Unraveling a messy dispute: no diversion for the use of trade secrets allowed by agreement

A recent Sixth Circuit case involving a source code agreement underscores the importance of carefully specifying what happens to the source code (and the trade secrets it contains) after the agreement is violated. In Epazz, Inc. v National Quality Assurance USA, Inc.,[1] The Sixth Circuit upheld the district court’s ruling that a software licensee did not misappropriate a licensor’s trade secret when the licensee acquired the source code from an escrow agent, because that the clear terms of the license agreement between the two permitted disclosure if the licensor violated. In addition, the licensee did not commit any misappropriation by engaging another vendor to maintain and further develop the source code, where the license conferred “the right.” . . to use the. . . Material ”in the event of breach of the agreement.

Jadian Enterprises (“Enterprises”) and National Quality Assurance (“NQA”) had a long-standing relationship in which NQA used Enterprise software to support NQA’s “registration and certification services”. As part of a master subscription agreement between the two, they signed an escrow agreement to allay NQA’s fears if Enterprise “couldn’t function” or “keep up” to its service requirements. This required the escrow agent to retain the source code and the escrow agent to provide the source code to NQA in the event of non-performance by the companies, “for the sole purpose of continuing the benefits offered” by the escrow agent. license agreement.

After the takeover of Enterprises by its successor Jadian, Inc. (“Jadian”), Jadian did not provide the same level of service as Enterprises, which prompted NQA to stop paying subscription fees in the part of the MSA and request the release of the Escrow Agent’s source code under the Escrow Agreement. The agent released the source code to NQA, who subsequently hired another vendor to develop and maintain the source code.

Jadian and its owner, Epazz, Inc., then sued NQA for breach of contract and misappropriation of trade secrets. The district court issued a summary judgment in favor of NQA, finding no trade secret misappropriation. The district court ruled that NQA correctly requested the source code “[b]on Jadian’s violation of the MSA ”and that the subsequent use of the source code by the NQA without paying a fee was appropriate under the escrow agreement because there was“ no explicit language obliging NQA to pay ”, and one of the conditions for the release of the payment was“ Fail. . . operate as an operating business ”, which was encountered here, with the court commenting that it“ does not[es] I don’t see why NQA would need to pay a fee based on the triggering event here – Jadian consistently fails, and then completely abandons, his contractual support obligations. Thus, NQA did not acquire the source code by improper means.

Regarding software license agreements, Epazz is a good reminder for clients and trade secret owners to clearly define the conditions and limitations of the use and / or transfer of trade secret material in case the relationship deteriorates later. Customers with doubts or concerns about a software vendor’s ability to function should seriously consider escrow agreements, especially when the software is central or essential to customer operations or if they are concerned that the supplier does not go bankrupt. On the other hand, trade secret owners must ensure that customers are contractually bound to keep the trade secret confidential and be prepared to provide access to their source code language in the event of a breach of an agreement. escrow covering this one.

[1] No. 20-1552, 2021 US App. LEXIS 25942 (6th Cir. 26 Aug 2021).


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