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Trading Secrets

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

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

Posted in Trade Secrets

On Tuesday, January 27, 2015 at 12:00 p.m. Central, Michael Wexler, Robert Milligan and Daniel Hart will present the first installment of the 2015 Trade Secrets Webinar series. They will review noteworthy cases and other legal developments from across the nation this past year in the areas of trade secrets and data theft, non-compete enforceability, computer fraud, as well as provide their predictions for what to watch for in 2015.

The panel will specifically address the following topics:

  • Increased threats to trade secrets by foreign hackers and insiders and proactive steps that companies can take to protect their assets in light of the recent cyber-attacks;
  • Significant legislative efforts, including the continuing attempt in the U.S. Congress to create a federal civil cause of action for trade secrets theft and the European Union’s proposed directive to harmonize trade secrets protection among the EU’s 28-member states;
  • Significant new federal and state court decisions on non-competes and other restrictive covenants that may impact their enforcement, including efforts by government agencies and employees to narrow their use;
  • Recent NLRB rulings on use of social media and IT resources and their implications for protecting trade secrets;
  • Noteworthy criminal prosecutions and criminal sentences for trade secret misappropriation, data theft, and computer fraud;
  • Trade secret preemption and courts’ difficulties in grappling with whether the theft of non-trade secret information is actionable in tort; and
  • Prominent social media cases discussing ownership of contents and contacts in social media accounts.

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.

Federal Circuit Reverses Lower Court’s Ruling That Plaintiff’s Trade Secret Misappropriation And Conspiracy Claims Were Untimely And Unprovable

Posted in Practice & Procedure, Trade Secrets

The Federal Circuit recently held that the dismissal of a trade secrets complaint for failure to state a justiciable claim was not warranted merely because the misconduct allegedly involved a number of wrongdoers and began many years before the complaint was filed.

Overview of the case. ABB alleged that, during a several decade period, some of its former employees engaged in a conspiracy to misappropriate — and to pass to alleged co-conspirator competitors — confidential information relating to its products. The district court dismissed on the grounds that the relevant statute of limitations had expired and that ABB had not been reasonably diligent in protecting its trade secrets. On appeal, the judgment was reversed. ABB’s allegations of wrongdoing were deemed sufficient to withstand a motion to dismiss. The case was remanded for further proceedings. ABB Turbo Systems, AG v. TurboUSA, Inc., Case No. 2014-1356 (Fed. Cir., Dec. 17, 2014).

The alleged conspiracy and resulting lawsuit. In 1986, Hans Franken left the employ of ABB, a designer and manufacturer of turbochargers and turbocharger parts, and founded a competitor. Over the course of more than 20 years, employees of ABB allegedly transferred to Hans’s company confidential information relating to parts embodying ABB’s patented inventions.

In 2009, Hans sold his company to TurboUSA, a corporation managed by Hans’s son Willem and partly owned by Hans. In connection with the sale, ABB’s documents in Hans’s company’s files supposedly were altered to disguise their source. TurboUSA allegedly continues to use ABB’s secrets, enriching Hans and Willem.

In 2012, ABB sued Hans, Willem, and TurboUSA for patent infringement, trade secret misappropriation, and conspiracy. The patent infringement claims were settled, Hans was dismissed as a defendant, and the trade secret and conspiracy case against TurboUSA and Willem continued until it was dismissed by the district court. ABB appealed.

The Federal Circuit’s decision.

a. Statute of limitations. According to the appellate tribunal, the district court erred when it dismissed the complaint based on the statute of limitations. That is an affirmative defense which ordinarily may not be used as a basis for dismissal on the pleadings unless the time-bar is evident on the face of the complaint (not so here). The trial court surmised that ABB “should have had at least an inkling that something was amiss.” The complaint, however, alleges concealment efforts made by the defendants, is silent with respect to when or how ABB discovered the misappropriation, and does not state facts demonstrating that ABB actually or constructively discovered the misconduct more than three years before the litigation was initiated.

b. Protection of confidentiality.  ABB’s pleading alleged various actions the company took to protect its trade secrets. The trial court surmised that ABB’s efforts to protect secrecy probably would be deemed insufficient. The federal circuit held that only “reasonable” care is required, and “the complaint stage is not well-suited to determining what precautions are reasonable in a given context.”

Takeaways. This case teaches that a complaint which alleges the relevant facts as the pleader understands them, and which aligns those factual allegations with the operative legal principles as ABB seemingly did here, has the best chance for surviving a Rule 12(b)(6) motion. On appeal, ABB’s pleading was found to satisfy those minimum standards. So, the parties will have an opportunity to take some discovery before the trial court decides whether further litigation would be futile.

Top 10 Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2014

Posted in Computer Fraud, Non-Compete Enforceability, Trade Secrets

As part of our annual tradition, we are pleased to present our discussion of the top 10 developments/headlines in trade secret, computer fraud, and non-compete law for 2014. Please join us for our complimentary webinar on January 27, 2015, at 1:00 p.m. e.s.t., where we will discuss them in greater detail. As with all of our other webinars (including the 10 installments in our 2014 Trade Secrets webinar series), this webinar will be recorded and later uploaded to our Trading Secrets blog to view at your convenience.

Here is our listing of top developments/headlines in trade secret, computer fraud, and non-compete law for 2014, as well as our predictions for 2015, in no particular order:

1) Increased Threat to Trade Secrets by Hackers.   As demonstrated by the suspected North Korean-linked cyber-attacks, hackers represent a significant and growing threat to the intellectual property of U.S. and multinational companies.  ICANN recently reported its own data breach and indicated that the email credentials of some ICANN staff members were compromised. Security company Mandiant published a report finding that the government of the People’s Republic of China (“PRC”) is sponsoring cyber-espionage to attack top U.S. companies.  Moreover, CREATe.org released a whitepaper that highlighted how far-reaching and deeply challenging trade secret theft is for companies operating on a global scale and identified “hacktivists,” some foreign governments, and organized crime (as well as competitors and rogue employees) as major threats to trade secrets.  While much of the attention on foreign threats to trade secrets has focused on the PRC, recent decisions from courts in Shanghai suggest that some courts in the PRC may be adopting an enforcement approach in trade secrets and non-compete cases that is closer to the approach of U.S. courts.  Notwithstanding this potentially significant development in the PRC, hackers, especially those tied to foreign governments, will likely continue to pose a major threat to U.S. and multinational companies in the near future. Please see our recent  webinar on addressing data security breaches.

2) More High-Profile Prosecutions under the Computer Fraud and Abuse Act and Economic Espionage Act.  In response to the growing threat to the trade secrets of U.S. companies, the Obama Administration released a 150-page report that unveiled a government-wide strategy designed to reduce trade secret theft by hackers, employees, and companies.  Consistent with this strategy, in 2014 the U.S. Department of Justice continued to pursue high-profile prosecutions under the CFAA and Economic Espionage Act, particularly against defendants tied to the Chinese government.  As we previously reported, earlier this year the DOJ obtained the first-ever federal jury conviction under the Economic Espionage Act in the U.S. v. Liew case.  Following the jury’s conviction of two individuals and one company in that case, a federal court sentenced defendant Walter Liew to 15 years in prison for theft of trade secrets from chemical giant DuPont and selling them to an overseas company controlled by the government of the PRC.  In another high-profile criminal case, a federal grand jury indicted five high-ranking officials of the PRC’s People’s Liberation Army for computer hacking, economic espionage and other offenses directed at American companies in the nuclear power, metals and solar products industries.   More high-profile prosecutions will likely continue in the next year as the federal government further cracks down on trade secret theft. 

3) Continued Attempt to Create Civil Cause of Action for Trade Secrets Theft in Federal Court.  As we previously reported, the past several years have seen increased attempts to create a civil cause of action for trade secrets misappropriation at the federal level.  2014 was no exception.   Earlier this year, Sens. Christopher Coons (D-Del.) and Orrin Hatch (R-Utah) introduced the Defend Trade Secrets Act of 2014 in the U.S. Senate. The bill amends the Economic Espionage Act to provide a civil cause of action to private litigants for violations of 18 U.S.C. § 1831(a) and 1832(a) of the EEA and for “misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.” The bill also would allow a plaintiff to obtain a seizure order, though some have questioned whether this remedy may be subject to abuse and have concerns about implementation.   A few months later, a bi-partisan group led by Reps. George Holding (R-N.C.) and Jerrold Nadler (D-N.Y.) introduced a similar bill in the House of Representatives, the Trade Secrets Protection Act of 2014.  The House bill largely tracks the Senate bill but refines the seizure provisions and contains other notable refinements that we discussed here.  The House Judiciary Committee has reported favorably on the bill and recommended its passage.  Although the House did not pass the bill before adjourning, expect to see the same or similar legislation introduced early this year. With the recent high profile hacking incidents, we believe that there is momentum for the passage of a bill this year.

4) Attempt to Harmonize Trade Secrets Protection in EU.  Across the pond, European lawmakers are considering a similar proposal to harmonize trade secrets protection throughout the EU’s 28 members states.  As we discussed here, currently there is no uniform protection of trade secrets across the EU.  Instead, a patchwork of uneven levels of protection and remedies exist among EU Member States.  After a study prepared for the European Commission identified substantial perceived weaknesses in the trade secrets protections afforded by the laws of many Member States, the European Commission announced a proposal for a Directive on trade secrets that, if enacted, will substantially alter the legal landscape in Europe regarding trade secret protection and will enhance cross-border certainty within the EU.  The draft directive is currently being reviewed by the EU Parliament’s Legal Affairs, Internal Market, and Industry Committees and their decisions have not been released yet.  While the European Parliament has not yet voted on the proposal, it is expected that the matter will be scheduled for a first reading in the Parliament during the first half of 2015.

5) Massachusetts Fails to Enact Proposed Non-Compete / Trade Secrets Legislation.  In what has become an annual tradition over the past several years, lawmakers in Massachusetts once again debated, but failed to pass, legislation that would overhaul the Bay State’s existing law on non-competes and trade secrets, which are currently governed by state common law. Along with New York, Massachusetts is one of only two states that has not yet adopted a version of the Uniform Trade Secrets Act (“UTSA”). This past legislative session, the Massachusetts legislature considered a proposed bill that would have adopted the UTSA and that (more controversially) would have virtually eliminated employee non-compete agreements in Massachusetts.  Although the state Senate overwhelmingly approved a compromise bill that, if enacted, would have imposed certain notice requirements and established presumptions of reasonableness for employee non-competes (among other provisions), ultimately the legislature did not pass either the compromise bill or any of the various alternative non-compete or trade secrets bills proposed this year.  But if recent history is any guide, expect to see attempts to overhaul Massachusetts non-compete law once again introduced in 2015.  In fact, after this year’s legislative session ended, outgoing Governor Duval Patrick introduced another compromise bill that legislators may debate when the new legislative session begins in January.

6) Courts Continue to Grapple with UTSA’s Preemptive Impact.  Among the 48 states that have adopted some version of the UTSA, courts continue to grapple with the impact of the UTSA on common law remedies for misappropriation of confidential information (such as claims for unfair competition, conversion, tortious interference, or unjust enrichment).  The UTSA contains a provision stating that the Act “displaces conflicting tort, restitutionary, and other laws of this State providing civil remedies for misappropriation of a trade secret” but “does not affect (1) contractual remedies, whether or not based on misappropriation of a trade secret; (2) other civil remedies that are not based on misappropriation of a trade secret; or (3) criminal remedies, whether or not based on misappropriation of a trade secret.”  As we discussed here, courts in several states have held that the UTSA should be read broadly to preempt all claims related to the misappropriation of information, regardless of whether or not the information falls within the definition of a trade secret.  In contrast, courts in other states have concluded that the UTSA preempts only claims for misappropriation of “trade secrets,” as defined by the UTSA, and leaves available all other remedies for the protection of confidential information that is not a trade secret.  With its recent decision in Orca Communications Unlimited, LLC v. Noder, 337 P.3d 545 (Az. 2014), the Arizona Supreme Court joined this latter group and held as a matter of first impression that the AUTSA does not displace common law remedies for misappropriation of confidential information that does not qualify as a trade secret.  Expect to see states continue to line up on either side of this divide.

7) Continued Significance of Choice of Law and Forum Selection Provisions In Non-Compete Disputes.  Following the U.S. Supreme Court’s decision in Atlantic Marine v. U.S.D.C. for the W.D. of Texas, choice of law and forum selection clauses are increasingly significant in non-compete litigation.  In Atlantic Marine, the Supreme Court held that courts should ordinarily transfer cases pursuant to applicable and enforceable forum selection clauses in all but the most extraordinary circumstances. While Atlantic Marine did not concern restrictive covenant agreements or the employer-employee context, the decision appears to strengthen the enforceability of forum selection clauses generally. For example, in AAMCO Transmissions, Inc. v. Romano, — F. Supp. 2d –, 2014 WL 4105986 (E.D. Pa. Aug. 21, 2014), a federal district court in Pennsylvania enforced a forum-selection clause in a non-compete agreement against both a franchisee who signed the agreement and the franchisee’s wife who, though not a signatory the agreement, was also deemed to be bound by the forum selection clause because of her close connection to the signatory.  In addition, as we reported here, federal district courts in California are increasingly enforcing forum selection clauses in non-compete agreements of California employees and finding that enforcement of such clauses does not violate California’s strong public policy of employee mobility.  In light of Atlantic Marine, expect companies to make greater use of choice of law and forum selection clauses (and the resulting “race to the courthouse”) in suits to enforce their restrictive covenants. 

8) Social Media Continues to Generate Disputes.  Continuing a trend that we discussed last year, social media continues to generate disputes in trade secret, computer fraud, and non-compete law, as well as in privacy law.  Wisconsin, Louisiana, Oklahoma, New Hampshire, and Rhode Island joined several other states in enacting legislation to protect “personal” use of social media by employees.  Expect other states to get on the social media bandwagon in the next year.   The ownership of content stored in LinkedIn and other social medial accounts is also a continuing source of disputes.  Like courts in the UK and elsewhere, US courts continue to grapple with whether there can be trade secret protection for such information.  For example, a few months ago, a federal district court in California issued a well-publicized decision in Cellular Accessories For Less, Inc. v. Trinitas LLC, No. CV 12–06736 D, 2014 WL 4627090  (C.D. Cal. Sept. 16, 2014), in which it denied a motion for summary judgment on a trade secrets misappropriation claim against a former employee who retained the contacts in a LinkedIn account that he created while employed by the plaintiff.  That case illustrates that LinkedIn and other social media contacts can be protectable as trade secrets if the methods used to compile the contact information are “sophisticated,” “difficult,” or “particularly time consuming,” though the purported trade secret holder will also have to establish that the contacts were not made public in order to be entitled to trade secret protection.  Although the Cellular Accessories court did not rely on decisions from other jurisdictions,  the court’s decision is consistent with a handful of recent decisions in which English courts have suggested that an employee’s competitive use of LinkedIn contacts that the employee developed during his or her employment might, in some circumstances, constitute a breach of the duty of good faith.  (See, e.g., Whitmar Publications Limited v Gamage [2013] EWHC 1881 (Ch.)  and Hays Specialist Recruitment (Holdings) v. Ions [2008] EWHC 745 (Ch.).)  As use of social media continues to proliferate, more courts are likely to weigh-in on this issue.

9) NLRB Challenges Employer Policies on Employee Use of Social Media and IT Resources.  Speaking of social media, the National Labor Relations Board (“NLRB”) issued significant decisions this year that have left many employers scrambling to revise their policies on employee use of social media and IT resources.  As we reported here, in Triple Play Sports Bar & Grille, 361 NLRB No. 31 (2014) , the NLRB ruled that a Facebook discussion regarding an employer’s tax withholding calculations and an employee’s “like” of the discussion constituted concerted activities protected by Section 7 of the National Labor Relations Act (“NLRA”), which protects employees’ rights to engage in concerted activities regarding the terms and conditions of their employment.  The Board also held that the employer’s internet and blogging policy (which provided that “engaging in inappropriate discussions about the company, management, and/or co-workers, the employee may be violating the law and is subject to disciplinary action, up to and including termination of employment”) was overly broad and, therefore, violated the NLRA.  Additionally, as we reported here, the NLRB recently ruled that employees who have access to an  employer’s email system as part of their job generally may, during non-working time, use the email system to communicate about wages, hours, working conditions and union issues.  The NLRB’s ruling (Purple Communications, 361 NLRB No. 126 (2014)) poses a major headache for employers who seek to control use of their IT assets.  As the new Republican-led Congress seeks to reign-in the NLRB, expect these rulings to be hotly debated in the coming year.

10) Courts, Lawmakers, and Regulators Continue to Scrutinize Non-Competes and Consideration Remains a Hot Button Issue.  Finally, as in past years, many employers are once again reviewing and tweaking their non-competes and onboarding procedures in light of continued scrutiny of non-competes by courts, legislatures, and regulators. On the enforcement side, the Texas Supreme Court found that the enforcement of a forfeiture provision for competitive activity in an employee incentive compensation plan was not contrary to Texas public policy. Courts have, however, continued to issue significant decisions invalidating some non-competes. For example, in Dawson v. Ameritox, Ltd., 571 Fed. App’x. 875 (11th Cir. 2014), the Eleventh Circuit affirmed an Alabama federal court’s ruling that a non-compete executed prior to employment was unenforceable. In Nott Co. v. Eberhardt, Nos. A13–1061, A13–1390, 2014 WL 2441118 (Minn. Ct. App.  June 2, 2014), the Minnesota Court of Appeals held that a non-compete was unenforceable against an employee who signed the non-compete and received benefits purportedly as consideration for the agreement because another employee did not sign a non-compete but nevertheless received the same benefits.  Following an Illinois Court of Appeals’ decision in Fifield v. Premier Dealer Servs., Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013), courts in Illinois are continuing to consider whether less than two years employment is adequate consideration to enforce a non-compete against an at-will employee where no other consideration is given for the non-compete.  In Charles T. Creech, Inc. v. Brown, 433 S.W.3d 345 (Ky. 2014), the Kentucky Supreme Court held that a non-compete with an existing employee was not supported by consideration where the employee was offered no payment, no change in employment terms, and was not threatened with termination if he failed to execute the agreement. Courts in Pennsylvania and Wisconsin are also grappling with what constitutes sufficient consideration for the enforcement of non-competes. We also expect that government agencies and employees will continue to mount challenges to the use and enforcement of some non-compete and other restrictive covenants  (including “no poaching” provisions) with certain employees and industries this year. In light of these decisions and other continuing developments in non-compete law, employers should periodically review their existing agreements and on-boarding procedures to maximize the likelihood that their agreements will be upheld.

We thank everyone who followed us this year and we really appreciate all of your support. We will continue to provide up-to-the-minute information on the latest legal trends and cases in the U.S. and across the world, as well as important thought leadership and resource links and materials.

Court Refuses To Enforce Settlement Agreement Containing Non-Compete Covenant Citing Lack of Assent

Posted in Non-Compete Enforceability, Practice & Procedure

Plaintiff’s motion to enforce a settlement agreement in principle was denied because some material terms of that agreement were not included in the version the plaintiff sought to enforce.  GeoLogic Computer Sys., Inc. v. MacLean, Case No. 10-13569 (D. Mich., Dec. 10, 2014).

Status of the case.  Counsel for the parties to a software copyright infringement lawsuit purportedly reached an agreement in principle to settle the litigation.  One of the material terms of the preliminary agreement was a status quo non-compete.  However, the parties could not reach a consensus with respect to the wording.  The plaintiff then settled with some of the defendants, deleting from that settlement any reference to a non-compete, and moved to enforce the old agreement in principle — minus the non-competition clause — against the non-settling defendants.  They objected to the motion on the ground that they could not be forced to accept a compromise significantly different from the one to which they had acquiesced.  The court agreed and denied the motion to enforce.

The settlement in principle.  After three years of hard-fought pretrial litigation in a federal court in Michigan, the district court judge referred the case to a magistrate judge for settlement negotiations.  In October 2013, the parties’ attorneys informed the magistrate judge orally that they had an agreement.  The judge directed them to recite on the record “the overarching terms,” and they purported to do so.  One was that two corporate defendants would pay approximately $1.5 million to the plaintiff over time, with the payments guaranteed by the individual defendant owners of those corporations.  Another term was that certain other defendants who were salespersons — people the court referred to as the “Non-Compete Defendants” — would compete with those corporations only with respect to relationships already existing.  The purpose of the covenant was to restrict the Non-Compete Defendants from interfering with the earning potential of those corporations to such an extent that they might be unable to liquidate their indebtedness to the plaintiff.  The magistrate judge directed the attorneys to memorialize the settlement. 

A partial settlement.  Unfortunately, the parties were unable to achieve unanimity, but the plaintiff and the Non-Compete Defendants did reach agreement.  They would pay the plaintiff $730,000.  Reference to a non-competition covenant was omitted.  The Non-Compete Defendants committed that they would — and they did — support the plaintiff’s subsequent motion to enforce as against the non-settling defendants the settlement agreement in principle (minus, of course, the non-compete).

Objections.  In their opposition to the motion to enforce, the non-settling defendants — the two corporations and their owners — contended that during settlement negotiations all parties had agreed that the non-compete was a material term, and no party had expressed any objection to it.  Moreover, by protecting the corporations’ income stream, the non-compete also served potentially to shield the individual guarantors from a default by the corporations which would trigger their own duty to pay.  Also, the non-settling defendants pointed out that if payment in full was not made, the plaintiff might claim entitlement to valuable rights relating to the software, and those defendants wondered aloud whether the plaintiff might be surreptitiously promoting non-payment.  In response, the plaintiff countered that the draft non-compete provision was solely for the plaintiff’s benefit, to increase the likelihood that it would be paid, and therefore the non-settling defendants would not be prejudiced by deletion of that provision. 

The court’s decision.  The trial judge agreed with the parties objecting to the motion to enforce.  The settlement in principle was not identical in all material respects to the order the plaintiff sought to have entered.  The court said that the subjective purpose of the omitted non-compete — here, supposedly to protect the plaintiff — is irrelevant.  The defendants never agreed to a settlement without that provision, and so the court was precluded from granting the motion to enforce. 

Takeaways.  This case reminds us that a motion to enforce a “settlement agreement in principle” will be denied unless all parties assented to every significant term.  Here, the agreement the plaintiff sought to enforce differed in several material respects — most notably, the deleted non-compete — from the settlement to which the parties purportedly had agreed several months earlier.  Those differences doomed the contested motion to enforce. 

 

First United Kingdom Decision on Tweeting in Workplace

Posted in Social Media

Season’s Tweetings

In the first UK high court decision on tweeting, the Employment Appeal Tribunal has held that dismissal of an employee for offensive posts on his private twitter account could potentially justify termination under the UK’s unfair dismissal rules.

The employee was dismissed after a colleague raised an anonymous complaint about the content of his tweets. The Court held that termination of an employee for offensive comments on his social media account could fall within the ‘range of reasonable responses’ open to employers.  The employee’s right to freedom of expression needs to be balanced against the employer’s concern to protect its reputation.

To decide whether termination was justified, UK Employment Tribunals will look at the entire picture, including:

  • Was the twitter account relevant to the employee’s role? In this case, the employee used the twitter account in his role as an internal investigator, to monitor the posts of other employees.
  • Was the twitter account genuinely private? If it linked the employee to the employer, or was followed by a number of work colleagues or customers, it may not be seen as private.
  • Did the employer’s social media policy or disciplinary rules make clear that offensive twitter posts could result in discipline, up to and including termination?
  • Is there evidence of actual damage to the employer’s reputation, such as complaints from customers or wider publicity?

This case extends the principles already applied to Facebook comments, as in the case of Apple v Crisp where termination was justified for an employee who criticized Apple’s products on Facebook in breach of a clear internal policy.

[Game Retail Ltd v Laws]

 

Seyfarth Attorneys Present At 2014 American Intellectual Property Association Trade Secret Summit

Posted in Trade Secrets

On December 4th and 5th, nearly 100 trade secret, non-compete, and economic espionage practitioners convened at the Intel Global Headquarters in Santa Clara, California for the annual American Intellectual Property Law Association Trade Secret Law Summit.  Two Seyfarth attorneys, Erik Weibust and Daniel Hart, presented a paper co-authored with Andrew Masak and Robyn Marsh, titled “Lawyer Mobility and Trade Secrets Protection: Restrictive Covenant, Confidentiality, and Non-Disclosure Considerations in the Legal Profession.”  Specifically, the Seyfarth attorneys, sought to address the question of “what can law firms and companies do to protect themselves – like any other industry – from attorneys who leave to join a competitor?  From their paper and presentation,

Attorneys leaving their law firms or companies for other opportunities is nothing new.  And, certainly, changing from one employer to another is not unique to the legal industry.  As in many other industries, employees switching jobs among competitors can raise serious concerns about the misappropriation of trade secrets and confidential information, and client poaching.  Yet, unlike most other industries, restrictive covenants limiting attorneys from competing with their former firms or companies, or taking clients with them, are generally unenforceable.  In fact, most successful firm lawyers are recruited to other firms for the very reason that they have “portable” business.

This does not, however, mean that attorneys have free range to take and utilize confidential information and trade secrets about their prior firms or clients who choose not to go with them.  Quite to the contrary, there are ethical rules barring such behavior.  Nevertheless, the inability of companies and law firms to impose restrictive covenants on lawyers employed by the companies and firms poses practical challenges.  Indeed, in-house counsel, who often act as much as business advisors as they do legal counsel, may be privy to the most sensitive business information of a corporation when they leave to join a competitor, yet they, too, are generally immune from restrictive covenants that restrict their ability to practice law, even for a competitor. 

In addition to the Seyfarth team presenting their ethics in non-competes presentation, the conference included two days of presentations and debates, including:

  • An FBI Briefing on Economic Espionage, “Honey Potting,” and When to Include the FBI in Your Company’s Litigation
  • Emerging Best Practices for Protecting Trade Secrets in Employment and Business-to-Business Relationships;
  • A Judicial Panel Providing Insights from the Bench on Trade Secret and Non-Compete Disputes;
  • Debates on the Future of Non-Competes and Pending Federal Legislation;
  • Pros and Cons of Trade Secrets vs. Patents; and
  • The Latest on Developing Cybersecurity Standards.

The AIPLA Trade Secret Summit is an annual conference designed for both in-house and outside counsel. 

2014 Trade Secrets Webinar Series Year in Review

Posted in Computer Fraud, Cybersecurity, Data Theft, International, Non-Compete Enforceability, Social Media, Trade Secrets

Throughout 2014, Seyfarth Shaw LLP’s dedicated Trade Secrets, Computer Fraud & Non-Competes Practice Group hosted a series of CLE webinars that addressed significant issues facing clients today in this important and ever changing area of law. The series consisted of 10 webinars:

  1. 2013 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law 
  2. Employee Social Networking: Protecting Your Trade Secrets in Social Media
  3. Barbarians at the Gate: Class Action Avoidance and Mitigation for Data Breach
  4. Trade Secret and Non-Compete Legislative Update
  5. International Trade Secrets and Non-Compete Law Update
  6. Protecting Confidential Information and Client Relationships in the Financial Services Industry
  7. Ins and Outs of Prosecuting and Defending Trade Secret Injunction Cases
  8. Protecting Trade Secrets: The Current Landscape, Top Threats, Best Practices for Assessing and Protecting Trade Secrets, Proposed Legislation and Future Scenarios      
  9. How and Why California is Different When it Comes to Trade Secrets and Non-Competes
  10. Protecting Trade Secrets and Intellectual Property in Business Transactions

As a conclusion to this well-received 2014 webinar series, we compiled a list of key takeaway points for each of the webinars, which are listed below. For those clients who missed any of the programs in this year’s webinar series, the webinars are available on CD upon request or you may click on the title below of each webinar for the online recording. We are pleased to announce that Seyfarth will continue its trade secrets webinar programming in 2015 and has several exciting topics lined up. We will release the 2015 trade secrets webinar series in the coming weeks.

2013 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law

The first webinar of the year, led by Michael Wexler, James McNairy and Joshua Salinas, reviewed noteworthy cases and other legal developments from across the nation in the areas of trade secret and data theft, non-compete enforceability, computer fraud, and the interplay between restrictive covenant agreements and social media activity, as well as provided predictions for what to watch for in 2014.

  • While courts continue to struggle with what is the proper scope of trade secret preemption and at what stage in the case it should be applied (e.g., at the motion to dismiss/demurrer vs. summary judgment stage), courts increasingly hold that trade secret claims preempt or “supersede” concurrently pled common law tort claims based on the theft of information.
  • The U.S. Supreme Court’s decision in Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, 134 S. Ct. 568 (2013), appears to strengthen the enforceability of forum selection clauses as it held that, where the other requirements for transferring an action exist, courts ordinarily should, except in exceptional circumstances, transfer cases where valid, enforceable forum selection clauses exist. However, because this case did not involve a forum selection clause in an employment agreement, it remains to be seen whether lower courts faced with transfer motions in employment disputes will interpret forum selection clauses in the same manner as the Atlantic Marine court.
  • During 2013, courts in Massachusetts, Minnesota, and New York joined the Ninth Circuit’s narrow reading of the Computer Fraud and Abuse Act, limiting its applicability to scenarios where the defendant(s) hacked into or otherwise took affirmative steps to circumvent computer security, finding that violating employer computer usage or access policies alone do not violate the CFAA.

Employee Social Networking: Protecting Your Trade Secrets in Social Media

In our second webinar of the series, Scott Schaefers, Justin Beyer and Joshua Salinas addressed the interplay between trade secrets and social media.

  • Social Media Privacy Laws are on the Rise. At least 14 states now have laws prohibiting employers from requiring or even asking for access to employees’ or job applicants’ personal social media accounts. Penalties for violations range from nominal administrative fines to much larger damages, including punitive damages and attorneys’ fees. Many of the laws, however, have broad exceptions and loopholes, including required employer access of “nonpersonal” accounts and on suspected data theft or workplace misconduct. To learn more, please see our Social Media Privacy Legislation Desktop Reference.
  • Watch Out for Your Trade Secrets. The new legislation may throw wrenches into employer-employee trade secret theft cases. For example, a disloyal employee secretly copies a confidential employer customer list onto his personal LinkedIn account. The employee works in a state that has adopted the new privacy legislation, which has an exemption for suspected data theft. The employer hears unsubstantiated gossip about that list copying, but does not investigate based on the flimsy evidence and for fear of violating the privacy law. The employee later resigns, and uses that list for a competitor. Did the former employer waive a trade secrets claim against the employee because it decided not to investigate, even though it could have? Did that decision amount to an unreasonably insufficient effort to protect its trade secrets? 
  • Have a Social Media Policy. Employers should have compliant social media usage policies. The policy should describe, among other things, what constitutes a “personal” social media account, what types of information belong to the employer, what types of social media activity is permissible, the instances in which the employer may seek to require or request access, and the potential consequences for non-compliance. 

Barbarians at the Gate: Class Action Avoidance and Mitigation for Data Breach

The third installment of the series was presented by Robert Milligan, Bart Lazar and John Tomaszewski as they discussed avoidance and mitigation techniques for data breaches, including where the class action bar is going and what potential defenses and strategies companies can employ in such lawsuits.

  • A strong data security program requires layers. You can’t rely just on technical safeguards and the IT group. You also need people and processes to help catch the threats which get through the cracks that technology cannot plug. As part of that layering, it isn’t just about the prevention of threats, it is also about detection and early warning of threats. This will allow for the isolation of a threat which has made it through the “front door” before it gets into the safe in the bedroom.
  • A company gets a greater return on investment by being prepared for a security breach.   Training employees on handling personal information engages them in the process, and raises awareness to reduce the risk of an incident or that an incident will go unnoticed.  Developing an incident response protocol and team with defined responsibilities allows a company to be more nimble and efficient when a potential incident occurs.  And, as the study we referenced demonstrates, companies that already have an incident response plan in place spend 1/3 less on security incidents than those that do not have an incident response protocol.
  • Increasingly courts are becoming more receptive to putative class claims alleging unlawful data breach in violation of statute or under the common law. Article III standing and lack of actual damages continue to be key defenses to such claims but courts are more receptive to creative claims based upon statutory language or contract interpretation. Companies should consider using arbitration agreements with class action waivers, as well as early dispositive motions to attempt to manage the risk of these dangerous and expensive suits.

Trade Secret and Non-Compete Legislative Update

The fourth webinar in the series, presented by Katherine E. Perrelli, Daniel P. Hart and Dawn Mertineit discussed the significant statutory changes to several jurisdictions’ laws regarding trade secrets and restrictive covenants and pending legislation proposed in additional jurisdictions over the past year.

  • 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 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 learn more, please see our 50 State Desktop Reference: What Employers Need to Know About Non-Compete and Trade Secrets Law

International Trade Secrets and Non-Compete Law Update

The fifth webinar in the 2014 series, presented by Wan Li, Ming Henderson, Justine Turnbull and Daniel Hart, focused on non-compete and trade secret considerations from an international perspective. Specifically, the webinar involved a discussion of non-compete and trade secret issues in Europe, Australia, and China compared to the United States. This 90-minute webinar provided 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.

International

One size does not fit all. Requirements for enforceable restrictive covenants vary dramatically from jurisdiction to jurisdiction. Bearing in mind non-compete covenants may be unlawful in certain countries or heavily restricted, employers should carefully tailor agreements to satisfy local legal requirements and appropriately apply local drafting nuances to aid enforceability of any restrictive covenants. In addition, employers should take advantage of other contractual and/or tactical mechanisms as a “belt-and braces” approach, such as, clawbacks and forfeiture of deferred compensation (where permitted), use of garden leave provisions, and strategic use of forum selection and choice-of-law provisions.

Employers should also take practical measures to protect their confidential information and trade secrets, including limiting access to sensitive information, using exit interviews, and (provided that applicable privacy laws are followed) monitoring use of company IT resources and conducting forensic investigations of departing employees’ computer devices.

France

Drafting a non-compete clause under French labor law requires specific care as courts are particularly critical of the following: duration, the geographical and activities scope, the conditions in which the employer releases the employee from such obligation, the employee’s role, the interests of the company and the financial compensation provided by the clause.

During employment an employee is subject to a general obligation of confidentiality and breach may be subject to civil and criminal sanctions. Only “trade secrets”, however, are protected post-termination under certain circumstances. Employers should therefore enter into a confidentiality agreement to strengthen the protection of the company’s data post-termination. Unlike non-compete covenants, a confidentiality clause does not require any financial compensation and can be unlimited in time and scope, if justified by the nature of the confidential information to protect.

United Kingdom

Restrictive covenants are potentially void as an unlawful restraint of trade and are therefore only enforceable if they go no further than is necessary to protect legitimate business interests. In practical terms, this means that such covenants are only likely to be enforceable where they are fairly short in duration, the restriction is narrowly focused on the employee’s own personal activities (e.g. geographical scope) and is specific to the commercial environment. Careful drafting is key especially given the unforgiving nature of the English Courts when it comes to poor drafting even if the intention of the parties is obvious, an unclear clause could be struck out, rather than redacted. Employers should also consider other creative and acceptable ways to aid enforceability, such as, deferring remuneration and varying and reaffirming covenants.

Absent any agreement, only “trade secrets” will be protected after employment. Employers should therefore ensure that employment contracts and/or other free-standing binding agreements provide full coverage for the protection of confidential and other valuable business information post-termination. In addition, employers should also physically protect their confidential information (e.g. encrypting data, installing passwords, secure storage, etc.) and seek to retain control of it to reduce and limit unwanted disclosure and misuse. Physical security can be a more effective and less costly approach in the long-term.

Australia

It is possible to protect an organization’s confidential information, customer or client connections, trade secrets and other proprietary interests from inappropriate use by former employees in Australia. To do this detailed consideration is required of the employee’s role and responsibilities and we as their personal situation. Further, protection must not only be included in the written terms of employment but also employed at a very practical level in the business, for example, by password protecting documents, limiting access to confidential information to those who ‘need to know’ and by expressly reminding employees in different forms about the importance of certain information and relationships to the business and their related obligations.

Protecting Confidential Information and Client Relationships in the Financial Services Industry

The sixth webinar of the year, led by Scott Humphrey, Jason Stiehl and Rebecca Woods, focused on trade secret and client relationship considerations in the banking and finance industry, with a particular focus on a firm’s relationship with its FINRA members.

  • Enforcement of restrictive covenants and confidentiality obligations for FINRA and non-FINRA members are different. Although FINRA allows a former employer to initially file an injunction action before both the Court and FINRA, FINRA, not the Court, will ultimately decide whether to enter a permanent injunction and/or whether the former employer is entitled to damages as a result of the former employee’s illegal conduct.
  • Address restrictive covenant enforcement and trade secret protection before a crisis situation arises. An early understanding of the viability of your restrictive covenants and the steps that you have taken to ensure that your confidential information remains confidential will allow you to successfully and swiftly evaluate your legal options when a crisis arises.
  • Understand the Protocol for Broker Recruiting’s impact on your restrictive covenant and confidentially requirements. The Protocol significantly limits the use of restrictive covenants and allows departing brokers to take client and account information with them to their new firm.
  • Use of cloud-based services is increasing, including in the financial services industry. This creates different risks for protecting trade secrets with potential theft, exposure, or loss from cloud providers, hackers, and rogue or sloppy employees. A comprehensive and preventative slate of measures should be considered in order to ensure protection from each of these threats and to manage and mitigate the consequences of a compromise of protected information. “Analog” protections, such as confidentiality agreements, employee training, and basic security safeguards remain relevant. “Cloud” protections should be added, however, and include maximizing technology-based security features, negotiating savvy and strong vendor agreements, and obtaining properly-scaled cyber-insurance coverage. The compromise of proprietary information that includes personal information may trigger federal and/or state breach notification obligations.

Ins and Outs of Prosecuting and Defending Trade Secret Injunction Cases

In the seventh installment, Justin K. Beyer, Dawn Mertineit, and James Yu discussed practical steps employers can take to protect trade secrets during an employee’s employment and after, best practices employers should take upon discovering or suspecting that an employee has misappropriated its data, best practices employers should take in onboarding a competitor’s former employee to minimize the likelihood of being sued, and strategic considerations when faced with defending a trade secret misappropriation case.

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

Protecting Trade Secrets: The Current Landscape, Top Threats, Best Practices for Assessing and Protecting Trade Secrets, Proposed Legislation and Future Scenarios

In our eighth installment, Robert B. Milligan, Daniel Hart, along with the CREATe.org’s CEO Pamela Passman and Marissa Michel, the Director in PriceWaterhouseCoopers’ Forensic Services Group, took a rigorous look at the issue or trade secret theft and discussed insights from a recent PwC – CREATe.org report: Economic Impact of Trade Secret Theft: A Framework for Companies to Safeguard Trade Secrets and Mitigate potential threats.

  • Theft of trade secrets poses a substantial threat to companies throughout the world and will likely remain a significant challenge in the next 10-15 years as companies face increasing threats from competitors, malicious insiders, nation states, transnational organized crime, and hacktivists.
  • Companies should carefully assess their existing trade secrets portfolio and the steps needed to protect their trade secrets by following a detailed and comprehensive 5-step framework: (1) identifying their trade secrets, (2) assessing the threats to their trade secrets portfolio and possible exposures, (3) analyzing the relative priorities of their trade secrets to assess which trade secrets require the highest level of protection, (4) assessing the likely economic impact that would be caused by a theft of trade secrets, and (5) secure the trade secrets portfolio by implementing a management system (including policies, protocols, training, and other measures across the organization).
  • Effective protection of trade secrets requires a coordinated and deliberative effort across all business units in a company, including IT, HR, legal, and other business leaders. The only way to effectively protect a company’s trade secrets portfolio is to carefully analyze the threats to the company’s trade secrets and thoughtfully develop a comprehensive and customized strategy with buy-in from all stakeholders across the organization.

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

The ninth webinar this year, presented by Robert B. Milligan, James D. McNairy and D. Joshua Salinas, focused on recent legal developments in California trade secret and non-compete law and how it is similar to and diverse from other jurisdictions, which included: a discussion of the California Uniform Trade Secrets Act, trade secret identification requirements, remedies, and the interplay between trade secret law and Business and Professions Code Section 16600, which codifies California’s general prohibition of employee non-compete agreements. The panel discussed how these latest developments impact litigation and deals involving California companies.

  • While California has rejected the inevitable disclosure doctrine, threatened misappropriation can be a viable theory for relief when there is evidence of data theft and intent to use company data.
  • California’s recent appellate decision in Altavion, Inc. v. Konica Minolta Sys. Laboratory, Inc., 226 Cal. App. 4th 26 (2014)  has broadened the scope of trade secret protectable information to include ideas.
  • Federal district courts in California have increasingly elected to enforce forum selection clauses in non-compete agreements of California employees and found that enforcement of such clauses does not violate California’s strong public policy of employee mobility. See, e.g., Hegwer v. American Hearing and Associates, 2012 WL 629145 (N.D. Cal., Feb. 27, 2012) (granting motion to dismiss California action based upon Pennsylvania forum selection law clause – alleged illegality of non-compete irrelevant to enforcement of forum selection clause); Hartstein v. Rembrandt IP Solutions, 2012 WL 3075084 (N.D. Cal., July 30, 2012) (court agrees to enforce Pennsylvania forum selection clause, disregarding ultimate affect that Pennsylvania court will enforce improper non-compete clause against California citizen).
  • The recent decision in Cellular Accessories For Less, Inc. v. Trinitas LLC, No. CV 12–06736 D, DP (SHx), 2014 WL 4627090 (C.D. Cal. Sept. 16, 2014) illustrates that LinkedIn contacts and other social media connections could be protectable as trade secrets if the methods used to compile the contact information are “sophisticated,” “difficult,” or “particularly time consuming.” Nonetheless, the purported trade secret holder will also have to establish that the contacts were not made public.

Protecting Trade Secrets and Intellectual Property in Business Transactions

In the final installment of our 2014 Trade Secrets Webinar Series, Seyfarth attorneys Michael Baniak and Randy Bruchmiller focused on considerations involving protecting trade secrets and intellectual property in business transactions, including, mergers and acquisitions, joint ventures and other collaborative arrangements.

  • The protection of intellectual property is critical in joint venture and other agreements in order to protect what, many times, is some of the most important assets of the company. These protections may include protecting the confidentiality of the information and addressing what rights each party will have in the intellectual property after the transaction or venture.
  • Companies should protect their trade secrets at every level of the employee hierarchy. Executives and high-level employees usually have employment agreements that address confidentiality and the handling of trade secret information. Mid-level managers and lower level employees are often over-looked. It is important to have all employees enter into confidentiality agreements and, in many cases, intellectual property assignment agreements.
  • Regardless of what protections are put in place, it is very important to be aware of law changes in the states where the company has employees and to revise agreements to address any changes in the law.

2015 Trade Secret Webinar Series

Beginning in January 2015, we will begin another series of trade secret webinars. The first webinar of 2015 will be “2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law.” To receive an invitation to this webinar or any of our future webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here.

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

Michael Wexler is Chair and Robert Milligan is Co-Chair of the Trade Secrets, Computer Fraud & Non-Compete Practice Group. If you have any questions, please contact Michael Wexler at mwexler@seyfarth.com /(312) 460-5559, Robert Milligan at rmilligan@seyfarth.com /(310) 201-1579, the Seyfarth Shaw attorney with whom you work or any Trade Secrets, Computer Fraud & Non-Compete attorney on our website (www.seyfarth.com/tradesecrets). You may also access our blog, Trading Secrets, at www.tradesecretslaw.com.

Arizona Supreme Court Holds that UTSA Does Not Preempt Common Law Claims for Misuse of Confidential Information That Is Not a Trade Secret

Posted in Trade Secrets

The nineteenth century English jurist Lord Ellenborough once observed that “it is difficult to struggle with the common law.”  Kerr v. Willan, 171 Eng. Rep 570 (K.B. 1817).  Nearly two centuries later, struggling with the common law is still a formidable task – especially in cases involving claims of trade secrets misappropriation under the Uniform Trade Secrets Act (“UTSA”).

The UTSA, which has been enacted in one form or another by all but two states, provides a statutory remedy for trade secrets misappropriation.  Like the version of the UTSA enacted by other states, Arizona’s version of the UTSA, the Arizona Uniform Trade Secrets Act (“AUTSA”), contains a provision broadly providing that the law “displaces conflicting tort, restitutionary, and other laws of this state providing civil remedies for misappropriation of a trade secret.”  A.R.S. § 44-407(A).  Also like the version of the UTSA enacted by other states, the AUTSA includes an important exception to this broad preemption provision:

This chapter does not affect:

1. Contractual remedies, whether or not based on misappropriation of a trade secret.
2. Other civil remedies that are not based on misappropriation of a trade secret.
3. Criminal remedies, whether or not based on misappropriation of a trade secret.

A.R.S. § 44-407(B).

These provisions are straightforward when a plaintiff sues for misappropriation of information that is clearly a “trade secret” as defined by the AUTSA.  In those cases, the AUTSA is the plaintiff’s sole remedy (other than criminal and contractual remedies) and the plaintiff cannot bring common law claims (such as claims for unfair competition, conversion, or unjust enrichment) for misappropriation of the same information.  But what happens when a plaintiff sues for misappropriation of both “trade secrets” and confidential information that does not qualify as a “trade secret” under the AUTSA?  Since the plaintiff cannot assert an AUTSA claim for misappropriation of run-of-the-mill confidential information that does not qualify for protection as a trade secret, is the plaintiff free to assert common law claims for misappropriation of that run-of-the-mill confidential information?  Or is the plaintiff simply out of luck?

Courts throughout the country have grappled with this question since the UTSA was first adopted.  Not surprisingly, courts have reached different opinions on the question.  Courts in several states have held that the UTSA should be read broadly to preempt all claims related to the misappropriation of information, regardless of whether or not the information falls within the definition of a trade secret.  Conversely, courts in other states have concluded that the UTSA preempts only claims for misappropriation of “trade secrets,” as defined by the UTSA, and leaves available all other remedies for the protection of confidential information that is not a trade secret.

With its recent decision in Orca Communications Unlimited, LLC v. Noder, 337 P.3d 545 (Az. 2014), the Arizona Supreme Court joined this latter group and held as a matter of first impression that the AUTSA does not displace common law remedies for misappropriation of confidential information that does not qualify as a trade secret.

In that case, Orca Communications Unlimited (“Orca”), sued its former employee, Noder, for unfair competition after Noder left Orca to start a competing business.  In its complaint, Orca alleged that, through her employment with Orca, Noder had “learned confidential and trade secret information about Orca,” including  “Orca’s business model, operation procedures, techniques, and strengths and weaknesses,” and that she intended to “steal” and “exploit” that information to gain a competitive advantage for her new company.  After Noder filed a motion to dismiss, the trial court dismissed Orca’s unfair competition claim, reasoning that the AUTSA preempted “common law tort claims arising from the alleged misuse of ‘confidential information,’” even as to information “not asserted to rise to the level of a trade secret.” On appeal, the Arizona Supreme Court disagreed and reversed the trial court’s decision.  Noting the split of authority on the scope of the UTSA’s preemption of common law remedies, the court based its decision on the express language of the AUTSA cited above and observed:

On its face, § 44-407 displaces only conflicting tort claims for “misappropriation” of a “trade secret,” terms AUTSA specifically defines, A.R.S. § 44-401(2), (4), and leaves undisturbed claims “that are not based on misappropriation of a trade secret,” id. § 44-407(A), (B)(2). Nothing in this language suggests that the legislature intended to displace any cause of action other than one for misappropriation of a trade secret.

Moreover, the court noted that Noder’s argument was inconsistent with the “well-established principle” that “[i]f the legislature seeks to preempt a cause of action, the law’s text or at least the legislative record should say so explicitly” and that “[a]bsent a clear manifestation of legislative intent to displace a common-law cause of action, we interpret statutes with every intendment in favor of consistency with the common law.”  Accordingly, because the text of the AUTSA “creates reasonable doubt about the legislature’s intent regarding displacement of common-law claims that do not involve trade secrets as defined in AUTSA,” the court concluded that the trial court erred in dismissing the unfair competition claim to the extent that it was premised on misappropriation of confidential information that is not protected by the AUTSA.

The Arizona Supreme Court’s decision in Orca illustrates a significant trend in trade secrets litigation in recent years: as an increasing number of states adopt the UTSA, courts throughout the country increasingly must consider how the UTSA impacts existing common law remedies,  As reflected by the split of authorities that the Arizona Supreme Court cited in Orca, courts are literally all over the map in how they answer this question.  Since interpretation of the UTSA (as enacted by each state) is a matter of state law, it is unlikely that a consensus will be reached on this issue anytime in the near future.  And although creation of a federal civil cause of action for trade secrets misappropriation appears increasingly likely, current proposals in Congress provide that any federal civil action will not preempt state law.  Assuming that Congress does not completely preempt state law trade secrets law, the split of authorities among state courts will likely continue even if a federal trade secrets law is passed.

Given the lack of uniformity on this issue, employers should stay abreast of how courts are interpreting the UTSA or other trade secrets law in the jurisdictions where they do business.  For a quick reference on how your jurisdiction stacks up on trade secrets protection, refer to our 50 State Desktop Reference and contact a Seyfarth Shaw trade secrets lawyer.

USPTO To Host Trade Secret Symposium

Posted in Legislation, Trade Secrets

The U.S. Department of Commerce’s Patent and Trademark Office (USPTO) will host its first Trade Secret Symposium on Thursday, January 8, 2015, at USPTO Headquarters in Alexandria, Virginia. The symposium will provide an opportunity for members of the public to hear from representatives of academia, government, legal practice and industry on important trade secret issues facing innovators today.

The panels will touch on a variety of topics, including legislative proposals regarding trade secret protection, the challenges to estimating losses due to trade secret theft, the intersection of patents and trade secrets, issues in civil litigation involving trade secrets, international considerations, and the response to trade secret theft in the U.S.  The schedule will allow time for questions from the audience.

The symposium will be held at the United States Patent and Trademark Office, Madison Building, Madison Auditorium South, 600 Dulany Street, Alexandria, Virginia  22314.  The symposium will begin at 9:00 a.m. and end at 3:00 p.m.  The agenda will be available a week before the symposium on the USPTO Web site, www.uspto.gov/.

Registration is available at www.uspto.gov/ip/init_events/trade_secret_symposium.jsp.  Attendees may also register at the door.  Attendance is free.

Further information about the symposium may be found in the Federal Register Notice.

No Stick Without a Carrot: UK Court Refuses to Enforce Post-Employment Restrictive Covenants

Posted in Restrictive Covenants

The recent decision of the High Court in Re-use Collections Limited v. Sendall & May Glass Recycling Ltd. serves as a useful reminder for employers: restrictive covenants introduced during the employment relationship (rather than at the point of hiring) require specific consideration if they are to be enforceable. Under UK law, changes to employment terms require consideration if they are to be relied on. The fact the employee keeps their job does not amount to consideration, unless the employee would genuinely have been dismissed if they did not agree. UK law would only rarely justify termination for failure to agree new post-termination restrictions.

It is good practice to periodically review restrictive covenants, to reflect the latest UK case law and any changes to the employee’s role or the business.  To give the best chance of enforcing restrictions, employers should however take care to link any new covenants to some form of benefit for the employee. This can be monetary (e.g. linking the new restrictions to pay review) or other benefit (e.g. a promotion) for existing employees.  In the instant case, the continued employment of the employee was not considered a benefit, as there was no suggestion that the employee would have been dismissed if he refused to agree to the covenants.