New Weapon for Michigan Employers for Protecting Against Unfair Competition and Trade Secret Theft
Michigan Companies were recently given a new tool for fighting back against trade secret misappropriation and unfair competition.
Specifically, in Actuator Specialties, Inc. v. Chinavare the Michigan Court of Appeals agreed with the trial court's determination that Actuator Specialties established a threat of misappropriation against its former employee and his new employer. This threat entitled it to an injunction prohibiting the former employee from working for any competitor of Actuator Specialties for three years.
As explained below, this decision is significant because the three year restriction on working for competitors was based on the Michigan Trade Secret Act rather than a noncompete agreement.
In this regard, Michael Khoury, a fellow business lawyer, noted that "This may be one of the first cases of this kind in Michigan relying solely on the [Michigan Trade Secret Act] ... most [court opinions] have relied on written employment or nondisclosure agreements."
At the time Chinavare ended his employment with Actuator Specialties he was employed as a general manager. While employed, Chinavare had copied Actuator's files onto a personal USB drive.
He later testified that he copied these files to be able to work after hours away from the Actuator's offices. Chinavare further explained that after copying these files to his USB drive that he realized his personal computer did not have a USB port so he kept the USB drive containing the files of Actuator Specialties at his house in a closet.
In 2008, Chinavare and two other Actuator employees quit and they begin working for a competing business called Renew Valve and Cleveland Valve & Gauge (Renew Valve). Shortly after this departure, Actuator Specialities discovered that only three days before their departure someone had accessed confidential files belonging to Actuator Specialties.
This discovery prompted the former employer to file its lawsuit and seek a Temporary Restraining Order (TRO) on 2/12/08. The TRO was issued on 2/15/08, which did not prohibit Chinavare from working for Renew Valve. But on 2/13/08, Chinavare uploaded the data on his USB drive onto his Renew Valve computer. He also altered certain Actuator file documents to reflect Renew Valve in the letterhead.
Computer Forensic Inspection Revealed Wide Spread Theft & Use
The theft of computer files was later discovered and resulted in Actuator Specialities hiring a computer forensics company to conduct an analysis of digital evidence. Notably, this forensic inspection extended to Chinavare's computers and Renew Valve's computers.
The inspection revealed hundreds of files in the possession of both Chinavare and Renew Valve that belonged to Actuator Specialties. It also revealed a missing or unidentified USB drive that had not been previously disclosed. This USB drive had been inserted into Chinavare's computer and later into four computers at Renew Valve.
After seven days of evidentiary hearings, the trial court issued a preliminary injunction enjoining Chinavare from working at RV or any similar competitor of Actuator Specialties for a three-year period, which was later converted to a preliminary injunction. The entry of this preliminary injunction was appealed by Chenevare only.
Trade Secret Theft Warranted a Three Year Injunction
In analyzing Chinavare's claim, the Court examined Michigan’s Uniform Trade Secrets Act (MUTSA), MCL 445.1901 et seq. Under this statute, Michigan courts are authorized to award injunctive relief for "actual or threatened misappropriation" of trade secrets.
In affirming the trial court's order for injunctive relief, the Court of Appeals noted that Actuator had showed that Chinavare (i) possessed its confidential information; (ii) had downloaded that information onto Renew Valve’s computer system; and (iii) used that information for the benefit of Renew Valve.
The Court further concluded that the evidence showed Renew Valve engaged in questionable behavior that showed a lack of trustworthiness (hiring three former employees away from Actuator at the same time and Renew Valve had used portions of a PowerPoint presentation created by Actuator as its own).
Take-Away for Michigan Employees and Employers
It is important to note that this opinion is unpublished, which means it does not have any precedential effect under Michigan law. Accordingly, another court is not required to follow the ruling.
Even so, this opinion may provide persuasive authority for another court and, therefore, there a number of significant issues that individuals and companies on both sides of the employment fence (e.g., companies whose employees are departing and companies making new hires) should consider in relation to trade secrets and protecting competitive business interests:
- First, for departing employees don't misappropriate company information. For employers of newly hired employees, don't encourage and don't allow misappropriated information to be used in your company. Such misappropriation may open the door for asserting computer fraud claims like those under the Computer Fraud and Abuse Act. And if you violate this rule, don't try and cover it up. Computer forensics - 11 times out of 10 (intentional hyperbole) - will uncover some type of "digital fingerprint" that will often point to unauthorized access of digital information. Covering up, i.e., deleting such evidence will often result in spoliation and sanctions, which is never a good thing.
- Second, the Court of Appeals opinion in Actuator Specialties assumes without discussion that information taken met the statutory definition of "trade secret." Presumably, however, trade secret status was established at the trial level and it was not challenged on appeal. But "trade secret" designation should not be assumed by either side. In defending companies and employees against trade secret misappropriation claims, I've had success in showing that information does not rise to the statutory definition of trade secret or that the party claiming trade secret protections failed to take the appropriate steps to maintain trade secret protections.
- Third, when it comes to new hires, a recommended practice for employers is to have the new employee confirm, in writing, that he or she is not subject to any noncompete agreements that would restrict the employee from accepting a position. But the Actuator Specialities case illustrates that more effort may be required of employers when it comes to new hires. Such efforts may include confirming a new hire has not improperly taken any information belonging to a former employer and make it clear that it is against company policy to use any such information. Upon learning that these efforts have failed, the new employer must promptly respond in order to limit its liability for trade secret misappropriation.
- Fourth, employers should follow the example set by Actuator Specialties. Specifically, shortly after the individual defendants terminated their employment on, an owner of Actuator Specialties - either by design or out of caution - made the stategic decision to investigate what, if any, company data may have been accessed or taken prior to its former employees departing. The results of this investigation provided the ammunition for Actuator Specailties to pursue its claims of trade secret misappropriation.
- Fifth, William Hazlitt wrote: "Wit is the salt of conversation, not the food." Similarly, Michigan employers should consider using the Michigan Trade Secret Act to prohibit former employees from working for competitors as the salt of a company's intellectual property protection plan, not the food. In other words, employers must bolster its chance of successfully protecting its competitive advantages and intellectual property by strategically using noncompete agreements (sometimes referred to as covenants not to compete) to protect against unfair competition by former employees. One reason for this point is that properly drafted noncompete agreements will provide broader protections than available only under Michigan's Trade Uniform Secrets Act.
Here is a link for additional recommendations and best practices for protecting company information from misappropriation or feel free to contact me about implementing a trade secret protection program, pursuing a trade secret/unfair competition claim, or defending against such claims.