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Trading Secrets

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

Upcoming Webinar: Ins and Outs of Prosecuting and Defending Trade Secret Injunction Cases

Posted in Trade Secrets

On Tuesday, September 16, 2014 at 12:00 p.m. Central, Seyfarth attorneys, Justin Beyer, Dawn Mertineit and James Yu will present the seventh installment in its series of 2014 Trade Secret Webinars. They will focus on the issues confronting plaintiffs in preparing for and prosecuting trade secret cases as well as the particularities of conducting defensive discovery prior to a trade secret preliminary injunction hearing.

Topics will include:

  • Practical steps employers can implement to protect trade secrets upon termination of an employee relationship;
  • What employers should do if their trade secrets are improperly removed or disclosed, or if a former employee is violating his/her agreements;
  • How to prosecute a case against a former employee who has or is suspected of having misappropriated trade secrets;
  • Best practices for hiring new employees to limit potential liability for trade secret misappropriation; and
  • Strategic considerations in defending a trade secret misappropriation case in advance of a preliminary injunction hearing.

Our panel consists of a diverse panel of attorneys with nationwide experience prosecuting and defending trade secret cases as well as advising clients on restrictive covenant and trade secret issues.

Cost: 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.

 

Push for Federal Trade Secret Legislation Gaining Momentum

Posted in Legislation, Trade Secrets

Federal legislators introduced bills this year to create a civil cause of action for private litigants in federal court for trade secret misappropriation.

With the most recent bill introduced in the House by a bi-partisan coalition in late July, there appears to be surging momentum for the passage of federal trade secrets legislation this fall, particularly with several leading companies and business groups supporting the creation of a federal civil remedy.

The Economic Espionage Act, which provides criminal liability for trade secret misappropriation, currently only authorizes civil actions by the Attorney General but not by private parties. Accordingly, unless diversity jurisdiction exists, or there is some other hook such as a cause of action brought under the federal Computer Fraud and Abuse Act, there is currently no basis to bring a civil trade secret cause of action in federal court.

Instead, plaintiffs are left to bring trade secret claims in state court under various state statutory adoptions of the Uniform Trade Secrets Act. Massachusetts and New York have not adopted the UTSA and trade secret claims are brought under the common law in those jurisdictions.

There are inconsistencies and differences among some states concerning their specific adoption of the UTSA and some courts have differing interpretations regarding the key provisions of the UTSA. In sum, there are significant differences among some states concerning key issues such as recoverable damages/royalties, preemption, trade secret identification, reasonable secrecy measures, statute of limitations, and reverse engineering. Thus, companies who conduct business in the United States often must address differing and conflicting standards when trying to protect their trade secrets throughout the nation.

Senate Bill: Defend Trade Secrets Act

On April 29, 2014, Sens. Christopher Coons (D-Del.) and Orrin Hatch (R-Utah) introduced the Defend Trade Secrets Act of 2014. 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.” According to the sponsors, the bill will provide uniform trade secrets protection and federal remedies across the United States. They also stated that there is a need for legislative action with an estimated $160 to $480 billion lost to trade secrets theft in the United States and the ease of theft in the electronic age.

The bill marked the latest attempt in the past four years to create a private civil cause of action for trade secret misappropriation at the federal level. The following bills previously failed: Amendment to Currency Exchange Rate Oversight Reform Act of 2011,  Protecting Trade Secrets and Innovation Act of 2012 (“PATSIA”), and Private Right of Action Against Theft of Trade Secrets Act of 2013 (“PRATSA”).

The bill provides for a five year statute of limitations and provides uniform remedies for misappropriation of trade secrets. It provides for injunctive relief to prevent any actual or threatened misappropriation of trade secrets.  It also allows for affirmative actions to be taken to protect trade secrets. With respect to damages, it provides damages for actual loss, unjust enrichment, and a reasonable royalty in certain scenarios. Additionally, in exceptional circumstances, royalties can be awarded for the use of trade secrets in lieu of a permanent injunction. In cases of willful or malicious misappropriation, the bill provides for exemplary damages of not more than three times the actual damages. It also provides for attorneys fees’ and costs for willful and malicious misappropriation or for the pursuit of a trade secret cause of action in bad faith.

It also provides for ex parte orders for preservation of evidence and seizure of any property used, in any manner or part, to commit or facilitate a violation of the statute, using the procedure contained in the Lanham Act.

Lastly, the bill provides that nothing in the statute “shall be construed . . . to preempt any other provisions of law.” Accordingly, the intent of the bill is not to preempt state UTSA claims. It is unclear whether state common law claims would also not be subject to preemption.

House Bill: Trade Secrets Protection Act

On July 29, 2014, a similar bill, entitled the Trade Secrets Protection Act of 2014, was introduced into the House, by a bi-partisan group led by George Holding (R-N.C) and Jerrold Nadler (D-NY).

“American businesses face relentless cybersecurity threats every day, costing our economy billions of dollars and tens of thousands of jobs each year,” said Rep. George Holding in his press release in support of the bill.

“As a way to help create jobs, grow our economy and protect our businesses, I have introduced the Trade Secrets Protection Act of 2014.  This bill will help supply American businesses, both large and small, with the tools needed to combat these destructive threats,” he added.

“American businesses are global leaders in innovation and job creation, yet they are faced with increasing threats to valuable information.  The current patchwork within state and federal statutes is not enough to keep pace with organized trade secret theft, resulting in a loss of nearly $100 billion which could mean 200,000 jobs, a recent report stated, “ he remarked.

“By helping American businesses defend against these threats, we are not only protecting American interests, but helping recover the millions of dollars and thousands of jobs lost each year,” Holding concluded. 

The bill is co-sponsored by Holding, Howard Coble, R-N.C., Hakeem Jeffries, D-N.Y., Steve Chabot, R-Ohio and John Conyers, D-Mich.

Differences Between the Two Trade Secret Bills

The House bill largely tracks the Senate’s Defend Trade Secrets Act but has three notable and significant modifications, which are tracked in this redline:

1) It only permits a civil claim for “misappropriation of a trade secrets that is related to a product or service use in, or intended for use in, interstate or foreign commerce.” It does not permit a claim for a violation of 18 U.S.C. § 1831(a) and 1832(a).

2) It permits a seizure order on an ex parte basis to preserve evidence or to prevent the propagation or dissemination of the trade secret that is the subject of the action but it has certain precautions and limitations not found in the Senate bill.

3) It clarifies that it only covers misappropriation actions that occur on or after it is enacted.

With respect to the seizure order language, in order to obtain an ex parte order, the plaintiff must show, that (1) a temporary restraining order under Rule 65(b) would be inadequate because the defendant would evade, avoid, or otherwise not comply with such order; (2) an immediate and irreparable injury will occur if seizure is not ordered; (3) the harm to the plaintiff of denying the order outweighs the legitimate interests of defendant and substantially outweighs any harm to third parties; (4) the plaintiff is likely to succeed against the defendant in showing that the defendant misappropriated the trade secret and is in possession of the trade secret; (5) the plaintiff described with particularity the matter to be seized and the location where the matter is to be seized; (6) the defendant would destroy or make the property inaccessible to the court if the applicant were to proceed on notice; and (7) the plaintiff has not publicized the request.

Additionally, the court’s order must (1) minimize any interruption of the business operations of  third parties and the defendant that is unrelated to the trade secret that has allegedly been misappropriated; (2) protect the property from disclosure to plaintiff; (3) set a hearing date no later than seven days after the order is issued; and (4) require a security adequate to cover damages from a wrongful or excessive seizure. The court is required to take appropriate action to protect the defendant from publicity. The court is also required to take custody of the material ordered seized. Lastly, any person who suffers damage by reason of a wrongful or excessive seizure has a cause of action against the plaintiff.

In sum, the most significant difference between the bills is the clarification and refinement of the seizure order. 

Analysis and Discussion of the Legislative Movement

According to sources, there may not be any significant opposition by the Senate sponsors to the House’s version of the trade secret bill.

With some attention away from patent reform on the Hill, there may be an opportunity to get a trade secret bill done in the fall.  Congress has shown an ability to pass amendments to the Economic Espionage Act in recent years. We expect that there will be activity on the bills in early September with possible votes taken in mid-to-late September.

There appears to be some very positive momentum for the bills, including bi-partisan support in both houses by high ranking legislators and likely support by the Obama Administration. Additionally, on the right, the Heritage Foundation recently wrote an article in support of a private right of action. On the left, Congresswoman Zoe Lofgren previously proposed creating a civil cause of action in federal court last year in the PRATSA bill. Also, a diverse set of companies and organizations have come out in favor of legislation or the concept of a federal civil cause of action, including Adobe, Boeing, Microsoft, IBM, Honda, DuPont, Eli Lilly, Broadcom, Caterpillar, NIKE, Qualcomm, General Electric, Michelin, 3M, United Technologies Corporation, AIPLA, ABA IP Section, National Association of Manufacturers, and the National Chamber of Commerce.  

As indicated NAM supports the bill, noting that it marked “a critical step toward ensuring manufacturers can effectively and efficiently enforce their trade secrets at home and abroad.” “[Trade secret] theft costs businesses in this country some $250 billion a year,” the group said. “The Trade Secrets Protection Act would help to address this challenge by providing access to federal civil enforcement for trade secrets theft. Right now, businesses must go state by state to defend their rights.”

Proponents of the bill cite the advantages of a federal cause of action, as among other things, a unified and harmonized body of law that addresses discrepancies under the existing law and provides companies a uniform standard for protecting its proprietary information.  It may treat trade secrets on the same level as other IP and establish them as a national priority, address national security concerns, and create a demonstrative effect on major foreign jurisdictions.  The bill may provide a complimentary measure to combat trade secret misappropriation by private industry in light of strained government resources.  There are also service of process advantages, ease of conducting nationwide discovery, and additional remedies to aid victims, such as seizure.  

Additionally, the former head of the Patent Office, David Kappos recently came out in favor of the bill on behalf of the Partnership of American Innovation stating, “Trade secrets are an increasingly important form of intellectual property, yet they are the only form of IP rights for which the protection of a federal private right of action is not available. The Trade Secrets Protection Act will address this void, and the PAI supports its swift enactment.”

While no formal opposition has been organized yet, various attorneys skeptical of the legislation cite federalism concerns, legislation in search of a problem, the alleged over breadth of the seizure language, and the perceived burden on the federal courts.

We will carefully track the developments of these bills going forward this year. It is important to note that like the United States, the European Commission is considering a directive providing more uniform protection of trade secrets.

Kansas Federal Court Denies Preliminary Injunction For Alleged Violation Of Confidentiality And Non-Compete Covenants under Canadian Law

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

The plaintiff corporation — now a Delaware LLC based in Kansas — was headquartered in Alberta, Canada at the time its employees signed agreements containing confidentiality and non-compete covenants.  The agreements designated the applicable law to be that of Alberta.  When its ex-employees allegedly violated the covenants, the plaintiff sued them and their new employer in a Kansas federal court.  Relying largely on Alberta law, that court recently denied the plaintiff’s motion for entry of a preliminary injunction.

Summary of the Case

The court denied the injunction with respect to the covenant of confidentiality, holding that the evidence did not show a substantial likelihood of trade secrets misappropriation.  The non-compete prohibited ex-employees from servicing any competitor or customer in any capacity anywhere in the world.  No Canadian case was located which enforced such a broad prohibition.  The court concluded that neither the balance of harms nor the public interest warranted issuance of the requested injunction.  AgJunction LLC v. Agrian Inc., Case No. 14-CV-2069-DDC-KGS (D.Kan., July 23, 2014).

The Corporate and Individual Parties

Plaintiff AgJunction makes and sells “precision” agronomy hardware and software.  In November 2012, AgJunction moved its corporate headquarters from Alberta, Canada, to Kansas.  Before AgJunction left Canada, its employees signed non-compete and confidentiality covenants governed by Alberta law.  

The corporate defendant, Agrian, is a California corporation which, historically, made and sold “compliance” agronomy software.  In December 2012, AgJunction licensed Agrian to access the former’s software for the purpose of reselling or sublicensing it to specified companies.  The license contained a confidentiality provision.  In early April 2013, Agrian began developing “precision” agronomy software.  One by one during the period August-December 2013, five employees of AgJunction resigned and went to work for Agrian.  They also were named as defendants (subsequently, the cases against two of the individuals were dismissed for lack of personal jurisdiction over them in Kansas).

AgJunction’s Complaint

AgJunction’s largest customer was Crop Production Services (CPS).  When AgJunction was informed by CPS of its intent to move its “precision” business to Agrian, AgJunction filed a multi-count complaint against Agrian and the five ex-employees.  The complaint alleged trade secret misappropriation, breach of contract, and other wrongs. 

“Last peaceable uncontested status”

AgJunction moved to enjoin the defendants from competing.  Reviewing Kansas law, the court stated that a preliminary injunction should not be issued unless it restores the “last peaceable uncontested status existing between the parties before the dispute developed.”  To warrant an injunction, AgJunction was required to make a “strong showing” that it was likely to succeed on the merits.  But Agrian began the process of creating “precision” products prior to the time any of the five employees left AgJunction, and so the court concluded that an injunction would “disturb the status quo and is disfavored.” 

Canadian Law Governing Misappropriation of Trade Secrets

A Canadian employer alleging trade secrets misappropriation must demonstrate that particularized “know how” was taken, not just “general skills and knowledge.”  AgJunction showed only the latter. 

Canadian Law Governing Non-Compete Covenants

The court concluded that “AgJunction has produced some evidence suggesting that defendants, at best, acted in an underhanded manner in their departure from and dealings with AgJunction” but not the requisite “strong showing” that it would prevail at trial.  Reviewing Alberta law, the court observed that “Because there is generally an imbalance in power between employer and employee, restrictive covenants in employment contracts receive rigorous scrutiny in Canada.”  Further, Canadian courts enforce non-compete clauses “only in exceptional circumstances.”

Geographically broad non-compete clauses have been upheld in Canada, for example, an assets sale agreement restraining competition in the entire country, but no case was located that supports a global provision.  The court stated that Canadian jurists are not likely to enforce an employment agreement covenant prohibiting “a nearly unbounded scope of work with no geographical limitation.”  Finally, regarding balancing harms and the public interest, the court said that “the harm the injunction would cause defendants is certain, while the evidence that they stole AgJunction’s confidential and proprietary information is not.” 

Takeaways

The opinion in AgJunction v. Agrian should be consulted when Canadian law may apply to restrictive covenants.  The opinion contains an extensive discussion restrictive covenant disfavor by Canadian courts.  Interestingly, AgJunction did not rewrite the choice of law provision in its covenants, to take advantage of the greater likelihood of enforceability, after moving its headquarters to Kansas (see, e.g., Wichita Clinic, P.A. v. Louis, 185 P.3d 946, 951-55 (Kans. App. 2008) (emphasizing the sanctity of contracts in enforcing reasonable restrictions, even in employment agreements).  However, a preliminary injunction against Agrian might also have been denied under Kansas law unless the expansive breadth of the territorial and prohibited activities provisions in AgJunction’s covenants was narrowed.

Webinar Recap! International Trade Secrets and Non-Compete Law Update

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

We are pleased to announce the webinar “International Trade Secrets and Non-Compete Law Update,” is now available as a podcast and webinar recording.

The fifth webinar in the 2014 series, was 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.

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

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, exclusivity 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 labour law requires specific care as Courts are particularly critical of the following: duration, the geographical and activities scope, the employee’s role, the interests of the company and the financial compensation provided by the clause.  Case law and the applicable collective bargaining agreement may also provide minima to comply with and employers should be mindful of these.  

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.

UK

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. 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.

United Kingdom Update on Contractual Notice Periods and Restrictive Covenants

Posted in International, Non-Compete Enforceability, Restrictive Covenants

An employee cannot ‘walk out’ and refuse to work to avoid their notice period and the restrictive covenants contained in their contract of employment.

In Sunrise Brokers LLP v Rodgers [2014] EWHC 2633 the High Court held that an employer does not have to accept that a ‘walk out’ by an employee will terminate the contractual relationship. The employer has the option to accept the employee’s repudiatory breach or to affirm the contract. In addition, although a court cannot order an employee to work, it can grant an injunction ordering an employee to observe the other terms of his contract during his notice period and his post-termination restrictive covenants.

Background

Mr Rodgers was employed by Sunrise on a fixed term contract until 22 September 2014, terminable on 12 months’ notice. His contract contained a valid set of restrictive covenants.

At the beginning of March 2014 Mr Rodgers signed another contract with a competitor to commence work on 1 January 2015. On 27 March 2014 Mr Rodgers told Sunrise that he was leaving immediately, which he confirmed in writing in April 2014. Sunrise stopped paying him at the end of March 2014 and confirmed payment would recommence if he returned to work.

Decision

Following Mr Rodgers’ resignation with immediate effect, Sunrise had the option to accept his repudiatory breach or to affirm the contract. The Court ruled Sunrise did not lose its right to affirm the contract by its decision to cease payment to Mr Rodgers who refused to work, as the employee must be ready and willing to work in exchange for wages and vice versa. Failure of either of these mutual obligations did not mean the contract ceased to exist. In effect, only one obligation (pay) is suspended until the other obligation (work) is performed.

Mr Rodgers was not entitled to payment irrespective of work, as the price of the restrictions and other terms to which he was bound under his contract (analogous to garden leave). His entitlement to payment depended on his readiness and willingness to work. It was held Mr Rodgers remained employed until 16 October 2014 (a reduced notice period offered by Sunrise).

The Court agreed that it was forbidden to enforce the terms of Mr Rodgers’ contract, if this would compel Mr Rodgers into “forced labour”. However, it was appropriate to grant an injunction ordering Mr Rodgers to observe the other terms of his contract (e.g. not working for a competitor and not contacting his former clients), until 16 October 2014.

The post-termination restrictive covenants were reasonable when entered into and could be enforced.  Given the fact the contract indicated that the maximum period of restraint required by Sunrise was 6 months from the last client contact and that an employee would usually spend approximately 4 months handing over his/her job, the Court concluded it would be reasonable to enforce the post-termination covenants for 10 months from the last client contact.  Therefore, it was held that the restrictive covenants would be upheld until 26 January 2015.

 “Take-aways”

  1. Although the courts cannot force an employee to work, they are willing to grant an order requiring an employee to comply with the other terms of his contract, therefore it is essential to have a well drafted and up to date employment contract.
  2. During garden leave an employee is entitled to receive pay whilst being asked not to work by the employer but the same does not apply where the employee refuses to work. An employee cannot demand that he/she is put on garden leave. It is the employer’s choice.
  3. Employers should carefully consider the short and long term impacts of an employee resigning in breach of contract and seek legal advice on immediate actions to be taken.  Beyond the restrictive covenant issues, the business may also want to consider how to safeguard confidential information, trade secrets and client contacts.

Seyfarth Attorneys Present on Latest Developments in Trade Secrets and Non-Compete Law At ABA Annual Meeting

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

Seyfarth partners Robert Milligan and Kate Perrelli will lead a CLE program for the ABA IPCentral Conference during the ABA’s Annual Meeting in Boston on August 7th.

They are scheduled to be joined by in-house counsel Pamela Davidson from U.S. Foods, Karen Tompkins from Stryker, Lisa Seilheimer from CDW, and Jerry Cohen from Burns & Levinson LLP.

The panel will discuss recently passed trade secret legislation in Texas, New Jersey, and other jurisdictions, as well as the recent efforts to create a federal civil cause of action for trade secret theft and the recent attempt to ban non-compete agreements in Massachusetts. They will also discuss significant non-compete decisions in Illinois and Kentucky regarding the required consideration for non-competes. Panelists will also review recent cases on forum selection/choice of law, pleading standards, identification requirements, summary judgment, and damages.

Best practices for protecting trade secrets and risks to proprietary information, as well as the latest cases addressing reasonable secrecy measures will also be addressed.

The ABA-IPL Trade Secrets Committee will also provide the audience with its annual 2013/2014 survey of the latest developments in trade secrets and non-compete law.

For more information about the program, please click here.

If you are in Boston, please come over for what is sure to be a great program.

There is Still Time to Cast Your Vote in the ABA’s 100 Best Legal Blogs Competition!

Posted in Trade Secrets

Voting is open for the American Bar Association’s Annual 100 Best Legal Blogs competition until August 8th. Thank you to those who have already voted — we’ve received some really nice feedback over the last week.  If you have not already voted, we hope you will cast your vote today to help keep Seyfarth’s Trading Secrets blog on the ABA’s list for 2014.

Trading Secrets is a resource for employers and legal professionals that provides timely legal and news updates to C-suite executives, corporate in-house counsel, technology and security officers, and HR professionals concerned about protecting their valuable trade secrets, intellectual capital, workforce, customer relationships, and other confidential information.

The blog also offers a mobile device version; video blogs; podcasts of our popular and informative webinars on trade secret, non-compete, and computer fraud issues; and resources, including an archive library from 2008 to the present, and our 50 state non-compete/trade survey and social media survey.

Help us gain some extra recognition by casting your vote in the ABA’s annual 100 best legal blogs competition!

You only have a few days left to vote: The deadline is August 8, 2014.

Click the link here to vote. Simply provide a short explanation of why you like this blog.

 

When Is The Possession of International Trade Secrets A Mistake Or Economic Espionage: Contrasting U.S. v. Yeh with U.S. v. Liew

Posted in Cybersecurity, Data Theft, Espionage, Trade Secrets

The judgments rendered in two recent 2014 federal criminal cases reveal the inherent complexity in prosecuting international trade secret misappropriation claims.

In U.S. v. Liew, Judge White of the U.S. District Court for the Northern District of California sentenced defendant Walter Liew to 15 years in prison for misappropriating trade secrets from chemical giant DuPont and selling them to an overseas Chinese company known as the Pangang Group, based in Chengdu. It was proven during the trial that Liew and his company, ironically named USA Performance Technology, received over $27.8 million in compensation for selling DuPont’s industrial trade secrets to Pangang, the trade secrets including technical blueprints belonging to DuPont related to the manufacturing of titanium dioxide, a white-colored pigment used in many commonplace consumer products such as paper and plastic. Thus, Liew’s intent to misappropriate trade secrets was established beyond a reasonable doubt by U.S. Attorneys.

On the other hand, in U.S. v. Yeh, a Texas jury acquitted former Texas Instruments (TI) employee Ellen Yeh on all counts brought against her (including trade secret misappropriation) based on proprietary information she admitted downloading before leaving the U.S. to work for a semiconductor manufacturing company in China. In her testimony, which she submitted polygraph results for, Ms. Yeh stated that she had no idea such activity was illegal or unauthorized, was confused about what constituted a TI trade secret vs. non-trade secret, and merely downloaded the files only for safekeeping in case another job opportunity arose to work for TI in China. Therefore, after a nine-day jury trial, she was acquitted because she was not found to have the requisite intent to commit trade secret misappropriation or illegal copying.

Proving Intent to Misappropriate Trade Secrets Beyond A Reasonable Doubt

In the Yeh case, it was difficult to prove Ms. Yeh’s intent to misappropriate trade secrets beyond a reasonable doubt, which is the standard used under the law, e.g., trade secrets misappropriation prohibited by the Economic Espionage Act and illegal copying prohibited by the National Information Infrastructure Act, a U.S. computer crime law passed in 1996. It is also harder to establish the commission of complex crimes such as criminal trade secret misappropriation because such claims require multiple elements to prove, such as the accused having to know what a trade secret is first (and why it would derive value from not being generally known to the public) and then knowingly, willfully misappropriating the trade secret once having this knowledge.

It may have been harder to prove intent in the Yeh case because it only involved the downloading of proprietary information. In the Liew case, not only was their possession of trade secrets (in the form of blueprints) but there were proven sales of that information made by Liew to the Pangang group. Liew also paid former DuPont engineers for trade secrets, so there were financial transactions Liew underwent to acquire the trade secrets in the first place. Therefore, the presence of commercial activity may make it easier to prove intent to misappropriate trade secrets, because it already establishes that the accused knows that the proprietary information he is selling or buying has high economic value.

Knowledge of What Constitutes a Trade Secret v. A Non Trade Secret

In the Yeh case, Ms. Yeh asserted that she was confused about what constituted a TI trade secret versus non-trade secret proprietary information. It may be difficult to discern a highly valuable trade secret from information that is already proprietary. Therefore, the burden is on the trade secret holder to educate their employees properly about company information, or to have stricter protection protocols under company policies for information clearly constituting trade secrets. The easier it is to establish that an accused party knows what a trade secret is, the easier it will be to establish the intent of that accused party to misappropriate trade secrets. For example, in addition to being found guilty of paying former DuPont employees to provide him with company trade secrets, Liew was also found guilty of filing false tax returns, making false statements, and witness/evidence tampering. Therefore, it might be clearer in Liew’s case that he knew what trade secrets were and also knew their true value – which is why he went to such extents to acquire them and sell them to the Pangang Group.

Limited Time for Prosecution

Having a smaller window of time to pursue remedies for trade secret misappropriation allows a higher likelihood of success. As does ensuring the defendant does not leave the country. Ms. Yeh departed TI over nine years ago. In 2005, because she had been living in China for a while already, the prosecution was stalled for over five years, and even after the grand jury indictment in 2008, she still continued to live overseas in China. Not until August of 2013 did Yeh finally return to the U.S. to face trial after she was detained at the South Korean border in response to a “Red Notice” issued by Interpol at the U.S. government’s request. The process would have been much better for the prosecution, strategically as well as time-wise, if the defendant stayed in the United States, like the Liew case.

The Defendant Need Not Actually Use The Trade Secrets

Liew’s attorney, Stuart Gasner from Keker & Van Nest, argued that Liew received the trade secrets from a former DuPont engineer who had kept them sitting in his closet for 14 years. He further stated that there was no proof that Liew actually used those secrets to hurt DuPont. Assistant U.S. Attorney John Hemann quickly responded that Gasner’s argument that the trade secrets weren’t used was “the most insulting thing that has been suggested” and that there was still misappropriation and the sale of such highly confidential, proprietary information.

Takeaways

There are a number of factors, as discussed above, that need to be taken into consideration when prosecuting a trade secret misappropriation claim in a federal criminal case. For a crime as complex as trade secret misappropriation, the more details and facts that can be established about the defendant’s state of mind, the stronger the case will be.

 

Upcoming Webinar: Protecting Confidential Information and Client Relationships in the Financial Services Industry

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

On Tuesday, August 26, 2014 at 12:00 p.m. Central, Seyfarth attorneys Scott Humphrey, Jason Stiehl and Rebecca Woods will present the sixth installment in its series of 2014 Trade Secret Webinars. They will focus 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.  Topics will include:

  • Practical steps financial institutions can implement to protect trade secrets and client relationships.
  • What should you do if your trade secrets are improperly removed or disclosed, or if your former employee is violating his/her agreements.
  • How do you prosecute a case against a former employee who is a FINRA member.
  • The impact of the Protocol for Broker Recruiting on trade secrets and client relationships.

Our panel consists of attorneys with experience advising clients on restrictive covenant and trade secret issues.

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.

Registration

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

 

 

No Massachusetts Non-Compete or Trade Secret Legislation This Year

Posted in Legislation, Non-Compete Enforceability, Trade Secrets

Although, as we have previously reported, the Massachusetts legislature arguably got closer to enacting a non-compete statute this year than ever before ─ which, if Governor Deval Patrick had his druthers, would have banned them outright ─ there will be no new legislation this year according to our sources.   The legislative session ends today.

As we last reported, a compromise bill was overwhelmingly approved by the Massachusetts Senate in early July that would have required:

(a) that non-competes be in writing and signed by both the employee and the employer, and expressly state that the employee has the right to consult with counsel prior to signing;

(b) to the extent reasonably feasible, employees be given five business days’ advance notice; and

(c) if entered into after commencement of employment (but not in connection with a separation agreement), non-competes must be supported by fair and reasonable consideration in addition to continued employment,    and notice must be provided at least ten business days before the agreement is to be effective; and where the non-compete is part of a separation agreement, the employee must be given seven days to rescind acceptance.

The compromise bill also would have established presumptions of reasonableness with respect to duration (6 months), geographic reach (the area in which employee, during the last two years of employment, provided services, or had a material presence or influence), and the scope of proscribed activities (specific types of services provided by the employee during last two years of employment), and it would have banned the use of non-competes for  workers classified as nonexempt under the FLSA (e.g., hourly workers).

Finally, the compromise bill would have permitted courts to reform (or “blue pencil”) non-competes only where provision to be reformed was either presumptively reasonable (as described above) or where the employer made objectively reasonable efforts to draft the particular provision so that it would be presumptively reasonable.

While this bill was supported in the Massachusetts Senate, it will not pass this year.  Likewise, there will be no new legislation enacting the Uniform Trade Secrets Act.

Although non-compete legislation is dead in the water this year, we have no doubt that it will be a hot issue again next year, particularly with the election of a new governor this fall.  We will keep you posted on any developments.