Monday, December 30, 2013

Triple Trouble: Conversion Claims in Trade Secrets Cases

What Is Conversion?

Conversion is the civil equivalent of theft.  It is useful in cases involving the taking of a tangible thing – equipment, machines, supplies, and the like.  I won a conversion claim on behalf of a medical device manufacturer who sued a sales representative when the rep didn’t return all of the products he’d taken as samples.  A case such as this is precisely the type for which conversion was created.

Some lawyers have also found conversion to be useful for raising the stakes in a garden-variety commercial dispute.  In Michigan (and in other states, too), there is a statute that provides for treble damages if liability is found.[1]  It is for this reason that Michigan has seen an uptick of cases in which clever plaintiffs’ lawyers bring conversion claims in basic breach of contract disputes. 

I’m not going to address the propriety of such claims here, although I think it’s an important topic and one that I intend to write about in a future post.  Instead, I want to talk about what happens when a plaintiff in a trade secrets case brings a conversion claim for the taking of the tangible thing where the trade secret is memorialized.   

 Conversion and Preemption.

Most practitioners in this field are well aware that if they practice in one of the 47 states that has adopted the Uniform Trade Secret Act, any tort claims they bring for misappropriation of trade secrets will be preempted by the Act.[2]  This means that the theft of trade secrets cannot give rise to claims for conversion. 

This puts plaintiffs’ lawyers in a quandary: how do they increase the amount in controversy in a case where a customer list or drawings were taken?  After all, if suit is filed quickly, the damages associated with lost profits will be (or at least should be) minimal.  The answer seems simple: since trade secrets are generally thought of as ideas, rather than as tangible things, clever attorneys plead that it is not the idea that was converted, but rather the medium upon which it was memorialized.  The measure of damages in a conversion claim is fair market value at the time the item at issue was converted.  So if a drawing for a million-dollar machine is at issue, that drawing suddenly because very valuable, even if the plaintiff can’t prove that it lost any profits as a result of its taking.     

I was peripherally involved in a case recently where the plaintiff pleaded just that: the defendants – engineers for a manufacturing company – left to go to work for a competitor and took some drawings and other ideas written on paper with them.  This, the plaintiff’s attorney pleaded, was the taking of tangible things – pieces of paper containing valuable ideas – and, therefore, constituted conversion. 

But this type of artful pleading doesn’t fly.  Similar arguments have been flat-out rejected by a number of courts.  The leading case is Thomas & Betts Corp v Panduit Corp, 108 F. Supp. 2d 968, 973 (N.D. Ill. 2000), in which a federal court sitting in Illinois held that the taking of the actual computer, disks, and paper belonging to the plaintiff was not actionable, since “these physical items have little value apart from the information contained therein ….”  A court in Michigan followed suit, as did one in a recent case in Indiana.[3] 

The Lesson:

It isn’t complicated: if you have a trade secret – a true, valid, actionable trade secret – you’re stuck in the framework provided in the Uniform Act (unless you practice in New York, North Carolina, or Massachusetts, where the Act has not been adopted).  Some would argue that the Uniform Act doesn’t have enough “teeth” to deter employees from taking trade secrets from their employers.  This is especially true since – as I pointed out in this post – it is the misappropriation of trade secrets that is illegal, not the possession of them.

So where does this leave practitioners, particularly those who represent plaintiffs in trade secrets cases?  It would be so easy for me to waive you dear readers off with a warning to craft your complaints carefully and leave it at that.  But what I really want to tell you is to manage your client’s expectations.  Clients need to understand that the Uniform Act limits their ability to bring shock and awe upon their opponents, even if their opponents are bad people who stole business information and ideas. 

This is probably not a popular point of view.  But in my opinion, lawyers serve their clients much better when they bring a narrow cause of action that’s simple and that works than when they employ the “throw the pasta at the wall” method of pleading.  Doing the latter causes plaintiffs’ lawyers to spend valuable time defending dispositive motions, rather than time preparing a winning case. 

Trust me on this one.  The idea of recovering treble damages is so enticing, I know.  But therein lies the “triple trouble” – treble damages are hard to recover in any case, but if conversion is the damages enhancing vehicle, such damages are barred in a trade secrets case.    

Liza Favaro
Non-Compete Counsel

* Disclaimer: The ideas and opinions shared on this site are my own and are not attributable to my employer. No amount of interaction on this site will create an attorney-client relationship. If you have a legal question and you ask it here, I will also answer it here (if I can), but such answers do not guarantee results and do not create an attorney-client relationship. If you wish to contact me directly, you may do so at

[1] MCL 600.2919a

[2] Michigan’s version of the Act provides that it “displaces all tort, restitutionary and other law … providing civil remedies for misappropriation of a trade secret.”  MCL 445.1908.
[3] Bliss Clearing Niagara, Inc. v. Midwest Brake Bond Co., 270 F. Supp. 2d 943, 950 (W.D. Mich. 2003); HDNet LLC v. North American Boxing Council, 972 N.E. 2d 920 (Ind. App. 2012).


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