United States: Federal Court Rejects Employer's Trade Secret And Computer Fraud And Abuse Act Claims

Last Updated: March 8 2016
Article by Paul E. Freehling

An ex-employee's former employer sued him for alleged violations of the Kansas Uniform Trade Secrets Act (KUTSA) and the federal Computer Fraud and Abuse Act (CFAA). The first claim was based on the company's hunch that he had misappropriated trade secrets and thereby breached his non-disclosure agreement. Two forensic experts were paid $38,000 to examine the computers and flash drives he had used, looking for evidence that he had used or disclosed confidential information. The second claim centered on his admission that, shortly before resigning from the company, he had read a top-secret file which was, but should not have been, accessible to employees. He moved for summary judgment on both claims. The court granted the motion, holding that (a) payments to the experts did not satisfy the KUTSA requirement of showing an "actual loss caused by misappropriation" (K.S.A. 60-3322(a)), and (b) he was authorized to access the company's shared files and, therefore, he did not violate the CFAA. Tank Connection, LLC v. Haight, No. 6:13-cv-01392-JTM (D. Kan., Feb. 5, 2016) (Marten, C.J.).

Summary of the case. Haight was International Sales Manager of Tank Connection, a manufacturer of large storage tanks. He signed a confidentiality agreement (but not a non-compete). With the company's consent, he downloaded confidential information onto the laptop and flash drives provided to him by the company. However, he also downloaded company data onto his own flash drives. Further, he reviewed — but did not copy — the company's president's confidential computer file. Following his resignation, he returned the company's laptop and what he asserted were all of its flash drives. Further, he insisted that he had neither disclosed the company's secrets to his new employer nor used the information, and that he had deleted all of Tank Connection's data from his personal flash drives. Concluding that Tank Connection had produced no evidence contrary to his disavowal of trade secret misappropriation, and that reading the shared file was not a violation of the CFAA, the court entered judgment for Haight.

Why the claim of trade secret misappropriation failed.

Tank Connection's expert witnesses determined that, shortly before Haight's resignation, he accessed the company's server and transferred to the company's laptop and flash drives, and to his own flash drives, a lot of confidential information. The company contended that "harvesting" of that data circumstantially supported the claim that he had used proprietary information improperly and/or had disclosed it to his new employer. However, Chief Judge Marten ruled that without any hard evidence of wrongdoing, and in the face of Haight's unqualified denial of culpability, Tank Connection's speculation of improper conduct was insufficient to create KUTSA liability.

Tank Connection alleged that its damages from Haight's "misappropriation" aggregated $1,238,000: $1.2 million that the company had expended for creating, developing and updating the computer programs, plus $38,000 it had paid to the experts. Chief Judge Marten rejected the $1.2 million claim because the company did not show any loss of data, damage to its computers or programs, unfair competition, or unjust enrichment. Further, the statutory alternative of assessing "a reasonable royalty" was inapplicable due to the absence of proof that Haight disclosed or used confidential information.

Finally, the court held that payments to computer forensic experts retained by Tank Connection to investigate an alleged but unproved theft of trade secrets were not an "actual loss caused by misappropriation." The judge said that the question has not been decided by Kansas judges, and that Connecticut Appellate and Virginia Supreme Court rulings are in diametric opposition to each other. Concluding that the payments were "not within the traditional realm of tort damages," and that they were incurred merely in an attempt to ascertain if there had been a theft, the court held that they were not compensable losses under KUTSA.

Why the claim of a CFAA violation failed.

A few days before Haight resigned, a co-worker brought to his attention a computerized folder containing highly sensitive information intended solely for the eyes of the company president and one administrator. The company was unaware that incorrect security settings for the folder enabled employees such as Haight to access it. He admitted that he had looked at it, which constituted a CFAA violation according to Tank Connection, but he insisted that he and other employees regularly viewed shared files in the course of their work and that he did not copy, disclose or use the folder's contents.

Chief Judge Marten observed that the president's folder was in a shared file, and there was no evidence that Tank Connection told its employees not to open the folder. He said that, therefore, Haight clearly did not violate the statutory prohibition against accessing a computer "without authorization." The difficult question under the CFAA was whether Haight exceeded his authorized computer access. The judge found persuasive U.S. v. Valle, 807 F.3d 508 (2nd Cir. 2015), which held that an employee's authority to access a computer file is dispositive in determining that the CFAA has not been violated, regardless of the use to or purpose for which the file is accessed. Thus, summary judgment was granted on the CFAA claim as well.

Takeaways. Haight prevailed on the trade secrets misappropriation claim largely because he was authorized to use Tank Connection's confidential data in the course of his employment, and the company had no evidence that he disclosed or used the data other than for company business. In the absence of a smoking gun or an eye witness to wrongdoing (Tank Connection had neither), employers often have difficulty disproving an ex-employee's denial of culpability. Perhaps Tank Connection might have strengthened its case if it had examined Haight's personal flash drives before he deleted all of the information on them.

The ruling declining reimbursement of Tank Connection's expenses for computer forensic experts seems to have been driven by the company's inability to prove that any misappropriation occurred. A number of courts have held that amounts paid to such experts, for tasks associated with a pretrial investigation launched because of suspected trade secret theft, are recoverable damages. However, in those cases typically, the experts concluded that the company's suspicion was well-founded. Tank Connection is unusual because reimbursement was sought in the face of a failure to prove any impropriety. Under these circumstances, the expenses did not qualify as an "actual loss caused by misappropriation."

Chief Judge Marten's ruling regarding the scope of the CFAA is another in the litany of disputes pitting a narrow statutory interpretation against a broader one. Compare such decisions as Valle cited by the court (holding that the Act only prohibits computer hacking by an outsider), with, e.g., Epic Systems Corp. v. Tata Consultancy Services Ltd., No. 14-cv-748 (W.D. Wis., Nov. 18, 2015) (opining that the CFAA also criminalizes "insider hacking," that is, unauthorized use of data by someone authorized to access the computer). The conflict in these decisions probably can only be resolved by Congress or the U.S. Supreme Court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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