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Trading Secrets

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

Non-Compete Injunction Denied, Ninth Circuit Remands For Reconsideration, But District Court Denies It Again, Declines Equitable Tolling

Posted in Non-Compete Enforceability, Practice & Procedure

Untitled-1As directed by the court of appeals, a district court judge reconsidered his denial of a non-compete covenant case injunction but reached the same result on reconsideration.  He also stated why he would not have extended the covenant’s expiration date even if he had been inclined to enter the injunction.  Ocean Beauty Seafoods LLC v. Pacific Seafood Group Acquisition Co., No. C14-1072 (W.D.Wash., Oct. 30, 2014) (Ricardo S. Martinez, J.), remanded, No. 14-35950 (9th Cir., May 8, 2015), on remand, (W.D. Wash., June 25, 2015).

Status of the case.  Last October, a federal district court judge in Seattle denied a motion for preliminary injunction in a lawsuit alleging violation of a non-competition covenant.  The unsuccessful movant appealed to the Ninth Circuit Court of Appeals.  Concluding that the lower court had made a number of factual, legal and procedural errors, the appellate court remanded for the district court’s reconsideration.  Last month, the Seattle judge again declined to issue an injunction order.  He also explained why, if he had issued the order, he would not have equitably tolled expiration of the one-year covenant.

Background When Michael Coulston first became a Pacific Seafood employee in January 2011, he signed a covenant barring him, for 12 months after termination, from engaging in business with a competitor of the company in any “geographic area” in which it does business.  The covenant was governed by Oregon law.  In July 2014, he left Pacific and went to work for Ocean Beauty.  Both companies are seafood processors and distributors on the West Coast.  Pacific sued Ocean Beauty and Coulston.

Judge Martinez’s initial denial of a preliminary injunction.  In his 2014 decision, Judge Martinez determined that Pacific Seafood (a) had failed to demonstrate a likelihood of success on the merits of its claim against Ocean Beauty and Coulston, and (b) had failed to show that it would sustain irreparable harm absent injunctive relief.  There was no definition of “geographic area” in the covenant.  The judge said it appeared to encompass the entire west coast of the U.S. which he found to be unreasonable since Coulston had a more limited territory.  Moreover, Judge Martinez held that Coulston was not shown to have diverted, or was likely to divert, any business to Ocean Beauty based on his knowledge of Pacific’s business practices.

The Ninth Circuit’s decision.  Marked as a “Memorandum” and “Not for Publication,” the appellate court’s ruling took issue with Judge Martinez’s findings, conclusions and denial of Pacific Seafood’s motion to supplement the record.  According to the appeals court, Coulston’s territory while he worked for Pacific was more extensive than the district court indicated and, moreover, Oregon law does not render a covenant automatically unenforceable even if it covers an overly broad territory.  Further, Pacific was held to have a protectable interest in information Coulston possessed regarding Pacific’s “marketing plans and product allocation.”  The Ninth Circuit also noted that the trial court seemingly did not appreciate the difference between evidence of actual harm and a showing of a likelihood of harm.  The trial court’s denial of Pacific’s motion to supplement the record was said to be an abuse of discretion as well.  The case was remanded to Judge Martinez for reconsideration.  Finally, in a footnote, the appellate court directed the district court, if it grants a preliminary injunction, to consider equitably extending the non-compete’s one-year term.

Judge Martinez’s second denial of an injunction.  On remand, the judge said he “remains unconvinced” that “the geographic scope of the non-compete agreement is reasonable.”  Further, he stated that the record before him did not persuade him that “there is a substantial risk Ocean Beauty would be able to divert a significant part of Pacific Seafood’s business given Mr. Coulston’s knowledge” or that he was “likely to divert business to Ocean Beauty based on any such knowledge.”  So, Judge Martinez again found a failure by Pacific to show that it would suffer irreparable harm in the absence of an injunction.

In light of the Ninth Circuit’s footnote, and recognizing that the appellate court might disagree with his second denial of an injunction, Judge Martinez discussed equitable tolling.  The issue potentially was relevant because of the imminent expiration of Coulston’s one-year non-compete.  The judge noted that the Oregon Supreme Court, the Ninth Circuit and many other courts of appeal have declined to extend a covenant that has expired or is about to expire, and he said that the record before him warranted a similar ruling in this case.

Takeaways.  Counsel drafting, seeking to enforce, or defending against an effort to enforce, a non-compete should consider the following:

  • Equitable tolling.  A non-competition agreement often expresses the parties’ intent that the employer shall be entitled to an extension of the injunction period equal to the length of time during which the ex-employee engaged in illicit competition.  The non-compete in the Ocean Beauty litigation did not include such a provision.  Arguably, Pacific Seafood’s request for tolling asked the court to amend the covenant by adding a term to which Coulston had not consented.  But a contrary contention could be made: assuming the covenant was enforceable, failure equitably to toll would deprive Pacific of the benefit of its bargain which was for 12 months’ freedom from Coulston’s competition.  A party seeking equitable tolling should present persuasive, admissible evidence justifying an extension of the non-compete period.
  • Geographic scope and time limit of the non-compete.  Larger and longer are not necessarily preferable when it comes to the area and temporal provisions set forth in a restrictive covenant.  If excessive, they may cause unenforceability.  Geographic scope and time limit terms may approach, but they should never exceed, the maximums that are reasonable under the circumstances.
  • Be gracious to a judge whose prior opinion has been remanded for reconsideration.  Judge Martinez emphasized that he disagreed with the appellate court’s order, and he did not take kindly to what he viewed as Pacific Seafood rubbing his face in the remand order.  His second opinion expressed annoyance — to say the least — at what he called Pacific’s “rejoic[ing] in reiterating the numerous ‘errors’ found by the Ninth Circuit.”  He also took “exception to the tone” of Pacific’s briefs and Pacific’s “apparent lack of respect for this Court and its prior findings.”  If Pacific wanted to generate sympathy for its legal position, understatement might have been more effective.  However, he might have reached the same result in any event.

 

Hawaii Bans Non-Compete and Non-Solicit Agreements with Technology Workers

Posted in Legislation, Non-Compete Enforceability, Practice & Procedure, Trade Secrets

shutterstock_136762520Hawaii joined the small list of states that prohibit certain non-compete agreements with employees.

On June 26, 2015, Hawaii’s governor David Ige signed Act 158 which voids any “noncompete clause or a nonsolicit clause in any employment contract relating to an employee of a technology business.”

The Act defines “technology business” as one that “derives the majority of its gross income form sale or license of products or services resulting from its software development or information technology development, or both.”  It excludes any business that is part of the broadcast industry or any telecommunications carrier.  “Information technology development” is defined under the Act as “the design, integration, deployment, or support services for software” and “software development” is defined as “the creation of coded computer instructions.”

The Act defines a “noncompete clause” as one that “prohibits an employee from working in a specific geographic area for a specific period of time after leaving work with the employer.”

“Nonsolicit clause” is defined as one that “prohibits an employee from soliciting employees of the employer after leaving employment with the employer.” Curiously, there appears to be an open issue as to whether customer non-solicit provisions are covered by the new Act, though proponents of the Act may argue that customer non-solicits are covered under the “noncompete clause” language.

The stated purpose of the Act “is to stimulate Hawaii’s economy by prohibiting noncompete agreements and restrictive covenants that forbid post-employment competition for employees of technology businesses.”

In passing the bill, the Hawaii legislature found:

[R]estrictive employment covenants impede the development of technology businesses within the State by driving skilled workers to other jurisdictions and by requiring local technology businesses to solicit skilled workers from out of the State.  Eliminating restrictive covenants for employees of technology businesses will stimulate Hawaii’s economy by preserving and providing jobs for employees in this sector and by providing opportunities for those technology employees to establish new technology companies and new job opportunities in the State.

A restrictive covenant not to compete with a former employer imposes a special hardship on employees of technology businesses as these highly specialized professionals are trained to perform specific jobs in the industry.  Because the geographic area of Hawaii is unique and limited, noncompete agreements unduly restrict future employment opportunities for technology workers and have a chilling effect on the creation of new technology businesses within the State by innovative employees.

Hawaii has a strong public policy to promote the growth of new businesses in the economy, and academic studies have concluded that embracing employee mobility is a superior strategy for nurturing an innovation-based economy.  In contrast, a noncompete atmosphere hinders innovation, creates a restrictive work environment for technology employees in the State, and forces spin-offs of existing technology companies to choose places other than Hawaii to establish their businesses.

The effective date of this law is July 1, 2015. It does not affect any existing noncompete or nonsolitication clauses in employment contracts for technology businesses prior to July 1, 2015.

Non-competes with other Hawaii employees remain enforceable as long as they pass a reasonableness analysis under Hawaii law.  The legislature found in the new Act “that employer trade secrets are already protected under the [sic] federal Uniform Trade Secrets Act and under section 480-4(c)(4), Hawaii Revised Statutes; therefore, the benefits to the employer from noncompete or nonsolicit agreements are duplicative and overreaching protections that may unreasonably impose undue hardship upon employees of technology businesses and the Hawaii economy.” The existing Act permits non-disclosure covenants with employees. Accordingly, employers should still use those covenants, even with technology workers.

Companies conducting business in Hawaii in the technology sector should review their employment contracts to determine whether they need to revise their agreements to comply with this new law.

Is An Offer Of At-Will Employment Adequate Consideration For A Non-Compete? Recent Court Rulings Split Three Ways

Posted in Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants

shutterstock_192971546Three very recent decisions reflect the irreconcilable division of judicial authority regarding the adequacy of at-will employment as the sole consideration for an otherwise valid non-compete.  Compare (a) Standard Register Co. v. Keala, No. 14-00291 (D. Haw., June 8, 2015) (adequate under Hawaii law) (“majority rule”), with (b) Hunn v. Dan Wilson Homes, Inc., Nos. 13-11297 and 14-10365 (5th Cir., June 15, 2015) (inadequate under Texas law) (“minority rule”), with (c) McInnis v. OAG Motorcycle Ventures, Inc., 2015 IL App. (1st) 130097 (June 25, 2015) (2-1 ruling based on the Fifield rule) (“middle ground”).

Status of the Standard Register case.  Several at-will employees of Standard, a distributor of promotional marketing products, executed non-competes and then resigned and went to work for an alleged competitor.  Standard sued them.  Judge Seabright bifurcated and decided the adequacy-of-consideration issue.  Although the non-competes contained an Ohio choice-of-law provision (Standard is an Ohio corporation), he held that Hawaii had the most significant relationship to the parties and the dispute.  So, Hawaii law applied.

Hawaii’s Supreme Court has not decided whether, under that state’s law, “continuing at-will employment is, by itself, sufficient consideration for an otherwise reasonable non-competition agreement entered into during a term of employment (and not at the beginning of employment).”  Judge Seabright observed that courts in several states hold that consideration in such a situation is insufficient, but “the clear majority position is to the contrary.”  The court concluded that “the Hawaii Supreme Court would not require additional consideration beyond continuing at-will employment.”

Status of the Hunn case.  Texas Bus. & Com. Code § 15.50(a), provides that “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.”  Lack, an at-will employee of Hunn’s architectural design company, signed a non-compete.  Lack transferred to his home computer from the company’s computer a copy of confidential plans and specifications relating to a project on which Lack was working for a client of Hunn’s (the company permitted employees to take files home to work on them).  Then, Lack resigned, was hired by the client, and allegedly used the files to complete the project.  Hunn sued Lack for breach of the non-compete, violating the Computer Fraud and Abuse Act, and unlawfully disclosing the company’s confidential information to Hunn’s client.

The Fifth Circuit held that a contract for at-will employment does not qualify as “an otherwise enforceable agreement” under the Texas statute “because the promise of continued employment in an at-will contract is illusory — neither the employer or employee is bound in any way.”  Therefore, the non-compete lacked consideration and was unenforceable under Texas law.  That court also rejected Hunn’s other claims (see below).

Status of the McInnis case.  For three years, McInnis was an employee of OAG, selling Harley-Davison motorcycles.  He quit OAG and went to work for a competitor for one day.  He then returned to OAG which required him to sign a non-compete and confidentiality agreement as a condition of his re-employment.  He resigned 18 months later and resumed employment with the competitor.  OAG sued and sought an injunction.  It was denied on the ground that the covenant lacked adequate consideration because he was an at-will employee employed for less than two years.  A scathing dissent challenged the majority’s rationale.

The conflict among the states. 

The majority position:  According to Judge Seabright in Standard Register, courts in Maryland, Ohio, Vermont, and Wisconsin reason that an employer’s forbearance in exercising a legal right — here, not terminating an at-will employee — is valid consideration for a non-competition covenant and is not illusory.  Further, he referenced the Restatement Third of Employment Law (April 2014 Proposed Final Draft), § 8.06 comment e, and Reporters’ Notes.  Comment e asserts that “Continuing employment of an at-will employee is generally sufficient consideration to support the enforcement of an otherwise valid restrictive covenant.”  The Reporters’ Notes to comment e cite rulings to this effect by courts in more than 20 states.

The minority position:  Citing cases from Minnesota, South Carolina, and Washington, Judge Seabright said that several jurisdictions hold that “continued at-will employment, standing alone, is insufficient consideration for a non-competition agreement entered into during current employment.”  He said that the Restatement Third of Employment Law identifies six jurisdictions, besides those three, that concur with the minority view.

Middle ground:  According to Judge Seabright, the Restatement identifies eight states — including Illinois — that endorse a middle ground, namely, that consideration is sufficient only if the employee is retained for a substantial period after the non-compete is signed.  A leading Illinois case (there is no Supreme Court decision directly on point) is Fifield v. Premier Dealer Services, Inc., 2013 Ill. App. (1st) 120327, holding that continuous employment for two years or more constitutes reasonable consideration for a restrictive covenant.  The majority in McGinnis followed that ruling.

Justice Ellis, dissenting, rejected as indefensible a bright-line two-year rule.  He insisted that a determination of the adequacy of consideration requires a case-by-case analysis in order to protect “at-will employees from the whim of the employer.”  Here, in his view, it was relevant that McGinnis signed the covenant at the time he was hired, that the period of McGinnis’s post-covenant employment (18 months) was substantial, and that he left OAG voluntarily.  The jurist said he could understand the term “additional consideration” in the instance of an existing employee but questioned the logic of requiring “additional compensation” — additional to what? — for a newly hired employee.  He also noted that three of the four federal judges deciding post-Fifield cases predicted that the Illinois Supreme Court would reject the bright-line rule.

Two other issues in Hunn. 

CFAA.  One count of Hunn’s complaint against Lack accused him of violating the Computer Fraud and Abuse Act.  The appellate tribunal held that since Lack was employed by Hunn when he transferred the files to his home computer, and since employees were permitted to transfer files to their home computers, Lack did not exceed authorized computer access.  Therefore, there was no CFAA violation.

Disclosure of trade secrets and other confidential information.  Hunn accused Lack of post-employment disclosure of Hunn’s confidential plans and specifications.  But the Fifth Circuit disagreed because the plans had been disclosed to the client with Hunn’s consent —  through  its agent, Lack — during Lack’s employment by Hunn.

Takeaways. 

  1. Consideration. Determination of the sufficiency of consideration for a non-compete executed by an at-will employee may turn on which state’s law applies.  If the relevant facts and circumstances permit, an employer should include a choice-of-law provision designating the law of a state where at-will employment is adequate consideration.  However, as the Hunn case illustrates, choice-of-law clauses are not always honored.
  2. Confidential information. An employer who gives employees access to confidential information should require them to sign written commitments (a) to return or delete the information promptly after termination of employment, and (b) under no circumstances to use or disclose the information other than in furtherance of the employer’s business.

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

Posted in Practice & Procedure, Trade Secrets

shutterstock_183065225We are pleased to announce the webinar “How and Why California is Different When it Comes to Trade Secrets and Non-Competes ” is now available as a podcast and webinar recording.

In Seyfarth’s fifth installment of its 2015 Trade Secrets Webinar series, Seyfarth attorneys 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.

As a conclusion to this well-received webinar, we compiled a list of key takeaway points, which are listed below.

  • 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. April 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.

Corporate Espionage: Not Your Typical Sports-“Gate”

Posted in Computer Fraud and Abuse Act, Cybersecurity, Data Theft, Espionage, Trade Secrets

shutterstock_270428249Generally when one refers to “competitors” in the context of protecting trade secrets, it is in regard to business competitors, not competing sports teams.  And usually when the talking heads on sports radio and television are discussing legal issues, they relate to domestic violence or other crimes, concussions, illicit and performance enhancing drugs, or labor disputes (sometimes even non-competes), not to corporate espionage.  Recently, however, the worlds of sports and trade secret protection collided on the baseball diamond when the St. Louis Cardinals were accused of hacking into the Houston Astros’ internal computer network and stealing proprietary information. According to the New York Times, Cardinals employees gained access to the Astros’ “internal discussions about trades, proprietary statistics and scouting reports,” which the Astros no doubt would prefer to keep private.  Specifically:

Law enforcement officials believe the hacking was executed by vengeful front-office employees for the Cardinals hoping to wreak havoc on the work of Jeff Luhnow, the Astros’ general manager, who had been a successful and polarizing executive with the Cardinals until 2011.

The Astros hired Mr. Lunhow away from the Cardinals in December 2011, and he quickly helped to turn the struggling team into a contender (they currently have the best record in the American League—and the second best record overall, trailing only the Cardinals who are perennial contenders). This allegedly caused Cardinals personnel to be concerned that Mr. Lunhow had taken their proprietary baseball information with him to the Astros (he has denied doing so). Indeed, highlighting the benefits of a trade secret audit, accessing the Astros’ computer system was apparently quite simple and unsophisticated, as Mr. Lunhow purportedly used the same password to access the Astros’ network that he had previously used to access the Cardinals’ network (he has denied this as well).  According to the Times:

Investigators believe that Cardinals personnel . . . examined a master list of passwords used by Mr. Luhnow and the other officials when they worked for the Cardinals.  The Cardinals employees are believed to have used those passwords to gain access to the Astros’ network, law enforcement officials said.

The FBI is investigating and “subpoenas have been served on the Cardinals and Major League Baseball for electronic correspondence.”  The Cardinals and/or any employees involved in the hacking could face federal criminal charges, including charges under the Economic Espionage Act (EEA), which deals with theft of trade secrets, the Computer Fraud and Abuse Act (CFAA), which deals with the hacking itself, and perhaps even the Wire Fraud Statute.

Charges under the EEA would require prosecutors to prove that the Cardinals:  (1) stole or misappropriated trade secret information (as defined by the Uniform Trade Secrets Act); (2) knew that such information was proprietary; (3) knew that such information was stolen or misappropriated; (4) acted with the intent of economically benefitting someone other than the Astros (i.e., the Cardinals); and (5) intended to injure the Astros.  Moreover, the prosecution would also have to prove that the trade secrets were “related to or included in a product that is produced for or placed in interstate or foreign commerce,” which Major League Baseball (the “product” here) certainly is. A person found guilty of violating the EEA can be fined or imprisoned up to 10 years, or both, and an organization such as the Cardinals that is found guilty can be fined up to $5 million.

Charges under the CFAA would require prosecutors to prove that the Cardinals:  (1) accessed a protected computer, (2) without authorization or by exceeding such authorization as was granted; (3) knowingly and with the intent to defraud; and (4) obtained something of value in furtherance of the intended fraud.  Penalties under the CFAA also include fines and imprisonment.

Some states have analogous criminal statutes, including both Texas and Missouri, which could be implicated given that the victim of the alleged hacking, the Astros, are located in Houston, and the alleged perpetrators, the Cardinals, are located in St. Louis.

The Astros could also seek civil damages under federal law, including under the CFAA and possibly the Stored Communications Act (if communications were hacked), as well as under state law, including state unfair business practices statutes, trade secret misappropriation statutes, and common law claims of misappropriation, conversion, and the like.  Indeed, the Missouri criminal statute discussed above contains a civil cause of action that allows for the recovery of compensatory damages and attorneys’ fees where there tampering with computer data, equipment, and users can be proven (including “any expenditures reasonably and necessarily incurred by the owner or lessee to verify that a computer system, computer network, computer program, computer service, or data was not altered, damaged, or deleted by the access”).

Although it appears, based on the limited facts that have been publicly disclosed to date, that the Astros could have strong civil claims against the Cardinals, it is far more likely that they will simply allow federal officials to pursue any criminal charges they may deem appropriate, and otherwise handle the issue within the confines of MLB’s disciplinary process.  Indeed, MLB’s constitution requires that teams address “[a]ll disputes and controversies related in any way to professional baseball” internally, with the commissioner acting as arbitrator.

Dean Pelletier and Eric Ostroff have very informative blog postings on this topic as well that are certainly worth reading.  And we will be sure to provide any updates as they become available.

How a Trade Secret Could Have Saved a Running Royalty From a Nearly Invincible Law

Posted in Practice & Procedure, Trade Secrets

shutterstock_284998106In Kimble v. Marvel Entertainment, LLC, just handed down June 22, 2015, the Supreme Court reaffirmed the 50 year old holding  of  Brulotte v. Thys Co., 379 U. S. 29 (1964), that patent royalties cannot extend beyond the expiration of the patent. So why is this case being discussed in a blog directed to trade secrets? Because the Court also reiterated that post-expiration royalties are allowable so long as they are tied to a non-patent right; and typically one of the most readily available such rights are trade secrets that almost invariably reside with the technology being licensed (or sold for that matter).

But first, back to the Kimble story, just for fun (and the Supreme Court did have some fun with this story).

Kimble developed a toy that would shoot “webs” (actually pressurized foam string from the palm of the hand). Naturally, he goes to Marvel  Entertainment, home to Spider-Man. Marvel then comes out with its “Web Blaster”, for “web-slinging fun”; but without paying Kimble.  Kimble puts a spider-bite on Marvel and the resulting lawsuit produces a settlement under which Marvel bought the patent, paying a lump sum and a 3% royalty going forward–except the royalty provision has no expiration date.

Amazingly, both parties later professed that they knew not of the seminal Brulotte  case when they entered into the agreement. But Marvel ultimately “stumbled across” it,  and thus ensued a DJ action that Marvel could cease paying upon conclusion of the patent’s story-arc.  The case found its way to the Ninth Circuit, which while acknowledging extensive criticism of Brulotte  over the years, concluded that its holding must reluctantly be followed. The Supreme Court then webbed-up the case on certiorari, to decide whether Brulotte should now be overruled.

Writing for the majority, Justice Kagan said stare decisis had to prevail, notwithstanding that the Court may now believe that the prior decision was incorrect: “we require as well what we have termed a ‘special justification–over and above the belief ‘that the precedent was wrongly decided.’” And since this case lies at the intersection of patent and contract, overturning Brulotte could “upset expectations” of agreements entered into. “As against this superpowered form of stare decisis, we would need a superspecial justification to warrant reversing Brulotte.” (The dissent noted that no such “super-duper protection” for that decision existed).  Good alone would not trump evil in this situation.  “Stare decisis means sticking to some wrong decisions.”

All said and done, the Supreme Court concluded that plainly Congress wasn’t stirred to change the law over the last five decades.  Justice Kagan stated the law “is simplicity itself to apply. A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.” No dice, because the patent monopoly would thereby extend beyond the life of the patent, violating an essence of the patent grant, which places the invention in the public domain upon expiration, regardless of who you are (even a licensee).  “Patents endow the holder with certain super powers, but only for a limited time.”  Thus, it was up to Congress to do something, not the Supreme Court.  “What we can decide, we can undecide. But stare decisis teaches that we should exercise that authority sparingly. Cf. S. Lee and S. Ditko, Amazing Fantasy No. 15: “Spider-Man,” p. 13 (1962) ([I]n this world, with great power there must also come—great responsibility)”.   Therefore unlike Spider-Man, this Justice league would not be coming to the rescue.

So back to trade secrets. There are ways around Brulotte.  One is that a licensee and licensor could agree to defer payments for pre-expiration use to a post-expiration period; of course, that could still not be keyed to anything smacking of ongoing “royalties.” Easier is the situation where there are trade secrets involved in the transaction, and know-how, show-how and who-doesn’t-know-what-how is so very often part of the deal. The so-called hybrid license. As Justice Kagan put it, “[t]hat means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone).”

Frankly, that is a bit too much of a simplistic example, as the allocation between patent and trade secrets has implications, such as the impact on other just pure patent royalty deals to be had and valuation of the patent rights, just to name two. Further, savvy licensees are not likely to accept a deal that leaves the trade secret part of the arrangement running forever. But it can happen.

The point remains, however, that once you can toss something more into the license or sale of the invention rights beyond the patent, like trade secret transfer, then you can “do whatever a spider can” with royalty expiry.

New Jersey Supreme Court Confirms Aspiring Whistleblowers Can’t Help Themselves to Confidential Documents

Posted in Practice & Procedure, Trade Secrets

shutterstock_225889915 (1)

By Robert T. Szyba and Jade Wallace

In a pivotal decision with broad implications for aspiring New Jersey whistleblowers, yesterday the New Jersey Supreme Court affirmed the Appellate Division’s finding that no qualified privilege exists to protect an employee from criminal prosecution for taking confidential documents from her employer under the guise of gathering evidence for an employment lawsuit.

In State v. Saavedra, A-68-13 (June 23, 2015), a former public employee, Ivonne Saavedra, was criminally indicted on charges of second-degree official misconduct and third-degree theft of public documents after taking hundreds of highly confidential original and photocopied documents from her former employer, the North Bergen Board of Education.  These documents, which contained sensitive personal information, such as individual financial and medical information regarding individual minor students, were taken by Saavedra in support of her whistleblower retaliation and discrimination claims against the Board.  Saavedra alleged that she was a victim of gender, ethnic, and sex discrimination, as well as hostile work environment and retaliatory discharge.

Saavedra moved to dismiss the indictment, arguing that, in Quinlan v. Curtis-Wright Corp., 204 N.J. 239 (2010), the New Jersey Supreme Court “establishe[d] an absolute right for employees with employment discrimination lawsuits to take potentially incriminating documents from their employers.”  In Quinlan, the plaintiff’s employment was terminated after her employer discovered that the plaintiff copied about 1,800 pages of confidential information without authorization, and gave them to her attorney to use in the lawsuit. The plaintiff added a claim of retaliation to her lawsuit and was awarded a multimillion dollar verdict. The New Jersey Supreme Court upheld the jury verdict, finding that the plaintiff had engaged in protected activity that could not lawfully serve as a grounds for termination.

Analyzing Saavedra’s argument, the Appellate Division found that Quinlan did not apply in criminal cases, and instead of a bright-line prohibition against taking company documents, established a totality-of-the-circumstances test for use in civil litigation.

The New Jersey Supreme Court agreed.  It confirmed that the “decision in Quinlan did not endorse self-help as an alternative to the legal process in employment discrimination litigation. Nor did Quinlan bar prosecutions arising from an employee’s removal of documents from an employer’s files for use in a discrimination case, or otherwise address any issue of criminal law.” On the contrary, the Court explained that the Quinlan decision stands for the proposition that an employer’s interest must be balanced against an employee’s right to be free from unlawful discrimination when assessing whether an employee’s conduct in taking documents from his or her employer constitutes a protected activity.  The Court pointed to the discovery procedures available to litigants that would have provided Saavedra access the same documents that she took, but would have allowed the trial court the opportunity to balance her interests with the Board’s interests, including any concerns about the privacy of minor students and their parents.

Despite the fact that the Court declined to provide an automatic shield from prosecution under Quinlan, the Court pointed out that in such circumstances, the employee will nevertheless be able to assert a claim of right defense or a justification.  Thus, the employee will still be able to assert that his or her taking of the employer’s documents was justified.  And there, the Court suggested, Quinlan’s guidance may assist the trial court in analyzing the particular facts and circumstances to determine whether the employee can assert this defense.

The New Jersey Supreme Court has thus clarified that although self-help tactics may be justifiable in certain circumstances, Quinlan did not establish or endorse an unfettered right of employees to surreptitiously take documents from the workplace for their own use in litigation or otherwise.  New Jersey employers, especially those who may be concerned with customer identity theft and data breaches, have won an important victory to assist in guarding against the unauthorized, and often covert, taking of confidential documents and information.

Robert T. Szyba and Jade Wallace are associates in the firm’s New York office. If you would like further information, please contact a member of the Whistleblower Team, your Seyfarth Shaw LLP attorney, Robert T. Szyba at rszyba@seyfarth.com, or Jade Wallace at jwallace@seyfarth.com.

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Unsecured Networks More Susceptible to Data Theft

Posted in Cybersecurity, Data Theft, Trade Secrets

shutterstock_1488153Over the past few years, users have become increasingly aware of the inherent dangers of connecting to unsecured Wi-Fi networks. Unfortunately, existing security vulnerabilities in the underlying network hardware may still open a user’s computer to security issues.

Recently, Wired reported that security firm Cylance discovered a vulnerability in a specific brand of network routers deployed throughout many hotel chains throughout the world that could allow someone to install malware on guest’ computers, analyze and record data transferred over the network, and possibly access the hotel’s reservation and keycard systems.[1] Researchers were able to locate 277 vulnerable routers in 29 different countries across and over 100 of them were located within the United States.

This vulnerability was not exclusively limited to hotel chains, but also was discovered at conference centers and other facilities. It is critical that users continue to question and consider how they are connecting to the internet, especially when they are doing so on public networks or in public places, such as at coffee shops, restaurants, libraries, or even on airplanes. Any unknown access point could potentially allow an attacker to analyze and obtain sensitive information, including personal, banking, or health data. Further, additional software may be used to impersonate another person through intercepting and hijacking those transmissions. For example, an extension for the Firefox browser named Firesheep can allow an attacker to view unencrypted information from certain social media websites sent over their local network and can even allow the attacker to easily impersonate their victim on those websites. Even when information providers fix security holes that would allow Firesheep-type software to operate, hackers are quickly on their tail, attempting to exploit other weaknesses.

There are a number of effective method of protecting yourself while using public or unencrypted networks. The first is to use a Virtual Private Network, or VPN, which creates a secure connection between a user’s computer and a private network in order to ensure that their communications are protected from other users on the public network. Many companies employ VPNs in order to protect their employees’ connections while they are abroad, but there are many VPN providers that provide this service for a small fee. Alternatively, the prevalence of aircards and mobile hotspots through cellular phones can allow users to bypass public Wi-Fi networks entirely through the use of their own cellular networks.

The inherent risks when using unsecured networks is not limited to the theft of personal information, but can extend to the theft of corporate and proprietary data that can subject an employee or company to substantial legal risks or liability through the theft of trade secrets. However, one of the key factors that must be shown in order to recover under trade secret law is that reasonable precautions were taken to prevent disclosure or release of the allegedly secret information. With widespread instances of data breaches and theft, as well as the increasing availability of VPN networks and other security measures that can be employed to protect against those threats, taking no protection steps may not rise to the level of “reasonable precautions” that are necessary.

Finally, even though the most common threats can occur while a public network is being used, that may only be the first step in an attacker’s plan. If an attacker compromises the security of a user’s workstation, they may wait until it connected to a corporate network before deploying any malicious software or extracting sensitive data. Although corporate security measures may be able to identify and neutralize any such threat, the potential for damage once connected to a corporate network is substantially greater.

In some instances, the use of public networks is inevitable, but users should all be aware of the communications and associated information that are being transferred while connected to such a network. The possibility of legal risk increases dramatically when standard security measures are not followed. Seyfarth Shaw can advise you how to develop a proactive plan to mitigate risks to your employees, yourselves, and your business associates and customers.

[1] Big Vulnerability in Hotel Wi-Fi Router Puts Guests at Risk, available at http://www.wired.com/2015/03/big-vulnerability-hotel-wi-fi-router-puts-guests-risk.

Video Interview: Discussing the MOVE Act with LXBN TV

Posted in Legislation, Non-Compete Enforceability

Following up on my post weighing on the MOVE Act, which stands to impact non-compete agreements for low-wage employees if enacted, I had the opportunity to discuss the subject with Colin O’Keefe of LXBN.  In the interview, I discuss the basics of the potential legislation and whether or not it has a chance of passing.

CFAA and SCA Do Not Prohibit Creation Of A Fake Facebook Page

Posted in Computer Fraud and Abuse Act, Cybersecurity, Social Media, Trade Secrets

shutterstock_142248280The defendants in a case pending in Chicago federal court were accused of contravening Facebook’s terms of use by accessing its computers in order to create a phony page and then using it to ridicule someone. In Bittman v. Fox, Case No. 14 C 8191 (N.D.Ill., June 1, 2015) (Holderman, J.), the court held that those allegations do not state a cause of action under the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, or the Stored Communications Act, 18 U.S.C. § 2707.

Summary of the case. In 2013, several persons began voicing complaints to the staff and board of trustees of a public library which permitted patrons to view pornography on the library’s computers. The objectors’ increasingly strident efforts to persuade library personnel to install filters on the computers were unsuccessful. Moreover, allegedly in response to those efforts, library personnel engaged in what the objectors viewed as violations of the Illinois Open Meetings Act and as harassment. The objectors retaliated by creating a Facebook page on which they mocked the library’s spokesperson. She filed a multi-count complaint alleging, among other causes of action, CFAA and SCA violations. The objectors’ motion to dismiss the CFAA and SCA counts, and a few other claims, was granted. The remaining counts will be heard by a different judge (because Judge Holderman retired the day the opinion was issued).

Actions by and against the objectors. The objectors attempted to make their views heard at board meetings. The board responded by committing what the objectors viewed as Open Meetings Act violations (in at least one instance, the Illinois Attorney General agreed that the Act had been violated) and refusing in other ways to let the objectors speak their minds. On one occasion, library personnel accused the objectors of illegally disrupting board meetings and summoned the police, but no arrests were made. When the objectors began receiving harassing emails and phone calls at home, which they attributed to library personnel (acting directly or indirectly), the objectors created the fake Facebook page and used it to ridicule the library spokesperson and her floral arrangement business. She sued.

Dismissal of the CFAA and SCA claims. The CFAA and SCA counts allege that the plaintiff was injured by the defendants’ violation of Facebook’s terms of use, and that the violation constitutes unauthorized access to Facebook’s computer. Her allegations were imaginative, but there appears to be scant authority supporting the view that she stated justiciable causes of action.

In his ruling on the Rule 12(b)(6) motion, Judge Holderman reasoned that the statutes were enacted to protect against hacking, or tampering with, computerized personal and proprietary information. The defendants here “did not access a computer to damage, steal or tamper with” the plaintiff’s data. Further, noting that the CFAA is a criminal statute, he cited the rule of lenity and the decision in U.S. v. Drew, 259 F.R.D. 449 (C.D. Cal. 2009), a somewhat similar California case. The court there ruled for the defendant, holding that criminalizing “the conscious violation of a website’s terms of service runs afoul of the void-for-vagueness doctrine.” Judge Holderman also cited Matot v. CH, 975 F. Supp. 2d 1191 (D. Ore. 2013), a decision reaching the same result in a civil lawsuit.

Takeaways. According to Matot, the fabrication of fake social media accounts and phony profiles is not uncommon, and sometimes they even have been created by law enforcement personnel. Moreover, users of electronic media have been known to include lies and other fictions in their postings. Judge Holderman cited Drew for the proposition that prosecuting someone for accessing social media computers in violation of the media’s rules, even as part of a vindictive campaign or one intended to embarrass, “affords too much discretion to the police and too little notice to citizens who wish to use the Internet.” Judge Holderman did not mention U.S. v. Morris, 928 F.2d 504 (2d Cir. 1991), where the use of electronic media in a manner unrelated to its intended function contributed to a CFAA criminal conviction for unauthorized access to a public website.

In Bittman v. Fox, in addition to the dismissed CFAA and SCA claims, several common law causes of action were alleged. The defendants still are charged with defamation, intentional infliction of emotional distress, and interference with prospective economic advantage. The defendants in Bittman were not alleged to have achieved a monetary gain by violating an electronic media’s rules. If there were such a claim in a different case, that claim might state a cause of action for fraud.