HR Management & Compliance, Recruiting

6th Circuit Rules on Stolen Trade Secrets, Noncompetes

The U.S. 6th Circuit Court of Appeals (whose rulings apply to all Ohio employers) barred two former employees from using stolen trade secrets for their new business but vacated the lower court’s judgment enforcing a three-year noncompete agreement because the employer hadn’t proven the restriction was reasonable.

Facts

Jeffrey Wilson and Joseph Russo formerly worked at RECO Equipment Inc., an Ohio company that sells, leases, repairs, and rebuilds heavy construction equipment in numerous states. Wilson signed an employment contract in which he agreed to:

  • Never use or disclose RECO’s confidential information;
  • Return all of the employer’s tangible and intellectual property (including his cell phone) if he were ever to leave the company; and
  • Comply with a noncompete provision that prohibited him from competing with RECO within 50 miles of its territory for a three-year period if he were ever to leave.

Russo didn’t sign an employment contract.

Wilson subsequently left and started his own competing company within 50 miles of RECO’s territory. He didn’t return his cell phone. He also retained confidential and proprietary information about the accounts he had managed at RECO.

Around the same time, Russo left RECO and joined Wilson’s new company. Before he left, an IT technician discovered he had downloaded hundreds of files, copied them into Dropbox, and transferred them to his personal e-mail address.

Wilson also had forwarded a link to a Google Drive account containing RECO’s confidential information to his e-mail address at the new company. RECO estimated he had accessed more than 400 files and folders containing confidential information about its customers, finances, and manuals.

RECO sued Wilson and Russo in federal court for breach of contract and misappropriation of trade secrets. The trial court immediately ordered Wilson to return his cell phone and stop competing with RECO for a 90-day period.

After a hearing, the trial court ordered Russo and Wilson to return the stolen trade secrets RECO and preliminarily barred them from using the information to solicit its customers. The court also entered a preliminary injunction requiring Wilson to comply with his noncompete agreement until the lawsuit was resolved.

Wilson and Russo appealed the trial court’s ruling. The 6th Circuit affirmed the preliminary injunction with respect to the trade secrets claim but reversed it for breach of contract claim (i.e., the noncompete agreement).

Court’s Rationale

Trade secrets. Wilson and Russo first argued the stolen information didn’t actually constitute trade secrets. The court disagreed because RECO had (1) provided evidence the stolen information is essential to its business and gives it a competitive advantage in the marketplace and (2) shown it takes reasonable measures to keep the information secret, including password-protecting documents and limiting access to certain employees.

Irreparable harm. Next, Wilson and Russo argued their use of RECO’s information didn’t cause it to suffer irreparable harm. The court again disagreed, holding the company had proven it would likely lose business if the former employees were to use its trade secrets, and the amount of the loss would be incalculable. Therefore, the court affirmed the preliminary injunction with respect to this claim.

Breach of contract. Wilson admitted he violated his noncompete agreement but argued it was unreasonable and therefore not legally enforceable. Ohio law requires employers to prove a noncompete agreement is reasonable, i.e., it isn’t greater than is required to protect the employer, doesn’t impose undue hardship on the employee, and isn’t injurious to the public.

The court held RECO had failed to prove a three-year noncompete agreement wouldn’t impose undue hardship on Wilson. Without such a showing, the company wasn’t entitled to a preliminary injunction enforcing his noncompete provision. RECO Equip., Inc. v. Wilson.

Takeaways

You should take affirmative measures to guard and restrict access to your trade secrets. Also, be prepared to prove your noncompete agreements are reasonable, i.e., they are no greater than required and won’t impose undue hardship on the employee.

Caroline H. Gentry is an attorney with Porter Wright Morris & Arthur, LLP, in Dayton, Ohio. You can reach her at  cgentry@porterwright.com.