Sunday, December 21, 2008

Novel Question Concerning Scope of Release At Issue in New Jersey Trade Secrets Action (Grow Company v. Choksi)

A New Jersey appellate court recently addressed two novel procedural questions on which there has been a relative paucity of case law throughout the United States. The trade secrets dispute required the construction of a settlement agreement entered into in 2001 between the plaintiff, Grow Company, and its former chemist, Dilip Choski. The defendant and two other ex-Grow Company employees had formed a competitor in 1991 and allegedly used certain trade secrets over a period of 8 years to compete with their former employer. The parties eventually signed a settlement agreement and release in 2001.

Grow Company then filed suit again in 2005 against Choski and Pharachem (with whom he had some sort of business affiliation) claiming that Choski was again using trade secrets of Grow Company improperly. Although the appeal addressed a number of procedural issues, two stood out:

(a) did the 2001 release preclude Grow Company from suing Choski again for trade secrets theft?

(b) if Choski prevailed, could he recover attorney's fees from Grow Company under the release document even though Pharmachem financed his litigation?

The first issue was left unresolved by the court, primarily because the exact nature of the trade secrets claim was unclear and left unresolved at summary judgment. The court, basically, needed more factual development before it could ascertain whether the release precluded the 2005 lawsuit. However, the court did note (but did not adopt) two tests were used by other courts to determine whether an employee could be sued more than once for the same trade secret theft. The answer depends on whether trade secrets theft is a continuing wrong based on misappropriation of a "property right", or whether it arises out of the breach of a confidential relationship - such as that created between an employee and employer.

If it is the latter, some courts (such as those in California) have held that an action "arises but once." A release from the 2001 suit would therefore preclude Grow Company from claiming that Choski was up to his old tricks again. Under the former theory, though, destruction or compromise of a property right - even if intangible - would not be barred by a prior release. The New Jersey court declined to adopt a test and noted the relative scarce amount of legal opinion on the issue.

(Parenthetically, New York and Massachusetts - two of the states which have not adopted the Uniform Trade Secrets Act - appear to endorse the "property right" theory of trade secrets theft. Since New Jersey also is one of the few states not endorsing the UTSA, it ultimately may side with the more employer-friendly, liberal approach.)

It seems unusual that the release agreement in question would not have addressed Choski's prospective obligation to Grow Company regarding use of any confidential or proprietary information learned by him. Similarly, the opinion is not clear whether the release required Choski to return documents concurrent with the settlement. These issues, frankly, could have been avoided, and the parties should have clarified their options - particularly if everyone knew Choski would remain in his field of expertise.

The second issue of note was resolved in favor of Choski. The fact he did not bear responsibility for paying attorney's fees - they were picked up by Pharmachem - won't bar recovery of the same should he prevail on the ultimate issue. As the court noted, "[t]he existence of an obligation on the part of the actual payor of fees to the benefited party is not relevant because, as a general matter, it would be inequitable for a person or entity in Grow's position to be able to avoid its contractual obligation to pay fees simply because another has provided financing to the wronged party."


Court: Superior Court of New Jersey, Appellate Division
Opinion Date: 11/12/08
Cite: Grow Co., Inc. v. Choski, 959 A. 2d 252 (N.J. App. Ct. Nov. 12, 2008)
Favors: Employee
Law: New Jersey

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