trade secret misappropriation

texas-imageApplying new Texas Supreme Court precedent, a Texas Court of Appeals recently held that a six-year-old cease-and-desist letter alleging trade-secret misappropriation did not constitute proof of knowledge for purposes of the discovery rule. By allowing for the accrual date of this claim to be deferred, the court appears to have made it easier for trade-secret plaintiffs to overcome the statute-of-limitations defense in the future.

According to the opinion issued by the First Court of Appeals in Houston, Garner Environmental Services, Inc. (“Garner”) provides disaster-response training and related services. In 2008, Garner’s then-vice president quit, formed a competing company called First in Rescue, Safety and Training, LLC (“FIRST”), and hired several Garner employees. In January 2009, Garner sent FIRST a letter accusing it of wrongfully using Garner’s customer lists, contacts, and other trade secrets to solicit Garner’s customers. Garner based these allegations solely on the fact that, shortly before sending this letter, Garner had learned that a client scheduled to attend one of Garner’s training classes switched at the last minute to attend a class held by FIRST instead. Later that month, FIRST responded that it had not stolen Garner’s trade secrets because Garner’s customer lists and contacts were readily available to the general public, could be replicated from memory, and were therefore not confidential information in the first instance. FIRST’s letter also pointed out that none of the former Garner employees had entered into non-compete or non-solicitation agreements while employed by Garner, so they were not prohibited from contacting Garner’s customers. Apparently, this mollified Garner because it did not file suit against FIRST at this time.

Fast-forward nearly five years: In late 2013, FIRST filed suit against a former employee that had gone to work for another competitor. At an unspecified time in 2014, after reviewing documents the employee had filed in that suit, Garner determined that FIRST had unlawfully used Garner’s confidential information. So, in July 2015—more than six years after sending the initial cease-and-desist letter in January 2009—Garner filed suit against FIRST asserting, inter alia, a claim for misappropriation of trade secrets. FIRST filed for summary judgment, arguing that all of Garner’s claims were barred by the statute of limitations because it discovered or should have discovered the nature of its injury in January 2009. Garner argued in response that the discovery rule applied and, as such, limitations did not begin to run until it discovered the injury in 2014 when it reviewed the documents filed in connection with the lawsuit FIRST’s former employee had asserted against a third party. The trial court granted FIRST’s motion and dismissed Garner’s claims with prejudice.

On appeal, the sole issue before the Court of Appeals was when Garner discovered, or in the exercise of reasonable diligence should have discovered, the nature of its injury. Under the discovery rule, the accrual of a claim is deferred until the injured party learned of, or in the exercise of reasonable diligence should have learned of, the wrongful at causing the injury. Garner argued that the court of appeals was bound by the Texas Supreme Court’s recent decision in Southwestern Energy Production Co. v. Berry-Helfand, 491 S.W.3d 699 (Tex. 2016), which involved the discovery rule in the context of trade-secret misappropriation. In that case, the court held that surmise, suspicion, and accusation, even if sufficient to make one aware of a potential for misuse of trade secrets, are not facts that in the exercise of reasonable diligence would lead to the discovery of theft of trade secrets. Furthermore, the Southwestern court held that the defendant asserting the limitations defense “ha[d] not identified any evidence revealing what [the plaintiff] would have discovered had she made further inquiry.”

Finding “no meaningful differences between Southwestern and this case,” the Garner court noted that although Garner alleged in its January 2009 letter that FIRST had stolen its trade secrets, it had no facts to support these allegations other than mere suspicion that FIRST was competing with Garner’s clients. As in Southwestern, accusations were insufficient to establish knowledge of injury, the discovery rule applied. The Court of Appeals further noted that FIRST did not explain why it is entitled to have Garner’s statements of accusation construed as proof of knowledge while having its own statements of denial construed as “lawyer posturing” upon which Garner could not reasonably rely. The court thus rejected FIRST’s attempt to have its cake and eat it too.

FIRST also argued that Garner could have discovered the injury had it conducted presuit depositions under Texas Rule of Civil Procedure 202, which it did not do. In order to take a presuit deposition under Rule 202, the petitioner must show that there is a reason that the deposition must occur before the anticipated lawsuit is filed, and not after. The Court of Appeals, however, reiterated that Garner lacked any proof of its suspicions and thus had no basis to establish that FIRST had any information in its possession that could justify a Rule 202 deposition. A petitioner is also entitled to conduct a Rule 202 deposition if it demonstrates that the likely benefit of the requested deposition to investigate a potential claim outweighs the procedure’s burden or expense. The Court of Appeals stated: “To allow a rule 202 deposition in th[is] situation would require the other party to reveal the confidential information in their possession,” which the court concluded was too heavy a burden on FIRST. Thus, FIRST failed to establish a date (prior to Garner’s stated discovery date in 2014) by which Garner knew or, with reasonable diligence, could have discovered the nature of its injury. Accordingly, the Court of Appeals reversed the judgment of the trial court, and remanded for further proceedings.

The take-away from this case is that potential plaintiffs who, although suspicious, lack concrete proof that a potential defendant has misappropriated its trade secrets, will, on account of the Southwestern and Garner decisions, likely find it easier to assert the discovery rule to defer the accrual date of its misappropriation claim. Moreover, according to Garner, such potential plaintiffs will find it difficult, if not impossible, to meet their burden to establish the necessity of the information to be entitled to conduct a Rule 202 presuit deposition. It remains to be seen, however, if this case might decrease the use of Rule 202 depositions in trade-secret cases. Still, the boot-and-suspenders approach of attempting a Rule 202 deposition may be the better course to preserve the legal rights of a potential misappropriation plaintiff.

Garner Envtl. Services, Inc. v. First In Rescue, Safety & Training, LLC, 01-16-00388-CV, 2016 WL 7671377 (Tex. App.—Houston [1st Dist.] Dec. 22, 2016, no. pet. h.)

shutterstock_521249434The United States International Trade Commission (“ITC”) is an independent, quasijudicial Federal agency with broad oversight over trade matters.  In addition to trade practices such as dumping and subsidies, the ITC adjudicates matters involving the misappropriation of trade secrets and theft of intellectual property.  Specifically, Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337(a)(1)(A), prohibits “unfair methods of competition and unfair acts in the importation of articles … into the United States.”

In 2012, the Federal Circuit—which has jurisdiction over all ITC matters—was asked to consider whether the ITC had authority to investigate the misappropriation of trade secrets protected by domestic law when the misappropriation occurred exclusively in China.  See Tianrui Group Co. Ltd. v. ITC, 661 F.3d 1322 (Fed. Cir. 2011).  The Federal Circuit answered in the affirmative and held that the ITC had authority to “investigate and grant relief based in part on extraterritorial conduct insofar as it is necessary to protect domestic industries from injuries arising out of unfair competition in the domestic marketplace.”  Tianrui, 661 F.3d at 1324.  Following Tianrui, domestic companies have used the ITC to redress misappropriation of trade secrets far from American shores so long as the misappropriation resulted in the importation of products into the US causing domestic injury.  For further background on the Tianrui decision, please see our prior post here.

The ITC’s extraterritorial authority established in Tianrui is once again being challenged.  Recently, in another case involving the misappropriation of American trade secrets in China, the Supreme Court was asked to decide whether Section 337 of the Tariff Act does, in fact, authorize the ITC to investigate misappropriation that occurred entirely outside the United States.  See Sino Legend (Zhangjiangang) Chemical Co. Ltd. v. ITC, cert petition available here.  The crux of Sino Legend’s argument is that for a statute to apply abroad, there must be express congressional intent.  Not surprisingly, Sino Legend argues that such intent is missing from Section 337 of the Tariff Act.  In Tianrui, the Federal Circuit held that such intent was manifest in the express inclusion of “the importation of articles .. into the United States” which evidenced that Congress had more than domestic concerns in mind.  Tianrui, 661 F.3d at 1329.  To prevail, Sino Legend must convince the Supreme Court to not only hear its case, but to overrule Tianrui’s holding that such intent is evident from the “importation of articles” clause in the Act.

Sino Legend’s petition comes at an interesting time.  The Supreme Court is only 8 justices following the death of Justice Scalia, perhaps making it even more difficult for cert to be granted.  At the same time, trade with China was a repeat theme of President-Elect Trump’s presidential campaign.  Companies with operations abroad should closely monitor the progress of Sino Legend, as reversal of Tianrui will result in the removal of a powerful tool in a trade secret owner’s arsenal against extraterritorial misappropriation of trade secrets.

webinarWe are pleased to announce the webinar “Proving-Up Trade Secret Misappropriation: Best Practices and Tales from the Trenches” is now available as a webinar recording.

In Seyfarth’s final installment in the 2016 Trade Secrets Webinar Series, James McNairy and Justin Beyer, joined by computer forensics expert Jim Vaughn of iDiscovery Solutions, focused on best practices for assembling the evidence most often needed to prosecute a claim for misappropriation of trade secrets

As a conclusion to this well-received webinar, we compiled a summary of three takeaways that were discussed during the webinar:

  1. The first step in prosecuting trade secret misappropriation starts with identifying your trade secret information, maintaining its confidentiality, and putting in place safeguards such as robust confidentiality agreements, computer use and access policies, and exit interviews that are tailored to flag any exfiltration of data by high risk employees or business partners with whom your company is parting ways. Diligence on the front end will better alert your organization of potential data theft and enable it to secure the data, should it be misappropriated.
  2. As part of your investigation of potential trade secret misappropriation, remember to conduct a complete audit of devices and sources of data storage and transmission to ensure nothing is overlooked. While doing so, it is critical to maintain the forensic integrity of the devices and data to allow the best chance of admitting the information into evidence in any litigation.
  3. Efficiently organizing the right team to prosecute trade secret theft is critical. The “team” most often includes human resources professionals (to authenticate key agreements, policies, dates of employment etc.), a senior manager or executive (who can validate the existence of the trade secret, its value, the measures taken to maintain secrecy etc.), senior managers who worked with the suspected misappropriators (who can attest to access, use, and possession of the at issue information), in-house IT professionals (who can lay the foundation for devices, data, and access rights of the suspected misappropriators), and an independent computer forensics expert (who can objectively present the facts concerning data accessed, by whom, through what means, and explain any technical nuance to “connect the technical dots” of the bad actor(s) conduct).

webinarOn Tuesday, December 13, at 12:00 p.m. Central, Seyfarth attorneys, James McNairy and Justin Beyer, joined by computer forensics expert Jim Vaughn of iDiscovery Solutions, will present the final installment of the 2016 Trade Secrets Webinar Series. This program will provide attendees with best practices for assembling the evidence most often needed to prosecute a claim for misappropriation of trade secrets.

Topics covered will include:

  • Preventative measures to alert companies of potential trade secret theft
  • Once theft is suspected, steps for identifying and preserving evidence
  • Considerations for deciding on forum and state vs. federal court
  • Injunctive relief: what to seek and how to be effective
  • Early discovery: foundation for preliminary injunction and fleshing out case theme

Please join us for this informative webinar.

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DTSA Cover ImageOn May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”), which Congress passed April 27, 2016. So, what does the passage of the DTSA mean for your company?

In a nutshell, the DTSA “federalizes” trade secret law by creating a federal claim for trade secret misappropriation and creates new remedies, including an ex parte 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 reasonable secrecy measures in place to protect them.

Nevertheless, the DTSA also imposes new obligations on employers. 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 the statute’s effective date.

Seyfarth’s DTSA Desktop Reference guide describes the DTSA’s unique legal structure and remedies. We also provide tips and strategies in light of the passage of the DTSA.

How to get your DTSA Desktop Reference guide:

This publication may be requested from your Seyfarth contact in hard copy or eBook format (compatible with PCs, Macs and most major mobile devices). The eBook is fully searchable and offers the ability to bookmark useful sections and make notations for easy future reference.

To request the DTSA Desktop Reference guide in eBook or hard copy, please click the button below:

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shutterstock_115262968A Texas Court of Appeals held on August 22, 2016, that a former employer was entitled to $2.8 million in attorney’s fees against a former employee who used the employer’s information to compete against it. The Court reached this ruling despite the fact that the jury found no evidence that the employer sustained any damages or that the employee misappropriated trade secrets.

Patrick Daugherty was a partner and senior executive at Highland Capital Management, L.P. (Highland), until he left to start a competing business. Highland presented evidence at trial that, after leaving Highland, Daugherty forwarded Highland documents to his personal email address, kept printouts of other emails, and kept 40,000 documents on his laptop that he only submitted for forensic remediation after trial. The documents on his laptop included portfolio and pricing information as well as documents regarding Highland’s internal management and operations.

Ultimately the jury found that the information Daugherty took did not meet the definition of “trade secret” but did constitute “Confidential Information” as that term was defined in Daugherty’s employment agreement. The jury then found that Daugherty had breached his employment agreement and related buy/sell by using or disclosing confidential information and other information. Nevertheless, the jury awarded Highland $0 in damages but did find Highland was entitled to $2.8 million in attorney’s fees. The trial court upheld these findings and issued a permanent injunction against Daugherty preventing him from retaining or disclosing Highland’s confidential information.

Daugherty appealed, arguing that the Texas statute awarding attorney’s fees for breach of contract- Texas Civil Practices and Remedies Code § 38.001(8) – only does so when there is a finding of damages. Daugherty also argued that the award of $0 in damages, and Highland’s efforts to recover a specific dollar amount, foreclosed the possibility of imminent harm, irreparable injury, and no adequate remedy at law, all of which were necessary for a permanent injunction to issue.

The Dallas Court of Appeals rejected these arguments and affirmed the jury verdict and trial court injunction. First, the Court held that Highland had adequately pleaded and presented evidence that the agreements Daugherty breached entitled Highland to and assessment of fees against him independent of § 38.001(8), and that the contract provisions did not require a finding of damages.

The Court further held that the damages question posed to the jury only involved lost profits. Highland presented extensive evidence, meanwhile, that Daugherty’s actions resulted in long-term unquantifiable harm, including the ability of competitors to replicate Highland’s business strategies. Highland also presented evidence that Daugherty’s actions may have resulted in the loss of trust from Highland’s clients. The Court further noted that Daugherty’s contracts with Highland also allowed for injunctive relief as a result of breach.

Daugherty v. Highland Capital Mgmt., L.P., No. 05-14-01215-CV ,2016 WL 4446158 (Tex. App. – Dallas, Aug. 22, 2016).

On Thursday, March 6, 2014 at 12:00 p.m. Central, Michael Wexler, Jim McNairy and Josh Salinas will present Seyfarth’s first installment of its 2014 Trade Secrets Webinar series. They will review noteworthy cases and other legal developments from across the nation this past year in the areas of trade secret and data theft, non-compete enforceability, computer fraud, and the interplay between restrictive covenant agreements and social media activity, as well as provide their predictions for what to watch for in 2014.

The panel will specifically address the following topics:

  • Significant federal and state court non-compete, computer fraud, and trade secret decisions, including recent developments concerning how information may lose its protected status as “secret,” damages under the Computer Fraud and Abuse Act, procedural requirements when presenting employees with restrictive covenant agreements, and attorneys’ fees and sanctions for trade secret misappropriation claims brought in bad faith;
  • Important legislative efforts, including efforts to strengthen federal criminal trade secret laws, recent states’ legislative proposals concerning non-compete enforceability, and enhanced social media privacy protection laws;
  • Noteworthy jury trial verdicts, criminal prosecutions, and criminal sentences for trade secret misappropriation, data theft, and computer fraud;
  • Trade secret preemption and courts’ difficulties in grappling with whether the theft of non-trade secret information is actionable in tort;
  • Prominent social media cases discussing when social media activity may violate non-solicitation agreements.

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

If you have any questions, please contact events@seyfarth.com.

 *CLE credit is available. Seyfarth has applied for CLE credit in IL, NY, and CA. If you would like us to pursue CLE credit in any additional states, please contact events@seyfarth.com. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

On September 20, 2012, a trade secret misappropriation lawsuit was filed against rock star drummer Tommy Lee and his band Mötley Crüe in Los Angeles Superior Court.

Plaintiff Howard Scott King alleges in his complaint that in 1991 he developed an idea and concept for a “Tommy Lee Loop Coaster.” The concept consists of a platform on wheels that follows a loop-shaped track. A drum set is attached to the wheeled platform and follows the track in a complete loop, allowing the drummer to play the drums upside down. Other drummers in rock bands have used similar stunts at live shows for many years.  Media outlets have previously reported on the dispute and the parties’ contentions. 

King alleged that he disclosed the idea to Lee and Lee’s band in 1991, and subsequently received signed confidentiality agreements (which have been misplaced or lost) from Lee’s agents. King also alleged that he has since maintained the secrecy of his idea and only disclosed the idea as necessary to implement it.

King allegedly brought action against Lee and Mötley Crüe after he discovered that they were allegedly using his alleged drum set loop coaster idea for a worldwide concert tour in 2011. King alleges that the defendants disclosed the purported trade secret to another company, which made a similar loop coaster for use by the defendants at the concerts. He alleges that the idea is the centerpiece of many performances and was used in commercials and promotions for the band.

King alleges that he has suffered damages in excess of $400,000. King has asserted claims for trade secret misappropriation, unfair competition, and breach of promise.

It will be interesting to see how the court deals with the absent confidentiality agreements, especially since the parties may have difficulty remembering the exact terms and provisions of any purported confidentiality obligations.

Additionally, while this case is still in its infancy, the plaintiff will likely have a very difficult time establishing that his alleged idea qualifies as a trade secret under California law, particularly demonstrating that the information provided derives independent economic value from not being generally known to others or to others who can obtain economic value from its secrecy and is subject of efforts that are reasonable to protect its secrecy.

While a separate idea theft claim may still be actionable under California law, to pursue such a claim, the plaintiff will need to demonstrate that the defendants voluntarily accepted the disclosure knowing the conditions on which it was tendered and that the defendants used his work. Defendants may also challenge the claim on the grounds of independent development, which constitutes a complete defense.

A response is not yet due to the complaint and defendants have yet to file their response. We will keep you posted on this entertaining case.

By Joshua Salinas and Jessica Mendelson

A Florida District Court of Appeal recently confirmed that plaintiffs in trade secret misappropriation cases must identify their trade secrets with reasonably particularity before conducting discovery. AAR Mfg., Inc. v. Matrix Composites, Inc., No. 5D11–3802, 2012 WL 3870419 (Fla.App. 5 Dist., 2012). The Court of Appeal, however, rejected the notion that, as a threshold matter, the plaintiff was also required to prove the existence of its trade secrets.

Plaintiff Matrix Composites, Inc., manufactures and designs carbon fiber composites for the aviation, medical, and space industries. For example, these critical composite structures are used in F22 fighter jets and are extremely useful for stealth and weight reduction.  (Also check out this great video from Matrix’s website about the use of composites in fighter jets).

The case arose when Matrix sued a competitor, AAR Manufacturing, in Florida state court alleging misappropriation of trade secrets pertaining to various product molding processes.

During discovery, Matrix requested certain documents from AAR pertaining to AAR’s trade secrets. AAR filed a motion for a protective order to prevent the discovery of its own trade secrets on grounds that discovery could not continue until Matrix first identified its own trade secrets with reasonable particularity. The trial court denied AAR’s motion for the protective order, finding Matrix had identified its own trade secrets with reasonable particularity. Accordingly, the trial court ordered AAR to produce the requested discovery documents to Matrix within sixty days.

AAR petitioned the District Court of Appeal of Florida, Fifth Circuit for relief from the order denying its motion for the protective order. In particular, AAR argued that the trial court failed to make a “threshold finding” that Matrix’s allegedly misappropriated trade secrets actually existed before ordering AAR to disclose its own trade secrets.

The Court of Appeal denied AAR’s petition in part. The court recognized that, in trade secret misappropriation cases, a plaintiff is required to identify its trade secrets with reasonable particularly before proceeding with discovery. (See Del Monte Fresh Produce Co. v. Dole Food Co., 148 F.Supp.2d 1322 (SD. Fla. 2001).

The Court of Appeal, however, rejected the notion that the trial court was required to make a “threshold finding” regarding the existence of trade secrets in misappropriation. Specifically, the Court of Appeal rejected any “threshold finding” requirement that may derived from the recent Revello case. (See Revello Medical Management, Inc. v. Med-Data Infotech USA, Inc. 50 S.3d 678, 679 Fla. 2d DCA 2010) (stating that prior to proceeding with discovery in trade secret cases, “[t]he plaintiff must, as a threshold matter, establish that the trade secret exists”).

This case is significant because the Florida Court of Appeal has set the record straight with respect to the pre-discovery requirements for trade secrets misappropriation cases. Florida does not have a pre-discovery trade secret identification statute (see e.g. California Code of Civil Procedure § 2019.210), but this procedure is well established through Florida case law. It appears that the 2010 Revello case overly expanded these pre-discovery requirements to add a threshold finding that trade secrets exist. The Court of Appeal used the instant decision to eliminate any further confusion regarding pre-discovery trade secret identification.

A district court for the Eastern District of Wisconsin recently held that even though misappropriated information no longer was a trade secret on the date the wrongdoer was sued, a misappropriation lawsuit may be maintained if the information qualified as a trade secret on the date of the wrongdoing.  Encap, LLC v. The Scotts Co., LLC, Case No. 11-C-685 (E.D. Wis., Sept. 14, 2012).

The case involved a dispute between two companies in the lawn and garden industry.  Plaintiff Encap has invented many novel platform technologies in the seed, mulch, and fertilizer industries.  Defendant The Scotts Company is well known for its Miracle-Gro, EZ Seed, and Turf Builder Grass Seed products.

In early 2002, Scotts personnel allegedly had several introductory confidential communications with persons at Encap inquiring about Encap’s platform technologies. In particular, Scotts was allegedly interested in how Encap’s encapsulated seed technology absorbed water.  Scotts allegedly requested cases of Encap’s new seeds for testing purposes.

In June of 2002, Encap allegedly sent Scotts a confidential memorandum, which allegedly contained certain Encap trade secrets. For example, the memorandum contained information about encapsulating seeds to aid in water absorption, using the color of mulch as a watering indicator, and developing a business strategic business plan to exploit these new technologies.  The memorandum, however, provided that Scotts agreed to keep the document confidential and not use or disclose the data within.  A dispute arose when Scotts allegedly used Encap’s confidential information from the memorandum without authorization to make similar competitive products and derive substantial profits.

Encap subsequently sued scotts for patent infringement and trade secret misappropriation.

Encap later brought a motion to dismiss Encap’s trade secret missapropration claim for failure to state a cause of action.  Shortly before Scotts’ motion, Encap requested leave of court to file its 2002 confidential memorandum under seal.

The court entered an order rejecting Encap’s request on the ground that the memorandum was “ten years old and does not contain any apparent trade secrets or underlying data, such as chemical formulas or manufacturing processes.”  Scotts’ motion to dismiss the claim of misappropriation was based on the absence of a trade secret, as seemingly determined by that order.  However, the court reasoned that the decision with respect to filing the memorandum under seal “does not mean that some of the information [in the memorandum] was not a trade secret in 2002 and thereafter when Scotts is alleged to have misappropriated,” and to have used, the information for its own advantage.  So, the motion to dismiss was denied.

This decision teaches that, at least in Wisconsin, just because information no longer is confidential at the time a misappropriation case is filed, a cause of action can be stated if (a) the information constituted a trade secret when the misconduct occurred, and (b) damages resulted.  So, whenever trade secrets are disclosed pursuant to a confidentiality agreement, the party making the disclosure should remain alert for a considerable period to the possibility that the agreement was violated.