Category Archives: Trade Secrets

Password protection not enough to protect trade secrets

In the case of Liebert Corp. v. Mazur, the Illinois Court of Appeals has held that customer lists stored online in password protected directories were not entitled to trade secret protection where employer did not adequately make employees aware of the lists’ confidential nature.

After several former sales representatives began working for a competitor, Plaintiffs Zonatherm Products and Liebert Corporation filed suit for violations of the Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1 et seq. and sought a preliminary injunction against the former sales representatives. The court denied the motion for preliminary injunction and plaintiffs appealed.

Zonatherm and Liebert claimed that one of the trade secrets defendants had misappropriated was the plaintiffs’ customer lists. These customer lists were stored online on a server in password protected directories, and each sales representative had a copy on his or her desktop computer. One of the issues on appeal was whether the customer lists could be protected as a trade secret under the ITSA.

To establish that information is a trade secret under the ITSA, two requirements must be met: (1) the plaintiff must show the information was sufficiently secret to give the plaintiff a competitive advantage, and (2) the plaintiff must show that it took affirmative measures to prevent others from acquiring or using the information. Although the court determined in this case that the customer lists met the first requirement, it denied trade secret protection based on the second requirement.

The court held that “[r]estricting access to sensitive information by assigning employees passwords on a need-to-know basis is a step in the right direction.” This precaution in and of itself, however was not enough. The court was “troubled by the failure to either require employees to sign confidentiality agreements, advise employees that its records were confidential, or label the information as confidential.” There was insufficient evidence in the record to show the employees understood the information to be confidential, thus the trial court’s finding that the customer lists were not trade secrets was not against the manifest weight of the evidence.

Liebert Corp. v. Mazur, — N.E.2d —, 2005 WL 762954 (Ill.App. 1st Dist., April 5, 2005).

Misappropriation of web development services not unfair competition

In Atari, Inc. v. Games, Inc., arising from a dispute over an agreement to license games for online use, the U.S. District Court for the Southern District of New York dismissed defendant’s counterclaim for unfair competition, holding that such a claim could not stand where (1) alleged misappropriation was merely of services and not of knowledge, and (2) counterclaimant had not shown it was the exclusive owner of rights allegedly infringed.

In early 2004, the parties entered into an agreement whereby Games would acquire the domain name Games.com, the website located there, and an exclusive right to provide online versions of certain games such as Scrabble. The parties structured the transaction to occur over a period of time, culminating in a final payment to be made by Games, at which time Games would acquire the exclusive license to the website and online versions of the games.

Before the exclusive license was to be turned over to Games, Atari was to continue developing the Games.com site, and was to incorporate advertising on the site to raise revenue. Atari was slow in implementing the advertising, and Games assisted in implementing the advertising before it was to acquire the exclusive license.

Soon before the date the final payment was due, Games learned that there was another online version of Scrabble available, which would violate the exclusivity of its license. For various reasons, the parties ended up in litigation, asserting claims and counterclaims against one another.

Among the counterclaims that Games brought forth was one for unfair competition. The plaintiffs moved to dismiss, and the court granted plaintiffs’ motion.

As one aspect of its unfair competition claim, Games asserted that Atari had misappropriated the “labor and know-how” of Games employees who had figured out how to place advertising on the Games.com website during the period before the site was to be transferred. The court noted that “under New York law, ‘the gravamen of a claim of unfair competition is the bad faith misappropriation of a commercial advantage belonging to another by infringement or dilution of a trademark or trade name or by exploitation of proprietary information or trade secrets.'” The court held that Atari’s alleged misappropriation of “labor and know-how” in implementing the advertising did not meet the gravamen of an unfair competition claim because Games did not allege that it had employed any skill that was proprietary to it, or that could not have been provided by many other companies. The court stated “[t]he alleged misappropriation is therefore of Games’s services, not knowledge, and this will not support an unfair competition claim.”

The other aspect of Games’s unfair competition claim was that the presence of the other versions of the games online infringed rights exclusively held by Games. The court rejected this claim, however, after an examination of the agreement revealed that Games never held such exclusive rights. The grant of such exclusive rights was contingent on the final payment, which admittedly never was made.

Atari, Inc., v. Games, Inc., 2005 WL 447503 (S.D.N.Y., February 24, 2005).