A business that does not take reasonable steps to protect its confidential information while using Zoom cannot receive trade secret protections, according to the Court of Chancery of the State of Delaware. The court noted that a failure to use Zoom’s safety features, such as requiring a password for access to a meeting or placing participants into a waiting room while verifying identity, led to confidential information not being protected. ABA Litigation Section leaders agree that the case is a stark reminder that businesses using video conferencing platforms must implement adequate privacy and safety protocols.
The conflict in Smash Franchise Partners, LLC v. Kanda Holdings, Inc. began when Todd Perri expressed interest in a mobile trash compaction business franchise operated by Smash Franchise Partners, LLC, and Smash My Trash, LLC. After learning about the franchisee opportunity, Perri had several calls on Zoom, a video conference platform, with Smash contractors and franchisees to learn about the company. To proceed in the franchisee process, Perri had to sign a nondisclosure agreement (NDA) and did so. After executing the agreement, Perri and his colleague decided they would use their engineering and business backgrounds to form their own mobile trash compaction business called Dumpster Devil LLC, while Perri would continue to attend Smash’s meetings to gather information.
Consequently, Smash filed suit and sought a preliminary injunction to stop Dumpster Devil from doing business, or alternatively, to enjoin Dumpster Devil from making false comparisons between the two companies’ products and using the “Smash My Trash” trademark in marketing campaigns.
Under Delaware law, “to obtain a preliminary injunction, a plaintiff must demonstrate (i) a reasonable probability of success on the merits, (ii) a threat of irreparable harm if an injunction is not granted, and (iii) that the balance of the equities favors the issuance of an injunction.” The court explained that the elements are not weighed equally and a strong showing of one element can overcome the weakness of another element. However, a failure of proof on one of the elements will defeat the injunction request.
After analyzing each cause of action on its reasonable probability of success, the court denied “business-stopping” injunctive relief to the plaintiffs. The court stated that while the defendants “engaged in disingenuous and underhanded conduct,” the information that plaintiffs sought to enjoin defendants from using was (i) made publicly available by the defendants, (ii) not Confidential Information within the meaning of the NDA, or (iii) not a trade secret.
The crux of the court’s ruling was rooted in the plaintiffs’ lack of proper protection of trade secrets. The court explained that for information to qualify as a trade secret, it “must both derive independent economic value from not being generally known or readily ascertainable and be subject to reasonable efforts to maintain its secrecy.” The court concluded that even if some of the information, such as business routes and pricing models, gave the defendants an independent economic advantage over its competitors, the defendants did not take reasonable steps to protect the information’s secrecy.
The court pointed out that the defendants freely provided the Zoom meeting information to anyone that expressed interest, did not use the password-protection feature for the meetings, or the waiting room feature to screen attendees. Additionally, the court found that the defendants did not follow their own procedures and take roll at the beginning of each call or remove anyone who did not belong. There was also no indication that the twenty participants in defendants’ meeting signed NDAs.
Because much of the information at issue was either made public by the plaintiffs or left unprotected, the court ruled that a broad “business-stopping” injunction was unwarranted and disproportionate. However, it also determined the plaintiffs had made the requisite showing for a “targeted” injunction to prevent the defendants from making false or misleading statements regarding plaintiffs’ products.
Litigation Section leaders agree that the Smash case highlights the need for practitioners to apply foundational concepts to new technology. “Translate brick and mortar trade secret practices into the virtual settings,” advises Nicole D. Galli, Philadelphia, PA, cochair of the Section’s Business Torts & Unfair Competition Committee. “The nature of the electronic medium makes it easier for people to overlook simple protections many would not overlook in a physical setting. In person, there are checks and balances in procedures for protection. So, now, we need heightened protection while online,” states Galli.
Businesses and practitioners should develop safety protocols for virtual meetings, especially when discussing confidential information. “The best practice would be to take attendance, and gather the information of individuals, before inviting attendees into a room to hear your product,” says Gregory S. Bombard, Boston, MA, cochair of the Trade Secret Litigation Subcommittee of the Section’s Commercial & Business Litigation Committee. “This case is an excellent example of how all businesses, clients, and trade secret lawyers need to think about how new technology may be applicable to old advice. Make sure to be intentional about updating agreements, training employees, and addressing new technology,” advises Bombard.
