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

By Rebecca Woods

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

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

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

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

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By Robert Milligan, David Monachino, and Jeffrey Oh

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

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

Effects of the Act on Trade Secret Protection in New Jersey

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

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

Variations between the UTSA and NJTSA

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

Advice for Employers

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

Questions for the Future

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

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By Robert Milligan and Gary Glaser

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

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

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

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

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

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

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

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

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

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

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

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By Justin Beyer

In a matter of first impression, Judge William Standish of the Western District of Pennsylvania ruled in Best Medical Int’l, Inc. v. Spellman, 07-cv-01709-WLS, 2011 U.S. Dist. LEXIS 147853 (W.D. Pa. Dec. 22, 2011), that, pursuant to the Pennsylvania Uniform Trade Secrets Act (“PUTSA”), a defendant may recover attorneys' fees against a plaintiff where the plaintiff filed an objectively specious misappropriation of trade secrets claim and subsequently engaged in subjective misconduct during the course of discovery. 

At issue in this case was Best Medical’s claims that four of its former employees (Hill, Spellman, Scherch, and Bittman) misappropriated Best Medical’s trade secrets and provided those trade secrets to Accuray, Inc. Accuray and Best Medical are competitors in the radiation treatment planning and image guided therapy systems industry. 

In December 2007, Robert Hill filed suit against Best Medical claiming Best Medical denied him severance benefits after his job responsibilities were reduced due to corporate downsizing. Following what Hill claimed was his constructive discharge, Hill went to work for Accuray, Inc.

Best Medical counterclaimed, alleging, among other claims, that Hill misappropriated Best Medical’s confidential and trade secret information.   In March 2008, Hill and Best Medical agreed to a stipulated motion for permanent injunction. Included amongst the terms of the permanent injunction, Hill agreed to return all Best Medical documents in hard copy form and submit his electronic storage devices to forensic examination, permit an image of his computer to be taken, and permit the alleged trade secrets and confidential information to be deleted from his computer. At no point during the remainder of the litigation did Best Medical claim that Hill violated the stipulated permanent injunction in any way. 

In October 2008, Best Medical filed suit against Spellman, Scherch, and Bittman (the “Spellman Defendants”), all former Best Medical employees, and Accuray, alleging breaches of contract, tortious interference, and violations of PUTSA. Like Hill, the Spellman Defendants and Best Medical entered into a stipulated permanent injunction, also requiring the Spellman Defendants to turn over their electronic devices for review, imaging, and deletion of Best Medical’s documents found on the computers.  

The parties then engaged in nearly a year of settlement negotiations, which eventually culminated in Best Medical filing another complaint against Hill, the Spellman Defendants, and Accuray. In May 2010, Accuray filed a series of motions to compel seeking a definitive answer from Best Medical as to the trade secrets Best Medical claimed had been misappropriated and which Best Medical further claimed Accuray was using to Best Medical’s detriment. 

Over the course of another year, Best Medical stonewalled on answering that question, until two 30(b)(6) deponents, presented by Best Medical, conceded that Best Medical: (a) could not identify the trade secrets that Accuray allegedly misappropriated; (b) had not investigated its misappropriation claim prior to filing suit; and (c) did not have any evidence of Accuray misappropriating and improperly using Best Medical’s trade secrets.

Following the court’s grant of summary judgment in October 2011, Accuray and the Spellman Defendants sought recovery of attorneys’ fees spent defending the misappropriation claims based on three theories:

(1)        Best Medical violated PUTSA, 12 Pa. C.S. § 5305(1), which requires that “attorneys fees, expenses and costs [may be recovered by] the prevailing party: (1) if a claim of misappropriation is made in bad faith;”

(2)        Best Medical violated 28 U.S.C. § 1927, which requires that: “Any attorney or other person admitted to conduct cases in any court of the United States … who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct;” and

(3)        that the court possessed the inherent power to sanction Best Medical and award attorneys fees to Accuray and the Spellman Defendants due to Best Medical’s litigation conduct.

Finding no Pennsylvania case interpreting 12 Pa. C.S. § 5305(1), the court relied heavily on other states’ interpretation of their own versions of the Uniform Trade Secrets Act. The court decided to follow and apply a two-part test rendered by the California Court of Appeal in Gemini Aluminum Corp. v. Cal. Custom Shapes, Inc., 95 Cal. App. 4th 1249, 1262 (Ct. App. 2002). In Gemini, the California Court of Appeals ruled that, to merit an attorneys fee sanction against the plaintiff, the defendant must prove: (1) the “objective speciousness of the plaintiff’s claim;” and (2) “subjective bad faith in brining or maintaining the claim.” 2011 U.S. Dist. 147853, at * 10, citing Gemini, 95 Cal. App. 4th at 1262. 

Defining “objective speciousness,” the Best Medical court cited to decisions from the District of Maryland and the Southern District of California, in which those courts held that “objective speciousness exists where there is a complete lack of evidence supporting plaintiff’s claims.” 

The Best Medical court also defined what constituted “subjective misconduct” finding it “exists where a plaintiff knows or is reckless in not knowing that its claim for trade secret misappropriation has no merit.” 2011 U.S. Dist. LEXIS 147853, at *12.

After also considering a defendant’s burden of proof to show that attorneys’ fees should be awarded under 28 U.S.C. § 1927 or the court’s inherent power, the court analyzed why an award was appropriate pursuant to PUTSA. The court found that Best Medical acted in bad faith, and relied heavily on three salient facts; namely:

(1)        that Best Medical possessed images of the Spellman Defendants’ computers since November 2008, but failed to analyze those computers;

(2)        that an affidavit from Best Medical’s president, which indicated that Best Medical was: (a) always ready, willing and able to assist counsel in the prosecution of this matter; (b) monitored its counsel’s activities throughout the litigation; and (c) identified to counsel at the outset of the litigation the trade secrets at issue; was essentially unreliable and not supported by the facts of the case; and

(3)        that Best Medical’s 30(b)(6) witness admitted in May 2011 that Best Medical did not investigate its misappropriation claims thoroughly before it filed its complaint against Accuray and the Spellman Defendants.

The court concluded that Accuray and the Spellman Defendants were entitled to all of their attorneys’ fees incurred as a result of defending the PUTSA claims. The court did not reach the other arguments based on 28 U.S.C. § 1927 or the inherent powers of the court.

While the reach of this decision is not yet apparent, it is important to note that Pennsylvania now joins other states, including, California, Maryland, Minnesota, and Michigan, in finding that a defendant may recover attorneys' fees where a plaintiff brings or maintains a misappropriation claim in bad faith. See 2011 U.S. Dist. LEXIS 147853, at * 10-12. As seen from the above factual recitation, however, it also appears that a plaintiff must act quite egregiously and lack any evidence of misappropriation before a Pennsylvania court will award attorneys' fees.  

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By Justin Beyer

On January 17, 2012, Yuan Li, a former research scientist with Sanofi Aventis, pled guilty to one count of violating 18 U.S.C. § 1832 (the section of the Economic Espionage Act dealing with commercial economic espionage). Li, a Chinese national, was residing in Somerset, New Jersey at the time of her incarceration. 

Sanofi Aventis is a global healthcare company, headquartered in Bridgewater, New Jersey. Sanofi owns and manufactures prescription drugs such as Allegra, Plavix, Copaxone, and Ambien. In addition to these well-known pharmaceutical labels, Sanofi also develops, manufactures, and sells other prescription and over-the-counter pharmaceuticals. 

According to the criminal complaint, to protect its trade secrets and prevent competitors from improperly receiving or accessing such information, Sanofi requires its employees to sign confidentiality agreements and invention assignment agreements, repeatedly informs and reminds its employees of the confidential nature of Sanofi’s business, restricts access to its facilities, requires researchers to log in lab notebooks and maintain them under lock and key, maintains an encrypted document management system, and restricts access to its computer systems through advanced computer security measures. 

To those ends, in August 2006, when Sanofi hired Li as a medicinal chemist (later promoting her to a research scientist), it required Li to sign a “Conflict of Interest” statement, a certificate acknowledging her receipt of Sanofi’s corporate ethics and code of business conduct, an Inventions Agreement, and a document entitled “Trade Secrets and Confidential Information.” Additionally, Li confirmed to Sanofi that she “never materially participated in any illegal act relating to the development and approval of drug products, including, but not limited to, submitting false data to governmental authorities and falsifying records that are maintained by pharmaceutical and consumer health companies.” 

Despite these protections and Li’s promises, according to the government, starting sometime in or about October 2008, Li improperly accessed Sanofi’s internal database and began downloading Sanofi’s proprietary chemical structures. During that same time frame, Li was a 50 percent partner of Abby Pharmatech, LLC, a Delaware limited liability corporation, which purportedly served as a United States subsidiary to Chinese chemical producer, Xiamon KAK Science & Technology Co. Ltd. 

Over a nearly three-year period, according to the government, Li engaged in an elaborate scheme in which she improperly accessed, downloaded, transferred the downloaded information to her personal home computer by either emailing the information to her personal e-mail address or by using a USB thumb drive, and attempted to pass off Sanofi’s proprietary chemical compounds as those of Abby Pharmatech. According to the criminal complaint, Sanofi became aware in May 2011 that, on Abby Pharmatech’s website, Abby Pharmatech was advertising chemical compounds that belonged to Sanofi, including a number which Sanofi had not yet publically disclosed. 

During the course of the FBI’s investigation into Li’s illegal activities, Sanofi representatives verified that Abby Pharmatech registered over 6000 Sanofi proprietary chemical structures as Abby Pharmatech property. Moreover, in forensically examining the laptop computer Sanofi issued to Li, it was discovered that Li possessed copies of Abby Pharmatech’s 2010 tax return. Most incriminating, however, Li possessed on her laptop a document entitled “AbbyPharmatech,” which contained a list of 144,000 compounds, including compounds that were categorized with Sanofi internal control numbers. Those internal control numbers could not have been discovered but for unauthorized access to Sanofi’s internal databases. 

As a condition of her guilty plea, the United States Attorney, District of New Jersey, agreed not to prosecute Li for her theft of chemical compounds occurring between January 1, 2010 and July 27, 2011. Despite her plea and the U.S. Attorney’s agreement not to charge and prosecute her for certain thefts, Li still can be sentenced for a maximum of 10 years imprisonment and up to a $250,000 fine. Also, contingent with her plea, Li agreed to pay Sanofi a total of $131,000 in restitution damages. Judge Joel A. Pisano received and accepted the guilty plea. Pursuant to the Sentencing Reform Act, 18 U.S.C. §§3551-3742, Li’s sentence is within the sole discretion of Judge Pisano. Any immigration proceedings and potential removal from the United States will be handled through a separate proceeding. 

This case highlights that, even when a company has sophisticated practices in place to protect its trade secrets, it must remain constantly vigilant in its efforts to prohibit misappropriation of those secrets. In instances like this and where a company’s trade secret is essentially its lifeblood, a company should consider using additional preventive means to prohibit employees from stealing trade secrets, such as configuring the operating system to restrict access to external devices, thus, restricting the ability to download information to an external device; blocking a user from uploading information to a web-based site; and/or utilizing software that blocks employees from sending emails to certain domain names. 

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By Robert Milligan and Joshua Salinas

We have compiled a list of the top 2011 developments/headlines in trade secret, computer fraud, and non-compete law. While large jury verdicts and criminal prosecutions garnered a significant amount of attention, there were also a number of significant state and federal court decisions that have altered the landscape of trade secret, computer fraud, and non-compete law in various jurisdictions. For example, in Illinois, the state supreme court broadened the discretion and increased the flexibility of trial courts in determining the reasonableness of non-competes.  Also, in Texas, the state supreme court made it easier to enforce non-competes by opening the door for other consideration (apart from access to trade secrets) to serve as consideration for a non-compete.  On the federal front, the Ninth Circuit in United States v. Nosal found that an employee may be liable under the Computer Fraud and Abuse Act (“CFAA”) for violations of an employer’s computer use policies (the court has since granted en banc review and heard oral arguments in December 2011) and there remains a circuit split on the applicability of the CFAA in the workplace.

There have also been significant legislative efforts to modify trade secret, computer fraud, and non-compete law in various jurisdictions. For instance, in Georgia, the Restrictive Covenant Act illustrates the state’s fundamental change in public policy toward enforcement of restrictive covenant agreements, including non-competes and non-solicits.  In New Jersey, the state recently adopted its own version of the Uniform Trade Secrets Act. In Massachusetts, a non-compete reform bill has undergone significant review, comment, and revision regarding standing, attorneys’ fees, and consideration for non-compete agreements. On the federal front, the Patent Reform Act was passed and there have also been efforts to modify the CFAA.   

In 2012, we expect to see more cases involving the intersection between cloud computing/social networking and trade secrets. With the proliferation of electronic information used to conduct business and as more data is housed remotely and outside company servers, courts have begun addressing the extent to which companies retain ownership of such information and can sue for the misuse of such information.   

We also expect to see more cases addressing trade secret preemption and the protection (or lack thereof) of confidential information.  Some courts have also continued to insist on greater specificity in pleadings on trade secret claims and the strict identification of alleged trade secrets in discovery by plaintiffs to frame the issues in dispute.  Disputes concerning the enforcement of forum selection and choice of law provisions in non-compete disputes will also remain prevalent. Lastly, we also expect to see more cases involving the interplay between employee confidentiality obligations and employees’ rights under the Sarbanes-Oxley Act.

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

1.         Significant State Supreme Court Decisions

            Several significant state supreme court decisions have addressed the construction of enforceable non-compete provisions. The Virginia Supreme Court required employers to demonstrate that the non-compete is no broader than necessary to protect the employer’s “legitimate business interests” and does not “unduly burden” the ex-employee’s right to earn a living. The Texas Supreme Court continued the state’s movement toward non-compete enforceability and for the first time approved of something other than providing an employee confidential business information as appropriate consideration for a non-compete agreement (i.e. stock options). The Illinois Supreme Court also made non-compete enforceability easier by granting Illinois trial courts significant discretion to consider “the totality of the facts and circumstances of the individual case” when assessing whether a “legitimate business interest exists.”   The Idaho Supreme Court found that a two-year non-compete agreement executed in connection with the sale of a business was enforceable under California law and could be narrowed within a scope that was reasonably necessary to protect the goodwill of the sold business. The Montana Supreme Court ruled that an employer will not be permitted to enforce a non-compete provision in an employment agreement where the employer was solely responsible for ending the employment relationship. The Oklahoma Supreme Court recently held that non-compete agreements are reviewable by a court, even if the agreement contains an arbitration clause and there is no claim as to the validity or enforceability of the arbitration clause, and further held that provisions that are contrary to Oklahoma’s statutory limitations on non-competes may result in the court invalidating the entire non-compete.

2.         Expanded Role Of The International Trade Commission in Preventing Foreign Trade Secret Theft

            The Federal Circuit’s decision in TianRui Group Co. v. International Trade Commission confirmed that the ITC has jurisdiction to address trade secret claims, even when the alleged wrongful conduct occurs in a foreign country. The court found that the ITC has jurisdiction through section 337 of the Tariff Act, which prohibits “[u]nfair methods of competition and unfair acts in the importation of articles … into the United States….” U.S. companies now have a meaningful remedy to address concerns about the extraterritorial protection of trade secrets.

3.         Continuing Developments in Legislation

            New Jersey, one of the four remaining states that had not adopted some or all of the provisions of the Uniform Trade Secrets Act (UTSA), recently passed the state’s own version of the UTSA. New Jersey’s Trade Secrets Act was recently signed into law on January 9, 2012. 

            Senators Kohl (D-WI) and Coons (D-DE) also introduced a federal bill in October 2011 that would create a new federal private right of action for trade secret owners.

            Georgia passed the Restrictive Covenant Act. The Act has three significant implications: (1) it creates statutory presumptions that restraints two years or less in duration are reasonable in time and restraints more than two years are unreasonable; (2) it eases the drafting requirements for specific restrictive covenants; and (3) permits Georgia courts to “blue pencil” (i.e. partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under existing Georgia case law. At least one Georgia court has interpreted the new Act as providing courts discretion to re-write restrictive covenants to make them enforceable, rather than merely providing the authority to remove overbroad covenants.

            The Massachusetts legislature heard testimony in September 2011 regarding a non-compete bill that aims to modify the common law pertaining to non-compete agreements and to simultaneously afford greater procedural protections to those affected by the contractual restrictions on mobility in employment. Changes include the elimination of a threshold that confined the use of non-compete agreements to employees earning over $75,000 per year in favor of a requirement that courts more broadly consider the economic impact on an affected employee before deciding whether to enforce a non-compete agreement. Bill 2293 also provides for mandatory attorneys’ fees to employees.  However, an employer can avoid paying fees if the court determines that it took “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable.”  Finally, the new bill would permit the signing of mid-employment non-compete agreements so long as “fair and reasonable” consideration is provided to the affected employee. To date, the Massachusetts legislature has yet to approve the proposed bill.

            There have also been efforts to amend the CFAA. Proposed amendments to the CFAA that would restrict the definition of “exceeds authorized access” have recently been the subject of debate. U.S. Senator Patrick Leahy (D-VT) proposed a bill that excluded violations of computer use policies and terms of service agreements from “exceed[ing] authorized access” in violation of the statute. The Department of Justice has taken a pro-employer stance and objected to CFAA changes, while emphasizing the importance of holding employees liable for violations of computer use policies to protect our nation’s economic security. 

            Additionally, the American Invents Act of 2011 was signed into law. The America Invents Act of 2011 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.

4.         Significant Jury Trials Verdicts and Criminal Sentences

            In 2011 we saw several significant trade secret jury trial decisions. The second jury in the contentious Barbie vs. Bratz case awarded more than $80 million in damages, plus attorneys’ fees and treble damages to MGA for Mattel’s alleged trade secret misappropriation; a reversal of the case’s first jury trial that resulted in a large jury verdict in favor of Mattel. Mattel is appealing the decision and we expect to see more litigation in this case in 2012.

             The jury in Pacesetter Inc. v. Nervicon Co. awarded more than $2.3 billion in damages (later pared down to $947 million by the trial court judge) to St. Jude Medical for a former employee’s theft of confidential technical information about the company’s medical devices. Additionally, the jury in DuPont v. Kolon awarded more than $919 million in damages for a former employee’s theft of information regarding DuPont’s anti-ballistic Kevlar fiber. 

              The TCW Group, Inc. v. Gundlach case, followed with great interest in the financial community ended in split jury verdicts, after each party had sought hundreds of million of dollars in damages against the other. The jury found the former investment chief liable for alleged trade secret misappropriation and breach of his fiduciary duty but did not award any damages on the fiduciary duty claim. Instead, the jury assigned the determination of damages for trade secret theft to the judge. The jury awarded the former investment chief $66.7 million for back pay after his termination.  The parties recently settled the litigation pursuant to a confidential settlement, prior to the court’s ruling on the amount of damages to award on the trade secret claim.   

              Regarding criminal prosecution, an ex-Goldman Sachs programmer was sentenced to more than 8 years in prison for the theft of confidential information regarding the company’s trading system. Additionally, an ex-Dow AgroSciences scientist was sentenced to more than 7 years in prison for the theft of secret information about organic insecticides. 

5.         Emerging Areas in Social Media and Cloud Computing

            The explosion of cloud computing and the ubiquity of social media has increased the risks and vulnerabilities in protecting valuable company data and prized trade secrets. Companies utilizing cloud-computing services must employ effective measures to protect and secure their intellectual property. Issues have also arisen regarding the ownership of employee created social media content and passwords. For example, the current PhoneDog v. Noah Kravitz case in the Northern District of California involves a dispute regarding the ownership of an employee’s Twitter account, specifically the account’s follower list and password. The outcome of this case will be closely monitored by employers, especially in light of the 2010 case Sasqua Group v. Courtney. In that case, a New York district court found that an allegedly misappropriated customer list was not a trade secret because the information could be easily located through Google and LinkedIn searches. 

            A New Jersey district court in Syncsort Incorporated v. Innovative Routines, International, Inc., 2011 U.S. Dist. LEXIS 92321, (D.N.J. August 18, 2011), however, found that posting information on the internet might not necessarily void that information’s trade secret status. The takeaway is that prior methods to maintain confidentiality may no longer be viable with the heightened connectivity of social media and cloud computing. More recently, a Pennsylvania federal court held that an employer may claim ownership of its former executive’s LinkedIn connections where the employer required the executive to open and maintain an account, the executive advertised her and her employer’s credentials and services on the account, and where the employer had significant involvement in the creation, maintenance, operation, and monitoring of the account. 

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By Joshua Salinas

As a follow-up to yesterday's blog entry about a new California trade secret designation decision, another important issue that trade secret litigators face is whether the pre-discovery trade secret identification requirements of California Code of Civil Procedure section 2019.210 apply in California federal court.  There is a split in authorities but recent cases suggest that California federal courts will require at a minimum an identification of trade secrets by the plaintiff as part of a trade secret plaintiff’s Rule 26 disclosure or during the infancy of discovery.

In Jardin v. DATAllegro, No. 10-CV-2552-IEG (WVG), 2011 WL 3299395 (S.D. Cal. July 29, 1011), the Honorable Magistrate Judge William Gallo “wholeheartedly” agreed that section 2019.210 did not apply in federal district court.  Yet despite refusing to directly apply the statute, Judge Gallo’s pre-discovery trade secret identification order mirrored the procedures and policies provided in section 2019.2010.  Jardin epitomizes the growing trend in which federal district courts will require parties to identify trade secrets with particularity before commencing discovery, without explicitly applying section 2019.210.

Section 2019.210 requires a plaintiff to identify allegedly misappropriated trade secrets before commencing discovery.  The requisite pre-discovery identification helps serve four purposes: (1) promotes well-investigated claims, (2) avoid abuses of the discovery process, (3) frames the appropriate scope of discovery, and (4) enables the formation of complete and well-reasoned defenses.  Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 985 (S.D. Cal. 1999).

Jardin involved a dispute over the inventorship of U.S. Patent Number 7,818,349 (“Ultra-shared-nothing parallel database”).  Plaintiff Jardin had previously filed a related suit two years earlier against Defendant DATAllegro regarding the infringement of a different patent. Consequently, discovery in the prior case allegedly provided Jardin with access to DATAllegro’s confidential information.  Additionally, a protective order entered in the previous case limited the use of the produced protected information.  DATAllegro brought this issue to Judge Gallo, concerned that Jardin would improperly use confidential information from the prior case.

Judge Gallo found DATAllegro’s confidentiality concerns legitimate. Despite his explicit rejection of section 2019.210, Judge Gallo ordered that no discovery would take place until Jardin identified the allegedly misappropriated information.  In fact, Judge Gallo’s orders and underlying policy considerations mirrored section 2019.210.

Jardin objected to Judge Gallo’s order.

The Honorable Chief Judge Irma Gonzales upheld Judge Gallo’s order, finding nothing erroneous in his refusal to apply section 2019.210. Judge Gonzales noted that the Ninth Circuit has not decided whether section 2019.210 applies in federal court and California district courts continue to reach conflicting conclusions.  However, she stated that Federal Rule of Civil Procedure 26 provides district courts with broad discretion to control discovery. Thus, Judge Gallo could properly fashion his order after section 2019.210 without necessarily applying section 2019.210.

This case is significant because it illustrates the court's movement toward applying the procedures and policies behind section 2019.210 while retaining their “inherent discretion to manage discovery.”

The Southern District court in Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980 (1999) was one of the first federal courts to directly apply section 2019.  That court recognized that the statute codified the holding in Diodes, Inc v. Franzen, 260 Cal. App. 2d 244 (1968), that pre-discovery trade secret identification is necessary to provide reasonable notice of the issues at trial and reasonable guidance in ascertaining the scope of appropriate discovery.  The Northern District in Neothermia Corp. v. Rubicor Medical, Inc., 345 F. Supp. 2d 1042 (N.D. Cal. Nov. 14, 2004) followed Computer Economics and directly applied section 2019.210.

The Eastern District in Funcat Leisure Craft, Inc. v. Johnson Outdoors, Inc., No. S-06-0533 GEB (GGH), 2007 WL 273949 (E.D. Cal. Jan. 29, 2007) was the first federal court to reject the direct application of section 2019.210.  That court found the statute to be a procedural rule that conflicted with the Federal Rules.

Since Funcat many district courts have continued to apply section 2019.210 either directly or indirectly. The Northern District applied the statute directly in M.A. Mobile LTD. v. Indian Inst. of Tech. Kharagpur, No. C08-02658 RMW (HRL), 2010 WL 3490209 (N.D. Cal. Sept. 3, 2010). The Eastern District in Hilderman v. Enea Teksci, Inc., No. 05cv1049 BTM (AJB), 2010 WL 143440 (S.D. Cal. Jan. 8, 2010), rejected the direct application of section 2019.210, yet held that plaintiffs would be barred from presenting trade secret claims for failing to provide defendants with “fair notice.” Moreover, the court in Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., Ltd., No. C 07-5248 JW PVT, 2008 WL 183520 (N.D. Cal. Jan. 18, 2008), declined to rule on section 2019.210 applicability, but required the plaintiffs to disclose the allegedly misappropriated trade secrets.

Jardin signifies this recent departure from Funcat’s complete elimination of section 2019.210 from federal court.  Indeed, federal courts should not ignore the purposes behind the statute as articulated in Computer Economics.  It is interesting to note that Jardin is from the same Southern District of California as Computer Economics. While Jardin refused to directly apply section 2019.210, it indirectly applied the statute with the same reasoning set forth in Computer Economics.

The Ninth Circuit has yet to resolve the dispute. However, in nSight, Inc. v. PeopleSoft, Inc., 296 F. App'x 555, 560 (9th Cir. 2008) (unpublished), it upheld the dismissal of a trade secret misappropriation claim because the plaintiff failed to identify any trade secret with “reasonable particularly” per section 2019.210.  While unpublished, and thus nonbinding, nSight may foreshadow the Ninth Circuit’s views regarding section 2019.210 applicability.

Moreover, the Eastern District in N. Am. Lubricants v. Terry, 2011 U.S. Dist. LEXIS 133672 (E.D. Cal., Nov 18, 2011) recently applied the rationale from Computer Economics regarding trade secret identification.  N. Am Lubricants involved a motion to compel for the plaintiff’s failure to identify trade secrets with sufficient particularity in response to an Interrogatory requesting said information.  The court noted that although the dispute did not involve section 2019.210, the court found the rationale in Computer Economics persuasive regarding the need for reasonably specific identification of claimed trade secrets in response to interrogatories at the outset of litigation.  It is notable that the decision was from the same magistrate who decided the Funcat case.

Trade secret defendants who find themselves in California federal court should request from plaintiffs the identification of any allegedly misappropriated trade secrets.  While some federal courts may not directly apply section 2019.210, the growing trend is for those courts to fashion orders to ensure that the policies of both Rule 26 and section 2019.210 are achieved and that there is a trade secret identification disclosure either before the commencement of discovery or at the infancy of the discovery process.  Thus, federal courts are more willing to either directly or indirectly use section 2019.210 because it is a helpful guideline to give defendants proper notice of the claims, enable complete defenses, guide proper discovery, and eliminate disadvantageous surprises at trial.

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The trend of some recent judicial decisions seems to reflect an increasing concern by courts that, notwithstanding trade secret misappropriation plaintiffs’ understandable reluctance to disclose proprietary information in more detail than absolutely necessary, they must describe with considerable specificity whatever is alleged to have been purloined. For example, a California district court ruled recently that “Whatever [the plaintiff] wishes to claim as trade secrets that [the defendant] misappropriated, it must identify each particular composition, formula, technology and manufacturing techniques, application and manufacture of [the applicable product] without further delay.” Delphon Industries, LLC v. International Test Solutions, Inc., Case No. C 11-01338 PSG (N.D. Cal., Jan. 4, 2012).

Plaintiff Delphon develops and manufactures gel products used in safely transporting delicate technology devices within and between laboratories. The gels are polymers created using proprietary formulas consisting of mixtures, blends and balances of specific chemical elements. In response to an interrogatory from Defendant ITS seeking identification of the trade secrets that allegedly were misappropriated, Delphon stated that it “customizes the composition of its gel materials to its customers’ needs” and that the trade secrets are “The ‘recipe’ for its different gel materials - including the amount of each ingredient used, the process . . . [and] methods of combining the ingredients, the use of solvents with gel materials, and the blending, mixing and dispersion of additives into the gel material.” ITS told Magistrate Judge Paul Grewal that Delphon had not identified its trade secrets with the specificity required by Section 2019.210 of the California Code of Civil Procedure, and he agreed. 

Section 2019.210 provides that, before commencing discovery relating to a trade secret allegedly misappropriated, the alleging party must “identify the trade secret with reasonable particularity.” According to Judge Grewal, the statute provides a “flexible standard” which does not require “every minute detail” of the claimed trade secrets but must be adequate “to permit the defendant to learn the limits of the secret and develop defenses [and] to permit the court to understand the secret and fashion discovery.” He held that Delphon had fallen short. First, it had admitted that its depiction of the trade secret was imprecise; the court added that “In fact, the description is so general that Delphon did not even bother to protect the description under the terms of the Stipulated Protective Order.” Second, Delphon’s Director of Materials Technology conceded at her deposition that the disclosures were “conceptual” and lacked specific details even though Delphon has this information. Third, the court explained that Delphon had offered “no credible expert testimony suggesting that those in the field would be able to review Delphon’s designations and distinguish the alleged trade secrets from information in the field.”

The lessons learned from this case are that a trade secret misappropriation plaintiff should 1) insist on the entry of a protective order; 2) should state that the description of the confidential information is covered by that order, and 3) should avoid referring to the disclosed information as “general” or simply “conceptual.” Finally, the plaintiff should consider seeking to retain a qualified expert witness to the extent necessary to testify that the unique characteristics of the trade secrets have been described sufficiently to differentiate the trade secrets from public information.

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A manufacturer engaged an independent contractor to improve the efficiency of certain machinery.   After the task was completed, the contractor did the same for a competitor of the manufacturer.   The manufacturer, claiming that the improvements were its trade secrets, sued the competitor in an Ohio state court for misappropriation. The case went to trial before a jury which returned a verdict of liability, answered special interrogatories consistent with that verdict, but awarded no damages. The trial judge entered judgment on the verdict and enjoined the competitor from using the trade secrets for five years unless the manufacturer was paid a specified royalty. On cross-appeals, the Ohio appellate court recently affirmed the judgment in all respects. Columbus Steel Castings Co. v. King Tool Co., 2013 Ohio 6826 (10th Appellate Dist. Court of Appeals, Dec. 30, 2011).

Columbus manufactures steel bolsters that support and stabilize railroad cars. In 2003, Columbus retained King Tool to build a new, more efficient machine. As a result, Columbus’ productivity increased three-fold. Then, Columbus’ competitor Alliance Castings retained King for the same purpose and achieved production six times its former output. Columbus, claiming that the improvements to its machine made it “unique as a whole” and afforded a competitive advantage, sued King and Alliance for misappropriation of trade secrets. The defendants sought and obtained summary judgment, but Columbus appealed. In 2008, the Ohio Court of Appeals identified genuine issues of material fact and, therefore, reversed and remanded for a trial.  

Columbus settled with King and tried, to a jury, the dispute with Alliance. The jury returned a general verdict in favor of Columbus on liability but awarded no monetary relief. In answers to special interrogatories, the jury found that (a) the “machine made by King Tool for Columbus Steel was not generally known to, or readily ascertainable by proper means by, someone who might obtain economic value from its use,” (b) Columbus “made reasonable efforts to maintain the secrecy of the design of the” machine, (c) the design was a trade secret of Columbus, and (d) Alliance misappropriated Columbus’ trade secret.   The trial court enjoined Alliance’s use of its new machine for five years but, as an alternative, established a royalty of $10.60 -- approximately 1% of the average sales price -- for Alliance to pay Columbus for each bolster manufactured on the machine during that period. Both parties appealed. 

Columbus argued that the jury’s zero damages verdict resulted from misleading jury instructions. The Court of Appeals determined, however, that the instructions “as a whole” did not mislead “the jury in a manner affecting [Columbus’] substantial rights.” 

Alliance maintained that the case should not have been submitted to the jury at all because there was no evidence to support Columbia’s claims that (a) the machinery design qualified as a trade secret, (b) Columbus took “reasonable steps to protect the secrecy of the design,” (c) Alliance misappropriated the design, and (d) “Alliance’s alleged misappropriation caused Columbus damage.” The appellate tribunal, reviewing de novo, rejected all of these contentions and affirmed the judgment in its entirety. The court held that it must affirm “if substantial evidence exists to support” the verdict and “reasonable minds could reach different conclusions on essential elements of the claim.” As to Alliance’s contentions:

            1.         Trade secret. The design qualified as a trade secret under the Ohio Uniform Trade Secrets Act, even though certain components “were readily ascertainable, because the machine as a whole was unique and afforded a competitive advantage to Columbus Steel.” 

            2.         Protection of confidentiality. There was some evidence that Columbus had told King that the design was to be kept confidential and not shared with Columbus’ competitors. Further, Columbus “had security guards, fences, and locked entryways, and that the sketches and engineering drawings for the new machine were kept in a locked office.”  Alliance claimed that the improvements were readily ascertainable by viewing the machine, but the appellate court pointed to evidence that Alliance’s representatives “obtained unauthorized access by means of false representation in order to view the new machine.”

            3.         Misappropriation. Alliance may have used improper means to acquire knowledge of the trade secrets. There was some evidence that an Alliance misrepresented to King that he was working for both Alliance and Columbus. The Court of Appeals said it was the province of the jury to determine whether there was a misrepresentation and whether Alliance had reason to know of it.

            4.         Damage. There was evidence from which a jury could have found that Columbus lost an indeterminate amount of profits due to misappropriation. In trade secret cases, “it is often difficult to prove money damages or lost profits” with certainty. The injunction provided “some relief for the misappropriation [because] the facts and circumstances of this case, particularly the zero damages verdict, lend themselves to a presumption of [irreparable] harm and a finding that money damages could not adequately compensate Columbus Steel.” 

This decision provides insights with respect to proper jury instructions and special interrogatories in trade secret misappropriation cases. It shows that appellate courts will strive to reconcile all aspects of a jury’s verdict and a trial court’s judgment.

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Expanding what until recently had been very limited options for U.S. companies to enforce their rights against Chinese companies misappropriating trade secrets, the Federal Circuit in TianRui Group Co. v. International Trade Commission, Fed. Cir., Case No. 2010-1395, held that the International Trade Commission has statutory authority to review and rule on conduct occurring in China in the course of a trade secret misappropriation investigation. The primary effect of this decision is that US companies are now afforded the ability to sue Chinese parties in the United States, an avenue previously foreclosed such companies because, generally, in such cases a substantial amount of the wrongful activity would have taken place in China, and the Chinese parties are thus beyond the reach of most long arm statutes.  In sum, the decision allows US companies through the International Trade Commission to block the importation of products produced by a foreign company using trade secrets stolen from a U.S. competitor.

The relevant factual particulars of TianRui are as follows. Amsted Industries, an American manufacturer of cast steel railway wheels, granted a license to Datong, a Chinese manufacturer of the same product, for a proprietary foundry process for the manufacture of these wheels. There was no question that the process was a trade secret belonging to Amsted. TianRui, another Chinese manufacturer, approached Amsted in 2005 and attempted to negotiate a similar license as Datong for the process. However, an agreement was never reached with Amsted. After the failure of the negotiations, TianRui hired away nine Datong employees trained in Amsted’s manufacturing process.  Notably, all of these former Datong employees had actual knowledge that the manufacturing process was a confidential trade secret belonging to Amsted, and moreover eight of the nine had signed confidentiality agreements with Datong covering, amongst other trade secrets, the Amsted process.  In addition to having their trade secrets misappropriated, Amsted was further injured because TianRui ultimately sold the wheels it manufactured with the process in the U.S. through a joint venture.

Amsted there after filed a complaint with the International Trade Commission, alleging that the importation of the wheels into the U.S. violated § 337 of the Tariff Act of 1930, 19 U.S.C. §1937, by reason of TianRui’s use of the Amsted manufacturing process which was developed in the U.S. and therefore subject to protection by U.S. trade secret laws.  TianRui interposed a defense that no action against it could lie because Congress did not intend for § 337 to apply to territories outside the U.S., including China. After hearing the matter, the International Trade Commission rejected TianRui’s reading of Congressional intent on § 337, and issued a limited exclusion order relating to the wheels produced with the Amsted manufacturing process. TianRui sought review of the decision by the Federal Circuit after the International Trade Commission elected not to review the decision itself.

Ultimately, the Federal Circuit found that § 337 was properly applied by the International Trade Commission based upon TianRui's conduct within the U.S., specifically the importation of the wheels, by its joint venture, into the U.S. Significantly, the Federal Circuit further found that despite the fact that most of the offending conduct, the misappropriation of Amsted’s trade secret and production of the wheels using these misappropriated secrets, took place in China, the International Trade Commission’s exclusion order was nevertheless proper because the Commission was empowered under § 337 to set the circumstances pursuant to which products may or may not be imported into the U.S., including the exclusion of products found to be manufactured by means of misappropriated U.S. trade secrets.

In sum, an ITC proceeding can be a powerful tool to protect trade secrets that are misappropriated by the foreign competitors of U.S. companies. 

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Legislation intended to help protect the trade secrets of New Jersey businesses has been signed into law by Gov. Christie. The New Jersey Trade Secrets Act (S-2456/A-921) establishes by law specific remedies available to businesses in the event that a trade secret – such as a formula, design, a prototype or invention – is misappropriated. New Jersey was one of the four remaining states that have not adopted some or all of the provisions of the Uniform Trade Secrets Act (Massachusetts, New York and Texas are the others), but instead NJ courts have relied wide range of common law decisions in order to establish a trade secret misappropriation claim.

The New Jersey Senate approved the bill 39-0; the Assembly approved the measure 79-0. The law takes effect immediately, except it does not apply to misappropriation that occurred prior to the effective date or to a continuing misappropriation that began prior to the effective date of the law and continued after the effective date of the law.

The new law provides for damages for both actual loss suffered by a plaintiff and for any unjust enrichment of the defendant caused by the misappropriation of trade secrets. Damages also may include a reasonable royalty for unauthorized disclosure or use of the trade secrets. In cases of willful misappropriation, punitive damages and attorneys’ fees may be awarded. In addition, if a claim for misappropriation is brought in bad faith, attorneys’ fees may be awarded.

The New Jersey Act also has a couple of unique and helpful provisions, including a requirement that a court "preserve the secrecy of an alleged trade secret by reasonable means consistent with" court rules. There is also "a presumption in favor of granting protective orders in connection with discovery proceedings" as well as provisions limiting access to confidential information to only the attorneys for the parties and their experts, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.

It remains to be seen if New York will now follow New Jersey’s lead and adopt similar legislation.

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By Scott Schaefers

In the age of social media and networking, where employees undoubtedly use their company-issued computers to network with customers, vendors, colleagues, and friends, a legal question presents itself: can employers claim an interest in their employees’ LinkedIn accounts, or other social networking accounts, which the employees use in part to grow and maintain their relationships for the benefit of their employers? 

A.        Can An Employer Claim Ownership Of Its Executive’s LinkedIn Profile?

A federal court in Philadelphia recently said “Yes,” though not definitively. In Eagle v. Morgan, No. 11-4303, 2011 WL 6739448 (E.D. Pa. Dec. 22, 2011), the court held that an employer may claim ownership of its former executive’s LinkedIn connections where the employer required the executive to open and maintain an account, the executive advertised her and her employer’s credentials and services on the account, and where the employer had significant involvement in the creation, maintenance, operation, and monitoring of the account. More specifically, the court refused to dismiss employer Edcomm’s counterclaims for “misappropriation of an idea” and unfair competition against its former chief executive, Dr. Linda Eagle, who allegedly accessed and used her Edcomm-generated LinkedIn account three weeks after she was terminated. Edcomm had an established policy requiring its executives to create LinkedIn accounts using an Edcomm-prepared template, and requiring them to respond to LinkedIn client and colleague inquiries using an Edcomm template. This policy and participation regarding the executive’s LinkedIn account and activities was enough to state a valid claim for misappropriation of Edcomm’s alleged ownership of the account. Notably, the court did not cite any social-networking-related precedent in its decision.

And interestingly, the court dismissed Edcomm’s claims of statutory trade secret misappropriation and common law conversion to the extent they were premised on Eagle’s alleged misuse of the connections and content in her Edcomm LinkedIn account. The court held that such connections could not be trade secret if they were posted on the internet.

There is another active case in the Northern District of California that we previously blogged on that addressed similar issues. 

The lesson here is that employers and their lawyers should consider getting more involved in their employees’ social-networking activities, particularly to the extent that such activities are used for company business and where employees are required or expected to promote themselves on behalf of the company using these networking sites. The day may come where the employer wished it would have kept a closer eye on departing employees’ online profiling.

B.        The Eagle Court Sides With The Pro-Employee Line Of Cases Which Hold That
            Employers Cannot Use The Federal Computer Fraud And Abuse Act To Sue Employees
            Who Misuse Their Employers’ Computers

The Eagle decision is noteworthy for another reason: it agreed with other federal courts which held that employers may not sue unfaithful employees under the federal Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq. (CFAA) for stealing or misusing company computer files, so long as the employees had authorized access to the computers for company business. 

The court noted the existing divide between federal courts – some which hold that employers may sue employees under CFAA (e.g. EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577 (1st Cir. 2007), Int’l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006), see also U.S. Rodriguez, 628 F.3d 1258 (11th Cir. 2010)), and some which hold they may not (e.g. Int'l Ass'n of Machinists & Aerospace Workers v. Werner–Masuda, 390 F.Supp.2d 479, 498 (D. Md. 2005) and similar Pennsylvania federal cases).  Congress and the Supreme Court have yet to resolve this conflict among lower federal courts. Until then, whether employers may sue their employees under the CFAA may depend largely on the federal circuit court of appeals in which the employer or employee is located.

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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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Throughout 2011, Seyfarth Shaw LLP’s dedicated Trade Secrets, Computer Fraud & Non-Competes practice group hosted a series of CLE webinars that addressed significant issues facing clients today in this important and ever changing area of law. The series consisted of six webinars: Trade Secrets in the Financial Services Industry, The Anatomy of a Trade Secret Audit, Georgia’s New Non-Compete Statute, Managing and Protecting Trade Secrets in the Brave New World of Cloud Computing and Social Media, Choosing the Right IP Protection: Patent, Trade Secret or Both?, and Key Considerations Concerning Trade Secrets and Non-Competes in Business Transactions. As a conclusion to this well-received 2011 webinar series, we have compiled a list of key takeaway points for each of the webinars, which are listed below. For those clients who missed any of the programs in this year’s webinar series, the webinars are available on compact disc upon request and CLE credit is available as discussed below. We are also pleased to announce that Seyfarth Shaw LLP will continue its trade secrets webinar programming in 2012 and has several exciting topics lined up.

Trade Secrets in the Financial Services Industry

The first webinar of the year, Trade Secrets in the Financial Services Industry, was led by Seyfarth attorneys Scott Humphrey and Scott Schaefers.   The financial services industry has unique concerns with respect to trade secret protection. This webinar had a particular focus on a financial institution’s relationship with its FINRA members and also covered practical steps that can be implemented to protect trade secrets and what to do if trade secrets are disclosed.

• Enforcement of restrictive covenants and confidentiality obligations for FINRA and non-FINRA members are different. Although FINRA allows a former employer to initially file an injunction action before both the Court and FINRA, FINRA, not the Court, will ultimately decide whether to enter a permanent injunction and/or whether the former employer is entitled to damages as a result of the former employee’s illegal conduct.
   
• Address restrictive covenant enforcement and trade secret protection before a crisis situation arises. An early understanding of the viability of your restrictive covenants and the steps that you have taken to ensure that your confidential information remains confidential will allow you to successfully and swiftly evaluate your legal options when an emergency arises.
   
• Understand the Protocol for Broker Recruiting’s impact on your restrictive covenant and confidentially requirements. The Protocol significantly limits the use of restrictive covenants and allows departing brokers to take client and account information with them to their new firm.

The Anatomy of a Trade Secret Audit

The second webinar was led by Robert Milligan, Bob Niemann and David Monachino. This webinar dissected what is involved in an audit of your company’s trade secret protections, including, identifying trade secrets and secrecy protections and implementing effective secrecy protections and hiring and termination protocols. The webinar also discussed employing a comprehensive trade secret protection plan, as well as managing and working to protect computer-stored data, including responding to emergency issues related to computer fraud and security breaches.

• The issues relating to all the aspects of trade secrets can be overwhelming to those that deal with it on rare occasions or in emergencies. Having effective checklists are helpful to marshal evidence, evaluate your claims, and be pro-active to pursue litigation and defend against claims.  Ask your Seyfarth Shaw attorney for sample checklists.
   
• Use a forensic computer investigator to assess former employees’ computer activities, including use of email and USB devices to unlawfully transmit company data.  Ensure that you have strong computer usage restrictions that prohibit unauthorized and unpermitted computer activities on your computer network.
   
• Mark your confidential documents confidential and treat them as such, including having company policies requiring that they not be removed from the workplace and that they be returned at time of termination. Also establish clear employee entrance and exit policies to ensure that trade secret information is adequately protected throughout the hiring and termination process.

Georgia’s New Non-Compete Statute

The third webinar of the year, led by Bob Stevens and Erika Birg with guest panelist Kevin Levitas, former member of the Georgia House of Representatives, focused on Georgia’s Revised Restrictive Covenant Act. The webinar addressed the fundamental paradigm shift toward enforcing restrictive covenant agreements in Georgia and addressed the underlying legislation, legislative history that led to the 180 degree change for enforcement of such agreements in Georgia and detailed the significant changes to the law.  

• There has been a fundamental change in Georgia public policy toward enforcement of restrictive covenant agreements, including non-competes and non-solicits.
   
• The Georgia Revised Restrictive Covenant Act addressing restrictive covenants permits courts for the first time to blue pencil or modify agreements entered into after May 10, 2011 to make overbroad agreements enforceable. The old Georgia law still applies to agreements entered into prior to January 1, 2011. Due to arguments over the constitutionality over Georgia’s Restrictive Covenant Act passed in late 2010, the law regarding agreements entered into between January 1, 2011 and May 10, 2011 is still uncertain.
   
• Employers operating in Georgia should have their non-compete agreements evaluated by competent counsel to ensure that they comply with the new Act and provide employers with the greatest protections under Georgia law.  

Managing and Protecting Trade Secrets in the Brave New World of Cloud Computing and Social Media

2011’s fourth trade secrets webinar focused on cloud computing and social media and their impact on trade secret  status and protection efforts. Robert Milligan, Jason Stiehl and Jason Priebe led this highly attended webinar. This webinar discussed a 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, and effective social media policies to protect trade secrets.

• When utilizing cloud computing, generally follow a three-step process: (1) ensure you understand and define your trade secrets internally through a trade secret audit before consider placing such information in the cloud; (2) create necessary barrier/security protocol to protect those secrets; and (3) develop comprehensive and cohesive social media and restrictive covenants/confidentiality policies to avoid disclosure.
   
• Identifying and collecting information to fulfill an organization’s duty to preserve and/or discovery obligations can be tricky in cloud environments. While the information may belong to your company or organization, the underlying software structure belongs to a service provider, and the data may be scattered over multiple locations. It is a good idea to consider potential issues of data control, ownership, and jurisdiction when evaluating a software as a service (SAAS) cloud-based platform solution.
   
• Carefully review the proposed service agreement with the cloud provider and ensure that provider agrees to keep data confidential and has reasonable security measures in place to protect your information; also consider avoiding contractual limitations on provider liability depending upon bargaining power.  If the secrets involved are “bet the company” type information, the cloud may not be the place to store it.

Choosing the Right IP Protection: Patent, Trade Secret or Both?

The fifth webinar, led by Brian Michaelis, Dan Schwartz and Jim McNairy, focused on choosing the best legal tool to protect particular types of intellectual property. The topics discussed in this webinar included a definition of a patent and what information is patentable, defining a trade secret and what information qualifies for trade secret protection, the pros and cons of patent vs. trade secret protection, which types of information/technology may be best protected through both trade secret and patent protection, the impact the new America Invent Act (Patent Reform Legislation) has on the decision to seek patent or trade secret protection.

• There may be “tension” between patent protection and trade secrets; for instance, patents require public disclosure in return for a government granted monopoly whereas trade secret require that the information remain secret throughout its life. Once information is no longer secret or otherwise becomes available, trade secret protection will be lost.
   
• The remedies available under patent laws and trade secret law differ significantly. A patent owner is always entitled to at least a “reasonable royalty” for any infringement. There is no statutory floor of damages such as a “reasonable royalty” for trade secret owners.
   
• Recent changes to the patent laws provide trade secret owners with additional defenses to allegations of patent infringement where the trade secret owner has maintained as a trade secret a later patented method or system.

Key Considerations Concerning Trade Secrets and Non-Competes in Business Transactions

The final webinar of 2011 was led by Todd Hunt, Erik Weibust and Jim McNairy. This webinar included a discussion of which relationships other than employer/employee relationships require trade secret protections, the most significant risks to the trade secret status of your valuable confidential information under the Uniform Trade Secrets Act and best practices for protecting trade secrets in business transactions.

• Broader non-competes are better tolerated in the sale of a business context, but care should be taken to carefully assess your specific facts and applicable law to help ensure that time, place, and subject matter restrictions, if any, are consistent with law in the jurisdiction(s) at issue. Pay special consideration to choice of law and choice of forum issues as they impact enforceability.
   
• Adequately protecting trade secrets and goodwill in business presentations and transactions requires careful planning and forethought. The often large and frequent exchange of information in these contexts requires use of Non-Disclosure/Confidentiality Agreements.
   
• All business relationships are potential threats to trade secret status and opportunities for misappropriation. Given this, it is imperative to identify any trade secrets at issue and proactively assess any aspects of the business relationship or transaction that may present risks of unintended or unauthorized disclosure or use of trade secrets, as well opportunities for bad actors to improperly acquire your trade secret information.

2012 Trade Secrets Webinar Series

Beginning in January 2012, we will begin another series of Trade Secret webinars. The first webinar of 2012, Latest Developments in the Computer Fraud and Abuse Act, Social Media and Privacy, will be held on January 26. To receive an invitation to this webinar or any of our future webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here.

For client attorneys licensed in Illinois, New York or California, who are interested in receiving CLE credit for viewing recorded versions of the 2011 webinars, please e-mail CLE@seyfarth.com to request a username and password.

If you have any questions, please contact the Seyfarth Shaw attorney with whom you work or any Trade Secrets, Computer Fraud & Non-Compete attorney on our website (www.seyfarth.com/tradesecrets). 

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By Paul Freehling

A recent Eighth Circuit Court of Appeals decision, extremely favorable to a plaintiff alleging trade secret misappropriation, holds that protection may be accorded to a compilation of information if reasonable efforts were made to keep the compilation secret, where the compilation adds value to the information, regardless of the amount of the information that already was in the public domain. The defendant, who used the compilation after obtaining it from a third party who was not authorized to provide it, was hammered by the court. 

Rolls-Royce developed procedures, approved by the FAA, for repairing and overhauling helicopter engines. The procedures were compiled and disclosed in documents provided to its Authorized Maintenance Centers (AMCs) with, in at least some instances, a proprietary rights legend on the front page. AvidAir, which was not an AMC, acquired the information partly from public sources and partly by a purchase from an AMC that did not have permission to sell it. When AvidAir began using the procedures, Rolls-Royce demanded that AvidAir deliver the compilation documents to Rolls-Royce and cease using them. AvidAir proceeded to file suit in a Missouri federal court seeking a declaratory judgment that the information was not a trade secret and accusing Rolls-Royce of antitrust violations and tortious interference. Rolls-Royce countered with a misappropriation lawsuit in an Indiana federal court. Both Indiana and Missouri have adopted the Uniform Trade Secrets Law. The two cases were consolidated in the Missouri court. 

On cross-motions for summary judgment, the trial court ruled in favor of Rolls-Royce and dismissed AvidAir’s claims. A jury then awarded Rolls-Royce $350,000 in damages. The trial court entered judgment on the jury verdict and awarded permanent injunctive relief to Rolls-Royce. The Eighth Circuit affirmed in all respects. AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp., No. 10-3444 (8th Cir., Dec. 13, 2011).

AvidAir asserted that the non-public information in the compilations was too trivial to be accorded protection. The appellate court rejected that assertion, stating that a compilation has value if it gives the compiler “a competitive advantage,” even if the compiled information itself is generally available. Contrasting a trade secret with a patented invention, the court said that engineering advances are not a prerequisite to trade secret protection: “Unlike patent law, which predicates protection on novelty and nonobviousness, trade secret laws are meant to govern commercial ethics.” Rolls-Royce’s compilation was a trade secret because (a) it consisted of information with value “independent of older publicly available versions,” and (b) Rolls-Royce made “reasonable efforts to keep it secret.” The court stressed that Rolls-Royce showed that the compilation required “a substantial investment of time, effort, and energy,” and so the fact that others could have duplicated it by legitimate means is not a defense to a misappropriation claim. Indeed, “AvidAir’s repeated [unsuccessful] attempts to secure the [compilation] without Rolls-Royce’s approval belies its claim that the information in the documents was readily ascertainable or not independently valuable.” 

AvidAir maintained that Rolls-Royce did not try very hard to protect the confidentiality of the compilation. The court responded: “Reasonable efforts to maintain secrecy need not be overly extravagant, and absolute secrecy is not required.” Rolls-Royce’s use of a proprietary legend is evidence of Rolls-Royce’s attempt, and its “[m]isplaced trust in a third party who breaches a duty of confidentiality does not necessarily negate efforts to maintain secrecy.”

The lesson of this ground-breaking decision is that one who makes commercial use of even a minimal amount of confidential information, after obtaining it from a source without authority to provide it, runs a risk of incurring the wrath of a court adjudicating a trade secret misappropriation lawsuit (at least in the Eighth Circuit).

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A recent opinion issued by a U.S. Magistrate Judge for the District of Colorado with respect to a discovery dispute in a trade secret misappropriation case may please defense counsel, but create headaches for plaintiffs’ lawyers, because the Court set harsh pleadings standards that plaintiffs must meet. The Court seems to have been more sympathetic (a) to the defendants’ and the court’s desire to have identification “with reasonable particularity” of the supposedly misappropriated trade secrets, than to (b) the justifiable reluctance of plaintiffs to disclose detailed confidential information.   If the Court's reasoning becomes generally accepted, plaintiffs may decide that some trade secret misappropriation claims are better left unfiled rather than making disclosures with the requisite specificity.

The Court recognized that “the case law does not provide clear guidance” as to the pleading requirements. However, basing her ruling primarily on unreported (plus a few reported) decisions, she held that before the plaintiffs may compel discovery, they must file a complaint that “describe(s) the actual equipment, methods, software or other information” they claim as trade secrets. Plaintiffs’ “general allegations and generic references to products or information are insufficient to satisfy the reasonable particularity standard.” L-3 Communications Corp. v. Jaxon Eng’r’g Maintenance, Inc., Civ. Ac. No. 10-cv-02868-MSK-KMT (D.Colo., Oct. 12, 2011) (emphasis added).

According to the Court, allegations that defendants misappropriated broad categories, such as “customer lists, pricing templates and labor rates, vendor lists, drawings, designs and processes,” are inadequate. Plaintiffs must identify the actual “parts and vendors, the actual methods by which they use their equipment, or the actual software they use to process the generated raw data.” The Court faulted the plaintiffs in the case before her both for inadequate pleading and for not filing, or at least seeking to file, the requisite disclosures of their trade secrets under seal. Accordingly, the Court determined that the plaintiffs were not entitled to compel discovery responses. 

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By Paul Freehling

When the evidence of trade secret misappropriation and resulting substantial damages is compelling, defendants should expect to get hammered in court. A recent Massachusetts case is in point. There, despite a jury verdict for the defendants, the trial court entered judgment for the plaintiff which included a permanent injunction prohibiting the defendants from using the plaintiff’s manufacturing process trade secret and an order directing the defendants to dismantle the production line where the trade secret had been used. Defendants were forbidden from manufacturing a competing product for five years by any means and were assessed $8 million in damages, fees and costs. 

STR’s common law and statutory trade secret misappropriation claims were tried in the Superior Court simultaneously, the former to a jury and the latter to a judge. At trial, STR described its five-year effort to develop “an innovative method to produce a specialized encapsulant used in making solar cells.” STR showed how its 25% share of worldwide sales of that product declined when JPS begin making and selling a competing product, using the identical process, within one year after a key STR employee defected to JPS.   An expert witness calculated JPS’ profits resulting from the wrongdoing. 

Answering a special interrogatory, the jury found that STR’s trade secret had not been misappropriated. The trial judge disagreed. In addition to granting equitable relief, she awarded STR more than $1 million in damages (which she trebled pursuant to the applicable state statute), $3.9 million in attorney’s fees, and costs in excess of $1.1 million. The Appeals Court of Massachusetts affirmed and indicated that STR also would be entitled to reimbursement of its fees and costs incurred on appeal. Specialized Technology Resources, Inc. v. JPS Elastomerics Corp., No. 11-P-776 (Mass. App. Court, Nov. 23, 2011).

Several Massachusetts cases hold that (a) there is no right to a jury trial on statutory claims of the type involved here, and (b) the jury’s verdict with respect to common law causes of action parallel to the statutory claims is not binding on the judge in deciding whether the statute has been violated. So, the Superior Court judge was permitted to disregard the jury verdict. The defendants maintained, however, that no Supreme Judicial Court decision authorizes a trial judge, in a case where the statutory and common law actions are tried together, to decide questions of fact contrary to the findings of the jury as reported in special interrogatory answers. Nevertheless, one prior appellate court ruling upheld a trial judge’s finding, in a breach of warranty lawsuit, that the defendants were not liable notwithstanding the jury’s directly contrary answers to special verdict questions. Relying on that precedent, the decision below in favor of STR was affirmed. The entirety of the trial judge’s award of injunctive and monetary relief was determined to be within her discretion.

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By Gary Glaser

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

PhoneDog asserted 4 causes of action, two of which arose from its contention that Kravitz unlawfully misappropriated and/or converted PhoneDog’s trade secrets: namely, the compilation of subscribers to its Twitter account and the password used to access the account. And it was these claims anchored in PhoneDog’s trade secret claims that survived Kravitz’s motion to dismiss. 

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

Kravitz countered by arguing that the Twitter Account cannot be a trade secret because the names of the Twitter Account followers are, and have always been “publically available for all to see at all times.” The passwords, he argues, are not trade secrets because they don’t derive any independent economic value as required under the Uniform Trade Secrets Act (“UTSA”), since they don’t provide any “substantial business advantage.” Instead, all they do, Kravitz contends, is permit the individual logging in to view information that is already publicly known. He argued that the password is also not protectable as a trade secret because he, and not PhoneDog, initially created the password, and that PhoneDog did not take reasonable efforts to maintain its secrecy.

In addition, Kravitz contended that PhoneDog failed to allege that he engaged in any act that constitutes “misappropriation,” as it is defined under the UTSA. Instead, he argued, PhoneDog merely alleged, in conclusory terms, that he used “improper means” to obtain the Twitter password and to continue to use the Twitter Account, which belonged to it, rather than him.

The Court denied Kravitz’s motion to dismiss both the misappropriation of trade secrets and the conversion claims. As to the misappropriation claim, the Court held that PhoneDog had described the subject matter of the trade secret with “sufficient particularity” and satisfied its pleading burden as to Kravitz’s alleged misappropriation by alleging that it had demanded that Kravitz relinquish use of the password and Twitter Account, but that he has refused to do so. And, with respect to Kravitz’s challenge to PhoneDog’s assertion that the password and the Account followers do, in fact, constitute trade secrets -- and whether Kravitz’s conduct constitutes misappropriation, the Court ruled that the such determinations require the consideration of evidence outside the scope of the pleading and should, therefore, be raised at summary judgment, rather than on a motion to dismiss.

The Court followed a similar approach in denying Kravitz’s motion to dismiss PhoneDog’s conversion claim. Kravitz challenged such claim on the ground that PhoneDog had not sufficiently alleged that it owns or has the right to immediately possess the Twitter Account.   He also argued that PhoneDog failed to adequately allege that he had engaged in his alleged act of conversion “knowingly” or “intentionally.” The Court, however, found that these issues lie “at the core of [the] lawsuit” and that, accordingly, an evidentiary record outside the pleading had to be developed before the Court could resolve such fact-specific issues.

The last two of the claims were dismissed by the Court, both of which alleged interference with prospective economic advantage – one intentional, and the other negligent. The basis for the dismissal of these claims was that California law does not protect “mere ‘potential’ relationships that are ‘at most a hope for an economic relationship and a desire for a future benefit.” Here, the Court found that it was unclear who the “users” of PhoneDog’s mobile news and review services are -- in other words, whether they are the 17,000 Account followers, consumers accessing PhoneDog’s website, or some other individuals, and what the nature of PhoneDog’s purported economic relationship is with these users. The Court also agreed with Kravitz that PhoneDog had failed to adequately allege any actual disruption of the relationship between it and its users or actual economic harm. With respect to the negligent interference with prospective economic advantage claim, the Court also agreed with Kravitz that PhoneDog had failed to allege that Kravitz owed it a duty of care.

The writer eagerly awaits the decision of this Court once a complete evidentiary record has been developed. However it ultimately rules, though, one can rest assured that this is but one more chapter in what we can anticipate will be a long line of cases addressing the issues of whether social media passwords and social media analogs to the classic customer list are “trade secrets,” and who, if anyone, truly “owns” them?   And, more broadly, whether any information available on the web can be considered a "trade secret."

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By David Monachino

New Jersey is one of the four remaining states that have not adopted some or all of the provisions of the Uniform Trade Secrets Act (Massachusetts, New York and Texas are the others), but instead NJ courts have relied wide range of common law decisions in order to establish a trade secret misappropriation claim. On September 26, 2011, the New Jersey Senate approved a bill known as the "New Jersey Trade Secrets Act" (A - 921), which provides statutory remedies and procedural guidance for the misappropriation of trade secrets. This proposed bill provides for damages for both actual loss suffered by a plaintiff and for any unjust enrichment of the defendant caused by the misappropriation of trade secrets. Damages also may include a reasonable royalty for unauthorized disclosure or use of the trade secrets. In cases of willful misappropriation, punitive damages and attorneys’ fees may be awarded. In addition, if a claim for misappropriation is brought in bad faith, attorneys’ fees may be awarded.

The New Jersey Act also has a couple of unique and helpful provisions, including a requirement that a court "preserve the secrecy of an alleged trade secret by reasonable means consistent with" court rules. There is also "a presumption in favor of granting protective orders in connection with discovery proceedings" as well as "provisions limiting access to confidential information to only the attorneys for the parties and their experts, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval."

The NJ Assembly has to vote on the Senate’s amended version of the bill before it is presented to Governor Chris Christie for his signature. The bill is expected to be voted upon after the November recess and Governor Christie then has 45 days to sign the bill into law. If the bill is singed, it will become effective immediately, but will not be retroactive. Assuming the law eventually passes, it is still important for companies doing business in NJ to define what may constitute proprietary information, especially if that definition is broader than the "trade secret" definition found in the statute. Either way -- whether the bill passes or not -- it remains important for a business to continue to take reasonable efforts to maintain the secrecy of any information that it deems confidential or risk losing trade secret protection.

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

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

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

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

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

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

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

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By Robert Milligan and Joshua Salinas

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

Labor Code section 2802 provides:

(a) An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.

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

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

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

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

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

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

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

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

(b)    Private Civil Actions

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

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

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

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

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

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

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

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

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A dental products supply company, DHPI, won partial summary judgment from a Wisconsin federal court against its ex-employee, Ringo, for competing with DHPI both while still an employee and soon after resigning. The most interesting issues in the opinion, however, concern application of the Computer Fraud and Abuse Act to Ringo’s copying of DHPI’s computer hard drive, and DHPI’s unsuccessful claim against Ringo’s new employer for “misappropriation of confidential information.” Additionally, Ringo’s Illinois Wage Payment Act counterclaim failed because DHPI is a Wisconsin corporation with its principal place of business in that state. Dental Health Products, Inc. v. Ringo, Case No. 08-C-1039 (E.D.Wis., Aug. 24, 2011).

Ringo began working for DHPI in 2002 as a salesman and became Illinois branch manager in 2005. He was subject to a confidentiality and 90-day post-employment non-compete agreement. In 2007, while still employed by DHPI, Ringo began making sales through his own dental equipment sales company. He resigned from DHPI the following year and immediately went to work for his wife’s competing company. Not surprisingly, the court held that Ringo breached his duty of loyalty to DHPI and his non-compete agreement.

Before leaving DHPI, Ringo made a copy of his employer’s computer’s hard drive. In response to DHPI’s Computer Fraud and Abuse Act claim, he protested that he had permission to access the computer at the time he copied the hard drive. Further, he emphasized that he had not damaged the computer system, that he knew most of the information or could have developed it with little difficulty, and that he never viewed the copy. The court held that Ringo’s authorization to access DHPI’s computer ended when he decided to copy the hard drive and quit. 

The CFAA has a $5,000 minimum damages provision. DHPI claimed as damages the $16,000 it paid to a computer forensic expert to determine the extent of Ringo’s unauthorized conduct. The court concluded that DHPI’s expenditure “was a reasonable reaction to the knowledge that one of its key salesmen had left the company in order to compete with it and had made a copy of a company hard drive before doing so.”

Ringo counterclaimed under the Illinois Wage Payment and Collection Act for wrongful withholding of earned commissions, failure to compensate him for unused vacation time, and refusal to reimburse him for health insurance premiums he paid while a DHPI manager. The court held, quoting a 1996 Northern District of Illinois decision, that the Act only applies “to a group of employers and employees, all of whom are in Illinois.” Since DHPI was a Wisconsin corporation with its headquarters there, it was not liable.

Lastly, the court rejected DHPI’s misappropriation claim. The company conceded that its customer lists and basic financial information did not constitute trade secrets but insisted that the information was confidential and deserving of protection. The court held that there is no statutory or common law basis for a misappropriation claim other than for trade secrets.

This case teaches that the CFAA prohibits an employee’s illicit access to a company computer and permits reimbursement of expenditures incurred by the employer to determine the extent of its injury. Further, “misappropriation of confidential information” which is not a trade secret is not actionable. The DHPI decision adds to the body of authority limiting the geographic scope of the Illinois Wage Act. Finally, the opinion reminds us that blatant violations of the duty of loyalty and of a reasonable non-compete provision may be summarily punished. 

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By Jason Stiehl

Last month, Judge Walls of the U.S. District Court of New Jersey became yet another pioneer in the evolving world of trade secret protection and the Internet. In a well-reasoned and thorough analysis of case precedent, Judge Walls utilized two historic landmark public disclosure cases, DVD Copy Control Ass'n, Inc. v. Bunner, 116 Cal. App. 4th 241 (Cal. App. 6th Dist. 2004), and Data General Crop. v. Digital Computer Controls, Inc., 357 A.2d 105 (Del. Ch. 1975), as his guidepost in determining whether certain code language found within Syncsort's Reference manual and scripts remained trade secrets, despite posting of both parts, and, in some instances, all of the language on various websites.

The Guiding Hand of History

Data General and DVD Copy present a clear contrast of partial disclosure versus unlimited disclosure. In Data General, a pre-Internet disclosure case, a minicomputer manufacture made publicly available, through manuals, general technical information governing its products. The Court held that, unlike a logic diagram, the manuals did "not contain sufficient logic design [ ] to permit their being successfully used of the purpose of either duplicating such machine or in assembling a computer substantially identical to" the Data General's minicomputer. Data General, 357 A.2d at 110-11. In contrast, in DVD Copy, a foreign computer programmer, through his license agreement, began widespread distribution of the DIVX code associated with copyright protection on DVDs. Rather than suing this individual, the association tasked with protecting the copyright status on DVD's went after a host of United States' individuals who had posted portions of the code on their websites and blogs. Ultimately, by the time the matter came to preliminary injunction, the information had been distributed to over a million people, thus, according to the court, eviscerating the trade secret status of the code, holding that information "in the public domain cannot be removed… under the guise of trade secret protection." DVD Copy, 116 Cal. App. 4th at 255.

Bytes and Pieces

In Syncsort, the Plaintiff developed a language which allowed users to translate data from one form to another. Syncsort's competitor, Innovative Routines, Int'l ("IRI"), also maintained proprietary software which allowed for a similar translation. However, because the languages were unique, it was difficult and time-consuming for a Syncsort customer to simply switch to IRI's program. To solve this problem, IRI improperly, through a Syncsort distributor, came into possession of a Syncsort Reference Guide which contained over 400 pages of description and definition related to Syncsort's language. IRI then took this guide and developed a translator for Syncsort's translation device-- called ssu2scl-- which could translate Syncsort scripts to IRI's program language. IRI also requested, from Syncsort customers, examples of Syncsort scripts to run against the ssu2scl to determine the effectiveness of the translation device. The activities of both the distributor and the customers were controlled and governed by confidentiality and licensing agreements prohibiting such disclosures.

Once sued for its activities, IRI went about a hunt throughout the Internet to locate Syncsort's Reference Guide and scripts to demonstrate that, although they may have procured the information from an improper source, the information was publicly available, and therefore should not be afforded trade secret status. Mostly unsuccessful, IRI was initially able to locate only four partial sources and, ultimately, three full sources, where Syncsort's information was available. As to the partial sources, Judge Walls applied the logic of Data General and held that the information, in its fragmented and limited form, was not sufficient to recreate the Syncsort language. As to the full sources, Judge Walls looked to DVD Copy, and, in contrast, found that the full posts-- found on (1) a university password-protected site; (2) a Korean website taken down within days of notice; and (3) a Japanese website taken down within days of notice-- were "sufficiently obscure of transient or otherwise limited" so that it was not "generally known to the relevant people."

A "Manual" Going Forward?

Although it will be tempting for litigants to cite this case for a black-letter type pronunciations, this author would caution against such efforts. First, the facts of this case tilted well against the Defendant. For example, IRI had: (1) admittedly improperly sought out and received the information; (2) only conducted internet searches after being sued to determine whether the information was publicly available; and (3) known that the sources of the information were bound by restrictions governing the sharing of that information. Second, this case has a prolonged and protracted history, including a previous trial on the merits and full summary judgment briefing, allowing for a complete record to develop. Third, the breadth and depth of the release of information remains a case-by-case type determination without any precise formulation. For example, imagine if the Korean manual had been up for five years, or if it had been translated from Korean and posted on an US website. With that said, this case presents what will likely become the paradigm for Internet "release" cases in the future.

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White Wave International, Inc. filed an action in Florida against Lindsay Lohan, Lorit LLC, a company she has an indirect ownership interest in, and several other defendants arising out of a certain Confidentiality Agreement Between Firms (“CABF”) between White Wave and Lorit. It was alleged by White Wave that the CABF provided Lohan, Lorit and the other defendants with a time-limited opportunity to examine and obtain samples of White Wave’s product. It was further alleged that although Lorit made an offer to purchase the product from White Wave, the parties were unable to agree on a purchase price and the relationship was terminated. White Wave’s action arose, it alleged, when Lorit, Lohan and another defendant introduced a product which was claimed to contain the nearly identical ingredients as White Wave’s product.

White Wave’s complaint included five counts including breach of contract, theft of trade secrets (under the Uniform Trade Secrets Act), civil conspiracy, intentional interference with contract and deceptive and unfair trade practices. Lohan moved to dismiss the complaint as against her on the basis of lack of personal jurisdiction (notably, the action had been dismissed as against 3 other defendants previously on similar grounds).

Lohan argued that the court lacked personal jurisdiction over her because she did not have sufficient contacts with the State of Florida with respect to the facts that gave rise to the complaint, specifically regarding the CABF, Lorit or its business. White Wave argued that Lohan communicate with Florida citizens “through the internet” regarding Lorit’s product, and that consequently her physical presence in Florida was not necessary to confer jurisdiction.  Essentially, that her “telephonic, electronic, or written communications into Florida” regarding Lorit’s product were enough to invoke long-arm jurisdiction.

The court dismissed the action as against Lohan, finding that none of the activity prescribed to her by White Wave satisfied Florida's long-arm statute (subparagraphs (1)(a) through (h) of § 48.193 of the Florida Statutes).  Although the court agreed that “… a defendant does not have to be physically present in the state to commit a tort under § 48.193(1)(b)” and further that “[t]he Eleventh Circuit has consistently applied [a] broader construction of section (1)(b)”,  it further held that the cases in which the Eleventh Circuit has applied section (1)(b) to foreign torts causing injury within Florida, the conduct was directed at Florida residents, corporations, or property, and the harm was felt exclusively or primarily in Florida.  Because the alleged tortious act was the misappropriation of White Wave’s trade secrets, a misappropriation alleged to have occurred outside the State, the alleged tortious act was not directed at Florida residents, corporations or property and thus could not be used to invoke the long-arm statute.

As to the allegation that Lohan committed a tortious act within Florida “by making telephonic, electronic, or written communications” into the State, to wit her “internet communications” promoting Lorit’s product, the court found that the cause of action alleged, misappropriation of trade secrets, did not arise from said internet communications. Consequently the court ruled that the “tortious conduct” occurred outside of the state, and the damage alleged were insufficient to satisfy Florida's long-arm statute.

The court similarly rejected plaintiff’s argument that its civil conspiracy claim satisfied the long-arm statute.  White Wave argued that the long-arm statute conferred personal jurisdiction over an alleged conspirator where any other co-conspirator committed an act in Florida in furtherance of the conspiracy. The court found that the complaint failed to allege sufficient facts from which it could be reasonably inferred that the defendants, including Lohan, “…were part of a conspiracy either engineered in Florida or pursuant to which a tortious act in furtherance was committed in Florida.”

The court also rejected the argument that personal jurisdiction over Lohan could be established by the breach of contract provision of the Florida long-arm statute because the CABF was between White Wave and Lorit, and Lohan was only, at best under the facts alleged in the complaint, a member of the limited liability corporation. Consequently, the court found that she could not be personally liable for any liability of the limited liability corporation under the facts alleged, and therefore, jurisdiction under under the Florida long-arm statute failed there as well. As a result, the court did not reach Lohan’s due process arguments.

White Wave may decide to pursue its suit against Lohan in another forum where she is subject to personal jurisdiction, such as California.

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By Scott Schaefers

            In a recent decision involving whether a former employer could obtain a temporary restraining order under its broad non-competition agreement with its former employees and former software development company, the federal court in Richmond Technologies, Inc. v. Aumtech Business Solutions, No. 11–CV–02460–LHK, 2011 WL 2607158 (N.D.Cal. July 1, 2011) granted plaintiff’s request and enjoined defendants from competing with plaintiff while using its proprietary information. The court attempted to balance plaintiff’s property interests in its confidential data and business reputation against California’s long held public policy against noncompetition agreements. Ultimately, the court held there was sufficient evidence of defendant’s alleged wrongdoing to justify a TRO. 

            The Richmond court effectively “blue penciled,” or reformed, plaintiff’s broad non-compete agreement, rolling back its provisions to conform with California’s “trade secret exception” to California’s statutory bar on employee non-competes. Such blue penciling is arguably inconsistent with several recent California state court decisions prohibiting such reformation of overbroad noncompetes. In the end, the case highlights the difficulty in applying a trade secret exception to Business and Professions Code section 16600 and determining whether sued-upon noncompete covenants are necessary to protect an employer’s trade secrets.

Plaintiff’s Allegations in Richmond Technologies

            The plaintiff in Richmond was a distributor of enterprise planning software. Plaintiff sued defendants, which were plaintiff’s source-code company and plaintiff’s former employees, for misusing plaintiff’s source code and proprietary customer data to unfairly compete with plaintiff, before and after defendants terminated their relationships with plaintiff. In doing so, defendants (plaintiff alleged) breached their noncompete, non-solicitation, and non-disclosure agreements with plaintiff, violated California’s unfair competition statute, and were liable under other related common law theories. Notably, plaintiff did not make a claim for trade secret misappropriation under California’s Uniform Trade Secret Act (Cal. Civ. Code § 3426.1 et seq.).

.           The noncompete agreement prohibited defendants from competing with plaintiff for one year after their relationships terminated, and the non-solicitation agreements prohibited defendants from soliciting plaintiff’s customers during defendants’ employment and for one year thereafter. There appeared to be no significant difference in the broad application of the non-solicitation and noncompete agreements; in fact, the non-solicitation agreements, which contained certain exceptions regarding time lapse and the employees pre-existing relationship with the customer, were narrower than the noncompete. The non-disclosure agreement prohibited defendants from using plaintiff’s proprietary data.

The Court’s Decision

            Even though the court denied an injunction based on plaintiff’s non-solicitation agreements because they were overbroad and likely unenforceable under California’s statutory bar against restrictive covenants (Cal. Bus. & Prof. Code § 16600), the court issued a limited injunction based on the non-competition agreement. The court noted and discussed at some length the “trade secret exception” under Section 16600, which, despite California’s strong public policy against non-competition agreements, permitted claims for breach of noncompete agreements if necessary to protect a trade secret. Retirement Group v. Galante, 176 Cal.App.4th 1226, 1237, 98 Cal.Rptr.3d 585 (Cal.Ct.App.2009) and Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 81 Cal.Rptr.3d 282, 189 P.3d 285 (2008).  Plaintiff presented sufficient evidence, the court found, that:

• defendants had access to Richmond’s customers’ specialized requirements;
• defendants set up their competing business almost a year prior to terminating relationship with plaintiff;
• prior to terminating, defendants stopped using their Richmond e-mail accounts to communicate with plaintiff’s customer, and instead began using their Aumtech e-mail accounts;
• defendants listed plaintiff’s customers on Aumtech’s website as Aumtech customers;
• defendants contacted specific plaintiff customers and induced them to switch to defendants; and
• one of the individual defendants, prior to resigning from plaintiff, wiped her Richmond computer using three wiping programs, thus forever deleting many customer files and e-mails that Richmond needed to carry on its business with those customers.

            In light of this evidence, the court found that there were, at a minimum, “serious questions going to the merits” of plaintiff’s claims which justified its TRO.

            Nevertheless, to balance plaintiff’s interests against California’s policy against noncompetes, the court “narrowly” drew its injunction, such that defendants were prohibited from:

• holding out plaintiff’s customers on Aumtech’s website as defendants’ customers;
• initiating contact with plaintiff’s customers that defendants knew of or had contact with during their employment with plaintiff (except for broad-based marketing of its products), but defendants were not prohibited from responding to requests initiated by such customers;
• using plaintiff’s proprietary data to negotiate or do business with plaintiff’s customers, but defendants were allowed to do business with those customers so long as defendant’s did not use such plaintiff’s proprietary information; and
• using plaintiff’s source code in their business, but defendants were allowed to market and sell similar products so long as they did not use plaintiff’s trade secrets.

The Court’s Decision and State Court Authority

            The court’s findings are arguably inconsistent with recent California state court decisions; however, this is just a decision on the temporary restraining order and not a preliminary injunction. On the one hand, the Richmond court held that plaintiff’s broad non-solicitation agreements were unenforceable under Section 16600 because they were not “narrowly tailored” to protect plaintiff’s trade secrets, even though the agreements contained certain exceptions. Plaintiff’s noncompete agreement, however, was just as broad, if not more so - it provided that, upon defendants’ termination of their relationships with plaintiff and without exception, they “will not compete with [plaintiff] with similar product and or Service using its technology for a period of one year thereafter.” Nevertheless, the court issued the injunction under the noncompete.

             In effect, the court blue-penciled or reformed the noncompete to conform to the trade-secret exception under Section 16600. Such blue-penciling has been held impermissible by several California cases, including those which held that employers violate California’s unfair competition statute (Cal. Bus. & Prof. Code § 17200) by even requiring employees to sign overly broad noncompete agreements at the beginning of their employment. See Kolani v. Gluska, 64 Cal.App.4th 402, 407-08 (1998) (holding that trial court properly declined to rewrite illegal covenant not to compete into a narrow bar on theft of confidential information); D’Sa v. Playhut, Inc., 85 Cal.App.4th, 927, 934-35 (2000) (refusing to narrowly construe invalid covenant not to compete so as to make it enforceable); Dowell v. Biosense Webster, Inc., 179 Cal.App.4th 564, 579  (2009).                                                                     

Lessons Learned           

               The takeaways from the Richmond decision are that (1) California courts still struggle with whether there is a trade secret exception to Section 16600 that would permit certain narrow noncompete restrictions; (2) when drafting restrictive covenants, employers should make sure they are tailored to protect against the misuse of trade secrets; (3) employers should monitor employee’s conduct and keep an eye out for unlawful activity (defendants in Richmond allegedly engaged in unlawful activity for almost a year without plaintiff knowing), and (4) when suing a former employee for breach of contract and trade secret theft, recognize that courts will likely impose heavy pleading and proof burdens, and diligently investigate and document alleged misconduct.

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The explosion of cloud computing has provided companies with many technological benefits; but with those well recognized benefits, there are incumbent risks to valuable company data, including prized trade secrets. Companies utilizing cloud computing must employ effective measures to protect and secure their intellectual property. Sensible executives will seek advice from competent counsel to ensure that the cost savings and financial opportunities in cloud computing, including social media, are not outweighed by the potential legal and business risks.  The attached article, which was first presented at the ITechLaw Association World Technology Law Conference & Annual Meeting in San Francisco, California, discusses these issues in more detail.

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There is wiener controversy brewing, but this one does not involve Twitter™ or a Representative from New York. Rather, this dust up concerns a Chicago hot dog dynasty and allegations of misappropriated trade secrets, false advertising, unfair competition, and trademark infringement.

On June 21, 2011, District Court Judge Sharon Coleman denied Vienna Beef LTD’s motion for a temporary restraining order which sought to enjoin competitor hot dog maker Red Hot Chicago , Inc. ("RHC") and its founder, Scott Ladany (collectively, "Defendants"), from engaging in various alleged conduct, including using Vienna Beef recipes or claiming that their recipes are century old, date back to 1893, or that they are Sam Ladany or Ladany family recipes. Vienna Beef claims, among other things, that its hot dog recipes are trade secrets and that RHC is using them without permission.

Scott Ladany is the grandson of company founder Samuel Ladany, who in 1893 began selling sausages using a family recipe. Scott Ladany began working for Vienna Beef in 1971 and obtained a 10% stock interest. The Ladany family sold Vienna in the early 1980s to plaintiff Vienna Beef ("Vienna"). Scott Ladany remained employed by Vienna until 1983, when he sold his 10 percent stake in Vienna. At the time Ladany left Vienna, he signed agreements which prohibited him from using or disclosing Vienna’s trade secrets and competing with Vienna for a specified term.

In 1986, at the end of the non-compete term, Ladany started RHC.

As to its trade secrets claim, Vienna offered the following evidence of misappropriation (1) that Defendants included language in their advertising stating that Defendants have been making hot dogs "using" a century-old "time honored family recipe" which "is the foundation for a true Chicago-style hot dog…"; and (2) sworn statements by vendors attesting that Defendants claim their products are made with Vienna’s recipes.

In her Memorandum Opinion, Judge Coleman held that Vienna had predicated its trade secrets claim on RHC’s advertising materials and that RHC effectively rebutted Vienna’s allegations. The Court cited to an affidavit filed by Ladany unequivocally stating that RHC does not use the Vienna recipe developed by Ladany’s grandfather, but instead developed its own recipe as early as 1986 through work with Heller Seasonings & Ingredients, which recipe has been used by RHC in substantially similar form for 25 years.

The Judge concluded that, in any event, Vienna "has shown no evidence that [its] recipes were used in RHC’s business and therefore cannot show that it is likely to succeed on the merits of [its claim for misappropriation of trade secrets]." Likewise, the Court found that Vienna had not shown irreparable harm as, but for one new advertisement, the complained of advertising had been used by RHC "for years", thus negating the need for emergency relief. Accordingly, the Court found that Vienna Beef's application did not pass muster and was denied. Based upon the Court's ruling, it will be interesting to see if there is a round two of the wiener wars in the form a preliminary injunction motion.

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The Trade Secret Subcommittee of the Intellectual Property Section of the State Bar of California will have a live program entitled “Hot Topics in California Trade Secret Law” on June 27, 2011 in Los Angeles, California and on June 29, 2011 in San Francisco, California.  Seyfarth Shaw’s Downtown Office will host the Los Angeles event. 

Robert Milligan will be speaking at the program, which will be led by an experienced panel of IP and employment practitioners, including the co-editors of the IP Section's treatise Trade Secret Litigation and Protection in California, and a certified computer forensics examiner. The program will provide participants with an overview and insightful discussion of the latest cases, developments, and emerging areas in California trade secret law, including social media and cloud computing, trade secret audit and protection programs, restrictive covenants and non-competes, and trade secret preemption.

The one hour and fifteen minute presentation is designed for IP, employment and corporate lawyers. Registration information can be found by clicking on this link.  

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Clarifying the legal principle that an injunction will only be entered if there is no adequate remedy at law, the Ohio Court of Appeals held recently that an award of damages for past trade secret misappropriation is not inconsistent with, and does not preclude granting, injunctive relief to prevent future harm. Litigation Management, Inc. v. Bourgeois, 2011 Ohio 2794 (Ct. of App. of Cuyahoga County, OH, June 9, 2011).

Litigation Management, Inc. (LMI) provides litigation support services. A number of LMI employees who had signed not-compete and confidentiality agreements left the company’s employ and formed a direct competitor which then used LMI’s trade secrets. LMI sued for damages and injunctive relief, and the damages case went to trial. After the close of the evidence, the judge blue-penciled the geographic limitations set forth in the agreements (substituting “the Greater Cleveland Metropolitan Area” for any place in the country) and submitted the case to the jury. It returned verdicts for LMI against all of the defendants. 

LMI’s post-trial motion for an injunction, however, covering the period of time the defendants had worked in violation of their agreements, was denied. The trial court held that “not only is an adequate remedy at law available, it has been given. The wrong of competing unfairly has been righted by the jury’s award: LMI has received fair and reasonable redress.”   

LMI appealed. The appellate court reversed, agreeing with LMI that the monetary relief was intended as a make-whole remedy only with regard to misconduct to the date of trial. The appropriate relief for future, threatened violations is an injunction. So, in the view of the Ohio Court of Appeals, there was nothing inconsistent about granting both compensatory damages and an injunction. The moral is that one who misappropriates trade secrets can be hit with both a monetary award for past wrongs and severely debilitating injunctive relief.

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Distinguishing between continuing misappropriation of one trade secret and separate misappropriations of related trade secrets can be a daunting task. The Supreme Court of Colorado recently held that, for statute of limitations purposes, the distinction may be inconsequential where misuse occurs on disparate occasions but the proprietary information was disclosed to the same person at substantially the same time, and in furtherance of the same commercial venture. That constitutes misappropriation of a single trade secret.

Gognat developed proprietary information relating to the methodology for identifying and extracting reserves of oil and gas. In 1997, he shared this information with Ellsworth when they entered into a joint venture to develop reserves in western Kentucky. At about the same time, Ellsworth secretly formed MSD Energy, Inc. (MSD) for the same purpose. 

By January 2001, Gognat knew that MSD was using his trade secrets in connection with acquiring leases in the same area of Kentucky as the joint venture. He demanded that the joint venture compensate him. Ellsworth assured him that his demand would be resolved fairly. Relying on that assurance, Cognat deferred filing a lawsuit against Ellsworth and MSD. That proved to be a big mistake. 

In 2005, Gognat learned that MSD was using his proprietary information in connection with development of a different area of western Kentucky, and that MSD’s activities in the first area were more extensive than he had previously known. He filed suit against Ellsworth and MSD for misappropriation of trade secrets. The defendants moved for summary judgment based on Colorado’s three-year statute of limitations, contending that Cognat was aware four years earlier, in 2001, that Ellsworth and MSD were using the trade secrets. Gognat responded that until 2005 he did not know, and had no reason to suspect, that Ellsworth and MSD were using his trade secrets in the second area. The trial court granted the defendants’ motion to dismiss, and both the Court of Appeals and the Supreme Court affirmed. Gognat v. Ellsworth, 224 P.3d 1039 (Colo. App. 2009), aff’d, Case No. 09SC963 (Colo. Sup. Ct., June 6, 2011).

Colorado’s Trade Secrets Act is modeled after the Uniform Act. It defines a trade secret as all or part of proprietary information that the owner has taken measures to prevent from becoming available beyond those to whom the owner has given limited access. In the instance of separate acts of misappropriation with respect to related trade secrets, when does the statute of limitations begin to run? According to the Colorado Supreme Court, the misconduct of Ellsworth and MSD was one continuing misappropriation and, therefore, the cause of action accrued in 2001 when Gognat learned of the first instance of misuse. Further, the fact that what Gognat knew in 2001 may not have been sufficiently damaging to justify the cost of litigating is immaterial.

The Gognat decision teaches that litigation with respect to trade secret misuse must be initiated promptly after learning of misappropriation, even though accrued damages may be quite modest. Otherwise, the claim may be held to have been waived by the passage of time notwithstanding a substantial subsequent increase in the amount of resulting damages. Contact a trade secrets attorney at Seyfarth Shaw for assistance in determining whether a potential trade secrets misappropriation cause of action is time-barred.

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The ABA Journal reports that a Princeton PhD candidate study has found electronic “redactions” included on PDF documents may not always be effective. Specifically, the study revealed that a computer program was able to scan 1.8 million Pacer filed documents, identify 2,000 documents that contained redactions (in the form of the ubiquitous “black boxes” obscuring the confidential information) and further identify 194 of these redactions which were able to be removed and the “confidential” information revealed. The “flaw” appears to be in the PDF documents themselves, and how they were created. The author of the study, Timothy Lee, explained that PDF documents consist of multiple layers, and that an improperly placed “redaction box” might not completely obscure the confidential information which is sought to be protected. Mr. Lee explains that “retrieving” the redacted information could be as simple as cutting and pasting from the PDF document.

Mr. Lee offers suggestions for legal practitioners looking to avoid the pitfalls of “failed” redactions, but the greater issue raised by the study is the danger in not fully exploring and understanding the technology we as lawyers are using to aid and further the representation of our clients. Although the study focuses on Pacer filed documents, “redacted” PDF files are exchanged by parties regularly during discovery, particularly now in the age of e-Discovery. Where once documents were redacted by-hand before copying was done, and the confidential information never being on the produced document, as Mr. Lee indicated redaction on PDF documents is usually accomplished by adding a “black box” layer to the information sought to be protected. Depending on how the PDF document is then handled, the information might still be accessible. Simply assuming that because you cannot “see” the information on the screen it is “gone” can be a dangerous plan. Attorneys would be well served to ensure that their electronic redactions are as secure as those made by the old fashioned black marker. This means not only looking at the PDF documents before sending them along to opposing counsel and/or electronically filing with the court, but ensuring that the redactions are to all of the layers of the PDF, and that they cannot be otherwise reversed.

Confidentiality agreements, “claw-back” provisions and protective orders may be able to recapture information inadvertently revealed to opposing counsel, but the lurking peril here is that none of these will recapture information lost to a non-party Pacer search similar to the one Mr. Lee ran for his study. Greater caution, and greater familiarity with the technology we are using, is the name of the game, especially if a company's trade secrets are in play.

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Trade Secrets 2011 Webinar Series - The Anatomy of a Trade Secret Audit: Is the Data That Drives Your Company Adequately Protected?

May 25, 2011

10:00 am - 11:00 am Pacific
11:00 am - 12:00 pm Mountain 
12:00 pm - 1:00 pm Central
1:00 pm - 2:00 pm Eastern

CLICK HERE TO REGISTER

With the economy recovering in some sectors, the risk of trade secret theft to businesses has increased with greater employee mobility and the incumbent pressures on production and sales, together with the alarming frequency of targeted data theft attacks and the explosion of social media and cloud computing. Companies cannot simply react to these real business risks to their data once the data is compromised but should employ a thoughtful and comprehensive approach to the protection of their trade secrets and confidential information.
 
It is not uncommon for companies to find themselves in situations where important assets are overlooked or taken for granted. Yet, those same assets can be lost or compromised in a moment through what is often benign neglect. Authoritative sources estimate that companies lose hundreds of billions of dollars as a result of trade secret theft. At the same time, companies sometimes find themselves, through poor controls, exposed when they inadvertently obtain others’ trade secrets. Recent jury verdicts across the nation demonstrate the risk is real. Moreover, once the trade secret is lost, it is lost forever along with the value the company derives from the information.
 
To address these recurrent issues, Seyfarth Shaw helps clients protect their important assets and effectively manage risk by conducting Trade Secret Audits. Our experience has shown that companies gain tremendous value by taking a proactive, systematic approach to assessing and protecting their trade secret portfolios through a Trade Secret Audit. Please join us for the second webinar of the 2011 series which focuses on Trade Secret Audits.

Topics will include:

• Identifying trade secrets and secrecy protections
• Effective secrecy protections, including employment and non-compete agreements.
• Effective hiring and termination protocols, including effective exit interviews and termination protocols.
• Employing a comprehensive approach and trade secret protection plan
• Managing and working to protect computer-stored data,including responding to emergency issues related to computer fraud and security breaches
• This informative presentation will include a question and answer portion and checklists.

Our panel consists of attorneys with experience advising clients on issues related to trade secret audits. CLE credit will be available for participants.*

For questions, please contact events@seyfarth.com and reference this event.

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Seyfarth Shaw partner Robert Milligan will present at the LegalTech West Conference on Tuesday, May 17, 2011 at the Westin Bonaventure Hotel in Los Angeles, California at 1:00 p.m. His presentation is entitled "Trade Secret Investigations: The Legal and Technical Perspective" and will cover areas of computer forensics that corporations and law firms may have previously overlooked, including artifacts that may be available when conducting forensic analysis, legal issues and challenges when dealing with trade secret issues in different jurisdictions and facts about the statistical makeup of trade secret cases. Registration information can be found at

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Seyfarth Shaw LLP partner Robert Milligan will speak on trade secrets and cloud computing at the 2011 ITechLaw World Technology Law Conference and Annual Meeting set for May 12th-May 14th.

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           Delaware Court of Chancery Vice Chancellor J. Travis Laster, faced with an unreasonable non-compete/non-solicitation agreement, indicated that he would have preferred to hold it invalid but said that he had no choice other than to modify its terms because its Maryland choice-of-law provision requires judicial “blue penciling.” He did enjoin the ex-employee from using his ex-employer’s customer list, a trade secret, but held that the ex-employee may call on any customer whose name is within his own knowledge.

            Delaware Elevator, Inc. (“DEI”), a national elevator installer and servicer, sued ex-employee John Williams who had 20 years of experience in the industry (six of them with DEI) at the time he left that corporation and started his own -- one man -- competing elevator maintenance company. He had signed an agreement with DEI (a) barring him for three years after leaving its employ from working in a competing business within 100 miles of any DEI office, and (b) prohibiting him from soliciting business from anyone who during the last six months of his employ had been either an actual DEI customer or a potential customer DEI was actively soliciting. While he claimed his signature on the agreement was a forgery, the court said that no rational fact finder could accept his claim. 

            The agreement contained a Maryland choice-of-law provision and a stipulation that a violation would inflict irreparable harm on DEI. Maryland law upholds non-competes if the restraints are reasonably necessary for the protection of the employer, do not impose an undue hardship on the employee, and are in the public interest. Even DEI recognized the unreasonableness of the territorial restriction as written (within 100 miles of any DEI office) and sought to enforce the agreement within 100 miles of just the Newark, Delaware office where Williams worked.   

            The Vice Chancellor observed that Williams has 34 years in the workforce, has personal and family ties to the area where he has been working, and could not readily re-locate or find an equivalent job in a new field. Rhetorically, the court asked DEI’s attorneys “how they would fare if forced to re-start in a far-off jurisdiction, to re-invent themselves as practitioners in a completely different subject-matter area, or to leave the law entirely and find employment in another industry.” 

            While he might have preferred to invalidate the agreement altogether, the Vice Chancellor stated that Maryland “does not authorize a policy-based refusal to enforce an unreasonable non-compete agreement. Maryland law instead calls on the court to carve back overly broad restrictive covenants by wielding the judicial ‘blue pencil.’” Accordingly, he modified the restrictive provisions to a two-year-30-miles-from-Newark-radius (since the two year period began January 17, 2010, Williams’ date of termination, it will expire less than one year after the decision was announced in March 2011). The court observed that, as modified, Williams would be able to earn a living by using his contacts and knowledge of the industry outside the non-compete zone immediately, and within the zone shortly, while at the same time DEI’s relationships with existing and prospective customers were adequately protected. 

            Williams admitted that he took a DEI customer list with him and used it. Because the list was held to constitute a trade secret, he was ordered to destroy all electronic and paper copies. However, the court said he is free to call on customers he knows, even if their names are on the list. A hearing on damages for wrongful use of the list will be scheduled.

            Employers should be cognizant of the applicable legal principles when they include a choice-of-law provision in a non-compete or non-solicitation agreement. If DEI’s agreement with Williams had provided for application of Delaware law, the agreement might have been voided altogether. By applying Maryland law, the employer salvaged at least some protection. Designation of another state’s law might have been even more favorable to the employer. Ask your Seyfarth Shaw trade secrets attorney for advice about choice-of-law provisions.

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Entities do not have the right to claim a privilege against self-incrimination. Accordingly, even though agents of a corporation may refuse, based on the Fifth Amendment, to comply with a court order requiring the individuals to submit an affidavit stating whether their principal has ever possessed specified products that allegedly embody purloined trade secrets, the corporation itself must abide by the order even though the effect may be incriminate the agents.  

PCS4LESS, LLC and an affiliated company sued a corporation and certain of its employees in a Michigan state court, alleging that the plaintiffs were the exclusive licensees with respect to certain software, which constituted trade secrets, used in the secondary market for refurbished cell phones. The plaintiffs claimed that the defendants had misappropriated the software. The court was asked to enter a TRO directing the defendants neither to use nor to destroy the trade secrets, and to deliver the products containing the software to the plaintiffs. 

Initially, the defendants denied that they possessed, or ever had possessed, the products. However, when the court required submission of an affidavit to that effect, the defendants declined on the ground that the information at issue was protected by the Fifth Amendment. Plaintiffs moved to compel all of the defendants to comply with the earlier order, the court granted the motion, and they appealed.

The Michigan Court of Appeals agreed with the employees that their own privilege against self-incrimination could be compromised if they, individually, were forced to comply. So, the trial court’s order was reversed to that extent. But the appellate court affirmed the order requiring the corporate defendant to submit the affidavit, rejecting the argument that compelling the corporation to reveal whether it has possessed the software essentially would disclose the same information that the individual defendants were excused from providing. The court pointed out that “organizations with independent existence apart from their individual members may not assert the Fifth Amendment privilege.” Analogizing the individual defendants to custodians of corporate records, the Court of Appeals stated that “the custodian of an organization’s records may not refuse to produce records even if those records might incriminate the custodian personally.” PCS4LESS, LLC v. Stockton, Nos. 296870 and 09-000380-CZ (Mich. Ct. of App., Mar. 8, 2011), citing Paramount Pictures Corp. v. Miskinis, 418 Mich. 708, 344 N.W.2d 788 (1984).

The PCS4LESS case shows that wrongful possession of someone else’s proprietary information can lead not only to a civil suit for damages but also to criminal prosecution. Trade secret counsel should be consulted promptly by anyone charged with misappropriation.

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The first webinar of the 2011 series will focus on trade secret considerations in the banking and finance industry, with a particular focus on a firm's relationship with its FINRA members.  Topics will include:

• What practical steps can financial services institutions implement to protect trade secrets and client relationships
   
• What should you  do if your trade secrets are improperly removed or disclosed, or if your former employee is violating his/her agreements
• How do you prosecute a case against a former employee who is a FINRA member

Our panel consists of attorneys with experience advising clients on international non-compete and trade secret issues. CLE credit will be available for participants.*

Wednesday, April 6, 2011

10:00 am - 11:00 am Pacific
11:00 am - 12:00 pm Mountain 
12:00 pm - 1:00 pm Central
1:00 pm - 2:00 pm Eastern

For questions, please contact events@seyfarth.com and reference this event.

 CLICK HERE TO REGISTER

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            When a defendant, sued by a former employer for misappropriating a manufacturing process that allegedly constituted a trade secret, denies that the process is confidential and files a counterclaim alleging that the plaintiff is engaged in sham litigation in order to stifle competition, is it appropriate for the court to instruct the jury that the evidence shows plaintiff does not have a valid trade secret? In a recent case, the trial judge gave such an instruction which led to a multi-million dollar jury verdict for the defendant. The appeal that followed is reported in Whitesell Int’l Corp. v. Whittaker, 2010 WL 3564841 (Mich. App., Sept. 14, 2010) (affirming the judgment below; 2-1 ruling that the instruction was appropriate), vacated on reconsideration, 2011 WL 165405 (Mich. App., Jan. 18, 2011) (vacating the judgment below and remanding for a new trial; unanimous decision that the instruction was inappropriate).

            The sole manufacturer of interconnected “pierce nuts” filed a trade secret misappropriation lawsuit in Wayne County, Michigan, against an ex-employee who allegedly was using the plaintiff’s manufacturing process in a competing business. Pierce nuts affix materials to sheet metal. 

            Responding to the lawsuit, which was the third one between the parties, the ex-employee successfully moved to dismiss the claim on the ground of res judicata. In a counterclaim for tortious interference with a business relationship and expectancy, he denied that the process was confidential, and he demonstrated that the process was readily visible to plant visitors and was disclosed in detail in an old, expired patent. He also proved that the plaintiff’s employees were not required to sign confidentiality agreements and that no document referred to the process as confidential. Accordingly, he maintained that the plaintiff was engaging in sham litigation which was a “flagrant violation” of the Michigan Antitrust Reform Act and part of an unlawful effort to preserve a monopoly. Insisting that it had acted reasonably in filing the lawsuit, the plaintiff produced witnesses who testified to their understanding that the process was confidential. 

            Immediately prior to the start of deliberations following a 25-day trial, the jury was instructed that the manufacturing process did not constitute a trade secret. Naturally, the jury then decided the counterclaim for the defendant. Including attorneys’ fees and pre-judgment interest, the counterclaimant was awarded more than $8 million.

            The manufacturer appealed with interesting results. Initially, the Michigan Court of Appeals affirmed, 2-1. The dissent insisted that the claim should not have been dismissed on res judicata grounds and that the counterclaim instruction was improper and highly prejudicial. On reconsideration, the panel vacated the judgment and remanded for a new trial, concluding that the dissent had been correct in saying that the judge below should have let the jury decide the trade secret question. However, the ruling in the initial opinion regarding res judicata was left unchanged. The judge who initially had dissented now concurred in the portion of the decision on reconsideration remanding because of the improper trade secret instruction, but he continued to dissent with respect to the reiterated ruling on res judicata.

            As this case illustrates, in trade secret misappropriation litigation a party alleging that a manufacturing process is confidential has an uphill battle to obtain a sustainable directed verdict where there is a dispute concerning whether the process constitutes a trade secret.

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An article published yesterday in the Gonzaga Law Review presents an interesting analysis of trade secret litigation in state courts. Authors David S. Alming, Darin W. Snyder, Michael Sapoznikow, Whitney E. McCollum, and Jill Weader published the follow-up article to their article last year concerning trade secret litigation in federal courts. According to the new article, they analyzed 2,077 state appellate court decisions issued between 1995 and 2009 and coded 358 of them for 17 relevant factors.

Here are some interesting findings from their article:

• In more than 90% of trade secret cases in both state and federal courts, the alleged misappropriator was either an employee or business partner of the trade secret owner.
• Just five states account for about half of all trade secret litigation in state appellate courts. California leads the pack (16% of cases), followed by Texas (11%), Ohio (10%), New York (6%), and Georgia (6%).
• State appellate courts affirmed 68% of trade secret decisions and reversed 30% of them.
• State appellate courts favor defendants. Alleged misappropriators (the defendants) prevailed in 57% of cases and trade secret owners (the plaintiffs) prevailed in 41%.
• State courts appear to be a tougher venue for trade secret owners who are suing business partners than for those suing employees. Trade secret owners won 42% of the time on appeal when the owner sued an employee, but only 34% when the owner sued a business partner.
• For decades following its 1939 publication, the Restatement (First) of Torts “was almost universally cited by state courts, and in effect became the bedrock of modern trade secret law.” James Pooley, Trade Secrets § 2.02[1] (2010). Those days are over. Only 5% of the cases in the state study cited the Restatement.
• Unlike federal courts, which cite persuasive authority in more than a quarter of cases, state courts cited persuasive authority in only 7% of cases.
• In contrast to the exponential growth of trade secret litigation in federal courts, trade secret litigation in state appellate courts is increasing, but only in a linear pattern at a modest pace.
• Of all the reasonable measures trade secret owners took, only two statistically predicted that the court would find that this element was satisfied: confidentiality agreements with employees and confidentiality agreements with third parties.

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On January 20, 2011, Massachusetts State Representatives Lori Ehrlich, William Brownsberger, and Alice Hanlong Peisch re-filed the Massachusetts non-compete bill, aptly entitled “An Act Relative to Noncompetition Agreements.”  The bill was originally submitted in late 2009 as House No. 1799, and since that time has undergone significant review, comment, and revision.  While much of the bill remains the same, its sponsors made changes to address several concerns the business community had expressed about particular provisions.  There is no current timeline for a vote on the bill, but we do expect there to be ample opportunity to provide additional input.

What Remains the Same As the Prior Bill?

The bill applies to non-compete agreements in the context of employment, including forfeiture for competition agreements (agreements that impose adverse financial consequences if an employee engages in competitive activities).  However, the bill specifically excludes non-solicitation agreements (both of customers and employees); non-compete agreements outside the employment context, such as those that are executed in the sale of a business; forfeiture agreements (agreements that impose adverse financial consequences as a result of termination regardless of whether the employee engages in competitive activities); and agreements not to reapply for employment.  The bill does not apply to non-disclosure or confidentiality agreements. 
In essence, the bill codifies the existing common law rules, which provide that non-compete agreements are enforceable only if they are reasonable in duration, geographic reach, and scope of proscribed activities necessary to protect the employer’s trade secrets, confidential information, or goodwill, and are consonant with public policy.  In addition, the bill does not change current Massachusetts law permitting courts to reform or modify unreasonable non-compete agreement provisions.

The bill requires non-competes to be in writing, signed by both parties, and “to the extent reasonably feasible,” they must be provided to the employee at least seven business days in advance of employment.  If the agreement is executed after the commencement of the employment relationship, the employee must be provided with notice and “fair and reasonable” consideration (beyond continued employment).

The bill restricts non-compete agreements to one year, except for “garden leave” clauses (agreements by which the employer agrees to pay the employee during the restricted period), which may last up to two years. 

The bill mandates the payment of attorneys’ fees to employees if a court refuses to enforce “a material restriction or reforms a restriction in a substantial respect,” or if it finds that the employer acted in bad faith.  Attorneys’ fees are not mandated, however, if a particular provision is “presumptively reasonable,” as defined by the statute, or if the employer made “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable,” even if a court refuses to enforce or reforms the provision.  An employer may be entitled to its legal fees if it prevails only if they are otherwise permitted by statute or contract, the agreement is presumptively reasonable, the non-compete was enforced, and the employee acted in bad faith.

What Has Changed From the Prior Bill?

Perhaps the most significant change in the current version of the bill is that it no longer restricts the use of non-compete agreements to employees making more than $75,000 per year.  Instead, the bill calls for courts to consider the economic circumstances of, and economic impact on, the employee.  This is important because there are many companies doing business in the Commonwealth, oftentimes start-ups, that employ individuals who are paid less than $75,000 per year, but who are otherwise provided with potentially lucrative equity interests, stock options, or the like.  The departure of these employees to a competitor can cripple a start-up company and can even cause hardship to well-established companies that may utilize these other types of non-monetary compensation and pay key employees less than $75,000.  This salary benchmark was also a concern for companies that employ part-time or seasonal employees, and staffing agencies, to name a few, which may not meet the $75,000 salary benchmark in a calendar year.    

Another change in the bill relates to the award of mandatory attorneys’ fees to employees.  While this provision remains in the bill, as discussed above, an employer can avoid paying fees if the court determines that it undertook “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable,” even if unsuccessful.  This provision, however, does not provide clear guidance to employers as to the parameters of such “objectively reasonable efforts,” and remains a significant departure from existing law that litigants pay their own attorneys’ fees, win or lose.

Like some other states, including California, the bill, in its prior and current versions, explicitly rejects the inevitable disclosure doctrine (which holds that even in the absence of an enforceable non-compete agreement, a former employee may be prevented from working for a competitor based on the expectation that the employment would inevitably lead to the disclosure of trade secrets or confidential information of the former employer).  The newest version of the bill, however, recognizes that employers may nevertheless protect themselves using other laws and agreements, including applicable trade secrets laws and non-disclosure agreements.   

Other changes from the last version of the bill include: (a) non-competes executed after the commencement of employment no longer must be accompanied by a 10% increase in salary to be presumptively reasonable; now, they must simply be supported by “fair and reasonable consideration”; (b) non-compete agreements no longer need to be separate documents; (c) garden leave clauses are permitted; and (d) the scope of restrictions placed on forfeiture agreements has been limited.

Finally, it is important to note that the bill is not retroactive, and will not apply to agreements entered into before January 1, 2012.

Seyfarth Shaw plans to monitor and participate in the legislative process and will report on the status and evolution of this bill on our blog, Trading Secrets, at www.tradesecretslaw.com.  If you have any questions or would like to provide input on the bill, please contact the Seyfarth Shaw attorney with whom you work or any Trade Secrets, Computer Fraud & Non-Compete attorney on our website (www.seyfarth.com/tradesecrets). Click here for Seyfarth Shaw's Management Alert on the bill.

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By Robert Milligan and Joshua Salinas

Wrongfully accessing someone’s personal email account may cost you $1,000 per unauthorized access, even if that person suffers no injury or loss. In Pure Power Boot Camp v. Warrior Fitness Boot Camp, 2010 WL 5222128 (S.D.N.Y. 2010), a New York district court permitted the recovery of statutory damages under the Stored Communications Act (SCA) (18 U.S.C. § 2707(a)) without proof of actual damages sustained.

Lauren Brenner allegedly hired former U.S. Marines Ruben Belliard and Alex Fell to work as “drill instructors” at her Pure Power Boot Camp physical fitness center. While still employed at Pure Power, Belliard and Fell allegedly made plans to open a competing boot camp style physical fitness center. Belliard and Fell left Pure Power, and shortly thereafter opened Warrior Fitness Boot Camp.

Fell alleged that after he left, Benner, or someone from Pure Power, accessed his personal e-mail account and printed e-mails from his personal Gmail, Hotmail, and Warrior Fitness accounts. Fell had left his username and password information saved on Pure Power computers, which allowed access to his email accounts. The emails revealed that Belliard and Fell allegedly copied Pure Power documents, stole Pure Power customers, and shredded their non-compete agreement.

Benner allegedly read these emails and Pure Power Boot Camp brought claims against Belliard and Fell, which included claims for breach of their non-compete agreements and theft of Pure Power’s business model, customers, and documents.

Fell counterclaimed against several parties, including Brenner and Pure Power, alleging that the unauthorized access of Fell’s account violated the SCA and entitled him to statutory and punitive damages, as well as attorneys’ fees.

A significant issue in this case was whether Fell could recover statutory damages under the SCA, even though he failed to allege or prove actual damages. In fact, Fell confirmed in his deposition that he sought only statutory and punitive damages.

On summary judgment, the court held that proof of actual damages is not required to recover under the SCA. The interesting aspect of this case was the court’s departure from the holding in Van Alstyne v. Elec. Scriptorium, Ltd.,560 F.3d 199 (4th Cir. 2009), the only federal appellate decision to analyze this issue. Van Alstyne required proof of actual damages in order to recover the $1,000 statutory damages under SCA. Van Alstyne based its decision on Doe v. Chao, 540 U.S. 614 (2004), where the Supreme Court required proof of actual damages for recovery under the Privacy Act. However, the Pure Power court criticized Van Alstyne’s analysis because the SCA and Privacy Act have different purposes, language construction, and legislative histories.

Indeed, according to the court, an overwhelming majority of jurisdictions decided after Doe permit recovery of statutory damages under the SCA absent actual damages. This has been applied to unauthorized access of employee’s email accounts (Cedar Hill Assocs., Inc. v. Paget, No. 04cv0557, 2005 WL 3430562 (N.D. Ill. 2005)), restricted websites (In re Hawaiian Airlines, Inc., 355 B.R. 225 (D.Haw. 2006)), and social media accounts (Pietrylo v. Hillstone Restaurant Group, No. 06-5754, 2009 WL 3128420 (D.N.J. 2009)).

The court, however, rejected Fell’s argument that each e-mail that was accessed constituted a separate $1000 violation under the SCA. The court found that, because the period over which the emails were accessed was relatively short (a nine day period), and because there was no evidence indicating the specific number of times each account was accessed, it was appropriate to aggregate the intrusions with respect to each individual e-mail account and find that there had been four independent violations of the SCA  --one violation for each unauthorized access of an electronic communications facility, which allowed access to electronic communications while still in electronic storage.  The court also rejected Fell’s request for punitive damages at this stage in the proceedings because the court was unable to determine as a matter of law which party accessed the email accounts, and the surrounding circumstances, and therefore, there was no basis upon which to decide whether punitive damages were appropriate. The court also rejected Fell’s request for attorneys’ fees as premature because the court was presently unable to determine which of the parties named in the counterclaim was liable for the four violations of the SCA.

The Pure Power court’s affirmation of some employee privacy rights and the removal of the actual damages hurdle to a SCA claim have several implications for employers and management. First, increased attention must be given when dealing with employee personal e-mail and social network accounts. The decision does not impair the ability to monitor employee web activity or work provided email accounts, provided that the employer has clear policies articulating that employees have no expectation of privacy. However, extra care must be given to employee personal accounts, particularly when the employee saves login information on the computer and the login information is used to access the employee’s personal accounts. Employers should not engage in such conduct. 

In Pure Power, the access of Fell’s email accounts created a cause of action to recover statutory damages for Fell, where the employer may have a solid non-compete/unfair competition suit against the employee. Perhaps more detrimental to employer Pure Power Boot Camp, the court also excluded the highly relevant emails demonstrating alleged employee disloyalty from evidence. Finally, the ability to recover statutory damages without proof of actual damages, as well as punitive damages and attorney fees, may provide an incentive for employees and their counsel to pursue SCA claims against current and former employers.

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By Paul Freehling and Scott Schaefers

The Eleventh Circuit Court of Appeals’ December 27, 2010 decision in U.S. v. Rodriguez, Appeal No. 09-15265, -- F.3d --, 2010 WL 5253231 (11th Cir. Dec. 27, 2010) may mark a significant split among the federal appellate circuits over the meaning of the phrases “without authorization” and “exceeds authorized access” under the federal Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq. (“CFAA”). On one side of the fence sit decisions which reject such suits due to the employer’s prior grant of access, regardless of the employee’s purpose of access or subsequent use of the files. On the other side are decisions which allow CFAA claims where the employee’s purpose for accessing the files was unauthorized, even if the access itself was permitted.

In Rodriguez, the court upheld the criminal CFAA conviction of defendant Roberto Rodriguez, a former Social Security Administration (“SSA”) telephone service representative, because he accessed confidential and sensitive files for “a non-business reason.” The SSA had previously established a policy prohibiting employee access of confidential databases “without a business reason,” of which Rodriguez was made aware several times. Despite these clear warnings from his employer, Rodriguez accessed more than 100 times confidential, personal information from Social Security files concerning women with whom he had a romantic relationship. Even though Rodriguez’s access of the database itself was authorized, the purpose of the access was not, thus triggering the “without authorization” or “exceeds authorized access” provisions of the CFAA.

The Eleventh Circuit thus aligned itself with the Seventh Circuit, which in Int’l Airport Centers, LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006), held that an employee violates the CFAA where he already has decided to quit, and thereafter accesses company files for unauthorized purposes in furtherance of his “breach of duty of loyalty” to the company (i.e. to erase valuable company data). That is, when an employee accesses computer files with a purpose to injure his employer, his access is necessarily unauthorized because by law because he never had permission to work against the company. 

On the other side of the split is the Ninth Circuit‘s September 2009 decision in LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009). There, the court dismissed the CFAA suit against the former employee for subsequent misuse of company files because the purpose and misuse of the employee’s access was irrelevant, so long as the access itself for was permitted, for any purpose. According to Brekka, reading a purpose-related qualification into the CFAA terms “without authorization” and “exceeds authorized access” would run counter to the plain meaning of those statutory requirements. In fact, Brekka explicitly rejected Citrin’s suggested interpretation along those lines.

Rodriguez did not explicitly reject Brekka. Rodriguez instead distinguished Brekka because in Brekka there was no express prohibition against the employee’s accessing files and e-mailing them to his home address, whereas in Rodriguez, a prohibition against non-business-related access was in place. Nevertheless, Rodriguez implicitly rejected Brekka, because Brekka limited CFAA claims to those instances in which an employee had not received permission to access a computer for “any purpose,” or where the permission had been previously rescinded and the employee accessed the computer anyway. Rodriguez had permission to access the SSA database, albeit for a limited purpose, so his conviction likely would have been overturned by the Ninth Circuit, not upheld as the Eleventh Circuit did. Also, because of the unique circumstances in Rodriguez, there is a possibility that it could be distinguished on its facts alone.

In any event, the lessons to be learned by corporate counsel and management from this conflict are not limited to whether an employer can sue an employee for violating the CFAA. These decisions serve as reminders to management that they must carefully and vigilantly create and enforce employee computer-use policies, including the following:

*Write clear computer-access policies, disseminate those policies among employees, and periodically remind employees of their obligations;

*Require employees, whether professional, clerical, or otherwise, to sign non-disclosure and computer confidentiality agreements, where access to computers is strictly limited to furthering company business; and

*Develop a limited-permission structure so that employees are provided access only to those files needed to do their job.

You may contact Seyfarth Shaw’s Trade Secret Protection attorneys for further ideas and discussion of issues related to employee misuse or theft of company intellectual property.

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Throughout 2010, Seyfarth Shaw LLP’s dedicated Trade Secrets, Computer Fraud & Non-Competes practice group hosted a series of webinars that addressed key issues facing clients today in this important and ever changing area of law. The series consisted of five webinars: The Computer Fraud and Abuse Act: What You Need to Know, Protecting the Secrets in Your Employees’ Heads, Trade Secret Litigation and Protection in California, Franchise and Dealer Relations: Protecting Your Trade Secrets and Brand, and Protecting Your Trade Secrets in the Global Economy: Non-Compete and Trade Secret Considerations In Europe and Asia. As a conclusion to this well-received 2010 webinar series, we have compiled a list of key takeaway points for each of the webinars. If you were not able to attend the webinars, we invite you to request the archived recordings of the webinars by contacting your Seyfarth Shaw LLP attorney. We are also pleased to announce that Seyfarth Shaw LLP will continue its webinar programming in 2011 and has several exciting topics lined up.

The Computer Fraud and Abuse Act

Our first webinar this year, led by Seyfarth attorneys James Yu, Michael Elkon, and Carolyn Sieve, was entitled The Computer Fraud and Abuse Act: What You Need to Know. The Computer Fraud and Abuse Act (CFAA) is a federal statute that has been used for almost a decade to obtain injunctive relief against, and impose liability on, employees and hackers who steal or interfere with a company’s electronic information. This webinar covered the essential points that employers need to know about the CFAA and its potential uses in protecting electronic assets.

·         CFAA claims often turn on what an employee was authorized to do on an employer’s computer system. Therefore, handbooks, IT policies, sign-in screens, and other materials that cover IT authorization should address what an employee is (and is not) allowed to do on the system. 

·         The CFAA is not limited to employees. An employer should consider what authorization instructions it provides to clients, vendors, potential business partners, and contractors. It should also carefully monitor the security protections for its website and internal servers as hackers remain a continuous threat. 

·         There is a split among federal courts regarding whether the CFAA applies to employees who are initially provided access to company data but then either exceed that authorization or otherwise act in a manner that revokes the initial authorization. Some courts have limited the use of the CFAA to unauthorized users such as hackers. Therefore, the location of a possible violation of the CFAA is important.

Inevitable Disclosure

The second webinar of the 2010 series, led by Erik von Zeipel, Jason Stiehl, and David Countiss, focused on Inevitable Disclosure, an evolving doctrine recognized in a large number of jurisdictions that may prevent an employee from accepting employment when the employee’s duties cannot be performed without the disclosure of a former employer’s trade secrets. This discussion covered what employers need to know about the Inevitable Disclosure Doctrine, including jurisdictions which have adopted the doctrine and its application to both exiting and incoming employees. The panel also discussed best practices for handling the hiring and termination of employees in such jurisdictions.

·         Understand the state of the law regarding inevitable disclosure in your jurisdiction. Injunctive relief may be easier to obtain if your jurisdiction has adopted the doctrine.

·         Require new employees to sign agreements acknowledging their obligation to protect company’s trade secrets, as well as acknowledging that they understand that they need to respect their prior employer’s trade secrets and any related agreements. Be prepared to marshall any breaches of these agreements if litigation ensues.

·         When an employee departs, sequester technology assets, conduct exit interviews and have the employee acknowledge agreements and covenants protecting trade secrets.

California Trade Secrets Law

This third webinar, conducted by Robert Milligan, Robert Niemann, and Jim McNairy, focused on how California trade secret law is similar and diverse from other jurisdictions, including a discussion of the California Uniform Trade Secrets Act, trade secret identification requirements, remedies, and the interplay between trade secret law and Business and Professions Code Section 16600, which codifies California’s general prohibition of employee non-compete agreements. The webinar also covered effective California trade secret protection policies and practices.

·         Aside from a few narrow exceptions, non-competition agreements are presumed void under California law in the typical employment context and recent cases hold that most non-solicitation of customer clauses are synonymous with non-compete agreements and are therefore also unlawful. It remains to be seen whether the so-called “trade secret exception” will be a viable exception to California’s general prohibition against non-competition agreements. Employers should keep these developments in mind when assessing such agreements and make sure that their agreements comport with the recent developments in the law. Failure to do so places employers at risk for unlawful business practice suits. 

·         Because non-compete agreements are typically unenforceable in California, employers typically pursue trade secret misappropriation claims against former employees who steal proprietary company information. In such suits, the employer has the burden of showing that the information is a trade secret, including showing that reasonable secrecy measures were in place to protect the information. Accordingly, prudent companies should consider investing the time and money to conduct a trade secret audit. A trade secret audit generally assesses what company information may be protectable as a trade secret and the security measures the company has in place to protect such information. The results of a successful audit are clearly identified trade secrets with adequate protection measures (including updated trade secret protection agreements) in place: the existence of which are essential to success in trade secret litigation, as well as to ensure that key company assets are adequately protected.

·         Conduct a thorough investigation prior to filing a trade secret misappropriation suit to ensure that the claim can be supported from all lines of attack to enable the court to issue appropriate injunctive relief and award damages. This includes obtaining evidence of the trade secret’s existence and the efforts used to protect it. Employers will need to dedicate the time and resources to arm their counsel with this essential information before and during the litigation. Trade secret plaintiffs are also required to identify their trade secrets with particularity before discovery commences in the case, so be prepared to have a trade secret identification statement prepared in advance of serving your discovery.

Trade Secrets and Franchise Law

The fourth webinar of the 2010 series, led by Andrea Okun, Jim McNairy, and Marcus Mintz, discussed how to protect trade secrets, trademarks, trade dress, and goodwill while maintaining and enhancing successful franchises and dealerships. These are often the core assets of a franchise or dealership, and this webinar presented an overview of what assets are protectable, how those assets can be protected, what state and federal laws can be used to protect these assets, and what can be done if these assets are threatened.

·         One of the best ways to protect trade secrets, trademarks, trade dress and goodwill is by entering into clear, enforceable agreements at the outset of the business relationship. These agreements should clearly identify the assets (such as confidential information and intellectual property) that are being shared/licensed and expressly state the receiving party’s agreement to (a) not make unauthorized use or disclosure of those assets, (b) return all assets at the termination of the relationship, and (c) the need for injunctive relief should the receiving party breach the agreement.

·         In addition to the federal Lanham Act, know the law of your jurisdiction(s). 46 out of 50 states plus the District of Columbia have adopted some variation of the Uniform Trade Secrets Act protecting highly confidential information. Of the remaining 4 states, Massachusetts, New Jersey, and New York have introduced their own versions of the Uniform Trade Secrets Act (only Texas has no trade secret act in place or pending). The franchise acts in Illinois, Indiana, Iowa, Louisiana, Michigan and Minnesota make mention of the enforceability of non-competes. Further, Alabama, California, Colorado, Florida, Georgia, Hawaii, Michigan, Montana, New York, South Dakota, and Texas all have statutes specifically dealing with non-competes.

·         When drafting restrictive covenants and seeking injunctive relief, do not overreach. Drafting overly broad agreements or seeking injunctive relief beyond the scope of legitimate business needs may result in invalidation of the agreements at issue and denial of any form of injunctive relief. Be careful not to assume that every jurisdiction will blue pencil or re-write your restrictive covenants to make them enforceable. Many will not.

International Trade Secrets and Non-Compete Law

The final webinar of the 2010 series, led by Marjorie Culver, Dominic Hodson, and Robert Milligan, focused on non-compete and trade secret considerations from an international perspective. The webinar involved a discussion of non-compete and trade secret issues in Europe and Asia, including the threats to trade secrets and confidential information in these regions. The similarities and differences in approach among the various jurisdictions were discussed and compared to the United States. The panel discussed drafting considerations for confidential/trade secret protection and non-compete agreements as well as appropriate policies in these regions, along with a discussion of sources of protection other than written agreements and policies. This webinar provided valuable insight for companies who compete in the global economy and must navigate the legal landscape in these regions and ensure protection of their trade secrets.

·         One size does not fit all when it comes to drafting employment restrictive covenants for employers operating in international countries. Local jurisdictions take an active interest in agreements that restrict employees from competition as a matter of public policy. Companies must be mindful of the legal requirements for valid non-competes and non-solicits where the employees predominantly provide services or where the employees are likely to later compete. Even where the parties agree on a governing law or forum, the courts in the local jurisdiction often apply local law requirements and void restrictive covenants that do not comply.   

·         Trade secrets: default statutory protections only go so far. Though many countries make trade secret misappropriation unlawful (similar in some respects to the U.S.), this protection may not be helpful unless a company takes active measures to define and protect its proprietary information. Companies should execute confidentiality agreements adequately defining what a company considers confidential and proprietary and also put in place technological and security protocols to restrict access to the company’s most valuable proprietary information. Failure to take such measures can undermine a company’s claim that the information constitutes a trade secret. Companies must also be mindful that their security precautions do not interfere with employees’ privacy rights, particularly in Europe.

·         Non-competes: are they worth the effort in every instance? In some jurisdictions, non-competition restrictions require payment to the former employee during the restrictive period. And, in some cases, even an employer who no longer wishes to oblige the employee cannot waive the non-compete and the obligation to pay. Additionally, injunctive relief may not be available in some countries, making a non-compete the least expedient means for protecting the company from unfair competition. Across the board use of non-competes may not be the most cost-effective or efficient way to protect a company’s competitive position or trade secrets. Rather, companies should formulate a thoughtful strategy that only utilizes non-competes with employees for which there is a legitimate business and legal justification.

2011 Trade Secrets Webinar Series

Beginning in January 2011, we will begin another series of Trade Secret webinars. Planned topics for the 2011 series include Trade Secrets in the Financial Services Industry, Georgia’s New Non-Compete Statute, Choosing the Right IP Protection: Patent or Trade Secret, The Anatomy of a Trade Secret Audit, and Maintaining Trade Secrets in the New World of Cloud Computing. For notifications concerning our upcoming webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here.

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A federal court recently declined to issue a blanket injunction to thwart the defendant's campaign to obtain trade secrets information through public records requests, stressing the right and importance of access to public records. The court also pointed out that some jurisdictions -- such as Mississippi, which was one of the jurisdictions where the defendant sought documents -- have statutes providing a party with an opportunity to seek a court order blocking disclosure, and the plaintiff failed to show that this local protection was inadequate. Therefore, the plaintiff did not demonstrate a strong probability of success on the merits or the likelihood of establishing irreparable harm. Campuseal, Inc. v. Datatel, Inc., 2010 U.S. Dist. LEXIS 133607 (N.D. Ohio, 12/17/10).

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A federal court recently entered a TRO to prevent disclosure of trade secrets justifiably shared, in confidence, with business associates. When two of those associates made plans, clandestinely, to form a competing company, they were enjoined from disclosing the trade secrets even though they had not signed a confidentiality agreement. Exl Labs., LLC v. Egolf, 2010 U.S. Dist. LEXIS 131105 (E.D. Pa., Dec. 7, 2010). 

Plaintiff Exl manufactures dairy hygiene products. Non-party Lancaster is the exclusive dealer for Exl products in Pennsylvania. Non-party Beers is VP and GM of Exl and also is a member of the Board of Directors of Lancaster. On several occasions, Beers discussed Exl's confidential information at Lancaster's Board meetings, but Beers cautioned the directors not to disclose any of it to third parties. 

Defendants Egolf and Dry, members of the Board and employees of Lancaster, used some of the confidential information in the course of making plans to compete with Lancaster. They also provided some of the information to a business consultant who was assisting them in their illicit venture. When Exl learned what Egolf and Dry were up to, Exl sued them in a Pennsylvania federal court, alleging trade secret misappropriation and requesting a TRO. 

Arguing that Exl's disclosure of the trade secrets at Lancaster Board meetings defeated Exl's lawsuit and request for a TRO, the defendants moved to dismiss. The court disagreed, holding that Exl had endeavored to achieve "substantial secrecy" which, rather than "absolute secrecy," is all that is required. The court also decided, apparently, that the limited disclosure had a business justification. The defendants maintained that Exl’s lawsuit failed because of the absence of any written confidentiality agreement between Exl on the one hand, and Lancaster or the defendants on the other. The court ruled that Exl had taken sufficient steps to maintain confidentiality and that, under these circumstances, a written agreement was not essential.

The defendants claimed that Lancaster was an indispensable party in federal court (its addition would destroy diversity jurisdiction). The court rejected the claim because Exl was suing solely for misappropriation of its own trade secrets.

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On December 13, 2010, Kevin Crow was sentenced to serve thirty-six (36) months in Federal prison, without parole, which prison term was to be followed by 3 years' supervised release. Mr. Crow was also fined $10,000.00. What was Mr. Crow’s alleged crime? He had been charged with one-count of Theft of Trade Secrets in violation of Title 18 United States Code, Section 1832. Specifically, Mr. Crow allegedly had stolen trade secrets from a former employer and used this information to the benefit of his new employer.

The facts as alleged by the prosecution were as follows. Mr. Crow had been an engineer with Turbine Engines Components Technologies Corporation (TECT) for just under thirty years, (August 1979 until June of 2007) when he was laid off by the company. Of particular interest, Mr. Crow’s duties at TECT were alleged to include creating and modifying company policy for the identification and protection of TECT’s trade secrets. As is common practice in many “trade-secret heavy” firms, Mr. Crow executed a statement upon his termination that he had returned all documents containing any trade secrets TECT. The prosecution, however, alleged that despite this statement, he had in fact taken approximately 100 computer discs containing information identified as trade secret by the Company.

After his termination at TECT, Mr. Crow became employed at Precision Components International (PCI), a direct competitor of TECT. Both companies manufacture and sell various parts used in military aircraft engines. While employed by PCI, the prosecution alleged that Mr. Crow contacted several employees of TECT and requested copies of pricing documents containing TECT vendor and customer information, as well as copies of other documents that contained information Mr. Crow knew to be TECT trade secrets. Of possibly the most importance, Mr. Crow was alleged to have admitted to a TECT employee that he had taken information off of TECT computers including blueprints and cost and pricing information, a course of conduct he is also alleged to have admitted to the same employee could be considered industrial espionage.

As part of a plea, Mr. Crow stipulated that TECT had suffered losses not exceeding $14,000,000 as a result of his conduct.  The United States Attorney was quoted as indicating that although the cost to TECT could be, and was, estimated in dollars, “…the potential harm to our military equipment readiness is still unknown.” The involvement of potential military secrets, specifically information used in the manufacture of military aircraft engines, likely contributed to the prosecution of what is, at surface, a matter of “corporate espionage,” but the application of the available criminal statute to an otherwise “garden variety” trade secrets case bears taking notice.

The matter was investigated by the Federal Bureau of Investigation in conjunction with agents of Immigration and Customs Enforcement,  and the prosecution was conducted by Assistant United States Attorney Jennifer Kolman.

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By Robin Cleary

After nine years of protracted litigation, a Santa Clara jury unanimously decided that Marvell Semiconductor Inc. did not misappropriate Jasmine Network Inc.'s trade secrets and did not violate a non-disclosure agreement according to published reports. The lynch pin of Jasmine's case was the infamous voice mail heard 'round Silicon Valley---in it, a conversation among Marvell's former general counsel, in-house patent attorney and vice president of engineering was recorded when Marvell's counsel inadvertently failed to hang-up the phone after leaving a message for Jasmine's legal and business affairs director. According to a transcript of the voice mail, Marvell's former general counsel stated that: "Sehat doesn't go to jail. [Marvell vice president of business development] Manuel [Alba] might go to jail." Later, another company officer says: "If we took that IP on the pretense just evaluating it, and put it in our product …"

Jasmine's attorney portrayed this voice mail as the pièce de résistance in its case to prove that Marvell conspired to steal Jasmine's trade secrets and raid a group of Jasmine's core engineers. But, after two weeks of deliberations, a Santa Clara jury disagreed.

According to reports, when the voice mail was actually played for the jury, it was difficult to hear because multiple voices were talking over each other. In addition, Marvell mounted an aggressive counter-attack on Jasmine. Marvell's defense attorney argued that Jasmine had stolen technology from a Stanford professor in an alleged "night raid" and then tried to sell that same technology to Marvell. For added flair, Marvell's defense attorney even waved a pair of toy night-vision goggles in front of the jury during his closing argument. Marvell's counsel also downplayed the voice mail, saying that Jasmine was using it as an extortion tool against Marvell.

Santa Clara Superior Court Judge William Elfving presided over the trial in the case, which has made two trips to the Court of Appeal. 

It remains to be seen whether Jasmine will appeal but we would not be surprised if there is an appeal based upon the contentiousness of the parties' dispute to date.

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 Los Angeles partner Robert Milligan will be leading a presentation on "Hot Topics in Trade Secret Law" at the State Bar of California’s 35th Annual Intellectual Property Institute at the Silverado Resort in the Napa Valley on Saturday, October 30, 2010 beginning at 9:35 am.

The Institute is the premier multiday program of the State Bar of California’s Intellectual Property Law Section. The Institute begins on Thursday, October 28, 2010 with Nuts & Bolts sessions on intellectual property law. Friday and Saturday are two days of IP programming covering trade secrets, trademarks, copyrights, patents, and cyber law.

The Institute is highlighted by 2010 Vanguard Awards on Friday afternoon. This year's honorees are Brett Alten, Director of Patent Development, Apple, Inc., Ian C. Ballon, Hon. Jeremy D. Fogel, U.S. District Court for the Northern District of California, and Cindy Cohn, Legal Director, Electronic Frontier Foundation.

From the thorny issues of California Uniform Trade Secret Act preemption of common law claims and remedies, through the continued use of employee non-solicitation/non-competition agreements in the post-Edwards era, to the by-now ubiquitous skirmishing over the sufficiency of a plaintiff’s pre-discovery designation of trade secrets under CCP § 2019.210, Robert and the expert panel will guide participants through recent developments in some of the more rapidly evolving areas of trade secret protection and litigation in California on Saturday morning.

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By Robin Cleary (San Francisco)

Double-checking the locks on your car; re-opening the door on the public mail box after mailing a letter; and re-pressing the receiver button on your speakerphone after finishing a conference call—all extra precautions to preserve privacy, though not always viewed as essential by many. But in Marvell Semiconductor’s case, a little extra diligence by its former executives would have saved it years of headaches and legal expenses. After nine years, the trade secret misappropriation case filed by Jasmine Networks against Marvell is finally underway in Santa Clara Superior Court. Jasmine alleges that Marvell breached a nondisclosure agreement and stole its intellectual property. Jasmine claims lost business worth $80 million to $100 million.

At the heart of Jasmine’s case is a voicemail left in August 2001 by Marvell’s former general counsel for Jasmine’s legal and business affairs director. In the voicemessage, Marvell’s general counsel asked Jasmine’s in-house counsel to return his call. Marvell’s counsel, however, inadvertently failed to hang up the phone, and his subsequent conversation with Marvell’s in-house patent attorney and vice president of engineering was recorded.

According to reports, a transcript prepared by Jasmine quotes Marvell's former general counsel, saying on the voicemessage "Sehat doesn't go to jail. [Marvell vice president of business development] Manuel [Alba] might go to jail." Later, another company officer says: "If we took that IP on the pretense just evaluating it, and put it in our product …"

Jasmine’s trial counsel characterize the voicemail as evidence that Marvell conspired to steal its trade secrets. Marvell counters that the voicemail is simply speculation by Marvell executives about what could happen and that, regardless of how the voicemail is characterized, there was no misappropriation because none of Jasmine’s technology was used in any of Marvell’s product. Although Marvell was initially successful in obtaining a preliminary injunction to prevent the use or disclosure of the voicemail, the Sixth District Court of Appeal reversed the order on the grounds that the attorney-client privilege had been waived and that the voicemail fell within the crime-fraud exception to the attorney-client privilege.

Whether the infamous voicemail was a confession or mere speculation now appears to be a question for the trier of fact to decide. We will provide an update to let you know what the jury decides. In the meantime, remember to hang up your phone after you leave a voice message.

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        Periodically, we see significant trade secrets issues arising in the franchise context. As counsel, we regularly advise clients on these issues. Given the significance of trade secrets in the franchise organization, we thought it might be helpful to get the perspective of the President of Franchise Opportunities Network, W.C. Garth Snider, on the role of trade secrets in the franchise operation. Franchise Opportunities Network, www.franchiseopportunitiesnetwork.com, connects domestic and international franchisors and potential franchisees through Internet-based (online) websites (counting over 20 in number), including www.franchiseopportunities.com and www.smallbusinessopportunity.com. Snider also is a regular author of blog postings related to franchising, such as www.franchisinglaw.com, www.franchiseopportunitiesnetwork.com/category/blog, and http://www.franchiseopportunities.com/blogs/

            The first question that I posed to Snider was how important does he think trade secrets are in the franchise arena. In a nutshell, he responded, “Very.” As he pointed out, a franchise is based on the principle of using a specialized system to sell products. A franchise’s “success is derivative of the ability of the franchisor (1) to protect the method and manner by which it distributes its product and (2) the uniqueness of the product itself. So, to the extent that there is a formula, pattern, device, or compilation of information that it can take advantage of that are not readily accessible to its competitors, that is very valuable.” Snider noted that the heart of any good franchise is its goodwill, and in turn, that goodwill is based on the trade secrets behind the products it takes to market. 

            Typical types of trade secrets found in franchises depend on the type of business, but can vary from Kentucky Fried Chicken’s original recipe or the chemical formula behind a successful carpet cleaning company to business methods and plans for tax preparation companies. And, depending on how well protected the information is, trade secrets in the franchise context can include supplier lists, pricing data, algorithmic formulas for data and software, and customer lists.

            Snider opined that protection for these trade secrets begins first and foremost with the franchise agreement. The agreement should define very clearly what is considered a trade secret or other confidential information and how that information should be handled. He recommends that “nothing be left to chance” when it comes to crafting adequate protections in an agreement. For example, he recommends including language in the agreement that makes it plain that the trade secrets are being licensed and not sold. Moreover, he suggests including a ban on reverse-engineering in the agreement itself, requiring the franchisee to ensure that its personnel receive frequent reminders regarding confidentiality, and that the franchisee require its personnel to execute appropriate confidentiality agreements. Finally, he suggests that repeated reminders be included in operation manuals; education of employees regarding the importance of guarding the secrets can be crucial to preventing negligent disclosure.

            One recommendation that Snider makes is for the franchisor to have a compliance officer who monitors the use of the trade secrets and the proper implementation of restrictions on the use of the trade secret information. Snider suggests that the compliance officer be charged with conducting audits and monitoring reports from franchisees. Indeed, he suggests that the franchisees self-audit and report to the compliance officer as well.   By creating a closed loop on all of the protections in place, the company is more secure and, if something unforeseen happens, also in a good position to protect its trade secrets in litigation. 

            A tricky question that comes up when we talk about trade secrets and franchises is valuation of the franchise based on the trade secrets. Snider did not have a magic formula (trade secret or otherwise) for how best for a franchisee or franchisor to value the trade secrets, but offered a rule of thumb: the more easily replicated the trade secret, the less valuable it is. According to Snider, it is a sliding scale; if the trade secret can be reverse engineered with relatively minimal expenditure of time and resources (while still qualifying as a trade secret), the less value a franchisee may place on it. As an additional layer, value is added by brand recognition. The Kentucky Fried Chicken brand is more valuable than Joe’s Fried Chicken because it is well-known -- even if the chicken is comparable. Customer lists also are difficult to value, but not impossible. The key there is to make sure that the list is protected as a secret and not widely distributed. 

            As domestic franchisors expand abroad, Snider had one firm recommendation - know a local lawyer. “Franchising is its own discipline in every country,” Snider said. “Spend the time and money to get it right the first time.” [Note - protections that may work to protect trade secrets in the United States may not work in some foreign countries, particularly Europe, where employee workplace privacy protections are strong; monitoring of employee activities in workplace such as e-mail and physical surveillance are different.] As for international franchisors moving into the U.S., particularly from the Gulf states, India, and Australia, we agreed that franchisors beginning business here should take all the same steps to protect their trade secrets as a domestic franchisor would. 

            In sum, Snider agreed, franchisors and franchisees have much to be concerned about when it comes to trade secrets and much to protect. Actively monitoring and managing these assets is critical to a successful enterprise.

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PLEASE CLICK HERE TO REGISTER

Date: Wednesday, October 6, 2010

Time:
9:00 am - 10:00 am Pacific
10:00 am - 11:00 am Mountain 
11:00 am - 12:00 pm Central
12:00 pm - 1:00 pm Eastern

The fifth webinar of the 2010 series will focus on non-compete and trade secret considerations from an international perspective. The webinar will involve a discussion of non-compete and trade secret issues in Europe and Asia, including the threats to trade secrets and confidential information in these regions. The similarities and differences in approach among the various jurisdictions will be touched upon and compared to the United States. This webinar will provide valuable insight for companies who compete in the global economy and must navigate the legal landscape in these regions and ensure protection of their trade secrets.

Our team will discuss:

• Overview of non-compete and trade secret law in selected European and Asian countries, including a discussion of the impact of a forum's legal system.
• Drafting considerations for confidential/trade secret protection and non-compete agreements as well as appropriate policies in these regions, along with a discussion of sources of protection other than written agreements and policies.
• Comparison of similarities and differences of non-compete and trade secret law in these regions and the United States.
• Enforcement mechanisms, including arbitration, remedies, as well as forum issues.
• Jurisdictions discussed will include China (including Hong Kong), India, France, Germany, Australia, the UK, Spain, Japan and Taiwan. 

For questions, please contact events@seyfarth.com and reference this event.

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             On July 27, the United States Court of Appeals for the Third Circuit affirmed a district court’s order enjoining a senior executive from Bimbo Bakeries USA, Inc., from working for one of Bimbo’s competitors, Hostess, until after the district court resolved the merits of Bimbo’s misappropriation of trade secrets claim against the executive. Among other trade secrets at issue in the lawsuit is the recipe for Thomas’ English Muffins, which were estimated to account for approximately $500 million in Bimbo’s annual sales income. Defendant Chris Botticella is alleged to be one of only seven people who possess all of the knowledge necessary to replicate independently the muffins.

            The Circuit Court affirmed the district court’s finding that Bimbo was likely to prevail on the merits of its misappropriation of trade secrets claim under Pennsylvania’s Uniform Trade Secrets Act (“PUTSA”). Specifically, the Circuit Court left undisturbed the district court’s determination that Bimbo likely would be able to prove at trial that Botticella would misappropriate Bimbo’s trade secrets if allowed to work at Hostess.

            The Circuit Court focused on PUTSA section 5303 and related case law, which allows courts to enjoin actual or threatened misappropriation of trade secrets. The district court’s finding that there was “[a] substantial likelihood, if not an inevitability, that [Botticella] will disclose or use Bimbo’s trade secrets in the course of his employment with Hostess,” was proper, held the Circuit Court. In so holding, the Circuit Court rejected Botticella’s argument that the district court could only issue an injunction where it is shown that it would be “virtually impossible” for Botticella to perform his new job at Hostess without disclosing trade secrets.

            In reaching this holding, however, the Circuit Court took exception with the district court’s analysis of Pennsylvania’s law concerning the “inevitable disclosure” doctrine. Specifically, the Circuit Court noted that “[w]hile we agree…that Pennsylvania law empowers a court to enjoin the threatened disclosure of trade secrets without requiring a plaintiff to show that disclosure is inevitable, we do not consider that an injunction granted absent such a showing was issued pursuant to the ‘inevitable disclosure doctrine’.” Rather, said the Court, an injunction enjoining one from assuming particular employment may issue where the facts of the case demonstrate a substantial threat of trade secret misappropriation.

            Citing the district court’s findings of fact, the Circuit Court held that the district court had, and properly exercised, discretion to enjoin Botticella from working at Hostess to the extent his proposed employment there threatened to lead to the misappropriation of Bimbo’s trade secrets. The Circuit Court noted that, among other things, the district court found that (1) Botticella had accessed via his laptop computer in his final days at Bimbo highly sensitive information belonging to Bimbo which information would have been damaging to Bimbo if obtained by a competitor; (2) Botticella’s explanation at deposition regarding his suspicious use of the laptop was “confusing at best” and “not credible”; and (3) Botticella’s conduct following his acceptance of the Hostess job offer demonstrated his intention to use Bimbo’s trade secrets during his employment with Hostess. As to this latter point, the district court found that Botticella (a) did not disclose to Bimbo his acceptance of a job offer from a direct competitor and remained in his position to receive Bimbo’s confidential information, (b) received Bimbo’s confidential information after his acceptance of the Hostess job offer, and (c) copied trade secret information from his work laptop onto external storage devices.

The Third Circuit’s decision provides guidance to employers as to the showing required to enjoin former employees from assuming new employment where the facts show that there is a substantial threat of trade secret misappropriation.

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On July 28, 2010, Seyfarth Shaw will continue its webinar series on trade secrets, with a focus franchise and dealer relations.

The fourth webinar of the 2010 series will focus on how to protect trade secrets, trade dress/marks, and goodwill while maintaining and enhancing successful franchises and dealerships. These are often the core assets of a franchise or dealership, and this webinar will present an overview of what assets are protectable, how those assets can be protected, what state and federal laws can be used to protect these assets, and what can be done if these assets are threatened.

Among the topics discussed will be

• Common protectable interests such as trade secrets, trade marks, trade dress and goodwill 
• Best practices for the protection of these assets during the franchise, dealership or distributor relationship, including the use of confidentiality and/or non-competition agreements at the beginning of a business relationship and registering trade dress/marks
• State and federal law that can be used to protect trade secrets and brands such as the Uniform Trade Secret Act, the Lanham Act, unfair competition statutes and common law
• What a company must show to prevail in litigation and what he company may recover if successful

Our panel consists of attorneys with significant experience advising franchise, dealer, and distributor clients on protecting their brands, trade secrets, and other intellectual property, including litigating trade secret cases, drafting protection agreements and conducting trade secret audits. on trade secret issues, including  litigating trade secret cases, drafting protection agreements and conducting trade secret audits. CLE credit will be available for participants.

Register here.

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In New York, injunctive relief will not be awarded unless the plaintiff sets forth specific non-monetary harm to Plaintiff in a trade secret case.

In Systems Management Planning, Inc., v. Gordon, 23 Misc.3d 1104(A), 2009 WL 901514 (N.Y.Sup.) (Sup. Ct., Monroe Co, April 3, 2009), the court, in determining a preliminary injunction, assumed that the trade secret status of the information and the fact of its misappropriation has indeed occurred and therefore focused on the issue of irreparable harm and the “related” doctrine of inevitable disclosure. 

Plaintiff asserted that, in all cases, irreparable harm is presumed when trade secrets have been misappropriated. The Gordon court first noted that “no appellate case in New York has laid down such a hard and fast rule” and the subsequently declined to adopt such a rule citing the recent Second Circuit decision in Faiveley Transport Malmo AB v. Wabtec Corp., --- F.3d at ---, 2009 WL 636020 (2d Cir. Mar. 9, 2009) (such a presumption “might be warranted in cases where there is a danger that, unless enjoined, a misappropriator of trade secrets will disseminate those secrets to a wider audience or otherwise irreparably impair the value of those secrets.”)

The Gordon court, applying the principles of Faiveley Transport, concluded that plaintiff in that case had not adduced clear evidence of irreparable harm. Instead, the court found the plaintiff’s moving affidavit wholly lacking, because it merely stated in conclusory fashion that the defendants had used the confidential and proprietary information that they stole to unfairly divert business and solicit certain specified customers. The court held that these “conclusory assertions wholly fail to show how this worldwide $20 million business cannot readily ascertain its damages if successful in proving that the claimed diversion of six customers resulted from defendant's misuse of wrongfully appropriated trade secret information, instead of what defendants insist was legitimate competition occurring in the absence of a confidentiality agreement or restrictive covenant.”

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In a case brought by a seller of camouflage clothing against a competitor, the U.S. District Court for the District of Montana held recently that just because “something is confidential does not mean it is a trade secret,” and the court granted the defendants’ summary judgment motion. Montana Camo, Inc. v. Cabela’s, Inc., Civ. Ac. No. CV-08-71-BLG-RFC, 2010 U.S. Dist. LEXIS 57895 (D. Mont., June 11, 2010). 

Montana Camo sued Cabela’s, alleging that Cabela’s violated Montana’s Uniform Trade Secrets Act by misappropriating Montana Camo’s confidential sources of supply, marketing information, patterns, and technical information used in making its products. With respect to the names of Montana Camo’s suppliers, however, the court held that most of the relevant information was readily ascertainable, that Cabela’s had not even used certain of the suppliers, and that Cabela’s began purchasing from one of the suppliers before Montana Camo was formed. Since the customer and dealer identification was available on Montana Camo’s website, it was not secret. The technical information to which Montana Camo claimed proprietary rights was determined to be generally known or otherwise not misappropriated. Finally, the court said that even if the supposedly confidential cost, pricing and marketing information referred to by Montana Camo could ever constitute something other than “nebulous concepts” insufficient to be considered a trade secret, Montana Camo had not detailed it adequately to defeat the summary judgment motion.

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 A recent decision by the Commercial Division in New York County requires specific pleading security measures to establish trade secret protection under New York law.  Clean Earth Holding, Inc. v. Kopenhaver, et al., Ind. No. 604077/2007, Sup. Ct., NY Co., Commercial Part (Ramos) (April 26, 2010) (Unpublished)

Clean Earth is in the business of treating, recycling, reusing, transporting, and disposing of contaminated soil, dredge sediments, and other non-hazardous and hazardous materials. Clean Earth's success was alleged to have been due to its unique position in the marketplace, pricing strategies, exclusive arrangements with third-party disposal facilities, and its client base that it had developed over the years.

Clean Earth alleged that defendant Richard Rivkin had breached his fiduciary duty by soliciting certain Clean Earth clients after his employment with Clean Earth was terminated. Clean Earth predicated this cause of action on the theory that its "Client List" was a trade secret and that Rivkin breached his fiduciary duties by providing the Client List to a competitor.

Justice Ramos noted the six factors that are considered in trade secret claims are:

 (1) the extent to which the information is known outside of [the] business; (2) the extent to which it is known by employees and others involved in [the] business; (3) the extent of measures taken by [the business] to guard the secrecy of the information; (4) the value of the information to [the business] and [its] competitors; (5) the amount of effort or money expended by [the business] in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.'"

 Justice Ramos then indicated that trade secret protection does not apply to names, addresses, and telephone numbers of clients or potential clients, if the information is readily available from public sources, such as a local telephone directory.

In dismissing the fiduciary duty claim on summary judgment, Justice Ramos first ruled that certain representations in a client certification that the Client List "is protected within our company in a number of ways, and access to the information is restricted internally" failed to demonstrate with sufficient detail the measures that were taken to guard the information's secrecy. Justice Ramos then held that "Clean Earth fails to raise a triable issue that the Client List was not readily ascertainable to those in the industry or that it was compiled through great effort and expense. Therefore, it fails to demonstrate that the Client List qualifies as a trade secret."

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A recent decision by the United States Court of Appeals for the Second Circuit is a not so subtle reminder that a company must adequately protect its confidential client information at all levels of the company in order to receive trade secret protection under the law. In Nationwide Mutual Insurance Company v. Mortensen, Nationwide insurance agents left Nationwide to work for a competitor.  In doing so, the agents took with them confidential information about Nationwide policyholders. The confidential information included personal client information and data about the client’s needs and purchasing history. The agents received this information while working for Nationwide and the information was kept in two places, Nationwide’s protected computer system and the agent’s personal policyholder file.

The agents shared the confidential client information with Nationwide competitors while looking for alternative employment. Not surprisingly, the agents also used the confidential client information to compete with Nationwide once they joined a competitor. Nationwide filed suit against the agents alleging, among other things, that the agents violated the Connecticut Uniform Trade Secrets Act (CUTSA) when they improperly retained the confidential client information and shared the information with Nationwide competitors. 

Unfortunately for Nationwide, the trial court found, and the Appellate Court affirmed, that Nationwide could not seek protection under the CUTSA. The basis for the Courts’ decision was the lack of adequate protective safeguards that would prevent the disclosure of the confidential client information found in the agent’s personal policyholder files. The fact that the confidential client information was properly protected in a secure computer system was irrelevant because confidential information has to be “adequately protected” at all company levels in order to be protected by the CUTSA. Since Nationwide did not adequately protect the confidential information contained in the agent’s policyholder files, Nationwide could not use the measures found in the CUTSA (injunctive relief, punitive damages, attorneys fees, etc.) to thwart the agent’s removal and subsequent use of Nationwide’s confidential client information.

A trade secrets audit may have enabled Nationwide to receive trade secret protection under the CUTSA. A trade secrets audit identifies the location(s) of confidential information, individuals who possess or need to possess the confidential information, and steps a company can take in order to keep the information confidential and, if necessary, seek protection under the Uniform Trade Secrets Act.

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On May 19, 2010, Seyfarth Shaw will continue its webinar series on trade secrets and restrictive covenant issues with a focus on California.  

The third webinar of the 2010 series will focus on how California trade secret law is similar and diverse from other jurisdictions, including a discussion of the California Uniform Trade Secrets Act, trade secret identification requirements, remedies, and the interplay between trade secret law and Business and Professions Code Section 16600, which codifies California's general prohibition of employee non-compete agreements. The webinar will also cover effective California trade secret protection policies and practices.  Among the topics discussed will be

• Defining and understanding trade secrets in California 
• Comparison between California trade secret law and other jurisdictions
• Protecting trade secret assets in California and remedies for trade secret misappropriation
• Appropriate policies and practices to effectively protect trade secrets, including hiring and termination protocols, a discussion  regarding the use of restrictive covenants, and effective computer and physical security practices

Our panel consists of attorneys with significant experience advising clients on trade secret issues, including  litigating trade secret cases, drafting protection agreements and conducting trade secret audits. CLE credit will be available for participants.*

Register here.

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The Los Angeles County Bar Association's Corporate Law Departments Section is hosting a luncheon program entitled "Employees Run Amok: A Roundtable Program on Recent Developments in California Trade Secrets Law And Covenants Not To Compete" for in-house counsel on Thursday, April 22, 2010 at Seyfarth Shaw LLP's Century City, California office.

The meal/reception will start at 11:30 a.m. followed by the program which will run from 12:15 p.m. through 1:15 p.m. 1 hour of CLE credit will be provided. Seyfarth's office is located at 2029 Century Park East, Suite 3500, Los Angeles, California 90067.

This will be an informative program for in-house counsel on the latest developments in California trade secret law and best practices for protecting trade secret and confidential information.

To register for the program, please click here [http://onlinestore.lacba.org/calendar/index.cfm?fuseaction=ViewCalendarEvent&CalendarEventID=3196] or contact LACBA's Member Services Department at 213-896-6560. You do not need to be a LACBA Member to attend.

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Join Seyfarth Shaw's Jim McNairy for a program for The State Bar of California: 

Trade Secret Protection and Litigation
Thursday, April 8, 2010, 1 p.m. - 2 p.m. Pacific Time

This program offers 1 hour of participatory MCLE. Cost: $55. In order to participate, you must pre-register online.

This program highlights the unique aspects of litigating a trade secret case. Topics include pleadings, motions, injunctions, identification of trade secrets, proof of trade secrets, misappropriation, and remedies. With speakers Jill Kopeikin and James McNairy.

This program is part of the Sections Cyber Institute, a series of one hour webinars being held during lunch times or at the end of the work day.


 

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When explaining to lay people what we do, trade secret practitioners often use the classic examples of the formula for Coca-Cola or KFC’s secret recipe of eleven herbs and spices. Now, we can add as an illustration the nooks and crannies of Thomas’ English Muffins, as demonstrated by a case filed by Bimbo Bakeries (“BBakeries”) in the Eastern District of Pennsylvania. BBakeries, which sells a variety of different breads and baked goods, brought an action against Chris Botticella, a high-level BBakeries executive, on January 15, 2010. In the action, BBakeries is seeking, among other things, a preliminary injunction forbidding Botticella from commencing employment as an executive with Hostess Brands, a BBakeries competitor. The Honorable R. Barclay Surrick of the Eastern District of Pennsylvania held a hearing on BBakeries’ motion on January 25, 2010. At present, he has not ruled on the motion.

Not unlike other major companies that have pursued an executive going to competitors, BBakeries is proceeding against Botticella on an inevitable disclosure theory. BBakeries’ claim is that Botticella’s knowledge of its trade secrets and confidential information is so thorough that he would inevitably use that information in his work for Hostess, thus violating a non-disclosure agreement with BBakeries and the Pennsylvania Uniform Trade Secrets Act. In its motion and accompanying declarations, BBakeries alleges that Botticella is one of “less than ten people in the world with full knowledge of how to produce Thomas’ English Muffins, famous for their distinctive ‘nooks and crannies’ characteristics.” BBakeries also claims that Botticella knows the cost structure and strategies for most of its products, such as its “super premium breads.” All of this information would, according to BBakeries, give Hostess an improper competitive advantage. Finally, BBakeries asserts that Botticella concealed his intentions to move to Hostess, and then instructed his secretary to delete information from his hard drive.

As evidenced by the proposed findings of fact and conclusions of law filed by Botticella on January 29, 2010, Botticella is making several counter-arguments, which include the following: (1) there is no evidence as to Botticella’s responsibilities for Hostess, including whether he will be working on its English muffins, so BBakeries cannot show that he would inevitably disclose confidential information; (2) Botticella did not look at confidential materials sent to him by BBakeries after signing an “Acknowledgment and Representation Form” with Hostess on December 7, 2009; (3) the materials that Botticella deleted from his hard drive were of a personal nature, although he did accidentally delete work files; and (4) Botticella used an external storage device to practice his computer skills. 

Botticella also argues that the inevitable disclosure doctrine should not apply because BBakeries set forth his post-employment obligations in its agreement with him. That agreement included a non-disclosure covenant, but not a non-compete provision. Thus, Botticella posits, the agreement provides a contractual framework governing his post-BBakeries employment and that framework should trump the inevitable disclosure doctrine.

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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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It is generally accepted that that compilations of public information can constitute a trade secret provided that the compilation has unique value, but will that protection extend to watching Michael Jackson's This Is It in an IMAX theater? A New York State court may soon be answering that question in Imax Corporation, v. Cinemark USA, Inc., NY Sup. Ct., NY Co., Ind. No. 09603441.

In its lawsuit, IMAX claims that for five decades it “has specialized in the design and manufacture of highly propriety, premium quality, large-format, immersive theatre systems.” Since 1997, Cinemark-one of the largest movie exhibitors in the world-has been a valued customer of IMAX. Separate and apart from the actual technological components of IMAX's theatre systems, IMAX claims that since its inception in 1967 dedicated significant time and resources, including hundreds of millions of dollars, to the extensive research and development, marketing and promotion of a highly proprietary, immersive theatre experience that is unique to IMAX. Beginning in 1997, IMAX and Cinemark allegedly entered into a series of contracts that provided for the installation, maintenance and operation of IMAX theaters at Cinemark locations, and the marketing and commercial promotion of IMAX by Cinemark.

IMAX claims that it recently discovered that, contrary to representations Cinemark made to IMAX, the parties' business relationship has been blatantly used by Cinemark to attempt to reproduce the entire, trademarked "IMAX Experience®" in the form of a product that Cinemark unveiled earlier this year and that Cinemark refers to as "Extreme Digital Cinema" and "Cinemark XD," or simply, "XD." Whereas for years IMAX theatres have been widely marketed and promoted as having "screen[s] that typically span from wall to wall and floor to ceiling... and loudspeaker technology that ensures every theatre seat is in a good listening position," Cinemark has marketed and promoted its XD as a cinema with "huge wall-to-wall screens, wrap around sound [to] ensure that every seat is an intense sensory experience." Adding fuel to the fire, IMAX claims that Cinemark has touted its XD as being "just like" and in some instances, "better than" IMAX.

Thus, IMAX seeks redress for Cinemark's willful breach of contract, fraud, tortious interference with existing and prospective economic relations, breach of the implied warranty of good faith and fair dealing, unjust enrichment and deliberate acts of bad faith, as well as misappropriation of trade secrets.

The ruling of this case could have interesting implications in light of the United State’s Supreme Courts recent grant of certiorari (argued on November 9^th) on what has been called the "business method patent" case, Bilski v. Kappos, where the Court appears poised to rule that the business method claim at issue is not the valid subject of a patent. Whether the Court will provide further guidance as to what is and what is not a patentable "process" is uncertain. A ruling that sides with the Patent Office could bar patents on processes and methods of doing business, such as online shopping techniques, medical diagnostic tests and procedures for executing trades on Wall Street. But, such a ruling also may lend support for making your IMAX experience a trade secret.

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Competitive intelligence is a business function that many large companies utilize for the purpose of gathering and analyzing useful information about competitors in an ethical manner. Two Seyfarth Shaw LLP trade secret lawyers recently had an article published about this important business function and some of the trade secret issues involved.

Michael Wexler and Robert Milligan's article, "Keep On the Right Side of the Line: A Trade Secret Law Perspective," was published in the September-December 2009 issue of Competitive Intelligence Magazine, which is a publication of the Society of Competitive Intelligence Professionals (“SCIP”), www.scip.org. The article discusses the pitfalls a company encounters when it does not do enough to protect its key information. The authors also address some best practices for competitive intelligence (CI) professionals to gather useful information in an ethical manner while simultaneously protecting their own companies from disclosing sensitive information. They note that

Companies must continuously and aggressively seek new and effective ways to protect their proprietary and trade secret information. If a trade secret is leaked, its value to the company may be severely compromised and lost forever. Likewise, to avoid the often detrimental and serious repercussions that accompany improper intelligence gathering, companies must be extremely vigilant to ensure that they use only ethical means to acquire information about their competitors.

According to Michael and Robert, "A CI professional should gather intelligence by examining published information sources, conducting interviews, and using other ethical information gathering methods." They also point out that companies' needs for creative trade secret protections has increased due to advances in technology and telecommunications. The authors conclude, "Competitive intelligence is an important aid to a company in the marketplace if it is gathered properly. However, if the information is gathered improperly, the information ceases to constitute competitive intelligence at all, and can result in detrimental and serious consequences for the CI professionals involved and their company."

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We are pleased to announce that the Trade Secrets, Computer Fraud, and Non-Competes Group's first webinar on November 5, 2009 entitled Monitoring the Revolving Door: Protecting Your Trade Secrets in Today's Economy was a tremendous success.

There were over 550 registered attendees in various legal and business positions, including business leaders, general and associate in-house counsel, human resource professionals, franchise professionals, competitive intelligence professionals, and outside counsel, from numerous domestic and international locations.

The first webinar covered best practices for protecting your company’s trade secrets and managing risk from trade secret claims. 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. Employer downsizing and competitive pressures have increased the need for companies to ensure that they have adequate protections in place to safeguard company assets.

Topics discussed in the first series of informative discussions included:

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

As discussed during the presentation, seeking trade secret counseling and a secret audit can assist clients to determine best practices to help protect their most important assets.

For those interested professionals who were not able to attend the first webinar and would like to listen to the recorded audio webinar or would like a copy of the presentation materials, please submit your request to sguigliano@seyfarth.com

Coming up on December 9th, we will host the second in our series, Trade Secret Triage and Restrictive Covenant Relief.  Please register (link to website registration) to join us to discuss what to do when you fear that someone has misappropriated your trade secrets.

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In Coleman v. Retina Consultants, P.C., the Georgia Supreme Court reversed a trial court’s decision to enjoin a former employee based on his non-compete provision, but it upheld the injunction to the extent that it prevented the employee from using his former employer’s trade secrets. The case is especially interesting from a factual perspective, as it covers the increasingly common situation of an employee and employer disputing ownership of software developed over the course of employment. The relevant facts as follows:

Retina Consultants is a medical practice specializing in retina surgery. Retina Consultants hired Brendan Coleman as a software engineer in 2000. When Coleman joined Retina Consultants, he already had written and marketed a medical billing program called Clinex.  While employed by Retina Consultants, Coleman, with the assistance of the doctors who worked for Retina Consultants, modified his Clinex program to suit Retina Consultants’s specific business needs. Coleman integrated Retina Consultants’s trade secrets and confidential information into the new program, which was named Clinex-RE. Clinex-RE integrated electronic medical records, image storage, and a billing software component. Clinex and Clinex-RE are different programs, but Clinex-RE only works in conjunction with Clinex.

In 2003, Coleman and Retina Consultants entered into a Software Agreement that set forth that Retina Consultants owned Clinex-RE, Coleman owned Clinex, and that Retina Consultants had a non-exclusive license to use and sell Clinex. The Software Agreement also contained a non-compete provision stating that “Coleman will not distribute, vend or license to any ophthalmologist or optometrist the Clinex software or any computer application competitive with the Clinex-RE software without the written consent of Retina Consultants.”

Shortly before resigning on November 24, 2008, Coleman removed all applicable encryption keys and source and access codes for Clinex, along with any manual/installation instructions. After his resignation, Coleman attempted to license Clinex and Clinex-RE to other ophthalmologists; refused to disclose to Retina Consultants the passwords required to use Clinex and Clinex-RE software; refused to provide copies to Retina Consultants of all documentation in his possession and control relating to the programming and use of the software; refused to return to Retina Consultants copies of the Clinex-RE software; used Retina Consultants’s trade secrets; and took funds from a bank account belonging to a business set up jointly by Retina Consultants and Coleman. It is not unreasonable to speculate that the trial court was influenced by Coleman’s pre- and post-resignation behavior when it elected to enjoin Coleman in a broad fashion based on the non-compete provision.

Coleman appealed directly to the Georgia Supreme Court, which held unsurprisingly that the non-compete provision was unenforceable because it lacked geographic or temporal terms. However, the Supreme Court decided that the Clinex-RE package was a trade secret belonging to Retina Consultants, so Coleman could be enjoined from using it. Coleman could not be enjoined from using Clinex, because that was his property. Thus, the Supreme Court found that the trial court erred when it enjoined Coleman from retaining Clinex encryption keys, access codes, source codes, manual/installation instructions, passwords, and documentation. In the end, Retina Consultants was able to prevent Coleman from using the software that it owned, but the trial court went too far in stopping Coleman from using his software and in enforcing a limitless non-compete provision. 

The case illustrates the fact that the statutory protections of an applicable trade secret statute can act as a useful backstop in the event that a non-compete provision is unenforceable.

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By Jason Stiehl

Often one of the most confidential aspects of a business is its pricing mechanism and the quotes that it provides its customers. It is for this reason that the general rule governing trade secret law is that a company’s non-published pricing is a trade secret. See generally PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7^th Cir. 1995).  What happens, however, when a company does not prohibit its customer from sharing that pricing with others in the industry? 

This precise question was addressed in Southwest Stainless, LP v. Sappington, 582 F.3d 1176 (10^th Cir. 2009), and we touched on it in an earlier posting.  However, as the issue comes up fairly frequently, we thought it might warrant deeper discussion.

In Southwest Stainless, the U.S. Court of Appeals for the Tenth Circuit held that although pricing generally may be protectable, a court needs look at the specific pricing at issue in the case to determine whether the company protected that pricing. Ultimately, the Court in Southwest Stainless held that sharing pricing with a customer, without restriction, removes any claim of confidentiality that may have existed.

John Sappington and William Emmer worked for over ten years supplying metals to customers in the Tulsa-area on behalf of Southwest Stainless. Within a month of each other (and shortly after the departure of another Southwest employee), Sappington and Emmer left Southwest to work for a local competitor, Rolled Alloys. After their departure, Southwest identified two Southwest customer (previously serviced by Sappington and Emmer) who transferred business to Rolled Alloys. At trial, it was adduced that the former employees had assisted in preparing pricing quotes to these customers, including re-quoting Rolled Alloys’ prices at a price lower than the Southwest quote known to the former employees. The trial court entered judgment on behalf of Southwest, relying upon the steps undertaken by Southwest to keep its pricing confidential, such as: (1) confidentiality agreements, (2) password protection, (3) expenditure of hundreds of thousands of dollars to keep the information confidential, and, notably (4) the admission of the former employees that they understood price quotes to be confidential. Southwest Stainless, 582 F.3d at 1189.

On appeal, the Tenth Circuit reversed this holding,[1] drawing a distinction between “general measures” used to protect trade secrets and the “particular” pricing at issue in this case. Id. at 1190. It cited record evidence that Southwest had provided customers with “posted pricing,” that customers revealed competitors’ pricing, and that Southwest did not prevent customers from sharing its information. Id. The Tenth Circuit relied upon the United States Supreme Court decision of Rucklehaus v. Monsanto Co., 467 U.S. 986, which held:

If an individual discloses his trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the secret, his property right is extinguished.

Here, because Stainless had “disclosed the quote” and the customer was “under no obligation to keep the information confidential,” the Court held the district court erred in holding such a price quote confidential and reversed the judgment in favor of the Plaintiff. 

This holding implies, however, that a company still may be able to assert trade secret protection for information necessarily shared with customers so long as the company requires its customers to treat the information as confidential as well.

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Today is the first in our series of webinars.  Our team will be discussing identifying and protecting your company's trade secrets.  Please join us.  Information on registration is available here.

Coming up on December 9th, we will host the second in our series, Trade Secret Triage and Restrictive Covenant Relief.  Please register to join us to discuss what to do when you fear that someone has misappropriated your trade secrets. 

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In an article published today by the Daily Journal, "Economy Leads Companies to Sue Ex-Workers," (linked with permission) author Laura Ernde talks with a number of California practitioners about what they see happening with trade secrets litigation in the wake of the California Supreme Court's ruling in Edwards v. Arthur Anderson  and the economy.  

Although Ernde indicates that the anecdotal evidence is that interest in trade secrets is on an "upswing," according to Seyfarth Shaw's own Carolyn Sieve and Robert Milligan, research regarding filings in Los Angeles indicates that the actual number of lawsuits mentioning "trade secrets" has decreased over the last two years. 

Ernde's article also touches on the "inevitable disclosure" doctrine, noting that under FLIR v. Parrish, 2009 DJDAR 8598, the doctrine is no longer applicable in California. 

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The U.S. Court of Appeals for the Tenth Circuit recently held that a former employer’s price quotations to prospective customers were not trade secrets under Oklahoma law because they did not contain a confidentiality provision, but the former employee who took advantage of those quotations on behalf of his new employer did violate his non-compete covenant.  Southwest Stainless, LP v. Sappington, No. 08-5127 (10th Cir.  Sept. 21, 2009).

An Oklahoma court is permitted to blue-pencil unreasonable contractual geographic limits in a non-compete to make them reasonable. The Tenth Circuit held that the  trial court’s damages award with respect to business lost due to violation of the non-compete was properly based on the ex-employer’s historic profit margins on business with the relevant customers. Moreover, injunctive relief should have been awarded because the ex-employee took advantage of the "personal contacts [with] and a knowledge of the special needs and requirements of" the ex-employer’s customers which the former employee learned during the employment relationship.

Coincidentally, only a few weeks earlier, an Oklahoma district court granted a motion for partial summary judgment in a breach of contract and trade secrets case, based on the plaintiff company’s "legitimate interest in . . . relationships . . . with . . . existing and established customers."   The Court thereby upheld a "hands-off" non-solicitation covenant an independent contractor sales agent signed with the plaintiff.  The plaintiff’s trade secret misappropriation claim was not discussed in the ruling on the partial summary judgment motion.  Drummond Am., LLC v. Share Corp., No. CIV-08-1004-F (W.D. Okla., Aug. 3, 2009), 2009-2 CCH Trade Cases ¶ 76.701.

These decisions teach that in a state (such as Oklahoma) where covenants are enforceable, a breach of contract claim against former sales personnel may be at least as strong a cause of action for a jilted employer as a suit for misappropriation of trade secrets.

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In a battle of competing noodle franchises, a federal district court in Arizona recently granted a franchisee’s motion to compel arbitration in a trade secret and breach of contract dispute with its franchisor.   

Apart from its colorful facts, the court’s ruling is significant.  First, it demonstrates that franchisors that include arbitration provisions in their franchise agreements may be precluded from obtaining immediate injunctive relief in court against their franchisees, particularly where they include provisions that only permit the franchisor to obtain injunctive relief outside the arbitration proceeding (at least under Arizona law). Next, it demonstrates that a nonsignatory to a franchise agreement may be permitted to compel arbitration in the Ninth Circuit where the signatory’s claim against the nonsignatory involves a dispute that is “intertwined with the contract providing for arbitration.” The decision is also a reminder that although binding arbitration with franchisees may be beneficial, franchisors must keep abreast of the ever-changing law in the governing jurisdiction(s) to ensure that arbitration rather than litigation in the courts is the appropriate dispute resolution forum for their business objectives.  Simply put, if a rogue franchisee’s actions put a franchisor’s system in jeopardy, a franchisor may not be willing to put the fate of its misappropriated intellectual property in the hands of an arbitrator. 

In Noodles Development, LP v. Latham Noodles, LLC, 2009 WL 2710137 (D. Ariz. August 26, 2009), a federal district court in Arizona (District Judge Neil V. Wake, presiding) granted the franchisee’s motion to compel arbitration and stayed the civil action initiated by the franchisor.

The plaintiff, a franchisor owing the rights to the “Nothing But Noodles” franchise of restaurants, entered into a franchise agreement with the defendant franchisee which permitted the franchisee to open a franchise in New York. See id. at *1.

The franchise agreement provided that “any dispute or claim relating to or arising out of this Agreement must be resolved exclusively by mandatory arbitration by and in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“AAA”) or another arbitration service agreed to by the parties.”  See id.

The franchise agreement also provided the franchisor with the right to petition a court of competent jurisdiction for the entry of temporary and permanent injunctions of specific performance enforcing the provisions of the franchise agreement relating to “(a) Franchisee's use of the Marks or the System ...; (d) Franchisee's violation of the provisions of this Agreement relating to confidentiality and the covenants not to compete; and (e) any act or omission by Franchisee or Franchisee's employees that ... (2) is dishonest or misleading to the guests or customers of the Franchised Restaurant or other Nothing But Noodles Restaurants ..., or (4) may impair the goodwill associated with the Marks or the System.” Id.at *1.

The franchisor challenged the franchisee’s motion on the grounds that 1) the agreement did not encompass the claims that it had brought against the franchisee; 2) it need not first arbitrate the substantive merits of its claims because pursuant to the franchise agreement it may bring an action for injunctive relief before the court and principles of judicial economy should allow it to litigate its damages claims in court as well; and 3) it need not arbitrate with one of the co-defendants because he was not a signatory to the franchise agreement.  The court rejected all three of the franchisor’s arguments.  See id. *1-*4.

First, the court stated that the franchisee agreement requires arbitration of “any dispute or claim relating to or arising out of this Agreement.”  The noted that the Ninth Circuit has observed that the phrase “arising out of or relating to” creates an arbitration clause that is “broad and far reaching” in scope.  Id. at *1 (citing Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1131 (9^th Cir. 2000)).  The court found that an arbitration clause with a broad and far reaching scope “reaches every dispute between the parties having a significant relationship to the contract and all disputes having their origin or genesis in the contract.”  Id. at *1 (citing Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9^th Cir. 1999)).

The court stated to require arbitration, the factual allegations of the complaint “need only ‘touch matters' covered by the contract containing the arbitration clause.” Id. (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 624 n. 13 (1985)).

The court found that all of the facts alleged in franchisor's complaint have a significant relationship to the franchise agreement.  The court noted that the complaint alleges trademark and trade dress infringement, misappropriation of trade secrets, and breach of contract.  The court reasoned that the factual predicate of these claims was the franchisee's alleged misuse of the Nothing But Noodles marks and system.  Because the franchisee's use of the Nothing But Noodles marks and system was the core subject of the franchise agreement, the court found that the franchisor's claims have a significant relationship to the franchise agreement and must be arbitrated.  See id. at *2.

The court also noted that the franchisor alleged that franchisee tortiously interfered with its business relationships.  The court found that the claim was significantly related to the confidentiality clauses and covenants not to compete in the franchise agreement and an area development agreement signed by the parties, which also contained an arbitration clause.  The area development agreement provided the franchisee with the right to sell new franchises on behalf of the franchisor.  The court stated that the franchisor alleged that the franchisee had instead been soliciting existing Nothing But Noodles franchises to re-brand their restaurants under another mark.  See id.

The court found that the facts of this allegation were significantly related to the franchisee's duties as a representative of franchisor under the area development agreement, especially those provisions relating to confidentiality and competition.  The court found that the franchise agreement therefore required arbitration of the tortious interference claim.  See id.

In sum, the court found that the substance of each claim asserted by the franchisor in its complaint was covered by the arbitration agreement and therefore could not be adjudicated by the court.  See id. at *2.

Next, the court acknowledged that the franchise agreement does, however, reserve to the franchisor the ability to seek preliminary or permanent injunctive relief in court for certain types of claims. The court remarked that typically courts in our circuit [Ninth Circuit] may not grant preliminary injunctive relief where interim relief is available from an arbitral tribunal.  See id.

The court found, however, that the terms of the agreement control the scope of the arbitration clause in the suit.  The franchise agreement specifically permitted the franchisor to seek injunctive relief from the court despite the availability of such relief under the rules of the American Arbitration Association.  See id.

However, the court found that the franchise agreement did not specify whether the franchisor may seek permanent injunctive relief in court before obtaining a substantive determination of the merits of its claims from an arbitral tribunal.  The franchisor argued that it need not first arbitrate the substantive merits of its claims and that because it may bring an action for injunctive relief before the court, principles of judicial economy should allow it to litigate its damages claims in court as well.  See id. at *3.

The court found that such an interpretation nullified the arbitration clause because once the court decided the merits of the franchisor's claims, there was little purpose in involving an arbitral tribunal.  The court found that the franchisor’s interpretation conflicted with the parties' demonstrated intent to have an arbitral tribunal, not a court, decide the merits of “any dispute or claim arising out of or related to” the franchise agreement.  See id. at *3.

The court stated that the franchise agreement's injunction provision may simply be intended to preserve the availability of a court to impose an injunctive remedy, rather than decide the merits of the claims.  “In other words, it may allow Franchisor to seek preliminary injunctive relief to maintain the status quo during arbitration and to seek permanent injunctive relief if the arbitral tribunal rules in its favor.”  Id. at *3.  The court found that this interpretation was equally as plausible, if not more plausible than the franchisor's interpretation.  The court held that the ambiguous relationship between the franchise agreement’s arbitration clause and the injunction provision must be reconciled in favor of arbitration.  See id. at *3.

The court found that the franchisor may seek emergency injunctive relief to preserve the status quo while it arbitrates, but it must obtain a substantive determination of the merits of its claims from an arbitral tribunal before applying for a permanent injunction from the court.  The court noted that the franchisor had not yet moved for any emergency injunctive relief.  See id.

The court also stated that at least one court had recently held that, under Arizona law, an arbitration agreement that reserves the right to seek judicial injunctive relief to only one party is substantively unconscionable.  See id. (citing Wernett v. Serv. Phoenix, LLC, 2009 U.S. Dist. LEXIS 62593 at *26-28, 2009 WL 1955612 at *8 (D.Ariz. July 6, 2009)).  The court stated that should the franchisor seek preliminary injunctive relief from the court instead of from the arbitral tribunal, it will first have to address the validity of the franchise agreement’s “one-sided injunction provision under Arizona law.”  Id.at *3. (emphasis added).

Lastly, the franchisor argued that it need not arbitrate with one of the co-defendants because he was not a signatory to the franchise agreement.  The court stated that a nonsignatory to an arbitration agreement may estop a signatory from refusing to arbitrate its claim against the nonsignatory where the dispute is “intertwined with the contract providing for arbitration.”  Id. at *3 (citing Mundi v. Union Sec. Life Ins. Co., 555 F.3d 1042, 1047 (9th Cir.2009)). “[A]pplication of equitable estoppel is warranted ... when the signatory to the contract containing the arbitration clause raises allegations of ... substantially interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract.”  Id. at *3 (citing Brantley v. Republic Mortgage Ins. Co., 424 F.3d 392, 396 (4th Cir.2005)). 

The court noted that the complaint alleges that “the Individual Guarantors and [non-signatory] Defendant . . . have contacted Noodles' franchisees and made attempts to induce such franchisees into breaching their respective agreements with Noodles.”  Id. at *3.  The court found that the complaint therefore raises allegations of substantially interdependent and concerted misconduct by the non-signatory defendant and the defendant signatories to the franchise agreement.  Accordingly, the court found that the franchisor was estopped from refusing to arbitrate its claim against the non-signatory defendant.  See id. at *3.

The court stayed the civil action until the arbitration has been completed, having concluded that all claims in the suit were subject to arbitration, but indicated that the franchisor may apply to the court for injunctive remedies.

The court’s decision has a number of general take-aways for franchisors. Franchisors should carefully consider whether to include an arbitration provision in their franchise agreement. Arbitration can provide a number of benefits to franchisors, such as a cost-effective and seemingly uniform method of resolution with franchisees. There can be significant drawbacks though depending upon the applicable governing law, such as having to pay for the costs of the arbitration, losing or having a limited right to seek immediate injunctive relief in a court of law, only having a limited review of arbitration decisions, and having non-signatories to the arbitration agreement made part of the arbitration proceeding. Before including arbitration provisions in their franchise agreements, franchisors should consult counsel to determine the ever changing state of the law in the governing jurisdiction and decide whether arbitration provides an adequate forum to protect any misappropriated intellectual property, such as the franchisor’s system.

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By Robert Milligan and Carolyn Sieve

As mentioned in a previous blog entry, the California Court of Appeal issued a significant trade secret decision earlier this year providing additional clarification concerning the trade secret identification disclosures which a party pursuing claims for trade secret misappropriation must make before commencing civil discovery in California state court.

The California Supreme Court subsequently denied Sylvester Stallone's and another named cross-defendant's petition for review challenging the Court of Appeal's decision.

Accordingly, the Court of Appeal decision is binding case authority.

A California statute requires that trade secrets be identified with particularity before commencing discovery relating to the trade secret in suits alleging the misappropriation of trade secrets under California’s Uniform Trade Secrets Act.

Specifically, Code of Civil Procedure § 2019.210 provides:

In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate under Section 3426.5 of the Civil Code.

In Brescia v. Angelin, 172 Cal.App.4th 133 (Mar. 17, 2009), the Court of Appeal found that Code of Civil Procedure § 2019.210 does not require in every case that a trade secret claimant explain how the alleged trade secret differs from the general knowledge of skilled persons in the field to which the secret relates. The Court found that such an explanation is required only when, given the nature of the alleged secret or the technological field in which it arises, the details provided by the claimant to identify the secret are themselves inadequate to permit the defendant to learn the boundaries of the secret and investigate defenses or to permit the court to understand the designation and fashion discovery. The Court found that the trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favor of allowing discovery to go forward.

Our recent article published by the Oxford Journals in the Journal of Intellectual Property Law & Practice discusses the Court of Appeal decision in depth and its practical significance.

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Zynga Game Network, Inc., which describes itself as “the number one social gaming company with 30 million daily active users,” obtained an ex parte temporary restraining order against its competitor Playdom, Inc. and two former Zynga employees. Z ynga both filed the case in the Superior Court of the State of California, Santa Clara County, and obtained the temporary restraining order on Wednesday, September 9, 2009.  Zynga asserted its entitlement to injunctive relief on trade secret misappropriation and unfair competition grounds under California law.

In its Complaint and Motion for Temporary Restraining Order (posted on TechCrunch) Zynga alleges that two of its employees retained trade secret-laden documents prior to resigning to join Playdom. Specifically, the Motion asserts that Zynga employee David Rohrl copied three files to a USB storage device before business hours roughly two weeks before his resignation. The files in question concern the design and modification of some of Zynga’s online games. The Motion further alleges that Zynga employee Raymond Holmes e-mailed a number of documents to his personal e-mail account on the days leading up to his August 24, 2009 resignation from Zynga. Among the e-mailed documents was Zynga’s “Playbook,” a document that Zynga describes as “literally the recipe book that contains Zynga’s ‘secret sauce,’ and its contents would be invaluable to a competitor like Playdom.” Zynga adds that Holmes deleted these e-mails from his "Sent" e-mail folder on his computer on the date of his resignation.

Zynga also sets forth a series of allegations that Playdom obtained Zynga trade secrets through its process of recruiting Zynga employee Martha Sapeta. Playdom recruiter Jennifer Farris gave Sapeta assignments to provide suggestions to improve Playdom games, including an instruction that Sapeta’s proposed features “can be a straight up ripoff from our competitors [sic] app.” Zynga also asserted (albeit in a vaguer fashion) that Playdom also obtained Zynga trade secrets in its recruitment of Zynga employee Scott Siegel.

Although not central to its Motion for Temporary Restraining Order, Zynga also adds in a back story concerning Playdom’s alleged previous efforts to obtain Zynga trade secrets and confidential information. Zynga describes an effort by Playdom to use a sophisticated computer algorithm to obtain information about users of Zynga’s Texas Hold ‘Em game and then to solicit those users to play Poker Palace, a competing Playdom game. Zynga also claims that Playdom used the trademark of Mafia Wars, a Zynga game, in an advertisement for Mobsters, a competing Playdom offering.

The Court entered the Temporary Retraining Order in exactly the form submitted by Zynga. The Order forbids Playdom, Holmes, and Rohrl from a variety of activities, including using certain Zynga information, attempting to recreate Zynga’s applications to which Holmes and Rohrl had access at Zynga, and inducing Zynga employees to violate contractual obligations or their duties of loyalty. The Court further executed an Electronic Preservation Order that compels the Defendants to preserve potentially relevant information, identify a number of categories of data, and, most significantly, provide a number of electronic storage devices to Zynga’s forensic expert for imaging.  Finally, the Court set forth an expedited discovery schedule culminating in a preliminary injunction hearing on October 1, 2009.  We expect a flurry of activity in the case leading up to that date.

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By Rina Wang, summer associate, and Timothy B. Nelson

The California Court of Appeal recently addressed the issue of the interpretation of arbitration clauses in the context of claims for misappropriation of trade secrets in the case of Valentine Capital Asset Management, Inc. v. Agahi, 174 Cal.App.4th 606 (1st Dist. 2009).

In Valentine, respondent John Valentine was the founder and president of Valentine Capital Asset Management, Inc. (“VCAM”) and Valentine Wealth Management, Inc. (“VWM”), neither of which was a member of the Financial Industry Regulatory Authority (“FINRA”). John Valentine was subject to FINRA rules and regulations through his affiliation with FINRA member Geneos Wealth Management, Inc., but not through his affiliation with VCAM and VWM. Appellants Agahi, Luippold and Ortale worked as employees of VCAM and VWM. In their capacity as employees of VCAM and VWM, Agahi, Luippold and Ortale were given business leads, and they were responsible for following up on the leads, developing a client relationship, and providing services to those clients. Agahi resigned from VCAM and VWM to form a competing firm, which added Luippold and Ortale as employees. The competing firm was also not a member of FINRA. The three defendants allegedly brought VCAM and VWM client databases with them to the competing firm. Valentine allegedly discovered that Agahi had e-mailed VCAM and VWM’s client database to Ortale, and that files and e-mails had been deleted from Agahi’s work computer prior to his departure. Valentine also allegedly discovered that Agahi was attempting to persuade clients of the Valentine companies to move their assets to Agahi and his competing firm. Valentine sued Agahi, Luippold and Ortale for misappropriation of trade secrets, intentional interference with contractual relations, intentional interference with prospective economic advantage, trade libel, slander, and common law and statutory unfair competition.

Agahi, Luippold and Ortale moved to compel arbitration, arguing that the dispute was subject to mandatory arbitration under FINRA’s arbitration clause because all of the parties were members of FINRA. Valentine opposed the motion, contending that the defendants had waived their right to arbitrate and that the disputes in the litigation were not subject to FINRA arbitration. The trial court denied the motion to compel arbitration, finding that FINRA was inapplicable because the parties’ dispute did not arise out of their business activities as FINRA members.

The Court of Appeal affirmed. The court first explained that written arbitration provisions in interstate commercial transactions are enforceable under the FAA. Thus, the FAA applied to determine the scope of arbitration provisions in contracts with FINRA-member firms. Before engaging in activities as a registered representative for a FINRA-member firm, all registered representatives of broker-dealers, investment advisors, and securities issuers must sign a “Uniform Application for Securities Industry Registration or Transfer,” also known as Form U-4. See McManus v. CIBC World Markets Corp., 109 Cal. App. 4th 76, 88 n. 3 (2003). Form U-4 contains an arbitration provision. Valentine and the defendants signed this form, thereby agreeing to arbitrate every dispute required to be arbitrated under FINRA rules. Arbitration of a dispute between associated persons is required under FINRA Rule 13200 only “if the dispute arises out of the business activities of a member or an associated person . . . .”

The Valentine court found that the phrase “business activities of . . . an associated person” is limiting and cannot include the activities of every possible business enterprise in which an individual “associated person” might be engaged. Valentine, 174 Cal.App.4^th at 615. According to the Valentine court, this language, when reasonably read, must require arbitration of disputes only if they arise out of the business activities of an individual as an associated person of a FINRA member. Id.at 616.

The court held that there was no allegation that any of the parties were acting for any FINRA-member firm or as an associated person. No relation was alleged between any FINRA-member firm and the work performed for Valentine. The Court further determined that none of the purported wrongdoing was alleged to have occurred in the course of the parties’ duties as associated persons with a FINRA-member firm. Rather, it allegedly occurred with investment advisory firms that were not members of FINRA. The disputes thus related to defendants, but not to their business activities as associated persons of a FINRA member.

Although Valentine is based on the distinction between “broad” and “narrow” arbitration clauses, the court reached its conclusion based on the language of the pleadings. The plaintiff pled multiple causes of action alleging misconduct by various defendants.  When the court ruled on the motion to compel arbitration, the legal characterization of the parties in the Complaint controlled the ruling. 

The Valentine decision makes it clear that when prosecuting or defending a claim for misappropriation of trade secrets, one must be mindful of what forum is appropriate, arbitration or litigation. Furthermore, the Valentine decision also provides an example of the importance of pleading causes of action properly based upon the forum. Because Valentine pled his causes of action in a way that made it clear they were not based on the defendants’ business activities as associated persons of a FINRA member, Valentine was able to avoid FINRA arbitration.

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In a 56-page opinion, the U.S. Court of Appeals for the Second Circuit sent a long-pending trade secrets case, Jasco Tools, Inc. v. Dana Corporation, Appeal No. 08-2762-bk, back to the lower court for further proceedings because of the bankruptcy court's "flawed application of well established summary judgment principles."  (Slip Op. at 32.)  In the case, Jasco alleged that Dana had conspired, among other things, with former Jasco employees to steal and use Jasco trade secrets.   While the case was pending, Dana filed for bankruptcy.  Jasco subsequently filed a proof of claim against Dana's estate.  (Slip Op. at 12.) 

The bankruptcy court allowed Dana Corporation ("Dana") to move for summary judgment through an objection to disallow the claim of Jasco as a creditor (the "Objection").  Where the court first erred was by ordering that the parties would file their statements of undisputed material facts (Rule 7056-1 statements) simultaneously.  (Slip Op. at 32.)  Then, as Law 360 discusses, the bankruptcy court erred by refusing to allow Jasco to complete discovery, particularly deposition discovery, of Dana employees.  Although the case had a long history, the Second Circuit concluded that, in this case, under Fed. R. Civ. P. 56(f), the bankruptcy court should have allowed Jasco to complete the additional discovery it sought.

Substantively, the Second Circuit found that, "even without discovery of additional evidence, the record as it stands was sufficient to preclude the entry of summary judgment dismissing and expunging the Jasco claim."  (Slip Op. at 38.)  After reviewing the "well established summary judgment principles" referenced earlier in the opinion, the Second Circuit concluded that the "principles were not properly applied."  (Slip Op. at 41.)  Limiting its discussion to Jasco's claim of conspiracy to misappropriate trade secrets, the Second Circuit carefully and painstakingly analyzed applicable law as well as the direct and circumstantial evidence relating to Jasco's claim, concluding that there were sufficient disputed issues of material fact on the conspiracy to misappropriate trade secrets claim that the case should have proceeded to a jury.  

One interesting aspect of the Second Circuit's analysis, which otherwise is worth reading for the facts, was its discussion of Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) as applied to trade secret conspiracy claims.  (Slip Op. at 53-55.)   Dana cited Matsushita for the principle that "conduct that is consistent with permissible competition as well as with illegal conspiracy does not, without more, support even an inference of conspiracy."  475 U.S. at 597 n.21.   The Second Circuit rejected the application of this theory because (1) Matsushita involved antitrust claims, not claims of trade secret misappropriation; (2) Matsushita involved a situation where the actions were "economically senseless parallel actions by persons competing with each other," whereas in this case, the parties were acting collaboratively in a manner that was supported by an obvious pecuniary motive; and (3) even though the Supreme Court in Matsushita made it clear that "mere proof of conduct that is as consistent with permissible competition as with illegal conspiracy, 'without more'" will not support a inference of conspiracy, the facts in this case supplied the necessary "more."

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By Robert Milligan and summer associate Alana Friedman

Production companies for Criss Angel, the star of Cirque de Soleil’s “Believe” and the A&E cable television show Mindfreak, were sued in New York state court recently by a twenty-three year old illusionist who claims that Angel’s companies have failed to pay him for the use of three alleged confidential and proprietary magic tricks that he claims that he created. 

Jacob Spinney’s eight count complaint arises out of an alleged breach of contract involving certain confidential and proprietary magic tricks (e.g. methods of staging and performing three specific illusions or magical effects) that he claims to have permitted Angel to use pursuant to a written contract. Spinney claims that Angel failed to satisfy his end of an agreement that they purportedly entered in 2005. Pursuant to the alleged agreement, Spinney purportedly assigned the rights in three of his magical effects to Angel’s production company in exchange for a percentage of the net profits realized from the magical effects. Spinney is now seeking monetary compensation and for all rights to be returned to him on two of the three illusions.

Spinney, who allegedly makes his living by selling illusions and magical effects that he originates and creates, claims that in late 2004 Criss Angel (whose real name is Christopher Sarantakos) contacted him expressing interest in performing Spinney’s Chair Self-Levitation illusion where the performer appears to be floating above the ground. Spinney claims that Angel was interested in the illusion for his upcoming television series Mindfreak. In the 2005 Agreement which result from Angel’s alleged inquiry, Spinney claims that he assigned the rights in his confidential and proprietary magical tricks entitled Chair Self-Levitation, Chair Self-Suspension (performer appears to be suspended above the ground), and Fork Bending Gimmick (performer appears to bend a fork without exerting any physical pressure upon it) to Angel’s production company in exchange for 25% of the profits that it derived from the magical effects. 

Spinney alleges that he invented, designed, and tested the method of performing all three illusions. He claims that levitation, suspension, and fork bending illusions or magical effects are valuable commodities in the magic industry because they are difficult to create and have significant audience appeal.

Their 2005 Agreement provides that “In the field of magic, a magician’s success depends upon the secrecy of the methods, apparatus, and workings of magical effects and illusions; and…a magician creates and establishes his reputation based upon the originality and novelty of the various magical illusions which are proprietary information, intellectual property and proprietary technologies, and constitute a trade secret.” 

Spinney alleges that Angel performed the Chair Self-Levitation on the second episode of his Mindfreak television series which was later broadcast on the A&E Network and included on four separate Mindfreak DVDs. According to the complaint, Angel’s production company publicized the Chair Self-Levitation illusion as Angel’s most popular demonstration and featured the illusion on “Masterminds Volume 2: Self-Levitation,” a “how to” DVD featuring only the Chair Self-Levitation illusion. Spinney further alleges that the packaging on the Mastermind DVD advertised that “Criss teaches everything you need to know about this modern day miracle; step by step instructions on the method, how to construct it…and how to perform it.” Spinney claims that the Mastermind DVD retailed for $100 and sold over 3,900 copies in its first six months, grossing over $190,000 in profits. 

Spinney alleges that despite the 2005 Agreement, Angel’s production companies did not pay Spinney any royalties from profits it made from the Mindfreak television show or DVDs and paid him only a small portion of the royalties from profits it made on the Mastermind DVDs. According to the complaint, the DVDs made approximately $267,000 in gross sales and Spinney received only $27,000. 

Spinney also claims that his Chair Self-Levitation illusion is proprietary information, intellectual property and proprietary technology, and constitutes a trade secret. He further claims that Angel’s production companies benefited from learning the confidential and proprietary methods of performing the illusion by deriving profits from certain performances and by excluding others from marketing or selling the illusion. He claims that he has suffered a detriment because he was not adequately compensated for the illusion and continues to be precluded from marketing or selling the effect on his own or through alternative means.

Additionally, Spinney alleges that Angel’s production companies failed to make reasonable efforts to sell Spinney’s Chair Self-Suspension or Fork Bending Gimmick pursuant to the 2005 Agreement. Spinney seeks lost profits for the failure to sell or market the two illusions, an amount equal to the fair market value for the illusions, or a judgment returning to him the rights in both.

Apart from its unique and colorful facts, the case highlights some of the issues that exist when confidential information or trade secrets are licensed, such as: 1) ensuring that a reasonable royalty is provided in the agreement with clear definitions of permitted use and payment terms; 2) including language in the agreement providing that the licensee agrees to keep the secrets confidential notwithstanding its use in the ultimate product or service; 3) requiring the licensee to use best efforts to market and sell the ultimate product or service if payment under the agreement is tied to sales; 4) closely monitoring sales of the ultimate product or service in the marketplace to ensure that all royalty payments are made; 5) licensors should consider using a flat fee amount for use of the confidential information and/or trade secrets in lieu or in addition to royalty payments; 6) licensors should closely protect the confidentiality of the target confidential information or trade secrets in the negotiation process with prospective licensees; and 7) the licensor should prohibit independent development of the target confidential information or trade secrets by the licensee in the agreement.

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By Carolyn Sieve and summer associate Rina Wang

A California federal court has added to the body of decisional law on preemption under the California Uniform Trade Secrets Act, Cal. Civ. Code §§ 3426, et seq. (“CUTSA”). In Aversan v. Jones, No. 2:09-cv-00132-MCE-KJM, 2009 WL 1810010 (E.D. Cal. June 24, 2009), the Court denied defendants’ motion to dismiss plaintiff’s claims for interference with contractual relations, interference with prospective economic advantage, breach of duty of loyalty, and unfair competition, finding that plaintiff had sufficiently pled facts supporting these claims without relying on the same nucleus of facts as its CUTSA misappropriation of trade secrets claim.

Civil Code section 3426.7 provides that CUTSA “does not affect (1) contractual remedies, whether or not based upon misappropriation of a trade secret, (2) other civil remedies that are not based upon misappropriation of a trade secret, or (3) criminal remedies, whether or not based upon misappropriation of a trade secret.” (Emphasis added.) This provision has been interpreted to mean that CUTSA preempts common law claims that are based on the same nucleus of facts as the CUTSA claim. Thus, preemption is not triggered where the facts in an independent claim are similar to, but distinct from, those underlying the misappropriation claim.

Defendants Jones and Mellse were employees of plaintiff Aversan, which recruits and trains engineers to perform services for Aversan’s customers and clients of its customers. They later quit to work for one of Aversan’s clients, Ambire, which had retained Aversan to provide engineers to one of Ambire’s clients, CalPERS.  Defendants had been assigned by Aversan to work on the CalPERS project. While assigned to CalPERS, defendants wrote custom software programs using Aversan’s proprietary software script. 

Aversan’s complaint alleged that defendants violated CUTSA by using Aversan’s proprietary and confidential information to continue performing work for Ambire and CalPERS. Defendants also allegedly used Aversan’s confidential information to solicit employees, contractors and recruits. In addition, Aversan sought damages for Jones’ alleged interference with a residential lease agreement, and defendants’ supposed interference with Aversan’s customer relationships.

Defendants moved to dismiss plaintiff’s claims for interference with contractual relations, interference with prospective economic advantage, breach of duty of loyalty, and unfair competition. The district court denied the motion, holding that the facts supporting these tort claims were sufficiently independent of the CUTSA claim. Under these causes of action, Aversan claimed that defendants prevented Aversan from participating in and profiting from its agreements with Ambire by working directly for Ambire and that defendants allegedly interfered by usurping Aversan's position with CalPERS.  Aversan also claimed that Jones encouraged and convinced an apartment lessor to terminate its lease with Aversan. Aversan had already paid for that month's rent as an employee benefit to Jones and re-let the same apartment unit to Jones directly. These claims survived dismissal because they did not rely on the same nucleus of facts as Aversan's CUTSA claim and they sufficiently stated an independent claim for relief.  

Aversan thus provides some guidance as to what allegations will overcome dismissal of tort claims in a case alleging CUTSA violations. If a party in a trade secrets case is faced with a possible preemption argument, it is worth comparing this decision with the recent California Court of Appeal decision in K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal.App.4^th 939 (2009).

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The California Court of Appeal’s recent decision in FLIR Systems, Inc. v. Parrish, 2d Civil No. B209964, 2009 WL 1653103 (Cal. App. 2d Dist. June 15, 2009), affirming a $1.6 million attorney fee award to defendants upon a finding that the action was brought in bad faith, provides a useful and interesting discussion of various factors that may lead a court to conclude that a misappropriation case has been brought in bad faith. The decision highlights the importance of considering carefully whether to bring a misappropriation claim against former employees, particularly where there is little or no evidence of actual damage, or of actual misappropriation or threatened misappropriation.

In 2004, FLIR acquired the assets of Indigo, of which defendants Parrish and Fitzgibbons were officers. Indigo manufactures and sells microbolometers, devices used in connection with infrared cameras, night vision, and thermal imaging. After the sale, defendants continued to work for Indigo. About a year later, defendants decided to start a new company to mass produce bolometers. The new company was based on a business plan developed by Fitzgibbons several years before FLIR acquired Indigo. Before leaving Indigo, defendants advised FLIR and Indigo of their business plan and invited FLIR and Indigo to participate. FLIR rejected the offer. 

In 2006, defendants began negotiations with Raytheon Company in accord with their business plan. Defendants assured FLIR and Indigo that they would not misappropriate Indigo’s trade secrets and that they would use an intellectual property filter similar to the one used at Indigo to prevent the misuse of trade secrets. In June 2006, FLIR and Indigo sued defendants on the theory that defendants could not mass produce low-cost microbolometers without misappropriating trade secrets. Upon learning of the lawsuit, Raytheon terminated business discussions with defendants, and one month after the suit was filed, defendants advised FLIR and Indigo that they would not go forward with their new business.

FLIR and Indigo, before trial, dismissed their damages claims and tried only the misappropriation of trade secrets and California Unfair Competition Act claims. On December 6-17, 2007, the case was tried. In a statement of decision issued in June 2008, the trial court found no misappropriation or threatened misappropriation of trade secrets. It was undisputed that defendants received no funding for their business plan, never started their new business, had no employees or customers, did not lease any facility or develop technology, and did not design, develop or sell any infrared products. The trial court ultimately denied permanent injunctive relief and awarded defendants $1,641,216.78 in attorney fees.

The California Uniform Trade Secrets Act allows for an award of reasonably attorney fees to the prevailing party where the claim was brought in bad faith. Civ. Code § 3426.4. The court ultimately held that FLIR and Indigo had essentially brought the action based on the doctrine of “inevitable disclosure,” as there was no evidence of misappropriation or threatened misappropriation, and the FLIR and Indigo witnesses were unaware of such evidence though they maintained suspicions that misappropriation would occur. Given that the “inevitable disclosure” doctrine has been definitively rejected in California, the Court found FLIR and Indigo to have brought and maintained the action in bad faith. The items the Court considered significant: 

•           The absence of any economic harm.

•           The absence of any evidence of misappropriation or threatened misappropriation of trade secrets. Notably, there was evidence at trial that one of the defendants, Parrish, had downloaded technological data onto a hard drive before leaving Indigo, and that he destroyed the hard drive a few months before the lawsuit was filed. Although evidence that an employee has downloaded confidential information shortly before leaving his employer is typically significant to support a misappropriation claim, here, the evidence was discounted because defendants first learned of the download after the complaint was filed, so it was not a consideration for bringing suit, and the download was not a threatened misappropriation because there was no evidence that the contents of the hard drive, “if such contents existed, were improperly accessed, used, or copied before the drive was destroyed.”

•           Evidence that FLIR and Indigo had an anticompetitive motive in filing the lawsuit.  On this point, the court found significant the testimony of FLIR’s CEO, who testified that “we can’t tolerate a direct competitive threat by [Parrish] and [Fitzgibbons],” inferring that the CEO had no evidence of wrongdoing but was bothered that defendants planned to compete with FLIR in the future. The Court also found significant the fact that another FLIR officer had voted to file the lawsuit but had no personal knowledge that defendants had committed a wrongful act.

•           Failure by FLIR and Indigo to identify what trade secrets would be subject to the permanent injunction. The Court found as “strong evidence of bad faith” FLIR and Indigo’s proposed injunction, which barred defendants from developing certain products for a 12-month period even if they did not use FLIR and Indigo’s technology or trade secrets.

•           Imposition of unnecessary settlement conditions. When defendants notified FLIR and Indigo of their business plan, FLIR and Indigo responded with a demand for $75,000, a non-competition agreement, and agreement that defendants would not hire FLIR and Indigo’s employees, and agreement that they would not challenge Indigo’s patent applications. The Court found these restrictions to be unlawful restraints on trade.

•           FLIR and Indigo’s experts at trial admitted there was no scientific methodology to predict trade secret misuse and agreed that no trade secrets were misappropriated.

The FLIR decision is a reminder to employers to be cautious when determining to bring a lawsuit against former employees for trade secret misappropriation. California courts may not tolerate the filing of misappropriation claims where it appears the employer is merely fearful or suspicious of wrongdoing. In such cases, the employer plaintiff risks not only a dismissal of its claims but the possibility of being sanctioned for bringing the action. 

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Attorneys for Sylvester Stallone and another named cross-defendant recently filed a petition for review with the California Supreme Court challenging a significant published California Court of Appeal decision (Brescia v. Angelin, 172 Cal.App.4^th 133 (March 17, 2009)) regarding the sufficiency of a trade secret identification statement.

In 2007, a Los Angeles Superior Court judge entered judgment in favor of Stallone and another cross-defendant on a claim for trade secret misappropriation in a cross-complaint brought against him and others by a manufacturer of high protein, low carbohydrate pudding. 

In March 2009, a Court of Appeal for the Second Appellate District, Division Four reversed the judgment on the grounds, among other things, that cross-complainant’s trade secret identification statement was sufficient. 

The parties have briefed Stallone’s petition for review, with Stallone’s reply filed with the California Supreme Court on May 22, 2009. The Supreme Court has yet to rule on the petition.

According to the Court of Appeal decision, the cross-complainant alleges that Stallone participated with other cross-defendants in misappropriating cross-complainant’s trade secrets, which are described in the cross-complaint as: “a formula, manufacturing process, marketing plan, funding plan and a distribution and sales plan for a high protein, low carbohydrate pudding with an extended shelf life and a stable and appealing consistency and most important, when mass produced, an appetizing flavor.” See id. at 139-140. 

According to the decision, Stallone was the chairman of the board for a company (also a cross-defendant) that allegedly conspired to steal cross-complainant’s ideas for the alleged high protein, low carbohydrate pudding that was allegedly unlike any other pudding on the market. See id. at 139. The company and another allegedly began producing and selling a pudding based on cross-complainant’s formula and business plan. See id. at 139.

At the trial court level, judgment was entered in Stallone’s and another cross-defendant’s favor on the trade secret misappropriation claim, after the court sustained their demurrer to cross-complainant’s third amended cross-complaint, based on the alleged inadequacy of the manufacturer’s trade secret designation statement.

The trial court reasoned that the trade secret designation was defective, because it made “no attempt . . . to identify why certain aspects or all of the aspects of the manufacturing process are anything other than matters generally known to persons skilled in the field,” and “no attempt . . . to indicate why the peculiar product formulation here that is stated with precision is a trade secret, as opposed to the typical ingredients involved in formulating other low-calorie, low-fat puddings.” See id. at 142. 

The trial court commented that cross-complainant’s submission was silent on the question whether the alleged trade secrets were known to skilled persons in the field: “So by its silence it's doomed to failure, because there's no attempt even to commence to describe why this formula is unique and not known to others. [] It just is a formula. Likewise, it is a cooking or manufacturing process of many steps. Some of which apparently, according to matters of which I believe I can take judicial notice are actually fairly familiar when you are trying to make a comparable product.” See id.

A California statute requires that trade secrets be identified with particularity before commencing discovery relating to the trade secret in suits alleging the misappropriation of trade secrets under California’s Uniform Trade Secrets Act.

Specifically, Code of Civil Procedure § 2019.210 provides:

In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate underSection 3426.5 of the Civil Code.

Cross-complainant appealed the trial court’s decision. On appeal, the Court of Appeal found that section 2019.210 does not require in every case that a trade secret claimant explain how the alleged trade secret differs from the general knowledge of skilled persons in the field to which the secret relates. The Court found that such an explanation is required only when, given the nature of the alleged secret or the technological field in which it arises, the details provided by the claimant to identify the secret are themselves inadequate to permit the defendant to learn the boundaries of the secret and investigate defenses or to permit the court to understand the designation and fashion discovery. The Court found that the trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favor of allowing discovery to go forward.

Specifically, the Court held that cross-complainant’s trade secret designation met the reasonable particularity standard of section 2019.210. According to the designation statement, two alleged trade secrets were identified: the pudding formula and the manufacturing process. The statement “particularly described” the details of the pudding formula as of the last quarter of 2003, listing the 15 specific ingredients by common name and the percentage of the total pudding. The statement also listed the same 15 ingredients by their supplier and brand name and particularly described each step in the mixing, testing, and code marking of the pudding. 

The Court concluded that cross-complainant’s statement was adequate because: 1) the statement permitted cross-defendants to investigate possible defenses; 2) there was no deficiency in the trade secret designation that would hamper its ability to protect the parties' proprietary information or to determine the scope of relevant discovery; and 3) there was no showing that the trial court was unable to understand the nature of the alleged secrets and fashion discovery. 

The Court concluded that the nature of the identification required in any particular case need only be reasonable under the circumstances. The Court further stated the 2019.210 requirement cannot be divorced from the statutory goals which it is intended to serve and “[t]he identification is to be liberally construed, and reasonable doubts concerning its sufficiency are to be resolved in favor of allowing discovery to commence.”

The Court of Appeal decision received some media coverage after its publication. 

The issues presented to the California Supreme Court on the petition for review are:

1)      “Does Code of Civil Procedure section 2019.210 . . . permit plaintiffs to designate purported trade secrets by simply listing all of their product manufacturing specifications, without distinguishing them from matters known in the trade, thereby forcing defendants to guess as to what aspect(s) the plaintiffs will argue at trial constitutes the actual trade secret?

2)      Does this new, diminished designation standard, which conflicts with the designation standard utilized for over a decade (which required plaintiffs to distinguish their purported secret from matters known in the trade) undermine the legislative intent behind Section 2019.210 and Business and Professions Code section 16600 . . .?.

3)      Does this new designation standard create de facto non-compete covenants (unlimited as to time or geography), restraining the mobility of technical employees , and allowing employers to circumvent Edwards v. Arthur Andersen (2008) 44 Cal.4^th 937, 946 . . .?

4)      When plaintiffs designate patented information as their trade secret, and cannot distinguish their purported secret from these patents, may trial courts take judicial notice of the designation and patents, and grant demurrer? Or, must trade secret defendants always face costly litigation, no matter how incurably insufficient the information designated as trade secret?”

Pending the California Supreme Court’s decision on the petition review, the Court of Appeal’s decision serves as a significant decision providing additional clarification concerning the disclosure requirements of Section 2019.210.  We will provide an update once the Supreme Court issues a ruling on the petition for review.

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Under California Civil Procedure Code section 425.16, a defendant sued for exercising its constitutional rights may assert that the action is Strategic Litigation Against Public Participation (“SLAPP”) and move to strike the complaint on that basis. Section 425.16, also known as the “anti-SLAPP statute,” when properly invoked, can be a powerful defense tool because it imposes an automatic stay on discovery until a ruling on the motion, potentially forces the plaintiff to establish with evidence a “probability” that plaintiff will prevail on its claim, and exposes the plaintiff to a fee award if the motion is granted. The invocation of the anti-SLAPP statute in cases involving trade secrets disputes between business competitors will most likely be futile, however, as a recent decision by the California Court of Appeal indicates.

In World Financial Group, Inc. v. HBW Insurance & Financial Service, Inc. et al., 2009 WL 1019118 (Cal. App. 2d Dist. April 16, 2009), plaintiff World Financial Group, Inc. (“WFG”), a company that provides insurance, pension and financial services, sued its direct competitor, HBW Insurance & Financial Services, Inc. and a number of former WFG associates (collectively, “defendants”) for, among others, trade secret misappropriation and use of WFG’s confidential information to solicit WFG’s associates and customers. 

Defendants filed an anti-SLAPP motion, arguing that all of WFG’s claims were based on defendants’ speech and conduct in furtherance of their right of free speech in connection with a public issue. Specifically, defendants claimed that their speech and conduct involved the pursuit of lawful employment, workforce mobility, and free competition, all of which are matters of public interest and protected policy. Both the trial court and appeals court disagreed, holding that defendants failed to meet their burden of showing that WFG’s complaint arose from speech and conduct in connection with a public issue. As the Court of Appeal explained, “[A]ll of the allegedly wrongful conduct and speech that plaintiffs attribute to defendants was committed in a business capacity, and was directed at a competitor’s associates and customers for the sole purpose of promoting the competing business as a superior employer and provider of products and services.” 

The Court of Appeal also rejected defendants’ strategy of couching their argument in terms of society’s general interest in the subject matter of the dispute—lawful employment, free competition and employee mobility—rather than focusing on the specific speech or conduct at issue in the complaint. “The focus of the anti-SLAPP statute must be on the specific nature of the speech rather than on generalities that might be abstracted from it.” Applying the statute in the general manner defendants proposed, the Court of Appeal observed, would mean that “every case alleging breach of a noncompetition agreement or the related misappropriation of trade secrets would be categorically subject to the anti-SLAPP statute,” effectively eviscerating the unfair business practices laws.

Finally, even if defendants had argued that the specific speech and conduct at issue was protected, that argument would still be unavailing because the statements by which defendants attempted to solicit employees and customers were not of public interest, were irrelevant to WFG’s claims, and were merely incidental to the conduct upon which the complaint is based.

If defendants’ immediate goal was to delay discovery, then the use of the anti-SLAPP statute essentially accomplished that objective—for the short term.  Beyond that, use of the anti-SLAPP statute to strike garden-variety misappropriation and non-solicitation claims, as confirmed in the World Financial Group decision, will likely be unsuccessful.

The Seyfarth Trade Secrets, Computer Fraud & Non-Competes practice group attorneys congratulate their colleagues, Brian Ashe, Erik von Zeipel, Daniel Sable, Kurt Kappes, and Timothy Nelson, who represented WFG at the trial and appellate levels!

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In Decision Insights, Inc. v. Sentia Group, Inc., No. 07-1596, 2009 WL 367585 (4th Cir. Feb. 4, 2009), the Fourth Circuit Court of Appeals grappled with the distinction between a claim that elements of a software program are trade secrets and a claim that the program is a trade secret as a total compilation. The Court of Appeals determined that the district court considered the former, but not the latter, and reversed the district court’s grant of summary judgment.

Decision Insights brought claims against Sentia and a number of former Decision Insights employees, alleging that the former employees used Decision Insights’ trade secrets and confidential information when they formed Sentia to develop a competing software application. Included in Decision Insights’ complaint were claims for breach of restrictive covenants and for misappropriation of trade secrets. Decision Insights alleged that the former employees used their knowledge of its software code to develop a competing product in “record time” that produced the same results as Decision Insights’ software.

After a discovery dispute regarding Decision Insights’ identification of its trade secrets and confidential information, Sentia moved for summary judgment. The district court granted the motion, holding that Decision Insights had not shown the existence of trade secrets or confidential information. The district court also found that the non-compete provision signed by one employee was unenforceable under Virginia law and that there was no evidence that any of the employees had breached their non-disclosure provisions.

The Court of Appeals reversed the district court’s grant of summary judgment. In its ruling, the Court of Appeals drew a distinction between Decision Insights’ two trade secret claims. The Court of Appeals affirmed the trial court’s conclusion that Decision Insights did not properly describe the 12 processes within its software that it claimed were trade secrets. The Court of Appeals agreed with Sentia’s expert that Decision Insights’ description of the trade secrets was “incomplete and fragmented,” thus preventing a meaningful evaluation of the trade secrets.

However, the Court of Appeals held that the trial court erred by concluding that Decision Insights had not shown, as a matter of law, that the software program as a total compilation was a trade secret. Decision Insights produced its entire source code, as well as a flow chart and narrative explaining its software program as a whole. The Court of Appeals held that the district court did not consider whether the software could collectively constitute a trade secret. Thus, the Court of Appeals remanded the matter to the district court with instructions to determine whether: (1) Decision Insights adequately identified its software compilation as a trade secret; and, if so, (2) whether Decision Insights had established a triable issue of fact as to the existence of a trade secret. 

Based on the Court of Appeals’ finding that the district court did not properly consider whether the software program as a total compilation constituted a trade secret, it also reversed the dismissal of Decision Insights’ claims for breach of contract against the former employees. The trial court had concluded that Decision Insights presented no evidence that the former employees had breached their non-disclosure of confidential information agreements. Once the Court of Appeals found that the trial court had not considered Decision Insights’ trade secret claim in totality, it also concluded that the district court did not properly consider whether the former employees breached their agreements.

The Court of Appeals similarly found that the district court erred in concluding that a non-compete provision in one of the former employees’ employment agreements was unenforceable. The district court found that Decision Insights did not show a legitimate business interest supporting the provision. The Court of Appeals reversed, stating that the district court’s conclusion on the non-compete provision was tainted by its failure to properly address Decision Insights’ trade secret claim.

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By Michael Levinson

Following up on our recent post about Faiveley Transport Malmo AB v. Wabtec Corporation, No. 08-5126 (2d Cir. March 9, 2009), the Second Circuit's reversal of the preliminary injunction in that case effectively granted a compulsory license to Wabtec, the likely trade secret misappropriator.  The evidence showed that Wabtec was using the Faiveley air brake secrets to sell its own air brakes.  The court reasoned that there was no evidence that Wabtec had or was threatening to disseminate Faiveley’s secrets any further.  Indeed, Wabtec itself gained a competitive advantage by not further disclosing the secrets.  The “only possible injury that [the] plaintiff may suffer is loss of sales to a competing product . . . [which] should be fully compensable by money damages.”  As a result, according to the Second Circuit, Faiveley did not face irreparable injury sufficient to justify equitable relief.

Based on this analysis, the Second Circuit’s decision could be seen as a license to steal.  It means that a trade secret misappropriator who “only” uses a purloined secret for its own benefit may not be enjoined.  It would be as if a soft drink company could steal the formula for Coke, without fear of being enjoined, so long as it “merely” used the formula itself to compete with Coke and thus Coke could obtain money damages.  This flies in the face of the well-accepted presumptions that trade secrets are unique and that their loss might not be able to be measured in money damages.  This result could also empower misappropriators to steal their competitor’s secrets, confident that they can compel a license and that the worst that might happen if they get caught is that they would have to disgorge some amount of profits.

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Roughly two months ago, we wrote about Michael Scott and Dwight Schrute, two fictional characters on NBC’s sit-com The Office, stealing the trade secrets of a competitor: Prince Paper. On last Thursday night’s episode, we learned the fate of Prince Paper: it went out of business. (5:35 into the linked clip.) Is this a result of Dunder Mifflin taking Prince Paper’s key customers? The show leaves this question unanswered.

Last Thursday night’s episode also illustrates a classic series of violations of the duty of loyalty by Michael Scott. At the close of the preceding week’s episode, Scott had given two weeks’ notice of his resignation from Dunder Mifflin. In last Thursday night’s episode, Scott learns that Prince Paper (where Scott had hoped to move after resigning) has gone out of business and then decides to open his own competing paper company, creatively named “Michael Scott Paper Company.” Scott proceeds to solicit a number of other employees in the office, including all three of the branch’s sales representatives, to resign from Dunder Mifflin, and join his new competitor. (The various solicitation efforts start at 6:30 in the clip and run for much of the episode.) Scott goes to the lengths of soliciting one employee in the branch parking lot and a second in the men’s room. Scott also spends company time asking Pam Beesley, the branch receptionist, to change the Dunder Mifflin invoice to say “Michael Scott Paper Company.” (8:35 into the clip.) Finally, the show strongly implies that Scott took a customer list because his new boss, Regional Vice President Charles Minor, asks the branch employees about “the client list that Michael was supposed to be working on.” (17:15 into the clip.)

Scott’s removal of a client list would be a case of trade secret misappropriation. Although the law on the duty of loyalty varies from state to state, Scott’s solicitation of employees for a competing venture while still employed by Dunder Mifflin would violate the duty of loyalty in most states. There are at least two cases in Georgia that reach this conclusion. U.S. Anchor Mfg., Inc. v. Rule Indus., Inc., 717 F. Supp. 1565, 1576 (N.D. Ga. 1989); E.D. Lacey Mills v. Keith, 183 Ga. App. 357, 362-363, 359 S.E.2d 148 (1987). More importantly for Dunder Mifflin and its Scranton branch, Pennsylvania law is similar. Reading Radio, Inc. v. Fink, 833 A.2d 199, 211 (Pa. Super. Ct. 2003). Scott’s use of company time and resources to create an order form for his new company would also be an issue for him.

While Prince Paper illustrated what an employer should not do in safeguarding its interests, Minor gives a lesson in an appropriate response. (Minor’s character is a level-headed, model manager, which is what creates comedic tension with the unorthodox, oft-inept Scott.) Minor keeps tabs on Scott after he hands in his two weeks’ notice. Minor intervenes when Scott is alone with sales representative Jim Halpert. Finally, Minor has Scott escorted out of the building by security when he learns that Scott is planning on starting a competing paper company. Dunder Mifflin likely would be in a good position to argue that it takes reasonable steps to protect its interests based on Minor’s actions.

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As discussed in our March 9th posting, Illinois Senate bill SB 2149 seeks to alter the landscape of trade secret enforcement and litigation in Illinois by, among other things, a) requiring disclosure of trade secrets before a party issues written or oral discovery; b) requiring attorneys'  fees be awarded to the prevailing party in a trade secrets case; and c) ordering a court to enter an attorneys' fees award against any party that subsequently amends their initial trade secret disclosure. SB 2149 passed through the Senate Judiciary Committee on March 12, 2009, and will now proceed to a full senate vote. The vote likely will occur within the next few weeks. If approved by the Senate (which is quite likely since SB 2149 spent less than one week before the Senate Judiciary Committee), SB 2149 will be sent to the Illinois House of Representatives Judiciary Committee for review and approval. If the House Judiciary Committee subsequently approves SB 2149, SB 2149 will then be considered and voted upon by the entire House of Representatives. We will continue to monitor the bill and its progression through the Illinois General Assembly.
 

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Opening with a tribute to the iconic New York City subway system, complete with citations to sources as diverse as Leonard Bernstein and The Bonfire of the Vanities, the Second Circuit Court of Appeals earlier this week vacated and remanded a preliminary injunction barring a braking system manufacturer from disclosing proprietary drawings and other information to the New York City Transit Authority during the contracting process. 

In 1993, SAB Wabco (Faiveley Transport Malmo AB’s predecessor-in-interest) entered into a license agreement with then-sister company Wabco (Wabtec’s predecessor-in-interest) that gave Wabco the authority to use SAB Wabco’s “know-how,” including manufacturing data, specifications, designs, plans, and trade secret information. Among other information, this included details related to BFC TBU, described by the court as “a unique air brake system designed to stop trains quickly and smoothly, if not always quietly.”

When the agreement terminated at the end of 2005, Wabtec began to develop its own line of BFC TBU through reverse-engineering, and in 2007 was awarded a sole source contract to provide the braking system for the Transit Authority’s overhaul of a certain class of subway cars. Faiveley sought a preliminary injunction in federal district court, asserting that the BFC TBU information constituted trade secrets that Wabtec was misappropriating by manufacturing the braking system and disclosing information to the Transit Authority during the contracting process. The district court granted the injunction.

On appeal, however, the Second Circuit held that although the district court had not erred in finding that Faiveley was likely to succeed on the merits of its misappropriation claim, there was no evidence of irreparable harm and, thus, no basis for entry of a preliminary injunction. Most notably, the court made a point of correcting the misapplication of the law by some district courts that had erroneously read Second Circuit precedent as meaning that a presumption of irreparable harm automatically arises upon the determination that a trade secret has been misappropriated. Instead, the court clarified that, although a rebuttable presumption of irreparable harm may arise where there is a danger that the trade secrets will be disseminated to a “wider audience” or their value otherwise impaired, no such presumption is warranted where “a misappropriator seeks only to use those secrets—without further dissemination or irreparable impairment of value—in pursuit of profits” because such harm can be compensated with money damages.

Thus, the Second Circuit found that no injunction was merited here because the evidence showed only that Wabtec had used Faiveley’s proprietary information to gain a competitive advantage, but had not disseminated any trade secrets and, indeed, was treating the information with the same confidentiality given its own proprietary information. Because there was no risk that Wabtec would further disclose or irreparably harm Faiveley’s trade secrets, the court vacated the injunction and remanded the matter to the district court. This decision serves as an important reminder of the facts that must be alleged and established to prove irreparable harm when seeking temporary or preliminary injunctive relief for trade secret misappropriation.

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A new bill recently introduced in the Illinois State Senate would dramatically change the Illinois Trade Secrets Act (765 ILCS 1065/1 et at.) and alter the landscape of trade secret litigation in Illinois. The bill, SB 2149, requires a party asserting trade secret misappropriation to serve on the opposing party, before commencing any written or oral discovery, a written statement that describes "with reasonable specificity the trade secrets which have allegedly been improperly used, disclosed or misappropriated." The bill requires a party to obtain leave of court to supplement its written statement and 180 days after submitting its statement to identify additional trade secret misappropriation. More importantly, any court that allows a party to amend its written statement must also enter an attorneys’ fees award against the amending party for attorneys’ fees the opposing party incurred as result of the amended statement.

In addition, the new bill allows the prevailing party to recover its attorneys’ fees and also orders the court to award attorneys’ fees if:

Finally, the proposed bill allows the court to award attorneys’ fees if the court:

a. finds that a damages claim for trade secret misappropriation is "objectively specious and has been maintained without substantial proof of economic injury approximately caused by improper use;"

b. modifies an injunction because the injunction is "impermissibly overbroad, vague or ambiguous;"

c. finds that a request for injunctive relief is substantially greater than what is necessary to protect "legitimate economic interests" regarding the improper use, disclosure or misappropriation of trade secrets.

We will continue to monitor this bill and its progression through the Illinois General Assembly.

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By Kurt Kappes and Jim McNairy, Sacramento

Mass layoffs are painful events for employees and employers alike.  But for employers, increasingly more than just personnel are leaving their facilities: researchers estimate that data theft cost businesses $1 trillion in 2008.

In a recent study commissioned by McAfee, Inc., researchers at Purdue University's Center for Education and Research in Information Assurance and Security (CERIAS) polled 800 executives at businesses with more than $250 million in annual sales.  Of the executives surveyed, 42 percent said that laid off workers were the biggest threat to business caused by the current recession.  Businesses reported losing $4.6 million on average in 2008 as a result of data theft.  McAfee noted that a lot of anecdotal evidence shows that many of the thefts were internal. 

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Although one would not expect to get insights on protecting confidential information from a prime time comedy, last Thursday night’s episode of NBC's The Office provided an amusing illustration of the importance of a company not giving away sensitive material. The episode involves two employees of the fictional paper company Dunder Mifflin – Michael Scott and Dwight Schrute – being tasked by their company’s CFO to learn about a small competitor – Prince Paper – that is beating Dunder Mifflin in a certain geographic area. Scott and Schrute pose as a potential client and a potential new employee, respectively, and go to Prince Paper’s office to ask questions about the company. Prince Paper’s principal discloses the number of his company’s customers. He goes as far as to provide a customer list to Scott. His wife also permits Scott to take a picture of her with a map of Prince Paper’s customers in the background.

(The relevant scenes take place at 6:00, 8:00, 10:15, and 12:10 of the video.)

The point of the episode is to show the ham-handed Scott and Schrute taking advantage of an unsuspecting competitor and then fighting over what to do with the information. That said, the episode does illustrate the pitfalls of a company not doing enough to protect its key information. Employers are often wary of the dangers of a disgruntled employee e-mailing a customer list to a personal e-mail account before resigning, but they forget the dangers that can come from disclosing information to seemingly innocuous customers and potential hires. In this case, Prince Paper would have a hard time showing that its customer list is a trade secret if it had to acknowledge that it previously gave the list away to a person posing as a potential customer. This is especially true when that person is the bumbling Michael Scott.

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(Thanks to Ralph Carter for preparing this posting).

As readers of our previous posts may recall, in November 2008, Judge Kenneth Karas of the Southern District of New York granted IBM’s motion to preliminarily enjoin one of its former high-level employees, Mark D. Papermaster, from working for Apple. Finding that “it is likely that Mr. Papermaster inevitably will draw upon his experience and expertise … he gained from his many years at IBM,” Judge Karas reaffirmed the viability of the “inevitable disclosure” doctrine. Int’l Business Machines Corp. v. Papermaster, No. 08-CV-9078 (KMK), 2008 WL 4974508, at *9 (S.D.N.Y. Nov. 21, 2008). 

On November 20, 2008, Mr. Papermaster appealed to the Second Circuit from Judge Karas’s preliminary injunction and also moved immediately for an expedited appeal. On December 8, 2008, Second Circuit Judge Debra Ann Livingston denied Mr. Papermaster’s motion for expedited appeal without prejudice, subject to renewal should the February 24, 2009 trial of the merits of the matter be delayed, or upon subsequent application after the scheduled trial. 

Under the current briefing schedule, Mr. Papermaster’s brief to the Second Circuit is due on January 26, 2009 and IBM’s appellee’s brief is due on February 25, 2009. Oral argument on the appeal may be heard as early as the week of April 20, 2009. Stay tuned for an analysis of Mr. Papermaster’s brief in a post to follow.

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In August, federal prosecutors charged Biswamohan Pani, a former Intel Corp. engineer, with theft of trade secrets from his former employer, Intel.  This week, a Massachusetts grand jury added four new counts of wire fraud.  If convicted, Pani could serve up to 10 years in prison for the theft of trade secrets count, and up to 20 years on each count of wire fraud.

Federal prosecutors in Massachusetts allege that after Pani resigned from Intel in May 2008, he downloaded confidential documents and trade secrets worth $1 billion, including new microprocessor chip designs. Pani accessed the internal Intel network via his Intel-issued laptop, downloading "mission-critical" documents.

It is reported that Pani told his supervisors that he was leaving Intel to work for a hedge fund, but in reality he had accepted a job months earlier with Intel’s main competitor, Advanced Micro Devices, Inc., and began working there days after his resignation from Intel, but while still employed by Intel.  For a brief period, Pani was on both AMD’s and Intel’s payrolls due to accrued, unused vacation time at Intel.  Intel owns 80% of the worldwide market for microprocessors, and AMD owns the rest.

An FBI search of Pani’s home recovered eight Intel documents classified as “secret,” “top secret,” and “confidential.” Pani told FBI investigators that he planned to give the information to his wife, who also works for Intel. AMD is not accused of any misconduct, and there is no evidence that AMD had any involvement in or awareness of Pani’s actions.  Pani, of course, is no longer employed by AMD. 

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 By James McNairy & Robert Milligan

A new Ninth Circuit case, Asset Marketing Systems, Inc. v. Gagnon, 2008 WL 4138181 (Sept. 9, 2008), acknowledges (at least in dicta) that there is a trade secrets exception to Business and Professions Code Section 16600.

In the case, Gagnon, an independent contractor who developed computer programs for AMS, a field marketing organization, alleged, among other things that AMS had misappropriated his trade secrets that were contained in the programs’ source code.

The Ninth Circuit rejected Gagnon’s claims that AMS misappropriated his trade secrets.  The Ninth Circuit affirmed the district court’s determination that Gagnon had granted AMS an implied, unlimited license to retain, use, and modify the software, thus destroying any trade secret status the code might have had.

In rejecting Gagnon’s trade secret claim, the Court affirmed the district court’s holding that the noncompetition agreements signed by Gagnon’s employees were invalid. Gagnon contended that even if AMS obtained an implied license, it still misappropriated his trade secrets that were contained in the programs’ source code by hiring away his employees in violation of their employment agreements. One of the provisions in the employees’ agreements was an agreement not to engage in any employment or personal contractual agreement for AMS for twenty-four months without written consent from Gagnon.

Citing the California Supreme Court’s recent decision in Edwards v. Arthur Andersen LLP, 189 P.3d. 285, 288 (2008), the Ninth Circuit stated (arguably in dicta) that noncompetition agreements in California are invalid unless necessary to protect an employer’s trade secrets. The California Supreme Court in Edwards, however, specifically did not address what it called the so-called trade secret exception to Bus. & Prof. Code § 16600 and rejected the Ninth Circuit’s narrow restraint exception to section 16600 (the “narrow restraint” exception interpreted section 16600 to allow noncompetition agreements where departing employees were barred from pursuing only a small or limited part of a business, trade or profession). According to the Ninth Circuit, the non-competition agreements that Gagnon had his employees execute “were no longer enforceable” because they were no longer necessary to protect Gagnon’s trade secrets against AMS.

In this first post-Edwards published Ninth Circuit decision regarding section 16600, the Court did not provide any specific analysis concerning the nature of the trade secrets exception and what one must show to make defensible use of it. The Court’s dicta appears to suggest that non-competition agreements executed “to protect” an employer’s trade secrets will be enforceable. But as with most things legal, with trade secrets, the devil is in the details. What exactly the Court meant by a non-competition agreement to protect trade secrets is unclear. Further, mere assertions in employee/employer noncompetition agreements that the agreement has been executed “to protect” trade secrets without more is unlikely to withstand challenge.

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The Sixth Circuit Court of Appeals recently held that whether a trade secret is a protectable interest is an equitable question not affected by the lack of a written instrument. Niemi v. NHK Spring Company, --- F.3d ---, 2008 WL 4273123 (6th Cir. Sept. 19, 2008).

Richard Niemi is an individual engineer who provides various automobile company manufacturers with designs related to stabilizer bars for automobiles. In the early 1990s, Niemi had an idea for a new method of stabilizer-bar manufacturing, which interested his long term client, New Mather Metals (a subsidiary of Defendant NHK Spring Co.) Although the purchase order through which New Mather ordered the manufacturing tooling, which Niemi claimed to be a “trade secret,” included the clause that “no other or different terms or conditions shall apply to this order unless specifically agreed to in writing. . .”, Niemi claimed that he had assurances that his new method would be kept “confidential.” In order to protect itself from Niemi’s selling his designs to its competitors, New Mather requested that Niemi enter into a “exclusivity agreement,” which Niemi described as “reciprocal” despite any language in the instrument to that effect. “No further writing was needed, in Niemi’s estimation, because New Mather’s obligation represented a continuation of an arrangement that had been in place for 25 or 30 years . . . .” 

Niemi learned a few years later that New Mather had disclosed his stabilizer manufacturing trade secret to other designers, and he brought an action against New Mather and its parent companies for misappropriation of trade secrets, as well as for other claims. The district court ultimately granted summary judgment to Defendants on the trade secrets claim, finding that Niemi had not taken sufficient steps to keep his designs secret. 

In reviewing Niemi’s appeal of judgment against his trade secrets claim, the Sixth Circuit considered Ohio’s adopted Uniform Trade Secrets Act, particularly focusing on the factor requiring “reasonable” efforts to maintain secrecy. Ultimately, it concluded that there were direct, disputed material facts sufficient to warrant reversal of the district court.

The decision is most significant, however, for the reasoning underlying its rejection of one of Defendants’ arguments; namely, that Niemi’s “oral reciprocal exclusivity agreement” was barred by the statute of frauds. In rejecting that argument, the court quoted Ohio law in noting that “protection afforded by trade secret laws is not a function of property interests or contract rights, but of ‘equitable principles of good faith applicable to confidential relationships.’” In other words, whether there is a contract or property interest in the trade secrets is “irrelevant” because trade secret protection derives from equity.

The progenitor of the principle quoted by the Sixth Circuit was Justice Oliver Wendell Holmes’ opinion in Masland, where he observed that, in “explaining the nature of a trade secret . . . trade secret laws are not those of property but the equitable principles of good faith applicable to confidential relationships.” Valco Cincinnati v. N & D Machining Service, Inc., 492 N.E.2d 814, 817 (Ohio 1986) (citing E.I. Du pont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917) (Holmes, J.)). 

In any event, although the fundamental character of a trade secret may be one of confidence protected by equity, there is some dispute among the states regarding whether a trade secret is a property right. Compare Envirotech Corp. v. Callahan, 872 P.2d 487, 494 (Utah App. 1994) (trade secret is a property right) with ConFold Pacific, Inc. v. Polaris Industries, Inc., 433 F.3d 952, 959 (7th Cir. 2006) (holding that, under Wisconsin law, a trade secret is not a property right but instead an interest protectable by contract).

The Sixth Circuit is correct that the lack of a written instrument does not itself negate a claim under the Uniform Trade Secrets Act. Certainly, if the existence of a written agreement – such as the “oral” mutual exclusivity and confidentiality agreement present in Niemi – would tend to increase the likelihood of a protectable trade secret, then its absence should mitigate against it.  But the Sixth Circuit seemed to go a step further in concluding that because a trade secret’s nature is one of equity, the lack of a contractual or property claim renders wholly “irrelevant” the lack of a written instrument. 

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 By Robert Milligan, Kurt Kappes and James McNairy

The California Supreme Court released its highly anticipated decision in Edwards v. Arthur Andersen LLP  today and held that employee non-competition agreements are invalid, even if narrowly drawn, unless the agreement falls within a statutory exception. 

In doing so, the Court rejected the Ninth Circuit’s narrow restraint exception, which excepted the prohibition contained in Business and Professions section 16600 on non-competition agreements where one was barred from pursuing only a small part or limited part of the business, trade or profession.

In its decision, the Court limited its review to two issues:

1)      To what extent does Business and Professions Code section 16600 prohibit employee non-competition agreements;

2)      Is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.

The Court concluded that Business and Professions Section 16600 prohibits employee non-competition agreements unless the agreement falls within the applicable statutory exceptions of sections 16601, 16602, or 16602.5. The Court also held that a contract provision whereby an employee releases “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.

On the first issue, the Court found that California state courts have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility. Section 16660 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (emphasis added) The chapter excepts non-competition agreements in the sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5). 

The Court noted that it had previously invalidated an otherwise narrowly tailored agreement as an improper restraint under section 16600 because it required a former employee to forfeit his pension rights on commencing work for a competitor (citing Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242-243). The Court, quoting Muggill, stated section 16600 invalidates provisions in employment contracts and retirement pension plans that prohibit “an employee from working for a competitor after completion of his employment or imposing a penalty if he does so unless they are necessary to protect the employer’s trade secrets.”

The two clauses at issue in Edwards’ agreement with Andersen provided:

1)      If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client. 

2)      For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) [Los Angeles] to which you were assigned during the eighteen months preceding release or resignation. 

Andersen argued that the Court should interpret the term “restrain” under section 16600 to mean simply to “prohibit,” so that only contracts that totally prohibit an employee from engaging in his or her profession, trade, or business are illegal. 

The Court rejected that argument and found that Andersen’s non-competition agreement was invalid because the two specific clauses at issue in the agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession. 

Earlier in the decision, the Court expressly stated it did not address the applicability of the “so-called trade secret exception to section 16660.” Before the Supreme Court granted the petition for review in Edwards, the lower appellate court’s decision remanded the case to the trial court to determine if the trade secret exception applied, i.e. the non-competition agreement was necessary to protect trade secrets. The Court’s disposition indicates that the issue is closed though and that there will be no such remand to the trial court:

We hold that the noncompetition agreement here is invalid under section 16600, and we reject the narrow-restraint exception urged by Andersen. Noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they within the applicable statutory exceptions of sections 16601, 16602, or 16602.5

Andersen asked the Court to adopt the limited or “narrow-restraint” exception to section 16600. The Court noted that confusion over the Ninth Circuit’s application of section 16600 arose in a paragraph in the Ninth Circuit’s decision in Campbell v. Trustees of Leland Stanford Jr. Univ. (9^th Cir. 1987) 817 F.2d 499, in which the Ninth Circuit stated that some California state courts have excepted application of section 16600 “where one is barred from pursuing only a small or limited part of the business, trade or profession” (citing Boughton v. Socony Mobil Oil Co. (1964) 231 Cal.App.2d 188 and King v. Gerold (1952) 109 Cal.App.2d 316). The Court found that the reasoning in these state court cases does not provide persuasive support for adopting the narrow restraint exception because Boughton involved the use of land, not a restriction upon a plaintiff’s practice of a profession, and King relied upon a trade secret exception to the statutory rule. 

The Court acknowledged that recent Ninth Circuit cases have followed Campbell to create a narrow-restraint exception to section 16600 in federal court. The Court stated that California state courts have not embraced the Ninth Circuit’s narrow restraint exception and stated “no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts have been clear in their expression that section 16660 represents a strong public policy of the state which should not be diluted by judicial fiat” (citing Scott v. Snelling and Snelling, Inc. (N.D. Cal. 1990) 732 F. Supp. 1034, 1042).

In sum, while the Court’s decision clearly states California does not recognize a “narrow restraint” exception to the general rule that employee non-competition agreements are invalid, the Court did not specifically address when non-solicitation of customer and employee clauses are permissible to protect trade secrets. 

The San Francisco Chronicle also has posted an article about this case.

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           According to the California Supreme Court's website, the Court’s highly anticipated decision in Edwards v. Arthur Andersen, LLP will be available tomorrow, August 7, 2008 at 10:00 a.m. on the Court’s website.

            Trade secret and employment attorneys have been closely following the Edwards case after the Supreme Court granted review of the case on November 29, 2006. 

            In the lower court, the Court of Appeal for the Second Appellate District expressly rejected somewhat settled Ninth Circuit case law that provides an exception to the general rule in California that covenants not to compete are unlawful in the employment context pursuant to Business and Professions Code section 16600. The narrow restraint exception essentially provides that a noncompetition agreement is not unlawful where it leaves a substantial portion of the market open to the employee. The lower court expressly found that the narrow restraint exception was a “misapplication of California law when applied to an employee’s noncompetition agreement.” The court further stated “[i]n our view, section 16600 prohibits noncompetition agreements between employers and employees even where the restriction is narrowly drawn and leaves a substantial portion of the market available for the employee.”

            The lower court also found that the broadly worded release that Edwards allegedly was required to sign was unlawful because it purportedly waived Edwards’ Labor Code section 2802 rights. Labor Code section 2802, subdivision (a), provides: "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties . . ." The lower court held that “[b]ecause Labor Code section 2802's indemnity provisions implement public policy, requiring Edwards to waive indemnity rights as a condition of continued employment violated public policy and constituted an independently wrongful act for purposes of . . .[Edwards’] intentional interference with prospective economic advantage claim.”

            The issues that the Supreme Court are expected to address in tomorrow’s decision are:

 (1) Is a non-competition agreement between an employer and an employee that prohibits the employee from performing services for former clients invalid under Business and Professions Code section 16600, unless it falls within the statutory or judicially-created trade secrets exceptions to the statute?

(2) Does a contract provision releasing "any and all" claims the employee might have against the employer encompass non-waivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

            We will provide a follow-up blog entry once the decision comes out.  

By Robert Milligan, James McNairy and Summer Associate Julia Brodsky

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Mississippi State University v. People for the Ethical Treatment of Animals, Inc., No. 2006-CA-02120-SCT, 2008 WL 2927836 (Miss. July 31, 2008).

The Mississippi Supreme Court has reversed a lower court’s order granting a request by People for the Ethical Treatment of Animals (“PETA”) seeking disclosure of documents from Mississippi State University (“MSU”) regarding its care of research animals. Specifically, PETA had requested that MSU release records relating to research and testing that was funded by Iams, a pet food company. PETA subsequently modified its request to seek only certain animal care protocol review forms prepared by MSU in conjunction with Iams pursuant to a series of agreements specifying that MSU would not disclose Iams’ confidential information and that MSU would maintain its animal care facilities in conformance with the federal Animal Welfare Act, 7 U.S.C. § 2131 et seq., and all other applicable laws and policies.    

Iams sought a court order prohibiting the disclosure of exempt information under the Mississippi Public Records Act, Miss. Code Ann. §§ 25-61-9 and 79-23-1, on the ground that the information PETA requested constitutes trade secrets. In particular, Iams asserted that the data and information reveals aspects of Iams’ “strategic product development portfolio” that is not generally known by its competitors in the marketplace, including its formulations, improvements, and new product development. After reviewing relevant documents in camera, the trial court, however, concluded that, with the exception of a section entitled “Experimental Design” and certain personal information about the researchers, the protocol forms were not exempt from disclosure because the Act only covers protocols developed by MSU under contract with Iams, which, it found, was not the case here.

However, the Mississippi Supreme Court reversed because the unrefuted evidence on the record established that the information in the protocol forms was developed by MSU pursuant to its agreements with Iams; thus, the “plain and unambiguous language” of the Act requires exemption of the substantive portions of the forms. See 2008 WL 2927836, *13-14. In addition, the Court observed that the protocol forms are required by the federal Animal Welfare Act, which also exempts from public disclosure “trade secrets or commercial or financial information which is privileged or confidential.” Id. at *14, citing 7 U.S.C. § 2131(a)(6)(B). In closing, the Court noted that “[a]ny disagreements with those directives are best aimed toward the Legislature.” Id.

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  By Erik Weibust (Boston) 

          Illustrating the roadblocks that Taiwanese companies still must overcome to do business in mainland China (Taiwan split from China amid a civil war in 1949), Forbes.com is reporting that electronics giant Hon Hai Precision Industry Co. recently took out half-page ads in major Taiwanese newspapers complaining about delays in a Chinese court over the prosecution of a Chinese competitor for allegedly stealing its trade secrets. In 2006, Hon Hai, which employs approximately 500,000 Chinese workers, sued BYD Company Limited, a Chinese competitor, for allegedly “systematically looting its trade secrets.”   According to Hon Hai, in 2006, two of its former employees took secret information when they left to work for BYD. Although the two employees have since been convicted of infringement in a Chinese court, according to Hon Hai, that may only be the tip of the iceberg. Specifically, Hon Hai alleges that over the past 4 to 5 years, 400 of its employees have moved to BYD, many of whom are suspected of providing the company with Hon Hai’s trade secrets and proprietary information. 

            According to the newspaper ads, the head of BYD is a member of the powerful People’s Congress, which has “the power to remove members of the judiciary.”  This, Hon Hai alleges in its ads has “result[ed] in a certain degree of unwillingness among local judicial and police members to deal with the case.” Nevertheless, Hon Hai believes that its rights will be vindicated eventually, particularly given China’s senior leaders’ commitment to protecting the interests of Taiwanese businesses on the mainland. 

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United States v. Malhotra, No. 5:08-CR-00423-JF (N.D. Ca.)

Former Hewlett Packard vice president Atul Malhotra today pleaded guilty in federal district court in San Jose, California to one count of theft of trade secrets. In an information filed on June 27, 2008, the United States charged Malhotra with violating the Trade Secrets Act, 18 U.S.C. § 1832(a)(2), by disclosing to HP certain confidential pricing information he obtained while employed at IBM. Specifically, the government charged that in his capacity as director of sales and business development for output management services for IBM Global Services, Malhotra obtained trade secret information regarding the IBM Global Services “CC Calibration Metrics.” This information concerned products costs and materials that IBM used to compete in the marketplace for printers and other output devices. Accordingly the document was stamped “IBM Confidential” on each page.

 Approximately two months after obtaining the confidential IBM information, Malhotra accepted a position as vice president of imaging and printing services at Hewlett Packard in Palo Alto, California. Shortly thereafter, the government alleges, Malhotra sent e-mails to two separate HP senior vice presidents entitled “For Your Eyes Only,” and attached the IBM Global Services CC Calibration Metrics.  An HP statement at the time indicated that HP conducted an internal investigation, terminated Malhotra’s employment, and reported the activity to law enforcement and to IBM.

Malhotra faces up to ten years in prison and a $250,000 fine on the single count of theft of trade secrets. Sentencing is scheduled for October 29, 2008, before District Judge Jeremy Fogel.

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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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Associated Press (Anna Jo Bratton) is reporting that a state district court judge in Lancaster County, Nebraska tagged two Nebraska Municipal Power Pool executives with millions of dollars in damages arising out of their scheme to use American Public Energy Agency's "company information, financial data and copyrighted material."  View Article. It appears that Nebraska Municipal Power Pool ("NMPP") previously provided services to American Public Energy Agency.  Then the two NMPP executives decided to create their own agency to compete with American Public Energy Agency.  AP also reports that the two executives attempted to steal away American Public Energy Agency's customers in an effort to eliminate or severely harm the company. 

I have not been able to locate a copy of the opinion, but I am hoping that it will be up on a website or a search service soon.   If I find it publicly available, I'll try to post a link to the judge's decision.

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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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United States v. Meng, No. CR 04-20216 JF (U.S.D.C. N.D. Calif.).

Judge Jeremy Fogel of the U.S. District Court for the Northern District of California in San Jose today imposed a 24-month prison sentence on Xiaodong Sheldon Meng, who pleaded guilty to possessing night vision software for pilots belonging to Quantum3D, his former employer, and using that information in a sales demonstration to Chinese naval officials.

According to the indictment, Meng was employed by Quantum3D in various systems engineering and analysis positions, and later as a consultant to Quantum3D. In that capacity, he had access to various trade secrets belonging to Quantum3D, a producer of hardware and software components for simulation systems for commercial and military customers. Among the products to which Meng had access were “Mantis,” a product used to visually simulate motions and three-dimensional scenes for training and other purposes, and “viXsen,” a visual simulation software program using for training military fighter pilots using thermal imaging (night vision) equipment. As part of his employment, Meng signed an “Employee Proprietary Information Agreement” acknowledging his obligation to return Quantum3D’s information, documents and other property to the company at the end of his employment.

Upon ending both his employment and consulting relationship with Quantum3D, Meng took a position with Orad, a direct competitor of Quantum3D in China. The government charged that Meng then traveled to China and made a presentation and demonstration to various foreign governments and officials, including the Royal Thai Air Force, the Royal Malaysian Air Force, and government entities and military contractors of the People’s Republic of China, using Quantum3D’s products, modified to seem like they belonged to Orad.

The United States government charged Meng with misappropriating Quantum3D’s trade secrets without authorization and attempting to export them from the United States to China in violation of various federal laws including, among others, the Economic Espionage Act (18 U.S.C. § 1831), the Trade Secrets Act (18 U.S.C. § 1832), and the Arms Export Control Act (22 U.S.C. § 2778). Although the statutory maximum for the economic espionage count to which he pleaded guilty is 15 years in prison, Meng’s plea agreement with the government, in which he pleaded guilty to 2 of the 36 counts of the indictment, recommended a maximum sentence of 24 months’ imprisonment.

At the sentencing hearing, Judge Fogel imposed the 24-month maximum under the plea deal, emphasizing the need to deter others who would consider stealing and selling American technology and jeopardizing national security. In doing so, Judge Fogel became the first judge in the country to sentence a defendant convicted under the rarely-used Economic Espionage Act.

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Tracy v. Winfrey, et al., No. 07-1630 (1st Cir. June 11, 2008).

The U.S. Court of Appeals for the First Circuit has affirmed the dismissal of Darlene Tracy’s copyright infringement and trade secret misappropriation suit against Oprah Winfrey, Harpo Productions, and ABC Television.

In a pro se complaint filed in federal district court in Boston, Tracy alleged that she came up with the idea that eventually became the hit reality TV show “Oprah’s Big Give.” In the show, which recently completed its run, Winfrey gave money to ten contestants, who then competed to make the biggest impact on the lives of complete strangers by giving the money away. Tracy alleged that she conceived of the idea for a show entitled “The Philanthropist,” and submitted a proposal to an executive producer for The Oprah Winfrey Show. She claims that a second producer told her the proposal was under review, but that the producers stopped returning her phone calls and ignored her requests to return her proposal. The complaint asserts that more than a year later, Winfrey announced at the end of her daily talk show that she was giving $1,000 to audience members to use for a charitable purpose in their communities. Shortly thereafter, Winfrey and ABC announced a new program with the working title “The Big Give,” which Tracy alleged mirrored her concept for “The Philanthropist.”

The district court dismissed the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failing to allege facts sufficient to support her claims. Tracy, now represented by counsel, appealed to the First Circuit. But the First Circuit affirmed the dismissal, concluding that “neither copyright nor misappropriation of trade secrets are apt legal theories for the facts as pled by Tracy, which, even construed in her favor, reveal that Tracy voluntarily and without reservation submitted her material to the defendants.”

While the lawsuit was pending, it garnered widespread media coverage, which was rumored to cause at least one large publishing house to back out of discussions concerning a possible companion “Big Give” book out of fear that it, too, might be named in the suit.

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The recent California appellate decision, Cypress Semiconductor Corp. v. Superior Court, is instructive not just on the issue of when the statute of limitations begins to run in a trade secret matter, but also contains important language with respect to the obligations of the trade secret owner to notify good faith, third-party users of the alleged misappropriation of trade secrets.

In Cypress, Silvaco Data Systems had developed and licensed electronic design automation software (“EDA”). This software was used by Silvaco’s customers to design their own products. One of Silvaco’s EDA products was known as Smart Spice, and Silvaco maintained the source code for SmartSpice as a trade secret. In late 1998, a former Silvaco employee began working for Circuit Systems, Inc. (“CSI”) and incorporated the SmartSpice trade secrets into a CSI product known as DynaSpice. Silvaco first suspected the trade secrets misappropriation in 2000 and sued its former employee and CSI at that time. Silvaco did not directly notify or take any action against CSI customers who had licensed DynaSpice. In August 2003, Silvaco and CSI entered into a settlement agreement and a stipulated judgment. The judgment included an express finding that Silvaco’s trade secrets had been incorporated into DynaSpice. The judgment also required CSI to discontinue licensing DynaSpice, as well as notify DynaSpice license holders that the software contained Silvaco trade secrets and to encourage customers to discontinue using DynaSpice.

Cypress Semiconductor Corporation (“Cypress”), which was one of CSI’s customers, learned of the judgment in late August 2003. After judgment was entered, Silvaco also directly notified CSI customers that DynaSpice contained misappropriated trade secrets from Silvaco. Silvaco contacted Cypress in September 2003 and demanded that Cypress cease using Silvaco’s trade secrets. Silvaco claimed that despite this notice, Cypress continued to use the DynaSpice program, and thus continued to use Silvaco’s trade secrets. Silvaco brought suit against Cypress in May 2004.

The central issue decided by the California Sixth Appellate District in Cypress involved the statute of limitations of Silvaco’s claims against Cypress. However, the decision also contains important language regarding the obligations of a trade secret holder with respect to third parties who are using the holder’s trade secrets.

The Cypress court stated that “a cause of action for misappropriation against a third-party defendant accrues with the plaintiff’s discovery of that defendant’s misappropriation.” The Cypress court also noted that trade secret owners have an incentive under the California Uniform Trade Secrets Act (“CUTSA”) to put good-faith third parties on notice. According to Section 3426.1(d) of the CUTSA, “a trade secret loses its protected status if the owner does not undertake reasonable efforts to keep it secret.” Also, according to Section 3426.1(b)(2)(C) of the CUTSA, good faith acquirers of trade secrets who do not receive notice before materially relying upon the trade secrets may not be liable for misappropriation at all. Therefore, according to the Cypress decision, “the failure of the trade secret owner to take prompt action to protect its trade secrets or to alert good-faith acquirers to the existence of its trade secret claims can serve as a defense in the event the trade secret owner eventually decides to pursue a misappropriation claim against the third party.” (emphasis added).

A trade secret owner, therefore, must promptly investigate instances of possible misappropriation and seek to notify any third parties who may have acquired the owner’s trade secrets. Failure to act promptly, under the CUTSA and the Cypress decision, can give rise to statute of limitations defenses, as well as the possibility that the Court may find that the claimed trade secrets are no longer protected trade secrets at all.

The full text of the Court's decision can be accessed here http://www.courtinfo.ca.gov/opinions/documents/H032114.PDF.

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A California appellate court recently held that the statute of limitations for trade secret misappropriation claims against third parties who receive stolen trade secrets from others begins when the plaintiff, not the third party, suspects a misappropriation of trade secrets.

The Court stated: "We conclude that with respect to the element of knowledge, the statute of limitations on a cause of action for misappropriation begins to run when the plaintiff has any reason to suspect that the third party knows or reasonably should know that the information is a trade secret. The third party’s actual state of mind does not affect the running of the statute."

The Court indicated that the trade secret holder's failure to take "prompt action" in notifying the third party about the purported misappropriation may diminish the holder's trade secret misappropriation claim.

Justice Eugene M. Premo, the author of the court decision, stated "A trade secret loses its protected status if the owner does not undertake reasonable efforts to keep it secret."

The Court's opinion is significant because the decision demonstrates that trade secret holders need to take "prompt action" once they suspect a misappropriation of trade secrets, including investigating potential misuses of their secrets.

A trade secret audit can be an invaluable part of protecting a company's trade secrets before and after a company's trade secrets have been compromised. For more information on Seyfarth Shaw LLP's trade secret audit capabilities, click here.

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By Scott Krol, New York

The United States Court of Appeals for the Fourth Circuit recently upheld summary judgment holding that a former employee did not violate the Virginia Computer Crimes Act (“VCCA”) when the former company could not prove that they were unaware of employees’ use of company funds. Further, the employee did not violate the Virginia Uniform Trade Secrets Act (“VUTSA”) when the company could not show any evidence that the employee in fact used any of the otherwise protected trade secrets for his benefit.

The parties to this case are closely linked. Jerry Nims is an entrepreneur who obtained patents on many technologies used in making identification cards more difficult to temper with or counterfeit. Nims started Orasee which owned many of these patents.

In 2003, Nims formed EC4 Technologies Limited (“EC4 UK”), a wholly owned subsidiary of Orasee, to license the technologies.

In 2005, Nims set up Othentec Ltd. (“Othentec UK”) as a subsidiary of EC4 UK.

Nims’s son-in-law, Jeffrey Phelan, was appointed Managing Director of both EC4 UK and Othentec UK, and later was put in charge of better distributing the company’s product in the United States.

On March 17, 2005, Phelan formed EC4 Technologies, Incorporated (“EC4 USA”) and became that company’s CEO. He began to market and distribute Orasee technologies in the U.S. pursuant to a sublicense agreement between the EC4 UK and EC4 USA. In November 2005, another executive formed Othentec Limited (“Othentec USA”) for the same purpose as EC4 USA, this time as wholly owned by Othentec UK.

By early 2006, after a considerable amount of friction developed between the parties, Phelan was discharged from his positions at the UK companies, but continued to do business as EC4 USA. This gave rise to the case at hand, essentially Nims’ companies claimed that Phelan abused his position of power and trust to form EC 4 USA fraudulently and proceeded to use Othentec UK’s money and trade secrets to run the U.S. business successfully. Phelan moved for and won summary judgment against Othentec UK on all issues except whether Phelan breached his fiduciary duty to Othentec UK.

The district court explained that there are three elements of committing a violation of the VCCA: “(1) using a computer or computer network (2) without authority (3) intending to obtain, embezzle, or convert the property of another.” Va. Code Ann, §18.2-152.3.

The Court found that Phelan clearly was authorized to access Othentec UK bank account, Othentec UK was aware of the withdrawals, and Phelan did not directly withdraw the money using a computer. Instead, Phelan merely sent an email to the accountant asking for the withdrawal. Hence, there was no evidence of the unauthorized use of a computer to commit a crime. Othentec UK “produced no evidence outside of self-serving speculations that Phelan committed a violation. of the VCCA.”

The VUTSA makes it illegal for a person to misappropriate trade secrets from another. Othentec UK argued that Phelan, as Managing Director, was intimately familiar with the technology, “unless someone is foolish enough to believe that all that (EC4 USA’s technology) was developed in a clean-room environment without reference to, use of, or attempting to work around” Othentec UK’s proprietary and highly confidential software and manufacturing process, than Othentec UK had no basis for its argument. The Court agreed with the last part, ruling that these “allegations, speculations, and inference are not enough to survive summary judgment.” See Othentec Ltd. v. Phelan, --- F.3d ----, Case No. 06-2297, 2008 WL 2009740 (4th Cir. May 12, 2008) (emphasis added).

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The Topps Company, maker of “Bazooka” bubble gum, licensed Stani to manufacture and distribute the gum in Argentina. The original license was entered into in 1957 and was to expire in 20 years. It provided that Topps would share its “know-how, formulae, processes and techniques” with Stani in exchange for royalties on Stani’s sales. In 1976, the parties entered into a new 10-year agreement, with Stani given an option to extend it for another 10 years. The new agreement provided for the parties sharing Topps’ “manufacturing technology, marketing concepts and techniques, … and trademark use” in exchange for Stani’s payment of a yearly license fee. In the 1976 agreement, Topps also gave Stani “the exclusive non-assignable right and license to manufacture ... and sell within the [relevant] Territory, during the continuance of this Agreement, Licensed Products utilizing TOPPS Technology.” Emphasis added. Four years later, the parties entered into two new contracts: a third license agreement, and an escrow agreement. The 1980 license agreement, which expired by its terms in April 1996, gave Stani the same “exclusive non-assignable right and license” that had been given in 1976 except that the corresponding 1980 provision ended with the words “Licensed Products” and did not include "utilizing TOPPS' technology." The escrow agreement (for which Stani paid $100,000) recited that, absent a default, upon expiration of the 1980 license agreement legal title to the registration in Argentina of the trademarks “Topps” and “Bazooka” would pass to Stani.

In 1999, three years after the 1980 license agreement expired, Topps sued Stani and its parent corporation, Cadbury (to whom Stani had assigned the trademarks), alleging that Stani was continuing to use Topps technology which constituted misappropriation of trade secrets. In its answer, Stani denied that it was using Topps’ formulae but argued that, in any event, it had the right under the parties’ agreements to do so. The district court granted summary judgment to Stani and its parent, reasoning that the 1976 and 1980 documents (including the assignment to Stani of the Argentina registration of the trademarks) necessarily gave Stani the right to continue using Topps’ chewing gum formulae after April 1996. The Second Circuit reversed on the ground that summary judgment was inappropriate because the agreements were ambiguous with regard to Stani’s rights after April 1996. Topps Co. v. Cadbury Stani S.A.I.C., No. 06-5316-cv (2d Cir., May 15, 2008).

The court of appeals said that, on the one hand, the 1980 license agreement provided that the “TOPPS Trademarks and the Topps Technology shall at all times remain the exclusive property of TOPPS or its assigns” and gave Stani the right to use TOPPS formulae only “during the continuance” of the agreement. Those provisions suggest that Stani had no post-April 1996 rights. On the other hand, the “during the continuance” provision might have been intended to refer solely to what was to happen if there was an early termination of the 1980 license for cause, and there was no provision expressly granting or expressly denying Stani the right to the formulae after April 1996. Moreover, the assignment of trademark registration gave Stani at least the right to make a substantially similar product if it could do so without using the Topps formulae and without deceiving customers. Therefore, the parties’ intent was a material disputed issue requiring a trial.

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Georgia’s Trade Secrets Act prohibits knowing misappropriation of trade secrets. See Ga. Code Ann. § 10-1-761. In a recent decision, the Eleventh Circuit briefly examined this principle in affirming a district court’s grant of dismissal and concluded that the Complaint must set forth facts from which the court could infer that any misappropriation of trade secrets was knowing. Southern Nuclear Operating Co., Inc. v. Electronic Data Systems Corp., 2008 WL 1700204 (11th Cir. Apr. 14, 2008).

Southern Nuclear Operating Company had retained Electronic Data Systems (“EDS”) to provide computer and software services. Southern Nuclear eventually terminated that agreement and hired Computer Technologies Solutions, Inc., (“CTS”) to perform the same functions. EDS requested that Southern Nuclear return EDS’s products and documentation or certify their destruction. Southern Nuclear never did so, and so EDS filed an action against Southern Nuclear and CTS for misappropriation of its trade secrets.

The only issue on appeal was whether the district court had erred in granting dismissal on the grounds that EDS did not allege that CTS knew or should have known at the time it was hired that it had misappropriated trade secrets of EDS. The court of appeals agreed with the district court and affirmed the dismissal in a very brief opinion because there was “nothing in the Complaint that provides facts from which the court could infer that CTS knew or should have known that it had misappropriated trade secrets of EDS.”

Nonetheless, service providers such as CTS should still be conscious of trade secrets issues when they enter into new agreements to provide services or products, ensuring that information used by the client and made available to the service provider is not a competitors’ trade secrets, particularly if there is some reason to suspect that the information may be protected.

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The Illinois Appellate Court affirmed a ruling granting summary judgment to American Family Mutual Insurance Company on its declaratory judgment action seeking a determination that it has no duty to defend the insured defendants in an underlying trade secret misappropriation action the company brought in federal court. American Family Mut. Ins. Co. v. Roth et al., No. 1-07-0526 (Ill. App., 2d Dist., Mar. 31, 2008).

American Family, a Wisconsin-based insurer, entered into written agency agreements with defendants Bonnie Roth and Connie Roth, owners of Roth & Roth Insurance, pursuant to which Bonnie and Connie worked as exclusive agents of American Family. The agency agreements provided that the policies, policyholder records, and other materials furnished by American Family to the defendants remained American Family’s property and that all originals and copies were to be returned to American Family within 10 days of termination of the agreements. The agreements also contained provisions, signed by the defendants, governing their access to American Family’s proprietary computer system, software and database, which included customer lists and confidential customer information. In addition, the agreements contained nonsolicitation agreements prohibiting the defendants from soliciting American Family policyholders for one year following termination of the agreements.

After terminating the agreements with Bonnie and Connie, American Family demanded the return of all of its property, including policyholder records, and reminded Bonnie and Connie that privacy laws and the agreements prohibited them from disclosing policyholder information to third parties. Nonetheless, the defendants solicited American Family customers, including sending a solicitation letter to at least one American Family customer that contained personal financial information Connie Roth obtained while an agent of American Family.

American Family sued the defendants in federal court alleging violations of the Wisconsin Uniform Trade Secrets Act, Wis. Stat. Ann. § 143.90(1)(c); federal law; and state common law for breach of contract and tortious interference. American Family also instituted a declaratory judgment action in the Illinois circuit court seeking a determination that it has no duty to defend the defendants in the federal court action pursuant to the terms and conditions of the business-owners’ package insurance policy it had issued to them as its agents. The circuit court granted summary judgment in favor of American Family.

On appeal, the defendants asserted that the circuit court erred because the underlying complaint contained factual allegations of “personal and advertising injury” that brought the action within the policy’s coverage. But the appellate court rejected this argument, finding that the defendants’ alleged retention and use of confidential information gleaned from American Family’s database and computer system amounted to trademark and trade secret infringement, thus bringing the action with the policy exclusion for injuries knowingly caused by the insured and arising out of such infringement. The appellate court also found that the defendants’ alleged retention of American Family’s information and use of that information to solicit American Family’s customers constituted a breach of the agency agreements, thus bringing the action within an exclusion to the policy’s coverage for injuries that arise from breach of contract. Accordingly, the court concluded that American Family did not owe a duty to defend its former agents in the underlying action.

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One of the nation’s large home builders recently filed suit against a former executive in federal court in Albuquerque, New Mexico for alleged misuse of the company’s trade secrets related to a highly confidential internal strategic plan.

Pulte Home Corporation filed suit against former executive Lynn Galindo, a former area vice president based out of Las Vegas, Nevada, in the United States District Court of New Mexico (Case 1:08-cv-00210-JB-LFG) alleging claims of trade secret misappropriation, conversion, breach of fiduciary duty, breach of contract, fraud, breach of implied covenant of good faith and fair dealing, and unjust enrichment.

The complaint alleges that shortly before Galindo’s departure from the company, she misappropriated an internal strategic plan related to the Albuquerque housing market and later used it to create a similar plan for a competitor.

According to the complaint, the plan, which cost in excess of $1 million dollars to produce, contained information that would allow a competitor at Pulte’s expense to make informative decisions regarding the “relative health of the market in terms of marco/micro economic and market forces; the size of the mobility of the population within the market; the organization of Pulte’s Target Consumer Groups; the location preferences by consumer group, price sensitivity, product preferences, over-and under-served consumers groups which indicates market opportunity; and the top performing communities in the market organized by Target Consumer Group.” The plan also contained Pulte’s analysis of this data, its strategy for increasing its presence in the market, an “identification of specific challenges of this market and Pulte’s proposed solutions to those challenges.”

According to Pulte’s complaint, “A knowledgeable person would be able to use Pulte’s . . . [strategic plan] to assess the viability of a specific location (or multiple locations), understand the best opportunities for targeting specific consumer groups in the locations under evaluation and be able to fine tune a product offering in terms of community layout, community design, community amenities, lot size and configuration, floor plan selection and specifications of homes.”

According to the suit, Pulte provided Galindo with notice of her termination in the spring of 2007 as part of a reduction in force. Galindo negotiated a lucrative severance package that paid her nearly $300,000 in severance pay, bonuses and other compensation. Pulte claims Galindo conspired to obtain the strategic plan while she was negotiating her severance from the company and that if it would have known she had obtained the highly confidential plan that it would not have entered the severance agreement. Galindo apparently obtained the plan by contacting a subordinate and induced the employee to send her a copy prior to her separation.

During Galindo’s employment and as part of her severance agreement, Galiando signed agreements to keep Pulte’s proprietary information, such as the strategic plan, confidential, according to the complaint. Pulte claims that Galindo agreed to provide a developer in the Albuquerque area with a marketing study and used material from Pulte's confidential strategic plan in the report.

The case has yet to be set for trial and has been assigned to District Judge James O. Browning and Magistrate Judge Lorenzo F. Garcia.

This case highlights the need for employers to review the activities of departing employees shortly before their departure to ensure that company confidential/trade secret information has not been compromised and that the employees understand their continued confidentiality obligations to the company. Employers should consider reviewing these employees’ e-mail activity and access to proprietary databases prior to their departure, as well as remind other employees to report any suspicious activities, to attempt to safeguard company secrets.

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A former software engineer for a Chicago-area telecommunications company has been indicted for allegedly misappropriating over 1,000 proprietary documents containing trade secrets which she was evidently attempting to transport with her to her new job in China. Neither company has been named.

The defendant, Hanjuan Jin, a naturalized citizen, took a medical leave of absence from the Chicago-based company (Company A) in February 2006. During her medical leave, she accepted a job with a company in China (Company B) where she was to develop communications software. She then informed Company A that she would return to work on February 26, 2007, without notifying the company that she had secured a job in China. After purchasing a one-way ticket to China for Feb. 28, 2007, Jin returned to Company A and allegedly downloaded hundreds of documents. She allegedly returned that night as well as the next night to copy more documents. These documents included descriptions of how Company A provides an interstate communication feature that cost the company hundreds of millions of dollars to develop, and federal authorities claim that had Jin succeeded in bringing them to China, Company A could have lost more than $600 million over the next three years.

Jin was arrested and the documents seized at O’Hare Airport on Feb. 28, 2007. She was charged with three counts of theft of trade secrets. If convicted, each count carries a maximum penalty of ten years in prison and a $250,000 fine.

For more information, see http://www.earthtimes.org/articles/show/suburban-chicago-woman-indicted-for,337647.shtml or http://www.chicagotribune.com/news/local/chi-trade-secrets-webapr03,1,1758307.story.

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The Eleventh Circuit Court of Appeals affirmed the sentence of a former Coca-Cola Company employee and one of her co-conspirators for conspiracy to commit theft of trade secrets in violation of 18 U.S.C. § 1832(a). In United States v. Williams, a jury convicted Joya Williams of taking trade secrets related to secret marketing materials from Coca-Cola and working with her co-conspirator, Edmund Duhaney to try to sell them to Pepsi Company through a third-party, Ibrahim Dimson. (Mr. Duhaney pleaded guilty.)

The facts under which Ms. Williams and Mr. Dimson were convicted and sentenced read like a serial clock-and-dagger television series. Ms. Williams snuck files (and even a product sample) out of her workplace, gave them to Mr. Duhaney (who testified against Ms. Williams and Mr. Dimson as part of his plea-bargain), who then contacted Mr. Dimson to act as the go-between with Pepsi Co. Mr. Dimson contacted Pepsi Co. by mailing an executive at Pepsi an offer to provide “very detailed and confidential information” about Coca-Cola he would provide “to the highest bidder.” Pepsi Co., of course, notified Coca-Cola, which then notified the FBI. An undercover agent with the FBI posed as a Pepsi executive and began the process of purchasing small confidential items with an aim towards one large purchase. After the terms of the large purchase were consummated, the FBI arrested each of the three conspirators.

As stated by the Court, the facts leave no doubt as to the validity of the underlying convictions, but Ms. Williams raised two constitutional challenges to her trial. First, she argued that the trial court’s limitation on her cross-examination of Mr. Duhaney violated her Sixth Amendment right of confrontation (the Eleventh Circuit disagreed). Second, she argued that the trial court denied her due process by striking her closing argument’s reasonable doubt analogy (again the Court of Appeals disagreed). And both Ms. Williams and Mr. Dimson appealed their sentences, arguing that the district court had placed too heavy an emphasis on the seriousness of the offense in going above the recommended sentencing guidelines for each of them. The Court of Appeals, however, held that the trial court had not abused its discretion in sentencing them.

¹ Trial lawyers frequently have a series of “reasonable doubt” stories and analogies for use at closing argument, tailored to the case and whether they are the prosecutor or defense attorney. Ms. Williams’ attorney’s analogy is arguably one of the stranger ones: “Williams argues that her counsel properly explained the concept of reasonable doubt by comparing it to a patient's desire to seek a second opinion when told by a doctor ‘you know, I'm looking at you and I think you need to have both of your legs amputated.’”

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The Chemical Abstracts division of the American Chemical Society (ACS) sued three software developers who left ACS to start their own company, Leadscope. ACS sued for trade secret misappropriation, alleging that the software developers used ACS trade secrets to develop their own product. The filing of the lawsuit scuttled several pending (very promising) deals that Leadscope was about to close on. Leadscope counterclaimed for defamation, tortious interference, unfair competition and deceptive trade practices.

The lawsuit was filed in 2002 was hotly contested. Among other things, there was a dispute over insurance coverage, resulting in a court of appeals decision in favor of coverage, see Am. Chem. Soc. v. Leadscope, Inc. , 2005-Ohio-2557.

The trial lasted 2 months in the Franklin County Court of Common Pleas (Columbus, Ohio). On March 27, the jury returned a verdict ruling in favor of Leadscope (the defendant and counterclaimant), awarding counterclaim compensatory damages of $27 million.

In closing arguments, Leadscope's attorney argued, that ACS "destroyed the reputations of three dedicated scientists...They have ruined the financial position of LeadScope...These scientists did their own work. They didn't take anything from [ACS]". Much of the case focused on expert analysis of Leadscope's source code. Leadscope presented expert testimony that the source code of their own product was NOT copied.

Certainly, a cautionary tale for people filing trade secret lawsuits!

The Columbus Dispatch has reported on the verdict. See
http://www.columbusdispatch.com/live/content/business/stories/2008/03/28/LEADSCOPE.ART_ART_03-28-08_C12_HF9P1EG.html?sid=101

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Stanley Steemer licensed AAA Abachman to operate a carpet and upholstery cleaning business under the Stanley Steemer name. The franchise agreement gave Abachman “the sole right to use Stanley Steemer’s ‘trademarks, service marks, patents, and trade secrets’ in its carpet and upholstery cleaning business within its assigned territory.”

After Abachman had secured this right, however, Stanley Steemer licensed a second company to operate a “duct cleaning” business in an overlapping geographic area. Abachman complained to Stanley Steemer that this second license violated its exclusive rights in the area, and, after being rebuffed, sought a declaratory judgment that this was so. The parties’ cross summary judgment motions resulted in judgment for the defendant, Stanley Steemer, on the basis that the franchise agreement granted exclusive rights only as to “carpet” and “upholstery” cleaning, not “duct” cleaning. Abachman appealed to the 11th Circuit.

The central issue in the appeal was whether the contract between Abachman and Stanley Steemer afforded Abachman an exclusive right in Stanley Steemer’s mark generally, or only as to carpet and upholstery. The relevant portion of the agreement gave “Abachman the exclusive and perpetual rights ‘to own and operate a Stanley Steemer carpet and upholstery cleaning business (hereinafter referred to as a ‘Stanley Steemer Business’) in the ... ‘Franchisee’s Area’[ ] and to use the trademarks, services marks, patents, [and] trade secrets ... solely in a Stanley Steemer Business in that area and in no other manner.’”

The per curiam decision affirmed the district court, holding that this language provided an exclusive right to the Stanley Steemer mark only as to “carpet and upholstery.” Relying on the language “and in no other manner,” the Court held that this unambiguous language foreclosed any broader understanding of the contract, even a subsequent term requiring payment by Abachman to Stanley Steemer for “any additional sale resulting from or associated with the name Stanley Steemer.”

Although there was a weak, facial argument that the broad language “trademarks, services marks, patents and trade secrets” is broader than only “carpet and upholstery cleaning” if done under the Stanley Steemer name, it seems clear that the Court concluded from the contract language quoted in its opinion that such use is constrained to “Stanley Steemer Business,” a term defined as “a Stanley Steemer carpet and upholstery cleaning business.”

Although neither a trendsetting case nor a departure from black letter law, this case is a good reminder that clearly written, descriptive contract language is (still) critical and definitive in disputes. Here, Stanley Steemer did a good job of providing both the breadth necessary for Abachman to run a successful franchise and at the same time limiting that franchise strictly so as to enter into a separate agreement with another entity.

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On February 29, 2008, Allen Cotten pleaded guilty in U.S. District Court in Sacramento to stealing microwave technologies from his former employer, Genesis Microwave, Inc., and selling or offering them for sale to foreign governments and military contractors. In a scheme that lasted two years, Cotten downloaded confidential information from Genesis computers, including plans, designs, and specifications for microwave technologies that, according to the U.S. Attorney’s Office, have military applications such as “enhancing navigation and guidance capabilities, radar jamming, electronic countermeasures, and the ability to locate and pinpoint enemy signals during warfare.” Cotten also stole mechanical parts and hardware made with the confidential plans belonging to Genesis, and both sold and offered to sell those components to foreign governments and military contractors. At his sentencing hearing in May, Cotten faces up to ten years’ imprisonment and a fine of $250,000.

Cotton’s illegal activities were uncovered by the Export Enforcement Task Force comprised of various federal agencies, including the Department of Justice, FBI, Immigration and Customs Enforcement, Department of Commerce, Department of Defense, and the armed services. The task force was created to detect, investigate, and prosecute cases involving the theft or export of sensitive technology.

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In almost every trade secret/restrictive covenant dispute, a company whose trade secret information has been stolen must confront the possibility that its customers will be dragged into the dispute. One company decided to take the bull by the horns pre-litigation and sent a letter to all of its customers notifying them of a misappropriation by one of its former employees and “suggesting” that, to avoid potential involvement in any ensuing litigation “as a material witness, or otherwise,” the customers should not do business with the former employee.

Unsurprisingly, the former employee sued his former employer for defamation. The former employer brought a motion to strike the defamation complaint under California’s anti-SLAPP statute, which authorizes a court to dispose of lawsuits that are brought to chill “the valid exercise of constitutional rights,” such as the right of free speech. The trial court’s decision to grant the former employer’s anti-SLAPP motion and strike the defamation complaint was upheld yesterday by the Court of Appeal . See Neville v. Chudacoff, __ Cal.Rptr.3d __, 2008 WL 650658 (Cal.App. 2d. Dist. March 12, 2008).

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In a February 29, 2008 Order, the Northern District of California entered a preliminary injunction against four defendants on behalf of Verigy US, Inc. Verigy demonstrated in discovery that Romi Omar Mayder, the principal of Silicon Test Systems, Inc., e-mailed a number of sensitive documents to a business partner, Robert Pochowski. The documents concerned technology for testing flash memory cards.

In granting the preliminary injunction, the district court rejected a number of arguments put forward by Defendants. Defendants first argued that a difference of opinion between Verigy witnesses regarding the application of Verigy’s confidentiality policy, but the court found that the existence of such a policy, along with non-disclosure agreements, was sufficient for Verigy to show reasonable efforts to maintain the secrecy of its information.

Defendants further argued that the items alleged by Verigy to be trade secrets were publicly known elements. However, the court concluded that Verigy demonstrated that the combination of those elements was not publicly known and was therefore entitled to protection as a trade secret.

Finally, Defendants argued that the product they ultimately developed did not utilize Verigy’s trade secrets because Defendants made significant changes to the final product. The court rejected this argument, holding that Defendants’ use of Verigy’s items gave Defendants a head start in ultimately developing their final product, even if the final product varied from the Verigy plans. Additionally, the court relied upon Defendants’ misappropriation of Verigy information regarding the requirements of other vendors in concluding that Defendants’ actions gave them an unwarranted competitive advantage.

The court was also forced to grapple with the question of the duration of the injunction restricting Defendants marketing or selling their product. To answer this question, the court had to determine how much of a temporal head start Defendants obtained by misappropriating Verigy’s trade secrets. The court determined that Mayder took eight months at Verigy working on the project in question, but then elected to shorten the injunction period to five months because: (1) some of the technology used on the project was publicly available; and (2) Defendants’ final product ultimately went in a different direction than the product sold by Verigy.

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A federal court in the Southern District of California recently burst the bubble on a plaintiff’s suit alleging that the defendant, the alleged creator of a novelty chewing gum product, had stolen the plaintiff’s idea for a NASCAR-themed bubble “chew” by granting the defendant’s motion for summary judgment.

The decision provides a reminder to companies that provide confidential and trade secret information to others under non-disclosure agreements that they need to follow the precise terms of those agreements, including properly designating all information that they seek to protect, otherwise they run the risk of their information being exposed and compromised.

In the colorful case, Hoffman v. Impact Confections, Inc., Case No. 06cv0489 BTM (NLS), 2008 WL 413751 (S.D. Cal.), the plaintiff alleged that together with a partner they established a bubble gum company named Ollie Pop Bubble Gum, Inc. (“Ollie Pop”). Plaintiff claimed that he came up with the concept of marketing novelty gum and candy “which was designed to combine the popularity of NASCAR and its drivers with the lure of the chew tobacco favored by many of NASCAR's fans by providing a gum or candy in an original new packaging intended to appeal to all ages.” First Am. Complaint 11.

Plaintiff alleged that he contemplated two different packaging options, both to be sold under the mark “Pit Crew Chew.” Id. at 12. The first packaging option was a pouch containing gum or candy and the second packaging option was a plastic container shaped like a tire and wheel that would also contain gum or candy. Id. Plaintiff’s idea purportedly was to have the products licensed by NASCAR and bear NASCAR's logos. Plaintiff also wanted to have the products endorsed by at least one NASCAR driver and display the driver's image and/or his car and/or associated number. Id.

According to the plaintiff, he designed both packages and began working with Motorsports Management to establish a relationship between Ollie Pop and NASCAR. Id. at 13. Plaintiff claimed he entered into discussions with Joe Gibbs Racing to have one of its drivers endorse the product and allegedly was able to obtain the promise of an endorsement from Tony Stewart. Id. at 15.

Plaintiff claimed that in 2003, he entered into negotiations with the defendant regarding the marketing and selling of “Pit Crew Chew” products. Id. at 16. The parties entered into a written non-disclosure agreement in May 2003.

As part of his discussions with the defendant, plaintiff contended that he disclosed confidential information and materials to defendant, including, but not limited to, “the idea/concept of marketing and selling a NASCAR and NASCAR driver endorsed bubble gum, the idea/concept of providing gum and/or candy in a package which would appeal to NASCAR fans' noted fondness for ‘chew,’ and the specific drawings of both the pouch and wheel to be marketed and sold.” Id. at 18. Plaintiff also claimed he introduced defendant’s employees to Motorsports employees.

According to plaintiff’s complaint, by July of 2003, defendant had submitted an application for a license to NASCAR seeking to market and sell “Pit Crew Chew” products with the NASCAR logos in place. Id. at 20. Following defendant’s submission of the licensing application to NASCAR, Motorsports allegedly informed defendant and Ollie Pop that NASCAR was indeed interested in licensing the “Pit Crew Chew” products. Id. at 21. Plaintiff alleged that by August 2003, Dale Earnhardt, Jr. was interested in endorsing “Pit Crew Chew” products. Id. at 22.

Then, around the beginning of September 2003, according to plaintiff, defendant abruptly ended its relationship with Ollie Pop and plaintiff. Id. at 24. With the failure to launch “Pit Crew Chew” products, Ollie Pop encountered financial difficulties and as a result plaintiff took a controlling interest in Ollie Pop. Id. Under the deal he allegedly struck with his former partner, plaintiff claimed that Ollie Pop granted him all right, title, and interest in and to and all intellectual property rights related to the “Pit Crew Chew” mark and products, all rights of Ollie Pop under the non-disclosure agreement, and all patent and copyright rights relating to the tire and wheel design and artwork. Id. at 26.

In 2005, plaintiff allegedly obtained copyright registrations for the two-dimensional artwork on Ollie Pop's candy wheel design. Plaintiff also claimed in 2005 he learned that defendant had launched its own product, “Champion Chew.” According to plaintiff, the product consisted of gum enclosed in a tire and wheel and was designed to bear a resemblance to “chew” tobacco. Id. at 27. Plaintiff alleged that “Champion Chew” was licensed by NASCAR and was endorsed by one of NASCAR's drivers. Id. at 28.

Plaintiff filed suit and his first amended complaint asserted claims for: (1) misappropriation of trade secrets under California’s trade secret misappropriation statute (Cal. Civ. Code § 3426.1); (2) intentional interference with economic relationships; (3) negligent interference with economic relationships; (4) breach of contract; (5) breach of implied contract; (6) copyright infringement; (7) quantum merit; (8) unfair business practices in violation of Cal. Bus. & Prof.Code § 17200 and California common law; (9) constructive trust/accounting; and (10) injunctive relief.

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The critical importance of securing confidential information was brought home again yesterday when the intersection of trade secrets and spy games made the newspapers.

Four men, one a United States Department of Defense systems analyst and three Chinese natives, were arrested and charged with espionage in two separate cases. Aside from the political ramifications of ongoing Chinese espionage, which one top Justice Department official characterized as reaching “Cold War levels,” these two cases highlight the importance of confidential secrets not only as a protectionist principle for businesses, but also for national security.

One of the two cases concerned a civilian analyst’s sale of classified information concerning U.S. weapon sales to Taiwan; the other case concerned a long-time civilian contractor employed by Rockwell International and then Boeing Co., who was accused of providing China with classified military aerospace information. In giving a statement on the arrests and charges, U.S. Assistant Attorney General Kenneth Wainstein, noted that increased Chinese espionage is “a threat to our national security and to our economic position in the world, a threat that is posed by the relentless efforts of foreign intelligence services to penetrate our security systems and steal our most sensitive military technology and information.”

The case of the defense industry employee from Boeing is just as disturbing. Mr. Greg Chung, a 72-year old naturalized U.S. citizen, is reported to have given national defense trade secrets to the Chinese government out of “loyalty to the Motherland,” according to a U.S. Attorney, despite having been a Boeing contractor for over 30 years. Those trade secrets were reported to include information related to the space shuttle and other military airspace programs. That case grew out of an investigation into another Chinese-spying case, which was uncovered in 2006 and concerned espionage by Chinese agents of U.S. military technology related to U.S. Navy warships and submarines.

“Certain foreign governments are committed to obtaining the American trade secrets that can advance the development of their military capabilities,” the U.S. Attorneys’ office said in a statement laced with a cautionary principle for all companies engaged even remotely in defense contractor work. Indeed, the lesson for civilian companies, particularly those whose trade secrets portfolios include any sensitive or classified information, is that espionage is not limited to the corporate realm, and the ramifications of being involved in international espionage may have long-term damaging effects on national security, in addition to the negative impact on a company’s business and perception.

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Al Minor & Associates, Inc. v. Martin, Slip Opinion No. 2008-Ohio-292.

The Supreme Court of Ohio ruled yesterday in a case in which it was asked to decide whether a former employee, having taken no confidential documents from the plaintiff employer but instead memorizing client lists, could be held liable for a statutory trade secret violation.

The plaintiff, Al Minor & Associates, Inc. (“AMA”), is an actuarial firm that serves approximately 500 clients. In 1998, AMA hired the defendant, Robert Martin, but did not require him to sign a non-compete agreement or an employment contract. While still employed with AMA, Martin took steps to form his own company which would provide essentially the same services as AMA. He resigned in 2003, and did not take any confidential documents with him. He later successfully solicited 15 AMA clients, using client information that he had memorized.

AMA filed suit, alleging that Martin had violated Ohio’s Uniform Trade Secrets Act (UTSA), and a magistrate found for AMA. The magistrate recommended that the trial court award AMA over $25,000 in fees that AMA would have earned from the clients which Martin solicited. The court of appeals affirmed, and Martin appealed to the Supreme Court of Ohio, contending that a client list memorized by a former employee cannot be the basis of a trade secret violation, and that the trial court’s decision unduly restricted his right to compete with AMA. AMA maintained that public policy favored the protection of trade secrets regardless of whether they were written or memorized.

The Court analyzed a 1902 case which defined trade secrets, as well as the UTSA, which was adopted in 1994. The Court noted that a 1997 Ohio case had established a six-factor test to determine the existence of a trade secret: 1) the extent to which the information is known outside the business; 2) the extent to which it is known to those in the business; 3) precautions taken to guard the secrecy of the trade secret; 4) the value of the secret to the holder; 5) the amount of money or effort expended in developing the information; and 6) the amount of time and expense needed for others to acquire and duplicate the information.

After looking at these sources, the Court determined that nothing in any of them indicated that the determination of whether or not a client list is a trade secret hinges on its form (e.g., written or memorized). The Court also noted that the legislature could have excluded memorized information from the definition of a trade secret in enacting the UTSA, but it failed to do so. The Court further mentioned that the majority position in the other states is that memorized information can be the basis of a trade secret violation. The Court also recognized the numerous treatises on the issue which supported this view (quoting one for the proposition that “the form of the information and the manner in which it is obtained are unimportant; the nature of the relationship and the defendant’s conduct should be the determinative factors”).

The Court noted that the protection of trade secrets requires a balancing of employers’ rights in their trade secrets and the former employee’s right to use his talents. However, the Court declared, by adopting the UTSA, the Ohio legislature clearly determined that Ohio public policy favors the protection of the employer’s trade secrets. The Court thus affirmed the judgment of the court of appeals.

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Although issued in an antitrust case, In re Urethane Antitrust Litigation, 2008 WL 110896 (D. Kan. Jan. 8, 2008), an opinion by Magistrate Judge Waxse may be relevant to Rule 34 document requests in trade secrets and other litigation wherever filed. In brief, he held that use of the terms “relating to,” “pertaining to,” or “concerning” in such a request can render it objectionable. Do you use those terms in your discovery requests? Don’t we all?

Judge Waxse denied a motion to compel certain parties to produce “[e]ach document concerning your costs of producing, transporting and selling” specified goods. First Request No. 17 (emphasis added). Those parties had objected on the grounds that, in the judge's words, the request was “overly broad and unduly burdensome on its face because it uses the omnibus phrase ‘each document concerning’ in reference to an extremely broad group of documents.” He held “that a discovery request is overly broad and unduly burdensome on its face if it uses omnibus terms such as ‘relating to,’ ‘pertaining to,’ or ‘concerning’ to modify a general category or broad range of documents or information.” Id. (footnote omitted).

Judge Waxse continued: “[D]espite a valid objection that a request is facially overbroad or unduly burdensome, the responding party still has a duty to respond to the extent the request is not objectionable. Before the Court will require an objecting party to answer, however, the Court must receive some guidance – from either the parties or some other source – as to what portion of the request is reasonably answerable.” Id.(footnote omitted). He concluded that, in the lawsuit before him, “inadequate guidance exists to determine the proper scope of First Request No. 17. The Court therefore sustains [the] facial overbreadth and facial undue burden objections.”

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After granting summary judgment for plaintiff in late November 2007, Judge Susan Illston of the U.S. District Court for the Northern District of California recently awarded plaintiff $6.6 million in damages, the majority of which related to future lost profits due to breach of contract and misappropriation of trade secrets. Although the motion for summary judgment was uncontested, the court's ruling and damages award highlights the importance non-disclosure and confidentiality agreements can play in trade secret disputes.

Plaintiff Oculus Innovative Sciences Inc. entered into non-disclosure and purchase agreements with Nofil Corp. related Oculus' MicrocynTM disinfectant, antiseptic and sterilization technology. Under the agreements, Nofil agreed to manufacture certain machines for the production of MicrocynTM and to not disclose confidential information obtained from Oculus.

After ruling that Nofil had breached the agreements, the court held that Nofil had misappropriated Oculus' trade secrets. The court first held that Oculus had established the existence of a trade secret through reference to language in the non-disclosure and purchase agreements ("while the Court does not find this evidence to be overwhelming, it will assume for present purposes that Oculus can establish the presence of some trade secrets that fall within the scope of the [non-disclosure agreement]").

The court then determined that Nofil had misappropriated such trade secrets through its manufacture and sale to a competitor in Mexico of two machines covered by the agreements between the parties . Specifically, the court found persuasive PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368 (2000), which held that "[e]mploying … confidential information in manufacturing, production, research or development, marketing goods that embody the trade secret, or soliciting customers through the use of the trade secret information, all constitute use."

In a January 23, 2008 Order, the Court awarded Oculus $916,206 for lost profits for 2006 through part of 2008. The Court awarded future lost profits of $5,727,829 for a period of 5 ½ years discounted to present value.

The case is Oculus Innovative Sciences, Inc. v. Nofil Corporation, et al., Case No. 06-1686, N.D. Cal. 2006.

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Trade secrets discovery in a suit for misappropriation, breach of contract, breach of fiduciary duty, etc., can give rise to a number of dilemmas. A recent Northern District of Georgia ruling, DeRubeis v. Witten Technologies, Inc., 244 F.R.D. 676, involves one of those dilemmas. The company asked for identification of the trade secrets the defendants were using in their competing business. The defendants objected, claiming that the company might use the response to “mold its cause of action around the discovery it receives.” On the one hand, the court emphasized, the defendants are entitled to know the nature of the company’s claim and to limit the company’s discovery accordingly. On the other, the company does not necessarily know exactly what trade secret information the defendants allegedly stole and are using.

In DeRubeis, the court required the company to “identify with ‘reasonable particularity’ those trade secrets it believes to be at issue.” The phrase “reasonable particularity” was defined as a sufficient description so that the defendants are “put on notice of the nature of” the claims and “can discern the relevancy of any requested discovery” propounded by the company. “Once [the company] has fulfilled its obligation, it will be entitled to discovery on [the defendants’] trade secrets, provided that what it seeks is relevant.”

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In Patriot Homes, Inc. v. Forest River Housing, Inc., No. 06-3012, 2008 WL 90081 (7th Cir. Jan. 10, 2008), the U.S. Court of Appeals for the Seventh Circuit vacated an injunction entered by the U.S. District Court for the Northern District of Indiana, ruling that it was insufficiently specific and therefore was not in compliance with Rule 65(d) of the Federal Rules of Civil Procedure.

The facts of the matter as set forth in Patriot Homes are as follows: Forest River hired four employees of Patriot Homes after merger talks between the two companies fell through. Forest River formed a new company named Sterling with the new employees. Patriot Homes, Forest River, and Sterling are all in the modular homes industry. The four employees copied information from Patriot Homes’s computer system before resigning and utilized that information for Sterling. Sterling did not deny that its employees had done so, but it argued that the information taken from Patriot Homes was not a trade secret because it was filed by Patriot Homes with various state governments and could be procured through Freedom of Information Act requests. Discovery revealed that most, but not all, of the information taken from Patriot Homes and used by the four employees could indeed be procured from state governments.

The District Court entered a preliminary injunction forbidding Sterling from “[u]sing, copying, disclosing, converting, appropriating, retaining, selling, transferring, or otherwise exploiting Patriot's copyrights, confidential information, trade secrets, or computer files.” The preliminary injunction also required Sterling to: “[c]ertify that copied data and materials of Patriot's property, confidential information and trade secrets on computer files and removable media (CDs, DVDs, tapes, etc.) have been deleted or rendered unusable.”

The Court of Appeals found that the injunction was not specific enough to put Sterling on notice as to what acts on its part would constitute contempt of court: “The preliminary injunction entered by the district court uses a collection of verbs to prohibit Sterling from engaging in certain conduct, but ultimately it fails to detail what the conduct is, i.e., the substance of the “trade secret” or “confidential information” to which the verbs refer.” The Court of Appeals based its decision on Sterling’s uncertainty as to what information was truly a trade secret or confidential information and what was not entitled to such protection by virtue of being publicly available. The case stands as a reminder that injunctions compelling parties to simply “follow the law” without more instruction do not comply with Rule 65(d).

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A California appellate court held in a recent decision that a broad “no-hire” provision contained in a consulting agreement was unenforceable as a matter of law because it was an impermissible restraint on trade in violation of the California Business and Professions Code Section 16600.

Despite the frequent use of “no-hire” and “non-solicitation” provisions in consultant and employment agreements, the validity of these provisions in California, especially broad “no-hire” provisions, is far from certain in light of the Court of Appeals for the Fourth Appellate District’s recent decision in VL Systems Inc. v. Unisen Inc., 152 Cal.App. 4th 708 (2007).

The full text of the Court’s decision can be found at http://www.courtinfo.ca.gov/opinions/archive/G037334.PDF

Though the holding in VL Systems appears to be limited to broad “no-hire” provisions, the Court’s policy analysis in the decision suggests, though it is far from certain, that even more narrow “non-solicitation” provisions would be subject to scrutiny by California courts and enforceable only to the extent that they are necessary for legitimate business reasons and are not overly broad in time and scope.

The contract in question included a “no-hire” provision. Specifically, the contract provided that defendant would not hire any of plaintiff’s employees for 12 months after the computer consulting contract’s termination, subject to a liquidated damages provision.

In analyzing the validity of the “no-hire” provision, the Court found that this type of contractual provision may seriously impact the rights of a broad range of third parties, including those who were not even employed by plaintiff at the time of its contract with defendant.

To this end, the court noted that the employee in question was not employed by plaintiff at the time the contract was performed, and that the employee had independently sought employment with defendant.

The court recognized that certain narrower restrictions have been held valid in the past by California courts and expressly stated that it took no position on whether a more narrowly drawn and limited “no-hire” provision would be permissible under California law.

However, it found that the “no-hire” clause at issue was too broad in that it covered not only solicitation by defendant, but all hiring, and it applied to all of plaintiff’s employees, regardless of whether they worked for defendant or were even employed at the time.

The court’s emphasis on the employees’ freedom of mobility protected by Section 16600 of the Business and Professions Code suggests that any contractual restriction on such mobility will be highly scrutinized by California courts.

In light of VL Systems, businesses should reconsider the inclusion of broad “no-hire” provisions in both business service agreements and employment agreements.

Prior to requiring your California employees to sign agreements containing such restrictive covenants, a consultation with a Seyfarth Shaw LLP attorney is recommended.

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Polar Molecular Corp. v. Amway Corp., et al., No. 1:07-CV-460, 2007 WL 3473112 (W.D. Mich. Nov. 14, 2007).

A Michigan federal court recently declined to dismiss a petroleum additives company’s claim under the Michigan Uniform Trade Secrets Act (“MUTSA”) against several manufacturers and distributors of its fuel additive product, but held that the company’s common law claims of misappropriation and conversion were displaced by the statute.

Polar Molecular Corporation (“Polar”) sued twelve defendants, alleging violations of the Lanham Act, breach of contract, misappropriation of trade secrets under the MUTSA, and common law claims for misappropriation, conversion, and conspiracy. Polar had entered into a series of licensing agreements with certain defendants (the “Amway Defendants”) to make, use, and sell its fuel additive, called “DurAlt” and marketed as “Freedom Fuel.” Pursuant to the agreements, Polar provided the Amway Defendants with confidential formulas for DurAlt. After the parties had a falling-out over failed negotiations concerning royalties and fleet sales, Polar alleges that the Amway defendants provided its confidential formulas to another group of defendants (the “DNS Defendants”), who used the formulas to manufacture and sell a “knock off” of DurAlt called “ProFuel” and marketed as “Freedom 2.” Polar further alleges that the defendants misrepresented to potential customers that they had a licensing agreement with Polar for the manufacture and sale of “Freedom 2.”

The defendants argued that Polar’s claim under the MUTSA should be dismissed because Polar published the DurAlt formula in a patent, and thus it was no longer secret. Polar countered that, during the course of its licensing arrangement with the defendants, it had provided Amway with additional, improved DurAlt formulas that were not disclosed in the patent, including the specific formula at issue in this litigation. The court observed that “[a]lthough information disclosed in a patent cannot be a trade secret,…the existence of a patent covering the general subject matter does not necessarily mean that the patent disclosed the specific formula (the trade secret) used to produce a specific commercial product.” The court then concluded that the allegations in the complaint—that the defendants had obtained confidential information not known to others and that this information gave them a competitive advantage—were sufficient to state a claim for misappropriation of trade secrets under the MUTSA.

However the court also had before it the defendants’ motion for summary judgment on the MUTSA claim. The court found that Polar’s evidence was insufficient to controvert the seven affidavits produced by the Amway Defendants asserting that there had been no unauthorized disclosure of Polar’s confidential information and that ProFuel had been independently developed based on a reverse-engineering analysis of the Freedom Fuel product and the information in Polar’s expired patent. But the court concluded that Polar had shown a need for some discovery to resolve the issue, and thus declined to rule on the summary judgment motion until after a sixty-day period of limited discovery.

The court also dismissed the common law misappropriation and conversion claims, concluding that they were preempted by the MUTSA because Polar had not sufficiently alleged that these claims were based on wrongful conduct independent of the misappropriation that served as the basis for the MUTSA claim. But the court declined to dismiss the conspiracy claim as preempted, to the extent that, rather than being based upon the alleged theft of a trade secret, it was based on “palming-off or unfair competition” arising out of the defendants’ alleged representations that Pro-Fuel was a “knock off” of DurAlt and their alleged false statement that they manufactured it pursuant to a licensing agreement with Polar. The court also declined to dismiss the trademark infringement claim under the Lanham Act and granted summary judgment to the Amway defendants on the breach of contract claim to the extent that it was based upon a certain provision of the licensing agreement.

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A recent ruling from the U.S. District Court for the District of Delaware serves as a reminder that, in addition to civil liability, an ex-employee stealing his or her former employer’s trade secrets can face jail time and a fine. On November 6, 2007, former DuPont employee Gary Min was sentenced to 18 months in prison and two years of supervised probation, fined $30,000, and ordered to pay $14,500 in restitution to his former employer. According to a statement released by the company, Min had been a senior scientist. Shortly before he resigned to take a position with another company, he “misappropriated a significant volume of confidential and proprietary DuPont technical documents.” DuPont filed a civil suit against him in federal court, and that “suit was resolved to our complete satisfaction” according to the company's statement. Then, he was indicted for theft, entered a plea of guilty and was sentenced. United States v. Min, No. 1:06-cr-00121-SLR (D.Del.).

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RRK Holding Co. v. Sears, Roebuck & Co., No. 04-CV-3944, Verdict (N.D. Ill. Nov. 19, 2007)

A family-owned Wisconsin company that makes power tools recently won a $21.5 million verdict against Sears, Roebuck and Co. after the jury found the national retailer guilty of stealing the design for the popular Craftsman all-in-one cutting tool. Plaintiff RRK Holding Co., formerly known as Roto Zip, convinced the federal jury in Chicago that Sears had willfully and wantonly misappropriated its trade secrets under the Illinois Trade Secret Act and breached the parties’ nondisclosure agreement.

In the late 1990s, Roto Zip was one of Sears’ major suppliers of the rotary saw. The suit alleged that in 1999, pursuant to a nondisclosure agreement, Roto Zip disclosed to Sears drafts for a next generation, hand-held combination power saw, but after negotiations broke down over price, Sears declined to make a deal. Instead, Sears took the design to a Chinese manufacturer for lower-cost production. Unaware of Sears’ breach of the nondisclosure agreement, Roto Zip continued to develop the tool to bring it to market. While Roto Zip’s finished product sold for $119, Sears’ Craftsman combination tool undercut at just $59. Sales of Roto Zip’s rotary saw declined dramatically after the Sears version launched.

The $21.5 million verdict includes $13.5 million for lost profits and an additional $8 million in punitive damages. Sears plans to appeal. http://www.suntimes.com/news/metro/658969,CST-NWS-tool20.article; http://ip.law360.com/secure/ViewArticle.aspx?Id=41303

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New lawsuit filed in Utah accuses a former research scientist employed by a nutritional supplement company of stealing trade secrets, customers, and employees when forming a rival vegan supplement company.

Systemic Formulas, Inc. claims that its former research director, Daeyoon Kim, is using Systemic’s trade secrets and proprietary information as the basis for its formula in the rival vegan supplement company. In its complaint against Kim, Systemic alleges that Kim executed Confidentiality and Non-Disclosures Agreement intended to protect Systemic’s proprietary information. Systemic alleges that Kim was specifically hired to develop a line of nutritional supplements without the RNA/DNA factor that is considered to be an animal product and therefore less appealing to certain portions of the supplement-consuming public that want a more natural supplement. Kim asserts that his primary duty was an employee manager and claims that Systemic did not have a research facility. However, Systemic’s website states, “Systemic Formulas uses a technologically advanced research and production facility to manufacture the bottling and capsulation process of its product’s raw materials.”

After Kim resigned from Systemic, he requested a modification to the Confidentiality Agreement to allow Kim to manufacture a line of vegan dietary supplements. Systemic alleges that Kim admitted that the proposed line of vegan dietary supplements would represent a line of products in conflict with his obligations under the Confidentiality Agreement and therefore requested a modification. Kim asserts he reached an agreement with Systemic in June regarding his request to develop the vegan supplements and that the lawsuit surprised him.

This case should be full of classic trade secret issues including an analysis of the scope of the confidentiality agreement and Kim’s exposure to proprietary information as a research director or an employee manager. Another area of inquiry will no doubt be whether the confidentiality agreement was altered by an oral or written agreement. Ultimately, the degree of similarity between Systemic’s supplements and Kim’s vegan supplements will be a major factor in this dispute. Another interesting issue may be whether Kim had a certain amount of knowledge before he was an employee of Systemic or whether he developed his vegan formula idea independently from the scope of his duties at Systemic.

This case can be monitored under Case No. 07-CV-159 in the District Court of Utah, Central Division.

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The taking and using of customer lists is no longer just a matter for civil proceedings and injunctive relief. On Monday, November 26, 2007, the Georgia Court of Appeals affirmed a jury’s criminal conviction of an individual who took and used her former employer’s master client list to solicit customers, who used company computers to plan her new business venture, and otherwise misappropriated client files.

Defendant Shan DuCom was tried and convicted after it was discovered that she had attempted to wipe out her former employer (C&D)’s property management business completely by converting the property management function to her own, newly created entity. Indeed, DuCom conspired with other employees to start a new firm, used C&D’s computers to create new “letterhead and logos, press releases, solicitation postcards, and various ‘to-do’ lists,” as well as to engage in “massive” copying of information maintained on C&D’s computer hard drives to discs. Her actions were apparently so wanton that the day after she left, the former employers’ team came to work and found the office had “been left barren, ‘cleaned out.’ The computer server was turned off, the hard copies of client files were missing, the fax and credit card phone lines had been sabotaged, and office supplies and equipment were missing.” Once the computer service was restored, C&D found that entire databases were missing and that the C&D website had been transferred to DuCom’s new firm. Three of DuCom’s co-workers resigned and joined her new firm as well. Georgia’s Uniform Trade Secrets Act specifically protects client and customer lists as trade secrets, provided they

(A) Derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(B) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

O.C.G.A. § 16-8-13(a)-(b). The appellate court remarked, in particular, that as a new business, DuCom’s new firm “would have opened its doors with little or no property to manage, and with no property to manage, it would have very little income,” reflecting that her head-start approach runs afoul of the law. Noting the damage that she caused by her acts in stealing the client list, the court affirmed the lower court’s award of restitution based on valuation of C&D’s “book of business.”

DuCom also was convicted of “computer theft” under O.C.G.A. § 16-9-93(a) for using C&D’s computers without authorization. The appeals court reflected that she had downloaded data she was not permitted to use and that the jury could have found “beyond a reasonable doubt that DuCom used a computer, owned by her employer, with knowledge that such use was without authority and with the intention of removing programs or data from that computer and appropriating them for her own use.” Under Georgia law, unauthorized use includes “the use of a computer or computer network in a manner that exceeds any right or permission granted by the owner of the computer or computer network” O.C.G.A. 16-9-92(18). With a broad definition and unassailable facts, the appellate court did not waste much time in discussing its reasoning to affirm.

Although it is not unusual to hear tales of such wanton conduct in preparing to compete in a new business, it is not very often that we hear of criminal prosecutions of such matters at the state level in Georgia. We’ll be keeping our eyes and ears open for any further such cases.

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A recent California Court of Appeal decision reaffirmed what those who practice trade secret law already knew, but do not always focus upon, in trade secret litigation --the purported trade secret cannot qualify for protection under California’s trade secret statute unless there is a showing that the information has a demonstrated economic value from not being known to third parties who can obtain economic value from its disclosure or use.

The Court’s decision appears to add an additional wrinkle to this proposition by suggesting that to show independent economic value, one must also demonstrate that there is a discrete advantage to third parties who could utilize the information to the disadvantage of the original owner, thereby creating economic value in its secrecy. Secrecy and usefulness alone will not establish independent economic value.

In Yield Dynamics, Inc. v. Tea Systems Corp., 154 Cal. App. 4th 547 (2007), the California Court of Appeal for the Sixth Appellate District upheld the trial court’s decision granting a former employee’s motion for nonsuit and dismissing a software design company’s trade secret misappropriation claim on the basis that it had failed to demonstrate that segments of its computer source code had independent economic value.

The text of the Court’s entire opinion can be located at this link http://appellatecases.courtinfo.ca.gov/search/case/mainCaseScreen.cfm?dist=6&doc_id=286480&doc_no=H029604

California defines a trade secret under the Uniform Trade Secrets Act as information that “derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from it disclosure or use, and is subject to efforts that are reasonable under the circumstances to maintain its secrecy.” Cal. Civ. Code § 3426.1(d)(1), (2) (2007).

On appeal, the software design company argued that testimony that segments of its source code that were taken would provide “some help” to a programmer to create new routines or to save time programming and that this helpfulness was alone sufficient for a finding of independent economic value in the segments. The appellate court rejected this argument and stated that testimony merely suggesting that the information was useful in carrying out a certain activity does not compel a finding that the information was sufficiently valuable to afford an economic advantage over others.

Appellant also argued that the segments achieved independent economic value because it kept the segments in confidence and entered into non-disclosure agreements with its employees. The Court was unpersuaded and stated that secrecy only exhibits an opinion that secrecy may be advantageous.

The Court also found that appellant failed to establish independent economic value because there was testimony that the segments were not of high quality and were not designed for use by others. The Court noted that the testimony suggested that the segments had no value to anyone outside of the parties themselves. According to the Court, appellant failed to establish that the segments “in and of themselves would provide a competitive advantage to a competitor.” The Court found that there was no evidence that appellant derived independent economic value in keeping the segments from others’ use.

In sum, Yield Dynamics suggests that information lacking value to anyone except its holder that cannot be exploited to gain a competitive advantage by others cannot qualify for trade secret protection despite its secrecy.

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Adcor Industries, Inc. v. Bevcorp, LLC, 2007 WL 3104796, No. 06-4260 (6th Cir. Oct. 23, 2007).

Last month, the United States Court of Appeals for the Sixth Circuit affirmed an Ohio federal d istrict court’s grant of summary judgment in a trade secrets misappropriation case. Adcor Industries, Inc. sued Bevcorp, LLC, among other defendants, in the Northern District of Ohio for allegedly misappropriating Adcor’s trade secrets and violating a consent decree entered in 1988.

The consent decree was issued against Baron Haag and Chester Romp, individual defendants in the Adcor case, arising out of a scheme in which Haag and Romp, who owned Brau Manufacturing, Bevcorp’s predecessor corporation, illegally obtained drawings to manufacture replacement parts for beverage fillers created by Crown, the predecessor to Adcor. The main thrust of the decree was that it prohibited Haag and Romp from manufacturing Crown parts. Furthermore, the decree applied to their successors, among others.

In 2003, Adcor sued Bevcorp and the other defendants, claiming that Bevcorp, as successors to Brau, had violated the consent decree and misappropriated Adcor’s trade secrets by using the drawings obtained by Haag and Romp. The district court granted summary judgment on the breach of consent decree claim, finding that Adcor had failed to prove to a reasonable certainty that the owners of Bevcorp had acquired the drawings directly from Haag and Romp. The court also granted summary judgment in the trade secrets misappropriation claim, ruling that the claim was time-barred.

In affirming the district court’s decision, the Sixth Circuit pointed to Ohio’s Uniform Trade Secrets Act, which provided that a trade secret misappropriation claim must be brought within four years of the discovery of the misappropriation, or when the plaintiff should have reasonably discovered it. The statute further provided that a continuing misappropriate constituted a single claim. The court found that there was undisputed evidence that Adcor had inquiry notice of the misappropriation more than four years before the suit was commenced. Furthermore, the court noted that there was evidence in the record that Adcor’s delay in commencing the lawsuit was a “strategy deadlock.”

Finally, the court ruled that Adcor had failed to prove by clear and convincing evidence that the defendants had violated the consent decree, agreeing with the district court that there was not sufficient evidence to conclude that the owners of Bevcorp had obtained the drawings from Romp and Haag.

Judge Karen Nelson Moore concurred in part and dissented in part, arguing that Adcor had presented evidence that there were genuine issues of material fact as to when Adcor should have known that the defendants misappropriated the drawings.

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Bob Fernandez of the Philadelphia Inquirer reports that scientist Dr. Manhua Mandy Lin has taken a significant step in clearing her name of trade secret allegations, well, at least in the opinion of one government employee. Lin, who has been engaged in a protracted legal battle with her former employer, materials innovator Rohm & Haas Co., recently received word from a Department of Energy chemist, Charles Russomanno, of his determination that she did not steal trade secrets to develop her innovative procedure for the production of methacrylic acid. Despite this apparent victory, it does little to advance Lin’s interests in her pending litigation.

In November 1999, Lin resigned from her position with Rohm & Haas pursuant to a settlement agreement reached as a result of allegations that she was the victim of unlawful discrimination while at the company. Following her departure from Rohm & Haas, among other legal disputes that have ensued, the company alleged that Lin misappropriated its trade secrets in engaging in her independent research for her company EverNu Technology L.L.C. Montgomery County Court Judge Bernard A. Moore has refused to order an independent scientific assessment in the case and has imposed daily fines of $200 on Lin for her failure to release her research to Rohm & Haas. In total, she has already been penalized more than $200,000.

Worried that her business was in jeopardy due to Rohm & Haas’s suggestion that the Department of Energy was in the process of investigating Lin, she sent confidential court submissions to the Department of Energy in the hopes of avoiding agency action. Although Russomanno’s review of the documents resulted in a finding that Lin did not misappropriate any trade secrets, it remains to be seen whether this conclusion will educe any measurable benefit to Lin in the courtroom. Presumably, Russomanno’s determination will either help spur settlement negotiations or, ultimately, just represent another hollow victory in the course of this seemingly never ending litigation.

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The Woburn Daily Times Chronicle has reported that iRobot Corp., a Burlington, MA corporation, has been granted a preliminary injunction in the District of Massachusetts in its case against Robotic FX, Inc., and its founder and president, former iRobot employee Jameel Ahed. iRobot is suing Ahed and Robotic for misappropriation of trade secrets.

iRobot’s lawsuit alleges that Robotic used iRobot’s trade secrets to develop the Negotiator, a replica of iRobot’s PackBot robot. iRobot describes the PackBot robots as “robots that perform dull, dirty or dangerous missions in a better way.” The PackBots were the first ground robots to be used in combat by U.S. forces.

The U.S. Army had a $280 million contract with Robotic for use of the Negotiator, but set aside the contract in October pending a re-examination of Robotic’s ability to deliver the Negotiator “as a responsible contractor.” The Army has notified both Robotic and iRobot that if Robotic is unable to provide the Negotiator, the contract will be awarded to iRobot instead.

In issuing the preliminary injunction, U.S. District Judge Nancy Gertner found that iRobot had shown a likelihood of success on the merits of its case. The exact terms of the order are under seal so as to further protect iRobot’s trade secrets; however, iRobot reports that the injunction prohibits Robotic from using “critical features” in the design of the Negotiator.

iRobot has a separate lawsuit pending in the Northern District of Alabama for patent infringement. iRobot sought the injunction in Massachusetts after discovering that Robotic had attempted to destroy evidence in both the Alabama case and the Massachusetts case. Judge Gertner ordered a trial date of no later than April 7, 2008.

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It appears that the Georgia Court of Appeals narrowly interpreted the phrase “on behalf of” in a non-solicitation clause to prevent application of a non-solicitation provision to support a breach of contract claim. Although the parties did not dispute that the Clause applied to clients who transacted business with the plaintiff, Atlantic Insurance Brokers LLC (“AIB”), and dealt with the agent (“Phillips”) during the course of the relationship, the Court nonetheless concluded that there was no breach of the Agreement.

The Clause provided, in pertinent part, that

Phillips covenants that during the term of this Agreement, and for a period of two (2) years following termination of this Agreement for any reason, he shall not at any time, directly or indirectly, solicit, sell, attempt to divert or provide competing insurance services or coverages to any insureds who transacted business with AIB and with whom Phillips dealt with on behalf of AIB and had material contact . . . .

Atlantic Ins. Brokers LLC v. Slade Hancock Agency Inc., Case No. A07A1177, 07 FCDR 3002 ( 10/12/07).

In some unusual facts, the client at issue, 24/7 contacted Phillips for assistance in procuring insurance after Phillips left AIB but before the Agreement terminated. He referred the business to AIB to assist him in procuring insurance. AIB assisted in procuring the insurance for 24/7 (splitting the commission with Phillips’s new employer), but the insurer declined to renew the policy the following year. 24/7 again asked Phillips for help, and he brokered insurance for them through his new company, without assistance from AIB. AIB sued, alleging that 24/7 was an insured covered by the Clause, and thus Phillips breached the agreement. The Court rejected AIB’s claim because AIB did not ask Phillips to work with 24/7. In other words, it appears that the Court may have equated the phrase “on behalf of” to be equivalent to “at the request of.” Although the factual scenario is highly unique, one should consider whether through its interpretation of the agreement the Court created unusual defenses in upcoming breach of contract cases about the meaning of “on behalf of.”

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InstitutionalInvestor.com reported that the National Futures Association (“NFA”) has issued the new rules, “to prevent members from using illegitimate means to gain a competitive advantage if doing so would harm customers.”  InstitutionalInvestor.com noted, click here to view article, that new Compliance Rule 2-4 is directed at activity such as:

• Misusing customer information, for example by misappropriating social security numbers or deliberately violating the firm's privacy statement.
• Disclosing customer orders before execution.
• Obtaining or trying to obtain information disclosing a commodity trading adviser's historical trading positions without the CTA's permission.

 According to the article, Rule 2-4 became effective last month; however, the Securities and Exchange Commission has yet to rule on it.

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WebWire reports: http://www.webwire.com/ViewPressRel.asp?aId=50093

Economic Espionage and Theft of Trade Secrets – On Sept. 26, 2007, Lan Lee and Yuefei Ge were charged in a superseding indictment the Northern District of California on charges of economic espionage and theft of trade secrets. The indictment alleges that the pair conspired to steal trade secrets from two companies and created a new firm to create and sell products derived from the stolen trade secrets. The charges also allege that Lee and Ge attempted to obtain funds for their new company from the government of China, in particular China’s General Armaments Division and China’s 863 Program, otherwise known as the National High Technology Research and Development Program of China. The case was investigated by the FBI.

Strategy Page also discussed the case recently: http://www.strategypage.com/htmw/htintel/articles/20071002.aspx.

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