald in any capacity inwhich Fitzgerald would be required to use ordisclose Sperry Rail’s trade secret or confidentialinformation.

In Merck & Co, Inc. v. Lyon,783 contraryto the result in Cyprus Foote, discussed below,here the Middle District of North Carolina appliedthe “inevitable disclosure doctrine.” Lyon wasemployed by Merck for five years, from 1990 to1995. In 1995, he was recruited, both directly and

783 941 F. Supp. 1443 (M.D.N.C. 1996).

through an executive search firm to joincompetitor, Glaxo Wellcome, PLC. On December15, 1995, Glaxo extended an offer to Lyon, andLyon’s last day at Merck was March 1, 1996.Nevertheless, in the interim, Lyon twice deniedthat he was going to work for a competitor.Although the court found that Merck had notshown any actual misappropriation of tradesecrets, the court nevertheless found that “actual orthreatened misappropriation” could be enjoinedunder the North Carolina Trade Secrets Act.

The court further distinguished the casefrom Cyprus Foote. Unlike Cyprus Foote, here,according to the court, Merck was not seeking abroad injunction preventing him from working inthe area of his general expertise and, further, hereMerck had identified the precise nature of its tradesecret information and the project they wished toenjoin Lyon from working on. According to thecourt, in deciding whether disclosure will be likelyor inevitable, the court should consider (a) thedegree of competition between the former and newemployers, (b) the new employer’s efforts tosafeguard the former employer’s trade secrets, (c)the former employee’s forthrightness (or lackthereof) before accepting the new job, and (d) thesimilarity between the employee’s former and

current positions.784

E. Cases Declining to Apply The InevitableDisclosure Doctrine RationaleSeveral courts have expressly or impliedly

refused to apply or adopt the inevitable disclosure

doctrine.785 The rationale that the courts have

784 See also Branson Ultrasonics Corp. v. Stratman, 921 F.Supp. 909 (D. Conn. 1996); Ackerman v. Kimball Int’l,Inc., 652 N.E.2d 507, 1995 Ind. LEXIS 101 (Ind.1995).

785 See, e.g., In re Wilson, 47 U.S.P.Q.2d 1212 (4th Cir.1998)(affirming order of Bankruptcy Court allowingdisclosure of certain trade secret information to twohigh-level employees of defendant in statemisappropriation action and holding, in response toarguments that such individuals would inevitably useor disclose the trade secret information, that need forinformation outweighed probable harm.); CampbellSoup Co. v. Giles, 47 F.3d 467, 33 U.S.P.Q.2d 1916 (1stCir. 1995).; Dulisse v. Park Int’l Corp., 45 U.S.P.Q.2d1688 (N.D.Ill. 1998); International Paper Co. v. Suwyn,966 F. Supp. 246 (S.D.N.Y. 1997); Carboline Co. v.








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used is exemplified in FMC Corp. v. Cyprus Foote

Mineral Co.786 FMC and Cyprus Foote werehead to head competitors in the business ofproducing battery-quality lithium products.Fickling, apparently, was a key FMC metallurgicalengineer who had been involved with inventing ordeveloping at least some of FMC’s currentproducts, and had survived several layoffs. Hehad executed an employee non-disclosureagreement while at FMC. In 1995, Fickling leftand joined Cyprus Foote to work in the samegeneral area as he had at FMC. FMC brought suitand moved for a preliminary injunction.

In denying the injunction, the court notedthat FMC had asserted broad allegations of tradesecrets in every stage of its production, and wasseeking an injunction that would preclude Ficklingfrom doing any work in his area of expertise. Thecourt refused to apply the “inevitable disclosure”doctrine here noting that Fickling had 14 yearsgeneral knowledge, skill and experience in lithiumproduction. The court further noted that under itsview of North Carolina law, the “inevitabledisclosure” doctrine would not be invoked absentsome “bad faith, underhanded dealing, oremployment by an entity so plainly lackingcomparable technology that misappropriation canbe inferred.”

In H&R Block Eastern Tax Servs., Inc. v.

Enchura,787 the defendants, Enchura and Fortner,

Lebeck, 990 F. Supp. 762, 45 U.S.P.Q.2d 1922(E.D.Mo. 1997); Bridgestone/Firestone, Inc. v. Lockhart, 5F. Supp. 2d 667 (S.D. Ind. 1997); Abbott Labs. v. ChironCorp., 43 U.S.P.Q.2d 1695 (N.D. Ill. 1997); APACTeleservices, Inc. v. McRae, 985 F. Supp. 852 (N.D. Iowa1997)(doctrine acknowledged, but court concludedthat plaintiff had not shown that former employeewould inevitably disclose trade secret information);Zellweger Analytics, Inc. v. Milgram, 1997 WL 667778(N.D. Ill. 1997)(no evidence that subsequent employerwill inevitably rely on plaintiff’s trade secrets); Glaxo,Inc. v. Novopharm, Ltd., 931 F. Supp. 1280 (E.D.N.C.1986); Avery Dennison Corp. v. UCB S.A., 1996 U.S.Dist. LEXIS 8682 (N.D. Ill. 1996); Multiform Dessicantsv. Sullivan, 1996 U.S. Dist. LEXIS 2802 (W.D.N.Y.1996).

786 899 F. Supp. 1477 (W.D.N.C. 1995).787 122 F. Supp.2d 1067 (W.D. Mo. 2000).

were regional directors for H&R Block. Theirduties generally included establishing financialand other goals for company-owned offices intheir regions. They did not have responsibilitiesfor franchised operations or for marketing. Bothhad signed employment agreements that includednon-competition covenants providing that theywould not, for a period of two years aftertermination of employment, engage in anybusiness involving the preparation or electronicfiling of income tax returns within their assignedregions. Both became disenchanted with theiremployment, and joined H&R Block’s principalcompetitor, Jackson Hewitt, Inc. Jackson-Hewitt,unlike H&R Block, uses franchises exclusively.Fortner in his new position had nationwideresponsibility, and therefore his area ofresponsibility included his formerly assignedregion with H&R Block. Enchura’s area ofresponsibility did not, however, include hisformerly assigned region. At a hearing on H&RBlock’s application for a preliminary injunction,both Fortner and Enchura indicated that they didnot object to entry of an injunction, but assertedthat an injunction was not necessary because theywere not violating their covenants. The court,nevertheless, entered an injunction enforcing theterms of the covenants finding that Fortner was, infact, violating the covenant. The court concludedthat the covenant, as written, was not limited tocompany-owned outlets, and covered franchiseoperations as well, even though Fortner had noresponsibility for the same with H&R Block.

H&R Block additionally urged thatEnchura and Fortner should be enjoined fromworking for Jackson Hewitt under the inevitabledisclosure doctrine. The district court declined todo so. The district court read PepsiCo assuggesting that “demonstrated inevitability aloneis insufficient to justify injunctive relief.” Rather,according to the court, an injunction requiresfinding “demonstrated inevitability in combinationwith a finding that there is unwillingness to

preserve confidentiality * * *.”788 [Emphasis inoriginal.] The district court found no evidence ofan unwillingness to preserve confidentiality. Evenif that was not a requirement, however, the districtcourt concluded that “what is necessary is some

788 122 F. Supp. 2d at 1075.









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indication that Enchura and Fortner will bemaking decisions for JH in the same areas coveredby Plaintiffs’ trade secrets and that Enchura andFortner have been so involved with Plaintiffs’trade secrets that they cannot help but consider

them while performing duties for JH.”789 Inother words, the district court would limit thedoctrine of inevitable disclosure to those cases inwhich the former employee not only hadknowledge of trade secret or confidentialinformation, but had actually been involved indeveloping such information. Such aninterpretation would limit PepsiCo essentially toits facts. In any event, the district court found thatthe general information the former employees heldregarding H&R Block’s business was so unrelatedto their current positions that there was littledanger of “inevitable” use or disclosure, and thatspecific trade secret information they had recentlyacquired was simply too voluminous to memorizeor otherwise use.

In FLEXcon Co., Inc. v. McSherry,790 anemployment agreement containing non-disclosureand non-competition covenants, characterized bythe court as ambiguous and poorly drafted, wasnot enforced. McSherry began work withFLEXcon as a quality analyst in 1986. FLEXconmanufactured, inter alia, pressure-sensitiveadhesive coated film products for use asidentification stickers and decals, and asmanufacturing labels for high-temperature printedcircuit boards. Three days after joining FLEXcon,McSherry signed an employment agreement thatprovided that, for a period of two years followingtermination, he would not accept employment witha competitor “in the territories” in which he hadworked. McSherry was ultimately promoted toManager of FLEXcon’s Nebraska operations, butleft in November, 2000, to join Avery-Dennison,one of FLEXcon’s principal competitors, asDirector of Operations of the Graphics MediaDivision (Ohio). FLEXcon brought suitattempting to enforce the employment agreementalleging that “territories” should be construed tocover the entire United States. The court refusedto issue a preliminary injunction finding that

789 Id.790 123 F. Supp.2d 42 (D. Mass. 2000).

FLEXcon had not shown a likelihood of successon the merits or irreparable harm.

With respect to likelihood of success onthe merits, the court noted that McSherry’soriginal offer of employment and subsequentpromotions made no mention of, and were notconditioned on, the restrictive covenant, and hisemployment agreement was signed at a time whenhe had accepted an entry level position that wasunlike his later manager’s position. The courtfurther found that McSherry had not been involvedwith “the inner sanctum of running thecorporation” and apparently had receivedinformation regarding strategic planning,marketing, customers “on a distribution basisonly.”

The court further found that McSherry’sjob responsibilities with Avery would not requirehim to use or disclose any of FLEXcon’s allegedlyconfidential information that “he might retain inhis head.” Although “inevitable disclosure” wasnot specifically mentioned, that finding would, ofcourse, preclude a finding that McSherry wouldnecessarily use or disclose confidentialinformation in performing his new jobresponsibilities with Avery Dennison.

F. Recent Cases

Avery Dennison Corp. v. Finkle, 2002 Conn.Super. LEXIS 329 (Conn. Super. 2002)

Connecticut adopted a version of the

UTSA in 1983, which was amended in 1997.791

Avery, of course, manufactured anddistributed office products and writinginstruments. Finkle was employed as director ofproduct development and engineering from 1998until 2001. His employment agreement containeda non-competition covenant that extended for aperiod of two years (apparently without anygeographical limitations) and to “any businessengaged in the manufacture or sale of products

791 CONN. GEN. STAT. §§ 35-50 et seq. See also, Robert S.Weiss & Assoc., Inc. v. Wiederlight, 208 Conn. 525, 546A.2d 216 (1988).


http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=ct_caselaw&volume=208&edition=Conn.&page=525&id=70510_01




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similar to those on which the employee workedwhile at Avery Dennison.” Finkle accepted anoffer of employment with Bic Corp, and Averybrought suit seeking, inter alia, an injunction. Thecourt granted the injunction.

The court found that as a result of hisposition, Finkle had access to, and contributed tothe formulation of procedures and informationrelating to concept testing data, including “deadends,” pertaining to writing instruments beingdeveloped at Avery. The court found that Finklealso had access to Avery’s business plan,including projected product revenues, marketingsupport, component part suppliers, and capitalinvestment information, all of which the courtfound constituted trade secret information. Thecourt found that such information had independenteconomic value, and that Avery had takenreasonable precautions to protect suchinformation, including having employees signnon-competition covenant, having suppliers signnondisclosure agreements, having employees keeplogs as to the products that they were working on,by giving employees yearly refresher courses inintellectual property, by using “read only” files toprevent printing, and by having employees sign“check out” forms when they ended theiremployment.

The court further found that Finkle’s jobat Bic would inevitably lead to disclosure of thosetrade secrets, although the court did not adopt theinevitable disclosure doctrine per se. The courtfound that “[h]owever well intentioned thedefendants may be, it seems virtually impossiblefor Avery Dennison’s trade secret information,particularly as to ‘dead ends,’ to not affect theemployment relationship of * * * Finkle while inthe employ of Bic. From the evidence submitted,the court finds that it is likely or probable that theplaintiff will be successful in showing, at aminimum, a threatened misappropriation of tradesecrets by the defendants in Bic Corporation’semployment of * * * Finkle in a capacity dealingwith the manufacture or sale of writinginstruments.”

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