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Trading Secrets

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

Ohio Court Issues Significant Non-Compete Decision: Damages for a Breach are the Payor’s Lost Profits, Not the Amount of Consideration

Posted in Non-Compete Enforceability, Practice & Procedure

The usual measure of monetary damages for violation of a covenant not to compete, even where the violator was paid a discreet sum for the covenant, is the amount that puts the injured party in the same position it would have been in if the contract had been performed.  Briggs v. GLA Water Management, 2014 Ohio 1551 (Ohio App., Apr. 11, 2014).  

Summary of the Case

In November 1999, Briggs sold GLA, an industrial water treatment company he owned, to Hamrick, a long-time and high-ranking GLA employee.  Briggs executed a covenant not to compete with GLA in Ohio, Indiana or Michigan for 15 years.  As consideration for the covenant, the company promised to pay him $3,500 per month from January 2000 through December 2014.  Hamrick guaranteed GLA’s promises to make these payments.  After a few years, payments for the non-compete allegedly stopped.  Briggs sued GLA and Hamrick for breach of contract.  GLA counterclaimed, asserting that Briggs had violated the non-competition covenant and demanding damages equal to the contractual consideration for it.  A jury determined that both GLA and Briggs breached their contracts, awarding approximately $119,000 to Briggs and $354,000 to GLA.  The trial court entered judgment for GLA in the amount of the difference, approximately $235,000.  On appeal, the judgment was reversed.  The appellate court held that GLA was not entitled to damages because it produced no evidence that Briggs’ breach injured the company. 

Motions and Trial

In response to Briggs’ summary judgment motion, GLA offered evidence of his competition but did not claim that his breach resulted in lost profits or other injury.  Briggs denied competing but insisted that, in any event, there were no recoverable damages.  He made the same argument in motions for a directed verdict at the close of the evidence, and for judgment notwithstanding the verdict or for a new trial after judgment was entered, but all of his motions were denied.  Although recognizing that the measure of damages for breach of a non-compete agreement usually is lost profits, the trial judge ruled that there were triable issues of fact such as whether the parties intended the agreed-upon monthly payments to constitute the value of the non-compete clause.  The judge also observed that, under Ohio law, when a contract is breached the innocent party may recover the contractual benefits received by the breaching party.

Appeal

The Court of Appeals held that there was sufficient evidence for a jury to find that Briggs breached the non-competition covenant, but the correct measure of damages was the sum which would put GLA in the position it would have been in if the contract had been performed, that is, lost profits.  Here, “GLA would not have been entitled to receive the money back that Briggs had been paid for his agreement not to compete if the contract had been performed.”  Since GLA had contracted to make the monthly payments, and there was no evidence that Briggs’ misconduct injured GLA, it sustained no recoverable damages.

Takeaways

The covenant, which was executed by sophisticated business persons in conjunction with a sale of assets, seemingly did not unlawfully restrain trade — even though it had a 15-year term and a three-state geographical restriction — because it appears to have been no more restrictive than necessary to protect GLA’s investment.  In any event, Briggs did not protest the duration or area of the restriction.  What was problematic, however, was the company’s argument that the parties intended the monthly payments to be liquidated damages for Briggs’ breach.  First, that argument flies in the face of the fact that the contract did not express any such intention.  Second, a liquidated damages clause must reflect a reasonable approximation of actual damages or else it may constitute an unenforceable penalty provision.  Here, there was no evidence that Briggs’ alleged violation of the covenant caused any injury to GLA, much less the more than $350,000 GLA was awarded.  The parties’ agreement might have provided explicitly that if there was difficulty proving actual damages for a breach of the covenant, a specified modest sum would be payable to GLA. 

Sometimes in contract violation cases involving no provable substantial injury or loss, nominal damages are awarded.  A nominal damages award to GLA here might have been upheld on appeal.

Massachusetts Governor Proposes Sweeping Legislation Banning Non-Compete Agreements

Posted in Legislation, Non-Compete Enforceability, Trade Secrets

By Katherine E. Perrelli, Dawn Mertineit and Erik W. Weibust

Last week, Massachusetts Governor Deval Patrick proposed sweeping legislation that would eliminate employee non-compete agreements in Massachusetts.  While it remains to be seen whether this bill will actually become law, employers should be aware of the potential implications of this far-reaching bill, and should implement steps sooner rather than later to protect their trade secrets and confidential information should non-competes become unenforceable in the Commonwealth.

Eliminating All Employee Non-Competes in Massachusetts

The Governor’s bill, entitled “An Act to Promote Growth and Opportunity” (HB4045), includes a provision that would invalidate all non-compete agreements in Massachusetts, with a few very limited exceptions, regardless of industry.  This would bring Massachusetts in line with only California and North Dakota, the only other states that prohibit employee non-compete agreements. 

The limited exceptions to the proposed Massachusetts statute include non-competes entered into in connection with the sale of a business (or the sale of substantially all of the assets of a business), where the restricted party owns at least 10% of the business and received significant consideration for the sale, and non-compete agreements arising outside of an employment relationship. 

Additionally, the bill would not affect non-solicitation agreements (both those prohibiting solicitation of an employer’s customers and those prohibiting solicitation of employees), non-disclosure agreements, forfeiture agreements, or agreements not to reapply for employment to the same employer.  While the bill does not explicitly reference “garden leave” or “bench” provisions (where the employee is compensated not to compete during the restricted period), it would seem to bar such provisions, as they would presumably be deemed to prohibit or restrict an employee’s ability to seek or accept other employment.  This is something the legislature should clarify and/or the courts may ultimately need to consider in interpreting the bill, should it pass. 

One of the most notable provisions of the bill, however, provides that the prohibition on non-compete agreements applies to agreements executed before the bill’s effective date.  Companies whose only protection of confidential and proprietary information or customer relationships consisted of non-compete agreements (which is not advisable) will have to ensure that they have appropriate protections in place moving forward.

Adoption of the Uniform Trade Secrets Act

The bill also includes a provision adopting the Uniform Trade Secrets Act (“UTSA”)—making Massachusetts the forty-ninth state to have adopted some version of the UTSA, with only New York lagging—and another provision that would repeal the current statutory provisions related to liability for trade secret misappropriation and injunctive relief (Sections 42 and 42A of Chapter 93 of the Massachusetts General Laws).   

Unlike the current statutory scheme in Massachusetts, the UTSA explicitly permits injunctive relief for actual or threatened trade secret misappropriation (whereas under the current scheme, actual misappropriation must be established). The UTSA also specifies that damages can include not only the actual loss caused by the misappropriation, but also unjust enrichment damages. 

Like the current statutory scheme, courts can award multiple damages for trade secret misappropriation:  The UTSA would allow awards of exemplary damages of up to twice the amount of actual loss or unjust enrichment, where the misappropriation is willful and malicious.

The UTSA also includes a provision permitting a court to award attorneys’ fees in trade secret misappropriation cases to the prevailing party if: (i) a claim of misappropriation is made or defended in bad faith, (ii) a motion to enter or terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists.  Unlike the section of the bill eliminating non-competes, the section relating to the UTSA would not apply retroactively.

What Does This Mean For Your Business?

Faced with incredibly disparate opinions in the business community, and the fact that Governor Patrick’s administration is in its final months, it may be that the bill in its current form will wither on the vine. Instead, previous bill sponsors may continue their hard work to find a compromise between outright elimination of non-competes and a codification of the common law, which has evolved in most instances in the Commonwealth, to enforce those non-competes that are narrowly tailored and address the employer’s legitimate business needs to protect its good will, confidential information, and trade secrets.

While some studies have suggested a connection between enforcement of non-competes and limited regional growth (for example, comparing the boom of Silicon Valley, where non-competes are unenforceable, to the more tempered success of the Route 128 area in Massachusetts), other studies have noted that a variety of factors distinguish these regions, such as cultural and structural differences between the East and West Coasts.  Accordingly, we anticipate that critics of this bill will point out that the Patrick administration’s claim that non-competes “are a barrier to innovation in Massachusetts” may not be quite that cut-and-dried. 

Notwithstanding the fact that the bill may ultimately not become law, employers with operations in Massachusetts should take steps to prepare themselves in the event the bill is passed, in which case even those agreements that were executed prior to its passage would be invalidated.

Best practices include:

  •  Identifying the various types of valuable information within a company and assessing the secrecy measures protecting such information.
  •  Drafting and enforcing robust confidentiality and invention assignment agreements that clearly define the sort of information and documents the company considers a trade secret or confidential;
  •  Implementing entrance interview protocols to educate employees about their non-disclosure obligations from the very start of their employment; 
  • Implementing exit interview protocols to both remind departing employees of their continuing non-disclosure obligations, and also to ensure that employees return all documents and software at termination;
  • Conducting regular employee education programs that create a culture of confidentiality whereby employees understand the value of protecting company data;
  • Labeling confidential information as such where appropriate;
  • Limiting access to trade secrets, including implementing computer access codes, passwords, identification badges, and locked files for hard copies;
  • Regular evaluations of effective trade secret protection measures that take into account new technologies and trends, such as social media and cloud computing issues;
  • Notifying departing employees’ new employers about your concerns of trade secret disclosure (whether advertent or inadvertent) or misappropriation;
  • Reviewing computer records (including email activity, USB drive usage, and phone records) to determine whether a former employee disclosed or maintained sensitive information leading up to or after termination; and
  • Use of non-solicitation agreements to limit a departing employee’s ability to call on your customers or other employees.

Implementing these practices will help protect your business should Governor Patrick’s bill pass.  In the meantime, non-compete agreements that are reasonably tailored to protect your company’s legitimate business interests are still enforceable, and may add another layer of protection.

Scott Schaefers Discussing Employee Social Media Privacy – How Employers Can Strike the Necessary Balance

Posted in Legislation, Privacy, Social Media, Trade Secrets



On April 16th, Scott Schaefers spoke with LexBlog’s Colin O’Keefe in a live online interview about what employers need to know about the social networking privacy legislation passed by thirteen states in the last two years.  Scott discussed Seyfarth’s soon-to-be-published survey of that legislation, as well as some ideas of what employers can do to protect its proprietary assets.  Those interested in more detail can attend our upcoming April 24th webinar, in which we will present the various features of the new laws, as well as what to expect in the courts.

Though the specific components of the laws vary from state to state, generally speaking they prohibit employers from requiring or requesting employees to provide access to their personal social networking accounts (Facebook, LinkedIn, Twitter, etc.).  The penalties for violations also differ depending on the state, and range from mere slaps on the wrist (i.e. New Jersey) to much heavier civil liability, including payment of employees’ attorneys’ fees (i.e. Oregon).  Employers enjoy a number of exemptions and immunities under many of the statutes, including the right to demand access for employer-related accounts, to demand access upon reasonable suspicion of information theft, and to conduct appropriate network and system monitoring. 

Some gaps in the new laws will have to be filled in by the courts, including how the laws will impact employers’ rights to its trade secrets; the discoverability of social networking account content in litigation now that the content has been given an added measure of privacy; and which state’s law will apply in disputes involving multi-state employers.  Employers are encouraged to consult with counsel versed in the new legislation to anticipate the effect on their businesses.

Update: Massachusetts Governor Proposes Sweeping Legislation Banning Non-Compete Agreements

Posted in Legislation, Non-Compete Enforceability, Trade Secrets

By Katherine Perrelli, Dawn Mertineit, and Erik Weibust

As we reported last week, Massachusetts Governor Deval Patrick has proposed sweeping legislation that would eliminate employee non-compete agreements in Massachusetts.  Now that we have had an opportunity to review the Governor’s bill, entitled “An Act to Promote Growth and Opportunity” (HB4045), we wanted to report back on its content and the implications should it pass.  While the bill includes a number of proposed changes and additions to existing laws on a variety of subjects, two main provisions are of particular interest here. 

Outright Elimination of Employee Non-Compete Agreements

First, as expected, the bill includes a provision that would invalidate all employee non-compete agreements in the Commonwealth. 

In our last post on the topic, we wondered whether the proposed legislation would apply solely to non-competes in the technology and life sciences industries, as this Boston Globe headline suggested, or if it would apply to a broader category of industries.  We can now report that the bill, as currently drafted, would invalidate all non-compete agreements in Massachusetts, with a few very limited exceptions, regardless of industry. 

This would bring Massachusetts in line with only California and North Dakota, the only other states that completely prohibit employee non-compete agreements. 

The limited exceptions to the proposed Massachusetts statute include non-competes entered into in connection with the sale of a business (or the sale of substantially all of the assets of a business), where the restricted party owns at least 10% of the business and received significant consideration for the sale, and non-compete agreements arising outside of an employment relationship. 

Additionally, the bill would not affect non-solicitation agreements (both those prohibiting solicitation of an employer’s customers and those prohibiting solicitation of employees), non-disclosure agreements, forfeiture agreements, or agreements not to reapply for employment to the same employer.  While the bill does not explicitly reference “garden leave” or “bench” provisions (where the employee is compensated not to compete during the restricted period), it would seem to bar such provisions, as they would presumably be deemed to prohibit or restrict an employee’s ability to seek or accept other employment.  This  is something the legislature should clarify and/or the courts may ultimately need to consider in interpreting the bill, should it pass. 

One of the most notable provisions of the bill, however, provides that the prohibition on non-compete agreements applies to agreements executed before the bill’s effective date.  This retroactive application is certain to impact negatively businesses in Massachusetts that currently use non-compete agreements to protect their legitimate business interests (e.g., protection of good will, trade secrets, and confidential information), and plan to do so until they are invalidated by statute.  Companies whose only protection of confidential and proprietary information or customer relationships consisted of non-compete agreements (which has never been advisable) will have to ensure that they have appropriate protections in place moving forward.

Adoption of the Uniform Trade Secrets Act

Second, the bill includes a provision adopting the Uniform Trade Secrets Act (“UTSA”)—making Massachusetts the 49th state to have adopted some version of the UTSA—and another provision that would repeal the current statutory provisions related to liability for trade secret misappropriation and injunctive relief (Sections 42 and 42A of Chapter 93 of the Massachusetts General Laws).    

Unlike the current statutory scheme in Massachusetts, the UTSA explicitly permits injunctive relief for actual or threatened trade secret misappropriation (whereas under the current scheme, actual misappropriation must be established). The UTSA also specifies that damages can include not only the actual loss caused by the misappropriation, but also unjust enrichment damages. 

Like the current statutory scheme, courts can award multiple damages for trade secret misappropriation:  The UTSA would allow awards of exemplary damages of up to twice the amount of actual loss or unjust enrichment, where the misappropriation is willful and malicious.

Another significant change that adoption of the UTSA would bring about is an attorneys’ fees provision, where the court would be permitted to award fees to the prevailing party if: (i) a claim of misappropriation is made or defended in bad faith, (ii) a motion to enter or terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists.  We have addressed the implications of a nearly identical provision in the Texas Uniform Trade Secrets Act here.  Notably, unlike the section of the bill eliminating non-competes, the section relating to the UTSA would not apply retroactively.

Now What?

While the UTSA may be welcomed by businesses operating in Massachusetts, we anticipate mixed responses to the proposed elimination of all non-competes (and its proposed retroactive application), with passionate arguments on both sides of the issue. 

Of course, the mere introduction of the bill does not ensure its passage and, as we have previously reported, other legislation regarding the enforceability of non-compete agreements in Massachusetts has been pending in one form or another in the state legislature since 2009.

Faced with incredibly disparate opinions in the business community, and the fact that Governor Patrick’s administration is in its final months, it may be that the bill in its current form  will wither on the vine. Instead, previous bill sponsors may continue their hard work to find a compromise between outright elimination of non-competes and a codification of the common law, which has evolved in the Commonwealth, to enforce those non-competes that are narrowly tailored and address the employer’s legitimate business needs to protect its good will, confidential information, and trade secrets. While some studies have suggested a connection between enforcement of non-competes and limited regional growth (for example, comparing the boom of Silicon Valley, where non-competes are unenforceable, to the more tempered success of the Route 128 area in Massachusetts), other studies have noted that a variety of factors distinguish these regions, such as cultural and structural differences between the East and West Coasts.  Accordingly, we anticipate that critics of this bill will point out that the Patrick administration’s claim that non-competes “are a barrier to innovation in Massachusetts” may not be quite that cut and dry. 

The bill was filed in the Massachusetts House of Representatives and has since been referred to the Joint Committee on Economic Development and Emerging Technologies.  We will keep you updated on this sweeping bill’s progress.

Third Circuit Signals Pro-Defendant Interpretation of the Computer Fraud and Abuse Act’s “Authorized Access” Provisions

Posted in Computer Fraud, Computer Fraud and Abuse Act, Cybersecurity, Espionage

On April 11th, the Third Circuit Court of Appeals reversed the conviction and 41-month prison sentence of a Computer Fraud and Abuse Act (CFAA) defendant, holding that he was tried and convicted in an improper venue.  U.S. v. Auernheimer, No. 13-1816 (3rd Cir. Apr. 11, 2014).  Though we usually do not post on procedural issues like these, we certainly post on substantive CFAA developments.

In footnote 5 of its opinion, the court said that the government failed to prove that defendant accessed the network “without authorization, or in excess of authorization” under New Jersey’s state computer-crime law.  That is the same language in the CFAA over which federal courts have been split for the last several years regarding employee liability for misuse of company files.  The Third Circuit’s footnote indicates that it is leaning toward the narrower, pro-employee / pro-defendant interpretation, espoused by the Fourth and Ninth Circuits, which prohibits CFAA liability for employees who merely abuse their otherwise legitimate access to company files.

The defendant in Auernheimer (a/k/a “Weev”) was convicted of “slurping,” which, at least in this case, involved the automated scraping of user email addresses from their login screens on their computer tablets.  Such slurping and scraping did not involve “hacking,” or circumventing a code- or password-based barrier to a user account or network.  Rather, the slurpers merely found loopholes in public-facing login screens, and gathered the username email addresses which the account providers unintentionally “published.”  In other words, slurping did not involve “accessing” an account “without authorization” from the provider or accountholder.  It merely involved scraping together information which was publicly available, albeit inadvertently from the provider’s and user’s standpoint.

After defendant and his “co-conspirator” gathered 114,000 email addresses and went to the press with this alleged “security flaw,” the New Jersey U.S. Attorney’s Office obtained a two-count indictment against them for conspiracy to violate the CFAA, and for violation of New Jersey’s computer crime statute.  Defendants objected to venue in New Jersey, citing the facts that they “slurped” from their homes in California and Arkansas, and that the cell network’s affected servers were located in Texas and Georgia.  The district court overruled defendants’ objections, and a jury eventually convicted them on both counts.  The district court sentenced Weev to 41 months in prison.

In reversing the conviction, the Third Circuit said that venue in criminal cases implicated constitutional rights, which were violated in this case by defendants’ being tried and convicted so far from home and where they allegedly broke the law.  In pointing out that neither defendant “accessed a computer in New Jersey,” the court noted that the government failed to prove that defendants’ slurping of email addresses amounted to access “without authorization, or in excess of authorization” under the state cybercrime law.  (P. 12, n. 5).  Defendants merely wrote a program which scraped together publicly available information, the access of which could not be unauthorized.

This reasoning indicates that the Third Circuit is leaning toward the pro-employee, pro-defendant interpretation of the CFAA’s “without authorization” and “exceeding authorization” provisions.  The Fourth and Ninth Circuit Courts of Appeals have adopted that approach, holding that the CFAA does not apply to employees who copy files and send them to or use them for a competitor.  The access itself was not unauthorized, even if the subsequent file use was.  Thus, no liability under the statute’s plain language.  The Fifth, Seventh and Eleventh Circuits take the opposite stance; that employees who use their otherwise authorized access to company computers can be liable under the CFAA for their subsequent misuse of the files on those computers.  Under normal agency law, employees have no authorization to use company files against the company.  Their accessing the company’s computers for that purpose, those courts held, violated the CFAA.

Granted, the dicta reasoning is not binding on district courts in the Third Circuit, or on the Third Circuit itself.  But the court’s interpretation of the very same CFAA language over which other federal courts have issued conflicting decisions for the past two decades again points up the need for the Supreme Court to resolve the split, or for Congress to amend the statute.  The Obama administration lobbied the Senate in 2011 to adopt the Fifth, Seventh, and Eleventh Circuits’ pro-employer position, but nothing yet.  As it stands, whether a disloyal employee may be prosecuted or sued under the CFAA depends on the federal circuit in which he or she works.

Breakfast Briefing: Protecting Your Most Valuable Assets — Trade Secrets, IP and Your Employees

Posted in Practice & Procedure, Privacy, Restrictive Covenants, Trade Secrets

Significant recent developments in Illinois and other states, as well as Congress, have changed the landscape of trade secret and restrictive covenant enforcement and protection. Understanding the impact of these changes, and the tools now available to employers for trade secret and restrictive covenant enforcement and protection, will help a company safeguard its most valuable assets and maintain its competitive advantage over competitors.

On Thursday, May 15th at 8:00 a.m. CST, the Chicago office is hosting a Breakfast Briefing entitled “Protecting Your Most Valuable Assets – Trade Secrets, IP and Your Employees.” Attorneys  J. Scott Humphrey, Molly M. Joyce, Jason P. Stiehl and Michael D. Wexler will discuss significant recent developments in restrictive covenant and trade secrets law, as well as “best practices” for protecting your company’s most valuable assets — trade secrets, intellectual property and employees.

The program will include a focus on key issues and practical responses, including:

  • A review and discussion of Fifield v. Premier — the recent Illinois Appellate decision that attempts to change longstanding Illinois law on the consideration that must be given to an employee in order to enforce a restrictive covenant. 
  • What to do when your new hire is bound by a restrictive covenant agreement.
  • Analysis of real-world situations where former employees have attempted to loot the company’s employees and confidential information and take them to a competitor.
  • Methods to protect confidential information and intellectual property.
  • How to respond when employees leave or take trade secret information.


There is no cost to attend but registration is required and seating is limited. Members of the general counsel’s office, HR professionals, corporate executives, risk managers, and directors are invited to attend.

 

 

Randy Bruchmiller Discussing the Finer Points of the Texas Uniform Trade Secrets Act

Posted in Practice & Procedure, Trade Secrets

The Texas Uniform Trade Secrets Act was signed into law in 2013 and applies to any misappropriation of trade secrets occurring on or after September 1, 2013.  Texas trial and appellate courts will be interpreting these new provisions of Texas law as new trade secrets cases work their way through the legal system.  Randy Bruchmiller weighs in on a couple of the new provisions that have already received considerable discussion in the legal community.

Breaking News: Massachusetts Governor Deval Patrick to Propose Legislation Eliminating Non-Compete Agreements in Certain Industries

Posted in Legislation, Non-Compete Enforceability, Trade Secrets

By Dawn Mertineit and Erik Weibust

The Boston Globe reported this morning that Massachusetts Governor Deval Patrick will propose legislation today that would eliminate non-compete agreements in technology, life sciences, and “other industries,” with his secretary of Housing and Economic Development, Greg Bialecki, stating that the administration “feel[s] like noncompetes are a barrier to innovation in Massachusetts.”  No word just yet on what “other industries” might include.

While Governor Patrick had previously been more tempered in his views on non-compete agreements, his current position supporting the outright elimination of such restrictive covenants is hardly surprising in light of comments made by Bialecki at a hearing before the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development just seven months ago.  At that hearing, on which we previously reported here, Bialecki foreshadowed today’s move, stating that the Patrick Administration supported the outright elimination of non-compete agreements, stating that such agreements “stifle movement and inhibit competition.” 

While the proposed legislation has not yet been filed, the Globe has reported that it is modeled after California’s ban on non-compete agreements, and that it will include a provision adopting the Uniform Trade Secrets Act (the “UTSA”).  As we have previously noted here, Massachusetts is currently one of only a handful of states that has not adopted the UTSA.

More details to follow once the proposed legislation is publicly available, including what other industries may be affected by the administration’s proposal. It is not often that you hear states wanting to be more like California particularly on labor and employment issues.

Jury’s $920 Million Trade Secret Misappropriation Verdict Vacated

Posted in Practice & Procedure, Trade Secrets

In a stunning per curiam ruling, the Fourth Circuit Court of Appeals last week vacated a judgment of nearly $1 billion, and a 20-year non-compete injunction, entered by an Eastern District of Virginia judge in favor of the DuPont Company.  The appellate tribunal held that the lower court committed prejudicial error by granting DuPont’s pre-trial motion in limine to bar defendant Kolon Industries from offering any evidence relating to an earlier lawsuit involving DuPont.  The case was remanded for a new trial before a different judge.  E.I. DuPont De Nemours & Co. v. Kolon Industries, Inc., No. 12-1260 (4th Cir., Apr. 3, 2014).

Summary of the case.  DuPont maintained that one or more former employees, working as consultants to Kolon, misappropriated DuPont’s trade secrets relating to the manufacture and marketing of “Kevlar,” a strong, synthetic fiber used, for example, in bullet-resistant armor.  Kolon contended that what the consultants disclosed was not confidential because it was part of the public record in prior trade secret misappropriation litigation DuPont filed against a company — not Kolon — that was, at the time, DuPont’s primary competitor with respect to “Kevlar.”

Granting DuPont’s in limine motion in the Kolon case, the trial court ruled that any reference to that prior lawsuit would be confusing and prejudicial.  The Court of Appeals reversed, holding that the trial judge’s “wholesale preclusion of any mention” of the earlier litigation was arbitrary, irrational, and an abuse of discretion.

Kolon also contended that the trial judge should have recused himself because he formerly had practiced law at the firm representing DuPont in both the earlier and this litigation.  That contention was rejected on appeal — 2-1 — as untimely but, in the exercise of its “supervisory powers,” the panel unanimously directed the Chief Judge of the district court to whom the case was remanded to assign a different jurist to conduct further proceedings.

Origin of the lawsuit.  Former DuPont employee Mitchell, who had extensive knowledge concerning the manufacturing and marketing of “Kevlar,” allegedly communicated repeatedly with Kolon about the product.  In the course of an FBI investigation of Mitchell’s conduct, he agreed to cooperate.  As a result, Kolon and several of its officers were indicted for theft of trade secrets, conspiracy, and obstruction of justice.  DuPont then sued Kolon.

The erroneous pre-trial evidentiary decision.  Kolon contended, in its defense to DuPont’s misappropriation claims, that at least some of the trade secrets at issue in this case were “strikingly similar” to details of the production process described in exhibits in the court’s public files relating to DuPont’s earlier lawsuit against the different competitor.  Moreover, one of Kolon’s witnesses was an expert witness for DuPont in the previous litigation.  Mention of the prior case seemingly was inevitable at the Kolon trial.  The trial judge granted DuPont’s motion in limine to bar any reference to the earlier lawsuit on the ground that no showing had been made that a trade secret at issue in the Kolon case actually was disclosed in the earlier trial.  The appeals court held, however, that the lower court applied “too stringent a standard for admissibility.  Under the circumstances [here], a ‘strikingly similar’ standard of relevance is enough” to allow the jury to decide whether the information retained the requisite confidentiality.

Takeaways.  Although the Fourth Circuit’s opinion is designated “Unpublished” and, therefore, “not binding precedent,” it seems to include carefully drafted guidelines regarding pretrial motions.  The appeals court recognized that streamlining a trial and “fostering the orderliness of evidentiary presentations of complicated issues cannot be doubted”  but cautioned that “a court is often wise to await the unfolding of evidence before the jury before undertaking to make definitive rulings on the likely probative value of disputed evidence.”  By the same token, a party who succeeds in obtaining an in limine instruction and who prevails at the subsequent trial may find that it was an exercise in futility.  Lengthy trials — the one between DuPont and Kolon lasted seven weeks — are costly, and a retrial adds expense.  So, litigants should think carefully before seeking to exclude a large volume of evidence.

Another lesson learned in this litigation is that confidential information disclosed in the course of a misappropriation trial thereafter may cease to qualify as confidential. 

Finally, the Fourth Circuit’s plurality and partially dissenting opinions relating to Kolon’s effort to disqualify the trial judge also may be instructive in a future case.  The plurality of the per curiam court denied disqualification, but all three judges voted nevertheless to remand for further proceedings before a different judge.  So, consideration might be given to requesting, as an alternative in a federal appellate court motion seeking a recusal on remand, the exercise of “supervisory powers” with respect to assignment of another trial judge.  Both requests seek substantially the same relief. 

Covert Cellular: Enough Protection for Trade Secrets?

Posted in Cybersecurity, Data Theft, Espionage, International, Trade Secrets

With the ever-increasing need to maintain communications with customers and your employees, mobile phones have become a requirement for business people. Spanish telecommunications company Geeksphone is targeting the business market with Blackphone, the first mobile phone that encrypts data transmissions. No one would argue against the value of increased wireless data security, but do CIA-style cellular phones really provide enough extra protection to justify the cost?

All cell phone transmissions are encoded in some way, which may be why we feel some level of comfort sending some of our most intimate personal information through mobile devices. We text our friends from Antarctica using satellite phone links, Instagram selfies from the beach, play games with people from all over the world while waiting for a flight (thank you, Alec Baldwin, for delaying a flight departure because of a “Words with Friends” obsession), purchase goods online (with our credit card numbers sailing through cyberspace) and catch up on email while driving (which may be against the law in some jurisdictions). If these modern conveniences are not continuously available from almost anywhere on the globe, some may consider that cellular service providers have somehow usurped our constitutionally guaranteed freedom of expression.

Business discussions also involve confidential data. If trade secrets are involved, reasonable measures, such as limiting dissemination and providing adequate safeguards on the restricted material, must be taken to maintain legally enforceable protection.

Thanks to Edward Snowden, though, we are aware that Big Brother is essentially recording every transmission from mobile phones. Senator Dianne Feinstein, German Chancellor Angela Merkel, and many Americans consider such data collection “spying.” More First Amendment violations.

In light of Mr. Snowden’s revelations, the use of cellular communications in business, especially when confidential information is involved, may fall short of the required security threshold.

And thus, a niche market for encrypted cellular communication has been born. With a Blackphone, whomever attempts to record your encrypted calls and texts will record unintelligible data bits instead of a verbatim transcript.

This extra level of protection may be worth the $629 per unit for your company. Indeed, an entire fleet of spy-thwarting cellular phones may be a wise investment if your executives routinely travel to parts of the world where someone in addition to the National Security Agency (NSA) may be listening—and this may be especially true if your company uses wireless networks to send confidential data or trade secrets.

But are Blackphone’s hyper-secrecy and extra cost really necessary for confidential data transfer? Possibly not. As another post on this blog reports, 2.5 Exabytes (computer jargon for “a whole bunch”) of information are created daily. That means the “c u @ movies @ 7” text you just sent is akin to a single needle in a billion billion haystacks on any given day, so your data is already pretty difficult to locate even without Blackphone’s extra level of encryption.

Still, all communications sent over wireless networks, even from a Blackphone, are broadcast in the open, and therefore subject to interception by unwanted prying eyes (and ears). Yes, Blackphone transmissions will be harder to interpret without the special secret decoder ring. And for additional privacy, the Blackphone automatically deletes the transmitted text or call details after the transmission is completed.  Therein lies the problem.

Whether Blackphones are company-provided or the personal property of employees, the legal standard courts may use could be, “Does encrypted, public dissemination of a company’s proprietary data represent ‘reasonable protection’?” Is additional encoding of a public broadcast considered enough of an access limitation?

Further, although the extra layer of encryption may be deemed a limited access, is providing untraceable back doors to your private data an adequate safety measure?

Data-encrypting cell phones such as the Blackphone may appear to be the perfect fit for your company’s needs, but do not be deluded into a false sense of security; Edward Snowden, after all, used the NSA’s own technology to disseminate the agency’s secrets. Remember that although Blackphone transmissions are difficult to trace, the data are sent somewhere. That means that somebody has the key to decode the data—and that might be your competition.

Indeed, the best course of action for your company might be to adopt a policy that prohibits confidential communications via cell phone, and restricts them to an environment that is secure.

If you absolutely must communicate verbally, or with drawings or formulae, you can always forego the phone and communicate face-to-face with your clients.

Because even with a Blackphone, the airwaves might just be your competitor’s (and a spy’s) best friend.