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Third Circuit Affirms Award of Damages in Misappropriation of Trade Secrets Case and Denial of Recovery on Injunction Bond After Employee’s Partial Success on Appeal

In Customer lists, Employee Mobility, Injunction Bond, Third Circuit on September 20, 2010 at 6:52 am
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The United States Court of Appeals for the Third Circuit affirmed the district court’s award of damages against employees on a claim brought by their former employer for, inter alia, misappropriation of trade secrets.  Latuszewski v. Valic Financial Advisors, Inc., No. 08-1511, 2010 WL 3582434 (3rd Cir. Sept. 15, 2010).   Former employer, VALIC Financial Advisors, Inc., bought claims against former employees Gary Latuszewski and James Rogan alleging breach of contract, breach of fiduciary duty, misappropriation of trade secrets, and tortious interference with contract. Id. *1. Employees appealed arguing that this award was in error and also that the District Court erred in declining to award them damages under VALIC’s injunction bond after this court vacated part of the District Court’s temporary injunction against them. Id.

Background

VALIC sells and services financial products and required the Employees to sign new employment contracts that included a non-compete covenant and a provision preventing the Employees from using VALIC trade secrets for any purpose other than their work. Id. About a year after the Employees signed the new contracts, they resigned from VALIC to join a company created by Latuszewski called North Atlantic Asset Management, which directly competed with VALIC. Id. Some of the Employees’ clients at VALIC moved their accounts to North Atlantic.  Id. The Employees filed a declaratory judgment action in state court to resolve their contractual obligations under the non-compete and trade secrets provisions.  VALIC removed to federal court and filed counterclaims for breach of contract, tortious interference with contract, misappropriation of trade secrets, and breach of fiduciary duty.  Id. VALIC also moved for a preliminary injunction to enforce the non-compete covenant and to stop the Employees’ misappropriation of trade secrets. Id. The District Court issued an injunction, which in part required VALIC to post a $500,000 bond.

Award of Damages for Misappropriation of Trade Secrets

The District Court held a bench trial and found the Employees liable on each of VALIC’s counterclaims. Id. *2. The District Court found that the Employees had used customer information from VALIC’s proprietary databases to create a list of the Employees’ clients with accounts that could easily be moved to a new firm, and that the Employees contacted those clients and invited them to do so. Id.

The District Court held that the “customer lists, account balances, account activity, financial objectives, investment preferences, and transfer details, including penalties” in VALIC’s databases comprised trade secrets. Id. In a former appeal, the Third Circuit concluded that “the District Court properly held that the information described in the preliminary injunction constituted protectable trade secrets.” Id. (citing Latuszewski v. Valic Fin. Advisors, Inc., 2005 WL 1367809, *1 (3d Cir. June 9, 2005)).  The court concluded that the “Employees have pointed to nothing to convince us to deviate from our earlier decision.” Id.

The Employees argued that the District Court erred in finding that they used any trade secrets in a way that harmed VALIC.  Id. The District Court found that the Employees used trade secret customer information to compile lists, including mental lists, of those customers who would be targeted for transfer, that the Employees personally contacted at least some of those VALIC customers to invite them to move their money, and that at least some of those individuals did so. Id. The Third Circuit affirmed, holding that “[t]hese findings were not clearly erroneous, and it is evident that the Employees’ actions constitute a breach of confidence that harmed VALIC.” Id.

Recovery on Injunction Bond

The Employees also argued that because part of the injunction was vacated on a prior appeal, they are entitled to recover on the injunction bond. Id. *3.  The court held that “Here, the Employees were wrongfully enjoined only from servicing those clients who wished to transfer or did transfer their funds to North Atlantic, and who were not solicited through the use of VALIC’s trade secrets.” Id. The District Court found that the Employees failed to sufficiently prove that the vacated portion of the injunction caused them any damages.   Id.

The Third Circuit affirmed the denial of recovery on the injunctino bond, holding that the “Employees’ failure to present sufficient and particularized evidence as to the extent, if any, to which they actually suffered damages as a result of the vacated portion of the injunction is dispositive.”  Id.

Judges and Attorneys

Circuit Judge Dolores Korman Sloviter wrote the opinion for the court.  Circuit Judges Maryanne Trump Barry and D. Brooks Smith concurred.

On appeal from the United States District Court for the Western District of Pennsylvania, (D.C. No. 03-cv-00540), District Judge: Honorable Gary L. Lancaster.

Michael J. Betts, Esq., Betts, Hull & Klodowski, Pittsburgh, PA, Michael J. Betts, Esq., for Gary Latuszewski; James Rogan; Reed Bigham.

Anthony L. Giacomini, Esq., Larry S. Pozner, Esq., Hoffman, Reilly, Pozner & Williamson, Michael A. Rollin, Esq., Reilly, Pozner & Connelly, Denver, CO, Colin E. Wrabley, Esq., Reed Smith, Pittsburgh, PA, for Valic Financial Advisors, Inc.; The Variable Annuity Life Insurance Policy.

By CHARLES JUNG

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