In a May 26 ruling in Rel. Ins. Inc. v. Pilot Risk Mgmt. Consulting, LLC, North Carolina's Supreme Court reinstated an insurer's trade secret theft case, finding that the lower court erred in taking too narrow a view of what qualifies as a trade secret under North Carolina law, and also in large part due to its reluctance to summarily dismiss trade secret misappropriation claims in the face of the insurance producer defendants' wide-ranging deletion of evidence that occurred after they had received notice of their former employer's demand to preserve all material evidence.
To be honest, it's the last piece that I found most interesting, and why this case made some headlines.
The Supreme Court's Unusually Direct Language Addressing the Nature and Extent of the Spoliation of Evidence
You need not take my word for it; here it is, in the Court's own words:
The spoliation of evidence in this case is remarkable. As the forensic analyst opined, “in his 35+ years of experience, he has never seen such extensive and coordinated deletions of evidence across so many electronic devices as he discovered in his forensic examination in this matter. The deletions have destroyed what the full picture of data would have been in this case.”(Extraneities omitted.) Indeed, the Business Court found as a fact that “there are multiple instances in the record of [d]efendants deleting materials from their devices or completely ‘wiping’ their devices[,]” with the subject matter of at least some of the deleted material “directly address[ing] issues raised in this case.” Rel. Ins., Inc., 2024 WL 3549145, at *14.
The extensive spoliation of evidence renders meaningful review of many factual questions in this case exceedingly difficult. After granting plaintiffs’ motion for adverse inference, the Business Court failed to identify with specificity where and how the inference should be drawn, leaving its scope unclear. As such, we remand the issue of spoliation for the Business Court to clarify, with greater precision,its application of the inference as to each claim. On remand, the Business Court should provide the parties to this case with its adverse inference instruction and specifically detail in its orders where the inference applies.
Later in its decision, the Supreme Court further noted as follows:
[P]laintiffs cite to several documents in the record clearly indicating that,on 26 April 2022, King logged into her old Relation account to access a vendor portal, causing a series of security alerts to Relation staff. The security alerts indicated that several other Pilot employees, including Kinney,accessed the same Relation vendor portal. And significantly, King’s access of the portal occurred nearly two months after Relation issued its cease-and-desist letter to King and two weeks after plaintiffs filed their PI Motion in this matter
What the Supreme Court Also Held Regarding the Plaintiff Insurer's Trade Secret Theft Claims
The other, and perhaps, more important aspect of this holding, at least from a strictly legal perspective, is that the Supreme Court reversed that part of the trial court's holding that where the identity of those on a customer list could be readily ascertained from public sources, that information may still qualify as a "trade secret" if that particular compilation remains unique. In reaching this conclusion, the Court first articulated the general rule for what constitutes a "trade secret" under North Carolina law, stating:
In determining whether information constitutes a trade secret, North Carolina and federal courts consider six factors:(1)The extent to which the information is known outside the business; (2)the extent to which it is known to employees and others involved in the business; (3)the extent of measures taken to guard secrecy of the information; (4)the value of information to the business and its competitors; (5)the amount of effort or money expended in developing the information; and (6)the ease or difficulty with which the information could properly be acquired or duplicated by others. Wells Fargo Ins. Servs. USA, Inc. v. Link, 372 N.C. 260, 278 (2019) (extraneities omitted); see also TSG Finishing, LLC v. Bollinger, 238N.C. App. 586, 591–92 (2014); Sterling Title Co. v. Martin, 266 N.C. App. 593, 601 (2019); Area Landscaping, L.L.C. v. Glaxo-Wellcome, Inc., 160 N.C. App. 520, 525 (2003); Combs & Assocs., Inc. v. Kennedy, 147 N.C. App. 362, 369–70(2001); State ex rel.Utils.Comm’n v. MCITelecomms. Corp., 132 N.C. App. 625, 634 (1999); Wilmington Star-News, Inc.v. New Hanover Reg’l Med. Ctr., 125 N.C. App. 174, 180–81 (1997); Allstate Ins. Co. v. Fougere, 79 F.4th 172, 188 (1st Cir. 2023).
Below, plaintiffs identified several documents with sufficient particularity to bring their trade secrets claims. However, the Business Court found that three documents did not qualify as protectable trade secrets under the Acts. Plaintiffs appeal two of those documents: Gurley’s Customer List and the Client Renewal List. Both documents are Excel spreadsheets containing various information about plaintiffs’ clients. In other words, each constitutes a client list.
Defendants testified that no online source provided those outside the business with a compilation of the clients serviced by plaintiffs. Defendants attempt to rebut this testimony by focusing on the fact that the names and addresses of the individual clients can be obtained online. However, this misconstrues the identified trade secret. Gurley’s Customer List is a compilation of ninety-eight Relation clients. There is no evidence that such a compilation is publicly available or could have been compiled from public listings.
What the Business/Trial Court Will Likely Do on Remand
While it's hard to predict what the trial court will do next, my reading of the appellate decision here strongly suggests that the trial court felt compelled to dismiss the claims due its view that the client lists inherently did not qualify as a "trade secret" worthy of judicial protection, and that it was doing so very reluctantly in light of the defendants' shockingly widespread deletion of relevant data and wiping of devices. Indeed, I imagine that there was no reason for the lower court to go into such detail about that spoliation of evidence other than to note its reluctance to dismiss the claims. Now that the Supreme Court has clarified that these client lists may, in fact, qualify as a trade secret, I suspect that the lower court will likely issue a truly heavy, if not draconian, penalty on the defendants for the destruction of that data after they had clear, actual knowledge that they were under a duty to preserve that very information which is central to the case, perhaps even striking their answer, which would preclude the defendants from contesting liability, and directing the parties to proceed to trial on the issue of damages only.
Time will tell.
