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Trading Secrets

A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

New California Law May Preclude Use of Forum-Selection Clauses to Enforce Non-Compete Agreements in Employment Contracts

Posted in Legislation, Non-Compete Enforceability

shutterstock_150165167On September 25, California Governor Jerry Brown signed into law Senate Bill 1241. SB 1241, effective January 1, 2017, adds Section 925 to the Labor Code to restrain the ability of employers to require employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where the employee was individually represented by a lawyer in negotiating an employment contract.

For companies with headquarters outside of California and employees who work and reside in California, this assault on the freedom of contract is not welcome news. Particularly affected are companies that include forum-selection clauses in contracts with California employees that include non-competition or customer non-solicit provisions. Once SB 1241 becomes effective, it may foreclose—in all but the most unusual circumstances—the sometimes successful strategy of enforcing a non-competition agreement against a California resident through litigation in another state. Continue Reading

50 State Non-Compete and Trade Secret Desktop Reference Now Available

Posted in Legislation, Non-Compete Enforceability, Trade Secrets

Seyfarth Offers 2016-2017 Edition of 50 State Desktop Reference:
What Employers Need To Know About Non-Compete and Trade Secrets Law

2016 50 state desktop guideWith the passage of the Defend Trade Secrets Act (DTSA) in May 2016, there is now a federal cause of action for trade secrets misappropriation. In addition, some states have passed legislation this year further narrowing the use of non-compete agreements, and both federal and state regulators have increased their scrutiny of such agreements in certain contexts.

Seyfarth’s Trade Secrets, Computer Fraud and Non-Competes Practice Group is pleased to provide the 2016-2017 Edition of our one-stop 50 State Desktop Reference, which surveys the most-asked questions related to the use of non-competes, restrictive covenants, and trade secrets in all 50 states. For the company executive, in-house counsel, or HR professional, we hope this guide will provide a starting point to answer your questions about protecting your company’s most valuable and confidential assets.



Available Now! 2016 Defend Trade Secrets Act Reference Guide

Posted in Trade Secrets

DTSA Cover ImageOn May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”), which Congress passed April 27, 2016. So, what does the passage of the DTSA mean for your company?

In a nutshell, the DTSA “federalizes” trade secret law by creating a federal claim for trade secret misappropriation and creates new remedies, including an ex parte seizure order to recover misappropriated trade secrets. It also serves as a reminder that trade secrets can be highly valuable to your company and that you should ensure that your company has reasonable secrecy measures in place to protect them.

Nevertheless, the DTSA also imposes new obligations on employers. To take full advantage of the remedies provided under the DTSA, companies have an immediate obligation to provide certain disclosures in all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following the statute’s effective date.

Seyfarth’s DTSA Desktop Reference guide describes the DTSA’s unique legal structure and remedies. We also provide tips and strategies in light of the passage of the DTSA.

How to get your DTSA Desktop Reference guide:

This publication may be requested from your Seyfarth contact in hard copy or eBook format (compatible with PCs, Macs and most major mobile devices). The eBook is fully searchable and offers the ability to bookmark useful sections and make notations for easy future reference.

To request the DTSA Desktop Reference guide in eBook or hard copy, please click the button below:


Upcoming Webinar: The Intersection of Trade Secrets Violations and the Criminal Law

Posted in Computer Fraud and Abuse Act, Espionage, Trade Secrets

Tank Connection, LLC v. HaightThe stakes are getting higher: Trade secret misappropriation is increasingly garnering the attention of federal law enforcement authorities. This reality creates different dynamics and risks depending on whether the company at issue is being accused of wrongdoing or is the victim of such conduct.

On Tuesday, October 4, at 12:00 p.m. Central, Seyfarth attorneys Katherine E. Perrelli, Andrew S. Boutros and Michael D. Wexler will present “The Intersection of Trade Secrets Violations and the Criminal Law,” the ninth installment in Seyfarth’s 2016 Trade Secrets Webinar series.

Our presenters will focus on criminal liability for trade secret misappropriation, covering:

  • Key statutes: Economic Espionage Act, Computer Fraud and Abuse Act, and Defend Trade Secrets Act of 2016
  • Key elements for criminal prosecution
  • Factors prosecutors consider when deciding whether and what to prosecute
  • How to work with federal prosecutors and their law enforcement partners: Making your case attractive to the “Feds”
  • Cutting-edge considerations: Civil RICO under the Defend Trade Secrets Act
  • Best practices to avoid misappropriation and what to do when you suspect misappropriation has occurred, including a discussion of forensic investigation options

Our panel consists of experienced attorneys with significant experience investigating and litigating trade secret issues, advising clients on trade secret protection, drafting confidentiality and restrictive covenant agreements, conducting trade secret audits, and handling federal criminal matters. This CLE is recommended for management, HR personnel and in-house counsel.

*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.


Texas Appellate Court Affirms Injunctive Relief and $2.8 Million Award in Attorney’s Fees Against Former Employee in Trade Secret Misappropriation Case

Posted in Trade Secrets

shutterstock_115262968A Texas Court of Appeals held on August 22, 2016, that a former employer was entitled to $2.8 million in attorney’s fees against a former employee who used the employer’s information to compete against it. The Court reached this ruling despite the fact that the jury found no evidence that the employer sustained any damages or that the employee misappropriated trade secrets.

Patrick Daugherty was a partner and senior executive at Highland Capital Management, L.P. (Highland), until he left to start a competing business. Highland presented evidence at trial that, after leaving Highland, Daugherty forwarded Highland documents to his personal email address, kept printouts of other emails, and kept 40,000 documents on his laptop that he only submitted for forensic remediation after trial. The documents on his laptop included portfolio and pricing information as well as documents regarding Highland’s internal management and operations.

Ultimately the jury found that the information Daugherty took did not meet the definition of “trade secret” but did constitute “Confidential Information” as that term was defined in Daugherty’s employment agreement. The jury then found that Daugherty had breached his employment agreement and related buy/sell by using or disclosing confidential information and other information. Nevertheless, the jury awarded Highland $0 in damages but did find Highland was entitled to $2.8 million in attorney’s fees. The trial court upheld these findings and issued a permanent injunction against Daugherty preventing him from retaining or disclosing Highland’s confidential information.

Daugherty appealed, arguing that the Texas statute awarding attorney’s fees for breach of contract- Texas Civil Practices and Remedies Code § 38.001(8) – only does so when there is a finding of damages. Daugherty also argued that the award of $0 in damages, and Highland’s efforts to recover a specific dollar amount, foreclosed the possibility of imminent harm, irreparable injury, and no adequate remedy at law, all of which were necessary for a permanent injunction to issue.

The Dallas Court of Appeals rejected these arguments and affirmed the jury verdict and trial court injunction. First, the Court held that Highland had adequately pleaded and presented evidence that the agreements Daugherty breached entitled Highland to and assessment of fees against him independent of § 38.001(8), and that the contract provisions did not require a finding of damages.

The Court further held that the damages question posed to the jury only involved lost profits. Highland presented extensive evidence, meanwhile, that Daugherty’s actions resulted in long-term unquantifiable harm, including the ability of competitors to replicate Highland’s business strategies. Highland also presented evidence that Daugherty’s actions may have resulted in the loss of trust from Highland’s clients. The Court further noted that Daugherty’s contracts with Highland also allowed for injunctive relief as a result of breach.

Daugherty v. Highland Capital Mgmt., L.P., No. 05-14-01215-CV ,2016 WL 4446158 (Tex. App. – Dallas, Aug. 22, 2016).

Two New England States Pass Legislation Restricting Physician Non-Competes

Posted in Legislation, Non-Compete Enforceability

shutterstock_331572470We’ve written a lot this summer about the Massachusetts legislature’s latest failed attempt at non-compete reform. Two other states in New England, however, are able to claim accomplishments in that regard. Specifically, Connecticut and Rhode Island each enacted statutes this summer imposing significant restrictions on the use of non-compete provisions in any agreement that establishes employment or any other form of professional relationship with physicians. While Connecticut’s simply law limits the duration and geographic scope of physician non-competes, Rhode Island completely banned such provisions in almost all agreements entered into with physicians.


Effective July 1, 2016, any covenants not-to-compete entered into, amended, or renewed in Connecticut can no longer restrict a physician’s competitive activities (i) for longer than one year and (ii) in a geographic region beyond 15 miles from the “primary site” where the physician practices. Primary site refers to “the office, facility or location where a majority of the revenue derived from such physician’s services is generated” or “any other office, facility or location where such physician practices and mutually agreed to by the parties and identified in the covenant not to compete.” The law also renders such provisions enforceable only if (i) the provision is made in anticipation of a partnership or ownership agreement or (ii) the employment or contractual relationship is terminated by the employer for cause.

Rhode Island

Effective July 12, 2016, it is now unlawful in Rhode Island to restrict in any way “the right to practice medicine in any geographic area for any period of time after the termination” of any partnership, employment, or professional relationship with a physician. The law also prohibits any restrictions on the right of physicians “to solicit or seek to establish a physician/patient relationship with any current patient of the employer.” It does not, however, apply in connection with the purchase and sale of a physician practice, provided the restrictive covenant is less than five years in duration.


Entities that employ physicians in Connecticut and Rhode Island should take note of these recent changes to the law and thoroughly review their existing physician non-compete and non-solicitation agreements. These agreements may need significant modifications to be in compliance with the new standards discussed above.

What To Do About Employee Thieves—Catch Them If You Can!

Posted in Trade Secrets

Cross Posted from California Peculiarities.

Seyfarth Synopsis: When employee theft occurs, employers must be cautious in investigating, avoiding self-help, and in deciding if and how to terminate the offending employee.

HiRes-e1470410742878-300x300Companies work hard to hire trustworthy employees, but employee theft can occur in any business. Employee theft takes different shapes—you may discover an employee is stealing products, supplies, confidential information or money from the company; an employee may steal more surreptitiously by padding time on a time sheet; or an employee may intentionally fail to enter vacation time taken in order to get paid for that time when they quit. Whether subtle, or as brazen as a famous thief (see https://en.wikipedia.org/wiki/Catch_Me_If_You_Can), any form of employee theft hurts your business and can present you with a difficult management situation.That’s why we’re here to help with the following tips.

1.“An Honest Man Has Nothing to Fear”—Background Checks:

Inquiring into an applicant’s history can be a useful tool to identify people with a propensity toward dishonesty, but if you use background checks, make sure you follow the rules about collection and use of information.

a) California law prohibits use of consumer credit reports for employment purposes except when hiring for certain specified positions, such as managers, peace officers, positions that involve regular access to personal and banking information of individuals, access to $10,000 or more of cash, or access to confidential or proprietary information of the employer. (Labor Code § 1024.5.)

b) State and local agencies (as well as employers in San Francisco and Richmond) cannot use information about criminal history unless and until a decision about the candidate’s minimum qualifications has already occurred. (See. e.g., Labor Code 432.9 and San Francisco Fair Chance Ordinance.)

c) In addition, under federal law, criminal history may not present an automatic barrier to employment; there must be a relationship between the criminal activity and the important elements of the job, and employers should consider the number of convictions, their nature and seriousness, how recent they are, and evidence of rehabilitation.

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D.C. Circuit Upholds NLRB Finding that Employment Agreement’s Confidentiality and Non-Disparagement Provisions Violated the NLRA

Posted in Restrictive Covenants

Cross Posted from Employer Labor Relations Blog.

Seyfarth Synopsis: The U.S. Court of Appeals for the D.C. Circuit recently denied Quicken Loans, Inc.’s petition for review of an NLRB decision finding that confidentiality and non-disparagement provisions in the company’s Mortgage Banker Employment Agreement unreasonably burdened employees’ rights under Section 7 of the NLRA.

Back in 2013, an NLRB administrative law judge found that certain confidentiality and non-disparagement provisions contained in Quicken’s Mortgage Banker Employment Agreement violated the NLRA (see our earlier blog post here). The Board agreed with the ALJ, and the Company petitioned the D.C. Circuit for review. Recently a three-judge panel of the D.C. Circuit denied the Company’s petition for review and granted the NLRB’s cross-application for enforcement, finding that there was nothing arbitrary or capricious about the Board’s decision and there was no abuse of discretion in the Board’s hearing process (Case No. 14-1231).


As a condition of employment, mortgage bankers were required to sign a Mortgage Banker Employment Agreement that included a confidentiality provision and a non-disparagement provision. The confidentiality provision prohibited employees from disclosing nonpublic information regarding the company’s personnel, including personnel lists, handbooks, personnel files, and personnel information of coworkers such as phone numbers, addresses, and email addresses. The non-disparagement provision prohibited employees from publicly criticizing, ridiculing, disparaging or defaming the company or its products, services, policies, directors, officers, shareholders or employees.

Court’s Reasoning

The D.C. Circuit noted that its review of the Board’s decision was limited, as Congress has entrusted the Board with implementing Sections 7 and 8(a)(1) of the Act and determining when an employer’s workplace rules run afoul of those provisions. The three-judge panel noted that the Board’s determinations are therefore entitled to considerable deference and will be sustained as long as the Board “faithfully applies” the legal standards and its textual analysis of a challenged rule is “reasonably defensible” and adequately explained.

In finding that the Board properly determined that the confidentiality provision violated employees’ Section 7 rights, the court noted that the very information the provision forbids employees from sharing (i.e., personnel lists and employee rosters) has long been recognized as information that employees must be permitted to gather and share among themselves and with union organizers. With respect to the non-disparagement provision, the court found that the Board “quite reasonably found that such a sweeping gag order would significantly impede mortgage bankers’ exercise of their Section 7 rights because it directly forbids them to express negative opinions about the company, its policies, and its leadership in almost any public forum.”

In reaching its conclusions, the appeals court noted that the validity of a workplace rule turns not on subjective employee understandings or actual enforcement patterns, but on an objective inquiry into how a reasonable employee would understand the rule’s disputed language. The court observed that this approach serves “an important prophylactic function: it allows the Board to block rules that might chill the exercise of employees’ rights by cowing the employees into inaction,” rather than forcing the Board to wait until that chill is manifest and then try to undertake the difficult task of dispelling it. The court also noted that the absence of enforcement “could just as readily show that employees had buckled under the Employment Agreement’s threat of enforcement.”

Employer Takeaway

In recent years, the Board has issued numerous decisions in which workplace rules were found to unlawfully restrict employees’ Section 7 rights, and the D.C. Circuit’s decision demonstrates that employer petitions for review of such decisions may not be successful. The decision also highlights the need to not just draft and review employee handbooks and policies for possible non-compliance with the NLRA, but employment agreements as well.

All or Nothing: Nevada Supreme Court Refuses to Adopt “Blue Pencil” Doctrine for Non-Compete Agreements

Posted in Non-Compete Enforceability

shutterstock_303993722In a recent opinion, the Supreme Court of Nevada refused to adopt the “blue pencil” doctrine when it ruled that an unreasonable provision in a non-compete agreement rendered the entire agreement unenforceable. “Blue penciling” refers to a court’s willingness to strike unreasonable clauses from a non-compete agreement, leaving the rest of the agreement to be enforced; or to modify the agreement to reflect terms that are reasonable under the law. Many jurisdictions permit “blue penciling” while others have refused to adopt the doctrine.

Traditionally, Nevada courts have followed the latter approach by refraining from reforming or “blue penciling” parties’ private contracts, including non-compete agreements. The case of Golden Road Motor Inn, Inc. v. Islam, presented the Supreme Court of Nevada with an opportunity to join the number of jurisdictions that have embraced the doctrine. For various reasons, the Court refused to do so.

The Islam case involved a dispute between a casino worker and his former employer. The worker, who worked as a casino host for the former employer, entered into an agreement with the former employer to refrain from working for any other gaming establishment within 150 miles of the former employer for one (1) year following the end of his employment with the former employer. After resigning from his employment with the former employer, the worker began working as a casino host for a new employer within the prohibited 150-mile radius. The former employer sued the worker to prevent his employment with the new employer.

The Court found the non-compete agreement’s prohibition of all types of employment with a gaming establishment within 150 miles of the former employer was overbroad, as such a prohibition extended beyond what was necessary to protect the former employer’s interests. The Court also found such a prohibition severely restricted the worker’s ability to be gainfully employed. Finding this provision unreasonable, the Court declared the entire agreement unenforceable.

The former employer asked the Court to modify the overbroad provisions of the non-compete agreement to render the agreement enforceable. Rejecting the former employer’s argument, the Court stated that it was not its role to rewrite the parties’ contract and that courts are not empowered to make private agreements. The Court explained that its restraint from “the urge to pick up the pencil” to modify the non-compete agreement avoids trampling the parties’ contractual intent, preserves judicial resources, and holds the employer, as the drafter of the agreement, to a higher standard. The Court explained that under a “blue pencil doctrine,” the employer receives what amounts to a “free ride” on the unreasonable provision, perhaps knowing that the provision would never be enforced. Consequently, the Court stated, the practice of “blue-penciling” encourages employers with superior bargaining power to “insist upon unreasonable and excessive restrictions, secure in the knowledge that the promise will be upheld in part, if not in full.” This, the Court maintained, forces the employee to bear the burden as employers “carelessly, or intentionally overreach.”

In light of this opinion, employers conducting business in Nevada should ensure that non-compete agreements with their employees are reasonably necessary to protect the employers’ interests. This means that the scope of activities prohibited, the time limits, and geographic limitations contained in the non-compete agreements should all be reasonable. If an agreement contains even one overbroad or unreasonable provision, the employer risks having the entire agreement invalidated and being left without any recourse against an employee who violates the agreement. Employers should consult with an attorney if they have any concerns about the enforceability of their non-compete agreements with their employees.

We Traced The Trade Secret Leak … It’s Coming From Inside The Business

Posted in Trade Secrets

Cross Posted from California Peculiarities.

Seyfarth Synopsis:  Protecting trade secrets from employee theft requires more than using an NDA when onboarding employees. If businesses want to protect confidential information, they need a cradle-to-grave approach, reiterating employee obligations regularly, including during exit interviews. (Yes, you need to do exit interviews!)

Headline stories in intellectual property theft tend to involve foreign hackers engaged in high-tech attacks to pilfer vast troves of data stored by big businesses or government entities, such as those involving Russian government hackers or the Chinese military. The losses are staggering. In 2009, McAfee estimated that cybercrime cost worldwide economies $1 Trillion. That number was cited by (a then-youthful) President Obama in his first speech on cybersecurity. Since that time, attacks by professionals and nation states have remained at the forefront of both news reports and the public perception. Since then, hack attacks have remained at the forefront of both news reports and the public perception.

But despite the disproportionate attention given to high value, high-tech attacks by outsiders, many U.S. businesses recognize that threats from the inside are just as costly as revealed by a 2014 PricewaterhouseCoopers survey. Nevertheless, “only 49%” of organizations surveyed had “a plan for responding to insider threats.”

Trade secrets are particularly susceptible to theft because they, by definition, consist of secret information with economic value. Company insiders often find that information too tempting to be leave behind when changing employers, or when seeking new employment. Therein lies the problem.

Trade secret theft by employees may not grab as many headlines as neo-Cold War espionage, but the data suggest that employees, not outsiders, pose the greatest threat of loss from trade secret theft. The good news is that a little proactivity by employers will go a long way toward keeping them out of the 49% who lack a plan to prevent leaks.

Of course, in California, obtaining protection is not all that simple. Non-compete agreements are, with very limited exceptions, a non-starter under Business and Professions Code § 16600, so you need special steps to keep your trade secret house in order. And because a California trade secret plaintiff (e.g., a former employer suing its former employee) likely must identify its trade secrets with reasonable particularity before commencing discovery, it pays to invest time on the front end to identify and inventory your trade secret information before litigation arises.

So, what can employers do?

Update Non-Disclosure Agreements to Comply With the DTSA, and See That Employees Know Why NDAs Are Important

Almost all employers (we hope) have confidential/non-disclosure and trade secret protection provisions in their employment agreements. But have these agreements been updated to comply with the recently enacted Defend Trade Secrets Act (“DTSA”) and its important employee/whistleblower notification provisions? And what are employers doing to help ensure compliance with their agreements? Rolling out new agreements is relatively easy. Making sure they are effective takes some doing.

Remember, your organization will not even have trade secrets to protect unless it has made  “efforts reasonable under the circumstances” (under the California Uniform Trade Secrets Act) or has taken “reasonable measures” (under the DTSA) to maintain the secrecy of the information it claims to be a trade secret. Cal. Civ. Code § 3426.1(d); 18 U.S.C. § 1839(3)(A).

Implement Computer Use and Social Media Agreements and Policies

Most trade secret theft occurs via electronic device. Make sure your company has computer use and access policies and agreements that:

  • Set forth that company computers, network, related devices, and information stored therein belong to the company;
  • Indicate that access to company computers and networks are password-protected, with access authorized only for work-related purposes;
  • Make use of data storage/access hierarchies, with the most valuable information being accessible on only a need-to-know basis, with security access redundancies (housed in a highly secure database that requires unique user credentials distinct from the log-in credentials the employee uses to access a computer workstation);
  • Identify which devices are allowed in the workplace—BYOD practices have become popular, but also present challenges in regulating information flow and return. If employees use their own devices to perform work for the company, make clear that the company data on those devices belong to the company;
  • Notify employees that the company reserves the right to inspect devices used for work to ensure that no company data exist on the devices upon termination of employment;
  • Define whether cloud storage may be used by employees, under what terms, and what happens when employment ends;
  • Define whether external storage devices (e.g., thumb drives) are allowed and under what terms; and
  • Identify whether and how employees may use social media associated with their work—trade secrets must never be publicly disclosed, but beware of any overreach that would suppress employee communications protected by the National Labor Relations Act.

Build a Culture of Confidentiality—Make Sure Employees Know What The Company Regards as Confidential and Then Remind Them Routinely

Employees need to understand what information your company considers confidential.  Educating employees on this subject should start at the beginning of employment, continue  throughout employment,  and recur at the end of employment. Tools that can help in this regard include:

  • Onboarding procedures to emphasize the importance of company confidential information;
  • Including in NDAs an express representation that the employee does not possess and will not use while in your employ confidential information belonging to any former employer or other third party;
  • Using yearly (or more frequent) brief interactive e-modules emphasizing the importance of maintaining the confidentiality of company information;
  • Requiring that the employee sit for an exit interview; and
  • Requiring that the employee certify in writing, during exit interviews, that they have returned all company information and property (the employee may provide property on the spot or make statements about what will be returned—you should inventory all such indicated property and information).

Properly Exiting Employees—Particularly for High Risk Employees—Matters!

Not all employees present the same risk of loss. Generally, the loftier an employee is in the corporate hierarchy the greater the threat that that employee will expose company confidential information. The following recommendations are for mid-to-high risk departing employees:

  • The person conducting the exit interview must be prepared—use a checklist;
  • “Preparedness” for higher-risk employees will include (1) identifying, before the exit interview, the trade secret and confidential information the employee routinely accessed and used during employment, (2) reviewing for unusual activity the departing employee’s computer and work activities (including card key facility access data, where available) in the days and weeks leading up to their exit, (3) using an exit certification as noted above, and (4) inquiring where the employee is going and what position the employee will hold;
  • Where initial investigation warrants, discreetly interview company-friendly co-workers of the departing employee to identify potentially suspicious conduct;
  • Immediately shut down the departing employee’s access to company computers, networks, and other data repositories (e.g., cloud or other off-site storage). Cutting off access to company computer and data may be warranted before exiting the employee, depending on the perceived risk of data theft;
  • Send a reminder-of-obligations letter to the now former employee, reciting ongoing obligations to the company and attaching, where useful, a copy of the NDA the employee has signed;
  • Consider notifying the new employer, but tread carefully here to avoid overstepping or providing a basis to be accused of interfering with the employment relationship between your former employee and the new employer; and
  • Depending on the threat level you perceive, consider having a departing employees’ emails preserved and their electronic devices forensically imaged.

With best practices in place, protecting your company’s trade secrets should be more like routine, but vigilant maintenance, than preparing to do cyber battle with foreign states. Organizations understandably focus on creating the next “big thing,” increasing sales, and building investor value, but slowing down enough to be purposeful in protecting intellectual property is a must.