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Fifth District Court of Appeal Overturns Damages Award in Trade Secrets Act Lawsuit

 

A client list and information on clients’ computer networks do not qualify as trade secrets under the Illinois Trade Secrets Act, the Fifth District Court of Appeal decided April 13 in a business trade secrets lawsuit. In System Development Services v. Haarman, No. 04-CH-30 (Ill. 5th 2009), System Development Services (SDS) sued four former employees who left to start a competing business offering networking services to businesses in Effingham County. A trial court found that the defendants had misappropriated a list of clients and potential clients, as well as information on SDS clients’ networks, but the Fifth District Court of Appeal overturned that decision.

SDS sets up and maintains computer networks for local businesses. It maintains a database of clients and potential clients, and stressed to employees that both the list and the clients’ network information should be kept private. Defendants Timothy Haarman, Jason Repking, Rick Hoene and Terry Oldham left SDS after a bad financial year and started a competing business, Technical Partners. None had signed a restrictive covenant limiting their right to compete with SDS. However, when starting out, they sent out a mailing to potential clients that SDS thought was suspiciously similar to addresses in its client database. They also relied on former SDS customers during their first month inbusiness. SDS sued them for violations of the Illinois Trade Secrets Act and breach of fiduciary duty.

At a bench trial, the plaintiff testified that some of the addresses at issue contained information not found in the telephone book, and that work orders and emails were deleted from their system shortly before defendants left. However, the company’s owners told the court that they had no personal knowledge that a client list was stolen. The defendants testified that they made their mailing list using the phone book, the Internet and a chamber of commerce listing. They also relied on client relationships formed at SDS and personal connections. One defendant testified that no special knowledge other than the ordinary knowledge of a network technician was necessary to serve SDS and Technical Partners clients.

The trial court found for the plaintiff on the Trade Secrets Act claims as to misappropriation of the SDS client list and information about clients’ networks. It granted damages and an injunction stopping them from competing with SDS. The defendants appealed.

On appeal, the Fifth District Court of Appeal reversed that decision, saying that the client list and information about customers’ networks did not qualify as protectable trade secrets under the Trade Secrets Act. To qualify as a trade secret, the court said, information must give its owner a competitive advantage in business, and the owner must make an effort to keep it secret. Illinois common law also requires judges to evaluate how well known the information is, the effort it took to develop it and the difficulty others would face in acquiring it.

Under these standards, the court wrote, neither the SDS client list nor its customers’ network information were “sufficiently secret” to merit protection as trade secrets. The businesses’ contact information is readily available from multiple sources, and many businesses on the client list were only potential clients, the justices pointed out. It cited no fewer than six Illinois and federal cases holding that client lists were not trade secrets, including the First District Court of Appeal’s decision in Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill. App. 3d 557 (1992). As to the network information, no evidence at trial showed that SDS installed proprietary networks, and the information the defendants did have was no more than the general skills and knowledge inevitably gained from employment. Thus, the Fifth District wrote, there was no trade secret to steal, and the judgment of the trial court was reversed.

The business litigation law firm of DiTommaso-Lubin handles all types of business disputes, including lawsuits over theft of trade secrets, violations of restrictive covenants and breach of fiduciary duty. With offices in Oakbrook Terrace, near Naperville, Ill., and Chicago, our business litigation and business trial attorneys handle many different types of business disputes, including shareholder and partnership lawsuits, breach of contract claims and real-estate disputes from around the state of Illinois, as well as in Indiana and Wisconsin. For more information about the types of cases we handle and a summary of our litigation and trial experience click here, If you have a business litigation matter in state or federal courts and you would like to learn more, please contact DiTommaso-Lubin via email or call 1-877-990-4990 to set up a confidential consultation.