The US Ninth Circuit Court of Appeals has overturned some of the decisions made by the US District Court regarding claims that EBS BrokerTec CTO, Viral Tolat, misappropriated trade secrets from his former employer, Integral Development Corp.
To succeed in a claim for misappropriation of trade secrets under California law, Integral must show that it possessed a trade secret, that Tolat misappropriated that trade secret and that this misappropriation caused or threatened damage to Integral.
In its case against Tolat, Integral claims that there are three sets of information that Tolat misappropriated. Firstly, the firm claims that Tolat misappropriated facts about Integral’s business that he then included in a resume he sent to EBS, a competitor of Integral.
Secondly, it alleges that Tolat took the source code that Integral uses for its products, and thirdly, Integral claims that he misappropriated documents containing, among other things, customer lists and details about ongoing projects.
Profit & Loss previously reported in February 2014 that a US District Court had denied the charges brought against Tolat, but that Integral planned to pursue the case in the Ninth Circuit Court of Appeal.
The judgment from this appeals court has upheld one, reversed two and vacated two of the original District Court’s summary judgments on this case.
Regarding Integral’s claims, the latest court document notes that, “Integral has failed to present any evidence that it suffered damages as a result of Tolat disclosing facts about Integral in his resume or as a result of Tolat copying and retaining Integral’s business files”.
The court document continues: “There is no evidence in the record that Integral suffered actual losses from these actions, or that any of Integral’s competitors were unjustly enriched as a result of these actions.”
As a result, the district court granted summary judgment in favour of Tolat on Integral’s claim, “to the extent that it is based on the information contained in Tolat’s resume or the business files that he allegedly coped and retained”.
But in other areas, the Ninth Circuit Court reversed the District Court’s summary judgments.
The latest court judgment says that Integral met the burden of whether the source code is a trade secret under the California Uniform Trade Secrets Act (CUTSA), noting that there “is evidence that Tolat copied at least a portion of Integral’s source code to an external hard drive, in violation of Integral’s policies” shortly before he planned to retire from the firm.
It also claims that there is evidence that Tolat only copied the recent updates in the source code to the external hard drive “and that he tried to cover up the evidence that he had tried to transfer the files to his personal device”.
The Ninth Circuit judgment indicates that there is evidence to raise a question of material fact as to whether Tolat misappropriated those portions of Integral’s source code that qualify for trade secret protection.
“There is evidence that Tolat copied the source code shortly before he planned to leave Integral and join EBS. There is also evidence that, after Tolat joined EBS, EBS released a product – EBS Direct – that competed directly with some of Integral’s products. A fact finder must determine whether Tolat actually gave Integral’s source code to EBS and whether EBS used the source code to develop EBS Direct,” it says in the court document.
Finally, the latest judgment finds that there is evidence that EBS Direct cut into Integral’s sales, resulting in a loss of revenue and causing Integral’s equity value to decrease, satisfying the burden of proving damages.
The case is now remanded to the District Court, with some factual questions required by the court to be resolved by a fact-finder.
“We are pleased and agree with the Ninth Circuit’s ruling in the case. We look forward to presenting the evidence of Tolat’s actions to a jury and obtaining a just result for Integral and its shareholders,” says Tim Mahota, general counsel for Integral.
Even though the case is against Tolat, not EBS BrokerTec, a spokesperson for the latter comments: “We understand the Court upheld the dismissal of one of Integral’s claims and narrowed others, and we continue to be confident the remainder of the case will be rejected following trial.”