Most lawyers know, at least generally, that IP infringement and misappropriation actions are subject to various statutes of limitations. Patent actions need to be brought within six years, copyright actions within three, and so forth. As with so many other IP issues, the devil is often in the details. The issue we’ll focus on here is specific to cases involving employees who depart one company for a competitor.
In such situations, employers typically will notify both the employee and the new company of the employee’s ongoing obligations of confidentiality to the old employer. Exit processing may also involve examination of the employee’s computer/network activity in the weeks leading up to their departure, particularly where the circumstances suggest possible misappropriation. However, the old employer has far less insight into what the new employer may be doing with information from the employee.
Such was the situation in a recent case (Schwan’s Company v. Cai) involving two food manufacturing companies and an employee leaving one to join the other. The employee, Cai, was a research scientist working on food ingredient technologies for the plaintiff, Schwan’s. On November 8, 2017, the scientist was offered a job by the defendant, Conagra, and accepted it two days later. He only submitted his letter of resignation on December 18, 2017, requesting an effective date of the following January 5. Cai’s supervisor immediately asked if he intended to move to a competitor, and he allegedly denied that he did. However, Schwan’s apparently learned later that day that Cai was in fact going to Conagra, so he was immediately terminated. Just nine days thereafter, Cai filed two U.S. patent applications (and one corresponding Chinese patent application) relating to work he had been doing for Schwan’s.
In January 2018, Schwan’s sent a letter informing Conagra that Cai was in possession of Schwan’s confidential information and asking that Cai not use this information for Conagra’s benefit. In October 2020, Schwan’s brought suit against Cai but not Conagra. Based on discovery in that suit, Schwan moved to amend its complaint to include Conagra as a defendant as well. Conagra sought to dismiss the claims against it based on the three-year statute of limitations applicable to the federal and state trade secrets acts.
The district court undertook a comprehensive analysis in looking at the statute of limitations issues. Initially, it observed that a motion to dismiss is typically “not the proper stage to resolve whether a claim is barred by a statute of limitations.” However, “if the complaint itself shows that the claim is time-barred,” dismissal may be appropriate. In this case, both the state and federal trade secrets acts mark the beginning of the period as when misappropriation is “discovered or . . . should have been discovered.”
Conagra argued that Schwan’s met this standard in early 2018 based on what it learned about Cai. The court, however, denied Conagra’s motion, saying that knowledge of the employee’s behavior did not serve to inform Schwan’s about Conagra’s behavior in any way. The court also emphasized that questions of fact often make limitations issues unsuitable for resolution on summary judgment, much less a motion to dismiss.
Adding further complexity to this issue, another very recent decision from a federal court in Azima v. Del Rosso, looking at a fairly similar fact pattern, dismissed a federal trade secrets count but not a corresponding state trade secrets count. The federal Defend Trade Secrets Act includes language making clear that the limitations period begins when the plaintiff discovers the first act of misappropriation that continues over time. On the other hand, the North Carolina statute is silent on the point, and under that state’s general “continuing wrong” doctrine, the applicable period restarts when an allegedly wrongful act is repeated.
These cases serve to underscore lessons for both the old employers and the new employers. For companies losing an employee to a competitor, it’s important to realize that even slight nuances in how the facts arise (and how they are presented in a complaint) can determine when the limitations clock begins to run with respect to the competitor—and that may differ from the time frame applicable to the departing employee. For companies hiring from a competitor, it is important to keep in mind that potentially differing time frames may subject the company to a lawsuit even after such a claim directly against the employee might be barred.
For these reasons, among many others, companies are well served by taking both their employee inbounding and outbounding diligence duties seriously.
