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Co. can’t sue contractor for stealing trade secrets

NEIH 042114_p09_HimelfarbA company that hired an independent contractor without requiring him to sign a confidentiality agreement could not later sue him for misappropriation of trade secrets, a Massachusetts Superior Court judge has decided.

The plaintiff company apparently had brought aboard the defendant contractor —the nephew of a customer who was negotiating to buy the company — to help run the business. When the negotiations fell through, the defendant resigned and allegedly absconded with customer lists, accounting records and other confidential information, leading to the misappropriation suit.

The defendant contended that he could not be held liable for misappropriation because the plaintiff had not taken sufficient measures to protect such information.

Judge Cornelius J. Moriarty agreed, rejecting the plaintiff’s argument that testimony from two employees that they understood the information to be confidential showed that proper steps had, in fact, been taken to protect the company’s trade secrets.

In granting summary judgment to the defendants, Moriarty said that there was no evidence of a policy regarding confidential information and that the company never required the defendant contractor to sign a confidentiality agreement, something that was undisputed. Furthermore, the judge said, one of the employees testified that the customer lists were available on the computer and that the plaintiff had advertised certain contracts on its websites.

The eight-page decision is C.R.T.R., Inc. v. Lao, et al.

‘Stark warning’

David Himelfarb of McCarter & English in Boston represented the defendant and his co-defendant uncle. He said the case illustrates one of the many pitfalls companies face when they classify workers as independent contractors.

“Because the company treated the defendant as an independent contractor instead of as an employee, the court decided that the company did not take adequate steps to protect its confidential information, such as price and customer lists, before disclosing the information to the defendant,” Himelfarb said. “Going forward, if a company wants to disclose confidential information to an independent contractor, it should, at a bare minimum, have the individual sign a confidentiality agreement.”

Business litigator Ilan D. Barzilay of Seyfarth Shaw in Boston said the case is a “stark warning” to small businesses that just because they believe something is confidential or a trade secret does not mean it actually is, even if it is the type of information that everyone would assume should be kept secret.

“Something doesn’t have to rise to the level of the secret formula for Coca-Cola to be important to an operating business, but if it’s important to you, you need to take explicit steps to protect it,” said Barzilay, who handles trade secret litigation.

Barzilay said C.R.T.R. may have had a different outcome had someone simply advised the company: “If this stuff is important to you, you should do something about it. Just sitting down and making the independent contractor know the rules of the game beforehand probably would have prevented the case from being thrown out on summary judgment.”

Barry A. Guryan, also a Boston trade secret lawyer, said the decision is a reminder that companies need to ensure confidential information is available only to those with a “need to know.”

“Companies should [also] be careful to prevent trade secrets and confidential information from becoming readily available either internally to employees or externally to customers or others through social media or otherwise,” said Guryan, who practices at Epstein, Becker, Green.

Anthony T. Panebianco of Wynn & Wynn in Raynham, Mass., represented the plaintiff. He declined to comment other than to note that his client intends to appeal the summary judgment.

Deal gone bad

Plaintiff CRTR is a company that recycles nonfunctioning electronics, otherwise known as “e-waste.”

Around 2007, defendant Jimmy Lao began purchasing e-waste from the plaintiff and reselling it to buyers in Asia. Lao eventually began negotiating to purchase CRTR and entered into a memorandum of understanding with the company in 2008.

In February 2009, Lao’s nephew, defendant Kenneth Lao, started working at CRTR as an independent contractor. One of his job functions was to help run the company.

Though Kenneth — who was working for another company, Honour Crown Asia, at the same time — was apparently exposed to confidential information, the plaintiff never required him to sign a confidentiality agreement.

On Aug. 1, 2011, Jimmy’s attorney sent a Chapter 93A demand letter to the plaintiff claiming that it had breached the terms of the memorandum of understanding by failing to provide him with an agreed-upon discount when he purchased e-waste.

Ten days later, Kenneth resigned from his position with the plaintiff.

On Aug. 17, 2011, the plaintiff sued the defendants in Superior Court, alleging misappropriation of trade secrets and confidential information and seeking an injunction barring them from using any such information.

The plaintiff also filed for a preliminary injunction that would require Kenneth to return all CRTR documents in his possession.

Brockton police subsequently seized Kenneth’s laptop, and his counsel delivered to CRTR three boxes of documents on Sept. 14. According to the plaintiff, however, Kenneth failed to send along all CRTR-related emails.

During a deposition, CRTR manager and director Peter Kopcych testified that both Kenneth and Jimmy misappropriated confidential information, including customer names, prices, information about the plaintiff’s business relationship with another company and accounting records.

The defendants filed for summary judgment, arguing that the plaintiff had failed to identify its alleged trade secrets with sufficient specificity and that it failed to take adequate steps to protect any alleged trade secrets or confidential information.

Problems with protection

Moriarty found that the plaintiff had, in fact, identified the allegedly stolen trade secrets with sufficient specificity to support a claim, including prices paid by the plaintiff and its customers, amounts sold and purchased, billing procedures, customer lists, business processes and workflow patterns, and pricing information.

“Furthermore, CRTR has put forth sufficient evidence to create a dispute of fact over whether such information provides it a competitive advantage … and to suggest such information is not known to others outside its business,” the judge continued.

Accordingly, Moriarty said, “it is likely that there is a genuine issue of material fact as to whether any of the purportedly misappropriated information is a trade secret.”

Nonetheless, the judge found that the plaintiff did not exercise the necessary vigilance required under Massachusetts law to protect the alleged trade secrets.

First, Moriarty noted, CRTR apparently knew Kenneth was working for Honour Crown Asia at the same time he was working for the plaintiff, yet it never required him or his uncle to sign a confidentiality agreement.

Meanwhile, Moriarty was unmoved by the plaintiff’s assertion that the depositions of two of its employees — who stated that they knew without being told that the customer lists were confidential and that they had been instructed not to bring work out of the office — demonstrated that the company had, in fact, taken measures to protect its interests.

“This is not adequate evidence [of sufficient protection measures],” the judge said, noting that there was no policy regarding confidential information, that neither defendant signed a confidentiality agreement, and that the plaintiff advertised some of its municipal contracts on its websites.

“CRTR has provided no evidence that it took measures to protect its purported trade secrets, such as its process for determining fair market value and obtaining customers, or its packaging and shipping methods,” Moriarty concluded, granting summary judgment for the defendants.

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