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Court Applies Inevitable Disclosure Doctrine to Defend Trade Secrets Act Case

In Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16 C 03545, 2017 WL 1954531 (N.D. Ill. May 11, 2017), a federal court in Illinois was asked to decide whether the complaint before it alleged sufficient facts to support a claim under the federal Defend Trade Secrets Act (“DTSA”) and the Illinois Trade Secrets Act (“ITSA”). In finding that the plaintiff corporation alleged facts sufficient to survive a motion to dismiss, the court relied on the inevitable disclosure doctrine to conclude that the complaint should survive.

In Molon Motor, Manish Desai (“Desai”) was the Head of Quality Control for Molon Motor & Coil Corporation (“Molon”), a company that made fractional and sub-fractional electric motors and gear motors that served various industries. Desai’s job duties included overseeing product liability testing, coordinating the production of engineering data, and processing quality assurance test results, among other things. While employed by Molon, Desai signed an employment agreement that precluded the unauthorized use of company data. Molon viewed this commitment as important, as Desai allegedly had access to all of Molon’s trade secrets and other confidential business information.

Desai eventually resigned from Molon to perform similar job duties for Merkle-Korff, a competitor of Molon. Merkle-Korff later became Nidec Motor Corporation (“Nidec”), also a competitor of Molon. Before leaving his employment with Molon, Desai allegedly copied onto a Kingston portable data drive many of Molon’s trade secrets and other confidential business information, including engineering, design, and quality control files, as well as communications with customers.

Molon sued Nidec under the DTSA and ITSA, alleging that Desai unlawfully disclosed to Nidec Molon’s trade secrets and that Nidec used and continued to use those trade secrets. Nidec filed a motion to dismiss, arguing that Molon did not sufficiently allege a “misappropriation” under either statute and, even if a misappropriation was alleged, there was no basis to infer that Nidec accessed or used any of the information allegedly misappropriated.

The court analyzed the two statutes together, noting that both the DTSA and ITSA used very similar definitions. Nidec argued that no “misappropriation” could have occurred under the facts alleged by Molon because Desai allegedly copied the data while he was still employed by Molon, meaning he was authorized to access the files and did so using his Molon username and password. In other words, Desai could not have taken any trade secrets by “improper means.” Molon countered, and the court agreed, that Desai was on notice through his employment agreement that he could not use Molon’s confidential business information for any purpose other than to perform his job duties for Molon and, because Molon did not use or provide flash drives to employees to access its computer network, it was reasonable to infer that any copying by Desai of Molon’s confidential information was not for Molon’s benefit. Upon reaching this conclusion, the court found that it also was reasonable to infer that Desai copied the information for the benefit of his future employer, which would mean that Desai acquired the trade secrets through “improper means.”

The court then analyzed whether Molon adequately alleged that Nidec (as opposed to Desai) acquired Molon’s trade secrets. Nidec argued that Molon did not include any specific allegations in its complaint to support such a finding. Molon countered that it did not need to be specific at this stage of the proceeding, as the acquisition could be inferred pursuant to the inevitable disclosure doctrine. Under the inevitable disclosure doctrine, which is not recognized in every state, a plaintiff may prove misappropriation of a trade secret where a defendant’s “new employment will inevitably lead him [or her] to rely on the plaintiff’s trade secrets.” To allow such an inference, courts consider (1) the level of competition between the new and former employer, (2) whether the employee’s position with the new company is comparable to the position the employee performed for his/her former employer, and (3) the actions the new company has taken to prevent the former employee from using or disclosing the former employer’s trade secrets.

With respect to the first factor, the court found that Molon sufficiently alleged that it and Nidec were direct competitors in the same markets. With respect to the second factor, Nidec argued that Desai’s work in quality control, as opposed to design for example, did not involve trade secrets and other confidential business information. The court, however, found that Desai’s work in quality control did not preclude him from having access to trade secrets and other confidential information, as “employees of all stripes have been found to fit the bill” when it comes to trade secret cases. Furthermore, the court noted that Desai was the Head of Quality Control, which was not a “low-rung position,” but, instead, was a “broad role with a far-reaching set of tasks” that plausibly could include access to and use of trade secrets. Thus, the court found that Molon adequately alleged that Desai performed similar job duties for Nidec as he did for Molon and those duties could have involved access to and use of trade secrets. As for the third factor, the court found the record was silent, which was not surprising at the motion to dismiss stage because a complaint is not likely to allege what, if anything, a competitor did to safeguard against using a competitor’s trade secrets. Thus, the court did not hold the absence of allegations in this regard against Molon.

Lastly, the court addressed Nidec’s argument that, with respect to the DTSA claim, Molon did not allege any wrongful acts occurred after the effective date of the DTSA (May 11, 2016). The court couched the question as whether the inevitable disclosure doctrine allows an inference of continued use, which in this case would extend beyond the effective date of the DTSA. While the court cautioned that complaints should not stack inferences on top of inferences, the court found that the inferences were reasonable in this case. In this regard, the court found that the trade secrets at issue were not the kind to go stale in a relatively short period of time. The trade secrets at issue involved motor designs and related quality control data – the kind of information that likely will remain relevant for years to come. Thus, it was reasonable to infer a continuing use and that the trade secrets were used after the effective date of the DTSA. As a result, the court held that the complaint stated a claim upon which relief could be granted and, thus, the motion to dismiss was denied.

The court’s decision in Molon Motor is significant for multiple reasons. First, it is an important reminder about the utility of the inevitable disclosure doctrine for companies seeking to protect against the misappropriation of trade secrets. Second, with a federal court applying the inevitable disclosure doctrine under the DTSA, it opens up questions as to whether and how courts from jurisdictions that have rejected the inevitable disclosure doctrine (such as Maryland) will apply the doctrine, at least at the federal level in connection with the DTSA. Third, the court’s decision in Molon Motor illustrated how the nature of a trade secret could affect the degree of protection it receives. In this regard, the court in Molon Motor recognized that design plans are likely to have a longer utility than perhaps some other type of trade secret and, thus, the court inferred that the defendant in this case, Nidec, likely was using the trade secret for an extended period of time.

If you have any questions regarding this post, please contact Stephen B. Stern at sstern@hwlaw.com or (410) 260-6585.

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