Trade Secret Laws
Alan L. Weldy
Many employers find themselves in situations where they have hired employees with prior experience gained by working for a competitor in the same industry. Courts in Indiana have long held that if an individual has knowledge of trade secrets, that individual can be held liable if those trade secrets are disclosed to another party. Under Indiana law, information which constitutes a trade secret includes information which has independent economic value and is the subject of reasonable efforts to maintain its secrecy. Although an individual who might misappropriate a trade secret can be held liable, until recently there was little guidance from the courts as to whether someone who might employ such an individual could also be held liable for the misappropriation of trade secrets.
In the case of Infinity Products, Inc. v. Quandt, 775 N.E.2d 1144 (Ind. Ct. App. 2002), the Indiana Court of Appeals addressed the issue of whether an employer could be held vicariously liable for the misappropriation of trade secrets by an employee. In that case, Quandt was an employee of a company acquired by Infinity. When Quandt’s employment was terminated, he took company materials, including confidential documents, and went to work for Fabri-Tech. Quandt discussed with Fabri-Tech the possibility of sending a mailing to customers he had developed while working for Infinity. Fabri-Tech did not permit Quandt to send a mailing, but did authorize him to telephone these customers. All of the customers contacted by Quandt shifted their business from Infinity to Fabri-Tech, in part because Quandt quoted prices to the customers which were slightly lower than the prices quoted by Infinity.
Infinity filed suit against Quandt and Fabri-Tech, alleging a violation of the Indiana Uniform Trade Secrets Act. The trial court found that Infinity’s cost and pricing information was a trade secret and that Quandt had misappropriated that secret information. The trial court found that Infinity’s actual losses due to Quandt’s misappropriation of this information totaled just over $300,000. Under the Trade Secret Statute, which allows an injured party to receive up to three times its actual losses, plus attorney’s fees, the trial court entered a judgment in favor of Infinity of just over $1,000,000. Following some additional hearings after the trial, the trial court ended up reducing the award to $763,253.24. This judgment was solely against Quandt, because the trial court dismissed Fabri-Tech under the theory that only Infinity’s former employee could be liable for misappropriating its trade secrets.
On appeal, Infinity argued that Fabri-Tech should also be held liable for the actions of its employee. The Court of Appeals agreed, ruling that as a matter of law Fabri-Tech should be held vicariously liable for the actions of Quandt. As a result, Infinity was granted the authority to pursue collection of its judgment against both Fabri-Tech and Quandt.
The court’s ruling in Infinity Products, Inc. v. Quandt illustrates the importance of exercising caution when hiring individuals who may have been employed by a competitor. It is important to make sure that such employees do not bring with them customer lists, pricing information, design drawings, strategic plans or other confidential information of the competitor. If you have any reason to believe that such an employee might have this type of information and might be using it to the detriment of their former employer, you need to immediately take steps to terminate the use of such information. Additionally, you may want to affirmatively document that sales calls were based upon existing customer lists, that pricing offered to customers is consistent with existing pricing practices, and take whatever other steps are reasonably necessary to ensure that your employees are not utilizing information that they brought from their prior employment. The failure to take such precautions may open you to claims from prior employers which could include claims for triple damages and attorney fees.
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Alan Weldy is an attorney of Counsel with the law firm
of Yoder, Ainlay, Ulmer & Buckingham, LLP in Goshen, Indiana, practicing
in the areas of business litigation, corporate law, and health law.
While information in this article is
believed to be accurate, it is educational and general in nature, and
should not be construed as legal advice. Please consult your attorney
for specific legal advice. Yoder, Ainlay, Ulmer & Buckingham, LLP
© 2006
Yoder,
Ainlay, Ulmer & Buckingham, LLP