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Trading Secrets

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

First United Kingdom Decision on Tweeting in Workplace

Posted in Social Media

Season’s Tweetings

In the first UK high court decision on tweeting, the Employment Appeal Tribunal has held that dismissal of an employee for offensive posts on his private twitter account could potentially justify termination under the UK’s unfair dismissal rules.

The employee was dismissed after a colleague raised an anonymous complaint about the content of his tweets. The Court held that termination of an employee for offensive comments on his social media account could fall within the ‘range of reasonable responses’ open to employers.  The employee’s right to freedom of expression needs to be balanced against the employer’s concern to protect its reputation.

To decide whether termination was justified, UK Employment Tribunals will look at the entire picture, including:

  • Was the twitter account relevant to the employee’s role? In this case, the employee used the twitter account in his role as an internal investigator, to monitor the posts of other employees.
  • Was the twitter account genuinely private? If it linked the employee to the employer, or was followed by a number of work colleagues or customers, it may not be seen as private.
  • Did the employer’s social media policy or disciplinary rules make clear that offensive twitter posts could result in discipline, up to and including termination?
  • Is there evidence of actual damage to the employer’s reputation, such as complaints from customers or wider publicity?

This case extends the principles already applied to Facebook comments, as in the case of Apple v Crisp where termination was justified for an employee who criticized Apple’s products on Facebook in breach of a clear internal policy.

[Game Retail Ltd v Laws]

 

Seyfarth Attorneys Present At 2014 American Intellectual Property Association Trade Secret Summit

Posted in Trade Secrets

On December 4th and 5th, nearly 100 trade secret, non-compete, and economic espionage practitioners convened at the Intel Global Headquarters in Santa Clara, California for the annual American Intellectual Property Law Association Trade Secret Law Summit.  Two Seyfarth attorneys, Erik Weibust and Daniel Hart, presented a paper co-authored with Andrew Masak and Robyn Marsh, titled “Lawyer Mobility and Trade Secrets Protection: Restrictive Covenant, Confidentiality, and Non-Disclosure Considerations in the Legal Profession.”  Specifically, the Seyfarth attorneys, sought to address the question of “what can law firms and companies do to protect themselves – like any other industry – from attorneys who leave to join a competitor?  From their paper and presentation,

Attorneys leaving their law firms or companies for other opportunities is nothing new.  And, certainly, changing from one employer to another is not unique to the legal industry.  As in many other industries, employees switching jobs among competitors can raise serious concerns about the misappropriation of trade secrets and confidential information, and client poaching.  Yet, unlike most other industries, restrictive covenants limiting attorneys from competing with their former firms or companies, or taking clients with them, are generally unenforceable.  In fact, most successful firm lawyers are recruited to other firms for the very reason that they have “portable” business.

This does not, however, mean that attorneys have free range to take and utilize confidential information and trade secrets about their prior firms or clients who choose not to go with them.  Quite to the contrary, there are ethical rules barring such behavior.  Nevertheless, the inability of companies and law firms to impose restrictive covenants on lawyers employed by the companies and firms poses practical challenges.  Indeed, in-house counsel, who often act as much as business advisors as they do legal counsel, may be privy to the most sensitive business information of a corporation when they leave to join a competitor, yet they, too, are generally immune from restrictive covenants that restrict their ability to practice law, even for a competitor. 

In addition to the Seyfarth team presenting their ethics in non-competes presentation, the conference included two days of presentations and debates, including:

  • An FBI Briefing on Economic Espionage, “Honey Potting,” and When to Include the FBI in Your Company’s Litigation
  • Emerging Best Practices for Protecting Trade Secrets in Employment and Business-to-Business Relationships;
  • A Judicial Panel Providing Insights from the Bench on Trade Secret and Non-Compete Disputes;
  • Debates on the Future of Non-Competes and Pending Federal Legislation;
  • Pros and Cons of Trade Secrets vs. Patents; and
  • The Latest on Developing Cybersecurity Standards.

The AIPLA Trade Secret Summit is an annual conference designed for both in-house and outside counsel. 

2014 Trade Secrets Webinar Series Year in Review

Posted in Computer Fraud, Cybersecurity, Data Theft, International, Non-Compete Enforceability, Social Media, Trade Secrets

Throughout 2014, Seyfarth Shaw LLP’s dedicated Trade Secrets, Computer Fraud & Non-Competes Practice Group hosted a series of CLE webinars that addressed significant issues facing clients today in this important and ever changing area of law. The series consisted of 10 webinars:

  1. 2013 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law 
  2. Employee Social Networking: Protecting Your Trade Secrets in Social Media
  3. Barbarians at the Gate: Class Action Avoidance and Mitigation for Data Breach
  4. Trade Secret and Non-Compete Legislative Update
  5. International Trade Secrets and Non-Compete Law Update
  6. Protecting Confidential Information and Client Relationships in the Financial Services Industry
  7. Ins and Outs of Prosecuting and Defending Trade Secret Injunction Cases
  8. Protecting Trade Secrets: The Current Landscape, Top Threats, Best Practices for Assessing and Protecting Trade Secrets, Proposed Legislation and Future Scenarios      
  9. How and Why California is Different When it Comes to Trade Secrets and Non-Competes
  10. Protecting Trade Secrets and Intellectual Property in Business Transactions

As a conclusion to this well-received 2014 webinar series, we compiled a list of key takeaway points for each of the webinars, which are listed below. For those clients who missed any of the programs in this year’s webinar series, the webinars are available on CD upon request or you may click on the title below of each webinar for the online recording. We are pleased to announce that Seyfarth will continue its trade secrets webinar programming in 2015 and has several exciting topics lined up. We will release the 2015 trade secrets webinar series in the coming weeks.

2013 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law

The first webinar of the year, led by Michael Wexler, James McNairy and Joshua Salinas, reviewed noteworthy cases and other legal developments from across the nation in the areas of trade secret and data theft, non-compete enforceability, computer fraud, and the interplay between restrictive covenant agreements and social media activity, as well as provided predictions for what to watch for in 2014.

  • While courts continue to struggle with what is the proper scope of trade secret preemption and at what stage in the case it should be applied (e.g., at the motion to dismiss/demurrer vs. summary judgment stage), courts increasingly hold that trade secret claims preempt or “supersede” concurrently pled common law tort claims based on the theft of information.
  • The U.S. Supreme Court’s decision in Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, 134 S. Ct. 568 (2013), appears to strengthen the enforceability of forum selection clauses as it held that, where the other requirements for transferring an action exist, courts ordinarily should, except in exceptional circumstances, transfer cases where valid, enforceable forum selection clauses exist. However, because this case did not involve a forum selection clause in an employment agreement, it remains to be seen whether lower courts faced with transfer motions in employment disputes will interpret forum selection clauses in the same manner as the Atlantic Marine court.
  • During 2013, courts in Massachusetts, Minnesota, and New York joined the Ninth Circuit’s narrow reading of the Computer Fraud and Abuse Act, limiting its applicability to scenarios where the defendant(s) hacked into or otherwise took affirmative steps to circumvent computer security, finding that violating employer computer usage or access policies alone do not violate the CFAA.

Employee Social Networking: Protecting Your Trade Secrets in Social Media

In our second webinar of the series, Scott Schaefers, Justin Beyer and Joshua Salinas addressed the interplay between trade secrets and social media.

  • Social Media Privacy Laws are on the Rise. At least 14 states now have laws prohibiting employers from requiring or even asking for access to employees’ or job applicants’ personal social media accounts. Penalties for violations range from nominal administrative fines to much larger damages, including punitive damages and attorneys’ fees. Many of the laws, however, have broad exceptions and loopholes, including required employer access of “nonpersonal” accounts and on suspected data theft or workplace misconduct. To learn more, please see our Social Media Privacy Legislation Desktop Reference.
  • Watch Out for Your Trade Secrets. The new legislation may throw wrenches into employer-employee trade secret theft cases. For example, a disloyal employee secretly copies a confidential employer customer list onto his personal LinkedIn account. The employee works in a state that has adopted the new privacy legislation, which has an exemption for suspected data theft. The employer hears unsubstantiated gossip about that list copying, but does not investigate based on the flimsy evidence and for fear of violating the privacy law. The employee later resigns, and uses that list for a competitor. Did the former employer waive a trade secrets claim against the employee because it decided not to investigate, even though it could have? Did that decision amount to an unreasonably insufficient effort to protect its trade secrets? 
  • Have a Social Media Policy. Employers should have compliant social media usage policies. The policy should describe, among other things, what constitutes a “personal” social media account, what types of information belong to the employer, what types of social media activity is permissible, the instances in which the employer may seek to require or request access, and the potential consequences for non-compliance. 

Barbarians at the Gate: Class Action Avoidance and Mitigation for Data Breach

The third installment of the series was presented by Robert Milligan, Bart Lazar and John Tomaszewski as they discussed avoidance and mitigation techniques for data breaches, including where the class action bar is going and what potential defenses and strategies companies can employ in such lawsuits.

  • A strong data security program requires layers. You can’t rely just on technical safeguards and the IT group. You also need people and processes to help catch the threats which get through the cracks that technology cannot plug. As part of that layering, it isn’t just about the prevention of threats, it is also about detection and early warning of threats. This will allow for the isolation of a threat which has made it through the “front door” before it gets into the safe in the bedroom.
  • A company gets a greater return on investment by being prepared for a security breach.   Training employees on handling personal information engages them in the process, and raises awareness to reduce the risk of an incident or that an incident will go unnoticed.  Developing an incident response protocol and team with defined responsibilities allows a company to be more nimble and efficient when a potential incident occurs.  And, as the study we referenced demonstrates, companies that already have an incident response plan in place spend 1/3 less on security incidents than those that do not have an incident response protocol.
  • Increasingly courts are becoming more receptive to putative class claims alleging unlawful data breach in violation of statute or under the common law. Article III standing and lack of actual damages continue to be key defenses to such claims but courts are more receptive to creative claims based upon statutory language or contract interpretation. Companies should consider using arbitration agreements with class action waivers, as well as early dispositive motions to attempt to manage the risk of these dangerous and expensive suits.

Trade Secret and Non-Compete Legislative Update

The fourth webinar in the series, presented by Katherine E. Perrelli, Daniel P. Hart and Dawn Mertineit discussed the significant statutory changes to several jurisdictions’ laws regarding trade secrets and restrictive covenants and pending legislation proposed in additional jurisdictions over the past year.

  • Employers should employ a holistic approach to the protection of their trade secrets and confidential information, whether or not Massachusetts bans non-compete restrictions altogether or adopts the Uniform Trade Secrets Act. Utilize non-solicit, non-disclosure and invention assignment agreements; implement entrance and exit interview protocols to educate employees on non-disclosure obligations; create a culture of confidentiality with regular training programs, and various levels of security access to confidential business information; regularly evaluate your trade secret protection policies/protocols; and forensically review computer usage of departing employees with access to confidential information.
  • As non-compete and trade secrets law continues to evolve, expect a greater trend toward uniformity in trade secrets law and a continued attempt to regulate trade secrets at the federal level.  Review your company’s policies and practices on a regular basis to ensure that they are consistent with the latest developments and continue to take proactive, practical measures to ensure that your trade secrets are subject to reasonable methods to maintain their secrecy.
  • Even if your company has operations in a state that does not prohibit employers from requiring employees and applicants to provide social media login information or access, your best bet is to avoid asking employees and applicants for this sort of information (unless account access is necessary to investigate workplace misconduct).  More and more states are considering laws prohibiting such actions, and it’s best to be ahead of the curve.

To learn more, please see our 50 State Desktop Reference: What Employers Need to Know About Non-Compete and Trade Secrets Law

International Trade Secrets and Non-Compete Law Update

The fifth webinar in the 2014 series, presented by Wan Li, Ming Henderson, Justine Turnbull and Daniel Hart, focused on non-compete and trade secret considerations from an international perspective. Specifically, the webinar involved a discussion of non-compete and trade secret issues in Europe, Australia, and China compared to the United States. This 90-minute webinar provided valuable insight for companies who compete in the global economy and must navigate the legal landscape in these countries and ensure protection of their trade secrets and confidential information, including the effective use of non-compete and non-disclosure agreements.

International

One size does not fit all. Requirements for enforceable restrictive covenants vary dramatically from jurisdiction to jurisdiction. Bearing in mind non-compete covenants 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. In addition, employers should take advantage of other contractual and/or tactical mechanisms as a “belt-and braces” approach, such as, clawbacks and forfeiture of deferred compensation (where permitted), use of garden leave provisions, and strategic use of forum selection and choice-of-law provisions.

Employers should also take practical measures to protect their 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

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.

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 enter into a confidentiality agreement to strengthen the protection of the company’s data post-termination. Unlike non-compete covenants, a confidentiality clause does not require any financial compensation and can be unlimited in time and scope, if justified by the nature of the confidential information to protect.

United Kingdom

Restrictive covenants are potentially void as an unlawful restraint of trade and are therefore only enforceable if they go no further than is necessary to protect legitimate business interests. 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. geographical scope) and is specific to the commercial environment. Careful drafting is key especially given the unforgiving nature of the English Courts when it comes to poor drafting even if the intention of the parties is obvious, an unclear clause could be struck out, rather than redacted. Employers should 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” 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. In addition, employers should also physically protect their confidential information (e.g. encrypting data, installing passwords, secure storage, etc.) and seek to retain control of it to reduce and limit unwanted disclosure and misuse. Physical security can be a more effective and less costly approach in the long-term.

Australia

It is possible to protect an organization’s confidential information, customer or client connections, trade secrets and other proprietary interests from inappropriate use by former employees in Australia. To do this detailed consideration is required of the employee’s role and responsibilities and we as their personal situation. Further, protection must not only be included in the written terms of employment but also employed at a very practical level in the business, for example, by password protecting documents, limiting access to confidential information to those who ‘need to know’ and by expressly reminding employees in different forms about the importance of certain information and relationships to the business and their related obligations.

Protecting Confidential Information and Client Relationships in the Financial Services Industry

The sixth webinar of the year, led by Scott Humphrey, Jason Stiehl and Rebecca Woods, focused 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.

  • 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.
  • Use of cloud-based services is increasing, including in the financial services industry. This creates different risks for protecting trade secrets with potential theft, exposure, or loss from cloud providers, hackers, and rogue or sloppy employees. A comprehensive and preventative slate of measures should be considered in order to ensure protection from each of these threats and to manage and mitigate the consequences of a compromise of protected information. “Analog” protections, such as confidentiality agreements, employee training, and basic security safeguards remain relevant. “Cloud” protections should be added, however, and include maximizing technology-based security features, negotiating savvy and strong vendor agreements, and obtaining properly-scaled cyber-insurance coverage. The compromise of proprietary information that includes personal information may trigger federal and/or state breach notification obligations.

Ins and Outs of Prosecuting and Defending Trade Secret Injunction Cases

In the seventh installment, Justin K. Beyer, Dawn Mertineit, and James Yu discussed practical steps employers can take to protect trade secrets during an employee’s employment and after, best practices employers should take upon discovering or suspecting that an employee has misappropriated its data, best practices employers should take in onboarding a competitor’s former employee to minimize the likelihood of being sued, and strategic considerations when faced with defending a trade secret misappropriation case.

  • Employers can best protect their trade secrets by instituting robust training, policies and procedures aimed at educating its work force as to what constitutes confidential information and that this information belongs to the employer, not the employee. By utilizing confidentiality, invention assignment, and reasonable restrictive covenants, as well as implementing onboarding and off-boarding protocols, educating employees on non-disclosure obligations, educating employees on that data which the employer considers confidential, clearly marking the most sensitive data, and restricting access to confidential information, both systemically and through hardware and software blocks, employers can both educate and prevent misappropriation.
  • If an employee voluntarily resigns his or her employment with the company, the employer should already have in place a specific protocol to ensure that the employee does not misappropriate company trade secrets. Such steps include questioning the employee on where he intends to go, evaluating whether to shut off access to emails and company systems prior to the expiration of the notice period, requesting a return of company property, including if the company utilizes a BYOD policy, and reminding the employee of his or her continuing obligations to the company. Likewise, companies should have robust onboarding policies in place to help avoid suit, such as attorney review of restrictive covenants, offer letters that specifically disclaim any desire to receive confidential information from competitors, and monitoring of the employee after hire to ensure that they are not breaching any confidentiality or non-solicitation obligations to the former employer.
  • If a company finds itself embroiled in litigation based on either theft of its trade secrets or allegations that it either stole or received stolen trade secrets, it is important to take swift action, including interviewing the players, preserving the evidence, and utilizing forensic resources to ascertain the actual theft or infection (if you are on the defense side). Companies defending against trade secret litigation also need to analyze and consider whether an agreed injunction is in its best interests, while it investigates the allegations. These types of cases tend to be fast and furious and the internal business must be made aware of the impact this could have on its customer base and internal resources.

Protecting Trade Secrets: The Current Landscape, Top Threats, Best Practices for Assessing and Protecting Trade Secrets, Proposed Legislation and Future Scenarios

In our eighth installment, Robert B. Milligan, Daniel Hart, along with the CREATe.org’s CEO Pamela Passman and Marissa Michel, the Director in PriceWaterhouseCoopers’ Forensic Services Group, took a rigorous look at the issue or trade secret theft and discussed insights from a recent PwC – CREATe.org report: Economic Impact of Trade Secret Theft: A Framework for Companies to Safeguard Trade Secrets and Mitigate potential threats.

  • Theft of trade secrets poses a substantial threat to companies throughout the world and will likely remain a significant challenge in the next 10-15 years as companies face increasing threats from competitors, malicious insiders, nation states, transnational organized crime, and hacktivists.
  • Companies should carefully assess their existing trade secrets portfolio and the steps needed to protect their trade secrets by following a detailed and comprehensive 5-step framework: (1) identifying their trade secrets, (2) assessing the threats to their trade secrets portfolio and possible exposures, (3) analyzing the relative priorities of their trade secrets to assess which trade secrets require the highest level of protection, (4) assessing the likely economic impact that would be caused by a theft of trade secrets, and (5) secure the trade secrets portfolio by implementing a management system (including policies, protocols, training, and other measures across the organization).
  • Effective protection of trade secrets requires a coordinated and deliberative effort across all business units in a company, including IT, HR, legal, and other business leaders. The only way to effectively protect a company’s trade secrets portfolio is to carefully analyze the threats to the company’s trade secrets and thoughtfully develop a comprehensive and customized strategy with buy-in from all stakeholders across the organization.

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

The ninth webinar this year, presented by Robert B. Milligan, James D. McNairy and D. Joshua Salinas, 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.

  • 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 non-compete 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.

Protecting Trade Secrets and Intellectual Property in Business Transactions

In the final installment of our 2014 Trade Secrets Webinar Series, Seyfarth attorneys Michael Baniak and Randy Bruchmiller focused on considerations involving protecting trade secrets and intellectual property in business transactions, including, mergers and acquisitions, joint ventures and other collaborative arrangements.

  • The protection of intellectual property is critical in joint venture and other agreements in order to protect what, many times, is some of the most important assets of the company. These protections may include protecting the confidentiality of the information and addressing what rights each party will have in the intellectual property after the transaction or venture.
  • Companies should protect their trade secrets at every level of the employee hierarchy. Executives and high-level employees usually have employment agreements that address confidentiality and the handling of trade secret information. Mid-level managers and lower level employees are often over-looked. It is important to have all employees enter into confidentiality agreements and, in many cases, intellectual property assignment agreements.
  • Regardless of what protections are put in place, it is very important to be aware of law changes in the states where the company has employees and to revise agreements to address any changes in the law.

2015 Trade Secret Webinar Series

Beginning in January 2015, we will begin another series of trade secret webinars. The first webinar of 2015 will be “2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law.” To receive an invitation to this webinar or any of our future webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here.

Seyfarth Trade Secrets, Computer Fraud & Non-Compete attorneys are happy to discuss presenting similar presentations to your groups for CLE credit.

Michael Wexler is Chair and Robert Milligan is Co-Chair of the Trade Secrets, Computer Fraud & Non-Compete Practice Group. If you have any questions, please contact Michael Wexler at mwexler@seyfarth.com /(312) 460-5559, Robert Milligan at rmilligan@seyfarth.com /(310) 201-1579, the Seyfarth Shaw attorney with whom you work or any Trade Secrets, Computer Fraud & Non-Compete attorney on our website (www.seyfarth.com/tradesecrets). You may also access our blog, Trading Secrets, at www.tradesecretslaw.com.

Arizona Supreme Court Holds that UTSA Does Not Preempt Common Law Claims for Misuse of Confidential Information That Is Not a Trade Secret

Posted in Trade Secrets

The nineteenth century English jurist Lord Ellenborough once observed that “it is difficult to struggle with the common law.”  Kerr v. Willan, 171 Eng. Rep 570 (K.B. 1817).  Nearly two centuries later, struggling with the common law is still a formidable task – especially in cases involving claims of trade secrets misappropriation under the Uniform Trade Secrets Act (“UTSA”).

The UTSA, which has been enacted in one form or another by all but two states, provides a statutory remedy for trade secrets misappropriation.  Like the version of the UTSA enacted by other states, Arizona’s version of the UTSA, the Arizona Uniform Trade Secrets Act (“AUTSA”), contains a provision broadly providing that the law “displaces conflicting tort, restitutionary, and other laws of this state providing civil remedies for misappropriation of a trade secret.”  A.R.S. § 44-407(A).  Also like the version of the UTSA enacted by other states, the AUTSA includes an important exception to this broad preemption provision:

This chapter does not affect:

1. Contractual remedies, whether or not based on misappropriation of a trade secret.
2. Other civil remedies that are not based on misappropriation of a trade secret.
3. Criminal remedies, whether or not based on misappropriation of a trade secret.

A.R.S. § 44-407(B).

These provisions are straightforward when a plaintiff sues for misappropriation of information that is clearly a “trade secret” as defined by the AUTSA.  In those cases, the AUTSA is the plaintiff’s sole remedy (other than criminal and contractual remedies) and the plaintiff cannot bring common law claims (such as claims for unfair competition, conversion, or unjust enrichment) for misappropriation of the same information.  But what happens when a plaintiff sues for misappropriation of both “trade secrets” and confidential information that does not qualify as a “trade secret” under the AUTSA?  Since the plaintiff cannot assert an AUTSA claim for misappropriation of run-of-the-mill confidential information that does not qualify for protection as a trade secret, is the plaintiff free to assert common law claims for misappropriation of that run-of-the-mill confidential information?  Or is the plaintiff simply out of luck?

Courts throughout the country have grappled with this question since the UTSA was first adopted.  Not surprisingly, courts have reached different opinions on the question.  Courts in several states have held that the UTSA should be read broadly to preempt all claims related to the misappropriation of information, regardless of whether or not the information falls within the definition of a trade secret.  Conversely, courts in other states have concluded that the UTSA preempts only claims for misappropriation of “trade secrets,” as defined by the UTSA, and leaves available all other remedies for the protection of confidential information that is not a trade secret.

With its recent decision in Orca Communications Unlimited, LLC v. Noder, 337 P.3d 545 (Az. 2014), the Arizona Supreme Court joined this latter group and held as a matter of first impression that the AUTSA does not displace common law remedies for misappropriation of confidential information that does not qualify as a trade secret.

In that case, Orca Communications Unlimited (“Orca”), sued its former employee, Noder, for unfair competition after Noder left Orca to start a competing business.  In its complaint, Orca alleged that, through her employment with Orca, Noder had “learned confidential and trade secret information about Orca,” including  “Orca’s business model, operation procedures, techniques, and strengths and weaknesses,” and that she intended to “steal” and “exploit” that information to gain a competitive advantage for her new company.  After Noder filed a motion to dismiss, the trial court dismissed Orca’s unfair competition claim, reasoning that the AUTSA preempted “common law tort claims arising from the alleged misuse of ‘confidential information,’” even as to information “not asserted to rise to the level of a trade secret.” On appeal, the Arizona Supreme Court disagreed and reversed the trial court’s decision.  Noting the split of authority on the scope of the UTSA’s preemption of common law remedies, the court based its decision on the express language of the AUTSA cited above and observed:

On its face, § 44-407 displaces only conflicting tort claims for “misappropriation” of a “trade secret,” terms AUTSA specifically defines, A.R.S. § 44-401(2), (4), and leaves undisturbed claims “that are not based on misappropriation of a trade secret,” id. § 44-407(A), (B)(2). Nothing in this language suggests that the legislature intended to displace any cause of action other than one for misappropriation of a trade secret.

Moreover, the court noted that Noder’s argument was inconsistent with the “well-established principle” that “[i]f the legislature seeks to preempt a cause of action, the law’s text or at least the legislative record should say so explicitly” and that “[a]bsent a clear manifestation of legislative intent to displace a common-law cause of action, we interpret statutes with every intendment in favor of consistency with the common law.”  Accordingly, because the text of the AUTSA “creates reasonable doubt about the legislature’s intent regarding displacement of common-law claims that do not involve trade secrets as defined in AUTSA,” the court concluded that the trial court erred in dismissing the unfair competition claim to the extent that it was premised on misappropriation of confidential information that is not protected by the AUTSA.

The Arizona Supreme Court’s decision in Orca illustrates a significant trend in trade secrets litigation in recent years: as an increasing number of states adopt the UTSA, courts throughout the country increasingly must consider how the UTSA impacts existing common law remedies,  As reflected by the split of authorities that the Arizona Supreme Court cited in Orca, courts are literally all over the map in how they answer this question.  Since interpretation of the UTSA (as enacted by each state) is a matter of state law, it is unlikely that a consensus will be reached on this issue anytime in the near future.  And although creation of a federal civil cause of action for trade secrets misappropriation appears increasingly likely, current proposals in Congress provide that any federal civil action will not preempt state law.  Assuming that Congress does not completely preempt state law trade secrets law, the split of authorities among state courts will likely continue even if a federal trade secrets law is passed.

Given the lack of uniformity on this issue, employers should stay abreast of how courts are interpreting the UTSA or other trade secrets law in the jurisdictions where they do business.  For a quick reference on how your jurisdiction stacks up on trade secrets protection, refer to our 50 State Desktop Reference and contact a Seyfarth Shaw trade secrets lawyer.

USPTO To Host Trade Secret Symposium

Posted in Legislation, Trade Secrets

The U.S. Department of Commerce’s Patent and Trademark Office (USPTO) will host its first Trade Secret Symposium on Thursday, January 8, 2015, at USPTO Headquarters in Alexandria, Virginia. The symposium will provide an opportunity for members of the public to hear from representatives of academia, government, legal practice and industry on important trade secret issues facing innovators today.

The panels will touch on a variety of topics, including legislative proposals regarding trade secret protection, the challenges to estimating losses due to trade secret theft, the intersection of patents and trade secrets, issues in civil litigation involving trade secrets, international considerations, and the response to trade secret theft in the U.S.  The schedule will allow time for questions from the audience.

The symposium will be held at the United States Patent and Trademark Office, Madison Building, Madison Auditorium South, 600 Dulany Street, Alexandria, Virginia  22314.  The symposium will begin at 9:00 a.m. and end at 3:00 p.m.  The agenda will be available a week before the symposium on the USPTO Web site, www.uspto.gov/.

Registration is available at www.uspto.gov/ip/init_events/trade_secret_symposium.jsp.  Attendees may also register at the door.  Attendance is free.

Further information about the symposium may be found in the Federal Register Notice.

No Stick Without a Carrot: UK Court Refuses to Enforce Post-Employment Restrictive Covenants

Posted in Restrictive Covenants

The recent decision of the High Court in Re-use Collections Limited v. Sendall & May Glass Recycling Ltd. serves as a useful reminder for employers: restrictive covenants introduced during the employment relationship (rather than at the point of hiring) require specific consideration if they are to be enforceable. Under UK law, changes to employment terms require consideration if they are to be relied on. The fact the employee keeps their job does not amount to consideration, unless the employee would genuinely have been dismissed if they did not agree. UK law would only rarely justify termination for failure to agree new post-termination restrictions.

It is good practice to periodically review restrictive covenants, to reflect the latest UK case law and any changes to the employee’s role or the business.  To give the best chance of enforcing restrictions, employers should however take care to link any new covenants to some form of benefit for the employee. This can be monetary (e.g. linking the new restrictions to pay review) or other benefit (e.g. a promotion) for existing employees.  In the instant case, the continued employment of the employee was not considered a benefit, as there was no suggestion that the employee would have been dismissed if he refused to agree to the covenants.

NLRB “Deletes” Employer Email Rule

Posted in Cybersecurity, Privacy

Until December 11, employers thought that they owned their email systems and could limit their use to company business.  On that day, a divided National Labor Relations Board (“NLRB”) ruled “not so.”  In Purple Communications, 361 NLRB No. 126 (Dec. 11, 2014), the NLRB ruled that employees who have access to an  employer’s email system as part of their job generally may, during non-working time, use the email system to communicate about wages, hours, working conditions and union issues.  The NLRB reached this conclusion notwithstanding the fact that Purple Communications has a rule providing that its email system was to be used for “business purposes only.”  It is expected that the NLRB’s ruling will be challenged in the federal courts.

Specifically, the NLRB ruled that employees with access to company email can use company email systems for union organization and Section 7 protected activities.  The ruling overturned the NLRB’s 2007 decision in Guard Publishing v. NLRB, (571 F.3d 53 (D.C. Cir. 2009)) (“Register Guard”) which held, in relevant part, that employees have no statutory rights to use their employer’s email systems for labor organization purposes or discussions about wages or other workplace issues.  The Purple Communications ruling is the result of a case brought by the Communications Workers of America union (“the Union”) after it failed in its attempt to organize employees of a company that provides interpreting services for the deaf and hard of hearing.  The Company, for its part, had an “Internet, Intranet, Voicemail, and Electronic Communication Policy” that allowed the use of company owned electronic equipment and systems, including its email system, for “business purposes only.”  The Company claimed that its “business purposes only” restrictions for company email use were aimed at reducing workplace distraction.  The Union argued, on the contrary, that the Company’s prohibition of its employees’ use of company email for non-business purposes and on behalf of organizations not associated with the company interfered with the Company’s employees’ Section 7 rights.

As anticipated, the NLRB sided 3-2 with the Union; the three Democratic appointees voting in favor of what many will view as an unprecedented taking of private, employer property. The two Republican appointees filed vigorous dissents.   The NLRB held that Section 7 statutorily protected communications (e.g., communications about labor organizations, wages or other workplace issues) between employees on nonworking time must be permitted by employers that have chosen to provide employees email accounts hosted on the employer’s email servers.  In the ruling, the NLRB stated that Register Guard initially got the issue wrong because it undervalued employees’ Section 7 rights and placed too much emphasis on employers’ property rights.  Additionally, the majority opined, Register Guard incorrectly analogized company email to company-related equipment (e.g., bulletin boards, copy machines, public address systems, etc.).  The NLRB previously determined in an unrelated case that employers could place restrictions on company-related equipment, given its physical size and content limitations.  But, for purposes of the current case, the NLRB concluded that this analogy “inexplicably failed to perceive the importance of email as a means by which employees engage in protected communications.”  Moreover, the majority noted that since Register Guard was decided seven years ago, the importance of email as a means for communication has only increased, further intensifying the error of the Register Guard decision.

The Purple Communications ruling, of course, turns Register Guard, on its head.  However, the NLRB attempted to make its ruling seem more palatable by proffering several caveats in its general repudiation of Register Guard.  First, the Purple Communication ruling applies only to employees who already have been granted access to an employer’s email system in the course of their work.  Accordingly, the ruling does not require employers to provide employees access to the employer’s email system in the first place.  Second, employers can still ban all non-work-related use of email—including Section 7 email use on nonworking time—if the employers can demonstrate that special circumstances make the ban necessary to maintain “production or discipline.”  Additionally, absent justification for a total ban of non-work related email on non-working time, employers may still limit employees’ use of the employer’s email system as long as the limitations are applied uniformly and are necessary to maintain “production and discipline.”  Unfortunately, the NLRB stated that the circumstances in which a ban would be justifiable would be “rare.”

In a further effort to attempt to placate the anticipated employer reaction to the decision, the majority also stated that its ruling did not apply to non-employees, and that employers could lawfully monitor employee email use as long as doing so fell within the ordinary scope of its email system monitoring polices. This effectively means that employers may not increase its monitoring during a labor “organizational campaign” or “focus its monitoring efforts on protected conduct or union activists” or otherwise enhance their monitoring efforts to stymie protected activity.  But, employers may continue to tell their employees that it monitors, or at least reserves the right to monitor, computer and email use for legitimate business reasons.  Further, the ruling does not change the general rule that employees have no expectation of privacy when they utilize their employer’s email systems.  Thus, even though employees’ use of their employer’s email systems for Section 7 purposes is now protected, employers can still monitor their employees’ use of the email system and also advise employees’ that they are doing just that.

Finally, regardless of the far reaching impact of its decision, the NLRB did note that its Purple Communications decision would not prevent an employer from establishing uniform and consistently enforced restrictions.  These restrictions could include, for example, prohibitions on large attachments or audio/ video segments, if the employer could demonstrate that, left unregulated, the employee actions would interfere with the email system’s efficient functioning.

The upshot of the Purple Communications ruling is that employers should review their email system policies.  In some cases, employers may want to eliminate email system usage by employees whose jobs do not require the use of email.  Otherwise, employers need to ensure they apply their email system policies, including monitoring, uniformly and consistently.  Finally, it never hurts to very clearly remind employees that they have no expectation of privacy when they use company email systems—even if they are engaging in Section 7 protected activities.

While some employers may modify their rules that the email system is to be used for business purposes only to read that “With the exception of communications regarding wages, hours, working conditions and unions, our email system may be used only for business purposes,” other employers may wait to see if the federal appellate courts embrace this departure from decades of NLRB and judicial precedent.

Webinar Recap! Protecting Trade Secrets and Intellectual Property in Business Transactions

Posted in Trade Secrets

We are pleased to announce the webinar “Protecting Trade Secrets and Intellectual Property in Business Transactions” is now available as a podcast and webinar recording.

In Seyfarth’s ninth installment of its 2014 Trade Secrets Webinar series, Seyfarth attorneys focused on considerations involving protecting trade secrets and intellectual property in business transactions, including, mergers and acquisitions, joint ventures and other collaborative arrangements.

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

  • The protection of intellectual property is critical in joint venture and other agreements in order to protect what, many times, is some of the most important assets of the company. These protections may include protecting the confidentiality of the information and addressing what rights each party will have in the intellectual property after the transaction or venture.
  • Companies should protect their trade secrets at every level of the employee hierarchy.  Executives and high-level employees usually have employment agreements that address confidentiality and the handling of trade secret information.  Mid-level managers and lower level employees are often over-looked.  It is important to have all employees enter into confidentiality agreements and, in many cases, intellectual property assignment agreements.
  • Regardless what protections are put in place, it is very important to be aware of law changes in the states where the company has employees and to revise agreements to address any changes in the law.

Beginning in January 2015, we will begin another series of trade secret webinars. The first webinar of 2015 will be “2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law.” To receive an invitation to this webinar or any of our future webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here.

Court Thwarts Employer’s Effort To Block Vested Profit-Sharing Plan Participant from Obtaining Employment with a Competitor

Posted in Non-Compete Enforceability, Trade Secrets

Other than to protect good will or trade secrets, a non-compete provision intended to prevent a former employee from acquiring an interest in, or becoming an officer or director of, a competitor of the ex-employer may not be enforceable.

Summary of the case:  A stand-alone agreement executed by employee-participants vested in their employer’s profit-sharing plan contained an unusual non-compete provision.  It prohibited participants, for five years after termination, from owning or becoming an official of a “similar” trade or business located within 25 miles of the employer’s facility in Columbus, Nebraska.  A participant resigned his employment and sought from a Nebraska state court a declaration that the provision was an unreasonable restraint.  The trial court entered the requested judgment order, and the employer appealed.  A few weeks ago, the Nebraska Supreme Court affirmed.  Gaver v. Schneider’s O.K. Tire Co., 289 Neb. 491 (Nov. 14, 2014).

The covenant.  The express purpose of the non-compete provision was to assure that profit-sharing plan participants did not use plan benefits “to the detriment of the Employer.”  Participants were permitted to become mere employees of a competitor but not to be officers, directors, or owners of a financial interest. 

The decision below.  The trial court reasoned that the provision would prevent ex-employees from engaging in any form of competition.  In that court’s view, the covenant provided greater protection to the employer than was necessary.

The decision on appeal.  The appellate tribunal affirmed.  It held that while an employer may legitimately seek to preserve its good will and confidential information, that was not the goal of this restrictive covenant.  Instead, it was intended to limit the use employees could make of their own funds, earned and already received. 

Takeaways.  This decision conceivably could have broad implications for future lawsuits involving non-competes and profit-sharing plans at least in Nebraska, but more likely it will be limited to its peculiar facts.  For example, the appellate tribunal declined to decide whether the employer could have enforced the non-compete provision if it had been included in the profit-sharing agreement rather than in a stand-alone document.  Nor did that court state whether what it called the “time and space” of the non-compete, five years and 25 miles from the employer’s place of business, were valid (however, the court did include a citation to a Nebraska deferred compensation case holding that a “4- to 5-year time restriction contained in [a] forfeiture-for-competition clause” was unreasonably long).  Finally, there was no ruling as to the meaning, much less the legality, of the prohibition’s purported scope (restrictions applicable to businesses “similar to” that of the employer).

California Court Extends Protections To “Silent Whistleblowers”

Posted in Practice & Procedure, Trade Secrets

Employers, although contractually free to terminate the employment of at-will employees for any reason, at any time, cannot dismiss an employee in violation of public policy. A prime California public policy is that employers cannot retaliate against whistleblowers—individuals who have reported suspected unlawful employer conduct. In January 2014, the Legislature expanded the general whistleblowing statute, Labor Code section 1102.5, to prevent employers from taking retaliatory action in a belief that “the employee disclosed or may disclose” relevant information.

On November 21, 2014, in Diego v. Pilgrim United Church of Christ, the California Court of Appeal clarified that Section 1102.5, even in its pre-amended version, forbids employers to terminate “perceived whistleblowers,” even if that belief is mistaken.

The Facts

Cecilia Diego worked as an assistant director of Pilgrim United’s preschool. Diego claimed that a coworker had contacted the Licensing Division of the California Department of Social Services to report a foul odor in a classroom and inadequate sand beneath the playground equipment. The Licensing Division then conducted an unannounced inspection, but found no violations and issued no citations. Diego claimed that her supervisor then asked Diego why she had made the reports. Diego understood that her supervisor believed that she had been the source of the anonymous complaints to the Licensing Division, even though this was not the case.

Shortly after the inspection, Diego failed to appear at a meeting her supervisor had scheduled for her. Pilgrim United then discharged Diego for insubordination.

When Diego sued Pilgrim United, claiming that her termination was retaliatory and in violation of California public policy, the trial court granted summary judgment against her claim. The trial court found that Diego had failed to identify a significantly important public policy that was implicated by constitutional or statutory authority: Diego had failed to cite “any case holding that an employer’s mistaken belief that the employee reported a violation can support a claim for wrongful termination in violation of public policy.”

The Appellate Court Decision

The Court of Appeal reversed the trial court. It held that California’s public policy “applies to preclude retaliation by an employer not only against employees who actually notify the agency of suspected violations but also against employees whom the employer suspects of such notifications.” The Court of Appeal reasoned that the policy embodied by former Labor Code section 1102.5 (which did not expressly address an employer’s belief about whistleblowing) was not limited to employees who actually reported violations, because such a limitation would discourage employees from reporting violations in the first instance.

In addition, the Court of Appeal found that the alleged “insubordination” was not so well established, for purposes of summary judgment, to withstand Diego’s proof that the employer’s assertion of insubordination was a mere pretext for unlawful retaliation in the belief that Diego had been a whistleblower.

What Pilgrim United Means For Employers

California Labor Code section 1102.6 already provides that if an employee proves that the employee’s protected activity was “a contributing factor in the alleged prohibited action,” then the employer must show by “clear and convincing evidence that the alleged action would have occurred for legitimate, independent reasons even if the employee had not engaged in [protected] activities.” Pilgrim United reinforces the point that employers should document performance issues and disciplinary decisions to help support later decisions to discipline an employee.