Protecting Company Assets: The Price of a Dance Ticket Just Went Up
On September 12, 2013, the Supreme Court of Virginia surprised many by ruling that a motion to dismiss (demurrer) is not the proper procedure to challenge the enforceability of a noncompete agreement when a lawsuit is filed to enforce the agreement. Instead, the Court ruled that when one argues that the restrictive covenant is overbroad on its face and unenforceable as a matter of law, the court cannot issue a ruling solely on the pleadings but it must have a factual record. In Assurance Data, Inc. v. Malyevac, a unanimous Supreme Court reversed the trial court’s decision to grant a demurrer which found the restraint unenforceable. The Supreme Court said, “each case involving the enforceability of a restraint on competition must be determined on its own facts,” and pointed out that the employer bears the burden of proving the restrictions are legitimate and reasonable. Prior to this decision, noncompete cases were frequently decided at an early pleading stage before the parties engaged in discovery. Assurance Data is likely to be a game changer in the strategic process of evaluating options since summary judgment is rare in state court in Virginia.
In a federal case decided a week earlier in Alexandria, Judge Cacheris ruled that a former employer had stated valid claims for misappropriation of trade secret information, as well as claims alleging violations of the Virginia Computer Crimes Act, breach of contract and breach of fiduciary duty. In Marsteller v. ECS Federal, Inc., the judge ruled that in order to establish a claim under Virginia’s Uniform Trade Secret Act (Va. Code § 59.1-336, et. seq.), the plaintiff need only plead and prove that “(1) the information in question constitutes a trade secret and (2) the defendant misappropriated it.” The court went on to note that the case law makes it clear that “just about anything can constitute a trade secret under the right set of facts.”
Marsteller, the executive, started this legal action by suing her former employer under Title VII and on other employment-related claims. ECS, the former employer, responded with a counterclaim alleging that Marsteller had improperly acquired the company’s trade secrets when she copied certain materials onto external storage devices and then retained the information after she left. The court found the following information eligible for “trade secret” status: (i) management systems documentation generated and used to secure ISO certification, and (ii) certain documents containing pipeline information that laid out the company’s business development plans. The company alleged that this information was not publicly available nor readily ascertained by those outside the company, and it had taken the steps to protect this information by storing it on a password protected server.
The noteworthy part of the court’s analysis came when Judge Cacheris set forth what it takes to establish the “misappropriation” element of the claim. Although Virginia courts have not recognized the theory of “inevitable disclosure,” the Marsteller decision moves trade secret analysis in that direction. Judge Cacheris ruled that a “misappropriation” claim can be stated simply by establishing that the trade secret was “improperly acquired.” A showing of an improper use or disclosure is not necessarily required for a claim.
The former executive argued that the trade secret counterclaim should be dismissed because no disclosure or use of the trade secret was expressly alleged. The court rejected her claim, noting that “improper acquisition of a trade secret, even in the absence of the allegation of use or disclosure, is sufficient” to state a claim. The court also rejected the former executive’s attempt to dismiss the other state law claims as being pre-empted by the Virginia Uniform Trade Secret Act. Since the executive disputed whether the information in question actually constituted a “trade secret,” the court allowed all of the state law claims to proceed as alternative theories of relief.
There are least two take-aways from these decisions. First, if a violation of an agreement containing a restrictive covenant or the improper acquisition of a trade secret is properly alleged, then the case will move forward beyond a motion to dismiss. Courts are going to be more reluctant to dismiss cases at the initial pleading stage. This change gives the party moving for enforcement greater early leverage than previously existed. Second, for all parties, the costs associated with litigating trade secret and noncompete cases will now go up significantly. While there may be other procedural devices that a party may try to use to challenge the legal enforceability of a noncompete restriction, courts will have a much harder time ruling on these types of dispositive motions early in a case before evidence has been developed through discovery, or without holding an evidentiary hearing.
While the costs of litigation of these types of claims are often high, courts are becoming less afraid to award costs and attorney’s fees, even against individuals. In one recent case, Tech Systems, Inc. v. Pyles (August 2013), after the plaintiff obtained a jury verdict against its former HR director for sabotaging the company’s records and disclosing confidential information, the court awarded more than $340,000 in attorney’s fees and costs to the former employer under the Virginia Computer Crimes Act. In Tech Systems, the magistrate judge found that the former HR director had destroyed evidence by deleting incriminating emails sent from her company-issued Blackberry phone.
If you have questions regarding trade secrets, your company’s rights or your rights as an executive under employment agreements containing restrictive covenants, noncompete or nonsolicitation provisions, or nondisclosure agreements, please contact David Paxton at 540.983.9334, or any member of Gentry Locke’s Employment law or Litigation team; Greg Haley, Michael Finney, Todd Leeson, Paul Klockenbrink, John Thomas, or Abigail Murchison.