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Employers: Act Fast or Weaken Your Trade Secret Case

Posted in Trade Secrets and Competition

By: James Kachmar

When one or more of your key employees leaves to join a competitor and begins soliciting your customers, one of your strongest weapons under California’s trade secret laws is the ability to obtain an immediate temporary restraining order to stop your former employee and his or new employer from unlawfully competing against you. Many trade secrets cases can be won or lost at the early TRO/preliminary injunction stage. However, it is imperative that employers act fast to protect their rights or they may find that their trade secret case is weakened. Employers may, when faced with departing employees who are soliciting their customers, take a wait and see approach to determine the amount of damage and whether it is worthwhile to hire an attorney to pursue the matter in the court system. While this may make sense from a business approach, it can adversely impact the employer’s remedies should it eventually decide to pursue a lawsuit.

A recent court decision, Farmers Insurance Exchange v. Steele Insurance Agency, Inc., illustrates this dilemma that can face employers. In that case, several insurance agents for Farmers Insurance Exchange left to start up or join a competing insurance agency. While employed by Farmers, each of them had access to Farmers’ computer system that contained all of its important client information. Several of the departing employees downloaded customer information from the system prior to leaving Farmers and joining the competitor. Between January and November 2012, several agents left Farmers to join this other agency and Farmers became suspicious during the year that its customers were being unlawfully solicited. Despite this suspicion, Farmers waited until April 2013, more than six months after the departure of the last employee, before filing a lawsuit that claimed its former employees had misappropriated its trade secret information.

Within weeks of filing its lawsuit, Farmers sought a temporary restraining order against its former employees and their new employer that would have prevented them from, among other things, soliciting, accepting or servicing the insurance business of any of the policy holders that they had serviced while employed at Farmers. In order to obtain a temporary restraining order/preliminary injunction, a plaintiff in a trade secret case typically has to show: (1) that it has a substantial likelihood of prevailing on the merits of its trade secret misappropriation claim; and (2) that it will sustain irreparable injury if the defendants are not immediately stopped from engaging in their unlawful activities. Numerous California courts have recognized that the loss of customers as a result of alleged trade secret misappropriation can constitute the irreparable injury that would warrant a TRO/preliminary injunction.

However, the court denied Farmers’ application for a TRO on the ground that it could not establish that it needed the “emergency” relief of a TRO. Specifically, the Court found that the six month delay between the discovery of the wrongful conduct and the application for the TRO constituted an “undue delay” meant that the irreparable harm Farmers allegedly suffered was not imminent. Farmers apparently could offer “no explanation for their delay in seeking a TRO for nearly six months”. Thus, as a result of Farmers decision to wait to see what would happen after its employees departed, it lost an opportunity to obtain immediate injunctive relief to stop defendants’ alleged unfair competition.

While Farmers may still obtain a preliminary injunction, several weeks will lapse before that would be possible, which will allow the departing employees to continue to solicit and do business with Farmers customers. Furthermore, the court that will decide whether to grant a preliminary injunction has already found that Farmers engaged in unnecessary delay. This outcome is a reminder to all employers that if they suspect their trade secret information has been misappropriated and they are being damaged by having their customers solicited away, they should act fast to pursue all available legal remedies and protect their business interests.