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Trading Secrets

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

Trade Secret Protection: What are Reasonable Steps?

Posted in Cybersecurity, Data Theft, Practice & Procedure, Trade Secrets

PamelaPassman CREATe.org smAs a special feature of our blog –special guest postings by experts, clients, and other professionals –please enjoy this blog entry by Pamela Passman, President and CEO for the Center for Responsible Enterprise and Trade (CREATe.org)

-Robert Milligan, Editor of Trading Secrets

By Pamela Passman

Regional and national laws are increasingly focusing on the specific steps that companies should take to protect trade secrets. In the 1996 World Trade Organization (WTO) Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement, and in many countries’ laws, the definition of a trade secret includes the requirement that the owner or other controller undertake “reasonable steps” or “reasonable efforts” to protect the secrecy of its information. A “reasonable steps” requirement is also included in the draft EU Directive on the Protection of Undisclosed Know-How and Business Information (Trade Secrets) which, if adopted, would become part of the national legislation in all 28 EU member countries. New legislation proposed at the national level in the U.S. likewise has contained similar requirements.

In addition to implementing “reasonable steps” to prevent trade secret theft and misuse, taking such steps can also have crucial legal significance. Where the legal definition of trade secrets includes a “reasonable steps” or similar requirement, a court can find that a company’s information is not in fact a trade secret at all if such steps are not taken. Failing to take adequate precautions to protect such information thus can preclude a company from getting any legal redress if the worst happens and an unauthorized disclosure or use of the information does take place. Case in point: the failure of the MBL (USA) Corporation to inform employees “what, if anything, [the company] considered confidential” was one of the key failures that led the court to dismiss MBL’s case against its former employee.

What exactly are “reasonable efforts”? A new whitepaper by the Center for Responsible Enterprise And Trade (CREATe.org) offers insights into the evolving legal landscape, cases and recommendations for an effective trade secret protection plan. Here are some key takeaways:

  • Make sure agreements and policies are in place – and procedures as well. Many companies rely on nondisclosure and other agreements with employees and third parties – and the courts have looked favorably on these as evidence of “reasonable steps.” However, corporate policies – and equally important, procedures to ensure policies are being followed – are also critical. Companies that adopted procedures to implement key aspects of trade secret protection often prevail in lawsuits. These include procedures such as marking sensitive documents as confidential; segregating confidential information or processes into discrete parts so no single employee or vendor has full control; and conducting exit interviews that include the return of confidential information.
  • Identify, assess and manage risks. To protect trade secrets, you first need to identify, classify and assess potential risks to confidential technical and business information. Courts have reviewed whether material is included in a trade secret registry and if reasonable efforts have been made to keep the information confidential.
  • Put an information protection team in place. Trade secrets – which include information that ranges from customer lists and financial data to product prototypes, source code and unique know-how – often reside in many different parts of an organization. Putting together a cross-functional team headed by someone with overall control helps to ensure that adequate protections are in place throughout the organization, and provides the foundation for effective response in the event of trade secret misappropriation.
  • Extend physical and network security to address trade secret protection. New government regulations are increasingly insisting upon robust security systems for protecting trade secrets. Courts look at such measures as well. In Japan, courts determining the adequacy of secrecy measures have insisted, among other actions, that a company must “implement physical and electronic access restrictions” in order to be protected by Japan’s unfair competition rules protecting trade secrets.

It is important to note, however, that many IT and physical systems aren’t designed with protection of trade secrets or other particular intellectual property in mind. Companies need to take steps to ensure that their valuable trade secrets are identified and that security systems are designed with a specific objective to make them secure – through access control, technical measures, physical restrictions, monitoring and other actions. For example when the U.S. government attempted to prosecute a former computer programmer who had worked on the investment bank Goldman Sachs’s proprietary high-frequency trading platform, the trial court noted with approval the multiple electronic-security systems that Goldman had in place to protect such information. These included maintaining a firewall, monitoring employee use of internet sites, blocking access to certain websites, implementing pop-up banners that advised employees logging in to their computers of acceptable and prohibited uses, restricting access to firm computers, and restricting use of USB flash drives to only a few employees with administrative access.

  • Engage employees and third parties. In addition to agreements, companies need to inform and educate staff and third parties such as suppliers and other business partners about what is considered confidential and their role in protecting trade secrets.
  • Monitor and take corrective actions. Courts have looked favorably on companies that have approached trade secret protection in a systematic rather than an ad hoc fashion. Putting business processes in place and measuring and improving these over time offer companies a robust way to protect confidential information. In a case involving Aetna, the court looked favorably on the firm’s practice of employees signing nondisclosure agreements annually rather than just when starting. It is a good example of building employee awareness and monitoring to ensure that agreements are in place.

Courts have also examined the corrective actions that companies have taken against breaches. For example, the Pre-Paid Legal Services company found that its practice of taking corrective actions against trade secret breaches – sending cease and desist letters and entering into agreed injunctions against former employees who had misappropriated trade secrets – was helpful in winning its case against former employees and contractors who had used the company’s employee contact, performance and other confidential information to recruit other Pre-Paid staff.

Trade secrets are critical to virtually every modern company. To help mitigate the loss of proprietary and confidential information, and meet the “reasonable steps” requirement, it is vital for companies to put systems in place that embed trade secret protection in an ongoing and systematic way across an enterprise.

Pamela Passman is President and CEO of the Center for Responsible Enterprise and Trade (CREATe.org), a global nongovernmental organization helping companies prevent corruption and protect intellectual property. Prior to founding CREATe in October 2011, Passman was the Corporate Vice President and Deputy General Counsel, Global Corporate and Regulatory Affairs, Microsoft Corporation. 

U.S. Congress To Again Consider Private Right of Action for Trade Secret Misappropriation

Posted in Legislation, Trade Secrets

shutterstock_217832893On July 29, 2015, with bipartisan support, congressional leaders in both the House and Senate, including Senator Orrin Hatch (R-UT) and Representative Doug Collins (R-GA), introduced a bill to create a federal private right of action for the misappropriation of trade secrets.  The proposed legislation, titled the “Defend Trade Secrets Act of 2015” (“DTSA”), follows a failed attempt just last year to pass the “Defend Trade Secrets Act of 2014.”

Announcement of the proposed legislation was joined by a letter of support on behalf of the Association of Global Automakers, Inc., Biotechnology Industry Organization (BIO), The Boeing Company, Boston Scientific, BSA | The Software Alliance (BSA), Caterpillar Inc., Corning Incorporated, Eli Lilly and Company, General Electric, Honda, IBM, Illinois Tool Works Inc., Intel, International Fragrance Association, North America, Johnson & Johnson, Medtronic, Micron, National Alliance for Jobs and Innovation (NAJI), National Association of Manufacturers (NAM), NIKE, The Procter & Gamble Company, Siemens Corporation, Software & Information Industry Association (SIIA), U.S. Chamber of Commerce, United Technologies Corporation and 3M.  The joint letter expressed the need for a private right of action to supplement the existing Economic Espionage Act of 1996 (“EEA”), which only provides for criminal sanctions in the event of trade secret misappropriation.

If passed, the proposed DTSA will grant a private right of action for misappropriation of trade secrets under federal law.  The DTSA is largely consistent with the Uniform Trade Secrets Act (“UTSA”), which has been passed in some form in almost all states.  The DTSA defines “misappropriation” consistently with the DTSA, and provides for similar remedies, including injunctive relief, compensatory damages, and exemplary damages and the recovery of attorneys’ fees in the event of willful or malicious misappropriation.

The DTSA differs from the UTSA in several important aspects.  First, the DTSA allows for an ex parte seizure order.  A plaintiff fearful of the destruction or hiding of its trade secrets would be able to take proactive steps to recover its trade secrets prior to giving any notice of a lawsuit.  The proposed seizure protection goes well beyond what a court is typically willing to order under existing state law.  Second, the DTSA’s limitations period is five years compared to just three under the UTSA.  Third, the DTSA allows for the recovery of treble exemplary damages versus double under the UTSA.  Fourth, the DTSA contains no language preempting other causes of action that arise under the same common nucleus of facts, unlike the UTSA.  Finally, the DTSA allows for federal jurisdiction of a misappropriation claim, provided the plaintiff can demonstrate a connection between the trade secret and interstate commerce.  In sum, the DTSA provides significant measures for a plaintiff compared to the UTSA.

The DTSA offers significant protections to trade secret holders and will create a uniform legal framework across the United States.  Now, all stakeholders will need to wait and see whether the DTSA of 2015 is able to become law where prior legislative efforts failed.

Robert B. Milligan to Speak at 2015 ABA Annual Meeting on Trade Secret and Non-Compete Developments

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

Annual Website Left BannerJoin Seyfarth Trade Secrets and Non-Compete Co-Chair Robert B. Milligan at the 2015 ABA-IPL Annual Meeting in Chicago on July 30, 2015.  Robert will join expert panelists to discuss significant statutory changes to several jurisdictions’ laws regarding restrictive covenants and pending legislation proposed in additional jurisdictions over the past year, as well as the ongoing effort to federalize trade secret law. They will also discuss recent case developments regarding preemption, damages, consideration, and reasonable secrecy measures. The panel will also discuss how to effectively conduct trade secret investigations and how companies should protect trade secrets.  As trade secrets and non-compete laws continue to evolve from state to state in piecemeal fashion, companies should continually revisit their trade secrets and non-compete strategies in light of the evolving legal landscape and legislative trends. Lastly, the panel will release and provide highlights concerning the ABA Trade Secret Committee’s 2014-2015 Trade Secret Case Law Report. For more information and registration, click here.

No Economic Recovery Available For Breach Of A Non-Compete Set Forth In A Distributorship Agreement Which Bars Damages Awards

Posted in Non-Compete Enforceability, Practice & Procedure

shutterstock_155087132Where a freely negotiated contract between two sophisticated companies included a provision barring an award of monetary relief for breach of contract, the court will enforce the provision as written and award no economic damages.  CH2O, Inc. v. Meras Engineering, Inc., No. 45728-8-II (Wash. App. Court, July 21, 2015) (unpublished opinion).

Status of the Case

A non-exclusive distributorship agreement between CH2O, a California water treatment company, and Meras, a Washington State competitor, provided for CH2O’s sales of specified products to Meras for resale to certain of its existing customers.  The agreement’s non-compete clause prohibited sales by Meras of products similar to those made by CH2O but manufactured by its competitors.  Further, Meras was required to refer to CH2O inquiries regarding, and requests for, CH2O’s products from potential customers.  Section 9 of the agreement stated that neither of the parties would be liable to the other for economic damages arising out of a breach of the agreement.  CH2O sued Meras in a Washington state court, seeking economic damages for breach of contract, for allegedly selling products similar to CH2O’s products to CH2O’s customers.  The lower court granted summary judgment to Meras.  CH2O appealed.  A few days ago, the state’s appellate court affirmed.

CH2O’s Contentions

CH2O maintained that the lower court’s interpretation of Section 9 rendered other contractual obligations illusory.  For example, Section 6(a) obligated Meras to use its best efforts to sell the identified CH2O products to designated California customers.  Section 13 contained a force majeure provision, disclaiming liability of one contracting party to the other for events beyond the parties’ control.  Further, CH2O contended that the court’s interpretation of Section 9 was inconsistent with Section 18 which provided for an award of costs and attorneys’ fees for a prevailing party in a dispute concerning the agreement.  CH2O insisted that Section 9 only excluded one party’s liability to the other with respect to third party claims brought against one of them by, for example, customers.

The Ruling on Appeal

The appellate court agreed with Meras that Section 9 contained an express, unambiguous and universal waiver of the parties’ liability to each other for economic damages resulting from a breach of the agreement, regardless of what caused the damages.  But a lawsuit for breach of contract was not precluded so long as only noneconomic recovery — for example, asking for specific performance or a declaratory judgment — was sought.  Consistent with the court’s effort to reconcile Sections 9 and 18, it said that by means of Section 18 the parties carved out from the damages exclusion recovery of attorneys’ fees and costs for prevailing in a contract action seeking only equitable relief.

CH2O maintained that the court misconstrued the parties’ intent as to the meaning of Section 9.  Finding Section 9 to be unambiguous, the court declined to interpret it based on evidence outside the four corners of that section.  (Interestingly, however, the court went on to surmise that perhaps the reason for Section 9’s exclusion of monetary damages was that, as business partners, the companies “depend on each other’s financial stability to execute a successful business strategy.” )

Takeaways

Although Section 9 might appear to be strange, it left little room for interpretation.  The appeals court found that both companies engaged in drafting and negotiating their contract.  Therefore, the court concluded that Section 9 should be enforced precisely as written.  The lesson is that a party acts at its peril by assuming that a contract provision will be interpreted by a court to incorporate terms not actually included.

These two companies have litigated against each other before.  Meras’ employment of several CH2O’s employees, who allegedly were subject to non-compete agreements with CH2O, was the subject of Northern District of California court rulings in August 2012 and January 2013.  In that litigation, Meras and the employees sued in California, seeking a determination that the non-competes were void (separately, CH2O sued the employees in Washington to enforce the agreements).  The California federal court held that because the employees’ non-compete clauses required litigation in a Washington court construing the clauses under Washington (not California) law, the California lawsuit must be dismissed.  That holding was the subject of a Seyfarth Shaw blog in February 2013.

Upcoming Webinar: State Specific Non-Compete Oddities Employers Should Be Aware Of

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

WebinarOn Tuesday, August 18, 2015 at 12:00 p.m. Central, Kate Perrelli, Eddy Salcedo and Dawn Mertineit will present the sixth installment in our 2015 Trade Secrets Webinar Series. They will discuss 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.  As trade secrets and non-compete laws continue to evolve from state to state in piecemeal fashion, companies should continually revisit their trade secrets and non-compete strategies in light of the evolving legal landscape and legislative trends.

Topics will include:

  • Recent changes in Hawaii, Alabama, New Mexico, and Oregon;
  • The next wave of non-compete reform? Proposed statutory changes to restrictive covenant law in Massachusetts and Wisconsin, and the federal MOVE Act;
  • Not-so-recent but still important: unenforceability in California, Oklahoma, and North Dakota; other quirks in Louisiana, Alabama, New Hampshire, and Illinois;
  • The split amongst states regarding whether continued employment is sufficient consideration for non-compete agreements.

register

Cost: There is no cost to attend this program, however, registration is require 

If you have any questions, please contact events@seyfarth.com.

*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

Sales Of $8,000 Stemming From Trade Secret Misappropriation Results In Liability For $1.3 Million

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

shutterstock_112451030At a time when an ex-employee’s newly created company was subject to an injunction prohibiting misappropriation of his former employer’s supposed trade secret, the new company allegedly used that confidential information on a few occasions in the course of providing services.  The former employer sued.  Although the trial court found no violation of the injunction, that ruling was reversed on appeal, and the new company was ordered to pay $1.9 million to the former employer.  Analog Technologies Corp. v. Knutson, Case No. A14-1721 (Minn. App., July 13, 2015) (not for publication).

Summary of the case.  Shortly after leaving the employ of Analog, an electrical engineering company, Knutson formed Dimation, a competitor company.  Dimation allegedly used a trade secret process belonging to Analog for installing and repairing printed circuit boards.  Analog sued for misappropriation and initially was awarded $1.9 million.  The court also enjoined Dimation from using that process for three years.  After filing for bankruptcy, Dimation executed a confession of judgment.  The confession document contained an Early Payment Option (EPO).  Pursuant to the EPO, the judgment would be satisfied if $600,000 was remitted by a specified date, but the EPO would expire if (a) there was a default in payment, or (b) the injunction was violated.  Dimation paid as promised, but Analog rejected the final payment.  It sued Dimation, claiming the EPO was void because the injunction had been violated.  The trial court found no violation.  A few days ago, the Minnesota Court of Appeals reversed and awarded Analog the full $1.9 million judgment less the $600,000 already paid.   

The parties’ litigation. 

Analog I.  Analog’s first trade secret misappropriation lawsuit resulted in a 2009 judgment against Dimation for $1.6 million and attorneys’ fees.  In addition, that company was enjoined from further misappropriation for three years.  It filed for bankruptcy and then executed the confession described above.  Dimation also challenged the injunction in the Minnesota appellate court.  In 2011, that court substantially affirmed but remanded with instructions to clarify the injunction order.

Analog II.  On remand, the parties agreed to certain modifications of the injunction, but Dimation proposed still more.  In 2013, the trial court entered a new injunction in the form requested by Analog.  Dimation appealed on the grounds that Analog had no protectable trade secret and that the trial court had not complied in full with the appellate court’s remand instructions.  Late in the year, the 2013 trial court order was affirmed.

Analog III.  While Analog II was pending, Analog asked the lower court to find Dimation in contempt for violating the earlier injunction.  Dimation responded by requesting entry of an order to the effect that the EPO terms had been satisfied.  During an evidentiary hearing, Knutson testified that from April 2011 to February 2012, Dimation had made “at the most” 10 infringing sales amounting to $8,000.  The court held that Dimation did not violate the injunction and should not be held in contempt.  Analog appealed.  The Court of Appeals affirmed in part and reversed in part.

The ruling in Analog III. 

  1. Misappropriation. The lower court was reversed.  Dimation stressed that the lower court had found as a fact that Analog had failed to prove infringement of its supposed trade secret.  The appellate tribunal held that the finding clearly was erroneous.  Earlier decisions upheld the validity of Analog’s trade secret.  Knutson’s own testimony established a violation of the 2009 injunction order, an order which Analog I did not vacate or reverse.  Further, Dimation breached its contractual obligation (set forth in the confession of judgment) not to violate the injunction.
  2. Contempt. The lower court was affirmed.  Analog claimed that the lower court erred by refusing to find Dimation in contempt of the 2009 order.  The appellate court found no abuse of discretion.  It said that Dimation had been found to be in civil (not criminal) contempt, and that the purpose of civil contempt is remedial, not punitive.  Since the court’s decision in Analog III reinstated the original $1.9 million judgment, “finding Dimation in contempt would serve no further remedial purpose.”

Takeaways.  Dimation was held to have made the $8,000 in allegedly infringing sales during a period when it was prohibited by court order from making any.  By also contracting not to make those sales, Dimation gave Analog a second string to its bow: breach of contract.  Dimation seemingly speculated that (a) if it was sued for violating the injunction or breaching the contract, it could prove that Analog had no protectable trade secret, and (b) if that gambit failed, the miniscule amount of sales it had made would suffice to persuade a court not to find a violation that might result in a nearly $2 million judgment against Dimation.

The principal takeaway from the recent Minnesota Court of Appeals decision is that Dimation engaged in risky conduct.  Judges rarely are sympathetic towards parties that violate court orders while simultaneously appealing the issue of whether the order is valid.  Moreover, many court cases hold that violation of an injunction while it is in effect is inappropriate even if the injunction later is found to be unenforceable.

50 State Non-Compete and Trade Secret Desktop Reference

Posted in Non-Compete Enforceability, Trade Secrets

Seyfarth Offers 2015-2016 Edition of 50 State Desktop Reference:
What Employers Need To Know About Non-Compete and Trade Secrets Law

50stateThere is no denying that there exists a variety of statutes and case law across the country when it comes to non-competition and non-solicitation agreements, as well as the protection of proprietary information. All too often, what is enforceable in one state may be questionable in another and entirely prohibited in the next.

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

How to get your Desktop Reference:

This publication may be requested from your Seyfarth contact in hard copy or eBook format (compatible with PCs, Macs and most major mobile devices). The eBook is fully searchable and offers the ability to bookmark useful sections and make notations for easy future reference.

To request the 2015-2016 Edition of 50 State Desktop Reference in eBook or hard copy, please click the button below:

eBook Button

 

 

Alabama Revises Non-Compete Statute In Effort to Provide Additional Clarity

Posted in Legislation, Non-Compete Enforceability

Untitled-1On June 11, 2015, Alabama’s Governor signed into law legislation that revises the state’s non-compete statute, which is found in Section 8-1-1 of the Code of Alabama.  The effective date for these changes is January 1, 2016.  As summarized below, these revisions represent the Alabama legislature’s attempt to “clarity” portions of the non-compete statute by codifying several recent judicial decisions that interpreted the previous version of Section 8-1-1.

Just like its predecessor, the revised statute begins by setting forth a general ban against any agreements that restrict someone from engaging in “a lawful profession, trade, or business of any kind.”  That said, in “order to preserve a protectable interest,” the new law then details six exceptions to that general ban:

  1. When the “agent, servant, or employee holds a position uniquely essential to the management, organization, or service of the business.”
  2. “An agreement between two or more persons or businesses or a person and a business to limit commercial dealings to each other.”
  3. “One who sells the good will of a business may agree with the buyer to refrain from carrying on or engaging in a similar business and from soliciting customers of such business within a specified geographic area . . . subject to reasonable time and place restraints.  Restraints of one year or less are presumed to be reasonable.”
  4. “An agent, servant, or employee of a commercial entity may agree with such entity to refrain from carrying on or engaging in a similar business within a specified geographic area so long as the commercial entity carries on a like business therein, subject to reasonable restraints of time and place. Restraints of two years or less are presumed to be reasonable.”
  5. “An agent, servant or employee of a commercial entity may agree with such entity to refrain from soliciting current customers, so long as the commercial entity carries on a like business, subject to reasonable time restraints.  Restraints of 18 months or for as long as post-separation consideration is paid for such agreement, whichever is greater, are presumed to be reasonable.”
  6. “Upon or in anticipation of a dissolution of a commercial entity, partners, owners, or members, or any combination thereof, may agree that none of them will carry on a similar commercial activity in the geographic area where the commercial activity has been transacted.”

For the first time, the new law now defines “protectable interest,” which includes the following:

  1. Trade secrets (as defined by Alabama law).
  2. “Confidential information, including, but not limited to, pricing information and methodology; compensation; customer lists; customer data and information; mailing lists, prospective customer information; financial and investment information; management and marketing plans; business strategy, technique, and methodology; business models and data; processes and procedures; and company provided files, software, code, reports, documents, manuals, and forms used in the business that may not otherwise qualify as a trade secret but which are treated as confidential to the business entity, in whatever medium provided or preserved, such as in writing or stored electronically.”
  3. “Commercial relationships or contacts with specific prospective or existing customers, patients, vendors or clients.”
  4. “Customer, patient, vendor, or client good will associated with any of the following: (1) An ongoing business, franchise, commercial, or professional practice, or trade dress. (2) A specific marketing or trade area.”
  5. “Specialized and unique training involving substantial business expenditure specifically directed to a particular agent, servant, or employee; provide that such training is specifically set forth in writing as the consideration for the restraint.”

Several other key revisions include:

  1. “Blue penciling” is now codified, allowing a court (if it so chooses) to void an overly broad or unreasonable in duration restraint and reform it to “preserve the protectable interest or interests.”
  2. The new law provides the following remedies for breach of a non-compete agreement as follows:
    • “Such injunctive and other equitable relief as may be appropriate with respect to any actual or threatened breach.”
    •  “The actual damages suffered as a result of the breach or lawful liquidated damages of provided in the contract.”
    •  “Any remedies available in contract law, including attorneys’ fees or costs, if provided for in the contract or otherwise provided by law.”
  3. The new law states that the party who opposes enforcement of a non-compete agreement must establish that such enforcement would cause them undue hardship. Previously, the plaintiff had the burden of proving the lack of undue hardship.
  4. The new law does not abolish the “Professional Exemptions,” which includes doctors, physical therapists, lawyers, CPAs, and veterinarians.

In light of these forthcoming changes, it is imperative that Alabama employers carefully review their non-compete agreements before January 1, 2016 and update them as necessary to conform with the new law.  In particular, employers should carefully review the time durations included in their non-compete agreements, as well as how they define their protectable interests, in order to avoid having a non-compete agreement held invalid.  Please do not hesitate to contact us if you have any questions or wish to discuss further.

State Bar of California Webinar on “Hot Topics in Trade Secret Law”

Posted in Trade Secrets

shutterstock_272849567Webinar: Hot Topics in Trade Secret Law
Tuesday, July 14, 2015, 12:00 p.m. – 1:00 p.m. PT

Presented by the Trade Secrets Interest Group of The Intellectual Property Law Section of The State Bar of California

Robert B. Milligan, partner of Seyfarth’s Litigation department and co-chair of the firm’s Trade Secrets, Computer Fraud & Non-Competes practice group, is a panelist on an upcoming webinar presented by The State Bar of California IP Section’s Trade Secrets Treatise editors. The webinar, titled “Hot Topics in Trade Secret Law”, will take place on July 14, 2015 from 12:00 – 1:00 pm PT.

The editors of the IP Section’s Trade Secret Treatise will discuss some of the latest developments in trade secret law in California, including a discussion of recent cases regarding preemption, damages, bad faith, non-compete and no ”re hire” agreements. They will also discuss practical tips for protecting trade secrets, conducting trade secret theft investigations, drafting enforceable trade secret protection covenants, and litigating trade secret cases.

Mr. Milligan will be joined by Randy Kay (partner at Jones Day) and Rebecca Edelson (partner at Steptoe). The panelists specialize in trade secret litigation and counseling and are former State Bar IP Section Executive Committee members and the editors of the Section’s Trade Secret Treatise.

For more information and registration, please click here.

*This program offers 1 hour participatory MCLE credit.

Non-Compete Injunction Denied, Ninth Circuit Remands For Reconsideration, But District Court Denies It Again, Declines Equitable Tolling

Posted in Non-Compete Enforceability, Practice & Procedure

Untitled-1As directed by the court of appeals, a district court judge reconsidered his denial of a non-compete covenant case injunction but reached the same result on reconsideration.  He also stated why he would not have extended the covenant’s expiration date even if he had been inclined to enter the injunction.  Ocean Beauty Seafoods LLC v. Pacific Seafood Group Acquisition Co., No. C14-1072 (W.D.Wash., Oct. 30, 2014) (Ricardo S. Martinez, J.), remanded, No. 14-35950 (9th Cir., May 8, 2015), on remand, (W.D. Wash., June 25, 2015).

Status of the case.  Last October, a federal district court judge in Seattle denied a motion for preliminary injunction in a lawsuit alleging violation of a non-competition covenant.  The unsuccessful movant appealed to the Ninth Circuit Court of Appeals.  Concluding that the lower court had made a number of factual, legal and procedural errors, the appellate court remanded for the district court’s reconsideration.  Last month, the Seattle judge again declined to issue an injunction order.  He also explained why, if he had issued the order, he would not have equitably tolled expiration of the one-year covenant.

Background When Michael Coulston first became a Pacific Seafood employee in January 2011, he signed a covenant barring him, for 12 months after termination, from engaging in business with a competitor of the company in any “geographic area” in which it does business.  The covenant was governed by Oregon law.  In July 2014, he left Pacific and went to work for Ocean Beauty.  Both companies are seafood processors and distributors on the West Coast.  Pacific sued Ocean Beauty and Coulston.

Judge Martinez’s initial denial of a preliminary injunction.  In his 2014 decision, Judge Martinez determined that Pacific Seafood (a) had failed to demonstrate a likelihood of success on the merits of its claim against Ocean Beauty and Coulston, and (b) had failed to show that it would sustain irreparable harm absent injunctive relief.  There was no definition of “geographic area” in the covenant.  The judge said it appeared to encompass the entire west coast of the U.S. which he found to be unreasonable since Coulston had a more limited territory.  Moreover, Judge Martinez held that Coulston was not shown to have diverted, or was likely to divert, any business to Ocean Beauty based on his knowledge of Pacific’s business practices.

The Ninth Circuit’s decision.  Marked as a “Memorandum” and “Not for Publication,” the appellate court’s ruling took issue with Judge Martinez’s findings, conclusions and denial of Pacific Seafood’s motion to supplement the record.  According to the appeals court, Coulston’s territory while he worked for Pacific was more extensive than the district court indicated and, moreover, Oregon law does not render a covenant automatically unenforceable even if it covers an overly broad territory.  Further, Pacific was held to have a protectable interest in information Coulston possessed regarding Pacific’s “marketing plans and product allocation.”  The Ninth Circuit also noted that the trial court seemingly did not appreciate the difference between evidence of actual harm and a showing of a likelihood of harm.  The trial court’s denial of Pacific’s motion to supplement the record was said to be an abuse of discretion as well.  The case was remanded to Judge Martinez for reconsideration.  Finally, in a footnote, the appellate court directed the district court, if it grants a preliminary injunction, to consider equitably extending the non-compete’s one-year term.

Judge Martinez’s second denial of an injunction.  On remand, the judge said he “remains unconvinced” that “the geographic scope of the non-compete agreement is reasonable.”  Further, he stated that the record before him did not persuade him that “there is a substantial risk Ocean Beauty would be able to divert a significant part of Pacific Seafood’s business given Mr. Coulston’s knowledge” or that he was “likely to divert business to Ocean Beauty based on any such knowledge.”  So, Judge Martinez again found a failure by Pacific to show that it would suffer irreparable harm in the absence of an injunction.

In light of the Ninth Circuit’s footnote, and recognizing that the appellate court might disagree with his second denial of an injunction, Judge Martinez discussed equitable tolling.  The issue potentially was relevant because of the imminent expiration of Coulston’s one-year non-compete.  The judge noted that the Oregon Supreme Court, the Ninth Circuit and many other courts of appeal have declined to extend a covenant that has expired or is about to expire, and he said that the record before him warranted a similar ruling in this case.

Takeaways.  Counsel drafting, seeking to enforce, or defending against an effort to enforce, a non-compete should consider the following:

  • Equitable tolling.  A non-competition agreement often expresses the parties’ intent that the employer shall be entitled to an extension of the injunction period equal to the length of time during which the ex-employee engaged in illicit competition.  The non-compete in the Ocean Beauty litigation did not include such a provision.  Arguably, Pacific Seafood’s request for tolling asked the court to amend the covenant by adding a term to which Coulston had not consented.  But a contrary contention could be made: assuming the covenant was enforceable, failure equitably to toll would deprive Pacific of the benefit of its bargain which was for 12 months’ freedom from Coulston’s competition.  A party seeking equitable tolling should present persuasive, admissible evidence justifying an extension of the non-compete period.
  • Geographic scope and time limit of the non-compete.  Larger and longer are not necessarily preferable when it comes to the area and temporal provisions set forth in a restrictive covenant.  If excessive, they may cause unenforceability.  Geographic scope and time limit terms may approach, but they should never exceed, the maximums that are reasonable under the circumstances.
  • Be gracious to a judge whose prior opinion has been remanded for reconsideration.  Judge Martinez emphasized that he disagreed with the appellate court’s order, and he did not take kindly to what he viewed as Pacific Seafood rubbing his face in the remand order.  His second opinion expressed annoyance — to say the least — at what he called Pacific’s “rejoic[ing] in reiterating the numerous ‘errors’ found by the Ninth Circuit.”  He also took “exception to the tone” of Pacific’s briefs and Pacific’s “apparent lack of respect for this Court and its prior findings.”  If Pacific wanted to generate sympathy for its legal position, understatement might have been more effective.  However, he might have reached the same result in any event.