Scarinci Hollenbeck, LLC
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201-896-4100 info@sh-law.comFirm Insights
Author: Scarinci Hollenbeck, LLC
Date: January 20, 2021
The Firm
201-896-4100 info@sh-law.comZoom calls have become one of the most common ways to conduct business during the COVID-19 pandemic. However, businesses must ensure that they are taking the proper steps to safeguard their confidential data, including trade secrets, when using the popular technology.
A Delaware business recently found out the hard way that failing to take reasonable steps to protect the confidentiality of trade secrets during a Zoom call can destroy their legal protection. The court denied the company’s request for an injunction that would have halted the operation of a competing business that had allegedly misappropriated its trade secrets because the company failed to take adequate precautions.
“At this stage of the case, the record does not support a business-stopping injunction. All of the information that the defendants received was publicly available, freely shared by Smash’s franchisees, or provided by Smash without taking adequate precautions to protect its confidentiality,” the Chancery Court of Delaware held in Smash Franchise Partners, LLC v. Kanda Holdings, Inc.
According to the court’s decision, Plaintiffs Smash Franchise Partners, LLC, and Smash My Trash, LLC (jointly, “Smash”) operate a mobile trash compaction business and sell franchises to entrepreneurs who want to run a Smash-branded franchise in a protected territory. The core business involves using a truck-mounted mobile trash compactor to smash trash in a customer’s dumpster, which enables the customer to pack more trash into each dumpster load and save on fees paid to the waste management company that provides the dumpster and hauls away the waste.
Defendant Todd Perri expressed interest in a Smash franchise. He soon concluded that with his engineering background and business experience, he could create his own mobile trash compaction business. Despite deciding to form his own business, Perri continued to feign interest in a Smash franchise and gather information about Smash. One of the sources of information Perri relied upon was weekly Zoom calls, one of which was conducted by Smash and another conducted by its franchisees. In total, Perri participated in approximately ten hours of Smash-sponsored calls. He took detailed notes and often wrote down the names of the participants.
Perri and his college fraternity brother, Kevin McLaren, ultimately went on to form Dumpster Devil LLC as a competing mobile trash compaction business. Smash filed suit, seeking a preliminary injunction to shut down Dumpster Devil’s business.
The Chancery Court denied the injunction, concluding that Smash had failed to show that the defendants obtained and used highly confidential and valuable information from Smash. With regard to the information obtained via the Zoom calls, the court held that any confidential information they obtained was freely shared by Smash’s franchisees on the calls or provided by Smash without sufficient safeguards to protect confidentiality. As explained by the court:
Smash did not take reasonable steps to protect their secrecy. Smash freely gave out the Zoom information for the Franchisee Forum Calls and the Founder Calls to anyone who had expressed interest in a franchise and completed the introductory call. Smash used the same Zoom meeting code for all of its meetings. Smash did not require that participants enter a password and did not use the waiting room feature to screen participants. Anyone who had expressed interest and received the code could join the calls, and participants could readily share the code with others.
The court also noted that Smash failed to follow its own procedures. For instance, the call moderator was supposed to take roll at the beginning of each call and remove anyone who did not belong, which she did not. “The record establishes that twenty participants who cannot be identified listened to the meetings,” the court added. “There is no evidence that these individuals signed NDAs.”
Because the legal protections afforded to trade secrets hinge on the information being kept secret, it is imperative that businesses take precautions to keep sensitive business data confidential while conducting videoconferences. In April, the Federal Trade Commission (FTC) published a list of videoconferencing privacy tips that can be helpful when creating your own best practices. They include:
Much like a live meeting, when using technology like Zoom, businesses must take steps to safeguard trade secrets and other confidential information. That includes limiting the participants, controlling who hears the conversation, and setting limits on whether the meeting is recorded or notes are taken. If proprietary or trade secret information is to be discussed with others, do not proceed absent a signed non-disclosure agreement.
If you have any questions or if you would like to discuss the matter further, please contact me, David Einhorn, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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