The plaintiff, System Development Services, Inc. (SDS), is an Illinois corporation in the business of furnishing computer network services to businesses in and around Effingham County, Illinois. The defendants were four computer technicians that were formerly employed with SDS.
Three of the defendants signed an employee-confidentiality agreement, which stated as follows:
The employee acknowledges that his/her employment affords access to both company[-] and customer-related information that is proprietary, confidential, and not generally known by the public, current or prospective customers, vendors, subcontractors[,] or competitors. The employee agrees not to divulge any of this information to the general public, current or prospective customers, vendors, subcontractors[,] or competitors for any reason. Specific examples of confidential information would include[ ] but is not limited to: system manuals, employee manuals, price lists, pricing strategies, contracts, accounting/financial information (such as profit and loss statements, bank statements, balance sheets, job budgets, job estimates, job cost reports, etc.), management forms, customer lists[,] and internal marketing information. Violations of this confidentiality agreement can result in disciplinary action and/or dismissal.
All four of the defendants were subject to SDS’s employee handbook, which also contained a paragraph on confidentiality, which read as follows:
It is very important for all employees to maintain the confidentiality of our customer information as well as the confidentiality of company[ ]related information. Information we have access to at our customer locations may seem non[ ] confidential but could be of great importance to them. We must maintain very high levels of confidentiality so our customers will know we can be trusted with their information. Company[-]related information is also very sensitive and should never be divulged or discussed with persons outside the company. Failure to maintain confidentiality is grounds for disciplinary action and possibly termination.
None of the defendants had signed an agreement not to compete that would have prohibited them from competing against SDS upon the termination of their employment with SDS.
In April 2004, the defendants began doing business under the name Technical Partners, and they began competing with SDS in providing the businesses in Effingham County with computer network services. During the first 30 days of business, most of Technical Partners' income came from customers that had recently been SDS's customers.
In May 2004, SDS filed a multicount complaint seeking injunctive relief and damages against the defendants, alleging that the defendants violated the Trade Secrets Act by misappropriating, disclosing, using, and acquiring its customer list, manuals, marketing plans, profitability analysis, pricing plans and determinations, and knowledge of SDS's customers' computer systems and system requirements.
In May 2006, the circuit court conducted a bench trial. The defendants testified that they prepared a handwritten mailing list by going through telephone books and using the Internet, and a chamber of commerce directory. Each defendant contributed names of businesses and people to contact in the Effingham area. One of the defendants testified that when he left SDS in January of 2004, he told an SDS owner that all the businesses in the area were "fair game" since "probably 99 percent of the businesses in Effingham County have a computer now."
The defendants testified that their initial strategy after resigning from SDS was to contact businesses in Effingham County that they had a previous relationship with through family, friends, former classmates, or someone they knew in the business community. One of the defendants testified that he "went around driving hitting all the businesses that [he] knew in town, talking to family and friends and just letting them know, and getting the word out."
One of the defendants testified that there was nothing unique or special about the networks they had serviced for SDS's customers. He explained: "A network is one, two servers in most instances, and PC's. There's usually a router for the [I]nternet and a switch to connect all the PC's to the servers."He testified, "Anybody can take care of them as long as they have some knowledge of a service and network and routers."
One of SDS's former office and sales managers testified that he identified potential customers for SDS by utilizing the telephone book and the chamber of commerce list of area businesses, by making cold calls, and by driving around Effingham. The sales manager testified that if there was an operating business in the area with more than five employees, it was a worthwhile target. The bigger the business, the more likely it would utilize computers and a computer network.
An SDS owner testified that knowing that a particular business has a computer network and knowing a contact person's name makes it easier to get "your foot in the door." Knowing the customer's network is a further advantage. He also acknowledged, however, that identifying potential customers was somewhat based on common sense. Businesses with more than one employee were potential customers of computer networking services. According to an SDS sales manager, every business in the telephone book was a potential client, and all the computer businesses in Effingham were "going after the same piece of pie."
At the trial, an SDS owner acknowledged that there was nothing to prohibit the defendants from leaving SDS and going to work for a competitor of SDS or opening their own business to compete with SDS. He also testified that SDS's customers had the right to choose who serviced their computer networks and that SDS did not have any exclusivity contracts with any of its customers. He agreed that SDS employees could resign, go out on their own, and begin servicing SDS's customers. He testified that the customers, not SDS, owned the computers, servers, networks, passwords, and related network information located at the customers' respective business locations.
At the conclusion of the evidence, the court found that SDS's customer list and information about its customers' computer systems and networks were protectable trade secrets under the Trade Secrets Act. The court found that the defendants "utilized SDS's customer mailing list and that it was improperly obtained" and that the defendants "not only utilized their general skills and knowledge of the industry in their new business, they also utilized technical and confidential information that was particularized to each individual customer of SDS that included the intricacies of each customer's network."
In September 2007, the court granted an injunction prohibiting the defendants "from marketing to and from providing any computer or network[-]related type services to all actual and potential customers in SDS'[s] customer database on and prior to April 9, 2004, for a period of three (3) years commencing immediately upon [the] entry of this Judgment." In addition, the court granted an injunction prohibiting the defendants from disclosing any of SDS's trade secrets. The court awarded SDS a judgment in the amount of $481,892 plus court costs, attorney fees and expenses in the total amount of $260,695.99, and exemplary damages in the amount of $20,000. In October 2007, the defendants filed an appeal.
On April 13, 2009, the Appellate Court reversed the decision of the circuit court, holding as follows:
First, concerning SDS's list of customers and potential customers, the evidence failed to establish that the names, addresses, and contact information contained in the list were not generally known by others in the computer network service industry or otherwise readily available. The Court stated: "In today's modern world, computers and computer networks are common business tools, and all businesses are potential customers of computer network services. Locating potential customers is merely a matter of identifying businesses in a particular town, county, or area and looking up their contact information. This information is easily obtained from telephone directories, chamber of commerce directories, the Internet, and a variety of other sources. ‘[W]here customer information is readily available to competitors through normal competitive means, no protectable interest exists. A trade secret must be something kept from the general public and not susceptible to common knowledge.’"
Second, the Court held the evidence was insufficient to establish that the intricacies of SDS customers' computer systems and networks qualified as trade secrets belonging to SDS. SDS did not present evidence that its technicians installed or utilized anything proprietary in servicing computers and networks. On the contrary, the testimony at the trial established that the customers owned their computer systems, networks, and related information, not SDS. Information concerning a customer's computer system, passwords, and network "was the customer's own information," and SDS "cannot control what a customer does with its own information."
Accordingly, the Court held that the defendants' knowledge of the specific computer systems and networks that they worked on while employed with SDS was akin to general skills and knowledge acquired in the course of employment. By servicing SDS's customers' computer systems and networks, the defendants naturally carried away familiarity with those systems when they left SDS. "[The] defendants cannot be compelled to erase from their minds the knowledge gained from working on a particular piece of [computer] equipment."
The Court instructed that an employer who is concerned that an employee's knowledge and experience will give the employee an unfair competitive advantage is not without protective options. The employer has the option of requiring employees to enter into restrictive covenants, but SDS did not utilize this option. "[I]t would really be unfair competition to allow the employer without such a covenant to obtain trade secret status for the fruits of ordinary experience in the business, thus compelling former employees to reinvent the wheel as the price for entering the competitive market."
SDS incurred attorneys fees and costs in the amount of $260,695.99 and spent approximately five years fighting this battle, which they lost. If SDS had its employees sign enforceable non-compete agreements at the outset of their employment, the result would have been different.
In summary, notwithstanding signed confidentiality agreements, employee handbook provisions about confidentiality, and security measures, employers subject to Illinois law will not be able to obtain trade secret status for information that is already commonly known in the industry, is readily obtainable, or is in the nature of the personal skills and abilities of employees developed during the course of their employment.
Please do not hesitate to contact us if you have any questions about this case, trade secrets, or enforceable non-compete agreements.
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