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A recent decision from the Eastern District of Pennsylvania reinforces the importance of the timing of purported misconduct in alleged violations of the Computer Fraud and Abuse Act (CFAA) and Defend Trade Secrets Act (DTSA). In Teva Pharmaceutical USA, Inc. v. Sandhu, et al., 2018 WL 617991 (Jan. 30, 2018), Judge Savage found that a defendant former executive could not be liable under the CFAA for conduct that occurred while she had authorized access to computers from which she misappropriated trade secrets. Id. at *1. However, the court also found that CFAA claims could be brought against the recipients of those trade secrets under an “indirect access” theory, and that DTSA claims could be brought on the basis of activity that began before the enactment of the DTSA but continued to occur after its passage. Continue Reading Federal Court Dismisses CFAA Claims Against Former Executive, Allows CFAA and DTSA Claims Against Competitor in Pharmaceuticals Trade Secret Dispute

Continuing our annual tradition, we present the top developments/headlines for 2017/2018 in trade secret, computer fraud, and non-compete law.

1. Notable Defend Trade Secrets Act Developments

Just two years after its enactment, the Defend Trade Secrets Act (“DTSA”) continues to be one of the most significant and closely followed developments in trade secret law. The statute provides for a federal civil cause of action for trade secret theft, protections for whistleblowers, and new remedies (e.g., ex parte seizure of property), that were not previously available under state trade secret laws. Continue Reading Top Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2017/2018

In Seyfarth’s first webinar in its 2018 Trade Secrets Webinar Series, Seyfarth attorneys Michael Wexler, Robert Milligan, and Joshua Salinas presented 2017 National Year In Review: What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law. The panel reviewed noteworthy cases and other legal developments from across the nation over the last year in the areas of trade secrets and data theft, non-competes and other restrictive covenants, and computer fraud. Plus, they provided their predictions for what to watch for in 2018.

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

  • While the Defend Trade Secrets Act provides for an ex parte seizure order, courts have been very unwilling to provide such relief except in extraordinary circumstances.
  • In light of recent state laws and appellate court decisions at both the federal and state level in 2017, choice of venue and choice of law provisions must be carefully considered and strategically implemented.
  • The ABA’s May 4, 2017, Ethics Opinion encourages lawyers to have an open exchange of communication with their clients about the securities measures their firms are taking to safeguard the clients’ confidential information.

On January 25th at 12:00 p.m. Central Time, in Seyfarth’s first installment of its 2018 Trade Secrets Webinar series, Seyfarth attorneys will review noteworthy cases and other legal developments from across the nation over the last year in the areas of trade secrets and data theft, non-competes and other restrictive covenants, and computer fraud. Plus, they will provide their predictions for what to watch for in 2018.

Seyfarth attorneys Robert Milligan, Michael Wexler, and Joshua Salinas will address the following topics:

  • Significant new federal and state court decisions and legislation on non-compete and other restrictive covenants that may impact their enforcement;
  • The Defend Trade Secrets Act and tips for navigating the law and updating trade secret protection agreements to comply with the statute;
  • Discussion of recent trade secret misappropriation decisions;
  • Noteworthy data breaches and criminal prosecutions and criminal sentences for trade secret misappropriation, data theft, and computer fraud matters and discussion of lessons learned;
  • Best practices for updating agreements and policies to adequately protect company assets and trade secrets.

On Tuesday, October 10, 2017, the United States Supreme Court denied certiorari in Nosal v. United States, 16-1344. Nosal asked the Court to determine whether a person violates the Computer Fraud and Abuse Act’s prohibition of accessing a computer “without authorization” when using someone else’s credentials (with that other user’s permission) after the owner of the computer expressly revoked the first person’s own access rights. In denying certiorari, the Court effectively killed the petitioner’s legal challenge to his conviction in a long-running case that we have extensively covered here, here, here, here, here, here, and here (among other places). The denial of certiorari leaves further development of the scope of the CFAA in the hands of the lower courts. Continue Reading Supreme Court Refuses to Hear Password-Sharing Case, Leaving Scope of Criminal Liability Under Computer Fraud and Abuse Act Unclear

We are pleased to announce the webinar “2016
National Year In Review:webinar What You Need to Know About the Recent Cases/Developments in Trade Secrets, Non-Compete, and Computer Fraud Law” is now available as a webinar recording.

In Seyfarth’s first installment of its 2017 Trade Secrets Webinar series, Seyfarth attorneys reviewed noteworthy cases and other legal developments from across the nation over the last year in the areas of trade secrets and data theft, non-competes and other restrictive covenants, and computer fraud. Plus, they provided their predictions for what to watch for in 2017.

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

  • The DTSA can be a powerful tool to protect intellectual capital. However, in order to take full advantage of the DTSA, businesses should carefully check their agreements with employees, handbooks and equity awards to make sure they contain language mandated by the Defend Trade Secrets Act.
  • 2016 was a record year for data and information security breaches. Organizations should alert and train employees on following company policies, spotting potential social engineering attacks, and having a clear method to escalate potential security risks. Employee awareness, coupled with technological changes towards better security will reduce risk and exposure to liability.
  • Several states enacted laws to limit the scope and duration of non-competes in 2016. There were also some significant decisions limiting their scope and enforceability in 2016 as well. Companies should have their non-disclosure and non-compete agreements reviewed to ensure that they comply with the latest state and federal laws, including the new Defend Trade Secrets Act.

2016 TS YIR Cover

The 2016 Year in Review is a compilation of our significant blog posts from throughout last year and is categorized by specific topics such as: Trade Secrets, Computer Fraud and Abuse Act, Non-Compete & Restrictive Covenants, Legislation, International, and Social Media and Privacy. As demonstrated by our specific blog entries, including our Top Developments/Headlines, Trade Secrets Webinar Series – Year in Review and our dedicated page concerning federal trade secret legislation, 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 2016 Review also includes links to the recordings of all webinars in the 2016 Trade Secrets Webinar Series. More information on our upcoming 2017 webinars is available in the program listing contained in this Review. Our highly successful blog and webinar series further demonstrate that Seyfarth Shaw’s national Trade Secret, Computer Fraud & Non-Competes Practice Group is one of the country’s preeminent groups dedicated to trade secrets, restrictive covenants, computer fraud, and unfair competition matters and is recognized as a Legal 500 leading firm.

Clients and friends of the firm can request a digital, CD, or printed copy of the 2016 Review below.

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shutterstock_144630422Although stealing bases, and even signs, in baseball may be part of the game, stealing another team’s trade secrets can land you in federal prison, as one executive recently learned the hard way.

As we previously reported, the FBI has been investigating the St. Louis Cardinals for hacking into the Houston Astros’ internal computer network and stealing proprietary information, including internal discussions about trades, proprietary statistics, and scouting reports. The investigation has now concluded, the Cardinals’ former director of baseball development, Chris Correa, pleaded guilty to five counts of unauthorized access of a protected computer in January, and he has now been sentenced to 46 months in federal prison. He also must pay $279,038 in restitution. According to NPR, “U.S. District Judge Lynn Hughes, as she sentenced Correa, noted that the crime has resulted in stricter security at other baseball teams, according to a press release from the Justice Department. When Correa apologized and called his actions ‘reckless,’ [Judge] Hughes replied, ‘No, you intentionally and knowingly did these acts.’”

As the Department of Justice reported at the time of Correa’s plea:

The plea agreement details a selection of instances in which Correa unlawfully accessed the Astros’ computers. For example, during 2013, he was able to access scout rankings of every player eligible for the draft. He also viewed, among other things, an Astros weekly digest page which described the performance and injuries of prospects who the Astros were considering, and a regional scout’s estimates of prospects’ peak rise and the bonus he proposed be offered. He also viewed the team’s scouting crosscheck page, which listed prospects seen by higher level scouts. During the June 2013 amateur draft, he intruded into that account again and viewed information on players who had not yet been drafted as well as several players drafted by the Astros and other teams.

Correa later intruded into that account during the July 31, 2013, trade deadline and viewed notes of Astros’ trade discussions with other teams.

Another set of intrusions occurred in March 2014. The Astros reacted by implementing security precautions to include the actual Ground Control website address (URL) and required all users to change their passwords to more complex passwords. The team also reset all Ground Control passwords to a more complex default password and quickly e mailed the new default password and the new URL to all Ground Control users.

Shortly thereafter, Correa illegally accessed the aforementioned person’s e mail account and found the e mails that contained Ground Control’s new URL and the newly-reset password for all users. A few minutes later, Correa used this information to access another person’s Ground Control account without authorization. There, he viewed a total of 118 webpages including lists ranking the players whom Astros scouts desired in the upcoming draft, summaries of scouting evaluations and summaries of college players identified by the Astros’ analytics department as top performers.

On two more occasions, he again illicitly accessed that account and viewed confidential information such as projects the analytics department was researching, notes of Astros’ trade discussions with other Major League Baseball teams and reports of players in the Astros’ system and their development.

The parties agreed that Correa masked his identity, his location and the type of device that he used, and that the total intended loss for all of the intrusions is approximately $1.7 million.

Michael McCann provides a good analysis of the sentence for Sports Illustrated and describes potential penalties Major League Baseball may pursue against the Cardinals.

shutterstock_236620168On July 12, 2016, the Ninth Circuit filed its published opinion in Facebook, Inc. v. Power Ventures, Inc., et al., Case No. 13-17154 (“Power Ventures”).  Power Ventures is the latest in a series of decisions from the Ninth Circuit relating to the type of activities potentially giving rise to liability under the Computer Fraud and Abuse Act (18 U.S.C. §1030) (“CFAA”). Power Ventures has potentially important implications for the ways that businesses create, store, and monetize data through computers and web-based applications. Unlike the court’s Nosal line of decisions, Power Ventures is focused more on internet-based conduct that may violate the CFAA.

The underlying legal dispute between the parties began in 2008, when Facebook filed suit against Power Ventures, Inc. (“Power”) in the USDC for the Northern District of California. Power, which aggregated data from different social networking sites using, among other things, automated scripts (i.e., “scraping”), enabled people with various social media accounts to access all of their information in one place. Power used user-provided social media log-in information to import people’s information to a Power portal. In an effort to promote itself and attract users, Power then contacted via e-mail Facebook users’ friends, making it appear as if the e-mails came from Facebook.

Upon learning of Power’s activities, Facebook sent Power a cease and desist letter and used IP blocks in an attempt to prevent Power from obtaining Facebook data (IP blocking is a process by which a computer or network is directed to ignore all communications from a particular IP address). But Power continued to copy Facebook data and took measures to evade the IP blocks.

Although the Ninth Circuit analyzed whether Power’s conduct violated the federal CAN-SPAM Act (finding that it did not, and reversing District Court Judge Lucy Koh), the court’s analysis of the CFAA issues are most noteworthy. The court first walked through its United States v. Nosal CFAA decisions (from 2012 and July 5, 2016; see our coverage of these decisions here and here) to “distill two general rules” in analyzing the issue of authorized access under the CFAA:

(1) “a defendant can run afoul of the CFAA when he or she has no permission to access a computer or when such permission has been revoked explicitly” (noting that “once permission has been revoked, technological gamesmanship or the enlisting of a third party to aid in access will not excuse liability”); and

(2) “a violation of the terms of use of a website—without more—cannot be the basis for liability under the CFAA.”

Applying these rules, the court noted that Power users “arguably gave Power permission to use Facebook’s computers to disseminate messages” (further stating that “Power reasonably could have thought that consent from Facebook users to share the [Power promotion] was permission for Power to access Facebook’s computers”) (emphasis in original). Importantly, the court found that “[b]ecause Power had at least arguable permission to access Facebook’s computers, it did not initially access Facebook’s computers ‘without authorization’ within the meaning of the CFAA.”

The court declined, in a footnote, to “decide whether websites such as Facebook are presumptively open to all comers, unless and until permission is revoked expressly” (citing to a law review article asserting that “websites are the cyber-equivalent of an open public square in the physical world”).
Instead, the court found that a cease and desist letter sent to Power by Facebook expressly rescinded the permission granted by Facebook users to Power and put Power on notice that it “was no longer authorized to access Facebook’s computers.” The letter informed Power that, in Facebook’s view, Power had violated Facebook’s Terms of Use and directed Power to cease using Facebook content or otherwise interacting with Facebook through automated scripts.

Power continued to access Facebook and took steps to evade the IP blocks that Facebook put in place. The court noted discovery from the trial court that appears to reflect a concerted effort by Power to wire around Facebook’s countermeasures and a likely awareness that Power’s conduct implicated the CFAA.

To explain its finding that the Facebook cease and desist letter had revoked Power’s permission to access Facebook, the court analogized the circumstances to a person who wanted to borrow a friend’s jewelry held in a bank safe deposit box. The court said that the borrower would need permission from the bank and the safe deposit box holder to access the box if the bank had determined that it did not want the borrower on its premises (in the court’s example, because the borrower brought a shotgun to the bank when entering to access the safe deposit box).

Although the court’s analogy might have helped it better understand the technology and information flow at issue in Power Ventures, it lacks the nuance that can swirl around alleged “scraping” scenarios where there are sometimes questions concerning whether “access” under the CFAA has occurred and whether there is a protectable or property interest in the data scraped (in the court’s analogy, the jewelry was the safe deposit box holder’s property, but what was the data equivalent in Power Ventures and, under different facts, what might be the bank’s property interest?).

The court then went on to distinguish Power from its Nosal decisions and, in doing so made some interesting observations (arguably in dictum) about the legal effect of Facebook’s Terms of Use. The court observed that “Facebook and Power had no direct relationship, and it does not appear that Power was subject to any contractual terms that it could have breached.” It is unclear whether, by making this statement, the court is saying that, by its conduct, Power and Facebook had not entered into a contract (e.g., the Facebook Terms of Use) or rather there simply were no terms within the Terms of Use that prohibited Power’s conduct.

Notably, Facebook does not appear to have pleaded a breach of contract claim in the trial court.

In any event, whether a website’s terms of use will apply to and bind a party that attempts to “scrape” data from the website is likely to be further litigated as the intersection of traditional contact formation principles meet the evolving standards under “browser-wrap” and “click-wrap” agreements.

This much is clear from Power Ventures: Those who use websites to conduct business would be well-served to (1) carefully consider the drafting and use of website terms of use; (2) diligently monitor their websites and associated computers/servers for any access, and the means of access, by anyone other than authorized users; and (3) where unauthorized access is detected, to act promptly to notify in writing those who have potentially made such access of the conduct alleged to be improper/unlawful and demand that such conduct cease.

Cyberspace and e-commerce law will continue to evolve rapidly, so banks best keep an eye out for those skilled in the programming arts along with shotgun-toting borrowers of jewelry.

shutterstock_261389492Ever since Iqbal and Twombly, it has become imperative that a complaint filed in federal court contains “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”  Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 554, 570 (2007)).  The Eastern District of Michigan recently reiterated this point in the context of an alleged violation of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030.  As detailed below, failure to include the requisite factual allegations can and will result in the dismissal of potential CFAA claims.

SUMMARY

In Fabreeka International Holdings, Inc. v. Robert Haley and Armadillo Noise & Vibration LLC, 2015 U.S. Dist. LEXIS 154869 (E.D. MI, Nov. 17, 2015), Fabreeka Intl. Holdings filed suit against its former employee, Robert Haley, and his new employer, alleging that Haley unlawfully accessed its computers to obtain confidential information in violation of the CFAA.  Specifically, Fabreeka alleged that: (1) during the period of his employment, Haley accessed confidential business information stored on Fabreeka’s servers; (2) Haley did not return all of Fabreeka’s confidential information at the time of his resignation; and (3) Haley authored or assisted in authoring proposals for his new employer using Fabreeka’s confidential information for the purpose of undercutting Fabreeka’s prices.

Fabreeka contended that its allegations establish violations under three sections of the CFAA: 18 U.S.C. §§ 1030(a)(2)(C), 1030(a)(4), 1030(a)(5)(B) and (C).

  • Subsection (a)(2) prohibits (1) intentionally accessing a computer (2) without authorization or exceeding authorized access and (3) thereby obtaining information (4) from any protected computer (if the conduct involved an interstate or foreign communication) where (5) there was loss to one or more persons during any one-year period aggregating at least $5,000 in value.
  • Subsection (a)(4) prohibits (1) accessing a “protected computer” (2) without authorization or exceeding such authorization that was granted, (3) “knowingly” and with “intent to defraud,” and thereby (4) furthering the intended fraud and obtaining anything of value, causing (5) a loss to one or more persons during any one-year period aggregating at least $5,000 in value.
  • Subsection (a)(5)(B) prohibits (1) intentionally accessing (2) a protected computer (3) without authorization, and (4) as a result of such conduct, recklessly causes damage. 18 U.S.C. § 1030(a)(5)(B).
  • Subsection (a)(5)(C) prohibits (1) intentionally accessing (2) a protected computer (3) without authorization, and (4) as a result of such conduct, causing damage and loss. 18 U.S.C. § 1030(a)(5)(C).

The District Court dismissed each of these CFAA claims for the following reasons:

  1. There was no dispute that Haley was authorized to access information on the Fabreeka’s servers, including sales and manufacturing data, during his employment at Fabreeka. Since the facts pled established Haley had authorization, the Court held that Fabreeka’s claims subsections (a)(5)(B) and (a)(5)(C), requiring the access be “without authorization,” should be dismissed. This left Fabreeka’s remaining CFAA claims, which the Court said could proceed so long as Fabreeka pled facts that establish Haley exceeded his authorized access.
  2. Fabreeka’s Complaint asserted that Haley misappropriated confidential information based solely on the similarity of proposals submitted by Fabreeka and his new employer. Based off those proposals, Fabreeka offered unsupported conclusions that Haley stole confidential files and assisted in authoring the competitor’s proposal. The Court held that because “[a] pleading must include factual allegations that exceed mere speculation, see Twombly, 550 U.S. at 555, and Fabreeka’s CFAA allegations fail to meet this standard.”

In addition, the Court noted that a complaint must state sufficient facts to “raise a reasonable expectation that discovery will reveal evidence” of a claim’s required elements.  Although Fabreeka’s Complaint alleged that Haley and his new employer’s owner communicated on Fabreeka’s computer during Haley’s employment, the Court found that the mere fact that the two discussed Haley joining Armadillo does not support a plausible inference that the two colluded to misappropriate confidential information. Thus, the Court held that it did “ not feel” that Fabreeka’s Complaint “pled sufficient facts to raise a reasonable expectation that further evidence of a CFAA violation will be revealed in discovery.”

  1. Fabreeka’s Complaint implied that the company considers all non-public information confidential. Defendants, on the other hand, claimed that Fabreeka’s proposals cannot be considered confidential because they are transmitted to third parties without any steps to protect the proposals or the information they contain.  The Court noted that the Sixth Circuit previously stated, in the context of trade secrets, that if a company did not take reasonable steps to maintain the confidentiality of alleged trade secrets, a misappropriation claim properly fails. See BDT Products, Inc. v. Lexmark Int’l, Inc., 124 F. App’x 329, 333 (6th Cir. 2005).  Accordingly, the Court held that insofar as Fabreeka’s allegations address confidential material taken, the company’s proposals submitted to customers may not be properly considered secret or confidential.
  2. Finally, the Court held that Fabreeka’s Complaint did not allege that the “damage and loss” allegedly suffered arose from the cost of responding to or from investigation into Haley’s alleged violation. Instead, the Complaint merely recited the elements of the CFAA and asserted there had been “damage and loss.”  The Court held this was insufficient.

TAKE-AWAY

When asserting claims under the CFAA, it is critical to not only review and pled the necessary elements that form the claims, but to also include the sufficient factual allegations to support those claims.  The Fabreeka decision highlights how more and more courts are cracking down on insufficient pleading, particularly in the context of CFAA suits.  As a plaintiff, do not fall victim to poor or lazy drafting and, as a defendant, carefully review a complaint’s factual allegations with an eye towards a possible motion to dismiss.