The Kansas Supreme Court recently handed down its opinion in Wolfe Electric, Inc. v. Duckworth, —P.3d—, 2011 WL 5008566 (Kan. Oct. 21, 2011), holding that only a company’s trade secrets, but not its confidential information, are protected under the Kansas Uniform Trade Secrets Act (KUTSA). The Court’s holding requires companies to reassess the security of their important business information.
The case involved a dispute between a manufacturer of conveyor pizza ovens, Wolfe Electric, Inc., and its former employee, Terry Duckworth and his competing business. Wolfe hired Duckworth as a human resources consultant in 2003. In early 2004, he was promoted to president. As part of his promotion, Duckworth signed an employment agreement that contained certain restrictive covenants. Specifically, Duckworth agreed that if his employment was terminated for any reason, he would not solicit any of Wolfe’s current or former customers for one year. Duckworth also agreed not to disclose or use Wolfe’s trade secrets or other confidential information.
Soon thereafter, Duckworth’s relationship with Wolfe began to deteriorate, and his employment ended in March 2005. Within a month, Duckworth began working on forming a directly competing commercial pizza oven manufacturing company, Global Cooking Systems, LLC. In April, Global began the process of reverse engineering one of Wolfe Electric’s ovens, the XLT. After discovering that Global had produced an oven in 3 months, Wolfe suspected that Duckworth had misappropriated its trade secrets and other confidential information to replicate the oven.
In October 2005, Wolfe filed suit against Duckworth claiming he had breached his employment agreement, breached his fiduciary duty to it, and misappropriated its trade secrets. Wolfe also sued Global, alleging that Global misappropriated its trade secrets and tortiously interfered with its contract with Duckworth by encouraging Duckworth to divulge Wolfe’s confidential information and trade secrets in violation of the agreement. After a 3-week trial, the jury returned verdicts for Wolfe on all counts. Wolfe was awarded $600,000 in damages and over $140,000 in attorney fees under KUTSA. And the trial court imposed a 4-year injunction against Global, prohibiting it from competing in the pizza oven manufacturing industry.
The Kansas Supreme Court reversed and remanded for a new trial because of instructional error. Specifically, the trial court instructed the jury that it should find for Wolfe on its KUTSA claims if it found that the defendants misappropriated Wolfe’s trade secrets and confidential information. The Court reviewed the language of KUTSA, which does not mention “confidential information.” Accordingly, the Court held that KUTSA does not protect confidential information that is not a trade secret. Therefore, the jury verdict awarding damages for misappropriation of trade secrets and confidential information under KUTSA was improper. Because the award of attorney fees and the injunction were based on the KUTSA claims, those awards were reversed as well. Additionally, because KUTSA preempts all other tort claims based on trade secrets, the Court reversed the jury’s verdicts on the fiduciary duty and tortious interference claims because these were also based on the misappropriation of trade secrets and confidential information. The Court did not decide whether the KUTSA preempts tort claims for misappropriation of non-trade secret confidential information because the parties did not adequately brief the issue.
After Wolfe, employers may be concerned that their “confidential information” that is not a “trade secret” cannot be protected. But while the Court has foreclosed protection under KUTSA, it left other protections in place. First, despite having an employment agreement that prohibited the use and disclosure of non-trade secret confidential information, Wolfe inexplicably did not make a claim against Duckworth for breaching this provision of the employment agreement. Rather, its breach of contract claim was premised only on Duckworth’s starting of a competing business. Because KUTSA does not preempt claims for breach of contract, Wolfe could have relied on the employment agreement’s prohibition on the disclosure of confidential information for recovery. Additionally, the Court did not foreclose the possibility of common law tort claims for non-trade secret confidential information loss. However, it did not confirm that such claims are viable either. Thus, prudent employers should now require their employees to sign agreements prohibiting the use and disclosure of important information, or risk its loss. Additionally, the more steps a company takes to keep secret its important information, the more likely it will be found to be a “trade secret” and therefore protected by KUTSA.