Confidential Information Regarding Clients in a Dynamic Internet Database Can Be Trade Secrets and Support a Nonsolicitation Agreement - Hackstaff & Snow, LLC

Confidential Information Regarding Clients in a Dynamic Internet Database Can Be Trade Secrets and Support a Nonsolicitation Agreement

In a recent Colorado case involving a debt collection agency that stored customer service information in a password protected web database, the Colorado Court of Appeals upheld the enforcement of claims for misappropriation of trade secrets and breach of a nonsolicitation agreement against a independent sales agent who left to work for a competitor.  The case reinforces the enforceability of properly drafted nonsolicitation agreements which support the protection of trade secret information.  It also provides some insight into how dynamically updated information accessed by a former employee is still trade secret information, even if the employer is unable to identify the specific information actually accessed by the former employee.

On February 17, 2011, the Colorado Court of Appeals released its opinion in the matter of Saturn Systems, Inc. v. Militare, No. 07CA2453, 2011 WL 543759 (Colo. Ct. App. Feb. 17, 2011).  Saturn Systems sued a former independent contractor sales agent, Militare, for accessing its confidential password protected on-line database to gain information on clients which Militare then used to solicit business for a competitor.  Militare had signed a sales agent agreement which provided in a single provision that Saturn’s client lists, sales materials, and proprietary information was confidential and could not be used to solicit Saturn clients on his own behalf, or that of others during the engagement, and for a year thereafter.

Background

After Militare was terminated from employment, he went to work for a competitor.  Saturn received word from a client (who also notably asked that their password to the web database be changed) that Militare had visited them to solicit business for debt collection services.  Saturn then hired a computer expert to investigate unauthorized access to the database.  The expert found multiple times Militare accessed confidential website pages after termination.  After sending a cease and desist letter, Saturn filed suit alleging misappropriation of trade secrets, breach of the nonsolicitation provision of the sale agreement, and requesting injunctive relief.

Trade Secret Misappropriation

The trial court found that the information accessed by Militare was trade secret information under CRS Sections 7-74-101 to 110.  Specifically, whether the information was trade secret was a fact question related to several factors including: (1) the extent to which the information is known outside the business; (2) the extent to which it is known to those inside the business, such as the employees; (3) the precautions taken by the holder of the trade secret to guard the secrecy of the information; (4) the savings effected and the value to the holder in having the information as against competitors; (5) the amount of effort or money expended in obtaining and developing the information; and (6) the amount of time and expense it would take for others to acquire and duplicate the information.  The trial court determined that (1) the information is confidential and not known outside of the business, either by competitors or the general public; (2) the real-time information is available only through the use of a client’s username and password; (3) access to Saturn’s database is strictly limited on a “need to know” basis; and (4) Saturn has taken reasonable efforts to maintain the secrecy of the information stored within its database.

Dynamic Information

Militare argued that because Saturn could not identify the specific information that he supposedly misappropriated, the court could not hold that the data at issue was trade secret information.  However, the Court of Appeals rejected this argument.  The court noted that the information at issue was dynamically updated and it was too high a burden to require presentation of the exact data taken by Militare when Saturn had already produced enough evidence to show the types and particulars of the data on the website as trade secret information.

Accessing the Website Enough

Militare also argued that there was insufficient evidence to show that he misappropriated any trade secret information.  Noting that under Colorado law, misappropriation only requires improper disclosure or acquisition of a trade secret–not actual use or commercial implementation of the trade secret, the court rejected Militare’s argument finding that because the trial court found he viewed the trade secret information on the website, he had misappropriated trade secrets.

Nonsolicitation

The court reviewed Colorado law in CRS Section 8-2-113 regarding restrictions on noncompete agreements and found that the restriction on solicitation of Saturn’s clients in the sales agreement was properly limited to the valid purpose of protecting trade secret information and therefore valid such that Militare had breached that term of the agreement.  The statute states that all noncompete agreements are invalid unless they fall under an exception listed in the statute.  One of the exceptions is to protect trade secret information.

The court noted that the nonsolicitation clause at issue was limited to protecting the specific trade secret information from disclosure and use.  This was enforceable under the statute.

Damages and Attorney Fees

Finally, the damages awarded for the misappropriation of trade secrets was only $525 which was made up of the investigation done by Saturn to determine if and when Militare had accessed the web database.  However, with this award, the court upheld the award of attorneys fees of closer to $70,000 against Militare based on the sales agreement provision that awarded fees to the party that succeeded in litigation.  The court also awarded attorney fees regarding the appeal based on the agreement’s terms.

Conclusion

This case helps to spell out some of the issues related to drafting contract terms and litigating trade secrets and nonsolicitation issues.  It is clear that the proper crafting of terms in the contract will go a long way to preserving a company’s ability to protect its trade secret assets like client lists and data about clients which it uses for advantage in soliciting business.

Uniquely, the Saturn Systems case also shows an example of how Colorado courts are willing to apply the general principles of trade secrets to new systems such as the password protected proprietary web based database created and maintained by Saturn.  Although the information was dynamically updated, the court allowed the evidence of what kind of particular information in the system to be sufficient to determine that it was trade secret information.

The case also illustrates how important it can be to include attorney fee provisions in an agreement.  While the only actual damages awarded was the cost of investigating the unauthorized access of $525, Saturn had crafted an agreement that tilted the potential benefit of successful litigation in its favor so it was in a position to proceed with litigation at an early stage to prevent the potentially immeasurable damages being threatened by its former sales agent.  While it is unknown if the fees will be recoverable from Militare, such a result is likely a deterrent to other persons in similar situation.