Header graphic for print

Trading Secrets

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

Seyfarth Shaw is Pleased to Announce the Publication of the Trading Secrets 2014 Year in Review!

Posted in Computer Fraud and Abuse Act, Non-Compete Enforceability, Trade Secrets

The 2014 Year in Review is a compilation of our significant blog posts from throughout last year and is categorized by specific topics such as: Trade Secrets Legislation; Trade Secrets; Computer Fraud and Abuse Act; Non-Compete & Restrictive Covenants; Legislation; International; and Social Media and Privacy. As demonstrated by specific blog entries, including our Top 10 Developments/Headlines and Trade Secrets, Computer Fraud, and Non-Competes Webinar Series – Year in Review, our blog authors stay on top of the latest developments in this area of law and provide timely and entertaining posts on significant new cases, legal developments, and legislation.

The 2014 Review also includes links to the recordings of all webinars in the 2014 Trade Secrets Webinar Series and all video blogs. We are kicking off the 2015 webinar series with a program entitled, “2014 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secret, Non-Compete, and Computer Fraud Law.” More information on our upcoming 2015 webinars is available in the program listing contained in this Review. Our highly successful blog and webinar series further demonstrate that Seyfarth Shaw’s national Trade Secret, Computer Fraud & Non-Competes Practice Group is one of the country’s preeminent groups dedicated to trade secrets, restrictive covenants, computer fraud, and unfair competition matters and is recognized as a Legal 500 leading firm.

Click on the picture to the right to download your copy today.

Clients and friends of the firm can request a CD or printed copy of the 2014 Review by clicking here.

Appellate Court Re-Affirms Key Aspects of Georgia Non-Compete Law

Posted in Practice & Procedure, Restrictive Covenants, Trade Secrets

A recent decision by the Georgia Court of Appeals, Holland Ins. Group, LLC v. Senior Life Ins. Co., 766 S.E.2d 187 (Nov. 20, 2014), includes several excellent reminders regarding the enforceability (and unenforceability) of restrictive covenants in Georgia.

Relevant Facts and Holding

William Holland and Senior Life Insurance Company entered into an agreement (“Agreement”) authorizing Holland to sell Senior Life’s insurance products as an independent agent.  Senior Life subsequently terminated the Agreement and notified Holland that it had “suspended” payment of commissions to Holland pending an investigation into whether Holland had violated restrictive covenants contained in the Agreement.  Holland then filed a complaint against Senior Life seeking injunctive relief and a declaratory judgment that the Agreement’s restrictive covenants were overbroad and thus, unenforceable.  Holland also filed a motion for judgment on the pleadings, which sought a declaratory judgment that: “(1) the non-solicitation and confidentiality provisions of the [Agreement] are unenforceable as a matter of law; and (2) the liquidated damages of the [Agreement] are void[.]”  The trial court denied Holland’s motion, and Holland appealed.

Although the Court of Appeals found no error in the trial court’s denial of Holland’s motion for judgment on the pleadings as to the Agreement’s non-solicitation and confidentiality provisions, it did reverse the trial court’s decision that the Agreement’s liquidated damages provision was valid.  The Court’s analysis on both of these issues is worth examining.

First, Holland contended that Section 5.5 of the Agreement, entitled “Confidentiality,” was overly broad.  The provision provides, in relevant part, that “[u]ntil this Agreement terminates and at all times thereafter, you will hold in the strictest confidence and not use in any manner detrimental to us, or disclose, publish, or divulge, directly or indirectly, to any individual or entity any Confidential and Proprietary Information[.]”  Section 5.5 defines “Confidential Proprietary Information” as:

certain confidential and proprietary information relating to our business, including, but not limited to, certain lists of or data relating to our Customers and Prospective Customers … and certain other information relating to our services, marketing techniques, business methods or finances, which information is generally not known to the public…. [Senior Life] take[s] all reasonable steps necessary to ensure that each and every component of the Confidential and Proprietary Information constitutes a “Trade Secret.”

Holland contended that the “Confidential and Proprietary Information” defined in Section 5.5 did not constitute a trade secret and, thus, the confidentiality covenant was void because it did not contain a time limit.  While Georgia law does not require a time limit to safeguard trade secrets, it is well established that a “nondisclosure clause with no time limit is unenforceable as to information that is not a trade secret.”  (Citation omitted.)  Allen v. Hub Cap Heaven, Inc., 225 Ga. App. 533, 539, 484 S.E.2d 259 (1997).

Ultimately, the Court of Appeals determined that it could not conclude as a matter of law that the “Confidential and Proprietary Information” defined in Section 5.5 of the Agreement was not a trade secret.  Instead, the Court believed that additional facts beyond those set forth in the relevant pleadings was needed to determine whether the information defined as Senior Life’s “Confidential and Proprietary Information” is a legitimate trade secret or merely confidential information relating to its business.  As a result, the Court found no error in the trial court’s denial of Holland’s motion for judgment on the pleadings as to this provision.

Second, Holland contended that Section 5.7 of the Agreement, entitled “General Remedies and Damages,” was unenforceable because the section included an overbroad non-compete clause.  Section 5.7 provides a “formula” for determining liquidated damages as well as other damages that could be imposed if it is found that Holland violated “the terms of this Agreement[.]”  That section also includes the following non-compete clause:

[n]otwithstanding our proprietary interest in our Customers and Prospective Customers, we recognize that upon termination of this Agreement, certain of our Customers may choose to sever their respective relationship with us in favor of you or any person engaging you after the termination of this Agreement, without any direct or indirect solicitation by you in violation of the terms of this Agreement. As such, … you hereby agree that, with respect to any Customer of ours who completely or partially severs his/her relationship with us in favor of you … you shall pay us an amount equal to 100% of the commissions you earned (whether accrued or actually received) from us with respect to the Severing Customer during the twenty-four (24) month period immediately preceding the termination of this Agreement.

(Emphasis supplied.)

The Court noted that, generally speaking, a restrictive covenant in Georgia “may not validly preclude the employee from accepting unsolicited business from customers of his former employer.” Vulcan Steel Structures, Inc. v. McCarty, 329 Ga. App. 220, 764 S.E.2d 458 (2014).  While an employer may properly protect itself from the risk that a former employee “might appropriate its customers by taking unfair advantage of client contacts developed while working for that employer,” the employer “cannot prevent [the employee] from merely accepting overtures from those customers.”  (Citation and punctuation omitted.)  Id.  Accordingly, the Court held that “because the plain language of Section 5.7 penalizes Holland from accepting the unsolicited business from Senior Life’s former clients, regardless of who initiated the contact, it is unreasonable and unenforceable.”

Takeaways

Holland Ins. Group reinforces several important aspects of Georgia restrictive covenant law that one should take into account when including these types of restrictions in employment agreements:

  1. Do not use the phrase “confidential information” interchangeably with “trade secrets.”  “Confidential information” and “trade secrets” are very separate and distinct legal terms.  If you do not fully appreciate the legal differences, it will likely result in severe enforceability issues.
  2. Utilizing a liquidated damage provision can be a very beneficial way to streamline litigation, but only if it is properly applied.  Tacking on a liquidated damages provision to a non-solicitation provision without first understanding Georgia non-solicitation law (and the interchange between the two) is never advisable.

If you have any questions about whether your restrictive covenant agreements comply with Georgia law, contact a Seyfarth Shaw trade secrets lawyer.

Appellate Court Holds That Non-Compete Agreement Assigned Pursuant to Bankruptcy Court Order is Enforceable by Assignee

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

Courts are divided on the enforceability by an assignee of a non-compete covenant relating to personal services where the covenant does not state whether it is assignable and the employee does not consent to the assignment.

Status of the case.  A non-compete agreement signed by an employee of TSG, Inc., purported to be effective for two years after his termination and to be applicable to the whole of North America.  Subsequently, TSG, Inc. was adjudicated a bankrupt.  The trustee in bankruptcy assigned the agreement to TSG Finishing, a solvent, wholly-owned operating subsidiary of TSG, Inc., and the employee went to work for the subsidiary.  He had the same job title, and performed essentially the same tasks, as before.  Two years later, he resigned and accepted a similar position with a competitor.  The subsidiary sued him and moved for entry of a preliminary injunction.  The motion was denied, but the appellate tribunal reversed, remanded, and directed the trial court to enter the injunction.  TSG Finishing, LLC v. Bollinger, Case No. COA140623 (N.C. Court of Appeals, Dec. 31, 2014).

The assignor, the assignee, and the employee.  TSG, Inc. and its wholly-owned, operating subsidiary TSG Finishing, were in the business of “fabric finishing,” applying chemical coatings to textiles in order to provide customers with, for example, the desired color, stiffness, and abrasion resistance.  The fabric finishing process was complex and involved trade secrets. 

Bollinger was a long-time employee of TSG, Inc.  He signed the covenants in 2007 in exchange for a salary increase and a signing bonus.  

In 2009, TSG, Inc. filed a Ch. 11 bankruptcy petition.  Two years later, the bankruptcy trustee assigned a number of TSG, Inc.’s assets, including the covenants, to TSG Finishing which became Bollinger’s employer.  His title with each company was Quality Control Manager, and his duties were substantially the same.  TSG Finishing was headquartered in Pennsylvania.  He worked at a plant in North Carolina.  In 2013, he quit TSG Finishing and was employed by a nearby competitor and was given a similar job assignment.   

The non-compete.  The covenant was silent with regard to assignability.  It included a Pennsylvania choice-of-law provision.

Courts are split regarding the enforceability of personal service non-compete covenants assigned without the employee’s consent,  courts cite the following factors:

1. A covenant assigned simply by operation of law — for example, where the assignor corporation merely changed its state of incorporation or just converted to an LLC — usually is enforced.  See, e.g., Ochsner v. Relco Unisystems Corp., Case No. A13-2399 (Minn. Court of Appeals, Oct. 6, 2014), p. 6.

2. The employee may be deemed to have given implied consent if the covenant states that it is binding on the parties’ “successors and assigns.”  If the covenant contains no such words, but the employment agreement of which it is a part contains that language, judicial rulings are not uniform.

3. Courts are divided as to whether enforceability is impacted by the form of the assignment, for example, (a) a transfer to the assignee of all of the assignor’s assets, as opposed to (b) all of the assignor’s stock.  In either event, enforcement may be less likely if the assignor was not an operating business on the date of the transfer.  See, e.g., Cronimet Holdings, Inc., v. Keywell Metals, LLC, Case No. 14 C 3503 (N.D.Ill., Nov. 7, 2014) (slip opin. at 11-12).

4. If the assignee and the assignor are virtually identical, and particularly if they are closely affiliated, courts seem less hesitant to enforce assigned covenants.  The same is true if the employee’s job title, duties and responsibilities are no different after the assignment, especially if the employee received valuable consideration for signing.

5. Judges tend to be sympathetic to employees who may be unable to earn a living if the covenant is enforced.  However, judges also sympathize with assignees whose good will, confidential information, and investment would be at substantial risk in the absence of enforcement. 

The rulings here. 

The trial court concluded that the assignee was unlikely to succeed on the merits.  Among the primary factors which seem to have led to this result were the absence of a covenant provision permitting assignment, the enormous breadth of the covenant’s geographic scope, and the court’s view that a leading Pennsylvania case, Hess v. Gebhard & Co.,  808 A.2d 912, 922 (Pa. 2002) — which involved a sale of the assignor’s assets and held that the assignee could not enforce the covenant — was analogous. 

On review, the opposite result seems to have been reached primarily because of the extensive amount of time, effort, and expense the assignee (and the assignor) incurred in developing and protecting the trade secrets which were critical to the assignee’s business.  In the absence of enforcement, the competitor would be able to use that confidential information without making a similar investment.  In addition, the appellate judges deemed the Hess case to be distinguishable.  Also, the covenant did not have a provision prohibiting assignment, the assignor demonstrated that there were jobs the employee could perform even if the covenant was enforced, and substantial consideration was given for the covenant at signing. 

Takeaways.  There can be no certainty regarding the enforceability of a personal services non-compete assigned without the employee’s permission.  But consent may be inferred by, for example, a “successors and assigns” clause or if the nature of the employment immediately after the assignment is little different from what it was before.  If prejudice to the assignee resulting from not enforcing the covenant greatly outweighs the harm to the employee if it is, enforcement is likely.

Privacy & Security Are Back on the Agenda in DC

Posted in Cybersecurity, Legislation, Privacy

Cross Posted from Global Privacy Watch

The plethora of security incidents in the news have once again put security front and center of the international agenda. Predictably, this has triggered a number of responses from governments around the world. Some of these responses seem to have been ill-considered. However, one of the more comprehensive responses came out of the US President’s address to the Federal Trade Commission last week. A series of laws were proposed to address the increasing risks which are confronting individual security and privacy rights.

The President’s remarks at the FTC gives some valuable insight into where the US regulatory environment may end up in the next year or so. As a part of this analysis, one should focus on two very different agendas: Privacy and Security. These issues, while similar, are very different. Case in point, the UK PM’s comment around banning encryption could well result in increased security. However, it will absolutely damage individual privacy (and arguably also damage commercial security).

Security Breach Notification

President Obama has proposed a national standard for security breach notification. This is not the first time this proposal has been placed on the legislative agenda. While this is a step in the right direction, as is always the case, the devil is in the details.

One of the most challenging issues to deal with regarding a security breach is “what data” is impacted, and “does it matter”? In essence, the definition of “personal information” and the “harm” v. “access” triggers are the primary headache for those dealing with whether or not they have to provide notice. Elsewhere in the world, “personal information” is very broadly defined. Historically, the limiting definition of “personal information” was supposed to avoid over-notification. As has been pointed out, this does not seem to have worked.

Practically, it would be more useful to standardize the notice trigger around the concept of “harm”. This would operate to make the definition of “personal information” far less important. In effect, if there is a reasonable likelihood of harming someone with the information breached, a notice would be required. This “harm” concept is a well-established principle of tort law, and one that most lawyers are quite capable of dealing with when given the necessary facts. Removal of a variable always makes a solution more efficient, and the use of a results-driven variable such as “harm” should help avoid any unintended consequences which result in an imprecise definition of “personal information”. Let’s hope the Administration moves in this direction.

Another component which is concerning is the timing requirement around breach notification. While there have been instances of companies being slow to notify impacted consumers, notice is only going to be useful when you actually know what data was compromised, what was the source of the compromise, and who was responsible for the compromise. While a company may know it was breached, it may take well over 30 days to determine the scope and reasons for the breach. Without a clear understanding of the scope and reasons for a breach, an arbitrary 30-day notice requirement may lead to additional notice-fatigue. If this legislation is to be actually useful, there will need to be a considered discussion as to when the 30 day clock starts ticking; as well as when that clock can be stopped. Almost all the State breach statutes have a tolling period for law enforcement investigations. Hopefully, any national standard will at least have the same limitation.

Consumer Privacy Bill of Rights

Several years ago, the Obama administration presented a Consumer’s Privacy Bill of Rights as part of the US endorsement of the APEC Cross Border Privacy Rules System. There are 7 high-level principles contained in the Privacy Bill of Rights. These are: Transparency, Respect for Context, Individual Control, Focused (read: limited) Collection, Accuracy, Security and Accountability. As is usually the case, the high-level principles sound fine at first blush. However, the way they are implemented may have serious unintended consequences. For example, anti-fraud, development of new services, and IP protection are all activities which may become more challenging if the Individual Control principle does not include appropriate limitations. Additionally, some espouse a baseline set of obligations, regardless of individual choice, should be in place. Others point out that individuals often don’t have the time or expertise to exercise control in a meaningful way. Consequently, an over-broad reliance on Individual Choice may actually reduce the privacy protections of individuals.

Remedies

Along with the Privacy Bill of Rights, careful consideration will need to be taken around remedies. Some proposals for law have included private rights of action for violations of privacy. The current trend is to rely on the FTC or State Attorney’s General to enforce privacy rights. Regardless of one’s position on this issue, it is going to be a significant policy driver, with significant impacts to innovation and business growth. Policy makers and legislators will need input from their constituencies to avoid unintended negative consequences growth.

In anyone’s analysis, Privacy and Information Security are going to be hot topics on the agenda for the foreseeable future.

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.