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Does Misappropriation of Trade Secrets by a Former Employee Constitute a Per Se Violation of Section 75-1.1?

Ellis Winters

Ellis & Winters

As we have explored, a party that tries to prove a violation of N.C. Gen. Stat § 75-1.1 in connection with an employment matter faces some serious obstacles.

A recent decision from the U.S. District Court for the Western District of North Carolina analyzes one of these obstacles. In Legacy Data Access, LLC v. Mediquant, Inc., Chief Judge Frank D. Whitney examined an important issue in 75-1.1 jurisprudence that arises regularly in departing-employee matters: does the misappropriation of trade secrets constitute a per se violation of section 75-1.1?

This post studies Judge Whitney’s analysis. (His opinion also assesses another important issue on the law of section 75-1.1: the application of the statute to the conduct of a departing employee and his new employer. We will explore this aspect of the opinion in a later post.)

An Employee Joins a Competitor—at a Price of $600,000

William Rowland worked for Legacy Data Access until he resigned to join Mediquant. Legacy believed that Rowland took trade secrets and clients with him.

Legacy then sued Mediquant. The lawsuit included a claim for trade-secret misappropriation under the North Carolina Trade Secrets Protection Act, as well as an alleged violation of section 75-1.1.

After a six-day trial, Legacy largely prevailed. The jury awarded Legacy $600,000 on the trade-secret claim. Legacy also prevailed on the 75-1.1 claim, but it received only nominal damages of $1.

Legacy and Mediquant filed post-trial motions—including motions to amend the judgment on the 75-1.1 claim:

  • Legacy argued that a misappropriation of trade secrets is a per se violation of section 75-1.1. That conclusion would call for the $600,000 award to be trebled.
  • Mediquant argued that Legacy had not proven a violation of section 75-1.1. In particular, Mediquant argued that that the jury’s finding that Mediquant had employed Rowland—when Mediquant knew that Rowland was violating his restrictive covenants with Legacy—did not give rise to 75-1.1 liability. We will explore this aspect of the case in a later post.

Judge Whitney considered both motions, but ultimately left the verdict untouched.

Are Per Se Violations the Exception?

The North Carolina Supreme Court has not addressed whether a violation of the Trade Secrets Act is a per se violation of section 75.1.1. In view of this void, Judge Whitney turned to other Supreme Court decisions that assessed arguments for 75-1.1 per se liability based on the violation of some statute:

  • In Winston Realty Co. v. G.H.G., Inc., the Court treated the violation of a statute designed to regulate the actions of employment agencies as a per se violation of section 75-1.1.
  • Similarly, in Pearce v. American Defender Life Insurance Co., the Court concluded that violations of a statute designed to define unfair or deceptive trade practices in the insurance industry also amounted to violations of section 75-1.1.
  • Judge Whitney also noted the Court’s recent refusal in Walker v. Fleetwood Homes of North Carolina to treat the violation of a licensing regulation under the North Carolina Administrative Code as a per se violation of section 75-1.1.

Having reviewed these cases, Judge Whitney concluded that a violation of the Trade Secrets Act does not establish a per se unfair or deceptive trade practice. He noted that the Trade Secrets Act has several features that the relevant statutes in Winston and Pearce did not have. 

First, the Trade Secrets Act contains a private right of action. The Trade Secrets Act also allows violations even where the violator has acted by mistake or in good faith. Judge Whitney further noted that the Trade Secrets Act protects property rights, while the statutes in Winston and Pearce were designed to protect consumers.

Perhaps most importantly, Judge Whitney understood Walker to reflect that the law on section 75-1.1 disfavors per se violations. Judge Whitney viewed the Walker Court’s refusal to find a per se violation as an indication that the Supreme Court “is not inclined to recognize violations of regulations or statutes as ‘unfair or deceptive trade practices’ as a matter of law.”

Finally, Judge Whitney examined decisions of the North Carolina Court of Appeals regarding the relationship between a misappropriation of trade secrets and 75-1.1 liability. In Medical Staffing Network v. Ridgway, the Court of Appeals stated that a “violation of the Trade Secrets Protection Act constitutes an unfair act or practice.” In its decision in Drouillard v. Keister Williams Newspaper Services, Inc., however, the Court of Appeals concluded that a violation of the Trade Secrets Act does not automatically violate section 75-1.1. These cases, Judge Whitney explained, suggest there is no per se rule that a violation of the Trade Secrets Act also violates section 75-1.1.

Having determined that a violation of the Trade Secrets Act does not automatically violate section 75-1.1, Judge Whitney considered whether any of the jury’s other findings nevertheless demonstrated that the misappropriation here was an unfair and deceptive trade practice. The only other finding available to Judge Whitney was the jury’s damages number of $600,000. Judge Whitney concluded that the damages alone did not suggest that the conduct fit within the intended reach of section 75-1.1.  Thus, the misappropriation of trade secrets did not establish an unfair or deceptive trade practice. 

The Evolution of Per Se Theories

For a litigant who seeks to impose 75-1.1 liability under a per se theory, the decision in Legacy Data reveals the types of arguments that the litigant will likely face. These arguments may rely on (1) appellate decisions on per se liability, (2) the relevant statutory language, and (3) the purpose of the statute that serves as the predicate violation.

Legacy Data also serves as a reminder of the varying law on per se liability. Matt Sawchak—this blog’s founder, and the current North Carolina Solicitor General—recently prepared an in-depth analysis of this area of 75-1.1 law in the North Carolina Law Review.

This article, and Legacy Data, are important reads for North Carolina business litigators.

Author: Jeremy Falcone

January 9, 2018
Posted in  Per Se Violations