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June 9, 2020 in 75-1.1 Exemptions by

The Business Court Tells a Departing-Employee Case with No Trade-Secret Issues to Buzz Off

Steven A. Scoggan thumbnail photo

Steven A. Scoggan

Departing-employee cases often involve claims for trade-secret misappropriation, breach of confidentiality and noncompetition agreements, and tortious interference with contractual or business relationships. Because these claims may also be per se violations of section 75-1.1, departing-employee cases between competitors almost always involve section 75-1.1 claims, as well.

The North Carolina Business Court frequently handles these cases when they contain trade-secret claims. A recent Order of Significance in Ludwig v. Lilly helps clarify when departing-employee disputes without trade-secret claims may be litigated in the Business Court.

Starting a Competing Business Stirs up a Hornets’ Nest

Ludwig is a dispute between competitors in the pest-control industry. Mr. Ludwig and Mr. Lilly previously worked in sales together at a pest-control company called Aptive Environmental. After leaving Aptive, Mr. Ludwig started a new pest-control business—Aruza. He allegedly recruited several other Aptive employees (but not Mr. Lilly) to join this new venture.

Unsurprisingly, this spawned a lawsuit, but not in North Carolina. Aptive sued Mr. Ludwig and Aruza in Utah under that state’s trade-secret statute and for breach of an employment agreement. The case settled in 2019.

That settlement, however, did not end the fight. It was now Mr. Ludwig and Aruza’s turn to sting. Less than six months later, they sued Mr. Lilly (an Aptive employee) in North Carolina. According to Mr. Ludwig and Aruza, Mr. Lilly told a number of lies about them in order to help Aptive poach Aruza’s salespeople and harm its business. Over 100 Aruza sales representatives then swarmed to Aptive. Mr. Ludwig and Aruza claim that the salespeople breached employment agreements by joining Aptive (cue the tortious-interference claim).

Importantly, Mr. Ludwig and Aruza also assert that Mr. Lilly caused Aruza’s departing salespeople to share Aruza’s “proprietary and confidential business information, including client and sales representative lists.” Although they argue that this information was none of Aptive’s beeswax, Mr. Ludwig and Aruza did not assert a claim under North Carolina’s Trade Secrets Protection Act, nor did they claim that it was a trade secret. Instead, they argued that acquiring and using this “private business information” was unfair or deceptive and gave rise to a section 75-1.1 claim.

With its salesforce dropping like flies and its confidential business information in a competitor’s hands, Aruza claims that it suffered over ten million dollars in damages.

Mr. Lilly Makes a Beeline to the Business Court

Mr. Lilly sought to have the case designated to the Business Court. He argued that the case involved trade secrets and, due to the damages claimed, was a “mandatory mandatory” case that could proceed only in the Business Court.

The Chief Justice of the N.C. Supreme Court, who determines in the first instance whether a case qualifies for Business Court designation, asked Chief Business Court Judge Bledsoe to decide the issue. Notably, this approach prevented the parties from briefing the issue of whether the case qualified for Business Court designation.

Practice tip: When it’s a close call, a notice of designation should thoroughly explain—with citations to authority—why the case qualifies for Business Court designation. Fortunately, Mr. Lilly’s notice of designation did just that. Unfortunately for Mr. Lilly, those arguments did not prevail.

A Fly in the Ointment: “Proprietary and Confidential” Does Not Mean “Trade Secret”

Chief Judge Bledsoe’s decision outlines when a case may involve trade secrets and therefore qualify for designation. First, a case need not contain a claim under North Carolina’s Trade Secrets Protection Act to qualify for designation to the Business Court. After all, the designation statute, N.C. Gen. Stat. § 7A-45.4, says that any case that involves trade secrets can be designated, including cases with TSPA claims. If a case lacks a trade-secret claim, it can still qualify for designation if “the existence, ownership, or misuse” of trade secrets is at issue. Finally, a case will not qualify for designation if issues or claims involving trade secrets could have been raised, but were not.

Mr. Lilly advanced several theories about why designation was appropriate, but Chief Judge Bledsoe swatted each one down.

First, Mr. Lilly pointed to allegations in his counterclaims concerning Mr. Ludwig and Aruza’s alleged breach of the settlement agreement from the earlier trade-secret lawsuit in Utah. These allegations, however, did not place any trade secrets at issue in the North Carolina case.

Next, Mr. Lilly highlighted the complaint’s allegations that “proprietary and confidential business information” had been taken. Noting that proprietary and confidential business information “is not synonymous with trade secret information,” Chief Judge Bledsoe observed that the plaintiffs did not allege that the information taken—client and sales representative lists—was a trade secret.

Finally, Mr. Lilly suggested that the plaintiffs may be using their section 75-1.1 claim, premised on unlawful use of confidential business information, to sneak a trade-secret dispute into the case. Chief Judge Bledsoe acknowledged that trade-secret misappropriation may constitute a per se violation of section 75-1.1, but he concluded that the section 75-1.1 claim would not “rely on or require proof of the existence, ownership, or misuse of” trade secrets.

Chief Judge Bledsoe ultimately concluded that the case did not present disputes involving trade secrets and shooed it out of the Business Court.

Could Mr. Lilly Have Avoided the De-designation Flyswatter?

Could this case have qualified for designation under a different statutory ground? It’s difficult to say. The Business Court tends not to accept cases involving restrictive covenants (and related allegations of tortious interference) unless there is another independent basis for designation. So, the claims that Mr. Lilly wrongfully interfered with the Aruza salespeople’s restrictive covenants likely would not nudge this case across the line.

Some of the allegations in this case—employee raiding to cripple a competitor’s business and gain confidential information—conjure up memories of Sunbelt Rentals, Inc. v. Head & Engquist Equipment, LLC, a noteworthy Business Court case from the early 2000s. Before 2014, cases involving “state trademark or unfair competition law, except claims based solely on unfair competition under” section 75-1.1, qualified for Business Court designation. For this reason, employee-raiding cases that raised issues of common-law unfair competition could be heard in the Business Court.

Do employee-raiding cases without trade-secret issues still qualify for designation? That question hasn’t been answered yet. After 2014, the designation statute was amended to remove unfair competition as an independent basis for designation. A 2015 decision from then-Chief Judge Gale raised, but did not decide, the question of whether cases involving “employee raids [that] rise to the level of common law unfair competition” can still be designated to the Business Court. As far as we are aware, no decision since then has answered that question.

Author: Steven Scoggan