IP Law Daily, TRADE SECRETS—Tool maker wins key battle in trade secret lawsuit against rival and former employees, (Oct 31, 2023)

By George Basharis, J.D.

Lawsuit claims former employees stole proprietary project and bidding information that was then used by a competitor to solicit customers.

A machine tools designer has successfully established a claim of trade secret misappropriation against two former employees and a business rival, a federal court in California has determined in a mixed ruling. The rival is alleged to have utilized proprietary information stolen by these employees to solicit customers. The court found that the lawsuit adequately established that the tool maker possessed protectable trade secrets in project and bidding information, that the information was kept reasonably secure, that the former employees stole this information, and that the rival, who subsequently hired these employees, used the information to compete with the tool maker. In addition to pursuing a trade secret misappropriation under the Defend Trade Secrets Act (DTSA), the company also sued its former employees and their new employer for violations of the California Penal Code and the Unfair Competition Law. However, the state and common law claims in the lawsuit were preempted by the California Uniform Trade Secrets Act (CUTSA) and were subsequently dismissed (Tri Tool, Inc. v. Hales, October 30, 2023, Drozd, D.).

Tri Tool, Inc. specializes in the design of high-performance machine tools. The company carefully safeguards confidential project information, which includes customer lists, contact details, pricing guidelines, historical purchasing data, and customers’ business needs and preferences. Tri Tool also maintains sensitive and proprietary bidding information relating to costs and pricing. Access to this project and bidding information is restricted on a need-to-know basis, with additional security measures such as password protection and the requirement of confidentiality agreements for all employees.

Two individuals, employed by Tri Tool as technical service managers, had direct access to the company’s project and bidding information. Both individuals had signed confidentiality agreements and had been with Tri Tool for over a decade. However, in May 2022, these employees resigned. Tri Tool alleges that prior to their resignations, the employees spent months attempting to divert Tri Tool’s customers to Enerpac, a competitor, and stole physical hardware and electronic files from their company devices. The stolen information included company contacts and text messages stored on Tri Tool company phones. Furthermore, just before resigning, the former employees requested copies of their confidentiality agreements. Following their departures from Tri Tool, they were promptly hired by Enerpac.

Tri Tool sued its two former employees and Enerpac, contending that Enerpac intentionally targeted these employees for hire because of their access to Tri Tool’s trade secrets. The lawsuit asserted multiple claims, including misappropriation of trade secrets under the DTSA, receipt of stolen property, and allegations of unfair and fraudulent business practices under the California Penal Code and Unfair Competition Law. Additional claims for common law breaches of contract and duty of loyalty were included in the lawsuit. According to Tri Tool, the district court had supplemental jurisdiction over its state law claims because they stemmed from the same set of underlying facts.

Enerpac sought to dismiss the lawsuit, contending that Tri Tool’s DTSA claim lacked factual support and that its state law claims were preempted by the CUTSA. The court ruled in favor of Enerpac concerning the state law claims, but it denied the motion to dismiss Tri Tool's trade secret misappropriation claim under the DTSA.

DTSA claim. The court determined that Tri Tool’s project information, which encompassed customer lists, contact details, pricing guidelines, historical purchasing records, and insights into upcoming projects poised to generate future revenue, qualified for trade secret protection under the DTSA. Furthermore, Tri Tool asserted that the company restricted access to this information based on a “need to know” basis and implemented password protection.

Tri Tool also effectively alleged that its two former employees had direct access to this project information and misappropriated it, as exemplified by their alleged theft of files from Tri Tool’s electronic devices. These allegations put forth by Tri Tool reasonably suggested that Enerpac either knew or had good reason to believe that the project information was obtained by the former employees of Tri Tool through illicit means, and subsequently, Enerpac employed this information to solicit customers. Consequently, Tri Tool established a DTSA claim as it related to the company’s proprietary project information.

The court also found that Tri Tool’s proprietary data related to pricing and bid preparation for projects was eligible for trade secret protection. This bidding information had been cultivated over numerous years, and Tri Tool adequately demonstrated that the company had implemented reasonable measures to maintain the secrecy of this information. Given that the data held significant importance to the company’s operations, provided a competitive edge, and Enerpac’s access to it gave it an unfair advantage, the court rejected Enerpac’s argument that this bidding information could not be considered a trade secret due to some aspects of it, like pricing, being made public for specific projects. Moreover, the trade secret as claimed by Tri Tool extended beyond pricing data, encompassing comprehensive details related to the development of quotes and cost estimation for projects, a process that empowered Tri Tool to construct competitive bids.

The court further determined that Tri Tool had effectively established that its former employees and Enerpac had misappropriated Tri Tool’s proprietary bidding information. The court recognized that the same allegations pertaining to the theft of company files, customer contacts, and Enerpac’s actual or constructive awareness of the employees’ wrongdoing applied equally to both Tri Tool’s bidding information and project information. As a result, Tri Tool had sufficiently alleged misappropriation of the bidding information.

State claims. Nonetheless, the court sided with Enerpac regarding Tri Tool’s claims under the California Penal Code and Unfair Competition Law, determining that they were preempted by the CUTSA. This preemption was justified because these claims stemmed from the same core set of facts as Tri Tool’s misappropriation of trade secrets claim. The court also determined that CUTSA preemption extended to Tri Tool’s common law claims.

The Case is No. 2:22-cv-01515-DAD-KJN.

Attorneys: Dylan W. Wiseman (Buchalter, A Professional Corp.) for Tri Tool, Inc. Thad Hales, pro se. James Putman Carter (Jackson Lewis P.C.) for Enerpac Tool Group Corp.

Companies: Tri Tool, Inc.; Enerpac Tool Group Corp.

Cases: TradeSecrets CaliforniaNews