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Trade Secrets - Internet Library of Law and Court Decisions - Updated November 27, 2008

Affirming the decision of the Bankruptcy Court below, the Southern District of New York holds that defendant Marie Nixon (“Nixon”) misappropriated plaintiff’s trade secrets, converted its property, and was unjustly enriched, by taking possession of plaintiff’s customer list, and attempting to auction it over the Internet.  As a result, the Court affirms an award to plaintiff Cross Media Marketing of $236,000 in actual damages, representing the cost of developing plaintiff’s customer list, and an additional $50,000 in punitive damages.  Notably, such an award was rendered despite the fact that defendant Nixon did not actually sell the customer list via auction.  It should be noted that defendant Nixon did not appear at the trial of this matter, and was not represented by counsel on appeal.  On appeal, her motion for a new trial was denied.

Former employees of Internet Advertising Agency enjoined for six months from rendering advice on Internet advertising matters to competitors of their former employer, in light of the fact, itallies, that (a) they had misappropriated confidential company information, such as rates charged customers and traffic generated by advertisements, which they had and planned in the future to utilize in competition with their former employer and (b) had taken steps to set up a competing business while in plaintiff's employ, including solicitation on behalf of their new concern of one of plaintiff's potential clients.

Plaintiff EarthWeb, Inc. moved for a preliminary injunction enjoining a former vice president from either working for, or disclosing trade secrets to, a competitor. Such relief was mandated, claimed plaintiff, by a one-year restrictive covenant in the defendant's employment agreement. The court held that this restrictive covenant was unenforceable because, given the nature of the Internet today, it interfered with defendant's employment for an unreasonably long period of time. The court further held that defendant was unlikely to disclose the limited confidential information of which he was aware to his new employer. As a result, the court refused to issue the requested injunctive relief.

Court denies plaintiff's application for a preliminary injunction to enjoin defendant from publishing plaintiff's confidential materials on the Internet, notwithstanding the fact that such publication would violate Michigan's Uniform Trade Secrets Act. Enjoining this conduct, determined the court, would constitute an impermissible prior restraint on speech prohibited by the First Amendment.

Defendant, a student, came into possession of documents containing confidential information about plaintiff Ford Motor Company and its products. Defendant threatened to, and did publish a number of these documents on a web site he maintained. Defendant claimed that he was unaware of the identity of the individuals who delivered these materials to him. The court surmised that they were "likely former and current Ford employees" under a duty to keep such materials confidential.

Plaintiff Ford brought suit alleging, among other things, that defendant's conduct violated Michigan's Uniform Trade Secrets Act. Plaintiff sought to enjoin further publication of these materials, a remedy authorized by that act.

In denying plaintiff's application, the court stated that even though "Ford ... presented evidence to establish that [defendant] is likely to have violated the Michigan Uniform Trade Secrets Act, the Act's authorization of an injunction violates the prior restraint doctrine and the First Amendment as applied under these circumstances." The court further stated that:

[T]his court is bound by existing precedent, and, under the broad holdings of the Pentagon Papers case and Procter & Gamble, may not enjoin [defendant's] publication of Ford's trade secrets and other internal documents. In the absence of a confidentiality agreement or fiduciary duty between the parties, Ford's commercial interest in its trade secrets and [defendant's] alleged improper conduct in obtaining the trade secrets are not grounds for issuing a prior restraint.

Court holds that under the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. section 1030, the costs incurred by the owner of a computer system in retaining consultants to conduct forensic investigations of the use by defendants of the computer system, and the harm such use may have caused, constitute a “loss” within the meaning of the statute, which can be used to meet the CFAA’s $5000 jurisdictional threshold. 

The Court further held that, under the CFAA, once the Act’s jurisdictional threshold has been met, the plaintiff can recover “compensatory damages” caused by the defendant’s violation of the Act.  Such “compensatory damages” include lost profits and revenue caused by the defendants’ use of data improperly obtained in violation of the CFAA.  Importantly, the court held that such lost profits can be recovered even in the absence of an interruption in service caused by defendants’ conduct.

Indiana Court of Appeals holds that neither website developer's utilization of contents of commercial web site he created for plaintiffs to set up a competitive online business, nor his appropriation of domain names that had previously been used to direct traffic to plaintiffs' sites, constituted a violation of Indiana's Trade Secrets Act, because plaintiffs had made no effort to keep this information secret.  The Appellate Court accordingly reversed the trial court's grant of injunctive relief to plaintiffs.  It should be noted that much of the content found on plaintiffs' sites consisted of promotional materials created by the manufacturers of products both parties sold to the public, for which plaintiffs obtained display licenses for their own web sites.

Quick Hits

Court grants so much of plaintiff employee’s motion for summary judgment which sought dismissal of claims brought by his former employer under the Computer Fraud and Abuse Act (“CFAA”) arising out of plaintiff’s alleged use of company information, copied from a company computer, to solicit company customers and compete with his former employer.  The Court held that the lost profits defendant allegedly sustained as a result of such competition were not recoverable under the CFAA.  Rather, the CFAA only permits recovery of losses caused by an interruption of service, or damage sustained by ‘any impairment to the integrity or availability of data, a program, a system or information.’  Because defendant Gulfstream Training Academy did not establish that the information plaintiff copied and deleted from its laptop were unavailable to it, it could not pursue a claim for lost profits resulting from plaintiff’s use of this data in competition with defendant, as such lost profits did not constitute either a ‘loss’ or ‘damage’ recoverable under the CFAA.  Said the Court:

Upon a review of the statutory language and the competing case law, the Court concludes that while the issue is a close one, the more appropriate reading of the statutory language is that any ‘loss’ must be related to interruption of service.  In this case, the fact that Plaintiff copied files and allegedly stole clients from GTA did not cause an interruption of service as contemplated by the CFAA.  Rather, the CFAA statutory language evidences an intent to allow recovery for reasonable costs caused by interruptions in service or damage to a computer.  GTA would need to prove that the customer files were unavailable to GTA due to Plaintiff’s actions in exceeding his authority to access the computer.  There is no evidence to support such a theory.  Simply copying the files and then contacting customers in those files to take their business is not causing a loss because of interruption of service.  Similarly, GTA has not shown that Plaintiff’s deletion of any information, which could be construed as ‘damage’ under the CFAA, resulted in at least $5000 worth of damage.  Rather, it appears that the only allegations of damages are the lost business profits.

The Court recognized that other courts had reached differing conclusions on this issue, including Resdev LLC v. Lot Builders Ass’n, Inc., 2005 WL 1924743 (M.D. Fla. 2005), Nexans Wire S.A. v. Sark-USA Inc., 319 F.Supp.2d 468 (S.D.N.Y.) aff’d 166 Fed Appx. 559 (2d Cir. 2006) and Cenveo Corp v Celum Solutions Software, 504 F. Supp. 2d 574 (D. Minn. 2007) which reached conclusions similar to those reached by the Court, and Frees Inc. v. McMillian, 2007 WL 2264457 (W.D. La. 2007) which held that, once a plaintiff had met the jurisdictional damage thresholds imposed by the CFAA, it provisions permitted recovery of any compensatory damages sustained by the Act’s violation, limited only by the requirement that they be ‘economic damages.’

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Ninth Circuit holds that plaintiff can recover damages for loss business and business goodwill arising out of defendant’s misuse of proprietary source code and customer lists improperly obtained in violation of the Computer Fraud and Abuse Act.  Such damages were held recoverable notwithstanding the absence of an interruption of service caused by defendant’s misconduct.  Said the Court:

Both the old and new versions of the statute limit damages for loss aggregating at least $5000 in a year to ‘economic damages.’  Getloaded objects to paying damages for loss of business and business goodwill.  The objection is without force, because those are economic damages.

As a result, the Ninth Circuit affirmed the lower court’s determination, after trial, which awarded plaintiff $150,000 for each of three violations by defendant of the Computer Fraud and Abuse Act. 

In affirming the District Court’s decision, the Ninth Circuit further held that the $5000 damage threshold of the CFAA does not require the plaintiff to prove it sustained $5000 in damages as a result of a single act of unauthorized access.  Rather, held the Court:  “neither version of the statute supports a construction that would require proof of $5000 of damage or loss from a single unauthorized access.  The syntax makes it clear that in both versions [of the CFAA], the $5000 floor applies to how much damage or loss there is to the victim over a one-year period, not from a particular intrusion.  …  The damage floor in the Computer Fraud and Abuse Act contains no single act requirement.”  

This action arose out of a competitior’s use of source code improperly obtained by accessing plaintiff’s site through another password, and ‘hacking’ into the site and its code.  The competitor also hired a former employee of plaintiff, who improperly supplied it with plaintiff’s customer lists.  The parties’ respective websites are used by truckers to ascertain loads available for transport in a given area, so as to permit the trucker to prevent ‘dead heading’ and allow them, instead, to travel both to and from a location fully loaded with cargo.  In addition to an award of $450,000 under the CFAA, the Court also awarded plaintiff $60,000 for violation of the Idaho Trade Secrets Act, $342,787,35 in attorneys fees and expenses, and $120,000 in exemplary damages as a result of defendants’ improper acts, including its violation of injunctions designed to prevent the destruction of evidence.

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Court holds that lost profits caused by alleged misuse of proprietary data improperly obtained in violation of the Computer Fraud and Abuse Act are not recoverable as damages in claims asserted thereunder in the absence of an interruption in service caused by defendants’ alleged misconduct.  As a result, the Second Circuit affirmed the District Court’s grant of summary judgment to the defendants, dismissing plaintiff’s Computer Fraud and Abuse Act claim.  These claims alleged that defendants improperly obtained plaintiff’s proprietary data, which they used in aid of a competitor to plaintiff’s injury.  “As the district court correctly recognized, the plain language of the statute treats lost revenue as a different concept from incurred costs, and permits recovery of the former only where connected to an ‘interruption in service.’  …  Because it is undisputed that no interruption of service occurred in this case, L & K’s asserted loss of $10 million is not a cognizable loss under the CFAA.”

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