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.

Cowan Systems, LLC v. Jeffrey Shane Ferguson (Maryland U.S.D.C.)

Filed:  August 3, 2012
Opinion by Judge Ellen Lipton Hollander

Held:  State law claims related to an employment agreement's confidentiality and non-soliciation provisions in the transportation industry are not preempted by the Interstate Commerce Commission Termination Act ("ICCTA") because the Act's preemption provision was created to ensure that the States would not undo federal deregulation with regulation of their own.

Facts:  Cowan Systems, LLC ("Employer"), a broker in the transportation industry, filed suit against Jeffrey Shane Ferguson ("Employee"), a former employee, for breach of his employment agreement, and Lipsey Logistics Worldwide, LLC ("Competitor"), also a broker in the industry, for tortious interference with contract, tortious interference with prospective economic advantage, violation of the Maryland Uniform Trade Secrets Act, and civil conspiracy.

Employee entered into an employment agreement with Employer that contained confidentiality and non-solicitation provisions prohibiting him from from ever disclosing Employer's business secrets and from soliciting Employer's customers for one year post-termination.  Employee resigned from Employer and began working for Competitor, a direct competitor of Employer's, the next day.  Employer alleges that Employee violated his employment agreement by communicating and soliciting Employer's customers on Competitor's behalf before and after his tenure with the company.  Employer also claims that both Employee and Competitor are causing an immediate threat to Employer's business.

Competitor filed a motion to dismiss based on the premise that state law claims are preempted the ICCTA which provides in part, "a State...may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier...or any...broker...with respect to the transportation of property."  Employer opposed the motion.

Analysis:  The USDC for Maryland denied Competitor's motion following the ruling in Aloha Airlines, Inc. v. Mesa Air Group, Inc., No. 07-00007, 2007 WL 842064 (D. Haw. Mar. 19, 2007), which found that an intentional tort claim was not preempted by the Airline Deregulation Act ("ADA"), a federal law in which the Supreme Court has recognized as having a preemption provision with identical scope as that of the preemption provision of the ICCTA.  The Aloha Court found that courts have upheld state tort claims against entities subject to the ADA when those claims do not contravene the law's purpose to promote competition in that industry.  That Court concluded that to find otherwise would indeed undermine the purpose of the ADA which was to ensure the components of the transportation industry relied upon competitive market forces.  It found that the ADA's preemption provision was to prevent the States from superceding federal deregulation with its own regulation.

The Court denied Competitor's motion to dismiss finding that the same principles in the ADA apply to the ICCTA preemption provisions.  The purpose of the ICCTA preemption provision was to promote competition within the transportation industry and to free it from state laws and regulations that could interfere with interstate commerce.  The fact that Employer's claims against Competitor pertained to pricing information "should not serve to insulate Competitor from liability" because it engages in brokerage services.  Congress never intended to shield individual bad actors from "thwarting competitive enterprise."

The full opinion is available in PDF.

Brass Metal Products, Inc. v. E-J Enterprises, Inc. (Ct. of Special Appeals)

Filed: November 30, 2009
Opinion by Judge Kathryn Grill Graeff

Held: To establish a claim for conversion, the plaintiff must first demonstrate that he or she had a property interest in property that was allegedly converted. Where the Defendant E-J Enterprises, Inc., ordered and paid for aluminum railings to store for Plaintiff Brass Metal Products, Inc., until Brass Metal requested delivery, E-J owned the railings until it sold them to Brass Metal. When E-J sold the railings to another company, it may have violated the business agreement between the parties, but its actions did not constitute conversion. The claim that E-J converted Brass Metal’s interest in the designs of the aluminum railings asserts intangible property rights. Conversion claims for intangible property rights are limited to situations where the intangible property rights are merged into a document that has been transferred. Where no such showing was made, the conversion claim failed.

Brass Metal alleged that, based on custom and usage, E-J converted the unpatented design of its railings. Brass Metal cites no case holding that custom and usage in an industry can create property rights that give rise to a conversion claim. Even if custom and usage could create property rights, Brass Metal failed to present sufficient evidence to establish that there was a uniform, definite, and well-established custom in the aluminum extrusion industry that a person who creates a die possesses a property right in the shapes created from the die.

Brass Metal failed to produce sufficient evidence to create a jury question regarding whether a confidential relationship existed between the parties, such that E-J had a duty to disclose its business dealings with Brass Metal’s competitor. Where two businesses are engaged in an “arms-length” transaction to further their own separate business objectives, a confidential relationship does not exist. E-J did not exercise the type of dominion and influence over Brass Metal that would establish a confidential relationship.

Facts: E-J, a wholesale metal distributor, entered into an agreement with Brass Metal to provide “just-in-time” inventory services, which entailed purchasing aluminum railings directly from aluminum extrusion mills, storing these railings, and selling them to Brass Metal as needed. The railings were designed by Brass Metal’s owner and President, James Burger, but Burger did not patent his railing designs.

In April 2006, E-J sold railings that were being held for Brass Metal to another company, Parthenon Installations. Thomas Martin, a Brass Metal salesman, owned a majority interest in Parthenon. In July 2006, when Burger discovered that Parthenon had established a manufacturing facility that was a “duplicate” of his facility, he fired Martin. Burger then requested that E-J stop selling railings based on Burger’s design to Parthenon. E-J declined Burger’s request and this lawsuit followed. Prior to trial, Brass Metal settled claims that it had brought against Parthenon, Martin, and Anastasios Pantoulis, another partner in Parthenon.

Analysis: At the outset of the opinion, the Court stated that:

Our review of the record, in the light most favorable to Brass Metal, reflects the following: (1) Brass Metal and E-J Enterprises entered into an agreement whereby E-J Enterprises would purchase railings from an aluminum extrusion mill and then supply the railings to Brass Metal as needed; (2) Brass Metal contacted mills and gave authority for E-J Enterprises to order railings from Brass Metal’s dies; and (3) Brass Metal may have given E-J Enterprises drawings of its designs to enable E-J Enterprises to order additional dies. Brass Metal points to no place in the record that supports its assertion that it gave E-J Enterprises dies, metallurgical formulas, trade secrets, or other confidential information.

As to Brass Metal's claim of conversion of its die designs, the Court found that Brass Metal did not obtain a property interest in the shapes and designs by custom and usage because custom and usage in an industry cannot create property rights that give rise to a conversion claim. Moreover, there would have had to be proof that the alleged custom and usage was “definite, uniform, well established, and so general that knowledge of it may be presumed . . . .” There was no such proof in this case.

As to the claim of conversion with respect to the aluminum railings, the evidence at trial established that E-J purchased aluminum railings from the mill, and it stored the railings until Brass Metal requested a delivery. Once the railings were delivered, Brass Metal was obligated to pay E-J within 30 days. Although selling the railings to other people may, or may not, have been contrary to the agreement between the parties, it did not constitute conversion.

As to Burger's claim of conversion of its dies, the Court found that Brass Metal failed to prove that E-J deprived Brass Metal's owner, the owner of the dies, possession of the dies.

With regard to various specific contracts and business relationships, the Court found that Brass Metal failed to adduce proof as to a number of the elements of tortious interference with contract.

As to the claim for deceptive concealment, the Court found that there was no confidential relationship between Brass Metal and E-J, since "[w]here businesses are engaged in an 'arm’s length' transaction, a confidential relationship does not exist."

Brass Metals also raised various evidentiary challenges, all of which were rejected by the appellate court.

Practice Pointers: Brass Metals could have avoided the problems it faced had it entered into appropriate agreements with E-J and its employees, such as Martin, and others, such as Pantheon, restricting their right to compete.

A copy of the opinion is available in PDF.

Glynn v. EDO Corp. (Maryland U.S.D.C.)

Opinion by Judge J. Frederick Motz
Filed July 23, 2009

Facts: Glynn sold assets of his company to EDO and signed a non-disclosure and confidentiality agreement and restrictive covenants. He went to work for EDO and worked with one James Martin. EDO ultimately discharged both Glynn and Martin who formed companies that began to compete against EDO.

Glynn brought this action against EDO alleging retaliation in violation of the False Claims Act, 31 U.S.C. § 3730 et seq., and wrongful termination. EDO filed counterclaims against Glynn and his wholly-owned LLC asserting numerous state law causes of action arising from Glynn’s alleged actions during and after his employment with EDO's corporate predecessor, including breach of contract, breach of fiduciary duty, misappropriation of trade secrets, conversion, defamation, tortious interference with advantageous relations, unjust enrichment, and civil conspiracy. While styled as a "cross-claim," EDO asserted similar claims against Martin.

Martin was not a resident of Maryland. He was served while in Maryland to file, pro se, a request for an extension of time to challenge EDO's assertion of the Court's ability to exercise personal jurisdiction over him.

Held:

1. Claim for conversion based upon alleged conversion “proprietary documents, employee information, technology design and schematics, contact lists, vendor and pricing information, and other trade secrets and non-trade secret proprietary and confidential information” are based on the misappropriation of EDO's information. Hence, such claims are subject to dismissal because such claims are preempted by the New Hampshire Uniform Trade Secrets Act (“NHUTSA”). Claims for conversion of physical property such as a desk or a chair is not preempted.

2. A claim for conversion by spending company time on matters for the company's competitors is also subject to dismissal because an employee's conduct on company time is not in the nature of a property or right which may be the subject of conversion.

3. EDO asserted that the alleged wrongful acts of Glynn and his company allowed them to “gain a head start” in developing and producing products, resulted in benefits such as profits, earnings, patent royalties, and commissions. Thus, EDO made a claim for unjust enrichment. Judge Motz denied the motion to dismiss of the unjust enrichment claim, holding that it was “premised on wrongdoing over and above” the misappropriation or misuse of EDO's information.

4. The Court denied the motion to dismiss claims of civil conspiracy because the allegations that Glynn et al. agreed and conspired to “misappropriate, defraud, and convert [EDO]’s proprietary and confidential information and trade secrets” and “unlawfully commit unfair competition and interference with [EDO]'s contractual and prospective business relationships” was sufficient to state a claim “where the elements of the claim require[d] some allegation or factual showing in addition to that which [formed] the basis for [the] claim of misappropriation of a trade secret.”

5. As to Martin, there were insufficient facts upon which to assert either general or long-arm jurisdiction. Martin's appearance in Maryland to request an extension of time to raise the jurisdictional defense does not constitute an implied waiver of the defense.

The opinion has been recommended for publication and the full opinion is available in PDF.