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

When explaining to lay people what we do, trade secret practitioners often use the classic examples of the formula for Coca-Cola or KFC’s secret recipe of eleven herbs and spices. Now, we can add as an illustration the nooks and crannies of Thomas’ English Muffins, as demonstrated by a case filed by Bimbo Bakeries (“BBakeries”) in the Eastern District of Pennsylvania. BBakeries, which sells a variety of different breads and baked goods, brought an action against Chris Botticella, a high-level BBakeries executive, on January 15, 2010. In the action, BBakeries is seeking, among other things, a preliminary injunction forbidding Botticella from commencing employment as an executive with Hostess Brands, a BBakeries competitor. The Honorable R. Barclay Surrick of the Eastern District of Pennsylvania held a hearing on BBakeries’ motion on January 25, 2010. At present, he has not ruled on the motion.

Not unlike other major companies that have pursued an executive going to competitors, BBakeries is proceeding against Botticella on an inevitable disclosure theory. BBakeries’ claim is that Botticella’s knowledge of its trade secrets and confidential information is so thorough that he would inevitably use that information in his work for Hostess, thus violating a non-disclosure agreement with BBakeries and the Pennsylvania Uniform Trade Secrets Act. In its motion and accompanying declarations, BBakeries alleges that Botticella is one of “less than ten people in the world with full knowledge of how to produce Thomas’ English Muffins, famous for their distinctive ‘nooks and crannies’ characteristics.” BBakeries also claims that Botticella knows the cost structure and strategies for most of its products, such as its “super premium breads.” All of this information would, according to BBakeries, give Hostess an improper competitive advantage. Finally, BBakeries asserts that Botticella concealed his intentions to move to Hostess, and then instructed his secretary to delete information from his hard drive.

As evidenced by the proposed findings of fact and conclusions of law filed by Botticella on January 29, 2010, Botticella is making several counter-arguments, which include the following: (1) there is no evidence as to Botticella’s responsibilities for Hostess, including whether he will be working on its English muffins, so BBakeries cannot show that he would inevitably disclose confidential information; (2) Botticella did not look at confidential materials sent to him by BBakeries after signing an “Acknowledgment and Representation Form” with Hostess on December 7, 2009; (3) the materials that Botticella deleted from his hard drive were of a personal nature, although he did accidentally delete work files; and (4) Botticella used an external storage device to practice his computer skills. 

Botticella also argues that the inevitable disclosure doctrine should not apply because BBakeries set forth his post-employment obligations in its agreement with him. That agreement included a non-disclosure covenant, but not a non-compete provision. Thus, Botticella posits, the agreement provides a contractual framework governing his post-BBakeries employment and that framework should trump the inevitable disclosure doctrine.

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

When we last wrote about IBM’s efforts to enjoin David Johnson, its former Vice President of Corporate Development, from joining Dell, Judge Stephen Robinson of the Southern District of New York had denied IBM’s second motion for preliminary injunction and the Second Circuit Court of Appeals was preparing to hold oral argument on the matter. The Court of Appeals has now issued a brief order upholding Judge Robinson’s decisions. After setting forth that it would review the District Court’s denials of the motions for preliminary injunction under the deferential abuse of discretion standard, the Court of Appeals upheld the denial of the first motion for preliminary injunction. In so doing, it cited to the trial court’s finding that Johnson was “extremely credible” and that IBM’s witness “lacked familiarity with documents bearing on the controversy.” The Court of Appeals also rejected IBM’s attacks on the trial court’s order denying the second preliminary injunction, finding that the trial court was correct when it held that it could not address the second motion because it concerned the same facts as the first motion, which was at that time before the Second Circuit.

The matter now returns to the trial court. In the last actions taken in the trial court prior to the resolution of the appeal, Johnson had moved to dismiss two counts of IBM’s Amended Complaint. The trial court had also denied Johnson’s request to stay discovery, instead directing the parties to agree on a scheduling order. The case will now proceed on those two fronts.

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

In an article published today by the Daily Journal, "Economy Leads Companies to Sue Ex-Workers," (linked with permission) author Laura Ernde talks with a number of California practitioners about what they see happening with trade secrets litigation in the wake of the California Supreme Court's ruling in Edwards v. Arthur Anderson  and the economy.  

Although Ernde indicates that the anecdotal evidence is that interest in trade secrets is on an "upswing," according to Seyfarth Shaw's own Carolyn Sieve and Robert Milligan, research regarding filings in Los Angeles indicates that the actual number of lawsuits mentioning "trade secrets" has decreased over the last two years. 

Ernde's article also touches on the "inevitable disclosure" doctrine, noting that under FLIR v. Parrish, 2009 DJDAR 8598, the doctrine is no longer applicable in California. 

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

By Kate Perrelli and Erik Weibust

On October 7, 2009, the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development held a hearing on a non-compete bill, House No. 1799, sponsored by Representatives Will Brownsberger and Lori Ehrlich. Representatives Brownsberger and Ehrlich had each previously sponsored their own independent bills – Brownsberger’s based on California’s statute that bans non-compete agreements altogether, and Ehrlich’s based on Oregon’s statute that permits non-compete agreements with certain restrictions. The two Representatives have spent a considerable amount of time and energy over the past few months crafting a compromise bill, relying on input from proponents and opponents of non-compete agreements, including industry leaders, employees, trade associations, and attorneys. Several of these people testified before the committee about the need for predictability in the area of restrictive covenants -- for both employers and employees -- and the need to balance the interest of employer’s in protecting their confidential information, trade secrets, and goodwill, with those of employees in being able to switch jobs freely. Although this compromise bill in some respects codifies Massachusetts common law, there are four provisions in particular that warrant further review and refinement:

• The bill prohibits enforcement of non-compete agreements against employees who make less than $75,000 per year. One concern with this provision is that start-up companies often pay their employees lower salaries until they are able to obtain greater financing, yet provide them with as much, if not more, confidential information and trade secrets than higher paid employees at other companies. The bill ignores this scenario. In addition, there is no method in the bill for determining whether companies that pay hourly wages to their employees, such as staffing agencies, are subject to the law, as it is difficult to determine whether an employee will make more than $75,000 in a given year when they begin their employment, which is when they would be required to execute a non-compete agreement. The bill makes no exception or accommodation for these types of companies or others that would be adversely impacted by the $75,000 minimum.
   
• The bill limits non-compete agreements to one year, with the exception of a garden leave clause provision, pursuant to which the employer would pay the employee to sit on the sidelines for the term of the restriction. Courts in the Commonwealth often enforce as reasonable two-year non-compete agreements, and in some limited instances, for longer. A one year limitation may be insufficient in many situations. 
   
• Attorneys’ fees are mandatory for successful defendant-employees, yet they are merely permissive for successful plaintiff-employers, and are to be awarded only in the latter situation if the employer can show that the employee acted with bad faith, a very subjective standard. Moreover, an employee also receives attorneys’ fees if he or she files a declaratory judgment action challenging his or her non-compete agreement, provided that two days before doing so, the employee provides the former employer with specific measures that the employee would take to protect the employer’s confidential business interests, which measures are substantially adopted by a court as part of a hearing on preliminary injunctive relief. Again, this provision may place undue pressure on a start-up to accept an employee’s proposal to avoid incurring legal fees.   
   
• The bill rejects the inevitable disclosure doctrine, under which it is presumed that an employee who had access to a significant amount of confidential information and trade secrets will disclose that information, even if unintentionally, to his or her new employer. This doctrine plays the important role of acting as a backstop to non-compete agreements, or as the only protection where no non-compete agreement is executed, and is necessary to further protect employers against disclosure by such employees. Complete obliteration of this doctrine will affect certain industries more dramatically than others.

Kudos to the legislators, and the group that they enlisted to fashion this compromise bill.  Massachusetts has stepped back, at least for the time being, from the precipice of following California’s legislature’s path in banning non-competes altogether, and instead, has taken a big step forward to provide more clarity to a very complex, fact-specific area of Massachusetts law. There are steps left to be taken, but the current debate is healthy and productive.

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

Katherine (Kate) Perrelli (a Seyfarth Shaw partner in Boston) recently published an op-ed, “Is Banning Non-Competes the Answer for Massachusetts?" in the September 21, 2009 issue of Massachusetts Lawyers Weekly. In her article, Kate discusses two bills addressing non-competition agreements that are currently pending in the Massachusetts legislature; one bill would enforce reasonably tailored non-competes, while the other would ban them altogether.  A full copy of the article is available here. Kate outlines the supporting arguments of both critics and proponents of non-competition agreements. She explains that those criticizing non-competes claim that restrictive covenants limit employee mobility and industry innovation and should be banned altogether. Proponents of non-competes argue that banning them will hurt employers by negatively impacting employer research productivity and the employer’s ability to protect intellectual property. Kate contends that “reasonable and narrowly tailored non-competes, combined with non-solicitation and non-disclosure agreements, best balance the freedom and interests of the employee against the employer’s interest in protecting intellectual capital.” Kate notes that “while encouraging the free flow of employees and ideas in our economy is appealing, the Legislature should listen carefully to Massachusetts’ business leaders and examine relevant research closely before embracing an all outright ban. Such action may in the end have harmful effects on startups, current employers and the Massachusetts’ economy generally.” She further notes that “banning non-competes in Massachusetts would be a dramatic sea change for companies currently and considering, doing business here.”  A copy of joint proposed legislation is available here.  A hearing is scheduled for tomorrow, October 7, 2009, where debate will be heard on the competing bills.

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

The California Court of Appeal’s recent decision in FLIR Systems, Inc. v. Parrish, 2d Civil No. B209964, 2009 WL 1653103 (Cal. App. 2d Dist. June 15, 2009), affirming a $1.6 million attorney fee award to defendants upon a finding that the action was brought in bad faith, provides a useful and interesting discussion of various factors that may lead a court to conclude that a misappropriation case has been brought in bad faith. The decision highlights the importance of considering carefully whether to bring a misappropriation claim against former employees, particularly where there is little or no evidence of actual damage, or of actual misappropriation or threatened misappropriation.

In 2004, FLIR acquired the assets of Indigo, of which defendants Parrish and Fitzgibbons were officers. Indigo manufactures and sells microbolometers, devices used in connection with infrared cameras, night vision, and thermal imaging. After the sale, defendants continued to work for Indigo. About a year later, defendants decided to start a new company to mass produce bolometers. The new company was based on a business plan developed by Fitzgibbons several years before FLIR acquired Indigo. Before leaving Indigo, defendants advised FLIR and Indigo of their business plan and invited FLIR and Indigo to participate. FLIR rejected the offer. 

In 2006, defendants began negotiations with Raytheon Company in accord with their business plan. Defendants assured FLIR and Indigo that they would not misappropriate Indigo’s trade secrets and that they would use an intellectual property filter similar to the one used at Indigo to prevent the misuse of trade secrets. In June 2006, FLIR and Indigo sued defendants on the theory that defendants could not mass produce low-cost microbolometers without misappropriating trade secrets. Upon learning of the lawsuit, Raytheon terminated business discussions with defendants, and one month after the suit was filed, defendants advised FLIR and Indigo that they would not go forward with their new business.

FLIR and Indigo, before trial, dismissed their damages claims and tried only the misappropriation of trade secrets and California Unfair Competition Act claims. On December 6-17, 2007, the case was tried. In a statement of decision issued in June 2008, the trial court found no misappropriation or threatened misappropriation of trade secrets. It was undisputed that defendants received no funding for their business plan, never started their new business, had no employees or customers, did not lease any facility or develop technology, and did not design, develop or sell any infrared products. The trial court ultimately denied permanent injunctive relief and awarded defendants $1,641,216.78 in attorney fees.

The California Uniform Trade Secrets Act allows for an award of reasonably attorney fees to the prevailing party where the claim was brought in bad faith. Civ. Code § 3426.4. The court ultimately held that FLIR and Indigo had essentially brought the action based on the doctrine of “inevitable disclosure,” as there was no evidence of misappropriation or threatened misappropriation, and the FLIR and Indigo witnesses were unaware of such evidence though they maintained suspicions that misappropriation would occur. Given that the “inevitable disclosure” doctrine has been definitively rejected in California, the Court found FLIR and Indigo to have brought and maintained the action in bad faith. The items the Court considered significant: 

•           The absence of any economic harm.

•           The absence of any evidence of misappropriation or threatened misappropriation of trade secrets. Notably, there was evidence at trial that one of the defendants, Parrish, had downloaded technological data onto a hard drive before leaving Indigo, and that he destroyed the hard drive a few months before the lawsuit was filed. Although evidence that an employee has downloaded confidential information shortly before leaving his employer is typically significant to support a misappropriation claim, here, the evidence was discounted because defendants first learned of the download after the complaint was filed, so it was not a consideration for bringing suit, and the download was not a threatened misappropriation because there was no evidence that the contents of the hard drive, “if such contents existed, were improperly accessed, used, or copied before the drive was destroyed.”

•           Evidence that FLIR and Indigo had an anticompetitive motive in filing the lawsuit.  On this point, the court found significant the testimony of FLIR’s CEO, who testified that “we can’t tolerate a direct competitive threat by [Parrish] and [Fitzgibbons],” inferring that the CEO had no evidence of wrongdoing but was bothered that defendants planned to compete with FLIR in the future. The Court also found significant the fact that another FLIR officer had voted to file the lawsuit but had no personal knowledge that defendants had committed a wrongful act.

•           Failure by FLIR and Indigo to identify what trade secrets would be subject to the permanent injunction. The Court found as “strong evidence of bad faith” FLIR and Indigo’s proposed injunction, which barred defendants from developing certain products for a 12-month period even if they did not use FLIR and Indigo’s technology or trade secrets.

•           Imposition of unnecessary settlement conditions. When defendants notified FLIR and Indigo of their business plan, FLIR and Indigo responded with a demand for $75,000, a non-competition agreement, and agreement that defendants would not hire FLIR and Indigo’s employees, and agreement that they would not challenge Indigo’s patent applications. The Court found these restrictions to be unlawful restraints on trade.

•           FLIR and Indigo’s experts at trial admitted there was no scientific methodology to predict trade secret misuse and agreed that no trade secrets were misappropriated.

The FLIR decision is a reminder to employers to be cautious when determining to bring a lawsuit against former employees for trade secret misappropriation. California courts may not tolerate the filing of misappropriation claims where it appears the employer is merely fearful or suspicious of wrongdoing. In such cases, the employer plaintiff risks not only a dismissal of its claims but the possibility of being sanctioned for bringing the action. 

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