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

TalentBurst, Inc. v. Collabera, Inc., Civ. No. 08-10940-WGY (D. Mass. July 25, 2008).

A federal court in Boston has dismissed a complaint brought by information technology temp agency TalentBurst against competitor Collabera for aiding and abetting a breach of fiduciary duty by TalentBurst’s former employee, who subsequently joined Collabera, on the ground that the employee owed no fiduciary duty of loyalty to TalentBurst.

Raj Mohan Pallerla was hired by TalentBurst as a systems administrator and, as a condition of his employment, was required to sign an employment agreement that included non-compete and non-solicitation provisions. While employed by TalentBurst, Pallerala performed work for one of Collabera’s clients pursuant to a consulting services agreement between the two firms. Immediately after resigning from TalentBurst, Pallerla became employed by Collabera where he continued without interruption servicing the same Collabera client he had serviced while employed by TalentBurst. In response to TalentBurst’s letter demanding that it enforce Pallerla’s restrictive covenant, Collabera asserted that TalentBurst had waived enforcement of the covenant by entering into the consulting services agreement with Collabera.

TalentBurst brought suit against Collabera alleging that Collabera aided and abetted Pallerla’s breach of his fiduciary duty to TalentBurst. The court, however, rejected this claim because Pallerla’s job title, duties, and the fact that he was hired out to clients while at TalentBurst demonstrated that he was a “worker bee” rather than a manager, executive, or officer. Thus, under Massachusetts law he owed no fiduciary duty of loyalty to his employer. The court concluded that because there was no predicate breach of fiduciary duty by Pallerla, and no direct fiduciary relationship between TalentBurst and Collabera, the claim must fail. 

Of particular interest, the court noted that TalentBurst failed to allege that Pallerla “was entrusted with confidential information or that other special circumstances existed such that he could be said to have occupied a position of ‘trust and confidence.’” In a footnote, the court further observed that “although it is clear that the employment agreement, including the Covenant, created contractual duties on Pallerla’s part, TalentBurst cites no authority for the proposition that the signing of a restrictive covenant also creates a fiduciary obligation.”

Based on this conclusion, the court also dismissed TalentBurst’s claim for tortious interference because the “aiding and abetting” was the sole basis upon which TalentBurst alleged that it had satisfied the element requiring improper means or motive. The court went on to consider whether Collabera’s interference with the restrictive covenant itself created a presumption that Collabera had an improper motive. Although other Massachusetts state court cases suggested this might be sufficient, the court found those cases distinguishable because in those cases the defendants obtained and used confidential information through the employee, whereas here there was no allegation that Collabera did anything more than simply hire TalentBurst’s employee. In addition, the court concluded that Collabera might have had a legitimate motive for hiring Pallerla, namely to save money by employing him directly.

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By Robert Milligan and Summer Associate Justin de Herrera

In City of Oakland v. Hassey, 163 Cal.App.4th 1477, (June 17, 2008), a California appellate court recently rejected a police officer’s claim that a provision in his employment contract requiring him to reimburse the City of Oakland for his training expenses constituted an illegal covenant not to compete in violation of Business & Professions Code Section 16600. The former Oakland police officer agreed in his employment contract to pay back the cost of his police academy training if, once hired, he left the department in less than five years time. The officer’s training expenses were approximately $8,000.

On appeal, after the trial court granted summary judgment in favor of the City on its reimbursement claim, the officer contended that the provision violated Business and Professions Code Section 16600. Section 16600 provides “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” 

The court disagreed and found that “[n]othing prevented [Hassey] from working for another police department, or anywhere else, for that matter.” 

The appellate court relied heavily on a Seventh Circuit federal case, Heder v. City of Two Rivers, Wisconsin, 295 F.3d 777 (2002), in reaching its decision. The Heder case involved a firefighter claiming that a provision in his employment contract – similar to the one at issue in Hassey – constituted an illegal covenant not to compete. The Heder court equated the provision to other valid employment incentives that employers offer to their employees. The Heder court reasoned that the residents of the city where the firefighters worked received the benefit of a more skilled fire department, and that the city might be less likely to provide that benefit if it feared that employees would leave the fire department, taking their new skills elsewhere. 

The court’s ruling in Hassey, however, leaves many questions unanswered. For instance, does the decision only apply to repayment provisions in government employment contracts or only those of public safety officials for that matter? After all, the court’s reference to Heder seems to suggest that when the agreement benefits city residents, additional latitude is granted to the government. On the other hand, if the ruling does apply to private employment contracts, how much money may an employer seek in reimbursement from an outgoing employee for training expenses, if at all, before a court finds that a Section 16600 restraint exists? To some, a $8,000 bill could represent a serious impediment to changing jobs.

More importantly, however, how does the court’s ruling in Hassey square with California Labor Code section 2802? That section requires an employer to “indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties . . . ” Oakland required that all of its officers obtain licensed academy training before becoming police officers. 

Interestingly, the court, in an addendum to its original decision, refused to address this issue because Hassey did not rely on Labor Code Section 2802 in his answer and because Hassey did not allege a Labor Code Section 2802 cause of action in his cross-complaint . The court also refused to address Hassey’s argument that the agreement violated Labor Code 2804 [contracts waiving benefits of this article or any part thereof are invalid] for similar reasons. Currently, Edwards v. Arthur Andersen, LLP, a case that will decide whether an employee can waive the protections of Labor Code Section 2802, is currently on appeal with the California Supreme Court. Oral argument was held on June 4, 2008 and an opinion in the case is due at any time.

Due to the many unanswered questions that the Hassey decision prompts, its application to private employment contracts remains dubious. The Supreme Court’s pending decision in Edwards v. Arthur Andersen, LLP may provide some additional guidance.

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  By Erik Weibust (Boston) 

          Illustrating the roadblocks that Taiwanese companies still must overcome to do business in mainland China (Taiwan split from China amid a civil war in 1949), Forbes.com is reporting that electronics giant Hon Hai Precision Industry Co. recently took out half-page ads in major Taiwanese newspapers complaining about delays in a Chinese court over the prosecution of a Chinese competitor for allegedly stealing its trade secrets. In 2006, Hon Hai, which employs approximately 500,000 Chinese workers, sued BYD Company Limited, a Chinese competitor, for allegedly “systematically looting its trade secrets.”   According to Hon Hai, in 2006, two of its former employees took secret information when they left to work for BYD. Although the two employees have since been convicted of infringement in a Chinese court, according to Hon Hai, that may only be the tip of the iceberg. Specifically, Hon Hai alleges that over the past 4 to 5 years, 400 of its employees have moved to BYD, many of whom are suspected of providing the company with Hon Hai’s trade secrets and proprietary information. 

            According to the newspaper ads, the head of BYD is a member of the powerful People’s Congress, which has “the power to remove members of the judiciary.”  This, Hon Hai alleges in its ads has “result[ed] in a certain degree of unwillingness among local judicial and police members to deal with the case.” Nevertheless, Hon Hai believes that its rights will be vindicated eventually, particularly given China’s senior leaders’ commitment to protecting the interests of Taiwanese businesses on the mainland. 

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Goodyear Tire & Rubber Co. v. Schalmo, 2008 Wl 2697248 (Fla. App. 2 Dist. July 11, 2008)

The District Court of Appeal for the Second District in Florida confirmed that, no matter how unpleasant the task, when faced with an issue regarding whether documents are covered by Florida's Sunshine in Litigation Act, § 69.081, the trial court must conduct an in camera inspection of the documents and cannot enter a blanket confidentiality order. 

In Goodyear, the tire company refused to produce confidential and trade secrets documents in connection with a products liability lawsuit filed against it by individuals injured when the tire (manufactured by Goodyear) of a motor home separated and caused an accident. Goodyear argued that the Act required the court to conduct an in camera inspection of each of the documents before entering a confidentiality order and requiring production. 

Under the Florida Sunshine in Litigation Act,

            Upon motion and good cause shown by a party attempting to prevent disclosure of information or materials which have not been previously been disclosed, including but not limited to alleged trade secrets, the court shall examine the disputed information or materials in camera. If the court finds that the information or materials or portions thereof consist of information concerning a public hazard or information which may be useful to members of the public in protecting themselves from injury which may result from a public hazard, the court shall allow disclosure of the information or materials. If allowing disclosure, the court shall allow disclosure of only that portion of the information or materials necessary or useful to the public regarding the public hazard.

Goodyear, 2008 WL 2697248, *2 (quoting Fla. Stat. § 69.081(7)). The trial court, concerned about the inability to review and understand voluminous technical documents, developed its own procedure by which it protected all confidential materials through a blanket order and directed the parties to resolve the other issues regarding what would be protected, bringing back to the court only those issues the parties themselves could not resolve. The appellate court found that this procedure violated the judge’s duties to act as the gatekeeper of the Act. Id. at *3.

The appellate court went on to recognize that, although a trial court may still prevent public disclosure of trade secrets, it cannot do so if those alleged trade secrets relate to a public hazard.  If the trade secret material is otherwise relevant and discoverable (but not relating to a public hazard), it can be protected by an appropriate confidentiality order. 

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United States v. Malhotra, No. 5:08-CR-00423-JF (N.D. Ca.)

Former Hewlett Packard vice president Atul Malhotra today pleaded guilty in federal district court in San Jose, California to one count of theft of trade secrets. In an information filed on June 27, 2008, the United States charged Malhotra with violating the Trade Secrets Act, 18 U.S.C. § 1832(a)(2), by disclosing to HP certain confidential pricing information he obtained while employed at IBM. Specifically, the government charged that in his capacity as director of sales and business development for output management services for IBM Global Services, Malhotra obtained trade secret information regarding the IBM Global Services “CC Calibration Metrics.” This information concerned products costs and materials that IBM used to compete in the marketplace for printers and other output devices. Accordingly the document was stamped “IBM Confidential” on each page.

 Approximately two months after obtaining the confidential IBM information, Malhotra accepted a position as vice president of imaging and printing services at Hewlett Packard in Palo Alto, California. Shortly thereafter, the government alleges, Malhotra sent e-mails to two separate HP senior vice presidents entitled “For Your Eyes Only,” and attached the IBM Global Services CC Calibration Metrics.  An HP statement at the time indicated that HP conducted an internal investigation, terminated Malhotra’s employment, and reported the activity to law enforcement and to IBM.

Malhotra faces up to ten years in prison and a $250,000 fine on the single count of theft of trade secrets. Sentencing is scheduled for October 29, 2008, before District Judge Jeremy Fogel.

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Judge Leoni Brinkema (E.D. Va.) sentenced Gregg W. Bergersen to almost five years in prison for his role in providing secret information about U.S.-Taiwanese military relationships to a Chinese spy.   According to Matthew Barakat, writing for the Associated Press, View Article, the Chinese spy (Tai Kuo) fronted as a New Orleans furniture salesman who was aligned with Taiwan.  Instead, Barakat reports, it turns out that Kuo was forwarding the information to China.   Bergersen stated in court that he believed he was helping Taiwan develop a new air defense system and did not turn over the information with a motive for financial gain, a claim that federal prosecutors challenged.

According to the article, Kuo has pleaded guilty to espionage, and sentencing for him should occur later this month.

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Associated Press (Anna Jo Bratton) is reporting that a state district court judge in Lancaster County, Nebraska tagged two Nebraska Municipal Power Pool executives with millions of dollars in damages arising out of their scheme to use American Public Energy Agency's "company information, financial data and copyrighted material."  View Article. It appears that Nebraska Municipal Power Pool ("NMPP") previously provided services to American Public Energy Agency.  Then the two NMPP executives decided to create their own agency to compete with American Public Energy Agency.  AP also reports that the two executives attempted to steal away American Public Energy Agency's customers in an effort to eliminate or severely harm the company. 

I have not been able to locate a copy of the opinion, but I am hoping that it will be up on a website or a search service soon.   If I find it publicly available, I'll try to post a link to the judge's decision.

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A company's trade secrets may be some of its most important assets.  Recent headlines underscore their importance, and vulnerability:

1. Recently, an employee was arrested at the airport and over 1,000 company proprietary documents containing trade secrets were seized that the employee was attempting to transport with her to her new job.
   
2.  A national retailer recently was hit with a $21.5 million verdict after a jury found the retailer liable for stealing the design of a popular home improvement tool. 
   
3. A former employee recently pleaded guilty in a U.S. District Court in California to stealing proprietary technologies from his former employer and selling or offering them for sale to foreign governments and military contractors.

A survey of companies estimated that in just one year, companies likely were to have lost as much as $53 to $59 billion dollars in proprietary information and intellectual property through theft and misappropriation.  Seeking trade secret counseling and an audit can assist clients to determine best practices to help protect their most important assets.

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Zimmer, Inc. v. Albring, 2008 WL 2604969 (E.D. Mich.June 27, 2008)

Judge Steeh in the Eastern District of Michigan carefully crafted a narrowly tailored injunction order to prevent a former employee (Albring) from violating her non-compete and non-solicit agreements, but allowed her to remain employed by her new employer, and to be paid by that employer, pending the expiration of the restrictive covenants.   Albring had entered into an arrangement to become employed full-time by a competitor of her former employer, Zimmer (both in the surgical implant business) pending expiration of her restrictive covenants. Her deal paid her “$3,000 per week to do nothing as the company is waiting for her non-compete agreement with Zimmer to run out and then she will begin selling . . . products for them.” Judge Steeh found that Albring’s profitable arrangement did not violate the non-compete, because she was not actively selling competing products. 

Zimmer also argued that Albring should be enjoined on the grounds that it put the company’s confidential information at risk. The court rejected that argument based on its conclusion that none of the information that the company sought to protect were properly raised. The court said that “Zimmer has not shown or even alleged any trade secrets involving surgical implants or the identity of [defendant’s] customers. . . .” 2008 WL 2604969 at *6. The court went on to reject any claim that customer information was confidential, noting that the defendant claimed that the targeted surgeons were friends of hers before she became employed by Zimmer and “[i]n any event, their identity is easily accessible and can be located merely by checking the telephone book.” 

Nonetheless, the Court did enjoin the defendant from a second job that put her in direct contact with the same surgeons and had the effect of promoting or selling surgical implants that competed with Zimmer's.

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Cynergies Consulting, Inc. v. Wheeler, 2008 WL 2623960 (Ohio App. 8 Dist. July 3, 2008)

An Ohio Court of Appeals recently ruled that although “‘an injunction must account for period of noncompliance in order to make judicial enforcement effective’,” 2008 WL 2623960 at *4 (citation omitted), failure to file the complaint before the expiration of the non-compete clause will prevent the complaining party from seeking to take advantage of the tolling provision when looking for injunctive relief. The court emphasized that if the non-compete period had not expired as of the time that the plaintiff filed the complaint, then injunctive relief and tolling for purposes of extending the period of the injunction would be potentially available remedies. 

The court also denied the plaintiff’s request for an accounting for the revenues received by the defendant (former employee) in connection with the alleged breach of the non-compete agreement. The court ruled that the “discovery process provides adequate means to obtain the same information sought through an accounting. . . .” Id. at *5.

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