Omni Direct v. Creative Direct Response (Cir. Ct. Mont. Co.)

Filed:  December 18, 2018

Opinion by: Judge Rubin

Holding:  Section 11-1207 of the Maryland Uniform Trade Secrets Act (MUTSA), which provides for both legal and equitable remedies in the event of a misappropriation of a trade secret, displaces common law claims that could be based on the same set of operative facts, even if “extra” facts are added to the other claims.

Facts:   Two direct mail marketing companies, Omni Direct (Omni) and Creative Direct Response (Creative), signed an NDA to pursue a business development collaboration for targeting the Hispanic community based on Omni’s expertise in this field.  Omni later sued Creative for allegedly using confidential information from Omni to start its own in-house Hispanic marketing program.

Analysis:  11-1207 of Maryland’s Commercial Law Article “displaces conflicting tort, restitutionary and other law…providing civil remedies for misappropriation of a trade secret.”  The purpose of this provision is to avoid pleading in the alternative if a Court decides during the trial that the information is not a trade secret.

This provision, adopted by other states from the Uniform Trade Secrets Act (USTA), has divided courts across the United States into three camps, although Maryland has not examined it in detail.  One, some courts throw out all duplicate common law claims, except contract-based remedies, even if the Court decides the information is not a trade secret.  Two, other courts allow a plaintiff to pursue other civil remedies in that lawsuit.  Three, a final group of courts take a middle of the road approach and displace other claims that are “based solely on the alleged misappropriation of a trade secret.”  Maryland courts have not had the opportunity to evaluate the displacement provision.

Here, the Circuit Court for Montgomery County dismissed Counts IV through VII because they were “grounded in the same core of operative facts” as Counts I through III which claimed a trade secret violation under MUTSA.  Adding “extra” facts and pleading in the alternative is exactly what the USTA sought to avoid with the displacement provision.

The full opinion is available PDF.

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.

Agora Financial, LLC, et al. v. Martin Samler

Filed: June 17, 2010

Opinion by Judge Beth P. Gesner.


Held: The Court held that the defendant did not (i) misappropriate plaintiff’s published investment recommendations since the plaintiff’s “hot news” misappropriation claim is preempted by federal copyright law, and (ii) unfairly compete with plaintiff by misleading consumers through false associations with the plaintiff and its investment recommendations.

Facts: Plaintiffs publish financial investment newsletters to paid subscribers, wherein financial analysts recommend broad investment strategies, identify specific investments and compile lists summarizing recommended investments.

Plaintiffs alleged that the defendant posted without authorization on his website the investment recommendations contained in plaintiffs’ publications and profited from theses postings by charging individuals access to his website.

Defendant’s website expressly disclaimed any affiliation, endorsement, or sponsorship by or with those analysts whose recommendations it reproduced or those analysts’ affiliated financial entities.

Plaintiffs submitted a Motion for Default Judgment after defendant failed to respond. The case was referred to the Court to submit a report and recommendation regarding the entry of default judgment and the appropriate amount of damages to be awarded to plaintiffs.

Analysis: On a Motion for Default Judgment, the Court must: (i) determine whether the unchallenged facts in plaintiffs’ complaint constitute a legitimate cause of action, and, if they do, (ii) make an independent determination regarding the appropriate amount of damages. The plaintiffs’ complaint failed to constitute a legitimate cause of action under either theory, and, thus, the Court did not address damages.
The central issue with respect to whether the plaintiff’s “hot news” misappropriation claim is legitimate is whether the claim is preempted by federal copyright law.

Copyright law protects author’s original works and grants the author the exclusive right to reproduce, distribute, perform, or display, which, in turn, “encourage[es] the creation of writings by authors” and to protect them rather than to reward them for their labor.

The common law “hot news” misappropriation theory “protects costly efforts to gather commercially valuable, time-sensitive information that would otherwise be unprotected by law.” International News Service v. Associated Press, 248 U.S. 215 (1918); See GAI Audio of N.Y. Inc. v Columbian Broad Sys., Inc. 27 Md. App. 172 (Md. Ct. Spec. App. 1975).

The main distinction between the two theories is that copyright seeks to protect “original” works, whereas “hot news” misappropriation seeks to protect “non-original” material, such as factual information.

Under Section 301, the Copyright Act preempts any state law (i) if the state rights are equivalent to any of the exclusive rights within the general scope of copyright . . . and (2) the work in which state rights are claimed falls within the subject matter of the copyright.

The Court analyzed the application of various tests used in connection with evaluating the preemption of the Copyright law by various state “hot news” misappropriation claims. The leading recent case involved Motorola publishing statistical information that is factual from NBA games in the Second Circuit. National Basketball Assoc. v. Motorola, Inc. 105 F.3d 841 (2d Cir. 1997).

In the NBA case, the Second Circuit adopted a test to evaluate whether a state “hot news” misappropriation claim is preempted by the federal Copyright law. The elements include: the plaintiff generates or gathers information at some cost or expense . . .; (ii) the value of the information is highly time-sensitive . . .;(iii) the defendant’s use of the information constitutes free-riding on the plaintiff’s costly efforts to generate or collect it . . . (iv) the defendant’s use of the information is in direct competition with a product or service offered by the plaintiff. . .; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened . . . The NBA court held that satisfying these requirements would push a claim outside of the general scope of copyright and be allowed to proceed.

The Fourth Circuit has never applied or discussed the NBA test, but this Court has expressly rejected it in a similar case stating that none of the “extra elements” of the NBA test constitute an “act” that is distinquishable from “the right to reproduce, perform, distribute or display a work” and therefore does not fall outside of the “general scope requirement” of Section 301. See Lowry’s Reports, Inc. v. Legg Mason, Inc. 271 F.Supp. 2d 737 (D.Md. 2003).

In this case, plaintiffs expressly based their “hot news” misappropriate claim on the NBA test, and claimed that this Court had only expressed skepticism of the breadth of the NBA test.

The Court rejected the plaintiff’s interpretation and stated that even if we applied the NBA test, the plaintiffs would fail because the plaintiff’s had not set forth factual allegations in their Complaint or any proof in their subsequent filings from which the Court could conclude that the material at issue in this case is “factual information.”

The Court reconciled its decision with the NBA test by limiting the NBA test to circumstances in which the material at issue must be “factual information” for it to form the basis of a “hot news” misappropriation claim.

Here, the recommendations of plaintiffs’ analysts to invest in a company are not fact, but instead an “original” work, which, in plaintiffs’ case, entails “judgment” and “creativity.” Plaintiffs employ their writers to exercise their professional judgment in recommending investments. Plaintiffs are not seeking to protect an exclusive right to profit or otherwise benefit from the labor they expend in generating, gathering, and compiling the “factual information” underlying those recommendations, e.g., the daily performance of one of plaintiffs’ analysts’ recommended stocks.

The Court noted that the plaintiffs could probably bring a cause of action under federal copyright law, but not under the common law “hot news” misappropriation theory.

Further, plaintiffs’ complaint failed to support a claim under Section 43(a) of the Lanham Act, which prohibits the use of any word, term, name, symbol, or device, etc., likely to cause confusion, or to cause mistake, or to deceive as to the origin, sponsorship or approval of one’s goods or services, or commercial activities.

Defendant’s website expressly disclaims any affiliation, endorsement, or sponsorship by or with those analysts whose recommendations it reproduces or those analysts’ affiliated financial entities by stating that “[Defendant] is no way affiliated with or endorsed by [plaintiff’s writers] or [plaintiffs] nor do[es] [Defendant] claim to represent the performance of their publication.”

The Court ruled that such disclaimer was sufficient to debunk any such confusion, mistake or deceit.

A copy of the opinion is available as a pdf.