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Trading Secrets

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

President Obama Signs the Defend Trade Secrets Act: Tips for Navigating the New Law

Posted in Legislation, Trade Secrets

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Seyfarth Synopsis: A new federal civil cause of action is now available to trade secrets owners seeking to pursue claims of trade secret misappropriation under the Defend Trade Secrets Act (“DTSA”).  To take full advantage of the remedies provided  under the DTSA, companies have an immediate obligation to provide certain disclosures in all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following today.  Our post provides a brief history and summary of the DTSA, and, notably, provides business owners a list of tips and strategies to implement in light of the DTSA’s passage.

Today, President Obama signed into law the Defend Trade Secrets Act of 2016, which Congress passed on April 27.

What does the passage of the DTSA mean for your company? In a nutshell, it means your company can now pursue claims for trade secret misappropriation in federal court like other forms of intellectual property (i.e., patent, trademark, copyright) and seek remedies such as a seizure order to recover misappropriated trade secrets.  It also serves as a reminder that trade secrets can be highly valuable to your company and that you should ensure that your company has identified such assets and put in place reasonable secrecy measures to protect them.

Below, we provide an overview of the DTSA’s key provisions.  We also provide tips and strategies in light of the passage of the DTSA.

What Does the DTSA Provide?

The DTSA authorizes a civil action in federal court for the misappropriation of trade secrets that are related to a product or service used in, or intended for use in, interstate or foreign commerce.  Prior to the passage of the DTSA, civil trade secret claims were solely a matter of state law, with 48 states having adopted some version of the Uniform Trade Secrets Act (“UTSA”) and the remaining states recognizing common law claims for misappropriation of trade secrets.  While the DTSA does not displace these state law claims, it provides a federal civil claim above and beyond the state law claims that previously existed.

How Does the DTSA Work?

The DTSA creates a uniform standard for trade secret misappropriation by expanding the Economic Espionage Act of 1996 (“EEA”) to provide a federal civil remedy for trade secret misappropriation.  The DTSA also provides pathways to injunctive relief, monetary damages, and other remedies in federal court for companies whose trade secrets are misappropriated, including via ex parte property seizures (subject to various limitations).   Through the ex parte seizure provision, a plaintiff can seek to have the government seize misappropriated trade secrets without providing notice to the alleged wrongdoer.  The DTSA further harmonizes the differences in trade secret law under the UTSA and provides more uniform discovery procedures.

What Are the Significant Provisions of the DTSA?

The DTSA provides aggrieved parties with legal recourse in federal court via a federal trade secret cause of action (whereas previously, relief was only available under the state law UTSA or common law claims), as well as new remedies, including a seizure order.  Below are the key provisions of the statute:

  • The DTSA provides for actual damages, restitution, injunctive relief, significant exemplary relief (up to two times the award of actual damages), and attorney’s fees.
  • Ex parte property seizures are available to plaintiffs, but subject to limitations. As noted above, an ex parte seizure means that an aggrieved party can seek relief from the court against a party to seize misappropriated trade secrets without providing notice to the alleged wrongdoer beforehand.  As a measure to curtail the potential abuse of such seizures, the DTSA prohibits copies to be made of seized property, and requires that ex parte orders provide specific instructions for law enforcement officers performing the seizure, such as when the seizure can take place and whether force may be used to access locked areas.  Moreover, a party seeking an ex parte order must be able to establish that other equitable remedies, like a preliminary injunction, are inadequate.
  • Injunctive relief for actual or threatened misappropriation of trade secrets is available in federal court.  However, a court will not enjoin a person from entering into an employment relationship unless there is a showing through evidence of “threatened misappropriation and not merely on the information the person knows.”  This language was included in the DTSA to guard against plaintiffs pursuing “inevitable disclosure” claims.
  • The statute of limitations is three years.  A civil action may not be commenced later than 3 years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered.
  • A whistleblower immunity provision exists to protect individuals from criminal or civil liability for disclosing a trade secret if it is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law.  Similarly, a related provision states that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding as long as the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.
  • The immunity provision places an affirmative duty on employers to provide employees notice of the new immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  This notice provision applies to contracts and agreements that are entered into or updated after the date of DTSA’s enactment (May 11, 2016).
  • An employer will be in compliance with the notice requirement if the employer provides a “cross-reference” to a policy given to the relevant employees that lays out the reporting policy for suspected violations of law. Should an employer not comply with the above, the employer may not recover exemplary damages or attorney fees in an action brought under the DTSA against an employee to whom no notice was ever provided. Curiously, the definition of “employee” is drafted broadly to include contractor and consultant work done by an individual for an employer.
  • The “Trade Secret Theft Enforcement” provision increases the penalties for a criminal violation of 18 U.S.C. § 1832 from $5,000,000 to the greater of $5,000,000 or three times the value of the stolen trade secrets to the organization, including the costs of reproducing the trade secrets.
  • The DTSA further amends the RICO statute to add a violation of the Economic Espionage Act as a predicate act.

What Distinguishes the DTSA from the UTSA?

Because claims may still arise under states’ varied versions of the UTSA , it is important to highlight the important ways in which the DTSA differs from the UTSA.  Most notably, the DTSA opens the federal courts to plaintiffs in trade secrets cases.  The DTSA also allows for an ex parte seizure order.  A plaintiff concerned about the propagation or dissemination of its trade secrets would be able to take proactive steps to have the government seize misappropriated trade secrets prior to giving any notice of the lawsuit to the defendant.

Nevertheless, the ex parte seizure order is subject to important limitations that minimize interruption to the business operations of third parties, protect seized property from disclosure, and set a hearing date as soon as practicable.  As referenced above, the ex parte seizures are limited and may only be instituted in “extraordinary circumstances.”

The DTSA also contains no language preempting or displacing other causes of action that may arise under the same common nucleus of facts of a trade secret claim, unlike the UTSA as interpreted by some states which preempt such claims.

As also noted above, unlike the UTSA, the DTSA also provides protection to “whistleblowers who disclose trade secrets to law enforcement in confidence for the purpose of reporting or investigating a suspected violation of law,” and the “confidential disclosure of a trade secret in a lawsuit, including an anti-retaliation proceeding.”

Why Employers or Businesses Should Care and What They Should Do

Here are some tips and strategies we believe will assist employers and business owners in complying with and taking full advantage of the relief available under the DTSA:

  1. Update: Starting immediately, all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following today must contain disclosures of the DTSA’s immunity provisions (either set forth directly in the agreement or in a policy that is cross-referenced in the agreement).  Employers who fail to provide these disclosures cannot recover exemplary damages or attorney fees in an action brought under the DTSA against an employee to whom no notice was provided.   Consequently, employers should immediately update their standard agreements to include the required disclosure language. Remember that employee is broadly defined under the DTSA to include contractor and consultant work done by an individual for an employer.
  2. Review: Have qualified counsel review policies and relevant agreements to ensure that they contain the required language noted above.  Additionally, ensure that your company is using non-disclosure agreements with your employees and that such agreements have clear definitions of trade secrets and confidential information and are not overly broad.
  3. Ensure and Protect: Do you have valuable information that could be protected as a trade secret? First, identify valuable sources of information in your organization. You should then check to see how your company protects such information. You will only be able to pursue trade secrets claims if you can show that your company employs reasonable secrecy measures to protect its trade secrets. Check out one of our recent webinars discussing best practices for the proper treatment of trade secret information. We have found that a trade secret audit with the assistance of counsel can be valuable for companies trying to identify and protect their trade secrets.
  4. Prepare: To protect your company’s trade secrets and avoid DTSA claims against your company, maintain proper on-boarding and off-boarding procedures and counsel your employees regarding the handling and further protection of your company’s confidential and trade secret information, including recurring employee training. Also closely monitor relationships with vendors and contractors who may have access to your company’s trade secrets and confidential information and ensure that there are appropriate protections in place.

It will be a brave new world with the passage of the DTSA. Federal courts will likely become the new forum for trade secret litigation. Make sure that your company is ready.

Further Information

Please visit our blog, Trading Secrets, for further coverage of the DTSA. We regularly update our page featuring DTSA developments, and we recently recorded a webinar and podcast featuring coverage of the DTSA updates (as of April 11, 2016).  We will also be hosting a webinar on Monday, May 16.  The webinar will describe the key features of the DTSA and compare its key provisions to the state Uniform Trade Secrets Act (“UTSA”) adopted in many states. The webinar will also provide practical tips and strategies concerning the pursuit and defense of trade secret cases in light of the DTSA, and provide some predictions concerning the future of trade secret litigation.

We are happy to discuss with you what the DTSA may mean for your company.

 

No Microscope Needed to See Why This Non-Compete Is Unenforceable

Posted in Non-Compete Enforceability, Restrictive Covenants

shutterstock_325101959When is a microscope not needed? When the problem one is looking at is big as an elephant, not small as an amoeba.

Nion, an electron microscope manufacturer, contracted with Gatan, a spectrometer manufacturer, to use Gatan’s spectrometers in Nion’s microscopes. The contract contained both confidentiality and non-compete clauses. When Gatan learned that Nion had sold other parties microscopes that used Nion’s own spectrometer, Gatan sued, claiming that Nion had breached the non-compete (but not the confidentiality) provision of the contract. In ruling on Nion’s motion to dismiss, the court found that the non-competition provision was void and that Gatan’s claim that the provision was necessary to protect its trade secrets was without merit. Gatan, Inc. v. Nion Company, 2016 WL 1243477 (N.D. Cal. Mar. 30, 2016).

Gatan proffered some interesting arguments in opposition to Nion’s motion (kind of like your mother said it was “interesting” when you cut your own hair at the age of 5 using some rusty scissors that you found in the neighbor’s yard). Though Gatan’s complaint captioned a trade secret claim, it never used the word “misappropriate” anywhere in its complaint. Gatan also asserted that the covenant not to compete in its contract with Nion protected Gatan’s trade secrets. But the non-compete covenant said nothing whatsoever about trade secrets.

In making its arguments, it appears that Gatan was shooting for the so-called “trade secrets exception” to California Business and Professions Code 16600 (prohibiting covenants not to compete), but unfortunately had somewhat of a misfire. Still, the court’s order contains some notable analysis.

First, the court acknowledges that there is a trade secret exception to California’s prohibition on covenants not to compete. As we have discussed in earlier blogs, here and here, California courts are split on whether there is a trade secret exception to BPC 16600. Some, like those cited in the Gatan order, believe that an exception exists. Others, like Ret. Grp. v. Galante, 176 Cal. App. 4th 1226 (2009), deny (in dicta) that such an exception does or even needs to exist. Unfortunately, the Gatan court did not advance this discussion.

So lesson #1 from Gatan: If one is going to invoke the “trade secrets exception” to BPC 16600, then the covenant not to compete better expressly make reference to the alleged “trade secrets.” Companies cannot, as Gatan did, simply point to a theoretical exception to the rule as a way to enforce what some would argue is a facially void clause. As the court wrote, “under any reading of the Agreement …, [the non-compete clause] cannot be considered ‘necessary’ to protect Gatan’s trade secrets”—the court found that the agreement’s separate confidential information provision sufficiently did this.

Second, Gatan cites to Golden v. California Emergency Physicians Med. Grp., 782 F.3d 1083 (9th Cir. 2015), for the proposition that BPC 16600 applies in the business-to-business context as much as in the employer-to-employee context, on the ground that the section “does not specifically target covenants not to compete between employees and their employers.” (See our blog on Golden here.) Other courts have held similarly. See, e.g., Jan Marini Skin Research, Inc. v. Allure Cosmetic USA, Inc., 2007 WL 1508686, at *13 (Cal. Ct. App. May 24, 2007), as modified on denial of reh’g (June 25, 2007) (unpublished) (“While many cases applying section 16600 arise in the context of an employer-employee relationship, the statute also applies to other contracts, such as manufacture or distributorship agreements between businesses or individuals.”); Richmond Techs., Inc. v. Aumtech Bus. Sols., 2011 WL 2607158, at *17 (N.D. Cal. July 1, 2011).

Perhaps time will tell if Golden and Gatan accurately predict the breadth of BPC 16600.  In the meantime, one thing appears clear: if one seeks to enforce a covenant not to compete on the basis that the covenant is needed to protect trade secrets, the covenant better at least mention the term “trade secrets” at least before Judge Hamilton in the Northern District of California.

Drones & Trade Secrets – How Low Can They Go?

Posted in Trade Secrets

shutterstock_230531929This Blog first addressed the threats drones pose to the protection of Trade Secrets in June of 2014.[1] Since then, drones continue to proliferate at a dizzying pace. Everybody and their brother has one, and drones are becoming much more sophisticated and advanced. [2]  The challenge is for the law to keep up with the technology, and so far, the law has not done a very good job.

In many ways, the challenge to protect trade secrets from drones is similar to the challenge to comply with legal data privacy obligations. In both situations, bad guys keep coming up with new ways to invade privacy and misappropriate secrets. The legal obligations remain generally the same, but the playing field keeps changing as technology advances.

For data privacy, there is no clear federal law,[3] but state laws frequently use language such as “reasonable security procedures and practices to protect the information from unauthorized access.”  For trade secrets, the legal standard is found in the Uniform Trade Secrets Act (UTSA) adopted by 48 states[4] and there should soon a federal version with the Defend Trade Secrets Act of 2016 (DTSA).[5]  The UTSA says two things relevant to drones. In order to be a trade secret, the information must not be publicly available, and a business must take reasonable steps to keep the information confidential.

Trade secrets are only protected as long as they remain secret. If a trade secret becomes known, it is like trying to push toothpaste back into the tube — you can’t do it. All you can do is seek legal recourse.  But in order to be successful in seeking such recourse, you must be able to show the information was not “publicly available” and you took “reasonable steps” to keep your secrets secret.

This leads us back to drones. In law school, we learned the common law principle of “ad coelum,” which says property rights extend vertically up and down.[6] Aviation changed upward vertical rights (a landowner’s rights no longer extend to the “heavens”), but it is still not clear where they stop.  In 1946, the U.S. Supreme Court declared airspace is now a “public highway,” but consistently flying noisy planes 83 feet above a chicken farm can be an unlawful taking of property.[7]  In 1970, the 5th Circuit held DuPont didn’t voluntarily disclose its trade secrets to someone spying via aerial photography on a methanol plant that was under construction.[8] It has been a long time since these two cases were decided, and there has been very little case law on these issues since then.  How relevant are these cases today in the age of modern drone technology when the standard for protecting trade secrets is “reasonable”?

Federal law remains unclear regarding the height at which a landowner can express exclusive dominion. Some have advocated that landowners should be allowed to exclude drones from airspace above their land up to a height of 500 feet.[9]  State laws are starting to come out and they naturally vary,[10] while states are taking a wait-and-see approach.  New legislation has been proposed to protect privacy rights,[11] and much has been written about Fourth Amendment ramifications and our “reasonable expectation of privacy,”[12] but how does this impact business owners and their trade secrets?  What can a business do to protect its trade secrets in an increasingly invasive drone age? Indeed what must a business do to protect its legal right to claim its confidential information is a trade secret at all.

And what if the drone is flying really low? What if the drone is just outside your office window? Does it matter if your office is ground level or on the 25th floor?

Rapidly advancing drone technology changes things for business owners. While satellites with sophisticated cameras can read the screen on a laptop while the user is sitting on a park bench, satellites with this capability are not in the hands of the typical business competitor — at least not yet — but drones are.

So what reasonable steps must businesses take to protect their trade secrets from drones?

As tempting as it may be,[13] shooting drones down is not a good option. Federal law makes it a crime to destroy a civil aircraft , and there are several reports of state and local criminal charges being filed against property owners who shot at drones like they were sporting clays.[14]

Signal jamming is one possibility.[15] The Secret Service started experimenting with this after a drone crashed on the White House lawn.[16]  However, this presents legal problems for private citizens since federal law prohibits using jamming equipment that interferes with cellular services, police radar, and GPS, and Wi-Fi.[17]

Geo Fencing is another option. Airports increased their research in this area after a drone recently collided with a passenger plane landing at Heathrow Airport outside London.[18] This technology prevents drones from flying over geographic locations by blocking the GPS coordinates.  But this only affects drones that need GPS equipment to operate. It won’t prevent someone from flying by line of sight.

Other technologies include sophisticated listening equipment able to detect and locate drones based on the sounds they make. Specialized radar technology is being tested that works differently from standard radar which has difficulty spotting slow-moving objects. Drone spoofing is a technology that involves sending fake GPS signals to the drone.  Hijacking (or “skyjacking”) drones involves taking over their navigational control systems. One company is even experimenting with security drones that are able to capture spy drones in nets that dangle from the security drones.[19] Drones armed with “net guns” were used during last year’s Boston Marathon to capture any drones violating an airspace ban along the race course.[20]

Basic window covering should also be examined. While many states have “Peeping Tom” laws that make it illegal to look in windows, their applicability to drones spying on places of business is largely untested.  In the new drone landscape, businesses should consider blocking all visibility through windows to interior spaces where confidential information exists and might be viewed with powerful new cameras — especially now that drones can bring those powerful new cameras even closer.

Finally, consider whether “good” drones should be used to proactively protect trade secrets, instead of just worrying about defending against “bad” drones controlled by competitors. Good drones could be effective enhancements to traditional surveillance systems already being used by businesses concerned about protecting their trade secrets.

Businesses must strike a balance between getting work done freely without restrictions and doing what is necessary to protect company secrets.  Make sure your next trade secret audit includes the exposures created by modern drone technology and reasonable countermeasures available to minimize such exposure, while also considering proactive ways drones might be used to enhance a business’ overall security.

[1] See “Josh Salinas Explains How Drones Could Pose a Threat to the Protection of Trade Secrets

[2] See, e.g., New announcements such as wearable cameras that can fly to take selfies, and the proliferation of indoor drones.

[3] There is no comprehensive federal law providing a uniform compliance standard for information security best practices.  U.S. businesses must comply with 47 different states’ laws governing such issues.

[4] The UTSA, published by the Uniform Law Commission (ULC) and amended in 1985, was recently adopted by Texas, which became the 48th state to enact some version of the UTSA. New York and Massachusetts are the only states that have not enacted the UTSA.

[5] Congress passed the Defend Trade Secrets Act of 2016 in April. The DTSA has strong bipartisan support, and President Obama has indicated he will sign it into law.

[6] Taken from the Latin Cuius est solum eius est usque ad coelum (et ad inferos) meaning “for whoever owns the soil, it is theirs up to Heaven (and down to Hell).”

[7] United States v. Causby, 328 U.S. 260 (1946).

[8] E.I. DuPont deNemours & Co. V. Christopher, 431 F.2d 1012 (5th Cir. 1970)

[9] Rule, T. A. (2015). Airspace in an Age of Drones. Boston University Law Review, 95(1), 155-208, at p. 159

[10] E.g., Nevada prohibits drones from flying less than 250 feet.

[11] E.g., Sen. Edward Markey (D-MA) is pushing legislation known as the Drone Aircraft Privacy and Transparency Act.

[12] See, e.g., Matiteyahu, Taly, (2015). Drone Regulations and Fourth Amendment Rights: The Interaction of State Drone Statutes and the Reasonable Expectation of Privacy, Columbia Journal of Law and Social Problems, 48, 265-308.

[13] The Colorado town of Deer Trail made national headlines when it called for a vote on issuing hunting licenses for drones.

[14] See, e.g., http://www.cnn.com/2015/09/09/opinions/schneier-shoot-down-drones/

[15] See, e.g., http://makezine.com/2015/10/16/research-company-takes-aim-uavs-portable-anti-drone-rifle/

[16] See http://www.popsci.com/secret-service-tries-jamming-drone-signals-near-white-house

[17] See https://www.fcc.gov/general/jammer-enforcement

[18] See https://www.theguardian.com/technology/2016/apr/18/drones-government-labour-ba-rules-drones-heathrow-incident

[19] See “Copping a ‘copter” in the May 2, 2015 issue of The Economist

[20] https://www.bostonglobe.com/metro/2015/04/21/boston-marathon-drone-detection-firm-brought-net-guns/2oSp9Brfn5rFOIYqRJmP3H/story.html

White House Issues A Call To Arms With Respect To Non-Competes

Posted in Legislation, Non-Compete Enforceability, Restrictive Covenants

shutterstock_348832949 (1)On May 5, 2016, the White House issued a report largely piggybacking on a recent U.S. Treasury Department study, on which we previously posted, with a primary focus on the purported misuse and negative impacts of non-compete agreements.  The White House report reiterated much of what the Treasury Department covered its March 31, 2016 study, and focused on how the White House will apparently begin to “facilitate discussion on non-compete agreements and their consequences.”

Indeed, on the same day that the White House issued its report, Vice President Joe Biden posted a lengthy message on his Facebook page, linking to a White House survey that encourages employees to share with the administration “how non-competes agreements or wage collusion are holding you down.”  The Vice President expressed concern in his post about “the improper use of non-compete agreements, where companies make workers promise when they are hired that if they leave the company, they can’t work for another company in the same industry,” and noted that “these agreements can create unnecessary roadblocks for any worker trying to get a raise, looking to move up the ladder by joining another employer, or even start their own company.”  He concluded by promising that “the President and I will continue to fight for the dignity and respect of hardworking Americans,” including “put[ting] forward a set of best practices and call to action for state legislators to make progress on reforms to address the misuse of non-competes.”

Like the U.S. Treasury Department, the authors of the White House report briefly acknowledge that, in some cases, non-compete agreements can play an important role in protecting businesses, promoting innovation, and encouraging greater employer investment in their workers.  They ultimately conclude, however, that the potential harm of misuse by employers, and effects on wages, labor market dynamism, innovation, entrepreneurship, and regional economic growth outweighs those benefits.  The authors further noted the “growing movement in states to take action to limit the misuse of non-compete agreements,” specifically highlighting that several states have taken steps to limit the scope and duration of non-compete agreements, noting for example Hawaii’s ban on non-compete agreements for technology jobs and New Mexico’s recent ban on non-compete agreements for health care jobs.

The authors go on to list seven areas in which they believe that workers may be disadvantaged by non-competes, and gives examples of how state legislatures are attempting to address the issues.  The issues include (1) compelling workers who are unlikely to possess trade secrets to sign non-competes, (2) having new employees sign a non-compete only after accepting a job offer, (3) not explaining the implications and enforceability of such agreements to employees, (4) drafting overly broad or unenforceable agreements,(5) requiring non-competes without consideration beyond continued employment, (6) restricting employees after they are fired without cause, and (7) the purported detrimental health and well-being effects by restricting consumer choice.

The authors note that in the ensuing months, the White House, the Treasury Department, and Department of Labor will convene a group of experts in labor law, economics, government and business to facilitate discussion on this matter.  “The goal will be to identify key areas where implementation and enforcement of non-competes may present issues, to examine promising practices in states, and put forward a set of best practices and call to action for state reform.”  They also stress that research must continue to assess and identify policy reforms and how such reforms will impact the non-compete world.  Lastly, the authors emphasize that ultimately the power of reform is in the hands of state legislators and policymakers to adopt institutional reforms that strike a balance between the appropriate use of non-competes and the protection of the workers subjected to them.

Despite Evidence That Ex-Employee Violated Customer Non-Solicitation Covenant, Injunction Denied Because No “Irreparable” Harm

Posted in Non-Compete Enforceability, Practice & Procedure

shutterstock_345216839Touzot was an employee of ROM, a seller of products used in making balsa wood model planes and boats.  His employment agreement included a post-termination customer non-solicitation covenant.  After he left ROM, he became a competitor.  The company sued him and his Ecuadorian supplier of balsa wood, which previously had been ROM’s supplier, alleging that they were colluding to steal ROM’s customers.  Although ROM was found to have satisfied most of the other requirements for injunctive relief, the court held that a monetary award would provide adequate compensation for any damages. Touzot v. ROM Dev. Corp., Civ. Ac. No. 15-6289 (D.N.J., Apr. 26, 2016) (Linares, J.) (not for publication).

Status of the case.  Touzot initiated litigation in a New Jersey state court against ROM.  The company is based in Rhode Island.  ROM removed the case to federal court and moved to dismiss for lack of personal jurisdiction.  While the motion was pending, ROM filed its own lawsuit in Rhode Island federal court, charging breach of contract, misappropriation of trade secrets, tortious interference, etc.  ROM sought and obtained from the judge in Rhode Island a temporary restraining order, but it was stayed pending a determination of which court should adjudicate the dispute.

After ROM’s motion to dismiss the New Jersey case was denied, the Rhode Island suit was transferred to New Jersey for consolidation with the case there.  A few days ago, Judge Linares issued his opinion denying ROM’s application for a preliminary injunction and granting the motion filed by Touzot and his balsa wood supplier to dissolve the TRO.

Background.  By 2011, ROM had sustained a sharp decline in the volume of its quite profitable sales of balsa wood products, partly because of a shortage of balsa wood.  Hoping to improve its sales, ROM hired Touzot who introduced the company to a supplier in Ecuador which had abundant quantities of balsa wood and became ROM’s principal source.  Touzot was ROM’s contact person with the supplier as well as ROM’s sales representative for its model wood customers (according to ROM, the customers, unlike the supplier, previously were unknown to Touzot).

Once ROM had an adequate supply of balsa wood, its model products sales took off.  Nevertheless, after four years the company fired Touzot who then formed his own company to sell balsa wood model products.  ROM’s supplier announced dramatically increased prices for sales of balsa wood to ROM, which would have eliminated its profits for wood model products.  However, the supplier sold balsa wood to Touzot at the old, lower prices.  Other suppliers of balsa wood did not raise their prices but, as before, they did not have the capacity to satisfy ROM’s needs.  Consequently, the company could not compete effectively with Touzot, and many of its former customers became his customers.

The restrictive covenants.  Touzot’s employment agreement with ROM contained multiple restrictive provisions (non-compete, non-solicitation, trade secret confidentiality, etc.).  The only covenant ROM sought to enforce with an injunction was Touzot’s promise that for two years after termination he would not solicit anyone in “the Americas” who was a ROM customer during his employment for orders with respect to products similar to those sold by ROM.

Injunction standards.  In his opinion, Judge Linares stated that, whether New Jersey or Rhode Island law applied, ROM was required to show that (1) it was likely to succeed on the merits, (2) the balance of equities favored ROM, (3) an injunction was in the public interest, and (4) ROM would suffer irreparable harm if the injunction were not issued.  He wrote that ROM was likely to be able to prove that Touzot solicited its customers, and that he sold products substantially similar to those it sold.  The time and geographical restrictions were found to be reasonable.  Touzot was said to have admitted that he could obtain employment without violating the non-solicit restriction and simply chose not to do so.  However, regarding the fourth prong, the judge ruled that if ROM could prove lost sales as a result of Touzot’s covenant violations, a monetary award would provide adequate relief.

Takeaways.  The same evidence admitted at an injunction hearing frequently is offered at a subsequent trial on the merits, and the ruling on a motion for entry of a preliminary injunction often is a good predictor of the likely judgment at trial.  For these reasons, many cases settle after an injunction hearing and ruling.  Of course, Judge Linares stressed that his decision applied solely to the motion for preliminary injunctive relief and was not dispositive with respect to the merits of (a) the parties’ differing interpretations as to the meaning of the non-solicitation covenant, much less (b) ROM’S allegation that Touzot breached it.

The court did not really address the public interest prong of the injunction standards.  Yet, if Touzot is enjoined from selling to model wood customers for two years, they might be unable to locate an alternative source for the product during that period.  On the other hand, there is a public interest in holding contracting parties, especially relatively sophisticated parties, to the contractual commitments they make.

In his opinion, Judge Linares pointed out that monetary relief is rarely adequate for breach of a confidentiality covenant which puts another’s trade secrets into the public domain.  On the other hand, many courts recently have denied motions for injunctions with respect to violations of various covenants, holding that compensatory damages can be an adequate remedy when the injury consists of provable lost sales and profits.

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

Posted in Trade Secrets

shutterstock_149599301We are pleased to announce the webinar “Protecting Confidential Information and Client Relationships in the Financial Services Industry” is now available as a podcast and webinar recording.

Seyfarth’s fourth installment, presented by Scott Humphrey, Marcus Mintz and Kristine Argentine, focused on trade secret and client relationship considerations in the banking and finance industry, with a particular focus on a firm’s relationship with its FINRA members.

As a conclusion to this well-received webinar, we compiled a list of  takeaways:

  • Enforcement of restrictive covenants and confidentiality obligations for FINRA and non-FINRA members are different. Although FINRA allows a former employer to initially file an injunction action before both the Court and FINRA, FINRA—not the Court—will ultimately decide whether to enter a permanent injunction and/or whether the former employer is entitled to damages as a result of the former employee’s illegal conduct.
  • Address restrictive covenant enforcement and trade secret protection before a crisis situation arises. An early understanding of the viability of your company’s restrictive covenants and the steps your company has taken to ensure that its confidential information remains confidential will allow your company to successfully and swiftly evaluate its legal options when a crisis arises.
  • The Defend Trade Secrets Act (“DTSA”), if signed into law, will provide federal jurisdiction for misappropriation of trade secret claims. The DTSA will provide for the recovery of misappropriated trade secrets, compensatory damages, as well as exemplary damages and attorneys’ fees in certain circumstances.
  • Understand the Protocol for Broker Recruiting’s impact on your restrictive covenant and confidentially requirements. The Protocol significantly limits the use of restrictive covenants and allows departing brokers to take client and account information with them to their new firm.

Join us on Tuesday, May 10 at 12:00 p.m. Central  for our next webinar entitled, “Trade Secrets, Restrictive Covenants and the NLRB: Can They Peacefully Coexist?” 

Monitoring Employee Communications: A Brave New World

Posted in Practice & Procedure, Privacy, Social Media, Trade Secrets

shutterstock_328329848Over the last decade, communication via email and text has become a vital part of how many of us communicate in the workplace. In fact, most employees could not fathom the idea of performing their jobs without the use of email. For convenience, employees often use one device for both personal and work-related communications, whether that device is employee-owned or employer-provided. Some employees even combine their personal and work email accounts into one inbox (which sometimes results in work emails being accidentally sent from a personal account). This blurring of the lines between personal and work-related communications creates novel legal issues when it comes to determining whether an employer has the right to access and review all work-related communications made by its employees.

Employers have legitimate business reasons for monitoring employee communications. Take, for example, the scenario in which an employee leaves her employment, and the employer is concerned that she has taken proprietary information or solicited clients in violation of her duty of loyalty or a contractual agreement. Another common scenario that gives rise to the need for employers to review all of an employee’s work-related emails is when the employer is in litigation that requires production of employee communications.

Most employers are comfortable with the notion that, with a properly worded policy that provides notice to employees of the ability and intent to monitor email, an employer can access emails on an email server provided by the employer. However, what about cases in which the employer does not provide the email service? With employees using web-based emails, like Gmail and Hotmail, and texts to communicate in the workplace, the relevant communications may be elsewhere. In these situations, what are an employer’s rights to access and review such communications?

An employer’s ability to review electronic communications is governed by the Electronic Communication Privacy Act (ECPA) and the Stored Communications Act (SCA). The ECPA prohibits the interception of electronic communications, and the term “interception” as used in the ECPA has been interpreted so narrowly that this title of the ECPA rarely comes into play in cases involving an employer’s review of employee email or texts. The SCA makes it illegal to access without authorization a facility through which electronic communication service is provided and thereby obtain access to communications in electronic storage.

With regard to an employer’s review of employee emails sent through web-based email accounts like Gmail or Hotmail, the most frequent scenario confronted by courts is one in which a former employer accesses the web-based email of a former employee, looking for evidence of malfeasance. In these cases, the former employer is typically able to access the former employee’s web-based email account because the employee has saved her username and password on a device provided by the employer, which was returned at termination, or failed to delink an account from such a device. In these cases, courts have been reluctant to punish the former employee for failing to take appropriate steps to secure their own personal, and allegedly private, communications.

For example, a district court in New York considered an employee’s claim that his former employer’s review of emails in his Hotmail account after his termination violated the SCA because it was unauthorized. The defendant argued that its review of the emails did not violate the SCA because the employee had implicitly authorized its review of the emails on his Hotmail account because the employee had stored his username and password on the employer’s computer system or forgot to remove such an account from an employer-provided phone before returning it.

The court rejected this argument, holding that it was tantamount to arguing that, if the employee had left his house keys on the reception desk at the office, he would have been implicitly authorizing his employer to enter his home without his knowledge. The court also noted that the employer’s computer usage policy did not provide the necessary authorization because it only referred to communications sent over the employer’s systems.

Likewise, a district court in Ohio confronted with similar facts, refused to hold the plaintiff responsible for his own failure to safeguard his information. In this case, the employee had turned in a company-issued blackberry upon termination without first deleting the Gmail account he had added to the phone. The former employer reviewed the emails in the former employee’s Gmail account, and the former employee alleged that this violated the SCA. The former employer argued that the former employee had negligently or implicitly consented to their review of the emails in her Gmail account by returning the blackberry to the company without deleting the account. However, the court held that the employee’s “negligence” in leaving the Gmail account on her phone when she turned it in was not tantamount to her authorizing the defendant to review the emails on her Gmail account.

However, a federal district court in California reached a different result in a case involving text messages. In this case, a company had sued its former employee for misappropriating trade secrets when it discovered, upon his termination, a number of text messages on the former employee’s company-issued iPhone that documented his misappropriation. The former employee had forgotten to delink his Apple account from the company phone he returned, and thus, his text messages continued to go to the phone — and his former employer. The court granted the company’s motion to dismiss the former employee’s counter claim that the company’s review of his text messages violated the SCA. The court held that text messages stored on phones are not in “electronic storage” within the meaning of the SCA, citing a Fifth Circuit case that reached the same conclusion about text messages. Of course, a violation of the SCA is not the only issue in these cases.

For example, in this case, the employee also alleged that his employer had invaded his privacy. However, the court held that the employee had no reasonable expectation of privacy in a company-owned phone that was no longer in his possession. In contrast to the two cases above, the court found that the employee’s failure to undertake precautions to maintain the privacy of his text messages showed he had no right to exclude others from accessing them.

The main lesson from these cases is that, if an employer wants to have the ability to review all employee communications that take place in the workplace, the employer needs to have, at a minimum, a policy that specifically provides for the right to monitor and review, for legitimate business reasons, any work-related communications made by the employee on a device provided by the company or a personal device used for work purposes. (Although the SCA does not require any showing about the employer’s motives in accessing the emails, a traditional invasion of privacy analysis would take this into account.) As a practical matter, the employer may not have the ability to access such accounts, but where access is available, this policy language is critical.

U.S. Treasury Department Suggests That Non-Compete Reform is Necessary

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

shutterstock_369744050The U.S. Department of Treasury recently released a study on the effect of non-compete agreements, taking a hard line with respect to their social and economic benefits and purported harms.  Specifically, while the authors of the study acknowledge that in some cases non-compete agreements can promote innovation, they ultimately conclude that the potential harm of misuse by employers outweighs those benefits.

Recent Research 

According to the study’s authors, recent research suggests that about 18 percent of American employees, amounting to nearly 30 million people, are currently covered by non-compete agreements; and nearly 37 percent of workers report having worked under one at some point during their career.  Workers bound by non-compete agreements are not just limited to the highly educated or compensated.  In fact, 15 percent of workers without a four-year college degree and 14 percent of workers earning less than $40,000 per year are bound by them.

Purported Costs vs. Benefits of Non-Compete Agreements

Although the authors of the Treasury Department study acknowledge that non-compete agreements can have social benefits in some situations, such as  (1) protecting trade secrets, thereby promoting innovation; (2) reducing the probability of employees resigning, thereby increasing employers’ incentives to provide costly training; and (3) allowing employers with historically high turnover to use non-competes to match with workers who have a low desire to switch jobs in the future, they place greater emphasis on what they believe to be serious downsides to non-compete agreements as well.  Specifically, according to the authors, non-compete agreements can (1) result in lower wages after the agreement is signed; (2) discourage workers from re-entering their field in its entirety once they are terminated, thereby foregoing accumulated training and experience in certain fields; and (3) reduce job churn, which helps raise labor productivity by achieving a better matching of workers and employers.

The authors go on to express concern that a growing body of evidence suggests that employers are taking advantage of their employees’ incomplete understanding of such agreements, resulting in a purported lack of transparency and fairness.  For example, employers often require workers to sign non-compete agreements in states that refuse to enforce them, such as California.  Other employers fail to inform candidates about the existence of such agreements in their job offers.  Further, according to the authors of the study, only 10 percent of workers with non-compete agreements report bargaining over the terms of their non-compete agreements, with 38 percent of those not even realizing that they could have negotiated the agreement.

The authors of the Treasury Department study also suggest that while protection of trade secrets undoubtedly seems to be a legitimate justification for these agreements, about 18 percent of workers bound by non-compete agreements are in fields like personal services and installation and repair, in which such purportedly should not be a concern.  The authors of the study question the legitimate business purpose of imposing non-competes on employees such as fast food restaurant workers, as it is not likely that they will possess any trade secrets or proprietary training.  Along those lines, we recently reported on a case in which a trial court struck down a beauty salon’s non-compete agreement because it lacked a legitimate business purpose.

These characteristics, the authors of the study suggest, may have a negative impact on the national economy by reducing job mobility, and lowering wage growth and initial wages.  According to the authors, research has shown the stricter the non-compete enforcement to be in a particular state, the lower the wage growth and initial wages.  Given that job switching is generally associated with substantial wage increases, the resulting increased difficulty of switching jobs would purportedly reduce wage growth over time.

The Study’s Recommendations

Based on the foregoing, the authors of the Treasury Department study recommend that (1) policy makers should inject more transparency into the world of non-compete agreements; and (2) employers should only use enforceable non-competes, align them with legitimate social purposes like the protection of trade secrets, and require consideration for workers to be bound by such agreements, such as severance packages.  This would purportedly better protect the employer’s business interests, limit the harm to workers, but most important it would preserve the more socially valuable agreements and chip away the least valuable, as employers would be hesitant to incur costs on them.  Of course, other than the additional consideration piece (in many states continued employment is sufficient), these are all things that we recommend to our clients, and on which most non-compete agreements are generally based in any event (at least those that are enforceable in most states).

Takeaways

The study only addresses the effects of non-compete agreements, not other types of restrictive covenants, such as customer and employee non-solicitation or confidentiality agreements.   It is unclear what, if any, effect this Treasury Department study will have on policy makers, but we will certainly report on anything that comes of it.

What Does the Passage of the Defend Trade Secrets Act Mean for Your Business?

Posted in Legislation, Trade Secrets

Congress passed federal trade secrets legislation today. On April 4, 2016, the Senate passed S. 1890, the Defend Trade Secrets Act of 2016 (“DTSA”). Soon after, on April 20, 2016, the House Commshutterstock_267261659ittee approved S. 1890 by voice vote. Today, the House passed the DTSA. President Obama has voiced his support for the DTSA, which indicates that he will sign it.

What does the passage of the DTSA mean for your company? In a nutshell, it means your company can now pursue claims for trade secret misappropriation in federal court like other forms of intellectual property (i.e., patent, trademark, copyright) and seek remedies such as a seizure order to recover misappropriated trade secrets. It also serves a reminder that trade secrets can be highly valuable to your company and that you should ensure that your company has reasonable secrecy measures in place to protect them.

Below we outline a brief history of the DTSA, describe what legal structure and remedies the DTSA creates, and describe the unique provisions of the DTSA. We also provide tips and strategies in light of the passage of the DTSA.
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