Cross Posted from Employment Law Lookout.

Seyfarth Synopsis: On October 20, the DOJ and the FTC jointly issued their Antitrust Guidance for HR Professionals, stating that DOJ intends to pursue employers criminally for alleged wage fixing and no-poaching agreements.  

shutterstock_77814403On October 20, 2016, the DOJ and FTC jointly issued their “Antitrust Guidance for Human Resource Professionals.”  The Guidance explains how antitrust law applies to employee hiring and compensation practices.  The agencies also issued a “quick reference card” that lists a number of “antitrust red flags for employment practices.”

In a nutshell, agreements (whether formal or informal) among employers to limit or fix the compensation paid to employees or to refrain from soliciting or hiring each other’s employees are per se violations of the antitrust laws.  Also, even if competitors don’t explicitly agree to limit or suppress compensation, the mere exchange of compensation information among employers may violate the antitrust laws if it has the effect of suppressing compensation.

The seriousness of this issue is underscored by the agencies’ statements in their press releases that the guidance is aimed at putting companies on notice that DOJ will proceed criminally against wage fixing and no-poaching agreements.  There also has been a significant uptick in recent years in class action litigation and enforcement activity challenging antitrust violations in the employment context.  In one exchange of wage information case in Detroit, a group of hospitals paid a total of $90 million to settle the case, and in one consolidated case involving allegations of agreements among employers not to poach each other’s employees, the defendants settled for a total of $435 million.

The evidence in many of these cases demonstrates that many HR professionals and other managers and executives do not realize that the antitrust laws apply in the employment marketplace just as they do in the commercial marketplace.  It is important that those HR professionals and other managers and executives who are involved in recruiting, hiring or the compensation process have a clear understanding of antitrust requirements as applied to those practices.

For more information on this topic, please contact the authors, your Seyfarth Attorney or a member of the Firm’s Antitrust/Trade Regulation Team or the Workplace Policies and Handbooks Team.

By Robert Milligan and Joshua Salinas

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.

Counterfeiting and piracy is estimated to cost the U.S. hundreds of billions of dollars every year.  According to the Business Software Alliance, if the U.S. could reduce piracy by 10 percent in two years, it would add $52 billion in GDP, $8 billion in tax revenue, and create more than 25,000 new jobs. California alone is losing an estimated $34 billion annually because of counterfeiting and piracy.  Much of the problem is related to foreign companies violating the intellectual property rights of U.S. companies. 

Traditionally, U.S. companies have used three primary weapons in their fight against foreign violators: (1) civil lawsuits; (2) complaints with the International Trade Commission; and (3) criminal prosecution.  Each of these measures have pros and cons which may make them more or less suitable depending on the circumstances of the particular situation.  Recently, U.S. companies have seen a new addition to the arsenal – State Attorneys General suing foreign intellectual property thieves for unfair competition. 

Earlier this year, Kamala D. Harris, the Attorney General of the State of California, filed two separate lawsuits in Los Angeles Superior Court against Chinese and Indian apparel manufacturers alleging they were unfairly competing against California companies. The California lawsuits allege that California companies are injured when foreign companies impermissibly use or copy their intellectual property, but also that domestic apparel manufacturers face unlawful competition when foreign competitors illegally use software without paying the license fees domestic companies pay. The Attorney General alleges that the defendants’ conduct violates California’s Business and Professions Code section 17200, et seq., and seeks injunctive relief, certification that the defendants are in compliance with all software licensing requirements, the appointment of a trustee to verify the certifications, and a civil penalty of $2,500.

By filing these lawsuits, California is taking a page from the playbooks of Attorneys General in Massachusetts and Washington who have already had success with similar tactics both in and outside of court, without prolonged litigation, in obtaining certifications that alleged foreign violators will comply with all software license requirements. The ultimate efficacy of this strategy depends on a number of factors which may make it a disfavored option in many situations.  For starters, Section 17200 does not provide for damages or attorneys’ fees for the injured companies, and jurisdictional and venue requirements make the approach inherently unsuitable for violators which do not do business in the U.S.  Moreover, service is complicated for defendants which do business in the U.S. but do not have a U.S. agent for service of process.  For example, the Chinese defendant sued in California has yet to be served almost eight months after the filing of the complaint.  Conversely, the Indian defendant was served in June, and its demurrer to the complaint has been set for hearing in November.  To be sure, the outcome of these two lawsuits will be watched with great interest by U.S. owners of intellectual property, the U.S. companies competing with the foreign companies which violate intellectual property rights, and perhaps also by foreign companies violating U.S. intellectual property rights.

By Michael Baniak and Puya Partow-Navid

Arthur Quiller-Couch formulated seven basic plots for a conflict.  Following his formula, every movie and television show can be narrowed down to one of seven basic plots.  Although the number of plots may be limited, there are inifinite ways to tell a story.  In a town like Hollywood, where everyone seems to have a script, there is always a chance that your story may be new; or similar to a story that has already been told, or even worse, a story that has already been sold.  Protection of “ideas” in Hollywood can literally be a big deal.

Intellectual property (property of the mind) is protected under copyright, trademark, patent, or trade secret law.  Still, it is well known that none of the aforementioned laws protect ideas per se, such as ideas for television series or movies. 

However, under California law, ideas still get some protection under the principles of an implied-in-fact contract.  The disclosure and submission of an idea may be consideration for a promise to compensate for the disclosure/submission of the idea.  Specifically, idea theft claims under California’s “implied-in-fact contract law” require proof of: (1) submission of the idea on an obligation to pay for use of the idea; (2) voluntary acceptance of the submission based on knowledge of the obligation to pay for the use of the idea; (3) use of the idea; and (4) damages.  See Desny v. Wilder, 46 Cal. 2d 715 (1956) and Mann v. Columbia Pictures, Inc., 128 Cal. 3d.  628 (1982). 

In idea submission cases, the framework for proving use is nonetheless parallel to showing copying in a copyright claim.  The elements of a copyright infringement are ownership of the copyright and actual copying by the defendant.  Meta-Film Associates, Inv. v. MCA, Inc. 86 F. Supp. 1346, 1354 (1984).

Copyright protects the creative expression of an idea, the idea in and of itself is not copyrightable.  Thus, if the author confides his idea to a friend and the friend uses the idea to make a movie, there is no copyright infringement.  The exclusion of ideas from copyright protection may be found in 17 U.S.C. § 102(b). 

In Spinner v. American Broadcasting Companies, Inc. (ABC), Spinner alleged that ABC developed and produced the television show LOST from a script Spinner submitted to ABC in 1977.  The Court of Appeals affirmed the lower court’s finding of summary judgment, finding that Spinner failed to produce evidence that ABC used his materials.  Furthermore, the Court of Appeals found that ABC established the independent creation of LOST, an absolute defense to idea theft.

Spinner was retained by ABC in 1977 to draft a pilot and entered into an agreement that was to pay Spinner $30,000 for his services.  Spinner submitted a script for a two-hour pilot titled L.O.S.T..  The show was based on people stranded in the Himalayas as a result of a plane crash.  While in the Himalayas, the survivors entered a mountainside tunnel and were transported to a prehistoric world.  The show centered on the survivors attempt to survive in the prehistoric world where they come up against creatures and primitive human beings.

ABC passed on the 1977 script.  Time passes and in 1991 Spinner submitted a new treatment of the 1977 script to ABC.  Spinner also submitted a third treatment in 1994.  The updated treatments moved the story from the Himalayas/prehistoric world to outer space.  Still, ABC passed on the updated treatments.  More time passes.

In 2003, Lloyd Braun first thought of the concept of what would be the television show LOST.  Braun stated that the concept was based on a marriage of the concepts from Survivor and Cast Away.  At the time, Braun was the chairman of the ABC Entertainment Television Group.  Braun pitched his idea of LOST to other ABC executives at an ABC retreat.  After reviewing an initial draft by a contract writer, Braun hired J.J. Abrams and Damon Lindelof to draft a script.  In 2004, a brainstorming session was held, and Lindelof drafted detailed notes based on the brainstorming session between Lindelof, Abrams, and ABC executives.

A script for the pilot was submitted on February 24, 2004.  The script and the general format of the show were finalized by May 2004 and ABC premiered the pilot of LOST in September 2004.  For LOST, the time between drafting the script and airing the pilot was very fast, even by Hollywood standards.

Spinner alleged that the concept of the LOST series that premiered in September 2004 was based on the idea he originally submitted to ABC in 1977, and that ABC could not possibly have been able to go from concept-to-premiere so fast without his 1977 script.

The Spinner Court first focused on the use element.  Spinner did not have direct evidence that ABC used his script.  Still, Spinner tried to infer use by alleging that ABC had access to his idea.  Additionally, Spinner inferred use by alleging that the idea for LOST was similar to Spinner’s script. 

To show proof of access, and lack thereof, both Spinner and ABC relied on copyright infringement cases.  Typically, copying is proven via circumstantial evidence of access and substantial similarity.  Meta-Film Associates, Inv. V. MCA, Inc. 86 F. Supp. 1346, 1354-55 (1984).  Access means that the defendants had an opportunity to view or to copy plaintiff’s work.  Id. at 1355.

Spinner predicated access on the theory that the development executives of LOST had a reasonable opportunity to view Spinner’s 1977 script, because ABC had a policy of permanently retaining unreturned scripts; his script had not been returned.  Spinner thus alleged that the script must have been accessible in an ABC “script library.”

However, a search for Spinner’s 1977 script yielded no results from ABC’s drama development files.  Moreover, ABC maintained that there was no centralized “script library” where executives can search and access scripts.  Finally, the people that worked at ABC in 1977 and had knowledge of Spinner’s script were long gone, and there was absolutely no evidence that any of them had ever talked to the creators of LOST. 

Accordingly, the Court found that Spinner had only shown, at best, a bare possibility of access based on speculation, supposition, and guess work.  Thus, any inference of use would have to be based only on substantial similarity.  In an idea submission case, similarities that do not result from copying are “similarities… without legal significance.”  Teich at 804.  Therefore, any alleged similarity between LOST and Spinner’s idea was of legal insignificance.

The Court then focused on evidence that LOST had been independently created.  When a plaintiff, such as Spinner, infers use of the idea, the inference can be negated by evidence that conclusively demonstrates that the defendant independently created the work.  The evidence of independent creation must be “clear, positive, uncontradicted and of such a nature that it cannot rationally be disbelieved.”   Teich v. General Mill, Inc., 170 Cal. 2d 791, 797 (1959). 

In Spinner, the evidence of independent creation included development notes from Braun’s initial pitch at the company retreat, the first draft of the script written by the contract writer, and notes from the brainstorming session attended by the ABC executives and the writers of LOST.  In summary, the Court was able to see the evolution of the LOST television show, without any influence of Spinner’s idea.  Therefore, the Court held that ABC established the independent creation defense as a matter of law.

The Court in Spinner nicely elucidated the framework for the use element of idea theft cases based on an implied-in-fact contract.  Although Spinner was directed to the entertainment industry, implied-in-fact contracts exist in all industries, such as technology, advertising, and consumer products. 

Those who produce “ideas” should document milestones in the development process.  This applies to both sides, but perhaps with different objectives.  As seen in Spinner, the documentation, such as meeting transcripts, brainstorming notes, and script outlines, were essential in ABC’s defense for independent creation.  Contrast that with ABC’s policy for retaining unreturned scripts.  Spinner predicated his use theory based on ABC’s retention policy.  Had ABC retained Spinner’s 1977 script, and had it shown up in ABC’s drama development files, the story may have come out differently (at least on summary judgment) for Spinner.

Those who believe that their “idea” has been purloined, should remember that in an idea theft case based on the implied-in-fact contract, similarities that do not result from copying are similarities without legal significance.  In most jurisdictions, ideas are as “free as air,” and being essentially “free,” courts look with a very jaundiced eye on those who would charge for the thought.

By Robert B. Milligan, Jessica Mendelson, and Daniel Joshua Salinas

Company information that is sensitive, but may not rise to the level of a trade secret is protectable in California, isn’t it?

Not necessarily. Some recent California decisions have significantly limited an employer’s ability to pursue certain claims and remedies based upon the theft of mere confidential or proprietary information by rogue employees.

Defendants (often individual former employees) who are sued in California for stealing a company’s data are increasingly using the trade secret preemption doctrine to seek dismissal of non-trade secret claims, which are often pleaded alongside trade secret misappropriation claims, that allegedly fall within the scope of the California Uniform Trade Secrets Act (“CUTSA”).

Non-trade secret claims advanced by the employer typically include:

  • conversion
  • interference with contract
  • interference with prospective economic advantage
  • breach of fiduciary duty
  • unjust enrichment
  • fraud
  • statutory claims brought under Bus. & Prof. Code section 17200.

These claims are typically made because they are often easier to prove than the elements of trade secret misappropriation.

While trade secret preemption does not displace breach of contract claims, it can significantly limit the claims and remedies that companies may seek when their confidential or proprietary information is stolen.

Differences Among the States:

Other States: The breadth and scope of trade secret preemption varies from state to state. While some states have held that preemption eliminates alternative causes of action for misuse or theft of confidential, proprietary or trade secret information, other states allow common law claims to be brought for the theft of confidential or proprietary information alone or along with trade secret misappropriation claims.

California state courts: In California, CUTSA generally preempts causes of action that rely on the same “nucleus of facts” as a trade secret misappropriation claim. A recent California Court of Appeal decision reaffirmed that CUTSA provides the exclusive civil remedy for conduct falling within its terms, so as to supersede other civil remedies based upon misappropriation of a trade secret. Accordingly, California state courts typically do not allow both trade secret and non-trade secret claims to be brought for the theft of company information.

 California federal courts: Some California federal courts have been more kind to employers, with some courts not forcing employers to choose until trial which of the claims they will ultimately pursue. A recent California federal court decision, however, refused to permit a plaintiff to proceed on a tort theory for the theft of confidential information at the pleading stages, leaving the pursuit of tort claims for the theft of information not rising to the level of a trade secret unsettled.

Thus, variety is the only consistency when it comes to the application and breadth of preemption under CUTSA in California state and federal court. The California Supreme Court has yet to determinatively address the supersessive scope of CUTSA, but may eventually resolve this difference of opinion.

Workplace Solutions:

California employers must be vigilant to ensure that their employees don’t share their valuable information with competitors. Employers should employ well-drafted and well-communicated agreements and policies to best protect themselves should a dispute arise. Best practices for employers include:

  • Identifying trade secrets or confidential information and adding confidentiality designations on the data
  • Creating agreements and policies to protect the secrecy and confidentiality of company trade secret and proprietary information
  • Effective employee education and training on importance of protecting company trade secrets
  • Effective entrance and exit procedures, including employing exit interviews
  • Tailoring non-disclosure of confidential information agreements to protect non-public and valuable information, and specifying examples of genuine confidential information
  • Utilizing contractual agreements–not simply employee handbooks or policies­­– with employees as contractual remedies are not preempted by CUTSA
  • Aggressive enforcement against breaches and prevention of data theft

Please see our recorded webinars on 2012 California Year in Review: What You Need to Know About the Recent Developments in Trade Secret, Non-Compete, and Computer Fraud Law and the Anatomy of a Trade Secret Audit for more details on how to put your company in the best position.

By Robert Milligan and Grace Chuchla

California federal courts have again said it loud and clear — when analyzing whether or not the enforcement of a forum selection clause within a non-competition agreement is contrary to California public policy, the court will not consider the substantive effects of enforcing the clause.  In a recent case out of the Northern District, Meras Engineering v. CH20, Inc., Case No. C-11-0389 EMC, Judge Chen articulated this concept by ruling that the enforcement of the forum selection clause was in no way determinative of which state’s law would ultimately be applied.  As he reasoned, forum selection and choice of law analyses are not one in the same, or in other words, “the selection of a forum does not always dictate the choice of law.”

Clear as Judge Chen’s ultimate ruling might have been, the background leading up to this order is a muddled one, involving multiple parties, states, suits, motions, and stays.  Events were set in motion on January 26, 2011, when Rich Bernier and Jay Sughroue left their employment with CH2O and went to work for Meras Engineering.  Both CH2O and Meras are industrial water  purification companies, with their principle places of business in Washington and California, respectively.  Bernier and Sughroue signed non-competition agreements with CH2O that contained choice of law and forum selection provisions stating that all suits arising under the agreement would be heard in Thurston County, Washington.  Both Bernier and Sughroe worked and lived in California and visited CH2O’s Washington office only twice. 

On the same day that Bernier and Sughroue left CH2O, they filed suit along with Meras in the Northern District of California seeking declaratory judgment against CH2O to void their non-competes.  Six days later, on February 2, 2011, Meras filed suit against Bernier and Sughroue in Washington state court seeking enforcement of the same non-competition agreements.  Bernier and Sughroue then successfully removed the Washington case to federal court and moved to dismiss, stay, or transfer the Washington case to the Northern District of California under the first-to-file rule.  The Washington federal court denied this motion because of the forum selection clause in the agreements.  Following Bernier’s and Sughroe’s unsuccessful attempts to transfer the  Washington case, the Washington court granted two separate stipulated stays, the first of which was lifted on May 23, 2012.  The second stay, which was granted because Bernier filed for bankruptcy, was lifted on September 6, 2012, but only with respect to CH2O’s claims for injunctive relief. 

With the proceedings in Washington stayed until the resolution of Bernier’s bankruptcy case, CH2O brought a motion to stay the California case pending the outcome of the Washington case.  CH2O based its argument on the fact that Washington courts had already ruled that the choice of law clause in Bernier’s and Sughroue’s non-competes was enforceable and therefore Washington law should decide this case.  Plaintiffs objected, stating that the California case was more advanced than the Washington case, which meant that the “gravitational pull” of the litigation was toward California, not Washington. 

Using the test laid out in Landis v. North American Company, 299 U.S. 248, (9th Cir. 1962), Judge Chen pointed out that the simple fact that Meras was not a party to the Washington case was sufficient to show that plaintiffs would suffer “a fair possibility of harm” if the stay in California were granted, as a resolution of the Washington case would directly impact Meras’s rights without allowing it to participate in the litigation.  This, in conjunction with the fact that CH2O did not successfully show how it would be harmed if the case were to proceed, led Judge Chen to deny CH2O’s request for a stay in California. 

Judge Chen then moved on to the forum selection clause in Bernier’s and Sughroue’s non-competition agreements.  Nowhere in its motion to stay did CH2O raise this issue; however, it was an element of Plaintiffs’ motion for summary judgment, which Judge Chen also ruled on in this order.   After resolving the question of whether or not CH2O had waived the issue of venue through its conduct,  Judge Chen rejected Plaintiffs’ claim that the enforcement of the forum selection would violate California public policy.  The basis of Plaintiffs’ argument was that the enforcement of the forum selection clause would lead to the application of Washington law, which, because Washington allows for certain non-competition agreements, would create a result that is contrary to California public policy.  Judge Chen took issue with this three-part chain of events and Plaintiffs’ conflation of enforcing a forum selection clause and deciding what law applies.  Forum selection and choice of law are two very distinct questions.  There is nothing in the forum selection clause that “dictate[s] a priori” that Washington law would apply, and simply having a case heard in a different forum is not contrary to California public policy.  Therefore, by severing the tie between where the case is heard and what law will apply, Judge Chen reasoned that the forum selection clause in Bernier’s and Sughroue’s non-competes was enforceable and valid and that their case should be dismissed. 

This order reaffirms the recent trend out of California federal courts when it comes to forum selection clauses in non-competition agreements.  Just as Northern District judges did in Hartstein v. Rembrandt (2012 WL 3075084, N.D. Cal., July 30, 2012) and AJZN v. Yu (2013 WL 97916, N.D. Cal., January 07, 2013), Judge Chen refused to look beyond the procedural effects of the forum selection clause and into its substantive ramifications.  As this string of cases has made clear, the “contrary to California public policy” element of the Bremen  test extends only as far as ensuring that all parties have their procedural rights protected at the same level that they would California (M/S Bremen v. Zapata Off–Shore Co., 407 US 1).  Anything that delves into the substance of the transferee court’s handling of a California case — such as that court’s choice of what substantive law should apply — is beyond the scope of what California federal courts will consider when ruling on the enforceability of a forum selection clause. 

That said, this order is by no means carte blanche for defendants looking to enforce forum selection clauses and other courts may disagree with the analysis.  As Judge Chen is careful to point out, there are “some situations where a forum selection clause may have the effect of selecting the substantive law to be applied.”  In these scenarios, forum selection clauses are not enforceable, but this of course leaves the door open for interpretation as to how exactly a court will define these “situations.”  Judge Chen does provide some clarification when he explains that forum selection is appropriate as long as it does not “preordain” the choice of law, but again, at what point can one say that the result of a suit are preordained?  The answers to these questions are uncertain, but one can be sure that this recent string of cases out of the Northern District of California has bolstered the power of forum selection clauses while also defined a standard to be used when deciding whether or not to enforce such provisions when non-competition agreements are at issue in the suit.

Now that the Tory Burch lawsuit has settled, it looks like we’ve got ourselves another preppy clothing dispute on our hands!  Last week, J. Crew sued one of its former employees, a senior design director named Dwight Fenton, for allegedly stealing confidential information in New York state court.  Fenton had recently resigned from the company to take a position at Bonobos, a competitor in the men’s clothing market.  Allegedly, Fenton planned to use confidential and proprietary information from J. Crew in working for his new employer.

As a function of his position at J. Crew, Fenton was allegedly able to access valuable confidential and proprietary business information.  During his employment, Fenton signed a confidentiality and non-disclosure agreement, agreeing to keep this information “confidential in the event he left the company.”   However, J. Crew alleges that Fenton failed to comply with the terms of the agreement when he resigned from J. Crew on January 15,2013.  Before leaving the company, he allegedly sent a variety of  “highly confidential and proprietary J. Crew documents to his personal email address,” including product design specifications and measurements, manufacturing resources and financials, budgets, and design inspirations.  J. Crew alleges that in doing so, Fenton violated company policy and breached the confidentiality agreement.  J. Crew asserts various causes of action, including misappropriation, breach of the duty of confidentiality, and unfair competition.

J. Crew is seeking injunctive relief, as well as compensatory and punitive damages of over $650,000.  The company alleges it meets the standard for a preliminary injunction, since Fenton violated J. Crew’s confidentiality agreement and “common law obligations under New York Law by misappropriating the confidential and proprietary information.”  Additionally, J. Crew alleges that if it is not granted a temporary injunction, it will suffer irreparable harm, since it will enable Bonobos will be allowed to copy J. Crew’s products and replicate them at a reduced cost.

Interestingly enough, J. Crew’s complaint for misappropriation never explicitly uses the phrase “trade secret.”  Instead, J. Crew claims Fenton misappropriated its “confidential and proprietary information [including] product designs, . . . productions schedules, manufacturing resources, and other information concerning [its] business operations,” such as budgets and marketing strategies.  As the Trade Secrets Institute explains it, New York has not yet adopted the Uniform Trade Secrets Act, instead, relying on common law.  Under common law, misappropriation of trade secrets requires a showing of use.  As such, many litigants will simply claim unfair competition, which allows a plaintiff to sue for unlawful misappropriation of property,  in order for the defendant to compete with the plaintiff.  The property at issue need not be tangible,  and as such, is often applied to ideas as well.  Here, the difficulty in proving that there was actual use may explain why the phrase “trade secret” is never explicitly mentioned in the complaint.  The case also highlights the importance of careful pleading, particularly in states which have not adopted the Uniform Trade Secrets Act.

Cases defining the scope of the California Uniform Trade Secrets Act’s (“CUTSA”) preemptive effect have grown in recent years.  Preemption (or “supersession” as the California Supreme Court prefers), increasingly is used by litigants to seek dismissal of non-trade secret causes of action pleaded alongside trade secret claims and which allegedly fall within the scope of CUTSA.  This has been particularly so since the decision in Silvaco Data Systems v. Intel Corporation, 184 Cal. App. 4th 210 (2010), which interpreted broadly—albeit at times in dicta— the CUTSA’s supersessive scope, finding among other things that “CUTSA bars [Bus. & Prof. § 17200] claims sounding in misappropriation of trade secrets.”

The California Supreme Court has yet to determinatively address the supersessive scope of the CUTSA, but on January 24, 2013, issued an opinion that will likely be used in the ongoing debate over CUTSA supersession. In Aryeh v. Canon Bus. Solutions, Inc., Case No. S184929, analyzing whether the “continuous accrual” rule properly may apply to bar under a statute of limitations theory an unfair competition claim, the court made the following observation:

The UCL affords relief from unlawful, unfair, or fraudulent acts; moreover, under the unlawful prong, the UCL “borrows violations of other laws and treats them as unlawful practices’ that the unfair competition law makes independently actionable.” [emphasis added.] Depending upon which prong is invoked, a UCL claim may most closely resemble, in terms of the right asserted, an action for…misappropriation [of trade secrets]… (citing Glue-Fold, Inc. v. Slautterback Corp., 82 Cal. App. 4th 1018 (2000) (emphasis added)).

The court’s citation to Glue-Fold is interesting.  In Glue-Fold, the issue on appeal was “whether three different statutes of limitation have run on what are essentially three causes of action for the same wrong—misappropriation of a trade secret.”  The Glue-Fold plaintiff had asserted causes of action for breach of contract (a non-disclosure agreement), misappropriation of trade secrets under CUTSA, and violation of section 17200 of the California Business and Professions Code.  Id. at 1023.

After expressly noting the non-trade secret claims before it, the Glue-Fold court expressly stated that “The Uniform [Trade Secrets] Act as adopted in California provides that its protection does not displace other contractual or civil remedies.” (citing § 3426.7, subd. (b).).  The court proceeded to analyze the statute of limitations issues before it.

While not too much should be read into Aryeh, neither should too little.  Other California Supreme Court precedent supports that other civil remedies related to the taking of confidential business information properly may be pleaded alongside claims for misappropriation of trade secrets.  See, e.g., Reeves v. Hanlon, 3 Cal. 4th 1140, 1155 (2004) (claim of tortious interference to gain unfair business advantage actionable alongside claim for misappropriation under CUTSA).

In time (hopefully sooner rather than later) the California Supreme Court may provide clarification as to the supersessive scope of CUTSA.  In the meantime, California businesses will continue to navigate the murky waters of California law related to the unlawful taking of confidential information.

In Seyfarth’s first installment of its 2013 Trade Secrets Webinar series, Seyfarth attorneys Michael Wexler, Robert Milligan, and Joshua Salinas 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-compete enforceability, computer fraud, and company owned social media accounts and social media policies, as well as provide their predictions for what to watch for in 2013.

The webinar will take place on Monday, January 28, 2013, from 12:00 p.m. to 1:00 p.m. Central (10:00 a.m. to 11:00 a.m. Pacific).

The Seyfarth panel will specifically address the following topics:

  • Significant U.S. and state supreme court non-compete and trade secret decisions, including a discussion of choice of law, forum selection, and arbitration issues;
  • Important legislative efforts, including several states enacting legislation to protect employees’ “personal” social media accounts, the recent amendments to the Economic Espionage Act in response to the Second Circuit’s U.S. v. Aleynikov decision, New Jersey’s adoption of the Uniform Trade Secrets Act, and New Hampshire’s new non-compete notification requirements;
  • Prominent social media cases involving disputes over the ownership of company social media accounts and account “followers” on Twitter, LinkedIn, Facebook, and Myspace;
  • Noteworthy jury trial verdicts and criminal sentences;
  • The increased involvement of government agencies, such as the FBI, Department of Justice, Federal Trade Commission, and National Labor Relations Board, in the areas of trade secrets and non-compete law, including the DOJ’s scrutiny of no-hire or no recruiting provisions among competitors;
  • Trade secret preemption and courts’ difficulties in grappling with whether the theft of non-trade secret information is actionable in tort;
  • The current circuit split regarding the ability of employers to use the Computer Fraud and Abuse Act to sue former employees in typical employee data theft cases.

The panel will discuss the following 2012 cases: PhoneDog v. Kravitz; Eagle v. Morgan; Lown Companies, LLC v. Piggy Paint; Christou v. Beatport; US v. Nosal; WEC Carolina Energy Solutions, LLC v. Miller; Acordia of Ohio, L.L.C. v. Fishel; Nitro-Lift Technologies LLC v. Howard; US v. Aleynikov; and DuPont v. Kolon.

There is no cost to attend this program, however, registration is required.

 

 

*CLE credit is available.  (Seyfarth has applied for CLE credit in IL, NY, and CA. If you would like us to pursue CLE credit in any additional states, please contact events@seyfarth.com. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.)

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.