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Trading Secrets

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

Seyfarth to Host Webinar on International Trade Secrets and Non-Compete Law

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

When the Walt Disney Company built the “It’s a Small World” ® ride for the New York World’s Fair in 1964, they probably had no idea of the challenges that globalization could pose 50 years later. From cases involving the sale of stolen trade secrets to foreign companies to departing employees setting up competing business in different jurisdictions, many of our recent posts illustrate an unmistakable fact: in an increasingly globalized world, protection of trade secrets, confidential information, and other intellectual property presents global challenges as never before.

On Thursday, July 31, 2014 at 9:00 a.m. Central, Seyfarth attorneys from across the globe will present an on-demand webinar focused on non-compete and trade secret considerations from an international perspective. During the 90-minute webinar, Seyfarth attorneys Wan Li (Shanghai), Ming Henderson (London), Justine Turnbull (Sydney) and Daniel Hart (Atlanta) will provide valuable insight on non-compete and trade secret issues in Europe, Australia, and China compared to the United States.

Topics will include the following

  • 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, France and Australia, 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

Please register to receive access to the broadcast by clicking here.

 

Rebecca Woods on Recent Kentucky Supreme Court Decision Holding that Non-Compete Failed for Lack of Consideration

Posted in Non-Compete Enforceability, Practice & Procedure

In a recent ruling by the Supreme Court of Kentucky, Creech v. Brown (June 19, 2014), the court affirmed that in Kentucky, noncompetition agreements must be supported by adequate consideration in order to be enforceable. The circumstance addressed by the court involved an employee who was presented with a noncompetition and confidentiality agreement after working for the employer for 16 years. The employee was offered no payment, no change in employment terms, and was not threatened with termination if he failed to execute the agreement. The court held that under this set of facts there was a lack of consideration and the court deemed the agreement unenforceable. The ruling makes clear that while consideration is necessary, it may be deemed from after-the-fact changes in employment circumstances.

Trading Secrets Readers: Cast Your Vote in the ABA’s 100 Best Legal Blogs Competition!

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

Voting is open for the American Bar Association’s Annual 100 Best Legal Blogs competition. You helped us get named to the list in 2013, and we hope you will cast your vote today to help keep Seyfarth’s Trading Secrets blog on the ABA’s list for 2014.

Trading Secrets is a resource for employers and legal professionals that provides timely legal and news updates to C-suite executives, corporate in-house counsel, technology and security officers, and HR professionals concerned about protecting their valuable trade secrets, intellectual capital, workforce, customer relationships, and other confidential information.

The blog also offers a mobile device version, video blogs, podcasts and webinar library of our popular and informative webinars on trade secret, non-compete, and computer fraud issues, and resources, including an archive library from 2008 to the present.

Help us gain some extra recognition by casting your vote in the ABA’s Annual 100 Best Legal Blogs competition!

You only have a few days left to vote: The deadline is August 8, 2014.

Please click the link here to vote. Simply provide a short explanation of why you like the blog.

Seyfarth Offers 2014-2015 Edition of 50 State Desktop Reference: What Employers Need to Know About Non-Compete and Trade Secrets Law

Posted in Non-Compete Enforceability, Trade Secrets

What Employers Need To Know About Non-Compete and Trade Secrets Law

There is no denying that there exists a variety of statutes and case law across the country when it comes to employee non-competition and non-solicitation agreements, as well as the protection of proprietary information. All too often, what is enforceable in one state may be questionable in another and entirely prohibited in the next.

Seyfarth’s Trade Secrets, Computer Fraud & Non-Competes Practice Group has created a one-stop Desktop Reference surveying many of the questions related to the use of employee covenants and intellectual capital protection in all fifty states. For the company executive, in-house counsel or HR professional, we hope that this booklet will provide a starting point to answer your questions about protecting your company’s most valuable and confidential assets.

How to get your Desktop Reference: 

This publication may be requested from your Seyfarth contact or Trading Secrets editor Robert Milligan (rmilligan@seyfarth.com) in hard copy or is available as an eBook, which is compatible with PCs, Macs and most major mobile devices*. The eBook format is fully searchable and offers the ability to bookmark useful sections for easy future reference and make notes within the eBook. To request the 2014-2015 Edition of 50 State Desktop Reference as an eBook, please click the button below:

 

$16 Million Awarded By Arbitrator Against 50 Cent in Trade Secret Spat

Posted in Practice & Procedure, Trade Secrets

By Christina F. Jackson

In a case out of Florida involving the rapper known as “50 Cent” an arbitrator found the rapper liable for trade secret misappropriation, among other claims, in the creation of his own line of headphones. The arbitrator awarded, the plaintiff in the case, Sleek Audio, LLC, a little over $11.5 million in damages. Attorney’s fees were also awarded to Sleek and two other individual plaintiffs in the amount of nearly $4.5 million.

Summary of Case

Curtis J. Jackson, III, (aka “50 Cent”) had originally invested in a company known as Sleek Audio, LLC, to design a line of headphones.  Jackson also became a member of Sleek’s board.  Sleek began creating a design for over-the-ear headphones known as “Sleek by 50.” However, eventually Sleek and Jackson parted ways in 2011.  Thereafter, Jackson collaborated with another company, of which he was a majority owner, SMS Audio, to create the headphones known as “Street by 50” and “Synch by 50.”  Jackson hired individuals to work on the SMS Audio headphones that had already had access to the design of Sleek’s headphones.

Sleek then sued Jackson for misappropriation of trade secrets in relation to the headphone design of SMS Audio.  Jackson brought claims against Sleek or fraud in the inducement to enter into a securities purchase agreement and operating agreement.  The claims went to arbitration.

Comparing The Headphones

Ultimately the arbitrator found Jackson liable for misappropriation of trade secret claims, as well as other claims.  As for the misappropriation claim, the arbitrator relied upon Sleek’s expert testimony in comparing Sleek’s headphones to SMS’ headphones.  The expert opined that the three sets of headphones “shared a multitude of mechanical design details” unlike those of other headphones.  Moreover, since Sleek had not yet marketed its headphones to the public, the mechanical design was not “generally known” or “readily ascertainable” by others.  The arbitrator thus found that these similarities as well as Sleek’s internal company procedures for attempting to safeguard this information evidenced trade secret misappropriation.

Additionally, the arbitrator found that an employee of one of Jackson’s company’s had misappropriated trade secrets consisting of potential customer data on Sleek’s webpage that had been password protected.

Inevitable Disclosure

Furthermore, the arbitrator, in relying upon Sleek’s expert opinion, found that SMS’ headphone design could not have been started in such a short period of time and be of such quality without having used Sleek’s trade secrets.  This finding was based upon Jackson hiring the individuals who, prior to working for SMS, had access to the design of Sleek’s headphones.

Liability of Jackson

The arbitrator found Jackson was liable for the misappropriation of Sleek’s trade secrets because of Jackson’s role as a corporate officer of SMS. Under applicable case law, a corporate officer that “was aware of or ratified” use of “improperly obtained trade secrets” along with knowing (or should have known) they were “acquired by improper means” can be held personally liable.  Here, the arbitrator found that the misappropriation of trade secrets by SMS employees combined with Jackson’s awareness of the misappropriation was a sufficient basis for Jackson’s liability.

Takeaways

This case highlights the need for entrepreneurs or businesses to be careful about who they hire and for what purpose.  If a new hire or potential new hire has worked on a similar product for a competitor, caution should be applied in development of similar products.  Perhaps the outcome in this case would have been different had Jackson hired individuals to design SMS’ headphones who had not previously had access to Sleek’s design information.  Additionally, an officer of a company may be liable for an employee’s misappropriation of trade secrets.  This case serves as a reminder of the burdens an officer bears.  Finally, in regard to litigation, as has been demonstrated time and again, a key expert can play a major and decisive role in the outcome of a case.

Texas Federal Court Imposes Ongoing Royalty Rather Than Permanent Injunction Against Alleged Trade Secret Misappropriator

Posted in Practice & Procedure, Trade Secrets

A Texas federal trial court, finding the absence of any legal precedence to award an ongoing royalty in a trade secret misappropriation case, looked to the patent laws to impose an ongoing royalty. As a result, rather than permanently enjoining the misappropriator from continuing, the trial court imposed a royalty, thereby allowing the victim some compensation but allowing the other party to continue its activities. Sabatino Bianco MD v. Globus Medical Inc., 2014 WL 2980740 (ED Tx. 02 July 2014)(docket no.: 2:12-cv-00147)

Summary of the Case

Dr. Bianco designed certain spinal implants. The jury ruled that Globus misappropriated Dr. Bianco’s trade secrets and awarded damages. Dr. Bianco wanted disgorgement of Globus’ profits, but the jury instead awarded Dr. Bianco a 5% royalty as back-payment for the taken secrets. Dr. Bianco asked for, but was denied, a permanent injunction. Instead, the district court asked the parties to come up with some figure for the ongoing royalty percentage, which the judge determined to be 5% also. The judge said that the payment period would extend for 15 years.

Dr. Bianco asked for more than 5% (he asked for 6%) and Globus said it wasn’t going to pay anything in the future because the secrets were no longer secret and that the prior 5% back-payment was full compensation. Dr. Bianco said that the previous 5% was a floor and any new rate should necessarily be higher. Globus said that once the misappropriation was publicized and embodied in the actual spinal devices, nothing was a secret. Certainly there was no call for paying royalties over 15 years. Dr. Bianco asked for a higher rate to send warnings to other misappropriators that such behavior is not tolerated. The trial judge rejected both sides’ proposals.

The Court’s Rationales

First the court noted that in Texas, there is no state-based trade secret law covering the ongoing royalty situation. So the court unsurprisingly adopted patent law as the trial judge was in fact Judge William Bryson of the US Federal Circuit Court of Appeals, sitting in designation in Texas.

The court then noted that in Texas, injunctions can continue longer than the period after which a secret becomes public. The court also noted that any increase in the rate cannot be for punitive or willful theft purposes because Texas law does not allow for punitive forward looking remedies and that any punitives were included in the back-payment royalty rate.

Furthermore, the court reasoned that in Texas, trade secret theft is a one-time event, hence the proper calculation would be on what the parties would hypothetically negotiate on the one-time event. In patent law, though, each infringement is a continuing tort.

Finally, the court rejected Dr. Bianco’s deterrent effect argument. The court noted that any deterrent effect is satisfied by the possibility that the court will not award any base damages or ongoing royalties but instead will order a full disgorgement.

Takeaways

This case teaches several aspects: (1) One should not assume that every trade secret theft can be remedied by automatic permanent injunction relief. Rather a court may allow the defendant to continue activities so long as it pays some royalty; (2) In your particular state, as here, there might be no case law precedent that sets the contours of the remedy, and hence, a court may borrow from another legal subject matter; (3) While we do not recommend any such action, this is an instance in which the misappropriation is allowed to continue, with a royalty payment. One could presume that there is still a significant financial benefit to the misappropriator in that it still makes money from its initial misappropriation; and  (4) In the initial disclosure, though in confidence, of Dr. Bianco’s information to Globus, would the result have been different if the disclosure documents included Globus Medical’s agreement that it would be subject to permanent injunctive relief and disgorgement? Perhaps the disclosure documents could have included those statements.

Eleventh Circuit Affirms Alabama Federal Court Ruling that Non-Compete Signed Prior to Employment is Void

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

A few months ago, we reported on a federal court decision in the Southern District of Alabama declining to enforce a non-compete and non-solicitation agreement against a former employee who executed the agreement before he began his employment. Last week, a panel of the Eleventh Circuit affirmed the District Court’s decision in an unpublished opinion.

As we reported following the District Court’s decision, in Dawson v. Ameritox, Ltd., 2014 WL 31809 (S.D. Ala. Jan. 6, 2014), Ameritox, a healthcare company, sought to enforce non-compete and non-solicitation covenants against its former Assistant Director of Medical Science and Health Outcomes Research, Dr. Eric Dawson, who had left Ameritox for a similar position with a competitor. Although Ameritox sought a preliminary injunction against Dawson, the District Court denied the motion and ruled that the covenants in question were void and unenforceable because Dawson had executed the agreement before his employment with Ameritox began. Under Alabama Code § 8-1-1, a contract by which anyone “is restrained from exercising a lawful profession, trade, or business of any kind” is void, except that “one who is employed as an agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city, or part thereof, so long as the . . . employer carries on a like business therein.” Relying on the Alabama Supreme Court’s prior decision in Pitney Bowes, Inc. v. Berney Office Solutions, 823 So. 2d 659 (Ala. 2001), the District Court noted that employee non-compete agreements are valid only if signed by an employee and that prospective employment is not sufficient to meet the exception in Section 8-1-1. Thus, because Dr. Dawson was not an employee of Ameritox at the time he signed the agreements, the District Court reasoned that the agreements were void and unenforceable.

In its unpublished opinion affirming the District Court’s decision, the Eleventh Circuit agreed with the District Court, noting that Ameritox’s attempts to distinguish Pitney Bowes were unpersuasive. The Eleventh Circuit reasoned that, because the agreement was void under Alabama Code § 8-1-1, Ameritox failed to show a substantial likelihood of success on the merits. Thus, the District Court did not abuse its discretion in denying Ameritox a preliminary injunction.

The Eleventh Circuit’s panel decision reaffirms the importance of practical pointers we noted in our prior post. While it is prudent — and, in some states, required — to provide prospective employees with copies of required non-compete agreements before the employee’s first day of work, employers in Alabama should ensure that employees execute (or re-execute) such agreements on or after their first day of employment, ideally in the presence of a representative of human resources. In addition, because continued at-will employment is sufficient consideration for new restrictive covenants in Alabama, employers with operations in Alabama should consider periodically reviewing their existing restrictive covenants and requiring employees to execute new agreements from time to time as appropriate.

 

Florida Court Finds That Employer Without Knowledge That Employees It Just Hired Have Non-Competes Are Not Liable For Tortious Interference With Contract

Posted in Non-Compete Enforceability, Practice & Procedure

A defendant company was unaware, when it hired two individuals, that they had entered into non-competition agreements with their prior employer.  As a result, according to a Florida federal court, the prior employer did not have a valid cause of action against the new employer for intentionally interfering with those non-compete obligations. 

Summary of the Case

During their employment by Aerotek, a recruiting company, Zahn and Jiminez signed non-compete covenants.  Shortly after termination of their Aerotek employment, they allegedly violated the covenants by going to work for that company’s competitor C-T.  Aerotek sued C-T for tortious interference with contract.  C-T responded by moving to dismiss on the ground that it did not know about the covenants when it hired the two ex-Aerotek employees.  The motion was granted.  Aerotek, Inc. v. Zahn, Case No. 6:14-cv-293-orl-31TBS (M.D. Fla., 6/17/14).

The Court’s Rationale

The court reasoned that to state a claim for tortious interference, Aerotek was required to prove that C-T intentionally interfered with Zahn’s and Jiminez’s covenants at the time they supposedly committed a breach of contract.  However, the court said, the employees breached when C-T hired them, and that occurred several months before C-T learned about the covenants.  At that time, CT lacked the requisite intent to interfere with the contracts.  What occurred thereafter may have been a continuation of injuries and damage, but it was not a continuing tort.  In the court’s words, Aerotek “conflates the moment of the breach with the period of the injury.”  

The court relied on a case concerning the date the statute of limitations began to run on a trade secret misappropriation claim against the new employer who allegedly received the former employer’s confidential information from a new hire.  The ruling there was that the misappropriation occurred the day the ex-employee started working for the new employer.  What occurred later were the effects of that one act, not a continuing tort.

Takeaways

The ruling in Aerotek, if generally followed, seemingly would provide some cover for an employer ignorant with regard to its hires’ non-compete covenants.  Vaguely reminiscent of the military’s former “don’t-ask-don’t-tell” policy, on its face Aerotek suggests that the new employer may benefit from not questioning a new hire concerning the existence of a non-compete with a prior employer.  But the strategic decision by the new employer not to seek that information before making a job offer, and not to assess the risks before investing time and money in the new hire, can be perilous if the new hire did promise not to compete. 

First, even if the former employer does not sue its successor, the former employer may file a complaint against the new hire for torts and breach of contract.  Any such lawsuit almost certainly will be distracting to both the new hire and the new employer, and will be expensive for one or both.  Second, a court order might be entered enjoining the new hire from competing, which could result in an inability (at least temporarily) to perform all or part of the job for which he or she was employed. 

Third, the prior employer may make claims against the new employer which are held to state valid causes of action.  If tortious interference is alleged, the court might not follow the lead of the Aerotek judge and dismiss the allegations.  Moreover, the complaint may allege misconduct other than or in addition to tortious interference.  Fourth, if a lawsuit is filed against the new employer and/or the new hire, bad publicity may result regardless of the outcome in court.  The better course usually will be to inquire sooner rather than later regarding non-compete obligations that a prospective hire may have.

Time to Party Like It’s 1999… Again: Information Technology Returns to Center Stage

Posted in Cybersecurity, Data Theft

By Matthew Hafter

With the Securities and Exchange Commission’s attention again returning to cybersecurity issues, many registrants are recalling the Commission’s intense focus on “Year 2000” issues over a decade ago.

Commissioner Luis Aguilar, in remarks at the SEC’s cybersecurity roundtable held on March 26, 2014, made a special point of discussing the SEC’s growing concerns about cybersecurity and observed that cyber-attacks have wide-ranging and potentially devastating effects on the economy, individual consumers and on markets and investors.  In an April 2, 2014 speech, Commissioner Aguilar stated that the SEC’s Office of Compliance Inspections and Examinations will be making cybersecurity an exam priority, warning that the industry should expect that SEC examiners will be reviewing whether asset managers have policies and procedures in place to prevent and detect cyber-attacks and whether they are properly safeguarding their systems against security risks.

These concerns are not limited to those operating in the retail side of the securities markets.  All companies subject to reporting obligations under the Securities Exchange Act of 1934 must be aware of how cybersecurity issues should be disclosed.  The SEC identified several key areas of potential disclosure in CF Disclosure Guidance: Topic No. 2 .

Risk Factors

The SEC expects registrants to disclose risks related to cyber incidents if those risks make an investment in the company speculative or risky.  As with other risk factors, disclosure must be tailored to the registrant’s specific circumstances, and include such matters as areas of business or operations that give rise to material cybersecurity risks, and the potential costs and consequences.  Companies that outsource must consider cybersecurity risks related to that aspect of their business and how those risks are addressed, including detection of incidents and potential insurance coverage.

Management’s Discussion and Analysis

Cybersecurity risks and incidents may result in costs or other consequences that are reportable as a material event, trend or uncertainty that could have a significant impact on a registrant’s operations, financial condition and results.  Such disclosure could include the impact of increased expenses for data and system security, or the consequences of theft of valuable intellectual property from a cyber-attack.

Description of Business

Registrants must disclose any material effects of cyber incidents on products, relationships with business partners, or competitive conditions.

Legal Proceedings

Cyber incidents may result in litigation or government investigations that meet the disclosure requirements of Item 103 of Regulation S-K.  In particular, Instruction 2 requires aggregation and disclosure of “any proceeding [that] presents in large degree the same legal and factual issues as other proceedings.”  In this way, individual claims related to cyber security incidents may point to a larger disclosure issue – both in terms of meeting the dollar threshold of Item 103 and a failure of internal controls (discussed below) – even if each claim by itself is not material.

Financial Statement Disclosure

There are many ways cybersecurity risks and incidents may affect a registrant’s financial statements.  These include:

  • Costs to maintain system and data security and to prevent cyber incidents.
  • Costs to remediate the effects of any data breaches (such as customer loyalty or incentive programs, or providing free credit reports).
  • Expenses and losses resulting from claims asserted by customers for product returns, breach of warranty, or breach of contract, or claims from counterparties for their own remediation efforts, as well as the costs of regulatory investigations and potential litigation.  The financial statements must deal with accrual and/or disclosure for both asserted and threatened claims; and, in addition, cyber incidents are one of the relatively rare instances where unasserted possible claims are so likely and could be so material that they must be dealt with under the loss contingency rubric.

Disclosure Controls and Procedures

Cyber incidents pose multiple risks to the registrant’s ability to control its own data and other assets and to its ability to accurately record and report information required in SEC filings.  This may the most painful disclosure of any listed, because it requires the registrant to at least skirt around the edges of information about vulnerabilities it would not want any hacker to know about.

The SEC’s Disclosure Guidance on cybersecurity did not present mandatory rules for disclosure, but merely guidance.  However, given the SEC’s increasing attention to this hot-button issue it is likely that the Commission will be pressing registrants to provide greater attention and detail to these challenges.  Privately held companies should also be mindful of the disclosure obligations identified by the SEC when issuing securities in private transactions.  We also expect cybersecurity issues to become increasingly prominent in the broader realm of corporate governance as directors are likely to face greater scrutiny under the standards of In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) to assure that the company has adequate information and reporting systems to assure compliance with applicable legal requirements related to data security and privacy.

John Tomaszewski Explains the Supreme Court’s Riley v. California Decision and What It Means for Consumer Privacy Going Forward

Posted in Privacy

While the Supreme Court has taken some heat in the past for seeming to misunderstand technology and how it impacts the normal person’s life, with Riley v. California the Court demonstrated not only an unexpected fluency with how mobile phone technology has evolved, but also with how it has caused our daily sphere of privacy expectations to evolve. Just like when the police want to rifle through your house, when they want to go through your phone, the Chief Justice makes it very simple – get a warrant.