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

Georgia’s Trade Secrets Act prohibits knowing misappropriation of trade secrets. See Ga. Code Ann. § 10-1-761. In a recent decision, the Eleventh Circuit briefly examined this principle in affirming a district court’s grant of dismissal and concluded that the Complaint must set forth facts from which the court could infer that any misappropriation of trade secrets was knowing. Southern Nuclear Operating Co., Inc. v. Electronic Data Systems Corp., 2008 WL 1700204 (11th Cir. Apr. 14, 2008).

Southern Nuclear Operating Company had retained Electronic Data Systems (“EDS”) to provide computer and software services. Southern Nuclear eventually terminated that agreement and hired Computer Technologies Solutions, Inc., (“CTS”) to perform the same functions. EDS requested that Southern Nuclear return EDS’s products and documentation or certify their destruction. Southern Nuclear never did so, and so EDS filed an action against Southern Nuclear and CTS for misappropriation of its trade secrets.

The only issue on appeal was whether the district court had erred in granting dismissal on the grounds that EDS did not allege that CTS knew or should have known at the time it was hired that it had misappropriated trade secrets of EDS. The court of appeals agreed with the district court and affirmed the dismissal in a very brief opinion because there was “nothing in the Complaint that provides facts from which the court could infer that CTS knew or should have known that it had misappropriated trade secrets of EDS.”

Nonetheless, service providers such as CTS should still be conscious of trade secrets issues when they enter into new agreements to provide services or products, ensuring that information used by the client and made available to the service provider is not a competitors’ trade secrets, particularly if there is some reason to suspect that the information may be protected.

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The Eleventh Circuit recently affirmed the enforcement of a non-competition agreement against a former employee where the plaintiff-company appealed from judgment entered in its favor because it was dissatisfied with the result. See MQ Associates, Inc. v. North Bay Imaging, LLC, 2008 WL 713688 (11th Cir. March 18, 2008).

Plaintiff MQ Associates (“MedQuest”) operates outpatient medical imaging clinics, providing services such as Magnetic Resonance Imaging (MRI), X-rays, and CT Scans. MedQuest employed defendant Bruce Woolum, first as a technician moving up eventually to area manager. In return for his employment and stock options, Woolum agreed to a non-competition agreement, which prevented his solicitation of MedQuest employees and competition with MedQuest within a 25-mile radius of the relevant imaging clinic for 24 months. The non-competition agreement also included an “extension” provision, which provided that “If [Woolum] violates the provisions [stated above], [Woolum] shall continue to be bound by the restrictions set forth [above] and the Non-Compete Period shall continue until the expiration of a cumulative period of twenty four months after the cessation of the violation.” In other words, if Woolum violated the agreement just before it expired, it could result in a total prohibition on competition of nearly four years.

Despite this agreement, Woolum left MedQuest and prepared to open a competing imaging center two miles away. In so doing, he solicited a MedQuest employee to join him at his new venture: North Bay Imaging. In response, MedQuest filed an action requesting, among other things, an injunction against North Bay and Woolum preventing competition and solicitation. The district court granted the injunction as to the non-solicitation provision, including extending its length because, it concluded, the extension clause operated independently based on the particular prohibition challenged. But as North Bay had not opened for business yet, the court reasoned, it was not actually in competition, thus, the non-competition provision could not be enforced against North Bay.

MedQuest appealed, claiming that these conclusions were incorrect because (i) the extension clause applied to both prohibitions and (ii) even if it did not apply to both prohibitions, entering into a venture for the purposes of competing was sufficient to find “indirect competition.”

The appeals court disagreed on both counts and refused to find that the district court had abused its discretion in tailoring the injunctive relief. Most notable from this decision is the difficult place into which MedQuest was placed when its former employee began preparing to compete. It could prohibit him from soliciting its employees, to be sure, but the Court held that “formation and start-up” are insufficient to support finding competition.

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A district court in Arizona recently issued a published decision limiting the use of the Computer Fraud and Abuse Act (“CFAA”) by employers who have been the victim of electronic data theft by their former employees. In Shamrock Foods v. Gast, --- F.Supp.2d ----, 2008 WL 450556 (D.Ariz.), the district court held that a departing employee’s transmittal of confidential information to his personal e-mail account prior to his resignation did not give rise to a cause of action under CFAA.

According to the employer’s complaint, the employee, who had executed a confidentiality agreement with the employer, allegedly e-mailed numerous company confidential and proprietary files to his personal e-mail account shortly after the employee had begun employment negotiations with a competitor. The day after he sent the company material to his personal e-mail account he allegedly told his manager that he was considering leaving the company and shortly thereafter informed the company that he was joining a direct competitor.

In its complaint, the company alleged that the employee was acting as an agent of the competitor when he assessed and e-mailed the confidential information. The company further alleged that he provided the information to the competitor and that the competitor was using the information to the company’s detriment.

The company brought suit in federal court asserting CFAA claims under 18 U.S.C. § 1030(a)(2), (4), and (5)(iii), as well as state law misappropriation claims. The employee and the competitor moved to dismiss the CFAA claims for failure to state a claim.

The district court granted the motion to dismiss concluding that 1) a violation for accessing a protected computer “without authorization” occurs only when the initial access is not permitted; and 2) an “exceeds authorized access” violation occurs only when initial access to a protected computer is permitted but the access of certain information is not permitted.

The court analyzed the CFAA statute in some depth and the specific CFAA claims that the employer brought. The court stated that it is a violation of section 1030(a)(2) when a person “intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains ... information from any protected computer if the conduct involved an interstate or foreign communication.” Next, the court stated that section 1030(a)(4) is violated when a person “knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value....” Finally, the court declared that section (a)(5)(A)(iii) is violated when a person “intentionally accesses a protected computer without authorization, and as a result of such conduct, causes damage. . . .”

In sum, the court reasoned that to state a claim under (a)(2) and (a)(4), the employer must allege conduct showing that the employee accessed a protected computer without authorization or exceeded authorized access and under section (a)(5)(A)(iii), the employer must allege conduct showing that the employee accessed a protected computer without authorization.

The competitor and the employee argued the CFAA claims were not actionable because the employee was authorized to access the computer and information at issue. The employer argued that the employee was no longer authorized to access its confidential information once he acquired the improper purpose to use this information to benefit himself and the competitor.

The district court acknowledged that there were two lines of cases interpreting the meaning of “authorization” under the CFAA. According to the court, some courts have applied principles of agency law to the CFAA and have held that an employee accesses a computer “without authorization” whenever the employee, without knowledge of the employer, acquires an adverse interest or is guilty of a serious breach of loyalty. The court cited the following the cases in support of that proposition: Int'l Airport Ctrs., L.L.C. v. Citrin, 440 F.3d 418, 420-421 (7th Cir.2006); ViChip Corp. v. Lee, 438 F.Supp.2d 1087, 1100 (N.D.Cal.2006); Shurgard Storage Ctrs., Inc. v. Safeguard Self Storage, Inc., 119 F.Supp.2d 1121, 1125 (W.D.Wash.2000).

The court also stated that other courts “have opted for a less expansive view, holding that the phrase ‘without authorization’ generally only reaches conduct by outsiders who do not have permission to access the plaintiff's computer in the first place.” The court cited the following cases in support of this contrasting position: Diamond Power Intern., Inc. v. Davidson, Nos. 1:04-CV-0091-RWS-CCH and 1:04-CV-1708-RWS-CCH, 2007 WL 2904119, at *13 (N.D.Ga. Oct.1, 2007); Brett Senior & Assocs., P.C. v. Fitzgerald, No. 06-1412, 2007 WL 2043377, at *2-4 (E.D.Pa. July 13, 2007); Lockheed Martin Corp. v. Speed, No. 6:05-CV-1580-ORL-31, 2006 WL 2683058, at *5 (M.D.Fla. Aug.1, 2006); Int'l Ass'n of Machinists and Aerospace Workers v. Werner-Masuda, 390 F.Supp.2d 479, 495 (D.Md.2005).

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The Illinois Appellate Court affirmed a ruling granting summary judgment to American Family Mutual Insurance Company on its declaratory judgment action seeking a determination that it has no duty to defend the insured defendants in an underlying trade secret misappropriation action the company brought in federal court. American Family Mut. Ins. Co. v. Roth et al., No. 1-07-0526 (Ill. App., 2d Dist., Mar. 31, 2008).

American Family, a Wisconsin-based insurer, entered into written agency agreements with defendants Bonnie Roth and Connie Roth, owners of Roth & Roth Insurance, pursuant to which Bonnie and Connie worked as exclusive agents of American Family. The agency agreements provided that the policies, policyholder records, and other materials furnished by American Family to the defendants remained American Family’s property and that all originals and copies were to be returned to American Family within 10 days of termination of the agreements. The agreements also contained provisions, signed by the defendants, governing their access to American Family’s proprietary computer system, software and database, which included customer lists and confidential customer information. In addition, the agreements contained nonsolicitation agreements prohibiting the defendants from soliciting American Family policyholders for one year following termination of the agreements.

After terminating the agreements with Bonnie and Connie, American Family demanded the return of all of its property, including policyholder records, and reminded Bonnie and Connie that privacy laws and the agreements prohibited them from disclosing policyholder information to third parties. Nonetheless, the defendants solicited American Family customers, including sending a solicitation letter to at least one American Family customer that contained personal financial information Connie Roth obtained while an agent of American Family.

American Family sued the defendants in federal court alleging violations of the Wisconsin Uniform Trade Secrets Act, Wis. Stat. Ann. § 143.90(1)(c); federal law; and state common law for breach of contract and tortious interference. American Family also instituted a declaratory judgment action in the Illinois circuit court seeking a determination that it has no duty to defend the defendants in the federal court action pursuant to the terms and conditions of the business-owners’ package insurance policy it had issued to them as its agents. The circuit court granted summary judgment in favor of American Family.

On appeal, the defendants asserted that the circuit court erred because the underlying complaint contained factual allegations of “personal and advertising injury” that brought the action within the policy’s coverage. But the appellate court rejected this argument, finding that the defendants’ alleged retention and use of confidential information gleaned from American Family’s database and computer system amounted to trademark and trade secret infringement, thus bringing the action with the policy exclusion for injuries knowingly caused by the insured and arising out of such infringement. The appellate court also found that the defendants’ alleged retention of American Family’s information and use of that information to solicit American Family’s customers constituted a breach of the agency agreements, thus bringing the action within an exclusion to the policy’s coverage for injuries that arise from breach of contract. Accordingly, the court concluded that American Family did not owe a duty to defend its former agents in the underlying action.

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One of the nation’s large home builders recently filed suit against a former executive in federal court in Albuquerque, New Mexico for alleged misuse of the company’s trade secrets related to a highly confidential internal strategic plan.

Pulte Home Corporation filed suit against former executive Lynn Galindo, a former area vice president based out of Las Vegas, Nevada, in the United States District Court of New Mexico (Case 1:08-cv-00210-JB-LFG) alleging claims of trade secret misappropriation, conversion, breach of fiduciary duty, breach of contract, fraud, breach of implied covenant of good faith and fair dealing, and unjust enrichment.

The complaint alleges that shortly before Galindo’s departure from the company, she misappropriated an internal strategic plan related to the Albuquerque housing market and later used it to create a similar plan for a competitor.

According to the complaint, the plan, which cost in excess of $1 million dollars to produce, contained information that would allow a competitor at Pulte’s expense to make informative decisions regarding the “relative health of the market in terms of marco/micro economic and market forces; the size of the mobility of the population within the market; the organization of Pulte’s Target Consumer Groups; the location preferences by consumer group, price sensitivity, product preferences, over-and under-served consumers groups which indicates market opportunity; and the top performing communities in the market organized by Target Consumer Group.” The plan also contained Pulte’s analysis of this data, its strategy for increasing its presence in the market, an “identification of specific challenges of this market and Pulte’s proposed solutions to those challenges.”

According to Pulte’s complaint, “A knowledgeable person would be able to use Pulte’s . . . [strategic plan] to assess the viability of a specific location (or multiple locations), understand the best opportunities for targeting specific consumer groups in the locations under evaluation and be able to fine tune a product offering in terms of community layout, community design, community amenities, lot size and configuration, floor plan selection and specifications of homes.”

According to the suit, Pulte provided Galindo with notice of her termination in the spring of 2007 as part of a reduction in force. Galindo negotiated a lucrative severance package that paid her nearly $300,000 in severance pay, bonuses and other compensation. Pulte claims Galindo conspired to obtain the strategic plan while she was negotiating her severance from the company and that if it would have known she had obtained the highly confidential plan that it would not have entered the severance agreement. Galindo apparently obtained the plan by contacting a subordinate and induced the employee to send her a copy prior to her separation.

During Galindo’s employment and as part of her severance agreement, Galiando signed agreements to keep Pulte’s proprietary information, such as the strategic plan, confidential, according to the complaint. Pulte claims that Galindo agreed to provide a developer in the Albuquerque area with a marketing study and used material from Pulte's confidential strategic plan in the report.

The case has yet to be set for trial and has been assigned to District Judge James O. Browning and Magistrate Judge Lorenzo F. Garcia.

This case highlights the need for employers to review the activities of departing employees shortly before their departure to ensure that company confidential/trade secret information has not been compromised and that the employees understand their continued confidentiality obligations to the company. Employers should consider reviewing these employees’ e-mail activity and access to proprietary databases prior to their departure, as well as remind other employees to report any suspicious activities, to attempt to safeguard company secrets.

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A former software engineer for a Chicago-area telecommunications company has been indicted for allegedly misappropriating over 1,000 proprietary documents containing trade secrets which she was evidently attempting to transport with her to her new job in China. Neither company has been named.

The defendant, Hanjuan Jin, a naturalized citizen, took a medical leave of absence from the Chicago-based company (Company A) in February 2006. During her medical leave, she accepted a job with a company in China (Company B) where she was to develop communications software. She then informed Company A that she would return to work on February 26, 2007, without notifying the company that she had secured a job in China. After purchasing a one-way ticket to China for Feb. 28, 2007, Jin returned to Company A and allegedly downloaded hundreds of documents. She allegedly returned that night as well as the next night to copy more documents. These documents included descriptions of how Company A provides an interstate communication feature that cost the company hundreds of millions of dollars to develop, and federal authorities claim that had Jin succeeded in bringing them to China, Company A could have lost more than $600 million over the next three years.

Jin was arrested and the documents seized at O’Hare Airport on Feb. 28, 2007. She was charged with three counts of theft of trade secrets. If convicted, each count carries a maximum penalty of ten years in prison and a $250,000 fine.

For more information, see http://www.earthtimes.org/articles/show/suburban-chicago-woman-indicted-for,337647.shtml or http://www.chicagotribune.com/news/local/chi-trade-secrets-webapr03,1,1758307.story.

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The Eleventh Circuit Court of Appeals affirmed the sentence of a former Coca-Cola Company employee and one of her co-conspirators for conspiracy to commit theft of trade secrets in violation of 18 U.S.C. § 1832(a). In United States v. Williams, a jury convicted Joya Williams of taking trade secrets related to secret marketing materials from Coca-Cola and working with her co-conspirator, Edmund Duhaney to try to sell them to Pepsi Company through a third-party, Ibrahim Dimson. (Mr. Duhaney pleaded guilty.)

The facts under which Ms. Williams and Mr. Dimson were convicted and sentenced read like a serial clock-and-dagger television series. Ms. Williams snuck files (and even a product sample) out of her workplace, gave them to Mr. Duhaney (who testified against Ms. Williams and Mr. Dimson as part of his plea-bargain), who then contacted Mr. Dimson to act as the go-between with Pepsi Co. Mr. Dimson contacted Pepsi Co. by mailing an executive at Pepsi an offer to provide “very detailed and confidential information” about Coca-Cola he would provide “to the highest bidder.” Pepsi Co., of course, notified Coca-Cola, which then notified the FBI. An undercover agent with the FBI posed as a Pepsi executive and began the process of purchasing small confidential items with an aim towards one large purchase. After the terms of the large purchase were consummated, the FBI arrested each of the three conspirators.

As stated by the Court, the facts leave no doubt as to the validity of the underlying convictions, but Ms. Williams raised two constitutional challenges to her trial. First, she argued that the trial court’s limitation on her cross-examination of Mr. Duhaney violated her Sixth Amendment right of confrontation (the Eleventh Circuit disagreed). Second, she argued that the trial court denied her due process by striking her closing argument’s reasonable doubt analogy (again the Court of Appeals disagreed). And both Ms. Williams and Mr. Dimson appealed their sentences, arguing that the district court had placed too heavy an emphasis on the seriousness of the offense in going above the recommended sentencing guidelines for each of them. The Court of Appeals, however, held that the trial court had not abused its discretion in sentencing them.

¹ Trial lawyers frequently have a series of “reasonable doubt” stories and analogies for use at closing argument, tailored to the case and whether they are the prosecutor or defense attorney. Ms. Williams’ attorney’s analogy is arguably one of the stranger ones: “Williams argues that her counsel properly explained the concept of reasonable doubt by comparing it to a patient's desire to seek a second opinion when told by a doctor ‘you know, I'm looking at you and I think you need to have both of your legs amputated.’”

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The Chemical Abstracts division of the American Chemical Society (ACS) sued three software developers who left ACS to start their own company, Leadscope. ACS sued for trade secret misappropriation, alleging that the software developers used ACS trade secrets to develop their own product. The filing of the lawsuit scuttled several pending (very promising) deals that Leadscope was about to close on. Leadscope counterclaimed for defamation, tortious interference, unfair competition and deceptive trade practices.

The lawsuit was filed in 2002 was hotly contested. Among other things, there was a dispute over insurance coverage, resulting in a court of appeals decision in favor of coverage, see Am. Chem. Soc. v. Leadscope, Inc. , 2005-Ohio-2557.

The trial lasted 2 months in the Franklin County Court of Common Pleas (Columbus, Ohio). On March 27, the jury returned a verdict ruling in favor of Leadscope (the defendant and counterclaimant), awarding counterclaim compensatory damages of $27 million.

In closing arguments, Leadscope's attorney argued, that ACS "destroyed the reputations of three dedicated scientists...They have ruined the financial position of LeadScope...These scientists did their own work. They didn't take anything from [ACS]". Much of the case focused on expert analysis of Leadscope's source code. Leadscope presented expert testimony that the source code of their own product was NOT copied.

Certainly, a cautionary tale for people filing trade secret lawsuits!

The Columbus Dispatch has reported on the verdict. See
http://www.columbusdispatch.com/live/content/business/stories/2008/03/28/LEADSCOPE.ART_ART_03-28-08_C12_HF9P1EG.html?sid=101

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