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Trading Secrets

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

Update: Massachusetts Governor Proposes Sweeping Legislation Banning Non-Compete Agreements

Posted in Legislation, Non-Compete Enforceability, Trade Secrets

By Katherine Perrelli, Dawn Mertineit, and Erik Weibust

As we reported last week, Massachusetts Governor Deval Patrick has proposed sweeping legislation that would eliminate employee non-compete agreements in Massachusetts.  Now that we have had an opportunity to review the Governor’s bill, entitled “An Act to Promote Growth and Opportunity” (HB4045), we wanted to report back on its content and the implications should it pass.  While the bill includes a number of proposed changes and additions to existing laws on a variety of subjects, two main provisions are of particular interest here. 

Outright Elimination of Employee Non-Compete Agreements

First, as expected, the bill includes a provision that would invalidate all employee non-compete agreements in the Commonwealth. 

In our last post on the topic, we wondered whether the proposed legislation would apply solely to non-competes in the technology and life sciences industries, as this Boston Globe headline suggested, or if it would apply to a broader category of industries.  We can now report that the bill, as currently drafted, would invalidate all non-compete agreements in Massachusetts, with a few very limited exceptions, regardless of industry. 

This would bring Massachusetts in line with only California and North Dakota, the only other states that completely prohibit employee non-compete agreements. 

The limited exceptions to the proposed Massachusetts statute include non-competes entered into in connection with the sale of a business (or the sale of substantially all of the assets of a business), where the restricted party owns at least 10% of the business and received significant consideration for the sale, and non-compete agreements arising outside of an employment relationship. 

Additionally, the bill would not affect non-solicitation agreements (both those prohibiting solicitation of an employer’s customers and those prohibiting solicitation of employees), non-disclosure agreements, forfeiture agreements, or agreements not to reapply for employment to the same employer.  While the bill does not explicitly reference “garden leave” or “bench” provisions (where the employee is compensated not to compete during the restricted period), it would seem to bar such provisions, as they would presumably be deemed to prohibit or restrict an employee’s ability to seek or accept other employment.  This  is something the legislature should clarify and/or the courts may ultimately need to consider in interpreting the bill, should it pass. 

One of the most notable provisions of the bill, however, provides that the prohibition on non-compete agreements applies to agreements executed before the bill’s effective date.  This retroactive application is certain to impact negatively businesses in Massachusetts that currently use non-compete agreements to protect their legitimate business interests (e.g., protection of good will, trade secrets, and confidential information), and plan to do so until they are invalidated by statute.  Companies whose only protection of confidential and proprietary information or customer relationships consisted of non-compete agreements (which has never been advisable) will have to ensure that they have appropriate protections in place moving forward.

Adoption of the Uniform Trade Secrets Act

Second, the bill includes a provision adopting the Uniform Trade Secrets Act (“UTSA”)—making Massachusetts the 49th state to have adopted some version of the UTSA—and another provision that would repeal the current statutory provisions related to liability for trade secret misappropriation and injunctive relief (Sections 42 and 42A of Chapter 93 of the Massachusetts General Laws).    

Unlike the current statutory scheme in Massachusetts, the UTSA explicitly permits injunctive relief for actual or threatened trade secret misappropriation (whereas under the current scheme, actual misappropriation must be established). The UTSA also specifies that damages can include not only the actual loss caused by the misappropriation, but also unjust enrichment damages. 

Like the current statutory scheme, courts can award multiple damages for trade secret misappropriation:  The UTSA would allow awards of exemplary damages of up to twice the amount of actual loss or unjust enrichment, where the misappropriation is willful and malicious.

Another significant change that adoption of the UTSA would bring about is an attorneys’ fees provision, where the court would be permitted to award fees to the prevailing party if: (i) a claim of misappropriation is made or defended in bad faith, (ii) a motion to enter or terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists.  We have addressed the implications of a nearly identical provision in the Texas Uniform Trade Secrets Act here.  Notably, unlike the section of the bill eliminating non-competes, the section relating to the UTSA would not apply retroactively.

Now What?

While the UTSA may be welcomed by businesses operating in Massachusetts, we anticipate mixed responses to the proposed elimination of all non-competes (and its proposed retroactive application), with passionate arguments on both sides of the issue. 

Of course, the mere introduction of the bill does not ensure its passage and, as we have previously reported, other legislation regarding the enforceability of non-compete agreements in Massachusetts has been pending in one form or another in the state legislature since 2009.

Faced with incredibly disparate opinions in the business community, and the fact that Governor Patrick’s administration is in its final months, it may be that the bill in its current form  will wither on the vine. Instead, previous bill sponsors may continue their hard work to find a compromise between outright elimination of non-competes and a codification of the common law, which has evolved in the Commonwealth, to enforce those non-competes that are narrowly tailored and address the employer’s legitimate business needs to protect its good will, confidential information, and trade secrets. While some studies have suggested a connection between enforcement of non-competes and limited regional growth (for example, comparing the boom of Silicon Valley, where non-competes are unenforceable, to the more tempered success of the Route 128 area in Massachusetts), other studies have noted that a variety of factors distinguish these regions, such as cultural and structural differences between the East and West Coasts.  Accordingly, we anticipate that critics of this bill will point out that the Patrick administration’s claim that non-competes “are a barrier to innovation in Massachusetts” may not be quite that cut and dry. 

The bill was filed in the Massachusetts House of Representatives and has since been referred to the Joint Committee on Economic Development and Emerging Technologies.  We will keep you updated on this sweeping bill’s progress.

Third Circuit Signals Pro-Defendant Interpretation of the Computer Fraud and Abuse Act’s “Authorized Access” Provisions

Posted in Computer Fraud, Computer Fraud and Abuse Act, Cybersecurity, Espionage

On April 11th, the Third Circuit Court of Appeals reversed the conviction and 41-month prison sentence of a Computer Fraud and Abuse Act (CFAA) defendant, holding that he was tried and convicted in an improper venue.  U.S. v. Auernheimer, No. 13-1816 (3rd Cir. Apr. 11, 2014).  Though we usually do not post on procedural issues like these, we certainly post on substantive CFAA developments.

In footnote 5 of its opinion, the court said that the government failed to prove that defendant accessed the network “without authorization, or in excess of authorization” under New Jersey’s state computer-crime law.  That is the same language in the CFAA over which federal courts have been split for the last several years regarding employee liability for misuse of company files.  The Third Circuit’s footnote indicates that it is leaning toward the narrower, pro-employee / pro-defendant interpretation, espoused by the Fourth and Ninth Circuits, which prohibits CFAA liability for employees who merely abuse their otherwise legitimate access to company files.

The defendant in Auernheimer (a/k/a “Weev”) was convicted of “slurping,” which, at least in this case, involved the automated scraping of user email addresses from their login screens on their computer tablets.  Such slurping and scraping did not involve “hacking,” or circumventing a code- or password-based barrier to a user account or network.  Rather, the slurpers merely found loopholes in public-facing login screens, and gathered the username email addresses which the account providers unintentionally “published.”  In other words, slurping did not involve “accessing” an account “without authorization” from the provider or accountholder.  It merely involved scraping together information which was publicly available, albeit inadvertently from the provider’s and user’s standpoint.

After defendant and his “co-conspirator” gathered 114,000 email addresses and went to the press with this alleged “security flaw,” the New Jersey U.S. Attorney’s Office obtained a two-count indictment against them for conspiracy to violate the CFAA, and for violation of New Jersey’s computer crime statute.  Defendants objected to venue in New Jersey, citing the facts that they “slurped” from their homes in California and Arkansas, and that the cell network’s affected servers were located in Texas and Georgia.  The district court overruled defendants’ objections, and a jury eventually convicted them on both counts.  The district court sentenced Weev to 41 months in prison.

In reversing the conviction, the Third Circuit said that venue in criminal cases implicated constitutional rights, which were violated in this case by defendants’ being tried and convicted so far from home and where they allegedly broke the law.  In pointing out that neither defendant “accessed a computer in New Jersey,” the court noted that the government failed to prove that defendants’ slurping of email addresses amounted to access “without authorization, or in excess of authorization” under the state cybercrime law.  (P. 12, n. 5).  Defendants merely wrote a program which scraped together publicly available information, the access of which could not be unauthorized.

This reasoning indicates that the Third Circuit is leaning toward the pro-employee, pro-defendant interpretation of the CFAA’s “without authorization” and “exceeding authorization” provisions.  The Fourth and Ninth Circuit Courts of Appeals have adopted that approach, holding that the CFAA does not apply to employees who copy files and send them to or use them for a competitor.  The access itself was not unauthorized, even if the subsequent file use was.  Thus, no liability under the statute’s plain language.  The Fifth, Seventh and Eleventh Circuits take the opposite stance; that employees who use their otherwise authorized access to company computers can be liable under the CFAA for their subsequent misuse of the files on those computers.  Under normal agency law, employees have no authorization to use company files against the company.  Their accessing the company’s computers for that purpose, those courts held, violated the CFAA.

Granted, the dicta reasoning is not binding on district courts in the Third Circuit, or on the Third Circuit itself.  But the court’s interpretation of the very same CFAA language over which other federal courts have issued conflicting decisions for the past two decades again points up the need for the Supreme Court to resolve the split, or for Congress to amend the statute.  The Obama administration lobbied the Senate in 2011 to adopt the Fifth, Seventh, and Eleventh Circuits’ pro-employer position, but nothing yet.  As it stands, whether a disloyal employee may be prosecuted or sued under the CFAA depends on the federal circuit in which he or she works.

Breakfast Briefing: Protecting Your Most Valuable Assets — Trade Secrets, IP and Your Employees

Posted in Practice & Procedure, Privacy, Restrictive Covenants, Trade Secrets

Significant recent developments in Illinois and other states, as well as Congress, have changed the landscape of trade secret and restrictive covenant enforcement and protection. Understanding the impact of these changes, and the tools now available to employers for trade secret and restrictive covenant enforcement and protection, will help a company safeguard its most valuable assets and maintain its competitive advantage over competitors.

On Thursday, May 15th at 8:00 a.m. CST, the Chicago office is hosting a Breakfast Briefing entitled “Protecting Your Most Valuable Assets – Trade Secrets, IP and Your Employees.” Attorneys  J. Scott Humphrey, Molly M. Joyce, Jason P. Stiehl and Michael D. Wexler will discuss significant recent developments in restrictive covenant and trade secrets law, as well as “best practices” for protecting your company’s most valuable assets — trade secrets, intellectual property and employees.

The program will include a focus on key issues and practical responses, including:

  • A review and discussion of Fifield v. Premier — the recent Illinois Appellate decision that attempts to change longstanding Illinois law on the consideration that must be given to an employee in order to enforce a restrictive covenant. 
  • What to do when your new hire is bound by a restrictive covenant agreement.
  • Analysis of real-world situations where former employees have attempted to loot the company’s employees and confidential information and take them to a competitor.
  • Methods to protect confidential information and intellectual property.
  • How to respond when employees leave or take trade secret information.


There is no cost to attend but registration is required and seating is limited. Members of the general counsel’s office, HR professionals, corporate executives, risk managers, and directors are invited to attend.

 

 

Randy Bruchmiller Discussing the Finer Points of the Texas Uniform Trade Secrets Act

Posted in Practice & Procedure, Trade Secrets

The Texas Uniform Trade Secrets Act was signed into law in 2013 and applies to any misappropriation of trade secrets occurring on or after September 1, 2013.  Texas trial and appellate courts will be interpreting these new provisions of Texas law as new trade secrets cases work their way through the legal system.  Randy Bruchmiller weighs in on a couple of the new provisions that have already received considerable discussion in the legal community.

Breaking News: Massachusetts Governor Deval Patrick to Propose Legislation Eliminating Non-Compete Agreements in Certain Industries

Posted in Legislation, Non-Compete Enforceability, Trade Secrets

By Dawn Mertineit and Erik Weibust

The Boston Globe reported this morning that Massachusetts Governor Deval Patrick will propose legislation today that would eliminate non-compete agreements in technology, life sciences, and “other industries,” with his secretary of Housing and Economic Development, Greg Bialecki, stating that the administration “feel[s] like noncompetes are a barrier to innovation in Massachusetts.”  No word just yet on what “other industries” might include.

While Governor Patrick had previously been more tempered in his views on non-compete agreements, his current position supporting the outright elimination of such restrictive covenants is hardly surprising in light of comments made by Bialecki at a hearing before the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development just seven months ago.  At that hearing, on which we previously reported here, Bialecki foreshadowed today’s move, stating that the Patrick Administration supported the outright elimination of non-compete agreements, stating that such agreements “stifle movement and inhibit competition.” 

While the proposed legislation has not yet been filed, the Globe has reported that it is modeled after California’s ban on non-compete agreements, and that it will include a provision adopting the Uniform Trade Secrets Act (the “UTSA”).  As we have previously noted here, Massachusetts is currently one of only a handful of states that has not adopted the UTSA.

More details to follow once the proposed legislation is publicly available, including what other industries may be affected by the administration’s proposal. It is not often that you hear states wanting to be more like California particularly on labor and employment issues.

Jury’s $920 Million Trade Secret Misappropriation Verdict Vacated

Posted in Practice & Procedure, Trade Secrets

In a stunning per curiam ruling, the Fourth Circuit Court of Appeals last week vacated a judgment of nearly $1 billion, and a 20-year non-compete injunction, entered by an Eastern District of Virginia judge in favor of the DuPont Company.  The appellate tribunal held that the lower court committed prejudicial error by granting DuPont’s pre-trial motion in limine to bar defendant Kolon Industries from offering any evidence relating to an earlier lawsuit involving DuPont.  The case was remanded for a new trial before a different judge.  E.I. DuPont De Nemours & Co. v. Kolon Industries, Inc., No. 12-1260 (4th Cir., Apr. 3, 2014).

Summary of the case.  DuPont maintained that one or more former employees, working as consultants to Kolon, misappropriated DuPont’s trade secrets relating to the manufacture and marketing of “Kevlar,” a strong, synthetic fiber used, for example, in bullet-resistant armor.  Kolon contended that what the consultants disclosed was not confidential because it was part of the public record in prior trade secret misappropriation litigation DuPont filed against a company — not Kolon — that was, at the time, DuPont’s primary competitor with respect to “Kevlar.”

Granting DuPont’s in limine motion in the Kolon case, the trial court ruled that any reference to that prior lawsuit would be confusing and prejudicial.  The Court of Appeals reversed, holding that the trial judge’s “wholesale preclusion of any mention” of the earlier litigation was arbitrary, irrational, and an abuse of discretion.

Kolon also contended that the trial judge should have recused himself because he formerly had practiced law at the firm representing DuPont in both the earlier and this litigation.  That contention was rejected on appeal — 2-1 — as untimely but, in the exercise of its “supervisory powers,” the panel unanimously directed the Chief Judge of the district court to whom the case was remanded to assign a different jurist to conduct further proceedings.

Origin of the lawsuit.  Former DuPont employee Mitchell, who had extensive knowledge concerning the manufacturing and marketing of “Kevlar,” allegedly communicated repeatedly with Kolon about the product.  In the course of an FBI investigation of Mitchell’s conduct, he agreed to cooperate.  As a result, Kolon and several of its officers were indicted for theft of trade secrets, conspiracy, and obstruction of justice.  DuPont then sued Kolon.

The erroneous pre-trial evidentiary decision.  Kolon contended, in its defense to DuPont’s misappropriation claims, that at least some of the trade secrets at issue in this case were “strikingly similar” to details of the production process described in exhibits in the court’s public files relating to DuPont’s earlier lawsuit against the different competitor.  Moreover, one of Kolon’s witnesses was an expert witness for DuPont in the previous litigation.  Mention of the prior case seemingly was inevitable at the Kolon trial.  The trial judge granted DuPont’s motion in limine to bar any reference to the earlier lawsuit on the ground that no showing had been made that a trade secret at issue in the Kolon case actually was disclosed in the earlier trial.  The appeals court held, however, that the lower court applied “too stringent a standard for admissibility.  Under the circumstances [here], a ‘strikingly similar’ standard of relevance is enough” to allow the jury to decide whether the information retained the requisite confidentiality.

Takeaways.  Although the Fourth Circuit’s opinion is designated “Unpublished” and, therefore, “not binding precedent,” it seems to include carefully drafted guidelines regarding pretrial motions.  The appeals court recognized that streamlining a trial and “fostering the orderliness of evidentiary presentations of complicated issues cannot be doubted”  but cautioned that “a court is often wise to await the unfolding of evidence before the jury before undertaking to make definitive rulings on the likely probative value of disputed evidence.”  By the same token, a party who succeeds in obtaining an in limine instruction and who prevails at the subsequent trial may find that it was an exercise in futility.  Lengthy trials — the one between DuPont and Kolon lasted seven weeks — are costly, and a retrial adds expense.  So, litigants should think carefully before seeking to exclude a large volume of evidence.

Another lesson learned in this litigation is that confidential information disclosed in the course of a misappropriation trial thereafter may cease to qualify as confidential. 

Finally, the Fourth Circuit’s plurality and partially dissenting opinions relating to Kolon’s effort to disqualify the trial judge also may be instructive in a future case.  The plurality of the per curiam court denied disqualification, but all three judges voted nevertheless to remand for further proceedings before a different judge.  So, consideration might be given to requesting, as an alternative in a federal appellate court motion seeking a recusal on remand, the exercise of “supervisory powers” with respect to assignment of another trial judge.  Both requests seek substantially the same relief. 

Covert Cellular: Enough Protection for Trade Secrets?

Posted in Cybersecurity, Data Theft, Espionage, International, Trade Secrets

With the ever-increasing need to maintain communications with customers and your employees, mobile phones have become a requirement for business people. Spanish telecommunications company Geeksphone is targeting the business market with Blackphone, the first mobile phone that encrypts data transmissions. No one would argue against the value of increased wireless data security, but do CIA-style cellular phones really provide enough extra protection to justify the cost?

All cell phone transmissions are encoded in some way, which may be why we feel some level of comfort sending some of our most intimate personal information through mobile devices. We text our friends from Antarctica using satellite phone links, Instagram selfies from the beach, play games with people from all over the world while waiting for a flight (thank you, Alec Baldwin, for delaying a flight departure because of a “Words with Friends” obsession), purchase goods online (with our credit card numbers sailing through cyberspace) and catch up on email while driving (which may be against the law in some jurisdictions). If these modern conveniences are not continuously available from almost anywhere on the globe, some may consider that cellular service providers have somehow usurped our constitutionally guaranteed freedom of expression.

Business discussions also involve confidential data. If trade secrets are involved, reasonable measures, such as limiting dissemination and providing adequate safeguards on the restricted material, must be taken to maintain legally enforceable protection.

Thanks to Edward Snowden, though, we are aware that Big Brother is essentially recording every transmission from mobile phones. Senator Dianne Feinstein, German Chancellor Angela Merkel, and many Americans consider such data collection “spying.” More First Amendment violations.

In light of Mr. Snowden’s revelations, the use of cellular communications in business, especially when confidential information is involved, may fall short of the required security threshold.

And thus, a niche market for encrypted cellular communication has been born. With a Blackphone, whomever attempts to record your encrypted calls and texts will record unintelligible data bits instead of a verbatim transcript.

This extra level of protection may be worth the $629 per unit for your company. Indeed, an entire fleet of spy-thwarting cellular phones may be a wise investment if your executives routinely travel to parts of the world where someone in addition to the National Security Agency (NSA) may be listening—and this may be especially true if your company uses wireless networks to send confidential data or trade secrets.

But are Blackphone’s hyper-secrecy and extra cost really necessary for confidential data transfer? Possibly not. As another post on this blog reports, 2.5 Exabytes (computer jargon for “a whole bunch”) of information are created daily. That means the “c u @ movies @ 7” text you just sent is akin to a single needle in a billion billion haystacks on any given day, so your data is already pretty difficult to locate even without Blackphone’s extra level of encryption.

Still, all communications sent over wireless networks, even from a Blackphone, are broadcast in the open, and therefore subject to interception by unwanted prying eyes (and ears). Yes, Blackphone transmissions will be harder to interpret without the special secret decoder ring. And for additional privacy, the Blackphone automatically deletes the transmitted text or call details after the transmission is completed.  Therein lies the problem.

Whether Blackphones are company-provided or the personal property of employees, the legal standard courts may use could be, “Does encrypted, public dissemination of a company’s proprietary data represent ‘reasonable protection’?” Is additional encoding of a public broadcast considered enough of an access limitation?

Further, although the extra layer of encryption may be deemed a limited access, is providing untraceable back doors to your private data an adequate safety measure?

Data-encrypting cell phones such as the Blackphone may appear to be the perfect fit for your company’s needs, but do not be deluded into a false sense of security; Edward Snowden, after all, used the NSA’s own technology to disseminate the agency’s secrets. Remember that although Blackphone transmissions are difficult to trace, the data are sent somewhere. That means that somebody has the key to decode the data—and that might be your competition.

Indeed, the best course of action for your company might be to adopt a policy that prohibits confidential communications via cell phone, and restricts them to an environment that is secure.

If you absolutely must communicate verbally, or with drawings or formulae, you can always forego the phone and communicate face-to-face with your clients.

Because even with a Blackphone, the airwaves might just be your competitor’s (and a spy’s) best friend.

Webinar Recap! National Year in Review of Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law

Posted in Computer Fraud and Abuse Act, Non-Compete Enforceability, Social Media, Trade Secrets

By Michael Wexler, James McNairy and Joshua Salinas

We are pleased to let you know that the webinar “2013 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete and Computer Fraud Law” is now available as a podcast and webinar recording.

In Seyfarth’s first installment of its 2014 Trade Secrets Webinar series, Seyfarth attorneys reviewed noteworthy cases and other legal developments from across the nation this past year 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 their predictions for what to watch for in 2014.

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

  • 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 pleaded common law tort claims based on the theft of information.
  • The U.S. Supreme Court’s recent 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 trial 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 alone, violating employer computer usage or access policies did not violate the CFAA.

Please join us for our next webinar on April 24th, Employee Social Networking: Protecting Your Trade Secrets In Social Media.

Australia Non-Compete Primer: Protecting Your Business Interests Post-Employment

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

By Justine Turnbull and Cassie Howman-Giles

Given difficult economic times, protection of confidential information (including trade secrets) has become a greater priority for business in Australia. As a result, post-employment restraint litigation is increasingly common as employers attempt to protect their confidential information and restrain former employees from soliciting the business of their valued clients.

This note outlines the position in Australia regarding the legal enforceability of post-employment restrictions on conduct.

POST-EMPLOYMENT RESTRAINTS

Content

It is common in Australia for contracts of employment with executives and other key employees to contain terms restricting the activities of employees after the employment relationship ends, including prohibitions against: 

  • competition;
  • solicitation of clients, customers or suppliers; and
  • solicitation of employees or other workers.

The restraints are almost always limited to a defined restricted activity, a time period and an area of operation. These operational limitations are important when considering whether the restraints are legally enforceable.

‘Garden leave’ clauses, which allow an employer to instruct an employee serving their notice period to not attend work, are increasingly being viewed by courts as being equivalent to post-employment restraints.

Are restraints enforceable?

In Australia, post-employment restraints are generally unenforceable for public policy reasons unless they are reasonably necessary to protect the employer’s (or principal’s) legitimate business interests (usually confidential information or goodwill with customers or employees). There are two elements to be satisfied: firstly, the employer must have a legitimate interest in imposing the restraint and secondly, the scope of the restraint must be no wider than is reasonable necessary to protect that interest.

Legitimate business interests

Stifling competition from a former employee or preventing a valuable worker from being employed by someone else is not a legitimate interest. Recognised categories of legitimate interest include confidential information and customer or employee connections.

Reasonableness

In assessing the reasonableness of a restraint, a court will consider various factors including: 

  • types of activities restrained;
  • duration of restraint;
  • geographic coverage of restraint;
  • seniority and role of employee; and
  • whether consideration is provided in exchange for the restraint and, if so, the level of consideration.

Seniority and role of the employee are an important consideration when considering enforceability as they determine whether the employee:

  • had access to confidential information of the employer and/or customers;
  • were ‘customer facing’ and involved in building customer relationships; and
  • were the ‘human face’ of the business.

Enforceability of a restraint is determined at the time the restraint was agreed to (that is, in most cases, the time the employment contract was entered into).

Drafting restraints

Given the difficulty in determining whether a restraint will be found to be enforceable, ‘cascading clauses’ are often used to provide the court with a variety of options for the scope of the restrained activities, the period and the geographical coverage. Courts have a common law  power to delete the options so that the resulting clause is reasonable and enforceable (the ‘blue pencil test’).

In New South Wales, legislation empowers the Supreme Court of New South Wales to read down otherwise invalid restraints. This power is much broader than the common law power to simply sever certain options and can generally be relied on to obtain at least partial enforcement of a restraint in New South Wales.

Enforcement

The usual remedy sought by an employer when enforcing a post-employment restraint is an injunction, that is, an order of the Court restraining the employees from performing particular activities. The employer may also seek damages for any loss caused by a breach of the restraint.

 

With international offices in London, Shanghai, Melbourne, and Sydney, Seyfarth Shaw’s trade secrets, computer fraud, and non-competes practice group provides national and international coverage for companies seeking to protect their information assets, including trade secrets and confidential information, and key business relationships.  For more information on international trade secret and non-compete issues, please see our previous webinars When Trade Secrets Cross International Borders and Trade Secret and Non-Compete Considerations In Asia. We are pleased to announce that we will have  another international trade secrets and non-compete law update later this year with an Australia and EU focus. Follow the blog for more details.

Tips for Ensuring Your Competitors Do Not Steal the Valuable Fruits of Your Research and Development

Posted in Trade Secrets

By Katherine E. Perrelli and Erik W. Weibust

Every employer in the pharmaceutical industry is keenly aware of the need to ensure that a departing employee, a potential investor, or a business partner does not misappropriate the company’s valuable trade secrets.  If such valuable information falls into a competitor’s hands, they may use it to gain a significant market advantage.  Companies in the pharmaceutical industry face unique challenges because, while the fruits of their research and development are often protectable as trade secrets, companies are often required to communicate this valuable information to potential investors, partners, and governmental agencies, such as the U.S. Food and Drug Administration (FDA).  Because pharmaceutical companies spend an extraordinary amount of money on research to develop new products, understanding how much of this valuable information is protectable as a trade secret, and how best to protect such information, is key to the company’s success, regardless of whether its products are in early stage development or are well-established in the industry.  This article is the first in a series about protecting trade secrets and enforcing non-competition agreements in the pharmaceutical industry.

I. Trade Secrets Specific to the Pharmaceutical Industry

First we will address what kind of information you can protect and then we will explain how to protect it. 

Companies cannot protect information contained in patent applications and patents as trade secrets, because they must disclose that information publicly to the U.S. Patent and Trademark Office (PTO) and ultimately to the public at large.  However, there are many types of information at all stages of drug development, from the discovery phase through the commercial launch, that a company can protect as trade secrets.  Indeed, the most sensitive information is often developed early in the process, before the company can even request a patent.   

Early Research & Development.  In the discovery or pre-clinical phase, a company generates a great deal of useful information that it can protect as trade secrets.  Most of this information is intangible data, formulations, or processes, as opposed to tangible products.   This includes, for instance, a “vision plan” (i.e., brainstorming of possible drug candidates, plans of attack, etc.), data regarding which candidates are viable and which pathway to follow, and early manufacturing techniques that the company has considered.   

Product Development.  During the development phase, a company generally produces more tangible products, processes, and data.  For instance, during the clinical trials, a company can protect all of the following as trade secrets: lead candidate information, optimization data, bench trials, synthesis (organic or recombinant), formulations, safety and efficacy information, and clinical trial sites and data. 

Approval.  At the approval stage, a company can protect the following as trade secrets: FDA interactions, risk evaluation and management systems (REMS) data, current good manufacturing practices (cGMP), quality assurance and quality control (QA/QC), and ICH compliance.  While the Company will have to share much of this information with the FDA to obtain approval, as discussed below, it can nevertheless maintain its trade secret status. 

Post-Approval.  Following the approval of a new drug, the most sensitive information is generally commercial in nature, such as sales data, marketing plans, customer lists, general marketing feedback, cost of goods sold (COGS), supply chain information and integrity, sales forecasts, adverse drug events, new indications, life cycle management, and new plans for related development.    

II. Protecting Trade Secrets

Information and data from the early stages of new drug research and development is arguably the most sensitive, because its misappropriation can lead to the most severe consequences.  Specifically, a competitor could use misappropriated information to develop the same product and obtain patent protections before the original company even discovers that the information is missing.  This is particularly problematic if the company utilizing the misappropriated information has greater resources and can develop the drug more quickly.  Indeed, there are generally three motivations for misappropriating trade secret information during this early stage:  (1) to directly compete by racing to develop the drug first; (2) to indirectly compete by creating another drug candidate in the same therapeutic class or by creating a combination therapy; and (3) to apply for patent protection under the new “race to file” system and thereby block out the original developer from doing so.  Of course, information from the later stages is also highly important and must be protected, but that type of information—which is generally more commercial in nature—is less unique to the pharmaceutical industry, and there is not much commercial damage if the original company has patents in place. 

We recommend the following processes to our pharmaceutical clients in order to ensure that you protect your valuable trade secrets: Implement and enforce strict post-employment restrictive covenants (i.e., non-compete and non-solicitation agreements) and non-disclosure or collaboration agreements with third parties (i.e., potential investors and partners) (stay tuned for part 2 of this series).  In addition, you should create and disseminate internal and external policies and procedures (see part 3 of this series), including: 

  • Onboarding checklist and exit interview policies and procedures;
  • Confidentiality policies and procedures (including annual training programs and disciplining or termination of employees who improperly disclose or use confidential information);
  • Work from home policies and procedures;
  • Internal notebooks that are marked confidential and kept in secure spaces, password protected computers, or clean rooms;
  • USB usage policies and procedures;
  • Social media and internet usage policies and procedures; and
  • Cell phone usage policies.    

Similarly, you should consider hiring an outside professional to conduct annual or semi-annual trade secret audits to determine how easy or difficult it is to exfiltrate sensitive information.  You can even install mobile device management software that can protect sensitive information from being exfiltrated through mobile devices such as iPhones, and also permit the company to access and/or wipe company information if a mobile device is stolen or lost, or an employee leaves the company.  

Finally, you may still maintain trade secret status for information that you provide to the FDA despite your limited disclosure for regulatory purposes.  Federal regulations governing the FDA specifically exempt trade secret and confidential commercial or financial information from public disclosure by the FDA.  Likewise, the federal Freedom of Information Act provides that a federal agency, such as the FDA, may withhold information if it constitutes or contains trade secrets, and certain patent, trademark, and copyright regulations permit companies to redact trade secrets from public filings, subject to certain limitations.

Of course, the best way to ensure that trade secrets are not disclosed, intentionally or otherwise, is to define clearly what information constitutes trade secrets and what your expectations are as to how your employees and investors/partners will treat such information.  Moreover, you should only provide such information to those employees or potential investors/partners who need to know it, can be trusted, and are subject to strict post-employment restrictive covenants and/or non-disclosure agreements.  The Company should also have a commitment to, and culture of, enforcing these agreements and company policies, and ensuring that anyone giving access to trade secrets understands the serious consequences of disclosure.  This is not an easy task, but particularly in the pharmaceutical industry, where so much of a company’s fortunes can be tied up in its ideas and development plans, it is imperative that the company take pains to do this correctly.