By Robert Milligan and Joshua Salinas

As part of our annual tradition, here is our list of the top 10 developments/headlines in trade secret, computer fraud, and non-compete law for 2012.

Last year we predicted that in 2012 we would see a significant increase in social media cases and this year did not disappoint.  In fact, we saw several disputes involving the ownership of social media accounts and account “followers” on  Twitter, LinkedIn, Facebook and Myspace. We also saw several states enacting legislation to protect employees’ “personal” social media accounts and we expect more states to follow.  In 2013, we expect to see social media continue to generate disputes in trade secret, computer fraud, and non-compete law, as well as in privacy law.

The circuit split regarding the interpretation of what is unlawful access under the Computer Fraud and Abuse Act (“CFAA”) continued to widen with the Fourth Circuit and federal district courts in Minnesota  and Michigan adopting the Ninth Circuit’s narrow interpretation, which significantly limits employers’ ability to use the CFAA in typical employee data theft scenarios.  A resolution may be soon approaching, however, as a petition for writ of certiorari has been filed with the US Supreme Court on “whether the CFAA applies to employees who violate employer-imposed computer access and data use restrictions to steal company data.”  {Editor’s Note, after this alert was first published on December 31, 2012, the parties in the Fourth Circuit case withdrew the petition for writ of certiorari.  Accordingly, the circuit split remains unresolved and another case will need to make its way up to the Supreme Court}

There have also been significant legislative efforts to modify trade secret, computer fraud, and non-compete law in various jurisdictions.  In fact, New Jersey adopted a version of the Uniform Trade Secrets Act. President Obama signed into law an amendment to the criminal Economic Espionage Act, which closes a loophole in the Act and expands trade secret protections for companies. New Hampshire also adopted notification requirements on the use of non-compete agreements. Massachusetts, Virginia, and Idaho have considered legislation that would provide certain limitations on non-compete agreements or modifications to their trade secret laws. We expect more legislative activity in 2013, particularly regarding social media, privacy, and trade secret legislation to curb foreign trade secret theft.

Finally, government agencies have become more active, such as the FBI’s recent initiative to curb the growing rise of trade secret and other intellectual property theft, some high profile prosecutions under the Economic Espionage Act and the National Labor Relations Board’s increased scrutiny of employers’ social media policies. We expect more government activity in 2013.

Below is our listing of top developments/headlines in trade secret, computer fraud, and non-compete law for 2012 in no particular order:

1.         Significant State Supreme Court Decisions

Several significant state supreme court decisions have addressed the enforceability of non-compete agreements or other significant trade secret/data theft issues. In a rare procedural move, the Ohio Supreme Court reconsidered and reversed its prior decision in a post-merger non-compete case and held that non-competes are like any other agreement and automatically transfer to the surviving entity after a merger.  The Nevada Supreme Court recognized for the first time (although implicitly) that restrictive covenants may be enforceable against independent contractors.  The Indiana Supreme Court rejected one of its century-old decisions and held that filing a lawsuit to enforce a non-compete agreement does not violate the state’s blacklisting statute.  The Missouri Supreme Court reaffirmed that Missouri is a pro-non-compete jurisdiction when it enforced non-compete and modified non-solicit agreements against non-resident former company employees.  Recognizing the trend across Illinois appellate courts in recent years, the Illinois Supreme Court  joined the “vast majority of other jurisdictions” in recognizing the tort of intrusion upon seclusion in a case involving a former employer’s alleged unlawful investigation methods into the activities of an ex-sales agent bound by a non-compete.

The South Carolina Supreme Court found that a defendant who allegedly hacked into a plaintiff’s personal e-mail account to retrieve messages that were already read by the plaintiff was not liable under the Stored Communications Act.  The South Carolina Supreme Court also held that holdover clauses in invention assignment agreements were not restraints of trade subject to the traditional three-part “rule of reason” standard analyzing the enforceability of non-competes.  The Virginia Supreme Court issued two important trade secret decisions: one that raised the bar for proving damages and another that complicated the valuation of lost goodwill damages. The Ohio Supreme Court also affirmed in large part an Ohio jury’s award of $26.5 million for unfair competition claims that arose from the alleged malicious litigation of a trade secret case brought to disrupt and/or destroy a small business.  Thanks to a recent decision of the Georgia Supreme Court, the assignee of confidential and proprietary information has found itself in a Catch 22 dilemma – precluded from suing under the state’s trade secrets statute because the information did not qualify as trade secrets but prohibited by that statute from bringing related common law claims.

2.         Widening Federal Circuit Split on the Computer Fraud and Abuse Act

This year the circuit split regarding the interpretation of unlawful access under the CFAA continued to widen.  On one side, the Ninth Circuit has adopted a narrow interpretation of the CFAA, while on the other side, the Fifth, Seventh, and Eleventh Circuits have adopted a broader interpretation of the CFAA based on either common-law agency principles or computer usage policies.  Similarly, a Mississippi federal district court adopted the common-law agency theory of liability espoused by Judge Posner in the Seventh Circuit and found that a plaintiff had stated a claim under the CFAA. Earlier this spring, a Ninth Circuit en banc panel in U.S. v. Nosal adopted a narrow interpretation of the CFAA and found that an employee’s violation of his/her employer’s computer usage policies was not a violation of the CFAA; the Solicitor General declined to file a petition for writ of certiorari in that case.  The Ninth Circuit’s narrow interpretation was followed by federal district courts in Minnesota and Michigan.  Perhaps more important was the Fourth Circuit’s adoption of the Ninth Circuit’s narrow interpretation, which resulted in a petition for writ of certiorari before the Supreme Court on “whether the CFAA applies to employees who violate employer-imposed computer access and data use restrictions to steal company data.”  Should the Supreme Court grant the petition, it will undoubtedly be the hottest and most closely watched CFAA case in 2013.  Should the petition be denied and Congress not intervene, the protection of employers’ data under the CFAA will vary depending upon the circuit’s interpretation of the CFAA.

3.         The Social Media Cases and Ownership Issues

Social media was one of the hottest topics in 2012 because it raised novel issues in many areas of law, including trade secrets, computer fraud, and non-competes.  We saw disputes over the ownership of company social media accounts and account “followers”  in cases involving Twitter (PhoneDog v. Noah Kravitz), LinkedIn (Eagle v. Morgan), Facebook (Lown Companies, LLC v. Piggy Paint) and Myspace (Christou v. Beatport).  One significant takeaway from 2012 is the necessity for employers to have social media ownership agreements with their employees when utilizing company social media accounts to conduct business.  Moreover, at least one court found that suggestive Facebook posts may not violate non-solicitation covenants.  We also saw the difficulty in employees proving cognizable losses or damages under the CFAA when their social media accounts, such as LinkedIn, are taken over by their employers. We expect social media cases to continue to be hot in 2013 and for companies to continue to seek to capitalize on “Big Data” and for related disputes over the ownership of such data to increase. We will offer a special webinar this year on the trade secret and privacy issues involved in the Big Data movement.

4.         Continuing Developments in Legislation

Some of the biggest developments involved legislation that was never enacted.  Specifically, the SOPA, PIPA, and CISPA anti-piracy and cybersecurity measures failed to pass after immense public backlash and widespread protests.  The last attempt by Congress, the Cybersecurity Act of 2012, failed in November 2012. Additionally, there were failed attempts to amend the CFAA and limit its applicability.

In late December 2012, the President signed the Theft of Trade Secrets Clarification Act, which strengthens the scope of the Economic Espionage Act to ensure it addresses the theft of trade secrets related to a product or service used or intended to be used in interstate or foreign commerce, and to prevent results like the Second Circuit’s decision in U.S. v. Aleynikov.

Additionally, the America Invents Act went into effect. The Invents Act changes the U.S. Patent system to a “first-to-file” format. More importantly, it allows companies to defend against alleged patent infringement when they practice information they elect to keep as trade secrets, but are sued for infringement because another inventor filed for a patent first. Companies can keep information related to their inventions a trade secret and retain these “prior use rights” as long as they have “commercially” practiced their invention. We believe that the full extent of this “defense” will begin to be fleshed out this year and more companies may begin to rely upon trade secret, rather than patent, protections as result. The United States Patent and Trademark Office submitted a report to Congress earlier this year affirming the “prior commercial use” defense, which allows companies that commercially use a trade secret to avoid patent infringement liability if a patent is later issued on that trade secret.

There was also proposed federal trade secret legislation, which provided for a federal civil cause of action for trade secret theft, seizure orders to keep infringing goods from entering the US, as well as for monetary damages, attorneys’ fees, and other injunctive relief. We expect that similar legislation will be reintroduced to Congress in 2013.

There has also been some new state legislation.  New Jersey became the 47th state to adopt a version of the Uniform Trade Secrets Act.  New Hampshire enacted a notice period requirement for presenting employees or prospective employees with non-competes.  Massachusetts also considered a statute that would limit non-competes, like California.  There was also similar legislation proposed in Virginia. There was legislation proposed in Idaho to modify its trade secrets law. None of the bills, however, passed.

An emerging trend that may carry over into 2013 involves social media legislation.  California, Maryland, Illinois, and Michigan enacted laws regulating employers’ abilities to demand access to employees and prospective employees’ personal social media accounts.  We expect that more states will consider similar legislation in 2013.

 5.         Significant Jury Trials Verdicts, Criminal Sentences, and Other Notable Decisions Regarding Trade Secret Identification, Sealing, and Bad Faith Attorney Awards

In U.S. v. Aleynikov, the Second Circuit Court of Appeals, in a surprise decision, overturned convictions against a former employee accused of stealing computer source code for trade secret theft under the Economic Espionage Act and transporting stolen property in interstate commerce under the National Stolen Property Act. The Court held that the stolen computer source code failed to satisfy the interstate or foreign commerce requirements, and thus, Aleynikov had not violated either law. As a result, Congress recently passed the Trade Secrets Clarification Act which closes this loophole and expands the Economic Espionage Act to cover trade secrets “related to a product or service used in or intended for use in interstate or foreign commerce.”  This means that the amended Economic Espionage Act, which was signed by President Obama, will now protect a broader range of trade secrets.

There were also some significant prosecutions under the Economic Espionage Act and related statutes. A former Motorola engineer was convicted of stealing his former employer’s trade secrets.  A former General Motors engineer and her husband were convicted of stealing trade secrets on hybrid- car technology from the automaker to help develop such vehicles in China.  Additionally, a former software engineer for CME Group Inc., the world’s largest derivatives exchange, pleaded guilty to charges of downloading more than 10,000 files containing source code from his employer to support trading activities in an exchange in China.  A New Jersey federal jury convicted a former employee of L-3 Communications Holdings Inc.’s space and navigation division for transporting stolen property and possessing trade secrets related to precision navigation devices.  The Department of Justice has prepared a report listing some of its most significant cases.

As for significant civil cases, American chemical company DuPont was awarded almost a billion dollars and an extraordinary 20-year global manufacturing injunction against rival Kolon Industries for the alleged theft of trade secrets regarding a proprietary fiber used to make “bulletproof” police and riot gear.  Hallmark Cards won a jury verdict of $31.3 million in November in a trade secrets case in Kansas City federal court.  A California pharmaceutical company secured a 10-month sale injunction in a California federal court against a competitor for the alleged misappropriation of protected customer lists and contact information.

A Ninth Circuit panel recently heard oral argument in the long running and closely-watched Mattel and MGA dispute, which may result in the reversal of a more than $310 million award in damages and attorneys’ fees against Mattel in whole or part.

A California Court of Appeal held that parties may be liable for attorneys’ fees and costs under its Uniform Trade Secrets Act for trade secret claims brought in bad faith if the claims are brought on suspicions alone and without any evidence of misappropriation to support the claims. A Pennsylvania federal court also held in a case of first impression that a defendant may recover attorneys’ fees against a plaintiff where the plaintiff filed an objectively specious trade secret misappropriation claim and subsequently engaged in subjective misconduct during the course of discovery.

The widely followed Apple v. Samsung case illustrated the difficulties and challenges in protecting trade secrets filed in the public record or discussed in open court, especially when courts are unwilling or refuse to seal records in trade secret cases.

Courts continue to require identification of trade secrets with particularity in pleadings and discovery. Please see our previously recorded webinar on this important topic.

We also saw the Internal Revenue Service award a record $104 million to a whistleblower that helped the IRS collect hundreds of millions of dollars in U.S. taxes owed on money stored overseas. This underscores the importance of handling purported whistleblowers with access to your company’s confidential information and trade secrets with extreme care and caution. Please see our previously recorded webinar on this important topic.  

6.         Increased Involvement of Government Agencies

This year we also saw increased involvement of government agencies in the areas of trade secrets and non-compete law.  The FBI recently launched an initiative to curb the growing rise of trade secret and other intellectual property theft, in part because it sees state-sponsored espionage as a growing national security threat.  As mentioned above, we saw additional prosecutions under the Economic Espionage Act. Both the FTC and Nevada Attorney General scrutinized a Nevada healthcare company’s alleged anti-competitive behavior concerning the use of non-competes.  The Department of Justice continued to scrutinize alleged no-hire agreements between companies and a proposed civil class action pending in federal court in California concerning the alleged unlawful use of anti-poaching agreements continues to proceed. Finally, the National Labor Relations Board has increasingly scrutinized employers’ social media policies and issued several reports and memorandum concerning such policies. Employers should make sure that their policies comply with the NLRB’s recent “guidance” and also utilize social media ownership agreements with their employees.

7.         Significant Non-Compete Enforcement and Defense Cases, Including Cases Highlighting the Continued Importance of Choice of Law and Forum Selection Provisions

An Illinois Appellate Court in a significant unpublished non-compete decision held that the Illinois Supreme Court’s Reliable Fire Equipment v. Arredondo opinion should apply both retroactively and proactively. Reliable Fire clarified the standard for determining the enforceability of non-compete agreements in Illinois. According to the Illinois 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.

In a race to judgment non-compete dispute, an Oregon federal court 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, based on the plaintiff’s potential liability for defendant’s allegations in a separate out-of-state lawsuit.  A New York court held that the employee choice doctrine does not apply to equitable relief in a non-compete matter.  The Kentucky Court of Appeals both affirmed the ability of Kentucky courts to modify overly broad non-competition agreements in the employment context and laid out a six-part framework that trial courts may follow when analyzing the reasonableness and enforceability of non-competition agreements.  A Texas appellate court reminded employers of the importance in signing employment agreements when it held that a non-compete was unenforceable because the employment contract it was contained within was not signed by the employer.

Despite California’s general prohibition on non-competes, the limited sale of business exception and so-called trade secret exception continue to remain viable mechanisms for certain non-compete enforcement in California when correctly utilized.

As predicated in last year’s review, choice of law provisions and forum selection clauses cases continued to be significant in 2012. Such provisions are often included in non-compete agreements to apply the law and forum of the state that will most likely result in a favorable enforcement of the non-compete by the employer.  The Ninth Circuit held that a contractual choice of law provision calling for the application of Georgia law was unenforceable because California had a materially greater interest than Georgia did in the outcome of the case.  A California federal court for the Northern District of California, however, found that the alleged illegality of a non-compete clause in an employment agreement involving a California employee has no bearing on a legal forum selection clause and, accordingly, transferred the employee’s declaratory relief action seeking to invalidate his non-compete to a Pennsylvania federal court.  Another Northern District of California federal court similarly held that it did not matter to the court whether the ultimate effect of enforcing the forum selection clause may result in the enforcement of the non-compete provision which “was purportedly contrary to California law,” and dismissed the employee’s case.

Further, a Colorado federal court decision in a non-compete dispute demonstrated the importance of drafting enforceable forum selection provisions in business transactions. Expect more choice of law, forum selection, and personal jurisdiction decisions in 2013.

8.         Trade Secret Preemption Gains Steam

Trade secret preemption continues to remain a significant issue in many jurisdictions.  In a well-researched and articulate opinion, the federal court for the Northern District of California recently dismissed, as preempted by the California Uniform Trade Secrets Act, claims for misappropriation of non-trade secret proprietary information.  This decision is at odds with a case earlier this year from the Northern District of California involving two social media app gaming companies and other state and federal authority.  A federal court in Wisconsin (applying California law) illustrated that claimants who merely assert, in the alternative to their trade secret claim or otherwise, misappropriation of information not qualifying as a trade secret claims, risk dismissal of those claims on preemption grounds.  According to a puzzling Arizona federal court decision, employers must choose whether to sue for an Arizona Uniform Trade Secrets Act violation or for pre-empted claims. The Utah Court of Appeals also held that the Utah Uniform Trade Secrets Act preempts many common law claims relating to allegations of misuse of confidential information not qualifying as a trade secret. The Indiana Court of Appeals in a mixed martial arts broadcasting dispute held that the Indiana Uniform Trade Secrets Act preempts common law misappropriation and civil conversion claims.  A New Hampshire federal court also broadly interpreted preemption under the New Hampshire Uniform Trade Secrets Act. We predict further unsettling trade secret preemption decisions in 2013 as courts grapple with whether the theft of non-trade secret information is actionable in tort.

9.         Bring Your Own Device? Create Your Own Headache

More companies are allowing employees to use their own computer devices in the work place.  This reduces costs for the companies and the employees’ familiarity with the devices can lead to increased productivity.  Employing effective BYOD policies are important to protect valuable company trade secrets and information.  In fact, the federal government recently developed a BYOD Working Group to study and analyze effective BYOD implementation, procedures, and policies.  Some legal commentators, however, predict that BYOD may disappear in 2013 with an increased prevalence of corporate-owned devices. Some companies feel greater security over the control of their information through the use of corporate-owned devices. Whether or not employing corporate-owned devices, employers must be vigilant not to invade the privacy of their employees’ personal information and accounts in light of recent cases and legislation.

10.        Increase in Arbitration?

The U.S. Supreme Court reaffirmed the Federal Arbitration Act’s national policy in favor of arbitration and emphatically shot down an attempt by the Oklahoma Supreme Court to exert judicial review over the enforceability of a non-compete agreement that contained a mandatory arbitration provision.   This opinion is yet another clear affirmation of the Court’s 2011 AT&T Mobility v. Concepcion opinion and its desire to bolster the power of the FAA.  Employers in jurisdictions hostile to non-compete agreements may consider employing arbitration agreements with company-friendly mandated venues and choice of law provisions in light of the new decision. Employers, however, typically like to have courts resolve requests for injunctive relief, so the ultimate impact of this decision may be mixed.

Some courts have pointed to carve outs for employers to pursue non-compete and trade secret claims in court in arbitration agreements as purported evidence of unconscionability to invalidate arbitration agreements.  Notwithstanding those decisions, a California federal court recently ruled that an arbitration agreement’s exclusion for injunctive relief for trade secrets and unfair competition claims is not unconscionable and does not invalidate the agreement.

Please continue following our blog this year. We incorporated several new features in our blog in 2012, including video interviews, an informative resources page, special guest authors, cutting edge infographics, and access to our well-received Trade Secret Webinar Series from 2011 to the present.

In 2013, we plan to incorporate video blog posts, audio podcasts, more guest authors, and provide a more enhanced resources page on the blog. We also plan to incorporate the latest developments in privacy, social media, big data, and technology into our blog coverage. Additionally, we plan to increase the accessibility to our blog by joining additional social media networks.  Thank you for your continued support of the blog. You can also follow us on Twitter at @tradesecretslaw.

On December 28, 2012, President Obama signed into law the Trade Secrets Clarification Act to ensure that the Economic Espionage Act will cover trade secret violations for products or services used or “intended for use” in interstate commerce or foreign commerce.

The Senate passed the legislation in November and the House of Representatives approved the legislation earlier this month.

 The legislation directly responds to the Second Circuit’s decision in U.S. v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), which overturned a jury verdict finding the defendant violated 18 U.S.C. 1832(a) of the Economic Espionage Act by stealing computer code from his employer. The court held that the statute did not apply because the computer code failed to satisfy the requirement that the “product” was “produced for” or “placed in” interstate or foreign commerce.

The amended Section 1832(a) now applies to a trade secret “that is related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof.” (emphasis added).

The House of Representatives is scheduled to vote today on a bill enhancing the penalties for violations of the Economic Espionage Act. Under the bill, the upper limit of penalties for individual offenses at Section 1831(a) would be increased from $500,000 to $5,000,000; the upper limit for corporate offenses at Section 1831(b) would be increased from $10,000,000 to the greater of $10,000,000 or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.

The Senate previously approved the bill. We will keep you updated on the bill’s status.

By Paul Freehling and Jim McNairy

There was only coal delivered for California employers in a recent California federal decision in which the Court refused to permit a plaintiff to proceed on a tort theory for the theft of confidential information.

In a well-researched and articulate opinion, the federal court for the Northern District of California recently dismissed, as preempted by the California Uniform Trade Secrets Act (CUTSA), claims for misappropriation of non-trade secret proprietary information. Judge Koh, reasoned that those claims arose out of the same operative facts as the plaintiff’s trade secret misappropriation cause of action. SunPower Corp. v. Solarcity Corp., Case No. 12-CV-00694-LHK (N.D. Cal., Dec. 11, 2012) (Koh, J.).

CUTSA contains two somewhat contradictory provisions. It states that “claims based on the same nucleus of facts as trade secret misappropriation” are preempted. But it also provides that the preemption clause does not affect contractual and other claims “that are not based upon misappropriation of a trade secret.” A court analyzing a complaint which alleges misappropriation of trade secrets may conclude that some of the confidential proprietary data referenced does not qualify as a trade secret because, for example, the owner failed to make reasonable efforts to maintain its secrecy. Judicial decisions are divided in such instances as to whether a cause of action for misappropriation of non-trade secret data is preempted.

Judge Koh relied primarily on a California Appellate Court opinion in which, albeit in dicta and in a footnote, the Appellate Court “emphatically reject[ed]” a Pennsylvania federal court’s decision that statutory preemption does not apply. Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210, 239 n.22 (2010) (“a prime purpose of the [Uniform Act] was to sweep away the adopting states’ bewildering web of rules and rationales and to replace it with a uniform set of principles for determining when one is—and is not—liable for acquiring, disclosing, or using ‘information of value’”), disapproved on other grounds, Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011).

The individual defendants in SunPower all were sales employees of the plaintiff, a manufacturer and distributor of solar panels, until they were recruited by SolarCity which also distributes solar panels. All of the individual defendants had signed confidentiality agreements with SunPower. The nine-count complaint alleged that the individual defendants misappropriated (a) trade secrets, in violation of CUTSA, and (b) “non-trade secret proprietary information.” The defendants moved to dismiss the latter claims primarily on the ground that they were superseded by the statute.

In SunPower, Judge Koh cited Georgia, Hawaii, Idaho, New Hampshire and Vermont Supreme Court decisions, as well as several district court opinions, that concurred with the Silvaco dicta and held that non-trade secret misappropriation claims are preempted. However, she also identified a half dozen other district court opinions that were in accord with the Pennsylvania federal court ruling Silvaco criticized. Moreover, she referenced two Ninth Circuit holdings which, “while not explicitly addressing the issue of supersession, . . . have suggested” that the Pennsylvania federal court decision is correct, but she concluded that those holdings “should not be followed to the extent they suggest that SunPower may bring a claim based on confidential or proprietary information that does not satisfy the definition of a trade secret.” She reasoned that the Silvaco court’s rationale was the more persuasive and that decisions to the contrary failed adequately to consider that rationale.

Ultimately, Judge Koh held that, in light of Silvaco, claims for misappropriation of proprietary non-trade secret information would be superseded by CUTSA unless (1) such information was “made property by some provision of positive law”, or (2) the non-trade secret claims allege “wrongdoing that is materiall[y] distinct [] [from] the wrongdoing alleged in a [C]UTSA claim”. By addressing both the nature of the information at issue and the conduct related to alleged unlawful acquisition or use of such information, Judge Koh very broadly interpreted the preemptive effect of CUTSA. In doing so, she placed a premium on careful, precise pleading.

Another issue raised by SunPower in opposition to SolarCity’s motion concerned the propriety of deciding, pursuant to a Rule 12(b)(6) motion rather than delaying until the summary judgment stage, whether SunPower’s trade secret and non-trade secret claims arose out of the same nucleus of facts. In several cases cited by SunPower, the courts denied Rule 12(b)(6) motions on the ground that, for purposes of deciding such motions, the plaintiffs’ factual allegations must be accepted as true. However, Judge Koh was not convinced. She cited one Northern District of California decision to the contrary, and she referenced the U.S. Supreme Court’s opinions in Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombley in concluding that SunPower’s complaint asserted implausible causes of action regarding non-trade secret information (however, she said she would grant SunPower leave to amend its complaint).

Judge Koh left no doubt concerning her resolution of the present confusing and contradictory state of California law regarding preemption by CUTSA of non-trade secret claims. She went out on a limb by relying on controversial dicta in a California Appellate Court opinion, an opinion which she candidly noted was disapproved —on other grounds—in a later California Supreme Court ruling. Her decision will be applauded and cited by defendants in that state and elsewhere, but it will be criticized by plaintiffs and employers having deal with data theft by former employees.  At an early date, the legislators should consider amending the Act by removing the current inconsistency. This is particularly the case because a trade secret claim has a heightened evidentiary standard and employers may not be able to pursue such a claim (at least under a tort theory) where an employee steals data that may not rise to the level of a trade secret in light of this decision.

Throughout 2012, Seyfarth Shaw LLP’s dedicated Trade Secrets, Computer Fraud & Non-Competes Practice Group hosted a series of CLE webinars that addressed significant issues facing clients today in this important and ever changing area of law. The series consisted of eight webinars:

1) Employee Privacy, Social Networking at Work, and the Computer Fraud and Abuse Act Standoff;
2) Employee Theft of Trade Secrets or Confidential Information in Name of Protected Whistleblowing;
3) Pleading, Providing and Protecting Trade Secrets in Litigation;
4) Protecting Your Trade Secrets in the Financial Services Industry;
5) When Trade Secrets Cross International Borders;
6) Trade Secrets and Non-Compete Legislative Update;
7) Trade Secret Protection Best Practices: Hiring Competitors’ Employees and Protecting the Company When Competitors Hire Yours; and
8) 2012 California Year in Review: What You Need to Know About the Recent Developments in Trade Secret, Non-Compete, and Computer Fraud Law.

As a conclusion to this well-received 2012 webinar series, we compiled a list of key takeaway points for each of the webinars, which are listed below. For those clients who missed any of the programs in this year’s webinar series, the webinars are available on CD upon request or you may click on the title below of each webinar for the online recording. CLE credit is available as discussed below. We are also pleased to announce that Seyfarth will continue its trade secrets webinar programming in 2013 and has several exciting topics lined up. We will release the 2013 trade secrets webinar series in the coming weeks.

Employee Privacy, Social Networking at Work, and the Computer Fraud and Abuse Act Standoff

The first webinar of the year, led by Seyfarth partners Gary Glaser and Scott Schaefers, addressed the issue of employees’ privacy rights on their work computers; unauthorized use or disclosure of company intellectual property while using social media; and the Computer Fraud and Abuse Act (CFAA).

  • To have the best chance of seeking remedies under the federal CFAA, only give employees access to company networks on a need-to-know basis. Require all employees with access to confidential company information to sign confidentiality and restricted access and use agreements. Have clear written policies in place that leave no doubt that any access and use of company information, for purposes other than company business, is strictly prohibited, and have employees acknowledge receiving copies of such policies. Send out periodic reminders of those policies, each of which should require acknowledgement of receipt by the employees.
  • Do NOT attempt to access an employee’s personal e-mails, files or Internet accounts without advice of counsel. Under both federal and many state laws, employees often have privacy rights in their personal information, even if they store it or access it on company computers.
  • For social networking sites (e.g., LinkedIn), have clear written policies that spell out what company information may/may not be posted on such sites, and identify what information belongs to the company (e.g., contact lists, company photos or graphics, etc.), as well as a process for purging the company-owned information from their contact lists posted on social networking sites such as LinkedIn at the time the employee departs. An exit interview should also be conducted at the time any employee separates, and as part of that exit interview process, each exiting employee should be given a written reminder of their ongoing trade secret, confidentiality and social networking obligations. If an employee leaves the company without such clear written direction, the company risks waiving any proprietary interest in the information in his/her LinkedIn profile. Also consider using ownership agreements that specify that the company owns the particular social media accounts that the employee may work on and remember to obtain the password from the employee to the company owned social media account before the employee leaves.

Employee Theft of Trade Secrets or Confidential Information in The Name of Protected Whistleblowing

In our second webinar of the series, Seyfarth partner Robert Milligan answered the question, “Can employees steal trade secrets and confidential information to support their whistleblower claims?” This program covered recent decisions addressing the interplay between maintaining employer confidentiality and protection of trade secrets and protected activity under whistleblower statutes and “self-help” discovery, as well as the provisions in whistleblower bounty programs that preclude enforcement of confidentiality agreements in certain instances.

  • A central goal of Sarbanes-Oxley is the accurate valuation and protection of a company’s assets. But what does this mean for trade secrets, which have traditionally been thought of as an undefined intellectual property right? Sarbanes-Oxley has mandated duties of disclosure and internal controls that have transformed trade secrets into an asset that must be valued and reported.
  • At a minimum, companies should create a trade-secret protection committee or have a corporate officer whose job it is to identify, value, and protect trade secrets. However, doing so requires an understanding of 1) what a trade secret is, 2) where one finds a trade secret, and 3) how to appropriately protect a trade secret. The key is to identify, inventory and value as well as institute internal controls to protect trade secrets. Seyfarth has extensive experience assisting companies with this process and offers an effective and well-received trade secret audit program.
  • Section 922 of the Dodd-Frank Act prevents any person from interfering with a whistleblower’s report, including by threatening to enforce confidentiality agreements. Whistleblower thieves may seek revenge by making confidential information public in addition to bringing it before the SEC. Companies must act swiftly to have genuine confidential or trade secret information removed from public mediums, such as the Internet, to attempt to preserve its secrecy. New whistleblower rules may decrease incentives to follow internal reporting procedures and instead provide a perverse incentive for sham employees to work for bounties rather than fulfill their employment obligations. Careful planning should be done to make good hiring decisions as well as employing effective performance management of existing hires to attempt to manage the risk of the retention of rogue and disloyal servants.
  • Consider these strategies to protect trade secrets and confidential information when faced with a whistleblower thief:
  1. Make sure you have a clear anti-retaliation policy and document investigation. Follow your corporate compliance programs and ethics policies and procedures.
  2. Be careful in all communications with the whistleblower. Do not make him or her feel threatened. Try to find an employee that the whistleblower thief trusts to get back company documents.
  3. Consider engaging a third-party neutral to maintain confidential documents and information if the whistleblower has not yet gone to the SEC.
  4. Consider amnesty negotiations. Remind the whistleblower of the serious legal consequences of stealing trade secret and confidential information.
  5. Offer to study the problem internally and report to the SEC.
  6. Move swiftly to attempt to obtain the removal of any confidential or trade secret documents from the Internet by working with Internet service providers to obtain the immediate takedown and involve the court as needed.

Pleading, Proving and Protecting Trade Secrets in Litigation

The third installment in the 2012 Trade Secrets Webinar Series was presented by trade secrets practice leader Michael Wexler. Many courts require that claims for trade secret misappropriation be pled specifically as to the nature of the trade secret or suffer the consequences of challenges to the pleadings. The challenge is to plead with reasonable particularity without actually disclosing the secrets in a public document. From a defense stand point, the identity of the trade secret is paramount to prepare defenses, determine the value of the secrets, and determine if they were actually misappropriated. This webinar covered the ethical, technical and practical aspects of initial pleadings that are fundamental to the filing and defending of trade secret claims.

  • In any trade secrets litigation in which you represent the plaintiff, you must have a frank discussion with your client prior to the inception of the litigation concerning its duties to identify the alleged misappropriated trade secrets with specificity and the resulting discovery disclosure that will be required in the litigation. Simply put, the client needs to know that counsel for the defendant(s) (at a minimum) will be provided access to the allegedly purloined trade secret as well as others. Depending upon the state and occasionally the individual judge, the defendants may also be able to obtain access to the stolen trade secrets subject to a protective order so that they can defend themselves against the claim. A plaintiff must be mindful that their secrets may be further disclosed to a competitor during trade secret litigation subject to non-disclosure obligations and that plaintiff must vigorously defend and protect the confidentiality of said information throughout the litigation.
  • A majority of states either by statute or case law require that a plaintiff disclose their trade secrets with specificity as part of the discovery process. Failure by the plaintiff to provide sufficient specificity regarding the stolen trade secret in discovery may result in a defendant obtaining summary judgment on the claim. Some states require the plaintiff to provide a specific trade secret disclosure document before discovery commences. See California Code of Civil Procedure section 2019.210.
  • Protective orders in trade secret litigation must be carefully tailored to protect confidential information disclosed in discovery and limit the disclosure of such information to those who need to know for purposes of the litigation. A protective order should have appropriate measures concerning how documents containing confidential information will be provided to the court, witnesses, and experts. Careful consideration should also be made on whose burden it is to justify the protection level assigned to particular documents.
  • Plaintiffs should use contention interrogatories to flesh out any allegations made by the defendant(s) that particular alleged trade secrets are in the public domain. Written discovery should probe the basis of such allegations, including when and where such disclosure occurred.

Protecting Your Trade Secrets in the Financial Services Industry

The fourth webinar in the series, presented by partners Scott Humphrey and James McNairy, focused on trade secret considerations in the banking and finance industry, including prosecuting claims against former employees who are FINRA members.

  • When seeking injunctive relief in a trade secrets dispute involving parties that are subject to FINRA regulation, be sure to first consult FINRA (NASD) Rule 13804 governing injunctive relief—while the moving party may first seek injunctive relief from a court of competent jurisdiction, the party must also make specified filings with FINRA.
  • When litigating a trade secret dispute before FINRA, keep in mind that the FINRA process is often less formal than in court, and the arbitration panel may include persons who are not lawyers. Thus, it behooves both parties to keep their legal arguments concise and, where complex trading algorithms or other complex trade secrets are at issue, the trade secret should be described as simply as possible.
  • When the FINRA trade secret dispute arises out of facts involving broker recruitment, the parties should be aware of the 2004 “Protocol for Broker Recruiting,” which currently has well over 400 signatories and allows brokers to take to their new employer certain account information. Other limitations within the protocol should also be carefully considered before filing suit.

When Trade Secrets Cross International Borders

Our fifth webinar in the 2012 series was presented by Robert Milligan, Marjorie Culver and Matthew Werber and provided a high-level discussion of recent non-compete and trade secret issues that impact foreign companies conducting business in the United States and companies operating internationally. This program provided an overview of the key considerations that foreign companies should appreciate in order to effectively navigate trade secret and non-compete law in the U.S. and highlighting the issues facing U.S. trade secret owners attempting to address the theft of stolen trade secrets abroad. This webinar provided valuable insight for companies who compete in the global economy and must navigate the legal landscape in these jurisdictions to ensure they are adequately protecting their trade secrets.

  • In many U.S. states, initial employment and continued employment can be sufficient consideration for non-compete, non-solicitation and non-disclosure agreements, whereas in several European countries, the employer must pay for any post-termination non-compete. In contrast to the law in some foreign countries, employers can still enforce the non-compete even if the employer terminates the employment relationship in some U.S. states. Injunctive relief is typically the top litigation goal in most U.S. trade secret/non-compete matters. There are significant differences in U.S. states concerning the interpretation of the Uniform Trade Secrets Act (which has been adopted in 46 U.S. States). For example, there are significant differences regarding the application of the inevitable disclosure doctrine, trade secret preemption and recoverable damages.
  • Cross-border considerations: employers must be vigilant and think critically about the most likely venue that a non-compete/trade secret battle will occur should an employee later leave the company as forum and choice of law can be outcome determinative. Employers should carefully select employees for cross-border coverage, taking into consideration where the work will likely be performed, where the employee will likely reside, what jurisdiction/choice of law is most favorable, and the likely chance of successful enforcement. The employer should draft to the highest standard based upon the likely locale of any dispute concerning the non-compete.
  • Trade secret holders seeking to remedy misappropriation occurring abroad should consider the United States International Trade Commission (ITC) as a potential forum for seeking relief. In TianRui Group Co., Ltd. v. ITC, 661 F.3d 1322 (Fed. Cir. 2011), the Federal Circuit ruled that the ITC can exercise its jurisdiction over acts of misappropriation occurring entirely in China so long as the dispute concerns products being imported into the United States.

Trade Secrets and Non-Compete Legislative Update

The sixth webinar of the year, led by Robert Stevens, Erik Weibust, and Daniel Hart, focused on new and pending legislative changes to non-compete and trade secrets statutes, including a review of Georgia’s Revised Restrictive Covenant Act one year after its enactment, recent and pending legislative changes to non-compete statutes in New Hampshire and Massachusetts, adoption of the New Jersey Uniform Trade Secrets Act, and pending legislative changes to trade secrets statutes in Idaho and at the federal level.

  • To the extent that they have not already done so, employers operating in Georgia should have their non-compete agreements evaluated by counsel to ensure that they are taking full advantage of the change in Georgia public policy toward enforcement of restrictive covenant agreements, which permits courts to blue pencil overbroad agreements and which only applies to agreements signed after May 11, 2011.
  • Employers operating in New Hampshire should ensure compliance with the new statutory requirement of disclosing non-compete and non-piracy agreements to employees prior to making an offer of employment or an offer of change in job classification, while employers operating in Massachusetts should stay abreast of proposed legislation that, if enacted, could make enforcement of restrictive covenants more difficult in Massachusetts. Please see our chart that summarizes the various iterations of the proposed legislation.
  • In light of New Jersey’s adoption of the Uniform Trade Secrets Act and proposed legislation in Idaho and at the federal level, trade secrets law is slowly moving toward greater uniformity. In light of the continually developing statutory landscape, employers operating anywhere in the United States should continue to ensure that they have taken reasonable measures to protect their trade secrets, by, among other steps, limiting access to trade secrets to employees with a need for such access, providing password protections on documents, encrypting data, limiting the ability of employees to remotely print highly sensitive documents, and enacting vigorous restrictive covenant agreements in jurisdictions where such agreements are permitted.

Trade Secret Protection Best Practices: Hiring Competitors’ Employees and Protecting the Company When Competitors Hire Yours

The seventh webinar in our series, presented by Michael Wexler, Robert Milligan and Joshua Salinas, discussed best practices when dealing with newly hired or departing employees and the incumbent trade secret, non-competition and information protection issues.

  • During the job interview of a competitor’s employee, remember to 1) discuss general skills and talents, not the former employer’s customers or trade secrets; 2) control the interview and put the employee at ease; 3) make clear that the employee should not, under any circumstances, use or bring any of his employer’s information or solicit any former co-workers; 4) focus on making the transition as smooth as possible for the former employer; and 5) check if the employee has any existing agreements with former employers before making an offer.
  • Key agreements/provisions/policies that companies should have with their employees: 1) non-disclosure and trade secret protection agreements; 2) non-solicitation of employee agreements/provisions; as permitted by law 3) agreements/provisions relating to former employer’s trade secrets (don’t use or disclose and do not bring to premises); 4) computer use and access provisions/agreements; 5) social media ownership agreements and policies; and 6) invention assignment agreements.
  • The exit interview process with departing employees is key. Employers should:
  1. Prepare for the interview, identify the trade secret and confidential information the employee accessed/used, consider having in-house counsel or HR and employee’s manager present
  2. Question the departing employee in detail.
  3. Ask the employee why he/she is leaving.
  4. Ask the employee what his/her new position will be.
  5. Check the employee’s computer activities and work activities in advance of the meeting.
  6. Ensure that all Company property, hardware, and devices have been returned, including e-mail and cloud data, and social media accounts; consider using an inventory list.
  7. Ensure that arrangements are made to have all company data removed from any personal devices, accounts, storage areas.
  8. Disable access to company computer networks.
  9. Make sure you obtain user names and passwords for all company social media accounts.
  10. Inform the employee of his continuing obligations under agreements with the Company.
  11. Consider letter to new employer and employee with reminder of continuing obligations.
  12. Consider having departing employee’s emails preserved and electronic devices forensically imaged.
  13. Consider using an exit interview certification.

2012 California Year in Review: What You Need to Know About the Recent Developments in Trade Secret, Non-Compete, and Computer Fraud Law

In Seyfarth’s final installment of its 2012 Trade Secret Webinar series, Seyfarth attorneys James McNairy, Joshua Salinas and Jessica Mendelson reviewed noteworthy California cases and other legal developments in the increasingly hot areas of trade secret protection, the preemptive effect of the California Uniform Trade Secrets Act, California’s hostility to non-competition and non-solicitation agreements, the continued erosion of the Computer Fraud and Abuse Act as a tool for California employers to curb data theft, and social media’s influence on how organizations identify and protect confidential information.

  • Clearly define company social media policies before problems arise. Avoid restricting employees’ abilities to discuss the terms and conditions of their employment, wages, and other activities protected under Section 7 of the National Labor Relations Act. Employers who make use of social media accounts should consider using contracts to state clearly that the employer owns the accounts, which are to be used only for authorized purposes, but that do not overreach into areas that violate employee rights to privacy.
  • Companies should ensure their computer and network policies cover “access,” not merely “use,” to comply with the Ninth Circuit’s narrow interpretation of the CFAA. Access should be defined clearly to delineate functionally what computer resources and information employees permissibly may and may not access, with data repositories containing sensitive information requiring enhanced access restrictions.
  • To fall under California Business and Professions Code section 16601’s “sale of business” exception, non-competition covenants executed pursuant to the sale of a business should be incorporated into the terms of the purchase agreements and reflect a clear purpose to protect business goodwill.
  • Because preemption under California’s Uniform Trade Secrets act is increasingly invoked by defendants as a basis to dismiss claims related to the taking of trade secret information, it is imperative that potential plaintiffs carefully plead non-trade secret claims as distinct from the trade secret allegations within the complaint. Failure to do so can cause related claims to be preempted and, if the trade secret claim itself is faulty, significantly reduce the number of at issue claims.
  • Create a culture of confidentiality within your company so that at every turn employees are aware of the importance of protecting confidential, proprietary, and trade secret information and the steps required of all employees to protect the company’s information assets. Doing so may enable your organization to invoke the trade secrets exception to California Business and Professions Code section 16600, which may help protect company information assets and moderate high employee mobility in California.

2013 Trade Secrets Webinar Series

Beginning in January 2013, we will begin another series of trade secret webinars. The first webinar of 2013 will be a national year in review on the most important cases and developments throughout the country concerning trade secrets, non-competes, and computer fraud. To receive an invitation to this webinar or any of our future webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here.

For attorneys licensed in Illinois, New York or California, who are interested in receiving CLE credit for viewing recorded versions of the 2012 webinars, please e-mail CLE@seyfarth.com to request a username and password. Seyfarth Trade Secrets, Computer Fraud & Non-Compete attorneys are also happy to discuss with you presenting similar presentations to your groups for CLE credit.

Happy holidays!!!

By Robert Milligan and Jessica Mendelson

The United States House of Representatives approved the Theft of Trade Secrets Clarification Act today under a suspension of the House Rules, a process intended to expeditiously resolve non-contentious measures. The Act broadens federal law to ensure it addresses the theft of trade secrets related to a product or service used or intended to be used in interstate or foreign commerce.

Under House Rule XXVII, the Speaker of the House for the United States House of Representatives is permitted to suspend the House Rules and expeditiously resolve non-controversial measures in the last six days of a congressional session. In order to suspend the rules, two thirds of present and voting members of the House must approve the suspension, and amendments are not permitted unless they were submitted at the time the motion to suspend the rules is offered. Once a motion to suspend has been brought, the bill is debated for up to forty minutes, with twenty minutes of debate given to a representative who supports the bill, and twenty minutes given to a member who opposes the bill. A vote is then ordered, and the suspension can be issued.

This year, the suspension list included S.3642, the Theft of Trade Secrets Clarification Act of 2012, which recently passed in the Senate. The Act is intended to strengthen the scope of the Economic Espionage Act to prevent results like the Second Circuit’s decision in United States v. Aleynikov, which we previously discussed. Under the Economic Espionage Act, only trade secrets “related to or included in a product that is produced for or placed in interstate commerce” are protected. The Second Circuit interpreted this provision narrowly in Aleynikov, and found it only protected actual products placed in interstate or foreign commerce. The court would not apply the law because the trade secret failed to satisfy the interstate or foreign commerce requirement. The passage of the Theft of Trade Secrets Clarification Act expands the Economic Espionage Act to cover trade secrets “related to a product or service used in or intended for use in interstate or foreign commerce.”  (emphasis added). This means that the Economic Espionage Act will now protect a broader range of trade secrets, including trade secrets with a relationship to a product or service intended for interstate or foreign commerce.  Furthermore, the Theft of Trade Secrets Clarification Act attempts to correct the Aleynikov loophole. The bill  moved under suspension of House Rules on Tuesday, December 18, and passed 388-4. It will now go directly to the White House for President Obama’s signature. We will continue to keep you posted on the bill’s progress.

By Daniel Hargis

The case of Illumination Management Solutions, Inc. v. Ruud pending in the Eastern District of Wisconsin exemplifies the continuing lack of certainty on the scope of California Uniform Trade Secrets Act (“CUTSA”) preemption when the claims potentially subject to preemption concern information that itself may not qualify as a trade secret but is nevertheless confidential or proprietary.

CUTSA does not preempt claims that seek “civil remedies that are not based upon misappropriation of a trade secret.” Cal. Civ. Code § 3426.7(b). While this language may suggest on its surface that claims alleging misappropriation of information not rising to the level of a trade secret are not preempted, courts disagree on the issue. Compare, e.g., Leatt Corp. v. Innovative Safety Tech., LLC, No. 09–CV–1301, 2010 WL 2803947, at *6 and n. 5 (S.D. Cal. July 15, 2010); Phoenix Tech. Ltd. v. DeviceVM, No. C 09–04697, 2009 WL 4723400, at *5 (N.D. Cal. Dec. 8, 2009) with Mattel, Inc. v. MGA Entm’t, Inc., 782 F.Supp.2d 911, 987 (C.D. Cal. 2011); Gabriel Techs. Corp. v. Qualcomm Inc., No. 08CV1992, 2009 WL 3326631, at *11 (S.D. Cal. Sept. 3, 2009).

Illumination Management, which was adjudicating the CUTSA as the case was originally filed in federal court in Los Angeles but was later transferred to the Eastern District of Wisconsin, falls into the group of cases finding such claims to be preempted. The dispute arose out of the one-time collaboration of two businesses in the lighting industry. The plaintiff, a company specializing in the development of light emitting diode technology, partnered with the Wisconsin based defendants to incorporate its technology into defendants’ products. The collaboration led to the defendants becoming shareholders in the plaintiff and obtaining a seat on the plaintiff’s board. Because of the relationship, the plaintiff freely shared information and technology with the defendants. The defendants are alleged to have thereafter introduced their own competing products using the light emitting diode technology. And the defendants entree into the market, according to the plaintiffs, was due to various wrongs perpetrated by the defendants, including misappropriation of the plaintiff’s trade secrets and breach of common law duties owed to the plaintiff.

After the case was transferred to the Eastern District of Wisconsin, the defendants moved to dismiss the plaintiff’s second amended complaint, which alleged eleven claims, including misappropriation under CUTSA and several common law claims.

In September, the court dismissed plaintiff’s common law claims for breach of fiduciary duty, civil conspiracy, aiding and abetting breach of fiduciary duty, and negligent breach of the duty of care finding that the claims arose from the same nucleus of facts as the CUTSA claim and were thus preempted. Illumination Management Solutions, Inc. v. Ruud, No. 10–C–1120, 2012 WL 4069315 (E.D. Wis. Sept. 14 2012). The court stated that claims based on the misappropriation of information that does not qualify as a trade secret are preempted by CUTSA. Id. at *4. Recently, the court denied the plaintiff’s motion for reconsideration of the dismissal order. Illumination Management Solutions, Inc. v. Ruud, No. 10–C–1120, 2012 WL 6060967, *1-2 (E.D. Wis. Dec. 6, 2012). The court, however, did grant the plaintiff’s alternative request to amend its complaint to attempt to allege common law claims that “do not involve the misuse of trade secrets or confidential information.” Id. at *3 (emphasis original).

Whether claims based on the misappropriation of information that does not qualify as a trade secret are preempted by CUTSA may one day be resolved by the California Supreme Court. But until then, Illumination Management highlights that claimants who merely assert, in the alternative to their trade secret claim or otherwise, that misappropriation of information not qualifying as a trade secret can nevertheless give rise to non-trade secret claims risk dismissal of those claims on preemption grounds.

Claimants need to be aware of the issue and, if there are valid grounds to do so, plead around the preemption defense. If there is another theory that would support a non-trade secret claim beyond a misappropriation of information theory, the claimant should plead that alternative theory if it can do so in good faith. The theory can be pled in conjunction with, but as a clearly delineated alternative to, a misappropriation of information theory. Before filing the pertinent pleading, the claimant should thus consider potential alternative theories for its non-trade secret claims, ensure there is support for the alternative theories, or if the theories can be asserted on information and belief, and draft the pleading such that it is clear that the alternative theories are distinct from a misappropriation of information theory. This is really an exercise in issue spotting and thinking creatively about one’s claims.

Finally, claimants shouldn’t assume they will be able to cure pleading deficiencies through amendment. Even if given leave to amend, the allegations in a prior pleading can doom a subsequent pleading. For example, at least in California, admissions in an original pleading that has been superseded by an amended pleading remain within the court’s cognizance, and the alteration of such admissions by amendment designed to conceal fundamental vulnerabilities in a plaintiff’s case will not be accepted the court. See, e.g., Berg & Berg Enterprises, LLC v. Boyle, 178 Cal.App.4th 1020, 1043 n. 25, 100 Cal.Rptr.3d 875 (2009). Similarly, a claimant may not avoid dismissal by alleging facts in an amended pleading that contradict those facts originally pled. See, e.g., McKell v. Washington Mut., Inc., 142 Cal.App.4th 1457, 1491, 49 Cal.Rptr.3d 227 (2006).

Two rival toy makers engrossed in an eight-year battle over the Bratz doll line have once again taken their fight to the Ninth Circuit. This week, a Ninth Circuit panel consisting of Chief Judge Alex Kozinski, Judge Kim Wardlaw, and Judge Stephen Trott, heard oral argument concerning an award of more than $310 million in damages and attorneys’ fees against Mattel, Inc. in its dispute with MGA Entertainment, Inc.

This is the second time the case has made its way to the Ninth Circuit and to the same three-judge panel. In 2010, the same panel reversed a jury verdict that awarded Mattel nearly $100 million in damages for copyright infringement and the ownership rights to the Bratz doll brand. Previously, Chief Judge Kozinksi, writing for a unanimous panel, reversed the decision below that Bratz creator and former Mattel employee Carter Bryant had assigned the intellectual property rights in the dolls to his former employer through his employment agreement’s invention assignment provision. The case was remanded for a retrial.

In a surprising turn of events, the second jury in the contentious case awarded more than $80 million in damages to MGA for Mattel’s alleged trade secret misappropriation (a claim that was not tried in the first jury trial), plus attorneys’ fees and treble damages for a total amount of more than $310 million.

Oral arguments began Monday in Pasadena, California. Mattel requested the court to vacate or reverse the award on grounds that MGA’s trade secret counterclaim was untimely and barred by the statute of limitations. Mattel also asked the court to reverse or vacate the trade secret damages award on grounds of insufficient evidence, and reverse or vacate the attorneys’ fees and costs award on grounds that Mattel’s pursuit of its copyright claim was objectively reasonable.

During yesterday’s oral arguments, the panel primarily focused on the timing issue. The statute of limitations for trade secret misappropriation under the California Uniform Trade Secrets Act (Cal. Civ. Code § 3426.7) is three years after the plaintiff discovers, or should have discovered, the misappropriation.

During its oral argument, Mattel explained that MGA filed its trade secret counterclaim against Mattel in August 2010, on grounds that Mattel allegedly stole trade secret information about the Bratz Doll lines during toy fairs. Mattel argued that the statute of limitations began running in 2004, when MGA had “reason to suspect” the alleged misappropriation after it hired two Mattel employees that were aware of Mattel’s alleged “toy fair conduct.” Specifically, Mattel pointed to MGA’s prior pleadings and discovery requests concerning the alleged toy fair conduct, which allegedly evinced MGA’s “reason to suspect.” Thus, Mattel argued that more than three years had passed and MGA’s trade secret counterclaim was untimely and barred.

In addition, Mattel argued that the district court erred when it found that MGA’s trade secret counterclaim compulsory and related back to Mattel’s own trade secret claim in 2006, because the two sets of claims involved different trade secrets that were allegedly stolen at different places and times; by different actors; and through different means.

MGA opened its argument by accentuating Mattel’s alleged deposition misconduct, which allegedly tolled MGA’s claim. MGA also argued that its counterclaim was compulsory because Mattel’s trade secrets claim concerned the same “category of documents.”

Chief Judge Kozinski pressed MGA hard on its “same category of documents” position. The Chief Judge emphasized that the compulsory issue is based on the claim, not documents. For example, he explained that the same document can simultaneously support different torts and contracts claims without giving rise to compulsory counterclaims. He stated that he “didn’t see how it’s compulsory or anywhere related.”

MGA also argued that there is a “logical relationship” between the parties’ trade secret claims. Judge Trott said he is having trouble with this argument based on the definition provided in In Re Pegasus Gold Corp., 394 F.3d 1189 (9th Cir. 2005), which is “the same aggregate set of operative facts as the initial claim.” Mirroring the Chief Judge’s concerns, Judge Trott said he does not see what constellation or common nucleus of facts makes them compulsory. He said the two claims are as different as “chalk and cheese.”

If the Ninth Circuit finds that the counterclaim was not compulsory, and MGA did not have reason to suspect it should have brought its counterclaim earlier, this could mean more litigation in this action in the upcoming year. In fact, Judge Wardlaw suggested that MGA refile its trade secret claim as a separate new lawsuit against Mattel.

While the ultimate outcome of this dispute is unclear, what is clear is that it does not appear to be reaching a resolution any time soon.

We will keep you apprised of any further developments.

By Robert Milligan and Jessica Mendelson

Recently, we blogged about the passage of California Assembly Bill 1844 (“AB 1844”), which regulates employers’ ability to demand access to employees’ or prospective hires’ personal social media accounts. Assembly Bill 1844 was codified as section 980 of the California Labor Code. Recently, California State Assemblywoman Nora Campos has proposed an additional bill, AB 25, which amends California Labor Code section 980 to specify that it applies to private and public employers.

Although the language of AB 1844 does not specify that it only applies to private employees, Campos’ office likely proposed the bill to make clear that it applies to both public and private sector employees in light of recent California court decisions. Although public employees are not specifically excluded by the statute, the term employer is not defined in California Labor Code section 980. Furthermore, recent California appellate decisions call into question whether certain Labor Code sections apply to public employers. For example, in California Correctional Peace Officers’ Association v. State of California, 189 Cal.App.4th 849 (2010), the correctional officers union brought a class action against the state claiming penalties for alleged missed meal periods under Labor Code section 226.7. The meal period requirement in the statute did not explicitly exclude public sector employees, and the plaintiffs argued this indicated an intent to cover both public and private employees. However, the Court of Appeal held otherwise, finding that the union’s arguments about alleged legislative intent were trumped by a more general presumption that the Labor Code does not apply to government employees. The Court found, “A traditional rule of statutory construction is that, absent express words to the contrary, governmental agencies are not included within the general words of a statute.” The court drew upon the case of Johnson v. Arvin–Edison Water Storage Dist., 174 Cal.App.4th 729 (2009) in its analysis, stating that “unless Labor Code provisions are specifically made applicable to public employers, they only apply to employers in the private sector.”

As we have previously mentioned in our prior blog post about AB 1844, while California Labor Code section 980 is well-intentioned, the statutory language has some serious shortcomings. The definition of social media is overly broad, including “electronic service or account, or electronic content, including, but not limited to, videos, still photographs, blogs, video blogs, podcasts, instant and text messages, email, online services or accounts, or Internet Web site profiles or locations.” This could be construed to cover effectively all digital content and activity.

Furthermore, the law provides no definition of the term “personal.” While the law only applies to personal accounts, the lack of definition of the phrase “personal” is problematic, particularly since it is not always clear who owns company social media accounts. We have previously blogged on cases concerning the ownership of “social media assets” on Twitter, Facebook, and MySpace, each of which illustrate the importance of clear policies regarding the ownership of company social media accounts. Here, without clearly defining the term, the law goes too far and will likely lead to unintended consequences and perhaps misuse. Both public and private employers will need to make sure that they employ social media ownership agreements with their employees to ensure that company social media accounts stay with the company and that the employer has the username and password for the account when the employee departs.

A Utah federal judge recently held that a jury’s compensatory damages award of $2.92 million for misappropriating trade secrets was supported by the evidence and was not excessive. Because the jury found by clear and convincing evidence that the misappropriation was willful and malicious, the court added $1.46 in exemplary damages. The total verdict: $4.38 million. Storagecraft Technology Corp. v. Kirby, Case No. 2:08-CV-921 (D.Utah, Sept. 27 and Dec. 4, 2012) (appeal pending).

STC developed and obtained a copyright on a source code. The company went to considerable lengths to maintain the code’s secrecy. No one could access the company’s technology without signing a confidentiality agreement, obtaining a license, and agreeing to pay a royalty. Kirby, a software engineer, resigned as a STC employee in late 2004. Shortly before he quit, he informed the company that he had stored the source code and related files on his laptop and desktop. When STC’s attorney communicated with him about returning this intellectual property, he responded that it would be deleted or returned. Not trusting him, the company sued him for misappropriation.

As part of the 2005 settlement of the case, Kirby represented and warranted that he had returned all of STC’s intellectual property. In addition, he promised that he would not use or disclose such property, and that he would cooperate with STC in preserving it. One year later, Kirby delivered to a company he knew to be a STC competitor and lawsuit adversary his entire backup file containing the source code and 100,000 emails he had sent or received while a STC employee.

When STC learned about this delivery, it sued Kirby for misappropriation, breach of contract and copyright infringement. At trial, evidence was introduced supporting STC’s claims, including a charge that Kirby was motivated by a desire to harm the company. The Utah Trade Secrets Act permits the use of a reasonable royalty as a basis for the computation of damages for trade secret misappropriation. STC’s trial expert testified that a reasonable royalty for an unrestricted license to the company’s source code was at least $4.5 million.

The jury discounted the expert’s calculations and awarded $2.9 million in compensatory damages. Based on the jury’s finding that Kirby had maliciously injured STC, the court added exemplary damages in an amount equal to 50% of the jury’s award. Kirby is appealing the judgment.

In a post-trial motion, Kirby argued that the jury verdict was contrary to the clear weight of the evidence, and that the compensatory damages award “was excessive, unreasonable, and should shock the conscience of [the] Court given the lack of evidence that Kirby proximately caused any ‘actual injury or loss’ to STC.” The court rejected Kirby’s argument and stated: “The very essence” of the parties’ prior settlement agreement “was Kirby’s covenant to return and protect all STC Intellectual Property.”

The ruling is of particular interest because, by upholding the reasonable royalties method of computing damages for misappropriation of trade secrets, STC did not have to show that Kirby actually profited from his misconduct (although there was evidence that the competitor to whom he disclosed STC’s trade secrets paid him a salary of $15,000 per month for some unspecified period). Moreover, STC was not required to prove what the competitor would have been willing to pay, if anything, for use of the confidential data.

By Robert Milligan and Jessica Mendelson

We have previously blogged on the colorful sports agent case of Mintz v. Mark Bartelstein & Associates d/b/a Priority Sports & Entertainment et al., Case No. 12-02554 SVW (SSX), (C.D. Cal.), where Aaron Mintz, a National Basketball Players Association (NBPA) certified player-agent, and his former employer, Priority Sports & Entertainment (“Priority Sports”), clashed in California federal court regarding his departure from Priority Sports to Creative Artists Agency (“CAA”).

The case recently concluded after a two-day jury trial in downtown Los Angeles, California resulting in a verdict awarding Mintz $85,000 on his invasion of privacy claim for Priority Sports’ access of Mintz’s personal email account after he left the company.

As discussed below, the case, apart from its colorful facts, has several key takeaways for employers.

General Background and Claims

By way of brief background, Mintz left Priority Sports in March 2012, accepted a position with competitor CAA, and immediately sought declaratory relief to invalidate his non-compete agreement with Priority Sports. As the case progressed, Mintz added additional claims against Priority Sports for violations of the Computer Fraud and Abuse Act (“CFAA”), the Electronic Communications and Privacy Act (“ECPA”), and California Penal Code section 502, as well as claims for defamation, invasion of privacy, intentional inference with contractual relations, and violation of Business and Professions Code section 17200. Mintz asserted some of the claims against Priority Sports principle Mark Bartelstein.

Mintz alleged that he worked for Priority Sports for eleven years and then decided to pursue a better opportunity with CAA. Apart from the two year non-compete, which he claimed violated Business and Professions Code section 16600, Mintz claimed the fourteen-day notice of termination provision in his employment agreement violated section 16600 as well. Mintz claimed that the notice provision restricted his ability to terminate his employment, and thereby prevented him from competing with Priority Sports for two weeks after termination in violation of California law. Mintz’s employment contract prohibited Mintz from soliciting company clients or business on behalf of a competitor or performing any activities for a competitor during his employment with Priority Sports. It further provided that, for two years after his termination, Mintz was prohibited from soliciting company clients or providing services that are similar to the services provided by Priority to company clients.

Mintz also claimed that after he resigned Priority Sports hacked his personal email account, reviewed his contract with CAA, and disclosed its terms to third parties. He also claimed that defamatory statements were made to basketball executives, players, and family members of players to persuade players not to follow Mintz to CAA.

Priority Sports counterclaimed against Mintz asserting claims for breach of contract, breach of covenant of good faith and fair dealing, breach of duty of loyalty, misappropriation of trade secrets, intentional interference with contractual relations, intentional interference with prospective economic advantage, conversion, violation of California Penal Code section 502, defamation, trade libel, conspiracy, and unfair competition. Priority Sports also asserted some of the claims against CAA.

Shortly before the trial, the Court ruled on both parties’ motions for summary judgment. As described in more detail below, the Court granted Mintz’s motion for summary judgment with respect to his claims for violations of California Penal Code section 502 and invasion of privacy, but denied the motion for summary judgment with respect to his claim under California’s unfair competition statute. The Court also granted summary judgment in favor of Mintz and CAA on each of Priority Sports’ counterclaims, and denied Priority Sports’ motion for partial summary judgment on its claims for breach of contract and breach of the duty of loyalty against Mintz. The Court also granted summary judgment in favor of the defendants on Mintz’s claims for declaratory relief, violation of the CFAA, and violation of the ECPA.

Mintz’s Motion for Summary Judgment on His Claims

The Court’s ruling on the parties’ summary judgment motion resolved a number of significant issues in the case. Mintz’s employment contract with Priority Sports included both a two-year non-compete agreement and a requirement that he provide fourteen days written notice prior to leaving the company. Rather than provide notice, Mintz resigned to Bartelstein by telephone. Upon hearing of Mintz’s resignation, Bartelstein allegedly responded, “Wait until I tell the world about this. You made your bed, you better be ready to lie in it.”

Additionally, after Mintz resignation, Priority Sports’ counsel allegedly instructed another employee to access Mintz’s personal email account without Mintz’s permission. The employee obtained a temporary password without Mintz’s consent and accessed Mintz’s gmail account for at least twenty minutes. It was undisputed that the employee viewed a copy of Mintz’s employment agreement with CAA. The next day, Mintz’s colleague emailed Mintz the following message: “I’m in shock! Rumor on the street is that CAA is paying you less money over 4 years then [sic] you would have made here. I don’t get it[.] You had a 50-year guaranteed deal here.” Mintz also contended that defendants leaked his employment terms with CAA to a third party.

Mintz requested a declaratory judgment that the non-compete was void but the Court found that he failed to meet his burden of demonstrating an actual controversy. At the hearing, defendants responded that their refusal to stipulate that Priority would not enforce the non-compete was not based on any desire to enforce the non-compete provision, but rather their concerns with the overbreadth of the proposed stipulation provided by Mintz’s counsel. The Court concluded that there was no evidence that defendants had attempted, in this or any other litigation, to enforce the non-compete clause. The Court, therefore, concluded that Mintz had not met his burden of demonstrating an actual controversy with “sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”

With respect to the notice of termination provision, the Court found that Mintz did not take issue with the notice requirement itself, but argued that the clause was unenforceable because it prevented him from competing for clients after leaving Priority Sports. In short, according to the Court, Mintz only contended that the two-weeks’ notice provision is unenforceable “to the extent Priority Sports asserts it prevented Mintz from competing for clients, including his own clients, after his resignation.” The Court stated that Mintz misconstrued defendants’ position regarding the provision. According to the Court, in their opposition, defendants conceded that the notice provision “did not prevent Mintz from terminating his employment or from joining CAA; nor did it prevent Mintz from competing fairly with Priority Sports after his termination date.” (Opp. at 9). Instead, defendants only argued that Mintz breached the notice provision by failing to give fourteen days’ notice of his resignation. According to the Court, Mintz cannot conjure an actual controversy by distorting defendants’ position on the notice provision. Given the foregoing, the Court concluded that because Mintz and defendants’ positions were not in fact opposed, there was no actual controversy over the effect of the notice provision. Therefore, the Court granted summary judgment for defendants with respect to Mintz’s claims for declaratory relief.

The Court then granted summary judgment for Priority Sports on Mintz’s CFAA claim concerning the access to his personal email account. Under the CFAA, to bring a civil action, damages or loss to the victim must fall under five specific circumstances. Mintz alleged in this case that there was “loss to 1 or more persons during any 1–year period . . . aggregating at least $5,000 in value.” 18 U.S.C.§ 1030(c)(4)(A)(i)(I). Under the CFAA, “loss” is defined as “any reasonable cost to any victim.” 18 U.S.C. § 1030(e)(11).

Here, the Court found that the evidence Mintz presented failed to satisfy the threshold, because Mintz’s legal fees here were paid by CAA, and not Mintz, the victim in the offense. As a result, this expense could not be considered a cost to him. Additionally, the Court held that the expense of the litigation did not count as a loss under the CFAA because it was not “essential to readying the harm of the unauthorized access.” The Court reasoned that Mintz knew right after his departure from Priority Sports that it was responsible for the offense, and that it had accessed Mintz’s employment contract with CAA. According to the Court, all Mintz needed to do to secure his gmail account – indeed, all he could do – was to change the password and the back-up email address used to retrieve the password. The Court concluded that it defies common sense to believe that Mintz’s subsequent legal efforts to confirm Priority Sports’ involvement were “essential to remedying the harm” of the unauthorized access. Accordingly, the Court concluded as a matter of law that the litigation costs in the case do not count as a “loss” under the CFAA.

With respect to the ECPA claim, the Court granted summary judgment in favor of Priority Sports. Mintz alleged Priority Sports had intentionally intercepted his electronic communication. However, the Court found no interception, since the emails were not accessed during transmission, but after receipt.

In a bit of a surprise considering its ruling on the CFAA claim, the Court did, however, find that Priority Sports violated California Penal Code section 502 by “knowingly accessing” Mintz’s gmail account and wrongfully obtaining data without his permission. Section 502 sets no threshold level of damage or loss that must be reached to impart standing to bring suit. Under the plain language of the statute, any amount of damage or loss may be sufficient.” Facebook, Inc. v. Power Ventures, Inc., No. C 08–05780 JW, 2010 WL 3291750, at *4 (N.D. Cal. 2010) (holding that the fact that plaintiff “expended resources” to stop further violations of § 502 sufficed to establish damages, even if such resources only comprised a few “clicks of a mouse” and some “keystrokes”). Upon review, the Court found that the undisputed facts showed that Priority Sports knowingly and without permission used a computer to wrongfully obtain data, in violation of § 502(c)(1). Specifically, defendants did not dispute that at the direction of Priority Sports’ counsel, a Priority Sports employee accessed Mintz’s gmail account without permission, and viewed the contents of several emails, including Mintz’s employment agreement with CAA. (Opp. at 9). The Court further found that Mintz experienced sufficient damage to support a private right of action. The Court found that it was undisputed that after the hacking incident, Mintz spent some time restoring his gmail password and investigating who had hacked the gmail account. (Mintz Decl. ¶ 19). In light of the foregoing undisputed facts, the Court concluded that Defendants violated California Penal Code § 502. Accordingly, the Court granted Mintz summary judgment on the § 502 claim.

The Court also granted summary judgment for Mintz on the invasion of privacy claim. According to the Court, Mintz had a legally protected interest in his personal email account, along with a reasonable expectation of privacy. By accessing this account, Priority Sports committed a serious invasion of Mintz’s privacy interest without reasonable justification.

Finally, with respect to the unfair competition claim, the Court declined to grant summary judgment, finding Mintz had failed to show a loss of money or property resulting from unfair competition as required by Proposition 64.

Mintz and CAA’s Motions for Summary Judgment as to Priority Sports’ Counterclaims

The Court granted Mintz’s motion for summary judgment on Priority Sports’ breach of contract counterclaim because of Priority Sports’ failure to provide factual support for this claim. Priority Sports claimed, among other things, that Mintz breach his contract by working for CAA prior to his resignation, soliciting players on CAA’s behalf prior to his resignation, and failing to provide fourteen days written notice. While the parties’ disputed whether one NBA player was solicited by Mintz prior to his departure, there was no evidence that the player left Priority Sports to join Mintz at CAA. The Court found that Priority Sports did not demonstrate that it suffered any damages as a result of any conduct by Mintz. The Court also found that Priority Sports could not establish damage resulting from Mintz’s failure to give fourteen days’ notice. Priority Sports contended that the lack of notice “deprived Priority Sports of the opportunity to reach out to those of its clients who had worked with client-service teams that included Mintz and to secure its relationships with those clients before Mintz’s departure was a fait accompli.” (Opp. at 16). According to the Court, the sole support for this assertion was Bartelstein’s declaration, in which he claims that because of the lack of notice, he was unable to contact a client until five days after Mintz’s resignation. (Bartelstein Decl. ¶ 7). But Bartelstein also conceded that the client remained with Priority. Finally, the Court stated that Priority Sports failed to identify a single client that it lost as result of Mintz’s failure to give notice. Based on this deficient showing, the Court concluded that no rational fact-finder could conclude that Mintz’s failure to give notice damaged Priority Sports. The Court also dismissed Priority Sports’ breach of the implied covenant of good faith and fair dealing, finding it to be based on the same speculative assertions.

Priority Sports’ claim that Mintz breached his duty of loyalty was also rejected by the Court. According to the Court, under California law, an employee does not breach his duty of loyalty merely by preparing to compete with his employer. In addition, there was no showing that Mintz’s actions had actually harmed Priority Sports. According to the Court, there was no evidence that Mintz actually solicited Priority Sports’ clients nor did Priority Sports present facts that described how it was harmed by Mintz’s preparatory steps. Priority Sports also failed to direct the Court to any evidence, for example, that Mintz’s plan making resulted in the loss of a client. Based on this reasoning, the Court found there was no triable issue of breach or damages.

The Court also granted Mintz’s motion for summary judgment on the misappropriation of trade secrets counterclaim, finding that Priority Sports failed to offer specific evidence of misappropriation. According to the Court, “Priority Sports’ Opposition is utterly devoid of evidence that Mintz or CAA misappropriated any trade secrets belonging to Priority Sports.” Furthermore, the Court granted summary judgment for Mintz on the intentional interference with contractual relations claim, finding “Priority Sports has failed to present any evidence that CAA committed any independently wrongful act to induce Mintz to breach or disrupt its at-will employment contract with Priority Sports.” The Court also granted Mintz’s motion for summary judgment on the conversion claim, finding that the ownership of the blackberry that Mintz used while employed by Priority Sports was disputed, and therefore, there was insufficient evidence to assert a claim of conversion. Additionally, the Court granted Mintz’s motion for summary judgment on defamation and trade libel, finding that Priority Sports had failed to produce evidence of the specific libelous statements Mintz allegedly made. Finally, the Court found there was insufficient evidence of either conspiracy or unfair competition by CAA, and granted CAA’s motion for summary judgment on both counts.

Jury Verdict in Favor of Mintz

The trial, which concluded on November 14, 2012, was essentially limited to a determination of damages on Mintz’s claims for violation of Penal Code § 502 and for invasion of privacy. Mintz elected not to pursue his affirmative claims for defamation, interference with contractual relations, and violation of California’s unfair competition statute.

The jury awarded damages on Mintz invasion of privacy claim of $85,000 against Priority Sports, which was apportioned $80,000 for past noneconomic loss, including emotional pain/mental suffering, and $5,000 for future noneconomic loss, including emotional pain/mental suffering. The Court granted the Defendants’ motion for a directed verdict regarding punitive damages, finding Priority Sports’ conduct insufficiently malicious, oppressive or fraudulent to qualify for punitive damages.  The Court reasoned that if the mere fact that Priority Sports had unlawfully and intentionally accessed Mintz’s gmail account rose to the level of malice, “every intentional tort would give rise to punitive damages.”  The Court also found that Mintz was not entitled to emotional distress damages on his Penal Code § 502 claim because he did not disclose those damages in his complaint or discovery disclosures.

Takeaways

*Don’t access your employees’ personal email accounts. The Court’s handling of the CFAA and the Penal Code § 502 claims is interesting. While Mintz could not maintain a claim under the CFAA because to there was no “loss” and Mintz’s subsequent legal efforts to confirm Priority Sports’ involvement were not “essential to remedying the harm” of the unauthorized access, Mintz was able to maintain a California Penal Code section 502 claim, as well as an invasion of privacy claim, based upon the same conduct. Accordingly, employers should not access their employees’ personal email accounts, even if conducting a workplace investigation, unless they receive express written consent from the employees in question. Look for more Penal Code § 502 claims in light of this decision.

*Consider using notice provisions with employees in your trade secret protection agreements. The Court’s handling of the two-week notice prohibition serves as a reminder that California is very much a pro-employee state. Rather than address whether the two-week notice provision violates California’s prohibition on non-compete agreements, the Court found that there was no controversy, and no damages resulting from Mintz’s actions. According to the Court, Priority Sports failed to identify a single client it lost as a result of Mintz’s failure to give notice, and thus, there was no resulting harm. Notwithstanding, the Court did not indicate that the notice provision was unlawful. Accordingly, employers should consider utilizing reasonable notice provisions in their trade secret protection agreements. While you may not be able to recover damages, you may be able to use the breach of such provisions to leverage a threatened misappropriation of trade secrets claim and as evidence of an ill intent by the departing employee.

*Exit interviews are essential. A thorough exit interview with a departing employee is an essential part of an effective trade secret protection plan. An employee’s failure to cooperate or evasive activities can be used by the employer to support a claim of threatened misappropration of trade secrets against the employee and also give an employer the heads up to investigate the employee’s computer activities on its network as well as to secure company customer and employee relationships. Please see our recent webinar on Trade Secret Protection Best Practices: Hiring Competitors’ Employees and Protecting the Company When Competitors Hire Yours for more on effective exit interviews.

*Need creative approaches. Some cases, if important to the company, necessitate creative approaches. Here, Mintz had NBA player relationships throughout the United States, Priority Sports was based out of Illinois, Mintz had regular communications with its Illinois staff and traveled to Illinois for business meetings, and the non-compete was governed by Illinois law. With Priority Sports and Mintz’s connections with Illinois, an Illinois forum would likely have been much more favorable for Priority Sports. While Mintz still may have pursued his suit in California, Priority Sports could have had the possibility of an alternative forum. A mandatory forum selection provision, coupled with a consent to jurisdiction clause, as well as possibly an arbitration provision, may have provided Priority with additional options to pursue.  Please see our previous blog on a California federal court’s recent dismissal of a declaratory suit , like Mintz’s claim, based upon a Pennsylvania forum selection provision.

*Need evidence of wrongful solicitation and use of trade secrets. Finally, this case shows that the evidence necessary to show damages and use of trade secrets can be difficult to prove without cooperating witnesses or evidence of data transmission and use, particularly where the main focus of the suit is on damages, rather than injunctive relief.