Will a Troublesome Part of the North Carolina Trade Secret Statute Finally be Clarified?

A significant issue arises when an employee who has had access to an employer’s sensitive commercial information leaves to work with a competitor. If a noncompete agreement is in place, the employer can sue to enforce it. But the employer may also seek to protect itself by invoking trade secret laws, which apply regardless of whether the employee signed a noncompete or confidentiality agreement.

What is necessary to entitle an employer to pursue a lawsuit for trade secret misappropriation? Is it enough that the employee merely had access to those secrets and is going to work for a competitor where those secrets could be used? Or is it necessary to have evidence that the employee has acquired or used the secret improperly?

Unfortunately, North Carolina law has become a tangle of seemingly conflicting court decisions regarding these questions. In a couple of recent rulings, however, the North Carolina Business Court has begun to chart a way out of the thicket. The trouble in the law begins with the North Carolina Trade Secret Protection Act (“NCTSPA”), Article 24 of Chapter 66 of the N.C. General Statutes, which departs from most trade secret protection statutes in a perplexing way. The language in question sets out the requirements for a “prima facie case,” that is, what a plaintiff must at least have a well-founded basis to allege to survive early dismissal of the case, and substantial evidence to prove in order to go to trial. The language, which is found at N.C. Gen. Stat. § 66-155, is as follows:

“Misappropriation of a trade secret is prima facie established by the introduction of substantial evidence that the person against whom relief is sought both:

1. Knows or should have known of the trade secret; and
2. Has had a specific opportunity to acquire it for disclosure or use or has acquired, disclosed, or used it without the express or implied consent or authority of the owner.”

Subsection (1) makes perfect sense: to prove trade secret misappropriation, there must be a basis for saying the accused person knows or is on notice that he has his former employer’s secret. The bugaboo here is subsection (2). Read grammatically, section (2) says that a prima facie case is established EITHER by showing a “specific opportunity to acquire” the trade secret OR that it was acquired, disclosed or used without the owner’s authority or consent. The problem is that a “specific opportunity to acquire” a trade secret is often entirely innocent and appropriate, most commonly for employees given access to secrets in the ordinary course of their employment. For such an employee, when he departs employment, under a literal application of the NCTSPA, he is subject to being sued and potentially having to defend himself all the way through trial merely on a showing by the employer that he had access to his employer’s trade secrets at some point during his employment. He might also suffer a preliminary injunction (court order) at the outset of the case requiring him to refrain from using the secrets on penalty of violating the order, or possibly even an injunction against working for the competitor. An employee could face these burdens even though there is no evidence he improperly acquired or used the trade secret. The potential for an unjust outcome from the employee’s perspective is obvious. Of course, from the former employer’s perspective, who suspects improper conduct but has not been able to uncover often difficult-to-find evidence of it, the balance of burdens and risks associated with a literal application of the NCTSPA may seem about right.  

The Uniform Trade Secret Protection Act – which has been adopted by 47 states, but not by North Carolina – as well as the recently enacted federal Defend Trade Secrets Act – contain no specification of the elements of a prima facie case. Instead, those acts define “trade secret misappropriation,” and then the court determines what an employer must allege and produce evidence of to avoid dismissal of its case and to proceed to trial. Because trade secret misappropriation is generally defined to include a requirement that there has been acquisition of the trade secret by “improper means” or disclosure or use “without authority or consent” or similar language, courts generally require evidence of such wrongful conduct in order to permit a case to go forward. Although the NCTSPA does not adopt the Uniform Act, its definition of misappropriation is similar, requiring proof of acquisition, disclosure or use of the trade secret “without express or implied authority or consent” in order to establish misappropriation (that is, proof of those elements is necessary for the plaintiff to obtain a final court judgment of misappropriation, as opposed to what is required for the prima facie case to survive early dismissal and to have the right to proceed toward trial). It would seem, therefore, that the prima facie case under the NCTSPA should likewise require allegation and evidence of “unauthorized” access or use. But, as set out above, the NCTSPA appears to provide otherwise and to allow satisfaction of the prima facie case based merely on “an opportunity” to acquire the trade secret, without an additional showing that such opportunity was improper.  

Applying the NCTSPA, North Carolina courts have in fact authorized some cases to go forward based on a bare showing that a former employee had access to their former employer’s secrets, even though there was no showing of unauthorized access or use. Several decisions of the North Carolina Court of Appeals, some recent, have endorsed these results. E.g., Horner Int’l Co. v. McKoy, 232 N.C. App. 559 (2014); TSG Finishing, LLC v. Bollinger, 238 N.C. App. 586 (2014) and Bar-Mullin, Inc. v. Browning, 108 N.C. App. 590 (1993). In other cases, however, courts have required more than a showing that a defendant was in possession of a trade secret. For example, in Static Control Components, Inc. v. Summix, Inc., No. 1:08CV928, 2012 WL 1379380, at *7 (M.D.N.C. Apr. 20, 2012), the court dismissed the case of an employer who could show that a former employee had access to its trade secrets, but could not make the further showing that the employee shared the secrets with a competitor. And in Amerigas Propane, L.P. v. Coffey, No. 14 CVS 376, 2015 WL 6093207, at *13 (N.C. Super. Ct. Oct. 15, 2015), the court held that no prima facie case was shown by producing evidence only of an opportunity to acquire the secrets where there was no evidence of improper acquisition. These disparate case authorities have led to the aforementioned confusion in the law.

Judge McGuire of the North Carolina Business Court, relying on reasoning in a decision by the U.S. Court of Appeals for the Fourth Circuit, pointed a way out of this case law tangle in the recent case of American Air Filter Company v. Price. In the American Air Filter case, an employer sought an injunction against its former employee who had gone to work for a competitor, alleging a trade secret violation. The employee argued that the former employer had shown nothing more than an innocent acquisition of a trade secret, but had insufficient grounds to believe actual misappropriation had occurred or was threatened. To resolve whether the employer had made a sufficient case to justify an injunction, Judge McGuire first addressed the question of whether the NCTSPA means what it appears to say, that a prima facie case is created merely by showing possession and an opportunity to acquire the secret, without requiring a showing that the secret was acquired or used improperly. He concluded that the NCTSPA does not actually mean that. In so finding, he relied on the Fourth Circuit’s opinion in RLM Communications, Inc. v. Tuschen, 831 F.3d 190 (4^th Cir. 2016) case (which was written by a former judge of the Business Court, Judge Albert Diaz).

In RLM, Judge Diaz had found that a literal application of the prima facie case section of the NCTSPA would lead to the absurd outcome outlined above – that a former employee could be forced to defend herself all the way through trial from a charge of misappropriation solely based upon a showing that she had acquired the secrets, even though her access had occurred entirely properly in the course of her employment.  Judge Diaz concluded that the only reasonable way to interpret the NCTSPA is to require that an employer asserting misappropriation show not only that the employee had knowledge and an opportunity to acquire the trade secret, but also that the opportunity to acquire the secret was unauthorized, or that the secret had been used without authority. Judge Diaz’s reasoning was then adopted by Judge McGuire in the American Air Filter case. One month later, Judge Conrad of the Business Court did likewise in the case of Addison Whitney, LLC. v. Cashion (March 15, 2017).

Although significant, neither the decision of the Fourth Circuit Court of Appeals nor the decisions of the Business Court become the “law of North Carolina” binding on other state trial courts unless and until the North Carolina appellate courts adopt their reasoning.

If the rule of American Air Filter does become the law in North Carolina, what would be the practical effect? Would that raise the bar for a plaintiff to make a prima facie case of trade secret misappropriation under state law? The answer is yes, but probably not by much.

First, as noted above, perhaps in most cases plaintiffs are already held to a standard of alleging and showing either that the defendant acquired the trade secret wrongfully, or wrongfully disclosed or used it. Further, in both the American Air Filter and Addison Whitney cases, the Business Court had no trouble finding that the wrongfulness threshold had been crossed. But, the door would be closed on cases that would allow a plaintiff’s allegations to survive even though the defendant came into possession of the secrets in the course of their employment, and the plaintiff (former employer) has no evidence of wrongful disclosure or use.

If the analysis of the Air Filter case is adopted, courts faced with motions to dismiss and requests for preliminary injunctions will be required to directly confront what evidence exists for actual or threatened misappropriation and will not be able to fall back on a mere showing that an employee had access at some point.