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

The Ninth Circuit Court of Appeals ordered that U.S. v. Nosal be reheard en banc by all of the Appeals Court judges and that the “three-judge panel opinion [in U.S. v. Nosal, 642 F.3d 781 (9th Cir. 2011)] shall not be cited as precedent by or to any court of the Ninth Circuit.”

Accordingly, the ability of employers to sue employees who violate computer usage policies by stealing company data under the CFAA in the Ninth Circuit is again in question.

This comes after the three-judge panel Nosal opinion was beginning to gain momentum in district courts in the Ninth Circuit.

Should the Ninth Circuit reverse the decision, the U.S. Supreme Court may elect to take the decision as a Ninth Circuit reversal would cement the conflict between the Ninth Circuit and other Circuits, such as the Fifth and Eight Circuits. The U.S Supreme Court's decision to take up the case may also be impacted by whether Congress passes amendments to the Computer Fraud and Abuse Act which would curtail the ability of the government and companies to sue for violation of usage policies, including violations of social media sites terms of service.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

While Companies regularly and formally protect their confidential information and trade secrets from competitors, the general public, and potentially misappropriating employees, they all too frequently fail to protect information assets in business transactions with their "friends." Transactions with vendors and customers, franchisees and licensees, and sellers and buyers of a business all present potential risks. Failure to implement appropriate safeguards in these transactions can make any prior protections ineffective, causing loss of trade secrets.
This webinar will  focus on protection of trade secrets in business transactions. Topics will include:

• What relationships other than employer/employee relationships require trade secret protections?
• What transactions should give rise to serious trade secret concerns?
• The most significant risks to the trade secret status of your valuable confidential information under the Uniform Trade Secrets Act.
• Trade secret and restrictive covenant law that may provide enhanced protection of trade secrets and other confidential information in the sale of a business.
• Best practices for protecting trade secrets in business transactions.

Seyfarth attorneys Todd Hunt, Jim McNairy & Erik Weibust will present the sixth and final webinar in the 2011 Trade Secrets Webinar Series.

For more details and registration, please click here. We look forward to your joining us on November 30th!
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A growing number of courts across the country have required  plaintiffs to specify with particularity the trade secret that they are accusing a defendant of stealing, and that plaintiffs’ refusal to do so could result in dismissal of the claim.  See, e.g., Dura Global, Tech, Inc. v. Magna Donnelly Corp., 2008 WL 2064516 (E.D.Mich. May 14, 2008) (staying discovery until the plaintiffs provided the defendants with a list identifying the trade secrets alleged to have been misappropriated "with reasonable particularity").  Similarly, California has enacted a statutory requirement that requires a plaintiff in a trade secrets case "to identify the trade secret with reasonable particularity . . . before commencing discovery relating to the trade secret." Cal.Code of Civil Proc. Section 2019.210.

A federal district court in New Jersey has failed to follow that trend.  In Reckitt Benckiser Inc. v. Tris Pharma, Inc., 2011 U.S. Dist. LEXIS 19713 (D.N.J.  June 21, 2011) (unpublished), the underlying action arose out of, inter alia, the alleged infringement of several drug patents.  Defendants moved to dismiss several of  the non-patent counts, including a trade secret misappropriation claim.  Defendants argued that plaintiffs' claim for misappropriation of trade secrets must be dismissed as a matter of law, because defendants contended that plaintiffs should have identified the alleged trade secrets in its complaint with particularity since they were "uniquely known to plaintiffs.”

The district court disagreed and denied the motion to dismiss holding that under New Jersey law, a claim of misappropriation of trade secret "does not require specific pleading of the precise information that constitutes the trade secret in order to survive a motion to dismiss. Indeed, 'unless there are heightened pleading requirements as to a particular cause of action, the Federal Rules of Civil Procedure do not require a plaintiff to plead all the relevant facts in detail . . .  and generally do not require a plaintiff to provide specific information about trade secrets at this stage of the litigation.’” 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A recent trade secret misappropriation action resulted in an award of compensatory damages of $41,000 and punitive damages of $40,000. Then, the plaintiff asked for more than a million dollars in attorney’s fees and costs. The defendants protested that (a) the fee request was grossly disproportionate to the damages that were recovered, and (b) the plaintiff’s billing was excessive. However, except for reimbursement of the expense of one expert witness the court deemed unnecessary, the entire requested amount was awarded. SKF USA, Inc. v. Bjerkness, Civil Action Nos. 08C 4709 and 09 C 2232 (N.D. Ill., Sept. 27, 2011).

An employee of plaintiff SKF left in order to “set up a competing business, taking with him a handful of other SKF employees and thousands of SKF’s computer files.”

SKF sued and established misappropriation. The court granted injunctive relief plus what it described as “a modest damages award.” SKF proceeded to file a fee request for $1.3 million. While not challenging SKF’s attorneys’ hourly rates, the defendants characterized as “outrageous” the more than 2700 hours billed. The defendants stressed that they had made substantial settlement offers, two of which were in amounts in excess of the damages ultimately recovered, and that SKF had rejected each while declining to make a counter-proposal.

SKF objected to the defendants’ argument based on settlement offers, but case law supports the court’s consideration of such information in adjudicating a fee request.

Case law also indicates that proportionality of the fee request is a relevant factor, but compared to what? Some courts weigh the ultimate result against the amount sought in the complaint and some look at the plaintiff’s reasonable expectations. The Seventh Circuit has declined to adopt a specific rule.

SKF’s success in obtaining injunctive relief -- particularly in light of its claim that the recovery of monetary damages was not its initial primary goal -- was deemed relevant in reducing the significance of the comparison between the judgment amount and the fee request. Three other factors also influenced the court: (a) the extent to which the defendants’ tenacious litigation strategy impacted the amount of SKF’s fees; (b) the fact that shortly before the defendants jumped ship, SKF was acquired and the purchase price “assigned great value to the trade secrets used in the business;” and (c) SKF’s payment of the fees in full.

This decision teaches two lessons. First, it provides a road map for use by a party prevailing on the merits in a fee-shifting case who then seeks reimbursement of a very substantial amount of expenses, especially where the reimbursement request is a high multiple of the damages award. Second, the ruling reminds us that a party who has lost on the merits in a hard-fought fee shifting case, and who then aggressively protests the fee request, is likely to face an incredulous judge.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Bob Stevens and Daniel Hart

As we have discussed on this blog before, on May 11, 2011, Georgia reissued its new Restrictive Covenant Act (the “New Act”). The New Act reflected a fundamental change in Georgia’s law regarding restrictive covenants because it permitted Georgia courts to “blue pencil” (i.e., partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under then-existing Georgia case law. While the New Act permits Georgia courts to partially enforce overbroad restrictive covenants, it does not require that they do so.

For the first time since Georgia passed the New Act, a Court in Georgia has elected to exercise its discretion to blue pencil restrictive covenants that it found to be overbroad. In Pointenorth Insur. Group v. Zander, No. 1:11-cv-3262-RWS, 2011 U.S. Dist. LEXIS 113413 (N. D. Ga. Sept. 30, 2011), the Court found that, among other things, the non-solicitation covenant contained in the employment agreement at issue was overbroad because it extended to any of the former employer’s clients, not just the ones with whom the former employee had contact during her employment. 

Rather than attempting to excise or mark out the overbroad provision and enforce the remaining restrictive covenants, the Court modified or altered the restrictive covenant and enjoined the former employee only from soliciting the clients with whom she had contact while employed by the plaintiff. The Court also enjoined the new employer from soliciting the same clients. 

This suggests that at least the Court interprets the New Act as providing it with the discretion to re-write restrictive covenants to make them enforceable, rather than merely providing a court with the power to remove overbroad covenants. It remains to be seen if other courts in Georgia follow the Pointenorth Court’s lead and use the New Act as a basis for re-writing restrictive covenants that are found to be overbroad. For the time being, this decision represents the lone voice on the stage and indicates that there may be a willingness to modify restrictive covenants instead of simply excising them and enforcing the remaining provisions.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Robert Milligan and Joshua Salinas

On October 12, 2011, the California Court of Appeal in Nicholas Laboratories, LLC v. Christopher Chen, No. G044105, 2011 WL 4823329 (Cal. Ct. App. Oct. 12, 2011), held that Labor Code section 2802 does not require an employer to reimburse its employee for attorney fees incurred in the employee’s successful defense of the employer’s action against the employee.  While reaffirming the traditional American rule in non-wage related litigation between employees and employers, the decision serves as a reminder to California employers of the implications involved in providing a defense and indemnifying employees in suits brought by third parties, including suits brought by their former employers against employees for trade secret theft.

Labor Code section 2802 provides:

(a) An employer shall 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, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.

(b) All awards made by a court or by the Division of Labor Standards Enforcement for reimbursement of necessary expenditures under this section shall carry interest at the same rate as judgments in civil actions. Interest shall accrue from the date on which the employee incurred the necessary expenditure or loss.

(c) For purposes of this section, the term "necessary expenditures or losses" shall include all reasonable costs, including, but not limited to, attorney's fees incurred by the employee enforcing the rights granted by this section.

Nicholas Laboratories, LLC (Nicholas Labs) filed suit against employee Christopher Chen for alleged theft of company property, misuse of the company credit card, and diverting business opportunities away from Nicholas Labs. The trial court entered judgment for Chen and against Nicholas Labs on the complaint and awarded Chen his costs. Chen then moved for attorney fees per Labor Code section 2802. The issue before the Court of Appeal was whether Nicholas Labs was required to “indemnify” its ex-employee, defendant Christopher Chen, for attorney fees incurred by Chen during his successful defense of the action. 

Chen asserted that various statutory (Lab. Code, § 2802, subd. (a); Corp. Code, § 317, subd. (d)) and/or contractual indemnity provisions obligated Nicholas Labs to reimburse Chen. Additionally, Chen argued that California’s strong public policy favors indemnification of employees by their employers.

The Court of Appeal rejected Chen’s argument and held that Labor Code section 2802 does not require an employer to reimburse its employee for attorney fees incurred in the employee’s successful defense of the employer’s action against the employee. The court stated that indemnification only applies to suits from third-parties and not the employer itself.  The court further concluded that Corporations Code section 317 did not apply because Nicholas Labs was a limited liability company and not a corporation.

This case highlights the situation where a new employer provides a defense for and indemnification for a new employee in a lawsuit brought by his or her former employer. Specifically, the issue may arise in the context of an ex-employee’s alleged trade secret misappropriation on behalf of or for the benefit of the new employer. Under Labor Code section 2802, an employer is required to indemnify employees in defense against third-parties for "all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer." The broad language of the statute can make new employers, who have litle knowledge of miscreants' actions on behalf of their employer, responsible not only for their defense but for indemnification for any money judgment obtained against the employees. Employers need to be particularly vigilant before hiring such high risk employees from competitors to make sure the potential "baggage" in having such employees is worth the risk. Additionally, counsel that represent both the ex-employee and new employer in such suits may have potential conflicts of interest in these joint representation scenarios, which must be constantly monitored.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

U.S. Senators Herb Kohl (D-WI) and Christopher Coons (D-DE) introduced an amendment to the Currency Exchange Rate Oversight Reform Act yesterday aimed at protecting American trade secrets and innovation.

Currently, Title 18 of the US Code only permits the Attorney General to bring a civil action in federal court for trade secret theft. The amendments would open the federal courts to private parties as follows:  

(b)    Private Civil Actions

            (1)        In General-Any person aggrieved by a violation of section 1832 (a) may bring a civil action under this subsection

            (2)        Pleadings-A complaint filed in a civil action brought under this subsection shall-

                        (A)       describe with specificity the reasonable measures taken to protect the secrecy of the alleged trade secrets in dispute; and

                        (B)       include a sworn representation by the party asserting the claim that the dispute involves either substantial need for nationwide service of process or misappropriation of trade secrets from the United States to another country.

The amendment also provides for immediate ex parte seizure orders and damages for the unlawful conduct. 

Senators Kohl and Coons cited two examples of trade secret theft to support their amendment- a Chinese national convicted of stealing trade secrets valued between $50 and 100 million for a Chinese competitor, and a disgruntled Wisconsin employee that attempted to sell aviation related trade secrets valued at hundreds of thousands of dollars to a competitor. Their amendment would enable victims of trade secret theft to seek injunctive relief and compensation for their losses in federal court.

It is important to note that the amendment only provides private civil action when the trade secret theft victim shows a (1) substantial need for nationwide service of process or (2) misappropriation of trade secrets from the US to another country. A nationwide service of process would apply to cases where a state court may have difficulty acquiring personal jurisdiction over multiple defendants residing in different states. Thus, the amendment would provide relief in cases where the federal court’s jurisdiction extends beyond the territorial limitations of the state court.

The amendment aims to primarily protect American business against international and foreign misappropriators. Therefore, trade secret owners should not necessarily view this amendment as a free pass to federal court to assert trade secret claims.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By Robert Milligan and Joshua Salinas

The Ninth Circuit’s important U.S. v. Nosal decision is gaining momentum. On September 14, 2011, a California district court in Facebook v. MaxBounty, the Honorable Jeremy Fogel, presiding, became one of the first courts to apply Nosal, reaffirming that the violation of computer use policies constitutes “exceeding authorized access” under the Computer Fraud and Abuse Act (CFAA). In doing so, Facebook arguably reinforced the legal protections for employers against employees who steal or remove electronic files or data in violation of their employers’ written computer-use restrictions.

Facebook is one of the most popular social networking websites with more than 500 million active users. It requires users to agree to its terms of use, which include regulation and restrictions regarding advertising on its website. Facebook’s advertising guidelines prohibit advertisements that are fraudulent, deceptive, or misleading.

Maxbounty is an online advertising and marketing company that drives internet traffic to its customers’ websites.   

Facebook alleged that MaxBounty engaged in impermissible advertising and commercial activity on its website. Facebook alleged that MaxBounty created Facebook pages that were intended to re-direct unsuspecting Facebook users to third-party commercial websites. 

Facebook brought a claim, inter alia, under the CFAA against MaxBounty for “knowingly and with intent to defraud, access[ing] of a protected computer without authorization or exceeding authority.” 18 U.S.C. § 1030(a)(4).

MaxBounty moved to dismiss Facebook’s CFAA claim per Federal Rule of Procedure 12(b)(6). MaxBounty argued that it could not act “without authorization” or “exceed authority” because Facebook granted MaxBounty access to the Facebook website.

The district court rejected MaxBounty’s argument, citing Nosal’s holding that “an individual who is authorized to use a computer for certain purposes but goes beyond those limitations is considered by the CFAA as someone who has ‘exceed [ed] authorized access.” U.S. v. Nosal, 642 F. 3d 781, 789 (9th Cir. 2011). The court stated that MaxBounty agreed to Facebook’s terms of use, which placed restrictions on Maxbounty’s use of Facebook’s website. 

MaxBounty argued that because Facebook granted it access to the Facebook site, it could not have exceeded its “authorized access” within the meaning of the CFAA. However, the court noted that Facebook alleged that MaxBounty and its affiliates registered for Facebook accounts and accepted Facebook’s terms of use, which places restrictions on their use of the Facebook site. In this light, the court found that Facebook’s allegations were sufficient to state a claim under the CFAA.

This case is significant because it is one of the first cases to apply Nosal’s holding that the violation of computer-use policies constitutes “exceeding authorized access” under the CFAA. As discussed in our prior blog, Nosal provides employers in the Ninth Circuit with a clear CFAA remedy against dishonest employees who exceed their authorized access of their employers’ computer systems. Facebook fortifies that protection and encourages employers to take proactive steps with well written computer-use policies and procedures.

• Email This
• Print
• Comments
• Trackbacks
• Share Link