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

Although most non-compete and trade secret disputes arise from the employer-employee relationship, these issues can arise in any number of contexts. One situation is in business-to-business negotiations. OnBrand Media v. Codex Consulting, Inc., a November 19, 2009 decision from the Georgia Court of Appeals, involves a dispute between entities involved in joint venture negotiations relating to developing and marketing of a software program.

OnBrand Media, Inc., (“OnBrand”) and Lisa Jones developed and produced a multimedia e-mail software program called EyeMail. OnBrand and Jones began negotiations with Open Systems, Inc. (“OSI”) to form a joint venture relationship for the development of a software program that they would market to Aflac Insurance. OSI provides technology services and software development to various companies, including Aflac, with which it had already entered into an agreement to provide certain programming services. Jones introduced EyeMail to OSI in 2005, describing it as a marketing tool for sending out email messages with embedded audio, video, animated graphics, and flash applications.

In 2005 and 2006, OnBrand, Jones, and OSI discussed forming a joint venture to pursue the EyeMail project with Aflac. During the negotiations, OSI realized that the EyeMail program would require a separate portal, so it approached Codex Consulting, Inc. Codex agreed to develop the portal in exchange for a share of the ultimate EyeMail subscription revenues. Before Jones and OnBrand would agree to disclose technical details regarding EyeMail, they insisted that Codex and OSI sign non-disclosure agreements (“NDAs”) with OnBrand. Codex and OSI did so in October 2006.

After reviewing the EyeMail code, Codex and OSI decided that the program was not a feasible product to sell to Aflac and went about developing their own program called “RightMail.” Although OSI and Codex continued negotiations with OnBrand, hoping that it could assist in selling the RightMail program to Aflac, the negotiations ultimately ended after OnBrand and Jones threatened legal action when OSI and Codex refused to call the program Eyemail. OnBrand and Jones filed suit against OSI and Codex in June 2007, alleging claims for breach of contractual duty of good faith and fair dealing, misappropriation of trade secrets, deceptive trade practices, fraud and deceit, tortious interference with a business opportunity, intentional infliction of emotional distress, violation of the Georgia Uniform Deceptive Trade Practice Act ("UDTPA"), and breach of confidentiality. OSI and Codex filed a motion for summary judgment, which the trial court granted.

The court of appeals upheld the trial court’s grant of summary judgment to OSI and Codex. The court spent some effort deciding the right level of scrutiny for a business-to-business agreement covering information shared in negotiations before deciding to apply the same intermediate level of scrutiny ordinarily applied to professional partnership agreements. The court did not explain why applying intermediate scrutiny (as opposed to the heightened scrutiny standard applicable to employment and franchise agreements or the relaxed scrutiny applicable to sale of business agreements) mattered. In fact, the NDAs were likely unenforceable under any standard of review because, as the court found, the non-compete provisions in the NDAs lacked temporal or geographic limitations, which are necessary for all agreements, not just those subject to the intermediate level of scrutiny. The time spent discussing the applicable scrutiny also is a bit puzzling given that the court did not explain how the three levels of scrutiny would differ.

The court then addressed the non-disclosure requirements of the NDAs. The court affirmed the trial court’s finding that OnBrand and Jones did not produce any evidence that OSI and Codex used or disclosed confidential information. (It is unclear as to whether the Court also found that the non-disclosure provisions were unenforceable. Georgia requires non-disclosure provisions to include time limitations, so it is likely that OnBrand and Jones would have lost even if they had shown that OSI and Codex had used or disclosed confidential information.)  Furthermore, the court of appeals found that OnBrand and Jones’s action for breach of the duty of good faith and fair dealing was contingent on its contractual claims, so the infirmities of the latter doomed the former.

The court then moved on to OnBrand and Jones’s trade secret claim. It found that the claim failed as a matter of law because OnBrand and Jones voluntarily disclosed their trade secrets to OSI and Codex. Thus, there was no misappropriation because OSI and Codex did not use improper means to acquire the program.

The court also affirmed dismissal of the remaining claims, holding

(1) that OnBrand and Jones’s claim for fraud failed because they presented no evidence that OSI and Codex had false intentions when they entered into the NDA;

(2) that OnBrand and Jones’s claim for tortious interference with business relations failed as to Aflac because OSI and Codex were not strangers to the relationship;

(3) that OnBrand and Jones’s claims as to three additional customers failed because OnBrand and Jones never showed that they were likely to form relationships with those entities; 

(4) that OnBrand and Jones’s deceptive trade practices claims failed because the evidence reflected that customers understood that OSI was not trying to sell them EyeMail; and

(5) that OnBrand and Jones did not demonstrate that OSI and Codex engaged in “extreme and outrageous conduct” to support a claim for intentional infliction of emotional distress.

Although each of these holdings may provide instruction for future claimants, OnBrand Media is most remarkable for the court’s first impression decision that business-to-business agreements in the joint venture context covering information shared in negotiations are subject to intermediate scrutiny.  Of course, in the end, that decision did not affect the result here, but it may affect the outcome of future cases.

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In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., No. C 07-05248 JW, 2009 WL 1481147 (N.D. Cal. May 20, 2009), the Northern District of California held that Applied Materials’ use of inventions agreements constituted unfair business practices under California law. Applied Materials, a California-based semiconductor company, brought claims for trade secret misappropriation and unfair competition against Advanced Micro-Fabrication Equipment, a start-up competitor. In the action, Applied Materials asserted that a number of its former employees had moved to AMEC and conceived inventions that belonged to Applied Materials pursuant to assignment clauses in the former employees’ employment agreements. The clauses stated as follows:

In case any invention is described in a patent application or is disclosed to third parties by me within one (1) year after terminating my employment with APPLIED, it is to be presumed that the invention was conceived or made during the period of my employment for APPLIED, and the invention will be assigned to APPLIED as provided by this Agreement, provided it relates to my work with APPLIED or any of its subsidiaries.

AMEC brought counterclaims for declaratory judgment and unfair competition, arguing that the assignment clauses are unenforceable non-compete agreements under California Business & Professions Code § 16600. AMEC then moved for summary judgment on its counterclaims. 

The Northern District of California granted AMEC’s motion for summary judgment. Applied Materials argued that the assignment clauses merely created a rebuttable presumption that it owns its former employees inventions conceived in the first year after the end of their employment. The District Court rejected this interpretation, holding that the clauses plainly state that all such inventions “will be assigned” to Applied Materials. The district court further noted that the clauses state neither that an employee can rebut the presumption nor how an employee would do so.

The District Court went on to hold that the assignment clauses were unenforceable under California law for two reasons. First, the clauses are not limited to inventions using Applied Materials’ confidential information. Second, the clauses were not limited to inventions conceived by former Applied Materials employees while they were employed at Applied Materials, but instead extended to inventions conceived up to a full year after the end of employment. 

Once the Court found that the assignment clauses were unenforceable, it therefore followed that it would grant AMEC’s claim for declaratory judgment. It also granted AMEC’s claim for unfair competition. The California Court of Appeal has held that the use of non-compete provisions that violate section 16600 of the Business & Professions Code constitutes an unlawful business practice under section 17200 of the Code. Thus, the Court held that Applied Materials’ use of the assignment clauses were unfair business practices as a matter of California law.

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In Smith Barney, Inc. v. Darling, No. 09-C-540, 2009 WL 1544756 (E.D. Wis. Jun. 3, 2009), the United States District Court for the Eastern District of Wisconsin denied Smith Barney’s request for temporary injunctive relief in aid of arbitration against five departing financial consultants and their new employer. Smith Barney sought an injunction to: (1) require the former employees to return all customer information; and (2) prevent the departing employees from soliciting Smith Barney customers. The former employees countered by arguing that the non-solicitation and non-disclosure covenants relied upon by Smith Barney were unenforceable under Wisconsin law. They also argued that they were entitled to retain client contact information.

The District Court agreed with the departing employees on all fronts. It found that the non-disclosure of confidential information provisions were unenforceable because they did not contain time limitations. (Wisconsin and Georgia are the only two states that we are aware of that have such requirements.) It also found that the non-solicitation of customers provisions found in the former employees’ employment agreements were unenforceable because they covered customers “whose name became known” to the former employees during their time at Smith Barney. The Court reasoned that the provision would cover individuals who came into Smith Barney’s office to ask for directions, as well as individuals whom the former employees met at softball games. In fact, the Court went so far as to point out that the restriction covered customers of the departing employees’ new employer – Robert W. Baird & Co. – about whose existence the departing employees learned during their employment with Smith Barney. The Court went on to conclude that additional non-solicitation covenants in various agreements with the five former employees were unenforceable because they covered customers that did not do business with Smith Barney and/or with whom the departing employees had not had contact in years. Because Wisconsin courts do not blue pencil otherwise unenforceable restrictive covenants, these flaws in the provisions were fatal.

The Court also addressed the impact of the Protocol for Broker Recruiting, to which Smith Barney is a signatory. Even though Baird & Co. is not a signatory to the Protocol, the departing employees argued that Smith Barney could not show entitlement to injunctive relief because it had tacitly conceded that departing employees are not a threat by signing the Protocol. Smith Barney countered by noting that some of the accounts at issue were excluded from the Protocol. The Court concluded that Smith Barney’s argument was “not sufficiently developed” to merit an award of temporary injunctive relief. 

Ultimately, the Court ordered the departing employees to return or destroy client account information, but not client names, addresses, telephone numbers, and email addresses. The Court did not address explicitly in its published decision whether Smith Barney had shown that some or all of this information constituted a trade secret under Wisconsin law, despite the fact that Smith Barney had pled a claim for trade secret misappropriation against the defendants. The Court did state that Smith Barney could have an evidentiary hearing on an expedited basis, if it chose.

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Emigra Group, LLC v. Fragomen, Del Rey, Bernsen & Loewy LLP, et al., No. 07 Civ. 10688 (LAK) (S.D.N.Y. Mar. 31, 2009).

In a decision that should be considerable reassurance to employers in general and law firms in particular, a district judge in New York has rejected an antitrust claim brought by a consulting firm against its former employer, an attorney who returned to his former law firm. 

Emigra, an immigration consulting firm, sued its former vice president of operations, Ryan Freel, and the law firm that was his prior and subsequent employer after Freel resigned from Emigra and returned to practicing law at Fragomen, Del Rey, Bernsen & Loewy, an international immigration law firm headquartered in New York. Emigra alleged that Freel took confidential and trade secret information that he had obtained while employed by Emigra, including strategies, customer lists, pricing information, and profit and loss data; disclosed this information to Fragomen; and used it to contact Emigra’s customers on Fragomen’s behalf.

However, the court noted that while Emigra filed “the usual state law claims for misappropriation of trade secrets, unfair competition, and the like,…it did not seek a preliminary injunction.” Instead, Emigra asserted a number of antitrust claims and, the court noted, there is reason to believe that it did so in order to “gain access through pretrial discovery to precisely the sort of competitively sensitive information about Fragomen’s business that Emigra claims Freel improperly disclosed to Fragomen about Emigra’s business.”  

In a lengthy 63-page opinion, the district judge granted the defendants’ summary judgment motion. Among other findings, the court concluded that Emigra had offered no evidence of price control, exclusion of competition, or monopoly power in violation of the antitrust laws, and that “a contrary conclusion would turn many disputes over the hiring by one competitor of an employee of another, the stuff of everyday commercial tort claims, into monopolization or attempted monopolization cases.” The court further noted that Emigra cannot avoid summary judgment through “gamesmanship” by withholding its own evidence while insisting that its competitor reveal its competitively sensitive information. For these and other reasons, the court dismissed the federal antitrust claims on the merits with prejudice, and declined to exercise supplemental jurisdiction over the remaining state-law trade secret and unfair competition claims. The decision serves as a warning to litigants who might consider pursuing questionable antitrust claims in federal court as a means for obtaining discovery that would not otherwise be available to them in a state court proceeding.

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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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Where hearsay and speculation form the sole basis for a complaint, summary judgment and sanctions against counsel will be the result, according to a recent decision of the Third Circuit. In Brubaker Kitchens, Inc. v. Brown, 2008 WL 2123327 (3d Cir. 2008), the Court granted defendants summary judgment and sanctioned plaintiff’s counsel because non-competition allegations against a defendant lacked reasonable foundation.

Brubaker Kitchens manufactures custom cabinetry. In 2005, both the general manager and plant manager of Brubaker resigned from their positions to form a competing cabinet company. During their time at Brubaker, the two managers had become friendly with defendant Mark Schibanoff, one of the principals of Kitchen Consultants, a sales and marketing company that had done work with Brubaker. On highly tenuous hearsay and speculation, Brubaker’s president suspected that Schibanoff had been inappropriately involved with the formation of the managers’ competing company. Regardless, however, Brubaker brought a series of claims again Schibanoff, including tortious interference claims, in response to which defendant filed a motion for summary judgment and a request for sanctions under Rule 11. The District Court granted summary judgment in favor of Schibanoff on all claims and also imposed direct sanctions against Brubaker’s counsel for submitting the frivolous claims.

The Third Circuit upheld the judgment of the District Court, agreeing that Brubaker had failed to substantiate its allegations with sufficient factual support to satisfy the essential elements of the claims against Schibanoff. Since the only significant evidence of Schibanoff’s involvement with the competing company was an informal dinner discussion and a single innocuous reference letter, the claims were deemed frivolous.

Although the Third Circuit unanimously affirmed the grant of summary judgment in favor of Schibanoff, Judges Jordan and Sloviter were split regarding the standard of review on the issue of sanctions. Judge Jordan, writing for the majority, found that the District Court did not abuse its discretion in imposing sanctions against Brubaker’s counsel where its lawsuit consisted solely of a “vague belief based on bad feelings and a stray comment that the accused was ‘involved,’” while Judge Sloviter believed the District Court incorrectly had relied on an earlier version of Rule 11 that stated the imposition of sanctions was mandatory rather than discretionary and had abused its discretion in this instance.

This case serves as a reminder to employers that they must have concrete evidence of improper competition and cannot rely simply on guesswork in bringing claims of tortious interference. In addition, counsel should also exercise careful judgment when deciding whether or not to proceed with a case, as the courts will not hesitate to impose sanctions if they believe claims lack a factual basis.

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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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