Customs Brokerage Industry Narrowly Escapes Restructuring

Monday, October 04, 2004

Publication:Intellectual Property Litigation Reporter, Vol. 11, Issue 12

On Aug. 5, 2004, U.S. District Judge Paul D. Borman of the Eastern District of Michigan entered judgment against Ford Motor Co.'s former customs broker in a landmark case that received worldwide attention from the customs brokerage industry. Caught up in this multimillion-dollar trade secrets dispute between Ford's former customs broker and its new customs service provider was an individual named Jennifer Sharkey, the only named defendant in this case.

After more than three years of legal drama and a nearly three-week trial, Sharkey and her defendant employer ultimately prevailed in Expeditors International of Washington Inc. et al. v. Vastera Inc. et al., No. 01-71000, verdict returned (E.D. Mich., S. Div. Aug. 5, 2004).

The plaintiff, Ford's former customs broker Expeditors International of Washington Inc., filed its complaint March 14, 2001, against Ford's global trade management provider, Vastera Inc., along with Sharkey.

On Sept. 1, 2000, Ford decided to transition its on-site customs group to Vastera, a separate entity of which Ford owns a 25 percent interest. Over the next six months, Vastera began to assume certain brokerage duties from Expeditors.

Eventually, employees began to shift from Expeditors to Vastera, much to Expeditors' displeasure. Sharkey was one of 12 employees who eventually moved directly from Expeditors to Vastera. At Expeditors Sharkey worked as a classification manager on the Ford account. When she joined Vastera, Sharkey continued to work in the area of Ford classification. The principal allegation in Expeditors' complaint against Sharkey was breach of her confidentiality agreement and misappropriation of trade secrets.

Trial began July 15, 2004, and lasted nearly three weeks. After two weeks of trial and before jury deliberations, the court granted defendants' motion for judgment as a matter of law July 30, 2004, dismissing Sharkey from the case because Expeditors failed to claim any damages against her. With Sharkey out of the case, all the jury had left to decide was whether her employer Vastera was liable for misappropriation of trade secrets.

The jury began deliberations Aug. 3, 2004. They next day, the jury returned a verdict of no trade secret misappropriation for Vastera. More importantly for the customs industry, however, the jury found that the information allegedly used or disclosed by Vastera (called "the business process as a whole") was not a trade secret.

"If the jury had somehow been convinced by the plaintiffs that the interpretation of customs laws and regulations and how they apply to a particular importer's business are somehow a 'trade secret,' the effect would have been very negative," Sharkey said. "But not on the part of customs brokers. The real loser would be the importer because once they provide their business requirements to a broker (or service provider), that broker could claim them as their trade secret, and the importer would be stuck with them indefinitely. It takes competition right out of the equation."

Ernie L. Brooks, lead defense counsel and president of Brooks Kushman P.C., said: "The jury's decision vindicates Vastera and reinforces what we have said all along, which is that Vastera was not engaged in any wrongdoing. We are obviously pleased that the jury unanimously agreed."

Brooks said he believes that courts are generally reluctant to rule against individuals when large corporations are involved in the dispute, such as in Manville Sales Corp. v. Paramount Systems Inc. et al., 917 F.2d 544 (Fed. Cir. 1990).

The jury verdict in this case can be seen as a victory for the customs industry as well as for the defendants, because the plaintiff unsuccessfully tried to say the entire process of handling transactions was a trade secret, and if someone took over, he could not use it.

Because this case was the first of its kind, if the jury had found that there were trade secrets in how a customs broker completes work for its customer (the importer), then there would be precedent for future lawsuits in this area.

Now, there is no such precedent.

This case is unique because it is the first in which a former customs broker sued its replacement for trade secret misappropriation. Ford is typically the first- or second-largest importer in the United States in any given year. Other large customs brokers and service providers, such as those servicing General Motors and Chrysler, were well aware of this case and were following it intently.

The customs community had even more to watch. On Sept. 2 the court awarded Sharkey $427,500 in attorney fees in accordance with a provision in her confidentiality agreement, a result that elated Sharkey. So in a suit where plaintiff Expeditors originally sought to win more than $150 million, the end result was a judgment that Expeditors had to pay $427,500.