Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

Although the trial court's analysis was not extensive, it clearly found that allegations in a complaint that an employee used a computer program to delete information from a laptop and knowingly deleted information without authorization sufficiently states a Computer Fraud and Abuse Act claim so as to survive a motion to dismiss for failure to state a claim.

In Alliance International Inc. v. Todd, Civ. Action No. 5:08-CV-214-BR (E.D.N.C. July 22, 2008), the parties contested whether the former employees (now defendants) could be held liable for deleting information from company computers.  Defendants argued, ultimately unsuccessfully, that plaintiff could not bring a cause of action under CFAA Subsection (a)(5)(A)(i) against two of the individual defendants because Alliance did not plead that those individuals downloaded a file erasure program.   Subsection (a)(5)(A)(i) provides a cause of action against someone who

knowingly causes the transmission of a program, information, code, or command, and as a result of such conduct, intentionally causes damage without authorization, to a protected computer . . .

18 U.S.C. § 1030(a)(5)(A)(i). 

Defendants argued that "[a]n employee's act of knowingly deleting files by hitting the 'delete' key could not plausibly give rise to criminal and civil liability under the CFAA."  (Defs.' Mem. of Law in Support of Mot. to Dismiss at 24 (filed May 29, 2008) (emphasis added).   Not taking the bait to argue whether hitting the delete key constitutes a "command," Alliance merely contended that it met its pleading obligation under the CFAA by alleging that the defendants permanently deleted/destroyed information from Alliance computers. 

The Court side-stepped both parties' arguments, however, and found that the specific allegations in Alliance's complaint, to wit that the defendants

(1) "deleted, removed and destroyed information, documents and/or data contained on . . . protected computers" and

(2) "knowingly caused the transmission of a program, information, code or command, including but not limited to, Net Eraser Trial, and as a result of such conduct, intentionally caused damage without authorization, to a protected computer"  (citing paragraphs 62 & 63 of the complaint),

were sufficient to state a CFAA claim.  Although clearly tailored to the facts at hand, the court's decision could be persuasive authority for a plaintiff to withstand a Rule 12(b)(6) motion targeting similar allegations.

 Not long after the Court's ruling, on August 12, 2008, Alliance filed a stipulation of dismissal of the case, with prejudice, signaling a likely settlement with the defendants following the Court's ruling in Alliance's favor.  The court's opinion, nonetheless, as well as the parties' briefing, is a ready resource for case citations on the issue of deletion as well as "authorization" under the CFAA, as the parties and the court cite to numerous federal cases on these issues.

• Email This
• Print
• Comments
• Trackbacks

 By Robert Milligan, Kurt Kappes and James McNairy

The California Supreme Court released its highly anticipated decision in Edwards v. Arthur Andersen LLP  today and held that employee non-competition agreements are invalid, even if narrowly drawn, unless the agreement falls within a statutory exception. 

In doing so, the Court rejected the Ninth Circuit’s narrow restraint exception, which excepted the prohibition contained in Business and Professions section 16600 on non-competition agreements where one was barred from pursuing only a small part or limited part of the business, trade or profession.

In its decision, the Court limited its review to two issues:

1)      To what extent does Business and Professions Code section 16600 prohibit employee non-competition agreements;

2)      Is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.

The Court concluded that Business and Professions Section 16600 prohibits employee non-competition agreements unless the agreement falls within the applicable statutory exceptions of sections 16601, 16602, or 16602.5. The Court also held that a contract provision whereby an employee releases “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.

On the first issue, the Court found that California state courts have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility. Section 16660 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (emphasis added) The chapter excepts non-competition agreements in the sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5). 

The Court noted that it had previously invalidated an otherwise narrowly tailored agreement as an improper restraint under section 16600 because it required a former employee to forfeit his pension rights on commencing work for a competitor (citing Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242-243). The Court, quoting Muggill, stated section 16600 invalidates provisions in employment contracts and retirement pension plans that prohibit “an employee from working for a competitor after completion of his employment or imposing a penalty if he does so unless they are necessary to protect the employer’s trade secrets.”

The two clauses at issue in Edwards’ agreement with Andersen provided:

1)      If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client. 

2)      For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) [Los Angeles] to which you were assigned during the eighteen months preceding release or resignation. 

Andersen argued that the Court should interpret the term “restrain” under section 16600 to mean simply to “prohibit,” so that only contracts that totally prohibit an employee from engaging in his or her profession, trade, or business are illegal. 

The Court rejected that argument and found that Andersen’s non-competition agreement was invalid because the two specific clauses at issue in the agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession. 

Earlier in the decision, the Court expressly stated it did not address the applicability of the “so-called trade secret exception to section 16660.” Before the Supreme Court granted the petition for review in Edwards, the lower appellate court’s decision remanded the case to the trial court to determine if the trade secret exception applied, i.e. the non-competition agreement was necessary to protect trade secrets. The Court’s disposition indicates that the issue is closed though and that there will be no such remand to the trial court:

We hold that the noncompetition agreement here is invalid under section 16600, and we reject the narrow-restraint exception urged by Andersen. Noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they within the applicable statutory exceptions of sections 16601, 16602, or 16602.5

Andersen asked the Court to adopt the limited or “narrow-restraint” exception to section 16600. The Court noted that confusion over the Ninth Circuit’s application of section 16600 arose in a paragraph in the Ninth Circuit’s decision in Campbell v. Trustees of Leland Stanford Jr. Univ. (9^th Cir. 1987) 817 F.2d 499, in which the Ninth Circuit stated that some California state courts have excepted application of section 16600 “where one is barred from pursuing only a small or limited part of the business, trade or profession” (citing Boughton v. Socony Mobil Oil Co. (1964) 231 Cal.App.2d 188 and King v. Gerold (1952) 109 Cal.App.2d 316). The Court found that the reasoning in these state court cases does not provide persuasive support for adopting the narrow restraint exception because Boughton involved the use of land, not a restriction upon a plaintiff’s practice of a profession, and King relied upon a trade secret exception to the statutory rule. 

The Court acknowledged that recent Ninth Circuit cases have followed Campbell to create a narrow-restraint exception to section 16600 in federal court. The Court stated that California state courts have not embraced the Ninth Circuit’s narrow restraint exception and stated “no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts have been clear in their expression that section 16660 represents a strong public policy of the state which should not be diluted by judicial fiat” (citing Scott v. Snelling and Snelling, Inc. (N.D. Cal. 1990) 732 F. Supp. 1034, 1042).

In sum, while the Court’s decision clearly states California does not recognize a “narrow restraint” exception to the general rule that employee non-competition agreements are invalid, the Court did not specifically address when non-solicitation of customer and employee clauses are permissible to protect trade secrets. 

The San Francisco Chronicle also has posted an article about this case.

• Email This
• Print
• Comments
• Trackbacks

           According to the California Supreme Court's website, the Court’s highly anticipated decision in Edwards v. Arthur Andersen, LLP will be available tomorrow, August 7, 2008 at 10:00 a.m. on the Court’s website.

            Trade secret and employment attorneys have been closely following the Edwards case after the Supreme Court granted review of the case on November 29, 2006. 

            In the lower court, the Court of Appeal for the Second Appellate District expressly rejected somewhat settled Ninth Circuit case law that provides an exception to the general rule in California that covenants not to compete are unlawful in the employment context pursuant to Business and Professions Code section 16600. The narrow restraint exception essentially provides that a noncompetition agreement is not unlawful where it leaves a substantial portion of the market open to the employee. The lower court expressly found that the narrow restraint exception was a “misapplication of California law when applied to an employee’s noncompetition agreement.” The court further stated “[i]n our view, section 16600 prohibits noncompetition agreements between employers and employees even where the restriction is narrowly drawn and leaves a substantial portion of the market available for the employee.”

            The lower court also found that the broadly worded release that Edwards allegedly was required to sign was unlawful because it purportedly waived Edwards’ Labor Code section 2802 rights. Labor Code section 2802, subdivision (a), provides: "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties . . ." The lower court held that “[b]ecause Labor Code section 2802's indemnity provisions implement public policy, requiring Edwards to waive indemnity rights as a condition of continued employment violated public policy and constituted an independently wrongful act for purposes of . . .[Edwards’] intentional interference with prospective economic advantage claim.”

            The issues that the Supreme Court are expected to address in tomorrow’s decision are:

 (1) Is a non-competition agreement between an employer and an employee that prohibits the employee from performing services for former clients invalid under Business and Professions Code section 16600, unless it falls within the statutory or judicially-created trade secrets exceptions to the statute?

(2) Does a contract provision releasing "any and all" claims the employee might have against the employer encompass non-waivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

            We will provide a follow-up blog entry once the decision comes out.  

By Robert Milligan, James McNairy and Summer Associate Julia Brodsky

• Email This
• Print
• Comments
• Trackbacks

In an order dated July 25, 2008, the Georgia Court of Appeals reiterated that non-compete provisions in Georgia cannot prohibit an ex-employee beyond performing services related to the employer’s business. Avion Systems, Inc. v. Thompson, No. A07A1488, 2008 WL 2854300 (Ga. App. Jul. 25, 2008). In Avion Systems, the Court of Appeals was asked to determine whether the following non-compete provision was enforceable:

For a period of twelve (12) months following the completion of project, the Employee unconditionally agrees to not deal directly, indirectly, or by any other means, either individually or in association with another individual or organization for any pecuniary gain with Corporation's customer or their client to whom he is assigned at the particular job site for that particular division or subdivision with whom Employee had contact....

Despite the fact that the non-compete provision was limited to 12 months in duration and to the customer to whom the employee was assigned, the Court of Appeals held that the provision was unenforceable. The restriction ran afoul of the prohibition in Georgia against “in any capacity” restrictions:

Here, the covenant did not specify the activities in which Thompson was prohibited from engaging, but instead prohibited her from dealing with a client “for any pecuniary gain,” regardless of whether her activities were related to Avion’s business. The provision was thus overbroad and unenforceable, as it is not reasonably necessary to protect the interests of Avion.

Avion Systems stands as a reminder that Georgia has very particular requirements for the enforcement of non-compete provisions and that an employer must pay attention to those requirements to have any chance of enforcing post-employment restrictions.

• Email This
• Print
• Comments
• Trackbacks

Mississippi State University v. People for the Ethical Treatment of Animals, Inc., No. 2006-CA-02120-SCT, 2008 WL 2927836 (Miss. July 31, 2008).

The Mississippi Supreme Court has reversed a lower court’s order granting a request by People for the Ethical Treatment of Animals (“PETA”) seeking disclosure of documents from Mississippi State University (“MSU”) regarding its care of research animals. Specifically, PETA had requested that MSU release records relating to research and testing that was funded by Iams, a pet food company. PETA subsequently modified its request to seek only certain animal care protocol review forms prepared by MSU in conjunction with Iams pursuant to a series of agreements specifying that MSU would not disclose Iams’ confidential information and that MSU would maintain its animal care facilities in conformance with the federal Animal Welfare Act, 7 U.S.C. § 2131 et seq., and all other applicable laws and policies.    

Iams sought a court order prohibiting the disclosure of exempt information under the Mississippi Public Records Act, Miss. Code Ann. §§ 25-61-9 and 79-23-1, on the ground that the information PETA requested constitutes trade secrets. In particular, Iams asserted that the data and information reveals aspects of Iams’ “strategic product development portfolio” that is not generally known by its competitors in the marketplace, including its formulations, improvements, and new product development. After reviewing relevant documents in camera, the trial court, however, concluded that, with the exception of a section entitled “Experimental Design” and certain personal information about the researchers, the protocol forms were not exempt from disclosure because the Act only covers protocols developed by MSU under contract with Iams, which, it found, was not the case here.

However, the Mississippi Supreme Court reversed because the unrefuted evidence on the record established that the information in the protocol forms was developed by MSU pursuant to its agreements with Iams; thus, the “plain and unambiguous language” of the Act requires exemption of the substantive portions of the forms. See 2008 WL 2927836, *13-14. In addition, the Court observed that the protocol forms are required by the federal Animal Welfare Act, which also exempts from public disclosure “trade secrets or commercial or financial information which is privileged or confidential.” Id. at *14, citing 7 U.S.C. § 2131(a)(6)(B). In closing, the Court noted that “[a]ny disagreements with those directives are best aimed toward the Legislature.” Id.

• Email This
• Print
• Comments
• Trackbacks

TalentBurst, Inc. v. Collabera, Inc., Civ. No. 08-10940-WGY (D. Mass. July 25, 2008).

A federal court in Boston has dismissed a complaint brought by information technology temp agency TalentBurst against competitor Collabera for aiding and abetting a breach of fiduciary duty by TalentBurst’s former employee, who subsequently joined Collabera, on the ground that the employee owed no fiduciary duty of loyalty to TalentBurst.

Raj Mohan Pallerla was hired by TalentBurst as a systems administrator and, as a condition of his employment, was required to sign an employment agreement that included non-compete and non-solicitation provisions. While employed by TalentBurst, Pallerala performed work for one of Collabera’s clients pursuant to a consulting services agreement between the two firms. Immediately after resigning from TalentBurst, Pallerla became employed by Collabera where he continued without interruption servicing the same Collabera client he had serviced while employed by TalentBurst. In response to TalentBurst’s letter demanding that it enforce Pallerla’s restrictive covenant, Collabera asserted that TalentBurst had waived enforcement of the covenant by entering into the consulting services agreement with Collabera.

TalentBurst brought suit against Collabera alleging that Collabera aided and abetted Pallerla’s breach of his fiduciary duty to TalentBurst. The court, however, rejected this claim because Pallerla’s job title, duties, and the fact that he was hired out to clients while at TalentBurst demonstrated that he was a “worker bee” rather than a manager, executive, or officer. Thus, under Massachusetts law he owed no fiduciary duty of loyalty to his employer. The court concluded that because there was no predicate breach of fiduciary duty by Pallerla, and no direct fiduciary relationship between TalentBurst and Collabera, the claim must fail. 

Of particular interest, the court noted that TalentBurst failed to allege that Pallerla “was entrusted with confidential information or that other special circumstances existed such that he could be said to have occupied a position of ‘trust and confidence.’” In a footnote, the court further observed that “although it is clear that the employment agreement, including the Covenant, created contractual duties on Pallerla’s part, TalentBurst cites no authority for the proposition that the signing of a restrictive covenant also creates a fiduciary obligation.”

Based on this conclusion, the court also dismissed TalentBurst’s claim for tortious interference because the “aiding and abetting” was the sole basis upon which TalentBurst alleged that it had satisfied the element requiring improper means or motive. The court went on to consider whether Collabera’s interference with the restrictive covenant itself created a presumption that Collabera had an improper motive. Although other Massachusetts state court cases suggested this might be sufficient, the court found those cases distinguishable because in those cases the defendants obtained and used confidential information through the employee, whereas here there was no allegation that Collabera did anything more than simply hire TalentBurst’s employee. In addition, the court concluded that Collabera might have had a legitimate motive for hiring Pallerla, namely to save money by employing him directly.

• Email This
• Print
• Comments
• Trackbacks

By Robert Milligan and Summer Associate Justin de Herrera

In City of Oakland v. Hassey, 163 Cal.App.4th 1477, (June 17, 2008), a California appellate court recently rejected a police officer’s claim that a provision in his employment contract requiring him to reimburse the City of Oakland for his training expenses constituted an illegal covenant not to compete in violation of Business & Professions Code Section 16600. The former Oakland police officer agreed in his employment contract to pay back the cost of his police academy training if, once hired, he left the department in less than five years time. The officer’s training expenses were approximately $8,000.

On appeal, after the trial court granted summary judgment in favor of the City on its reimbursement claim, the officer contended that the provision violated Business and Professions Code Section 16600. Section 16600 provides “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” 

The court disagreed and found that “[n]othing prevented [Hassey] from working for another police department, or anywhere else, for that matter.” 

The appellate court relied heavily on a Seventh Circuit federal case, Heder v. City of Two Rivers, Wisconsin, 295 F.3d 777 (2002), in reaching its decision. The Heder case involved a firefighter claiming that a provision in his employment contract – similar to the one at issue in Hassey – constituted an illegal covenant not to compete. The Heder court equated the provision to other valid employment incentives that employers offer to their employees. The Heder court reasoned that the residents of the city where the firefighters worked received the benefit of a more skilled fire department, and that the city might be less likely to provide that benefit if it feared that employees would leave the fire department, taking their new skills elsewhere. 

The court’s ruling in Hassey, however, leaves many questions unanswered. For instance, does the decision only apply to repayment provisions in government employment contracts or only those of public safety officials for that matter? After all, the court’s reference to Heder seems to suggest that when the agreement benefits city residents, additional latitude is granted to the government. On the other hand, if the ruling does apply to private employment contracts, how much money may an employer seek in reimbursement from an outgoing employee for training expenses, if at all, before a court finds that a Section 16600 restraint exists? To some, a $8,000 bill could represent a serious impediment to changing jobs.

More importantly, however, how does the court’s ruling in Hassey square with California Labor Code section 2802? That section requires an employer to “indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties . . . ” Oakland required that all of its officers obtain licensed academy training before becoming police officers. 

Interestingly, the court, in an addendum to its original decision, refused to address this issue because Hassey did not rely on Labor Code Section 2802 in his answer and because Hassey did not allege a Labor Code Section 2802 cause of action in his cross-complaint . The court also refused to address Hassey’s argument that the agreement violated Labor Code 2804 [contracts waiving benefits of this article or any part thereof are invalid] for similar reasons. Currently, Edwards v. Arthur Andersen, LLP, a case that will decide whether an employee can waive the protections of Labor Code Section 2802, is currently on appeal with the California Supreme Court. Oral argument was held on June 4, 2008 and an opinion in the case is due at any time.

Due to the many unanswered questions that the Hassey decision prompts, its application to private employment contracts remains dubious. The Supreme Court’s pending decision in Edwards v. Arthur Andersen, LLP may provide some additional guidance.

• Email This
• Print
• Comments
• Trackbacks

  By Erik Weibust (Boston) 

          Illustrating the roadblocks that Taiwanese companies still must overcome to do business in mainland China (Taiwan split from China amid a civil war in 1949), Forbes.com is reporting that electronics giant Hon Hai Precision Industry Co. recently took out half-page ads in major Taiwanese newspapers complaining about delays in a Chinese court over the prosecution of a Chinese competitor for allegedly stealing its trade secrets. In 2006, Hon Hai, which employs approximately 500,000 Chinese workers, sued BYD Company Limited, a Chinese competitor, for allegedly “systematically looting its trade secrets.”   According to Hon Hai, in 2006, two of its former employees took secret information when they left to work for BYD. Although the two employees have since been convicted of infringement in a Chinese court, according to Hon Hai, that may only be the tip of the iceberg. Specifically, Hon Hai alleges that over the past 4 to 5 years, 400 of its employees have moved to BYD, many of whom are suspected of providing the company with Hon Hai’s trade secrets and proprietary information. 

            According to the newspaper ads, the head of BYD is a member of the powerful People’s Congress, which has “the power to remove members of the judiciary.”  This, Hon Hai alleges in its ads has “result[ed] in a certain degree of unwillingness among local judicial and police members to deal with the case.” Nevertheless, Hon Hai believes that its rights will be vindicated eventually, particularly given China’s senior leaders’ commitment to protecting the interests of Taiwanese businesses on the mainland. 

• Email This
• Print
• Comments
• Trackbacks

Goodyear Tire & Rubber Co. v. Schalmo, 2008 Wl 2697248 (Fla. App. 2 Dist. July 11, 2008)

The District Court of Appeal for the Second District in Florida confirmed that, no matter how unpleasant the task, when faced with an issue regarding whether documents are covered by Florida's Sunshine in Litigation Act, § 69.081, the trial court must conduct an in camera inspection of the documents and cannot enter a blanket confidentiality order. 

In Goodyear, the tire company refused to produce confidential and trade secrets documents in connection with a products liability lawsuit filed against it by individuals injured when the tire (manufactured by Goodyear) of a motor home separated and caused an accident. Goodyear argued that the Act required the court to conduct an in camera inspection of each of the documents before entering a confidentiality order and requiring production. 

Under the Florida Sunshine in Litigation Act,

            Upon motion and good cause shown by a party attempting to prevent disclosure of information or materials which have not been previously been disclosed, including but not limited to alleged trade secrets, the court shall examine the disputed information or materials in camera. If the court finds that the information or materials or portions thereof consist of information concerning a public hazard or information which may be useful to members of the public in protecting themselves from injury which may result from a public hazard, the court shall allow disclosure of the information or materials. If allowing disclosure, the court shall allow disclosure of only that portion of the information or materials necessary or useful to the public regarding the public hazard.

Goodyear, 2008 WL 2697248, *2 (quoting Fla. Stat. § 69.081(7)). The trial court, concerned about the inability to review and understand voluminous technical documents, developed its own procedure by which it protected all confidential materials through a blanket order and directed the parties to resolve the other issues regarding what would be protected, bringing back to the court only those issues the parties themselves could not resolve. The appellate court found that this procedure violated the judge’s duties to act as the gatekeeper of the Act. Id. at *3.

The appellate court went on to recognize that, although a trial court may still prevent public disclosure of trade secrets, it cannot do so if those alleged trade secrets relate to a public hazard.  If the trade secret material is otherwise relevant and discoverable (but not relating to a public hazard), it can be protected by an appropriate confidentiality order. 

• Email This
• Print
• Comments
• Trackbacks