Baxter Revisited for Misappropriation Claim

September 13, 2016Articles Garden State Gavel Blog

So, while the Baxter court concluded that a tortious interference claim could not survive summary judgement under the facts set forth in our previous post, those same facts supported the survival of the misappropriation claim.

Determining whether HQ had potentially misappropriated Baxter’s trade secrets under New Jersey’s Trade Secrets Act required a very different analysis from the tortious interference claim considered by the Court. The seminal issue on the misappropriation claim was whether HQ knew or had reason to know that the employee obtained trade secrets by improper means.

Analyzing this question, the Court noted that HQ knew that: i) the employee was involved in the development of a similar patent while he was employed by Baxter and ii) HQ had no development effort with that product prior to the hiring of Baxter’s former employee. Based on those facts, HQ conceivably had “reason to know” that the employee may have accessed (and relied upon) trade-secret information obtained through improper means. Significantly, the Court noted that HQ had apparently inquired about the employee’s contractual obligations to Baxter for precisely that reason– i.e., to determine if the employee had misappropriated the trade secrets. Accordingly, the misappropriation claim was not dismissed.

What is Misappropriation After Baxter?

It appears that the Court reached different results for the tortious interference and misappropriation claims because they have different “knowledge” requirements. Tortious interference requires malice to sustain a cause of action while misappropriation under the Act only requires that the defendant (here, HQ) have a “reason to know” of the improper conduct.

Because HQ inquired about the employee’s contractual obligations and received assurances that he had no outstanding obligations with Baxter, HQ lacked malice and, therefore, was not liable for tortious interference. Yet the same conduct by HQ did not necessarily bar a misappropriation claim because it suggested that HQ knew about the employee’s prior involvement with a confidential formulation and, in fact, inquired about his contractual obligations – apparently, out of concern for misappropriation.

Practice Tip:

Employers should be careful to spot the red flags of misappropriation that were highlighted in Baxter including: (1) a new employee working on the same sensitive information at both companies; (2) the new employer being aware that the employee previously worked on such information; and (3) the new employer using the sensitive information after the employee joins the new employer and begins the development of a new product. Under Baxter, if similar warning signs exist, the new employer may not be able to avoid liability by obtaining and accepting representations from the employee that no misappropriation occurred.