Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

By Robert Milligan and Joshua Salinas

The best things in life are free, except for screensavers, games, and other software provided on-line that spy on your computer activity and gather your personal information, at least according to the consumer Plaintiffs in the recent data collection/privacy suit filed in Illinois federal court captioned Harris v. comScore, Inc., No. 11 C 5807, 2011 WL 4738357 (N.D. Ill. Oct. 7, 2011). The Plaintiffs in the case won't be forced to litigate the action in Virginia after a federal court recently denied comScore's attempt to enforce the forum selection provision contained in its licensing agreement.

The District Court for the Northern District of Illinois, Honorable Chief Judge James Holderman presiding, recently denied defendant comScore’s motions to dismiss and transfer venue because he found that comScore’s forum-selection clause was not reasonably communicated to the plaintiff consumers. In doing so, the court found that the terms and conditions of license agreements for free software downloads require a higher standard of notice to consumers.

According to Plaintiffs' complaint, Defendant comScore is an internet research company that allegedly monitors the computer and online activity of consumers that download its software. ComScore allegedly bundles its surveillance software with free programs, such as screensavers and games, to encourage consumers to download and install the software. Once installed, comScore’s surveillance software allegedly collects the computer user’s information and activity, which comScore then allegedly sells to its clients for marketing research.

Plaintiffs Mike Harris and Jeff Dunstan allegedly downloaded and installed comScore’s screensavers and games. Harris and Dunstan allegedly soon realized that comScore’s software continually and surreptitiously monitored their computer activity. Additionally, the software allegedly collected usernames, passwords, and credit card information. They brought a class action against comScore in Illinois federal court, and asserted claims, inter alia, under the Computer Fraud and Abuse Act, Electronic Communications Privacy Act, Stored Communications Act, and Illinois Consumer Fraud and Deceptive Practices Act.

ComScore moved to dismiss the case for improper venue or in the alternative, to transfer venue from Illinois to Virginia. ComScore argued that the terms and conditions in its User License Agreement contained a forum-selection clause that limited all litigation to courts in the State of Virginia. ComScore claimed that before anyone can install its software, the individual must first click a box acknowledging that he or she has read and agreed to the terms and conditions of the license agreement. Thus, comScore alleged that Harris and Dunstan agreed to the license agreement, and more importantly, the forum-selection clause that prohibited their lawsuit in Illinois.

Harris and Dunstan argued that comScore’s forum-selection clause was not enforceable because it was not reasonably communicated to them when they downloaded the software. They alleged that the comScore software’s installation process obscured the hyperlink to the license agreement, and thus the terms and conditions were not readily available.

Chief Judge Holderman cited several cases that enforced “click through” agreements, including some with forum-selection clauses. He noted that the key difference in this case was Harris and Dunstan’s allegation that the hyperlink to the User License Agreement was obscured.   Normally, click through agreements place consumers on at least inquiry or constructive notice. Consequently, in this case Harris and Dunstan should have known about the agreement because they were required to acknowledge their acceptance of the agreement before downloading comScore’s games and screensavers. In fact, Harris and Dunstan each clicked a box acknowledging that they read the terms and conditions of the agreement. Chief Judge Holderman held, however, that while there is a lower expectation of notice for free software: “Nonetheless, it is not reasonable to expect a user casually downloading free software to search for such an agreement if it is not immediately available and obvious where to obtain it.” Harris, 2011 WL 4738357, at *2. Thus, comScore could not hold Harris and Dunstan to its license agreement, and the included forum-selection clause, because it never provided them reasonable access to the terms and conditions.

The court concluded that the forum-selection clause was not reasonably communicated to the plaintiffs, and thus their action could proceed in Illinois.

Additionally, the court declined to transfer the case because at least one of the plaintiffs resided in Illinois, and also he downloaded and installed the software there.

This case is important because of its impact on requirement of notice for online license agreements. Online license agreements are now ubiquitous and users cannot avoid their obligations merely because they clicked “agree” without reading the terms of the agreement. Courts will generally enforce agreements where consumers are required to click the box and acknowledge that they read the agreement’s terms and conditions. This case is interesting because the court refused to find that the plaintiffs read the agreement even though they clicked a box confirming that they read the agreement. This case requires software and service providers to ensure that agreement terms and conditions are readily available; providers cannot merely rely on evidence that the consumer clicked a box.  For free software downloads, Harris concludes that consumers have less of a burden to look for any potential license agreements. Indeed, this case is favorable to consumers seeking to invalidate provisions in licensing agreements, but also reminds us that free rarely means free.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A recent trade secret misappropriation action resulted in an award of compensatory damages of $41,000 and punitive damages of $40,000. Then, the plaintiff asked for more than a million dollars in attorney’s fees and costs. The defendants protested that (a) the fee request was grossly disproportionate to the damages that were recovered, and (b) the plaintiff’s billing was excessive. However, except for reimbursement of the expense of one expert witness the court deemed unnecessary, the entire requested amount was awarded. SKF USA, Inc. v. Bjerkness, Civil Action Nos. 08C 4709 and 09 C 2232 (N.D. Ill., Sept. 27, 2011).

An employee of plaintiff SKF left in order to “set up a competing business, taking with him a handful of other SKF employees and thousands of SKF’s computer files.”

SKF sued and established misappropriation. The court granted injunctive relief plus what it described as “a modest damages award.” SKF proceeded to file a fee request for $1.3 million. While not challenging SKF’s attorneys’ hourly rates, the defendants characterized as “outrageous” the more than 2700 hours billed. The defendants stressed that they had made substantial settlement offers, two of which were in amounts in excess of the damages ultimately recovered, and that SKF had rejected each while declining to make a counter-proposal.

SKF objected to the defendants’ argument based on settlement offers, but case law supports the court’s consideration of such information in adjudicating a fee request.

Case law also indicates that proportionality of the fee request is a relevant factor, but compared to what? Some courts weigh the ultimate result against the amount sought in the complaint and some look at the plaintiff’s reasonable expectations. The Seventh Circuit has declined to adopt a specific rule.

SKF’s success in obtaining injunctive relief -- particularly in light of its claim that the recovery of monetary damages was not its initial primary goal -- was deemed relevant in reducing the significance of the comparison between the judgment amount and the fee request. Three other factors also influenced the court: (a) the extent to which the defendants’ tenacious litigation strategy impacted the amount of SKF’s fees; (b) the fact that shortly before the defendants jumped ship, SKF was acquired and the purchase price “assigned great value to the trade secrets used in the business;” and (c) SKF’s payment of the fees in full.

This decision teaches two lessons. First, it provides a road map for use by a party prevailing on the merits in a fee-shifting case who then seeks reimbursement of a very substantial amount of expenses, especially where the reimbursement request is a high multiple of the damages award. Second, the ruling reminds us that a party who has lost on the merits in a hard-fought fee shifting case, and who then aggressively protests the fee request, is likely to face an incredulous judge.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

We informed our readers on March 31, 2009 about Illinois House Bill 4040, titled "Illinois Covenants Not to Compete Act" (link). House Bill 4040 attempted to limit non-compete enforcement to employees or independent contractors who:

• have substantial involvement in the executive management of the employer’s business;
• have direct and substantial contact with the employer’s customers;
• possess knowledge of the employer’s trade secrets and/or proprietary information;
• possess such unique skills that they have achieved "a high degree of public or industry notoriety, fame, or reputation as a representative of the employer;" or
• are among the highest paid 5% of the employer’s work force for the year immediately preceding the separation.

House Bill 4040 also attempted to change Illinois law by:

• eliminating an employer’s ability to enforce a non-competition covenant if the employer failed to notify the new employee two weeks prior to the first day of his employment that a covenant not to compete is required, or if the covenant is not accompanied by a "material" advancement, promotion, bonus or compensation increase;
• creating a rebuttable presumption that a non-competition covenant is invalid if the covenant exceeds one year, the geographic restrictions in the covenant cover areas beyond which the former employee provided services "during the one year preceding his termination;" or if the covenant concerns personal services activities that the employee did not perform during the "one year preceding termination of their employment;"
• forbidding a court, if it chooses to modify an existing covenant, from imposing a damages award for the employee’s original breach of the covenant;　
• instructing a court to interpret any attorneys’ fees provision found in a non-competition covenant to allow either the employer or the employee to recover their attorneys’ fees
• empowering the court to award attorneys’ fees to the employee if, through a declaratory judgment action brought by the employee, the court declares the non-competition covenant unenforceable.

House Bill 4040 was introduced by Representative Rosemary Mulligan (Republican - 65th District) and never made it out of committee. Hence, the Bill terminated when the Illinois House of Representatives concluded its session. However, Representative Jil Tracy (Republican - 93rd District) introduced a bill identical to House Bill 4040 on January 12, 2011. Representative Mulligan became a co-sponsor of Representative Tracy’s bill, House Bill 0016, on February 4th. So far, House Bill 0016 has not attracted significant public attention or traction in the Illinois House. Nevertheless, we will continue to monitor House Bill 0016 and any other actions the Illinois House or Senate may undertake with respect to non-competition agreements or trade secrets.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a landmark decision just issued, the Illinois Appellate Court, Fourth District, ruled that an ex-employer seeking to enforce a covenant-not-to-compete against former sales personnel need only show that the time-and-territory restrictions are reasonable and need not prove, in addition, that there is a sufficient legitimate-business-interest in enforcement. 

In Sunbelt Rentals, Inc. v. Ehlers, No. 4-09-0290 (9/23/09), the appellate tribunal agreed with the trial judge that the defendants’ conduct amounted to breach of a reasonable contract and affirmed the entry of a preliminary injunction prohibiting the defendants from violating the covenant. The appellate court held for the first time that the plaintiff’s business interest – that is, a showing not only that the time-and-territory restrictions were reasonable but also that the ex-employer had a “near permanent relationship” with customers and/or that information it provided to ex-employees was confidential – is irrelevant. In the process, the court overruled a number of its own prior decisions and criticized the reasoning of virtually every previous Illinois intermediate appellate decision in point. 

Interestingly, the primary basis for this dramatic shift is the absence of any mention of the legitimate-business-interest test in a 2006 Illinois Supreme Court opinion (Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85) enforcing a restrictive covenant. (For entertainment, read the Sunbelt court’s explanation for affirming the circuit court judge notwithstanding that judge’s indisputable violation of the principle “that a trial court is not free to ignore binding precedent from the appellate court in its own district.”) 

Note that the time to seek rehearing of the Sunbeltdecision, or a petition for leave to appeal to the Illinois Supreme Court, has not yet expired.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As discussed in our March 9^th and 17^th postings, Illinois Senate Bill SB 2149 seeks to dramatically alter the landscape of trade secret enforcement and litigation in Illinois by, among other things, (a) requiring disclosure of trade secrets before a party issues written or oral discovery; (b) awarding attorneys’ fees to the prevailing party in a trade secrets case; and (c) mandating that a court enter an attorneys’ fees award against any party that subsequently amends its initial trade secret disclosure. Apparently not to be outdone, the Illinois House of Representatives is considering whether to enact a statute that would dramatically limit an employer’s ability to enforce non-competition agreements, and change the way restrictive covenant cases are handled in Illinois.

Currently, non-competition/restrictive covenant enforcement is governed by Illinois case, as opposed to statutory, law. Illinois case law does not limit the type or category of employee who can be subject to a restrictive covenant. Instead, the court examines the covenant to determine if the covenant is reasonably written (i.e. reasonable in both temporal and geographic scope) to protect a “legitimate business interest.”  A “legitimate business interest” exists if the employer demonstrates (1) near-permanent customer relationships that the employee would not know about but for his employment or (2) that the employee acquired trade secrets or other confidential information during his employment and subsequently tried to use the trade secrets for his own benefit. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 226 Ill. Dec. 331, 340, 685 N.E. 2d 434, 443 (2^nd Dist. 1997). 

In contrast, House Bill HB 4040 limits non-compete enforcement to employees or independent contractors who:

•                     have substantial involvement in the executive management of the employer’s business;

•                     have direct and substantial contact with the employer’s customers;

•                     possess knowledge of the employer’s trade secrets and/or proprietary information;

•                     possess such unique skills that they have achieved “a high degree of public or industry notoriety, fame, or reputation as a representative of the employer,” or

•                     are among the highest paid 5% of the employer’s work force for the year immediately preceding the separation.

HB 4040 also changes Illinois law so that an employer loses the right to enforce a non-competition covenant if the employer fails to notify the new employee two weeks prior to the first day of his employment that a covenant not to compete is required, or if the covenant is not accompanied by a “material” advancement, promotion, bonus or compensation increase. In addition, HB 4040 alters the court’s ability to determine whether a non-competition covenant is reasonable in temporal and geographic scope (an analysis that is done on a case-by-case basis) by creating a rebuttable presumption that a non-competition covenant is invalid if:

•                     the covenant exceeds one year;

•                     the geographic restrictions in the covenant cover areas beyond which the former employee provided services “during the one year preceding his termination;”

•                     the covenant concerns personal services activities that the employee did not perform during the “one year preceding termination of the employment.”

One of the few similarities between HB 4040 and Illinois case law is that HB 4040 does allow the court to modify a non-competition covenant to “make the covenant reasonable under the circumstances.”   However, HB 4040 goes on to state that, if a court chooses to modify the covenant, then the court cannot impose a damages award for the employee’s original breach of the covenant. Instead, the court can award damages only for conduct that occurs after the modification. Finally, HB 4040 instructs a court to interpret any attorneys’ fees provision found in a non-competition covenant as allowing either the employer or the employee to recover their attorneys’ fees; and further empowers the court to award attorneys’ fees to the employee if, through a declaratory judgment action brought by the employee, the court declares the non-competition covenant unenforceable.

We will continue to monitor HB 4040’s progress through the Illinois House of Representatives.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

BY JASON STIEHL

            In recent years, courts in the Northern District of Illinois have made clear that without actual harm to data, a plaintiff cannot claim “damage” under the Consumer Fraud and Abuse Act, 18 U.S.C. 1030 et seq. (“CFAA”). See, e.g., Garelli Wong & Assoc. v. Nichols, 551 F. Supp. 2d 704, 704 (N.D. Ill. 2008) (holding there was no “damage” because the defendant’s “unauthorized acts of copying and e-mailing [Plaintiff’s] computer files did not impair the integrity or availability of the information in the Database and did not cause any interruption of service.”) To circumvent this strict reading of the CFAA, companies have used the term “loss” in the statute, arguing that a company suffered a “loss” by undertaking efforts to investigate and assess what “damage” may have been caused.   18 U.S.C. 1030 (e)(11) (defining “loss” to include “conducting a damage assessment.”).  A recent case calls into question whether such allegations will continue to suffice.

            In Kluber Skahan & Associates, Inc. v. Cordogan, Clark & Assoc., Inc., the court addressed whether allegations of a “loss” suffered within two years were sufficient to toll the limitation period under the CFAA, which requires a case to be brought within two years of discovery of any “damage.” In answering in the negative, Judge Zagel further shortened the reach of the CFAA. In Kluber, the court defined the elements of CFAA as requiring proof of: (1) damage or loss, (2) as a result of (3) a violation of some other provision of section 1030, and (4) conduct involving one of the facts set forth in section 1030 (c)(4)(A)(i). Kluber Skahan & Associates, Inc. v. Cordogan, Clark & Assoc., Inc., No. 08-cv-1529, 2009 WL 466812, * 6 (N.D. Ill. Feb. 25, 2009). The court undertook an analysis of the definitions of “loss” and “damage” under Section 1030, finding that the words were not only different in definition, but different in concept. Specifically, the court stated “whereas ‘damage’ contemplates harms to data and information, ‘loss’ refers to monetary harms.” Id. at * 7. The court went one step further, announcing that “Section 1030(g) does not require damage for a CFAA claim to arise.” Id. at *8 n. 14.   It is ironic that with such an emphasis on the distinction between these harms, the court would later take effort to amalgamate them.

            Ultimately, the court refused to toll the limitations period, holding that Congress explicitly chose to provide a two-year limitation for injury-discovery regardless of whether a “loss” had occurred. Id. at * 8 (“It was well within Congress’ power to include a separate two-year limitation of the discovery of loss. The text of the CFAA reflects that Congress declined to do so, and so will I.”). It supported its decision by emphasizing that the purpose of the statute is primarily criminal and that the statute was not meant to “cover the disloyal employee who walks off with confidential information.” Id (citing Am. Family Mut. Ins. Co. v. Rickman, 554 F. Supp. 2d 766, 771 (N.D. Ohio 2008)). Thus, it concluded that “[l]osses are monetary harms attenuated from the underlying concern of the Act: damage to data.” Id. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As discussed in our March 9th posting, Illinois Senate bill SB 2149 seeks to alter the landscape of trade secret enforcement and litigation in Illinois by, among other things, a) requiring disclosure of trade secrets before a party issues written or oral discovery; b) requiring attorneys'  fees be awarded to the prevailing party in a trade secrets case; and c) ordering a court to enter an attorneys' fees award against any party that subsequently amends their initial trade secret disclosure. SB 2149 passed through the Senate Judiciary Committee on March 12, 2009, and will now proceed to a full senate vote. The vote likely will occur within the next few weeks. If approved by the Senate (which is quite likely since SB 2149 spent less than one week before the Senate Judiciary Committee), SB 2149 will be sent to the Illinois House of Representatives Judiciary Committee for review and approval. If the House Judiciary Committee subsequently approves SB 2149, SB 2149 will then be considered and voted upon by the entire House of Representatives. We will continue to monitor the bill and its progression through the Illinois General Assembly.
 

• Email This
• Print
• Comments
• Trackbacks (1)
• Share Link

A new bill recently introduced in the Illinois State Senate would dramatically change the Illinois Trade Secrets Act (765 ILCS 1065/1 et at.) and alter the landscape of trade secret litigation in Illinois. The bill, SB 2149, requires a party asserting trade secret misappropriation to serve on the opposing party, before commencing any written or oral discovery, a written statement that describes "with reasonable specificity the trade secrets which have allegedly been improperly used, disclosed or misappropriated." The bill requires a party to obtain leave of court to supplement its written statement and 180 days after submitting its statement to identify additional trade secret misappropriation. More importantly, any court that allows a party to amend its written statement must also enter an attorneys’ fees award against the amending party for attorneys’ fees the opposing party incurred as result of the amended statement.

In addition, the new bill allows the prevailing party to recover its attorneys’ fees and also orders the court to award attorneys’ fees if:

Finally, the proposed bill allows the court to award attorneys’ fees if the court:

a. finds that a damages claim for trade secret misappropriation is "objectively specious and has been maintained without substantial proof of economic injury approximately caused by improper use;"

b. modifies an injunction because the injunction is "impermissibly overbroad, vague or ambiguous;"

c. finds that a request for injunctive relief is substantially greater than what is necessary to protect "legitimate economic interests" regarding the improper use, disclosure or misappropriation of trade secrets.

We will continue to monitor this bill and its progression through the Illinois General Assembly.

• Email This
• Print
• Comments
• Trackbacks (2)
• Share Link

In Hal Wagner Studios, Inc. v. Elliott, No. 3:09-CV-31-MJR, 2009 WL 424432 (S.D. Ill. Feb. 19, 2009), Judge Michael Reagan of the Southern District of Illinois entered a preliminary injunction against Kris Elliott (Wagner’s former general manager for its Edwardsville, Illinois office) and a number of former Wagner employees, including Elliott’s wife, Pam. The facts of the case are as follows:

Wagner is in the business of supplying photography services to local schools. In 1994, Wagner purchased the assets of Mr. Elliott’s business, Delmar Studios, for $245,000. As part of the sale, Mr. Elliott executed a non-compete provision, forbidding him from doing the following for 18 months after the end of his employment with Wagner: (1) soliciting or selling school photography accounts from Elliott’s territory, which was defined in the agreement; (2) disclosing a list of said accounts; or (3) otherwise competing for the accounts. Pam Elliott did not sign a non-compete agreement.

On December 31, 2008, Elliott and six co-workers (including his wife) mailed resignation letters to Wagner’s headquarters in St. Louis, Missouri. Defendants’ resignations left Wagner’s Edwardsville office bereft of personnel save for two short term employees. The Elliotts and at least one other Defendant then commenced employment with Herff Jones, Inc., a competitor of Wagner. On January 2, 2009, the Elliotts sent out a solicitation letter on behalf of Herff Jones to approximately 50 schools serviced by Wagner’s Edwardsville office. In that letter, the Elliotts referred to themselves collectively 16 times. Kris Elliott then had his wife, Pam, solicit those schools because she was not covered by a non-compete agreement. Pam Elliott obtained contracts from 21 of the schools.

Upon inspection of the Edwardsville office after Defendants’ resignations, Wagner determined that a number of business documents had been taken, printed, and/or deleted from the company’s office and computers. Specifically, Wagner could not locate its contracts with the vast majority of schools serviced by the Edwardsville office. Wagner further determined that the Elliotts had removed “The Bible,” a rolodex containing the contact information for Wagner customers serviced by the office. 

Wagner filed an action against Defendants on January 9, 2009. The Court entered a temporary restraining order against Defendants on January 13, 2009. In that order, Judge Reagan ordered the Elliotts to return all Wagner property in their possession. Judge Reagan declined to enjoin Defendants on the basis of Kris Elliott’s non-compete provision because of a dispute regarding alleged modifications to the provision. Following a preliminary injunction hearing that took place from February 2-4, the Court entered an order granting a preliminary injunction on February 6 and codified that ruling in its decision published on February 19. 

In the decision, the Court reiterated its finding that Defendants would have to return all Wagner property in their possession. Judge Reagan specifically noted that Defendants’ actions in taking Wagner property made it very difficult for Wagner to service its clients.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In Baird and Warner Residential Sales, Inc. v. Mazzone, No. 1-07-2179, the Illinois Appellate Court, First District reversed the circuit court’s determination that a restrictive covenant between Patricia Mazzone and her former employer, real estate broker Baird & Warner, was unenforceable as a matter of law. The ruling was issued in June as an unpublished order but was later published on August 15, 2008, upon the motion of Baird & Warner, which requested publication to provide guidance to the real estate industry where restrictive covenants are commonplace.

Baird & Warner sued Mazzone and her current employer, competing broker Midwest Realty Ventures, seeking to enjoin Mazzone for violating the restrictive covenant that prohibited her from soliciting Baird and Warner employees and independent contractors for one year following the end of her employment there. Although the circuit court initially granted a temporary restraining order and ordered expedited discovery, Mazzone and Midwest Realty quickly moved to dismiss on the ground that the non-solicitation agreement was unreasonable, overly broad, and thus enforceable because it sought to impose a “poison pill” whereby any competitor that hired any Baird & Warner manager was then precluded from hiring any of Baird & Warner’s thousands of employees and independent contractors. 

Baird & Warner opposed the motion, contending that, based on other language in the agreement, the covenant should be interpreted to apply only to the Baird & Warner office where Mazzone had worked.   But the circuit court dismissed the complaint and dissolved the TRO, concluding that the plain language of the agreement was not limited to the one office and declining to “blue pencil” the agreement because doing so would discourage precise drafting of agreements.

In an interlocutory appeal, the Appellate Court determined that even though the agreement was ambiguous as to whether it applied to one office or all of the company’s employees, “there is insufficient evidence to support a finding that the agreement was overly broad.” The court noted that under Illinois law, a court determining the reasonableness of a restrictive covenant should consider, among other factors, the hardship caused to the employee and the effect upon the general public. Here, the court concluded, there was no evidence on the face of the complaint to weigh those factors, and therefore it cannot be determined that the covenant is unreasonable as a matter of law. 

Based on this ruling, the court concluded that it need not address Baird & Warner’s alternative argument that the circuit court erred in refusing to exercise its “blue pencil” powers to modify the non-solicitation agreement to render it enforceable.

• Email This
• Print
• Comments
• Trackbacks
• Share Link