Header graphic for print

Trading Secrets

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

Non-Compete And Confidentiality Clauses In A Beverage Maker’s Contracts With A Bottler And A Consultant Held To Be Unenforceable

Posted in Non-Compete Enforceability

Courts will decline to enforce contractual restrictive covenants in agreements that unreasonably restrain trade or lack adequate consideration.

Summary of the Case

Innovation Ventures (IV), developer of an energy drink, entered into contracts with a bottler and with a production consultant.  Both contracts contained non-compete and confidentiality clauses.  Shortly after the bottler’s and consultant’s business relationships with IV ended, IV sued them, together with their principals, in a state court in Michigan for breach of contract.  The trial court granted summary judgment to the defendants.  Recently, that decision was affirmed on appeal on the grounds that the agreement with the bottler unreasonably restrained competition, and the contract with the consultant lacked adequate consideration.  Innovation Ventures, L.L.C. v. Liquid Mfg., L.L.C., Case No. 315519 (Mich. Court of Appeals, Oct. 23, 2014) (unpublished).

The Parties and the Contracts

The bottler.  In 2007, pursuant to a contract with IV, Liquid Manufacturing commenced bottling IV’s “5 Hour Energy” using the bottler’s own equipment.  Three years later, the bottler, by its principal, and IV executed an agreement terminating that contract.  The termination agreement permitted Liquid Manufacturing to use the equipment for bottling other producers’ products (a) if IV gave its consent, and (b) provided that the other producers covenanted not to disclose that the equipment had been used for bottling “5 Hour Energy.”  Post-termination, Liquid Manufacturing sued the bottler and its principal for breach of contract.

The consultant.  In 2008, IV entered into an oral agreement with a consultant company to design, manufacture, and install certain production and packaging equipment for IV.  The agreement was memorialized in writing for the first time in 2009.  Less than two weeks later, IV exercised its right to end the relationship without cause.  IV then sued the consultant and its managing member for violating the restrictive covenants.

The Appellate Tribunal’s Decision

  1. The appeals court ruled that the bottler’s principal, who executed the termination agreement as an agent of the corporation, could not be sued for breach of contract because he did not sign on his own behalf. 
  2. Although the bottler may have failed to obtain the covenant described above, any such violation was held to have been cured in a timely manner. 
  3. IV’s attempt in the termination agreement to reserve to itself virtually unfettered discretion to decide which products Liquid Manufacturing could bottle constituted an unreasonable restraint on trade.  A provision reflecting the bottler’s stipulation that the termination agreement was reasonable was held to be void because courts, not the parties, determine whether contracts are unreasonable. 
  4. The confidentiality clause in the termination agreement was held to be waived by expressly authorizing the bottler to use supposedly confidential information in order to bottle competing products. 
  5. Consideration for the contract between IV and the consultant was the parties’ implied promises to continue their relationship for a reasonable period of time.  IV’s cancellation after less than two weeks was held to have nullified the contract. 

Takeaways

This decision teaches that restrictive covenants in commercial contracts are not always enforceable.  Just as with a comparable provision in an employment agreement, a non-compete clause in a commercial contract must be no more protective of a manufacturer’s good will than is reasonably necessary.  In other words, unfair competition may be restrained, but not fair competition.  The ruling also shows that purported consideration in a commercial contract must not be illusory.  Absent an express contractual provision to the contrary, a court may decline — for want of adequate consideration — to enforce a non-compete covenant in a contract which the non-covenanting party terminates without cause almost immediately after execution.

 

French Court Rules That A Confidentiality Clause Does Not Require Any Financial Compensation to Be Lawful

Posted in International, Non-Compete Enforceability, Restrictive Covenants, Trade Secrets

As many readers will know, non-compete clauses in employment contracts are only valid in France if, among other conditions, an employee receives a financial consideration of 40 to 60% salary depending on the sector and the role for the duration of the restriction. But do confidentiality clauses need to be subject to the same treatment?

The recently published decision of the High Court (SNC Adex v/ MD dated 15 October 2014) confirming that a confidentiality clause does not require any financial compensation will be met with a sigh of relief by employers employing staff in France.

“A confidentiality clause does not prevent an employee from finding another job”

This decision, though not entirely surprising, is important firstly because rulings by the High court on confidentiality clauses are rare and can be quoted by employers as authority for cases before other courts. Secondly, the circumstances of the employee were particularly interesting: the employee had argued that following his redundancy as Marketing Director (industrial explosive division), the confidentiality clause in his employment contract effectively prevented him from finding another role because he had always worked in the same niche sector where his skills are rare.  He also claimed the confidentiality clause was particularly restrictive as it was neither limited in time nor geographical scope.  All these circumstances, the employee argued, meant he was prevented from working for a competitor, and therefore in the same way that a non-compete clause operates, the contractual restrictions imposed on him should only be enforceable if he received an adequate financial compensation.

Not so. The high court disagreed with the employee’s reasoning and declared that the clause did not prevent the employee from finding another job, it just imposed on the employee a duty to keep confidential the restricted information he held regarding the company.

Key Takeaways – Confidentiality clauses are a must have

The decision of the High court is good news for employers, particularly given the facts at stake.  Employers should therefore be encouraged to include a robust confidentiality clause in the employee’s contract in France and ensure the confidentiality obligations are reconfirmed at the time of termination. Even though there is an implied duty to keep information confidential during the employment contract, this duty falls when the employment contract expires, and the confidentiality clause which needs to be expressly agreed by the employee prior to the termination will be helpful to protect the employers interests when parting with the employee.

Currently only non-compete clauses are subject to a financial compensation in an employment contract.  It will be interesting to see whether, like confidentiality clauses,  non-solicitation clauses that apply post termination also continue to be exempt from any financial compensation.

Union Files NLRB Complaint Regarding the USPS’ Handling of Security Breach Involving Employee Personal Information

Posted in Cybersecurity, Data Theft, Privacy

A company faced with a security breach has a lengthy “to do” list, things to accomplish with respect to its incident response plan. It must, among other things, determine the root cause of the vulnerability or breach, investigate and eliminate the vulnerability or breach, determine the full nature and extent of the breach, determine who to notify and finalize the notifications.

If the American Postal Workers Union (APWU) has its way, a unionized employer facing a security breach involving employee personal information would have yet another responsibility – bargaining over the impact of or response to the security breach.

The asserting that the United States Postal Service sent notice of the breach to employees on November 10, 2014, and offered the employees free credit monitoring for 1 year, but “did not give the Union advance notice that would enable it to negotiate over the impact and effects of the data breach on employees.” The Union’s complaint further states that by providing free credit monitoring, the USPS made a unilateral change in wages, hours and working conditions.  Under the various state database security notification laws and the HiTech provisions of HIPAA, employers that encounter a breach of personal information regarding employees, must, absent certain exceptions, notify the affected employees (or for a HIPAA breach, plan participants), as well as potentially notify regulators and others.

There is no legal requirement in the United States that companies must consult with their employees regarding the investigation and/or impact of a security breach involving employee data. In fact, it is important that information concerning potential security incidents be maintained confidential so that the investigation is not compromised. Therefore, the APWU is taking a novel, unprecedented stance in claiming that the USPS had an obligation to be at the table and bargain over what actions USPS would take with respect to investigating and/or remediating a breach.

Although it will be several months (at the earliest) before the NLRB issues any type of ruling or guidance on this matter, employers should consider this type of communication should a data breach occur.  In other words, while not legally required, it is certainly important and prudent for a company to consider all stakeholders in determining how to respond to a security breach. The goodwill of a company, and its relationships with employees and customers are  extremely valuable.

Since the wrong internal or external communications concerning a breach can have a significant impact on how actual and potential customers and employees, as well as shareholders, perceive the company we recommend that every incident response plan include a company’s public relations and communications experts in order to make sure that the proper groups are properly informed as to the status of a security incident and the measures a company is taking to protect affected individuals.

Seyfarth Attorneys to Present Paper on Trade Secrets and Lawyer Mobility at AIPLA Trade Secret Summit

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

At some point in his or her legal education, every law student discovers one of the more strikingly unique rules about the profession that he or she aspires to enter.  Unlike laws governing physicians, accountants, engineers, and virtually all other professions, rules governing the practice of law impose a nearly absolute prohibition on lawyer non-compete agreements.  At the same time, the law imposes on lawyers nearly ironclad obligations of confidentiality that generally do not apply to other types of professionals and business people.

Despite — or, perhaps, because of — these unique rules, protection of trade secrets in the legal profession poses unique challenges for both law firms and companies.  In fact, during the past year, several cases delving into these topics have generated considerable buzz in the legal community, from Schlumberger Ltd.’s suit against its former deputy general counsel for alleged trade secrets theft to a widely publicized lawsuit by Elliott Greenleaf & Siedzikowski against a former partner for alleged hacking of computer files.

The irony, of course, is that attorneys are hired every day to enforce or seek to block enforcement of non-compete agreements and other post-employment restrictive covenants, yet they are not subject to such agreements themselves.  Indeed, while no universal black letter law defines what lawyers can and cannot do in this regard, courts and bar associations facing this issue generally apply a balancing test to ensure that a lawyer’s conduct comports with the rules of professional conduct, that client interests are protected, and that there is promotion of fair and open opportunities for lawyer competition.  These considerations apply whether the putative restriction applies to in-house or outside counsel.  Nevertheless, the overwhelming weight of authority appears to be that attorneys—in-house or outside counsel—are not subject to post-employment restrictive covenants other than under the most exceptional circumstances.

On December 4, 2014, Seyfarth Shaw attorneys will discuss these timely issues at the American Intellectual Property Law (“AIPLA”) 2014 Trade Secret Law Summit in Santa Clara, California.  At  the summit, Erik Weibust (Boston) and Dan Hart (Atlanta) will present “Lawyer Mobility and Trade Secrets Protection:  Restrictive Covenant, Confidentiality, and Non-Disclosure Considerations in the Legal Profession,” a paper they co-authored with Seyfarth associates Robyn Marsh (Chicago) and Andrew Masak (Atlanta).  Among other topics, the presentation will discuss:

  • ABA Model Rules of Professional Conduct 1.6 and 5.6 and their impact on lawyer mobility,
  • Recent cases and ethical decisions (including ethics opinions from the State Bars of New York, New Jersey, Illinois, Washington, and other jurisdictions) on lawyer restrictive covenants,
  • Application of ethical rules on lawyer non-competes in the in-house context, and
  • Practical considerations for protecting trade secrets and enforcing restrictive covenants in the legal profession.

Registration and additional information about the event can be found here.

Connecticut Supreme Court Grants Private Action for HIPAA Breach

Posted in Data Theft, Privacy

This week, the Connecticut Supreme Court issued an opinion which upheld a state common law negligence action against a healthcare provider for violation of privacy and confidentiality laws and regulations using as evidence of the standard of care the Health Information Portability and Accountability Act (HIPAA) and its accompanying regulations. The court denied defense arguments that HIPAA, which expressly does not provide a private right of action, preempts such state law negligence claims.

The plaintiff was a patient of the defendant and had been provided with a copy of defendant’s privacy policy, which provided that protected health information would not be released or disclosed without the patient’s authorization. Shortly thereafter, the plaintiff’s ex-boyfriend filed suit against the plaintiff and served defendant with a subpoena requesting patient’s medical records. Defendant responded to the subpoena by filing the plaintiff’s medical record with the court, but did not notify the plaintiff. The plaintiff alleged that, as a result of this disclosure, she suffered harassment and extortion from her ex-boyfriend. The trial court initially ruled for the defendants, stating that HIPAA preempted any state statutory or common law claims related to HIPAA violations.

While acknowledging that it was “well settled” law that HIPAA creates no private right of action, the Connecticut Supreme Court reversed the trial court’s decision, noting that the plaintiff was not asserting a statutory right or a private right of action under HIPAA, but rather was making a common-law negligence claim with HIPAA informing the standard of care. The court, in reviewing HIPAA’s preemption provisions, which apply to “contrary” provisions of state law and exempt “more stringent” state laws, concluded that HIPAA did not preempt a state common law theory of negligence. the court found that HIPAA was appropriately used to inform the standard of care applicable to such a negligence theory on the basis that HIPAA now sets standards for health information privacy and confidentiality among health care providers,. The court was able to identify multiple decisions in both federal and state courts throughout the country which came to similar conclusions regarding HIPAA’s failure to preempt common law claims of negligence.

This is an important decision that reflects how HIPAA non-compliance or breach can be used to establish claims of negligence based on breach of applicable standards of care extending to not only “covered entities” such as health care providers, insurers or clearinghouses, but also those organizations that do business with Covered Entities as Business Associates. Based on the Connecticut decision and other similar cases throughout the country, there is a likelihood we will see an increased number of claims using state common law negligence actions based on unauthorized release or disclosure of the plaintiff’s protected health information, or even an inadvertent breach, if appropriate physical and technological safeguards were not in place as required by federal and state privacy laws.

The case is Emily Byrne v. Avery Center for Obstetrics and Gynecology, P.C. (SC 18904).

Don’t Come to a Trade Secret Fight with a Patent Law Defense

Posted in Trade Secrets

In what is at heart a trade secret misappropriation case, some Patent Law periodically materializes, like the smile of the Cheshire Cat.

This concept was evidenced by a recent case out of Texas.  Bianco, M.D. v. Globus Medical, Inc., 2:12 CV 147 (E.D. TX 10/27/14).

Dr. Bianco had an idea for a continuously adjustable spinal implant, which would fit between two adjacent vertebrae in the spine that had become compressed.  Adjust the mechanism, and the vertebrae move apart. The prior art, to use a patent term, revealed mechanisms  which would do the same, but were not continuously adjustable—they worked at best in increments, and could not be reversed (once you separated, that was that; no going back).

Dr. Bianco approached Globus with his idea, which apparently was not much more than some drawings and related general text, for a specific embodiment in the form of a scissor mechanism for performing the adjustability (think of a car jack).

According to the Court, Globus and the good Dr. entered into a written NDA (which apparently disappeared in the records, ultimately taking along with it a count for breach of written contract—the contract not materializing at trial).  Globus had him submit a “new Idea Submission Form” with his proposal. Over the next two and a half years, Dr. Bianco inquired of Globus on multiple occasions about the Bianco device and Globus’ decision. Sometime in later 2009-early 2010, Globus then told Dr. Bianco that it is “not interested in his technology.”

Wait for it—one year later, according to the Court, Globus began marketing a continuously adjustable spinal implant. How did Dr. Bianco learn this? A Globus sales representative tried to interest him in the “new” product. (Practice Point 1: Don’t try to sell an idea submitter his product development submitted to the company).  Dr. Bianco, obviously now “upset,” confronted his Globus liason with this news, who responds according to the record that “he understood that [Bianco] had intellectual property in this implant and that the company would make it right.”  (Practice Point 2: Whoa.)

With that as preamble, the case is of some note because of what we see develop out of Texas  trade secret law (which is not atypical here), and the interplay of Patent Law in the process. The case ultimately turned upon not a written contract, but the confidentiality associated with the disclosure and relationship established between the parties surrounding the “idea.” Evidence showed that what Globus actually developed and commercialized was not a “scissor mechanism,” but something else (called a “ramp”).  But Dr. Bianco pitched that his confidential disclosure was broader than just his “scissor” embodiment, and that it was his ideas tht promted Globus to pursue the continuously expandable and reversible implant. This “spurred” Globus engineers to the “ramp” concept. (Practice Point 3: Don’t have a sketch of  what would be the Globus commercial concept literally drawn by your engineer on the back of Dr. Bianco’s submission papers—I couldn’t make this up).

The Court does some dancing with the law on the protectability of an “idea” per se, stating axiomatically that “ideas” of course are not protectable under any intellectual property concepts, except, of course, if you keep that idea secret and protect it from discovery by improper means. One can agree to that protection by contract, implied or otherwise, or in “an informal fiduciary relationship.”   Here, the Court (in the context of evidence presented to the jury), reviewed how the parties did indeed proceed on the basis that the basic “idea” for a continuously adjustable spinal implant may have been conveyed, and then used to if nothing else, “spur” the Globus development.

Patent Law permeates the case where the Globus attempted to try to parse out details of the commercial product from the “idea” conveyed by the plaintiff—“we didn’t use certain features, therefore we didn’t use the trade secret.” The Court noted that for liability, you don’t have to use everything, as in a patent claim: “”[u]se does not require that a party use another’s trade secret in the form in which it received it.”

Patent Law then again materialized in damages. Dr. Bianco was awarded a royalty, both as to past and then going forward, but no injunction. This is very much a result of current Federal Circuit jurisprudence (our national Patent Appeals Court). Dr. Bianco wanted a disgorgement of profits, but the jury, and then post-hac the Judge, concluded that a reasonable royalty was really the measure of damages, largely based upon industry comparative licenses for use of developments by doctors in similar circumstances.

Upcoming Webinar: Protecting Trade Secrets and Intellectual Property in Business Transactions

Posted in Practice & Procedure, Trade Secrets

On Tuesday, December 2, 2014 at 12:00 p.m. Central, in the final installment of our 2014 Trade Secrets Webinar Series, Seyfarth attorneys Michael Baniak, Joseph Lanser and Randy Bruchmiller will focus on considerations involving protecting trade secrets and intellectual property in business transactions, including, mergers and acquisitions, joint ventures and other collaborative arrangements.

Summary of topics:

  • How to properly address developments by independent contractors hired to “invent” or develop
  • IP due diligence in mergers and acquisitions
  • Effectively integrating and binding key employees with access to confidential information in business transactions
  • IP rights in the lifecycle of a joint venture

There is no cost to attend this program, however, registration is required.

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.

 

Seyfarth Attorneys Facilitate Discussion On Cybersecurity and Protecting Valuable Trade Secrets at the 39th Annual Intellectual Property Institute Conference

Posted in Cybersecurity, Practice & Procedure, Privacy, Trade Secrets

Seyfarth Intellectual Property, Trade Secret and Privacy attorneys are participating in the 39th Annual Intellectual Property Institute Conference in Garden Grove, California this week.

The IP Institute brings together preeminent speakers from leading companies and law firms to share tips “from the trenches.” The Institute covers a great array of topics affecting our clients, such as trademarks, copyrights, licensing, litigation, entertainment law, right of publicity, trade secrets, sweepstakes, social media, ADR, privacy, and technology law, as well as a separate patent law track.

Los Angeles Partner Robert B. Milligan will be moderating a panel on “Cybersecurity and Protecting Valuable Trade Secrets and Confidential Information While Balancing Innovation and Employee Mobility,” and Sacramento Partner James D. McNairy will be presenting “Hot Topics in California Trade Secrets Law,” on Thursday, November 6, 2014.

Seyfarth will have a staffed table at the event, Seyfarth attorneys Yandi Fashu-Kanu, Alan M. Lenkin, James D. McNairy, Robert B. Milligan, Puya Partow-Navid, Joshua Salinas, Eugene Suh and Kenneth L. Wilton are scheduled to attend and participate.

For more information, please click here

Webinar Recap! How and Why California is Different When it Comes to Trade Secrets and Non-Competes

Posted in Trade Secrets

We are pleased to announce the webinar “How and Why California is Different When it Comes to Trade Secrets and Non-Competes” is now available as a podcast and webinar recording.

In Seyfarth’s eighth installment of its 2014 Trade Secrets Webinar series, Seyfarth attorneys focused on recent legal developments in California trade secret and non-compete law and how it is similar to and diverse from other jurisdictions, which included: a discussion of the California Uniform Trade Secrets Act, trade secret identification requirements, remedies, and the interplay between trade secret law and Business and Professions Code Section 16600, which codifies California’s general prohibition of employee non-compete agreements. The panel discussed how these latest developments impact litigation and deals involving California companies.

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

  • While California has rejected the inevitable disclosure doctrine, threatened misappropriation can be a viable theory for relief when there is evidence of data theft and intent to use company data.
  • California’s recent appellate decision in Altavion, Inc. v. Konica Minolta Sys. Laboratory, Inc., 226 Cal. App. 4th 26 (2014)  has broadened the scope of trade secret protectable information to include ideas.
  • Federal district courts in California have increasingly elected to enforce forum selection clauses in noncompete agreements of California employees and found that enforcement of such clauses does not violate California’s strong public policy of employee mobility. See, e.g., Hegwer v. American Hearing and Associates, 2012 WL 629145 (N.D. Cal., Feb. 27, 2012) (granting motion to dismiss California action based upon Pennsylvania forum selection law clause – alleged illegality of non-compete irrelevant to enforcement of forum selection clause); Hartstein v. Rembrandt IP Solutions, 2012 WL 3075084 (N.D. Cal., July 30, 2012) (court agrees to enforce Pennsylvania forum selection clause, disregarding ultimate affect that Pennsylvania court will enforce improper non-compete clause against California citizen).
  • The recent decision in Cellular Accessories For Less, Inc. v. Trinitas LLC, No. CV 12–06736 D, DP (SHx), 2014 WL 4627090 (C.D. Cal. Sept. 16, 2014) illustrates that LinkedIn contacts and other social media connections could be protectable as trade secrets If the methods used to compile the contact information are “sophisticated,” “difficult,” or “particularly time consuming.” Nonetheless, the purported trade secret holder will also have to establish that the contacts were not made public.

Our next and final webinar of our series will take place in December. Seyfarth attorneys will have a high-level discussion on protecting trade secrets and intellectual property in business transactions. Details to come at www.seyfarth.com/seyfarth-events

 

Cybersecurity: Coming to an Office Near You

Posted in Cybersecurity, Data Theft

Way back in the 1980’s, there was a very simple way to keep computer information from being stolen. Every disk containing confidential information was locked in a Sargent and Greenleaf safe. 

Of course, even then, there were problems: 22,000 or so 3.5 inch “microfloppy” disks hold the same amount of data as a 32 GB thumb drive can hold today. The safe got a bit full, and it was difficult to find your disk in that haystack.

Now there is the internet, and tablets that are fully-functioning computers, and cellular telephones the size of…tablets. Cell phones can take pictures, record conversations, and send data anywhere in the world.

For example, Stephen Ward of Owensboro, Kentucky sold a digital copy of a confidential manual for the RQ-21A Blackjack drone aircraft to an FBI undercover agent. For more on Mr. Ward’s conviction, see the Yakima Herald article. Of course, some people just give electronic copies of government secrets away, like Edward Snowden and Bradley Manning.

The insider threat to data security, also called “cybersecurity” is no longer somebody else’s problem, nor merely an information technology (IT) problem.  Cyber crimes are everyone’s problem.  And everyone at your company needs to be part of the solution.

This does not mean that everyone must be subjected to lie detector tests or threatened with waterboarding if they accidentally lose their cell phone.  It does mean that everyone must use a little common sense about their use of company resources, and it also means the company should have reasonable IT safeguards.

Many people use workplace-provided laptop computers to do their jobs from somewhere other than the office. That alone isn’t a problem, but having open access to sensitive corporate data via the coffee house wi-fi, or allowing wireless access to proprietary data, might be. Some employees absolutely must have the latest and greatest devices to be more productive. These next-generation devices may also have…the ability to access confidential data without leaving a trace. Then there are personnel that just leave devices lying around unattended.  All of these situations must be addressed.

Because not all data is proprietary, a good place to start is determining what data needs protection.  For example, if your company stores or works with Protected Health Information (PHI), that data probably needs to be secured. Although this step may seem somewhat obvious, in July 2013, four million people had their PHI and social security numbers compromised, and another breach in 2011 affected 4.9 million people.

Once the confidential data is identified, secured storage for that data may be appropriate.  Separate storage that is only accessible by certain employees, or other limitations on access may provide your proprietary data with additional protection. To ensure your secrets remain secret, you may want to do what the CIA and NSA do: encrypt your data. 

No matter how safe the computer systems are, if you have inexperienced or untrained personnel, you have a big hole in your security system. Training your employees how to maintain data security on an ongoing basis should help maintain their awareness that the data is important and needs to be protected.  Update your security training and your security system if new projects or data needs additional protection. 

When you disseminate proprietary information, just because the data is no longer in your control doesn’t mean you shouldn’t take steps to protect it. Secure all data, and record the dissemination that is outside of normal avenues of access. 

In other words, have a cybersecurity program that fits your business. Keep your employees aware of how to maintain security of the data in your systems. And every now and then, make sure that your confidential data cannot be retrieved by a teenager using their newest cell phone.

Or you can go back to the floppy disks and a safe. Kind of difficult to drag that into a business meeting, though.