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

In Eastman Chemical Company, v. Alphapet Inc., et al., Civ. Action No. 09-971-LPS-CJB 2011 U.S. Dist. LEXIS 127757 (Dist. DE) (November 4, 2011) (unpublished) Plaintiff Eastman Chemical Company ("Eastman" or "Plaintiff') filed an amended complaint alleging patent infringement, breach of contract and trade secret misappropriation.  Plaintiff alleged that former Eastman employees at the direction of one or more of the Defendants, improperly disclosed Eastman's confidential, proprietary, and trade secret information relating to the manufacture of certain products in violation of a technology license agreement.  Defendants moved to dismiss the trade secret misappropriation claim based on a failure to specifically plead this claim.  

Defendants argued that Plaintiff’s claim for trade secret misappropriation failed to satisfy the pleading standard of Fed. R. Civ. P. 8 in three principal respects.  First, Defendants asserted that the amended complaint failed to identify which of the Defendants allegedly obtained Eastman's trade secrets, and which individuals were involved in the allegedly illicit disclosure and use of that information. Second, Defendants argued that the description of the trade secrets that were allegedly used or disclosed is "so broad as to be meaningless."  Finally, Defendants contended that "Eastman failed to adequately plead that any [particular] defendant actually used or disclosed" any trade secrets.  

For purposes of its analysis, the Magistrate Judge considered case law from other states that have adopted the Uniform Trade Secrets Act to be persuasive authority.  Viewing Plaintiff's misappropriation claim and the associated facts in the light most favorable to Plaintiff, the Magistrate Judge found that Defendants had not shown that this misappropriation claim should be dismissed pursuant to Rule 8.   Having outlined and considered the contours of Plaintiff’s factual allegations, the Magistrate Judge found that Defendants have been given sufficient factual information to provide adequate notice of the plausible grounds for Plaintiff’s misappropriation claim under the Twombly/lqbal standard.
 

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By Robert Milligan and Joshua Salinas

The best things in life are free, except for screensavers, games, and other software provided on-line that spy on your computer activity and gather your personal information, at least according to the consumer Plaintiffs in the recent data collection/privacy suit filed in Illinois federal court captioned Harris v. comScore, Inc., No. 11 C 5807, 2011 WL 4738357 (N.D. Ill. Oct. 7, 2011). The Plaintiffs in the case won't be forced to litigate the action in Virginia after a federal court recently denied comScore's attempt to enforce the forum selection provision contained in its licensing agreement.

The District Court for the Northern District of Illinois, Honorable Chief Judge James Holderman presiding, recently denied defendant comScore’s motions to dismiss and transfer venue because he found that comScore’s forum-selection clause was not reasonably communicated to the plaintiff consumers. In doing so, the court found that the terms and conditions of license agreements for free software downloads require a higher standard of notice to consumers.

According to Plaintiffs' complaint, Defendant comScore is an internet research company that allegedly monitors the computer and online activity of consumers that download its software. ComScore allegedly bundles its surveillance software with free programs, such as screensavers and games, to encourage consumers to download and install the software. Once installed, comScore’s surveillance software allegedly collects the computer user’s information and activity, which comScore then allegedly sells to its clients for marketing research.

Plaintiffs Mike Harris and Jeff Dunstan allegedly downloaded and installed comScore’s screensavers and games. Harris and Dunstan allegedly soon realized that comScore’s software continually and surreptitiously monitored their computer activity. Additionally, the software allegedly collected usernames, passwords, and credit card information. They brought a class action against comScore in Illinois federal court, and asserted claims, inter alia, under the Computer Fraud and Abuse Act, Electronic Communications Privacy Act, Stored Communications Act, and Illinois Consumer Fraud and Deceptive Practices Act.

ComScore moved to dismiss the case for improper venue or in the alternative, to transfer venue from Illinois to Virginia. ComScore argued that the terms and conditions in its User License Agreement contained a forum-selection clause that limited all litigation to courts in the State of Virginia. ComScore claimed that before anyone can install its software, the individual must first click a box acknowledging that he or she has read and agreed to the terms and conditions of the license agreement. Thus, comScore alleged that Harris and Dunstan agreed to the license agreement, and more importantly, the forum-selection clause that prohibited their lawsuit in Illinois.

Harris and Dunstan argued that comScore’s forum-selection clause was not enforceable because it was not reasonably communicated to them when they downloaded the software. They alleged that the comScore software’s installation process obscured the hyperlink to the license agreement, and thus the terms and conditions were not readily available.

Chief Judge Holderman cited several cases that enforced “click through” agreements, including some with forum-selection clauses. He noted that the key difference in this case was Harris and Dunstan’s allegation that the hyperlink to the User License Agreement was obscured.   Normally, click through agreements place consumers on at least inquiry or constructive notice. Consequently, in this case Harris and Dunstan should have known about the agreement because they were required to acknowledge their acceptance of the agreement before downloading comScore’s games and screensavers. In fact, Harris and Dunstan each clicked a box acknowledging that they read the terms and conditions of the agreement. Chief Judge Holderman held, however, that while there is a lower expectation of notice for free software: “Nonetheless, it is not reasonable to expect a user casually downloading free software to search for such an agreement if it is not immediately available and obvious where to obtain it.” Harris, 2011 WL 4738357, at *2. Thus, comScore could not hold Harris and Dunstan to its license agreement, and the included forum-selection clause, because it never provided them reasonable access to the terms and conditions.

The court concluded that the forum-selection clause was not reasonably communicated to the plaintiffs, and thus their action could proceed in Illinois.

Additionally, the court declined to transfer the case because at least one of the plaintiffs resided in Illinois, and also he downloaded and installed the software there.

This case is important because of its impact on requirement of notice for online license agreements. Online license agreements are now ubiquitous and users cannot avoid their obligations merely because they clicked “agree” without reading the terms of the agreement. Courts will generally enforce agreements where consumers are required to click the box and acknowledge that they read the agreement’s terms and conditions. This case is interesting because the court refused to find that the plaintiffs read the agreement even though they clicked a box confirming that they read the agreement. This case requires software and service providers to ensure that agreement terms and conditions are readily available; providers cannot merely rely on evidence that the consumer clicked a box.  For free software downloads, Harris concludes that consumers have less of a burden to look for any potential license agreements. Indeed, this case is favorable to consumers seeking to invalidate provisions in licensing agreements, but also reminds us that free rarely means free.

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

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

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

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

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

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

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

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Intellectual property is often one of a business' greatest assets. Choosing the best legal tool to protect particular types of intellectual property is key. Patent and trade secret protection are primarily creatures of statute and are two forms of intellectual property recognized throughout the United States. Depending on the information that one seeks to protect, patent, trade secret, or both patent and trade secret protection may be appropriate.

Please join us in the webinar "Choosing The Right IP Protection: Patent, Trade Secret, or Both", where Seyfarth attorneys will address the following topics:

• What is a patent and what information is patentable?
• What is a trade secret and what information qualifies for trade secret protection?
• What are the pros and cons of patent vs. trade secret protection?
• What information/technology may be best protected through both trade secret and patent protection?
• How does the new America Invent Act (Patent Reform Legislation) impact the decision to seek patent or trade secret protection?

Seyfarth attorneys, Brian Michaelis, Dan Schwartz and Jim McNairy will use hypothetical fact patterns to work through these topics and highlight the practical application of patent and trade secret law. CLE credit may be available.

For more details and registration, please click here. We look forward to your joining us on October 6th!
 

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Please join us on Monday, August 29, 2011, for the next in our Seyfarth Shaw series of trade secrets-related webinars.  This great event will focus on Trade Secrets, Cloud Computing and Social Media. 

Topics will include:

• Technological overview of Cloud Computing and Social Media
• "Both sides of the coin" look at cloud computing adoption as a business decision
• Trade secrets and reasonable secrecy measures
• Key considerations in selecting a cloud provider from a security and trade secrets perspective
• Effective vendor and employment agreements and policies to protect trade secrets in the cloud, including a discussion of key provisions to include
• Effective social media policies to protect trade secrets

This informative presentation will include a question and answer portion and a PowerPoint.

The webinar will be hosted by Robert Milligan, Jason Stiehl, and Richard Lutkus, seasonsed attorneys with experience advising clients on litigation, eDiscovery, and transaction issues related to cloud computing, social media, and trade secrets.  CLE credit may be available. 

For more details and registration, please click here.   We look forward to your joining us on August 29th!

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By Marcus Mintz

In a recent case filed in the United States District Court for the Northern District of Florida, Mainline Information Systems, Inc. v. Fordham, No. 11-137, 2011 WL 2938435 (N.D. Fl. July 21, 2011), the plaintiff sought a preliminary injunction against an individual defendant for tortious interference with business relationships and for misappropriation of trade secrets. Plaintiff provides integrated IT solutions for businesses and other related products and services. Plaintiff contended that the defendant was soliciting more than 20 of its employees directly, and an additional 14 employees indirectly, to terminate their employment relationships with plaintiff and join a competing company. Plaintiff also argued that defendant was seeking to misappropriate its trade secrets through the solicitation of its employees.

The district court denied plaintiff’s motion for preliminary injunction because plaintiff failed to demonstrate a “substantial likelihood” that plaintiff would prevail on the merits of either of its two claims, for tortious interference or misappropriation of trade secrets. At bottom, the court found that plaintiff had run into court without the evidence to support its claims. The court specifically found that plaintiff introduced no witnesses to testify at the preliminary injunction hearing and only presented two affidavits in support of its application for injunctive relief. One such affidavit was dismissed as “threadbare” in that it only asserted that the allegations of the complaint were true and correct. The second affidavit was made by one of plaintiff’s senior vice presidents who stated that defendant had, directly and indirectly, solicited plaintiff’s employees. Neither affidavit was sufficient to meet plaintiff’s burden to obtain a preliminary injunction, particularly in light of the evidence put forth by the defendant that contradicted plaintiff’s claims.

In contrast to the plaintiff, the defendant testified at the hearing and denied contacting the majority of the employees that plaintiff claimed were solicited by the defendant. The defendant also presented evidence from several of the purportedly solicited individuals who stated they were never contacted by defendant. Based on the foregoing evidence put forth by defendant, which directly contradicted plaintiff’s second affidavit, the court denied the motion for preliminary injunction as it related to tortious interference. Similarly, because no evidence was presented regarding defendant’s use of any trade secrets, the preliminary injunction was also denied as to defendant’s misappropriation claim.

The court’s brief ruling is an instruction to would-be litigants that argument by itself is insufficient to obtain injunctive relief in Florida’s district courts.

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Aimed at eliminating a potential issue regarding the effective date of the earlier statute and to fix certain drafting anomalies identified after previous passage, Georgia's Restrictive Covenant Act  (version 2011), is now law, as the Governor signed the bill as passed by the House and Senate late this afternoon (May 11, 2011). 

The legislature made clear that the impetus for the re-enactment of the Restrictive Covenant Act was the potential issue regarding the effective date.  In Section 1 of the Act, the legislature wrote:

The primary substantive change to O.C.G.A. Section 13-8-56, which is now clarified to show that it applies both to in-term covenants and to post-term covenants.  No substantive changes were made to other sections in the statute as they were in the version passed by the General Assembly and signed by the Governor in 2009. 

The Governor's signing should end a period of uncertainty since the enabling amendment was passed.  (For our previous post on that issue, see here.) 

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A few years after ruling that the Air Force violated the confidentiality clauses of contracts with a government contractor by disclosing its proprietary information relating to the manufacturing process for a conveyor used in assembling smart bombs weighing more than a ton each, the Court of Federal Claims recently determined the contractor’s damages. The court treated the controversy as involving a “lost asset” for which there is no known market, and not a “lost profits” case as the Government contended. Therefore, the appropriate measure of damages was an estimate of the amount a willing buyer would have paid a willing seller for the proprietary information. The proper methodology was to multiply the number of conveyor units the Air Force expected to purchase as of the date of the breach, times the contractor’s bid price, times a reasonable profit, and then to discount for the “risk that a potential buyer of [the] proprietary information would associate with realizing the profit stream deriving from the use of that asset.” Spectrum Sciences & Software, Inc. v. U.S., No. 04-1366C (Court of Fed. Claims, Feb. 14, 2011) (the court’s decision regarding liability is reported at 84 Fed. Cl. 716 (2008)). 

Over the course of several decades beginning in the early 1970s, the Air Force developed and upgraded the conveyors. In 2000, Spectrum Sciences & Software (Spectrum) self-funded an effort, which ultimately failed, to become the principal supplier of new versions of the conveyor. However, Spectrum needed the Air Force’s cooperation in order to refine and test its products. So, the parties entered into a Cooperative Research and Development Agreement (CRADA) which prohibited disclosure by either of them of the other’s proprietary information. Since Spectrum’s confidential data was expressly identified in the CRADA, protection should have been assured. Moreover, when Spectrum thereafter submitted a proposal to build the conveyor and the proposal contained the data, the cover page of the submission “warned, inter alia, that ‘[t]he data in this proposal will not be disclosed outside the Government and will not be duplicated, used, or disclosed in whole or in part for any purpose other than to evaluate the proposal.’” 

Ultimately, Spectrum’s proposal was rejected. However, it was not returned to Spectrum, and contrary to orders the contracting officer opened it and circulated it among a number of Air Force officials. Spectrum’s proprietary information then was used extensively by the Air Force procurement team and was incorporated in a subsequent RFP that was distributed to outside vendors, including Spectrum’s competitors. 

The trial with respect to liability was bifurcated from the damages determination. With respect to liability, in 2008 the Court of Federal Claims held that “the Air Force repeatedly breached the CRADA in failing to protect adequately Spectrum’s proprietary information.” Spectrum, 84 Fed. Cir. at 744. At the subsequent trial on damages, each party presented an expert witness. Spectrum’s expert computed its damages as roughly four times the amount proposed by the Government. The final award was $1.2 million.

A significant reason for the difference between the two valuations resulted from Spectrum’s expert basing damages on the number of conveyor units the Air Force anticipated buying as of the date of the breach (2003) whereas the Government’s expert used the much smaller number that had actually been ordered on the date when the court’s liability ruling was issued (2008). The court observed that the number ultimately ordered was irrelevant because it was a function, in part, of the poor performance by Spectrum’s competitor that had been awarded the contract, something that could not have been known or anticipated several years before when the breach occurred.

With regard to the per unit price, Spectrum’s expert used the company’s initial bid. Although that bid had been rejected, and while “unaccepted offers to sell property, like other unconsummated transactions, generally represent poor barometers of value,” in this instance use of the bid price was appropriate. It was well below the Government’s pre-bid estimate, and it approximated Spectrum’s selling price to the United Kingdom for the same product. The Government’s expert, by contrast, suggested use of Spectrum’s bid for a similar product several years after the breach, but the court disagreed because that bid constituted “a last ditch effort by Spectrum to realize something from its efforts . . . [at a time it was competing] with firms that were being handed its intellectual property gratis.” Thus, that bid was “based upon a price cut triggered by the Air Force’s improper release of Spectrum’s proprietary information [and] would effectively reward defendant for the misconduct of its officers in a way that the law simply does not countenance.” 

With respect to the appropriate profit margin, the court held that a reasonable expectation of profit was the 15% ceiling for federal procurement under a cost-plus-fixed-fee contract (even though this procurement involved simply a fixed-fee contract). Finally, the proper way to compute the discount rate was to take the risk-free interest rate (for short-term Treasuries) plus an equity risk premium, plus or minus factors reflecting the riskiness of investing in stock of a company in Spectrum’s industry, of a company Spectrum’s size, and of a company like Spectrum that had a key-customer dependence factor. Having decided that “defendant appropriated significant benefits for itself and inflicted significant harm on plaintiff by breaching the CRADA,” it is not surprising that substantial damages were awarded.

This opinion is significant for several reasons. First, it is a rare example of a court detailing the method of computing damages in a lawsuit involving misappropriation of proprietary information for which there is no known market. Second, the court clearly differentiated between the valuation of a lost asset and the computation of lost profits.

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On January 13, 2011, in Holmes v. Petrovich Development Company, LLC, a California Court of Appeal ruled that emails sent by an employee to her attorney from a company computer were not privileged. 

Read our Seyfarth Shaw Labor & Employment Department's alert here.   This should be of particular interest in all employee-related cases, including trade secrets and non-compete cases.  As the alert notes:

This case reminds employers of the importance of having a strongly worded and clearly written policy on employee use of employer-provided technology such as computers, email systems and voice mail systems for personal reasons. These policies also should specify that employees have no expectation of privacy in their non-work communications and that all employer-provided technology is subject to monitoring, even if it is password-protected.

Having clear technology policies are also particularly important to protecting trade secrets and other confidential information.

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Georgia moved one step closer this week to amending its Constitution to allow the General Assembly to enact legislation regarding commercially applicable (non-real estate) restrictive covenants.  HR 178  passed out of the House (158 yeas - 12 nays) on Monday, March 22, 2010 and is headed to the Senate.  Word is that it is expected to pass without problem.  The House Resolution provides that it is

A RESOLUTION proposing an amendment to the Constitution so as to allow the enforcement of contracts that restrict competition during or after the term of employment or of a commercial relationship so long as such contracts are reasonable in time, area, and line of business; to provide that courts may modify such contracts to achieve the intent of the contracting parties; to provide for the submission of this amendment for ratification or rejection; and for other purposes.

If passed by the Georgia Senate, the proposed amendment will appear on the general election ballot in November 2010.

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Can a California corporation with virtually no ties to Rhode Island nonetheless be sued in Rhode Island federal court for misappropriation of a Rhode Island company’s trade secrets because the California corporation lured away a Florida employee who had a confidentiality agreement with the Rhode Island company?   Yes, according to the United States Court of Appeals for the First Circuit.  Astro-Med, Inc. v. Nihon Kohden America, Inc., Nos. 08-2334 and 08-2335, 2009 WL 3384786, 158 Lab. Cas. ¶60,887, and 29 IER Cas. 1543 (1^st Cir., Oct. 22, 2009). 

Although the three judges did not agree on the reason for upholding the district court’s jurisdiction over the California corporation and although the non-compete clause in the ex-employee’s employment agreement with his former employer contained an undeniably excessive territorial restriction, the court affirmed judgment against the ex-employee for breach of contract – and against the California corporation for tortious interference with the Rhode Island competitor’s prospective economic advantage. 

Astro-Med is a Rhode Island company that manufactures and sells “instruments for sleep and neurological research and clinical applications of sleep science and brain wave recording and analysis.” It employed Kevin Plant as a trainer and product demonstrator in Rhode Island. His employment agreement contained a comprehensive trade secrets-confidentiality provision as well as a one-year non-compete clause covering a vast territory: the whole of Europe and North America. The agreement recited that it would be governed by Rhode Island law and that all disputes would be heard in a Rhode Island court. 

When Plant asked Astro-Med for a transfer to Florida, Astro-Med agreed and soon promoted Plant to District Sales Manager. In his positions with Astro-Med in Rhode Island and Florida, Plant had access to his employer’s most sensitive proprietary and secret business information. 

Two years following Plant’s transfer, Astro-Med competitor Nihon Kohden America, a California company that had virtually no ties to Rhode Island but was fully aware of Plant’s contract, lured Plant away from Astro-Med to be Kohden’s Florida sales representative. Astro-Med promptly sued both Plant and Nihon in a Rhode Island state court. Both defendants were charged with misappropriation of trade secrets, which is a violation of the Rhode Island Uniform Trade Secrets Act. Astro-Med also accused Plant of breach of contract and Nihon of tortious interference with prospective economic advantage. 

The defendants removed the lawsuit to federal court on the basis of diversity of citizenship. Then, Nihon moved to dismiss the complaint as against it for lack of in personam jurisdiction or, in the alternative, to transfer the case to Florida or California as a more convenient forum, and Plant joined in the venue motion. The district court denied both motions.

Following “especially hard-fought” litigation, a jury returned a verdict in favor of Astro-Med against both defendants and awarded $375,000 in damages. The court added exemplary damages, attorneys’ fees, costs, and sanctions that brought the judgment to $1.16 million. The defendants, of course, appealed from the denial of their motions as well as the judgment. The appellate court affirmed the district court’s rulings.

Precedent in the First Circuit holds that minimum contacts with the forum state means satisfaction of three requirements: relatedness, purposeful availment, and reasonableness. Attacking relatedness, the defendants argued that all activity between Nihon and Plant occurred in Florida or California, and that Nihon never came in contact with Rhode Island in the course of wooing or employing Plant. Further, Nihon had no place of business, assets or employees in Rhode Island. Yet, District Judge Woodcock, sitting in the appellate court by designation, agreed with the trial judge that the relatedness requirement was satisfied by applying the “effects test” since Nihon’s “conduct in Florida and California was a cause of the breach of contract – the actual injury – that occurred in Rhode Island.” 

The “effects test” is commonly applied in determining whether a tort action bears a significant relationship to the forum state even though the tortfeasor, while not physically present there, purposefully engages in acts that cause injury there. The Astro-Med decision is unusual because the court held that the relatedness prong of the jurisdictional analysis was satisfied in Rhode Island on the basis that Nihon’s conduct outside that state caused breach of a Rhode Island contract. 

Judge Woodcock said that there was purposeful availment because Nihon was aware of Plant’s contract at all relevant times and knowingly accepted the risk of a possible lawsuit in Rhode Island by Astro-Med. The reasonableness test was met by litigation against Nihon in Rhode Island because, even though all of the events relevant to Nihon’s relationship with Plant took place in Florida and California, because “the Florida and California witnesses and evidence were heading for trial in Rhode Island” in any event since, indisputably, Astro-Med had a right to litigate with Plant in that state. 

The defendants insisted that the non-compete clause in Astro-Med’s contract with Plant was invalid because its territorial coverage obviously was over-broad. Over-broad? Yes, said the district and appellate courts, but not invalid. The clause could be “partially enforced” by “restricting its territorial application to the state of Florida and to a limited subset of Astro-Med customers.” Moreover, as the “breaching party,” Plant had no cause to complain since he “is being held to a more narrowly circumscribed agreement than the one he signed.”  

In separate opinions, the other two jurists on the appellate panel, Circuit Judges Howard and Lipez, concurred in the result. Judge Howard took exception to Judge Woodcock’s jurisdictional analysis on the ground that it was irreconcilable with First Circuit precedent, while Judge Lipez challenged the legitimacy of that precedent. 

Judge Howard noted that, to justify jurisdiction over an out-of-state defendant, the plaintiff must demonstrate that the claim relates to or arises out of the defendant’s contacts with the forum state. He stressed that Judge Woodcock’s application of the “effects test,” that is, where the injury occurred, to the relatedness prong of minimum contacts is irreconcilable with unequivocal First Circuit holdings that relatedness cannot be based solely on the in-forum consequences of distant conduct. He concluded that Judge Woodcock’s jurisdictional decision nevertheless was correct because a special rule can be applied in a business tort case where the defendant’s conduct was purposeful and where exercising jurisdiction is reasonable. In those circumstances, a court may construe the relatedness requirement “slightly more generously than we might in [other cases, thereby permitting] the best-suited forum to entertain the dispute.” The Rhode Island district court was that “best-suited forum.” 

Circuit Judge Lipez, also concurring, bemoaned what he called “an analytical flaw in our precedent” which seemingly confines the “effects test to the purposeful availment prong of the specific jurisdiction inquiry. It is the illogic of that precedent that has required my concurring colleague to justify our outcome here by raising the possibility of a special relatedness test for business torts.” Rather, according to Judge Lipez, the “in-forum impacts of conduct undertaken outside the forum” – the “effects test” – is properly considered both “in evaluating personal availment [and in] the relatedness inquiry. In my view, therefore, there should be no need for a special category of economic or business tort.”

The Astro-Med case shows that an employer of someone who has a confidentiality and non-compete agreement with a former employer can be forced to defend misappropriation of trade secrets and tortious interference litigation in an inconvenient forum, especially when the prospective employer was aware of the agreement at all relevant times and the former employer is located within the First Circuit. Further, the prospective employer and ex-employee will not necessarily prevail in their challenge to an invalid non-compete clause where a court exercises “blue pencil” authority to modify the clause.

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I start by warning you that this case is old, over 5 years old, in fact.  However, when it arrived in my regular e-mail of case synopses, I thought I would take a look, and given the long, slow holiday week, I thought it might have a nugget to share and to keep in mind as we go into 2010. 

The case, The Newark Group, Inc. v. Sauter, Civ. Action No. C2:01-CV-1247, 2004 WL 5782100 (S.D. Ohio), was pending back in 2004.  This particular opinion, on Defendants' motion to strike Plaintiff's jury demand, was decided in April 2004.  Nevertheless, I think the point the court makes may be helpful. 

The question before the court on Defendant's motion was whether the plaintiff was entitled to a trial by jury on its claims for damages in a trade secrets case under a theory of unjust enrichment.  Defendants argued that under a trade secret case, an unjust enrichment claim was nothing more than a claim in equity, not triable to a jury. 

The court easily rejected the claim under Ohio's Trade Secret Misappropriation Act.  In explaining its decision, the court noted that the trade secret statute provides several methods by which to calculate damages, including unjust enrichment.  And, that the statute

acknowledges that calculating monetary damages for trade secret misappropriation may be difficult to ascertain, it therefore provides specific methods by which to calculate monetary damages.  One method for measuring damages is by calculating the amount of unjust enrichment caused by such misappropriation.  The fact that the statute contemplates different means of calculating damages does not transform the statutorily created legal theory of recovery . . . to become an equitable claim to relief. 

The other two methods of calculating damages:  actual loss caused by the misappropriation and imposition of a reasonable royalty also are not equitable relief, just other methods of calculating the monetary damages available to a successful plaintiff.  Even though the statute refers to "equitable," it means fair.  The damages remedies are legal in nature and thus triable to a jury -- even if difficult to ascertain.

Happy New Year to all!

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Our own Robert Milligan, Kurt Kappes, and Timothy Nelson contributed a chapter, "Trade Secret Audits and Protection Plans," to the November 2009 update of the Continuing Education of the Bar's Treatise Trade Secrets Practice in California. Robert also co-authored a second chapter entitled "Litigation Issues." The book is the preeminent treatise in California on trade secret law, and it is cited by practitioners and courts for its reasoning on trade secret issues.

In Robert, Kurt, and Tim's chapter on trade secret audits, the authors recommend that "companies should ensure that they have adequate trade secret protections in place by conducting a thorough analysis of their protections through a formal trade secret audit." The authors also note that "Experience has shown that companies gain tremendous value by taking a proactive, systematic approach to assessing and protecting their trade secret portfolios through regular trade secret audits."

Robert's litigation chapter identifies issues in trade secret misappropriation cases from the perspective of both the trade secret owner and the accused misappropriator. In analyzing litigation procedure, the chapter identifies preliminary issues, pretrial motions, trial issues, and post-resolution issues. The chapter also addresses other remedies against trade secret misappropriation not based on the Uniform Trade Secrets Act (UTSA). The relationship of trade secret protection under the UTSA and protection under other state and federal statutes is also discussed.

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Because the laws of various states regarding non-compete clauses differ significantly, cases involving these provisions often entail fights at the outset as to the proper venue. The Eastern District of Pennsylvania recently faced just such an issue in CertainTeed Corp. v. Nichiha USA, Inc., Civil Case No. 09-CV-3932-LS, 2009 WL 3540796 (E.D. Pa. Oct. 29, 2009). In that matter, CertainTeed contested with Bruno Demey, its former Director of Manufacturing and Technology, and Nichiha, Demey’s new employer, over whether litigation between the parties should go forward in Pennsylvania or Georgia.

CertainTeed’s headquarters are located in Valley Forge, Pennsylvania, and it has manufacturing plants in Indiana, North Carolina, and Oregon. Its confidential information, trade secrets, and computer servers are located in Valley Forge. CertainTeed hired Demey in March 2003. Demey executed a non-compete agreement with CertainTeed in September 2004. During his employment with CertainTeed, Demey resided in South Carolina and made numerous trips to Valley Forge for meetings.

The timeline of events relevant to the litigation are as follows: 

1.         Demey resigned from CertainTeed on August 20, 2009.

2.         Demey filed a complaint and motion for a preliminary injunction in the Superior Court of Fulton County, Georgia on August 24, 2009. Demey stated that he intended to move to Georgia to work for Nichiha and therefore sought injunctive relief against CertainTeed setting forth: (a) that the non-compete and non-disclosure terms of the non-compete agreement are unenforceable under Georgia law; and (b) that CertainTeed could not take action to enforce the covenants against Demey or otherwise preclude Demey from working for Nichiha.

3.         On August 26, 2009, CertainTeed removed the state court action to the United States District Court for the Northern District of Georgia. 

4.         CertainTeed filed an action against Demey and Nichiha in the Eastern District of Pennsylvania on August 28, 2009. CertainTeed alleged a breach of contract claim and breach of fiduciary duty claim against Demey, a tortious interference with contractual relations claim and an unfair competition claim against Nichiha, and violations of the Pennsylvania, South Carolina, North Carolina, Indiana, and Oregon trade secrets acts, as well as a civil conspiracy claim, against Demey and Nichiha.

5.         On August 31, 2009, CertainTeed requested a preliminary injunction and temporary restraining order.

6.         On September 2, 2009, the Georgia district court granted Demey’s motion for a temporary restraining order and enjoined CertainTeed from enforcing the non-competition covenant in Georgia. On that same date, Nichiha filed a motion to dismiss, transfer or stay the Pennsylvania action.

7.         On September 3, 2009, CertainTeed filed a first amended complaint in the Pennsylvania action, removing any claim to enforce the non-compete covenant in Georgia.

The Pennsylvania district court ultimately decided to deny Nichiha’s motion to dismiss, stay, or transfer and therefore let CertainTeed proceed with its claims in Pennsylvania. In its order, the Pennsylvania court addressed three issues. First, it rejected Nichiha’s claim that the first-filed rule required that the matter progress exclusively in Georgia. The court found that the Pennsylvania action was not “truly duplicative” of the Georgia action because the former included a number of claims that were not present in the latter. The court rejected Nichiha’s assertion that the claims asserted by CertainTeed were mandatory counterclaims in the Georgia action, instead finding that the trade secret claims were not so related to the non-compete claims that separate trials would lead to “substantial duplication of efforts.”

The district court next addressed the issue of venue. It decided that a substantial portion of the events at issue took place in Pennsylvania. Specifically, it cited CertainTeed’s allegations that: (a) Demey and Nichiha would be sharing and utilizing confidential information and trade secrets that originated, and are stored, in Valley Forge, Pennsylvania; and (b) Nichiha and Demey conducted negotiations while Demey was in Pennsylvania.

Finally, the district court answered the question of whether it should transfer the case to Georgia in the negative. After recognizing that a plaintiff’s choice of forum is a “paramount consideration,” the court remarked that CertainTeed’s key witnesses and documents are maintained on servers located in Valley Forge. The court also decided that the Eastern District of Pennsylvania is as convenient as the Northern District of Georgia for non-party witnesses. Thus, for the time being, the case between CertainTeed, Demey, and Nichiha will proceed on two fronts.

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Please join us for the first of our Trade Secrets Webinar Series
Monitoring the Revolving Door:
Protecting Your Trade Secrets in Today's Economy
on November 5, 2009

Seyfarth Shaw’s Trade Secrets, Computer Fraud, and Non-Competes Group is pleased to announce a comprehensive webinar series on trade secrets, computer fraud, and non-competes in today’s economy.

The first webinar will cover best practices for protecting your company’s trade secrets and managing risk from trade secret claims. Employer downsizing and competitive pressures have increased the need for companies to ensure that they have adequate protections in place to safeguard company assets. Rarely does a day go by without a news report of another high profile theft of important data from a company or the loss of key employees to competitors.

Topics slated for discussion in the first of our series of informative discussions include: 

• Identifying trade secrets
• Adequately protecting trade secrets  
• Conducting trade secret "audits"
• Implementing effective trade secrets policies and procedures

Date: November 5, 2009

Time: 
10 am – 11:30 am Pacific
11:00 am – 12:30 pm Mountain
12:00 pm – 1:30 pm Central
1:00 pm – 2:30 pm Eastern

Panelists:

Michael Wexler, Seyfarth Shaw LLP
Kurt Kappes, Seyfarth Shaw LLP
Robert Milligan, Seyfarth Shaw LLP

Register: www.seyfarth.com/events

Next Trade Secrets Webinar Program
Trade Secret Triage and Restrictive Covenant Relief
Wednesday, December 9, 2009 

Once an employee is out the door, the swift and certain reaction of management is essential to protecting the company's valuable business information.  Kate Perrelli and Erika Birg will discuss generally (1) immediate steps to take upon an employee's departure; (2) assessment of potential claims; (3) forensic analysis of electronic clues in support of potential claims; and (4) steps to prepare for litigation, if necessary.

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By Robert Milligan and summer associate Alana Friedman

A federal district court in Oregon recently granted a motion to stay in a dual-state non-compete matter based on the first-to-file rule, even though the two cases were filed only a few hours apart. The first-to-file rule provides that, when similar cases have been filed in different federal district courts, it is within the court's discretion to dismiss the second filed action when it involves the same parties and issues.

In Biotronik, Inc. v. Guidance Sales Corp., 2009 WL 1838322 (D. Or. Jun. 22, 2009), Judge King of the United States District Court for the District of Oregon granted Guidance Sales Corporation’s (“GSC”) motion to stay against GSC’s competitor, Biotronik, Inc (“Biotronik”). The court granted the motion to stay based on the first-to-file rule.  Id. at *3. 

Biotronik and GSC are competitors in the distribution of cardiac rhythm management devices such as pacemakers and defibrillators. Biotronik is an Oregon corporation and GSC is an Indiana corporation with its principal place of business in Minnesota. 

On April 10, 2009, twelve GSC employees ended their employment at GSC and began working at Biotronik. The employees signed agreements with GSC containing non-compete, non-solicit, and non-disclosure provisions. The agreements contained Minnesota forum and choice of law provisions. 

On April 14, 2009, at approximately 12:26 p.m PDT, GSC filed suit in the United States District Court for the District of Minnesota seeking damages from Biotronik and the twelve defecting employees for allegedly breaching their employment agreements. GSC also alleged several employees breached their duty of loyalty as well as their non-disclosure and non-solicitation agreements. GSC further alleged that Biotronik tortiously interfered with GSC's contract with its employees and aided and abetted the employees' breach of their duty of loyalty to GSC. Finally, GSC sought a declaration that its non-compete agreement with each of the twelve employees was valid and enforceable and that Minnesota law applies.

Later that same day, Biotronik filed suit in Oregon state court at approximately 5:11 p.m. PDT (Biotronik apparently e-mailed the complaint to GSC at 3:42 p.m. PDT in advance of the filing). Biotronik sought a declaration that the twelve employees, and one additional former GSC employee also working for Biotronik, were in compliance with all of the “enforceable” restrictive covenants contained in the agreements they signed while employed by GSC. The former employees were not named parties to the action. The case was later removed to the federal district court in Oregon and assigned to Judge King.

On April 29, 2009, the Minnesota federal court entered a stipulated temporary restraining order and order for expedited discovery. The tro required Biotronik to return confidential information and prohibited Biotronik from inducing the employees to solicit other GSC employees to leave. The employees were also prohibited from disclosing or retaining confidential information and soliciting current GSC employees to leave.

GSC then moved to have the federal case in Oregon dismissed or stayed under the first-to-file rule. The court found that the first-to-file rule was applicable because Biotronik and GSC are parties to both actions and the issues are substantially similar since both cases seek to determine the enforceability of the non-competition agreement. Id. at *2 (relying on Pacesetter Sys., Inc. v. Medtronic, Inc., 678 F. 2d 93, 94-95 (9^th Cir. 1982)). 

Although the court noted that rigid application of the first-to-file rule was not required, especially where the cases were filed only hours apart, it nevertheless chose to enforce the rule. The court provided two reasons as to why it was appropriate to grant the stay and allow the Minnesota case to proceed. Id. at *3. First, the Minnesota case would more thoroughly resolve the dispute because it involved more issues than the Oregon case. The court reasoned that Biotronik would still have to defend some of the charges in the Minnesota action even if the Oregon case proceeded. Second, the Minnesota action had progressed more quickly than the Oregon action since the parties in the Minnesota action had already agreed to a temporary restraining order and discovery had already begun.  Id. The court also noted that Biotronik had not relied on any of the exceptions of the first-to-file rule, such as bad faith, anticipatory suit, and forum shopping. Id.(citing Alltrade, Inc. v. Uniweld Prods., Inc., 946 F.2d 622, 628 (9^th Cir. 1991)) (emphasis added).

The court summed up its decision by stating that, “[i]n short, application of the first-to-file rule will promote the interest of judicial economy and avoid the possibility of conflicting judgments.” Id. 

The case serves an important reminder that, depending upon the circumstances, filing suit first can make a difference when it comes to enforcing non-competition and non-solicitation covenants against former employees and their new employers, and vice versa. However, where there is demonstrated evidence of forum shopping, the court may decline to apply the "first-filed" rule.

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In just a matter of weeks, we have a second case (see Consulting Engineers Corp. v. Geometric, Ltd.) in which plaintiffs sought to use a choice of law clause as a forum selection clause. In this case as well, the plaintiffs were unsuccessful. 

A Delaware Court of Chancery recently held that it lacked jurisdiction over a non-resident against whom enforcement of a non-competition agreement was sought. See Mobile Diagnostic Group Holdings v. Suer, __ A.2d __, Case No. 4298, 2009 WL 763405 (Del. Ch. Mar. 24, 2009).

The Plaintiffs were a series of related entities largely organized in the State of Delaware. The Defendant, Robert Suer, was a sales professional and a resident of the State of California. Plaintiffs claimed that Suer had negotiated and executed a non-competition provision with the Plaintiffs as part of the Purchase Agreement concerning Plaintiffs’ acquisition of the company for which Suer worked, and they sought to enforce its provisions against him in Delaware Chancery Court. In turn, Suer moved to dismiss the complaint for lack of personal jurisdiction, pointing out that he had never resided in or even been to Delaware and had undertaken no acts or negotiations in Delaware.

The Chancery Court considered two arguments by the Plaintiffs for why Suer was subject to jurisdiction in Delaware. First, the Plaintiffs argued that he had consented to jurisdiction because, in the Purchase Agreement, the parties had agreed that Delaware law controlled service of process. The Chancery Court rejected that argument, noting that such a clause only indicates the choice of law for evaluating service, it does not establish jurisdiction. Furthermore, another clause in the Purchase Agreement concerning equitable remedies contemplated jurisdiction “in any court of the United States or any state thereof,” but did not demand it in any particular location.

Second, the Chancery Court considered Plaintiffs’ argument that Suer’s negotiations had opened him up to specific jurisdiction because their claim arose out of a “specific jurisdictional act.” The Chancery Court rejected this argument as well because the mere execution of a contract with a Delaware entity does not subject a party to jurisdiction in Delaware, and Suer had done no more than that. In this regard, the Chancery Court considered the case of General Motors (Hughes) Shareholder Litigation, Case No. 20269, 2005 WL 1098021 (Del Ch. May 4, 2005), where specific jurisdiction premised on a complex, negotiated agreement ultimately did result in jurisdiction, but it concluded that too many distinctions existed to apply it as Plaintiffs had requested. Most critically, unlike in General Motors, Suer did not participate in the selection of Delaware as a forum, even though Plaintiffs had created Delaware entities to consummate the Purchase Agreement.

This decision demonstrates again the need for companies entering into restrictive covenants either to bring actions in a forum in which there is no doubt as to jurisdiction or to ensure the proper forum selection and jurisdictional waiver clauses exist in the agreements themselves.

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The United States Court of Appeals for the Fourth Circuit recently affirmed the denial of jurisdiction by the United States District Court for the Eastern District of Virginia over two companies foreign to the Commonwealth of Virginia. See Consulting Engineers Corp. v. Geometric, Ltd., --- F.3d ---, 2009 WL 738165 (4th Cir. Mar. 23, 2009). Consulting Engineers Corporation (“CEC”) sued Geometric Limited and another company, Structure Works, LLC, in Virginia, for claims arising out of Geometric’s hiring of one of CEC’s critical employees.

Structure Works, a Colorado corporation, hired Geometric, an Indian corporation, to handle a software design project in India. Structure Works suggested that CEC assist Geometric with one aspect of the project, which the two companies agreed to pursue. CEC and Geometric therefore entered into a non-disclosure agreement (NDA I), which included a restriction on recruiting certain employees from the other. CEC also negotiated a separate non-disclosure agreement (NDA II) with Structure Works. In each of these two negotiated agreements, each of the companies, through e-mail and a few telephone calls, negotiated from their respective home state or country (Virginia for CEC, Colorado for Structure Works, and India for Geometric). NDA II contained a choice of law and forum selection clause provision naming Colorado. NDA I contained only a choice of law provision naming Virginia.

After executing the NDAs, the parties held one face-to-face meeting in India, after which time negotiations continued for a few months before Structure Works and Geometric ultimately went their separate way from CEC. During those few months, Geometric had hired away from CEC one of the employees specifically listed in NDA I as protected from solicitation by Geometric. CEC eventually sued both Structure Works and Geometric in Virginia State Court for claims relating to the hiring away of the employee. Specifically, it alleged tortious interference, conspiracy to injure another in trade, and violation of Virginia’s Uniform Trade Secrets Act. The Defendants removed the case to federal district court and then moved to dismiss for lack of personal jurisdiction, a motion granted by the district court.

CEC appealed to the Fourth Circuit, arguing that the exchange of e-mails and telephone calls was sufficient to establish “minimum contacts” with Virginia, where it was located and where it brought the action, in part because of the heavy reliance on technology in the negotiation and execution of the NDAs. CEC also argued that the choice of law provision in NDA I indicated that the Defendants had agreed to jurisdiction in Virginia. Finally, CEC argued that the “effects” of the allegedly tortious action (hiring away the employee in India) occurred in Virginia. For these reasons, CEC argued, the district court had erred in granting the motion to dismiss. In response, the Defendants pointed out that they had not been to Virginia, they did not operate in Virginia, the telephone calls were limited, and the e-mails insufficient to establish specific jurisdiction over them. Likewise in favor of a lack of jurisdiction was the fact that the choice of law provision in NDA I was not a forum selection clause and therefore only persuasive at best as to jurisdiction.

The Fourth Circuit had little trouble agreeing with the Defendants. It relied on all of the factors above in refusing to find that the district court had erred in rejecting specific jurisdiction over the Defendants. Notably, the Fourth Circuit considered the emphasis on technology to be a red herring, noting that “technology cannot eviscerate the constitutional limits” on a state’s jurisdiction. It also recognized that India was the only place in which the alleged conduct occurred, the only place the parties had met, and the only place in which the subject matter of the agreements would be pursued. Thus, the Fourth Circuit affirmed the motion to dismiss.

In sum, the Fourth Circuit’s decision held that negotiations with a company located in the forum state does not alone subject a company to jurisdiction in the forum state. Moreover, e-mails and telephone calls are not themselves sufficient to satisfy jurisdiction because technological means of communications are entitled to no special considerations in determining jurisdiction. Finally, the Fourth Circuit recognized a distinction between choice of law provisions and forum selection clauses: the former concerns which law is to be applied in the lawsuit and the latter where the lawsuit is to be brought.

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By Tim Nelson and Robert Milligan

The recent decision of California’s Third Appellate District in Wallis v. PHL Associates, Inc. underscores the importance of following the terms of a protective order in trade secret litigation and acting cautiously when handling materials that arguably may be protected under a protective order.

In Wallis, the trial court imposed sanctions of $43,678.42 against an attorney and her clients. The sanctions arose out of alleged conduct by the attorney and her clients in response to a declaration and accompanying documents that opposing counsel attempted to filed under seal pursuant to a protective order, but which inadvertently ended up in the court’s public file.

Opposing counsel filed an attorney declaration with over 800 pages of documents attached, which included his client’s alleged trade secrets. The caption for the declaration indicated that it was to be filed under seal. At the bottom of each page of the declaration was a footer that indicated that it was to be filed under seal. In addition, some of the individual pages of documents that were attached were marked as confidential. The declaration was placed in an envelope and sealed, and a copy of the first page of the declaration was affixed to the envelope that indicated it was to be filed under seal. Notwithstanding the caption that the confidential declaration and exhibits thereto were to be filed under seal, the filing was made available to the public.

According to the appellate court’s decision, the sanctioned attorney discovered that the confidential declaration was in the court’s public file. She claimed she notified opposing counsel of the problem, but according to the appellate court her only evidence was a cryptic reference in an opposition brief. The attorney also claimed that she spoke to someone at the State Bar ethics hotline regarding the issue, although according to the appellate court, there was no indication that she discussed the protective order. 

The attorney allegedly notified her client that the declaration was in the court’s public file. The client then sent three people to view the public file and to take notes so that an argument could be made that the alleged trade secrets had been publicly disclosed. The client also had a copying service make a digital copy of the confidential declaration. The client apparently had third parties view the declaration to shield the client from violating the protective order but to make the argument that the trade secrets had been disclosed. There was also evidence that the confidential declaration had been posted on the internet, but emails that indicated where the declaration was posted had been deleted by one of the clients.

On appeal, the attorney and her clients argued that the trial court abused its discretion because the circumstances showed that they believed the declaration was not entitled to the protection of the protective order and that the declaration did not contain trade secrets. They also argued that the sanctions order was premature because there had yet to be a determination that the information attached to the declaration constituted protectable trade secrets.

The appellate court affirmed the imposition of sanctions. The appellate court found that the attorney’s actions were frivolous and were taken in bad faith. The appellate court found that the totality of the circumstances made it clear, and would have made it clear to any reasonable attorney, that the confidential declaration was to be filed under seal and was protected by the protective order. Furthermore, if the attorney truly believed that the declaration was not confidential, her remedy was to bring the issue to the court’s attention and have the court make the determination, according to the appellate court. The appellate court also found that the actions taken by the clients were frivolous and were taken in bad faith.

The Wallis decision makes clear the need to honor the terms of protective orders in trade secret cases and to act cautiously when handling materials that may arguably be protected under a protective order. Parties and their counsel who fail to do so risk the imposition of sanctions.

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In this breach of employment contract and misappropriation of trade secrets case, plaintiff moved to compel production of e-mails from defendant’s personal Yahoo! account. 

Plaintiff contended that Defendant used this specific e-mail account to engage in the activities upon which this entire lawsuit is based. Defendant claimed that he could not produce these e-mails, because they had been destroyed by Yahoo!. However, the defendant offered only a copy of a generic response from Yahoo! about deactivating accounts.  The court declined to accept defendant’s explanation that production was "impossible," particularly given the important evidentiary value of the e-mails and the "feeble offering" by defendant in support of the contention. Indeed, the Court indicated that it "will not accept Defendant's position that [defendant] cannot produce these emails until assurance is given from an executive at Yahoo! responsible for such tasks that this request is indeed impossible."

In addition, the court held that defendant's representation that he was being "completely truthful" when he did not identify the account, because he knew it would be impossible to ultimately produce these e-mails, to be sanctionable: "It will figure largely into the sanctions ultimately awarded in this matter if it is learned that Defendant's failure to identify this account earlier is the cause of the alleged impossibility."  The court stated the particular sanctions awarded would depend on the outcome of defendant's efforts to obtain the documents, and what was revealed by these efforts as to defendant's actions, if any, that resulted in spoilation of evidence or other more serious discovery violations.

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Goodyear Tire & Rubber Co. v. Schalmo, 2008 Wl 2697248 (Fla. App. 2 Dist. July 11, 2008)

The District Court of Appeal for the Second District in Florida confirmed that, no matter how unpleasant the task, when faced with an issue regarding whether documents are covered by Florida's Sunshine in Litigation Act, § 69.081, the trial court must conduct an in camera inspection of the documents and cannot enter a blanket confidentiality order. 

In Goodyear, the tire company refused to produce confidential and trade secrets documents in connection with a products liability lawsuit filed against it by individuals injured when the tire (manufactured by Goodyear) of a motor home separated and caused an accident. Goodyear argued that the Act required the court to conduct an in camera inspection of each of the documents before entering a confidentiality order and requiring production. 

Under the Florida Sunshine in Litigation Act,

            Upon motion and good cause shown by a party attempting to prevent disclosure of information or materials which have not been previously been disclosed, including but not limited to alleged trade secrets, the court shall examine the disputed information or materials in camera. If the court finds that the information or materials or portions thereof consist of information concerning a public hazard or information which may be useful to members of the public in protecting themselves from injury which may result from a public hazard, the court shall allow disclosure of the information or materials. If allowing disclosure, the court shall allow disclosure of only that portion of the information or materials necessary or useful to the public regarding the public hazard.

Goodyear, 2008 WL 2697248, *2 (quoting Fla. Stat. § 69.081(7)). The trial court, concerned about the inability to review and understand voluminous technical documents, developed its own procedure by which it protected all confidential materials through a blanket order and directed the parties to resolve the other issues regarding what would be protected, bringing back to the court only those issues the parties themselves could not resolve. The appellate court found that this procedure violated the judge’s duties to act as the gatekeeper of the Act. Id. at *3.

The appellate court went on to recognize that, although a trial court may still prevent public disclosure of trade secrets, it cannot do so if those alleged trade secrets relate to a public hazard.  If the trade secret material is otherwise relevant and discoverable (but not relating to a public hazard), it can be protected by an appropriate confidentiality order. 

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Judge Leoni Brinkema (E.D. Va.) sentenced Gregg W. Bergersen to almost five years in prison for his role in providing secret information about U.S.-Taiwanese military relationships to a Chinese spy.   According to Matthew Barakat, writing for the Associated Press, View Article, the Chinese spy (Tai Kuo) fronted as a New Orleans furniture salesman who was aligned with Taiwan.  Instead, Barakat reports, it turns out that Kuo was forwarding the information to China.   Bergersen stated in court that he believed he was helping Taiwan develop a new air defense system and did not turn over the information with a motive for financial gain, a claim that federal prosecutors challenged.

According to the article, Kuo has pleaded guilty to espionage, and sentencing for him should occur later this month.

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A company's trade secrets may be some of its most important assets.  Recent headlines underscore their importance, and vulnerability:

1. Recently, an employee was arrested at the airport and over 1,000 company proprietary documents containing trade secrets were seized that the employee was attempting to transport with her to her new job.
   
2.  A national retailer recently was hit with a $21.5 million verdict after a jury found the retailer liable for stealing the design of a popular home improvement tool. 
   
3. A former employee recently pleaded guilty in a U.S. District Court in California to stealing proprietary technologies from his former employer and selling or offering them for sale to foreign governments and military contractors.

A survey of companies estimated that in just one year, companies likely were to have lost as much as $53 to $59 billion dollars in proprietary information and intellectual property through theft and misappropriation.  Seeking trade secret counseling and an audit can assist clients to determine best practices to help protect their most important assets.

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In April 2007, six Quizno's franchisees filed a class action in federal court in Chicago against the franchisor, related entities, and some individuals. Quizno's is a fast-food, toasted sandwich restaurateur. The plaintiffs alleged that they had been the victims of RICO, antitrust, and other statutory violations, as well as common law causes of action, in connection with Quizno's franchise agreement. Significantly, they claimed that they became franchisees as a result of various oral misrepresentations and material omissions.

The district court dismissed the federal law counts for failure to state justiciable causes of action. Siemer v. Quizno's Franchise Co. LLC, No. 07 C 2170 (N.D. Ill., Mar. 31, 2008) (Pallmeyer, J.), relying in large part on Westerfield v. Quizno's Franchise Co., 527 F. Supp. 2d 840 (E.D. Wis. 2007) (Griesbach, J.). Judge Pallmeyer's 18-page Memorandum Opinion and Order details the disclaimer and warning provisions of Quizno's Uniform Franchise Offering Circular as well as the franchise agreement included within the Offering Circular, which protect the franchisor from liability for alleged misrepresentations and omissions. In this regard, the decision in Siemer is recommended reading for (a) attorneys defending franchisors against claims similar to those made by the franchisees in this case, and (b) draftspersons of such documents regarding how to minimize exposure to those claims.

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House v. Commonwealth of Kentucky, No. 2007-CA-000417-DG, 2008 WL 162212 (Ky. Ct. App. Jan. 18, 2008).

The Kentucky Court of Appeals recently allowed a criminal defendant access to the source code for the breathalyzer device used to develop probable cause for his arrest for operating a motor vehicle under the influence of alcohol with the aggravating factor of a level over 0.18. The lower court quashed the subpoena on motion by the Commonwealth of Kentucky and CMI, Inc. The criminal defendant, Lennie House, appealed, and the Circuit Court had affirmed.

At a hearing on the Commonwealth’s and CMI’s motion to quash the subpoena, House produced a computer software engineering expert who testified that if he had the source code for the device, he could examine the code for any bugs or flaws that might have produced an incorrect blood alcohol reading. However, the district court granted the motions to quash and the circuit court affirmed.

But the Kentucky Court of Appeals reversed, finding that the lower courts erred because the Commonwealth and CMI failed to make the required showing under the Kentucky Rules of Criminal Procedure that the subpoena was unreasonable or oppressive. The court noted that the request is not unreasonable because its purpose is to challenge the validity of the readings produced by the Intoxilyzer 5000, which is anticipated will be used at trial by the Commonwealth to prove the drunk driving charge and the aggravating factor. In addition, the court found that the request for the source code is not oppressive because the code can be produced on a CD-ROM with minimal expense.

The Court of Appeals rejected the argument asserted by the Commonwealth and CMI that the computer code is a protected trade secret and that this should weigh against disclosure. In reaching this conclusion, the court noted that House had indicated his willingness that he, his attorney, and his expert witness would enter into a protective order barring sharing of the code or its contents with any non-party. Moreover, the court observed that the protective order may also include language requiring that any copies or work product generated by House’s expert be returned to CMI upon completion of his review of the code. Finally, the court noted that the possibility of civil and/or criminal penalties for violating the protective order “should obviate any concern CMI may have with respect to protection of its source code.”

This is not the first court decision to reach the conclusion that a criminal defendant has a right to inspect the source code for a breathalyzer device. For example, in a similar case in 2007 the Minnesota Supreme Court ordered production of the source code for the Intoxilyzer device, relying in large part on the existence of a contract between the state and CMI specifying that the state owned the source code for the device and on the express language of the RFP in which CMI agreed to provide to attorneys representing individuals charged with crimes using evidence from the device any information necessary to comply with a court order. See Underdahl v. Commissioner of Public Safety, 735 N.W.2d 706, 712-13 (Minn. 2007). Arguing that the source code is confidential, copyrighted and proprietary, the state had asked for a “writ of prohibition” barring the source code from being released. But the court rejected that request on the basis that “[a] writ of prohibition is an extraordinary remedy and is only used in extraordinary cases,” and the facts here did not merit such a remedy. See id. at 710.

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