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Trade Secret Laws in North Carolina

North Carolina has statutes to protect "trade secrets." The specifics of this statute, and the cases addressing the statute, are addressed in more detail below.

A recent case illustrates some of the complexity in litigating these claims. In the case of Barbarino v. Cappuccine (March 6, 2012), the employee, a salesperson, signed a confidentiality agreement and a covenant to not compete with the employer. The employer filed a claim (actually a counterclaim) against the employee, alleging that the employee violated the Trade Secrets Act by using the employer's trade secrets. The employer did not, however, specifically identify the trade secrets which the employee misappropriated. As a result, the claim was dismissed, and the appellate court affirmed. Case law in North Carolina holds that notwithstanding the principles of "notice pleading," a claim for a violation of the Trade Secret Protection act must be pled with specificity.

In another recent case, from February 4, 2014, the Court of Appeals addressed the enforceability of a non-competition agreement (which can often be relevant to a claim for violation of trade secret laws). In Copypro v. Musgrove, the Court of Appeals ruled that a non-competition agreement was overly broad. In that case, the employee leased office equipment. His contract with the employer prevented him from working (in any capacity) for a competitor, within a certain territory for three years. The Court held that the agreement was unenforceable because it would have prevented him from even working for a competitor as a custodian.

A person having a trade secret must take measures to keep the information (or process) confidential. This can include limiting access to the information, the use of passwords, and policies for access to files. Although computer software can be reverse-engineered, the use of "object code" can help to preserve the secrecy of the software. A party disclosing the information to third-parties, or even to a court in a legal proceeding, can take measures to try to maintain the confidentiality of the information.

Most of the disputes pertaining to trade secrets in North Carolina involve employment. Typically, an employer sues its former employees, or a competitor who has hired such former employees, alleging that the former employees departed with trade secrets that will be used by the competitor. The use of a "non-compete" agreement, as well as a confidentiality (or "non-disclosure") agreement can greatly help to minimize these risks.

I.       Statutes regarding Trade Secrets

North Carolina has enacted laws to protect "Trade Secrets." A "Trade secret" is defined as " business or technical information, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that: a. Derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use; and b. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

The misappropriation of a trade secret is defined as the "acquisition, disclosure, or use of a trade secret of another without express or implied authority or consent, unless such trade secret was arrived at by independent development, reverse engineering, or was obtained from another person with a right to disclose the trade secret." A person having a trade secret that is being violated can obtain an injuction; i.e. an order of the court requiring the other party to stop using the trade secret. That person can also recover damages (either the actual loss or the unjust enrichment to the other party), punitive damages, and attorneys fees, depending on other factors.

Regarding the proof of this claim, a statute states:

Misappropriation of a trade secret is prima facie established by the introduction of substantial evidence that the person against whom relief is sought both:
(1) Knows or should have known of the trade secret; and
(2) Has had a specific opportunity to acquire it for disclosure or use or has acquired, disclosed, or used it without the express or implied consent or authority of the owner.
This prima facie evidence is rebutted by the introduction of substantial evidence that the person against whom relief is sought acquired the information comprising the trade secret by independent development, reverse engineering, or it was obtained from another person with a right to disclose the trade secret. This section shall not be construed to deprive the person against whom relief is sought of any other defenses provided under the law.

The claim must be brought within three years (i.e. after the misappropriation is or reasonably should have been discovered).

II.        Cases Addressing Trade Secrets.

Several disputes have arisen under these laws and have been addressed by the State and Federal courts in North Carolina. This section addresses cases in which the courts have recognized and have rejected claims under the Trade Secrets Act.

1.         Cases Recognizing Trade Secret

In one case, a party sought disclosure of the pricing agreement between a hospital and a HMO. In determining whether this pricing information was a trade secret, the court set forth the following factors: "(1) The extent to which information is known outside the business; (2) the extent to which it is known to employees and others involved in the business; (3) the extent of measures taken to guard secrecy of the information; (3) the value of information to business and its competitors; (4) the amount of effort or money expended in developing the information; and (5) the ease or difficulty with which the information could properly be acquired or duplicated by others."

The court in this case concluded that "The disclosure of the financial terms of a contract between an HMO and a hospital would be of substantial economic benefit to the competitors of that HMO; each HMO member of the North Carolina HMO Association considers the financial terms of its agreements with health care providers to be confidential trade secrets; disclosure of the financial terms of specific contracts between HMOs and health care providers would be detrimental to competition in the industry and would impair the ability of HMOs to control the rising costs of health care; 'secret pricing' is more important to vigorous competition in a concentrated market; [HMO] and Medical Center are in a concentrated market; HMOs in North Carolina and nationally view price terms of their contracts with health providers as extremely important to keep secret; [HMO] advised the hospital that the pricing information was confidential at the beginning of negotiations over the agreement; the agreement specifies that 'the parties agree to maintain the confidentiality of this agreement, and shall not divulge the terms to any third party . . .'; the price lists were accessible only to a limited number of people; physicians did not have access to the price lists; and it would be extremely difficult for an HMO's competitors to generate this specific information." Wilmington Star-News v. New Hanover Regional Medical Ctr., 125 N.C. App. 174 (1997).

In another case, a company rented equipment to contractors. A competing company hired away numerous employees from the first company. The court held that the company's pricing, customer, personnel, and salary information constituted trade secrets. The former employees from the first company knew about the equipment needs of contractors, and this gave an advantage to the second company entering the market. Some pricing information was also confidential, as was information about salaries. Following the hiring of these persons, the first company sustained a decrease in business, and the competitor had a dramatic increase in sales. The competitor took several clients from the first company. The first company was awarded approximately five million dollars ($5,000,000) in lost profits. This amount was trebled, under a statute pertaining to "unfair or deceptive" acts, and the company was also awarded $1.2 million in legal fees, for a total award of $16,200,000. Sunbelt Rentals, Inc. v. Head & Engquist Equip., L.L.C., 174 N.C. App. 49 (2005). In another case, a stock brokerage firm sued a former employee to prevent him from taking information and using it to work for a competing firm. The employee had signed a non-compete agreement as well as confidentiality agreement. The court ruled for the brokerage firm, and ruled that the employee could not solicit the firm's clients. The court also ruled that the employee could not use information regarding the firm's clients, except that a list of the names and addresses of clients was held to be not a "trade secret," based on the Novacare case discussed in the next subsection. UBS PaineWebber, Inc. v. Aiken, 197 F. Supp. 2d 436, 438-439 (W.D.N.C. 2002)

In one case, the plaintiff operated a landscaping business. It kept information as to its costs confidential (on a computer system accessed only by the president, but also apparently shared with the vice-president). Its vice-president and general manager left to start a competing business. This former employee had marketed the plaintiff's services and had developed business relationships with the plaintiff's customers. The plaintiff alleged that the employee had access to the confidential financial information and customer information, and that the employee solicited the plaintiff's customers while still employed by the plaintiff. The court held that "confidential data regarding operating and pricing policies can also qualify as trade secrets. It is apparent that the ability to predict a competitor's bid with reasonable accuracy would give a distinct advantage to the possessor of that information." The jury awarded the plaintiff $41,000 for lost profit, which was trebled under Chapter 75 to $123,000. Byrd's Lawn & Landscaping, Inc. v. Smith, 142 N.C. App. 371 (2001).

In another case, the plaintiff made equipment to process lumber, including software directing the equipment as to how to handle the lumber through the saw. The plaintiff's vice-president of engineering developed the software, installed the equipment at plants, and assisted customers after installation. The engineer left and started a competing company, and began providing service to the plaintiff's customers, which included modifying the computer program. The court held that the "object code" (as opposed to the "source code") was a trade secret; further, even though the code could be reverse-engineered, this was sufficiently difficult that it was not "readily ascertainable." The first company was therefore entitled to a preliminary injunction, preventing the engineer from marketing or modifying software (in the relevant industry) and from disclosing the software to other persons. Barr-Mullin, Inc. v. Browning, 108 N.C. App. 590 (1993).

In one case, a company developed a line of toner products. A competitor hired a scientist from the company, who had signed a non-compete agreement (i.e. stating that he would not compete with the company) and also a non-disclosure agreement (i.e. stating that he would not disclose confidential information to others), and also took several other employees from the company. The competing company soon developed its own products within a short time. The first company argued that the competitor had obtained its customer list, its vendor list, and technical information. The court held that the evidence was sufficient to support a claim under the Trade Secrets Act. Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp. 2d 541 (M.D.N.C. 2002).

In another case, the State asked various local telephone providers to disclose information about its business and residential customers. The court held that this was protected information, because the information "is not available to the public. Indeed, to provide public access to this information would provide competitors rather extensive insight into the business plans and operations of a particular CLP [telephone provider], information that otherwise would not be available generally. Disclosure of this information would allow competitors to discover how a CLP serves its customers, a CLP's plans for entering the local market and how quickly it acquires new customers, and in which areas of the state the CLP is focusing its marketing efforts and the relative effectiveness of those efforts. Most importantly, disclosure of such information would thwart the creativity and innovation that competition brings to the marketplace, and prohibit the competitive environment our legislature intended to create." Utilities Comm'n v. MCI Telecomms., Corp., 132 N.C. App. 625 (1999).

In another pharmaceutical case, one company planned to launch Pepcid product. One of its employees was hired by a competitor. The first company alleged that the competing company would use its trade secrets. The court held that the first company's supply agreement and projected launch dates of various products was "information not generally known," and was entitled to protection. Even though the employee did not take documents with him, the information contained in his memory could not be given to a competitor. The failure of the company to require the employee to sign a non-compete agreement did not negate its claim, where the employee told the company that he would not be joining a competitor, and where he had signed a confidentiality agreement. Merck & Co. v. Lyon, 941 F. Supp. 1443, 1457 (M.D.N.C. 1996).

2.          Cases Rejecting Trade Secret Claim

In another case, the plaintiff produced lithium products (for use in batteries). One of its employees, an engineer, went to work for a competitor. The employee had signed a confidentiality agreement. The employer claimed that the employee would use confidential information about its processes for producing lithium, and sought to prevent the engineer from conducting research and development for the competitor in several areas. The court held that the evidence was not sufficient to support a preliminary injunction. The engineer stated that he did not intend to use confidential information for the competitor, and he had other motives for leaving his employer. Further, the court found that the employer had not shown that its processes were in fact a trade secret, in part because similar technology could be purchased from vendors, and in part because the competitor claimed to already have the technology at issue. FMC Corp. v. Cyprus Foote Mineral Co., 899 F. Supp. 1477, 1481-1482 (W.D.N.C. 1995).

In another case, a marketing company sued its former employee, who started a company to compete with the company. This new company solicited work from a customer of the marketing company. The marketing company sued the employee, and claimed that it misappropriated trade secrets, consisting of sales forecasting information, a customer database, and information about sales activities in certain territories. The court held that this information was not secret, as it could have been complied by others, and also as the marketing company had already divulged some of this information. Combs & Assocs. v. Kennedy, 147 N.C. App. 362 (2001).

In another case, the general manager of a company that serviced jet engines contacted competitors looking for employment. The company sued the manager for misappropriation of trade secrets. The company could not, however, specify those secrets which the manager supposedly used. The manager had erased his hard drive, and the employer argued that the doctrine of "spoliation of evidence" should raise an inference that the manager misappropriated trade secrets; the court rejected this argument, and held that because the employer could not specify the secrets used by the manager, that the claim failed. Panos v. Timco Engine Ctr., Inc., 197 N.C. App. 510 (2009).

In another case, a company sold prosthetics. Its employee resigned and began work with a competitor, who began acquiring some of the first company's customers. The court rejected the claim, stating, "plaintiff has not come forward with any evidence to show that the company took any special precautions to ensure the confidentiality of its customer information. Indeed, any information used to contact the clients would have been easily accessible to defendant through a local telephone book. As for his treatment of their orthotic and prosthetic needs, the evidence suggests that defendant had been treating these particular clients since his employment with [plaintiff's predecessor]. He had developed a personal relationship with them, and one could expect that they would follow him to a competing business. Thus, we conclude that plaintiff has failed to establish likelihood of success on the merits regarding its claim for trade secret protection." Although the employee had signed a non-compete and confidentiality agreement, these were not worded sufficiently to provide the company with a claim against the employee. Novacare Orthotics & Prosthetics E., Inc. v. Speelman, 137 N.C. App. 471 (2000).

In another case, a company made circuit boards, and two of its engineers went to work for another company making circuit boards. The court held that the first company was not entitled to a preliminary injunction to prevent the employees from using information obtained from the first company because the nature of the circuit boards manufactured by the two companies was so distinct as to render the knowledge the employees acquired at the first company not highly relevant at the second company. Further, the court found that many of the components at issue were generally known in the industry or were readily ascertainable by reverse engineering. Analog Devices, Inc. v. Michalski, 157 N.C. App. 462 (2003).

In one case, a pharmaceutical company sued a competitor for allegedly using information, obtained from confidential documents, to make a competing product. The court rejected the claim, in part, because the competitor created the compound at issue before it could have received information from the confidential (or "secret") documents. The court also found that the chemical principles at issue were "not so distant from the grasp of chemists experimenting with the substance that it may be declared not readily discoverable." Glaxo Inc. v. Novopharm Ltd., 931 F. Supp. 1280 (E.D.N.C. 1996).

III.         Precautions to Maintain Secrecy of Information

Parties with a trade secret must take care to preserve the secrecy of the information. Several cases have addressed whether a party took sufficient measures to maintain the secrecy of the information at issue. In one case, a party to a lawsuit used much of its secret information at a hearing in court, without taking any measures to keep the information from the public domain. The court ruled that this action resulted in a loss of any secrecy of information, stating, "Glaxo's concern for the confidentiality of its information dissipated somewhere between its secured facilities and the courthouse." Glaxo v. Novopharm.

In one case, a person had an idea for a business in which people would make payments to cover the costs of a vacation to be taken in the future. This person sent his idea to a potential partners or other companies to purchase his business. One such company started such a program, and the person with the original idea sued this company. The federal court dismissed the case largely on the basis that the plaintiff had not adequately protected his idea, stating, "plaintiff's forecast of evidence could not support a finding that his Travel Bank idea warrants trade secret protection. . . . It seems plain that anyone with reasonable skill in the field could divine and copy the basic concept of the plan based on plaintiff's own promotional materials." And "his repeated disclosure of the details of the Travel Bank, without any attempt to ensure the information's confidentiality, voids any claim to trade secret protection." Bank Travel Bank v. McCoy, 802 F. Supp. 1358 (E.D.N.C. 1992).

In another case, a company with confidential information (e.g. a list of its customers) did not require its sales employees to sign a confidentiality agreement. The sales employees had access to the customer list, but not to purchase histories. A court held that this was sufficient effort to ensure the confidentiality of the information. Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp. 2d 541 (M.D.N.C. 2002).

In another case, a company took measures to safeguard its confidential information (such as customer lists, vendor lists, salary information), including the use of special books for pricing information, the use of passwords used to protect access to computers, and rules for the removal of files. Sunbelt Rentals, Inc. v. Head & Engquist Equip., L.L.C., 174 N.C. App. 49 (2005).