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Rutgers, the State University of New Jersey v. Scan-Tech Security L.P.

A-7108-96T5 (N.J. Super. App. Div. 2000) (Unpublished)

NON-COMPETITION; CONFIDENTIALITY—The public’s interest in the advancement of scientific information and knowledge can outweigh a private interest to restrict competition.

A company sought to develop coherent x-ray scatter (CXRS) technology as a means of detecting explosives. It contracted with a university for technical assistance, and also contracted with individual consultants related to the university. The contract between the company and the university required the university to disclose patentable inventions to the company. It also provided for a five-year non-competition period. Development proceeded and proposals and prototypes were submitted to the Federal Aviation Administration (FAA). Ultimately, the FAA, who had funded the project for a period of time, terminated the funding agreement, and the agreement between the company and the university expired. At that time, the company had made only one payment to the university, and additional payments were due. After the contract was terminated, an employee of the FAA, who subsequently joined a private company, contacted the university concerning a possible joint application to the FAA, between his new employer and the university in order to secure further funding for the development of CXRS explosives detection technology. The former FAA employee, during his employment at the FAA, had access to all information relating to the performance of the first company’s device, including its quarterly and final reports. Representatives of the new company, including the former FAA employee, met with the university representatives to inspect the CXRS device which was located at the university. The university notified the original company of the meeting, but the original company did not take any action after receiving notice of the meeting. In addition, the university obtained approval from the FAA prior to permitting the new company to inspect the device. Nevertheless, one of the university employees dismantled the device to ensure that the new company’s representatives did not observe anything “critical” to the prototype’s functionality. That employee even videotaped the brief visit. Later, a request was made to the university to send copies of the original company’s FAA reports to the new company. The university did so, but two days later became concerned that its contract with the first company precluded it from providing those quarterly reports. It immediately demanded the reports to be returned, and they were. The new company never submitted a proposal to the FAA, nor did it pursue further research into the development of a CXRS explosives detection device. When the university sued the original company for the monies it was owed, the original company counterclaimed that the university had given away trade secrets and had breached the non-competition agreement. The lower court found that the original company had not established the existence of any trade secrets warranting protection. Further, the lower court judge, noting the public interest in the continued development of the explosives detection technology, “(1) reduced the restrictive covenant in the contract to a period of three years; (2) declared [the university and its employees] free to research and develop activities without restriction in the field of explosives detection, including CXRS technology; and (3) declared [the university and its employees] free to ‘make, use, sell and publish all inventions, information, data, or other knowledge’ that they acquired while performing under their subcontracts with” the original company. On appeal, the original company objected to the lower court’s finding that there were no trade secrets involved. The Appellate Division pointed out that the lower court had found that the asserted trade secrets were essentially general categories of study. The university’s expert “opined that the lists of asserted trade secrets set forth only generalities and provided nothing from which a competitor could have recreated the machine developed with the CXRS technology.” Once the university realized it might have trade secret and non-competition problems, it immediately recovered the information it had given to the second company. Further, because the former FAA employee had access to the technological information when he was an FAA employee and was familiar with the CXRS project, it would have been virtually impossible to differentiate what the new company had learned from its limited contacts with the university and what it had learned through employment of the former FAA employee. Lastly, with respect to the validity of the restrictive covenant, the Court pointed out that such covenants are enforceable when: “(1) the restriction protects the employer’s legitimate interests; (2) the restriction does not cause the employee any undue hardship; and (3) the restriction is not counter to public interest.” Modification of a restrictive covenant is permissible so long as it does not injure the public nor result in injustice. Here, the lower court noted that the original company had to abandon the project, and the public nature of much of the relevant information and technology justified a reduction of the five-year restriction. Further, with the Appellate Division’s approval, the lower court “emphasized that the public’s interest in the advancement of scientific information and knowledge outweighed any single entity’s interest in monopolizing information for its own gain.” Consequently, there was no abuse of discretion on the part of the lower court.


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