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Top 10 Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2012

Posted in Computer Fraud and Abuse Act, Data Theft, Espionage, Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants, Trade Secrets, Unfair Competition

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.