You can’t use your old employer’s trade secrets, even if you’re not competing.

Collelo v. Geographic Services, Inc., ___ Va. ___ (January 13, 2012) Geographic Services, Inc. (“GSI”) subcontracts with various United States government prime contractors, including the Boeing Company (“Boeing”), to perform what is known as “geonames” work. Geonames work involves entering data into a spreadsheet, sometimes thousands of items, referring to a map feature. Once all of the map feature information is collected and verified, GSI then submits the spreadsheet to the prime contractor or the United States government. As part of its business, GSI developed a method for identifying and correcting errors in the data entered into the spreadsheet. GSI claims that its method enables it to produce highly accurate data more efficiently than is possible without the method. GSI considers its method a proprietary, confidential trade secret, and GSI has undertaken efforts to keep the method secret.

GSI hired Anthony Collelo in 2006 and trained him to do geonames work using GSI’s confidential methods. When GSI hired Collelo, he signed (among other things) a non-compete, non-solicitation, and confidentiality agreement which prohibited Collelo from disclosing confidential information without GSI’s written consent, and from soliciting or performing “Conflicting Services” for a customer or contractor of GSI for a period of one year after his GSI employment ended. In early 2008, Collelo resigned from GSI and went to work for Boeing, a GSI customer, in a non-geonames capacity. By mid-2008, however, Collelo became part of a Boeing team that started work on a future Boeing-GSI geonames project. Within a few months after he started work with Boeing, Collelo wrote a memo to his supervisors that he had developed methods that would dramatically increase production and efficiency in Boeing’s geonames work. When GSI learned that Collelo was engaged in geonames work, GSI objected and advised Boeing that it believed that Collelo was in violation of his non-solicitation agreement.

After a failed attempt at settling the dispute, GSI sued Boeing (and one of its subsidiaries) and Collelo alleging that (1) Collelo had breached his contract by performing services for Boeing and disclosing GSI’s confidential information to Boeing, (2) that Boeing and Collelo had violated the Trade Secrets Act, and (3) that Boeing had tortiously interfered with GSI’s contract with Collelo. At the trial, GSI gave evidence establishing that its method was a trade secret. GSI also offered testimony from two experts regarding the amount that GSI’s value had decreased due to the actions of Collelo and Boeing, GSI’s cost to develop its trade secrets, Boeing’s unjust enrichment resulting from its use of GSI trade secrets, and the reasonable royalty to be paid for the disclosure and use of GSI’s trade secret. Both experts, however, acknowledged at the trial that their testimony was not offered to prove damages on either the breach of contract claim or the tortious interference claim. GSI also offered the testimony of a computer science expert, who gave his opinion that the software tool Collelo developed for Boeing was all but identical to the software tool that GSI used as part of its method and other evidence showing the substantial similarity between the GSI method and the method Collelo implemented at Boeing’s request.

After GSI had presented all its evidence, the trial court dismissed GSI’s entire case, reasoning that “even if Mr. Collelo had taken something, and [despite the fact that Boeing] was a customer of GSI, Boeing is not doing and has not been doing the same work as GSI.” While the trial court did conclude that “[t]here has been no loss of business to GSI,” and “[t]here has been no [showing] that Boeing has made more money because it has used these trade secrets,” it did so based on its conclusion that “[t]here is no way that the jury could find that Boeing has taken GSI’s secret in order to do the work that that secret was designed for.” With respect to the Trade Secrets Act, the trial court stated, “the reason for the rule is to avoid a person benefiting by doing the type of work which this trade secret enables to the detriment of the creator of the trade secret.” In other words, the court struck the case because there was no evidence that Boeing was competing with GSI.

On appeal, the Virginia Supreme Court agreed with the trial court that the lack of evidence of damages killed the plaintiff’s claims of breach of contract and tortious interference. With respect to the Trade Secrets Act claim, however, the Supreme Court disagreed with the trial court’s “faulty premise” that a Trade Secrets Act claim depends upon competition.

The Supreme Court stated that in order for a plaintiff to establish a violation of the Trade Secrets Act, two elements had to be proved. First, the plaintiff was obligated to prove that the thing at issue was a “trade secret,” which is a term defined in the Act. Second, the plaintiff must prove that the defendant “misappropriated” the trade secret. There was no dispute on appeal that GSI’s method of geonaming amounted to a trade secret under the Act. The Supreme Court noted, however, that the trial court had never made a finding, or allowed the jury to make a finding, that the acts of the defendants amounted to misappropriation.

There are two forms of misappropriation described in the Trade Secrets Act. Under the first definition, “misappropriation” is the “[a]cquisition of a trade secret of another by a person who knows or had reason to know that the trade secret was acquired by improper means.” Under the second definition, “misappropriation” means the disclosure or use of a trade secret, without permission, by a person who used improper methods to acquire it, or who disclosed or used the trade secret with knowledge that the trade secret was acquired improperly, or in confidence, or in breach of a duty, or by accident.

Significantly, though, the Trade Secret Act does not require the plaintiff to prove that the one who is accused of misappropriation used the trade secret to compete with the plaintiff. In this case, the Supreme Court held that once GSI had established that its method was a trade secret, all that GSI was required to show in order to recover against Collelo under the Trade Secrets Act was that Collelo disclosed (and Boeing used) GSI’s trade secret without GSI’s consent, that Collelo had reason to know that he had acquired the trade secrets in confidence, and that GSI suffered damages or was otherwise entitled to relief. Looking at the evidence that GSI had introduced at trial, the Supreme Court concluded that the evidence was sufficient for a reasonable jury to find that the defendants had misappropriated GSI’s trade secrets. The Supreme Court also suggested that the plaintiff had offered sufficient evidence to show damages, but hedged a bit and said that the reason for reversing the trial court was not based on the issue of damages, but on the trial court’s “faulty premise” for granting the motion to strike. The Court affirmed the trial court’s dismissal of the contract and tortious interference claims, and sent the Trade Secrets Act claim back for a new trial.

Justice McClanahan dissented from the majority’s ruling on the Trade Secrets Act claim and opined that the trial court had reached the right result, although for the wrong reason. In his dissent, he expressed the opinion that the plaintiff had the burden to show, with reasonable certainty, that its damages (if any) resulted from the misappropriation of the trade secret. Justice McClanahan disagreed with the majority and stated that the economic experts’ testimony did not establish that GSI had suffered any out-of-pocket loss, nor did the expert testimony establish either the value of the trade secret or any diminution in value as a result of the misappropriation. Moreover, wrote Justice McClanahan, there is no legal authority that supports measuring damages by diminished business value or trade secret development costs, particularly where the plaintiff remains a viable business, continues to use the trade secret method, and has not shown any lost profits as a result of the misappropriation. Justice McClanahan also concluded that the plaintiff’s evidence regarding unjust enrichment, or the value of a reasonable royalty, was also insufficient because of the flawed methodology of plaintiff’s expert.

The dissent is not binding authority on any court but it does illustrate a problem inherent in trade secrets cases. The Trade Secrets Act provides, as remedies for misappropriation, either money damages or injunctive relief. Money damages are measured by quantifying either the plaintiff’s actual loss or the defendant’s unjust enrichment resulting from the misappropriation. If the evidence of actual loss or unjust enrichment is too speculative or unavailable, the Trade Secrets Act gives the plaintiff a reasonable royalty as an alternate measure of damages.

The measurement of the plaintiff’s actual loss is typically the lost profit resulting from the misappropriation. (As the dissent pointedly noted, actual loss is not measured by diminution in business value or as the development cost of the trade secret.) Conversely, unjust enrichment is measured by the defendant’s increased profit resulting from the misappropriation. Each measure of damage requires that the effect of the misappropriation be taken in isolation from other factors, such as marketplace, political, technological, and other economic factors, but in reality those factors have an irremovable effect on a business’s profits. As the dissent put it, the evidence must distinguish between just enrichment and unjust enrichment. If the evidence does not make this distinction, then it is insufficient to prove the plaintiff’s damages.

If the plaintiff cannot prove lost profits or unjust enrichment, the Trade Secrets Act offers the alternative remedy of a reasonable royalty. The royalty is typically calculated by multiplying the defendant’s unjust profits by a percentage. As the dissent noted, however, a flawed or speculative unjust enrichment calculation will lead to a flawed or speculative royalty calculation.

The percentage also creates a problem. The dissent noted that the plaintiff’s expert had used a “rule of thumb” multiplier of twenty-five percent which, at the time of the trial, was generally accepted. Since that time, however, a federal court has discredited the 25% rule of thumb and held that it cannot be used to support expert opinion testimony regarding a reasonable royalty. Presumably, the “reasonable” percentage will now depend upon evidence of what a hypothetical arms-length negotiation between plaintiff and defendant would have yielded. Accordingly, a reasonable royalty calculation could be said to be the product of a profit estimate multiplied by a hypothetical percentage: in short, speculation based on conjecture.

The dissenting justice did not question that GSI’s method was a trade secret and did not question that it had been misappropriated. The problem was that GSI offered unsatisfactory evidence that the misappropriation had had an effect on either GSI’s profits or Boeing’s. The dissent would have ruled “No harm, no foul,” on the trade secrets claim, but the majority sent it back for a do-over, instead.

Leave a Reply