Wednesday, March 4, 2009

Utah Court Grants Summary Judgment to Defendants On Threatened Disclosure of Trade Secrets (IOSTAR v. Stuart)

Resting somewhere on the continuum between actual misappropriation of trade secrets and inevitable disclosure is the notion that one can be liable for threatening to steal confidential information. While cases concerning inevitable disclosure are now legion, relatively few decisions have articulated what constitutes threatened disclosure under trade secrets statutes.

In IOSTAR Corp. v. Stuart, a federal district court in Utah started putting some parameters on this issue. The dispute arose when IOSTAR attempted to obtain funding for development of an aerospace on-board nuclear power technology. To qualify for a federal loan, IOSTAR needed to raise seed money - about $300 million in liquid assets. As with most start-up ventures, this brought together a diverse group of characters. IOSTAR affiliated with one Richard Busch, who had designed satellite communications technology, and it also began a relationship with a fundraiser - James Stuart - as well as an aerospact industry investor, George French. IOSTAR had plans to make French the majority shareholder in the company.

All three signed non-disclosure agreements, and it was clear all three had access to information IOSTAR felt was proprietary - financial information, technical reports, and contracts. By mid-2007, the relationship between French, Stuart, and Busch, on the one hand, and IOSTAR on the other had become frayed. Stuart quit as President, and French had all but given up on investing in IOSTAR.

In the late summer or early fall of 2007, French, Stuart and Busch had discussions about forming a business in the field of communications satellites and satellite power systems. It appears undisputed the intent was to compete in the same field as IOSTAR, which got wind of the plan when an e-mail was sent to Busch inadvertently at his former IOSTAR account. IOSTAR filed a lawsuit shortly thereafter under a variety of legal theories, including trade secrets misappropriation.

It was clear from the facts IOSTAR could not prove actual misappropriation of trade secrets by any of the defendants; it made no claim for inevitable disclosure. Its hoard of evidence consisted entirely on the mistakenly sent e-mail among its former key group of employees, a series of e-mails months before where the defendants discussed IOSTAR's technology, and their retention of documents (which were not wrongfully acquired in the first place). Nothing indicated any of the defendants attempted to use IOSTAR information in their nascent (albeit competitive) venture.

The court had little trouble granting summary judgment on the trade secrets claim. In particular, the court distinguished between a risk of disclsoure, and a tangible threat to disclose. The statute did not guard against risk, which was too tenuous of a concept on which to order injunctive relief. Specifically, the court stated if it were to accept IOSTAR's argument about the risk of misappropriation, "the Court would essentially be creating a mandatory injunction anytime a party lawfully obtains trade secret information and then leaves his employer to take a position in the same or a similar field. In many instances, this could even create an implied statutory noncompete clause simply by lawfully receiving and lawfully possessing trade secret information."

The IOSTAR case teaches that mere access to trade secrets and an intent to compete won't suffice. A plaintiff must show some intent or threat by a defendant to use specifically identifiable information in direct competition.


Court: United States District Court for the District of Utah
Opinion Date: 2/3/09
Cite: IOSTAR Corp. v. Stuart, 2009 U.S. Dist. LEXIS 9476 (D. Utah Feb. 3, 2009)
Favors: Employee
Law: Utah

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