IP Law Daily, TRADE SECRETS—4th Cir.: Trade secrets and computer trespass claims do not ‘arise’ from sales agent agreement for choice-of-law purposes, (Sep 4, 2024)

By Robert Margolis, J.D.

Jury verdict against former employee was vacated because law of the place where he committed “his offending” tortious conduct governs, not the law chosen for claims that “arise” from the parties’ agreement.

Tort claims for trade secrets misappropriation and computer trespass under Virginia law against a former employee who later signed an Independent Sales Agent Agreement should be governed by the law of Colorado, where the “offending conduct” occurred, despite the agreement’s choice-of-law provision selecting Virginia law for “[a]ny dispute that shall arise,” the U.S. Court of Appeals for the Fourth Circuit in Richmond has held. A jury verdict in favor of GMS Industrial Supply, Inc. finding its former Director of Sales and Independent Sales Agent Westly Greer liable for trade secret misappropriation and computer trespass was vacated and the case remanded to the district court to determine whether to grant a new trial applying Colorado law. The court designated the opinion as “Unpublished,” such that it is not binding precedent in the Fourth Circuit (GMS Industrial Supply, Inc. v. Greer, No. 22-2090 (4th Cir. Sept. 3, 2024)).

Secretly competing. GMS is a Virginia-based sales company, supplying industrial products to military bases. While serving as GMS’s Director of Sales, and while working remotely in Colorado, Greer secretly founded and operated two competitor companies. In January 2019, Greer quit the Director of Sales position, and GMS hired him as an independent sales agent. Unlike his prior employment agreements, the parties’ Independent Sales Agreement contained a choice-of-law provision, stating in relevant part:

This Agreement shall be governed by and construed in accordance with the laws of the State of Virginia without giving effect to any choice of law provisions. Any dispute that should arise will be handled accordingly. Both parties agree that the exclusive venue for any action … relating to or arising from this Agreement shall be in the state or federal courts located in Virginia Beach, Virginia …

When GMS learned of Greer’s secret competitive efforts, it terminated the Agreement, and sent him a cease-and-desist letter ordering him to return his GMS computers and cease using or disclosing GMS confidential information. While he eventually returned the computers, he downloaded and deleted thousands of GMS documents before doing so.

Virginia law claims. GMS brought Virginia statutory claims against Greer, for violation of the Virginia Uniform Trade Secrets Act, and Virginia’s computer trespass statute (the Virginia Computer Crimes Act). The jury returned a verdict for GMS on both claims. After trial, Greer moved for judgment as a matter of law, arguing that the claims were not cognizable because his offending conduct occurred in Colorado. The trial court denied the motion. Greer appealed.

Choice-of-law rules. As the case was brought in federal court in Virginia under diversity jurisdiction, Virginia’s choice-of-law rules applied. Virginia applies lex loci delicti, or “the law of the place of the wrong,” to determine the substantive law in tort suits. This means the place where the perpetrator committed the tort, which in this case was Colorado.

Virginia also allows contracting parties to choose the laws of a different jurisdiction in a contractual choice-of-law provision. Such a choice will override lex loci delicti and be given full effect, if the provision is deemed applicable to the claims. Greer argued the parties’ choice-of-law provision was inapplicable to the statutory tort claims against him, and the appellate court ultimately agreed.

“Arising” from. The court’s analysis focused on the language of the parties’ choice-of-law provision, in particular that “[a]ny dispute that should arise” will be governed by Virginia law. GMS argued that this provision governs “any dispute” arising between the parties, while Greer argued the agreement only covers claims arising from the agreement itself. The court found that Greer had “the better argument.” It reasoned that the choice-of-law provision’s “any dispute that should arise” language is “bookended” by two sentences referring specifically to the agreement. Reading those sentences together, the court concluded that the provision applies only to claims that relate to or arise from the agreement. It further noted that the parties could have expressly stated that the provision covers all claims between them, but did not.

The court then turned to the “trickier question” of whether the statutory tort claims against Greer relate to or arise from the agreement. The court read the provision to apply not only to contract claims, but also to contract-related tort claims. But the court did not agree with GMS that its trade secrets and computer trespass claims relate to or arise from the agreement. The court relied on a Virginia Supreme Court decision holding that a misappropriation of trade secrets claim did not qualify as an action relating to the parties’ contract for purposes of a contractual fee-shifting provision. Ulloa v. QSP, Inc., 624 S.E.2d 43 (Va. 2006).

The court also noted that both the Virginia Uniform Trade Secrets Act and the Virginia Computer Crimes Act impose duties and create separate remedies independent of any agreement between the parties, which further supports the conclusion that claims invoking those statutes do not arise under or relate to any such agreement. The court rejected GMS’s argument that because the agreement created the parties’ business relationship, claims arising out of that relationship necessarily arose out of the agreement. The agreement says nothing about Greer’s work technology or his duty to maintain files on his computer after termination. And while the agreement did state a duty not to disseminate trade secret information, the agreement does not define “trade secret.” As the court pointed out, it is the statute that provides that definition as well as for Greer’s liability for misappropriation.

Because the agreement’s choice-of-law provision does not apply, Virginia’s lex loci delicti rule dictates that Colorado law applies, not Virginia law, the appellate court held. Therefore, the district court should have granted Greer’s motion for judgment as a matter of law. The case was remanded to the district court to determine whether to grant a new trial applying Colorado law. “Though we acknowledge that Colorado’s statute of limitations may bar GMS’s Colorado trade secrets claim, we leave it to the district court to decide the issue in the first instance,” the appellate court said. And “even if Colorado’s computer crimes law doesn’t provide a standalone civil cause of action, as Virginia’s does, at least one court has held that a plaintiff can proceed on a Colorado negligence per se claim by alleging a violation of Colorado’s computer crimes law,” the court observed. The district court was directed to consider granting GMS leave to add a negligence per se claim.

The Case is No. 22-2090.

Judge: Agee, G.

Attorneys: Thomas S. Berkley (Pender & Coward, PC) for GMS Industrial Supply, Inc. Vera Kathleen Dougherty (McGuireWoods, LLP) for Westly L. Greer.

Companies: GMS Industrial Supply, Inc.; G&S Supply, LLC; Greer Group, LLC; Country Roads, LLC; Wartech Industries, LLC; HMC Supply, LLC

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