shutterstock_529332652Seyfarth Synopsis: An environmental remediation technologies company is in the midst of litigation in Chinese courts over a $1.2 million contract to provide its technology to a Chinese company. According to the Chinese entity, the technology provider failed to deliver the unit in a “timeframe that was agreed.”

The West Mountain Environmental Corp. (WMT) had issued a press release in October 2016 that it had sold its first indirect thermal desorption technology (TPS) unit in China to Shanghai Hehui Environmental Technology, Co. Ltd. (Hehui). WMT valued the contract at approximately $1.2 million.

Historically, WMT had operated in China since 2012 and has treated, it claims, over 100,000 tons of contaminated soil and oil sludge using TPS technology. TPS’ patented indirect thermal desorption technology is “recognized in the industry as one of the most efficient and safest technologies for the removal of hazardous contaminants.” WMT asserts that TPS was one of the first western environmental remediation technologies successfully transferred to China which has been recognized as a top 100 environmental technology in the 3iPET Program supported by the Ministry of Environmental Protection.

This sale, WMT indicated, represented the first time that TPS technology had been used as part of a process to treat waste purified terephalic acid (PTA) sludge. “PTA is required for the manufacture of polyester fibre, polyethylene terephthalate (PET) bottle resin and polyester film and China is the largest producer of PTA at over 50 million tonnes per year.”

Now according to a recent WMT press release, it received notice that a lawsuit had been filed against it by Hehui, claiming that WMT failed to deliver the TPS unit in a “timeframe that was agreed.” As a consequence, a Chinese Court ordered that WMT’s bank accounts be frozen until a hearing is held on March 27, 2017 in Shanghai.

Subsequently WMT was informed by its Chinese legal counsel that its motion to remand its contract dispute with Hehui to arbitration in conformance with the terms of the contract between the parties was denied. The release indicated that Chinese Intermediate Court ruled that as the contract between the parties did not specify an arbitrator, so the Intermediate Court would hear the case. As a result of the ruling and based on the recommendation from Chinese legal counsel, WMT will file an objection of jurisdiction to the Intermediate Court on April 5, 2017, at which time an official hearing for the case will be set.

This case illustrates how very careful parties need to be in preparing contracts, especially in international cases. Deals in China may be especially complicated as the law varies in different provinces.

For more information on this or any related topic please contact the authors, your Seyfarth attorney, or any member of the International Employment Law Team, the Intellectual Property, or the Trade Secrets Teams

itechlaw_logoSeyfarth Shaw LLP is pleased to be a Global Sponsor at ITechLaw’s 2016 European Conference in Madrid on November 9-11.

ITechLaw is a not-for-profit organization established to inform and educate lawyers about the unique legal issues arising from the evolution, production, marketing, acquisition and use of information and communications technology.

The conference will feature a wide-ranging program and invaluable networking opportunities that will focus on cutting-edge legal topics, including e-commerce, e-contracting, disruptive technologies, data protection developments, and the impact of cognitive technologies in the legal spheres. Attendees at the European Conference include leading attorneys in private practice, in-house counsel, business executives focusing on the global economy, government officials and academics.

This year, Seyfarth Shaw Partner Robert B. Milligan serves on ITechLaw’s Board of Directors and is Chair of the Intellectual Property Committee. He will also serve as the moderator of the Disruptive Technologies session, which will cover:

  • a practical approach to the Internet of Things (IoT)
  • consumer protection in the age of IoT
  • the impact of robotics, artificial intelligence & disruptive technologies in law

In addition, Seyfarth Shaw is pleased to co-sponsor the conference. Please stop by our table during the conference to learn about our Intellectual Property, Global Privacy & Security and Trade Secrets, Computer Fraud & Non-Competes Practice Groups.

For more information, click here.

In this installshutterstock_543904594ment in Seyfarth’s 2016 Trade Secrets Webinar Series, International attorney Dominic Hodson focused on non-compete considerations from an international perspective. Dominic discussed general principals and recent international developments in non-compete issues around the globe. Companies who compete in the global economy should keep in mind these key points:

  • Requirements for enforceable restrictive covenants vary dramatically from jurisdiction to jurisdiction. However, there are some common requirements and issues regarding enforceability based on the region, particularly in common law jurisdictions such as the UK, Canada (excluding Quebec), Australia/New Zealand, and Singapore/Hong Kong. A restrictive covenant is void unless it is reasonable to protect a legitimate interest of the employer; simply wanting to stop competition post-termination is not a legitimate interest.
  • Outside of common law countries, there is no uniformity in rules, and every country must be taken separately. There are often detailed statutory rules that the clause must fulfill, but nevertheless there are repeating themes: There must be reasonableness to the non-compete agreement, and you must require proportionality between the clause and the interest sought to be protected.
  • With respect to non-common law countries, liquidated damaged are often allowed. Civil law countries tend to be much more forgiving of liquidated damages and don’t have the same rules regarding “penalty clauses.”

WebinarOn Thursday, July 28, at 12:00 p.m. Central, Seyfarth attorney Dominic Hodson will present “International Non-Compete Law Update,” the eighth installment in Seyfarth’s 2016 Trade Secrets Webinar series.

Mr. Hodson will focus on non-compete considerations from an international perspective. Specifically, the webinar will involve a discussion of recent developments, and a refresher in general principals, in non-compete issues around the globe. This webinar will provide valuable insight for companies who compete in the global economy and must navigate the legal landscape in these countries to ensure protection of their trade secrets and confidential information, including via the effective use of non-compete and non-disclosure agreements.

*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

register

shutterstock_384957430Earlier today (by a vote of 503 to 131 with 18 abstentions), the European Parliament approved the text of a proposed Directive for the protection of trade secrets in the European Union.  Once approved by the European Council (which is typically a formality), the Directive will be binding on all EU member states and will require member states to enact national legislation that meets certain minimum requirements for the protection of trade secrets.

Up to this point, no legal framework has existed for the protection of trade secrets throughout the EU.  In 2013, the European Commission commissioned a study on trade secrets protections in EU member states by comparison to legal protections for trade secrets in the United States, Switzerland, and Japan.  Following that study, which highlighted the lack of uniformity in the laws of EU member states, the European Commission proposed an initial draft of the directive to remedy perceived inadequacies in the existing legal framework.  With adoption of the new directive, EU member states now have a period of 24 months to adopt national legislation that meets certain minimum standards of protection for trade secrets.

Several key provisions of the Directive are notable.

First, the directive provides a uniform definition of a “trade secret” as “information which meets all the following requirements: (a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; (b) has commercial value because it is a secret; and (c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”  (Directive, Art. 2 ¶ 1.)

Second, the directive defines the following conduct as unlawful:

  • “Acquisition of a trade secret without the consent of the trade secret holder shall be considered unlawful, whenever carried out by . . . unauthorised access to, appropriation of, or copy of any documents, objects, materials, substances or electronic files, lawfully under the control of the trade secret holder, containing the trade secret or from which the trade secret can be deduced; [and] any other conduct which, under the circumstances, is considered contrary to honest commercial practices.” (Directive, Art. 3 ¶ 2.)
  • “The use or disclosure of a trade secret shall be considered unlawful whenever carried out, without the consent of the trade secret holder, by a person who is found to meet any of the following conditions: (a) have [sic] acquired the trade secret unlawfully; (b) be in breach of a legally valid confidentiality agreement or any other duty to maintain secrecy of the trade secret; [or] (c) be in breach of a legally valid contractual or any other duty to limit the use of the trade secret.”  (Directive, Art. 3 ¶3.)
  • “The acquisition, use or disclosure of a trade secret shall also be considered unlawful whenever a person, at the time of acquisition, use or disclosure, knew or should, under the circumstances, have known that the trade secret was obtained directly or indirectly from another person who was using or disclosing the trade secret unlawfully within the meaning of [Art. 3 ¶3].”  (Directive, Art. 3 ¶4.)
  • “The production, offering or placing on the market of infringing goods, or import, export or storage of infringing goods for those purposes, shall also be considered an unlawful use of a trade secret when the person carrying out such activities knew, or should, under the circumstances, have known that the trade secret was used unlawfully within the meaning of [Art. 3 ¶3].”  (Directive, Art. 3 ¶5.)

Third, the Directive establishes exceptions that essentially creates a whistleblower defense to trade secrets misappropriation claims, similar to language in the U.S. Senate’s version of the proposed Defend Trade Secrets Act pending in the U.S. Congress.  The relevant portion of the text provides as follows:

“Member States shall ensure that the application for the measures, procedures and remedies provided for in this Directive is dismissed when the alleged acquisition, use or disclosure of the trade secret was carried out in any of the following cases: (a) for exercising the right to freedom of expression and information as set out in the Charter of Fundamental Rights of the European Union, including respect for freedom and pluralism of the media; (b) for revealing a misconduct, wrongdoing or illegal activity, provided that the respondent acted for the purpose of protecting the general public interest; (c) the trade secret was disclosed by workers to their representatives as part of the legitimate exercise of their representative functions in accordance with Union or national law, provided that such disclosure was necessary for that exercise; (e) for the purpose of protecting a legitimate interest recognised by Union or national law.”

(Directive, Art. 4.)

Fourth, the Directive requires member states to establish limitations periods for trade secrets claims, as follows: “Member States shall, in accordance with this article, lay down rules on the limitation periods applicable to the substantive claims and actions for the application of the measures, procedures and remedies pursuant to this Directive. . . . The duration of this limitation period shall not exceed six years.”  (Directive, Art. 7.)

Fifth, the Directive requires member states to establish minimum rules for protection and preservation of trade secrets during litigation, including measures that “shall at least include the possibility (a) to restrict access to any document containing trade secrets or alleged trade secrets submitted by the parties or third parties, in whole or in part, to a limited number of persons; (b) to restrict access to hearings, when trade secrets or alleged trade secrets may be disclosed, and their corresponding records or transcript to a limited number of persons; (c) to make available to any person other than those comprised in the limited number of persons referred to in points (a) and (b) a non-confidential version of any judicial decision, in which the passages containing trade secrets have been removed or redacted.”

To take full advantage of the protections provided by the new Directive, as well as the protections that will be afforded by the Defend Trade Secrets Act in the U.S., employers on both sides of the Atlantic would be wise to review their existing practices and procedures to ensure that they are taking “reasonable steps under the circumstances” to protect their trade secrets, including:

  • Reviewing IT policies and procedures for protecting sensitive information;
  • Reviewing existing employment agreements, including restrictive covenant agreements in jurisdictions where they are permitted, to ensure that they provide appropriate levels of protection permitted under applicable law;
  • Reviewing existing employment policies regarding protection of confidential information and ensuring that employees are adequately trained on the policies; and
  • Reviewing employee exiting policies and procedures to ensure that sensitive information is returned upon the end of employment.

In addition, in light of the new whistleblower protections afforded by both the EU Directive and the Defend Trade Secrets Act, employers should ensure that their policies and practices are in compliance with all applicable anti-retaliation laws and that management employees are properly trained on best practices to reduce the risks of whistleblower retaliation claims.

For more on these practical tips and background to the Directive and the Defend Trade Secrets Act, please check out our recent webinar on these topics.

shutterstock_102405310As we have previously reported in this blog, this week marks a milestone in ongoing attempts in the European Union to overhaul the existing regulatory framework for the protection of trade secrets.  Earlier today, members of the European Parliament debated the compromise text of the proposed Directive to protect trade secrets.  A full recording of the debate can be found here.

Today’s debate came on the heels of a press conference earlier in the day by MEP Constance Le Grip (European People’s Party — France), the rapporteur who has shepherded the proposed directive in the European Parliament for the past 18 months.  For those who have been following the proposed Directive, Ms. Le Grip’s comments provide an interesting explanation of the varying political considerations that produced the compromise text, including balancing the concerns of businesses and the rights of workers.

Questions posed by journalists at the press conference are perhaps more interesting.  If the questions posed by journalists (as well as the comments by many MEPs during the debate) are any indication, considerable opposition exists to the proposed directive.  While business groups and many MEPs have largely welcomed the proposed directive, other MEPs and some interest groups have expressed concern that the proposed directive will be used by companies to stifle whistleblowers and journalists.  Notably, the compromise text already includes language that expressly guarantees protection of whistleblowers, freedom of the press, and other fundamental rights, as follows:

Member States shall ensure that the application for the measures, procedures and remedies provided for in this Directive is dismissed when the alleged acquisition, use or disclosure of the trade secret was carried out in any of the following cases:

(a) for exercising the right to freedom of expression and information as set out in the Charter of Fundamental Rights of the European Union, including respect for freedom and pluralism of the media;

(b) for revealing a misconduct, wrongdoing or illegal activity, provided that the respondent acted for the purpose of protecting the general public interest;

(c) the trade secret was disclosed by workers to their representatives as part of the legitimate exercise of their representative functions in accordance with Union or national law, provided that such disclosure was necessary for that exercise;

(e) [sic] for the purpose of protecting a legitimate interest recognised by Union or national law.

See Proposed Directive [compromise text], Art. IV.   Yet despite this language, opponents of the proposed directive have argued that the directive does not go far enough in protecting whistleblowers.   Whether such concerns are wide enough to scuttle the proposed directive remains to be seen.      

A full vote on the proposed directive is scheduled for tomorrow.  For up-to-date coverage of the proposed directive, please look for an update in this blog following tomorrow’s vote.

shutterstock_46364566As we reported last month in this blog, in December the European Council and representatives of the European Parliament reached a “provisional agreement” on the European Commission’s proposed Directive to protect trade secrets.  With this provisional agreement, the Council and representatives of the European Parliament agreed on compromise language to be submitted to the Parliament for approval, thus clearing the way for adoption of the proposed directive in the next few months.

At the time that we reported on this development, the compromise text was not yet available.  However, now that the Parliament and Council have completed a legal-linguistic review of the text, the full English-language version of the compromise text is now available.  With the benefit of the full text, we can now answer one final open question that we reported last month — i.e., what is the scope of the protections that will be available to trade secrets during litigation under the compromise text?

As we previously noted, the European Commission’s original text contemplated that courts in Member States may issue “Attorneys’ Eyes Only” protective orders like those that are typically used in trade secrets cases in the U.S.  Specifically, the Commission’s original text provided that:

Member States shall also ensure that the competent judicial authorities may, on a duly reasoned application by a party, take specific measures necessary to preserve the confidentiality of any trade secret or alleged trade secret used or referred to in the course of the legal proceedings relating to the unlawful acquisition, use or disclosure of a trade secret. The measures referred to . . .  shall at least include the possibility: (a) to restrict access to any document containing trade secrets submitted by the parties or third parties, in whole or in part; (b) to restrict access to hearings, when trade secrets may be disclosed, and their corresponding records or transcript.   In exceptional circumstances, and subject to appropriate justification, the competent judicial authorities may restrict the parties’ access to those hearings and order them to be carried out only in the presence of the legal representatives of the parties and authorised experts . . .

In contrast, in its draft Legislative Resolution, the European Parliament’s Legal Affairs Committee watered down this language with the following proposed language that would appear to eliminate true “Attorneys’ Eyes Only” protective orders:

The measures referred to . . .  shall at least include the possibility: (a) to restrict access to any document containing trade secrets or alleged trade secrets submitted by the parties or third parties to a limited number of persons, in whole or in part provided that at least one person from each of the parties, and, where appropriate in view of the proceedings, their respective lawyers and/or legal representatives, are given access to the document in full; (b)  to restrict access to hearings, when trade secrets or alleged trade secrets may be disclosed, and their corresponding records or transcript to a limited number of persons, provided that it includes at least one person from each of the parties, and, where appropriate in view of the proceedings, their lawyers and/or legal representatives . . .

Based on the compromise text, the Council and representatives of the Parliament appear to have adopted the Legal Affair’s Committee’s approach, albeit with different language.  The relevant portion of the compromise text now reads as follows:

Member States shall also ensure that the competent judicial authorities may, on a duly reasoned application by a party, take specific measures necessary to preserve the confidentiality of any trade secret or alleged trade secret used or referred to in the course of the legal proceedings relating to the unlawful acquisition, use or disclosure of a trade secret. Member States may also allow competent judicial authorities to take such measures on their own initiative.

The measures referred to in the first subparagraph shall at least include the possibility:

(a) to restrict access to any document containing trade secrets or alleged trade secrets submitted by the parties or third parties, in whole or in part, to a limited number of persons;

(b) to restrict access to hearings, when trade secrets or alleged trade secrets may be disclosed, and their corresponding records or transcript to a limited number of persons;

(c) to make available to any person other than those comprised in the limited number of persons referred to in points (a) and (b) a non-confidential version of any judicial decision, in which the passages containing trade secrets have been removed or redacted.

The number of persons referred to in points (a) and (b) of the second subparagraph shall be no greater than what is necessary in order to ensure compliance with the right to an effective remedy and to a fair trial of the parties to the proceedings and shall include, at least, one natural person from each party and the respective lawyers or other representatives of those parties to the proceedings.

Proposed Directive, Article 8, ¶ 2.

Assuming that this compromise text is approved by the European Parliament, legislatures and courts in Member States will no doubt take different approaches to effectuate this language.  Although the final compromise text is somewhat weaker than the protections that U.S. practitioners typically see in trade secrets litigation, on balance the compromise language provides a reasonable baseline for protection of trade secrets during litigation that is probably more than sufficient for most disputes.

The compromise text is expected to be submitted to the full European Parliament for approval in the next few months.  If the Parliament approves the text on a first reading, the European Council will approve the European Parliament’s position and the Directive will be adopted.  Member States then will be required to enact national law consistent with the Directive within two years.  We will continue to track progress of the proposed Directive as it crosses the final hurdle necessary for adoption.

shutterstock_306766586In the latest of our series of post-employment protection blog posts, we consider the compliance and regulatory issues that need to be thought through when drafting an effective post-employment restraint in Australia.

How will any restraint payment be structured?

The threshold question is what kind of payment (if any) to make in return for the agreement of an employee not to engage in particular activities, such as working for a competitor, soliciting business from clients, etc.

The best option will depend on the particular circumstances.

Payment could be part of normal salary. There could be a separate lump sum payment which is paid when the agreement is made or at the time the restraint is called on. Alternatively, an employer might wish to drip feed monthly payments during the restraint period. There are a number of ways to structure the arrangements that best suit the business and the employee concerned.

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It is also possible for no specific payment to be made in return for the restraint. However, at a practical level, paying an individual not to engage in certain activities such as working for a competitor or poaching staff might mean the obligations are more likely to be complied with. For example, an executive who is not “out of pocket” during the restraint period is less likely to need to take the risk of working for a competitor.

From a purely legal perspective payment does not guarantee enforceability. When the payment is made and the quantum are discretionary matters to be taken into account by a court asked to enforce a restraint. In our experience, it is very helpful to be able to point to payment in return for agreement to be restrained.

Payment for a restraint will, of course, raise a number of regulatory disclosure, approval and tax issues.

“Gardening leave” compared to a post-employment restraint

At the outset it’s important to distinguish between:

  • payment of salary during a period of notice of termination where the employee is not required to work, which is referred to commonly as “gardening leave” because the employee cannot commence working for another employer but can engage in leisure activities such as gardening (Notice Payments); and
  • additional payment/s made after termination of employment in return for the former employee’s agreement to be prevented from engaging in certain activities such as working for a competitor or approaching their former clients, suppliers or colleagues (Restraint Payments).

Notice Payments will not raise the same issues as Restraint Payments. However, neither payment will guarantee the legal enforceability of the restrictions but will merely be a factor that a court may consider in deciding whether the restrictions are reasonable. The argument is that the payment will go some way to addressing the public policy concern about restraints to the effect that they should not deprive a person of their ability to earn a living.

Termination benefits requiring shareholder approval

In the case of certain executives (broadly “Key Management Personnel” as defined in the Corporations Act 2001 and directors) Restraint Payments may also require the approval of shareholders in general meeting if they are in connection with termination of employment or the transfer of any undertaking or property of the company. This is because the corporations legislation in Australia specifically deems a payment that is made as part of “a restrictive covenant, restraint-of-trade clause or non-compete clause” a benefit that requires shareholder approval.

Whether such approval is required must be determined on a case by case analysis. Generally, Notice Payments will not be caught by this requirement.

Board determination of “reasonableness” of the payment

For some executives a company’s board of directors may also have to determine whether a Restraint Payment is “reasonable” in the context of the limits on payments to related parties under the corporations legislation. This is an issue that should be considered at the time a restraint provision is drafted and agreed. If a benefit is not considered reasonable then it will require shareholder approval. External advice may need to be taken by a board to assist its determination of whether a proposed payment is reasonable.

Disclosure

Corporations legislation and the Listing Rules of the Australian Securities Exchange impose obligations on companies to make disclosures about executive pay, including Restraint Payments and Notice Payments, in certain circumstances. Whether a payment is ultimately disclosed publicly may be a relevant consideration in deciding whether the payment is commercially acceptable to both the executive or employee and the company. On this basis any potential disclosure obligations should be considered at the time of drafting and agreeing payment obligations for restraints.

Taxation

Finally, the tax treatment of a Restraint Payment may be different to the tax treatment of a Notice Payment, depending on whether the Restraint Payment is categorised as an employment termination payment or a capital payment. Specific consideration of this issue will also be required.

Well drafted restraints of trade are a necessary and reasonable business tool and can be highly effective to protect business interests. To be enforceable, and to prevent side issues becoming a problem, the above matters need to be carefully thought through at the time the restraint is drafted and agreed.

shutterstock_178722866As regular readers of this blog will note, we have been tracking progress of the European Commission’s proposed Directive to protect trade secrets as it has made its way through the European Union’s complicated legislative process over the past several years. Last week, the proposed Directive crossed yet one more procedural hurdle with a “provisional agreement” on the Directive reached by the European Council (represented by the Luxembourg presidency) and representatives of the European Parliament.

The European Commission first proposed the Directive in November, 2013 to provide greater and more consistent protection of trade secrets throughout the EU’s 28-Member States. Earlier this year, the European Parliament’s Committees on Internal Market and Consumer Protection and Industry, Research, and Energy published comments and proposed amendments to the Directive.  The Parliament’s Committee on Legal Affairs subsequently issued a draft Legislative Resolution that adopted some (but not all) of the amendments proposed by the other committees.  The provisional agreement now clears the way for a vote in the European Parliament next year.

Although the text of the provisional agreement is not currently available, a press release issued by the European Council provides a general overview of the terms.  As expected, the proposed Directive will provide that EU member states must ensure that adequate civil procedures and remedies are available to redress illegal acquisition, use, and disclosure of trade secrets without undermining fundamental rights and freedoms or the public interest.  Consistent with concerns raised (and amendments proposed) by the Parliamentary committees that previously reviewed the proposed Directive, the Council and representatives of the European Parliament agreed that the proposed Directive (i) will protect whistleblowers, (ii) will not place any limitations on investigative journalism, (iii) will not place any restrictions on workers in their employment contracts, and (iv) will not affect employees’ rights to enter into collective bargaining agreements.

In addition, the press release suggests that the Council and representatives of the Parliament have reached an agreement about the limitations period for claims of trade secret misappropriation.  The Legal Affairs Committee’s draft resolution from earlier this year provided that “Member States shall ensure that actions for the application of the measures, procedures and remedies provided for in this Directive may be brought within three years after the date on which the applicant became aware, or had reason to become aware, of the last fact giving rise to the action.”  While this three-year limitations period is longer than the Commission’s original text (which proposed a limitations period of “at least one year but not more than two years), it is still somewhat short by comparison to the existing limitations period in some EU member states. (For example, in the UK, a common law claim for breach of confidence or breach of contract is six years.)  Based on the European Council’s press release, it is now clear that the Council and representatives of the European Parliament have agreed on a limitations period that “will not exceed six years.”

The press release is less clear on the protections that will be available to trade secrets during litigation.  The Commission’s original text provided that:

Member States shall also ensure that the competent judicial authorities may, on a duly reasoned application by a party, take specific measures necessary to preserve the confidentiality of any trade secret or alleged trade secret used or referred to in the course of the legal proceedings relating to the unlawful acquisition, use or disclosure of a trade secret. The measures referred to . . .  shall at least include the possibility: (a) to restrict access to any document containing trade secrets submitted by the parties or third parties, in whole or in part; (b) to restrict access to hearings, when trade secrets may be disclosed, and their corresponding records or transcript.   In exceptional circumstances, and subject to appropriate justification, the competent judicial authorities may restrict the parties’ access to those hearings and order them to be carried out only in the presence of the legal representatives of the parties and authorised experts . . .

In other words, the original text contemplated “Attorneys’ Eyes Only” protective order like those that are typically used in trade secrets cases in the U.S.

In contrast, in its draft Legislative Resolution, the Legal Affairs Committee watered down this language with the following proposed language that would appear to eliminate true ““Attorneys’ Eyes Only” protective orders:

The measures referred to . . .  shall at least include the possibility: (a) to restrict access to any document containing trade secrets or alleged trade secrets submitted by the parties or third parties to a limited number of persons, in whole or in part provided that at least one person from each of the parties, and, where appropriate in view of the proceedings, their respective lawyers and/or legal representatives, are given access to the document in full; (b)  to restrict access to hearings, when trade secrets or alleged trade secrets may be disclosed, and their corresponding records or transcript to a limited number of persons, provided that it includes at least one person from each of the parties, and, where appropriate in view of the proceedings, their lawyers and/or legal representatives . . .

Unfortunately, the Council’s press release does not explain how the provisional agreement resolves this conflict but states only that “[w]here necessary, confidentiality of trade secrets will also be preserved during the course of and after the legal proceedings.” 

Now that the provisional agreement has been reached, the Parliament and Council will conduct a legal-linguistic review of the text.  Once that process has been completed, the proposed Directive will then be submitted to the full European Parliament for approval.  Currently, the European Parliament is expected to vote on the initiative around March 2016, but the precise date for a first reading has yet to be determined.  If enacted, Member States will be required to enact national law consistent with the Directive within two years.

We will continue to track progress of the proposed Directive, as well as the proposed Defend Trade Secrets Act in the U.S. Congress (which currently has 20 co-sponsors in the Senate and over 100 co-sponsors in the House).  In the meantime, companies on both sides of the Atlantic should review their current procedures for protecting trade secrets to ensure that they can fully take advantage of these proposed laws if enacted next year.  For practical tips on ways to maximize protection of trade secrets in the workplace, please check out the best practices highlighted in our 2014 webinar series.

 

shutterstock_345999860Throughout 2015, Seyfarth Shaw’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 nine webinars:

  1. 2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete and Computer Fraud Law
  2. Protecting Confidential Information and Client Relationships in the Financial Services Industry
  3. International Trade Secrets and Non-Compete Law Update
  4. Employee Social Networking: Protecting Your Trade Secrets in Social Media
  5. How and Why California is Different When It Comes to Trade Secrets and Non-Competes
  6. State Specific Non-Compete Oddities Employers Should Be Aware Of
  7. So You Want An Injunction in A Non-Compete or Trade Secret Case?
  8. Social Media Privacy Legislation Update
  9. Enforcing Non-Compete Provisions in Franchise Agreements

As a conclusion to this well-received 2015 webinar series, we compiled a list of key takeaway points for each program, which are listed below. For those clients who missed any of the programs in this year’s series, the webinars are available on CD upon request, or you may click on the title below each webinar for the online recording. We are pleased to announce that Seyfarth will continue its trade secrets webinar programming in 2016, and we will release the 2016 trade secrets webinar series topics in the coming weeks.

2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete and Computer Fraud Law

The first webinar of the year, led by Michael Wexler, Robert Milligan and Daniel Hart, reviewed noteworthy cases and other legal developments from across the nation in the areas of trade secret and data theft, non-compete enforceability, computer fraud, and the interplay between restrictive covenant agreements and social media activity, and provided predictions for what to watch for in 2015.

  • As demonstrated by high-profile hacking attacks and criminal prosecutions for trade secrets theft, companies’ trade secrets are at greater risk today than ever before. To mitigate the risk of trade secrets theft, companies should review their security procedures, policies on IT resources and email usage, and employee exit interview/termination processes to ensure that the company’s assets are adequately protected.
  • Use of social media continues to generate disputes. As more and more states adopt social media privacy laws, companies increasingly seek to assert an ownership interest in work-related social media accounts. Additionally, as the NLRB cracks down on social media policies that prohibited employees from engaging in protected activities, employers should periodically review their policies regarding use of social media in the workplace.
  • Courts and regulatory agencies continue to scrutinize non-competes and other restrictive covenants.  In light of these and other continuing developments in non-compete law, employers should periodically review their existing agreements and on-boarding procedures to maximize the likelihood that their agreements will be upheld. To learn more, please see our 50 State Non-Compete and Trade Secrets Desktop Reference.

Protecting Confidential Information and Client Relationships in the Financial Services Industry

The second installment, led by Scott Humphrey, Jason Stiehl and James Yu, focused on trade secret and client relationship considerations in the banking and finance industry, with a particular focus on a firm’s relationship with its FINRA members.

  • 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 company’s restrictive covenants and the steps your company has taken to ensure that its confidential information remains confidential will allow your company to successfully and swiftly evaluate its legal options when a crisis 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.

International Trade Secret and Non-Compete Law Update

In the third installment, attorneys Wan Li, Ming Henderson and Daniel Hart focused on non-compete and trade secret considerations from an international perspective. Specifically, the webinar involved a discussion of non-compete and trade secret issues in Europe and China as compared to the United States. This webinar provided valuable insight for companies who compete in the global economy and must navigate the legal landscape in these countries to ensure protection of their trade secrets and confidential information, including the effective use of non-compete and non-disclosure agreements.

International…Local Law Compliance is Key

  • One size does not fit all! Requirements for enforceable restrictive covenants vary dramatically from jurisdiction to jurisdiction. However, there are some common requirements and issues regarding enforceability based on the region (e.g., in Europe; see below). Bearing in mind non-compete covenants across the world may be unlawful in certain countries or heavily restricted, employers should carefully tailor agreements to satisfy local legal requirements and appropriately apply local drafting nuances to aid enforceability of any restrictive covenants.
  • The general approach to restrictive covenants in Europe is that the restrictions should not go further than is reasonably necessary to protect the employer’s legitimate business interests. This restrictive approach is a continuing trend across Europe. For example, there is a recent prohibition in the Netherlands on non-compete clauses in fixed-term contracts unless justified by the special interests of the company. In practice, this means that employers should particularly focus on the duration and scope (in terms of geographical coverage and the employee’s own personal activities) of the restrictions and be mindful of any local payment obligations when preparing restrictive covenants (e.g., in France and in Germany). Europe is also making an attempt to remedy the uneven levels of protection and remedies in relation to trade secrets. The draft EU Directive for trade secret protection is currently making its way through the legislative process with no firm timeline for adoption.
  • In addition to local or regional nuances, employers should take advantage of other contractual and/or tactical mechanisms as a “belt-and braces” approach, such as claw-backs and forfeiture of deferred compensation (where permitted), use of garden leave provisions, and strategic use of forum selection and choice-of-law provisions. Employers operating in the U.S. should also consider strategic use of mandatory forum selection and choice-of-law provisions in restrictive covenant agreements with U.S.-based employees.
  • Practical measures should also be taken to protect confidential information and trade secrets, including limiting access to sensitive information, using exit interviews, and (provided that applicable privacy laws are followed) monitoring use of company IT resources and conducting forensic investigations of departing employees’ computer devices.

France…Do Not Miss the Deadline

  • Drafting a non-compete clause under French labor law requires specific care as courts are particularly critical of the following: duration, the geographical and activities scope, the conditions in which the employer releases the employee from such obligation, the employee’s role, the interests of the company, and the financial compensation provided by the clause.
  • Recent case law shows that French courts are strict when it comes to the interpretation of the non-compete clauses and the possibility to waive the non-compete clause. If an employer misses the relevant contractual deadline to release an employee from her/his non-compete, the financial compensation will be due for the entire period. Similarly, if the employer waives the non-compete prematurely, the courts will consider the waiver as invalid.
  • During employment, an employee is subject to a general obligation of confidentiality and breach may be subject to civil and criminal sanctions. Only “trade secrets,” however, are protected post-termination under certain circumstances. Employers should therefore automatically include a confidentiality clause in employment agreements to strengthen the protection of the company’s data post-termination. Good news for employers: the French High Court recently confirmed that, unlike non-compete covenants, a confidentiality clause does not require any financial compensation.

United Kingdom…Less is NOT More

  • Restrictive covenants are potentially void as an unlawful restraint of trade. In practical terms, this means that such covenants are only likely to be enforceable where they are fairly short in duration, the restriction is narrowly focused on the employee’s own personal activities (e.g., by geographical scope), and is specific to the commercial environment. Unlike in some European jurisdictions, payment will not “rescue” an unenforceable restriction. In addition, the English courts tend to have an unforgiving nature when it comes to poor drafting even if the intention of the parties is obvious. Employers should therefore also consider other creative and acceptable ways to aid enforceability, such as deferring remuneration and varying and reaffirming covenants.
  • Absent any agreement, only “trade secrets,” which are narrowly defined, will be protected after employment. Employers should therefore ensure that employment contracts and/or other free-standing binding agreements provide full coverage for the protection of confidential and other valuable business information post-termination. Often the physical protection of confidential information is underestimated (e.g., encrypting data, installing passwords, secure storage, etc.), which can be a more effective and less costly approach for employers in the long-term. Employers should therefore also seek to retain physical control of such information in order to reduce and limit unwanted disclosure and misuse.

China….Stay ON TOP of An Evolving Regulatory System

  • In China, employers should ensure that they have a non-compete agreement with the employee at the time of employment, so that the employer can decide whether to enforce or not to enforce the non-compete agreement for a period of post-employment.
  • In addition, employers should ensure that documents are marked with “confidential,” or that other measures are taken to protect confidential information. Otherwise, remedies may not be available under the Chinese law for breach of confidential obligations. Employers should also review and update rules and policies regarding confidentiality and security arrangements. Pre-employment vetting of R&D staff is also essential to prevent unexpected breach or non-compliance with trade secret and intellectual property rights.
  • As a notable (and relatively recent) development, injunctive relief for trade secret misappropriation is available in Shanghai and Anhui.

Employee Social Networking: Protecting Your Trade Secrets in Social Media

The fourth installment, presented by John Tomaszewski, Eric Barton and Joshua Salinas, addressed the relationship between trade secrets, social media, and privacy.

Social Media Privacy Laws are on the Rise

  • At least 20 states now have laws prohibiting employers from requiring or even asking for access to employees’ or job applicants’ personal social media accounts. Penalties for violations range from nominal administrative fines to much larger damages, including punitive damages and attorneys’ fees. Many of the laws, however, have broad exceptions and loopholes, including required employer access of “nonpersonal” accounts and on suspected data theft or workplace misconduct. To learn more, please see our Social Media Privacy Legislation Desktop Reference.

Safeguard Your Trade Secrets

  • Protecting your company’s valuable confidential information and trade secrets from disloyal employees is a very different exercise than keeping strangers and competitors locked-out. This exercise is further complicated by inconsistent privacy legislation, which can vary wildly from state to state. For example, a disloyal employee secretly copies a confidential employer customer list onto his personal LinkedIn account. The employee works in a state that has adopted the new privacy legislation, which has an exemption for suspected data theft. The employer hears unsubstantiated gossip about that list copying, but does not investigate based on the flimsy evidence and for fear of violating the privacy law. The employee later resigns, and uses that list for a competitor. Did the former employer waive a trade secrets claim against the employee because it decided not to investigate, even though it could have? Did that decision amount to an unreasonably insufficient effort to protect its trade secrets?

Social Media and Bring Your Own Device (BYOD)

  • Social media is an extension of the trend to combine work, and non-work related activities within the same platform. Just like smartphones allow you to engage in both work and non-work related emailing, the social media platforms continue to drive the conflation of personal and employee activity. As a result, a holistic approach needs to be taken in managing the employee. Otherwise, what was once considered a reasonable policy at work may get applied to private or protected activity and thereby become at a minimum, unreasonable; and in some cases, illegal.

How and Why California is Different When it Comes to Trade Secrets and Non-Competes

The fifth installment, directed by Robert Milligan, James McNairy and Joshua Salinas, focused on recent legal developments in California trade secret and non-compete law and how it is similar to and diverse from other jurisdictions, including: a discussion of the California Uniform Trade Secrets Act; the interplay between trade secret law and Business and Professions Code Section 16600 (which codifies California’s general prohibition of employee non-compete agreements), and recent case developments regarding non-compete agreements and trade secret investigations. The panel discussed how these latest developments impact counseling, litigation and deals involving California companies.

  • Broad “no re-hire” provisions in settlement agreements may, under certain circumstances, constitute unlawful restraints of trade under California law, as reflected in Golden v. California Emergency Physicians Medical Group (9th Cir. Apr. 8, 2015).
  • Alone, voluntary dismissal of a trade secret claim is not a safe harbor to liability for attorneys’ fees if the claim otherwise meets the criteria for having been brought or maintained in bad faith.
  • The preemptive scope of California’s Uniform Trade Secrets Act is very broad. As a result, tort or conversion claims that might be viable in other states may be preempted when pleaded in California with a trade secret claim, provided independent unlawful acts are not alleged.

State Specific Non-Compete Oddities Employers Should Be Aware Of

In Seyfarth’s sixth installment, attorneys Michael Baniak and Paul Freehling discussed the significant statutory changes to several jurisdictions’ laws regarding trade secrets and restrictive covenants and pending legislation proposed in additional jurisdictions over the past year. As trade secrets and non-compete laws continue to evolve from state to state in piecemeal fashion, companies should continually revisit their trade secrets and non-compete strategies in light of the evolving legal landscape and legislative trends.

  • Enforceability of non-compete, non-solicit, and confidentiality covenants in employment agreements depends primarily on the applicable statutes, and pertinent judicial decisions and conflict of laws principles, regarding (a) the acceptable breadth of such covenants, and (b) appropriate balancing of the legitimate business interests of employers, employees, and the public. Enforceability requires constant vigilance in updating the covenants because the law, business, and employment evolves often very rapidly.
  • Because each jurisdiction’s version of the Uniform Trade Secrets Act as enacted (it has been adopted in one form or another in the District of Columbia and each of the 50 states except New York and Massachusetts) is unique, all relevant jurisdictions’ versions must be analyzed.
  • Oddities in the law of restrictive covenants include: (a) hostility in a few states to non-competes and/or non-solicit covenants in general; (b) in some states (whether by statutory provision or judicial fiat); certain employees are exempt from such covenants; (c) there are disparities in various courts’ willingness to “blue pencil,” reform, or invalidate covenants deemed overbroad as written; and (d) there are variations in different courts’ views as to whether only actual disclosure, or also threatened or inevitable disclosure, of trade secret or confidential information will be enjoined.

So You Want An Injunction in A Non-Compete or Trade Secret Case?

In Seyfarth’s seventh installment, attorneys Justin Beyer, Eric Barton and Bob Stevens focused on the issues confronting plaintiffs in preparing for and prosecuting trade secret cases and the various ins and outs of seeking both temporary restraining orders and preliminary injunctions.

  • Employers can best protect their trade secrets by instituting robust training, policies and procedures aimed at educating its work force as to what constitutes confidential information, and that this information belongs to the employer, not the employee. By utilizing confidentiality, invention assignment and reasonable restrictive covenants, as well as implementing onboarding and off-boarding protocols, educating employees on non-disclosure obligations, educating employees on that data which the employer considers confidential, clearly marking the most sensitive data, and restricting access to confidential information, both systemically and through hardware and software blocks, employers can both educate and prevent misappropriation.
  • If an employee voluntarily resigns his or her employment with the company, the employer should already have in place a specific protocol to ensure that the employee does not misappropriate company trade secrets. Such steps include questioning the employee on where he intends to go, evaluating whether to shut off access to emails and company systems prior to the expiration of the notice period, requesting a return of company property, including if the company utilizes a BYOD policy, and reminding the employee of his or her continuing obligations to the company. Likewise, companies should have robust onboarding policies in place to help avoid suit, such as attorney review of restrictive covenants, offer letters that specifically disclaim any desire to receive confidential information from competitors, and monitoring of the employee after hire to ensure that they are not breaching any confidentiality or non-solicitation obligations to the former employer.
  • If a company finds itself embroiled in litigation based on either theft of its trade secrets or allegations that it either stole or received stolen trade secrets, it is important to take swift action, including interviewing the players, preserving the evidence, and utilizing forensic resources to ascertain the actual theft or infection (if you are on the defense side). Companies defending against trade secret litigation also need to analyze and consider whether an agreed injunction is in its best interests, while it investigates the allegations. These types of cases tend to be fast and furious and the internal business must be made aware of the impact this could have on its customer base and internal resources.

Social Media Privacy Legislation Update

In Seyfarth’s eighth installment, Seyfarth attorneys Robert Milligan, Daniel Hart and Joshua Salinas discussed their recently released Social Media Privacy Legislation Desktop Reference and addressed the relationship between trade secrets, social media, and privacy legislation. We compiled a list of brief summaries of the more significant cases that were discussed during the webinar:

  • In KNF&T Staffing Inc. v. Muller, No. 13-3676 (Mass. Super. Oct. 24, 2013), a Massachusetts court held that updating a LinkedIn account to identify one’s new employer and listing generic skills does not constitute solicitation. The court did not address whether a LinkedIn post could ever violate a restrictive covenant.
  • Outside of the employment context, the Indiana Court of Appeals in Enhanced Network Solutions Group Inc. v. Hypersonic Technologies Corp., No. 951 N.E.2d 265 (Ind. Ct. App. 2011) held that a non-solicitation agreement between a company and its vendor was not violated when the vendor posted a job on LinkedIn and an employee of the company applied and was hired for the position, because the employee initiated all major steps that led to the employment.
  • In the context of Facebook, a Massachusetts court ruled in Invidia LLC v. DiFonzo, No. 2012 WL 5576406 (Mass. Super. Oct. 22, 2012) that a hairstylist did not violate her non-solicitation provision by “friending” her former employer’s customers on Facebook because “one can be Facebook friends with others without soliciting those friends to change hair salons, and [plaintiff] has presented no evidence of any communications, through Facebook or otherwise, in which [defendant] has suggested to these Facebook friends that they should take their business to her chair.”
  • Similarly, in Pre-Paid Legal Services, Inc. v. Cahill, No. CIV-12-346-JHP, 2013 U.S. Dist. LEXIS 19323 (E.D. Okla., Jan. 22, 2013), a former employee posted information about his new employer on his Facebook page “touting both the benefits of [its] products and his professional satisfaction with [it]” and sent general requests to his former co-employees to join Twitter. A federal court in Oklahoma denied his former employer’s request for a preliminary injunction, holding that communications were neither solicitations nor impermissible conduct under the terms of his restrictive covenants
  • The Virginia Supreme Court in Allied Concrete Co. v. Lester, 285 Va. 295 (2013) upheld a decision sanctioning a plaintiff and his attorney a combined $722,000 for deleting a Facebook account and associated photographs that undermined the plaintiff’s claim for damages stemming from the wrongful death of his wife in a car accident. The deleted photographs showed plaintiff holding a beer while wearing a T-shirt with the message “I Love Hot Moms.” Subsequent testimony revealed that the plaintiff’s attorney had instructed his paralegal to tell the plaintiff to “clean up” his Facebook entries because “[they did] not want blowups of [that] stuff at trial.”
  • PhoneDog v. Noah Kravitz, No. C11-03474 MEJ, 2011 U.S. Dist. LEXIS 129229 (N.D. Cal. 2012) involved a dispute over whether a Twitter account’s followers constitute trade secrets even when they are publically visible. The court denied the defendant’s motion to dismiss and ruled that PhoneDog, an interactive mobile news and reviews web resource, could proceed with its lawsuit against Noah Kravitz, a former employee, who PhoneDog claimed unlawfully continued using the company’s Twitter account after he quit. 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 refused to do so. 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 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 parties ultimately resolved the dispute.
  • The Second Circuit Court of Appeals in Triple Play v. National Labor Relations Board, No. 14-3284 (2d. Cir. Oct. 21, 2015) affirmed an NLRB decision that a Facebook discussion regarding an employer’s tax withholding calculations and an employee’s “Like” of the discussion constituted concerted activities protected by Section 7 of the National Labor Relations Act. The Facebook activity at issue involved a former employee posting to Facebook, “[m]aybe someone should do the owners of Triple Play a favor and buy it from them. They can’t even do the tax paperwork correctly!!! Now I OWE money . . . Wtf!!!!” A current employee “Liked” the post and another current employee posted, “I owe too. Such an asshole.” The employer terminated the two employees for their Facebook activity. The Second Circuit affirmed the NLRB’s decision that the employer’s termination of the two employees mentioned Facebook activity was unlawful.

Enforcing Non-Compete Provisions in Franchise Agreements

In Seyfarth’s ninth and final installment, attorneys John Skelton, Erik Weibust and Anne Dunne focused on how to implement and enforce covenants against competition in the franchise context. A franchisor’s trade secrets, confidential information, and goodwill are often among its core assets, and implementing and enforcing covenants against competition are a common, and effective, means of protecting such business interests.

  • For franchisors, non-compete provisions, especially post-termination restrictive covenants, are an important part of the franchise relationship because franchisees are given access to a franchisor’s confidential information and trade secrets. Upon the termination, expiration or non-renewal of the franchise agreements, franchisors have a vested interest in preventing the use of such information in a competitive business and in protecting the integrity of the franchise network and their goodwill.
  • The enforceability of non-compete provisions is most often litigated in the context of a request for a preliminary injunction, and thus franchisors need to be able present evidence to establish: (1) all of the necessary elements, especially that the franchisor will suffer irreparable harm to its legitimate business interests and goodwill if the franchisee violates the terms of the agreed upon non-compete; and (2) that the restrictions are reasonable in time and scope.
  • The enforceability of non-compete provisions varies significantly by state, so national franchisors must ensure that restrictive covenants are drafted to comply with the various definitions of legitimate business interests and protected goodwill, and the different blue pencil, red pencil and reformation rules.

2016 Trade Secret Webinar Series

Beginning in January 2016, we will begin another series of trade secret webinars. The first webinar of 2016 will be “2015 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law” on January 28. 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. We are also tracking the latest on the movement to federalize trade secrets law. Please visit our dedicated page on the blog.

Seyfarth Trade Secrets, Computer Fraud & Non-Compete attorneys are happy to discuss presenting similar presentations remotely or in person to your groups for CLE credit.