Header graphic for print

Trading Secrets

A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Australia Non-Compete Primer: Protecting Your Business Interests Post-Employment

Posted in Non-Compete Enforceability, Restrictive Covenants, Trade Secrets

By Justine Turnbull and Cassie Howman-Giles

Given difficult economic times, protection of confidential information (including trade secrets) has become a greater priority for business in Australia. As a result, post-employment restraint litigation is increasingly common as employers attempt to protect their confidential information and restrain former employees from soliciting the business of their valued clients.

This note outlines the position in Australia regarding the legal enforceability of post-employment restrictions on conduct.

POST-EMPLOYMENT RESTRAINTS

Content

It is common in Australia for contracts of employment with executives and other key employees to contain terms restricting the activities of employees after the employment relationship ends, including prohibitions against: 

  • competition;
  • solicitation of clients, customers or suppliers; and
  • solicitation of employees or other workers.

The restraints are almost always limited to a defined restricted activity, a time period and an area of operation. These operational limitations are important when considering whether the restraints are legally enforceable.

‘Garden leave’ clauses, which allow an employer to instruct an employee serving their notice period to not attend work, are increasingly being viewed by courts as being equivalent to post-employment restraints.

Are restraints enforceable?

In Australia, post-employment restraints are generally unenforceable for public policy reasons unless they are reasonably necessary to protect the employer’s (or principal’s) legitimate business interests (usually confidential information or goodwill with customers or employees). There are two elements to be satisfied: firstly, the employer must have a legitimate interest in imposing the restraint and secondly, the scope of the restraint must be no wider than is reasonable necessary to protect that interest.

Legitimate business interests

Stifling competition from a former employee or preventing a valuable worker from being employed by someone else is not a legitimate interest. Recognised categories of legitimate interest include confidential information and customer or employee connections.

Reasonableness

In assessing the reasonableness of a restraint, a court will consider various factors including: 

  • types of activities restrained;
  • duration of restraint;
  • geographic coverage of restraint;
  • seniority and role of employee; and
  • whether consideration is provided in exchange for the restraint and, if so, the level of consideration.

Seniority and role of the employee are an important consideration when considering enforceability as they determine whether the employee:

  • had access to confidential information of the employer and/or customers;
  • were ‘customer facing’ and involved in building customer relationships; and
  • were the ‘human face’ of the business.

Enforceability of a restraint is determined at the time the restraint was agreed to (that is, in most cases, the time the employment contract was entered into).

Drafting restraints

Given the difficulty in determining whether a restraint will be found to be enforceable, ‘cascading clauses’ are often used to provide the court with a variety of options for the scope of the restrained activities, the period and the geographical coverage. Courts have a common law  power to delete the options so that the resulting clause is reasonable and enforceable (the ‘blue pencil test’).

In New South Wales, legislation empowers the Supreme Court of New South Wales to read down otherwise invalid restraints. This power is much broader than the common law power to simply sever certain options and can generally be relied on to obtain at least partial enforcement of a restraint in New South Wales.

Enforcement

The usual remedy sought by an employer when enforcing a post-employment restraint is an injunction, that is, an order of the Court restraining the employees from performing particular activities. The employer may also seek damages for any loss caused by a breach of the restraint.

 

With international offices in London, Shanghai, Melbourne, and Sydney, Seyfarth Shaw’s trade secrets, computer fraud, and non-competes practice group provides national and international coverage for companies seeking to protect their information assets, including trade secrets and confidential information, and key business relationships.  For more information on international trade secret and non-compete issues, please see our previous webinars When Trade Secrets Cross International Borders and Trade Secret and Non-Compete Considerations In Asia. We are pleased to announce that we will have  another international trade secrets and non-compete law update later this year with an Australia and EU focus. Follow the blog for more details.

Tips for Ensuring Your Competitors Do Not Steal the Valuable Fruits of Your Research and Development

Posted in Trade Secrets

By Katherine E. Perrelli and Erik W. Weibust

Every employer in the pharmaceutical industry is keenly aware of the need to ensure that a departing employee, a potential investor, or a business partner does not misappropriate the company’s valuable trade secrets.  If such valuable information falls into a competitor’s hands, they may use it to gain a significant market advantage.  Companies in the pharmaceutical industry face unique challenges because, while the fruits of their research and development are often protectable as trade secrets, companies are often required to communicate this valuable information to potential investors, partners, and governmental agencies, such as the U.S. Food and Drug Administration (FDA).  Because pharmaceutical companies spend an extraordinary amount of money on research to develop new products, understanding how much of this valuable information is protectable as a trade secret, and how best to protect such information, is key to the company’s success, regardless of whether its products are in early stage development or are well-established in the industry.  This article is the first in a series about protecting trade secrets and enforcing non-competition agreements in the pharmaceutical industry.

I. Trade Secrets Specific to the Pharmaceutical Industry

First we will address what kind of information you can protect and then we will explain how to protect it. 

Companies cannot protect information contained in patent applications and patents as trade secrets, because they must disclose that information publicly to the U.S. Patent and Trademark Office (PTO) and ultimately to the public at large.  However, there are many types of information at all stages of drug development, from the discovery phase through the commercial launch, that a company can protect as trade secrets.  Indeed, the most sensitive information is often developed early in the process, before the company can even request a patent.   

Early Research & Development.  In the discovery or pre-clinical phase, a company generates a great deal of useful information that it can protect as trade secrets.  Most of this information is intangible data, formulations, or processes, as opposed to tangible products.   This includes, for instance, a “vision plan” (i.e., brainstorming of possible drug candidates, plans of attack, etc.), data regarding which candidates are viable and which pathway to follow, and early manufacturing techniques that the company has considered.   

Product Development.  During the development phase, a company generally produces more tangible products, processes, and data.  For instance, during the clinical trials, a company can protect all of the following as trade secrets: lead candidate information, optimization data, bench trials, synthesis (organic or recombinant), formulations, safety and efficacy information, and clinical trial sites and data. 

Approval.  At the approval stage, a company can protect the following as trade secrets: FDA interactions, risk evaluation and management systems (REMS) data, current good manufacturing practices (cGMP), quality assurance and quality control (QA/QC), and ICH compliance.  While the Company will have to share much of this information with the FDA to obtain approval, as discussed below, it can nevertheless maintain its trade secret status. 

Post-Approval.  Following the approval of a new drug, the most sensitive information is generally commercial in nature, such as sales data, marketing plans, customer lists, general marketing feedback, cost of goods sold (COGS), supply chain information and integrity, sales forecasts, adverse drug events, new indications, life cycle management, and new plans for related development.    

II. Protecting Trade Secrets

Information and data from the early stages of new drug research and development is arguably the most sensitive, because its misappropriation can lead to the most severe consequences.  Specifically, a competitor could use misappropriated information to develop the same product and obtain patent protections before the original company even discovers that the information is missing.  This is particularly problematic if the company utilizing the misappropriated information has greater resources and can develop the drug more quickly.  Indeed, there are generally three motivations for misappropriating trade secret information during this early stage:  (1) to directly compete by racing to develop the drug first; (2) to indirectly compete by creating another drug candidate in the same therapeutic class or by creating a combination therapy; and (3) to apply for patent protection under the new “race to file” system and thereby block out the original developer from doing so.  Of course, information from the later stages is also highly important and must be protected, but that type of information—which is generally more commercial in nature—is less unique to the pharmaceutical industry, and there is not much commercial damage if the original company has patents in place. 

We recommend the following processes to our pharmaceutical clients in order to ensure that you protect your valuable trade secrets: Implement and enforce strict post-employment restrictive covenants (i.e., non-compete and non-solicitation agreements) and non-disclosure or collaboration agreements with third parties (i.e., potential investors and partners) (stay tuned for part 2 of this series).  In addition, you should create and disseminate internal and external policies and procedures (see part 3 of this series), including: 

  • Onboarding checklist and exit interview policies and procedures;
  • Confidentiality policies and procedures (including annual training programs and disciplining or termination of employees who improperly disclose or use confidential information);
  • Work from home policies and procedures;
  • Internal notebooks that are marked confidential and kept in secure spaces, password protected computers, or clean rooms;
  • USB usage policies and procedures;
  • Social media and internet usage policies and procedures; and
  • Cell phone usage policies.    

Similarly, you should consider hiring an outside professional to conduct annual or semi-annual trade secret audits to determine how easy or difficult it is to exfiltrate sensitive information.  You can even install mobile device management software that can protect sensitive information from being exfiltrated through mobile devices such as iPhones, and also permit the company to access and/or wipe company information if a mobile device is stolen or lost, or an employee leaves the company.  

Finally, you may still maintain trade secret status for information that you provide to the FDA despite your limited disclosure for regulatory purposes.  Federal regulations governing the FDA specifically exempt trade secret and confidential commercial or financial information from public disclosure by the FDA.  Likewise, the federal Freedom of Information Act provides that a federal agency, such as the FDA, may withhold information if it constitutes or contains trade secrets, and certain patent, trademark, and copyright regulations permit companies to redact trade secrets from public filings, subject to certain limitations.

Of course, the best way to ensure that trade secrets are not disclosed, intentionally or otherwise, is to define clearly what information constitutes trade secrets and what your expectations are as to how your employees and investors/partners will treat such information.  Moreover, you should only provide such information to those employees or potential investors/partners who need to know it, can be trusted, and are subject to strict post-employment restrictive covenants and/or non-disclosure agreements.  The Company should also have a commitment to, and culture of, enforcing these agreements and company policies, and ensuring that anyone giving access to trade secrets understands the serious consequences of disclosure.  This is not an easy task, but particularly in the pharmaceutical industry, where so much of a company’s fortunes can be tied up in its ideas and development plans, it is imperative that the company take pains to do this correctly.

California Attorney General Provides Some Guidance on Cybersecurity

Posted in Cybersecurity, Data Theft, Privacy

Cross-Posted from The Global Privacy Watch

With all the high-profile cybersecurity breaches that seem to be in the news lately, there is a plethora of “guidance” on cybersecurity. The Attorney General of California has decided to add to this library of guidance with her “Cybersecurity in the Golden State” offering. Cybersecurity is a pretty mature knowledge domain, so I am not quite sure why General Harris has determined that there needs to be additional guidance put in place. However, it is a good reminder of the things that regulators will look for when assessing whether or not “reasonable security” was implemented in the aftermath of a breach. And while there isn’t anything new in the guidance, what is informative is what is not there. Continue Reading

The Two Billion Dollar Zhu Zhu Pet, Sold for $5k: Puffing in Trade Secret Misappropriation Pleadings May be Perilous

Posted in Trade Secrets

Zealous advocacy, copious use of Latin, and literary devices advantageously applied to attack our adversaries’ arguments.  These are the cornerstones of American legal representation. 

These tools are part of the modus operandi of every lawyer.  This article may use dead language and assonance as running themes, but some lawyers take zealous advocacy ad infinitum.  Such attorneys are rarely even admonished by the courts, much less sanctioned.  That said, the Ninth Circuit has approved sanctions against an attorney for “misrepresentations” made in the complaint of a trade secret lawsuit.  

Wait a minute…the COMPLAINT?  The boiler-plate statement “upon information and belief” was somehow omitted?  After the trial is over and the bad, bad defendant is found to be not so bad after all, is not all that bluster and bravado in the complaint long forgotten? 

N.B.: Perhaps not. 

Although they are called “pleadings” for a reason, statements in the pleadings must be at least “grounded in fact” to pass muster as fact, even in the complaint.  Synonyms used to impress clients might better be left to other writing exercises, e.g., fantasy novels and fairy tales. 

In Heller v. Cepia LLC et al., 11-cv-1146 (N.D. Cal. 2011), Jason Heller claimed that Cepia, the makers of “Zhu Zhu Pets” robot toy hamsters, used the same features and accessories he had disclosed to toy manufacturers in his prototype designs.  Mr. Heller asserted, inter alia, that the manufacturers forwarded his trade secrets to Cepia, who then used his ideas in the Zhu Zhu Pets products.

In the 2011 complaint, Mr. Heller’s attorney alleged that visitor logs at one of the manufacturers “appeared to confirm” that Cepia had visited the manufacturer.  Mr. Heller then “confronted” the manufacturing company who “refused” to provide information about any relationship with Cepia.

Sort of benign, isn’t it?  Some visitor logs and a request for additional information that was denied.  Prima facie this does not seem to be sanctionable writing or behavior.  Yet the use of “appeared to confirm” and “confronted” are why Mr. Heller’s attorney was sanctioned.

This puffing seems rather tame in comparison to the damages Mr. Heller sought: over $2,000,000,000.  Yes, two Billion.  For a toy hamster?  Such a damage request, seemingly made rather boldly across several pages in the complaint, appears somewhat less bona fide than something couched with “appeared,” and, remarkably, did not even rate a de minimis or dicta mention by the court as raising any cause for concern.

No wonder there are so many cries for tort reform.

Fast forward to a year later, where, on joint stipulation, the complaint was dismissed against Cepia with prejudice.  Per se no sanctions, right? 

Wrong.

In part of the quid pro quo for the dismissal stipulation, Cepia received Mr. Heller’s acknowledgement that “he did not find any evidence that Cepia had any access to any of Mr. Heller’s hamster toy ideas or information” in the documents and evidence produced during discovery.

First mistake: saying, “There is nothing in any of the evidence showing the defendant was bad.”  Because then the complaint looks like, oh, a big lie.

Second mistake: letting a client say, “There is nothing in any of the evidence showing the defendant was bad.”  Because then it looks like the attorney fabricated the complaint ab initio.  And yes, now sanctions may be apropos, in this case to the tune of $5,000.00 from the Northern District of California.

Mr. Heller’s attorney appealed, arguing in his appellate brief that “in hindsight, my wording could have been better.”  Admitting the wording was misleading is likely a third mistake. 

Mr. Heller’s attorney then tried to save the day, ibid, by arguing that his letter to one of the manufacturers constituted a “method of confronting them on the issues.”

Fourth mistake: unless you are a Court of Appeals for the Federal Circuit judge, you are not allowed to construe the meaning of words de novo.

Confront means “to oppose or challenge (someone) especially in a direct and forceful way” or “to directly question the action or authority of (someone).” (Merriam-Webster).

The complaint implied that someone went to the defendant’s place of business and spoke to them face-to-face, or challenged them to prove they were innocent.  Nope.  His attorney dashed off a quick note saying, in essence, “Hey, thanks for the visitor logs, can you tell us a little more about your relationship with Cepia?”  The defendants did not answer.  There was no confrontation, and the visitor logs didn’t confirm any visits by Cepia.

In reality, the only mistake here was somebody thinking it was a good idea to make the defendants appear uncooperative and/or hiding the truth.  Had the complaint contained the facts, instead of something that sounded a little more ominous, the lawsuit would have still gone forward exactly as it did. 

Everything except for the sanctions.

For more on Heller v. Cepia, see the Law360 Article.

Recent Decision Affirms Significant Protections for Confidential Information in United Kingdom

Posted in International, Practice & Procedure, Trade Secrets

By Ming Henderson and Razia Begum

With the increasing number of disputes and client queries regarding confidential information in the United Kingdom, the recent case of Personnel Hygiene Services Ltd & ors v. Rentokil Initial UK Ltd , EWCA Civ 29, 29 January 2014, serves as a useful reminder of the extensive protection of confidential information. 

The Court of Appeal, considered whether the obligations under a confidentiality agreement continued to apply after the parties entered into a second agreement which contained no such express obligations. The court upheld the first instance decision, finding that the confidentiality obligations continued to apply to protect trade secrets ( in this case, information relating to customers and services).  Although not a landmark decision, this may seem a surprising judgment , particularly as the second agreement contained an entire agreement clause which would usually be interpreted as replacing all previous contractual arrangements. The court made no reference  to this point in the judgment. 

In this case, Rentokil (the party in receipt of the confidential information) appealed against an injunction preventing it from contacting customers of UK Hygiene (the provider of the confidential information). UK Hygiene had terminated the second agreement in order to deal directly with the ultimate customers. Following this, Rentokil directly approached UK Hygiene’s customers with a  goal to provide services to them using, in part, confidential information (about customers and services) under the first agreement.

Key takeaway messages:

  • Extensive protection: Although we would always recommend inserting strong confidential information clauses that limit use after the term of the agreement or for other purposes, this decision provides comfort to those providing information to potential competitors that “confidential information” with a significant risk of misuse will be protected.
  • Prevention is better than cure: Though the point was not specifically raised in this case, companies should, if they are not already doing so, physically protect their confidential information (e.g. by installing passwords, limiting access by other means, etc.) and seek to retain control of it. This can be a far more effective and less costly approach in the long-term than litigating over confidential information in the hands of third parties. 

With international offices in London, Shanghai, Melbourne, and Sydney, Seyfarth Shaw’s trade secrets, computer fraud, and non-competes practice group provides national and international coverage for companies seeking to protect their information assets, including trade secrets and confidential information, and key business relationships.

Computer Fraud and Abuse Act Claims in the First Circuit – Will the Narrow Approach Prevail?

Posted in Computer Fraud, Computer Fraud and Abuse Act

The scope of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030, remains unsettled in the First Circuit after two decisions issued just weeks apart adopted differing approaches to the treatment of such claims.

The CFAA prohibits the intentional access of a computer without authorization or exceeding a party’s authorization to obtain information from a protected computer.  As we have previously reported here, courts are split on the interpretation of what constitutes unauthorized access or access that exceeds authorization.    In some jurisdictions, courts take a narrow view, limiting “unauthorized access” to true “hacking” cases, where a party improperly gains access to documents he or she is not authorized to obtain.  On the other hand, certain circuits have favored a broad interpretation that would prohibit a party from accessing documents to which he or she typically would have access, if such access were for an improper purpose (for example, an employee who misappropriates documents to which she legitimately had “technical access” for the benefit of a competitor).

At the beginning of December, Judge Denise Casper of the U.S. District Court for the District of Massachusetts granted in part a preliminary injunction in Enargy Power Co. Ltd. v. Wang, C.A. no. 13-cv-11348-DJC, based on an alleged violation of the CFAA.  The plaintiff had alleged that the defendant, a former employee, had instructed his assistant to encrypt certain files on the employer’s computer server, and directed her to transmit those files to him, all in violation of the CFAA.  Citing Advanced Micro Devices, Inc. v. Feldstein, et al., C.A. No. 13-40007, which we previously reported on here, Judge Casper noted that the defendant’s actions “employed an element of deception in that he acted without his employer’s consent or knowledge . . . and using his assistant as a conduit, who had every reason to trust that [the defendant] was acting within the scope of his authorization,” and accordingly those actions likely exceeded the scope of his authorization. 

Judge Casper’s reliance on the “means of a deception” language used in Feldstein suggests a trend in the First Circuit to limit the previously adopted broad interpretation to those cases where a defendant exceeds his authorization through some deceptive act with fraudulent intent.  It remains unclear whether a garden-variety misappropriation case, in which an employee obtains documents for the purpose of competing with his or her employer but without “hacking” into the employer’s computer servers, would be viewed as sufficiently “deceptive” so as to constitute a violation of the CFAA under the Feldstein and Enargy line of cases. 

Another case decided less than two weeks later took an even narrower view.  In Verdrager v. Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Judge Peter Lauriat of the Massachusetts Superior Court analyzed a law firm’s CFAA counterclaim against its former associate, who had alleged sex discrimination and retaliation.  The firm, Mintz Levin, alleged that the associate had conducted searches for documents related to her case on the firm’s document management system, and forwarded relevant documents to herself or her attorney.  Determining that the associate clearly had access to the documents she viewed and transmitted, Judge Lauriat found that “it was not the obtaining of the documents that creates the basis for [Mintz Levin’s] claims against [the associate], but for what use she sought to obtain them.”  Judge Lauriat held that the associate’s disloyalty could not form the basis of a CFAA violation, and that Mintz Levin’s failure to restrict the associate’s access to sensitive documents related to her case “further weaken[ed] [Mintz Levin’s] position” that the associate had violated the CFAA, and granted summary judgment in the associate’s favor.

In light of the unsettled landscape of CFAA actions in the First Circuit, employers must remain vigilant.  For example, where employers have reason to believe an employee may be using confidential documents for an improper purpose, immediate steps should be taken to restrict the employee’s ability to access such documents.  However, until Congress or the Supreme Court settles the matter for good, it remains unclear how courts in the First Circuit will treat CFAA claims against employees accused of misappropriation.

Trade Secrets: A New Framework

Posted in Cybersecurity, Trade Secrets

As a special feature of our blog –special guest postings by experts, clients, and other professionals –please enjoy this blog entry by Pamela Passman, President and CEO for the Center for Responsible Enterprise and Trade (CREATe.org)

-Robert Milligan, Editor of Trading Secrets

By Pamela Passman

Around the globe, dozens of countries are considering or enacting legal reforms to grapple with the growing misappropriation of trade secrets. As these changes lumber forward, it remains to be seen how new laws will be enforced, and whether legal remedies will offset the losses from theft.

In this uncertain landscape, companies must invest in practical, preventive measures to address the risk to their valuable intellectual assets, according to a new report, “Economic Impact of Trade Secret Theft: A framework for companies to safeguard trade secrets and mitigate potential threats.”

The report by the Center for Responsible Enterprise and Trade (CREATe.org) and PriceWaterhouseCoopers provides a fresh look at the problem of trade secret theft — including an estimate of the magnitude of the problem and analysis of the main types of perpetrators, their motivations and means. It also develops several scenarios suggesting how the effectiveness of regulation, the openness of the internet, and cyber threats could play out and impact the environment for the protection of trade secrets in the coming 10-15 years.

Practical measures in an uncertain world

For companies, this analysis provides a backdrop for addressing the immediate and pressing challenge: How to protect trade secrets in a rapidly changing and risky global marketplace?

The report offers companies an original framework for protecting valuable competitive information that has been developed through experience, investment and research.

A series of practical measures, the report argues, should be adopted throughout the company’s operations — and shared or required of contractors and business partners throughout the global supply chain, to the greatest extent practical.

The five-part framework — illustrated with the help of a fictional company, ABC Widget— starts with making an inventory of trade secrets.

ABC is billed as a large, global, publicly traded, U.S.-based alternative energy company with a widely dispersed global supply chain.

Get a handle on the goods

The inventory process starts with “a cross-functional team of senior executives, business unit leaders and corporate functional leaders” who are asked to make lists of key company information in five categories: product information, research and development, critical and unique business processes, sensitive business information, IT systems and information.

“Participants arrive at the working session with their lists, which they present, discuss, and compile into a master list that aligns with ABC’s views about what constitutes a trade secret. The meeting results in a categorized list of valuable trade secrets reflecting critical elements of ABC’s business model.”

With that, a team of security professionals moves into action:

“Using tools that search based on keywords and other identifiers, trade secrets from the master list are found on various servers, in files with non-relevant file names, and on shared-file sites created for reasons unrelated to the trade secret itself. The results for the location of each trade secret found are noted on the master list, to be incorporated later into the vulnerability assessment.”

The security team also works with the other business leaders to find trade secrets that are not digitized — things like hand written notes and prototypes — in an effort to make the inventory as comprehensive as possible.

Pick your poison

The second step is to assess the “threat actors” that present the greatest risk to the company’s assets, given its specific industry and areas of operation—and how company security systems measure up.

Various perpetrators — competing companies, transnational criminal organizations, “hacktivists,” nation-states and “malicious insiders” in the company have various means of stealing trade secrets and a variety of motivations, including pure profit, nationalistic advantage and political or social goals.

Companies involved in military technologies or dual-use technologies that have civilian and military applications, for instance, will need to factor in the threat from governments that have been known to steal information through cyber attacks or by dealing with “malicious insiders” who work for the company.

Where to put the money

From there, the report walks through level three of the framework — ranking trade secrets according to the impact that their theft would have on the business.

Step four is to assign a dollar cost to those hypothetical losses. This includes direct impact on performance, including lost sales revenue and market share. It also includes indirect losses, where there is damage to investor confidence, customer trust or other secondary impacts.

So, in the case of the fictional ABC alternative energy company, the report explores the indirect dollar impact from stolen source code:

ABC… investors may assert that the company lacks appropriate controls and protection processes to support sustainable growth, deciding to sell shares despite the absence of direct financial consequences of the theft. Also, if discussion of the theft trends on social media blogs or is covered by traditional media, it can influence long-term customers’ buying decisions. Similarly, the theft may erode the trust of the company’s key business partners.

After assigning costs to the damage, the company is in a position to make decisions and investments — step five — to invest its resources to mitigate the most significant potential threats to trade secrets.

This, of course, is the bottom line: Companies need to understand, assess and embrace their trade secrets, and develop security around them. In the global economy, this security is an investment, rather than a cost.

###

Pamela Passman is President and CEO of the Center for Responsible Enterprise and Trade, a non-profit organization working with companies to protect intellectual property and prevent corruption in global supply chains. Previously, Pamela was the Corporate VP and Deputy General Counsel, Global Corporate and Regulatory Affairs at Microsoft Corp and has practiced law with Covington & Burling (Washington, DC) and Nagashima & Ohno (Tokyo).

Upcoming Client Webinar: Employee Social Networking: Protecting Your Trade Secrets In Social Media

Posted in Social Media, Trade Secrets

On Thursday, April 24, 2014 at 12:00 p.m. Central, Seyfarth’s second installment of its 2014 Trade Secrets Webinar series will address the relationship between trade secrets and social media. 

The Seyfarth panel will specifically address the following topics:

  • Defining and understanding trade secrets in social media, including a deeper dive into how courts are interpreting ownership of and whether social media sites constitute property and preventing trade secret misappropriation or distribution through social media channels.
  • Discussing the National Labor Relations Board’s treatment of employer social media policies, whether it applies to you, and what steps should be taken to avoid potential penalties for violating NLRB policy.
  • Analyzing judicial treatment of ownership of social media handles, pages, and accounts and how developing internal company policy and/or contracts can obviate expensive litigation.
  • Discussion and analysis of recent employee privacy legislation, including discussion of the Trade Secrets Clarification Act, and how it may impact policies dictating mandatory turnover of social networking passwords and employee privacy concerns.

 

 

 

There is no cost to attend this program, however, registration is required. 

If you have any questions, please contact events@seyfarth.com.

*CLE: CLE Credit for this webinar has been awarded in the following states: CA, IL and NY. CLE Credit is pending for the following states: GA, NJ, 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.

Beware: Over-Inclusive Non-Compete Agreement May Be Unenforceable

Posted in Non-Compete Enforceability, Restrictive Covenants

An employment agreement non-competition provision stated that, for 18 months after termination, the employee shall not become employed by or act “directly or indirectly, as an advisor, consultant, or salesperson for, or become financially interested, directly or indirectly, [in an entity] engaged in the business of selling flavor materials.” Earlier this month, the North Carolina Court of Appeals held that the provision was impermissibly broad. Horner Int’l Co. v. McKoy, Case No. COA 13-964 (N.C. App., Mar. 4, 2014).

Summary of the case

McKoy, a plant manager in North Carolina, was a party to an employment agreement with Horner, a manufacturer of flavor materials for use in food and tobacco products. The agreement contained non-competition and trade secret confidentiality clauses. McKoy had been in the food processing and flavor industry for decades. He resigned after six years with Horner and went to work in New Jersey for a company that manufactured food and beverage flavoring items. Horner sued him and sought preliminary injunctions with respect to both clauses. Earlier this month, the trial court’s ruling — denying the motion for an injunction with respect to the non-compete but granting the injunction motion relating to the confidentiality provision — was affirmed on appeal.

The appellate court’s rulings

The appeals panel stated that it was guided by the familiar rules that employee covenants not to compete are disfavored but are enforceable if they are no broader than necessary to protect the employer’s reasonable business interests. The non-competition covenant here had no geographic limitations and was not restricted to performance of tasks similar to those McKoy performed for Horner. Further, the covenant purported to prohibit him from associating with any company selling flavoring materials even if that company’s products did not compete with Horner’s. Finally, because he was precluded from investing “directly or indirectly” in such a company, the appellate court concluded that the non-compete was intended to prevent him even from owning shares in a mutual fund that was a Horner stockholder. For all of these reasons, the court held that the covenant exceeded permissible boundaries.

The injunction relating to the confidentiality clause, however, was upheld. North Carolina law permits injunctions for actual or threatened misappropriation of trade secrets the employee knows and has the opportunity to use or disclose. McKoy had access to Horner’s trade secrets. By averring “with great detail and specificity the information Defendant has allegedly provided to his new employer,” Horner met the “sufficient particularity” pleading standard.

Takeaways

Non-compete covenants must be limited in scope not only with respect to time and geography, but also concerning the activities which are prohibited. Horner teaches that an employer’s use of virtually limitless phrases such as “directly or indirectly” and “financially interested” can be risky. Also, purporting to extend the covenant to services beyond those actually performed for the employer, and locales where the employee did not work, may doom the enforceability of the non-compete. Violation of a confidentiality clause may be enjoined, however, if the employee’s access to the employer’s trade secrets is demonstrated, they are described in sufficient detail, and the likelihood the employee may exploit or divulge the confidential information is shown.

Global Business 101: Hire Your Competitor as a “Consultant”

Posted in Espionage, Trade Secrets

Why spend millions of dollars employing a bunch of bright, talented employees to develop your business when you can just hire a worker from your rival to steal all their research?  As on every test you took in school, isn’t getting the right answer more important than figuring out how to solve the problem?

Competition for business is fierce.  Small price differences or lower development costs can win your company any number of contracts.  How can one effectively compete in today’s marketplace?

Some companies, in a word, cheat.

Korea-based KCC Silicones hired chemist Michael Agodoa of Michigan-based rival Wacker Chemical Corp. as a consultant in 2010.  Rather than taking years to determine the proper formulas and millions in experimentation costs on plastics used in extrusion, silicone mold making materials, and elastomers, KCC employed Mr. Agodoa to steal over 100 of Wacker’s trade secrets.

Isn’t this what business people call a “win-win” situation?   Mr. Agodoa probably made enough extra cash to have a nice vacation or two.  KCC didn’t have to waste any time testing and certainly received a large “ROI” (return on investment).  Business, after all, is business.

Wacker Chemical spent two decades developing and refining their manufacturing methods.  Mr. Agodoa’s defense was that he shared Wacker’s knowledge and experience “in the spirit of scientific cooperation” over a period of two years.  In other words, KCC bought eighteen years’ worth of intelligence for the price of one consultant.

Facing up to forty-six months behind bars, Mr. Agodoa plea-bargained his way to a two-year federal prison sentence and a $7,500.00 fine.  Wacker Chemical’s losses were estimated at more than $15 million.

Trade secrets are valuable weapons in today’s global marketplace.  Trade secrets are often very costly to develop, and may provide the competitive edge for your company.  Although Mr. Agodoa only faced federal trade secret charges, the addition of even harsher criminal penalties under the Economic Espionage Act will hopefully make employees think twice about taking that moonlighting “consulting” job.

Federal prosecution for trade secret theft is a “closing the door after the horse has left the barn” approach.  Yes, it is nice to know that your trade secrets are protectable and additional statutes are increasing that protection.  As employers, however, it may be prudent to make your employees aware of the potential penalties before they decide to sell your proprietary information.  The Office of the National Counterintelligence Executive is a good place to look for materials that may be useful in your workplace.

As with students of every age, the temptation is to take the path of least resistance.  Just as with students, the reward is potentially great; your company could win that lucrative contract or catch up to the competition in a short amount of time.  Just find a way to “borrow” your competitor’s know-how.

With trade secret theft, and the Economic Espionage Act, the penalty is not a few days of vacation from school and a meeting with some toothless academic honor board.

You, like Mr. Agodoa, get to head straight to a federal penitentiary.

For more details on U.S. v. Agodoa, 13-cr-20525, (E. D. Mich. 2014), see the Rubber News article and the Bloomberg News article.