IP Law Daily Logistics company’s former employees stole proprietary source code to build competing software
Wednesday, June 24, 2020

Logistics company’s former employees stole proprietary source code to build competing software

By Robert B. Barnett Jr., J.D.

In addition to infringing the company’s copyright, the former employees wrongfully retained and misused the company’s trade secrets and confidential information to further their interests.

In a suit by a logistics company against former employees who breached their non-compete agreement in working for a competitor, the company was entitled to summary judgment for copyright infringement because the evidence overwhelmingly established that the former employees copied source code for a software program, used it to build in three months a program similar to the program the company spent years developing, and benefitted from the theft by using it as a major selling point in poaching clients, the federal district court in New York City has ruled. The court also granted summary judgment to the company on its claim for misappropriation of trade secrets because the "overwhelming forensic evidence" demonstrated that the former employees wrongfully retained and misused the company’s trade secrets and confidential information to further their new company’s business (Capstone Logistics Holding Inc. v. Navarrete, June 23, 2020, Daniels, G.).

Capstone Logistics Holdings, Inc., Capstone Logistics, LLC, and Pinnacle Workforce Logistics, L.L.C. sued four former high-placed executives for breach of contract, misappropriation of trade secrets, breach of fiduciary duty, tortious interference, fraud, unjust enrichment, copyright infringement, and unfair competition. The court issued a preliminary injunction against the individuals preventing them from using proprietary information and trade secrets. After discovery, the company filed a motion for summary judgment.

Copyright infringement. The company asserted that the former employees infringed copyrights held on the MobilTrak source code, MobilTrak documentation, MobilTrak 2.0 Overview, and MobilTrak 2.0 Training. It alleged that the former employees illegally copied the content and used it to make a competing product called Genesis. Among the damning evidence was the fact that the former employees built Genesis in three months, compared to the years that it took the company to build MobilTrak. The primary architect of both platforms was the same person, a non-party who was hired by the former employees. The non-party testified that he was instructed to create a platform similar to MobilTrak. The evidence also indicated that the meticulous documentation that the non-party had used for MobilTrak was also used for Genesis. In addition, some of the source code for Genesis contained not only numerous instances of verbatim lines of code but also identical errors.

The former employees argued that MobilTrak was not original. The evidence, however, was to the contrary, with even the former employees’ expert admitting that other options existed. As a result, the court rejected the former employees’ argument that the merger doctrine applied, that is, that there existed only one or few ways of expressing the code. Other methods of construction could have used to create the same technology. The court went on to note that evidence clearly established that the former employees were responsible for copying the protected code. Their argument that they had no idea that the developer they hired did not build it from scratch was belied by the evidence, including the time it took to create Genesis compared to the original. As for whether the former employees benefited from the infringed material, the evidence clearly established that the former employees readily used the existence of Genesis to move clients from the former employer to the new employer. As a result, no genuine factual dispute existed about whether the former employees were guilty of copyright infringement.

Trade secrets. The record was "full of evidence," the court said, that the former employees "wrongfully retained and misused" trade secrets and confidential information to further the new company’s business interests. The information that they used was exactly the type of information that the trade secrets law considered a trade secret. The court also rejected the argument that the trade secrets were not used in interstate commerce, as the Defend Trade Secrets Act of 2016 requires. All the law requires is that the trade secrets be intended for use in interstate commerce. Without a doubt, the company operated nationally and intended for the trade secrets to be used in interstate commerce. The former employees, therefore, were guilty of misappropriation of trade secrets.

Other claims. The court also granted summary judgment to the company on its claims for breach of contract, unfair competition, breach of fiduciary duty, and tortious interference.

Sanctions. The court, however, denied the company’s motion for sanctions, which was based on a contention that the former employees destroyed evidence. Some evidence revealed that any evidence that was destroyed was destroyed before the obligation to preserve it began. Some other evidence did exist, however, that the former employees continued to engage in activities specifically enjoined by the preliminary injunction. No sanctions were mandated, however, because adequate protections already existed to address that problem.

The court, therefore, granted summary judgment on liability on the six claims. As a result, the company was entitled to damages, which will be determined at a later date. In addition, the court agreed to convert the preliminary injunction into a permanent injunction.

This case is No. 1:17-cv-04819-GBD-BCM.

Attorneys: James S. Yu (Seyfarth Shaw LLP) for Capstone Logistics Holdings, Inc., Capstone Logistics, LLC and Pinnacle Workforce Logistics, LLC. Eric A. Savage (Littler Mendelson P.C) for Pedro Navarrete and David Poffenberger.

Companies: Capstone Logistics Holdings, Inc.; Capstone Logistics, LLC; Pinnacle Workforce Logistics, LLC

MainStory: TopStory Copyright TechnologyInternet TradeSecrets GCNNews NewYorkNews

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