A new decision by a Federal District Court judge in Minneapolis indicates that it will be more difficult for employers to file lawsuits alleging trade secret misappropriation against former employees.

Hot Stuff Foods claimed that one of its former executives, Dornbach, secretly entered into business relationships with its customers before he resigned from the company, and that he also downloaded and copied its confidential pricing and business planning information from his work computer.  As a result, Hot Stuff sued Dornbach.   In response, Dornbach brought a Rule 12 motion to dismiss claiming that, in light of two recent Supreme Court’s decisions, Hot Stuff’s complaint failed to contain sufficient factual specificity.

One of Hot Stuff’s claims was that Dornbach had misappropriated its confidential trade secrets when he copied information from his work computer.    Dornbach argued that Hot Stuff failed to plead sufficient facts suggesting the existence of a trade secret because Hot Stuff had alleged only generally that Dornbach had access to confidential information concerning its business plans, pricing, margins and sales strategies, and that the company had not set forth specific information that this information met the definition of a trade secret; i.e. that it had independent economic value, was not readily ascertainable by others, and that Hot Stuff took reasonable efforts to maintain its secrecy.

The Court agreed with Dornbach that it is not enough for a party simply to claim, without specifics, that its data is confidential, and that Hot Stuff’s non-specific and conclusory statements were not enough to establish that the copied information met the definition of a trade secret.   Instead, a party must set forth specific facts showing that the information meets the definition of a trade secret.

This case should remind both companies and their lawyers that it will be harder for them to have their day in court when alleging trade secret misappropriation, and that they must be prepared to allege specific facts showing why their information deserves protection.

First, some background.   Astro-Med and Nihon Kohden are rivals in the highly competitive life sciences equipment market.  In October 2006, Nihon Kohden hired away Kevin Plant, a valuable Astro-Med employee. When first hired at Astro-Med in 2002, Plant signed an employee agreement that contained non-competition and non-disclosure provisions. Relying in large part on those provisions, in December 2006, Astro-Med filed suit against Plant alleging breach of contract and misappropriation of trade secrets. Astro-Med later added a third claim of unfair competition against Plant and joined Nihon Kohden as a defendant, against whom it alleged claims of tortious interference and misappropriation of trade secrets.

In April 7, 2008, a jury returned a verdict against Nihon Kohden and Plant,  awarding $375,800 in damages in favor of Astro-Med. Following the verdict, on July 25, 2008, the district court awarded exemplary damages against Nihon Kohden and Plant in the amount of $560,000, added an award of attorney’s fees and costs, and imposed a sanction pursuant to Federal Rule of Civil Procedure 37. All told, the judgment against Nihon Kohden and Plant equals $1,159,823.60.  Nihon Kohden and Plant appealed, but the Court of Appeals rejected their arguments and upheld the jury verdict.

There are, from my point of view, two interesting holdings in this case.  The first is that the Court was willing to enforce Astro-Med’s non-competition agreement even after finding that its territorial restriction (which was basically the entire world) was overbroad.  In other words, the court used the “blue pencil” doctrine to judicially revise the non-compete and make it enforceable.

The second interesting point is the inherent burden the defendants in these types of cases sometimes face.   The jury apparently concluded that the reason Nihon Kohden hired Plant was to obtain access to his intimate knowledge of Astro-Med’s business.  “It is a logical inference that a competitor who hires away a rival’s valued employee with access to inside information has done so in order to use that inside information to compete with the rival, and it is an equally logical inference that once Plant became a Nihon Kohden employee, he sought to justify its hiring decision by revealing and using the information Nihon Kohden had bargained for.”

On appeal, Plant argued that he had not misappropriated any trade secrets because Nihon Kohden never used any of them.  The Court held that  misappropriation includes disclosure of a trade secret by one who acquired it while under a duty to maintain its secrecy and the acquisition of a trade secret by one who knows that it was acquired by breach of a duty to maintain secrecy.   “Contrary to defendants’ assertion, Astro-Med need not have shown that either Plant or Nihon Kohden “used” Astro-Med’s trade secrets; disclosure or acquisition is sufficient to constitute misappropriation.” 

The bottom line is that both courts and juries are willing to conclude that where there is smoke, there is fire.  If a defendant had the means and the motive to misappropriate trade secrets, that will probably be enough to justify a finding of actual misappropriation, and the large damages awards that can flow from that.