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Trading Secrets

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

Five Easy Tips for Improving Your Company’s Non-Compete and Confidentiality Agreements and Related Practices Now

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

shutterstock_242263660As January quickly passed by and new projects increase by the day, there is still a golden opportunity to capitalize on some low-hanging fruit to immediately improve your company’s practices and add immediate value to your company.  The opportunity lies in improving your company’s restrictive covenant and confidentiality agreements and confidentiality policies.  Below are five tips that you can employ immediately to improve your company’s agreements/policies and practices.

First, make sure your company is using confidentiality agreements and confidentiality policies with your employees.  You may be surprised to learn how many companies do not ask their employees to sign such agreements.  When those companies later seek to explore their options against employees who have joined competitors, their options are significantly narrowed.  Also, your company should not rely solely on employee handbook policies or other similar policies.  While your company may not use non-compete or non-solicitation covenants with your workforce, at a minimum, companies should use non-disclosure agreements with their employees.  There is really no excuse not to ask employees to sign such agreements.

Additionally, companies should consider using the maximum legally permissible restrictive covenants in their jurisdictions, including non-competes and non-solicitation of customers and employees as applicable, with their workforces; otherwise, companies are leaving a competitive advantage at the table.  While some companies may elect not to use non-compete agreements because such covenants are viewed as not supportive of their company “culture,” companies should carefully survey what their competitors are doing and determine whether they are putting themselves at a disadvantage in the talent market.

Second, spend some time with the business leaders in departments that create your company’s confidential information to make sure that your company’s non-disclosure agreement provides sufficient descriptions of the information that each department considers high value confidential information.  Oftentimes, companies give little thought to the categories of information described in the non-disclosure agreement or have no description of the information whatsoever.  While your company should not provide the secret information in the agreement, your company should at least describe the category of information in which it belongs and some specifics so that the category is easily identifiable by employees.  The value in describing the information in more detail is that the employee then understands what the company deems confidential, and it also provides the company a better chance in the courtroom to hold a former employee accountable if he or she misappropriates such information.

Third, review your company’s restrictive covenant and confidentiality agreements to make sure that they do not unnecessarily limit the company’s rights.  In one recent case, an employer lost its trade secret suit because its non-disclosure agreement defined confidential information as only that information which had been marked confidential.  The court found that the trade secret claim failed because the information in dispute had not been marked confidential.  The trade secret claim may have proceeded if the contract had not unnecessarily restricted the term “confidential” information to only signify information labeled confidential.  While labeling information as confidential indicates that such information may be subject to reasonable secrecy measures to support a classification as a trade secret, it is typically not dispositive as to whether contract and trade secret claims can be pursued for the theft of company information.

Additionally, companies operating in states that permit non-compete and non-solicitation agreements should consider using such agreements with their employees in those states even if those companies’ corporate headquarters are in jurisdictions where non-competes are typically void in the employment context, such as California.  Simply put, just because your company is headquartered in California does not mean that you should not ask your employees in Florida to sign non-compete and non-solicitation agreements governed by Florida law.  Additionally, some companies have been successful in using forum selection and choice of law provisions to bind employees who work in jurisdictions where restrictive covenants are limited to non-competes and non-solicitation covenants in the company’s home forum, particularly where such employees are provided access to trade secrets and maintain well-established relationships with company clients.  A company should also consider whether to use a prevailing party provision for attorney’s fees and costs for actions brought on or related to the agreement.

Fourth, take into account some recent developments in state non-compete law to make sure that your company’s agreement is compliant.  For example, Oregon has limited the duration of employee non-competes to two years effective January 1, 2016.  Hawai’i has banned the use of non-compete and non-solicit agreements with technology works effective July 1, 2015.  Alabama has made it easier to enforce non-compete agreements with a revised statute that became effective January 1, 2016.  Also, in Alabama, non-competes of one year will now be presumed to be enforceable.  Additionally, Illinois and Pennsylvania have special requirements for the roll-out of non-compete agreements with existing employees, including providing consideration apart from continued employment alone, to enforce such agreements.  The Wisconsin Supreme Court recently has found that continued employment was adequate consideration for non-compete agreements entered into after the inception of employment. There are also active movements in Utah and Washington to restrict the use of non-compete agreements.

Fifth, critically examine which employees and third parties your company asks to sign restrictive covenant and confidentiality agreements and be mindful of third-party scrutiny.  Regulators, legislators, and employee groups are scrutinizing the use of restrictive covenant agreements.  While some employers may not be using such agreements enough, particularly with the right people (i.e., executives, engineers, R&D personnel, sales representatives, among others), other companies may be accused of overreaching in asking all employees to sign non-compete agreements.  While the janitor does not necessarily need to sign a non-compete, he or she probably should sign a non-disclosure agreement in certain instances.  Also, your company should perform an audit or ensure one has been performed to see if your company has signed agreements with key employees, particularly high level executives and employees who may be flight risks.

Companies should think critically about who they are asking to sign such agreements and who they should be asking to sign such agreements (e.g., appropriate restrictive covenants and non-disclosure agreements with vendors and contractors).  We have found that while some companies may have solid agreements with employees, the same high value information may be provided to contractors and vendors without similar protections, which erodes the confidentiality protections placed on the information.  Government agencies such as the NLRB, SEC, and EEOC are actively scrutinizing employer confidentiality restrictions, so companies should be mindful to provide examples of confidential information instead of broad undefined labels, to not prohibit disclosure of information protected by Section 7 of the National Labor Relations Act (such as concerted activity involving discussions of conditions of employment or wages), and to not prohibit participation in government investigations or including similar provisions which impede the ability of employees to act as whistleblowers.

As many have already broke their New Year’s resolutions as we move into February, there is still an opportunity for you to add value to your organization by addressing these critical issues and providing useful recommendations to your organization.  Don’t wait.  Act today and reach for this low-hanging fruit.

Upcoming Webinar: Data Security and Trade Secret Protection for Lawyers

Posted in Cybersecurity, Data Theft, Trade Secrets

WebinarOn Thursday, February 25, 2016 at 12:00 p.m. Central, Seyfarth attorneys, Richard D. Lutkus and James S. Yu, will be joined by Joseph Martinez, Chief Technology Officer and Vice President of Forensics at Innovative Discovery to present the second installment of the 2016 Trade Secrets Webinar series. This program will cover considerations that attorneys should take into account when in possession of any client data. Coverage will include both technical considerations, best practices and policies, as well as practical advice to steer clear of ethical violations.

The panel will specifically address the following topics that often arise in trade secret investigations and litigation:

  • Information Storage, Retention, and Remediation
  • Device Management
  • Phishing and Social Engineering
  • Security Considerations
  • Cloud Storage and Ethical Considerations

There is no cost to attend this program, however, registration is required.

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.

register

Computer Fraud and Abuse Act Not Violated Unless Plaintiff Shows Defendant Had Intent To Defraud

Posted in Computer Fraud, Computer Fraud and Abuse Act

shutterstock_131284286In a recent Computer Fraud and Abuse Act case, the Seventh Circuit Court of Appeals affirmed the district court’s conclusion that the plaintiff had produced no evidence refuting the defendant’s contention that it honestly believed it was engaging in lawful business practices rather than intentionally deceiving or defrauding the plaintiff.  Accordingly, entry of judgment for the defendant was appropriate.  Fidlar Technologies v. LPS Real Estate Data Solutions, Inc., Case No. 4:13-CV-4021 (7th Cir., Jan. 21, 2016).

Summary of the case.  Fidlar licenses technology to county governments enabling them quickly to scan and digitize real estate transaction documents.  The county-licensees pay Fidlar a fee for using its technology.  In turn, county-licensees making the digitized documents available on line charge an access fee.  Persons who access the digitized documents and print copies must remit copying fees to Fidlar.

LPS gathers, analyzes and sells data concerning real estate transactions.  It developed software that permits the company, in exchange for a monthly payment to the county-licensees, to harvest and download en masse documents digitized by the counties using Fidlar’s technology.  The software enables LPS to analyze the digitized data without printing the documents and, thereby, to avoid paying copying fees which otherwise would have been owed to Fidlar.  When Fidlar learned what LPS was doing, Fidlar accused LPS of computer fraud in violation of the CFAA.  LPS denied wrongdoing and prevailed in court on summary judgment.

The parties’ contentions.  According to Fidlar, LPS defrauded Fidlar because LPS knew about the copying fee and had to know that its system for harvesting the information contained in the digitized real estate transaction documents allowed it to benefit from Fidlar’s technology without paying anything to that company.  LPS responded that, far from intending to deceive or defraud, its business practices were driven by its need to access and analyze data quickly and efficiently, and that printing copies of the documents was unnecessary.

Did LPS intend to defraud Fidlar?  Counties pay a fee to Fidlar for using its technology in order to digitize the contents of documents.  LPS pays a fee to counties for enabling its computers to access the digitized data.  LPS avoided remunerating Fidlar by not printing copies of the information.  And, significantly, there was neither disruption nor destruction of Fidlar’s computer system or intellectual property.  Fidlar apparently failed to anticipate, and therefore did not forbid, LPS’ access to and use of the data in this manner.

The CFAA criminalizes fraudulently accessing a computer or computer system with the intent of deceiving or cheating.  In opposition to LPS’s summary judgment motion, Fidlar maintained that whether LPS intended to defraud Fidlar is a question of fact requiring a trial.  However, both the lower and appellate tribunals said that the entry of summary judgment was appropriate because Fidlar was required, but failed, to demonstrate that there was evidence in the record supporting Fidlar’s claim that LPS had a fraudulent intent.

Takeaways.  Proving a CFAA violation requires evidence of an intentional fraud.  Even though Fidlar’s technology did not expressly permit third parties to access the digitized records and use the information without printing copies, thereby avoiding payment of fees to Fidlar, such access and use were not prohibited.  Fidlar lost the case because it failed to design its software to require payments to the company by third parties who figured out how to make use of the data without printing it.

Seyfarth Shaw is pleased to announce the publication of the Trading Secrets 2015 Year in Review!

Posted in Trade Secrets

imageThe 2015 Trading Secrets Year in Review is a compilation of our significant blog posts from throughout last year and is categorized by specific topics such as: Trade Secrets; Computer Fraud and Abuse Act; Non-Compete & Restrictive Covenants; Legislation; International; and Social Media and Privacy. As demonstrated by our specific blog entries, including our Top 10 Developments/Headlines, Trade Secrets, Computer Fraud, Non-Competes Webinar Series – Year in Review and our dedicated page concerning federal trade secret legislation, our blog authors stay on top of the latest developments in this area of law and provide timely and entertaining posts on significant new cases, legal developments, and legislation.

The 2015 Trading Secrets Year in Review also includes links to the recordings of all webinars in the 2015 Trade Secrets Webinar Series and all our video blogs. On Friday, January 29 at 12:00 p.m. Central, we are kicking off the 2016 webinar series with a program entitled, “2015 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secret, Non-Compete, and Computer Fraud Law.” To register for this webinar, click here. More information on our upcoming 2016 webinars is available in the program listing contained in this Review. Our highly successful blog and webinar series further demonstrate that Seyfarth Shaw’s national Trade Secret, Computer Fraud & Non-Competes Practice Group is one of the country’s preeminent groups dedicated to trade secrets, restrictive covenants, computer fraud, and unfair competition matters and is recognized as a Legal 500 leading firm.

Clients and friends of the firm can request a CD or printed copy of the 2015 Review by clicking here.

 

Senate Judiciary Committee Votes in Favor of Passage of an Amended Defend Trade Secrets Act

Posted in Legislation, Trade Secrets

keyposterlarge1-225x300Earlier today, the Senate Judiciary Committee held a voice vote in favor of the passage of the now amended Defend Trade Secrets Act of 2016 (“DTSA”). At this point, the Committee has not yet revealed when the current version of the DTSA will make it to a floor vote, nor has it been announced when and if the House will consider the issue.  The House’s version of the DTSA was introduced late last July, and now has 107 cosponsors. It remains to be seen whether the House version will include the Senate’s amendments.

Below are some highlights from the Senate’s amended version of the DTSA:

  • The section limiting injunctive relief has been fortified insofar as a court shall not grant such relief if it would prevent a person from entering into an employment relationship. Under the new language, a court could place conditions on that employment relationship only upon a showing through evidence of “threatened misappropriation and not merely on the information the person knows.” This language was likely added to guard against “inevitable disclosure” based upon the statute.
  • The statute of limitations has decreased from five to three years.
  • The Senate has added an immunity provision to protect individuals from criminal or civil liability for disclosing a trade secret if it is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law. Moreover, the amended language places an affirmative duty on employers to provide employees notice of the new immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” An employer will be in compliance with the notice requirement if the employer provides a “cross-reference” to a policy given to the relevant employees that lays out the reporting policy for suspected violations of law. Should an employer not comply with the above, the employer may not recover exemplary damages or attorney fees in an action against an employee to whom no notice was ever provided. Curiously the definition of employee is drafted broadly to include contractor and consultant work done by an individual for an employer.
  • New language further restricting the ex parte seizure ordered now appears in the Senate’s DTSA. This language now prohibits copies to be made of the seized property, and requires that the ex parte order provide more specific instructions for law enforcement officers performing the seizure, such as when the seizure can take place and whether force may be used to access locked areas.
  • A new section was added “Trade Secret Theft Enforcement,” which increases the penalties for a violation of 18 U.S.C. §1832 from $5,000,000 to the greater of $5,000,000 or 3 times the value of the stolen trade secrets to the organization, including the costs of reproducing the trade secrets. It also adds a provision that allows trade secret owners to be heard in criminal court concerning the need to protect their trade secrets.  It also amends the RICO statute to add a violation of the Economic Espionage Act as a predicate act.
  • Exemplary damages have been lowered from three times to two times the amount of actual damages.

What’s Next

  • Now that the Senate Judiciary Committee has amended the DTSA and voted (by voice vote) in favor of its passage, the DTSA is poised for presentment on the Senate floor, and potential later for presentment in the House. Even before the amendments, the DTSA enjoyed bipartisan support in both houses, as well as widespread support from companies like DuPont, General Electric, and Microsoft, to name but a few. Stay tuned for further coverage.
  • These amendments came just a day after Senators Orrin Hatch (R-Utah) and Chris Coons (D-Delaware) co-authored an article emphasizing the importance of having a federal cause of action for trade secret misappropriation available. The Senators highlighted the difficulties trade secret owners face in protecting their rights, such as appealing to state courts or federal prosecutors, which creates costly and complicated procedural and jurisdictional issues. Moreover, the Senators noted the limited resources the United States Department of Justice has to prosecute trade secrets cases. Without enough resources, trade secret misappropriators can cross state lines, and even destroy evidence of their legal violations, much to the detriment of U.S. businesses and individuals. As the Senators point out in their article, the Senate’s version of the DTSA provides business owners the ability to seek court orders (only upon an appropriate showing of trade secret ownership, theft, and lack of harm to third parties upon the issuance of such an order) to stop further theft of their trade secrets, not at all a means to seize information for anti-competitive purposes.

EU Publishes Text of Compromise Trade Secrets Directive for Approval by European Parliament

Posted in International, Legislation, Trade Secrets

shutterstock_46364566As we reported last month in this blog, in December the European Council and representatives of the European Parliament reached a “provisional agreement” on the European Commission’s proposed Directive to protect trade secrets.  With this provisional agreement, the Council and representatives of the European Parliament agreed on compromise language to be submitted to the Parliament for approval, thus clearing the way for adoption of the proposed directive in the next few months.

At the time that we reported on this development, the compromise text was not yet available.  However, now that the Parliament and Council have completed a legal-linguistic review of the text, the full English-language version of the compromise text is now available.  With the benefit of the full text, we can now answer one final open question that we reported last month — i.e., what is the scope of the protections that will be available to trade secrets during litigation under the compromise text?

As we previously noted, the European Commission’s original text contemplated that courts in Member States may issue “Attorneys’ Eyes Only” protective orders like those that are typically used in trade secrets cases in the U.S.  Specifically, the Commission’s original text provided that:

Member States shall also ensure that the competent judicial authorities may, on a duly reasoned application by a party, take specific measures necessary to preserve the confidentiality of any trade secret or alleged trade secret used or referred to in the course of the legal proceedings relating to the unlawful acquisition, use or disclosure of a trade secret. The measures referred to . . .  shall at least include the possibility: (a) to restrict access to any document containing trade secrets submitted by the parties or third parties, in whole or in part; (b) to restrict access to hearings, when trade secrets may be disclosed, and their corresponding records or transcript.   In exceptional circumstances, and subject to appropriate justification, the competent judicial authorities may restrict the parties’ access to those hearings and order them to be carried out only in the presence of the legal representatives of the parties and authorised experts . . .

In contrast, in its draft Legislative Resolution, the European Parliament’s Legal Affairs Committee watered down this language with the following proposed language that would appear to eliminate true “Attorneys’ Eyes Only” protective orders:

The measures referred to . . .  shall at least include the possibility: (a) to restrict access to any document containing trade secrets or alleged trade secrets submitted by the parties or third parties to a limited number of persons, in whole or in part provided that at least one person from each of the parties, and, where appropriate in view of the proceedings, their respective lawyers and/or legal representatives, are given access to the document in full; (b)  to restrict access to hearings, when trade secrets or alleged trade secrets may be disclosed, and their corresponding records or transcript to a limited number of persons, provided that it includes at least one person from each of the parties, and, where appropriate in view of the proceedings, their lawyers and/or legal representatives . . .

Based on the compromise text, the Council and representatives of the Parliament appear to have adopted the Legal Affair’s Committee’s approach, albeit with different language.  The relevant portion of the compromise text now reads as follows:

Member States shall also ensure that the competent judicial authorities may, on a duly reasoned application by a party, take specific measures necessary to preserve the confidentiality of any trade secret or alleged trade secret used or referred to in the course of the legal proceedings relating to the unlawful acquisition, use or disclosure of a trade secret. Member States may also allow competent judicial authorities to take such measures on their own initiative.

The measures referred to in the first subparagraph shall at least include the possibility:

(a) to restrict access to any document containing trade secrets or alleged trade secrets submitted by the parties or third parties, in whole or in part, to a limited number of persons;

(b) to restrict access to hearings, when trade secrets or alleged trade secrets may be disclosed, and their corresponding records or transcript to a limited number of persons;

(c) to make available to any person other than those comprised in the limited number of persons referred to in points (a) and (b) a non-confidential version of any judicial decision, in which the passages containing trade secrets have been removed or redacted.

The number of persons referred to in points (a) and (b) of the second subparagraph shall be no greater than what is necessary in order to ensure compliance with the right to an effective remedy and to a fair trial of the parties to the proceedings and shall include, at least, one natural person from each party and the respective lawyers or other representatives of those parties to the proceedings.

Proposed Directive, Article 8, ¶ 2.

Assuming that this compromise text is approved by the European Parliament, legislatures and courts in Member States will no doubt take different approaches to effectuate this language.  Although the final compromise text is somewhat weaker than the protections that U.S. practitioners typically see in trade secrets litigation, on balance the compromise language provides a reasonable baseline for protection of trade secrets during litigation that is probably more than sufficient for most disputes.

The compromise text is expected to be submitted to the full European Parliament for approval in the next few months.  If the Parliament approves the text on a first reading, the European Council will approve the European Parliament’s position and the Directive will be adopted.  Member States then will be required to enact national law consistent with the Directive within two years.  We will continue to track progress of the proposed Directive as it crosses the final hurdle necessary for adoption.

Senate Judiciary Committee to Hold Meeting About Passage of the DTSA

Posted in Trade Secrets

shutterstock_177379169This morning in Washington, the Senate Judiciary Committee will hold a meeting to consider S. 1890, the Defend Trade Secrets Act of 2015 (“DTSA”).  The passage of the DTSA would provide a federal civil cause of action for the theft of trade secrets.  Trade secret law currently consists of a mix of federal protection through the Economic Espionage Act (“EEA”) and the various state versions of the Uniform Trade Secret Act (“UTSA”).  Instead of this patchwork-like scenario, the DTSA would create a uniform standard that individuals and companies could use to protect and fight against violations of their highly valuable trade secrets.  Trade secrets violations end up being costly not only to these entities, but also to end consumers.  Utilizing a protective measure like the DTSA to defend trade secrets could help curb job and revenue losses, resulting in a net benefit to the American economy.

The DTSA was introduced in the House and Senate on July 29, 2015.  Since then, the DTSA has enjoyed bipartisan support, as well as broad support in various industries, such as the manufacturing, biotech, software, and agriculture sectors.  After gaining more support, careful drafting and negotiation, the DTSA is now ready for markup, which the Senate Judiciary Committee will be doing today.

Currently, S. 1890 has 26 cosponsors in the Senate: Sen. Tammy Baldwin (D-WI), Sen. Chris Coons (D-DE), Sen. Richard Durbin (D-IL), Sen. Jeff Flake (R-AZ), Sen. Thom Tillis (R-NC), Sen. Richard Blumenthal (D-CT), Sen. Roy Blunt (R-MO), Sen. Michael Crapo (R-ID), Sen. James Risch (R-ID), Sen. Kelly Ayotte (R-NH), Sen. Mark Kirk (R-IL), Sen. Amy Klobuchar (D-MN), Sen. David Perdue (R-GA), Sen. Jefferson “Jeff” Sessions (R-AL), Sen. Christopher Murphy (D-CT), Sen. Claire McCaskill (D-MO), Sen. Alan “Al” Franken (D-MN), Sen. Angus King (I-ME), Sen. Susan Collins (R-ME), Sen. Roger Wicker (R-MS), Sen. Deb Fischer (R-NE), Sen. Dean Heller (R-NV), Sen. Mazie Hirono (D-HI), Sen. Dianne Feinstein (D-CA), and the most recent supporters, Sen. Lindsey Graham (R-SC) and Sen. Sheldon Whitehouse (D-RI).  The House version of the DTSA, H.R. 3326, currently has 107 cosponsors, including 77 Republicans and 30 Democrats.

Stay tuned for more updates.

Oil-And-Gas Services Companies Argue Over Trial Court’s Authority to Exclude Corporate Representatives Under New Texas Trade Secret Law

Posted in Trade Secrets

shutterstock_220422451On January 13, before the Texas Supreme Court, two major oil-and-gas-services companies disputed whether Texas’s new trade secret laws require a trial court to exclude a party’s corporate representative from a hearing at which trade-secret testimony from the opposing party is given.

Jeff Russo is a former employee of M-I SWACO, a Schlumberger subsidiary, who left to work for National Oilfield Varco (NOV) in early 2014.  Russo filed suit against in April 2014, seeking a declaratory judgment on his non-compete agreement.  M-I SWACO counterclaimed for breach of contract and misappropriation of trade secrets and further sued NOV as a defendant.  The parties entered into an agreed protective order and engaged in expedited discovery.

At a temporary injunction hearing, M-I SWACO sought to present evidence of its trade secrets through oral testimony and asked the trial court to temporarily clear the courtroom of everyone except the parties’ counsel, their experts, and Russo.  The trial court denied the request, stating “I am not going to exclude a representative of a party that you’re making claims against from [the courtroom],” and adding that it would be “a total violation of due process.”  To protect M-I SWACO’s alleged secrets, the trial court instead issued a gag order for NOV’s representative prohibiting disclosure or use of anything heard in the courtroom.  This mandamus followed.

At issue in the appeal is the trial court’s authority under the newly-enacted Texas Uniform Trade Secrets Act (TUTSA) to “preserve the secrecy of an alleged trade secret by reasonable means.” Tex. Civ. Prac. & Rem. Code §134A.006.

M-I SWACO argued that, in order to preserve the secrecy of its trade secrets, “reasonable means” required in this case disclosing the alleged secrets in the presence of NOV’s attorneys and experts, and in front of Russo, but not in front of NOV itself.  The trial court’s order, M-I SWACO argued, “created a needless dilemma” in which, “one way or the other,” NOV would be given access to M-I SWACO’s trade secrets through NOV’s corporate representative.

NOV argued, however, that the trial court’s gag order directed at NOV’s corporate representative is sufficient protection for the alleged trade secrets, and that TUTSA permits nothing more.  “Not only does TUTSA not authorize the relief M-I SWACO seeks, it expressly authorizes courts to issue the relief the trial court ordered here,” NOV argued in its brief.  “Although that is not exactly what M-I SWACO wanted, it cannot constitute an abuse of discretion as a matter of law.”

At oral argument before the Texas Supreme Court, M-I SWACO’s counsel argued that there would be times when a gag order such as the one the trial court entered in this place would be appropriate, but only in those situations where the competitor already knew the trade secret.

NOV’s counsel argued at the hearing, however, that excluding the defendant from the court room during the hearing would constitute a radical departure from the American processes of jurisprudence.

TUTSA became effective in Texas on September 1, 2013.  The parties appeared to agree that the matter before the Texas Supreme Court was a matter of first impression.

The parties briefs before the Texas Supreme Court can be accessed here.

Access to the oral hearing can be found here.

Charities Take Note: Ninth Circuit Reaffirms CA Attorney General’s Entitlement to Sensitive Donor List

Posted in Practice & Procedure, Trade Secrets
shutterstock_333053624With an apparent thumbs up from the U.S. Supreme Court, the Ninth Circuit Court of Appeals[1] once again upheld the position of the California Attorney General (AG) requiring that charities located or operating in California must provide a copy of their unredacted Form 990 Schedule B, including the names, addresses and contribution amounts for all donors listed.[2]  While the court has preliminarily prevented the AG from making the information publicly available, the ruling is unwelcome news for charities concerned about protecting donors’ identities.  The collection of sensitive donor information from charities appears to be a growing trend by state Attorneys General.

Affected charities, including out-of-state charities soliciting or otherwise operating in California, should review their donor confidentiality policies and disclosures to ensure that their donors are aware of such requirements.

Regulation of Charities Located or Operating in California

Most California charities and certain out-of-state charities are required to register and file an annual report (Form RRF-1) with the AG’s Registry of Charitable Trusts.  Religious organizations, educational institutions, hospitals and health care service plans are exempt from this registration and reporting.

A copy of the charity’s annual information return (Form 990 or Form 990-EZ ) must be included with the annual report.  The AG recently began treating annual reports submitted without Schedule B (or with a redacted Schedule B) as incomplete.  Failure to file a complete report generally results in penalties, fees and the loss of California income tax exemption.

Several states, including New York, have a similar filing requirement.  Both the California and New York AGs note that it is not their policy to disclose Schedule B to the public.  In fact, in December of 2015, the California AG proposed amendments to state regulations to provide that donor information exempt from public inspection pursuant to the Internal Revenue Code will be maintained as confidential by the AG subject to certain limited exceptions.[3]

However, there is no guarantee that such disclosure policies (whether codified or not) will not change in the future and it is unclear if the donor information, once in the possession of a state attorney general, would be subject to a request for disclosure under that state’s public records act.

Schedule B – Donor Disclosure

Schedule B to the Form 990 is used to disclose to the IRS the reporting organization’s significant donors (generally those who contribute over $5,000 in cash or property), including their names, addresses, and contribution amounts.  Tax-exempt organizations are generally required to make available for public inspection and copying their three most recent annual returns, including copies of all schedules, attachments and supporting documents filed with these returns.  Most such returns are posted and publicly available at no cost on third-party websites, such as Guidestar.org.

However, except for private foundations (Form 990-PF filers) and section 527 political organizations, public disclosure of the names and addresses of contributors set forth on Schedule B generally is not required, and the Schedules B of those organizations typically do not appear when posted online.

Center for Competitive Politics v. Harris

In an earlier case, Center for Competitive Politics, a Virginia nonprofit registered with the California AG, challenged the AG’s unredacted Schedule B filing requirement.  It argued that the disclosure violates its and its supporters’ First Amendment rights to freedom of association and that certain nondisclosure rules under federal law preempt the state requirement.

The U.S. Court of Appeals for the Ninth Circuit rejected the Center’s arguments, concluding that the disclosure requirement bears a substantial relation to a sufficiently important government interest and is facially constitutional, and the U.S. Supreme Court denied the Center’s petition for the case to be reviewed.[4]

However, the Ninth Circuit left open the possibility that a future litigant could show a reasonable probability that the compelled disclosure of its contributors’ names will subject them to threats, harassment or reprisals that would warrant relief on an “as-applied” challenge.

Americans for Prosperity Foundation v. Harris

Two nonprofits, Americans for Prosperity Foundation and Thomas More Law Center, brought such a challenge, resulting in preliminary injunctions issued by the Federal District Court prohibiting the AG from demanding the plaintiffs’ unredacted Schedules B.

The plaintiffs argued that confidential disclosure to the AG itself chills protected conduct or would lead to persecution and harassment of their donors by the state or the public.  Second, they argued that, notwithstanding the AG’s voluntary policy against disclosing Schedule B forms to the public, the AG may change its policy or be compelled to release the forms under state law, and that the resulting public disclosure would lead to harassment of their donors by the public, chilling protected conduct.

However, the Ninth Circuit vacated the injunctions and rejected the plaintiffs’ arguments.[5]  The Court noted that neither plaintiff had shown anything more than broad allegations or subjective fears that confidential disclosure to the AG would chill participation or result in harassment of its donors by the state or the public.  Neither plaintiff was able to show to the Court’s satisfaction that the disclosure had actually chilled protected conduct or would be likely to do so, or that there was a reasonable probability of harassment at the hands of the state or the public due to such disclosure.

The Court did, however, issue a new injunction preventing the AG from publicly disclosing the Schedule B information, consistent with the AG’s stated position and the proposed regulations.

This decision, upholding the AG’s confidential disclosure requirements, coupled with the AG’s recent proposal to amend state regulations to generally prohibit the AG’s disclosure of Schedule B information, appears to close the book on any new confidentiality exceptions to California’s filing requirement.  It would seem unlikely for the U.S. Supreme Court to agree to review the Americans for Prosperity Foundation case after having declined a review of the Center for Competitive Politics case.

Conclusion

These court decisions exemplify what we expect to be a growing trend by state Attorneys General to demand sensitive donor information from charities operating or soliciting in those states.  Charities should continue to heed the Schedule B instructions and not include Schedule B in filings with states that do not specifically require it, as those states may inadvertently disclose the charity’s donor information to the public.[6]

In addition, out-of-state charities that are (1) “doing business” in California for charitable purposes or (2) “holding property” in California, and are not currently registered with the AG’s Registry of Charitable Trusts, may wish to consider contacting local counsel for advice regarding their California operations to avoid or minimize potential penalties.[7]

[1] Americans for Prosperity Foundation v. Harris, No. 15-55446 (9th Cir. Dec. 29, 2015).

[2] For our prior article on this subject matter, please visit http://www.seyfarth.com/publications/CA060115-TEO.

[3] The AG has proposed to amend sections 310 and 999.1 of the California Code of Regulations Title 11, Division 1.  The text of the proposed amendments and related materials may be found on the AG’s website:  http://oag.ca.gov/charities/notice-prop-amend-regs.

[4] Center for Competitive Politics v. Harris, No. 14-15978 (9th Cir. May 1, 2015), cert. denied (November 9, 2015).

[5] Americans for Prosperity Foundation v. Harris, No. 15-55446 (9th Cir. Dec. 29, 2015).

[6] Schedule B, Page 5 (General Instructions: Public Inspection), available at http://www.irs.gov/pub/irs-pdf/f990ezb.pdf.

[7] For a detailed discussion of California requirements that extend to out-of-state charities, see Mancino, “California Regulation of Out-of-State Charities,” 17 Taxation of Exempts 6 (May/June 2006).

Q&A Concerning IP Protection and Social Media Issues in the Workplace

Posted in Social Media, Trade Secrets

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The explosion of digital and social media enables companies to work more efficiently and to easily and creatively promote their products and services to large audiences across the globe. Modern technological developments in the workplace, however, come with modern issues – one such challenge for companies is protecting intellectual property (IP) and confidential information in today’s dynamic, digital and mobile environment.

On January 19, the State Bar of California is bringing together leading IP and employment attorneys from private industry, public agencies, private law firms and law schools for a conference in San Francisco on these issues: “Intellectual Property Protection and Social Media Issues in the Workplace.” Seyfarth Shaw is a proud sponsor of the conference and I have the honor of serving as the conference chair.

In this Q&A, I  was interviewed by CREATe.org President and CEO Pamela Passman about the conference and these important issues.

1)    The issue of social media and IP protection is a daunting one for companies. As you were putting together topic areas for the conference, how did you decide what to focus on?

Indeed, companies are challenged today with a broad range of issues related to IP protection in today’s digital and social media environment. For this conference, we considered the top areas of concern and information that would be most practical for participants.

For example, the session “Ownership of IP in the Workplace,” looks at the types of agreements you should and can have employees sign. The “IP Issues You Didn’t Know you Had” panel takes a look at emerging challenges stemming from hackers, third-party hosted sites, open source software, unscrupulous partners who claim your IP as their own, and users of torrents and the Darknet, to name a few. The luncheon program – “Testimonials and Endorsements: How to Properly Involve Employees” – will provide an overview of the restrictions on the use of testimonials and endorsements and will offer general and specific approaches to staying out of trouble when navigating new advertising media. Closing the day is the session featuring Ms. Passman – “IP Theft in the Workplace.” It looks at insider threats – both malicious and unintentional – to confidential information and provides practical steps for improving the protection of IP, including trade secrets.

2)    Why should companies be more proactive when it comes to social media in the workplace?

First, companies need to be aware of the legal risks related to the use of social media in the workplace. These include:

  • Document retention and electronic discovery issues
  • Exposure of confidential information and trade secrets and cybersecurity concerns
  • Securities law concerns, including insider trading
  • Vicarious liability for discrimination, retaliation, defamation, invasion of privacy, trademark & copyright infringement, obscene material and otherwise illegal content

A 2013 Ponemon study, while a bit dated, illustrates some of the scenarios that can get companies in trouble. They interviewed 3317 individuals in six countries (United States, United Kingdom, Brazil, France, China, and Korea) and found that of those surveyed:

  • Over half e-mail business documents from their workplace to their personal e-mail accounts (41 percent say they do it at least once a week);
  • 41 percent download intellectual property to their personally owned smart phones or tablets; and
  • 37 percent use file-sharing applications (e.g., Dropbox™ or Google Docs™) without company permission.

3)    Where should companies start? Is it necessary for your company to have a social media policy in place and, if so, what should your policy include?

Social media platforms attract large audiences worldwide: Facebook has over 1.4 billion account holders and over 936 million daily active users. LinkedIn has over 364 million members in over 200 countries in territories. Given these statistics, it is more than likely that some of your employees are active social media users. It is absolutely necessary for your company to have a social media policy in place, one which should address:

  • Proper Use: acknowledging your company provides its employees internet access, that it is a useful business tool and that employees must use it properly
  • Use During Work Hours While Using Company Provided Equipment/Systems: no or limited use of social media by your employees unless directly related or necessary to perform the job
  • Limitations on Social Media Activity to Those Impacting The Company: acknowledging that social media may be a personal activity and that your company will only seek to impose limitations on its use when it impacts your company, co-workers, clients or third parties who deal with your company

4)    Are there any legal issues for your company to consider regarding employee social media activity?

If your company decides to implement a social media policy or agreement, there are legal implications to take into consideration. Most states have limits on what you can ask an employee regarding social media accounts. Other implications include (but are not limited to):

  • First Amendment: protects free speech
  • Fourth Amendment: protects against unreasonable searches and seizures
  • National Labor Relations Act (NLRA): An employee is protected under the National Labor Relations Act (NLRA) when engaging in a discussion of work conditions with other co-workers on social media, including sharing information about wages, complaining about policies or managers and expressing union support. Section 7 of the NLRA prohibits employers from enacting policies that stifle or prevent employees from engaging in “concerted activity” for “mutual aid and protection”

You should always consult with your company’s legal department to determine the limitations you can impose on employee social media activity.

5)    You have mentioned trade secrets as one type of IP that is particularly vulnerable. What are trade secrets and how can employees access company trade secrets in the workplace?

Because trade secrets can be central to your company’s competitive edge, these company ‘crown jewels’ must be properly protected in the workplace. There are six factors to determine whether information constitutes a trade secret:

  • Extent known outside company
  • Extent known by employees and others inside company
  • Measures taken by company to protect secrecy
  • Value of trade secret to company and competitors
  • Time, effort and money expended in development
  • Ease of difficulty which it can be properly acquired or duplicated by others

Examples of trade secrets include: product launches and designs, formulas, processes, business plans and customer lists. Rogue employees and business partners account for 90% of trade secret misappropriation, the vast majority of this misappropriation occurring by electronic means.

For more information about the conference, please click here. There is still time to register.