Failure To Allege Theft Of Trade Secrets By Wrongful Means Dooms Claim For Relief

• Posted on: Apr 18 2018

Recently, this Blog wrote about the law governing the theft or misappropriation of trade secrets. (Here.) As noted in that post, with the exception of New York and Massachusetts, the protection of trade secrets is generally governed by the Uniform Trade Secrets Act (“UTSA”). In those two states, however, the protection of trade secrets is governed by the common law.

Generally, trade secret owners have recourse only against the misappropriation of a trade secret. Misappropriation is the use of a trade secret without permission “to gain an advantage over [the] plaintiff.” CBS Corp. v. Dumsday, 268 A.D.2d 350, 353 (1st Dept. 2000).

Under the UTSA, misappropriation occurs when a trade secret is acquired by “improper means” or from someone who has acquired it through “improper means.” Theft, bribery, and misrepresentation are among the acts considered to be “improper means.”

In New York, there is no case law explicitly defining “improper means”.  Instead, New York courts have looked to the Restatement of Torts to define the elements of the claim. See Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 407 (1993) (adopting the Restatement definition of a trade secret).

Under New York law, a trade secret is misappropriated if it was obtained through corporate espionage or other improper manner. “Improper manner” usually means conduct that “fall[s] below the generally accepted standards of commercial morality and reasonable conduct.” Restatement of Torts § 757 cmt. f (1939). New York courts consider improper manner to include, among other things, physical violence, fraud or misrepresentation, civil suits and criminal prosecutions, and some degree of economic pressure. Guard-Life Corp. v. Parker Hardware Mfg. Corp., 50 N.Y.2d 183, 191 (1980).

In addition, a person or company can be guilty of misappropriation if the information was obtained through a breach of trust, e.g., an employee steals trade secrets from his employer, gives the information to another company, and that company uses the secrets even though it has obtained the information without permission.

“Improper manner” was the subject of an April 3, 2018, decision issued by the Appellate Division, First Department in which the Court held that a theft of trade secrets claim should have been dismissed for failure to allege the use of improper means in obtaining the trade secrets. BGC Partners, Inc. v. Avison Young (Canada) Inc., 2018 N.Y. Slip Op. 02290 (1st Dept. Apr. 3, 2018).

BGC Partners, Inc. v. Avison Young (Canada) Inc.

Background

BGC Partners arose out of the acquisition by Plaintiffs, BGC Partners (“BGC”) and its indirect subsidiary, G&E Acquisition Company, LLC (“G&E Acquisition”), of certain assets and causes of action possessed by Grub & Ellis Company (“G&E”), one of the oldest and largest real estate brokerages in the United States. Plaintiffs alleged that Defendant, Avison Young (“AY”), one of Canada’s largest real estate brokerage firms, and its United States affiliates, embarked upon an aggressive expansion campaign in the U.S., by targeting and stealing G&E’s personnel, offices, trade secrets, and business opportunities. Defendants did so, according to Plaintiffs, through a variety of tortious and illegal means, including: (i) inducing dozens of G&E affiliates and brokers to breach their employment or independent contractor agreements; (ii) using improper means to misappropriate G&E’s trade secrets; and (iii) inducing and assisting larceny by these same brokers and affiliates by rewarding them—with full knowledge or recklessness to the consequences—for concealing and stealing trade secrets and business opportunities that belonged to G&E.

In particular, Plaintiffs alleged that the improper means used by Defendants included: offering excessive incentives to G&E’s affiliates in Nevada and South Carolina to breach their Affiliate Agreements; offering excessive compensation packages to former G&E brokers – packages that were designed to incentivize brokers to conceal their in-progress deals from Plaintiffs; and providing brokers with up to 95% commission splits for transactions closed in the first few months after commencing employment with AY, as opposed to the industry standard split of about 60%.

Plaintiffs alleged that Defendants induced at least 41 brokers to leave their employ with G&E.

Motion Court Proceedings

Defendants moved to dismiss the action in its entirety. The court granted the motion as to the claims for tortious interference, conspiracy, aiding and abetting breach of fiduciary duty and unjust enrichment, but denied it as to the claims for theft of trade secrets, aiding and abetting breach of the duty of fidelity, and injunctive relief.

With regard to the claim for theft of trade secrets, the court found that Plaintiffs’ “customer list and other customer-specific data [were] protectable as trade secrets.” The court noted that Plaintiffs acquired the customer information, which was not readily ascertainable, “through cultivation of long-standing relationships; that the customer information included not just names but specific customer data such as preferences about properties and locations; and that plaintiffs took reasonable steps to maintain its secrecy through the use of confidentiality agreements.”

The court also found that Defendants used improper means to obtain the trade secrets.  They did so by inducing the affiliates and brokers to breach confidentiality agreements that protected customer lists and other information about customer preferences and histories and engaged in a scheme to deprive plaintiffs of commissions and business opportunities. “These allegations,” held the court, were “sufficient to plead improper means.” Citations omitted.

In sustaining the claim, the court rejected Defendants’ argument that the type of conduct meant by improper manner is “limited to ‘industrial espionage.’” While “industrial espionage may undoubtedly support a claim for misappropriation of trade secrets [,]” the court noted that “other tortious and wrongful acts, whether or not considered espionage, may constitute improper means.” As noted, the court found that Plaintiffs adequately pled “improper means by alleging that defendants paid the G&E brokers to induce them to violate their confidentiality agreements and to disclose plaintiffs’ trade secrets to defendants in order to divert plaintiffs’ business opportunities.”

Plaintiffs appealed.

The First Department’s Decision

The First Department unanimously reversed the motion court’s order granting the motion to dismiss as to the theft of trade secrets, aiding and abetting breach of the duty of fidelity and injunctive relief causes of action, and otherwise affirmed the remainder of the decision.

As to the claim for the misappropriation of trade secrets, the Court held that it should have been dismissed, finding that the means used to obtain the customer lists were not improper. In this regard, the Court noted that offering the brokers “competitive compensation” is not wrongful.

Takeaway

BGC Partners teaches that pleading an improper manner is not as easy as it seems. The plaintiff must show that the conduct used to misappropriate the trade secret was wrongful. Conduct that is considered customary or acceptable within the subject industry – such as offering lucrative compensation packages as an incentive to convince a broker to join another firm – is not wrongful or improper. More is needed.