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defendant can run afoul of the CFAA when he or she has no permission to access a computer or when such permission has been revoked explicitly” (noting that “once permission has been revoked, technological gamesmanship or the enlisting of a third party to aid in access will not excuse liability”); and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

shutterstock_131284286In a recent Computer Fraud and Abuse Act case, the Seventh Circuit Court of Appeals affirmed the district court’s conclusion that the plaintiff had produced no evidence refuting the defendant’s contention that it honestly believed it was engaging in lawful business practices rather than intentionally deceiving or defrauding the plaintiff.  Accordingly, entry of judgment for the defendant was appropriate.  Fidlar Technologies v. LPS Real Estate Data Solutions, Inc., Case No. 4:13-CV-4021 (7th Cir., Jan. 21, 2016).

Summary of the case.  Fidlar licenses technology to county governments enabling them quickly to scan and digitize real estate transaction documents.  The county-licensees pay Fidlar a fee for using its technology.  In turn, county-licensees making the digitized documents available on line charge an access fee.  Persons who access the digitized documents and print copies must remit copying fees to Fidlar.

LPS gathers, analyzes and sells data concerning real estate transactions.  It developed software that permits the company, in exchange for a monthly payment to the county-licensees, to harvest and download en masse documents digitized by the counties using Fidlar’s technology.  The software enables LPS to analyze the digitized data without printing the documents and, thereby, to avoid paying copying fees which otherwise would have been owed to Fidlar.  When Fidlar learned what LPS was doing, Fidlar accused LPS of computer fraud in violation of the CFAA.  LPS denied wrongdoing and prevailed in court on summary judgment.

The parties’ contentions.  According to Fidlar, LPS defrauded Fidlar because LPS knew about the copying fee and had to know that its system for harvesting the information contained in the digitized real estate transaction documents allowed it to benefit from Fidlar’s technology without paying anything to that company.  LPS responded that, far from intending to deceive or defraud, its business practices were driven by its need to access and analyze data quickly and efficiently, and that printing copies of the documents was unnecessary.

Did LPS intend to defraud Fidlar?  Counties pay a fee to Fidlar for using its technology in order to digitize the contents of documents.  LPS pays a fee to counties for enabling its computers to access the digitized data.  LPS avoided remunerating Fidlar by not printing copies of the information.  And, significantly, there was neither disruption nor destruction of Fidlar’s computer system or intellectual property.  Fidlar apparently failed to anticipate, and therefore did not forbid, LPS’ access to and use of the data in this manner.

The CFAA criminalizes fraudulently accessing a computer or computer system with the intent of deceiving or cheating.  In opposition to LPS’s summary judgment motion, Fidlar maintained that whether LPS intended to defraud Fidlar is a question of fact requiring a trial.  However, both the lower and appellate tribunals said that the entry of summary judgment was appropriate because Fidlar was required, but failed, to demonstrate that there was evidence in the record supporting Fidlar’s claim that LPS had a fraudulent intent.

Takeaways.  Proving a CFAA violation requires evidence of an intentional fraud.  Even though Fidlar’s technology did not expressly permit third parties to access the digitized records and use the information without printing copies, thereby avoiding payment of fees to Fidlar, such access and use were not prohibited.  Fidlar lost the case because it failed to design its software to require payments to the company by third parties who figured out how to make use of the data without printing it.

WebinarOn Friday, January 29, 2016 at 12:00 p.m. Central, Seyfarth attorneys Michael Wexler, Robert Milligan and Joshua Salinas will present the first installment of the 2016 Trade Secrets Webinar series. The presenters will review noteworthy cases and other legal developments from across the nation this past year in the areas of trade secrets and data theft, non-competes and other restrictive covenants, computer fraud, as well as provide their predictions for what to watch for in 2016.

The Seyfarth panel will specifically address the following topics:

  • New trade secret cases addressing damages, injunctive relief, and preemption;
  • Practical implications of new state non-compete legislation in Alabama, Oregon, and New Mexico;
  • Growing circuit split concerning applicability of Computer Fraud and Abuse Act in typical employee data theft scenarios;
  • National and international efforts to improve trade secret protections, including the continuing attempt in the U.S. Congress with the proposed Defend Trade Secrets Act to create a federal civil cause of action for trade secrets theft, the European Union’s proposed directive to harmonize trade secret protection among the EU’s 28-member states as well as the Trans Pacific Partnership Agreement’s impact on trade secrets;
  • Significant new federal and state court decisions on non-competes and other restrictive covenants that may impact their enforcement, including concerns regarding adequate consideration for agreements and growing efforts by government agencies and employees to challenge and narrow their use;
  • Recent NLRB pronouncements on employer policies and agreements and their implications for protecting trade secrets;
  • Noteworthy data breaches and criminal prosecutions and criminal sentences for trade secret misappropriation, data theft, and computer fraud and discussion of lessons learned.

register

*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.  If you have any questions, please contact events@seyfarth.com.

shutterstock_276783140We are pleased to announce the webinar “Social Media Privacy Legislation Update” is now available as a podcast and webinar recording.

In Seyfarth’s eighth installment in its series of Trade Secrets Webinars, Seyfarth social media attorneys discussed their recently released Social Media Privacy Legislation Desktop Reference and addressed the relationship between trade secrets, social media, and privacy legislation.

As a conclusion to this well-received webinar, we compiled a list of  brief summaries of the more significant cases that were discussed during the  webinar:

  • In KNF&T Staffing Inc. v. Muller, Case No. 13-3676 (Mass. Super. Oct. 24, 2013) a Massachusetts court held that updating a LinkedIn account to identify one’s new employer and listing generic skills does not constitute solicitation. The court did not address whether a LinkedIn post could ever violate a restrictive covenant.
  • Outside of the employment context, the Indiana Court of Appeals in Enhanced Network Solutions Group Inc. v. Hypersonic Technologies Corp., 951 N.E.2d 265 (Ind. Ct. App. 2011) held that a nonsolicitation agreement between a company and its vendor was not violated when the vendor posted a job on LinkedIn and an employee of the company applied and was hired for the position, because the employee initiated all major steps that led to the employment.
  • In the context of Facebook, a Massachusetts court ruled in Invidia LLC v. DiFonzo, 2012 WL 5576406 (Mass. Super. Oct. 22, 2012) that a hairstylist did not violate her nonsolicitation provision by “friending” her former employer’s customers on Facebook because “one can be Facebook friends with others without soliciting those friends to change hair salons, and [plaintiff] has presented no evidence of any communications, through Facebook or otherwise, in which [defendant] has suggested to these Facebook friends that they should take their business to her chair.”
  • Similarly, in Pre-Paid Legal Services, Inc. v. Cahill, Case No. CIV-12-346-JHP, 2013 U.S. Dist. LEXIS 19323 (E.D. Okla., Jan. 22, 2013) a former employee posted information about his new employer on his Facebook page “touting both the benefits of [its] products and his professional satisfaction with [it]” and sent general requests to his former co-employees to join Twitter. A federal court in Oklahoma denied his former employer’s request for a preliminary injunction, holding that communications were neither solicitations nor impermissible conduct under the terms of his restrictive covenants
  • The Virginia Supreme Court in Allied Concrete Co. v. Lester, 285 Va. 295 (2013) upheld a decision sanctioning a plaintiff and his attorney a combined $722,000 for deleting a Facebook account and associated photographs that undermined the plaintiff’s claim for damages stemming from the wrongful death of his wife in an car accident. The deleted photographs showed plaintiff holding a beer while wearing a T-shirt with the message, “I Love hot moms.” Subsequent testimony revealed that the plaintiff’s attorney had instructed his paralegal to tell the plaintiff to “clean up” his Facebook entries because “we do not want blowups of this stuff at trial.”
  • PhoneDog v. Noah Kravitz, No. C11-03474 MEJ, 2011 U.S. Dist. LEXIS 129229 (N.D. Cal., 2012) involved a dispute over whether a Twitter account’s followers constitute trade secrets even when they are publically visible. The court denied the defendant’s motion to dismiss and ruled that PhoneDog, an interactive mobile news and reviews web resource, could proceed with its lawsuit against Noah Kravitz, a former employee, who PhoneDog claimed unlawfully continued using the company’s Twitter account after he quit.  The court held that PhoneDog had described the subject matter of the trade secret with “sufficient particularity” and satisfied its pleading burden as to Kravitz’s alleged misappropriation by alleging that it had demanded that Kravitz relinquish use of the password and Twitter account, but that he has refused to do so.  With respect to Kravitz’s challenge to PhoneDog’s assertion that the password and the Account followers do, in fact, constitute trade secrets — and whether Kravitz’s conduct constitutes misappropriation, the court ruled that the such determinations require the consideration of evidence outside the scope of the pleading and should, therefore, be raised at summary judgment, rather than on a motion to dismiss.  The parties ultimately resolved the dispute.
  • The Second Circuit Court of Appeals in Triple Play v. National Labor Relations Board, No. 14-3284 (2d. Cir. Oct. 21, 2015) affirmed an NLRB decision that a Facebook discussion regarding an employer’s tax withholding calculations and an employee’s “like” of the discussion constituted concerted activities protected by Section 7 of the National Labor Relations Act. The Facebook activity at issued involved a former employee posting to Facebook, “[m]aybe someone should do the owners of Triple Play a favor and buy it from them. They can’t even do the tax paperwork correctly!!! Now I OWE money . . . Wtf!!!!” A current employee “liked” the post and another current employee posted, “I owe too. Such an asshole.” The employer terminated the two employees for their Facebook activity. The 2nd Circuit affirmed the NLRB’s decision that the employer’s termination of the two employees for their aforementioned Facebook activity was unlawful.

The following is a collection of social media policies that have been implemented by various companies:  http://socialmediagovernance.com/policies/. While these policies can serve as a helpful guide, companies should tailor their own social media policies and consult with counsel.

For more information, please contact your Seyfarth Shaw LLP attorney, Robert B. Milligan at rmilligan@seyfarth.com, Daniel P. Hart at dhart@seyfarth.com or Joshua Salinas at jsalinas@seyfarth.com.

shutterstock_299582249On October 20, 2015, a Ninth Circuit panel consisting of Chief Judge Sidney Thomas and Judges M. Margaret McKeown and Stephen Reinhardt heard oral argument from the U.S. Department of Justice and counsel for David Nosal on Nosal’s criminal conviction arising under the Computer Fraud and Abuse Act (CFAA).   In 2013, Nosal was found to have violated the CFAA by allegedly conspiring to obtain access to company information belonging to his former employer, executive search firm Korn Ferry, through the borrowing of another employee’s login password. He was also convicted of trade secret misappropriation under the Economic Espionage Act.

The panel focused most of its questions around one main point of contention between the parties: the interpretation of the “without authorization” language appearing throughout Section (a) of the CFAA.  Such a focus makes sense given that the interpretation of this short phrase could completely change the legal landscape surrounding password sharing, not only in professional settings, but also in personal, consensual settings.

Nosal’s Points

Counsel for Nosal urged the panel to adopt a limited reading of the CFAA, based on the reasoning laid out in the Ninth Circuit’s previous en banc opinion (Nosal I).  Nosal I held that the CFAA was an “anti-hacking” statute and did not contemplate, nor criminalize, the misappropriation of trade secrets.  As an “anti-hacking” statute, the CFAA, the court held, criminalizes “the circumvention of technological access barriers.”  In other words, a person cannot be found to have accessed a computer “without authorization” if he did not circumvent a technological access barrier, or “hack” into a computer.

This time around, counsel for Nosal argued that password sharing is not hacking, and therefore, such an action cannot amount to a federal crime.  Further, counsel urged the panel to limit its interpretation of the “without authorization” language appearing throughout the Act, so as to prevent the over-criminalization of actions otherwise not prohibited by law (e.g., password sharing over a cloud system, or another consensual password sharing arrangement).   Nosal’s counsel also argued that the “without authorization” language be read consistently throughout the Act, so that the same interpretation would apply to both the misdemeanor and felony provisions of the Act.

U.S. Government’s Arguments

On the other side of the spectrum lie the government’s arguments.  Counsel for the government argued that protecting computers with passwords to prevent unintended user access indeed creates a “technological access barrier,” and any circumvention thereof (consensual or otherwise) constitutes a violation of the CFAA.  Such a broad interpretation was met with raised brows from the members of the judicial panel.

Counsel for the government repeatedly argued that the interpretation of the “without authorization” language should mirror the interpretation in the LVRC Holdings LLC v. Brecka case.  Per Brecka, a person accesses information “without authorization” under Sections (a)(2) and (4) of the CFAA when he has not received permission to use a computer for any purpose, or when the person’s employer has rescinded permission to access a computer and the person uses it anyway.  In other words, the government’s counsel seemed to advocate the criminalization of any sort of password sharing.  After receiving some push-back from the panel after making such an argument, counsel suggested limiting this interpretation to the employment context only, but members of the panel shot back because the CFAA includes no such limiting language. The government’s counsel argued that the person must have shared or used the password while also knowing it was prohibited by an employer to do so.

With regard to Nosal’s trade secrets conviction, the panel pressed the government’s counsel for a good portion of her allotted argument time.  Counsel argued the record revealed sufficient evidence to establish the element that source lists derive independent economic value for not being generally known by the general public.

Possible Outcomes for Nosal and Beyond

Though the panel did not give a clear indication one way or the other whose side it was likely to advocate in Nosal’s case, recent Ninth Circuit precedent may prove enlightening on the topic.  In the U.S. v. Christensen (9th Cir. 2015) decision, the Ninth Circuit (composed of a panel of different judges than those deciding Nosal’s fate) vehemently upheld the holdings in Nosal I, despite the different facts of each case.  In particular, the Christensen panel relied heavily on the Nosal I rationale that the CFAA only deals with violations of restrictions on access to information, not restrictions on use.  At the very least, Christensen demonstrates that the CFAA has been on the Ninth Circuit’s radar, even though its rationale may not impact the outcome in Nosal II.

Moreover, the panel’s surprise at the government’s assertion that all password sharing should be subject to criminal sanctions indicates an unwillingness to adopt such an argument.  As a previous post hypothesized, the panel’s final ruling will likely put to bed the password sharing issue, and limit it to certain situations (on which ground is still unclear), at least in the Ninth Circuit.  The ruling will hopefully provide helpful guidance on how to formulate acceptable computer policies prohibiting conduct running afoul of the CFAA. That way, employers and businesses can better protect their trade secrets from escaping the confines of their walls.

shutterstock_242602567While employee Lehman was employed by Experian and allegedly subject to various employment covenants, he incorporated Thorium, a competitor.  After Experian laid him off, he operated Thorium.  Experian sued Lehman and Thorium in a Michigan federal court, accusing them of wrongdoing including violations of the federal Computer Fraud and Abuse Act.  Holding that the CFAA is intended to criminalize hacking and that Experian’s allegations of hacking were oblique at best, the court dismissed most of Experian’s claims under that statute.

Status of the case.  Because some of Experian’s common law causes of action and one of its CFAA contentions were not dismissed, discovery is proceeding. Experian Marketing Solutions, Inc. v. Lehman, Case No. 15:cv-476 (W.D. Mich., Sept. 29, 2015).

Background.  Experian is part of a world-wide marketing services conglomerate that collects and analyzes business data.  At the time he was laid off, Lehman was Experian’s executive vice president.  He was based in Grand Rapids, Michigan, and was authorized to access the company’s computer files.  As a condition of his initial hire, and again later in connection with settlement of a claim he brought against the company while still its employee, he executed non-compete, non-solicitation, and confidentiality agreements.  He allegedly violated those agreements and the CFAA by creating and operating Thorium and by downloading Experian’s confidential information (both while he was an Experian employee and after he was laid off) to a hard drive that company had provided to him.  He also was accused of violations by purportedly instructing three Experian employees, whom Thorium later hired, to provide him with data from Experian’s computers, and by erasing all information on Experian’s hard drive before returning it.

Broad and narrow interpretations of the CFAA.  Federal courts are divided on the meaning of the phrases “[access] without authorization” and “exceeds authorized access” as used in the CFAA with respect to computers.  Four courts of appeal have interpreted the statute broadly, ruling that the purpose for accessing a computer is relevant in determining whether access was authorized.  Two federal appellate courts disagree.

The Sixth Circuit Court of Appeals.  The Sixth Circuit has not ruled definitively as to the meaning of those statutory phrases.  However, that court seemed to signal that it favored the majority position when it wrote, in a 2011 decision (quoting from a 2009 Ninth Circuit opinion), that “an individual who is authorized to use a computer for certain purposes but goes beyond those limitations . . . has exceed[ed] authorized access.”  Pulte Homes, Inc. v. Laborers’ Int’l Union of N. Amer., 648 F.3d 295, 304.

The ruling in Experian.  Concluding that the Sixth Circuit has not weighed in definitively on the meaning of “authorized” as used in the CFAA, and that the quote from Pulte Homes is mere dicta, the district court found the minority interpretation to be the most satisfying.  Since Lehman was “authorized” to access Experian’s computers when he downloaded its confidential data before he was laid off, the court held that the CFAA was not violated regardless of what he did with the data.  Similarly, the court ruled that the defendants did not violate the statute by obtaining, from three Experian employees who had “authorization” to access its computers, the company’s proprietary secrets after Lehman was terminated.  Although his continued use of an Experian computer after he was terminated clearly was not “authorized,” such use was held to be not actionable under the CFAA because Experian failed to allege that he or Thorium thereby obtained anything of value.

One of Experian’s CFAA claims was not dismissed.  The allegation that Lehman caused “impairment to the integrity or availability of data” by wiping the hard drive clean before returning it was held to state a statutory violation.

Takeaways.  A CFAA claim for unauthorized use of a computer not based on hacking is likely to be dismissed in the Fourth and Ninth circuits.  Four other Courts of Appeal — the First, Fifth, Seventh and Eleventh — disagree, holding that the CFAA also prohibits accessing a computer for an unauthorized purpose even though the user has authority to use the computer.  Individual district court judges in the circuits that have not ruled have reached varying decisions on this issue.  Eventually, either Congress must amend the statute to resolve this inconsistencies or the U.S. Supreme Court may be asked to do so.  In the meantime, litigants and their counsel can only guess how those circuit courts which have yet to decide, and the district courts in those circuits, will rule.

California -- brick wallIn United States v. Nosal, 676 F.3d 854 (9th Cir. 2012) (en banc), the court held that the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, prohibits unlawful access to a computer but not unauthorized use of computerized information.  Although that holding represents a minority position, two recent opinions — one in a Ninth Circuit criminal case and one by a California district court in a civil proceeding — indicate that the ruling in Nosal still is the law out west.

Recent Ninth Circuit and California district court CFAA cases. 

Christensen.  The 100+ page opinion in U.S. v. Christensen, Nos. 08-50531, et al. (9th Cir., Aug. 25, 2015), details what the court described as “a widespread criminal enterprise offering illegal private investigation services in Southern California.”  Six individuals were accused and convicted in the District Court for the Central District of California pre-Nosal of computer fraud, bribery, racketeering, wiretapping, identity theft, and more.  On appeal, several convictions were affirmed, and some others were remanded but just for resentencing.  Of particular interest to readers of this blog, however, all three convictions for violating the CFAA were vacated on the ground that Nosal rendered the jury instructions clearly erroneous and prejudicial.  A retrial may be possible.

Loop AI Labs.  In Loop AI Labs Inc. v. Gatti, No. 15-cv-00798 (N.D. Cal., Sept. 2, 2015), the defendants’ motion to dismiss certain counts of the amended complaint was granted in part and denied in part.  The defendant was Loop AI Labs’ former CEO.  Although she had left the company and worked for a competitor, she continued to log in to Loop AI Labs’ computers.  The court ruled that until Loop AI Labs formally revoked her authorization to access the company’s computers, she did not violate the CFAA by logging in, regardless of her motive.

Faulty jury instructions in Christensen.  One of the defendants was a Los Angeles police officer.  He was charged with violating the CFAA, among other statutes, by (a) logging in to confidential state and federal law enforcement databases — which he had the right to access — and (b) in exchange for a bribe, providing to two other defendants information they requested from those databases but to which they were not entitled.  The prosecutor simply assumed, and did not attempt to prove, that the officer thereby committed a CFAA violation.  According to the Ninth Circuit, that assumption was unwarranted after Nosal was decided.

By the same token, at trial the three defendants accused of CFAA violations did not object when the court instructed the jurors — before Nosal — that they should find a CFAA violation if they determined that a computer had been knowingly accessed with the intent to use the information to commit a fraud.  In Christensen, the appellate court held that those jury instructions were plainly erroneous in light of Nosal and clearly were prejudicial.  For these reasons, the CFAA convictions were vacated.

Takeaways.  Approximately one-half of the circuit courts of appeal have ruled on the meaning of the phrase “exceeds authorized access” as used in the CFAA.  In the circuits where there has not yet been a ruling, obviously, there is uncertainty as to which position the court will adopt.

The majority — so-called liberal — view is exemplified by holdings in cases such as International Airport Centers, L.L.C. v. Citrin, 440 F.3d 418, 420-21 (7th Cir. 2006) (CFAA violated by accessing a computer for an unauthorized purpose).  Nosal, and now Christensen, represent the minority (or narrow) position that an individual with authorization to access a computer does not commit a CFAA violation regardless of what the individual does with the information so obtained.

Adding to the confusion, courts are not in agreement over the meaning of Nosal.  For example, in the recent case of U.S. v. Shen, Case No. 4:14-CR-122 (W.D. Mo. Apr. 21, 2015), the facts were somewhat similar to those in Loop AI Labs.  Citing Nosal, the court in Shen stated: “There is some disagreement as to whether an employee who properly accesses a computer and then misuses the information can be convicted” of violating the CFAA.  The Missouri court added: “However, courts are clear that employees who gain access to a computer through their employment lose authorization once they have resigned or been terminated.  Moreover, persons of common intelligence would understand as much.”  Id. at p.4 (citations omitted).  As is apparent, the judge who decided Loop AI Labs does not concur. Further, there are also federal courts in California who have concurred with the Shen reasoning.

Similarly, one cannot be sure that all courts agreeing with the “narrow view” set forth in Nosal also would accept the holding implicit in Christensen that a corrupt police officer does not exceed his “authorized access” to confidential government data bases when he logs in solely for the purpose of providing other persons, in exchange for a bribe, information to which they have no right. With all this uncertainty, the one thing that is certain is that the Ninth Circuit continues to embrace a very narrow and restrictive view of CFAA liability, in contrast to most of the other circuits in the nation.

Top_tier_firmsThe 2015 edition of The Legal 500 United States recommends Seyfarth Shaw’s Trade Secrets group as one of the best in the country.

Nationally, our Trade Secrets practice retained its position in Tier 2. For the second year in a row, our practice has been named to the shortlist for best trade secrets practice in the U.S., and we are very pleased to report that Seyfarth is one of four firms shortlisted for 2015 Law Firm Award for Trade Secrets Litigation. We expect the award winner to be announced on Wednesday, June 10th.

Based on feedback from corporate counsel, two Seyfarth partners, Michael D. Wexler and Jason P. Stiehl were recommended in the editorial.

The Legal 500 United States is an independent guide providing comprehensive coverage on legal services and is widely referenced for its definitive judgment of law firm capabilities. The Legal 500 United States Awards 2015 is a new concept in recognizing and rewarding the best in-house and private practice teams and individuals over the past 12 months. The awards are given to the elite legal practitioners, based on comprehensive research into the U.S. legal market.

shutterstock_176119643The parties in a Computer Fraud and Abuse Act case moved for partial summary judgment. Among the issues were whether the plaintiff had incurred the requisite $5,000 in qualifying losses, and whether the complaint was time-barred. The motions were denied, but the court had to do a lot of explaining. Quantlab Technologies Ltd. v. Godlevsky, Case No. 4:09-CV-4039 (S.D.Tex., Apr. 14, 2015) (Ellison, J.).

Status of the case. Judge Ellison ruled that the CFAA damages threshold was met. He held that (a) the value of time spent in an internal investigation could be aggregated with (b) sums paid to two consultants to investigate the intrusions and to assist in the prosecution of resulting litigation. He also decided that the statute of limitations began to run when the plaintiff first learned of the supposed CFAA violations, even though the identity of the perpetrator was unknown. And he ruled that claims against an individual whose alleged wrongdoing was mentioned in the body of the initial CFAA count filed in 2009, but who was not named as a defendant in that count until a third amended complaint was filed in 2014, related back to the 2009 filing.

The alleged violations. Quantlab is a financial research firm that claimed to have valuable trade secrets relating to high frequency stock trading programs. In September 2007, six months after the company terminated its employee Kuharsky, Quantlab discovered that its computer network apparently had been accessed without authorization on four separate occasions between March and August 2007. An internal probe indicated that he was the culprit.

Additional investigation prior to filing the complaint, In 2008, Quantlab retained network security consulting firm Grey Hat to ascertain whether Kuharsky could gain future unauthorized access. No conclusions were reached. Later, Quantlab concluded that he had not accessed the company’s files after all. Rather, it was his friend Andreev, a Quantlab employee, who acted at Kuharsky’s behest and used Kuharsky’s home computer.

The pleadings. Quantlab’s original CFAA count named Kuharsky as a defendant. Quantlab employee Maravina was not named as a defendant, but she was described as a “sleeper mole” who had assisted Kuharsky in stealing trade secrets and confidential information. She was added as a CFAA defendant in the third amended complaint.

Calculating qualifying losses.

  1. Qualifying losses relating to Kuharsky. Quantlab calculated that its internal investigation in 2007 took 10-12 hours and cost the company $2,500-3,000. That sum was not enough, however, to satisfy the $5,000 requirement for bringing a CFAA lawsuit. Gray Hat billed the company $13,400 in 2008 for consulting services, but Kuharsky contended that those services did not include investigation of the supposed computer incursion. The court accepted as true the sworn declaration of Quantlab’s CEO that Gray Hat was hired in response to Kuharsky’s actions. Thus, the requisite qualifying loss total was deemed established.
  2. Qualifying losses relating to Maravina. After the complaint was filed, Quantlab hired consulting firm Pathway Forensics and asserted that payment of its $31,900 bill constituted qualifying losses. Maravina insisted that Pathway’s assignments concerned litigation, not investigating her role in the 2007 events. Quantlab maintained, however, that the lawsuit work was not included in that bill. The court concluded that since Pathway may have contributed to Quantlab’s 2014 decision to add Maravina as a defendant, $5,000 in damages was demonstrated. The court said it was unnecessary to rule on the question of whether all expenses incurred investigating several persons’ intrusions can be used in computing the amount of losses attributable to each person’s involvement.

Statute of limitations.

  1. Kuharsky. Quantlab moved for summary judgment against Kuharsky. He asserted that the two-year statute of limitations began to run in September 2007. Quantlab argued that it had two years from early 2008 when the company first learned that Andreev, not Kuharsky, had accessed the network. The court said that the motion could not be granted because no evidence had been presented regarding the material question of whether Andreev was authorized to access the network from Kuharsky’s home.
  2. Maravina. Seven years elapsed between the intrusions in 2007 and the first time Maravina was named as a CFAA defendant. She asserted a statute of limitations defense. The court reiterated that the original CFAA count called her a “sleeper mole” and said she was “on notice that the lawsuit concerned the same conduct that now underpins the CFAA claim against her.” So, that claim was held to relate back to the 2009 litigation commencement date. Although not mentioned in its recent ruling, an earlier written decision on other motions in the same case stated that she was a named defendant (but not in the CFAA count) in the original complaint, and the court added that she was Kuharsky’s wife.

Takeaways. CFAA litigation can be very complex. For example, judges have not consistently ruled on the two primary issues involved in Quantlab: (a) the meaning of the statutory requirement of a “loss . . . of at least $5,000,” and (b) the date the statute of limitations regarding a CFAA violation begins to run. Moreover, judicial interpretations of the statutory phrases “without authorization” and “exceeding authorized access” as they relate to prohibited contact with a computer network are sharply divided. Some courts hold that those phrases refer only to hacking by an outsider. Other jurists say the statute also is directed at persons who make unauthorized use of their employer’s computer. Both a prospective plaintiff considering filing a CFAA claim, and a defendant who is or may be named, should consult experienced counsel.