Modus LLC v. Encore Legal Solutions, Inc.

The court did not grant a declaratory judgment in favor of a new employer when employees from another company brought trade secrets to the new company.

Opinion (Teilborg): Plaintiff Modus, LLC ("Modus") hired former employees of Defendant Encore Legal Solutions, Inc. ("Encore"). Encore required its former employees to sign an employment agreement as well as a non-compete provision of an employment contract. Each of the employees at issue resigned from Encore and were subsequently hired by Modus. Encore approached Modus about the hiring of the employees, so Modus brought action for a declaratory judgment. Encore than counterclaimed, alleging violation of the Arizona Trade Secrets Act. Encore's counterclaim alleged that the employees who had been hired by Modus had plugged USB devices into Encore's software to obtain Encore's proprietary information. Encore claimed that this amounted to a misappropriation of trade secrets. In an action for misappropriation, the plaintiff must identify the trade secrets and carry the burden of showing that they exist. 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 constitutes misappropriation. "Improper means" includes theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy. Misappropriation also occurs when a person discloses a trade secret without express or implied consent, and that at the time of disclosure, the party knew or had reason to know that the trade secret was acquired under circumstances that give rise to a duty to maintain secrecy. Modus argued that while some employees obtained information with a USB device, not all employees did. The court did not find merit in this argument because Encore's counterclaim was against Modus, not against the individual employees. Modus also argued that Encore had failed to allege a plausible claim for proximately-caused misappropriation damages. In response, Encore argued that it has sustained, and will continue to sustain damages based on the misappropriation of trade secrets. The court agreed with Encore and therefore DECLINED to grant declaratory judgment in Modus' favor.