another’s trade secret is when you hire a
contractor or employee that has misappropriated someone else’s trade secret.
The new hire uses the misappropriated information in the course of work for you.
Are you liable? Well, maybe. Individual
state law, such as the local flavor of the
uniform trade secret act (if adopted) that
the state uses, can produce varying outcomes to this question.
For example, in Infinity Products, Inc.
v. Quandt, an employee of T.E. Scott, Inc.,
Herbert Quandt, was fired right before
the company was sold, trade secrets and
all, to Infinity Products, Inc. Mr. Quandt
took customer information with him, and
was hired by Fabri-Tech Inc., a competitor of T.E. Scott. Fabri-Tech Inc. asked
Mr. Quandt whether he was under a non-compete agreement, which he wasn’t.
During his duties as a salesman, Mr.
Quandt did make use of Infinity Products
customer lists and pricing information
(trade secrets purchased from T.E. Scott
by Infinity Products) to underbid Infinity
Products and poach some of their customers. Infinity Products sued both Mr.
Quandt and Fabri-Tech for trade secret
misappropriation in an Indiana court.
Mr. Quandt was found liable, but not
Fabri-Tech. The court ruled that there
was a lack of enough evidence that Fabri-
Tech had participated in or had knowl-
edge of the misappropriation.
But lawyers like billing hours, so the
case went to the Indiana Appellate Court
which reversed the finding and held that
Fabri-Tech was vicariously liable under the doctrine that an employer is responsible for the action of its employees
during their employment (respondeat superior, for Latin fans), regardless of the
knowledge the employer had at the time
of their actions. So, off to the Indiana
Supreme Court we go, which reversed the
decision again, because under the Indiana
Uniform Trade Secrets Act (Indiana
UTSA), there needs to be sufficient evidence that a misappropriator “knew or
should have known” of the misappropriation, and that the Indiana USTA superseded the common law’s respondeat
superior doctrine.
A similar set of circumstances occurred
in Central Trust & Inv. Co. v. SignalPoint
Asset Mgmt. LLC, 422 S.W.3d 312 (Mo.
2014), but with an independent contractor. Mr. Kennedy was an employee of a
financial management company and left
when it was purchased by Central Trust
to set up his own investment management
company, ITI, and began using his former employer’s client list. Mr. Kennedy
became an independent contractor for
another company, Signal Point, to solicit
orders for securities from clients. And began, of course, Central Trust suit against
Signal Point, as well as Mr. Kennedy and
his company, for trade secret misappropriation. The Mississippi Supreme Court
found that, besides the lack of evidence
that Signal Point has used, acquired, or
disclosed Central Trust’s trade secret
information, Signal Point was not vicariously liable for Mr. Kennedy’s indiscretion under respondeat superior due to
his status as an independent contractor
rather than an employee.
Bottom line: Check with an attor-
ney familiar with the nuances of the
jurisdiction(s) where you operate and in
which a potential case may be tried. Then
have the attorney draft you agreements
accordingly to reduce the chances of be-
ing dragged down by a rouge employee
via a state specific legal doctrine. And fire
all your employees and only hire indepen-
dent contractors (just kidding, maybe).
A possible way to proactively add to
your protective wall of paper is to have
a new employee sign a statement along
the lines that trade secrets from prior
employers will not be used during their
employment. And the employee’s execute
a non-disclosure agreement that stipulates they will not disclose other’s trade
secrets to you. You thus exclude use or
disclosure of others trade secrets from actions that would fall into the respondeat
superior domain. And, if they are under a
non-compete agreement, have your attorney determine if what issues exist, if any,
which may cause you not to hire them to
avoid trouble.
However, a note of caution. Now
that we got you all jumpy to avoid getting blindsided by someone else’s misappropriation, don’t go bananas with
your protective agreements. Going
overboard in your non-disclosure or
non-compete agreements can open lead
to them being invalidated under certain
circumstances. An agreement may be
found void if made under duress, such
as the employee being threatened with
being fired if he does not sign. Adding
unexpected contract clauses at the last
moment may be viewed as “unfair surprise,” and thus invalidate the contract.
And, if the agreement is too broad, such
as non-compete agreement that, in the
eyes of a court, lasts too many years,
covers too much geographic area in
which the employee is precluded from
working, and/or prevents too many
types of work activity for a former
employee, then the court may find the
agreement is an unconscionable agreement and unenforceable.
Your employees are not you enemies,
usually. And, with reasonable care you
can prevent or limit the occasional “bad
apple.” You’re the good guy. Wear a
white hat and have a Hollywood smile
for everyone. But, don’t shut the eyes
in the back of your head …. lest you get
smacked by a legal beanball tossed by the
occasional rouge. CW
