Opinion
No. FST CV 06-4009802 S
January 12, 2007
MEMORANDUM OF DECISION
This action claiming violations of statutory and common-law rights involving trade secrets and proprietary information and seeking injunctive relief and damages came to this court on August 4, 2006. On that date the court, (D'Andrea, J.), granted the plaintiff's application for preliminary ex-parte relief pursuant to General Statutes § 52-570b(a)(3). On August 7, 2006 a custodian appointed by the court's order, together with a state marshal, went to the defendant's residence and made copies of the contents of hard drives on several computers located in the residence.
"(a) Any aggrieved person who has reason to believe that any other person has been engaged, is engaged or is about to engage in an alleged violation of any provision of section 53a-251 may bring an action against such person and may apply to the Superior Court for: . . . (3) an order directing the appointment of a receiver. Subject to making due provisions for the rights of innocent persons, a receiver shall have the power to sue for, collect, receive and take into his possession any property which belongs to the person who is alleged to have violated any provision of section 53a-251 and which may have been derived by, been used in or aided in any manner such alleged violation. Such property shall include goods and chattels, rights and credits, moneys and books, records, documents, papers, choses in action, bills, notes and property of every description including all computer system equipment and data . . ."
Over a period of five days throughout the autumn of 2006, the court heard the parties' evidence with regard to the plaintiff's application for a temporary injunction. During the course of those hearings the plaintiff sought an order pursuant to Practice Book § 11-20 permitting certain evidence involving trade secrets to be presented in a closed courtroom. A limited order was granted by the court (Nadeau, J.) on November 2, 2006. In keeping with the spirit of that order and the provisions of General Statutes § 35-55 this memorandum of decision will make only general reference to matters which the plaintiff claims are trade secrets.
"In an action under this chapter, a court shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting protective orders in connection with discovery proceedings, holding in-camera hearings, sealing the records of the action and ordering any person involved in the ligation not to disclose an alleged trade secret without prior court approval."
The evidence establishes the following facts. The plaintiff is a small publicly held corporation engaged in the business of developing systems for the delivery of certain drugs used in the treatment of serious diseases, including liver cancer. The Delcath system involves isolating the blood flow to a diseased organ by use of catheters and delivering large doses of chemotherapy to the organ. After flowing through the organ the medicated blood is run through an external filter which removes the chemotherapy drugs before the blood is returned to the patient. The prospective advantage of the Delcath system is that permits the administration of chemotherapy in larger doses than would otherwise be possible because of the isolation of the diseased organ and the minimization of side effects to the remainder of the patient's body.
In 2006 the plaintiff had only 6 to 7 employees.
Medical devices such as the Delcath System require the approval of the Federal Food and Drug Administration ("FDA") before they can be made commercially available. The Delcath system is in the final stage of the approval process, known as phase three clinical trials. To successfully complete phase three a statistically significant number of properly selected patients need to be treated using the Delcath system under strict protocols. At the same time, as part of the same clinical trials, other similarly afflicted patients are treated conventionally. In order to secure FDA approval, the clinical trials must demonstrate that the Delcath system is reasonably safe and offers statistically significant advantages in the treatment of liver cancer.
The defendant was first employed by the plaintiff in an executive capacity in 1992, when he and M.S. Koly, the plaintiff's current chief executive officer joined the company. The defendant and Koly had been colleagues prior to joining plaintiff. The defendant was employed by the plaintiff until 2001 when plaintiff terminated his employment. At that time the defendant held the position of director of operations. No aspect of defendant's employment with plaintiff, including confidentiality and trade secrets, was the subject of any written agreement. The plaintiff did not produce any evidence that it had promulgated any company policies or standards regarding trade secrets or confidentiality of company information. At the time of his termination in 2001 the defendant was the owner of 20,200 shares of the plaintiff's common stock. He remained a holder of those shares up to and including the time of the hearings on the plaintiff's application.
After the defendant's termination in 2001 and until July 27, 2006 the defendant was retained by the plaintiff as a part-time consultant. The first year of the consulting arrangement was covered by a written contract which expired in mid-2002. Thereafter the relationship between the parties was not the subject of a written agreement. As a consultant the defendant was provided with an office equipped with a personal computer at the plaintiff's place of business.
The defendant also maintained a home office which was also equipped with a personal computer. That computer had many files relating to the defendant's work for the plaintiff. In addition to defendant's consulting arrangement with plaintiff, the defendant acted as a consultant for other parties and engaged in projects of his own. With the plaintiff's knowledge and consent the defendant worked on plaintiff's projects both at the plaintiff's office and at the defendant's home. The plaintiff permitted the defendant to work on projects for third parties at the plaintiff's office; in order to have the advantage of having the defendant on site and available to provide immediate services to plaintiff as the need arose.
During the consultancy both the plaintiff and the defendant referred to the defendant as plaintiff's director of operations. His duties included shareholder relations which involved frequent communications with many of the plaintiff's shareholders.
The computers at the plaintiff's office are not networked and do not share any common data bases. Each is a stand-alone personal computer which does not afford access to any other company computer or data base.
Both as an employee and as a consultant the defendant reported directly to the plaintiff's chief executive officer, M.S. Koly ("Koly"). In June 2006, Koly informed the defendant that it no longer wished to continue the relationship with the defendant in its current form. Koly offered the defendant full-time employment with the plaintiff at a salary reflecting his then current consulting rate. The defendant, believing that it was in his best interest to continue his personal projects and his consulting work for third parties, rejected the offer of full-time employment. The parties then agreed that the defendant would not act as a consultant for plaintiff after July 31, 2006. As events transpired the defendant actually terminated his consulting services with the plaintiff on July 27, 2006.
In 2006, the plaintiff's largest shareholder was Robert Ladd ("Ladd") and his affiliated entities, Laddcap Value Associates, LLC and Laddcap Value Partners, LP. Ladd became concerned with certain corporate actions, including the election of certain new directors. When the plaintiff failed to address these concerns to Ladd's satisfaction, Ladd began planning a consent solicitation. A consent solicitation is a solicitation of proxies from the shareholders of a publicly held company seeking the approval of a majority of the shareholders for certain corporate actions. The defendant was well acquainted with Ladd because of his shareholder communication efforts on the plaintiff's behalf.
One evening in March 2006, the defendant had a telephone conversation with Ladd lasting nearly an hour. During the conversation the defendant tried to persuade Ladd to abandon his plans for a proxy solicitation. The defendant reported the conversation, including its substance and tenor to Koly the next day.
On July 5, 2006, the defendant met with Ladd for dinner at his request. At that meeting Ladd informed the defendant of his plans to proceed with a proxy solicitation and asked the defendant to agree to be a nominee for one of the directorships which a successful solicitation would open up. The defendant accepted Ladd's proposal which included a promise to pay the defendant $20,000 a month during the solicitation. The defendant did not discuss the meeting with Koly.
After his July 27, 2006 resignation the defendant became openly involved in the proxy solicitation on Ladd's behalf. When launched, Ladd's consent solicitation sought the removal of all of plaintiff's directors, their replacement with five new directors including Ladd and the defendant, and the repeal of certain recently enacted by-laws. The defendant actively assisted Ladd in the preparation of his proxy solicitation particularly those portions dealing with the plaintiff's business prospects.
For his efforts on Ladd's behalf the defendant was paid $40,000. Defendant's request for an additional $25,000 as a "success fee" was not agreed to by Ladd. Ladd's consent solicitation was opposed by the plaintiff. M.S. Koly testified that he felt personally betrayed by the defendant's decision to align himself with Ladd in the proxy fight. In the course of the solicitation Koly issued a statement threatening to resign in the event Ladd's solicitation succeeded.
On August 30, 2006, in response to Koly's threat, the defendant authorized the release of a letter critical of the plaintiff's management and addressing the particulars of certain phase III clinical trials crucial to the plaintiff's efforts to commercialize certain uses of its products. In the letter the defendant announced his fitness and availability to serve as interim chief executive office of the plaintiff if Koly made good on his threat to resign.
The defendant's efforts in support of Ladd during the consent solicitation give rise to the claims asserted in the plaintiff's first, second, third, fourth, fifth and sixth counts. Those counts include allegations that the defendant divulged plaintiff's trade secrets both publicly in his August 30, 2006 letter to shareholders and privately to Ladd in E-mail communications in violation of the Connecticut Uniform Trade Secrets Act, General Statutes § 35-50 et seq. and the Connecticut Unfair Trade Practices Act, General Statutes § 42a-110 et seq.
On February 27, 2006, during the period of his consultancy, the defendant downloaded a program named "Eraser" from the Internet and installed it on the computer in his office on the plaintiff's premises. The program was designed to cleanse a computer's hard drive of any trace of deleted files. The defendant testified that he ran the program several times prior to his last day as a consultant to plaintiff. The defendant testified that he installed the "Eraser" program at Koly's request after concerns arose that sensitive files might not have been deleted from obsolete computers which were designated for donation to schools or other charities.
Koly testified that he had not made such a request of the defendant. However, he also testified that he was "computer illiterate" and that the defendant was responsible for all computer issues both during his employment and during his consultancy. The plaintiff called Carlos Cordova, a forensic computer expert, as a witness. Cordova had examined the computer in the defendant's former office on the plaintiff's premises. Based on his examination of the schedule log of the hard drive of the computer, he concluded that the "Eraser" program had been scheduled to run more than 100 times prior to July 25, 2006 (the defendant's last day at plaintiff's office) and twice thereafter. Cordova did not examine the system log on the same hard drive. Such an examination would be necessary to determine the number of times the "Eraser" program actually ran during the period in question. Cordova testified that he found evidence of ten files that had been permanently deleted from the computer. Five of those files were recoverable and could be identified.
The deleted files including copies of the defendant's expense reports submitted to the plaintiff, records of the defendant's activities on behalf of the plaintiff during the consultancy and a memo from the defendant to Koly. There was no evidence that any of those files were of any value to the plaintiff or were not duplicates of files located on other computers owned by the plaintiff. The defendant's actions in installing the "Easer" program and in using it to delete files form the basis for the claims asserted in the plaintiff's seventh and eighth counts. Those counts include allegations that the defendant violated General Statutes §§ 53a-251 and 52-570b by deleting files from the personal computer located in his office at the plaintiff's place of business in Stamford.
CONNECTICUT UNIFORM TRADE SECRETS ACT
The Connecticut Uniform Trade Secrets Act prohibits the "misappropriation" of trade secrets. General Statutes § 35-51(d) defines a "trade secret" as:
information, including a formula, pattern, compilation, program, device, method, technique, process, drawing, cost data or customer list that (1) Derives independent economic value, actual or potential, from not being generally know to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Whether or not particular material is a trade secret, and therefore entitled to protection is a fact-driven analysis. See Town Country House Home Service, Inc. v. Evans, 150 Conn. 314 (1963). "Information of a business is a proprietary trade secret if it is information not generally available to competitors which has been developed at the expense of the business and which the business safeguards as a secret known only by those acting on behalf of the business." Id., at 319.
The gravamen of the first count of the plaintiff's complaint is that the plaintiff disclosed trade secrets to the public and to Ladd in violation of General Statutes § 35-51(b)(2). That provision prohibits the misappropriation of trade secrets. "Misappropriation," as is defined as:
disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret or (B) at the time of the disclosure or use knew or had reason to know that his knowledge of the trade secret was (i) derived from or through a person who had utilized improper means to acquire it; (ii) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (C) before a material change of his position knew or had reason to know it was a trade secret and that knowledge of it had been acquired by accident or mistake.
The evidence does not support the plaintiff's claim that the defendant engaged in any act that would constitute misappropriation of a trade secret of the plaintiffs. The press release issued by the defendant during the proxy solicitation did not disclose any information to the public regarding the plaintiff's trade secrets and operational plans that were not already disclosed to the investing public in the filings made by the plaintiff pursuant to its reporting obligations under the Securities Act of 1933, 15 U.S.C. § 77a et seq. and the regulations of the Securities Exchange Commission.
The information transmitted by the defendant to Ladd via e-mail was sent in response to an inquiry by Ladd questioning some of the defendant's suggested edits to a press release and filing related to Ladd's proxy solicitation. The defendant's e-mail was ambiguous and could have referred to matters within the public domain as well as matters which might tangentially involve confidential information. The court found the defendant's explanation that the e-mail did not involve trade secrets to be credible and entirely consistent with the context of the prior communications between Ladd and the defendant. The alternative explanation urged by plaintiff's counsel would require the court to make inferences not reasonably supported by the evidence.
The plaintiff further claims that the defendant's conduct in placing plaintiff's files on his home computer and retaining them after the termination of his consultancy also constitutes misappropriation of the plaintiff's trade secrets. The evidence supports the defendant's claim that the plaintiff was aware that the defendant used his home computer for the plaintiff's work and retained the plaintiff's files on that computer's hard drive. The evidence does not show that the plaintiff, at any time, prior to the commencement of this litigation demanded the deletion of such files from the plaintiff's home computer and/or requested the defendant to return any documents or materials belonging to plaintiff. In fact, the application for injunctive relief demanded an order preventing the defendant from destroying or removing any files from his home computer.
The court finds that the defendant did not "misappropriate" any information belonging to the plaintiff. Accordingly, the court need not determine whether the scant efforts which the plaintiff made to protect its trade secrets and confidential information were sufficient to meet the requirements of General Statutes § 35-51(d)(2).
CONNECTICUT UNFAIR TRADE PRACTICES ACT COMMON-LAW CLAIMS
In its second count the plaintiff alleges that the same conduct which served as a basis for its claims under the Connecticut Uniform Trade Secrets Act also constituted violations of the Connecticut Unfair Trade Practices Act ("CUTPA"). In its third count, the plaintiff alleges a breach of a common-law duties of loyalty. The fourth count seeks injunctive relief based on the same allegations. The fifth count alleges a constructive trust. The sixth count alleges breach of fiduciary duty. Each of these common-law counts are based on the same factual allegations as the first count. Since the court has found that the plaintiff has failed to establish that any wrongful conduct occurred, the plaintiff's CUTPA count and each of its common-law claims must fail as well.
STATUTORY COMPUTER ALLEGATIONS
In its seventh count the plaintiff alleges that the defendant misused computer information in violation of General Statutes §§ 53a-251(e) by making unauthorized copies of plaintiff's computer files and maintaining them on his home computer; and by deleting and destroying computer files on the computer located in his office on plaintiff's premises. The claim of unauthorized copying is based on the admitted presence of plaintiff's files on the defendant's home computer. The claim of file destruction is based on the installation and use of the "Eraser" program on the defendant's computer located at the plaintiff's offices. These alleged violations of General Statutes § 53a-251(e)(1), (2) and (3), a criminal statute, are used as a basis for civil claims under General Statutes § 52-570b(a).
"(e) Misuse of computer system information. A person is guilty of the computer crime of misuse of computer system information when: (1) As a result of his accessing or causing to be accessed a computer system, he intentionally makes or causes to be made an unauthorized display, use, disclosure or copy, in any form, of data residing in, communicated by or produced by a computer system; or (2) he intentionally or recklessly and without authorization (A) alters, deletes, tampers with, damages, destroys or takes data intended for use by a computer system, whether residing within or external to a computer system, or (3) intercepts or adds data to data residing within a computer system; or (3) he knowingly receives or retains data obtained in violation of subdivision (1) or (2) of this subsection; or (4) he uses or discloses any data he knows or believes was obtained in violation of subdivision (1) or (2) of this subsection."
"a) Any aggrieved person who has reason to believe that any other person has been engaged, is engaged or is about to engage in an alleged violation of any provision of section 53a-251 may bring an action against such person . . ."
In its eighth count the plaintiff claims that essentially the same conduct constitutes unauthorized use of a computer in violation of General Statutes §§ 53a-451 and 52-452.
The court has already determined that the evidence establishes that the defendant's use of his home computer with respect to the plaintiff's files was authorized. Accordingly, plaintiff's allegation of a violation of General Statutes § 53a-251 based on such conduct must fail.
Having considered the evidence, the court finds that the defendant's use of the "Eraser" program was not intended to and did not cause harm to the plaintiff. The evidence shows that the use of the program was innocent and innocuous. The court further finds that the use of the "Eraser" program was authorized by the plaintiff. The court need not determine if, as the defendant claims, M.S. Koly asked defendant to evaluate the effectiveness of program. The evidence established that at the time the "Eraser" program was installed, the defendant was in change of all relevant aspects of the plaintiff's computers and had the authority to install and use the program as he saw fit No evidence was presented to show that the computer used by the defendant at the plaintiff's office was damaged or that any files or materials, not otherwise in the plaintiff's possession, were missing from the hard drive of that computer.
The plaintiff claims that the "reason to believe" provision of General Statues § 52-570b(a) imposes a minimal burden on a plaintiff seeking relief under its provisions. The statute represents a legislative enactment which relieves a plaintiff invoking its provisions of the customary obligation of alleging irreparable harm or lack of an adequate remedy at law. D.L. Ryan Companies, LTD v. Sierra Communications Group, LTD, Superior Court Fairfield JD, No. CV950326239 S, (February 2, 1996, Moran, J.) [ 16 Conn. L. Rptr. 168]. It was on this basis that the plaintiff was able to obtain the relief previously granted in this case.
The "reason to believe" provision of the statute authorized the plaintiff to bring this action against the defendant without proof of actual harm. However, the statute does not articulate that the plaintiff is subject to a lower standard of proof (e.g. probable cause) once the action is commenced. Accordingly the plaintiff is still subject to the burden of establishing, by a preponderance of the evidence, the facts necessary to support its claims. In this case the evidence does not establish that the defendant's conduct constitutes a violation of any of the statutes cited by the plaintiff. To wit: General Statutes § 53a-251(e), § 52-570b, § 53a-451, or § 52-452.
CONCLUSION
Notwithstanding its failure to present evidence supporting its claims for injunctive relief, the plaintiff urges the court to maintain in place the orders issued by the court (D'Andrea, J.T.R.) pursuant to the plaintiff's ex parte application. Those orders include enjoining the defendant from disclosing or destroying any of the plaintiff's trade secrets or other confidential information in his possession.
The standards governing the granting of a temporary injunction are well established. The party seeking such relief must establish 1) the absence of an adequate remedy at law; 2) the possibility the party will suffer irreparable harm; 3) the likelihood that the party will prevail at trial; and 4) that the balance of the equities favors the injunctive relief. Waterbury Teachers A'ssn. v. Freedom of Information Comm., 230 Conn. 441, 446, 645 A.2d 978 (1994).
Because the plaintiff is seeking relief under General Statutes § 52-570b(a) the requirements of demonstrating an adequate remedy at law and irreparable harm are, at least at the temporary injunction stage or the proceedings, not at issue. However, even assuming that the balance of the equities favors the plaintiff, the plaintiff's evidence fails to establish a likelihood that the plaintiff will prevail at trial. Under these circumstances the court must reject the plaintiff's request that the temporary injunction issued against the defendant remain in place.
In its post-hearing brief the defendant invited the court to find that the plaintiff had brought its application in bad faith. The court declines to do so. The issue was not before the court.
However, the court notes that Koly's credible testimony established the shock, disappointment and sense of personal betrayal he felt when he learned that the defendant, a long-term colleague, had joined the Ladd Group in opposition to Koly's leadership of the defendant. Given their long-term working relationship, the court finds the defendant's failure to personally inform Koly of his decision to join Ladd inexplicable. The suspicious circumstances created by the defendant's behavior strongly militates against an inference of bad faith on the plaintiff's part.