Trend Continues on Limiting Actionable “Loss” Under CFAA

March 19, 2010

Although much attention has been focused on the split within the courts on the meaning of  permissible “authorization” to access a computer (see 10/20/09 Tech Razor post), the differing interpretations of the types of losses that may be pursued under the CFAA also pose a substantial hurdle to employers seeking to use the CFAA as a means of pursuing a trade secret misappropriation claim in federal court.  Two recent federal  district court decisions continue the trend of limiting the scope of what may be regarded as an actionable “loss” under the Computer Fraud and Abuse Act (CFAA).

Liability Under The CFAA

The CFAA provides, in part, that “[a]ny person who suffers damage or loss by reason of a violation of this section may maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief. . . .”  Section 1030(g).   Based on this an employer or other person who has had a “protected computer” accessed without authorization (or in a manner that exceeds the scope of authorization) may pursue a CFAA claim.  However, if “damage” or “loss” cannot be shown then the CFAA does not provide any source of recovery.   Section 1030(e)(8) defines “damage” as “any impairment to the integrity or availability of data, a program, a system, or information” and Section 1030 (e)(11) defines “loss” as “any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service.”

While some courts have been liberal about construing the scope of eligible losses under the CFAA, the majority of courts that have addressed the issue have made clear that unless there has been actual damage to data, program or a system or an interruption of service, then a CFAA claim may not be pursued.  Adding to the majority view are two cases decided earlier this year, ReMedPar v. AllParts Medical, et al., Civ.  Action No. 3:09-cv-00807 (M.D. Tenn. Jan. 4, 2010), and Mintel International Group v. Neergheen, Case No. 08-cv-3939 (N.D. Ill. Jan. 12, 2010). 

ReMedPar and Mintel

ReMedPar presented the situation of a competitor company, AllParts, aided by former employees of the plaintiff, ReMedPar, making use of proprietary ERP and CRM systems developed by ReMedPar.   While it was very likely that the former employees breached confidentiality and other obligations to ReMedPar, at no time was ReMedPar prevented from use of its systems or data and there was no physical damage.   Because of this, the court found that while the business of plaintiff, ReMedPar, may very well have suffered from the defendant’s wrongful action, ReMedPar did not suffer a recoverable “loss” covered by the statute.

Mintel involved a former employee, Neergheen, who in the course of his employment copied a wide variety of confidential information of his then employer, Mintel, which the employee then utilized when he went to work with a competitor business.   Again, because there was no impairment or damage to the employer’s data or systems and no interruption of use by the former employer, the court observed, “[defendant’s] allegedly unauthorized acts of copying and e-mailing Mintel’s computer files did not impair the integrity or availability of the information in Mintel’s system . . . .  As several judges in this district have already found (or confirmed), the ‘underlying concern of the [CFAA] [is] damage to data’ and ‘the statute was not meant to cover the disloyal employee who walks off with confidential information.’ . . . Rather, there must be destruction or impairment to the integrity of the underlying data. . . . Thus, Mintel has not demonstrated that it suffered the type of damage contemplated by [the CFAA]. ”  Mintel also did not suffer a recoverable loss because an “alleged loss” must also have stemmed from the impairment or unavailability of data or interruption of the service of a system.

Bottom Line

In both these recent cases, the plaintiff employers are not without other remedies against the offending parties, particularly under relevant state laws dealing with protection of trade secrets and confidentiality.  The  CFAA has a definite place to play in protecting valuable data and system assets, but its role fits a very specific set of circumstances.  Beacuse of this in many courts, at least, it will  continue to be more difficult to shoehorn within the CFAA framework claims for breaches of trade secrets or confidentiality obligations.  


Opinion in ReMedPar v. AllParts MedicalReMedPar

Opinion in Mintel v. NeergheenMintel

Hertz v. Luzenac Reaffirms Trade Secret Principles

September 16, 2009

The 10th U. S. Circuit Court of Appeals, in Hertz v. The Luzenac Group, Nos. 06-1324, 06-1358  (10th Cir. Aug. 11, 2009), recently reaffirmed some trade secret basics in a case involving the alleged misappropriation of a proprietary process by two former employees of a manufacturer.  Although the defendant-employees alleged that each of nine separate elements of a proprietary process for Luzenac Group’s production of a form of vinyl silane-treated talc called 604AV were publicly known, the 10th Circuit held that even where separate elements may be publicly known, a trade secret may still be found to exist when a process is considered as a whole.   This is because the manner in which the individual elements are combined — or the exact details of how the Luzenac Group fine tuned a given element — is not something that would necessarily be known, even if aspects of individual elements are the subject of general industry knowledge.  

The Circuit Court also determined that the lower court erred by focusing on the steps that the Luzenac Group failed to take to protect its proprietary process rather than the reasonableness of the protective steps that were taken.   Among other things, Luzenac Group posted signs directing employees to keep the process confidential, had key employees and contractors sign confidentilaity agreements, barred visitors from viewing the production process and marked important documents with confidentiality legends.  The Circuit Court therefore determined that while there might always be additional steps that could have been taken, it does not follow that the measures adopted by Luzenac Group were unreasonable under the circumstances.  

Finally, the Court stated that even if the subject information did not rise to the level of a trade secret, the Luzenac Group was not precluded from pursuing breach of contract claims against the former employees based on the written confidentiality agreements signed by those employees.

Link to Decision: