Trade Secrets Act Claim Against Competitor Can Proceed Even Though Claim Based On Violation Of Non-compete Agreement Is Dismissed
The most recent edition of this newsletter discussed the 2018 case of Darton Environmental, Inc. v. FJUVO Collections, LLC, et.al. (U.S. District Court, Western District) (the “Darton Case”). See our article on the enforceability of non-compete agreements with a competitor. This article is the second in a series of three articles analyzing the Darton Case as an example of common business litigation involving non-compete agreements, torts and statutory claims.
Darton Environmental, Inc. (“Darton”) wanted to do business with FJUVO Collections, LLC (“FJUVO”), and for that purpose only showed its facilities to FJUVO. To assure that FJUVO would not steal its technology or compete based on what it learned from the tour, Darton had FJUVO execute a Non-compete and Confidentiality Agreement (“Non-compete Agreement”). Later, when Darton discovered that FJUVO established a competing business, Darton sued FJUVO and the individual agents of FJUVO who visited the facility (“Individual Defendants”). Defendants filed a motion to dismiss, which motion is the subject of this series of articles.
In our prior November newsletter, we discussed Darton’s allegation that FJUVO violated the Non-compete section of the Agreement. The claim based on that alleged violation was dismissed by Judge Moon who found that the Non-compete section of the Agreement was ambiguous and overly broad. In this issue, we discuss the Court’s analysis of the conversion and trade secret claims asserted in the Complaint.
Conversion and Trade Secrets Act Claims
Darton alleged that FJUVO converted its property interest in the Darton technology and misappropriated a trade secret when it set up a facility that processes recycled oil based on the Darton technology.
Judge Moon dismissed the conversion count of the Complaint. He found that the Virginia Uniform Trade Secrets Act (Code § 59.1-336) (“VUTSA”) preempted the conversion count because the conversion claim was “premised entirely on an alleged misappropriation of trade secrets.” Furthermore, the Court concluded that a claim of conversion must be based on conversion of “tangible property rights”; and, Judge Moon found that the Darton technology, as described in the Complaint, was an “undocumented intangible property right” (emphasis added).
It is noteworthy, however, that at this stage of the pleadings, Judge Moon ruled that the allegation of misappropriation of trade secrets under VUTSA could go forward to trial. He found that the Complaint sufficiently alleged that the Darton technology constitutes a trade secret as defined by VUTSA. The Complaint stated that the Darton technology “derives independent economic value…from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure of use” and that its technology is significantly less labor-intensive and less costly than the centrifuge method used by other refining systems. Furthermore, while the judge found the Non-compete section of the Agreement was not enforceable, that section of the Agreement put the Defendants on notice “of the sensitive nature of the Darton technology, and of Darton’s desire to maintain its proprietary nature”.
Judge Moon found that Darton plausibly alleged, as required by VUTSA, that each Defendant misappropriated the technology, knowing or having reason to know that the technology was a trade secret. Furthermore, Darton alleged that these Defendants used the technology for their own purposes. Because the Agreement was a negotiated document, FJUVO and the Individual Defendants understood that it was proprietary technology for which Darton intended to provide limited access.
Thus, the trade secret act claim was permitted by the Court to go forward. The next newsletter will discuss Judge Moon’s approach and rulings on Darton’s business tort claims of tortious interference in business expectancy and statutory business conspiracy. Business tort claims are commonly filed in business disputes, and, therefore, it is worthwhile to understand the law as it applies to these types of torts.
If you want to review other articles by our law firm on the topic of non-compete agreements, visit: https://grddlaw.com/case-example-non-compete-agreement-must-narrowly-tailored and https://grddlaw.com/non-compete-agreements-even-unenforceable-agreements-can-effective-virginia