Publications & Articles

Reproduced with permission from BNA's Patent, Trademark & Copyright Journal, Vol. 68, No. 1676, June 18, 2004, pp. 181-182. Copyright 2004 by The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.

A decision by a Minnesota state district court finding willful misappropriation of trade secrets faults the defendant for failing to ask an employee for evidence that he independently developed a product after being put on notice by the plaintiff that there was a potential trade secrets issue. As a result, employers should take steps when hiring to ensure that they avoid any potential misappropriation liability.

BY SCOTT J. SLAVICK

In a potentially ground-breaking case, a state district court in Minnesota has ruled that companies cannot put blinders on when hiring new employees who may possess their former employer's trade secrets. Claiming you had no idea that your new employee was bringing trade secrets from their former employer is apparently no defense to a trade secret misappropriation claim. It could potentially open up your company to liability ranging from attorneys' fees to exemplary damages. In the Minnesota case of Scott Equipment Co. v. Stedman Machine Co.¹, Scott Equipment Co. sued its competitor, Stedman Machine Co., over the design and development of similar industrial grinders. In its complaint, Scott claimed that Stedman willfully and maliciously misappropriated detailed drawings of Scott's grinder, in violation of the Minnesota Uniform Trade Secrets Act² and Minnesota's common law of unfair competition. The case was before the court on Stedman's motion for summary judgment but was denied for several reasons.

Former Employee Joined Competitor

Scott designed and developed its grinder from 1993 to 1994. Among the engineers who had worked on the project were William Luker and Rick Nelson, both of whom were Scott employees, and an outside consultant, David Phillips. In 1995, Luker left his employment with Scott and formed his own company. Shortly thereafter, Nelson resigned from Scott to join Luker. Within two years, Luker agreed to design and develop a grinder for Stedman, and an agreement for the project was drawn up between Stedman, Luker, and a company created by Luker called Midwest Mill Parts. By May 1998, Luker completed a set of drawings for Stedman, which unveiled a prototype of its grinder at a trade convention. Within days of seeing the prototype at the convention, Scott contacted Stedman and accused it of copying Scott's grinder. Communications between Scott and Stedman continued through September 1999. Meanwhile, in May of the following year, Stedman, Luker, and Midwest Mill entered into an agreement whereby Stedman agreed to purchase the Midwest Mill drawings. The agreement included a representation by Luker and Midwest Mill that they had not used any of Scott's intellectual property in creating the drawings. After purchasing the Midwest Mill drawings, Stedman used them to produce its grinder. Scott brought this action in Minnesota state court in April 2001, alleging that Stedman had misappropriated Scott's trade secrets related to its grinder.

Judgment in Plaintiff's Favor

The Minnesota trade secrets statute authorizes an action for relief and damages against any person who misappropriates a trade secret.³ If the misappropriation is willful and malicious, the owner of the trade secret can also recover exemplary damages and reasonable attorneys' fees.⁴ Scott claimed that the drawings of its grinder were trade secrets, and that Stedman - through Luker, Nelson, and Phillips - willfully and maliciously misappropriated the drawings, allowing Stedman to design and develop its grinder. In Stedman's motion for summary judgment, it was argued that: (1) the drawings were not trade secrets, (2) Stedman did not misappropriate the drawings, and (3) even if the drawings were trade secrets and Stedman misappropriated them, the misappropriation was not willful and malicious. The court held in short order that the drawings were trade secrets. It is the theory upon which the court held that the trade secrets were misappropriated that bears analysis.

Objections Gave Notice of Problem

Scott's theory was that Stedman knew or had reason to know that the Midwest Mill drawings contained Scott's trade secrets when Stedman acquired and used the Midwest Mill drawings to produce its new grinder. Apparently, when Stedman first contacted Luker, Stedman knew that Luker had worked to design and develop Scott's grinder. Stedman also knew of the potential litigation between Scott and Luker regarding Luker's work on Scott's grinder. Almost immediately after the debut of Stedman's prototype grinder, Scott accused Stedman of copying its grinder. Scott repeated the accusation in several calls and letters. In fact, Stedman's president admitted that he was 'inundated' with communications from Scott during this period. In these letters, Scott informed Stedman of its suspicion that Scott's former employees had been involved in designing and developing the prototype of Stedman's grinder. Despite being put on notice of the possibility that the information in Scott's drawings had been used to create the Midwest Mill drawings, Stedman never asked Luker for any evidence to corroborate Luker's representations that he had independently created the Midwest Mill drawings, never asked an engineer to review the Midwest Mill drawings to determine whether they had been independently developed, and, aside from obtaining oral and written assurances from Luker that he had not used Scott's drawings, did not conduct any investigation into the matter. According to Stedman's president, his company did not know, and never asked, whether anyone helped Luker create the Midwest Mill drawings. The court held that viewing this evidence in the light most favorable to Scott, seeing as it was Stedman's summary judgment motion, a rational fact finder could find that Stedman knew or had reason to know that the Midwest Mill drawings contained Scott's trade secrets. The final issue raised with respect to Scott's MUTSA claim was whether, assuming the information in Scott's drawings constituted a trade secret and that Stedman misappropriated it, the misappropriation was willful and malicious. The court concluded that the abovereferenced evidence regarding misappropriation could support a finding in Scott's favor on this issue as well.

Employers Must Ask Questions

So what does this mean? For starters, companies should check to see if new employees have any previous employment agreements that need to be honored. They should ask if new employees have any restrictive covenants or confidentiality agreements that limit what they can and cannot do at the new company. And they should verify that new employees have not brought any proprietary information from their previous company to their new offices. It appears as though some courts are not going to follow the old adage 'hear no evil, speak no evil, see no evil.' If this precedent catches on, companies guilty of pretending not to notice or relying on general representations from new employees that they were not aware of any trade secrets from their prior job may not escape liability in trade secrets cases. If you have reason to believe a new employee may have been exposed to a competitor's trade secret during a previous employment, get it out of the way before it becomes a problem. Conduct in-depth interviews geared at ferreting out exactly what your potential new employees know and what they can and cannot divulge. If you have reason to believe something might be wrong, it may be your duty to investigate it. A court's ruling against you is not the time to start investigating what your employees might have taken with them. Take a proactive approach and avoid Stedman's fate.

Scott J. Slavick is a litigator at the intellectual property law firm Brinks Hofer Gilson & Lione, Chicago.

¹ 2003 U.S. Dist. LEXIS 13514 (Minn. Dist. Ct. July 31, 2003).

² Minn. Stat. ch. 325C (2002).

³ See Minn. Stat.