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Necessary Evidence and Proof For Business Misappropriation

Author: LegalEase Solutions

QUESTION PRESENTED

What are the elements and required proofs for: 

  1. breach of contract (and related causes)
  2. tortious interference with business
  3. misappropriation of IP/trade secrets/proprietary confidential business information. 

SHORT ANSWER

  1. In Connecticut, the elements of a breach of contract action are the formation of an agreement, performance by one party, breach of the agreement by the other party and damages. As all elements for breach of contract seem to be met by the Purchaser and NABFC-NJ, it can likely sue the Purchaser and BBD for breach of contract.
  2. Breach of implied covenant of good faith and fair dealing, require that two parties engage in a contract in which the plaintiff reasonably expects to benefit; the benefit is in some way injured by the other party’s actions; and these injurious actions were the product of the defendant’s bad faith. Here, the parties entered into an agreement; however, both Seller and BBD appear to have acted in bad faith. Therefore, it would seem that Purchaser and NABFC-NJ has a valid claim of breach of implied covenant of good faith and fair dealing against both Seller and BBD.
  3. In order to prevail on a claim of tortious interference with business expectancy, plaintiff must show the existence of a business relationship; the alleged tortfeasor’s knowledge of that relationship; intentional interference with the relationship; and consequential loss. Here, both Seller and BBD appear to have intentional interfered with the business relationship of NABFC-NJ, with an improper intent to usurp a deal obtainable by NABFC-NJ, causing damages to NABFC-NJ. Therefore, it would seem that a valid claim of tortious interference with business expectancy lies against both Seller and BBD.
  4. To prevail on a claim for misappropriation of a trade secret, plaintiff must prove that it possessed a trade secret, and defendant is used that trade secret in breach of an agreement, confidence, or duty, or as a result of discovery by improper means. Here, both Seller and BBD appear to have used and disclosed the trade secrets breaching their respective agreements with the Purchaser and NABFC-NJ. Therefore, a claim for misappropriation of a trade secret appears to lie against both Seller and BBD.

 

RESEARCH FINDINGS

  1. Breach of contract (and related causes)

Under Connecticut law, “[a] contract must be construed to effectuate the intent of the parties, which is determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction. . . . .” Office of Labor Relations v. New England Health Care Employees Union, District 1199, AFL–CIO, 288 Conn. 223, 231, 951 A.2d 1249 (2008)). Further, “‘[i]f the language of a contract is susceptible to more than one reasonable interpretation, [then] the contract is ambiguous” Poole v. City of Waterbury, 266 Conn. 68, 88, 831 A.2d 211, 224 (2003) (quoting United Illuminating Co. v. Wisvest-Connecticut, LLC, 259 Conn. 665, 671, 791 A.2d 546 (2002)). Additionally, “‘[a]lthough ordinarily the question of contract interpretation, being a question of the parties’ intent, is a question of fact … [w]here there is definitive contract language, the determination of what the parties intended by their contractual commitments is a question of law.” Hanks v. Powder Ridge Rest. Corp., 276 Conn. 314, 322, 885 A.2d 734, 739 (2005) (quoting Goldberg v. Hartford Fire Ins. Co., 269 Conn. 550, 559–60, 849 A.2d 368 (2004)). In Connecticut, “‘[t]he elements of a breach of contract action are the formation of an agreement, performance by one party, breach of the agreement and damages.’” Keller v. Beckenstein, 117 Conn. App. 550, 558, 979 A.2d 1055, 1060 (2009) (quoting American Express Centurion Bank v. Head, 115 Conn.App. 10, 15–16, 971 A.2d 90 (2009)).

From the foregoing, it appears that, in Connecticut, a contract is interpreted based on the ‘intent of the parties’ from the language used in the contract and the circumstances connected to the contract.

In the present case, according to purchase agreement, C. David Butler, II is the “Seller” and John F. Larkin is the “Purchaser” of North American BioFuels Company-NJ, L.L.C. (“NABFC-NJ”). Seller was employed as Chief Technical Officer (“CTO”) with the Purchaser. (Clause 9, Purchase Agreement, August 4, 2009). Later, in February 2012, Bridgeport BioDiesel (“BBD”) employed Seller as a chief scientist. Seller used NABFC-NJ’s confidential information to provide directions to BBD to design, construct, and open its 3 million gallon biodiesel facility.

Therefore, Seller was indirectly competing with the business of the purchaser company during the restricted period of five years. Additionally, Seller was barred from using or disclosing the trade secrets of NABFC-NJ to third parties. (Clause 4, Purchase Agreement, August 4, 2009). Here, Seller was employed as chief scientist by the BBD by February 2012, which shows that Seller very likely used or disclosed trade secrets of the purchaser company.

Additionally, under Non-Disclosure and Non-Circumvention Agreement, it was agreed that confidential information shall not be disclosed to third parties ‘without the prior written approval of an authorized representative of the other Party in each instance’. (Clause 2, Non-Disclosure and Non-Circumvention Agreement, Sept.__, 2009). However, [i]n or around November 2013, BBD sold its biodiesel plant to Tri-State Biodiesel, The Sustainable Biodiesel Company, and/or Lard-NABFC, LLC (the “New Operators”). Further, BBD shall not use or disclose trade secrets of NABFC-NJ to third parties. (Clause 4, Non-Disclosure and Non-Circumvention Agreement, Sept.__, 2009). The language of the Non-Disclosure and Non-Circumvention Agreement appears definite and clear. It would seem that NABFC-NJ’s confidential information is being used by the New Operators. This likely shows breach of Non-Disclosure and Non-Use of Confidential Information by BBD.

Here, there existed both a purchase agreement and a Non-Disclosure and Non-Circumvention Agreement. Purchaser and NABFC-NJ performed its part, but Seller and BBD breached clauses 4 and 9 of the purchase agreement, and Clauses 2 and 4 of Non-Disclosure and Non-Circumvention Agreement, respectively. The acts of the Seller and other parties caused damages to the Purchaser and NABFC-NJ. Because all the three elements required for a claim for breach of contract appear to be met by Purchaser and NABFC-NJ, it can likely sue the Seller for breach of contract.

2. Breach of implied covenant of good faith and fair dealing

“[I]t is axiomatic that the … duty of good faith and fair dealing is a covenant implied into a contract or a contractual relationship….” Keller, 117 Conn. App. at 563, 979 A.2d at 1063. Therefore, “[u]nder Connecticut law, ‘[e]very contract carries an implied covenant of good faith and fair dealing requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement” Elm Haven Const. Ltd. P’ship v. Neri Const. LLC, 376 F.3d 96, 102 (2d Cir. 2004) (quoting Habetz v. Condon, 224 Conn. 231, 238, 618 A.2d 501 (1992)).

Further, “a claim brought pursuant to a contract, alleging a breach of the implied covenant of good faith and fair dealing, sounds in contract because “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement….” Bellemare v. Wachovia Mortgage Corp., 894 A.2d 335, 345-46, 94 Conn.App. 593 (2006), aff’d, 931 A.2d 916, 284 Conn. 193 (2007) (citing Collins v. Anthem Health Plans, Inc., 275 Conn. 309, 880 A.2d 106 (2005)).

“‘To constitute a breach of [the implied covenant of good faith and fair dealing], the acts by which a defendant allegedly impedes the plaintiff’s right to receive benefits that he or she reasonably expected to receive under the contract must have been taken in bad faith….” TD Bank, N.A. v. J & M Holdings, LLC, 143 Conn. App. 340, 348, 70 A.3d 156, 162 (2013) (quoting De La Concha of Hartford, Inc. v. Aetna Life Ins. Co., 269 Conn. 424, 432–33, 849 A.2d 382 (2004)) (original brackets in the quote).

“Bad faith in general implies both ‘actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake regarding one’s rights or duties, but by some interested or sinister motive.’” Habetz v. Condon, 224 Conn. 231, 237, 618 A.2d 501, 504 (1992) (quoting Black’s Law Dictionary (5th Ed.1979)). Additionally, “‘[b]ad faith means more than mere negligence; it involves a dishonest purpose.’” Elm Haven Const. Ltd. P’ship, 376 F.3d at 102 (quoting Habetz, 224 Conn. at 237, 618 A.2d at 501).

In the present case, there were two contracts. Firstly, the purchase agreement between Seller and Purchaser dated August 4, 2009. Secondly, the Non-Disclosure and Non-Circumvention Agreement between Seller and BBD dated Sept.__, 2009. BBD breached the non-solicitation clause 7 of the agreement by employing Seller as a chief scientist in February 2012. Thereafter, in or around November 2013, BBD sold its biodiesel plant to the New Operators for an undisclosed amount. The circumstances likely show BBD’s sinister motive behind employing Seller within five year period restricted under Non-Competition Agreement clause in the Purchase agreement. Therefore, BBD appears to have acted in bad faith. Because all three elements required for breach of implied covenant of good faith and fair dealing seem to be met by Purchaser and NABFC-NJ, it can likely sue BBD for breach of implied covenant of good faith and fair dealing.

3. Tortious interference with business relations

In Connecticut, a claim of tortious interference with business relations requires a plaintiff to “plead and prove at least some improper motive or improper means.” Blake v. Levy, 191 Conn. 257, 262, 464 A.2d 52 (1983). Further, “[i]n order to succeed on a claim of tortious interference with business expectancies, however, the plaintiff must do more than show that the defendant’s actions proximately caused a loss to the plaintiff’s business.” Sportsmen’s Boating Corp. v. Hensley, 192 Conn. 747, 754, 474 A.2d 780, 785 (1984).

Under Connecticut law, to establish claim for tortious interference with business expectancy, plaintiff must show: “(1) a business relationship between the plaintiff and another party; (2) the defendant’s intentional interference with the business relationship while knowing of the relationship; and (3) as a result of the interference, the plaintiff suffers actual loss’” Hi–Ho Tower, Inc. v. Com–Tronics. Inc., 255 Conn. 20, 27, 761 A.2d 1268 (2000) (citing Solomon v. Aberman, 196 Conn. 359, 364, 493 A.2d 193 (1985)). Further, “in this state, [the court] recognize that a cause of action does exist for unlawful interference with business and that it is not essential to that cause of action that it appear that the tort has resulted in a breach of contract to the detriment of the plaintiff.” Sportsmen’s Boating Corp., 192 Conn. at 754, 474 A.2d ar 785 (quoting Goldman v. Feinberg, 130 Conn. 671, 674, 37 A.2d 355 (1944)).

However, “[i]t is an essential element of the tort of unlawful interference with business relations that the plaintiff suffered actual loss, i.e., damage[.]” DiNapoli v. Cooke, 43 Conn. App. 419, 428, 682 A.2d 603, 608 (1996) (citing Taylor v. Sugar Hollow Park, Inc., 1 Conn.App. 38, 39, 467 A.2d 935 (1983)). Additionally, it is essential to a cause of action for unlawful interference with business that it appear “‘that, except for the tortious interference of the defendant, there was a reasonable probability that the plaintiff would have entered into a contract or made a profit.’” Id. (quoting Taylor, 1 Conn.App. at 39, 467 A.2d at 935).

Further, “[t]his element may be satisfied by proof that the defendant was guilty of fraud, misrepresentation, intimidation or molestation … or that the defendant acted maliciously….” Daley v. Aetna Life & Cas. Co., 249 Conn. 766, 805-06, 734 A.2d 112, 135 (1999) (citing Kecko Piping Co. v. Monroe, 172 Conn. 197, 201-202, 374 A.2d 179 (1977)).

To determine whether the alleged acts of interference are improper, certain enumerated in the Restatement (Second), Torts § 769, which include:

“(a) the nature of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the actor’s conduct interferes, (d) the interest sought to be advanced by the actor, (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor’s conduct to the interference and (g) the relations between the parties.”

Id.

In the present case, if the Purchaser could plead and prove an improper motive beyond the fact of the interference itself, then the Purchaser could prevail in a claim for tortious interference with business expectancy. As the facts indicate that, on Sept. __, 2009, the NABFC-NJ executed a Non-Disclosure and Non-Circumvention Agreement, with Bill Malone and Bridgepoint Bio Diesel regarding a business opportunity between them. Seller was employed by BBD. It seems that Seller as an employee of NABFC-NJ under the Purchase Agreement, had knowledge about the customers of NABFC-NJ, including Tri-State Biodiesel, The Sustainable Biodiesel Company, and/or Lard-NABFC, LLC (“New Operators”), which is considered as trade secrets of NABFC-NJ. However, Seller contrary to the purchase agreement used and disclosed these trade secrets to BBD. Subsequently, as a result of this disclosure, it appears that BBD sold its biodiesel plant to the New Operators, with intent to usurp a deal obtainable by NABFC-NJ, causing damages to Purchaser and NABFC-NJ.

It seems that if there was no unlawful interference by Seller and BBD, there was a reasonable probability that the Purchaser and NABFC-NJ would have entered into a contract or made a profit. Here, it appears that Seller and BBD had acted with malicious intent to loss of Purchaser and NABFC-NJ.

From the facts it appears that there existed a business relationship between Purchaser and NABFC-NJ and New Operators. However, BBD’s act of selling its biodiesel plant, knowing that Purchaser and NABFC-NJ was about to make a deal with New Operators likely caused damages to Purchaser and NABFC-NJ. Therefore, all elements for tortious interference with business expectancy seem to be met by the Purchaser and NABFC-NJ, it can likely sue the Purchaser and BBD for tortious interference with business expectancy.

4. Misappropriation of trade secrets/proprietary confidential business information.

“A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” Integrated Cash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990) (citing Restatement of Torts § 757, comment b). Further, to qualify as a trade secret, “a substantial element of secrecy must exist, to the extent that there would be difficulty in acquiring the information except by the use of improper means.” Town & Country House & Homes Serv., Inc., v. Evans, 150 Conn. 314, 319, 189 A.2d 390, 393 (1963).

In Connecticut, to establish liability under the Connecticut Uniform Trade Secrets Act [CUTSA], “‘[a] primary issue to be determined … is whether there is a trade secret existing which is to be protected.’” Elm City Cheese Co., Inc., v. Federico, 251 Conn. 59, 70, 752 A.2d 1037 (1999) (quoting Plastic & Metal Fabricators, Inc. v. Roy, 163 Conn. 257, 267, 303 A.2d 725 (1972)). Further, “if the information at issue falls into the category of possible trade secrets, the party claiming trade secret protection must prove that the information: (1) is of independent economic value; and (2) was the subject of reasonable efforts to maintain its secrecy.” Id. at 78, 752 A.2d at 1049.

Additionally, ‘Misappropriation’ is defined as:

“(1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (2) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret; or (B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was (i) derived from or through a person who had utilized improper means to acquire it; (ii) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use, including but not limited to disclosures made under section 1-210, sections 31-40j to 31-40p, inclusive, or subsection (c) of section 12-62; or (iii) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.”

Smith v. Snyder, 267 Conn. 456, 464, 839 A.2d 589, 596 (2004) (quoting Conn. Gen. Stat. Ann. § 35-51(b)). Moreover, “[t]rade secrets are the property of the employer and cannot be used by the employee for his own benefit.” Town & Country House & Homes Serv., 150 Conn. at 319, 189 A.2d at 393).

Therefore, “[a] plaintiff claiming misappropriation of a trade secret must prove: ‘(1) it possessed a trade secret, and (2) defendant is using that trade secret in breach of an agreement, confidence, or duty, or as a result of discovery by improper means.’” Integrated Cash Mgmt. Servs., Inc., 920 F.2d at 173 (quoting Rapco Foam, Inc. v. Scientific Applications, Inc., 479 F. Supp. 1027, 1029 (S.D.N.Y.1979)). Further, “[c]onfidential proprietary data relating to pricing, costs, systems, and methods are protected by trade secret law.” In re Dana Corp., 574 F.3d 129, 152 (2d Cir. 2009) (citing Lehman v. Dow Jones & Co., 783 F.2d 285, 298 (2d Cir.1986)).

In the present case, it appears from the Purchase Agreement that Purchaser purchased a Company which had intellectual property rights in creating renewable clean energy sources from fats, oils and greases. This probably may show the existence of a trade secret. It appears from the Non-Disclosure and Non-Circumvention Agreement, Sept. __, 2009, entered between NABFC-NJ and BBD, Mr. Butler, and Mr. William A. Malone, that the parties agreed not to compete with NABFC-NJ, or employ any of NABFC-NJ employees, officers or directors, or use or disclose any confidential information or trade secrets of NABFC-NJ, for the subsequent five-years. It seems that BBD entered the Non-Disclosure and Non-Circumvention Agreement with NABFC-N, to acquire knowledge of the trade secret of NABFC-NJ.

Further, it appears Seller had knowledge about NABFC-NJ business relation with New Operators. Seller would have disclosed this business relationship and business expectancy to BBD. Probably, on knowing NABFC-NJ business relation with New Operators, BBD would have disclosed trade secrets of NABFC-NJ, which enabled BBD sell its biodiesel plant to New Operators for an undisclosed amount, by breaching the five-year non-compete agreement. This act of BBD likely would have caused damages to NABFC-NJ; therefore, BBD used improper means and confidence to acquire knowledge of the trade secret of NABFC-NJ.

From the facts, all elements for claiming misappropriation of a trade secret seem to be met by the Purchaser and NABFC-NJ. Therefore, NABFC-NJ can likely sue the Purchaser and BBD for misappropriation of a trade secret.

CONCLUSIONS

As indicated above:

  1. All the three elements required for a claim for breach of contract appear to be met; therefore, JOHN F. LARKIN (“Purchaser”) can likely sue C. DAVID BUTLER, II (“Seller”) for breach of contract of purchase agreement entered on August 4, 2009. Additionally, NABFC-NJ can likely sue BBD for breach of contract of Non-Disclosure and Non-Circumvention Agreement, entered on Sept. __, 2009.
  2. Contrary to their respective agreements both Seller and BBD acted in bad faith, resulting loss to NABFC-NJ. Therefore, Purchaser and NABFC-NJ, can likely sue the Seller and BBD for breach of implied covenant of good faith and fair dealing.
  3. It seems that both Seller and BBD have intentionally interfered with the business relationship of NABFC-NJ, with malicious intent to cause damages to NABFC-NJ. Therefore, a valid claim for tortious interference with business expectancy may lie against the Seller and BBD.
  4. It appears that both Seller and BBD disclosed the trade secrets of NABFC-NJ on creating renewable clean energy sources from fats, oils and greases, contrary to their respective agreements, the Purchaser and NABFC-NJ, can likely sue the Seller and BBD for misappropriation of a trade secret.