I have written previously on the challenges of protecting trade secrets in the context of arbitration. A case filed yesterday in New York Supreme Court by the venture capital firm Advanced Equities, Inc. (AEI) reinforces the necessity of getting injunctive relief from a court while an arbitration is pending and an arbitrator is being selected.
As Law360 is reporting, AEI sued its former employee, Jared Carmel, and his new employer, Felix Investments, LLC, alleging that Carmel and Felix are misappropriating its trade secrets, among other things. Like many disputes in the financial services sector, AEI and Felix have a history, as Felix was formed by a former employee and officer, Frank Mazzola (who AEI has also joined as a defendant) and the firms have already been in litigation over Felix’s claims that AEI has defamed it. AEI and Felix have been in the news lately, as they are apparently fierce competitors in a potentially lucrative market of securities: shares of Facebook and Twitter from employees interested in selling them in advance of any initial public offering.
While the allegations of the lawsuit are relatively straightforward (i.e., breach of fiduciary duty, theft of trade secrets, intentional interference of contract), what is noteworthy is the fact that AEI has already filed an arbitration proceeding against Carmel before the Financial Industry Regulatory Authority (otherwise known as FINRA). Normally, a court might defer to that pending proceeding and stay any lawsuit filed afterward; however, given the delay that accompanies the appointment of an arbitrator, courts have found that it is appropriate for a party to request an injunction during this process to preserve its trade secrets. See Performance Unlimited, Inc. v. Questar Publishing, Inc., 52 F.3d 1373 (6th Cir. 1994).
The takeaway? Follow AEI’s example and file for a TRO in court even though your trade secrets claim may be subject to an arbitration provision. While this approach is costly and potentially duplicative in some respects, the alternative is that your client’s trade secrets may be lost during the inevitable delay that comes with the selection and approval of an arbitrator. The better solution, of course, is to draft your agreements to carve out trade secret and intellectual property disputes from any arbitration provision so that added expense and potential motion practice about the appropriate forum is eliminated.