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Trading Secrets

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

Webinar Recap! International Trade Secret and Non-Compete Law Update

Posted in Data Theft, International, Non-Compete Enforceability, Trade Secrets

shutterstock_183065225We are pleased to announce the webinar “International Trade Secret and Non-Compete Law Update” is now available as a podcast and webinar recording.

In Seyfarth’s third installment of its 2015 Trade Secrets Webinar series, Seyfarth attorneys focused on non-compete and trade secret considerations from an international perspective. Specifically, the webinar will involved a discussion of non-compete and trade secret issues in Europe and China compared to the United States. This webinar provided valuable insight for companies who compete in the global economy and must navigate the legal landscape in these countries to ensure protection of their trade secrets and confidential information, including the effective use of non-compete and non-disclosure agreements

As a conclusion to this well-received webinar, we compiled a list of key takeaway points, which are listed below.

International…local law compliance is key

One size does not fit all! Requirements for enforceable restrictive covenants vary dramatically from jurisdiction to jurisdiction. However, there are some common requirements and issues regarding enforceability based on the region (e.g. in Europe, see below). Bearing in mind non-compete covenants across the world may be unlawful in certain countries or heavily restricted, employers should carefully tailor agreements to satisfy local legal requirements and appropriately apply local drafting nuances to aid enforceability of any restrictive covenants.

The general approach to restrictive covenants in Europe, is that the restrictions should not go further than is reasonably necessary to protect the employer’s legitimate business interests. This restrictive approach is a continuing trend across Europe. For example, there is a recent prohibition in the Netherlands on non-compete clauses in fixed-term contract unless justified by the special interests of the company. In practice, this means that employers should particularly focus on the duration and scope (in terms of geographical coverage and the employee’s own personal activities) of the restrictions and be mindful of any local payment obligations when preparing restrictive covenants (e.g. in France and Germany). Europe is also making an attempt to remedy the uneven levels of protection and remedies in relation to trade secrets. The draft EU Directive for trade secret protection is currently making its way through the legislative process with no firm timeline for adoption.

In addition to local or regional nuances, employers should take advantage of other contractual and/or tactical mechanisms as a “belt-and braces” approach, such as, claw-backs and forfeiture of deferred compensation (where permitted), use of garden leave provisions, and strategic use of forum selection and choice-of-law provisions. Employers operating in the U.S. should also consider strategic use of mandatory forum selection and choice-of-law provisions in restrictive covenant agreements with U.S.-based employees.

Practical measures should also be taken to protect confidential information and trade secrets, including limiting access to sensitive information, using exit interviews, and (provided that applicable privacy laws are followed) monitoring use of company IT resources and conducting forensic investigations of departing employees’ computer devices.

France…do not miss the deadline

Drafting a non-compete clause under French labor law requires specific care as Courts are particularly critical of the following: duration, the geographical and activities scope, the conditions in which the employer releases the employee from such obligation, the employee’s role, the interests of the company and the financial compensation provided by the clause.

Recent case law shows that French Courts are strict when it comes to the interpretation of the non-compete clauses and the possibility to waive the non-compete clause. If an employer misses the relevant contractual deadline to release an employee from their non-compete, the financial compensation will be due for the entire period. Similarly, if the employer waives the non-compete prematurely, the Courts will consider the waiver as invalid.

During employment an employee is subject to a general obligation of confidentiality and breach may be subject to civil and criminal sanctions. Only “trade secrets”, however, are protected post-termination under certain circumstances. Employers should therefore automatically include a confidentiality clause in employment agreements to strengthen the protection of the company’s data post-termination. Good news for employers, the French High Court recently confirmed that, unlike non-compete covenants, a confidentiality clause does not require any financial compensation.

United Kingdom…less is NOT more

Restrictive covenants are potentially void as an unlawful restraint of trade! In practical terms, this means that such covenants are only likely to be enforceable where they are fairly short in duration, the restriction is narrowly focused on the employee’s own personal activities (e.g. by geographical scope) and is specific to the commercial environment. Unlike in some European jurisdictions, payment will not ‘rescue’ an unenforceable restriction. In addition, the English Courts tend to have an unforgiving nature when it comes to poor drafting even if the intention of the parties is obvious. Employers should therefore also consider other creative and acceptable ways to aid enforceability, such as, deferring remuneration and varying and reaffirming covenants.

Absent any agreement, only “trade secrets”, which is narrowly defined, will be protected after employment. Employers should therefore ensure that employment contracts and/or other free-standing binding agreements provide full coverage for the protection of confidential and other valuable business information post-termination. Often the physical protection of confidential information is underestimated (e.g. encrypting data, installing passwords, secure storage, etc.), which can be a more effective and a less costly approach for employers in the long-term. Employers should therefore also seek to retain physical control of such information in order to reduce and limit unwanted disclosure and misuse.

China …. stay atop an evolving regulatory system

In China, employers should ensure that they have a non-compete agreement with the employee at the time of employment, so that the employer can decide whether to enforce or not to enforce the non-compete agreement for a period of post-employment.

In addition, employers should ensure that documents are marked with ‘confidential’, or that other measures are taken to protect confidential information.  Otherwise, remedies may not be available under the Chinese law for breach of confidential obligations.  Employers should also review and update rules and policies regarding confidentiality and security arrangements. Pre-employment vetting of R&D staff is also essential to prevent unexpected breach or non-compliance with trade secret and IP rights.

As a notable (and relatively recent) development, Injunctive relief for trade secret infringement is available in Shanghai and Anhui.

Aggressive SEC Enforcement Efforts Regarding Confidentiality Agreements Will Continue

Posted in Practice & Procedure, Restrictive Covenants

shutterstock_263632130By Ada W. Dolph

In a post-script to the SEC’s April 1 cease and desist order penalizing KBR, Inc. for a confidentiality statement that failed to carve out protected federal whistleblower complaints (our alert on it here), SEC Office of the Whistleblower Chief Sean McKessy today made additional comments that suggest public companies as well as private companies that contract with public companies should immediately review their agreements for compliance.

In a webinar sponsored by the American Bar Association titled “New Developments in Whistleblower Claims and the SEC,” McKessy commented on the recent KBR Order. Here are the key takeaways:

SEC Rule 21F-17 is “Very Broad

McKessy stated that he views the SEC Rule 21F-17 as “very broad,” and “intentionally so.” The Rule provides in relevant part:

(a)       No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.

McKessy said that he reads the Rule as stating that “no person shall take any action” to impede an individual from communicating directly with the SEC.

Agreement Review a Continued High Priority for the SEC

McKessy stated that this initiative remains a “priority” for him and his office. “To the extent that we have come across this language [restricting whistleblowers] in a Code of Conduct” or other agreements, the SEC has taken the position that it “falls within our jurisdiction and we have the ability to enforce it.”

He noted that “KBR is a concrete case to demonstrate what I have been saying,” referencing public remarks he has made in the past regarding SEC scrutiny of employment agreements. He stated that the agency is continuing to take affirmative steps to identify agreements that violate the Rule, including soliciting individuals to provide agreements for the SEC to review. Additionally, he reported that the SEC is reviewing executive severance agreements filed with Forms 8-K for any potential violations of the Rule.

The KBR Language is Not a “Safe Harbor”

When asked whether the language required as part of the KBR Order constituted a “safe harbor,” McKessy stated that he would “not go that far,” and that each agreement will be viewed in context. He described the language in the KBR Order as “certainly instructive” but “not restrictive” and not insulating a company from further scrutiny by the SEC. He also stated that it is “really not appropriate for me to bless any language,” and suggested that the same language could be acceptable in one context but not in another depending on the company’s approach to encouraging employees to come forward to report alleged securities fraud.

KBR Could Be Applied to Private Companies

McKessy was also asked whether the SEC would apply the KBR Order to private companies under the U.S. Supreme Court’s 2014 ruling in Lawson v. FMR LLC, 134 S.Ct. 1158 (2014), which expanded Sarbanes-Oxley’s whistleblower protections to employees of private companies who contract with public companies.

McKessy stated that the SEC has not officially taken a position on this issue, but in his personal opinion he can “certainly can see a logical thread behind the logic of the Lawson decision” to be “expanded into this space [private companies],” and that “anyone who has read the Lawson decision can extrapolate from it the broader application.”

SEC Not Bound By Agreements Precluding Production of Company Documents

McKessy was asked regarding the SEC’s position regarding the disclosure of company documents by whistleblowers in their complaints to the agency. He said that it will “surprise no one that companies have a 100% record” of preferring that company documents not be provided to the SEC. But, “[a]t the end of the day” he stated that any kind of agreement restricting an employee from providing company documents to the SEC is not enforceable against the SEC and companies should not “bank on the fact” that the SEC would “feel bound” by that agreement in any way.

McKessy took a more measured approach with regard to privileged company documents, however. McKessy stated that the SEC is “not interested in getting privileged information” and that the SEC discourages whistleblowers and their counsel from providing privileged information as part of their complaints. He noted that while there are “certain exceptions to privilege,” he would “hate to leave the impression that [the agency] is looking to create to create an army of lawyers who can ignore their confidentiality requirements because of the possibility of being paid under our [Dodd-Frank bounty] program.”

Next Steps for Companies

McKessy concluded his remarks on this issue by stating that “[t]his is the time for the company to take a look at standard, standing severance and confidentiality agreements.”

In short, it is clear that we can expect further SEC enforcement actions in this area. Public companies and private companies that contract with public companies should consult with counsel to review their employment agreements to be sure they will not be the next to be caught in the SEC’s crosshairs.

Ada W. Dolph is Team Co-Lead of the National Whistleblower Team. If you would like further information on this topic, please contact a member of the Whistleblower Team, your Seyfarth attorney or Ada W. Dolph at adolph@seyfarth.com.

Forum Selection Clause in Non-Compete Agreement Unenforceable

Posted in Non-Compete Enforceability, Practice & Procedure

shutterstock_87257554A contractual provision designating the exclusive venue for filing a breach of contract lawsuit was held to be trumped by a 100-year old statute requiring trial of such cases in the county of residence of at least one party. A&D Environmental Services, Inc. v. Miller, Case No. COA14-913 (N.C. App., Apr. 7, 2015).

Summary of the case. A North Carolina statute provides that, absent other applicable law, contract litigation “must be tried in the county in which” one or more plaintiffs or defendants reside when the complaint is filed. The parties’ employment agreement relevant to this litigation included a non-compete, not-solicit, and confidentiality provision, and a forum selection clause which stated that any complaint concerning the agreement “shall be brought exclusively in Mecklenburg County, North Carolina” (most likely Charlotte). The employer was headquartered in Guilford County (Greensboro, which is 90 miles from Charlotte). The employee, a resident of Orange County (not far from Greensboro), resigned, went to work for a competitor, and was sued in Guilford County. He moved to dismiss for lack of venue. His motion was denied, and the ruling was affirmed on appeal.

The Appellate Court’s Holding. There was no evidence that either party resided in Mecklenburg County, the contractually designated “exclusive” venue. Relying on the statute, as well as a 1921 North Carolina Supreme Court decision (Gaither v. Charlotte Motor Car Co., 182 N.C. 498, 109 S.E. 362) applying the statute in a factually similar lawsuit, the appellate tribunal held that venue in Guilford County was proper. The reasonableness of the statute as applied to the facts was not addressed.

Takeaways. At one time long ago, most courts invalidated forum selection clauses on the ground that the parties have no right to dictate where their disputes may be adjudicated (particularly if the legislature had addressed the issue). Today, the North Carolina statute and courts in a few other states perpetuate that philosophy.

However, a 1972 U.S. Supreme Court decision (The Bremen v. Zapata Off-Shore Co., 407 U.S. 1) criticized such thinking in part because forum selection clauses often provide consistency and certainty. Thereafter, many judges have held that such clauses must be analyzed on a case-by-case basis. When drafting — or being asked to agree to — a forum selection clause, keep the following factors in mind since they may determine whether it will be enforced:

  • whether the clause identifies the only court or courts where the controversy is to be heard or simply refers to a permissible adjudicatory forum,
  • whether the contract was procured by fraud or duress, and whether the choice of venue is reasonable,
  • whether the selected forum has subject matter jurisdiction (for instance, a clause naming a specific federal court will not be enforced in the absence of diversity of citizenship and the jurisdictional amount in controversy, or a federal question),
  • whether there is a nexus between the facts underlying the dispute and the location of the contractually designated adjudicator,
  • whether the relief requested by the plaintiff is at odds with fundamental policies of either the state of the forum or of the selected venue, and
  • whether comity is impacted (for example, if the contractual venue is in another country and was a reasonable selection when the contract was signed, the decision-maker may be inclined to enforce the clause, other things being equal).

 

Ninth Circuit Jeopardizes Broad “No Re-Hire” Clauses in California

Posted in Non-Compete Enforceability, Practice & Procedure, Trade Secrets

shutterstock_118297453In Golden v. California Emergency Physicians Medical Group, a divided Ninth Circuit panel held that a “no re-hire” provision in a settlement agreement could, under certain circumstances, constitute an unlawful restraint of trade under California law.

The Facts

Dr. Golden, a physician, agreed to settle his discrimination claim against his employer, California Emergency Physicians Medical Group (“CEP”). Their oral settlement agreement, later reduced to writing, had Dr. Golden “waive any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future.” The district court enforced the parties’ settlement over Dr. Golden’s objection that this “no-rehire” clause violated Section 16600 of California’s Business & Professions Code, which provides that a contract is void if it restrains anyone from engaging in a lawful profession.

The Appellate Court Decision

On appeal, Dr. Golden argued that the “no re-hire” clause was unlawful and that, because it constituted a material term of the settlement, the entire agreement was void, permitting Dr. Golden to pursue his discrimination lawsuit.

The Ninth Circuit panel determined that Dr. Golden might prevail on this argument, and remanded the case to the district court for further proceedings. The panel first found that the validity of the “no re-hire” clause was ripe for determination. The dispute was ripe not because CEP was currently seeking to enforce the “no re-hire” clause against Dr. Golden (it was not), but because Dr. Golden sought to have the settlement agreement voided after his former attorney attempted to enforce the agreement in order to collect attorney’s fees. The panel reasoned that “when a litigant resists his adversary’s attempt to enforce a contract against him, the dispute has already completely materialized.”

The Ninth Circuit panel next addressed the validity of the “no re-hire” clause. Historically, this type of clause, which commonly appears in settlement agreements, has not been viewed as a non-compete clauses, in that a “no re-hire” clause does not keep a former employee from working for a competitor—just the former employer. The Golden court, however, took a wider view of Section 16600, reasoning that it applies to any contractual provision that “ ‘restrain[s anyone] from engaging in a lawful profession, trade, or business of any kind’ … extend[ing] to any ‘restraint of a substantial character,’ no matter its form or scope.”

To support this broad interpretation, the Ninth Circuit panel majority cited Section 16600’s language, statutory context, and case law to reason that Section 16600 applies to any contractual limitation that restricts the ability to practice a vocation. See, e.g., Edwards v. Arthur Andersen LLP, 189 P.3d 285 (Cal. 2008); City of Oakland v. Hassey, 163 Cal. App. 4th 1447 (2008). The panel majority noted that both Edwards and Hassey focused on the text of the law—whether the contested clause restrained someone from engaging in a trade, business, or profession—and not specifically whether the clause prevented competition with the former employer. The panel majority concluded that a clause creating a restraint of “substantial character” that could limit an employee’s opportunity to engage in a chosen line of work would fall under Section 16600’s “considerable breadth.”

Of significance is that the Ninth Circuit panel did not rule that the clause was actually void. Instead, the panel majority concluded that the district court would need to do more fact-finding to see if the clause actually created a restraint of a “substantial character” on Golden’s pursuit of his profession.

It also is significant that the Ninth Circuit panel majority—mindful that the California Supreme Court itself has not ruled on whether Section 16600 extends beyond traditional non-compete clauses in employment agreements—was merely predicting how it thought the California Supreme Court would rule.

A sharp dissent by Judge Kozinski expressed skepticism that the California Supreme Court would reach the same result as the panel majority, and argued that the settlement agreement should be enforced because the provision put no limits on Dr. Golden’s current ability to pursue his profession.

What Is the Golden Rule for California Employers?

Golden furnishes no clear guidance as to the continued viability of “no re-hire” clauses in California settlement agreements, for it is unclear how courts will apply the “substantial character” standard. However, it can be expected that plaintiffs’ lawyers will closely scrutinize “no-rehire” clauses and that this is even more likely if a clause applies beyond the employee’s prior employer to, for example, subsidiaries and affiliates of the employer, or if the employer commands a substantial share of the relevant labor market. But more limited “no re-hire” clauses, for most employers, would not seem to create any restraint that one could reasonably consider to be of “substantial character.” And most cases, unlike Golden, would not raise the validity of a “no re-hire” clause until there actually is an issue of re-hire—an issue that often never arises as a practical matter. Nonetheless, until the California Supreme Court weighs in, California employers should consider the Ninth’s Circuit’s decision when drafting settlement agreements that contain “no re-hire” clauses.

SEC Cracks Down On Confidentiality Agreements Chilling Employees’ Rights to Report Potential Securities Law Violations

Posted in Data Theft, Trade Secrets

shutterstock_155289302By Ada Dolph, Christopher Robertson, and Robert Milligan

The Securities and Exchange Commission (SEC) announced today that it had made good on its prior promises to take a hard look at employment agreements and policies that could be viewed as attempting to keep securities fraud complaints in-house. In KBR, Inc., Exchange Act Release No. 74619 (April 1, 2015), the agency announced an enforcement action and settlement with KBR in which KBR agreed to amend its Confidentiality Statement to provide further disclosures to employees regarding their right to communicate directly with government agencies, notify KBR employees who had signed the Statement in the past, and pay a $130,000 civil penalty.

The SEC concluded that KBR’s Confidentiality Statement violated SEC Rule 21F-17, adopted by the SEC after the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010. SEC Rule 21F-17 provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

According to the SEC Order, under its compliance program, KBR required that employees who were interviewed as part of the company’s internal investigations into internal reports of potential illegal or unethical conduct, including potential securities violations, sign a Confidentiality Statement at the start of any company interview. The KBR Confidentiality Statement provided in part:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC found that although it was not aware of any instance in which a KBR employee was actually prevented from communicating directly with the SEC, the Confidentiality Statement “impedes such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action including termination of employment,” thereby undermining the purpose of Rule 21F to “encourage[] individuals to report to the Commission.”

As part of the enforcement action, KBR agreed to amend its Confidentiality Statement to include this provision:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

Additionally, KBR agreed to contact KBR employees who signed the Confidentiality Statement from August 21, 2011 to the present informing them of the SEC Order and including a statement that they need not seek permission from KBR’s General Counsel before communicating with any governmental agency. The SEC also assessed a civil penalty of $130,000.

In a press release announcing the decision, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, is quoted as saying: “KBR changed its agreements to make clear that its current and former employees will not have to fear termination or retribution or seek approval from company lawyers before contacting us. . . . Other employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.”

This appears to be the next step in the SEC Whistleblower Division’s initiative to crack down on agreements that it views as violating SEC Rule 21F-17. In widely reported remarks before the Georgetown University Law Center Corporate Counsel Institute last spring, McKessy indicated that the agency was “actively looking for examples of confidentiality agreements, separation agreements, employee agreements that . . . in substance say ‘as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.’” And just this past February, it was reported that the SEC had delivered official letters to several companies seeking several years’ worth of their employee agreements, including nondisclosure and separation agreements.

In recent months, we have seen similar actions regarding agreements or policies by the Equal Employment Opportunity Commission (EEOC) and the National Labor Relations Board. Employers should review their existing employment policies and employment agreements, including confidentiality, non-disclosure and separation agreements, for any provisions that might go astray of these agency enforcement initiatives. As part of this enforcement action, the SEC found that the amended language cited above was acceptable in the employer’s Confidentiality Statement. Employers should consider including this language or similar language in their agreements and policies specifying that the reporting of potential violations law or regulations to government agencies is not prohibited, and indicating that no prior employer approval is required.

Given this enforcement action by the SEC, it may be just a matter of time before the SEC also weighs in on whether employers can prohibit employees from taking and disclosing company documents in connection with their alleged whistleblowing activities. See our prior blogs on this issue here and here, and one of the more recent controversial administrative decisions addressing this issue here.

Ada W. Dolph and Christopher F. Robertson are Team Co-Leads of the National Whistleblower Team. Robert B. Milligan is Co-Chair of the National Trade Secrets, Computer Fraud & Non-Competes practice group. If you would like further information on this topic, please contact a member of the Whistleblower Team, your Seyfarth attorney, Ada W. Dolph at adolph@seyfarth.com, Christopher F. Robertson at crobertson@seyfarth.com or Robert B. Milligan at rmilligan@seyfarth.com.

Webinar Recap! Protecting Confidential Information and Client Relationships in the Financial Services Industry

Posted in Practice & Procedure, Trade Secrets

shutterstock_74943355We are pleased to announce the webinar “Protecting Confidential Information and Client Relationships in the Financial Services Industry” is now available as a podcast and webinar recording.

In Seyfarth’s second installment of its 2015 Trade Secrets Webinar series, Seyfarth attorneys will focus on trade secret and client relationship considerations in the banking and finance industry, with a particular focus on a firm’s relationship with its FINRA members.

As a conclusion to this well-received webinar, we compiled a list of key takeaway points, which are listed below.

  • Enforcement of restrictive covenants and confidentiality obligations for FINRA and non-FINRA members are different. Although FINRA allows a former employer to initially file an injunction action before both the Court and FINRA, FINRA, not the Court, will ultimately decide whether to enter a permanent injunction and/or whether the former employer is entitled to damages as a result of the former employee’s illegal conduct.
  • Address restrictive covenant enforcement and trade secret protection before a crisis situation arises. An early understanding of the viability of your restrictive covenants and the steps that you have taken to ensure that your confidential information remains confidential will allow you to successfully and swiftly evaluate your legal options when a crisis arises.
  • Understand the Protocol for Broker Recruiting’s impact on your restrictive covenant and confidentially requirements. The Protocol significantly limits the use of restrictive covenants and allows departing brokers to take client and account information with them to their new firm.

To accommodate our global audience, the third installment in the 2015 Trade Secrets Webinar Series will be available as an on-demand broadcast. Please register to receive access to the International Trade Secrets and Non-Compete Law Update broadcast here.

Many Courts Are Reluctant To Permit Parties To Redact Filed Documents, Or To File Them Under Seal, Even When They Contain Trade Secrets

Posted in Practice & Procedure, Trade Secrets

BicycleIn a patent infringement case pending in a California federal court, the defendant moved for summary judgment. The parties jointly requested leave to submit to the court under seal, or with redactions, documents containing trade secrets and other confidential information. The court granted the request only in part. Icon-IP Pty Ltd. v. Specialized Bicycle Components, Inc., Case No. 12-cv-03844 (N.D. Cal., Mar. 3, 2015) (Tigar, J.).

Status of the case. This hotly contested patent infringement lawsuit concerned bicycle seats. The defendant moved for summary judgment. By agreement of the parties, the defendant sought to support the motion with certain exhibits filed under seal, or redacted, and the plaintiff did likewise in opposition to the summary judgment motion. Sealing or redacting would have the effect of denying to the public access to all or parts of those documents. Judge Tigar granted leave to seal or redact some of the relevant documents, denied leave as to some, and as to the remainder he directed the parties to tailor more narrowly their sealing or redacting request.

Legal standards applicable to requests to seal or redact.   Judge Tigar indicated that there are guiding principles which relate to all such requests in civil cases and additional rules that vary depending on whether the court is considering a non-dispositive or a dispositive motion.

  1. General principles. The starting point, according to the court, is Fed.R.Civ.P. 26(c)(1)(G). In relevant part, it states that “The court may, for good cause, issue” a protective order “requiring that a trade secret or other confidential . . . commercial information not be revealed, or be revealed only in a specified way.” Next, Judge Tigar pointed to Northern District of California local rule 79-5 which provides that a party seeking to seal or redact must establish that the document contains matter protectable by law and that the request is “narrowly tailored.” An uncontested protective order (or stipulation) regarding confidentiality will not suffice, he said, because of the “strong presumption in favor of [public] access” to court documents. Other courts considering similar motions also have mentioned the burden that sealing and redacting places on judges and other court personnel as another relevant factor.
  2. Non-dispositive motions. According to Ninth Circuit case law cited by the judge, if the motion to which the request to seal or redact relates is not for summary judgment (or if the motion is for summary judgment but the documents in question “would not be effectively dispositive of” any issues raised in the motion), the party requesting a stay or redaction need make only “a particularized showing under the good cause standard” of Rule 26(c)(1)(G). The Icon-IP case concerned a dispositive motion, and so the court had no occasion to define the phrase “particularized showing.” Other judges have written that the it means proof of specific prejudice or harm that will result if the information is disclosed.
  3. Dispositive motions. Citing Ninth Circuit and California district court opinions, Judge Tigar stated that a party seeking to seal or redact a document submitted with respect to a dispositive summary judgment motion must overcome a “presumption of public access.” This means articulation of “compelling reasons, supported by specific factual findings that outweigh the general history of access and the public policies favoring disclosure, such as the public interest in understanding the judicial process.” In other words, courts should operate in the open and not behind a shroud of secrecy.

The court’s rulings.

  1. Judge Tigar permitted redacting a portion of the deposition of a non-party who had been questioned about “highly sensitive business information regarding” his own company. Sealing the entirety of certain of the non-party’s documents was denied, however, even though they contained confidential information which could be damaging to the non-party’s business interests if it became public. Referring to Local Rule 79-5(b), the judge said that redaction might be permitted if a request was “narrowly tailored to seek sealing of only sealable material.”
  2. The court denied, for failure to present compelling reasons, the request to seal all or portions of deposition transcripts containing confidential information concerning the defendant’s own research and development, budgets, marketing, sales, revenue, and consulting and licensing agreements. This denial may be without prejudice to a renewed request with more detail regarding the reasons for submitting it.
  3. Judge Tigar held that compelling reasons were provided for sealing documents where he was satisfied that public access “would result in an invasion of [a] third party’s privacy” and “would put Specialized at a disadvantage in future” licensing negotiations.
  4. The judge observed that the “compelling reasons” and “good cause” tests also apply to an uncontested request to seal or redact exhibits or deposition transcripts bearing on a Daubert motion to exclude certain expert testimony. If the testimony is “aimed squarely at” a party’s damages methodology, and exclusion “could cause a crippling blow to the sponsoring party’s ability” to support its position with regard to summary judgment, the “compelling reasons” standard should be used. He added that if the testimony would not be dispositive with respect to any “central” issue, “good cause” is the applicable principle.

Takeaways. At one time, courts entered a sealing or redacting order based solely on the parties’ stipulation, but no more. Today, in most courts, even an uncontested request to seal or redact confidential documents to be filed in connection with a non-dispositive pretrial motion requires a particularized showing of specific prejudice or harm. Such a request relating to a dispositive motion requires “compelling reasons” for overriding the public interest in the openness and transparency of court proceedings. Presumably, the “compelling reasons” test also is applicable even to uncontested requests to seal or redact exhibits (a) offered into evidence in a bench trial, or (b) to be submitted in a record on appeal. Contact your Seyfarth Shaw trade secrets attorney for advice regarding the complex rules relating to sealing or redacting confidential information in documents to be filed in court.

Upcoming On-Demand Webinar: International Trade Secrets and Non-Compete Law Update

Posted in International, Trade Secrets

WebinarTo accommodate our global audience, the third installment in the 2015 Trade Secrets Webinar Series will be available as an on-demand broadcast on Tuesday, April 14, 2015 at 9:00 a.m. Central.

Seyfarth attorneys Wan Li, Ming Henderson and Daniel Hart will focus on non-compete and trade secret considerations from an international perspective. Specifically, the webinar will involve a discussion of non-compete and trade secret issues in Europe and China compared to the United States. This webinar will provide valuable insight for companies who compete in the global economy and must navigate the legal landscape in these countries to ensure protection of their trade secrets and confidential information, including the effective use of non-compete and non-disclosure agreements.

Summary of Topics:

  • Overview of key rules for non-compete and non-disclosure agreements in Europe
  • Key principles of non-compete and non-disclosure agreements in the United Kingdom and France, including recent case developments
  • Latest developments in non-compete and trade secret law in China
  • The European Commission’s proposed directive on trade secrets protection throughout the European Union
  • Practical considerations under U.S. law for multinational employers to effectively protect their trade secrets and confidential information

If you have any questions, please contact events@seyfarth.com.

*CLE: CLE Credit for this webinar has been awarded in the following states: CA, IL and NY. CLE Credit is pending for the following states: GA, NJ, 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.

Employer Can Be Found Liable For Misappropriating An Employee’s Trade Secrets

Posted in Trade Secrets

shutterstock_232865755A Chicago federal judge denied summary judgment to an employer alleged to have misappropriated and converted a subordinate’s trade secrets. Stevens v. Interactive Financial Advisors, Inc., Case No. 11 C 2223 (N.D. Ill., Feb. 24, 2015) (Kennelly, J.).

Summary of the case. After 20 years as a licensed insurance broker, Stevens wanted to provide investment advisory services as well. However, he was not a registered investment advisor, and so he affiliated with Interactive which was registered. Stevens uploaded his insurance client and investment customer information — which he considered to be his trade secrets — to the electronic database of Redtail, a technology company also used by Interactive. When Interactive subsequently terminated Stevens’ affiliation, it reassigned his customers to two other Interactive advisors and directed Redtail to block his access to his client and customer information. Stevens sued, charging Interactive and Redtail with trade secret misappropriation and conversion. The court granted the defendants’ summary judgment motion as to Stevens’ investment customers but denied it with regard to his insurance clients.

Stevens’ relationship with Redtail. Although Stevens apparently had no written agreement with Redtail, he considered their relationship to be contractual. He paid Redtail for its services relating to his client and customer information.

Termination of Stevens. In year six of Stevens’ association with Interactive, the firm accused him of involvement in a Ponzi scheme and terminated his affiliation. After he was terminated, he still could provide services to his insurance clients but not to his reassigned investment customers.

The litigation. Stevens’ federal court complaint was based on diversity jurisdiction. He alleged that both by blocking access to his data base and by granting such access to other advisors, Interactive and Redtail misappropriated his trade secrets in violation of the Illinois Trade Secrets Act, converted his property, and committed other torts.

The court’s decision on the defendants’ motions for summary judgment.

  1. Investment customers. Judge Kennelly observed that, as a result of the termination, Stevens no longer was affiliated with a registered securities advisor and, thus, could not legally service his investment customers. Interactive had to reassign them. Moreover, federal regulations and Interactive’s own policies provided that a terminated representative ceased to have a right of access to his investment customers’ non-public personal information. The defendants were entitled to summary judgment, the judge concluded, with regard to Stevens’ claims of misappropriation and conversion of his investment customers’ information because no material issues were in dispute.
  2. Insurance clients. Material facts were in dispute, according to Judge Kennelly, concerning Stevens’ allegations of misappropriation and conversion of information relating to his insurance clients, and a reasonable jury could agree with Stevens that he owned that information, that it constituted a trade secret, and that Interactive misappropriated and converted it.

Further, the court ruled that a reasonable jury could find that Redtail acted as Interactive’s agent by blocking Stevens’ access to the data base and granting access to others designated by Interactive. According to the judge, if Redtail assisted Interactive in committing torts, Redtail could be held jointly and severally liable with Interactive. In addition, there was a genuine dispute relating to the existence and terms of a contractual relationship Stevens contended that he had with Redtail, and as to the duties Redtail owed to him. For these reasons, Redtail’s motion for summary judgment as to Stevens’ claims of misappropriation and conversion of his insurance clients’ information was denied.

Takeaways. Several judicial opinions state in dicta that employers rarely are sued for conversion and trade secret misappropriation. The case of Stevens v. Interactive is one of those rare lawsuits. Judge Kennelly’s decision illustrates that — like anyone else — an employer who takes and uses someone else’s property without permission risks being sued for conversion. Further, if that property constitutes a trade secret, the employer also may be accused of misappropriation. To be sure, Stevens was an independent contractor, not an Interactive employee, but nothing in the court’s opinion suggests that the ruling turned on that distinction.

Beware of the Delaware Choice of Law in Non-Compete Agreements

Posted in Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants

shutterstock_6242524By Justin K. Beyer and Matthew I. Hafter

Delaware has long been one of the jurisdictions most friendly to the interests of corporations and is the state of incorporation for a significant majority of corporations. While that trend does not seem likely to change, a new Delaware Chancery Court decision should give pause to choice of law decisions of Delaware corporations with multi-jurisdictional work forces and operations in states other than Delaware.

Recent Ascension Case

In Ascension Ins. Holdings, LLC v. Underwood, C.A. No. 9897-VCG, 2015 Del. Ch. LEXIS 19 (Del Ch. Jan. 28, 2015) (unpublished), the Delaware Court of Chancery recently ruled that, despite a Delaware choice-of-law and venue provision contained in a non-compete agreement, California law applied to the agreement and under California law the agreement was void as a matter of law. In this case, the plaintiff (Ascension) sought an injunction against a former employee (Underwood) for violating a non-compete provision in an employment agreement entered into around the same time Ascension purchased Underwood’s business under an asset purchase agreement.

When Underwood terminated his employment relationship with Ascension, the five-year non-competition period under the asset purchase agreement lapsed. However, the separate non-compete provision of Underwood’s employment agreement provided a two-year tail at the end of the employment, which Ascension argued was specifically contemplated during the negotiations when acquiring Underwood’s business.

Ascension was incorporated in Delaware, but headquartered in California which is also where Underwood worked. In the employment agreement, parties selected Delaware law to govern. Delaware law generally enforces employee non-competition agreements if reasonable in scope and duration and if they advance a legitimate economic interest of the employer. California, in contrast, has a specific statute that renders a covenant not to compete unenforceable against an employee unless made in connection with his or her sale of substantially all of the assets and goodwill of a business non-competition agreements (Cal. Bus. & Prof. Code Sections 16600, 16601).

Choice of Law Analysis

The Chancery Court conducted a choice-of-law analysis to determine whether Delaware or California law would apply. The court found that the parties’ relationship was centered in California, the various contracts were negotiated and entered into there, and the territory in which the defendant employee would be restricted was located there. The court acknowledged that “[u]pholding freedom of contract is a fundamental policy of [Delaware]” but rejected the plaintiff employer’s argument that Delaware’s interest in that policy trumped California’s interest in not burdening its citizens with non-competition covenants. The Delaware court acknowledged that under the applicable California statute the non-compete in the asset purchase agreement would be enforceable to protect the acquired goodwill, but reasoned that the covenant in the employment agreement was directed to a different employer interest; concluding that the restriction in the employment agreement would be prohibited under California law. It held that “allowing parties to circumvent state policy-based contractual prohibitions through the promiscuous use of [choice-of-law] provisions would eliminate the right of the default state to have control over enforceability of contracts concerning its citizens.” On this basis, the Chancery Court denied the employer’s motion for preliminary injunction.

Practical Considerations

For Delaware corporations with employees in many states, this case presents a conundrum:

  • While there is clearly a value to having a single state law govern its relationship with employees in many states, and Delaware law is comparatively employer-friendly with respect to restrictive covenants, there is a risk that the law of each employee’s home state will control unless the corporation has a meaningful connection to Delaware.
  • Similarly, a Delaware corporation headquartered in a state with laws on restrictive covenants that are in the middle of the spectrum (enforceable but narrowly construed or with high proof thresholds) might opt for Delaware law because it is more favorable. But in that situation the employer should evaluate the risk that in reaching for the more friendly laws of Delaware it may lose the benefit of even the modestly friendly provisions of its home state and become subject to laws of each employee’s state which may render non-competition restrictions completely unenforceable or in other respects may be less favorable that those of the employer’s home state.
  • In mergers and acquisitions and similar transactions involving the sale of a business, acquirers commonly require restrictive covenants in both the sale agreement and in separate employment agreements. Acquirers should balance the risk that a court in any particular state may reject the choice-of-law provision that selects Delaware compared with the law of the state in which the acquirer has meaningful contacts.