Trade Secret Misappropriation

The Federal Reserve is prepared to ratchet up the penalty for bankers caught misappropriating their employer’s trade secrets. Although bankers were already subject to civil liability under state laws governing trade secrets and breach of contract, the Federal Reserve now appears willing to subject guilty bankers to an outright ban from working with any institution specified in 12 U.S.C. § 1818(e)(7)(a), pursuant to section 8(e) of the Federal Deposit Insurance Act.

Two Wyoming bankers are seemingly harbingers of this newfound willingness by the Federal Reserve to ban bankers caught misappropriating an employer’s trade secrets. The two culprits misappropriated Central Bank & Trust’s (“Central”) proprietary business information in connection with their plan to acquire employment and an ownership interest in Farmers State Bank (“Farmers”). The bankers’ malpractice included dissuading Central from pursuing an opportunity they conspired to exploit once at Farmers, moving loans from Central to Farmers, and the sharing of other proprietary (non-customer) information with Farmers’ employees. Although a Wyoming state judge ruled against the bankers last April, they retained their new jobs; this apparently irked the Board of Governors. In seeking to ban the bankers, the Federal Reserve alleged unsafe or unsound banking practices, as well as breaches of fiduciary duty. If banned, the duo will likely struggle to make good on their court-ordered $2.2 million civil judgment.

Whether the Federal Reserve is instituting a policy change regarding enforcement of trade secrets law or is merely punishing an instance of exceptionally brazen illicit behavior is still unclear. That said, aggrieved banks certainly have another arrow in their quiver when confronting unscrupulous ex-employees. Regardless, any employee should proceed with extreme care when handling an employer’s confidential and proprietary business information.

The case is In the Matter of Frank E. Smith and Mark A. Kiolbasa, Docket No. 18-036-E-I, before the Board of Governors of the Federal Reserve System.

The Federal Circuit has revived a complaint to correct inventorship in another case involving the intersection of patent and trade secret law. In Coda Development v. Goodyear Tire & Rubber, Plaintiffs asserted that Defendants misappropriated trade secrets and breached a non-disclosure agreement (NDA) by seeking patent protection for Plaintiff’s inventions related to self-inflating tire (SIT) technology. The district court dismissed the case on a Rule 12(b) motion. But the Federal Circuit reversed holding that the district court improperly made underlying factual findings on the inventorship issue at the pleading stage.

Click here to read the full version of this alert, authored by Crowell & Moring Partner Mark Klapow, Partner Anne Li, and Associate Siri Rao.

In an aggressive first move, Plaintiffs – two former employees accused of trade secret misappropriation – filed a preemptive suit for declaratory relief and unfair business practices against their former employer, Defendant Chandler Holding’s, Inc., in California Superior Court. Plaintiffs contend that shortly after their resignations from Chandler Holdings, Inc., they received letters from Defendant’s counsel accusing them of “numerous wrongful, illegal, fraudulent and contract breaching actions.” The letters allege that Plaintiffs are wrongfully competing against Defendant and are violating the California Uniform Trade Secrets Act, Economic Espionage Act of 1996 and Securities Exchange Act.

Plaintiffs resigned from their positions on February 1, 2019. They returned the notebook computers issued to them by Defendant. Shortly thereafter, Plaintiffs received the letters described above, which further suggest that Plaintiffs: “(1) solicited employees of Chandler, (2) solicited customers and other “business” relationships of Chandler, and (3) accessed, appropriated, and used Chandler’s property, including trade secrets and confidential information.”

Plaintiffs maintain that they did not take any confidential or proprietary information when they left. They argue that the allegations in Defendant’s letters are unsubstantiated and meritless and that the letters are intended to harass, intimidate, and restrain them from pursuing their livelihood. In addition to seeking declaratory relief to preempt such claims, Plaintiffs also allege that Defendants engaged in unfair business practices. Specifically, Defendants’ actions violated Business and Professions Code § 17200 when, in their letters, Defendant alleged that Plaintiffs were “wrongfully competing against Chandler based on their new employment with their new employer.” Plaintiffs contend that there is no valid or enforceable non-compete between Plaintiffs and Defendant and any employer is free to employ Plaintiffs.

The Complaint was filed on February 15, 2019. We will follow this case closely and report back on how Defendant responds.