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Trading Secrets

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

Webinar Recap! So You Want An Injunction in a Non-Compete or Trade Secret Case?

Posted in Trade Secrets

shutterstock_318803609We are pleased to announce the webinar “So You Want An Injunction in a Non-Compete or Trade Secret Case? ” is now available as a podcast and webinar recording.

In Seyfarth’s seventh installment in its series of 2015 Trade Secret Webinars, attorneys Justin K. Beyer, Eric Barton and Robert C. Stevens focused on the issues confronting plaintiffs in preparing for and prosecuting trade secret cases and the various ins and outs of seeking both temporary restraining orders and preliminary injunctions.

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

Getting Your Money Back: New Jersey Employers Can Disgorge A Disloyal Employee’s Salary

Posted in Breach of Fiduciary Duty, Data Theft, Practice & Procedure, Trade Secrets

shutterstock_295640804By Christopher Lowe and Robert T. Szyba

In a recent ruling, the New Jersey Supreme Court gave employers a great recourse for dealing with former employees who breach their duty of loyalty.  In Bruce Kaye v. Alan P. Rosefielde, the Court allowed an employer to recover compensation paid to a disloyal, recently terminated, employee, even where the employer sustained no economic hardship from the employee’s acts of disloyalty.


In Kaye, the employee, an attorney, who was only licensed to practice in New York, was hired as Chief Operating Officer (“COO”) and General Counsel for plaintiff’s business selling and managing timeshares in Atlantic County, New Jersey.  Interestingly, although the defendant’s contract refers to his salary as a retainer for his services, and it appeared that both parties intended  defendant to be an independent contractor, both parties agreed that defendant performed the services of an employee rather than an independent contractor.

While employed in the hybrid COO/General Counsel role — earning a salary of  $500,000 per year — the Court found that the employee committed a number of “egregious” acts that ultimately resulted in the termination of his employment, including: (1) expensing a $4,000 personal trip to Las Vegas, the cost of which included a hotel suite with three “adult film stars”; (2) fraudulently applying for health insurance; (3) forging signatures on false quitclaim deeds of defaulting timeshare owners; (4) carved out a greater-than-agreed-upon personal interest in one of his employer’s corporate entities; (5) creating an entity under his employer’s name, without his employer’s consent, taking a 20% interest in that entity for himself (the employee); and (6) making numerous sexual advances towards other employees.  When the employer learned what was going on, he fired the employee and sued him for breach of fiduciary duty, fraud, legal malpractice, unlicensed practice of law, and breach of duty of loyalty.

The Trial and Appellate Courts

After a 26-day bench trial, the trial court found that the former employee breached his duty of loyalty to the employer, and committed legal malpractice and fraud.  The employer was awarded $4,000 for the Las Vegas trip, over $800,000 in counsel fees and costs, and rescission of all of the employee’s ill-gotten interests in the employer’s other companies.  But despite it being “difficult to imagine more egregious conduct by a corporate officer,” the trial court declined to order equitable disgorgement for the former employee’s compensation during the period of disloyalty.  The trial court interpreted a prior Supreme Court decision, Cameco, Inc. v. Gedicke, as holding that “in order to compel disgorgement of a disloyal employee’s compensation, a court must first find that ‘the employee’s breach proximately caused the requested damages.’”  The Appellate Division agreed with the trial court on that point and affirmed that the employer could not disgorge the compensation paid to the disloyal former employee because it could prove no actual harm.

The New Jersey Supreme Court granted certification only to address the specific question of “whether a court may remedy disgorgement of a disloyal employee’s salary to an employer that has sustained no economic damages.”

The Court reversed the courts below, holding that disgorgement is an equitable remedy within the trial court’s authority, including where a disloyal former employee’s misconduct is not tied to an economic loss suffered by the employer on account of the employee’s disloyalty.  The Court directed lower courts to consider four factors to determine whether an employee breaches his/her duty of loyalty:

(1) the existence of contractual provisions relevant to the employee’s actions;

(2) the employer’s knowledge of, or agreement to, the employee’s actions;

(3) the status of the employee and his/her relationship to the employer (for example, corporate officer or director versus production line worker); and

(4) the nature of the employee’s conduct and its effect on the employer.

In effect, courts are directed to consider “the parties’ expectations of the services that the employee will perform in return for his or her compensation, as well as the ‘egregiousness’ of the misconduct that leads to the claim.”

The Court further clarified that once the employee is found to have breached the duty of loyalty, courts should decide whether disgorgement is a proper remedy by considering: “[t]he employee’s degree of responsibility and level of compensation, the number of acts of disloyalty, the extent to which those acts placed the employer’s business in jeopardy,” “the degree of planning to undermine the employer that is undertaken by the employee,” as well as “other factors” that may be relevant.  And once disgorgement is found to be appropriate, the court suggested apportionment commensurate to misconduct at issue, as opposed to “wholesale disgorgement.”

Outlook for Employers

New Jersey employers scored a significant win and a meaningful tool to deter and redress a breach of an employee’s duty of loyalty.  The Kaye Court addressed the circumstance of a disloyal employee who’s employment was terminated, however the analysis  is certainly  instructive in addressing situations with current employees.  The ability to recoup some or all of a disloyal employee’s salary/compensation is certainly a powerful tool in the right circumstances, and certainly something to consider when faced with a breach of the duty of loyalty.

Financial Projections, Strategic Plans, And Customer Contract Proposals Can Be Trade Secrets

Posted in Trade Secrets

shutterstock_322264889Two competitors who do research and analysis for advertisers and media companies, concerning how television viewing impacts consumer purchasing, have been in a legal battle over alleged trade secret misappropriation, patent infringement, and other causes of action. The dispute already has produced at least six district court opinions. Recently, in a 47-page non-precedential order issued by the Court of Appeals for the Federal Circuit, the district court’s summary judgment order — reported at 984 F. Supp. 2d 205 (S.D.N.Y. 2013) (Scheidlin, J.) — was affirmed in part, reversed in part, vacated in part, and remanded. TNS Media Research, LLC v. TiVo Research & Analytics, Inc., No. 2014-1668 (Fed. Cir., Sept. 16, 2015).

Status of the case.

TNS Media Research (referred to by the courts as “Kantar”) sued TiVo (referred to as “TRA”). Kantar sought a declaratory judgment that it did not infringe a particular TRA patent. TRA counterclaimed for infringement of that patent and two others, plus misappropriation of trade secrets, breach of contract, and breach of fiduciary duty. After extensive discovery, TRA moved for summary judgment. Judge Scheidlin granted the motion in substantial part. She (a) held that TRA did not infringe Kantar’s patents, (b) dismissed TRA’s misappropriation claim as a discovery sanction, (c) ruled that TRA’s allegedly confidential information did not constitute trade secrets, (d) held that TRA submitted insufficient evidence to support a claim for damages, and (e) denied TRA’s requests for injunctive relief relating to allegations of a breach of fiduciary duty and for a jury trial on compensatory damages. According to the appeals tribunal, many of these rulings were erroneous.


Before they were competitors, Kantar was a substantial investor in TRA, a seemingly valuable corporation at the time. As a result of its investment, Kantar was given a seat on TRA’s Board and considered merging with TRA. Kantar allegedly was given access to TRA’s trade secrets both as a Board member and in the course of the companies’ merger negotiations, ultimately abandoned. After Kantar purchased and began operating a competing analytics company, TRA’s fortunes dwindled, and it was sold for a fraction of its former value. The purchaser continued to operate the acquired company under the TRA name.

The ruling below regarding TRA’s trade secret claims.

Absence of trade secrets. In its counterclaim, TRA alleged that Kantar misused TRA’s confidential information. After originally asserting more than 20 categories of trade secrets, on the eve of summary judgment briefing TRA reduced the number to five including characteristics of its products and its strategic plans.

Judge Scheidlin found that TRA had disclosed publicly most of the properties of its products. Further, she ruled that there was no evidence that Kantar’s products used any of TRA’s technical information. Regarding TRA’s strategic plans, she concluded that these were merely goals which are not protectable trade secrets under New York law. Judge Scheidlin added that “TRA’s trade secret claims had no colorable basis and were brought in bad faith.” Thus, she granted summary judgment as to misappropriation. She did not consider whether TRA’s customer contract terms, proposals and pricing were protectable.

Dismissal as a sanction. Kantar alleged that TRA had failed during discovery to identify trade secrets with sufficient specificity. The district court agreed. It held that dismissal of the misappropriation claims was warranted as a sanction because TRA’s violation of Federal Civil Procedure Rule 26(e) (requiring timely supplementation or correction of disclosures and responses) was “manifestly prejudicial to [Kantar] and taxing on the Court.”

Rulings on appeal by the Federal Circuit.

Grant of summary judgment. TRA had a proprietary product called Media TRAnalytics. The company claimed that the product’s speed, reliability, scalability and performance were trade secrets. The Federal Circuit concluded that the information concerning Media TRAnalytics that was publicly disclosed was merely an overview. In addition, the court held that the question of whether Kantar improperly used TRA’s confidential product information to gain a competitive advantage requires a determination by a fact finder rather than a summary disposition. Further, proprietary financial projections and strategic plans may be protectable if “not publicly known, not readily identifiable, or otherwise complex.”

In the Federal Circuit’s view, customer contract terms, proposals and pricing can be trade secrets. The district court was held to have committed reversible error by granting summary judgment regarding misappropriation without considering whether TRA’s customer information warranted protection. Similarly, “TRA presented sufficient evidence to create a colorable question about Kantar’s intent to injure TRA,” and so TRA was entitled to a trial on the subject of its entitlement to punitive damages.

Dismissal of trade secrets claims as a sanction. The Federal Circuit said that dismissal as punishment was not warranted here: “[T]here is no indication that TRA purposefully shirked its discovery obligations.” Further, TRA was not given a warning, and the lower court’s finding of prejudice to Kantar was unexplained. On remand, the district court was directed to consider a less harsh sanction.


The Federal Circuit’s order teaches that proprietary financial projections, strategic plans, and customer contract terms, proposals and pricing, all may be trade secrets. Further, a mere overview, or only partial disclosure, of a product’s confidential characteristics does not defeat trade secret protection for the undisclosed portion. In addition, whether a party’s protected information was used by another to gain a competitive advantage is a question to be decided by the fact finder.

When E-Filing Goes Wrong: How to Protect Your Trade Secrets in the Event of Inadvertent Online Disclosure

Posted in Cybersecurity, Data Theft, Trade Secrets

shutterstock_206994166It is frightening to think that valuable corporate trade secrets could be lost with the click of a mouse. But as electronic court filing becomes increasingly prevalent, the risk of inadvertent disclosure of sensitive information online—and the resulting loss of trade secret protection—is becoming more and more real.

A litigant in New York recently learned this lesson firsthand, narrowly escaping what could have been extremely harsh consequences from an accidental e-filing. In HMS Holdings Corp. v. Arendt, the Supreme Court of New York refused to create a per se rule that would unfairly punish Plaintiff HMS Holdings Corp. (“HMS”) for its mistaken disclosure of more than 1,500 pages containing corporate trade secrets, but the court did leave room for serious consequences in future cases.

The HMS court has created a ten-factor test that could result in loss of trade secret status under some circumstances. However, careful study of these factors can help avoid—or at least mitigate—damage in the event a mistake is made.

HMS Holdings Corp. v. Arendt

HMS owns certain proprietary systems, methodologies, and technologies specific to a niche market: state Medicaid agencies who need assistance identifying and verifying alternative forms of healthcare coverage and funding from third-party payors. HMS carefully guards these systems, methodologies, and technologies as trade secrets. So when a group of employees left to go work for a rival and attempted to bring several of HMS’s customers to the competing business, HMS sought preliminary injunctive relief against them.

But the trouble really began for HMS when it filed its motion papers in preparation for its injunction hearing. Although a stipulated protective order was in place that allowed the company to designate its supporting affidavit and annexed exhibits “Attorneys’ Eyes Only,” HMS inadvertently e-filed an unredacted affidavit with more than 1,500 pages attached that detailed the trade secrets at issue.

The company learned of this mistake in the worst way possible: defense counsel raised the issue during the injunction hearing, insisting that filing on the New York State Courts Electronic Filing (“NYSCEF”) system rendered the information public and thus vitiated its trade secret status.

Indeed, the information had been available on the Internet via NYSCEF for almost a month between the filing and the hearing, when the court issued an immediate sealing order on consent. Luckily for HMS, the court rejected the defendants’ argument, noting that although NYSCEF could be accessed online, “it does not follow that the inadvertent e-filing of an unredacted document on NYSCEF necessarily constitutes a posting to the Internet that renders the information generally known.”

The Ten Factor Test

Ultimately, the HMS court was hesitant to adopt a “rigid and formulaic” rule regarding inadvertent e-filing, as there was no clear precedent governing the issue. Defendants cited cases that either did not involve e-filing or predated its widespread adoption, with the exception of a single opinion finding waiver of trade secret status after “multiple, unrectified publications in court records over a span of several years.” Furthermore, there were overarching public policy concerns to consider. According to the court, creating a per se rule in this context would “frustrate the Judiciary’s important objective of promoting a modern, technologically advanced court system.”

Therefore, the court analyzed the issue by adopting factors set forth in the Restatement of Torts to determine whether “the alleged trade secrets have become generally known or readily ascertainable through proper means.”

Specifically, the court started by considering six factors:

(1)        the means by which access to the filing was available;

(2)        the class of persons who have (or had) access to the information;

(3)        how long the filing remained accessible;

(4)        the extent to which the filing actually was viewed and/or downloaded;

(5)        the extent to which the material was indexed and/or made searchable on the Internet; and

(6)        whether the material remains cached or otherwise available on the Internet.

The court noted that in cases where the alleged trade secrets have, in fact, been accessed and downloaded by third parties, it is also proper to consider:

(7)        the extent of any re-dissemination;

(8)        the likelihood of any future re-dissemination;

(9)        the extent to which recipients already knew the secrets; and

(10)      the extent to which such recipients are obliged to maintain the secrecy of the information.

HMS’s Trade Secret Status Remains Intact…For Now…

Certain facts in the HMS case raised the court’s suspicion: two former HMS employees claimed they happened to independently download the affidavit and exhibits from NYSCEF on the very same day, “simply out of a desire to stay abreast of developments concerning HMS.” The court noted that these particular individuals were former vice presidents of HMS who had access to much of the same material during their employment and who are subject to both common law and contractual obligations preventing them from re-disseminating it. Under those circumstances, the court refused to punish HMS for the inadvertent e-filing, holding that the e-filing did not destroy trade secret status so as to deprive HMS of a likelihood of success on the merits of its trade secret claim. However, the court promised to revisit trade secret status after discovery, when “the myriad of factors necessary to the determination of that issue can be applied to a fuller and firmer factual record.”


The HMS court’s analysis is helpful in formulating proper internal controls for e-filing procedure. Access to trade secret information should be limited to as few individuals as possible, but not so few that an organization cannot put checks in place to ensure that each electronic court filing is completed without release of sensitive information. Prompt review after each filing should ensure that, in the event a mistake has been made, the secret information can be removed as soon as possible, reducing the number of people who can access, view, and/or download the material.

The U.S. District Court for the Northern District of California offers guidelines on its website for ensuring prompt and effective removal of erroneous e-filings. The Court suggests taking the following steps upon discovery of an inadvertent filing containing confidential information:

(1)        If your judge has a docket correction e-mail, send a message to that address immediately, including your case number, docket number, and a brief description of your problem. If possible, mark your message “urgent.”

(2)        If during business hours, call the court to request expedited handling.

(3)        File a Motion to Remove Incorrectly Filed Document(s) as soon as possible. If your Motion is granted, the erroneously filed document(s) can be permanently removed from the court’s online records system.

(4)        E-file a corrected (i.e., redacted) version of the document. Note: you can do this right away, without awaiting the outcome of steps 1 through 3 above.

Ideally, with these protocols in place, compromises to valuable trade secret information can be kept to a minimum in the future—at least when it comes to e-filing.

Frequently Asked Questions Regarding Trade Secret Disputes and Employment Risks Answered

Posted in Computer Fraud and Abuse Act, Cybersecurity, Data Theft, Espionage, International

shutterstock_152933135In today’s post, we have answered some of the most frequent and significant questions that we are asked about trade secret disputes and employment risks.

  1.  Could you provide a brief snapshot of current trends in trade secret disputes? Do companies need to be more aware of the potential risks in this area?

Milligan: Data theft of valuable company trade secrets through the use of portable electronic storage devices is occurring more and more, as is theft through cloud storage. We are also seeing an increase in more sophisticated hacking of company networks to obtain proprietary data by organized crime and foreign companies or states. Technological tools and employee use of personal mobile devices such as smartphones and tablets have given rise to a parallel trend of employers allowing — or requiring — their employees to use their own personal mobile devices at work. This “Bring Your Own Device” (BYOD) movement can provide benefits to employees and employers, such as convenience, greater flexibility and productivity, as well as cost savings. However, BYOD programs can also create risks for employers. Companies need to be aware of potential data security issues, BYOD policies in a unionized workforce, employee privacy concerns and intellectual property issues. Moreover, the recovery of stolen information and workplace investigations can be hampered by employee-owned devices, not to mention challenges in litigation when trying to gain access to such devices where privacy considerations are often leveraged. Additionally, attacks on reasonable secrecy measures — part of the definition of a trade secret — is also on the rise: One court recently ruled that password protection alone was not enough to demonstrate reasonable secrecy measures.

Wexler: Further, like the EU, the United States is considering enhancing trade secret protections through additions to its laws. There are two bills pending in the United States Congress to create a civil cause of action for trade secret misappropriation in federal court. If passed, the legislation would provide companies with an additional forum and remedy to combat trade secret theft. With the increasing accessibility of data from a variety of electronic devices and threats by insiders and outsiders, companies also need to be more aware of potential risks to their data and ensure that they have appropriate policies and agreements in place with employees, vendors, and business partners, as well as top of the class data security protections.

  1. How severe is the threat of losing trade secrets to a departing employee or departing executive? What are some of the common scenarios in which trade secrets can be compromised in this manner? Does the threat level change depending on the size of the company – small cap, mid cap, Fortune 50?

Wexler: The threat of losing trade secrets to a departing employee is real and not a matter of if, but when. Prudent companies will make sure that they have appropriate processes in place to address the threat when it occurs. As today’s businesses meet the challenges of intensifying global competition, a more volatile workforce and information being transmitted at an unprecedented speed, they also face a greater risk of losing their valuable proprietary information to theft, inadvertent disclosure, or coordinated employee departures. At a minimum, failure to take both proactive and immediate reactive measures could result in significant loss of profitability and erosion of an established employee and customer base. The threat of losing trade secrets to a departing employee or executive is enhanced if you don’t have appropriate policies and agreements in place to prevent such theft or hold employees accountable for their unlawful conduct. And it can happen so easily and rapidly: One thumb drive can carry millions of pages of proprietary information and company information transferred to a personal email account or in a personal cloud all pose means for theft.

Milligan: Just look at recent headlines involving some of the world’s largest companies who have seen their proprietary information compromised by insiders and outsiders. The crown jewels of many companies are at risk, and millions of dollars are in play. Lack of market secrecy measures, sloppy practices including poor supply side protections, lack of employee education and stale agreements and policies, poor security and different standards for executives who say one thing and do another are all common scenarios that put a company at risk. Common scenarios in which trade secrets can be compromised include letting an employee take company data when he or she leaves. Another red flag scenario is not utilizing non-compete or non-disclosure agreements. There can also be scenarios where the particular industry is highly competitive and competitors are willing to take the enhanced risks to acquire the business or technology. In such scenarios, companies need to make sure they have in place appropriate onboarding and off-boarding practices and procedures, and use the appropriate agreements so they are not exposed. In our experience, the threat level does not necessarily change depending on the size of the company, but the magnitude of harm may increase. The larger the company, the more information to protect and employees/third parties to regulate and police. But small and mid-cap companies have similar concerns because they oftentimes have innovative technology that competitors or other third parties want, so these companies can also be vulnerable.

  1. What steps can companies take during the hiring process to reduce the threat that it may later be sued for trade secret misappropriation – particularly executives or those employees with higher level access to sensitive IP assets?

Milligan: Companies need to have a thoughtful, pro-active process in place when hiring employees from competitors that is calculated to ensure that new employees do not violate their lawful agreements with their former employees, including using or disclosing their former employers’ trade secrets, and retaining any of their former employers’ property. It’s important to regulate who interviews the job candidate and evaluate the candidate’s non-compete or confidentiality agreement. Advise company personnel who are interviewing the candidate not to ask about a competitor’s confidential information during the hiring process. Focus the interview on the recruit’s general skills and experience in the industry. It’s also important not to disclose company trade secrets to the candidate — be careful of the access permitted to the candidate. Candidates for employment should sign certifications that they will not disclose any trade secrets of their current employer. Additionally, make sure you analyze a recruit’s agreements in advance of an offer being made. Should the candidate accept an offer, provide clear instructions to the employee that you don’t want the former employer’s trade secrets or property and use agreements with the employee documenting the same. There are unique issues surrounding the retention and departure of high-level executives, particularly related to non-compete and trade secret issues. Since businesses can become targets of trade secret-related lawsuits if they hire executives and senior management who have worked at a competitor and misappropriate trade secrets or otherwise violate their restrictive covenants, it’s important for companies to conduct due diligence on prospective employees and make sure that they have thoughtful plan in place before bringing on any high risk hires.

Wexler: Simple steps such as retaining hard drives when an employee leaves and inspecting computers, devices, cloud storage, and email accounts can alert an employer to theft of information. More sophisticated methods such a forensic exam and monitoring software can also detect theft. Most of all, create a culture in which recruits and new employees are told “we do not want anything from your prior employer.” Some additional best practice considerations follow below. Do not allow a recruit to do any work for your company until he or she has left his or her prior employer. Assist the employee in announcing the change in employment upon commencement of employment as appropriate. Focus on making the transition as smooth as possible for the current employer and encourage the departing employee to give proper notice and work out a mutually agreeable transition schedule with his or her current employer. With respect to the employee’s new position, don’t put the employee in a position in the company where he or she will necessarily need to reveal trade secrets. Finally, HR personnel needs to follow up with the employee to make sure that she is following her agreements and not pushing the envelope, and also follow up with managers to make sure the employee is doing the same.

  1. In what ways is the technology now available to employees changing the playing field in terms of loss or theft of trade secrets?

Milligan: The constant evolution of technology, particularly in mobile devices, data storage and security, and social media, has created legal challenges for companies and the playing field has changed tremendously. Portable electronic storage devices, online data storage, and personal email are available to employees for nominal to no expense and can provide the means to trade secret theft. Additionally, business leaders often want data and information immediately and often want to make it accessible to various constituents, but companies don’t necessarily keep up with the latest in security in protecting such data. Companies need to stay on top of technology, including the latest in data storage and security and storage devices. Hacking of computers and mobile devices is more of a concern these days, and more mobility for employees also means more potential security issues for companies. Companies also need to stay on top of social media. Given its rapid and somewhat haphazard growth, social media carries with it a set of issues that traditional avenues of trade secret disclosure do not. For instance, unlike the departing employee who knowingly takes with him a box of documents, the relaxed and non-professional environment of social media sites could lead to employees disclosing confidential information without even realizing they are doing so. Exposure of confidential company information and employee privacy rights are all issues that companies are now struggling with.

Wexler: Social media privacy legislation has become increasingly common in the United States and often impacts trade secret investigations. Issues related to social media privacy in the workplace are not going away and we expect to see more disputes to define acceptable practices in this area. In light of this uncertainty, employers should determine whether their company has employees in any of the states that have adopted or are planning to adopt social media privacy laws in order to ensure compliance with such laws. Employers should also be aware that state laws may restrict requests for information about such activity. Counsel should review the applicable state social media access law before asking an employee for any account-related information. Additionally, employers should not overlook social media evidence in conducting employee investigations, and trade secrets and restrictive covenant lawsuits, but make sure that your company’s review and access of such information does not violate applicable law.

  1. How can companies avoid trade secret misappropriation and what should they do if they suspect misappropriation has occurred? What forensic investigation options might be available?

Wexler: Apart from civil liability, the Economic Espionage Act makes it a federal crime to steal trade secrets, and companies can be liable if they hire employees who misappropriate trade secrets for their new employers’ benefit. Make sure your executives know the importance of playing by the rules. Employers can best avoid trade secret misappropriation with solid hiring practices and strong off-boarding procedures which are calculated to protect trade secrets and honor lawful agreements, coupled with effective ongoing employee training on trade secret protection and fair competition. Protecting your company information is critical to avoid trade secret misappropriation, and companies should work with their outside counsel to create solid policies and agreements, and solutions for onboarding to avoid exposure on restrictive covenants and trade secrets. It’s also crucial to know your business partners, and have them vetted, so that they don’t expose your valuable trade secrets. Critical to any trade secret matter is the thorough investigation of what, if any, wrongdoing occurred. Companies should work with legal counsel who is experienced in conducting such investigations. Comprehensive interviews and a review of relevant files, emails and workspaces are often the starting points of a competent investigation.

Milligan: We also regularly collaborate with forensic experts and computer specialists to find out how secrets were taken, and by whom, and to preserve any evidence necessary to future litigation. It’s important to preserve data, review emails, and talk to relevant witnesses to interpret the forensic data. A digital forensics examination often includes collecting and analyzing artifacts from the operating system, internet history, and unallocated space. Routine eDiscovery does not typically delve into questions about the source computer or storage device and ESI, although eDiscovery may uncover the need to ask questions related to internet history, webmail, cloud storage, mobile devices and phone back-ups, and removable devices.

  1. How should companies interact with criminal prosecutors and federal/state law enforcement to complement civil claims for trade secret misappropriation?

Milligan: Private companies can investigate misappropriation claims and provide information to authorities for purposes of prosecuting Economic Espionage Act and/or Computer Fraud & Abuse Act claims as well as similar state criminal laws, but businesses need to be aware of two important points: 1) allowing law enforcement access to the business can be a double edged sword creating interference with operations and disclosure of more information than the business may want, and 2) when conducting an investigation be certain to follow accepted forensic practices and chains of custody in collecting information. In sum, ensure that you have your house in order so you don’t become the target of an investigation. When considering criminal prosecutions, always be cognizant of the ethical rule required of attorneys that generally prohibits threatening or initiating criminal proceedings to gain an advantage in a civil proceeding. Consultation with criminal authorities should be done in secrecy and ideally by non-attorneys so as not to run afoul of ethical rules. However, note an attorney can have contact with authorities, it is not prohibited in and of itself.

Wexler: It should also be noted that criminal prosecutors may make a request regarding the secrecy of the investigation or to hold off taking certain actions in the civil matter (or pursing the case altogether while the criminal case is ongoing) as they are focused on the criminal matter whereas a company and its counsel may be focused on the civil matter and damages. These differing interests can collide at times, so coordination is key. No private right of action exists yet under the Economic Espionage Act. The U.S. Senate and House are currently considering legislation on this issue.

  1. What kinds of challenges do US companies face in pursuing trade secrets and non-compete claims against foreign companies, particularly from China?

Milligan: U.S. companies may face the challenge of not being able to enforce injunctive relief orders and judgments, as well as jurisdictional challenges posed by foreign companies. Additionally, in some cases, Chinese companies doing business in the U.S. have quite limited assets in the U.S. and individual defendants may be judgment proof. Even if a U.S. company obtains a favorable judgment from the U.S. court, the judgment may not be recognized or enforceable in China, and thus, the company may not obtain sufficient monetary or equitable remedy. Therefore, the U.S. company must carefully select its business partners and the jurisdiction in a confidentiality or non-compete agreement to attempt to enhance its ability to obtain an injunction and judgment. If forced to sue abroad, remember the court systems are different and there are different views on IP. Your company may not be able to get complete relief in a foreign jurisdiction. The EU Commission has proposed a directive to harmonize trade secrets law in Europe that may assist in this regard in the future if approved.

  1. What are some practical considerations for US companies or multinational companies doing business in Asia and Europe to protect their trade secrets and confidential information?

Wexler: Know your business partners. Have them fully vetted so they don’t steal your IP. Try to protect your supply side with appropriate agreements. You should also be careful about what you share with your business partners. If it is bet-the-company information, consider keeping that internal. In addition to getting employees and business partners to execute well-prepared agreements, training — both on-board and on-the-job — can be a powerful measure. Employers should make sure that access to trade secrets and confidential information is granted only to those with necessity to know and make sure your local workforce abroad is trained on company policies and signs appropriate agreements to protect IP. Realize that you are not in the U.S., and the legal systems and respect for IP may be different. For example, in China, different locales may have different views on trade secret protections and non-compete agreements. For instance, the statutory minimum non-compete compensation in Shenzhen is higher than the one in Shanghai. U.S. companies or multinational companies doing business in China should be aware of such local variations and may need to take different measures in different places to ensure protection.

Milligan: Within a foreign forum the selection of the right venue, meaning a locale where the court is more willing to implement the rule of law is essential. In China, for example, the enforcement varies by locale. For instance, recent decisions indicate that Shanghai courts are more willing to give protection to the employer in trade secret and non-compete cases, including issuing injunctive relief. Try to use contractual choice of law, consent to jurisdiction, and forum clauses for the most favorable forum for you. Also consider international arbitration. Assess your security vulnerabilities, particularly in light of the foreign locale, and put in place appropriate safeguards. Carefully access your IT security in foreign countries and be alert for unauthorized monitoring and surveillance. Provide training to executives on traveling abroad and conducting business abroad to ensure that trade secrets are not carelessly compromised.

  1. In your experience, what should a company do if a trade secret dispute arises between it and a former employee?

Milligan: If a company suspects that valuable information has been improperly taken or compromised, you need to first assess the potential competitive threat to the company. It’s important to take fast, effective action and consider whether to pursue civil remedies or criminal intervention against the former employee. If litigation is anticipated with the departure of an employee, you should take precautionary steps immediately:

  • Secure and establish a chain of custody for all items returned by the departing employee, including laptop computer, desktop computer, USB devices, tablets, and physical property.
  • Secure and maintain a chain of custody of the employee’s office and the items in that office until it is searched.
  • Retain outside counsel to investigate the departure and have outside counsel secure the services of a digital forensic investigation firm with a good reputation.
  • If the employee is computer savvy, do an immediate search of the internet for relevant materials posted to social media sites, including LinkedIn, Facebook, and Twitter.

Wexler: When our clients are faced with possible trade secret misappropriation by former employees, we immediately investigate and develop the facts through interviews, document review, and collaborate with a qualified digital forensic expert. Forensic investigation of computing devices to identify the possible theft of confidential information is a must. We assess the company’s business objectives as well as the chance of success, and assuming that there is sufficient evidence to pursue, we demand compliance and appropriate remedies via cease and desist demands prior to the initiation of litigation. Should written requests for compliance not be successful, we seek injunctive relief and damages to protect company assets and further our client’s objectives.

  1. In the battle against trade secret theft and related disputes, do companies place enough importance on the language and provisions contained in employment contracts? How can employment contracts be strengthened to either reduce trade secret theft or improve the company’s chances of reaching a successful outcome in a trade secret dispute?

Wexler: In our experience, companies should place more importance on their agreements with employees, vendors, and business partners to protect trade secrets. Companies need to strengthen the language and provisions contained in such agreements, including clearer definitions of protectable trade secrets, return of company property provisions, appropriate restrictive covenants, and appropriate forum and choice of law provisions. Well-drafted agreements can reduce the risk of information being misappropriated. Such agreements should be updated annually, as needed, based on changes in the law, and companies should routinely audit their practices to make sure each employee has an appropriate agreement. Companies should also make it an agreed requirement for employees to sit for an exit interview and return any company confidential information stored on any personal devices. Finally, agreements should include an attorneys’ fee provision for breach.

Milligan: Additionally, a thorough exit interview should be conducted at the time any employee separates, and as part of that exit interview process, each exiting employee should be given a written reminder of their ongoing trade secret, confidentiality and social networking obligations, and should be asked to sign the reminder acknowledging receipt and their agreement to comply with such obligations. The exit interview is also the time to get company property returned by the departing employee and make any arrangements for the return and remediation of company property on any personal devices.

California Federal Courts Reiterate: Unless Computer Hacked, Computer Fraud and Abuse Act Permits Misuse Of Electronic Information

Posted in Computer Fraud, Computer Fraud and Abuse Act, Cybersecurity, Data Theft

California -- brick wallIn United States v. Nosal, 676 F.3d 854 (9th Cir. 2012) (en banc), the court held that the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, prohibits unlawful access to a computer but not unauthorized use of computerized information.  Although that holding represents a minority position, two recent opinions — one in a Ninth Circuit criminal case and one by a California district court in a civil proceeding — indicate that the ruling in Nosal still is the law out west.

Recent Ninth Circuit and California district court CFAA cases. 

Christensen.  The 100+ page opinion in U.S. v. Christensen, Nos. 08-50531, et al. (9th Cir., Aug. 25, 2015), details what the court described as “a widespread criminal enterprise offering illegal private investigation services in Southern California.”  Six individuals were accused and convicted in the District Court for the Central District of California pre-Nosal of computer fraud, bribery, racketeering, wiretapping, identity theft, and more.  On appeal, several convictions were affirmed, and some others were remanded but just for resentencing.  Of particular interest to readers of this blog, however, all three convictions for violating the CFAA were vacated on the ground that Nosal rendered the jury instructions clearly erroneous and prejudicial.  A retrial may be possible.

Loop AI Labs.  In Loop AI Labs Inc. v. Gatti, No. 15-cv-00798 (N.D. Cal., Sept. 2, 2015), the defendants’ motion to dismiss certain counts of the amended complaint was granted in part and denied in part.  The defendant was Loop AI Labs’ former CEO.  Although she had left the company and worked for a competitor, she continued to log in to Loop AI Labs’ computers.  The court ruled that until Loop AI Labs formally revoked her authorization to access the company’s computers, she did not violate the CFAA by logging in, regardless of her motive.

Faulty jury instructions in Christensen.  One of the defendants was a Los Angeles police officer.  He was charged with violating the CFAA, among other statutes, by (a) logging in to confidential state and federal law enforcement databases — which he had the right to access — and (b) in exchange for a bribe, providing to two other defendants information they requested from those databases but to which they were not entitled.  The prosecutor simply assumed, and did not attempt to prove, that the officer thereby committed a CFAA violation.  According to the Ninth Circuit, that assumption was unwarranted after Nosal was decided.

By the same token, at trial the three defendants accused of CFAA violations did not object when the court instructed the jurors — before Nosal — that they should find a CFAA violation if they determined that a computer had been knowingly accessed with the intent to use the information to commit a fraud.  In Christensen, the appellate court held that those jury instructions were plainly erroneous in light of Nosal and clearly were prejudicial.  For these reasons, the CFAA convictions were vacated.

Takeaways.  Approximately one-half of the circuit courts of appeal have ruled on the meaning of the phrase “exceeds authorized access” as used in the CFAA.  In the circuits where there has not yet been a ruling, obviously, there is uncertainty as to which position the court will adopt.

The majority — so-called liberal — view is exemplified by holdings in cases such as International Airport Centers, L.L.C. v. Citrin, 440 F.3d 418, 420-21 (7th Cir. 2006) (CFAA violated by accessing a computer for an unauthorized purpose).  Nosal, and now Christensen, represent the minority (or narrow) position that an individual with authorization to access a computer does not commit a CFAA violation regardless of what the individual does with the information so obtained.

Adding to the confusion, courts are not in agreement over the meaning of Nosal.  For example, in the recent case of U.S. v. Shen, Case No. 4:14-CR-122 (W.D. Mo. Apr. 21, 2015), the facts were somewhat similar to those in Loop AI Labs.  Citing Nosal, the court in Shen stated: “There is some disagreement as to whether an employee who properly accesses a computer and then misuses the information can be convicted” of violating the CFAA.  The Missouri court added: “However, courts are clear that employees who gain access to a computer through their employment lose authorization once they have resigned or been terminated.  Moreover, persons of common intelligence would understand as much.”  Id. at p.4 (citations omitted).  As is apparent, the judge who decided Loop AI Labs does not concur. Further, there are also federal courts in California who have concurred with the Shen reasoning.

Similarly, one cannot be sure that all courts agreeing with the “narrow view” set forth in Nosal also would accept the holding implicit in Christensen that a corrupt police officer does not exceed his “authorized access” to confidential government data bases when he logs in solely for the purpose of providing other persons, in exchange for a bribe, information to which they have no right. With all this uncertainty, the one thing that is certain is that the Ninth Circuit continues to embrace a very narrow and restrictive view of CFAA liability, in contrast to most of the other circuits in the nation.

Trade Secrets or Patents – Why Software Presents No “One Size Fits All” Solution

Posted in Trade Secrets

shutterstock_90529750There are many ways to obtain intellectual property protection for software creations. Many keep the software code confidential and maintain the software as a trade secret. Others seek patent protection on the software, which discloses the higher-level concepts surrounding the software without explicitly publishing the source code. Recent changes in patent law have changed what types of software inventions are patentable and the requirements for obtaining such patents. However, the evolution of the law has been ongoing for quite some time.

The Supreme Court has struggled to define what types of software inventions are patentable in a string of cases over the past fifty years. The most recent case, Alice Corp. Pty. Ltd. v. CLS Bank Intern., 134 S. Ct. 2347 (2014), held that an invention directed to an abstract idea is not patentable simply because it is implemented on a general purpose computer. In particular, Alice and its progeny held that a software invention is not patentable if it (1) recites an abstract idea; and (2) does so without claiming “something more” that transforms “the nature of the claim into a patent-eligible application.” Id. at 2357.

The “abstract idea” prong has been confusing at best. Alice failed to define the test for determining what constitutes an abstract idea. Id. “[W]e need not labor to delimit the precise contours of the ‘abstract ideas’ category in this case.” As a result, courts and patent practitioners have struggled with this lack of guidance from the Supreme Court, with one court even recognizing it “could never succeed in intelligibly” defining what constitutes an abstract idea, but that “I know it when I see it.” McRO Inc., v. Activision Pub., Inc., No. CV 14-336-GW, 2014 WL 4759953, at *5 (C.D.Cal. Sept. 22, 2014). The Patent Office itself declined to issue a bright line rule, instead opting to rely on examples provided by the courts. July 2015 Update to Interim Guidelines, p. 1 “Because the courts have declined to define abstract ideas, other than by example, the 2014 IEG instructs examiners to refer to the body of case law precedent in order to identify abstract ideas by way of comparison to concepts already found to be abstract.” Nonetheless, many software inventions are not considered abstract ideas.

The “something more” prong has borne more fruit for software patents. For example, the Court of Appeals for the Federal Circuit declined to invalidate a patent for an invention that overcomes a problem in computer networks. DDR Holdings v. Hotels.com, No. 2013-1505 (Fed. Cir. December 5, 2014). The patents in DDR Holdings addressed a problem in e-commerce, that a third party merchant can “lure” away visitors of a host web page when a user clicks on the link of the third party merchant. The system of the DDR Holdings patents “generates and directs the visitor to a composite web page that displays product information from the third-party merchant, but retains the host website’s ‘look and feel.’” Id. at 3-4. While the majority opinion did not specify whether the invention was directed to an abstract idea, it held the invention was patent-eligible due to its function of improving computer technology. The software in DDR Holdings is but one example of a patent-eligible software invention.


There is no “one-size-fits-all” solution for protecting software. Trade secret protection can be inexpensive, but can become weak if the software is publicly disclosed or otherwise disseminated. Also, trade secret protection can be obtained in combination with patent protection, with the patent protecting the higher level concepts around the software and the trade secret protecting the source code or other details. In the end, it is best to determine the type of invention sought to be protected and the best form of intellectual property that fits the particular invention. The Seyfarth PTAB Blog discusses many of these trends at www.seyfarth.com/PTAB-blog.

This is a guest post from Patrick Muffo, a writer at the Seyfarth Patent Trial and Appeal Board blog (www.seyfarth.com/PTAB-blog). The Patent Trial and Appeal Board (PTAB) blog discusses recent decisions and trends of the PTAB and provides an overview of prevailing patent topics.

2015-2016 Edition of the Social Media Privacy Legislation Desktop Reference Now Available

Posted in Legislation, Privacy, Social Media, Trade Secrets

Social Media Privacy Legislation Desktop Reference
What Employers Need to Know

There is no denying that social media has transformed the way that companies conduct business. In light of thSMPLe rapid evolution of social media, companies today face significant legal challenges on a variety of issues ranging from employee privacy and protected activity to data practices, identity theft, cybersecurity, and protection of intellectual property.

Seyfarth’s Social Media practice group has prepared an easy-to-use “Social Media Privacy Legislation Desktop Reference,” as a starting point to formulating guidance when these issues arise.

The Desktop Reference:

  • Describes the content and purpose of the various states’ new social media privacy laws.
  • Delivers a detailed state-by-state description of each law, listing a general overview, what is prohibited, what is allowed, the remedies for violations, and special notes for each statute.
  • Provides an easy-to-use chart summarizing existing social media privacy laws by state.
  • Offers our thoughts on the implications of this legislation in other areas, including technological advances in the workplace, trade secret misappropriation, bring your own device (BYOD) issues and concerns, social media discovery, and federal law implications.
  • Concludes with some best practices to assist companies in navigating this challenging area.

We hope that you find its content useful.

How to get your Desktop Reference:

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

To request the 2015-2016 Edition of the Social Media Privacy Legislation Desktop Reference in eBook or hard copy, please click the button below:


Upcoming Webinar: Information Security Policies and Data Breach Response Plans

Posted in Data Theft, Privacy

WebinarOn Tuesday, September 22 at 12:00 p.m. Central, Seyfarth attorneys Karla Grossenbacher and John Tomaszewski will present “Information Security Policies and Data Breach Response Plans.” With the recent uptick of high-profile data breaches and lawsuits being filed as a result by both employees and consumers as a result, every business should take a fresh look at its information security policies and data breach response plans with two thoughts in mind: compliance with applicable laws, and limiting liability in the event of litigation. Cybersecurity is a critical and timely issue for all businesses. If your company has employees and pays them or gives them benefits, then your company is maintaining their personally identifiable information and faces liability in the event of a data breach.

Currently, there is no comprehensive federal law that sets forth a uniform compliance standard for information security best practices or data breach response plans.  Companies operating in the U.S. must comply with a patchwork of 47 different states’ laws that set forth a company’s obligations in the event of a data breach. In the wake of several high-profile data breaches, state legislators in the U.S. have been updating these state laws in the past few months, adding new requirements.

In addition to dictating how and when a company must respond in the event of a data breach in which personal information has been compromised, a number of these laws also contain substantive requirements about cybersecurity measures a company must take generally. Add into this mix that a U.S. Court of Appeals agreed with the Federal Trade Commission (FTC) that it has the right to file lawsuits against businesses that it deems have lax information security protocols – without informing companies in advance of the standard to which they will be held.

Against this backdrop, the presenters will provide a high-level discussion on how your business can structure an information security program to comply with applicable law and minimize liability – since waiting for a breach is not an option. They will discuss, from a legal perspective:

  • Essential components of a comprehensive information security policy;
  • Key elements of a data breach response plan including strategies for state law compliance; and
  • Best practices for dealing with third party vendors that store personally identifiable information for your company.

Registration: 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.

Inevitable Disclosure Doctrine Held Inapplicable To Failed Business Transaction

Posted in Practice & Procedure, Trade Secrets

shutterstock_147490814An Illinois appellate court recently rejected applying the inevitable disclosure doctrine in a trade secret misappropriation spat arising out of a failed business transaction.

After first securing an executed confidentiality agreement, Destiny, the developer of a proprietary healthcare wellness program called “Vitality,” shared details of it with Cigna, a healthcare insurer.  The insurer decided instead to create a wellness product of its own called “Empower.”  Destiny sued Cigna for trade secret misappropriation and breach of contract, alleging circumstantial evidence and “inevitable disclosure.”  Cigna’s summary judgment motion was granted, and the appeals court affirmed.  Destiny Health, Inc. v. Connecticut Gen. Life Ins. Co., No 1-14-2530 (Ill. App. Court, 1st Dist., Aug. 21, 2015).

Status of the case.  Because of a possible interest in “Vitality,” Cigna was considering entering into a joint venture or partnership with Destiny, or making an offer to acquire the company.  Destiny obtained a signed non-disclosure agreement, prohibiting use or misappropriation of Destiny’s confidential information, and then allowed Cigna to take a “deep dive” into data relating to “Vitality.”  The insurer ultimately decided that “Vitality” was too expensive and lacked flexibility.  Thereafter, with the assistance of others, Cigna created and began using “Empower.”  Claiming that Cigna inevitably misappropriated Destiny’s intellectual property and breached the confidentiality agreement, the developer sued the insurer but to no avail.

Background facts.  “Vitality” was used to motivate employees to engage in specific healthy activities and to be rewarded for doing so.  After deciding not to use “Vitality,”  Cigna designed and developed “Empower” with some assistance from a different vendor.  Both “Vitality” and “Empower” incentivize healthy activities by providing rewards.  “Vitality” does not permit employers to change the activities or the points to be awarded for each whereas employers using “Empower” can customize both the activities and the awards.  Soon after “Empower” was launched, Destiny sued in the Circuit Court of Cook County.  Following several years of discovery, Cigna moved for summary judgment.

Arguments for granting Cigna’s motion.  The insurer maintained that Destiny provided it with no trade secrets and that, in creating “Empower,” it used nothing learned from the developer.  Cigna also asserted that Destiny cannot prove damages.

Several Illinois court rulings recognize the “inevitable disclosure” doctrine.  Cigna purported to distinguish those decisions on the grounds that they all came early in the litigation, in connection with motions to dismiss or for a preliminary injunction, and all involved employer-employee disputes.  According to Cigna, since the instant lawsuit had passed those preliminary points and had reached the summary judgment stage, and because the case concerned a failed business transaction, the doctrine was inapplicable.  Cigna cited Omnitech Int’l v. Clorox Co., 11 F.3d 1316, 1325 (5th Cir. 1994), which held that, in a failed business transaction case, absent evidence of actual disclosure, an inference of misuse or misappropriation of trade secrets cannot be based on unsupported speculation.  Cigna also referred the court to Connecticut and New York court decisions holding that the “inevitable disclosure” doctrine cannot be used to create a triable issue of fact in opposition to a summary judgment motion.

Arguments against granting summary judgment.  Destiny admitted relying on circumstantial evidence but emphasized that it often is used to prove misappropriation.  The developer stressed that the Cigna team members who had evaluated “Vitality” had no prior experience with incentive-points platforms, and yet they designed “Empower” quickly after concluding that evaluation.  According to the developer, what the insurer learned from Destiny inevitably provided “a footprint for Cigna to work from in creating its own wellness” product.  Destiny insisted that the insurer should have constructed a “firewall” or “white room” to insulate the “Vitality” evaluation team from participating in the creation of “Empower.”

Further, Destiny contended that the question of whether the insurer inevitably used the developer’s intellectual property involved disputed issues of material fact which precluded entry of summary judgment for Cigna.  Destiny also argued that the same policy reasons underlying application of “inevitable disclosure” in a dispute between a former employer and its ex-employee apply when a business suitor is given access to confidential information and then uses it to create a competitive product.

The ruling.  The Illinois Appellate Court affirmed judgment for Cigna:

“The fact that the information provided by Destiny might have made Cigna more informed in evaluating whether to partner with Destiny or another vendor in the development of an incentive-points program does not support an inference that Cigna misappropriated Destiny’s trade secrets absent some showing that Cigna would not have been able to develop its incentive-points program without the use of Destiny’s trade secrets.”

Takeaways.  As Cigna argued and both courts agreed, Omnitech Int’l is the leading decision regarding the inapplicability of the “inevitable disclosure” doctrine to a failed business transaction.  The court there stated that a potential acquiring company must be free to examine the books of all potential targets and should not be presumed to have revealed confidences.

Unless precluded, a potential acquirer often uses the same team to evaluate all targets.  A target concerned about an “inevitable disclosure” would be well advised to obtain an express commitment from the potential acquirer to create a “firewall.”  Without such a commitment, the target may be unable to win a failed business transaction lawsuit claiming misuse of proprietary data unless (a) the target can show instances of actual misappropriation of its confidential information, or (b) the target can demonstrate that the potential acquirer could not have succeeded in entering into competition with the target without using the target’s secrets.