NC Business Court Allows Misappropriation Case to go Forward but Declines to Issue Preliminary Injunction
The North Carolina Trade Secret Protection Act (“NCTSPA”) explicitly authorizes enjoining actual or threatened misappropriation of trade secrets during the pendency of an action. N.C.G.S. Sec. 66-154-(a). In a recent case the North Carolina Business Court declined to issue a preliminary injunction to prevent Defendants from misusing Plaintiffs’ trade secrets, even while holding that Plaintiffs had made allegations of actual misappropriation of its trade secrets sufficient to survive a motion to dismiss. Allegis Group, Inc., et. al. v. Zachary Piper, LLC, et. al. 2013 NCBC 13.
In Allegis, Plaintiff staffing company alleged that Defendants of a former employee had obtained Plaintiff's service agreements and pricing lists, and had used external storage devices to extract information from their company laptops before leaving Plaintiff. These are allegations typical of misappropriation claims, and the Business Court wasted little ink determining they met the threshold to state a claim under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure.
The Court required more analytical muscle to wrestle with the issue of whether it should preliminarily enjoin Defendants from misusing the allegedly misappropriated information. In promoting the injunction, Plaintiff apparently relied upon the argument that “the facts demonstrate that misappropriation will necessarily occur.” (at 27) This led the Court to consider the issue through the lens of North Carolina decisions on the question of inevitable disclosure.
“In its simplest terms, the doctrine applies when an employee who knows trade secrets of his employer leaves that employer for a competitor and, because of the similarity of the employee’s work for the two companies, it is “inevitable” that he will use or disclose trade secrets of the first employer.” Analog Devices, Inc. v. Michalski, 157 NC App 562, 579 S.E.2d 499 (2003), fn 3, quoting K. Roberson, South Carolina’s Inevitable Adoption of the Inevitable Disclosure Doctrine: Balancing Protection of Trade Secrets with Freedom of Employment, 52 S.C.L.Rev. 895 (2001). North Carolina Appellate Courts have suggested the limitations that should be imposed upon the use of the inevitable disclosure doctrine without ever actually endorsing its application. See, Analog at 470-471, 455 (suggesting that if the inevitable discourse doctrine were to be applied, it should only limit the scope of an employee’s new employment duties while not preventing all employment with a competitor); Travenol Laboratories, Inc. v. Turner, 30 NC App. 686, 693-694, 228 S.E.2d 478 (1976) (stating that an injunction may be appropriate to limit an employee’s unauthorized disclosure of trade secrets, but only if the likelihood of disclosure is “high”). The Allegis Group decision further recognized that the United States Federal Court for the Middle District of North Carolina has “predicted that the North Carolina State Courts will recognize the doctrine in appropriate circumstances. Merck & Co. v. Lyon, 942 F. Supp. 1443 1459 (M.D.N.C 1966). However, the court cautioned that the trade secrets at risk would have to be clearly identified and there would have to be significant similarity between the companies as well as between the employee's position with the two companies. Id. at 1460.” Allegis Group, Inc. at 29 .
Noting specifically the disparate views of the parties on whether they were actually competitors, the Business Court determined that it could not “conclude that Plaintiffs have to date shown an adequate factual predicate to justify issuing an injunction based on threatened inevitable disclosures.” Id. Thus, per Allegis Group, the roadmap for obtaining a preliminary injunction to preclude threatened misappropriation of trade secrets pursuant to the NCTSPA would appear to track the suggested requirements for demonstrating entitlement to inevitable disclosure:
- Limit requested relief to preventing disclosure or narrowing employment scope, as opposed to precluding employment with a competitor;
- Demonstrate high likelihood of disclosure;
- Identify alleged trade secret information with specificity;
- Demonstrate status of plaintiff and defendant as competitors; and
- Show that departing employee’s position with defendant bears a significant similarity to that which he held with the plaintiff.
The Allegis Group decision does not acknowledge that two of the three inevitable disclosure cases it discusses, Travenol and Merck, predate the adoption of the NCTSPA and its explicit authorization of the issuance of preliminary injunctive relief for threatened misappropriation of trade secrets. In the third case, Analog, there was no allegation of actual misappropriation of documents promoted as trade secrets (such as the download of information or the retention of pricing lists and agreements alleged in Allegis Group). Thus, there may yet be room to argue for enjoining an employee who has downloaded or otherwise absconded with confidential, trade secret information from using that information in the service of a subsequent employer prior to the ultimate conclusion of the case.