Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

The taking and using of customer lists is no longer just a matter for civil proceedings and injunctive relief. On Monday, November 26, 2007, the Georgia Court of Appeals affirmed a jury’s criminal conviction of an individual who took and used her former employer’s master client list to solicit customers, who used company computers to plan her new business venture, and otherwise misappropriated client files.

Defendant Shan DuCom was tried and convicted after it was discovered that she had attempted to wipe out her former employer (C&D)’s property management business completely by converting the property management function to her own, newly created entity. Indeed, DuCom conspired with other employees to start a new firm, used C&D’s computers to create new “letterhead and logos, press releases, solicitation postcards, and various ‘to-do’ lists,” as well as to engage in “massive” copying of information maintained on C&D’s computer hard drives to discs. Her actions were apparently so wanton that the day after she left, the former employers’ team came to work and found the office had “been left barren, ‘cleaned out.’ The computer server was turned off, the hard copies of client files were missing, the fax and credit card phone lines had been sabotaged, and office supplies and equipment were missing.” Once the computer service was restored, C&D found that entire databases were missing and that the C&D website had been transferred to DuCom’s new firm. Three of DuCom’s co-workers resigned and joined her new firm as well. Georgia’s Uniform Trade Secrets Act specifically protects client and customer lists as trade secrets, provided they

(A) Derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(B) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

O.C.G.A. § 16-8-13(a)-(b). The appellate court remarked, in particular, that as a new business, DuCom’s new firm “would have opened its doors with little or no property to manage, and with no property to manage, it would have very little income,” reflecting that her head-start approach runs afoul of the law. Noting the damage that she caused by her acts in stealing the client list, the court affirmed the lower court’s award of restitution based on valuation of C&D’s “book of business.”

DuCom also was convicted of “computer theft” under O.C.G.A. § 16-9-93(a) for using C&D’s computers without authorization. The appeals court reflected that she had downloaded data she was not permitted to use and that the jury could have found “beyond a reasonable doubt that DuCom used a computer, owned by her employer, with knowledge that such use was without authority and with the intention of removing programs or data from that computer and appropriating them for her own use.” Under Georgia law, unauthorized use includes “the use of a computer or computer network in a manner that exceeds any right or permission granted by the owner of the computer or computer network” O.C.G.A. 16-9-92(18). With a broad definition and unassailable facts, the appellate court did not waste much time in discussing its reasoning to affirm.

Although it is not unusual to hear tales of such wanton conduct in preparing to compete in a new business, it is not very often that we hear of criminal prosecutions of such matters at the state level in Georgia. We’ll be keeping our eyes and ears open for any further such cases.

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A recent California Court of Appeal decision reaffirmed what those who practice trade secret law already knew, but do not always focus upon, in trade secret litigation --the purported trade secret cannot qualify for protection under California’s trade secret statute unless there is a showing that the information has a demonstrated economic value from not being known to third parties who can obtain economic value from its disclosure or use.

The Court’s decision appears to add an additional wrinkle to this proposition by suggesting that to show independent economic value, one must also demonstrate that there is a discrete advantage to third parties who could utilize the information to the disadvantage of the original owner, thereby creating economic value in its secrecy. Secrecy and usefulness alone will not establish independent economic value.

In Yield Dynamics, Inc. v. Tea Systems Corp., 154 Cal. App. 4th 547 (2007), the California Court of Appeal for the Sixth Appellate District upheld the trial court’s decision granting a former employee’s motion for nonsuit and dismissing a software design company’s trade secret misappropriation claim on the basis that it had failed to demonstrate that segments of its computer source code had independent economic value.

The text of the Court’s entire opinion can be located at this link http://appellatecases.courtinfo.ca.gov/search/case/mainCaseScreen.cfm?dist=6&doc_id=286480&doc_no=H029604

California defines a trade secret under the Uniform Trade Secrets Act as information that “derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from it disclosure or use, and is subject to efforts that are reasonable under the circumstances to maintain its secrecy.” Cal. Civ. Code § 3426.1(d)(1), (2) (2007).

On appeal, the software design company argued that testimony that segments of its source code that were taken would provide “some help” to a programmer to create new routines or to save time programming and that this helpfulness was alone sufficient for a finding of independent economic value in the segments. The appellate court rejected this argument and stated that testimony merely suggesting that the information was useful in carrying out a certain activity does not compel a finding that the information was sufficiently valuable to afford an economic advantage over others.

Appellant also argued that the segments achieved independent economic value because it kept the segments in confidence and entered into non-disclosure agreements with its employees. The Court was unpersuaded and stated that secrecy only exhibits an opinion that secrecy may be advantageous.

The Court also found that appellant failed to establish independent economic value because there was testimony that the segments were not of high quality and were not designed for use by others. The Court noted that the testimony suggested that the segments had no value to anyone outside of the parties themselves. According to the Court, appellant failed to establish that the segments “in and of themselves would provide a competitive advantage to a competitor.” The Court found that there was no evidence that appellant derived independent economic value in keeping the segments from others’ use.

In sum, Yield Dynamics suggests that information lacking value to anyone except its holder that cannot be exploited to gain a competitive advantage by others cannot qualify for trade secret protection despite its secrecy.

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An Illinois Appellate Court recently affirmed a preliminary injunction granted to a medical products manufacturer against its former employee, enforcing 24-months’ non-competition and non-solicitation agreements. The non-competition agreement barred the defendant-employee from competing with the plaintiff with respect to all products and territory assigned to the defendant during his final 18 months of employment. The non-solicitation agreement prohibited the defendant from soliciting or assisting in the solicitation of sales or leases of such products competitive with the plaintiff’s products in that same territory.

The court concluded that the defendant possessed confidential information concerning his ex-employer’s method of calculating so-called “open quotes,” offers to sell products in bulk to specific customers, even though the open quotes themselves were not confidential and they resulted in orders less than 50% of the time. Moreover, the competitor for whom the defendant went to work already was selling similar products to the same customers before the defendant changed employers. Furthermore, many of the plaintiff manufacturer’s employees did not have confidentiality agreements, and the defendant was not charged with taking any information with him when he left the plaintiff’s employ, other than what he had in his head. Lifetec, Inc. v. Edwards, No. 4-07-0300 (Ill.App., 4th Dist., Nov. 6, 2007).

The three appellate court justices were somewhat divided in their reasoning. Two ruled that the plaintiff had “legitimate business interests” in protecting its trade secrets, and found that the time and territorial restrictions applicable to the defendant were reasonable. The third justice concurred in the result. He expressed his opinion that enforcement is appropriate if an employer demonstrates that reasonable time and territorial restrictions were violated, but that courts should not impose on a plaintiff the additional burden of proving that it had a protectible or “legitimate” business interest.

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Adcor Industries, Inc. v. Bevcorp, LLC, 2007 WL 3104796, No. 06-4260 (6th Cir. Oct. 23, 2007).

Last month, the United States Court of Appeals for the Sixth Circuit affirmed an Ohio federal d istrict court’s grant of summary judgment in a trade secrets misappropriation case. Adcor Industries, Inc. sued Bevcorp, LLC, among other defendants, in the Northern District of Ohio for allegedly misappropriating Adcor’s trade secrets and violating a consent decree entered in 1988.

The consent decree was issued against Baron Haag and Chester Romp, individual defendants in the Adcor case, arising out of a scheme in which Haag and Romp, who owned Brau Manufacturing, Bevcorp’s predecessor corporation, illegally obtained drawings to manufacture replacement parts for beverage fillers created by Crown, the predecessor to Adcor. The main thrust of the decree was that it prohibited Haag and Romp from manufacturing Crown parts. Furthermore, the decree applied to their successors, among others.

In 2003, Adcor sued Bevcorp and the other defendants, claiming that Bevcorp, as successors to Brau, had violated the consent decree and misappropriated Adcor’s trade secrets by using the drawings obtained by Haag and Romp. The district court granted summary judgment on the breach of consent decree claim, finding that Adcor had failed to prove to a reasonable certainty that the owners of Bevcorp had acquired the drawings directly from Haag and Romp. The court also granted summary judgment in the trade secrets misappropriation claim, ruling that the claim was time-barred.

In affirming the district court’s decision, the Sixth Circuit pointed to Ohio’s Uniform Trade Secrets Act, which provided that a trade secret misappropriation claim must be brought within four years of the discovery of the misappropriation, or when the plaintiff should have reasonably discovered it. The statute further provided that a continuing misappropriate constituted a single claim. The court found that there was undisputed evidence that Adcor had inquiry notice of the misappropriation more than four years before the suit was commenced. Furthermore, the court noted that there was evidence in the record that Adcor’s delay in commencing the lawsuit was a “strategy deadlock.”

Finally, the court ruled that Adcor had failed to prove by clear and convincing evidence that the defendants had violated the consent decree, agreeing with the district court that there was not sufficient evidence to conclude that the owners of Bevcorp had obtained the drawings from Romp and Haag.

Judge Karen Nelson Moore concurred in part and dissented in part, arguing that Adcor had presented evidence that there were genuine issues of material fact as to when Adcor should have known that the defendants misappropriated the drawings.

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Bob Fernandez of the Philadelphia Inquirer reports that scientist Dr. Manhua Mandy Lin has taken a significant step in clearing her name of trade secret allegations, well, at least in the opinion of one government employee. Lin, who has been engaged in a protracted legal battle with her former employer, materials innovator Rohm & Haas Co., recently received word from a Department of Energy chemist, Charles Russomanno, of his determination that she did not steal trade secrets to develop her innovative procedure for the production of methacrylic acid. Despite this apparent victory, it does little to advance Lin’s interests in her pending litigation.

In November 1999, Lin resigned from her position with Rohm & Haas pursuant to a settlement agreement reached as a result of allegations that she was the victim of unlawful discrimination while at the company. Following her departure from Rohm & Haas, among other legal disputes that have ensued, the company alleged that Lin misappropriated its trade secrets in engaging in her independent research for her company EverNu Technology L.L.C. Montgomery County Court Judge Bernard A. Moore has refused to order an independent scientific assessment in the case and has imposed daily fines of $200 on Lin for her failure to release her research to Rohm & Haas. In total, she has already been penalized more than $200,000.

Worried that her business was in jeopardy due to Rohm & Haas’s suggestion that the Department of Energy was in the process of investigating Lin, she sent confidential court submissions to the Department of Energy in the hopes of avoiding agency action. Although Russomanno’s review of the documents resulted in a finding that Lin did not misappropriate any trade secrets, it remains to be seen whether this conclusion will educe any measurable benefit to Lin in the courtroom. Presumably, Russomanno’s determination will either help spur settlement negotiations or, ultimately, just represent another hollow victory in the course of this seemingly never ending litigation.

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Clients often ask whether they need to provide any consideration to their existing employees when they ask their employees to sign non-compete or non-solicitation agreements. The answer in Georgia typically is that continued employment is sufficient consideration for such an agreement. (The answer is different in Texas and North Carolina, for example.) Glisson v. Global Security Services, LLC, Georgia Court of Appeals, No. A07A1456, 2007 Ga. App. LEXIS 1047 ( Sept. 25, 2007), however, reminds us that this is not a universal rule. In that case, William Glisson entered into a two-year employment contract with his employer, Global Security Services. The agreement contained a non-compete provision, as well as a two-year term for employment. Approximately eighteen months after entering the agreement, GSS requested that Glisson sign a more extensive, non-competition agreement. Glisson did so, but shortly thereafter left GSS and formed a competing business. GSS brought an action against Glisson under the second non-compete provision that Glisson had signed.

The trial court ruled that the non-compete provision was enforceable and that GSS was entitled to an injunction preventing Glisson from competing in a certain area. The Georgia Court of Appeals reversed that judgment, holding that GSS was already obligated to employ Glisson through the end of his two-year term when it compelled him to sign the second non-compete agreement. Thus, the second non-compete agreement lacked consideration and was unenforceable.Glisson illustrates that continued employment may not be sufficient consideration for an existing employee to sign a non-compete agreement where the employee is not an at-will employee (instead, the employee is under contract). This could be an important exception to the general rule that an employer does not have to provide its employees any consideration for execution of a restrictive covenant.

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The Woburn Daily Times Chronicle has reported that iRobot Corp., a Burlington, MA corporation, has been granted a preliminary injunction in the District of Massachusetts in its case against Robotic FX, Inc., and its founder and president, former iRobot employee Jameel Ahed. iRobot is suing Ahed and Robotic for misappropriation of trade secrets.

iRobot’s lawsuit alleges that Robotic used iRobot’s trade secrets to develop the Negotiator, a replica of iRobot’s PackBot robot. iRobot describes the PackBot robots as “robots that perform dull, dirty or dangerous missions in a better way.” The PackBots were the first ground robots to be used in combat by U.S. forces.

The U.S. Army had a $280 million contract with Robotic for use of the Negotiator, but set aside the contract in October pending a re-examination of Robotic’s ability to deliver the Negotiator “as a responsible contractor.” The Army has notified both Robotic and iRobot that if Robotic is unable to provide the Negotiator, the contract will be awarded to iRobot instead.

In issuing the preliminary injunction, U.S. District Judge Nancy Gertner found that iRobot had shown a likelihood of success on the merits of its case. The exact terms of the order are under seal so as to further protect iRobot’s trade secrets; however, iRobot reports that the injunction prohibits Robotic from using “critical features” in the design of the Negotiator.

iRobot has a separate lawsuit pending in the Northern District of Alabama for patent infringement. iRobot sought the injunction in Massachusetts after discovering that Robotic had attempted to destroy evidence in both the Alabama case and the Massachusetts case. Judge Gertner ordered a trial date of no later than April 7, 2008.

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The Texas Supreme Court recently held that no Texas precedent allows a Texas court to ignore a forum selection clause in an employment agreement.

Autonation owns automobile dealerships across the country, including Houston , Texas , and its corporate headquarters and principal place of business is in Florida . In re Autonation, Inc., 2007 WL 1861341, *1 (TX 2007) (orig. proceeding). Garrick Hatfield worked as a general manager for one of Autonation's dealerships in Houston . In 2003, Mr. Hatfield signed a non-competition agreement that contained a Florida choice-of-law provision and forum-selection clause. Two years later, Hatfield went to work for a competitor. Autonation sought to enforce the non-competition agreement in Florida . But before learning of the first-filed Florida action, Hatfield filed a declaratory judgment action in Harris County, Texas, asking the court there to rule that Texas law governed the non-competition agreement and that the agreement was unenforceable. After learning of the Florida action, Hatfield also sought an anti-suit temporary restraining order and temporary injunction to enjoin further proceedings in the Florida action. Hatfield argued that Autonation was attempting to circumvent Texas law by pursuing the Florida action and that Florida would likely refuse to apply Texas law. (Note: The agreement also had a Florida choice of law provision in it.)

The trial court issued the anti-suit injunction, and the Houston Court of Appeals denied the petition for writ of mandamus by holding that the trial judge did not abuse his discretion by issuing the anti-suit injunction because "fundamental Texas public policy requires the application of Texas law to the question of enforceability of a non-compete agreement." Id. (citing DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 679-81 ( Tex. 1990)).

The Supreme Court of Texas acknowledged this prior precedent in DeSantis , but rejected the application of DeSantis on the grounds that a forum-selection clause is not the same as a choice-of-law clause.

The Court held that "even if DeSantis requires Texas courts to apply Texas law to certain employment disputes, it does not require suit to be brought in Texas when a forum-selection clause mandates venue elsewhere." Autonation, 2007 WL at *4. The Court also stated that "[n]o Texas precedent compels us to enjoin a party from asking a Florida court to honor the parties' express agreement to litigate a non-compete agreement in Florida , the employer's headquarters and principal place of business." Id . According to the Court, this holding (1) gives deference to the first-filed Florida action; (2) honors the parties' contractual commitment; and (3) also honors principles of interstate comity. Id.

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It appears that the Georgia Court of Appeals narrowly interpreted the phrase “on behalf of” in a non-solicitation clause to prevent application of a non-solicitation provision to support a breach of contract claim. Although the parties did not dispute that the Clause applied to clients who transacted business with the plaintiff, Atlantic Insurance Brokers LLC (“AIB”), and dealt with the agent (“Phillips”) during the course of the relationship, the Court nonetheless concluded that there was no breach of the Agreement.

The Clause provided, in pertinent part, that

Phillips covenants that during the term of this Agreement, and for a period of two (2) years following termination of this Agreement for any reason, he shall not at any time, directly or indirectly, solicit, sell, attempt to divert or provide competing insurance services or coverages to any insureds who transacted business with AIB and with whom Phillips dealt with on behalf of AIB and had material contact . . . .

Atlantic Ins. Brokers LLC v. Slade Hancock Agency Inc., Case No. A07A1177, 07 FCDR 3002 ( 10/12/07).

In some unusual facts, the client at issue, 24/7 contacted Phillips for assistance in procuring insurance after Phillips left AIB but before the Agreement terminated. He referred the business to AIB to assist him in procuring insurance. AIB assisted in procuring the insurance for 24/7 (splitting the commission with Phillips’s new employer), but the insurer declined to renew the policy the following year. 24/7 again asked Phillips for help, and he brokered insurance for them through his new company, without assistance from AIB. AIB sued, alleging that 24/7 was an insured covered by the Clause, and thus Phillips breached the agreement. The Court rejected AIB’s claim because AIB did not ask Phillips to work with 24/7. In other words, it appears that the Court may have equated the phrase “on behalf of” to be equivalent to “at the request of.” Although the factual scenario is highly unique, one should consider whether through its interpretation of the agreement the Court created unusual defenses in upcoming breach of contract cases about the meaning of “on behalf of.”

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InstitutionalInvestor.com reported that the National Futures Association (“NFA”) has issued the new rules, “to prevent members from using illegitimate means to gain a competitive advantage if doing so would harm customers.”  InstitutionalInvestor.com noted, click here to view article, that new Compliance Rule 2-4 is directed at activity such as:

• Misusing customer information, for example by misappropriating social security numbers or deliberately violating the firm's privacy statement.
• Disclosing customer orders before execution.
• Obtaining or trying to obtain information disclosing a commodity trading adviser's historical trading positions without the CTA's permission.

 According to the article, Rule 2-4 became effective last month; however, the Securities and Exchange Commission has yet to rule on it.

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In a recent decision, Bender v. Xcel Energy, Inc., the Eighth Circuit Court of Appeals suggested that attempts by executives to replace employer release agreements must comply precisely with contractual requirements. A unanimous panel affirmed the District Court’s grant of summary judgment to defendant Xcel Energy, Inc., on the claims of former executives of a subsidiary company of Xcel, NRG Energy, Inc. Most interesting to those in the non-compete/restrictive covenant arena was Xcel’s (successful) argument regarding the company release form. Xcel argued that because two of the executives did not use the provided form, and instead attempted to use their own, they had not satisfied their obligations under the contract. Thus, the executives could not participate in the severance plan.

For executives to receive their NRG stock options after its merger with Xcel, the severance plan then in effect for NRG executives required that they provide the company with a release “in a form to be provided by the Company.” Plaintiffs James Bender and Craig Mataczynski thought that the release language was too broad, and provided an alternative release, which they said satisfied the same obligations under the severance plan. Specifically, Bender and Mataczynski argued that the release they were asked to execute was much broader than a “standard release of claims.” The Eighth Circuit noted, however, that not only was it generally appropriate for employers to condition severance payments on releases, but, more importantly, the plain language of the severance plan clearly called for a release form “to be provided by the Company.” Accordingly, the Eighth Circuit affirmed the district court’s summary judgment against Bender and Mataczynski’s claims, because, simply put, they did not use the form provided by the company and there was nothing inherently wrong in requiring such a form.

By holding to a “plain language” understanding of the severance agreement, the Eighth Circuit did not undertake any significant analysis of the non-competition issues. It is fair to question whether the Court even cared whether the release form was too broad since it never posed that question. Moreover, the Court undertook no unconscionability test, nor did it evaluate the non-compete or confidentiality provisions, all issues raised by Bender and Mataczynski. In other words, while the Court was at least nominally concerned with the release and strict compliance with the form to be provided, it did not express any trepidation about confidentiality or non-competition issues.

The moral of the story for executives (and the companies for which they work): do not plan to rely on competition-related arguments in the Eighth Circuit where a strict textualist approach to severance plan contracts seems to carry the day.

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