Sunday, June 11, 2017

Proexpress Distributors LLC v. Grand Electronics (Ct. of Special Appeals, Unreported)

Filed: May 24, 2017

Opinion by: Judge Glenn T. Harrell, Jr.

Holding:

Simply storing a “trade secret” in a cloud-based service is not sufficient to be considered reasonable to maintain its secrecy under Maryland law.  Reasonable efforts may include changing the password to the account after an employee leaves, limiting access on a “need to know” basis within the company, or restricting the dissemination of information with confidentiality or non-disclosure agreements.

Facts:

Plaintiff sells electronic products on Amazon.com.  Defendant is a competitor and was founded by a former employee of Plaintiff.  Plaintiff alleges it owns a trade secret in its “methodology by which it inputs information into the Amazon search template in order to drive sales for its online tablet computer business.”  Plaintiff keeps its trade secret, along with other business documents, in cloud-based password-protected accounts on the Internet.  Plaintiff shares access to the Dropbox accounts with its service providers.

On September 18, 2014, Plaintiff filed a complaint in the Circuit Court for Montgomery County for misappropriation of a trade secret.  Plaintiff asserted that a consultant of Defendant, who was a former employee of a service provider of Plaintiff, viewed the trade secret in Plaintiff’s Dropbox account in April 2014.

The Circuit Court ruled in favor of Defendant on the trade secret issue.  Plaintiff appealed to the Court of Special Appeals (Court), which affirmed the decision regarding the alleged trade secret.

Analysis:

Md. Code, Commercial Law Art. § 11-1201 states that a “trade secret” is “information… that (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

The Court upheld the Circuit’s Court decision in ruling that Plaintiff’s actions were not reasonable to safeguard its proprietary information involving a cloud storage service.  Cloud storage is a “backup and storage service on the Internet” whereby a “customer’s files are downloaded to anyone’s computer with a Web browser and password.”  Dropbox’s desktop applications allow customers to “easily move files from (their) computer to the cloud and vice versa by dragging and dropping them into (their) Dropbox folder.  The service automatically and quickly syncs (their) files across all of (their) devices, so (they) can access everything, everywhere.”

The Court contrasted Plaintiff’s efforts with the company in LeJeune v.Coin Acceptors, Inc., 381 Md. 288, 310-11, 849 A.2d 451, 464-65 (2004), which did not want its customers disclosing its pricing with other customers because it used a “tiered pricing scheme”.  The company acted reasonably under those circumstances by (1) negotiating non-disclosure agreements with its customers, (2) marking “confidential” on pricing and proposal documents, and (3) communicating to the employees in the company’s employee handbook that it required employees to protect the company’s secret manufacturing process and business methods.

The Court determined that merely uploading its proprietary methodology to a cloud-based program on the Internet is not a reasonable effort to protect the information.  The Court suggested ways in which a company can satisfy the second prong of § 11-1201 when information is stored in the “cloud”.  Examples of reasonable efforts to maintain the secrecy of Plaintiff’s methodology include (1) changing the password to the account after an employee leaves, (2) limiting access on a “need to know” basis within the company, and (3) restricting the dissemination of information with confidentiality or non-disclosure agreements.

The Court also reviewed whether the punitive damages award was excessive.

This is an unreported opinion.  See Md. Rule 1-104.

The full opinion is available PDF.

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