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Denial of Trade Secrets Misappropriation Undermines Statute of Limitations Defense

Thursday, April 11, 2013
By Tamlin H. Bason

A federal district court erred in dismissing a trade secrets claim under the relevant statute of limitations by failing to take into account significant evidence in the record, the U.S. Court of Appeals for the Sixth Circuit ruled April 5 in an opinion designated as not for publication (Kendall Holdings Ltd. v. Eden Cryogenics L.L.C., 6th Cir., No. 12-3258, 4/5/13, unpub).

The statute of limitations gives a putative plaintiff four years from when it knew or should have known of a alleged misappropriation of trade secrets, the court noted.

In this case, the district court had found that the plaintiff should have known as early as 1999 that its trade secrets were being used by the defendant, and it therefore found the claim, brought in 2008, barred by the statute of limitations. The appeals court reversed and remanded.

The defendant had argued that in 1999 there was no misappropriation because the party that gained access to the alleged trade secrets had done so with the consent of the trade secret's owner.

It was therefore not clear when the statute of limitations clock should have been triggered and so it was an error for the district court to grant the defendant summary judgment on the matter, the Sixth Circuit held.


Small Industry, Tough Competition
The cryogenics industry is a sophisticated, tightly knit, and relatively small industry that utilizes extremely low-temperature substances and high-vacuum conditions to manufacture and supply items for use in the industrial gas, automotive, military, aerospace, medical, and semiconductor industries.

Steven L. Hensley began working in the cryogenics field in 1967 when he started working for CVI Inc. and eventually became vice president of the company. Jim Mitchell began working CVI as a draftsman in 1988. In 1989, Mitchell left CVI but continued to work for the company on a part-time basis.

In 1991, CVI's founder retired and subsequently founded PHPK Technologies Inc. By 1995, both Hensley and Mitchell were working for PHPK, though Mitchell was still only doing designs on a part-time basis. He often took drafts home with him so he could work from home.

Hensley, who became president of PHPK in 1998, was aware that Mitchell was taking work home with him and in fact asked Mitchell to keep backup copies of his work in case of fire.

In 1999, Mitchell's part-time contract with PHPK ended. Mitchell did not return to PHPK or destroy any of the drawings that he had at home. Hensley, who was aware that Mitchell had these drawings, never asked that the be returned to PHPK.

When Mitchell left PHPK he began working part-time for Chart, a successor to CVI. Mitchell worked at Chart until 2004.

In 2004, PHPK was purchased by Kendall Holdings Inc. Hensley became president of Kendall, and Mitchell was brought back to perform part-time drafting duties. Kendall terminated Hensley later in 2004 and Mitchell left shortly thereafter.

In 2006, Hensley co-founded Eden Cryogenics, which designs and manufactures similar products in competition with Kendall. Hensley hired Mitchell to help design Eden's standard product line and its product catalogue.

Kendall filed a complaint against Eden, alleging federal copyright infringement and misappropriation of trade secrets in violation of Ohio law, asserting that Hensley and Mitchell had improperly acquired shop drawings, customer lists, and pricing information and were using that information to build its business.

Further, it alleged that Eden's catalogue infringed copyright-protected works in Kendall's catalogue.

Kendall moved for a temporary restraining order that the court denied, holding that Kendall had failed to demonstrate irreparable harm. Following the denial of the TRO, Kendall dismissed all of its claims other than the misappropriation of trade secrets claim.

Eden moved for summary judgment on the misappropriation claim. Eden argued that Mitchell could not have misappropriated trade secrets in 1999 because he was permitted, by Hensley, to possess and retain the drawings.

Hensley was the president of PHPK at that time, and Kendall was the successor in interest to PHPK, Eden argued. Thus, the four-year statute of limitations set forth under the Ohio Uniform Trade Secrets Act barred the misappropriation claim, the defendants argued. The court agreed and dismissed the misappropriation claim. Kendall appealed.


Statute of Limitations Did Not Accrue in 1999
Judge Kevin H. Sharp said that the problem with the district court's statute of limitations determination was that it was counter to the defendant's own evidence.

Under the OUTSA a cause of action for misappropriation for trade secrets begins to accrue when the bad act occurs. Under the statute, that act is the:

[a]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or the disclosure or use of another's trade secret without the other's consent, if the discloser/user acquired it by improper means, in breach of a duty of secrecy, or with the knowledge that it was a trade secret and had been acquired by accident or mistake.

Ohio Rev. Code §1333.61(B).

The court noted that Ohio uses the discovery rule, meaning that the action begins to accrue either when the plaintiff knew, or through the exercise of reasonable diligence should have known, of the bad act. It was under this rule that the district court ruled that Kendall should have known in 1999 that Mitchell retained the documents. The evidence did not support this conclusion, the appeals court said.

“Had [the district court] viewed the evidence in the light most favorable to [Kendall] … no cause of action for misappropriation could have arisen in 1999 because evidence in the record supports a finding that Mitchell did not acquire the shop drawings in breach of any duty or by other improper means,” the court said.

Indeed, Eden itself submitted evidence that Hensley had authorized Mitchell to retain the documents after Mitchell stopped working for PHPK in 1999. Thus, “It is thus not undisputed that in 1999 Mitchell retained the drawings through 'theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means,' ” the court said, quoting from the statute.


Misappropriation May Have Occurred in 2006
Eden argued in the alternative that the appeals court should affirm the dismissal of the misappropriation claim because no misappropriation had taken place. The appeals court said that factual disputes remained with respect to whether Mitchell did steal Kendall's trade secrets.

In particular, the court noted that Kendall had argued that it had stamped its drawings with a legend declaring the works to be confidential. Given this evidence, “a reasonable fact finder could conclude that if any misappropriation occurred it occurred in 2006, when Mitchell used the drawings while designing products for [Eden]” the court said.

The court also declined to rule on whether the drawings themselves could constitute trade secrets. The district court had not explicitly determined whether the drawings constituted trade secrets under Ohio law, but rather assumed that they were trade secrets for purposes of granting Eden summary judgment, the court said. On remand, the district court will need to determine whether the information in question can constitute a trade secret.

Judges Deborah L. Cook and Helene N. White joined the opinion.

Kendall was represented by Gerald P. Ferguson of Vorys, Sater, Seymour & Pease, Columbus. Ohio. Eden was represented by David Peter Shouvlin of Porter, Wright, Morris & Arthur, Columbus, Ohio.

By Tamlin H. Bason


Text is available at http://www.bloomberglaw.com/public/document/Kendall_Holdings_v_Eden_Cryogenics_et_al_Docket_No_1203258_6th_Ci.

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