A new federal private cause of action to protect trade secrets appears imminent. Since North Carolina already allows private parties to bring a civil action to protect their trade secrets, we compare the two statutes and answer several practical questions related to the dual protection.

1.  Do the statutes protect the same things?

The North Carolina Trade Secrets Protection Act (“NCTSPA”) defines a trade secret as business or technical information, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The Federal Defense of Trade Secret Act (“FDTSA”) defines a trade secret as all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if the owner thereof has taken reasonable measures to keep such information secret and the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public.

Though the federal definition is much wordier, the two definitions are very similar. Essentially both statutes protect financial or technical information that has economic value because it is not generally known and the owner has taken reasonable steps to protect the secrecy of the information.

2.   Does the same conduct constitute a misappropriation or violation of both statutes?

The Federal statute defines a misappropriation as the “acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means or disclos[es] or use[s] a trade secret of another without express or implied consent.”  Improper means includes, among other things, acquisition “under circumstances giving rise to a duty to maintain the secrecy of the trade secret.”  Notably, reverse engineering is not improper.

The NCTSPA defines misappropriation as “acquisition, disclosure, or use of a trade secret of another without express or implied authority or consent, unless such trade secret was arrived at by independent development, reverse engineering, or was obtained from another person with a right to disclose the trade secret.”  Reverse engineering is lawful under the State statute as well.

In contrast to the FDTSA, the NCTSPA does not make knowledge or reason to know that the information is a trade secret an element of misappropriation. However, as discussed below, knowledge or reason to know significantly impacts the remedies available under the State statute.

3.  Do the statutes offer the same remedies?

Damages are available under both the State and federal statutes. Under the State statute actual damages are measured by either the economic loss to the owner or unjust enrichment of the defendant. Punitive damages are available if the misappropriation was willful or malicious.

Under the FDTSA, damages are available measured by damage to the owner, unjust enrichment to the defendant, or as a reasonable royalty. If the misappropriation is willful and malicious exemplary damages are available in an amount up to three times (House version; two times in the Senate version of the Bill) the amount of compensatory damages awarded.

Both the State and federal statute provide for injunctive relief to prevent the use or disclosure of trade secrets. The State statute provides that an injunction may condition use of the trade secret on the payment of a reasonable royalty. Under the State statute, the knowledge or reason to know that the information is a trade secret has significant effects on the remedies available.

For instance, no damages are available for use prior to the time the defendant knew or had reason to know it was a trade secret. If the defendant has materially changed its position prior to knowledge then she cannot be enjoined but may be required to pay a royalty. Further, if the defendant has acquired inventory without knowledge he may dispose of the inventory without payment of a royalty.

Preservation of Secrecy: The NCTSPA explicitly allows the court to take steps to preserve the secrecy of the trade secret. Since by definition, the secret derives value from not being publicly known anything less would be self-defeating. Under the State statute, this includes:

• sealing the record
• in-camera proceedings and
• protective orders.

In addition to the means of preservation available under the NCTSPA, the federal statute also provides for “civil seizure” of the trade secret. In some cases, this may be a very important remedy but there is a heightened threshold to be met before it is available. The details of civil seizure under the FDTSA is beyond the scope of this post but will be discussed in a subsequent blog post.

4.  Can the prevailing party recover attorneys’ fees?

Under the FDTSA, reasonable attorneys’ fees are available to the Plaintiff where the trade secret is willfully or maliciously misappropriated or where a motion to terminate an injunction is made in bad faith. Fees are available to the defendant when the claim of misappropriation or an opposition to a motion to terminate the injunction is made in bad faith.

Likewise, under the NCTSPA, attorneys’ fees are available to the prevailing party if the claim of misappropriation was made in bad faith or if the misappropriation was willful or malicious.

5.  When must the action be brought?

A claim under the North Carolina statute must be brought within three years of the misappropriation or within three years of when it was or reasonably should have been discovered.

The Senate and House versions of the FDTSA have different statutes of limitation. The Senate version allows three years but the House would allow five years. Although a five year statute of limitations in some cases may make a difference, waiting five years to protect a valuable trade secret may impact the determination of how valuable a secret it is in the first place.

North Carolina General Statutes chapter 44A grants contractors and certain subcontractors the right to place a lien on property if they are not paid in a timely fashion for providing labor and material that improved the property. General Statute § 44A-35 provides for the winner of a lawsuit to recover its attorneys’ fees from the loser if certain conditions are met. Specifically: [“T]he presiding judge may allow a reasonable attorneys’ fee to the attorney representing the prevailing party. . . upon a finding that there was an unreasonable refusal by the losing party to fully resolve the matter . . . .”

It is rare for a trial judge to award fees under the statute. In most of the reported cases in which fees were awarded, the record included a description of the settlement offers that both sides made during the litigation, which can be the basis for finding an unreasonable refusal to resolve the matter.

In R & L Construction of Mt. Airy, LLC v. Diaz, 2015 WL 1529382 (N.C. App. 2015), the court upheld an award of attorneys’ fees even though the court did not know what settlement offers, if any, one of the parties made.

The case began after the plaintiff contractor renovated the defendant owner’s house, and charged the owner $16,175.49.

The owner paid $5,000, but refused to pay more. After the contractor filed a lawsuit to collect the balance, the parties engaged in a court-ordered mediation, which is required in virtually every lawsuit filed in superior court. At the mediation, the contractor lowered its demand from $11,175.49 to $9,000. It appears that the owner rejected the demand and did not make a counteroffer. The owner eventually won the lawsuit on a motion for summary judgment, and the contractor recovered nothing.

The owner then pursued a motion for attorneys’ fees, which the trial court granted. The trial court found that the contractor “made a final settlement demand of $9,000.00 at the mediation of this matter which was thereby rejected by the Defendant, constituting an unreasonable refusal to fully resolve the matter and in light of [the owner] being granted summary judgment on [the contractor’s] claims . . . .” The trial court then awarded the owner attorneys’ fees of $8,823.

On appeal, the court of appeals focused on the lack of transcripts from either the summary judgment hearing or the hearing on the motion for attorneys’ fees. Although there was no evidence presented by either side concerning what offers, if any, the owner made during the course of the lawsuit or at mediation, the court of appeals upheld the finding that the contractor’s last offer, which was 20% less than the original demand, was an unreasonable refusal to resolve the matter.

Two things make the court’s opinion noteworthy:

1. First, there is no way, based upon the evidence discussed in the opinion, anyone could know whether the contractor’s settlement position was unreasonable. The court noted the lack of transcripts from the motions hearings. Many attorneys do not have motions hearings recorded or transcribed because the process is expensive and often unnecessary. Indeed, summary judgment motions are determined on the materials in the record. The arguments of the attorneys are not a basis for ruling on the motion. It is clear from the outcome in this case, however, that counsel should always request that a hearing be recorded if there is any chance that the matter will end up before the appellate courts.
2. Second, the court questioned how settlement discussions, which are “statutorily confidential information under N.C. Gen. Stat. § 70A-38.1,” could be considered by the trial judge. The court offered no insight into this issue, but it is an important one.

Settlement negotiations are considered privileged, and most courts have rules that forbid a party from presenting information concerning what settlement offers were made (or were not made) to a court. However, General Statute § 44A-35 requires the court to find that there was an unreasonable refusal to settle. A court cannot make this determination without knowing what offers were made. How the conflict between the confidentiality rules and statutes, and the requirement that the court consider whether a settlement position was unreasonable, remains unresolved.

Mediation is a remarkable tool for resolving disputes. Very few cases in North Carolina are tried to juries anymore, in large part because the mediation process is so effective.

I was recently in a restaurant that prominently displayed this sign: “NO we don’t have WiFi. Talk to each other.” Many times disputes erupt or are exacerbated because folks refuse to talk to each other. Mediation forces a conversation – often a difficult conversation, but it has the ability to lay bare feelings and positions that the parties often prefer to remain hidden for a variety of reasons.

Parties often begin a mediation more interested in “winning” or inflicting pain on the other side than finding a resolution. When I mediate a case, I often tell litigants at the outset that if they expect to leave the building happy, they are probably going to be disappointed. My goal as a mediator is not to make anyone happy. It is to find a solution to a problem that the parties can live with – and that almost always means they won’t be particularly happy at the end of the day.

Compromise seems to be a dirty word these days, but it is fundamentally important in almost every business context. Mediation is a communal process. An effective mediator can open up communication between and among people who might not want to communicate, but it is the only path towards any compromise. Indeed, in cases where long-standing relationships have been disrupted through a disagreement, the mediation process can sometimes help start the process of mending those relationships, but I digress.

If the parties in a mediation obtain a result they can live with, and we can put an end to the time, money, and stress of an ongoing lawsuit, that is a win – even though it may not feel like it to the litigants at the time. As litigators, we should make sure our clients see that big picture, and don’t get lost in the emotional jungle of anger, hurt, or insult. Those emotions create obstacles to resolution. We can help our clients move beyond those obstacles to achieve the bigger goal of resolving their disputes, so they can get on with their lives, and one way of doing that is making sure their expectations are realistic. One of my favorite mediators tells folks that his job is to help folks have difficult conversations. He’s exactly right. Those conversations probably won’t bring them happiness, but by ending the litigation, we give them the opportunity to go find it on their own.