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

By Robert Milligan and Jeffrey Oh

For the past three years, social media platform Facebook has pursued legal action against social media aggregator Power Ventures ("Power") over what it has viewed as a blatant violation of state and federal law. Filed by Facebook in December 2008,  the suit alleges violations by Power of the CAN-SPAM Act in addition to the Computer Fraud and Abuse Act ("CFAA") (18 U.S.C. § 1030) and the California Comprehensive Computer Data Access and Fraud Act (California Penal Code § 502). Facebook generally alleged that Power accessed its website in an unauthorized manner, and then utilized this unauthorized access to send unsolicited and misleading commercial emails to Facebook users.

On February 16, 2012, United States District Chief Judge James Ware of the United States District Court for the Northern District of California granted Facebook’s Motions for Summary Judgment on all three counts. The Court's decision is potentially significant and groundbreaking for social media companies, like Facebook, and social media aggregators, like Power Ventures, concerning data collection by aggregators that violates social media companies' terms of service. The Court also asked for additional briefing on the amount of damages Facebook should receive and the individual liability of Power's CEO.

The decision also highlights issues regarding social media sites and spam, as well as the more significant issue of user control of their own data on social media sites. One commentator has remarked that the natural question that begs to be asked is "if Facebook users own their own data, why can't they choose the way it's accessed?" Another commentator has stated that the upshot of the decision is that "if users want to access data, they have to do so on Facebook’s terms, and may not do so using a third party tool that is not a part of Facebook’s developer platform. " 

Power Ventures

Launched in August 2008, Power Ventures is a web service designed to offer users of multiple social platforms a one-stop solution for accessing their networks. Using login credentials disclosed by its users, Power gathers data from various sites, such as Facebook, and aggregates it on its own site. For its part, Facebook offers its own application programming interface (API) which allows third-party developers to use Facebook user data in their applications. However, after determining that the Facebook API did not include access to all of the relevant user data they wanted, Power instead allegedly used their users’ login information to access and save cached versions of Facebook pages, scraping these webpage snapshots for data. Additionally, in a “Launch Promotion,” Power allegedly gathered the names of its users’ Facebook friends and offered a chance at a $100 prize in return for agreeing to send them an invite to Power’s service. The subsequent invitations to join were allegedly sent through Facebook’s message service and used a “@facebookmail.com” address instead of a Power.com address.

CAN-SPAM Act

Passed in 2003, the CAN-SPAM Act makes it “unlawful for any person to initiate the transmission, to a protected computer, of a commercial electronic mail message, or a transactional or relationship message, that contains, or is accompanied by, header information that is materially false or materially misleading .” 15 U.S.C § 7704(a)(1).  Facebook argued that Power initiated misleading messages to its users inviting them to join Power’s service. Coming from the “@facebookmail.com” address, the message allegedly initiated by Power came from Facebook's servers and contained no return address where Power could be reached, nor any header information identifying Power as the initiator of the message.

As an Internet access service provider (IAS provider), Facebook is permitted to assert a cause of action (and obtain statutory damages) if it is able to establish standing under the CAN-SPAM Act, i.e. was Facebook "adversely affected" by the alleged violations. Testifying to this essential element, which the Court credited, Facebook documented its expenditures in response to Power’s actions, including associated legal fees as well the cost of increased technical measures to attempt to prevent the spamming.

The Court noted that Power's spamming activity was ongoing, prolific, and did not stop after requests from the network owner. The Court reasoned that to hold that Facebook originated the emails merely because Facebook servers sent them would ignore the fact that Power intentionally caused Facebook's servers to do so, and created a software program specifically designed to achieve that effect. The Court also reasoned that the emails did not contain any return address or any address anywhere in the email that would allow a recipient to respond to Power. Thus, the Court concluded that the header information did not accurately identify the party that actually initiated the email and the header information was materially misleading. Consequently, the Court ruled in favor of Facebook, finding Power to be in violation of the CAN-SPAM Act.

Computer Fraud and Abuse Act & California Penal Code § 502

The Computer Fraud and Abuse Act is a federal law designed to, among other things, combat hacking, cracking of computer systems, and other computer-related offenses. In this case, Facebook sued Power under a subsection of the act (18 U.S.C. § 1030(a)(2)(C)) which provides that it is unlawful to “intentionally access[] a computer without authorization or exceed[] authorized access, and thereby obtain[]…information from any protected computer.” Similarly, Facebook also asserted a claim under California Penal Code § 502, a state statute that aims to prevent entities and individuals from “knowingly and without permission” accessing and taking, copying, or making use of data from computers, computer systems, or computer networks. Though Power gained access to Facebook pages using login information provided by its users, the automated process by which Power obtained user data is a violation of Facebook’s terms of use. As a result, Facebook argued that Power did not in fact have authorized access (under Facebook’s own terms of use) to the user profiles it gathered, or the subsequent data therein, and was in violation of both § 502 as well as the CFAA.

While the Court did not agree that simply violating a network’s terms of use was enough to warrant the distinction of “without permission” under § 502, it established a new standard for unauthorized access by distinguishing access which “circumvents technical or code-based barriers in place to restrict or bar a users’s [sic] access.” In support of this additional requirement, Facebook detailed its efforts to block Power’s IP address and access, as well as the adjustment of Power’s software to circumvent this measure. Additionally, Facebook pointed to emails by Power’s CEO, as well as transcripts of discussions with his staff in which the CEO warns them of Facebook’s potential countermeasures and the need to not be detected. Given the Power CEO's anticipation of potential blocks to Power’s methods, as well as Power’s actual circumvention of Facebook’s IP blocks, the Court ruled that Power did in fact access Facebook’s servers without permission and was in violation of California Penal Code § 502. Similarly, after crediting Facebook's showing of Power's violation of § 502 and considering Facebook’s costs to attempt to thwart Power's unauthorized access, which were in excess of the $5,000 minimum damage or loss threshold mandated by 18 U.S.C. § 1030, the Court also found Power to be in violation of the CFAA.

Conclusion and Takeaways

In response to the decision, interested parties have voiced differing views. Facebook's lead litigation counsel has been quoted by Bloomberg News as saying: "We will continue to enforce our rights against bad actors who attempt to circumvent Facebook’s privacy and security protections and spam people.” The EFF has criticized the decision stating that the case "demonstrates the difficulties facing those who seek to empower users to interact with closed services like Facebook in new and innovative ways."

Though successful in proving that Power accessed its site without permission, Facebook’s victory may be bittersweet for the social networking giant. Previously, Facebook relied heavily on its incredibly robust terms of use to safeguard itself from what it viewed as abuse of its service. Now, given the Court’s standard for what constitutes access “without permission,” Facebook, as well as other Internet based services, must focus even more heavily on incorporating protective measures into its website’s code and allocate more resources to promptly respond to threats from outsiders like Power. Monitoring a network the size of Facebook’s for unauthorized access may be a daunting technical task and the security investigation costs significant, yet failing to do so may cost even more to a service dependent upon users who may expect privacy and security. Companies that traffic in secured information should be sure to invest in comprehensive protective measures designed to keep unauthorized users out, whatever their purpose. Crafting a comprehensive terms of use that explicitly outlines what is acceptable is still important to protecting a company from misappropriation or abuse as it helps to establish clear boundaries for authorized access. However, while a strong terms of use is necessary, it is not sufficient to gain the full protections of the CFAA and California Penal Code § 502 for social networking services, such as Facebook, at least acccording to this Court.

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Dear Clients and Friends,

2011 was a successful year for our Trading Secrets blog. Launched in 2007, the blog has continued to grow in both readership and postings. Content from Trading Secrets has appeared on newsfeeds such as Lexology and iTechLaw, IP.com’s “Securing Innovation” Blog, and Kevin O’Keefe’s “Real Lawyers Have Blogs,” one of the leading sources of information and commentary on the use of blogs. We are pleased to provide you with this 2011 Year in Review which compiles our significant blog posts from 2011 and highlights our blog’s authors. For a general overview, we direct you to our Top 10 2011 Developments/ Headlines in Trade Secret, Computer Fraud, and Non-Compete Law blog entry (pages 13-18) as well as our 2011 Trade Secrets Webinar Series - Year in Review blog entry (pages 30-36) which provide a summary of some of the key cases and legislative developments in 2011, as well as practical advice on maintaining trade secret protections.

As the specific blog entries that are contained in this Review demonstrate, our blog authors stay on top of the latest developments in this area of law and provide timely and entertaining posts on significant new cases, legal developments, and legislation.  In 2012, we plan to increase the frequency of our postings by including more authors (including special guest authors (e.g. law professors, clients, and forensic experts), enhancing the visual effectiveness of posts (e.g. more pictures, charts, and video), as well as provide resource material (e.g. applicable statutes, significant cases and links, and webinars) on the blog.  

In addition to our blog, Seyfarth’s dedicated Trade Secrets, Computer Fraud, and Non-Competes group hosts a popular series of webinars, which address significant issues facing clients today in this important and ever changing area of law. In 2011, we hosted six webinars: Trade Secrets in the Financial Services Industry, The Anatomy of a Trade Secret Audit, Georgia’s New Non-Compete Statute, Managing and Protecting Trade Secrets in the Brave New World of Cloud Computing and Social Media, Choosing the Right IP Protection: Patent, Trade Secret or Both?, and Key Considerations Concerning Trade Secrets and Non-Competes in Business Transactions.  For those who missed any of the programs in 2011’s webinar series, the webinars are available on compact disc upon request and CLE credit is available for attorneys licensed in Illinois, New York or California.  If you are interested  in receiving CLE credit for viewing recorded versions of the 2011 webinars, please e-mail CLE@seyfarth.com to request a username and password.

We kicked off the 2012 webinar series with a program entitled, “Employee Privacy, Social Networking at Work, and the Computer Fraud and Abuse Act Standoff,” and had over 1000 registrants. More information on our upcoming 2012 webinars is available in program listing contained in this Review. Our highly successful blog and webinar series further demonstrate that Seyfarth Shaw’s national Trade Secrets, Computer Fraud & Non-Competes Practice Group is one of the country’s pre-eminent groups dedicated to trade secrets, restrictive covenants, computer fraud, and unfair competition matters. For more information, please sign up for our mailing list and our RSS feed. Also, if you are interested in a copy of the Year in Review in hard copy or cd, please contact us.

Thank you for your continued support.

Michael Wexler                

Chicago Partner and Practice Group Leader

Robert Milligan

Los Angeles Partner and Blog Editor

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As a result of his recent post on Seyfarth’s Trade Secrets Law Blog about the Zynga/Farmville suit, Scott Schaefers was contacted by LexBlog to participate in a Skype interview about the case.  In the lawsuit, which was filed in June 2011 in an Oakland federal court, plaintiff SocialApps claims that Zynga (the operator of Facebook’s popular application, Farmville) engaged them in potential acquisition talks, looked at the code for their virtual farming game, myFarm, during “due diligence” and then turned around and made Farmville just a few months later. The case involved seven claims for copyright infringement, statutory trade secrets theft, breach of contract, breach of “implied contract,” breach of confidence, breach of implied covenant of good faith and fair dealing, and “unjust enrichment.”

Scott’s Skype interview was published last week on The LexBlog Network website. The LexBlog Network is the largest professional blog network in the world. 
 

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By Robert Milligan and Jeffrey Oh

A recent California federal court decision has permitted an employer to pursue a former employee for alleged violations of the employer's computer usage policies under the Computer Fraud and Abuse Act (“CFAA”), while an en banc Ninth Circuit panel considers the validity of such claims. The Ninth Circuit’s decision in the United States v. Nosal provided employers with a potentially powerful tool under the CFAA to combat data theft by employees and other insiders, only to see the decision rendered non-citable in October 2011 while an en banc Ninth Circuit panel reconsiders the issue.  A recent decision from federal district judge Larry Alan Burns of the United States District Court, Southern District of California, reflects a willingness to allow employers to continue to use the CFAA to combat data theft at least until the en banc panel rules in Nosal.

The case, Platinum Logistics v. Mainfreight and Melissa Ysais, centers around Ms. Ysais, a former sales manager at Platinum Logistics who allegedly violated a binding nondisclosure agreement by taking customer lists and rate sheets in her transition to a competitor.  Platinum Logistics claims that in taking these electronic documents without permission Ms. Ysais violated the CFAA.

In its initial complaint, Platinum Logistics specifically cited § 1030(a)(5)(C), a subsection of the CFAA which prohibits “intentionally access[ing] a protected computer without authorization, and as a result of such conduct, caus[ing] damage and loss.” Ruling on a motion to dismiss, the Court cited the Ninth Circuit’s interpretation of § 1030(a)(5)(C) given in LVRC Holdings LLC v. Brekka in which access without authorization is defined as “without any permission at all.” Given that Ms. Ysais accessed the documents in question while still employed at Platinum Logistics and had accessed them previously within the scope of her job, the Court granted the defendant’s motion to dismiss, but without prejudice to Platinum Logistics. In his discussion on the matter, the Court provided Platinum Logistics with the opportunity to file an amended complaint, citing a different subsection of the CFAA as the potential basis for a valid claim.

According to the Court, Platinum Logistics may have a valid claim under §§ 1030(a)(2) and (a)(4), which offers legal recourse for cases where authorized access is exceeded. As interpreted by the Ninth Circuit in Nosal, “an employee ‘exceeds authorized access’ under § 1030 when he or she violates the employer’s computer access restrictions - including use restrictions.” In the case of Platinum Logistics, Ms. Ysais’s alleged apparent disregard of the company’s non-disclosure agreements in taking electronic documents puts her in violation of the CFAA as it is currently interpreted. Accordingly, the Court provided the plaintiff with an opportunity to amend its complaint to state this claim under the CFAA. Should the plaintiff elect to assert the CFAA claim, the Court ordered the claim stayed pending resolution of Nosal.  

As modern computer technology continues to change the work place and how companies operate, the CFAA continues to serve as an increasingly important legal tool in preventing data theft by employees and insiders. The outcome of Nosal is being closely watched by employers and employees and United States Supreme Court challenge is probably inevitable once the Ninth Circuit renders its decision.

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By Jessica Mendelson

On February 13, SunPower Corporation, a manufacturer of solar panels, sued five former employees, as well as its rival, SolarCity Corporation in federal court in San Francisco, California and sought a temporary restraining order against the defendants. SunPower asserted claims of unfair competition, trade secret misappropriation, and violations of the Computer Fraud and Abuse Act (“CFAA”), as well as a number of other claims, in its complaint.

In its complaint, SunPower alleges that five former employees copied thousands of electronic files containing confidential information on to external hard drives and USB devices. The individual defendant employees all signed non-disclosure and non-solicitation agreements with SunPower. 

One of the individual defendants allegedly left SunPower in August 2011, and began working at SolarCity. In the days leading up to his departure, SunPower alleges the individual defendant used portable storage devices to steal proposals, contracts, quotes, deals and market analysis from SunPower. This data also included information about SunPower’s major customers, as well as the names of the employees responsible for the sales. SunPower alleges this former employee then used this information to recruit other SunPower employees to SolarCity. These employees included the other individual defendants, each of whom allegedly copied additional confidential information on to a personal USB device prior to leaving SunPower.  One of the individual defendants also allegedly accessed his SunPower email immediately after leaving and forwarded several confidential documents to his personal email account. SunPower used forensic analysis to confirm the alleged theft of these files after the fact.

SunPower’s complaint alleges the stolen files were then transferred to computers or devices at SolarCity, which knowingly accepted them, and used the information to conduct business. In doing so, SunPower alleges SolarCity and its employees violated the CFAA and misappropriated trade secrets. Based on SolarCity’s actions, SunPower requested the judge grant a temporary restraining order, which would include allowing a forensic expert to copy data from the employees’ computers and computer media to preserve evidence of stolen information. 

SunPower alleges the stolen information “will greatly damage [their] global sales by allowing SolarCity to predict SunPower’s every movement for years to come. . . it is highly likely defendants will conceal the stolen computer files unless this court grants this motion and allows SunPower to copy data from the former employees’ computers.”

The Ninth Circuit has previously addressed the issue of liability under the CFAA in cases where employees steal or remove electronic data in violation of employer computer use policies. In US v. Nosal (9th Cir. No. 10-10038), the court held that a former employee “exceeds authorized access” to data on an employer’s computer system when the employee takes actions on the computer which are prohibited by written policies and procedures concerning acceptable use. Under the  policy articulated in Nosal, employees must strictly adhere to a company’s computer use restrictions in order to comply with the CFAA. However, the Ninth Circuit granted en banc review of the previous Ninth Circuit Nosal decision. Oral argument before the en banc panel was held in December and a decision has yet to be released. Accordingly, it is unclear whether Sunpower will be able to maintain its CFAA claim.  

As of February 17, it appears unlikely that the court will rule on Sunpower's motion for temporary restraining order. The parties have filed a joint stipulation withdrawing the motion for a temporary restraining order without prejudice, and seem to think it is likely that an agreement can be reached. However, SunPower has reserved the right to refile for injunctive relief. We will continue to follow this case closely as it progresses.

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By Scott Schaefers

On February 13, 2012, a federal judge in Los Angeles, California dismissed a remote-access software company’s claim that one of its customers violated the California Trade Secrets Act, Cal. Civ. Code § 3426.1 et seq., by downloading a trial version of plaintiff’s Mac-environment remote-access software and “reverse engineering” its own program. Aqua Connect, Inc. v. Code Rebel LLC, No. 2:11-cv-05764-RSWL-MAN (C.D. Cal. Feb. 15, 2012) (Doc. No. 30). This decision clarifies, to an extent, when competitors may be liable under the Trade Secrets Act for using free trial versions of a commercial product or program as a starting-off point for their own research and development of a competing product.

Aqua Connects allegations were fairly straightforward. Aqua Connect alleged that its “ACTS” software, by which users can remotely access a Mac-based environment, was a trade secret under California’s Trade Secrets Act. Aqua Connect alleged that Code Rebel downloaded a free trial version of ACTS after agreeing to all the terms and conditions of Aqua Connect’s clickwrap End User Licensing Agreement. The Agreement prohibited users from reverse engineering the ACTS software and any subsequent sales of such infringing programs. That is exactly what Code Rebel did, according to Aqua Connect. Code Rebel allegedly used its free trial ACTS package to develop a competing remote-access program Aqua Connects alleged, in relevant part, that such reverse engineering in breach of the Agreement constituted acquisition of trade secret information by “improper means,” and thus “misappropriation,” under the Trade Secrets Act.

Code Rebel, and the federal court, disagreed. The court held that the Act’s definition of “improper means” and the accompanying committee comments made clear that mere reverse engineering of a trade secret, without any further evidence of improper access or acquisition, was not enough to prove misappropriation under the Act. Thus, Aqua Connect’s online offering of free 14-day trials of its ACTS program, even though accompanied by a license agreement not to reverse engineer and subsequently sell such programs, precluded Aqua Connect’s claim of improper acquisition. Essentially, the court focused on Code Rebel’s access, and not use, of the ACTS program, and there was nothing wrong with the access.

The court also rejected Aqua Connect’s alternative argument that Code Rebel is liable under the Act because misappropriation also occurs when someone acquires a secret “under circumstances giving rise to a duty to maintain its secrecy, but nevertheless uses the secret without authorization. That theory of misappropriation, the court held, was reserved for fiduciary or employment relationships where agents or employees owe automatic legal duties to their clients or employers, which circumstances were not present here. And because Aqua Connect had twice tried and failed to allege trade secret misappropriation based on Code Rebel’s misuse of the online trial program, the court dismissed Aqua Connect’s claim with prejudice and without permission to try again.

This decision is noteworthy because it refused to hold liable under the Trade Secrets Act a company which agreed not to reverse engineer a competitor’s product for its own benefit, but then turned around and did just that. One might question why Aqua Connect’s clickwrap Agreement’s express prohibition against reverse engineering was not enough to impose on Code Rebel a duty under the Trade Secrets Act not to misuse the ACTS software. If agents and employees can be held liable under the “circumstances giving rise” theory of trade secrets misappropriation, and agents and employees voluntarily take on their legal duties of loyalty and confidence, then why cannot a customer which voluntarily takes on a contractual duty of secrecy be held to the same standard? After all, holding Code Rebel to the same standard would seemingly not contradict the Act’s provision that reverse engineering alone is insufficient. Code Rebel breached an express promise of secrecy, a promise that Aqua Connect probably insisted on to prevent the very acts of which it accused Code Rebel. But, the logic and fairness of this result are broader topics that are outside the scope of this post.

And in the end, Aqua Connect is not without recourse. Still alive are its claims for breach of agreement, false promise, statutory unfair competition, and unjust enrichment. So Aqua Connect still may be able to recover similar compensatory damages as it would under a trade secret misappropriation claim, and it can potentially recover punitive damages under its false promise claim.  We will continue to follow this case and update you on any significant developments. 

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By Justin Beyer

Thompson Reuters (Healthcare) Inc. sued three former executive employees, all formerly working for Thompson Reuters in its pharmacy benefits management and consulting division of its healthcare services arm, in the United States District Court for the Eastern District of Wisconsin on Monday and immediately filed a motion for partial summary judgment against the former executives for a declaration that their non-solicitation agreements are enforceable under Wisconsin law.

According to the complaint, all three former employees were originally employed by Trivantage Pharmacy Strategies, LLC, a private company located in Milwaukee, Wisconsin, which Thompson Reuters acquired in 2009. 

As alleged in the complaint, Trivantage was in the business of providing pharmacy benefit management consulting and auditing services to assist companies in lowering their healthcare costs, and specifically lowering their pharmacy costs. Prior to Thompson Reuters acquisition of Trivantage, one of the employee defendants was allegedly a co-founder of Trivantage and had served as its Vice President of Business Development and the other two individual defendants served as Vice Presidents of Consulting Services. Between the three defendants, they were allegedly responsible for identifying potential clients, marketing Trivantage’s services, developing and maintaining relationships with Trivantage’s customers and prospective customers, and developing relationship with the appropriate personnel for each customer, for the purpose of establishing goodwill and maintaining customer relationships.

According to the pleadings, during the course of their employment with Trivantage, each of the defendants also executed various employment agreements, which, among other things, prohibited them from soliciting Trivantage’s customers; specifically, one of the individual defendants agreed not to solicit Trivantage’s customers for two years and the other two individual defendants agreed not to solicit for 18 months. Also included in each of the various agreements was an assignment clause, in which each of the defendants agreed that their non-solicitation agreement was assignable to any Trivantage successor.

In April 2009, Thompson Reuters entered into an agreement to purchase Trivantage, according to the complaint. Before the deal was executed, one of the individual defendants allegedly entered into a separate deal with Trivantage, through which Caldwell allegedly reaffirmed his non-solicitation obligations in exchange, in part, for receiving five percent of the net proceeds from Thompson Reuters’ acquisition of Trivantage. Thompson Reuters attached an unexecuted copy of the alleged agreement to its complaint and claims that its agreement with that individual defendant constitutes an alleged oral contract.

For the following two years, the defendants continued to be employed by Thompson Reuters, performing the same functions that they had performed at Trivantage. In mid-2011, Thompson Reuters discovered that the defendants were not allegedly devoting their full energies to Thompson Reuters and suspected that the defendants were setting up and/or operating a new business. Specifically, Thompson Reuters claims that one of the individual defendants stopped logging his sales efforts into Thomson Reuters’ computer system, the other two individual defendants allegedly exchanged emails that seemed to indicate that they were brainstorming about the name for a new company, and, on at least one occasion, according to the complaint, the individual defendants or one of their associates appear to have funneled a Thomson Reuters’ payment to an unauthorized vendor.

Subsequently, Thompson Reuters terminated the individual defendants in August 2011. After their termination, Thompson Reuters sent a letter to each of the defendants reminding each of their non-solicitation agreements, but each defendant responded claiming that their non-solicitation agreement was unenforceable. 

Also after terminating the defendants, Thompson Reuters allegedly discovered that the defendants, in May 2011 and while still in Thompson Reuters’ employ, incorporated Remedy Analytics, a business which is competitive to Thompson Reuters and which is operated from two of the individual defendants'  home. In November 2011, Thomson Reuters further learned that the defendants, through Remedy Analytics, were allegedly soliciting and attempting to poach certain Thompson Reuters’ clients.

Interestingly, Thompson Reuters does not seek injunctive relief against the defendants in the complaint, instead seeking a declaration that the non-solicitation agreements are enforceable and seeking money damages for breaches of contract. In addition to filing its complaint, Thompson Reuters filed a motion for partial summary judgment seeking an immediate ruling from the court that the non-solicitation agreements are enforceable. 

This case is worth watching as it addresses significant issues such as the enforceability of the non-solicitation agreements under Wisconsin law, including whether the court will enforce non-solicitation agreements acquired through a stock purchase agreement.  Also, should the Court find that the restrictive covenants are enforceable, the amount of damages, if any, recovered, by Thompson Reuters should be interesting to follow.

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By Robert Milligan and Joshua Salinas

In light of Valentine’s Day, a blog involving two competitors specializing in heart rhythm therapy seems fitting. The Oregon district court case is Biotronik, Inc. v. Medtronic, USA, Inc., No. 03:11-cv-00366-HU, 2012 WL 14031 (D. Or. Jan. 4, 2012), where the Honorable Judge Michael H. Simon, found the amount in controversy for federal diversity jurisdiction satisfied, even though the plaintiff sought only declaratory relief and did not claim damages exceeding $75,000. 

The interesting aspect of this case is that Judge Simon determined the value of the amount in controversy based on the plaintiff’s potential liability for defendants’ allegations in a separate out-of-state lawsuit.

The Parties and Background Facts

Plaintiff Biotronik, Inc. and Defendants Medtronic USA, Inc. and Medtronic, Inc. (collectively “Medtronic”) are competitors in the cardiac rhythm management device (“CRMD”) industry. CRMDs electrically stimulate the heart to pump blood when the heart is unable to keep a steady beat. Inherent in this highly competitive and technologically complex market is the necessity to have skilled salespeople with a great deal of technical knowledge. Thus, companies such as Medtronic retain noncompetition and non-solicitation agreements to protect the training and resources they invest in their employees.

A dispute arose when several employees left Medtronic to work for Biotronik. Medtronic believed former employee Rory Carmichael had wrongfully solicited these employees and caused them to leave for Biotronik.

Medtronic sued Carmichael in Minnesota state court, alleging that he solicited Medtronic’s employees, on behalf of and/or for the benefit of Biotronik, in breach his Employment and Separation Agreements with Medtronic. At the time of the alleged solicitations, Carmichael was not yet an employee of Biotronik. Medtronic did not join Biotronik in the Minnesota action because Medtronic allegedly lacked sufficient evidence to sue for tortious interference with contract. 

Biotronik's Declaratory Relief

Biotronik formally hired Carmichael while the Minnesota action was still pending, and immediately brought a declaratory relief action against Medtronic in Oregon state court. Biotronik sought two declarations:

            1. “Biotronik has the right to employ Carmichael, free from any Post-Termination Obligations relating to noncompetition and non-solicitation that are set forth in the [Employee Agreement] and the Parties’ Agreement; and

            2. “Biotronik did not cause any violation of any of the Post-Termination Obligations set forth in [Carmichael’s Employee Agreement].”

Medtronic removed the case to federal district court based on diversity of citizenship; Biotronik was an Oregon corporation and Medtronic a Minnesota corporation. Medtronic then moved to dismiss the case for improper jurisdiction, or in the alternative, transfer to Minnesota. Medtronic hoped to transfer the case to Minnesota, which has a stronger policy in enforcing noncompetition and non-solicitation agreements compared to Oregon.

Biotronik on the other hand moved to remand the case back to Oregon state court and maintain any “home field advantage,” contending that the amount in controversy did not exceed the $75,000 requirement for federal jurisdiction. 

Determining the Amount in Controversy

Judge Simon stated that when a removed lawsuit seeks declaratory or injunctive relief, the amount in controversy is measured by the value of the “object of litigation.” (See Hung v. Wash.State Apple. Adver. Comm’n, 432 U.S. 333 (1977)). The object of litigation here was Biotronik’s potential liability to Medtronic – the value of liability if Biotronik was in fact found liable in the Minnesota action for causing Carmichael to wrongfully solicit Medtronic’s employees. 

The value of that potential liability was the liquidated damages provision in Carmichael’s Separation Agreement, which required Carmichael to repay Medtronic all post-termination compensation and additional consideration he received from his Employment and Separation Agreements. Judge Simon found the amount in controversy satisfied because the amount of these repayments would exceed $75,000.

Judge Simon found federal diversity jurisdiction satisfied, but denied Medtronic’s request for dismissal or transfer.

Important Takeaways:

1. Noncompetition and non-solicitation cases often involve a “race to the courthouse” to file  first and secure the home forum and applicable state law because states differ in their policies toward the enforcement of non-compete clauses. 
    
2. Plaintiffs seeking to avoid the removal of their declaratory relief actions to federal court, and potentially face dismissal or transfer, should narrow the language of their declarations to restrict the scope of their potential liability. Judge Simon noted that Biotronik’s first declaration regarding its mere ability to employ Carmichael would not have satisfied the amount in controversy requirement. Biotronik’s broad language in its second declaration, however, opened the door and allowed Judge Simon to consider Biotronik’s potential liability for causing “any violation of any of [Carmichael’s] Post-Termination Obligations.”
    
3. Defendants seeking to remove a plaintiff’s declaratory relief actions to federal court, to
   ultimately dismiss or transfer the case, should anticipate this strategy when initiating any early lawsuits. While the ideal strategy for employers is to file actions in one’s own state first, the new employer is usually in the best position to know when the alleged breacher/employee is officially hired. Moreover, while there may not be sufficient evidence to join the new employer in an initial lawsuit, as in Medtronic’s case, the scope of the allegations concerning the new employer in a complaint or other pleadings may help expand the scope of the new employer’s potential liability. Thus, if the new employer’s later declarations are too broad, the allegations in the early lawsuit may help widen the scope of potential damages to satisfy the amount in controversy for federal diversity jurisdiction, and help assist in a future motion to dismiss or transfer.

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By Robert Milligan and Jeffrey Oh

Over the past decade, no avenue has had a bigger impact on society and the ways in which people interact than social media. Websites like Facebook, Twitter, LinkedIn, which traffic in information shared on its servers, encourage users to publish every detail of their lives. For employers, the reality of social media’s pervasiveness (and benefits) presents unique challenges in maintaining the integrity of trade secrets and confidential information accessible to employees. While it is always important to err on the side of caution in crafting effective social media policies for the workplace, employers must be aware of their legal limitations in setting parameters for appropriate use. To avoid the ire of the National Labor Relations Board (NLRB), companies must align their policies with the National Labor Relations Act (NLRA). In connection with the same, the Office of the General Counsel for the NLRB has recently issued its interpretation of how the Act applies to social media. Companies that rely on trade secrets and confidential information need to listen and make sure that their social media policies are compliant with the NLRA or risk that their valuable information is exposed and liability under the NLRA.

Passed in 1935, the NLRA is a federal law designed to protect employees’ rights to organize unions, labor strikes, or engage in collective bargaining. In practice, the Act allows workers to freely discuss issues ranging from the terms and conditions of employment to complaints of unfair treatment. Relating to social media, this protection allows employees to author public posts about a company or their workplace so long as it can be construed as a discussion with fellow employees and a potential first step towards self-organizing. With respect to this protection, it does not matter whether the employer is a union shop as these protections apply to non-union employers as well.

In a recent operations management memo issued by Lafe Solomon, the Acting General Counsel for the NLRB, an analysis of recent cases related to social networking in the workplace found that a majority of employers had applied overly broad policies that did not adhere to the provisions of the NLRA. These cases were largely related to the terminations of employees who had authored some sort of work-related post on Facebook. Although employers have both a duty and the right to take action against employees who misappropriate company information online, in light of the NLRB’s interpretation of these cases, companies should revisit their social media policies and ensure that they offer maximum protection without opening themselves up to future litigation. In particular, employers should be aware of what sorts of topics are protected by the NLRA - even on a very public forum such as Facebook.

According to the NLRB, the report underscores two main points made in an earlier compilation of cases:

1. Employer policies should not be so sweeping that they prohibit the kinds of activity protected by federal labor law, such as the discussion of wages or working conditions among employees.
2. An employee’s comments on social media are generally not protected if they are mere gripes not made in relation to group activity among employees.

The report provides several examples of social media policies that run afoul of the NLRA and those that do not. The NLRB report concluded that the policy described below was not overly broad and, therefore, was lawful:

“The employer’s social media policy provided that the employer could request employees to confine their social networking to matters unrelated to the company if necessary to ensure compliance with securities regulations and other laws. It prohibited employees from using or disclosing confidential and/or proprietary information, including personal health information about customers or patients, and it also prohibited employees from discussing in any form of social media ‘embargoed information,’ such as launch and release dates and pending reorganizations.”

According to the NLRB’s interpretation of recent cases, the potential scope of protected employee-discussion is fairly large. Examples of speech protected by the NLRA include accusations of sexism in the workplace, departmental complaints, complaints about orders or instructions perceived to be unfair and other labor disputes. In each of these cases, the NLRB found location (a forum including fellow employees) and context (relating to terms and conditions of employment) to be the standard for what is, and is not permissible. 

For companies worried about trade secret protection and keeping sensitive information confidential, the broad nature of the NLRA can seem like a severe handicap in their efforts to prevent all forms of misappropriation. Dealing with the possibility that an employee could, for example, complain online about having to travel to a distant location for an upcoming project, only to inadvertently disclose a business strategy the company had otherwise gone to great lengths to keep confidential, is a nightmare scenario that is all too likely in the information age. Fortunately, the NLRB has clarified what it views as permissible social media policy in regards to this issue. Recently, a company expanded a policy asking employees to abide by securities regulations in relation to discussing the company on social networking sites to include “embargoed information” that it deemed confidential. Although this policy could be seen as trying to restrict actions protected under the NLRA, the NLRB ruled that the employees would reasonably interpret to the policy to apply only to communications that might implicate security regulations.

In addition, they ruled that since employees do not have a protected right to disclose embargoed information such as trade secrets or confidential information, the employees would not reasonably interpret the rule to disallow communications about the terms and conditions of their employment. While this may not be the clearest, bright-line rule, it at least acknowledges that the NLRB acknowledges an employer's right to protect its trade secrets and confidential information.

Maintaining an up-to-date social media policy should be a high priority for any company. As social media continues to evolve in its effects on society and modern communication, it is critical that employers educate their employees on what is, and is not permissible social media use with regards to company information. Actual meaningful training is essential rather than hiding the social media policy in a stack of new hire paperwork. Eliminating any ambiguities that may remain from outdated policies can serve to offer future protection against the misappropriation of trade secrets or confidential information online, no matter what the social media service of choice may be for the particular company. Employers should focus on legitimate business interests in articulating their written policies and conveying their policies to employees. Clearly defining the parameters of what is off limits or embargoed for discussion in social media is the most effective way to protect a company from misappropriation while steering clear of overly broad policy applications that may be deemed unlawful by the NLRB. Depending upon the industry, social media policies may also want to address the ownership of content in social media accounts used to generate business for the employer. Competent legal counsel should be consulted to create and/or update appropriate social media policies.

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By Jessica Mendelson

On February 3, 2012, the Appellate Court of Illinois, Second District reversed and remanded the Winnebago County Circuit Court’s decision in Hafferkamp v. Llorca in a significant unpublished non-compete decision. The Second District held that the trial court failed to properly apply the Illinois Supreme Court's standard set in Reliable Fire Equipment v. Arredondo to determine whether the non-compete agreement was valid. 

The defendant in this case, Leah Llorca, worked at a hair salon owned by the plaintiff, Mary Hafferkamp. As part of the terms of her employment, Llorca signed a non-compete agreement. Llorca later left Hafferkamp’s hair salon, and joined a competing business, located in the geographic area excluded by the non-compete agreement. Hafferkamp sued to enforce the contract, and the trial court held the agreement unenforceable. The trial court’s holding was based on LSBZ, Inc. v. Brokis, 237 Ill. App. 3d 415 (1992), which provided the correct enforceability test at the time of the trial court’s ruling.  The LSBZ test required the court to determine whether the promisee had a legitimate business interest in enforcing the agreement, and found that such an interest only existed in two cases: when the employee acquired confidential information from the employer, or where the employer had near permanent customer relations. The court here found that neither criteria was met, and thus the agreement was found unenforceable. Hafferkamp then appealed the case to the Second District.

After the trial court’s decision in Hafferkamp v. Llorca was made, but prior to the Second District’s ruling, the Illinois Supreme Court issued a significant ruling on non-compete agreements. This decision, in the case of Reliable Fire, clarified the standard for determining the enforceability of non-compete agreements. According to the Supreme Court, for an agreement to be enforceable, it must be analyzed under a three-pronged rule of reason test. The covenant would only be enforced if doing so was (1) not greater than necessary to protect a legitimate business interest of the promisee, (2) would not be “injurious to the public,” and (3) would not cause “undue hardship to the promisor.” Reliable Fire, 2011 IL 111871 at ¶ 17. Additionally, the court found that whether an interest was considered a “legitimate business interest” needed to be determined based on the totality of the circumstances. Id.

Basing its holding on the Illinois Supreme Court’s decision, the Second District reversed and remanded Hafferkamp v. Llorca for the Reliable Fire test to be applied.  By using the LSBZ holding as the basis for its decision, the trial court had not considered the totality of circumstances in determining whether Hafferkamp’s business interests were legitimate, and thus, the Second District chose to remand the case.  

According to the Second District, the “decision in Reliable Fire should apply both retroactively and proactively, since the Supreme Court “did not expressly limit the application. . . to prospective cases only.” Hafferkamp v. Llorca, 2011 IL App (2d) 100353 at ¶17.   The court’s reasoning for this was that Reliable Fire did not create a new test, but simply clarified a convoluted test to prevent misapplication. Additionally, the court found that failing to implement Reliable Fire retroactively could lead to inconsistent rulings depending on the filing date of the case, even if the facts of the case did not warrant such rulings.

The Second District’s ruling is of note for future Illinois cases, in that it suggests that Reliable Fire’s test for the enforceability of a non-compete clause applies to cases filed prior to the date on which Reliable Fire was decided.

One legal commentator, Kenneth Vanko of non-competes.com, has remarked that the Second District's ruling is consistent with Reliable Fire because the Illinois Supreme Court "really did nothing to change the law but only rejected the appellate courts' gloss on the applicable non-compete test."

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By Scott Schaefers

On February 6, 2012, a federal court in Oakland, California denied the popular Facebook application “Farmville” operator’s (Zynga, Inc.) motion to dismiss several claims brought by the inventor of “myFarm” (SocialApps, LLC, or “SA”)) for alleged theft of the source code, game images, and “concepts and features” used in the myFarm app. The court allowed SocialApps to proceed with its claims that Zynga took SA’s trade secrets, and breached implied contracts, “covenants of good faith and fair dealing,” and SA’s “confidences” in connection with a pre-acquisition non-disclosure agreement. In doing so, the court paved the way for SA to hold Zynga liable for allegedly betraying SA’s unwritten, but clearly implied, trust and confidence it placed in Zynga while the two discussed Zynga’s buyout of myFarm.

SA alleged that it launched myFarm the first-ever virtual farming game, in November 2008 on Facebook. The application thereafter attracted millions of users. In May 2009, in anticipation of Zynga’s acquisition of myFarm, Zynga and SA entered into a written confidentiality agreement to protect SA’s assets while Zynga conducted its due diligence. Within a month, however, Zynga used SA’s source code, game images, and other “concepts and features” to launch FarmVille, all without buying the rights or obtaining SA’s consent. Using the ruse of "due diligence," Zynga allegedly had SA produce its confidential source code and other information for 'myFarm,'" which Zynga allegedly use in "FarmVille," the complaint said.

In June 2011, SA sued Zynga, making six claims for copyright infringement, statutory trade secrets theft, breach of contract, breach of “implied contract,” breach of confidence, and breach of implied covenant of good faith and fair dealing, and later adding a seventh claim for “unjust enrichment.” In October 2011, Zynga asked the court to dismiss SA’s claims for trade secrets theft, breach of implied contract, breach of confidence, and implied covenant of good faith. Zynga argued that SA’s alleged trade secrets were on the internet, and thus not secret; that the claims breach of implied contract, confidence, and implied covenant of good faith were duplicative of the written contract claim, and that the California Trade Secrets Act preempted the breach of confidence claim.

The court largely rejected Zynga’s arguments, at least at the preliminary stages of the case. The court did strike SA’s trade secrets theft claim, but only insofar as it based the claim on any of myFarm’s publicly available images and features. 

"As [SocialApps] has alleged, the 'myFarm' game was publicly released in November 2008, and therefore the images and features were visible to the public several months before the May 2009 letter agreement or June 2009 release of 'FarmVille,'" the Court wrote. The "images and features" component of SocialApps' trade secrets claim will therefore be stricken, leaving the "proprietary source code" component alive, the judge ruled.

The court upheld the trade secrets theft claim to the extent it was based on SA’s source code, and upheld the other implied contract, confidence, and implied covenant of good faith confidence claims. In essence, the court held that SA could be held liable for violating not only the letter of the May 2009 non-disclosure agreement, but also its spirit. 

Also of note is the court’s holding that, at least at this stage, that SA’s breach of confidence claim was not preempted by the Trade Secrets Act. The court held that to the extent SA based its confidence claim on Zynga’s unauthorized use or disclosure of myFarm’s “concepts and/or game features” that did not involve SA’s proprietary source code underlying its trade secrets theft claim, SA stated a valid information-theft claim separate from a trade secrets violation.  The decision is consistent with other courts’ recent decisions that a plaintiff may maintain an independent common law claim for information theft, at least at the pleading stage. (i.e. Amron Int’l Diving Supply, Inc. v. Hydrolink Diving Comm., Inc., No. 11-cv-1890-H (JMA), 2011 U.S. Dist. LEXIS 122420, at * 25-27 (S.D. Cal. Oct. 21, 2011). 

We will continue to monitor this interesting new case.

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In Renaissance Nutrition, Inc. v. Jarrett, 2012 WL 42171 (WDNY) (January 9, 2012), Renaissance, a vitamin and pre-mix company serving the dairy industry, alleged that two former top-level employees violated a five year "non-recruitment" or "anti-raiding" clause. In short, Renaissance alleged that these employees resigned in tandem with plans to develop a rival company, Cows Come First, and then actively recruited three other former Renaissance employees to join them in their new venture. The former employees moved for summary judgment arguing, in part, that the non-recruitment clause was invalid, because it did not protect a legitimate business interest. Renaissance responded by arguing that New York courts have upheld recruitment clauses like the one at issue here and that the clause was proper in scope because it only limited the defendants from purloining its employees not from engaging in business generally.

After noting that there appeared to be only one New York case discussing the applicable standard for enforcing a non-recruitment covenant (and no appellate authority), the District Court decided to apply the "overriding requirement of reasonableness" used to analyze non-compete covenants in New York. In its "reasonableness" analysis, the District Court required that Renaissance make "an enhanced showing" that its interests in protecting its client relationships outweigh the former employees’ interests in free competition, by demonstrating that: "(1) the employees diverted by defendants posed a substantial risk that if they left, their customers would follow, (2) the departed employees would engage or did engage in competitive business with Renaissance, and that (3) it provided substantial resources and assistance in cultivating the customer base such that it would be unfair to allow employees to steal those customers to compete with it." The District Court ultimately held that Renaissance had a legitimate interest in the protection of client relationships developed at its expense and denied defendants’ motion for summary judgment.

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Quoting Section 40, comment c, of the Restatement (Third) of Unfair Competition, the Fifth Circuit Court of Appeals held recently that “Any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant” constitutes a “use” giving rise to liability for misappropriation (emphasis added). So, when Varco, LLP filed its own patent application with respect to another person’s invention which had been disclosed to Varco in confidence, Varco “used” the trade secret. Although no patent ever was issued, the jury’s compensatory damages award of $600,000 against Varco and in favor of the inventor was warranted. Bohnsack v. Varco, LLP, No. 10-20741 (5th Cir., Jan. 23, 2012).

After Varco executed a confidentiality agreement, Bohnsack disclosed his invention of a machine to clean tanks used in oil drilling. Negotiations ensued regarding Varco’s payment for use of the invention, but ultimately they were abandoned. During the course of the negotiations, Varco asked its attorney, McClure, to prepare a patent application. He did so, but he included a declaration that he and Bohnsack were co-inventors. At McClure’s request, Bohnsack executed the declaration. After signing, however, he had second thoughts which he communicated to McClure who assured him that the declaration would not be filed until the matter was “sorted out.”   Nevertheless, McClure proceeded to file the application and declaration. 

McClure assigned to Varco his rights in the invention. But Varco already had a product that performed the cleaning task cheaper, and so it decided not to use the invention, withdrew the patent application, and relinquished all rights to Bohnsack. He then developed the invention without patent protection. 

Varco sued Bohnsack in a Texas federal district court, seeking a declaration that it had done nothing wrong. It stressed that McClure was not a Varco employee, and so respondeat superior did not apply to his misconduct. Bohnsack counterclaimed for trade secret misappropriation and for the fraud McClure had committed. Varco’s motions for judgment were denied, and the case was submitted to the jury. It rendered a verdict for Bohnsack and against Varco, awarding him compensatory damages of $600,000 on both counts and punitive damages on the fraud claim. 

The appellate court affirmed the trade secret misappropriation compensatory damages verdict but held that Bohnsack was entitled to a “take-nothing” judgment for fraud and to no punitive damages. Rejecting Varco’s argument that Bohnsack had not proved an injury caused by the misappropriation, the Fifth Circuit reasoned that Varco knew about McClure’s misconduct, and that a $600,000 award was proper because it approximated the minimum fair market value of the trade secret since Varco had offered to buy the invention for that much and more.

This case teaches, first, that filing a patent application covering someone else’s invention may constitute a “use” of the invention and, therefore, an applicant who fails to obtain the inventor’s unequivocal consent may be found guilty of trade secret misappropriation. The second lesson is that juries and judges are not sympathetic to miscreants. 

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By Rebecca Woods

In the most recent ruling in long-running litigation styled AMG National Trust Bank v. Ries, NO. 06-CV4337, 09-cv-3061 (E.D. Pa.) (decided Dec. 29, 2011), the Eastern District of Pennsylvania partially granted the defendant Stephen Ries’s motion for summary judgment, jettisoning the plaintiff’s breach of fiduciary duty claims and plaintiff’s request for liquidated damages, but permitting the case to proceed for alleged breach of a restrictive covenant in his employment agreement.

Ries sought to have the court declare that the liquidated damages clause in the AMG non-compete agreement was unenforceable. The liquidated damages clause provided for payment of ten times the most recent annual gross fee income of the AMG client with whom defendant violated the non-compete. The court held that, as a matter of law, ten years worth of projected client fees per violation was an "unreasonably large and incredibly disproportionate estimate of the presumed actual damages caused by breaching a two-year restrictive covenant." The court noted in a footnote that other courts had held that even limiting the liquidated damages multiplier to the number of restricted years constituted an unreasonable penalty. The court also held, however, that notwithstanding the unenforceable liquidated damages clause, AMG had provided sufficient evidence that it had suffered actual damage such that summary judgment on the claim was not warranted.

The court also granted the summary judgment motion as to AMG’s breach of fiduciary duty claim. Declining to resolve a choice of law issue because there was no conflict, the court concluded that the fiduciary duty claim was a mere duplicate of the breach of contract claim and thus was barred by either Colorado’s economic loss rule or Pennsylvania’s "gist of the action" rule. AMG had failed to identify any duty owed by defendant that was not grounded in his contractual obligations.

Finally, the court rejected summary judgment as to AMG’s customer lists claim. Conceding that customer lists are "at the very periphery of the law of unfair competition" (quotation omitted), the court ruled in AMG’s favor, invoking prior Pennsylvania case law noting that customer data may qualify as a trade secret if it is not basic, widely available information, albeit collected as a result of the employee’s efforts. Instead, the employer seeking to protect such information must demonstrate that the data was collected by the employee only by virtue of the employee’s position, with the help of the employer (time, expense, and efforts), while the employee was subject to a confidentiality agreement. A factor in the court's conclusion also appeared to be that AMG limited its claim to customers with whom Ries did not allege a close relationship. Ries's use of customer list data for customers with whom he had not worked at AMG appeared to make it easier for the court to conclude that this was information the jury could hold was properly subject to protection.

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By Robert Milligan, David Monachino, and Jeffrey Oh

With Governor Chris Christie’s signature on January 9, 2012, New Jersey became the 47th state to adopt a form of the Uniform Trade Secrets Act (UTSA). Previously governed by common law, trade secrets of persons or entities in New Jersey will now have statutory protection under the New Jersey Trade Secrets Act (S-2456/A921). The new statute went into effect immediately after its signing, and applies to all new claims which arise on or after January 9, 2012.

To read the full text of the law, please visit this website.

Effects of the Act on Trade Secret Protection in New Jersey

The New Jersey Trade Secrets Act (NJTSA) sets forth clear statuatory language for trade secret protection for the first time in the state, including defining what a trade secret is as well as what acts constitute misappropriation of a trade secret. Prior to the Act, trade secret analysis relied on the Restatement of Torts, pursuant to New Jersey cases such as Sun Dial Corp. v. Rideout (1954), making protection somewhat inconsistent as varying interpretations of the common law were applied.

Protections afforded to persons and entities with valid trade secret claims under the NJTSA include injunctive relief for “actual or threatened misappropriation,…a reasonable royalty” for misappropriation, and monetary damages (compensating for both actual losses as well as “unjust enrichment caused by the misappropriation”). In addition, for cases of “willful and malicious misappropriation,” attorney fees may be recovered and punitive damages may be awarded for up to two times the damages otherwise awarded. There is also no statutory requirement to identify trade secrets prior to commencing discovery unlike some jurisdictions.

Variations between the UTSA and NJTSA

Despite being based on the UTSA, the New Jersey legislature did make certain adjustments in drafting its state’s trade secret statute. One such adjustment was the exclusion of a clause present in the UTSA which directs courts to take trade secret rulings in other states into account when handing down decisions. Another key difference between the UTSA and NJTSA is the NJTSA’s explicit mention that the provisions of the act are “in addition to and cumulative of any other right, remedy or prohibition provided under the common law or statutory law of this State.” In practice, this allows confidential and proprietary information that does not satisfy the trade secret requirements set forth by the act, but was previously protected under the state’s common law, to remain protected.  This in contrast to some states who have adopted adapted versions of the UTSA, many of which take the stance of preemption of common law claims. Finally, the NJTSA contains more robust protections for the preservation of trade secrets in the court system than in the standard UTSA. Courts are directed to use “reasonable means” to ensure the protection of trade secrets during litigation, including sealing court records when necessary, limiting disclosure of trade secrets to attorneys’ eyes only, and granting protective orders during discovery. This is particularly significant because some jurisdictions are reluctant to seal court records even in trade secrets cases.

Advice for Employers

The NJTSA offers companies statutory protections for trade secrets, though it is their responsibility to ensure this protection by making “efforts that are reasonable under the circumstances to maintain its secrecy.” To accomplish this, companies should have explicit policies preventing disclosure of their trade secrets while also being vigilant in educating employees of their responsibilities. Any suspicion of trade secret misappropriation by an employee or competitor should be investigated immediately in order to prevent the loss of rights in trade secret protection. Under the NJTSA, the statute of limitations for bringing a misappropriation claim has been reduced from six years, to three years from discovery of the misappropriation. An attorney with knowledge and experience in litigating trade secret claims is best suited to guide companies through this process.

Questions for the Future

With New Jersey joining the other 46 states who have passed some form of trade secret protection legislation, just three states, Texas, New York and Massachusetts, have yet to adopt a variation of the UTSA. It will be interesting to se how the New Jersey courts construe the new law, including "threatened misappropriation" and preemption of common law claims. How long these hold-outs will remain reliant on common law protections is an important discussion moving forward. Part of the UTSA’s goal when drafted in 1979 was to address the disparity in trade secret protection across state lines, and to that end there has been some interest in Congress in instituting federal civil trade secret protections, but the scope and preemptive effect of such legislation is entirely uncertain

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By Robert Milligan and Gary Glaser

A California federal district court denied a former employee's motion to dismiss his former employer's claims for tortious interference with prospective economic advantage and negligent inteference with prospective economic advantage Monday in a closely watched lawsuit concerning the interplay between social media, trade secrets, and employee mobility.

We previously wrote about this case from the United States District Court for the Northern District of California after the Court ruled that PhoneDog, an “interactive mobile news and reviews web resource,” could proceed with its lawsuit against Noah Kravitz, a former employee, who it claims unlawfully continued using PhoneDog’s Twitter account after he quit. PhoneDog v. Noah Kravitz, No. C11-03474 MEJ, 2011 U.S. Dist. LEXIS 129229 (N.D.Cal.)(James)(November 8, 2011)

PhoneDog reviews mobile products and services and provides users with the resources that they can use to research, compare prices, and shop from mobile carriers. Kravitz worked for PhoneDog as a product reviewer and video blogger. He was given access to PhoneDog’s Twitter Account “@PhoneDog_Noah”, using a password and used the Account to send out information and promote PhoneDog’s services on its behalf. The centerpiece of PhoneDog’s trade secret claims are that all PhoneDog_Name_Twitter Accounts and the passwords to such accounts used by PhoneDog’s employees -- like the one to which Kravitz was given access to and use of – constitute proprietary, confidential information. PhoneDog contends that the Twitter Account to which Kravitz was allowed to use on its behalf generated about 17,000 Twitter followers during Kravitz’s employment.According to the complaint, the employee refused to turnover the Twitter account after he left and instead changed the name handle and continued to use the account with the built-in following.

Kravitz had moved to dismiss the entire suit on the grounds, among other things, that a Twitter account’s followers are not “secret” and that Kravitz’s followers were not property.

As part of its November ruling, the Court granted the employee's motion to dismiss PhoneDog's tortious interference and negligent interference with prospective economic advantage claims, subject to PhoneDog's right to file an amended complaint. PhoneDog subsequently filed an amended complaint and then Kravitz filed a motion to dismiss PhoneDog's claims for tortious interference with prospective economic advantage and negligent inteference with prospective economic advantage.

In its most recent January ruling denying Kravitz's motion to dismiss, the Court found that "the court is able to draw the reasonable inference that PhoneDog had an economic relationship with at least one third-party advertiser that was disrupted by Kravitz’s alleged conduct, causing it economic harm.”

The Court stated that it initially dismissed PhoneDog’s tortious interference claim because PhoneDog failed to sufficiently allege which economic relationships were actually disrupted by Kravitz’s alleged conduct. Dkt. No. 28 at 11-12. To cure this deficiency, according to the Court, PhoneDog’s first amended complaint clarified that it had economic relationships with (1) the approximately 17,000 followers of the Twitter account at issue; (2) its current and prospective advertisers; and (3) CNBC and Fox News, and that each of these economic relationships were actually disrupted by Kravitz’s conduct. FAC ¶¶ 19, 33-36.

Kravitz’s motion attacked each of these three alleged economic relationships as insufficient to sustain the intentional interference claim. The Court reasoned that for PhoneDog to have properly alleged its tortious inteference claim, only one of the above economic relationships has to meet the elements of the tort. The Court found that the alleged relationship between PhoneDog and its current and prospective advertisers suffices.

The Court rejected Kravitz's argument that the allegations supporting this relationship are speculative because they only assert that PhoneDog's advertising revenue “might have” decreased. According to the Court, PhoneDog explicitly alleges in its first amended complaint that a significant amount of its income is derived from advertisements on its website, and “advertisers pay for ad inventory on PhoneDog’s website for every 1000 pageviews generated from users visiting PhoneDog’s website.” FAC ¶ 10. According to the complaint, due to Kravitz’s alleged conduct, “there is decreased traffic to [the] website through the Account, which in turn decreases the number of website page views and discourages advertisers from paying for ad inventory on PhoneDog’s website.” FAC ¶ 36. “As a direct and proximate result of Defendant’s wrongful acts, PhoneDog has suffered damage to is business by way of lost advertising revenue . . . .” FAC ¶ 38. Based on these factual allegations, the Court concluded that it is able to draw the reasonable inference that PhoneDog had an economic relationship with at least one third-party advertiser that was disrupted by Kravitz’s alleged conduct, causing it economic harm.

The Court also found that PhoneDog’s first amended complaint also sufficiently alleges its third claim for negligent interference with prospective economic advantage. The Court previously dismissed this claim on the same grounds as it dismissed the second claim for intentional interference: PhoneDog had not sufficiently alleged which economic relationships were actually disrupted by Kravitz’s alleged conduct. Dkt. No. 28 at 13. The Court found based upon the amendments discussed above that the previous deficiencies have been corrected by PhoneDog’s amended allegations in the first amended complaint.  The Court also noted that the other reason the Court previously dismissed the third claim was because PhoneDog had failed to allege that Kravitz owed it a duty of care, which is a necessary element of the negligent interference claim. To rectify this missing allegation, PhoneDog’s first amended complaint now asserts that “Defendant owed a duty of care to PhoneDog as an agent of PhoneDog.” FAC ¶ 42. Accordingly, the Court concluded that PhoneDog had complied with the Court’s previous order and provided Kravitz with the reason why it believes he was negligent (as an employee, he owed his company a duty of care).

The next milestone in this closely watched case appears to be Kravitz's not yet filed summary judgment motion which will likely challenge PhoneDog's claims that the Twitter followers constitute trade secrets and its ownership interest in the Twitter account.

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