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Corporate Liability for Trade SecretTheft By Employees

Steven A. WeissSCHOPF & WEISS LLP May 11, 2007One South Wacker DriveChicago, IL 60606312.701.9300weiss@sw.com

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POTENTIAL THEORIES

• Respondeat Superior Doctrine• Direct Violation of Trade Secrets Act

• Tortious Interference with Contract• Aiding Breach of Relationship

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Respondeat Superior

Respondeat Superior is a commonlaw doctrine under which liability isimposed by law upon an employer foracts done by an employee

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Restatement of Agency (Second)Sec. 219

• Employer is subject to liability for the tortsof their employees:

• “while acting in the scope of theiremployment”

• Not generally responsible if outside scopeof employment

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Scope of Employment

• Restatement of Agency (Second) Sec. 228says conduct is within scope ofemployment if, but only if:(a) it is of the kind he is employed toperform;(b) it occurs substantially within theauthorized time and space limits;(c) it is actuated, at least in part, by apurpose to serve the master.

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• Typical common law standard is whetherthe act was:(1) expressly or impliedly directed by theemployer (or naturally incident tobusiness); and(2) performed with intent to furtheremployer’s business, at least in part.

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• Generally, employer’s actual knowledge ofemployee’s actions not required

• But, some courts impose a requirement offoreseeability

• Employer knew or should have known thatsuch conduct might occur

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Issues

• Whether Trade Secret Act preemptsclaims for respondeat superior or vicariousliability

• If respondeat superior available, does“scope of employment” require thatemployer knew or should have known ofmisappropriation (“forseeable”)

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PRE-EMPTION UNDER ITSA• 8(a) “this Act is intended to displace conflicting tort,

restitutionary, unfair competition, and other laws of thisState providing civil remedies for misappropriation of atrade secret.” 765 ILCS 1065, section 8(a).

• Does not preempt claims “that are not dependent uponthe existence of competitively significant information.”Hecny Transp., Inc. v. Chu, 430 F.3d 402, 405 (7th Cir.2005).

• Does not preempt contract claims even if based on tradesecrets. 765 ILCS 1065, section 8(b)(1).

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

• Federal court in Eastern District of Virginia• February 5, 2001• If respondeat superior doctrine is

available, it clearly applied to the factsalleged

• Court said respondeat superior notpreempted by Trade Secrets Act becausenot conflicting

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Physicians Interactive v. Lathian SystemsInc., 2003 WL 23018270 (E.D. Va. 2003).

Preliminary injunction against companyand its employee.

Microstrategy, Inc. v. Business Objects,S.A., 331 F.Supp.2d 396 (E.D. Va. 2004)

Judgment after trial.

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Hagen v. Burmeister & Associates, Inc., 633N.W.2d 497 (Minn. 2001)

• Minnesota Supreme Court• August 2, 2001• Employer can be held vicariously liable for

trade secret misappropriation by employee• But declined to do so because plaintiff

failed to introduce evidence of actualknowledge or foreseeability of misconduct

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Competitive Technologies v. Fujitsu Limited,286 F.Supp.2d 1118 (N.D. Cal. 2003)

• Plasma display manufacturer’s tradesecret claim against owner of patent andits agent for disclosing manufacturer’slicensing negotiations.

• Applied respondeat superior doctrine to“breach of confidence” claim.

• Allowed trade secret claim against bothparties.

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Infinity Products, Inc. v. Herbert Quandt and Fabri-Tech, Inc., 810 N.E.2d 1028 (Ind. 2004),

• Indiana Supreme Court• June 29, 2004• Quandt misappropriates customer

information from former employer• Uses information for new employer without

expressly telling employer what he wasdoing

• No vicarious liability because Trade SecretAct preempts respondeat superior

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Microstrategy, Inc. v. Business Objects, S.A., 331F.Supp.2d 396 (E.D. Va. 2004)

• Competitor obtained trade secrets throughformer and current employees

• “an employer can be liable for trade secretmisappropriation committed by anemployee acting within the scope of hisemployment through the doctrine ofrespondeat superior.”

• Even if acts expressly forbidden• Employer need not know of activity

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Direct Violation of the TradeSecrets Act

Trade Secrets Act prohibits obtaining tradesecrets through “improper means”

(i) acquisition of a trade secret that “was acquired byimproper means”

(ii) disclosure or use of a trade secret by someone who“used improper means to acquire knowledge of thetrade secret” or who knew or had reason to know thatthe trade secret was derived through a person “who hasutilized improper means to acquire it.”

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Section 1(1) of the Uniform TradeSecrets Act defines “impropermeans” as:

– ‘Improper means’ includes theft,bribery, misrepresentation, breach orinducement of a breach of a duty tomaintain secrecy, or espionage throughelectronic or other means.

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Illinois Trade Secrets Act, section1065/2(a) is almost the same:

(a) ‘Improper means’ includes theft,bribery, misrepresentation, breach orinducement of a breach of a confidentialrelationship or other duty to maintainsecrecy or limit use, or espionage throughelectronic or other means.

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Restatement of Torts, Sec.757, comment f.

“improper means,” defined as “meanswhich fall below the generally acceptedstandards of commercial morality andreasonable conduct.”

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Restatement of the Law of UnfairCompetition, Sec. 43

Defines “improper means” as including,“theft, fraud, unauthorized interception ofcommunications, inducement of orknowing participation in a breach ofconfidence, and other means eitherwrongful n themselves or wrongful underthe circumstances of the case.”

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Examples of improper meansby an employer:

1. Misusing information acquired through aconfidential relationship or contractualconfidentiality agreement.

2. Hiring competitor’s employees.

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Hiring Competitor’s Employees

• Sonoco Products Co. v. Johnson, 23 P.3d1287 (Col. App. 2001)

• Computer Associates International v.Quest Software, Inc., 2004 WL 1459495(N.D. Ill. June 28, 2004)

• Hexacomb Corp. v. GTW Enterprises, Inc.,875 F. Supp. 457 (N.D. Ill. 1996)

• RKI, Inc. v. Grimes, 177 F. Supp. 2d 859(N.D. Ill. 2001)

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[New employer] “also ‘misappropriated’[former employer’s] trade secrets in thatshortly after [employee] started working for[new employer, he] disclosed [ ] tradesecret information to other [ ] personnel.”

RKI v. Grimes

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Former Employees Creating newCompany

• Mangren Research and DevelopmentCorporation v. National Chemical Co., 87F.3d 937 (7th Cir. 1996)

• BBA Nonwovens Simpsonville, Inc. v.Superior Nobwovens, LLC, 303 F.3d 1332(Fed. Cir. 2002)

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Hiring a competitor’s employee or consultant tohelp reverse engineer is generally improper.

BBA Nonwovens Simpsonville, Inc. v. Superior Nonwovens, 303F.3d 1332 (Fed. Cir. 2002) (consultant hired and then disclosedtrade secrets).

Mangren Research and Development Corp. v. National ChemicalCo., Inc., 87 F.3d 937, 944-45 (7th Cir. 1996) (disclosure of tradesecret by former employee).

Hexacomb Corp. v. GTW Enterprises, Inc., 875 F. Supp. 457, 466(N.D. Ill. 1993) (defendant hired engineer who then reconstructedformer employer’s machine).