Saturn Systems, Inc. v. Militare

Citations: 252 P.3d 516; 2011 Colo. App. LEXIS 224; 2011 WL 543759Docket: 07CA2453

Court: Colorado Court of Appeals; February 16, 2011; Colorado; State Appellate Court

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Delbert J. Militare appeals a judgment from a bench trial in favor of Saturn Systems, Inc., which found him liable for misappropriation of trade secrets and breach of contract, and an accompanying order for attorney fees. Saturn, a debt collection agency established in 1997, provides various debt recovery services and has developed a proprietary website for client access to confidential account information. Militare was hired as a sales agent on January 13, 2003, under a written agreement that mandated confidentiality regarding client lists, sales materials, and proprietary information, prohibiting him from disclosing such information to outsiders or soliciting clients for himself for one year post-termination. The agreement also stipulated that the prevailing party in any legal action would be entitled to attorney fees. Though the confidentiality provision lacked a specific geographic limitation, both parties agreed at trial that it was confined to Colorado. The court affirmed the judgment and remanded with directions.

Militare, a former Saturn sales agent, was granted access to a confidential database on Saturn's website but had his Agreement terminated with proper written notice on January 18, 2005. Shortly after, he began working for CB Solutions, LLC, a competitor of Saturn. In March 2005, while at CB Solutions, Militare visited Premier Members Federal Credit Union, a client of Saturn, to solicit their business. Following this visit, Premier contacted Saturn for a new password, raising suspicion. In early April 2005, Saturn hired David Travis to investigate potential unauthorized access, confirming that Militare had accessed fifteen client accounts and reviewed seventy-two confidential web pages post-termination. Saturn subsequently sent cease and desist letters to Militare for violating the Agreement and Colorado's trade secret laws. On May 6, 2005, Saturn filed a complaint against Militare for misappropriation of trade secrets and breach of contract, seeking damages and an injunction. After a trial in September 2007, the court found Militare liable for misappropriating trade secrets and breaching confidentiality clauses, awarding Saturn $525 for investigation costs, along with attorney fees and costs, totaling $73,101.07. Militare appealed the court's judgment and attorney fees order. The standard of review for the appeal emphasizes the trial court's discretion in evaluating evidence and credibility, with findings of fact being upheld unless clearly erroneous.

A trial court's factual findings are reviewed under the clear error standard, while its legal conclusions are reviewed de novo. In the case of Militare's appeal regarding the misappropriation of trade secrets from Saturn, he challenges the trial court's findings on two grounds: the validity of Saturn's trade secrets and his alleged misappropriation of those secrets. The court found sufficient evidence to support that Saturn's client and debtor information qualifies as trade secrets under Colorado law, which defines trade secrets as confidential business information that is valuable and secret.

To determine if something qualifies as a trade secret, Colorado courts consider several factors, including the extent of knowledge of the information outside the business, the precautions taken to protect it, its competitive value, and the effort expended to develop it. The Colorado Uniform Trade Secrets Act (UTSA) requires that reasonable measures be taken to maintain secrecy, without necessitating extreme or costly procedures.

In this case, the trial court determined Saturn's information was confidential, not publicly known, accessible only via a secure login, limited to authorized personnel on a need-to-know basis, and that Saturn employed reasonable efforts to protect its secrecy. Consequently, the trial court's finding that Saturn's database information constituted trade secrets was upheld.

The trial court's findings regarding Saturn's valid trade secrets are supported by substantial evidence. Saturn's president testified that the proprietary information in its "status reports" and "debtor notes" holds significant competitive value, as competitors could leverage insights into clients' pre-purchased accounts and debt recovery to craft targeted marketing strategies. Security measures, including a password-protected and encrypted website with limited access, were also described, along with substantial financial investment in the database's development and maintenance. The court found that Saturn's evidence sufficiently detailed the types of confidential information it held, aligning with the definitions of trade secrets under the Uniform Trade Secrets Act (UTSA) and Colorado law.

Militare's argument, claiming insufficient evidence of misappropriation due to Saturn's failure to present specific data misappropriated, was rejected. The court noted that the dynamic nature of the information rendered it impractical to require exact data disclosure. Additionally, the trial court did not err in admitting expert testimony from Travis, despite Militare's claims of non-compliance with pretrial disclosure requirements. The court's discretion in evidentiary matters was upheld, as there was no evidence of arbitrary or unreasonable decisions. The expert rules under C.R.C.P. 26(a)(2) require a written report detailing the expert’s qualifications and opinions, which were met in this case.

A claiming party must disclose expert witness information at least 120 days prior to trial, as mandated by C.R.C.P. 26(a)(2)(C)(I). Violations of these pretrial disclosure requirements can result in sanctions under C.R.C.P. 37(c)(1), which prohibits a party from presenting undisclosed evidence unless the failure to disclose is harmless or substantially justified. The court evaluates whether the nondisclosure prejudiced the opposing party by limiting their opportunity to defend against the evidence, rather than focusing solely on the potential harm of the evidence itself.

In this case, Saturn disclosed its intention to call expert witness Travis well in advance, detailing his qualifications and the substance of his testimony regarding unauthorized access to Saturn's website. This included a spreadsheet of access instances and was supplemented by a more detailed disclosure weeks before trial. However, Militare did not receive a formal written report summarizing Travis's testimony until the day before trial, which led to Militare's objection during the trial based on nondisclosure. Militare argues on appeal that the trial court erred in allowing Travis to testify due to the late provision of the expert report, which was required under C.R.C.P. 26(a)(2)(B)(II).

The court did not err in allowing Travis to testify, despite Saturn's potential violation of C.R.C.P. 26(a)(2)(B)(II) for failing to timely produce a written report. The court found no prejudice to Militare from the late disclosure, as he had prior knowledge of the underlying data and findings regarding unauthorized access to Saturn's website, presented in a spreadsheet format. Militare received this information well before trial and was aware of Travis's expert opinions and contact information without deposing him. No reversible error occurred due to the timing of the report, and Militare did not seek a continuance after receiving it. Consequently, the court concluded that the admission of Travis's expert testimony was appropriate.

Furthermore, since Travis's testimony was properly admitted, the court dismissed Militare’s argument against the finding of misappropriation of Saturn's trade secrets. According to the Uniform Trade Secrets Act (UTSA), misappropriation involves acquiring a trade secret through improper means, which includes theft or breach of confidentiality. Colorado law does not require actual use of the misappropriated trade secret for damages to occur; improper disclosure or acquisition alone suffices.

Militare was found by the trial court to have knowingly misappropriated trade secrets from Saturn during and after his termination, including unauthorized access to privileged information on Saturn's website, which caused harm to Saturn. The court determined that Militare utilized improper means to benefit from Saturn’s trade secrets, supported by expert testimony detailing his unauthorized actions and his own admissions during the trial. For misappropriation claims under the Uniform Trade Secrets Act (UTSA), whether Militare actually used or disclosed the information is irrelevant; the key factor is his knowing acquisition of protected information. 

Regarding the breach of the Sales Agent Agreement, the court upheld the finding that Militare breached the nonsolicitation clause. Although Militare argued that this clause was void under Colorado law, the appellate court affirmed that the validity of contractual provisions is a legal question subject to de novo review. The interpretation of contract language aims to reflect the parties' intent based on the contract's plain meaning. It was noted that nonsolicitation agreements are akin to non-compete agreements, which are generally considered contrary to Colorado's public policy and may be void, but the court did not find the nonsolicitation clause unenforceable in this instance.

The unenforceability of noncompetition provisions is primarily based on the principle against restraining trade, ensuring that former employees can solicit past customers without using the employer's trade secrets. In Colorado, section 8-2-113(2), C.R.S. 2010, states that any noncompetition agreement restricting an individual’s ability to earn a living is void, except for specific exceptions including contracts for business sales, trade secret protection, recovery of training expenses for employees with less than two years of service, and certain personnel categories. The current appeal examines the validity of a nonsolicitation clause within a confidentiality provision aimed at protecting trade secrets. A two-prong test established by prior court rulings requires assessing whether the restrictive covenant is justified and examining the reasonableness of its terms, emphasizing that noncompetition clauses must be narrowly defined. An enforceable nonsolicitation clause can exist if it is intended to protect trade secrets and is reasonable in its temporal and geographic limits. The confidentiality provision in the Agreement between Saturn and Militare, which prohibits solicitation of clients for one year after termination and is limited to Colorado, is deemed valid under the trade secrets exception. The trial court found that Saturn's client-related information qualifies as trade secrets under the Uniform Trade Secrets Act (UTSA).

The nonsolicitation clause in the Agreement is deemed necessary to protect Saturn's debt collection business by preventing former employees or contractors from using confidential information—such as client details and debt recovery statistics—to solicit clients for renewal. This clause is part of a broader confidentiality provision aimed at safeguarding Saturn's client lists and proprietary information, illustrating an intent to restrict the use of trade secrets. Comparatively, a general noncompetition clause can be valid when it is tied to the protection of trade secrets, as seen in case law, including Gold Messenger, Inc. v. McGuay. The nonsolicitation clause limiting Militare's ability to solicit Saturn's clients for one year is justified based on the need to protect confidential information accessible through a secure website. Previous cases like Colorado Accounting Machines and Mergenthaler are distinguished from the current matter, as the agreements in those cases did not adequately protect trade secrets. In contrast, the nonsolicitation and nondisclosure clauses in Saturn's Agreement are interconnected within the same confidentiality provision, reinforcing the intent to protect confidential information rather than serving as a general noncompetition clause, which would be invalid.

The nonsolicitation provision in question is a specifically tailored clause aimed at preventing Militare from soliciting Saturn's clients to safeguard Saturn's trade secrets and confidential information, rather than an overarching restriction on all competition. The clause is deemed valid and enforceable under Colorado law, as it aligns with the trade secrets exception outlined in section 8-2-113(2)(b). The trial court confirmed that Militare breached this clause by soliciting Premier, a known Saturn client, after his termination. The court's findings indicate that Militare was aware of Premier's status as a client and had accessed proprietary information about it prior to soliciting their business. Evidence presented at trial, including Militare's own admissions, supports the conclusion that he intentionally solicited Premier while under contract with CB Solutions, constituting a breach of the nonsolicitation clause of the Agreement. The court deemed the clause reasonable and upheld the finding of breach based on the gathered evidence.

An employee was questioned about soliciting business for CB Solutions, confirming that the inquiry was exploratory to assess interest in their collection services. The trial court found a breach of a nonsolicitation clause, a decision that is upheld on appeal, rendering unnecessary the examination of the nondisclosure clause breach. Militare challenged the court's finding of liability for $525 in breach of contract damages, arguing that such costs are not recoverable under Colorado law. However, Colorado law requires proof of a contract, performance or justification for nonperformance, a defendant's failure to perform, and resulting damages for breach claims. The damages should restore the plaintiff to the position they would have been in had the breach not occurred. Militare's motion for a directed verdict was denied, and Saturn successfully demonstrated the existence and cause of its damages, specifically the $525 spent on an investigation linked to Militare's breach. The trial court's conclusion that Militare is liable for these damages was deemed correct.

Militare argues that if the trial court's finding of breach is reversed, the award of attorney fees and costs to Saturn should also be vacated. However, the court upheld the finding of breach of the nonsolicitation clause, thus affirming the award of attorney fees and costs to Saturn under the Agreement. Regarding Saturn's request for appellate attorney fees and costs, C.A.R. 39.5 requires that such requests be made in the principal brief, which Saturn did in its answer brief, citing the attorney fee provision of the Agreement. Given the confirmed breach, the court finds Saturn entitled to reasonable appellate attorney fees and costs. Consequently, the request is granted, and the case is remanded to the trial court to determine the specific amount. The judgment and order for costs and attorney fees are affirmed, with Judges CASEBOLT and FOX concurring.