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

The explosion of cloud computing has provided companies with many technological benefits; but with those well recognized benefits, there are incumbent risks to valuable company data, including prized trade secrets. Companies utilizing cloud computing must employ effective measures to protect and secure their intellectual property. Sensible executives will seek advice from competent counsel to ensure that the cost savings and financial opportunities in cloud computing, including social media, are not outweighed by the potential legal and business risks.  The attached article, which was first presented at the ITechLaw Association World Technology Law Conference & Annual Meeting in San Francisco, California, discusses these issues in more detail.

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A recent decision by the Texas Supreme Court makes it easier for employers to enforce restrictive covenants in Texas. Employers often seek to obtain these types of contracts with key employees to prevent them from going to work for competitors or to leave to start competing businesses. The enforceability of such contracts is typically governed by state law, resulting in a patchwork of differing standards across the United States, with some states favoring enforcement, and others precluding such agreements altogether. Please read Seyfarth Shaw's One Minute Memo on the new case.

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There is wiener controversy brewing, but this one does not involve Twitter™ or a Representative from New York. Rather, this dust up concerns a Chicago hot dog dynasty and allegations of misappropriated trade secrets, false advertising, unfair competition, and trademark infringement.

On June 21, 2011, District Court Judge Sharon Coleman denied Vienna Beef LTD’s motion for a temporary restraining order which sought to enjoin competitor hot dog maker Red Hot Chicago , Inc. ("RHC") and its founder, Scott Ladany (collectively, "Defendants"), from engaging in various alleged conduct, including using Vienna Beef recipes or claiming that their recipes are century old, date back to 1893, or that they are Sam Ladany or Ladany family recipes. Vienna Beef claims, among other things, that its hot dog recipes are trade secrets and that RHC is using them without permission.

Scott Ladany is the grandson of company founder Samuel Ladany, who in 1893 began selling sausages using a family recipe. Scott Ladany began working for Vienna Beef in 1971 and obtained a 10% stock interest. The Ladany family sold Vienna in the early 1980s to plaintiff Vienna Beef ("Vienna"). Scott Ladany remained employed by Vienna until 1983, when he sold his 10 percent stake in Vienna. At the time Ladany left Vienna, he signed agreements which prohibited him from using or disclosing Vienna’s trade secrets and competing with Vienna for a specified term.

In 1986, at the end of the non-compete term, Ladany started RHC.

As to its trade secrets claim, Vienna offered the following evidence of misappropriation (1) that Defendants included language in their advertising stating that Defendants have been making hot dogs "using" a century-old "time honored family recipe" which "is the foundation for a true Chicago-style hot dog…"; and (2) sworn statements by vendors attesting that Defendants claim their products are made with Vienna’s recipes.

In her Memorandum Opinion, Judge Coleman held that Vienna had predicated its trade secrets claim on RHC’s advertising materials and that RHC effectively rebutted Vienna’s allegations. The Court cited to an affidavit filed by Ladany unequivocally stating that RHC does not use the Vienna recipe developed by Ladany’s grandfather, but instead developed its own recipe as early as 1986 through work with Heller Seasonings & Ingredients, which recipe has been used by RHC in substantially similar form for 25 years.

The Judge concluded that, in any event, Vienna "has shown no evidence that [its] recipes were used in RHC’s business and therefore cannot show that it is likely to succeed on the merits of [its claim for misappropriation of trade secrets]." Likewise, the Court found that Vienna had not shown irreparable harm as, but for one new advertisement, the complained of advertising had been used by RHC "for years", thus negating the need for emergency relief. Accordingly, the Court found that Vienna Beef's application did not pass muster and was denied. Based upon the Court's ruling, it will be interesting to see if there is a round two of the wiener wars in the form a preliminary injunction motion.

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The Trade Secret Subcommittee of the Intellectual Property Section of the State Bar of California will have a live program entitled “Hot Topics in California Trade Secret Law” on June 27, 2011 in Los Angeles, California and on June 29, 2011 in San Francisco, California.  Seyfarth Shaw’s Downtown Office will host the Los Angeles event. 

Robert Milligan will be speaking at the program, which will be led by an experienced panel of IP and employment practitioners, including the co-editors of the IP Section's treatise Trade Secret Litigation and Protection in California, and a certified computer forensics examiner. The program will provide participants with an overview and insightful discussion of the latest cases, developments, and emerging areas in California trade secret law, including social media and cloud computing, trade secret audit and protection programs, restrictive covenants and non-competes, and trade secret preemption.

The one hour and fifteen minute presentation is designed for IP, employment and corporate lawyers. Registration information can be found by clicking on this link.  

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Clarifying the legal principle that an injunction will only be entered if there is no adequate remedy at law, the Ohio Court of Appeals held recently that an award of damages for past trade secret misappropriation is not inconsistent with, and does not preclude granting, injunctive relief to prevent future harm. Litigation Management, Inc. v. Bourgeois, 2011 Ohio 2794 (Ct. of App. of Cuyahoga County, OH, June 9, 2011).

Litigation Management, Inc. (LMI) provides litigation support services. A number of LMI employees who had signed not-compete and confidentiality agreements left the company’s employ and formed a direct competitor which then used LMI’s trade secrets. LMI sued for damages and injunctive relief, and the damages case went to trial. After the close of the evidence, the judge blue-penciled the geographic limitations set forth in the agreements (substituting “the Greater Cleveland Metropolitan Area” for any place in the country) and submitted the case to the jury. It returned verdicts for LMI against all of the defendants. 

LMI’s post-trial motion for an injunction, however, covering the period of time the defendants had worked in violation of their agreements, was denied. The trial court held that “not only is an adequate remedy at law available, it has been given. The wrong of competing unfairly has been righted by the jury’s award: LMI has received fair and reasonable redress.”   

LMI appealed. The appellate court reversed, agreeing with LMI that the monetary relief was intended as a make-whole remedy only with regard to misconduct to the date of trial. The appropriate relief for future, threatened violations is an injunction. So, in the view of the Ohio Court of Appeals, there was nothing inconsistent about granting both compensatory damages and an injunction. The moral is that one who misappropriates trade secrets can be hit with both a monetary award for past wrongs and severely debilitating injunctive relief.

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Distinguishing between continuing misappropriation of one trade secret and separate misappropriations of related trade secrets can be a daunting task. The Supreme Court of Colorado recently held that, for statute of limitations purposes, the distinction may be inconsequential where misuse occurs on disparate occasions but the proprietary information was disclosed to the same person at substantially the same time, and in furtherance of the same commercial venture. That constitutes misappropriation of a single trade secret.

Gognat developed proprietary information relating to the methodology for identifying and extracting reserves of oil and gas. In 1997, he shared this information with Ellsworth when they entered into a joint venture to develop reserves in western Kentucky. At about the same time, Ellsworth secretly formed MSD Energy, Inc. (MSD) for the same purpose. 

By January 2001, Gognat knew that MSD was using his trade secrets in connection with acquiring leases in the same area of Kentucky as the joint venture. He demanded that the joint venture compensate him. Ellsworth assured him that his demand would be resolved fairly. Relying on that assurance, Cognat deferred filing a lawsuit against Ellsworth and MSD. That proved to be a big mistake. 

In 2005, Gognat learned that MSD was using his proprietary information in connection with development of a different area of western Kentucky, and that MSD’s activities in the first area were more extensive than he had previously known. He filed suit against Ellsworth and MSD for misappropriation of trade secrets. The defendants moved for summary judgment based on Colorado’s three-year statute of limitations, contending that Cognat was aware four years earlier, in 2001, that Ellsworth and MSD were using the trade secrets. Gognat responded that until 2005 he did not know, and had no reason to suspect, that Ellsworth and MSD were using his trade secrets in the second area. The trial court granted the defendants’ motion to dismiss, and both the Court of Appeals and the Supreme Court affirmed. Gognat v. Ellsworth, 224 P.3d 1039 (Colo. App. 2009), aff’d, Case No. 09SC963 (Colo. Sup. Ct., June 6, 2011).

Colorado’s Trade Secrets Act is modeled after the Uniform Act. It defines a trade secret as all or part of proprietary information that the owner has taken measures to prevent from becoming available beyond those to whom the owner has given limited access. In the instance of separate acts of misappropriation with respect to related trade secrets, when does the statute of limitations begin to run? According to the Colorado Supreme Court, the misconduct of Ellsworth and MSD was one continuing misappropriation and, therefore, the cause of action accrued in 2001 when Gognat learned of the first instance of misuse. Further, the fact that what Gognat knew in 2001 may not have been sufficiently damaging to justify the cost of litigating is immaterial.

The Gognat decision teaches that litigation with respect to trade secret misuse must be initiated promptly after learning of misappropriation, even though accrued damages may be quite modest. Otherwise, the claim may be held to have been waived by the passage of time notwithstanding a substantial subsequent increase in the amount of resulting damages. Contact a trade secrets attorney at Seyfarth Shaw for assistance in determining whether a potential trade secrets misappropriation cause of action is time-barred.

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The ABA Journal reports that a Princeton PhD candidate study has found electronic “redactions” included on PDF documents may not always be effective. Specifically, the study revealed that a computer program was able to scan 1.8 million Pacer filed documents, identify 2,000 documents that contained redactions (in the form of the ubiquitous “black boxes” obscuring the confidential information) and further identify 194 of these redactions which were able to be removed and the “confidential” information revealed. The “flaw” appears to be in the PDF documents themselves, and how they were created. The author of the study, Timothy Lee, explained that PDF documents consist of multiple layers, and that an improperly placed “redaction box” might not completely obscure the confidential information which is sought to be protected. Mr. Lee explains that “retrieving” the redacted information could be as simple as cutting and pasting from the PDF document.

Mr. Lee offers suggestions for legal practitioners looking to avoid the pitfalls of “failed” redactions, but the greater issue raised by the study is the danger in not fully exploring and understanding the technology we as lawyers are using to aid and further the representation of our clients. Although the study focuses on Pacer filed documents, “redacted” PDF files are exchanged by parties regularly during discovery, particularly now in the age of e-Discovery. Where once documents were redacted by-hand before copying was done, and the confidential information never being on the produced document, as Mr. Lee indicated redaction on PDF documents is usually accomplished by adding a “black box” layer to the information sought to be protected. Depending on how the PDF document is then handled, the information might still be accessible. Simply assuming that because you cannot “see” the information on the screen it is “gone” can be a dangerous plan. Attorneys would be well served to ensure that their electronic redactions are as secure as those made by the old fashioned black marker. This means not only looking at the PDF documents before sending them along to opposing counsel and/or electronically filing with the court, but ensuring that the redactions are to all of the layers of the PDF, and that they cannot be otherwise reversed.

Confidentiality agreements, “claw-back” provisions and protective orders may be able to recapture information inadvertently revealed to opposing counsel, but the lurking peril here is that none of these will recapture information lost to a non-party Pacer search similar to the one Mr. Lee ran for his study. Greater caution, and greater familiarity with the technology we are using, is the name of the game, especially if a company's trade secrets are in play.

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