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Trading Secrets

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

Time to Party Like It’s 1999… Again: Information Technology Returns to Center Stage

Posted in Cybersecurity, Data Theft

By Matthew Hafter

With the Securities and Exchange Commission’s attention again returning to cybersecurity issues, many registrants are recalling the Commission’s intense focus on “Year 2000” issues over a decade ago.

Commissioner Luis Aguilar, in remarks at the SEC’s cybersecurity roundtable held on March 26, 2014, made a special point of discussing the SEC’s growing concerns about cybersecurity and observed that cyber-attacks have wide-ranging and potentially devastating effects on the economy, individual consumers and on markets and investors.  In an April 2, 2014 speech, Commissioner Aguilar stated that the SEC’s Office of Compliance Inspections and Examinations will be making cybersecurity an exam priority, warning that the industry should expect that SEC examiners will be reviewing whether asset managers have policies and procedures in place to prevent and detect cyber-attacks and whether they are properly safeguarding their systems against security risks.

These concerns are not limited to those operating in the retail side of the securities markets.  All companies subject to reporting obligations under the Securities Exchange Act of 1934 must be aware of how cybersecurity issues should be disclosed.  The SEC identified several key areas of potential disclosure in CF Disclosure Guidance: Topic No. 2 .

Risk Factors

The SEC expects registrants to disclose risks related to cyber incidents if those risks make an investment in the company speculative or risky.  As with other risk factors, disclosure must be tailored to the registrant’s specific circumstances, and include such matters as areas of business or operations that give rise to material cybersecurity risks, and the potential costs and consequences.  Companies that outsource must consider cybersecurity risks related to that aspect of their business and how those risks are addressed, including detection of incidents and potential insurance coverage.

Management’s Discussion and Analysis

Cybersecurity risks and incidents may result in costs or other consequences that are reportable as a material event, trend or uncertainty that could have a significant impact on a registrant’s operations, financial condition and results.  Such disclosure could include the impact of increased expenses for data and system security, or the consequences of theft of valuable intellectual property from a cyber-attack.

Description of Business

Registrants must disclose any material effects of cyber incidents on products, relationships with business partners, or competitive conditions.

Legal Proceedings

Cyber incidents may result in litigation or government investigations that meet the disclosure requirements of Item 103 of Regulation S-K.  In particular, Instruction 2 requires aggregation and disclosure of “any proceeding [that] presents in large degree the same legal and factual issues as other proceedings.”  In this way, individual claims related to cyber security incidents may point to a larger disclosure issue – both in terms of meeting the dollar threshold of Item 103 and a failure of internal controls (discussed below) – even if each claim by itself is not material.

Financial Statement Disclosure

There are many ways cybersecurity risks and incidents may affect a registrant’s financial statements.  These include:

  • Costs to maintain system and data security and to prevent cyber incidents.
  • Costs to remediate the effects of any data breaches (such as customer loyalty or incentive programs, or providing free credit reports).
  • Expenses and losses resulting from claims asserted by customers for product returns, breach of warranty, or breach of contract, or claims from counterparties for their own remediation efforts, as well as the costs of regulatory investigations and potential litigation.  The financial statements must deal with accrual and/or disclosure for both asserted and threatened claims; and, in addition, cyber incidents are one of the relatively rare instances where unasserted possible claims are so likely and could be so material that they must be dealt with under the loss contingency rubric.

Disclosure Controls and Procedures

Cyber incidents pose multiple risks to the registrant’s ability to control its own data and other assets and to its ability to accurately record and report information required in SEC filings.  This may the most painful disclosure of any listed, because it requires the registrant to at least skirt around the edges of information about vulnerabilities it would not want any hacker to know about.

The SEC’s Disclosure Guidance on cybersecurity did not present mandatory rules for disclosure, but merely guidance.  However, given the SEC’s increasing attention to this hot-button issue it is likely that the Commission will be pressing registrants to provide greater attention and detail to these challenges.  Privately held companies should also be mindful of the disclosure obligations identified by the SEC when issuing securities in private transactions.  We also expect cybersecurity issues to become increasingly prominent in the broader realm of corporate governance as directors are likely to face greater scrutiny under the standards of In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) to assure that the company has adequate information and reporting systems to assure compliance with applicable legal requirements related to data security and privacy.

John Tomaszewski Explains the Supreme Court’s Riley v. California Decision and What It Means for Consumer Privacy Going Forward

Posted in Privacy

While the Supreme Court has taken some heat in the past for seeming to misunderstand technology and how it impacts the normal person’s life, with Riley v. California the Court demonstrated not only an unexpected fluency with how mobile phone technology has evolved, but also with how it has caused our daily sphere of privacy expectations to evolve. Just like when the police want to rifle through your house, when they want to go through your phone, the Chief Justice makes it very simple – get a warrant.

On the Eve of The Esplanade July 4th Fireworks Celebration – Massachusetts May Not Blow Up Non-Competes After All – A Compromise is in the Air

Posted in Legislation, Non-Compete Enforceability, Trade Secrets

There are signs that the debate over whether to ban non-competes may end in a compromise, a result many, including this blog, have predicted.

As we reported in Friday’s post, the Joint Committee on Economic Development and Emerging Technologies held a public hearing yesterday at the Statehouse on HB4802, which would adopt the Uniform Trade Secrets Act (“UTSA”), repeal the current statutes regarding theft of trade secrets (Sections 42 and 42A of Chapter 93), and ban employee non-compete agreements.  The three hour hearing was packed with legislators, lawyers, and business people on both sides of the non-compete debate. Also, in attendance and presenting testimony were individuals negatively impacted by non-competes, many of whom were wearing “Create Jobs in Massachusetts/Ban Non-Competes” stickers.

The Committee’s Chair, House representative, John Wagner noted at the commencement of the hearing that unless convinced otherwise he was somewhere along the spectrum between leaving the law as it is on non-competes, and banning them outright. The hearing testimony was kicked off by Governor Patrick’s economic development chief, Gregory Bialecki, who presented the Patrick administration’s position that non-competes stifle innovation and job growth and should be banned, but he told the committee that the administration would be open to a compromise.

Another House Representative, Lori Ehrlich,  who has been involved in the non-compete debate since 2009 (please see our link to previous blog entries on the topic), and worked previously with then House Representative William Brownsberger, on a compromise bill, offered proposed changes to the HB4802. She explained that the changes are designed to address the unpredictability of the current common law, and incent employers to use narrowly  tailored non-compete restrictions.  Ehrlich’s proposal would establish presumed reasonable terms for the duration, geographic scope, and activity restrictions of non-competes, such as a six month non-compete restriction, and limiting the employee only from taking a position with similar duties to previous position and within same geographic region he/she was in previously. Under current Massachusetts common law, while courts can reform overbroad agreements to be more limited, it is difficult at best for employers and employees to predict what will be deemed reasonable or not. Erhlich’s proposal sets a “reasonableness” guidepost. Moreover, in a departure from current law, the proposal includes a “red pencil” provision for any non-compete restriction not presumed reasonable under the proposed legislative scheme. For example, if the enforcing company cannot demonstrate a legitimate business reason for exceeding a 6 month non-compete restriction, Ehrlich’s proposal requires a court to “red pencil” and strike the non-compete, rather than merely reduce it to a 6 month presumed reasonable time frame. The intent behind this part of the proposal is to incent employers to implement very tailored and narrow non-compete restrictions. 

While it seems there is much less debate over the trade secrets provisions in HB4802, Erhlich also proposed some revisions relating to the UTSA, including expanding protections to licensees of trade secrets rather than just the owners; eliminating the need for owners of trade secrets that have been misappropriated to continue security protections while they pursue enforcement; and limiting the premature and breadth of disclosure of the trade secrets at issue in litigation to enforce UTSA protections.

As we had previously reported (link to previous blog), also still in play on non-compete and trade secret protection in Massachusetts are the House and Senate’s pending economic development bills. The House economic development bill is notably silent on the issue of non-competes and adoption of the UTSA. The Senate economic bill, was also silent on the issue of non-competes, but would adopt the UTSA. Yesterday, while the Joint Committee hearing was underway, the Senate voted 32-7 in favor of a compromise approach offered by Senator William Brownsberger, an early proponent of banning non-competes. Here is a link to earlier blog entries on the bills. This compromise like Ehrlich’s would limit the duration of non-compete restrictions to six months and prohibit their use with hourly employees. It is unclear what the House will do on the non-compete issue given the pending bill’s silence on the issue. These differences will no doubt be addressed and perhaps settled later in the month when the Senate and House try to reconcile their economic development bills before the end of the legislative session on July 31.

In sum, it seems more likely now that Massachusetts will enact some form of legislation governing the use of non-competes and adopt some form of the Uniform Trade Secrets Act. The final form of such legislation remains to be seen, as well as whether it can be accomplished before the end of July. As we reported previously, there will be no more formal sessions of this legislature after July 31st.  While informal sessions will still occur, typically those only address “non-controversial” legislation, such as the changing of a street name.  Moreover, it is the last year of the two year legislative session, so unless the legislature acts on HB4802 or another standalone bill before the end of July, the legislation would have to be reintroduced into a new congress in January — with a new governor.

We will continue to monitor all the pending bills, as well as any others that may be filed, and report back.

Legal 500 Names Seyfarth Shaw as a Finalist for Top Trade Secrets Litigation Department in the U.S.

Posted in Trade Secrets

The 2014 edition of The Legal 500 United States recommends Seyfarth Shaw’s Trade Secrets group as one of the best in the country.

Nationally, our Trade Secrets practice moved up one position from the 2013 rankings to Tier 2. In addition, Legal 500 has launched its first-ever shortlist for U.S. awards, and we are very pleased to report that Seyfarth is one of five firms shortlisted for 2014 Law Firm Award for Trade Secrets Litigation. We expect the award winner to be announced on Wednesday, July 2nd.

Based on feedback from corporate counsel, three Seyfarth partners were recommended in the editorial, and they include Michael D. Wexler, Robert B. Milligan, and Jason P. Stiehl.

The Legal 500 United States is an independent guide providing comprehensive coverage on legal services and is widely referenced for its definitive judgment of law firm capabilities. The Legal 500 United States Awards 2014 is a new concept in recognizing and rewarding the best in-house and private practice teams and individuals over the past 12 months.
The awards are given to the elite legal practitioners, based on comprehensive research into the U.S. legal market.

Josh Salinas Explains How Drones Could Pose a Threat to the Protection of Trade Secrets

Posted in Espionage, Privacy, Trade Secrets

The commercial and personal use of drones are becoming increasingly more prevalent. Indeed, there were allegations during the ongoing World Cup that a drone was purportedly used to spy on a team’s practices by an opponent who was looking to gain a competitive advantage. Josh Salinas weighs in on the potential threat drones may pose to the protection of trade secrets.

Another Public Hearing Scheduled for Massachusetts Non-Compete Bill: What’s Next?

Posted in Legislation, Non-Compete Enforceability, Trade Secrets

We reported in our post of June 11th that Governor Patrick had introduced a sweeping economic growth bill (HB4045) — that, if passed, would ban employee non-competes in the Commonwealth. We also explained that subsequent to Governor Patrick’s bill, another bill (HB4082), was introduced that stripped Governor’s Patrick’s bill and left only those portions dealing with trade secrets and non-competes. This new bill would adopt the Uniform Trade Secrets Act, repeal the current statutes regarding theft of trade secrets (Sections 42 and 42A of Chapter 93), and ban employee non-compete agreements.  HB4082 was likely introduced because of concerns that Governor Patrick’s bill would not make swift enough progress, since the other provisions that did not relate to employee non-compete agreements were so broad in scope. 

The second bill, HB4802, was referred to the Joint Committee on Economic Development and Emerging Technologies in early June, and now that Committee has scheduled a public hearing for July 1, 2014 from 11:00 a.m. to 2:00 p.m. in Room B-1 at the Statehouse. Similar to the committee hearing held previously on Governor Patrick’s broader economic bill (HB4045), we expect to hear testimony from constituencies on both sides of the non-compete debate.  As the Boston Globe noted after the hearing on Governor Patrick’s bill, “[t]he sides are generally split according to size, with large, established employers … working to maintain the status quo, and people from the startup world — including venture capitalists who invest in early-stage companies — pushing to let workers jump to rivals whenever they want.We will be attending the hearing, and will report out after.

Also, still in play are the House and Senate’s economic development bills. As we reported previously, the House economic development bill is notably silent on the issue of non-competes and adoption of the Uniform Trade Secrets Act. The Senate economic bill, which was released this morning, is also silent on the issue of non-competes, but adopts the Uniform Trade Secrets Act. Both economic bills are pending.  After votes on any amendments to the Senate bill next week, a conference committee will be appointed with three members from each body to reconcile the House and Senate versions. Since neither of the economic bills mention non-competes at all, the final version of the  bill (after they reconcile the House and Senate bills) sent to the Governor for his signature (by July 31) will not change state law on non-competes. Separate and apart from the pending economic bills, whether or not a standalone bill like HB4802 will get to the Governor for signature by January 31st remains to be seen.

Against this backdrop, you may wonder what is next on the legislative path for HB4802 after the July 1st hearing.  As we understand it, the Committee will meet after the hearing to decide next steps.  This could happen as soon as Tuesday after the hearing, or sometime thereafter.  The bill could emerge from the Joint Committee as is, or it could include amendments. Some are suggesting that the bill will be amended and a compromise bill will emerge that will then go to the House Ways and Means Committee, where any changes to bills are reported.  It could then be reported out to the full House for consideration, or it may have to go back to committee.

In sum, it is difficult to predict at this juncture whether HB 4082 will survive in its current form, or evolve toward a compromise bill like the one previously introduced by Senator William Brownsberger and Representative Lori Ehrlich in late 2012.  Keep in mind that after July 31, there will be no more formal sessions of this legislature.  While informal sessions will still occur, typically those only address “non-controversial” legislation, such as the changing of a street name.  It is also worth noting that this is the last year of the two year legislative session, so unless the legislature acts on HB4802  before end of July, the legislation would have to be reintroduced into a new congress in January — with a new governor.

We will continue to monitor all the pending bills, as well as any others that may be filed, and report back after the July 1 hearing. You may be interested in today’s Boston Business Journal’s article on the non-compete debate in Massachusetts.

Upcoming On-Demand Webinar: International Trade Secrets and Non-Compete Law Update

Posted in International, Non-Compete Enforceability, Trade Secrets

To accommodate our global audience, the fifth installment in the 2014 Trade Secrets Webinar Series will be available as an on-demand broadcast on Thursday, July 31, 2014 at 9:00 a.m. Central. Please register to receive access to the broadcast.

Seyfarth attorneys Wan Li, Ming Henderson, Justine Turnbull and Daniel Hart  will focus on non-compete and trade secret considerations from an international perspective. Specifically, the webinar will involve a discussion of non-compete and trade secret issues in Europe, Australia, and China compared to the United States. This 90-minute webinar will provide valuable insight for companies who compete in the global economy and must navigate the legal landscape in these countries and ensure protection of their trade secrets and confidential information, including the effective use of non-compete and non-disclosure agreements.

Summary of Topics:

  • Overview of key rules for non-compete and non-disclosure agreements in Europe
  • Key principles of non-compete and non-disclosure agreements in the United Kingdom, France and Australia, including recent case developments
  • Latest developments in non-compete and trade secret law in China
  • The European Commission’s proposed directive on trade secrets protection throughout the European Union
  • Practical considerations under U.S. law for multinational employers to effectively protect their trade secrets and confidential information

 

 

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.

 

Webinar Recap! Trade Secret and Non-Compete Legislative Update

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

We are pleased to announce the webinar “Trade Secret and Non-Compete Legislative Update” is now available as a podcast and webinar recording.

In Seyfarth’s fourth installment of its 2014 Trade Secrets Webinar series, Seyfarth attorneys discussed the significant changes to several laws regarding trade secrets,  restrictive covenants, and social media, as well as proposed legislation pending in other jurisdictions.

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

  • Employers should employ a holistic approach to the protection of their trade secrets and confidential information, whether or not Massachusetts bans non-compete restrictions altogether or adopts the Uniform Trade Secrets Act. Utilize non-solicit, non-disclosure and invention assignment agreements; implement entrance and exit interview protocols to educate employees on non-disclosure obligations; create a culture of confidentiality with regular training programs, and various levels of security access to confidential business information; regularly evaluate your trade secret protection policies/protocols; and forensically review computer usage of departing employees with access to confidential information.
  • As non-compete and trade secrets law continues to evolve, expect a greater trend toward uniformity in trade secrets law and a continued attempt to regulate trade secrets at the federal level.  Review your company’s policies and practices on a regular basis to ensure that they are consistent with the latest developments and continue to take proactive, practical measures to ensure that your trade secrets are subject to reasonable methods to maintain their secrecy.
  • Even if your company has operations in a state that does not prohibit employers from requiring employees and applicants to provide “personal” social media login information or access, your best bet is to avoid asking employees and applicants for this sort of information (unless account access is necessary to investigate workplace misconduct).  More and more states are considering laws prohibiting such actions, and it’s best to be ahead of the curve.

To accommodate our global audience, the fifth installment in the 2014 Trade Secrets Webinar Series, “International Trade Secrets and Non-Compete Law Update,”  will be available as an on-demand broadcast on July 31st! For registration and more upcoming events please visit our events page.

Seyfarth Attorney to Present on Protecting Pharmaceutical Trade Secrets at the Chinese Biopharmaceutical Association’s Annual Meeting

Posted in Trade Secrets

This Saturday, June 21, 2014, Seyfarth attorney, Justin K. Beyer, will present at the 19th Annual Chinese Biopharmaceutical Association Conference on Legal Challenges in Trade Secret Protection, at the University of Maryland’s Shady Grove Conference Center.  Through this panel discussion, Mr. Beyer will offer insights into what constitutes a trade secret, trade secrets unique to the pharmaceutical industry, and best practices for protecting those trade secrets. 

If you are attending the Chinese Biopharmaceutical Association’s Annual Meeting, please be sure to stop by our table in the exhibition room.