chevron-down Created with Sketch Beta.
February 22, 2021 Top Story

Misappropriation Litigants Must Show Evidence of Impropriety

Mere use of trade secrets by departing employees insufficient for UTSA breach

By Michael Stefanilo Jr.

An appellate court has ruled that a startup competitor of tech giant Apple Inc. failed to satisfy its burden of proof in establishing a misappropriation claim based on its former employees’ retention and use of purported trade secrets. The ruling highlights public policy considerations favoring free mobility of employees, while also revealing strategies that practitioners may employ to protect their clients when their employees depart for a competitor, according to ABA Litigation Section leaders.

The tech giant Apple was sued for retaining employees of a startup competitor without compensating the startup

The tech giant Apple was sued for retaining employees of a startup competitor without compensating the startup

iStockphoto by Getty Images

Multi-Round Acquisition Negotiations Falter

In Hooked Media Group, Inc. v. Apple Inc., Hooked Media Group, Inc. sued Apple alleging misappropriation of trade secrets under the Uniform Trade Secrets Act (UTSA), among other things. Apple had sought to acquire Hooked’s team of engineers, but Hooked preferred “acquisition possibilities” of a larger magnitude, including the sale of its technology and market share. Apple declined to purchase Hooked but indicated that it might be interested in paying a “finder’s fee” for the engineering team as part of an “acqui-hire.” Instead, Apple proceeded to contact and retain three Hooked employees, including its chief technical officer, without providing Hooked with any compensation.

The trial entered summary judgment in favor of Apple. Hooked appealed to the Sixth District Court of Appeals for the State of California, one of 47 states and the District of Columbia to adopt the UTSA.

Improper Acquisition Requires More Than Just Evidence of Use

The appellate court affirmed the entry of summary judgment. Hooked unsuccessfully argued that Apple had misappropriated two types of its trade secrets by poaching its employees: “(1) technical information, such as algorithms and app recommendation strategies; and (2) information about the makeup and skills of Hooked’s core engineering team.” In rejecting Hooked’s claims, the court reasoned that there was insufficient evidence that former Hooked employees possessed trade secret information, or even that these same employees drew on such knowledge in furthering Apple’s corporate interests. The court explained that under the UTSA, mere possession of trade secrets by a departing employee was simply not enough to “meet the standard for improper use or acquisition.”

The court further relied on public policy considerations of free employee mobility in rejecting Hooked’s arguments. “Allowing an action for trade secret misappropriation against a former employee for using his or her own knowledge to benefit a new employer is impermissible because it would be equivalent to retroactively imposing on the employee a covenant not to compete,” the court opined. In reaching its conclusion, the court followed past precedent in rejecting the “inevitable disclosure” doctrine, “under which a claim for trade secret misappropriation is stated if an employee’s new job will inevitably lead to reliance on the former employer’s trade secrets.”

Learning Lessons the Hard Way

In light of strong public policy considerations favoring employee mobility, in addition to the power disparities often present in trade secret litigation, Litigation Section leaders offer some suggestions and lessons learned from the court’s opinion. “This decision is characteristic of how California has balanced employee mobility versus protection of confidential information—heavily tilted toward employee mobility,” observes Chad S.C. Stover, Wilmington, DE, cochair of the Section’s Intellectual Property Litigation Committee. “One problem with this approach is that it becomes more difficult to prevent a competitor from stealing confidential information by merely hiring away top employees,” explains Stover.

Section leaders advise that companies, especially startups like Hooked, take various precautions to avoid the same fate, such as entering into a nondisclosure agreement prior to negotiations. “Hooked could also implement better policies on protecting trade secrets and limiting the disclosure of the company’s most important trade secrets to a smaller group of employees,” Stover suggests. “Another approach would be to seek patent protection to the extent possible,” he adds, recognizing that such protection would be “limited in duration.”

Having a nondisclosure or nonsolicitation agreement in place is also a mitigation measure that Section Leaders agree can be beneficial in similar situations. “Rejection of the inevitable disclosure doctrine is not good for businesses,” opines James D. Abrams, Columbus, OH, cochair of the Section’s Commercial & Business Litigation Committee. “However, employees cannot unlearn the skills they’ve developed over time so the best way to protect the employer and employee is to require a noncompetition agreement so that a situation like Hooked could not occur,” he explains.

According to Section leaders, the erosion of the inevitable disclosure doctrine in jurisdictions such as California supports the need for caution when entering into negotiations similar to those at issue in this case. “[Hooked] should not have proceeded without a [nondisclosure] or a nonsolicitation agreement,” Abrams observes.

Despite Hooked’s failure to take adequate precautions, the risk of litigation “is not acceptable to most companies, and it will deter this type of conduct in the majority of M&A discussions,” Stover predicts. However, whether this decision potentially functions to chill future acquisition negotiations between startups and established technology companies remains to be seen.

Michael Stefanilo Jr. is a contributing editor for Litigation News.

Hashtags: #tradesecrets #nondisclosure #misappropriation #intellectualproperty #UTSA


Copyright © 2021, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Litigation Section, this committee, or the employer(s) of the author(s).

The material in all ABA publications is copyrighted and may be reprinted by permission only. Request reprint permission here.