“It’s all in your head but I own it anyway.” It’s a tough argument to make, let alone swallow, and, fortunately, it has been recently rejected by two federal courts in cases that follow an increasingly common fact pattern: an employee abides by their restrictive covenant but goes on to compete against their former employer after the covenant expires. Fearing the competition, the employer pursues a trade secrets claim, arguing that the employee will inevitably disclose its trade secrets or that the employee has memorized and is therefore misappropriating the trade secrets. Or it involves a similarly-attenuated fact pattern: the employer has no restrictive covenant at all and there is no evidence of tangible misappropriation (i.e., no evidence of thumbdrives or downloading, no Dropbox or GoogleDoc dumps, nor emailed documents to personal email accounts), but it relies on a trade secret claim that an employee must still be using those trade secrets because they are successfully competing.
The two decisions, CAE Integrated, Inc. v. Moov Technologies, Inc., issued by the U.S. Court of Appeals for the Fifth Circuit, and First Interstate BancSystem, Inc. v. Hubert, issued by the U.S. District Court for the District of Wyoming, both reach the same conclusion: an employer has a very high burden to overcome when making a trade secret claim on these facts in the absence of compelling evidence of misappropriation. As I explain below, taken together, these are significant decisions that demonstrate that employers should think carefully before pursuing employees on claims that the former employees were or would be relying on their memories to improperly use trade secrets rooted in customer identity or customer preferences.
What happened in those two cases? Let’s start with the CAE Integrated case. The former employee, Meisner, was a successful trader at CAE who developed relationships with buyers and sellers of semiconductor equipment. His employment agreement had a one-year non-solicitation provision forbidding him from soliciting CAE’s actual or potential customers with whom he was in contact during the year preceding his termination and a non-disclosure provision protecting CAE’s proprietary customer and supplier information. CAE fired Meissner in 2016 and he waited out his restrictive covenant, joining Moov as its head of sales in 2019. When Moov secured millions of dollars in investments, CAE concluded it was “implausible” that Meissner could be so successful without using their alleged trade secrets.
CAE filed a lawsuit and requested a preliminary injunction prohibiting Meissner from using its alleged trade secrets under the Texas Uniform Trade Secrets Act and Defend Trade Secrets Act (DTSA). The U.S. District Court for the Western District of Texas denied the request and the Fifth Circuit affirmed that decision, finding that CAE failed to prove that Meissner and Moov misappropriated transactional documents and customer lists of CAE. The Fifth Circuit emphasized the following: (1) Meissner had deleted any copies of those documents from his personal devices and accounts long before working for Moov; (2) without proof that Meissner used that information, Meissner’s knowledge of whom he worked for while at CAE, standing alone, wasn’t enough for a misappropriation claim; (3) the contact information that was allegedly a trade secret was publicly available and readily ascertainable and the majority of that information was already listed in Moov’s database before Meissner started; and (4) circumstantial evidence without more on this record, was insufficient as a matter of law. (For more on this case, check out Rick Dunning’s post in Sheppard Mullin’s Trade Secrets Law Blog).
Turning to the First Interstate BancSystem case, U.S. District Court Judge Nancy Freudenthal dismissed the employer First Interstate BancSystem’s (FIB) case, finding that FIB had failed to show that a team of employees who had left to join a competitor had misappropriated genuine trade secrets. FIB did not have a restrictive covenant with the four employees but it argued that documents printed by the employees contained customer information that qualified as trade secrets. While Judge Freudenthal acknowledged remembering trade secrets could qualify as misappropriation, her opinion focused on the underlying merits of the trade secrets themselves. In her opinion, Judge Freudenthal thoroughly reviewed each of the dozens of documents printed by the employees that were the grounds for misappropriation and she rejected the trade secret claims for the following reasons: (1) she criticized FIB for lumping all customer information together and not breaking it down sufficiently for her to analyze; (2) she noted that many of the customers’ identities appeared to be readily ascertainable; (3) she rejected the argument the employees’ notifications of their departure to customers amounted to a misappropriation of any genuine confidential information; and (4) and she found that FIB failed to demonstrate that the employees actually used any of the truly proprietary information from the customers’ accounts. (For an excellent summary of the opinion, see Steptoe’s Bill Toth and Michael J. Allan’s client alert). Although her analysis tracked the individual trade secret claims at issue, it mirrored the reasoning of the Fifth Circuit’s analysis of misappropriation.
Why are these decisions important? A couple of important points to remember before turning to the legal aspects of these decisions. First, these fact patterns seem to occur almost always in the sales context, where an employer is trying to argue that customer identity and preferences should be wielded as trade secrets and broadly protected, which can be an awfully tough claim to make. Of course, the industry and nature of the customers can impact the analysis of the strength or weakness of a trade secret claim, but in industries with limited players and few customers and vendors, arguments that their identity or preferences are somehow secret can be easily refuted; in fact, the new employer Moov was able to do this by showing many of those semiconductor customers and vendor identities were already in its database.
Second, employers shouldn’t underestimate the power of the argument that they are attempting to bootstrap a broad trade secret claim to extend or create a non-compete that doesn’t exist. Judge Freudenthal noted that very argument in her opinion, and while not mentioned explicitly by the Fifth Circuit, it would be hard to ignore the fact that CAE had already gotten the benefit of its bargain during the year that Meissner honored his non-solicitation agreement. Very broad trade secret injunctions that have the same effect as a non-compete, in the absence of serious misbehavior and compelling trade secrets, are very likely going to be rejected by a court as overreaching.
And third, although not emphasized by either court, it bears mentioning that the former employees in both cases appear to have played by the rules. They didn’t breach any duties of loyalty before they left, they didn’t take or download any information, and they otherwise abided by their written agreements. While the FIB employees did print out numerous documents, Judge Freudenthal was underwhelmed by the content of the information in those documents and largely viewed them as trivial or non-threatening. It’s worth remembering that trade secret law has a powerful ethical underpinning, rooted in principles of business ethics and commercial morality (see the definition of misappropriation under the UTSA and DTSA, without which there can be no trade secret claim). These principles percolate under the surface of these decisions, particularly when an injunction–an equitable remedy–is sought by an employer. Fairness, and conversely overreaching, are always going to be an unspoken factor.
Turning to the legal issues, the CAE court focused on language in the DTSA that is not emphasized nearly as frequently as it should be–namely, 18 U.S.C. §1836(b)(3)(A)(i)(1) which requires any injunctions placing conditions on “employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” This is one of the significant differences between the DTSA and the UTSA, and I don’t believe courts have given sufficient attention to this part of the DTSA when rendering decisions involving injunctive relief. This language was added late in the legislative negotiation process to minimize the use of injunctions prohibiting new employment and avoid the codification of the inevitable disclosure doctrine in the DTSA. The phrase “information the person knows” has not yet been fully defined by a court, but it stands to reason this should protect an employee’s general skill and knowledge that is accumulated over the course of his/her career and not the property of their employer.
Speaking of the inevitable disclosure doctrine, these cases suggest courts will continue to be ambivalent about its use. As Jim Pooley and others have noted, much of the hullabaloo about the doctrine is probably overstated, since one still has to show at minimum a credible risk of threatened misappropriation in any request for a trade secret injunction–a showing that requires a real risk of improper use or disclosure. However, the CAE and First Interstate BancSystem cases collectively stand for the proposition that a trade secret owner needs to establish that there is truly a risk that the employee has acted or is going to act improperly. They also stand for the proposition that to secure the equivalent of a restrictive covenant, an employer needs to make a compelling case that the information that is at risk of being used/disclosed is more than mere customer identity.
As you can see, there are a lot of important considerations that these decisions touch upon. I admit that I am showing my bias here, but there are far too many trade secret cases that are being filed today that follow this pattern. The reasoning in these cases, at least in my judgment, is sound and should be influential in deterring similar disputes in the future.