In a classic example of bad facts creating bad law, a federal judge in Kentucky recently denied a motion to dismiss claims brought against attorneys who allegedly counseled employees to breach a non-compete agreement and assisted in setting up a competing business. In Pinnacle Surety Services, Inc. v. Manion Stigger, LLP, the plaintiff sued its former attorneys and their respective law firms, alleging among other things that the attorneys tortiously interfered with a contractual relationship and aided and abetted Pinnacle’s former employees’ breaches of fiduciary duty, by encouraging them to violate their non-compete agreements and helping them set up a competing surety bond company. Continue Reading Can Attorneys Be Liable For Directing Clients to Breach Non-Competes? One Federal Court Says Maybe
In a recent ruling, the New Jersey Supreme Court gave employers a great recourse for dealing with former employees who breach their duty of loyalty. In Bruce Kaye v. Alan P. Rosefielde, the Court allowed an employer to recover compensation paid to a disloyal, recently terminated, employee, even where the employer sustained no economic hardship from the employee’s acts of disloyalty.
In Kaye, the employee, an attorney, who was only licensed to practice in New York, was hired as Chief Operating Officer (“COO”) and General Counsel for plaintiff’s business selling and managing timeshares in Atlantic County, New Jersey. Interestingly, although the defendant’s contract refers to his salary as a retainer for his services, and it appeared that both parties intended defendant to be an independent contractor, both parties agreed that defendant performed the services of an employee rather than an independent contractor.
While employed in the hybrid COO/General Counsel role — earning a salary of $500,000 per year — the Court found that the employee committed a number of “egregious” acts that ultimately resulted in the termination of his employment, including: (1) expensing a $4,000 personal trip to Las Vegas, the cost of which included a hotel suite with three “adult film stars”; (2) fraudulently applying for health insurance; (3) forging signatures on false quitclaim deeds of defaulting timeshare owners; (4) carved out a greater-than-agreed-upon personal interest in one of his employer’s corporate entities; (5) creating an entity under his employer’s name, without his employer’s consent, taking a 20% interest in that entity for himself (the employee); and (6) making numerous sexual advances towards other employees. When the employer learned what was going on, he fired the employee and sued him for breach of fiduciary duty, fraud, legal malpractice, unlicensed practice of law, and breach of duty of loyalty.
The Trial and Appellate Courts
After a 26-day bench trial, the trial court found that the former employee breached his duty of loyalty to the employer, and committed legal malpractice and fraud. The employer was awarded $4,000 for the Las Vegas trip, over $800,000 in counsel fees and costs, and rescission of all of the employee’s ill-gotten interests in the employer’s other companies. But despite it being “difficult to imagine more egregious conduct by a corporate officer,” the trial court declined to order equitable disgorgement for the former employee’s compensation during the period of disloyalty. The trial court interpreted a prior Supreme Court decision, Cameco, Inc. v. Gedicke, as holding that “in order to compel disgorgement of a disloyal employee’s compensation, a court must first find that ‘the employee’s breach proximately caused the requested damages.’” The Appellate Division agreed with the trial court on that point and affirmed that the employer could not disgorge the compensation paid to the disloyal former employee because it could prove no actual harm.
The New Jersey Supreme Court granted certification only to address the specific question of “whether a court may remedy disgorgement of a disloyal employee’s salary to an employer that has sustained no economic damages.”
The Court reversed the courts below, holding that disgorgement is an equitable remedy within the trial court’s authority, including where a disloyal former employee’s misconduct is not tied to an economic loss suffered by the employer on account of the employee’s disloyalty. The Court directed lower courts to consider four factors to determine whether an employee breaches his/her duty of loyalty:
(1) the existence of contractual provisions relevant to the employee’s actions;
(2) the employer’s knowledge of, or agreement to, the employee’s actions;
(3) the status of the employee and his/her relationship to the employer (for example, corporate officer or director versus production line worker); and
(4) the nature of the employee’s conduct and its effect on the employer.
In effect, courts are directed to consider “the parties’ expectations of the services that the employee will perform in return for his or her compensation, as well as the ‘egregiousness’ of the misconduct that leads to the claim.”
The Court further clarified that once the employee is found to have breached the duty of loyalty, courts should decide whether disgorgement is a proper remedy by considering: “[t]he employee’s degree of responsibility and level of compensation, the number of acts of disloyalty, the extent to which those acts placed the employer’s business in jeopardy,” “the degree of planning to undermine the employer that is undertaken by the employee,” as well as “other factors” that may be relevant. And once disgorgement is found to be appropriate, the court suggested apportionment commensurate to misconduct at issue, as opposed to “wholesale disgorgement.”
Outlook for Employers
New Jersey employers scored a significant win and a meaningful tool to deter and redress a breach of an employee’s duty of loyalty. The Kaye Court addressed the circumstance of a disloyal employee who’s employment was terminated, however the analysis is certainly instructive in addressing situations with current employees. The ability to recoup some or all of a disloyal employee’s salary/compensation is certainly a powerful tool in the right circumstances, and certainly something to consider when faced with a breach of the duty of loyalty.
The security breach news cycle continues. There remains a deluge of news stories about point-of-sale terminals being compromised, the ease of magnetic stripes being cloned, and the need for Chip and PIN technology being deployed on credit cards. The legal ramifications of all these events is just starting to become apparent – and it’s complicated. Individual liability is beginning to develop.
Before addressing legal issues, the question (mostly as a result of the Wyndham case) as to what constitutes “reasonable security” should be addressed. Fortunately, the law doesn’t require perfect information security. To do that would be to encase your computers and data in a block of amber and toss them to the bottom of the Marianas Trench – which makes them useless. So, for the rest of us who actually want to do business, the question is what do you do to have “reasonable security”?
The FTC has spent a pretty good amount of time going through what they consider “reasonable security”. Unfortunately, it isn’t a laundry list of “…do this and everything will be all right.’ One of the major take-aways of the Wyndham case is that the variable nature of the security threats which are out there demands that the FTC have the ability to evaluate reasonable security on a case-by-case basis. Practically this means you need to have a three-pronged strategy: 1) Risk Assessment (and you have to do this regularly – not just once, and think you are done); 2) implementation of controls to mitigate the threats identified in the first step (not just the ones that the media, or your vendor says you need to use); and 3) incident response protocols.
In general, the usual cause of a breach is a failure to do the first step. If you don’t know what your actual risk is (or how it has changed – remember, this isn’t a static environment), it won’t matter what you do in the control phase as you won’t cover all the actual risks that are there.
With a breach, the default approach of res ipsa loquitor is rearing its ugly head. In other words, the plaintiff’s bar would have the mere existence of the breach be a violation of a duty. Interestingly enough, much like other res ipsa cases, determining who is the culpable party is just as difficult. Who was responsible for the breach? Who has standing to sue? Which part of an organization had the obligation to protect against breaches?
If a large company has a breach, someone is going to sue them. Either the people who had their data compromised, or the shareholders who have stock that has gone down in price. As I have commented in other posts, officers and directors have a duty of care they must adhere to. However, the usual cause of action which can affect the individual manager has been limited to the data subject, or the shareholder as the plaintiff. While this remains true, there is an additional party who is starting to prosecute individuals – the FTC.
In February of this year, the 4th Circuit upheld a $163 million judgment against an individual executive at a company accused of defrauding consumers via a “scareware” scheme. While not directly the same as a security breach, the defendant’s argument in this case centered around a challenge to the legal standard the lower court applied in finding individual liability under the FTC Act. Specifically, that a person could be held individually liable if the FTC proves that the individual participated directly in the deceptive practices or had authority to control them, and had knowledge of the deceptive conduct.
This standard comes from securities fraud jurisprudence and requires proof of an individual’s authority to control the alleged deceptive practices, coupled with a “failure to act within such control authority while aware of apparent fraud.” This proposed standard would permit the commission to pursue individuals only when they had actual awareness of specific deceptive practices and failed to act to stop the deception, i.e., a specific intent/subjective knowledge requirement”.
However, the 4th Circuit said this standard would effectively leave the FTC with the “futile gesture” of obtaining “an order directed to the lifeless entity of a corporation while exempting from its operation the living individuals who were responsible for the illegal practices” in the first place.
While the 4th Circuit’s holding is related to a very obvious fraud scheme, the usual cause of action the FTC asserts against a company for a security breach is under the “deceptiveness” prong of Section 5, liability for a security breach is starting to creep outward to those who are actually responsible for the security posture of a company.
As part of our annual tradition, we are pleased to present our discussion of the top 10 developments/headlines in trade secret, computer fraud, and non-compete law for 2013. Please join us for our complimentary webinar on March 6, 2014, at 10:00 a.m. P.S.T., where we will discuss them in greater detail. As with all of our other webinars (including the 12 installments in our 2013 Trade Secrets webinar series), this webinar will be recorded and later uploaded to our Trading Secrets blog to view at your convenience.
Last year we predicted that social media would continue to generate disputes in trade secret, computer fraud, and non-compete law, as well as in privacy law. 2013 did not disappoint with significant social media decisions involving the ownership of social media accounts and “followers” and “connections,” as well as cases addressing liability or consequences for actions taken on social media, such as updating one’s status, communicating with “restricted” connections, creating fake social media accounts, or deleting one’s account during pending litigation.
We also saw more states (e.g., Arkansas, Utah, New Mexico, California, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington) enact legislation to protect employees’ “personal” social media accounts and we expect more states to follow.
The circuit split regarding the interpretation of what is unlawful access under the Computer Fraud and Abuse Act (“CFAA”) remains unresolved and another case will need to make its way up to the Supreme Court or legislation passed to clarify its scope as federal courts continue to reach differing results concerning whether employees can be held liable under for violating computer use or access policies.
There have also been several legislative efforts to modify trade secret, computer fraud, or non-compete law in various jurisdictions. Texas adopted a version of the Uniform Trade Secrets Act, leaving Massachusetts and New York as the lone holdouts. Oklahoma passed legislation expressly permitting employee non-solicit agreements. Massachusetts, Michigan, Illinois, New Jersey, Maryland, Minnesota, and Connecticut considered bills that would provide certain limitations on non-compete agreements but they were not adopted.
We expect more legislative activity in 2014, particularly regarding privacy, the scope of the CFAA, and trade secret legislation to curb foreign trade secret theft and cyber-attacks.
Finally, while the Snowden kerfuffle and NSA snooping captured the headlines in 2013, government agencies remained active, including some high profile prosecutions under the Economic Espionage Act, the release of the Obama Administration’s Strategy on Mitigating the Theft of U.S. Trade Secrets, and the National Labor Relations Board’s continued scrutiny of employers’ social media policies. We expect more government activity in this space in 2014.
Here is our listing of top developments/headlines in trade secret, computer fraud, and non-compete law for 2013 in no particular order:
1) Dust Off Those Agreements . . . Significant New Non-Compete Cases Keep Employers On Their Toes
Employers were kept on their toes with some significant non-compete decisions which forced some employers to update their agreements and onboarding/exiting practices. First, in Fifield v. Premier Dealer Services, an Illinois appellate court found that less than two years employment is inadequate consideration to enforce a non-compete against an at-will employee where no other consideration was given for the non-compete. Second, in Dawson v. Ameritox, an Alabama federal court found that a non-compete executed prior to employment was unenforceable. Next, in Corporate Tech. v. Hartnett, a Massachusetts federal court held that initiating contact was not necessary for finding solicitation in breach of a customer non-solicitation agreement. Lastly, in Assurance Data v. Malyevac, the Virginia Supreme Court found that a demurrer (i.e., a pleading challenge) should not be used to determine the enforceability of non-compete provisions but rather evidence should be introduced before making such a determination.
2) Continued Split of Authority On the Computer Fraud and Abuse Act and Efforts to Reform CFAA and Enhance Federal Trade Secret and Cybersecurity Law
Courts in Massachusetts, Minnesota, and New York joined the Ninth Circuit’s narrow reading of the CFAA and limited its applicability to pure hacking scenarios rather violations of employer computer usage or access policies. Additionally, in 2013, Representative Zoe Lofgren introduced Aaron’s Law, named after the political hackvist Aaron Swartz, to reform of the Computer Fraud and Abuse Act. Her proposed legislation would limit the CFAA to pure hacking scenarios and exclude violations of computer usage policies and internet terms of service from its scope. Lofgren also introduced legislation which would create a federal civil cause of action in federal court for trade secret misappropriation. Other legislation to prevent intellectual property theft was also introduced including the Deter Cyber Theft Act, which aims to block products that contain intellectual property stolen from U.S. companies by foreign countries from being sold in the United States. The Cyber Economic Espionage Accountability Act was also introduced and allows U.S. authorities to “punish criminals backed by China, Russia or other foreign governments for cyberspying and theft.” We expect Congress to consider similar legislation in 2014.
3) Texas Adopts Uniform Trade Secrets Act
Texas joined forty-seven other states in adopting some version of the Uniform Trade Secrets Act. Until recently, Texas common law governed misappropriation of trade secrets lawsuits in Texas. The new changes under the Texas UTSA (which we discuss in more detail here) provide protection for customer lists, the ability to recover attorneys’ fees, a presumption in favor of granting protective orders to preserve the secrecy of trade secrets during pending litigation, and that information obtained by reverse engineering does not meet the definition of a trade secret. Legislation has been introduced in Massachusetts to adopt the Act but has yet to pass. For additional information on recent trade secret and non-compete legislative updates, check out our webinar “Trade Secrets and Non-Compete Legislative Update.”
4) High Profile Prosecutions and Trials under Computer Fraud and Abuse Act and Economic Espionage Act
2013 saw several high profile prosecutions and trials under the CFAA and Economic Espionage Act. Bradley Manning, who allegedly leaked confidential government documents, to WikiLeaks, and Andrew ‘Weev’ Auernheimer, who allegedly hacked AT&T’s servers, were both convicted under the CFAA. Executive recruiter David Nosal was convicted by a San Francisco jury of violating federal trade secret laws and the CFAA and sentenced to one year and a day in federal prison. In U.S v. Jin, the Seventh Circuit upheld the conviction of a Chicago woman sentenced to four years in prison for stealing trade secrets of her employer before boarding a plane for China. For additional information on criminal liability for trade secret misappropriation, check out our webinar “The Stakes Just Got Higher: Criminal Prosecution of Trade Secret Misappropriation.”
5) More Social Media Privacy Legislation
Arkansas, Utah, New Mexico, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington all passed legislation social media privacy legislation in 2013 that prohibited employers from asking or insisting that their employees provide access to their personal social networking accounts. California extended its current social media privacy law to specify that it encompassed public employers. We expect more states to enact social media privacy legislation in 2014.
6) Continued Uncertainty on the Scope of Trade Secret Preemption
Courts have continued struggled with the scope and timing of applying preemption in trade secret cases but there is a growing movement to displace common law tort claims for the theft of information. Such claims are typically tortious interference with contract, conversion, unfair competition, and breach of fiduciary duty. In essence, plaintiffs may only be left with breach of contract and a trade secret claim for the theft of information if a jurisdiction has adopted a broad preemption perspective. Courts in western states such as Arizona, Hawaii, Nevada, Utah, and Washington have preempted “confidential information” theft claims under their respective trade secret preemption statutes.
In K.F. Jacobsen v. Gaylor, an Oregon federal court, however, found that a conversion claim for theft of confidential information was not preempted. In Triage Consulting Group v. IMA, a Pennsylvania federal court permitted the pleading of preempted claims in the alternative. Additionally, in Angelica Textile Svcs. v. Park, a California Court of Appeal found that there was no preemption of claims for breach of contract, unfair competition, conversion, or tortious interference because the claims were based on facts distinct from the trade secret claim and the conversion claim asserted the theft of tangible documents. In contrast, in Anheuser-Busch v. Clark, a California federal court found that a return of personal property claim based on the taking of “confidential, proprietary, and/or trade secret information” was preempted because there was no other basis beside trade secrets law for a property right in the taken information. For additional information on the practical impact of preemption on protecting trade secrets and litigating trade secret cases, check out our webinar “How and Why California is Different When it Comes to Trade Secrets and Non-Competes.”
7) Growing Challenge of Protecting of Information in the Cloud with Increasing Prevalence of BYOD and Online Storage
While the benefits of cloud computing are well documented, the growth of third party online data storage has facilitated the ability for rogue employees to take valuable trade secrets and other proprietary company electronic files, in the matter of minutes, if not seconds. The increasing use of mobile devices and cloud technologies by companies both large and small is likely to result in more mobile devices and online storage being relevant in litigation. A recent article in The Recorder entitled “Trade Secrets Spat Center on Cloud,” observed that the existence of cloud computing services within the workplace makes it “harder for companies to distinguish true data breaches from false alarms.”
An insightful Symantec/Ponemon study on employees’ beliefs about IP and data theft was released in 2013. It surveyed 3,317 employees in 6 countries (U.S., U.K., France, Brazil, China, South Korea). According to the survey, 1 in 3 employees move work files to file sharing apps (e.g. Drop Box). Half of employees who left/lost their jobs kept confidential information 40% plan to use confidential information at new job. The top reasons employees believe data theft acceptable: (1) does not harm the company does not strictly enforce its policies; (2) information is not secured and generally available; or (3) employee would not receive any economic gain. The results of this study serve as a reminder that employers must be vigilant to ensure that they have robust agreements and policies with their employees as well as other sound trade secret protections, including employee training and IT security, to protect their valuable trade secrets and company data before they are compromised and stolen. Employers should implement policies and agreements to restrict or clarify the use of cloud computing services for storing and sharing company data by employees. Some employers may prefer to simply block all access to such cloud computing services and document the same in their policies and agreements. For a further discussion about steps and responses companies can take when their confidential information and/or trade secrets appear, or are threatened to appear, on the Internet, check out our webinar “My Company’s Confidential Information is Posted on the Internet! What Can I Do?”
8) Continued Significance of Choice of Law and Forum Selection Provisions In Non-Compete and Trade Secret Disputes
The U.S. Supreme Court’s recent decision in Atlantic Marine v. U.S.D.C. for the W.D. of Texas appears to strengthen the enforceability of forum selection clauses as it held that courts should ordinarily transfer cases pursuant to applicable and enforceable forum selection clauses in all but the most extraordinary circumstances. While Atlantic Marine did not concern restrictive covenant agreements or the employer-employee context, it may nonetheless make it more difficult for current and/or former employees to circumvent the forum selection clauses contained in their non-compete or trade secret protection agreements. Many federal courts continue to enforce out-of-state forum selection clauses in non-compete disputes (see AJZN v. Yu and Meras Eng’r’g v. CH2O), while some courts have disregarded forum selection clauses in such disputes “in the interests of justice.” The Federal Circuit in Convolve and MIT v. Compaq and Seagate, held that information at issue lost its trade secret protection when the trade secret holder disclosed the information because it failed to comply with the confidential marking requirement set forth in a non-disclosure agreement. Accordingly, trade secret holders should be careful what their non-disclosure agreements say about trade secret protection otherwise they may lose such protection if they fail to follow such agreements.
9) Social Media Continues to Change Traditional Legal Definitions and Analyses
Social media continues to change the way we define various activities in employment, litigation, and our everyday lives. A Pennsylvania federal district court in the closely watched Eagle v. Morgan case found that a former employee was able to successfully prove her causes of action against her former employer for the theft of her LinkedIn account, but she was unable to prove damages with reasonable certainty. Recent cases in Massachusetts and Oklahoma held that social media posts, updates and communications with former customers did not violate their non-solicitation restrictive covenants with their former employer. In the litigation context, a New Jersey federal court issued sanctions against a litigant for deleting his Facebook profile, while a New York federal court allowed the FTC to effectuate service of process on foreign defendants through Facebook. The Fourth Circuit held that “liking” something on Facebook is “a form of free speech protected by the First Amendment.” Federal district courts in Nevada and New Jersey illustrated the growing trend of courts finding that individuals may lack a reasonable expectation of privacy in social media posts. For further discussion on the relationship between social media and trade secrets, check out our webinar “Employee Privacy and Social Networking: Can Your Trade Secret Survive?”
10) ITC Remains Attractive Forum to Address Trade Secret Theft
The Federal Circuit caught the attention of the ITC and trade secret litigators alike when it ruled in TianRui Group Co. v. ITC that the ITC can exercise its jurisdiction over acts of misappropriation occurring entirely in China. Since then, victims of trade secret theft by foreign entities are increasingly seeking relief from the ITC (e.g. In the Matter of Certain Rubber Resins and Processes for Manufacturing Same (Inv. No. 337-TA-849)). For valuable insight on protecting trade secrets and confidential information in China and other Asian countries, including the effective use of non-compete and non-disclosure agreements, please check out our recent webinar titled, “Trade Secret and Non-Compete Considerations in Asia.“
We thank everyone who followed us this year and we really appreciate all of your support. We also thank everyone who helped us make the ABA’s Top 100 Law Blogs list. We will continue to provide up-to-the-minute information on the latest legal trends and cases across the country, as well as important thought leadership and resource links and materials.
Don’t forget to register to receive a copy of our Annual Blog Year in Review.
Occasionally, you may need emergency relief against a former employee who has absconded with a client list, your confidential information, and the clients themselves. If you are very unlucky, you may need to get a TRO against his new employer as well. If you, the former employee, and the new employer are all required to arbitrate any claims before FINRA, how do you get your TRO?
FINRA Rule 13804
FINRA is well aware that its members and registered representatives may occasionally need emergency relief, and may need limited recourse to the courts to obtain a TRO. FINRA Arbitration Rule 13804 permits parties to obtain a TRO in court in conjunction with filing a statement of claim with FINRA. Under the rule, the parties obtaining a TRO must immediately submit their case to FINRA, which will appoint a panel on an expedited basis for summary adjudication on a preliminary injunction.
Under the rule, a party seeking a TRO may obtain one from any court of competent jurisdiction. If the court issues the TRO, the party must immediately submit a statement of claim to the Director of Arbitration of FINRA requesting injunctive relief as well as all other relief sought, and must serve the statement of claim on all other parties at the same time. The rule requires a hearing on the request for injunctive relief to commence within fifteen days, and provides an expedited process for selecting the panel that will hear the request. The process is the same if an arbitration claim has already been filed and the request for injunctive relief is being brought as a counterclaim.
Although the rule does not require it, it is prudent to file your statement of claim simultaneously with the TRO. You can supplement the statement if the court modifies the relief you are seeking. In addition, it is wise to attach the statement of claim to your court pleadings and the court pleadings to your statement of claim so that your adversary cannot argue to either tribunal that you are pulling the wool over its eyes.
A TRO can be a tricky thing to get, and courts seldom grant all of the relief you are seeking. Bear this in mind as you craft your TRO and argue for it in court – you will need a TRO that remains in place until FINRA can convene a hearing on injunctive relief. Allowing the court to provide a specific expiration date on the TRO is perilous, and numerous factors outside of your control could cause the hearing to be postponed beyond the court’s deadline, leaving you without injunctive protection. If possible, you should request that the court order the matter to arbitration, and direct that the TRO will remain in place until the arbitration hearing can occur.
By the same token, if you are on the receiving end of a TRO, be sensitive to the fact that a FINRA hearing on an injunction may not be convened as quickly as you would like. Be prepared to argue in court for a specific expiration date on the TRO, and if the court declines to order one, be prepared to return to court for further relief if the FINRA process takes longer than you anticipated.
Using a forum selection clause to transfer a case out of California federal court may have become easier thanks to a recent order from Judge Koh of the United States District Court for the Northern District of California. In her order, Judge Koh granted defendants’ motion to transfer plaintiff’s complaint to Delaware federal court, finding that the forum selection clauses contained in two agreements were both broadly applicable to tort and statutory claims and enforceable despite allegations that enforcing them would violate California public policy, e.g. the inclusion of an alleged unenforceable jury trial waiver. AJZN, Inc. v. Donald Yu, et al., Case No. 5:12-cv-03348-LHK, (N.D. Cal.)
The agreements and forum selection clauses in question came to be when plaintiff sold all of its assets to one of the defendants in exchange for a warrant giving plaintiff the option to purchase a stake in one of the defendants and that defendant’s assumption of plaintiff’s debt. This transaction was accomplished via an Asset Purchase Agreement and a Warrant Agreement, both of which contained jury trial waivers and forum selection clauses stating that suits arising under the agreements must be filed in Delaware.
Following the transaction, the relationship between the parties took a turn for the worse, and on July 3, 2012, the plaintiff filed suit alleging eight causes of action under both federal and California law related to misrepresentations in the Warrant Agreement and in the defendants’ actions, including claims for breach of fiduciary duty and unfair competition.
Defendants responded with a motion to dismiss or transfer based on the forum selection clauses in both the Asset Purchase Agreement and the Warrant Agreement. In its opposition, plaintiff argued that the claims it brought were not covered by the forum selection clauses and that the clauses were unenforceable due to their inclusion of a jury trial waiver. Judge Koh disagreed with plaintiff and struck down each of its arguments in turn. The Court found that federal law, not California law, controlled the question of the enforceability of the forum selection clauses and that the plaintiff had the burden of establishing the lawful basis to set aside the clauses.
First and foremost, Judge Koh refuted plaintiff’s assertion of inapplicability by approving of the broad wording of the forum selection clauses. The text of these clauses reads:
“The parties agree that all actions or proceedings relating to this Agreement (whether to enforce a right or obligation or obtain a remedy or otherwise) will be brought solely in the state or federal courts located in or for Wilmington, Delaware.” (emphasis added)
As Judge Koh saw it, these clauses “do not require that claims seek to enforce the agreements, or seek remedies under the agreements.” Rather, they “require only that claims relate to, or are based on matter in connection with, the agreements.” Using this broad interpretation of the forum selection clause, Judge Koh easily held that plaintiff’s claims fall within the scope of the clause.
Plaintiff’s second argument — that the forum selection clauses should be struck down because of their inclusion of a jury trial waiver — met with a similar fate. Although Judge Koh recognized that jury trial waivers may be unenforceable in California, she did not view the forum selection clause as a contravention of California public policy. In its briefings, plaintiff did “not presen[t] any reason why a Delaware federal court could not protect [its] interests as well as a California court could.” Based on this lack of a concrete threat, Judge Koh was not ready to speculate about how a Delaware court would handle this case. Perhaps it would apply California law. Perhaps it would apply “some other law that would be equally protective of the interests of California citizens.” The answer was unclear, and therefore plaintiff did not meet its burden of proving that enforcing the forum selection clauses would contravene California public policy.
Coming on the heels of cases such as Hartstein v. Rembrandt and Hegwer v. American Hearing and Associates — both of which also came from the Northern District and enforced forum selection clauses despite claims of violation of California public policy, i.e. Business and Professions Code section 16600 — AJZN v. Yu is yet another example of how California federal courts are generally willing to enforce forum selection clauses, absent a strong showing that enforcement would be unreasonable or unjust. Notable here is Judge Koh’s insistence that plaintiff concretely demonstrate that transferring this case to a Delaware court would contravene California public policy. As Judge Koh stated at the end of her analysis:
“A mere unspecified ‘risk’ that a court could, in theory, enforce the waiver…cannot carry AJZN’s heavy burden to establish that ‘enforcement of the clause would contravene a strong public policy’ of California.” (citing to Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 324 (9th Cir. 1996), emphasis in original).
Although it remains to be seen how concrete of a “risk” California federal judges will demand from plaintiffs in the future, Judge Koh has provided further authority for courts to demand that plaintiffs all but predict the future if they want to have a forum selection clause declared unenforceable because it contravenes California public policy. Because we cannot predict the future (try as we might!), only time will tell how this dispute over the enforceability and applicability of forum selection clauses will play out in California. Expect the continued use of aggressive use of forum selection and choice of law provisions to attempt to secure a more favorable forum for future disputes.
Delaware is typically viewed as business friendly as sophisticated parties attempt to avail themselves of Delaware courts through mandatory forum selection, choice of law, and consent to jurisdiction provisions. Delaware also has a favorable choice of law/venue statute, 6 Del. C. § 2708, which provides that parties to certain contracts over $100,000 may use Delaware choice of law provisions in their contracts and that it “shall conclusively be presumed to be a significant, material and reasonable relationship with this State and [the agreement] shall be enforced whether or not there are other relationships with this State.”
We are pleased to announce the publication of the Trading Secrets Blog 2012 Year in Review.
The 2012 Review is a compilation of our significant blog posts from 2012 and is categorized by specific topics: Trade Secrets; Computer Fraud and Abuse Act; Non-Competes and Restrictive Covenants; and Legislation.
As the specific blog entries, including our Top 10 Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2012 and 2012 Trade Secrets, Computer Fraud, and Non-Competes Webinar Series – Year in Review, contained in the Review demonstrate, our blog authors stay on top of the latest developments in this area of law and provide timely and entertaining posts on significant new cases, legal developments, and legislation. The Review includes a searchable, detailed index that references all cases and states mentioned throughout the Review.
The 2012 Review also includes a complete listing of all webinars in the 2012 Trade Secrets Webinar Series, with links to the recordings of each webinar.
We are kicking off the 2013 webinar series with a program entitled, “2012 National Year in Review: What You Need to Know About the Recent Cases/Developments in Trade Secret, Non-Compete, and Computer Fraud Law” on January 28th. More information on our upcoming 2013 webinars is available in the program listing contained in the Review.
Clients and friends of the blog can request a CD or printed copy of the Review by clicking here.
Preparing the Review was a complete team effort and we thank you for your continued support of the blog.
Throughout 2012, Seyfarth Shaw LLP’s dedicated Trade Secrets, Computer Fraud & Non-Competes Practice Group hosted a series of CLE webinars that addressed significant issues facing clients today in this important and ever changing area of law. The series consisted of eight webinars:
1) Employee Privacy, Social Networking at Work, and the Computer Fraud and Abuse Act Standoff;
2) Employee Theft of Trade Secrets or Confidential Information in Name of Protected Whistleblowing;
3) Pleading, Providing and Protecting Trade Secrets in Litigation;
4) Protecting Your Trade Secrets in the Financial Services Industry;
5) When Trade Secrets Cross International Borders;
6) Trade Secrets and Non-Compete Legislative Update;
7) Trade Secret Protection Best Practices: Hiring Competitors’ Employees and Protecting the Company When Competitors Hire Yours; and
8) 2012 California Year in Review: What You Need to Know About the Recent Developments in Trade Secret, Non-Compete, and Computer Fraud Law.
As a conclusion to this well-received 2012 webinar series, we compiled a list of key takeaway points for each of the webinars, which are listed below. For those clients who missed any of the programs in this year’s webinar series, the webinars are available on CD upon request or you may click on the title below of each webinar for the online recording. CLE credit is available as discussed below. We are also pleased to announce that Seyfarth will continue its trade secrets webinar programming in 2013 and has several exciting topics lined up. We will release the 2013 trade secrets webinar series in the coming weeks.
The first webinar of the year, led by Seyfarth partners Gary Glaser and Scott Schaefers, addressed the issue of employees’ privacy rights on their work computers; unauthorized use or disclosure of company intellectual property while using social media; and the Computer Fraud and Abuse Act (CFAA).
- To have the best chance of seeking remedies under the federal CFAA, only give employees access to company networks on a need-to-know basis. Require all employees with access to confidential company information to sign confidentiality and restricted access and use agreements. Have clear written policies in place that leave no doubt that any access and use of company information, for purposes other than company business, is strictly prohibited, and have employees acknowledge receiving copies of such policies. Send out periodic reminders of those policies, each of which should require acknowledgement of receipt by the employees.
- Do NOT attempt to access an employee’s personal e-mails, files or Internet accounts without advice of counsel. Under both federal and many state laws, employees often have privacy rights in their personal information, even if they store it or access it on company computers.
- For social networking sites (e.g., LinkedIn), have clear written policies that spell out what company information may/may not be posted on such sites, and identify what information belongs to the company (e.g., contact lists, company photos or graphics, etc.), as well as a process for purging the company-owned information from their contact lists posted on social networking sites such as LinkedIn at the time the employee departs. An exit interview should also be conducted at the time any employee separates, and as part of that exit interview process, each exiting employee should be given a written reminder of their ongoing trade secret, confidentiality and social networking obligations. If an employee leaves the company without such clear written direction, the company risks waiving any proprietary interest in the information in his/her LinkedIn profile. Also consider using ownership agreements that specify that the company owns the particular social media accounts that the employee may work on and remember to obtain the password from the employee to the company owned social media account before the employee leaves.
In our second webinar of the series, Seyfarth partner Robert Milligan answered the question, “Can employees steal trade secrets and confidential information to support their whistleblower claims?” This program covered recent decisions addressing the interplay between maintaining employer confidentiality and protection of trade secrets and protected activity under whistleblower statutes and “self-help” discovery, as well as the provisions in whistleblower bounty programs that preclude enforcement of confidentiality agreements in certain instances.
- A central goal of Sarbanes-Oxley is the accurate valuation and protection of a company’s assets. But what does this mean for trade secrets, which have traditionally been thought of as an undefined intellectual property right? Sarbanes-Oxley has mandated duties of disclosure and internal controls that have transformed trade secrets into an asset that must be valued and reported.
- At a minimum, companies should create a trade-secret protection committee or have a corporate officer whose job it is to identify, value, and protect trade secrets. However, doing so requires an understanding of 1) what a trade secret is, 2) where one finds a trade secret, and 3) how to appropriately protect a trade secret. The key is to identify, inventory and value as well as institute internal controls to protect trade secrets. Seyfarth has extensive experience assisting companies with this process and offers an effective and well-received trade secret audit program.
- Section 922 of the Dodd-Frank Act prevents any person from interfering with a whistleblower’s report, including by threatening to enforce confidentiality agreements. Whistleblower thieves may seek revenge by making confidential information public in addition to bringing it before the SEC. Companies must act swiftly to have genuine confidential or trade secret information removed from public mediums, such as the Internet, to attempt to preserve its secrecy. New whistleblower rules may decrease incentives to follow internal reporting procedures and instead provide a perverse incentive for sham employees to work for bounties rather than fulfill their employment obligations. Careful planning should be done to make good hiring decisions as well as employing effective performance management of existing hires to attempt to manage the risk of the retention of rogue and disloyal servants.
- Consider these strategies to protect trade secrets and confidential information when faced with a whistleblower thief:
- Make sure you have a clear anti-retaliation policy and document investigation. Follow your corporate compliance programs and ethics policies and procedures.
- Be careful in all communications with the whistleblower. Do not make him or her feel threatened. Try to find an employee that the whistleblower thief trusts to get back company documents.
- Consider engaging a third-party neutral to maintain confidential documents and information if the whistleblower has not yet gone to the SEC.
- Consider amnesty negotiations. Remind the whistleblower of the serious legal consequences of stealing trade secret and confidential information.
- Offer to study the problem internally and report to the SEC.
- Move swiftly to attempt to obtain the removal of any confidential or trade secret documents from the Internet by working with Internet service providers to obtain the immediate takedown and involve the court as needed.
The third installment in the 2012 Trade Secrets Webinar Series was presented by trade secrets practice leader Michael Wexler. Many courts require that claims for trade secret misappropriation be pled specifically as to the nature of the trade secret or suffer the consequences of challenges to the pleadings. The challenge is to plead with reasonable particularity without actually disclosing the secrets in a public document. From a defense stand point, the identity of the trade secret is paramount to prepare defenses, determine the value of the secrets, and determine if they were actually misappropriated. This webinar covered the ethical, technical and practical aspects of initial pleadings that are fundamental to the filing and defending of trade secret claims.
- In any trade secrets litigation in which you represent the plaintiff, you must have a frank discussion with your client prior to the inception of the litigation concerning its duties to identify the alleged misappropriated trade secrets with specificity and the resulting discovery disclosure that will be required in the litigation. Simply put, the client needs to know that counsel for the defendant(s) (at a minimum) will be provided access to the allegedly purloined trade secret as well as others. Depending upon the state and occasionally the individual judge, the defendants may also be able to obtain access to the stolen trade secrets subject to a protective order so that they can defend themselves against the claim. A plaintiff must be mindful that their secrets may be further disclosed to a competitor during trade secret litigation subject to non-disclosure obligations and that plaintiff must vigorously defend and protect the confidentiality of said information throughout the litigation.
- A majority of states either by statute or case law require that a plaintiff disclose their trade secrets with specificity as part of the discovery process. Failure by the plaintiff to provide sufficient specificity regarding the stolen trade secret in discovery may result in a defendant obtaining summary judgment on the claim. Some states require the plaintiff to provide a specific trade secret disclosure document before discovery commences. See California Code of Civil Procedure section 2019.210.
- Protective orders in trade secret litigation must be carefully tailored to protect confidential information disclosed in discovery and limit the disclosure of such information to those who need to know for purposes of the litigation. A protective order should have appropriate measures concerning how documents containing confidential information will be provided to the court, witnesses, and experts. Careful consideration should also be made on whose burden it is to justify the protection level assigned to particular documents.
- Plaintiffs should use contention interrogatories to flesh out any allegations made by the defendant(s) that particular alleged trade secrets are in the public domain. Written discovery should probe the basis of such allegations, including when and where such disclosure occurred.
The fourth webinar in the series, presented by partners Scott Humphrey and James McNairy, focused on trade secret considerations in the banking and finance industry, including prosecuting claims against former employees who are FINRA members.
- When seeking injunctive relief in a trade secrets dispute involving parties that are subject to FINRA regulation, be sure to first consult FINRA (NASD) Rule 13804 governing injunctive relief—while the moving party may first seek injunctive relief from a court of competent jurisdiction, the party must also make specified filings with FINRA.
- When litigating a trade secret dispute before FINRA, keep in mind that the FINRA process is often less formal than in court, and the arbitration panel may include persons who are not lawyers. Thus, it behooves both parties to keep their legal arguments concise and, where complex trading algorithms or other complex trade secrets are at issue, the trade secret should be described as simply as possible.
- When the FINRA trade secret dispute arises out of facts involving broker recruitment, the parties should be aware of the 2004 “Protocol for Broker Recruiting,” which currently has well over 400 signatories and allows brokers to take to their new employer certain account information. Other limitations within the protocol should also be carefully considered before filing suit.
Our fifth webinar in the 2012 series was presented by Robert Milligan, Marjorie Culver and Matthew Werber and provided a high-level discussion of recent non-compete and trade secret issues that impact foreign companies conducting business in the United States and companies operating internationally. This program provided an overview of the key considerations that foreign companies should appreciate in order to effectively navigate trade secret and non-compete law in the U.S. and highlighting the issues facing U.S. trade secret owners attempting to address the theft of stolen trade secrets abroad. This webinar provided valuable insight for companies who compete in the global economy and must navigate the legal landscape in these jurisdictions to ensure they are adequately protecting their trade secrets.
- In many U.S. states, initial employment and continued employment can be sufficient consideration for non-compete, non-solicitation and non-disclosure agreements, whereas in several European countries, the employer must pay for any post-termination non-compete. In contrast to the law in some foreign countries, employers can still enforce the non-compete even if the employer terminates the employment relationship in some U.S. states. Injunctive relief is typically the top litigation goal in most U.S. trade secret/non-compete matters. There are significant differences in U.S. states concerning the interpretation of the Uniform Trade Secrets Act (which has been adopted in 46 U.S. States). For example, there are significant differences regarding the application of the inevitable disclosure doctrine, trade secret preemption and recoverable damages.
- Cross-border considerations: employers must be vigilant and think critically about the most likely venue that a non-compete/trade secret battle will occur should an employee later leave the company as forum and choice of law can be outcome determinative. Employers should carefully select employees for cross-border coverage, taking into consideration where the work will likely be performed, where the employee will likely reside, what jurisdiction/choice of law is most favorable, and the likely chance of successful enforcement. The employer should draft to the highest standard based upon the likely locale of any dispute concerning the non-compete.
- Trade secret holders seeking to remedy misappropriation occurring abroad should consider the United States International Trade Commission (ITC) as a potential forum for seeking relief. In TianRui Group Co., Ltd. v. ITC, 661 F.3d 1322 (Fed. Cir. 2011), the Federal Circuit ruled that the ITC can exercise its jurisdiction over acts of misappropriation occurring entirely in China so long as the dispute concerns products being imported into the United States.
The sixth webinar of the year, led by Robert Stevens, Erik Weibust, and Daniel Hart, focused on new and pending legislative changes to non-compete and trade secrets statutes, including a review of Georgia’s Revised Restrictive Covenant Act one year after its enactment, recent and pending legislative changes to non-compete statutes in New Hampshire and Massachusetts, adoption of the New Jersey Uniform Trade Secrets Act, and pending legislative changes to trade secrets statutes in Idaho and at the federal level.
- To the extent that they have not already done so, employers operating in Georgia should have their non-compete agreements evaluated by counsel to ensure that they are taking full advantage of the change in Georgia public policy toward enforcement of restrictive covenant agreements, which permits courts to blue pencil overbroad agreements and which only applies to agreements signed after May 11, 2011.
- Employers operating in New Hampshire should ensure compliance with the new statutory requirement of disclosing non-compete and non-piracy agreements to employees prior to making an offer of employment or an offer of change in job classification, while employers operating in Massachusetts should stay abreast of proposed legislation that, if enacted, could make enforcement of restrictive covenants more difficult in Massachusetts. Please see our chart that summarizes the various iterations of the proposed legislation.
- In light of New Jersey’s adoption of the Uniform Trade Secrets Act and proposed legislation in Idaho and at the federal level, trade secrets law is slowly moving toward greater uniformity. In light of the continually developing statutory landscape, employers operating anywhere in the United States should continue to ensure that they have taken reasonable measures to protect their trade secrets, by, among other steps, limiting access to trade secrets to employees with a need for such access, providing password protections on documents, encrypting data, limiting the ability of employees to remotely print highly sensitive documents, and enacting vigorous restrictive covenant agreements in jurisdictions where such agreements are permitted.
The seventh webinar in our series, presented by Michael Wexler, Robert Milligan and Joshua Salinas, discussed best practices when dealing with newly hired or departing employees and the incumbent trade secret, non-competition and information protection issues.
- During the job interview of a competitor’s employee, remember to 1) discuss general skills and talents, not the former employer’s customers or trade secrets; 2) control the interview and put the employee at ease; 3) make clear that the employee should not, under any circumstances, use or bring any of his employer’s information or solicit any former co-workers; 4) focus on making the transition as smooth as possible for the former employer; and 5) check if the employee has any existing agreements with former employers before making an offer.
- Key agreements/provisions/policies that companies should have with their employees: 1) non-disclosure and trade secret protection agreements; 2) non-solicitation of employee agreements/provisions; as permitted by law 3) agreements/provisions relating to former employer’s trade secrets (don’t use or disclose and do not bring to premises); 4) computer use and access provisions/agreements; 5) social media ownership agreements and policies; and 6) invention assignment agreements.
- The exit interview process with departing employees is key. Employers should:
- Prepare for the interview, identify the trade secret and confidential information the employee accessed/used, consider having in-house counsel or HR and employee’s manager present
- Question the departing employee in detail.
- Ask the employee why he/she is leaving.
- Ask the employee what his/her new position will be.
- Check the employee’s computer activities and work activities in advance of the meeting.
- Ensure that all Company property, hardware, and devices have been returned, including e-mail and cloud data, and social media accounts; consider using an inventory list.
- Ensure that arrangements are made to have all company data removed from any personal devices, accounts, storage areas.
- Disable access to company computer networks.
- Make sure you obtain user names and passwords for all company social media accounts.
- Inform the employee of his continuing obligations under agreements with the Company.
- Consider letter to new employer and employee with reminder of continuing obligations.
- Consider having departing employee’s emails preserved and electronic devices forensically imaged.
- Consider using an exit interview certification.
In Seyfarth’s final installment of its 2012 Trade Secret Webinar series, Seyfarth attorneys James McNairy, Joshua Salinas and Jessica Mendelson reviewed noteworthy California cases and other legal developments in the increasingly hot areas of trade secret protection, the preemptive effect of the California Uniform Trade Secrets Act, California’s hostility to non-competition and non-solicitation agreements, the continued erosion of the Computer Fraud and Abuse Act as a tool for California employers to curb data theft, and social media’s influence on how organizations identify and protect confidential information.
- Clearly define company social media policies before problems arise. Avoid restricting employees’ abilities to discuss the terms and conditions of their employment, wages, and other activities protected under Section 7 of the National Labor Relations Act. Employers who make use of social media accounts should consider using contracts to state clearly that the employer owns the accounts, which are to be used only for authorized purposes, but that do not overreach into areas that violate employee rights to privacy.
- Companies should ensure their computer and network policies cover “access,” not merely “use,” to comply with the Ninth Circuit’s narrow interpretation of the CFAA. Access should be defined clearly to delineate functionally what computer resources and information employees permissibly may and may not access, with data repositories containing sensitive information requiring enhanced access restrictions.
- To fall under California Business and Professions Code section 16601’s “sale of business” exception, non-competition covenants executed pursuant to the sale of a business should be incorporated into the terms of the purchase agreements and reflect a clear purpose to protect business goodwill.
- Because preemption under California’s Uniform Trade Secrets act is increasingly invoked by defendants as a basis to dismiss claims related to the taking of trade secret information, it is imperative that potential plaintiffs carefully plead non-trade secret claims as distinct from the trade secret allegations within the complaint. Failure to do so can cause related claims to be preempted and, if the trade secret claim itself is faulty, significantly reduce the number of at issue claims.
- Create a culture of confidentiality within your company so that at every turn employees are aware of the importance of protecting confidential, proprietary, and trade secret information and the steps required of all employees to protect the company’s information assets. Doing so may enable your organization to invoke the trade secrets exception to California Business and Professions Code section 16600, which may help protect company information assets and moderate high employee mobility in California.
2013 Trade Secrets Webinar Series
Beginning in January 2013, we will begin another series of trade secret webinars. The first webinar of 2013 will be a national year in review on the most important cases and developments throughout the country concerning trade secrets, non-competes, and computer fraud. To receive an invitation to this webinar or any of our future webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here.
For attorneys licensed in Illinois, New York or California, who are interested in receiving CLE credit for viewing recorded versions of the 2012 webinars, please e-mail CLE@seyfarth.com to request a username and password. Seyfarth Trade Secrets, Computer Fraud & Non-Compete attorneys are also happy to discuss with you presenting similar presentations to your groups for CLE credit.
A Virginia federal court district court recently issued a significant decision awarding lost profits to an aggrieved employer for breach of fiduciary duty by a former employee. The Court found that the ex-employee was not able to deduct his services for the company as an expense against the damages award. Further, the Court found that the employer’s CFAA claim failed becuase there was not a sufficient showing of loss. Ritlabs, SRL v. Ritlabs, Inc., 2012 WL 6021328 (E.D. Va. 11/30/12).
Ritlabs SRL (“SRL”) sued its CEO and part owner Demcenko, for alleged self-dealing through another company he formed (co-defendant), Ritlabs, Inc. (“INC”). The host of counts included breach of fiduciary duty of loyalty, violation of the Computer Fraud and Abuse Act (CFAA), and tortious interference with contractual relations. In a nutshell, Demcenko, while still the director (essentially CEO) of SRL, allegedly formed a rival Internet technology and software company INC with his wife. He then entered into a license agreement between SRL and INC to exclusively sell SRL’s software in the US, with a non-exclusive worldwide. As the Court determined, Demcenko did not obtain approval from his SRL co-owners, nor advise them of his ownership interest in INC, or that he was cancelling a software distributorship agreement between SRL and another company, which he then entered into on behalf of INC.
Needless to say, his co-owners did not take kindly to Demcenko’s activities, and sued. Plaintiff ultimately moved for summary judgment as to all of its claims, which resulted in the Court’s grant of the same generally across the board, along with summary judgment against Defendants on all counterclaims. The Court imposed constructive trusts, issued restraining orders, and ordered an accounting and disgorgement proceeding. A bench trial ensued as to damages, and it is here that interesting tidbits reside.
The breach of fiduciary duty was the big-ticket item, based upon Demcenko’s diversion of corporate opportunities to himself (through INC). SRL went for INC’s gross revenue, without reduction for any expenses, as well as for some other smaller amounts. SRL also sought punitive damages in the way of costs and attorney’s fees.
Applying Virginia law, a plaintiff is entitled to what it would have received “but for” the breach of fiduciary duty, so as to “deny Defendants the fruits of their scheme.” Accordingly, the Court determined that damages should therefore be calculated on the basis that Demcenko was operating INC for the constructive benefit of SRL; ergo, SRL was entitled to only profits, not gross revenue. In what might be seen as a bit of chutzpah by some, the Defendants sought to deduct amounts received by Demcenko for his “services”. The Court was not buying it, however, and concluded that collecting a salary for breach of one’s duty of loyalty, and while he was still receiving a salary from SRL, was not appropriate as a deductible expense.
As for damages under the CFAA, the Court noted that civil liability, and responsibility for compensatory damages or other relief, requires a showing of CFAA qualifying “loss” aggregating at least $5000. 18 U.S.C. section 1030(g). The bar for loss is not terribly high, as any reasonable cost to the “victim,” including the cost of responding to the offense, damage assessment, restoration, revenue lost “or other consequential damages incurred because of interruption of service” will suffice. But here, the Court did not find the necessary nexus with damage incurred because of interruption of service for the bulk of what SRL was toting up on this count. That left an amount below $5000 total, which the Court noted was below the jurisdictional threshold, and divested the Court of jurisdiction. The previous judgment as to liability was thereby vacated for “lack of subject matter jurisdiction.”
As for costs and attorneys fees, the elimination of the CFAA count removed that as a basis for a fee award. And as for punitive damages, upon which SRL further predicated its costs and attorneys fees, “the Plaintiff did not include a prayer for punitive damages in its Complaint, and should not be considered now.” Nonetheless, the Court reviewed the evidence, and concluded that SRL did not meet its high burden for punitive damages. It was in this discussion that what might otherwise have seemed to be a fairly open and shut case revealed some nuances, such as his former partners having some favorable knowledge of Demcenko’s plans to open a US branch, and “that the affairs of SRL were at times accompanied by rather unorthodox self-driected transactions by each of the owners.”
A high profile trade secret dispute among the board members of one of the fashion world’s most well-known companies has the American fashion elite taking sides. Last month, Christopher Burch filed a breach-of-contract and tortious interference complaint against his ex-wife, fashion mogul Tory Burch, in Delaware Chancery Court. In response, Tory filed counterclaims in early November, in which she accused Christopher of stealing trade secrets to establish stores which looked suspiciously like her own boutiques.
Tory Burch and her ex-husband, J. Christopher Burch, co-founded the fashion empire Tory Burch LLC in 2003. The company is an apparel and accessories brand providing consumers with luxury apparel and other goods. As Oprah Winfrey stated in 2005, the company is “the next big thing in fashion.” Today, the company’s annual sales total more than $700 million annually.
The Burches divorced in 2006, and both Tory and Christopher remained on the board of Tory Burch LLC. Christopher continued to pursue other projects, and in 2008, began to lay the groundwork to launch his own apparel brand, C.Wonder. The company opened its first store in October 2011. Its products included clothing, accessories, and home décor, all of which allegedly resembled Tory Burch’s products, but were sold at a significantly lower price. Allegedly, the store copied the Tory Burch brand, using similarly styled lacquered front doors and store fixtures, as well as furniture and rugs which closely resembled those found in the Tory Burch stores.
In June 2011, Christopher provided the Board of Directors (“the Board”) of Tory Burch LLC with notice that planned to sell his shares of the company. The Company then engaged Barclay’s Capital to assist in the process of locating a buyer. This project was referred to as “Project Amethyst.”
The events which followed the opening of C. Wonder vary depending on who is telling the story. Tory alleges the company sought to “arrive at a consensual resolution of its dispute” with Christopher, despite his violations of his fiduciary duties. In her counterclaim, she states the company continued to move forward with Project Amethyst to find a new investor to purchase Christopher’s stake in the company. In addition, five of the seven board of directors agreed that Christopher would need to enter into a settlement agreement to protect Tory Burch LLC’s brand and confidential information prior to completing any sale. According to Tory’s version of the story, the three bidders positioned to purchase Christopher’s required such an agreement to be in place before they would agree to invest, and Christopher’s refusal to agree prevented the sale from taking place. Christopher tells the story very differently, alleging Tory had cut off his power and “hijacked the bidding process” through which he had been attempting to sell his stake in the company. Furthermore, he alleges Tory manipulated third party bidders into requiring him and his company, C Wonder to reach a one-sided and onerous settlement agreement with the Company regarding trade secret misappropriation and trade dress infringement allegations.
On October 2, 2012, Christopher filed suit against Tory, the other directors, and Tory Burch LLC, requesting a declaratory judgment stating the defendants could not restrain him from pursuing other business ventures. Additionally, Christopher alleged the Board had breached the Operating Agreement by preventing him from engaging in other business ventures, tortiously interfered with his business relationships, and improperly interfered and acted in bad faith to impede his ability to sell his shares of the company.
On November 5, 2012, Tory filed counterclaims against Christopher, alleging Christopher had stolen trade secrets from Tory Burch LLC to establish stores which closely resembled Tory Burch boutiques. Tory alleged Christopher had stocked the stores with mass-market knock-offs of her luxury brand , and that under the terms of the operating agreement, he did not have the right to create knock-off goods, and his right to compete was qualified and limited by his other obligations as a director. Tory’s counterclaim alleges Christopher breached his fiduciary duty by using confidential information belonging to Tory Burch LLC and engaging in unfair competition for his personal benefit. Additionally, Christopher allegedly misappropriated trade secrets from Tory Burch LLC, which he then used in creating C Wonder. Tory’s counterclaim also alleges unfair competition, breach of contract, and deceptive trade practices. She further requests injunctive relief to stop Christopher’s use of Tory Burch LLC’s confidential information and company inventions.
Heavyweight fashion industry players like Anna Wintour and Diane Von Furstenburg have already spoken out in support of Tory Burch. According to Anna Wintour, the editor of Vogue, “As far as we’re concerned [this is] 100% Tory’s business, and we’ve never had anything to do with Chris.” Diane Von Furstenburg, the President of the Council of Fashion Designers of America, echoes Wintour’s support, characterizing Christopher’s behavior as “bizarre and nasty.”
The case is still in the early stages, but has already drawn attention for some colorful hearings. At the first scheduling hearing, which occurred on November 1, 2012, Chancellor Leo Strine promised not to burden anyone’s holidays with this “preppy clothing dispute. . . I’m sorry, but this is — this is not a case about intercontinental ballistic missiles.” In proposing an April trial date, Strine reflected on the popularity of “really ugly” duck shoes, “slightly irregular alligator shirts,” and how “real WASPS actually don’t go and pay full Polo price. . . at Macy’s. No way. They actually will find a bargain. That’s how they got to be, you know, WASPs.” Strine went so far as to suggest, jokingly, that the best way to evaluate the similarities between the C. Wonder and Tory Burch brands would be a fashion show featuring the parties’ attorneys. Finally, Strine discussed his recent reading of John Cheever’s works, and explained its impact on the dispute. “Totally unrelated to this case, I’ve been deep in it, in an autumnal Cheever phase. ” he said. “So I’ll have to just keep that up through the case. Have you read your Cheever lately? You know who he is? … And Mad Men will be coming back at some point in time. So I think if you read Cheever, go see the new Virginia Woolf revival and watch Mad Men, we’ll be all geared up and in the mood for this sort of drunken WASP fest. Are they WASPs? Are the Burches WASPs? Do we know?”
Whether Chancellor Strine’s preliminary views of this “preppy clothing dispute” lead to a quick resolution between the parties remains to be seen. We will continue to keep you apprised of future developments as the case progresses.