North Cal Startup Engineers Accused of Stealing Trade Secrets

Startups should be aware of the consequences if your employee steals trade secrets from his former employer. Read about a recent case in Northern California concerning shared ride technology…

Plaintiffs UCAR are a large chauffeured car service provider in China. They offer ride-hailing services like Uber and Lyft in the U.S. UCAR is working on ride-hailing software and its analysis of large data sets related to vehicles in transit. The company brought an action against four of its former employees (“the engineers”) for violation of federal law and misappropriation of trade secrets stemming from their resignation and departure from UCAR.

Defendants were all accomplished engineers employed by UCAR as part of an R&D team in the Silicon Valley. These engineers worked on software coding and programming, project management, and data analysis of autopilot technologies for UCAR. They all resigned from UCAR in March 2017. Shortly thereafter, UCAR filed a request for a Temporary Restraining Order (“TRO”) seeking to enjoin the engineers from keeping or using the company’s proprietary information.

UCAR claimed that when the engineers resigned, they reformatted their company-issued laptops and deleted all the data stored on the computers. UCAR also said that even after their resignations, the engineers accessed, downloaded, and retained company trade secrets and intellectual property, and used or intended to use the proprietary information to set up their own startup. Based on these allegations, the court initially found that UCAR’s allegations justified the issuing of a TRO. The engineers opposed the injunction.

A Preliminary Injunction Is “An Extraordinary Remedy”

U.S. District Judge Edward J. Davila wrote in his opinion that a preliminary injunction is “an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief,” quoting the United States Supreme Court. He also noted that the Ninth Circuit also held that to obtain a preliminary injunction, the moving party must establish that:

1. It’s likely to succeed on the merits;
2. It’s likely to suffer irreparable harm in the absence of preliminary relief;
3. the balance of equities tips in its favor; and
4. an injunction is in the public interest.

In the alternative, the judge explained that a preliminary injunction is also appropriate if “serious questions going to the merits were raised and the balance of the hardships tips sharply in the plaintiff’s favor.” These formulations aren’t different tests, the judge pointed out, but represent “two points on a sliding scale in which the degree of irreparable harm increases as the probability of success on the merits decreases.” However, under either formulation, the moving party must demonstrate a significant threat of irreparable injury. The moving party must demonstrate that irreparable injury is likely in the absence of an injunction… it has to be an “immediate threatened injury.”

Here, UCAR argued that it had shown irreparable harm because: (i) the engineers admitted that they destroyed company property and might continue to do so as part of a “pattern of destruction” unless the court enjoined their actions (the preservation theory); and (ii) the engineers “planned” to take and disclose UCAR’s confidential information to a competing startup, which would irreparably damage its competitive advantage (the disclosure theory). But Judge Davila said that those contentions were too speculative and weren’t supported by sufficient evidence to satisfy UCAR’s burden of establishing irreparable injury.

No Proprietary Information Lost

The judge acknowledged that there was no dispute that the engineers reformatted their laptops when they left UCAR, erasing all the data on the computer. But UCAR failed to identify any data that was actually lost as a result of that. The engineers stated that it was their practice to store their work on UCAR’s servers, not on their laptop’s hard drive, and UCAR didn’t refute this claim.

As to the disclosure theory, the judge acknowledged that UCAR had a legitimate interest in protecting its proprietary information from disclosure and that some of the engineers’ actions raised valid concerns, such as logging on to the work computers after the engineers left the company. And there was no dispute that the engineers joined a new startup company that might be a competitor to UCAR. Judge Davila noted that courts have found that the use of one company’s trade secrets by a former employee at a competitor may satisfy the irreparable harm necessary for injunctive relief, but there was little evidence in this case showing why it was likely that the engineers would use or disclose UCAR’s proprietary information.

Judge Davila found that UCAR offered no proof that there was an imminent threat of use or disclosure of its confidential information or trade secrets. UCAR didn’t demonstrate that irreparable harm was likely, rather than just possible. UCAR’s description of potential ensuing harm wasn’t the type of “immediate threatened injury” required for a preliminary injunction.

As a result, the Court held that UCAR didn’t meet its burden to demonstrate a clear entitlement to injunctive relief. The preliminary injunction was denied. UCAR Technology (USA) Inc. v. Li, 2017 U.S. Dist. LEXIS 59965 (N.D.Ca. April 19, 2017).

Summary

Trade secrets are critical to every organization, including your startup. Don’t be caught with a competitor’s trade secrets that are brought to your startup by a new employee. Work with an experienced intellectual property attorney to understand the defenses to trade secret violations and to educate your startup employees.

Attorney Michael Ahmadshahi focuses on patents, intellectual property, copyright, and trade secrets in Irvine, California. The Michael Ahmadshahi, PhD, Law Offices are also located in Beverly Hills and Sherman Oaks. Call us toll free at (800) 747-6081 or direct at (949) 556-8800 or email info@mmaiplaw.com and let us help you with your trade secret questions and the IP strategy for your startup.

Michael Ahmadshahi

Mr. Ahmadshahi’s area of practice is Intellectual Property Laws including Patent Prosecution and Litigation, Trademarks, Copyrights, Unfair Business Practices, and Business Litigation. He is also an entrepreneur and an inventor.